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th
COINAGE AND ) BANKING

PHILIPPINE ISLANDS,

Sk Gy RB ADR YOR WAR

CHARLES A. CONANT,

OF BOSTON,

NOVEMBER 25, 1901.

WASHINGTON:
GOVERNMENT PRINTING OFFICE.
1901.
A SPECIAL REPORT

ON

COINAGE AND BANKING

IN THE

- PHILIPPINE ISLANDS,

MADE TO THE

SEHECRETARY OF WAR

BY

CHARLES A. CONANT,

OF BOSTON,

NoveMBER 25, 1901.

[From tHe ANNUAL REPORT OF THE SECRETARY OF WaR, APPENDIX G.]

WASHINGTON:
GOVERNMENT PRINTING OFFICE.
1901.

D
TABLE OF CONTENTS.

Entroduction: sacecce cee send acbe en oes seauie aenase bee ee eseeuceecs
Principles of coinage system recommended ..........-----------------------
Reasons for rejecting other plans .--...---....-- 22-220 ee eee eee ee cere acces
The proposed adoption of United States currency...-.-..-.--.-2--+-+-------
Danger of counterfeiting American silver....-...-..----.--------2---------4-
Objections to the Mexican standard..............2---------------- eee ee eens
Difficulties of relying upon a foreign standard .......--..-.---.-------------
The project of a new silver coin ....--....--------------- ssodeeeeeeeseneees
Fundamental objections to a silver standard...............-----------------
How the gold standard attracts capital.......-.-----2-------------- eee eee ee
The monetary experience of Japan ........-..-2.---2-2 222222 - eee eee eee eee
Monetary stock: of J apains sce oe s)ecncwicinieicieisions sis are.eie te ecjneisiciee sees aeeninele ce
The foreign trade-of Japan <2 cjcis es tacsos ob 2s oceciadicnpceecemee sa veeeaeece
Character of the proposed silver coin -.......---------- He Soteee sami eleoaat
Weight and fineness of the proposed coin. .......-.-------------------------
The future course of silver .......--- 22-22-22 eee eee eee eee eee ee eee e ee
Highest, lowest, and average price of silver buliion and value of a fine ounce -
Methods of maintaining parity -.......---------2-- 02-222 e eee eee eee eee
Provision for a currency reserve fund .......-.----22.- 200-222-2202 - ee eee eee
Means of maintaining the reserve fund.........-.-----------------2--------
Amount of the currency reserve fund -..-....---..2..2.22-------2-20-------
The danger that gold would be hoarded....-.--.-.-2:2-2-.2-22-.--2-02002205
Disposition of the Mexican silver dollars ..........2.22-22-2-2-2--22----+-+5-
Opening of the mint at Manila....-....2220-2220-222 222-2 e eee eee eee eee
Provision for subsidiary and minor coins....-....-----.--.------0-2---0----
The vesulation Of bankas ojos esicidea seaecaissie us $5.5 dhe Bodnemae abu
Outlines of the plan proposed -.......-.--------- 2-2-2 e eee eee eee eee eee eee
Powers of the local government over banking......-..----.-..-------------
Classes of banks to be dealt with ..-.-..2-22222 222-222 e ieee eee eee eee eee
Power of foreign banks in the Orient ................-2.--------------2-----
The benefits of branch banking............-...-20220022 2-22 eee eee eee eens
Importance of large banking capital ..............-....2.-22-020----2 eee eee
The pressing need for paper currency..........-..-222.2002eeee eee eee erence
The paper circulation at other Oriental ports.............2222--222eeeeeeeee
Necessity of liberal provisions for note issue

Safeguards suggested for note issues...........2...0 000000 cece eee eee
4 REPORT OF THE SECRETARY OF WAR.

Sustaining the guaranty fund by taxation .............--------2-+ee ee eee eee 48
Advantages of notes in a new country.........-.-.2------2-0- eee ee eee eee 50
The status of existing banks..............0.20200.22--- 20-0 eee eee eee eee eee 51
Claims of the Spanish-Filipino Bank ........-..-----eeeeeeeeeeeeeeeeeeeees 52
Policy recommended toward the Spanish-Filipino Bank.........------------ 54
Relations of the Federal and Philippine treasuries .......---.--------------- 55
Need for mortgage. banks: 2. cccccccceciceaieec cave ce cee ginraacier weenie seems 56
Restrictions upon mortgage banks ...........---.--------- eee ee eee eee eee eee 58
Mortgage loans by commercial banks -.........----------+------0 ---+--e-e- 60
The need for a depository for public funds .......-..----.. met ar a as 62
Scope of the measures recommended.....-..-------------0--- 2 cece eee eee ees 64
EXHIBITS.
I.—Statement of Mr. J. T. B. M. MacLeod .........--...-----.--------- 67
IL.—Statement of Mr. T. E. Sansom, acting agent of the Chartered Bank of
India, Australia and China ........------2-----0---- 2-2 eee eee eee 77
III.—Statement of Mr. W. Adams Oram, acting agent of the Hongkong and
Shanghai Banking Corporation .-...-----.----------------------- 85
IV.—Statements of officers of the Army regarding the need for a legal deposi-
tory of public: fundsat Manilasc<c2200 sesenesosesewecs ewes eeeeses 96
V.—Statement of directors of the Spanish-Filipino Bank to Commissioner
Wg oc ee eee ee ees dase ani ea 98
VI.—Letter of Commissioner Ide to directors of the Spanish-Filipino Bank
arid ‘their reply thereto ..2...05 2 eee ceee eee neeteseceeeccee ee enees 112
VII.—Statement of the vice-governor of the Bank of Japan..----.....-..-. 116

VIII.—Letters regarding monetary conditions in Porto Rico .............--- 119
A REPORT ON COINAGE AND BANKING IN THE PHILIPPINE ISLANDS MADE
TO THE SECRETARY OF WAR BY CHARLES. A. CONANT, NOVEMBER 25, 1901.

Str: In compliance with your commission to investigate and report
upon the state of coinage and banking in the Philippine Islands, and
to recommend proper legislation to be proposed to Congress with
regard to the same, I have the honor to submit the following report:

I visited the Philippine Islands and there took the views of repre-
sentative business men and bankers in the city of Manila. I visited
the city of Hongkong and took the views of leading bankers there
upon the proper currency system for the Philippines and upon gen-
eral monetary conditions in the East, and also conferred with the
consuls of the United States at Hongkong and Nagasaki. In Japan,
which recently adopted the gold standard, I conferred with the
minister of finance and the vice-governor of the Bank of Japan.

After consultation with Judge Henry C. Ide, secretary of finance
and justice under the Philippine government and a member of the
Philippine Commission, projects were prepared relating to coinage and
banking in the Philippines, which were submitted to the Commission
and received their approval in prineiple and in detail. The outlines
of the measures agreed upon are indorsed by the Philippine Commis-
sion in their annual report to the War Department. The reasoning
in support of these principles presented in this report, while follow-
ing the lines of discussion between the commission and myself, has
not been submitted to them, as the report was prepared after leaving
Manila.

The chief medium of exchange in the Philippine Islands at the
present time is the Mexican silver dollar. The Philippines were for
many years connected with the administrative system of Mexico, while
both were Spanish colonies, and the financial and commercial relations
thus set up were not entirely severed when Mexico achieved political
independence. The Mexican dollar contains 416 grains of silver of
the fineness of 902 one-thousandths. It has become toa large extent
the standard money of China and certain other Oriental countries as
well as of the Philippine Islands. It has not always, however, been
the standard in the Philippines, nor is it the only form of silver money
which has been in common use there. Several efforts were made by

5
6 REPORT OF THE SECRETARY OF WAR.

the Spanish Government to establish a distinctive coinage for the Phil-
ippines, but they were not supported in all cases by proper measures
for carrying out what was attempted. Gold was the standard for
some years, while silver was more valuable than gold at the European
coinage ratio of 154 to 1, and special gold coins were minted for the
Philippines. The effect of the fall in the gold value of silver began
to be seriously felt about 1880. Gold then began to be exported from
the Philippines in considerable amounts, and within a few years prac-
tically disappeared from circulation and left silver money as the chief
medium of exchange and the standard of value in the islands. The
disappearance of gold and the confusion in the forms of money in use
led the Spanish Government in 1897 to issue a distinctive Filipino peso,
which has circulated in considerable quantities side by side with the
Mexican silver dollar. The peso contains less pure silver than the
Mexican dollar and has continued, therefore, to remain in the Philip-
pine Islands, while the Mexican dollar has come and gone according
to the demand for it in other countries. This Filipino peso is still in
circulation, but constitutes only a small percentage of the amount of
silver in use in the islands. The steady fall in the gold value of silver
has affected prices and wages as expressed in silver in the form of a
gradual advance in prices and a slower advance in wages, with the
result of a serious loss to the wage-earner.

PRINCIPLES OF THE SYSTEM RECOMMENDED.

The principles governing the coinage system which I have the honor
to recommend are the same as those set forth in the annual report of
the Philippine Commission to the War Department last year. It was
there stated: :

It seems to be desirable that some substitute for the Mexican dollar, as well as for
the Spanish-Filipino dollar, should be provided which would be uniform in its rela-
tion to the United States dollar, and would commend itself to general public use as
being substantially what they have long been accustomed to. We have interviewed
a large number of leading business men of the islands, and they substantially all con-
cur in the opinion that it would be injurious to business to place the islands immedi-
ately upon an absolute gold standard.

As a solution to the problem it has been suggested, and the suggestion has met the
approval of the business men here generally, that the United States dollar, or a theo-
retical United States-Filipino gold peso, of the value of half a dollar, like the theoreti-
eal gold yen which is the unit of currency in Japan, should be made the standard of
value, but that a silver United States-Filipino peso, containing a small percentage
less silver than the Mexican dollar, should be coined, which would be receivable in
business transactions as the equivalent of 50 cents in United States money, together
with convenient subsidiary coins of the same character. The amount of silver in the
peso should be such a percentage less than that in the Mexican dollar that its
intrinsic value would not at any time warrant its export from the islands, but its con-
vertibility into American money at uniform fixed rates, guaranteed by the United
States, would make it a convenient and useful currency for ordinary business trans-
actions in the islands.
REPORT OF THE SECRETARY OF WAR. 7

The general lines agreed upon by the commission and myself for
carrying out this policy are as follows:

1. That there should be a distinctive Philippine coin of silver which
should be legal tender for 50 cents in the gold money of the United
States.

2. That this distinctive silver coin should be known as the peso,
should contain 25 grams of silver of the fineness of 0.835, and should
be divisible into one hundred equal parts, called centavos.

8. That this coin should be issued by the government of the Philip-
pine Islands in such quantities, to be determined by such government,
as may be required by the needs of trade.

4, That the distinctive coin should be maintained at par with gold
by the limitation of the amount coined and by a gold reserve, to be
constituted from the seigniorage derived from the coinage of silver
bullion, and to be employed, in the discretion of the Philippine gov-
ernment, for the direct exchange of silver for gold, and in such other
ways as may be necessary to maintain the parity fixed by law.

5. That the Mexican silver dollar and other coins now in use in the
Philippine Islands should cease to be legal tender after specified dates,
and that the new silver coins and the gold money of the United States,
where not otherwise stipulated by the contract, should be the sole
legal tender for public and private obligations.

6. That the new coinage should be executed as far as possible at the
mint at Manila, and should bear distinctive devices expressing the fact
that it is intended for use in the Philippine Islands.

REASONS FOR REJECTING OTHER PLANS.

This plan carries out one of the four principal suggestions which
have been made in regard to the monetary system of the Philippine
Islands. It has the merit of retaining silver money in use, in harmony.
with the present habits of the people, and of changing very little the
weight and value of the coins used. At the same time it establishes
the money of the country firmly upon the gold basis, which is now
the standard of nearly all civilized nations, including the important
Oriental countries of British India and Japan. There appears to be
no doubt, in view of the experience of other countries, that the adop-
tion of a system of this sort would promote the investment of capital
in the Philippines and thereby stimulate their industrial progress.
Some of the arguments for the adoption of the plan which is recom-
mended will be illustrated by first considering the reasons for the
rejection of the other three projects which have been suggested from
time to time for adoption in the Philippines. These projects may be
described in general terms as follows:

1. The introduction of American currency as the standard and sole
legal tender.
8 REPORT OF THE SECRETARY OF WAR.

2. The continuance of the present system of relying upon the use of
Mexican silver dollars as a-medium of exchange.

3. The adoption of a distinctive Philippine coin of the same weight
and fineness as the Mexican dollar, to be coined by the government of
the Philippine Islands, but without any fixed relation to gold.

THE PROPOSED ADOPTION OF UNITED STATES CURRENCY.

I. The introduction of American currency as the exclusive cur-
rency of the islands has upon its face the merit of simplicity and
convenience to American officers and American business men. It is
advocated by some public officers, who believe that it would greatly
simplify their accounts with the departments-at Washington. I can
not find, however, that it is advocated by any considerable number
of business men, or by anyone who has studied from a scientific point
of view the monetary necessities of the Filipino people.

The fundamental objection to the introduction of American cur-
rency at the present time as the sole money of the Philippines is that it
would create great confusion in retail prices and in rates of wages.
The attempt to force the American dollar upon the people of the
provinces, especially those distant from Manila, might have results,
not only unfavorable from an economic point of view, but politically
disastrous by checking the growing contentment so necessary to the
progress of pacification.

The offer of 50 cents in gold, or an American silver piece of 50
cents, for a débt which is now discharged by a Mexican silver dollar,
would undoubtedly be objectionable to such of the native Filipinos
as have not learned by continued contact with Americans the fact
that the American token coin of 50 cents possesses the same value
in exchange as the Mexican coin of twice its size and weight.
Either the cost of labor would be raised by the necessity of paying
more American money than the exact equivalent of the amount now
paid in Mexican money, or the laborer would receive half as much
silver as under existing conditions, and would, in many cases, fail to
grasp the fact that he was receiving an amount equal in real exchange
value to that which he formerly received. Even if the laborer under-
stood this aspect of the new system he would be subjected to many
petty impositions by retail tradesmen, who would tell him that goods
which were formerly marked in Mexican dollars were now marked
in American dollars, and that the two were substantially the same.
The theoretical result of such a contention would be to double the
real price of commodities. It is not probable that the advance in
prices would be carried to this extreme, but it is probable that retail
tradesmen would make a merit of putting their goods at a somewhat,
reduced price as expressed in dollars when the new price represented
a material advance in pesos and in real exchange value. This was the
REPORT OF THE SECRETARY OF WAR. 9

experience in Porto Rico in spite of the high degree of intelligence
prevailing there and the small quantity of money to be dealt with.
Letters appended to this report from leading bankers and business
men in Porto Rico show that both prices and wages rose as expressed
in American money, because of the attempt in many quarters to
create the impression that the American gold dollar was the exact
equivalent, or substantially the equivalent, of the silver peso which
was converted into American money. The expressions of Prof. J. H.
Hollander, in his report of April 1, 1901, as treasurer of Porto Rico,
though dealing with a proper official reserve with a policy already
carried out by the American Government, plainly indicate some of
the difficulties experienced in the introduction of American currency.
He says (First Annual Report of Charles H. Allen, governor of Porto
Rico, p. 195):

Like the hurricane under the military government, the ‘‘canje’’ or exchange has
been made to serve as the responsible cause for every subsequent disturbance or ill.
It is undoubtedly true that the substitution of a higher for a lower unit of exchange,
the brief period within which the exchange took place—even after extended through
the intervention of the civil government—and the use in effecting the redemption of
gold and notes of large denomination, rather than silver and small notes, worked
injury to certain classes. On the other hand, it is proper to remember that an iden-
tical currency has fostered commercial intimacy between Porto Rico and the United
States, that the period of redemption was a period of disturbance and instability
which should, from every consideration, have been made as brief as practicable,
and, finally, that it is an unfortunate but apparently inseparable incident of any
change in the standard of value that undeserved injury should come to certain classes
and unmerited gain should accrue to others. Were the redemption to take place at.
the present time, it is certain that changes in procedure would be adopted.

Even if all ground for misunderstanding were removed as to the
relation between American money and the coins now in use in the
Philippine Islands, the adoption of American currency would still be
open to an important objection. This would arise from the relative
size of the units. Wages are expressed in such small amounts in the
Philippine Islands, and many articles of necessity to the natives are
sold for such trifling sums, that for small transactions even the Amer-
ican cent is too large a unit. It is necessary that the lowest unit of
value should be a very small one. The centavo which is recommended,
equal to one-half of a cent, will meet this necessity. A native laborer
accustomed to receiving a peseta, or 20 centavos, for a day’s labor,
would find an American 10-cent piece less suited to his wants, even
though he was satisfied that it represented the same value. The rea-
son would lie in the fact that the American coin would be less easily
exchangeable for smaller subdivisions. The American 10-cent piece is.
the smallest silver coin which can be used with convenience, but the
peseta, or piece of 20 centavos, is of twice its size and is divisible
into two pieces of about the size of the American 10-cent piece, each
representing an exchange value of 5 cents in gold. As this difficulty
10 REPORT OF THE SECRETARY OF WAR.

was tersely put to the Schurman Commission in 1899 by Mr. Charles
Iiderton Barnes—

If the agriculturists are paid in gold, they can not make that gold go around like
twice the number of dollars in silver.

The time may come when the scale of wages and prices will have
reached a point which will justify the introduction of American cur-
rency and when popular knowledge of the American monetary system
will remove any doubt as to its successful operation. If this time
comes earlier than is now anticipated, substantially the only cost of
the abandonment of the proposed system will be the recoinage of the
silver pieces. The cost of the mechanical processes of such an opera-
tion will not be large. The amount of the new coinage required for
the Philippines in the immediate future promises to be about
40,000,000 pesos, and its recoinage would not represent a serious
burden to the Government. Silver is the natural money of unde-
veloped countries, where the scale of wages is low, and such countries
can only be given the benefits of the gold standard, without detriment
to their interests, by some system which cotibines the large use of
silver with measures for linking it closely to gold values. It. is such a
system which is recommended by this report.

DANGER OF COUNTERFEITING AMERICAN SILVER.

There is another, weighty argument against the use of American
silver of the present standard in the Philippine Islands. This is the
danger of counterfeiting. The silver bullion contained in a standard
dollar of the United States is worth only about 45 cents. The danger
of the counterfeiting of such a coin would be much greater in the East
than in the United States because of the extreme cheapness of labor.
A counterfeiter in the humbler walks of life could afford, even without
proper machinery, to devote many hours to skillful handwork, such
as is done by the native jewelers of Oriental countries, in producing
a duplicate of asilver coin. A profit of 100 per cent, even if acquired
at the cost of several days’ labor, would represent for him a compen-
sation larger than he would obtain _by legitimate labor in other occu-
pations. The danger of counterfeiting is greatly increased also in the
Philippines by the fact that the silver coins would be in general use by
the natives instead of represented in circulation by paper certificates,
as is so largely the case in the United States. The introduction of
American currency would be extremely unwise, therefore, for this
single reason alone, if there were no other reasons, that American
silver coins, circulating for more than twice their bullion value, would
be required for use in large quantities and would offer a strong
temptation to extensive counterfeiting.
REPORT OF THE SECRETARY OF WAR. 11
OBJECTIONS TO THE MEXICAN STANDARD.

Il. The project which has perhaps the strongest support among
those who are opposed to the adoption of a distinctive coinage for the
Philippines is the continued use as the medium of exchange of the
Mexican silver dollar. It is contended that the use of the Mexican
dollar links the commerce of the Philippines with that of China, the
Straits, and other countries of the Orient, and that to break this rela-
tion by the adoption of a practical gold standard would interfere seri-
ously with the interchange of goods between the islands on the one
hand and Hongkong and other commercial centers on the other. There
is some force in these contentions, but I believe their importance is
exaggerated by those who urge them as a reason for adhering to the
present system, and that such value as they may have is more than
counterbalanced by the faults which that system presents.

It may be said in passing that some of the arguments which were
made a few years ago in silver-using countries in favor of the silver
standard, and which were often urged in favor of bimetallism in the
United States, have ceased to have the weight which they may have
-had at that time. It was then contended with some degree of plausi-
bility that the steady fall in the gold value of silver acted asa stimulus
to exports of merchandise from silver-using countries by diminishing
the cost of production as expressed in gold, thereby enabling such
countries to sell their products in gold-standard countries at lower com-
petitive prices than their gold-standard rivals. Whatever force this
argument had was predicated upon the fact that wages in silver failed
to rise as rapidly as the gold price of commodities expressed in silver,
and that for goods produced under such conditions a lower gold pr ice
could therefore be made in competitive markets.

There is grave doubt whether this argument, in spite of its seeming
plausibility, can be sustained by any positive evidence. It was pointed
out by the Indian Currency Commission, in paragraph 27 of their report
to Earl Kimberley, secretary of state for India (May 31, 1893), that the
progress of the export trade of British India ‘‘ was less with a rapidly
falling than with a steady exchange.” In support of this declaration
the report set forth:

For example, from 1871-72 to 1876-77 the gold value of the rupee fell constantly
from 23.126d. to 20.508d., or about 11} per cent; the exports of merchandise were
actually less in the latter year than in the former, although in 1876~’77 their rupee
value exceeded by about 10 per cent that of the exports of either 1870-71 or 187273.
From 1878-’79 to 188485 exchange was fairly steady, the average rates varying only
between 19.961d. and 19.308d. per rupee, or about 3} per cent; and during those six
years the exports rose by no less than 36} per cent. Again, between 188485 and
1888-89 the fall of the rupee was very rapid, from 19.308d. to 16.379d., or over 15 per
cent, and the exports increased during those four years by 163 per cent; but in the

single year 1889-’90, when there was a slight improvement in the exchange, the
exports increased by more than 6} per cent. * * * Upon the whole we can not
12 REPORT OF THE SECRETARY OF WAR.

see any evidence that the effect of a falling exchange on the country at large, in
influencing either exports or imports, has over a series of years been very consider-
able. Some trains of a priori reasoning would seem to lead to the same conclusions,
and also to the further conclusion that, even if a fall in the gold value of the rupee
does stimulate exports, the result is not necessarily to the benefit of India as a whole,
though it may temporarily benefit the employer at the expense of the wage-earner,
because wages rise more slowly than prices.

In the case of Japan also the evidence fails to support the conten-
tion that her export trade was favorably affected by the falling value
of silver while she was on a silver basis in comparison with its volume
since she adopted the gold standard. Her export trade increased.
steadily under both conditions. The exports of 1896 were 117,842,761
yen, and rose in 1897 to 163,135,077 yen. The exports of 1900 were
204,429,994 yen, and those for the first nine months of 1901 indicate a
total for this year of 236,000,000 yen (cércwm $118,000,000).

Whatever may have been the effect upon foreign trade of the fallin
the gold value of silver while the fall was going on, it is obvious that
any favorable influence of this fall has largely ceased to be felt since
the fluctuations in the gold value of silver became less marked. Wages
in British India, Japan, and the Philippine Islands have gradually risen
as expressed in silver, until the rise has covered a considerable portion
of the loss which the wage-earner suffered when he accepted a uniform
wage in a metal which was declining in gold. The gold price of silver
does not seem likely to fall in the future with sufficient rapidity to
renew these benefits to the exporter at the expense of the wage-earner.
The benefits of a silver standard in promoting exports may, there-
fore, be ignored under the conditions which exist to-day in the relations
between gold and silver. If a silver standard did in fact tend to
encourage exports during the years of transition, its continuance would
not mean a continuance of these benefits to the exporting commerce of
a silver-using country, now that silver is no longer falling steadily in
gold value.

DIFFICULTIES OF RELYING UPON A FOREIGN STANDARD.

The argument made in behalf of the use of the Mexican dollar in the
Philippine Islands, that it establishes a uniform coinage system for the
Orient, is also less conclusive upon careful analysis than it might at
first appear. Uniformity in the unit of coinage has been a dream of
philosophers from time immemorial. It would undoubtedly be a benefit
to the world if this conception of a common unit could be realized under
the proper conditions; but these conditions absolutely require the free
coinage of the standard metal in all countries and the strict adherence of
all to the rule that there shall be no legal tender but standard coin. In
view, however, of the use of token coinsin many countries, and in view of
the fact that sound policy does not always govern the monetary meas-
ures of nations, serious practical difficulties have been encountered
REPORT OF THE SECRETARY OF WAR. 13

where a uniform type of coin has been adopted by several nations
for free circulation in all. This was the case with the Latin Union,
which adopted the franc under different titles as the standard of
value in France, Belgium, Switzerland, Italy, and Greece, and per-
mitted its use in Spain. The encouragement given by the adoption of
a common unit to the flow of the coins of one nation across the
frontiers of another resulted in a great accumulation of Italian and
Swiss silver coins in France as soon as the silver bullion they con-
‘tained ceased to be worth its face value. This tendency was greatly
stimulated when Italy went upon a paper basis, for the fall in the
value of the paper finally expelled even depreciated silver from her
limits. It became necessary for the Government of France to insist
upon the repurchase of Italian and other foreign silver coins by their
respective Governments, and their redemption in gold or gold ex-
change. The expedient of a common unit was a failure even after the
unanimous agreement of the Union to limit the coinage of depreciated
silver, and would have absolutely broken down if the free coinage of
silver had been continued in any country of the Union. By analogy
of reasoning, the Philippine Islands will be exposed to all the vicissi-
tudes of the fluctuations in the gold value of silver and to the additional
vicissitudes of the policy of the Mexican mints, if the islands permit
their. coinage system: to be controlled by the policy of a foreign
government.

The difficulties encountered in the Philippines by the use of a coin
originating in another and distant country have been illustrated in a
striking manner within the past eighteen months. A large demand
for money in China in the autumn of 1900 gave Mexican dollars a
-higher exchange value in China than in the Philippines and led to their
rapid exportation. The histoty of this movement was fully set forth
in the annual report of the Philippine Commission for 1900 and is car-
ried forward in the annual report for 1901. It is sufficient here to
point out that within less than three months more than 3,000,000 pesos
in Mexican silver were exported from the Philippines, and that the
city of Manila and other places were almost denuded of the currency
necessary for carrying on their daily transactions. After the reduc-
tion of the forces of the powers in China and the restoration of order
there the Mexican dollar, which had been much above 50 cents in
gold value, began to fall until it stood about 3 cents below that
amount. As the exchange value of the Mexican dollar fixed by
the Philippine Commission was 50 cents, the inevitable tendency of
this condition was to bring silver into the islands and denude them
of gold. This tendency was checked in part by the policy of the com-
mission in making appropriations in Mexican money and thereby
hoarding such American money as they had on deposit in the banks
from their surplus of receipts. It is obvious that such a measure could
14 REPORT OF THE SECRETARY OF WAR.

be effective only within narrow limits, and only where there was 4
large surplus of Government receipts, and could not long control the
flow of money in commercial operations or permanently fix the
standard for the country.

If a silver dollar corresponding to the Mexican were to be accepted
as the universal money of the Orient it would be essential, in order to
avert sudden convulsions and sevious calamities, that it should be
coined freely near the localities where it is used. The long distance of
the Oriental countries from Mexico, the cost of transferring the money,
and the probable insufficiency of the Mexican mints to meet demands
falsifies the true relation which should exist between the supply of
bullion in the world’s markets and the stock of silver coins. In strict
theory a coin which is the subject of free coinage should possess in
exchange only the value of the bullion which it contains, but when
large elements of friction oppose the free movement of the bullion
from the mines to the mints and from the mints to the places where
the coin is used, a value is given to the coin which is determined neither
by the bullion value of silver nor by any other calculable cause.

While subject theoretically to free coinage, the Mexican dollar is
subject in fact to the rules which govern a commodity of limited supply,
aud in this case to the control of the supply by conditions beyond the
reach of the Government or the commerce of the Philippine Islands.
This is the reason for much of the trouble which occurred when the
islands were denuded of Mexican silver by the recent military opera-
tions in China. If Mexican dollars had been coined freely at Manila,
Hongkong, and other points in the Orient, their value would not have
been subject to such violent fluctuations, the supply necessary for trade
in the Philippines would not have been so seriously impaired, and if.
impaired could have been more quickly restored through the operations
of the mint. The free play of the laws governing the value of money
requires that bullion of the standard metal shall be convertible instantly,
at will, and without material cost, into coin. This condition does not
exist for Mexican dollars in the Orient, and can not exist while they
are Mexican dollars—that is, while they are coined only under the
authority of a distant and foreign state.

THE PROJECT OF A NEW SILVER COIN.

_ Ii. A third project has been suggested in some quarters with the
purpose of avoiding some of the evils attendant upon the use of Mexi-
can coin without abandoning the silver standard. This project involves
the coinage of a distinctive Philippine coin, without establishing any
fixed relation between such a cain and the American gold dollar. The
advantages of this project over the present system of relying upon the
mints of Mexico would be that the mints in the Philippine Islands
would be open to the free coinage of silver, and the supply of money
REPORT OF THE SECRETARY OF WAR. 15

would respond much more nearly than at present to the natural influ-
ence of changes in the value of silver bullion. It is argued that the
Philippine Islands would not be subject under such a system to the
same drain upon their money supply and the dearth of currency which
was felt last year during the movements of the forces of the civilized
powers in China. These comparative advantages of the proposed plan
over present conditions would undoubtedly be felt in some degree,
because of the means afforded, when an increase of currency was
required, for the direct importation of silver bullion from the United
States and from other silver-producing countries and its speedy con-
version into money.

Notwithstanding these advantages, it is difficult to see how a drain
upon the existing currency supply would be entirely averted if the
new coins were of the same weight and fineness as the Mexican dollars.
They would serve practically the same purpose in exchange in China
and in other countries unless mere custom should cause a fictitious
preference for the Mexican coins. The ebb and flow of such money,
when the demand for it increased or diminished in the islands in rela-
tion to the demand in China or other countries, would be in itself a
normal movement and in harmony with the natural laws of trade.
Such a movement is not to be deprecated, except where it is influenced
by artificial causes. But such a project would still leave the Philip-
pine Islands subject to all the fluctuations in the bullion value of silver
and would more or less hamper their trade with gold-standard countries.

t

FUNDAMENTAL OBJECTIONS TO A SILVER STANDARD.

All projects which contemplate the continuance of a silver basis in
the Philippines without any fixed relationship between the money of
the islands and the gold standard are, in my opinion, hostile to the
best interests of the islands and to the development of American trade.
The great majority of trading nations have now adopted the gold
standard. Gold, by a process of natural selection, has become the
money of international trade and the standard by which value is
measured throughout almost the entire commercial world.

A nation whose monetary system is based upon silver is at a serious
disadvantage in its trade relations with other commercial nations. All
trade between silver countries and gold-standard countries is carried on
under conditions which are more or less speculative. This arises from
the fact that the value of silver as expressed in gold is subject to -con-
stant fluctuations. These fluctuations, it is true, are smaller than was
the case during the ten years from 1885 to 1895, but are not the less
disturbing to merchants engaged in foreign trade and to those who.
manufacture for that trade, in view of the narrow margins of profit
upon which their transactions are carried on under modern conditions
of competition. The fluctuations are not sufficient to insure a low cost
of production in silver countries, but they are sufficient to disturb
16 REPORT OF THE SECRETARY OF WAR.

materially the calculations of profit and the prices which must be
made by merchants in gold-standard countries in dealing with those of
silver-standard countries. Either the merchant in the gold-standard
country must do business at great risk of loss or must make the price
of his goods high enough to cover all possible margins of fluctuation.
In any case the tendency of such conditions, from the fact that they
are speculative, is to impose a higher cost for goods upon purchasers
in silver-standard countries, and to impose a greater risk of loss and
a@ preater uncertainty in business upon the exporter and importer of
gold-standard countries. In so far as this danger of fluctuation can be
obviated by establishing a fixed relation between gold and silver the
speculative element in business will be diminished. This I believe to
have been one of the declared purposes of the advocates of bimetallism
and of the free coinage of silver, as well as those who believe in the
extension of the gold standard.

HOW THE GOLD STANDARD ATTRACTS CAPITAL.

An important reason for the adoption of the gold standard by any
undeveloped country is the inducement held out for the investment
of capital there. The investor in negotiable securities, paying usually
a moderate interest of from 3 to 6 per cent, can not afford to see his
profits swallowed up by fluctuations in the gold value of silver.
English establishments in the Orient, like the Hongkong and Shanghai
Banking Corporation, have been compelled to make a large deduction
from their nominal dividends in order to transfer those dividends in
gold to their English stockholders. In the case of this bank, and in
some other cases, the profits have been so large that an ample margin
for gold dividends has remained after charging up what is classified as
**the loss on exchange.” This would not be the case with securities
‘paying a fixed and low return if the dividends on such securities were
payable in silver. A declared dividend of 3 per cent in silver would
shrink to less than 1$ per cent when converted into gold. For this
reason the accumulated capital of the great civilized countries has in
recent years refused to seek investment in silver countries. Since it
is in the gold-standard countries that the great surplus of capital has
heen accumulated, which is now being offered in the world’s money
markets for the development of the tropical countries, it is absolutely
essential that monetary legislation, as well as that regarding the sanc-
tity of contracts and the security of property, should be such as to
attract the investors of these countries.

Experience has demonstrated that capital seeking investment can be
attracted in no other way than by the adoption and maintenance of the
gold standard. The Empire of Russia adopted the gold standard in
1896 under the advice of the finance minister, M. de Witte, with the
avowed object of attracting foreign capital into Russia. The result
was a remarkable verification of the foresight of the minister of
REPORT OF THE SECRETARY OF WAR. 17

finance. The issues of shares in joint stock companies in Russia, which
had been 1,296,214,000 rubles during the entire period from 1799 up
to 1895, when the measures for adopting the gold standard were set in
operation, or an average of about 13,500,000 rubles per year, increased
to 232,040,000 rubles in 1896; 239,324,000 rubles in 1897; 256,237,000
rubles in 1898; 423,585,000 rubles in 1899; and about 300,000,000
rubles in 1900; making in this short period total issues of more than
1,450,000,000 rubles ($730,000,000).

The same policy influenced the Government of Japan in the adop-
tion of the gold standard in 1897, and the results were equally striking.
The capital invested in stock companies in Japan rose from 268,635,810
yen (about $134,000,000) at the close of 1895 to 878,154,396 yen (about
$438,000,000) at the close of 1899. The conditions in British India led
to the attempt to give a fixed value to the silver rupee as early as
1893. There also one of the chief motives was the introduction of
capital from Great Britain and abroad, and the same motive influenced.
the more resolute steps recently taken by the Indian government to
create a gold reserve and make the value of the rupee unchangeable
in its relation to gold.

The policy adopted in these countries has been subject to some criti-
cism upon the ground of monetary disturbances which occurred not
long after the adoption of the gold standard. Consideration of the
facts will show, however, that these disturbances were due to the too
rapid realization of the purposes of the new system, and to the too
extensive discounting of its effects, rather than to any faults inherent
in the system. Into both Russia and Japan the influx of foreign
capital was great and rapid. In both cases active speculation was
invited by the very fact that confidence had been so much strengthened
by the adoption of the gold standard. Capital was invested in projects:
which did not prove immediately productive, imports of merchandise
increased under the stimulus of visible prosperity, and a check inevi-
tably came to the rapidity of this process of development. The
United States went through a similar experience in 1857, and again
in 1873, as the result of undue investments in railways and other
important works. These checks to industrial development are almost
inevitable in a new country, but never set the country back to the
state of development existing before the period of undue speculation,
and the works which are premature in the sense that they draw in
undue proportion upon the existing resources of the country often
prove of high value in its ultimate development.

THE MONETARY EXPERIENCE OF JAPAN.

In the case of Japan, the tendency to undue speculation and embark-
ation upon extensive public works was intensified by the transfer to
the Japanese treasury of the large war indemnity exacted from China
by the treaty of 1895. Such a violent transfer of capital, contrary to

11577—01——_ 2
18 REPORT OF THE SECRETARY OF WAR.

the normal movements of commerce, had a similar effect in stimu-
lating speculation after the war between Germany and France in 1870,
and exposed Germany much more severely than France to the depress-
ing influences of the crisis of 1873. The crisis in Japan, so far as it
was a reality, was limited in its influence chiefly to the banking world
and the market for capital. It was not accompanied by the extensive
closing of factories, the fall of wages, and the enforced idleness of
labor which distinguish a period ‘of serious commercial depression.
This is the weighty testimony of Japanese officials and financiers,
with whom I conferred at Tokyo.

