report from this consulate concerned a project to construct a canal joining the Oder and Danube rivers, with a prolongation from the latter stream to the Adriatic Sea, near Fiume, Hungary. This was a distinctively Hungarian project, but it has evidently suggested a canal scheme upon a vast scale, which is now under consideration before a committee of the Austrian House of Representatives.

"The Austrian proposition contemplates a canal from the projected Oder-Danube waterway eastward to the Dniester River, which flows into the Black Sea, and another westward to the Elbe. Still another will join the Danube and Moldan rivers. The completion of these would mean a network of canals covering the principal provinces of Austria, which would afford cheap all-water routes to the Adriatic, the Black and the Baltic seas, besides linking the navigable streams of the empire. In addition to all this, the Chamber of Commerce of Trieste, Austria's seaport, asks for an amendment to the Canal Bill, providing for a water connection between that city and the Danube, thus making two outlets to the Adriatic, if the amendment be accepted."

An important bill passed is the Miners' Law, reducing the hours of labor in the mines to nine. The Socialist party asked that the time be reduced to eight hours, the same working day that they demand for other industries.

The publication of the proposed German tariff (in the latter part of July) created a great commotion in the Austrian Empire, owing to the close commercial relations of the two nations. Of Austria's exports in 1900 about 48 per cent. went to Germany and 37 per cent. of the imports came from Germany. If the bill become a law, customs wars between the two countries will be inevitable, and the results will be disastrous. A Hungarian paper, the Neues Pester Journal, says: "The consequences of the new tariff must be an extraordinary rise in the prices of victuals and the total ruin of industry. Our Hungarian agriculturists will depend exclusively upon the Austrian market, prices will fall very low, and the population's power of consumption will sink in proportion."

Attention has been called to one beneficial effect of the new law; it will serve to bind Hungary and Austria closer together, and there will henceforth be less talk of erecting barriers on the frontier in the shape of customs houses.

If reports are true, the Dual Monarchy will follow the example of other European nations in waging a tariff war, not only on Germany, but on the United States. Its agricultural and commercial interests are threatened by American enterprises, and higher duties are to be imposed to encourage home industries by shutting out foreign products. It is falling in line as an advocate of the protective policy.

The distinguished Hungarian statesman, Desider Szilagyi, died at Buda Pesth, July 31. A Times correspondent, writing from Vienna, Aug. 9, speaks highly of the material progress that the Austrians are making, in spite of political difficulties:

"The opening of the last section of the Vienna Metropolitan Railway this week recalls the fact that they have already taken a leading part in railway engineering-first in the construction of their Alpine lines, and now in the successful

solution of the difficult problem of providing for local traffic in Vienna, by a line which is a combination of the underground, overhead and gallery systems. As a preliminary toward its construction it was necessary to regulate the River Wien, a capricious and treacherous stream, which was occasionally transformed within a comparatively few hours from a shallow and malodorous creek that might be waded by a child into a destructive torrent that swept away bridges and inundated the houses along its banks.

"This great work, together with the ingenious devices employed in the regulation of the Danube and the Danube Canal in the vicinity of the capital, has for some years past made Vienna a place of pilgrimage for civil engineers from all parts of the world. There can be no doubt that the execution of the government canals and Alpine railway schemes, which bristle with novel technical difficulties, will greatly enhance the interest of this country for foreign engineers in search of valuable experience. . .

"Among other recent improvements is the new drainage system of Vienna, which will further promote the satisfactory decline in the metropolitan death rate. A project which promises to mark an important stage in the urgent problem of rendering the sewage of cities innocuous and useful is now under consideration here and has, indeed, received the preliminary sanction of the provincial and municipal authorities. This consists in the application to Vienna of a method developed by Herr Richard Noebel of the town of Posen, for the utilization of the liquid part of city sewage for the double purpose of irrigation and manure."

In August it was reported that diplomatic relations between Austria-Hungary and Mexico, which had been interrupted for more than 33 years because of the Maximilian episode, were resumed.

Bibliography.-Charles Seignobos, “A Political History of Europe since 1814" (trans. by S. M. Macvane, 1900); A. L. Lowell, “Governments and Parties in Continental Europe" (1897), Vol. II., chapters 8, 9, 10; Diplomatic and Consular Reports. No. 554, Miscellaneous Series, 1901, also Nos. 2521, 2565, 2583, 2664, Annual Series, 1900-1901.

EUGENE PARSONS.

BANK LAWS, NATIONAL.-Within the last few months an important bank closed its doors in New York City because of failure to abide by the laws established for the regulation of national banks. This incident and the recent change in the minimum capital required of banks chartered under national laws, together with the issue of two per cent. bonds for the purpose of securing the note circulation, have brought the national banks before the public to an unusual degree. The law of March 14, 1900, just referred to, was expected to remedy the old difficulty of insufficient banking facilities in the newer States. That it has done this. is still a question.

