In 1887 Comptroller Trenholm sent a circular letter to all the national banks inviting them to submit such suggestions for amendments to the national banking laws as, in their judgment, would tend toward the improvement and perpetuation of the system. More than forty plans were involved in the replies received, all bearing upon the note-issuing function of the banks.
In his annual report for 1887, Mr. Trenholm summarized these various propositions under five headings, eliminating such as contemplated a gold or silver deposit as security for circulation. Only three of the five plans suggested he regarded as coming within the range of probable adoption, viz.:
1. To increase the inducements for the banks to deposit United States bonds as a basis for national bank circulation.
2. To provide by a new issue of bonds for a continuance of the present or some modified system of national bank circulation based upon the security of United States bonds.
3. To allow the banks to issue circulation upon their general credit, without requiring specific security to be deposited.
After first presenting his views as to some of the obstacles which surrounded the adoption of either of these propositions, as affecting the interests of the Government, the banks, and the public, Mr. Trenholm then proceeded to analyze their relative merits from his point of view.
The refunding operations of the Treasury Department in United States bonds, and subsequent legislation increasing the amount of circulation that might be issued from ninety per cent. to the par of the bonds deposited, accomplished in a measure some of the objects sought to be attained by the first and second of the suggestions quoted, leaving only the third as having any bearing on the conditions then existing and the proposed amendments to the currency laws.
In regard to this proposition, Mr. Trenholm expressed the view that it was very doubtful whether the strong and conservatively managed banks would be disposed to jeopardize their credit with their depositors by issuing circulation secured by a first lien upon the assets of the bank, thus making the noteholder a preferred creditor over the depositor and weakening his security to that extent. Mr. Trenholm expressed the further view that if such a proposition were adopted the circulating notes issued under such conditions would be chiefly to banks having a small line of deposits, whose assets were of such an uncertain character as to constitute a very poor security, even as a first lien for circulation.
The circulating notes of a bank based upon the security of its credit, he said, are, of course, no better than the assets of the association issuing the notes, plus the individual liability of its shareholders. Under the system of bond-secured circulation, the notes of the weakest bank were as good as those of the strongest. The relative strength of the banks in nowise affected the security of their notes. Under an asset or credit currency system, the reverse would be the case, and the inability of a few associations to redeem their circulation in full in the event of insolvency, would have the effect of discrediting the note issues of a large number of banks, especially those of the smaller capital class, which under a bond-secured circulation were accepted at par, without question, in any part of the United States. He expressed the belief that it would require but a few failures of this kind to bring a return of the conditions which existed before the establishment of the national banking system, in respect to banknote circulation.
Mr. Trenholm was of the opinion that whatever form of security for bank issues should ultimately take the place of Government bonds, in whole or in part, a safe and satisfactory circulation, that would pass current in every section of the country without question, would have to rest upon something of more confident stability than the bare credit of the issuing bank; and that the confidence of depositors in the banks certainly would not be increased if the noteholder were made a preferred creditor over the depositor, as was contemplated by most of the schemes then presented, by making the circulation a first lien upon the assets of the issuing bank, thus lessening the security of the depositor to that extent.
Confidence of depositors in the security of their deposits is as essential to the success of the national banking system as the certainty of redemption at par of the circulation is to the noteholder to insure the passing current of such circulation in the hands of the people of every section of the country.