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THE BALTIMORE PLAN OF CURRENCY REFORM.

SEVERAL articles appear in the magazines this

month in support of the proposed currency reform known as the "Baltimore plan," the main features of which have recently received the endorsement of President Cleveland, Secretary Carlisle, and the present Comptroller, Mr. Eckels. This plan received its name from having been proposed at the last annual convention of the American Association of Bankers on October 11, 1894, by the Clearing House Association of Baltimore, as a body representing the banking interests of that city.

The Plan in Outline.

The "Baltimore plan" is briefly outlined as follows by the editor of the Engineering Magazine in an introductory paragraph to two addresses delivered before the recent bankers' convention, which he publishes: "It provides that bond security for national bank notes shall be abolished; that the banks shall be permitted to issue circulating notes up to 50 per cent. of their paid-up capital (and under emergency conditions an additional 25 per cent. may be named); that the notes of failed banks are to be paid out of a 'Guarantee Fund,' created by an annual tax on all national bank notes sufficient to cover such failures; that the government shall have a prior lien upon the assets of each failed bank and upon the liabilities of shareholders, for the purpose of restoring the amount with drawn from the 'Guarantee Fund' for the redemption of its circulation; and otherwise that the redemption of all national bank notes and the close scrutiny of all national banking affairs shall be carried on by the government as at present." It will be seen that practically the only change proposed is the substitution of a guarantee fund for government bonds as security. From this fund, which, as is specified in the plan, shall be equal to 5 per cent. of the outstanding circulation, the government is to redeem notes of failed banks.

ELASTICITY A REQUISITE.

Mr. Charles C. Homer who presented to the bankers' convention the plan on behalf of the banks of Baltimore, said in the course of his address, which is published in the Engineering Magazine: "We claim no novelty or originality for the plan which our Clearing House Association has delegated me to present to you, and which it hopes may meet with the approval and advocacy of yourselves and of our entire country. Having lived and prospered for thirty years under the influence and blessing of the national banking system, which supplies every requirement except that of elasticity, we have aimed to outline an amendment which would not dwarf its good features, but which would be so broad and so liberal as to invite all State banks to come within its folds.

“Our currency must be supplied by the banks,— not by the government. The banks are the arteries of commerce, feeling instantly the changes of commercial activity. It requires no demonstration or argument to prove that a flexible currency, responsive

to the demands of commerce, can never be obtained so long as the institution issuing the same is required in advance to invest as much money or more in securities. To be elastic, it must be based upon credit; and the institution issuing the same must have for its sponsor the necessary government regulation, supervision and examinations."

The Safety Fund Feature.

Ex-Comptroller A. B. Hepburn, who discusses the "Baltimore plan," in the Forum, draws from our own experience since the creation of the national banking system, evidence in support of the soundness of the safety fund principle embodied in the proposed plan. From statistics furnished him by the present Comptroller, he is able to show that an annual tax of two-fifths of 1 per cent. would have been sufficient to meet the cost of our national bank system during the last thirty-one years, and also the redemption of the notes of failed national banks during this period, and is convinced that a 5 per cent. guarantee fund maintained by the banks is ample to protect the government, under the "Baltimore plan," against loss in guaranteeing the redemption of notes.

Mr. Hepburn goes on to say: "The State Bank of Ohio, chartered in 1845, having as many as thirty-six branches, illustrated the safety fund principle. Each branch was liable for the circulation of all, and was required to deposit with the Central Board of Control a 10 per cent. guarantee fund in money or bonds of the State of Ohio or the United States. This bank was very successful and its note-holders suffered no loss.

"The safety-fund principle was proved sound also in the State of New York. A free banking act was passed in 1829. A safety fund of 3 per cent. was provided for the protection of note holders. By a mistake in legislation this fund was made to apply to all liabilities of failed banks, and hence, when the crash came, was utterly inadequate. For twelve years there was no failure. Millard Fillmore, Comptroller of the State, shows in his report that, had this safety fund been limited to the protection of note holders, it would have been ample with several hundred thousand dollars to spare.

"Just such a law as the one proposed by the Baltimore bankers is now in successful operation in the Dominion of Canada, except that the Canadian law allows circulation to the par of unimpaired capital, and the government assumes no responsibility for the redemption of failed banks' notes beyond the application of the 5 per cent. fund. The law has proved eminently successful and satisfactory in Canada. In the light of these facts no one can dispute the safety of the plan.

THE PRESENT SYSTEM.

