The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
STATE BANKS AND TRUST COMPANIES SINCE THE PASSAGE
By Dr. George E. Barnett, of Johns Hopkins University. (366 pages.) Senate
Document 659. Price, 45 cents.
OF THE NATIONAL-BANK ACT.
Doctor Barnett has made a critical study of the development of state banks
and trust companies since the civil war, pointing out the direction of the growth
and analyzing the conditions and forces, which have determined it. In Part I,
the author has summarized state bank and trust company legislation under the
head of capital, liability of stockholders, restrictions on discounts and loans,
reserves, branch banks, and supervision. State banks, which did not begin to
recover until after 1870 from .the prohibitive tax imposed upon their circulation
by the law of March 3, 1865, have at the present time essentially the same powers
except in the matter of note issue as they exercised before the civil war. Trust
company legislation shows two main tendencies, the elimination of the insurance
powers, which the institution at first enjoyed, and the development of banking
privileges. Doctor Barnett finds, moreover, a recent strong tendency to make
the provisions of the banking law apply not to banks or trust companies as
such, but to certain classes of business, whether carried on by banks or by trust
companies.
In Part II, devoted to a study of the growth of state banks and trust companies, the author discusses the relative advantages enjoyed by these institutions as compared with those enjoyed by national banks, seeking in this manner
to explain particularly the very rapid growth of the state banks in the South
and West. Detailed statistics will be found in the appendix.
THE
INDEPENDENT TREASURY SYSTEM OF THE
UNITED
STATES AND ITS RELATIONS TO THE BANKS OF THE
COUNTRY.
Illinois.
cents.
By Dr. David Kinley, of the University of
(370 pages.) Senate Document 587. Price, 45
In this volume, which is a revision and continuation of his earlier work,
Doctor Kinley follows the policy of the Treasury with regard to the keeping
of the public funds throughout its history—its employment at the outset of the
First and Second Banks of the United States and of the state banks as depositories, its absolute divorce from the banks from 1847 to 1864, and its gradual
return to their use since the establishment of the national banking system. A
study of the actual working of the Independent Treasury system and of the
policies which Secretaries of the Treasury have followed in their attempts to
relieve the money market leads Doctor Kinley to the conclusion that the harm
done by the system is greater than the good. He believes that the advantages
of occasional assistance in time of crisis are more than offset by the continued
disturbance to the money market resulting from the action of the Independent
Treasury in periodically withdrawing and then disbursing a large part of the
country's circulating medium.
PUBLICATIONS OF
NATIONAL MONETARY COMMISSION
VOL. VII
STATE BANKS
TRUST COMPANIES
AND
INDEPENDENT TREASURY SYSTEM
INCLUDING
State Banks and Trust Companies since the Passage of
the National-Bank Act
By GEORGE E. BARNETT
The Independent Treasury System of the United States
and its Relations to the Banks of the Country
By DAVID KINLEY
WASHINGTON
1911
61ST CONGRESS!
3d Session
SENATE
]
("DOCUMENT
\
No. 659
NATIONAL M O N E T A R Y COMMISSION
STATE BANKS
AND TRUST COMPANIES
Since the Passage of the
National-Bank Act
By
G E O R G E E. B A R N E T T , Ph. D .
n>
Associate Professor of Political Economy
in Johns Hopkins University
LIBRARY
Washington : Government Printing Office : 1911
NATIONAL MONETARY COMMISSION.
NELSON W. ALDRICH, Rhode Island, Chairman.
EDWARD B. VRBELAND, New York, Vice-Chairman.
J U L I U S C. BURROWS, Michigan.
E U G E N E H A L E , Maine.
PHILANDER C. K N O X , Pennsylvania.
THEODORE E . BURTON, Ohio.
H E N R Y M. T E L L E R , Colorado.
HERNANDO D. MONEY, Mississippi.
JOSEPH W . BAILEY, Texas.
A. PIATT ANDREW,
JOHN W . W E E K S , Massachusetts.
R O B E R T W . BONYNGE, Colorado.
SYLVESTER C. SMITH, California.
LEMUEL P . PADGETT, Tennessee.
GEORGE F . BURGESS, Texas.
A R S 6 N E P . P U J O , Louisiana. •»
ARTHUR B . SHELTON, Secretary.
Special Assistant to Commission.
TABLE OF CONTENTS.
Page.
5
PREFACE
PART I . — S T A T E - B A N K AND TRUST-COMPANY LEGISLATION.
INTRODUCTION
9
CHAPTER I. Incorporation
II.
III.
IV.
V.
VI.
VII.
VIII.
23
Capital
Liability of stockholders
Restrictions on discounts and loans
Reserves
Branch banks
Supervision
;
Failures
35
74
86
no
135
144
182
PART I I . — T H E GROWTH OP STATE BANKS AND T R U S T COMPANIES.
CHAPTER I. The increase in the number of state banks and trust
companies
II. Causes of the growth of state banks and trust companies
199
205
APPENDIXES.
A. Statistical tables
B. The insurance of bank deposits in the West.
243
By Thornton
Cooke
261
Index
,. .
3
353
PREFACE.
In the preparation of Part I of the following work—
State-Bank and Trust-Company Legislation—I have been
much aided by the admirable Digest of the State Banking
Statutes made by Mr. Samuel A. Welldon for the National
Monetary Commission. The legislation is covered in Mr.
Welldon's digest through 1909; and in a few states, where
the published laws were accessible early in 1910, I have
taken account also of the laws enacted at the legislative
sessions of 1910.
The bank deposit guaranty laws recently enacted in certain States have not been included in the discussion, since
these laws and their effect have been fully dealt with by
Mr. Thornton Cooke in an essay, originally published in
the Quarterly Journal of Economics, which is reprinted
in connection herewith (Appendix B).
GEORGE E. BARNETT.
5
Part I
State Bank and T r u s t Company
Legislation
7
STATE BANK AND TRUST
LEGISLATION.
COMPANY
INTRODUCTION.
The banking institutions of the United States other than
national banks are ordinarily classified into (a) state banks,
(b) trust companies, (c) stock savings banks, id) mutual
savings banks, and (e) private banks. The following pages
deal with two of these classes, viz, state banks and trust
companies. It will be desirable at the outset to distinguish them from the other classes, and to outline the
history of legislation concerning them since 1865.
STATE BANKS.
The term "state bank" has been used in the United
States in several different senses; but whatever the variance in meaning, such banks have always had one common
characteristic—incorporation under state authority. "A
state bank," says Morse, "is one organized under a state
law or charter granted by the legislature of a State and
derives its power from state sovereignty." 0 In the bank
reports of some of the States, private banks are not distinguished from state banks. This is due to the fact that
in these States incorporated and unincorporated banks are
subject to the same regulation. A private bank, however,
0
Morse on Banks and Banking, 3d ed., sec. 16.
9
National
Monetary
Commission
is an unincorporated bank. The definition given in the
Utah statutes correctly represents present usage:
Private bankers are those who, without being incorporated, carry on the
business of banking.
Not all banking institutions incorporated by the States
are state banks. Mutual savings banks, stock savings
banks, and trust companies are also corporations organized
under state laws or charters granted by state legislatures.
The distinction between mutual savings banks and state
banks is clear. Mutual savings banks do not have a capital stock and do not carry on a discount and deposit business—i. e., they do not discount commercial paper, and do
not receive demand deposits payable on check. State
banks, on the other hand, have a capital stock and carry
on a discount and deposit business. Many state banks,
however, receive also savings deposits. The line of demarcation between state banks and stock savings banks
is much less definitely marked. Both state banks and
stock savings banks have a capital stock. Stock savings
banks are primarily savings banks, and many of them do
not do a discount, and deposit business, but confine themselves to the savings bank business. But in several States
the distinction between state banks and stock savings
banks is of the most unsubstantial character, since thestock
savings banks carry on the business of a commercial bank,
receiving demand deposits payable on check, and discounting commercial paper. Finally, the distinction between
state banks and trust companies is not exactly the same in
any two of the States. It can therefore be stated more
clearly later, after some consideration of the development
of the banking powers of the trust company.
State
Banks
and
Trust
Compantes
" State banks," then, as the term is used in the following
pages, are banks of discount and deposit (as distinguished
from savings banks, mutual and stock) incorporated by
one of the States or Territories (in contrast with private
banks, which are unincorporated, and with national banks,
which are organized under the national-bank act).
In i860 there were in the United States 1,562 state
banks. Owing to the repressive influence of the nationalbank act, hastened in its effect by the 10 per cent tax on
state-bank notes, the number of state banks had by 1868
fallen to 247. One result of this decline in the number
and importance of state banks was the cessation of state
banking legislation. The old laws regulating state banks
of issue were swept away by code revisions, or remained
obsolete and unchanged on the statute books.
The number of state banks began to increase about
1870. In a few States old banking laws intended for the
regulation of banks of issue hampered their development,
but in the remaining States they were left for a considerable period almost entirely without regulation. As late
as 1892, in his digest of the state statute law, Mr. Stimson
said:
I t seems unnecessary to incorporate the state banking laws in this edition. Nearly all the States, except the newer States and Territories, have
special chapters in their corporation acts concerning banks and moneyed
institutions, but these chapters are usually of old date, and have practically
been superseded for so long a time by the national banking laws t h a t they
have become obsolete in use and form.a
The increasing attention paid in recent years by the
state legislatures to the regulation of the state banks has
been partly due to the rapid growth of the banks in numa
American Statute Law, Vol. II, sec. 9500, p. 572.
11
National
Monetary
Commission
bers and in financial importance; but it is to be accounted
for primarily by a change of view as to the purpose of
banking regulation. The antebellum state-bank regulations were intended to secure the safety of the bank note.
Although the depositor was protected by many of the
regulations, this protection was purely incidental. The
view that note-issuing banks alone required governmental
regulation persisted for a considerable time after the passage of the national-bank act. Since the national banks
had a monopoly of the issue of bank notes, the regulation
of state banks was considered needless. As the importance of note issue as a banking function decreased, banking regulation, as seen in the national-bank act, began to
be considered desirable as a protection to depositors.
TRUST COMPANIES.
The powers of the state bank were already well defined
before the increase in state banking legislation noted
above, and that legislation has not had as one of its important purposes the marking out of the functions of the state
bank. With the exception of the power to issue notes,
which would be unavailable because of the tax on note
issue, the powers of the state banks of to-day are essentially the same as the powers of the state banks which
were in operation before the civil war. On the other hand,
the trust company is a new type of banking institution,
the functions of which are even yet not clearly defined.0 A
a
Excellent detailed accounts of the history of the early trust-company
movement may be found in " T r u s t Companies in the United States," by
George Cator, and in " T r u s t Companies," by Clay Herrick. The present
writer wishes to express his indebtedness to both of these works.
12
State
Banks
and
Trust
Companies
great part of the legislation with reference to trust companies, therefore, has had to do with defining the powers
of these corporations.
The early laws for the incorporation of trust companies
show the widest differences of opinion with regard to their
field of operation. The one point of agreement appears
to have been the idea that a corporation could administer
trusts more advantageously and safely than an individual.
But the companies in all the States were given additional
powers more or less closely connected with their trust
powers. Some of the companies, chiefly the very early
ones, were empowered to insure lives and to grant annuities. In a considerable number of states the companies
were authorized to insure the fidelity of persons in positions of trust and in some States to insure titles to land. a
Almost all the companies were empowered to do a safedeposit business. Among these powers there was a certain apparent connection. The power to insure the fidelity
of trustees, administrators, and executors seemed a natural
addition to the powers of a company which might act in
such capacities. Similarly, it appeared that the business
of insuring titles to land was one which could be most
economically conducted by a corporation which, in its
capacity of trustee, would be a large owner of real estate.
a
Of such kind were the general laws for the incorporation of trust companies, enacted in Colorado in 1891, in Idaho in 1901, in Kansas in 1901, in
Missouri in 1885, in Montana in 1887, in New Mexico in 1903, in North
Dakota in 1897, in Oklahoma in 1901, in Pennsylvania in 1881 and in 1895,
in Tennessee in 1883, in Texas in 1891, in Utah in 1890, in West Virginia
in 1891, in Wisconsin in 1883. Many of the early charters in Connecticut,
Maryland, and Delaware conferred similar powers.
13
National
Monetary
Commission
One other power was given to practically all the companies—the power to receive deposits of money in trust.
The following quotation from the Report of the Massachusetts Commissioners of Savings Banks for 1871 shows
the use which it was expected would be made of this
power:
The trust company in Worcester and the New England Trust Company
in Boston, both in successful operation, are the first of such corporations
established in this State.
They were incorporated after a very careful in-
vestigation by the legislature, with power to hold money in trust, and so
restricted in making loans and investments as to afford the safety which the
character of their business requires.
A similar institution will soon be
organized in Northampton, and others are contemplated.
They are well
calculated to promote public interests by affording to the owners of capital
not engaged in business many of the advantages secured by our savingsbank system for the savings of labor.
The development of the trust company as reflected in
the legislation with reference to its powers shows two main
tendencies: (1) The companies have to a very large extent
given up the insuring of the fidelity of persons in positions
of trust and the guaranteeing of land titles. (2) They
have largely increased their banking activities.
1. In some States which formerly authorized trust companies to insure the fidelity of persons in positions of trust,
or to guarantee titles to real estate, the more recent laws
do not permit the combination of such business with the
business of a trust company. In Connecticut, for example,
trust companies were forbidden by a law passed in 1907
to engage in any kind of insurance business, except that
companies doing a title-guaranty business might continue.
In West Virginia the trust-company act of 1903 does not
permit trust companies formed under it to do a fidelity
14
State'
Banks
and
Trust
Companies
and guaranty business. The Texas trust-company law
of 1905 similarly withholds from trust companies the
power to do a bonding business. Even in those States,
notably Missouri and Pennsylvania, in which trust companies are permitted to do a fidelity business, only a few
of the companies avail themselves of the power to carry
on such business.
The fidelity insurance business during the past twenty
years has been largely concentrated in the hands of a comparatively small number of companies which have agencies
in all parts of the country and which do not undertake a
trust or banking business. The elimination of fidelity insurance from the functions of the trust company has not
been chiefly or even largely due to adverse legislation, but
to the nature of the fidelity insurance business.a The
most successful conduct of that business appears to require,
like other kinds of insurance, that the risks shall be numerous and widely distributed. These conditions are best
met by companies which carry on business in many different places.
For the most economical conduct of the title insurance
business an expensive plant is necessary. The business
in each city tends therefore to fall into the hands of a
single company, which ordinarily finds it profitable to
devote itself entirely to the one kind of business. At the
present time, only a very small part of the trust companies in the United States insure titles to land.
a
There has, however, been some opposition to the same corporation carrying on both a trust and a fidelity business. In several of his reports, the
Pennsylvania commissioner of banking has recommended the separation
of the fidelity business from the trustee and banking business of the Pennsylvania trust companies.
15
National
Monetary
Commission
2. The second great tendency in the development of
the powers of the trust company—the enlargement of its
banking powers—has also been primarily an economic
development and not one due to legislative design. As
has already been noted, the early trust companies ordinarily had power to receive trust deposits and to loan
money. Some such powers were necessary for the exercise of their trust functions. The opportunity to enlarge
the banking powers of the companies lay in the difficulty
of distinguishing clearly between the powers which it was
intended to confer upon the trust companies and the
banking powers possessed by state and national banks.
In the greater number of the States the wording of the
sections conferring powers to do a trust business was such
that the trust companies were either held by the courts
to be empowered to do a banking business or, if the x
to do such business seemed not to be granted, were able
by some change in the method of doing the kind of banking business in question to bring it within the powers
actually conferred. In Missouri, for instance, since 1885
trust companies have been empowered to " receive money
in trust and to accumulate the same at such rate as may
be obtained or agreed upon or to allow such interest
thereon as may be agreed.'' The supreme court of Missouri in construing the power thereby conferred has held
that a trust company can take only interest-bearing deposits, but that such deposits may be demand deposits
payable on check.*1 The rate of interest may, however,
be nominal.
a
State v. Lincoln Trust Company (144 Mo., 562).
16
State
Banks
and Trust
Companies
In other States the trust companies have attained legal
recognition of their banking powers by slow steps. The
history of the Pennsylvania trust companies affords an
illustration. In the Pennsylvania general corporation
act of 1874 n o provision was made for the formation of
trust companies, but provision was made for the incorporation of title-insurance companies. By an amendment
to the corporation act in 1881 title-insurance companies
with a capital of at least $250,000 were given trust and
fidelity-insurance powers; but it was expressly provided
that such companies were not authorized thereby to do
a banking business. In 1885 the trust companies were
given the power to receive upon deposit for safe-keeping
valuable property of every description, and in 1895 trust
companies were given power to "receive deposits of money
anL idler personal property and to issue their obligations
therefor * * * and to loan money on real and personal securities." In 1900 the United States circuit
court of Pennsylvania decided that Pennsylvania trust
companies might legally receive demand as well as time
deposits.a Pennsylvania trust companies apparently even
now can not discount commercial paper, but they may
loan on it as collateral and may purchase it from the holder.
In his report for 1906 the Pennsylvania commissioner of
banking said:
Since a trust company is not a bank of discount and can not do a banking business, I have to recommend that an act be passed providing that
such a company shall not permit its money to be loaned except on collateral.
The States in whicb he banking powers of the trust
companies have been most narrowly restricted are Iowa,
a Bank of Saginaw v. Title and Trust Company (105 Fed. R., 491).
59045 0 —11
2
17
National
Monetary
Commission
Michigan, Nebraska, and Wisconsin. In Nebraska a
trust company can not do a banking business. In Iowa
trust companies can not do a banking business except
that they may receive time deposits and issue drafts on
their depositories. In Michigan trust companies are expressly forbidden to do * * a general banking business.'' The
Michigan commissioner of banking in his report for 1906
complained, however, that the law was not clear as to
the banking powers of the companies. In Minnesota the
trust companies may receive trust deposits, but may not
"engage in any banking business except such as is expressly authorized for such a corporation." In Wisconsin the extent of the power of trust companies to receive
deposits was much debated until 1909, when the legislature
provided for the incorporation of " trust-company banks,"
which have power to receive time and savings deposits,
but do not have power to receive deposits subject to
check.
The result of the two tendencies described above—the
elimination of the insurance powers of the trust company
and the addition of banking powers—has gradually
standardized the powers of the trust company, until at
the present time the trust company, as it appears in the
corporation laws of most of the States, may be fairly well
defined as a bank which has power to act in the capacity
of trustee, administrator, guardian, or executor.^
In a number of States the legislation concerning trust
companies deals with t h e m explicitly from this Standee There are differences among the state laws with respect to the trust
powers which trust companies may exercise. The present monograph
deals, however, with the trust company only in so far as it has banking
. powers.
18
State
Banks
and
Trust
Companies
point. The Illinois bank act of 1887 provided that any
bank might have power to execute trusts by complying
with the trust-company law. In Alabama and Tennessee
any state bank may be appointed and may act as an
executor, administrator, receiver, or guardian. In Mississippi any bank with a paid-up capital of $100,000 may
do a trust-company business. In Georgia any trust company may acquire banking powers by complying with the
laws regulating banks. In Texas banks may acquire
trust-company powers. The same tendency is shown in
the important banking laws enacted in Ohio in 1905 and
California in 1909^
The gradual change from the view that the trust company is an institution of markedly different character from
the ordinary bank of discount and deposit to the view
that the trust company is merely a bank exercising functions additional to those exercised by the majority of
banks has been the chief influence in determining the
form of the legal regulations imposed upon trust companies. As long as the older view obtained, the regulations concerning trust companies were widely different
from those imposed upon banks; but as the trust company has increased both the scope and amount of its
banking business, the regulation of the banking business
a
One result of this development is great confusion in the use of the
terms "trust company ,, and "bank." In Massachusetts, for instance,
the legislature has not seen fit to incorporate state banks, but does incorporate trust companies. A trust company, however, must be specially
authorized to do a trust-company business, and more than half of the
so-called "trust companies" do only a banking business. In Alabama, on
the other hand, any bank may do a trust business, and all the banks,
whether doing a trust business or not, are classified in the report of the
state treasurer as state banks.
*f
National
Monetary
Commission
of the trust company has tended to become assimilated
to the regulations imposed upon state banks.
In some States the assimilation is complete, but in the
majority of the States there remain considerable differences. In some cases these are mere historical survivals;
but in others they reflect differences still existing, even
where the banking powers of banks and trust companies
are essentially the same, in the character of the banking
business actually done by the state banks and by the
trust companies. There is difficulty, however, in drawing up different regulations properly applicable to each
class, since, even in those States where the banking
business of the trust companies taken as a whole is different from that of the banks, particular banks and particular trust companies do essentially the same kind of
banking business. There has recently been a strong
tendency in the state legislation to make the provisions
of the banking law apply not to banks or trust companies
as such but to certain classes of business, whether carried
on by banks or by trust companies. In his report for
1907 the New York superintendent of banks strongly
advocated this policy. He said:
An injustice would be done were we to deal with all financial institutions in accordance with the names under which they operate rather
than with reference to the character of business in which they are actually
engaged. In short, if the commercial bank or trust company is actually
doing a savings bank business, whatever it may be called, its deposits
of t h a t character should be protected by such safeguards as the legislature
has thought proper to apply to the legitimate savings bank business. I n
the same way, if a trust company is doing a commercial business, all
interests should be protected through those reserves which sound banking
principles require. If a commercial bank is doing a trust business, this
business in turn should be protected by proper safeguards.
20
State
Banks
and
Trust
Compantes
The California bank act of 1909 contains the most
complete application of the policy of disregarding the
old line of distinction between the state bank and the
trust company and basing the regulation of the banking
business on the character of the business. Under this
act banks are divided into commercial banks, savings
banks, and trust companies. Any bank may carry on
any or all of the three classes of business, but each kind
of business must be kept separate and distinct, and the
regulations apply specifically to each department. The
regulations, for instance, concerning the reserve to be
held against demand deposits are the same whether the
deposits are in a bank which has only a commercial department or whether they are in a bank which combines
all three departments.
The laws enacted in several States with reference to
the treatment of savings deposits also illustrate the same
tendency. In practically all the States and Territories,
some at least of the state banks and trust companies
receive such deposits.a Until recently savings depositors
in these institutions were on the same footing as other
depositors.6 If the bank failed, they shared in the assets
with other depositors. In 1891 the New Hampshire
legislature enacted a law which applied to savings deposits in trust companies the principles which had been
a
S e e below, p. 228.
&In fact, the savings depositor was in one way at a disadvantage, for
a bank in danger of insolvency might refuse to allow the withdrawal of
its savings deposits except after sixty or ninety days' notice. In the meantime, the other depositors might withdraw their deposits or a considerable
part of them, leaving the savings depositors to bear the burden of the failure. See Proceedings of the Eighth Annual Convention of the National
Association of Supervisors of State Banks, p. 55.
21
National
Monetary
Commission
worked out through the experience of many years for
mutual savings banks. The savings deposits were to
be segregated and held in a separate department and were
to be invested only in the securities in which it was permissible for mutual savings banks to invest their funds.
In the event of the insolvency of the bank, the assets of
the savings department were to be used in paying the
savings depositors. In 1899 the Michigan bank act,
which already provided for the investment of savings
deposits in specified securities, was amended so as to
provide that ''all the investments relating to the savings
department shall be kept entirely separate and apart
from the other investments of the bank." The supreme
court of Michigan in interpreting this provision said:
So long as it is entirely possible to trace the fund which was invested
in these securities as a fund derived from the savings department, we think
there is no difficulty in saying that it should be impressed with a trust in
favor of the savings depositors.^
In order to make certain that such funds should be traceable, the legislature of Michigan provided, in 1909,
for the imposition of a fine on any bank combining commercial and savings banking which did not keep separate
accounts and investments. Legislation similar to that
in New Hampshire and Michigan was enacted in Connecticut in 1907, in Massachusetts and Rhode Island in 1908,
and in California and Texas in 1909.
a
Peters v. Union Trust Co. (131 Mich., 322^
22
CHAPTER
I.
INCORPORATION.
The power to charter banking as well as other corporations is inherent in the state legislatures and is limited
only by constitutional provisions. The constitutions of
several States, at one time or another, have prohibited the
granting of charters for banking purposes, but in the period
since 1865 in only one State has the legislature been so
restrained from chartering banks that do not have the
privilege of note issue.® The Texas constitution of 1876
provided:
No corporate body shall hereafter be created, renewed, or extended
with banking or discounting privileges. &
The legislature of Texas in 1903, however, provided for
the submission to popular vote of an amendment to the
a
I t has sometimes been stated that the constitution of Oregon prohibits
the incorporation of banks, and Article XI, section i, of its constitution
seems capable of this construction, but the supreme court of Oregon, in
the case of State ex rel. v. Hibernian Savings Bank (8 Or., 396), after an
examination of the Journal of the Constitutional Convention, held t h a t
only the chartering of banks of issue was prohibited. There are provisions
prohibiting the legislature from incorporating banks of issue in several
other state constitutions now in force.
& Constitution of Texas, Article XVI, section 16. The policy of Texas,
from the beginning of its history as a State, has been almost constantly
opposed to the chartering of banking corporations. The constitutions of
1845, 1861, and 1866 contain the clause cited above. The constitution
of 1868 did not prohibit the granting of bank charters, and a few banks
were incorporated from 1868 to 1876.
23
National
Monetary
Commission
constitution authorizing the incorporation of banks. a
This amendment was adopted in November, 1904, and in
1905 a general banking law was enacted under which
banks might be incorporated. At the present time, therefore, the legislatures in all the States may charter corporations with banking powers.
There are, however, in several of the state constitutions provisions which limit the power of the legislature
to incorporate banks. From 1846 to 1859 the principle
of the referendum was applied to banking charters in
nearly all the States of the Middle West. Wisconsin,
Illinois, Michigan, Ohio, Iowa, and Kansas in quick
succession inserted in their constitutions provisions requiring banking laws to be submitted to popular vote for
ratification.6 In 1875 the same provision was adopted in
Missouri.0 In Kansas, Iowa, and Ohio the courts have held
that these provisions apply only to banks of issue and that
legislative acts incorporating banks of discount and deposit need not be submitted to vote. d In Missouri the
words of the provision explicitly restrict its application
to banks of issue. Only in three States—Michigan, Illia
T h e text of the amendment in so far as it relates to the power of the
legislature to incorporate banks is as follows: " T h e legislature shall by
general laws authorize the incorporation of corporate bodies with banking
and discounting privileges."
&Iowa (1857), Art. V I I I , sec. 5; Wis. (1848), Art. X I , sees, 4, 5; Mich.
(1850), Art. XV, sec. 2, amended in 1861 (Laws of 1861, p. 589); 111. (1848),
Art. X, sec. 5; Ohio (1851), Art. X I I I , sec. 7; Kansas (1857), Art. X I I ,
sec. 5, and (1859), Art. X I I I , sec. 8.
c Constitution of Missouri (1875), Art. X I I , sec. 26.
d Decisions holding referendum provisions applicable only to banks of
issue: Kansas, Pape v. Capitol Bank (20 Kans., 440); Iowa, State ex rel. v.
Union Stock Yards State Bank (70 N. W., 752); Ohio, Dearborn v. Northwestern Savings Bank (42 O. S., 617).
24
State
Banks
and Trust
Companies
nois, and Wisconsin—have these provisions affected the .
power of the legislature to charter banks without the
privilege of note issue. Only the general banking law
was subject to popular sanction in Michigan,a but in Wisconsin b and Illinois 0 every amendment of the banking
law was to be so ratified. These provisions were intended
to provide against conditions which no longer exist, and,
whatever their value may have been as a protection
against the evil of an overissue of bank notes, their only
effect since 1865 has been to render the adaptation of the
banking laws to the changed needs of the present day
slow and difficult. In 1902 a constitutional amendment
giving the legislature full power to enact banking laws
was adopted in Wisconsin, and in 1908 the referendum
requirement was omitted from the constitution adopted
in that year in Michigan. In Illinois all laws relating to
banking corporations must still be submitted to popular
vote.
A second restriction on the power of the legislatures to
create and regulate banking corporations is the provision
found in several state constitutions requiring a two-thirds
vote of the legislature for the enactment of banking laws.
a The provision in the Michigan constitution of 1850 required not only
t h a t every "banking law or law for banking purposes," but also that
amendments to such laws, should be submitted. By a constitutional amendment adopted in 1862 the provision was altered so that only the "general
banking l a w " need be approved by popular vote.
&Rusk v. Van Nostrand (21 Wis., 159), Van Steenwyck v. Sackett (17
Wis., 645); In re Koetting (90 Wis., 166, 169).
c
I t was held in People v. Iyoewenthal (93 111., 191) t h a t the referendum
clause in the constitution of 1848 applied only to banks of issue. The
constitution adopted in 1870 explicitly extended the principle to all incorporated banks. (Reed v. People, 125 111., 592.)
25
National
Monetary
Commission
This provision is contained in the constitution of Minnesota, adopted in 1857; it was substituted for the referendum requirement in Wisconsin in 1902, and it was inserted
in the constitution of Michigan adopted in 1908.
The third and most important restriction relates to the
method of incorporation. The legislatures, in the absence of constitutional provisions, may incorporate banks
either by special acts or under a general law. Throughout
the period since 1865, there has been a gradual increase in
the use of general laws at the expense of special charters.
It is needless to say that this movement has not been
confined to banking corporations. In fact, banking has
been somewhat later than other business pursuits to receive freedom of incorporation. Charters of every kind
were at first granted in all of the thirteen original States
only by special acts. Early in the nineteenth century
the substitution of general laws for special charters in
some kinds of business became common in the New
England and Eastern States ;a but the enactment of
general laws for the incorporation of banks was delayed.6
In his report for 1849, Hon. Millard Fillmore, comptroller
of the State of New York, thus described the circumstances
which led to the passage of the general law for the incorporation of banks in that State:
The practice of granting exclusive privileges to particular individuals
invited competition for these legislative favors.
They were soon regarded
as a part of the spoils belonging to the victorious party and were dealt
a
"Political
Essays," by Simeon E. Baldwin, p. 119.
&For general treatment of the antebellum movement toward general
incorporation laws for banks, see "Philosophy of the History of Bank
Currency in the United States," by Theodore Gilman, Bankers' Magazine,
vol. 50, p. 347.
26
State
Banks
and Trust
Companies
out as rewards for partisan services. This practice became so shameless
and corrupt t h a t it could be endured no longer; and in 1838 the legislature
sought a remedy in the general banking law.
According to the provisions of the constitution of
New York adopted in 1846, charters were to be granted
under general laws, "except where in the judgment of
the legislature the objects of the corporation can not
be attained under general laws;" a but the desirability of
incorporating banks by special charters was not left to
the discretion of the legislature; they were in all cases
to be formed under general laws.&
The States of the Middle West for the most part
followed the lead of New York, c and adopted the policy
of "freedom of incorporation." d In several of them, the
constitution permitted also the establishment of a state
bank with branches. With the extinguishment of the
state bank currency, however, incorporation under the
general law in all these states, except Illinois, became
a Constitution of New York (1846), Art. V I I I , sec. 1.
6 Constitution of New York (1846), Art. V I I I , sec. 4. See, however,
below, p. 30.
c I t was the introduction of the bond deposit as a means of securing the
safety of bank notes which made practicable the incorporation of banks of
issue under a general law. Michigan in 1837 had inaugurated a system
of " f r e e " banks with a circulation based on real estate. See "Banking
in Michigan," by Alpheus Felch. Senate Ex. Doc. 38, pt. 1, 52 Cong.,
2d sess.
^Provisions forbidding incorporation by special act were introduced
into the constitutions of these States as follows: Mich. (1850), Art. XV,
sec. 1; Ind. (1851), Art. XI, sees. 2, 4, 13; Ohio (1851), Art. X I I I , sec. 1;
Wis. (1848), Art. X I , sees. 1, 4, 5; Iowa (1846), Art. V I I I , sec. 1, and (1857)
Art. V I I I , sec. 1; Mo. (1865), Art. V I I I , sec. 4, and (1875), Art. X I I , sec. 2;
Minn, amdt., (1881), Art. X, sec. 2. I n Wisconsin the legislature was empowered to grant bank charters, but such grants were to be submitted to
popular vote. This provision made the use of the special act as a method
of incorporation impracticable.
27
National
Monetary
Commission
the sole method of incorporating banks. In Illinois special charters for banking corporations were granted until
1870. The constitution adopted in that year, however,
required that all corporations should be formed under
general laws.® The policy of requiring that corporations
be chartered only under general laws became the rule
also in the newer States of the West, and as each new
State was added to the Union it placed in its constitution
provisions prohibiting the formation by special act either
of all corporations or of certain classes of corporations. 6
In all of these States banks are now incorporated only
under general laws.
In the other sections of the United States, a very different
state of affairs has prevailed. Almost all of the New
England, Eastern, and Southern States, 0 at one time or
another since the civil war, have incorporated banking
corporations by special acts. Free banking on the basis
« Constitution of Illinois (1870), Art. X I , sec. 1; vide P. & Chicago Gas
Trust Co. (130 111., 268).
b Cal. (1849), Art. IV, sec. 31, and (1879), Art. X I I , sees. 1 and 5; Kans.
(1855), Art. X I I I , sec. 1; Oreg. (1857), Art. X I , sec. 2; Nev. (1864), Art.
V I I I , sec. 1; Nebr. (1866), Corp's, sec. 1 and (1875), Art. X I , sec. 1; Colo.
(1876), Art. XV, sees. 2, 3; N. Dak. (1889), sec. 131; S. Dak. (1889), sec.
191; Mont. (1889), Art. XV, sees. 2, 3; Wyo. (1889), Art. I l l , sec. 27;
Wash. (1889), Art. X I I , sec. 1; Idaho (1889), Art. X I , sec. 2; Utah (1895),
Art. X I I , sec. 1; Okla. (1907), Art. IX, sec. 38. By act of Congress of
March 2, 1867 (ch. 150, 14 Stat. L., 426), the legislative assemblies of the
Territories were forbidden to grant private charters, but were permitted
to incorporate associations by general acts for carrying on certain kinds
of business. By act of March 3, 1885 (ch. 330, 23 Stat. L., 348), banks of
deposit and discount (but not of issue) were included in the list of businesses for carrying on which associations might be formed.
c The nomenclature of the groups of States followed in this essay is that
used by the Comptroller of the Currency in his report for 1909; the States
included in each group may be seen by a reference to the tables in
Appendix A.
28
State
Banks
and
Trust
Comp antes
of a bond deposit had been adopted in the antebellum
period in several of these States, but only in New York
as an exclusive system. By the side of the specially
chartered banks, however, the free banks played in most
of these States but an insignificant role; and when, by the
imposition of the 10 per cent tax on notes, no opportunity was left for the issue of notes, these States
returned for the most part to the exclusive use of special
charters for the incorporation of banks.
In the New England States the policy of incorporating
banks by special act held its ground until very recently. a
In 1904 Massachusetts enacted a general law for the
incorporation of trust companies with banking powers; 6
in 1907 Maine made similar provisions/ and in 1908
Rhode Island provided for the incorporation of banks and
trust companies by a "board of bank incorporation." d
There is a movement in the same direction in the other
States in this group. In 1909 it was proposed to enact
a general incorporation law for banks in Connecticut, but
the bill failed to pass/ In 1906 Governor Proctor in his
message to the Vermont legislature recommended the
enactment of a general law for the incorporation of trust
companies.
« Until 1906 Vermont permitted the organization of state banks under
a general law which was designed for the incorporation of banks of issue,
and in Massachusetts the old free banking law has been retained on the
statute books; but in both cases the conditions imposed have been too
onerous for banks simply of discount and deposit.
& Mass. (1904), chap. 274.
c Me. (1907), chap. 96.
# R. I. (1908), chap. 1590.
« Proceedings of the Eighth Annual Convention of the National Association of Supervisors of State Banks (1909), p. 65.
29
National
Monetary
Commission
In New York, New Jersey, and Pennsylvania the old
free banking laws were retained on the statute books. In
New York the antebellum law was modified to suit the
new conditions, and special acts were not granted for
state banks. Trust companies, however, were incorporated under special acts until 1887, when a general law
was enacted. In Pennsylvania and New Jersey resort
was had for a time to special acts for the incorporation
of both banks and trust companies. Incorporation by
special acts was forbidden by the Pennsylvania constitution of 1873,0 and by the amendments to the New Jersey
constitution adopted in 1875.6 Maryland has had since
1870 a general law for the incorporation of state banks;
but this law has been little used, and practically all banks
and trust companies in that State have been organized
under special acts. c In 1910, however, the general
assembly passed a general law for the incorporation of
both banks and trust companies. Delaware alone of the
Eastern States retains the special act as the sole method
of incorporating banks, and the constitution of 1897
expressly excepts banks from the corporations which
must be formed under general laws.d
The same tendency, but slower in operation, may be
observed in the Southern States. Until very recently the
commercial and manufacturing industries of the South
a Art. Ill, sec. 7.
& Art. IV, sec. 7, Clause 11.
cThe Maryland constitution of 1867 (Art. Ill, sec. 48) permits the legislature to use its discretion as to the method of incorporating banks. In
1876 (L., p. 292) provision was made for incorporating trust companies under a general law, but this act was repealed in 1892 (L,., ch. 272.).
d Constitution of Delaware (1897), Art. IX, sec. 1.
3»
State
Banks
and Trust
Companies
have not been important, and in consequence freedom of
incorporation has advanced more slowly. Even ordinary
business corporations in many of the Southern States
were chartered only by special act nearly as late as the
civil war, and in only a few of the States were there general
banking laws. Until the period of reconstruction special
charters had not been forbidden in any of the Southern
state constitutions except that of Louisiana.** The
framers of the reconstruction constitutions were familiar
with the provisions—then in force in the Middle West—
requiring corporations to be formed under general laws,
and they attempted to introduce that policy. In some
cases the provisions inserted with this aim were either so
limited in application as to leave the hands of the legislature practically free, or they excepted banking corporations. In other cases such provisions were omitted in the
constitutions adopted somewhat later, but in Tennessee,6
Arkansas, 0 and West Virginiad they were effective. More
recently Texas, Louisiana, Mississippi, Kentucky, Virginia,
Florida, and Alabama have, by constitutional provisions,
adopted the general law as the exclusive method of incorporation/ Amendments to the constitution of Georgia,
adopted in 1891, and to the constitution of South Carolina,
a The Louisiana constitution of 1845 (Title VI, art. 123) prohibited incorporation under special act, but this provision was not inserted in the
constitution of 1852.
&Tenn. (1870), Art. XI, sec. 8.
cArk. (1868), Art. V, sec. 48.
d W. Va. (1861-1863), Art. XI, sec. 5, and (1872), Art. XI, sec. 1.
«Tex. (1876), Art. XII, sec. 1; (1904) amdt. to art. 16, sec. 16; La. (1879),
art. 46, also (1898) art. 48; Miss. (1890), sec. 178; Ky. (1891), sec. 59, subd.
17; Va. (1902), Art. XII, sec. 154; Fla. (amdt., 1900), Art. Ill, sec. 25; Ala.
(1901), Art. XII, sec. 229.
*
National
Monetary
Commission
adopted in 1905, forbade the incorporation of banks by
special act.®
While these changes did not affect to any considerable degree the method of incorporating ordinary business corporations in any of these States, since general laws for the incorporation of manufacturing and mercantile businesses
were already in existence, they did, in several of the States,
mark a change in the method of granting banking charters,
although independently of constitutional changes there
had been an increasing use of the general law as a method
of incorporation. 6 In North Carolina alone of the Southern States is the legislature at present free to charter banks
by special act, and in 1903 a general law for the incorporation of state banks was enacted in that State. In 1907
this general law was amended so as to provide for the incorporation of trust companies.
The net result of this development has been an almost
complete change, in the method of incorporating banking
institutions in the Southern and Eastern States. As late
as 1870, the special charter was, except in two or three
States, the only method of incorporating a bank. At
present only one State—Delaware—does not permit the
formation of banks or trust companies under general laws,
and in only two others—Maryland and North Carolina—
is the special act used with more or less frequency.
One result of the increasing regulation of state banking
institutions noted in the preceding chapter has been a
<*S. C. (1895), Art. IX, sees. 2, 9.
& General laws for chartering banking corporations were enacted in Virginia in 1870, Alabama in 1881 (L-, 1881, ch. 102), South Carolina in 1885
(L., 1885, XIX, 212), Florida in 1889 (L-, 1889, ch. 3864).
32
State
Banks
and Trust
Companies
marked change in the character of the general laws under
which banking institutions are incorporated. In nearly
all the States, prior to the civil war, there were "business
incorporation laws," under which associations for carrying on any manufacturing, mercantile, or mining business
might be formed. Banks were not allowed in any of the
States to incorporate under these laws, but were required
to organize either under special acts or under a general
banking law which differed materially in many particulars
from the general law under which ordinary business enterprises were incorporated.
In some of the "free banking" States the old general
banking laws were retained after the retirement of the
state bank note issue; but in others they were repealed,
and banks were allowed to incorporate under the " business
incorporation law." The new States of the West also,
without any traditions of note issue, allowed banking
corporations to be formed under the same incorporation
laws as mining, manufacturing, and mercantile corporations. Prior to 1887 only a few of the States which incorporated banks and trust companies under general laws
provided separate incorporation laws for them; but since
then, in nearly all the States, general bank and trust company laws for the incorporation of banks and trust companies, distinct from the "business incorporation laws,"
have been enacted. a With the increasing regulation of
a
In some States the general trust-company law preceded the general
banking law. This was due to the fact that in many States doubt existed
as to whether a corporation unless specially empowered could act as an
administrator or executor
Many of the early general trust-company
laws were, therefore, confined to authorizing the incorporation of companies with such powers.
590450—11
3
33
National
Monetary
Commission
banking institutions, the general banking law tends to be
differentiated more and more from the " business incorporation law."
Since 1865 state banks and trust companies have been
incorporated by the use of one of three methods: (1) By
special charter; (2) under the "business incorporation
law;" (3) under the general banking law. Not very many
of the States have used consecutively all three methods,
for the special charter and the "business incorporation
law" were used contemporaneously in different sections
of the country. Both have given place, in the great mass
of States, to the general banking law. From 1865 to
1875 probably the greater number of the banks formed
were incorporated under special acts; from 1875 to 1887
incorporation under the "business incorporation law"
was the prevailing method, and since then the general
banking law has become the almost universal method of
incorporating banks and trust companies.
34
CHAPTER
II.
CAPITAL.
The amount of the capital stock of banks formed under
the "business incorporation laws," designed as these laws
are to accommodate many kinds of business enterprises, is
left almost entirely to the discretion of the incorporators. a
When the States began to give attention to the regulation
of the banking business the question of capital received
immediate attention. The national-bank act and the
banking laws in New York and the Middle West which
had survived from the antebellum period contained provisions concerning the amount and payment of capital.
A requirement with regard to capital was recognized as the
central point in any system of bank regulation. The
capital stock is a buffer interposed between the bank's
creditors and losses which the bank may suffer. If there
is no capital, losses may fall directly on the creditor, and
the larger the capital stock, other things being equal, the
less the likelihood of loss to the depositor.
I. STATE BANKS.
AMOUNT OF REQUIRED CAPITAL.
At the present time only four of the States and Territories which permit the incorporation of state banks under
general laws—Arizona, Arkansas, South Carolina, and
a
The greater number of the "business incorporation laws" require
neither a specified minimum nor a specified maximum capital. In some,
however, a small minimum, rarely exceeding $1,000, is required.
35
National
Monetary
Commission
Tennessee—have no requirements as to the minimum capital of banks. a In these States banks are organized under
the " business incorporation law," and, so far as the requirement of a capital is concerned, are on the same footing
as other corporations. The decision as to the amount of
capital needed rests entirely with the persons seeking
incorporation.
The requirements as to capital in the other States and
Territories which incorporate state banks under general
laws may be grouped into three classes: (i) In the first
the minimum capital required is the same for all banks,
irrespective of location or amount of business. Such are
the requirements in Georgia, Indiana, Montana, New Jersey, New Mexico, Ohio, Virginia, and West Virginia.
(2) In the second class the amount of capital required is
graded entirely according to the population of the town
or city in which the bank is located. The requirements
are of this kind in Alabama, Colorado, Florida, Idaho,
Iowa, Illinois, Kentucky, Louisiana, Maryland, Michigan,
Minnesota, New York, North Dakota, North Carolina, Oregon, Pennsylvania, Utah, Washington, Wisconsin, and
Wyoming.6 (3) In the third class the amount of capital
required is determined in part by the amount of business
done by the bank. In all the States which have a require<*> In those States which incorporate banks by special act, the amount of
capital is fixed for each bank by the legislature. In Rhode Island the
amount of capital is determined by the board of bank incorporation. In
none of the New England States is a minimum capital required for banks
under a general law, except in Massachusetts. The Massachusetts general
banking law, however,, is obsolete, and its provisions are not considered in
the following discussion.
& In Idaho and Washington the laws require not a minimum capital, but
a minimum amount of property.
36
State
Banks
and
Trust
Gamp
antes
ment as to capital of this kind, there is an additional
requirement similar either to that of the first class or to
that of the second class. Such is the law in California,
Kansas, Nebraska, Nevada, Oklahoma, Rhode Island,
South Dakota, and Texas.
It will be convenient to consider first the differences
among the States and Territories in regard to the smallest
capital with which a bank is allowed to organize, disregarding for the present the additional capital required in
most of the States for banks located in larger towns or for
banks doing a greater amount of business. The smallest
capital with which a bank may be incorporated varies in
the different States from $50,000 to $5,000, but only one
State requires as much as $50,000, and in only one State
can a bank be incorporated with so small a capital as
$5,000. The great mass of the States require from $10,000
to $25,000.
These amounts have been determined in three ways:
(1) In the States which for a time allowed banks to incorporate on the same terms as ordinary business corporations, the legislatures, when they came to provide for a
minimum capital, accepted the existing situation. For
instance, when California, in 1895, required banking corporations to have a minimum capital, the smallest permissible capital was placed at $25,000, because there
were not in the State many banks whose capital was less
than $25,000; and it was thought that no great injury
would be done by requiring such banks to increase their
capital. Similarly, in Oregon, which first differentiated
banking from ordinary business corporations in 1907, the
37
National
Monetary
Commission
banking law fixed $10,000 as the smallest capital for a
state bank, because there were in operation many banks
with no larger capital.® (2) In those States which have
passed from the use of special charters to general laws for
the incorporation of banks, the smallest permissible capital was fixed in the general banking law at an amount
about equal to the capital of the smallest banks formerly
incorporated by special act. (3) The smallest permissible
capital has been set in the third group in an entirely different way. As has been said before, certain States in
which "free banking" laws were in force before the war
retained those laws. These States were Indiana, Ohio,
Minnesota, Michigan, Wisconsin, New. York, and Louisiana. In none of these States could banks be organized
with less than $25,000; in New York and Michigan the
smallest capital was $50,000, and in Louisiana $100,000.
In Minnesota,6 Michigan,c New York, d Wisconsin/ and
Louisiana/ by amendment or by the enactment of new
laws, the amount required has been decreased; but in
Ohio and Indiana it has remained $25,000.
The differences in the smallest permissible capital are
to some extent sectional. In none of the Eastern States
may the capital of banks incorporated under the general
banking laws be less than $25,000, except in Maryland,
where by the act of 1910 banks may be incorporated with
a capital of $10,000. In New Jersey the smallest per0 Oreg. (1907), chap. 138.
*>Minn. (1887), chap. 63.
cMich. (1887), act. 205, sec. 1; (1891) act 10; (1899) act 265.
<*N. Y. (1874), chap. 126; (1882) chap. 409, sec. 29; (1892) chap. 689
e
Wis. (1903), chap. 234; (1908) chap. 109.
/ L a . (1882), chap. 80.
38
State
Banks
and Trust
Companies
missible capital is $50,000. In Ohio, Indiana, Illinois,
and Iowa a it is $25,000, and in Michigan $20,000. In
the other Middle Western States and in all of the Western
States with the exception of Montana and New Mexico,
which require, respectively, $20,000 and $30,000, the
smallest permissible capital is $10,000. All of the Pacific
States, with the exception of California, which requires
$25,000, allow the incorporation of banks with a capital
of $10,000. Of the Southern States, Virginia, Mississippi,
Louisiana, and Texas incorporate banks with $10,000
capital. The smallest permissible capital in Alabama,
Florida, and Kentucky is $15,000. In Georgia and West
Virginia the capital of a bank must be at least $25,000.
In North Carolina banks may be chartered with a capital
of $5,000.
The States and Territories may be divided, then, roughly
into two great groups according to the amount of the
smallest permissible capital for state banks:
1. In the Eastern States and the more easterly of the
Middle Western States, the banking laws, with one exception, require that banks shall have a capital of at least
$25,000.
2. In the other sections of the United States banks in
most of the States are incorporated with a capital as
small as $10,000, although in a few of these States the
<* I n Iowa, since 1874 (15 G. A., chap. 60), savings banks, which exercise
also the functions of commercial banks, may be formed «vith a capital of
$10,000. I n the period immediately after the civil war in both Kansas
and Missouri, general laws for the incorporation of banks to be known
as savings banks, but with all the powers of commercial banks and none
of the restrictions of savings banks, were enacted. These banks were to
have a capital of $50,000, b u t only 10 per cent of capital was required to
be paid in. In Ohio, from 1889 to 1908, "savings b a n k s " might be formed
with a capital of $25,000, of which only one-half had to be paid in.
39
National
Monetary
Commission
smallest permissible capital is $15,000, $20,000, $25,000,
and $30,000, and in one it is $5,000.
In several States which formerly permitted the incorporation of banks with very small capital the required
amount of capital has been increased. When Kansas,
Nebraska, North Dakota, South Dakota, and Oklahoma
first enacted general banking laws they permitted the incorporation of banks with a capital of $5,000. In Wisconsin, by an act passed in 1903, banks with $5,000 capital
were authorized. In all of these States the state-bank
supervisors complained repeatedly that banks with a very
small capital were not satisfactory; a and in all of these
States the smallest permissible capital for banks has been
increased to $10,000. The only State which permits the
incorporation of banks with a smaller capital than $10,000
is North Carolina.
In a few States the bank supervisors have complained
that banks of even larger capital are too small. In Michigan the bank commissioner urged in 1898 that the provision authorizing the formation of banks with a capital
of $15,000 in towns of less than 1,000 population should
be repealed, 6 and since 1899 the smallest permissible
capital for a state bank in Michigan has been $20,000. In
Louisiana also the bank examiner has urged that banks
should not be incorporated with less than $25,000 capital. c
As has already been noted, the amount of capital required, except in a few States, is not a uniform amount,
<* Report of the State Bank Commissioner of Kansas, 1891-92; Ibid,
1893-94; Report of the State Bank Commissioner of North Dakota,
1892; Report of the Public Examiner of South Dakota, 1908; Report of
the Oklahoma Bank Commissioner, 1900, p. 6; • Report of the Commissioner of Banking of Wisconsin, 1903.
& Report of Bank Commissioner of Wisconsin, 1898, p. x.
cReport of Bank Examiner of Louisiana, 1898, p. 5.
40
State
Banks
and Trust
Companies
but is graded, usually according to the size of the city in
which the bank is located. In 29 of the 37 States and
Territories which require under a general law a specified
amount of capital for the incorporation of state banks
the amount of capital is thus graded. The grading of
the amount of capital required according to the population of the place in which a bank is located has been
chiefly due to the desire to bring about some adjustment
between the capital of each bank and the volume of its
business. It is assumed that the larger the business of
the bank the greater the chance of its suffering large
losses and the larger the capital necessary to protect its
depositors against loss. It is also assumed that the size
of the city in which it is located is a rough index of the
volume of business done by a bank. Under many of the
state banking laws the grades are very numerous. In
Nebraska, for instance, if the bank is located in a town or
village of less than 100 inhabitants, the capital must be
not less than $10,000; in a town or village of from 100
to 500 inhabitants, not less than $15,000; in a town or
village of from 500 to 1,000, not less than $20,000; in a
town or village of from 1,000 to 2,000, not less than
$25,000; in a town or village of from 2,000 to 5,000, not
less than $35,000; in a city of from 5,000 to 25,000, not
less than $50,000; in a city of from 25,000 to 100,000,
not less than $100,000; in a city of 100,000 or more, not
less than $200,000. The minute gradation of the capital
requirements found in many of the state banking laws is
due to the desire to encourage the formation of banks in
the smaller cities and towns, for it is to be noted that in
the greater part of the state laws the grades are not
numerous for the larger places. After the requirement
41
National
Monetary
Commission
reaches, in most States, $25,000, and in some $50,000, no
increase is made for larger places. It is only in Idaho,
Illinois, Kentucky, Louisiana, Maryland, Michigan, Nebraska, New York, Oklahoma, Texas, Utah, Washington,
and Wyoming that the required capital is as great as
$100,000. There has been, however, in the last ten
years a tendency to extend the scales upward.
One of the most noteworthy differences between the
national-bank act and nearly all the state banking laws
is the difference in the amount of capital required for
the incorporation of banks in small places. Under the
national-bank act no bank can be incorporated with a
smaller capital than $25,000 and banks in towns with a
population of over 3,000 are required to have a capital
of $50,000. The table on the next page shows the amount
of capital required under the state banking laws in towns
with a population of less than 3,000.
If the States and Territories are classified according
to the relative amount of capital required for state or
national banks in towns of less than 3,000 population,
they fall into the following groups:
1. In New Jersey and New Mexico the amount of capital required for state banks is greater than the amount
required for national banks in all places of less than
3,000 population. In New York the amount required in
the smaller towns is the same for state and national
banks, but in towns of 2,000 to 3,000 population the
capital required is larger for state banks.
2. In seven States—California, Indiana, Iowa, Illinois,
Ohio, Pennsylvania, and West Virginia—the required
capital is the same in all places of less than 3,000 population for state and national banks.
42
State
Banks
and Trust
Companies
Capital required for state and for national banks in towns of less than 3,000
Population.
Smallest
permissible
capital.
National-bank
act
Capital required in towns with a population of—
i
100.
500.
1,000.
1.500.
2,000.
$25,000
15,000
California
Colorado
Florida
Georgia a>.
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
2,500.
$25,000
25,000
10,000
$15,000
15,000
15,000
10,000
20,OOO
25,000
25,000
25,000
10,000
$15,000
$20,000
25,OOO
15,000
10,000
30,OOO
10,000
$20,000
20,000
25,000
10,000
15,000
10,000
20,000
25,OOO
15,000
10,000
20,000
10,000
$15,000
20,000
25,000
35.000
10,000
15,000
20,000
25,000
35.000
50,000
New Mexico
New York
North Carolina...
North Dakota. . .
Ohio
30, 000
Oregon
Pennsylvania....
South D a k o t a . . . . !
Texas
Utah
Virginia
10,000
West Virginia.
Wisconsin
Wyoming
25,000
25,000
50,OOO
5.000
10,000
10,000
20,000
30,OOO
25,000
10,000
2<?.OOO
15,000
25,000
30,OOO
25,000
10,000
25,OOO
15.OOO
10,000
25,000
IO,OOO
IO,OOO
15,000
10,000
2O.O0O
20,OOO
10,000
35,000
10,000
a The minimum capital of a bank in Georgia is nominally $25,000; but no provision
is made for the payment of capital to the amount of more than $15,000. See p. 55.
43
National
Monetary
Commission
3. In Louisiana, Nevada, North Dakota, Nebraska,
and Oregon, the amount of required capital is smaller
for state banks than for national banks in the smaller
towns; but before the population reaches 3,000 the capital required exceeds that required for national banks.
4. In Alabama, Kansas, Michigan, Oklahoma, Minnesota, South Dakota, Texas, and Wyoming the required
capital is smaller for state banks than for national banks
in the smaller places, but rises to the same amount as
that required for national banks before the population
reaches 3,000.
5. Finally, in the remaining States—Colorado, Georgia,
Florida, Idaho, Kentucky, Maryland, Mississippi, Missouri,
Montana, North Carolina, Utah, Virginia, Washington,
and Wisconsin—the amount of capital required is less
under the state banking laws than under the nationalbank act for all places of less than 3,000 in population.
From this survey it appears that in all except 10 of
these 37 States the capital required for state banks in the
smaller towns is less than that required for national
banks, and that in a considerable number of the States
it is less in all towns of less than 3,000 population. In
only a very few States is the capital required for state
banks in towns of less than 3,000 population greater
than the amount required for national banks.
44
Capital required for state and for national banks in towns and cities with a population of 3,000 and less than 25,00c
Capital required in towns and cities with a population of—
3.000.
National-bank act
Alabama
California
Colorado
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maryland
Michigan
3,5oo.
4,000.
5,000.
6,000.
10,000.
15,000.
20,000.
$100,000
$50,000
25,000
25,000
15,000
$25,000
25,000
$30,000
50,000
15,000
25,000
30, 000
50,000
25, 0 0 0
50, 000
100,000
25,000
50, 0 0 0
25, 0 0 0
$50,000
15,000
30, 0 0 0
50,000
$25,000
'
30,000
$100,000
50,000
50,000
Mississippi
15 000
Missouri
T O . nnn
Montana
Nebraska
Nevada
35,000
50,000
35,000
50, 000
50,000
New Mexico
30,000
';
CO
Capital required for state and national banks in towns and cities with a population
of 3,000 and less than
25,000—Continued.
Capital required in towns a n d cities with a population of—
3,000.
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
South Dakota
Texas
Utah
Virginia
Washington
Wisconsin
Wyoming
.
$50,000
10,000
35.000
25,000
25,000
30,000
25,000
25,000
25,000
10,000
10,000
25,000
25,000
20,000
25,000
3.500.
4,000.
5,000.
#40,000
$25,000
50,000
6,ooo.
10,000.
$50,000
15,000.
20,000.
$100,000
* 50,000
50,000
5 0 , 000
$50,000
50,000
$25,000
30,000
25,000
50,000
30,000
50, 0 0 0
50,000
100,000
3
State
Banks
and Trust
Companies
The difference between the amount of capital required
for state banks and that required for national banks in
places having a population of from 3,000 to 25,000 is even
more marked. Under none of the state banking laws is
the capital required in cities of any size in this class
larger than that required under the national-bank act.
Under the state banking laws of Iowa, New York, and
New Jersey, the capital required is as large as under the
national-bank act for cities of smaller population within
the class, but it is less for cities of larger population
within the class. Under the state banking laws of Illinois, Michigan, Oklahoma, Texas, and Wyoming, the
capital required is less than is required under the
national-bank act for the smaller cities within the class,
but is the same for the larger cities. In the remaining
States—over three-fourths of the total number prescribing a required capital—the capital required is less than
under the national-bank act for all cities of from 3,000 to
25,000 population. In several of the States the capital
required is very much less. A state bank, for instance,
may be incorporated in any city in Mississippi with a
capital of $15,000, in any city in Virginia with $10,000,
whereas under the national-bank act banks in cities with
a population of from 3,000 to 6,000 must have a capital
of at least $50,000, and in cities with a population of from
6,000 to 50,000 banks must have a capital of at least
$100,000.
47
National
Monetary
Commission
Capital required for state and for national banks in cities with a population of
25,000 and over.
Capital required in cities with a population of—
25,000.
National-bank act
l
I
30,000.
SO.OOO.
$100,000
IOO OOO.
110,000.
150,000.
$200,000
25,000
California
Colorado
Florida
Georgia
Idaho
25,000
30,000
50,000
IS.000
IOO,OOO
IOO,OOO
Indiana
200,000
25,000
50,000
Kansas
50,000
15,000
IOO,OOO
50,000
Michigan
Minnesota
Mississippi
$200,000
IOO,OOO
$250,000
25,000
15,000
I
IO,OOO
20,000
roo,000
$200,000
50,000
50,000
30, 000
50,000
North Carolina
$100,000
25,000
50,000
Ohio
25,000
r
IOO,OOO
50,000
50, 0 0 0
South Dakota
50,000
IOO,OOO
Utah
50,000
100,000
IO,OOO
IOO,OOO
75.000
West Virginia
25,000
50, 000
48
State
Banks
and
Trust
Compantes
In the table on page 48 are shown the requirements as
to capital of the national-bank act and of the state banking
laws for banks in cities with a population of from 25,000
to 150,000. It will be noted that in the banking laws of
very few States is the amount of capital required larger for
banks in cities of over 25,000 than for banks in cities with
a population of 25,000. Such requirements are made only
in the laws of Illinois, Kentucky, Maryland, Michigan, Missouri, Nebraska, New York, Utah, and Washington. In
only one State is the amount of capital required for any part
of the class of cities having a population of 25,000 or more
greater for state banks than for national banks. Under
the Michigan banking law, banks in cities of 110,000 population are required to have a capital of $250,000, whereas
national banks may be chartered in such cities with a capital of $200,000. The amount of capital required under
the state banking law of Illinois is the same for banks in
all cities in this class as that required by the national-bank
act. Under the state banking laws of Idaho and Louisiana
the amount of capital required is the same as under the
national-bank act for banks in cities with a population of
25,000 to 50,000, but for banks in cities with a population
of more than 50,000 the amount of capital required under
the national-bank act is larger. Under the state banking
law of Maryland the amount of capital required is less than
under the national-bank act for banks in cities with a
population of less than 150,000, but the same for banks in
cities with a population of 150,000. Under the Nebraska
banking law the capital required is the same as under the
national-bank act for banks in cities of from 25,000 to
59045 °—11
4
49
National
Monetary
Commission
50,000 population, less for banks in cities of from 50,000
to IOO,QOO, and the same for banks in cities of over 100,000.
In the remaining States, three-fourths of all, the specified
requirements for banks in all cities of 25,000 population
and over are less under the state banking laws than under
the national-bank act.
The grading of the amount of capital required according
to the population of the place in which the bank is located
is evidently a Very crude way of securing a proportion between capital and volume of business. The elaboration of
the scale is of some service, but there remain differences in
the volume of business transacted in places of the same size
and the more important differences in the amount of competition which different banks must meet. As has already
been noted, in a few of the state systems the requirement as
to capital is graded directly according to some criterion
of the amount of business done by the bank. The earliest
attempt to apply this principle is found in the Iowa
savings bank law of 1874. The capital of banks incorporated under that act was fixed at $10,000, but it was
provided that such banks might receive deposits only to
the amount of ten times their capital. a If a bank secured
deposits to a larger amount, it was required to increase its
paid-up capital. The efficacy of this provision has been
much impaired by two amendments. In 1900 banks were
allowed to count their surplus as part of their capital in
making up the required capital; 5 and in 1902 the requirement was modified so as to demand a capital and surplus
equal only to one-twentieth of the deposits.c
c
a Iowa (1874), chap. 60, sec. 7.
& Iowa (1900), chap. 67.
50
Iowa (1902), chap. 167.
State
Banks
and
Trust
Compantes
A more important experiment in the same direction
was made in Kansas from 1897 to 1901. In 1897 the
legislature of that State, convinced of the desirability of
grading in some way the requirement as to capital, enacted
that the total investments of any bank, exclusive of United
States bonds, should not exceed four times the capital and
surplus actually paid in. a The purpose and operation of
this clause was thus described by the Kansas bank commissioner : b
One provision, which produced the greatest opposition, was the section
which limited the total investments of every bank to four times its capital
and surplus. The theory upon which the adoption of this section was
urged was that a bank's capital should bear some proper proportion to the
volume of business transacted by it; and there being no possible way by
which the amount of deposits could be restricted, the idea of restricting
the investments appeared to be not only possible but wise. I t was argued
in support of the proposition that it would result in an increase in the
capital of small banks, thereby giving greater protection to depositors;
that it would not be a difficult matter to procure additional capital when,
for each $1,000 thus invested, the bank could invest $4,000, and above all,
t h a t banks should be content with receiving an income on $4 for every
dollar invested. The operation of this section has resulted in nearly ioo
banks increasing either their capital or surplus. Many have carried their
entire earnings to surplus, thereby adding to the strength of the bank and
the security of depositors.
The law was repealed against the objection of the commissioner in 1901,° and in 1908 a scale graded according
to population was adopted/ In 1909, however, it was
enacted that no bank might accept deposits in excess of
ten times its paid-up capital and surplus.
a Kans. (1897), chap. 47, sec. 9.
& Report of Kansas Bank Commissioner, 1897-98, p. viii.
c Kans. (1901), chap. 64.
d Kans. (1908), chap. 15.
