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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXIV

Commerce and Finance - Chapter XXIV

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII



When the Civil War broke upon the country it found the
national government illy prepared to meet the enormous expendi-
tures which a war entails. The treasury was almost empty, and
yet vast amounts of money were needed at once. Gold had been
hoarded and exported in anticipation of war to such an extent
that in the winter of 1861 the banks suspended specie payment.
This left no circulating medium except the state bank notes. In
1862 and 1863 the government, to relieve the situation, issued
$450,000,000 of government notes, called "greenbacks," with
which it purchased the munitions of war and paid its expenses,
but depreciation set in and further issues of such notes were
stopped. It then became necessary for the govern-
u. s. Bonds ment to borrow money, and issue its obligations in
the form of bonds. In order to find a market for
those, Secretary Chase, of the treasury department, proposed to
offer as an inducement to their purchase certain banking priv-
ileges. He worked out the scheme of our national banking
system and urged the organization of national banks, first in
his report of December, 1861, and again in 1862. The chief
points of advantage in his scheme were that it would create a
demand for government bonds, in return for which the national
treasury would receive large amounts of much needed cash,
and second it would give the country a safe, uniform and stable
note circulation. After much consideration Congress passed
the National Banking Act, and in February, 1863, it received the
president's signature and became a law.

The original act was crude and unsatisfactory and has been
often amended, but the general features of the system remain.
In 1864 an amendment was made forbidding national banks from
making loans on landed security, which had been permitted by
the original act. The law was so framed as to enable state banks
to become members of the national system by the simple process
of conversion without reorganization. Every inducement was
made to the state banks to lead them into the system, but they
were slow to make the change. On March 3, 1865, a law was
enacted imposing a ten per cent, tax per annum

U P n the n te isSU6S f a11 state banks ' This WaS

a death blow, as it was intended to be, and drove
the state bank notes out of existence, leaving the field clear to
the national bank circulation. Following this law the state
banks rapidly came into the national system, and on the first
of January, 1867, there were $291,093,294 of national Bank of Canada
notes in circulation. The large increase in the number and
capital of the national banks meant an increased demand for
government bonds, which in turn meant vast receipts of cash
to the government treasury. Government bonds had been pre-
viously selling at 7 per cent, discount. The demand raised
their price above par and thus the system proved of the greatest
assistance to the government.

But the 10 per cent, tax which virtually made state bank
issues unprofitable and hence impossible, aroused considerable
opposition on the part of the state bankers. Congress was
accused of overstepping its constitutional limitations in its at-
tempt to interfere with state institutions. Suit was brought by a
bank in Maine to recover the tax which it had paid, and in the
brief submitted to the United States Supreme
Court > the contention was made that the state had
a right to charter a bank and empower it to issue
circulating notes. This right had been exercised by all of the
states from the foundation of the republic, without objection


or interference from Congress. It had been recognized and
upheld by the Supreme Court itself in a previous case. Now to
subject the bank to a tax of ten per cent, was virtually to destroy
this right, and thus encroach upon the prerogatives of the state
in a manner unwarranted by the Constitution. The court
decided that "Congress had the undisputed power to provide a
currency for the entire republic, and that in the exercise of that
power it might, if it saw fit, by taxation or otherwise restrain
the circulation of any notes not issued by its immediate author-

Thus was formed a national banking system infinitely more
powerful than the bank which Jackson waged a war upon, on
account of his belief that it concentrated too much power in the
hands of a few men, but a system which has proven all of Jack-
son's fears to be groundless. The favoring conditions in the
formation of the national banking system were the stress of war,
and the assumption of implied powers by the government made
necessary in order to carry on its struggle for existence.

The principal features of the national banking system are
as follows:

A currency bureau has been established as a department of the
treasury, under the management of an officer called the Comp-
troller of the Currency. This bureau is charged with the execu-
tion of the banking law and the regulation of all details of the
organization and management of national banks, the issue to
such banks upon receiving their deposits of United
States bonds, the appointment and supervision of
inspectors of banks, etc. The Comptroller must
not be interested in any national bank either directly or indi-
rectly. He must make an annual report to Congress of the
conditions of all national banks.

