for the demands of business, without the help of government paper money, and flexibly responsive to those demands.

The foundation of a national currency upon evidences of public debt is dangerous and unscientific and proved fatal to some of the State currencies before the Civil War. A comparison of the State systems shows a distinct line of cleavage which is far from favorable to the principles of the present national banking law. This line of cleavage separates the banks issuing currency against general assets, like those of New England, Indiana, and Louisiana, from those issuing circulation, on the other hand, against securities, like the banks of New York, Illinois, and Wisconsin, and those established under the parental care of the State, like the Bank of the Commonwealth of Kentucky, the Union Bank of Florida, the State Bank of Alabama, and the Bank of Mississippi. The experience of the New England and Indiana banks is the triumphant vindication of the principle of banking on general assets and issuing notes redeemable in coin on demand, which is supported by the critics of the present national system and the advocates of a banking currency. The banks issuing circulation on securities, with their pitiable failures and their wildcat banking, were the prototypes of the national system and afford a hint of what that system would become if note issues based upon State and municipal securities were substituted, as is sometimes proposed, for note issues based upon national bonds. It must be remembered, moreover, that perfect as the security seems for bank-notes under the national system, it is a security which has followed the ups and downs of government paper money. There was neither purpose nor pretence of maintaining the notes of national banks at parity with coin while the notes of the government itself and the bonds by which bank-notes were secured were depreciated. Banknotes remained from 1864 to 1879 at par with government obligations because those obligations themselves were far below par in coin.

If the banks issuing circulation upon securities were the model for the national banks of to-day, the banks of State

which existed before the war were the models and the prototypes of the Federal treasury management under the régime of legal tender paper. Their issues were not banknotes in the sense in which banking currency is opposed to a government paper currency, but they were simply the bills of credit of the State resting upon the credit of the State as completely as the paper roubles of the Bank of Russia. The fact that they were hardly ever maintained at par in coin, in spite of the great wealth and undoubted honesty and good faith of the people of the various commonwealths, is a practical demonstration of the folly of attempting to do a banking business upon general credit without quick assets. The lesson of the history of the State banking systems, reduced to its simplest terms, is the success of the systems based upon the banking principle and the failure of the systeins based upon the deposit of securities, like the national banking system, or based simply upon the public credit, like the government currency system of the United States.

One of the essential errors of early banking in the United States was the undue expansion of credit upon slender resources. It is an error common in a new country and one from which the United States and Australia, in more recent years and under other systems of note issue, have not been exempt. The impression has been assiduously cultivated by the opponents of a banking currency that the early American banks issued a volume of circulating notes enormously in excess of the legitimate demands of business. This impression is absolutely unfounded and the proof is afforded by the figures. Some of the State banking currencies were over-issued in the sense that every dollar which is not kept at par with the metallic standard is improperly issued, but the aggregate banking currency of the country was at no time over-issued in the sense that an equal volume of good money was not capable of ready and healthy absorption by the legitimate demands of business. The circulation of all forms of money in the United States between 1880 and 1895 has ranged between $21.71 and $24.44 and has only

recently been regarded, with the slackening of business activity, as beyond the volume required by business needs. It is only necessary to compare such figures with those of the circulation prior to the Civil War to show how erroneous is the assertion that the currency was unduly inflated in volume during the years of State banking. The following table shows the circulation of both bank-notes and specie at various dates, including the years of largest circulation,-the difference between the bank-note circulation and the total money in circulation representing the specie:

G

CHAPTER XV.

THE NATIONAL BANKING SYSTEM.

State of the National Finances at the Beginning of the War-The Suspension of Specie Payments and the Loan Policy of Secretary Chase The First Plans for the National Banking SystemChanges in the Circulation-The Necessity for a New System and the Plan of Secretary Carlisle-The Adoption of the Gold Standard in 1900, and Later Efforts to Secure Banking Reform.

TH

'HE national banking system of the United States had its origin in the management of the finances during the Civil War. The system was hardly in operation until the war was two-thirds over, but it offered a market for the public securities which contributed materially to raise their price in the depreciated paper with which the government discharged its obligations. The system afforded the country for some years a currency having the advantages of uniformity and security, and possessed in these respects a great advantage over the bank currency of the different States which had before been in use. The national banking system, however, great as were its services in absorbing the evidences of the public debt, always lacked the essential feature of a purely banking currency. The currency was without elasticity, in the sense of responsiveness to the demands of business, and the volume fluctuated only with the price of securities. The gradual reduction of the public debt has removed the basis for national bank-note circulation until it has become but a minor factor in the currency system of the country, and a strong demand has arisen for the separation of the note issues from public securities.

The United States at the outbreak of the Civil War were conducting their financial operations through the independent Treasury. The notes of the State banks formed a large part of the medium of exchange in private transactions, but only specie was accepted in payments to the government. The aid of the banks was not sought in handling funds, in making transfers, in placing loans, or in paying interest. This at least was the theory of the independent Treasury, although in fact the absence of proper depositaries led many public officers to deposit their funds temporarily in the banks at their own risk.' The circulation of the country outside of the Treasury on July 1, 1861, consisted of $246,400,000 in specie and $202,005,767 in the notes of State banks, making a total of $448,405,767, or $13.98 per capita.' The essential question for Mr. Chase, Lincoln's Secretary of the Treasury, was whether the operations of a great war could be carried on through these instrumentalities. The question was the occasion of much discussion at the time and has never been answered to the satisfaction of all sides. The answer of Mr. Chase was that the operations of the war could not be carried on upon a basis of specie and State bank paper.

The government was obliged almost at the outset to abandon the position that it was able to carry on its own finances without the help of the banks. Some small loans had been placed by public subscription during the administration of Buchanan, but it was perfectly obvious that great sums could not be obtained quickly except from the banks, which had the keeping of the transferable capital of the country. Secretary Chase held a conference in New York on August 9, 1861, with representative bankers of New York, Philadelphia, and Boston. They agreed to advance to the Treasury $150,000,000 in gold, to be secured by three-year notes bearing interest at 7.30 per cent., and to be reimbursed as the proceeds of the sale of bonds were covered into the Treasury. This union of the banks of New York, Boston, and Philadelphia in support of the public credit was one of the most 1 Kinley, 60-61.

2 Finance Report, 1894, p. cviii.