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The Financial Reports of National Banks as

a Means of Public Control

By F. A. Cleveland, Ph.D., New York University



New York University

The inquiry suggested by the title would seem to be one of possibility rather than precedent or present practice. Assuming this point of view, discussion will first proceed from a consideration of the law under which powers of control may be exercised. Broadly speaking, there are three legal questions raised: (1) What are the powers of control given by the National Bank Act? (2) Under the Act, what are the purposes for which control is to be exercised? and (3) In the exercise of powers granted by the Act, what devices or means may be employed by the Comptroller to reach these ends?

The Powers of Control given by the National Bank Act.

The first of these questions may be answered by direct appeal to the language of the Act. Section 87 of the National Banking law (Section 5211 R. S.) contains this specific mandatory declaration: "Every Association (i. e., National Bank) shall make to the Comptroller of the Currency not less than five reports during the year, according to the form which may be prescribed by him." This general provision is supplemented by grants of specific power to the Comptroller, which enable him to call for other reports as often as he may desire, and to obtain such information as he "in his own judgment" thinks necessary "to a full and complete knowledge" of financial condition; a bank failing or refusing to comply with such request is liable to a penalty of $100 pcr day (Sec. 5213 R. S.). It would appear, therefore, that the Comptroller is not lacking in authority to obtain any and all information which may be necessary to administrative supervision. A further reading of the National Bank Act quite as concisely forces the conclusion that the Comptroller has all the power necessary to a complete control over National Banks and their operations, as to all subjects which are properly

within the range of official discretion; this power extends even to the taking possession of the bank itself and winding up its affairs for failure to comply with his demands.

The Purposes for which Control is to be Exercised.

This brings us to consider the second question raised, viz.: the subjects of official discretion, or the purposes for which official control is to be exercised under the Act. It has been repeatedly affirmed that the prime purpose of the National Bank Act was to create a better market for Government bonds at a time when the National credit needed support. In the midst of civil strife when the financial resources of the nation were strained almost to the point of bankruptcy it was conceived that a very large part of the capital employed in commercial banking enterprise in the United States might be utilized to support the Government. The plan proposed was an old one-one in which the banks, being induced to use their capital to purchase Government bonds, would be permitted to use bank notes with which to carry on their business. By this device it was thought that the financial strength of the banks might be brought to the support of the Government-i. e., that the State banks might be induced to bring over their capital into a new National system where it might be utilized in the manner indicated.

To make such a scheme acceptable, however, two conditions. must be met: The first result of such a plan of support to the bond market would be a large increase in the money circulation of the country; the bank-note would not be received unless it were made as sound (i. e., as valuable) as the money then in current use—the greenback. But this was not the only condition that the Government must reckon with. In the experience of the past, business had suffered quite as much from unsound bank credit in the form of customers' accounts (or deposits) as it had from an unsound currency. National reaction against "wild-cat" banking had but recently forced the several State systems over to a basis of capitalization and official inspection to protect the people against wholesale fraud and bankruptcy. If these State institutions were to be brought into a National banking system-if the Government was to utilize their capital resources to fund its own necessities-the new National system

must carry with it all the provisions for safety and for the protection of the public against the speculative devices of the unscrupulous that three decades of legislative reaction had evolved.

Wild-cat banking was banking on "commercial assets" without adequate capitalization. From 1837 to the time of the Civil War the whole trend in banking ideals and in banking legislation was toward the strengthening of banking equipment. It had been found from bitter experience that a bank which was not properly capitalized, and which therefore did not have capital resources sufficient to support its credit transactions, was as dangerous to those coming into business contact with it as was a mine or a factory whose construction was faulty and whose machinery was overcrowded. To the public, the poorly-equipped bank was much more dangerous than the mine or the factory by reason of the fact that, in case of collapse, a much larger number of people were constantly within the danger line.

After two years of agitation and amendment and compromise an acceptable law was enacted. This Act carried with it two protective features: (1) the note was to be secured by a collateral deposit of bonds purchased, and (2) those holding the credit accounts of the bank were to be protected by provisions which required what was thought to be adequate capitalization before business might be begun, and by the exercise of official supervision to prevent "impairment of capital" during the period that business should continue. It was for the purpose of enforcing these two provisions of safety and security that the Bureau of the Currency was created and a Comptroller was appointed.

Means by which Control may be Exercised, and the Ends of the Act Reached.

The functions of the Comptroller have a direct relation to the conditions above described. The first or, as it was then viewed, the prime purpose for which public control was to be exercised was to guarantee the soundness of the new National currency. This is clearly expressed in the first clause of the Bank Act which recites: "There shall be in the Department of the Treasury a Bureau charged with the execution of all the laws passed by Congress relating to the

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