Evening star. [volume] (Washington, D.C.) 1854-1972, 1897-11-10
PROF. NEWcOMB'S REPLY
Communication on Finance to the Monetary
Commission.
He Deals Principally With the Sinh.
ject Of Banking and the
Issue of Notes.

Among the replies which the monetary
commission has received to the interroga-
tories requesting the views of financiers.
business men and students Of political
economy on the general subject of currency
reform, is one from Prof Simon Newcomb
Of this city.
1t may surprise Prof. Newoombs Wash
ington friends, who know him only as an
eminent astronomer and mathematician. to
learn that he has been for many years a
close student of economics and that he
was the author in 1879, during the green
back craze, of a treatise entitled ..'The
A. B. Of Finance" which is stin re- re-
garded as standard authority. Mr. New
combs reply deals principally with the
subject of banking, concerning which he
says:
1.-The use Of bonds deposited with a GEN.
tral authority as a security for note is
sues is subject to the objection that the
fundamental purpose Of banking capital is
to supply at call the varying volume of
credit required by the mercantile COM
munity. Hence. every part of the capital
invested in bonds not at command of the
bank Is diverted from the legitimate pur-
pose of the bank.
"On the other hand, 1 am sure that no
one who remembers the condition of our
currency. and the losses and inconvenience
TO the cen munity from the multiplicity of
bank notes before the civil war, would, un-
to a system of unrestricted note issues
This dilemma suggests the fact that the
issue OF notes is not necessarily any part
of the legitimate functions of the bank
and that. in a mercantile community, the
bank which gives its customer a credit on
its books In exchange for promissory
note, bestows upon him that which he can
use as money under all ordinary circum-
stances by drawing his checks upon the
bank. Hence, there is no limit to the elias
tlc!ty of that large part of the volume of
the currency which consists in bank credits
But 1t is, believe understood that notes
are still necessary in many cases. notably
that of moving the crops. where credit is
not so firm that checks can always be
drawn and accepted
IF the commission is disposed to con-
sider plan radically Objectionable in prin-
cipie and contrary to the best ideas on the
subject, and yet possibly practical and use
ful. l would suggest that some system be
devised unCer which note issue by the
banks cculd be guaranteed by the govern
meht without a deposit of bonds. Such
notee should, of course, be first lien on
tic assets of the bank, The restrictions
under which the guarantee could be made
Without serious danger would involve some
system of licensing analogous to the pres
national bank system.
1t would be interesting in considering
this question to know how many cases
have arisen in the history of our national
banks in which, had the government thus
guaranteed the notes, the assets of the
bank would not have sufficed for their re-
demption." In reply to the question, How
would you, in times of panic or sudden
stringency, provide for additional issues by
the banks to enable them to continue dis
counts and prevent commercial distress?"
Mr.. Newcomb says:
1T seems to me that the system adopted
by the Bank of England comes quite near
that which is practically best Those
restrictions upon issues by the banks which
are wholesome and necessary under Or
dinary circumstances should be capable of
relaxation in times of panic or sudden
Stringency by the same central authority.
That this may have its proper effect, re-
strictions on the rate of interest which
may be charged by a bank should be re-
moved. rate of interest should always
be known at which any customer of bank
offering good security should be able to
borrow money for limited time"
Mr.. Newcomb thinks a step in the right
direction might be made by providing that
to have definite reserve at all times the
average ratio of reserve to the issue during
periods of, say one year, should alone he
fixed. Then bank which during nine
months kept ore than It's required reserve
would be allowed to expand, irrespective of
that reserve, during the remainder of the
year. Mr.. Newcomb frankly admits that
such an arrangement might not be alto
gether practical; in which case he would
advise the adoption of a system like the
British "orders in council" with the Sec
retary of the Treasury acting as council.
or possibly permitting the council to con-
Sist of some authority organized by the
banks themselves or by the clearing houses.