6. Circulating bank notes are re deemable on demand in lawful money at the counter of the issuing bank, and, to facilitate redemption fur ther, each bank is required to deposit with the Treas ury an amount of lawful money equal to five per cent of its outstanding circulation. When notes are pre sented to the government they are redeemed out of this fund. Circulation may be retired by redeeming the notes over the bank's counter and sending them to Washington for cancellation, or by depositing money to an equal amount in the Treasury. The deposited bonds are then freed. The law restricted redemp tion, however, by providing that not more than $9,000,000 of national bank notes might be retired in any one month by the deposit of lawful money. This restriction was changed by the Federal Reserve Act, as will be seen in Chapter XVII.
The notes are subject to taxation by, the govern ment. When they are secured by the two per cent bonds, the banks must pay one-fourth of one per cent semi-annually on the average circulation. When they are secured by higher-rate bonds the tax is one half of one per cent semi-annually. The expense of redemption is also borne by the banks. It is esti mated that it amounts to about $63 for each $100,000 of circulation. It is to be noted that the cost of re deeming notes under the Suffolk system was only $10 per $100,000.
On December 1, 1917, the amount of circulation se cured by United States bonds was $717,052,065. A majority of these bonds bore only two per cent in terest, the lowest rate paid by any nation in the world, and were selling slightly under par. Thus the predic tion that the law would create a market for govern ment bonds was fulfilled. The second object in the adoption of the law—that it might provide a uniform currency—was likewise accomplished, for national bank notes have always circulated freely and with out discount. The note of a Maine bank is as ac ceptable in California as one issued by a bank in San Francisco.
The danger in the system lay in the price which was paid for these benefits. In making the currency stable and uniform it was made inflexible, and in re quiring a deposit of government bonds a system was founded which assumed the continuance of the na tional debt.
7. Reserve national banks are required to keep a certain amount of lawful money on hand as a reserve. In New York, Chicago and St. Louis,—designated central reserve cities—this amount was 25 per cent of the deposits until 1913, when the requirement was changed by the pass ing of the Federal Reserve Act. In certain other cities, called reserve cities, the amount was 25 per cent, but one-half of this might consist of de mand deposits with national banks in New York, Chicago and St. Louis which were approved as re
serve agents by the Comptroller. All other national banks were required to keep a reserve of 15 per cent, three-fifths of which might be deposited with re serve agents in reserve or central reserve cities. The five per cent redemption fund might be counted as a part of the reserve. The enforcement of this reserve provision was the duty of the bank examiners and the Comptroller of the Currency.
The reserve requirements made by the Federal Re serve Act will be given in Chapter XVII.
8. Development of bank deposit history of banking in the United States, since the es tablishment of the national banking system and the attendant restrictions upon note issue by the state banks, deals chiefly with the development of the de posit function. The following table shows the in crease of deposits relative to capital and note issues in 1917 as compared with 1865: 1865 1917 Capital and surplus and undivided profits $464,220,865 $ 2,171,035 Deposits 549,081,254 9,696,459,000 • Notes 171,321,903 717,052,065 While national banks had increased five times in number, the capital and surplus over four times, and the notes over four times, the deposits had increased over seventeen times. In addition to this, moreover, we must count the $12,000,000,000 of deposits in state banks which issue no notes whatever.
This deposit system gave rise to check circulation —the most perfect currency known, a currency which performs a vast amount of money work at a minimum cost, and which expands and contracts during ordi nary times with the varying needs of business. The national banking law completely subordinated the issue of notes to this function.
In parts of the country, particularly the rural dis tricts of the South and West, banking facilities are poor and the people must use either notes or actual money. Furthermore, at certain times of the year their demand for currency of one form or another in creases. It is obviously poor economy to force these districts to use gold in their hand to hand transac tions when that gold can perform three times the money work if held in bank reserve's as a basis for deposit currency. While the deposit currency will expand somewhat to meet the seasonal increases of business in the financial centers, it does not aid in any way the rural community which needs more actual money. For this, if for no other reason, the subor dination of the note issue function prevented the greatest economy in banking.