136. It should be noted that when the necessities of business urgently demand additional notes, even if the price of bonds should be such as to make the issue profitable, the delays incident to the purchase of bonds, the taking out of circulation upon them, etc., would make it impossible to obtain the currency until all need for it was practically past. Under such a system, therefore, banks must refuse to customers additional supplies of notes upon sudden demand even though the community in such circumstances has enlarged its currency need and an additional supply may, therefore, without additional strain on the bank, be kept in circulation. Under such circumstances, if notes are an essential to the borrower, rates for loans rise abnormally and crisis conditions are vastly intensified. Probably the best illusincrease in the national bank circulation; but their price touched 120 in 1882, and for nine years thereafter, the bonds being high priced, there was a steady decrease in the note circulation of the national banks. The financial panic of 1890 caused a fall in the prices of government bonds, and thereby increased the chances of profit on the circulation of national bank notes. As a result there was a net increase of $13,000,000 in their circulation in 1891, and of $8,000,000 in 1892. Now, in these two years, there was absolutely no demand for an increase in the circulating medium of this country; on the contrary, the Treasury Department in these years was injecting arbitrarily between $25,000,000 and $50,000,000 of silver paper money into the currency of the country, as a result of the Silver Purchase Act of 1890, and gold, in consequence, was being exported at a rate which alarmed business men and finally precipitated the panic of 1893.

During 1893 the 4's of 1907 sold down to 113, and the banks added to their circulation $37,000,000. During the months of June, July, and August of that year there was a most urgent need for an expansion of the currency; but during these months the new national bank notes did not appear. Not until after the panic was over and money was piling up in all the financial centers. - a drug on the market- did the increase in the national bank note circulation take place. As a result of the panic, business being depressed, the interest rate on prime commercial paper during 1894, 1895 and 1896 was between 3 per cent. and 4 per cent. The money supply of the country was in excess of its needs and gold was exported in large amounts. The Treasury, embarrassed by the withdrawals of gold, was forced to issue bonds in order to maintain the gold reserve. These bond issues forced down the prices of bonds, and thus increased the profit which banks could make upon new circulation. Therefore, considerable idle banking capital, which could be loaned barely at 3 per cent. in business, was exchanged for government bonds and made the basis for bank notes, so that in 1895 and 1896 there was a net addition to the bank note circulation of $32,000,000. Thus, the national bank note helped to embarrass the government by inflating the currency at a time when the government was doing its utmost to hinder inflation and prevent the exportation of gold to Europe.”—PROFESsor Joseph FreNCH JOHNSON, in response to the interrogatories of the Monetary Commission.

tration of this delay in responding to demand was seen in the difficulty of obtaining currency during the summer of 1893, when it was practically impossible to secure a sufficient supply of a circulating medium of any sort. The New York banks held on June 1, 1893, a surplus of $21,000,000 in excess of their legal reserve. At that time the volume of national bank notes outstanding was about $177,000,000. By the first of August extraordinary demands for currency had drawn down the reserves $14,000,000 below the legal minimum and yet the outstanding notes were only about $5,000,000 more than June 1. By September 1, however, when the reserves were but $1,500,000 below the minimum, and the urgency was past and currency once more comparatively abundant, the notes had begun to expand and had already reached $199,800,000, subsequently rising to $209,300,000 on November 1, notwithstanding the continued decrease in the demand for them.

These considerations may be stated in three indictments of the system (1) higher regular rates of interest; (2) inelasticity; (3) inconvenience and delay.

The explanations here briefly given sufficiently account also for the extraordinary fact in the history of the national banking system that from December 1873, when the note circulation. stood at $341,320,256, it pretty steadily diminished to October 1890, when the amount outstanding was but $122,928,084. That is, in the face of a special stress, the bank-note circulation proved its maladjustment to the needs of the public by shrinking at the time when there was more work to be done.

CIRCULATION SECURED BY COMMERCIAL ASSETS.

137. None of the objections previously noted are, of course, applicable to notes issued on the security of general commercial assets. It has been fully shown that a bond-secured circulation cannot furnish an elastic medium, expanding and contracting automatically. But it is quite otherwise with a currency which is based upon the general assets of the issuing banks. The volume of notes put forth under such circumstances will, like deposits, automatically expand in volume by being issued upon demand from legitimate borrowers, and automatically contract by being returned to the bank when the need for the currency is past. Under such a system, any increase in the demand for money, and consequent higher rate of interest, adds to the inducement to issue notes, instead of making it less profitable as in the case of bond-secured currency.