"The deposits in national banks are to their capital and surplus as $2,255,000,000 to $1,002,000,000. The deposits are more than double the capital and surplus combined, which means that more than two-thirds of the banking business is done upon deposits, and less

than one-third upon the money of the stockholder. The national banks, with over 300,000 stockholders, far from being monopolies, are great co-operative institutions, both as to ownership of stock and deposits. The borrowing season of one industry is offset by the surplus season of another. The extra demand from one section, while marketing its particular staple, is supplied from the surplus money of another section whose crop has been moved or whose special money wants have been supplied. This keeps money moving to and from our distributing money centres. With our present inflexible currency system, there is no alternative. Under the proposed law the banks of locality could increase their note issue whenever the demand for money is active and when the demand ceases such currency would naturally flow back to the banks' vaults, awaiting a renewed demand. This would in a measure save the expense of transporting money to and from money centres and would tend to prevent the congestion of money in our large cities with abnormally low rates and a tendency to speculation; and, on the other hand, it would tend to reduce the high rates for money in rural localities. An elastic currency is indispensable in time of panic. The only elasticity of our present currency system consists in the auxiliary credits.

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Ninety-two per cent. of all the business transacted through banks in the United States is consummated by means of checks, drafts and other forms of credit. Hence, when credit is withheld, a money stringency is easily created. Reliable data show that certified checks, cashiers' checks, certificates of deposit from banks, due bills from individuals and corporations, all in round amounts, intended to pass from hand to hand as money and added to clearing house certificates used in settling bank balances, were utilized to the extent of more than $100,000,000 during the recent currency famine. This illustrates the defect in our currency law, for which the Baltimore bankers have suggested the remedy. Under their proposed law, the banks would have met the situation with an increased issue of notes.

"Another objection is that note-holders will have a prior lien upon the assets of a failed bank. So they have now by the National Bank act. Nearly all our State laws contain the same provision. The prior claim of note-holders has long been recognized in Great Britain. It is a well-settled principle of currency legislation, and was well settled long prior to the passage of the National Bank act. It gives note-holders an advantage over depositors, says the critic. He is entitled to it. Currency is the ingredient that assimilates all business transactions, reduces all barter to a common unit, and permits setoff and payment of balances. The claim of a depositor is wholly a private contract, and rests upon an entirely different basis. No man deposits money in a bank because the government has given it a charter, but because of the standing of the bank.

"As to the objection that banks would be organized in remote places solely for the purpose of issuing circulation,-remember that all circulation is issued

by the Comptroller, who would enforce wholesome restrictions. All provisions of the National Bank act as to payment of capital in cash, verified reports, and expert examinations, would still apply. The Comptroller has power to withhold a charter if the character of the incorporators, the locality, or any good reason convinces him that good banking is not the purpose of the organization.

"It is a recognized duty of the government to supply its citizens with money which possesses debtpaying power, which when tendered by a debtor to a creditor must be accepted as extinguishing the debt. The constitution reserves to Congress the sole power to coin money and to regulate the value thereof, and with the coining of gold and silver, I think, the government's money function should end. Our own experience and the experience of other nations prove the wisdom of leaving the issue of auxiliary currency, paper money which does not possess legal-tender quality, under proper regulations, to the banks. Our government's credit would not then be measured by its gold reserve. The national bank note exemplifies the true principle of paper money, and, relieved from the unreasonable restrictions and given the elasticity embodied in the safety-fund principle, I believe it will prove a boon to our commercial interests, and relieve us from vexatious and injurious currency agitation."

Mr. Bradford Rhodes' Endorsement.

Mr. Bradford Rhodes, editor of the Journal of Banking, gives the "Baltimore plan" his unqualified endorsement. In the current number of his Journal he says: "The plan is most conservative, and exhibits careful regard for some of the prejudices which its practical introduction will be sure to encounter. It is of great importance to have the American Bankers' Association recognize and recommend a course of financial reformation founded on sound principles, and the principles on which this is founded have all of them been submitted to the test of successful experience. In fact it embodies and combines the results obtained at two different periods of the history of banking in the United States with the results of banking methods tried with success in Canada and in Germany.

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"The two periods of banking in the United States referred to are, first, the period of the New York safety fund banking from 1829 to 1860, and the period of national banking from 1863 to the present time.

