Probably the main consideration in the passage of the currency act establishing the system of national banks was to provide a market for the national loans made necessary by the war. The country, however, was glad of a chance to exchange the system of State banks under different laws in each commonwealth for a national system, which would at least be uniform, and which, above all, would substitute a system of national bank note currency for the many issues of State bank notes. As is well known, it was then expected that this bank note currency would replace all other forms of paper currency in circulation. It was probably on this account that the official who was to have charge of the relations of the federal government and the banks, was called Comptroller of the Currency, instead of the Comptroller or Superintendent of National Banks, which, as events have shown, would be a more distinctive title. The issue of legal tender, United States notes and other forms in circulation, and later the addition of a large volume of silver certificates to our paper circulation, have made such a change in the situation that, instead of furnishing all the paper currency, the national bank notes have formed but a comparatively small part of it.

It was mainly the granting of the privilege of note circulation. which first attracted banks to the national system and made any national control of banks possible. The national banks were intended and expected to be primarily banks of issue, and were indirectly given a monopoly of this privilege by a prohibitive tax levied on the issues of all other banks. Outside of their note issues, the powers of the national banks were quite severely restricted. They were expected to be banks of deposit and discount and to transact, as far as possible, the local commercial business of their community. They were denied the power to have branches, to make loans on real estate or to own real estate other than their necessary banking houses, to loan more than ten per cent. of their capital to any one person, firm or corporation, to own or deal in shares of stock, to own or make loans on their own shares of stock as security. Each bank was originally required to keep a minimum reserve against deposits and notes issued, but this was later amended to require a reserve on deposits only.

When the act was first passed, there was much question whether the inducements offered the banks were sufficient to induce them to

!

submit to examination, restriction and control by the United States. Many of the early banks were organized, or converted from State to national as much or more from patriotic motives as from hopes of increased profits. The fact is, the circulation has never been very profitable; never sufficiently so to induce the banks to approach the maximum amount permissible. The highest percentage of possible circulation was issued in 1882 and was 81.6 per cent. This gradually declined to 27.54 per cent. in 1892 and has since then steadily increased to 54.75 per cent. in 1903. A strong inducement to the banks in the larger cities to secure national charters is the system of reserve and central reserve banks, which permits a national bank in other cities to keep two-thirds of its cash reserve on deposit with an approved reserve agent national bank in a reserve or central reserve city; and a bank in a reserve city to keep one-half its reserve in the central reserve cities St. Louis, Chicago and New York. This gives national banks in reserve cities an opportunity to secure large deposits from country banks which the State banks cannot secure, because deposits with State banks are not counted as reserve, and are also subject to the ten per cent. limit on indebtedness by any one firm or corporation. An additional inducement for banks to submit to federal control is the greater confidence in which the banks under national supervision and control are held by the people. This has steadily increased since the creation of the system as the result of the examinations and published reports, and that this is justified is shown by the comparative statement of the failures of national and State banks. From the date of the organization of the national system to January 22, 1904, there were organized 7083 national banks. Of this number 404 became insolvent and 1499 have gone into voluntary liquidation, leaving 5180 in operation. The percentage of failed banks to the total organizations is 5.7 per cent.; the percentage of liquidating banks is 21.2.; the percentage of active banks is 73.1.

From an estimate based on 330 insolvent national banks whose affairs have been finally closed, dividends amounting to 71.31 per cent. have been paid on claims proved amounting to $101,724,840. Including in this estimate, however, offsets allowed, loans paid, etc., the creditors received on an average 78.55 per cent. on their claims. This would make a loss of 21.45 per cent. to the creditors. The total

loss to depositors in forty-one years on deposits, now amounting to almost three and one-half billion dollars, has been less than thirty million dollars. The cost of liquidation, based on the total amount collected from assets and from assessment on shareholders was $8,579,822, or 8.3 per cent. The causes of failure have been classified as follows:

Comparing the result of failures and liquidations among the national banks with the figures in regard to the failures of State banks from 1863 to 1896, as given in the report of the Comptroller of the Currency for 1896, the last date to which complete figures are available, it will be seen that while only 6.5 per cent. of the number of national banks in existence failed during this time, 17.6 per cent. of the other banks in existence failed. And while the national banks which had failed up to 1896 paid to their creditors 75 per cent. in dividends, the State and other banks paid only about 45 per cent. The cost of liquidation of State and other banks which failed is also very much higher than the cost of liquidation of national banks.

