out circulating notes, have the following example to be considered in
issuing every one hundred thousand dollars of their notes:
Bonds purchased: United States
Registered 2% bonds to be paid
at par in 1930.
Price of bonds 104 $104,000.00
Par value of bonds purchased 100,000.00
Money worth 6%.
Income from bonds $2,000.00
Income from circulating notes loaned at 6% 6,000.00
---------
$8,000.00
_LESS DEDUCTIONS._
Annual tax on circulating notes $500.00
Sinking Fund to retire premium
on bonds at maturity, amount
to be charged off each year 181.00
Expenses (plates, express charges,
etc.) 75.00 756.00
---------
Net Income from Circulating Notes $7,244.00
Net Income from loaning $104,000.00 (net
cost of bonds purchased) at 6% 6,240.00
---------
Net profit on taking out $100,000.00 of
circulating notes $1,004.00
Hence the net percentage of profit on taking out National Bank notes on
this class of bonds, is about one per cent., based on their _present_
market price.
The profit on taking out circulation on other United States bonds is
even less.
Suppose the market price of the 2% bonds purchased was higher, say 108,
as it was several years ago, the profit would be even less. Also, if
the bonds decline in market value below par (as in case of war, for
instance), the bank must stand that loss; and purchase and deposit an
additional amount of bonds, so as to make the market value of the bonds
deposited equal to the amount of its outstanding circulating notes.
In order to retire its circulating notes and obtain possession of its
United States Bonds, deposited as security therefor, the bank must send
the Treasury Department an amount of lawful money equal to the amount
of the circulating notes it wishes to retire. It can then "withdraw a
proportionate amount of the bonds held as security for its circulating
notes."
But the law says that not more than nine millions of National Bank
Notes can be retired in any one month. Therefore, if the market price
of United States bonds goes up to a point where all profit on its
circulation is wiped out, the bank may have to wait several months
until previous requests for retiring circulation are out of the way. In
the meantime United States bonds may have gone down in price.
As has been stated, a National Bank _can_ take out an amount of
circulating notes, or National Bank currency, equal to the amount of
its capital. But the profit on the operation is so small (leaving out
the chances of actual loss) that many banks do not issue notes to the
full amount allowed. The following figures relative to the total
capital of all the National Banks, and the total circulation of these
banks on the dates stated, conclusively prove this fact. (These figures
are taken from the annual report of 1907 of the Comptroller of the
Currency.)
November 12, January 26, March 22,
1906. 1907. 1907.
Capital
Stock $847,514,653.00 $860,930,624.00 $873,669,666.00
Circulating
Notes 536,109,931.00 545,481,870.50 543,320,375.00
May 20, August 22,
1907. 1907.
Capital
Stock $883,690,917.00 $896,451,314.00
Circulating
Notes 547,918,696.00 551,949,461.50
It can be seen from these figures that the National Banks _could_ have
taken out _over three hundred millions_ more of circulating notes than
they _actually_ issued during the time stated. And these figures are
not exceptional.
Banks, other than National, "shall pay a tax of ten per centum on the
amount of their own notes used for circulation and paid out by them."
This tax is prohibitive and no State Banks issue circulating notes for
this reason.
XV
THE SO-CALLED "SPECIAL PRIVILEGES" OF BANKS
In every political campaign, especially the National ones, the orators
talk a great deal about the "special privileges" of banks. But they are
never defined exactly.
According to them, one privilege (?) the bank enjoys is the power to
lend a certain per cent. of its depositors' money. But if it could not
do this, what reason would the bank have for existing? That is its
principal real source of profit.
Practically the only other privilege the National banks have, is the
right to take out National Bank Notes, or currency. As has been shown
in the remarks on "The Method of Issuing National Bank Notes," this
privilege allows so little profit that the banks do not use it to the
full extent of the law.
On the other hand, consider a few of the many risks the bank is
constantly taking. Every loan it makes is a risk. A few bad loans, made
through dishonest or visionary representations of its customers, may
blot out the bank's profits for a year or more. Every check or draft
cashed is a risk. Every check, draft, or note it takes for collection
is a risk. In fact, every transaction the bank undertakes is more than
ordinarily hazardous. Moreover the profits of the average city bank are
not large. Considering their responsibilities and the innumerable ways
by which they may involve the bank, the salaries paid the employes,
from the President to the messengers, are small. Also remember there is
no "water" in the stock of banks. The capital of every National Bank
must be fully paid in, before it is allowed to open for business; and
in most of the States, the banks, other than National, must have their
entire capital paid up within a year from their beginning. The net
profits of successful banks, located in cities with a population of one
hundred thousand or over, average about six to ten per cent. The
business man, when considering an investment in a mercantile or
manufacturing enterprise, generally counts on double that amount of
dividends.
If, as the politicians state, the banks enjoy so many "special
privileges"; it is strange that the people of every section of the
country do not rush in to organize and take stock in banks.
* * * * * *
Transcriber's note:
Minor typographical errors have been corrected without note.
Irregularities and inconsistencies in the text have been retained
as printed.