The New International Encyclopædia/Bank, Banking

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BANK, BANK′ING (Fr. banque, It. banca, from Ger. Bank, a bench, table for changing money. Hence, bankrupt; It. banca rotta, broken bench, as in Florence a bankrupt had his bench broken). The three functions which characterize the banking business are the receipt of deposits, the making of discounts, and the issue of notes. The last named is generally restricted in modern times to institutions chartered by law, though in earlier days, and especially in England, private banks and banking firms issued notes. But as all banks do not embrace all these functions, it is common to speak of banks of deposit and discount, as distinguished from banks of issue. The latter are, as a rule, banks of deposit and discount also; and, as this is the most universal function of banks, it may properly be considered first.

Banks may be tersely described as lenders and borrowers. Their loanable funds consist on the one hand of their own capital, and on the other of the deposits intrusted to them. Their profits arise from the payment to them of interest on loans.

Banks as Borrowers. Receiving as they do deposits from their clients, banks may be spoken of as borrowers. If, as they sometimes do, they pay interest upon deposits, this offsets in part the profits arising from loans. But in many cases they pay no interest upon deposits, the clients of the bank being contented with the greater security in the custody of their funds which the bank offers, and other advantages which arise from the possession of bank accounts. At times these advantages have been so considerable that depositors have been willing to pay the bank for the safe-keeping of their funds. Thus, during the Seventeenth Century, the great Bank of Amsterdam simply received bullion and stored it, issuing receipts for it, which could be transferred from hand to hand, and entitled the holder to get back the gold or silver originally deposited, on the payment of a small premium for withdrawal. Such a bank was merely a warehouse for bullion. It performed a service similar to that of the United States Treasury in the issue of gold and silver certificates. The service was valuable because it substituted the notes of the bank for the extremely varied and uncertain metallic circulation of the period, consisting of the coins of many nations, often worn by use, and clipped by those who derived profit from mutilating the coinage. The bank received them at their bullion value, and thus fixing their real value once and for all, did away with the numberless vexations which arose from the use of such a currency. If we except the United States Treasury, which cannot strictly be called a bank, such banks of deposit only have ceased to exist. The reason for them has disappeared, and the lending of money is always associated in banking with the receiving of it.

Modern banks are banks of ‘deposit and discount,’ for though all loans made by banks are not in the form of discounts, the word is used in this connection to embrace all its loans. The advantage to society from banking operations consists in centralizing credits. The banker collects the money and wealth which would otherwise lie idle, and brings it into use. Through his agency, wealth which would lie idle and unproductive becomes useful and productive. His particular service is to mass together the small amounts of capital which in themselves are perhaps too trifling to become the basis of a business enterprise. He is the intermediary between those who possess capital and those who employ it. Thus he enlarges the field of business enterprises and intensifies its operations. The bank is the chief organ of credit which plays so large a role in the organization of modern industrial society. See Credit.

For the depositor the bank acts as paymaster. The depositor pays his debts by orders upon the bank in the form of checks. This not only relieves the depositor of the necessity of keeping in his own possession sums of money larger than he has an immediate use for, and whose safekeeping is a matter of anxiety and concern, but also furnishes him, through the indorsement of the check by payee, a receipt for the money paid out. The banks also act as collectors for their depositors. Only a small part of the deposits in banks consists of actual cash; by far the larger proportion, about nine-tenths, being in checks and other credit instruments. When a check is deposited to the credit of a person, the bank charges itself with the duty of collecting it. If it is drawn upon a distant point, a small charge is made for this service, but in general the cost is borne by the bank and not the depositor. If drawn upon the same bank, the collection consists merely of a transfer upon the books of the bank. If drawn upon another bank, collection may be made directly or through the clearing-house. (See Clearing-House.) In either case there is likely to be a set-off, and the collection effected without the transfer of cash. But in addition to collecting checks, the bank collects other debts, such as coupons and negotiable paper.

In addition to these advantages which the depositor obtains from his bank account, he sometimes receives interest upon his deposits. Among the commercial banks of the United States, the practice of paying interest upon deposits is not widespread. Persons who desire interest upon deposits must, as a rule, be content to surrender something of the absolute and immediate control over their funds, which is the characteristic of commercial banking. In such cases, they patronize the savings-banks or the loan and trust companies rather than the national banks. In these institutions, various plans are adopted to restrain the depositor from making sudden calls for any considerable amount of his deposit. Sometimes it is a requirement of previous notice of the intention to withdraw, or again it may be a provision that a certain part of the deposit is to remain untouched, and that interest be paid upon this only. It is clear that the various advantages of banks to the depositor, obvious as they are, cannot be a substitute for the investment of his capital or its employment in productive enterprise. It will therefore be, as a rule, a portion of what is designated as the circulating, rather than the fixed, capital of the nation which be placed in banks. When banks, however, offer interest upon deposits, under conditions which afford security, they will probably retard the process by which unused capital seeks a definite and profitable employment, and thus secure for the hanks a larger line of deposits.

Banks as Lenders. From the services which the bank renders those from whom it borrows, we may turn briefly to the more obvious services, rendered to those to whom it loans. Bank-loans are, in form, time-loans for a definite period of days or months, and call-loans, upon which instant payment may be demanded at will. Either form of loan may be made on the personal credit of the borrower, though this is not considered good banking, and can be safely done only in cases of persons of unexceptionable standing. Loans are made, as a rule, upon mercantile paper and upon collateral. The time of the loan is definitely fixed by the face of the instrument, and the amount loaned is that stated in the note or draft, less the interest upon the same for the unexpired time. Loans upon collateral are either for a definite period of time or on call. As in the latter case the amount of interest cannot be fixed in advance, it is customary to loan a definite sum, and at the expiration of the loan collect also the interest at a rate agreed upon for the duration of the loan. The collateral or security consists of stocks or bonds greater in value than the amount of the loan and probable interest, which are for the time being deposited with the bank, in the event of failure to pay the loan, the bank secures the satisfaction of its claim by the sale of the securities. In the case of discounts of mercantile paper, the bank relies upon the good faith and general property of the several parties to the note or draft, without having a claim against any specific property.

