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 ma ket 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.