7. Restrictions on note principal reg ulations concerning note issue refer to the total amount to be issued, the percentage of reserve to be carried, and the kind of assets for which notes may be exchanged. All of these questions have been con sidered in Chapter VI.
The requirement that bank notes may not be issued in denominations below a certain figure has a signifi cane which is not commonly understood. National bank notes and Federal Reserve notes may not be issued in denominations under five dollars. In or dinary times, the smallest Bank of England note is five pounds, which is almost twenty-five dollars. The reason for this is that small notes remain in circula tion longer than large ones and, consequently, there is greater danger of inflation in their issue. Govern ments usually monopolize the privilege of putting out small circulating notes. The profit is handsome, and there is no decisive reason why the government should not make the profit so long as the issue is limited to the amount needed for making change in business.
The levying of a tax upon note issue for regulative or other purposes has been discussed in a previous chapter.
8. investments are pro hibited to banks and others are regulated. National banks may not buy stocks, except stock in the federal reserve banks, because of the speculative element in their value. They may not buy real estate, above the amount required for the banking house, because of the difficulty of liquidating it quickly without loss. Investments of savings banks are regulated with ex treme care. The theory behind all this regulation is that as soon as a bank steps out of the field of pure commercial credit, that is, buying and discounting commercial paper or lending against it, there is dan ger of either tying up its assets in some fixed form or dissipating them altogether in speculative venture.
9. Examinations and reports.—The average banker realizes that most of the provisions of the law are sound and that it would be to his interest to fol low them even if he were not required to do so. Propositions of unusual attractiveness, but of doubt ful legality, arise from time to time, however, and the temptation to "take a chance" is hard to resist. The danger is all the greater where there is a large num ber of small banks. Realizing this, our Federal gov ernment and most of the states have examiners who occasionally pay unexpected visits to the banks just to make sure that they are complying with all legal requirements. The examiners do more than merely enforce the letter of the law. They often point out practices which appear unwise altho they may be al together within the law. Bankers usually heed the examiner's warning, as they do not wish to be put in a bad light with either the state banking department or the Comptroller's office. Inspections are usually made in a friendly spirit with the sole purpose of help ing the banks.
Detailed reports are demanded by the authorities from time to time. These are assembled, and the com bined figures serve as an indication of banking con ditions thruout the country. It will appear that re serves are high or low in certain section. The nature of loans will be revealed in a general way. The com bined reports published by the Comptroller of the Currency and the various state banking departments are valuable to one who understands how to interpret them. They must be analyzed carefully and com pared with preceding reports before any conclusions of value can be derived from them.
10. Government government tries to help the banks in various ways. Usually the at tempts are blundering and ineffective, for they are nearly always artificial. Our Federal government has adopted the policy of depositing funds with banks when their reserves are running low, for the purpose of supplying them with ready cash. The shortage may have been caused in the first place by the unscien tific fiscal system of the government.
During the panic of 1907, the governors of two of the states declared legal holidays, for seven weeks in one case and eight in the other, in order that banks might be relieved from the necessity of paying their debts. It was simply a device for legalizing bank suspension. Something of a similar nature was done by most of the nations of the world when they de clared moratoria at the outbreak of the European war in 1914. The suspension of payment on cer tain kinds of debts was legalized. Some countries went much further than others, but the idea was the same—to help banks and other debtors to tide over a critical period by legalizing delay in making pay ments.
Other less important examples of government aid might be given. On the whole it may be said that the banks give to the government more help than they receive from it.
11. Control of banking in the United States.— Much has been said already about the various ways in which governmental control is exercised in the United States. National banks operate under Fed eral charter and regulation. They are also subject to a certain amount of legal restraint by the states in which they are located. State banks, on the other hand, are regulated primarily by the laws of the re spective states, but they are brought under Federal jurisdiction in certain matters. One of the most im portant is the Federal law imposing a tax of ten per cent upon state bank note issue, the result of which was the elimination of state bank notes.
If state banks enter the Federal Reserve system, they become subject to a great deal of supervision from Washington. Most of them have refused to join the system. Prominent among the reasons for this hesitation are unwillingness to submit to Federal supervision and uncertainty as to just how far the Federal Reserve Board might go in trying to regu late the business of state banks.