1. Superiority Of Bank To Individual Credit

One of the functions of a national bank is to issue notes for general circulation; in other words, to use its credit as money. As state banks must pay a tax of ten per cent on their note issues, the tax operates as a prohibition and was intended to be prohibitory.

A bank, when thus using its credit, within proper limits, is performing a highly useful purpose. A desires to have $10,000 more credit or capital. He says to himself: "The bank in this town is issuing its notes and everybody willingly receives them. I will do the same thing." Accordingly he has printed a thousand ten-dollar notes similar in form to bank notes, signs them, and attempts to put them into circulation. He soon regretfully learns that hardly any one is willing to receive them.

In his sorrow and chagrin he goes to a bank and inquires what he shall do. The president says to him, "Give the bank your note for $10,000, and I will give you a thousand ten-dollar notes issued by this bank in exchange." The exchange is effected, A agreeing to return them or other bank notes at the end of four months and something more to the bank for the use of its credit. These notes A can readily circulate. What is the nature of this transaction ? A has exchanged his note, possessing limited credit, for the notes of the bank, which possess unlimited credit. Why is the credit of the bank so much better than his own? Because it is known to possess wealth; it has long been issuing notes and has always redeemed them whenever the holders have desired payment; its credit, therefore, has become firmly established. A may regret that his credit is not as extensive; he says to himself, "I am worth just as much as the bank; it ought to be as readily taken;" but he can not whistle down the fact, which is otherwise.

2. Amount Of Notes That A Bank Can Issue

Whenever such a system of issuing bank notes has been set up, the amount has been regulated by the needs of borrowers. The national bank system changed this so far as prescribing the maximum amount of notes that a bank can issue. It can issue notes only to the amount of the par value of the national bonds in which its capital may be invested. It can, however, if it pleases, invest its entire capital in tin's manner, and for several years after the system went into effect national banks were obliged to invest all their capital in national obligations. At the present time the profits on issuing notes are not huge enough to tempt banks to invest more than the minimum amount of capital required by law.1

3. Security For Them

The bonds are deposited with the Treasurer of the United States, and must be registered. This is done to render them more safe from loss by robbery, as a registered bond is not negotiable like a coupon bund. The latter is like an ordinary negotiable note, and if it is stolen and transferred to another, who buys it in good faith, knowing nothing about the theft, he acquires a good title and can compel the maker to pay him. When a bond is registered, purchasers must follow the record in order to acquire a good title.

1 See page 41 showing how much of a national bank's capital must still be invested in national bonds.

A national bank can purchase bonds and send them to the Controller of the Currency with the request that they be exchanged for registered bonds for deposit with the Treasurer, and he will perform the service. The securities of every bank are put in a box which is kept in a safe containing no other securities, and during the period of nearly forty years since the system went into operation, none of these bonds have ever been mislaid or stolen.

The bonds thus sent are assigned in trust to the Treasurer of the United States, who sends a receipt for them containing a description or identification of each bond. The mode of assigning them is described in a note printed on the back.

Interest on them matures twice a year, which the Treasurer pays by check to the order of the bank payable at any United States subtreasury, or United States depository.