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a single industry, in that locality. A large bank, on the other hand, would be able to extend its operations by means of branches into various parts of the Philippine Islands, and losses in a given locality would be compensated to some extent by profits and the safety of investments in other localities.

The provision that a mortgage bank should not loan more than 10 per cent of its resources to any one person or corporation is designed to prevent the same evil as the requirement that the bank shall have an adequate capital-the locking up of the whole or a large part of the resources of the bank in a few risks. This provision is rendered still more conservative by the third limitation suggested that loans shall be limited to one-third of the ascertained market value of the property which forms the security. In order to prevent improper inflation of value by the parties in interest, the rules governing the determination of market value are placed under the control of the government of the islands, and may, in their discretion, provide for the participation of some public officer in such valuation.

The limitation of loans in cities and large towns is designed to give the benefits of the proposed system chiefly to the agricultural sections. It also has the merit of guarding against the speculation which sometimes occurs in city lots and gives to them for a time a market value which is subsequently lost. Limitations of this sort are prudent, even where speculation can not occur to the extent which is likely to prevail in an undeveloped country. The Crédit Foncier, the leading mortgage bank of France, has been subjected to more or less criticism for entering upon a form of speculative loans with builders, by which money was advanced for new buildings which were not obviously required by rental conditions, simply for the purpose of finding an outlet for its resources. If such operations could be carried on in such a long settled and conservative country as France, where values change but little over long terms of years, it is obvious that the danger would be much greater in an undeveloped country where the expectations of early development in particular places might be disappointed by

events.

MORTGAGE LOANS BY COMMERCIAL BANKS.

The familiar reasons which prevent commercial banks from engaging in mortgage loans have already been set forth. These reasons are subject to some qualification, however, in the case of banks of large capital, long standing, and abundant resources. Such banks may, without risking the liquid character of the assets held against demand liabilities, set aside a certain portion of their capital or surplus for permanent investments. Many of them actually do this by the purchase of bonds and shares in industrial enterprises. Within narrow limits it is possible for such banks to go further and invest in mortgage

loans, provided that the remaining and liquid assets of the bank are amply sufficient to meet all of its demand liabilities and to afford a reserve against the failure of any part of these assets. The fact that a certain percentage of capital can be safely set aside for mortgage loans is recognized, as stated by the commission, by the statutes of the Austro-Hungarian Bank and of the Imperial Bank of Russia, each of which issues the entire credit paper currency of the country where it is established.

It is recommended, therefore, that banks having a capital of not less than $1,000,000 be authorized to devote one-fourth of this capital, in their discretion, to mortgage loans. This power need not be conferred absolutely, however, even upon a bank of this size, but may be left subject to the approval of the government of the Philippine Islands. This condition would necessarily involve compliance with any special safeguards or limitations which such government might see fit to impose. A bank of large capital should be subjected to the same limitations in the use of that part of its capital devoted to such loans as those imposed upon banks devoted exclusively to mortgage business. The reason for giving the power of making mortgage loans to banks not exclusively devoted to this class of business is found in the necessity of providing for this type of loans at the earliest possible date. While large profits would undoubtedly be derived from the operations of a mortgage bank in the Philippine Islands, it is possible that capital might be more promply attracted by the opportunities open to a commercial bank or to a trust company or finance company engaging in various classes of business at the same time. In such a case, the benefit of a lower rate for mortgage loans would continue to be denied to the agriculturists of the islands if such banks were forbidden to make such loans. It seems to be desirable that Congress should impose such restrictions as are here recommended upon any future mortgage loans by corporations, even if such loans are only a part of their general business. The provisions suggested, if made applicable to any bank authorized to do business in the Philippine Islands, would limit mortgage loans by corporations to those having a capital of $1,000,000 and to those complying fully with the restrictions above recommended, but would not prevent the grant of the power of mortgage loans to trust companies or other institutions not directly regulated by authority of Congress or by the Comptroller of the Currency of the United States under the national banking law. Such restrictions are properly made applicable by law to all corporations, because their officials dispose of the capital of others; but none of these restrictions affect in any manner the right of private persons to loan their own capital on any terms and with or without security as they may see fit. Strong inducement to outside capital to enter the islands for

the purpose of mortgage loans is as vital to the agriculturist as the increase of commercial banking facilities and of paper currency are to the merchant and general trader, and provisions which will accomplish this end will do much to promote the contentment of the people and consolidate American influence in the Philippines.

THE NEED FOR A DEPOSITORY FOR PUBLIC FUNDS.

One of the needs most frequently urged by the officers of the Army in regard to the financial system of the Philippine Islands is the creation of a depository for public funds. Section 5488 of the Revised Statutes of the United States prohibits the deposit of public funds in any depositories except those authorized by law. Such lawful depositories include in some cases national banks of the United States, but as there are no such banks in the Philippine Islands, this section precludes the legal use of any of the existing establishments in those islands for the custody of public funds of officers of the United States. The section quoted makes unauthorized deposits equivalent to embezzlement, for which a penalty may be imposed of imprisonment with hard labor for not less than one year nor more than ten years or by heavy fines.

