AFTER RECESS.

STATEMENT OF MR. ALFRED L. RIPLEY.

The CHAIRMAN. The chair has invited two gentlemen from Boston, Mr. Ripley, vice-president of the Hide and Leather Bank, and Mr. C. C. Jackson. These gentlemen are now present and will address the committee. Mr. Ripley will first take the stand.

Mr. RIPLEY. Mr. Chairman and gentlemen of the Committee on Banking and Currency, I appreciate it a high honor to be allowed to come and address your honorable committee on this subject. I realize, too, I trust, that your labors have already been long, arduous, and diligent, and I will endeavor to detain you but briefly. What I wish to do is this: I wish to set forth certain considerations that show to my mind conclusively that the issue of the demand notes by our Government, as is done at present, is vicious.

In the second place, I wish to show what should be the safeguards under which another form of currency, much better and much safer, may be issued by the banks.

And then I desire briefly to call attention to certain points in the bill produced by the honorable Secretary of the Treasury with which I have the honor to differ.

No civilized country desires, needs, and understands the use and advantages of a good paper currency for home circulation so well as the United States. By a good paper currency is meant, of course, a convertible one. While the "Greenbackers" are not all dead by any means, no one whose judgment in such matters is worth anything wishes to go back to the ante-resumption days and a gold premium. And any proposition looking to such an end needs no discussion; reason and experience condemn it utterly. Now, our paper currency comes from two sources: first, the Government, which issues, or has issued, gold certiticates, silver certificates, certificates of deposits for legal tenders-a form of paper currency seen only in banks-old legal tenders of 1862, or "greenbacks," and legal tenders of 1890, or coin certificates; and second, the national banks, which issue their own notes in accordance with the United States law. The total amount of the Government issues outstanding is approximately as follows: Gold certificates, $65,000,000; silver certificates, $338,000,000; old legal tenders, or "greenbacks," $346,000,000; legal tenders of 1890, $152,000,000, a total of $901,000,000. (The certificates of deposit for legal tenders need not and must not be counted, as they simply represent an equal amount of "greenbacks" stored in the vaults of the United States subtreasuries.) Here, then, is at first sight an apparently enormous economy in the use of bullion. But there are items on the other side of the account. Every dollar represented by the outstanding gold certificates lies idle in the Treasury, either as coin or bullion; every dollar represented by silver certificates has a coined silver dollar in the Treasury to meet it; every dollar of the legal tenders of 1890 represents bullion lying in the Treasury vaults whose cost in dollars equaled the amount of these legal tenders at the time they were issued. In other words, the portion of our paper currency represented by the gold certificates, silver certificates, and legal tenders of 1890 represents no economic gain-barring, of course, the fact that the silver is not worth as much as the paper issued against it; in other words, the collateral is not good for the notes. The addition to the apparent stock of money in the country is counter

balanced by the hoarded metal in the Treasury; the community gains in convenience and ease of handling, but there is no real economy.

The old legal tenders, or greenbacks, on the contrary, represent a real economy of capital, and the function of the Government in issuing them is totally different from its function in issuing the other forms of paper currency already described. In the latter case its part is essentially that of a warehouseman, issuing a negotiable receipt for goods deliverable to bearer; a warehouseman pure and simple in the case of the gold certificates, but with an all-important requirement in the case of the silver certificates and legal tenders of 1890, that of the act of Congress, 1890, which at the close of section 2 declares it to be "the established policy of the United States to maintain the two metals on a parity with each other upon the present legal ratio, or such ratio as may be provided by law."

In the case of the greenbacks, on the other hand, the Government becomes a banker, having borrowed money or services of its citizens and given in return therefor its own notes payable on demand. It must in so far, therefore, be guided by sound banking principles and employ sound methods; all the more so because its liabilities are so tremendous, and its creditors take its notes under compulsion. Hence the need of an idle reserve of gold, and for no other reason; withdraw the cause and the Treasury needs only the funds to meet current expenses.

It is perhaps outside the limit of the present paper to discuss at length whether it is sound and wise public economy for the Government thus to continue in the banking business. But a few facts may be noted, and all bear in one direction. In the first place, no first-class power has seen fit to follow our example. The note issues of England, France, and Germany are made by banks, not by the Government; even if the Government have, as in France, a voice in the management of the bank of issue, the bank's affairs are in the hands of trained financiers, not of a cabinet officer or legislative body. Again, the system under which the Government conducts its banking business is as badly adapted to the purpose as any that could be devised. Good banking calls for sagacious, experienced, and prudent managers, carefully selected, armed with most ample discretionary powers, and able to act promptly and decisively in an emergency. Does our present system of Government banking meet any of these requirements? The history of the past two years gives convincing answer.

