THE profit of the national banks, by reason of their circulation, is about 2 per cent. on the capital employed.

If a company of men, for example, should invest $100,000 in 4 per cent. bonds of the United States, the annual income would be $4000, from which no deduction is to be made for taxation.

If the same men should invest their capital in a State bank, and lend it during the year at an average rate of 6 per cent., they would receive a gross income of $6000, but they would be obliged to pay a State tax of 1 1/2 Per cent, and a national tax of 1/2 per cent. on their capital, amounting to $2000, and reducing their net earnings to $4000, as before.

If the company should form a banking association under the national law, investing their whole capital in 4 per cent. bonds, they would receive in interest on their bonds $4000. They would also receive $90,000 in bank-bills, of which they would be obliged to invest 5 per cent. in United States notes to be kept at Washington, and 10 per cent. more in United States notes to be kept at home, for the redemption of their bills, leaving $76,500 which might be lent during the year at an average rate of 6 per cent., as before, bringing in $4590. Here is a gross income of $8590, but the shares of bank-stock are subject to a State tax of 1 1/2 per cent. amounting to $1500, and so the income is reduced to $7090. The total advantage from the circulation is, therefore, the difference between $7090 and $4000-namely, $3090, or 3.09 per cent. on $100,000 ; but this margin has to be divided with the United States government, which levies a tax of 1 per cent. on the total circulation, amounting in this case to $900, and reducing the net profit to 2.19 per cent.

This comparison may be stated more clearly, perhaps, in two accounts, thus:

Expenses and losses would affect these margins equally, leaving the constant difference of $2190, or 2.19 per cent., in favor of the national bank.

Now, why should this advantage be given to the national banks ?

There are two reasons, one relating to the treasury, the other to the business of the country.

The treasury gets from the State bank a tax, in the case supposed, of $500 a year. From the national bank it gets a loan of $100,000 at 4 per cent. and a tax besides of $900. Furthermore, the shares of the national bank are subject, like the capital of the State bank, to local taxation, and herein is a reason for placing the bonds of the United States with national banks rather than with private holders.

But the principal benefit accrues after all to the business community. The use of circulating notes enables the banks to lend not only their actual capital to the government, but their corporate credit to the public. The margin of 2 per cent. goes in the end to help the active business men who know how to use money. The bank rate of interest, to regular customers of approved credit, is always lower than the rates of outside bill-brokers and note-shavers.

Consider the movement, for instance, of a single cargo of wheat, from the time it leaves the Western granaries until it is shipped abroad from New York.1 A buyer in St. Paul makes a note for $1000, payable in thirty days, gets it discounted at a St. Paul bank, and goes out on the Northwestern Railroad to buy wheat. He buys to sell again, and the understanding is that when he sells his wheat the note shall be paid. His credit is good; he understands his business; he could get credit of the fanners until the wheat is sold, if they knew him; but he would have to give his note for every separate lot, and he would have to make a second tour to pay his notes; besides, the farmers do not know him, but they know the St. Paul National Bank. The bank simplifies the whole transaction. The bank takes his note in exchange for banknotes; the exchange is equivalent to an endorsement of his paper; it is the credit of the bank which he borrows. The bank makes all inquiries about his solvency, his capacity and integrity, and charges for this trouble, and for the loan of its credit to the extent of $1000 for thirty days, the moderate sum of six or seven dollars. As soon as the buyer has collected a few car-loads he ships his grain to Chicago, drawing upon his consignee there for the proceeds, and the St. Paul bank takes the draft and credits him for the amount on notice that the draft has been accepted. The Chicago buyer stores the wheat in an elevator, and when he has collected a cargo of 50,000 bushels, ships it to Buffalo, making a short draft on his Buffalo consignee. The proceeds of this draft go to pay the accepted drafts of the original shippers, forwarded to Chicago banks for collection. The Buffalo consignee forwards the grain to New York by canal, drawing on New York for each boatload of 7000 or 8000 bushels, and these drafts are negotiated by the Buffalo banks. The New York buyer sells the grain for export, taking a sixty days bill of exchange to cover delay in making up a cargo, the time of the voyage, and time for unloading and delivery in Europe, and this bill of exchange is cashed by a New York banker, enabling the merchant to go on buying of Buffalo.

1 This illustration is borrowed, substantially, from the remarks of Dr. Marslnnd before the committee on ways and means in 1S78. Addresses on the Repeal of the Federal Taxes on Deposits, p. 12.

At every step the banks intervene to facilitate these transactions, and always in the same way-by lending their credit to the customer during the interval before he can receive returns from his consignees. The Minnesota buyer, if he had been obliged to use his own money, must have waited for returns from Chicago before he could have begun buying again. The Chicago consignee, if unable to use his Buffalo draft, would have been obliged to stop buying by the car-load until the draft matured and the proceeds were received by express. The Buffalo shipper would have been equally embarrassed, and so would the New York merchant.