At least five persons are necessary to form a national bank.
Articles of association setting forth all of the details concerning
the proposed bank, its name, place of business, capital, etc., are


signed by the five stockholders and transmitted to the Comp-
troller at Washington, who, upon approving them and satisfying
himself as to payment of the capital and compliance with other
Organization requirements of the law, issues a charter for twenty
of National years. This charter may be renewed for a like
term of twenty years. The law authorizes national
banks 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 dis-
counting and negotiating promissory notes, drafts, bills of ex-
change and other evidences of debt; by receiving deposits; by
buying and selling exchange, coin and bullion; by
loaning money on personal security, and by ob-
taining, issuing and circulating notes." But they
are not permitted to loan money on real estate security or hold
real estate except such as is necessary for the conduct of tfie
business, or may have been acquired in liquidation of previous
obligations, and then only until it can be disposed of without

The affairs of the national banks are managed by a board of

not less than five directors, elected annually by the stockholders,

as in the case of other corporations, except that all directors

of national banks must be American citizens, and own at least

ten shares of stock. Stockholders are under the

stockholders "double liability" obligation, i. e. every stockholder

is liable for all of the debts and liabilities of the

bank to the extent of the amount of the par value of his stock

and as much more besides'.

At least one-half of the capital stock must be paid in before
beginning business and the balance in five equal monthly install-
ments. The amount of the capitalization of the bank is also con-
trolled by law, and depends upon the population of the town or
city in which the bank is to be located. In cities of 3,000 or
less population the capital must not be less than $25,000, in


cities of more than 3,000 and less than 6,000 the capital must be
not less than $50,000, in cities of more than 6,000 and less than

50,000 the capital must be not less than $100,000,
capital and in cities of 50,000 or over it must be not

less than $200,000. A bank with a capital of
$150,000 or less must deposit with the Treasurer of the United
States government bonds equal to one-fourth its capital. A bank
with a greater capital must deposit at least $50,000 in bonds.
These bonds may be used as a basis for circulating notes or not,
according to the option of the bank. No bank is compelled to
issue notes.

A national bank may issue circulating notes to the amount of
90 per cent, of the par value of the government bonds deposited
with the Treasurer of the United States.* The Comptroller
furnishes suitable notes, in blank, in denominations of $5, $10,
$20, $50, $100, $500 and $1,000, and these when signed by the

officers of the bank are ready for issue over the
circulation bank's counter. Bank notes are receivable in all

parts of the United States in payment of taxes,
excises, public lands, and all other dues to the United States
except duties on imports and interest on the public debt.

Each national bank is required to keep on deposit with the
Comptroller of the currency a deposit equal to five per cent, of
its circulation, as a fund for the redemption of its worn out or
mutilated notes. When notes become worn, defaced or mutilated
so that they are no longer fit for circulation they will be replaced
with new notes by the Comptroller. The old notes are then
"macerated" or destroyed by the process of grinding them to a
pulp. Whenever the redemption of notes for any bank amounts
to $500 it is called upon to replenish its deposit.

Any bank desiring to reduce its volume of circulating notes
may do so by paying into the United States treasury either the

"This was the original provision of the law, but by the Act of 1890 the
limit was raised to the par value of the bonds deposited.


notes themselves or a sum of lawful money with which the Comp-
troller may redeem them, and a corresponding amount of gov-
ernment bonds will then be released from deposit
and returned to the bank. To prevent any sud-
den or serious contraction of the currency of the
country, the law prescribes that not more than $3,000,000 of
notes shall be retired by all of the banks in any one month. Of
course no bank can withdraw bonds below the minimum required
to be deposited irrespective of circulation. Certain enumerated
cities in various parts of the country are denominated "reserve
cities," among which are New York, Chicago, Boston, Cincin-
nati, Baltimore, Albany, Cleveland, Detroit, Philadelphia, St.
Louis, San Francisco, Milwaukee, Louisville and Washington.
The banks in these cities are required to keep on hand a sum
of money equal to 25 per cent, of their deposits. Banks in other
cities are required to keep a reserve of 15 per cent., but three-
fifths of this may consist of deposits with banks
Reserve in reserve cities. The five per cent, redemption

fund on deposit with the Comptroller may be
counted as a part of the reserve. When a bank's cash falls below
the reserve limit, it is forbidden to increase its liabilities by
making new loans or discounts, or to declare further dividends
until the cash reserve is restored. Failure to restore the reserve
may subject the bank to forced liquidations at the discretion of
the Comptroller.