It is clear that in so far as a bank makes its loans from its capital, it can use for that purpose all that is not needed for running expenses. It should be remarked that commercial banks must have a considerable capital of their own, not only for running expenses, but also as a guaranty to depositors. The larger the capital of the bank, the greater the feeling of security among the depositors that, the personal property of the bankers being embarked in the enterprise, caution and prudence will guide its steps, and that in the event of bad investments, the bank will yet be able to meet its obligations as trustee of their funds. But if a bank can employ all its capital, it is obvious that it cannot employ all deposits in making loans, because occasions are always occurring for removing deposits, as well as making them. Business men, for example, day by day, deposit with their bankers the checks or sums of money which they receive in the course of their business; and, on the other hand, day by day, draw out such sums as they require for the payment of purchases of goods, wages, rent, and other expenditure. A bank, therefore, while continually receiving deposits, is continually repaying deposits; and the amount uncalled for is subject to a daily fluctuation. At one period of the year, or in a certain condition of trade, the amount of deposits may be high; at another, low. As it is a principle at the very root of banking that money deposited shall be returned, either on demand, or punctually at the expiration of a stipulated notice, it follows that banks must always have at hand as much of the money deposited with them as may in any emergency be called for. When business is in its ordinary condition, a bank can, after some experience, approximate pretty nearly to the amount of the greatest demand for a return of deposits throughout the year, and provide accordingly. But sometimes the credit of a bank becomes doubted, either from causes peculiar to itself, or on occasions of a panic or general distrust, when all who own money wish to have it in their own possession. In these cases, there is a run on the bank for repayment of its deposits, and the amount called for may be far beyond the maximum demanded in ordinary times. If the bank has not retained a sufficient amount of deposits to meet the demand, it is said to suspend payment, and, as a general rule, it must wind up its business, the confidence of the public that it will in future restore its deposits on demand being now destroyed. There are two prime rules in safe banking: the one is, that the bank shall lend its deposits only on undoubted and readily reliable securities, however low the profit; and the other that the bank shall retain a sufficient amount of its resources—and this is called the reserve—to meet the possible demands of the depositors even in cases of a run, although there may be no reason to expect one; for when a run comes, it seldom casts its shadow before. But it is evident that the greater the reserve of a bank, the less the amount of deposits which it can lend out and draw interest for; hence the temptation which banks lie under of imprudently lending out a too great proportion of their deposits; and it is their yielding to this temptation that almost always precipitates the failures of banks.

In the practice of private banking, the amount of the reserve is wholly in the discretion of the banker. Chartered banks are frequently subject to legal provisions which determine not only a minimum reserve, but prescribe how it shall be held. Thus, in the national-banking system of the United States, the law requires a minimum reserve of 25 per cent. of the amount of the deposits in large cities named in the law, and 15 per cent. of the deposits in other places. In three of the principal cities, namely, New York, Chicago, and Saint Louis, which are designated as central reserve cities, the whole amount of the reserve must be held in lawful money of the United States. In the remaining cities, one-half of the reserve may consist of deposits in the three central reserve cities named; but at least one-half must be held in lawful money in the bank. In other places, two-fifths of the legal reserve only need be held in the bank in lawful money, and the remainder may be deposited in any of the reserve cities. In practice, the reserve held by the national banks is considerably in excess of the legal requirement.

In England, the practice of banks is somewhat similar. The reserve of the banking department of the Bank of England is always in coin or in notes, against which there is coin lying in what is called the issue department of the bank. Other banks generally hold a portion of their reserve either in Government bonds, which can be readily sold in case of necessity, or as a deposit in the Bank of England. As the Bank of England is the channel through which, directly or indirectly, payments are made and moneys received, by other banks, it is more convenient for them to have their reserve lying as a deposit in it than lying as gold within their own vaults. In the case of a demand on their reserve, the banks will draw out their deposits, in notes, or, if gold be in demand, in gold, from the Bank of England. Whether, therefore, the reserve of a bank is invested in Government securities or is deposited in the Bank of England, or is in Bank of England notes, it is from the coin in that bank that the gold comes in the case of a run. It is apparent from this that it is essential to the stability of all banks in that country, so long as they themselves do not keep a sufficient reserve of coin in their coffers, that the Bank of England shall always be possessed of coin, and ever be able, on demand, to pay its depositors in gold, or to give gold in exchange for all its notes that may be presented to it.

Banks of Issue. We have thus far discussed only banks of deposit and discount, and it is now time to consider the special characteristics of banks of issue. Banks of deposit, as has been mentioned, make loans from their capital and deposits. If from capital, the banker has no greater profit by the transaction than if he had lent out his money in any other way, equally safe, and involving the same amount of trouble. If from deposits, the interest he receives, so far as it exceeds the interest, if any, paid to the depositors, and a ratable proportion of the expense of carrying; on the business of the bank, is pure gain to him. But a banker may give the loan from his own notes, and in that case his gain is still greater. A bank-note is simply a written promise, by the bank issuing it, to pay to the bearer, on demand, a sum of money—that is, lawful money. The borrower would not accept a loan from a bank in its own notes, unless he believed that it could redeem its promise of paying in coin, and that the public were of the same opinion; for the moment that a suspicion arises that the promise will not be made good, the note will cease to pass from hand to hand as coin, or to perform all the functions that coin performs. But when the loan is accepted in a bank's own notes, it is evident that the interest which the bank draws for the loan of its promises to pay is pure profit, except the proportion—as in the other cases—of the expense of carrying on its business, and the expense of the paper and printing of the notes, and any special taxes resting upon such issues. In other words, a bank which can get people to pay to it interest for the loan of its promises to pay, draws the same income—barring the comparatively trifling expense of manufacturing the written promises—as a bank does which has to provide itself with gold for making its loans. The motive which a bank has to extend its issues on loans is therefore apparent, so long, of course, as it is not compulsory on it to retain unemployed in its coffers as much in gold as it issues in notes.

