7 of the reserve stands out as the "dead line," beyond which lies confusion and panic. The natural reluctance of the banks to cross the line until the last moment causes a contraction of loans, which intensifies distrust and increases the pressure for accommodation, and the result is that when the banks have resolved to disregard the law the crisis is found to have passed beyond their control, and apprehension is consummated in panic. There can be no question that, while all our panics have been seriously aggravated through the operation of a compulsory reserve, some might have been wholly averted had the banks been free to use their lawful money resources according to their individual discretion. In theory, the legal regulation is designed to protect the banks; in practice, it imperils both them and their customers. It is difficult to specify any advantages accruing from this restriction that at all offset these serious disadvantages. There might be some reasonable justification of necessity if the banks were recklessly managed and regularly kept their reserves at a low point, but such is not the fact. There would be some apology for the law if the reserves were made available under emergencies; but, on the contrary, while holding the means of remedy, the relief is withheld under penalty of corporate death. Such incongruity would be ridiculous were it not so serious. Nor would it much mend the matter, if discretion were given to the Secretary of the Treasury, or to the clearing houses, to relax the operation of the law when necessity seemed to call for such elasticity. Experience shows that such discretions are never used until the danger has gone well nigh beyond control; and the uncertain waiting for the intervention is one of the most demoralizing forms of suspense. I can therefore regard the legal regulation of bank reserves against deposits only as an effete remnant of methods adapted for times when bank management was less intelligent and less conservative than in these days. The principle is venerable for its antiquity, and, to minds living more in the past than in the present, it may seem shocking to abandon this highly prestiged retraint; but, for myself, I can only conclude that the Secretary is as wise as he is courageous in urging the abolition of legal regulation of the reserves. To my view public opinion, and I may say banking opinion also, has so far greatly underrated the practical importance of redemption arrangements. The things dependent upon a redemption system are no less important than these: The regulation of the volume of notes; their natural and equitable geographical distribution; the checking of undue issues by any individual bank; the restraining of unhealthy expansions of banking operations; the prevention of unwholesome redundancies of currency; the checking of financial and commercial speculations resting purely upon a superabundance of money facilities. It is to be conceded that the propo ed enlargement of the freedom of issue might easily run into an excessive supply of circulation and an illegitimate expansion of bank credits. That possibility is so obvious that a measure which failed to provide protection against such a result 'would be radically defective, and after brief trial would bring upon itself the condemnation of the conservative sentiment of the country. The only safe means of preventing such a failure is to provide arrangements which would allow the utmost facilities of dispatch and economy for forwarding the notes for redemption. In devising such arrangements it is important to keep in mind who are the parties to use them. The general public have no interest in redemptions, for they have no reason for desiring to change one form of money for another. The redemption agency is purely a banker's institution. The notes flow into the banks in the way of deposits, and it is to the interest of the bank receiving them to exchange them as soon as possible for “lawful money." In so doing, the bank makes the more room for paying out its own notes, and at the same time strengthens its own lawful money reserves. There is a constant competition between the banks to occupy the field of circulation, each one seeking to get out and keep out its own notes and using the redemption agency as a means of pushing into retirement the issues of its competitors. This competition is the truest possible regulator of a bank-note circulation. It permits expansion of the volume when an increase is needed; it compels contraction when the outstanding volume is excessive. Under such a machinery there can be neither scarcity nor redundance. The regulating force is the self-interest of each bank checked by that of all others. If the bank is suspected of matters affecting its credit, that fact operates as a special inducement for sending its notes for redemption; and that discrimination puts its circulation under the severest regulation. It will thus be seen that the note clearing house, or redemption agency, becomes the very salt and conservation of a bank-note system, protecting the quality of the notes and assuring a healthy adjustment of their volume and their geographical distribution. Not any or every form of agency, however, will insure these advantages. It is essential that the agency shall not be so far from the point of issue as to impose obstacles of time and expense in transmission. It is necessary that the charges for redemption service shall be nominal, and that the proceeds of the conversions be instantly remitted. None of these requisites are afforded by the existing redemption agency of the national banks. That institution has been a lamentable failure from the beginning; nor is there any possibility of so modifying it as to make it properly effective. Under that system the redemptions