National Banks can lend only a certain proportion of their deposits.
In New York, Chicago, and St. Louis, called Central Reserve Cities, National Banks must keep on hand, in lawful money, a reserve of twenty-five per cent. of their deposits.
In Albany, Baltimore, Boston, Cincinnati, Cleveland, Detroit, Louisville, Milwaukee, New Orleans, Philadelphia, Pittsburg, San Francisco and Washington, calledReserve Cities, the National Banks must have the same reserve of twenty-five per cent. of their deposits. But the National Banks in these last-named thirteen cities can keep one-half oftheirreserve in National Banks located in any of the three Central Reserve Cities, viz.: New York, Chicago and St. Louis.
In all other cities or towns the National Banks must have a reserve of fifteen per cent. of their deposits, but nine per cent. oftheirreserve can be kept in National Banks located in any of the thirteen "Reserve Cities"; or in National Banks in the three Central Reserve Cities.
"Approved Reserve Agents" are the banks of the larger cities, selected by the banks of smaller cities or towns, in which to carry part of their reserve. These selectionsmustbe approved by the Comptroller of the Currency, the executive head of the National Banking System.
A National Bank is forbidden to lend more than ten per cent. of its combined capital and surplus to any one firm or individual. "But the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed." Also no National Bank can lend on its own stock as security.
The Comptroller of the Currency can have an examination made, as often as he may deem proper, of the condition of any National Bank. The visits of the National Bank Examiners are never announced in advance. They come suddenly and without warning. Their duties are not only to balance the books and count the cash, but alsocritically to examine each loan and its security; and to give especial attention to loans to any director or officer, and to any concerns in which they may be financially interested.
If the bank is overloaned, that is, has loaned more than the law allows, the examiner immediately reports it, and the Comptroller of the Currency orders that bank to cease lending, and to require payment of enough of its loans to make good the reserve required by law. And if the bank does not court disaster and the closing of its doors, it hastens to obey orders and to "get in line."
The supervision of the National Banks is not perfunctory or careless. It is very strict.
The inquisitorial powers of the National Bank Examiners are practically unlimited. They have a legal right to put any bank officer on oath in questioning the affairs of the bank. They look into every department in the most searching way, and any disobedience of the law is reported promptly to the Comptroller. These Examiners are appointed by the United States Government; and if they want to hold their positions, they must be strictly impartial in their reports to the authorities.
The provisions of the National Bank Act have been so rigidly enforced,that in forty-four years, or since the Act was passed by Congress, the average annual loss to depositors in National Banks, has been only thirty-seven one thousandths part of one per cent. of their deposits. Practically no loss at all.
Isn't that a tribute to the wisdom of that law; to the strict supervision of the Government; and to the honesty and integrity of the officers of National Banks; past and present? It has happened, of course, that some spoilers have occasionally obtained control of a National Bank, and have dishonestly used the depositors' money in risky ventures for their own profit. But the officials of the Treasury Department have soon sized them up, and such men shortly find the banking business not to their liking, especially with "Uncle Sam" as a supervisor.
Practically every bank in the United States keeps part of its funds in banks in New York City, the money center of the country. All National Banks are allowed to keep part of their reserve in the National Banks of New York, Chicago and St. Louis, the three Central Reserve Cities. For these reasons checks drawn on banks in these three cities are generally accepted at par, that is, collected without cost to the depositor.
In this connection, the word "exchange" comes from the fact that youexchangeyour personal check for the bank's check on another bank, located in some other city.
In remitting for collections, or for balances due, the banks outside of the three Central Reserve Cities, generally send their checks on one of these cities, according to their location.
Under certain conditions you will notice your local newspapers quoting New York Exchange at so much premium or so much discount. These rates are generally in use only between the different banks in your city. The banks do not charge a depositor any premium for its checks on other cities, unless the amount of the checks called for is large.
The proper way to draw your check when you want New York Exchange, is to make it read "Pay to the order of New York Exchange." The bank then makes out its check on a New York bank payable to your order. Then you should endorse the bank's check to the order of the party to whom you are remitting.
Banks do not like to sell their checks on other banks to strangers. Some expert at raising checks may buy New York Exchange for ten dollars and raise it to ten thousand. Also he might buy the bank's check with the idea of obtaining the Cashier's signature for the purpose of forgery.
Many people have the idea that a National Bank, having a capital of, say one hundred thousand dollars, can call on the United States Treasury Department for an equal amount of National Bank Notes, without expense to the bank; and thus have double the amount of its capital to lend at the start.
