funds and of
the amount of the liability of stockholders for subscriptions in case
of failure, no well-founded principles have been developed for the
guidance of legislators. They should be great enough to cover
prospective losses and to induce conservatism, honesty, and efficiency
in management, and not so great as to prevent the free flow of an
adequate amount of capital into the business. Unfortunately, the
statistics of losses in cases of failure are not a sufficient guide.
In some cases they bear a large proportion to the volume of business
transacted and in others a very small one, and the number of cases
available are too small to give much value to averages. The amount
necessary to secure the best possible management is also purely
problematical.

In lieu of well-founded principles, the practice has developed in this
country of making the minimum capitalization permitted depend upon the
population of the town in which the bank is located. This seems to be
a very crude and indirect method of proportioning capital to the
volume of business transacted. The fixing of such a proportion, or of
a proportion which no bank should be permitted to exceed, is probably
the best method of solving this problem, but it should be done
directly and not by the roundabout method which has been mentioned
above.

A proportion of ten to one between capital and aggregate demand
obligations would probably be justified by American experience. The
present practice of fixing the surplus fund at twenty per cent of the
capital would be justifiable if the capital fund were properly
regulated in amount.

(_b_) _Inflation and Means of Protecting the Public against It._--The
greatest abuse to which the business of commercial banking is subject,
and against which the public most needs protection, is inflation. This
is a condition difficult to diagnose, and not well understood by the
general public and even by bankers. The most easily recognized symptom
of its existence is the forced liquidation of credits; that is, forced
sales of property in order to meet maturing obligations to banks.
When, for example, the people whose notes or bills have been
discounted by banks default in large numbers, and the collateral
deposited as security has to be sold, or, in the absence of
collateral, the courts must order the sale of their property, the
presence of inflation may be suspected.

The chief cause of inflation is the issue by commercial banks of