53D CONGRESS, 3d Session.

HOUSE OF REPRESENTATIVES.

{ REPORT

No. 1508.

NATIONAL BANKING ASSOCIATIONS.

DECEMBER 17, 1894.-Committed to the Committee of the Whole House on the state of the Union and ordered to be printed.

Mr. SPRINGER, from the Committee on Banking and Currency, submitted the following

REPORT:

[To accompany H. R. 8149.]

The Committee on Banking and Currency, to which was referred the bill (H. R. 8149) to amend the laws relative to national banking associations, to exempt the notes of said banks from taxation upon certain conditions, and for other purposes, having had the same under consideration, report the same back with the recommendation that it

pass.

The laws of the United States heretofore passed authorizing national banking associations to issue circulating notes require that the banks issuing them shall deposit with the Secretary of the Treasury bonds of the United States as a security for the ultimate redemption of such notes. The amount of circulating notes can not exceed 90 per cent of the par value of the bonds. At the time the national banking act passed a bond security of this kind was deemed necessary to secure the bill holders against possible loss.

was

THE SECURITY REQUIRED.

Your committee are of the opinion that a security to the full amount of the circulating notes issued is no longer necessary for the safety of the notes. The bill, the passage of which is recommended by your committee does not require the deposit of bonds of the United States, or of any other interest-bearing obligation, but in lieu of such security provides as follows:

First. A guaranty fund consisting of Treasury notes, including the notes issued under the act of Congress approved July 14, 1890, equal to 30 per cent of the circulating notes applied for.

Second. A safety fund, which will amount when it reaches its maximum to 5 per cent upon the total amount of national-bank notes outstanding.

Third. A first lien upon all the assets of the association issuing the

same.

In case the guaranty and safety funds and the assets of the failed bank are not sufficient to redeem the notes of such bank, a pro rata assessment upon all the other banking, associations, according to the amount of their outstanding circulation, is to be made by the Treasury Department, and the banks so assessed shall have a first lien upon the

assets of each failed bank for the amount properly chargeable to such bank on account of the redemption of its circulation. It is believed by your committee that the funds thus provided will be amply sufficient to secure the notes of failed banks.

AMOUNT OF THE SECURITY.

According to the report of the Comptroller of the Currency for the year ending October 31, 1894, it appears that there were at the close of that year in operation in the United States 3,756 national banks, with an authorized capital stock of $672,671,365. The bill reported by your committee limits the amount of circulating notes which any bank may issue to 75 per cent of its capital stock. If, under this bill, the national banks should take out the entire circulation to which they would be entitled, the aggregate of circulating notes would be $504,000,000. The 5 per cent safety fund upon this circulation would amount to $25,020,000. The guaranty fund required by the bill upon this circulation would amount to $151,000,000.

The resources of all the banks at that time amounted to $3,473,922,055. It thus appears that upon a possible circulation of $504,000,000 there would be a present available security of $151,000,000 guaranty and $25,000,000 of safety funds, and an ultimate fund upon which assessments could be made to the amount of $3,473,922,055. During the great financial crisis of 1893, 158 national banks suspended payment, having a capital stock of $30,350,000. If the national banks in the United States had taken out the full amount of circulation to which they were entitled at that time, under the proposed bill, if it had been in force at that time and if the suspended banks had taken out their maximum circulation, the notes of such banks would have amounted to $22,762,000. Thirty per cent of that amount would have been secured by the deposit of legal-tender notes. This would have left $13,934,000 of circulating notes for payment out of the safety fund, which, as before stated, would have amounted to $25,020,000.

These facts demonstrate conclusively that if the proposed bill had been in force during the crisis of 1893, if all the banks had theretofore taken out circulation to the maximum amount allowed by law, and if the failed banks had also taken out their maximum circulation, the guaranty and safety funds would have been ample for the payment of the entire circulation of the outstanding notes, and would have left a surplus of over $11,000,000 still in the safety fund without the necessity, even in a great crisis of that kind, of making any assessment on the resources of the other national banks. But of the 158 banks which suspended payment, 86 banks, with a capital stock of $18,205,000, resumed business within the year, and were able to pay all their liabilities, including their circulating notes. Only 65 banks, with a capital stock of $10,935,000, passed into the hands of receivers. If we assume that the notes of the 65 banks only were to be paid out of the safety and guaranty funds, there would have been only $8,200,000 of notes outstanding if all of the banks which passed into the hands of receivers had taken out notes to the maximum amount allowed.