Again, the Government has no means of adjusting the amount of its banking reserve to the demands of the time. It can not call in and cancel its notes when the supply is abundant, but must pile up idle reserve; it has no quick assets which it can convert speedily to meet gold withdrawals, but must see its reserve dwindle at the very time when it should be strong. Its only way of getting rid of a surplus is by lavish expenditure, of increasing low reserves by selling bondsborrowing in another form-or by increased taxation. And all these remedies have two cardinal defects: They require the sanction of the legislative body, and they are slow of execution. The reserve held by the Government under the existing system is, therefore, almost sure to be either too large or too small. In the one case the economic waste is out of all proportion to any possible advantage; in the other the people pay far more for the anxiety and dread which the diminished reserve inspires than they can save in taxes by lending the Government some three hundred millions without interest. The Treasury NAT CUR-18

becomes a possible and potent factor in the market; what that may mean is best shown by such scandals as the gold scandal of Black Friday, in October of 1869*. And to-day it is both possible and easy for a body of speculators for the fall to work havoc in the market by withdrawing gold for shipment, playing upon the fears already aroused by the notoriously weak position of the Government's reserves.

But even were it advisable that the Government should continue its banking business, there is a grave defect in the currency thus issued. The supply is, under existing laws, absolutely inelastic, understanding by elasticity the capacity to expand and contract in accordance with the demands of trade. This is obviously true of the gold and silver certificates; they can be canceled only on the release of the same amount of coin to take their place; they can be issued only upon deposit of coin to be hoarded in the Treasury; in fact, no new gold certificates are at present issued. The legal tenders of 1890 may be paid in coin and canceled, but can not be increased. The issue of greenbacks is by law (approved May 31, 1878) kept at a fixed amount, and when redeemed they must be reissued. But whether needed or not, the Government notes must be kept alive, and can not be retired when the commercial demand is over; they become in dull times a clog and a menace in rendering gold exports so much the easier.

And in point of elasticity our national-bank notes are but very little better than the Government paper issues. True, they may be and are presented for redemption in large amounts. But the conditions of their issue preclude the issuing bank from either withdrawing them freely or increasing their number. No bank cares to run the risk involved in constant purchases and sales of Government bonds; for even if the price fluctuates but slightly, a very small change is enough to convert a profit on the circulation into a loss. And when money is close the banks, as a rule, have no funds to spare to lock up in Government bonds for the sake of getting a reduced amount of currency. It is true that the national-bank note circulation was enormously increased during the months of August and September, 1893. But two things must be borne in mind in that connection: First, that it was done at an expense which would have been prohibitory except in a time of panic; and second, that it could never have been done at all had the banks had to pay cash for the bonds; in other words, had the banks at the time settled their clearings in cash. Only clearing-house loan certificates made bond purchases possible at all.

To sum up, therefore, our Government paper issues furnish us an absolutely inelastic currency, with very small economy of metal and with very grave risks and dangers to the whole country, which form a necessary and inevitable detect in the system. Our national-bank note issues, while possessing the essential requisite of security, are almost equally inelastic, and call for a tremendous locking up of capital in a form of assets which must be sold to be liquidated.

The prime requisite for a circulating note should be that it is secure, and all the cries of "wildcat" and "red-dog" currency, which were so loudly heard from the opponents of repeal, sprang from a fear, either real or feigned, that we were in grave danger of going back to antebellum conditions. The cries were really a gross injustice to the business sense of the community, a vastly different thing from its political sense; as if we had progressed so marvelously the past forty years, and yet learned nothing of banking. A reason for the outcry was sought for in argument like this: The note holder is now secured by

* See Yale Review, vol. 3, p. 8, May 1894.

the obligation of the Government at 90 per cent of its par value. What better security can the note holder, what better asset can the bank have than this? But in just this point consists our progress-we have learned that a bank can have better assets than Government bonds, which will make the note holder as certain of ultimate and more certain of immediate repayment. A note-issuing bank's best assets are its good business notes, falling due and paid each day. So long as the makers are solvent a bank is in far better position to pay circulating notes from its bills receivable than from any kind of bonds for which it must find a market.

And the same objection holds true, only with far greater force, of all the divers substitutes proposed for the Government bond as security for circulating notes, whether State, county, city, or railroad bonds. All these forms of security lack in greater or less measure the wide credit and steady market which the obligations of our Government enjoy.