But it does not follow that when a bank makes a loan in its own notes for a definite period, it will really obtain the benefit of the whole of the interest on it for that period; for the borrower does not apply for the notes that he may keep them lying idle, but that he may pay them out in making a purchase, or in liquidating a debt; and this, most commonly, on the very day he receives them. If the person to whom the notes are thus paid by the borrower has himself no purchase to pay for, or no payment to make, he may, the moment he gets them, return them to the bank that issued them, to lie there on deposit. If the bank pays interest on deposits, as banks often do, then out of the interest drawn by it on the original loan, it will have to pay interest to the depositor of the notes; in other words, the loan is no longer a loan of its notes, but a loan from its deposits. Or, the person receiving the notes from the borrower, may immediately present them to the issuing bank for coin, instead of depositing them. Here, too, therefore, the loan that was made in notes is now converted into a loan of coin that was in reserve from previous deposits, or that was part of the bank's own capital; in which cases, the bank obtains no advantage whatever in having made the loan originally in its notes. It might equally well, so far as profit is concerned, have originally made it in gold from its reserve of deposits or capital. Notes generally find their way back to the bank that issued them through other banks, into which they have been paid as deposits, or for the liquidation of debts due to them. These banks suffer the loss of profit or interest on the amount of the notes thus received by them so long as they keep them; they therefore immediately present them to the issuing bank for gold, to replenish their own reserves, or to lend out.

It will now be apparent to the reader that there are two checks which, under such a system, keep a bank from issuing notes to any extent it pleases. In the first place, there must be a demand for its notes by borrowers. It is only to people in good credit, and likely to make a profitable use of them, that a bank will lend its notes, and such people will not take an increase of loans unless trade is increasing, and new opportunities are presenting themselves for profitably employing the notes borrowed. True, banks, when imprudently conducted, or when deceived in the character of their customers, frequently lend their notes to reckless persons, who overtrade them, and become bankrupt. But banks commit this error, when they do commit it, to a far greater extent by loans of their deposits and capital than by loans of their notes. In the second place, the immediate return of the notes, chiefly through other banks for gold, or for other portions of the reserve of the issuing bank, is a check to its issuing more notes than it has a reserve to meet. This return of notes through banks is called the exchange of notes—the notes issued by a bank being returned to it in exchange for the notes held by it of another bank.

Besides issuing its notes in loans, a bank may issue them in repayment of deposits. In this case, there is the same profit to the bank as in the other case. The bank gets the profit which it makes on the money which was originally deposited or lodged with it, without having to pay interest to the persons who made the deposit or lodgment; the deposit, or money lodged, having now been repaid in its notes. But here, too, these notes are equally liable to be returned to the issuer as when they are issued on loans.

Of all the notes issued, in whatever way, by banks, a certain amount is not returned to them, but is kept in circulation, being what is required by the necessities of the public for use as money, passing from hand to hand. It is of course on this portion that the banks make their profit; and, in consequence of this profit, they are able to afford banking facilities to the public more cheaply than they could otherwise do. The profit is just the interest on the notes in circulation—less the expense of manufacturing the notes, a ratable proportion of the expenses of conducting the banks, and the loss of interest or profit on an unemployed reserve kept from prudence, or by the requirement of law, to meet a return of notes. The interest on the volume of bank-notes in circulation is paid by the persons who originally borrowed these notes from the banks, and who have not repaid them; or if the banks have repaid deposits with the notes, the interest is paid by those to whom they lent what was originally these deposits.

In the foregoing discussion of the nature of banknote issues, it has seemed best to proceed upon the assumption that the issue of notes, and the conditions of the issue, such as the amount of the reserve, lay wholly in the discretion of the banker. This is the so-called ‘free’-banking system, in which the value of the bank-note depends upon its instant redemption in coin, where the whole organization of the system is such that the bank will, in fact, be called upon to redeem its notes frequently. But the issue of bank-notes in modern States is not thus left wholly to the discretion of the banker. In the first place, the issue of such notes is not universally permitted, but is restricted, as a rule, to chartered institutions. In these again, the issue is frequently subject to legal restrictions, affecting, for instance, the amount of the reserve. Two general types of banknotes may be said to exist: (1) those issued upon the general assets of the banks being those contemplated in the foregoing discussion, and (2) those issued upon the deposit of certain securities. In principle, the latter class, of which, perhaps, the most conspicuous instance is the issue of bank-notes under the National Bank Act of the United States, departs widely from the theoretical ideal of a bank-note. In the second ease, the value of the note depends upon the securities behind it, and not upon its frequent redemption. Indeed, it may be said that the object of the law is to make the bank-note so safe that it will not be presented for redemption, but continue to circulate as money, and this end is fully attained.

Banking in the United States. The earliest use of the term ‘bank’ in the American Colonies was to designate an issue of paper money, and it may be said that, in the history of banking in the United States, banks of issue play a more important part than elsewhere. All the banks mentioned in Colonial history were loan banks, and not deposit banks. The funds they loaned were issues of notes. Between the issues thus loaned by banks under authority of the Government, and the issues of the Colonial governments, no clear distinction was drawn, and all such issues were frequently designated as banks. (See Money.) This is not to be wondered at when we recall the fact that the issues of the Colonial governments, notably in Pennsylvania, were loaned to individuals, on mortgages, plate, and other securities. The collapse of the Continental paper currency in 1781, led to the chartering by Congress on the last day of the year of the Bank of North America. In addition to the usual business of a bank, this institution was designed to furnish through its notes a circulating medium for the country. The Bank of New York, and that of Massachusetts, at Boston, were chartered in the year 1784. But the erection of these institutions did not check the issue of paper money by the several States, which, however, ceased with the adoption of the Federal Constitution, which expressly forbade such issues.

