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reserves in both cases. Until 1874 the currency banks were required to keep the same reserve against circulation as against deposits, so the national banks in all redemption cities were under the same rule as the gold banks. The profits on circulation in the two cases may be estimated as follows, assuming in both cases an interest rate of 10 per cent., which was about the prevailing rate in California. The difference in the two cases arises from the fact that United States bonds were worth about 115 in greenbacks, while they were at par for gold, and that gold was worth about 115 in greenbacks:

PROFIT ON CIRCULATION

For National Currency Banks in Redemption Cities. $100,000 United States 5 per cent. bonds at 115 = $115,000, amount

invested for circulation. 90 per cent. of par value = $90,000, amount of notes issued. $90,000 — 25 per cent. reserve = $67,500, amount of notes available

for loans. $67,500 @ 10 per cent. interest brings income of $6,750 Interest on $100,000 United States bonds at 5 per cent., $5,000 in gold, equal in greenbacks to

5,750 Total income on investment for circulation

$12,500, which is 10.87 per cent. on the investment of $115,000. This means that the profit derived from the circulation was only 0.87 per cent. more than could have been earned by lending the capital directly at 10 per cent.

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For National Gold Banks. $100,000 United States 5 per cent. bonds at par for gold = $100,000, circulation of 1 per cent. more than could have been earned by lending the capital directly.1

amount invested for circulation. 80 per cent. of par value = $80,000, amount of notes issued. $80,000 — 25 per cent. reserve = $60,000, amount of notes available

for loans. $60,000 @ 10 per cent. interest brings income of

$6,000 Interest on $100,000 United States bonds at 5 per cent. . 5,000 Total income on investment for circulation

$11,000, which is 11 per cent. on the investment of $100,000. This shows a profit on

"I assume a value of 115 in these calculations. The market value of both bonds and gold fluctuated widely. During the period 1869 to 1874 gold ranged between 107 and 123, and United States 5 per cent. bonds between 108 and 122.

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Another comparison may be made in the ratio which the circulation issued bears to the amount invested for circulation. The currency banks issued $90,000 on an investment of $115,000, or 78.26 per cent.; while the gold banks issued $80,000 on an investment of $100,000, or 80 per cent. Thus we see that the gold banks, tho issuing only 80 per cent. of the bonds deposited, really issued a larger proportion of the amount invested for circulation than did the national currency banks. And they could make a slightly larger profit on circulation, assuming the same interest rate in both cases, because of the discount on greenbacks and the premium on government bonds when purchased in greenbacks.

This was true, however, only of the national currency banks situated in the redemption cities. A larger profit on circulation was possible for currency banks in country districts, because they were required to keep only 15 per cent. reserve. It was the difference in the reserve requirements that made the circulation of the national currency banks more profitable than that of the national gold banks on the same interest basis. After the law of 1874, releasing the reserves against circulation, the profit of the national currency bank on circulation was 2.43 per cent.; while the gold banks, still required to keep reserves, had only their 1 per cent. as before.

The gold notes, moreover, were adapted only for local circulation, as there was no provision for redemption outside of California. And, besides, experience had proved that there was really no very great need for such notes, either in the East or in California. United States gold certificates supplied the means for making large payments, and coin could be conveniently used for smaller payments. And the hard-money ideas of the California people made paper money a dangerous liability for banks in that State.

1 No allowance is made here for taxation of circulation, which would fall wit approximate equality upon all banks alike.

2 See below, page 624, for the effect of a difference in interest rates. 3“Redemption cities" before 1874; “reserve cities" since that time.

• Their profit, estimated as above, with a 10 per cent. interest rate, would be 1.65 per cent.

Aside from circulation the restrictions of the national system were perhaps an argument against it rather than for it at the time. The reserve requirement, as we have seen, was too much for the gold banks to live up to until they learned their lesson in the panic of 1875. After that time they carried large reserves. The other banks were not restricted, as were the national banks, in regard to their reserves, loans, and real estate holdings; and these things perhaps all told in favor of the existing banks and against their conversion into national banks.