That the crisis in Japan was due to the tendency to overspeculation
is plainly shown by the statistics of foreign trade, which appear below.
These figures indicate that the importation of machinery and raw
material for new enterprises, as well as of luxuries, created a heavy
excess of imports of merchandise, which had to be settled by the
export of gold. Japan, in spite of her great progress during the
present generation, is not a rich country, and a comparatively limited
drain upon her monetary supply created a more serious impression
than if she were possessed of greater resources. Her entire stock of
gold at the close of 1899, according to the official estimates made by
the Financial Annual of Japan, recently issued by the department of
finance at Tokio, was only 93,360,986 yen, or about $1.05 per capita.
This sum, equivalent to gold resources of only about $80,000,000 for
the larger population of the United States, was perhaps an inade-
quate basis upon which to inaugurate the gold standard. The gold
stock, however, including that held in reserve, was equal to more than
one-third of the money in actual circulation, and is still equal to about
one-sixth of the circulation. The official estimates of the monetary
stock of Japan for recent years are as follows:

Monetary stock of Japan.

[In gold yen=49.8 cents.]

 

 

 

 

= Total Specie in re-}| Net amount

December 31 outstanding.|’ old. serves. Fs circulation.
AGO eon oes dy tote: Decne Rog ac NesorS tte 305, 143, 672 | 79,899,898 | 64,673,530 | 380,470, 142
0S er eiesrnete earls d et hah tt tae teder tee 351,133,169 | 83,648,655 | 65,513,471 | 285,619, 698
M699 seis carcsestem Sim Se eins ora scainyn ate eniwin ele oreradare eee 421, 144,516 | 93, 360, 986 83, 335, 035 337, 809, 481
900 SA hl ler teshiclaateN nay estes Aa dened 358, 316, 645 | 52,930,394 | 38, 084, 510 | 320, 282, 135

 

 

 

Foreign trade balances create a more immediate and powerful impres-
sion upon monetary conditions in Japan than in more advanced coun-
tries because of her small reserve resources in accumulated capital
and the resulting absence of the steadying and mitigating influence of
a flexible stock market. An ‘‘adverse” foreign balance has to be
settled in gold, because it can not be settled by the transfer of credits
and securities. These conditions have brought their own remedy by
REPORT OF THE SECRETARY OF WAR. 19

arresting imports of foreign merchandise and stimulating exports
from Japan. How effectively and promptly this corrective has
worked may be judged by comparing the trade balances for the pre-
vious years with those of the nine months ending with September last
in the following table, which is compiled from the Financial Annual
of Japart and from the monthly Return of the Foreign Trade of the
Empire of Japan for September, 1901:

The foreign trade of Japan.

 

 

Excess of—
Year. Exports of | Imports of
merchandise.|merchandise. Exports. Imports.
Yen. Yen. Yen Yen.
TBS bo iciazcaiscvars erat sieey cise creme metas aetaier! 118, 246,086 | 117,481,955 |.........--- 4, 235, 869
WSG5 ss teins eG esi eke gee sce 136,112,178 | 129,260,578 | 6,851,600 |.....-.....---
WSO Goce ctcraee aronsia mironn nie ateroram cere sie stereroeiaiatareab ib wie Bioce 117,842,761 | 171,674,474 |............ 58, 831, 713
BD ise scicysenss teases hdd anys eso easi apeapeesteysiclonmisieleigsoe aise 163, 185,077 | 219,800,772 |....-..-.--- 56, 165, 695
WS OB i s.scassrccecsccarate vie viaictarucorain eeereraelete wate eee eHaTSIS 165, 758,753 | 277,502,157 |...-...----- 111, 748, 404
DRG fetes aadtas snot eur aah asim rnwienees 214,929,894 | 220,401,926 |......---.-- 5, 472, 082
W900 scr inrewent caegnmasemeriemeeeereeneeseerener ees 204, 429,994 | 287,261,846 |............ 82, 831, 852
TOOL AO MONEHS)|«.oi.iewcwnceewemenniedeemaencareene 177, 255,048 | 205,038,500 |............ 27, 783, 452

 

 

 

 

These figures show that an excess of imports of merchandise which
amounted to 82,831,852 yen (c. $41,000,000) in 1900, has been reduced
to 27,783,452 yen for the first nine months of the present year, or to
the rate of about $18,000,000 per year. The healthful effect of this
movement in merchandise is reflected in the movement of specie and
bullion, chiefly gold, which showed an excess of exports of 45,189,228
yen for 1900, but showed a balance of imports amounting to 1,371,129
ven for the first nine months of 1901. For the three months ending
with September last the aggregate exports of specie were less than
500,000 yen and the imports were more than 6,100,000 yen.

Analysis of the real conditions in Japan, Russia, and British India,
therefore, will not justify the conclusion that they would have been
better off under the silver standard than they are to-day; that they have
not already greatly profited by the adoption of the gold standard, or
that they will not profit by it to a still greater degree in time to come.
It was freely admitted by the managers of the foreign banks in Manila,
whose statements are appended to this report, and by the managers of
those banks in Hongkong, that the Government of the Philippine
Islands would be able, if they took the proper measures, to maintain
the gold standard unimpaired.

The development of the Philippines may follow in some respects
that of other undeveloped countries. There is likely to be specula-
tion and some losses of capital in enterprises which prove to be prema-
ture. There is reason to believe, however, that overspeculation and
premature development will be much less than in countries like Russia
or Japan, because the development of the Philippine Islands will be
20 REPORT OF THE SECRETARY OF WAR.

carried on chiefly by American capitalists and others from without
who will be governed in a large measure by conditions elsewhere.
They will not be swayed by the seeming prosperity in the islands to
the extent that they would be swayed by similar conditions in their
own country, where the entire environment would tend to stimu-
late overproduction and obscure the suggestions of prudence and
conservatism.

The reasons appear to be conclusive, therefore, for the adoption in
the Philippine Islands of a monetary standard based upon gold.
Whether the position of investors is theoretically sound or not, there
is no doubt, as a matter of fact based upon experience, that they will
be deterred from investments under the silver standard and will be
attracted under the gold standard. It would be of questionable pro-
priety to introduce the money of the United States, or gold money of
any kind, for general circulation, for the reasons which have already
been pointed out; but if the use of silver money can be continued
while it is given a fixed and unquestioned relation to gold, the double
result will be accomplished of leaving undisturbed the present customs
of the people and of extending a tempting invitation to American and
foreign capital to enter and develop the islands.

CHARACTER OF THE PROPOSED SILVER COIN.

For‘carrying out these purposes it is recommended that a silver coin
be coined and issued by the government of the Philippine Islands,
having the exchange value of 50 cents in gold, and that effective
means be placed in the possession of the government to maintain such
coins, at all times and without question, at the gold value thus fixed.

The Mexican dollar has been receivable for public dues by the Phil-
ippine treasury at the rate of two such dollars for one American
dollar, almost continuously since the American occupation of the
islands. Fluctuations in the value of the coin outside the Philippines
have affected somewhat the stock in the islands, but have not resulted
as yet in any change in the official ratio proclaimed by the Philippine
government. The substitution of a new coin, having the value of
fifty cents in gold, will not, therefore, involve the impairment of con-
tracts, nor a serious change in the customs of the people. There is no
reason to apprehend that the adoption of new devices for the coin
will cast distrust upon it with the masses, in view of the recent mone-
tary history of the Philippine Islands. Within about twenty years
silver has superseded gold there as the chief medium of exchange, and
the Mexican silver dollar has been employed concurrently with the
Spanish dollar of ancient coinage and with the new Philippine dollar,
or peso, issued by the Spanish government in 1897. The people have,
therefore, become accustomed to receiving coins of different devices
REPORT OF THE SECRETARY OF WAR. 21

and are not likely to object to a new set of devices indicating the
sovereignty of the United States over the islands.

It is recommended that the new coin be known distinctively as the
‘“peso,” in order to do away as far as possible in the future with the
distinction between two coins each known as a “‘dollar,” but differing.
widely in value. The necessity of qualifying the term ‘‘dollar” is a
source of inconvenience in retail trade, and might, under some condi-
tions, lead to litigation in regard to the interpretation of contracts. It
seems probable that the adoption of a distinctive Philippine coinage
system, with proper auxiliaries in the form of certificates and bank
notes, would tend to reduce the amount of American money now in
circulation in the Philippine Islands and to make the new currency the
chief, if not the exclusive, medium of commercial transactions. It is
proper, however, that the gold money of the United States and its
paper representatives should be legal tender in the islands, in order
that they may be used, if necessary, to maintain the parity and
exchange value of the Philippine currency and to meet any extraordi-
nary pressure for currency which it might not be possible to meet
with the limited resources of the Philippine mints.

WEIGHT AND FINENESS OF THE PROPOSED COIN.

While it is suggested that the new coin should be similar in size to
the Mexican silver dollar, it is not necessary that it should be éxactly
identical in-weight and fineness. - If it is to be a token coin, sustained
at a fixed value by its exchangeability for gold, it might, theoretically,
-be greatly reduced in bullion value. A radical change in this direction
would, however, invite distrust and expose the new coin to the same
danger of counterfeiting as American silver money. The reason for
recommending that the new coin should contain less pure silver than
the Mexican dollar is chiefly to guard against a rise in the bullion
‘value of silver. Such a rise, if it carried silver above the ratio of
32 to 1, would send the silver coins to a premium, drive them to the
melting pot, and deprive the country of a sufficient volume of the
medium of exchange. This is practically the only danger menacing
the proposed system which would not be under the complete control of
the government of the Philippine Islands.

To guard against such a danger, it is suggested that the new silver
coins be of the fineness of the subsidiary silver issued by the countries
of the Latin Union. This would make them of a fineness of 0.835
instead of 0.9, the latter being the fineness of the standard silver dollar
of the United States and of the 5-franc piece which was formerly
coined by the countries of the Latin Union. The adoption of the
fineness proposed would bring the new peso into exact conformity with
the subsidiary coin of the countries of the Latin Union, and the exist-
ing Spanish-Philippine peso. Some advantages might be found in this
uniformity of character if the project of a uniform standard of coinage
22 ‘REPORT OF THE SECRETARY OF WAR.

throughout the world should ever be favorably considered by the lead-
ing commercial nations. The following table shows the weight in
grams of various silver coins, with their fineness and their nominal
value at the old coinage parity of gold and silver:

 

 

Value
Weight. |Fineness. Wi ser
pence.
Grams.
MEXICAN: PESO: .6c.cndccce,i aed-ctecocedahansogeacan shies auadosedanddaaany 27.073 0. 902 $1. 012
United States silver Gollan s.cnccisweesvcisnacess vee sesicineiiesvareueresles: 26. 729 - 900 1.000
SATANC PiCCCiascisicce se wemcaaserec ne ccremscecaclewcvceeee cece deem bewtecisls aald 25. 000 - 900 935
United States subsidiary silver (2 half dollars) .............----------- 25. 000 - 900 - 985
PrOpOse! PSO) we vacniesvesevereesexecsdasemarecereysesecinevemescacces| (201000 - 835 . 8677

 

 

 

 

The ratio of 32 to 1 would reduce the par value of these coins to
just half what is stated in the last column of the table. Hence the
proposed Filipino peso would represent about 434 cents in bullion value
if silver and gold stood at the ratio of 32 tol. At a higher ratio,
representing a lower price for silver, there would be a still greater
difference between the, bullion value of the coin and its par value in
exchange. It is the amount of this difference which marks the limit
within which silver might rise in value without causing difficulty with
the proposed Philippine coinage. It is this difference, also, which
marks the seigniorage or profit which would be derived by the Philip-
pine government from the coinage of the new coin from silver bullion
purchased at the market price. This margin, under present condi-
tions, would amount to about 15 per cent of the face value of the coin,
and would seem to afford ample protection against a probable rise in
the market price of silver.

THE FUTURE COURSE OF SILVER.

There seems to be little danger, in view of the recent course of the
silver market, that there will be a rise of a serious and permanent
character in the price of silver bullion. The course of the market was
almost uninterruptedly downward from 1870 to 1894. Within this
period of twenty-four years silver lost more than half its original
market value in gold. Since 1894 the decline in value has been less
marked, but the market for the metal has usually been weak rather
than strong. The occasions of an upward movement haye been those
when some local demand was announced or reported for the sub-
sidiary coinage of some gold-standard country, or when an attempt
has been made by the owners of silver bullion to give fictitious
value to the metal by combination or by manipulation of the market.
The highest average price since 1894 was in 1896, when the bullion
value of the silver dollar of the United States, which had been 50.587
cents in 1895, rose to 52.257 cents. The highest quotation of silver
REPORT OF THE SECRETARY OF WAR. 23

in 1896 in the London market was 3144 pence, and the average quota-
tion was 304% pence. The minimum quotation of 1896 was 294 pence,
but the minimum has since touched (in 1897) 232 pence and (in 1898)
25 pence. The market has been more steady during the past three
years and the price has been sustained to some extent by the efforts
of a syndicate of holders of silver bullion. The following table shows
the price of silver bullion for various representative years and the
effect of the price upon the American silver dollar, including the price
for each month of the fiscal year 1901:

Highest, lowest, and average price of silver bullion and value of a fine ounce.

 

 

 

 

 

 

 

 

 

piceper yilueofa,| Bullion
Year. Highest.| Lowest.| Qunce, |fine ounce | ynited | Ratio.
‘ standard | change at ie.
0.925, par, 4.8665.
Pence. Pence. Pence.

60} 60} 6035 $1. 328 $1. 027 15.57
57% 57% 5644 1, 24233 - 96086 16. 64
5244 514 52¢ * 1.14507 - 88564 18. 05
50 463 489; 1. 06510 . 82379 19.41
448, 41§ 42% a 98974 «72683 22.00
54g 43% 47% 1.04634 - 80927 19.75
483 434 455 . 988 76416 | 20. 92
433 37% 39} 87145 . 67401 23.72
383 305 35395 «78030 . 60351 26.49
312 27 2845 . 63479 49097 32. 56
312 2735| 2948 . 65406 50587 | 31. 60
3143 293 3013 «67565 92257 30. 59
2913 238 272, - 60483 46745 34. 20
282 25 2648 - 59010 - 45640 35. 03
29 26% 2783 - 60154 - 46525 34. 36
303 27 28% - 62007 - 4795 33.33
28,55 273 28, 2375 61895 47871 33, 39
AUCUSU snp iecnetee~ caeneeeemneneees 28Z5| 2748 28. 2500 - 61927 - 47896 33. 38
September...........20--00-ee cece eee 29% 28 ¥| 28. 8375 - 63215 - 48621 32. 70
OCLODER ieee, .aicisis cc goSiicincjsiniciniciciciics 303 293 29.5902 - 64865 - 50169 31.86
2948) 2975 29. 6634 - 65025 «50292 31.79
2985 295 29. 6900 . 65839 - 50922 31.39
DADUAIY sé dade caee easetsnuenceeaaess 2985 273 28. 9735 . 63518 - 49123 32.54
February 285% 275 28, 1592 «61728 47742 33. 48
Marthicacden sos vnewcescececes zeae 28) 2785 27, 9495 - 61628 «47386 33.74
APTI. 5. se saccancewsiweenseessansens 2748 2638] 27. 2995 . 59828 46273 | 34.55
May snictciciericslcniavalecewaide teeaemarres 27% 27%| 27.4189 . 60105, 46487 | 34.39
AB ULTUG 2 crcrerci sisi mints vate Riseryefo seiewmincleisie siecle 27% 272 27.4200 + 60107 - 46468 34.39
Average for fiscal year, 1901 ...|...-......]..-------- 28. 4568 - 62443 «48247 33.13
INDY. scsrecrsisscisecserinae Seep aereeeaarss 274 2633) 26. 9629 - 59107 45715 34. 97
AUGUSt. acc dicscsce dapeeetieeuesseess 278 263 26, 9375 . 59050 . 45671 35.00
September........2.--0-ceseeseeeenee 27 263 26. 9650. - 59110 - 45717 34. 80
October... ..------ +22 cence eee eee e eee 265 263 26. 6157 58344 - 49125 35. 43
Average for 10 months ........|.....0....[...0---0-- 27. 4694 - 60252 - 46570 34. 33

 

 

 

 

 

 

 
24 REPORT OF THE SECRETARY OF WAR.

There is no influence known to-day likely to come into operation in
any part of the world which will cause a large or permanent rise in
the value of silver or in the demand for it. The decision of any gov-
ernment to purchase a few million ounces for coinage purposes might
raise the price a few pennies per ounce, and for this reason some
margin for guarding against such a contingency is desirable between
the par value and the bullion value of the coin issued in the Philip-
pine Islands. The government of Japan, in establishing the ratio of
thirty-two to one between silver and gold, has taken the risk that a
comparatively slight rise in the bullion value of silver would expel its
silver coins and thereby deprive the country of its small money. The
subject of adopting a lighter coin, at the ratio of 24 to 1 or 27 to 1, is
under consideration by some of the leading financiers of that country.
The last-named ratio would not depart widely from that herein recom-
mended for the coinage of the Philippines, which is about 1 to 274.
Such a reasonable margin between the face value of the coin and the
present price of silver bullion seems to guard sufficiently against the
danger of counterfeiting on the one hand and against any probable
rise in the price of silver on the other.

The probability of a large and enduring rise in the price of silver
bullion, as the result of a large and continuous demand for the metal
for coinage purposes, is very slight. The area over which the silver
standard prevailed has been steadily contracting within the present
generation, and even within the last few years. The United States
have adopted the gold standard by law and suspended the purchase of
silver bullion. Russia adopted the gold standard in 1896 and does not
issue any considerable amount of silver coins. Her standard coins are
now of gold. and her coinage of silver, purely for subsidiary purposes,
was only $21,373,189 in 1898, $20,967,769 in 1899, and $3,946,971 in
1900. In the Orient the free coinage of silver was suspended by the
government of British India in 1893, and measures were taken in 1899
to confirm and continue this policy by providing for the coinage of
gold and the creation of a gold reserve. Japan adopted the gold
standard in 1897 and is not likely to depart from it.

Throughout the civilized world the natural tendency has been to
make gold the standard of value, as it has long been the standard of
international trade, because of its conveniences for transfer, and its
adaptability in other respects for large transactions. This tendency
is not likely to be arrested by any cause now discernible, but rather
to be intensified with the elevation of the standard of living, the rise
of wages, and the approximation toward Western business methods of
the Eastern nations. The Orient, once regarded as the great sink of
the precious metals, is likely in future to make less demand than in
the past upon the silver supply and more demand upon the gold sup-°
ply. In the eighteenth century Newton regarded the occasional rise
in the price of silver as always due to an increased demand for the
Indies. This demand continued in some degree to sustain the price of
REPORT OF THE SECRETARY OF WAR. 25

silver down to our own day, because the great quantities of the metal
exported to India, China, and other countries of the Orient, disap-
peared there in hoards, and were rarely returned to the civilized
countries by reexportation. The tendency under modern conditions
is to substitute gold for silver as the object of hoarding, even among
the less advanced nations, and to diminish the special demand which
so Jong operated upon the price of silver bullion in the London mar-
ket. This tendency to hoard gold in preference to silver has already
been noted in the Philippines among the Chinese, the subjects of the
only great country where there is likely to be a considerable demand
for silver for coinage purposes. There seems to be no doubt, there-
fore, that the margin provided in the proposed plan of coinage for the
Philippine Islands between the face value and the bullion value of the
coins is adequate to cover the temporary fluctuations of the silver
market, and that no permanent and important rise in the value of silver
bullion will occur within the limits of a future which it is now possible
to foresee.

METHODS OF MAINTAINING PARITY.

There are two fundamental methods of maintaining a fixed ratio of
value between two different metals. Experience has shown that the
mere fiat of law, that two metals shall bear a fixed relation to each
other when they come into competition in unlimited quantities under
the system of free coinage of both metals, is incapable of maintaining
this fixity of relationship. The two methods which will accomplish
it, when combined with each other, are limitation of the amount of
the coinage and the interchangeability of the cheaper metal with the
standard metal at the ratio fixed by law.

Both these influences have operated in the United States in an
effective manner to keep at par with gold a mass of currency much of
which has been in bullion value far below its face value. Limitation
of the quantity of silver coined under the acts of 1878 and 1890 kept
the standard silver dollars steadily at par with gold, while their bul-
lion value fell with equal steadiness until it stands to day at less than
half the amount at which it formerly stood. The sensitiveness of the
stock of coin to the law of demand and supply was demonstrated when
the quantity of standard silver dollars after 1890 began to exceed the
amount needed in the channels of trade. The surplus of currency began
to go abroad in the form of gold, and the country was threatened with
a plunge to the silver standard and the rupture of the parity between
its silver money and the standard metal. The experience of 1893,
which led to the repeal of the silver-purchase law, was not the first
approach to this danger. A similar excess of silver beyond the amount
demanded in the channels of trade threatened the Treasury in 1885,
and was only averted by the authority given by Congress in 1886 to
26 REPORT OF THE SECRETARY OF WAR.

issue silver certificates of the denominations of $1, $2, and $5. The
demand for small notes being large, the new currency was rapidly dis-
tributed, and the marked excess of silver beyond the amount which
could be absorbed in the channels of trade was postponed until the
crisis of 1893.

Limitation of the quantity of any form of currency brings into
play the same law which governs the value of other commodities—the
law of monopoly or scarcity value. In this way it has been found
possible in the United States to maintain $500,000,000 in silver at par
with gold. In the same way it was attempted in British India in 1893
to give stable value to the silver rupee. That experiment was not
entirely successful, because of the excessive quantity of the silver in
circulation in India. The government succeeded at once, by suspend-
ing the free coinage of silver, in giving an artificial value to the rupee,
which raised it above the value of the bullion which it contained,
although it did not at once raise it to the value prescribed by the
Indian treasury. These experiments, whether only partially or wholly
successful, demonstrate the law that scarcity of supply governs
exchange value. It is this law, coupled with the exchangeability of
the silver coins for gold at the legal parity, which can be relied upon
implicitly to maintain the value of a silver coinage in the Philippine
Islands without regard to the fluctuations in the price of silver bullion.
It is only necessary under these conditions that the quantity of the
coins issued should be determined with good judgment. This can be
left to the discretion of the finance minister of the Philippine govern-
ment, who will always have the light cast upon the requirements of
the situation by the demand upon his gold resources and by the char-
acter of the money paid into the public treasury.

PROVISION FOR A CURRENCY-RESERVE FUND.

While the adaptation of the quantity of the currency to the demands
of trade will do much to maintain its value, the aid of other measures
would be required under the conditions proposed for the Philippine
Islands to maintain exact parity and full confidence in the proposed
silver coins. The most essential of these provisions is the creation of
a gold reserve. Such a reserve should be employed for the redemp-
tion of the silver coins at par, and for reducing the outstanding
volume of silver coin when it becomes redundant. It is reeommended
that such a reserve be constituted to the amount of the seigniorage or
profit derived from the coinage of silver bullion and from the recoin-
age of such Mexican dollars and Filipino dollars as may be left in the
treasury when these coins cease to be legal tender in the islands. The
profit upon the coinage of bullion at the rate proposed would be from
10 to 15 per cent of the face value of the coins issued, and upon an
issue of $0,000,000 pesos would be from 4,000,000 to 6,000,000 pesos.
REPORT OF THE SECRETARY OF WAR. 27

This would be equivalent to a reserve of $2,000,000 to $3,000,000 in
gold against outstanding issues of the value of $20,000,000.

It is probable that a gold reserve of this amount, employed in the
manner which is recommended, would be sufficient to maintain the
value of the silver coins at the parity established by law. A reserve
which was definite in amount would tend to regulate the volume of
currency in circulation in substantially the same manner as it is regu-
lated in gold-standard countries whose mints are open to free coinage
of the standard metal. If the currency became redundant, demands
would be made upon the gold reserve by the presentation of silver for
exchange. This silver would be locked up in the reserve, while the
gold withdrawn would be exported from the country. Thus, by the
decisive influence of foreign exchange, the currency in circulation
would be reduced and would be kept adjusted to the demands of busi-
ness. Ifa change of business conditions created a new demand for
currency, and made the stock in circulation less than the amount
needed to meet the calls upon the banks, the remedy for such a condi-
tion would be the importation of gold and its presentation to the cur-
rency reserve fund for standard silver coins. Thus the system would
work with the same automatic precision as the free movement of gold
between gold-standard countries under the influence of the balance of
trade and exchange. The amount of currency of all classes in the
currency reserve fund would remain fixed. The amount of silver in
the reserve would increase and the gold would be withdrawn, when the
silver currency in circulation was redundant; the amount of silver in
the reserve would decrease, and the gold would increase, when the
demand for silver currency exceeded the supply in circulation. In
case the currency reserve should consist wholly of gold, and be inca-
pable, therefore, of meeting frequent demands for silver in exchange
for gold, this condition would indicate that there was need for a per-
manent increase in the currency of the islands. Such a need would
be met by a prudent minister of finance by a small additional coinage
of silver.

MEANS OF MAINTAINING THE RESERVE FUND.

It has been stated that the seigniorage alone derived from the put-
chase and coinage of silver bullion and the reminting of existing coins
would probably provide a gold fund adequate for all possible demands.
In order, however, to give still stronger assurance of the security and
permanence of the proposed system it is recommended that additional
powers, to be used in case of need, be given to the government of the
Philippine Islands to sell gold drafts, to transfer current funds tempo-
rarily to the currency reserve fund, to issue temporary certificates of
indebtedness, and to buy gold coin or bullion at a moderate premium,
not exceeding the reasonable charges for its importation from abroad.
28 REPORT OF THE SECRETARY OF WAR.

These powers, while somewhat broad in their character, are substan-
tially such as have been found wise in the United States, to insure the
parity of their various forms of money. Reluctance and delay in the
use of such powers have invited evils which would have been averted
by prompt and energetic action. It is probable that the government
of the Philippine Islands, dealing with a coinage stock of small amount,
with a system founded from the outset on scientific principles and sus-
tained by the whole moral power of the Government of the United
States, would rarely, if ever, find it necessary to employ these reserve
powers. The fact that the Government was armed with such powers
would alone be sufficient to obviate the need for their exercise, just as
the nation best prepared for defense is best assured of immunity from
attack.

The authority to sell drafts on the United States or other countries,
payable in those countries in gold, is a banking function which should
not be exercised except in emergencies. The use of such powers
would require a gold credit in the United States. Such a credit is
likely to exist at any time, however, as the result of the deposit of the
funds of the insular treasury in the United States to meet ordinary
drafts, and could be created, if required by a sudden emergency, by a
temporary loan arranged by cable. This power to sell gold drafts
is one of the most useful and efficient weapons which can be placed in
the hands of any banking institution or treasury for maintaining the
soundness of the monetary system. The use of such drafts is the em-
ployment of the natural outlet for surplus currency by offering a
means for transferring funds abroad in the standard’ money of the
commercial world. It is this power which is relied upon chiefly by
the Bank of Java, in the almost entire absence of a gold reserve, in
maintaining the value of the silver coinage of that island. The coin-
age system of Java is based upon the old European ratio of 154 to 1,
and the Bank of Java never carried more than a trifling amount of
gold; but the sale of gold bills on Holland at the usual rate of ex-
change has for many years maintained the parity of the coins with the
gold standard of the Netherlands. The difference has only been such
as was justified by the cost of exchange between two distant countries.
It would not be advisable, in my opinion, for the treasury of the
Philippine Islands to usurp the functions of the banks, under ordinary
conditions, by the sale of such drafts, but if any of the barks are dis-
posed, for any reason, to refuse reasonable and proper cooperation in
the maintenance of the monetary standard, they may be deterred from
such a policy by the knowledge that it is in the power of the Philip-
pine treasury to use a power similar to their own in the exchange
markets of the world.

The other measures recommended for maintaining parity are such
as naturally suggest themselves for such a purpose, and such as have
REPORT OF THE SECRETARY OF WAR. 29

been employed in the United States when they have been needed. The
issue of temporary certificates of indebtedness would be an improve-
ment upon the issue of long-time bonds, because such certificates could
be promptly retired and canceled when the emergency which led to
their issue had passed, from the surplus of treasury receipts, and with-
out saddling the Government with the interest on a permanent debt.
The power to buy gold at a reasonable cost is the same as that con-
ferred upon the Treasury of the United States by section 3700 of the
Revised Statutes, which was reenacted in the gold-standard act of
March 14, 1900.

AMOUNT OF THE CURRENCY-RESERVE FUND.

It is believed that the gold fund provided from the seigniorage, with
the other weapons placed in the hands of the treasury of the Philip-
pine Islands, will be sufficient to maintain the silver coins at par with
gold without frequent resort to other resources. While this reserve
is only 15 per cent of the silver circulation, there can be no doubt that
nearly all of the silver coins would be absorbed in the wholesale trade
of the commercial centers and the retail trade of the provinces, and
there would be only a small percentage under any circumstances which
could weigh unduly upon the money market and come upon the Treas-
ury for redemption in gold. It would be really the small excess of
coin above the constant demand with which the treasury would have
to reckon in guarding its reserve, and this excess would not bear any
excessive proportion to the reserve. Control of the volume of coin-
age by the government would prevent that steady drain upon the

reserve which would follow the offer to exchange Mexican dollars for
gold, or which occurred in the United States when there was a con-
stant increase in the supply of silver after it had long passed the limit
of safety.

If, however, the gold reserve provided from the profits upon silver
coinage should prove insufficient for ordinary demands, the amount of
the reserve could be permanently increased by transferring a definite
sum from the current funds of the Philippine government to the cur-
rency-reserve fund, or by the purchase of the necessary amount of
gold coin or bullion by a similar transfer of funds. The setting aside
of the profits of coinage for a gold reserve permits the carrying out of
the proposed system of coinage without cost to the government of the
Philippine Islands. Any increase in the coinage from time to time
would involve an additional profit, to be added to the currency-reserve
fund. Even if it was found necessary to increase the currency-reserve
fund by from $1,000,000 to $2,000,000, the interest upon the amount
thus invested would impose but a trifling burden upon the budget
of the Philippine Islands, and would be a small price to pay for the
security afforded to commerce and the invitation extended by a sound
30 REPORT OF THE SECRETARY OF WAR.

monetary system to the investment of capital with the resulting
increase in the taxable property and the revenues of the islands.

THE DANGER THAT GOLD WOULD BE HOARDED.

While the currency-reserve fund should be used freely and courage-
ously by the finance minister of the Philippine government in main-
taining the parity of the proposed currency, there are local reasons
why the power to pay gold for silver at par should be in the discretion
of the finance minister rather than that of all holders of thesilver coins.
In an advanced country, where the banking and deposit system is well
developed, the option to demand gold should lie with the holder of the
silver, because he acts from the legitimate motives governing the com-
mercial movement of the precious metals. In the Philippine Islands,
however, and other countries largely occupied by Chinese and other
peoples who hoard and bury coin, encouragement should not be given
to such persons to withdraw gold permanently from circulation. The
danger that this might be done by the Chinese and other persons has
been several times suggested in the course of inquiry as to conditions
in the islands. Thus in the testimony of Mr. Edwin H. Warner, taken
before the Schurman Commission (p. 194), Mr. Warner is thus quoted:

A. As a rule, gold in China commands a fairly good premium. The Chinese
absorbed a good deal of the gold that was current here, and the Chinese very often,
instead of taking away drafts, would take away gold and sell it on the other side.

Q. To what extent was there such a use of gold by the Chinese?—A. I suppose the
Chinese would take away in a year from here, in the old days—we calculated that
they would take about $800,000 in gold, outside of what they took in jars.

It is to be said that the evil can not be so great in its effects as it is
regarded by some, since no person can withdraw gold from use with-
out rendering an equivalent in service or goods. The Chinaman
leaving the Philippines, or hoarding gold within the islands, can
obtain the gold only in exchange for labor or the products of labor.
If he chooses to withdraw his means from active use in the channels
of production he may withdraw them in goods or in silver coins. In
taking gold he only withdraws a different commodity of equivalent
value.

The chief reason for putting restrictions upon the withdrawal of
gold i is the fact that it is the most inviting form of wealth for hoard-
ing, and its free issue in exchange for silver ‘might stimulate hoarding
instead of discouraging it. It seems to be the fact that nearly all the
gold sent from the United States to the Philippine Islands has disap-
peared. It is not now found in general circulation. This would have
been the case in any event under the policy pursued by the Philippine
government in fixing an arbitrary ratio between gold and Mexican
silver dollars, because this course has given a higher value to gold in
comparison with silver in other markets than in the Philippines. With
REPORT OF THE SECRETARY OF WAR. bl

the Mexican dollar at 474 cents in Hongkong every gold piece of $20
sent to Hongkong would bring more than $42 in Mexican silver, which
would exchange when brought back to Manila for $21 in American
money. The repetition of this process with large amounts would soon
place the exporter in command of a fortune. It is probable that these
influences, as much as Chinese hoarding, have resulted in the disap-
pearance of American gold from the channels of circulation in the
Philippines. The same influences would lead to the exportation of
American paper money and have been tending to that result. If gold
has disappeared more completely than paper, it is probably because of
its tangible value to the Oriental mind and its superior advantages for
hoarding derived from its capacity to withstand the dangers of fire,
climate, and corrosion. Asa measure of precaution against the en-
couragement of such hoarding it is recommended that the power to
pay gold for silver be discretionary with the minister of finance of the
Philippine Islands.

DISPOSITION OF THE MEXICAN SILVER DOLLARS.

It is desirable that the new coinage, if authorized by Congress,
should be executed as rapidly as possible from silver bullion pur-
chased in ‘the open market and from such silver coins as may be
received by the Philippine treasury for public dues. The question
of disposing of the Mexican silver dollars, now in circulation in the
Philippine Islands to the amount of some 30,000,000 pesos, is not
likely to offer any serious difficulty if a reasonable time is allowed
for the substitution of the, new currency for the old. It is important
that a sufficient amount of the new coinage should be executed and put
in circulation, or be ready for issue, before the Mexican silver dollars
cease to be legal tender for obligations in the islands.

It is obvious that the Government can not afford under any circum-
stances to treat the Mexican dollar as exchangeable for gold at the
ratio to be fixed for the exchange of the new Philippine coins. The
Mexican dollar is not a coin of the Spanish Government or of the
government which has succeeded that of Spain in the Philippines.
No obligation rests upon the existing government to treat it any more
favorably than is necessary to prevent injustice in the fulfillment
of contract obligations and embarrassments to business. The proc-
ess of substituting the new coins for the Mexican can be carried on
without shock or loss if a date is fixed at a reasonable distance in the
future, from two to three years, when the Mexican coins shall cease
to be legal tender for private debts or public dues. There is no doubt
that the gradual introduction of the new coinage would tend to drive
the Mexican coins to countries where they were still legal tender,
without limit as to time, and would thus, without friction and almost
unobserved, substitute the new coins for the old in general use. The
82 REPORT OF THE SECRETARY OF WAR.

small amount of Mexican silver dollars in the Philippine Islands in
proportion to the entire quantity in circulation in Mexico and the
Orient would prevent the change from exercising any material influ-
ence upon any other monetary center toward which the coins might
be driven by their expulsion from the: Philippines. The problem
would be a serious one, if the quantity of money in the Philippines
was as large as in the United States, how to expel the old coins with-
out causing a redundancy of them in other countries; but the small
amount and the considerable time allowed for the process would make
the influence of the increased supply in other markets almost imper-
ceptible. In so far as the change tended to make the supply of Mexi-
can coins in the world redundant, it would be corrected by the ability
of the owners of silver bullion to withhold it from the Mexican mints.

THE OPENING OF THE MINT AT MANILA.

