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than the promises of corporations. In their case the present need
of reform is not the result of excess or of insecurity. Their in-
crease is under heavy restraint, and they are as secure as the credit
of the government can make them. Their grand defect is want
of adaptation to the proper business of banking, which limits their
usefulness in some parts of the country and makes them practi-
cally unavailable for issue in others.

The framers of the bank acts of 1863 and 1864, which have
become Title LXII. of the Revised Statutes, had their attention
fixed chiefly on the provision of a paper currency of uniform value
throughout the United States, which should absorb by permanent
investment a certain amount of United States bonds, and should
become the sole paper currency of the future. Indeed, the title of
each act, " An Act to provide a National Currency, secured by the
pledge of United States stocks [or bonds], and to provide for the
Circulation and Redemption thereof," sufficiently shows the point
of view from which these measures were regarded. The provi-
sions as to the general business of banking were, no doubt, greatly
in advance of those existing in many states ; but, after all, it was
the issue of notes upon a secure basis which interested Congress
and the public at the time, and has continued to be a leading con-

1 Quarterly Journal of Economics, October, 1897.
227



228 ESSAYS

sideration in national legislation on this subject ever since. Per-
haps the failure of the national system to meet the wants of large
sections of country might not, even now, have secured the atten-
tion which it deserves, had not the provision for the safety of the
notes finally undermined the issue and threatened its extinction.
The inability of the system as it stands to perform steadily and
satisfactorily its chief duty of supplying the business of the coun-
try with a safe and adequate currency, has finally brought the
whole subject of banking under discussion, and has raised the
question as to the proper coordination of issue with the other
functions of banks, in a more radical form than for thirty years
before.

Although the purpose of this paper is to consider some of the
points at which, in the judgment of the writer, the national banking
system has proved to be badly adapted to the present needs of the
country, the writer must premise that the national system appears
to him to be the foundation on which any reform of our bank-note
currency must necessarily stand. Experience under that system
has shown plainly the gain secured by uniformity of regulation
and unity of supervision. There is no question that the national
banks find their credit in every form strengthened by the fact that
all rest upon the same law, universally known, and are under the
same recognized authority, whose mode of operation is universally
understood. That the convenience of their notes for use is mate-
rially increased by this unity of regulation, and by the uniformity
of design of the notes themselves, is perhaps the one point in the
working of the national system as to which all are agreed. To
replace such a system by any complex arrangement by which the
right of issue should be extended to state banks would be a pal-
pable sacrifice of advantages, from which the public as well as the
stockholders of the banks are now gainers. It has been proposed
that such state banks as may accede to proper regulations pre-
scribed for safety and solvency should be allowed the right of
issue. But it is difficult to see how such regulations could be
enforced with certainty except by the authority of the United
States, or by that authority without much risk of friction and
possible conflict between national and state jurisdictions, or with-
out such strictness of rule and superintendence as would destroy
the reasons for preferring state organization to national. The



THE NATIONAL BANKING SYSTEM 229

last-named consideration is the more serious when we consider the
fact, not to be disguised, that in many states the local opinion as
to what is safe regulation and what is not is too loose to be satis-
factory beyond the state line. In short, practical as well as the-
oretical difificulties begin to multiply, as soon as we attempt to
reconcile the conception of a really national currency with anything
short of an absolutely uniform system of safeguards.

The banking history of the United States has been for the most
part a succession of catastrophic changes rather than a process of
steady growth. One expedient after another has been taken up,
abruptly dismissed in its turn, like the two Banks of the United
States, or suddenly revolutionized, like the currency provisions of
the Independent Treasury Act. The national banking system has
now had a longer term of active existence than any other national
system adopted in this country, or any important state system of
issue. Seriously as its defects have limited its usefulness, it has
grown in strength and credit. In the course of a generation it has
collected a mass of legislation, judicial precedents, and rules of
official practice, which make up a body of administrative law of
remarkable completeness and value, known from one end of the
Union to the other, — a common possession, in which it is not
impossible that all our people may yet come to appreciate their
common interest. This is a foundation to build upon, not an
experiment to be dismissed and superseded by some other. Never
since the early part of this century has there been a Hke opportu-
nity to improve our legislation upon banking and currency by the
proper adjustment of an existing system, old enough and success-
ful enough to have acquired an historical position and credit. We
now enjoy an advantage analogous to that which England finds in
making the ancient reputation and strength of the Bank of Eng-
land the starting-point in any financial measure, or France in her
careful adhesion, through every revolution in dynasty or politics,
to the century-old Bank of France.

