important point as its right to the exclusive privilege of note issue. It is probable that any bank not suffering very serious pecuniary loss by such restrictions would prefer to accept them, even if infringing its franchise, rather than to resist at the expense of prolonged litigation. The restrictions proposed, moreover, do not involve a serious departure from the principles of equity in dealing with the bank. The exclusive privilege is of minor importance so long as the bank is permitted to retain the privilege of issuing notes to the full amount of its capital and the regulations governing American banks are not such as to permit issues by them upon more favorable terms. It is recommended, therefore, that the restrictions applied to other banks in respect to the issue of notes be applied to the SpanishFilipino Bank, with the exception that it be allowed to issue to the full amount of its capital, but that no other restrictions be applied which would tend to impair the privileges which are claimed for it under its existing franchise.

One of the suggestions made in the letter addressed to the directors of the bank on the subject of this privilege was that certain old issues of notes, some dating back to 1865, which are now outstanding, should be excluded from the authorized limit of issue so as to give the bank a wider margin of issues for its present form of notes. It is reasonable to believe that a considerable portion of these old issues have been destroyed and will never be presented for redemption, but full provision should be made for their redemption in case they are presented. For this purpose it is suggested that the bank be required, if it accepts the proposal to exclude these issues from its authorized limit, to pay into the public treasury a part of the amounts of these old issues, to be reimbursed from time to time if the notes are actually presented for redemption. The effect of this will be, if the notes are not presented, to give to the public treasury the free use without interest of the amounts thus deposited. It is probable that only a small part of this deposit will ever be required for the redemption of the notes, but it would not be sound public policy to cease to treat the amount of the outstanding notes as an obligation of the bank to the note holders, and the deposit in the public treasury as a part of the fund held for the discharge of the obligation.

RELATIONS OF THE FEDERAL AND PHILIPPINE TREASURIES.

The convenience of the government of the Philippine Islands and the several branches of the Government of the United States will undoubtedly be served in the future by a certain degree of cooperation between the treasuries of the two governments. In order to give permanent legal authority for such relations several provisions of law seem to be required. Various classes of transactions will probably be carried on by the Philippine government in the United States, as is

already being done through the Bureau of Insular Affairs of the War Department, and the Government of the United States may benefit by the cooperation of the Philippine government in the management of receipts and disbursements on account of the Army and Navy. For this reason it is recommended that authority be given by Congress for mutual arrangements between the financial officers of the two governments for the transfer of funds and the issue of checks and drafts upon each other. These transactions would be only such as are carried on between two correspondent banks, and it should be distinctly provided that none of the expenses of the government of the Philippine Islands shall be paid from the Treasury of the United States, unless expressly authorized by law.

The extension of the national banking system to the Philippine Islands would impose new duties upon the Comptroller of the Currency and the Treasurer of the United States which they would exercise in some respects at an inconvenient distance. It may be desirable that each of these officers should designate some responsible officer of the Philippine government to act as his representative in the islands. It would probably be found desirable to keep in the Philippine Islands a portion of the fund for the current redemption of bank notes and perhaps such United States bonds as might be deposited by the banks when beginning business. The Treasurer of the Philippine Islands could be made the custodian of such funds, but if a considerable amount of labor were involved in their administration it might be proper to designate one of his subordinates as the special representative of the Treasurer of the United States and the Comptroller and to pay a part of his compensation from the Treasury of the United States or from the proceeds of the taxes and charges paid by the banks in conformity with the present system of issuing and redeeming national-bank notes. There would be no more risk involved in this arrangement than in the administration of public money through the subtreasuries, and it would be proper that both the Treasurer of the United States and the Comptroller of the Currency should exercise as close a supervision over fiscal and banking conditions in the Philippines as circumstances permitted. The representative of the Comptroller might be authorized to pass upon minor points in connection with the administration of the banking laws, but should be required to submit to the Comptroller for his personal consideration all applications for new banks and important questions of law.

NEED FOR MORTGAGE BANKS.

One of the most influential means of promoting prosperity in the agricultural districts of the Philippine Islands would be a system of loans at moderate rates to agriculturists. The desire for some system

of such loans was strongly expressed in many towns and provinces on the tour of the commission for the creation of civil governments, and such a system is vigorously urged by the commission in their annual report. The methods of agriculture now employed in the islands are antiquated and fail to yield the best results attainable by the culture of the soil. Even such slender resources for their development as the people possessed prior to the insurrection of 1896 have been impaired by the disorders of the succeeding five years, down to the restoration of civil government in the spring of the present year. The means of education in better methods are being offered, to some extent, by the system of agricultural colleges which is provided for in the scheme of education prepared by the efficient commissioner of education of the islands. The instruction given in such improved methods can not well be availed of, however, unless cultivators have the means of acquiring good seed, draft animals, and modern tools. Only by some system of agricultural loans can these means be placed in the hands of the people, and the stimulus given to the agriculture of the islands which will produce the results which their rich resources are capable of yielding.

