Part 8

The inquisitorial powers of the National Bank Examiners are practically unlimited. They have a legal right to put any bank officer on oath in questioning the affairs of the bank. They look into every department in the most searching way, and any disobedience of the law is reported promptly to the Comptroller. These Examiners are appointed by the United States Government; and if they want to hold their positions, they must be strictly impartial in their reports to the authorities.

The provisions of the National Bank Act have been so rigidly enforced, that in forty-four years, or since the Act was passed by Congress, the average annual loss to depositors in National Banks, has been only thirty-seven one thousandths part of one per cent. of their deposits. Practically no loss at all.

Isn't that a tribute to the wisdom of that law; to the strict supervision of the Government; and to the honesty and integrity of the officers of National Banks; past and present? It has happened, of course, that some spoilers have occasionally obtained control of a National Bank, and have dishonestly used the depositors' money in risky ventures for their own profit. But the officials of the Treasury Department have soon sized them up, and such men shortly find the banking business not to their liking, especially with "Uncle Sam" as a supervisor.

XIII

NEW YORK EXCHANGE

Practically every bank in the United States keeps part of its funds in banks in New York City, the money center of the country. All National Banks are allowed to keep part of their reserve in the National Banks of New York, Chicago and St. Louis, the three Central Reserve Cities. For these reasons checks drawn on banks in these three cities are generally accepted at par, that is, collected without cost to the depositor.

In this connection, the word "exchange" comes from the fact that you exchange your personal check for the bank's check on another bank, located in some other city.

In remitting for collections, or for balances due, the banks outside of the three Central Reserve Cities, generally send their checks on one of these cities, according to their location.

Under certain conditions you will notice your local newspapers quoting New York Exchange at so much premium or so much discount. These rates are generally in use only between the different banks in your city. The banks do not charge a depositor any premium for its checks on other cities, unless the amount of the checks called for is large.

The proper way to draw your check when you want New York Exchange, is to make it read "Pay to the order of New York Exchange." The bank then makes out its check on a New York bank payable to your order. Then you should endorse the bank's check to the order of the party to whom you are remitting.

Banks do not like to sell their checks on other banks to strangers. Some expert at raising checks may buy New York Exchange for ten dollars and raise it to ten thousand. Also he might buy the bank's check with the idea of obtaining the Cashier's signature for the purpose of forgery.

XIV

THE METHOD OF ISSUING NATIONAL BANK NOTES

Many people have the idea that a National Bank, having a capital of, say one hundred thousand dollars, can call on the United States Treasury Department for an equal amount of National Bank Notes, without expense to the bank; and thus have double the amount of its capital to lend at the start.

The National Bank Act does say that each National Bank must issue currency equal to a certain per cent. of its capital; and further, that each National Bank can issue currency equal to the full amount of its capital. But the profit on taking out this currency, or circulating notes, is so very small that many banks do not issue as much as the law allows.

These circulating notes must be issued under certain expensive conditions. First--the bank must purchase and deposit with the Treasurer of the United States an amount of registered United States Bonds, equal at their par value, to the amount of the circulating notes called for. Second--dependent on the kind of bonds deposited, the bank must pay a tax on its circulating notes. Third--the bank must stand the expense of plates for printing and the express charges for sending it the original issue of its notes. Also, when any of its worn-out or mutilated notes are sent to the Treasury Department, they are destroyed, and the bank then has to pay the expense of re-issue and the express charges for sending them to the bank that originally issued them. The signature of the President and Cashier of the bank must be affixed.

Therefore National Banks, in calculating the possible profit on taking out circulating notes, have the following example to be considered in issuing every one hundred thousand dollars of their notes:

Bonds purchased: United States Registered 2% bonds to be paid at par in 1930.

Price of bonds 104 $104,000.00 Par value of bonds purchased 100,000.00 Money worth 6%. Income from bonds $2,000.00 Income from circulating notes loaned at 6% 6,000.00 --------- $8,000.00

LESS DEDUCTIONS.

Annual tax on circulating notes $500.00 Sinking Fund to retire premium on bonds at maturity, amount to be charged off each year 181.00 Expenses (plates, express charges, etc.) 75.00 756.00 --------- Net Income from Circulating Notes $7,244.00 Net Income from loaning $104,000.00 (net cost of bonds purchased) at 6% 6,240.00 --------- Net profit on taking out $100,000.00 of circulating notes $1,004.00

Hence the net percentage of profit on taking out National Bank notes on this class of bonds, is about one per cent., based on their present market price.

The profit on taking out circulation on other United States bonds is even less.

Suppose the market price of the 2% bonds purchased was higher, say 108, as it was several years ago, the profit would be even less. Also, if the bonds decline in market value below par (as in case of war, for instance), the bank must stand that loss; and purchase and deposit an additional amount of bonds, so as to make the market value of the bonds deposited equal to the amount of its outstanding circulating notes.

In order to retire its circulating notes and obtain possession of its United States Bonds, deposited as security therefor, the bank must send the Treasury Department an amount of lawful money equal to the amount of the circulating notes it wishes to retire. It can then "withdraw a proportionate amount of the bonds held as security for its circulating notes."

But the law says that not more than nine millions of National Bank Notes can be retired in any one month. Therefore, if the market price of United States bonds goes up to a point where all profit on its circulation is wiped out, the bank may have to wait several months until previous requests for retiring circulation are out of the way. In the meantime United States bonds may have gone down in price.

As has been stated, a National Bank can take out an amount of circulating notes, or National Bank currency, equal to the amount of its capital. But the profit on the operation is so small (leaving out the chances of actual loss) that many banks do not issue notes to the full amount allowed. The following figures relative to the total capital of all the National Banks, and the total circulation of these banks on the dates stated, conclusively prove this fact. (These figures are taken from the annual report of 1907 of the Comptroller of the Currency.)

November 12, January 26, March 22, 1906. 1907. 1907. Capital Stock $847,514,653.00 $860,930,624.00 $873,669,666.00