The present law authorizes the Comptroller to order an examination of a bank at any time he may see fit. For several years after the establishment of the system but one examination was made each year. After a short time the banks in the reserve cities were examined twice in each year. During the administration of Mr. Eckels. after the panic of 1893, this system was extended until each bank is now examined regularly twice each year. The reports made by the examiners have grown from a short statement of liabilities and resources until they now cover all vital points of interest in regard to the condition and solvency of the bank examined. These reports when received in Washington, are gone over very carefully by a corps of trained men, and letters are written to the banks, calling attention to and criticising the various items in the reports and asking for an explanation or additional information in regard to them. This is probably the most important work of the Bureau, especially in cases where a bank is in a critical condition. Probably the greatest utility which is done by the Currency Bureau is to be seen in those cases where it is

discovered, through the reports, that a bank has made such losses as to involve an impairment of capital or possible insolvency. In more cases than are generally known the Comptroller of the Currency, with the aid of the bank examiner, is able to save a bank which, without intervention and assistance, would have failed. Of course it is essential to success in this matter that secrecy be observed, and it rarely becomes known to anyone outside of the bank and the Comptroller's office what has been the condition of a bank or what steps are necessary to save it. It is the experience of the office that, where the officers of the bank are honest, truthful and make complete statements of their difficulties, in most cases additional security can be obtained for doubtful paper, or such a contribution made by the directors or other stockholders that the impairment of capital or insolvency can be entirely removed, and there are many banks in the United States to-day which have been saved in this way and are now not only thoroughly solvent, but highly prosperous institutions. This system of examinations, of course, is far from perfect. The examiner cannot, in the time at his disposal, make such an inspection as will always result in the detection of fraud and violations of law. If the officers of a bank, or any of them, are dishonest, being in the bank every day, they have every advantage over an examiner, and are very frequently able to deceive him. No system of examination can supply ability or ensure honesty in bank management. This must be supplied by the officers and directors, and upon them the responsibility must rest. In any well managed bank the work of the examiner ought to be supplemented and aided by continued and thorough examinations by the directors themselves, or someone appointed by them independently of the men who regularly have charge of the funds and accounts. In addition to the two examinations in each year, each national bank is compelled by law to make to the Comptroller at least five sworn reports of its condition. These were first made on fixed dates, but it was found that as these dates were known the banks would always prepare to make their statement; and the present method is for the Comptroller to call for a statement of condition as of some previous date, and these are always made without any notice to the bank on dates which are not fixed by the Comptroller until the moment the call is made. A summary of the statement of condition of all banks of the country, divided by States,

which is published within two or three weeks after the issuance of a call, gives very prompt and valuable information as to the condition of the banks in all parts of the United States.

It is worthy of notice that, while the national banking system has been steadily growing until there are now about 5200 banks, with the great resources already referred to, the tendency to increase, both in number of banks, capital and deposits is greater among the banks other than national than among the national banks. The following is a table from the report of the Comptroller of the Currency for the year 1903:

The national banks, which had 67 per cent. of the capital in 1882, had 63.9 per cent. in 1892, 52.4 per cent. in 1902 and 50.43 per cent. in 1903. The national bank deposits, which were 39.7 per cent. of the whole in 1882, were 37.8 per cent. in 1892, 32.2 per cent. in 1902 and 32.8 in 1903. Some of this apparent decrease may be possibly due to more complete returns from the banks other than national which are now obtained, but there is no doubt of the fact that the tendency is for the banks other than national to increase more rapidly. This is true in spite of the fact that the law of March 14, 1900, authorizing the organization of national banks with a capital as low as