260 



FINANCES OF THE UNITED STATES. 



with the United States Treasurer lawful money 

 for the redemption of the notes for which the 

 bonds are held as security not, however, re- 

 ducing the deposits of bonds below $50,000. 



The restriction in the issue of notes, as above 

 stated, would seem to be needless, as the banks 

 have not called for the maximum by about 

 $70,000,000 of the circulation to which, un- 

 der existing laws, they are entitled, though 

 probably in certain individual cases banks have 

 been embarrassed by the restriction, and the 

 country thereby deprived of a temporary in- 

 crease of circulation when much needed. Ex- 

 perience shows, however, that the volume of 

 circulating national-bank notes is not regulated 

 so much by the necessities of business as by 

 other causes, principally the market rate of in- 

 terest and the market price of the bonds de- 

 posited to secure the notes. The lower either 

 of these, the greater the profit on circulation 

 will be, and the more inducement for banks 

 to expand their issues, and conversely for a 

 higher rate or price. The profits realized by 

 a national bank, on its circulation, may be cal- 

 culated thus: Take for illustration $100 of 

 capital to be thus invested, the market rate 



of interest being 6 per cent, per annum, with 

 4 per cent, bonds at a premium of 12 per cent. 

 The interest on the $100 4 per cent, bond 

 on which the circulation is issued would be 

 $4. The circulation received would be $90, 

 from which, however, must be deducted $12 

 premium on bond, and $4.50 for 5 per cent, 

 reserve, leaving of loanable circulation $73.50, 

 the interest on which at 6 per cent, is $4.41, 

 making a total interest of $8.41 on the original 

 investment of $100. From this, however, should 

 be deducted 1 per cent, on $90 for tax on the 

 circulation, and nine cents approximate cost of 

 redemption, and there remains $7.42 or 7 1 4 o 2 <r 

 per cent, net interest realized. Had the $100 

 been loaned directly at 6 percent, there would 

 have been realized $6, making a net profit by 

 taking out circulation of 1'42 per cent. It 

 will be readily seen that with a decreased pre- 

 mium on the bond the profit on circulation 

 would have been correspondingly larger. The 

 following table, prepared by the same method, 

 shows that, with the price of the security bonds 

 remaining constant, an increase in the market 

 value of money lessens the profit of bank cir- 

 culation : 



This demonstration is well confirmed by the 

 existing distribution of the currency. In the 

 New England States, containing about one 

 twelfth of the population of the country, the 

 market rate of interest as compared with that 

 of other sections of the country is uniformly 

 low, and that section consequently furnishes 

 more than one third of the national-bank cir- 

 culation of the entire country. In the Western 

 States, where the rate of interest is usually high, 

 capital has more generally sought private bank- 

 ing as more remunerative, there being in those 

 States 1,683 private banks, with a capital of 

 $45,743,007, against 536, with a capital of only 

 $12,015,578, in New England; while of na- 

 tional-bank capital the New England States 

 have $166,070,420, against $63,137,042 in the 

 Western States. Of national-bank circulation 

 the New England States have $125,000,000, and 

 the Western States $63,000,000. 



Assuming the market rate of interest to 

 remain unchanged, or to have a tendency to 

 increase, an increase of national-bank circula- 

 tion would naturally occur only with a fall of 

 the market price of the bonds; and this was 

 well illustrated during the past autumn when 

 the market value of bonds was increasing. At 

 that time the pressure for an increase of paper 

 circulation was so great, that the Government 

 floated $45,000,000 in silver certificates issued 

 mainly upon deposits of gold the banks mean- 

 while diminishing instead of increasing their 



circulation, and not heeding the demand for 

 more currency. It is very evident that no 

 elasticity of the currency through free banking 

 has been secured by the present banking laws. 

 On the contrary, as currency becomes scarce 

 and the market rates of interest advance, the 

 tendency of the banks will be to withdraw, 

 rather than to increase, their circulation, and 

 the needed currency must be supplied from 

 other sources, if supplied at all. 



Whatever defects in this system of national 

 banks may exist, it is generally conceded that 

 no better system of banking has ever yet been 

 devised. Many of the bank charters will soon 

 expire, however, and the question of their re- 

 newal must be met. 



The rapid reduction of the public debt, if 

 continued at present rate, will in less than 

 twenty years retire all the interest-bearing 

 bonds of the United States, and the question 

 of supplying a sound paper currency to the 

 country in place of the present bank issues 

 will soon be of serious importance. 



The foreign trade for the calendar year 1880 

 has been greater than ever before in the his- 

 tory of the country, the exports of domestic 

 produce alone being larger than the entire ex- 

 ports of any year previous to 1870. 



The following tables show the rapid growth 

 and colossal amounts of this trade. Whether 

 these figures are to be kept up to their present 

 proportions may admit of doubt ; but while we 



