All the largest city banks have made their profits and accumulated huge surpluses by use of checks on deposits, and with very little use of their note issues. The same is clearly seen in the accounts of the Banking Department of the Bank of England. Quite apart from the Issue Department, it does the main banking work of the greatest financial centre in the world by the use of checks drawn on deposits.

(2) There may be many persons—of the Upton Sinclair type-who really think that banks may wish to bring on panics. A bank is ex natura so placed that to bring on a panic would bring on its own destruction. Every one knows that in the liabilities of a bank account appear the items indicating its obligation to share-holders for the capital, surplus, and profits, as well as the items of deposits indicating the sums left with the bank which may be drawn on demand. On the other hand, the bank lends its resources -whether coming from capital or deposits -and receives as its only security assets from whose recurring maturity its loans are repaid. If these assets, such as collateral composed of stocks and bonds, or paper based on the sale of goods, should lose their basis of value, the banks would lose. They have already given the borrower the right to draw, and they get repayment by the borrower only in the future. Hence, the only chance of the bank to regain what they have parted with lies in the assets retaining value enough to cover the loans already made. To suppose, therefore, that the banks should ever have a motive for bringing on a panic is to suppose that a sailor afloat on the ocean in an open boat should have a motive for punching a hole in the bottom of the boat-the only thing which saves him from destruction.

(3) The popular supposition that the bankers gain a special profit by the issue of notes, which by right should go to the government, is doubtless wide-spread. In truth, there is per se no banking profit except that arising from the discount on loans; and since discounting, or lending, can go on without issuing notes-as is seen at all banks and trust companies organized under State laws then it is patent that the profit of banking is not due to the issue of notes.*

For the sake of brevity and clearness, I omit the claim that a national bank depositing bonds to secure its notes gets a profit both on the bonds and on the notes when issued. In reality, a bank which stays out of the national system can

(4) Yet, even if it were desirable to have the banks issue the paper money, it has been claimed that the banks would be unable to issue enough money for the enormous trade of so great a commercial country as this; and consequently, the government is the only authority competent to meet so great a task. Those who think thus overlook the patent fact that (omitting gold) the note issues, either of a government or a bank, are not much used in actual transactions of any importance. In fact, payments are usually made by checks. Therefore, the service to be performed is not that coterminous with our trade, but a service coterminous with those retail and minor transactions in which buying and selling are closed only by the passage of some form of coin or paper money. We may need cash for buying a railway ticket, but not for buying a cargo of wheat. It is the banks which supply a deposit-currency, offsetting checks at clearing-houses, by which in the United States over $150,000,000,000 of goods per year are exchanged, and without recourse to silver, gold, bank-notes, or greenbacks, except for settling small balances.

IV

WHEN We come to positive arguments in favor of assigning to banks the duty of issuing the notes needed by the trade of our country, we are obliged to ask: What other institutions than banks exist which can know when and for how much a demand exists for notes in transactions which cannot be performed by checks? Certainly, Congress cannot know. Whether we like banks or not, the fact is that they are the institutions of credit, evolved by centuries to serve the needs of trade; and whether they like it or not, the banks must satisfy them idle and new funds pass into the these needs, or cease to exist. Through hands of producers; they disburse capital; and they alone can know in just what way

make more profit than one in it. If each have the same reserve of $100,000, it would support $400,000 of loans on a 25 per cent. reserve; and the profit would be, say, 6 per cent. on $400,000 in case, as of a State bank, no notes were

issued. But if the bank went into the national system, and if its borrowers called for notes when a loan was made, then support less than $100,000 of notes. Thus its loans would be limited to less than $100,000, and its gains restricted to 6 per cent. on that sum, with a small interest on the bonds. If it had sufficient discount business, the bank could earn much more than in the national system, and wholly without the issue of a single note.

the whole reserve must go for bonds which at best would

the public wish the capital transferred to it—whether through the medium of gold, silver, paper money or checks. In this respect the bank is the slave of the business public. If the public wish only a deposit account, the banks provide it; if they wish notes, the bank must give notes.

(5) If such be the case, the banks are the only organizations which can provide an elastic currency. We have seen that the Treasury cannot do it. As a matter of fact, the greenbacks have been rigidly limited since 1878. Although the present bondcirculation of the banks can never be anything but inelastic, since the amount of notes is made to depend upon the price of bonds and the rate of interest, the banks can be given a safe method of issues, quickly redeemable, such as would provide the necessary seasonal elasticity not possible in government issues-elasticity, of course, which contracts as well as expands. Leaving the elasticity to the banks is the only democratic way. There could be no overissues under a system which provides for easy redemption of bank-notes at many centres; and they would go out only when there was a need, such as arises in the autumn harvests.

