$46,000,000 of bank notes in circulation. During the war with England (1812-1815) $110,000,000 of such notes were in use. The second United States Bank was established by Congress in 1816 to remedy to some extent the evils then existing.

After the liquidation of the second United States Bank (1836), the state banks remained the only system of banking. In 1837 there was a suspension of specie which brought ruin to many banks. Banking continued in an unhealthy condition owing to the little restraint on the issue of bank notes and to the slight supervision of the state governments over the banks.

In several states efforts were made to remedy the evils of banking. In Massachusetts, the "Suffolk Bank System" was adopted. The name is derived from the fact that the Suffolk Bank led in the movement.

"The Suffolk Bank, with the coöperation of six other banks of Boston, organized a clearing house for notes of outside institutions, by establishing a redemption fund in the Suffolk Bank. The banks which entered the system would have their notes received at par in Boston, the financial center, and would be called upon for redemption only at specified periods by the Suffolk, which would receive in redemption, also at par, any notes of banks in good standing in lieu of specie." (A. B. Hepburn, Contest for Sound Money, p. 92.)

The effect of the system was to restrain circulating notes within reasonable limits. It served to lessen the disaster to New England banks in the panic of 1837.

New York also strove to provide a remedy against the general disorder of banking. In 1829, the "Safety Fund System " was adopted by statute. It required banks to contribute to a joint fund for the redemption of notes and payment of deposits of any of their number which should be overtaken by disaster. Each bank contributed annually a certain amount to the fund until the contribution amounted to 3 per cent of the total bank capital. The system, though good in itself, failed on account of defects in details and careless enforcement of its provisions.

In 1838, New York passed the "free banking" law. It

provided "that anybody might form a bank and issue notes without receiving a charter from the legislature, as had been the custom in the past. But these notes must be based on United States bonds, or bonds of the various states (subsequently limited to New York bonds), or approved real estate mortgages, which securities were deposited with the state as security." (Handy, Banking Systems of the World, p. 16.)

Similar laws were passed in other states. The theory was good, but much depended on the enforcement of the laws, as well as upon the nature of the laws.

As a result of inadequate laws and the non-enforcement of laws, the business of banking remained in a very unsettled condition throughout the country, although here and there might be found cases of good and honest business management and sound banking laws. As a rule, however, there was instability in the currency, many failures of banks, and much loss and suffering among depositors.

A. Barton Hepburn, in his Contest for Sound Money, thus gives a general review of "Banking conditions for the whole period of national existence prior to the Civil War:

"1. First United States Bank (1791-1811) — Sound bank currency.

"2. Interval (1812-1816) State bank currency inflation, suspension, disasters involving enormous losses.

'3. Second United States Bank (1817-1836) — At first unsettled conditions as to currency and business, then sound paper currency by reason of United States Bank enforcing redemption of state bank notes, and formulating a standard of credit to which the state banks in competition were obliged to conform; then during last years of its existence unsettled conditions owing to political power exerted to prevent renewal of bank's charter.

“4. 1837-1846 - Inordinate inflation, suspension and losses measured by the hundred millions, withdrawal of government funds from the banks, with the declared hope of preventing undue expansion of bank note issues by so doing.

5. 1847-1860 Banking becoming more conservative; deposits counting more and note issues less as a means of extending credit; note issues, however, unrestrained and entailing enormous losses upon the people; failure of subtreasury to restrain or control banking methods, but disastrously interfering with business by withdrawing from the channels of trade and locking up funds which should be current." (p. 169.)

(4) National Bank System. The national bank system was introduced by law of Congress, Feb. 25, 1863. It owes its origin to the Civil War. Its main object was to secure a market for United States bonds, so that the government might get money to defray the heavy expenses of the war.

The law establishing the system was at first imperfect and was amended and changed during succeeding years.

The organization of national banks has been described on a preceding page. As there mentioned, the banks were obliged to invest a certain proportion of their capital in United States bonds. They were allowed to issue bank notes up to 90 per cent of their bond investment.

The limit of the whole issue of circulating notes was fixed by the laws of 1863 and 1864 at 300 millions of dollars. In 1870 the limit was raised to 354 millions, and in 1875 all limit was removed.

On March 3, 1865, a ten per cent tax was imposed on the note issues of all banks not national banks, and this tax, by practically prohibiting the circulating notes of state banks, caused many of them to secure national bank charters.

By an Act of June 20, 1874, a national bank redemption bureau in the Treasury Department in Washington was authorized.

Other laws affecting the system were made, until the law of March 14, 1900, finally determined the present status of national banks.

By this act, the minimum capital in a place having 3000 or less inhabitants was fixed at $25,000; the amount of circulating notes that could be issued by any bank was fixed at the par value

of the United States bonds held by the bank instead of 90 per cent of such bonds as heretofore; the tax on circulating notes was reduced from one per cent per annum to one half of one per cent per annum on all bonds paying 2 per cent interest. The 2 per cent bonds were instituted in 1900 by consolidating the 35 of 1908-1918, the 4s of 1907, and the 5s of 1904 into what are called Consols of 1930.

The growth of national banks was at first very slow, but after the passage of the law of March 3, 1865, imposing a tax of 10 per cent on the note issues of all other banks not national banks, and especially after the law of March 14, 1900, the activity and growth of national banks have been remarkable. Shortly after the former act, over $400,000,000 worth of United States bonds were held by the national banks, and in a few years after the act of 1900, the number of national banks increased by 691. (Cf. Annals of the American Academy of Political and Social Science, Nov., 1910, p. 119.)

QUESTIONS

1. What is banking? What is a bank?

2. Name the different kinds of banks. Why are certain banks called com

mercial banks?

3. Describe briefly the organization of a national bank. amount of capital required to organize a bank?

4. What kind of bank has the right to issue bank notes ? bank issue bank notes?

What is the

Can a state

5. What reserves are national banks required to keep? What are reserve cities? Central reserve cities?

6. How are state banks organized?

7. How are private banks organized?

8. What is the prime object of a savings bank? Who are the managers of a savings bank?

9. How are loan and trust companies organized?

10. What are the functions of a commercial bank?

II. What is discount? What factors determine the rate of discount?

12. How are bank loans made? What is single-name paper? Doublename paper? What may be the nature of the security offered for loans?

13. What is the object of a credit department in a bank?

14. Upon what kind of security are loans made by commercial banks? 15. What is meant by bank credit? What is its advantage?

16. Describe the functions of loan and trust companies.

17. Describe the functions of savings banks.

18. Give a brief historical sketch of banking in general; in the United States.

19. Describe the first Bank of the United States; the second Bank of the United States.

20. What is the independent treasury system? When did it begin?

21. Give a brief account of state banks in the United States.

22. When did the national bank system begin?