Banks, therefore, by the purchase of bonds realize several advantages, which may be enumerated as follows: 1. They provide themselves with a secondary reserve, which is also earning interest.
2. They provide themselves with an important means of ser vice to their customers.
3. They have an additional source of earnings in the profits made from the traffic in bonds, profits which may be regarded as the price paid by the customer or correspondent for expert analy sis, supervision, and counsel.
4. They realize indirect advantages by pledging bonds as collateral for the security of national bank notes and of govern ment and postal savings deposits.
5. They are enabled to help the government by creating an additional market for its bonds.
The following table gives the amount of the various kinds of investment securities held by national banks on June 3o, 1919 and 192o: The savings banks, state banks and trust companies, and pri vate banks on the same dates owned $7,178,000,00o and $7,201, 000,000, respectively, of investment securities.
Powers of Commercial Banks with Respect to Securities The power of commercial banks to buy, sell, and own securi ties is limited by law as well as business prudence. The national banking laws do not empower a bank to purchase the stock of any corporation other than that of the federal reserve banks and of banks engaged in international or foreign banking, the latter investment requiring the previous approval of the Federal Reserve Board.' In one case' the Supreme Court has held that, The power to purchase or deal in stock of another corporation is not expressly conferred upon national banks, nor is it an act which may be exercised as incidental to the powers expressly conferred. A dealing in stocks is consequently an ultra vires act, and being such it is without efficacy.
It is unlawful for a national bank to acquire and hold the stock of another national bank as an investment or for a speculation. This prohibition has restrained the consolidation of banking by the stock ownership of allied or chain banks. But although national banks are impliedly prohibited from dealing in stocks, they may accept them when transferred to them, bona fide, in satisfaction or payment, or by way of compromise of debts due to or from the bank, or when taken with a view to their subse quent sale or conversion into money to make good or reduce an anticipated loss; this right rests upon the bank's implied power to take reasonable and appropriate measures to secure its own obligations or to collect or secure debts due to it.
On the other hand, the legal inhibition from engaging in or promoting purely speculative business prevents a national bank either buying stock in a corporation organized for such purpose or even taking such stock to protect itself from loss on a pre-exist ing indebtedness. Stocks legally acquired by a national bank, as above, must be disposed of promptly. The Comptroller requires this action, and the bank can pass good title.
National banks have no power to speculate, traffic, or deal in stocks or bonds, or to buy and sell them for a commission. It has been held not to be incidental to the banking business, nor an implied power pertaining to a bank, to buy or sell stocks or bonds.
Section 5136 U. S. Revised Statutes empowers a national bank to discount and negotiate " promissory notes, drafts, bills of exchange, and other evidences of debt." Bonds are held to come within the classification of "other evidences of debt." It has long been the custom of national banks to deal in government bonds, and the Treasury Department has more or less encouraged the practice. National banks, until the Federal Reserve Act was enacted, were compelled to purchase United States bonds to secure their national bank notes, and such bonds are still used for that purpose. The Aldrich-Vreeland Act provided for emergency circulation secured by state and municipal bonds; and as financial agents of the government banks have been encouraged to buy and sell and exchange its bonds. It seems likely, therefore, that Congress intended that banks should be permitted to deal in government bonds.