Conservative *
cnpital in banking , as compared with
other enterprises , would thus produce
competition and reduce the nverage
loaning rate to the point of equilibrium ,
where the not return was no greater
than in other lines of business.
As a result of this survey we are in a
position to understand what the force is
which has given to our great cities and
commercial centers the low rate of in
terest which they have enjoyed in
recent years. It is , in large measure ,
nothing more nor less than this tenden
cy of competition to force down interest
f rates as fast as the increased use of
deposits by the business community has
made it possible to earn the same return
upon the capital invested , even where
loans are made at lower rates.
Itcstrictions Upon tin1 Issue of Note
Currency.
When we turn from the users of deposit -
posit currency to those whose habits de
mand the use of notes instead , \vo find
a very different situation. The deposit-
using communities are the cities. They
have been left free from restrictions up
on the use of their favorite medium of
exchange. The note-using communities ,
as has been explained above , are mainly
our rural population , the inhabitants of
the country districts. By the severity
of the burdens and restrictions placed
upon the employment of their favorite
form of currency notes they have
been virtually denied the right to use it
except at a cost so great as to be practical
ly prohibitive.
In what , then , do these restrictions
lie ? Of what do these burdens consist ?
Though there are in all quite a num
ber of provisions of law which rest
more heavily upon the note-user than
upon the deposit-user , the others are
insignificant by the side of two , viz. :
1. Requirement that a bank shall in
vest in United States bonds an amount
exceeding the notes it shall issue ;
2. The taxation of bank notes with
out a corresponding tax upon deposits.
In order to put the country districts
upon an equality with the city com
munities in the matter of supplying
themselves with an economical and
convenient currency , it is essential that
these restrictions upon the issue of bank
note currency should bo removed. It is
to these restrictions especially the first
mentioned that must be attributed the
largest share in the high interest rates
which prevail in the more distinctively
rural and agricultural portions of our
country.
The following illustration by way of
comparison between a typical city bank
and a typical country bank may help to
make this clear.
Typical City Bank.
Take for example a city bank of $100-
000 capital with $150,000 deposits.
Supposing it to hold a reserve of 25 per
cent of its demand liabilities , its condi
tion would bo represented by the
following balance sheet.
ASSKTS.
Loans mid Discounts ? 212..r > 00
Cash Reserve- ii'/iOO
WoO.OOO
MAlllMTIKS.
Capital ? 100,000
DcpoHits 150,000
$2.- > oooo
Let us suppose that its expenses ( over
and above its profits from exchange and
sundry sources ) amount to § 5,000. In
order to earn a 6 per cent dividend upon
its capital , the income from the loana
and discounts must be $11,000. To pro
vide this amount it is necessary that
the loans should bo made at an average
rate of 5.18 per cent. And under con
ditions where this is a typical bank ,
that is the rate toward which the loans
will tend by the force of competition ,
as explained above.
Typical Country Bun It.
Contrast with this the situation of a
typical country bank under the existing
system. The distinguishing feature , as
will be understood from what has gone
before , is that the clientele of the
country bank demands that a large part
of the bank's liability serving a medium
of exchange shall be in the form of
notes rather than deposits. Take , as
before , a bank of $100,000 capital , with
$150,000 of demand liabilities , $90,000
of which are notes and $00,000 deposits.
It is first necessary under the present
system that the bank should buy $100-
000 of United States bonds to be de
posited with the treasurer at Washing
ton. There are more of the 4 per cent
bonds of 1007 than of any other ; there
fore it is fair to take them as an illus
tration. Suppose the bank purchases
them at the present price ( October , 1899) ) ,
112 . The cost , will be $112,500.
This will leave the bank ( after deduct
ing $37,500 for a cash reserve ) only
$100,000 for general loans and discounts.
Its situation will be represented by the
following balance sheet :
ASSKTS.
U. S. Bonds $112,500
Loans and Discounts 100,000
Cash Reserve 87,500
! ? 2oO,000
TjlAlllUTIUS.
Capital $100,000
Deposits 00,000
Circulation 00,000
$250,000
To the same expenses as are borne by
the city bank ( $5,000) ) must be added
$900 for tax upon the circulation. A G
per cent dividend would take $0,000 , as
before. The bank's total income from
loans and investments , therefore , must
be $11,900 in order to make possible a 6
per cent dividend upon the capital stock.
Now , the net return upon the $112,500
invested in government bonds , after
providing for a sinking fund to liquidate
the premium by the time the bonds
mature , is only 2 % per cent. The net
income on the $112,500 thus invested is
therefore only $2,531.25. In order to
make the total income up to $11,900 , the
loans and discounts must produce $9-
8G8.75 which requires that they should
be made at on average of about 9.4 per
cent.
In other words , those communities in
which the note constitutes the predomi
nant currency in the proportion suggest
ed ( that is , distinctly rural communities )
are denied the use of their local credit
in the form required by their business
except at ruinously high rates of in
terest. While the commercial com
munities , properly left free to utilize
their credit as they see fit , under similar
circumstances find the interest rate
tending toward 5.18 per cent and re
ceive the benefit in the shape of oven
lower rates , of every increased use of
deposits by the community.
The question is sometimes asked :
"Why are the rates of interest so high
as they are in portions of the west and
south ? And why does not more bank
ing capital go into those sections to take
advantage of 8 per cent and 10 per cent
rates of interest ? " The answer is easy.
It is because more money can be made by
a bank lending in an eastern city ( on
$150,000 of deposits ) at 5.18 per cent
than in lending in Arkansas ( on $60,000
deposits and $90,000 notes ) at any less
rate than 9.37 per cent ,
Another aspect of the same subject
which should appeal strongly to borrow
ers in the west and south is seen when
we look at the amount of loans offered
to local borrowers. The city bank with
$212,500 ( o invest is left free to loan the
whole to local borrowers : while the
country bank is compelled to withdraw ,
for investment in bonds , $112,500 , which
might otherwise be loaned at home. In
this way , by the operations of our
present bond requirments , the capital
available for loans is greatly restricted
wherever the habits of the people re
quire the use of notes instead of deposits.
The result must necessarily be scarcity
of credit accommodations and consequent
quent high rates of interest.
Again , the absolute necessity for a
high rate of interest under the existing
system in those sections whore notes are
required is apparent from another
standpoint. Wo may assume , in the
first place , that banks will not be organ
ized to do business and make loans in a
rural locality unless they can get as good
a rate of return upon capital as could be
obtained by doing business in a city.
Now , if a country bank is forced ( by
the requirements of the law ) to invest ,
say , half of its resources in an invest
ment bearing a rate of interest far be
low the normal commercial rate ( as , for
example , 2J < or 2j per cent ) it "stands
to reason" that in order to make any
given rate ( say 5 per cent ) upon the
whole , the other half must be loaned
