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National Banks








Our national banking system owes its existence to financial exigencies
of the federal government experienced during the Civil War. For a
considerable period preceding the outbreak of that struggle the
expenses of the government had exceeded its receipts. The deficit was
greatly increased as soon as the war began, and Congress did not find
it possible immediately to devise adequate new sources of revenue,
including a market for government bonds. It was, therefore, forced to
the issue of legal-tender notes under authority of an act passed
February 25, 1862.

After three issues of these notes, amounting to $400,000,000, had been
exhausted, and the value of the notes had depreciated to such an
extent that persistence in this method of financiering portended
speedy financial disaster, Congress adopted a suggestion made early in
the war by Secretary Chase, to the effect that a market for government
bonds might be created by compelling banks to purchase them as
security for their note issues. An act passed February 25, 1863,
provided for the incorporation of banks with the right to issue notes
on condition that they purchase government bonds and deposit them with
an official to be known as Comptroller of the Currency.

It was the expectation of the authors of this act that the state
banks, then numbering over one thousand, would exchange their state
for national charters and purchase bonds sufficient to secure their
circulation under the terms of the new act, but, since they showed
reluctance so to do, in 1865 force was applied in the form of a tax of
ten per cent on bank notes otherwise secured. Under this pressure most
of the state banks reorganized as national institutions, but a few
retained their state charters and formed the nucleus of the state
system of the present day. On account of the ten per cent tax,
however, the issue of notes by this remnant became unprofitable, and
the new national banks have to this day remained the sole banks of
issue in the country.

The act of 1863 has been amended several times, notably in 1864, 1870,
1874, 1875, 1882, 1887, and 1900. In its present form it permits the
organization of banks with a capitalization as low as $25,000 in towns
of 3,000 inhabitants or less, and with a capitalization as low as
$50,000 in towns of 6,000 or less. Banks organized under this act must
put ten per cent of their profits into a surplus fund until said fund
amounts to twenty per cent of the capital; must invest at least
twenty-five per cent of their capital, if it is less than $200,000,
and at least $50,000, if it is $200,000 or more, in government bonds;
and may deposit said bonds with the Comptroller of the Currency and
receive circulating notes to the amount of their par value, provided
their market value is par or above.

The rights and privileges of these banks are stated in very broad and
general terms, a fair interpretation of which permits them to engage
in both commercial and investment banking under certain specified
limitations, of which the most important are the following: they must
not invest in or hold real estate beyond their owns needs for suitable
quarters, or temporarily for the purpose of collecting debts due them;
they must not accept real estate as security for loans; they must not
loan more than ten per cent of their capital and surplus to any one
person or firm; and they must keep reserves to the amount of fifteen
per cent of their deposits, if they belong to the group known as
country banks, and to the amount of twenty-five per cent of their
deposits, if they belong to either the reserve city or the central
reserve city group.

In the case of country banks, at least two-fifths of the required
reserves, and in the case of reserve city banks, at least one-half,
must consist of specified forms of money in their own vaults. The
remainder may be balances payable on demand in approved banks in
reserve or central reserve cities in the case of country banks, and in
the central reserve cities in the case of reserve city banks. In the
case of banks in central reserve cities, the entire reserve prescribed
by law must consist of money in the vaults. These required minimum
reserves must not be infringed upon. When a bank's cash and balances
with its reserve agents fall to the prescribed minimum, discounting
must be stopped under penalty of suspension of privileges and
liquidation by the Comptroller of the Currency.

At five dates each year, selected by the Comptroller of the Currency,
national banks must make detailed reports of their condition on
prescribed blanks and publish abstracts of such reports in local
newspapers. They must also submit to examination by persons appointed
for that purpose by the Comptroller as often as this official may deem
necessary and proper.

National banks have been organized in every state of the Union, and in
Maine, Massachusetts, and Vermont they have completely supplanted the
state banks. Elsewhere they exist side by side with state banks and
compete with them. In some states they are more and in others less
numerous than state banks. In the kind of business transacted the only
important difference between the two classes of institutions consists
in the loans on real estate security, which national banks are
prohibited, and state banks allowed, to make. The latter, therefore,
share this class of business with the trust companies only, and where
it predominates have a distinct advantage in competition over the
national institutions.





Next: The Independent Treasury System

Previous: State Banks



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