The New Student's Reference Work/Banks
Banks (from the Italian banco, meaning a bench). The Babylonians and Chinese as well as the Greeks and Romans are known to have made use of the principles of banking; but the bank of Venice in the 12th century was the first institution which carried on banking business as it is now practiced. The bank of Barcelona was founded in 1401; and one at Genoa, started in 1407, was for centuries one of the first banks in Europe. The bank Amsterdam (1609) was the great warehouse for bullion during the 17th century, giving receipts for the coin and bullion put there, which receipts were used as money.
Modern banking begins with the 18th century, and the modern bank in its simplest form is an institution which receives money from its depositors and loans it out to borrowers, charging the latter interest for the loan. The difference between the higher rate of interest which the bank charges the borrowers and the lower rate which it pays its depositors is the gross profit which the bank makes.
The money which the bank loans is represented in the bank by notes, which are promises to pay back the money at a certain time and place, signed by the borrowers. In order that the bank may safely loan money it requires the borrower to give security. This may be in the form of an endorsement which is the signature of a person, firm or corporation on the back of the note, and this endorsement makes the endorser guarantee the payment of the note and interest. Other forms of security are stock, bonds, mortgages, etc. If the borrower fails to pay the note when it is due, the bank can then sell the stock, bonds, mortgages, etc., and apply the proceeds in payment of the note.
In the United States banks may be divided into national banks, state banks, trust companies, savings banks and private banks. National banks are organized and operated under the national banking laws, and are examined by national bank examiners who are under the Comptroller of the Currency in Washington, D. C., and make their reports to him. National banks are also required to make sworn statements of their condition to the comptroller whenever he calls for them. State banks, savings banks and trust companies are organized and operated under the banking laws of the states in which they are located. They are subject to examinations by state bank examiners and must make sworn statements of their conditions when the proper state official calls on them to do so. Private banks are not organized under the national or state banking laws and are not subject to the supervision of federal or state officials. When a bank is organized under the national or state banking laws, it is known as a chartered bank, because the national or state government gives the owners of the bank, known as stockholders, a charter which authorizes them to conduct a banking business.
The stockholders supply the money to start the bank, and this money is called the capital of the bank. As the bank prospers, it lays aside a certain amount of its net earnings each year in a fund called surplus. Some banks have a surplus larger than the capital. The capital and surplus belong to the stockholders; but if for some cause the bank should fail—that is, be unable to pay back to the depositors the money they had deposited, then the public authorities take the capital and surplus to pay the depositors what is owing them. If this is not sufficient, an assessment is made on the stockholders, sometimes for as much as the par or face value of the amount of stock they own.
Stockholders of a bank meet each year and elect directors to represent them in the management of the bank. The directors in turn elect the officers of the bank to whom they delegate authority to operate the bank. It is the duty of the directors to see that the bank is properly managed and that the officers conduct the bank's business carefully, safely and properly and with profit, for unless the bank makes a profit it cannot pay dividends upon its stock, A dividend is a division of the net profits of the bank among the stockholders in proportion to the amount of stock each holds and is designated as a percentage of the capital. Thus, if a bank pays 10 per cent, dividends, it divides each year among the stockholders an amount of money equal to 10 per cent, of its capital stock. The par or face value of the stock of national or state banks is $100. Its real value is what it sells for. The stock of some banks is worth many times its par or face value.
The first chartered bank in this country was the Bank of North America. The charter was granted by the Congress of the Confederation in 1780. Because there was some doubt as to the power of Congress to do this, the bank was rechartered by Pennsylvania in 1781, In 1784 the Bank of Massachusetts and the Bank of New York were organized. In 1791 Congress established the Bank of the United States; the charter was limited to 20 years. The capital was $10,000,000 one fifth of which was supplied by the government. The headquarters of the bank was in Philadelphia, with branches in other cities of the country. When the charter expired in 1811, Congress refused to renew it. In 1816 the second United States Bank was chartered by the government with a capital of $35,000,000 of which the government subscribed one fifth. This bank was used as a depository for government funds, and five of its 25 directors were appointed by the government. In 1832 Congress passed an act renewing its charter, but President Jackson vetoed it. The bank became a great political issue, and President Jackson ordered the public funds to be removed from the bank and deposited in state banks. In 1836 the bank's charter expired, but a few days before this occurred Pennsylvania gave it a state charter and it became the United States Bank of Pennsylvania. Between 1836 and 1863 only state banks existed in the United States.