Among the earliest acts of the new Congress was one chartering the first Bank of the United States, February 25, 1791. The charter was for twenty years. The authorized capital was $10,000,000, of which Congress took $2,000,000. The capital was subscribed partly in coin and partly in Government securities. The notes issued by the bank were receivable by the Government for all debts due to it. The charter of this bank did not prevent the rise of a considerable number of banks in the States, which also issued notes. But by reason of its larger capital, and its several branches in different parts of the country, the Bank of the United States dominated the entire banking system and regulated the issues of the State banks. It could and did refuse to receive as deposits, or in payments, the notes of banks which were not sound, and by sending the notes received from one branch to another would insure the presentation of the notes of other banks for redemption. In the early part of the century the Government sold its stock in the bank, and when, in 1811, the charter expired, the Government had no direct interest in its renewal. The renewal of the charter was opposed by the State banks, and the effort to secure it failed. The bank, thereupon, wound up its affairs. The absence of the restraining influence of the Bank of the United States soon made itself felt. State banks multiplied; from 90 in 1810, they grew to 150 in 1814, with note issues of $62,000,000. The war with England brought about a general suspension of specie payments, and a very disordered state of the bank-note circulation, the only currency of the country. The ‘old regulator’ was seriously missed, and, on April 3, 1816, Congress chartered the second United States Bank at Philadelphia, with power to establish branches. Its capital was $35,000,000, of which the Federal Government took $7,000,000; the bank, with its branches, was made the official depository of Government money; its bills were legal tender, and it was the agent for negotiating Federal and State loans. This compelled the State banks to resume specie payments, and business again moved forward steadily. State banks, however, grew in number rapidly. In 1816 there were 246, with $90,000,000 capital. In 1830, when the rechartering of the United States Bank was proposed, there were 330 State banks, with $145,000,000 capital. President Jackson, in his message, December, 1829, expressed his opposition to the United States Bank, and his expected veto of the bill to renew the charter came in July, 1832. The next step was to remove the deposits of public money from the bank. This took the form of an order to cease deposits in the United States Bank and to draw out the balance in payments. This could be done only by order of the Secretary of the Treasury, and as that officer refused to conform to the President's wishes, he was summarily removed, and a more tractable man was appointed in his place. The old bank, which had more than once saved the credit of the nation, was crippled and went down. In the wind-up it was found that its whole capital was lost, though it managed to pay its debts. Its last operations were under a charter from the State of Pennsylvania.

The refusal to continue the National Bank gave full scope to State institutions, and they grew with mushroom rapidity. In 1837 there were 634 of them, with a capital of $291,000,000, of which $149,000,000 were in circulating notes, and $127,000,000 in deposits. The loans and discounts amounted to $525,000,000. The inevitable crash was hastened by an enormous crop of cotton in 1836, a consequent decline in prices, and the depreciation of the credit of cotton-dealers and their backers. The tumble began in 1837, and by the first of June there was an entire suspension of specie payments; values fell from dollars to shillings, all business was deranged, millions of people were reduced from comparative ease to sharp poverty, and a period of wretchedness began which continued nearly five years. However, Congress passed a general bankruptcy law, the States assisted, by limitation and other laws, and by 1843-44 the country had nearly recovered. The banks had many trials; some resumed only to suspend again, and many went into liquidation. Congress passed the Independent Treasury Act, and thereafter the Federal Government had no direct concern in banking until the Civil War broke out. The old United States Bank had its final downfall in the crash of 1837. That crisis taught wisdom to the State banks, and a general retrenchment was the consequence. Between 1838 and 1842 the number of banks was reduced from 675 to 577; capital from $317,000,000 to $229,000,000; circulation from $116,000,000 to $59,000,000; and discounts from $486,000,000 to $254,000,000. Further security was demanded by the public, and among the new measures were the Suffolk Bank plan in Massachusetts, and the New York safety-fund system. The Suffolk Bank plan was merely an arrangement whereby that bank was made the channel through which all notes of New England banks that found their way to Boston, as most of them naturally did, were at once forwarded to the issuers for redemption. The result was that all solid bankers found it for their interest to deposit with the Suffolk a redemption fund, as that insured the acceptance of their notes.

The New York safety-fund system, which is the cardinal principle of the present national banking plan, required each bank to deposit, with the banking department of the State, securities consisting of Federal or State stocks, or bonds and mortgages, which, in case of the failure of the bank, were sold, and the proceeds applied to the liquidation of its debts. In 1857 there was another crash, followed by a general suspension of specie payments; but the depression did not long continue.

One of the serious evils, avoided to a great extent by the issue of greenbacks and national bank currency, was counterfeited or altered bills. When almost every bank had its own plates for six or more denominations of notes, the country was flooded with counterfeits and alterations, and no business man ventured to accept a bank-note not well known to him without previous comparison with counterfeit detectors, weekly volumes giving description of counterfeits and spurious notes. In 1862 there were counterfeits on the notes of 253 banks, besides 1861 bills imitated, and 1685 entirely spurious notes. On the best notes there was a discount in the business centres of from 1 to 10 or even 15 per cent.; and exchange was more variable than the weather. The ‘wild-cat’ and ‘red-dog’ banks of Michigan and other Western States were notoriously unsafe. A dozen of them would club together to make a show for one only, when the examiner came along, and the same specie would be an hour in advance of him all along his route. The ‘red-dog’ bank was so called because of its movable nature, and of the color stamped on its notes. Established in one place on Monday, the ‘banker’ might pack his carpet-bag at night, and on Tuesday open his bank 50 miles away; in which case he stamped in red ink on the face of his notes the name of the place in which the ‘banking-house’ was last established.

The Civil War (1861-65) made large issues of credit necessary, and among the earliest financial proposals was one to enlist the interest of banks in the national credit by permitting them to organize under a national law and issue notes on the basis of bonds purchased by them and deposited with an officer of the Government. It was, however, some time before these proposals took the form of law in February, 1863. In the meantime. Congress had flooded the nation with paper money issued directly by the Government. The banking law of February 25, 1803, created a currency bureau in the Treasury Department, at the head of which is the Comptroller of the Currency, who has power to authorize banking by associations of not less than five persons, and a minimum capital (unless in very small places) of $100,000, one-half to be paid at once, and the remainder in six months. Before commencing business, the association must transfer to the Treasury of the United States interest-bearing bonds of the National Government to the amount of one-third the capital; whereupon they may receive circulating notes, registered and counter-signed, equal to 90 per cent. of the market value of the stocks deposited, but not beyond the amount of their par value. The entire amount of currency to be issued was limited to $300,000,000, one-half to be apportioned among the States according to their representative population, and the other half with regard to the existing banking capital, resources, and business of the several States. The system was slow in getting into operation, and the aid rendered the Government by furnishing a market for its bonds was, after all, slight. In January, 1865, there were only 683 banks that had organized under the national law. To hasten the process, a law of March 3, 1865, imposed a tax of ten per cent. on the notes of State banks, to go into effect August 1, 1866. Under the stimulus of this law, the reorganization proceeded rapidly, and in October, 1866, the number of national banks had reached 1644. The subsequent development of the national banking system is briefly shown in the following exhibit:

DATE Number
 of Banks 

 Surplus, and 
 Circulation   Loans and 
 U. S. Bonds 
to Secure

Jan. 22, 1870  1,615   450   546   295   689   339
Mar. 1, 1875  2,029   679   648   325   956   381
Feb. 21, 1880  2,061   614   849   321   974   362
Mar. 10, 1885  2,671   730   997   274  1,232   313
Feb. 28, 1890  3,383   917  1,480   124  1,845   143
Mar. 5. 1895  3,728   992  1,668   170  1,965   196
Feb. 13, 1900  3,604   977  2,482   205  2,481   236
Sept. 30, 1901   4,221  1,086  2,938   324  3,018   329

