Part 14
2. Books will not be necessary. The student, however, who wishes to make a more thorough study of the national banking system will find excellent chapters on the subject in "Carroll's Principles and Practice of Finance" (New York: Putnams) and "White's Money and Banking" (Boston: Ginn & Co.).
3. Take up the papers of the course paragraph by paragraph and ask yourself the reason why each is introduced. Discuss with your friends the advantages or disadvantages of particular requirements.
OUR NATIONAL BANKING SYSTEM
The national banking system of the United States was established by an act of Congress in 1863, revised in 1864, and amended by later legislation. The great advantage of the system, it is said, is the feature of uniformity, the fact that it brings the banking business of the whole United States under one authority and under the supervision of one set of administrative officers. The note-issuing department is subordinate in its public usefulness to the facilities afforded by banks and clearing-houses for the interchange of credits. The essential features of national banks are briefly set forth as follows:
1. There is a bureau of the Treasury Department having charge of all matters relating to national banks, the chief officer of which is the comptroller of the currency.
2. Any number of persons, not less than five, may form an association for banking purposes, to continue not more than twenty years, but renewable for twenty years with the approval of the comptroller.
3. The powers of the bank are limited to the discounting of promissory notes, drafts, bills of exchange, and other evidences of debt; receiving deposits, dealing in exchange, coin, and bullion, loaning money on personal security, and issuing circulating notes. It cannot hold real estate except such as may be necessary for the transaction of its business, or such as may have been taken as security for debts previously contracted in good faith.
4. There can be no national banks anywhere of less capital than $50,000, and these small ones are restricted to places of not more than 6000 inhabitants. In cities of more than 6000 and less than 50,000 inhabitants there can be no bank of less than $100,000 capital, and in cities of 50,000 inhabitants or more none of less than $200,000. One half of the capital must be paid in before the bank can begin business and the remainder must be paid in monthly instalments of at least ten per cent. each.
5. Shareholders are liable for the debts of the bank to an amount equal to the par value of their shares in addition to the amount invested therein.
6. Each bank having a capital exceeding $150,000 must deposit in the treasury of the United States registered interest-bearing bonds to an amount not less than $50,000. Those having a capital of $150,000 or less must deposit bonds equal to one fourth of their capital stock. Each bank may issue circulating notes to the amount of ninety per cent. of the market value of the bonds deposited by it, but not exceeding ninety per cent. of the par value of the same, and not exceeding ninety per cent. of the paid-in capital of the bank; but no bank is compelled to issue circulating notes. No bank-notes shall be issued smaller than $5. The notes are receivable at par for all dues to the United States except duties on imports, and are payable for all debts owing by the United States within the United States except interest on the public debt and in redemption of the national currency.
7. Every bank in certain designated cities, called reserve cities, must keep a reserve of lawful money equal to twenty five per cent. of its deposits. All other banks must keep a like reserve of fifteen per cent., but three fifths of the said fifteen per cent. may consist of balances on deposit in banks approved by the comptroller in the reserve cities.
8. Each bank must keep on deposit in the treasury of the United States lawful money equal to five per cent. of its circulation as a fund for redeeming the same. This five per cent. may be counted as part of its lawful reserve. This does not relieve banks from the duty of redeeming their notes at their own counters on demand.
9. One tenth of the net profits must be carried to the surplus fund until it is equal to twenty per cent. of the capital.
10. A bank must not lend more than one tenth of its capital to one person, corporation or firm, directly or indirectly, nor lend money on the security of its own shares, nor be the purchaser or holder of its own shares unless taken as security for a debt previously contracted in good faith, and if so taken they must be sold within six months under penalty of being put in liquidation.
11. Each bank must make to the comptroller not less than five reports each year, showing its condition at times to be designated by him, and he may call for special reports from any particular bank whenever he chooses to do so.
12. Each bank must pay to the treasurer of the United States a tax equal to one per cent. per annum on the average amount of its notes in circulation. The shares are liable to taxation by the States in which they are situated at the same rate as other moneyed capital owned by the citizens of such States.
13. Any gain arising from lost and destroyed notes inures to the benefit of the United States.
14. The comptroller has the absolute appointment of all receivers and fixes their compensation. All moneys realised from the assets are paid into the treasury to the credit of the comptroller, and all dividends are paid out by him.
15. Over-certification of cheques is strictly prohibited, rendering officers or clerks liable to imprisonment.
16. National bank directors are by law individually liable for the full amount of losses resulting from violations of the national banking laws.