5i
National
Monetary
Commission
Within recent years seven other States—California, Nevada, Oklahoma, South Dakota, Texas, Nebraska, and
Rhode Island—have adopted similar methods of determining the amount of capital required. In California,
by the act of 1909, a graded scale, ranging from $25,000 in
cities of 5,000 population or less to $200,000 in cities of
over 25,000 population, was replaced by a requirement
of $25,000 for all banks, together with a requirement that
the " aggregate of paid-up capital, together with the surplus, of every bank must equal 10 per cent of its deposit
liabilities." If the deposits reach this proportion, the
bank must either increase its capital or refuse to receive
additional deposits.a In 1908 the legislature of Oklahoma gave authority to the bank commissioner to fix the
proportion between capital and deposits, and in 1909 it
was provided that no bank should receive deposits in
excess of ten times its paid-up capital and surplus. 6 In
South Dakota the proportion of capital and surplus to
deposits must be 1 to 15;° in Rhode Island, 1 to io.<* In
Texas a much more complicated arrangement has been
introduced. On November 1 of each year the average
daily deposits of the preceding year are computed. If
the bank has a capital stock of not more than $10,000
and its deposits are more than five times its capital and
surplus, the bank must increase its capital stock 25 per
cent within sixty days, or keep its deposits within the prescribed limit. Similar provisions are made for banks of
° C a l . (1909), chap. 76, sec. 19.
& Okla. (1908), p. 126; (1909), pp. 120, 121.
<>S. Dak. (1909), chap. 223, Art. II, sec. 1.
<*R. I. (1908), chap. 1590.
52
State
Banks
and Trust
Companies
larger capital, but the proportion of deposits to capital and
surplus is increased for banks of larger capital until in the
case of banks with a capital of $100,000 or more the proportion allowed is 10 to 1. The Nevada and Nebraska
banking laws provide that " loans and investments, exclusive of reserve, banking house, and fixtures," shall not
exceed eight times the amount of capital and surplus.
In Kansas, Nebraska, Nevada, Oklahoma, South Dakota,
and Texas the requirement that capital shall be in a
certain proportion either to deposit or to loans is coupled
with a capital requirement graded according to population. In California it is coupled with a flat minimum
requirement. In Rhode Island the board of bank incorporation determines the amount of capital required
for the incorporation of a bank.
The adjustment of the amount of capital required according to population serves another purpose, however,
besides preserving roughly a proportion between the
amount of capital and the amount of business, in that it
also acts as a check on excessive competition. A requirement graded entirely or chiefly according to deposits
or loans does not accomplish this end. For instance, if
the capital required to establish a bank in a city of 3,000
population is $50,000, there will usually be only one bank
in a place of that population, since there is not enough
business to make it profitable for two banks to incorporate
with that amount of capital. Under the California law
of 1909 a bank with commercial and savings departments
may be organized in any California town or city, even in
San Francisco or Los Angeles, with a capital of $25,000.
53
National
Monetary
Commission
Competition is much freer under such a requirement than
under a requirement graded according to population.
Undoubtedly, the number of banks will be somewhat
larger. The supervisors of banks in the different States
appear to be in fair agreement that such a multiplication
of banks is undesirable from the standpoints of safety
and economy. It is likely, therefore, that if requirements as to capital based directly on some index of business are introduced widely in the state banking laws that
they will, as in most of the laws now in force, supplement
and not supplant the requirements graded according to
population.
PAYMENT OF CAPITAL.
Under the "business incorporation laws," three kinds
of capital may be distinguished: Authorized, subscribed,
and paid up. The amount of the difference between subscribed and paid-up capital is left by the "business
incorporation laws" in most of the States largely to the
discretion of the directors, who have power to require
the payment of the stock subscription in such sums and
at such times as they think properA It is possible
therefore for the subscribed capital of such corporations
to be largely in excess of the sum actually paid in. In
South Carolina, for example, where banks are still organized under the "business incorporation law/' a bank may
begin business when 50 per cent of its authorized capital
has been subscribed, and 20 per cent of the subscribed
capital has been paid. A bank with an authorized capital
o In som& States a specified part of the subscribed capital must be paid
in, e. g., in Vermont one-fourth; a number of States require t h a t 10 per
cent shall be paid in, but in most of the States no amount is fixed.
54
State
Banks
and Trust
Companies
of $50,000 may consequently have a subscribed capital of
$25,000, and a paid-up capital of $5,000. In Arkansas,
Arizona, South Carolina, and Tennessee the provisions
for the payment of the capital of banks are the same as
those for the payment of the capital of ordinary business
corporations.
Obviously, if any law requiring a minimum capital for
banks is to be effective, it must provide specifically for
the payment either of all the capital or of a specified sum;
otherwise the directors of the bank may require the payment of only a small part of the capital. In West Virginia, for example, an act passed in 1881 required banking
corporations to have a capital of $25,000, but made no
provisions for the payment of the capital. 0 The state
bank examiner pointed out repeatedly that the effect of
the law was to allow the incorporation of banks with a
merely nominal paid-up capital.
In a few States the requirement for the payment of the
capital stock of banks has taken the form of requiring
that a specified sum should be paid in. The directors
might if they saw fit leave the remainder of subscribed
capital outstanding. Thus, in Wisconsin until 1903,
although the minimum capital was $25,000, only $15,000
had to be paid in, the remainder being at the call of the
directors. The result was the establishment of an actual
minimum capital of $15,000. Similarly, in West Virginia,
the act of 1901 required that 40 per cent of the capital
should be paid in; but the payment of the remainder was
left to the discretion of the directors. In Georgia, at the
«\V. Va. (1881), chap. 17.
55
National
Monetary
Commission
present time, 20 per cent of the capital and not less than
$15,000 must be paid in, but there are no provisions for
the payment of the remainder. Similarly, in Alabama
and Idaho, after a specified minimum capital graded
according to population has been paid in, the payment
of any remaining capital stock is subject to the discretion
of the directors. In Maryland the act of 1910 provides
for the payment of the specified minimum capital in full,
but does not provide that the authorized capital shall be
fully paid. The California law of 1909 includes a similar
provision.
All the other States which require the payment of a
specified capital require that it shall all be paid in, and
not merely a specified sum. The objection to permitting
part of the capital of banking corporations to remain unpaid is that depositors may be deceived by the advertisement of capital not fully paid. In California, until 1895,
there were no provisions for the payment of bank capital,
and in 1890 the bank commissioners said:
Licenses to conduct the business of banking have been demanded and
received under the law, the commissioners being powerless to refuse them,
when the amount of capital stock paid up was merely nominal—in fact,
infinitesimal—and these concerns most loudly proclaim their authorized
capitals
The provision in the national-bank act concerning the
payment of capital has been the model for similar provisions in the banking laws of a large number of the States.
In the following States 50 per cent must be paid in before
the bank begins business and the remainder in a specified
time, ranging from ninety days to two and one-half years:
a Twelfth Annual Report of Banking Commissioners of California, 1890.
56
State
Banks
and Trust
Companies
Colorado, Florida, Indiana, Kentucky, Louisiana, Maryland, Michigan, Missouri, North Carolina, North Dakota,
New Mexico, Ohio, Oregon, Pennsylvania, Virginia, Washington, and Wyoming. In Utah 25 per cent must be paid
in before the bank begins business, and the remainder
within ten months. In Nevada 80 per cent must be paid
in at the outset and the remainder in two years. In
Mississippi specified sums must be paid in according to
the population of the place in which the bank is located,
and the remainder within five months.
There is a tendency to shorten the length of the period
allowed for the full payment of the capital stock. In the
greater part of the States which allow payment of part of
the capital to be deferred, complete payment must be
made in five months; and in only one, West Virginia, can
complete payment be deferred more than a year. In the
most recent legislation, a tendency to go somewhat further
has manifested itself, and in New York, Iowa, Montana,
Vermont, Minnesota, Nebraska, Illinois, South Dakota,
New Jersey, Oklahoma, Rhode Island, Kansas, Texas, 0 and
Wisconsin the entire capital stock must be paid up before
any business can be transacted by the corporation.
Under the "business incorporation laws" in practically
all the States, payments for the capital stock of corporations may be made in money or in other property. The
particular kind of property which was once much favored
in several of the States as a means of payment for bank
stock was commercial paper. It frequently happened that
a The rule that the capital of banks shall be fully paid up in cash is
incorporated in an amendment to the constitution of Texas adopted in 1904.
57
National
Monetary
Commission
subscribers paid for their shares with their own notes, indorsed usually by other subscribers. The national-bank
act does not specifically provide that capital shall be paid
in cash, but the Comptroller has held that capital can only
be so paid. Some of the state banking laws follow the
wording of the national-bank act in this particular, and
the state-bank officials in these States have generally required payments in cash. a A great number of the state
banking laws explicitly provide that payments on capital
stock shall be made " in cash " or " in money of the United
States." In a few States still, however, payments for
capital stock need not be made in money. In Idaho and
Oregon banking corporations are required to have a minimum amount of property. This property may be in
" money, commercial paper, bank furniture, fixtures, or
the necessary banking building." In Nevada the capital
stock may consist of money; deposits; national, state,
county, or municipal bonds; furniture; building; and lot.
The bonds must not aggregate more than one-half, nor the
bank building and lot together with the bank furniture
and fixtures more than one-third, of the paid-in capital.
In these States the existing conditions are peculiar in that
until quite recently no minimum capital has been required
for state banks, and the requirement as to capital is chiefly
a The supreme court of Indiana in Coddington v. Conaday (157 Ind.,
243), said: " I t may be suggested that strong reasons exist for holding that
the acceptance of anything but money in payment of subscriptions to the
capital stock of a banking association is illegal. No authority for such
transaction is found in the statutes, and the nature of the business to be
carried on seems to forbid them." In Iowa as early as 1883 the attorneygeneral held that "commercial paper made by a stockholder for his stock
can not be accepted as constituting any part of 'paid-up capital.'"
58
State
Banks
and Trust
Companies
intended to set a standard for banks already actively engaged in business. In Washington a minimum amount of
property is required for existing banks, but all new banks
must have their capital paid in lawful money.
SURPLUS.
As an additional safeguard against loss to depositors a
large number of the States require banks to set aside a
part of their earnings to form a fund known in some of
the States as a surplus, but in others as a guaranty fund.
The Ohio "free banking" law of 1851 provided that
banks incorporated under that law should retain onetenth of their net earnings in a surplus fund until the
fund amounted to 20 per cent of their capital. The
same provision was made a part of the national-bank act.
Many of the state banking laws contain the same provision. In the following States banks must set aside 10
per cent of their net earnings until a surplus of 20 per
cent has been accumulated: Florida, Idaho, Kentucky,
Louisiana, Maryland, Michigan, Missouri, Montana,
Nevada, New Jersey, New York, North Dakota, Ohio,
Oregon, Pennsylvania, South Dakota, Washington, West
Virginia, and Wisconsin. The recent legislation shows a
tendency to require a more rapid rate of accumulation
and a larger aggregate fund. In California, Indiana,
Minnesota, and Nebraska 20 per cent, and in Kansas,
Oklahoma, and Texas 10 per cent of net earnings must be
carried to surplus until it amounts to 50 per cent of capital. The least stringent requirement for the accumulation of a surplus is that contained in the Virginia banking
law, under which dividends must not be paid in excess of
59
Nat ion al
Monetary
Commission
6 per cent until a surplus equal to 10 per cent of capital
has been accumulated.
In the remaining States which incorporate state banks—
Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Georgia, Iowa, Illinois, Mississippi, New Hampshire, New Mexico, North Carolina, Rhode Island, Tennessee, Utah, and Wyoming—state banks are not required by a general law to accumulate a surplus. In
Delaware, Connecticut, and New Hampshire the few
state banks are chartered only under special acts, which
in some cases provide for a surplus. The remaining
States and Territories in the list, with the exception of
Colorado, Georgia, Iowa, Illinois, Rhode Island, and
Utah, are States in which banks are incorporated practically on the same terms as ordinary business corporations.
In most of the States the officials in charge of the supervision of banks have strongly recommended the enactment of laws providing for the accumulation of a large
surplus. The supervisors have also encouraged the banks
to build up a surplus in excess of the legal requirement.
In at least two States—Nebraska and Louisiana—the
supervisors publish in their reports a list of all banks that
have a surplus of more than a certain amount.
IMPAIRMENT OF CAPITAL.
It is a general rule of the law of corporations that dividends are to be paid only from earnings. It is ordinarily
difficult, however, to ascertain whether dividends are
paid from capital or from earnings, since in estimating
the' assets of the corporation a valuation of its property
60
State
Banks
and Trust
Companies
must be made. The assets of banking corporations, however, are preponderantly in the form of debts due the
bank, and the value of such assets may usually be estimated with some accuracy.
A considerable number of the antebellum banking laws
provided that dividends should be paid only from profits, and that if capital were impaired by losses no dividends should be paid until the capital was restored. 0
These laws also ordinarily defined bad debts—the most
important item in calculating the profits of a bank for a
given period. Provisions of the same kind were included
in the national-bank* act at the time of its passage. Dividends were to be paid only from profits, and in calculating the net profits of a bank for any dividend period
debts on which interest was past due and unpaid for a
period of six months, unless well secured and in process
of collection, were to be considered bad debts.
In the banking laws of all the States except Alabama,
Arizona, Arkansas, Delaware, Illinois, Mississippi, North
Carolina, Rhode Island, South Carolina, and Virginia
there are specific provisions prohibiting the payment of
dividends except from "net profits," "actual earnings,"
or "net earnings." In only a few of the States, however,
has any attempt been made to define the items which
shall be subtracted in calculating assets. In Indiana,
Kentucky, and South Dakota the provision contained in
the national-bank act has been copied. In Minnesota a
bad debt is one on which interest has been past due and
unpaid for twelve months, unless the debt is well secured
a See, for example, N. Y. (1839), chap. 260, No. 28; Wis. (1852), chap.
479; sec. 40 j Minn. (1866), Chap. XXXIII, No. 31; Ohio (1851), 49, v. 41,
sec. 22; Ind. (1855), p. 23.
61
National
Monetary
Commission
and in process of collection; in Louisiana debts on which
payments of interest or principal have been overdue for
twelve months must be charged off or reduced in value
after appraisement by the state bank examiner and two
stockholders. In Washington and California it has been
provided that interest, unpaid and accrued, shall not be
counted as an asset in calculating net profits.a The most
elaborate rule for calculating net profits is found in the
New York banking law. It reads as follows:
Interest unpaid, although due or accrued on debts owing to the corporation or banker, shall not be included in the calculation of its profits
previous to a dividend, unless such interest be accrued upon loans secured
by collaterals as provided by section twenty-seven of this chapter. The
surplus profits, from which alone a dividend can be made, shall be ascertained by charging in the account of profit and loss and deducting from
the actual profits:
i. All expenses paid or incurred, both ordinary and extraordinary,
attending the management of its affairs and the transaction of its business.
2. The interest paid, or then due and accrued, on debts owing by it.
3. All losses sustained by it. In the computation of such losses, all
debts owing to it shall be included which shall have remained due, without prosecution, and upon which no interest shall have been paid for
more than one year, or on which judgment shall have been recovered
that shall have remained for more than two years unsatisfied, and on
which no interest shall have been paid during that period.
The national-bank act in its original form did not provide any better means of restoring capital when impaired
than by restraining the payment of dividends. In 1873,
however, it was provided that if the capital of a national
bank should be impaired, the shareholders were to assess
themselves and repair the deficiency.6 The same provision had been adopted in New York in 1871,° but the
a The same conclusion was earlier reached by the courts in California.
(People ex rel. Farnum v. San Francisco Savings Banks, 72 Cal., 199.)
b Act of March 3, 1873, chap. 290, Stat. L., 603.
c N . Y. (1871), chap. 456.
62
State
Banks
and Trust
Companies
other States have followed this innovation somewhat
slowly, chiefly because until recently in only a few of the
States were there adequate examinations of the banks. a
In many of the States, as soon as examinations began, it
was found that the capital of some of the banks was
grossly impaired, b and it was urged that a remedy should
be provided.
In general, the state banking legislation has followed
the lines of the amendment to the national-bank act, and
the stockholders of a bank have been required to assess
themselves if its capital is impaired. The banking laws
of the following States contain such provisions:0 California, Colorado, Florida, Georgia, Idaho, Indiana, Illinois,
Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, New
York, North Dakota, Nebraska, Ohio, Oklahoma, Oregon,
Pennsylvania, South Dakota, Texas, Utah, Virginia,
Washington, West Virginia, and Wisconsin.
The period allowed for the restoration of capital under
the national-bank
a c t is t h r e e m o n t h s . ^
In a
consider-
ed Kentucky is the only State which provides for the restoration of
impaired capital by assessment and does not provide for the regular examination of its banks.
&For example, see " R e p o r t of Bank Examinations in Missouri," 1897.
c In Georgia the impairment must amount to 10 per cent and in Louisiana
to 25 per cent before an assessment is required. In Missouri and Texas, if
the impairment amounts to 25 per cent, restoration must be made in sixty
days; if the impairment is less, the supervisors may allow a longer period.
d The Comptroller of the Currency in his testimony before the National
Monetary Commission recently said: " I think a bank that has an impaired
capital ought to be made to make it good at once * * *. It is rather
a disgraceful condition of affairs now, and has always been since the
national-bank act was passed forty-five years ago, to allow a bank to run
along with an impaired capital and still continue to take people's money,"—
"Suggested Changes in the Administrative Features of the National Banking Laws," 61st Cong., 2d sess., Doc. No. 404, pp. 229-230.
63
National
Monetary
Commission
able number of the state banking laws which provide for
the assessment of stockholders in case of impairment of
capital the period is fixed at sixty days and in a few at
thirty days. In the more recent laws, however, no period
is specified, the supervisors having power to fix the time,
which may vary according to the condition of the bank.
Only in Florida and New Mexico is the period allowed as
long as under the national-bank act.
The enforcement of that provision of the national
banking act which requires the restoration of capital was
at first difficult; for frequently some of the stockholders
in a bank whose capital was impaired would not pay their
assessments, and the other stockholders were forced
either to buy their shares or to allow the bank to be
placed in the hands of a receiver. It was provided, therefore, by Congress in 1876 that if any shareholder refused
to pay his assessment the directors might sell his stock
at public auction. The same difficulty has been found
in forcing the restoration of capital under the state banking laws. a Provisions for the sale of the stock of recalcitrant shareholders have been made, however, only in
Indiana, Iowa, New York, Oklahoma, South Dakota,
Wisconsin, and West Virginia. In Illinois the state
auditor has power to sue stockholders who do not pay their
assessments. In New York the superintendent of banks
in 1904 reported that he found it impracticable to
require the public sale of the stock of delinquent stockholders, because of the danger of thereby starting a run
« Report of Superintendent of Banks of New York, 1879, p. xi; Report
of the Bank Commissioner of Oklahoma, 1906; Twentieth Annual Report
of the Commissioner of Banking of Michigan, 1908, p. xxxviii.
64
State
Banks
and Trust
Companies
on the bank. The New York legislature in 1905 accordingly made provision for the private sale of the stock
after due notice to the shareholders.a
II. TRUST COMPANIES.
AMOUNT OF REQUIRED CAPITAL.
In several States the laws make no provision with reference to the amount of capital required for a trust company. In Tennessee, where banks are incorporated on
the same terms as ordinary business corporations, trust
companies (i. e., banks with trust company powers) may
be incorporated in the same way. 6 In Arizona, Nebraska, and Florida there is no legislation specifically
providing for the incorporation of trust companies. In
all these States, presumably, trust companies may be
incorporated under the ''business incorporation laws,"
and the amount of their capital is left to the discretion
of their incorporators. In Connecticut, Delaware, New
Hampshire, and Vermont trust companies are incorporated only under special acts and the amount of their
capital is determined in each particular case by the legislature. In Rhode Island trust companies are incorporated by a board which has power to fix the terms of
incorporation, including the amount of capital.
The first general laws for the incorporation of trust
companies in the United States required such companies
to have a much larger capital than that required for
o N. Y. (1905), chap. 649.
& In Tennessee trusts may be accepted without bond by banks organized
to conduct a banking, savings, and trust business, provided such banks are
located in counties of 60,000 to 90,000 population and have a capital of at
least $100,000.
59045 0 —11-
5
65
National
Monetary
Commission
banks, but the later legislation shows a distinct tendency
in the direction of lowering the requirements in regard to
capital. In nearly all of the States, however, the requirement for trust companies is still substantially different
from that for state banks. The following table shows
the capital required for trust companies, omitting those
requirements which are based on the volume of business.
In California, Nevada, Nebraska, Rhode Island, and
South Dakota the amount of capital required for a trust
company depends, as in the case of state banks, either
on the amount of deposits or on the amount of loans.
The provisions of this kind in these States are identical
for banks and for trust companies. Similar provisions
with reference to banks in the laws of Kansas, Texas,
and Oklahoma do not appear to apply to trust companies.
The smallest permissible capital for a trust company,
it will be noted, ranges from $5,000 in North Carolina to
$1,000,000 in the District of Columbia. Only in Iowa,
North Carolina, Nevada, Oregon, Virginia, and Wyoming
may a trust company which carries on a banking business be incorporated with less than $25,000 capital,
and the total number of trust companies in these States
on April 28, 1909, according to the statistics gathered by
the National Monetary Commission, was only fifteen.
Nine States permit the organization of trust companies
with a capital of $25,000. Three States require a capital
of $50,000, and fourteen States require a capital of
$100,000; the remaining six require a capital of over
$100,000, but of these only two require a capital of over
$125,000. The majority of the States, therefore, which
66
Capital required for trust companies that carry on a banking
Smallest
permissible
capital.
business.
Capital required in towns and cities with a population of—
100.
500.
1,000.
1,500.
2,000.
4,000.
$25,000
5,000.
6,000.
10,000.
15,000.
20,000.
25,000.
30,000.
40,000.
50,000.
100,000.
250,000.
$100,000
$50,000
a 50,000
225,000
Colorado
District of Columbia
.. .
50,000
$100,000
I,OOO,OOO
IOO,OOO
Idaho
25,000
30,000
$50,000
25,000
50,000
100,000
$100,000
$200,000
25,000
50,000
10,000
Kansas
100,000
50,000
100,000
50,000
100,000
25,000
50,000
75.000
100,000
$100,000
150,000
150,000
$200,000
100,000
200,000 i
150,000
300,000
$500,000
200,000
100,000
Missouri
100,000
100,000
10,000
$15,000
$20,000
$25,000
$35.000
50,000
100,000
$250,000
100,000
150,000
100,000
North Carolina
200,000
25,000
$10,000
5, 0 0 0
100,000
Ohio
125,000
200,000
100,000
10,000
25, 0 0 0
30,000
50,000
125,000
25,000
50,000
25,000
Utah
100,000
100,000
25,000
10,000
50,000
25,000
West Virginia
100,000
100,000
50,000
Wyoming
Texas
10,000
25,000
$50,000
100,000
50,000
« In Arkansas a capital of $75,000 is required for trust companies located in counties of 40,000 to 50,000 population, and a capital of $100,000 in counties of 50,000 and over.
59045 0 —11.
(To face page 66.)
500,000
State
Banks
and Trust
Companies
provide that trust companies must have a specified
minimum capital do not permit the organization of trust
companies with a smaller capital than $100,000.
In a comparison of the amount of capital required for
trust companies with that required for state banks, certain of the States which require a minimum capital for
trust companies must be omitted. In the District of
Columbia, Maine, and Massachusetts there are no state
banks; in Arkansas and South Carolina, state banks are
not differentiated with respect to capital from ordinary
business corporations. The remaining States fall into several groups:
(a) In Illinois, Nevada, North Carolina, Oregon, Virginia,
and Wyoming the capital required for trust companies is
exactly the same as for state banks.
(b) In California, Georgia, Kentucky, Montana, New
Jersey, Ohio, and West Virginia the requirement is not
graded for either trust companies or state banks. The
required minimum is larger for trust companies than for
state banks.
(c) In Colorado, Oklahoma, Maryland, Michigan, New
York, and South Dakota the requirement for both banks
and trust companies is graded and is higher throughout
for trust companies.
(d) In Indiana the smallest permissible capital is the
same for state banks and for trust companies, but the
required capital for trust companies is graded and that
for state banks is not. As a result the capital required
for trust companies is greater in cities of more than 25,000
population.
67
National
Monetary
Commission
(e) In Kansas, Minnesota, Mississippi, North Dakota,
and Pennsylvania the smallest permissible capital for
trust companies is greater than that required for state
banks, but the capital required for trust companies is
ungraded, while that for state banks is graded. Even in
the largest cities, however, the amount of capital required
for state banks is not as large as that required for trust
companies.
(/) In Idaho and Utah the smallest permissible capital
is larger for trust companies than for state banks, but the
requirements for both state banks and trust companies
are graded, and in the larger cities the required capital is
the same.
(g) In Alabama the smallest permissible capital is
larger for trust companies than for state banks, but the
requirement for trust companies is graded and that for
state banks is not. The result is that in the larger cities
the required capital is larger for trust companies.
(h) In Texas the smallest permissible capital is larger
for trust companies than for state banks, but the requirement for state banks is graded and the requirement for
trust companies is not. In cities of more than 20,000
population the capital requirement for state banks is
larger.
(i) In Wisconsin the smallest permissible capital is
larger for trust companies than for state banks, and both
requirements are graded. In cities of from 10,000 to
50,000 population the amount of capital required is the
same, but in places of over 50,000 the requirement for
trust companies is higher.
68
State
Banks
and Trust
Companies
(/) In Louisiana the smallest permissible capital is
larger for trust companies than for state banks, but the
requirement for state banks is graded and that for trust
companies is not. In cities of over 20,000 population the
required capital is the same for both.
(k) In Washington and Missouri the smallest permissible
capital is larger for trust companies than for state banks,
and both requirements are graded. In the larger cities
the amount of capital required is the same for both.
(I) Finally, in the case of Iowa the smallest permissible
capital is less for trust companies than that required for
state banks, and both requirements are graded. In cities
of over 10,000 population the amount of capital required
is the same for both.
Certain more general conclusions may now be stated:
1. Only in one State is the smallest permissible capital
less for trust companies than for state banks; in six States
it is the same; in all the others it is larger.
2. In five States the requirements as to capital are the
same for trust companies and state banks in large and
small cities alike. In eighteen States they are higher
throughout for trust companies; in one State they are the
same for banks and trust companies in the smaller places,
but larger for trust companies than for banks in the larger
places; in the remaining States the capital required is
larger for trust companies in the smaller places, but the
same in the larger places.
In the laws of those States in which the banking powers
of the trust companies are well developed there is a certain
similarity in the relation between the capital required for
69
National
Monetary
Commission
trust companies and that required for state banks. The
smallest permissible capital for trust companies is practically always larger than that required for state banks, and
if neither requirement is graded the minimum capital for
trust companies is greater in towns and cities of all sizes.
Where the capital is graded for either trust companies or
banks, the required capital for trust companies ordinarily
is greater in places of all sizes; but the difference between
the two requirements is not so great in the larger places.
PAYMENT OF CAPITAL.
The same reasons for requiring the payment of capital
are influential in the case of trust companies as in the case
of banks. In Colorado, the District of Columbia, Illinois,
Idaho, Iowa, Kansas, Kentucky, Maine, Massachusetts,
Michigan, Mississippi, Nevada, New Jersey, New York,
North Carolina, Ohio, Oklahoma, Oregon, Rhode Island,
South Dakota, Texas, Washington, and Wyoming the subscribed capital must be fully paid. In over half of these
States it must be paid before business is transacted. In
the District of Columbia, Idaho, Kentucky, Michigan,
North Carolina Ohio, and Wyoming one-half of the capital
must be paid before the transaction of any business and
the remainder within a specified period, varying from five
months to a year. In Kansas only 20 per cent need be
paid in at the beginning and the remainder within six
months. In North Dakota and Mississippi a specified sum
must be paid in, and the remainder within specified periods,
in the one case five months and in the other two years. In
Nevada 80 per cent must be paid at the beginning and
the remainder in two years.
70
State
Banks
and Trust
Companies
In many of the States the trust-company law has not yet,
however, been as fully differentiated from the " business
incorporation law" as has the state-bank law. In Pennsylvania, for example, subscribers to the capital stock of
banks have been required for many years to pay their
subscriptions in cash. Trust companies, on the other hand,
are incorporated under the " business incorporation law,"
and stock can be paid for with personal and real property.
The commissioner of banking in several recent reports
has recommended that the law should be changed. 0
In Alabama, Arkansas, California, Georgia, Indiana,
Louisiana, Maryland, Minnesota, Montana, New Mexico,
Pennsylvania, South Carolina, Utah, and West Virginia
the laws provide for paid-up capital of a specified minimum
amount, but no provision is made that the capital shall
be fully paid. In Missouri the subscribed capital must be
at least $100,000; one-fourth of the authorized capital
must be subscribed and one-half of the subscribed capital
must be paid in. In Wisconsin there is provision for a
minimum capital, but none for its payment. In those
States where trust companies are chartered exclusively by
special act—Connecticut, Delaware, New Hampshire, and
Vermont—the payment of the capital stock is ordinarily
provided for in the act of incorporation.
In all the States requiring a specified capital for trust
companies, except Alabama, Arkansas, California, Florida, Georgia, Idaho, Indiana, Kansas, Nevada, North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South
Carolina, Tennessee, Utah, West Virginia, and Wisconsin,
a Report of the Commissioner of Banking of Pennsylvania, 1906, Part I,
pp. 9 and 10.
7i
National
Monetary
Commission
it is specifically provided that the capital of trust
companies shall be paid in only "in cash" or "in lawful
money/' In a considerable number of the States whose
trust-company laws do not contain such provisions, the
supervisors will allow payment for capital stock to be
made only in cash.
SURPLUS.
The accumulation of a surplus is not required in so
many States for trust companies as for banks. In Indiana,
Kentucky, Louisiana, Minnesota, Nebraska, New York,
Oklahoma, and Pennsylvania banks are required to accumulate a surplus, but trust companies are not. In Nebraska, however, trust companies do not do a banking
business. In New Mexico trust companies must set aside
a surplus, but banks need not. In Maine and Massachusetts, where there are no state banks, trust companies
must accumulate a surplus. In the other States the provisions with regard to a surplus are identical for banks and
trust companies.
IMPAIRMENT OF CAPITAL.
In the matter of the restoration of impaired capital, the
laws governing trust companies have been almost completely assimilated to the laws governing state banks. In
a few States, however, where specific provision has been
made for the restoration of the impaired capital of banks,
the trust-company law does not contain such provisions.
Such is the case in Florida, Indiana, Nebraska, and Oklahoma. In Florida there are no laws specifically relating
to trust companies, and in Nebraska trust companies do
72
State
Banks
and Trust
Companies
not do a banking business. In Massachusetts and Maine,0
where there are no state banks, there are specific provisions for the restoration of the capital of trust companies.
In Vermont, where also there are no state banks, there is
no definite provision for the restoration of capital of trust
companies; but it is possible that, under certain provisions
which give the supervisors power to ask for a receiver in
case a trust company is conducting business in an " unsafe
and unauthorized manner," the restoration of impaired
capital may be forced. In the District of Columbia the
provisions of the national-bank act concerning the restoration of impaired capital have been extended to trust
companies.
a In Maine the bank examiner, if he finds the capital of a trust company
impaired, may file a complaint with an equity court, which orders an assessment made upon such stock. If the assessment is not paid within sixty
days, the stock of any shareholder who is in default may be sold at public
auction.
73
CHAPTER
III.
LIABILITY OF STOCKHOLDERS.
It is a practically universal rule of American corporation law that unpaid subscriptions to capital stock constitute a trust fund for creditors, and may be collected by
the assignee or receiver of the corporation. Since, however, as has already been shown, the laws in nearly all the
States require that stock in a banking corporation shall
be fully paid up either before the corporation begins business, or within a short time after, the liability of stockholders for unpaid subscriptions has become of little
importance so far as banking corporations are concerned.
Formerly, in a considerable number of States, banks
were required to have a specified capital, only a part of
which had to be paid in. Requirements of this kind
appear to have been designed to impose on shareholders
inbanks of small capital a liability for unpaid stock
subscriptions. In Wisconsin, for instance, until recently
no bank might be organized with a smaller subscribed
capital than $25,000, but only $15,000 was required to
be paid in. The stockholders of a bank with a paid-in
capital of $15,000 were, therefore, liable for a sum equal
to two-fifths of the amount of their shares in the event
of the bank's becoming insolvent. Similar provisions
were contained in the Missouri "savings b a n k " law
enacted in 1864, in the Kansas law of 1868, and later in
the Washington and West Virginia banking laws. The
only banking laws in which such provisions are found at
74
State
Banks
and Trust
Companies
present are those of Georgia and Alabama. Several of
the trust-company laws, now in force, as has been noted
above, contain similar provisions.a
While the liability for unpaid stock subscriptions has
been decreasing in importance along with the gradual
differentiation of banking corporations from ordinary
business corporations, " statutory liability," i. e., the
liability of stockholders beyond the amount of the capital
stock held by them, has been of constantly increasing
importance. The earlier American laws for the regulation of banking proceeded in this respect as in others on
the principle that it was the note holder who was to be
protected. The antebellum banking laws of Maineb and
Massachusetts,0 for example, imposed a statutory liability
only for the benefit of the creditors who held the notes of
the bank. In somewhat later legislation the liability
was for the protection of all creditors.d By the time of
the civil war the liability of shareholders in banks had
assumed in a considerable number of States its present
form—a liability to the amount of the stock in addition
to the liability for unpaid stock subscriptions.
With the practical prohibition of the issue of state
bank notes in 1866 and the consequent decrease in the
number of state banks, the liability of stockholders in
state banks became in nearly all of the States, except
where an additional liability was imposed by the constitution, the same as that of stockholders in ordinary
a
S e e above, p. 71.
*>Me. (1841), chap. 1, sec. 8.
cMass. (1828), chap. 96, sec. 13.
dConstitution of N. Y. (1846), Art. VIII, sec. 7; Pa. (1850), P. h. 477,
sec. 32.
75
National
Monetary
Commission
business corporations. Since 1880, however, provisions
imposing an additional liability on the stockholders of
banking corporations have been placed in the banking
and trust-company laws of nearly all the States in which
state banks or trust companies have assumed any great
importance.
In a small number of States the state constitution provides that stockholders in corporations shall be chargeable only for unpaid stock subscriptions. Such States
are Alabama, 0 Ohio, 6 Oregon,0 Missouri/ and Nevada.*
The supervisors of state banks of Missouri and Nevada
have recently urged that constitutional amendments be
submitted permitting the imposition of an additional
liability on the stockholders of banking corporations./
In a few States and Territories in which there are no
constitutional inhibitions the legislatures have not seen
fit to impose any additional liability on stockholders in
banking corporations. These States and Territories are
Arizona, Arkansas, Louisiana, Mississippi, New Hampshire, New Jersey, Rhode Island, Tennessee, and Virginia.
In Connecticut and Delaware there are no general laws
relating to the statutory liability of stockholders; but
since banks and trust companies are incorporated by
special acts, the legislature may impose an additional
liability by provision in the charter.
a
Alabama constitution (1901), sec. 236.
&Ohio constitution (1851), Art. XIII, sec. 3, amended 1903.
c Oregon constitution (1857), Art. XI, sec. 3.
<Z Missouri constitution (1875), Art. XII, sec. 9.
« Nevada constitution (1864), Art. VIII, sec. 3.
/Seventh Biennial Report, Bank Examination, Missouri, 1898, p. 12;
First Annual Report of the State Bank Examiner, Nevada, 1909, p. 10.
76
State
Banks
and Trust
Companies
In all the remaining States and Territories where state
banks are incorporated, an additional or statutory
liability is imposed on stockholders.a The list includes
California, Colorado, Florida, Georgia, Idaho, Illinois,
Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan,
Minnesota, Montana, Nebraska, New Mexico, New York,
North Carolina, North Dakota, Oklahoma, Pennsylvania,
South Dakota, South Carolina, Texas, Utah, Washington, West Virginia, Wisconsin, and Wyoming. In all
the States imposing the liability except two it is a double
liability (i. e., for an amount equal to the amount of
stock in addition thereto); but in California the stockholders in all corporations are individually liable for
their proportionate part of the debts of the corporation,5
and in Colorado the stockholders in banks are liable
for an amount equal to twice the amount of their stock.
In Michigan, South Carolina, and Georgia the liability
is for the benefit only of depositors. The same additional liability in nearly all of the States in which it is
imposed on the stockholders of state banks has been
imposed also on the stockholders of trust companies.
The exceptions are Florida, Minnesota, Nebraska, North
Dakota, Oklahoma, and Pennsylvania. In Florida there
« T h e double liability is imposed in a considerable number of these
States by provisions in the state constitutions as follows: Illinois constitution (1870), Art. X I , sec. 6; Indiana constitution (1851), Art. X I , sec.
6; Maryland constitution (1867), Art. I l l , sec. 39; Nebraska constitution
(1875), Art X I , sec. 7; New York constitution (1894), Art. V I I I , sec. 7;
South Carolina constitution (1895), Art. IX, sec. 18; South Dakota constitution (1889), Art. X V I I I , sec. 3; Texas constitution (1876), Art. XVI,
sec. 16, amdt. 1904; Utah constitution (1895). Art. X I I , sec. 18; Washington constitution (1889), Art. X I I , sec. i r ; West Virginia constitution
(1872), Art. X I , sec. 6.
&
California constitution (1879), Art. X I I , sec. 3.
77
National
Monetary Commission
are no specific provisions for the incorporation of trust
companies, and in Nebraska trust companies do not do
a banking business. In Oklahoma the stockholders of a
trust company are liable for twice the amount of their
unpaid stock subscription. In the District of Columbia,
Maine, Massachusetts, and Vermont, where there are
no state banks, a double liability is imposed on the
stockholders of trust companies.
In the larger number of the States and Territories the
liability is a proportionate one, and the stockholders are
responsible " equally and ratably and not one for another.''
This is the law in California, Colorado, Florida, Georgia,
Iowa, Kentucky, Maine, Massachusetts, Maryland, Michigan, Minnesota, Montana, New Mexico, New York, North
Carolina, North Dakota, Pennsylvania, Vermont, and
Wisconsin. In a smaller number of States and Territories
the stockholders are liable ''jointly and for each other.''
This is the law in the District of Columbia, Idaho, Illinois, 0 Indiana, Kansas, Nebraska, Oklahoma, South
Carolina, South Dakota, Texas, Utah, Washington,
West Virginia, and Wyoming.
The imposition of the statutory liability on the stockholders of state banks and trust companies has not
proved of great service as a protection to bank creditors
a The Illinois bank act of 1887 imposed a double liability " equally and
ratably." I n Dupree v. Swigert (127 111., 494) the supreme court of Illinois
held t h a t such a limitation of t h e liability imposed b y t h e constitution
was void, and in 1889 the legislature amended the bank act in such a way
as to make it conform to t h e constitution. Similarly in South Dakota a
law limiting t h e liability of stockholders to a proportionate share of t h e
debts was held in conflict with t h e constitution. (See Union National
Bank v. Halley (19 S. Dak., 474.).
78
State
Banks
and Trust
Companies
against loss. As yet little has been accomplished in the
way of making the enforcement of the liability effective,
but the steps which have been taken in this direction in
a few States indicate the difficulties experienced in the
enforcement of the liability.
i. In the first place, it has been held by the courts
in nearly all of the States that, in the absence of statutory provisions to the contrary, the liability is directly to
the bank's creditors and not to the bank itself.0 In
this respect it differs from an unpaid stock subscription, which is held to be an asset of the bank, and collectible by the bank or by its assignee or receiver.
There are two distinct and opposing lines of decisions
as to the method by which the creditors must proceed.6
In one set of cases it has been held that the proper form
of proceeding is by an action at law. In such a suit a
creditor sues for himself some one or more of the stockholders of the bank. The creditor who first brings suit
obtains a favored position with respect to others. c The
a
In Iowa, Nebraska, North Carolina, and Washington, however, the
courts have held t h a t independently of any statutory provision the receiver
may enforce the liability. State ex rel. v. Union Stock Yards State Bank
(103 Iowa, 553); Farmers' Loan and Trust Company v. Funk (49 Nebr.,
353); Smathers v. Western Carolina Bank (135 N. C , 410); Wilson v.
Book (13 Wash., 676). See also Conway v. Owensboro Savings Bank
and Trust Co. (165 F., 822).
b The two sets of cases may be partially reconciled in t h a t the equitable
remedy has been held to be the proper one where the liability is proportionate, whereas the law action has been ordinarily held proper where
the liability has been to the full amount. Even in the latter case, however, it has been held in some cases t h a t the proper remedy is a suit in
equity.
c Bank of Poughkeepsie v. Ibbeston (24 Wend., 473).
79
Nat ion a I Monetary
Commission
chief objection to the law action is that the proceeds of
the liability should be divided among all creditors, and
one should not be permitted to get, by superior diligence,
a more than proportionate share of whatever may be
collected. In a struggle for priority, creditors for small
amounts fare badly. Another objection to the remedy
at law lies in the fact that suits are multiplied, since
each creditor must maintain a separate suit. In a very
early case in Massachusetts,*1 it was held that the suit at
equity was the proper proceeding, because in this way
all parties could be joined in one action, and the proceeds
might be distributed proportionately.
The objection to leaving the liability to be enforced by
creditors, either by a law action or by proceedings in
equity, is that separate proceedings from the receivership
action must be maintained. 5 The liability of the stockholders can be determined in the receivership action
more expeditiously and at less expense.0 The New York
a
Crease v. Babcock (10 Metcalf, 125).
&The Ohio supreme court in 44 Ohio State, 318, said: " B y reason of
the great number of stockholders, the frequent transfers of stock, the
decease of parties, and of other causes, delays, vexatious, expensive, and
almost interminable seem to be inevitable in such proceedings, so much so
that such liability has grown to be looked upon as furnishing next to no
security a t all for the debts of the bank."
cThe supreme court of Washington, in Watterson v. Master ton (15
Wash., 511), said: " If any proof had been needed t h a t the method pointed
out in t h a t opinion [Wilson v. Book, 13 Wash., 676] for the enforcing the
contingent liability [i. e., by receiver] was demanded by public policy,
and was in the interest of all classes interested in the bank, such proof is
furnished by the record in this case. After great expense, and the waste
of much time for the purpose of establishing the facts necessary to authorize the enforcement of the liability in behalf of creditors against stockholders, such creditors were in no better condition than the receivers were
before they had commenced this proceeding."
80
State
Banks
and Trust
Companies
banking act of 1849 gave the receiver of an insolvent
bank the power to enforce the liability. The same
power was conferred in Massachusetts a and Maine b by
somewhat later statutes. Under the provisions of the
national-bank act the receiver of an insolvent bank,
under the direction of the Comptroller, enforces the individual liability of the stockholders. In nearly all of the
States, however, the liability was until very recently
enforceable exclusively by the creditors. It has been
only in recent years that any great improvement has
been made in this respect. In this improvement the
tendency has been to follow the early line of development, and to transfer to the receiver the right to collect
the liability.0 In about two-thirds of the States which
impose a double liability on the stockholders of banking
corporations, the liability is now collectible only by the
receiver.
2. Unless there are statutory or constitutional provisions to the contrary, it is a general rule of law, with few
dissenting decisions, that the statutory liability is a
secondary and not a primary liability. The stockholder
is not responsible to the creditor as a principal, but only
after the assets of the corporation have been exhausted.
The liability can not be enforced until it has been asceroMass. (i860), chap. 167, sees. 1, 2.
6 Me. (1855), chap. 164.
cSuch laws and the years of their passage are: D. C. (1901); Idaho
(1905); 111. (1907); Iowa (1897); Kans. (1897); Me. (1905); Mass. (1905);
Md. (1910); Mich. (1889); Minn. (1895); Nebr. (1895); N. Mex. (1903),
applicable only to trust companies; N. Y. (1897); Okla. (1897); S. Dak.
(1909); Tex. (1909), applicable only to guaranty banks; Wis. (1903).
59045 ° — " •
81
National
Monetary
Commission
tained, and it is ordinarily necessary that the affairs of
the insolvent corporation shall be entirely settled before
the amount due can be determined. Frequently therefore a considerable time must elapse before any action
can be taken which will bind the property of the shareholder. In the meantime it frequently happens that
because of the death or insolvency of the shareholder the
liability can not be collected.0
„
An efficient way of meeting this difficulty would be to
make the liability a primary one, accruing immediately on
the insolvency of the bank. There is, however, some
reason to object to the adoption of such a plan. When a
bank failure occurs, there is always a check to the business
of the community. To proceed at once to enforce the
liabilities of stockholders would probably prove an impediment to the rapid recovery of normal economic activity.
Despite the inconvenience of treating the liability as
primary there has been some movement in that direction.
Thus, in Nebraska it was enacted in 1895 that "such
liability may be enforced whenever such banking corporations shall be adjudged insolvent, without regard to the
assets of such insolvent bank being sufficient to pay all its
°> The same difficulty in the enforcement of the liability was evidently
felt in the antebellum systems. The appointment of a receiver in Maine
constituted a lien on the real estate of shareholders to the amount of their
liability. Under the antebellum law in New York applicable to banks of
issue the receiver was required to realize as far as possible on the assets;
but after six months he was to proceed against the stockholders. If the
sale of any assets was postponed beyond that time by the order of the
court, the stockholders were to look to such assets for reimbursement if it
proved that these assets of the corporation together with the amount
obtained from the stockholders was more than sufficient to pay the debts
of the bank.
82
State
Banks
and Trust
Companies
liabilities. " a In Kansas under an act passed in 1909 the
bank commissioner may, in his judgment, enforce the
liability immediately. In the interpretation of the Iowa
statute b the supreme court of that State has held that
the liability created is primary; that the exhaustion of
assets is not necessary, but that the assessment may be
for the full amount, and any surplus remaining after
complete settlement of the trust may be refunded/
The tendency, however, appears to be to follow, in the
collection of the liability, the method laid down in the
national-bank act. As is well ki\own, the Comptroller of
the Currency has power, as the liquidation of an insolvent
bank proceeds and it becomes clear that the assets of the
bank are insufficient to meet its liabilities, to levy an
assessment on the stockholders without waiting for the
exhaustion of the assets. In several of the States where
« Nebr. (1895), chap. 8, sec. 30. On account of constitutional provisions
peculiar to Nebraska, this section has been held unconstitutional. (State
v. German Savings Bank, 50 Nebr., 735.) The Nebraska court recognized,
however, the motive leading to the passage of the act. It said: " T h e
policy of the statute is to afford a speedy and somewhat summary remedy
for creditors of insolvent banks, and to enable the receiver for their benefit
to promptly enforce all liabilities of stockholders; * * * the danger
attending upon any process requiring securities to be immediately sold,
often on a falling market, or at a sacrifice, or if that danger be avoided the
still greater danger of delaying resort to proceedings against stockholders
until such a time that through death or insolvency the remedies become
ineffectual. * * * We may further acquiesce in the position of counsel
that for the effective winding up of insolvent banks and the protection of
depositors a remedy against stockholders should be permitted before, by
the slow process of liquidation, other assets shall have been exhausted."
& Iowa (18 G. A.), chap. 208.
c The court said in the case of State ex rel Stone, Attorney-General v.
Union Stock Yards Bank: " T h e liability for the payment to create the
fund is not made to depend on the application of the fund, but on the fact
of insolvency. The liability is primarily for the full amount, subject to
such an interest as will entitle him to any balance unexpended." (70 N. W.,
772.)
83
National
Monetary
Commission
receivers have power to maintain an action for the collection of the liability, the courts have held, either by way
of interpretation of the statutes or as declaratory of general
legal principles, that proceedings may be begun against
stockholders and an assessment levied without waiting
for the conversion of all the assets. Such is the law in
Michigan,0 North Carolina,5 Washington, 0 and Wisconsin. d In a considerable number of other States where the
subject has not been passed upon judicially the statutes
appear capable of the same construction.
3. The final difficulty in enforcing the statutory
liability of stockholders in state banks and trust companies is due to the impossibility of preventing transfers of stock with a view to evading the liability.
It is a general principle of law that a holder of stock
who transfers to an irresponsible party, with knowledge
that the bank is in a failing condition, will be held
responsible for the statutory liability; but the difficulty is to bring home to the transferrer knowledge of
insolvency. In several of the States an attempt has
been made to prevent stockholders from thus escaping
the liability by enacting laws extending the liability
for a period beyond the time of transfer. Thus in Wisconsin and Montana a stockholder's liability continues
for six months after the transfer; in Minnesota, New
Mexico, North Dakota, Texas, and South Dakota for
a year, and in Kentucky, for two years.
a
Foster v. Row (120 Mich., 1).
& Smathers v. Western Carolina Bank (135 N. C, 410).
c Bennett v. Thorne (36 Wash., 253).
<* Booth v. Dear (96 Wis., 516).
84
State
Banks
and Trust
Companies
Moreover, the transferrer, even if the transfer was
made with knowledge of insolvency and to an irresponsible party, is probably not liable in any of the States
for the debts of the bank contracted after the transfer.
This doctrine has been declared recently by the Supreme
Court of the United States in the case of McDonald v.
Dewey (202 U. S., 510). The same rule has been applied
in several of the state courts. In California, Illinois,
Iowa, Montana, Nebraska, New Mexico, and West
Virginia the liability by statute or constitutional provision is only for the debts of the bank accruing before
transfer. The debts of a bank, even of an insolvent
bank, change very rapidly, and it is difficult to work out
a practicable rule for charging a stockholder who has
transferred his stock.0 In several of the States, also,
which have extended the liability for a period beyond
the time of transfer, the liability of the stockholder is
by the terms of the law only for debts accruing during
the time the stockholder held the stock. In at least
one of these States, too, where the statute is not explicit,
it has been held by the courts that the liability of the
stockholder continues only for the debts of the bank
contracted prior to the transfer.5
a
See " Suggested Changes in the Administrative Features of the National
Banking Laws," 61st Cong., 2d sess., Doc. No. 404, p. 249.
& Harper v. Carroll (64 N. W., 145).
85
CHAPTER
IV.
RESTRICTIONS ON DISCOUNTS AND LOANS.
EXCESSIVE LOANS.
The desirability of some i legal limitation on the extent
of the liability to a banking institution which any one
person, firm, or corporation may incur is largely due to the
fact that, since the American banking system is a system
of independent banks, the resources of many of the banks
are necessarily small in comparison with the needs of
some of their customers for loans. A large manufacturing concern located in a small town may very well be
able to use all the assets of the local bank. If the
local bank were the branch of a larger bank, the mere fact
that a large loan was wanted by a manufacturer in a
small town would be of no significance, since the amount
of the loan would be small compared with the total assets
of the bank.
Moreover, in many banks a controlling interest is held
by a person, firm, or corporation that is actively engaged
in other business enterprises. Such control is far more
likely to be found in small banks than in large, and in a
system of independent banks than in one of branch banks.
One consequence of the close identification of interests
thus brought about between banking and other business
enterprises is the probability that loans will be made
directly or indirectly to some one borrower to an amount
larger than a proper distribution of risks would justify.
The national-bank act in its original form provided that
the total liabilities to any national bank of any person,
company, corporation, or firm for money borrowed should
86
State
Banks
and Trust
Companies
not exceed one-tenth of the amount of the paid-in capital
stock of the bank. The liabilities of the members of a
firm or company were to be included in the liabilities of
the firm or company. It was provided, however, that
"the discount of bills of exchange in good faith against
actually existing values and the discount of commerqial
or business paper actually owned by the person negotiating the same" should not be considered as money borrowed. This section of the national-bank act remained
unchanged until 1906, when it was amended so as to per
mit a single liability to be contracted equal to one-tenth
of the capital and surplus, instead of one-tenth of capital
only, but it was also provided that the liability should
not, in any case, exceed 30 per cent of the capital stock.
State banks.—In all the States and Territories which
incorporate state banks, except Arizona, Arkansas, Delaware, Florida, Indiana, Mississippi, New Mexico, Pennsylvania, Tennessee, and Washington, the banking laws
contain provisions limiting in some manner the amount
which may be borrowed by any one person, firm, company, or corporation. a This legislation has to a large
extent been modeled after the provision in the nationalbank act, but the variations from that provision are important and significant of the difficulties found in the
enforcement of the provision. These variations, or the
chief of them, may be grouped under two heads, according
a The banking laws of the majority of the States follow the phraseology
of the national-bank act in imposing the limitation on " t o t a l liabilities for
money borrowed." In some of the States the laws explicitly include all
liabilities, "whether as principal, indorser, or surety." In a smaller number of States the limitation is on the " a m o u n t of loans to any person,
firm, or corporation."
S?
National
Monetary
Commission
as they relate to (a) the amount of liability, and (b) the
excepted classes of liabilities.
(a) The amount of the liability which may be incurred
by any one person, firm, or corporation is stated in all
the state banking laws in the form of a percentage of
the capital of the bank, or of the capital and surplus, or,
finally, of the capital, surplus, and undivided profits. The
amounts permitted by the state banking laws may be
tabulated as follows:
I. Ten per cent of—
(a) Capital
New Hampshire and North Carolina. 0
(b) Capital and surplus. . California, Georgia, New Jersey, New
York, Rhode Island, Michigan, and
South Carolina.
(c) Capital, surplus, and
undivided profits. . Alabama and Connecticut.
II. Fifteen per cent of capital and
surplus
Illinois, Kansas, Minnesota, North Dakota, and Utah.
I I I . Twenty per cent of—
(a) Capital
Iowa and Oklahoma.
(b) Capital and surplus. . Colorado, Kentucky, Maryland, Montana, Nebraska, Ohio, West Virginia,
and Wyoming.
(c) Capital, surplus, and
undivided profits. .Louisiana.
IV. Twenty-five per cent of—
(a) Capital and surplus. . Missouri, Oregon, South Dakota, and
Texas. &
(b) Capital, surplus, and
undivided profits. . Idaho.
V. Thirty per cent of capital
and surplus
Wisconsin.
• I n North Carolina the limitation of the amount of a single liability
applies only to banks with a capital of less than $100,000.
Under the Texas banking law surplus can only be included if it amounts
to 50 per cent of capital.
88
State
Banks
and Trust
Companies
Exact comparisons with the provision in the nationalbank act are not possible for all the States because in
some the limitation is in the form of a percentage of
capital only. In only two of the States, New Hampshire and North Carolina, is the amount which may be
loaned certainly less than under the national-bank act.
In two other States, Iowa and Oklahoma, the limit on a
single liability is 20 per cent of capital, which is for most
banks far more liberal than the provision in the nationalbank act, although for banks with a surplus greater than
capital it is less liberal. In the banking laws of seven
States the limit on the amount of a single liability is the
same as under the national-bank act. The banking laws
of all the other States which contain provisions with
regard to the amount of a single liability permit a larger
amount to be loaned on a single liability than is permitted
by the national-bank act.
The inclusion of surplus with capital as a basis for
computing the allowable amount of a single liability has
for a considerable number of years been permitted by the
state banking laws. In only four of the state banking
laws which contain provisions with regard to the amount
of a single liability is the limitation, at present, in the
form of a percentage of capital only. The reasons
advanced in favor of including surplus are, in the first
place, that surplus is for all practical purposes capital,
and in the second place that thereby the banks are
induced to build up a large surplus, since many of the
banks find it desirable on occasion to make large loans on
89
National
Monetary
Commission
a single liability.0 Some of the state banking laws, it will
be noted, permit undivided profits also to be included
in the sum against which the percentage is reckoned.
(b) As has already been noted, the national-bank act
provides that discounts of " bills of exchange drawn against
actually existing values" and "commercial or business
paper actually owned by the person negotiating the same "
shall not be considered as money borrowed. The same
exceptions are made in practically all the state banking
laws.6 But in many of these laws additional exceptions
are also made. The most important of these are the
exceptions of loans on real estate mortgages, of loans on
bills of lading and warehouse receipts, of loans on collateral
security, and, finally, of loans approved by a vote of the
directors.
In Iowa a bank may loan on a real estate mortgage of
specified kind an amount equal to 50 per cent of its capital,
although the limit on a single liability otherwise is 20 per
cent of the capital. In Minnesota a bank may, under
similar conditions, loan an amount equal to 20 per cent
of its capital and surplus, although the limit on a single
a
In his report for 1909 the secretary of the Nebraska banking board
said: "This department has repeatedly recommended an amendment to
the present banking act permitting banks to loan to any person, partnership, or corporation 20 per cent of the unimpaired capital and surplus,
instead of 20 per cent of the capital only, as nowr permitted. This would
encourage a building up of a surplus fund, which is always a protection to
the capital invested, fortifying against its impairment and strengthening
the integrity of the bank."
b In New York the loans to any person, firm, or corporation, including
discounts of bills of exchange drawn in good faith against actually existing
values and commercial or business paper actually owned by the person
negotiating the same, must not exceed 25 per cent or 40 per cent of capital
and surplus, according to the population of the city or town in which the
bank is located.
90
State
Banks
and
Trust
Compantes
liability otherwise is 15 per cent. In Kentucky loans on
real estate mortgage may be made without restriction as
to amount, except that the value of the real estate, above
all other incumbrances, must be more than equal to the
amount of the mortgage. Similarly, in Michigan, Ohio,
and Oregon real estate loans are not counted as part of
the liability of any person, firm, or corporation^
In some of the Middle Western, Western, and Pacific
States, provision has been made for excepting loans made
on the security of evidences of ownership of commodities.
In Minnesota and Missouri loans on warehouse receipts
are excepted if the value of the products covered by the
receipts exceeds by at least 10 per cent the amount of the
loan, and if the products are insured in favor of the bank.
Loans made on bills of lading and warehouse receipts are
excepted, also, under the banking laws of California, Colorado, Idaho, Montana, North Dakota, and Oregon.
In a third group of States provision is made more
broadly for excepting loans which are secured. In some
States the exception is to any amount. In Alabama, for
instance, loans "amply secured by good collateral" are
excepted. In Georgia loans which are " amply secured by
good security" are excepted; in Idaho loans secured by
"personal property;" in Louisiana, Michigan, and New
Jersey those secured by collateral. Similarly, in Colorado
loans secured by collateral having a market value in
excess of the amount of the loan are excepted. In Michigan the collateral must be of certain specified kinds, and
a
In several of these States there are limitations on the total amount
which may be loaned on real estate, which in effect place a limit on the
amount of any single loan on real estate. See below, p. 101.
91
National
Monetary
Commission
in New Jersey it must have a value of 10 per cent more
than the amount of the loan. In certain other States a
limit is placed on the amount of secured loans which are
excepted. In California the liability of any one person,
firm, or corporation is limited to 10 per cent of capital and
surplus, but an additional amount equal to 15 per cent of
capital and surplus may be loaned on security worth at
least 15 per cent more than the amount of the loan. In
Connecticut the liability of any one person, firm, or corporation is limited to 10 per cent of capital, surplus, and
undivided profits, but the liability may amount to 20 per
cent of capital, surplus, and undivided profits if the loans
are secured by collateral whose market value is 20 per
cent more than the amount loaned. Similar provisions are
found in the banking laws of Kentucky, New York, Wisconsin, and Maryland. In Wisconsin and Maryland, however, not only must the additional amount be secured by
collateral, but the loan must be approved by a vote of the
directors.
In a fourth group of States the restriction on the
amount which may be loaned to any one person, firm, or
corporation may be partially or entirely removed by a vote
of the directors of the bank. In South Carolina, for
instance, a single liability is restricted to an amount equal
to 10 per cent of capital and surplus, but the board of
directors may, by a two-thirds vote, suspend the limitation
on loans to any one borrower. Similar provisions are
found in Georgia and Virginia. Of less liberal character
is the provision in Michigan, where the single liability is
restricted to an amount equal to 10 per cent of capital and
92
State
Banks
and Trust
Companies
surplus, but the directors may, by a two-thirds vote, allow
a single liability to be increased to an amount equal to
one-fifth of capital and surplus.
From this survey of the provisions in the state banking
laws, it is clear that except in a very few States the state
banking laws are far more liberal than the national-bank
act. In many of the States the restriction on such loans
was originally the same as that in the national-bank act.
The great difficulty experienced in enforcing the provision has been chiefly responsible for its gradual relaxation. The state bank supervisors have uniformly recommended changes which would permit larger loans
rather than the removal of all restrictions on the amount
of single liabilities.
In addition to the limitations on the liability of any one
person, firm, or corporation, limitations have recently
been imposed in several States on the amount of any one
loan, irrespective of the amount of the liability of the
persons, firms, or corporations responsible therefor. In
his report for 1907 the New York superintendent of
banks thus explained the desirability of such a provision:
Loans of an objectionable character have been made in excess of the
amount permitted by law upon the ground that the responsibility for the
payment of the obligation rested upon several individuals. Such loans
are frequently in the form of underwritten loans, and are based on underwriting agreements providing for their repayment through divided individual responsibility, and not on the joint and several obligation of the
borrowers.
Generally the obligation of the underwriter is to purchase his proportionate share of the securities held as collateral to the loan and meantime
to guarantee a pro rata proportion of the aggregate.
93
National
Monetary
Commission
The method of borrowing is not objectionable in itself, and as a form of
undertaking for banks or trust companies is criticisable only in so far as it
has become a common method for financing new and untried enterprises.
Restrictions might more properly be laid upon the character of the collateral in such loans than upon the form of the obligation, but because of
the common use of the underwritten loan in the financing of undemonstrated projects it would seem wise to limit the amount of any such loans
upon the securities of one corporation to 25 per cent of the capital and surplus of the bank or trust company. * * *
A feature of the underwritten loan is the long term for which it is made.
It has been found that those availing of this form of borrowing are in
many cases more susceptible to change of credit than those interested in
business enterprises of an established character. Therefore, it would seem
proper that no such loans be made for a longer period than one year.
The New York special commission on banks in 1907
made a similar recommendation, and in 1908 the New
York legislature enacted the following law:
No loans shall be made by any bank or trust company upon the securities of one or more corporations the payment of which is undertaken in
whole or in part severally but not jointly by two or more individuals,
firms, or corporations—
(a) If the borrowers or underwriters be obligated absolutely or contingently to purchase the securities, or any of them, collateral to such loan,
unless the borrowers or underwriters shall have paid on account of the purchase of such securities an amount in cash or its equivalent equal to a t
least twenty-five per centum of the several amounts for which they remain obligated in completing the purchase of such securities;
(b) If the bank or trust company making such loans be liable directly,
indirectly, or contingently for the repayment of such loans or any part
thereof;
(c) If its term, including any renewal thereof, by agreement, express or
implied, exceed the period of one year;
(d) Or to an amount under any circumstances in excess of twenty-five
per centum of the capital and surplus of the bank or trust company making
such loan.
94
State
Banks
and Trust
Companies
Similar provisions were inserted in the Rhode Island
banking law in 1908 and in the California banking law in
1909.
Trust companies.—In nearly all of those States in which
trust companies have acquired full banking powers the
provision limiting the amount of any single liability
applies to both banks and trust companies. In only one
State or Territory—New Mexico—is there such a provision for trust companies and none for state banks. In a
few States—Kansas, Michigan, Minnesota, Missouri, Montana, Oklahoma, New Jersey, Nebraska, and Wisconsin—
there are limitations on the amount of a single liability
for banks, but none for trust companies. In Nebraska
trust companies do not do a banking business, and in several of the other States in the list there are restrictions on
the powers of trust companies to do a banking business.
These restrictions in several of the States forbid trust
companies to discount or buy commercial paper, and
confine them to loans on real estate and on collateral
securities. Where restrictions of this kind exist, the
need for limitation of the amount of any single liability
is obviously less. In two States—Ohio and South
Dakota—the provisions relating to a single liability are
somewhat different for banks and for trust companies,
but the differences do not appear to be significant.
In those States which incorporate trust companies
but not state banks, the limitations imposed on the
liabilities of any one person, firm, or corporation are of
essentially the same character as those imposed in other
States on state banks and trust companies. Under the
95
National
Monetary
Commission
Massachusetts trust-company law, a single liability
must not exceed an amount equal to 20 per cent of
capital and surplus, if the trust company has a capital
of $500,000 or more, and 20 per cent of capital if the
trust company has a capital of less than $500,000. The
ordinary exceptions of certain kinds of bills of exchange
and commercial paper are made. In Maine a trust
company may not loan to a person, firm, or corporation
an amount equal to more than 10 per cent of its capital,
surplus, and undivided profits, unless the loan is approved by a majority of the investment board of the
bank, or secured by collateral. Loans in excess of 25
per cent of capital, surplus, and undivided profits must
be similarly approved, and must be secured by collateral
which in the judgment of a majority of the investment
board is of a value equal to the excess of the loan above
25 per cent of capital, surplus, and undivided profits.
The ordinary exceptions of certain kinds of bills of exchange and commercial paper are made.
