Gold and Silver Certificates

A large number of banks exist and flourish under state regulations. Many of them were organized and engaged in business prior to the formation of our national banking system and declined to enter that system, but the larger portion have since been organized from time to time to meet the real or supposed needs for better banking facilities in the communities in which they are located. As previously stated, by an amendment to the National Banking Law in July, 1866, the government imposed a tax of ten per cent, upon the note circulation of all state banks. The purpose of the tax was to drive the state bank notes out of circulation and thus make room for the national bank currency, and it accomplished its purpose perfectly. In other respects, however, the state banks were unaffected and have continued to do business in the same way, subject only to the regulations imposed by the laws of the states in which they are situated. A state bank discounts notes and drafts, receives deposits, buys and sells exchange and performs all the regular functions of any bank. Its internal mechanism and organization of officers and clerks is substantially the same as those of a national bank. The state laws usually require a directory of five or more persons to manage the affairs of the bank, and it must be a regularly organized corporation, formed and conducted in compliance with the statute.

While national banks are usually considered as possessing decided advantages over state institutions, the latter in turn have, in the opinion of some bankers, decided advantages, among which may be mentioned: They are not subject to such severe restrictions as to capital, reserve, etc.; are not examined so critically; are not, in many states, required to make reports or returns; have greater liberty in the making of loans, and may certify checks in excess of the amount which the depositor has on deposit. This latter right is strictly and rigidly denied to national banks, and at first thought would seem to be only a wholesome restriction as applied to any bank, but in certain classes of transactions, notably those connected with the stock exchange, it may be necessary for a bank to certify in excess of the deposit. While the practice is clearly objectionable it may be necessary under certain conditions. The banking laws of the different states are very dissimilar and produce the same variety in the character of the banks formed under them, so that in order to understand the requirements and restrictions under which state banks exist, it will be necessary to consult the statutes of the different states. Next lower in the order of size and importance come the private banks.* These differ from state banks, being usually not corporations with a fixed capital divided into shares and controlled by a board of directors, but having an indefinite capital owned entirely by one or more persons. The stockholders in a state bank are limited in their liability to the bank, but in the case of a private bank the owners or stockholders (in case of a stock company) are individually responsible for the liabilities of the bank without limit. Private banks usually grow out of favoring conditions. In a town too small to justify the organization of a national bank with a capital of $25,000, and yet needing banking facilities, a leading merchant who is well known as a responsible man, decides to open a bank as an annex to his store. His bank commands the confidence of the public, on account of his reputation for wealth, character and honesty. Or some man who is in the habit of buying notes or making small loans at remunerative rates, finally concludes to enlarge his office, and hangs out his sign as a banker. The capital of a private banker may be small, but he is well known in the community and is esteemed for his ability and integrity. His bank is not subjected to any examination by state or national authorities, nor is he required to make reports or publish statements of the bank's condition. Such is the origin of many of the private banks. As the resources of the community grow and the business of the private bank gradually expands, it is frequently organized into a state bank or merged into the national system.

*In 1902 there were 1,302 state banks in the United States, according to the comptroller's report.

Advantages of State Banks

As to the details of management of private banks, these are, or should be, in compliance with the rules of larger institutions.           Even private bankers cannot ignore the rules of safe banking without sooner or later suffering the consequences. In rare instances the practice has been adopted by private bankers of making public reports of their condition, and these reports have been published along with those of state and national banks, as a means of inspiring public confidence. The private banker can offer to his customer the advantages of unlimited liability for every obligation of the bank, and a greater concentration of responsibility, with a stronger sense of direct personal interest in the welfare of the concern than is felt by either the directors or officers of incorporated institutions, either state or national. The best guaranty which a customer can have of the soundness of his bank is the integrity and ability of its management, and the private banker can offer this as well as the state or national bank.