STATE BANKS
Upon the establishment of the national banking system the greater number of the banks incorporated under the laws of the several States were organised as national banks. With others, however, the rights of issue did not outweigh some inconveniences of the national system, and as a result there is now an important class of banks, and loan and trust companies, organised under State legislation and carrying on a deposit and loan business. The regulations under which they work are necessarily diverse, and the amount of public supervision over them varies in different states. The State banks in existence when the national banking system was organised were obliged to retire their note circulation, owing to the fact that the government imposed a tax of ten per cent. on their circulation. The object of the tax was to secure the retirement of the State bank-notes to make room for the circulation of the national banks. The internal mechanism of State banks differs but slightly from that of national banks.
II. SAVINGS BANKS AND TRUST COMPANIES
SAVINGS BANKS
Nearly $2,000,000,000 is deposited in the savings banks of the United States. This large sum represents the savings of about 5,000,000 people. The primary idea of a savings bank and of the post-office and other forms of saving institutions in foreign countries is to encourage thrift among the masses of the people.
The older savings banks, especially those in the eastern States, have no capital stock. That is to say, they are mutual in their form of organisation. Their capital is the accumulated deposits of a large number of people. The depositors are the owners. When taxes and other expenses are paid and a proper reserve set aside, the remaining profits go in the form of interest to the depositors. Many of the savings banks in the western States are capitalised as are other financial institutions, and on the Pacific coast they have capital stock or its equivalent in the form of a reserve fund in which the majority of the depositors are not interested otherwise than so far as it affords security for their deposits.
As these banks are the custodians of the surplus savings of large numbers of people the laws of the several States have hedged them about with many safeguards, not only for the protection of the depositors but of the institutions themselves. It is eminently right and proper that the State, through its bank commissioners or otherwise, should so far supervise the operations of savings banks as to see that they perform their part of their contract with depositors.
Safety, at best, is relative only; there is no absolute safety for the twenty-dollar piece a man has in his pocket, whether he is on the street, at his office, or by his own fireside. We are reminded that 'riches take to themselves wings' and that 'thieves break through and steal.' No savings bank can keep money on hand or deposit it or loan it with absolute safety. All is comparative. It is a peculiarity of money that each dollar requires watching; general supervision is insufficient; hence it is that the safety of moneyed institutions depends upon the capacity and honesty of those in control, and not upon adherence to arbitrary rules. No set of rules can be adopted that will bind dishonest men nor that will compensate for want of experience and ability of honest ones.
There is really no conflict between commercial and savings banks. In fact, a large number of the commercial banks of a country allow interest upon average balances and standing deposits in the same manner as savings banks. Primarily the savings bank creates wealth, while the commercial bank handles it; the savings banks are creative, while the commercial banks are administrative. The aim of the savings bank is to gather money and invest it safely and thus bring profit to the depositor; the aim of the commercial bank is to lend money at fixed charges and thus bring profit to the institution. The former opens its doors to savers, the latter to borrowers. One serves by receiving and keeping and the other by lending. The savings bank aims at making men savers as well as producers. It offers the aid of the strong, who can manage well, to the weak and inexperienced. If the 5,000,000 depositors of savings in the United States were to hide away their own savings nearly $2,000,000,000 would be withdrawn from circulation. The savings bank invests its money. Its managers are as a rule intelligent men, competent to make safe investments in solid securities. The best savings banks are conservative and do not encourage speculation.
The rules and regulations of savings banks differ largely. In some institutions deposits of a dime at a time are accepted; in others a dollar is the limit. Deposits usually begin to draw interest on the first day of each quarter, but they are entitled to it only if they remain until the end of the half-year. Thus money deposited on the 1st of January is entitled to six months' interest on the 1st of July, though it is not entitled to any interest if withdrawn in June. Some few banks allow interest to begin on the 1st of each month. Most savings banks do not permit money to be withdrawn short of thirty days' notice. Students of this course who are interested in securing definite information upon this subject regarding any particular bank should apply to that bank for a set of its rules and regulations for the information of depositors.