It is also a practical consideration of great weight that any
change in the existing system would be made with the least
disturbance of business relations and practices if it were made
by the better regulation of the mass of banks which already
have the right of issue; but upon this it is not necessary to
dwell.



230



ESSAYS



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THE NATIONAL BANKING SYSTEM



231



The defective adaptation of the national banking system to the
needs of the different sections is amply shown by the reports of
the Comptroller of the Currency. From the latest of these
reports 1 it appears that in 1896 more than two-thirds in number
of the national banks and more than three-fourths in capital were
to be found in the belt of states lying north of the Potomac and
Ohio on the east of the Mississippi, and including Iowa and Min-
nesota on the west of this river. The same states have more than
one-third in number and two-fifths in capital of the state banks
carrying on business without the right of issue ; but the state
banks, taking these states together, carry on an unequal contest
with the national system. In the rich states of the North
the vast preponderance, in number, capital, and business, is with
the national banks, although, as we advance westward, the newer
states, even in this belt, show a more equal division of the field.
Coming to the South and Southwest, excluding Missouri, we
find the national banks less numerous than the state banks, but
holding about seven-twelfths of the capital and a slightly larger
proportion of the deposits. The group made up of Missouri,
Kansas, Nebraska, and the Dakotas shows a great preponderance
of state banks in number and deposits and an approach to equality
in capital.^ The Central and Mountain states and territories,
with their extraordinary differences of economic condition, have
placed the greater part of their small banking capital under the
national system ; and, finally, the Pacific states show a great pre-
ponderance of state banking, which upon examination is found to
be due to the little use made of national banks by California.

It is clear that the inequalities thus briefly recapitulated rest
upon something more than mere differences in population, wealth,

1 See table on page 230.

In this table the Middle states include Maryland and the District of Columbia; the
West and Northwest, the states from Ohio to Iowa and Minnesota; the South and
Southwest, the Atlantic and the Gulf states from Virginia to Texas, with West Virginia,
Arkansas, Kentucky, and Tennessee ; the Missouri River group is Missouri, Kansas,
Nebraska, and the Dakotas ; the Pacific states are Nevada, California, Oregon, and
Washington ; the Central and Mountain group is Colorado, Idaho, Montana, Wyoming,
Utah, New Mexico, Arizona, Oklahoma, and the Indian Territory.

2 It should be noted here that in the Comptroller's returns for Kentucky, Kansas,
Nebraska, and Oklahoma, the figures for state banks include private as well as incorpo-
rated banks. Of the Kansas banks returned 109 were private, and of those in Ne-
braska 81, mostly of small capital in each case.



232 ESSAYS

and general activity. Those differences would lead us to expect
much disproportion in the use of banks in general ; but it is plain
that, in addition to this, the comparative attractions of national
banking with the right of issue, and of state banking without it, are
differently estimated in different states and sections. This appears
still more clearly when a comparison is made between different
parts of the same section. Thus, in the large Western group, the
four newer states — Michigan, Wisconsin, Iowa, and Minnesota —
have $36,000,000 of state bank capital to $52,000,000 of national,
in this respect approximating the condition of sparsely settled agri-
cultural states in other sections. In the South, of the most impor-
tant banking states, the Virginias and Kentucky have $32,000,000
of state bank capital to $21,000,000 of national. In general, the
rule holds that the older, richer, or more densely populated states,
with varied industries, find it easier to use the national system than
the more thinly settled communities, poor in capital and carrying
on industries of slow return. Even such an apparent exception as
that of Texas, where only the national system appears to be used,
proves the rule; for Texas, since 1876, has forbidden by her consti-
tution the establishment of state banks, and any competition with
national banks must there be carried on by private bankers.