The several state banking-systems, no two alike, caused great dissatisfaction and losses. Each state had its own banking laws and under them the state banks issued currency. The laws were so loosely drawn that suspensions and failures were frequent. In many instances the privilege of issuing notes to circulate as currency was grossly abused. This led Secretary Chase in 1861 to suggest a national-bank act, and in 1863 such an act was passed by Congress and became the basis of the present national banking laws. Congress in 1865 levied a tax of 10 per cent, on all circulating notes other than those issued by national banks, and this prohibitive tax put an end to state-bank currency.
National banks can issue their own banknotes to circulate as currency by depositing ,. United States bonds with the Comptroller of the Currency. The bank can issue notes to an amount equal to the bonds so deposited but not to exceed the amount of the bank's capital stock. Thus a national bank, having a capital of $1,000,000, can issue $1,000,000 national bank-notes, provided it deposits $1,000,000 United States bonds.
Any five citizens of the United States can organize a national bank. In towns or cities of less than 3,000 population a national bank with but $25,000 capital can be organized; where the population is between 3,poo and 6,000 the capital stock must be at least $50,000; between 6,000 and 50,000 population the capital stock must be at least $100,000 and over 50,000 population the capital stock must be at least $200,000.
In May of 1908 Congress enacted what is known as the Emergency-Currency Law. Under the provisions of this law ten or more national banks, each having an unimpaired capital and surplus of not less than 20 per cent, of its capital stock, all of the banks having a total capital and surplus of at least $5,000,000, may form themselves into a National Currency Association for the purpose of providing for an issue of emergency currency in times of financial stress or panics. Any bank belonging to a National Currency Association can use stocks, bonds or commercial paper (the notes of commercial houses) which have been approved by the association as a basis for additional circulation. To secure this emergency currency from the government through the currency association, the bank must meet certain requirements and do certain things laid down in the emergency currency law but always under the direction and control of the Secretary of the Treasury.
The law also provides for the issuance of emergency circulation to the banks direct without compelling the bank to secure such circulation through the medium of a currency association. A special tax on emergency circulation is provided for; it amounts to five per cent, a year for the first month such circulation is outstanding and one per cent a year for each additional month until the tax reaches 10 per cent, a year. This tax is levied to make it unprofitable for a bank to issue emergency circulation, the idea being that such circulation should only be used when the emergency is so great as to imperil the banks. The law also carries a provision for a currency commission of eighteen members, the Speaker of the national House of Representatives to name nine and the presiding officer of the United States Senate to name nine. This commission is to inquire into the entire subject relating to currency and make a report to Congress. The emergency currency law expires by limitation on June 30, 1914.
France claims the credit of being the mother of savings banks, basing this claim on a savings bank said to have been established in 1765 in the town of Brumuth, but it is of record that the savings bank idea was suggested in England as early as 1697. There was a savings bank in Hamburg, Germany, in 1778 and in Berne, Switzerland, in 1787. The first English savings bank was established in 1799, and postal savings banks were started in England in 1861.
The first chartered savings bank in the United States was the Boston Provident Savings Institution, incorporated December 13, 1816. The Philadelphia Savings Fund Society began business the same year, but was not incorporated until 1819. In 1818 banks for savings were incorporated in Baltimore and Salem, and in 1819 in New York, Hartford, Newport and Providence.
