Triumphs and Wonders of the 19th Century: The True Mirror of a Phenomenal Era / A volume of original, entertaining and instructive historic and descriptive writings, showing the many and marvellous achievements which distinguish an hundred years of material, intellectual, social and moral progress

by James P. Boyd

V. THE NATIONAL BANKING SYSTEM.

The desirability of perfecting the banking and currency system of the country was readily perceived on the breaking out of the Civil War in 1861. Secretary Chase in two annual reports, those of 1861 and 1862, recommended a system of national banks, whose supervision should be by national authority, and whose issues of notes should be based on deposits of bonds of the government. After several unsuccessful attempts, a bill, introduced by Mr. Sherman, passed both Senate and House, and became a law February 25, 1863. This act embodied the essential features of Mr. Chase’s reports. Under it the first charter was issued to the First National Bank of Philadelphia.

The formation of national banks proceeded very slowly at first. In order to hold out greater inducements for the State banks to enter the national system, the act was amended on June 3, 1864. The first report of the Comptroller of the Currency, November 28, 1863, showed that only 134 national banks had been organized up to that date; but when the act of June 3, 1864, went into operation, new banks were formed more frequently. A more rapid increase took place after the passage of the act of March 3, 1865, imposing a tax of 10 per cent on the circulating notes of State banks. This increase was from 638 banks in January, 1865, to 1513 in October of the same year; with an increase in capital of from $135,618,874 to $393,187,206; and in circulation of from $66,769,375 to $171,321,903. Prior to 1869 national banks were required to make their reports on fixed dates, but after March 3, 1869, they were required by law to make their reports to the Comptroller five times a year on some past date fixed upon by the Comptroller.

National Bank Laws and Regulations.—The national banks are under the supervision of the Comptroller of the Currency, who is appointed by the President on the recommendation of the Secretary of the Treasury. His salary is $5000 a year.

A national bank may be organized by any number of persons not less than five, on permission of the Comptroller. The capital required is not less than $50,000 in any case, and this minimum applies only to towns the population of which does not exceed 6000; in cities having a population exceeding 50,000, the minimum capital is $200,000. For places having a population over 6000 and not exceeding 50,000, the capital required is $100,000. One half of the capital must be paid in before the bank is authorized to begin business, and the remainder in installments of not less than 10 per cent on the entire amount of the capital, as frequently as one installment at the end of each succeeding month from the time it is authorized to begin business. Capital stock is divided into shares of $100 each.

The banks are managed by a board of not less than five directors, chosen by the stockholders. Executive officers of the bank—president, vice-president, cashier, and assistant cashier—are chosen by the directors.

Shareholders are individually liable for the debts, contracts, and engagements of the bank to the extent of the amount of their stock therein, at the par value, in addition to the amount invested in such shares. This is what is known as the double liability of shareholders, and is one of the features adding to the strength of the system.

National banks are designated by the Secretary of the Treasury to act as depositaries or custodians of public money. Such deposits are secured specially by a deposit of United States bonds with the Treasury.

All national banks before commencing business are required to transfer and deliver to the Treasurer of the United States, as security for their circulating notes, United States registered bonds to an amount not less than one fourth the capital where the capital is $150,000 or less, and to the amount of $50,000 where the capital is in excess of $150,000. These bonds must be taken by the banks whether they issue circulation or not.

Circulating notes are issued to national banks on a deposit of United States bonds with the Treasurer. Notes are limited to 90 per cent of the par value of the bonds, also to 90 per cent of the capital of the bank. They are over-secured, and no holder of them has ever lost a dollar by reason of the failure of a bank.

The notes are secured by the government bonds, there being a difference of the 10 per cent between the par of the bonds and the notes issued, and the bonds nearly always command a premium. They are further secured by the first lien on the assets of the bank, including the double liability of shareholders, by a 5 per cent redemption fund in the Treasury, and also by the margin between the capital and the amount of notes permitted.

National bank notes are redeemable at the counters of the issuing banks and at the Treasury in “lawful money” of the United States. This term, as commonly used, means legal-tender money, and in practice, perhaps, gold coin or legal-tender notes.

Reserves of national banks are the amounts of money kept on hand to pay their deposits and current checks and drafts. This reserve is to be kept in lawful money,—gold and silver coin or certificates, and United States currency certificates or legal-tender notes. There are three central reserve cities, namely, New York, Chicago, and St. Louis. National banks in these three cities must keep a reserve of 25 per cent against their deposits, and this amount must be kept in their own vaults. There are twenty-four other reserve cities which are also required to keep a reserve of 25 per cent, but one half of that amount may be due from other banks in New York and other central reserve cities, approved as reserve agents by the Comptroller of the Currency. Banks outside of these reserve cities must keep a reserve of 15 per cent, three fifths of which may be due from approved reserve agents in the reserve cities or central reserve cities.

In times of panic when there is a run on banks they may use this reserve to pay their depositors, and it often happens that the reserve falls below the amount required by law. Under such circumstances the Comptroller may notify the banks to make good the deficiency; failing to comply with this request within thirty days, they may be closed.

National banks are not permitted to make loans on real estate. The regulations prescribed by the law for the management of these institutions are very stringent, supplemented by a system of examination and reports.

In 1896 the Comptroller of the Currency estimated that the government had made a net profit of $157,439,248.98 out of the revenues derived from the national banks. It was estimated in the same report that the average percentage of dividends paid to creditors of insolvent national banks was 75 per cent. There have been no losses on circulation. In 1878 the Comptroller estimated that the annual losses upon all the currency issued by State and private banks amounted to 5 per cent annually.

The national banks are not monopolistic. Any body of five reputable citizens can form one by getting together $50,000 capital. The total shares of the national banks are approximately 300,000.

Profits on national bank stock are not exorbitant. For a period of twenty-nine years the net earnings on capital and surplus have been only a little over 7 per cent.

THE BOURSE, PARIS.

Since the establishment of the national banking system 5171 banks have been organized, of which 1224 have gone into liquidation, 368 have become insolvent, and 3579 are in operation (February 4, 1899).

There is a marked falling off in the number of new national banks organized in recent years. In 1890 there were 307 organized, but in 1898 there were only 50 organizations reported, and that was the highest number reported since 1893. The capital of the national banks is also decreasing, but the deposits show a large increase.

At present the State banks are gaining in numbers more rapidly than the national banks.

BANK OF ENGLAND, LONDON.

Profit on National Bank Circulation.—Many suppose that national banks make an undue profit on the privilege they have of issuing notes to circulate as money, based on a deposit of bonds with the United States treasurer. Official figures disprove this. The total national bank notes outstanding, February 4, 1899, was $203,636,184.50. The law permits these banks to issue notes to the extent of 90 per cent of their capital. This capital, on February 4, 1899, was $608,301,245. Therefore they might have had notes at issue on that date to the amount of $545,871,120.50, instead of only $203,636,184.50. This is conclusive evidence that there is no substantial profit in the issuing of such notes.

In the figures furnished by the Comptroller of the Currency for 1898, he shows that the profit which a national bank could make by taking out circulation on a deposit of $100,000 of United States bonds, on October 31, 1898, was less than 1 per cent. On that date eight leading banks had no circulating notes at all out. The meagre profits of national banks explain why they do not supply an adequate paper currency. The restrictions on them make it impossible to render any substantial assistance to business in this respect. This is especially true in times of panic. Possessing gigantic strength, they are compelled to see the industries of the country attacked by doubt and distrust, and are unable to go to their aid because of the restraints which forbid them to exercise their legitimate functions.