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it for granted that every now and then the horse will be stolen from the stable, and that consequently there should be some up-to-date device for sending promptly for the police. Under the general scheme set forth in this paper, or any other scheme containing the essential elements of soundness, there would be no emergencies" such as in the past Americans have regarded as a part of the natural order of things. But while it indicates some degree of error in attitude of mind to talk of "emergencies" and emergency currency," it is a downright blunder in principle to propose, as is done by some, to tax a so-called emergency credit note issue "progressively" as to its amount. Not the amount to which banks "go below the reserve," but the length of time they stay below" should be taxed or fined progressively. It is not desirable that the banks should be timid about taking relief measures when such are needed, and they alone can be the judges both as to occasion and quantity. If there is need to act at all they should be free to act with decision and with full amplitude of power, because it frequently happens in all departments of affairs (as for example, in the case of the first Cleveland bond issues) that "small measures do not produce small effects; they produce no effect at all."

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Under the plan of credit bank currency here proposed, moreover, there need be no fear of inflation. There cannot be such a thing as an inflation of the currency of any country by bank credit, as long as there is ample reserve and the unremitting test of current redeemability.* At the time of the Parliamentary Committee investigation which led to the famous "Bullion Report" of 1810, the bankers under examination said, that there could be no inflation of the currency (depreciation of bank notes) as long as the managers of the issue were very careful (as they themselves had always been) to discount prime commercial paper only. Theirs was an "asset currency" idea; and there was a depreciation of the bank note even at that moment. Bagehot quotes from the testimony of the governors and directors of the Bank of England before this committee and makes the comment: "Very few persons perhaps could have managed to commit so many blunders in so few words." Others, better informed, maintained

It is wholly illogical and unnecessary, although there is the precedent of Canada, to limit the notes of a bank by the amount of its capital. Such a limitation distracts attention from the principle.

Lombard Street, Works, Vol. V, pp. 115-118.

in connection with this controversy, that bank notes should be kept at par with gold by a very careful regulation of the quantity of paper issued, using the rate of foreign exchange and the paper price of bullion as indices; that is, by taking anxious care in such ways as might very properly be taken to guard against the depreciation of an inconvertible government issue. Neither set of advisers to the government saw, as the authors of the Bullion Report did see very clearly, that the avoidance of inflation and a premium on foreign exchange, and the attainment of immediate banking solvency as well, is a state or condition which "cometh without observation" provided there is maintained an ample reserve and constant exchangeability of bank notes for the standard coin of the realm.

The authors of the Fowler Report, unlike the authors of the Bullion Report, are evidently haunted by the fear of bank note inflation and hence the reason (in part at least) for their illogical restrictions on the "emergency part of the credit circulation they propose, and also the absolute limit on the total note issue under their plan which would be almost reached at the outset.* If one is apprehensive of danger from "inflation" he had better look in another quarter-to the increase of non-contractible bondsecured notes, under some hasty, ill-considered, patch-work scheme. That involves, in any form, precisely the old "greenback" fallacy over again. The issuing of bond-secured currency is virtually "coining " a specific form of the credit of the Government (its bonds), similar to the coining of " the general faith and credit of the people of the United States," about which the Greenbackers used to prate.†

ADVANTAGES OF A FLEXIBLE CREDIT BANK NOTE CURRENCY.

Real credit bank notes expanded freely by the banks (under adequate "general safeguards " and provision for maintenance of reserve) and contracted automatically by means of a proper standing rule prohibiting any bank from paying out the notes of other banks, would have many direct and indirect advantages. The circulation of banks would then fluctuate month by month. and seasonally, according to the needs of business, instead of

* Most of the complicated limitations as to the amount of circulation of the Fowler report are absent from the Fowler bill.

†The above was written before the bringing forward of the proposals to coin several kinds of bonds embodied in the Aldrich bill. I did not suppose that anything as bad as that would receive serious consideration.

going up or down in semi-geological age-long variations depending upon the price and supply of bonds. The advantage of our getting rid of the ever-recurring autumnal "moving-the-crops ' blow upon the angle of the jaw of our financial system, is well understood and calls for no demonstration here. It should be remarked in passing, however, that the influence of the present inflexible currency in producing this particular evil is much exaggerated. The cause of the crop-moving stringency is, in the main, the pyramiding of reserves. And to this last may be added, the drawing into Eastern financial centers of interior funds in general. But whether the chief cause or not, the inflexible currency is certainly a contributing cause of the regularly recurring minor crisis each autumn, and its removal would be a decided gain.

