institutions to a single office for doing business. Some idea of the use which has been made of the power to establish branches in the leading commercial countries of the world may be obtained from the following list of the number of banking offices in different countries:

These figures show that the power to establish branches has been freely availed of in all these countries. The figures are incomplete for France, and Germany, because they relate only to the central bank of issue and do not include the branches of the other large commercial banks of those countries. The banking business of France is almost wholly concentrated in the hands of five large institutions with head offices in Paris and with branches scattered throughout the Republic, but the exact number of branches is not available. In Germany also many powerful financial institutions compete with the Imperial Bank, and have their branches in every part of the Empire. The same is true, though in a less degree, of Austria-Hungary and of every other country of Europe.

The value of these branches is not merely in giving great power to the central bank, but in affording a channel for the diversion of capital from the points where it is least needed to those where it is most needed. A striking illustration of this transfer of capital is afforded by the history of the Australian banks. Most of them have their head offices nominally in Australia, but all have branch offices in Great Britain. By means of these British branches they have been able to gather up many millions of the savings of British investors and transfer them to Australia for investment on more liberal terms than could possibly be obtained by their employment in Great Britain.

The analogy between the relations of Great Britain and Australia to those of the United States and the Philippines is plain. If American banks are enabled to establish branches in the Philippine Islands they will be able to transfer there for proper banking loans large portions of their deposits which now lie idle on their hands and which afford but a small return or none. It would be necessary, of course, that proper precautions should be taken that loans should not be made for long terms or upon improper security. This would be regulated by the national banking law in the case of national banks, and would be governed by arrangements for time deposits in the case

of banks not restricted in the character of their loans by the national banking law and which desired to make investments for longer terms than that law allows.

Reliance upon small and isolated banks for the development of the Philippines and for the management of American business there would involve many other objections than their inherent weakness and isolation. They would be unable to attract large deposits of American capital seeking safe employment, and would be limited in the resources they disposed of to their own capital and the local funds of depositors. in the Philippines. Scarcity of capital would continue under such a system to retard the development of the islands, and the lack of close association with other American banks would place the local banks of the Philippines more or less at the mercy of their powerful foreign rivals.

THE BENEFITS OF BRANCH BANKING.

The close association which exists between a bank and its branches would not be compensated by the relations which are usually established between a local bank and its correspondents in commercial centers. A system of correspondents would serve to some extent for dealing in bills of exchange, but a bank which was a correspondent and nothing more could not be relied upon to make inquiries as to credits and render that constant assistance which would be rendered by a branch bank to its head office. The cooperation, sympathy, and aid in every banking detail and in behalf of every patron could not be expected from a correspondent bank which would be offered by a parent or branch bank. Such cooperation might be obtained to some degree by common ownership of independent banks in the United States and in the Philippines, as is already the case in the United States with certain large city banks whose controlling shareholders own country banks, but such community of ownership is in effect an evasion of the present national banking law, and is attended with difficulties which would not surround the open and acknowledged relationship between a bank and its branches. In the matter of transferring American capital to the Philippines for judicious employment there, community of ownership would fail to meet the requirements of the situation, and if such transfers were made in large amounts they would be a subject of just criticism by the shareholders of the lending bank and by the bank officials of the United States.

In recommending that national banks of the United States be permitted to establish branches in the United States, I am aware that strong feeling against such a proposal is likely to develop among some of the smaller country banks if the power to create branches is made general in its scope. For this reason, it is recommended

that it be limited in some way which will prevent the extension of branches for banking business of a purely domestic character into the smaller towns and cities. This can best be accomplished by providing that such branches within the United States shall not deal in domestic commercial paper nor loan to residents of their locality in the United States upon negotiable securities. This will cut off branch banks from the great classes of business represented by loans and discounts, and will make it unprofitable to establish such branches where the amount of foreign business is small. It will be possible under such a provision for branch banks to accept deposits for transfer to the Philippines and to conduct foreign exchange business, but not to compete with local banks in their usual and most lucrative fields. If a further restriction were desired upon the power of national banks to establish branches, it might be found in prohibiting such branches in communities of less than 100,000 population.

IMPORTANCE OF LARGE BANKING CAPITAL.

A small national bank located at Manila or elsewhere in the Philippines would be of little value in promoting and sustaining those large business enterprises which are being projected in the belief that they will be sanctioned by Congress and by the government of the islands. Only a bank having branches at the principal places in the islands, in the principal cities of the United States, and at foreign commercial centers would fulfill all the conditions required for the financial development of the country. These conditions are fulfilled in part by the two English banks already doing business at Manila-the Hongkong and Shanghai Banking Corporation and the Chartered Bank of India, Australia, and China. These banks, however, as appears in the testimony of the managers, annexed to this report, limit their business chiefly to the purchase and sale of foreign bills of exchange. They do not make advances to any large extent even upon securities to the wholesale and retail traders of the islands, and to a still less extent do they buy domestic bills of exchange. All those functions, among others, could be performed by an American bank which are not now performed by the English banks, and, by their own statements, are not among the classes of business which they seek. A bank without branches and with small capital, however, would be of little avail in promoting the commerce of the Philippines with the United States and foreign countries, and would be exposed to great risk from the powerful competition of the foreign banks.