In Vermont, however, the restrictions on a single
liability are somewhat peculiar. Loans to any one
person, firm, or corporation must not exceed 5 per cent
of deposits, and in no case must such a loan amount to
more than $30,000. If the loans are entirely on personal security, they must not exceed $10,000, until
deposits amount to $1,000,000, after which they may be
increased by 1 per cent of the deposits in excess of
$1,000,000. Loans on United States bonds and municipal bonds are excepted, but the ordinary exceptions
of certain kinds of bills of exchange and commercial
96
State
Banks
and Trust
Companies
paper are not made. The peculiar character of these
provisions is due to the assimilation in Vermont of the
regulation of the trust company to that of the savings
bank. The restrictions noted above are also imposed
in that State on savings banks. Under the trust-company law for the District of Columbia, no limitation
is imposed on the amount of a single liability.
LOANS TO DIRECTORS AND OFFICERS.
In almost all of the banking institutions of the
United States the directors or a part of them are actively engaged also in other business enterprises; and in
many cases they borrow from the banks or trust companies in which they are directors. Moreover, in some
banks one or two of the directors own a controlling
interest, and are at the same time large borrowers. The
possibility, in such cases, that larger loans may be made
than the credit of those directors warrant is very considerable. The following extract from the report for
1909 of the treasurer of Georgia is illustrative of conditions
which are not infrequently found:
In some instances, upon examination of the reports of the bank examiner, I was absolutely astounded to discover that the entire capital stock
and surplus had been used by the directors of the banks, and my astonishment was intensified when I found that there was no law to prevent it.
It is contrary to the old banking laws, but the new act provides that no
director shall borrow in excess of a certain amount except upon certain
conditions. When these conditions are complied with they can then
borrow all the money the bank has and not violate any law. It never
occurred to me, however, that directors of a bank should be authorized
or justified in using the entire capital and surplus of a bank to promote
their own individual enterprises to the exclusion of others who might
come in competition with them. I have also been astonished to find that
590450—11
-7
97
National
Monetary
Commission
the stockholders of banking institutions would select a board of directors
who had a very small per cent of the stock in the bank and leave all
matters connected with the bank entirely in their control. While the
stockholders have a certain protection under the law, and expect to be
protected to a certain extent by this department, I would respectfully
suggest to them that they be more vigilant as to their own affairs and as
to whom they select as directors of their business.
The national-bank act contains no provisions regarding
loans to directors, but in the laws of about one-half of
the States attempts have been made to devise rules
which would prevent the making of loans to directors in
excess of the amount to which their credit entitles them.
The provisions in the state banking laws concerning loans
to directors may be resolved into three elements, (a)
the requirement that a majority, two-thirds, or all of
the board of directors shall approve such loans, (6) a
limitation of the amount of loans to directors more
stringent than that of loans to other persons, and (c)
the requirement that loans to directors shall be secured.
Two or all of these are combined in the banking laws of
some States, but the requirement that loans to directors
shall be formally approved by the board of directors is
the one most frequently found. It has been thought
that directors would be reluctant to vote for excessive
loans to other directors if their vote is to be recorded.
In most of the States the provisions relating to loans to
active officers of the bank are identical with those relating
to loans to directors, but in some States they are more
stringent. In three States—California, Nebraska, and
Oklahoma—the active officers of a banking institution
may not borrow from it. In Connecticut, banks and
9*
State
Banks
and Trust
Companies
trust companies may not "discount any paper made,
accepted, or indorsed by any of their executive officers
or clerks." The desirability of forbidding banks to make
loans to their active officers has recently been urged by
the Wisconsin special committee on banking."
REAIv ESTATE LOANS.
There is no more characteristic difference between the
state banking laws and the national-bank act than the
fact that, in almost all the States, state banks and trust
companies may make loans on the security of real estate,
whereas national banks are prohibited from doing so.6
In some States, where the influence of the example of
the national-bank act was strong enough at the beginning
of state-bank regulation to secure the insertion in the
state banking laws of the prohibition of real estate loans,
it has later been found desirable to amend the laws in
this respect. The Pennsylvania general banking law of
1878, for instance, did not permit banks to loan on real
estate, but was amended in 1901 so as to permit such
loans to be made. In North Dakota and South Dakota,
also, similar changes have been made in the banking laws.c
a
Report of the Wisconsin Special Committee on Banking, 1910, p. 20.
& Revised Statutes of the United States, section 5137. In a considerable part of real estate loans the mortgage is only a collateral security.
The bank looks primarily to the personal credit of the individual, but is
further protected by an assignment of a mortgage. In many communities
real estate mortgages are one of the most important forms of investment,
and just as in other sections bonds and stocks are pledged as security for
a loan, so in these sections mortgages are thus used. The Comptroller of
the Currency, in his report for 1887, p. 8, recommended that the nationalbank act be amended so as to permit loans on mortgages as collateral.
C
N . Dak. (1899), chap. 28; S. Dak. (1893), chap. 23.
99
National
Monetary
Commission
In 1910 trust companies in all the States and Territories
where they are incorporated under general laws may loan
on the security of real estate. State banks so incorporated may also loan on real estate in all the States and
Territories except New Mexico and Rhode Island. In
Rhode Island, however, banks may loan on real estate
part of their savings deposits. In Colorado and Tennessee, the state banking laws apparently forbid the ownership of mortgages by banks, but permit loans on the
assignment of mortgages as security. In Connecticut,
Delaware, New Hampshire, and Vermont the powers
of banking institutions are prescribed in their charters,
but ordinarily, if not in all cases, they may loan on real
estate.
A few of the state banking and trust-company laws
contain provisions limiting the amount which may be
invested in real estate loans. Provisions of this kind
are found in the laws of Ohio, Vermont, Michigan, New
York, North Dakota, South Carolina, Texas, Pennsylvania, Oklahoma, and Wisconsin. Under the provisions
of the Michigan banking law, no real estate loans can be
made by a commercial bank until a resolution stating
the extent to which such loans may be made has been
passed by a two-thirds vote of the directors, and the
amount of such loans must not be more than 50 per cent
of the capital of the bank. 0 The savings deposits in a
commercial bank may, however, be invested to any
extent in real estate loans. When the prohibition of
real estate loans was repealed in North Dakota, it was
a Mich. (1887), art. 215, sec. 23.
State
Banks
and
Trust
Companies
enacted that loans secured wholly by real estate were
not to exceed 50 per cent of capital and surplus. This
provision is still retained in the banking law.
In New York a bank or trust company, if its principal place of business is located in a borough with a
population of 1,800,000 or more, may not loan on real
estate security more than 15 per cent of its assets; if
it is located in a village of not over 1,500 inhabitants,
and there is no savings bank in the village, not more
than 40 per cent of its assets; if located elsewhere, not
more than 25 per cent of its assets. In Texas a bank
may not loan "more than 50 per cent of its securities"
on real estate; in South Carolina not more than an amount
equal to one-half of capital and deposits; in Pennsylvania not more than an amount equal to the time deposits and not more than 25 per cent of capital, surplus,
and undivided profits. In Oklahoma loans on real
estate must not exceed 20 per cent of the loans of the
bank. In Ohio the directors must decide by a twothirds vote to what extent loans may be made on real
estate, but the aggregate amount of such loans must
not exceed 50 per cent of capital, surplus, and deposits,
except that if the bank does both a commercial and a
savings bank business, it may loan up to 60 per cent
of capital, surplus, and deposits. In Wisconsin a bank
may not loan on real estate more than 50 per cent of
capital, surplus, and deposits, unless such loans are
specifically authorized by its board of directors. Finally,
in Vermont not more than 80 per cent of the assets
of a trust company may be invested in mortgages of real
IOtt
National
Monetary
Commission
estate, and not more than 60 per cent in mortgages
of real estate outside Vermont.
There are also provisions in some of the state laws
defining the character of the loans which may be made
on real estate. These provisions relate (a) to the location of the real estate, (b) to the character of the lien,
and (c) to the value of the real estate in its relation to
the amount of the loan.
(a) In Massachusetts a trust company may not loan
on mortgages of farms or unimproved land unless situated in the New England States or in New York. In
Ohio banks may loan only on real estate in Ohio and
immediately adjacent States.
(b) In California, Pennsylvania, Oklahoma, and North
Dakota banks may loan only on first mortgages. In New
York banks and trust companies, since 1908, must not
make any loans on the security of real estate if the prior
incumbrances upon such real estate exceed 10 per cent of
the capital and surplus of the investing banking institution, or if they exceed two-thirds of its appraised value.
(c) In Texas a bank must not loan on real estate an
amount greater than 50 per cent of its cash value; in
Ohio not more than 40 per cent, if the real estate is
unimproved, and not more than 60 per cent if it is improved. In Vermont a trust company may not loan
on real estate an amount in excess of 60 per cent of
the value of the property mortgaged, and if the mortgages
are on unimproved or unproductive real estate, the
amount loaned must not exceed 40 per cent of the value
of the property mortgaged.
102
State
Banks
and Trust
Companies
In some of the States in which there are large numbers of small banks, the banks have encountered difficulty in finding good real estate loans, because of the
restrictions on the amount of a single liability. In
Minnesota, for instance, where the amount which may
be loaned to any one person, firm, or corporation is
restricted to 15 per cent of capital and surplus, the small
banks complained that they could not get the best real
estate loans because such loans were made in relatively
large amounts. In 1907 the Minnesota banking law was
amended so as to permit a bank to make a loan on real
estate to an amount equal to 20 per cent of the capital
and surplus. The amount of such loans, however, was
not to exceed 50 per cent of the value of the real estate
mortgaged. In Iowa, where the limit on a single liability is 20 per cent of the capital of the bank, state
banks may loan an amount equal to one-half of their
capital stock on a mortgage of unincumbered farm
land in Iowa worth at least twice the amount loaned.
In Kentucky the limitation on the amount of any single
liability does not apply to loans on real estate of a cash
value greater than the loan.
Real-estate security as a basis for bank loans has been
very generally condemned by writers on the subject of
banking. Mr. Horace White says:
The reason why lands and buildings ought not to form the basis of the
loans of a commercial bank is that they are not quick assets.
The liabili-
ties of the bank being payable on demand, the assets must be converted into
money within short periods.
When real property is given as security for a
debt, both borrower and lender look to it, and not to the personal obligation, as the source of payment. 0
a Money and Banking, p. 409.
103
National
Monetary
Commission
It will be noted that this view is based on the assumption
that the deposits are demand liabilities. As will be shown
later, it is one of the chief characteristics of the state banks
and trust companies that a large part of their deposits are
savings and other time deposits.
Within recent years the supervisors of state banks have
shown no disposition to oppose the increase by the banks
of their real estate loans. In several of the States, before
land values became stable, the supervisors did object to
allowing the banks to loan on real estate. The state
examiner of Minnesota, for instance, in his report for 1886
recommended that banks should not be allowed to loan
on real estate on the ground that such loans were not
readily convertible. As has already been noted, loans on
the security of real estate were prohibited during the
period of most rapid settlement in North Dakota and
South Dakota.
The most important recent criticism of real estate as a
banking investment was made by the New York superintendent of banks in his report for 1907. He said:
A cause contributing to embarrassment in some cases was the excessive
proportion of assets loaned upon real estate. Whether this amount was
made up of direct loans or of loans secured by the assignment of first or
second mortgages, they were found to be equally unavailable for use in
obtaining credit. Commercial banks making a practice of loaning upon
real estate mortgages were greatly embarrassed by the unmarketability of
such security.
Certain companies incorporated for the purpose of dealing in real estate
mortgages have a regular market for them, and such companies may not be
criticised for accepting this character of property as an investment or for
sale.
The objection to real estate for a bank of discount is not to its insufficiency, but to its character. As the obligations of such banks are payable
104
State
Banks
and Trust
Companies
largely on demand, it is proper that the securities which they hold should be
readily convertible into current funds.
While a mortgage upon real estate
may be good security, it can not ordinarily be availed of by a bank in an
emergency.
We realize, however, the hardship t h a t a prohibition against this character of loans would create, particularly in the smaller cities and towns of the
State, where the making of such loans is essential to profitable banking and
required by the needs of many borrowers.
Personal collateral as security
for loans is rarely obtainable by country banks.
In accordance with this recommendation an amendment made to the New York banking law permitted banks
and trust companies in the smaller towns and cities to
loan a larger percentage of assets on real estate loans than
those in larger places.
Although adequate statistical data are not obtainable,
there is reason to believe that the proportion of real estate
loans to the total loans of the banks, even without legislative provision, is larger in the smaller towns and cities.
An interesting analysis was made in 1899 by the bank
examiner of Wisconsin of the real estate loans held by the
state banks of that State. He said:
A classification of the loans and discounts indicates that $31,012,220.27,
or 77.98 per cent of this class of assets, consists of paper with or without
other personal security, and $8,749,881.51, or 22.1 per cent of loans on
mortgage or other real estate security. By a further classification of the
real estate loans, it may be noted that in cities of more than 6,000 inhabitants, real estate loans constitute 8.26 per cent, and in towns and cities of
less than 6,000 inhabitants, 19.91 per cent of the aggregate capital, surplus,
and deposits. 0
In 1908 the real estate loans made by state commercial
banks in San Francisco were only 14 per cent of their total
loans and discounts, while the real estate loans made by
a Fifth Annual Report of the Wisconsin Bank Examiner (1899).
105
National
Monetary Commission
the interior state banks were nearly one-third of their
total loans and discounts.
The chief concern of the state supervisors with reference to real estate loans has been the fear that through
making such loans banks may come into the actual ownership of considerable quantities of real estate. Their assets
would thus become hopelessly fixed. Practically all the
state-bank and trust-company laws provide that banks
and trust companies shall not hold real estate, except that
which is necessary for the accommodation of their business,
for longer than a certain period. These provisions are
modeled in a general way on the provision in the nationalbank act, which requires that real estate acquired in the
collection of debts shall be disposed of within five years,
although the period allowed in several of the state laws
is less than five years. But in some of the States there
are additional provisions intended to prevent more effectually any accumulation of real estate in the hands of the
bank or trust company, such, for instance, as the provision
that a bank or trust company, at a sale under a mortgage
to it, shall not bid more than is owing to the bank.
Despite these restrictions and the vigilance of the state
bank supervisors, in the period from 1892 to 1897 many
state banks in the Middle Western and Western States
came into the possession of large amounts of real estate.
Under the conditions then prevailing it would have been
impossible to force the banks to sell their real estate without driving many of them into insolvency. The increase
in the value of real estate in these States since 1898 has
enabled the supervisors to secure a great reduction in the
real estate holdings of the banks.
106
State
Banks
and
Trust
Compantes
Notwithstanding the disadvantages of real estate as a
convertible asset, the power to loan on the security of
real estate is a valuable one to many of the state banks. a
Many banks, particularly those in the smaller towns and
cities, if restricted to loans on personal security, find it
difficult to fully employ their funds. There are not sufficient local loans of this kind to employ all the funds of the
bank; and the amount not so employed, if it is to yield a
revenue, must either be invested in outside commercial
paper or deposited with banks in the great commercial
cities. The following extract from the testimony of Mr.
Arthur Reynolds, chairman of the legislative committee
of the American Bankers' Association and president of the
Des Moines National Bank of Des Moines, Iowa, before
the National Monetary Commission, is illustrative of conditions which exist in many small towns:
Mr. W E E K S . I S there any substantial demand in Iowa that national
banks be permitted to loan on real estate ?
Mr. REYNOLDS. There is a very great demand in the State of Iowa; yes,
sir. I have talked to very great many bankers, country bankers particularly, who are very favorable to that idea. In fact, I have in mind now
two or three national bank managers that have told me they would be
compelled to go out of the system if they were not permitted to loan on
real estate. I think there is such a demand, yes, sir. I would not want
to go on record as saying that I believe that it is a good thing to do; but I
do say t h a t there is quite a demand among the national banks for it.
Senator TELLER. What occasions t h a t ? Is it a lack of opportunity to
make good loans ?
Mr. REYNOLDS. Yes, sir; it is a lack of opportunity to make good loans,
particularly in the State of Iowa. We are very rich there, and there is a
a According to reports to the National Monetary Commission on April 28,
1909, the loans of all the state banks in the United States on the security
of real estate were 20.6 per cent of their total loans and discounts.
107
National
Monetary
Commission
lack of opportunity of investment. It drives them into the commercial
paper field. I have in mind right now a bank, one of our customers, that
was caught on a piece of paper a short time ago, that was originally carrying
a nice line of farming loans. The Comptroller's office requested them
to cut out the farm loans and they cut them out and invested them in commercial paper, and they lost some of their money. I was talking to a man
connected with that particular bank, and of course it was one of their
thoughts that they ought to have a wider range in the matter of loaning
on real estate.
The difficulty which the banks in the smaller towns and
cities encounter in employing their funds in loans on personal security appears to be, to some extent at least, a
sectional one. The large reserves held, by the country
national banks in the South and West are probably an
indication of the disadvantage under which these banks
labor in loaning their funds. According to the report of
the Comptroller of the Currency for 1909, reserves were
held at various dates in the year 1909 as follows:
Central reserve cities
COUNTRY
New England States
Eastern States
Southern States
Middle States
Western States
Pacific States
April 28.
June 23.
Per
Per
25.76
Percent.
26.82
30.73
30.15
29.05
25.15
23.18
24.51 i
22.19
27.40
24.48
25.46
24.40
21.99
2315
25-13
29.86
29.99
cent.
25.73
31-94
Other reserve cities
September 1.
February
5-
cent.
Per cent.
25.44
BANKS.
25.12
!
23.09
29. 10
26.09
32.68
31.14
32.49
32.67
24.97
30.43
3 1 . 20
It will be noted that while the reserves of the country
banks of the Eastern States ranged from 21.99 to 23.09 per
cent, the reserves of the country banks in the Pacific
States ranged from 29.99 to 31.14.
108
State
Banks
and Trust
Companies
It would be of interest to know for what length of time
loans on the security of real estate are usually made by
the banks. No statistical data bearing on this point can
be obtained, but there is reason to believe that a large part
of such loans are for a year or more. There is a great need
in agricultural sections for comparatively small loans to
cover the time of production. At present the banker is
largely debarred from entering this field by the cost of
examining titles and drawing mortgages. The expense is
so great, considering the size of the loan, that credit is usually obtained from other sources.
109
CHAPTER V.
RESERVES.
STATE BANKS.
In most of the antebellum state banking laws reserves
were required only against note issue. In Ohio, for example, the general banking law required a reserve of 30
per cent against circulation, but none whatever against
deposits. Several of the state banking laws which survived the destruction of the state bank-note issue contained, however, provisions requiring banks to hold a
reserve against deposits; but in none of these States
was the increase in the number of state banks important.
In those States in which the state banks were organized
under the " business incorporation laws" there were,
of course, no reserve requirements.
The first state banking legislation after the civil war
was directed almost solely to the differentiation of banking corporations from other business corporations in
respect to the capital required. Until 1887 a reserve
was required for state banks in only three States, and
in these the required reserves were small. A Connecticut
law, enacted in 1872 and in force without amendment
until 1901, required banks to keep a reserve equal to 10
per cent of all liabilities except capital stock; one-half
of this reserve might be in certain bonds. In 1879 state
no
State
Banks
and Trust
Companies
banks in Ohio were required to carry a reserve equal to
20 per cent of deposits, but the reserve might consist
wholly of specified bonds. A more nearly adequate
provision was contained in the Minnesota law of 1881,
which required state banks to hold a reserve equal to 20
per cent of immediate liabilities. One-half of the required reserve was to be in cash, and one-half might be
on deposit with other banks.
Even since the revival of state bank regulation, which
began in 1887, the requirement of a reserve has not been
regarded in many of the States as an important part of
the state banking law. It is not difficult to understand
this attitude. The primary purpose of state supervision
is to reduce the number of bank failures, and, in case of
failure, to secure the payment of as large a part of the
claims as possible. The attention of the supervisor is
concentrated, therefore, on questions related directly to
the safety of the individual bank, such, for instance, as
the prevention of excessive loans. To one aspect of the
reserve requirement—the desirability of keeping the bank
in a position to respond to the demands of its depositors
and creditors in ordinary contingencies—he is forced to
give some attention. But the wider importance of
bank reserves—their relation to the national credit structure—does not make the same intimate appeal.® Except
a
In 1898 the commissioner of banking in Pennsylvania in recommending
that state banks should be required to carry a specified reserve, said that
such a reserve would be of no avail in a panic, "since the institution which
would pay out golden currency would offer the public a premium to
denude it of its deposits." He thought, however, that the requirement
of a reserve would inspire confidence.
in
National
Monetary
Commission
in a few States, notably New York and Massachusetts,
the supervisors are not brought into close contact with
the central and organizing parts of the national credit
system.
In 1910 a reserve of some kind for state banks is required in all the States and Territories which incorporate
state banks, except Arkansas, Indiana, Illinois, Mississippi, New Hampshire, New Mexico, South Carolina,
Tennessee, Virginia, and Wyoming. a
* There are, however, the widest differences in the character of the reserves required. These variations may
be dealt with conveniently under the following heads:
(a) The amount of reserve, (b) the form of the reserve,
and (c) the provisions for the enforcement of the reserve
requirement.
Amount of reserve.—The most striking and important
difference between the reserve* required by the nationalbank act and the reserves required by the state banking
laws is that under the national-bank act the reserve is
a percentage of " deposits"—i. e., of all deposits—while
under the banking laws of a majority of the States either
no reserve is required against time or savings deposits, or a
smaller amount of reserve is required than against demand
deposits.
We may classify the reserve requirements in the state
banking laws into three groups according as the banks
are required (1) to hold the same amount of reserve
<* In some of these States the supervisors, acting under general powers
conferred upon them by the state banking law—such, for instance, as the
power to direct the discontinuance of unsafe practices—may require the
banks to keep a specified reserve.
112
State
Banks
and Trust
Companies
against all classes of deposits, (2) to hold a reserve only
against. demand deposits or liabilities, and (3) to hold
different amounts of reserve against different classes of
deposits. 0
1. The following States and Territories require the
same amount of reserve against all classes of deposits:
Arizona, Florida, Iowa, Kansas, Michigan, Montana,
Nevada, North Carolina, North Dakota, Ohio, Oklahoma, South Dakota, and Wisconsin. In six of these
States—Arizona, Nevada, North Carolina, Ohio, Montana, and Wisconsin—the amount of reserve required
is 15 per cent; in South Dakota and Florida, 20 per
cent; in Michigan, 15 per cent for banks in cities of less
than 100,000 population and 20 per cent for banks in
other cities; in Oklahoma, 20 per cent for banks in cities
of less than 2,500 population and 25 per cent for banks
in other cities; in Kansas, 20 per cent for banks in cities
of less than 5,000 population and 25 per cent for banks
in other cities; in Iowa, 10 per cent for banks in cities
of less than 3,000 and 15 per cent for banks in other
cities.
2. The banking laws in the States of the second group
are alike in that they require a reserve only against a
part of deposits, but they differ slightly with respect
to the deposits against which a reserve is not required.
In Alabama, Georgia, Louisiana, Maryland, Missouri,
and West Virginia a reserve is required only against
"demand deposits;" in Idaho, Minnesota, New Jersey,
a
One State, Colorado, curiously enough, requires a reserve against savings
deposits, but none against demand deposits.
59045 0 —11
8
113
National
Monetary
Commission
and Washington a reserve is required only against "immediate or demand liabilities." In Delaware and New
York a reserve is required against all deposits except
time deposits not payable within thirty days. In Connecticut and Rhode Island a reserve is to be held against
all deposits except savings deposits.
The amount of reserve required in Alabama, Connecticut, Idaho, Maryland, Missouri, New Jersey, Rhode
Island, and West Virginia is 15 per cent; in Minnesota
and Washington, 20 per cent; in Georgia and Louisiana,
25 per cent; in Delaware, 10 per cent for banks in cities
of less than 50,000 population and 15 per cent for banks
located elsewhere; and in New York, 25 per cent for any
bank whose principal place of business is in a borough
of 1,800,000 population or over, 20 per cent for any
bank with its principal place of business in a borough
with a population of 1,000,000 or over and less than
1,800,000, and 15 per cent for any bank located elsewhere in the State.
(3) The States in which the banking laws require
different amounts of reserve against different classes
of deposits are California, Kentucky, Oregon, Pennsylvania, Texas, and Utah. 0 The distinction between
the classes of deposits is not the same, however, in all
the States. In California a distinction is made between
"savings"
and
other
deposits; in
Oregon
and
Penn-
ey Under the banking law of Iowa the stock savings banks, which nearly
all carry on a commercial business, are required to carry reserves of different amounts against their commercial and savings deposits.
114
State
Banks
and Trust
Companies
sylvania, between demand and time liabilities; in Kentucky, between demand deposits and those on which
the depositor has not the right to check without giving
at least thirty days' notice; in Utah, between " commercial' ' and "savings" deposits; in Texas, between
' * demand deposits'' and '' savings deposits.''
In all of these States the reserve required for " savings" or " t i m e " deposits is less than that required for
"demand" or "commercial" deposits.
The reserve required against "savings" or " t i m e "
deposits is 4 per cent in California; in Pennsylvania,
7% per cent; in Kentucky, Oregon, and Utah, 10 per
cent; in Texas, 15 per cent. The reserves required
against "demand" or "commercial" deposits are as
follows: Texas, 25 per cent; California and Pennsylvania, 15 per cent; Kentucky and Oregon, 15 per
cent for banks in cities and towns with a population
of less than 50,000 and 25 per cent for banks in cities of
over 50,000 population; Utah, 15 per cent for banks
in cities and towns with a population of less than 25,000
and 20 per cent for banks in larger places.
Form of the reserve.—Under the national-bank act the
reserve of a bank must consist entirely of cash in bank
and balances due from other banks. Country banks may
count as three-fifths of their required reserves balances due
from banks in reserve or central reserve cities, and banks
in reserve cities are permitted to count as one-half of their
reserve balances due from banks in central reserve cities.
"5
National
Monetary
Commission
The reserves of banks in central reserve cities must consist entirely of cash in bank. 0
None of the state banking laws require that the reserve
of any class of banks shall consist wholly of cash in bank.
All the laws permit balances in other banks to be counted
at least as a part of the reserve. There are great differences among the laws, however, with respect to the amount
which may be so counted. In Idaho, Michigan, and
Minnesota one-half of the required reserve may be in the
form of balances; in Alabama, Arizona, Nebraska, New
Jersey, North Carolina, North Dakota, Rhode Island,
Texas, and West Virginia, three-fifths; in Louisiana, eight
twenty-fifths; in Delaware, Kentucky, Nevada, Oklahoma,
and Oregon, two-thirds; and in Iowa and Kansas, threefourths.
In a few States a larger part of the reserve against " savings " or " t i m e " deposits may be kept on deposit with
other banks than of the reserve against demand or "commercial" deposits. In Ohio, nine-fifteenths of the reserve
against demand deposits and eleven-fifteenths of that
against time deposits may be in the form of balances with
other banks; in California, three-fifths of the reserve
against demand deposits and one-half of the reserve
against time deposits may be so kept.
° Under the national-bank act, the cash-in-bank reserve must consist of
"lawful money" (i. e., gold coin of the United States, silver dollars, fractional silver coin, legal-tender notes, treasury notes of July 14, 1890,
and United States gold and silver certificates). No special importance
appears to have been attached to the phraseology employed in most of the
state banking laws in defining the cash-in-bank reserve. In some of them
the phrase used is " cash on hand," in a large number it is " lawful money,"
and in still others the several varieties of currency which may be counted
are enumerated. Such enumerations usually include national-bank notes.
116
State
Banks
and Trust
Companies
Finally, in New York the provision with reference to the
part of the reserve which may be carried in the form of balances is modeled more closely after that in the nationalbank act in that the part of the reserve which may be carried in other banks is greater for banks located in the
smaller towns and cities. A bank with its principal place
of business in a borough of a population of 1,800,000 or
over may deposit two-fifths of its reserve in other banks; a
bank in a borough of less than 1,800,000 population and
not maintaining a branch in a borough of 1,800,000 may
deposit one-half; and banks located elsewhere, three-fifths.
In only a few of the States is a distinction in the amount
of reserve required made between ordinary banks and
banks acting as reserve agents. In California, Montana,
Nevada, Oklahoma, and Wisconsin reserve agents must
carry a larger reserve, and they may count as part of their
reserve only balances due from other reserve banks. In
California reserve agents must carry a larger reserve, and
their reserve must be entirely in cash. In Rhode Island
reserve depositories must carry a reserve of 25 per cent,
except that Providence banks or trust companies serving
as reserve agents only for banks and trust companies in
Rhode Island towns need have only 15 per cent.
In the state banking laws hitherto considered the
requirements as to the form of the reserve do not differ
greatly from the requirements in the national-bank act.
In the remaining States which require a reserve, however,
the differences are fundamental. In one group of States,
including Colorado, Missouri, Montana, South Dakota,
Utah, Washington, and Wisconsin, although the reserve
117
National
Monetary Commission
must consist entifely of cash and of bank balances, the
banks determine for themselves what part of their reserve
shall be cash in bank and what part shall be in the form
of bank balances. Even more important are the differences from the national-bank act in a final group of States.
In Connecticut, Florida, and Pennsylvania, the reserve
may consist partly, and in Georgia wholly, of securities.
In Connecticut four-fifteenths of the reserve must be cash
in bank, and the remainder may consist of balances in
other banks or of railroad bonds that are legal investments
for savings banks. The bonds must not, however, exceed
one-fifth of the whole reserve. In Florida, the cash
reserve must be two-fifths of the total, and the remainder
may consist of balances in other banks or of United States,
Florida, and certain municipal bonds. In Pennsylvania
the cash in bank reserve must be one-third; another third
may consist of United States, Pennsylvania state, and
Pennsylvania municipal bonds; and the remaining third
of bank balances. In Georgia the reserve may consist, in
any proportion that the bank finds desirable, of cash balances in other banks and of " stocks and bonds " actually
owned.
The state bank supervisors in several of the States, at
one time or another, have recommended that banks should
be allowed to count as part of their reserve specified
securities,0 on the ground that in case of need cash could
be quickly secured by the sale of such securities. I t will
be noted that in all the above States except Georgia the
a In 1896 the treasurer of Georgia in his annual report recommended
that the banks should be allowed to count as part of their reserves advances
on cotton and naval stores which were being prepared for shipment.
118
State
Banks
and Trust
Companies
character of the securities which may be counted as a
part of the reserve is defined in such a way as to assure
the safety of the investment. The chief consideration
with reference to the form of a bank reserve is not, however, the safety of the investment, but the availability of
the reserve in an emergency.
Certainly many of the securities which may be counted
as reserve in these States could be sold during a panic
only at a heavy loss, and to realize on any of them would
require time. In his report for 1908 the commissioner of
banking of Pennsylvania justly said:
Such bonds may provide a safe investment, but they do not afford a
facility for sale that renders them a quick asset, and, in my opinion, do not
meet the requirements necessary when money is quickly needed.
In one very important particular the provisions concerning the form of the reserve in the state banking laws
differ generally from the provisions in the national-bank
act. Under that act, as has been said, the country banks
may count as part of their reserve only those balances due
from banks in reserve or central reserve cities, while
banks in reserve cities may count as part of their reserve
only balances due from banks in central reserve cities.
These provisions facilitate the concentration of reserves
in the great commercial cities, and particularly in New
York City, and thereby aid in establishing a national
reserve system.
The state banking laws do not to any appreciable
degree reflect the same idea. In Kansas, Michigan, and
Washington the reserve agents must be banks located in
cities approved by the state bank supervisors. In Rhode
119
National
Monetary
Commission
Island all state banks, national banks, and trust companies which are members of the Providence clearing
house may be reserve depositories, and banks or trust
companies in certain other cities also, if they are approved
by the supervisor. In Delaware the balance must be
carried in a Delaware bank or trust company or on
deposit with a bank, banker, or trust company in New
York, Philadelphia, or Baltimore. In North Dakota
reserve depositories must be located in a "convenient
commercial center." In Connecticut reserve agents must
be banks which are members of clearing houses in New
York, Boston, Philadelphia, Chicago, or Albany, or
national banks, state banks, or trust companies in New
Haven, Hartford, or Bridgeport. In Pennsylvania the
reserve agent may be any Pennsylvania bank or trust
company or any bank or trust company in a nationalbank reserve city. In New York and California the reserve agents must be banks or trust companies within
the State. In the other States no provision is made as to
the location of reserve agents.
It is obvious from the foregoing that none of the state
banking laws, except perhaps those of Rhode Island and
Connecticut, are framed in such a way as to strengthen
the tendency toward the concentration of banking reserves.a On the other hand, the laws in all the States
leave the banks almost entirely free to deposit their
a
In Michigan the commissioner in 1909 approved as reserve cities 30
places, of which 17 were in Michigan. Among the number were Alpena,
Houghton, Marquette, and Calumet. Detroit is the only national-bank
reserve city in Michigan.
120
State
Banks
and Trust
Companies
funds in banks in the great commercial centers. a The
strong economic pressure toward concentration is thus
left free to act toward drawing reserves into banks
located in the reserve and central reserve cities. The
total resources of the state banks and trust companies are
somewhat less than the total resources of the national
banks; but on September i, 1909, the net deposits of the
New York national banks due to state banks and trust
companies was $334,000,000, while the net deposits due
to other national banks was $289,000,000.
Undoubtedly in many of the States the absence of
provisions relating to the location of reserve banks or
the laxity of such provisions as exist permits evasion of
the reserve requirement. The New York special commission on banks in 1907 said:
Care should be taken to prevent evasion of the law as to due-from-bank
reserves, such as we find to have been practiced under existing law. To
illustrate: Trust Company A deposits $100,000 with Bank B , B in turn
deposits the same amount with Trust Company C, and C deposits the
same amount with A. This would avoid an offset of deposits and leave
each institution in possession of its original amount of funds and enable
each to count such deposits as reserve under the present law.
The supervisors have for the most part been much
more concerned with assuring themselves as to the solvency of the reserve agents of the banks under their
supervision than with the concentration of reserves.
In about one-half of the States which require a reserve the
bank selected as a depository must be approved by the
0 In most of the States the deposits are required to be in solvent banks.
I n a few States it is expressly provided that such deposits may be in
banks or trust companies, and in a few others in state or national banks.
121
National
Monetary
Commission
supervisor. Since the supervisor has no power of inspection over national banks or over state banks and trust
companies in other States, his approval of such banks
and trust companies can be based only on reports of the
Comptroller of the Currency or the supervisors in other
States."
In Texas in order to serve as a reserve agent a bank
must have a paid-up capital of $50,000. In New York a
depository bank or trust company must have a capital
of $200,000 or a capital of $100,000 and a surplus of
$150,000.
The supervisors have been particularly concerned to
prevent the depositing by a bank of part of its reserve
with an allied bank. Where the supervisor has power to
disapprove any particular bank as depository he may
prevent such deposits, but it has been thought worth
while in several States specifically to provide against such
a contingency. Thus, in Kansas the depositing bank
must not have any stockholders who are also stockholders
in the depository bank. In California the depository
is designated by a vote of the majority of the directors,
but interested directors may not vote. In a few States
also the amount of the deposit which may be carried in
any one bank is limited. Thus, in Texas the balance due
& The Oklahoma bank commissioner apparently has insisted upon examining national banks in Oklahoma which were depositories of state
banks. (Proceedings of the National Association of Supervisors of State
Banks, 1909, p. 87.) The Oklahoma banking law expressly provides t h a t
the " b a n k commissioner may refuse to consider as a part of its reserves
balances due to any bank from any other banking association which shall
refuse or neglect to furnish him with such information as he may require
from time to time relating to its business with any other bank doing
business under this act which shall enable him to determine its solvency."
122
State
Banks
and Trust
Companies
any depositing bank must not be more than 20 per cent
of the deposits, surplus, and capital of the depository.
In California not more than 5 per cent of the deposits of
the savings department of a bank may be deposited with
any one bank.
The means of enforcement.—The method of enforcing
the reserve requirements under the state banking laws
is in general similar to that prescribed in the nationalbank act. In California, Pennsylvania, Oklahoma, North
Dakota, New York, Delaware, Montana, Kansas, and
Rhode Island a state bank must not, while its reserve is
below the required amount, make any new loans or discounts otherwise than by discounting or purchasing a bill
of exchange payable at sight; it must not declare any
dividends. If for thirty (in Montana, sixty) days after
notice the bank does not make its reserve good the supervisor may begin proceedings for the appointment of a
receiver, or, in some of the States, may take possession
of the bank and wind up its affairs. In Maryland, Michigan, Nebraska, South Dakota, Utah, and Wisconsin the
provisions are similar, except that the payment of dividends is not prohibited. In a third group of States, including Connecticut, Florida, Kentucky, and Ohio, the
only provision is that the supervisor may begin proceedings for a receivership if the bank after notice fails
to make good its reserve. In a fourth group of States
the exact measures to be taken in case the reserve is below
the required amount are not specified. Such States are
Oregon, Nevada, New Jersey, North Carolina, Minnesota,
Missouri, Louisiana, Georgia, Idaho, Texas, Washington,
123
National
Monetary
Commission
and West Virginia. In some of these States, and probably in most of them, the supervisor, acting under the
general powers conferred on him to sue for a receiver in
case of "disobedience to a lawful order" or "violation of
law," may force a bank to make good its reserve. In
a few of these States the bank is. forbidden to make new
loans except by discounting sight exchange. Finally, in
Alabama a fine of $25 per day is imposed for each day
after thirty days' notice that the reserve remains below
the required amount.
TRUST COMPANIES.
In the greater number of States which incorporate both
state banks and trust companies the reserve requirement
is the same for both classes of credit institutions. This
is the case in Alabama, Arizona, California, Connecticut,
Delaware, Florida, Georgia, Idaho, Kentucky, Louisiana,
Missouri, Nevada, North Carolina, Oregon, Pennsylvania, Rhode Island, Washington, West Virginia, and
Wisconsin.0* In Arkansas, Indiana, Illinois, Mississippi,
New Hampshire, South Carolina, Tennessee, and Virginia
a reserve is not required for either class. In a few States—
Colorado, Iowa, Minnesota, Utah—although banks are
required to keep a specified reserve, trust companies are
not. On the other hand, in Wyoming, where no reserve
is required for state banks, trust companies must carry
a reserve of 25 per cent in cash or in demand deposits
in other banks. The proportion of cash in bank to bala> In Montana, North Dakota, and Texas the law does not appear explicitly
to require a reserve for trust companies, but if such a reserve is required
it is the same as that required for banks.
124
State
Banks
and Trust
Companies
ances is left to the discretion of the officers of the trust
company. In New Mexico, where also no reserve is
required for state banks, a reserve of 15 per cent against
aggregate liabilities is required for trust companies, of
which reserve three-fifths may be in balances from other
banks. In neither Wyoming nor New Mexico does there
appear to be any significance in the fact that a reserve
is required for trust companies and not for state banks.
In the remaining States which charter both banks and
trust companies there are differences in the amount and
form of reserve required, in some cases substantial and
in others comparatively unimportant. In Kansas the
reserve required for trust companies differs from that
required for banks in two important particulars. In the
first place, the required reserve for trust companies is
10 per cent of time deposits and 25 per cent of demand
deposits, whereas the required reserve for banks is 20
or 25 per cent of all deposits, according to the population
of the place in which the bank is located. Secondly, the
reserve of trust companies may be made up wholly or in
part of United States bonds or demand loans secured by
United States, state, or municipal bonds of a cash value
equal to the amount of the loans. Similarly, in Maryland trust companies and banks are required under the
act of 1910 to carry the same amount of reserve; but of
this reserve trust companies must keep two-thirds in
cash, whereas banks need keep only one-third. The
trust company, however, may have the remaining onethird of its reserve on deposit with reserve agents or in
specified bonds, while banks can count as reserve only
125
National
Monetary
Commission
cash in bank and deposits with reserve agents. In
Michigan the trust company need only keep a reserve
against "matured obligations," while state banks must
keep a reserve against all deposits. Moreover, the part
of reserves which may be kept in the form of balances
is larger for trust companies than for state banks. In
Ohio the reserves required for banks and trust companies
are the same except that in the case of trust companies
part of the reserve may consist of securities. In South
Dakota trust companies must carry a reserve of 10 per
cent of time deposits and of 25 per cent of demand
deposits, whereas state banks are required to carry a
reserve of 20 per cent of all deposits. Finally, in New
York the reserve required for trust companies is substantially less than that for state banks, but the state banks
are allowed to keep a somewhat larger part of their
reserves in the form of balances.
From the foregoing survey it will be noted that except
in New York the differences between the requirements
for trust-company reserves and those for state-bank
reserves are chiefly of two kinds. In the first place, the
provisions for trust-company reserves more frequently
permit the counting of bonds as a part of reserve; secondly, the provisions for trust-company reserves more
frequently include provisions for differing amounts of
reserve against time and demand deposits. The provisions for trust-company reserves in those States which
incorporate trust companies but do not incorporate state
banks show the same characteristics. In Maine the trust
companies are required to keep a reserve only against
126
State
Banks
and Trust
Companies
deposits withdrawable within ten days, and in Massachusetts only against deposits withdrawable within thirty
days. In Maine one-third of the required reserve may
consist of bonds and in Massachusetts one-fifth. In
Maine the entire reserve may consist of balances due
from other banks and of bonds, but in Massachusetts at
least two-fifths must be cash in bank. a
In recent years there has been much complaint in some
States that the reserves required for trust companies are
inadequate. Massachusetts and New York are the States
in which the matter has been most discussed and in which
the most considerable results in the way of legislation have
been obtained. Some account of the history of legislation
in these States with reference to trust-company reserves
will illustrate both the reasons for the great differences
with respect to the amount and form of reserves originally
made between trust companies and banks and the causes
which have tended toward an assimilation of the reserve
provisions of the two classes of credit institutions.
In his report for 1907 the bank commissioner of Massachusetts thus described the development of legislation
concerning trust-company reserves in Massachusetts:
The earlier trust companies of Massachusetts, like most of those in the
other Eastern States, were originally chartered to do a safe-deposit and
trust business, and to accept such deposits as were incident thereto.
It
was natural that, besides accepting trust deposits for investment, they
should also accept on deposit the funds of trustees and others awaiting
investment or distribution, and allow interest thereon.
These were time
deposits, and were sufficiently stable to permit loans or investments being
made against them up to almost ioo per cent of their volume.
As the trust
a In Vermont and the District of Columbia there are no provisions for
trust-company reserves.
127
National
Monetary
Commission
companies grew in number and importance and began to accept demand
deposits, and in the small cities to accept the deposits of, and to extend
their credit to, merchants, it became necessary for them to keep a reserve
against such deposits.
When the general trust-company law was passed in
Massachusetts in 1888, it contained a reserve section modeled on the charter requirements of many trust companies organized from 1880 to 1888,
requiring a 15 per cent reserve, of which two-thirds might be in reserve
banks and one-third might be in United States or Massachusetts bonds.
This was the first trust-company reserve law enacted in the United States.
In 1902 it was amended so that at present one-third must be cash, twothirds may be in reserve banks, but one-half t h e latter may be in United
States or Massachusetts bonds.
In 1908 radical changes were made in the reserves required for Massachusetts trust companies. Such companies were divided into three classes: (a) Boston trust companies, (b) reserve trust companies, (c) other trust companies, and a different reserve was required for each. The
following table shows the amount of the reserve required
for each class and of what it may consist:
Required currency and specie.
Maximum
Deposits of United
in reserve States and
Massachubanks.
Isetts bonds
Per cent.
Reserve t r u s t 10 per cent of deposits
companies.
B oston trust com- 8 per cent of deposits.
panies.
Other trust com- 6 per cent of deposits.
panies.
Per cent.
Total.
Per cent.
10
aS
b6
a 12 per cent may be carried on deposit and no bonds.
& 9 per cent may be carried on deposit and no bonds.
Another important change was made at the same time.
The trust company act of 1888 had required reserve to be
held against deposits payable on ten days* notice. In 1908
128
State
Banks
and Trust
Companies
it was provided that reserve must be held against all
deposits except savings deposits and time deposits " represented by certificates or agreements in writing and payable
only at a stated time." In 1909, in order to guard against
evasion, it was provided that a trust company should not
allow time deposits against which reserve is not kept to
be withdrawn before the time specified, and if no time is
specified such deposits must not be withdrawn without
thirty days' notice.
In New York the development of the business of the
trust companies and of legislation with reference to their
reserves has shown similar tendencies. The first general
law for the incorporation of trust companies in that State,
enacted in 1887, m a d e no provision for a reserve. I t did
require, however, that trust companies should invest their
capital in specified securities and also that they should
deposit with the superintendent of banks securities to an
amount equal to 10 per cent of their capital. When the
New York state banks were required in 1892 to keep a
reserve, no provision was made for trust companies. A
growing feeling that trust companies should be required
to keep a reserve led to the enactment in 1906 of a law
which required trust companies to maintain a reserve as
follows: The total reserve of trust companies located in
cities of 800,000 population or over was required to be
15 per cent of deposits, one-third of which required reserve
was to be cash in bank; the remainder might be made up
of bank balances and specified bonds, but not more than
one-third of the whole was to be in bonds. The total
59045 ° — 1 1 — 9
129
National
Monetary
Commission
reserve of trust companies located elsewhere was required
to be i o per cent of deposits. Three-tenths of the required reserve was to be cash in bank; the remainder
might consist of bank balances and bonds, but the amount
of bonds which might be counted as part of the reserves
was not to exceed three-tenths of the total required
reserve.
The reserve required for trust companies by the law
of 1906 was far less in amount than that required for
national banks, and it differed from the reserve required
for both national and New York state banks in that the
cash-in-bank reserve was a smaller part of the whole
and in that bonds might be counted as a part of the
reserve. The agitation for an increase in the reserves
of New York trust companies continued, and was increased by the panic of 1907 and the failure of several
large trust companies in New York City. The special
commission on banks, appointed in 1907 by Governor
Hughes, gave its chief attention to the question of reserves, and in 1908 the New York legislature enacted a
new law concerning the reserve of trust companies.
The most important provisions of the act of 1908
are as follows: Reserves are to be maintained against
all deposits, exclusive of trust deposits not payable
within thirty days, of time deposits not payable within
thirty days and represented by certificates, and of deposits secured by bonds of the State of New York.
Trust companies located in or having a branch office
in a borough with a population of 1,800,000 or over
130
State
Banks
and
Trust
Companies
must have a cash reserve of 15 per cent; trust companies
located in a borough with a population of less than
1,800,000 are also to have a reserve of 15 per cent, but
one-third of the required reserve may consist of balances
due from reserve agents; trust companies elsewhere
in the State are to have a reserve of 10 per cent, of which
one-half may consist of balances due from reserve
agents.
The development of the legislation with reference
to trust company reserves in Massachusetts and in New
York has, therefore, been highly similar in several important respects:
1. In New York bonds may no longer be counted
as a part of reserve, and in Massachusetts the proportion of bonds which may be counted has been much
decreased.
2. In both States no reserve is at present required
against time deposits. The first general trust company
law enacted in Massachusetts provided that no reserve
need be held against time deposits, but this exemption
was ineffective until 1908, because until then a heavy
tax was imposed on time deposits, with the result that
the trust companies could not accept time deposits as
such. In 1908, when the reserve requirement was
revised, the tax on time deposits was repealed; and
since that time the reserve has actually as well as nominally been against time deposits only.
The same
exemption is a fundamental part of the New York law
of 1908/ The special commission on banks in 1907 considered the feasibility of classifying deposits in framing
131
National
Monetary
Commission
a reserve requirement, but rejected the plan.
commission thus stated its conclusion:
The
It has been suggested to us to classify the deposits of trust companies,
with a view to graduation of the reserve that should be kept upon the
same, substantially as follows:
(a) Trust deposits, preferred by the terms of section 158 of the banking law. Such deposits are not subject to check, are awaiting investment,
and require no reserve.
(b) Deposits payable upon notice of not less than thirty days, or
maturing at a fixed date at least thirty days in the future. Such deposits
would manifestly require less reserve than demand deposits.
(c) Demand deposits, which should manifestly require the same reserves
as deposits in banks of discount.
We are not certain that such a plan of estimating reserves would prove
practicable, and it would clearly open the way to difficulties in administration * * * .
To avoid the practical difficulties in a classified plan, we have applied
the same to several companies for the purpose of ascertaining what ratio
of reserve on the total deposits would be its equivalent.
The New York superintendent of banks, however,
in his annual report for 1907, recommended that a reserve should not be required against trust deposits,
nor against time deposits unless payable within thirty
days, and the legislature followed this recommendation.
3. The amount of reserve required for trust companies
has been much increased in both States, but the requirements even yet are more liberal than those for national
banks or in New York for state banks. The discrimination thus made in favor of trust companies has been defended on the ground that there are differences of fundamental character in the nature of the deposits held by
banks and by trust companies. These differences are: (1)
132
State
Banks
and Trust
Companies
In the activity and fluctuations of the deposits, and (2) in
the case of banks and trust companies in New York City
and Boston in the extent to which the deposits are the
deposits of other banks or trust companies.
The New York special commission on banks found in
1907 that 13.62 per cent of the deposits of the New York
City trust companies were not subject to check nor due
to other banking institutions. The Massachusetts bank
commissioner, in his report for 1907, pointed out as evidence of the difference in activity between the deposits
of trust companies and of national banks that the average
daily clearings of the Boston trust companies during the
last six months of 1907 were 3.75 per cent of their average
daily deposits, whereas during the same period the average daily clearing of the Boston national banks was 9.44
per cent of their average daily deposits. A similar computation made by the superintendent of banks in New
York and contained in his report for 1907 showed that while
the trust companies in the city of New York had about
the same amount of deposits as the banks of that city their
clearings amounted to only about 7 per cent of the clearings of the banks. The superintendent stated the differences between the deposits in the two classes of institutions as follows:
It is not a matter of theory, but of fact, that a large proportion of the trust
companies' deposits are inactive. They include deposits by order of the
court, by executors of estates, sinking funds under corporate mortgages,
and the like, as well as the surplus funds of individuals and corporations
deposited for income and pending investment. A large proportion of the
deposits of banks are the margins of commercial borrowers and the active
working capital of individuals or corporations, which are subject to daily
draft and constant fluctuation.
133
National
Monetary
Commission
The difference between the trust companies and the
national banks located in Boston and New York in the
proportion of their deposits due to other banking institutions can be stated with exactness. The Boston national
banks held deposits of other banks on December 3,1907^0
the amount of 32.56 per cent of their total deposits,
whereas such deposits in the Boston trust companies
amounted to only 2.27 per cent of total deposits. Similarly, in New York City, in 1907, the percentage of deposits due to banks was 12 per cent for the trust companies
and 45 per cent for the national banks.
134
CHAPTER
VI.
BRANCH BANKS.
The, most characteristic feature of American banking
is the extent to which the banks and trust companies are
independent institutions. The national-bank act makes
no provision for the establishment of branch banks
except in cases of the conversion of state banks which
already have branches. Such banks are allowed to
retain their branches on condition that the capital is
assigned to the mother bank and the branches in definite
proportions, but in 1910 only some three or four national
banks have branches. Under none of the state banking
laws has there been built up an important system of
branch banks. This has been partly due to the very
general desire of each American community, no matter
how small, to have its banks managed by its own citizens,
and partly to the fact that in most of the States the
establishment of branch banks is either explicitly forbidden or in no way provided for by law. In eight States—
Colorado, Connecticut, Mississippi, Missouri, Nevada, a
Pennsylvania, Texas, b and Wisconsin a—the opening of
branch offices is forbidden by specific enactment. In a
o Until 1909 banks in Nevada and Wisconsin might have branches. In
Wisconsin, however, branches might be established only in the same town
or city in which the parent bank was located.
&One of the amendments to the Texas constitution adopted in 1904,
by which* the establishment of state banks was authorized, provided as
follows: "Such body corporate shall not be authorized to engage in business at more than one place, which shall be designated in its charter."
135
National
Monetary
Commission
large number of other States the banking laws make no
provision for the establishment of branches, and it has
been held in most of these States that the opening of
branch offices is unlawful.
The States in which state banks and trust companies
are definitely permitted to have branches are California,
Delaware, Florida, Georgia, New York, Oregon, Rhode
Island, Virginia, and Washington. In Louisiana, Maine,
and Massachusetts trust companies may have branches.
From the report of the state bank examiner of South
Carolina it appears that banks in that State may open
branches. In Maryland and North Carolina branches
are operated by some banks and trust companies which
were chartered by special act. There are in several of
these States, however, restrictions on the opening of
branch offices. In New York and Massachusetts branches
may be established only in the city in which the principal
office of the bank or trust company is located. In New
York, moreover, only banks located in a city of 1,000,000
inhabitants or over may have branches; but any trust
company may have branches. In Maine a trust company
may establish branches only in the county in which it is
located or in an adjoining county.
In nearly all the States which permit banks or trust
companies to establish branches one or both of two conditions are imposed. In the first place, additional capital
is required for each branch bank over and above the
amount for the parent bank. Secondly, the establishment of a branch bank must be specifically authorized
by some state official or officials.
136
State
Banks
and Trust
Companies
The requirement of additional capital for the establishment of a branch bank is a corollary of the requirement of a specified capital for the establishment of a
bank. a The amount of additional capital required for
each branch office varies in the different States. In California it is $25,000; in New York, $100,000; in Oregon and
Washington, the amount required for the establishment
of an independent bank in the place selected. In Delaware a bank or trust company may not establish a
branch office unless it has a paid-in capital of $25,000 and
a surplus of $25,000 for the parent bank and for each branch.
In Florida the capital must be assigned to the parent
bank and its branches in definite proportion.h In Rhode
Island, Virginia, and Georgia no additional capital is
required.
The provision that branches must be specifically authorized is found in the banking laws of Delaware, California,
New York, and Rhode Island. In New York and California authorization is not to be given until the superintendent of banks "has ascertained to his satisfaction that
the public convenience and advantage will be promoted by
the opening of such branch office." Similarly, in Rhode
a
I n Georgia branches may be established without additional capital
being paid in. In his report for 1909 (p. 14) the state treasurer said: " I
was also surprised to find that we had a number of branch banks operated
in the following manner; With, say, $15,000 paid-in capital the bank in A
is established; thereupon the bank of B will be established as a branch
bank of A with no additional capital, and so on. In this way we might
have an interminable number of branch banks established throughout the
State with a paid-in capital of only $15,000."
& Since 1906 no new branch banks may be established in Mississippi,
b u t every bank operating a branch office must set aside from its capital
for the exclusive use of the branch not less than $10,000.
137
National
Monetary
Commission
Island the board of bank incorporation authorizes the
establishment of a branch bank if it " shall decide that
public convenience and advantage will be promoted."
The Delaware law does not specifiy the grounds on which
the supervisor is to act in granting or withholding his
approval.
In a considerable number of States which do not permit
the establishment of branch banks the affiliation of banking institutions has been accomplished by other means.
Control of several banking institutions has been in most
of these cases secured either (a) through the ownership
by a state bank or trust company of a controlling interest
in the stock of other banking institutions, or (b) through
the ownership by a person, a group of persons, or a holding
company of a controlling interest in several banking
institutions.
(a) National banks may not lawfully invest in the stock
of other corporations, but under the laws of several of the
States state banks or trust companies may invest in such
stocks. Until 1907, for instance, a New York trust company might invest 10 per cent of its capital, surplus, and
undivided profits in the stock of another domestic corporation. Such investments were made by trust companies
in the stock of state banks, national banks, and other trust
companies. In his report for 1907 the New York superintendent of banks recommended, as one of the steps toward
breaking down the "too great interdependence" among
banking corporations, that a trust company should be forbidden to hold more than 10 per cent of the stock of any
other banking corporation. A similar suggestion was
138
State
Banks
and Trust
Companies
made in the same year by the New York special commission
on banks, and in 1908 this provision was made part of the
New York banking law.
In several States the banking laws specifically prohibit
the ownership by banks or trust companies of shares in
other banking institutions or in all corporations. In California a bank or trust company may not invest in the stock
of any other corporation. In Nevada a bank or trust
company may not invest in the stock of any other bank
or trust company. In Colorado, Kansas, Montana,
Nebraska, New Mexico, Oklahoma, North Dakota, South
Dakota, and Wyoming banks may not invest in the stocks
of other corporations. In a considerable number of States
in which there are no specific provisions against it the holding by a bank or trust company of the stock of any other
company would be unlawful as being ultra vires. In some
States the ownership of shares in other corporations has
been merely restricted. In Kansas the total investment
of any trust company in bank stock must not exceed an
amount equal to one-fourth of the capital stock of the
trust company. In Ohio banks may not invest more than
20 per cent of their capital and surplus in any one
stock, but trust companies may invest without restriction
in stocks which have paid dividends for five years. In
Texas neither a bank nor a trust company may hold more
than 10 per cent of the stock of any other banking corporation. In New Hampshire the investment of a bank or
trust company in the stock or bonds of any other corporation is limited to 10 per cent of the capital of the investing
bank or trust company. In Vermont a trust company
139
National
Monetary
Commission
may hold as an investment not more than 10 per cent of
the capital of any one bank, and it may not invest more
than 10 per cent of its deposits nor more than $35,000 in
the stock of any one bank.
On the other hand, in certain States the holding by one
banking institution of stock in another has not met with
opposition. In Massachusetts trust companies may invest
at their discretion in the stock of banks or other trust companies. In his report for 1907 the Massachusetts bank
commissioner said:
The Massachusetts trust-company laws have always left the companies
complete freedom in their investments, prohibiting only loans on real estate
outside of New England and New York State. Loans on and investments
in bank stocks are not in themselves bad loans or investments. It is generally known that control of the stock of four trust companies in Boston
is held by three other trust companies. As long as such control is not
improperly used, it is not detrimental to either the depositors or the
minority stockholders. No abuses of such control have developed in
Massachusetts, and should they occur it is believed that authoritative
supervision could check them.
In Connecticut, also, a bank or trust company may hold
such stocks and bonds as the "purposes of the corporation
may require." In Rhode Island a bank or trust company
may invest in stocks of other corporations to any extent.
(b). The second method of bringing a number of banking
institutions under a single control, viz, through the ownership by a person, a group of persons, or a holding company
of a controlling interest in several banks or trust companies, seems, in most of its forms, beyond the reach of any
except the most radical legislation. The supervisors of
state banks are, however, much opposed to the extension
of connections of this kind among the banks under their
140
State
Banks
and Trust
Companies
supervision. In several States such "chains" of banks
have been formed primarily for the purpose of furnishing
their promoters funds for carrying on outside enterprises.
Some of these banks have failed disastrously, and the
supervisors fear a repetition of such experiences. There
has been recently, it seems, some tendency toward building
up such chains on a large scale. In his report for 1909 the
commissioner of banking of Wisconsin said:
A new feature in banking has manifested itself of late which, if permitted
to go on unhindered, will eventually result in a monopoly control of the
banking business. I refer to the so-called holding companies which are
increasing with alarming rapidity in various parts of the country. One of
these companies, with headquarters in Minneapolis, Minn., owns a controlling interest in more than 50 banks in Minnesota, Iowa, Wisconsin,
and the Dakotas. In Wisconsin, 8 or 10 banks are now controlled by this
one company; two other companies have recently been organized at Minneapolis, Minn., for the purpose of getting control of banks either by buying up a majority interest in banks now in existence or by organizing new
banks. The same objection that has repeatedly been advanced against
branch banking or chain banking applies with equal force to this new
method of manipulating the banking business. The representatives of the
holding company are usually elected to the offices of president and cashier
of the bank, and while they generally have some local directors, the management is dominated by the holding company influence, and the loans
are in the majority of cases made to parties residing outside of this State.
Legislation should be had to discourage this evil in every proper manner.
Although it has not been feasible to forbid the ownership of stock in a banking institution by persons or companies who already own a controlling interest in other
banking institutions on the ground of such other ownership, one device by which control is secured by a comparatively small outlay of capital has received legislative
attention in several States. In the formation of such
141
National
Monetary
Commission
"chains/' it frequently happens that the promoters carry
through the enterprise by borrowing from the institutions
which they already control, in order to buy a controlling
interest in others. This method, as practiced in New
York City for some years prior to 1907, was thus described
by the New York special commission on banks:
A method of a certain class of promoters, well illustrated by the recent
developments in certain embarrassed financial institutions, is to buy stock
of a bank or trust company, and by using that as collateral borrow money
with which to buy stock of another banking institution.
By repeating
this process and by claiming the indulgence due a stockholder in the matter of extending credit in other directions, it is possible for adroit and
unscrupulous men to acquire the nominal ownership of a very considerable
amount of stock in a number of institutions, which will enable the promoters to utilize their credit and obtain funds to carry on their various
enterprises.
The commission and the New York superintendent of
banks agreed in recommending that banks and trust
companies should be forbidden to loan on the stock of
any "monied corporation" an amount exceeding in the
aggregate 10 per cent of the capital of the corporation
whose stock was offered as collateral. In 1908 this restriction was enacted into law by the New York legislature. Similar limitations on the extent to which a
bank or trust may loan on the security of the shares of
another bank or trust company are contained in a few of
the other state banking laws. The California banking
law of 1909 contains a provision identical with that enacted in New York in 1908. The New Hampshire banking law forbids a bank or trust company to hold as security for a loan the stock of any corporation in excess
of 10 per cent of the capital of the loaning bank. The
142
State
Banks
and Trust
Companies
Texas law forbids a bank or trust company to hold as
security for loans more than 10 per cent of the stock of
another bank or trust company. The special committee
on banking of the Wisconsin legislature recommended in
1910 that a similar provision should be inserted in the
Wisconsin banking law.
The number of branches of banks and trust companies
can not exceed a few hundred in the entire United States.
Compared with the total number of banks and trust
companies this is a small development. Moreover, the
most important affiliations among banking institutions
are among those located in the same city. The " chains "
of country banks possess, for the most part, little vitality,
and in the total banking business of the country they play
an insignificant r61e. The great mass of state banks and
trust companies are independent institutions. The most
enduring affiliations at present existing among the banking institutions are those between institutions of different
classes; as, for example, between a national bank and a
trust company or a state bank and a trust company.
The comparatively limited powers of the national banks
and in some States of the state banks have made it desirable for many of these institutions to affiliate trust
companies with themselves in order that desirable business may not be lost.
143
CHAPTER
VII.
SUPERVISION.
I. STATE BANKS.
The development of supervision over state banks has
been closely connected with the differentiation of banking
corporations from ordinary business corporations in
respect to the terms of incorporation. Supervision has
been inaugurated primarily, not to enforce regulations
essentially peculiar to the business of banking, such as
the requirement of a reserve, but in order to enforce the
group of rules which have been discussed above under
the head of *' Capital.'' With the development of the state
banking systems, however, an increasing amount of
attention has been paid to other regulations.
It will be convenient in discussing the development of
state bank supervision to consider, first, the means
employed of securing information; secondly, the powers
bestowed on the state supervisors; and, finally, the supervising officials.
MEANS OF INFORMATION.
Reports.—Except in a few States the only means of
information concerning the condition of banks which was
in use until 1887 was the report of the bank to some state
official. In many of the States the antebellum laws
had imposed on banking corporations the duty of making
144
State
Banks
and Trust
Companies
reports of their condition, and much of this legislation
remained in force even after the passage of the nationalbank act and the wholesale conversion of the state banks
into national banks. In 1873, when the Comptroller of
the Currency first began to publish statistics of state
banks, reports were made by the banks in nearly all of
the New England, Eastern, and Middle Western States.
An examination of the table on page 178 will show the
increase since that time in the number of States which
require reports. At the present time regular reports to
some state official must be made in all except two of the
States and Territories which incorporate state banks.
These States are Arkansas and Tennessee.a With the
development of state bank supervision, the character of
the required report has changed greatly. The earlier
laws usually required reports to be made on a specified
date, and provided ordinarily for only one or two reports
each year.6 Reports are now made more frequently and
on days set by the state officials which are not known
in advance by the officers of the banks. The more recent
legislation follows closely the provisions in the nationalbank act, and authorizes the supervisors to call for a
specified number of reports during each year. The report
is for some past day which is selected by the supervisor.
a
In Tennessee an obsolete law requires a monthly statement to the
comptroller.
&A considerable part of this legislation had the aim merely of securing
statistical information. The Comptroller of the Currency, at various
times, has urged on the state governments the expediency of requiring
reports (see Report of the Comptroller of Currency, 1879, p. 59), and it
was apparently in compliance with his request that the greater part of
the legislation prior to 1887 was enacted.
59045°—11-
10
145
National
Monetary
Commission
In 1910 the banking laws of 22 States require four reports
each year; 9 require five reports; 9 require two reports;
4 require three reports; and 1 requires one report. In
nearly all the States the number of reports required is a
minimum, and the supervisors may call for additional
reports if they see fit.