"The Canadian banking system, though in some respects under conditions that cannot prevail in the United States, indicates the possibility of the safety of a bank note circulation based on bank credit without special security, and the experience of the system of banking in the German empire has proved the utility of a heavily taxed emergency circulation. For years the Journal has called the attention of the public to the value of the features combined in the Baltimore plan,' and has carefully elucidated the principles underlying each one of them, and has moreover

pointed out the times and circumstances under which each one of them has been successfully tried. The Baltimore plan' is in itself, therefore, all that can be desired. It contemplates the retention of all that is advantageous in the national banking laws, and endeavors to so improve them in respect to the noteissuing function that the objections to the non-elasticity of the present national bank note currency will be removed. It also makes provision for the participation of State banks in the work of furnishing a currency, either by the inducements offered to these institutions to become national banks or by permitting them to issue currency as State banks if willing to submit to the supervision of the office of the Comptroller of the Currency."

While thus approving of the plan, Mr. Rhodes finds two difficulties in the way of its being successfully put into operation. "First, the difficulty of obtaining the favorable action of Congress. To overcome this difficulty the American Bankers' Association has appointed a distinguished committee to present the plan for the consideration of Congress and to press its adoption. If this committee shall wait upon the Janking and Currency Committee of the House and the Finance Committee of the Senate, and merely present the plan, we fear but little will be accomplished. The financial cranks, the fiat money and silver dollar advocates, much exceed the sound bank money men in the virtue of practical effort and perseverance therein. The bankers' association should establish an office in Washington properly equipped for bringing all legitimate influences to bear on Congressmen throughout the entire session. The distinguished committee cannot spend all its time in that city. Some one should be in charge of this office who can carefully watch the course of legislation and point out to the committee the times and seasons to bring their arguments to the attention of Congress. The plan itself should be open to much change and modification of details, which might under proper management gain votes for it, while the important principles might all be retained.

"The second difficulty is that even if Congress should be induced to adopt the Baltimore plan,' it will not have a fair field in which it can be submitted to a practical test so long as there remains outstanding the present enormous volume of inelastic government notes, legal tender and Treasury notes and silver certificates. To put so good a plan in operation in so poor a field would be a triumph for all the enemies of a bank note currency. The currency under the Baltimore plan' would we fear show but little if any more elasticity than the present national bank note currency, when brought in contact with the present excessive government issues. Some preliminary steps are necessary, therefore, before the Baltimore plan' should be introduced, even if Congress were willing to take up its consideration. The distinguished bankers who evolved the Baltimore plan' will after further consideration see the necessity of going into further details such as are here briefly outlined."

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The Views of Comptroller Eckels. Comptroller James H. Eckels, in the North American Review, concludes an article on our experiments in financial legislation as follows: "It would seem that some plan ought to be devised whereby both the Treasury Department and the business interests of the country will not be constantly in jeopardy through such laws as the Sherman Silver act and kindred legislation. The perplexities under existing conditions could not be more succinctly or more admirably stated than in the language of the Secretary of the Treasury, who in the report referred to says:

'While the laws have imposed upon the Treasury Department all the duties and responsibilities of a bank of issue and to a certain extent the functions of a bank of deposit, they have not conferred upon the Secretary any part of the discretionary powers usually possessed by the executive head of institutions engaged in conducting this character of financial business. He is bound by mandatory or prohibitory provisions in the statutes to do or not to do certain things, without regard to the circumstances which may exist at the time he is required to act, and thus he is allowed no opportunity to take advantage of changes in the situation favorable to the interest of the government or to protect its interest from injury when threatened by adverse events or influences. He can neither negotiate temporary loans to meet casual deficiencies nor retire and cancel notes of the government without substituting other currency for them, when the revenues are redundant or the circulation excessive, nor can he resort, except to a very limited extent, to any of the expedients which in his judgment may be absolutely necessary to prevent injurious disturbances in the financial situation.'

"It seems incredible that such an indictment could be presented and justified by the absolute facts against that which we term the currency system of this country. In the light of it the wonder is not that we have suffered so much financial disaster during the years of its construction, but that we have suffered so little. It is not at all surprising that each morning the first inquiry that addresses itself to the business man of the country, anxious to satisfy himself as to business conditions, is: Have a thousand dollars of gold come into the Treasury, or have a thousand dollars of gold gone out of the Treasury? No one can overestimate the detrimental influence upon the country's prosperity which such uncertainty breeds. It is an uncertainty which calls a halt upon every new undertaking and blocks every avenue of trade in which a busy people are engaged. It will continue to work injury to the people's interest until present conditions are completely changed and the source of the evil completely done away with. It may be delayed and its immediate effects for harm lessened by issuing bonds and the enactment of temporary measures of relief; but until the whole currency and banking system of the country is formulated into one harmonious plan in which each part shall be absolutely sound in principle, and the embodiment of monetary science, there can be no hope of undisturbed and substantial prosperity to all classes of the American people."

Some Objections.

