From the very beginning of our national history institutions enjoying, among others, the privilege of commercial banking have been chartered by our states. For several years after the adoption of our constitution it remained an open question whether the incorporation of such institutions was not their exclusive privilege, but in the case of McCulloch v. Maryland, in 1819, the Supreme Court decided that the federal government also had this right.
During the years 1791-1811, and 1816-1836, the state banks had as competitors the first and second United States banks, and in 1863 so-called national banks entered the field, and, more recently still, trust companies. Private banks have also existed from the beginning, but their number and relative importance have declined in recent years. At the present time the number of state banks exceeds that of all other classes of banking institutions combined, but in capital and resources they are inferior to both national banks and trust companies.
Since each state has had a free hand in the matter of legislation concerning the banks chartered under its auspices, uniformity in the regulations imposed upon and in the kind and degree of supervision exercised over this class of institutions, is lacking. In most cases, however, as compared to national banks, the amount of capital required is smaller; they have greater freedom in the making of loans, especially upon real estate security; and they are not so carefully examined and supervised by public officials. The most frequently imposed legislative requirements are: the accumulation of a surplus fund from earnings; double liability of stockholders; a minimum cash reserve to be kept in the vaults, and an additional reserve on deposit in other banks; the organization of a banking department for the administration of the laws pertaining to them; regular reports and examinations; and some limitation on real estate holdings and on the amount of loans to be made on real estate security. On account of the relatively low capital requirements imposed upon them, and the liberality of the laws concerning them in other respects, state banks have been able to prosper where national banks and trust companies could not exist, and on this account in many parts of the South and West they do most of the banking business in small towns and country districts. They generally perform a wide range of banking functions, including those of investment and savings as well as of commercial banks.
2. National Banks
Our national banking system owes its existence to financial exigencies of the federal government experienced during the Civil War. For a considerable period preceding the outbreak of that struggle the expenses of the government had exceeded its receipts. The deficit was greatly increased as soon as the war began, and Congress did not find it possible immediately to devise adequate new sources of revenue, including a market for government bonds. It was, therefore, forced to the issue of legal-tender notes under authority of an act passed February 25, 1862.
After three issues of these notes, amounting to $400,000,000, had been exhausted, and the value of the notes had depreciated to such an extent that persistence in this method of financiering portended speedy financial disaster, Congress adopted a suggestion made early in the war by Secretary Chase, to the effect that a market for government bonds might be created by compelling banks to purchase them as security for their note issues. An act passed February 25, 1863, provided for the incorporation of banks with the right to issue notes on condition that they purchase government bonds and deposit them with an official to be known as Comptroller of the Currency.
It was the expectation of the authors of this act that the state banks, then numbering over one thousand, would exchange their state for national charters and purchase bonds sufficient to secure their circulation under the terms of the new act, but, since they showed reluctance so to do, in 1865 force was applied in the form of a tax of ten per cent on bank notes otherwise secured. Under this pressure most of the state banks reorganized as national institutions, but a few retained their state charters and formed the nucleus of the state system of the present day. On account of the ten per cent tax, however, the issue of notes by this remnant became unprofitable, and the new national banks have to this day remained the sole banks of issue in the country.
The act of 1863 has been amended several times, notably in 1864, 1870, 1874, 1875, 1882, 1887, and 1900. In its present form it permits the organization of banks with a capitalization as low as $25,000 in towns of 3,000 inhabitants or less, and with a capitalization as low as $50,000 in towns of 6,000 or less. Banks organized under this act must put ten per cent of their profits into a surplus fund until said fund amounts to twenty per cent of the capital; must invest at least twenty-five per cent of their capital, if it is less than $200,000, and at least $50,000, if it is $200,000 or more, in government bonds; and may deposit said bonds with the Comptroller of the Currency and receive circulating notes to the amount of their par value, provided their market value is par or above.
The rights and privileges of these banks are stated in very broad and general terms, a fair interpretation of which permits them to engage in both commercial and investment banking under certain specified limitations, of which the most important are the following: they must not invest in or hold real estate beyond their owns needs for suitable quarters, or temporarily for the purpose of collecting debts due them; they must not accept real estate as security for loans; they must not loan more than ten per cent of their capital and surplus to any one person or firm; and they must keep reserves to the amount of fifteen per cent of their deposits, if they belong to the group known as country banks, and to the amount of twenty-five per cent of their deposits, if they belong to either the reserve city or the central reserve city group.
In the case of country banks, at least two-fifths of the required reserves, and in the case of reserve city banks, at least one-half, must consist of specified forms of money in their own vaults. The remainder may be balances payable on demand in approved banks in reserve or central reserve cities in the case of country banks, and in the central reserve cities in the case of reserve city banks. In the case of banks in central reserve cities, the entire reserve prescribed by law must consist of money in the vaults. These required minimum reserves must not be infringed upon. When a bank's cash and balances with its reserve agents fall to the prescribed minimum, discounting must be stopped under penalty of suspension of privileges and liquidation by the Comptroller of the Currency.