The 30 per cent guaranty fund would have paid $2,460,000 of these notes, which would have left only $1,100,000 to have been paid out of the 5 per cent safety fund. But all of the failed banks had available assets, which would have been applied to the payment of their outstanding notes. Their unavailable assets, which would have realized something in the end, and the amount which would be received on account

of the personal liability of the stockholders, would further lessen the amount which would have to be paid out of the safety fund. If it should be assumed that all of the national banks which were in existence on the 31st of October, 1894, were organized under the proposed bill, and that all of them in a great financial crisis should fail, and if it should be assumed that all of them had taken out circulation to the maximum amount allowed by the proposed bill, the conditions would then be as follows: The guar

The whole amount of circulation would be $504,000,000. anty and safety funds in the Treasury would amount to $176,000,000. This would leave $328,000,000 in circulating notes, the payment of which would be secured by pro rata assessments upon all the national banks whose resources, as before stated, amounted, on the 31st of October, 1894, to $3,473,922,055. The amount of notes, it will be seen, would not equal 10 per cent of the resources out of which they could be paid. The resources of the national banks do not include the personal liability of the stockholders, which is equal to the whole amount of the stock, and this amount, which at that time, as before stated, was $672,000,000, is an additional security for the ultimate redemption of the circulating notes. In view of these facts, your committee are of the opinion that should the proposed bill become a law, the notes which would be issued under it would be absolutely safe under any and all possible business conditions.

JOINT LIABILITY FOR CIRCULATION.

Some doubt has been expressed as to whether banks would take out circulating notes under the proposed bill, in view of the remote and contingent joint liability of all the banks for the circulating notes of each. Your committee are of the opinion that this is not an unreasonable requirement. National banks enjoy valuable privileges and franchises. They owe something to the public, in consideration of the benefits which they receive from legislation. If they are regardful of their own interests and the interests of the note holders there can be no loss to them nor to the note holders by reason of this requirement. The tax of 1 per centum upon the circulating notes of national banks heretofore required is reduced by the proposed bill to one-half of 1 per cent per annum. The proceeds of this tax are intended to reimburse the United States for the expense of printing bills, in the first instance, and reprinting mutilated bills and expenses incident to the issuance and ministration of the currency bureau.

There is also a tax imposed of one-half of 1 per cent upon the amount of circulating notes to constitute the safety fund provided for in the bill, but when this tax accumulates to 5 per cent upon the amount of the circulating notes outstanding it is to cease, and will not be reimposed unless the safety fund be reduced in payment of the notes of failed banks. The Secretary of the Treasury is authorized by the proposed bill to invest any money belonging to the safety fund in United States bonds, and such bonds and the interest accruing thereon are to be held as a part of the safety fund.

REDEMPTION OF NOTES.

The proposed bill provides that each bank shall redeem its notes at par on presentation at its own office, or at its own office and at such agencies as may be designated by it for that purpose. Any bank may retire any portion of its circulation by forwarding its notes to the Comptroller of the Currency for cancellation, and thereupon 30 per cent of

the amount of the canceled notes shall be returned to the bank. This permits the bank, when retiring its notes, to withdraw its portion of the 30 per cent guarantee fund, but it can not withdraw any amount of the 5 per cent safety fund. Any bank which desires to take out circulation after a portion of the safety fund has been contributed by other banks must pay its pro rata share into said fund before receiving notes.

DEFACED AND MUTILATED NOTES.

The same provisions of law as heretofore existed in regard to defaced and mutilated notes are provided in the proposed bill for notes issued under it.

TIME OF TAKING EFFECT.

Section 7 provides that national banks heretofore organized and having bonds on deposit to secure circulation shall, on or before the 1st day of July, 1895, withdraw such bonds, and deposit with the Treasurer of the United States a guarantee fund, consisting of legaltender notes, including the notes issued under the act of July 14, 1890, equal to 30 per cent of its outstanding circulation at that time, thus bringing the existing banks under the provisions of the new law.

SECTIONS REPEALED.

Sections 9 and 12 of the act approved July 12, 1882, and section 31 of the act approved June 3, 1864, and all acts and parts of acts amendatory thereof are repealed by the proposed bill.

The sections repealed are as follows:

SEC. 9. That any national-banking association now organized, or hereafter organized, desiring to withdraw its circulating notes, upon a deposit of lawful money with the Treasurer of the United States, as provided in section four of the act of June twentieth, eighteen hundred and seventy-four, entitled "An act fixing the amount of United States notes, providing for a redistribution of national-bank eurrency, and for other purposes,” or as provided in this act, is authorized to deposit lawful money and withdraw a proportionate amount of the bonds held as security for its circulating notes in the order of such deposits; and no national bank which makes any deposit of lawful money in order to withdraw its circulating notes shall be entitled to receive any increase of its circulation for the period of six months from the time it made such deposit of lawful money for the purpose aforesaid: Provided, That not more than three millions of dollars of lawful money shall be deposited during any calendar month for this purpose: And provided further, That the provisions of this section shall not apply to bonds called for redemption by the Secretary of the Treasury, nor to the withdrawal of circulating notes in consequence thereof.

