In the early days of the national banking system circulation was extremely profitable. Government bonds bore five and six per cent, interest and kept constantly increasing in value, and this, added to the profits on circulation issued against the bonds, acted as a strong inducement to the organization of national banks. In consequence of this increase in the number of banks of issue the volume of bank notes constantly rose until in December, 1874, it amounted to $354,394,346. From this point it experienced a slight falling off until in 1883 it reached high water mark in a volume of $362,651,169. The retirement of bonds by the government and refunding them at lower rates of interest then acted to reduce the volume of circulation and it ran down in 1891 to $167,927,974. Since then it has shown increases whenever there have been new issues of bonds. The act of 1900 permitted banks to issue notes to the amount of the paid in capital and to 100 per cent of the market value of the bonds deposited, provided this did not exceed their par value. The tax on circulation was reduced from one to one-half per cent and the effect has been an increase in the volume of bank note circulation.

It will thus be seen that the aggregate circulation depends approximately upon the current price of bonds and not upon the demands of business. When it is profitable to issue notes the banks do so, and when the market price of bonds insures to their owners better profits than by the deposit of them to secure circulation, then the banks contract their circulation. It thus happens that frequently when there is the greatest need of a large circulation in order to carry on the business of the country, the price of bonds makes it advantageous to the banks to reduce the volume of their notes, and surrender their circulation. This is one of the serious defects of our currency system. Real elasticity, whether of contraction or expansion, to adapt its volume to the needs of business is unknown under this system. But were expansion and contraction even possible under our system, it would be too slow and cumbersome to meet the requirements of business. Bonds must be sent to Washington, notes must be printed, forwarded and signed, all entailing a delay of several weeks, before the money is ready for circulation. A money stringency might arise, produce its unfortunate results and subside before the needed relief could be obtained through the channel of the expansion of bank note circulation.

The sub-treasury system of the United States seems to aggravate rather than correct the shortcomings of our bank note circulation, by locking up in the vaults and thus withdrawing from circulation many millions of dollars more than the government requires to meet its current obligations just at a time when it is most needed in circulation. Under our system of indirect taxation this locking up of money proceeds at a greater rate when business is prosperous and a larger volume of currency is needed in the channels of trade than when business is dull, for the reason that in active times importations are greater and the consumption of those luxuries which are taxed under the internal revenue law is greater, thus increasing the government receipts both from customs and internal revenues.

A system of asset banking somewhat after the Canadian method has been advocated for the United States as a relief from the objections to the sub-treasury system and the fast and hard rules of the National Banking Act. Certain it is that we need a more elastic circulating medium, and it is almost equally certain that a system of branch banking would be a decided advantage to the country. The National Banking Act has served the country so long and well that there is a reluctance to displace it, but there is also a strong feeling that reform is needed in our currency system to adapt it to changing conditions.

In order to maintain the country upon a specie basis it is necessary for the United States treasury to keep a large specie reserve on hand. The amount of this reserve has been fixed at $150,000,000.* Under the "parity" clause of the act of 1890 it was declared to be the policy of the United States to maintain the two metals (gold and silver) on a parity with each other. In order to do this, when treasury notes are presented for payment, they are paid in either gold or silver, as the holder demands. In the spring of 1893 the reserve in the treasury fell below the $100,000,000 mark, owing to large exportations of gold. By the following January the reserve had fallen to $65,650,000, and a feeling of fear spread over the country lest the treasury should be unable to maintain the reserve and values should go to a silver basis. The Secretary of the treasury sold $50,000,000 gold bonds on about a three per cent, basis and replenished the reserve. The redemption of notes continued, however, and by the following August (1894) the reserve had fallen to $52,000,000. In the following November another issue of $50,000,000 was made to restore the reserve. In January, 1895, $65,000,000 more of gold bonds were negotiated and the proceeds placed in the reserve, and in February, 1896, a fourth issue of $100,000,000 of bonds was resorted to, which served to maintain the reserve until the tide turned and gold began to flow into instead of from the United States treasury. This process of redeeming treasury notes in gold and issuing them again only to have them in turn presented for redemption in gold again, was called "the operation of the endless chain."

*This amount was originally $100,000,000, but was increased in 1900 to $150,000,000.

Prior to 1861 no notes not bearing interest were issued by the United States treasury, but on July 17, 1861, Congress directed the issue of $50,000,000 of demand notes in denominations of less than $50 in exchange for coin or in payment of debts due the government. These were the first "sinews of war" in the form of "greenbacks." The act of February 25, 1862, increased the issue to $150,000,000. These notes were a legal tender for all debts public and private except customs duties and interest on the public debt. On June 11, 1862, Congress increased the issue to $300,000,000 and on March 3, 1863, to $450,000,000. After the war Congress gradually reduced the volume, but by the act of April 12, 1866,limited the retirement to $10,000,000 monthly for six months and $4,000,000 monthly thereafter. During the panic of 1873 the retirement of notes was discontinued and the volume outstanding increased by nearly $27,000,000, bringing the total up to $382,979,815. But the act of January, 1875, provided for further reduction, and declared that on January 1, 1879, specie payment should be resumed. In order to prepare for the resumption of specie payments it was deemed wise in May, 1878, to prohibit the further cancellation of "greenbacks" and the amount has therefore stood ever since at $346,-681,016, as it was at the close of business on the day the act went into effect.

The secretary was authorized by the act of March 3, 1863, to receive deposits of gold coin and bullion and to issue therefor certificates in denominations of $20 and upward, payable on demand. The coin was to be held in the treasury for the redemption of the certificates. There were in circulation on July 1, 1901, gold certificates amounting to $247,036,359. These certificates are not a legal tender but are receivable for customs, taxes and all public dues. They are also available for the reserves of national banks.

Silver certificates are issued upon deposits of silver dollars, under the act of February 28, 1878, which authorized the coinage of the dollars. At first all deposits were limited to $10 or a multiple thereof, and certificates were issued only in like denominations, but the act of 1886 provided that certificates might be issued in denominations of $1, $2 and $5. The issue is limited to the amount of silver actually deposited in the treasury. The certificates are not a legal tender, but may be held by national banks as a part of their reserves. The volume of silver certificates outstanding on July 1, 1901, was $429,643,556.