The previous discussion in this chapter has been related chiefly to manufacturing and trading establishments. The same principles, however, apply to all lines of business. Not long ago the president of an important national bank had under consideration the advisability of increasing his capital stock from $750,000 to $1,000,000, but an analysis of the status of his bank and of customary practice in regard to banking capital indicated that the increase would be inadvisable for the reasons stated below.

The combined capital and surplus of this bank was found to bear a relation to the deposit liabilities of about 1 to 4. Other banks in the same city varied from as low as 1 to 3 to as high as 1 to 5.8. In the City of New York some of the large banks have proportions as follows:

American Exchange National Bank........

1

to

5.5

First National Bank.........

1

,,

9

Fourth National Bank........

1

,,

4

Hanover National Bank........

1

,,

6.6

Merchants National Bank.......

1

,,

6.7

National Park Bank.........

1

,,

6.7

National City Bank........

1

,,

3.7

National Bank of Commerce........

1

,,

4

Although some of these banks have a high proportion, it seems to have been the practice of at least two of them in recent years to increase their capital from time to time so that the proportion existing between the capital and surplus on the one side and deposit liabilities on the other side, would be about 1 to 4. This proportion is generally regarded as about correct for a bank doing the ordinary type of commercial business, though there may, of course, be excellent reasons for either a higher or a smaller proportion in particular cases.

In the case under consideration the bank was said by its president to be carrying on the ordinary type of commercial business and to be earning reasonably good but not extraordinary profits. If a great many new accounts were to be taken over and the deposit liabilities were thus to be largely expanded, its present capital would probably not be enough to maintain a secondary reserve up to the full requirements of safety. Unless, and until, this expansion should take place, however, there seemed to be no necessary reason for increasing the capital so as to reduce the proportion of capital to surplus liabilities below the normal ratio.

There would still remain the question whether the increase in capital at this time would in itself be a factor tending to bring about a corresponding expansion of current discount and deposit business. On this point, the consensus of opinion seems to be in the negative. When the capital of a bank is not profitably occupied and is not earning a normal rate of profit, the directors and managers are immediately put under pressure to find employment for the idle funds. This they can accomplish either by making investments in securities and commercial paper, apart from the paper that comes to them from their own customers, or by entering into side-line activities, such as underwriting and the like. Neither course of action is advisable for a commercial bank. A third possible course, which in this case would not be given serious consideration, is that of soliciting the accounts of new and weak depositors.

On the whole, there is probably no substitute in the banking business for the slow and solid growth that naturally goes on after a bank has become well-established and is maintaining an untarnished reputation for conservatism mixed with a reasonable degree of alertness. Expansion of that nature will gradually build up deposit liabilities until it becomes advisable to make a corresponding increase in capital. But the chief point to bear in mind is that the expansion will come first and the increase in capital will appear as a result, not a cause.