is perfectly familiar. Risk such as now has to be taken would be eliminated. What is vital, however, is that with a national discount market an investment in a bankaccepted bill is one which could be realized upon immediately. Commercial paper and bank acceptances are both discountable. The prime difference between them, as affecting a country bank, is that they are not both readily rediscountable. Herein probably lies the reason for the strong prejudice against rediscounts which exists among bankers in the United States. In this country when a bank discounts a piece of commercial paper it is discounting something which for its security depends solely on its maker. Should the bank desire to realize on this paper it could do so by rediscounting it, but such a rediscount would be practically equivalent to a loan to the bank on the strength of its own name. In other words, to rediscount its commercial paper would affect a bank's credit. To ask for a rediscount is to ask for accommodation. This would not be the case with bank-accepted bills. If such bills were discounted by a country bank as a means of investing its surplus and it was desired to realize on them such a rediscount would be made not on the name of the country bank, but on the name of the accepting bank. A rediscount in this instance would not constitute a loan to the country bank and would have absolutely no effect on its credit. It would merely indicate that some more profitable business had arisen in which to employ its funds or that it was desirous of increasing its reserve.

Since the reserves of interior banks are so largely concentrated with them and it is essential that they keep their assets in an especially liquid condition, the prohibition of

bank acceptances works injury to the banks at the country's financial center, New York, in a different way. It deprives them of what London banks, for example, have—that is, a mass of the soundest securities against which to loan their money on call or in which they may invest their funds for very brief periods-bills of exchange, covering genuine commercial transactions, bearing the acceptance of prime bankers. Unquestionably such securities as a basis for loans are preferable to stocks and bonds, but without them New York banks must have recourse to day-to-day loans on the Stock Exchange. Moreover, when the demand for such loans is limited, New York banks are forced into the keenest kind of competition, a competition which, as has been pointed out, is not only of little benefit to trade but which, through the lowering of the money rate, actually stimulates speculation. Furthermore, without a steady money rate such as exists in countries possessing discount markets, New York banks are left with no reasonable or satisfactory basis upon which to fix a rate of interest to pay for the deposits of country banks. In London interest on bank deposits is fixed at a certain percentage below the Bank of England discount rate, usually 11⁄2 per cent—that is, a rate which fluctuates with the value of money and normally leaves a certain margin of profit to the London bank. The same practice is followed in all the great financial centers of Europe. With us, country banks receive a fixed rate of interest for their deposits, usually 2 per cent, the year around, regardless of fluctuations in the value of money. The unscientific nature of such a rate is obvious. When the call loan rate is high country banks do not receive

interest in proportion to the value of their deposits. When it is low the New York banks pay more interest than the deposits are worth. In the latter instance the New York banks are forced into injurious competition with one another. They are in much the same position as competing railroads were earlier in our history, with results similarly baneful. With the railroads it was worth while to secure traffic even at a losing rate, as no matter what the return it helped if only a little toward meeting fixed charges. Oftentimes with the New York banks to-day any rate which they can secure for their money whether losing or not is acceptable as helping to meet this fixed interest charge on bank deposits. To pay 2 per cent for deposits and to keep a 25 per cent reserve a bank must loan its money at 234 per cent to come out even, taking into consideration the actual expense of making and recording the transaction. It is better to loan at 134 per cent, however, than to let the money lie idle. It is better to lose i per cent than to lose the entire 234 per cent, as would be done in case no loans at all were made, clerk-hire being just as much a fixed charge as interest. With the amendment of the national bank act, to permit the acceptance of time bills, such ruinous competition would cease. The funds of the banks would come to be principally invested in trade paper and stock-exchange loans would be relegated to a position of secondary importance, as in London and on the Continent. The field for the investment of their deposits would be greatly broadened, to the benefit both of the banks and trade in general.

To remedy this primary defect in our banking system, to make possible the financing of our domestic and foreign

trade along the lines which have proved so advantageous in other countries, to provide negotiable paper of a character suitable to the investment of foreign funds, paper which can not only be discounted but rediscounted, to give trade the advantage of bank surpluses accumulated both in the country at large and in New York, to lessen the evils of speculation, to afford a reasonable basis for the calculation of interest rates on bank deposits in central reserve cities, to bring New York into the circle of those financial centers between which funds move naturally as discount rates rise or decline, to secure the advantage of the competition of foreign capital for our trade paper, can be put in the way of accomplishment by the insertion of a paragraph or two in the national bank act.

To permit bank acceptances would not require the revision of the entire bank act. To remove the barrier to scientific banking, as it is known abroad, no complicated piece of legislation would be necessary. Time only would be required for the development of a great national discount market.

The establishment of a central government bank is not a prerequisite to the legalization of bank acceptances nor to the giving of utility to such acceptances. The chief value of such banks lies in their great resources, which enable them to rediscount bills and make loans against bills or other securities without practical limit at all times, thus enabling other banks temporarily to realize upon their assets should occasion require. That is the function of a central bank. If any bank is sufficiently powerful to do this and is willing to content itself with small profits through the keeping of a large reserve it can come to exer

cise the functions of a central bank. There is no necessity of such a bank being the Government's sole financial agent. It is not this which gives the Bank of England its power. It is rather the knowledge that the Government, realizing the size of the burden which the Bank is bearing and how important its safety is to the whole financial fabric of the country, stands ready to assist it in case of need. Past crises have been met by the Government authorizing the Bank of England to make an extraordinary issue of notes. Certainly our Government can be counted upon to render like assistance to a national bank similarly placed. In fact, we already have a law providing for an issue of emergency notes under the sanction of the Govern

ment.

If, moreover, we are to judge by the Bank of England, provisions for an elastic currency are not essential to the existence of a central Bank. It is true that the Bank of England has a large amount-£56,327,085 notes--outstanding, but of these £37,877,085 are on account of the Government—that is, they are nothing more than paper representing an equivalent amount of gold, being exactly similar to our own Government gold certificates. Of the remainder, £11,015,100 are based on £11,015,100 government debt. The balance, £7,434,900, is based on “other securities. This balance, however, is not subject to periodic fluctuation. From day to day the only way the Bank of England can increase its note issue is by receiving into its vaults an equal amount of gold.