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.