present conditions, because of the prohibition upon the grant of franchises embodied in the last Army appropriation act. It is doubtful whether, even in the absence of that restriction, they could be constituted under the national banking act and made responsible to the Comptroller of the Currency without direct authority of Congress. In any case, no national bank of the United States can lawfully maintain a branch under the interpretation given by every succeeding Comptroller of the Currency to the national banking law. It is not possible, therefore, under existing law for any national bank to be established in the Philippine Islands, nor for any national bank of the United States to establish a branch in the Philippine Islands.

OUTLINES OF THE PLAN PROPOSED.

For these reasons it is recommended that the national banking act be extended, with certain modifications, to the Philippine Islands, and that these modifications include, as the vital conditions of the usefulness and success of American banks, the power to establish branches and to issue circulating notes. This subject was considered in detail by the Philippine Commission, and a plan was agreed upon, upon my recommendation, acceptable to the commission. Its outlines are as follows:

1. That provision should be made by Congress that no person, firm, or corporation shall be permitted to conduct a banking business, or to establish or maintain a branch bank, in the Philippine Islands after June 30, 1902, without the written approval of the government of said islands.

2. That full power should be conferred upon the government of the Philippine Islands to frame and enforce regulations regarding the business of banking, including the appointment of examiners, and the right to have access through such examiners to all the records and assets of all banks doing business in the Philippines.

3. That the laws relating to national banking associations in the United States should be extended to the Philippine Islands, with certain important modifications regarding the creation of branches and the issue of circulating notes.

4. That national banks established in the Philippine Islands and national banks of the United States should have authority, with the approval of the government of the Philippine Islands, to establish branches in any part of said islands and in the United States, but that branches in the United States should not be permitted to discount commercial bills, or to make advances upon securities when such transactions are carried on wholly within the United States.

5. That circulating notes may be issued by the Comptroller of the Currency of the United States, under the conditions hereinafter set forth, to any national bank established or having branches in the Philip

WAR 1901-VOL 1, PT I- -14

pine Islands, to the amount of 50 per cent of the paid-up capital of said bank without the deposit of United States bonds required by the national banking law, but without suspending the provision that bonds shall be deposited to the amount of one-fourth of the capital, but not exceeding $50,000.

6. That the conditions governing the issue of such notes shall be that they shall constitute a first lien upon all the assets of the issuing bank except public funds; that they shall pay a tax at the rate of one-half of 1 per cent per annum into a guaranty fund; that they shall be protected by a cash reserve equal to 25 per cent of the amount of the notes outstanding, of which one-half may be in first-class gold bills or on deposit in some other bank; and that notes shall not be issued in denominations of less than 5 pesos.

7. That the power to issue notes should not be granted to any bank having a capital of less than $500,000.

8. That the guaranty fund constituted by the payment of the tax upon circulation should be employed for the immediate redemption of the notes of failed banks, but that such fund should have a lien upon the assets of a failed bank for the amount thus paid for the redemption of the notes.

9. That the Spanish-Filipino Bank should be required to comply with the requirements regarding circulation governing national banks, except that it may maintain a circulation equal to the whole of its paid-up capital instead of 50 per cent of such capital.

10. That mortgage banks should be authorized by the government of the Philippine Islands for making loans upon real estate and agricultural products, and that other banks having a capital of $1,000,000 or more may set aside an amount not exceeding one-fourth of their paid-up capital for mortgage business.

11. That mortgage banks should be permitted to loan upon real estate not more than one-third of its value, according to impartial appraisement, and should not be permitted to loan more than onetenth of their aggregate resources to any one person, firm, or corporation.

12. That the Treasury of the United States should be authorized to receive deposits from the government of the Philippine Islands, and that the treasuries of the two Governments should be authorized to carry on any convenient and proper transactions with each other.

13. That the treasury of the Philippine Islands and its branches may be designated by the Secretary of War as legal depositories of public money.

POWERS OF THE LOCAL GOVERNMENT OVER BANKING.

The regulation of banking in the Philippine Islands is complicated to some extent by the several classes of banks already doing business

there, and by the necessity of making different provisions for banks engaged in different classes of business. It is proposed in the plan outlined to give general authority to the government of the Philippine Islands to regulate banking in the islands. If banking were a purely local question, it might be better in some respects to leave to the government of the Philippine Islands the determination of all the details governing banking in the islands. It seems to be desirable, however, that authority to establish such regulations should be specifically conferred by Congress upon such government in order that its powers shall be beyond question and that the regulations framed shall be established in a legal public manner, instead of depending merely upon the order of an executive department.