It is recommended that the mint at Manila be promptly equipped with
the best machinery for coinage, and that one or more competent experts
be sent from the United States to put it in operation as soon as the new
coinage is authorized, if the recommendations of this report meet the
approval of the Government of the United States. Itseemstobe highly
desirable that as much coinage as possible should be executed at
Manila, partly because of the gratification which this would afford to
the Filipino people and also because of the greater promptness with
which additional coinage could be executed when needed. It will not
be possible, however, to strike all of the silver needed at Manila if the
new system is to be in full effect within two years. It is recom-
mended, therefore, that authority be given to the government of the
Philippine Islands to negotiate with the Secretary of the Treasury
and the Director of the Mint of the United States for the execution of
a part of this coinage at the mints of the United States from devices
and dies to be selected and adopted by the Philippine government. <A
special committee of the Philippine Commission was appointed during
my presence in Manila to consider the subject of appropriate devices
for a new Philippine coin, if one is authorized by the Government of
the United States. When the new coinage system has once been fairly
inaugurated, however, there is no reason why the facilities of the mint
at Manila should not be adequate for such additional coinage as may
be required from time to time.to meet the growth of business in the
Islands. An examination of the mint and a special report upon its
condition were ordered by the Philippine Commission in 1900, and a
report was made showing that work could be done with promptness
and efficiency with the addition of some needed machinery.

In the purchase of silver bullion for the new coinage it is important
that the government of the Philippine Islands should not be at the
REPORT OF THE SECRETARY OF WAR. 33

mercy of speculators in the silver market. For this reason it is rec-
ommended that authority be given for the purchase of silver bullion
from the Secretary of the Treasury of the United States by the gov-
ernment of the Philippine Islands, at a rate not less than the average
market price of silver for the fiscal year 1900. This will give the
option to the government of the Philippine Islands of buying in the
open market, if silver falls below the price of 1900, or of buying of
the United States Treasury if an attempt is made to force the market
price above the price of 1900. <A definite limit is suggested for the
minimum price at which the Secretary of the Treasury may sell silver
bullion to the government of the Philippine Islands, since the absence
of such a limit might lead that officer to doubt his legal authority to
sell below the market price. A provision of this character will almost
certainly protect the Philippine government against a fictitious corner
in silver bullion, to which it might be exposed if compelled to pur-
chase a considerable quantity of silver within a fixed time in the open
market. There is nothing in the amount required for the Philippines
which should cause a serious and permanent advance in the price of
silver. It is probable that a portion of the silver coins received by
the treasury, or left on its hands when Mexican silver dollars cease
to be receivable for public dues, will be available for conversion into
the new coins. This will diminish the demand upon the bullion mar-
ket, and future demands for increase of the currency of the Philippines
will be too small to have any material influence upon the price of
silver in London or New York.

PROVISION FOR SUBSIDIARY AND MINOR COINS.

The coinage of the silver peso should be accompanied by a coinage
of subsidiary silver and minor coins corresponding to the needs of
the community. There is at present a great dearth of small silver
and a still greater dearth of minor coins in the Philippines. The coins
in use are chiefly those which were coined from time to time by the
Spanish Government in pieces of 50 centavos, 20 centavos, and 10 cen-
tavos. It is recommended that these denominations be retained,
because they are the denominations to which the people are accus-
tomed. The piece of 20 centavos corresponds to the piece of corre-
sponding size and dimension in all the countries of the Latin Union.
It corresponds also with the coins used in China, Japan, and the
French colonies in the East, where the decimal system is followed.
Its continuance would accord more, therefore, with the customs of the
people of the East than the adoption of a new denomination of 25
centavos.

Minor coins have almost wholly disappeared from circulation in the
Philippines because they have a higher exchange value in Spain than
in the islands. The currency of the Spanish Peninsula, while not

11577—01——3
34 REPORT OF THE SECRETARY OF WAR.

redeemable in gold on demand, is above the bullion value of silver
and has been for sometime in the neighborhood of 75 cents in gold to
5 pesetas, of which the nominal value is 96.5 cents in American gold.
Considerable sums in minor coin of this character are in the possession
of the Government of the United States and of the Philippine Islands,
which were seized from Spanish offices upon the occupation of the islands
by the forces of the United States. It has not been thought expedient
to put these in circulation because of the certainty that their higher
exchange value in Spain would result in their exportation within a short
time and leave the islands as bare of small money as before. These
coins can be sold to exchange brokers for transmission to Spain at con-
siderable profit over their face value in the Philippines, and such a sale
has been recommended by the Philippine Commission in their annual
report. The proper bullion for new coins, whether of copper, nickel,
or bronze, can be purchased ‘in the open market at a rate which will
yield a considerable profit from the coinage. Full provision for such
coinage can be made, therefore, without permanent expense to the
government of the Philippine Islands.

The scarcity of minor coins isa greater hardship to the natives of
small means than to Americans and Europeans in the islands, because
of the small transactions in which natives engage in buying their food
and other necessaries. These transactions require that money shall be
in small subdivisions. The purchases made by Americans and Euro-
peans are usually in multiples of 10 centavos, equivalent to 5 cents in
gold, but it is essential that coins of smaller value be provided for the
natives in order to avert serious loss and embarrassment in their daily
life.

JJ.—Txe RecunaTIon oF BANKING.

One of the most obvious and pressing needs of the Philippine
Islands is an increase of banking facilities and a larger supply of
paper currency. Both of these needs are constantly forced upon
one’s attention in conversation with business men and by observation
of the conditions of both retail and wholesale trade. There is a
strong desire among Americans that encouragement should be afforded
by legislation for the opening of American banks, which shall do busi-
ness according to American methods, and afford a convenient’ means
of increasing trade with the United States. Among the officers of
the Army and Navy, and other public officials, there is also a strong
desire for the creation of a legal depositary for United States funds in
the custody of public officials. Al these ends appear to be legitimate,
and can be promoted by legislation so far as such legislation will tend
to remove the obstacles imposed by law to the extension of banking
facilities.

Such banks as are needed can not be created in the islands under
REPORT OF THE SECRETARY OF WAR. 35

present conditions, because of the prohibition upon the grant of fran-
chises embodied in the last Army appropriation act. It is doubtful
whether, even in the absence of that restriction, they could be con-
stituted under the national banking act and made responsible to the
Comptroller of the Currency without direct authority of Congress.
In any case, no national bank of the United States can lawfully main-
tain a branch under the interpretation given by every succeeding
Comptroller of the Currency to the national banking law. It is not
possible, therefore, under existing law for any national bank to be
established in the Philippine Islands, nor for any national bank of the
United States to establish a branch in the Philippine Islands.

OUTLINES OF THE PLAN PROPOSED.

For these reasons it is recommended that the national banking act
be extended, with certain modifications, to the Philippine Islands, and
that these modifications include, as the vital conditions of the useful-
ness and success of American banks, the power to establish branches
and to issue circulating notes. This subject was considered in detail
by the Philippine Commission, and a plan was agreed upon, upon my
recommendation, acceptable -to the commission. Its outlines are as
follows:

1. That provision should be made by Congress that no person, firm,
or corporation shall be permitted to conduct a banking business, or to
establish or maintain a branch bank, in the Philippine Islands after
June 30, 1902, without the written approval of the government of said
islands.

2. That full power should be conferred upon the government of
the Philippine Islands to frame and enforce regulations regarding the
business of banking, including the appointment of examiners, and the
right to have access through such examiners to all the records and
assets of all banks doing business in the Philippines.

3. That the laws relating to national banking associations in the
United States should be extended ‘to the Philippine Islands, with cer-
tain important modifications regarding the creation of branches and
the issue of circulating notes.

4. That national banks established in the Philippine Islands and
national banks of the United States should have authority, with the
approval of the government of the Philippine Islands, to establish
branches in any part of said islands and in the United States, but that
branches in the United States should not be permitted to discount
commercial bills, or to make advances upon securities when such trans-
actions are carried on wholly within the United States.

5. That circulating notes may be issued by the Comptroller of the
Currency of the United States, under the conditions hereinafter set
forth, to any national bank established or having branches in the Philip-
36 REPORT OF THE SECRETARY OF WAR.

pine Islands, to the amount of 50 pet cent of the paid-up capital of
said bank without the deposit of United States bonds required by the
national banking law, but without suspending the provision that bonds
shall be deposited to the amount, of one-fourth of the capital, but not
exceeding $50,000.

6. That the conditions governing the issue of such notes shall be
that they shall constitute a first lien upon all the assets of the issuing
bank except public funds; that they shall pay a tax at the rate of
one-half of 1 per cent per annum into a guaranty fund; that they
shall be protected by a cash reserve equal to 25 per cent of the amount
of the notes outstanding, of which one-half may be in first-class gold
‘bills or on deposit in some other bank; and that notes shall not be
issued in denominations of less than 5 pesos.

%. That the power to issue notes should not be granted to any bank
having a capital of less than $500,000.

8. That the guaranty fund constituted by the payment of the tax
upon circulation should be employed for the immediate redemption of
the notes of failed banks, but that such fund should have a lien upon
the assets of a failed bank for the amount thus paid for the redemption
of the notes.

9. That the Spanish-Filipino Bank should be required to comply
with the requirements regarding circulation governing national banks,
except that it may maintain a circulation equal to the whole of its
paid-up capital instead of 50 per cent of such capital.

10. That mortgage banks should be authorized by the government
of the Philippine Islands for making loans upon real estate. and agri-
cultural products, and that other banks having a capital of $1,000,000
or more may set aside an amount not exceeding one-fourth of their
paid-up capital for mortgage business.

11. That mortgage banks should be permitted to loan upon real
estate not more than one-third of its value, according to impartial
appraisement, and should not be permitted to loan more than one-
tenth of their aggregate resources to any one person, firm, or cor-
poration.

12. That the Treasury of the United States should be authorized to
receive deposits from the government of the Philippine Islands, and
‘that the treasuries of the two Governments should be authorized to
carry on any convenient and proper transactions with each other.

13. That the treasury of the Philippine Islands and its branches
may be designated by the Secretary of War as legal depositories of
public money.

POWERS OF THE LOCAL GOVERNMENT OVER BANKING.

The regulation of banking in the Philippine Islands is complicated
to some extent by the several classes of banks already doing business
REPORT OF THE SECRETARY OF WAR. 37

there, and by the necessity of making different provisions for banks
engaged in different classes of business. It is proposed in the plan
outlined to give general authority to the government of the Philippine
Islands to regulate banking in the islands. If banking were a purely
local question, it might be better in some respects to leave to the gov-
ernment of the Philippine Islands the determination of all the details
governing banking in the islands. It seems to be desirable, however,
that authority to establish such regulations should be specifically con-
ferred by Congress upon such government in order that its powers
shall be beyond question and that the regulations framed shall be
established in a legal public manner, instead of depending merely
upon the order of an executive department.

Another reason justifies special action by Congress in regard to
banks of issue and other large commercial banks. This is the fact
that the extension of the national banking system to the islands will
facilitate trade between the islands and the United States to an extent
which would not be possible under a system of purely local banking.
If national banks are to be established in the Philippine Islands, it is
first necessary that the laws of the United States should be so amended
as to permit national banks to engage in business legally in the islands,
and that the authority of the Comptroller of the Currency should
extend over such banks with the same force and the same degree of
scrutiny as over banks in the United States.

It seems proper to provide that the authority of the insular govern-
ment shall be absolute as to what banks shall enter upon business in
the Philippine Islands. This authority will not conflict with that of the
Comptroller of the Currency, since his approval will be required, in
addition to that of the Philippine government, before any set of per-
sons can assume in the Philippine Islands the functions and privileges
of a national-banking corporation. It also seems proper that the gov-
ernment of the Philippine Islands should have authority of their own
to examine and regulate banks doing business in the islands, in addition
to the authority exercised by the Comptroller of the Currency. It is
contemplated that the insular government shall exercise the same con-
trol over banks other than national which is exercised in the various
States by the State banking departments. This will involve the
appointment of bank examiners, who may or may not be the same per-
sons as those appointed by the Comptroller of the Currency for the
examination of national banks, according to the requirements of local
conditions in the islands. It is anticipated that the activities of the
insular officials will be directed chiefly to the supervision of banks other
than national, but circumstances might arise inthe conduct of national
banks or in local banking conditions, which would not come promptly
under the notice of the Comptroller of the Currency and in which
interference by them would be justified by its imminent necessity.
38 REPORT OF THE SECRETARY OF WAR.

CLASSES OF BANKS TO BE DEALT WITH.

The classes of banks with which Congress and the government of
the Philippine Islands will have to deal may be divided arbitrarily into
four:

1. National banks of the United States, which may establish branches
in the Philippine Islands.

2. National banks whose head officers are established in the Philip-
pine Islands. , ,

3. Banks not national issuing notes in the Philippine Islands.

4. All other banks doing business in the Philippines, including the
existing foreign banks, American and foreign loan and trust companies,
mortgage banks, savings banks, and all other forms of investment and
finance companies.

The regulations governing the first two classes of banks, both of
which would be established under the national banking law, should be
substantially the same. The difference between them consists in the
fact that the officers and directors of the first class would be chiefly in
the United States, while those of the second class would be chiefly in
the Philippine Islands—in each case where their head office might be
established. Some practical differences would arise from the fact that
if a national bank should be established in the Philippine Islands its
chief business would probably be done there rather than in the United
States, while a national bank of the United States having branches in
the Philippines would probably continue to have the more important
part of its business within the limits of the Union. It is obvious,
however, that there should not be a divided authority as to the direct
supervision of these banks, and that such supervision should be exer-
cised by the Comptroller of the Currency of the United States, since
authority for a bank of the United States to do business in the Philip-
pines without his supervision would open the door for frauds and
losses in the islands, causing loss to the American depositors and
shareholders of the bank, and a similar lack of supervision in the
United States over the business done there by a branch of a Filipino
bank would open the door likewise to losses by American depositors
and by the shareholders in the Philippines.

It is recommended, therefore, that the national banking law be
extended to the Philippine Islands, but with several important modi-
fications. The most important of these, beyond those which are merely
incidental to the extension, are the power to establish branches, the
power to issue notes under different conditions from those inposed by
the present national banking law, and the authority to devote a small
portion of capital to mortgage loans. Among the incidental changes
recommended is the amendment of the requirements as to the residence
of directors, so that any resident of the Philippine Islands may law-
fully act as director of a national bank engaged in business in the
Philippines.
REPORT OF THE SECRETARY OF WAR. 39

POWER OF FOREIGN BANKS IN THE ORIENT.

An American bank doing business in the Orient will be confronted
by foreign competitors long established, of unquestioned credit, and
possessing great resources. English capital for many years dominated
the colonial and foreign banking field, especially in the East, but has
recently encountered powerful competition in French, German, Bel-
gian, and Russian institutions, or in banks deriving.their capital from
these sources. No less than nine large banks do business in Hong-
kong, and other powerful institutions are scattered over Japan and
the Russian and French establishments in Eastern Asia. A few of
the leading banks doing business in the East, with their capital and
reserve funds, appear in the following table:

 

 

Capital and
reserve
Capital and reserve (local (equivalent
currency). in United
States cur-
rency).
Hongkong and Shanghai Bank ...........-..----------- $23,700,000 (Mexican) ......... $11, 500, 000

  

 

Chartered Bank of India, Australia, and China 1,500,000 (pounds sterling) .... 7,500, 000
PDeutsch-Asiatische Bank...........--------------- .---| 5,000,000 (Shanghai taels)-..... 5, 000, 000
Imperial Bank of China... -++-| 2,500,000 (taels) ...----........ 5, 000, 000
Mercantile Bank of India .................2..2-0202---6- 602,500 (pounds sterling) ....-. 3, 000, 000
Yokohama Specie Bank 26,500}000 (YOM) sce ata seicwiesaaier 18, 000, 000
National Bank of China 824,374 (pounds sterling) ...... 1, 500, 000
The Bank Of Japa. secemeseecemescmeawqaasseee ee wemewss 44,600,000 (yen)......----++---- 22, 000, 000

 

 

Japanese private banks ......-......-20secseecceceseenes 209,973,431 (yem)....--.-..2..05 104, 000, 000

S.

These banks represent only a part of the banking power available in
the Orient for competition with American institutions. London is still
the center of foreign banking enterprise, and in that city are the head
offices or the London offices of some thirty large banks organized to do
business in British dependencies and foreign countries, independently
of the banks organizetl chiefly for domestic business in Great Britain
and Ireland. The deposits of these colonial and foreign banks having
offices in London are about £200,000,000, and represent an advance of
nearly a thousand millions of dollars of English money for the devel-
opment of trade in the British colonies and in foreign countries.

It is this great banking power against which American banks must
contend in seeking business in the Orient. It is obvious that if Amer-
ican banks are to make head against such competition they should be
benefited by all the privileges and armed with all the proper powers
which Congress can confer. These foreign banks derive their power
largely from their ability to establish branches throughout the world.
There is hardly any Government but that of the United States which
prohibits the creation of branch banks and limits its national banking
40 REPORT OF THE SECRETARY OF WAR.

institutions to a single office for doing business. , Some idea of the
use which has been made of the power to establish branches in the
leading commercial countries of the world may be obtained from the
following list of the number of banking offices in different countries:

Number of

banking offices.
English: pankssazstets elie cet sA rn tah aoe hoes uaboesces 4, 741
Scotch: bankseiic5 cei eie ese e ene tenn See trees see scieemes 1, 081
Trish batiks, Jones cosine dt ate hye ee eee tats oo atevaneicineee 678
Baik ot rane s: excceds ics cpp ad ances oe Se eho ees Pea teaee 125
Imperial Bank of Germany .............-.----------- eee ee ee eee eee eee 330
Bank of Belgium, 2-22). sav cassasieatecdde so aces and aud bem tate ckeeseles 40
Canadian: Dan k6iccccu225 Saaannewuneexnddcsce nas haredese comets castes 500

These figures show that the power to establish branches has been freely
availed of in all these countries. The figures are incomplete for France,
and Germany, because they relate only to the central bank of issue and
do not include the branches of the other large commercial banks of
those countries. The banking business of France is almost wholly con-
centrated in the hands of five large institutions with head offices in
Paris and with branches scattered throughout the Republic, but the
exact number of branches is not available. In Germany also many
powerful financial institutions compete with the Imperial Bank, and
have their branches in every part of the Empire. The same is true,
though in a less degree, of Austria-Hungary and of every other
country of Europe.

The value of these branches is not merely in giving great power to
the central bank, but in affording a channel for the diversion of capital
from the points where it is least needed to those where it is most
needed. A striking illustration of this transfer of capital is afforded
by the history of the Australian banks. Most of them have their head
offices nominally in Australia, but all have branch offices in Great
Britain. By means of these British branches they have been able to
gather up many millions of the savings of British investors and transfer
them to Australia for investment on more liberal terms than could
possibly be obtained by their employment in Great Britain.

The analogy between the relations of Great Britain and Australia to
those of the United States and the Philippines is plain. If American
banks are enabled to establish branches in the Philippine Islands they
will be able to transfer there for proper banking loans large portions
of their deposits which now lie idle on their hands and which afford
but a small return or none. It would be necessary, of course, .that
proper precautions should be taken that loans should not be made
for long terms or upon improper security. This would be regu-
lated by the national banking law in the case of national banks, and
would be governed by arrangements for time deposits in the case
REPORT OF THE SECRETARY OF WAR. 41

of banks not restricted in the character of their loans by the national
banking law and which desired to make investments for longer terms
than that law allows.

Reliance upon small and isolated banks for the development of the
Philippines and for the management of American business there would
involve many other objections than their inherent weakness and isola-
tion. They would be unable to attract large deposits of American
capital seeking safe employment, and would be limited in the resources
they disposed of to their own capital and the local funds of depositors
in the Philippines. Scarcity of capital would continue under such a
system to retard the development of the islands, and the lack of close
association with other American banks would place the local banks of
the Philippines more or less at the mercy of their powerful foreign
rivals.

THE BENEFITS OF BRANCH BANKING.

The close association which exists between a bank and its branches
would not be compensated by the relations which are usually estab-
lished between a local bank and its correspondents in commercial cen-
ters. A system of correspondents would serve to some extent for
dealing in bills of exchange, but a bank which was a correspondent
and nothing more could not be relied upon to make inquiries as to
credits and render that constant assistance which would be rendered
by a branch bank to its head office. The cooperation, sympathy, and
aid in every banking detail and in behalf of every patron could not be
expected from a correspondent bank which would be offered by a
parent or branch bank. Such cooperation might be obtained to some
degree by common ownership of independent banks in the United
States and in the Philippines, as is already the case in the United
States with certain large city banks whose controlling shareholders
own country banks, but such community of ownership is in effect an
evasion of the present national banking law, and is attended with diffi-
culties which would not surround the open and acknowledged relation-
ship between a bank and its branches. In the matter of transferring
American capital to the Philippines for judicious employment there,
community of ownership would fail to meet the requirements of the
situation, and if such transfers were made in large amounts they would
be a subject of just criticism by the shareholders of the lending bank
and by the bank officials of the United States.

In recommending that national banks of the United States be per-
mitted to establish branches in the United States, I am aware that
strong feeling against such a proposal is likely to develop among
some of the smaller country banks if the power to create branches
is made general in its scope. For this reason, it is recommended
42 REPORT OF THE SECRETARY OF WAR.

that it be limited in some way which will prevent the extension
of branches for banking business of a purely domestic character
into the smaller towns and cities. This can best be accomplished by
providing that such branches within the United States shall not deal in
domestic commercial paper nor loan to residents of their locality in
the United States upon negotiable securities. This will cut off branch
banks from the great classes of business represented by loans and dis-
counts, and will make it unprofitable to establish such branches where
the amount of foreign business is small. It will be possible under
such a provision for branch banks to accept deposits for transfer to
the Philippines and to conduct foreign exchange business, but not to
compete with local banks in their usual and most lucrative fields. If "
a further restriction were desired upon the power of national banks
to establish branches, it might be found in prohibiting such branches
in communities of less than 100,000 population.

IMPORTANCE OF LARGE BANKING CAPITAL.

A small national bank located at Manila or elsewhere in the Philip-
pines would be of little value in promoting and sustaining those large
business enterprises which are being projected in the belief that they
will be sanctioned by Congress and by the government of the islands,
Only a bank having branches at the principal places in the islands, in
the principal cities of the United States, and at foreign commercial
centers would fulfill all the conditions required for the financial
development of the country. These conditions are fulfilled in part by
the two English banks already doing business at Manila—the Hong-
kong and Shanghai Banking Corporation and the Chartered Bank of
India, Australia, and China. These banks, however, as appears in the
testimony of the managers, annexed to this report, limit their busi-
ness chiefly to the purchase and sale of foreign bills of exchange.
They do not make advances to any large extent even upon securities to
the wholesale and retail traders of the islands, and to a still less extent
do they buy domestic bills of exchange. All those functions, among
others, could be performed by an American bank which are not now
performed by the English banks, and, by their own statements, are not
among the classes of business which they seek. A bank without
branches and with small capital, however, would be of little avail in
promoting the commerce of the Philippines with the United States
and foreign countries, and would be exposed to great risk from the
powerful competition-of the foreign banks.

It is therefore recommended that Congress in extending the national
banking act to the Philippine Islands authorize the creation of branch
banks, without limit as to number or as to their distribution in the
Philippine Islands or in foreign countries. It would be prudent also
to impose 2 minimum limit upon the capital of banks authorized to
REPORT OF THE SECRETARY OF WAR. 43

establish branches. This limit should not be less than $500,000. A
bank with even larger capital would be more effective than one with
the capital of half a million; but if the privilege of banking in the
Philippines is to be thrown open to all applicants who are properly
qualified under the national hanking law, the sum of $500,000 is per-
haps as high as the limit should be placed.

THE PRESSING NEED FOR PAPER CURRENCY.

The paper currency of the Philippines is now limited to the issues
of the Spanish-Filipino Bank, and such amounts of American paper
money as may happen to come to the islands through the operations
ot the War Department and in the pockets of visitors. This American
money rapidly disappears, because it possesses a higher exchange value
in Mexican silver at Hongkong and in other places than at Manila.
The act of the Philippine government, fixing the value of the American
dollar at $2 in Mexican silver, has not seriously affected the quotations
of Mexican dollars in other places and has not prevented their fall
below 50 cents in gold since the cessation of the acute demand for
them in the summer and autumn of the year 1900 for the military
operations in China. The quotations of Mexican silver dollars have
tended to fall to the level of silver bullion, and have fallen below the
official rate fixed at Manila. This fact has inevitably tended to drain
American money rapidly away from the islands, and even such quan-
tities as remain in the hands of disbursing officers are not all of the
denominations required for the convenience of trade. The tendency
of American currency to leave the islands will persist so long as pres-
ent conditions continue, and will probably not be seriously arrested if
a sufficient quantity of distinctive silver coins are issued as the basis
for monetary operations in the islands.

The Spanish-Filipino Bank has claimed the privilege, under a grant
from the Government of Spain, of issuing circulating notes to the
amount of three times its paid-up capital. This paid-up capital is
$1,500,000 in Mexican currency, entitling the bank under this claim
to issue $4,500,000 in circulating notes. The actual issues, according
to a statement made by the directors of the bank before Judge Ide,
the secretary of finance and justice, at a hearing given on September
9, 1901, never exceeded 3,400,000 pesos. These issues have recently
been reduced by degrees to about 2,100,000 pesos, and the directors of
the bank have expressed their willingness to conform to the wish of
the Philippine government that the issues should be reduced to the
amount of the paid-up capital, or to 1,500,000 pesos. This is equiva-
lent to only $750,000 in gold at the official rate of exchange established
at Manila, and even this amount would be subject to deduction if
allowance were made for notes lost or destroyed, which still figure as
44 REPORT OF THE SECRETARY OF WAR.

a part of the outstanding obligations of the bank. Leaving aside the
American-money which tends to disappear under present conditions,
these issues of the Spanish-Filipino Bank, amounting to $1,000,000 or
less, constitute the only paper money available in the Philippine
Islands.

It is obvious that this small quantity of paper is insufficient for the
needs of an active trade. This is preeminently true in a country
where silver is the usual money in use and payments of large amounts
can not be economically made in gold coin, as they can be where gold
coins are in universal use. Much complaint is made of the difficulty
of carrying even moderate amounts in Mexican silver dollars,
especially since these coins have come to represent a value of only
50 cents in gold. The fact that the demand for paper is acute is
indicated by the difficulty which the directors of the Spanish-Filipino
Bank have encountered in reducing their paper issues. Nearly all the
notes in circulation are much worn and defaced, but they are not paid
into the bank for reissue, because it is known that the bank is pur-
suing the policy of reducing its paper issues. As stated by one of the
directors of the bank at the hearing already referred to, the notes are
a continuing obligation, payable on demand, but without set date of
payment. It is not possible to call them in when their holders do not
choose to present them, unless by notice of repudiation after a certain
date which would be contrary to the principles upon which notes are
issued by solvent banks.

THE PAPER CIRCULATION AT OTHER ORIENTAL PORTS.

The fact that the present paper circulation in the Philippine Islands
is inadequate is a matter of everyday observation among business
men and in retail transactions. The convenience of an adequate circu-
lation is illustrated in a striking manner by comparison of the condi-
tions in Manila with those in other Oriental countries. The popula-
tion of the city of Hongkong, the nearest commercial competitor of
Manila, is estimated by the British officials at about 300,000. This
is only 50,000 in excess of the population of the city of Manila as
estimated by the health officials of the Philippine government. The
Mexican silver dollar is the standard unit of value in Hongkong and
is in circulation there in large amounts. The monetary circulation of
Hongkong also enjoys a much larger supply of subsidiary silver than
is now in circulation in Manila and its neighborhood. Notwithstand-
ing this considerable stock of silver coin, use is found in Hongkong
for note issues amounting to about 10,000,000 pesos in Mexican cur-
rency. The issues of the Hongkong and Shanghai Bank at the close
of August last and the average issues of the Chartered Bank of India,
Australia, and China for the quarter ending September 30, at their
REPORT OF THE SECRETARY OF WAR. 45

Hongkong branches, as furnished by the officials of those banks, are as
follows:

 

 

 

Denomi-
nations of |Hongkong and| Chartered
notes, Shanghai Bank of
(Mexican Bank. India, ete.
currency.)
$1 $226;,000! | acs sie sinsctarereare-sinisis
5 1, 350, 000 $200, 000
10 1, 828, 000 285, 000
25 185, 000 150, 000
50 1, 600, 000 215, 000
100 1, 700, 000 1, 200, 000
500 1, 500, 000 950, 000
8, 889, 000 8, 000, 000

 

 

 

 

 

A circulation of over $11,000,000 among 300,000 people is an aver-
age per capita of about 36 pesos, or about $18 in gold. This is in
addition to the circulation of silver dollars and subsidiary silver coin..
This is in striking contrast with the paper circulation of the Spanish-
Filipino Bank, which amounts to about $8 Mexican or $4 gold, even if
the circulation were confined within the city of Manila, and which it is
proposed to reduce to less than $3 in gold. It is no doubt to be con-
sidered that many of the notes issued in Hongkong circulate in Canton
and the surrounding country, but it is also a fact that the notes of the
Spanish-Filipino Bank circulate throughout the Philippine Archi-
pelago, and some even reach foreign countries in the processes of
international trade. This comparison would seem to make clear the
pressing need of providing some substitute for the notes of the Span-
ish-Filipino Bank as their volume is reduced, and for further issues
of paper currency as business increases in the Philippine Islands.
There exists a strong desire among Americans in the islands that the
new issues shall be afforded by American banks.

. NECESSITY OF LIBERAL PROVISIONS FOR NOTE ISSUES.

Ability to obtain a larger volume of paper currency is not only
vital to the prosperity of the Philippines, but the privilege of issuing
notes upon a profitable basis is one of the most effective weapons of
competition with the foreign banks which can be put into the hands of
American banks doing business in the islands. This weapon will not
be supplied by the power to issue notes under the provisions of the
present national banking law, requiring the deposit in the Treasury of
United States bonds for the full face value of the notes issued. This
privilege would certainly not be availed of sufficiently to supply the
paper circulation urgently needed in the Philippine Islands. The reason
why it would not be availed of is found in the relatively small profit
obtained upon circulation when thus secured, with the various restric-
46. REPORT OF THE SECRETARY OF WAR.

tions which govern it, when compared with the profit obtained by the
direct loan of the capital without the formalities attending its invest-
ment in bonds.

Circulating notes will not be issued by any bank under condi-
tions which afford no profit. The contraction of the bank cur-
rency which went on for many years, even in the United States,
because of the high price of bonds, is a slight indication of the influ-
ences which would operate on an American bank doing business in a
country where a much higher rate of return can be earned by capital
than under present conditions at home. The obstacles to issuing notes
in the Philippines based upon United States bonds would be greater
than in the United States, because of the absence of a local bond mar-
ket, the necessity of obtaining bonds from long distances at high
prices, and. the delay which would occur in reducing circulation and
getting possession of the bonds when market conditions suggested it.
It is not an unreasonable assertion that American banks, clothed only
with the power of issuing notes under the conditions of the present
national banking law, would, because of these obstacles, entirely refrain
from issuing notes and would leave the islands without any increase
-in this class of paper currency.

It is recommended that different and more liberal provisions be
made in respect to note issue, holding out sufficient prospect of profit
to induce national banks established in the Philippines to supply the
pressing need for currency. There can be no question of the ‘safety
of such issues in the case of banks with the large capital which has
_been suggested in this report, with their profits and losses diffused
‘over different sections and different countries through the system of
branches. The colonial and foreign banks having their head offices in
London issue notes upon their general assets in various countries of the
Orient, Africa, and South America without depositing special pledges
with the British Government or with the local government where they
are established for the security of these notes. The reputation and
resources of the bank are in many cases superior to any reputation for
security which they would derive from having deposited any part of
their assets as pledges with the local governments.

The deposit of the assets of a bank in a government office or in any
place out of its own custody deprives the bank of that quick command
of its resources which is one of the fundamental principles of safe
commercial banking. Even where the English law sometimes requires
banks to hold certain classes of assets against their issues of notes,
these assets are held in most cases in the bank itself, and the bank is
not required to part with control over its resources. The same is
true of all the great banking institutions of the European continent.
The special securities required for the protection of circulation are
held by the bank itself, and are not segregated in the public treasury
REPORT OF THE SECRETARY OF WAR. 47

from its banking resources. Whatever distinction may be drawn
between the business of these banks, because of their size and the
importance of their transactions, and the business of local banks in
the United States will not lie against the class of banks to be estab-
lished in the Philippine Islands if the recommendations of this report
are adopted, because such banks will conform more closely to the great
banks of issue in Europe than to the isolated banks of modest capital
in the small towns and cities of the United States.

A circulating note is only another form of certified check put into
a form which permits its ready transfer from hand to hand without
indorsement. As an obligation of the bank it differs in no essential
respect from the obligation to a depositor, except where its character
is strengthened by making it a preferred lien upon all the assets.
Both the deposit obligation and the note obligation are liabilities pay-
able on demand. If there is any distinction, it is in favor of the note
obligation, because a note circulates through many hands and is less
likely than a deposit obligation to be a subject of frequent demands
upon the bank. The power to issue notes instead of issuing obliga-
tions in the form of deposit receipts is important in an undeveloped
country, because the people of such a country are less accustomed
than in a fully developed country to the use of other forms of credit.
To deprive them of that form of credit is to discriminate against those
sections which desire notes and in favor of those sections which make
use chiefly of deposit.accounts and checks. There is no reason by
which this discrimination can be justified unless it is required by public
security and convenience. Upon these grounds it is only necessary to
provide that the power to issue notes shall be safeguarded in a manner
which will insure the redemption of the notes in full in case of the
failure or liquidation of the bank by which they are issued.

SAFEGUARDS SUGGESTED FOR NOTE ISSUES.

The safeguards recommended in regard to the issue of circulating
notes by banks in the Philippine Islands are:

1. That notes shall not be issued except by banks with a capital of
$500,000 or more.

2. That notes shall be a first lien upon all the assets of the issuing
bank. ‘

3. That notes shall not be issued beyond the amount of 50 per cent
of the paid-up capital of the bank.

4, That a reserve shall be kept in cash or in cash obligations equal
to 25 per cent of the amount of the circulation outstanding.

5. That banks issuing notes shall continue to make the deposit of
$50,000 in United States bonds required from national banks with a
capital of $200,000 or more as a preliminary to beginning business,
and that such bonds shall constitute a part of the security for note
issues.
48 REPORT OF THE SECRETARY OF WAR.

6. That a tax at the rate of one-half of 1 per cent per annum shall
be paid upon the circulation actually outstanding, whose proceeds shall
constitute a safety fund to be used, if necessary, for the redemption
of notes of failed banks beyond the amount provided by the first lien
upon their assets.

7. That bank notes shall not be issued below the denomination of 5
pesos, or $2.50.

These safeguards are abundantly sufficient, judged by the history of
banks of issue during the last century in the United, States and in
other countries, to insure the redemption of the notes of failed banks
in full in all cases. The effects of limiting the issue of notes to large
banks have already been pointed out.

The provision that the notes shall be a first lien upon the assets
would in itself provide for the payment of the notes in full in almost
every case, without permanent drafts upon the guaranty fund. The
average dividends paid by national banks in the United States which
have been placed in the hands of receivers have been about 75 per cent.
The assets have rarely fallen below the amount required to pay the full
value of the circulating notes. If this is the experience with several
thousands of isolated banks, some of them of very slender resources
and conducted by persons with limited banking. experience, a much bet-
ter showing would obviously be made by strong banks with widely
diffused resources and such a limited power of issue as is proposed
for the Philippine Islands. :

The limitation of the amount of notes issued to 50 per cent of the
capital of the bank is a precaution which goes beyond that of the
banking law of Canada, where the system has been most effectively
worked out of issuing notes upon the general credit of the banks.
Banks are there permitted to issue notes to the full amount of their
capital and are not required to deposit any pledges in the custody of
the Dominion Government, except the bank-note guaranty fund,
which is constituted from the proceeds of the tax upon circulation.
In the few cases of failure which have occurred since the creation of
the guaranty fund, the notes of the Canadian banks have remained
constantly at par and have heen redeemed promptly from the fund
without seriously reducing its amount. The Government has been
able in nearly every case to recover from the assets of the bank on
behalf of the fund a sufficient amount to cover all the amounts dis-
bursed for the redemption of the notes.