proper, excluding those connected with failed banks, and banks withdrawing their circulation, and also those connected with worn out notes, appear to amount to about forty million a year for the whole United States, or one-fifth of the outstanding volume. What this amounts to, as compared with what is needed under a really healthy and competitive note system, may be inferred from the fact that in 1857 the Suffolk Bank of Boston, acting as redemption agent for the New England banks, effected $400,000,000 of redemptions; in other words, New England, with its financial dimensions of thirty-seven years ago, had tenfold the amount of redemptions now effected at Washington for the whole United States. That is the difference in results between an efficient and an inefficient redemption agency. The services of the Suffolk Bank were rendered at a cost of 10 cents per $1,000, while those of the national bureau cost 70 cents per $1,000. With such an immense geographical area as our banks cover, it is an absolute impossibility that any single institution could afford effective redemption service. If redemption is to constitute the live and everactive regulator that the protection of a bank currency imperatively demands, the points of redemption must not be one, but many. Failing that, the redemptions must be few; there will be no elasticity of issues, and the banks will be tempted to use their privilege to the maximum limit, because they will be comparatively secure against the return of their notes for liquidation. With a view to keeping the agency near the point of issue, and thereby facilitating conversions, I would respectfully suggest that the Washington agency be discontinued, and that in its place the law shall establish six redemption districts, and confer upon the Comptroller of the Currency authority to designate some one bank, situated at a point central to each district, which shall act as redeeming agent for all the banks in such district. Perhaps some such geographical determination of the respective districts as the following might be most equal and most convenient: New York, New Jersey, Pennsylvania, Delaware, Maryland, District of No. 2 No. 3 No. 4 Southern States Ohio, Indiana, Illinois, Michigan, Wisconsin. West Virginia Total capital.... Present capital. $167, 000, 000 197, 700, 000 71,500,000 124,500,000 76,500,000 41, 000, 000 678,200.000 Each of these divisions would include an amount of bank capital sufficient to warrant its having an agency of its own. Each of the agencies should be required to redeem not only notes issued within its district, but also any presented that may have been issued in some other district, recouping itself by forwarding such notes to the agency for the district in which they were issued. Such extra-limit redemptions, however, would probably be found unimportant in volume. The importance of redemption is so vital that it seems necessary that the arrangements for facilitating it should be made imperative by law, rather than left to the voluntary action of the banks. And, for the same reason, it would seem prudent that the choice of agents should be left to the Federal Comptroller, as a disinterested dispenser of a function for which there might be troublesome competition, and which the banks have no organization to deal with. The Suffolk Bank system affords the best model for the form of organization. It grew out of a banking necessity, and its development over a period of thirty years brought its machinery to a state of virtual perfection. Following that precedent, each bank in a given district should be required to deposit with its redemption agency an amount of “lawful money" equal to, say, 2 per cent of its outstanding circulation, and to keep that deposit at all times good. That deposit would, to a valuable extent, afford to the agent bank a resource for loans; and the use of that resource would be a sufficient compensation for the services rendered by the agent. This was the basis of compensation ultimately reached by the Suffolk Bank, and it was found so remunerative as to bring out active competition for the service from other banks. Mr. HENDERSON. Are your suggestions intended to apply to State banks of issue as well as to the national banks? Mr. DODSWORTH. They do contemplate providing for State bank issues as well as for national banks. Mr. HENDERSON. The question I want to ask you is whether you propose that the State banks of issue should be under national control in any way? Mr. DODSWORTH. So far as respects the issue of their notes; and entirely so far as the issue of their notes is concerned I think that there should be no distinction whatever. Mr. HENDERSON. If they are to be under national control, why not have them as national banks instead of State banks? Mr. DODSWORTH. That is a question which I presume each bank would have its own reasons for answering. I do not see that that is a question which Federal legislation should concern itself about. Mr. HENDERSON. Have you thought of the question as to how far (if we admit State banks of issue) the National Government would have any power or control over them, or would you admit them quite free from any Federal control in any way? Mr. DODSWORTH. I scarcely understand your question. Mr. HENDERSON. Have you thought of the question whether (if you admit State banks of issue) there is any power under our form of gov ernment for the General Government to exercise any supervision or control over them? Mr. DODSWORTH. I conceive that if the General Government were to provide the conditions under which notes should be issued by State banks and should prescribe the limitations under which the issue should be operated (including inspection and all minor provisions for protection) it will be simply a matter whether the banks now