The requirement that a cash reserve shall be kept against circulation goes beyond the requirements of the national banking law in respect to notes secured by the deposit of bonds in the United States Treasury. There is at present no requirement for a cash reserve against circulation except the small fund of 5 per cent for current redemption deposited in the Treasury at Washington. It is proper that such a reserve should be kept, because it constitutes a resource more immediately available for cash demands than any class of securities. It is recommended, however, that half of this reserve may consist of gold bills drawn upon countries outside of the Philippine Islands or in deposits in other banks. The sale of such bills or drafts upon such foreign bank deposits are the equivalent of gold and would be more acceptable than coin or bullion when the demand for money took the form of a demand for export.

ADVANTAGES OF NOTES IN A NEW COUNTRY.

The issue of circulating notes under conditions profitable to the issuing banks is of great value in an agricultural community. It tends to convert the wealth of the community into a transferable form in much the same manner in which the ownership of a mill or of a railroad is converted into transferable subdivisions by the issue of stock and bonds. When an agriculturist is paid for his products in bank notes instead of a credit upon the store where he sells them, he is emancipated from the control of such stores and can make his purchases where he can make them upon the best terms. From being a vassal of the factor or the storekeeper he becomes an independent purchaser in the open market. It requires no argument to demonstrate how greatly the farmer profits by such conditions. But the benefits do not end with him. By the possession of money instead of store credits he is able to pay his hands in money. They in turn are able to make purchases under more favorable conditions than before and to contribute their share toward that larger and freer movement of both capital and credit and the stimulus to productive industry which in every country have followed the introduction of a sufficient and elastic system of bank-note currency.

It would seem to be clear, therefore, that the convenience of the community and the commercial growth of the Philippine Islands will be greatly served by a liberal system of note issue. That such a system would benefit the banks by increasing their possibilities of profit is equally plain. The possibility of increased profits would enable them to compete successfully with foreign rivals on the one hand, and on the other to offer lower terms for the use of capital to Americans seeking to develop the resources of the islands. Such advantages extended to American commerce and American investment enterprises

in the Philippines are vital factors in the encouragement of such enterprises and in the inducement extended to American capital by coming to the islands to relieve the congestion of surplus capital at home, which tends under present conditions to compete relentlessly against existing investments by the duplication of plants in industries already sufficiently provided for by existing establishments. The possession of banking power, including the ability to issue notes where they form an acceptable instrument of such power, is one of the potent factors which have enabled British bankers to win their large influence over the exchanges of the world. To refuse similar powers to American bankers in the Philippines, will be to cripple them at the outset in meeting their foreign competitors and in providing resources for American enterprises.

A form of paper currency which will add materially to the convenience of retail trade is the issue of paper certificates for the proposed silver coins. It is therefore recommended, if provision for a coinage issue is made, that authority be given to the government of the Philippine Islands to issue silver certificates of the same denominations as the silver certificates issued in the United States under existing law. The use of such certificates would obviate the necessity of carrying about great quantities of silver coin, while the certificates could be converted into coin whenever desired by their holders. This provision would not aid in the extension of credit in the same manner as an adequate bank circulation, but would do something to add to the flexibility and convenience of the proposed currency system.

THE STATUS OF EXISTING BANKS.

The adoption of a new banking system in the Philippines is necessarily complicated by consideration of the status of existing banks in the islands. The principal commercial banks are three in number— the Spanish-Filipino Bank, and branches of the Hongkong and Shanghai Banking Corporation, and of the Chartered Bank of India, Australia, and China. The latter banks, both owned in England, do not issue circulating notes and will come under regulations adopted by the United States or the government of the Philippine Islands only so far as those regulations apply generally to all banks of their character. All these banks have abundant capital, are prudently conducted, and are entirely safe in their character and management. The two English branch banks have behind their obligations in the Philippines the great resources of the parent banks, and the Spanish-Filipino Bank has a surplus fund equal to more than 50 per cent of its paid-up capital. It is recommended that full power be given to the government of the Philippine Islands to make general regulations governing banking, in harmony with the laws of Congress, which shall apply to the foreign banks as well as to those of the United States and the Philippines.

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While many complaints are made against the foreign banks in respect to their charges and methods of doing business, these are conditions which are less likely to be influenced for good by the direct action of the government than by the effective competition of American banks if they are given sufficient power to establish branches and to issue circulating notes.

The case of the Spanish-Filipino Bank stands upon a different footing from the others in respect to the issue of notes. This bank claims the exclusive right of issuing notes within the entire Philippine Archipelago under a special charter of the Spanish Government. The bank was founded in 1851, and is governed by by-laws and regulations approved by the Spanish Government in a royal decree dated October 17, 1854, with subsequent amendments. The last decree of the Royal Government was dated July 14, 1897, and approved changes in the by-laws recommended to the bank in the previous year. The original capital of the bank was 400,000 pesos, divided into shares of 200 pesos each, payable to order. Authority was given by several subsequent decrees to increase the capital to 4,500,000 pesos, but this authority has been availed of only to the limit of 1,500,000 pesos. The decree of October 17, 1854, granted to the bank the exclusive right to issue notes payable to bearer on demand, for general circulation in the Philippine Islands. The decree of June 5, 1864, authorized the bank to issue notes to the amount of double its paid-up capital. The decree of February 7, 1896, authorized the issue of notes to the amount of three times the paid-up capital of the bank, subject to the provisions of article 180 of the commercial code, which provides that banks shall keep in their vaults in cash at least onefourth of the amount of the deposits and current cash accounts and of notes in general circulation. The same decree extended the charter of the bank for twenty-five years from the date of the expiration of the present grant, which is January 1, 1903.

