STATEMENT OF MR. HORACE WHITE.

Mr. HORACE WHITE, of New York, proceeded to address the committee. He said:

After I had the honor of an invitation to appear before the committee last Sunday I put my views on the subject of the Baltimore plan in writing, and I will take the liberty of reading them to you. I will remark beforehand that the paper is only twenty-five minutes long, so that nobody need be dismayed at its possible length.

Mr. WALKER. I desire to ask Mr. White whether he has, in form, the draft of any bill which he approves, whether it includes the Baltimore plan or not. If he has I wish he would hand a copy of it to the committee.

I understand that Mr. White, or some other member of the Baltimore convention committee, has formulated a bill including the Baltimore plan. If so, I should like to have copies of it presented now so that we may use it in our questions.

The CHAIRMAN. Mr. White can state how that is.

Mr. WHITE. I have drawn a bill which embodies my ideas of the Baltimore plan, but it has not been adopted by the Baltimore committee, which consists of eight or ten gentlemen living in different parts of the country, and if I were to submit it now it would be only a presentation of my own views.

Mr. WALKER. I would like to have it. It may include the Baltimore plan or it may not, but it is Mr. White's views put into a bill.

Mr. WHITE. There are two other members of the Baltimore committee here now, and I should like to act in cooperation with them in a matter of this kind.

The CHAIRMAN. Mr. White may hand in his plan and it will be printed in the proceedings of the committee.

Mr. WALKER. Do we not want to see the plan while Mr. White is here?

The CHAIRMAN. Mr. White says that he desires to consult with his associates.

Mr. WHITE. I will consult with them immediately after I get through with my remarks; and we shall save time in that way. Gentlemen, the Baltimore plan deals with only one part of the banking businessthat of issuing circulating notes. It is often said that the issuing of notes is not a necessary function of a bank. It is true that a bank may exist without it, but a banking system without note issues comes far short of rendering to the community all the service that it is capable of. As money is an instrument of exchange, a bank is a machine of exchange. It consists of a guarantee fund called capital stock, and of the earnings of the community called deposits, which, together, form a body of assets. These assets are kept in a liquid state, or state of solvency, so that anybody having a claim against the bank can at any time draw it out in the form of money or realize it in the form of goods by giving his check. The condition that a bank must be in so that its assets shall always be "solvent" is determined by experience. Three banks still existing were started before the Federal Constitution was adopted. From that time to this the banks and the people have been learning by experience what things promote solvency and what things imperil it. The science of banking consists of all the means devised to preserve and maintain solvency. These are to be found in the history of banking and in the laws regulating it, which have been passed, amended, or repealed from time to time.

At common law any man may issue his promissory notes and circu late them as money if people are willing to take them. But this is like the right to make or keep gunpowder or to sell liquor. It is the paramount right and duty of the State to provide for the safety of the community. Hence it may prescribe the regulations under which circula ting notes shall be issued, or gunpowder be stored, or liquor be sold. It is not bound to give equal privileges to all persons to exercise these functions. It may authorize one bank of issue, or one powder mill, and

no more.

The evolution of banking in Massachusetts is one of the most interesting chapters in the history of the science. Little by little, from generation to generation, the stones were laid of the edifice which is known as the Suffolk system.

The wit of man from the earliest ages has been engaged (for the most part unconsciously) in finding means to exchange goods and services with the least expenditure of labor and capital. Since the precious metals are capital, and since the moving of them hither and thither requires labor, the system which reduces the use of them to the lowest terms consistent with safety is the best system. Under the Suffolk system anybody of good character who was engaged in a legitimate business could exchange his promissory note, running sixty or ninety days, for the notes of a bank payable on demand, and these notes would pay the wages of his employees or they would buy the raw materials of his trade anywhere in the United States or Canada. The notes were redeemed by the Suffolk Bank in Boston from day to day as fast as the course of trade took them thither. How were they redeemed? They were redeemed by the bills receivable of the issuing bank. The man who gave his sixty or ninety day note had by this time sold his prod uets or had received payment for a previous lot in a draft on Boston and had paid his note with the draft, and the bank was thus enabled to keep its balance good at the Suffolk. There was no limit to the work that the system would do. All years and all seasons were alike to it.

The Suffolk Bank was a clearing house for country bank notes. Its managers originally conceived that a profit could be made by persuading country banks to deposit money with it for redeeming their notes at par in Boston. As the country banks did not see any profit to themselves in such an arrangement they refused. Then the Suffolk began to send their notes home for redemption. It secured the cooperation of five other Boston banks. The country banks had hitherto monopolized the field of circulation even in Boston. Their notes being at a discount more or less according to the distance and difficulty of reaching their place of issue, and not being received on deposit at par by the Boston banks, they would be paid out by everybody for purchases and thus kept in circulation. The Boston notes, on the other hand, would be promptly returned to the issuing banks as deposits or in payment of debts due to them.