SUSTAINING THE GUARANTY FUND BY TAXATION.

The sufficiency of the rate of taxation provided for maintaining the
guaranty fund may be judged from the history of the national banking
system of the United States. ‘The rate of taxation there levied upon
circulation from the beginning of the national system until very
REPORT OF THE SECRETARY OF WAR. 49

recently has been. 1 per cent per annum. The proceeds of this tax
have been about $90,000,000. The total circulation of failed national
banks at the time of failure has been about $22,000,000. If the notes
represented by this circulation had not been secured by United States
bonds, but had been a claim upon the general assets of the issuing
banks, 75 per cent of this amount, or about $16,500,000, would have
been provided for from the general assets. This would have left
$5,500,000 to fall upon the guaranty fund, if such a fund had been con-
stituted from the proceeds of taxation. As this fund would have been
$90,000,000, the demands upon it would have been less than one-
fifteenth of this amount, and the fund would have scarcely felt the
effect of paying these losses. It is obviously safe, therefore, to make
the tax one-half the rate which has been collected upon the circulation
of national banks in the United States, or one-half of 1 per cent. Such
a tax would have raised upon the circulation of the national banks up
to a recent date $45,000,000, or about nine times the demands which
would have been made upon the guaranty fund if the notes of failed
national banks had not been secured by United States bonds. :

Additional safeguards are provided for the circulation proposed for
the Philippines in the provisions for a specific cash reserve against
circulation and for the continuance of the system of minimum bond
deposits by banks entering upon business. A bank having a capital
of $500,000 would be permitted to issue only $250,000 in the class of
notes recommended in this report. These notes would be covered at
the outset to the amount of 20 per cent by the bond deposit which is
required as a preliminary to beginning business under the national
banking law. The further requirement that banks should hold a
reserve of 25 per cent of their circulation, or an amount of 862,500, if
they issued circulation to their full legal limit, would add another safe-
guard, raising the total proportion of the circulation fully covered by
special security to 45 per cent. There would be still another small
amount in the custody of the Government to make up the 5 per cent fund
for the current redemption of notes. If this fund and the other two
resources mentioned remained unimpaired, the notes would be covered
by actual cash or bonded security to the amount of 50 per cent of their
facevalue. It is possible that in case of failure the cash reserve required
against circulation would be found to be somewhat impaired, but fre-
quent reports of the state of this reserve and of the other resources
of the bank would enable the bank examiners and officials to note
any weakness in bank management, and to take prompt steps to cor-
rect it or close the bank before its resources became further impaired.
Deliberate fraud in making returns might conceal a depleted reserve
between the dates of two inspections, but all banking experience
demonstrates that such fraud is rare and is extremely difficult in the
case of a large bank having many agents and high-salaried officials of
supposed good standing and responsibility.

11577—01——-4.
50 REPORT OF THE SECRETARY OF WAR.

The requirement that a cash reserve shall be kept against circula-
tion goes beyond the requirements of the national banking law in
respect to notes secured by the deposit of bonds in the United States
Treasury. There is at present no requirement for a cash reserve
against circulation except the small fund of 5 per cent for current
redemption deposited in the Treasury at Washington. It is proper
that such a reserve should be kept, because it constitutes a resource
more immediately available for cash demands than any class of securi-
ties. It is recommended, however, that half of this reserve may con-
sist of gold bills drawn upon countries outside of the Philippine
Islands or in deposits in other banks. The sale of such bills or drafts

upon such foreign bank deposits are the equivalent of gold and would

be more acceptable than coin or bullion when the demand for money
took the form of a demand for export.

ADVANTAGES OF NOTES IN A NEW COUNTRY.

The issue of circulating notes under conditions profitable to the issu-
ing “banks is of great value in an agricultural community. It tends to
convert the wealth of the community into a transferable form in much
the same manner in which the ownership of a mill or of a railroad is
converted into transferable subdivisions by the issue of stock and
bonds. When an agriculturist is paid for his products in bank notes
instead of a credit upon the store where he sells them, he is emanci-
pated from the control of such stores and can make his purchases
where he can make them:upon the best terms. From being a vassal
of the factor or the storekeeper he becomes an independent purchaser
in the open market. It requires no argument to demonstrate how
greatly the farmer profits by such conditions. But the benefits do not
end with him. By the possession of money instead of store credits
he is able to pay his hands in money. They in turn are able to make
purchases under more favorable conditions than before and to contrib
ute their share toward that larger and freer movement of both capital
and credit and the stimulus to productive industry which in every
country have followed the introduction of a sufficient and elastic sys-
tem of bank-note currency.

It would seem to be clear, therefore, that the convenience of the
community and the commercial growth of the Philippine Islands will
be greatly served by a liberal system of note issue. That such a sys-
tem would benefit the banks by increasing their possibilities of profit
is equally plain. The possibility of increased profits would enable
them to compete successfully with foreign rivals on the one hand, and
on the other to offer lower terms for the use of capital to Americans
seeking to develop the resources of the islands. Such advantages
extended to American commerce and American investment enterprises
REPORT OF THE SECRETARY OF WAR. 51

in the Philippines are vital factors in the encouragement of such enter-
prises and in the inducement extended to American capital by coming
to the islands to relieve the congestion of surplus capital at home,
which tends under present conditions to compete relentlessly against
existing investments by the duplication of plants in industries already
sufficiently provided for by existing establishments. The possession
of banking power, including the ability to issue notes where they
form an acceptable instrument of such power, is one of the potent
factors which have enabled British bankers to win their large influ-
ence over the exchanges of the world. To refuse similar powers to
American bankers in the Philippines, will be to cripple them at the
outset in meeting their foreign competitors and in providing resources
for American enterprises.

“A form of paper currency which will add materially to the convenience
of retail trade is the issue of paper certificates for the proposed silver
coins. It is therefore recommended, if provision for a coinage issue
is made, that authority be given to the government of the Philippine
Islands to issue silver certificates of the same denominations as the
silver certificates issued in the United States under existing law. The
use of such certificates would obviate the necessity of carrying about
great quantities of silver coin, while the certificates could be converted
into coin whenever desired by their holders. This provision would
not aid in the extension of credit in the same manner as an adequate
bank circulation, but would do something to add to the flexibility and
convenience of the proposed currency system.

THE STATUS OF EXISTING BANKS,

The adoption of a new banking system in the Philippines is neces-
sarily complicated by consideration of the status of existing banks in
the islands. The principal commercial banks are three in number—
the Spanish-Filipino Bank, and branches of the Hongkong and Shang-
hai Banking Corporation, and of the Chartered Bank of India, Aus-
tralia, and China. The latter banks, both owned in England, ao not
issue circulating notes and will come under regulations adopted by the
United States or the government of the Philippine Islands only so far
as those regulations apply generally to all banks of their character.
All these banks have abundant capital, are prudently conducted, and
are entirely safe in their character and management. The two English
branch banks have behind their obligations in the Philippines the great
resources of the parent banks, and the Spanish-Filipino Bank has a
surplus fund equal to more than 50 per cent of its paid-up capital. It
is recommended that full power be given to the government of the
Philippine Islands to make general regulations governing banking, in
harmony with the laws of Congress, which shall apply to the foreign
banks as well as to those of the United States and the Philippines.
52 REPORT OF THE SECRETARY OF WAR.

While many complaints are made against the foreign banks in respect
to their charges and methods of doing business, these are conditions
which are less likely to be influenced for good by the direct action of
the government than by the effective competition of American banks
if they are given sufficient power to establish branches and to issue
circulating notes.

The case of the Spanish-Filipino Bank stands upon a different footing
from the others in respect to the issue of notes. This bank claims
the exclusive right of issuing notes within the entire Philippine
Archipelago under a special charter of the Spanish Government.
The bank was founded in 1851, and is governed by by-laws and regu-
lations approved by the Spanish Government in a royal decree dated
October 17, 1854, with subsequent amendments. The last decree of
the Royal Government was dated July 14, 1897, and approved changes
in the by-laws recommended to the bank in the previous year. The
original capital of the bank was 400,000 pesos, divided into shares of
200 pesos each, payable to order. Authority was given by several
subsequent decrees to increase the capital to 4,500,000 pesos, but this
authority has been availed of only to the limit of 1,500,000 pesos.
The decree of October 17, 1854, granted to the bank the exclusive
right to issue notes payable to bearer on demand, for general circula-
tion in the Philippine Islands. The decree of June 5, 1864, author-
ized the bank to issue notes to the amount of double its paid-up
capital. The decree of February 7, 1896, authorized the issue of
notes to the amount of three times the paid-up capital of the bank,
subject to the provisions of article 180 of the commercial code, which
provides that banks shall keep in their vaults in cash at least one-
fourth of the amount of the deposits and current cash accounts and of
notes in general circulation. The same decree extended the charter
of the bank for twenty-five years from the date of the expiration of
the present grant, which is January 1, 1903.

CLAIMS OF THE SPANISH-FILIPINO BANK.

The Spanish-Filipino Bank under these grants claims that its exclu-
sive right to issue circulating notes in the Philippine Archipelago
continues unimpaired until January 1, 1928, and that its authority
extends to the issue of 4,500,000 pesos of such notes. The actual
maximum attained by the issues was about 3,400,000 pesos in 1898.
The amount has since been reduced to about 2,100,000 pesos and is
still in process of reduction. The legal question, whether the exclu-
sive privilege claimed by the bank is one which can not lawfully be
impaired by the government of the Philippine Islands, is one of a com-
prehensive character, involving important considerations of Spanish
and American law regarding the obligation of contracts and the char-
acter and sanctity of the franchise. Without undertaking to deal with
REPORT OF THE SECRETARY OF WAR. 53

these questions, it may be pointed out that the Congress of the United
States would probably be able to find means to render the privilege of
the bank nugatory, under the decisions of the Supreme Court sustain-
ing the power of Congress to levy a tax of 10 per cent upon the issues
of banks other than national banks. In my opinion it would not be
advisable to exert such a power as this, not only because of the arbi-
trary character of such action toward the bank and the effect it might
have upon its credit and that of its many commercial patrons in
Manila and thr oughout the islands, but because of the contraction
which it would operate in the volume ‘of paper currency. Such action,

taking effect at any near date, would be likely to invoke something
like a commercial crisis, which would be without excuse.

It is obvious, however, that the existing privileges of the Spanish-
Filipino Bank, in so far as they restrict the power to establish other
banks of issue, are in conflict with the interests of the commerce of
the Philippines and are, therefore, opposed to the public policy of the
Government of the United States and of the Philippine Islands.
Fortunately, the directors of the Spanish-Filipino Bank appear to
recognize this fact and to be ready to adapt themselves to the new con-
ditions established by American sovereignty and the increase in Ameri-
can trade which will naturally follow. The bank is governed in its
ordinary commercial transactions by two directors. More important
questions are submitted to a board of governors, and questions affect-
ing the statutes of the bank are submitted to meetings of the share-
holders. The two directors, Messrs. Balbas and La Rosa, appeared
before Judge Ide, the secretary of finance and justice, during my
presence in Manila, on the occasion already referred to, and discussed
with him a recent dispatch from the Department at Washington sug-
gesting that the circulation be brought within the limits of the paid-up
capital of the bank. Both gentlemen expressed their willingness to
comply with. this suggestion and to adopt other safeguards conforming
in some respects to the American law regarding the issue of notes.
They were willing as soon as practicable to reduce their circulation
within the limits of the paid-up capital, to deposit bonds with the gov-
ernment of the Philippine Islands as partial security for their outstand-
ing notes, and to maintain the reserves already required by Spanish
law. In respect to the exclusive character of the privileges of the
bank they reserved an official opinion for the judgment of their share-
holders, but Sefior Balbas, the managing director, frankly expressed
his personal opposition to monopoly, and evidently anticipated that
the exclusive privilege would be objected to by the American Govern-
ment.

In order to obtain in definite form assurances from the directors of
the bank that proper restrictions would be accepted by them without
legal contest, a letter was subsequently addressed by Judge Ide to the
54 REPORT OF THE SECRETARY OF WAR.

directors, setting forth the restrictions upon the power of i tigate notes
which he desired to recommend to the American Congress. In this
letter, which was prepared after consultation between Judge Ide and
myself, and conformed in every respect with my personal views, it
was suggested that it would be more advantageous for both the bank
and the government of the Philippine Islands that there should be
agreement upon the recommendations to be made to the Government
at Washington, rather than that the recommendations which might be
made by the commission should be contested by the bank. A copy
of the letter setting forth these conditions is appended to this report.

To this letter a reply was received stating that the questions raised
were so important that they had been submitted to the board of
governors, but were considered by that board of such a character that
it would be necessary to submit them toa meeting of the general share-
holders of the bank. This course, it was stated, was required by the
fact that the proposals involved important changes in the statutes of
the bank itself. Subsequent inquiry by Judge Ide in regard to the
date of this meeting of the shareholders drew forth the statement that
it had been called for November 21.

The restrictions suggested in this letter were in all respects those
which are recommended in this report for the government of other
banks of issue, except that the limit of issue of notes not fully secured
by United States bonds was allowed to remain in the case of the
Spanish-Filipino Bank at the full amount of the paid-up capital. It.
was not thought prudent to suggest the reduction of the note issues at
present to 50 per cent of the capital, as proposed for banks newly
entering upon business, for the reasons governing the arbitrary aboli-
tion of the power of note issue which have already been set forth.
Several of the restrictions, like that requiring a proportional coin
reserve, would apply automatically in due proportion to the larger
issues allowed to the Spanish- Filipino Bank. Aside from the i impair-
ment of the exclusive right of issue, the most important of the restric-
tions proposed in the letter of Judge Ide, affecting the financial
resources of the Spanish-Filipino Bank, is the requirement that it
shall pay a tax at the rate of one-half of 1 per cent per annum upon
its average outstanding circulation. This will involve a burden. of
about 75,000 pesos ($37,500 gold) if the circulation is maintained ¢ con-
stantly at the maximum allowed by law.

POLICY RECOMMENDED TOWARD THE SPANISH-FILIPINO BANK.

It seems probable, in view of the frank and conciliatory statements
of the directors, that an act of Congress imposing these restrictions
will be accepted without legal resistance. Even if the restrictions
were much more severe, there is always serious risk involved to the
credit and business of a bank in contesting in the courts such an
REPORT OF THE SECRETARY OF WAR. 55

important point as its right to the exclusive privilege of note issue.
It is probable that any bank not suffering very serious pecuniary
loss by such restrictions would prefer to accept them, even if infring-
ing its franchise, rather than to resist at the expense of prolonged
litigation. The restrictions proposed, moreover, do not involve a
serious departure from the principles of equity in dealing with the
bank. The exclusive privilege is of minor importance so Jong as the
bank is permitted to retain the privilege of issuing notes to the full
amount of its capital and the regulations governing American banks
are not such as to permit issues by them upon more favorable terms.
It is recommended, therefore, that the restrictions applied to other
banks in respect to the issue of notes be applied to the Spanish-
Filipino Bank, with the exception that it be allowed to issue to the full
amount of its capital, but that no other restrictions be applied which
would tend to impair the privileges which are claimed for it under its
existing franchise.

One of the suggestions made in the letter addressed to the directors
of the bank on the subject of this privilege was that certain old issues
of notes, some dating back to 1865, which are now outstanding, should
be excluded from the authorized limit of issue so as to give the bank
a wider margin of issues for its present form of notes. It is reason-
able to believe that a considerable portion of these old issues have been
destroyed and will never be presented for redemption, but full pro-
vision should be made for their redemption in case they are presented.
For this purpose it is suggested that the bank be required, if it
accepts the proposal to exclude these issues from its authorized limit,
to pay into the public treasury a part of the amounts of these old
issues, to be reimbursed from time to time if the notes are actually
presented for redemption. The effect of this will be, if the notes are
not presented, to give to the public treasury the free use without
interest of the amounts thus deposited. It is probable that only a
small part of this deposit will ever be required for the redemption of
the notes, but it would not be sound public policy to cease to treat the
amount of the outstanding notes as an obligation of the bank to the
note holders, and the deposit in the public treasury as a part of the
fund held for the discharge of the obligation.

*RELATIONS OF THE FEDERAL AND PHILIPPINE TREASURIES.

The convenience of the government of the Philippine Islands and
the several branches of the Government of the United States will
undoubtedly be served in the future by a certain degree of cooperation
between the treasuries of the two governments. In order to give per-
manent legal authority for such relations several provisions of law
seem to be required. Various classes of transactions will probably be
carried on by the Philippine government in the United States, as is
56 REPORT OF THE SECRETARY OF WAR.

already being done through the Bureau of Insular Affairs of the War
Department, and the Government of the United States may benefit by
the cooperation of the Philippine government in the management of
receipts and disbursements on account of the Army and Navy. For
this reason it is recommended that authority be given by Congress for
mutual arrangements between the financial officers of the two govern-
ments for the transfer of funds and the issue of checks and drafts
upon each other. These transactions would be only such as are car-
ried on between two correspondent banks, and it should be distinctly
provided that none of the expenses of the government of the Philip-
pine Islands shall be paid from the Treasury of the United States,
unless expressly authorized by law.

The extension of the national banking system to the Philippine
Islands would impose new duties upon the Comptroller of the Currency
and the Treasurer of the United States which they would exercise
in some respects at an inconvenient distance. It may be desirable
that each of these officers should designate some responsible officer
of the Philippine government to act as his representative in the
islands. It would probably be found desirable to keep in the Philip-
pine Islands a portion of the fund for the current redemption of bank
notes and perhaps such United States bonds as might be deposited
by the banks when beginning business. The Treasurer of the Philip-
pine Islands could be made the custodian of such funds, but if a
considerable amount of labor were involved in their administration
it might be proper to designate one of his subordinates as the special
representative of the Treasurer of the United States and the Comp-
troller and to pay a part of his compensation from the Treasury of
the United States or from the proceeds of the taxes and charges
paid by the banks in conformity with the present system of issuing
and redeeming national-bank notes. There would be no more risk
involved in this arrangement than in the administration of public
money through the subtreasuries, and it would be proper that both
the Treasurer of the United States and the Comptroller of the Cur-
rency should exercise as close a supervision over fiscal and banking
conditions in the Philippines as circumstances permitted. The repre-
sentative of the Comptroller might be authorized to pass upon minor
points in connection with the administration of the banking laws, but
should be required to submit to the Comptroller for his personal
consideration all applications for new banks and important questions
of law.

NEED FOR MORTGAGE BANKS.
One of the most influential means of promoting prosperity in the

agricultural districts of the Philippine Islands would be a system of
loans at moderate rates to agriculturists. The desire for some system
REPORT OF THE SECRETARY OF WAR. BT

of such loans was strongly expressed in many towns and provinces on
the tour of the commission for the creation of civil governments, and
such a system is vigorously urged by the commission in their annual
report. The methods of agriculture now employed in the islands are
antiquated and fail to yield the best results attainable by the culture
of the soil. Even such slender resources for their development as the
people possessed prior to the insurrection of 1896 have been impaired
by the disorders of the succeeding five years, down to the restoration
of civil government in the spring of the present year. The means of
education in better methods are being offered, to some extent, by the
system of agricultural colleges which is provided for in the scheme of
education prepared by the efficient commissioner of education of the
islands. The instruction given in such improved methods can not well
be availed of, however, unless cultivators have the means of acquiring
good seed, draft animals, and modern tools. Only by some system of
agricultural loans can these means be: placed in the hands of the peo-
ple, and the stimulus given to the agriculture of the islands which will
produce the results which their rich resources are capable of yielding.

Governor Taft is especially solicitous that some provision be made
for loans for the benefit of agriculture, and at his request I conferred
with Sefior José Ruiz Luzuriaga, recently governor of . Occidental
Negros and now a member of the Philippine Commission, in regard to
existing conditions and their remedy. Seftor Luzuriaga has been him-
self engaged in large business enterprises and he has had much oppor-
tunity for observing agricultural development in his native island,
which is one of the largest scurces of sugar production in the Philip-
pines. He states—and his testimony is borne out by testimony given
to the Schurman Commission and from other sources—that interest
rates for agricultural loans are now excessively high. Small money
lenders charge interest running as high as 25 per cent per annum, and
in some cases approaching, with commissions and charges, the almost
incredible limit of 40 per cent. A large corporation which does busi-
ness in Negros nominally charges 25 per cent, but in effect collects
from 30 to 40 per cent upon the value of the amount loaned, by requir-
ing that the crop of the borrower shall be delivered at the price fixed
by the company, that purchases of supplies shall be made from its
stores, and that other operations connected with the marketing of the
crop shall be conducted under its charge and at its profit. It is obvious
that under favorable conditions a rich field lies open here for the loan
of American capital at rates which will greatly relieve the present con-
dition of borrowers in the Philippines and yet afford profits far in
excess of those which are usually earned in enterprises at home.

One of the reasons for high rates for money in Negros and other
parts of the Philippines is the risk involved in the loans. The titles
to lands are no always perfectly clear, and there is always the risk
58 REPORT OF THE SECRETARY OF WAR.

incident to a loan which is to be repaid from the profits of agriculture
that there will be a failure of the annual crop. Notwithstanding these
drawbacks to the lending of money at low rates, the security offered
by the sugar plantations of Negros, when the land is pledged, seems
to be adequate to justify loans of a moderate amount at considerably
lower rates than those now paid. The chief difficulty in cases of
default would be found in the marketing of lands, but this difficulty
would disappear to a large degree if the lands could be worked under
modern conditions of culture—with improved machinery and without
the crushing burden of the charges made for the use of capital. While
the actual management of a sugar plantation would not fall within the
proper functions of a bank, an enterprising American bank would
probably find little difficulty in persuading American capitalists to
undertake the management under conditions which would insure large
profits and relieve the bank from serious risk.

For the creation of mortgage banks in the Philippine Islands it is
not absolutely necessary that the authority of Congress should be
invoked. Mortgage banking is a matter of local law in most of the
States of the, American Union, and there is already considerable law
on the subject in the Philippine Islands, inherited from the Spanish
Government. The general power to legislate on the subject would
remain with the Philippine Commission, if Congress should approve
and continue their existing powers, with an amendment of the provi-
sion of the last Army appropriation bill. prohibiting the granting of
franchises. For these reasons it is not considered essential that Con-
gress should legislate in detail regarding the charters of mortgage
banks in the Philippines. A knowledge of local conditions might
enable the local government to regulate the details of such franchises
with better results than if they were prescribed at a distance of ten
thousand miles. It seems to be desirable, however, that Congress
should take cognizance of the subject, and prescribe certain general
rules governing the creation of such banks, both as a guide to the
local government in the grant of franchises and as an as ‘~ rance to the
investing public that such franchises will be granted only 11der sound
conditions. Whatever the competence and knowledge of the local
government, a legislative act by the law-making power of the United
States will atford a more definite assurance of permanency of policy
to the investing community at home and abroad. For this reason it
is recommended that some sections be attached to the bill regulating
banking in the islands, if such a bill is passed, providing the condi-
tions upon which mortgage banks may be established.

RESTRICTIONS UPON MORTGAGE BANKS.

The limitations which should be imposed upon banks engaged in the
mortgage business are the fundamental ones which distinguish such
REPORT OF THE SECRETARY OF WAR. 59

forms of banking from commercial banking. Banks engaged in
accepting deposits payable on demand, and especially those engaged
in the issue of circulating notes, which are also payable in lawful
money on demand, can not safely embark any portion of their depos-
its in securities which can not be quickly converted into cash at need.
A bank devoted wholly to mortgage business, on the other hand, may
derive its resources, if it is properly conducted, from deposits for
long terms or from the sale of bonds payable at fixed dates. The
method adopted by the leading mortgage banks of Europe, to which
the Philippine Commission have made reference in their annual
report, is to sell bonds from time to time in comparatively small
blocks maturing in a general way and on the average at about the
time when given amounts of their mortgage loans mature. The pro-
ceeds of the loans constitute the resources from which the bonds may
be redeemed. In practice, new issues of bonds are usually eagerly
taken by investors and the proceeds applied to the continuance of old
loans and the granting of new ones, but the condition of solvency
required for such banks is the same as that for commercial and note-
issuing banks—that they shall have at command the resources for
meeting their obligations when they mature. The difference between
them consists in the fact that the obligations of commercial banks may
mature at any moment without notice, while those of mortgage banks
mature only at fixed dates against which full preparation can be made.

If Congress authorizes mortgage banks in the Philippine Islands, it
is recommended that such banks be governed by the following
restrictions :

1. That no such bank shall be authorized with a less capital than
$250,000.

9. That such a bank shall not loan more than 10 per cent of its
aggregate resources to any one person, firm, or corporation.

3. That such a bank shall not loan upon any real estate more than
one-third the market value of such property as determined under reg-
ulations to be framed by the government of the Philippine Islands.

4, That such a bank shall not loan more than one-third of its aggre-
gate resources upon the security of building lots or buildings in cities
or large towns.

5. That such banks shall be subject to such visitation, inspection,
and regulation as may be imposed by the government of the Philip-
pine Islands.

These restrictions are for the most part such as justify themselves
without extended argument. A small mortgage bank is exposed to
the risk of failure by a few lossss, which could be readily covered from
profits and surplus by a larger institution. A small bank, moreover,
would probably make most of its loans in a single locality and its
fortunes would be bound up with those of a few industries, perhaps
60 REPORT OF THE SECRETARY OF WAR.

a single industry, in that locality. A large bank, on the other hand,
would be able to extend its operations by means of branches into
various parts of the Philippine Islands, and losses in a given locality
would be compensated to some extent by profits and the safety of
investments in other localities.

The provision that a mortgage bank should not Joan more than 10
per cent of its resources to any one person or corporation is designed
to prevent the same evil as the requirement that the bank shall have
an adequate capital—the locking up of the whole or a large part of the
resources of the bank in a few risks. This provision is rendered still
more conservative by the third limitation suggested—that loans shall
be limited to one-third of the ascertained mai'ket value of the property
which forms the security. In order to prevent improper inflation of
value by the parties in interest, the rules governing the determination
of market value are placed under the control of the government of
the islands, and may, in their discretion, provide for the participation
of some public officer in such valuation.

The limitation of loans in cities and large towns is designed to give
the benefits of the proposed system chiefly to the agricultural sections.
It also has the merit of guarding against the speculation which some-
times occurs in city lots and gives to them for a time a market value
which is subsequently lost. Limitations of this sort are prudent, even
where speculation can not occur to the extent which is likely to pre-
vail in an undeveloped country. The Crédit Foncier, the leading
mortgage bank of France, has been subjected to more or less criticism
for entering upon a form of speculative loans with builders, by which
money was advanted for new buildings which were not obviously
required by rental conditions, simply for the purpose of finding an
outlet for its resources. If such operations could be carried on in such
a long settled and conservative country as France, where values change
but little over long terms of years, it is obvious that the danger would
be much greater in an undeveloped country where the expectations of
early development in particular places might be disappointed by
events.

MORTGAGE LOANS BY COMMERCIAL BANKS.

The familiar reasons which prevent commercial banks from engaging
in mortgage loans have already been set forth. These reasons are
subject to some qualification, however, in the case of banks of large
capital, long standing, and abundant resources. Such banks may,
without risking the liquid character of the assets held against demand
liabilities, set aside a certain portion of their capital or surplus for
permanent, investments. Many of them actually do this by the pur-
chase of bonds and shares in industrial enterprises. Within narrow
limits it is possible for such banks to go further and invest in mortgage
REPORT OF THE SECRETARY OF WAR. 61,

loans, provided that the remaining and liquid assets of the bank are
amply sufficient to meet all of its demand liabilities and to afford a
reserve against the failure of any part of these assets. The fact that
acertain percentage of capital can be safely set aside for mortgage
loans is recognized, as stated by the commission, by the statutes of
the Austro-Hungarian Bank and of the Imperial Bank of Russia, each
of which issues the entire credit paper currency of the country where
it is established.

It is recommended, therefore, that banks having a capital of not less
than $1,000,000 be authorized to devote one-fourth of this capital, in
their discretion, to mortgage loans. This power need not be conferred
absolutely, however, even upon a bank of this size, but may be left
subject to the approval of the government of the Philippine Islands.
This condition would necessarily involve compliance with any special
safeguards or limitations which such government might see fit to
impose. A bank of large capital should be subjected to the same
limitations in the use of that part of its capital devoted to such loans
as those imposed upon banks devoted exclusively to mortgage business.

The reason for giving the power of making mortgage loans to banks
not exclusively devoted to this class of business is found in the neces-
sity of providing for this type of loans at the earliest possible date.
While large profits would undoubtedly be derived from the operations
of a mortgage bank in the Philippine Islands, it is possible that capital
might be more promply attracted by the opportunities open to a
commercial bank or to a trust company or finance company engaging
in various classes of businessat the sametime. In sucha case, the benefit
of a lower rate for mortgage loans would continue to be denied to the
agriculturists of the islands if such banks were forbidden to make such
loans. It seems to be desirable that Congress should impose such
restrictions as are here recommended upon any future mortgage loans
by corporations, even if such loans are only a part of their general
business. The provisions suggested, if made applicable to any bank
authorized to do business in the Philippine Islands, would limit mort-
gage loans by corporations to those having a capital of $1,000,000
and to those complying fully with the restrictions above recom-
mended, but would not prevent the grant of the power of mortgage
loans to trust companies or other institutions not directly regulated
by authority of Congress or by the Comptroller of the Currency of
the United States under the national banking law. Such restrictions
are properly made applicable by law to all corporations, because their
officials dispose of the capital of others; but none of these restric-
tions affect in any manner the right of private persons to loan their
own capital on any terms and-with or without security as they may
see fit. Strong inducement to outside capital to enter the islands for
62 REPORT OF THE SECRETARY OF WAR.

the purpose of mortgage loans is as vital to the agriculturist as the
increase of commercial banking facilities and of paper currency are
to the merchant and general trader, and provisions which will accom-
plish this end will do much to promote the contentment of the people
and consolidate American influence in the Philippines. .

THE NEED FOR A DEPOSITORY FOR PUBLIC FUNDS.

One of the needs most frequently urged by the officers of the Army
in regard to the financial system of the Philippine Islands is the crea-
tion of a depository for public funds. Section 5488 of the Revised
Statutes of the United States prohibits the deposit of public funds in
any depositories except those authorized by law. Such lawful deposi-
tories include in some cases national banks of the United States, but
as there are no such banks in the Philippine Islands, this section pre-
cludes the legal use of any of the existing establishments in those
islands for the custody of public funds of officers of the United States.
The section quoted makes unauthorized deposits equivalent to embez-
zlement, for which a penalty may be imposed of imprisonment with
hard labor for not less than one year nor more than ten years or by
heavy fines.

These provisions of law were framed for conditions which did not
contemplate the extension of American power in the Orient and the
holding there of large amounts of public money in the hands of army
disbursing officers. These officials have found themselves unable in
many cases to retain these funds with safety in their personal custody
and have availed themselves of various expedients for keeping them at
their own risk. It is clear that such conditions should be promptly
brought to an end and that a safe depository for such funds should be
provided which can be used in conformity with law. In order to ascer-
tain the views upon this subject of the most responsible officers charged
with the custody of public funds, a letter was addressed by Governor
Taft, at my request, to Maj. Gen. Adna R. Chaffee, military governor,
in command of the Division of the Philippines, asking him, if agreeable
to him, to request such officers as were charged with the custody of
such funds in considerable amounts, to confer with me upon this sub-
ject. In response to this communication I received calls from Col.
C. A. Woodruff, acting. commissary-general, chief commissary Divi-
sion of the Philippines; Col. A. 8. Towar, assistant paymaster-general,
chief paymaster Division of the Philippines, and Lieut. Col. Charles
P. Humphreys, chief quartermaster Division of the Philippines.

The subject of providing a proper depository for public funds was
fully discussed by these officers, and was the subject of many repre-
sentations in private conversation by other officers interested in the
matter. This discussion, being in the nature of a general conversation
REPORT OF THE SECRETARY OF WAR. 63

for my information, was not reported in writing, but the following-
suggested provision of law for the consideration of Congress was laid
before these officers:

That the treasury of the government of the Philippine Islands and its branches,
and such banking associations and their branches in the Philippine Islands as may
be designated by the Secretary of War of the United States, shall be depositories of
public money, subject to the provisions of existing law governing such depositories
in the United States; provided that the treasury of the government of the Philippine
Islands shall not be required to deposit bonds in the Treasury of the United States
or to give other specific securities for the safe-keeping of public money except as
prescribed, in his discretion, by the Secretary of War. =

Each of the officers designated by General Chaffee to confer with
me upon the subject expressed his belief that this provision would
meet the requirements of existing conditions in regard to a public
depository. Letters from two of them are appended to this report.
Various criticisms were made by them upon the conduct of the foreign
banks in cashing checks and drafts and the charges made for such
services, but it was admitted that most of these services could be per-
formed by the disbursing officers of the Government, even to some
extent for the accommodation of officers in their personal transactions,
if a proper depository for public funds were authorized by law.

This proposed provision gives to the treasury of the Philippine
Islands substantially the same status toward the War Department as
the subtreasuries of the United States. The treasurer of the Philip-
pine Islands is not required to deposit securities with the Treasurer of
the United States, as is required of national banks when intrusted
with public funds, because the treasury of the Philippine Islands is
itself a branch of the public service of the United States, occupying
substantially the same position of responsibility and subject to similar
supervision as the subtreasuries, which are not required to deposit
any security for their transactions with the Treasurer at Washington.
The provisions in regard to the use of banks as public depositories
which now apply to national banks in the United States are extended
to all banks in the Philippine Islands. This will enable the government
to use the foreign banks, if necessary, as depositories, pending the
creation of strong American banks, and to use any American bank
which may be established in the Philippines without regard to the class
of banking business in which it may be engaged.

Banks intrusted with public funds of disbursing officers will be
compelled, under the provision proposed, to deposit United States
bonds in full for the protection of the funds held by them, in conform-
ity with the requirement made by law when such funds are deposited
in national banks in the United States. The foreign banks in Manila
now hold large amounts of the funds of the Philippine government
for which they have not deposited full security in United States bonds.
There is no question of the perfect safety of these banks and their
64 REPORT OF THE SECRETARY OF WAR.

ability to repay the deposits when desired by the government of the
Philippine Islands. Their position in regard to the purchase of United
States bonds simply illustrates the difficulty which would arise if banks
of issue were required to obtain such bonds as security for circulation
under the conditions governing their transfer and ownership in the
Philippine Islands. The Philippine government, disposing of funds
which are not construed legally as the funds of disbursing officers of
the United States, is acting within its legal powers in depositing these
funds in such depositories as can be found without requiring specific
security. This freedom of action on the part of the government of
the Philippine Islands will not be interfered with by the proposed
section; but it did not seem advisable to recommend that public
officers generally, without distincti»n of rank or responsibility, should
be allowed to intrust such funds to depositories which should not
secure them by specific pledges.

SCOPE OF THE MEASURES RECOMMENDED.

The possession of a sound and sufficient currency is one of the most
essential factors in the industrial progress of any community, because
the state of the currency affects all classes of business transactions and
every individual. In this respect the proper regulation of the cur-
rency is more important than the regulations governing almost any
other single branch of the public administration or those affecting any
one or several industries. In making the recommendations embodied
in this report the effort has been made to consider all aspects of the
needs of the Philippine Islands and of their future growth. The sys-
tems of coinage and banking recommended are capable of indefinite
expansion as the need for money and credit extends with the growth
of business.

Unless it contains defects which are not apparent, this system
will, if adopted, require no material change for many years to
come. The tendency of the silver coins which are proposed will be,
if they are exported for any reason, to return to the Philippine
Islands, because they will have a higher exchange value in gold in
Manila than their bullion value in any foreign country. Containing
less silver than the Mexican silver dollar, they will not pass into gen-
eral circulation in other countries where they are not legal tender and
where silver money tends to the level of the price of silver bullion.
If, however, the new coins should prove acceptable in foreign coun-
tries, as have the Mexican silver dollar and the British dollar, the
government of the Philippine Islands would profit rather than lose by
such a condition, because a seignorage would be derived from the addi-
tional coinage, and these profits would be added to the reserve fund
held in Manila for maintaining the coins at par with gold.