Another reason justifies special action by Congress in regard to banks of issue and other large commercial banks. This is the fact that the extension of the national banking system to the islands will facilitate trade between the islands and the United States to an extent which would not be possible under a system of purely local banking. If national banks are to be established in the Philippine Islands, it is first necessary that the laws of the United States should be so amended. as to permit national banks to engage in business legally in the islands, and that the authority of the Comptroller of the Currency should extend over such banks with the same force and the same degree of scrutiny as over banks in the United States.

It seems proper to provide that the authority of the insular government shall be absolute as to what banks shall enter upon business in the Philippine Islands. This authority will not conflict with that of the Comptroller of the Currency, since his approval will be required, in addition to that of the Philippine government, before any set of persons can assume in the Philippine Islands the functions and privileges of a national-banking corporation. It also seems proper that the government of the Philippine Islands should have authority of their own to examine and regulate banks doing business in the islands, in addition to the authority exercised by the Comptroller of the Currency. It is contemplated that the insular government shall exercise the same control over banks other than national which is exercised in the various States by the State banking departments. This will involve the appointment of bank examiners, who may or may not be the same persons as those appointed by the Comptroller of the Currency for the examination of national banks, according to the requirements of local conditions in the islands. It is anticipated that the activities of the insular officials will be directed chiefly to the supervision of banks other than national, but circumstances might arise in the conduct of national banks or in local banking conditions, which would not come promptly under the notice of the Comptroller of the Currency and in which interference by them would be justified by its imminent necessity.

CLASSES OF BANKS TO BE DEALT WITH.

The classes of banks with which Congress and the government of the Philippine Islands will have to deal may be divided arbitrarily into four:

1. National banks of the United States, which may establish branches in the Philippine Islands.

2. National banks whose head officers are established in the Philippine Islands.

3. Banks not national issuing notes in the Philippine Islands.

4. All other banks doing business in the Philippines, including the existing foreign banks, American and foreign loan and trust companies, mortgage banks, savings banks, and all other forms of investment and finance companies.

The regulations governing the first two classes of banks, both of which would be established under the national banking law, should be substantially the same. The difference between them consists in the fact that the officers and directors of the first class would be chiefly in the United States, while those of the second class would be chiefly in the Philippine Islands-in each case where their head office might be established. Some practical differences would arise from the fact that if a national bank should be established in the Philippine Islands its chief business would probably be done there rather than in the United States, while a national bank of the United States having branches in the Philippines would probably continue to have the more important part of its business within the limits of the Union. It is obvious, however, that there should not be a divided authority as to the direct supervision of these banks, and that such supervision should be exercised by the Comptroller of the Currency of the United States, since authority for a bank of the United States to do business in the Philippines without his supervision would open the door for frauds and losses in the islands, causing loss to the American depositors and shareholders of the bank, and a similar lack of supervision in the United States over the business done there by a branch of a Filipino bank would open the door likewise to losses by American depositors and by the shareholders in the Philippines.

It is recommended, therefore, that the national banking law be extended to the Philippine Islands, but with several important modifications. The most important of these, beyond those which are merely incidental to the extension, are the power to establish branches, the power to issue notes under different conditions from those imposed by the present national banking law, and the authority to devote a small portion of capital to mortgage loans. Among the incidental changes recommended is the amendment of the requirements as to the residence of directors, so that any resident of the Philippine Islands may lawfully act as director of a national bank engaged in business in the Philippines.

POWER OF FOREIGN BANKS IN THE ORIENT.

An American bank doing business in the Orient will be confronted by foreign competitors long established, of unquestioned credit, and possessing great resources. English capital for many years dominated the colonial and foreign banking field, especially in the East, but has recently encountered powerful competition in French, German, Belgian, and Russian institutions, or in banks deriving their capital from these sources. No less than nine large banks do business in Hongkong, and other powerful institutions are scattered over Japan and the Russian and French establishments in Eastern Asia. A few of the leading banks doing business in the East, with their capital and reserve funds, appear in the following table:

These banks represent only a part of the banking power available in the Orient for competition with American institutions. London is still the center of foreign banking enterprise, and in that city are the head offices or the London offices of some thirty large banks organized to do business in British dependencies and foreign countries, independently of the banks organized chiefly for domestic business in Great Britain and Ireland. The deposits of these colonial and foreign banks having offices in London are about £200,000,000, and represent an advance of nearly a thousand millions of dollars of English money for the development of trade in the British colonies and in foreign countries.

It is this great banking power against which American banks must contend in seeking business in the Orient. It is obvious that if American banks are to make head against such competition they should be benefited by all the privileges and armed with all the proper powers which Congress can confer. These foreign banks derive their power largely from their ability to establish branches throughout the world. There is hardly any Government but that of the United States which prohibits the creation of branch banks and limits its national banking