i8 



JJ\ G. Langzvorthy Taylor 



The third 

 Act, the Na- 

 tional Bank 

 Act of 1864, 

 tried to secure 

 the solvency 

 of banks by 

 limiting and 

 securing the 

 note issue, but 

 unwittingly 

 did business 

 the service of 

 leaving de- 

 posits free 

 from regula- 

 tion. 



There are 

 two inconsist- 

 ent movements 

 before the 

 public: one to 

 render the note 

 issue elastic, 

 and the other 

 to extend note 

 guaranty to 

 deposits. The 

 former is more 

 in line with 

 principle. 



ing obligations in the form of deposits to be increased indefinitely. 

 Finally, in 1894, under the stimulus of the general financial dis- 

 cussion that was going on in the country, a plan was presented 

 at the annual meeting of the American Bankers' Association held 

 in Baltimore, which proposed to do away with the deposit of 

 government bonds as security for the notes, but to defend them 

 by a guaranty fund to be raised by a tax upon the bankers as a 

 guild. 



§ 15. This idea is bearing fruit and has thoroughly permeated 

 recent, general, intelligent discussion of the banking question. 

 Men are beginning to ask, why should bank notes be absolutely 

 secured? especially when bank deposits are not and cannot be. 

 It is true that reformers of the more popular order, taking the 

 other horn of the dilemma, are demanding that bank deposits be 

 made just as safe as bank notes. In general appreciation of 

 thinking persons, the " banking principle '' in spirit is now getting 

 the upper hand of the " current principle." The movement is 

 not confined to this country. 



The proposition to make a rigid requirement to invest deposits and 

 reserves in absolutely good securities is not a new one; but it is imprac- 

 ticable. Among other bad eiifects, it would completely paralyze a bank 

 which desired to make a judicious investment of the resources that it had 

 acquired from third parties; good bills of exchange, drawn by solvent 

 persons, are preferable to a portfolio full of stocks and bonds subject to 

 the fluctuations of the stock exchange and which could not be sold on a 

 falling market in the case of a crisis. Almost all banks invest tempor- 

 arily in government bonds, but the English banks have learned to their 

 cost the disadvantage of holding English consols for the last two years. 

 Those banks have been compelled to change their investment in order to 

 stop the effect of the depreciation of ' the best security in the world,' which 

 had fallen in a few years from 114 to gi.'^ 



Rafifalovich shows plainly the evils of banking on bonds, and, 

 a fortiori, of a dollar-for-dollar metallic or other guaranty fund.^* 

 The same point has been made by Juglar. 



^* Arthur Raffalovich, Marche financier, 1901-02, p. 62. 



" Banking on bonds is not banking. Andre Liesse, History of Banking 

 ill France (National Monetary Commission), 63, 72, 104. Cf. Maurice 

 Patron, Bank of France (National Monetary Commission), 9: "The bank 

 note tends to become nothing more than a token representing money." 



132 



