The evening telegraph. [volume] (Philadelphia [Pa.]) 1864-1918, 1868-09-19
The National Banks,

From ne ~. y. tribune.
TO ehe LEdito, Of The 7ribune-Slr:-Please
show some readers of your paper how to justify
the existing arrangement between the Gov ern.
charge of their bonds, returns to them nearly
all their purchase money TO do business with
and pays them interest on their bonds, which
seems TO be equivalent TO paying IL on the notes
To lend money and pay interest upon 1t to
the borrower cannot but be considered a very
strange method OF doing business.
d. II appears reasonable that the interest should
while the banks are supplied with an amount
almost equal to the principal as working capi
tai; and the transaction being optional with the
banks no breach of the national faith would be
involved II such agreement were made.
Aug. %, 1868. MYsTIFIED REPUBLICAN,.
...... Reply by the Tribune.
l. The business of banks, in respect to their
circulating notes, consists in discounting,
I. e., in exchanging them for the notes Of pri-
vate parties, running at from thirty days to
four months time. They can only afford to
do this by making higher interest on the
capital they lend than they pay for it, City
banks and bankers can afford it by using
money deposited with them on which they
pay no interest. Interior and country bankers
have no such resource. Their deposits are
too small, and hence their ability to dis
count notes Of private parties, by giving
their own cash notes for private notes
running on time, depends ON their ability
either to get double interest from those for
whom they discount notes or to get one rate
OF interest from them and one upon the secu-
rites they deposit. Obviously, if all banks
were obliged to pay current rates of interest
to the Government on their capital, in order
to enjoy the privilege of lending at the same
rates on individual notes, the business of
banking would be wound up. Our CORES
pendent would have it that, before banker
should have the privilege of loaning him 800
at the current rates of interest, he must first
toto
This, if it were possible, would be very profit
able for the Government and the community,
but neither our correspondent nor any other
man would do banking on those terms.
2. Bankers always have issued their notes
on the pledge OF securities on which they drew
interest. Their capital being worth one rate
of interest by getting that on their securities
and an additional one on their discounts they
make one rate Of interest net, !. e., over and
above what their capital costs them, and
herein lies the essential profit of banking,
without which it cannot be done.
Under the old State bank system the banks
invested their whole capital in securities, de-
posted them as pledge for their circulation,
drew interest thereon, and loaned their cur
Tency to their customers in discountipg notes.
on which they drew interest again. By draw
ing two interests on capital which cost them
one, they made a net interest or profit. They
could not have made profit without it.
The question, therefore, resolves itself into
the simpler one-whether we shall have any
banks at all.
8. The Government has no power to stop
the interest from running on the bonds held
by the banks, any more than on those held
by private parties. The banks have bought
the bonds with capital which was their own.
The bonds are in no way under control of the
Government. The Government may repeal
the banking law, or perhaps prohibit all
hot b tnn frAs, 1Ns. I,xN -
would only make it more difficult to borrow
money, and hence increase the rates of in
terest.
A. The underlying question is, whether the
Government or the banks ought to furnish the
people with currency. The objection to
having the Government furnish the people
with currency is that the Government is not
a bank, cannot discount private notes, and
hence that its currency is not flexible, and
does not expand with demand for money,
and contract with q redundance Of it, as a
paper currency ought to do.
B. The Government would save nothing by
issuing the currency itself instead of issuing
it, as now, through the banks. This is proved
by the following facts. The National Banking
law limits the quantity of notes the banks can
issue to $500, 600, 900. OF this sum the law
requires them to keep 20 per cent, or $50, ,000,-
600, as reserve. They must also keep re-
serve equal to 20 per cent. of their deposits,
or $l14, 600, 900 more. These deductions leave
of the $500, 100000 only $12G, 200, 900 of crou-
lating notes on which the banks can draw
interest. The interest on this sum at seven
per cent. would amount to SS, 820, 900, as the
total interest on the available circulation of
the banks.
To offset this, they pay into the National
Treasury in taxes one per cent. on their circu-
lating notes, say S3 900, ,000-one-ha half of one
per cent. on their deposits, or $2,S55, 900.
tax on their capital stock not invested in
Government bonds of $400, 900, one-half of one
per cent. on net dividends and sur plus, which
for the year 1867 amounted to So, 300, 900,
and a license tax of 81 on every $1,000 OF
capital Their capital being S424, 200, 900, this
license tax amounts to $S49, 000 The sums
above named, amounting to $40, ,403, 900, are
paid into the National Treasury, beside about
$8,000,000 of local and State taxes. Beside
what they pay in State and local taxes, there
FORE the National Banks pay to the Govern
ment 81, ,5s3, 900 more in taxes than the
interest on their circulating notes amounts to.
In other words, they pay one and a half mil
lions per annum for the privilege of doing
business which is indispensable to commerce
and industry.