59TH CONGRESS, HOUSE OF REPRESENTATIVES. 2d Session.

ISSUE AND REDEMPTION OF NATIONAL BANK GUARANTEED CREDIT NOTES.

DECEMBER 20, 1906.-Referred to the Committee on Banking and Currency and ordered to be printed.

Mr. FOWLER, from the Committee on Banking and Currency, submitted the following

REPORT.

[To accompany H. R. 23017.]

The Committee on Banking and Currency, to whom was referred the bill (H. R. 23017) for the issue and reden.ption of national bank guaranteed credit notes, beg leave to submit the following report, and recommend that said bill do pass, without amendment.

PURPOSE AND EFFECT.

The purpose of the bill is to give to the people of the United States, in some degree at least, the benefit and advantage of a credit currency, which is now the currency in use in practically every civilized country in the world.

The effect of the bill is this:

First. Any national bank may issue an amount of credit currency equal to 40 per cent of its outstanding bond-secured currency, whatever that may be, but this amount of credit currency can not exceed 25 per cent of its capital. The bank must pay an annual tax of 3 per cent upon the amount of this issue of credit currency in circulation.

Second. The bank may take out an additional amount of credit currency equal to 12 per cent of its capital, but must pay upon the amount of this issue of credit currency in circulation a tax of 5 per

cent.

Third. The present capital of our national banks is $853,774,775. The possible issue, therefore, of 25 per cent, subject to a tax of 3 per cent, is $213,443,694; and the possible issue of 12 per cent, subject to a tax of 5 per cent, is $106,721,847, making a total possible issue of $320,165,541.

Fourth. The total circulation of a bank, including its credit currency, shall in no event exceed the amount of its capital.

Fifth. The bank must carry the same reserves against its credit currency that it now carries against its deposits-25 per cent in reserve

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cities and 15 per cent in other cities. Your committee recognizes no difference between this credit currency and deposits subject to check. Sixth. The profit upon this credit currency will be precisely the same as upon a corresponding amount of deposits upon which the bank is paying either 3 per cent or 5 per cent, as the case may be. The full text of the bill will be found appended to this report.

AN IMPORTANT PRINCIPLE.

Your committee reiterates its often repeated assertion that bankbook credits are identical with bank-note credits, and that it should be at the option of a depositor of a bank to say whether he shall have a current credit of the bank or a book credit subject to his check.

The currency commission, representing the American Bankers' Association, has recently enunciated this principle so well in the following language that your committee quotes it with unqualified approval:

A bank note is essentially the same in principle as a deposit payable on demand. It is a book deposit converted into such form that it passes current. It resembles in character a demand cetificate of deposit or cashier's check-simply a current deposit liability of the bank.

For the purpose of illustrating acutely the importance of incorporating this principle into our banking laws your committee challenges the attention of the House with the words of its chairman, Hon. Charles N. Fowler, uttered at St. Louis, October 19, 1906, during the recent convention of the American Bankers' Association:

It has been observed that during the crop-moving period this year, from July 1, there will have to be sent into our great agricultural sections $200,000,000 of currency, or money for the purpose of moving the crops. Let us assume that this amount is due from the banks in the money centers to the banks located in the crop-growing territory, and that on the first day of July the demands for this amount were met in the denominations asked for by cashier's checks drawn to bearer or credit bank notes. What would be the result?

All the country banks would be paid off in full, but the city banks would have a corresponding liability to meet in the form of cashier's checks or credit bank notes, for the two are identical. What has actually taken place? Bank-book credits have been converted into bank-note credits to the extent of $200,000,000.

The bank credits of the country have not been increased by a single dollar. The reserves have not been disturbed to the extent of a single cent. There has been neither expansion nor contraction. It has been a simple transaction in bookkeeping; and yet the entire crop-raising and stock-producing regions have been served precisely as they would have been or are being served to-day by the withdrawal and transmission of $200,000,000 of reserve money, gold certificates, silver certificates, and United States notes, requiring a contraction of credit approximating one thousand million dollars, nothing less than a commercial tragedy. I challenge any man in this audience to deny these statements and controvert these conclusions.

But will it be suggested that this is a large conversion of book credits into note credits at one time? Let us see. The deposits or book credits of the national banks alone are now nearly $6,000,000,000. Therefore the conversion of $200,000,000 of deposits or book credits into note credits is only a little over 3 per cent of the total. Again, since the aggregate of all bank deposits in corporate and private institutions is now about $15,000,000,000, it would be a conversion of only 13 per cent of the total deposits or book credits into note credits.

But the fact is that, whether large or small relatively, it is wholly immaterial, for the transaction does not change the total bank credits to the extent of a single cent.

Ricardo says:

The issuers of paper money should regulate their issues solely by the price of bullion and never by the quantity of their paper in circulation. The quantity can never be too great or too little, while it preserves the same value as the standard.

