these; and if they now have legal existence, it can scarcely be deemed sound policy to permit their continuance, or to sanction the establishment of others of like character." The legislation of 1848, providing that "all banking associations and individual bankers shall be banks of discount and deposit, as well as of circulation," was an attempt to do away with these "circulation" banks. It seems, however, to have been ineffectual.* Following is a tabular statement of data as to failed banks under Free Banking system. Banks. Tenth Ward Bank...[1840. ....... 27,343 b 74 122,234 a Par 7,109 1841 953 1,504 James Bank......... 1851 J.W.Rumsey&Co. Bk 1861 9,574 11.240 a 42 6.519 2,890 a 30 2,023 24.825 b Par $1,648,000 $72,849 2,582 a 60 1,132 Seneca County.... 1840 *This case is one of deterioration, during years of delay, in securities left to redeem a remnant of circulation, the bank having itself redeemed at par all of its circulation that it could reach, and the greater part of the $695 noted, never being in fact presented for payment. a. Secured by pledge of stocks alone. b. Secured by pledge of stocks and bonds and mortgages. DEFECTS AND REMEDIES. Ten years' experience under the safety fund system made it possible to avoid from the very origin of the free banking system numerous mistakes which might otherwise have been involved. But even with this advantage the novel conditions. resulting from the new legislation developed peculiar defects. First. It was found that the acceptance of public stocks other than those of New York, tended to create a market in New York, to serve as a basis for bank circulation, for stocks which were otherwise comparatively unsalable. As a consequence, when by the failure of banks depositing them, State officials attempted to realize upon them, the result was disastrous, and note holders suffered heavy losses. *It is believed that this provision of the law is in many cases entirely evaded. The quarterly reports received show that they are not banks of discount and deposit, having neither; or if they have, it is a mere nominal sum incorporated into their reports to comply with the form and not the spirit of the law. They are mere banks of circulation, and are established for that purpose alone. The business of circulating their notes is done exclusively through agents and brokers in commercia! cities distant from the location of the bank. In many instances, it is believed, the banker does not even sign the notes issued from this department and put in circulation, but gives that power to an agent. In this manner are evaded the provisions of the law of 1818, which makes it obligatory for banks and bankers to transact their usual business at the places where they are located. These banks afford no facilities to the business portion of the community, and in a time of pressure or embarrassment in the money market, not unfrequently allow their notes to be discredited, thereby creating a panic and subjecting the bill holders to losses.-Report of Comptroller, 1851. The following is a summary of the results of the sales of securities prior to Jan. 1, 1849 : Second. A similar result attended the use of bonds with mortgage collateral as a basis for currency. On sudden forced sale, no matter how good the security, they were frequently sacrificed at less than their face. Again, it was found that ordinary precautions were not sufficient to insure a proper margin in steady value of real estate collateral above the bond to secure which it was mortgaged. Third.-The business of currency issue being thus encouraged without reference to its connection with discount or other financial business, an incentive was offered to sanguine and visionary individuals to exploit their credit-with results scarcely less disastrous to themselves than to the community whose business they helped demoralize. Fourth. The law encouraged petty banking under more or less amateur management, with the resulting certainty of frequent petty failures however sound might be general conditions. Fifth.-No adequate distinction was made hetween security and availability. The result was that any serious strain must force upon the market a large amount of securities, the sale of which below their par or valuation by the State officials was as inevitable as was the consequent result of somewhat of loss to noteholders. Sixth. There was a tendency to rigidity of circulation. Though the securities accepted by the bank department were in general procurable at such rates as did not involve either large premiums or peculiarly low interest, yet any prompt response to legitimate demands for more currency was none the less obstructed. Experience elsewhere has shown that a 20 to 25 per cent. increase in the wants of a community at one season of the year above those of another is not unusual or abnormal. For the banks to create a new investment demand for securities equal to one-fourth or one-fifth of their circulation would be as sure to involve somewhat of a rise in price as would the throwing of an equal amount of securities upon the market, when the currency was no longer needed, bring about a substantial depreciation. To make the process pay, interest upon the additional currency thus secured for the short time involved, must be sufficient, not merely to provide compensatory interest, but to make up for the loss thus involved. In practice this was prohibitory, and increase of currency was ordinarily limited to such as might be obtained by the deposit of whatever securities a bank might happen to have; while the possession of securities involved a tendency to keep them on deposit at the Bank Department, and to take out the full amount of currency even during the season when there was little demand for it. The actual result was the natural one-a practical rigidity of free bank circulation-not, however, so great as has of late been the case under the National banking system, which the sacrifice involved in government bond investments, and the effect of Federal legislation intentionally prescribing rigidity, has left a petrifaction. Seventh. There was an absolute lack of mutual support among the banks of the system. As a result, however it might be perfected without remedying this defect, from time to time, in