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Mr. George Gunton, in his Social Economist, brings forth a number of objections to the 'Baltimore plan."

In advising that the greenback notes be retired, without showing how this is to be done, the plan may be assumed to mean that they shall be paid off by the government issuing coin in their stead. But how is this to be accomplished, inquires Mr. Gunton, when the government has no coin in the Treasury with which to pay off the $267,000,000 in greenbacks now in circulation? And, futhermore, he declares that to retire the greenbacks by paying them off and burning them, as was attempted by Secretary McCulloch in 1867, would bring about a sharp contraction of the currency and, as a result, a monetary crisis.

WHAT THE BANKS SHOULD DO.

As a means of avoiding contraction from the retirement of the greenbacks, Mr. Gunton suggests that "the banks of the country en masse, should in their associated strength assume the task of redeeming the greenbacks, and issuing their own notes in place of them-a plan which the banks could well afford, since the notes they would issue would be their own costless notes, and the coin with which they would purchase the greenbacks for retirement is now in their vaults and would return to them on deposit as soon as the purchase had been made."

In further criticism of the proposed plan Mr. Gunton says: The Baltimore plan' does not provide of what the paid-up capital' shall consist, nor in what securities it shall be invested, nor who shall

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pass upon its value. The corporation-forming' community know pretty well what 'paid-up capital' means. It means whatever trash the promoters of a corporation may choose to pay the cash for, which they have borrowed for an hour from the nearest source to pay with, and which they promptly return to its owners as soon as the payment has been made. It may mean mortgages on Seminole swamp lands assessed at $1,000 a front foot, or titles to mountain or desert wastes, or corporate shares in worthless enterprises. Of course the originators of the Baltimore plan will say, 'It is not our business to present a scheme which will be proof against perjury.' But perjury is just the weapon that a good banking scheme should be proof against.

INSUFFICIENT PROTECTION.

"A bank whose notes are daily subjected to the test of coin redemption, is protected as to its notes by a system in which perjury can have no share. So is a bank which deposits government bonds to a value exceeding by 10 per cent. the notes it issues. But a bank which enjoys an interim, while stepping out of one of these systems into the other, in which it is amenable to neither test in an effective manner, is in the air.

"Nor can any tax of 1 or 2 per cent. upon the total volume of a circulation which is permitted to be issued without the effective test of either bond security or coin redemption, amount to a guarantee fund for the redemption of the whole. As well expect a tax of 1 per cent. on the value of goods stolen to constitute a guarantee fund for the reimbursement of owners. Such a guarantee fund would apply in Canada, or among the provincial banks of England, where coin redemption indisposes to inflation. It would suffice under the bond security system. But where neither is in vogue it would have no application. The Baltimore plan' has the merit of stating correctly a need of our currency system. It needs elasticity. It lacks the merit of prescribing adequately for that need. Elasticity cannot be separated from coin redemption. To the achievement of coin redemption its prescription does not even profess to relate."

CON

THE ISSUE OF TREASURY BONDS.

OMMENTING in his Social Economist upon the proposal, since carried into effect, to sell fifty more millions of government bonds, Mr. George Gunton points out that this means of replenishing the Treasury is uncovering a weakness in our financial condition greater than had been suspected: "The government appears to be discovering for the first time the evils, indeed the imminent national bankruptcy, which threaten it so long as the United States Treasury is the sole debtor, in a nation of sixty-two millions of people, that can be asked for gold on its demand obligations. All the banks can make the government their buffer' under the Legal Tender act by paying in greenbacks. All depositors can, under the Legal Tender act, call upon their banks for the greenbacks. Holding either greenbacks or 'Sherman notes' they can present them at the Treasury and demand gold for them. This same gold they can tender to the Treasury in payment of their subscriptions to the fifty-million loan put forth ostensibly to replenish the Treasury with gold. In short, the purchasers of the bonds can draw out at the Treasury'spigot' the whole fifty millions of gold which they pour in at the Treasury 'bung,' get 2 per cent. per annum for loaning to the government exactly the $61,500,000 in gold now in the Treasury and not increase the stock of gold in the Treasury by a dollar.

"Never in all the history of national finance, not even in any of the old sinking-fund plans of paying off the principal of a large debt out of the savings to be made from interest derived from investing small portions of that same debt, nor in any of the famous financial hocus pocuses and bubbles of the South Sea and Mississippi era, was there ever devised a scheme so thin as that of keeping gold in the Federal Treasury by means of a sale of bonds when every purchaser of the bonds is entitled by law to draw gold from the Treasury itself to purchase the bonds with."

