STATE BANKS, financial institutions doing a banking business under the su pervision of the State, which guarantees its integrity to a greater or lesser ex tent, according to the individual State's laws, the relation between the bank and the State being similar to the relation between a National bank and the Fed eral Government. The State bank had its origin in New York, in the Free Banking Law of 1838, which terminated an evil system, or lack of system, un der which banking corporations and private individuals were granted char ters through special privileges, often by bribery and subterfuge. The law of 1838 extended banking privileges to all corporations willing to conform to its provisions, and so laid the groundwork on which the national banking system was based by Federal legislation. Since it is impossible to describe even super ficially the characteristic features of the State banking systems in all the States, an outline of the National banking sys tem, which is based on the original laws of New York and Massachusetts, will give a more concrete idea of underlying principles, more especially since the banking legislation of the younger States has been in turn taken from Fed eral legislation.
The first of the various acts of Con gress constituting the legislation on which rests our National banking sys tem was passed in February, 1863, which authorized certain banks to issue notes on bonds deposited in the United States Treasury. In June, 1864, this law was revised and amended and a bureau was established in the Treasury Department, in charge of the Comp troller of the Currency, which was to supervise the newly created National banking system. In cities of six thou sand population or over banks must have at least $100,000 capital. In smaller communities $50,000 was the limit, though this has since been reduced to $25,000. No bank could begin business before half of its capital stock had been paid in, and then the balance must be paid in within 5 months, in monthly installments. At least 30 per cent. of the paid in capital must be converted into United States bonds and deposited in the United States Treasury, 90 per cent. of whose market value could be represented in notes issued by the bank. The entire amount of these notes, how ever, was then limited to $300,000,000, but this limitation was later removed. Banks in rural communities were re quired to keep on reserve funds equal to 15 per cent. of their outstanding
notes and deposits, of which three fifths might be re-deposited with other National banks in 17 specified large cities, known as reserve cities. Banks in these reserve cities must maintain reserves equal to 25 per cent. of their deposits and outstanding notes, but half of these reserves might be deposited in the National banks in New York City, the central reserve city. Later Chicago and St. Louis were also ranked as cen tral reserve cities. The rural banks were compelled to provide for redemp tion of their notes at par by National banks in reserve cities. These latter must make similar arrangements with National banks in the central reserve cities. Added to these various restric tions was the semi-annual inspection of the books of all National banks by in spectors representing the Comptroller of the Currency, which was supposed to protect depositors against dishonesty or bad business judgment on the part of the bank officials.
It is on more or less the same prin ciples as the above system that the State banking systems are founded. Some slight differences and modifications there are. As an instance, Massachusetts has no State banks of discount and deposit. New York, California and Texas and several other States authorize corpora tions to transact discount and deposit banking, savings bank and trust com pany business under one charter. This kind of banking, known as "department store banking," is now also largely per mitted the National banks under the Federal Reserve Law of 1913, making it difficult for the State banks in those States which, have not made similar provisions to compete with the National banks. State banks, on the other hand, are more likely to be closely adapted to the needs of the local communities, espe cially in the agricultural districts, where rural credit is a problem that a Na tional bank cannot so easily solve.
State banks outnumber National banks 2 to 1. In the beginning of 1920 there were 17,225 commercial State banks, representing an increase of 637 over the year before. The total resources of all the State banks in the country amounted to over $11,500,000, 000. Individual deposits amounted to $8,999,000,000. Loans, discounts and in vestments in bonds and securities to talled $8,983,000,000.