There has been an increasing disposition to make the
calls on the days on which the Comptroller of the Currency
makes his calls. In a few States—California, Colorado,
Oregon, and Washington—the banking laws provide
explicitly for calls on the same days as those of the
Comptroller. In a considerable number of other States
the supervisors, in the exercise of the discretion permitted
them by the state banking laws, have adopted the policy
of calling for reports simultaneously with the Comptroller.
At the Seventh Annual Convention of the Supervisors
of State Banks, in 1908, the committee on uniform laws
reported in favor of making calls on the same dates as
the Comptroller. The committee's recommendation was
as follows:
The supervisor should have authority to make at least five calls a year
for reports of condition on past dates, and it is desirable that these calls
should be made on the dates on which the Comptroller of the Currency
makes his calls. The object of this is twofold: (1) To prevent the transferring of cash between national banks and state banks in order to show
a large reserve, which might be done if the calls were made on different
dates; and (2) to enable those who have occasion to study bank reports
to get simultaneous statements of all the banks of discount in the country
several times a year.
In 1909 the same committee reported that the supervisors in 22 States would make five calls on the same days
as the Comptroller. In 7 States the supervisors were
146
State
Banks
and Trust
Companies
able to make only from one to three calls, but agreed to
make these simultaneously with the comptroller. The
provisions of the banking laws in certain other States did
not permit compliance with the recommendation of the
committee. In New Hampshire, for instance, the dates
for the reports are specified. In New Mexico the reports
must be called for some day in January and in July. In
Alabama the report must be called for a date not more
than three days prior to the issue of the call.
Most of the supervisors also have power to call for a
special report from any particular bank whenever they
deem it necessary. This power has been specifically
given in all the States and Territories which require reports, except Arizona, Connecticut, Illinois, Kentucky,
Louisiana, Mississippi, Minnesota, Missouri, New Hampshire, New York, New Mexico, Oregon, South Carolina,
and Rhode Island. In several of these, also, the supervisors acting under general powers vested in them may
require such reports.
The form of the bank reports is fixed by law in a few
of the States, notably in California, Louisiana, New Hampshire, and Missouri; but in the greater number of the
States, the supervisor has power to determine the form
of the report. In 1908 a committee of the National Association of Supervisors of State Banks recommended for
adoption a standard form of report and in 1909 the same
committee reported the result of its efforts to the association, as follows:
Seven States have adopted the uniform classification of the association,
with only such minor changes as appear necessary to the heads of the
various departments.
147
National
Monetary
Commission
Two will adopt the classification within a short time.
Five have adopted the classification in its substantial features.
Five have adopted the classification as nearly as possible under the provisions of their respective banking laws.
Three have adopted it, or their old blanks conform "very closely."
Ten have made no definite reply, but are favorable toward the proposition.
Three are noncommittal.
Three departments, for various reasons, can not conform;
Louisiana, Maine, and Alabama.
they are
The publication of the report in a local newspaper is
required in all the States and Territories which require
regular reports; and in Tennessee, where the banks do
not report to any state official, they must publish a semiannual statement.
Examinations.—In 1870 state banks were regularly
examined in all of the New England States except Rhode
Island and Vermont. In the other States which at that
time made provision for examinations—New York and
New Jersey—examinations were made when there was
reason to suspect improper management, or on the application of stockholders or creditors. In New York, also,
the banks were examined on certain specified occasions,
as, for instance, on the reduction of their capital stock.
In 1878 the superintendent of banks in New York devised
a new form of bank report designed to reveal unsafe conditions. On the basis of these reports he made a considerable number of examinations. He urged that regular
examinations should be made, and said:
In the light of experience, I deem the examinations a remedial agency of
great effectiveness in securing and maintaining soundness in resources of
banks and lawful administration of their affairs.
148
State
Banks
and Trust
Companies
In each of several annual reports thereafter the super-*
intendent urged the importance of regular examinations,
and in 1884 he was given authority to examine the banks
whenever he saw fit.
In Virginia,0 Florida, 5 New Mexico,0 North Carol i n a / and Pennsylvania/ provision for the examination of banks was made prior to 1887, but the state
officials were only authorized to make examinations
on application, or when they had reason to believe a bank
unsafe. The only laws passed from 1865 to 1887 which
authorized regular examinations were those of New
York/, Indiana/, Minnesota/ California,* and Iowa.*
In several of these States regular examinations were not
instituted at once. In Indiana, under the act of 1873,
the state auditor was authorized "as often as shall
be deemed necessary or proper" to appoint some one
to make an examination of the state banks. Examinations appear to have been made biennially until 1880,
when annual examinations were begun. Similarly, in
Iowa, the Code of 1873 authorized the auditor, at his
discretion, to examine the banks; but only occasional
examinations were made until 1879, when an examination of all the banks was made. In 1883 annual examinations were instituted.
a Va. (1884), chap. 198, sec. 1.
b
Fla. (1868), chap. 1640, sec. 12.
c
N. Mex. (1884), chap. 36, sec. 7.
<*N. C. (1887), chap. 175.
6
Pa. (1876), P. L. 161, sees. 26 and 27.
/ N . Y. (1884), chap. 47.
0 Ind. (1873), Chap. VIII, sec. 18.
& Minn. (1878), chap. 84, sec. 14.
' *Cal. (1878), p. 840.
J Iowa, Code of 1873, sec. 1571.
149
National
Monetary
Commission
In 1910 regular examinations are authorized in all
the States and Territories except Arkansas, Kentucky,
Mississippi, and Tennessee. Arkansas and Tennessee
permit the formation of banking corporations on the
same terms as ordinary business corporations, and in
Mississippi and Kentucky the differentiation is slight.
On the other hand, Arizona is the only one of the States
and Territories incorporating banks on the same terms
as ordinary business corporations which provides for
regular examinations.
Of the 41 States and Territories which authorize the
regular examination of state banks in 1910, 20—Alabama,
Arizona, Florida, Idaho, Illinois, Maryland, Missouri, Montana, New Hampshire, New Mexico, North Carolina, North
Dakota, Oregon, South Carolina, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming—require that
the banks shall be examined at least once each year; 14—
California, Colorado, Connecticut, Georgia, Kansas, Louisiana, Michigan, Minnesota, Nebraska, New York, Ohio,
Oklahoma, Rhode Island, and South Dakota—require that
examinations shall be made at least twice a year; 1, Nebraska, requires that examinations shall be made at least
three times each year, and 1, Texas, by an act passed in
1909, requires that examinations shall be made at least
quarterly. 0 The more recent legislation provides almost
uniformly for at least two examinations. In the reo In several of the States the annual reports of the supervisors complain that they are unable, because of inadequate appropriations, to make
the required number of examinations. See, for instance, Report of
Treasurer of Georgia, 1908, p. xi; Report of State Bank Examiner of
Oregon, 1909, p. xiv; and the Report of Public Examiner of South Dakota,
1907-8, p. 19.
150
State
Banks
and Trust
Companies
maining States—Delaware, Indiana, Iowa, New Jersey,
and Pennsylvania—the banking laws leave the number
of examinations to the discretion of the state supervisors,
but in all of these States except Delaware a examinations
appear to be made at least annually.
In practically all of the States whose banking laws
authorize the making of regular examinations the supervisors may also at any time make a special examination
of a particular bank.
In a considerable number of States the supervisors
make an examination of a bank before it begins business.
Such examinations are provided for in California, Illinois, Kansas, Maryland, Michigan, Missouri, New York,
North Carolina, Ohio, Rhode Island, Washington, West
Virginia, and Wisconsin, and in several other States the
supervisors insist on making an examination before
issuing a certificate of incorporation. The chief purpose
of such an examination is to ascertain whether the
capital has been fully subscribed and partly or wholly
paid in as prescribed by law. The Comptroller of the
Currency since 1908 has adopted a similar policy, and
now requires that an examination shall be made of
every national bank before authority to begin business
is given. 6
Under practically all of the state banking laws the examiners are paid a fixed salary. The state laws in this
respect present a notable contrast to the national-batik act,
under which the examiners receive their remuneration
entirely in fees. In several of the States, at one time or
a
Report of the Insurance Commissioner of Delaware, 1906.
& Pratt's Digest, 1908, p. 35.
1 1
5
National
Monetary
Commission
another, the bank examiners have been paid by fees,a but
in 1910 this method of remuneration is found only in
Delaware and Illinois. The chief objection to the fee system is that the examiner, being dependent for the amount
of his remuneration on the number of banks examined, is
tempted to do his work hastily and, as a result, inefficiently. 6
In only a few States, notably in several of the New
England States and in Ohio, does the cost of bank supervision fall entirely on the State. 0 The banks in nearly all
of the States are required to pay fees either annually or for
0 Florida, until 1907; Indiana, until 1907; Iowa, until 1904; Nebraska,
until 1903; North Carolina, until 1907; Utah, until 1909.
b In his report for 1887 the Comptroller of the Currency said: " F r o m
many points of view, it would be expedient for the examiners to be paid out
of the tax on national banks, and not by fees. The present system establishes relations between the bank and the examiner which are inconsistent
with the functions of that officer and with what ought to be his attitude
toward the b a n k . " (Report of the Comptroller of the Currency, 1887, p. 9.)
See also, to the same effect, Report of the Comptroller of the Currency, 1900,
vol. 1, p. xxvii. For a discussion of the relative merits of the two methods
of remuneration, see Suggested Changes in the Administrative Features of
the National Banking Laws, 61st. Cong., 2d sess., Doc. No. 404, pp. 197
et. seq. and 285 et seq.
c The New York superintendent of banks urged in 1909 t h a t the State
should defray the entire cost of supervision. He said: " I believe t h a t the
principle of taxing banks, savings banks, trust companies, and other institutions for the expense of the banking department is ill advised and indefensible. Primarily the supervision is for the benefit and protection of the
public, and if it be of value in t h a t regard, then it is undeniable t h a t the
public should meet the cost. Supervision over the railroads was formerly
exercised at the expense of those corporations, but when the public service
commissioners were created and their powers established, the correctness
of the principle here advanced was fully recognized, and it wras not even suggested t h a t the old practice be continued. The same principle should govern in the supervision of our financial institutions. The best thought
of to-day does not approve the present system, and it would be more
consistent and more thoroughly in keeping with the dignity of the Commonwealth for the State to provide from its general revenue funds for
the support of the banking department.''
152
State
Banks
and
Trust
Compantes
each examination, and from these fees the salaries and
expenses of the bank examiners are paid wholly or in part.
In a few States, notably New York and California, the
expenses of supervision are apportioned among the banks
in proportion to capital or deposits.
Besides the examinations made by the state officials, a
considerable number of States in recent years have made
provision for the examination of state banks at intervals
by their directors. The chief purpose in providing for
such examinations is to keep the directors informed as to
the character of the loans and investments of the bank. a
It is a matter of complaint by the state supervisors, as well
as by the Comptroller of the Currency, that the greater part
of the bank failures result from the neglect by directors of
their duties. In his testimony before the National Monetary Commission, Comptroller Murray recently said:
In going over the records of the 500 banks t h a t have failed, it is shown
t h a t nearly all of them, except those where there were defalcations and stealing, have failed because the directors have paid no attention to the banks at
a In order to bring the affairs of the bank under the observation of the
directors, provision has been made in Michigan (1909, ch. 193) and New
York (1909, ch. 155) that the directors or a committee of the directors at
regular monthly meetings shall examine all loans and investments made
since the last meeting. The New York law is much more detailed and provides for the submission at such meetings of a "written statement of all
purchases and sales of securities and of every discount and loan, exclusive
of discounts and loans of less than $1,000. Such statements shall also contain a list giving the aggregate of loans and discounts to each individual,
firm, or corporation whose liability to such corporation has been increased
$1,000 or more since the last regular meeting of the board * * * "
A copy of this statement, properly verified, must be filed with the minutes
of the board. The enactment of this legislation was recommended by the
superintendent of banks of New York in his report for 1907 (p. xliii) and
also by the New York special commission on banks, 1907. Similar legislation has been recommended by the Wisconsin special committee on banking,
1910.
153
National
Monetary
Commission
all, but have just let them drift until they actually became insolvent.
The
history of the office shows t h a t no bank t h a t has lived within the law, or
where the directors have required the executive officers to stay within the
law, has ever failed, and I believe one never will fail.a
The result of neglect on the part of the directors frequently is that the bank officials or a coterie of interested
directors misapply the funds of the bank. 6
A secondary but important purpose in some of the
States in providing for such examinations has been to
secure a valuation of the bank assets by the directors.
As has been noted above, the central point in the regulation of banking in all the States is the rule requiring the
maintenance of a specified capital, and the chief purpose
in the examination of banks is to ascertain whether capital has been impaired. The bank examiner, with the
advice and guidance of his official superiors, must therefore value the assets of the bank in order to ascertain
whether they are of the value at which they are carried
on the books of the bank, and in making such a valuation,
the sworn valuation of the directors is of great service.
In 1910 the banking laws of 19 States—California,
Georgia, Iowa, Kansas, Michigan, Mississippi, Minnesota,
Nebraska, Nevada, New Hampshire, New York, New
Jersey, North Dakota, Oklahoma, Oregon, South Dakota,
Tennessee, Virginia, and Wisconsin—require the directors
or a committee of the directors of a state bank to make
an examination of the bank. In Missouri a committee
a
" Suggested Changes in the Administrative Features of the National
Banking L a w s , " 61st Cong., 2d. sess., Doc. No. 404, p. 280.
& In order to secure as far as possible t h a t the directors shall be financially
interested in the welfare of the bank, the banking laws in a majority of the
States provide that directors must be the bona fide owners of a specified
number of shares.
4
154
State
Banks
and Trust
Companies
of shareholders, elected as the shareholders decide, must
make an examination. In most of the States examinations must be made at least twice a year, but in several
States they must be made quarterly, and in others,
annually.
In nearly all of the States which provide for the examination of banks by their directors, a report of the examination must be forwarded to the state supervisor;
but in some of the States it is required only that the
report shall be spread on the minutes of the board for
the information of the supervisor or his examiner, and in
three States—Virginia, Tennessee, and Nebraska—there
are no provisions even for recording the result of the
examination.
The character of the report which is to be made is not
explicitly defined in some of the States. In Mississippi,
Kansas, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, Oregon, Virginia, and Tennessee it is provided
merely that the directors are to make a thorough examination of the affairs of the bank. In Iowa and New
Hampshire the report of the examination is made on
blanks furnished by the supervisor, and must therefore
cover all matters concerning which he desires information. In the remaining States which require such examinations the laws make explicit provision as to the
character of the report. The provision inserted in the
New York banking law in 1905, which has been the model
for most of the recent legislation of the same kind,
requires, for instance, that the report " shall contain a
statement in detail of loans, if any, which in the opinion
155
National
Monetary
Commission
of the directors are worthless or doubtful, together with
their reasons for so regarding them, also a statement of
loans made on collateral security, giving in each case the
amount of the loan, the name and market value of the
collateral, if it has any market value, and, if not, a statement of that fact and its actual value as nearly as possible."
Similar provisions are found in the banking laws of
California, Georgia, Michigan, Minnesota, Missouri, South
Dakota, and Wisconsin.
Nearly all the laws providing for the examination of
banks by their directors have been passed in recent years,
and it appears likely that such examinations will shortly
become a customary feature of the state banking laws.
The committee on uniform laws of the National Association of Supervisors of State Banks recommended in 1908
the enactment of similar laws in other States, and the
recommendation was approved by the convention. 0
POWERS OF THE SUPERVISORS.
Authorization.—As has already been noted, one of the
purposes in many of the States in abandoning the incorporation of banks by special act was to do away with favoritism in the granting of charters. Under the general
incorporation laws, any persons who comply with certain
specified conditions may become incorporated. The conditions for incQrporation laid down in most of the general
a Proceedings of the Seventh Annual Convention of the National Association of Supervisors of State Banks, pp. 21, 36. For an adverse opinion
as to the probability of thus securing the interest of directors, see "Suggested Changes in the Admistrative Features of the National Banking
Laws," 61st Cong., 2d sess., Doc. No. 404, p. 356.
156
State
Banks
and Trust
Companies
banking laws are of such a kind that the act of the state
officials in approving or issuing charters is purely formal.
In several States, however, power has recently been conferred on the supervisors to exercise more or less discretion in authorizing the incorporation of new banks. In
North Dakota, Ohio, Michigan, South Dakota, Wisconsin,
and West Virginia the supervisors have power to refuse
authorization if the bank is formed for other than the
legitimate business contemplated by the banking law. In
Minnesota the supervisor must be satisfied that the bank
has been organized not only for legitimate purposes, but
also " under such conditions as to merit and have public
confidence.'' In Nebraska the state banking board
must satisfy itself, before granting a license, that the incorporators are persons of integrity and responsibility. In
Illinois the auditor may withhold the certificate of incorporation, "when he is not satisfied as to the personal
character and standing of the officers or directors, or when
he has reason to believe that the bank is organizing for
any other purpose than that contemplated by this act."
In California and New York the supervisors are required to
ascertain, from the best sources of information at their
command, "whether the character and general fitness of
the persons named as stockholders are such as to command
the confidence of the community in which such bank is
proposed to be located." These provisions are intended
to give the supervisors power to prevent the formation
of banking associations for illegitimate or fraudulent purposes and to prevent the formation of such associations by
157
National
Monetary
Commission
irresponsible and inexperienced persons. Similar provisions are found in the banking law of Oklahoma.
In a few States the banking laws give the supervisors
still larger discretionary powers with reference to the
authorization of new banks. In Rhode Island the board
of bank incorporation must give a certificate that "public
convenience and advantage will be promoted" by the
establishment of any proposed bank before a charter is
granted. In New Jersey the commissioner of banking
and insurance approves the certificate of incorporation
of a bank, if it appears to him that the establishment of
such a bank will be of public service. In South Dakota
the public examiner may refuse a certificate if the business of the town or city in which the proposed bank is
to be located does not warrant the incorporation of another
bank. In Oklahoma the bank commissioner has refused
to issue certificates of incorporation for banks when he
considered the business of the town in which the proposed
bank was to be located insufficient to support an additional bank." In New York the superintendent of banks
has had power since 1908 to refuse a certificate of incorporation to a bank if in his opinion the public convenience
and advantage would not be promoted by its establishment.
Considerable differences of opinion appear to exist as to
the desirability of conferring power to refuse authorization for the establishment of new banks in cities or towns
where the supervisor regards the banking facilities as
a
Proceedings of the Eighth Annual Convention of National Association
of Supervisors of State Banks, 1909, pp. 85, 69.
158
State
Banks
and Trust
Companies
already ample. The New York special commission on
banks in 1907 favored strongly the conferring of such
powers on the superintendent of banks. They said:
I t has sometimes happened that banking institutions have been organized for no better purpose than to give employment to the parties bringing
about the organization, without regard to the need of the locality.
Because
of the very high price that the stock of successful banks has commanded,
institutions have been organized by promoters whose apparent ultimate
object was to realize a profit by selling the same after organization was
completed.
At the Seventh Annual Convention of the National Association of the Supervisors of State Banks in 1908, the committee on uniform laws recommended that supervisors
should be given authority to decide whether the proposed
incorporators of a bank are proper persons to conduct a
banking business, and also whether "any need of such a
bank exists in the locality in which it is proposed to establish it." The recommendation was eliminated from the
report as adopted, apparently because many of the supervisors were opposed to vesting in the supervisors any
power to determine the need of a community for additional banking facilities.0^ On the other hand, the supervisors in several of the States have recently urged that
they be given such powers.5 In his report for 1909, the
Secretary of the State Banking Board of Nebraska said:
There is one feature of the present situation in this State to which I desire
to call your attention and for which there seems at present no adequate
remedy, and that is the establishment of banks where banking often results
in two or three, or more, weak or poorly paying banks where fewer would
a
Proceedings of the Seventh Annual Convention of the National Association of Supervisors of State Banks, 1908, pp. 18, 34.
& Fourth Annual Report of 4;he Bank Commissioner of Idaho, p. 5; Report
of Public Examiner of Minnesota, 1907-8, p. viii.
159
National
Monetary
Commission
be stronger and safer and meet all the requirements. Your honorable
board should have the same privilege as the Comptroller of the Currency
in the supervision of national banks. You should have a legal right, when
application is made for a charter for a bank, to decide on the qualifications,
the financial ability, the past record of the proposed management, and to
determine whether or not the community where the proposed bank is to be
established justifies the venture. Repeated instances coming to this
department clearly indicate the necessity of some step in this direction.
The national-bank act confers authority upon the Comptroller to withhold his certificate when it has been ascertained that the association has been organized for purposes
other than those contemplated by the act. Also the organization of associations with a capital of less than
$100,000 is subject to the sanction of the Secretary of the
Treasury. Within the past two or three years the Comptroller of the Currency has been more careful than formerly
in the scrutiny to which he subjects proposed incorporations of national banks. In his report for 1909 the Comptroller said:
To avoid the formation of associations for ulterior purposes or by those
lacking the qualifications necessary to the successful conduct of the banking
business, or in a place the population and business of which are insufficient
to warrant the establishment of a national bank, the Comptroller, upon
receipt of an application to organize causes a special investigation to be
made, the results of which determine the favorable or unfavorable action.0
Powers with reference to banks engaged in business.—In
all of the States and Territories which charter state banks,
except two—Arkansas and Mississippi—some state official
is given power, in certain contingencies, to take action with
reference to the banks under supervision. These powers
0
Report of the Comptroller of the Currency, 1909, p 18; see also Proceedings of the Eighth Annual Convention of the National Association of
Supervisors of State Banks, 1909, p. 109.
160
State
Banks
and Trust
Companies
of the supervisors may be described from the two closely
connected standpoints: (i) Of the contingency in which
action may be taken, and (2) of the nature of the action.
The contingency in which the supervisors are most commonly given power to act is in case of insolvency, i. e., if
the bank fails to meet its obligations, or if its assets, as
valued by the supervisor, are less than its liabilities.
Specific provisions for action in such a contingency are
found in the laws of all the States and Territories which
incorporate state banks, except Arkansas, Connecticut,
Mississippi, New Hampshire, Tennessee, and Wyoming.
In Connecticut the supervisor may take action if the public
is in danger of being defrauded, and in New Hampshire,
if "necessary for the public safety." In Wyoming action
is to be taken if the bank fails to meet its obligations. In
many of the States the power to take action in case of insolvency was for a considerable time the only power conferred
on the supervisors. In one State, Alabama, insolvency
is at present the only contingency in which action by the
supervisor is specifically authorized.
Action by the supervisor is specifically required by the
laws of the greater number of the States if a bank after
notice fails to make good an impairment of its capital.
Sixteen of the States provide in their banking laws that
if a bank fails to maintain its required reserve the supervisor shall take action.
A considerable number of States provide more generally that the supervisors shall take action if the bank
violates any provision in the banking law or exceeds the
powers given it by its charter.
59045°-—! 1 — 1 1
161
National
Monetary
Commission
The foregoing contingencies, it will be noted, are definitely stated; the bank is in a certain condition or it has
violated definitely formulated laws. Within the past
few years, however, there has been a growing tendency
to give the bank supervisors, in addition, power of a
much more indefinite and discretionary character. Authority to " direct the discontinuance of unsafe and unauthorized practices" or similar powers have, in 1910,
been conferred on the supervisors in Arizona, California,
Iowa, Massachusetts, Michigan, Minnesota, Missouri,
Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Washington, and Wisconsin.a The
provision in the California law of 1909 is typical of the
provisions in those States in which the largest powers in
this respect have been conferred upon the supervisors. It
reads as follows:
If it shall appear to the superintendent of banks that such bank is conducting business in an unsafe and injurious manner, he must in like manner
direct the discontinuance of such unsafe and injurious practices. Such
order shall require such bank to show cause, before the superintendent of
banks at a time and place to be fixed by him, why said order should not
be observed. If upon such hearing it shall appear to the superintendent
of banks that such bank is conducting business in an unsafe or injurious
manner, or is violating its articles of incorporation or any law of this
State, then the superintendent shall make such order of discontinuance
final, and such bank shall immediately discontinue all practices named in
such order by the superintendent of banks.
There appears to be general agreement among the
state supervisors that such an extension of authority is
a The national-bank act confers upon the Comptroller of the Currency
power to require the restoration of capital and to close an insolvent bank
or one which fails to keep the reserve required by the act, but it does not
give the Comptroller power to force the discontinuance of practices which
he may consider unsafe.
162
State
Banks
and Trust
Companies
desirable. The grounds for this view have been set
forth clearly in recent official and semiofficial reports.
In his report for 1907 the superintendent of banks of New
York said:
Among the causes contributing to the suspension of the closed institutions was a lack of supervisory power in the superintendent of banks.
In
some cases the department has called attention to practices which were
considered to be unsafe, but without avail.
We believe that if the super-
intendent of banks had had the authority to enforce a discontinuance of
such practices several of the state institutions now closed would not have
found it necessary to suspend.
*
*
*
It is true t h a t he (the superin-
tendent) may address his communications of criticism to offending corporations, but this method of correction is the practical limit to which he
may go until conditions have reached such a point as to require his taking
possession of the bank or trust company when it shall appear to the superintendent that it is unsafe and inexpedient for such corporations to continue business.
The New York special commission on banks in its
report in 1907 said:
Under existing law he (the superintendent of banks) may criticise objectionable practices when they come to his knowledge, and report continued delinquencies to the attorney-general. His criticism is hence in
large measure academic and may be given scant consideration by delinquents. The authority to close offending institutions and appoint receivers therefor should be vested in the superintendent, for this reason
and others to be discussed presently. Were he clothed with the power to
"direct the discontinuance of unsafe practices," no institution would dare
continue the same after having been admonished by him.
The committee on uniform laws of the National Association of Supervisors of State Banks, in its report to the
convention of 1907, said:
I t is of relatively small advantage to the depositors or creditors of a
banking institution that the supervisor has the authority to close it after
it has become insolvent.
It would be of far greater advantage to them if
such officer were given authority to insist upon the discontinuance of
163
National
Monetary
Commission
unsafe or unauthorized practices, perhaps not technically in violation of
the law, but which if persisted in might endanger the solvency of the
institution.
In the majority of cases this could probably be accomplished
by the mere recommendation of the supervisor, but there are always
some cases in which violations of good banking practices are not unintentional or due to lack of information, but are deliberate or due to incompetence, and to remedy these, recommendations, unless they are
backed by authority, are of little or no avail. 0
The laws conferring upon the supervisors authority to
direct the discontinuance of unsafe practices have been
enacted in most of the States so recently that it is not
possible to obtain any comprehensive view as to how that
power will be used. The following statement issued by
the California superintendent of banks late in 1909 probably indicates in a general way the character of the
4
' unsafe practices" which are being repressed by the
supervisors:
The framers of the act of 1909 wisely recognized the absolute necessity
for centralization of administrative power in one man, a superintendent of
banks, and conferred upon the superintendent ample authority for the
enforcement of necessary regulations. I t is useless to prescribe remedial
measures without at the same time conferring ample authority for their
proper enforcement. The most striking illustration of this is the power
conferred upon the superintendent to direct the discontinuance of harmful
and injurious practices. By virtue of the same he has, among other
things, directed the discontinuance of the practice of creating indebtedness
on overdrafts, an old and vicious custom prevalent in many sections of
the State; directed the holding of monthly meetings of boards of directors
and their proper assumption of responsibility in the management of the
bank's affairs, his position in this matter being greatly strengthened by
similar directions of the Comptroller of the Currency, the bonding of
officials responsible for the handling of funds, the insurance of bank
premises, etc.
o Proceedings of the Seventh Annual Convention of the National Association of Supervisors of State Banks, 1908, pp. 17, 35; see also Proceedings
of the Eighth Annual Convention, 1909, pp. 13, 14.
164
State
Banks
and Trust
Companies
The action which the supervisors may take varies in
the different States, and also, in some of the States, according to the particular occasion. The powers of the supervisors may be classified as follows: (i) They may apply
to the courts for the appointment of a receiver; 0 (2) they
may take possession of the bank and then make application for the appointment of a receiver; or (3) they may
take possession of a bank and wind up its affairs.
1. Application for a receiver.—The application for a
receiver was originally in nearly all of the States the only
action which might be taken by the supervisor. In a
considerable number of States it remains so at present.
Such States are Alabama, Florida, Idaho, Kentucky,
Louisiana, Maryland, Ohio, Tennessee, Utah, Virginia,
and New Hampshire. In several of these States the
state official who has charge of the examination of
banks can not on his own account institute proceedings
for a receiver, but must submit the matter to some other
state official or officials. In Alabama, for example, the
treasurer, if he finds that a bank is not in a solvent condition, reports the fact to the governor, who institutes
receivership proceedings. Under the Maryland banking
law, enacted in 1910, the bank examiner in certain contingencies reports to the governor, who, after advising
with the attorney-general, causes such proceedings to
be instituted as he deems proper. In the greater number
of the States, however, the supervisor has been given
a
At the inauguration of a system of bank supervision the supervisor
was not always given power to apply for a receiver. Thus in Wisconsin,
until 1901, the bank examiner, if he found a bank insolvent, was authorized
merely to publish an account of its condition in a local newspaper.
165
National
Monetary
Commission
power on his own account to begin proceedings for a
receiver.
2. Power to take possession.—As soon as state supervision became fairly well organized, it became clear in
many of the States that the application for a receiver
failed to cover the needs of the case in an important particular. In the time which necessarily elapsed before a
receiver could be appointed the assets of the bank were
frequently misapplied by the officers or directors and
arrangements were entered into which seriously diminished the fund from which depositors were to be paid. In
order to prevent such a dispersion of the assets, the antebellum state banking laws made it the duty of some state
official to secure an injunction forbidding the bank to
carry on business or to transfer its assets.0 In Illinois,
Connecticut, and New Hampshire, at present, this
method of conserving bank assets is still employed. To
secure an injunction, however, requires time, and speedy
action is desirable. This would, however, probably have
been the direction which the state legislation would
have taken, if it had not been for the example of the
o The New Jersey act of 1889 followed the old method, and may be taken
as typical. It read: " Whenever it shall appear as the result of examination that the affairs of any such corporation are in an unsound condition
* * * or that it is transacting business * * * in violation of law,
it shall be the duty of the attorney-general, on notice by the commissioners,
to apply forthwith, by petition or bill of complaint of information, to the
chancellor for an injunction restraining such corporation from the transaction of further business, or the transfer of any portion of its assets in
any manner whatsoever, and for such other relief and assistance as may
be appropriate to the case; and the chancellor being satisfied of the sufficiency of such application, or that the interests of the people so require,
may order an injunction, and make other appropriate orders in a summary
way." N. J. (1889), 368, Chap. CCXXXIV.
166
State
Banks
and Trust
Companies
national-bank act, under which the Comptroller of the
Currency in certain contingencies takes immediate possession of a national bank. In over two-thirds of the
States and Territories the supervisors have been given
power to take charge of a bank immediately, and to hold
its assets until a receiver is appointed or the application
for a receiver is refused. This authority has, in most
States, been given somewhat later than the power to
apply for a receiver. In a few of the States the supervisor,
before taking possession of a bank, must secure the consent of some other state official or officials. Such is the
law in Georgia, Montana, and New Mexico.
In a considerable number of States, the power to take
possession is conferred only in case of insolvency or in a
situation in which the supervisor deems it hazardous for
the bank to continue in operation. In other contingencies, less likely to result in loss to the depositors, as, for
example, impairment of capital or failure to keep the prescribed reserve, the supervisor can not take possession,
but may apply for a receiver. Such distinctions are
made in the laws of Colorado, Delaware, Georgia, Indiana,
Iowa, Missouri, Montana, Nevada, New Jersey, Rhode
Island, South Dakota, Washington, Wisconsin, and
Wyoming. The tendency in the recent legislation is,
however, in any contingency calling for action, to give
the supervisor discretionary power to take immediate
charge of the bank.
3. Power to liquidate.—Until within the last four or
five years, the most striking administrative difference
between the national and the state banking systems was
167
National
Monetary
Commission
that, while the Comptroller of the Currency had power to
appoint a receiver in certain cases for a national bank, 0
the receivers for state banks and trust companies were
appointed in all the States by the courts.
For years there has been complaint on the part of the
supervisors in several of the States where the systems of
bank supervision are well advanced that the results
obtained from bank receiverships are far from satisfactory. The chief points of complaint have been the
length of the receiverships and the great expense involved.
The New York special commission on banks in 1907 thus
hummed up the objections to the judicial receiverships
of banks in that State:
While under our system the compensation of receivers is fixed and
appears fairly reasonable, incompetent persons are frequently appointed,
which in itself increases the expense; and the fees are often increased by
the courts upon special pleas. The number of attorneys to be employed
and their compensation are not regulated properly; many matters
which might readily be made the subject of adjustment by applying the
same principles which obtain as between individuals become subjects of
litigation; expensive "references" are necessary, not only for the settlement of contested questions, but upon the occasions of the periodical
accounting of receivers. These circumstances cause inordinate legal
expenses, largely added to by the notoriously cost-breeding delays in so
many of our courts.
Definite comparisons between the cost of bank receiverships under the judicial system and that of receiverships
a
I t is of interest to note that the cases in which the Comptroller may
appoint receivers have been much increased since the passage of t h e
national-bank act. Originally, it was only when a bank defaulted on its
notes or failed to make good its reserve after thirty days' notice t h a t he
could appoint. In 1873 he was authorized to appoint receivers for banks
whose capital had not been paid up or had been impaired, and it was not
until 1876 t h a t his power was extended to cover cases of insolvency.
168
State
Banks
and Trust
Companies
under the administrative system provided for in the
national-bank act can not be readily made, since the statistics of liquidating banks are not compiled by any of
the state bank supervisors in such a way as to give the
necessary data. The New York special commission on
banks in 1907 found, however, that the expense of winding
up the affairs of 16 New York state banks and trust
companies for which data were secured was 13.01 per
cent of the receipts, while the expense of winding up the
39 New York national banks which failed from 1865 to
1906 was 8.92 per cent. a
Various remedies have been tried. As early as 1887
the legislature of California gave the bank commissioners
of that State power to examine banks in the hands of
receivers; to limit the number and remuneration of
employees, and after two years to fix a time for closing
the receivership. In 1895 it was provided that if the
commissioners showed that a receiver was careless or
negligent he was to be removed. That this legislation
was not efficacious in correcting the evil may be judged
from the fact that in 1909 the California superintendent
of banks spoke of the " notoriously extravagant expenses "
connected with bank receiverships in that State.
In 11 States and Territories the receivers of state
banks are required to report to the supervisors.6 In six
States and Territories banks in the hands of the receivers
a
Report of the New York Special Commission on Banks, 1907, pp.
21, 45& These States and Territories are Arizona, Colorado, Connecticut, Florida,
Georgia, Illinois, Indiana, Maine, Michigan, Missouri, Nebraska, Nevada,
New Hampshire, and Vermont.
169
National
Monetary
Commission
are examined, and a report of the examination is filed
with the court which appointed the receiver. In North
Carolina receivers are required to obey the orders of the
corporation commission "in as far as they do not conflict with the orders or decrees Of the court made in the
case." In Nebraska and Idaho the fees of the receivers
of banks are fixed by the banking laws.
These provisions have entirely failed to remedy the
evil, and in the last few years there has been a growing
feeling in favor of transferring the administration of the
affairs of liquidating banks from the courts to the bank
supervisors. This was recommended by the National
Association of Supervisors of State Banks in 1908,0 and in
1910 nine States have made provision therefor. 6 In two
of them—West Virginia and Kansas—the state supervisors have been given power in certain contingencies
to appoint receivers. In West Virginia the supervisor
appoints with the consent of the governor; in Kansas
the entire responsibility for the appointment rests upon
the supervisor. In seven States—California, New York,
a
Proceedings of the Seventh Annual Convention of the National Association of Supervisors of State Banks, 1908, pp. 22, 40.
& In two other States—Michigan and Rhode Island—recent legislation
authorizes but does not require the appointment of the supervisor as
receiver. In Michigan the courts may appoint the commissioner, his
deputy, or one of the bank examiners as receiver. If a member of the
banking department is appointed, he serves without further compensation
than his salary, and all fees and expenses awarded him are turned into
the state treasury. In Rhode Island the commissioner may make application for the appointment as receiver of a failed bank of himself or his
deputy. Such receivers serve without expense to the liquidating corporation and legal advice is to be given them without charge by the attorneygeneral or his assistant.
170
State
Banks
and Trust
Companies
Texas, Wisconsin, Minnesota, South Dakota, and Oklahoma—the administration of the liquidating bank is
placed directly in the hands of the state supervisor, who
may appoint agents to assist him. a
The legislation authorizing the liquidation of banks by
the supervisors is so recent that the results can not be
stated. The superintendent of banks of New York
reported in 1909 that the expense of liquidation for one
trust company had been about 1 per cent of receipts and
for another two-thirds of 1 per cent. The assets in neither
case had, however, been fully administered. Apart from
the question of expense one great advantage of liquidation by the supervisor is that at any time the bank can
be turned back to the stockholders if they see fit to comply
with the requirements of the supervisor. In most, if not
all, of the States considerable difficulty and expense are
involved in getting rid of a judicial receivership. In
several States where liquidation by the supervisor is not
provided for, provision has been made that a bank may
place itself voluntarily at any time in charge of the supervisor. By doing so the bank is able to ward off an expensive receivership for a time, and meanwhile arrangements
may be made by the stockholders either for paying off
the depositors or resuming business.
THE SUPERVISORS.
The few effective systems of state bank supervision
which survived the almost complete conversion of the state
banks caused by the imposition of the 10 per cent tax
a In New York the superintendent of banks may, if he sees fit, apply
to the courts for the appointment of a receiver.
171
National
Monetary
Commission
upon their notes were of two types. In Connecticut,
Massachusetts, and New Hampshire supervisory powers
over state banks were lodged in the hands of boards of
bank commissioners. In New York and Maine a single
official, known in New York as the superintendent of
banks and in Maine as the bank examiner, was charged
with similar supervisory duties. The preference for
boards of commissioners over a single official in the three
first-named States was due to the fear that an official
acting alone might abuse the powers vested in him. The
plan of vesting supervisory powers in a board of officials
rather than in a single official was followed in the California banking law of 1878. The tendency in recent
years, however, has been in the direction of having a
single official in charge of bank supervision. In 1909 the
California bank commissioners were replaced by a superintendent of banks, and in 1906 the old board of savings
bank commissioners of Massachusetts, by a bank commissioner. Connecticut and New Hampshire still retain
their boards of bank commissioners, and in North Carolina and Virginia the state corporation commissioners
are charged with the supervision of state banks.
In many States the more important questions arising
in the supervision of banks must be referred by the supervisor to some other state official. In Nebraska, for
example, at the present time, a state banking board,
which consists of the governor, the auditor of public
accounts, and the attorney-general, passes upon all
important supervisory matters, such, for example, as the
taking possession of a bank. A similar system has been
172
State
Banks
and Trust
Companies
established in Nevada. A board consisting of the governor and four other members appointed by him, decides
when it is necessary to take charge of a bank and other
questions of similar character. In Rhode Island a board
of bank incorporation, consisting of the bank commissioner, the treasurer, and the attorney-general authorizes
the incorporation of new banks; and in various contingencies the commissioner must have the consent of one
other member of the board to take action. The tendency
however, particularly in those States in which the number
of banks under state supervision is large, is to give the
supervisor power to act independently of the consent of
any other state official.
One other development in the character of state supervision is noteworthy. In many States when the supervision of state banks began, the duty of receiving reports
and making examinations was imposed upon some state
official who had other duties. In Kentucky, Missouri,
and Utah the official selected was the secretary of state;
in Florida and Tennessee, the comptroller; in North
Dakota and South Dakota, the state examiner; in Delaware, the insurance commissioner; in Alabama, Colorado,
Georgia, Maryland, North Carolina, and Wyoming, the
state treasurer; in Texas, the commissioner of agriculture,
statistics, insurance, and banking; in Arizona, Indiana,
Illinois, Ohio, Mississippi, Montana, New Mexico, Iowa,
Pennsylvania, Rhode Island, Virginia, and Washington,
the state auditor. In many of these States the increasing
importance of bank supervision has led to the creation of a
separate and distinct office, the incumbent of which, known
173
National
Monetary
Commission
variously as the state bank commissioner, the state bank
examiner, or the superintendent of banks, has charge of
state bank supervision. This change is a highly important
one because the officials thus placed in charge of bank
supervision are usually appointed officers who are required
to have certain special qualifications.
II. TRUST COMPANIES.
When trust companies first became important enough to
attract legislative attention, they were generally considered to be institutions of widely different character from
banks of discount and deposit. The earlier legislation
consequently differentiated them sharply from banks in
the character of supervision to which they were subjected.
In New York, for example, it was not until 1874 that trust
companies were placed under the supervision of the banking department. Trust companies in that State have been
examined annually since 1874, while regular examinations
of banks began in 1884. The superintendent was not
until 1908 specifically given authority to take possession
of a trust company in an unsound or unsafe condition,
although he has been possessed of such power in the case
of a bank since 1892. On the other hand, power to authorize the incorporation of hew trust companies was given
to the superintendent in 1892; but similar power with
reference to state banks was not given until 1908. In
several States, on account of their possession of the power
to do a bonding and title guaranty business, the trust
companies were assimilated, in respect to the supervision
to which they were subjected, to insurance companies
174
State
Banks
and Trust
Companies
rather than to banks. In still other States the trust companies were under the supervision only of the courts.
As the character of the trust company has gradually
defined itself, and the banking side of its business has
become more and more important, the legislatures in most
of the States have gradually assimilated the supervision
of trust companies to that of state banks. a
In the following States the provisions for the supervision of trust companies doing a banking business
and for state banks are substantially identical: Colorado, Connecticut, Delaware, Florida, Georgia, Idaho,
Maryland, Mississippi, Nevada, New Hampshire, New
York, North Carolina, Oregon, South Carolina, Tennessee, and Virginia. In Alabama, California, Missouri,
Rhode Island, Texas, and Wisconsin6 the only important
additional provision for trust companies is the requirement that the company shall deposit with the supervisor or some other state official a specified sum in securities. In three States—New Jersey, North Dakota, and
Ohio—the trust companies are subject to all the supervisory regulations which relate to state banks, and in
addition they may be examined by order of the courts.
In Arizona, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Montana, Utah, West Virginia, and Wyoming
the intention of the legislature appears to have been
to assimilate the supervision of trust companies entirely
a In Nebraska trust companies do not do a banking business, and are
not subject to supervision. In Arkansas no supervision is exercised over
either state banks or trust companies.
& The requirement that trust companies must make a deposit of securities with some state official is also found in Illinois, Ohio, North Dakota,
and Oklahoma.
175
National
Monetary
Commission
to that of state banks; but a strict interpretation of the
legislation may leave minor differences. In Pennsylvania all of the recent legislation has provided for the
same supervision over both classes of institutions; but
there remain on the statute books certain supervisory
regulations enacted in 1876 and prior thereto which
relate to state banks and not to trust companies. These
laws are largely unimportant since the same points are
covered in nearly all cases by more recent legislation.
The differences in Newr Mexico are of the same general
character as those in Pennsylvania.
There are, however, certain States in which the provisions for the supervision of trust companies are markedly different from those for the supervision of state
banks. These States are Illinois, Indiana, Michigan, Oklahoma, and South Dakota. An examination
of the differences in the character of the supervision
provided for state banks and for trust companies in
these States fails, however, to disclose any tendency
to differentiate the two along clear lines. In Illinois
a trust company doing a banking business is subject
to the same supervision as a state bank, and is also
subject to certain additional supervision as a trust company. The state bank law of Indiana now in force
was enacted in 1873, and the trust company law was
enacted in 1893. They differ with respect to supervisory regulations in several particulars, but the chief
difference is that in the case of a state bank the supervisor has power to take possession in certain contingencies and hold the bank until a receiver is appointed, but he
176
State
Banks
and Trust
Companies
has not been given this power in the case of trust companies. Similarly, in Michigan, Indiana, Oklahoma,
and South Dakota the supervision exercised over trust
companies is somewhat less stringent than that exercised
over state banks. In none of these States except Indiana is there any considerable number of trust companies, and it may be expected that with the increase
in the number of such companies and the development
of their banking business there will be a complete assimilation in the character of the supervision exercised over
the two classes of institutions.
The supervision exercised over trust companies in
those States which do not incorporate state banks but do
incorporate trust companies is similar to that exercised
in the majority of States over state banks. In the District of Columbia, trust companies are under the same
supervision as national banks with the additional requirement that they must deposit a specified amount in securities with the Comptroller of the Currency. In Maine,
Massachusetts, and Vermont reports and regular examinations are required. In Maine and Massachusetts examinations by the directors are also required. In Maine the
bank commissioner and in Massachusetts the board of
bank incorporation, consisting of the bank commissioner,
the treasurer, and the commissioner of corporations has
authority to refuse to allow the establishment of a new
trust company if in their judgment public convenience
will not be promoted thereby. In Massachusetts the
board of bank incorporation has authority to refuse to
allow a trust company to begin a trust business, if they
59045 0 —ii
12
177
National
Monetary
Commission
think it inexpedient. In Maine and Vermont the supervisors do not have authority to take possession of a trust
company, but they may conserve its assets by securing
an injunction on the transaction of business. On the
other hand, the powers given to the bank commissioner
in Massachusetts are very large. Power to take possession of trust companies in certain contingencies was given
the bank commissioner in 1908, and in 1910 the duty of
liquidating banks was imposed on that official. He may
direct the discontinuance of unsafe practices, and if his
order is disobeyed may take possession of the bank and
wind up its affairs.
Table showing growth and present status of state bank and trust
supervision.
company
STATE BANKS.
Year power conferred on state
officials to—
Year
Year re- regular
examiports re- nations
quired. authorized.
Arkansas
Arizona
California
Colorado
Connecticut
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Apply
for receiver.
Take
possession
pending Appoint
a reappoint- ceiver.
ment
of receiver.
1903
1903
1903
1897
1878
1897
1878
1907
1907
1903
(0)
(•)
1897
1878
1907
(a)
1903
1869
1891
1905
(a)
(a)
i860
1891
1903
1889
1889
1905
1887
1873
1873
1891
1903
1889
189S
1905
1887
189S
1873
1891
1877
« Antebellum.
I78
189S
1909
1907
1907
1895
1897
1891
Liquidate
1908
State
Banks
and Trust
Companies
Table showing growth and present status of state bank and trust
supervision—Continued.
company
STATE BANKS—Continued.
Y e a r power conferred on state
officials t o —
Michigan
Minnesota
Missouri
Montana
Nebraska
New Hampshire
N e w Mexico
Nevada
New Jersey
New York
N o r t h Carolina
North Dakota
Ohio
Oregon
Pennsylvania
Rhode Island
S o u t h Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
W e s t Virginia
Wisconsin
Wyoming
1869
1882
1870
(a)
(a)
1888
1877
1887
1877
(a)
189s
1895
1889
(a)
189s
1899
1889
(a)
1897
1884
1907
(a)
(a)
1887
1890
(a)
1903
1907
1889
1884
1889
1890
1908
1907
1897
1891
1908
1906
1891
1909
1907
1889
1909
(a)
1892
1891
1903
1893
1897
1905
1888
1910
1907
1891
189S
1888
1905
1898
1904
1907
1901
1901
1888
1907
1897
(a)
(a)
1906
1891
(a)
I905
1888
1884
1886
1891
(a)
1888
1893
1889
1909
189s
1907
1899
1908
1908
1907
1897
1891
(a)
1906
1891
(a)
1907
1897
& 1891
1908
1906
1903
1908
1909
1909
1905
1907
a Antebellum.
& A preliminary hearing must be held before the attorney-general.
179
Liquidate.
1909
nil
Louisiana
Maryland
Iltft
Kentucky
Apply
for r e ceiver.
Take
possession
pending Appoint
a reappointceiver.
ment
of r e ceiver.
titti
Year
regular
Year re- examiports re- nations
quired. authorized.
1909
National
Monetary
Commission
Table showing growth and present status of state bank and trust company
supervision—Continued.
TRUST COMPANIES.
Year power conferred on state
officials to—
Year
Year re- regular
examiports re- nations
quired. authorized.
Alabama
Arkansas
Arizona
California
Connecticut
District of Columbia
Florida
Georgia
Idaho
Minnesota
New York
Ohio
1903
1891
1891
1872
1903
1890
1889
1894
1905
1887
1893
1904
1901
1897
1882
1883
1892
1888
1889
1883
1897
1895
1887
1903
1907
1889
1889
1874
1887
1897
1877
1907
Apply
for receiver.
1903
1903
1901
1891
1907
1872
1903
1890
1889
1889
1905
1887
1893
1904
1901
1891
1907
1879
1903
1890
1889
189S
1905
1887
1893
1904
1901
1898
1883
1892
1888
1891
1883
1902
1883
1892
1888
1891
1883
1895
1887
1897
1903
1907
1889
1909
1874
1889
1897
1908
1907
1882
1899
1907
1909
1895
1907
1903
1890
Liquidate.
1890
1907
1904
1901
1908
1908
1910
1899
1909
1897
1909
1909
1907
1889
1889
180
Take
possession
pending Appoint
a reappoint- ceiver.
ment
of receiver.
1891
1897
1899
1908
1903
1905
1908
1907
1907
1908
State
Banks
and Trust
Companies
Table showing growth and present status of state bank and trust company
supervision—Continued.
TRUST COMPANIES—Continued.
Year power conferred on state
officials to—
Year reports required.
Pennsylvania
Rhode Island
South Carolina
South Dakota
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Year
regular
examinations
authorized.
Take
possession
Apply pending
appoint
for re- appointa receiver.
ceiver.
ment
of receiver.
1901
1901
1901
1891
1891
1891
1908
1877
1908
1906
1906
1906
1895
1905
1905
1905
1890
1878
1894
1886
1891
1885
1903
1905
1898
1874
1910
1903
1891
1895
1903
i9*0S
1890
1884
1904
1903
1901
1905
1903
181
Liquidate.
1901
1891
1908
1906
1908
1905
1909
1903
1907
1905
1907
1909
CHAPTER
VIII.
FAILURES.
STATE BANKS.
The final test of the safety of any class of banks is to
be found in the statistics of insolvencies. Unfortunately
the data in the case of state banks are of such a character
as to make it impossible to reach any exact conclusions
even as to the number of failures. The States, as has been
noted, have not until recently shown any disposition to
give the officers charged with the administration of the
banking laws any control over failed banks, and it is in
only a few States that any official statistics are procurable
on the subject. 0
Various attempts have been made by the Comptroller
of the Currency to procure information on this point. In
his report for 1879, Mr. Knox summarized the results
of an investigation into failures of state, private, and
savings banks occurring during the three preceding years. 6
The number of such banks that failed in that period was
a
In Nebraska since 1901 the receivers' reports have been tabulated,
and the results are shown in the following table:
Average annual deposits in state banks since 1901
$50, 369, 810. 00
Total deposits in failed banks
451, 557. 00
Total unpaid claims, less cash in receivers' hands
187,955. 36
Average annual loss for past nine years
20, 888. 37
The average annual loss on deposits is less than 42 cents on each $1,000.
(Report of the Secretary of the State Banking Board, Nebraska, 1909 )
& Report of the Comptroller of the Currency, 1879, p. 35.
182
State
Banks
and Trust
Companies
210, and it was estimated that 66 per cent of the claims
would be paid. The 89 national banks which failed prior
to 1879 had paid a slightly smaller percentage of claims,
but the national system showed a much lower percentage
of failures. In 1895 the Comptroller undertook another investigation of similar character to that of 1879, a n ( i i n 1896
the inquiry was continued. 0 It was found that, as far
as could be ascertained, 1,234 banks had failed since
1863, and that they had paid less than 50 per cent of the
claims against them.
The banks reported as having failed were not separated
into classes, but were grouped together as " banks other
than national/' The term "state bank" was used in the
inquiry of the Comptroller, but synonymously, in this
case, with " banks other than national." 6 There is
abundant internal evidence that failures of private banks
also were considered by some examiners as within the
scope of the inquiry. 0 Seventy-seven failures, for instance, were reported for Indiana from 1863 to 1897,
whereas from reports to the state auditor it is certain
that the number of state bank failures from 1873 to 1897
a Report of the Comptroller of the Currency, 1895, vol. 1, p. 20. Id.,
1896, vol. 1, p. 52.
& The results of the investigation are to be found in the Report of the
Comptroller of the Currency for 1896, vol. 1, pp. 52-57. The paragraph is
headed "Results of an investigation relative to insolvent state banks
from 1863 to 1896." But in the heading of the tables the expression
" b a n k s other than national" is uniformly used, and an examination of
the letter of inquiry sent out to the bank examiners and from the answers
to which the tables were made up, shows that the two terms were used
indiscriminately. In the first paragraph of the letter, the investigation is
said to be "relative to failed banks other than national," while later on
the same banks are spoken of as " s t a t e banks."
c
I t is significant that of the 1,234 failed banks, 233 were reported as
without capital.
183
National
Monetary
Commission
did not exceed 12, and before that time there were during
the period over which the investigation extended practically no state banks in Indiana.
Another inquiry, confined to the question of the percentage of claims, was made by the Comptroller in 1899;
it was found that 283 of the state, private, and savings
banks which failed from 1893 to 1899 and for which information was procurable had paid 56.19 per cent of all
claims against them.
It is impossible to gain from the data collected by the
Comptroller's office any information as to the rate of
insolvency for state banks, since there is no possible way
of separating the failures of state banks from those of
other classes of banking institutions, such as savings
banks, private banks, and trust companies. This difficulty has not always been recognized, and erroneous
statements as to the relative safety of state and national
banks have resulted. The Indianapolis monetary commission said in its report:
The total number of national banks which have failed since the establishment of the system was, at the end of 1897, 352, or 6.9 per cent, of the
5,095 which had been organized.
As against this, 1,234 failures of state
banks are known to have occurred in the same period.
The total number
of state banks in operation during the year 1895-96 was 3,708; adding the
1,234 failed banks, a total of 4,942 is obtained, and though a certain number
have doubtless gone into liquidation, or for some other reason do not
appear in figures, it seems safe to say that probably about 20 per cent of
the total number of state banks organized during the period in question
have failed.
This would be a percentage nearly three times as high as that
of the national banks which failed during the periods
a
Report of Indianapolis Monetary Commission, p. 277.
184
State
Banks
and Trust
Companies
It may be doubted if any class of banks in this country,
even in an entire absence of regulation, would show as
high a rate of insolvency as that ascribed to state banks
by the commission. Regulation of the banking business
is undoubtedly helpful in keeping down the number of
failures, but to suppose that, if banks were left to go with
a free rein, they would fail three times as often, is to overrate the value of governmental oversight quite as much
as it has been common to undervalue it.
Fortunately, we have still another source of information
as to the failures of state banks. Since 1892 the Bradstreet Company has furnished the Comptroller annually
with information by States as to all bank failures in the
country. The banks are classified into state, savings, and
private. The tables on pages 186 and 189, compiled
from this source, form the only accurate body of statistics as to the number of state bank failures.**
From 1892 to 1899, inclusive, there were, according to
the Bradstreet reports, 380 failures of state banks; but this
does not include the entire number of insolvencies which
may properly be classed as those of state banks, for, in
these returns, state and savings banks are to a certain extent confused.
a
The statistics of assets and liabilities given by Bradstreet's are, from
the nature of the case, merely estimates, and are not included in the table.
The statements as to the number of failures have been compared, wherever
possible, with returns of insolvencies in official reports, and found to be
highly accurate. Since the method of collecting the returns used by
Bradstreet's is the same everywhere, there seems no question that, taken
as a whole, the reports are correct.
185
National
Monetary
Commission
Number of state bank failures,
State.
1892.
1893.
1894.
1895.
1892-1899.
1896.
1897.
1898.
1899.
Total.
1
1
1
1
Total
New York
Pennsylvania
1
1
1
6
2
2
i
1
2
4
2
12
3
1
Total
1
9
3
1
16
2
5
5
West Virginia
North Carolina
South Carolina
Florida
1
2
1
2
5
5
3
1
2
3
2
1
1
1
1
1
2
1
2
Total
5
2
1
1
2
3
1
7
25
7
2
Ohio
Indiana
Illinois
3
Total
North Dakota
South Dakota
Nebraska
3
5
1
1
7
4
7
I
1
54
1
12
13
1
1
1
1
1
1
13
1
2
1
15
4
8
2
10
9
8
3
56
2
14
20
18
4
10
2
18
17
6
6
25
6
2
7
4
Minnesota
Missouri
2
3
5
1
1
1
3
1
4
2
3
5
1
26
4
4
186
3
9
38
1
4
6
2
119
1
57
56
State
Banks
and Trust
Number of state bank failures
State.
1892.
1893.
1894.
Companies
1892-1899—Continued.
189S.
1896.
1897.
1898.
1899.
3
3
2
1
1
Colorado
9
Total
10
10
1
2
Washington
Oregon
California
Idaho
Utah
Total.
48
10
4
4
19
3
2
1
1
3
1
6
21
24
14
7
134
4
5
1
2
18
5
1
2
1
22
5
2
1
Total
T o t a l for
United
States . . . .
21
32
4
6
6
1
2
171
27
44
S4
44
14
2
5
53
380
In some States stock savings banks are classed as state
banks; consequently a part of the bank failures classified
by Bradstreet's as those of savings banks should be included
in state bank insolvencies. The total number of failures
of savings banks was 92, and, of these, 26 were in States
where there was no possibility of confusion, because the
state banks and savings banks are separated. There will,
therefore, have to be added to the 380 state bank failures
66 of stock savings banks. Also, in one of the years covered
by the reports, 1892, the figures as given in the table extend only over six months. The Comptroller of the Currency, in his report for 1893 (p. 13), gave the number of state
bank failures for the latter half of 1892 as 18. Making
these additions, the total number of insolvencies of state
187
National
Monetary
Commission
banks for the years 1892-1899, inclusive, is found to be
464, or an annual average number of 58.
The average number of state banks in operation during
the years 1892-1899, inclusive, was 3,864. It will be
noted, however, that in the table no returns are given of
insolvencies for North Dakota and South Dakota.® The
average number of state banks in operation in these
States during the eight years was 167. Making this
deduction we have 3,697 as the average number of state
banks in operation from 1892 to 1899 in the States covered by the statistics.
It appears, therefore, that in the years 1892-1899 the
annual number of failures of state banks was 1.5 per cent
of the average number of banks in operation during that
period. In the same period 225 national banks failed.
The average number of such banks in operation was 3,703,
so that the annual rate of insolvency was seventy-six
hundredths of one per cent, or something more than half
of that of state banks.
At first sight this conclusion seems to prove the much
higher safety of the national banks, but some consideration
will lead us to see that the difference in the rate of insolvency is by no means so significant as it appears. The
period 1892-1899 was an abnormal one. The most lengthy
and severest depression in the history of the United
States extended over the greater part of these years.
This depression had a far greater effect in those parts of the
a Incomplete returns are given in the Bradstreet reports for several of
the years for these two States, but since no information is available as to
how far the failures reported represent the total number it has seemed
best to omit all data for these two States.
188
State
Banks
and Trust
Companies
country in which the state banks are numerically strongest
than in other sections. Out of a total of 4,200 state banks
in operation in 1899, nearly 3,500 were located in the
Southern, Western, and Pacific groups and in the more
westerly States of the Middle Western group. On the
other hand, of 3,590 national banks in operation in the
same year, only 1,570 were in these States. It is possible
to determine with some exactness what effect this difference in location between the two classes of banks has had
on the differences in their rates of insolvency. Of the 225
failures of national banks from 1892 to 1899, 164 were
in the groups named. Since the number of national banks
located there was 1,570, the annual rate of failures was,
therefore, about 1.3 per cent, or approximately the same
as that for the state banks taken as a whole.
Number of state bank failures,
State.
1900.
1901.
1902.
igoo-igog.
1903. 1 9 0 4 . 1 9 0 5 . 1906
1907.
1908. 1909. Total.
Total
New York
2
1
7
2
2
2
2
6
New Jersey
Total
1
1
1
1
2
5
3
9
2
2
21
1
West Virginia...
North Carolina. .
South Carolina. .
1
3
1
2
1
1
1
1
1
189
3
6
1
1
3
1
National
Monetary
Commission
Number of state bank failures, igoo-igog—Continued.
State.
1900.
1901.
I 9 0 3 . 1904. 1905. 1906. 1907. 1908. I909.
1902.
I
2
2
6
I
2
7
1
6
1
I
Total.
1
1
1
2
1
Texas
Arkansas
2
2
1
Kentucky
2
3
2
1
1
1
Total
4
Ohio
Indiana
Illinois
1
5
3
12
4
1
I
1
3
1
1
5
9
2
1
3
2
17
8
16
3
2
2
61
1
I
1
1
1
2
2
1
1
1
Missouri
2
North D a k o t a . . .
South Dakota. . .
9
1
1
1
6
4
1
Kansas
1
3
4
7
34
1
3
6
1
1
I
2
3
1
1
1
1
3
3
2
1
1
5
3
I
1
Total
3
3
I
1
5
9
1
1
1
1
Total
2
5
4
1
1
I
2
4
3
1
10
1
1
4
3
2
1
1
2
2
4
1
1
1
California
1
33
3
3
4
2
2
2
2
IO
5
25
42
19
174
Utah
1
Total
Total for
U. S
1
1
9
8 I
1
2
I
2
37
16
15
IO
2
12
i
6
1
2
1
190
State
Banks
and Trust
Companies
This view is confirmed by the statistics for the years
1900-1909, inclusive. In this period, 174 failures of
state banks were reported. The number of failures of
savings banks is reported as 61; and, of these, 35 are
in States where the state banks do an extensive savings
bank business. Adding these failures, we have a total
number of 209 failures of state banks, or an annual
average of 21. The average number of state banks
in operation during the years 1900-1909 was 7,800,
and the annual percentage of failures was twenty-seven
one-hundredths of 1 per cent. During the same period
there were 118 failures of national banks, or an annual
average of 11.8. The average number of national banks
in operation was 5,310. The annual percentage of
failures was twenty-two one-hundredths of 1 per cent. It
appears, therefore, that so far as the number of failures
is concerned the difference between the state and the
national banks is not great. It is highly probable, however, that the percentage paid on claims in the case of
failed national banks is much higher than that for state
banks. 0
Trust companies.—The statistics of the number of the
failures of trust companies are less trustworthy than
those of the state banks. In the first place, the Bradstreet reports include for certain years in the failures
of trust companies those of loan and investment companies. In the second place, the trust companies in a
considerable number of States where the development
of trust companies has not been large are included among
a
S e e above, p. 169.
191
National
Monetary
C ommiss
to n
state banks. Any statement, therefore, must be in
the nature of a somewhat rough estimate.
Number of trust company failures,
States.
1892.
1893.
1894.
1895.
i8o2-i8go.
1896.
3
1897.
1898.0
1899.
Total.
4
1
Vermont
1
1
Connecticut
Rhode Island
Total
1
3
6
2
1
1
1
1
1
1
1
1
3
Maryland
Total
1
1
5
1
West Virginia
North Carolina
South Carolina
Florida
1
1
2
1
1
1
x
1
Kentucky
Total
2
4
1
1
1
9
Ohio
Indiana
Illinois
Michigan
Missouri
2
1
2
26
2
Total
3
4
1
6
3
1
« Includes loan and trust, mortgage, and investment companies.
t> Includes mortgage investment companies.
192
3
State
Banks
and Trust
Number o f trust company failures,
States.
1892.
1893.
1894.
Companies
1892-1899— Continued.
1895.
1896.
1897.
1898.
1899. Total.
North Dakota
South Dakota
Total
1
1
1
1
1
1
1
1
1
1
1
1
1
1
3
8
Utah
Total
Total for United
States
3
59045—11-
-13
13
s
1
193
2
2
37
National
Monetary
Commission
Number of trust comparty failures, igoo-iooo.
1
State.
1900. 1901.°
1902.
1903.
Maine
New Hampshire
Vermont
M assachuse tts
Connecticut...
Rhode Island.
1907. 1908.
1909.&
Total.
1
1
1
1
2
2
6
4
2
9
1
1
7
!
,
!
i
Total . .
New Y o r k . . . .
Pennsylvania .
New J e r s e y . . .
1906.
1904- 1905.
2
1
;
1
I
1
I
3
1
2
3
I
Delaware
Total . .
1
1
1
Virginia
West Virginia.
North Carolina
South Caro-
3
3
2
6
3
20
1
I
Florida
Georgia
Alabama
Mississippi.. . .
1
1
Texas
Arkansas
1
I
2
2
1
I
a
2
Total . .
