Unlike the three great countries of Europe, banking in the United States is not under the primary supervision of the national government. It is only the banks belonging to the "national" banking system that come specifically under federal control. Thousands of so-called "state" banks, trust companies, and private bankers come under the jurisdiction of their several state governments. Hence preliminary to the consideration of the Federal Reserve System it is necessary to examine the main outlines of the banking system as it appeared in the United States at the time of the passage of the Reserve Act.

The National Banking System dates from the Civil War. Its establishment was advocated by Salmon P. Chase, the Secretary of the Treasury, who expected it to be of assistance in the marketing of government bonds, on the one hand, and in the unification of the currency on the other. While the first purpose was not achieved, the second was in time fully realized, and, despite the weaknesses that the system later exhibited, the unification of the currency stands as an accomplishment the importance of which cannot easily be overestimated. The act as originally passed in February, 1863, was of course frequently amended to meet new conditions. No useful purpose would be served by trying to review in this place the history of the act down to the present day. Historical accounts can be found in adequate variety in other treatises. Here the effort will be made to describe the system as it had developed up to 1913.

No thorough-going national system of banking in the United States

The "national banking system"

Origin

Any number of persons, not less than five in number, were permitted to form a "national banking association." They were required to file a certificate giving information concerning the individuals involved, the place of business, amount of capital, etc. This certificate was passed upon by an officer called the Comptroller of the Currency, who was the head of the system. The comptroller might or might not accept such organization certificate, but if he did, a proper authorization was transmitted to the persons concerned, and the new bank was ready to begin business.1 Its charter was to run for twenty years, unless it was sooner dissolved by its own act, or as a result of violation of law. The association was authorized:

"To exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of this title."

The capital of national banks was fixed by the law according to the population of the several communities where the banks were to be established. It was not until the act of March 14, 1900, that a capital as small as $25,000 was permitted in the smaller towns having a population not to exceed 3,000, but after that act the gradations ran from $25,000, as indicated, to $200,000 in cities having a population of 50,000 or more. The shares were $100 each, were deemed personal property, and were made transferable on the books of the company. Fifty per centum of the capital had to be paid in before the bank was authorized to do business, while the remainder had to be paid in installments of at least 10% of the whole amount of capital each month from the time of such authorization. There were also elaborate provisions aiming to preserve the capital intact with final resort if necessary to forced liquidation by a government-appointed receiver.

Organization of national banks

Authorized powers

Capital requirements

1 In the case of banks with a capital under $100,000 the certificate had also to be approved by the Secretary of the Treasury.

Other general measures of safety were provided. There was, for example, the requirement that a surplus equal to 20% of the capital stock be accumulated through the apportionment to a surplus fund, before the declaration of dividends, of 10% of net profits. Moreover, the stockholders of national banks were subject to an extra liability equal to the amount of stock held.

The law provided that the banks were to be governed by a board of directors made up of citizens of the United States, resident for at least one year in the state where the bank was to be established, and continuing in such residence during their incumbency. Each director had to hold at least ten shares of the bank's stock, and had to take an oath that he would faithfully discharge the duties of his office. In the election of directors each stockholder was entitled to vote on the "one share one vote" basis.

The most distinctive feature of the National Banking System was the bond-deposit requirement. Banks having a capital of $200,000 or over were required to deposit with the Treasurer of the United States not less than $50,000 in United States bonds. The requirement was not less than one-fourth of the capital where the capital was $150,000 or less. As will be seen subsequently, the bonds so deposited were made the basis of note issue. Provision was made on substantially the same terms for the entry of state banks into the system.

In general the scope of the business of the national banks was as previously defined. In conformity with American procedure in these matters, granted powers were strictly interpreted. There were also positive limitations. National banks were forbidden to loan on or to purchase any of their own stock. Their debts were limited to the amount of the unimpaired capital, although notes and deposits, drafts against money actually deposited to the credit of the bank, and liabilities to stockholders for dividends were excepted in making the calculations. There were also definite restrictions of a bank's real estate holdings, and on the amount of credit that could be extended to an individual or firm. The total liabilities of any firm, person, etc., was not to exceed 10$ of the bank's capital and surplus, and, however large the surplus, such liabilities were in no event to exceed 30$ of the capital. In calculating these liabilities bills of exchange drawn in good faith "against actually existing values," and discounted commercial or business paper actually owned by the person negotiating the same, were not to be included. Moreover, the law forbade the overcertification of checks. ' It also established 7$ as the legal rate of interest, except in those states which had their own interest prescriptions. In these cases the state rate was made the legal rate for the national banks.