TRUST COMPANIES
There has grown up in this country a class of financial institutions which take a sort of middle ground between the commercial bank and the savings bank, so far as their service to the public is concerned. These are what are known as trust companies. National banks are prohibited by law from making loans on real estate, and though State banks are not hedged in this way, as a matter of good banking they usually avoid loans of this character. The policy of commercial banks is to make a great many comparatively small loans on short-time paper, while that of the trust company is to make large loans on long-time securities. The deposits of trust companies consist largely of undisturbed sums such as might be set aside by administrators, executors, trustees, committees, societies, or from private estates. They are such as are not likely to fluctuate greatly in amount. From the very nature of their deposits trust companies find it convenient and profitable to make larger loans and at longer periods than do ordinary banks. Trust companies not only receive moneys upon deposit subject to cheque and for savings, and loan money on commercial paper and other securities, as do commercial banks; but they also act as agents, trustees, executors, administrators, assignees, receivers for individual properties, and corporations. They frequently assist as promoters or reorganisers of corporations and in the sale of stocks, bonds, and securities. They act also as agents for the payment of obligations maturing at future dates, such as the premiums on insurance, interest on mortgages and bonds, etc. Trust companies are organised under the laws of the State in which they exist and are usually subject to all the supervision required in the case of State banks.
III. CORPORATIONS AND STOCK COMPANIES[9]
CORPORATIONS
Stock companies are usually referred to as corporations, though all corporations are not stock companies. A corporation is a body consisting usually of several persons empowered by law to act as one individual. There are two principal classes--(1) public corporations and (2) private corporations. Public corporations are not stock companies; private corporations usually are. Public corporations are created for the public interest, such as cities, towns, universities, hospitals, etc.; private corporations, such as railways, banks, manufacturing companies, etc., are created usually for the profit of the members. Corporate bodies whose members at discretion fill by appointment all vacancies occurring in their membership are sometimes called close corporations.
POWER TO BE A CORPORATION IS A FRANCHISE
In the United States the power to be a corporation is a franchise which can only exist through the legislature. There are two distinct methods in which corporations may be called into being: First, by a specific grant of the franchise to the members, and, second, by a general grant which becomes operative in favour of particular persons when they organise for the purpose of availing themselves of its provisions. When the specific grant is made it is called a charter. In the case of private corporations the charter must be accepted by the members, since corporate powers cannot be forced upon them against their will; but the charter is sufficiently accepted by their acting under it. When special charters are not granted individuals may voluntarily associate, and by complying with the provisions of certain State laws may take to themselves corporate powers. In some of the States private corporations are not suffered to be created otherwise than under general laws, and in others public corporations are created in the same way.
FOOTNOTE:
[9] For a preliminary treatment of the subject of this lesson the student is referred to Part I. of this book, entitled "General Business Information," especially Lessons XII. and XV.
A CORPORATION MUST HAVE A NAME
A corporation must have a name by which it shall be known in law and in the transaction of its business. The name is given to it in its charter or articles of association and must be adhered to. The necessity for the use of the corporate name in the transaction of business follows from the fact that in corporate affairs the law knows the corporation as an individual and takes no notice of the constituent members.
CORPORATE INTERESTS
In municipal corporations in the United States the members are the citizens; the number is indefinite; one ceases to be a member when he moves from the town or city, while every new resident becomes a member when by law he becomes entitled to the privileges of local citizenship. In corporations created for the emolument of their members interests are represented by shares, which may be transferred by their owners, and the assignee becomes entitled to the rights of membership when the transfer is recorded; and if the owner dies his personal representative becomes a member for the time being. In such corporations also shares may be sold in satisfaction of debts against their owners.
ADVANTAGES OF CORPORATIONS AND JOINT-STOCK COMPANIES OVER PARTNERSHIPS
The following are given as a few of the advantages which are claimed for corporations and joint-stock companies over partnerships:
1. Union of capital without the active service of the investors.
2. Better facilities for borrowing. It is a common thing for a partnership to be changed to a stock company for the express purpose of raising money by the issue of bonds or stock.
3. Limited agency of directors. A partner may pledge and sell the partnership property, may buy goods on account of the partnership, may borrow money and contract debts in the name and on the account of the partnership. Directors of a joint-stock company must act in accordance with the provisions of the by-laws of the company.
4. The continuous existence of a company.
5. New shareholders are admitted more easily than new partners.
6. A retiring partner is still liable for existing debts. A shareholder may retire absolutely by selling his stock and having it legally transferred.