The safety of the banks is guarded by the law through a

number of wholesome restrictions, among which are, that no

real estate acquired under judgment decrees or

Restrictions mortgages may be held for more than five years.

Not more than one-tenth of the capital of the

bank may be loaned to one individual, corporation or firm,

directly or indirectly, nor may any bank lend money on its own

shares, but they may be taken as security for a debt previously

contracted in good faith. Unearned dividends must not be


declared. If the capital is impaired by losses, the deficit must be
made good by an assessment on the shareholders if necessary.
One-tenth of the net profits must be annually added to the sur-
plus fund until the fund shall amount to 20 per cent, of the

Every national bank is required to make not less than five
reports of its condition each year to the Comptroller, verified
by the oath of the president or cashier and the signatures of at
least three directors. In addition to this special reports as to
dividends and earnings are made each half year,
miners Reports are usually called for a prior date, so as

to give bank officials no opportunity to patch up
affairs. As a further safeguard, bank examiners are employed
by the Comptroller, whose duty it is to make a thorough exam-
ination of the affairs of all national banks, inspect books, securi-
ties, assets and liabilities, and report the results of such finding
to the Comptroller.

The Comptroller also has charge of the settling up of the
affairs of failed national banks. He appoints the receivers and
fixes their compensation. All money received for the assets of
the bank is turned over to him and he pays out dividends to
creditors. The Comptroller also declares the bonds
^ e ^ ^ or secur ity of circulation forfeited, and gives
notice to the holders of all notes of the defunct
bank to present them at the treasury for payment.

In the early days of the national banking system circulation
was extremely profitable. Government bonds bore five and six
per cent, interest and kept constantly increasing in value, and
this, added to the profits on circulation issued against the bonds,
acted as a strong inducement to the organization of national
banks. In consequence of this increase in the number of banks
of issue the volume of bank notes constantly rose until in Decem-
ber, 1874, it amounted to $354,394,346. From this point it
experienced a slight falling off until in 1883 it reached high


water mark in a volume of $362,651,169. The retirement of
bonds by the government and refunding them at lower rates
of interest then acted to reduce the volume of circulation and
volume of ^ ran down in 1891 to $167,927,974. Since then

Bank Note it has shown increases whenever there have been

Circulation ^ w ^^ Qf bondg The ^ ^ ^ Q() permitted

banks to issue notes to the amount of the paid in capital and to
100 per cent, of the market value of the bonds deposited, pro-
vided this did not exceed their par value. The tax on circulation
was reduced from one to one-half per cent, and the effect has
been an increase in the volume of bank note circulation.

It will thus be seen that the aggregate circulation depends
approximately upon the current price of bonds and not upon the
demands of business. When it is profitable to issue notes the
banks do so, and when the market price of bonds insures to
their owners better profits than by the deposit of them to secure
circulation, then the banks contract their circula-
tion - Tt thus happens that frequently when there
is the greatest need of a large circulation in order
to carry on the business of the country, the price of bonds makes
it advantageous to the banks to reduce the volume of their notes,
and surrender their circulation. This is one of the serious
defects of our currency system. Eeal elasticity, whether of
contraction or expansion, to adapt its volume to the needs of
business is unknown under this system. But were expansion
and contraction even possible under our system, it would be too
slow and cumbersome to meet the requirements of business.
Bonds must be sent to Washington, notes must be printed, for-
warded and signed, all entailing a delay of several weeks, before
the money is ready for circulation. A money stringency might
arise, produce its unfortunate results and subside before the
needed relief could be obtained through the channel of the ex-
pansion of bank note circulation.

The sub-treasury system of the United States seems to ag-


gravate rather than correct the shortcomings of our bank note
circulation, by locking up in the vaults and thus withdrawing
from circulation many millions of dollars more than the govern-
ment requires to meet its current obligations just at a time when
it is most needed in circulation. Under our system of indirect
taxation this locking up of money proceeds at a greater rate
when business is prosperous and a larger volume of currency is
needed in the channels of trade than when business
is dull, for the reason that in active times im-
portations are greater and the consumption of
those luxuries which are taxed under the internal revenue law
is greater, thus increasing the government receipts both from
customs and internal revenues.