National Banks. Of the national banking system, it may be said that the Civil War presented to Congress as its first duty the invention of some plan for repressing the heterogeneous banking system and providing a system of a homogeneous and absolutely safe character; one that would be truly national, operating alike in every part of the United States. The necessities of the Government inspired the new order, but the old was rapidly failing to meet the wants of the people. The new, therefore, may be said to have grown out of the necessities of business as well as the straits of the nation. The new system preserved all the advantages of the old, and added many new ones. It gave absolute protection to the holders of the national bank-notes, as Government bonds were deposited with the United States Treasurer in ten per cent. excess of their issue for the security of their redemption. It provided security of a uniform and almost absolute character for the deposits, making the stockholder liable, in an equal amount of his stock interest, for the ultimate payment of the deposits. It provided for a uniform bank-note of equal value in every part of the country, so engraved and issued, that security against counterfeits was far better attained than ever before. It provided for a system of redemption which made exchange merely nominal, and gave to national bank-notes, issued in most distant places, a uniform value in all the great financial centres of the country. It provided a system of published reports over the sworn signatures of the executive officers of the banks, and a uniform system of examination under the direction of the Comptroller of the Currency.

Abstract of Reports of Earnings and Dividends of National Banks in the United States from March 1, 1901, to September 1, 1901

Surplus Dividends Net

 to Capital 
Per cent.
to Capital
 and Surplus 
Per cent.
to Capital
 and Surplus 
Per cent.

New England States   537 $135,820,820  $182,479,044  $4,177,397  $5,141,305  2.82 2.29 3.08
East. States, N.Y. to D.C.   1,055 211,208,935  135,474,465  8,997,682  16,175,874  4.67 2.60 4.26
Southern States   654 71,133,835  24,250,881  2,806,904  6,032,882  6.32 2.94 3.75
Middle States, O. to Mo.   1,198 168,083,100  52,919,905  6,816,907  10,351,077  4.68 3.08 4.06
Western States   439 32,769,390  6,274,379  1,608,913  2,122,816  5.44 4.12 4.91
Pacific States   127 20,027,000  5,854,450  887,020  1,481,466  5.72 3.39 4.38

United States  4,030  $639,043,080   $407,253,124   $25,294,823   $41,305,420  4.54 2.73 3.96

Table Showing Capital of Banks and Bonds Held for Circulation September 5, 1900


 No. of 
Capital  No. of 
Capital  No. of 

Central Reserve Cities         64  $ 93,500,000    64  $ 43,400,000  $ 3,200,000  $ 40,200,000
Reserve Cities     9  $   950,000   258   149,600,000   267    53,800,000   13,200,000    40,600,000
Country Banks  2,991   222,310,000   550   164,000,000  3,540   197,700,000   83,100,000   114,600,000

 Total  3,000  $223,260,000    872  $407,100,000   3,871  $294,900,000   $99,500,000   $195,400,000 

Table Relating to Banks Other than National, on or About June 30, 1901


 No. of 
 No. of 
 No. of 
 No. of 

New England States     22     3.3     9.5    77    18.9   187.0         466     963.4
Eastern States   352    41.6   468.2   217   111.5  1,075.2    51     2.1    10.4   192    1,231.5
Southern States  1,129    51.8   181.5     4     1.6     0.4    65     1.7     6.7    32     1.3    12.0
Middle States  1,837    97.3   675.7    36     5.4     8.5   736    13.1    89.1   256     9.4    73.6
Western States  1,341    21.8   112.3          31     0.7     4.6      
Pacific States   289    35.9   142.3          33     1.3     7.0    56     7.8   170.8
Islands    13     3.3    21.0           1     0.5     0.9      

United States  4,983   255.0  1,610.5   334   137.4  1,271.1   917    19.4   118.7  1,002    18.5  2,451.3

The national banks were required to pay to the revenues of the General Government as follows: (1) One-half of one per cent., semi-annually, on the circulation allowed by law. (2) One-quarter of one per cent., semi-annually, on the average deposits for the half year. (3) One-quarter of one per cent., semi-annually, on capital not in Government bonds. Their stockholders are subject to local taxation on the market value of their stock as personal property. Each bank must keep with the Treasurer of the United States, in legal-tender notes, for the redemption of its bills, 5 per cent. of the amount of its circulation.

Without any wide departure from the principles laid down in the original act, the laws governing national banks have, from time to time, been considerably modified in details. Thus the restriction upon the aggregate amount of bank-note issues has long since (1875) been removed. The charters of the banks were to lapse in twenty years, but in 1882 Congress authorized the recharter of the banks for terms of equal length. The currency law of March 14, 1900, made a number of important changes in the conditions of the issue of national bank-notes. It permits the issue of notes to the par value of the bonds deposited, instead of 90 per cent. of the par value, subject only to the restriction that in case the market value of the bonds should fall below the par value of the same, additional deposits of bonds or of lawful money might be required to maintain the security for the notes issued. The law provided for the conversion of several series of outstanding bonds into 2 per cent. gold bonds, payable thirty years after date. To effect this change it offered to the banks a special inducement in reducing the tax upon the circulation, so far as issued upon the new bonds, from one per cent, to one-half of one per cent. The act, moreover, favors the extension of the national banking system to small communities, inasmuch as it permits the erection of banks with a capital of $50,000 in places whose population docs not exceed 6000 inhabitants, and of banks with a capital of $25,000 in places where the population is less than 3000. The object of these changes was to extend the system and render the issue of notes more attractive. How far it has accomplished this end is sufficiently evident from the statistical exhibit already made.

National banks are the only banks of issue in the United States. But the States have chartered several forms of deposit banks in large number, while private bankers are also numerous. The business operations of State banks differ from those of national banking associations only in so far as they lack the feature of note issues. On the other hand, the loan and trust companies present some variations. In so far as they do a banking business, they differ from the State and national banks in paying interest on deposits. They are, moreover, generally restrained by law from discounting mercantile paper, and their loans are made upon collateral. The peculiar features of savings-banks call for no extended notice here. Both their deposits and their investments are, as a rule, of a more permanent character than those of other banks. The relative strength of the several forms of banks and other points which summarize banking operations in the United States are given in the accompanying statements from the last Report of the Comptroller of the Currency, for the fiscal year ending June 30, 1900.