IV. BORROWING AND LOANING MONEY[10]
THE MONEY MARKET
Money, like other articles of commerce, has for hundreds of years had its fields for the production of the raw products, its manufacturing establishments, its markets and exchange centres, its sellers and buyers, its wholesale and retail dealers, and its brokers and commission merchants. Out of this trade in actual coin has grown a trade in paper notes, which are really only promises to pay coin, and out of this latter trade has grown up during recent years a still further enormous trade in securities representing all kinds of property. Very often these securities are based solely upon the credit of the names attached to them, so that our modern system of borrowing and loaning money is really a system of borrowing and loaning credit. When our government borrows $100,000,000, as it did a few years ago, it gives "its bond" that the money will be paid. When States, or cities, or railroads, or other corporations borrow money they issue bonds guaranteeing payment at a particular time. When an individual borrows money he gives his "bond" in the form of a promissory note. These bonds pass from hand to hand and have a fairly constant value in the money market. They really represent the money trade to a much larger extent than does actual coin, so that the borrowing or loaning of money really means, to a very large extent, simply the borrowing or loaning of credit. If we borrow a $10 gold piece we borrow money; if we borrow a $10 bill or an indorser's name for the back of our note we simply borrow credit--in the one instance the credit of the United States and in the other the credit of the man who indorses our paper.
FOOTNOTE:
[10] The student is also referred to Part I. ("General Business Information"), Lesson IX.
BORROWING FROM BANKS
It is the business of a bank to loan money to responsible persons within reasonable limits. The regular customer of the bank is entitled to and will receive the first consideration if the demand is larger than the bank can safely meet. A business man should not hesitate, when occasion requires, to offer his bank any paper he may want discounted, if in his opinion it is good, nor should he be offended if his banker refuses to take it even without giving reasons. A portion of the loans of many banks consists of investments in solid bonds, but the bulk of the loans of banks is made on commercial paper. Time and demand loans are made upon collaterals of many descriptions. The larger banks loan on an average from $50,000 to $100,000 a day. Banks _discount_ paper for their depositors--and simply term the operation discounting; but when they go outside of their line of depositors in making investments in time paper they call it _buying_ paper. They generally buy from private bankers and note brokers. National banks are prohibited from loaning over ten per cent. of their capital to any one individual or corporation except upon paper representing actually existing merchandise.
WHAT ARE COLLATERALS?
If a business man borrow $1000 from a bank on his note and give ten shares of stock to the bank, to be held by it simply as security, the stock thus given would be termed collateral. These collaterals are not the bank's property and the bank is responsible for their safe keeping. If coupons mature while bonds are being held as collateral, the owners are usually allowed to collect the amount for which they sell. Sometimes one note is given as collateral security for another which is discounted.
ACCOMMODATION PAPER
Notes and acceptances that are made in settlement of genuine business transactions come under the head of regular, legitimate business paper. An accommodation note or acceptance is one which is signed or indorsed or accepted simply as an accommodation and not in settlement of an account or in payment of an indebtedness. With banks accommodation paper has a deservedly hard reputation. However, there are all grades and shades of accommodation paper, though it represents no actual business transaction between the parties to it and rests upon no other foundation than that of mutual agreement. No contract is good without a consideration, but this is only true between the original parties to a note. The third party, or innocent receiver or holder of a note, has a good title and can recover its value even though it was originally given without a valuable consideration. An innocent holder of a note which had been originally lost or stolen has a good title to it if he received it for value, the law justly protecting such a holder against the fault or carelessness of others.
NOTE BROKERS
Merchants sell a great many of their notes in the open market--that is, to note brokers. The banks buy these notes from the note brokers. The assistance of the broker who handles commercial paper is a necessary and valuable aid to the purchasing bank. Fully three fourths of all the paper purchased by banks in large cities is purchased upon the simple recommendation of the note brokers. As a rule these brokers simply transfer the paper without guaranteeing by indorsement its payment. Notes bought by banks from note brokers without their indorsement are held to be guaranteed by them to be all right in all points except that which covers the question of whether they will be paid or not. The bank uses its best judgment in taking the risk. If the note dealer in selling notes to a bank makes what he believes to be fair and honest representations regarding any particular paper--statements of such a straightforward type that upon them no charge of false pretenses can be made to rest--he simply guarantees the note genuine as to names, date, amount, etc., and that in selling it he conveys a good title to the paper. As business men, however, they are very cautious and are exceedingly anxious that the paper they sell shall be paid, and as a rule they make good any losses which grow out of apparent misrepresentations on their part.
BANKERS' RATES FOR LOANS