Savings banks are organized and maintained for the conveniences of the person of small means who by making small deposits can in time accumulate a comfortable sum of money. Such banks differ widely in the conduct of their business from commercial banks. Deposits in commercial banks are subject to withdrawal without notice, but savings banks reserve the right to require from 30 to 60 days—and in some instances six months'—notice of withdrawal of funds. Interest ranging from three to five per cent, per annum is paid on savings deposits, but such deposits must remain in the bank for a certain period—the time varying according to the rules of the banks—before interest is allowed. If the funds are withdrawn before interest time, the depositor loses the interest.
The postoffice savings banks which were established in England in 1861 at first were tried at only a few postoffices, but later the system was extended to include all the money-order offices in the United Kingdom.
In the United States the Postal Savings System was inaugurated under act of congress in 1911. On June 30th, 1912, the number of depositors was 8,113, and the deposits were approximately $20,300,000.
Deposits bear interest at two per cent per annum, principal and interest being guaranteed by the United States Government. Accounts may be opened and deposits made by any person of the age of 10 years or over. Deposits are received from individuals only, and not from corporations, associations or firms. Receipts for deposits are given in the form of postal savings certificates which are issued in denominations of $i, $2, $5, $10, $20, $50, and $100 each. No person is permitted to deposit more than $100 in any one month, nor have more than $500 on deposit at one time. A depositor is permitted to exchange his deposits for sums of $20, $40, $60, $80, $100 or multiples of $100 up to $500 into United States bonds bearing interest at 2j per cent per annum, payable semi-annually. Full information concerning the Postal Savings System may be obtained at any depository office or by addressing the Postmaster General (Postal Savings System), Washington, D. C.
A trust company is a banking institution organized under the laws of a state. In some states trust companies are not permitted to exercise all the functions of a bank; in other states banks are permitted to perform the functions of a trust company in addition to general banking. Trust companies act as trustees, guardians, administrators and executors of estates, conservators, agents, etc. In short, they can act in all matters of trust as if they were human individuals. A trust company can be appointed guardian by a court for orphan children. It can manage the estate of a dead person. It can be appointed to take care of an insane person or to manage the affairs of a spendthrift. Its varied and many functions bring it into close personal relationship with its clients. It also acts as trustee for railroads and other corporations issuing bonds, and does many things which banks cannot do. Many trust companies have savings departments, and, besides, do a large real estate business.
One of the most important services rendered by a bank is the transmission of funds or credit from one part of the country to another. For instance, a debtor in New York who wants to pay his creditor in Chicago, pays the money to a New York bank which, for a small charge, gives him a draft on a Chicago bank. This he sends to his Chicago creditor, who presents it to the bank in Chicago and receives the money. No money is sent by the banks in New York to Chicago, because Chicago banks send drafts to New York, and an account of how they stand toward each other is all that is necessary, and in this way the sending of money from one place to another is avoided. In the same way, one bank in a large city is constantly paying out money in exchange for checks and drafts which strictly should be paid by another bank. But instead of the first bank making the second bank at once pay back the same amount, all the banks of the city meet together once or twice a day, each showing how much it has paid out for the others, and how much they have paid for it, and the difference only is paid in cash. This is called a clearing-house. The first clearing-house originated in London. Many cities in the United States now have them.
Following are the number of banks, with their capital, surplus, deposits, etc. in the United States, as shown in the report of the comptroller of the currency for 1911:
National Banks. Number, 7,301, capital stock paid in, $1,025,441,384; surplus, $670,041,576; United States bonds to secure circulation, $707,204,380; national bank notes outstanding, $696,982,033; deposits, $5,489,995,011.
State Banks. Number, 17,115, divided into following: commercial banks, 12,864; capital, $452,944,684; surplus, $170,566,937; deposits, $2,777,566,835; loan !and trust companies, 1,251; capital, $385,782,993; surplus, $400,406,067; deposits, $3,295,855,895; mutual and stock savings banks, capital, $72,177,899; surplus, $261,834,082; deposits, $4,212,583,598; savings depositors, 9,794,647, having an average deposit of $430.09.
There are also 1,116 private banks, having a capital of $21,872,416, surplus $7,329,974 and deposits, $142,277,224.
- Malcolm McDowell