It is one of the most important conditions of the progress of the
islands that the currency system should be such as to attract Ameri-
REPORT OF THE SECRETARY OF WAR. 65

can and foreign capital by the assurance that investments there can be
realized upon at any time in the standard money of the world. For
this important result of bringing into the islands the means of devel-
oping their great natural resources even some temporary benefits
might well be sacrificed, if such benefits pertained to the existing
system or to a special silver coinage. The system proposed, however,
is substantially the system of two other important oriental countries—
British India and Japan—and conforms to the standard of the Euro-
pean countries with which the chief trade of the Philippines has
heretofore been conducted. By continuing the use of silver upon sub-
stantially the present basis the consequences of any jar attending the
adoption of a new system will be avoided, and all the benefits will be
attained which would be derived from either the silver standard alone
or the complete introduction of American currency.

The maintenance of the gold standard in a country of small resources
depends to some extent upon the state of its trade relations with
other countries. In the case of Japan large imports of merchandise
undoubtedly had something to do with the loss of gold in the year
1900. The effect of this pressure for gold was intensified by the
absence of a well-regulated stock market, which serves in every coun-
try as a buffer between the market for merchandise and the market
for gold, lightening the shock of any special demand for either class
of commodities by affording another acceptable means of exchange and
permitting the adjustment of international balances without strain
upon the currency system. In the Philippine Islands the course of
business in the future should be such as to preclude any pressure for
gold and to increase the supply of metallic money.

If American capital comes to the Philippines in large amounts for
investment it will come chiefly in the form of agricultural, mining,
and manufacturing machinery, railway equipment, and supplies for
the maintenance of laborers. Investments of capital in undeveloped
countries are inevitably made in these forms in the ultimate analysis,
since the money advanced by the investor is expended by promoters
for these necessary elements in carrying on their enterprises. So
long as these investments exceed: the demands upon the islands there
will be an excess of imports of merchandise, which will not require
to be paid for by a countermovement of merchandise or gold. On
the contrary, the only compensation made to the investor will be
in the form of printed certificates of bonds or shares, whose issue will
not for the time being impose any burden for repayment of the prin-
cipal upon the productive resources of the islands. Contented with a
small portion of the net produce of the islands in the form of interest,
the whole body of investors, including those entering the market with
new savings, will steadily send more to the islands then they take
away.

— danger is to be feared in the influence of the balance of trade

11577—01—5
66 REPORT OF THE SECRETARY OF WAR.

upon the maintenance of the gold standard, it would arise only at that
distant date at which new capital would cease to enter the islands and
the profits of existing enterprises would be continuously withdrawn
under a system of absentee ownership. This condition is too prob-
lematical and too far in the future to call for legislative provisions at
the present time except such as will tend to keep capital in the islands
and encourage its continuous investment and the investment of the
interest upon it in new enterprises. This continuous reinvestment of
capital was the history of British investments in Australia, until a
shock was given to confidence in 1893 by excessive loans by the banks
upon landed security, which deprived them of the power to meet
their demand obligations. The drain of the precious metals from a
country suffering from unfortunate economic conditions will affect
either metal which may happen to be the standard, whether that metal
be silver or gold. Against such unfavorable. conditions it is not the
function of currency legislation to make direct provision, but such
provision is indirectly made in a manner which is highly effective by
the adoption of a system which insures the stability and sufficiency of
the circulating medium in all its forms, and holds out the inducement
of security and opportunity for the continuous reinvestment of capital.

The disturbing influence of demands upon the stock of metallic
money is greatly mitigated in any country by a flexible and unfettered
bank-note currency. Such a currency automatically takes the place
of coin in meeting pressing demands for the tool of exchange, and
the demand for it throws upon the banks the obligation of -restoring
the supply of precious metals in order to maintain the reserves
required by law. A bank-note currency such as is recommended in
this report is capable of indefinite expansion as the demand increases
for additional credit facilities and for a larger volumeof money. Itis
a necessary forerunner of the system of checks and deposit accounts—
those more perfected forms of credit which tend to supersede it in
advanced commercial communities. If the duty is imposed upon the
banks, as proposed, of maintaining specified reserves against every
increase of their issue, they will be led by self-interest and the interest
of the business of the islands to supply a sufficient volume of paper cur-
rency and at the same time to protect it by an increase in the metallic
stock adequate to the expanding needs of trade. Such an auxiliary toa
proper coinage system will do much to promote its successful opera-
tion, to lighten the burden of interest charges upon the Filipino
people, and to hold out the inducement to the large investment of
American capital so essential to the prosperity of the country and the
justification of Americansovereignty both to the people of the islands
and the citizens of the United States.

All of which is respectfully submitted.
. CuarLes A. Conant.

Wasuineron, D. C., Vovember 25, 1901.

+
EXHIBITS TO ACCOMPANY APPENDIX G.—REPORT ON COINAGE AND BANKING
IN THE PHILIPPINE ISLANDS, BY CHARLES A. CONANT.

Exursit No. I.

Interview with Mr. J.T. B. M. MacLeod, manager Comparia Mari-
tima, Manila, P. [., September 23, 1901.

Mr. Conant. Mr. MacLeod, you have ‘given considerable attention
to currency matters here in the Philippine Islands. You have been
familiar with the different forms of currency and the rates of exchange
in connection with your business, have you not/—A. Yes, sir.

Q. What do you think should be the policy of the United States in
regard to the coinage in these islands?—A. For the coinage here it
would certainly be, in one way, a great benefit to have what we might
call a *‘ standard insular dollar” oe the fineness of the Mexican, which
is 900, weighing, I think, 415 or 416 grains.

Q. Four hundred and sixteen, is it not? The American is 4123,
nine-tenths fine, and the Mexican is a little heavier than the Amer-
ican.—A. I will not be sure about its weight; its fineness is 0.902.
‘That is with regard to what would be a good thing here as a standard,
if it is considered necessary to have any standard coinage. So far we
have gotten along with the Mexican dollar, but I do not think that it
is altogether healthy, as it takes away from the currency standing of
the country. It was found necessary in the Straits Settlements and
Singapore to establish their own dollar.

Q. Then you think it is better for the trade and finances of the
country to have its own coinage?--A. Yes; for the reason that it
makes a solid standard.

Q. I believe you stated that a good dollar would be a dollar like the
Mexican. Do you think it would be any objection to have a dollar of
less value?—A. As long as you make it a token there might not be
any objection to making a dollar of less fineness, but you would lay
yourself open to the risk of a want of confidence of the people of the
country. .

Q. Would there be a want of confidence if you took measures to
maintain parity by means of a gold reserve?—A. Perhaps not if you
have a gold reserve to maintain the silver, as it would not matter so
long as the quantity is limited. :

Q. You require here, so far as I can learn, for circulation in the
islands, taking normal times, about thirty-six millions?—A. That is
about what we should require. It would now be very difficult to
size up what would be required after the changes we have under-
gone and ‘with a new influx of capital and new developments of
commerce.

Q. But that could be regulated by the finance minister here if he

67
68° REPORT OF THE SECRETARY OF WAR.

studied the needs of trade, if he had authority to purchase and coin
silver?—A. Yes; but there ought to be at least forty millions of the
2 to 1 dollars, and there ought to be a sufficient supply of subsid-
iary coin, which we have not at present. That is one of the big
defects we are laboring under now.

Q. You do not believe it would be wise to introduce Amevican cur-
rency/—A. Certainly not; because there would come up the ques-
tion of labor. The native here looks upon a dollar as a dollar, and
while in Manila, Iloilo, and Cebu the natives who are more experienced
in handling money may consider the American dollar as worth two
Mexicans, the native of the country, who forms the great mass of the
population, thinks they are the same, and merely considers a dollar a
dollar. The wages of the Filipinos here in agricultural districts must
certainly be one of the greatest things there is to consider in the
country. The country or provincial native earns his money hy receiv-
ing so much a week and so much rice. If you pay the native a dollar
a week, or 87} cents, as they used to pay them, and offer him 47 cents,
he will think that is not enough and that he is getting the worst of it.
You would raise the cost of the country’s products as a result.

Q. On the other hand, would not shopkeepers raise thezr prices, and
undertake to mark as dollars what was formerly sold for pesos/—A.
In this respect it must be taken into account that the native here buys
nothing but rice and the cheap goods; the very cheapest and nastiest
grade is what he wants. So far the Americans have not been able to
make a sufficiently cheap and nasty grade of goods to supply the natives
with clothing. As long as the native has his rice and has enough to
buy his fish he is quite happy. That is speaking of the seven millions
of provincial natives. It is different, of course, with the natives of
the cities. The city natives buy some finer goods, butthe cheap goods,
the turkey red cloth and the cheap cotton stuffs from Manchester, will
for a long time be the prevailing stuffs here.

Q. Then you do not think that the introduction of American cur-
rency as legal tender would bean advantage?—A. It would raise a seri-
ous disturbance in business; yes, a very serious disturbance. I think
the introduction of American currency here would be taking a separate
step in a different direction from what any other country in the Orient
has done. I think it would be injustice to trade to make the standard
other than 32 to 1.

Q. That brings up the question as to whether the creation of a gold
parity here, making the new coin fixed in the ratio of gold to silver,
would injure in any way the relations of the Philippine Islands with
the silver-using countries.—A. Not if it is 32to1. But Japan is in
financial difficulties to-day as a result of changing when it went to the
gold standard.

Q. But is not that due to the great volume of business and the dis-
tribution of capital rather than to the standard’—A. They are, of
course, in rather a different position to the United States. The
Treasury is so good in the United States that it is on quite a different
basis. Japan has not sufficient inits treasury. They bought up gold,
and the gold has all gone out of the country. Here in the Philippines,
since American ovcupation, a gold standard was practically made for
treasury payments at 2 to 1, and the gold all went out of the country
to Japan.

Q. Tat was one thing I wanted to ask you about— whether it would
REPORT OF THE SECRETARY OF WAR. 69

be a wise thing or practicable to freely offer gold here in exchange for
silver. Would it be hoarded by the Chinese?—A. It would be sent
out of the country, as it was formerly. When I came here in 1880 I
was cashier of the firm of MacLeod & Co., Cebu, and about that time
Chinchilla, who was, I think, at the head of the revenue department,
had a bill introduced letting in Mexicans free, and as a consequence
in less than four years all the gold went out of the country.

Q. That was partly due to the change in the value of gold and silver
throughout the world. Up to 1873 gold was the cheaper metal, and
of course it would have expelled silver at that time. If you had free
coinage of both gold and silver, the gold would have been coined and
the silver would not have been coined.—A. The trouble was that they
made the law at just the wrong time. We have been dealing in Mex-
ican ever since. i

Q. What 1 wanted to ask you was this: When that gold standard
was in operation, was there then any strong tendency to hoard the
gold or to export it to Japan or China? Was there any disposition to
hoard the metal?—A. My experience dates from 1880. I practically
arrived when the gold commenced to go out, and it went out very
quick. Any gold that was hoarded was hoarded only in the same way
that a miser would hoard it at home.

Q. But I have been informed that the Chinese preferred to hoard
gold.—A. Every Chinaman who wished to go away from Manila
wished to take the gold with him. Their custom, on leaving the
country, was to fill a belt around their waist with gold coins; I have.
myself, seen a Chinaman with four or five thousand dollars around his
waist, and I have had them come to me when they were hard up and
offer me their gold as security on a loan.

Q. Then they prefer gold for the same reason that the most civilized
nations prefer it, because it is more convenient and less bulky. Would
it be expedient, if we established here a gold reserve, to provide that it
could not be obtained on demand, but could only be issued by the
Treasury when it was thought it would tend to maintain parity? It
would be used under such circumstances by legitimate bankers and
exporters, but there would not be an opportunity for taking out small
amounts—that is, it would lie with the Treasury whether to pay gold
on demand. The reserve would have to be available in some cases to
maintain parity. If there was a legitimate export demand caused by
the balance of trade or by the rates for the rental of capital—a demand
which justified the export of $1,000,000 to London—it would be pro-
vided then that the Treasury should issue the gold rather than disburse
its silver coin; but if it was optional they would only pay out when
conditions justified it.—A. That might meet with approval. The
Government must protect itself. I mean to say that tf vou start a
gold standard here, under which, by using the silver circulation, any-
body can come up and demand the gold when they wanted it, vou
would be liable to have a treasury being played with.

Q. That might be a possibility here. In the States we hold that
gold ought to be paid on demand, as in the Bank of England.—A. But
there are very different conditions here.

Q. Now, if the Government should decide to authorize a special coin
here of silver at the ratio of two to one, what course do you think
ought to be pursued with the Mexican dollars?—A. If you made it
the same as the Mexican dollars you would compete with them—in
70 REPORT OF THE SECRETARY OF WAR.

fact, it could be done if so wished by the Government, and it would be
easily arranged that you could buy the Mexican dollars, provided the
fineness is not less than the Mexican dollar. There is a difference of
about + per cent between the Mexicans and the subsidiary coins, and
they used to buy in the Mexicans and rec¢oin them here for the differ-
ence of fineness in the subsidiary coin. eee

Q. Would that be true of a distinctive coin if its quantity is limited
and its value is maintained by the gold reserve?/—A. I am afraid if
the dollar were to be of a different fineness it might create a want of
confidence. The people of the country are very peculiar, and it would
take some time for them to become educated up to the point of under-
standing what a gold reserve is. That is, of course, with regard to
the millions of provincial natives, and not with regard to the inhabit-
ants of the principal cities.

Q. The point I wish to make is this: If Mexican silver dollars are
a legal tender and the new coin is a legal tender, would it not be
desirable, as soon as enough of the new coin is ready, to declare that
Mexicans should cease to be a legal tender after a certain date, with a
view to substituting the new coint—-A. You could only do that by
buying up the Mexicans.

Q. Would they not be exported by degrees!—A. If you make a
gold standard here and the Mexican coins are in the country as a legal
tender at the moment, guaranteed by that gold standard, everybody
would hang on to their legal tender until such time as they were
forced to turn it in.

Q. But suppose the offer was not made to redeem Mexican dollars
in gold?—A. I think you would find that a very difficult problem;
you would have to solve the problem by buying them up, and prohibit,
not the export, but the import, of the Mexicans.

Q. It would not be desirable, under any circumstances, to prohibit
the export, I should say.—A. It has been done so here.

Q. But that has been repealed lately by the commission. I will state
my idea again. Suppose we desired to make the new coin the only
money of the islands, and we should offer to exchange these coins for
gold under conditions where we thought the demand for gold was
legitimate, but we never offered to exchange Mexicans for gold, would
not the fact be, if, savy, two years were allowed for the operation, that
the Mexicans would gradually drift to China as the new coins came
out of the mint and got into circulation’—A. To-day the exchange is
in favor of Manila to the extent of about 3 per cent on account of an
imaginary gold coinage here. The Mexican brings here about 3 per
cent more than in China.

Q. Would not that cease to be the case if after December 31 next
Mexican dollars should be declared no longer a legal tender?-—A.
Probably; but it would be very prejudicial to the people who have
been dealing in trade here, who would lose 3 per cent on their Mexicans.

Q. But if we had put in circulation a lot of distinctive silver that
was worth 50 cents gold?—A. That would make a circulation in
exchange, but all the commerce would be entirely upset by such a
radical measure. According to my idea the only way would be to pro-
hibit the import of Mexicans and for the Government to buy up those
Mexican dollars which are already in circulation here.

Q. lt would have to buy them at the rate of exchange here?—A.
Yes. The Government would have to lose one way or the other,
REPORT OF THE SECRETARY OF WAR. 71

unless they made a dollar of different fineness, and this might, as I have
said, create a want of confidence.

Q. Well, the people of the islands have shown a willingness to
accept four of five different kinds of silver dollars.—A. Yes; that has
been in places where they are familiar with money.

Q. But did they not accept the Spanish dollars, Mexican dollars,
etc., when they were introduced?—A. At that time they did not know
that the silver dollar was going to lose half of its value. In fact, in
the year 1880 silver was practically as high, if not higher, than the
value of gold. The exchange was then about 4 shillings and 2 pence
in London. Four shillings would be about what we call par between
silver and gold. Since the export of gold the natives have never
noticed the difference between the silver dollar at its lower value
and its former value when on a parity with gold. They paid out gold
dollars in exchange for silver at the former value. The natives have
lost, through the depreciation of silver, one-half of their money. But
the native who was getting 874 cents a week in the provinces for agri-
cultural work was quite as happy to have it at 2 shillings instead of
the 4 shillings it was worth twenty years before. He had not noticed
the difference.

Q. That being the case, it seems to me that a slight difference in the
amount of silver in a dollar would not affect the native if the new dol-
lar was of substantially the same size as the old.—A. Yes; you are
right in that. However, that question has two sides to it. Of course
you would force the export of Mexicans from the country.

Q. Yes; but if you had enough gf the new coins to take their place,
you would have enough currency.—A. You might take the Mexicans
up, recoin them, and turn them out at a less fineness. I won’t be too
strong in my opinion regarding having the new dollar of the sdme fine-
ness as the Mexican. It might be well to cover the expenses of taking
up all the Mexicans and reduce the fineness.

Q. You are familiar with the system of British India, are you not¢—
A. Well, I am not very strong upon it. They put the rupee at a
standard value.

Q. And recently they have established a gold reserve.—A. That,
of course, would be applicable here on a different ratio.

Q. Have you ever had occasion to note how they maintain the parity
in Java?—A. No. I think down there it is done on practically the
same basis as in India.

Q. I think there is this difference of detail, that in Java they do not
deliver gold for silver, but they sell gold drafts on Holland at the ratio,
so that if you have 1,000 guilders in Java and you desire to transmit it
to Holland, you can get a draft payable in 1,000 gold guilders plus a
reasonable charge for exchange. Now, what do you think would be
the effect here of a similar offer by the insular treasury? Would they
not be able to maintain the parity by offering to sell gold bills or drafts
payable in gold at the subtreasuries of the United States!/—A. They
would have to get them discounted here.

Q. No; they could sell their own drafts if they had arrangements
with the United States Treasury.—A. But under the way of doing
business here nearly everybody must do business through the banks.
If you take Treasury notes of the United States, for instance, they
72 REPORT OF THE SECRETARY OF WAR.

come in to me as receipts for passage money from the American offi-
cers. I take them to the banks. The banks will only pay me 1.97—
that is, I lose 14 per cent on these United States Treasury notes.

Q. They charge 1} per cent for American currency /—A. For those
Treasury. notes. . 7

Q. But suppose an American has $1,000 to pay in San Francisco;
he goes to the insular treasury with $1,000 of the new coinage, and
they will sell him a draft on the San Francisco subtreasury, payable
in gold. All he has to do is to mail that draft to the people at home
to whom he owes the money, and it will be collected in San Francisco
without charge.—A. You can not do that; there will always be an
exchange rate between here and the United States.

Q. But the Treasury can guarantee it?—A. Yes; although it would

be very foolish for the Treasury to do so. It would be prejudicial to
the administration here. You would have every head of a department
here with his head in a whirl trying to make up his balances. There
is only one solution with regard to the coinage and the financing of
these islands, which is to buy up Mexican dollars with insular dollars.
Whatever the coinage fixed here is, it must be entirely independent of
the basis of the United States currency. Let exchange take its own
course, and to avoid the departments having the difficulty they are at
present having with the payment of different coins for transportation,
for payment of officers and emplovees, etc., have established what
may be called a ‘‘colonial salary,” payable in the currency of the
Philippine Islands. There is no doubt that, happen what may happen,
exchange must exist.

Q. That is quite true in commercial matters. But the Treasury
would be able to ship gold of its own motion. You understand the
system ‘in the United States. It differs from the systems in most
European countries, in that the Treasury keeps its own money. If
they want to send money from Washington to San Francisco, they ship
it by express. They pay express charges, it is true, but they do not
go to any bank and buy exchange. They could do that here if we were
to establish a subtreasury here, although of course it would be an
expense to the Government.—A. It is exchange or the equivalent in
any case, and, besides, there is the question of insurance. The ship
might go down and they lose the money. There is no way of getting
around the point. If we had enough circulating money to use in the
Philippine Islands, there would be no difficulty for the Treasury at all.
One of the difficulties has been—take, for instance, the Army and Navy.
The Navy regulated its pay at a certain exchange to its officers, and
that was what raised the whole difficulty in the islands. The officers
of the Army said: ‘‘ Why should the Navy get this advantage?” and
then there was an order issued to pay the Army at the rate of 2 to 1.

Q. What, in your opinion, would be the operation of exchange if
we had a distinctive silver coin and a gold reserve?—A. It would raise
the exchange here; it would make the exchange on a more solid basis,
provided the rate was 32 to 1.

Q. The banks would then have to import gold if it were needed ?—
A. a the exchange would vary up or down to meet the balance in
trade.

Q. If gold were in circulation, in ordinary use, it would be furnished
by the Treasury for silver in order to maintain the parity. Now,
REPORT OF THE SECRETARY OF WAR. 73

there would be times, as in England, France, or Russia, when the state
of trade or the money market would demand more gold here or more
in Hongkong—that is, when the rate of discount would be such as to
attract gold. Now the banks, under ordinary, normal conditions,
would either import or export gold to meet these conditions?—A.
Never since 1880 has there been a case of importing gold.

Q. We would be on a different basis. e would be substantiall
on a gold basis. Suppose there has been an export movement of gold,
and we have but a limited stock of silver in the country and a consid-
erable part of that silver has been presented to the Philippine treasury
to.get gold. The result is to contract the silver currency in use. Now,
if an acute demand arises the banks would import gold to draw ovt
the silver, would they not?—A. Ido not think so. Ido not think it
possible under any circumstances that gold would be imported here.

Q. But, for instance, if you had in the treasury two millions of sil-
ver dollars and they were needed in trade and could only be obtained
with gold?—A. I do not think gold would be imported. The condi-
tions here are very peculiar. Perhaps, if by any means silver was to
get up high enough to make the value in favor of the silver as against
gold, but I think it is not possible.

Q. You understand, of course, that if a gold reserve was established
in the insular treasury it would be a fixed amount, say three millions
gold to start with, or perhaps five millions gold, and no silver. Now
the quantity of money in that fund would never change. Whena man
wanted to export gold he would bring in a certain quantity of silver
dollars. The effect would be to lock up those silver dollars. Now, if
they were needed in trade, in any European country or in America, it
would be the policy to offer gold to the treasury and get silver.—
A. But suppose you establish your treasury, start with five millions
of gold dollars, and then allow them to be exported for the use of
trade in certain cases and replaced by silver, and your silver is not
worth the gold?

Q. But you must remember that your coinage of silver is limited;
it is not free coinage of silver; the coinage is limited. The circum-
stances are the same in the United States. You know we have there
five hundred millions of silver dollars, worth 43 cents on the dollar.—
A. I think you would find that the gold basis might bea mistake here.

Q. What is the alternative7—A. A Government token in silver of
the same fineness as the Mexican dollar. It could be guaranteed; but
the guaranty should not be for circulation except under certain
conditions.

Q. Yes; that is what I contemplate, not to give it to every comer. [
understood you previously to say that you thought that would work
all right.—A. That would work all right so long asa solid basis is
shown. You would hare here a higher standard than you would have
in Hongkong and Singapore. In fact, with the army and navy funds
as a basis. on account of the influx from America of the money to pay
the Army and Navy, exchange has been latterly maintained higher than
it was in the years preceding the 2 to 1 ratio.

Q. It would he true, would it not, that you can not abolish exchange
between gold-standard countries because the exchange covers the cost
of transportation?—A. Alsothe balance of trade. For instance, a case
between a branch bank here and one in Hongkong orelsewhere: The
74 REPORT OF THE SECRETARY OF WAR.

bank here will sell you a draft on the other for $100,000. They have
to pay that on the other side. Perhaps there are no means at the
moment for replacing it on the other side.

Q. That is the same as legitimate exchange between gold-standard
countries: that feature of the exchange does not include any differ-
ence in the value of the money. There is a difference in the exchange
between gold moneys of the same value and between moneys in coun-
tries where in one case the money is gold and in others where the
money is silver.—A. The gold standard, of course, always gives a
solid base.

Q. What do you think of the willingness of the natives to accept a
new coin? Do you think they would be suspicious of coins which,
though perhaps of the same size, have a different stamp?—A. No; 1
do not think they would, providing the coin was about the same size.
You must remember, however, that the people have been much
instructed by the.people who are unfavorable to America and, in order
to injure the Government, would tell the natives that the Americans
were bringing them in an inferior class of coin. However, I do not
think the appearance of the coins and images on them would matter
if they were of the same fineness. If you were to introduce a coin
of the same size at the present time, but not of the same fineness, it
would be used as a weapon against America. Afterwards, after some
time had elapsed, I do not think it would affect the natives.

Q. Are not the outstanding subsidiary coins of lower fineness?!—A.
Yes, I think the half dollar is about 6 per cent less in value.

Q. In fact, the Spanish silver is on the basis of the Latin Union’s
subsidiary silver, is it not?—A. Iam not sure about that. I know that
it was always considered less than a dollar.

Q. What do you think ought to be the denominations of the silver
coins?—A. Ten cents, 20, and 50 cents is a very good coinage. Those
are the outstanding denominations and serve very well. The trouble
we have always had has been with the copper coins. I should sug-
gest that they be 100 cents to the dollar. The old-fashioned way,
as it exists to-day, is simply a residue of the old-fashioned Spanish
reals and dollars. Instead of having 10-cent or decimal divisions,
they had the divisions on the 123-cent basis, eight reals to the dollar.
There was a half real. Their subsidiary coins were of the value of 50
cents, 25 cents, 124 cents, and 64 cents; then, for the copper coins, so
many cuartos made a real, each one of the copper coins representing
2 cuartos. Everything has now been changed to the decimal basis
except the copper. The whole of the copper coinage does not amount
to avery large sum, probably not more than $200,000 in the whole
islands. They could easily be bought up, and by making the weight
somewhat less the Government could make a protit on the transaction.
The new coins ought, without fail, to be 100 cents to the dollar.

Q. Do you happen to know about what is the price of copper at
present?—A. No, sir; but there would be no difficulty, providing you
reduced the size. You could make two coins out of the present cop-
per coin.

Q. I think there have been occasions, when there was a great boom
in the copper market, when pig copper has gone above the value of
the coins. I think that that happened in Portugal some years ago.
But you do not think that there would be any danger?—-A. You could
REPORT OF THE SEORETARY OF WAR. 75.

make a smaller coin. What the natives are very anxious to have, and
a thing which they think a great deal of, is the subsidiary coin, espe-
cially the copper coins.

Q. You do not believe it would make any difference if the new coin
was as small or smaller than the American cent?—A. I do not think it
would do any harm to make it as small as that, but I do not think it
should be any smaller.

Q. I have been told that they would want a big one.—A. The dollar
is what they fix their minds on for size and fineness. I do not think it
would make any difference about the cent. ;

Q. Now, a few questions in regard to banking. Do you think there
is sufficient ieee currency at present to meet the needs of trade?—A.
The natives do not like paper as arule, preferring the Mexican dollars.
Paper here has been used more by Chinamen for easy transportation.
Paper is not a favorite money witb the native. :

. But is there not some desire for it for banking?—A. Yes; we
would always prefer it in Manila.

Q. I have been informed that the Spanish-Filipino Bank found
great difficulty in retiring their notes because people feared that if
they were retired they would not be issued again and that notes for 5
pesos would become. very scarce.—A. I never heard of that. In
Manila there is no scarcity of notes; if you don’t get Spanish Bank
notes, you get American notes. ‘

Q. Would there not be some deficiency if the American forces here
were largely reduced?) Would not some of the American currency go
back to the United States, and would there not be some demand for a
bank-note issue here?—-A. There might be. There is some demand, of
course, for a local bank note, as the American bank notes could not be
issued here. That isa question which I have not studied. The Spanish
bank is the only one which has the right to issue notes. While the
troops are here there will always be a circulation of American notes.

Q. Would there be objections to uniform regulation of all banks
doing business in the islands? Is there any objection to the same rules
regulating reserves, etc., and requiring inspections, being enforced on
all banks in the islands?—A. I do not think so; I do not think they
would object to that at all. There are only three banks here, the
Banco Espafiol- Filipino, the Hongkong and Shanghai Banking Cor-
poration, and the Chartered Bank of India, Australia, and China.
They would be only too glad to welcome the inspection, as it would
prove their good standing. The merchants, of course, rely upon these
three banks.

Q. Do the English banks, so far as you are informed, loan much
money or discount commercial paper?—A. They do where there is
exchange. The English banks are what might be called exchange
banks. They have their connections all over the world. They loan
money to merchants with the practical understanding that the money
from the produce is to go through their hands. They do not loan
money for the purpose of getting the mere interest on it. They rely
mainly on getting their profit on the exchange.

Q. Then they do not loan much to a local merchant in Manila, for
instance?—A. No; it is not a practice within their range.

Q. Then they do not advance much to business men on paper drawn
within the islands?—A. The Spanish bank does to some extent, but
76 REPORT OF THE SECRETARY OF WAR.

they are limited to what they may loan to each man and what they may
loan in the city, by the rules and regulations.

Q. Has it come under your observation whether there is at any one
season of the year a larger demand for capital or currency than at
other seasons?—A. Yes. For instance, while the tobacco and sugar
seasons are on it requires a good deal at one certain time. I forget
the exact time of the year. The sugar season, I believe, comes about
in November and the tobacco season in August.

Q. At these times would there be some advantage in greater freedom
of note issue if the exclusive privileges of the Spanish Bank could be
eliminated? Would there be some advantage in having a certain elas-
ticity in the issue of bank notes?—A. Not until you have educated the
natives up to the bank notes of the country. All the money which
goes out goes among the natives of the country, and the natives do not

understand paper money.

_ Q. I think yqu said something before the Schurman Commission
about the advantages of establishing an agricultural bank. What sort
of an agricultural bank do you mean in that interview?—A. An agri-
cultural bank would be a great benefit to the country, but it has its
difficulties. When a man borrows money there is some risk. The
small planter is not much considered; it is the big planter whom the
banks would deal with. The bankers would have to be very good men,
who are acquainted with the country; and, on the other hand, the
natives would have to be educated up to the banks. An agricultural
bank would certainly be to the benefit of the country. The other
banks would welcome it gladly, as it would relieve them of the big
loans they are compelled to make through the merchants.

Q. You do not think it is liable to be undertaken by a private bank
unless some Government support is given to it?—A. It would not pay.
An institution of that kind must be run by intelligent men—by high-
salaried men. It would not pay to run as a private institution, so far
as I can see. We have gone into that somewhat since my report to
the Schurman Commission.

Q. Is your reason or belief that it would not pay based upon the
costs of management alone, or would there be large losses‘/—A. There
is a risk in advancing so much money on loans. The titles of many of
the lands here are not clear. I think the future may be good fora
hank of that kind, but it will be some time before a bank of that kind
would be a success.

Q. Are you speaking purely of a small bank?—A. Yes.

Q. How would a bank get on which loaned only small amounts to
cultivators, accepting returns from the crops, having a mortgage, if
they took one at all, only as a sort of a safeguard/—A. The merchants
do that now. There is no need of a bank of that kind, for the reason
that the merchants advance the money to the estate holders on their
crops—only to the large ones, however. The small man is the one
who suffers.

Q. Could he be relieved if the Government could establish a fund
and loan him in small amounts, like 200 pesos, to buy new tools, etc.,
and take his promise that it should be repaid when the crop was har-
vested ?—A. Mt would be a benetit, but I think the Government would
have to be very careful and see that the money all came in again. If
the Government simply said, We are going to benefit these men, the

 
REPORT OF THE SECRETARY OF WAR. 77

native would begin to think he had a soft thing on. The banking
proposition here is a very hard one.

Q. How would it operate if the method were adopted which has
been adopted in Russia by.the Bank of Russia, in France by the Bank
of France, and, I think, to some extent in Germany, by requiring a
loan of that kind to be guaranteed by a syndicate of farmers in a
given locality, who would indorse each of these notes? Do you think
that a private corporation could be induced to loan upon these condi-
tions!—A. No; it would not work. You can not put them on the same
basis as our farmers. They are below the Russian peasant in finance.
The head men would say, ‘‘All right; I will indorse your note if you
pay me so much,” naming some sum of money. It would lay the whole
country open to fraud and cheat.

Q. In other words, it would not abolish high charges, in your
opinion?—A. No, sir.

Q. That is all. ‘

Exuieir No. II.

Lnterview with Mr. T. EB. Sansom, acting agent, in charge of Munila
branch of the Chartered Bank of India, Australia, and China,
September 23, 1901.

Mr. Conant. Mr. Sansom, I would like to invite your attention to
the report of the Philippine Commission for last year in what they say
in regard to currency. The following is an extract:

It seems to be desirable that some substitute for the Mexican dollar, as well as for
the Spanish-Filipino dollar, should be provided which would be uniform in its rela-
tion to the United States dollar and would commend itself to general public use as
being substantially what they have long been accustomed to. We have interviewed
a large number of leading business men of the islands and they substantially all con-
cur in the opinion that it would be injurious to business to place the islands imme-
diately upon an absolute gold standard.

As a solution of the problem, it has been suggested, and the suggestion has met the
approval of the business men here generally, that the United States dollar or a theo-
retical United States-Filipino gold peso of the value of half a dollar, like the theo-
retical gold yen which is the unit currency in Japan, should be made the standard of
value, but that asilver United States-Filipino peso, containing a small percentage less
silver than the Mexican dollar, should be coined which would be receivable in busi-
ness transactions as the-equivalent of 50 cents in United States money, together with
convenient subsidiary coins of the same character. The amount of silver in the peso
should be such a percentage less than that in’ the Mexican dollar that its intrinsic
value would not at any time warrant its export from the islands; but its converti-
bility into American money at uniform fixed rates, guaranteed by the United States,
would make it a convenient and useful currency for ordinary business transactions in
the islands.

Now, let me ask you what your views are in regard to that recom-
mendation ?
Mr. Sansom. I am in favor of it. The amount of silver in the
“proposed new coin should be made low enough to prevent its export
to China. It should contain less than 50 cents (United States currency)
worth of silver.
Q. Do you think the natives would object to taking it if it contained
ess silver than the Mexican dolllar?—A. I do not think so.
78 REPORT OF THE SECRETARY OF WAR.

Q. The plan of the commission involves measures to maintain the
value of the coin at 50 cents gold. Do you think that would be suffi-
cient?—A. Yes; I take it ‘that 50 cents gold would be a standard,
similar to the currency system in India now. :

Q. You have given considerable attention to conditions in British
India, have you not/—A. Yes; I have been in the East sixteen years.

Q. What is the system there/—A. The sovereign is really the
standard, at 15 rupees to the pound, but the silver rupee forms the
actual coinage, as they can not get the sovereign into circulation
among the natives.

Q. What was the step recently taken by the Indian government in
regard to the gold reserve?—A. They have accumulated a large gold
reserve.

Q. Has there been much difficulty in maintaining the gold value of
the rupee?—A. No, sir; not latterly.

Q. There was some difficulty at first, in 1893, was there not?—A.
Yes; but the mints were only closed in 1893. The experiment began
then. Owing to the very heavy ‘‘home charges,” i. e., annual sterling
liabilities of the Indian government, it isa very much more difficult
problem in India than it would be here where there are are no ‘* home
charges” due in gold.

Q. Within the last few years, then, the rupee has been kept steady
at the exchange fixed by law?—A. Yes. The limit of fluctuation has
been confined to the cost of shipping gold, i. e., freight, insurance,
and interest.

Q. Now, you state that you favor the plan of the commission. Do
you think it would bea wise policy to try to make American money—-
gold and paper—the only money in the islands?—A. No; because in the
first place it would double money values; and besides, the native likes
the silver coin.