It is therefore recommended that Congress in extending the national banking act to the Philippine Islands authorize the creation of branch banks, without limit as to number or as to their distribution in the Philippine Islands or in foreign countries. It would be prudent also to impose a minimum limit upon the capital of banks authorized to

establish branches.

This limit should not be less than $500,000. A bank with even larger capital would be more effective than one with the capital of half a million; but if the privilege of banking in the Philippines is to be thrown open to all applicants who are properly qualified under the national banking law, the sum of $500,000 is perhaps as high as the limit should be placed.

THE PRESSING NEED FOR PAPER CURRENCY.

The paper currency of the Philippines is now limited to the issues of the Spanish-Filipino Bank, and such amounts of American paper money as may happen to come to the islands through the operations of the War Department and in the pockets of visitors. This American money rapidly disappears, because it possesses a higher exchange value in Mexican silver at Hongkong and in other places than at Manila. The act of the Philippine government, fixing the value of the American dollar at $2 in Mexican silver, has not seriously affected the quotations. of Mexican dollars in other places and has not prevented their fall below 50 cents in gold since the cessation of the acute demand for them in the summer and autumn of the year 1900 for the military operations in China. The quotations of Mexican silver dollars have tended to fall to the level of silver bullion, and have fallen below the official rate fixed at Manila. This fact has inevitably tended to drain American money rapidly away from the islands, and even such quantities as remain in the hands of disbursing officers are not all of the denominations required for the convenience of trade. The tendency of American currency to leave the islands will persist so long as present conditions continue, and will probably not be seriously arrested if a sufficient quantity of distinctive silver coins are issued as the basis for monetary operations in the islands.

The Spanish-Filipino Bank has claimed the privilege, under a grant from the Government of Spain, of issuing circulating notes to the amount of three times its paid-up capital. This paid-up capital is $1,500,000 in Mexican currency, entitling the bank under this claim to issue $4,500,000 in circulating notes. The actual issues, according to a statement made by the directors of the bank before Judge Ide, the secretary of finance and justice, at a hearing given on September 9, 1901, never exceeded 3,400,000 pesos. These issues have recently been reduced by degrees to about 2,100,000 pesos, and the directors of the bank have expressed their willingness to conform to the wish of the Philippine government that the issues should be reduced to the amount of the paid-up capital, or to 1,500,000 pesos. This is equivalent to only $750,000 in gold at the official rate of exchange established at Manila, and even this amount would be subject to deduction if allowance were made for notes lost or destroyed, which still figure as

a part of the outstanding obligations of the bank. Leaving aside the American money which tends to disappear under present conditions, these issues of the Spanish-Filipino Bank, amounting to $1,000,000 or less, constitute the only paper money available in the Philippine Islands.

It is obvious that this small quantity of paper is insufficient for the needs of an active trade. This is preeminently true in a country where silver is the usual money in use and payments of large amounts. can not be economically made in gold coin, as they can be where gold coins are in universal use. Much complaint is made of the difficulty of carrying even moderate amounts in Mexican silver dollars, especially since these coins have come to represent a value of only 50 cents in gold. The fact that the demand for paper is acute is indicated by the difficulty which the directors of the Spanish-Filipino Bank have encountered in reducing their paper issues. Nearly all the notes in circulation are much worn and defaced, but they are not paid into the bank for reissue, because it is known that the bank is pursuing the policy of reducing its paper issues. As stated by one of the directors of the bank at the hearing already referred to, the notes are a continuing obligation, payable on demand, but without set date of payment. It is not possible to call them in when their holders do not choose to present them, unless by notice of repudiation after a certain date which would be contrary to the principles upon which notes are issued by solvent banks.

THE PAPER CIRCULATION AT OTHER ORIENTAL PORTS.

The fact that the present paper circulation in the Philippine Islands is inadequate is a matter of everyday observation among business men and in retail transactions. The convenience of an adequate circulation is illustrated in a striking manner by comparison of the conditions in Manila with those in other Oriental countries. The population of the city of Hongkong, the nearest commercial competitor of Manila, is estimated by the British officials at about 300,000. This is only 50,000 in excess of the population of the city of Manila as estimated by the health officials of the Philippine government. The Mexican silver dollar is the standard unit of value in Hongkong and is in circulation there in large amounts. The monetary circulation of Hongkong also enjoys a much larger supply of subsidiary silver than is now in circulation in Manila and its neighborhood. Notwithstanding this considerable stock of silver coin, use is found in Hongkong for note issues amounting to about 10,000,000 pesos in Mexican currency. The issues of the Hongkong and Shanghai Bank at the close of August last and the average issues of the Chartered Bank of India, Australia, and China for the quarter ending September 30, at their