CONSULAR REFORM.

A DEFINITE plan for the reorganization of our

consular service is outlined in the North American Review for December by Mr. Henry White, ex-Secretary of the U. S. Embassy at London. The following paragraphs embody Mr. White's principal suggestions:

"I would suggest that our service should consist of consuls-general, consuls (of two or three classes), and vice-consuls, the number of officials in each grade to be determined by Congress, and the unmeaning designation of vice or deputy consul-general abolished: consular agents and consuls permitted to engage in business to be only retained (not as a portion of the regular service) where absolutely necessary, and with a view to their abolition at as early a date as may be practicable.

EXAMINATIONS.

"Those seeking admission to the service after a certain date (to be fixed by Congress) should be compelled to pass an examination in, 1, the English language; 2, arithmetic; 3, commercial law, and, 4, one or two foreign languages, either French, German, or Spanish (with a view to our interests in South America) to be compulsory, and the examination therein rigid. Successful candidates should be appointed vice-consuls.

"Each original appointment as vice consul and each subsequent promotion must be made by the President and confirmed by the Senate, as provided by the Constitution; but the assignment to posts of those appointed should, so long as no increase of rank takes place, be left to the Secretary of State. I can see nothing in the Constitution to compel the President to assign consuls to particular posts at the moment of their appointment, and there is no more sense in his doing so than there would be in his giving a captain in the navy the command of a ship or an admiral that of a squadron at the moment of his promotion.

REFORM BY DEGREES.

"The only foundation upon which a reorganization such as I have suggested can be based with any hope of success is the Consular Service as existing at the time the same goes into effect; all vacancies after a certain date to be filled under the new system, and no removals to take place after the same date, save for causes to be determined by a board of officials, and which should, in each case, be communicated to Congress.

"It is only by a gradual process of improvement in the existing services, and not by the sudden creation of new ones through parliamentary action or otherwise, that those in Europe, to which I have referred, have attained their present degree of efficiency; and it is only by a process somewhat similar that ours can be made to produce the results which the people of this country have a right to expect, and which, I believe, it is their intention shortly to obtain."

OUR NEW NAVY.

‘O Cassier's Magazine Mr. Lewis Nixon, naval

a short history of the development of our new navy. We abstract as follows the main facts:

"The absence of effective vessels from the United States Navy first began to attract public attention about the beginning of the Forty-fifth Congress, in 1879, and the Naval Committees of that Congress and of the Forty-sixth Congress investigated the condition of both American and foreign navies and reported in favor of new men of war. Previous to the assembling of the Forty-seventh Congress, the Hon. J. H. Hunt, Secretary of the United States Navy, organized a board, with instructions to report upon the number of vessels needed, together with their cost, size, displacement, armament, machinery and equipment. This report was submitted to the Secretary of the Navy, but none of the vessels recommended were built. It was used, however, as a basis of operation by the Forty-seventh Congress, which, in an act, provided for the completion of the double-turreted monitors and authorized the construction of a 6,000ton cruiser. Hon. Wm. E. Chandler, then Secretary of the Navy, found the authorization for the cruiser so vague that he would not begin it. A second session of this Congress passed a definite bill, authorizing the construction of four ships and appropriating $1,300,000 to begin them. This was the beginning of our new navy.

"Mr. Whitney, who succeeded Mr. Chandler as Secretary of the Navy, brought about a continuous naval policy and domesticated armor and gun making and other industries that were necessary to make the government self-contained in shipbuilding, and made it possible to replace the wooden ships by powerful steel protected cruisers.

"General Tracy, by his strong advocacy, brought the battle ship and the first-class cruiser to the front, introduced Harveyized nickel-steel armor and gave the United States a war navy.

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Secretary Herbert, who had aided in all the above as member and chairman of the Naval Committee of the American House of Representatives, finds himself with many of the plans of his predecessors matured, and all the great problems in connection with financing, manning, coaling and handling our growing fleet before him, together with the necessity of constantly adding to the number of ships already in existence."

Mr. Nixon in conclusion gives a classified list of the forty-five ships constituting our new navy, now in commission, or actually under construction: "Twelve gunboats, Petrel, Yorktown, Concord, Bennington, Machias, Castine, Penguin, Albatross, Porpoise, Detroit, Montgomery and Marblehead; ten protected cruisers, Atlanta, Boston, Chicago, Charleston, Baltimore, Newark, San Francisco, Philadel phia, Raleigh, Cincinnati; three first-class protected cruisers, Columbia, Minneapolis and Olympia: three armored cruisers, New York, Brooklyn and Maine:

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