(6) Far different, however, from this seasonal elasticity is the demand for elasticity in a time of crisis. In such a crisis as that of 1907, when an antecedent expansion of speculation, undue rise of prices, and reckless promotions, had paved the way for disaster, an elastic currency, although it could not have prevented the panic, would yet have in a great measure modified the severity of the crisis. In times of emergency such as this, instant response to the need, and at the spot where the need exists, could have been made only by banks to their borrowers. A Treasury expansion, publicly advertised, would have been a certain means of frightening depositors and borrowers, and would have aggravated the disaster.

(7) It being understood that convertibility into gold is the prime requisite either of government or bank issues, it is appropriate to note that the cost of maintaining coin reserves, which we found to be so heavy in the case of the greenbacks, would be removed from the people and put wholly upon the banks, were the latter to be required to furnish the notes. In truth, the banks

would never have any real difficulty in maintaining gold payments, provided the government preserved the gold standard and redeemed its own obligations in gold. The national bank-note has from the beginning always been as good as the government note into which it was convertible; and the most significant thing in this result is that the national bank-notes have not been and are not now a full legal tender. Clearly enough, more depends on redeemability than on legal tender.

(8) If the government at any time needs gold it has to go to the banks or to allied institutions to get it. But if the banks were delinquent in maintaining redemption, have we any means of compulsion to keep them up to the mark? Certainly the bank occupies a better position, in this respect, than the government. A bank failing to redeem can be immediately sued in the courts, and can be obliged to keep its promises or go into liquidation. Not so with the Treasury. If the Treasury ceases to redeem, it cannot be compelled to fulfil its obligations against its own consent. Only if Congress permits, can the holder of its note proceed against the government for failure to redeem. For seventeen years, 1862-1878, the government was in fact derelict in paying coin, and was able to do so with impunity. The great wealth of the country did not save us from this ignominy.

(9) Yet the opinion is prevalent that the whole wealth of the nation lies behind the government paper, for which the credit of the country is pledged. Therefore, government issues would have a greater safety than those of banks. To this it might be said that no boy should be without apples as long as there are trees full of apples in well-guarded enclosures. There are the apples; but the boy does not own them. How can he get what he does not own? Similarly, the great wealth of the country is not owned by the State; and the State can take that wealth only by the forms of law which permit its acquisition by taxation or borrowing. It cannot steal. Then, if there is no limit to taxation and borrowing, say government paper advocates, the State can always secure gold enough to maintain its paper at par. But men do not always do what they ought to do. And, if there is boundless wealth, but if none of it is taken

to secure the paper, the great wealth of the country adds no more value to the paper than a summer's crop of thistledown. Moreover, the Treasury may have reached its limits of taxation and borrowing by expenditures for war, or for things other than the paper money. And since it cannot be required by court procedure to redeem its money, if it wishes not to redeem, then it is clear that the character of the paper is dependent not on the wealth of the country, but on the whims of Congress to whom the currency is subject.

The case is even more favorable for the banks than this. Apply to government paper the same test as that applied to banknotes. If a bank issues its notes as the result of a loan, it must receive assets in the form of securities as an equivalent. Indeed the quality of such assets is constantly brought into discussion. A skeleton account of a new bank would show the situation:

By the very nature of a government, it does not receive collateral when it issues notes. It is not a bank. It does not get assets which equal the sum of note issues. As a rule, what the government gets for the notes when issued, is, as in the buying of munitions of war, consumed, or made unavailable as an asset of value. And the scraping up a gold reserve is regarded as a very virtuous deed. Now a bank which took the assets received for its notes and used them

up would be jeered out of existence. But, if the directors spent the $400,000 of the bank's assets in champagne suppers, they would still have much the same protection for the notes as the Treasury.

In truth, bank-notes can be made as safe as any kind of money by proper rules as to guaranty funds, lien on assets, and the like. The Treasury, on the other hand, is little likely to submit to shackles which are easily imposed on a bank.

(10) Since the quality of the government paper is not really maintained by the wealth of a country-any more than the thirst of a prisoner in a dungeon is slaked from the cool lake he sees outside—it is obvious that the value of the paper is determined by the action of a Congress usually made up of active politicians. In short, government notes are at the mercy of every passing whim of the voters, whom the politicians sedulously court. Money should be left to experts; but in fact government paper never can be so left, as long as it is the plaything of politics. That is the curse of all government issues of notes, just as it is the curse of custom duties which are made political issues. Therefore, the strongest possible reason for relegating the system of paper issues to the banks, under general rules fully providing for elasticity and safety, is that they would be entirely removed from politics. If no other argument were presented, this one alone, judging not by theory but by actual experience, should be sufficient to induce us to decide in favor of bank issues. And this conclusion seems to have been already reached by those great commercial nations which are our closest rivals for the trade of the world.

Thus, in the great case of Government vs. Bank Issues before the people, the jury ought to find in theory and in fact in favor of the Bank Issues. Such a finding would be a protection against arbitrary party action by a central government under mere political pressure and in line with the democratic tendencies of the age.