Surplus and double liability of stockholders

Directors

Deposit of United States bonds

Limitations on business

The expansion of credit in the form of deposits by the national banks depended upon loans and discounts. The only check on such expansion was found in the reserve prescriptions. Banks in the central reserve and in the reserve cities were required to maintain against their deposit liabilities a reserve of 25$. In all other places the requirement was only 15$. New York City, Chicago, and Saint Louis were the central reserve cities, while any city with a population in excess of 50,000 might through a petition of its national banks to the comptroller be designated a "reserve city." The significance of this differentiation lay in the fact that reserve cities might keep one-half of their required reserves on deposit in central reserve cities, while the so-called "country banks" could keep three-fifths of their reserves deposited in either reserve or central reserve cities. This redepositing of reserves grew out of the necessity of having balances in the large centers for domestic exchange operations. If a bank's reserve fell below the prescribed minimum it was prohibited from making new loans. All the different kinds of money issued by the government were "lawful money" for reserve purposes, but the currency issued by the national banks themselves was, of course, excluded from reserves.

Expansion of deposits

Reserve requirements

Redepositing reserves

The deposits of the United States government were, by the Act of May 30, 1908, omitted in calculating the total deposit liabilities against which the specified reserves had to be maintained. Before that no such special exemption was made. But to safeguard the government funds the law had always required special deposits, with the Treasury, of United States bonds "and otherwise." In Secretary Shaw's administration of the treasury department these words "and otherwise" were interpreted to mean "or otherwise," under which interpretation state, municipal, and railroad bonds of designated standards were accepted as security for government deposits. In the early years of the National Banking System the government used the banks only for depositing internal revenue collections. Subsequently customs collections were also extensively so deposited. It was not until recently, however, that payments on government account were made by checks directly drawn on depositary banks. Before that the government funds were covered into the subtreasuries on which the warrants for amounts due were drawn.

The issue of notes by national banks was peculiarly controlled. In the first place all notes issued had to be backed up dollar for dollar by United States bonds, according to par value if that were les3 than the market value, or according to market value if the bonds went below par. Originally the total issue for each bank was limited to a certain rate per centum of its capital, the rate being regressive as the capital exceeded $500,000. This was subsequently changed to a uniform 90% of capital maximum, but this percentage was also increased so that the maximum was fixed finally at the full amount of capital stock.

Government deposits

Note issue

Concerning the general character of the notes it may be said that not more than one-third of the issue could be in denominations as low as five dollars, while no notes could be issued in denominations under five dollars.1 The notes were acceptable in all payments to the government, and in payments to national banks. Bank notes were not, however, available for reserve purposes for the national banks.

The notes were redeemable in lawful money over the bank's counters and at the government treasury or sub-treasuries. For the purpose of insuring redemption each bank was compelled to deposit in specie with the treasury 5% of the total amount of notes issued. This fund was drawn upon to redeem the notes of any bank that failed, the sale of the deposited bonds of the failed bank being relied upon if necessary to replenish the fund to the extent that the redemption of the notes exceeded the actual contribution to it of the failed bank. A bank could provide for the redemption of its notes, if it chose to reduce its outstanding circulation, by depositing lawful money or United States bonds with the Treasury, but, in order to prevent what might be considered too hasty a contraction of the currency, there was the peculiar provision that not more than $9,000,000 worth of such bonds could be deposited in one month. A tax was levied on the notes varying with the rate of interest of the bonds deposited to secure them. The rate was 1/2 of 1% each half year on circulation based on 3% bonds, and only one-half that on the circulation resting on the 2% bonds.

The general operation of the banks in the National Banking System was pretty carefully supervised by the government. The law required the banks to make at least five reports a year to the comptroller on forms supplied by him. Such reports had to be verified by oath or affirmation of the president or of the cashier, and had to be attested by the signature of at least three directors. Each of such reports had also to be published by the banks. Moreover, in addition to these reports the law provided that the comptroller, with the approval of the Secretary of the Treasury, might appoint examiners, and such examiners could be sent at any time by the comptroller to examine into the condition of any national bank.

Denominations and tender qualities

Redeem-ability

Government supervision

1 The object of this limitation was to monopolize the field of small bills for the silver certificates and for the silver dollar.

The weaknesses of the American banking system as outlined by the National Monetary Commission are subsequently discussed in some detail. Here, however, it may be said that one of the most serious weaknesses was the hopeless inelasticity of the bond-secured currency. Pending the reconstruction of the whole banking system there was passed on May 30, 1908, a measure popularly known as the Aldrich-Vreeland Act, which was aimed to provide at least temporary relief should a strain on the currency be again felt. A word or two must therefore be said about this act.