That the limitation placed upon the liabilities to any association of any person, company, corporation or firm for money borrowed, shall not apply where a loan in excess of the prescribed limit shall be less than two per cent. of the total assets of the bank at the time of making the loan, such loan to be at all times protected by collateral security equal to or greater in value than the excess in the amount of the loan over the limit at that time based upon the capital stock of the bank.
He also recommended that a strict and enforcible penalty be provided for infractions of this suggested amendment, so as to enable the Comptroller to compel compliance with its terms.
In suggesting this amendment Mr. Dawes expressed the opinion that while it would have the effect of compelling a safe and proper distribution of the loans of larger banks, it would at the same time enable them to loan more nearly the same per cent. of their total assets, as the law permitted the smaller banks to make and to supply the needs of borrowers in the larger communities within the limitations of the statute.
He stated that the size of a loan is of itself no indication of its strength or weakness, if it is not such as to be an undue concentration of the assets of the institution in the hands of one individual or concern. He did not regard it as wise to deprive the creditors and shareholders of a bank of the safety of the law of average, either upon economic grounds or upon the grounds of public policy.
For the purpose of illustrating the effect of the law as it existed in 1908, limiting loans to ten per cent. of the capital of the bank, Mr. Dawes presented a table in his report for that year showing the average maximum loan to average resources allowed under the ten per cent. limit based upon capital stock to be as follows:
New York City banks, 56/100 of one per cent. Chicago banks, 98/100 of one per cent. St. Louis banks, 1.4 per cent. Reserve city banks, 1.51 per cent. Country banks, 2.14 per cent.
Mr. Dawes recommended that domestic branch banks be authorized to be maintained in communities of less than two thousand inhabitants, in order to afford banking facilities in small communities that could not afford to maintain a bank with a capital of fifty thousand dollars, the minimum capital then allowed by law.
At the time this recommendation was made the law had not been amended authorizing the establishment of national banks with a minimum capital of twenty-five thousand dollars in places the population of which did not exceed three thousand people.
In his report for 1900 Mr. Dawes recommended the passage of a bill introduced by Representative Marriott Brosius, chairman of the Committee on Banking and Currency, in the First Session of the Fifty-sixth Congress, "For the better control of and to promote the safety of national banks."
This bill was designed to insure a greater degree of safety in loans to officers and directors of the banks. It recognized the distinction in the relations of directors to a bank and those sustained by executive officers of the association, and prohibited any loan being made to the president, vice-president, cashier, or any clerk, teller, bookkeeper or other person in the employ of the bank, except upon the previous approval of a majority of the board of directors constituting a quorum, or the executive committee of the board, and for any violation of this restriction provided a penalty of not more than five thousand dollars or imprisonment for not more than five years, or both.
It also provided that the board should fix by resolution, duly spread upon the minutes, the limit of credit to be extended to any director. Where no such limit of credit was fixed by the board, no loan should be made to a director without the previous approval of the board in the same manner that loans were made to officers and employees of the bank. For any violation of this provision, a penalty was provided that the association should forfeit to the United States a sum equal to double the amount of the interest charged by the bank upon such loan, to be collected by the Comptroller and covered into the Treasury of the United States.
This bill also prohibited overdrafts by any officer or employee of the bank, and provided for carrying into effect the recommendation of Mr. Dawes, heretofore referred to, in regard to the limitation of loans.
On the subject of bank reserves, Mr. Dawes expressed the belief that too great latitude is given the banks in connection with the use of their reserves, and recommended that the law be amended requiring a larger proportion of the reserve to be kept in cash in the vaults of the bank, for the reason that the ability of the banks to use credits with reserve agents as a basis of loans creates too great an extension of aggregate deposit credits, as compared with aggregate cash resources.
This condition, Mr. Dawes contended, increased in times of liquidation and financial panic the necessity for the banks to demand payment of loans and added to the demoralization of business. He expressed the opinion that by increasing the restrictions upon the right of the banks to count deposits with reserve agents as cash, a firmer and safer foundation would be built under the deposit credits of the country, and in times of liquidation the greater strength of the banks would more than compensate them for the loss of the small amount of interest on a portion of their balances which would result from a change in the law.
The Comptroller therefore recommended that one-fifth, instead of three-fifths of the reserve of fifteen per cent. then required by law to be kept by banks not reserve agents may consist of balances due from reserve banks, and that the law permitting reserve city banks to keep one-half of their reserve with central reserve city banks be repealed.
The adoption of the amendments suggested by Mr. Dawes would have prevented the concentration of so-called reserve in the three central reserve cities of New York, Chicago and St. Louis, which funds in times of panic, such as in 1907, were shown not to be reserve at all, but simply loans not available on demand.