Q. How would it affect the wage-earner?—A. He would expect
more dollars.

Q. Do I understand that in your opinion it would raise the price of
goods?—A. Yes; local products and wages.

Q. Would it not raise the local prices?—A. Yes; local prices for
wages, food, everything produced here.

6. It would raise local prices for all articles?]—A. Well, no; only
for articles produced here.

Q. If the plan of the commission was adopted, should any safeguard
be adopted to insure the parity of the silver with the gold standard ?—
A. Yes; a moderate gold reserve. The principal thing would be to be
very careful not to coin too many Filipino dollars. Keep them scarce.
Because I think that in time American currency notes will increase in
circulation here and to a certain extent displace a portion of the silver
currency.

Q. How large a gold reserve do you think necessary; any fixed per-
centage of the silver, any fixed amount?—A. No; not a fixed percent-
age; with a strictly moderate issue of local pesos a small percentage
would be sufficient, but if the issue was unnecessarily large a larger
percentage of gold would be required as a reserve.

Q. In your opinon, how large a gold reserve would be neces-
sary?—A. I could not tell you; it would depend upon the amount of
local currency issued.

 
REPORT OF THE SECRETARY OF WAR. 79

Q. Any particular percentage?/—A. Possibly. The right amount
would be between two and three million gold dollars. It would
depend, of course, entirely upon the amount of silver coined.

6. In the case of an extensive issue of silver coin?—A. You would
want a bigger gold reserve. If the issue of silver coinage was kept
small, the people could not spare it for export. Everybody must
have a certain amount of silver coin for personal use.

Q. If that system was adopted and the Government decided to coin
a distinctive silyer coin and maintain a gold reserve, as you suggest,
what course do you think ought to be taken with regard to the Mex-
ican dollar?—A. Stop the importation, in the first place, and recoin
first the Spanish coins, because there is always a chance of exporting
the Mexican coinage if Chinese exchange goes high enough to warrant
the banks in so doing.

Q. That is, you believe the insular government could buy silver and
make its own coins and gradually introduce them into circulation, and
that the Mexicans would gradually leave the country?—A. No; I do
not. Ido not believe the insular government should buy silver bullion.
There is probably enough silver here now, at any rate to begin with,
and introducing the new coin will take time.

Q. Would not the effect be, if they coined their own silver and gradu-
ally began putting it out, todrive out the Mexicans!/—A. No. Assum-
ing that this 50-cent gold is made the standard; when they make that
the standard they must allow every peso coin here to be received as
half a gold dollar. It would he robbery otherwise.

Q. Would it not be proper to declare that after a given date, two or
three years after, the Mexican dollar should cease to be legal tender ?—
A. Yes; but the government must redeem them at 50 cents, half a gold
dollar. Of course, if their value in China at that time was over half
a gold dollar they would probably be largely exported.

Q. You think it would not be sound public policy to discriminate
against them? The insular government, you must remember, is not
the maker of the Mexican coin.—A. But it is the money of the coun-
try, and was so for many years before the American occupation.
Under the proposed scheme of a 45-cent peso the government would
make a large profit on the recoinage. The insular government, with
its large deposits of pesos in the local banks (which deposits are repay-
able by law in the same coin), is really the biggest owner of the Mexi-
can dollar in the islands. ;

Q. It would of course involve a change, and time would be required
for it, but you do not mean to say that there should never come a time
when the Mexican coins, which we have never coined here, should
cease to be legal tender?—A. Certainly not; but the government first
must stop the importation and take over what isin the islands. Because
the Spaniards had not enough coins and used other countries’ coins
puts them all on the same footing. I believe foreign silver coins have
been in circulation here for a hundred years or more. Ey

Q. Now, if a gold reserve was established do you think it would be
advisable to pay gold for silver at the official ratio to all comers or only
furnish it in the manner they do at the Bank of France, in those cases
where the payment is considered to be a legitimate commercial pay-
ment?—A. In France they have a very large volume of silver currency
which is not received by other countries in settlement of international .
80 REPORT OF THE SECRETARY OF WAR.

balances. Here the proposition would have to be as small a silver
‘currency as we could get along with. :

_ Q. Ihave heard the suggestion that that would result in the Chinese
withdrawing the gold and exporting it to Hongkong/—A. Are you
speaking of gold paper or gold coin?

Q. Gold coin. You mean the American paper currency might be
paid in exchange?—A. Yes; because the Chinese would always export
gold for melting purposes, but United States paper currency would
not have the same attraction.

Q. Do you think that danger would ve largely done away with if
paper currency were paid instead of gold?—A. Yes; Ido. I think
that having paper currency in reserve and a strictly moderate coinage
of Filipino dollars, no more than is necessary, would prevent any risk
of a run on the reserve, except demands by hanks to meet the condi-
tions of trade.

Q. You believe, then, that if there was a fixed reserve and gold or
paper was drawn out or exported and silver locked up, that when the
silver was needed gold would be brought in by the banks to draw the
silver out?—A. Yes; because the banks could not coin their own dol-
jars and ‘aust procure them from the Government reserve.

Q. The banks would have to bring in the gold and get the silver in
order to meet the demands of their depositors, would they not, for
current funds, if there was a scarcity of silver coins?—A. Yes.

Q. And as their silver stock was reduced by the demands of cus-
tomers and depositors they would bring in gold in order to draw silver
from the Treasury?—A. Yes; and the converse when trade was dull
and the banks had big silver balances.

Q. Is not that in accordance with the natural law of money all over
the world?—A. It is at least true in the East.

Q. Do you consider that the supply of silver currency now in the
islands is redundant?—A. Thelarge silver balances held by the banks at
present looks as.if such was the case, but on considering all the circum-
stances the position is probably the other way about. From inquiries
made from old residents familiar with business in the provinces I gather
that actual coin is scarce in many places; also that practical barter largely
prevails. When peace is an actual fact and all the islands are reopened
to trade and cultivation, a considerable amount of silver currency is
likely to be absorbed. The 4,000,000 pesos recoined into 5, 10, and
20 centavos would allow less than half a peso per head of population.
If the commission’s proposed system is established I quite admit that
United States paper currency will displace a certain amount of silver
pesos, but for hoarding, silver (unless gold can be obtained) will be
preferred, being proof against fire, ants, and damp. Further, the
improved conditions that would accrue from the expected large
investments of American capital in mines, railways, etc., would cause
an increased demand for silver pesos for wages, etc. All Asiatics,
except possibly the Japanese, prefer metal to paper, and I understand
that the natives here hoard money to a considerable extent.

Q. Are you familiar with the methods of the Bank of Jaya/—A. I
spent three years in Batavia, from 1886 to 1889, but I am not very
familiar with the methods there. :

Q. Is it your opinion that the natives here would object to a silver:
coin because it was new and unfamiliar, independent of the question
REPORT OF THE SECRETARY OF WAR. 81

of weight?—A. I do not think so; but I have had no experience with
the Philippine natives of the provinces. Yet, Ido not think they would.

Q. There are at least three or four kinds of silver dollars which
were in circulation here before the American occupation, were there
not?—A. Yes; the Alfonso dollar, which is about 8 per cent worse
than the Mexican; the Mexican silyer dollar, and the old Spanish Car-
los dollar.

Q. Do you think there is a sufficient quantity of subsidiary silver in
the islands?—A. No; it is the great need at present. Copper coins of
one hundredth of a peso are also needed.

Q. Would it have a good effect if there was a new distinctive coin-
age to make a very large proportion in half pesos and pesetas rather
than pesos?—A. Yes; a large quantity of 5, 10, and 20 cent pieces,
especially, are wanted, and they need be only 800 fine.

Q. Those denominations are wanted more than half pesos, are they ?—
A. Yes; probably one-third the silver currency at present is half pesos.
We already have too many half pesos.

Q. Let me ask you this: Do you believe that a distinctive silver coin
would be a source of gratification to the people of the Philippine
Islands as a matter of pride?—A. Ido notknow. It is very necessary
to make the silver pesos issue as small as possible to obviate the chance
of heavy calls on the gold currency reserve, but large amounts of frac-
tional currency are greatly needed.

Q. That would be regulated by the demand upon the gold reserve.
Have an intelligent minister of finance here, and if he found that the
demand was heavy—if he found that he bad no silver coins in his
reserve—he would be justified in increasing the amount, would he
not?—A. Yes. When the Government wish to start this recoinage,
they should draw out 1,000,000 pesos from the banks, recoin and-pay
them into the bank, and keep on doing this until they found that there
was enough issued, and instruct the banks to collect the other coins as
rapidly as they were received from the public and only pay out the
new coins.

Q. You are talking of the conditions when the recoinage would be
going on. But suppose the recoinage had been completed and the
Mexican coinage has practically disappeared. If any increase was
needed then it would be indicated by the demands upon the Treasury
gold fund; that is, if there were large demands upon the gold fund,
it would indicate that there was too much silver, but if, on the other
hand, there was no demand on the gold reserve, they would then be
justified in coining more silver?—A. Yes.

Q. What do you think would be the effect: of authorizing the Treas-
ury to issue paper certificates for silver?—A. A very good thing at
present, because the English banks have no silver notes, and we could
use them as notes if of convenient denominations. There is no means
of getting silver noteshere. The Spanish Bank has in circulation only
about two millions, and the other banks are not allowed _to issue any.

Q. Is your bank allowed to issue notes in Chinat—A. Yes; we have
an authorized issue of $8,000,000, which is all issued in that country.
the Straits Settlements, and Siam.

11577—01 6

 
82 REPORT OF THE SECRETARY OF WAR,
BANKING.

Q. In regard to banking here, I suppose you realize that some effort
is likely to be made to establish American banks/—A. Yes; I think
they are needed here.

Q. Do you think, then, that the English banks and the Spanish
banks would not object to or oppose the establishment of American
banks?—A. The Chartered Bank would not.

Q. You have no objection to uniform regulation of banking for all
banks here?—A. What do you mean by uniform regulations?

Q. I mean that the supervision and reports required, as well as the
reserves required, and the conditions governing the issue of notes,
should be the same for the same classes of banks. The reserves may,
of course, be quite different for a savings bank and for what is called
a commercial bank, but a commercial bank, whether English, Spanish,
or American, would be subject to the same regulations as all other
banks of the same class. You have no objection to that?—A. No; we
are inspected already.

Q. Yes; but have you any objections to it?—A. No.

Q. What regulation of banking do you think would be proper as
applicable to all the commercial banks here? What would you sug
gest, including those already in existence?—A. Of course I am against
all these regulations, as we have never had them in England, and I
think we could get along very well without them. I would not want
to suggest any.

Q. I think you are required by Spanish law to keep a reserve of 25
per cent cash of your liabilities?—A. I do not know; we always keep
a large reserve.

Q. Do you keep it in Manila?—A. Yes.

Q. Do you object to the requirement that a cash reserve of 25
per cent should be kept?—A. No; not for our demand liabilities.
We should for our own protection have to keep a larger reserve than
an American bank doing a purely local business. We also take money
on fixed deposit for three, six, and twelve months. We should object
to being tied to keep a fixed proportion of cash, as the liability depends
on the nearness of the due dates.

Q. The existing law of the United States does not permit branches
of national banks; but if Congress should change the law, branches
would become legal, and would they not come into competition with
your bank?—A. Nc.

Q. What classes of banking business are done by your establish-
ment?—A. Buying and selling foreign bills of exchange. That is our
principal business.

Q. You do not buy many domestic bills on other places in the
islands?—A. We can not, because we only have one branch, which is
at Cebu. ;

Q. Do you discount bills where both people live in Manila?—A. We
discount bills very little.

Q. Why?—A. Because it is a difficult matter to tell the standing of
people in a place like this.

Q. Does not the Spanish-Filipino Bank do so?—A. I believe so, but
they know the people better, and are not strangers, like we are.

Q. Do not the branches of the English banks in Central and South
America do a good deal of discounting?—A. I do not know.
REPORT OF THE SECRETARY OF WAR. 838

Q. Then you do not think an American bank would be limited to
the same class of business by considerations of safety?—A. They
would be able to do American business that we can not touch, as they
ue find out better about the people; i. e., the new Americans start-
ing here.

Q. You would not object to their getting that class of business ?—
A. We would be glad indeed for them to take it.

Q. It would possibly mean more exchange for you?—A. No; I do.
not think so.

Q. Would not American houses here buy more largely in Europe as
business extended, and wouldn’t you get a small part, at least, of that
business’—A. Possibly.

Q. At any rate, you don’t think you would be injured?—A. No.

Q. Even if they got the new American bills of exchange?—A. No;
we should doubtless get a share.

Q. Do you think that an enlargement of facilities for using bank notes
isdesirable here? Iam not talking about the coinage so much as after
we have a regular coinage established. Would not a credit note have
some value?—A. I would rather have an American Government note.
If the American currency here is to consist entirely of paper, we de
not want more paper.

Q. Is there not a season of the year when there is much more demand
for money than at other seasons!—A. Yes; during the tobacco and
sugar seasons.

. Whom does the money go to?—A. Native tobacco growers in
the north and sugar people in the south and north.

Q. They are people who do business on a small scale, are there not ?—
A. Well, the large firms take out $200,000 or so and go there and buy.
I do not know how they do it. 5

Q. I presume they deal with small dealers?—A. I suppose so.

Q. Then your bank would not issue bank notes even if the law were
made on more liberal terms?—A. No; the British treasury would not
allow it. Weare limited to the amount of our capital of £800,000.
We have all we are allowed to issue now out in China, the Straits,
and Siam, and could not spare any for the Philippines. ee

Q. It has been represented that the rates of exchange were very
high between here and other points.—A. Which points, silver points
or gold points?

6. Well, for the United States—that your charge for cashing a
Treasury draft on the United States and selling exchange on New York
was exorbitant?—A. If you have a draft on Ge York we buy at the
face value, and if you buy from us on New York we charge 1 per
cent premium. ;

Q. Do you ever pay a premium for drafts on New York?—A. No;
but if it were not for the Government’s artificial par of 2 to 1, bills on
New York would command a premum.

Q. In buying at the face value do you do that, however small the
draft, or do you charge a small commission!—A. No; we take a draft;
that is, of course, from people we know. We take no drafts from
people we do not know. ‘

Q. If a man brought to you a check of or by a United States dis-
bursing officer and it was properly identified as genuine?—A. We can
not cash this class. There is too much risk init. We had alot on the
City of Rio Janeiro, and we shall have very much trouble to recover
the amount so that we are not now cashing any more.
84 REPORT OF THE SECRETARY OF WAR.

Q. You would probably get them all back some time?—A. If they
were issued in duplicate, it would be no trouble, we could cash them at
once, but they are not issued in duplicate, and we lost about $3,000
United States currency on the 2’o, and we have stopped handling them.

Q. Do you know whether the Hongkong and Shanghai Bank pur-
sues the same policy?—A. Idonotknow. If they were made in dupli-
cate, there would be no trouble in getting them cashed here.

Q. There has been a good deal of complaint made by army officers
that there was no place where they could lawfully deposit funds, but
this is, of course, not a matter which concerns you. You would not
object to receiving public funds?—A. No; the fault lies with the army
regulations.

Q. Have you a minimum limit for deposit on current account?—A.
$125 gold, $250 Mexican.

Q. Is there any difficulty in a man who has that amount of money
opening an account?—A. No; all he has to do is to get some one to
introduce him—some one that knows him. If he is an officer, of course
his uniform introduces him.

Q. What do you mean by that minimum limit? Is a man permitted
occasionally to go below it?—A. Yes; it is simply to begin with. The
opening of the account costs something, as do also the depositor’s
check and paying-in books. :

Q. Have you any suggestions to make regarding modifying the
banking laws in the islands?—A. I would like to know what the bank-
ing laws are. One thing that is very necessary for business is in
connection with the neutral go-down warrants. Suppose you area
merchant and you have a go-down warrant from Smith, Bell & Co. for
hemp, and you indorse that to me. That ought to be perfect security
if I advance you money on the hemp, but under the Spanish law it is
not. If you fail, the hemp which it represents has to go to the pool
for the other creditors; I have no preferential claim.

Q. What was the reason that the banks recently became involved in
that largehempfraud? Did not that illustrate the wisdom of the Spanish
law? AsI recall the matter, the same quantity of hemp was hypothe-
eated to several different banks. Was not that the case?—A. Yes;
duplicate liens were used and other gross frauds perpetrated.

. Ifa prior lien had been recognized, it would have fallen to the
bank first making the loan?—A. The hemp represented by neutral
godown warrants was only hypothecated once, there being only one
document of title in existence.

Q. That is a question of Spanish or local commercial law; it does
not pertain to the regulation of banks by Congress?—A. No; it was a
legal question.

Q. In respect to the regulation of banks, you have no special sugges-
tions to make?—A. No: I believe in freedom, as in British colonies.
[ would like to point out that by the form of return furnished us by
the Government bad debts have to be included with the good ones.
This is an unsound system. They should be stated separately.

Q. You do not care about the issuance of notes, because you do not
issue any?—A. No.

Q. Have you any further suggestions to make?—A. I would suggest
that arrangements be made to impress stamps on check books.

Q. What is the rate here?—A. Two cents on bearer check, but on
order checks ad valorem. If you have a check payable to Mr. Conant
REPORT OF THE SECRETARY OF WAR. $5

or bearer, it is 2 cents specific; but if payable to Mr. Conant or order,

it isad valorem. Regarding the various rates 1 do not remember, but

it practically stops all order checks being issued, so the Government

does not get the money, as the people use bearer checks and run the

ee involved. The stamp duty on an order check for $10,000 would
e $8.

Q. The bearer checks pay only 2 cents while the order checks pay a
high price ad valorem!—A. Yes; a prohibitive duty.

Q. What taxes are paid by your bank to the government of the
las Islands?—A. 6.35 per cent on profits.

Q. Do you pay on your real estate?—A. We have none. We rent
our quarters.

Q. Does the tax on net profits and the stamp tax comprise all the
taxes you pay to the insular government/—A. There is the tax on
salaries of 23 per cent.

Q. Well, that is rather to be paid by the men who receive the sal-
aries?—A. Yes; they are supposed to pay them, but as a matter of
fact, the bank pays the tax. We pay the urban tax. The landlords
should pay that, but do not, and we pay it.

Q. How much is that?—A. I do not recall.

Q. Have you further suggestions to make?—A. No.

Q. You do not object to the 6.35 per cent on net profits?—A. No.

Q. That is easily ascertained, I suppose?—A. Yes; because we bal-
ance our profits every half year.

Q. The tax,I believe, is figured on your net profit. You figure your
net profits entirely separate from those of the main bank?—A. Yes;
each profit by itself.

Q. There is a tax here, I believe, upon corporations. Do you pay
anything underthat law? The tax is levied upon the capital of corpora-
tions, but I presume your capital being issued elsewhere, you do not
pay anything on that here?—A. No; we use our deposits as capital.

am not aware of a tax on the capital of corporations and think you
must be mistaken.

Exuisit No. III.

Interview with Mr. W. Adams Oram, acting agent of the Hongkong and
Shanghai Banking Corporation at Manila, September 24, 1901.

Mr. Conant. Mr. Oram, you have read the report of the Philippine
Commission, I suppose, in regard to the coinage requirements here. I
don’t refer to any particular action of the commission to meet tempo-
rary conditions here, but their general recommendations in regard to
a Spanish-Filipino dollar?

Mr. Oram. Yes, sir; Iam acquainted with their views on the matter.

Q. What is your view in regard to it? Is it in favor of such a
plan?—A. Iam in favor of the sound silver dollar as being the least
liable to disturb trade and best suited to the requirements of the coun-
try in general. é

Q. You mean the free coinage of the silver dollar?—A. It would
practically amount to that. Much would depend upon the method
the Government adopted to supply us with the new coinage. We
86 REPORT OF THE SECRETARY OF WAR.

might import bar silver if they would accept it for coinage into
dollars. We think that, being so close to silver-using countries, and
with the prospect of China especially being a silver-using country for
a long time to come, a sound silver dollar of the same weight and fine-
ness as the Mexican or British dollar is the best dollar. ;

Q. Practically, then, you are not in favor of making an effort to main-
tain a fixed relation between the gold and silver dollar?—A. The dol-
lar that you propose to make would be more or less of a token dollar;
that is, not intrinsically worth the value it passes at. :

Q. You think, then, that a dollar of the same weight as the Mexican
dollar would be the best?—A. Yes; the same as the Mexican and the
British dollar.

Q. You think that such a dollar would promote commercial relations
with silver-using countries?—A. Yes, sir.

Q. Then, naturally, you do not favor the introduction of the Ameri-
ean currency here?—A. No.

Q. What effect would it have upon prices and wages!—A. It would,
I think, tend to enhance both prices and wages.

Q. And would it also have any particular effect on labor and retail
prices here; would it tend to raise prices?—A. 1 think it would have
that effect:to some extent.

Q. I am speaking of introducing the American gold dollar. Would
the native be satisfied to receive an American 10-cent piece where he
receives a peseta now/—A. I think he would become accustomed to
it. I don’t see any great difficulty in introducing the scheme, but I
consider that it would be better for the good of the country to remain
on a silver basis, with a dollar of the same weight and fineness as the
Mexican dollar.

Q. If that is your view, then why is it desirable to change at all from
the present conditions/—A. Because present conditionsare untenableas
a permanentsystem of currency. Banks here are bound by law to open
accounts in either United States or local currency, but have great dif-
ficulty in convincing the public that they are only entitled to demand
repayment in the currency they originally deposited.

Q. When did'the coinage of the British dollar begin?—A. In 1894;
in Bombay.

_Q. Do you know how many of these have been coined?—A. No;
when they first began the coinage Eastern banks guaranteed to take a cer-
tain amount, but whether it was two million or three million perannum I
don’tremember; but thatarrangement has been done away with, because
the Eastern banks now take just about as many as the mint can turn out.
Although there was some objection to them at first, the Chinese take
them very readily now.

Q. From an economic point of view, then, the only advantage of a
separate dollar here would be the better facilities for turning bullion
into coin. Exchange would still be liable to rise and fall with silver
bullion?—A. It must, of course.

Q. Do you not consider that a disadvantage in trade with gold-using
eountries?—A. A stable currency undoubtedly has its advantages, but
with the facilities now given to merchants by bankers for settling their
exchange forward the speculative element is practically eliminated and
the danger of fluctuations ix considerably lessened. You will have
fluctuations whether on a gold or silver basis, but they are liable to be
more limited on a gold basis. We have recently seen a rise in rates
REPORT OF THE SECRETARY OF WAR. 87

in Japan of between 2 and 8 per cent owing to the dearth of gold, but
now gold has come in, and exchange has gone back to where it was
before, and is remaining steady.

Q. If the plan of the commission had a supplementary provision pro-
viding for a gold reserve, the same as they have in British India, do you
think this would change the relations between the Philippines and other
silver-using countries?—A. If the plan of the commission is adopted
you must have a gold reserve, otherwise how would you redeem your
token silver dollars?

Q. Is there any other objection to such a project, if it is certain
that proper measures will be taken to maintain a par between gold
and silver at a ratio fixed upon?—A. I can not mention any further
special objection. On general principles I consider that it would be
better for the trade of the country to remain on a silver basis.

Q. You are familiar with the system in Java?—A. Yes; though I
have never been in Java. They are ona gold basis there, but one great
danger’ with their currency is that the silver 24-guilder piece is intrin-
sically worth only about half its gold vaiue and is consequently coun-
terfeited to a large extent.

Q. The system of the United States is substantially the same?—A.
Yes; so far as the silver dollar is concerned.

Q. Do you believe, if a gold-reserve fund was established, that there
would be any tendency on the part of the Chinese or. Filipino natives
to hoard the gold or bury it?-—-A. The Chinese would not do that; I
can not answer for the Filipinos.

Q. I have been told that the Chinese carry away a great deal of gold;
that is, when they leave the country.—A. A Chinaman leaving the
country always carries everything he has.

Q. Itis a question whether a gold reserve would be subjected to a con-
stant drain any more than silver would be. You don’t think there
would be any material difference?—A. Well, of course it would depend
a great deal upon the balance of trade. If no other remittances were
available, gold would probably be exported.

Q. How is the gold standard working in Japan?—A. Not very
satisfactorily.

Q. Do you attribute that to the coinage system or to lack of capital
for new industrial enterprises?—A. They do not seem able to retain
the necessary gold reserve.

Q. They should obtain more gold by increased foreign loans?—A.
Yes, sir; but I don’t know how far their credit would go in that way.

Q. Would any hardship be caused to interests in the Philippine
Islands if the Mexican silver dollar should cease to be legal tender
after a certain period, say two years, and the Government refused to
change them at the rate of 2to1?—A. Certainly not; the time is ample.

Q. In reference to the situation in Java, where the banks sell gold
at its par value in silver, do you think such a step could be taken here
in maintaining the parity of the token coin?—A. The Goveftnment’s
guarantee to exchange the token coin at 2 for 1 is the only step neces-
sary. to maintain its parity. ; ; ;

Q. Suppose there was issued an excessive quantity of silver dollars
and more was issued than the business of the country required, the
tendency then would be to affect the value of silver and make it lower
and affect exchange as compared with gold?!—A. The value of silver
88 REPORT OF THE SECRETARY OF WAR.

used only as a token coinage in a country on a gold basis would not
fluctuate. If there was at any time more silver than the country
required, it would probably be turned in to the Government in
exchange for gold.

Q. Now, if the Filipino treasury exchanged silver from some busi-
ness man for a draft on a bank in New York or San Francisco, or
upon the United States subtreasury in one of those cities, it would be
the oe as cash to him?—A. He would probably sell it to one of the
banks.

Q. I am asking, if a man obtains a draft on the United States and
remits that draft to the man to whom he owes money, whether the
treasury would not by that means tend to maintain the parity of
silver?—A. You would become bankers then. The transaction would
not affect the parity of silver.

Q. I don’t think that is desirable as a rule, but it might be useful
in certain cases. It would, in your opinion, affect the legitimate busi-
ness of the banks?—A. I think it would. :

Q. What would be the effect under the natural laws of exchange if
you were to exchange gold in the United States for silver? ould
it not maintain at par the local currency if we were on this gold basis
with the token dollar?—A. The operation would not be a suitable one.
If these islands are on a gold basis with a token dollar, the Government
will be the only importers of silver.

Q. We were referring to importing gold if silver was scarce.—A.
The Mint not being open to free coinage, the Government makes itself
responsible for the silver supply. Banks, at times, might import gold
to pay for the token dollars..,

&. How do you think the people would regard a new silver coin,
without regard to basis? Would there be any difficulty in its intro-
duction?—A. I don’t know sufficient about the native characteristics,
but I should not think so. If it were in China, I would say yes.

Q. But there have been here at least three different silver dollars in
common use.—A. From which it is fair to infer that they would take
it without any hesitation.

Q. What would you say in regard’ to the device on the new coin?
Would you have it as near like the Mexican as possible, or widely dif-
ferent, so that there would be a distinction?—A. I should suggest one
widely different.

Q. Do you think it would be a source of gratification to the people
to have a distinct coin?—A. It might be so, and it would serve to pre-
vent its being passed on other people for the Mexican dollar.

Q. There would be this advantage in the token coin, would there not,
that the Government would be able to keep the coinage up to the stand-
ard and redeem the worn coins?—A. Yes; if they promised to redeem
worn coins at their full value; otherwise they would remain in circula-
tion.

Q. Dé you think any distrust would follow the introduction of a
token coin if it was a trifle lighter than the Mexican coin‘—A. I should
not think so. The natives are used toit. The Spanish-Filipino dollar
is about 8 per cent less value than the Mexican.

Q. The people have never made any discrimination against that?—
A. No; I never heard of any trouble at all.

Q. No discrimination would be made by the banks so long as they
knew that the American dollar was exchanged for its face value in
gold?—A. No, sir.
REPORT OF THE SECRETARY OF WAR. 89

Q. But they would discriminate against it if there was free coinage
of silver and no reserve of gold?—A. Why should they discriminate?

Q. Because they could not sell it in the foreign market?—A. If it
was full weight there would be no question of discrimination.

Q. Under the free coinage of silver it would be an absolute neces-
sity to have the coin of the same weight as the Mexican?—A. Yes, sir.

Q. If it was of a lower weight it would tend to drive out the Mexi-
can and fall to bullion value?—A. Yes, sir.

Q. Do you think of any other considerations in regard to coinage ?—
A. I have nothing else to suggest.

Q. What do you think of the supply of coin here and its suffi-
ciency?—A. That, of course, is a very difficult question to answer in
the present condition of the country. It is next to impossible to form
an estimate of the amount of produce that has to be financed for. The
sugar season begins next month and present estimates give it at one to
tivo million piculs. I don’t think we have sufficient dollars in the
place at present.

Q. Well, coinage by the American Government, whether free coin-
age or token coinage, would enable the government to keep up the
supply to better advantage than under the present system, would it
not¢—A. In case of the adoption of a gold standard with a token sil-
ver dollar the responsibility would be thrown entirely upon the gov-
ernment. ‘ At present the government has no responsibility whatever.
I have not heard of any complaints about the present system. The
bankers are the importers of the coin and make it their first care to
a there is enough money in the country for the requirements of
trade.

Q. If business increases will there not be a demand for more cur-
rency of some kind?—A. Yes, sir; I should think so.

Q. United States currency is in considerable demand in places?—
A. Yes.

Q. But if you had had no introduction of American currency there
would have been a greater pressure for money?—A. Things would
have gone differently. After the American Government came there
was a large exportation of Mexican coin.

Q. Do you think if a separate coin were authorized under either
system that the new coins would tend to supersede the American cur-
rency to some extent?—A. I think there would always be a large
demand for silver, because the natives are accustomed to it.

Q. Do you think it would be advisable for the Government to issue
silver certificates, in order to enable men who handle fair amounts of
money to carry paper, instead of coins?—-A. I should hardly think so
at present, because there are no banking facilities in the provinces,
except at Iloilo and Cebu. Until the country is more developed there
is no field for further banking in the provinces, and without banks
large silver certificates would be unsuitable to the requirements of the

eople.
P Q. I am speaking of Treasury certificates in the place of silver dol-
lars.—A. I think that the natives in the country would have difficulty
in getting rid of them, especially as they have no banking facilities.

a But would not certificates be of some benefit in small denomina-
tions around the cities, say, for instance, in Manilat—A. Up to $500
they would be very useful.

Q. As low as $5, but fully secured?—A. They would be very use-
90 REPORT OF THE SECRETARY OF WAR.

ful, of course, but when you say silver certificates they would, I
understand, be all equally redeemable in gold.

Q. They would be issued if you had free coinage?—Yes; but they
would be simply certificates of deposit.

Q. We have both gold and silver certificates in the United States
and ae simply relieve the people from carrying coin?—A. Yes, sir.

ave you any suggestion to make of your own as to what kind
of supervision should be necessary by the United States over banks?—
A. It is not the custom in Great Britain or her colonies for banks to be
inspected, and we do not see the necessity for it here. We have, how-
ever, so far cheerfully submitted to Government inspection in Manila
and given every assistance to the officers appointed to make the inspec-
tion and shall continue to do so as long as it is necessary. We would
mention as one great drawback to the inspection that we keep a very
large cash balance here, and every time it is moved it has to be han-
dled by natives and a loss is almost certain to ensue. ‘

Q. You are aware that all American banks make reports to the
Comptroller five times a year and they are published in full once a
year?—A. The accounts of this bank as a whole are published twice a
year. Weshould not like our Manila statements published separately.

Q. In the case of the American banks, they don’t publish the entire
reports except once a year, but, I think, in New York all banks pub-
lish their balance sheets weekly ?—A. They are banks themselves. -We
are a branch of a bank. :

Q. You would not object so much to furnishing a statement provid-
ing it was not made public!—A. No; we have already furnished statis-
tics at the request of the Government having no bearing whatever on
the stability of the bank, but have asked that they may not be published.

Q. I believe the Spanish law required banks to have a cash reserve
of 25 per cent of their deposits?—A. I didn’t know the Spanish law
required that.

Q. The United States law requires that. Do you object to that?—
A. Certainly not; we should not consider it safe to allow our funds to
get below that.

Q. You hold that in currency!—A. Yes; both in United States and
local currency.

o. You don’t count gold and bills on deposit elsewhere?—A. Actual
cash.

Q. Well, in regard to the issue of notes, your bank issues no notes
here?—A. No; our charter allows us to issue the amount of our capi-
tal, but we can use the whole of it in Hongkong and China.

Q. You do issue notes in China?—A. We issue the amount allowed
by our charter, and by special ordinances are allowed to continue
issuing notes beyond that amount by depositing with the Government
dollar for dollar.

Q. What do you depos't?—A. Coin; dollar for dollar. If we issue
a $100 note we deposit $100 with the Government.

Q. If American banks were authorized to issue notes, would it be
an objection?—A. Not at all. Business is considerably hampered at
present by the insufficiency of local currency notes.

. In your business do you loan money to merchants on domestic
bills?—A. There are no domestic bills here, as the term is understood
in America; but merchants in Manila, having ae businesses,
are often drawn on at short usances, and such bills we from time
to time discount.
REPORT OF THE SECRETARY OF WAR. 91

Q. So you don’t loan money toa manufacturer here on a note given
a by some purchaser of his goods?/—A. There are no such bills
offering.

Q. It is done by the San Francisco banks, is it not?—A. It may be, but
in San Francisco banking business is slightly different. We being an
exchange bank like to advance on what you might call liquid security.
We don’t want to lock our money. up for months.

Q. What class of business could an American bank get if one were
established?—-A. They could advance money on mortgages, and on
products in the hands of dealers who required to hold them.

Q. That would not be a legitimate part of the business of a com-
mercial bank unless it set aside a small percentage of its capital for
that purpose.—A. There is not much else to be done that I can see.

Q. Would not an American bank get such business as between
American houses here and American houses in the States?—A. No
doubt a good deal of it. At present there are not very many Ameri-
can firms established here.

Q. As a banker located here, you have no objection to the establish-
ment of American banks here and to their issuing notes?—A. None
whatever.

Q. You have a clearing arrangement with the Spanish-Filipino
bank?—A. Yes, sir.

Q. Is there any clearing house here?—A. No; we just send men
ators to the other banks with checks from time to time during the

ay.

Q. And they pay you in actual coin?—A. When we demand it. If
the balance gets too big I can draw a check on them and send it over
and get it cashed.

Q. What policy have you been pursuing in regard to the notes of
the Spanish-Filipino bank? I understand that they have been trying
to draw them in from circulation, but without success?—A. .As to the
first question we receive them readily. There is a great demand for
them and we rarely have more than a few hundred dollars in hand.
As to the second question I could not answer that exactly, but we
have difficulty in getting notes from them. It looks as if they wish to
reduce their circulation.

Q. You have no special fear that an American bank would be allowed
to issue notes that were not safe?—A. No.

Q. Is there now or likely to be much demand for bank notes in the
business of the islands?—A. I should think so, as the present money
is rather cumbersome; but when a shipment of money is made down
to the provinces to pay for products it is made in hard dollars.

Q. Are there some seasons when the demand for money is much

reater that at others/—A. Yes. A good sugar crop makes a big
a for money toward the end of each year.

Q. Would bank notes enable the country to get along with less coin
at such times?—A. Yes; if the notes were readily taken by the natives
in the provinces. .

Q. Would not the issue of these notes, provided they had the
required reserve, help business when money was in special demand /—-
A. Yes; if they carried with them the confidence of the public.

. An American bank would not be permitted to issue in excess of
its capital, but its regular circulation might be below its capital. Then
at special times it might issue up to its limit?—A. Yes.

Q. In your opinion, what security should be provided for those
92 REPORT OF THE SECRETARY OF WAR.

notes if they were allowed?—A. I consider that at least one-third of
the amount of notes issued should be held in cash or first-class securi-
ties. The shareholders, as is the case in this bank, being also made
liable for the note issue, appears to me a wise provision.

~ Q. If the Government of the United States should decide to author-
ize a national bank, under the American law, to issue notes here, either
through branches of some American bank or through an American
bank having its head office here, would you desire that the regulations
placed upon the note issue should apply to all the banks, or are you
entirely indifferent upon the subject?/—A. Although at the moment it
does not seem likely that we shall require to avail ourselves of the
privileges of a note issue in Manila, we should like to have the option
of doing so at any future time.

Q. Now, will you just tell me a few things about your exchange
methods and your charges? I have heard complaint made that your
charges were excessive.—A. That is not so. Complaints have been
made, but I do not think they were justified.