There are other advantages of a flexible credit currency, however, that are not so well understood. One evil of our present system discovered a few years ago by Professor O. M. W. Sprague-then of Harvard, now of the Imperial University of Tokio-may be briefly set forth as follows:

In normal, good times when the spirit of enterprise is buoyant and bank reserves are still ample, the banks assist new enterprises to establish themselves and old ones to increase their operations, through making loans-through discounting commercial and industrial paper-the proceeds of which are placed for the most part to the credit of the customers on the books of the banks (credit created deposits). Such checking accounts afford command of a conventional means of payment, and straightway through purchases of all sorts, the large business of the country, both manufacturing and merchandising, expands apace. Also, concurrently with expansion, prices rise in the realm of the larger capital-creating undertakings. Presently, furthermore, there is an increase of wages and a rise of prices in the domain of the business of final consumption. All the working people of the country require (or rather have) more pocket-money, and all the retail merchants require (or rather have) more till-money. But there is within the country only one place that this additional pocket-money and till-money can come from, provided the Government is not inflating the currency just then with greenbacks or certificates issued in payment of purchases of silver. Inasmuch as such a period is an era of rising prices, the

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exchanges" will be against us and no gold will be imported. There is only one place, then, that the new money adapted for general circulation can come from, and that is, from the reserves of the banks. Being drawn from the reserves, it makes the whole credit superstructure upon which the general business of the country rests, and on which prosperity itself rests, totter from its foundations. For this serious defect in our present system, credit bank note currency, having free expansibility and issued in all denominations, is the appropriate remedy. The banks could then supply retail money as well as wholesale money, concurrently with expanding business and rising prices, up to the time when gold is forced abroad and a slow and easy recession sets in. That is, a slow and easy recession would take place if the banks have been doing a proper banking business, discounting real business paper based upon wealth-creating processes, but not if they have blown up a great bubble of speculation by means of loans based on stock market quotations. The "general safeguards" will need to be especially well looked to under a regime of free use of bank credit.

Another of the advantages in doing away with our present shackled system of bond-secured note issue, and getting a proper system of free trade in banking credit in its place, would be that we should thereby remove one of the chief sources of popular misunderstanding of and hostility to our banks. That part of the general mass of voters that knows and cares something about finance understands just enough so that it seems to them that great favoritism is now being shown the banks by the Government. Under the present system, a bank buys bonds and continues to own the bonds (although deposited in the keeping of the Government) and therefore as a bond-owner draws interest upon them: and then it receives back from the Government the face value of the bonds in a peculiar form of currency guaranteed by the Government (a sort of Government certificate for which the banks have no further very evident responsibility) which last so-called" notes" the bank, as a banker, lends out and so makes a second profit. This looks to the average man in the street, and on the farm, as if it were a most cunningly devised scheme of graftgraft the Government makes legal and respectable. The truth of the matter is that the bond-secured-currency tangle of laws, instead of being a permission, is a requirement; far from being a "favor," it is a most burdensome restriction. Hostility to the

banks in one particular begets hostility in other particulars— even a general attitude of suspicion. This considerable political nuisance and menace, always making Congress in currency matters very timid, could be almost entirely gotten rid of by a stroke of the pen. Pure bank credit-real bank notes-if they are made secure, the masses will never much interest themselves about; any more than they now bother their heads about deposits. In France the people no more think of interfering with the regular, free expansion and contraction of circulation by the Bank of France, than a child thinks of interfering with his father when he winds up the clock Saturday night. If a watchful people are suspicious of "favoritism" let them look elsewhere-to the existing connivance of the Government with "window dressing" by banks. Reference is made here not merely to particular features of our present practice but to the existing system as a whole. Under existing dual legal conditions, with many financial institutions carried on under the State governments, the present scheme of five "called" reports each year for the national banks is itself nothing but "window dressing." It is as if a king wishing a general inspection and census of his army were to allow the review to take place department by department, and with plenty of notice when it was coming. What would happen with respect to departmental commanders borrowing from each other to make a fine "showing" of equipment complete and ranks full, is obvious.

Still again the burdensome restrictions on our present system of national banks, as regards their natural and proper function of note issue, prevents the system from spreading equally into all parts of the country in proportion to the amount of business to be done. To serve adequately the business needs of their customers, the banks situated in rural, sparsely settled regions need to employ for obvious reasons a larger proportion of their credit in the form of circulation than do city banks or those located in a country district where population is dense. Many city banks get along very well with no circulation at all. The two sorts of banks have different industries to deal with and are governed by different circumstances in every way. A country bank cannot force its customers to make use of deposit banking (it cannot develop check banking in place of note banking) beyond a certain point, although there may yet remain business which the bank could do,