Attempts were made to remedy these evils and inequalities which worked against the success of the gold banks by so modifying the law as to enable them to increase their profits and to revive their declining business. A law of January 19, 1875, had removed the limit of one million dollars circulation permitted to any individual gold bank.' In January, 1877, a bill passed the House authorizing the issue of gold notes to 90 per cent. of the par value of the bonds deposited, and substituting a 5 per cent. redemption fund with the Assistant Treasurer at San Francisco for the 25 per cent. reserve against circulation. This would have placed the gold banks legally on the same footing with the other national banks. It failed to pass the Senate, however; and it never became a law, tho it was twice recommended by the Comptroller of the Currency after this time.

1 Statutes at Large, 43 C., 2 8., Chap. 19.

2 Congressional Record, 44 C., 2 s., p. 922. The bill was not considered in the Senate.

3 On a better footing, as a matter of fact, assuming the same interest rates. The profit on circulation estimated as above would have been larger for the gold banks than for the currency banks. But this would have placed them more nearly on an equality by tending to neutralize the difference in profit due to the difference in interest rates.

The discount on greenbacks was gradually disappearing as the time for the resumption of specie payments approached. The triumph of the resumptionists in Congress promised the country that the difference between the gold and the greenback standards would soon be eliminated from business calculations. This meant that the gold banks would then lose their only reason for existence. With the actual resumption of specie payments in 1879 the gold banks were at a greater disadvantage than before. Their notes were now no better than greenbacks and currency bank-notes; yet the banks must pay them in gold, and must keep a reserve of 25 per cent. against their circulation, and must keep their reserve in gold instead of in legal tenders. “Lawful money” in their case meant gold and silver coin, and this applied to reserves against deposits as well as to reserves against circulation.

In 1879 one of the gold banks went into voluntary liquidation, in order to reorganize as an ordinary national bank, there being no legal means for conversion without closing and reorganizing. The Comptroller recommended this year the passage of a law similar to the bill which had passed the House in 1877, mentioned above, and also a law permitting gold banks to become ordinary national banks without going into liquidation. The latter recommendation was embodied in an act of February 14, 1880, authorizing the conversion of gold banks under the same provisions prescribed for the conversion of State banks.' The result was that all but three of the gold banks reorganized by the close of the year 1880. These three continued as gold banks until 1882, and two of them until 1883. They were all finally converted into national banks. The gold notes were being gradually withdrawn during these years, and they have been slowly retired since the conversion of the last of the gold banks.

1 Finance Report, 1877, p. 155. 2 Statutes at Large, 46 C., 2 s., Chap. 25.

The gold banks might have been successful in California if the law had been modified in 1874 as suggested then by the examiner, and as later attempted by the bill of 1877. It is possible that, if the redemption of the notes had been in the hands of the Assistant Treasurer of the United States when the panic of 1875 came on instead of in the hands of the banks themselves, the gold notes would not have been discredited, and the runs on the banks would not have occurred. If the gold banks had passed through this crisis successfully, and if they could have issued notes to 90 per cent. of the bonds deposited, and been relieved of the reserve requirement on circulation, the national system would have gained a much stronger hold upon the Pacific States than it ever did gain.

But beyond all that has been said is another reason why the national banking system did not gain any greater strength in California. Interest rates were from 12 to 18 per cent. for call loans and from 9 to 12 per cent. on time loans in San Francisco at the time, and in the newer settlements the rates were undoubtedly considerably higher. The national circulation is not so profitable where the prevailing interest rates are high as where they are lower, because of the loss of interest on the amount withheld from use in the reserve or redemption fund, and the margin on the bonds and the premium on bonds. If we estimate the profit on circulation in the same way in which the previous estimates are made, we shall find that the profit on a 10 per cent. interest basis is 2.43 per cent., while on a 6 per cent. basis it is 3.46 per cent. Gold banks on a 6 per cent. interest basis could have earned on their investment for circulation 8.6 per cent., or a profit on circulation of 2.6

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