individual cases, noteholders would suffer petty losses. Experience showed that this was the case, and the uncertainty thus kept alive as to the safety of well secured notes, was much more serious than the actual loss suffered. REMEDIES. The first defect noted was corrected by the act of 1840, to which reference has already been made, restricting the state stocks admitted on deposit to those of the State of New York alone (even United States stocks not being accepted until 1849), and the earlier basis-a 5 per cent. stock at par-having proved too high a rating, the act of 1848 raised the basis to 6 per cent. As to second, it was not until 1863 that the Legislature went so far as to discard mortgages altogether as a basis for circulation; but the terms upon which they might be accepted were earlier made so strict as effectually to discourage their deposit. The third and fourth of the defects noted were to a certain extent corrected by the legislation of 1840 and 1844, requiring associations to deposit at least $100,000, and individual bankers at least $50,000, in approved securities before they could receive blank circulating notes. As to the fifth, sixth, and seventh of the points noted above no reform was ever had. As to the margin of availability, a mere limitation of notes to be issued to say 90 or some other per cent, less than par or official valuation would be perfectly easy, and if carried to the proper extent would meet the difficulty. As to the comparative rigidity of the circulation, this is a defect involved in the system itself, and, with all its faults, is not without somewhat of compensationthough it seems generally agreed that the balance of considerations is against rigidity. As to the seventh defect noted, the mutual support desirable to perfect in this regard the free banking system, would have been so much less than that necessary in the Safety Fund system (where such mutual support was the main security offered) that it could have been, and probably would have been, provided in some one of numerous practicable ways, which would not have been complicated in administration or burdensome to the banks. RESULTS. In the case of free banking, as earlier in the Safety Fund experience, legislation, to remedy such defects as were disclosed by experience, was on the whole. prompt and effective, as noted at pages 300 and 301. It was during the first twelve years that were suffered most of the disasters which were afterwards made impossible. Abstracting as to banks which failed before 1850 the results shown at page 303, it is found that for twelve years, with an average circulation of $6,000,000, the actual loss to noteholders was for the whole period $326,000, or $27,200 per year-less than half of one per cent. on the average circulation. For the latter period, 1851-65, the total failures. resulted in an average loss of $4,800 per annum upon an average circulation of $22,000,000 outstanding; while the experience of the last few years seems to indicate that, with the exception of rare petty losses of a small part of the circulation of individual banks, there were no other against which to perfect the security of the system it was necessary to provide. In its experimental days the Free Banking system had made but a poor showing in comparison with its Safety Fund rival *; but after it had been perfected in the light of experiment, it was so nearly a secure system as to have been accepted with universal approval as the model upon which National banking should be planned. SAFETY FUND vs. BOND DEPOSIT. (a) AS TO SECURITY. A comparison of the two systems so thoroughly tested in New York State seems to leave little room for preference between them on the mere matter of security. From its very nature, being, as it were, a Lloyds Insurance system, the Safety Fund plan avoided from the first the one defect in this regard which in the case of of the Free Banking system remained uncorrected to the end-that of unsupported responsibility of individual petty institutions and of separate petty funds. The losses on this account had, however, proved so petty in the latter years of the Free Banking system, and so easy and certain would have been a remedy had the matter ever become a serious one, that it is hardly fair to consider it as a make-weight in the comparison. It may, therefore, be assumed that, in its. perfected shape, each, the Safety Fund and the Bond Deposit system of New York, was satisfactory as regards the security of the circulation. (b) AS TO COST. In this regard the essential comparison is between the net expense and troubleto banks, connected with similar amounts of circulation under the respective systems, Eliminating features common to both, this comes down to a comparison of the average rate of the insurance assessment required by the safety fund system and the average loss by the investment requirements of the bond deposit plan. Solong as the required safety fund assessment was above one-half per cent. annually, and the bond deposits permitted to be made in a large range of investment securities, the bond deposit plan was undoubtedly at least as economical as the other. But in the face of experience showing that the safety fund plan as perfected would have required less than 3 per cent. annual insurance assessment upon circulation-while it had proved necessary, in order to make the bond deposit system safe, tolimit the securities deposited to a few of gilt edged classes-the comparison steadily turns in favor of superior economy of the safety fund system. (c) AS TO ELASTICITY. As compared with (b), which includes expense directly paid by the banker, this head involves the opportunities offered him to serve the public. For, whatever * In the security of the public under each system, our experience in the failure of ten Safety Fund banks, and about three times that number of free banks, proves that the contributions of half of one per cent. annually on the capital of the Safety Fund Banks, has thus far afforded as much protection, as the deposit with the Comptroller, by the free banks, of a sum noininally equal to all the bills sued to them. It will be seen, by reference to a statement under the head of insolvent free banks, that the loss to bilk holders, on the supposition that all the securities had been stocks of this State and bonds and mortgages, would have been over 16 per cent., while the actual loss has been nearly 39 per cent.