Q. What is your usual charge for exchange on London?—A. We fix
our rates according to local conditions.

Q. Your exchange rate includes the fluctuations in silver?—A. It
includes everything, but in normal times it would follow the fluctua-
tions of silver more closely than it does now.

Q. I mean that you can not entirely disregard that element?—A.
No; not entirely.

Q. Your charge for exchange would include something beyond what
it would if this was a gold-standard country ?—A. I do not think so.

Q. The commission charged would be less?—A. There is no such
thing as commission in our transactions. The rate is quoted, and it
covers all expenses.

Q. Would your exchange vary if this was a gold-standard country /—
A. Yes; in the same way that the exchange of New York on London
varies.

Q. You make a charge for transmittal?—A. Everything is included
in the rate.

Q. Is there not a pretty well-defined allowance for that charge inde-
pendent of the fluctuations of silver?—A. We are not bound down by
any hard-and-fast rules that I know of.

Q. I have heard that drafts upon New York and London were some-
times bought by your bank and other English banks at a premium ?—
A. Premium is not quoted on drafts on London. They are bought at
the current rate of exchange. Drafts on New York have been bought
at par, premium, or discount, according to the rate of the day.

§ But you have to transmit more money to London than you
receive?—A. Asa general rule.

Q. So you make a profit by selling a draft on London?—A. There
is a difference in exchange between buying and selling which consti-
tutes our profit.

Q. Have you handled many of the drafts on the Treasury or checks
of the disbursing officers?—A. We have bought a good many.

Q. By what methods?—A. We have lately been taking them at par.

Q. Both drafts upon New York and checks in favor of individual
officers upon the Treasury (—A. Yes.

Q. I have heard complaints from officers that they could not cash
certain classes of paper without paying a considerable commission.—

 
REPORT OF THE SECRETARY OF WAR. 93

A. These complaints, I think I may safely say, arise froma want of
knowledge of the laws of exchange.

Q. They must have been refused something they wanted.—A. To
give you an instance: A gentleman was in this morning who had sev-
eral checks on New York, and he asked me to give him gold for them
and place them to his credit here. I don’t get repaid this money for
onemonth. What I charged him was simply interest. On explaining
the matter in that way he was satisfied.

Q. Werethey Treasury checks?—A. They were not Treasury checks.
We rtin a certain amount of risk in taking them.

Q. Is it usual for banks in different countries to charge for collect-
ing checks?—A. Yes, in England banks always charge for it. I take
it it is thesame in America. If I went into a San Francisco bank with
a check on New York I should expect to be charged according to the
exchange ruling between the two places.

Q. If the officer had brought in a Government check would you have
charged him for it?—A. Not if he would take local currency. Then
I would give him par.

Q. At two to one?—A. Yes.

Q. I suppose your bank is more particular about accepting new
depositors than most of the American banks are?—A. To what class
of depositors do you refer—in what way ?

Q. That you require more formality’—A. I think we are rather
freer.

Q. There was an arrangement at one time, I think, was there not,
between your bank and the War Department, by which you delivered
United States currency here without charge for cable drafts upon New
York?—A. It still exists and is being carried out. In that case we are
only out of the money a very short time. As soon as we pay over the
money the cable is sent and there is not much delay before being paid.

Q. It saves you the expense of exporting gold from here to New
York?—A. Yes, sir.

Q. Has that system operated to help the currency situation here?—
A. Ithinkso. The military government imported gold for some time,
but it now suits them better to take it from the banks. A good deal
of gold has been leaving the country lately and we are getting a little
short.

Q. Why does it leave?—A. Because it suits the Chinese to export it.

Q. Is the Government rate upon Mexican dollars responsible for
the outward flow of gold to some extent?—A. They are running a
dual currency, and the superior will always leave the country.

Q. The difficulty is in making the Mexican dollars worth 50 cents
when they are not worth that?—A. That is practically it.

Q. What would be the effect of that policy naturally?—A. The
effect of it would be to drive out the superior money.

Q. Would it be a wise thing for the insular government to lower
the valuation of the Mexican dollar in gold?—A. I should not like to
see any disturbance at present, until we get on a proper currency
basis. You see, there was a great deal of difficulty at first about it.
The rate was always fluctuating and caused endless annoyance, and
hard things were said about the banks. Then the arrangement was
made to maintain the ratio of 2 to 1 by the Government being pre-
pared to take over the gold from the banks at that rate. Shortly
after it was found that the banks could take it over at the same rate
94 REPORT OF THE SECRETARY OF WAR.

a their own account and the Government were very glad to let them
0 SO.

Q. For the purpose of promoting trade the ratio is giving satisfac-
tion?—A. Yes.

Q. Is there any way of reducing to-a mathematical demonstration
the argument that your charges are not heavy?—A. The best proof I
can give you that our charges are not heavy is the fact that our busi-
ness is steadily increasing.

Q. About how much gold have you on hand now, for instance? This
is not to be given for publication. If it is published at all it will be
in the United States.—A. Nearly $2,000,000.

Q. What is the average of your deposits in Manila?—A. I could
not tell that offhand.

Q. Have you any criticisms to make upon the existing system of
taxing banks here?—A. We still pay under the old Spanish system.

Q.. You pay tax on the net profits, do you?—A. Yes, sir.

Q. This is determined separately for the Manila branch?—A. Not
ee ’ We pay the same proportion that we paid under the Span-
ish law.

Q. How did you determine how much was to be paid?—-A. It was
on the proportion of the net profits of the whole bank.

Q. Would it not be desirable to have some means of ascertaining
what the net profits of the Manila branch amounted to—something you
could define here/—A. A statement of profit and loss is reared half
yearly by the Manila branch.

Q. You-don’t pay any tax on the share capital of the bank?—A. No.

Q. Spanish law provides such a tax, I believe, but in the case of
foreign banks their capital is not here?—A. No; only a certain amount
of the capital is allotted to us here.

Q. I have heard a criticism made that the stamp tax on checks tended
to force the use of checks to ‘‘ bearer” instead of ‘‘to order.”—A. At
present people are obliged to give checks to bearer, because the stamp
tax that an ‘‘ order” check demands is so excessive.

Q. What is the rate?—A. An ‘“‘order” check for $1,000 Mexican
costs 60 cents; for $20,000 Mexican costs $15; above $20,000 Mexi-
can, 15 cents per $200.

. Q. Do you use them at all?—A. Very rarely.

/ Q. Have you ever considered the subject of agricultural loans here ?—

_ A. No; I can not say that Ihave. 1 presume you mean loans against

. growing crops. In agricultural countries where we have banks as a
rule the loans are made to the native producers by the exporting firms
who want to buy the products. We advance against produce when it
reaches the port of exportation.

Q. But the houses who do this charge a very high rate of interest,
do they not? Could you tell me what rate you charge them?—A. It
varies; 6 or 7 per cent.

Q. And as high as 10 per cent?—A. A very rare occasion if it is.
It might be in some very risky business. It is not a safe rate. ,

Q. Do you consider that it would be safe for the banks to loan money
at a lower rate to these houses?—A. It would be a mistake to lower
the rates that we charge now.

Q. Well, but the European banks loan money to patrons as low as 2
per cent?—A. Conditions here are very different. We pay higher
rates on deposits than European banks do.

 
REPORT OF THE SECRETARY OF WAR. 95

Q. Would not the rate fall if there was more capital out here?—A.
I don’t think so.

Q. You receive deposits of the minimum amount of how much?—
A. About $250 gold or $500 Mexican.

Q. The Chartered Bank receives for one-half that?—A. They adver
tise doing so. We really have no fixed rule; each case is considered
on its merits.

Q. Well, that doesn’t mean that a man can never draw below the
limit?—A. Certainly not. He can draw what he likes so long as he
has a credit balance.

Q. Under what provision of law do you exercise your functions
here?—A. We act under a power of attorney granted us by our chief
office in Hongkong.

Q. By what authority of the local government? It would be com-
_ petent for any government to prohibit foreign banks from doing busi-

ness. Have you any specific grant from the local government?—A.
Not that I know of.

Q. Itis a tacit understanding?—-A. We were here when the United
States came, and our right to be here has never been questioned. We
were properly registered under the Spanish Government.

Q. That is what I suppose; but you have not personally investigated
the subject¢—A. I know of an agreement dated 29th June, 1883, be-
tween ‘the Court of St. James and the Court of Madrid, giving free-
trade facilities between Great Britain and Spain. Nothing has been
done since, so far as ] am aware.

Q. Have you any further suggestions?—A. Well, touching the
stamp tax, we should very much like to see the embossed stamp intro-
duced, so that we could send our check books up to the stamp office
and get them stamped instead of having to affix the adhesive stamp.

Q. Are the embossed stamps generally used in other countries?—A.
Yes, sir. We should also like to see a uniform rate of stamp duty on
any denomination of check, and whether to ‘‘ order” or ‘‘ bearer.”

Q. Would it be an improvement if this ad valorem stamp tax on
checks to ‘‘ order” was made more liberal; for instance, for checks below
$2,000 pay 2 cents, and the higher checks be taxed a little higher ?—
A. It would certainly be an improvement; but why not do away with
it altogether and let all demand instruments bear a uniform stamp, as
in other countries? The system of ‘‘ bearer” checks is very insecure
indeed. We largely employ native collectors. Payment is made to
them in ‘‘ bearer” checks. If those checks are on other banks what is
to prevent them from cashing them and absconding ?

& If the rate were lower—instead of paying $8 for a check of
$10,000 to ‘‘order,” if we had a lower rate, do you think they would
be willing to pay that for the additional security?—A. A few might;
the majority would not. A check is a demand instrument, and I think
the rate on them should be uniform.
96 REPORT OF THE SECRETARY OF WAR.

Exarsit No. LV.

Statements of officers of the Army regarding the need for a legal
depository of public funds at Wonila.

HeapquartTers Division OF THE PHILIPPINES,
OrFicr CHIEF PAYMASTER,
Manila, P. I., September 25, 1901.
Sir: In response to your request, I have the honor to inclose a list of
peaeons why an assistant treasurer should be located in the Philippine
slands.
Your proposition to have the insular treasurer act as a depository
would, I think, answer the requirements.
Very respectfully,
A. 8. Towar,
Colonel, Assistant Paymaster-General, U. S. A.,
Chief Paymaster.
Mr. Carus A. Conant,
Manila, P. I.

 

(Memorandum inclosed.]

REASONS WHY THERE SHOULD BE AN AGENT OF THE UNITED STATES
TREASURY WHO WOULD RECEIVE DEPOSITS OF DISBURSING OFFICERS,
ETC., OF THE UNITED STATES LOCATED IN MANILA.

A representative of the Treasury Department in these islands would
be desirable to acquaint the Department at Washington with the
financial conditions prevailing not only in these islands but in the
Orient generally, with which Manila would, in a measure, be in sym-
pathetic touch.

To avoid the distribution of money in the hands of a large number
of disbursing officers. If kept in one place better means of protection
could be employed. At present all feel that matters are temporary,
and safety is often sacrificed to economy in cases where the work is to
betemporary. Guards are required at each office where funds are kept.

For the prompt detection of counterfeiting and to secure authorita-
tive action without delay on the part of a competent secret service.
Considering the character of the people of these islands, it would be
desirable that American money should be above suspicion, even from
this source. This also puts a heavy risk on the chief paymaster of
the division, as he receives money from different sources, and has been
unable to get an assistant who is an expert in the detection of counter-
feit money. The great bulk of the money comes from the banks, but
I understand that they have no one who is experienced in that capacity.

To redeem old, worn-out bills, unfit for circulation. This factor will
increase as time goes on. It has not yet been a large item, as nearly
all the money sent out has been new. The banks promise to take all
money and send the worn back to the United States, but it can be
readily seen that they will not care to take very old bills, and, not
knowing the Treasury regulations in regard to redemption of paper
money, will naturally refuse all that may appear doubtful, thus to an
extent discrediting the United States currency.
REPORT OF THE SECRETARY OF WAR. 97

For convenience of exchange in the islands. Disbursing officers
now have to draw checks on New York or San Francisco and the banks
charge 1 per cent or over for cashing them. The postmaster cashes a
large number at par, but when he has not sufficient funds to do so, the
holder is compelled to go to the banks.

To distribute fractional currency to the citizens. At present there
is a great scarcity of pennies, nickels, and dimes, and business men
are very much inconvenienced by the lack of them. The Filipino
people earn small wages and are accustomed to and require a large
supply of fractional currency. This is a very important matter.

HeapquartTers Division OF THE PHILIPPINES,
OFFICE CHIEF COMMISSARY,
Manila, P. L., September 28, 1901.

Dear Str: As requested by you, 1 have the honor to suggest the
need of a designated depository at Manila, and, for very many reasons,
I think the treasury of the insular government would be the proper
depository. Personally, I should not recommend any local bank,
for while they are, I understand, sound financially, their capital is
largely foreign and their management is not American.

As it is now, disbursing officers are obliged to keep large sums of
currency on hand, at the personal risk of the officer, for the purpose
of meeting outstanding obligations and for the transaction of current
business. They have no proper safes or vaults, and are, therefore,
compelled to accept risks that should not be put upon them.

Again, in my department especially, we receive considerable
amounts, the result of sales at the several posts, and disbursing offi-
cers’ checks, with many indorsements, are frequently sent here. These
finally find their way to New York or San Francisco, and for some
slight informality are frequently returned, and probably three or four
months have elapsed since these checks were indorsed, and to correct
the error is often very difficult. With a depository here this long
delay would be avoided.

Again, if contractors are paid in checks on New York or San Fran-
cisco, they must generally add from 1 to 2 per cent to cover the dis-
count charged by the banks, and where officers or enlisted men receive
checks for the safe-keeping of their funds they must pay this discount
when they need the currency. If the treasury of the insular govern-
ment was made the depository the probabilities are that they would
have branches at some of the more important points in the archipelago,
where checks drawn upon the depository could be readily cashed
at par.

it there could be added to the depository a savings-bank feature, no
matter how low the rate of interest, by which the employees of the
General and insular governments could deposit their savings, it would
be an aid to them and promote economy and temperance.

Very respectfully,
C. A. Wooprurr,
Colonel, Acting Commissary- General, U.S. A.,
Chief Commissary.
Cuas. A. Conant, Esq.,
Special Agent of the War Department, Manila, P. I.

11577—01 4

 
95 REPORT OF THE SECRETARY OF WAR.

Exuipit No. V.

Interview between Hon. Henry C. Ide, secretary department of finance
and justice, and Sefiors Balbas and Larosa, directors of the Banco
Espatiol Filipino. Mr. Conant, present; Rupert Ferguson, inter
preter; P. S. Carter, reporter—September 9, 1901.

Judge Ipr. You are two of the directors of the Spanish-Filipino
bank here?

Bawzas. Yes, sir.

Judge Ipz. The commission had a communication from the War
Department some time ago referring to quite a number of banking
matters here, and I wanted to confer with some representatives of
your bank in relation to the subject-matter of that telegram; and upon
the Ailpatrich, which has just arrived, Mr. Conant came in, who is
sent out from the Department at Washington to make investigations
in regard to the banking and financial conditions here, with a view to
obtaining direct information that will be useful for the Administration
and for Congressional committees when Congress meets, so that I have
asked him to come in this morning at this conference, so that he might
receive such information directly as we were able to obtain. I have the
papers here that show the organization and details and constitution of
your bank, but for the purpose of making the history a little fresher,
so that Mr. Conant may get the outline of it, I will ask one or two
questionsasa preliminary matter. In what year was your bank author-
ized by the Spanish Government?

Barpas. Mr. La Rosa says that the act was first authorized in the
year 1828, but, owing to the financial state of the Philippines at that
time, it did not come into being until the year 1852, and at that time
they had to get a new authority, and under the authority which was
granted them the Spanish Government required that several of the
larger corporations of the Philippines should take stoek in it, includ-
ing the municipality of Manila, the ayuntamiento of Manila, and the
community funds. When the civil directorate was formed here, also
the general government of the Philippines, there were certain commu-
nity funds which, according to the description of Mr. Balbas, were
funds of provinces which were reunited and placed into one central
fund, were also compelled to take shares of the new bank—community
funds. He says he is not aware how these community funds came to
be formed, because he was a very small boy at the time, but that is
what they call them—provincial funds.

Judge Ipz. They commenced business in the year 1852?

Baxpas. The first of the year; yes, sir.

Judge Ipr. And was the first period, after the charter was granted,
for twenty-five years?

Bawpas. Yes, sir.

Judge Inn. That brought it down to 1877?

Batpwas. Yes, sir,

J i Ive. And then was there another extension for twenty-five

ears
f Baxzas. Until the end of this year—1901.
Judge Ipz. Then was there another one?
REPORT OF THE SECRETARY OF WAR. 99

Bazas. For another twenty-five years.

Judge Ipr. And when was this last renewal for another twenty-five
years granted ¢

Bavpzas. In the year 1896.

Judge Ip. What time in the year 1896, do you recollect? I have
the papers all here, but I simply want this general outline of the story.

Baas. The rebellion began in August; I think it was April or May.

Judge Ipr. Before the rebellion commenced?

Baas. Yes, sir; it was published here in the Gazette, at the end
of 1896, I think; Iam not sure; October or November.

Judge Ipz. That is sufficient for general purposes. That was an act
of the Government of Spain4

Baupas. Yes, sir.

Judge Ipz. The original capital of the bank was how much, in 1852?

Bazas. Four hundred thousand ($400,000).

Judge Ipr. Four hundred thousand?

Bavsas. Four hundred thousand dollars. In the year 1867 they
increased it to $600,000; and then, afterwards, in this next lease, it was
increased to $1,500,000. ;

Judge Iprz. And it so remains to-day?

Bargas. And with a right to increase it to $3,000,000.

Judge Inn. But it never has heen increased to $3,000,000, but
remains at $1,500,000?

Barras. No, sir.

Judge Ipr. And has so remained since 1877?

Barpas. 1897. We increased first $300,000, from $600,000 to
$900,000, the year 1896, I think. Then the first three months of 1897
we increased another $300,000, and the second three months of the
year 1897 we increased another $300,000, so that will be $1,500,000.

Judge Ipr. The last increase then was in the year 1897?

Bargas. 30th of June, 1897.

Judge Inz. And, without going into details, your charter anthorizes
you to issue bank notes to the amount of three times the amount of
the paid-up capital; that is correct?

Bavpas. Yes, sir.

Judge Ipz. And, as at present constituted, under that charter, you
would be entitled to issue $4,500,000 of bank notes? There is no per-
sonal liability on the part of the stockholders for the debts of the
bank?

Baxgas. The shares are all paid.

Judge Ipr. And there is, by the terms of the charter, no provision
for further liability ?

Baxpas. No; it is what the English call a limited company.

Judge Ipz. Whatyou say is that their authorized capital is $3,000,000
and the paid-up capital is $1,500,000, and that you are authorized to
issue bank notes to three times the amount of the paid-up capital, and
therefore you are now authorized to issue bank notes to the amount of
$4,500,000 4 ‘

Barpas. Yes,sir. Weare not bound to keep this second reserve fund.
Every six months we separate this amount.

Judge Ipx. I understand you that your statement is that the bank
has 52 per cent of the reserve funds?

Bapas. 524 per cent.

Judge Ipx. In other words, if the bank should be closed to-morrow
100 REPORT OF THE SECRETARY OF WAR.

it would be able to pay all its debts and pay its stockholders in full
and have 524. per cent more to divide among the stockholders; that is
the real effect of your statement, is it?

Baxpgas. Yes, sir. He says in answer to your question, yes; but he
says it is a hypothetical question, and it might not be practical to do it
to-morrow, but it could be done eventually.

Judge Ipz. But that is upon the basis, of course, that the assets are
all in and there are no losses.

Baxgas. I understand that every liquidation is just the same. With
a bank it meets a certain amount of losses.

Judge Ipz. Now, the amount of bank notes that your bank has issued
has varied along from time to time—the number of bank notes that has
been outstanding has varied ?

Bavzas. Yes, sir.

Judge Ipz. What is the largest number—largest amount—of bank
notes that the bank has ever had outstanding at one time?

Bapas. It was the months of April and May, 1898, after the battle.

Judge Ipz. And how much was the issue at that time?

Baxrpas. $3,300,000 or $3,400,000.

Judge Ipz. And perhaps you can state in a general way how your
amount of outstanding notes progressed from that time onward—in a
general way. .

Baxpas. In the year 1898, after the battle of Cavite; the battle of
Cavite was on Sunday; on Monday they began to change all the notes;
then, in changing four days—$800,000—and getitin cash. Well, they
stopped. In the month of August, of 1898, when the Americans
entered Manila, I don’t remember how many I took from the market,
because there was another run.

Judge Inz. That is, the people presented the notes, and you had to
pay out silver for them?

Barpas. Silver. I think there were about two or three hundred
thousand dollars; and afterwards, the month of November, 1898, there
was another little ran—I don’t remember if it’ was $150,000—for two
or three days, and I took off from the market all those; and from that
day, and having collected all of the $200 notes which had been taken
out of the market, and from the year 1899, I think, I have been col-
lecting $25, $50, $100, and $200 notes.

‘Judge Ine. And retaining them in the bank?

Baxzas. J burn them. When we have a meeting of the board of
directors we put all the notes on the table, and two gentlemen of the
board of directors, or the secretary, before the four persons, they
look one by one at the numbers, and

Judge Ipm. And the record is kept of them?

Bargpas. From the beginning; yes, sir.

Judge Ipz. And are new notes issued in place of those?

Baxpas. No; they are withdrawn from circulation.

Judge Ipz. So that the amount of your notes that were in circula-
tion has been gradually decreased, ever since 1898 ¢

Barpas. Compared with May, it has been diminished. We have
withdrawn all of a certain series of the years 1852, 1865, and 1883,
from circulation; above $10. We have withdrawn all of those bills
from circulation and burned them up.

Judge Ipz. What was the purpose of that?

 
REPORT OF THE SECRETARY OF WAR. 101

Batpas. Because they were of a different grading, a different issue
from those years, and in order to have a uniform issue, they withdrew
the old bills from circulation.

Judge Ipz. What does he mean by saying they were different issues?

Baas. They were distinct issues, altogether different paper and
different engine, there was no similiarity between the $10 bill of
that day and the $10 bill of this day.

Judge Inz. What is the amount of paper that is now outstanding?

Bawpas. 2,154,450 pesos; that is the total, Iloilo and here (Manila).

Judge Ipz. Perhaps you could prepare a statement showing in detail
the amount of those old issues, each, and the amount of them that has
been destroyed ?

Baxpas. Yes.

Judge Ipr. You have not the data here, in your head?

Baugas. Yes. On the 17th of July, I think, the old issues out-
standing are $192,000; that is, the issues of 1852, 1865, and 1883. He
says, in order to separate and make a detailed statement of the three
issues it would be extremely difficult for them, because it would
involve the labor of looking through all of the minutes of the board
of directors, when they authorized the burning of the bills that came
in; that if you wished a detailed statement, he says it wouldebe very
difficult, indeed.

Mr. Conant. Doesn’t he know, in the case of each class of 1852,
1865, and 1883, what the total issues were?

Judge Ipr. He could get that without reference to this burning?

Baugpas. Yes; he will give you the total issues of the three together.

Mr. Conanr. Dosen’t your balance sheet show what your obliga-
tions still are on the issue of 1852?

Baxgas. No; they are separated. The account is kept in the min-
utes of the board of directors; when the authority is given for burning
up these bills the minute is taken of this fact.

Mr. Conant. It would not be necessary for me to know about these
separate destructions, but the balance sheet ought to show the total, but
you can not give that without too much labor for each separate year;
I mean for each year since 1852. :

“Batras. I would be bound to read over every article from 1852. I
don’t remember when they began to burn. I must look one by one.

Mr. Conant. Well, this total will do.

Judge Inr. Have you formed any estimate as to the amount of your
outstanding notes that have been lost, burned, or destroyed in the
hands of the public?

Bapas. It is very difficult. I thought of those old issues that there
would be lost about $400,000, but, now, you see, that $192,000, now.

Judge Ip. There are only $192,000 out?

Baupas. Out. ‘

Judge Ip. Well, you could not have lost $400,000 out of those?

Barpas. I thought in the beginning, for the year 1896, when we
began to burn all those notes.

7 udge Ing. You thought you were going to save $400,000?

Baxzas. But I was mistaken altogether. This is the country of
anomalies.

Judge Ipr. Has the number of notes that are outstanding been gradu-
ally decreasing ever sine 1898, or have there been times when it has
increased somewhat?
102. REPORT OF THE SECRETARY OF WAR.

Bauaas. All the bills of large denominations—over $25—have dimin-
ished a great deal since 1898, and the total quantity has diminished
somewhat; but this year I have been unable to sign any more bills of
small denominations than what I have done, because you can imagine
what an awful labor it is for a Bere to sign every $25 bill that comes
in, or larger; $5 bills are issued for it, not in exactly the same quan-
tity, because the amount has diminished, but I have been compelled
to sign every one of these bills, and it has diminished somewhat the
circulation.

Judge Ipr. They carry in their vaults a large number of the notes
of their bank as an asset?

Baxzas. He says that it goes into both sides—into the assets and lia-
bilities; he still has them there. He enters them as an asset, and off-
sets them as a liability on the other side. The balance sheet must show
everything he has in the vault.

Mr. Conant. The way most banks treat unissued notes and notes on
hand is as representing nothing, and they don’t carry them as an asset
or a liability.

Bauzas. That has been my system since the beginning; it is the
policy of the institution in keeping their books from the very start.
It is the,same principle exactly as a man goes in there and leaves $400
in gold in a box, and he puts that box in the safe, and signs for it, and
some dishonest employee steals it; he is liable for it—he has signed
for it.

Judge Ipz. You stated that the surplus was 52% per cent. To state
it in pesos, how much is the surplus, approximately ?

BauBas. $787,500; that is 524 per cent, I think.

Judge Ipr. That is near enough for what I want to know. Now,
the bank met with a considerable loss in this Mendezona hemp deal ?

Baxzas. I have separated italready. Now, at this moment, we have
$540,000.

Judge Ipr. After deducting that loss from the Mendezona deal?

Bazpas. We lost $1,016,000, but now the losses are $540,000 the
30th of June.

Judge Ipz. What did you mean by saying that you lost $1,016,000
and now the loss is $540,000; what did you mean by that?

Baxpas. The difference I have collected.

Judge IprE. When you say you lost $1,016,000, you meant that the
debt was in the beginning

Baxzas. In the beginning; yes. .

Judge Ipz. And that has been reduced?

Baxzpas. To $540,000, in round numbers.

Judge Ip. Did you expect to realize on some portion of that
$540,000, or is that probably all a loss?

coo This is all in round figures. They: owe me now, in the
books——

Judge Ipz. Who owes him now?

Barzpas. Mendezona & Co. owe him now $540,000.

Judge Ipr. By ‘*him” you mean the bank?

Batzas. Yes, sir. He expects to realize 38 per cent of the assets
of Mendezona & Co. on the 10th of August—that is to say, $231,000,
which will leave a loss of $809,000.

Judge Inn. Mexican ?

Bargas. Yes, sir. Now, he is going to take from his earnings of

 
REPORT OF THE SECRETARY OF WAR. 1038

the bank $150,000, which will reduce it to $159,000, and $50,000, which
will reduce it to $109,000.

Judge Ipp. And how much will the surplus be after deducting that
whole loss, in round numbers—the surplus of the bank? In other
words, after making good their loss, taking enough out of the surplus
to make good the whole of that loss, how much will the surplus of the
bank still be, above all liabilities, including liabilities to stockholders?

Mr. Conant. How much of the reserve

Baxgas. He says he expects that the last item of $50,000, which he
expects to turn over on the books on the 31st of December—he says he
expects to cut that down about $22,500, so that he shall be able to still
declare a dividend of 4 per cent to the stockholders from the earnings
of the bank.

Judge Ipr. That is, a semiannual dividend of 4 per cent?

Bawpas. Yes, sir.

Judge Ipr. Well, now, suppose that they take that same loss imme-
diately from their reserve, how much would their reserve still be?
The reserve is about $587,000, isn’t it?

Barpas. $787,500.

Judge Ipr. Now, take from that the estimated loss, the total esti-
mated loss of this Mendezona deal, without taking into account the
earnings of the bank, which will cover that loss; without taking into
account any future earnings; take it just as it is to-day.

Barpas. $478,500. :

Judge Ipr. Now, does Sefior Balbas think that the other assets are
all good for their face value, or does he think that there are some
doubtful ones among them ?

Bazpas. Perhaps some assets—I have some of the old assets of the
bank, although I don’t call them losses this moment. I don’t know how
to estimate their value; but to cover such losses I take 5 per cent of
the value of the real estate of the bank and put it against these esti-
mated losses every month—every six months. To give you an illus-
tration, I have a note for $4,500 belonging to some heirs in Spain, and
I had for a long time considered that as a loss, but had not taken it off
the books. Lately, I have been paid $17,000. It was real estate, to
secure this mortgage. I thought from the year 1896 it was a loss,
but the heirs in Spain, on account of the judges, because they are sepa-
rated in Spain, and [ can not put them together, and now they have
been to me to sell the ground, and I thought that they were offering
me four or five thousand dollars, so there would be a loss of interest,
because I have not calculated in the interest; but the other day they
told me, we offer you for the ground $17,000. All right, if you pay
me the capital and interest, the rest can go to those persons in Spain.

Judge Ipr. Now, the bank, at the close of the war, had a large
claim against the Government of Spain for money advanced?

Bavpas. Yes, sir.

Judge Ip. And that has been adjusted and settled?

Baxpas. Adjusted in a very bad way; not adjusted good.

Judge Ipz. It has been settled, hasn’t it?

Baxpas. Not yet, because they—I speak to gentlemen here, and I
don’t know what happens in Spain, but certain claims, forty-two by
one side and thirty-six or thirty-seven on the other side—they don’t
pay. I don’t know what happens there.
104 REPORT OF THE SECRETARY OF WAR.

Judge Ipz. What is the amount of the claim that you now have
against the Spanish Government?

Baas. $78,000 to $80,000; but I have put it in the books.

Judge Ipr. That is the whole?

Baxzas. That is the whole now. But I have put it in the books as
losses already, $36,000—the year 1898 or 1899.

Judge Inz. But you had a much larger claim than that, did you not?

Baxpas. I had.

Judge Ipr. Yes.

Bavpras. I had $1,700,000.

Judge Ip. And it has all been paid—the rest of it?

Bavgas. Yes, sir. What we claim now

Judge Ipr. These large payments that were made on the Spanish
debt, were they paid in cash?

Baxzas. In cash; because they wired me from Spain, if I wished to
receive $400,000, I think it was; $400,000 or $500,000, at the exchange
of 55 per cent. Well, I was bound to receive it, in the year 1899.

Mr. Conant. The exchange here?

Baupas. They obliged me, because in the telegram they said,
‘* Arrange with the Spanish Bank that we shall pay them $400,000 or
$500,000;” I don’t remember if the exchange was 55 per cent.

i Mr. Conant. That is, it was represented as the value of the Mexican
ollar.

Baxzas. It was a bad exchange, but I was obliged to receive it, los-
ing 2 or 8 per cent, and then, two or three days afterwards, they
arranged with the Chartered Bank and with the Hongkong Bank at 53
per cent, so that I lost. ,

Judge Ipz. That isa small matter. What 1 want to know is, that
these payments that were made were made in cash or in Spanish
securities ?

Baxzas. Jn cash,

(Mr. Balbas wished to explain that they placed to his credit in
Madrid the amount in cash, and that in wiring for it here he had suf-
fered some loss in exchange.)

Judge Ipzr. The bank pays dividends now at the rate of 8 per cent
a year, as I understand it. How long has it been paying at that rate?

Baxpas. Since the second semiannual dividend of 1898. Then, after
having paid that dividend for three semiannual dividends, it did not
pay any, but for the third semiannual they paid for a year and a half,
because they had not the money. The Spanish Government had it.

Judge Ipz. What had been the rate of dividend from the year 1890
down to 1898?

Bazas. On an average, from the year 1889 we paid 14 per cent per
year up to 1898.

Judge Inzr. Now, do the religious orders own some portion of the
capital stock of this bank?

Baxpas. Yes, sir.

Judge Inn. Which religious orders?

Bawsas. The four religious orders and the archbishop.

Judge Ipz. And how much of the stock of the bank of one million
and a balf paid-up stock is owned by the religious orders and the
bishop?

Baas About the third part of the capital stock. The College of
Santa Isabel also owns some stock.

 
REPORT OF THE SECRETARY OF WAR. 105

Judge Ipz. Owns how much?

Baas. Santa Isabel owns from 600 to 700 shares; they are the
principal shareholders, Santa Isabel College.

Judge Ipr. And the college is controlled by the religious orders?

Baxpas. Yes, sir.

Judge Ipr. And that makes, out of a million and a half—makes
a million two or three hundred thousand, or one or two hundred thou-
sand dollars—controlled by religious orders, directly or indirectly.

Batzas. This college of Santa Isabel is a corporation of its own. It
is a pious work. He can not say that it is a religious corporation. It
is a separate corporation, like Santo Tomas.

Judge Ipr. Yes; but it is administered by religious orders.

Barras. It is administered by a board.

Judge Inz. Not by one of the religious orders?

Bapas. He is one of the board of directors himself. He has been
the treasurer of Santa Isabel for eight or nine years.

Judge Inn. Then, taking the college—the Santa Isabel—and the
religious orders, and the bishop, it would account for about $1,200,000
of the capital?

Bargas. Not so much, I don’t think.

Judge Ipr. About how much, altogether.

Baxpas. It is rather difficult; this moment Ican notsay. They have
now 1,000 shares that they can not sell they call ‘‘anabolis;” that is
$200,000. Well, I think it would be—I can not, because I would be
mistaken. I can see the books, and to-morrow I can send you.

Judge Ipz. And who are the other large stockholders; in religious
societies or individuals?

Barpas. Individuals. Twasson & Co.—they must have 140 to 150
shares—then Ynchausty, Captain Louis, Lincart.

Judge Ipxr. Let me inquire, are there any municipalities or provincial
governments that own any shares?

Baxpas. The ayuntamiento of Manila, and those shares of the Cajas
de Manila; the shares of those community funds that were merged into
the civil directorate of the general administration for the Philippines—
they were provincial funds.

Judge Ipr. Were those funds provincial funds or funds of the gen-
eral government?

Baxpas. Provincial funds.

Judge Ipz. And in whose name were the shares issued?

Baupas. The community funds in the books of the bank. They are
carried under that.

Judge Ipz. To whom are the dividends paid on those shares?

Baupas. Now, tonobody. Before it was paid to the civil directorate.

Judge Ipz. They are accumulated there now, are they?

Bapas. Yes.

Judge Ipr. And ready to be drawn?

Batpas. Yes, sir.

Judge Inge. The shares that belong to the ayuntamiento of Manila,
have the dividends upon those been paid?

Barpas. No.

Judge Ipz. They are accumulated?

Barpas. Since the Americans are here nobody has got them.

Judge Ipr. Will you furnish me a statement of all the stockholders
and of the unpaid dividends that are due on any public funds?
106 REPORT OF THE SECRETARY OF WAR.

Baxpas. Yes, sir; you want a list?

Judge Ipz. Do you remember, approximately, how much the ayun-
tamiento of Manila has; how many dies, approximately ?

Baupas. Thirteen, I think.

Judge Ipz. Thirteen or fourteen? :

Bauzas. A small amount, and the community of Manila, I think, 43.

Judge Ipz. Those are small matters, then?

Baupas. Yes. The dividends, I think, now are $4,000. It is
separated.

udge Ipr. The notes of your bank are payable in what currency?

Barzas. In Mexican, the legal tender of the country.

Judge Ipr. Well, if the legal tender of the country was made United
States money, you would not want to pay it in that?

Baxsas. No.

Judge Ipr. You consider that these are payable either in Spanish
pesos or in Mexican dollars?

Barzas. Hither.

Judge Ipz. Either one will fill the bill?

Bavzas. Yes, sir; Spanish pesos we have very little, because we have
given them to the soldiers when they went to Spain.

