The Saint Paul globe. (St. Paul, Minn.) 1896-1905, 1901-08-04

report, however, proposes as further sc.
curity for the payment of bank notes
that each bank shall deposit with the
United States treasury a redemption fund
of 8 per. cent of the Outstanding circula-
ton, and in addition the notes to be a
first lien on all the assets of the bank,
including the liability of shareholders. 1t
is an essential requisite of any system
of bank note circulation that the notes
should be absolutely certain of payment
when presented to the issuing bank or
its redemption agency. and that the notes
should circulate with unquestioned con-
fidence everywhere in the land
1t is believed that the plan recommend
ed by the monetary commission for the
exta bliShment or guaranty fund win Sc
cure these two necessary attributes The
recommend of the commission for a
guaranty fund is not original. but was
suggested by the successful experience of
Sbanking systems in the states before the
Civil war. and in other countries
In 1929 the So-called back fund" was
esta blished in the state of New York
This fund was created by an annual fax
by the state on each note issuing bank
of half of per cent of its capital stock
to be accumulated until ii was equal to.
3 per cent Of the stock. This fund, how
ever, was then intended for guaranty
for both deposits and circulating notes
The act was subsequently modified in
some particulars. The fund was In ex-
istenee eight years before the failure of
any bank caused 1t to be drawn upon
1t was not until 1912 that experience
proved the inadeQuacy of the fund for
the safety OF both notes and deposits
ana In that year an act provided that the
fund should be used only for the redemp-
ton of notes of failed banks. An exam
ination of the facts shows that If the
hank fund had been applicable from the
beginning only to the notes and the notes
made a first lien upon all the bank as
sets, as they were by the constitution of
New York itself, in 1886 and earlier by
the state OF Connecticut, and with a pro-
ici.n dot inc h..
of their issue, the bank fund would not
have been one-half exhausted
The experience of New York under the
system, including the speculative years
from 1885 to 1888, shows that the total
loss from circulating notes If the sys-
tenn had been established in it's finally
perfected form, would have been met by
an assessment OF less than one-tenth of
l per cent of the capital of the issuing
banks. Other applications of the prin-
ciple OF a guaranty fund in the United
States are to be found in the state bank
systems of Ohio and Iowa which appear
to have given entire satisfaction. When
the plan for a guaranty fund was propos-
ed III the state of New York in 1929
Mr. Van Buren,, then governor of that
state referred 1t to Mr. Olcott cashier
of the Mechanics and Farmers Bank of
Albany, for his opinion. He discovered
that cautious and careful banking com
panies never would consent to make
themselves liable for the performance of
contracts of the various banks, scattered
over the great state from Long Island to
Lake Erie" and yet it is to his skill and
sagacity, aided by few other intelligent
and patriotic bankers, that the New
York public are indebted for the most
perfect systems of chartered banking
which ever was Invented" Hon. Willard
Fillmore, afterwards president of the
United States. and then comptroller of
the state of New York, reported in 1913,
that lit is apparent that the safety fund
would have proved ample indemnity to
the bill holder had it not been applied to
the payment OF other debts of the banks
than those due from circulation" and l..
Carroll Root, an authority on financial
questions, states as the result of calcu-
lation from the experience of thirty-slx
years, from 1929 to 1865, that had the
safety fund system been left untouched
as that upon which New York state bank
currency was based, not merely would
every dollar Of circulation have been kept
good, but the total assessment to keep
the fund good would have averaged less
than one-fourth of the / per cent on the
banking capital, or about Is per cent on
the average circulation outstanding
Applying the principle of the guaranty
fund to the experience of the national
bank circulation, Mr.. Conant, a careful
writer says: 1.-The following result has
been reached: The average circulation
of the national banks from 1864 to 1899
was about $Z77,000000, The circulation of
the national banks placed in the hands of
receivers during this time was 81 ,32S, 197.
CALCULATIONS
showed that the average dividend of the
failed banks on their general liabilities
we've about IA per cent. If the $2 32S, l97
bank notes had not been secured by
bonds but had shared ratably with the
general liabilities, the proportion of the
note issue that would have fallen as a
loss on the guaranty fund would have
been S., coo 900, or an annual average or
$158 eco for the thirty-fiYe years from 1864
to 1899 A tax of half of l per cent upon
the average CIRCULATION for this time
would have brought into the fund $685.
600 per year, or about eight times the
average annual loss. The total coIlec-
tions for the thirty-five years would
have created a fund of nearly $40, 900, co.,
deducting the computed loss Tor the same
period remainder of nearly 100000
would have been left in the fund. An
average tax of one-fifth of l per cent on
the total circulation for thirty-three
years would have covered all the notes
of the failed banks
Statistics like these are an unanswera-
Bile argument for the absolute protec-
ton such a guaranty fund would afford
to circulating notes, and the inviting
profits the bank would enjoy, through
the privilege of such issues. warrant their
acceptance of such a system.
The system today is in a most unsatiS-
factory operation in the Dominion OF can
ada lbs success there invites the thor
ough study of all intelligent bankers The
experience of the bankers and the people
of Canada, both lenders and borroWf1:5
of money, should commend this natural
and independent method of banking as
well worthy of the adoption and conf
dence of the commercial world.
The objection frequently expressed to
making the notes first lien on the as
sets of the bank and upon the stockhold-
els liability, IN my opinion is not wei
founded. It is the provision of the pres
ent national banking act. and while the
guaranty fund suggested is abundanSly
ample to protect the notes, yet in order
to give them the widest circulation and to
secure the most implicit confidence of
the people, this provision SO long existing
as part of the system should continue
to be maintained. Besides. as a question
of equity, it seems clear to me that the
bank notes in the hands of involuntary
holders, as they must be in the course
of prOmiscuous circulation, should stand
in a different relation to the assets of the
banks from the deposits of creditors who
have voluntarily made the banks the
debtor.
The recommendation of the monetary
commission does not make it obligatory
uron all banks in the system to issue
notes and become contributors to the
guaranty fund The privilege of Issuing
notes is made entirely voluntary If the
officers of any bank believe it unadvisa-
BILE for any reason to issue circulation
there is no compulsien to do So The bank
may be continued without circulation, as
is the case with many of the national
banks under the present system. A writ
er of distinction has well said: 1.-The is
sue of bank notes upon business assets
is the natural and scientific theory Of
banking, because the circulating medium
is the instrument of business transac-
tons, and should be developed out Of
them and be governed by them
y system of note issues upon business
assets is self-regulating, under require
merits for prompt redemption In gold, be-
cause the notes promptly return to the
Issuing bank for retirement when the
quantity in circulation becomes exces-
sive.