2. Composition Of A Board Of Directors

Lending is the work of the directors. It is the most important duty they have to perform. Let us begin by inquiring how a board is composed. The National Banking Law requires that every bank shall have a board consisting of at least five directors. There is no limit to the maximum number, and many banks have a board consisting of nine to thirteen. A national bank director must own at least ten shares of stock; often he is one of the largest shareholders in the bank.

1 These figures are taken from the Clearing House Statement, Oct. 25, 1902.

Their selection is founded on several considerations. They may be the largest shareholders, or influential citizens, able to bring a large amount of business to their bank. Sometimes a bank is organized with the intention of making particular persons, who were influential in raising the capital, directors. In not a few cases one or two persons own by far the largest amount of stock and determine the formation of the entire board. Generally a bank seeks to have a prominent representative of every leading kind of business in the place of its location on its board. If a bank is located in a city where tobacco is a prominent business, a bank will seek to have a director who is interested in tobacco. One reason for his selection is, he is supposed to have a special knowledge of the notes or other paper that may be offered for discount by men engaged in that business.

3. Motives Which Lead Directors To Serve

It is important for a bank to know what are the motives of those who serve on its directory. In choosing them a bank has a well-known purpose to strengthen itself, to attract cus-tomers, to have the benefit of their experience; bu1 the directors themselves may have very different moth They may be willing to serve simply to obtain large loans for themselves or for especial friends; in other words, with the view of helping them elves first and their bank afterward. Sometimes a man organizes a bank with the view of diverting nearly all of its resources into his own business and elects a directory who will do his bidding. Such a bank may be wisely left to the projector.

The national banking law forbids any bank from lending more than one tenth of its capital to a person on his note, "but the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial paper actually owned by the person negotiating the same, shall not be considered as money borrowed." A bank therefore is clearly prohibited from lending to a man on his accommodation notes, or the accommodation notes of another made for his use, more than one tenth of its capital. But there is no limitation whatever on the amount a man may borrow on the notes of a purchaser of property. Thus A, a merchant, can borrow only one tenth of the capital of a bank as above described, however wealthy he may be; but he may present notes for any amount taken for goods bought of him, and a bank has the right to discount them either with or without his indorsement. It may be asked, can not a person easily borrow more than the ten per cent by getting others to give him their notes purporting to grow out of real business ? It is easy to do this, and Potter's case is an example.1 By collusion with a few friends he borrowed enormous sums, and yet escaped punishment. This is one of the defects in the national law that needs amending.

In many bank failures the fact has come to light that this provision of the law was ignored. Though the bank examiner professes to examine all the notes and other paper discounted by a bank, he often fails to discover this evasion of the law. In truth, it is one of the most common evasions of all.

1 Potter v. United States, 155 U. S. 438.