-Comptroller A. C Flagg, 1846. may be speculative rates of interest caused by plethora or stringency of currency, the legitimate borrower is mainly interested in the rate at which during the seasons when he most needs advances he can secure them; and this depends almost entirely upon the relative ease or difficulty with which an increase of currency can be had to meet temporary business demands. Elasticity is the essential feature of a safety fund as compared with a bond deposit system. The limitations upon elasticity obstructions to temporary increase of circulation — are noted at page 304 above. It only remains here to compare the actual results of these two systems co-existing in the same State, under similar circumstances, during the years when both were in successful operation. The two diagrams which follow are their own best explanation, and the character of the exhibit is so marked that comment is superfluous. PER CENT 1857 1858 1859 1860 1861 CIRCULATION DEC. MAR JUNESEPT. DEC. MAR.JUNE SEPT DEC. MAR JUNE SEPT. DEC. MAR JUNE SEPT. DEC. ΤΟ CIRCULATION DEC. MAR.JUNE SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JUNE SEPT. DEC. STATUS WHEN SUPPRESSED BY FEDERAL LEGISLATION. Such had been the career of New York State bank currency, which was arbitrarily closed by the act of 1863, providing for national banks and their currency, and by later acts, including that of 1865, by which State bank notes were driven by a ten per cent. tax from the rivalry they still maintained. The experience had been most instructive, and its results most satisfactory-creditable alike to the business habits and legislative aptitude of the State. Under the old charters securing a monopoly of banking in a comparatively few large institutions, during the first quarter century-1791-1815-no noteholder had lost a dollar. Even during the next fourteen years of indiscriminate banking-1815-1829-the loss to noteholders had averaged less than 14 per cent., and probably less than 1 per cent. of the circulation. The Safety Fund act then ran twelve years-1829-1841-before a single noteholder suffered-though the panic of 1837 had meanwhile swept the country, and with the amendments to the Safety Fund act that were promptly made as their necessity was developed, not merely were the actual losses to the noteholders less than one-eighth of one per cent. per annum upon the circulation for the full period 1829-1866, but they were such in character as to show that, had the amendments subsequently adopted been originally incorporated in the law, and the system left undisturbed to serve the whole State, not only would the noteholders never have lost a dollar, but the annual assessment necessary to secure this would have averaged less than one-fourth of one per cent. upon the capital, or three-eighths per cent. upon circulation. The Free Banking system, adopted in 1838 as a political, rather than a financial reform, had in its turn learned by its mistakes until, with a loss for the whole period averaging less than one-tenth of one per cent. a year on its circulation, there had not been a failure since 1861 in which the notes were not at once redeemed in full; while the success of the system had made it the model upon which Secretary Chase planned the National Banking system. It is, of course, not intended to suggest that noteholders had not been subjected to many charges other than those above calculated. These charges, however, were the faults of the imperfect commerce of the time, were not chargeable to any system of banking, and were cured as commercial facilities developed. For example, before the arrangements by which all notes were issued in blank and registered by a State official, the loss to the community by counterfeits was large, though not entering into the reports of or concerning banks. Again, during the early part of the century communication was so imperfect, and commercial organization so lacking, that for these reasons alone exchange often commanded high rates-until, arrangements having been made for redemption agencies at New York. Albany and afterwards Troy, this factor became unimportant, and-the banks voluntarily bettering the provisions of the law-soon practically disappeared.* Nor is it intimated here that either system was perfect. As already noted, the safety fund assessments on capital should have been transferred to circulationand doubtless would have been, except that for its last twenty-five years the safety fund system was a survival, albeit a vigorous one, and already superseded by "Free Banking." On the other hand the comparative rigidity of the free banking circulation was so supplemented by the perfect elasticity of the safety fund system, until both were alike pushed aside by the national banking acts, that its inconvenience was not felt. Though the free banking system had had ten years of safety fund experience to guide it, its own earlier years were those of greater disaster than that The apprehension, that a redemption at par in New York would send back the notes upon the bank, and leave their place to be filled by a less valuable currency; or, that the banks thus redeeming at par would be restricted in their circulation and curtailed in their profits, is not borne ont by the experience of those banks which have for a long time kept their notes at par in the city of New York. In the following table, five banks have been selected, which keep their notes at par in New York and five with corresponding capitals, which redeem under the law at half of one per cent. The comparison extends to four quarters, and the aggregate circulation for the year for the five banks which redeem at par is. While the circulation of the other five is.. Excess in favor of par redemptions.. The details are given below: $3,329,975 3,232,218 $97,757 The following comparison between the Farmers' Bank o. Troy, which redeems its notes at par in the city of New York, and the other incorporated banks of the same place, the notes of which are at a discount, shows a more striking result than the above. The comparison is made for the same period of time: |