1
Ohio
Indiana
1
4
1
5
4
3
5
1
13
4
1
1
|
1
Missouri
i
Total . .
2
X
1
2
5
8
1
1
North Dakota.
<* The statement for 1901 is headed ' Loan companies.''
and trust companies.'
& The statement for 1909 is headed •Loan
'
194
State
Banks
and Trust
Companies
Number of trust company failures, igoo-igog—Continued.
State.
1900.
1901.
1902.
1903.
1904-
1905.
1906.
1907.
1908
1909.
Total.
1
Total . .
1
Washington . .
Oregon
1
1
3
3
1
1
Utah
Total . .
Total for
U. S. . .
1
1
1
4
1
2
8
2
4
4
2
2
6
8
25
6
57
The Bradstreet returns, after the deduction as far
as possible of investment companies, show 94 failures
in the eighteen years from 1892 to 1909, inclusive, or
an annual average number of 5.2. The average number
of trust companies in operation during the same years
was 650, or possibly as many as 700, if those included
among state banks are reckoned in. The annual average rate of failures was therefore approximately eightyfive one-hundredths of 1 per cent. If, however, the
statistics are divided into two periods, as in the case of
state banks, it appears that the average annual rate of
insolvency for trust companies from 1892 to 1899 was
one and nine-tenths per cent, whereas in the period
from 1899 to 1909 the rate of insolvency was sixty-two
one-hundredths of 1 per cent.
195
Part II
The Growth of State Banks and
Trust Companies
197
T H E G R O W T H O F STATE BANKS AND TRUST
COMPANIES.
CHAPTER I.
THE INCREASE IN THE NUMBER OF STATE
BANKS AND TRUST COMPANIES.
STATE BANKS.
During the past thirty years there has been a remarkable increase in the number of state banks. This increase,
however, partly because complete statistics have not been
accessible, has been little remarked until recently. a Since
1873 the Comptroller of the Currency has collected and
published in his annual reports statistics of state banks,
but complete data for compiling these statistics have been
available only for those States in which the banks were
required to report to some state official. The result has
been that, particularly in the earlier years, the statistics
as published in the Comptroller's report cover only a part
of the whole number of state banks. 6 In recent years,
however, these statistics are practically complete, since
in all except a few States the state banks are now required
o In his report for 1897 (vol. 1, p. xxxiii), the Comptroller of the Currency
said: "By reference to the statement of the resources and liabilities of the
state banks from 1873 to 1897 it will be noticed that with but one exception there has been an uninterrupted increase in.the number of banks
reporting, which is due rather to legislative action providing for the collection of banking statistics than to an actual increase in the number of
existing banks, although there has been a normal increase each year."
& See below, p. 244.
199
National
Monetary
Commission
to make reports. The following parallel columns show
the lack of correspondence for many of the years between the number of state banks as given by the Comptroller and the approximately correct number:
State banks as
given in the
Report of the
Comptroller of
the Currency.
1877
1878
1879
1880
1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
189s
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909
Approximately
correct number 0
of state banks.
592
475
616
620
652
672
754
817
975
849
.413
,403
,671
, 101
.572
, 191
,579
,586
,774
.708
.857
,965
,191
,369
,983
.397
. 962
.923
7.794
8,862
9.967
11,220
i r , 292
o See below, pages 243-248, for method of obtaining figures in this column.
b From special report of April 28, 1909. made by the banks to the National Monetary
Commission, exclusive of banks in island possessions.
200
State
Banks
and Trust
Companies
It will be seen that the increase in the number of state
banks has been especially rapid since 1886. In that year
they were far outnumbered both by private and by
national banks, but by 1899 they were the most numerous class of banking institutions in the United States.
Since 1899 their rate of increase has been even greater.
The following table shows the number of national banks,
state banks, private banks, and trust companies at certain dates: a
National banks
State banks
Private banks
Trust companies
1879.
1884.
1889.
1894.
1899.
1904.
2, 048
2,625
5.331
6,984
2,545
37
3,458
4,215
63
3.844
228
5.484
924
4 , 407
44
3.583
4.253
4 . 168
276
6,893
1, 017
3,239
2, 097
3.770
813
3.70S
1909.
Of the whole number of banks and trust companies in
the United States on January 1, 1910, nearly one-half
were state banks; and, if we deduct from the number of
private banks the large number of brokers so classified
who do not do a banking business, the state banks are
considerably more than one-half of the total. In 1879
less than one-sixth of the total number of banks and
trust companies were state banks.
The increase in the number of state banks has by no
means been uniform in the different sections of the
country. The number of state banks in the different
a The number of national banks is taken from the Reports of the Comptroller of the Currency; the numbers of private banks, state banks, and
trust companies are from Tables I, II, and III in Appendix A. The
method of compiling these tables is explained below, pages 243-250.
201
National
Monetary
Commission
groups of States for the years 1879, 1889, 1899, and 1909
is shown in the following table:
Number and percentage of increase of state banks, by groups of States, for the
years 1879, 1889, 1890, and 1900.
1879.
Group.
New England. .
Eastern
Southern
Middle Western.
Western
Pacific
Total
Number.
1889.
1909.
1899.
Num- PercentNumage of
ber. increase.
ber.
Percentage of
increase.
Number.
Percentage of
increase.
19
22
16
189
204
295
42
253
464
34
127
23
334
1,071
675
129
1.594
528
956
131
136
81
275
77
831
-17
16
209
133
216
302
4, 253
102
11,292
165
64
155
1.157
142
813
2, 097
1S8
5
19
32
387
3.312
3.717
3.026
It will be noted that the greatest increase in the number
of state banks has been in the Southern, Middle Western,
Western, and Pacific States. In the New England States
the number of state banks is exactly the same as in 1879,
and in the Eastern States the increase in the number of
state banks has been small.
Not only in the increase of state banks but also in their
present importance, compared with national banks and
trust companies, the same broad division of the States
may be made. The following table shows the relative
strength in number and capital of the three classes of
banking institutions for the year 1909:
202
DIAGRAM
NUMBER
OF
B/IA/XS
ja ooo
NUMBER
OF
SHOW/A/G A/UMBEA OF PRIVATE9 STATE, AMDNATIONAL BHNH6,
1877-1909
BRA/AS
/ £ £fcfc?
//ooo
/oooo
toooo
STATE BMKS
PRIVATE BM«5
9000
9000
NtmomL B^V/fS
6000
6000
7000
6
1
o
000
7000
6 OOO
l /
/
6 000
5000
N
........ m
4000
0*
,+*'
3000
—»»•
~~>^
c r
^^ .
4000
!**••*-
s
5000
S-
<s
——2 OOO
£000
1000
/OOO
J rr/w /€ 77
/679
59045°—11.
J36/
AM3
ASftd
(To face page 202.)
/667
/069
/SSI
/693
J&35
/6$7
/S99
/90/
/903
/SOS
J$07
J909
1
State
Banks
and Trust
Companies
Number and capital of national and state banks and trust companies, by groups
of States, on April 28, 1909.
[Capital expressed in millions of dollars.]
National banks.
Group.
New Hngland
Eastern
Southern
Middle Western
Western
Pacific
Total
Number.
483
i,542
1.399
1.969
i , 120
Capital.
State banks.
Number.
Capital.
101.8
19
3-0
320.9
387
3.312
52.4
Trust companies.
Number.
61. 2
3,7i7
3.026
375
56.7
831
54-4
155
475
131
228
34
56
6,888
933.2
11,292
410.7
1,079
143.5
248.8
114.3
137-4
48.9
Capital.
3 3 0
362.7
23. 4
81.2
4. 1
16.6
In the New England and Eastern States, the state
banks fall far behind both the national banks and the
trust companies in number as well as in aggregate capital.
Only a Jittle more than 2 per cent of the capital invested
in the New England States in the three classes of banking
institutions is represented by the capital of the state
banks. The state banks are somewhat more important
in the Eastern States, but less than 10 per cent of the
banking capital in this group of States is represented by
the capital of the state banks. In all the other groups
of States the state banks are more numerous than either
the national banks or trust companies. In none of these
groups, however, is the capital invested so great as that
invested in national banks, although in all of them it is
greater than the amount invested in trust companies.
In the Western and Pacific groups, however, the amount
of the capital of the state banks approximates that of the
national banks. In the Southern States the capital of
the state banks is in amount nearly four-fifths of that of
203
National
Monetary
Commission
the national banks, and in the Middle Western States a
little more than one-half.
TRUST COMPANIES.
The rapid increase in the number of trust companies
began much later than the increase in the number of state
banks. The number in the entire United States did not
exceed ioo until 1888, and the number of accessions was
not large until 1899. Since that time the increase has
been very rapid. According to the reports made to the
National Monetary Commission, on April 28, 1909, nearly
1,100 trust companies were actively engaged in business.
The great development of the trust company has been
almost entirely in the New England, Eastern, and, to a less
extent, in the Middle Western States. Nearly one-half
of all the trust companies in the United States are in the
New England States, Pennsylvania, and New York. As
will be noted from the table on page 203, the capital of
the New England trust companies is approximately onethird of that of the New England national banks, and the
capital of the trust companies of the Eastern States is
nearly two-thirds of that of the national banks in those
States. In both of these groups the trust companies are
far more numerous and of a much greater aggregate
capital than the state banks. In the Southern, Middle
Western, Western, and Pacific groups the trust companies
are far less numerous and far less important, measured
by the amount of their capital, than either the national
or the state banks.
204
CHAPTER
II.
CAUSES OF THE GROWTH OF STATE BANKS AND
TRUST COMPANIES.
STATE BANKS.
Since private and national banks as well as state banks
are banks of discount and deposit, the disproportionate
increase in the number of state banks must be explained by
their superior advantages over one or both of the classes
competing with them. It must be noted, however, that
the fields of operation of national and of private banks
are for the most part mutually exclusive, for very few
private banks have a capital sufficiently large to enable
them to organize under the national-bank act.° The state
a According to the returns made to the internal-revenue officials in 1882,
the average capital of private banks in the United States was $33,000.
In the Middle Western States, where they were numerically strongest, the
average capital was under $20,000. According to the returns made to the
National Monetary Commission on April 28, 1909, the average capital of the
private banks reporting was $18,000, and in the Middle Western States,
where about two-thirds of the reporting banks were located, the average
capital was $11,000. The returns to the Monetary Commission do not
include to any considerable extent houses whose business is confined to
brokerage and exchange. In a few States official reports are made by the
private banks to the state bank supervisors. Presumably the amount of
the capital of the private banks so reporting is fairly representative of the
same class of banks in other States. The capital of the 381 private banks
whose capital is thus reported in the latest official reports was as follows:
$5,000 or less
32
Over $5,000 and less than $10,000
5
$10,000 and less than $15,000
211
$15,000 and less than $20,000
33
$20,000 and less than $25,000
28
$25,000 and less than $50,000
42
$50,000 and less than $100,000
20
$100,000 and less than $200,000
5
$200,000 and over
5
Total
381
205
National
Monetary
Commission
bank, on the contrary, is a rival of both the other classes,
since the amount of capital required to incorporate a state
bank is in most of the States small enough to make it possible for private banks to become incorporated if they desire
to do so. The causes, then, which have led to the increase
of state banks may be divided into two categories according as they have been influential in giving the state bank
an advantage over the private or over the national bank.
STATE VERSUS PRIVATE BANKS.
There are two distinct functions which private banks
fulfill: (i) As an adjunct to the brokerage business in
large cities; (2) as a means of furnishing credit in small
communities, chiefly in agricultural sections. It is in the
latter of these capacities that they enter the same field
as the small state banks. The chief characteristic of both
classes of banks is their small capital. In a section with
a sparse population, if there are to be banks at all, they
must be of small capital, since the business which can be
obtained does not justify the investment of large sums.
The westward extension of the settled area in this country
has continually called into existence banks of small capital.
In 1850 the banks of Ohio, Indiana, and Illinois, even those
issuing notes, were small compared with similar credit agencies in the East. There is evidence also, although statistics
can not be cited, that in addition to the incorporated banks
with $25,000 capital of Ohio, Indiana, and Illinois, there
were numerous private banks in the smaller places. 0
a Thus, for instance, in Davis v. McAlpin (1858), Ind., 10; 137, the
supreme court of Indiana said: "Private banks of discount and deposit
must have existed to a very limited extent, if at all, in the early period of
our legislation. But in later years they have become numerous and are
discharging a large portion of the banking business."
206
State
Banks
and Trust
Companies
When the national bank took the place of the state bank,
a still wider field was left for the private bank, since
under the national-bank act until 1900 a bank might not
be incorporated with a smaller capital than $50,000. By
the act of March 14, 1900, national banks may be incorporated with a capital of $25,000 in towns of less than
3,000 population. The following table shows with what
rapidity, under these conditions, the growth of private
banks proceeded:
Number of private banks in the United States.Q
1877
1888
* 2, 432
4, 064
1899
4, 168
1909
4, 407
In the period 1877-1888 the rate of increase of private
banks was over 67 per cent; but from 1888 to 1909 it was
less than 9 per cent. This has come about despite the
fact that the number of private banks in the large cities
has been constantly increasing. The diminution in the
number of private banks in the small towns has nearly
counterbalanced the increase of brokers' banks.
An estimate as to the increase of brokers' banks may be
made by taking separately the number of private banks
in the States of New York, Massachusetts, Pennsylvania,
and Illinois. In all these States except Illinois the great
mass of private banks consists almost wholly of brokers'
banks; and in Illinois, though the percentage is not so
high, brokers' banks constitute a very large part of the
total number.
a See Table III, Appendix A.
207
National
Monetary
Commission
Number of private banks.
1877.
Massachusetts.
New York
Pennsylvania. .
Illinois
52
289
306
282
Total.
929
1888.
1899.
74
160
256
446
243
316
441
599
1909
173
902
366
823
. 264
Deducting the number of private banks in these four
States from the total number, we find that the number
of private banks in the remaining States for these years
was as follows:
1877
1888
1899
i, 503
3,050
2,647
i9°9
2,143
It will be noted that in the remaining States taken together there has been a steady decrease in the number of
private banks since 1888. It appears probable that in
1909 there were not more than 1,500 private banks exclusive of brokers' banks, while in 1888 only a very small
part of the 4,000 private banks were brokers' banks.
That this decrease in the number of private banks has
been caused in large degree by the preference of the banks
for incorporation is evident from the increase in the number of small state banks. The number of state banks
with a capital of less than $50,000 has increased as follows:
1877
1888
1899
1909
187
747
2,529
8, 980
The great mass of the state banks with a capital of less
than $50,000 are in the Southern, Middle Western, and
Western States. In 1888 there were in these three groups
208
State
Banks
and Trust
Companies
of States 3,300 private banks and 700 state banks with a
capital of less than $50,000. In 1909 in the same groups
there were 2,673 private banks, 8,300 state banks with
less than $50,000 capital, and 5,600 state banks with less
than $25,000 capital.
In the New England and Eastern States neither smail
state banks nor private banks, except brokers' banks, have
been numerous during the period under consideration.
In some of these States state banks are not incorporated,
and in several others the amount of capital required is
large, $25,000 or $50,000. But the chief reason for the
small number of private and small state banks in these
States is that the economic conditions do not make banks
with less than $50,000 capital profitable.
The chief reason for the partial supplanting of the
private bank by the small state bank is the advantage of
the corporate form of organization in giving greater
security to the depositor and consequently in increasing
the credit of the bank. The desire to obtain a charter can
not become effective, however, unless the amount of
capital required is small enough to permit the private
banks to make the conversion. If the business of a
locality will only support a bank with a capital of $10,000,
and the state banking laws require a minimum capital of
$25,000 for an incorporated bank, the additional credit
which might be obtained through incorporation will not
be a sufficient inducement to bring about the change to
the state system. In several of the Eastern and Middle
Western States the decrease in recent years in the amount
of capital required for the incorporation of state banks
has been largely responsible for the diminution in the
number of private banks.
590450—11—14
209
Number of private and small state banks for the years 1877, 1888, 1899, and 1909.
State
banks with
less than
$50,000
Private
banks
capital
Total New England S t a t e s . . . .
Total Eastern States
Virginia
West Virginia
State
banks with
less than
$50,000
Private
banks.
capital.
Maine
New Hampshire
Vermont
Massachusetts
Rhode Island
Connecticut
New York
New Jersey
Pennsylvania
Delaware
Maryland
1899.
1888.
1877.
$50,000
Private
banks.
capital.
8
12
8
2
3
2
State
State
banks with banks with
less than less than
$50,000
$25,000
capital.
capital
12
3
1
2
1
1
74
160
173
15
5
7
11
14
19
16
117
289
12
10
8
256
63
6
198
3
446
75
233
1
902
366
243
4
316
3
306
4
1
3
3
4
7
1
S3
33
23
2
19
6
43
631
22
527
69
813
142
18
30
24
30
160
|
8
12
3
47
47
27
6
4
94
|
9
4
23
29
24
256
30
Private
banks.
52
82
30
State
banks with
less than
1909-
36
1.384
113
11
7
214
13
3
South Carolina.
Georgia
Florida
Alabama
Mississippi. . . .
Louisiana
Texas
Arkansas
Kentucky
Tennessee
36
7
73
10
Total Southern States.
North D a k o t a .
South D a k o t a .
Nebraska
Kansas
Montana
Wyoming
Colorado
36
17
21
289
Ohio
Indiana. . .
Illinois. . . .
Michigan. .
Wisconsin.
Minnesota.
Iowa
Missouri. .
Total Middle Western States.
12
22
71
27
49
IS
14
130
20
19
39
8
76
460
219
in
282
131
70
49
201
104
17
28
29
49
141
250
156
44i
220
102
152
423
122
r. 167
292
1,866
196
29
43
13
8
56
36
34
5
8
179
17
59
13
17
22
18
186
17
13
i5
1,786
438
135
4
286
204
823
249
7
100
180
47
7o
134
76
181
192
289
187
14
32
9
529
416
5i
47
86
80
87
114
120
39o
287
222
599
249
120
239
519
no
278
186
232
243
390
114
252
564
166
442
817
649
42
356
98
975
2,345
2,876
1,596
2,065
439
374
617
592
26
400
333
480
43
67
34
47
103
94
57
65
104
306
313
84
5
5
120
365
259
5
69
153
335
71
128
233
131
264
267
373
267
63
76
83
30
25
19
42
II
55
493
8
4
33
6
55
Co
to
Number of private and small state banks for the years 1877, 1888, i8gg, and igog—Continued.
1888.
1877.
State
banks with
less than
$50,000
Private
banks.
New Mexico
Oregon
California
Idaho
Utah
4
21
5
Total United States
5
187
2
10
5
56
State
State
banks with banks with
less than less than
$50,000
$25,000
capital.
capital.
Private
banks.
7
32
17
2
1
501
443
36
861
30J
2, 691
2,255
2
14
17
24
156
61
56
2
21
15
20
86
SO
21
26
52
44
29
125
2
16
2
16
8
9
106
68
8
4
11
34
12
2
13
7
5
2
6
65
3
7
18
2, 432
$50,000
Private
banks.
969
294
102
State
banks with
less than
capital.
161
1
Total Pacific States
$50,000
Private
banks.
capital
capital
Total Western States
State
banks with
less than
ft
1909.
1899.
1
10
2
1
4
5
34
125
95
95
536
747
4,064
2,529
4,168
8,980
16
205
5,8 7 8
8
8
117
4, 407
State
Banks
and
Trust
Companies
The growth of small state banks has been much increased in a number of the States by legislation relating
to the private banks. The regulation of the business of
unincorporated bankers is of comparatively recent origin,
and is an outgrowth of the feeling that the banking
business, even when confined to discount and deposit,
should be subjected to supervision and regulation. The
regulation to which private bankers are subjected assumes
several forms, which differ considerably in the extent to
which they operate to induce private banks to become
incorporated.
In a considerable number of States it has been enacted
that private bankers must not use a corporate name.
The purpose of this provision is to prevent the deception
of the public, and some such provision has been particularly urged in those States where incorporated banks are
supervised and regulated and private banks are not,
although such provisions are found also in States where
both private and state banks are under supervision. As
early as 1882, in New York, persons doing a banking
business, if unincorporated, were forbidden to use a corporate title. At present the use of corporate titles by
private banks is forbidden in Wyoming, Michigan, Maryland, and Montana.
In some States private banks are not allowed to use the
name " b a n k " or similar titles on signs or on their advertising. Such provisions are found in the banking laws of
Colorado, Connecticut, Delaware, Florida, Minnesota,
Maine, Massachusetts, Montana, Rhode Island, and West
Virginia. In New Hampshire a private bank may not
213
National
Monetary
Commission
use the words "savings bank." In Maryland a private
bank may use the words "bank or banker" in connection with the name of the individual or copartnership,
but not otherwise. In Texas private banks must place on
their signs and advertising matter the word "unincorporated" after the name of the bank. In California
private bankers must use their true names. In Washington private bankers must use their own names and must
place after the name of the individual or firm the words
"private bank."
In another group—Alabama, Arizona, California, Colorado, Florida, Idaho, Indiana, Kansas, Mississippi, Missouri,
New Jersey, New Mexico, North Carolina, Oregon, South
Carolina, South Dakota, Utah, and Wyoming—an attempt
has been made to bring private banks, or in some of the
States a certain class of private banks, partially or entirely
under the same regulation and supervision as state banks.
The regulation of private banks is carried on, however,
under difficulties which render it much more imperfect
than the supervision of incorporated banks. It has
already been noted that the fundamental provision in
the systems of bank regulation in the United States is the
requirement of a minimum capital. In Arizona, New
Mexico, North Carolina, South Carolina, and Florida
private bankers are subject to practically the same regulations as state banks, except that they do not need to
have a specified capital. Such regulation has proved of
comparatively little value; and in the remaining States
which provide for the supervision and regulation of private
banks, either the private bankers have been required to
214
State
Banks
and Trust
Companies
give bond as security for the deposits made with them or
to have a specified minimum capital.
In Connecticut, Massachusetts, New York, and New
Jersey a bond is required of certain classes of private
bankers. In these States for many years there has been
great complaint that private bankers receive deposits
from immigrants and then default in their repayment. 0
In New Jersey, since 1907, persons and firms engaged in
transmitting money to foreign countries have been
required to obtain a certificate of authority from the
commissioner of banking and to give a bond to the commissioner as security for the funds deposited with them
for transmission. In Massachusetts steamship agents
who sell drafts and receive deposits were required, in
1905, to give a bond of $15,000, but since 1907 the amount
of the bond is left to the discretion of the commissioner of
banks. Similar legislation was enacted in New York in
1907. In Connecticut, by an act passed in 1907, private
bankers are allowed to use the word "banker" in connection with their signs and advertisements provided
they deposit with the bank commissioners bond or securities to the amount of $10,000.
Missouri was the first State to adopt the policy of requiring private bankers to have a specified minimum
capital. By an act passed in 1877 private bankers were
prohibited from engaging in the business of banking
a In his report for 1899 (p. 31) the superintendent of banks of New York
said: " I n the Hungarian and Italian quarters of that city it has been so
common during the past few years for a private banker to disappear overnight that such an occurrence has come to be expected with an almost
regular periodicity."
215
National
Monetary
Commission
without a paid-up capital of at least $5,ooo.a In 1895
private bankers were subjected to the same supervision
as incorporated banks, and it was made the duty of the
supervisor to proceed against them in case of impairment
of capital. 6 Essentially the same provisions were included in 1889 in the Nebraska banking law. The Kansas
banking law of 1891 made bankers "amenable" to all
its provisions, and this section of the law has been construed as requiring private banks to have a capital of the
same amount as incorporated banks. c
In 1910 the laws of California, Colorado, Idaho, Indiana,
Kansas, Mississippi, Missouri, New Jersey, Oregon, South
Dakota, and Utah d require that private banks shall have
a specified minimum capital. The same provision was
also, until recently, contained in the banking laws of
Nebraska and Kentucky. But in almost all of these
States a difficulty has presented itself which makes the
requirement of a minimum capital but a small protection
o Private bankers were defined as those "who carry on the business of
banking by receiving money on deposit, with or without interest, * * *
and of loaning money without being incorporated." Rev. Stat. (1879),
sec. 921.
& Laws of Mo. (1895), p. 97.
cl^aws of Kans. (1891), chap. 43, sec. 35. The commissioner, in his
report for 1892 (p. 1) recommended that as to the rights and duties of
private banks the law should be made more definite. He said: "While
sections 17 and 35 recognize the rights of individuals or partners to do a
banking business without incorporating, yet the other sections of the
law seem to have been framed for application to incorporated banks
only; hence, in the construction of the law, as to its application to private
banks, it requires not only a constant recollection of section 35, but a vivid
and analytical imagination as well."
d In Alabama and Wyoming private banks are subject to the same regulations as state banks. Apparently this includes the requirement of a
minimum capital.
216
State
Banks
and Trust
Companies
to the depositor. The private banker is frequently
engaged in other business enterprises, and in the event
of his failure creditors other than depositors come in for
a share of the assets. A corporation, on the other hand,
can not engage in business other than that prescribed by
its charter. In Missouri the law forbids the private
banker to use any of the funds of the bank in other business, but he may use other funds; and even without
engaging in any other business, he may accumulate an
indebtedness which may prove a severe charge on the
banking assets. a In a case in Nebraska it was held
that under the law in that State "an unincorporated
bank, exclusively owned by a private individual, is not
a legal entity, even though its business be conducted by a
president and a cashier, and in such a case the assets of
the bank represent merely the portion of the owner's
capital invested in banking and he may lawfully dispose
of them to pay or secure the just claims of any of his
creditors." b
°> The difficulty in the regulation of private banking was very clearly
described by the supreme court of Wisconsin in the opinion rendered in
the case of Weed v. Bergh: "If it should be granted that individual bankers
may be successfully subjected to all the provisions as to visitation, inspection, examination, and the making of reports to the same extent as corporations, it still must be conceded t h a t there are at least two well-defined
dangers to the public which are and must be present in private banking
which are eliminated in corporate banking. The first of these is the danger
that the private banker, by engaging in outside business ventures, may
subject his banking assets to the claims of business creditors, and thus
greatly prejudice if not destroy the remedies of bank depositors, and the
second is the danger and inconvenience which is likely to result when a
private banker dies and the business has to be temporarily suspended for
the purpose of probating the estate, involving perhaps destruction of public confidence and a run on the institution."
b Longfellow v. Barnard (79 N. W., 225).
217
National
Monetary
Commission
In Kansas the difficulty was met by a provision in the
law of 1897 that '/Any individual or firm doing business
as a private bank shall designate a name for such bank,
and all property, real or personal, owned by such bank
shall be held in the name of the bank and not in the name
of the individual or firm; all of the assets of any private
bank shall be exempt from attachment or execution by
any creditor of such individual or firm until all liabilities of such bank shall have been paid in full. No
private banker shall use any of the funds of the bank
for his private business." rt This makes of the private
banker essentially a corporation. Similarly, in South
Dakota the creditors of a private banker may not attach
any of the property or funds of the bank until the creditors of the bank have been paid. In Oregon the assets
of the private bank must be kept distinct from other
assets of the owner. Under the Indiana act of 1905 the
depositors of any private bank have a first lien on the
assets of the bank in case it is wound up; and for any
balance unpaid they share with general creditors in the
general assets.
Several States have dealt even more radically with the
problem and allow only incorporated associations to conduct a banking business. The earliest of these laws were
those of North Dakota and South Dakota, enacted in
1890 and 1891, respectively. In both States the laws
were contested as unconstitutional. The supreme court
of North Dakota held that the requirement of incorporate Laws of Kans. (1897), chap. 47.
218
State
Banks
and Trust
Companies
tion was constitutional as a proper exercise of the police
power.0 On the other hand, the supreme court of South
Dakota held the provision unconstitutional on the
ground that the State could not prohibit any citizen from
entering upon a business not injurious to the community,
even though affected by a public interest. 6 Grave doubts
were thus raised as to the constitutionality of such provisions. More recently, however, a considerable number
of States have followed the lead of North Dakota and
have forbidden private individuals to engage in the banking business. Such provisions have been placed in the
banking laws of Nevada, Oklahoma, Kentucky, Nebraska,
Wisconsin, and Virginia. The constitutionality of the
Wisconsin provision has recently been upheld by the
supreme court of that State. c
The legislation described above has all tended in greater
or less degree to influence private banks to incorporate.
The following table shows for certain years the number of
private banks in the two groups of States in which they were
in 1877 most numerous and in which the restrictions on
their operation have been most important.
0 State ex rel. Goodsill v. Woodman (1 N. Dak., 246).
& State v. Scougal (3 S. Dak., 55).
c Weed v. Bergh (124 N. W., 665).
219
National
Monetary Commission
Number of private banks in the Middle Western and Western groups in 1877,
1888, 1899, an^
I
9°9>
State.
1888.
1877.
Ohio
219
in
Illinois
282
131
Wisconsin
Minnesota
Iowa
Missouri
North Dakota
70
49
201
104
!
Colorado
1899.
287
222
599
249
120
239
519
250
156
44i
220
102
152
423
122
no
•
196
1*
30
306
I
84
365
5
n
5
12
25
4
69
10
Oklahoma
Total
1.328
2,835
1909.
286
204
823
249
7
42
356
98
32
57
65
81
21
12
55
7
1
2, 646
33
6
55
36
2.235
It will be noted that the number of private banks in
these States has fallen from 2,835 in 1888 to 2,235 in 1909,
and that the States in which the greatest decreases have
occurred are Wisconsin, Minnesota, North Dakota, Nebraska, and Kansas. In these States, as has been noted
above, either private banks have been prohibited or they
labor under grave restrictions in the conduct of business.
STATE VERSUS NATIONAL BANKS.
Not only has the number of small state banks increased
with great rapidity, but also the number of state banks with
capital large enough to permit them to be incorporated as
national banks has increased somewhat more rapidly than
the number of national banks. The table on the next page
shows for certain years the number of each class of banks
with a capital of $50,000 and over which were in operation.
220
State
Banks
and Trust
Companies
Number of state banks and national banks with a capital of $50,000 and over,
by States, for the years 1877, 1888, 18'op, and 1000.
1877.
1899.
Na- State Na- State Na- State NaState tional
tional banks, tional banks. tional
banks. banks,
banks. banks.
banks.
banks,
Maine
New Hampshire.
Vermont
Massachusetts.. .
Rhode Island. . .
Connecticut
Total New England
States
,
New York
New Jersey
Pennsylvania
Delaware
Maryland
District of Columbia.
83
7i
75
82
74
46
49
52
5o
46
49
49
44
237
253
250
195
62
60
56
22
81
84
79
76
543
57o
568
16
461
281
322
327
126
355
69
85
108
17
135
232
313
436
126
615
20
6
13
18
19
9
15
32
48
69
12
26
6
Total Eastern States.
633
Virginia
West Virginia. .
North Carolina.
South Carolina.
Georgia
Florida
Alabama
Mississippi
198
798
40
26
264
14
16
Louisiana
78
36
79
34
76
70
29
30
53
27
16
91
27
133
78
15
26
30
26
80
53
12
83
26
13
56
28
28
340
100
Texas
304
199
7
23
7
70
32
Kentucky
69
129
75
54
104
Tennessee
42
56
47
70
67
543
876
986
Arkansas
Total S o u t h e r n States,
Ohio
28
Indiana.. .
176
38i
165
219
5i
255
126
274
99
94
47
115
78
168
294
Illinois
30
144
29
182
69
217
187
Michigan..
24
80
54
109
108
80
128
87
Wisconsin.
41
36
46
98
31
32
78
69
80
Minnesota,
59
56
43
95
35
National
Monetary
Commission
Number of state hanks and national hanks with a capital of $50,000 and over,
by States, for the years 1877, 1888, 1800, and 1909—Continued.
1888.
1877.
1909-
1899.
Na- State Na- State NaNaState tional
S t a t e tional
tional banks. tional banks.
banks. banks.
banks. banks.
banks.
banks.
Iowa
Total Middle Western
States
18
78
87
172
95
205
30
77
97
129
76
50
105
63
137
88
206
668
357
898
548
1.049
874
1.309
1
24
58
North Dakota
Nebraska
Kansas
6
10
54
104
12
15
57
160
5
5
17
9
34
2
4
13
2
3
2
I :
28
26
5
9
10
2
391
Oklahoma
Total Western States.
Idaho
Utah
22
48
'
1
2
Arizona
7
34
12
42
33
56
36
6
8
5
26
3
10
33
19
7o
19
83
538
75
328
180
2
7
75
1
2
2
4
24
27
38
7
7
2
1
14
15
129
4
7
5
2
31
28
45
50
ill
29
14
5
63
34
196
23
22
II
II
145
1
9
1
I
23
25
100
98
21
11
35
9
11
1
9
10
Total Pacific States. .
40
12
93
106
176
120
360
268
Total United S t a t e s . .
634
2, 080
1,043
3.144
1.578
3.579
2,610
4.773
It will be noted that in 1877 the number of state banks
with a capital of $50,000 and over was 634, and the number of national banks was 2,080. In 1909 the numbers of
the same class.es were 2,610 and 4,773, respectively.
Measured by the number of accessions, the increase from
1877 to 1888 in the number of national banks with a capital
222
State
Banks
and Trust
Companies
of $50,000 and over was greater than the increase in the
number of state banks with a capital of $50,000 and over.
From 1888 to 1909 the absolute increase was approximately the same for the two classes of banks. In all of
the periods, however, the percentage of increase has been
much greater for the state banks.
Increase in number.
National banks with a capital of $50,000 and over
409
1,064
ill
From
1877 to
1888.
535
435
From
1899 t o
1909.
1,032
i, 194
Four prime factors enter into the determination of the
relative profitableness of incorporation under the state or
national banking systems:
1. In the first place, other things being equal, the system
of banking which gives the banks organized under it superior credit will be preferred. For a considerable period
after the civil war the national banks, in many of the
States, were practically the only incorporated banks of
discount and deposit. That they operated under regulalations prescribed by the National Government was well
known. The first state banks after the civil war in
nearly all the States were incorporated on the same terms
as ordinary business corporations, and were entirely unregulated and unsupervised. The national banks were
therefore regarded by depositors as affording a higher
degree of safety than state banks. As the state banking
systems have developed the state banks have come to
223
National
Monetary Commission
enjoy, in many states, almost if not quite as much
public confidence as the national banks.
In one respect, however, the state banks, even in those
States in which the regulation and supervision is of a high
order, are at a disadvantage as compared with the national
banks. Where there are relations between a person or a
bank in one State and a bank in another, and especially in a
distant State, the state bank suffers in competition with
the national banks, since in most cases the citizens of one
State are not acquainted with the merits of the banking
laws of another State, whereas they know the general
character of the national-bank act. The wider credit thus
enjoyed by the national bank is not ordinarily of controlling importance, although it increases in importance with
the increasing size of the banks. With one class of banks,
however, it is a factor of very great weight. In the
States whose economic development is not far advanced a
large part of the banking capital is supplied by nonresidents. The stock of national banks is undoubtedly a more
attractive investment for nonresident investors than the
stock of state banks. Such investors, though well
acquainted with the provisions of the national-bank act,
are little informed as to the state banking laws. Consequently, the promoters of banks who need a larger capital
than they can secure at home frequently prefer to organize
under the national system, for by so doing they can attract
nonresident investors. In his report for 1897 the Comptroller of the Currency analyzed the distribution of
national-bank shares. The following table shows for the
224
State
Banks
and Trust
Companies
different groups of States the proportionate part held at
that time by nonresidents:
Shares held by—
Group.
Residents of
the State,
1,477,380
122,536
8
1, 7 0 4 , 9 2 8
249,476
14
556,483
1,380, 223
216,601
128,422
Middle Western
Western
Nonresidents.
Percentage held
by nonresidents.
115.169
225,228
16
n o , 940
5i
38
49.728
It is to be noted, also, that within the groups the lessdeveloped States showed a higher percentage of shares
held by nonresidents.
2. Secondly, the national banks alone can issue notes
and derive a profit therefrom. The large profit on note
issue was the primary cause in 1865 and the years immediately following of the conversion of the great mass
of state banks into national banks. The same influence
was for many years influential in inducing far the greater
number of the new banks to incorporate as national
rather than as state banks. By 1880, however, the
increasing price of United States bonds led to a great reduction in the profit on the issue of bank notes. From
March 11, 1882, to February 26, 1891, the national banknote circulation fell from $323,000,000, or 69 per cent of
the capital of the national banks, to $123,000,000, or
18.6 per cent of the capital. The decrease in the amount
of the bank-note circulation was greatest in those sections
of the country in which the interest rate was highest.
This was due to the widening difference between the
59045—n-
-15
225
National
Monetary
Commission
amount of notes which might be issued and the cost of
the bonds. In order to issue $90,000 of circulation a
bank had to deposit bonds of a par value of $100,000, the
cost of which in the eighties ran as high as $128,000.°
A decline in the price of bonds was chiefly responsible
for the slow increase in the amount of the bank-note
circulation from 1891 to 1899. On December 2 of the
latter year it stood at $204,000,000, or 33.4 per cent of
capital. Since then the increase has been rapid, and on
September 1, 1909, the national bank-note circulation
amounted to $658,000,000, or 69.6 per cent of capital.
This great increase in the amount of circulation has been
due to the change made by the act of March 14, 1900, in
the conditions under which national banks may issue
notes. The essential features of that act, in so far as it
affected the profit on note issue, were (1) the increase in the
amount of notes which might be issued from 90 per cent
of the par value of the deposited bonds to 100 per cent,
(2) the provision that notes might be issued on the deposit of the 2 per cent consols of 1930, which it was expected would sell at only a little above par.
Under the provisions of this act the profit on note issue
is practically the same in all sections of the country,
since the difference between the amount of the investment and the amount of notes issued is very small. The
average price, for instance, in October, 1909, of $100,000
a
The diminishing profit in this period on national-bank circulation has
been discussed by many writers on banking and currency: White, " Money
and Banking," p. 418 et seq.; "Report of the Indianapolis Monetary Commission," pp. 180-191; and by the late Professor Dunbar, "The Bank
Note Question." Quar. Jour. Econ., Oct., 1892, p. 55.
226
State
Banks
and Trust
Companies
of the consols of 1930, on which the mass of the circulation
is based, was $101,052.
From 1882 to 1891 the profit on the issue of nationalbank notes was so small as to be almost negligible as a
factor in inducing banks to prefer incorporation under
the national-bank act. Since 1891, however, the national
banks as a whole have been able to make some profit from
their circulation, and since 1900 a very considerable
profit. The Comptroller of the Currency, in his report for
1909, calculated the profit on circulation, based on a deposit of United States consols of 1930, in October, 1909,
at 1.344 P e r c e n t * n excess of 6 per cent on the investment.
3. The provisions of the state banking laws in regard to
the character of the loans which may be made by the banks
are less stringent than those contained in the national-bank
act. The more liberal provisions in the state banking
laws with reference to the amount of a single liability a are
probably not largely influential in causing many banks to
incorporate under the state banking laws rather than under
the national-bank act; but the power to loan on real estate,
which is possessed by nearly all the state banks, is highly
valued by many banks. As has been indicated above,
however, the banks located in the large places are less
desirous of making loans on real estate. b Moreover, in the
newly settled sections the value of real estate is so uncertain
that the banks do not ordinarily make loans on such
security.
4. As has been shown above, the reserve requirements
in practically all of the state banking laws are lower than
°See above, p. 93.
&See above, p. 105.
227
National
Monetary
Commission
under the national-bank act. These differences are in
most States not a matter of very great importance to those
state banks which desire to confine themselves to the business of a commercial bank, for the reserves required by the
national-bank act are probably no greater than prudent
bankers would hold against demand deposits, even in the
absence of any legal regulations. 0 But a great part of both
the state and national banks do also a large savings and
time-deposit business. On April 28, 1909, 6,592 national
banks reported to the National Monetary Commission
757 millions of savings deposits; 8,258 state banks
reported 597 millions. The national banks must hold the
same reserve against savings as against other deposits,
whereas in a large number of the States the state banks
may hold against savings deposits a lower reserve or none
at all. Even where the state banking laws require the
same reserve against both classes of deposits the reserve
required is so small, except in a few States, that the banks
may adjust their reserves so as to hold a very small and
yet adequate reserve against savings deposits and a sufficient reserve against demand deposits without falling below
the required amount.
On the other hand, the national banks may invest their
savings deposits in the same manner as other deposits,
whereas in certain States the state banks and trust com
panies are required to segregate their savings deposits and
invest them in high-grade securities.6 The profit from
such deposits is thereby lessened. In such States, the
advantage of the lower reserve requirement is partially or
a See, however, below, p. 235.
228
6 See above, p. 22.
State
Banks
and Trust
Companies
entirely counterbalanced by the restrictions on investment. As yet, however, the segregation of savings
deposits is required in only a few States.
Several of the factors, noted above, in the relative
profitableness of incorporation under the state or national
banking systems vary in strength, according to the size
of the town or city in which the bank is located;
according to the economic development of the section of
country; or, finally, according to the class of business in
which any particular bank wishes to engage. Some indication of the joint result of these factors may be obtained
by classifying according to capital the state and national
banks with a capital of $25,000 and over.
It will be noted from the table on page 230 that the total
number of state banks with a capital of $25,000 and less
than $50,000 is much greater than that of the national
banks of similar capital. In the New England, Eastern,
and Western States, however, the number of national
banks of this class is greater than the number of state
banks. The smaller number of state banks with a capital
of $25,000 and less than $50,000 in the New England and
Eastern States is partly explained by the fact that in several of the States in these groups state banks are not incorporated, and in others the minimum capital required for
state banks is, or until recently was, $50,000.® In New
York, where state banks are incorporated under a general
law with a minimum capital of $25,000, the number of
state banks with a capital of $25,000 and less than $50,000
is nearly equal to that of national banks of the same capital.
a
See above, p. 38.
229
National
Monetary
Commission
Number of national and state banks in 1909 of $25,000 capital and over, classified by capital.0$25,000 and less
than $50,000.
$50,000 and less
than $100,000.
$100,000 and over.
States.
I National
! banks.
State
banks.
Maine
New Hampshire.
Vermont
Massachusetts.. .
Rhode Island. . .
Connecticut
National j State
banks
| banks.
39
35
17
33
32
172
Total New Eng- j
land States . . !
New York
New Jersey
Pennsylvania
Delaware
Maryland
District of Columbia.
Total Eastern
States
Virginia
West Virginia. .
North Carolina.
South Carolina.
Georgia
Florida
Alabama
Mississippi....
Louisiana
Texas
Arkansas
Kentucky
Tennessee
Total Southern
States
National
banks.
364
83
49
186
356
74
3
3
6
36
12
282
69
14
3
333
6
38
11
37
106
696
40 I
47
37
35
26 :
83
40
41
19 1
6
42
19
18
53
7
60
24
iS5
40
87
9
24
13
19
23
58
21
53
5
7
99
9
46
55
11
26
83 ;
83
97
24
12
75
17
45
946
233
76
59
44
29
37
42
41
30
34
20
38
17
32
17
17
143
15
60
30
525
494
« The classification is for national banks as reporting on September 1 1909, and is taken
from the Report of the Comptroller of the Currency, 1909, page i n
The classification
is for state banks at the nearest date to January 1, 1909 for which reports are accessible.
Eor exact dates, see page 249 and Table IV, Appendix A.
230
State
Banks
and Trust
Companies
Number of national and state banks in 1900 of $25,000 capital and over, classifled by
capital—Continued.
$100,000 and over.
States.
Ohio
Indiana
Illinois
Michigan
Wisconsin
Minnesota
Iowa
Missouri
Total Middle
Western
States
North Dakota
South Dakota
Nebraska
Kansas
Montana
Wyoming
Colorado
New Mexico
Oklahoma
6
3i
6
26
1
1
3
5
Total Western
States
Washington
Qregon
California
Idaho
Utah
Nevada
Arizona
Total
Pacific
States
Total United
States
24
25 !
16 i
78
3 j
6
3 |
11
127
i
33i
118
7
3
4 i
4 !
s|
I
8 j
5
5
154 j
143
125 1
3»
18
15
80
206
I
2, 197
3 102
2 214 |
I
2
i- 5 4 9
,559
I, 061
National
Monetary
Commission
While the number of national banks of this class exceeds
the number of state banks in the Western group as a
whole, there are striking differences among the States in
the group. In North Dakota, South Dakota, Colorado,
Wyoming, New Mexico, and Oklahoma the national
banks are preferred; but in Kansas, Nebraska, and
Montana the state banks are more numerous.
In all of the Southern States except Virginia and Texas
the state banks of this class greatly outnumber the national
banks. In Virginia the difference is not great, and in
Texas the larger number of national banks is without doubt
partly due to the fact that until 1905 no state banks were
incorporated. In Minnesota alone of the Middle Western
States are the national banks of this class more numerous. In all of the Pacific States the state banks are more
numerous.
The preference shown in most of the States by banks
with a capital of $25,000 and less than $50,000 for incorporation under the state banking laws appears to be largely
due to the desire to make loans on the security of real
estate. Such banks are with few exceptions located in
small towns, and a considerable part of their business is
with farmers and owners of agricultural land. The national
banks outnumber the state banks in this class chiefly in
those States where manufacturing and commercial industries are preponderantly important and in certain of the
newly developed States. In the former class of States the
demand for real estate loans is largely supplied from other
sources; and in the latter the banks are not so desirous
of making loans on real estate, because of its uncertain
232
State
Banks
and Trust
Companies
value. Moreover, in the more recently developed States,
as has been noted above, a factor which makes for incorporation under the national-bank act is the desire on the
part of the promoters of many banks to secure, the investment of outside capital in the shares of the bank. It
appears likely that as such States as North Dakota, Oklahoma, and South Dakota become less dependent on external credit for the development of their resources, and
as the value of their farming lands becomes more stable
the number of state banks with a capital of $25,000 and
less than $50,000 will increase, and the number of national
banks of similar capital will decrease.
State banks with a capital of $50,000 and less than
$100,000 are less numerous than the national banks of
similar capital, and the state banks with a capital of
$100,000 and over are only two-fifths as numerous as the
national banks of similar capital. The disparity in
numbers grows greater as the capital increases. Only
203 of the state banks in operation in 1909 had a capital
as large as $200,000, while 652 of the national banks had
a capital of $250,000 and over. The only States in which
the number of state banks with a capital of $100,000 and
over is greater than the number of national banks of
similar capital are Virginia, West Virginia, South Carolina, Georgia, Mississippi, Louisiana, Arkansas, Washington, Oregon, California, Idaho, Utah, and Nevada. It will
be noted that all of these States are in the Southern and
Pacific groups. In the Pacific group the total number
of state banks with a capital of $100,000 and over exceeds
that of the national banks of similar capital. In the
233
National
Monetary
Commission
Southern group, if Texas is omitted, the state banks
with a capital of $100,000 and over are equal in number
to the national banks of the same capital. A partial explanation of the greater relative number of large state
banks in the Southern and Pacific States is that in nearly
all of the States in these groups trust companies are not
separated from the state banks in the official reports. a
That the desirability of organization under the nationalbank act increases with the increase in the amount of
the capital of the bank is due to the increase in importance with the size of the bank of certain advantages of
the national over the state banking systems and to the
decrease in importance of certain advantages which the
state systems have over the national banking system.
The advantage of the wider credit which may be secured
by incorporation under the national-bank act undoubtedly increases with the size of the bank. Also, as has
been pointed out above, the banks in the large places, for
the most part, do not desire to loan largely on real estate.
On the other hand, the advantage of the lower reserve
required for state banks is important to those banks
which wish to develop a savings-bank business.
TRUST COMPANIES.
In any consideration of the causes responsible for the
great growth of trust companies during recent years it
must be borne in mind that a very large number of the
so-called "trust companies" are either entirely without
trust powers or have not cared to use these powers. In
a See p . 248.
234
State
Banks
and Trust
Companies
Massachusetts no state banks have been chartered for
many years, and a very large part of the trust companies
do only a banking business. Of the 48 trust companies
engaged in business in that State on November 16, 1909,
only 26 had trust departments. Similarly, in Maine
and Vermont no state banks have been incorporated in
recent years, and many of the trust companies are in all
except name state banks. Even in several of those
States in which both state banks and trust companies
may be incorporated the preference for organization
under the trust-company law is not due to the desire to
carry on a trust business, but to the greater liberality of
the trust-company law in its regulation of the banking
business. In New York, for example, where the increase
of the trust companies in resources, as shown by the
following table taken from the report of the New York
commission on banks, has been much larger than that of
either the national or state banks, there is no doubt that
the more liberal reserve requirement has been a factor of
considerable importance in the growth of the trust companies:
NEW YORK STATE.
Resources
Increase.
1897.
1902.
1907.
Per cent.
396. 7
National banks
i, 078. 0
1,364.0
244. 1
297. 0
363.0
9i5. 2
i,550.3
541.0
1,800.0
96.7
82. 1
The advantage to the trust companies in New York
City of the lower reserve requirement was thus stated
235
National
Monetary
Commission
by the New York special commission on banks in their
report:
Another and more forceful way to express the advantage which trust
companies enjoy, from a money-making standpoint, is to state the percentage of their total resources which, under existing laws and practices,
is earning interest, as compared with the resources of state and national
banks; 70.9 per cent of the total resources of state banks are loaned or
invested in securities or real estate—in other words, earning interest.
The
percentage of the total resources of the national banks earning interest is
70.3, whereas 92.2 per cent of the total resources of the trust companies is
earning interest.
Not only is the reserve requirement more favorable to
trust companies in several of the States in which these
companies have experienced their greatest growth, but
in certain other respects the regulations relating to trust
companies are more liberal than the regulations relating
to banks. For instance, in a number of States where
banks may not loan on the security of or invest in the
stock of other corporations, trust companies are permitted
to do so. a The great increase in the number of trust
companies has occured in a comparatively few States,
notably in the New England States, New York, Pennsylvania, and Indiana. In all of these States there are significant differences in the regulations to which trust companies and banks are subjected. These differences, as
has been noted in many places in the preceding chapters,
have tended to grow less, with the development of the
banking powers of the trust company.
Without question, however, there has been in recent
years a considerable increase in the number of trust com-
« See above, pp. 139-142.
236
State
Banks
and Trust
Companies
panies whose chief reason for preferring incorporation
under the trust company rather than under the state or
national banking laws has been the desire to combine with
their banking business a trust business. There is undoubtedly a great advantage in the larger cities in such a combination. The two leading authorities on the subject of trust
companies—Mr. George Cator and Mr. Clay Herrick—
are in agreement in assigning the advantage of such a
combination as a chief cause for the growth of such
companies.a After enumerating minor causes for the
growth of trust companies, Mr. Herrick b says:
A third cause [of the growth of trust companies], and in the writer's
opinion by far the most important one in most communities, lies in the
wide range of powers which the trust company may exercise. In most
States it may do all of the things that an ordinary bank may do, except
issue notes; and it performs numerous duties that other banks may not
undertake. These wide powers attract customers I t is a distinct convenience to most people to have all of their financial business attended to
under one roof. The trust company will not only care for their banking
business, but will also receive their valuables for safe-keeping, care for
their property, manage their estates temporarily or permanently, make
investments for them, give financial and legal advice, aid in the preparation of wills and execute the same after the decease of the customer.
With the steadily increasing assimilation of the regulation of the banking business of the trust company to that
of the state bank, the future growth of trust companies
will depend, primarily, upon the advantages which may
be obtained by such a combination of banking and trust
business, and that in its turn will depend upon the development of the trust business. Outside of the larger cities the
a George Cator, " T r u s t Companies in the United States," p. 66.
6 Clay Herrick, " T r u s t Companies," p. 32.
237
National
Monetary
Commission
amount of such business is at present very small, but it
appears to be increasing. There is a growing disposition
to prefer a corporation to an individual in fiduciary relations; and, as the amount of such business increases, the
desirability of combining the two branches of business in
a single institution will appeal to a larger number of
banking institutions.
The trust companies in nearly all the States have most
of the characteristics of the state banks. They may loan
on real estate, and their reserve requirements are lower
than for national banks. They are in essence not a distinct class of banking institutions, but only state banks
with additional powers. The full growth of state banking
can only be gauged, therefore, by combining the number
of state banks and trust companies. Since, however,
two-thirds of the trust companies in the United States
have a capital of $100,000 or over, the addition of the
trust companies to the state banks will not affect appreciably the figures given above except for the class of
state banks which have a capital of $100,000 or over.
The table on the next page shows the combined number of
state banks and trust companies with a capital of $100,000
and over and the number of national banks of similar
capital in operation in 1909.
23S
State
Banks
and Trust
Companies
State banks and
trust companies
with a capital of
$100,000 a n d
over.
Maine
New Hampshire.
Vermont
Massachusetts. .
Rhode Island. . .
Connecticut....
National banks
with a capital of
$100,000 a n d
over.
35
33
32
172
Total New England States .
364
New York
New Jersey
Pennsylvania
Delaware
Maryland
District of Columbia
233
76
338
6
333
6
37
11
Total Eastern States.
696
Virginia
West Virginia. .
North Carolina.
South Carolina.
Georgia
Florida
Alabama
Mississippi....
Louisiana
Texas
Arkansas
Kentucky
Tennessee
41
3o
34
31
20
46
38
27
32
17
17
37
30
17
26
143
25
IS
47
60
28
30
92
175
56
US
108
57
53
Total Southern States.
Ohio
Indiana. . .
Illinois. . . .
Michigan. .
Wisconsin.
Minnesota.
Iowa
Missouri. .
19
52
16
35
21
65
Total Middle Western States.
684
North Dakota.
South Dakota.
Nebraska
136
33
239
National
Monetary
Commission
State banks and
trust companies
with a capital of
National banks
with a capital of
$100,000 a n d
over,
over.
Kansas
Montana
Wyoming
Colorado
New Mexico
Oklahoma
Total Western States
Washington
Oregon
California
Idaho
Utah
Nevada
Arizona
Total Pacific States. .
1
Total United States.
$100,000 and
9
11
1
40
21
6
31
6
3
6
5
26
40
178
41
18
118
24
80
11
11
8
IS
6
7
5
3
5
209
143
1.78i
2,559
It will be noted that the total number of state banks
and trust companies with a capital of $100,000 and over
taken together is considerably less than the number of
national banks with the same capital. In only one group,
the Pacific, do the state banks and trust companies in this
class outnumber the national banks. The superiority in
numbers of the national banks over the state banks and
trust companies combined is greatest in the New England
States and the Western States; in these groups the number of state banks and trust companies with a capital of
$100,000 and over is approximately one-third and onefourth, respectively, of the number of national banks of
the same capital. In the Middle Western group the
number of state banks and trust companies with a capital
of $100,000 and over is about two-thirds of that of the
national banks, and in the Eastern and Southern groups
the disparity in number is not great.
240
APPENDIXES.
59045°—11
16
241
APPENDIX
A.
STATISTICAL TABLES.
NUMBER OF STATE BANKS.
Table I, showing the number of state banks by years and
States, is based on four sources of information:
I. Reports of the Comptroller of the Currency.
II. Reports by state banking officials.
III. Unofficial statements.
IV. Special report from the banks of the United States
to the National Monetary Commission, April 28, 1909.
I. REPORTS OF THE COMPTROLLER OF THE CURRENCY.
The first official attempt to collect statistics of banking
for the whole country was made in 1833 under a resolution
passed by the House of Representatives on July 10, 1832.
From that time until 1863, with the exception of some few
years, the Secretary of the Treasury regularly included
in his reports information regarding the number of state
banks in the United States. In his annual report for 1863
Secretary Chase recommended the discontinuance of the
practice, and no further information with regard to state
banks was given in the succeeding reports of the Treasury
Department. By act of Congress in 1873 a the Comptroller
of the Currency was required to report to Congress " a
statement exhibiting under appropriate heads the resources
and liabilities of the banks, banking companies, and savings banks organized under the laws of the several States
and Territories, such information to be obtained from the
reports made by such banks, banking companies, and
° Rev Stat., sec. 333.
243
National
Monetary
Commission
savings banks to the legislatures or officers of the different
States and Territories, and where such reports can not be
obtained the deficiency to be supplied from such other
sources as may be available."
Until 1887 the Comptroller included in the statistics of
state banks only those banks which made returns to some
state officials These statistics were reported to the
Comptroller by the authorities in the various States.
From 1887 to the present time information has been
gathered also directly from the banks located in States
whose laws do not require reports. The completeness of
these returns has depended entirely on the disposition of the
banks to give the information asked for. As a matter of
fact, only a few banks have made the reports. The statistics contained in the Comptroller's reports, in so far as
they are based on unofficial data, are therefore quite incomplete.
From 1875 to 1882 the reports of the banks to the Commissioner of Internal Revenue, given as a tax return, were
tabulated by the Comptroller and included in his reports.
It was only in the summaries for 1880, 1881, and 1882 that
the numbers of private, state, and savings banks were
shown by States. From the repeal in 1883 of the law imposing an internal-revenue tax on banks until 1909 no
complete official enumeration by classes of banks other
than national was made. 5
« There was a sporadic attempt in 1876 to gather information as to banks
in other States, but it was abandoned in 1877.
6 The internal-revenue law of 1898 again imposed a tax on banks and
afforded an opportunity for the compilation of a similar table, and this has
ostensibly been done (Report of Comptroller of Currency, 1900, Vol. I,
pp. 297-300), but in reality private and state banks are inextricably
confused.
244
State
Banks
and
Trust
Companies
II. REPORTS BY STATE OFFICIALS.
The reports of the state-bank supervisors are the primary source of information with regard to state banks.
They are compiled from returns made by the banks under
law, and consequently are entirely accurate. The statistics contained in the Comptroller's reports are valuable
only i<n so far as they are based on the state reports.
In the compilation of the accompanying tables the state
reports have been used to correct and supplement the
figures given by the Comptroller of the Currency in the
following ways:
i. In some cases where official statistics as to the number of state banks were obtainable they have not been
used by the Comptroller. For example, since 1891 state
banks in West Virginia have been required to make reports
to the state auditor. The number of state banks in West
Virginia for certain years are thus given by the reports of
the Comptroller and of the state auditor:
Comptroller's report.
1891
1892
1893
1894
189s
1896
1897
1898
1899
Auditor's
report.
45
55
56
58
60
68
74
75
Evidently for several of these years the Comptroller,
for some reason, has not availed himself of the information collected by the state authorities, but used incom-
245
National
Monetary
Commission
plete voluntary returns. Wherever, as in this case, a
discrepancy has been found between the numbers given in
official state reports and those in the Comptroller's reports
the former have been used.
2. In several States the returns of private and state
banks as given by the Comptroller are not separated. It
has been found possible in most cases by resorting to the
state reports to remedy this defect. In some States,
however, a few private banks are included in the number
of state banks as given in the table.
3. The Comptroller's office has pursued a varying
policy with regard to the classification of stock savings
banks in Iowa and Michigan. Until 1876 all banks in
Michigan operating under state charters were classed as
state banks, but in that year they were divided into state
and savings banks. Again in 1877 they were all reported
as state banks, but in 1888 the division was again made
and retained until 1893. Since that time the early
method of classing them together as state banks has been
followed. The banks of Michigan are nearly all banks of
discount and deposit, many of which carry on in addition
a savings bank business. Whatever classification is made
of them should be a uniform one, and it has seemed most
in accordance with the facts to consider them all as state
banks. Consequently the numbers for 1876, 1888, 1889,
1890, 1891, 1892, given in the Comptroller's reports, have
not been used in the tables, but the numbers given by the
bank commissioner of Michigan for all state banks have
been substituted for them. A similar situation presented
itself in the case of the Iowa banks. Since 1875 savings
246
State
Banks
and Trust
Companies
and state banks have been classed separately by the state
officials. Until 1886 they were grouped together as state
banks by the Comptroller, but after that time they were
separated. The numbers given for the earlier years by
the Comptroller have been replaced in the table by those
of the state auditor. 0
I I I . UNOFFICIAL STATEMENTS.
Even after the statistics given by the Comptroller have
been supplemented and corrected as far as possible by the
official state reports, there still remain a considerable
number of States for the banks of which official information is lacking either for all or a part of the period 18771899. As has been said before, the Comptroller since
1887 has collected statistics for such States by direct
communication with the banks, but he has secured
returns from such a small part of the banks that the
information given is of no value in determining the number of banks.
In order to fill in these gaps unofficial data have been
used. Since 1873 "Homans' Bankers' Almanac and Register" and its continuations has given annually the number of state banks in each State. There are reasons for
believing that the numbers given in "Homans"' are
approximately correct. They closely correspond for the
years 1880, 1881, 1882 with the numbers contained in the
official enumerations made by the Commissioner of
Internal Revenue. The substantial accuracy of the
a
Since the auditor's reports up to 1887 were biennial, returns are only
obtainable for alternate years; the intervening years have been filled by
taking an average of the preceding and succeeding numbers. This method
of interpolation has been used in several other places in the table.
247
National
Monetary
Commission
" R o m a n s ' " statistics is also indicated by the fact that
whenever a State has adopted a system of bank supervision the exact returns thus obtained indicate that the
"Romans' " numbers for previous years were very nearly
correct.
IV. SPECIAL
STATES
REPORT
TO
APRIL 28,
THE
FROM THE
BANKS
OF THE
NATIONAL
MONETARY
UNITED
COMMISSION,
1909.
The National Monetary Commission, with the cooperation of the state bank supervisors, has recently obtained
reports from as many as possible of the banking institutions of the United States. These reports showed the
condition of the banks at the close of business on April 28,
1909. Practically all of the state banks are included.
The numbers in Table I for 1909 are taken entirely from
this report.
NUMBER O F TRUST COMPANIES.
Table II, showing the number of trust companies by
years and States, is constructed from the same sources as
Table I. Prior to 1900, however, no unofficial reports of
the number of trust companies as distinguished from state
banks are available. Since 1900 the number of trust
companies for those States in which either there are no
official reports or in which the official reports do not distinguish state banks and trust companies have been inserted from the unofficial reports. From 1900 to 1905,
inclusive, " Homans' Bankers' Almanac " and its continuations was used for this purpose, and from 1905 to 1908,
inclusive, "Trust Companies of the United States." The
large increase in the number of trust companies from 276
248
T A B L E I.—Number of state banks, by States, for each year from I8J*J to 1909,
inclusive.
[The numbers marked "<*" are from Homans's Bankers' Almanac and its continuations; those marked "&" are from the official state reports; those marked " « " are the average of the preceding and succeeding years. All others, except for 1909, are from the official state reports as given in the reports of the Comptroller of the Currency.
1909 are from the special report from the banks of the United States made to the National Monetary Commission on April 28, 1909.]
States.
1878.
1877.
Maine
Total N e w England States
14
14
14
4
4
4
4
22
21
19
19
19
18
20
17
17
20
22
23
22
25
29
27
27
25
25
24
66
8
88
a
5
70
74
82
87
92
92
102
122
145
164
176
190
201
205
213
216
7
6
7
7
9
10
8
8
13
21
22
22
22
21
21
21
82
81
81
79
81
80
81
82
84
82
80
79
°4
7
0 4
85
°4
6
°4
6
°4
83
04
9
10
12
12
0 12
0 i4
326
334
33 7
337
334
333
86
85
92
89
59
66
& 74
75
71
10
10
113
106
88
b
b
1
1
1
6 2
64
13
13
10
10
10
10
10
4
6
6
8
8
8
6
b 8
5
5
9
9
8
8
b
13
6
13
613
b 11
b 11
5 IO
6
6
6
8
8
8
6
8
6
8
8
8
°4
°4
°4
°4
4
15
14
13
10
°5
8
77
a 4
10
10
10
10
10
8
9
10
°4
8
221
211
189
177
172
175
184
187
196
195
202
220
253
279
293
306
318
a 40
O 46
a 44
a 44
°44
0 44
041
041
52
35
°55
64
67
76
93
90
90
a
a
a
0
0 14
0 16
a
a 16
a 18
a 25
0 26
a 29
a 32
& 42
a
15
I 5
7
15
a
15
a
5
I?
0 6
«6
3
4
°7
5
°7
a 26
21
18
17
21
21
0 20
°7
«6
«8
°5
"4
a 27
0 29
a 26
«6
°7
°5
°7
°7
a
06
10
10
10
a
4
5
°5
a
I7
a
2
°5
08
0
a
2
0
I7
a 17
a
a 8
9
4
4
0
5
a
08
10
14
4
12
a
12
«8
°9
a 11
0
a 18
a 18
17
a 16
°i5
0 19
51
49
55
61
60
68
69
72
0 1
0 2
°3
°3
04
°3
65
a 2
°i5
a
I2
a
14
179
213
204
206
201
197
195
15
°3
a
°4
5
a 1
1
1
206
232
226
a
4
16
20
21
i5
a 19
0 28
°45
25
°3I
0 9
a 47
42
11
a
<*6
0
0
Ir
IS
30
°5
6
a 7
6
°5
7i
0
a
a
285
45
b
32
57
« 66
0 67
0 70
0 87
0 108
o
°39
a 44
a 40
47
54
55
63
3
6
8
6
8
33
a
a
1908.