CLAIMS OF THE SPANISH-FILIPINO BANK.

The Spanish-Filipino Bank under these grants claims that its exclusive right to issue circulating notes in the Philippine Archipelago continues unimpaired until January 1, 1928, and that its authority extends to the issue of 4,500,000 pesos of such notes. The actual maximum attained by the issues was about 3,400,000 pesos in 1898. The amount has since been reduced to about 2,100,000 pesos and is still in process of reduction. The legal question, whether the exclusive privilege claimed by the bank is one which can not lawfully be impaired by the government of the Philippine Islands, is one of a comprehensive character, involving important considerations of Spanish and American law regarding the obligation of contracts and the character and sanctity of the franchise. Without undertaking to deal with

these questions, it may be pointed out that the Congress of the United States would probably be able to find means to render the privilege of the bank nugatory, under the decisions of the Supreme Court sustaining the power of Congress to levy a tax of 10 per cent upon the issues of banks other than national banks. In my opinion it would not be advisable to exert such a power as this, not only because of the arbitrary character of such action toward the bank and the effect it might have upon its credit and that of its many commercial patrons in Manila and throughout the islands, but because of the contraction which it would operate in the volume of paper currency. Such action, taking effect at any near date, would be likely to invoke something like a commercial crisis, which would be without excuse.

It is obvious, however, that the existing privileges of the SpanishFilipino Bank, in so far as they restrict the power to establish other banks of issue, are in conflict with the interests of the commerce of the Philippines and are, therefore, opposed to the public policy of the Government of the United States and of the Philippine Islands. Fortunately, the directors of the Spanish-Filipino Bank appear to recognize this fact and to be ready to adapt themselves to the new conditions established by American sovereignty and the increase in American trade which will naturally follow. The bank is governed in its ordinary commercial transactions by two directors. More important questions are submitted to a board of governors, and questions affecting the statutes of the bank are submitted to meetings of the shareholders. The two directors, Messrs. Balbas and La Rosa, appeared before Judge Ide, the secretary of finance and justice, during my presence in Manila, on the occasion already referred to, and discussed with him a recent dispatch from the Department at Washington suggesting that the circulation be brought within the limits of the paid-up capital of the bank. Both gentlemen expressed their willingness to comply with this suggestion and to adopt other safeguards conforming in some respects to the American law regarding the issue of notes. They were willing as soon as practicable to reduce their circulation within the limits of the paid-up capital, to deposit bonds with the government of the Philippine Islands as partial security for their outstanding notes, and to maintain the reserves already required by Spanish law. In respect to the exclusive character of the privileges of the bank they reserved an official opinion for the judgment of their shareholders, but Señor Balbas, the managing director, frankly expressed his personal opposition to monopoly, and evidently anticipated that the exclusive privilege would be objected to by the American Govern

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In order to obtain in definite form assurances from the directors of the bank that proper restrictions would be accepted by them without legal contest, a letter was subsequently addressed by Judge Ide to the

directors, setting forth the restrictions upon the power of issuing notes which he desired to recommend to the American Congress. In this letter, which was prepared after consultation between Judge Ide and myself, and conformed in every respect with my personal views, it was suggested that it would be more advantageous for both the bank and the government of the Philippine Islands that there should be agreement upon the recommendations to be made to the Government at Washington, rather than that the recommendations which might be made by the commission should be contested by the bank. A copy of the letter setting forth these conditions is appended to this report. To this letter a reply was received stating that the questions raised were so important that they had been submitted to the board of governors, but were considered by that board of such a character that it would be necessary to submit them to a meeting of the general shareholders of the bank. This course, it was stated, was required by the fact that the proposals involved important changes in the statutes of the bank itself. Subsequent inquiry by Judge Ide in regard to the date of this meeting of the shareholders drew forth the statement that it had been called for November 21.

The restrictions suggested in this letter were in all respects those which are recommended in this report for the government of other banks of issue, except that the limit of issue of notes not fully secured by United States bonds was allowed to remain in the case of the Spanish-Filipino Bank at the full amount of the paid-up capital. It was not thought prudent to suggest the reduction of the note issues at present to 50 per cent of the capital, as proposed for banks newly entering upon business, for the reasons governing the arbitrary abolition of the power of note issue which have already been set forth. Several of the restrictions, like that requiring a proportional coin reserve, would apply automatically in due proportion to the larger issues allowed to the Spanish-Filipino Bank. Aside from the impairment of the exclusive right of issue, the most important of the restrictions proposed in the letter of Judge Ide, affecting the financial resources of the Spanish-Filipino Bank, is the requirement that it shall pay a tax at the rate of one-half of 1 per cent per annum upon its average outstanding circulation. This will involve a burden of about 75,000 pesos ($37,500 gold) if the circulation is maintained constantly at the maximum allowed by law.

POLICY RECOMMENDED TOWARD THE SPANISH-FILIPINO BANK.

It seems probable, in view of the frank and conciliatory statements of the directors, that an act of Congress imposing these restrictions will be accepted without legal resistance. Even if the restrictions were much more severe, there is always serious risk involved to the credit and business of a bank in contesting in the courts such an