MR. MERCHANT: Come to think it over, I believe you are absolutely right. Our present bank notes are made a first lien upon the assets of the bank issuing them. We were talking about that the other day over at the bank, and while I had never thought of it before, the cashier of the bank explained the matter fully to me, and gave the same reason for making bank notes a first lien that Mr. Lawyer has. When I told him that I did not quite understand the thing as he did, he satisfied me completely by using his own bank as an illustration.
He said, you will remember that we were a State Bank until about a year ago, when we became a National Bank. Our capital of $100,000 is all invested in this bank building which we occupy. Our deposits were $500,000. We took $100,000 of our deposits and purchased $100,000 of Government Bonds, which we deposited with the United States Government, and received in return $100,000 bank notes which we have put out, or, as we say, put into circulation. Now, since we actually took $100,000 of our deposits to buy the bonds with, and then placed the bonds up as collateral, to guarantee the payment of $100,000 of notes, it is perfectly clear that the noteholders will get their money, in case of our failure whether anybody else gets anything or not.
I then asked him this question: Suppose, for the sake of the argument, that the $100,000 of the United States Government Bonds should not sell for $100,000? Say they sold for only $75,000, would the noteholders lose the other $25,000, and he replied as follows:
"No, if the bonds should sell for only $75,000, the remaining $25,000 due the noteholders would be taken out of our assets, before any depositor got a cent."
You see, therefore, gentlemen, that our National Bank Notes are a first lien upon the assets of the banks that issue them, and that they will always be paid in full, before the depositors get anything.
MR. MANUFACTURER: I am very glad this point came up, and has been explained so completely and satisfactorily, because during the week when I was studying up this question of a credit currency, that matter came up, but I found no explanation or reasons given for making the notes a first lien. It seems to me to be a fundamental principle that they should be, and the reasons are the soundest for making them a first lien. The bank note is a tool or instrument of trade for the benefit of the public, and is of general importance, while the bank deposit is a tool or instrument for the benefit of the individuals composing that general public, and primarily of individual importance. The distinction between the two must be very clear to all of you as it is to me.