Judge Ipr. Right at this point, to diverge, what would you think
of the introduction of a large amount of American copper cents for
small change?

Baxzas. I think it would be good for the country. Mr. La Rosa
says it ought not to be introduced in any larger amount than one million.

Judge Inz. No; perhaps not as large as that.

Baxrgas. He says that there is in silver about $37,000,000—silver and
hard money—in circulation in the Philippines; that with a large amount
of copper coins introduced in the market it would withdraw from cir-
culation the hard coinage.

Judge Ipz. Suppose they were to have $250,000, American cents,
here for the small traders to make use of in making change; what
would he think about it? :

La Rosa. He says that will be very easily taken care of and be very
useful. Every fifty years or every one hundred years, Spain would
send here in small copper coin $1,000,000, and it immediately disap-
peared. Mr. Balbas says that in the time of his father, in the sixties,
small change was so very scarce here that there was a premium of 8
per cent on half dollars and a premium of 10 per cent on small copper
coins; the last remittance that was sent by the Spanish Government
here amounted to $600,000, in copper coins, so that it immediately
disappeared; so that now, that his bank—

Judge Ip. Sefior. Balbas, what would be the embarrassment to
your bank in destroying these notes of the bank that are in the vaults,
unissued ¢

Baxsas. 1 should say that if the bank having $2,000,000, we will
say, in bills issued, it gets the interest on that money, say, $30,000 or
$40,000 a year; now, by withdrawing those bills in circulation, or
destroying them, it would suffer embarrassment; but on the other
hand, the public would also suffer a great embarrassment.

Judge Ipr. The public would suffer an embarrassment, he means,
from a shortage of currency.

Barzpas. Not only that, but the bank would call in all of its loans
or as many of them as possible, in order to get coinage, and it would
be a great embarrassment to the public in that behalf.
REPORT OF THE SECRETARY OF WAR. 107

Judge Ipr. Perhaps he misunderstood my inquiry. My inquiry
was not as to the destruction of all its notes, but of those which are in
its vaults which are not drawing interest.

BaxBas. None, whatever.

Judge Iprz. Well, that would still leave outstanding $2,154,450, or
$654,000 more than their capital ?

Baas. Yes.

Judge Ipr. Now, the officers of the Administration at home feel a.
little disturbed by a system that leaves in the vaults of the bank prac-

- tically $2,000,000 of notes that could be shoved out at any moment—
ina day. What our Government wants to do is not to embarrass the
bank in any way, not to discommode the bank or the public, but to:
keep everything secure and safe, with the greatest safeguards placed
around the institution for the protection of the public.

Baupas. The Spanish Government gave the exclusive privilege of
issuing paper to the Spanish-Filipino Bank for the reason that it feared
if it did otherwise there would be too great a flood of paper and all of.
the coin would be hoarded up. Now, when the Americans came in here:
it was Mr. Balbas’s policy to withdraw from circulation all of the bills,
with the exception of the five and ten dollar bills of the bank, that the:
American paper money might have a place and circulate in the market,
and at the same time avoid a panic of hard money.

Judge Ip. In the United States the paper money that is issued by
our banks is all safeguarded by the deposit of Governmtnt bonds up:
to the full amount of the paper money that is issued. Now, I will state
to Sefior Balbas what I think our Government thinks would fortify the
bank notes of their bank. If the notes that are unissued be destroyed,
so that they could not be put out, and gradually the outstanding notes.
be reduced to the amount of the capital; the notes then, $1,500,000,
would have back of them all the capital of the bank, and all the sur-
plus, and those notes would be far more secure than they are now, and
more after the analogy of the security for our American banks; and L
would like to know whether he thinks that that could be done within
a reasonable period of time for the bank to shape itself, and still not
embarrass it seriously.

Barpas. There would be no difficulty in carrying out that plan of
fortifying the bills of the Filipino bank in the way which you have out-
lined. He says that, according to his reading, he understands the
economic system of American national banks now is to issue paper up
to the amount of the bonds, of the Government bonds purchased, but.
that it would be a great inconvenience to the public if the bills
were at once withdrawn from circulation; but Mr. Balbas says that as.
an individual and not as a director he believes that it would be a good.
thing to have that. He thinks that credit that is abused is worse than
not having any money at all, and for that reason he has been with-
drawing all his bills except the $5 bill.

Judge Ipr. Which are needed.

Barpas. I have demands for $50,000 every week. They can take
from the bank $50,000 for every week; I can not give one dollar.

Judge Ing. How long does he think it will require to reduce their
notes to a million and a half without embarrassing the bank or the
public either 4

Barpas. We are now taking them up as fast as we can from the
denomination of $25 up.
108 REPORT OF THE SECRETARY OF WAR.

Judge Ipr. What would he think of a period of six months for retir-
oe down to a million and a half?

ALBAS. Some of the bills come all the way from Marseilles; he
thinks the time is rather short.

Judge Ipr. There is about $650,000 that would have to be canceled.

Baxzas. That paper there shows.

Judge Ipn. $654,000?

Baxupas. There are some that we have received from Marseilles, in
France; some that we have received from Spain.

Judge Ipz. The suggestion was from the Administration at Wash-
ington that it would be desirable if it could be done—to be reduced
within six months to an amount not exceeding $1,500,000.

Barzas. Mr. La Rosa and Mr. Balbas both say that they think the
time is too short; that it would hardly be possible to do that within
that space of time. He says that although there is a discount on these
bills in Spain, a great many are circulating there in Spain.

Judge Ipr. What would hethink, then, of $50,000 per month, until
it was brought down to $1,500,000?

Baxzas. He says they are taking them up as fast as they can, and
Hd would guarantee to do that if the people would only present the
bills.

Judge Ipz. They have, of course, their bills coming into the bank
for deposit all the time?

Baxpas. Fives and tens; yes, sir.

Judge Ipz. But not the large ones?

Baxpgas. One or two.

Judge Ipr. But the small bills are needed for circulation, for cur-
rent business transactions, are they not!

Barpas. We only get the small bills that are nearly worn out (the
rest of them are held out by the people and not deposited, because
they are needed in the small transactions), checks against other banks,
and checks payable in insular currency. He says he has been so
anxious to withdraw some of those bills from circulation that when a
man has gone there to pay an amount of money on his indebtedness,
and he saw that he had some bills in his hand, he would take the bills
away from him and give him his own personal check for them. They
have withdrawn from circulation about $480,000 this year. On the
other hand, this month of August they have not been able to take
any at all.

Judge Ip. Perhaps he could tell mein round numbers, not exactly,
what is the amount of the unissued notes of their bank that they have
in their vaults now; not exactly, but in general terms. Last March—
on the 31st of last March—it was $1,959,870 of unissued notes of your
bank which you had in your vaults. Now, could you state approxi-
mately how much there is now?

Baxpas. There may have been more, on account of those we have
collected, but I don’t know.

Judge Ips. Say the 1st of April. There is another statement that
I have here, that is for the 1st of July, which will show it exactly, but
I did not have it at hand.

Baupas. I think we have in the vaults to-day more than $1,800,000,
but we have deducted $200,000 that we haye burned, That will be
REPORT OF THE SECRETARY OF WAR. 109:

$2,000,000 if we had not burned—$2,100,000 at the last meeting in
July. They burned $200,000.

Mr. La Rosa says that at the last meeting of the board of directors
they authorized the burning of $200,000 in bills in the beginning of July.

Judge Ipr. Is there any method that he could suggest for getting
in their outstanding bills with more rapidity ?

Batsas. It is very difficult to suggest a method by which those bills
could be called in; but it is simply a question, if you want to keep the
bill and I want it, there is no way to make you do it unless it is
denounced, and then there would be a run.

Ae udge Ive. But they pay out bills, do they not, as well as receive
them ¢ ;

Baxpgas. No; not since October and November of last year.

Judge Ipz. Have not paid out any small bills, or large bills either?

Baxsas. Have not signed or issued one.

Judge Ipr. Well, of those that come in in the ordinary course of
business?

BaxBas. Yes; five or six, yes, that come in in the ordinary course of
business.

Judge Ipr. But they pay them out again?

Baxgpas. Yes, sir.

Judge Inn. Why could they not keep them and pay out silver until
they had reduced the circulation more or less?

Baxgas. Well, if I did not do that I would not be able to get in $25.
or larger denomination bills.

Judge Ipr. But if they retained in the vaults all of their bills that.
came in and withdrew them from circulation and destroyed them until
they got down to a million and a half, they could do that in six months,
could they not?

Barzas. It would put us in rather a tight place for a while if we
did that.

Mr. Balbas says that another difficulty is the fact that one of the
securities—one of the chief assets for the issue of the bills or notes—is
7,000 shares of the colonial bonds of the Spanish Government, which
are worth to-day about $603,000, and if they were placed on the
market to-day he calculates there would be a loss of about $16,000.
He says they were compelled to take them by the Spanish Govern-
ment. That is an asset that he could not realize on now without a
loss, and we need the money to withdraw the bills in circulation.

Judge Ipz. Well, to the extent of destroying the unissued bills
under proper supervision, they would not be embarrassed at all, I
think.

Baxpas. None whatever.

Judge Ipr. Now, let me inquire one other matter. Under the Span-
ish law, I think that there was no other bank that has been authorized
to issue bank notes here in the Philippine Islands.

Bavzas. No.

Judge Ipz. Suppose that our Government should wish to introduce
banks here, organized under our national banking law, with privilege
of issuing paper. Would that affect their interests at all?

Barpas. Yes, sir. There would be others. There would be com-
petition. ;

Judge Ipn. That is true. Other banks could come here for general
110 REPORT OF THE SECRETARY OF WAR.

business, but { mean would the issuing of notes affect them at all—the
issuing of notes by American banks?

Baxzas. Yes, sir; it would affect them, because instead of being
on and instead of having the monopoly, there would be three or

our.

Judge Ipi:. Well, suppose their issue was limited to a million and a
half notes, and there was not currency enough to do the business of
the islands conveniently, it would be desirable to have more currency,
would it not?

Baxzas. It would not affect us; but it would have the effect of mak-
ing the people hoard up their hard money and use bills for circulating
currency.

Judge Ipr. There is a shortage of paper in these islands now, it
seems to me.

Batpas. Every day we have calls for from $50,000 to $60,000 in
paper, which we can not supply.

udge Ip. Suppose that Congress should pass a law providing that
the national banking system of the United States should be extended
to these islands, so that American banks could be established here,
with a privilege of issuing currency under the same restrictions that
are authorized in the United States, a deposit of Government bonds to
the amount of the currency; would they regard that as any invasion
of their rights—I mean that part of it which relates to the issuing
of currency ?

Baxzas. Do you ask me that question as a director of the bank?

Judge Ipz. Well, what we want to do is to have this bank properly
treated; absolutely fairly. We want to invade no right which belongs
to this bank, and at the same time in a Government function, like that
of issuing currency, we wish to have it so exercised that the people
shall have adequate currency and adequa‘e security for that currency.
We want to combine those two things, treating them fairly and secur-
ing adequate currency and adequate safety for that currency.

Baxpas. In any event, the interests of the bank would suffer ina
‘degree—and I am speaking now as a director—because it would have
competition; but as an individual I am against all sorts of monopolies.

Judge Ipz. They have no monopoly of the banking business here?

Baxpas. Only the notes.

Judge Ipz. And if the American banks that came here would have
a right, on proper legislation being made, to come here and go into a
banking business; but 1 am only speaking now on the subject of issu-
ing currency, and it does not seem to me now that that law would
interfere with them at all if they were authorized to issue that million
and a half of currency and keep it in circulation under proper safe-
guards. Perhaps I might see difficulty to them on further inspection,
but I do not now see it.

Baxpas. The principles in poor countries has been, in regard to sev-
eral banks issuing paper currency, that the Government has had finally
to step in and stop the issue of currency because it has depreciated to
such an extent. That has happened in Buenos Ayres and the Penin-
sula also, but I believe that if the amount of paper money issued by
the banks was restricted, I do not think it would prejudice our interests
to any great extent, but if it was allowed to be issued to any extent it
would
REPORT OF HE SECRETARY OF WAR. 111

Judge Ipr. Well, if any money is issued here, under our national
banking law, by banks authorized under the United States law—under
a banking law to be hereafter enacted—extending our national bankin
system here now, because there is no law under which our nationa
banking system can be extended outside the limits of the United States;
but if the system should te extended here, the banks established here
under that law could issue only such an amount of currency as was
supported by Government bonds purchased and deposited with the
Treasury Department at Washington, or, if the law so should provide,
with the treasurer of the islands, and this doubtless will be under the
restrictions of the Treasury Department of the United States. It is
impossible for paper money issued under our national banking law
ever to become depreciated at all unless the Government of the Upited
States goes to smash; there are the bonds back of it.

Batpas. But notwithstanding that, the general public like hard
money, and if there was a great amount of paper money and very little
metallic money, the paper money—does not matter how good it was—
would suffer a discount.

Judge Ipz. It never has in the United States since we have got inat-
ters adjusted, after the close of our civil war—since we resumed specie
payments. E

Barpas. Yes, that is true; but in the United States the laboring
classes are very well paid, which they are not here; besides, they are
educated. Here the laboring classes are ignorant and poorly paid and
suspicious; therefore they like hard money.

Judge Ipr. Well, there are thirty or forty million dollars of hard
money in the islands besides American gold and silver.

Bazas. I can not quite understand that. I have heard it said
before; some told me twenty-eight 1nd others thirty.

Judge Ipr. Of what kind of money?

Barzas. Hard money; United States money.

Judge Ipz. No, no; not United States money; Mexican money—
Mexican and insular, Mexican and Spanish.

Baxpgas. I can not believe that it is true, however.

Judge Ipr. Well, I understood Sefior La Rosa to give an estimate of
about $40,000,000.

Baupas. That is in metal money; in hard money. He says one
year before the Americans came here that was the estimate that was
made by the intendencia—$40,000,000.

Judge Ipz. We have on deposit in the banks here nearly $9,000,000
of insular currency now, to the credit of the insular government.
Barpas. That is something that the Spanish Government never had
here. :

Judge Ipz. Now, I can state in general terms, perhaps, what we
wanttodo. We want to be able to make recommendations to Congress
in regard to the banking question here, and we want to make those rec-
ommendations on such a basis that we shall not embargo any just rights
which your bank has, and at the same time we wish to make it clear
that the United States Government in legislating here will be just and
fair, and that he knows that his rights will be protected, and at the
same time he thinks personally he is opposed to monopolies. He does
not care if there are other banks here. He has said to Generals Otis,
Greene, and Blanco before, and when the question comes up with his
112 REPORT OF THE SECRETARY OF WAR.

board of directors he will say he is opposed to monopolies, and he is
also assured that any legislation the United States Government ma
bring in that regard will be framed so as to protect their own individ-
ual rights. He has nothing to fear.

On the other hand, Mr. La Rosa says, it will be well to take into
account not only the banking interests of the country in making these
recommendations to Congress, but also-the social state of society.
They are a poor and ignorant lot, and consequently from the great
amount of paper money issued here the metal money will be sent to
China and hoarded upand withdrawn from circulation, and consequently
the paper money will be depreciated. Thatis one of the conditions of
the country here.

Both the gentlemen say that personally they thank you very much
for all the kind words that you have expressed for them.

Judge Inz. Of course our Government recognizes that their bank
is one of the institutions of the country; it is not a foreign bank—it is
the bank here in the country; but I think that they can rely upon-the
control that our Government will exercise over other banks to make
sure that no more money will be authorized to be issued from those
banks than is needed for the business of the country. I wish you
would say to them that we thark them for coming in to-day, and we
have received valuable information, and Mr. Conant and I, and per-
haps the commission, would like to talk over some of the matters
suggested here and have a later interview with them or such com-
mittee appointed by their bank. :

Baxgpas. He will be very pleased to wait upon you any day which
you may name.

Judge Ipz. We will inform him as soon as we can, and be glad
again to meet him.

Exuipit No. VI.

Letter addressed to the Spanish-Filipino Bank by the Secretary of
Linance of the Philippine Government and the reply thereto.

Unirep Starrs PHILipPInE ComMISsIoN,
Manila, P. I, September 24, 1901.

My Dear Sirs: The subject of legislation upon the banking system
of the Philippine Islands is likely to be taken up at the next session of
the Congress of the United States, which begins in December. Instruc-
tions have already reached the civil government from the War Depart-
ment to prepare suggestions on this subject, and especially to adopt
measures which will insure the safety of pub!’c funds and of all notes
which may be allowed to circulate as money.

It seems desirable to the insular government that the regulations
governing similar classes of banks in these islands, and especially the
regulations governing the issue of circulating notes, should as nearly
as possible be uniform and should apply not only to your bank, but
REPORT OF THE SECRETARY OF WAR. 113

to any other which may be established here. The change in conditions
is such, since the transfer of sovereignty in these islands from Spain
to the United States, that’ there is a strong demand for American
banks and for the issue of circulating notes upon the American sys-
tem. ‘There is no desire to infringe upon the privileges of your insti-
tution so far as they are compatible with the commercial interests and
the government of these islands. It is probable, however, that the
Congress of the United States will refuse to consider the privilege of
note issue, pertaining to your establishment, to be exclusive.

The subject of enacting a uniform banking law is likely to be con-
sidered at Washington, whether the insular government so advises or
not; but I think I may safely state that any regulations governing:
banks of issue will be enforced with absolute impartiality and with
tbe same. rigor upon new banks as upon old..:

In view of these considerations, I desire to submit to you a state+
ment of the conditions which, in my opinion, should govern the issue
of circulating notes in these islands. It is to be understood that any
such suggestions must have the ratification of the Executive Govern-
ment at Washington and the Congress of the United States before
they can be embodied into law, and it is not in the power of the insu-
lar government to assure you positively that these suggestions will be
enacted into law. It will be obvious to you, however, that agreement
between the representatives of your establishment and the insular gov-
ernment upon recommendation to the War Department at Washington:
will be more likely than the absence of such agreement to secure what
is desired.

The conditions which I believe should be accepted by your bank in
regard to the issue of circulating notes are conditions which, for the.
most part, govern all banks of issue in the United States and are sup-.
ported by official and public opinion in that country. The conditions
which I therefore suggest for your consideration dre these:

The privilege of issuing notes to circulate as money shall not be
limited to any one bank.

The total amount of circulation shall not exceed the total amount of
the paid-up capital.

The circulating notes shall have a prior claim over all other obliga-
tions of the bank, in case of failure or liquidation, except obligations.
to the Government of the United States or that of the islands.

Bonds of the United States or of the insular government to the amount
of $50,000 shall be deposited by the bank in the custody of the insular
treasury or the Treasury of the United States, as may be prescribed
by Congress or the insular government. This is in accordance with
the national banking act of the United States, which requires any
national bank issuing circulating notes to deposit such bonds to the
amount of 25 per cent of its authorized capital, but such deposit need
not be more than $50,000. These bonds remain the property of the
bank while in the custody of the treasury. The interest upon them
is regularly paid to the bank by checks from the Treasury at Wash-
ington, and in case of failure the bonds would be sold in the open
market and the proceeds of such sale used as a part of the assets of
the bank for paying its notes. The proposition herewith submitted
to you is much more generous than that extended to banks in the.
United States by the American law, which requires bonds to be depos-

11577—01—_8
114 REPORT OF THE SECRETARY OF WAR.

ited in the Treasury to the full face value of the circulating notes
which are issued. It is recognized that this requirement of American
law would subject you to a larger investment in such bonds than you
might desire to make. A more liberal system of note issue is there-
fore Bo in the case of your bank than that prescribed for banks
in the United States, and a liberal system in this respect may be
recommended in regard to other banks established in these islands,
but not in any case more liberal than the proposition submitted in
respect to your establishment.

All notes shall be issued by the Comptroller of the Currency at
Washington, and plates and dies for making notes shall be in his cus-
tody, in order to prevent issues in violation of law.

The notes shall not be legal tender.

The circulation actually outstanding shall pay a tax of one-half of 1
per cent per annum.

All banks shall be subject to such additional taxation as may be pro-
vided by general laws.

A cash reserve shall be held against notes outstanding equal to 25
per cent of the total amount of such notes, but half of such reserve
may consist of gold bills upon foreign countries or deposits in domes-
tic or foreign banks having the sanction of the insular government.

Of this reserve of 25 per cent the bank shall keep one-fifth, amount-
ing to 5 per cent of its outstanding circulation, in the custody of the
Comptroller of the Currency of the United States, or his representa-
tive in the Philippine Islands, for the purpose of redeeming notes
which may be received for public dues or from other banks.

The bank shall, if requested by the insular government, enter into
a clearing arrangement with other banks in the Philippine Islands for
the mutual exchange of obligations.

You will observe that the requirements regarding the cash reserve
are less severe than the Spanish law now in force, which requires that
the reserve be held entirely in idle cash in the vaults of the bank.

There are certain other conditions relating to the making of reports,
the right of visitation, and similar matters of supervision, which will

robably be enforced upon all banks by American law; but as they
fae to a large extent been enforced by Spanish law, and would not
affect your earnings or financial condition, I do not think it necessary
to enter more specifically into them at this time.

If these conditions are acceptable to your establishment, I am willing
to make a recommendation to the Government of the United States
that the limit of your circulation be fixed at an amount exclusive of
that portion of your issues prior to the year 1884 which has not been
presented for redemption, provided that vou pay a part of the face
value of such outstanding issues into the insular treasury, such pay-
ment to be held only as a guaranty for the redemption of the notes in
case they are presented. If the other conditions which I have sug-
gested are acceptable, I shall be glad to discuss with you in more detail
the arrangements regarding the taking up or cancellation of your old
. issues.

I would be pleased, if agreeable to you, to have a response at the
earliest practicable moment to this communication, as a representative
of the War Department specially charged with the consideration of
REPORT OF THE SECRETARY OF WAR. 115

coinage and banking is now in the city and desires to leave before the
close of the present month.
Very respectfully, yours, Henry C. Ipr,
5 Commissioner.
The Directors or THe Banco EseaXou Frripro,
Manila, P. I.

[Translation.]

SpanisH-Finipino Bank,
Manila, P. [., September 27, 1901.
Hon. Henry C. Ip,
United States Philippine Commissconer.

Dear Str: The letter which you have been pleased to direct to us,
under date of the 24th of the current month, informing us of the con-
ditions under which, in your judgment, the banks already established
and those to be established in the future in these islands ought to be
conducted, has been the subject of our most careful consideration and
study, as well as the regulations to which it would be suitable to sub-
ject the issuance and circulation of notes.

Having carefully examined your propositions, the directorate of the
bank has arrived at the conclusion that it is not authorized, within the
limits of its powers and attributes, to decide the matter per se and to
give a concise and categorical answer as to its acceptance or its refusal
to accept your propositions, for the reason that they are of such a
nature as to essentially change the statutes of the bank, which consti-
tute our fundamental law.

In view thereof the directorate called a meeting of the board of goy-
ernors and, at a session held yesterday, submitted your communication
to it for deliberation and resolution. The board, after studious con-
sideration, formed the opinion that, its powers being purely administra-
tive, it was powerless to take any action which mori alter, modify, or
revoke the fundamental law of the bank, its statutes, 1s would most
certainly be the case should it take favorable action per se upon the
recommendations that you have proposed.

Upon these grounds the bank is of the opinion that only its share-
holders, who are the true and lawful owners of the establishment, are
qualified and authorized to take definite action upon the matter in hand;
therefore it has decreed to consult their opinion before giving cate-
gorical answers to the points involved. ;

The directorate of the bank very much regrets that the great impor-
tance of the matters which you have raised prevents its giving an answer
in ashort time, as you would desire in consideration of the near depar-
ture of the commissioner from the War Department to the United
States; but it begs toassure you that it will make use of every instru-
ment within its reach to infuse into this matter the greatest possible
activity.

We have the honor to be, sir, very respectfully, yours,
THE SpaNisH FILIPINO Banx.
By the directors in office, Venancio BALBAs.
Josh DE LA Rasa.
‘116 REPORT OF THE SECRETARY OF WAR.
Exurpit No. VIL.

Statement of Mr. Korekiyo Takahashi, vice-governor of the Bank of
Japan, at the head office of the bank at Tokyo (through an interpreter),
October 29, 1901.

Mr. Conant. I would like to ask you if the adoption of the gold
standard has proven beneticial to Japan ?

Mr. Taxauasut. It has proven to be very beneficial all around,
especially in our trade with foreign countries. The only exception is
with China. As we were accustomed to trading with them in silver,
we noticed some change when the standard was made gold. This was
due to the ignorance of the Chinese in matters of exchange.

Q. The conditions you speak of as regards China were only tem-
porary, were they not? The trade is quite good now?—A. It has
always been very good. The trouble was only temporary, but those
who opposed the gold standard took this opportunity of saying that it
was a result of the change into the gold standard.

Q. Your total trade was not reduced?—A. Not at all.

Q. Did you find, when you were on a silver basis, that it promoted
the export of merchandise?—A. When silver was low it was naturally
thought we could export our merchandise to other countries. At the
same time, when we changed to a gold standard, it has become difii-
cult for the Japanese merchants to import from other countries.

Q. Difficult since the adoption of the gold standard?—A. While we
were on a silver standard prices were falling, and we could.sell cheaper
in a falling market—the tendency of silver was to go lower.

Q. You think the country realized a benefit from that condition ?—
A. Temporarily, for export trade. For import trade it was an incon-
venience, because people had to pay higher prices than they received,
the imports being mostly from gold countries.

Q. Could you Gane kept up favorable conditions forexporting if you
‘had kept the silver standard?—A. No; we would not have done so.
‘The fluctuation in the price of silver made it difficult for manufactur-
evs and merchants to work together in Japan; while, since we have
changed to a gold standard, there being less fiuctuation—almost no
fluctuation—that trouble has disappeared.

Q. In any case you do not believe that silver would have continued
to fall?—A. No; not always. Sometimes it goes down and sometimes
it goes up; that fluctuation makes it very dificult for manufacturers
and merchants to sell goods and work together.

Q. That is, if it is fluctuating to a small extent up and, down.—A.
People feel uneasy.

Q. Would it not compel the merchant to charge more than he other-
wise would to cover risk?—A. Yes; to cover risk.

Q. How did the silver standard affect the wages of the people/‘—A.
The gold standard has not had much effect upon wages in Japan. Our
standard of wages is based upon rice, which is the principal thing in
Japan, and in olden times the price of rice was not affected by the for-
eign trade. Wages were low, but since our rice has become one of
the articles of foreign trade it has felt the etfect of the foreign mar-
kets, and at the same time the demand for rice has become so great in
Japan the price of rice has come up: therefore wages have greatly
increased as compared with several years ago, and the gold standard
has not much to do with the rise of wages in Japan.
§REPORT OF THE SECRETARY OF WAR. Tei

_Q. Didn’t the purchasing power of wages fall when you were on the
silver standard and silver was falling/—A. That is true; the purchas-
ing power would decrease under a silver system. _ 7

Q Was not that one of the reasons why you had an advantage in
exports?—A. You mean imports. No; under the silver system our
exports increased.

Q. Was not that because wages were falling and you could sell
cheaper in gold countries?—A. Yes; that was so; but only temporarily.

Q. Have any evil results followed the adoption of the gold stand-
ard?—A. None that I have noticed.

Q. It has been reported that there was a crisis in the country last
year, and that a number of banks failed at Osaka, and that money was
scarce and interest high.—A. The recent crisis and the failure of a few
banks had nothing to do with the gold standard. There were other
causes which can be clearly traced, and it had nothing to do with the
monetary standard.

Q. There was a large demand for capital for new enterprises, was
there not?—A. Yes. I have made a very minute examination into
this whole matter of the failure of the banks, ete., and have published
a small book stating my ideas with reference to the recent crisis. The
book was for circulation among my intimate friends, and was not
intended for the general public. It gives me peer to present you
with a copy, which will explain my views of the situation.

Q. Did this crisis affect the people generally, or only a few financial
institutions/—A. Only a few financial institutions.

Q. There was no stopping of mills and throwing people out of
employment?—A. No.

. There wasa large export of gold from Japan?—A. Last year
we exported considerable, and it continued until July or August of
this year. The foreign banks in Yokohama sent gold to other
countries. /

Q. What has the movement of gold been within the last few
months?—A. For a few months, after July and August, exportation
has ceased and gold remains the same. Only a few weeks ago, since
there were several bills to pay for imported goods, considerable of our
gold was taken away. et

Q. What measures does the bank take to keep gold at home in
Japan?—A. The measures we are taking at present are, first, to keep
up the high rate of interest; second, to induce merchants to import
gold from China and Korea; but, like other countries, our bank has
no power to stop the exportation of gold from this country. Only by
checking the importation of goods from other countries can we keep our
gold at home.

Q. Do you pay gold at the bank to all who ask it without demand-
ing any premium?—A. We pay to all who ask; no premium.

Q. You do not try to show disfavor‘—A. Not at all.

Q. You redeem all your notes at par in gold‘—A. Yes, sir.

Q. When a depositor asks for gold you give it tohim!—A. Yes, sir.

Q. You have been able to maintain a gold reservet— A. Yes, sir.

Q. What is your present gold reserve/—A. 69,000,000 yen. About
April of this year it came down to a little less than 60,000,000.

Q. You have here, I notice in your printed balance sheet, the item
of foreign hills. You do not count those as gold?—A_ No, sir.
118 REPORT OF THE SECRETARY OF WAR.

Q. They do count them as gold in Belgium.—A. Yes, sir.

Q. So you have nearly 12,000,000 ven in gold obligations/—-A. Yes,
sir. What we call the gold reserve is gold coin. .

Q. In regard to the actual method you took in establishing the ratio
of 32 to 1, you think that was better than to have adhered to 16 to 1?—
A. The rate of 32 to 1 was the market rate at the time we adopted the
gold standard. The subsidiary coins are less than that—27 to 1.

Q. What is their fineness?—A. Nine hundred; that of the subsi-
diary coins, 835.

Q. That is the same as the Latin Union subsidiary coin. A consider-
able rise in the price of silver would carry your subsidiary coins above
their face value, would it not?—A. There is a great deal of talk about
making our 50-sen piece and other subsidiary coins of the same size
and fineness as other countries. At present they are larger in size,
while fineness is the same.

Q. At presentthere is rather a scarcity of subsidiary coin in Japan /—
A. No; we have a great deal.

Q. I was told to-day that in some parts a premium had to be paid
for smal] silver.—A. In some localities there is probably a scarcity.

_Q. You think the amount in the whole country sufficient?—A. Yes,
sir.

Q. Are you going to withdraw your 1-yen notes?—A. We are
withdrawing them gradually. When they come into our hands we
retain them and give out small subsidiary coin instead.

Q. When this process is completed there will be nothing between a
5-yen note and a 50-sen piece in silver?—A. There will be nothing
between.

Q. Do you coin a 5-yen gold piece?—A. Yes, sir.

Q. How many of them are there coined?—A. About 1,500,000 yen.
Very few.

Q. How much has been coined of 10-yen pieces?—A. I can’t give
you the figures.

Q. I suppose your statistics will show the coinage. Is there a
statement showing the denominations of your notes?—A. Yes, sir.

Q. Do you think there is enough paper money in Japan at pres-
ent?—A. There is sufficient, but we have to be on guard for the
reserve in our bank.

Q. What is the law limiting your issues now!—A. We issue 120,-
000,000 yen on securities. We can issue 120,000,000 on security,
Government bonds; this is the authorized issue.

Q. Above that you can issue on gold without paying a tax?—A. The
sum of 120,000,000 yen is on security of gold and other Government
bills; above that on gold to any amount.

Q. If you issue without gold you have to pay a tax of 8 per cent?—
A. Yes, sir; the minister of finance can fix the rate to be paid at any
amount not less than 5 per cent.

Q. Do you think the adoption in the Philippines of a system similar
to yours, with a subsidiary system at 32 to 1, or a little less, and
exchangeable for American gold, would be a good system?—A. I think
it an excellent system. Ihave been considering a proposition in Japan
of making the 50-sen piece at the ratio of 23 to 1, and then make dif-
ferent denominations, 25 sen and 10 sen, accordingly—23 or 24 or
perhaps 27 to 1. With your country it is 16 to 1.
REPORT OF THE: SECRETARY OF WAR. 119

Q. Yes, sir.—A. I desire to make it 24 or 27 to 1 in Japan. mE
Q. Would a system such as I have described for the Philippines
promote trade between Japan and those islands?—A. I believe it
would establish strong commercial relations between the two countries.
_Q. [have nothing further to ask. Would be glad to hear from the
vice-governor.

The Vice-GovEernor. Was it your idea to make the standard in
the Philippines 16 to 14

Mr. Conant. No; 32 to 1, or less.

Vice-GovERNor. It is rather difficult to extemporize all these
answers without preparation. If you wish to have exact figures, and
would submit your questions, would be glad to consider them care-
fully and make answers.

Mr. Conant. I think the answers already received are sufficient,
and are very satisfactory. I thank you most cordially for your
courtesy and consideration.

Exuipir No. VIII.
Letters regarding monetary conditions in Porto Rico.

De Forp & Co., BANKERS,
San Juan, clugust 2, 1901.
Cuas. A. Conant, Esq.,
Speetal Commissioner of the War Department on
Coinage and Banking in the Philippine Islunds.
Care of the civil governor, Manila, P. I.

Str: We have your communication dated July 25, in Washington,
and in reply thereto would say that we believe that the conversion of
Porto Rican coin to that of the United States has, on the whole, bene-
fited the people of this island more, perhaps, because of the change
to a firmer basis than because the conversion was peculiarly suitable
locally.

There were, as we suppose you know, about 6,000,000 pesos in the
island. The Government retired nearly all of these at the rate of
1.66%, which left the island with something less than their equivalent—
$3,600,000. The immediate effect of our advertised intention to retire
the old currency was a very general raising of prices and demand for
the raising of wages among the smaller merchants, retailers, and work-
ingmen. This lasted but a short time, however, and the prices of
staple commodities, as well as the price of labor, has since worked
back toward the old basis, steadily but surely. To-day we believe a
conservative opinion would say that the change in the currency is per-
haps responsible for a rise in the cost of living of from 10 to 15 per
cent. In some parts of the island it is much higher, owing to combi-
nations of capitalists, but these will undoubtedly be dissolved in time.

Since the American occupation the cost of everything has risen
tremendously, from that of a breakfast to the purchase of a thousand
acres of ground, but this is undoubtedly due as much to the careless-
ness and ignorance of the local conditions by the Americans themselves
as to any change in the currency.

You ask for a specific instance. Shortly after the conversion of the
120 REPORT OF THE SECRETARY OF WAR.

currency we were obliged to raise the wages of our laborers at Aguirre,
a central sugar factory, in some instances 10 per cent, and others
slightly, more or less.

We are glad to furnish information on this or any other subject of
general interest whenever so requested, and remain, dear sir,

Yours, very truly,
De Forp & Co.,
Per P. G. Mumrorp.

AMERICAN CoLONIAL Bank OF Porto Rico,
San Juan, August 15, 1901.
Cuas. A. Conant, Esq., +
Special Commissioner to Philippine Islunds, Manila.

Dear Str: Yours of the 25th July came duly to hand. The change
in currency in this island was made easily and comparatively quickly,
and did not result in hardship to the people to any great extent. At
first the smaller merchants were disposed to ask dollars in place of

esos for their wares, but competition in business soon stopped that.

Vages have risen slightly, but not as a result of the change of moneys,
the cause being purely the result of better conditions and greater
coe among the agricultural classes, save with the coffee growers.

ith them the destruction of crops, and in many cases of whole

lantations, by the hurricane of 1899, has cheapened the price of labor.

e do not think that harm resulted to any one, save temporarily in a
few cases, through change of money, and it has removed the fluctua-
tion of value in the money of the country. American currency was
at a premium most of the time and values changed as much as 2 per
cent ina single day. There is no more of that, much to our relief,
and the people here appreciate the change from their cheap money to
one that passes current the world over. We trust the same plans may
be carried out in all of ‘‘ Uncle Sam’s” new dominions, as it does a good
deal toward Americanizing the people of the country.

Truly, yours,
E. L. ARNOLD, Cashier.

O