While this section of the original bank act was very ambiguously drawn, it fixed a limitation upon the discount of bills of exchange and in that respect was better than the present law. The Act of June 3, 1864, which repealed the Act of 1863, wiped out this limitation, and the banks since the former date have been allowed to discount business or commercial paper and bills of exchange without any restriction as to the aggregate amount in any one case, or of any one kind or class.

Until there is a restriction placed by law upon the amount of business paper of any one person, firm, company or corporation that may be discounted by a bank, and the law defines specifically what kind of paper shall come within this classification, just so long will some banks exceed the limits of prudence and safety in discounting for single or affiliated interests and endanger the solvency of the association.

The unsatisfactory and frequently dangerous conditions that have been found in banks, as a result of this provision of law, which the amendment proposed to the National Monetary Commission was intended to correct and regulate, may best be exemplified by the following illustrations of actual cases in point in one bank of each class with a capital stock varying in amount from $25,000 to $1,000,000.

1.

Capital.........

$25,000.00

Surplus...........

15,000.00

$40,000.00

Deposits.........

$190,000.00

Loans and discounts........

200,000.00

Total assets ................

250,000.00

Legal limit of a loan.........

4,000.00

Indebtedness of one company, the president of which was president of the bank:

Direct loan ................

$4,000.00

Commercial paper ..........

105,209.96

$109,209.96

2.

Capital ...................

$50,000.00

Surplus ...................

20,000.00

$70,000.00

Deposits...........

$377,000.00

Loans and discounts.........

325,000.00

Total assets ...............

497,000.00

Legal limit of a loan........

7,000.00

Indebtedness of the president:

Direct loan

6,967.00

Accommodation notes and loans to companies controlled by him......

75,032.00

$81,999.00

3.

Capital..........

$100,000.00

Surplus.............

50,000.00

$150,000.00

Deposits...........

$567,000.00

Loans and discounts.........

483,000.00

Total assets...........

827,000.00

Legal limit of a loan.........

15,000.00

Indebtedness of cashier:

Direct loan........

$9,900.00

Accommodation notes and loans to concerns controlld by him.....

215,000.00

$224,900.00

4.

Capital..........

$150,000.00

Surplus.........

100,000.00

$250,000.00

Deposits..............

$858,000.00

Loans and discounts..........

1,017,000.00

Total assets ..............

1,378,550.00

Legal limit of a loan........

25,000.00

Indebtedness of one company, in which the president of the bank was interested:

Direct loan........

$15,000.00

Indirect indebtedness, consisting of commercial paper and loans to subsidiary

Companies.......................

360,563.00

5.

Capital...........

$200,000.00

$375,563.00

Surplus........

60,000.00

$260,000.00

Deposits...........

$1,545,500.00

Loans and Discounts..........

1,508,000.00

Total assets.........

2,078,000.00

Legal limit of a loan......

26,000.00

Indebtedness of one company:

Direct loan.....

$10,000.00

Commercial paper and loans to subsidiary companies..........

345,454.00

$355,454.00

6.

Capital.........

$400,000.00

Surplus.............

150,000.00

$550,000.00

Deposits.........

$2,150,000.00

Loan and discounts.....

2,158,000.00

Total assets......

3,427,000.00

Legal limit of a loan

55,000.00

Indebtedness of one firm:

Direct...............

$40,000.00

Indirect - accommodation notes and loans to subsidiary concerns..................

279,000.00

$319,000.00

7.

Capital.............

$1,000,000.00

Surplus.........

200,000.00

$1,200,000.00

Deposits.............

.$13,400,000.00

Loans and discounts.........

7,100,000.00

Total assets .....

22,000,000.00

Legal limit of a loan......

120,000.00

Indebtedness of president:

Direct ...................

.........

.........

Indirect - accommodation and advance to his

$7,776,000.00

The foregoing are fair examples of the imprudent concentration of loans which may be found in many banks resulting from the excessive discounting of commercial or business paper, so called, for single interests, and in many instances while such paper takes the form of trade paper excepted from the limit of loans it consists of nothing but accommodation notes made for the purpose of indirectly borrowing money.

Senator Knox, a member of the National Monetary Commission at the time this matter was under discussion, seemed to think that inasmuch as the banks did not violate the law by discounting commercial or business paper to such an imprudent extent as to jeopardize the safety of the institution, it was not incumbent upon the Comptroller of the Currency to concern himself about such conditions, and that if disaster should overtake the association he would not be held accountable. This was a very complacent view to take of the matter. It is the banker's way of looking at it, but certainly should not be the Comptroller's, if the safety of the institution is to be considered in the exercise of his supervisory powers. It was assumed in the preparation of the recommendations for amendment to the laws that the Commission desired to strengthen the weak places in the statutes and thus increase the security of the creditors of the banks, and no provision of the statute was weaker or more responsible for the conditions which result in large losses and frequently insolvency, and needed strengthening more than the provision which permits the discounting of business and commercial paper without limit as to the aggregate of any one class, except the judgment or discretion of the bank's officers.

Mr. Padgett, a member of the Commission, stated that in England, France and Germany there is absolutely no Government inspection of the banks, and no regulation whatever in respect to their loans, while in this country the tendency is toward increasing inspection and regulation.

If all the national banks in this country were as well and as conservatively managed as the banks that were represented by the bankers who were present at the hearing before the Monetary Commission, or were members of that Commission, no additional restrictive legislation or increased supervisory powers would be necessary. It might be perfectly safe to let the banks be managed by their directors and officers, without governmental interference, in the confidence that they would be well and conservatively managed in the best interests of their stockholders and the safety of their depositors. But, unfortunately, such is not the case, and never will be, and in order to regulate and effectively supervise the banks that most need regulation and supervision, the additional restrictive measures and increased supervisory powers recommended at that hearing were considered necessary, and until there is a statutory limitation placed upon the total liabilities for discounted commercial or business paper and bills of exchange, of any one person, company, firm or corporation, there will be injudicious and imprudent banking and bank failures resulting from too great a concentration of loans and discounts in the hands of affiiliated interests.

If the English, German or French policy, referred to by Mr. Padgett, of letting the banks alone to be managed by their directors and officers without governmental supervision, were introduced in this country, it would also become necessary to adopt the Chinese penalty of decapitation as a punishment for bank wreckers.

The experienced and conservative banker does not need legislative restrictions to guide him in determining the line of credit to be extended to any borrower. The aggregate liabilities of every customer for direct loans and indirect obligations as endorser or guarantor, are measured by such bankers not by statutory regulations but by the borrower's known financial responsibility. Unfortunately, however, all bankers are not so constituted, consequently as long as some banks are managed and dominated by men of speculative tendencies, or optimistic or defective business judgment and of uncertain or questionable integrity, just so long will it be necessary to regulate and control their operations by well-defined laws and limitations.

That the weak places in the national banking laws were not strengthened from time to time to afford better protection to depositors and stockholders in the banks, and amended to meet new and constantly changing conditions in banking, was because of the fact that the recommendations made by the several Comptrollers of the Currency since the establishment of the system did not receive at the hands of Congress the consideration they should have received.