1909.
9
9
10
10
10
9
9
9
9
9
9
6
8
4
4
3
3
3
4
4
3
3
3
8
8
8
8
8
8
8
8
7
7
21
21
23
21
22
213
210
207
200
198
193
191
187
193
21
21
21
20
20
18
18
18
17
17
18
18
21
87
90
90
103
112
124
125
129
130
127
a
"4
a 17
105
04
107
04
95
a4
3
4
2
0 18
0 21
a 23
0 28
49
50
4
36
36
342
338
341
344
365
384
391
388
387
95
in
120
137
149
164
192
222
235
207
83
IOI
in
130
149
155
163
169
171
s
a
4
4
21
20
a
°4
4
21
20
19
19
189
192
200
199
4
45
44
45
54
79
81
98
134
170
210
269
260
a 78
081
a 62
a 70
085
a 97
0 101
a no
0 158
180
211
202
in
a 68
b 108
b in
119
136
144
169
189
223
279
357
405
458
43 7
36
a in
a 42
a 40
42
0 42
35
036
177
049
57
064
123
138
160
187
175
75
83
86
92
101
117
129
153
183
228
269
280
316
302
038
°39
°5i
50
56
66
80
102
119
135
155
175
182
178
06
4
3
113
233
319
390
°33
55
6
11
16
18
22
4
4
4
4
3
a 124
a 122
a 112
162
164
0 161
I3
a 23
a 40
0 61
063
i5
*I5
b 11
b 18
a 63
b 19
58i
730
798
848
825
464
1907.
a 76
151
a 52
336
1906.
4i
a 117
b
1905.
a 78
100
&6
1904.
58
123
4
1 *
23
1903.
36
106
0
8
'
24
1902.
64
27
j
°5
a
a
a
274
134
0 132
a 139
in
132
153
163
189
233
279
314
325
306
a 113
171
a 64
a 167
a 188
a 192
216
219
237
229
277
34i
348
369
408
426
405
082
081
0 79
086
a 85
a 86
0 120
154
a 165
0 194
a 266
a 299
a 296
200
26
20
24
21
20
23
20
25
28
31
42
60
88
98
94
861
93 7
976
1,013
1, 0 7 1
1.068
1, 2 2 4
1.359
1.585
1,848
2, 181
2, 7 2 9
3, 202
3.484
3. 312
198
225
412
0
135
0
0
0
36
33
32
29
27
29
29
38
35
46
25
48
49
64
77
86
87
95
123
131
144
155
164
239
289
313
355
403
426
13
C
J
5
18
20
19
27
c 29
32
32
37
45
53
72
86
88
92
99
96
94
97
96
106
n o
122
156
171
203
224
257
257
a
34
a 29
a 32
a 27
17
O 27
21
a 30
17
0 27
a 29
0 29
a 30
«3i
b 26
b 50
b 87
& n o
b 117
b 123
b 131
b 138
b 141
139
148
155
161
190
224
272
301
344
388
417
389
30
26
29
26
29
28 1
*o
171
178
179
179
188
194
207
223
b 242
b 248
6 277
301
6328
344
335
28
29
30
31
34
35
125
126
130
132
133
137
151
173
204
358
380
396
411
443
455
14
17
21
27
34
30
43
38
44
26
149
154
145
146
171
188
208
238
266
325
385
427
466
607
623
33
C 32
3i
c
32
6
<* 1 0 1
84
107
108 1
288
269
295
301
24
08
«8
°7
26
23
a 29
a
109
118
125
34
41
54
61
67
76
93
117
133
144
122
141
177
188
194
201
206
209
207
214
218
230
238
244
248
251
259
261
282
401
422
455
464
482
484
500
494
495
5io
588
589
584
633
740
830
890
934
964
1,331
1,383
1.439
I.503
1.528
1,537
1,594
1,658
1,837
1.978
2, 119
2.525
2.815
3. 107
3.369
3.689
3. 717
106
129
163
199
209
242
338
394
95
109
c
133
6
157
171
219
223
6
303
345
352
6
373
b 422
5i4
6
554
6 590
b
360
b 412
464
509
6588
615
80
260
105
301
417
459
488
558
599
675
812
0 11
0 18
°35
a 62
°3
0 18
0 29
a
0
a
a 46
37
164
91
74
375
31
159
80
238
334
°34
&138
67
65
3io
33
b 121
64
212
C 49
178
14
& 106
56
59
155
0
5 90
46
6
199
6 48
134
<*8
62
50
5o
C 40
0 2
49
3i
b 74
187
3i
120
6
1
°5
6
°56
54
3
38
0 80
° 126
68
°3
°4
06
06
°7
06
1
8
8
8
0
74
0
0 102
158
0 207
149
177
190
°3
°5
06
a 1
2
8
8
c
13
"4
I, 0 3 2
68
°43
a 2
35
56
a 2
42
47
58
60
°4
a
3
55
56
a
3
47
61
a
2
77
°4
67
0 2
106
139
194
°5
°5
°5
74
73
75
°5
°3
°4
353
°3
°7
88
°3
794
58
807
64
813
61
811
59
816 .
63
832 1
73 j
926
84
81
1,017
1, 124
1
(To face page 248.)
No. 1.
84 |
1, 207
43
49
50
21
24
34
43
39
36
41
36
c 50
64
82
10
13
a 91
18
22
26
26
0268
244
257
283
293
494
608
2,018
2,828
3. 0 2 6
°37i
b
b 249
281
276
274
b 287
b 284
6 275
b 282
6 299
6323
°9
a 13
a 14
13
4
7
7
6 10
14
15
18
21
27
27
28
6
4
5
5
5
8
9
10
11
14
IS
33
07
31
32
c 30
28
30
31
35
35
08
6
6
7
6
10
12
10
a 1
°7
a 26
0 64
a 69
7i
113
152
232
224
°7
a 1
a
3
0
5
325
6
311
86
6
6
c
95
3i4
6
33i
c
133
6
45 1
6
474
6
&
1
18
29
21
«6
08
24
°4
528
646
29 1
29
a
08
7
*55
68
883
956
1,045
1,188
1,411
1.667
1,812
2.476
2, 6 2 6
28
27
3i
40
53
69
73
86
84
196
185
a 25
a 30
°33
<»36
°5i
a 80
in
b 114
105
355
320
a 26
870
879
888
841
845
068
64
43
40
c 36
32
c
l 9
<»3i
a 30
0 28
3 I
032
30
a
173
09
174
173
176
176
178
180
187
201
237
275
280
a 11
a 11
a 10
a 12
0 18
a 22
0 20
"30
030
b 52
676
339
694
6
97
99
8
°9
a 11
08
a8
b 23
c 25
b 27
c
35
& 46
c
5x
658
55
7
a
a
a 7
a 7
0 11
a 11
a 13
0 19
a 28
626
24
°3
a 4
°3
°3
°3
a 7
b 16
& 16
16
22
22
280
293
326
378
435
520
617
744
887
831
4.405
4,906
5.433
6, i n
6,984
7,920
9.334
io,352
11.295
11,292
59
a
9
°9
n o
122
131
144
161
173
171
°3
°5
06
09
a 10
08
5
°5
a
150
017
9
24
O !7
a
0
880
766
11
2
a
2
1
2
9
11
a
2
°3
°3
°3
°7
08
a
757
37
°377
4
3
740
a 386
356
72
a
a
625
705
a 366
a 292
a
06
45
43 2
407
598
c 87
no
a
39
432
73
80
65
7i j
421
72
86
51
67
b
393
70
c 84
° 27
a 1
°4
1, 186
1
b 82
(
1
<*
°3
84
&56
36
a 67
55
29
0
j
a 77
a
3
b
*i6
43
a
IO
8
83
a
37
a
a 20
a 11
06
4
0
54
I7
a
9
a 8
4
0
a
13
0 22
I3
69
& 10
1901.
i
a
590450—11.
1900.
15
r
3
Total United States
1899.
4
75
6
Total Pacific States
1898.
1897.
15
44
Utah
Nevada
1896
1
12
Ohio
California
1895.
1
Florida
Total Western States
1894.
1893.
1
81
a
Colorado
1892.
1
°7
°9
North Dakota
South Dakota
Nebraska
Kansas
1891.
1
4
Total Middle Western States
T890.
1889.
1
°3
Illinois
1888.
79
a 4
Total Eastern States
Total Southern States
1887.
1886.
1885.
1884.
1883.
2
a 6
Texas
1882.
1881.
1880.
1879.
The numbers for
5
06
°9
a8
in
136
155
191
252
1.53i
1, 746
2, 0 9 7
2,534
3. 102
a
I2
°5
o
a 13
a
a
ag
O io
297
296
277
279
3,484
3, 7oo
3, 705
3.818
49
a
I3
5
°9
°9
29
a
7
30
30
7
<*34
a
7
7
7
278
268
269
275
3,917
3,978
4. 0 6 2
4, 253
<* 23
7
a
b
3
a 6
09
a 12
11
18
24
28
29
32
T A B L E II.—Number of trust companies,
by States, for each year from 1877 to 1909,
inclusive.
[The numbers marked " a " are from Homans's Bankers' Almanac and its continuations; those marked "*>" are from the official state reports; those marked "c»» are the average of the preceding and succeeding figures; those marked " d " are from Trust Companies of the United States.
reports of the Comptroller of the Currency. The numbers for 1909 are from the special report from the banks of the United States made to the National Monetary Commission on April 28, 1909.]
States.
1878.
1877.
"
1881.
1880.
1879.
1
1884.
1883.
1882.
1888.
1887.
1886.
1885.
1889. 1
1890.
1892.
1891.
1894.
1893.
1896.
1895.
1898.
1897-
1899.
1900.
All others, except those for 1909, are from the official state reports as given in the
1901.
1902.
1906.
1905.
1904.
1903.
5 |
2
6
10
9
12
13
14
15
18
17
16
29
b 19
6 19
b 19
6 20
6 20
b 23
6 23
34
35
36
40
38
41
45
35
d6
6 26
46
17
17
18
17
23
19
23
d6
b
*5
6
Total Eastern States
1908.
1907.
1909.
|
5
6
6
b6
!
5
5
66
68
6
6
67
6 1
68
69
68
6
6 10
6
9
II
39
5
41
d
6 11
*I4
&I4
&I5
6 17
6 18
6 18
6 18
6 19
6 18
3
13
15
18
20
23
25
32
32
34
6
8
7
7
8
8
8
8
8
6i7
34
8
6
9
11
13
17
20
20
6 12
12
10
10
10
10
10
12
12
13
14
16
16
18
19
20
22
23
25
27
90
96
100
117
127
145
148
160
155
85
|
627
29
52
47
1
1
1
1
1
1
1
1
1
1
6 2
2
2
4
12
11
10
10
10
7
6
6
6
6
7
8
8
8
24
23
22
21
22
20
21
20
21
21
29
36
3 °
48
S3
62
67
73
76
85
89
88
89
10
10
8
10
12
13
18
20
20
21
25
31
32
32
34
36
38
38
39
44
49
59
58
70
79
88
1
14
27
15
19
19
19
21
22
23
24
30
32
47
58
61
85
66
88
1
77
56
80
3
7i
75
78
7
6
6
75
82
82
88
90
89
88
97
115
158
204
241
291
314
328
327
278
20
17
15
8
8
6
7
14
IS
8
18
9
21
9
22
9
27
9
21
20
29
45
25
no
°4
°5
6
7
7
7
8
a 19
°5
a 16
4
0 17
a 21
0 20
a 12
d 20
d 18
d 21
19
4
4
4
4
4
4
4
5
5
366
409
454
496
516
524
d 20
d 21
d 18
d i
3
3
3
3
3
3
3
3
3
4
62
5o
131
140
142
150
154
159
164
211
233
300
0 10
a 11
a 12
°5
a 18
0 18
a
a 12
°3
°5
0 2
°5
08
a 15
t
06
06
09
a 14
!
a 22
0 24
a 10
a 10
°5
a6
06
<*8
a 1
a 1
°3
a 1
a
a 1
3
r
d 19
a 18
a 22
d
d 41
5
a 17
a 14
d 16
d 20
d 18
5
a 12
a 13
d i
d i
d 18
0
n
a 11
d 18
d 25
d 28
06
06
a 12
d 20
d 26
d
°5
°7
d 18
d 18
d 21
d 27
d
d 50
3 i
a9
a 26
a 36
<*57
d6
a 20
0 19
°5
°3
»6
0 18
0 21
0 23
a 28
a
a 17
a 17
a 20
0 22
a
|
!
1
i
3
&2
6 2
6 2
6
3
6 2
&6
7
* 3
7
3
&3
10
9
6 4
7
°4
97
IOI
a
3
103
a
0 4
4
178
157
d
a
d
T o t a l Middle Western States
2
6
3
8
9
10
12
13
15
30
d 25
8
d8
356
358
d
0 10
0 14
0 29
036
43
d 49
54
d63
5
12
29
33
44
54
63
69
&3
&3
&3
&3
&3
a 7
&3
a7
64
&4
&4
&5
<*53
66
d69
6 4
79
d63
6 6
°5
8
10
11
12
7
°7
8
9
6
°4
c
7
9
9
8
8
8
7
23
c6
c6
6 6
22
21
21
7
69
23
c
c 12
16
19
47
72
93
118
a 2
a 2
a 1
0
0 1
0 1
a 2
04
a 1
°5
a 1
..j
43
4
08
Total Western States
6
26
4
9
a 10
°3
0 1
04
a7
a
2
°3
a
5
21
135
22
254
155
0 1
06
a7
°3
°5
°3
°5
18
1
37
40
295
228
d
3
d8
d7
a 1
a 2
0 2
a 2
0 11
a 15
a 21
d 18
d 21
a 1
0 1
a 1
d 2
d 6
36
40
64
79
a4
0 10
a 12
a 1
0 2
a
°3
a 24
a 22
0 12
a 1
a 1
a 1
Utah
a 2
2
a 18
a
a 20
2
a 2
a 1
0 1
a
2
a 2
a
5
0 24
a
0
2
4
5
3
5
d
d
69
d 18
d 18
d 12
d 14
d i
d 30
d
d
7
<* 3
<* 3
34
d 12
d
3
d6
3
6
3
n
4
d 20
d 12
d
3
a 1
9
d6
d 10
a9
s
d
d 6
06
a 1
2
7
11
°5
50
4
d
d 12
a8
a 13
d
5
d6
d
5
1
d
0 4
a9
03
33
292
04
16
°3
4
a 1
22
5
14
0 1
r
66
4
5
<*5
!
19
93
13
<*3
d8
d7
d
3
9i
5
29
0 2
6
131
d 32
6
7
42
28
5
4
5
2
23
d8
d 27
2
7
15
d62
d
7
306
d
8
3
43
23
5
199
d
7
3
2
6 2
39
d 22
0 4
7
a 13
n
0 20
IS
475
3
34
19
5
34
17
d
14
9
d
4
d
5
1
d 1
a 1
0 1
29
37
492
56i
I
Total United States
44
40
37
35
37
38
42
44
So
52
1
52 1
63
63
1
102
125
124
1
1
590450—11.
(To face page 248.)
No. 2.
214
228
241
257
264
268
276
« 3
24
636 1
°5
°5
40
45
827
924
0 8
56
1,041
dS
d7
d6
72
94
90
56
1.337
1,485
1,496
1,079
State
Banks
and Trust
Companies
in 1899 to 492 in 1900 shown in the table is due to the
inclusion in 1900 of data from unofficial sources.
It is to be noted that from 1900 to 1908 there is some
duplication in the figures given in Tables I and II. A considerable number of official state reports include as state
banks all trust companies which engage in banking. The
number of trust companies in these States as obtained
from unofficial sources has been inserted in Table II,
although the same companies are already included wholly
or partly as state banks in Table I. Moreover, since 1906
the unofficial reports of the number of state banks used in
Table I to supplement the official data include trust companies, and since the unofficial reports of the number of
trust companies are from a different source it has not
seemed wise to attempt any separation. The extent of
the duplication can, however, be defined. The number of
trust companies as given by the official state reports and
the number as given in Table II are shown here in parallel
columns from 1900 to 1908, inclusive.
Trust companies
in those States Trust companies
for which official
in the United
reports as to the States according
number of trust
to official and
companies are unofficial reports.
accessible.
1900
1901
1902
1903
1904
1905
1906
1907
1908
249
National
Monetary
Commission
It is to be noted that the number of trust companies as
given by the reports to the National Monetary Commission
on April 28, 1909—1,079— was more than the number in
those States for which official state reports are accessible,
but much less than the number given by the combination
of official and unofficial reports.
NUMBER OF PRIVATE BANKS.
Table III, showing the number of private banks by
years from 1877 to 1909, has been compiled entirely from
u
Homans' Bankers' Almanac" and its continuations.
The number of private banks is officially reported in only
a few States.
CLASSIFICATION OF STATE BANKS, TRUST COMPANIES, AND
PRIVATE BANKS ACCORDING TO CAPITAL.
Tables IV, V, and VI show the number of state banks,
trust companies, and private banks classified according to
capital. The capital of the state banks classified in Table
IV has been ascertained wherever possible from the state
bank reports. In those States where the banks do not
make official reports or such reports are not published,
the capital has been taken from "Homans' Bankers'
Almanac" for January 1, 1909. The date of 1&e official
reports from which the capitals were taken is given in the
table after each State. The dates for which capital was
ascertained were not in all cases simultaneous with the
dates for which the number of state banks is given in Table
I. There are, therefore, slight discrepancies in the total
number of banks as given in Tables I and III.
250
TABIVH
III.—Number of private banks by States for each year from 1877 to 1909, inclusive.
[The numbers in this table are taken from Homans' Bankers' Almanac and its continuations.]
States.
1878.
1877.
1879.
1881.
1882.
1883.
1884.
1885.
1886.
1887.
1888.
1889.
1890.
1891.
1892.
8
&
9
11
II
II
10
12
14
15
12
13
13
25
15
13
2
3
4
4
4
3
I
3
3
3
3
6
4
4
3
3
3
2
I
2
2
2
2
2
4
4
52
58
62
7o
7o
75
6
69
8
71
71
77
74
5
3
77
4
1
3
3
73
72
4
4
75
5
5
14
18
289
96
295
8
10
5
15
11
8
8
8
8
11
13
10
10
10
9
7
14
14
12
3
2
2
2
2
2
2
2
2
2
a
I
1
1
X
1
3
2
1
1
1
1
1
0
2
3
3
3
2
2
2
1
72
162
166
160
304
301
275
280
283
298
153
161
l6l
173
7
19
7
7
10
11
11
11
10
5
6
11
10
10
10
13
12
7
14
26
21
15
28
19
19
23
21
22
21
22
22
19
20
18
16
14
14
20
23
23
20
32
35
34
31
128
128
128
120
125
197
201
201
198
442
34o
319
331
333
338
209
239
233
*33
342
33i
329
477
8
320
318
321
446
1,086
997
1,010
975
989
990
932
973
845
902
2
2
5
5
2
221
308
3ii
333
1 378
377
10
IOI
104
102
3
3
1
1
8
132
1 117
125
131
267
252
251
251
247
234
227
238
246
256
245
346
338
6
233
6
6
6
7
7
5
247
243
243
246
248
269
23
21
3
3
6
6
7
6
6
285
269
294
260
247
21 |
3
22
27 |
4
1
l6
1
32
3
3
19
37
3
4
649
593
567
26
32
11
11
10
8
582
549
33
34
41
5
5
55i |
3
23
22
15
20
19
20
45
40
5o
57
67
36
22
12
11
485
529
47
3
1
3
1
1
37
3
6
268
36
3
7
260
|
46
3
8
233
52
1
34
3
42
6
5
17
14
1
6
53i
517
527
524
625
652
655
647
625
42
28
30
30
31
33
29
31
3i
5
4
6
7
302
3i6
319
314
311
10
11
43
62
58
4
70
3
3
4
4
5
4
22
21
24
27
31
31
33
33
30
68
39
64
44
7o
71
60
53
55
52
56
49
49
5i
46
47
43
41
53
37
63
41
18
15
IS
17
16
16
14
14
12
14
14
10
18
IS
15
15
13
11
12
122
130
138
148
145
127
133
128
15
22
5
3
16
18
17
23
23
23
27
32
21
18
24
25
23
21
21
7
73
9
9
10
13
13
15
15
78
79
8
85
17
15
98
124
123
122
116
112
14
10
13
14
14
36
30
30
12
II
10
9
8
9
8
289
314
3i5
7
308
5
5
4
6
9
9
23
24
26
25
22
21
25
3
23
22
I.384
53
48
50
44
41
6
6
5
4
10
11
7
17
19
15
8
9
27
24
31
36
7
38
37
4i
19
12
13
13
24
26
20 !
19
26
26
25
32
34
38
19
24
20
17
41
43
42
49
59
74
79
77
66
59
31
33
34
40
40
47
48
48
67
36
62
34
65
43
29
26
17
4
4
4
14
13
14
26
29
38
28
34
28
22
26
6
6
6
153
147
165
5
8
187
9
18
186
15
19
20
20
24
35
30
32
33
7
8
6
19
21
14
22
24
36
22
24
20
36
43
49
42
42
43
42
37
22
21
25
32
44
41
40
51
SO
45
35
25
17
13
10
14
19
19
17
18
18
3-0
27
22
19
19
15
18
11
12
14
14
18
22
23
44
44
44
20
25
22
17
7
9
9
17
19
10
27
20
27
24
23
19
20
22
22
19
11
12
13
n
14
13
12
16
17
17
14
22
13
13
335
388
428
411
414
446
460
479
496
49i
455
469
464
450
368
362
399
416
508
535
473
606
622
670
544
540
504
438
271
263
265
253
262
260
268
287
276
182
229
254
257
260
302
296
298
286
204
209
213
222
228
240
229
274
a78
264
237
218
215
204
567
236
560
562
599
619
648
673
723
727
735
7i6
824
827
823
235
241
249
255
252
256
275
288
280
269
274
268
249
106
104
in
120
129
136
125
155
151
7
5
204
205
214
239
259
255
274
329
329
305
208
192
in
42
477
H4
477
490
519
534
521
480
493
484
438
438
399
382
107
107
no
108
114
115
152
156
174
127
133
106
356
98
2,157
2, 206
2,345
2, 408
2,348
2,381
2.655
2,670
2,456
2,304
2,341
2, 214
2, 065
6
56
75
3
5
8
10
9
3
1
1
1
63
62
63
62
49
37
31
27
22
75
62
70
70
56
28
22
15
11
81
75
55
51
49
40
19
15
10
4
21
20
17
21
22
24
30
29
32
3
33
6
61
55
4ii
181
187
197
182
282
295
305
321
33i
337
374
394
394
405
432
441
455
449
5ii
535
548
54i
131
140
138
140
I5i
159
174
184
192
197
217
220
228
232
227
222
224
219
70
75
73
80
88
94
97
103
104
107
114
102
119
no
104
no
no
100
49
5i
58
60
89
95
124
129
129,,
137
145
152
163
172
182
166
175
177
201
232
252
264
289
380
353
373
383
388
411
423
456
485
482
478
474
460
104
107
105
83
94
96
97
128
in
132
129
122
X4i
152
143
124
139
131
245
180
540
218
108
175
464
130
1, 167
1,254
1,2/4
1,288
1,387
1.517
i,59o
1,689
1.678
1.728
1,840
if866
1,986
2,041
2,085
2, 132
2,063
2,060
2, 170
•
0
1
2
10
10
31
97
136
140
162
183
196
205
14
48
0
10
48
47
52
48
43
60
92
113
140
147
185
229
90
108
137
160
194
211
247
303
6
5
8
5
11
12
17
15
14
13
278
353
10
J
I
62
146
2,101
38
30
19
14
64
58
297
244
192
155
143
132
365
343
327
253
208
190
171
148
11
15
16
22
19
19
14
16
9
56
9
58
8
9
8
9
12
12
11
15
17
17
7
50
52
55
4
5
4
77
5
10
3
78
6
23
19
5
21
75
4
78
4
55
9
74
5
55
7
64
4
20
48
5
4
n
56
8
12
44
1
11
12
13
27
31
33
17
14
479
440
346
35o
309
301
325
323
294
334
339
3io
229
199
161
170
28 1
56
5
9
9
9
12
IO
10
11
51
47
43
9
53
12
49
65
69
70
10
13
20
16
13
11
10
10
73
9
58
8
336
2
8
9
9
41
18
16
13
13
1
2
2
2
2
85
78
80
2,799
528
58i
651
78o
14
11
10
10
11
II
14
34
36
38
35
31
9
14
16
21
22
21
22
21
25
22
24
24
26
20
49
51
47
46
So
48
52
55
37
43
32
35
32
400
9ii
969
952
884
709
557
530
17
17
8
11
13
11
13
16
16
13
11
13
12
12
10
11
12
11
9
8
8
8
13
21
11
10
13
11
13
11
10
4
7
2
4
4
4
4
6
3
7
3
4
n
5
5
10
11
9
8
5
35
15
12
7
5
6
3
120
120
125
149
93
105
3.689
3,966
4, 0 6 4
4,215
in
118
3.107
3.3o6
117
3.458
113
3.456
7
306
5
223
7
66
165
127
50
4
9
7
(To face page 250.)
17
212
39
177
2,573
16
208
18
170
2,545
19
209
32
254
2,586
21
197
18
156
2,432
13
184
36
250
in
12
183
15
149
102
11
168
34
243
7
11
195
15
124
3
14
190
35
238
72
1
15
126
8
39
5
9
7
21
239
3
7
48
4
8
6
40
135
4
7
2
33
1
59045 °— 11.
1.337
44
243
2
Total United States
I.470
44
131
29
n
Total Pacific States
1.357
33
134
6
65
3
7
1.38l
1,403
237
181
12
1.376
38
122
162
10
39
234
161
9
27
114
7
7
32
231
5
2
28
113
5
4
29
227
4
366
1.378
118
25
60
3
3
1
1,386
225
22
4
71 I
321
1,482
119
232
6
309
813
235
5
4
307
67
3
3
642 |
in
36
75
7
6
1
|
647
219
25
Utah
!
1
4
646
264
5
Total Western States
1 744
28
10
25
26
58
35
84
I
21
19
30
1909.
22
36
1
1908
1907.
16
39
8
9
Total Middle Western States. . >
1
1906.
19
33
7
9
18
30
1905.
10
5
631
1904-
6
116
3
1903.
16
118
20
1902.
5
114
23 I
7
3
1901.
18
no
23
1900.
165
5
109
295
1899.
79
9
n o
316 |
1898
1897.
77
8
109
306
1
1896.
67
7
97
8
1895
1894.
1893.
8
82 |
I
1880.
128 1
4,305
6
149
124
125
4,230
4,004
4,031
3.844
3.924
81
"3
18 ;
79
74
118
96
57
65
81
17
17
21
4
6
6
2
36
15
17
19
24
32
31
44
46
49
63
7i
57
13
15
16
20
37
39
17
18
19
20
30
27
20
21
28
30
29
22
24
26
32
35
31
30
30
23
16
n
11
13
13
31
13
13
3
3
3
2
9
8
12
15
20
21
18
14
10
11
13
12
10
8
8
7
2
3
7
3
7
2
2
4
10
11
12
8
5
6
8
7
5
134
142
141
156
5.291
4,823
8
1
83 |
3.810
89 |
3.806
[
96 1
3,853
95
4,168
122
5.287 1
128
5. 0 6 0
106
4,976
5.417
5.484
158 |
4,947
8
8
7
4
8
8
4
4
127
117
4.576
4, 407
State
Banks
and
Trust
Companies
Table V, which shows the number of trust companies
classified by capital has been compiled entirely from the
official state reports. The total number of trust companies so classified is 988. Probably from 200 to 300 trust
companies are included among the state banks classified
in Table IV.
Table VI, which shows the number of private banks
classified according to capital, is compiled entirely from
official reports. Only a small part of the total number of
private banks are included, since official reports are made
by private banks in only about one-third of the States and
Territories.
251
TABLE IV.—Number of state banks, classified by capital, 1909.
$5.000
or less.
Over
$10,000
$20,000
$15,000
$25,000
$50,000
$5,000 a n d less
a n d l e s s a n d l e s s a n d less a n d l e s s
a n d less
than
than
t
h
a
n
t
h
a
n
than
than
$15,000. $20,000. $25,000. $50,000. $100,000.
$10,000.
N e w H a m p s h i r e ( J u n e 30, 1909)
3
5
1
C o n n e c t i c u t ( S e p t . 1, 1909)
P e n n s y l v a n i a ( N o v . 27, 1908)
Delaware
Maryland
a n d less
than
$200,000.
and
over.
Total.
9
1
1
1
2
5
3
7
19
6
4
6
36
40
50
12
3
39
1
74
3
3
6
1
^4.
$200,000
3
Total New England States
N e w Y o r k ( S e p t . 14, 1909)
$100,000
2
2
3
18
3
7
20
XI
9
18
5
6
3
3
19
3
8
106
131
92
81
446
6
21
46
24
4
34
27
162
39
16
5
19
47
83
42
53
155
24
58
35
41
18
60
87
19
53
21
23
8
5
1
69
3
1
130
16
79
D i s t r i c t of C o l u m b i a
Total Eastern States
W e s t V i r g i n i a ( N o v . 16, 1909)
2
5o
S o u t h C a r o l i n a ( N o v . 16, 1909)
F l o r i d a ( N o v . 16, 1909)
9
34
9
I
77
35
1
22
38 1
20
17
6
10
29
2
239
170
286
244
32
14
468
5
2
19
8
97
208
27
7
3
Mississippi (Nov. 16, 1909)Louisiana (Dec. 3, 1909). . .
Texas (Nov. 27, 1908)
Arkansas
Kentucky (Oct. 2, 1909)- • •
Tennessee
1
99
46
31
6
12
55
26
15
15
125
34
22
83
24
4
76
8
78
31
18
75
45
16
223
48
84
29
21
4
427
25
23
88
42
18
10
337
697
249
946
525
245
106
3,608
45
14
!43
84
33
9
404
1
182
53
24
1
264
44
33
419
15
371
76
3
16
Total Western States.
14
117
62
4
129
76
37
9
6
470
3
607
36
10
954
211
77
3.75o
72
23
138
61
13
42
122
32
8
166
79
16
93
130
168
91
326
308
1, 2 8 0
586
46
35
24
39
7
10
41
9
n o
60
137
40
1
1
659
57
99
49
5
2
648
4
218
261
8
18
15
7
25
29
4
5
9
2
1
46
10
1
20
9
1
77
15
2
3
49
16
58
14
3
2
520
349
181
436
147
24
9
2,871
.1.381
«*>
ft
ft-
446
78
17
bo
ft
386
3
358
76
ft
337
100
1
1
CO
187
292
139
308
23
30
98
316
300
Total Middle Western States .
North Dakota (Apr. 29, 1909)
South Dakota (June 2. 1908)
Nebraska (Nov. 16, 1909)
Kansas (Sept. 1, 1908)
Montana (Nov. 16, 1909)
Wyoming
Colorado (Nov. 27, 1908)
New Mexico
Oklahoma (Sept. 23, 1908)
°
33
Total Southern States.
Ohio (Nov. 16, 1909)
Indiana (Sept. 30, 1909). . .
Illinois (Sept. 2, 1909)
Michigan (Sept. 1, 1909). . .
Wisconsin (Nov 16, 1909).
Minnesota (July 15, 1908) .
Iowa (May 14, 1908)
Missouri (Sept. 23, 1908). .
3
26
65
37
S2
o
37
ft
**.
^>
TABI,E IV.—Number of state banks f classified by capital,
1909—Continued.
ft
Over
$ 1 5 , 0 0 0 $20,OCO $ 2 5 , 0 0 0 $ 5 0 , 0 0 0 $ 1 0 0 , 0 0 0
0,000
less and less and less and less and less and less $ 2 0and
less and
or less. and
than
than
than
than
than
than
than
over.
$10,000. $15,000. $20,000. $25,000. $50,000. $100,000. $200,000.
$5,000
$5,000
Washington (Nov. 16, 1909) . . . . ,
Oregon (Nov. 16, 1909)
California (July 15, 1908)
Idaho
Utah (Sept. 25, 1908)
1
1
3
2
Arizona
$10,000
37
25
21
10
46
7
5
4
8
4
2
11
2
12
1
2
1
95
36
25
16
22
11
123
78
38
12
22
11
6
n
4
8
59
8
5
4
3
Total.
16
7
59
3
6
3
321
129
219
56
24
27
Total Pacific States
1
6
124
45
29
33i
154
112
94
896
Total United States
414
240
3.029
1,420
775
3 . 102
1.549
688
373
u,590
ft
T A B L E V.—Classification
by capital of the number of trust companies in those States in which trust
official reports and in which they are distinguished from state banks, igog.
Over
$10,000
$15,000
$20,000
$25,000
$5,000
less and less and less and less
and less and
than
than
than
than
than
$15,000. $20,000. $25,000.
$5.000
or less.
$10,000.
$50,000
companies
$100,000
and less
than
and less
than
$50,000.
$100,000.
$200,000.
7
19
8
18
make
Co
$200,000
and
over.
Total.
to
I
New Hampshire
>
Massachusetts (Nov. 16, 1909)
!
-
New York (Jan. 1, 1910)
New Jersey (Dec. 31, I9OQ)
1
1
4
5
19
43
i
1
1
Maryland
District of Columbia (Sept. 1, 1909)
1
1
i
i
1
1
1
3
40
29
34
48
11
9
27
40
57
161
15
70
58
20
85
80
150
131
283
5
5
226
453
s
Total Eastern States
Virginia
West Virginia
North Carolina
South Carolina
3
9
1
1
3
3
14
Connecticut (Sept. 1, 1909)
Total New England States
11
223
Hi
T A B U S V.—Classification by capital of the number of trust companies in those States in which trust companies
official reports and in which they are distinguished from state banks, 1909—Continued.
$5,000
or less.
Over
$10,000
$15,000
$20,000
$25,000
$5,000
less ond less and less and less
and less and
than
than
t
h
a
n
than
than
$15,000. $20,000. $25,000. $50,000.
$10,000.
$50,000
$100,000
and less
than
and less
than
$100,000.
$200,000.
Florida
Alabama
make
$200,000
Total.
and
over.
4
5
22
17
1
18
11
11
1
40
28
16
85
8
13
14
36
30
38
17
7i
99
2
12
14
26
1
4
Arkansas
Tennessee
Total Southern States
Indiana (S^pt. 30, 1909)
1
40
5
S
5
2
13
7
3
19
10
9
38
79
57
96
271
to
Total Middle Western States
39
Co
1
1
I
Kansas (Sept. i , 1908)
2
6
Total Western States
Washington (Nov. 16, 1909)
2
to
a
5
7
2
5
1
1
2
4
1
1
2
4
173
3Si
402
988
14
ft
California
Utah
Arizona
Total Pacific States
Total United States
1
1
1
59
ft
T A B L E VI.—Classification
by capital of the number of private banks in those States in which private banks make official
reports, igog.
Over
$20,000
$25,000
$10,000
$15,000
$fe,ooo and
less and less and less and less
and
less
than
! or less.
than
than
than
than
$15,000. $20,000. $25,000. $50,000.
i $5,000
$10,OOO.
$50,000
$100,000
and less
than
and less
than
$100,000.
$200,000.
$200,000
and
over.
Total.
Massachusetts
Connecticut
Total New England States
New York
New Jersey
Pennsylvania
Maryland
District of Columbia
Total Eastern States
Virginia
West Virginia
North Carolina (Nov. 16. 1909)
South Carolina
Georgia
1
1
1
1
1
4
Alabama
Mississippi
Louisiana
Texas
Arkansas
Kentucky
Tennessee
Total Southern States
Co
to
1
1
1
1
1
5
?>-
Ohio
Indiana (Sept. 30, 1909)
Illinois
Michigan
133
21
12
21
2
1
1
1
8
5
5
Iowa
Total Middle Western States
North Dakota
South Dakota (June 2, 1909)
Nebraska (Nov. 16, 1908)
Kansas (Sept. 1, 1908)
Montana
Wyoming
Colorado (Nov. 27, 1908)
New Mexico
Oklahoma
Total Western States
19
3
19
1
6
4
19
3
154
23
19
26
10
1
13
3
3
1
32
6
5
4
4
48
9
6
4
5
5
53
1
258
r
2
12
8
1
1
51
1
85
^
fe
TABI/E VI.—Classification by capital of the number of private banks in those States in which private banks make official
reports, igog—Continued.
$5,000
or less.
$
Over
$50,000
$100,000
$10,000 $15,000 $20,000 $25,000
0,000
$5,000
less and less and less and less and less and less $ 2 0and
and less and
than
than
t
h
a
n
than
t
h
a
n
t
h
a
n
over.
than
$25,000. $50,000. $100,000. $200,000.
$10,000. $ 1 5 , 0 0 0 . $ 2 0 , 0 0 0 .
Oregon (Nov. i6, 1909)
California (July 15, 1908)
Idaho
Utah (Sept. 25, 1908)
Nevada
Arizona
7
1
1
Total Pacific States
Total United States
1
33
5
3
8
3
4
1
8
1
2
11
211
33
28
42
7
20
5
Total.
ft
1
2
15
15
1
3
4
33
5
381
ft
o
8
APPENDIX
B.
THE INSURANCE OF BANK DEPOSITS IN THE
WEST.
By THORNTON COOKE.
I.a
OKLAHOMA.
Within the last two years, laws providing for the
guaranty or insurance of bank deposits, through funds
administered by the State, have been enacted in Texas,
Oklahoma, Kansas, Nebraska, and South Dakota, a great
region stretching from the Gulf of Mexico almost to the
Canada line.
The first of these laws was adopted in Oklahoma,
and there could be no better place for the experiment
than this splendid commonwealth. Though not a pioneer
country, since much of it was opened to settlement twenty
years ago, yet its 70,000 square miles are still in the early
stages of their development. Almost every variety of
extractive industry and agriculture is here represented—
coal mining, oil production, the raising of wheat, alfalfa,
corn, and cotton, and the breeding and fattening of cattle.
The population of the new State, much more than 1,000,000
in number, is intensely American. Its people are ready,
when they find no precedent, to make one, as witness their
remarkable state constitution.
a The Quarterly Journal of Economics, November, 1909.
261
National
Monetary
Commission
The progress to the present time of their experiment
of guaranteeing deposits, begun more than a year ago, is
here presented. The information is derived from personal
observations, official sources, and conversation and correspondence with many Oklahoma bankers. One event
of absorbing interest, the closing of the largest state bank
in Oklahoma, has just occurred. Authoritative information about the bank and the administration of the state
guaranty fund since its closing can not now be had, a and
the significance of this episode must be presented in a later
paper, together with a study of the legislation adopted in
the rest of this region and proposed in other States. In
the light of these experiments, the subject can then be
generally considered and a conclusion reached as to how
far insurance of bank deposits is practicable and desirable.
When the bankers of Oklahoma reached their offices
Monday morning, October 28, 1907, they found that over
Sunday the banks of St. Louis and Kansas City, following
the example of New York and Chicago, had suspended
cash payments, except in small amounts, and that the
governor of Oklahoma, to give the banks time to meet the
situation, had declared a legal holiday of a week. The
panic was on. The principal correspondents of the banks
were in St. Louis and Kansas City. Currency could not
be obtained from either city except in driblets. An order
for $5,000 in currency might bring $500, if so much. The
Oklahoma banks had no place to get currency to pay depositors in the panic evidently sweeping over the country.
a October 13, 1909.
262
State
Banks
and Trust
Companies
The paralysis of trade the country over exceeded anything that had been seen in a generation, and the course of
events was the same in Oklahoma as in the other States.
Farmers would not sell hogs and grain and cotton because
the buyers could not pay in actual money. The movement of commodities stopped; long trains of idle freight
cars filled the city yards and cumbered the country sidings.
The railroads bought little coal and the output of the
mines fell off. Many railroad men, miners, mechanics,
and laborers were idle and money to pay others could be
scraped together only by the severest of expedients, and at
great expense. Values melted away and business was
dead.
All this was the common experience of the United
States, and there were two legislative results. It
seemed to many that additional supplies of currency in
October and November would have saved the situation,
and the Aldrich-Vreeland Act was passed in the belief
that it would provide such supplies in future stringencies.
It seemed to others that there would have been little
trouble if "bank depositors had known that their deposits
were secure; and this theory led to the creation of the
Oklahoma deposit-guaranty fund.
Immediately after the declaration of the week-long
holiday, the executive committee of the Oklahoma
Bankers' Association was convened at Guthrie, the
capital. A day and night of conferences with the
political authorities came to nothing. In a few days,
however, the committee was again at Guthrie to devise
some plan to enable the Oklahoma banks to resume cash
263
National
Monetary
Commission
transactions. It was obviously impossible to pay all the
depositors at once, and there was great fear that depositors would stampede if restrictions on cash payments were
removed. All over the country, during November and
December, bankers were saying that if the depositors only
knew that the banks were sound and their deposits well
invested and secure, the usual course of business could be
resumed any day. To give depositors this assurance, it
was suggested at this second Guthrie committee meeting
that the state and nation guarantee the bank deposits.
It was agreed that the state bankers present should submit
the idea to state banks throughout Oklahoma, while
national bankers urged congressional action. It was
soon learned that nothing was to be hoped from Congress,
at least in time to be of help in the crisis of 1907. The
national banks, through an able committee, then investigated the feasibility of an organization among themselves
to guarantee the deposits in the national banks of Oklahoma, but decided that the scheme was not practicable
at the time. The national banks of Kansas are now
trying to put such a scheme into operation, as will appear
later on in this paper.
A few weeks after the panic began Oklahoma became a
State, and the first state legislature met. The state
banking board prepared and had introduced a bill to
guarantee bank deposits. Governor Haskell was a member of the board.
The bill became a law December 17, 1907, while currency was still at a premium in New York, and before
cash payments had been fully resumed by western banks.
264
The chief provisions of recent legislation upon bank-deposit
State.
Trust companies.
National banks.
insurance.
Withdrawal from
participation.
What deposits insured.
Subsequent assessments per annum.
Assessments upon new banks.
Sufficient to maintain fund at 1 per
cent of deposits.
3 per cent of capital, subject
to adjustment on basis of
deposits.
One-fourth of 1 per cent of deposits
until a fund equal to 5 per cent of
deposits is accumulated. Thereafter sufficient to maintain fund at
5 per cent, but assessments not to
j exceed a per cent of deposits in any
year.
3 per cent of capital, subject
to adjustment on basis of
deposits.
One-twentieth of 1 per
cent of deposits eligible
to guaranty, less capital and surplus. $500
in bonds or cash for
every $100,000 of deposits must be deposited to guarantee payment of assessments.
One-twentieth of 1 per cent until guaranty fund reaches $500,000. If depleted, fund to be restored by additional assessments of one-twentieth
of 1 per cent, but not more than five
such in one year.
Amount approximately equal
in each case to its share of
guaranty fund after deduction of losses.
To participate must reorganize as state banks.
1 per cent distributed
over two years, of deposits, except public
deposits otherwise secured.
One-tenth of 1 per cent. Special
assessments may be made not exceeding 1 per cent in one year.
At least 1 per cent of deposits
as shown by first two statements. Must pay in, on
organization, 4 per cent of
capital as a credit fund
toward payment of assessments.
All corporations doing a
banking business participate.
One-tenth of 1 per cent of
average deposits for
preceding
three
months, except public
deposits otherwise secured, plus a membership fee of $100 to $i 70,
according to capital.
One-tenth of 1 per cent of deposits.
Special assessments not exceeding
four-tenths of 1 per cent in one year
may be made to pay then existing
deficiencies. Annual rate may be
reduced by board of commissioners,
and again raised.
Same as upon old banks.
Apparently banks must be
three months old to become
members. (Sec. 6 of act.)
Corporations doing a
banking business participate.
No provision on the subject..
One-fourth per cent of deposits until
fund equals $2,000,000. In case of
depletion of fund, or of emergency,
payment not exceeding 2 per cent of
deposits in one year may be required.
3 per cent of capital and surplus subject to adjustment
on basis of deposits.
Participate if subject to
the general banking
law. Companies opererating under special
charters may voluntarily submit to the
general law.
Pro rata part of fund unused Noninterest bearing exto be returned to banks vol- ; cept public deposits, if
untarily liquidating.
otherwise secured.
Participation by banks.
First assessment.
Compulsory; a special examination of all banks was
made before law went into effect.
1 per cent of deposits, except state and United
States deposits otherwise secured.
|
When deposits paid.
Limitation of interest payments by
participating banks.
Limitation of deposits.
,,_
*^ J1
H o w f u n d ke
Permissible advertising.
Pl-
OKLAHOMA.
Fitst plan: Acts of Dec.
17, 1907, and May 26,
1908. Tlan in effect
Feb. 14. 1908.
Modified plan: Effective
June I I ( 1909.
Can not withdraw
All
In full immediately after bank is closed.
Bank commissioner may fix maximum. (Fixed at 3 per cent on
bank balances, and certificates of
deposit for less than six months.
Four per cent on savings deposits
and certificates for six months or
longer.)
No provision
"Deposits are protected by the depositors' guaranty fund of the
State of Oklahoma,"
In full immediately after bank is closed.
If fund is insufficient at the time, depositors shall be given 6 per cent certificates of indebtedness, which shall
be paid in the order of their issue.
To ten times capital and
surplus, not applying,
however, to deposits of
other banks.
Deposits not bearing interest; certificates payable not less than six
months from date,
bearing not more than
3 per cent interest;
savings deposits not
exceeding $100, drawing not more than 3
per cent.
Deposits otherwise secured are not insured.
On closing a bank, depositors shall be
given 6 per cent certificates, to be
paid by dividends from assets, including the double liability of stockholders. After realization on such
assets, the balance due on the certificates shall be paid out of guaranty
fund. If fund is insufficient, depositors shall be paid pro rata, the remainder due to be paid when next
assessment is available.
To ten times capital and
surplus.
Deposited in banks on
collateral (state or municipal bonds).
"Deposits are guaranteed by bank
depositors' guaranty fund of the
State of Kansas." Penalty provided for so advertising as to tend
to convey the impression that deposits are guaranteed by the State
of Kansas.
All
In full as soon as deficiency in the cash
in hands of the bank's receiver is determined. No provision in case
fund shall remain insufficient after
levy of special assessments.
Investments must not exceed eight times capital
and surplus.
The assessments levied
upon each bank are to
be held by that bank
payable to the state
banking board on demand.
"To effect that depositors are protected by the depositors' guarantee
fund of the State of Nebraska."
In full on certificate of bank's receiver
that assets are insufficient to pay depositors. If fund is insufficient "all,
or so much as may be necessary, of
what is accumulated in said (bank
deposit insurance) fund within the
year covered by the last payment of
premium by the insolvent, shall be
distributed pro rata among said depositors until such depositors shall
have been paid in full." Apparently, if accumulations within the
year are not sufficient, the depositors
are not to be paid in full.
Under another law deposits are limited to fifteen
times capital and surplus.
By state treasurer. In
case the law shall provide for stated depositaries, shall deposit
fund therein, provided
that fund may be invested in state warrants.
Banks receive certificate of membership in association. No provision
on subject of advertising.
Same as under first plan. (Rate 75 per cent in
fixed, same as above, except that
rants or in
certificates drawing 3 per cent
curities that
must be issued for not less than 90 |
investments
days.)
funds.
state war- Same as under first plan. Penalty
other se- 1
provided for advertising that deare lawful |
posits are guaranteed by State of
for state
Oklahoma.
KANSAS.
Act of Mar. 6, 1909.
Plan in effect July 1,
1909*
Voluntary and limited to incorporated banks with
unimpaired surplus equal to 10 per cent of capital
and in business at least one year. In a tow*n
where all existing banks fail to participate for six
months after July, 1909, a new bank may participate at once. No bank paying more than 3 per
cent interest or any interest on savings deposits
withdrawn before Jan. 1 or July 1 may participate.
National and private banks and trust companies
may reorganize as state banks and participate at
once. Each bank must be examined before it
may participate.
May withdraw on six months*
notice, but must pay all
assessments on account of
banks that fail before expiration of this notice.
Bank commissioner may,
for cause, cancel the guaranty of any bank's deposits.
NEBRASKA.
Act of Mar. 25, 1909*
Plan in effect July 2,
1909.
SOUTH DAKOTA.
Voluntary: 100 or more banks with not less than
$1,000,000 aggregate capital may join to create the
State Association of Incorporated Banks.
!
|
TEXAS.
Act effective Aug. 9, 1909.
Guaranty fund goes into
operation Jan. 1, 1910.
All incorporated banks operating under the general
banking law must secure depositors either (0) by
the guaranty fund, or (6) by furnishing a "guaranty bond." If bank is incorporated, such bond
must equal its capital; if private, one-half its
average deposits. Bond may be executed by
three approved personal or one approved corporate
surety.
1 per cent of deposits, except public deposits
otherwise secured.
Must increase capital by
25 per cent if average
deposits exceed certain
ratios to capital and
surplus ranging from
five times a capital and
surplus of $10,000 to
ten times a capital and
surplus of $100,000 or
more.
No limitation, but interest-bearing
deposi ts are not protected by guaranty fund.
\
0
59045 —11. (To face page 264.)
state treasurer. Threefourths credited to
state banking board on
books of respective
banks.
cured deposits of this bank are protected by the depositors' guaranty
fund of the State of Texas,"
or
"The deposits of this bank are protected by guaranty bond under the
laws of this State."
Penalty provided for statement that
State of Texas guarantees deposits.
State
Banks
and Trust
Companies
The act levied an assessment on each bank of i per cent
of its average deposits to create a fund out of which should
be paid deposits of banks that might fail, and provided
that in case the fund should be depleted a special assessment should be made to cover the deficiency. No limit
was set to such special assessments, and each state bank
was therefore the absolute guarantor of the deposits of
all the other state banks of Oklahoma. New banks were
required to pay, as organized, 3 per cent of their capital,
this payment being subject to adjustment on the basis of
deposits at the end of their first year.
All state banks were by this law compelled, and national
banks were permitted, to guarantee their deposits in this
way. As will be seen later, the Comptroller of the Currency refused to allow national banks to participate in the
scheme.
The chief provisions of the Oklahoma statute are shown
in the accompanying table, in comparison with the provisions of the deposit-guaranty laws of other States.
Now, the Territory of Oklahoma had for a number of
years enjoyed a good banking law and a competent bank
commissioner. Failures had been few. The financial
history of Oklahoma is brighter than the early financial
history of other States in the same region. With the admission of Oklahoma as a State, however, there were added
to the institutions under the supervision of the bank commissioner some 175 banks and trust companies from the
old Indian Territory. These had been operating without
any public supervision or examination. They were officially an unknown factor in the banking situation.
265
National
Monetary
Commission
Partly because of these banks and partly to make it as
sure as possible that only good institutions should have
their deposits guaranteed, the bank commissioner decided
to have every institution in his charge examined within
the sixty days before the law would go into effect. Four
hundred and sixty-eight banks had reported to the commissioner December n , 1907. The examination of so
many banks in a single State within two months is unique.
It was accomplished by employing active bank officers as
special examiners of other banks than their own. The fact
is remarkable that almost all the banks stood the test.
A few were required to liquidate, and many being found,
as the commissioner says, "not in harmony with the law
at all points," were given further time to comply fully with
the law; but, practically speaking, the banks of Oklahoma
went into the guaranty system, February 14, 1908, with
a clean bill of health.
Expecting the insurance or guaranty of deposits under
state supervision to be attractive to depositors, no fewer
than 57 national banks applied to have their deposits
guaranteed, and were examined by the bank commissioner
of Oklahoma as provided by the guaranty law. On July
28, 1908, however, the Attorney-General of the United
States, Mr. Bonaparte, advised the Comptroller of the
Currency that a national bank could not legally participate
in the Oklahoma guaranty. In Mr. Bonaparte's opinion
it was beyond the powers of a national bank to insure its
deposits against loss, and he believed that under the
Oklahoma law the banks were not effecting insurance but
giving contracts of guaranty, or suretyship, which national
266
State
Banks
and Trust
Companies
banks clearly could not do. The Comptroller of the Currency, therefore, forbade the national banks to participate in the guaranty scheme.
Litigation to resolve the legal questions was already
under way. Many bankers felt that it was unwise and
unfair to require the successful banks to pay the debts of
the unsuccessful. As a test case, the Noble State Bank
asked for an injunction restraining the state banking board
from enforcing the law in its case. The points were made
that the bank's charter rights were not subject to change
by the legislature and that to exact contributions to a fund
for the payment of deposits of failed banks would be to
deprive it of its property without due process of law. The
supreme court of Oklahoma ruled, however, that the
charter was granted under conditions that made the
bank's rights thereunder subject to legislative amendment. Banking, it further held, was a quasi public business. The assessments complained of were for the purpose
of safeguarding the public in its dealings with the banks,
and it was within the police power of the State to levy
them, there being, moreover, a consideration in the benefits
derived by all banks from the assurance thus afforded customers of the safety of their deposits.0
The case was appealed to the Supreme Court of the
United States, and has not yet been decided.
The situation by midsummer of 1908 was that national
banks had been forbidden to obtain guaranty of their deposits, the constitutionality of the law as to state banks
had been seriously attacked, and the state banks were advertising far and near and forcibly, the protection afforded
a The opinion in this case may be found in 97 Pacific Reporter, 590.
267
National
Monetary
Commission
to their customers by the " Depositors Guaranty Fund of
the State of Oklahoma." Some banks went so far as to
advertise that their deposits were guaranteed by the State
itself. This was not permissible under the law, and was
forbidden under penalty by the amendatory act effective
June I I , 1909; but some banks continued so to advertise
as, perhaps, to give the impression that the State as such
protected the depositors. " Deposits protected by the law
of Oklahoma,'' or similar phrases, have been used. In
country banks much of the appeal for business is by word
of mouth, and state bankers have not failed to point out
that deposits in their banks are guaranteed.
The state banks were gaining on the nationals, as is
shown by the accompanying tables compiled from official
returns. a
Between the February and May statements of 1908,
the number of state banks had increased 24. The
number of banks in Oklahoma Territory had increased
only one between June 1, 1907, and December 11, 1907,
and the number in Oklahoma State had increased only
two between December 11, 1907, and February 29,
1908. The frequent organization of banks after the latter
date was because it was supposed that a new bank could
obtain a good line of deposits more rapidly under the
assurance of safety given to depositors by the new law.
Fewer banks were organized during the early summer,
but the July statement showed a gain in the individual
deposits of state banks since the taking effect of the
guaranty law of more than $3,000,000. The national
banks had decreased four in number, and their deposits
0
Pages 269-270.
268
State
Banks
and
Trust
Compantes
had declined about two-thirds of the amount the state
banks had gained. Both classes of banks had exhibited
in the February statements abnormally large reserves,
because of the accumulation of cash and sight exchange
during the panic. These reserves had declined somewhat
by midsummer, but remained ample in both cases. The
following table shows the percentage of the cash resources
of Oklahoma banks to deposits, (a) when the guaranty
law went into effect, (b) one year later, and (c) on June
2
3> 1909. In working out these percentages, some small
miscellaneous items of deposit and of exchange are; for
the sake of perfect accuracy, added to the items shown on
the table on page 270. The technical legal reserve of
national banks is so calculated as to be incomparable
with the reserve of state banks, but the following percentages have been calculated on the same basis for
both classes of banks:
STATE BANKS.
Feb. 29,
1908.
Percentage of cash and sight exchange to deposits.
51.8
11. 0
Feb. 5,
1909.
45-9
7-8
June 23,
1909.
38.9
7- 7
NATIONAL BANKS.
Percentage of cash and sight exchange to deposits.
Percentage of cash to deposits
269
Feb. 14,
Feb. 5.
June 23,
1908.
1909.
1909.
46.8
13- 2
41-9
8.9
39- 2
9- 8
Certain items in Oklahoma bank statements.
STATE BANKS.
F e b . 29,
1908.
Number of banks
Capital
Surplus
Due to banks
Individual deposits
Due from banks
Cash in bank
M a y 14,
1908.
J u l y 15,
1908.
S e p t . 23,
1908.
N o v . 27,
1908.
Feb. 5.
1909.
Apr. 28,
1909.
June 23,
1909.
470
494
499
520
546
574
611
631
$6,233,216
$6,640,650
$6,795,050
$7,456,250
580,892
563.417
705.727
20,387.887
7.919.878
1,964,392
S85.9SI
711.677
21,216,526
7,206,695
1. 9 6 8 , 9 4 4
595.774
1.341.324
$7,9S7.35o
613.218
1.823,620
29,448.970
11,186,403
$8,487,525
742.366
2,573,102
35. 160.713
14,366,615
$9,587,950
752.892
3.691.633
4o.99i.937
15,600,732
758.774
3.896,541
42,722,927
2,892.485
2.973.453
3.707,246
N o v . 27,
1908.
Feb- 5.
1909.
Apr. 28,
1909.
476,527
18, 0 3 2 , 284
7,529.816
2,078,687
2 4 . 9 7 L 147
8.593.570
2,295,700
14.390.114
3.643.366
NATIONAL BANKS.
F e b . 14,
1908.
Number of banks
Capital
Surplus
Due to banks
Individual deposits
United States deposits
Due from banks
Cash in bank
May 14
1908.
July i s .
1908.
312
309
308
$12,215,350
3.063,039
4.416.212
$12,212,700
$12,242,500
3,065,444
3,118,143
38.298,247
1,789,280
14.801,868
38,342.852
5,878,268
4,599.145
1.7i8.337
13.962,536
5,118,691
S e p t . 23,
1908.
298
288
270
$11,890,000
3.102,543
4,070,891
3,988;660
36,142,095
36,820,989
1.751.175
1.697.409
10,844,305
11.398.843
4,426,087
4. 4 7 3 . 543
$n,447.5oo
3.019,723
5,498,125
36,280.346
1.714.831
n.932.340
4,573.o8i
$10,987,500
J u n e 23,
1909.
242
230
$10.140,000
2,849,009
5.405.316
6,253,297
38.994,192
39,716.166
1. 2 1 0 . 4 2 5
1 , 6 2 0 . 135
14.426,383
IS.523.947
4,362,243
4,246.749
$9. 730.000
2.775.489
5,123,122
38,111,948
1. 2 0 3 , 4 1 2
3,091,922
12,901.584
4.373.131
3
State
Banks
and Trust
Companies
After the July statement, the organization of state
banks proceeded rapidly. By June 23 of this year, the
number had further increased 132, and had reached 631.
Many of the new state banks were conversions of national
banks, the number of the latter falling 78 in the same time,
a total loss of 82 since the taking effect of the guaranty
law. Only four national banks, all with the minimum
capital of $25,000 each, were chartered in Oklahoma from
February 14, 1908, to September 7, 1909, while 20 had
been chartered in the year ending October 31, 1907.
The April statements of 1909 showed that the state
banks had overtaken the national banks in individual
deposits, and in the June statements the total deposits of
the state banks, including the deposits of other banks,
were greater than all the deposits in the national banks.
In the state banks, individual deposits alone had grown
under guaranty from $18,000,000 to nearly $43,000,000;
more than double. Of this gain of $25,000,000, about
$7,300,000 came from the conversion of 73 national
banks. In the national banks, individual deposits had
barely held steady. The item "deposits of other banks"
showed a gain. Of course the deposits of the national
banks averaged larger per bank than before, because
there were fewer banks. Capital had measurably kept
pace with deposits, and this item, too, had become larger
in the statements of state banks than in those of the
nationals. The surplus of state banks could not, of
course, increase in proportion to the increase in capital;
the latter being swelled by the organization of new banks,
which would require time to accumulate surpluses.
271
National
Monetary
Commission
Without question the growth of $25,000,000 in the
deposits of the state banks of Oklahoma since the establishment of a system of deposit guaranty had been due
to that guaranty. There have been many attempts to
explain the growth of deposits in other ways, but it can
not be done. It was suggested that the state school fund
of $5,000,000 would account for part of the early growth,
but as early as March 1, 1909, the unexpended portion of
the fund amounted to only $1,187,950, of which $250,000
was in national banks. 0 There has been a tendency to
place other public moneys—state, county, city, and
school district accounts—in the state banks. Such
accounts are not separated from individual deposits on
the statements published by the bank commissioner; but
all the idle public funds of the new State can not amount
to $25,000,000 or any large fraction of it. The State
itself is issuing warrants for expenses, as are some of its
municipal divisions.
The rapid growth of Oklahoma accounts for part of
the gain, but only the state banks as a whole have gained.
It is true that large sums have been received on deposit
from citizens of other States and that $7,000,000 came
with converted national banks, but the outside deposits
and the wholesale conversions of national banks only
demonstrate the strong appeal that deposit insurance
makes to actual and potential depositors. A good deal
of buried money has been dug up and placed in banks.
Some have asserted that deposits have been attracted
by the payment of excessive interest, but the state banks
a
Letter from Bank Commissioner Young to the writer.
272
State
Banks
and Trust
Companies
are probably paying lower rates than are the nationals.
The commissioner informed the writer last March that of
all the national banks converted up to that time, about
40, all but 2 were paying from 5 to 7 per cent on time
deposits. State banks are limited to 4 per cent by the
commissioner, who has power to fix the maximum.
Some state banks would like to pay more to meet the
competition of national banks, and in parts of Oklahoma
5 per cent is not too much to pay in view of economic
conditions; but the commissioner adheres to his position.
Some state banks paid higher rates at first; one paid
8 per cent for a short time until the bank commissioner
heard of it. It is said that some bankers are evading
the commissioner's ruling by paying excessive interest
out of their own pockets, but the commissioner says that
he can not discover that this is done in many cases.a
The practice can not obtain to any important extent.
The following statistics of bank organizations and conversions under the guaranty law will be more readily
appreciated if it is recalled that Oklahoma is a typical
part of the great central region of this country in which
banks of the smallest legal capitalization abound. On
account of the lack of a system of branches, banking
facilities are afforded by banks of $10,000 capital, such
banks being often established in towns of fewer than 100
people. Formerly the new banks frequently had only
$5,000 capital, but with the growth of wealth the States
in this region have generally fixed $10,000 as the minimum capital, and most of the new banks have naturally
a Reply by Bank Commissioner A. M. Young to Prof. W. C. Webster,
Journal of Pol. Econ., July, 1909, p. 463.
59045 0 —11
18
273
National
Mon etar*y
Commission
not exceeded the minimum. Capital is scarce on the
economic frontier ,a
The following information has been derived from the
annual report of the bank commissioner, November i,
1908, and from a list kindly furnished by him of banks
organized since; and by comparing both with the reports
of the Comptroller of the Currency for 1907 and 1908.
From February 14, 1908, to September 1, 1908, 179 state
banks were chartered, including 77 conversions of national
banks. Between November 16, 1907, and November 1,
1908, 19 state banks liquidated, 3 changed location, 2 /
consolidated with other banks, and 2 nationalized. Their
capitals are not stated in the commissioner's report for
1908. Few banks have liquidated or nationalized since.
The 179 state banks had $3,684,000 capital distributed as
follows:
69 had each
37 had each not over
7 had each not over
40 had each
10 had each not over
12 had each not over
2 had each not over
i had
1 had
$10, ooo. oo
15, 000. 00
20, 000. 00
25, 000. 00
35, 000. 00
50,000. 00
61, 000. 00
100, 000. 00
200, 000. 00
The guaranty of deposits did not create the tendency to
small capitalization. Indeed there are rather more new
banks with capital over $10,000 than might have been
expected. For this there are three reasons. Many of the
a
For studies, by the writer, of banking in this region, see The Distribution
of Small Banks in the West, Q. J. E- xii, 70; The Minimum Capital of a National Bank, North American Review, vol. 167, p. 457; The Effect of the
New Currency Law on Banking in the West, Q. J. E. xv, p. 277; Branch
Banking for the West and South, Q. J. E. xviii, p. 97.
274
State
Banks
and
Trust
Companies
banks are conversions of national banks, all of which
before conversion had at least $25,000 capital each. An
unusually large number of banks was established in towns
that already had banks of more than the minimum capitalization. The acts of May 26, 1908, and June 11, 1909,
successively forbade banks of the minimum capitalization,
the former in towns of more than 2,500 population, the
latter in towns of more than 500 population.
