The lowest denomination of national bank-notes authorized by law is $5, and not more than one-third of any bank's issues can be of this denomination. The government issues notes for $1 and $2, as well as for higher denominations. The largest amount of bank-notes of one denomination is in bills for $10, which on the 31st of October 1907 constituted $249,946,530 in total outstanding issues of $609,905,441. Of this total circulation $562,727,614 was secured by bonds, and the remainder, $47,252,852, was covered by lawful money in the government treasury, deposited for the redemption and retirement of the notes as they might be received.
An important extension of the national system resulted from the authority given by the act of 1900 to incorporate national banks with a capital as low as $25,000, in places having a population not in excess of 3000. The previous minimum limit had been $50,000. Under this provision there were incorporated to the 31st of October 1907 2389 national banks with capitals of less than $50,000, with aggregate capital of $62,312,500, of which 272 banks were conversions of state and private institutions, 752 were reorganizations and 1365 were new institutions.
The national banks possess most of the powers of commercial banks, but are not permitted to hold real estate other than their banking houses, unless taken for debt. Five reports are required each year to the comptroller of the currency at dates selected by him without notice, and each bank is subject to the visitation of bank examiners acting under the comptroller. No reserves against notes are required by existing law except 5%, which is kept in Washington for current redemption purposes. The redemption system is defective in that redemptions are not authorized at other places, and the notes reach the treasury on an average only about once in two years. For many years the banks were prohibited from retiring more than $3,000,000 of notes monthly, but the limit was raised by an act of 4th March 1907 to $9,000,000 per month.
Reserves are required against deposits to the amount of 25% in so-called "reserve cities," and 15% in what are called the "country banks" outside of reserve cities. Not all these amounts, however, are required to be kept in cash. The three central reserve cities, where cash is required, with only trifling deductions, are New York, Chicago and St Louis. In other reserve cities, which in 1908 numbered forty, the banks are permitted to deposit half their cash in national banks in central reserve cities, while country banks may deposit three-fifths of their cash in any reserve city. The shareholders of national banks are subject in case of liquidation to double liability upon their shares, and this is now the rule in most of the conservative state banking systems. National bank-notes are not legal tender, but are receivable by the government for all obligations except customs dues.
The panic of 1907 imposed a severe strain upon the cash resources of the banks of New York City, but did not cause any such considerable number of failures as occurred in 1893.
Payment of cheques in currency was suspended in New York on the 28th of October 1907, and continued until about the beginning of the year 1908. The panic was precipitated by over-speculation by a group of national banks, followed by the suspension of the Knickerbocker Trust Company on the 22nd of October with deposits of $48,000,000. Then came runs on other companies, a deficit in the required reserves of New York banks of $38,838,825 in the week of 2nd November, and arrangements for the importation of foreign gold to an amount which soon approached $100,000,000. With an increase during the autumn of about $77,000,000 in national bank circulation, a transfer of $72,000,000 from the treasury to the banks, and a further decline in required reserves in New York during the next week, the amount of currency which was added to the circulation or disappeared during a few weeks of the panic amounted to more than $275,000,000, or nearly one-tenth of the usual volume of circulation in the country. The total bank-note circulation on the 28th of December 1907 had risen to $687,340,835; but this amount was abnormal and was reduced somewhat during the spring of 1908.
The position of the trust companies, especially those of the city of New York, was one of the disturbing features of the panic. These companies were comparatively a small factor in New York finance at the time of the panic of 1893. The capitalization of all the trust companies in the United States, even as late as 1897, was only $106,968,253, and individual deposits were $566,922,205. The capital of these companies had risen in 1907 to $276,146,081 and their deposits to $2,061,623,035. The trust companies of New York were required by the law of the state to maintain only 5% of their demand deposits in cash in their vaults. Whilst most of them had also large amounts on deposit in national banks, these reserves proved inadequate to sustain the vast mass of credit which was built upon them. The absolute amount of the reserves, however, was perhaps less important than the class of business to which some of the less conservative of these companies had committed themselves. Instead of keeping their assets liquid by purchases of commercial paper and loans on first-class negotiable securities, they had in some cases engaged in speculative underwritings and had locked up their funds in enterprises requiring a long time for their consummation.
It was these combined influences which led to distrust of the Knickerbocker Trust Company, and to the runs upon that company and others during the late days of October and early November. The result was to reduce the total resources of the forty-eight trust companies of Greater New York from $1,205,019,700 on the 22nd of August 1907 to $858,674,000 on the 19th of December 1907. Individual deposits subject to cheque fell from $692,744,900 to $437,733,400. Such a reduction of resources within so short a time, most of it being accomplished within a few weeks, has hardly ever been recorded in the history of banking, and the fact that the stronger companies were able to call in their cash and meet such demands was evidence to a certain extent that the criticisms upon them were exaggerated. The necessity for stronger reserves and for greater safeguards against speculative operations was so strongly impressed upon the public mind, however, that several restrictive measures were enacted at the session of the New York legislature in 1908, designed to prevent any abuses of this sort in the future.