The national banking system, as now seen in the United States, is the best example of a system of secured currency. Its history began in a time of war and national distress, and has continued to the present. Conceived as a means of revenue, the system has become an important means of increasing the money cir

culation of the land and of assisting its commercial business.

The national bank may be said to owe its existence to the civil war. At that time the government needed income; bonds must be sold, but on a falling market, racked by the public opinion of the day, it was almost impossible to dispose of them to advantage. A proposal to adopt a system of national banks was made by the Secretary of the Treasury in 1861. The act making the proposal a law was not passed until February, 1863; but this law proved so unsatisfactory that it was modified just one year later. Under the first law but little progress was made in organizing the system, for in the first sixteen months only 450 banks were organized. With the changed act the former State banks were permitted to reorganize as national banks. A year or two later, 1866, a tax of ten per cent. was laid on the circulation of all State banks, making it unprofitable to issue notes and giving to the national banks the monopoly of issuing bank notes. It was undoubtedly the intention of the framers to have the banks issue the whole of the national paper currency. Nevertheless, the so-called "greenbacks" and treasury notes still remain in circulation, although provision has now been made for the retirement of the latter.

Under the stimulus of the banking law of 1863 and the act of 1866 the system made rapid progress. In 1863 there were 66 banks with $7,000,000 capital and a very small circulation. By 1875 there were 2,088 banks, possessing $504,000,000 capital and $134,000,000 of notes. In the year 1901 there were 4,064 banks, having $640,778,000 of capital and issuing notes to the amount of $317,202,078. The resources of the national banks in 1895 were $3,423,629,343, which reached the larger figure of $5,630,794,367 in 1901.

At least five persons must be associated to form a national bank. Such was the decree of the law. The charter is granted for a period of twenty years, and may be renewed upon the expiration of the time. The amount of capital required was at least $100,000, except in towns of less than 6,000 inhabitants, when the capital may be $50,000. Even this requirement has been modified, so that towns of less than 3,000 inhabitants may have banks with a $25,000 capital. This amendment was made to meet the demand for banking facilities in the agricultural districts. The first law, 1863, gave to banks depositing United States bonds eighty per cent. of the bonds in notes. This law was modified in 1864 to read ninety per cent., and in 1900 to read one hundred per cent., so great was the premium on the bonds purchased for deposit. The percentages of note issues to bonds, as given above, apply to banks of less than $500,000 capital. In case the capital is over that amount and less than $1,000,000, eighty per cent. of notes may be issued; between $1,000.000 and $3,000,000, seventy-five, and over $3,000,000, but sixty per cent.

The principle upon which the national banking system rests is that of a secured note issue. the security being, as already noted, United States bonds. Upon the deposit of the bonds by the bank the Comptroller of the Currency

issues their face value in notes. These are signed by the president and cashier of the bank and become by that act a direct obligation of the bank, which is secured by the bonds deposited with the Comptroller and the assets of the bank. These notes are to be paid by the issuing bank whenever presented for redemption.

At Washington, with the Comptroller of the Treasury, each bank must deposit in cash five per cent. of the notes issued. This amount is called a redemption fund, which the government is at liberty to use when the notes are presented at the capital for redemption. The government, however, is virtually required to redeem all notes upon demand, even beyond the amount of the reserve. This condition has made the notes of the national banks uniformly good throughout the country. In case of a bank failure the obligation of the government still holds good. The government, however, expects in such case to reimburse itself by the sale of the bonds deposited by the insolvent bank. If by a decline of the bonds sufficient funds are not secured the government may call upon the stockholders to make good the deficiency.

It might be pertinently asked, why is the redemption of national bank notes necessary? The main reason, as it exists at present, arises from the fact that national bank notes are not "money," but merely the promissory notes of the banks issuing them. They are not legal tender between individuals, neither are they available for the "lawful money" reserve necessary for national banks to hold. As a result, at certain times in the year, when currency moves toward the financial centers, the banks sort out the national bank notes in their possession and send them in batches of $500 or more to Washington for redemption. In return they receive United States notes, called "greenbacks," which can be used as a part of their lawful reserve. The redemption of notes in the year ending March, 1901, amounted to $136,750,000, or less than half of the entire national bank circulation. The continual redemption and increase of bank notes makes the circulation respond to business conditions.

The law originally proposed a limit to the issue of bank notes of $300,000,000. In 1874 the demands of an increased circulation was met by an additional issue of bonds, making the limit $354,000,000. The original law also provided for the distribution of the notes, and reads in respect to this point as follows: "And that one hundred and fifty millions of dollars of the entire amount of circulating notes authorized to be issued shall be apportioned to associations in the States, in the District of Columbia, and in the Territories, according to representative population, and the remainder shall be apportioned by the Secretary of the Treasury among associations formed in the several States, in the District of Columbia, and in the Territories, having due regard to the existing banking capital, resources and business of such States, District and Territories." (Act of March 3, 1865.) The additional $54,000,000 provided for by the act of July 12, 1870, was to be granted to associations in those States and Territories having less than their apportionment. The act of March 14, 1900,

was passed to give communities not provided with banking facilities the opportunity to secure them with the smallest expenditure of capital possible.