The 77 banks converted during the period November
16, 1907, to September 1, 1908, had as national banks
$2,525,000 capital, and as state banks $2,047,000; the
shrinkage illustrating the necessity of economizing capital
in undeveloped or partially developed States. Where
there is so much need of buildings, plows, horses, wagons,
windmills, and cattle, comparatively little can be spared
for banking. Of the 77 institutions that have left the
national system to become state banks, 6 have more capital
than before, 33 have the same capital, and 38 have less.
The conversion of these banks has been the most dramatic feature of the guaranty episode. The national
bankers valued their charters. Many had strained a point
to provide the capital required in the national system in
order to share in the prestige that national banks have to
this time enjoyed.
Newcomers to the State, however—and newcomers are
many, for Oklahoma is growing fast—instead of depositing
in national banks, which they would have preferred a short
time ago, have sought out the state banks. In spite of
this, few banks converted until their own business, the
result sometimes of years of effort, began to slip away.
275
National
Monetary
Commission
Quite a few national bankers organized state banks to hold
the business of those customers who wanted their deposits
guaranteed. The national charters, valued from considerations of business and sentiment, were not surrendered,
but the national and state banks were operated under the
same management, side by side. The state banking board
is no longer authorizing the organization of state banks in
such cases, but can not refuse the owners of an old charter
permission to resume business. The Guthrie National
Bank, owning an old territorial charter, reopened the old
Bank of Indian Territory August 16, 1909, in the building
in which its own offices are. One Oklahoma national
banker to whom the writer applied for information in
March of this year, answered with a criticism of the origin
of the guaranty bill. Answering another letter in May,
the same banker wrote:
To begin with, you will note from the above letter head t h a t we have
surrendered our national charter and taken out a state charter here. This,
of course, is because of the guaranty law. * * *
I have not changed in my ideas. I believe as firmly as ever t h a t it is
wrong—unsound economically—and that it can not last. I believe t h a t
some day the whole idea will go up in smoke, just as other foolish notions
originated for their popularity have gone.
But, from a practical standpoint, it is a difficult matter for a bank in a
country community, especially where the banker is practically a stranger,
to stand out against. There is no question but t h a t the farmers and
many others—many of whom ought to understand better—do believe in
the idea, and they deposit their funds where the guaranty will protect
them. We found that in many instances customers who were under
obligations to us, men who actually owed us at the time, were carrying
small accounts at the state banks, and have had them send us a check
on a state bank to pay interest on a note we were carrying, asking at the
same time for a renewal. I have had customers tell me, with an apology,
that, to satisfy, perhaps, their wife, they have opened a silent account at a
276
State
Banks
and Trust
Companies
state bank, still checking on us because their treatment here had been
such that they were ashamed to openly hold the account at another bank.
These and other instances induced me to make a very careful inquiry
among all kinds of people, asking them in frankness their ideas, and almost
to a man they favor the guaranty.
Theoretically, it is wrong; fundamentally, it is wrong; economically,
it is unsound, and, therefore, wrong; but practically, in a country community, at least, it is popular, and we felt that it was best to convert.
In this connection, however, let me say that the legislature at its last
session amended and modified the law, limiting the amount which may
be assessed against a bank in any given year, and thus took away the most
dangerous feature of the old law—the unlimited liability.
There are a number of cases of sales of national banks
to men who were entire strangers to the communities
in which the banks were located, but who, by converting
the banks to state banks under the guaranty law, greatly
increased their business.
The letter just quoted is typical. When a depositinsurance law was passed in Kansas this year the National
Bank of America, of Salina, Kans., a large and strong
bank, wrote each national bank in Oklahoma for its
experience in competing with guaranteed banks. The
replies were so interesting that the bank published 214,
practically all of them, in a pamphlet. A number of the
banks had been converted into state banks before answering. One bank wrote:
For quite a while we asked nearly every farmer that came in what he
thought about the guaranty law, and almost without exception every one
said he would just a little bit rather have the money in a guaranteed bank
than in a national bank, and we have had several good-sized deposits
brought in solely because we were a state bank and they considered their
deposits guaranteed.**
<* Letters from National Banks in Oklahoma upon the Guarantee Law,
p . 36.
277
National
Monetary
Commission
Another said:
The national bank (here) has always been the stronger bank and always
had the larger deposit. In fact the " p a n i c " left the state bank in a very
dilapidated condition. The State passed the guaranty law and from t h a t
time on the state bank has gained rapidly and the national bank stood still.
We boasted of our strength and standing in the community, but we find
t h a t " strength and personality" cut no ice, and the bank with the guaranty
will take your business in spite of every effort. We did not like the idea,
b u t when we saw how things were going we surrendered our national charter
and became a state bank. We are glad we did it and have checked the business that seemed slowly b u t surely going to the other bank.
Our experience teaches us t h a t the guaranty is a deposit getter. I t is
so, especially with newcomers. I t will not affect your old-line customers,
but all transient business and all incoming business will line up with the
guaranty.
The guaranty will cause your time-deposit account to increase, and as an
advertisement there is no better theme to work on.°
The following are quotations from letters of national
banks that did not liquidate:
The state bank has gotten some business which none of the banks here
had. This is always the case with a new bank.&
While the state bank has increased its deposits it is from money t h a t has
been hidden away and buried that the guaranty has helped to bring from
hiding, c
The fellow who comes from Iowa, Illinois, Nebraska, or Minnesota seems
to look at the word " guaranty " as something to conjure with and I have no
doubt but we lose business of that kind.^
Customers of the national banks would open an account with the guaranty bank with the proceeds of the sale of crops, etc., and keep on checking
on the nationals until their balances were so small that they did not amount
to much, and the outcome is that the deposits have decreased. e
I for one would make the change at the earliest possible time t h a t I could.
o Letters from National Banks in Oklahoma, p. 37.
& Ibid., 26.
c Ibid., 8.
d
Ibid., 32.
e
Ibid., 35.
278
State
Banks
and Trust
Companies
We have done well and we can not see that we have lost much business
since the opening of the guaranty bank here, but there is always a dread
feeling that you have that you fear that you will lose business by having
such a law and you never get over it and sometimes that feeling almost
runs into a fever from the moves of some of your good customers, and you
have got to have a lookout all the time and two or three night watchmen on
duty every night, and they have got to be friends outside and not shareholders, and that puts you under everlasting obligations to these outside
fellows and, therefore, if we could call back one year I would insist on
taking out a state guaranteed bank. There is too much work attached to
it now; you just simply work day and night to hold your business, and while
I am up at nights doing something for my trade my competitor is at home
sleeping, and I don't like that. We have not changed and I don't know
that we will, but if I had it to do over I would recommend a change.
Now, we are in a little town, and that makes a big difference, because
the customers you have are nearly all country people and they like the word
guaranty written upon everything—upon their shoes, and upon the meat,
and everything else, whether it is worth anything or not they like it, and
some of them will look up excuses in some other way to quit you and will
magnify your faults and everything else will come up that you can not now
think about. a
Hoping that the National Government would give us some relief, we failed
to [convert].&
We have no intention of giving up the national here, although most of the
stockholders as well as myself are Democrats, and this is one of our state's
Democratic p e t s . c
If ever three or four good-sized state banks fail, there will be a run on all
the others and there won't even be Democratic politicians enough in Oklahoma to collect the guaranty fund.^
About the only class of people that we lost were a few Democrats. e
In communities which are strongly Democratic some national banks have
surrendered their charters, have taken out state charters, and have pushed
the guaranty feature with great energy, appealing to the people upon the
a Letters from National Banks in Oklahoma, p. 38.
& Ibid., 38.
c Ibid., 5.
d Ibid., 15.
«Ibid., 19.
279
National
Monetary
Commission
ground of supposed added safety, and also appealing to their political
loyalty, the guaranty feature here being strongly a Democratic creation.^
I n small towns there can be no question that it had affected the business
of national banks, but in the larger places it has made no particular difference. Our business has grown very materially since the guaranty law has
been in force, and this is largely true of all national banks in the larger
places of Oklahoma.^
No; I would stay under the Stars and Stripes with my national bank
charter, c
In publishing the letters, the National Bank of America,
of Salina, said:
These replies so strongly substantiate our own preconceived opinion
that a strong national will not suffer more than a temporary loss of business that we send out them t o encourage others.**
This conclusion is generally correct as to the older banks
and larger towns, although there are important exceptions. It is suggested by a large number of the letters,
and is confirmed by examination of the statements of
national banks in such towns, but it is evident that in
the smaller towns the depositors now want their deposits
guaranteed or insured. This was a plank in the national
platform of the Democratic party in 1908. It is the
fashion to say that political feeling has died out in this
country, but Oklahoma, settled from older States, is in
many ways typical of the Mississippi River States twentyfive years ago, and party feeling is intense. Some of the
extracts just quoted show that many regard guaranty
as a Democratic rather than as a financial policy. All
through the campaign of 1908, in Oklahoma, stump
« Letters from National Banks in Oklahoma, 21.
6 Ibid., 2.
clbid., 25.
<*Ibid., 1.
280
State
Banks
and Trust
Companies
speakers argued the guaranty of bank deposits. Comparisons were drawn, not always by politicians, between
the misery that followed specific bank failures in other
States, and the orderly payment depositors were promised under the Oklahoma guaranty.
Indeed, there was an Oklahoma instance. The International Bank of Coalgate, one of the banks "not in harmony with every provision of the banking laws" when
the guaranty went into effect, and whose condition,
although apparently somewhat improved, had not been
made satisfactory to the bank commissioner, was closed
May 21, 1908. Depositors were paid in full by the use
of part of the guaranty fund. The bank proved to be
solvent, the fund was reimbursed from the assets, and the
bank was reorganized under new management. It has
been alleged that it was closed to furnish a demonstration
for the Democratic national convention at Denver. Be
that as it may, the management had, after repeated warning, failed to correct objectionable conditions and the
closing was doubtless legally warranted. There has been
since the first of this year a magazine at Vinita, Okla., the
"Bank Deposit Guarantee Journal/' which has made frequent use of this episode. It prints a picture of a farmer
and his wife before the bank, on the door of which is the
notice of the bank commissioner asking depositors to
please call for their money. In juxtaposition, is a mob
besieging the doors of a closed bank in some other State
or a laboring man heartbroken over the loss of his savings.
Such pictures, and the talk they suggest (accounts in
country banks are much influenced by talk) must have
been effective.
281
National
Monetary
Commission
The case of the Columbia Bank and Trust Company of
Oklahoma City, the largest state bank in Oklahoma,
which closed September 29, 1909, will be discussed in the
next number of this journal.
The panic was scarcely over when the campaign of 1908
began, and, between politics and finance, the laboring
men and farmers and many business men were convinced
of the desirability of a fund, administered by the State,
to guarantee bank deposits. This is why national banks
in the small towns lost business and converted. This is
why the state banks gained so largely in number and
business. Whether the gains under the system will be
permanent can best be discussed after considering the
course of the deposit insurance movement in other States.
With State banks gaining on the national banks, and
passing them in total business, there has developed some
ill feeling. The national bankers have resented the implication in much of the talk and advertising that state banks
are safer than theirs, and have bitterly criticised the law
as worthless and dangerous. Each class of bankers has
thought that the other was using improper arguments.
This feeling has partially disrupted the Oklahoma Bankers' Association. This organization has been most useful,
not only in looking out for the banks in general ways, but
in furnishing burglary insurance, fire insurance, and officers'
bonds, through arrangement with various insurance organizations. The state bankers, feeling that after the establishment of the guaranty system their interests were no
longer identical with those of the national banks, organized
a "State bankers" section of the association, which met
282
State
Banks
and Trust
Companies
last May at Enid, a day before the convention of the association proper. State banks may belong to the section
without belonging to the parent association. The bankers'
associations of the various States arouse in their members
the sentiment of patriotism, for the associations have been
built up by hard work, are of great use to the banking
interests, and have led to the formation of life-long friendships among those engaged in their official or committee
work. Many bankers of Oklahoma naturally regret the
appearance of disruptive tendencies in the original association. The feeling between national and state bankers has
been heightened by the course of the bank commissioner.
This year Mr. A. M. Young succeeded Mr. H. H. Smock
in the office. Mr. Young believes in the state banking
system, and its method of deposit insurance. He has not
confined himself to the mere supervision of the state banks,
but has naturally interested himself to advance the state
system by bringing as many banks as possible into it. For
this he has been unjustly blamed.
All the States that have adopted deposit guaranty or
deposit insurance have made their banking laws more
strict. In the guaranty act, Oklahoma required bank
directors to own at least $500 stock, free of pledge. The
amount is small, but the requirement is a decided step
forward. The same act also prohibited active officers from
borrowing from their own banks, and provided for their
removal at the instance of the commissioner for dishonesty,
recklessness, or incompetency.
The later act, effective June 11, 1909, permits banks to
receive individual deposits to the amount of ten times their
283
National
Monetary
Commission
capital and surplus, and requires them, when deposits come
to exceed that amount to increase capital or surplus, or
to cease receiving deposits. The capital required by law
in new banks had varied according to population. This act
has changed the classification of towns and cities with the
effect of considerably increasing the capital requirement.
This act changed the protection of deposits from
guaranty to insurance. Not a few state bankers had been
restive under the feeling that they were guarantors of all
the deposits of all the other state banks. National
bankers had argued, that because of this liability, state
banks were not so safe as nationals. The new law, therefore, limited to 2 per cent of deposits the emergency assessments that might be levied in any one year. The regular
assessment is 1 per cent of deposits the first year, and onefourth of 1 per cent each year thereafter, until a fund
equal to 5 per cent of the deposits is accumulated. The
emergency assessments are to keep this fund up to 5 per
cent. If fund and assessments are ever insufficient to pay
depositors of failed banks, 6 per cent certificates of indebtedness are to be issued, and paid in the order of their issue.
At the time of the enactment of the first guaranty law
the bank commissioner was Mr. H. H. Smock, an experienced and successful official. Last January he resigned
•to become vice-president of the Columbia Bank and Trust
Company, of Oklahoma City, an institution to be mentioned later. He was succeeded by Mr. A. M. Young, also
an able commissioner. Under both the administration of
the banking department has been vigilant. The right to
require the resignation of undesirable bank officers has
been used. The selection of reserve agents for state banks
284
State
Banks
and Trust
Companies
has been supervised. National banks that pay higher
interest than Oklahoma state banks are allowed to pay
are not permitted to act as reserve agents. This ruling
is made partly to prevent a form of competition particularly annoying to state banks, which are legally unable
to meet it. We shall meet with this situation in Kansas.
Both Mr. Smock and Mr. Young have required evidence
of experience, character, and ability in the proposed management before authorizing the opening of new banks.
Both have refused authority for banks at points that in
their opinion already had-adequate facilities, following in
this the practice of the Comptroller of the Currency. In
one case a writ of mandamus was obtained to compel the
issuance of a certificate of authority to transact business, but
notwithstanding this decision against it, the commissioner's
office still declines to authorize banks where in its opinion
they are not needed. Very rarely can the organizers of a
bank proceed successfully against official disapproval.
The Oklahoma experiment of deposit guaranty has
been tried with faithful purpose to make it succeed, and
to do away with the paralysis of trade and the human
misery that have followed bank failures.
We leave the subject for the present, at a time when
the system is undergoing the severest possible test
through the closing of the largest bank in the system.
Some such early shock was not altogether unexpected
from the general conditions. When we resume in the
next number the relation of the Oklahoma experiment
and compare it with those of other States, the course of
events may make clear certain conclusions we should
now have to reach by long inferences.
285
National
Monetary
Commission
II. a
The compulsory insurance of deposits in Oklahoma state
banks began in February, 1908. Within a year and a half
the state banks had grown marvelously in number and deposits, while the national banks had decreased in number
and remained stationary in deposits. Then the Columbia
Bank and Trust Company failed, with the largest deposits
in Oklahoma, and this was a state bank.
Only a faint idea can here be given of the recriminations
that have ensued. The national banks have been unfairly
charged with having allowed the Columbia Bank and Trust
Company to fail when they might have saved it, and with
gloating over the failure afterwards. On the other hand,
opponents of the deposit insurance system have accused
state officials of indiscreet relations with the Columbia
Bank and Trust Company, have accused the state banking
board of favoritism in the liquidation, and Governor Haskell with preventing investigation of the causes of failure.6
Republicans have bitterly assailed the Democratic state
administration over the failure and liquidation, and the
administration has fervidly answered. The governor and
the attorney-general have quarreled. Litigation has been
instituted by some depositors and surety companies. Just
what caused the failure has not been told, but the course
of events, in so far as they bear upon deposit insurance,
is now reasonably clear.
The Columbia Bank and Trust Company was organized
in 1905, and its career for several years was uneventful.
In October, 1908, control was obtained by W. L. Norton.
« The Quarterly Journal of Economics, February, 1910.
b For the governor's explanation see p. 298, infra.
286
State
Banks
and
Trust
Companies
Mr. Norton had been an active investor in the gas and oil
field of eastern Oklahoma and was supposed to be a wealthy
man. Besides his oil and gas investments, and the Columbia Bank and Trust Company, he was heavily interested in
many other Oklahoma banks, both state and national.
The capital of the Columbia Bank and Trust Company
was $200,000. Its statement of September 23, 1908,
showed deposits of $365,000, of which $110,000 was due
to banks. The remarkable growth of its deposits thereafter
is shown by the following figures:
September 23, 1908
November 27, 1908
February 5, 1909
April 28, 1909
June 23, 1909
September 1, 1909
$365, 686. 01
602, 529. 90
1,111, 805. 64
1, 721, 039. 70
2, 345, 100. 33
2, 806,008. 61
The deposits of September 1, 1909, were classified as—
Individual deposits
State treasurer's deposit
Bank deposits
$1, 321, 929. 31
172, 383. 13
1,311, 696 17
In less than a year, therefore, the individual deposits
had increased from $255,000 to $1,300,000, and the bank
deposits from $110,000 to $1,300,000; a growth astonishing even in Oklahoma.
At this time opinions about Mr. Norton differed widely.
Some bankers considered him a successful business man,
worth $1,000,000. Others regarded him as perhaps
successful, but a plunger, and had nothing to do with his
banks.
The closing of the bank was imminent some days
before it occurred. A large amount of currency was
rushed to the other Oklahoma City banks to save the
287
National
Monetary
Commission
situation if alarm should spread. The Oklahoma City
clearing-house banks offered to lend $250,000 or more in
cash, if good security could be given them, and if such
assistance would save the bank. This offer was declined
by the bank commissioner, who took charge of the bank
on the night of September 28, 1909, and opened the doors
next morning to pay off the depositors as provided by the
guaranty law.
Several hundred people assembled, but there was no
such excitement as would attend the closing of so large a
bank whose deposits were not insured. The commissioner
began to pay depositors at once, and announced that,
beyond question, all would be paid in full. This was a
good deal to say, as there was at the time only about
$400,000 in the guaranty fund, but the fact that payments
were actually going on reassured most depositors.
The liabilities to be liquidated September 28, 1909,
were:
Individual deposits
Savings deposits
Certificates of deposit
Bank deposits
Cashier's checks
Certified checks
$ i , 165, 747. 42
75,061. 36
353, 184. 86
1, 293, 385. 73
10, 090. 96
3, 577. 60
a
Total
2, 901, 047. 93
The amount of cash and sight exchange is not given in
the commissioner's statement. On September i, 1909,
it was shown as $1,134,981.95. Whatever it was September 28, it was far too little to pay the depositors, even
with the whole of the guaranty fund added. The annual
a
Statement of Bank Commissioner Young, October 30, 1909, to state
banking board; Oklahoma Banker, vol. i, p. 136.
288
State
Banks
and Trust
Companies
assessment for the fund of one-quarter of i per cent of
deposits had recently been collected.
It will be remembered that, under the Oklahoma law,
emergency assessments may be made any year up to 2
per cent of deposits. The emergency assessment in this
case was, however, fixed at three-quarters of 1 per cent
of the average deposits of 1908. Under this assessment,
the state banks of Oklahoma had to pay $248,000.°
Many state bankers were incensed at the failure and at the
relations that were said to have existed between state
officials and the bank. There was talk of resisting the
assessment, but no banker cared to refuse payment at
the risk of having his bank closed. Governor Haskell
says, indeed, that only eleven protests were received.6
That there was discontent is shown by the fact that the
eastern group of the State Bankers' section of the Oklahoma Bankers' Association met at Tulsa about a month
after the failure of the Columbia Bank and Trust Company and adopted resolutions urging changes in the guaranty law.c
« Bank Deposit Guarantee Journal, December, 1909, p. 35.
& The Commoner, Lincoln, Nebr., vol. ix, No. 48, p. 2.
c The changes proposed were:
First. T h a t the state banking board be abolished and that the management and control of the guaranty fund be placed in the hands of the state
bank commissioner.
Second. T h a t the guaranty fund be redeposited with the banks from
which it originated without interest.
Third. That the State bear the expense of maintaining and operating
the guaranty fund.
Fourth. That upon the liquidation of any bank, this bank shall take
over as an asset 90 per cent of the unused portion of the guaranty fund
contributed by it.
The first and fourth changes might be desirable. The others would be
mistakes.
59045°—11
19
289
National
Monetary
Commission
We have seen that the bank commissioner, acting for
the state banking board, began to pay depositors on the
morning after taking charge. Yet the resources of the
Columbia Bank and Trust Company and of the guaranty
fund together were not nearly enough to go around; and
he could not possibly have known how much the loss on
the loans and investments of the bank would prove to be.
Such procedure can be justified only by success, if at all.
It was decided to pay the individual depositors first,
but even they could not all be paid at once, and charges
of discrimination were inevitable. The small or moderate
accounts were, in the main, paid promptly. The accounts
of banks were larger, and only such as could make a
showing of need were taken care of at first. No bank
seems to have been in jeopardy because of the tie up of its
account in the Columbia. Legal proceedings asking
that a receiver be appointed to wind up the bank in the
old-fashioned way were begun in two cases. One case
was over a disputed claim, and the United States court
denied the petition for a receiver. The other case was
that of a depositor aggrieved by having payment of his
large deposit postponed in favor of smaller ones. The
deposit was paid, however, and the proceedings were
dismissed.
The bank commissioner's statement of October 30,
1909, a month after the failure, showed $411,000 of
deposits still unpaid, not including the school land fund
account, secured by collateral and by surety company
bonds, nor $20,000 due to the treasurer of Oklahoma
County. The unpaid deposits of banks were $262,000,
290
State
Banks
and
Trust
Compantes
while the unpaid individual and savings accounts, certificates of deposit, and miscellaneous items had been
reduced to $149,000. This is an extraordinary showing,
probably without a parallel. The deposit of the state
treasurer, amounting to $189,000, had been paid by the
sale of collateral held to secure it. Other securities
owned by the bank had been marketed, collections had
been pushed, and $503,000 of the guaranty fund had
been used. The total expense of the liquidation had
been only $2,400, again a remarkable showing.
Besides the deposits, the bank owed $210,000 which
the bank commissioner considered not a charge on the
guaranty fund—either public deposits secured by surety
company bonds and collateral,a or amounts actually paid
on behalf of the bank by surety companies liable on such
deposits. The district court at Oklahoma City has since
ruled that the commissioner is wrong, and that these
liabilities are a charge on the guaranty fund.
To this item of
Add unpaid deposits
Add amount due guaranty fund
$210, 000. 00
411, 675. 41
503, 725. 25
And we have the bank's total liabilities October 30,
1908
1, 128, 400. 66
Mr. Norton and others had been induced to turn over
to the state banking board notes, bonds, real estate, and
a
There is no good ground for the statement that Oklahoma is inconsistent
in requiring banks to furnish security other than the guaranty fund to
protect deposits of public funds. Such deposits are large enough to increase unduly, if special security be not required, the amount at the risk
of the guaranty fund in single institutions. This is particularly true of
the deposit of the guaranty fund itself. I t would be unwise to let the
fund secure itself. Cf. what is said on this subject in the account of the
Texas and Nebraska laws, below, pp. 316, 324.
291
National
Monetary
Commission
oil-producing properties valued at $563,600. These will
have been a most important aid to the liquidation unless
the board shall be compelled to surrender them in bankruptcy proceedings that have been threatened in connection with another failure, to be mentioned later. Besides
the securities received from Mr. Norton, the bank commissioner had on hand October 30 assets of the bank of
the nominal value of $1,199,600.63, making total of
$1,763,200.63. A shrinkage of over $600,000 could occur
and still leave enough to repay the depositors, repay the
guaranty fund, and repay to the banks the emergency
assessment they had paid. The bank commissioner
announced that the assessment would be repaid, and
authorized such banks as wished to do so to carry it on
their books and in their official statements as an amount
' 'loaned to the State.'' The repayment of this "loan"
depends on many things, and in the meantime it is an
asset of problematical value. In many cases three-fourths
of 1 per cent of deposits is 3 per cent of capital. To charge
off the assessment would have meant to some banks
passing the next semiannual dividend and would have
made the guaranty law decidedly unpopular with their
stockholders. While not at this time a vital matter, it
would seem that it is a mistake of principle to try to make
the assessment palatable by allowing it to be carried as a
loan instead of ordering it charged off at once.
The liquidation of the bank proceeded rapidly. On
November 13 (1909) the commissioner said in a letter to
the writer that the amount due to banks had been reduced
from $1,300,000 at the time of the failure to $190,000.
292
State
Banks
and Trust
Companies
In an address at Sulphur, Okla., on December 6, the commissioner said that the bank still owed only 39 Oklahoma
banks and that the state banking board had then on hand
sufficient cash to pay all individual depositors and all
holders of certificates of deposit. The unpaid certificates
of deposit amounted to $27,500, and the holders of these
had been satisfied with "gilt edge" paper.
Prior to the failure of the Columbia Bank and Trust
Company Mr. Norton was apparently disposing of other
banks he controlled. Among these was the Farmers
National Bank of Tulsa, of which E. F. Blaise was president. About the middle of December the bank was
closed, because, according to Mr. Blaise, of large indebtedness of Mr. Norton to the bank. Mr. Norton, according
to press dispatches, denied that he owed the bank individually, and declined to say whether oil companies in
which he was interested owed the bank or not.
The First State Bank of Kiefer was under allied
management, and having $30,000 on deposit in the
Tulsa bank, was carried down by the failure. Its
deposits of $78,000 were promptly paid with the use
of about $40,000 of the state guaranty fund.
Mr. Blaise asserted that unless Mr. Norton's indebtedness to the Tulsa bank was made good, bankruptcy
proceedings would be instituted against Mr. Norton on
the theory, doubtless, that in turning over securities to
the state banking board Mr. Norton was preferring the
Columbia Bank and Trust Company to other creditors in
a manner open to attack under the United States bankruptcy law. The bank commissioner advised Mr. Blaise
293
National
Monetary
Commission
not to institute proceedings, and he has not done so.
Should he do so successfully, the $563,600 of securities
turned over by Mr. Norton would have to be surrendered,
and it might be impossible for the bank commissioner
to reimburse the guaranty fund. Another emergency
assessment on the state banks might even be necessary.
Another legal question that may involve the same
possibilities has been mentioned above. It was the
theory of the bank commissioner that public deposits
secured by bonds executed by surety companies were
excepted from the operation of the guaranty law, and
were not insured by the guaranty fund. No such exception appears in the guaranty law; and surety companies
that had furnished bonds covering the deposits by the
land commissioner's office in the Columbia Bank sought
to have the bank commissioner restrained from repaying
the state guaranty fund until he had paid the land commissioner's office its deposits pro rata with payments
made to other depositors. Such an order was made by the
district court at Oklahoma City. The principle involved
applies to all public deposits secured by surety bonds,
and if the decision is sustained by the Supreme Court,
the full repayment of the emergency assessment will
probably have to be postponed and perhaps abandoned.
Was the insurance of deposits to blame for the
failure of the largest bank in Oklahoma? A national
bank, we have seen, was carried down by similar bad
management, and it is an open secret that still another
national bank, of which Mr. Norton was president for
several years, had to be taken over last fall by a new
294
State
Banks
and Trust
Companies
bank, under a new name and charter. Obviously, the
Oklahoma insurance plan was not responsible for the
misfortunes of these national banks. Yet it can not be
relieved of all responsibility for the Oklahoma City failure. The case was of the sort familiar enough (as New
York City can witness) where control of a bank was
bought by a man who, whatever his capacity for other
business, ought not to have engaged in banking at all.
His policies were unwisely liberal. For instance, in a
number of cases he offered to receive from large institution in other cities all their checks on Oklahoma points,
enter credit to such institutions at par, and remit at par
a week later. Now, the exchange charges of Oklahoma
country banks are usually considerable, and a week is
scarcely more than enough to send checks and receive
payment by mail. The Columbia Bank and Trust Company was probably losing money on the proposition, besides inflating its deposit and cash accounts in a way deceptive even to itself.
This is a minor matter, however, in comparison with
the loans and overdrafts. The overdrafts when the bank
commissioner took charge were $200,000. The total
losses incurred by the bank have been estimated by the
bank commissioner at $400,000 and by the Oklahoma
City Times at $800,000.
Now, a liberal or reckless bank policy frequently
attracts extensive deposits, and the business of the
Columbia Bank and Trust Company would have grown
a good deal under Norton's management even without
deposit insurance. This insurance, however, made the
295
National
Monetary
Commission
growth faster and larger. Relying upon the insurance,
Oklahoma banks, and outside banks too, felt safe in
carrying deposit accounts with the Columbia, and in
taking advantage of its liberality in collecting country
checks at par. Outside of Oklahoma the bank advertised widely. The writer spent the summer vacation on
Lake Ontario, and in the Rochester paper read every
Sunday the advertisement of the Columbia Bank and
Trust Company for deposits at 4 per cent, " deposits
guaranteed by the law of Oklahoma/' Such advertising
drew a good deal of outside money into the Columbia.
It is evident, then, that, just as critics predicted, the
insurance of deposits has made it easier for an incompetent management to get deposits. The insurance system
is not responsible for the failure of the Columbia Bank
and Trust Company, but it is responsible for the magnitude of it.
In theoretical discussions of the subject it is often
suggested that under state-administered insurance of
bank deposits failures will be exceedingly rare, because,
it is argued, official supervision will be more strict, and
self-interest will cause the banks to keep effective watch
of each other's business. There is something in these
suggestions, but it would not be safe to let them determine a legislative policy. Banks know about some of
each other's loans, but by no means about all. If the
mutual supervision of bankers is wanted it can be exercised effectively only through examiners reporting to a
committee of the bankers themselves. Such a system
has been adopted of late years in several clearing-house
296
State
Banks
and Trust
Companies
cities. Oklahoma City has adopted it since the failure,
and one of Commissioner Young's examiners has resigned
to become the Oklahoma City clearing-house examiner.
It has been proposed to extend the system over whole
States, as in itself a safeguard to depositors. The mutual
watchfulness of bankers did not save the Columbia Bank
and Trust Company, nor was state supervision under the
insurance plan strict enough to save it. The bank had,
indeed, been examined, the commissioner says, by two
of his best deputies only about sixty days before the
failure, and had been found in good conditions Governor Haskell believes that the principal losses occurred
within one month of the closing of the bank. This
proves, if proof be needed, that no supervision can prevent the failure of bankers so unfortunate or imprudent
as to make a quantity of bad investments in a short time.
It is alleged that the Columbia Bank and Trust Company was in politics, and that for this the insurance plan
is to blame. The state treasurer, James Menefee, held
$25,000 of the capital stock. In buying stock Mr. Menefee
gave three notes of $10,000 each to the seller, who turned
over at least two of them to the Columbia Bank and
Trust Company. They were in the bank at the time of
the failure, neither being due. One has since been paid.
The state treasurer, a stockholder, and in this manner a
debtor of the bank, had on deposit there when it failed
$189,000, and as treasurer of the state banking board
$76,000 more, secured as stated above. An appointive
state officer is said to have owed the Columbia Bank and
a
Oklahoma Banker, vol. 1, p. 166.
297
National
Monetary
Commission
Trust Company about $6,000 to within a few days of the
failure, when he learned of the bank's trouble and paid'
up. The Oklahoma City Times charged that Mr. Norton
gave another banker $5,000 to " square things " with the
banking authorities. The paper admitted t&at "things"
were not " squared/' and that the attorney for the state
banking board made the banker turn the money into the
assets of the bank. All this makes a bad mess, but there
have been pet banks here and there since Andrew Jackson's time. Perhaps the Oklahoma state administration
was glad to further what seemed to be a conspicuous
example of the successful growth of banks under the
guaranty law, and perhaps state officials got personal
favors of the bank, but to blame the state guaranty
system for these personal entanglements is too far-fetched.
At any rate, the political objection is not fundamental.
There is no reason why politics can not be as completely
eliminated from the banking department of a State that
insures deposits as from the same department in a State
that does not.
The attorney-general recently began a grand jury investigation of the failure, and the governor stopped him.
The governor was charged with playing politics again, and
with stopping the proceedings to save somebody connected
with the state administration. His answer was that such
an investigation would interfere with the liquidation of
the bank; that he wanted to collect what he could for the
bank first and let the grand jury investigate the failure
afterwards. This seems reasonable.
The Oklahoma experiment raises another question as
to the practicability of state insurance of deposits, far
298
State
Banks
and Trust
Companies
more serious than the question of politics, more serious
even than the stimulus to recklessly managed banks.
This is the question of the size of single risks.
On June 23, 1909, the total deposits in Oklahoma state
banks were about $47,000,000. The deposits of the
Columbia Bank and Trust Company at the time of failure
were about $3,000,000, or 6 per cent of the total amount
at risk. What would happen to a fire insurance company
that ran its business so ? There is of course usually more
salvage after a great bank failure than after a great fire,
but it takes time to realize on the salvage. The Oklahoma experiment has shown that although depositors in
failed banks may be paid rapidly if the authorities can
exercise discretion as to whom to pay, payment immediately upon a failure can not be promised.
It took only one failure to show this, and another great
failure might have broken the Oklahoma system down.
What would have happened if another large bank had
failed soon after the Columbia Bank and Trust Company,
and if its president had not been able to turn over valuable securities? Another assessment would have been
necessary to pay depositors immediately, as provided by
law. Would the banks, already smarting under an assessment that absorbed a dividend, have paid another assessment without a fight? Probably not. If they had been
forced to pay, would not sympathy for the banks have led
to the repeal of the law ? Probably it would. The Oklahoma plan can not be a success until a guaranty fund has
become very large. Until then the plan is not insurance,
because there is no proper distribution of risks. It is
299
National
Monetary
Commission
wagering that there will not be enough failures of big institutions to upset the guaranty plan before the necessary
reserve has been accumulated. The wager may be successful. Apart from the observed tendency to stimulate
improper banking, the statistics of bank failures indicate
that it would be successful. There is no certainty about
it, however.
Fire-insurance companies pay losses only after the
amount of salvage has been ascertained or closely estimated. Could a state deposit insurance plan be operated
successfully on the same principle? Depositors would
probably be satisfied with negotiable certificates, bearing
interest while liquidation was going on, just as the notes
of Canadian banks draw interest after failure. If the
guaranty were good, such certificates would doubtless be
purchased or accepted as collateral by other banks.
To some extent the fact that no state-administered
deposit-insurance scheme can limit the size of risks
would jeopardize even a system of payment after
liquidation; but such a system would have more chance
of success than the scheme of paying as soon as a failure
occurs. The salvage in national-bank failures averages
82 per cent of the deposits a and should be as much in
Oklahoma. Perhaps the Oklahoma plan, modified as
here suggested, might be a success. Big failures, however, are always possible anywhere, and there would be for
many years the possibility of a breakdown, since no stateadministered deposit-insurance system can limit the size
of risks. For the present the success of the Oklahoma
a
Report of Comptroller of the Currency, 1908, p. 86.
300
State
Banks
and Trust
Companies
plan will be dependent on good luck. It takes seventeen
years to accumulate the fund of 5 per cent of deposits provided for by the guaranty law, and, in view of the large
deposits to be insured in single banks, it is doubtful if even a
5 per cent fund would always be adequate to the immediate
payment of depositors. If further heavy losses do not
occur for a number of years, the guaranty fund may grow
into a sufficient reserve. Until then the plan will be an
experiment only. The objection of the size of particular
risks is inseparable from state-administered deposit insurance, and can be overcome only by engaging private enterprise in the deposit-insurance business.
After the levy of the emergency assessment there was a
good deal of talk of the conversion of state banks into
national banks to escape future experiences of the kind.
The office of the Comptroller of the Currency informs the
writer that it is not practicable to announce how many
state banks have applied for authority to convert. The
bank commissioner of Oklahoma says the number is two,
and two reorganizations or conversions are all that the
writer has noticed in the press dispatches, one at Oklahoma City and one at Enid, the latter being a reconversion of a state bank that had formerly been a national
bank. Five national banks were converted into state
institutions between September 1 and November 16,
1909. The state banks continue popular, as would be
expected after the apparent success of the insurance plan
exhibited in the liquidation of $3,000,000 of deposits.
The following table shows that the decrease in the number
301
National
Monetary
Commission
of national banks and the increase in the number of state
banks continue.
STATE BANKS.
J u n e 2 3 , 1909.
September 1.
1909.
631
646
$44,777,259
(a)
66a
$49,775,433
$54,963,266
225
$37,726,265
$43,878,444
$41,617,228
$50,666,687
Number
T o t a l deposits
$42,722,927
$47,147,062
November 16,
1909.
NATIONAL BANKS.
Number.
Individual deposits
Total deposits
230
$38,111,948
$44,4So,7S9
o Not ascertained.
There were early predictions of disaster on account of the
organization of small banks in such large numbers, but
these banks seem to be getting on. A western country
bank can pay expenses if it can obtain $20,000 of deposits,
and in a growing country the future of such a bank is
reasonably sure. If some banks have been opened where
not required, they will consolidate with others or will
liquidate. Their passing will not cause disturbance. Nor
has there been any general development of rascality. It
may be that here and there is a banker whose antecedents
are bad. It is now more difficult than ever for a man of
bad record to get into the banking business in Oklahoma.
Perhaps there are such in a few Oklahoma banks already;
Oklahoma is a new country, and it would be strange if an
occasional rascal did not come in. The writer speaks from
personal knowledge, however, in stating that Oklahoma
bankers, taken by and large, are competent, and men of
character.
302
State
Banks
and
Trust
Companies
The failure of one or two banks does not disprove the
theory of state-administered deposit insurance, nor does
their successful liquidation prove it. The study of the
Oklahoma experiment, however, gives us some conclusions
of vital importance:
I. There is need of greater assurance of the safety of
deposits than is afforded by mere inspection and supervision. Given assurance which it considers adequate, the
public will make greater use of banks, and more banks will
be established. We shall consider later how widely this
conclusion is valid.
II. The State can not undertake to pay deposits in full
as soon as a bank closes.
III. The insurance of bank deposits assists the growth
of bad banks as well as good.
IV. Under a State deposit insurance system the risk that
will be assumed on a single bank can not be limited.
These results will be useful in the consideration of the
subject as a whole, after the experiments in other States
have been examined.
KANSAvS.
Oklahoma politics reflect the originality and venturesomeness of the pioneer American, but in the serious
consideration of bank deposit guaranty, Oklahoma was
long anticipated by Kansas. The writer heard the governor of Kansas, Major Morrill, a Republican and a banker,
say in an address before the convention of the Kansas
Bankers' Association, as early as 1895, that he believed
the Government should guarantee the deposits in banks;
though in later years Major Morrill opposed the plan.
303
National
Monetary
Commission
Mr. John W. Breidenthal, bank commissioner of Kansas,
in the fourth biennial report of his department, September
i, 1898, recommended the enactment of a deposit guaranty
law. Mr. Breidenthal, a Populist, was an efficient commissioner. In the following November, Governor Leedy,
also a Populist, was defeated for reelection. In order
that deposit guaranty legislation might be had, the governor called a special session of the legislature, believing that
the measure could be put through before the inauguration
of his Republican successor. The bill provided that banks
might either pay to the guaranty fund assessments of oneeighth of 1 per cent of their deposits, or place 5 per cent
of their deposits with the state treasurer, the income of
the 5 per cent to go to the guaranty fund. Prominent
bankers were at Topeka opposing the bill. It passed the
senate, and, after a hot parliamentary struggle in the house,
it received the votes of 59 members, a majority of those
present, but four short of a constitutional majority. The
four votes lacking could not be obtained, and the bill
failed. Mr. Breidenthal says that four legislators were
bribed to vote against it.
Nearly ten years later Governor Hoch, a Republican,
called another special session for the same purpose. The
deposit guaranty proposal was ably supported, and apparently sure of adoption, but, in the last few days of the
session, the opposition succeeded in sidetracking guaranty
by adopting a bill authorizing the formation of a company
to insure deposits. Governor Hoch vetoed the bill as a
worthless makeshift, and because, as he said, he would
rather delay guaranty than have it on the wrong basis.
304
State
Banks
and Trust
Companies
In the summer of 1908, however, the Democrats of
Kansas, following the lead of the national convention,
put into their platform a deposit guaranty plank. Many
of the "progressives" in the Republican party—they are
also known as "boss busters "—believed in bank guaranty
and believed that it would be popular in Kansas. It was,
therefore, advocated in the Republican platform also.
The Republicans won the election, and the legislature met
in January, 1909, with both parties pledged to the guaranty
of bank deposits. A system for the purpose, really an
insurance system, was provided after a strenuous session,
by the act of March 6, 1909, which went into effect July 1.
The Kansas law differs markedly from the law of Oklahoma. Perhaps the two most vigorous criticisms of deposit guaranty have been that it compels good banks to
pay the depositors of failed banks, and that incompetent
or dishonest bankers will draw away the business of conservative bankers by paying extravagant interest on deposits. Moved by these criticisms the Kansas legislators
made it optional with the banks whether to insure their
deposits or not, and provided that no bank paying more
than 3 per cent interest on any class of deposits could
insure any deposits whatever. To discourage the organization of new banks for the purpose of getting away the deposits of established banks, it was provided that, before
participating in the guaranty plan, a bank must have an
unimpaired surplus equal to 10 per cent of its capital, and
must have been in business one year. National and private banks and trust companies that reorganize as state
banks may, however, participate immediately. National
59<>45 b — I]t
2
°
305
National
Monetary
Commission
banks, indeed, may participate as such, so far as the Kansas
law goes; but are forbidden by the federal department from
doing so. It is provided also that if no one of the existing
banks in a town participates in the plan within six months
after July i, 1909 (when the law took effect), a new bank
may then, if otherwise qualified, come under the plan at
once.
The deposits insured are noninterest-bearing accounts,
savings accounts of not over $100 each, and time certificates of deposits payable from six months to one year after
date, and drawing not over 3 per cent interest. This excludes the deposits of other banks, for these deposits are
almost always on running accounts at from 2 to 3 per cent
interest. The assessments for the guaranty fund are levied
not on the amount of deposits, but on the amount of deposits eligible to guaranty, less the capital and surplus of
the bank. This introduces a sort of classification of risks—
the only attempt at such classification in the guaranty
law of any State. The larger a bank's capital and surplus
in proportion to its deposits, the less will be its assessment
or premium, and to this extent the Kansas law encourages
the accumulation of capital and surplus. The assessments
are to be made annually until the guaranty fund reaches
$500,000. If the fund is depleted, as many as five assessments may be called for in one year. To guarantee the
payment of the assessments, $500 for each $100,000 of
deposits must be deposited with the state treasurer in cash
or in certain bonds.
The Kansas law requires the bank commissioner to
examine rigidly each bank applying for permission to
participate in the guaranty plan, just as the Oklahoma
306
State
Banks
and Trust
Companies
commissioner did of his own motion. As participation
is voluntary, so banks may withdraw from the guaranty
by giving notice to the commissioner. They must,
however, pay all assessments that may be made on account
of banks that have already failed and banks that fail
within the next six months.
The assessments in the Kansas plan are small because
no attempt is to be made to pay depositors in full on
the closing of a bank. The assets, including the liability
of the stockholders, are first to be realized upon. Only
the loss remaining after the liquidation of the assets will
be paid out of the depositors' guaranty fund. In the
meantime, certificates bearing 6 per cent will have been
issued to the depositors, and it is expected that these can
be sold or pledged to other banks, so that general business
will not suffer as it frequently suffers when funds are tied
up in insolvent banks. As in Oklahoma, so in Kansas,
the legislation for the insurance of bank deposits was
accompanied by legislation providing additional regulations for banks. a
«Some of these are:
A majority of the directors must be residents of the county in which
the bank is located or of some adjoining county.
A stockholder to be eligible to the position of director or cashier must
own at least 5 shares of stock, which shall not be hypothecated.
The bank commissioner may refuse to consider as a part of the legal
reserve of any bank balances due to the bank from any other bank, any
of the stockholders of which are stockholders in such depositing bank.
Any officer of any state bank who may be found by the bank commissioner to be dishonest, reckless, or incompetent, shall be removed from
office by the directors of the bank on the written order of the bank commissioner.
I t is unlawful for any state bank, whether its deposits are insured or
not, to accept deposits continuously for six months in excess of ten times
its paid up capital and surplus.—Act of March 5, 1909.
307
National
Monetary
Commission
Once the deposit guaranty act was passed, it was
undoubtedly the desire of most of the national bankers
of Kansas to participate in the system. The maximum
assessment could in no year exceed one-fourth of i per
cent of deposits, and the near-by example of Oklahoma
seemed convincing as to the effect of deposit insurance
upon the banks that provided it and the banks that did
not. But the Comptroller of the Currency, Mr. Murray,
held that national banks could not lawfully participate
in the guaranty of deposits under the Kansas law.
Through the Secretary of the Treasury, he asked for the
opinion of Attorney-General Wickersham whether national
banks had the right to participate in the assessments and
benefits of the bank depositors' guaranty fund of the
State of Kansas upon the same terms and conditions as
applied to state banks. Governor Stubbs, Bank Commissioner Dolley, and Attorney-General Jackson, of
Kansas, saw Mr. Wickersham in Washington March 31,
1909, and argued in the affirmative; but Mr. Wickersham's
opinion, rendered April 6, 1909, was in the negative.
He shared the opinion of his predecessor, Mr. Bonaparte,
expressed in the Oklahoma case, that national banks have
not the power to insure their depositors against loss.
Mr. Wickersham said further that even had national
t a n k s such power, they had not the power to submit
themselves, as required by the Kansas statute, to examinations and other forms of control by the banking department of the State of Kansas. " Only an act of Congress/'
he said, "can confer such powers upon national banks." 0
a Report of Comptroller of the Currency, 1909, p. 94.
308
State
Banks
and Trust
Companies
Senator Curtis and Representative Madison of Kansas
introduced bills in Congress to grant national banks
authority to participate in deposit guaranty systems, but
no action was taken.
The national banks of Kansas had already held a meeting in Topeka March 26 to consider what their course
should be. They decided to await the return of the governor and his advisers from Washington, and agreed that
if the final decision should be that national banks could
not lawfully participate in the guaranty of deposits, the
national banks would then organize a currency asociation under the Aldrich-Vreeland act, believing that this
action would assure depositors that there would always
be a sufficiency of currency. It was further agreed that
they would organize a company to insure bank deposits,
both in national and in state banks.
Though the currency association has not been organized,
the organization of the Kansas Bank Deposit Guaranty
and Surety Company is well under way. Of course banks
can not, as such, subscribe for stock in an insurance company, yet it was desired that the banks should hold the
stock. The difficulty was obviated in this way: Each
bank that wished to aid in the organization of the company
had its shareholders appoint some one, usually the president of the bank, as trustee to hold the insurance stock in
behalf of the shareholders. They authorized the payment
to the trustee of a dividend of 2% per cent of the capital
and surplus of the bank, to be used to pay for stock in the
insurance company. It will be recalled that the AttorneyGeneral of the United States is of the opinion that national banks can not use their funds to pay premiums for
309
National
Monetary
Commission
the insurance of their deposits.® The premiums due the
Kansas company are, however, to be paid, not out of the
funds of the bank insured, but out of special dividends
duly declared, and, after such declaration, paid as premiums by the authority, previously given, of the shareholders individually. Dividends are not funds of the
bank, but the property of the shareholders, and there is
nothing to prevent the shareholders from using their own
property to purchase insurance for the depositors. The
premium rates have been fixed at 50 cents for each $1,000
of deposits up to the amount of the capital and surplus of
the insuring bank, and at $1 for each $1,000 of deposits in
excess of capital and surplus—that is, one-twentieth and
one-tenth of 1 per cent, respectively, the former being the
initial rate in the state system. This is analogous to the
credit the state guaranty scheme allows for capital and
surplus.
At the ineeting of national bankers in Topeka, March 26,
1909, Mr. Dolley, the bank commissioner, was present and
was not at all unfavorable to the plan of a deposit insurance
company. He stated that he would be impartial and would
leave the state banker to decide for himself whether to go
into the guaranty system provided by the State or to take
out insurance in the proposed company. Later Mr.
Dolley changed his mind, and in speaking of the insurance company and the guaranty fund, at the annual convention of the Kansas Bankers' Association at Wichita,
he said: "Every state banker should know where his
a
Under a later opinion the same result may be accomplished by insuring assets in a certain way. Report of Comptroller of the Currency,
1909, p. 94.
3io
State
Banks
and Trust
Companies
home is. "a In fact, there was fear that the state bankers would prefer to take out insurance instead of participating in the guaranty system provided by law, participation in Kansas being voluntary, and not permitted to
banks that pay over 3 per cent interest, even on time
deposits. Now just as the Oklahoma limit of 4 per cent
is below the economic rate in parts of that State, so 3
per cent is too low in a large part of Kansas, and not only
national but state banks advertised that they would insure their deposits in the new company and continue to
pay 4 per cent interest. This competition might keep
many banks from participating in the guaranty scheme
and might draw away some of the depositors of the banks
in the scheme. So serious was this possibility considered
that there was much talk of an extra session of the legislature to amend the law so that state banks could pay 4
per cent; but the attorney-general of Kansas concluded
that the insurance department of the State could forbid
the company to insure the deposits of banks that paid
more than guaranteed banks were allowed to pay.
The authorized capital of the Kansas Bank Deposit
Guaranty and Surety Company is $500,000. Of this
$346,550 has been subscribed and $257,850 paid in. It
was even announced that the company would begin to
write insurance. Meanwhile, however, legal complications have arisen. A Nebraska law for state insurance
of bank deposits had been held unconstitutional by the
United States circuit court. The Kansas law was attacked on smilar grounds. Among the lawyers engaged
to conduct the case against it were Senator Waggener, a
a
Proceedings Kansas Bankers' Association, 1909, p. 50.
3ii
National
Monetary Commission
Democrat, attorney for the Missouri Pacific Railway, and
ex-Senator Long, a RepubUcan, who had been defeated
for reelection in 1909 by the "boss busters.'' The guaranty of deposits is a "boss buster" asset, and the "old
crowd'' would not be sorry to have it declared unconstitutional. On December 24, 1909, the circuit court
granted a temporary injunction against the enforcement
of the act. The case was to be appealed to the circuit
court of appeals.0 But it is now stated that a special session of the state legislature will be called to amend the
law, such an extra session being expected to cost less
than sustained legal proceedings. A suit to test the
validity of the law under the state constitution is also
pending in the Kansas supreme court. Hence the legal
situation and the mutual outcome are still involved in
uncertainty, and the Deposit Guaranty Company is not
yet ready to do business.6
No attempt can be made here to enter on the legal
question. But all this litigation proves one thing of
significance. The fact that it seemed worth while to
raise a fund and engage in litigation proves that even
bankers opposed to the principle of insurance of deposits
through a fund administered by the State realize that
such insurance makes a powerful appeal to the people,
and will affect the distribution of deposits.
Many new state banks were organized in Kansas in
1909. Banks organized after March 5 at points where
a After this appeal was heard, the injunction was dissolved and the operation of the law resumed. 179 Fed. 461. The case is now in the United
States Supreme Court, with the Oklahoma and Nebraska cases.
& The company later commenced operations, and has now (December,
1910) been writing deposit insurance policies for some time.
312
State
Banks
and Trust
Companies
there are banks already can not have their deposits insured for six months or a year, but in some towns that
had banks, as well as in some that had not, the organization of new banks was somewhat hastened by the idea
that deposits would come more easily once a bank was
under guaranty. Eighty-seven state banks were organized from September i, 1908, to December 17, 1909, 38
of them in towns that had no banks before. Six national
banks, of which one was a reorganization, were organized
from October 31, 1908, to December 23, 1909. All of
these were in towns that had banks already. About 10
national banks have been converted into state banks. a
As in Oklahoma, so in Kansas, the establishment of a
system of deposit insurance has led some of the state
bankers to the conclusion that their interests are no
longer identical with those of the national banks. They
have, therefore, organized the Kansas State Bankers*
Association, which is wholly independent of the Kansas
Bankers' Association, and, like the older organization,
will procure fidelity bonds and burglary insurance for its
members.
By the middle of September, 1909, 451 banks had
applied to have their deposits guaranteed, and 229 had
paid their assessments, deposited their bonds, and were
under guaranty. Some of the applications had been
made by banks that did not intend to go into the system
at once, but applied in order that they might receive the
necessary examinations and be ready to go in without
delay should it prove advisable later to do so. On
September 28, 1909, Bank Commissioner Dolley stated
a See p. 352 for items from recent statements of Kansas banks.
3i3
National
Monetary
Commission
to the press that "the banks that have applied for participation have a combined capital stock of $7,350,000
and a combined surplus of $2,140,000. The combined
capital stock of banks that have not applied is $5,930,000
and these banks have a surplus fund of $1,680,000."
The commissioner concluded that "the stronger state
banks of Kansas believe in the guaranty law and have
availed themselves of opportunities to at once come under
its provisions." On the same date, according to a letter
from the commissioner, 300 banks were actually in the
guaranty system. By the end of October, 365 were in.
The amount in the guaranty fund December 17 was
$17,000, besides $276,876. of bonds and cash deposited to
guarantee payment of future assessments. This would
indicate about $40,000,000 of individual deposits in the
guaranteed banks. The Kansas banks are splendid risks
now. Their customers are prosperous. Alfalfa and cattle
have made a great change in Kansas agriculture since the
days when wheat and corn were almost the only dependence of many farmers. Mining and manufacturing
flourish also in many places. The State is rich. It is
to be remembered, too, that the Kansas fund will be used
only to pay losses finally ascertained at the winding up of
failed banks, and that four additional assessments equal
to the one now paid in could be levied within a year.
Nevertheless, a fund of $17,000 is a small one for starting
an insurance business with $40,000,000 of risks.
As the law went into effect on July 1, 1909, and as
banks have been going into the guaranty system ever since,
the bank commissioner has given out no statement of the
effect of the guaranty law on the deposits of the banks
314
State
Banks
and Trust
Companies
that have accepted its provisions. The effect is probably
slight. There are some stories that money has come out
of hiding and gone into the banks; and the advertisement
of the guaranty has increased the deposits of some banks.
The time has been short and the multifarious litigation
confusing. The scheme has not been so thoroughly
advertised by talk and print as in Oklahoma. Indeed,
the smallness of the fund has been criticised with effect,
and there is no popular interest in the subject. The
guaranty of deposits has had as yet no real test in Kansas.
None the less, such small results as have been observed
bear out the evident expectation of the bankers who
organized the insurance company, and of those who
instituted court proceedings, that deposits, if adequately
insured, would grow.
NEBRASKA.
In Nebraska also deposit guaranty is not a new proposal.
In every session of the legislature for nearly twenty years
there have been one or more bills for the guaranty of bank
deposits. In the days of the Populist party, one serious
attempt to pass a guaranty bill was defeated partly through
the efforts of Mr. Shallenberger, who, curiously enough, was
long after, in 1908, elected governor by the Democrats on a
deposit guaranty platform. In that year the Democratic
campaigners had made much of deposit guaranty on the
stump. The Republicans had not met them on the issue;
in fact, their nominee for governor, ex-Governor Sheldon,
had rather favored the proposal. It is said that a majority
of the members of the legislature were never convinced of
the wisdom of guaranty legislation, and that, notwithstanding campaign pledges, there might have been no such
315
National
Monetary
Commission
legislation but for the personal influence of Mr. Bryan,
who insisted that promises be redeemed.
Deposit guaranty, or insurance, was provided by the act
of March 25, 1909. Its chief provisions in comparison
with those of the laws of other States have already been
indicated. 0 Participation in the guaranty is compulsory
for all State banking institutions. No provision is made
for national banks. Four assessments, each amounting to
one-quarter of 1 per cent of average deposits, are to be
made by the state banking board between July 1, 1909
(when the law was to take effect), and January 1, 1911.
Thereafter, semiannual payments of one-twentieth of 1
per cent of deposits are to be made. Special assessments
not exceeding 1 per cent in one year may be levied to
restore the fund if depleted. The assessments are not to
be paid over to the state banking board, but each bank is
to credit the amount assessed against it to the state banking board, payable on demand. This is an arrangement
that might easily lead to trouble. Insurance premiums,
for that is what these assessments are, should be paid over
to the insurer, not held by the insured, subject to all sorts
of claims and processes if the insured happens to think his
insurance is proving too expensive.
All deposits are insured, and the deposits of every failed
bank are to be paid in full as soon as the deficiency in the
cash turned over to the receiver is determined. The state
banking board will obtain funds to meet the deficiency by
drawing checks against the assessment accounts standing
to their credit in all the state banks.
a
See the table opposite page 264.
316
State
Banks
and Trust
Companies
The act made the regulation of banking more stringent
in several particulars. The minimum capital of banks
thereafter organized was increased. The qualifications
of directors were made in some respects more exacting than
are the qualifications of the directors of national banks.
Most important regulation of all, the act limited banking
to corporations, and forbade individuals and firms to carry
on the business.
At the time of the passage of the act there was some
activity in organizing state banks, but the secretary of
the state banking board, in a letter to the writer, expresses
the opinion that few banks have been organized for the
purpose of taking advantage of the guaranty law. No
national banks converted for the purpose. " Several
state banks, however," he says, "have nationalized in
order to get out from under the new law, and several
more would have done so had the law gone into effect.''
The law is not yet in effect and may never be. Many
state banks and two private banks obtained from the
United States circuit court an injunction prohibiting the
state authorities from putting the law in operation. The
same questions were raised as in the Oklahoma case,
whether an assessment for the deposit guaranty fund
would be a mere police regulation of the conditions under
which the business of banking should be carried on, and
so within the ^ower of the State to levy, or whether it
would be depriving sound banks of their property without process of law, and turning that property over to the
depositors in unsound banks. There was raised also the
question whether the State could constitutionally legislate its 13 private banks out of existence. The court
317
National
Monetary
Commission
expressly declined to rule upon either of these points
separately, but held that, taken together, they established
the invalidity of the act. a The case has been appealed
to the United States Supreme Court. Meantime, neither
the additional regulations of banking provided for by the
act nor its guaranty provisions are in effect.
Although the experiment of deposit guaranty has thus
not yet begun in Nebraska, one can see, from the politics
and the litigation, as in Kansas and Oklahoma, that
bankers naturally oppose deposit guaranty and deny its
necessity, and yet that very many of the people are
expected to place their deposits under it if given a chance.
Bankers, to do them justice, fight the scheme not only
because they expect it to move some deposits from longestablished banks to new institutions, but because they
think such removal will tend to encourage unwisely
liberal, even reckless, methods, to the ultimate loss of the
community, especially the banks. This possibility can,
however, best be discussed after our review of legislation
is completed.
SOUTH DAKOTA.
Though manufacturing and the wholesale trades are
progressing rapidly in the States whose recent banking
history we are considering, the interests of the group
°The act not only attempts to exclude individuals from engaging in
the banking business, unless they do so through the agency of a corporation^
but also attempts to impose upon them, as a condition to their engaging
in that business even in that form, a duty to make good the obligations
of all other bankers in the State to their depositors. * * * We are of
the opinion that this can not be done consistently with the fourteenth
amendment to the National Constitution. (First State Bank of Holbein
et al. v. Shallenberger, Governor; Journal of American Bankers' Association, vol. ii, p. 187.)
3i8
State
Banks
and Trust
Companies
remain predominantly agricultural or pastoral. This
is particularly the case with South Dakota. The people
had plenty of wheat, flax, oats, corn, cattle, horses,
sheep, and hogs for sale, and the panic of 1907 was soon
forgotten. Only one bank failed in the State in three
years preceding the deposit insurance legislation of 1909,
and that bank paid 100 cents on the dollar. Probably
there would have been no attempt at deposit insurance
legislation had not the Democratic state convention followed the national convention by putting a guaranty
plank into the state platform. Not to be outdone by
this vote catcher, the Republicans also indorsed the
guaranty plan, so that it was in the platforms of both
parties, just as it was in Kansas.
The Republicans, it will be remembered, carried the
State; and their advocacy of the new plan became cool.
With the scheme in the platforms of both parties, however,
there seemed to be no way out, and it became a question,
apparently, of how little could be consistently done. a
The provisions of the scheme adopted in the act of March
9, 1909, have been outlined. Like the Kansas plan, the
South Dakota plan is voluntary. But while a single Kansas bank could take the state-administered deposit
insurance, and by paying its initial assessment establish
a guaranty fund, it would take one hundred banks to set
the South Dakota plan in operation. One hundred banks,
or more, could organize "the State Association of Incorporated Banks." The membership fee would be from $100
a One banker said in a letter to the writer: "The law which they passed
is considerable of an abortion and the intention in passing the same was
to make it so abortive that it would neither hold water under the Supreme
Court, or that no bank would take it up."
319
National
Monetary
Commission
to $170 each, according to capital. The annual premium
would be one-tenth of 1 per cent of the deposits, except
public deposits otherwise secured. In case of need, special
assessments might be levied, not exceeding in any year
four-tenths of 1 per cent of deposits. Out of the fund
thus established the depositors of failed banks would be
paid. If the fund were insufficient at the time of a bank
failure, the subsequent accumulations of the fund for the
year covered by the last premium paid by the insolvent
bank would be paid to depositors pro rata. Depositors
would apparently lose what was unpaid at the expiration
of the premium year.
It was probably not expected by many that an association would be formed under the act. Perhaps half a dozen
banks have written the public examiner asking if any
movement were under way to organize an association,
but there has been no movement, and the matter has
dropped.
The legislature, however, passed an excellent general
banking law. The act of 1903, amended in 1907, was a
comparatively short law, not so definite or particular as is
now deemed advisable in banking legislation. The act
of 1909 increases the minimum capital of a state bank to
$10,000 or more, according to population. Directors,
while still eligible if owning five shares, must own these
free of pledge. Directors, or a committee of stockholders,
must examine their banks twice a year and report to the
public examiner what they find. The public examiner is
allowed two additional examiners on his force. These and
other provisions will strengthen the banks and the public
examiner's department.
320
State
Banks
and Trust
Companies
The South Dakota banks have been given the opportunity to effect insurance for the benefit of their depositors, but have not done so because not required by law.
For two reasons, this is different from the course of hundreds of Kansas bankers under a voluntary plan. First,
the Kansas plan is more flexible, being available to individual banks. Second, the Kansas bankers were induced
to avail themselves of the plan by the apparent early
success of the neighboring Oklahoma plan, similar but
compulsory. The recommendation of the Kansas bank
commissioner to the banks under his supervision also contributed to the result observed in Kansas.
It is not likely that the South Dakota plan will ever be
used at all.
TEXAS.
As in Kansas, Nebraska, and South Dakota, the
first distinct impetus to deposit insurance legislation
in Texas was furnished by the Democratic national
platform. The loyalty of Texas to this party is proverbial, and it was almost as a matter of course that the
state convention adopted a similar plank. It is doubtful, however, if even party regularity would have been
a sufficient force to pass a guaranty bill without the
strongly exerted influence of the governor and of Bank
Commissioner Love, both firm believers in the wisdom
of the plan. They were reenforced by Mr. Bryan himself,
who, while on a visit to the State, visited the legislature
and advocated the guaranty of bank deposits in a speech
from the speaker's stand. The bankers in the cities
were, as a rule, opposed, but many of the country bankers
59045 0 —11
21
321
National
Monetary
Commission
favored the guaranty scheme as a preventive of panic and
a builder of deposits. The failure of the Western Bank
and Trust Company of Dallas under discreditable circumstances was comparatively recent, and had left a pronounced sentiment in favor of some measure that would in
the future afford depositors reasonable assurance of safety.
Notwithstanding politics, official pressure, and a favoring sentiment on the part of some banks and much of the
public, the regular session of the thirty-first legislature
adjourned March 12, 1909, without action on the subject. The governor issued a call March 13 for a special
session to convene the same day, and gave as one of the
purposes of the session that of enacting legislation to
guarantee bank deposits. This " called session/' however, adjourned April 11, without passing a guaranty
bill. The governor then called still another session, to
meet the next day. This second ''called session" gave
Texas a guaranty law. It went into effect August
9, 1909, and under its provisions the guaranty plan
went into operation January 1, 1910.