These provisions of law were framed for conditions which did not contemplate the extension of American power in the Orient and the holding there of large amounts of public money in the hands of army disbursing officers. These officials have found themselves unable in many cases to retain these funds with safety in their personal custody and have availed themselves of various expedients for keeping them at their own risk. It is clear that such conditions should be promptly brought to an end and that a safe depository for such funds should be provided which can be used in conformity with law. In order to ascertain the views upon this subject of the most responsible officers charged with the custody of public funds, a letter was addressed by Governor Taft, at my request, to Maj. Gen. Adna R. Chaffee, military governor, in command of the Division of the Philippines, asking him, if agreeable to him, to request such officers as were charged with the custody of such funds in considerable amounts, to confer with me upon this subject. In response to this communication I received calls from Col. C. A. Woodruff, acting commissary-general, chief commissary Division of the Philippines; Col. A. S. Towar, assistant paymaster-general, chief paymaster Division of the Philippines, and Lieut. Col. Charles P. Humphreys, chief quartermaster Division of the Philippines.

The subject of providing a proper depository for public funds was fully discussed by these officers, and was the subject of many representations in private conversation by other officers interested in the matter. This discussion, being in the nature of a general conversation

for my information, was not reported in writing, but the followingsuggested provision of law for the consideration of Congress was laid before these officers:

That the treasury of the government of the Philippine Islands and its branches, and such banking associations and their branches in the Philippine Islands as may be designated by the Secretary of War of the United States, shall be depositories of public money, subject to the provisions of existing law governing such depositories in the United States; provided that the treasury of the government of the Philippine Islands shall not be required to deposit bonds in the Treasury of the United States or to give other specific securities for the safe-keeping of public money except as prescribed, in his discretion, by the Secretary of War.

Each of the officers designated by General Chaffee to confer with me upon the subject expressed his belief that this provision would meet the requirements of existing conditions in regard to a public depository. Letters from two of them are appended to this report. Various criticisms were made by them upon the conduct of the foreign banks in cashing checks and drafts and the charges made for such services, but it was admitted that most of these services could be performed by the disbursing officers of the Government, even to some extent for the accommodation of officers in their personal transactions, if a proper depository for public funds were authorized by law.

This proposed provision gives to the treasury of the Philippine Islands substantially the same status toward the War Department as the subtreasuries of the United States. The treasurer of the Philippine Islands is not required to deposit securities with the Treasurer of the United States, as is required of national banks when intrusted with public funds, because the treasury of the Philippine Islands is itself a branch of the public service of the United States, occupying substantially the same position of responsibility and subject to similar supervision as the subtreasuries, which are not required to deposit any security for their transactions with the Treasurer at Washington. The provisions in regard to the use of banks as public depositories which now apply to national banks in the United States are extended to all banks in the Philippine Islands. This will enable the government to use the foreign banks, if necessary, as depositories, pending the creation of strong American banks, and to use any American bank which may be established in the Philippines without regard to the class of banking business in which it may be engaged.

Banks intrusted with public funds of disbursing officers will be compelled, under the provision proposed, to deposit United States bonds in full for the protection of the funds held by them, in conformity with the requirement made by law when such funds are deposited in national banks in the United States. The foreign banks in Manila now hold large amounts of the funds of the Philippine government for which they have not deposited full security in United States bonds. There is no question of the perfect safety of these banks and their

ability to repay the deposits when desired by the government of the Philippine Islands. Their position in regard to the purchase of United States bonds simply illustrates the difficulty which would arise if banks of issue were required to obtain such bonds as security for circulation under the conditions governing their transfer and ownership in the Philippine Islands. The Philippine government, disposing of funds which are not construed legally as the funds of disbursing officers of the United States, is acting within its legal powers in depositing these funds in such depositories as can be found without requiring specific security. This freedom of action on the part of the government of the Philippine Islands will not be interfered with by the proposed section; but it did not seem advisable to recommend that public officers generally, without distinction of rank or responsibility, should be allowed to intrust such funds to depositories which should not secure them by specific pledges.

SCOPE OF THE MEASURES RECOMMENDED.

The possession of a sound and sufficient currency is one of the most essential factors in the industrial progress of any community, because the state of the currency affects all classes of business transactions and every individual. In this respect the proper regulation of the currency is more important than the regulations governing almost any other single branch of the public administration or those affecting any one or several industries. In making the recommendations embodied in this report the effort has been made to consider all aspects of the needs of the Philippine Islands and of their future growth. The systems of coinage and banking recommended are capable of indefinite expansion as the need for money and credit extends with the growth of business.

come.

Unless it contains defects which are not apparent, this system will, if adopted, require no material change for many years to The tendency of the silver coins which are proposed will be, if they are exported for any reason, to return to the Philippine Islands, because they will have a higher exchange value in gold in Manila than their bullion value in any foreign country. Containing less silver than the Mexican silver dollar, they will not pass into general circulation in other countries where they are not legal tender and where silver money tends to the level of the price of silver bullion. If, however, the new coins should prove acceptable in foreign countries, as have the Mexican silver dollar and the British dollar, the government of the Philippine Islands would profit rather than lose by such a condition, because a seignorage would be derived from the additional coinage, and these profits would be added to the reserve fund held in Manila for maintaining the coins at par with gold.

It is one of the most important conditions of the progress of the islands that the currency system should be such as to attract Ameri

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