No bank is permitted to become indebted or in any way liable for an amount exceeding its capital stock, except for notes in circulation and deposits. Notes and deposits, if not on hand, are represented by commercial paper or other evidences of debt. But for greater security, it is required that one-tenth of the net profits, every half year, shall be carried to a surplus fund, until the surplus amounts to 20 per cent. of the capital, and that no dividend shall be declared until after this deduction is made. Net profits are to be estimated by deducting all losses and bad debts, and all debts are to be considered bad on which the interest is overdue six months.

No bank is permitted to make loans on its own stock; or to any one person or firm, except in the way of ordinary discounts, to an amount exceeding one-tenth of its capital stock. It was the violation of this latter rule that ruined the City of Glasgow Bank in 1878.1

1 Finance Report, 1878, p. 228.

Finally, there is the safeguard of publicity. Quarterly reports of the condition of the banks were originally required to be published in the newspapers of the towns or cities where the banks were doing business. In 1869 this requirement was changed, so that five reports may be called for annually, at such times as may be specified by the comptroller of the currency, and these reports also are made public. A powerful motive is furnished for keeping within the limits of prudent and legitimate banking, when a transgression of those limits may any day be exposed in the home newspapers. The cost of this publication is paid by the banks, and they are liable also for the compensation and ex-penses of a special examiner,whenever the comptroller may think it necessary to employ one.

1 When the City of Glasgow Bank failed, three firms were indebted to it as follows :

Mr. James Fleming was a director of the bank, and John Fleming, of Smith. Fleming & Co.,was his brother (British Quarterly Review, July, 1879, Am. ed., p. 90). The advances to the Flemings were secured on real estate, which is not admissible under the United States law.

The banks have paid from the beginning a United States tax of 1 per cent. per annum on their circulation, 1/2 per cent. on their deposits, and 1/2 per cent. on their capital not invested in United States bonds. The shares are taxed by the States, like other personal property, and the real estate of the banking associations is subject to local taxation like other real property.

The immediate object of Secretary Chase was to secure the revenue from the taxes on circulation and deposits, and to dispose of the bonds which he was compelled to sell. Fortunately, in perfecting the law, he had the assistance of an experienced banker, Mr. Hugh McCulloch, who was comptroller of the currency in 18G3 and 1864.1

1 Mr. McCulloch was president, until 1863, of the Bank of the State of Indiana.

The act of 1864 was a compilation from the best State laws. It was not a theoretical system, but the outgrowth of practical experience. The New York law furnished the example of a currency secured upon public funds. The prompt payment of stock subscriptions was required to prevent a repetition of the bad practice which had prevailed, in Pennsylvania and elsewhere, of beginning business upon the notes of the stockholders instead of a cash capital. If the bank prospered, the notes were good; otherwise, not. The circulation was based not upon the amount of bonds deposited, but upon the capital stock; because it had been found that borrowed bonds were sometimes deposited in the Western States, so that the notes issued upon them represented debt instead of credit. The directors were required to be residents of the State or Territory in which their banks were established, in order to prevent the organization of institutions intended to accommodate non-resident speculators instead of the community to which they belonged. The personal liability of directors and stockholders was one of the best features of the New York law. The provision for the redemption of the notes at the financial centres was taken from the Suffolk system, which had grown up in New England, and in spite of much opposition by the country banks, had maintained itself by reason of its evident usefulness in promoting a regular and healthy circulation.

The act of 1804 was thus guarded at all the points of danger indicated by previous experience; but a new peril was subsequently disclosed by the "lock up" of United States notes in New York, in November, 1868. Occasional runs had been made upon the bank reserves before, and so long as the reports were made quarterly, there was always an artificial scarcity of legal tenders at about the time when they were especially wanted by the banks. But in the fall of 1868 three "bears" at the stock board put in operation a scheme which produced an unprecedented panic. Having deposits amounting together to about $10,000,000, they presented their checks one morning and drew out this sum in legal-tender notes. The city banks were then required to hold reserves equal to 25 per cent. of their entire circulation and deposits. The subtraction of $10,000,000 from the reserves, therefore, compelled the banks at once to contract their loans to the amount of $40,000,000. The withdrawal of such a sum from the commercial business in which it was employed was enough to unsettle values; but there was still another blow to fall. Taking their $10,000,000 in legal tenders, these three men deposited them as collateral security for loans, and then, presenting their checks again, drew out the whole amount of the loans in United States notes. They had thus locked up between $12,000,000 and $16,000,000 in United States notes, and deprived the community of the use of between $48,000,000 and $(54,000,000 in bank-notes.1 This operation caused a decline of 25 cents a bushel in the price of wheat throughout the West; it caused a decline of from 3 to 4 cents a pound on the cotton crop of the country; vessels stopped loading at the wharves, and freight trains came empty from the West; the rate of interest ran up to 50 and even 150 per cent. per annum. Stocks came tumbling down, and the street was full of ruined brokers. It was a golden opportunity for the men who had contrived all this disturbance, and they improved it. But when Congress met again, the committee on banking and currency brought in a bill which was passed in February, 1869, forbidding future loans upon United States notes as collateral. At the same session Congress forbade the dangerous practice of certifying checks upon imaginary deposits, whereby in New York over $100,000,000 of fictitious capital had sometimes been created for speculation, and in 1874 the reserves were made to depend upon deposits alone, so that a repetition of the "lock up" of 1868 is now practically impossible.

1 This was an incident of the speculation at that time In the stock of the Erie railroad. The three men concerned were Jay Gould, James Fisk, and Daniel Drew, The exact sum locked up cannot be determined. Mr. C. F. Adams, Jr., in his Chapter of Erie, p. 67, sets the amount at $12,000,000, which is a minimum. Other estimates run from $12,000,000 to $16,000,000.

In 1870 Congress authorized the organization of gold banks under the national law. In the same year the limit of the amount of national currency was changed from $300,000,000 to $354,000,000. The secretary of the treasury had been charged in 1865 to see that $150,000,000 were apportioned to the States and Territories in the ratio of their capital, and $150,000,000 in the ratio of their population. It was now found that the limit had been reached, and that certain States and Territories were not sufficiently supplied with currency. It was estimated that $54,000,000 would make good this deficiency; but, if not, $25,000,000 were to be withdrawn from the States having more than their proportional share. Finally, in 1875, the limit was abolished; and since that time the only restriction upon the supply of bank currency has been the lack of capital, or the absence of any demand for more.