Under this law any bank has nominally an option
whether to protect its depositors by contributing to
a guaranty fund or by filing annually with the commissioner of insurance or banking, "on behalf of its
depositors/' " a bond, policy of insurance, or other
guaranty of indemnity in an amount equal to the amount
of its capital stock," or if a private bank, "in an amount
to be fixed by the commissioner of insurance/' but in no
case less than one-half the average deposits of the preceding twelve months. Incorporated banks must file
322
State
Banks
and Trust
Companies
additional security when their deposits exceed six times
their capital and surplus.a
Now, a policy of insurance or a bond procured from
some surety company for the benefit of the depositors
would cost at present rates one-half of i per cent of the
capital of an incorporated bank, while the annual assessments, under the guaranty fund plan, will be more than
that, but, except in emergencies, only one-fourth of i
per cent of the deposits. If resort is had to individual
sureties, there must be at least three of them. Most
bankers would hesitate to ask customers, even directors,
to sign a bond equal to the whole capital of the bank
so to be guaranteed, and most customers or directors
would hesitate to sign even if the request were made.
Moreover, a personal bond, made, as it would be, by the
active management or by its close friends, would reassure
few depositors in uneasy times and would attract few
new depositors in good times. If the management
turned out bad, the bond would not often be much
better, and experience proves that even solvent sureties
would usually seek in every way to avoid payment.
As a matter of fact, only 42 banks had chosen the bond
security plan on October 1, 1909, by which date all the
banks operating under the Texas banking law were
required to elect which form of security they would
provide for their depositors.
There are provisions in the Texas law permitting national
banks to avail themselves either of the guaranty fund
plan or of the bond security plan. Under the opinions of
0 Sections 15 and 22 of bank guaranty law effective August 9, 1909.
323
National
Monetary
Commission
Attorney-General Bonaparte and Attorney-General Wickersham, on the Oklahoma and Kansas laws, the former
plan is not open to national banks, but doubtless any
national bank could file a bond to secure its depositors,
provided it did not, as a bank, pay anything for such bond.
The outline of the Texas guaranty fund plan is like that
of Oklahoma, with interesting variations. It applies
to incorporated banks. The initial assessment is i per
cent of average deposits for the year ending November i,
1909. The regular annual assessment is one-fourth of 1
per cent of average deposits, but in emergency the total
assessments for any year may run to 2 per cent of deposits.
Twenty-five per cent of these assessments is to be paid
by the banks to the state banking board, and will be
deposited by the board with the state treasurer. Each
bank will credit on its books 75 per cent of each assessment
upon it to the state banking board, subject to check.
This retention of part of the assessments follows the law of
Nebraska, where all the assessments were to be paid in the
first instance by this bookkeeping device. The scheme is
a defect in the laws of both these States. Some Oklahoma banks seriously contemplated resisting the payment
of the drafts of the state banking board for the recent
emergency assessment, and many more banks were exceedingly restive. In Texas and Nebraska the banks would
hate to see the guaranty fund drawn upon, even though
carried on a separate ledger page. Checks by the banking
boards might prove a precarious resource. It would be
better to collect all assessments at once and keep the fund
in the state treasury or in marketable securities.
3M
State
Banks
and
Trust
Compantes
The maximum amount of the Texas guaranty fund is
$2,000,000. After the fund reaches that figure, the only
further assessments will be to restore it when temporarily
reduced. As in Oklahoma, it is provided that depositors
shall be paid in full on the closing of a bank. This, as
Oklahoma experience shows, can not be promised safely.
The act of 1909 provided additional general regulations
of banking, such as have been adopted in all the States in
which there has been deposit insurance legislation, and
partly because of it. If bankers are responsible for each
other, they desire that all shall be required to conform to
adequate regulations. Probably the most interesting and
important of the new Texas regulations is the attempt to
establish a relation between deposits and capital. We
have seen that banks under the bond security plan must
file additional security if deposits exceed six times capital
and surplus. It is further provided that capital must be
increased as deposits increase. If, for instance, the deposits
of a bank of $10,000 capital average for a year more than
five times its capital and surplus, the bank must increase
its capital by 25 per cent. So banks with capital up to
$20,000, $40,000, $75,000, $100,000, and over $100,000
must increase capital by 25 per cent when deposits exceed
six, seven, eight, nine, and ten times their respective
present capitals. Other changes are in provisions for
examinations quarterly instead of annually, and limiting
the liabilities a director may incur to his bank.
The total number of elections of the guaranty-fund
plan to December 29, 1909, was 493, and of the bondsecurity plan (as stated above) only 42. Existing banks
325
National
Monetary
Commission
*
were required to make their elections not later than October i, 1909. The failure in an adjacent State of the
Columbia Bank and Trust Company of Oklahoma City,
at the close of September, seems not to have caused the
Texas bankers to fear that in choosing the guaranty-fund
system they had chosen the wrong plan.
One indication of the attractiveness of guaranty
deserves mention. The Texas constitution of 1876
had forbidden the incorporation of banks. a A great
many private banks grew up, and there were some existing charters that the constitution could not abrogate.
Many of these gave exceedingly wide powers, like the
charters under which banking was sometimes conducted
in connection with various other business before the civil
war. The Western Bank and Trust Company of Dallas,
for instance, was a cotton factor. These charters have
been much used of late years, and parent institutions
have established numerous branches. After a change in
the constitution a general banking law was adopted in
1905, and many banks were incorporated. The bankguaranty law of 1909 has now provided that by discontinuing branches institutions operating under special charters
may avail themselves of either the bond-security plan or
the guaranty-fund plan. A remarkable instance of the
effect of the guaranty law appeared in the case of the Continental Bank and Trust Company of Fort Worth, which
has discontinued its 30 branches and has reorganized
a
No corporate body shall hereafter be created, renewed, or extended
with banking or discounting privilege.—Art. xvi, sec. 16, Const, of Texas,
1876.
326
State
Banks
and Trust
Companies
them as separate banks, all of them electing the guarantyfund plan.
No fewer than 89 state banks were organized between
June 20 and December 29, 1909, with a total capital of
$3,167,500. Eight were conversions of national banks.
Though this activity in bank organization must be ascribed
chiefly to the present rapid development of a wonderful
State, the fact that banks can attract deposits more rapidly under a system of deposit guaranty has undoubtedly
in some cases made possible the establishment of banking
facilities sooner than they would otherwise have been
provided. This consideration must not be exaggerated,
however. The organization of 89 banks in so few months
is striking, but not wholly exceptional. There was an
increase of 86 in the number of Texas state banks and
trust companies between the May statements of 1907 and
1908, long before the guaranty legislation.
On page 352 are some figures from recent Texas bank
statements.
As the guaranty of deposits in Texas banks began only
on the first of this year, there are no comparisons to be
made. So far the Texas law has not been attacked in
court. As the largest Commonwealth in the United
States, it is a wonderfully interesting field for a financial
experiment, and the result will be important.
COLORADO AND MISSOURI.
The bank guaranty scheme was proposed in the legislatures of many other States but failed of adoption.
Of these cases the legislative experiences of Colorado
and Missouri are, perhaps, the most interesting.
327
National
Monetary
Commission
In Colorado the Democrats, following the example
of the national convention held in Denver, put a
guaranty plank into the state platform, and, being
successful in the election of 1908, brought the guaranty
matter forward in January, 1909, early in the session
of the legislature. The matter was fought over until
April. The guaranty bill was a carefully drawn measure, providing for the accumulation of a fund of 1 per
cent of the deposits. Of this fund two-fifths was to
be paid in at once, and one-fifth each year thereafter.
In case the fund should be impaired, special assessments
to replenish it might be made, not exceeding 1 per cent
of the deposits in any one year. The interest to be
allowed on deposits was limited to 4 per cent.
It is only of recent years that Colorado has had an
adequate banking law, and there was no bank commissioner until 1908. Some good sized bank failures had
occurred. This fact reenforced the political situation,
and apparently strengthened the chances of the bill.
The Colorado Bankers' Association actively opposed
the bill, on the familiar ground that it would force good
banks to pay the losses of the bad. The Democratic
legislators, however, felt obliged by the party platform
to pass some kind of a guaranty bill, and there was prepared and introduced what became known as the individual guaranty bill. This provided that each bank
must set aside each year 1 per cent of its deposits
until it had so accumulated a fund equal to 10 per cent
of its deposits. This fund was to be invested in bonds
or warrants approved by the bank commissioner', and
328
State
Banks
and Trust
Companies
the bonds and warrants were to be delivered to the state
treasurer. In case of the insolvency of the bank, the
securities were to be turned over to the receiver for the
pro rata benefit of unsecured depositors. The fund
could not be used to restore impaired capital. If the
capital became impaired, but the banks did not become
insolvent, the impairment would have to be made up
by assessment on the stockholders; the so-called guaranty fund remaining intact for the benefit of depositors
in case of insolvency.
The Colorado bankers felt that in this unique and
interesting bill they had hit upon a good solution of the
guaranty problem, by providing for the establishment
of a large fund that would stand as a buffer between the
depositor and the losses his bank might make on its investments. The objection to the plan would seem to be
that it would require banks to invest largely in longtime securities. Colorado is industrially a comparatively new State, and has need of active working business
capital. It would seem that its banks should for the
present confine their investments to commercial and
agricultural channels.
The individual guaranty bill was strongly urged, and
the legislative situation grew into a deadlock. The legislature adjourned in April, without passing either the
mutual guaranty bill or the individual guaranty bill.
When the Missouri legislature convened in January,
1909, the Democrats were in control of the senate, while
the Republicans were in control of the house. Throughout the session there was much playing of politics. The
329
National
Monetary
Commission
governor recently elected was Herbert S. Hadley, the first
Republican governor Missouri has had in a generation.
A banking law adopted by the previous legislature went
into effect January 15, 1909. This law created the office
of bank commissioner. Until then, the state banks and
trust companies of Missouri had been supervised by the
secretary of state. This office had been filled under the
previous administration by John B. Swanger, a Republican, and Governor Hadley appointed Mr. Swanger to be
the first bank commissioner, in view of his ability and experience. Mr. Swanger desired to have the banking laws
of the State again revised, and caused to be introduced
both in the senate and the house a bill for the purpose.
Prior to the introduction of this bank revision bill, Senator
Lane had introduced in the state senate a guaranty bill
along the general lines of the first Oklahoma measure.
His bill, however, provided for a smaller fund—only onefourth of 1 per cent of the deposits, this to be kept up by
annual assessments upon which no limit was placed. It
was attached in the senate to the bank revision bill, which,
therefore, passed the senate and went to the house embodying a bank guaranty scheme. In the meantime, the
house had passed Mr. Swanger's revision bill, and sent it
to the senate. The senate attached Senator Lane's bill
to the house bill also, and sent it to the house for concurrence in the deposit-guaranty amendment. The house
neither passed the senate bill, however, nor concurred in
the senate's amendments to the house bill, and, as the
senate would not recede from its position, the desired revision of the banking law failed.
330
State
Banks
and Trust
Companies
The banking department of the State of Missouri is supported by the examination fees of the banks, and an important part of the revision bill had been a very proper
and necessary increase in these fees. On account of the
failure of the revision law because of the legislative deadlock of the senate and the house over the deposit guaranty
question, Commissioner Swanger was confronted by the
necessity of curtailing the work of his department or of
raising the money outside the state treasury. Some of
the larger banks of the state are, at the commissioner's
suggestion, carrying the salary warrants issued to the commissioner's force, and it is expected that the next legislature will appropriate enough money to cover the deficiency.
The experiences of Missouri and Colorado with the deposit guaranty bills illustrate the intense feeling that has
attended the working out of the question in the West.
DEPOSIT INSURANCE BY PRIVATE CORPORATIONS.
It has long been possible for a depositor to procure insurance of his deposit, or for a bank to procure insurance
on behalf of a particular customer (usually a public officer
depositing public funds) covering in a specified amount.
The rates have been ordinarily one-fourth of i per cent
per annum. Recently some of the large companies have
doubled the rate. Many Oklahoma national bankers have
believed that, unless Congress should authorize them to
participate in the state guaranty plan, they would have to
insure their deposits in order to compete with the state
banks.® It has been suggested that the leading surety
a
This they can do under some policy forms. Opinion of Attorney-General Wickersham in Report of Comptroller of the Currency, 1909, p. 94.
33i
National
Monetary
Commission
companies might combine to issue a joint policy. Seventeen of the companies have a total capitalization of about
$35,000,000, and their joint policy would be good.0
The organization of an insurance company in Kansas
by national bankers and some state bankers has been
recounted in our study of the Kansas situation. Attempts
have been made to organize other deposit insurance
companies.
Some of the existing companies doubt whether it is
possible to write deposit insurance at all generally. If
so, should the companies guarantee the repayment of all
a bank's deposits, whatever they might be, or should the
policies be for definite amounts ? Should a policy be paid
on the closing of a bank, or within a certain time thereafter, or only when liquidation had been completed?
These problems are as yet unsolved.
Of course, depositors would at the outset have more
confidence in a state guaranty fund than in the insurance
policy of any company. Even if the state system broke
down, the State would see that all losses were ultimately
paid, as did New York after the collapse of the safety
fund system. 5 If the insurance companies were solvent
a
New York Herald, May 28, 1909.
& I t is fortunate t h a t the Monetary Commission is to include in its
publications a study of the New York experiment. [The Safety Fund
Banking System in New York State from 1829 to 1866, by Dr.
Robert E. Chaddock.] The only study available has been t h a t of John
J a y Knox, in his History of Banking. Mr. Knox says t h a t the safety
fund system failed because it covered deposits as well as notes, but the
facts he sets out are not sufficient to test his conclusion. Evidently
politics and fraudulent note issues played an important part.
332
State
Banks
and Trust
Companies
and carefully administered, however, the public would
soon repose confidence in them, as it does in fire insurance
companies.
The companies may be expected to have a favorable
loss experience. They will employ good bank examiners
and select risks with care. It has been suggested that
only the weaker banks would apply for insurance, but
this is disproved by the experience of Kansas. Some
of the strongest banks in that State were participating
in the guaranty plan at the time its continuance was
enjoined, although the fund, as we have seen, was too
small to appear reassuring to depositors. It may fairly
be expected that strong banks would take out insurance
in a company organized with large paid-up capital by
good business men.
The loss experience can be helped in another way.
If an insurance company learns that one of its risks is
in difficulty, it can often, after ascertaining the exact
situation, obtain additional security from the stockholders, and put into the bank enough cash to enable it to
continue business. The stockholders would almost always
rather give security than let the bank close and pay the
assessments that usually follow. The insurance companies would rather put in cash by way of loan than let
the bank close and pay the policies. It is the intention
of the organizers to take this course wherever possible.
One objection to state-administered deposit insurance
has been the apparent necessity of a large degree of state
control of the operation of banks. This control is exercised by limiting deposits and limiting interest payments;
333
National
Monetary
Commission
the objections to it will be more fully considered later.
These limitations reach few of the possible elements of
bad management. Insurance companies could reach
many others by granting or withholding insurance in
specific cases. If deposit insurance has commercial
utility—and we have seen that in some places it has—
private corporations can furnish it satisfactorily. The
restraint thus exercised by the companies would not
have the injurious effects of excessive state regulations.
GENERAL ARGUMENTS AND CONCLUSIONS.
In the experiences of the States that in the last two
years have adopted or seriously considered deposit-insurance legislation we have found strong conflicting tendencies at work. In Oklahoma the time has been too
short for definite conclusions and in other States the
experiment of deposit insurance has either not begun or
hostile litigation has obscured the results. Let us, therefore, take up the general arguments for and against the
insurance of bank deposits and consider them in the
light of such facts as have been developed in the foregoing study. In the considerable volume of recent discussion on this subject 0 the following are stated to be the
chief purposes of deposit insurance:
i. The prevention of the individual distress that always
follows a bank failure. The statistics that prove how
a
Government
Insurance of Bank Deposits, edited by Rollo L. Lyman
(The H . W. Wilson Company, Minneapolis, 1908), contains excerpts from
essays on both sides of the question. See also Guaranty of National Bank
Deposits, by James B. Forgan, of Chicago; Guaranty of Bank Deposits,
by Prof. J. Laurence Laughlin; addresses by Charles H . Huttig, Festus
J. Wade, and H. P. Hilliard, of St. Louis; Andrew J. Frame, of Waukesha, 111.; and editorials in the Commoner, Lincoln, Nebr.
334
State
Banks
and
Trust
Companies
comparatively rare bank failures are and how infinitesimal the ultimate loss is, are not valid as a measure of the
blighted ambition and the " wreck of happiness " that follow the closing of banks.
2. Another and different purpose is to prevent the
embarrassment in other lines of business that has
heretofore followed the closing of banks. Deposit
insurance will accomplish this purpose, its advocates
say, either by paying deposits immediately or by furnishing depositors with interest-bearing certificates for
the amount of their claims, the ultimate payment of these
certificates being insured. Other bankers will, it is said,
undoubtedly buy the certificates or accept them as collateral for loans to business men. Assuming the insurance to be good, the writer believes that other banks
would take this course. Even without insurance, banks
now frequently take the business of depositors who have
money tied up in failed banks and lend on assignments of
claims for the tied-up funds.
3. Still another purpose is the prevention of financial panics by assuring depositors of the safety of
their funds. It is argued that, being so assured, depositors will not run upon the banks. It can not be
doubted that the insurance of deposits would now and
then prevent a bank run. But such runs as have
anything to do with general financial panics are symptoms and not causes. The causes are usually to be
found in overexpansion of trade, or in untenable
speculative situations, and neither of these causes
can be reached by deposit insurance. The most
335
National
Monetary
Commission
that such insurance could do would be to mitigate
the effects of a panic by assuring depositors of the
ultimate safety of their deposits. Yet it would mitigate them. Though much money would be drawn out
of banks by depositors who felt that they could not
afford to have their funds tied up even temporarily,
a great deal would be left in the banks by depositors
who would otherwise draw out their deposits in cash.
In 1907 the largest bank in the Southwest closed after
a practically continuous run of more than a month. So
far from losing all its deposits in those long and desperate
weeks, the bank closed with half its deposits still on its
books. All depositors can not be classed together.
Some are so frightened by the least rumor that nothing
can satisfy them but the withdrawal of their deposits in
money. Others are not frightened at all. Between these
two classes is the great bulk of depositors, more or less
uneasy, but reluctant to aggravate the situation by joining
a run. Bankers who have observed depositors in like
circumstances agree with the writer in saying that most
of this great middle class would let their deposits stay if
assured of ultimate safety.
4. Deposit insurance has been advocated to prevent the
closing of sound banks by runs. Sound banks, however, are
not closed by runs. Now and then a bank is injured by a
senseless run, but if it is thoroughly sound it does not close.
5. Deposit insurance, if otherwise successful, will, of
course, make it profitable to establish additional banks.
6. Economically, the most important purpose of deposit
insurance is to increase the use of banks by the general
336
State
Banks
and Trust
Companies
public. The amount of money hoarded in the United
States is enormous. The well-known investment of
savings in post-office money orders and the heavy remittances by immigrants to foreign banks indicate that large
numbers of people fear to deposit in. American banks.
Again, every country banker can tell of farms paid for in
his office with money damp from long burial in cellars or
under refuse heaps. Every city newspaper has frequent
stories of some washwoman being robbed of the savings
of years, or some mechanic whose wife forgetfully lights a
fire in the old stove and burns the hidden money. Nor is
it only laboring people and the ignorant who distrust all
banks. The safe deposit vaults hold the money of clerks,
real estate owners, and even business men by the millions
and millions. Money to the amount of $1,660,000,000 in
the United States is neither in the Treasury nor in the
banks. a Much of it is in circulation, but a vast amount
of it is hoarded. How much one can not even guess.
Here the Oklahoma experiment is in point. Given
deposit insurance in which the people have confidence,
there will be less hoarding of actual cash, and people will
use banks more. The effect will be cumulative, for as
people who are now ignorant of banking customs become
familiar with such customs their resort to banks for all
kinds of financial business will rapidly increase, to the
social good.
Let us now consider the objections.
1. The chief objections urged against the insurance of
bank deposits are that it is unnecessary and that there is
only a small demand for it. The small aggregate losses
to depositors in national banks since the establishment of
o Report of the Comptroller of the Currency, 1909, p. 62.
59045 0 — ll
22
337
National
Monetary
Commission
a national banking system in 1863 are referred to in support of this argument. The average loss is variously calculated. Mr. James B. Forgan, of Chicago, has calculated it to be one twenty-sixth of 1 per cent per annum,
but the writer can arrive at this result only by omitting
from the calculation the losses on receiverships not finally
closed, and these losses will be considerable.a The
Comptroller of the Currency has calculated the loss to be
about one-seventeenth of 1 per cent, but while taking the
total known and estimated losses on all classes of deposits
he figured his percentage on individual deposits only, not
including the very considerable item of deposits by banks. 6
The writer, taking these omitted elements into consideration, estimates the average annual loss on deposits in national banks to be one twenty-second of 1 per cent.
Now, this loss, while infinitesimal, deters a great
many people from depositing in banks, for the reason
that people do not know what institutions will fail.
It is suggested, of course, that such a fear is unreasonable. " Let the people pick out good banks to do business
with," say the opponents of deposit insurance. But in
too many cases the people can not pick good banks.
Not only in the country, but in the city, a large number
of people have not and can not get the necessary information to enable them to determine whether a given
bank is good or not. A few banks stand out in their
communities preeminent for strength and conservatism,
but these can not do all the business, and every now and
then one of these very institutions fails. To say nothing
of laborers and small tradesmen, even the great business
a
Guaranty of National Bank Deposits, by James B. Forgan, p. 12.
& Report of the Comptroller of the Currency, 1908, p. 86.
338
State
Banks
and
Trust
Companies
man usually knows only by general reputation whether
a bank is good or not. He can not know of all of the
bank's investments. Although in touch with the affairs
of the community, he is dependent on current gossip for
any details he may chance to learn of those transactions
that impair a bank's solvency.
The closing of any bank is a surprise to the very directors. Few of its depositors can have had any reasonable
chance to learn anything about it. Whom could they
have asked? The directors? They were deceived themselves. The big business men of the city? If they had
their misgivings they would not have communicated
them. Did they inquire as to the general reputation of
the management, the answer would be almost invariably
"reputation all right." The crash of failure comes upon
the depositor almost always without his having had
personal warning or any practical opportunity to obtain
it. Though there may be little active demand for bank
deposit insurance (it is a novel matter anyway), it is not
true that there is no need for such insurance. The
advisability of giving the holder of a bank's notes protection additional to that afforded by the particular bank
has long been recognized. Until comparatively recent
times the liabilities of banks were chiefly notes. Now
the liabilities are chiefly book credits—deposits. It may
be time that depositors should cease to be dependent
upon the fortunes of a single bank in a single place.
2. Another question raised has already been considered; whether deposit insurance will prevent financial
panics. The conclusion seems inevitable that while
panics can not be prevented, good deposit insurance
would mitigate some of the effects.
339
National
Monetary
Commission
3. Another series of objections is usually stated by
way of reductio ad absurdum. The existence of good
deposit insurance being assumed, it is argued that the
insurance itself would lead to impossible conditions, and
that the insurance system would, therefore, break down.
The simplest form of this reasoning is that deposit
insurance would make deposits in a poorly managed
bank as safe as those in a well-managed bank. But this
is not quite true, if we are correct in believing that deposit
insurance should not be paid until after the liquidation
of the assets of the insolvent bank. With such a provision in laws or policies there would still remain a sufficient incentive to depositors to seek banks operated by
careful and prudent men.
Again, it has been offered as an argument against
the Oklahoma plan, that if the qualities of honesty,
care, and skill would not make *one bank safer and
therefore more attractive for depositors than another,
so enabling the possessor of these qualities to excel in
banking; then honest, careful, and skillful men would
go into some other business, leaving the field to men of
weaker character and inferior ability. This, it is alleged,
would result in such deterioration of bank management
as to destroy the deposit insurance system, if not the
banking system itself. But would men of integrity and
strong character avoid the field of banking if the deposits
of their competitors were insured ? Is there no difference
between banks except in safety? The incentive to good
management in banking is not the mere desire to avoid
failure. If the banker manages ill, his bank will pass out
of existence to his financial loss, whether its depositors
340
State
Banks
and
Trust
Compantes
are insured or not. Deposit insurace is not stockholders'
insurance. Stockholders must lose all their money before
depositors collect any insurance at all. With insurance
in force, stockholders would need and have just as careful officers as now. The careful, skillful, and honest
would still succeed, the reckless, incompetent, and crimiinal would fail.
It is argued, however, that liberality in loans or in
interest rates would then be the chief inducement to depositors. It is supposed that much loss would result,
and that, if the unwise banking methods predicted did
not lead to wholesale bank failures, they would, at least,
result in a great waste of capital and a corresponding economic loss to the country. This argument has its force;
there would be some waste. There has been waste in
Oklahoma, some of it attributable to deposit insurance.
All insurance causes waste. But good insurance prevents
more than it causes. On the whole, fires are not more but
less because of insurance. It is reasonable to hope,
although impossible to prophesy, that deposit insurance,
by stimulating good banks and increasing their number,
will lead to a higher average of management, and to less
waste than at present. Failure and waste under any
proper deposit insurance system, will continue to be sporadic only and probably not more frequent.
As deposits are created largely by loans, it has
been suggested that loans might be made fraudulently,
and«payment of resulting deposits be required out of the
insurance fund, while the loans could not be collected.
The answer to this is that practically the same opportunity exists now. It can just as well be supposed that
341
National
Monetary
Commission
crooks would start an unguaranteed bank now, attract
some deposits, purposely make some bad loans, credit the
loans up as deposits, and pay the fraudulent depositors
with the funds of the good depositors. It is not necessary
to introduce the guaranty of bank deposits to provide
bankers of criminal tendencies with opportunities to defraud. It is probably true that, once in the business, such
bankers could get more deposits under a guaranty or insurance system than they could otherwise get. But
where there are guaranty laws, it is probably harder for
such people to get into the banking business now than
before the laws were passed; and their opportunities are
not sufficiently greater now than before to make it more
likely that the opportunities for crime will be availed of.
It is said that insurance of bank deposits will lead to
undue expansion, that the affairs of existing banks will
be overextended, and too many new ones organized.
It is hard to see how insurance could overexpand existing banks, except by increasing their deposits or by
inducing reckless management. As to bad management,
we have seen reason to hope that, on the average, it is
not more probable with insurance than without. The
increase of deposits surely can not be deplored. At
times it does lead to overexpansion of credits, but this
is a difficulty inherent in the credit system. As the use
of credit increases, because of deposit insurance or any
other factor, each expansion of credit is apt to be larger
than the one before. We can not on this account retrace our steps and reject the improvement of credit
devices. It is possible that too many new banks will be
organized on the adoption of a deposit insurance system.
342
State
Banks
and Trust
Companies
An effort to obtain part of the business of established
banks has been suspected in some of the new Oklahoma
and Kansas organizations.^ In some cases the new competition will be beneficial to the public, in others not. In
every case, the organizers have supposed that the total
deposits of their communities would be more than before. On the economic frontier, at least, it is highly
desirable that additional banks be established, because
under the American system many remote communities,
where the capital necessary to establish independent
banks is lacking, have gone without banking facilities
altogether. The overexpansion feared is not of a character to lead to great alarm. If the new banks attract
sufficient business, they will succeed. If they do not,
they will gradually go out of business, or consolidate
with other institutions. There is no reason to fear
that they will be the cause of a speculative mania or a
general financial crash.
It is said that depositors being by hypothesis satisfied
as to the safety of all banks, there would be no reason
for any bank to build up a surplus, and the result would
be the distribution of all profits, to the weakening of the
banking system and its component parts. There is force
in the argument. It seems to the writer, however, that
surplus is created more to secure stockholders against
possible impairment of capital and suspension of dividends than to reassure the depositors. The latter motive,
of course, is present, and is a great element of safety. The
office of the surplus as a buffer is, however, an important one, and is frequently the chief motive to its accumulation. With a good surplus a bank can sustain, without
alarming its stockholders or cutting off their dividends, a
343
National
Monetary
Commission
loss that, with no surplus or a small one, might not only
stop dividends but call for an assessment to repair capital.
Why stop at insuring the deposits of banks? "Why
not tax all the manufacturers and merchants to pay the
creditors of the unsuccessful or delinquent among
them?" a But why not regulate the business of manufacturers and merchants as minutely as banks are regulated? Why not limit their borrowings? Why not
require them to publish statements, sell only on certain
terms and in certain quantities, and submit to inquisitorial visitation? The principle of protecting the creditors of banks is settled. The new method of doing so
may be open to criticism, but the principle of safeguarding depositors is not itself open to debate.
4. As a further general argument, stress is laid on the
unfairness of taxing sound banks to pay the losses of
depositors of unsound banks. Though this consideration
would have to give way to the general good if deposit
insurance were otherwise desirable, the argument requires
examination. The depositors of good banks do not need
the insurance. At first thought it seems grossly unjust
not only to raise weaker competitors to the same level of
safety, but to put the expense of doing this upon the
strong banks themselves. This, however, is an argument against all insurance. The honest and careful
property owners, through their insurance premiums, pay
the fire losses of the careless and incendiary. The strong
and healthy pay the death losses of the weak. To make
the argument valid, we must go farther, and establish
that the deposit insurance will cause so much additional
loss as to overbalance the benefits to be derived from it;
a Forgan, loc. cit., p. 29.
344
State
Banks
and Trust
Companies
and this has not been established. In fact, we have
concluded that no deposit insurance could be even supposed to make all banks entirely equal in safety. And
would deposit insurance be unfair to the strong banks?
They would get their returns. The amount of hoarding in
this country is enormous. Adequate deposit insurance will
increase the deposits of even the most highly esteemed and
strongest banks, and so bring them additional revenue.
5. The next general argument is that such additional
revenue would not be nearly enough to sustain the burden
of insurance. The average annual loss to depositors in
national banks is less than one-twentieth of one per cent,
but the insurance premiums or taxes for the guaranty
fund would have to be more. The loss experience might
increase under the admitted tendency to unwise management, although this tendency would be in part counteracted by the more frequent examinations and stricter
laws that accompany deposit insurance legislation. To
the losses would have to be added the expense of management. We have seen that the surety companies have been
insuring deposits in a limited way for one-quarter or
one-half of 1 per cent. Mr. Forgan estimates the present
rate of profit on bank deposits, after allowing 5 per cent
for capital invested, to be three-fourths of 1 per cent. a
To insure all of a bank's deposits at one-fourth of 1 per
cent would take too much of this profit. But if the cost
could be reduced to one-tenth of 1 per cent, it is not so
clear that the expense would be too great. Disregarding
the profits that wx>uld come from additional deposits
made on account of insurance, the annual profit on
a Forgan, loc. cit., p. 15.
345
National
Monetary
Commission
deposits would be reduced from 0.75 per cent to 0.65 per
cent. This could be afforded. Or, to calculate the
effect on the ratio of profits to capital and surplus, we
may note that the profits of the national banks for the
year ended July 1, 1909, were 8.72 per cent of capital and
surplus, not much above recent averages. An amount
equal to one-tenth of 1 per cent of the deposits could be
deducted and still leave the profits well above 8 per
cent of capital and surplus. The premium or tax of onetenth of 1 per cent is used here more as illustration than
estimate. Deposit insurance would bring into play so
many tendencies that previous loss experience might
prove wholly unreliable.
Averages, however, do not tell the whole effect as to
loss-sharing, any more than the averages of loss to depositors tell the whole effect of bank failures. While the averages seemingly indicate that going banks could afford to
assume all the losses of depositors in closed banks, the
cost to some of the largest, strongest, and most useful
banks in the country would be too much. A tax of onetenth of 1 per cent would take $200,000 out of a bank that
had $200,000,000 deposits; and it is the large banks in
large cities that would derive the least benefit from deposit
insurance. Even though they would gain in deposits, the resulting additional revenue would probably not pay the cost.
A related objection is that the cost of insurance falls
upon the bank, and not upon the beneficiary, the depositor;
and, as deposits can no more be insured free than can
houses, it has been argued that the whole scheme of insurance paid for by the banks is unsound. A great deal
of other insurance, however, is paid for by the parties
against whose defaults the insurance is written. The
346
State
Banks
and Trust
Companies
employee in many cases pays for the bond that guarantees
his own fidelity. The contractor pays for the bond that
insures the completion of his work free of mechanics' and
material liens. Even banks already buy insurance covering the deposits of public funds. Perhaps the cost of the
employee's bond is made up in his pay, perhaps the premium on the contract bond has already been added to the
contractor's bid, and perhaps the cost of deposit insurance
is eventually paid by the depositor. The fact that the
bank pays it is not an objection nor even a novelty.
Of course, deposit insurance premiums must be paid out
of the earnings from the deposits, but it is a question
whether this means that the cost would fall upon the depositors. Many depositors receive no interest on their
deposits. Most of the five thousand millions of individual
deposits in national banks bear no interest. The trust
companies have shown that in many cases interest on individual deposits can be afforded. While depositors whose
accounts are at interest might find the rate of interest reduced if the accounts were insured, the banks could afford
themselves to pay moderate insurance on an enormous
total of interest-free accounts.
The insurance of interest-free accounts is not impracticable from the point of view of its effect upon the profits
of banks, but may be too expensive for certain banks if
compulsory. Like many another reform or improvement
of method, it will be well to let deposit insurance introduce
itself gradually. This it will do if it can demonstrate its
commercial utility. At present its utility in some localities
seems likely to exceed its cost, in other localities not.
Until the results of current experiments are clear, each
347
National
Monetary
Commission
bank should be allowed to determine for itself whether or
not to procure insurance for its depositors.
6. A sixth objection to deposit insurance lies against
the state-administered kind only, because private insurance
corporations could obviate it. This is the objection to the
large single risks that must be insured. The objection
would apply with considerable force even to compulsory
insurance administered from Washington covering all the
national banks. The State or nation can not insure the
little banks and decline the big ones. This consideration
has been discussed in our study of the Oklahoma situation,
and the objection still seems valid. As stated before, if
state-administered insurance can be conducted with few
or no great losses for a number of years, so that time can
be had to accumulate a great reserve, the plan might succeed. But success would be a matter of luck.
7. The next objection arises in part from the attempt
to control the size of risks. It is, in another form, the
objection already mentioned, that state-administered
deposit insurance involves too great interference with the
conduct of banking. Let the reader refer again to the
comparative table of legislation. It will be seen that several of the States are limiting the amount of deposits a
bank can receive in proportion to its capital and surplus.
Now capital and surplus are the buffers between the investments of a bank and its depositors, and it is commendable that legislators should desire capital and surplus to be
adequate. It is submitted, however, that this is not a
proper matter for legislative regulation. The great function of commercial banking is to aid commerce and industry by the device of credit, and if a given bank can safely
348
State
Banks
and Trust
Companies
do this to the extent of twenty times its capital and surplus,
which it sometimes can (though not often), why so much
the better. So much more capital is left free to other uses.
Again, interest on deposits is limited by the new
legislation, for fear some banks will overexpand by
paying too much interest, will fail, and involve others in
their loss. Some bankers of the older generation do not
believe in interest on deposits at all. American banking
has been haphazard in this regard. The $500 account
has had the same treatment as one of $10,000. Gradually, however, it is becoming recognized that some
accounts are worth more than the stationery and bookkeeping furnished, and bankers must be left free to say
what deposits are worth and what they will pay. Unwis-*
dom in paying too much brings its own penalty. A
private insurance corporation can say to a bank in eastern
Kansas, " I n view of the richness of your community and
the low rates obtainable on loans, it is unwise for you to
pay 4 per cent on your deposits, and if you do we can not
insure them." At the same time the company may be
glad to see one of its risks in western Kansas increasing
its business by paying 4 per cent. This is the beneficial
"higgling of the market," while the fixing of the price of
deposits by legislation would impair enterprise and interfere in some degree with economic development.
The other social objection, that it is not wise to exempt
individuals from the consequences of their mistakes, has
no weight, because it is in so many cases not applicable
to the selection of a depositary. The presumption is
always in favor of the bank under consideration because
the State or nation is allowing it to run. General reputa-
349
National
Monetary
Commission
tion is usually the only guide for the intending depositor.
He must deposit somewhere, or ought to, and no social
purpose is served by putting upon him the consequences
of a mistake he had no means of avoiding.
The immediate future of deposit insurance depends
much upon the result of pending litigation. If the
guaranty laws are upheld, the state guaranty systems
will be used for a time. It may be that in spite of the
large single risks, and the tendency to unwise liberality
in bank management, the state guaranty funds will
grow large enough to assure the success of the experiments. In that case some national banks will probably
begin to insure their depositors. If the laws are held
unconstitutional, there will probably be a good deal of
insurance of deposits in private companies on account of
banks in Oklahoma and perhaps elsewhere. The deposits
of Oklahoma banks increased so rapidly under state
insurance that they are not likely to discontinue insurance altogether if they can find companies to write it.
The laws will all need amendment. The Oklahoma
fund is not accumulated rapidly enough and the Kansas
fund is too small. Kansas does not insure the deposits
made by banks, although these should be insured as much
as any, because they are the reserve of the depositing
banks, and much depends on such deposits. Oklahoma
must abandon the effort to pay depositors as soon as a
bank is closed. This is not the place, however, for proposals of legislative changes.
In the end, we come back to the question of the need of
the insurance. Hoarding and distrust of banks are found
to some extent everywhere in this country. Deposit
350
State
Banks
and Trust
Companies
insurance would call out most of the hoards and remove
most of the distrust. Oklahomans are typical Americans,
and they swelled the deposits of their banks as soon as the
deposits were insured; while large amounts of deposits
came from Americans in other States.
This has been a remarkable economic experiment, projected in time of panic, taken up as a national political
issue, and carried on under the fire of hostile litigation.
If successful, it would serve high social purposes, and the
objections to the state control involved might be waived
if they did not interfere with success, and if there were no
better way to achieve the great purposes in view. Politics can be eliminated. Compulsory state-administered
insurance of deposits has not been proved impracticable,
although the resulting tendency to uncareful management, the expense and perhaps unfairness to sound banks,
and the impossibility of selecting the risks must cause
misgiving. These objections almost all disappear in the
consideration of insurance by private corporations. Such
insurance may prove the ultimate solution of the problem.
It must not be thought, however, that the introduction
of private insurance, as distinguished from that administered by the State, will be rapid. It will be slow. The
benefit to many banks would be small, and others will
take it up most gradually. Bankers are the most conservative of men. They know that their banks are good,
and many will feel insulted when solicited to insure their
depositors against loss. But if the limited observations
here set down are valid over a wide area—and the writer
believes they are—it will gradually and beneficially become
the custom to insure bank deposits.
351
Certain items in bank statements of November i6, iooQ.a
STATE BANKS.
Oklahoma. &
Number of banks.
Capital
Surplus
Due to banks
Individual deposits.
Due from banks
Cash in bank
Kansas. c
Texas.
South Dakota. &
662
<*8i9
$10,767,800
881,340
4,537.o8o
49.775,433
20,659,289
97, 217,510
43,328,797
18,051,023
3 6 , 5 2 8 , 127
5,324,673
4,607,348
J
5°2
474
$15,810,800
$16,114,000
4,957,936
l,475,96o
$6,316,275
972,942
6,541,580
2,59o,55i
49,557,4o8
14,497,871
2,722,583
Nebraska. &
$12,027,240
2, 1 1 5 , 9 7 7
73,283,626
15,075,686
4,452,424
NATIONAL BANKS.
Number of banks.
Capital
Surplus
Due to banks
Individual deposits
United States deposits.
Due from banks
Cash in bank
$10,070,000
206
519
95
$42,393,300
19,551,996
38, 744,096
164,6l8, 078
$3, 740,000
8,263,308
$11,992,500
4,887,573
16,691,222
41, 617,229
67,094,340
765,831
16,657,396
4,968,818
21,179,768
2 , 6 7 4 , 142
651,519
7,780,867
I,137,333
59,693,840
22, 314, 188
747,45o
5,295,688
28,631,498
545,459
8,238, 287
2,747,068
$14,395,000
5,6oo,960
28,948,348
82, 784,953
1,044,760
25,551,358
10,615,642
a The banking departments of the different States do not compile their reports in quite the same way, and the amounts given above as
'due from b a n k s " and as "individual deposits" do not in all cases include
quite the same items. The differences, however, are immaterial
d
b All banks other than national.
Includes 812 state banks, 4 private banks, and 3 trust companies,
e
c Statement of September 29, 1909.
Includes 450 state banks and 52 trust companies.
INDEX.
Affiliated institutions. See Branch banks.
Page.
Aldrich-Vreeland act, a result of panic of 1907
263
currency association under, in Kansas
309
American Bankers' Association, chairman of, testimony
107
Assessment, on stockholders of national banks
83
to restore capital
62-65
See also Insurance of deposits.
Assets of private banks
217-218
Authorization of state banks, powers of supervisors over
156-160
Bad debts defined
61
Baldwin, Simeon E-, Political Essays, cited
26 n.
" B a n k , " term confused with " t r u s t c o m p a n y "
19 n.
Bank commissioner of Oklahoma, takes charge of Columbia B a n k . . .
290
Bank Deposit Guarantee Journal, of Vinita, Okla
281
Bank notes, profit from issue of
227
Bank of Indian Territory, reopened under guaranty law
276
Bank stock, nonresident holders of
224-225
of national banks, distribution of
224-225
Bankers, committees of, supervising banks under guaranty l a w s . . . . 296-297
Bankers, private, definition of
216 n.
Banking laws, general, for incorporation
26-34
referendum of
24
two-thirds majority required for
25
Banks of over $25,000 capital, classified according to capital
229-234
Blaise, E. F., president of Farmers' National Bank, of Tulsa, Okla..
293
Board of bank incorporation, of Massachusetts, power over trust companies
177
of Rhode Island
29
Bonaparte, Chas. J., Attorney-General of the United States, opinion
against national banks participating in guaranty law of Oklahoma. 266,3 2 4
opinion supported b y Attorney-General Wickersham
308
Bonds, as security for deposits
323
" Boss busters"
312
favor bank guaranty law in Kansas
305
Bradstreet Company, on trust company failures
192
statistics of, on bank failures
185-190
59045 0 —11
23
353
National
Monetary
Commission
Page.
Branch banks, conditions imposed upon
136-138
holding companies or " chains "
140-143
investment in corporation stocks
138-140
scarcity of, in United States
135
Breidenthal, John W., bank commissioner of Kansas, recommends
deposit guaranty law
304
Brokers' banks
207
Bryan, W. J., urges deposit guaranty act in Nebraska
316
in Texas
321
California, bank act, 1909
21
bank commissioners of, powers over receivers
169
capital of banks in, graded according to deposits
52
minimum capital of state banks in
37
powers of superintendent of banks in
162
Call days for bank reports
146-147
Capital, average, of private banks
205 n.
banks of over $25,000, classified according to
229-234
classification of state and private banks and trust companies according to, Appendix A, Tables IV, V, VI
252-260
of national and state banks and trust companies in 1909
203
restoration of, in national banks
162 n.
table of national banks with over $100,000 of
239-240
Capital of state banks, amount to be paid in
55—57
assessment to restore
62-65
gradation of, according to population
41-50
according to deposits
5°~53
b y population as check to competition
.
53~54
impairment of
60-62
property accepted in payment of
57~59
increase in minimum r e q u i r e d . . . ,
40
minimum, how determined
37-38
minimum of, compared with that of national banks
42-50
minimum required
35~4o
sectional differences in minimum
38-40
Capital of trust companies, impairment of
72~73
minimum required
65-67
compared with state banks
67-70
payment of
70-72
surplus
72
Cator, George, Trust Companies in the United States, cited
12 n., 237
Chaddock, Robert E-, The Safety Fund Banking System in New
York State from 1829 to 1866
332 n .
" C h a i n s ' ' of banks
140-143
Chase, S. P . , Secretary of Treasury, discontinues collection of statebank statistics
243
354
State
Banks
and Trust
Compantes
Page.
Colorado, Bankers' Association of
328
guaranty of deposit bills in,
328-329
individual guaranty bill in
328-329
Colorado Bankers' Association, opposes guaranty of deposits in Colorado
328
Columbia Bank and Trust Company of Oklahoma City, assessment to
pay depositors of
289
failure of
282-288
effect in Texas
326
showed risks under guaranty law to be u n d i s t r i b u t e d . . . . 298-301
liquidation of
290-293
political influence in
297-298
rapid growth of
287
recriminations over failure of
286
Comptroller of the Currency, appointment of receivers b y
68 n.
assessment on stockholders by
83
report of, 1897, on distribution of national bank shares
224-225
report of, 1909, on profit of bank notes
227
reports of, on state banks
243-244
report for 1909
**lo8,160
report on fee system
152 n.
statistics on state banks b y
199-200
Commercial paper, as payment on stock of state banks
57-58
Commissioner of Internal Revenue, reports of banks to
244
Competition. See Capital of state banks.
Continental Bank and Trust Company of Fort Worth, Tex., enters
guaranty-fund plan
326-327
Credit of state banks compared with that of national banks
223-225
Crisis of 1907, in Oklahoma
262-264
Currency association, proposal of, in Kansas
309
Curtis, Senator Charles, of Kansas
309
Democratic party, favors guaranty of deposits in Kansas
305
platform of 1908, favors guaranty of deposits
280
pledged to guaranty of deposits in Colorado
328
Depositors Guaranty Fund of the State of Oklahoma. See Guaranty
law of Oklahoma..
Deposits, as means of grading capital requirement
50,52-53
insurance of. See Guaranty law of Oklahoma, Kansas insurance
of deposits act, and insurance of deposits.
of reserve
116-117
of trust companies, inactivity of
133-134
reserves against
112-11$
savings, to be segregated
21-22
Depression of 1892-1895, influence on bank failures
188-189
355
National
Monetary
Commission
Page.
Directors, examinations b y
153-156
loans to
97-98
report of loans to
97
required to own $500 stock in Oklahoma
283
Discounts and loans, amounts of single liabilities permitted to state
banks
88-89
exceptions in calculation of excessive loans
90-93
excessive loans, reasons for
86
excessive loans of trust companies
95~97
limitation of individual loans
93-95
limitation of loans by national banks
86-87
loans to active officers
98-99
loans to directors
97-98
loans on stock of other corporations
141-143
proportion of real estate loans
105-106
real estate loans
102-103
and holding of real estate
106
by trust companies
100
condemned b y writers
103-105
length of
108-109
limitation of
100-101
valuable to many state banks
107-108
surplus as basis for computing amount of single liability
89
Distribution of national-bank shares
224-225
Dolley, J. N., bank commissioner, of Kansas, argues for national banks
to participate in guaranty act
308
opposes Kansas Bank Deposit Guaranty and Surety Company. 310-311
Dunbar, C. F . , The Bank-Note Question, cited
226 n.
Examinations of state banks, before beginning business
151
b y directors
153-156
fees for, in Missouri
331
frequency of
150-151
growth of system
148-150
special
151
Examiners, of bankers' associations
296
payment of
151-153
Expense of receiverships
168-169,171
Farmers' National Bank of Tulsa, Okla., closed
293
Failures of " c h a i n s " of banks
141
Failures of state banks
182-191
influence of depression of 1892
188-189
numbers of, 1900-1909, table
189-190
according to Bradstreet
185-190
according to Comptroller's reports
182-184,187
356
State
Banks
and Trust
Companies
Page.
Failures of trust companies
191-192
tables
192-195
Bradstreet on
192
Fidelity business, not to be carried on with trust business
15 nFillmore, Hon. Millard
26
First State Bank of Kiefer, carried down by Farmers' National Bank
of Tulsa
293
Forgan, James B., Guaranty of National-Bank Deposits... . 33411., 338, 345
Frame, Andrew J., of Waukesha, address by
334 n.
Functions, of private banks
206
Georgia, report on loans to directors
97
Gilman, Theodore, Philosophy of the History of Bank Currency in
the United States, cited
26 n.
Guaranty law of Oklahoma, advertisement of
268
a political policy
280-282
assessment under, for Columbia Bank depositors
289
conversion of national banks under
275-277
growth of state-bank deposits under
271-273
increase of state banks under
268-271, 274
lessons from
301-303
national bankers' views of
277-280
partly responsible for Columbia Bank failure
294-296
risks under, undistributed
298-301
securing of public funds not inconsistent with
291
supplementary act of June 11, 1909
283-285
Texas act similar to
324
upheld b y supreme court of State
267
Guaranty of bank deposits. See Insurance of deposits.
Guthrie, executive committee of Oklahoma Bankers' Association
meets in
263-264
Guthrie National Bank, opens Bank of Indian Territory under bankguaranty law
276
Hadley, Herbert S., governor of Missouri
330
Haskell, C. N., governor of Oklahoma, member of banking b o a r d . . .
264
prevents investigation of failure of Columbia Bank
286-298
protests to, against assessment under guaranty law
289
Herrick, Clay, Trust Companies, cited
12 n., 237
Hilliard, H . P., of St. Louis, address b y
334 n.
Hoch, Edward W., governor of Kansas, vetoes bill for a deposits
insurance company
304
Holding companies with " c h a i n s " of banks
140-143
Homans's Bankers' Almanac, statistics of state banks
247-248
statistics of private banks
250
statistics of trust companies
248
357
National
Monetary
Commission
Page.
House of Representatives, resolution to gather statistics of b a n k i n g . .
243
Hughes, Chas. K., governor
130
Huttig, Chas. H . , address by
334 n.
Incorporation, board of bank incorporation in Rhode Island
29
board of incorporation in Massachusetts
177
of banks, methods of
„
26-34
of banks, in Texas
23
of trust companies
29-30
referendum of charters
23-25
•special acts for
26-34
Indianapolis monetary commission, report on bank failures
184
Indian Territory, banks in
265-266
Individual guaranty of deposits scheme in Colorado
328-329
Insolvencies. See Failures.
Insurance of deposits, bill authorizing company for, vetoed in Kansas.
304
b y private corporations
33I~334
company for, organized in Kansas City
332
cost of
345-347
demand for
337~339
future of
3S°-35 I
effect on loans
341-342
effect on surplus
343~344
fairness of
344~345
incentive to good management under
340-341
interference with banking under
348-349
large single risks
348
legislation on, table
to face
264
no cure for financial panics
^
335~336,339
overexpansion under
342
possibility of, b y private corporations
332-334
purposes of
334~337
See also Colorado, Kansas Bank Deposit Guaranty and Surety
Company, Kansas insurance of deposits act, Nebraska deposit
guaranty act, Oklahoma guaranty law, and South Dakota.
" Insurgents.'' See " Boss busters.''
Interest on deposits and deposit-insurance laws
349
International Bank of Coalgate, depositors of, paid from guaranty
fund
281
Investments, as means of grading capital requirement
51, 53
Iowa, capital of banks in, graded according to deposits
50
Jackson, Attorney General, of Kansas, argues for national banks to
participate in guaranty act
308
Kansas, capital of banks in, graded according to investments
51
"boss b u s t e r s " in
305,312
358
State
Banks
and Trust
Companies
Page.
Kansas, deposit guaranty bills defeated in
304
prosperity of
314
Kansas Bankers' Association, address before
303,310
splits on guaranty of deposits
313
Kansas Bank Deposit Guaranty and Trust Company awaits decision
of courts
311-312
participated in b y national banks
309-310
opposed b y state authorities
310-311
organization of
309-311
Kansas City, deposit-insurance company organized in
332
Kansas insurance of deposits act
305-307
constitutionality of
311-312
disrupts Kansas Bankers' Association
313
general bank regulations of
307 n.
how far availed of
313-314
national banks can not participate in
308-309
organization of new banks under
312-313
Kansas State Bankers' Association, organization of
313
Knox, John Jay, Comptroller of the Currency, report 1879
182
History of Banking
332 n.
Laughlin, J. Laurence, Guaranty of Bank Deposits
334 n.
Leedy, John W., Governor, of Kansas, defeated for reelection
304
Letters from National Banks in Oklahoma upon the Guaranty L a w . . . 277 n.
Liability of stockholders
74-85
enforcement of statutory liability
78-85
for unpaid subscriptions
74-76
statutory liability, a secondary liability
81-84
evasion b y transfer
84-85
to creditors not to bank
79-81
Liquidation of state banks, power of supervisor over
167-171
Loans, effect of deposits-insurance system on
341-342
examination of, by directors
153 n.
of national and state banks
227
on real estate, desire for, increases state banks
232
See also Discounts and loans.
Long, Chester I., ex-Senator, of Kansas, attorney against depositsinsurance act
312
Loss b y depositors in national banks
^8
Love, Bank Commissioner, of Texas, urges guaranty bill
321
Lyman, Rollo L-, Government Insurance of Bank Deposits . . . . . . . . 334 n.
Madison, E d m u n d H., Representative of Kansas
309
Management of banks, under deposit insurance system
340-341
Massachusetts, board of bank incorporation, power over trust companies
,
177
359
National
Monetary
Commission
Page.
Massachusetts, legislation concerning reserves of trust companies
in
127-129,132-133
report of bank commissioner 1907, quoted
127,133,140
report of commissioners of savings banks, 1871
14
Menefee, James, treasurer of Oklahoma, a stockholder of Columbia
Bank
297
Michigan, acts concerning segregation of savings deposits in
22
Minimum capital. See Capital.
Missouri, deposit-guaranty bill fails in legislature of
329-330
examination fees in
331
Morrill, E d m u n d N., advocates guaranty of deposits
303
Morse, J. T., jr., Banks and Banking, cited
9
Murray, L- O., Comptroller of the Currency, forbids national banks
to participate in Kansas guaranty act
308
testimony before National Monetary Commission
153
Mutual savings banks, distinguished from state banks
10
National Association of Supervisors of State Banks, proceedings of
the eighth annual convention, cited
21 n.
recommendations of, concerning call days
146
recommends uniform report
147
report of, on extension of supervisor's power
163
report of, on power to authorize new banks
159
National Bank of America, of Salina, Kans., publishes Letters from
National Banks in Oklahoma upon the Guaranty Law
277, 280
National bank charter, advantages and disadvantages of
223-234
National-bank notes, profitableness of
225-227
National banks and guarantee of deposits in Oklahoma
264, 265, 266
National banks, can not participate in Kansas deposits-insurance
act
308-309
capital of, compared with state banks
42-50
conversion of, to state banks under Oklahoma guaranty l a w . . . 275-277
credit of, compared with state banks
223-225
distribution of stock of
224-225
failures of, compared with state banks
182-191
form of reserves of
115
increase of, compared with state banks
220-223
limitation on loans of
86-87
number of
201,203
of large capital, outnumber state -banks
233-234
savings deposits of
228
with capital of over $100,000, table of, b y States
239-340
National Monetary Commission, publication on safety fund s y s t e m . . 332 n .
reports to, on savings deposits
228
special report of banks to
248
360
State
Banks
and Trust
Companies
Page.
National Monetary Commission, statistics gathered by
66
testimony before
107,153
Nebraska, receivers' reports in
182 n.
secretary of state banking board, report 1909, quoted
159
capital of state banks in
41
Nebraska deposits-guaranty act, litigation over
317-318
little effect of, on organization of banks
317
provisions of
316-317
New Hampshire, savings-deposits acts
21-22
New York, act of, concerning objectionable loans
94
definition of profits in
62
general law for bank incorporation in
27
legislation concerning reserves of trust companies in
129-133
safety fund system in
332 and n.
New York special commission on banks, 1907, on profits of trust companies
236
on authorization of banks
159
on " chains " of banks
142
on classification of deposits for reserve requirements
131-132
on evasion of reserve requirements
121
on extension of supervisory power
163
on inactivity of deposits of trust companies
133
on judicial receiverships
168
recommends regulation of loans
94
New York superintendent of banks, on extension of supervisory power
163
on fee system
152 n .
on inactivity of deposits in trust companies
133
on objectionable loans
93~94
on real estate loans
104
opposes maintenance of reserve against trust deposits
132
proposes banking regulations according to nature of business
done
20
urges regular bank examinations
148
Noble State Bank, gets injunction against Oklahoma guaranty l a w . .
267
Nonresidents, as holders of bank stock
224-225
Norton, W. I,., organizer of Columbia Bank and Trust Company
286-287, 2 9 I _ 2 9 3
Number of trust companies, sources for information on
248-249
Officers of banks, loans to
98-99
Ohio, free banking law, concerning surplus
59
Oklahoma, bank commissioner in, examines certain national banks. 112 n.
examination of banks in
266
guaranty of bank deposits in. See Guaranty law of Oklahoma,
panic of 1907 in
262-263
361
National
Monetary
Commission
Page.
Oklahoma Bankers' Association, disrupted b y guaranty law
282-283
executive committee of, plans resumption of cash payments . . 263-264
state bankers' section, resolutions of, for change in guaranty law..
289
Oklahoma City, clearing-house examiners in
297
clearing-house of, offers to help Columbia Bank and Trust Company
288
Oregon, chartering of banks in
23 n.
minimum capital of state banks in
37
Panics, guaranty of deposits no cure for
335~336
reserves during
111 n.
Pennsylvania, commissioner of banking, on securities as reserves. . .
119
history of trust companies in
17
Political Assays, b y Simeon E. Baldwin, cited
26 n.
Populist party, guaranty bill of, defeated in Nebraska
315
Possession of bank, power of supervisor to take
166-167
Private bankers, definition of
216 n.
Private banks, assets and liabilities of
217-218
average capital
205 n.
classified b y capital, Appendix A, Table VI
258-260
decrease of
.•
207-208
defined
9-10
difficulty of regulating
217 n.
field for
206-207
minimum capital of
215-216
number of
201, 207-208
table
210-212
number of, b y States, Appendix A, Table I I I , opp
250
number in West and Middle West
220
prohibition of
218-219
regulation of
, 213-219
supplanting of, b y state banks
208-209
Proctor, F . D., governor, of Vermont
29
Profits, calculation of
62
Public funds, security for, in Oklahoma not inconsistent with guaranty law
291 n.
Public need, and organization of banks
158-160
Publication of state bank reports
148
Real estate, holding of, b y banks
106
loans on. See also Loans, and Discounts and loans.
Receivers, appointment of, b y Comptroller
168 n.
limitations on
169-171
reports of, in Nebraska
182 n.
supervisors as
170
Receivership, application for, b y supervisors
165
expense of
168-169,171
362
State
Banks
and Trust
Companies
Page.
Receivership of state banks and trust companies unsatisfactory*.... 168-169
Referendum of bank charters
24
Republican party in Kansas pledged to guaranty of deposits
305
Reports of state banks, call days for
146-147
form of
147-148
increase in number of
145
publication of
148
special
147
Reports of state-bank supervisors
245-247
Reserve agents, regulations concerning
117,121-123
Reserve cities in Michigan
120 n.
Reserves, cash-in-bank, character of
116 n.
in time of panic
111 n.
of national banks
115
Reserves of state banks, amount of
112-115
concentration of
119-121
compared with national banks
227-228
deposit of
116-117,119-123
evasion of requirements as to
-.
121
form of
115-123
means of enforcement of
123-124
requirement of
110-112
securities as
118-119
solvency of reserve agents
121-123
Reserves of trust companies, comparison with state banks
124-127
inadequacy of
127
legislation concerning, in Massachusetts
127-129,132-133
legislation concerning, in New York
129-133
Resources of banks and trust companies in New York
235
Revenue tax on banks
244
Reynolds, Arthur, testimony on real-estate loans
107
Risks under guaranty law of Oklahoma, undistributed
298-301
Rhode Island, board of bank incorporation in
29
Safety fund system in New York
332
Savings banks, failures of
187
Savings deposits, investment of
228
of national banks
228
reserve against
228
segregation of
21-22
Secretary of the Treasury, statistics on banks in reports of
243
sanction of, for organization of banks
160
Securities as part of reserve
118-119,126
Shallenberger, A. C , governor of Nebraska, elected on depositguaranty platform
315
363
National
Monetary
Commission
Page.
Sheldon, G. L., ex-governor of Nebraska, inclined to favor guaranty
of deposits
315
%
Single liability, amount of a
93, 227
Single risks, in deposit-insurance
298-300, 348
Small state banks, increase of
209
Tables
210-212
Smock, H . H., resigns bank commissionership of Oklahoma
283, 284
South Dakota, deposit insurance in, suggested b y Democratic platform
319
general banking act
320
prosperity of
319
State Association of Incorporated Banks, no organization effected.
320
State Association of Incorporated Banks, provided for
319
Special acts of incorporation
26-34'
State banks, classified b y capital
252-254
credit of, compared with that of national banks
223-225
decline after national banking act
11
defined
9-11
increase of
11-12,199-204
increase of, compared with national banks
220-223
nonresident stockholders
224-225
number of
201, 203
number of, by States, Appendix A, Table I
to face 248
of large capital, outnumbered by national banks
233-234
supervision of, table
178-179
See also Capital, Surplus, Reserves, Discounts, and Deposits.
" Statutory liability.'' See Liability of stockholders.
Steamship agents, bonds required of
215
Stimson, F , J., cited
11
Stock, of other corporations, investment in
138-140
Stock savings banks, distinguished from state banks
10
Stock. See Bank stock.
Stockholders, nonresident
224-225
See also Liability of stockholders.
Stubbs, W. R., governor of Kansas, argues in favor of national banks
participating in guaranty act
308
Supervisors as receivers
170
Supervisors of state banks, application for receivership b y
165
dependence of, on other officials
172-173
power to liquidate
167-171
power to take possession
166-167
powers of
156-171
reports of
245-246
tendency toward giving discretionary powers to
162-164
364
State
Banks
and Trust
Companies
Page.
Supervisors of State banks, when to take action
161-164
See also National Association of Supervisors of State Banks.
Supreme Court of United States, appeal to, on Nebraska depositsguaranty case
318
Oklahoma guaranty law before
267
Surplus, as basis for computing amount of single liability
89
effect of deposit-insurance on
343-344
of state banks
59
of trust companies
72
Suspension of cash payments, 1907
262
Swanger, John E., first bank commissioner of Missouri
330, 331
Texas, capital of banks in, graded according to deposits
52
incorporation of banks in
23
legislature of, passes deposit-guaranty act
322
savings-deposits act, 1909
22
Texas deposits-guaranty act, general banking regulations of
325
new banks under
327
passage or"
322
popularity of
325-327
provisions of
322-325
similarity of, to Oklahoma act
324
Topeka, meeting of Kansas national bankers in
309, 310
Transmission of money, certificate required for firms engaged i n . . .
215
Trust companies, and stock of other corporations
138-143
banking business of, increase in
16-18
capital of. See Capital of trust companies.
causes of growth of
235-237
classified by capital
255-257
decline of bonding and land-title business of
14-15
disuse of trust powers
234-235
early powers of
13
early supervision of
174
excessive loans of
95~97
failures of
191-192
tables
192-195
future of
237-238
history of, in Pennsylvania
,
17
inactivity of deposits in
133-134
incorporation of
\
29-30
increase of
204
later legal regulations of
19-20
liberal reserve requirements, advantages of
235-236
loans on real estate
100
number of
201, 203, 248-250
365
National
Monetary
Commission
Page.
Trust companies, number of, by States
248-249
regulation of, according to character of business
20-22
regulations of savings deposits in
21-22
reserve of. See Reserve of trust companies.
should be classed with large state banks
238-240
supervision of, differs from that of banks
175-178
supervision of, table
180-181
with capital of over $100,000, table of, by States
239-240
Trust Companies of the United States, statistics on trust companies
in
248
"Trust company,'* term confused with "bank"
19 n.
Tulsa, meeting of state bankers' section of Oklahoma Bankers' Association at
289
Vermont, restrictions on single liability in
96
Vinita, Okla., Bank Deposit Guarantee Journal published in
281
Wade, Festus J., address by
334n.
Waggener, B. P., Senator, of Kansas, attorney against deposits-insurance act
312
Warehouse receipts, loans on
91
Webster, Prof. W. C , letter to
273^
Western Bank and Trust Company, of Dallas, Tex., acting as cotton
factor
326
failure of
322
White, Horace, Money and Banking
103, 226 n.
Wichita, Kansas Bankers' Association meets in
310
Wickersham, G. W., Attorney-General, opinion that national banks
can insure deposits
331 n.
opinion that national banks can not participate in Kansas guaranty act
308,324
Wisconsin, bank examiner of, cited
105
report of commissioner of banking, 1909, quoted
141
Young, A. M., becomes bank commissioner of Oklahoma
283,284
letter from
272 n., 273 n.
statement to state banking board, cited
288 n.
$
366
@FedFRASER