Banking in England. In the banking system of England, the central figure is the great Bank of England. This bank, the most important in the world, was projected by William Paterson (q.v.), and was incorporated July 27, 1694. It was constituted as a joint-stock association, with a capital of £1,200,000. In return for the loan of its entire capital to the Government, it received the right to issue notes and a monopoly of corporate banking in England. It was not until early in the Nineteenth Century that this monopoly was broken down. At its very outset, the Bank of England was a servant of the Government; and in a lesser or greater degree, it has enjoyed this character through all the stages of its subsequent history. At first the charter of the Bank was for eleven years only; but in consequence of the great services of the institution to the Government, its charter has been at various times renewed. The last renewal was in 1844, and the charter of that year still subsists, its terms being subject to modification or revocation by the legislature at pleasure. By the act or charter of 1844, the bank was divided into two departments—the issue and the banking. What led to the division was this: it was supposed that, when a foreign drain of gold should set in, it would, if the currency or circulation in the country had been purely metallic, have produced a contraction of the circulation, and a consequent fall of prices, and, as an ultimate result, the cessation of the drain. It was further supposed that banks could issue their notes to any extent they pleased when their excessive issues increased the currency, and therefore increased prices, which in their turn led to foreign drains; and that, on the occasions of these drains, the continued issues prevented the natural and desirable contraction of the circulation, and aggravated the commercial convulsions occurring at such periods. The object of the act of 1844 was to prevent issues of notes beyond a certain amount, unless against an equal amount of gold held by the issuing bank, so that the mixed currency of notes and coin might thus expand and contract like a self-acting metallic currency. Experience, however, has shown that, when these foreign drains occur, the gold exported is taken chiefly from the reserves in the Bank of England, being withdrawals of deposits or loans by the Bank; and that the amount of notes in the hands of the public has not been affected by the legislation of 1844. In practice, whenever there are signs of a foreign drain, and the reserve of the Bank is diminishing, the Bank counteracts the tendency to a drain by raising the rate of discount and restricting its loans; the purchasing power of the public is thereby limited, and prices kept down; and, at the same time, gold is attracted to England for investment. The circulation is in reality not interfered with. It was also intended by the act of 1844 to add to the security of bank-notes by insuring a supply of gold to meet the payment of them at all times. But the solvency of the Bank of England is undoubted; its notes would at any time be taken as gold; and this effect of the act of 1844, and the supplementary act of 1845, has in the case of the notes of other banks been hitherto inappreciable.

In the issue department of the Bank of England, its sole business is to give out notes to the public. Before the separation of the departments, the Government was indebted to the Bank £11,015,100. This sum was declared to be now a debt due to the issue department, and for the issues of notes to that amount, no gold need be held by it. This was just the same thing as if the Bank had originally lent £11,015,100 of its notes to Government, and these notes had found their way into circulation. The Bank was also allowed to issue notes on securities without holding gold. The amount of notes which may thus be issued, without gold being in reserve against it, is £17,775,000. All notes issued above that amount can be issued only in exchange for gold. At the passing of the act in 1844, the limit of notes to be issued against the Government debt and securities was fixed at £14,000,000—past experience having shown that there was not the least risk of there being at any time less than that amount of Bank of England notes in the hands of the public. The subsequent addition of £3,775,000 arose from the fact that when other banks of issue then in existence ceased to issue, notes equal to two-thirds of their circulation were by the terms of the act to be issued by the Bank of England. The profit the Bank derives from its issue department is the interest received on the Government debt and securities, less the amount paid as taxation and the expenses of the department. The Bank also makes a profit upon bullion and foreign coin. These are brought to the Bank for notes; they are worth £3 17s. 10½d. per ounce; but the Bank is obliged by its charter to purchase them at £3 17s. 9d. The holders prefer taking this price to having their bullion and foreign coin coined, free of charge, at the public mint, as the delay in the coining is equal to a loss of interest of 1½d. per ounce. The amount of notes in the hands of the public averages about £25,000,000; but the amount issued by the issue department is greater. The difference is the amount lying in the banking department, and represents the reserve of gold of that department; that is to say, the banking department retains only a half or three-fourths of a million of coin, and transfers the bulk of its reserve to the issue department in exchange for notes. The reserve of the banking department is regarded as gold, though it consists of notes issued by the other department.

Viewed in its banking department, the Bank differs from other banks in having the management of the public debt, and paying the dividends on it; in holding the deposits belonging to the Government, and making advances to it when necessary; in aiding in tlie collection of the public revenue, and in being the bank of other banks. For the management of the public debt, the Bank receives about £247,000, against which there has to be set £124,000 of charges. The remaining profits of the Bank are derived from its use of its deposits, on which it allows no interest, and of its own capital. The capital was originally £1,200,000; in 1816 it reached £14,553,000—the present amount. There is besides a reserve of about £3,200,000. In December, 1901, the public deposits were £10,493,177, and the private were £39,460,027; the maximum of deposits, public and private, is about £50,000,000.

In 1797, the Bank, being on the verge of bankruptcy, was ordered by the Government to suspend the redemption of its notes in coin, and the notes became the main currency of the nation, until the resumption of specie payments in 1821. The notes during this interval not having been convertible into coin on demand, there was no check upon the Bank in the amount of its issues; and the currency became depreciated. It is, however, said that the value of gold at the time was enhanced owing to absorption by hoarding and by military-chests, and that the depreciation was more apparent than real. The export of gold following on a rise of prices occasioned by an issue of bank or Government notes is unlimited, except by exhaustion, if these notes are not payable in coin on demand, and are issued without any check from without or self-imposed. But as prices estimated in these notes rise, the price of bullion, like other commodities, rises too, and the price of coin which can be converted into bullion, or be used abroad at its previous purchasing power, rises also. Since 1821 the Bank has more than once been on the verge of a suspension of payments, owing to foreign drains of gold. The separation of the Bank into two departments is regarded by many as having a tendency to produce a suspension in times of panic, when the reserve is reduced by withdrawals to supply a foreign drain, or to meet an internal run. Before the separation, the Bank, in the case of withdrawals of gold, had the whole amount of gold within its vaults to meet them; but now it loses the command of all the gold in the issue department. It cannot get that gold unless in exchange for notes, but, its reserve being reduced or exhausted, it has none to spare. The restriction of credit consequent upon the approach to an exhaustion of the reserve of the banking department, is so great that the fear of it occasions a panic; and in 1847, 1857, and 1866, on the possible suspension of payments by the banking department, owing to a reduction of its reserve, being apparent, the Government of the day took the responsibility of authorizing the Bank to lend additional notes, not represented by gold, which was an indirect way of getting at the gold in the issue department, where the object of the borrowers was to obtain gold. The Bank of England is situated in the centre of London; but it has two branches in the metropolis and nine branches in the provinces.

