Federal and State Banks and Currency Reform.

By John Ross.

No. I.

The need for a State bank is perfectly plain as a means for regulating the currency, to give all possible stability to credit and commerce, and prevent the enormous sacrifices of values occasioned by ever-recurrent monetary panics. The uniformity of the monetary circulation is the object to be aimed at, and an instrument whereby to accomplish this, so as to reduce to a minimum the fluctuation between inflations and contractions of credit, is the thing desired. The keeping of this main object steadily in view will provide a guiding principle in the framing of a constitution for a State Bank, and in directing its operations. The quantitative theory of money, as stated by Mill, is "that the value of money, other things being equal, varies inversely as to its quantity; every increase of quantity lowering its value, and every diminution raising it, in ratio exactly equivalent." The supreme importance of this law will be more evident when expressed in its alternative form, namely, the values of commodities rise or fall, other things being equal, in direct ratio to the rise or fall in the volume of money. For instance, if, by any means, the volume the world's money were reduced to one-half, that half would come to command as much of the world's goods as the entire volume could have done before its reduction, to the great injury of industry and commerce. An inflation of the currency would work in an exactly opposite direction; both are evils, but a currency contraction is by far the greater of the two. An increasing commerce will soon overtake a redundant currency and reduce inflated values to normal levels, but if trade expands without a corresponding expansion of money volume prices must keep on falling in proportion, and no manufacturer would continue to produce, nor merchant to purchase, goods which had to be disposed of in a continuously falling market. The consequences would be that commerce would have to limit itself to articles of more absolute necessity, and that the effective demand for articles of minor necessity would become continuously lower with increase of population—a reversion towards barbarism. "If money depreciates," says Hume, "and prices rise, everything takes a new face. Labor and industry gain life, the merchant becomes more enterprising, the manufacturer more diligent and skilful, and even the farmer ploughs with greater alacrity and attention. If it appreciates and prices fall, then poverty, beggary and sloth are easily foreseen." But the desideratum is to find a scientific monetary system capable of expanding in exact ratio to the natural expansion of commerce, and not liable to the sudden contractions to which a monetary system formed of credit based upon gold only is constantly exposed. A period of prosperity may have no speculative "boom" in it such as naturally leads to financial failures; it may be a perfectly legitimate and necessary expansion of commerce, tested by uniformity and steadiness of values. Yet hundreds of circumstances, such as the sudden cessation of a large public expenditure, a bad harvest, shortage in the supply of the staple of some leading industry, and so on, may interfere with the smooth course of commercial exchanges, and bring about a period of unrest, which may easily develop into a crisis, when credit may become suspended and a demand for gold set in. "At no time," says Ricardo, "can there be in a bank or in a country so much specie or bullion as the moneyed individuals of such country have a right to demand." Bankers themselves, therefore, in sensitive apprehension of danger, are influential factors in the precipita- page 4 tion of panics. In preparing for possible contingencies, solvent customers are more likely to suffer, in order to replenish a bank's treasury, than those from whose assets it would be hopeless to realise the amount of their indebtedness, with the not infrequently anomalous results that good estates are forced into liquidation, whilst bad and doubtful ones may be permitted to weather the storm.

Fortunately, leading bankers seem to recognise the gravity of the situation, and to realise that in State aid only can safety be found. This was clearly manifested at a conference of bankers held in Sydney in June, 1895, a report of whose transactions forms part of the appendix to the report issued in the same year by the Victorian Royal Commission on State Banking.

In the number of "United Australia" for April last year, Mr. H. G. Turner, general manager of the Commercial Bank, Melbourne, advocates uniform legislation, applicable to all banks carrying on business throughout the Commonwealth, and to the July number of the same quarterly Mr. J. Russell-French, general manager of the Bank of New South Wales, Sydney, contributes a paper on Federal Currency, of very great value to the State Bank discussion, but with a banker's bias respecting the control under which the Federal Bank notes ought to be distributed. "Some scheme," says Mr. French, "is earnestly to be desired of a Federal character to place our paper currency on a satisfactory basis as regards its usefulness, and to lift it out of the comparatively subordinate position it now occupies. The bankers recognise that this can be accomplished more successfully if the management is brought more closely in touch with the State; but at the same time they believe that the banks are the most convenient and suitable medium of distribution."