It is beyond dispute that one of the most serious difficulties in
the use of the national system in the newer or poorer communi-
ties is the requirement of an investment in United States bonds,
locking up banking capital in a non-banking security, returning
less than three per cent to the holder. In the older states, with
abundance of capital and low rates of profit, this requirement has
less importance ; but in states where the conditions are reversed
it is a heavy block in the way of the national system and its possi-
ble usefulness. Especially does the bond deposit block the way
in any section where there is a need of banks of relatively small
capital ; for, as the minimum holding of bonds is one-fourth of
the capital for banks of $150,000 or under, and $50,000 for larger
banks of whatever size, it bears most heavily in proportion upon
the small capitals. The comparative pressure of this requirement
in different sections, in October, 1896, is shown by the Comptroller
of the Currency,^ in a table from which the following statement
is made up : —

1 Report for 1896, p. 552.



THE NATIONAL BANKING SYSTEM



233



New England . .
Middle States . .
West and Northwest
South and Southwest
Missouri River . .
Central and Mountain
Pacific ....



Bonds held
FOR Circulation

65.4
87.9


Minimum
Required

21.6

28.9


Percentage
OF Excess

.67

.67


45-6


24.9




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21.3


14.2




•33


9.2


7-1




•23


3-9


2.9




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3-




.24



237.2



102.6



The reluctance with which the investment in bonds is made by-
small banks in the agricultural states is also shown with great
distinctness by the case of Texas, where vigorous growth calls
for extended banking, but only national banks can obtain charters.
Of the 207 national banks in Texas, 88 are banks of $50,000
capital, of which 86 have the exact minimum of bonds, i a nomi-
nal excess, and i a circulation equal to its capital. Of the y6
banks above $50,000 and not over $100,000, 63 have only the
exact minimum, 7 only a nominal excess, and 6 have together
$182,250 above the minimum. Of the 43 banks having capitals
above $100,000, 36 have the exact minimum of bonds, 3 have only
a nominal excess, and 4 have together $208,000 in excess of the
requirement. For the whole $20,920,000 of national bank capital
in Texas, the bonds held for circulation above the legally possible
minimum is but $434,700. The inference from these figures is
irresistible that banks in Texas cannot afford to invest at the low
rate of interest yielded by United States bonds, and the presump-
tion is strong that the increase of small banks is hindered and
that capital is forced into other channels by the bond requirement.
Nebraska is also a strong case of the same kind, with the differ-
ence that Nebraska seeks her relief by means of incorporated state
banks. The 113 national banks in Nebraska, having an aggre-
gate capital of $10,975,000, hold only $368,650 of bonds in excess
of the required amount; and $333,000 of this excess is held by
the large banks in the cities of Lincoln and Omaha. Out of 72
banks of $50,000 capital, only 3 hold bonds exceeding the mini-
mum, by so much as $1000, and 64 hold no excess whatever.
Similar illustrations of the working of the bond requirement may
be found in many other states.

Of the objects to be gained from the deposit of bonds, —



234 ESSAYS

security for the notes and the creation of a market for bonds, —
the former alone now has any value. Against the complete at-
tainment of this object, which must be admitted, have to be set
the facts that, as the government credit rises, the inducement to
take out circulation weakens, so that the strength of the security
tends to pinch the issue out of existence, and that the necessity of
giving this particular kind of security produces the maximum of
discouragement in sections where the need of banking facilities
is strongly felt. The propositions to permit notes to be issued to
the par of the bonds, instead of the ninety per cent so far allowed,
and to moderate or withdraw the one per cent tax on circulation, are
offered as palliatives for an acknowledged evil ; but they do not
strike at the cause, nor, as will be seen, can they have any effect
upon some of the more serious difficulties of the system. The
root of the trouble is, after all, the necessity for taking a relatively
large part of the capital of a bank out of the proper business of
banking, and investing it elsewhere, when all that the bank can
do by means of its capital and credit combined is needed for
the accommodation of its customers. A complete remedy would
have to start therefore, as was proposed by the American Bank-
ers' Association in 1894^ in the well-known "Baltimore Plan,"
with the abolition of the bond deposit and the restoration of the
note to its natural relation, as an exercise of credit in the business
of banking. If to this were added provisions for the security of
the note-holder by a first lien on the assets of the bank, and, as
was also proposed in the Baltimore Plan, by a guarantee or safety
fund supported by the contributions of the issuing banks, both
reason and experience show that the strength of the note would
be ample. Some other parts of the present system would no
doubt need revision. Provision for more thorough inspection
than is possible with the present staff, more frequent publication
of accounts, and strengthening of the stockholder's liabiHty, not
in its nominal extent, but in its binding effect,^ are changes already
needed, which would then be seen to be imperative.