Other Banks in England and Wales. While the Bank of England long held a monopoly of banking in London, it could not prevent the rise of bank's throughout the provinces. In the first instance these banks were merely private partnerships, and the number of partners could not exceed six. These country banks issued notes, and were without any Government supervision or control. After the panic of 1825, a law was passed permitting the country banks outside of a radius of 65 miles from London to organize as joint-stock companies, with their right to issue notes unimpaired. The Bank of England strenuously but ineffectively opposed the extension of the joint-stock principle, which had been conceded in the provinces, to the London banks. In 1833 an act of Parliament authorized the establishment of such banks in London, though it refused to give them the note-issuing privilege. When the Bank of England was rechartered in 1844, all joint-stock banks and private banks were restrained from issuing further notes, though they were authorized to maintain the circulation then outstanding, calculated on the average of the twelve weeks prior to April 27, 1844. At the time the Bank Act went into effect, the outstanding issues other than Bank of England notes were £5,153,417 for 207 private banks, and £3,478,230 for 72 joint-stock banks. In the course of time the number of issuing banks decreased, so that in 1902 there remained only 27 private banks and 24 joint-stock banks, having note issues to the extent of £2,462,662.

Banks in Scotland. The earliest banking institution in North Britain was the Bank of Scotland, instituted by a charter of incorporation from the Scottish Parliament in 1695. The original capital was £1,200,000 Scots, or £100,000 sterling. In 1774 the amount of stock was extended to £200,000 sterling; now it is £1,250,000 sterling. In 1727 a new and similar establishment was constituted under the title of the Royal Bank of Scotland, whose advanced capital is now £2,000,000. In 1746 another association was formed, and incorporated by royal charter, with the title of the British Linen Company. From £100,000, its capital has increased to £1,000,000. Besides those three banks, there are in Scotland eight other joint-stock banks, but no private banks.

In consequence of allowing interest on deposits, the banks in Scotland may be said to hold the whole capital of the country, minus only the money passing from hand to hand. This widespread system of depositing is greatly aided by the establishment of branches from the parent banks, and these branches are found in every small town in the kingdom. The entire number of branch banks in Scotland is over one thousand. At these branch banks the agent (who is usually a responsible person in business) discounts bills within certain limits, issues letters of credit, and pays out notes, and also gives cash on demand for them; though, strictly, the notes of a bank are payable only on demand at the head office. By a strict system of supervision, Scottish branch-banks are usually well conducted, and are of great service in every department of trade.

The banks in Scotland, like the banks in Ireland, but unlike the provincial banks in England, are allowed to issue notes beyond their fixed issues, on holding gold equal in amount to the extra issue. But as the gold thus retained is, like the other gold in reserve, liable for all deposits, as well as for the whole circulation of a bank if it should fail, the security of the establishment is increased only in a small degree by this arrangement, which, apart from the loss of profit to the bank on the gold unemployed, is attended with inconvenience at those seasons when the circulation is extended. In Scotland, and Ireland also, banks can issue one-pound notes; the English banks are not permitted to circulate notes of less value than £5.

Besides employing money in discounting bills, the Scottish banks grant loans of fluctuating amount, called cash-accounts or cash-credits. By a cash-account is signified a process whereby an individual is entitled to draw out sums as required, to a stipulated amount, and on an implied condition to make deposits at his convenience toward the liquidation of the same. On entering into this arrangement, he finds security to the bank that he will repay to the bank, whenever called on, the balance of sums drawn out, less those paid in, with the interest that may be due. These accounts are balanced yearly, like current or deposit accounts. The only difference between the latter and a cash-account on the face of them is, that if the credit allowed on the cash-account is being made use of, the balance is in favor of the bank; whereas, on the other kind of accounts, the balance is in favor of the bank's customer.

Banks in Ireland. There are nine joint-stock banks, having 454 branches and sub-branches. Their authorized issue is £6,354,404, of which £3,738,428 is that of the Bank of Ireland. It is a national bank, lending £2,630,769 of its capital to the Government. It was established in 1783, with privileges resembling those of the Bank of England. Its capital is £2,769,230, and its reserve £1,034,000. The capitals of the other banks vary from £142,766 to £1,500,000, and the total capital of the joint-stock banks in Ireland is £6,901,966. Six are banks of issue. Interest is allowed on money deposited for a stated period, but not on money at call, or as a rule on current accounts.

The following table gives some of the important features of the assets and liabilities of banks doing business in the United Kingdom for the date June, 1900:

Banks No. of
Branches Capital
Reserve and
Profits Circulation Deposits
and Current
Accounts Loans and
Discounts Cash Money
at Call and
Short Notice

Bank of England England and Wales Joint-Stock Banks England and Wales Private Banks Isle of Man Joint-Stock Banks Scotland Joint-Stock Banks Ireland Joint-Stock Banks

 Total Colonial Joint-Stock Banks with London offices Foreign Joint-Stock Banks with London offices