"The foregoing scheme," Mr. French remarks, "would be as applicable under federation as in the case of separate colonies. The issue would, of course, need to be uniform to in character throughout, and it would gain additional strength by resting on the much wider and more solid basis of Federal instead of State security. It is probable that the bankers who formulated that scheme wild not see any necessity to modify their lesions very materially at the present day, and that is the reason why I have given it fine prominence."

The proposed legislation suggests a real and practical currency and banking reform, based upon scientific conceptions of currency principles, infinitely superior to the flaky, haphazard system it is intended to supersede. If, however, the scheme were to be adopted without modifications of its proposed management, it might be found to favor restrictions which would prevent its marking out for the public benefit to the full extent of which it is capable. It seem evident, and, indeed, inevitable, that State Governments will have to create State Banks in touch with a Federal Bank of Issue the better to enable each to fulfil its obligations within its own territory as universal landlord and if private banking interests were to dominate in the administration of a Federal Bank of Issue, it might found an obstacle to the due performance of the duties which a State Govern it might find itself obliged to undertake the interests of country settlements [unclear: and] industries, and in rendering financial aid to municipalities, shire councls, [unclear: credit] societies for the better housing of people and other projects. It [unclear: would] far more advisable to preserve the management of the Federal Bank of Issue from the influence of bankers and politicians, and to have its affairs administered it board of commissioners chosen from picturing, mercantile, pastoral and [unclear: ltural] circles; men of known caution and business capacity, such as banking and company directorates are supposed to be supposed of, and likely to give more satisfaction than boards formed of banking [unclear: exp] only.

He then proceeds to show how this currency expansion could, and ought to, take place, so as to develop sources of wealth otherwise neglected.

Let us suppose, he says, that there is a tract of uncultivated or unreclaimed land which is, however, capable of being cultivated; let us suppose that there are a number of people living in its neighborhood sunk in poverty and misery from having no one to employ them. Suppose that a bank, seeing this state of things, plants a branch in this district of country, and a number of poor but skilful and industrious farmers settle there, and take leases of this uncultivated land. The bank agrees to advance them a number of its notes. With the advances so made the farmers engage the poor people as laborers, and in a very short time that which was a moor and a waste is covered with fields of waving corn and turnips and potatoes, affording sustenance to a large population; and cattle, and the excess of its produce over what is required for their support is exported abroad, and brings all sorts of commodities in exchange.

The history of land reclamation and farming in Scotland presents not a few practical instances of this kind, owing to the freedom with which Scottish banks could issue notes without slavish adherence to actual gold reserves.

The value of a monetary issue of this description cannot be doubted. Although page 6 the notes were not made convertible, their issue did not disturb the uniformity of the currency owing to the confidence with which the public accepted them at par value with gold, to the reproductive character of the work upon which the money was expended, and to the gradual extinction of the notes as the returns from the investment came in. Before the American Revolution the State of Pennsylvania was made prosperous by an issue of paper money under similar guarded conditions. Hume says of it:—

A planter, immediately he purchases any land, can go to a public office and receive notes to the amount of half the value of his land, which notes he employs in payments, and they circulate through the colony by convention. To prevent the colony being overwhelmed by this representative money, there are two means employed—first, the notes issued to any one planter must not exceed a certain sum, whatever may be the value of the land; secondly, every planter is obliged to pay back into the public office every year one-tenth of his notes.

The prosperity of Pennsylvania under this monetary system was phenomenal. The limitation of the notes issued to any one individual land owner discouraged land monopoly, and the loans were repaid and the notes canceled in periodic instalments, whilst the gold in the State was left free for use as international money. These two instances supply examples of a perfect circulating medium of exchange. Paper money was issued to effect certain reproductive purposes, and from the new sources of profit thus created the notes were repaid with periodic regularity, leaving behind them results which permanently enriched the communities—in the one case, a revenue-producing public market; in the other, land settlements and improvements, and the trade expansion which naturally accompanies them.