It

The three functions of a bank are to make discounts, receive deposits and issue notes. is the third that the law has placed so many restrictions upon in the effort to secure a uniform and stable currency, but the depositor is not altogether forgotten. The banking act divides the banks into two classes, those of reserve cities and those called country banks. The banks of the first class are required to maintain a reserve of twenty-five per cent., one-half of which may be kept on account with some New York national bank. The other class of banks are required to keep a reserve of fifteen per cent. In both cases the reserve must be fifteen or twenty-five per cent. of the total note circulation and deposits. The country banks are permitted to hold three-fifths of the fifteen per cent. in balances due them from banks of the reserve cities. The reserve thus required of all banks is primarily for the redemption of notes. The depositor is further protected by the obligation of the stockholders to make good liabilities to the extent of double their holdings.

A city can become a reserve city when it has 50,000 inhabitants and makes application to the Comptroller of Currency asking for the privilege. When granted, the banks in such cities must maintain a twenty-five per cent. reserve, but a city must have 200,000 inhabitants before its banks can receive the reserves of country banks for deposit and become what is known as a central reserve city.

In the matter of making loans and discounts, the law declares that national banks are prohibited from loaning to any person, company, corporation or firm an amount exceeding onetenth part of their capital. The law further provides that no loans or discounts shall be made on the security of shares of capital stock. The expectation of the law is not only to make the note issue a highly desirable one, but to secure a conservative management of the bank's affairs in the matter of loans and discounts as well.

A rigid system of inspection has been provided for in the law. Upon this point Comptroller Cannon says in his annual report for 1884: "This official inquiry into the affairs of a national bank does not end with the mere inspection of the cash, bills receivable, books and accounts of the association, but the examiners are instructed to closely scrutinize the business of the bank, to investigate the standing and fitness for their positions of the persons to whom the management of the affairs of the association is intrusted, and the manner in which the business is usually conducted, whether prudently or otherwise; to ascertain, as far as possible, the character of the loans and discounts of the bank, and what losses, if any. have been or are likely to be sustained.” There are a number of steps in the inspection of a national bank, which begins with a report of the condition of the bank, signed by the president or cashier and attested by at least three directors. This report must be made not less than five times a year and published in a newspaper. In addition to this

system of publicity the banks must report to the Comptroller the dividends earned and the amount of net earnings in excess of the dividends. At certain intervals bank inspectors examine the books and papers of the banks, and in order to make their work valuable they are given extended powers. On the first of July of each year the names of shareholders are published, with residences and number of shares held. This list may be examined at other times by any shareholder or creditor. In case any of the "directors knowingly violate any of the provisions of the national banking act, all the rights, privileges, and franchises of the association are forfeited, and further than this, every director who participates in such violation is held personally and individually responsible for all the damages sustained by any person." The inspection, reports, publicity and responsibility have given an unusually high standing to the national banks of the United States.

In case of impairment of capital stock or actual insolvency, the Comptroller is given power to deal with the affairs of the association so affected. Three months after the impairment of capital the bank must make good the loss by assessment of shareholders pro rata, and during the impairment interest on the bonds owned by the bank are withheld by the Treasurer of the United States. When a bank becomes insolvent the association is turned over to the Comptroller and a receiver appointed by him to take charge of the bank. This officer at once proceeds to collect its assets and pay off by dividends, from time to time, the claims of its creditors. The noteholders are already protected by the elaborate system of bond security. The other creditors have for their protection the assets of the bank, the capital paid in and the individual liability of the shareholders. A bank may pass into voluntary liquidation, which may be accomplished by depositing with the Treasury within six months an amount of “lawful money" equal to its entire outstanding circulation.

Under the old law national banks pay a tax of one per cent. upon the average amount of their circulation. This is in lieu of all other United States taxes, but the act of March 14, 1900, authorized the issue of two per cent. bonds, which were to be exchanged for the old four and five per cent. bonds owned by the banks and deposited to secure their note circulation. As an inducement for the exchange the tax was cut in two, and inasmuch as there was a smaller premium on the new bonds a great many of the banks availed themselves of this opportunity to free a part of their capital. The shares of the national banks are subject to State taxes, but the notes cannot be taxed by State or municipal authorities.

References-Reports of the Comptroller of the Currency; Sound Currency Pamphlets, 1895, pp. 31-48; Dunbar, "The Theory and History of Banking." ch. ix.; United States-Statutes at Large; Dunbar, "Laws of the United States Relating to Currency, Finance and Banking:" Sumner, "History of Banking in the United States;" White, "Money and Banking."

FRANK L. MCVEY, PH. D., Professor of Economics, University of Minnesota.