10 Conservative *
THE FAIUIEK'S INTEKKST IN THE
HANKING ( QUESTION.
Two recent numbers of Sound Cur
rency , by L. Carroll Root , secretary of
the Reform Club's Sound Currency
Committee , and formerly assistant to
the Indinnnpolis Monetary Commission ,
deal with the banking question from a
somewhat now , but very important
point of view. The first is entitled
"Deposit Currency. " In it the author
showd how bank deposits subject to
check constitute the main currency of
all the larger business of the country.
He demonstrates conclusively that these
deposits are bank currency just ns truly
ns bank notes are , the two being only
different forms which bank credit takes ,
and being similarly created in the
operation of discounting the notes of the
bunk's customers , and both performing
nil the offices of currency where used.
Mr. Root shows what are some of the
considerations which have made the note
form of currency more acceptable for
use in country districts and at the same
time have resulted in a decided prefer
ence for the bank deposit as the main
currency for use in the cities and the
distinctly commercial communities.
In the second pamphlet , entitled "The
Farmer's Interest in the Banking Ques
tion , " the author develops this point
further , and shows how , because of it ,
the restrictions which our laws have
placed upon the issue of bank notes in
excess of those put upon the use of de
posits amount to a practical discrimina
tion against the use of bank notes and
in favor of those whose currency is
deposits , and is thus a discrimination
against the country in favor of the city.
The most important of these restric
tions are the special taxation of bank
notes and the requirement for invest
ment in United States bonds to be
deposited as security for their issue.
Because of thene restrictions the use of
bank notes by those whose habits and
convHiiience require that form of cur
rency ( that is by the farmers and the
population of our agricultural sections
generally ) has been made expensive ,
while the commercial and financial
classes , who do not care to make use of
notes , but whose business w best and
most conveniently done with deposits ,
have been left free to use their own
particular form of
currency without re
strictions or burdens. This naturally
and necessarily produces higher rates of
interest in country districts , as the
author shows by a series of concrete
illustrations. He takes , for example , a
typical city bank of $100,000 capital ,
with $150,000 of deposits. Its condition
would be represented by the following
balance sheet :
AKSKT8.
Loans and Discounts $212,500
Cash Reserve (25 ( pur cent ) U7.5UO
$250,000
LIAIHMTIKH.
Capital. .1100,000
Deposits ino.000
$250,000
With $5,000 expenses , this bank could
earn a G per cent dividend upon its
capital if its loans were made at an
average rate of 5.18 per cent.
Contrast with this the situation of a
typical country bank under the existing
system. In order to furnish its cur
rency in the form needed by its custo
mers , a large part of it must be in the
shape of bank notes , instead of all
deposits , as in the city. Take , as before ,
a bank of $100,000 capital , with $150,009
demand liabilities $90,000 of which are
notes and $00,000 deposits. It is neces
sary under the present system that the
bank should buy $100,000 of United
States bonds , to bo deposited with the
treasurer at Washington. These at
present prices would cost about
$112500. This will leave the bank ,
after keeping out a cash reserve of
$137,500 as before , only $100,000 for
general loans and discounts. Its condi
tion will be as represented by the fol
lowing balance sheet :
ASSETS.
United States Bonds $112,500
Loans and Discounts 100,000
Cash Reserve (25 ( per cent ) 37,500
$250,000
LIAIIIUTIES.
Capital $100,000
Deposits 00,000
Circulating Notes 00,000
$250,000
To the same expenses as are borne by
the city bank must be added $900 for
tax on circulation. A 6 per cent divi
dend would take $6,000 as before. The
bank's total income must therefore be
$11,900 in order to make possible a G
per cent dividend upon the capital stock.
Now the net return upon the $112,500
invested in United States bonds is only
2 4 per cent. The total net income on
the $112,500 thus invested is , therefore ,
only $2,5in.2o. In order to make the
total income up to $11,900 , the loans and
discounts must produce $9,868.75
which requires that they should be made
at an average rate of about 9.4 per
cent.
This is the reason , as the author shows ,
why rate * of interest are so high in our
agricultural sections. More money can
be made by starting a bank in a city
and lending at 5 per cent , where the
form of currency desired ( deposits ) is
untaxed and unburdened , than can be
made by loaning at 9 per cent in n
country district , where a considerable
portion of the currency must take the
form of notes , the issue of which is so
severely burdened. Until those burdens
are removed rates of interest must re
main much higher in the country than
in the city.
Another common-sense view of the
question is as follows : The city bank
is left free to loan its entire $212,500 to
local borrowers. The country bank , in
lie typical case mentioned , i8 required
at the outset to withdraw $112,500 for
nvestuieut in bonds at 2J per cent
interest. This reduces the portion to be
loaned to local borrowers to $10,000.
And it "stands to reason" that if so
arge a part is required to be invested
in a special form at a rate of interest
much below the normal commercial j
rate , the part loaned at home must be
oaued at a rate enough above the nor
mal , rate to make up for what the bond
investment falls below it.
How different the situation if the issue
of notes , within reasonable limitations ,
were no more restricted and no more
heavily burdened than the use of de
posits ! Then the discrimination between
city and country would disappear , and
the rural community which preferred
its currency in the form of notes would
be at no disadvantage as compared with
the commercial community ; the country
bank would then be in a position to
make loans on as favorable terms as the
city bank , and the average loaning rate
required . to earn a 6 per cent dividend in
the typical case mentioned would fall
from 9.4 to 5.18 per cent.
Secretary of the
PARTISAN
MALICE.Treasury Gage is
being assailed with
more than ordinary partisan malice by
all the bigoted and infatuated disciples
of the money fallacies in the United
States. An organ of calamity at Lin
coln heads an article :
LET GAGE BE IMPEACHED.
HE HAS ENGINEERED A STEAL THAT IN
ENORMITY ECLIPSES ANYTHING EVE II
BEFOUE ATTEMPTED.
Now every citizen of Chicago and the
Northwest who knows Lyman J. Gage
it absolutely certain that he is utterly
incapable of wilfully violating the law.
However much THE CONSERVATIVE may
differ from the secretary in some things
after a personal acquaintance of many
years it is perfectly confident that the
headlines quoted are malicious and false.
Secretary Gage could not "engineer a
steal" if he would , and it is not decent
to accuse him by such reckless and
mendacious allegations.
To threaten the Southern states w.ith
a loss in representation "is poor states
manship and poorer politics , " the St.
Paul Pioneer Press ( rep. ) says. "If by
educational and property qualifications ,
justly enforced , the white can maintain
the domination that he is bound to
maintain anyway , the day will not
be far distant when the Southern voter
can give as free expression of his views
as the Northerner. And if the qualifi
cations now imposed in Mississippi ,
Louisiana and South Carolina are some
times inequitably applied to bar out
negro votes , that is a matter that time
and an awakened political conscience
can be depended upon to remedy. "