The National Bank Act does say that each National Bankmustissue currency equal to a certain per cent. of its capital; and further, that each National Bankcanissue currency equal to the full amount of its capital. But the profit on taking out this currency, or circulating notes, is so very small that many banks do not issue as much as the law allows.
These circulating notes must be issued under certain expensive conditions. First—the bank must purchase and deposit with the Treasurer of the United States an amount of registered United States Bonds, equal at their par value, to the amount of the circulating notes called for. Second—dependent on the kind of bonds deposited, the bank must pay a tax on its circulating notes. Third—the bank must stand the expense of plates for printing and the express charges for sending it the original issue of its notes. Also, when any of its worn-out or mutilated notes are sent to the Treasury Department, they are destroyed, and the bank then has to pay the expense of re-issue and the express charges for sending them to the bank that originally issued them. The signature of the President and Cashier of the bank must be affixed.
Therefore National Banks, in calculating the possible profit on taking out circulating notes, have the following example to be considered in issuing every one hundred thousand dollars of their notes:
Hence the net percentage of profit on taking out National Bank notes on this class of bonds, is about one per cent., based on theirpresentmarket price.
The profit on taking out circulation on other United States bonds is even less.
Suppose the market price of the 2% bonds purchased was higher, say 108, as it was several years ago, the profit would be even less. Also, if the bonds decline in market value below par (as in case of war, for instance), the bank must stand that loss; and purchase and deposit an additional amount of bonds, so as to make the market value of the bonds deposited equal to the amount of its outstanding circulating notes.
In order to retire its circulating notes and obtain possession of its United States Bonds, deposited as security therefor, the bank must send the Treasury Department an amount of lawful money equal to the amount of the circulating notes it wishes to retire. It can then "withdraw a proportionate amount of the bonds held as security for its circulating notes."
But the law says that not more than nine millions of National Bank Notes can be retired in any one month. Therefore, if the market price of United States bonds goes up to a point where all profit on its circulation is wiped out, the bank may have to wait several months until previous requests for retiring circulation are out of the way. In the meantime United States bonds may have gone down in price.
As has been stated, a National Bankcantake out an amount of circulating notes, or National Bank currency, equal to the amount of its capital. But the profit on the operation is so small (leaving out the chances of actual loss) that many banks do not issue notes to the full amount allowed. The following figures relative to the total capital of all the National Banks, and the total circulation of these banks on the dates stated, conclusively prove this fact. (These figures are taken from the annual report of 1907 of the Comptroller of the Currency.)
It can be seen from these figures that the National Bankscouldhave taken outover three hundred millionsmore of circulating notes than theyactuallyissued during the time stated. And these figures are not exceptional.
Banks, other than National, "shall pay a tax of ten per centum on the amount of their own notes used for circulation and paid out by them." This tax is prohibitive and no State Banks issue circulating notes for this reason.
In every political campaign, especially the National ones, the orators talk a great deal about the "special privileges" of banks. But they are never defined exactly.
According to them, one privilege (?) the bank enjoys is the power to lend a certain per cent. of its depositors' money. But if it could not do this, what reason would the bank have for existing? That is its principal real source of profit.
Practically the only other privilege the National banks have, is the right to take out National Bank Notes, or currency. As has been shown in the remarks on "The Method of Issuing National Bank Notes," this privilege allows so little profit that the banks do not use it to the full extent of the law.
On the other hand, consider a few of the many risks the bank is constantly taking. Every loan it makes is a risk. A few bad loans, made through dishonest or visionary representations of its customers, may blot out the bank's profits for a year or more. Every check or draft cashed is a risk. Every check, draft, or note it takes for collection is a risk. In fact, every transaction the bank undertakes is more than ordinarily hazardous. Moreover the profits of the average city bank are not large. Considering their responsibilities and the innumerable ways by which they may involve the bank, the salaries paid the employes, from the President to the messengers, are small. Also remember there is no "water" in the stock of banks. The capital of every National Bank must be fully paid in, before it is allowed to open for business; and in most of the States, the banks, other than National, must have their entire capital paid up within a year from their beginning. The net profits of successful banks, located in cities with a population of one hundred thousand or over, average about six to ten per cent. The business man, when considering an investment in a mercantile or manufacturing enterprise, generally counts on double that amount of dividends.
If, as the politicians state, the banks enjoy so many "special privileges"; it is strange that the people of every section of the country do not rush in to organize and take stock in banks.
Transcriber's Note:Minor typographical errors have been corrected without note.Irregularities and inconsistencies in the text have been retained as printed.
Transcriber's Note:
Minor typographical errors have been corrected without note.
Irregularities and inconsistencies in the text have been retained as printed.