rural banks. Of course, any one familiar with the operations of banking perfectly understands that the profit to a bank does not necessarily depend on its power to issue notes. On this point, however, a widespread misapprehension exists. It is supposed that by granting to banks the privilege of issuing notes, there is conveyed to them a means of making large profits and of monopolizing the market for loans. This belief is erroneous. At the very outset we are met by the fact that our largest city banks, almost without exception, make very little or absolutely no use of their right to issue notes; and yet these great banks make a profit from banking and accumulate a surplus. How can this be, if the note-issues are so important a privilege?

A bank in reality makes a profit by buying and selling. In making a loan or discount, it buys the right (duly secured) to receive money in the future, and it pays for this right by creating a liability to pay the borrower on demand from its resources. The profit arises from giving the borrower a claim for immediate payment less the bank discount or profit. It follows that the gain to a bank is settled by this discount operation, and resides in that. And this profit is the same to the bank whether the demand liability is issued to the borrower in the form of its notes, or in the form of a deposit-account to his credit. Whether one or the other form of liability is actually used, depends not upon the will of the bank, but upon the choice of its customers. In the great financial centers the banks adapt themselves to their constituents, who do not wish to carry notes about, but who find it much safer and more convenient to pay for the most part by checks or drafts on deposit accounts. This explains why the richest city banks with enormous deposits, do a profitable business without issuing any notes.

It is quite otherwise in rural districts: there the small borrower calls for notes, and seldom uses a deposit account. Upon the presentation of proper collateral, and a loan being asked for, the bank cannot grant it, unless it is able to provide that kind of bank currency—that is, notes-which the habits of the community force the borrower to choose. If, as under the present national banking system, the small banks of the South and West

find it unprofitable to issue notes or to obtain them in some way, then it will often happen that, even where banking capital exists, it cannot be used in the particular way which would be of most advantage and convenience to the community in which it is placed.

The present system, it has elsewhere been pointed out, requires banks of issue in rural districts to withdraw from those sections for investment in bonds large amounts which would otherwise naturally be loaned to local borrowers. The city banks, on the other hand, whose business is carried on by the use of deposit currency, are not thus required by our present law to invest in bonds as a basis for that form of currency, but are permitted to loan their funds freely to borrowers. The Commission proposes to remove this inequality by giving to the country banks the same freedom in loaning their funds to local " borrowers which the city banks already possess.

176. The plan of the Commission will work in the interest of the rural communities, and of small borrowers in those regions. Indeed, the plan is only carrying out equal justice and fairness to all classes and to all parts of the country. The large city banks do their business and earn a profit mainly without the use of noteissues. They create a form of currency, of a highly efficient quality as a medium of exchange, by which profits are obtained. No tax, however, is levied upon this medium of exchange, while the currency of country banks, that is, note-issues, is taxed. To allow to other parts of the country, where the note-liability is the only convenient form of completing the discount operation, an equal right to an untaxed medium of exchange, and to one also based upon the general commercial resources of the bank, is no more, no less, than justice. The recommendations of the Commission, therefore, concern mainly the small producers and borrowers in districts other than the financial centers.

It is true that if the method of issuing notes is made less burdensome and expensive, the city banks may issue more notes than now. They would do this, however, only provided they could supply other (and generally rural) communities with notes,

in default of sufficient local banking facilities. At present, for reasons illustrated by the figures elsewhere given, the country banks borrow of the city banks, and thereby obtain the currency which they do not now issue themselves. Under the plan of the Commission, the main demands of rural districts for notes will be supplied by the country banks, and they will not be obliged to depend so largely on the cities.

INSTANCES OF BANK NOTES BASED ON COM

MERCIAL ASSETS.

FOREIGN BANKS.

177. An appeal to the experience of other countries in regard to methods of securing bank-issues is a necessary part of our duty. It must be noted, however, that the history of European systems will not furnish instances of needs exactly parallel to our own. There the banks exist under special charters, and with large capitals, while we are now concerned with a free banking system with many small banks. The examination, however, will determine to what extent in other countries notes based on general commercial resources have been found to be safely secured.

178. In France a monopoly of the issue of notes resides in the Bank of France, which is neither required to deposit bonds as a special security for its notes, nor obliged to invest in such form any large portion of its assets. With a capital of $36,500,000 (182,500,000 francs) it is permitted to issue notes freely to the amount of $900,000,000 (4,500,000,000 francs) and even within this limit it is not governed by any legislative restrictions as to the amount or character of the reserve it shall hold against its liabilities. When the bank discounts a note for a borrower, and pays the proceeds to him in the form of its notes, those notes are based on the general assets of the bank, including, of course, the commercial paper acquired by the bank in the transaction. The notes of the Bank of France have always enjoyed the highest possible credit, and were but slightly depreciated even during the years about the time of the FrancoPrussian war, when specie payments were suspended. The credit and solvency of the bank have always been unquestioned.'

1

The system of deposit-accounts has not been much developed in France. Con sequently, except for the large substratum of gold and silver coin in general use, the medium of exchange furnished by the Bank of France consists almost wholly of notes

179. In Belgium and the Netherlands, the principle of basing bank-issues on ordinary commercial paper has been followed, and has resulted in a perfectly safe currency. In Belgium the national bank is forbidden to loan on mortgages or industrial stocks, or to take part in industrial enterprises. In this way its assets are confined very largely to legitimate commercial discounts. No portion of the assets is set apart for the note-holders, as distinguished from the other creditors of the bank. The only restriction upon its power to issue notes is the requirement that it hold specie to an amount equal to one-third of its outstanding notes and other demand liabilities; but in The condition of the bank on January 6, 1898, is shown in the following statement, which for convenience in comparison, has been thrown into a form similar to the usual national bank statement :

CONDITION OF THE BANK OF FRANCE JANUARY 6, 1898.
(Reduced from francs on the basis 5fr. = $1.)

The habits of the people being what they are in regard to using notes rather than deposit-accounts, the bank is obliged to conform its action to the requirements of its constituents—which explains the predominance in its account of note-issues over deposits. For this reason France furnishes the type of a bank and a constituency nearly like that of the country banks and communities in the United States, where notes are demanded, and deposit-accounts are little used.