Possibilities in these practices of this kind should not be used as a reason why the public should seek another institution for current credit accommodations. The conclusions just announced do not mean that the practices on the part of the Government of loaning to the banks by "issues" and by "deposits" may not be used to great advantage, and that this advantage may not be mutual. Such a result is possible, provided the practice is subject to regulation which will prevent the loan from weakening the institution of commercial-credit. To accomplish such results and to secure the advantage referred to, however, the Treasury-deposit to the bank must be properly considered as a loan from the Government to the bank, which is made under such conditions only as to provide a market in which the banks may obtain money by hypothecation of capital-resources at a fair market rate, when otherwise in the open market they might be forced to pay rates which would force a curtailment of commercial accommodations. CHAPTER XIII ADVANTAGES OF NATIONAL BANKS OVER STATE AND PRIVATE BANKS UNDER THE PRESENT PRACTICE OTHER conditions being equal there are two ways only, under the present practice, by which a National bank may enjoy an advantage over private and State banks: The first advantage lies in the possible in creased income to be obtained from Two advantages bonds used as a basis for "issues"; enjoyed the second advantage lies in the possible increased income to be derived from "Government deposits." At the ruling market prices and the present rate of interest receivable, the possibility of obtaining an increased return on investments in Government-bonds without the issue-privilege is small, if not wholly lacking. A statement of the net investment-return on bonds as computed by the Government Actuary is as follows: Investment-Return stated in Dollars per Hundred based on January 5s of 1904 Prices, 1895-1902 1895... $3.01 $2.76 1896.. $3.21 1897. com Assuming that all of the Government-bonds held by a National bank are hypothecated for issues, and that "par value" be received in notes, these notes "Issues may then be used by the bank as pared with legal- money. They may not, however, be tender reserves counted legally as a part of the reserve. If the notes are used to purchase "commercial paper" then the bank may not purchase more "paper" than it has notes, whereas an equal amount of legal-tender money held in reserve to support credit-accounts (deposits) would permit the bank to buy from two to four times as much of the commercial paper offered by customers (depositors). Such a use of the notes would therefore cause the bank to do business at a loss. The bank, however, may make the notes available for the highest banking return by paying them out in response to money-demands (as for example in settlement of balances due to distant banks) and hold and loss the legal-tender money received as Elements of gain "reserves." This device permits the National banks to avoid the disability attaching to the "notes," which prevents the "notes" from being held as reserves, but for the same reason forces the bank-note into general circulation to supplant the legal-tender holdings. Assuming that the bank in question succeeds in thus exchanging its entire "issue" for legal-tenders, then the only disability which it suffers is the tying up of the amount of its capital represented by the "margins," i.e., by the "premiums," the "five per cent fund with the Treasury," etc. With these two factors alone to be considered, then, if the investment return on the bonds were two per cent, and the "margin," including the "premiums" and the "five per cent fund," were ten dollars per hundred (and if again it be assumed that one dollar in reserve will support four dollars of credit-accounts, and that the rate of interest in commercial loans were five per cent), then the margin of income lost to the business on account of capital invested in "margins" would equal two per cent or exactly the same amount as the income realized on the bonds. Under such circumstances the advantage to the National bank would be nil. The same conclusion may be drawn from the computations of the Government Actuary found on page 33 of the Comptroller's Report, 1902. In this it is assumed that the notes may be invested at the rate of six per cent, and on this assumption the result exhibited is as follows: 2s of 1930.. 5s of 1904. $6.62 per 6.19 per 100 5.94 per 100 5.96 per 100 Such a result does not show any considerable adAdvantage small vantage from "bond investment and under present practice issue" as it would not be logical to assume that the "note" may be in vested at any higher rate than could the "legal-tender money" used to purchase the bond. Assuming that the note may be used with equal advantage, however, in the above showing, there would be a fraction of one per cent of profit on three classes of bond investments, and a fraction of one per cent of net loss on two others represented. Possibilities of a loss In this result, however, the assumption is that the "note" is as useful to the banker as are gold certificates or other forms of money. If this be an overstatement, then there may be, in truth, a loss to the bank on every class of bonds which is here made the basis for actuarial calculation. To say the least, the margin of net profit in "issue" is, in the judgment of bankers, so small that few have ever availed themselves of the maximum issue privilege. Quoting from Mr. Ridgely, in an address delivered on the evening of December 18, 1903, at a banquet given by the New York State Bankers' Association: "In the Report of the Comptroller of the Currency just made there is given a table showing the percentage of the issues outstanding to permissible circulation, from 1863 to 1902. The maximum of 81.6 per cent was reached in 1882, and the minimum of 44.1 per cent in 1892, and since the Act of 1900 it has been a little over 50 per cent, now being 53.32 per cent. It is hard to figure now whether there is any profit at all, as it depends upon the amount of notes which can be outstanding and the prices of bonds. On circu |