The six banks, headed by the Suffolk, soon began to make it hot for their country cousins by incesant calls for specie. The latter made a great outery. They called the Suffolk syndicate "The six-tailed Bashaw " and other opprobrious names, but the run continued remorselessly until they began to come in and make the deposits required for a redemption fund. When they had once done so they found their credit so much improved that their notes had a wider circulation than ever and would stay out longer than before, because their circulation had a greater range. At the time when the Suffolk system was at its best I lived in Chicago. The notes of Massachusetts banks were in

great request there. They were considered the best currency going and they bore a premium over the notes of Illinois and Wisconsin banks. The Suffolk system of redemption was not made compulsory by law. It was voluntary, Ike the clearing house system in general. It subjected the goodness of all bank notes in the range of its influence to a daily test. All the banks in the system were washed every day. This was very good for their health, but daily washing does not always prevent disease. A bank might become rotten while keeping up its redemption fund at the Suffolk, just as a bank may now become gradually unsound while maintaining its position at the clearing house. Nevertheless, the Massachusetts system, taken altogether, realized the ideal of bank-note issues, in the sense of supplying machinery for swapping the goods and products of the country with the least expenditure of labor and capital.

Notwithstanding its abounding merits and great success, New York has exercised a wider influence on banking than Massachusetts or any other State. This has been due to two essentially different and even contradictory methods of note issues, known as the safety fund system and the free-banking system. The former began in 1829 and continued till about 1860. The latter began in 1838 and still survives in the national banking act. The main question now before the country is. Which of the two shall prevail hereafter? Both systems aim to secure note holders, and both are adequate to that end. The question that ought to engage attention is, which one corresponds most nearly in other respects the ideal of banking which was so nearly realized in Massachusetts? That is to say, which one best answers the purpose of a machine for swapping goods and services with ease and regularity and with the minimum of expense?

The safety fund system was the invention of Josiah Forman, of Onondaga County, N. Y., who, in presenting it to Martin Van Buren, governor of the State, said that he had taken the idea from the organization known as the Hong merchants of Canton, China, all of whom were liable for the debts of each, and who had attained an incomparable credit by that means, no such thing as the failure of a Hong merchant being known. He did not propose, however, that all the banks should be liable for the debts of each, but merely that they should all contribute something to a common fund to provide for the redemption of the notes of failed banks. The contribution to the fund was to be onehalf of 1 per cent annually on the capital of the participating banks until 3 per cent should be accumulated.

The plan was adopted, but by a mistake in the framing of the law the safety fund was not limited to the redemption of the circulating notes, but was made applicable to all the debts of the failed banks. This accidental error led to mischievous consequences and brought the system into disrepute. Elderly bankers, who were in business while the safety fund was in vogue, have assured me that the system was a total failure, but when I have asked them for particulars they could not give any. They only spoke from general recollection that the fund was inadequate to meet the claims made upon it. That is true, but it means not that the annual contribution of one-half of 1 per cent was insufficient to redeem all the notes of failed banks, but that it was insufficient to pay all the depositors as well. The fact is that it would have been sufficient to pay the notes of all the failed banks during the time the system lasted, with a considerable surplus over, if it had not been diverted to other uses.

Another mistake in the safety-fund law was that it did not provide

that the notes should be registered and countersigned by any public officer. The result of this omission was that there were over issues of notes, so that $700,000 of fraudulent ones came upon the fund and were redeemed out of it. Both of these mistakes were rectified by subsequent legislation, but not until the system had been subjected to a severe strain and to unmerited obloquy. The upshot of the whole matter is that the safety-fund principle, apart from such infantile disorders, was a grand success, and although it was buried thirty years ago, at the place of its birth, is alive and in high esteem in a neighboring country, and is now showing signs of revival at home. The system was adopted in Canada in 1890 in order to secure the prompt redemption of the notes of failed banks, i. e., to avoid a discount on the notes of such banks pending liquidation.

Under the Canadian system the circulating notes are the first lien on the assets, and it is believed that the assets will always suffice to redeem the notes, but the delay in converting them into cash, prior to the establishment of the safety fund, had led to a temporary discount on such notes. There is now in the Canadian bank circulation redemption fund $1,800,000, and it is believed to be sufficient to meet all casualties of this kind. Under the Canadian law the Government is not responsible for the notes of failed banks, but such notes draw interest at 6 per cent. The maximum amount of the fund is 5 per cent of the outstanding circulation of all the Canadian banks, and it must be kept up to this maximum, the minister of finance having power to call on the banks for additional contributions, when necessary, not exceeding 1 per cent in any year. When the assets of failed banks are paid in, however, refunds may be made to the contributing banks of the excess over 5 per cent.

Under the New York safety-fund system all the capital of the banks was applicable to the banking business strictly. This raises the question, What is the banking business? It is the business of working a machine of exchange, and thus dispensing with the use of the precious metals, as far as possible, substituting credit therefor. Bank credit is a general belief that what a bank promises to do it is able to do. When this belief becomes fixed, it is a great advantage all around to dispense with the use of the precious metals as media of exchange, and to keep on hand only sufficient to serve as a touchstone of the paper instruments; in other words, to keep the standard of value at hand merely for purposes of comparison. How much gold is required for this purpose? That is a question to be answered by experience in different cities, States, and nations. I would not undertake to say how much is required in New York, or in Chicago, or in the United States as a whole, but I should say that we need a less percentage than the countries of Europe, because we are not exposed to the alarms of war, which are very disturbing to credit.

I said that under the New York safety-fund system all the capital of the banks was applicable strictly to the banking business. It was not so under the free-banking system. That system had its origin in a political upheaval which began in 1835. Prior to this time the history of banking in New York had been largely a narrative of bribery, corruption, and favoritism in the granting of bank charters. You will find all the details in Hammond's History of Political Parties in that State. I should like to give you some of them now, but it would take too much time. The long and short of it is, that there was a revolt in the Democratic party against these abuses, just as there was a revolt against Tammany Hall the other day. The revolt of 1835 was also against Tam