 Grand Total

1 82 21 3 11 9

11 3,824 ....... 12 1,077 559

£ 17,800,000 80,400,000 7,100,000 200,000 17,100,000 11,400,000

£30,200,000 900,000 200,000 100,000 7,900,000 6,400,000

£ 48,500,000 571,700,000 42,100,000 1,500,000 103,700,000 47,700,000

£ 30,500,000 386,800,000 23,500,000 800,000 70,500,000 36,600,000

£ 33,600,000 136,100,000 10,500,000 200,000 25,600,000 9,900,000

127 30 24

5,483 1,652 312

£134,000,000 46,500,000 42,600,000

£45,700,000 9,300,000 3,500,000

£815,200,000 167,500,000 115,600,000

£548,700,000 167,000,000 156,900,000

£215,900,000 54,000,000 33,800,000

181 7,447 £223,100,000 £58,500,000 £1,098,300,000 £872,600,000 £303,700,000

Continental Banks. On the Continent of Europe there are both private and State banks. The Bank of France stands second in repute only to the Bank of England. It was founded in 1800, and in 1806 was placed upon an enduring basis. Its original capital was 45,000,000 francs, which was increased in 1806 to 90,000,000 francs, and later reduced to 67,900,000 francs, with a reserve of 12,980,750 francs. It has the sole right to issue paper money in France, and enjoys a high degree of public confidence, which it is so anxious to retain, that in 1888, when dangerous counterfeits of its 1000-franc notes were put into circulation, it preferred to redeem them rather than, by refusing payment, to impair the general readiness to receive its own genuine paper. The Bank of France has often rendered important services to the French Government in furnishing large and promptly given loans. In November, 1890, during the crisis in the London money-market owing to the embarrassment of the firm of Baring Brothers, the Bank of France was able to relieve the pressure on the Bank of England by a large advance of gold. It issues notes of 50, 100, 500, and 1000 francs, and, besides carrying on a general banking business, takes charge of valuables, such as plate, jewels, and title-deeds, at a charge of one-eighth per cent. of the value of the deposit for each six months. It has various branches or succursales in the chief cities of France. The Banque Nationale of Belgium is conducted upon the model of the Bank of France. It issues notes for 20, 50, 100, 500, and 1000 francs. In Germany, the Imperial Bank (Reichsbank) was established by an act passed in 1875, with the right to issue notes not covered by bullion in the vaults, to the amount of 250,000,000 marks ($62,500,000); while a number of subordinate banks are permitted to issue uncovered notes to the amount of 135,000,000 marks ($33,750,000). Notes are issued for 5, 50, 100, 500, and 1000 marks. The State itself (by an act passed in 1874) may issue 120,000,000 marks in small notes for the general convenience of the public. For a more detailed treatment of the banking systems of foreign countries, see articles on those countries.

Historical Sketch. The origin of banking is in remote antiquity, but in its nature and scope great changes have been made during the last four centuries. The modern banker is a dealer in credit, while in ancient times the so-called banker was a mere custodian of other people's money and a buyer and seller of foreign moneys. The bill of exchange appears to have been the first credit instrument handled by the early bankers. Explorers have discovered evidence of its use in Assyria several thousand years before Christ. In Athens and in Rome several hundred years before Christ, men who would now be called bankers made a business of receiving money on deposit and of buying foreign money and foreign bills of exchange. In Rome bankers were called argentarii, or dealers in money. Although at first their profits came altogether from commissions upon deposits and from the exchange of domestic for foreign money, they finally became dealers in bills of exchange, and even loaned the money which had been intrusted to them, a credit on their books being transferred by an order resembling the modern check. Livy first mentions the argentarii at the year B.C. 350, and they are frequently referred to in Latin literature of a later date. They were not patricians and had no social status, being despised by the nobles and hated by the common people. By the time of Justinian, the business of banking, involving a comparatively large use of credit, had become firmly established, and a complete body of jurisprudence relating to the subject had been developed.

During the Middle Ages, the insecurity of property and the risks attending commerce practically reduced the business of banking once more to that of mere money-changing. In Italy, at this time, the bankers were known as campsores, or dealers in foreign money. There was still traffic in bills of exchange; but for several centuries banking in the modern sense of the term, implying the lending of other people's money, the issue of notes as a medium of exchange, and the transfer of accounts by order or check, was practically unknown. The rise of modern banking really dates from the establishment at Venice of the Banco di Rialto, in 1587. For two centuries prior to this date private bankers in Venice had been receiving deposits, making loans, and transferring credits upon order. The Banco di Rialto received deposits subject to call, and permitted its customers to transfer their credits by order. In 1619 this bank was absorbed by the Banco del Giro. This bank loaned 500,000 ducats to the Government of Venice. Depositors were given receipts in proportion to the weight of the gold or silver coins which they deposited, and these receipts were used as money. As the current coinage in Venice was in bad condition, it often happened that credits upon the Bank of Venice were at a premium. On several occasions, however, the paper of the bank was at a discount, on account of excessive issues. The bank survived until 1805, when its affairs were liquidated under a decree of Napoleon.

The Bank of Amsterdam and the Bank of Hamburg, established in the same century as the Banco del Giro in Venice, performed banking functions of a similar character. They did not issue bank-notes, and were not authorized to make loans; but their credits, based upon coins deposited, became a very popular medium of exchange in the settlement of all large transactions. These credits were known as ‘bank money,’ and are generally regarded as the first step in the evolution of the check and deposit system now in common use in Europe and the United States. The Bank of Amsterdam was successfully managed from 1609, the date of its establishment, until the middle of the following century, when secret advances to the Dutch East India Company resulted in the destruction of its credit. It was liquidated by a royal decree in 1819. The Bank of Hamburg was always conservatively managed, and survived until 1873, when the adoption of an Imperial coinage and bank currency rendered its services no longer necessary.

It was during the Eighteenth Century that the two characteristic features of modern banking—the issue of notes not covered by coin, and the granting of deposit accounts upon the mere credit of borrowers—were finally evolved. China appears to have been familiar with bank-notes for at least twelve centuries, but their use in Europe dates only from 1661, when the Bank of Sweden issued notes to avoid the transportation of copper coin. In England the recognition of the bank-note as a representative of credit rather than as a mere warehouse receipt secured by an equivalent deposit of coin, was not realized until the end of the Seventeenth Century, when the Bank of England was created. The Bank of Scotland, chartered in 1695, received privileges similar to those possessed by the Bank of England.

Consult: Bagehot, Lombard Street (New York, 1874); Conant, A History of Modern Banks of Issue (New York, 1897); Dunbar, Theory and History of Banking (New York, 1891); Francis, History of the Bank of England (London, 1848); Gilbart, History, Principles, and Practice of Banking (London, 1882); White, Money and Banking (Boston, 1896); Breckinridge, The Canadian Banking System (New York, 1895); Report of the Monetary Commission (Chicago, 1898); Reports of the Comptroller of the Currency. See also Credit; Currency; Interest; Savings-Banks.