1 For the details of the " Baltimore Plan " see White's " Money and Banking," p. 458;
Journal of Political Economy, December, 1894, p. loi.

'■' Prior to 1880 only about thirty-five per cent of assessments upon stockholders of
insolvent banks was actually collected ; and in the finished cases since 1880, reported
in the Comptroller's Report for 1896 (Table No. 76), it appears that the collections
averaged only fifty-two per cent.



THE NATIONAL BANKING SYSTEM 235

Amended by resting the issues of national banks upon their
assets, where the business community are wilUng to let the
$1,600,000,000 of deposits rest, the system would be freed from
one of the burdens which hinder its progress in the South and
West. It would still find its growth seriously hampered in
sparsely settled districts everywhere, by the inability of a small
community either to provide the capital or to supply the business
for banks of the size required by the present law. On this sub-
ject a flood of light is thrown by Mr. Thornton Cooke, in a
paper 1 showing the distribution of small banks in Missouri,
Kansas, Nebraska, and the Dakotas. In these states the mini-
mum capital required for state banks is $10,000 in Missouri
and 1^5000 in the four other states. Whatever this minuteness
of capital may show as to the prudence of the legislation, it
proves that in this important block of states the need of diffu-
sion is keenly felt ; and the same inference is to be drawn from
the minimum of $15,000 required in Michigan and $10,000 in
Minnesota. In the five states dealt with by Mr. Cooke an ex-
traordinary development has taken place. Of 1247 state banks
covered by the latest official returns, and excluding private banks,
1 1 58 are not beyond the $50,000 line of capital, 451 are not
beyond the line of $10,000, and 112 have capitals not exceeding
$5000. The tables make it plain that in these states, as a whole,
there has been a strong movement to provide for needs not now
covered by the national system. There is a long list of other
states in which, upon examination, we should find proof of de-
mands not satisfied by the national system, but met imperfectly
by state banks and by the great number of private banks, of whose
operations there is no record even approximately complete. In
every other important banking country such a demonstrated
need as this for diffused but sound banking would be answered
by the establishment of branches or agencies of banks of larger
capital. This method is not unknown in the United States, al-
though for various reasons its application for many years past
has been confined to a few states and has been on a limited scale.
That it is less applicable or hopeful here than in all the other
English-speaking countries, or that it needs anything more than
proper encouragement for its wide introduction, at least in sections

1 See Appendix, Quarterly Journal of Economics, October, 1 897.



236 ESSAYS

like the South and West, it is hard to believe. The change re-
quired in the present law would be slight. If no use were made
of the liberty to establish branches, the national system would
simply stand as at present, if not improved, at least not impaired ;
and, if use were made of the liberty, one of the two barriers which
bar the access of national banks to an important field would have
ceased to block the way.^

It has also been proposed, as a partial remedy for the imperfect
distribution of banking under the national system, to reduce the
minimum required capital to $25,000, as it stands in the law of
New York and of several other states.^ This proposition, how-
ever, is open to some serious objections. It plainly does not go
far enough to reach the seat of a great part of the evil. Taking
for illustration the case of the Missouri and Dakota group already
referred to, it appears from Mr. Cooke's tables that little over one-
third of the state banks in that group have capitals above $20,000.
The fact appears to be that banks of $25,000 capital would be
almost as completely beyond the means of a majority of the small
village centres in sparsely settled districts as banks of $50,000 are
now. But, even if such a reduction of required capital were
enough to lead to an important extension of the national system, it
is also a serious question whether on other grounds this would not
be a move in the wrong direction. As national banks multiply in
number, the problem of insuring sound management by effective
supervision becomes grave. With not far from thirty-seven hun-
dred banks already in operation, the United States evidently have
in hand a task such as no government ever before undertook ; and
the difficulties of this task would increase with the further pulveri-
zation of capital now suggested. The records of failures show that
even in large banks the close attention of directors is not always
easily had ; but with banks of the smallest class in small villages,
not only is there increased difficulty in making it worth the while



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 25 of 40)