During the latter part of the 18th century there seemed to be a general advance in the spirit of fraternal and provident societies in Europe and especially in England, and out of this grew the mutual savings bank as a means of taking care of the poor who came to want by improvidence or misfortune. The earliest institution of this kind was established in 1765, but not until about the close of the century did these institutions become permanently established. In 1816 and 1817 the need of savings banks became apparent in New York and Boston. The country was then becoming well settled and the people were able to accumulate a surplus out of their earnings, but poverty prevailed throughout the country generally, on account of the improvidence of the people, who squandered their earnings and paid no attention "to those small but frequent savings when labor is plentiful which may go to meet privation in unfavorable seasons." A bill was introduced into the New York legislature in 1819 and passed, for the incorporation of savings banks, and continues, with some modifications, as the basis of the savings bank system of the state at the present time.

In 1900 there were in the United States 1,007 savings banks, with deposits aggregating approximately $2,600,000,000, held in the name of 6,000,000 depositors. This vast sum represents the accumulated savings of a large class of people, especially those who are inexperienced in handling or investing money and whose savings are too small to loan or invest to advantage. The savings bank offers to the weak the aid of the experienced who understand finance, to receive their small gains and hold them securely against that time when need or desire may require the store for prudent use. "It accumulates money; it inspires and trains men to get money and to the wise use of it; it adds to the sum of national resources in money, and adds to the means for advancement in material improvement." Many state banks combine the functions of banks of discount with those of private savings banks, and while the character of the two are entirely different there is no conflict between them. The savings bank aims to gather wealth while the commercial bank uses it, and turns it into the channels of business. The profits of the savings bank, of the mutual kind, go to the depositors, while the profits of the ordinary commercial bank go to the stockholders or owners. "The savings bank opens its doors to savers; it receives and permanently invests money. The bank opens its doors to borrowers and users of money, for pay. One serves by receiving and keeping, the other serves by lending. The savings institution is a receiving reservoir from little springs; the bank is a distributing reservoir of accumulated capital."

Savings banks in the United States differ from those in England in not being required to invest their funds exclusively in government securities. Thus of the $2,600,000,000 on deposit in our savings banks in 1900, 30 per cent, was loaned out on real estate, 18 per cent, invested in state and other stocks and bonds, 11 per cent. in railroad bonds and stocks, and 3 per cent. in government bonds. While the ordinary discount bank must keep its funds as free as possible from permanent investments such as real estate loans, the savings bank pursues exactly the opposite course, its favorite form of investment being real estate loans. The savings bank does not hoard its money. It does not engage in speculation, but makes investments in solid securities of recognized value.

In the eastern states nearly all of the savings banks are conducted upon the mutual plan. Their capital consists of the deposits, and the depositors are the owners of the bank. The business of the bank is managed by a board of trustees who receive no compensation for their services. The only salaries paid are to those officers and clerks who give their entire time to the business. The income arises from interest on loans, and after taxes and running expenses are paid, the net profits go to the depositors as interest or dividends. This system seems to most nearly accomplish the object for which such institutions were formed, as it gives the depositor the full benefit of whatever profit may arise from the conduct of the business.

In the western states and on the Pacific coast most of the savings banks are private institutions, organized and conducted for the benefit of the owners, the same as other banks, and paying a fixed rate of interest to depositors. Such institutions have a fixed capital and maintain a reserve to meet withdrawals and secure the confidence of the public. They correspond to state banks, being usually subject to certain requirements and restrictions of the state laws, intended for the better security of depositors. Of course it is largely a question of management whether a savings bank is secure or not, either by the mutual or private system. All the law can do is to hedge about the interests of depositors and place restrictions upon officers. The depositors themselves must judge as to the ability and integrity displayed in the management of the institution.

The rules for the conduct of the business differ widely in different savings banks. Some receive deposits as low as a dime, while a dollar is the limit in others. Some allow interest only on the smallest balance of the half year, while others compute the interest upon monthly balances. Money withdrawn before the end of the month or half year is not entitled to interest for the time it was on deposit. Most banks, as a means of protection to themselves, may require thirty or sixty days' written notice from depositors before money can be withdrawn. This regulation is only enforced in time of panic to enable the bank to realize on its loans or securities.