There is, moreover, no delay or inconvenience such as exists where bonds must be purchased and deposited with the Treasurer before the notes can be issued. The assets on which the notes are based are the ordinary commercial paper acquired by the bank in the course of its regular business. The bank is thus always ready to increase its circulation if the public will use more notes, and all considerations of profit lead it to do so, as its power to loan will be increased in proportion as it is able to keep more notes in circulation. The same motives acting on all the banks lead to active competition, which, as explained elsewhere, results in the prompt redemption of all notes deposited or paid into any bank.

The greater comparative elasticity of a system of bank currency based on general assets over one based on deposit of bonds, is shown not merely by a comparison of the national bank system with foreign systems based on general assets, but even more sharply by an examination of the results of the two systems when existing side by side in New York, prior to 1860.

In that state the so-called "Safety Fund Banks" were free to issue notes upon their general commercial assets; while the "free banks" were obliged to deposit with state officials either United States or state bonds, or bonds and mortgages. Because the rate of interest which these investments bore was not very much less than the commercial rate, the inelasticity of the bondsecured currency in New York was not as great as that of the national banking system. Yet, as compared with the circulation issued by the safety fund banks upon commercial assets, it was so rigid as to make its inferiority in this regard perfectly manifest.'

Another result of a system of bank currency based on general assets indeed a corollary of what has just been stated— is that each community is thereby enabled to furnish for itself most easily and economically just such a currency as it requires for the convenient transaction of its business. The rural districts are not forced to go to more expense in creating their currency-notes-than are the commercial centers in creating that which they use-deposits.

Then, again, where commercial paper is accepted as the basis for the notes, the banks are not obliged to withdraw from the community for investment in bonds a large portion of their funds. The local borrowers thus get the benefit of having offered to them the capital which a bond-secured system requires to be invested in bonds. For sections where notes, as distinguished from deposits, constitute the important part of the currency, this is equivalent to a large increase in the capital offered to borrowers, and results in a consequent lower interest.

Considerations of elasticity, the greater facility given for the prompt and automatic adaptation of the supply of currency to varying demands, the larger opportunities afforded to every rural community to furnish for itself easily and economically the currency which it needs for the convenient transaction of its business, and the ability given to banks to loan more freely to local borrowers, thus favor the issue of bank notes upon the gen'See diagram in Sound Currency, 1896, p. 306.

eral assets of the bank as distinguished from the system of bond security.

138. The only arguments which have been seriously opposed to this plan have been based on the fear that the security provided by general commercial assets would not be equal to that afforded by bonds. The validity of the objection depends entirely upon the character of the assets. Of what, then, do the ordinary assets of banks consist, and what is their amount and character? In this connection it is neither necessary nor proper to consider any one bank apart from the others; for, under the plan proposed in this Report, the notes of each bank are secured not only by its own assets, but also, if those assets should prove insufficient, by such portion as might be necessary of the assets of all the other banks. It is, therefore, the general question of the character of bank assets as a whole with which we are concerned. These assets are the result of loans made by the banks to those carrying on the business of the country; they represent in the main marketable products or commodities in the process of exchange. and distribution. They are made by bankers whose interest it is to see that they are sound, inasmuch as the first loss, if any, must fall on the bank and its stockholders. These assets, therefore are based on and secured by the best business of the country; their character rests on that which is a condition precedent to all solvency, individual, corporate, and governmental. Should the time ever come, in this or any other country, when the best business assets were not worth on the average 35 cents on the dollar, a time will have come when government and municipal bonds will likewise be practically valueless. It is conceivable that a government may become bankrupt while the great portion of the private business of the country remains solvent; indeed, this has occurred. But it is not conceivable that the bulk of the private business of a country can become worthless and the government of that country remain solvent; this has never occurred. These considerations make it clear that, taken in the aggregate, there can be no safer security for bank notes than that afforded by the combined commercial assets of the issuing banks. No revulsion which has ever taken