But it may properly be urged that under our present system the security for the holder of national-bank notes is in the hands of a third party, the Government, whereas were notes issued by the banks on the security of their own assets it might well happen that, in case of any trouble in the issuing bank, the security would be found to have disappeared, bad assets having taken the place of good ones. Granting the objection, let us see how the difficulty is to be avoided.

Any system of note issue must be a national one. By that is meant that the laws governing the issue of circulating notes must be made by Congress, and not by the several State legislatures; that all the conditions and regulations as to issue, redemption, and withdrawal should be defined and controlled by a department of the National Government, and that the notes themselves should be printed and furnished by the Government alone.

These matters can not, with any safety, be left to the several States. For, in the first place, it is indispensable that the currency should be uniform in quality, not varying from good to bad. We have been so long free from the necessity of having to scrutinize and value each bank bill that a return to such conditions would be intolerable. And such uniformity can only be attained under United States laws. In the various States at present we find great diversity in the banking laws as to payment of capital in full; as to the additional liability of stockholders for an amount equal to the amount of their capital; as to the amount which any bank may loan to directors and to individuals; as to cash reserve; as to loans on mortgage of real estate; as to public reports of condition, examinations, and inspections; as to treatment of the assets in insolvency. But for note-issuing banks at least the laws governing these matters must be uniform and made by Congress, else the differences in the note security will be so great as to give us, from the very outset, good notes and bad notes, which only the expert can distinguish. One of the most potent factors in building up our present national banking system has been the fact that they are all chartered and operated under the same laws. The word "national," as applied to a bank, gives some clue to its organization and management, and our whole vast system of internal exchanges would never have grown so rapidly or attained such enormous proportions without this.

A speedy and uniform system of redemption is also a prime requisite for any system of circulating notes, and this must be furnished by the National Government, as is done at present in the case of the nationalbank notes. And the notes must be printed and issued to the banks

by the Government. In no other way can we secure uniformity of design, execution, and general appearance; and in no other way can we guard against the possibility of overissue or illegal issue on the part of some bank, and reduce the danger of counterfeiting to a minimum.

An issue of uncovered notes, that is, of notes for the redemption of which no specific security is pledged, would unquestionably be safe, so far as the public is concerned, if made under national legislation embodying the above conditions. The privilege should be granted to no banks of less than $50,000 capital, or whose capital is not fully paid up; to no banks whose stockholders are not liable for an additional amount equal to their share of the bank's capital; to no banks which loan on mortgage security or for a length of time greater than six months; it is of vital importance that the assets of a note-issuing bank be kept quick.

Such notes must further be an unquestioned first lien on all the assets of a bank in case of insolvency. The issuing bank must further undergo thorough and frequent examinations by a Government examiner, and publish full reports of its condition. And as an additional and complete security, the issuing banks must be taxed at the outset to estab lish a guarantee fund, out of which the Government should pay the notes of a failed bank, supposing-what would rarely be the casethat the assets of the bank and the sum derived from the shareholders on account of their double liability should prove inadequate to do so. Experience in the past has shown conclusively that a guarantee fund of 5 per cent of the total outstanding circulation would be amply sufficient for this purpose; and when once the fund had reached that point, the tax might be suspended until the fund should need replenishing.

Another important point must be considered: The question of taxation of such note issues. The national banks at present pay a tax of 1 per cent per annum on their outstanding circulation; and this tax, coupled with the premium on the bonds which must be deposited before circulation can be taken out, reduces the profit on any such circulation to such a low point that many conservative banks prefer to take out no circulation at all. And no bank can be expected to issue notes unless it sees a profit in so doing. A bank which puts out notes must be ready to redeem them, and to do so must carry idle reserve and keep its assets quick and well in hand. All this means a diminished return to the bank, which can only be made good by the profit to be derived from its circulation. A fair return must be had for the loss thus incurred and the risk run; else the conservative bank will decline to issue notes, and leave this business to the very banks which should not be encouraged to go into it.

But, on the other hand, the privilege of note issue should not be made a monopoly which brings in extravagant profit to those enjoying it. Much wild and foolish talk has been indulged in as to the value of this privilege to our national banks, and a reason for the prejudice which exists against the national-banking system is doubtless to be found in the current belief that it has been a source of great profit to the banks. But it is certain that a far greater profit was derived by the banks from the appreciation of the bonds on which the circulation was based than from the circulation itself; and, in buying these bonds, the banks took the same risk and ran the same chance as the individual purchaser. And, whatever may have been the profit derived from circulation in the fifteen years following the war, it is safe to say that the present genera