Your committee asserts that it is immaterial whether the obligations of a bank are in the form of deposits subject to check or of credit bank notes, providing that the reserves are ample and the same amount is required for the protection of each. With the same freedom on the part of the bank to issue its credit notes that it has to accept deposits subject to check the habits of a people will determine whether the deposits of a bank or its credit notes are the larger. For one hundred and forty years there was no such thing in Scotland as a deposit subject to check. The banks simply exchanged their credit notes payable on demand for the time obligations of the people.

On December 31, 1905, the people of Scotland held the credit notes of the eleven banks of Scotland to the extent of $35,000,000; and there was on deposit in the same banks to the credit of the people, subject to check, $500,000,000, disclosing a complete change of habit in the use of credit.

On May 31, 1906, the people of France held the credit notes of the Bank of France to the extent of $954,000,000; and there was on deposit in the Bank of France to the credit of the people, subject to check, only one-eighth of this amount, or $124,000,000, showing that the people of France prefer and use current credit instead of book credit subject to check.

On December 31, 1905, the people of Germany held the credit notes of the Imperial Bank of Germany to the extent of $419,000,000; and there was on deposit to the credit of the people, subject to check, only $159,000,000, which indicates that the German people prefer the current credits of the bank to book credits subject to check.

On June 30, 1906, the people of Canada held credit notes of the 34 banks of Canada to the extent of $69,000,000; but their deposits subject to check amounted to $598,000,000, or more than eight fold, proving that the habit of using checks largely prevails with them over note or current credits.

Here, then, are four countries where there is a perfect freedom of exchange between bank-book credits and bank-note credits, and where the relations between the two are constantly changing in perfect accord with the desire and convenience of the people.

Indeed, a true credit currency is the currency of the civilized world, with only an exception or two to accentuate the rule. To such exceptions your committee will presently allude.

ADVANTAGES OF A CREDIT CURRENCY.

The advantages of a credit currency are these:

First. It will lower and equalize the rates of interest throughout the United States.

Second. It will make the rates practically uniform throughout the

year.

Third. It will give to the country districts as economical a form of credit as the cities enjoy where checks are chiefly used.

Fourth. It will give to the mass of the people, who use currency in their smaller purchases, as economical a form of credit as those enjoy who use checks in their larger transactions.

Fifth. It will make it possible for the banks generally to serve such of their customers as may want currency without disturbing their reserves to the great injury of other customers who have loans which must be paid before the currency can be advanced; for it is immaterial to a bank whether it owes a depositor or a note holder. Sixth. It will almost invariably prevent any panic whatever, and will always avert a ruinous crisis.

Seventh. If at any time contraction of credits becomes necessary because too much of the commercial fund has been diverted and transformed into the investment fund, a credit currency will facilitate liquidation without that destruction of values incident to a fixed quantity of currency such as we now have.

For the edification of the House, your committee submits the following diagrams, which demonstrate that while there is no country in the world which needs a credit currency so much as ours, it is the only country in the world with a currency absolutely fixed, so far as adjusting itself to our varying needs in the slightest degree is

concerned.

The conditions in Canada, all things considered, are more nearly like our own than those of any other country; for, once every year, there is a very great demand for currency. This demand the Canadian banks supply, each recurring season, with a facility that must challenge the attention of every thoughtful and fair-minded man.

For the years 1903, 1904, and 1905 it will be observed that the increase and decrease, or expansion and contraction, of the Canadian bank notes approximate on the average 30 per cent, while our bank circulation was during this whole time moving only in one direction. It rose as persistently from January to July, when it should have contracted, as it did from July to January, when the crops had to be moved. The diagram discloses with startling nicety how accurately every fall, in the month of October, the Canadian currency was at its maximum.

Your committee desires to impress upon your attention the fact that in May and November there are settlements in Scotland, and that these are perfectly reflected in the accompanying diagram. This again demonstrates the peculiar fitness of a credit currency to come and go as the business needs of any country require it.

Your committee calls the attention of the House to the German system, in which there are four regular periods when the currency goes out and returns. There are quarterly settlement days in Germany. On these days the notes of the Imperial Bank, with perfect regularity, go out and do the work they are sent to perform, accomplishing it precisely as checks do. Then they return to the bank to await the next summons from the demands of trade.

So your committee might take up each of the countries with whose currency movements our own are compared and point out the reasons for the variations indicated. The per capita range of expansion and contraction for the various countries is as follows: Canada, $3.29; Germany, $2.12; France, $1.73; Austria-Hungary, $1.28; Japan, $0.48; England, $0.47; Scotland, $1.22.

If our variation per capita each year was as great as that of Canada, it would amount to $276,360,000. If it was the average of all the above countries, it would be $1.50 per capita, or a total of $126,000,000.