A system of asset banking somewhat after the Canadian
method has been advocated for the United States as a relief
from the objections to the sub-treasury system and the fast and
hard rules of the National Banking Act. Certain it is that we
need a more elastic circulating medium, and it is almost equally
certain that a system of branch banking would be a decided
advantage to the country. The National Banking Act has served
the country so long and well that there is a reluctance to dis-
place it, but there is also a strong feeling that reform is needed
in our currency system to adapt it to changing conditions.

In order to maintain the country upon a specie basis it is
necessary for the United States treasury to keep a large specie
reserve on hand. The amount of this reserve has been fixed at
$150,000,000.* Under the "parity" clause of the
act of 1890 it was declared to be the policy of the
United States to maintain the two metals (gold
and silver) on a parity with each other. In order to do this, when
treasury notes are presented for payment, they are paid in either
gold or silver, as the holder demands. In the spring of 1893

"This amount was originally $100,000,000, but was increased in 1900 to


the reserve in the treasury fell below the $100,000,000 mark,
owing to large exportations of gold. By the following January
the reserve had fallen to $65,650,000, and a feeling of fear
spread over the country lest the treasury should be unable to
maintain the reserve and values should go to a silver basis.
The Secretary of the treasury sold $50,000,000 gold bonds on
about a three per cent, basis and replenished the reserve. The
redemption of notes continued, however, and by the following
August (1894) the reserve had fallen to $52,000,000. In the
following November another issue of $50,000,000 was made to
restore the reserve. In January, 1895, $65,000,000 more of gold
bonds were negotiated and the proceeds placed in the reserve,
and in February, 1896, a fourth issue of $100,000,000 of bonds
was resorted to, which served to maintain the reserve until the
tide turned and gold began to flow into instead of from the
United States treasury. This process of redeeming treasury
notes in gold and issuing them again only to have them in turn
presented for redemption in gold again, was called "the oper-
ation of the endless chain."

Prior to 1861 no notes not bearing interest were issued by
the United States treasury, but on July 17, 1861, Congress
directed the issue of $50,000,000 of demand notes in denomina-
tions of less than $50 in exchange for coin or in payment of
debts due the government. These were the first "sinews of war"
in the form of "greenbacks." The act of February 25, 1862,
increased the issue to $150,000,000. These notes were a legal
tender for all debts public and private except customs duties
and interest on the public debt. On June 11, 1862, Congress
increased the issue to $300,000,000 and on March 3, 1863, to
$450,000,000. After the war Congress gradually

United States reduced the vo l ume? but by the act of April 12,

1866, limited the retirement to $10,000,000 month-
ly for six months and $4,000,000 monthly thereafter. Dur-
ing the panic of 1873 the retirement of notes was discontinued


and the volume outstanding increased by nearly $27,000,000,
bringing the total up to $382,979,815. But the act of January,
1875, provided for further reduction, and declared that on
January 1, 1879, specie payment should be resumed. In order to
prepare for the resumption of specie payments it was deemed
wise in May, 1878, to prohibit the further cancellation of "green-
backs" and the amount has therefore stood ever since at $346,-
681,016, as it was at the close of business on the day the act
went into effect.

The secretary was authorized by the act of March 3, 1863,
to receive deposits of gold coin and bullion and to issue therefor
certificates in denominations of $20 and upward, payable on
demand. The coin was to be held in the treasury for the re-
demption of the certificates. There were in circulation on July
1, 1901, gold certificates amounting to $247,036,359. These
certificates are not a legal tender but are receivable for customs,
taxes and all public dues. They are also available for the
reserves of national banks.

Silver certificates are issued upon deposits of silver dollars,
under the act of February 28, 1878, which authorized the coin-
age of the dollars. At first all deposits were limited to $10 or a
multiple thereof, and certificates were issued only
in like denominations, but the act of 1886 pro-
vided that certificates might be issued in denomina-
tions of $1, $2 and $5. The issue is limited to the amount of
silver actually deposited in the treasury. The certificates are
not a legal tender, but may be held by national banks as a part
of their reserves. The volume of silver certificates outstanding
on July 1, 1901, was $429,643,556.

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