Commercial banks are classified according to the source of their charters, into state and national banks. National banks are organized under the national bank law of 1863 and its amendments. Later chapters discuss this law in detail, as well as the organization, management and operations of banks doing business under it. State banks are chartered by and subject to the supervision of the various states. In some states, private banks are not differentiated from state banks owing to the fact that the same regulations and laws apply to both incorporated and unincorporated banks. So, too, the distinction between state banks and stock savings banks, and, again, between state banks and trust companies is not at all marked or uniform under the varying laws of the different states. In this book, we shall use the term "state bank" in the sense of a bank of discount and deposit incorporated under state law.

The original method of creating banks was by special charter granted to each individual bank by the legislature. In many cases, these charters were perpetual, and a few banks are still doing business under their original charters. The special charter method, however, was inconvenient and often attended by favoritism and corruption. At an early date in our banking development, therefore, general banking laws were passed in the several states under which all banks stood upon equal footing.

Commercial banks organized under state laws perform their functions in essentially the same way as national banks. Indeed, there is little to distinguish them in everyday business, except that national banks bear the title "national,"1 and that state banks do not issue circulating notes. Several factors enter into the determination of the relative advantage of incorporating under state law or the national system. In general, the state banking laws permit the organization of banks with smaller capital than under the national system. No national bank may be organized with less capital than $25,000; while in several states, banks may be started with as little as $10,000, and, in one state, $5,000. This makes it possible for small towns to secure the advantage of a bank under state law, which otherwise might have to do without. Until recently national banks were forbidden to loan on real estate, while state banks in most of the state's are permitted to make such loans. Generally, the reserve required of state banks is lower than under the national system. National banks alone can profitably issue notes; the issues of state banks are subject to a tax of ten per cent, which amounts to a prohibition.

1 There are a few special exceptions to this rule.

There is little or no justification for the popular opinion that national banks are safer and sounder than state banks. Most of the states now have excellent banking laws, which in many instances are modeled upon the national banking law. The percentage of failures among state banks is only a trifle higher than among national banks. The soundness of a bank depends, not upon the authority which issues its charter, but upon the ability and honesty of its management and supervision.