the constitution of 1851 having forbidden the state to own bank shares. The state netted a profit of $3,500,000 from the bank during the twenty-five years of its existence. The owners of the old bank stepped into the charter of the Bank of the State of Indiana, which was incorporated while liquidation was in progress, and, though the state had no share in it, it prospered until 1865, when the federal tax of 10 per cent on the notes of state banks forced it out of existence. The State Bank of Ohio, established in 1845, combined the safety fund and bond deposit principles. It had thirtysix branches, each liable for the note issues of all the others. Note issues were limited in amount to twice the capital and were secured by a fund, equal to 10 per cent of the circulation, consisting of money or bonds of the state or of the United States deposited with a central board of control. This bank was always solvent and successful, but passed out of existence with the expiration of its charter in 1866. In 1842, Louisiana, after a disastrous experiment with a state-owned bank, established a sound banking system, some features of which are worthy of note. All banks were required to hold a specie reserve equal to one-third of their liabilities, while the other two-thirds was to be covered by commercial paper limited to ninety days. This was the only limit to the amount of circulation, but prompt redemption was secured by the requirement that no bank should pay out any notes but its own and that balances between banks should be settled weekly in specie. Examinations were made by a board of state officers quarterly or oftener. The directors were individually liable for all loans and investments made in violation of the law unless they had voted against such violation, and absence from five successive board meetings was regarded as a resignation. This law was the first one passed by any state requiring banks to keep a definite percentage of specie reserve against deposits. Under it the banks of Louisiana were sound and prosperous. They weathered the panic of 1857 successfully and continued in successful operation until the capture of New Orleans during the Civil War. Thus through varying degrees of success and failure the state banks were slowly working toward a system of sound banking suited to their local needs. The fiscal difficulties of the Civil War checked this process of evolution and led to the establishment of the national banking system, which has been ever since the backbone of our banking system. Though some of these state banking systems secured to limited sections of the country a fairly uniform and safe currency, yet, considering the entire country, they lacked the essential quality of uniformity. The national banking system adopted in 1863 provided for the whole country a currency at once safe and uniform. Unfortunately, however, this blessing was secured at the expense of the equally vital quality of a good currency-elasticity. The lesson of the history of state banking is that the happy combination of safety, uniformity and elasticity of note issues can best be attained by resting them upon the general assets of the bank, with a guarantee fund for the redemption of the notes of failed institutions, and responsibility of each bank for the redemption of its own notes. READING REFERENCES Bullock: Essays in the Monetary History of the United States, Ch. VI. Catterall: Second Bank of the United States. Conant: History of Modern Banks of Issue, Chs. XIII, XIV. Fiske: The Modern Bank, Chs. XXVIII, XXIX. Knox History of Banking in the United States, Pt. I, Chs. II-VI; Pt. II, Chs. I-VII. Publications of National Monetary Commission: Holdsworth and Dewey: First and Second Banks of the United States. Dewey and Chaddock: State Banking Before the Civil War and the Safety Fund System in New York. Scott: Money and Banking, Ch. X. White: Money and Banking, Bk. III, Chs. IV-XIII. CHAPTER X FUNCTIONS OF THE BANK 75. Classification of banking institutions.-Before taking up the discussion of the functions and operations of the banks, it may be well to make a classification of the various types of banking institutions with which the modern world. is familiar. Banking institutions may be roughly classified as follows: I. Private banks. II. Public or chartered banks. 1. Savings banks. 2. Trust companies. 3. Commercial banks. (b) National banks. 4. Federal reserve banks. 5. Rural credit or farm loan banks. To these might be added mortgage banks, exchange banks, loan and investment companies, and other special kinds of banking institutions, but the groups above embrace the most important types in the United States. 76. Private banks.-Private banking is, perhaps, the oldest form of banking, and some of the most powerful banking concerns in the world to-day are private institutions. They are distinguished from public or incorporated banks in that they are conducted as individual or partnership enterprises, and that until recently they have not been subject generally to the supervision of the state. The tendency in recent years has been toward public regulation of private as well as incorporated banks. In several states, private banks are now forbidden to use a corporate name, or to use the name "bank" or any similar title. Some states require private bankers to have a minimum capital, and in a few Eastern states certain classes of private bankers are required to post a bond. In a few states the banking business is absolutely denied to unincorporated concerns.1 Private banks perform two principal functions: (1) as an adjunct to the brokerage business in large cities; (2) as a means of supplying banking accommodations in small communities where a state or national bank would not be profitable. In larger cities their main business is dealing in securities, foreign exchange and foreign loans. Some of the larger banking houses have been prominent in recent years in promoting large industrial combinations and consolidations, and in underwriting stock and bond issues. Generally speaking, they do not make a practice of discounting commercial paper, making business loans, and accepting checking deposits as commercial banks do. In the smaller communities, having only meager banking facilities, they do perform this service. Public or chartered banks are created by the state or Federal Government, which usually exercises some supervision over them. Savings banks, trust companies, and state commercial banks are chartered, that is, licensed to do business, by the several states; national banks are chartered by the Federal Government, under the terms of the national banking act and its amendments, and the Federal reserve banks are also chartered by the Government. In the early days of banking, each bank was created by a special charter granted by the legislature; now, nearly all the states have a general incorporation or banking law by complying with the terms of which a group of men proposing to establish a bank may get a charter. 1 Barnett: State Banks and Trust Companies (Nat. Mon. Comm.), pp. 213-218. 2 Ibid., p. 206. |