organized under State laws would undertake to conform to those conditions. They would probably find it difficult, as a rule, at any rate at first, and I conclude that as a consequence the legislatures of the several States would find themselves under the pressure of public opinion (especially of banking opinion) to reconstruct their banking laws so as to include the very provisions which would be included in this proposed legislation as to national banks. Mr. HENDERSON. Do you not think it very desirable that whatever system of currency we may adopt it should be a uniform currency that would be receivable and pass current in all the States of the Union? Mr. DODSWORTH. That would be most essential, and I conceive that under such an arrangement as that, every note being issued (whether by a State bank or a national bank) under the same conditions of current efficiency and redemption, they would be identical with each other. Mr. HENDERSON. You assume, then, that every one of the States that would legislate on the question of State banks would naturally follow on and adopt a uniform system? Mr. DODSWORTH. They would have to adopt the forms prescribed by the new law, and in that case there would be no difference in the currency. There might be differences as to other matters-matters regulat ng loans and deposits-but as to currency, every note issued, whether of a national bank or a State bank, would be under the same conditions. Mr. HENDERSON. Then, you would not dispense entirely with some sort of national control over State banks? Mr. DODSWORTH. Matters outside of the circulation of State banks should be undoubtedly left independent of national legislation. Mr. HENDERSON. I mean as to circulation. You do not intend to dispense with national control and national supervision over the currency issued by State banks? Mr. DODSWORTH. No, sir. Mr. JOHNSON, of Indiana. Do you think that we can so separate the functions of a bank of issue from the functions of a bank of discount and deposit that the issue function could be subject to one jurisdiction and the discount and deposit function be subject to another jurisdiction without inviting conflicting claims of jurisdiction between the United States and State authorities, and without bringing about a jarring of the system? Mr. DODSWORTH. I think so. Mr. JOHNSON, of Indiana. It does not suggest any such difficulties to your mind whatever? 7 Mr. DODSWORTH. It does not. In the case of national banks there can be no jar between the issue department and the discount branch of the business. And if it were found by any State that in order to have its banks avail themselves of the privilege of issuing notes the conditions would conflict with some existing law relating to deposits or redemption, or whatever it might be, outside of note circulation, the State legislatures would change their laws so as to produce a smoothly working condition as between the issue business of the banks and the discount or other branches of the bank. Mr. JOHNSON, of Indiana. You would expect, then, that the conditions imposed by the national authorities would take precedence over any inconsistent provisions in the State charters, would you? Mr. DODSWORTH. I am not sure whether I understand your question. Mr. JOHNSON, of Indiana. You would expect that all of the conditions imposed in this proposed system by the Federal authorities on the banks should have precedence over any inconsistent provisions imposed by the charters from the State, whether those inconsistent provisions referred to issue or to deposits, or whether they were inconsistent directly or only as a matter of inference? Mr. DODSWORTH. Precisely. Mr. JOHNSON, of Indiana. You would subject the State banks of issue to every one of the provisions of the national-banking law? Mr. DODSWORTH. So far as those provisions relate to the issue of bank notes, but no further. Mr. JOHNSON, of Indiana. You would supervise the visitations prescribed by the Federal authorities for national banks over State banks also, including the right of examination by experts, and including compulsory reports under oath by the bank officials? Mr. DODSWORTH. With reference to these police provisions (if I may so call them), if it were possible for the Comptroller of the Currency to get his knowledge through methods less offensive it would be preferable, I think; but if not, and if the present regulations should be a necessity, why I think they ought to be enforced. Mr. JOHNSON, of Indiana. Suppose a State bank should become insolvent, to whom would you intrust the appointment of a receiver? Mr. DODSWORTH. To the Comptroller of the Currency at Washington. Mr. JOHNSON, of Indiana. It has never occurred to you that there would be any lack of simplicity or harmony in the system which you suggest? Mr. DODSWORTH. There is some complexity, I concede. It might be better if we could avoid a system which from the beginning embarrassed the whole country, but the conditions of the country were not such as to admit of their being dispensed with. But we have got to have established methods, and to observe them as we find them, and it seems to me that we must conform ourselves to them. Mr. JOHNSON, of Indiana. The established conditions that you refer to have simply limited the issuing of notes under the national banking law to national banks, have they not? Mr. DODSWORTH. Yes. Mr. JOHNSON, of Indiana. What would you consider safer and better for the people of the country, a system of note issue that was exclusively under national control or one that was exclusively under the control of the States? Mr. DODSWORTH. I favor the largest possible method of freedom in all such matters. But at the same time, in the matter of providing a circulating medium, you have got to insist on everything which is con |