Governor Taft is especially solicitous that some provision be made for loans for the benefit of agriculture, and at his request I conferred with Señor José Ruiz Luzuriaga, recently governor of Occidental Negros and now a member of the Philippine Commission, in regard to existing conditions and their remedy. Señor Luzuriaga has been himself engaged in large business enterprises and he has had much opportunity for observing agricultural development in his native island, which is one of the largest sources of sugar production in the Philippines. He states-and his testimony is borne out by testimony given to the Schurman Commission and from other sources-that interest rates for agricultural loans are now excessively high. Small money lenders charge interest running as high as 25 per cent per annum, and in some cases approaching, with commissions and charges, the almost incredible limit of 40 per cent. A large corporation which does business in Negros nominally charges 25 per cent, but in effect collects from 30 to 40 per cent upon the value of the amount loaned, by requiring that the crop of the borrower shall be delivered at the price fixed by the company, that purchases of supplies shall be made from its stores, and that other operations connected with the marketing of the crop shall be conducted under its charge and at its profit. It is obvious that under favorable conditions a rich field lies open here for the loan of American capital at rates which will greatly relieve the present condition of borrowers in the Philippines and yet afford profits far in excess of those which are usually earned in enterprises at home.

One of the reasons for high rates for money in Negros and other parts of the Philippines is the risk involved in the loans. The titles to lands are no always perfectly clear, and there is always the risk

incident to a loan which is to be repaid from the profits of agriculture that there will be a failure of the annual crop. Notwithstanding these drawbacks to the lending of money at low rates, the security offered by the sugar plantations of Negros, when the land is pledged, seems to be adequate to justify loans of a moderate amount at considerably lower rates than those now paid. The chief difficulty in cases of default would be found in the marketing of lands, but this difficulty would disappear to a large degree if the lands could be worked under modern conditions of culture-with improved machinery and without the crushing burden of the charges made for the use of capital. While the actual management of a sugar plantation would not fall within the proper functions of a bank, an enterprising American bank would probably find little difficulty in persuading American capitalists to undertake the management under conditions which would insure large profits and relieve the bank from serious risk.

For the creation of mortgage banks in the Philippine Islands it is not absolutely necessary that the authority of Congress should be invoked. Mortgage banking is a matter of local law in most of the States of the American Union, and there is already considerable law on the subject in the Philippine Islands, inherited from the Spanish Government. The general power to legislate on the subject would remain with the Philippine Commission, if Congress should approve and continue their existing powers, with an amendment of the provision of the last Army appropriation bill prohibiting the granting of franchises. For these reasons it is not considered essential that Congress should legislate in detail regarding the charters of mortgage banks in the Philippines. A knowledge of local conditions might enable the local government to regulate the details of such franchises with better results than if they were prescribed at a distance of ten thousand miles. It seems to be desirable, however, that Congress should take cognizance of the subject, and prescribe certain general rules governing the creation of such banks, both as a guide to the local government in the grant of franchises and as an assurance to the investing public that such franchises will be granted only under sound conditions. Whatever the competence and knowledge of the local government, a legislative act by the law-making power of the United States will afford a more definite assurance of permanency of policy to the investing community at home and abroad. For this reason it is recommended that some sections be attached to the bill regulating banking in the islands, if such a bill is passed, providing the conditions upon which mortgage banks may be established.

RESTRICTIONS UPON MORTGAGE BANKS.

The limitations which should be imposed upon banks engaged in the mortgage business are the fundamental ones which distinguish such

forms of banking from commercial banking. Banks engaged in accepting deposits payable on demand, and especially those engaged in the issue of circulating notes, which are also payable in lawful money on demand, can not safely embark any portion of their deposits in securities which can not be quickly converted into cash at need. A bank devoted wholly to mortgage business, on the other hand, may derive its resources, if it is properly conducted, from deposits for long terms or from the sale of bonds payable at fixed dates. The method adopted by the leading mortgage banks of Europe, to which the Philippine Commission have made reference in their annual report, is to sell bonds from time to time in comparatively small blocks maturing in a general way and on the average at about the time when given amounts of their mortgage loans mature. The proceeds of the loans constitute the resources from which the bonds may be redeemed. In practice, new issues of bonds are usually eagerly taken by investors and the proceeds applied to the continuance of old loans and the granting of new ones, but the condition of solvency required for such banks is the same as that for commercial and noteissuing banks-that they shall have at command the resources for meeting their obligations when they mature. The difference between them consists in the fact that the obligations of commercial banks may mature at any moment without notice, while those of mortgage banks mature only at fixed dates against which full preparation can be made. If Congress authorizes mortgage banks in the Philippine Islands, it is recommended that such banks be governed by the following restrictions:

1. That no such bank shall be authorized with a less capital than $250,000.

2. That such a bank shall not loan more than 10 per cent of its aggregate resources to any one person, firm, or corporation.

3. That such a bank shall not loan upon any real estate more than one-third the market value of such property as determined under regulations to be framed by the government of the Philippine Islands.

4. That such a bank shall not loan more than one-third of its aggregate resources upon the security of building lots or buildings in cities. or large towns.

5. That such banks shall be subject to such visitation, inspection, and regulation as may be imposed by the government of the Philippine Islands.

These restrictions are for the most part such as justify themselves without extended argument. A small mortgage bank is exposed to the risk of failure by a few lossss, which could be readily covered from profits and surplus by a larger institution. A small bank, moreover, would probably make most of its loans in a single locality and its fortunes would be bound up with those of a few industries, perhaps