The fundamental basis of all the currency reform plans that were proposed while Mr. Dawes was Comptroller, contemplated making the note-holder a preferred creditor over the depositor. Mr. Dawes held this principle to be not only inherently wrong, but unjustifiable by any grounds of public policy, and that the practical effect of such a measure upon the relation of depositors to the banks in the smaller communities of the United States would be so revolutionary as to bring about the most injurious conditions in the general business of the country.
The Government was given a first lien upon the assets of a bank for any deficiency between the market value of the bonds deposited to secure circulation and the amount of the circulation outstanding against such bonds, but as the circulation issued could not exceed the par value of the bonds deposited to secure its redemption, and as the bonds were redeemable at par by the Government, it never was and probably never would become necessary for the Government to resort to this lien on the assets of a bank to redeem its circulation, except in the case of a sale of the bonds of a failed bank at a price below par. If the bonds securing the circulation of an active association fell below par in the market, the law authorized the Comptroller to require an additional deposit of bonds to cover the deficiency, but no additional deposit ever was required when the market price of the bonds was below par.
Mr. Dawes claimed that it was as sound in principle for a bank to issue banknotes as to receive deposits when the note-holder and the depositor stood upon the same footing in relation to the assets of the bank, but it was not as sound in principle when in the event of insolvency, the creditor who holds a note of the bank claims the right to be first paid in full before the creditor who claims as a depositor can receive anything.
Mr. Dawes expressed the opinion that the preference of a noteholder to the depositor could not be justified upon any grounds of public policy which did not admit the injustice to the depositor class as an expedient necessary for the Government to resort to as a means of securing additional and a different kind of circulation than that issued under the bond-secured requirement.
The argument usually advanced by those who favored a preferment of the note-holder to the depositor under the various plans presented for an asset or credit currency in the liquidation of the liabilities of national banks, was that the depositor voluntarily selected the bank in which to deposit his money, and that it is incumbent upon him to inform himself beforehand of the trustworthiness of the institution, while the notes of the bank are issued for general circulation and pass into the hands of those who have no means of knowing the condition or the solvency of the association issuing them.
This line of reasoning did not appeal to Mr. Dawes, as commending itself to men of practical views, and in his report for 1898, he disputed the logic of such an assumption, as follows:
Experience demonstrates that in the banking business the detection of untrustworthiness in banks is, as a matter of fact, not one of the duties with which the depositor, as a general rule, charges himself. He has come to leave that to the officials of the National and State Governments; and while it may be true that as a class he ought to exercise greater discretion in his selection of banks for his deposit, it is equally true that as a class he has course to have the confidence in the system which has made him comparatively indifferent under normal conditions to this duty.
Again, he is often compelled, by the very nature of his business, to be dependent upon the agency of banks at a distance in handling his funds, in which case he, like the noteholder, could not investigate if he so desired.
Certainly the fundamental right to prefer in the distribution of the assets of an insolvent bank the note-holding class to the depositor class, should rest upon some broader ground than the assumed neglect of the depositor class to acquaint itself with the nature of the private business and internal management of banking institutions, whose proper supervision the National Government, as the representative of the depositors and the public, has taken upon itself.
The lien given to the note-holder under the present system, first upon the Government bonds deposited expressly in trust as security for said notes, before other assets of the bank can be reached, is far different in practical effect from the general and unqualified priority in lien upon the assets of a bank proposed in these plans.
The priority of lien of the note-holders under the present system over the depositors, is first upon the United States bonds deposited in trust for their benefit, and only secondarily, in case of deficiency in bonded security, upon the general assets of the bank. In practical operation this security gives the notes the unquestioned credit necessary to enable them to circulate, and at the same time does not, as a matter of fact, interfere with the rights of the depositor in case of insolvency, since the bonds at public sale bring the amount of the notes, and return to the insolvent bank for the benefit of the general creditors practically all the equity originally invested in them.
This being the practical effect of the present bank-note system, it cannot rightfully be considered as justifying any assumption that in its theory the rights of noteholders are considered as more sacred in themselves, than the rights of depositors.
Under the present system the relation of the note-issues of a national bank to its general business, is somewhat the same as the relation of the issue and redemption department of the Bank of England, to its commercial department. They are in reality almost entirely separate, and so intended to be.
If under any new system, the note-holder and the deposit holder come into similar relations to the bank, their rights against the common assets, to which their money has alike contributed, should be equally sacred.