The Secretary of the Treasury stated before the Committee on Banking and Currency that it might not be absolutely necessary to repeal section 9, above mentioned, for the reason that the proposed bill dispenses entirely with the deposit of bonds and with the payment of lawful money to redeem circulation, but the spirit of the section is, as stated by the Secretary, that the national banks shall not redeem in the aggregate more $3,000,000 of their circulation per month, and having retired any part of their circulation they shall not be permitted to increase it again until after six months. It is for this reason that the bill proposes to repeal that section.

Section 12 is as follows:

SEC. 12. That the Secretary of the Treasury is authorized and directed to receive deposits of gold coin with the Treasurer or assistant treasurers of the United States, in sums not less than twenty dollars, and to issue certificates therefor in denominations of not less than twenty dollars each, corresponding with the denominations of United States notes. The coin deposited for or representing the certificates of deposits shall be retained in the Treasury for the payment of the same on demand.

Said certificates shall be receivable for customs, taxes, and all public dues, and when so received may be reissued; and such certificates, as also silver certificates, when held by any national banking association, shall be counted as part of its lawful reserve; and no national banking association shall be a member of any clearing house in which such certificates shall not be receivable in the settlement of clearing house balances: Provided, That the Secretary of the Treasury shall suspend the issue of such gold certificates whenever the amount of gold coin and gold bullion in the Treasury reserved for the redemption of United States notes falls below one hundred millions of dollars; and the provisions of section fifty-two hundred and seven of the Revised Statutes shall be applicable to the certificates herein authorized and directed to be issued.

Section 5207 of the Revised Statutes, referred to in section 12, prohibits any national bank from depositing certain kinds of Government securities as collateral for obligations incurred by them, and that provision is made applicable by this section to the gold and silver certifi cates.

It is the opinion of the Secretary of the Treasury that if the right to deposit gold and obtain gold certificates is taken away a greater amount of gold will be paid into the Treasury of the United States for customs duties than heretofore.

Section 31, above mentioned, which is repealed by the proposed bill, requires each national bank in certain cities to keep a fixed reserve equal to 25 per cent of the amount of their deposits, and requires national banking associations in other cities to keep a fixed reserve of 15 per cent on their deposits.

That part of the section which required the computation to be made on the circulation of the bank as well as on the deposits has been repealed, so that as the law now stands these banks are required to keep this reserve on their deposits alone.

The repeal of section 31 is not an essential part of the currency system embraced in the proposed bill. The Secretary of the Treasury, in his report to Congress at the beginning of the present session, recommends this repeal, and gives the following reasons therefor:

It will be observed that the plan submitted proposes the repeal of all provisions of existing laws which require national banks to hold a fixed reserve against deposits, and, as this is a departure from the practice which has prevailed continuously for more than thirty years, it is proper to state, briefly, the reasons which have prompted me to make this suggestion. When the national banking system was originally authorized it was regarded by many as a doubtful experiment at best, and accordingly various precautionary restrictions and limitations were imposed for the security of the note holders and depositors which practical experience has since shown to be unnecessary and sometimes harmful. Among these are the requirements that bonds shall be deposited to secure 90 per cent of their par value in circulating notes and that a fixed reserve, which can not be lawfully diminished, shall be held on account of deposits. The consequence of this last requirement is that when a bank stands most in need of all its resources it can not use them without violating the law.

The necessity for holding a sufficient reserve against deposits is not questioned, and, in fact, the business of receiving deposits and discounting paper ought never to be conducted without it, but it should be held for actual use when the occasion arises, and not made legally inaccessible at the very time when it was theoretically supposed to be beneficial in sustaining the credit of the bank and affording relief to its customers. Under the present law, when a bank finds its reserve in danger of reduction below the legal requirement, on account of the demands of its depositors, it is compelled at once to call in its loans, thereby increasing the distrust and aggravating the situation, which a judicious use of the reserve would have relieved; and besides, at such times, in order to protect the reserve, which is then entirely useless for all practical purposes, clearing-house certificates, various forms of time cheeks and bills, and other devices of doubtful legality are habitually resorted to for the purpose of supplying circulation to take the place of lawful money lying idle in the vaults of the banks.

To provide for a reserve which can not be utilized, even at a time of the greatest stringency and distrust, without incurring the penalties of forfeiture, affords a most striking illustration of the impolicy of legislative interference with the