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nations and recommendations have reversed tendencies toward failure of numerous banks. Banks against whom evil rumors were circulating have been saved by the publication of a favorable clearing house report.

235. State guaranty funds. Several states of the United States have not been satisfied with the plan of safeguarding the banking business by the means which have been explained in the preceding paragraphs. Regulation of national banks and of most state banks makes no guarantee that depositors will not lose; it minimizes the risk. Regulation seeks to prevent unwise banking, or to discover unwise banking before there is loss to depositors. Oklahoma, Texas, Kansas, Nebraska, North Dakota, Washington, South Dakota, and Mississippi, have passed laws which guarantee certain depositors against loss. As a sample of the legislation, the Texas plan will be described. In Texas the guarantee applies only to those deposits of state banks which do not bear interest and which are unsecured. There are two plans. One is the bond security plan which is used by only about 32% of the banks. According to this method a bank deposits, with the state banking board, a bond equal at least to the amount of the capital and surplus of the bank. If its deposits exceed six times its capital and surplus additional bond to the amount of the excess must be deposited. In case the bank fails the banking board collects from the bondsmen up to the face of the bond enough to prevent loss to the depositors. The other plan is the guarantee fund plan. Each bank the first year was required to pay into the fund an amount equal to one per cent of its daily average deposits. Afterward each year a payment of one fourth of one per cent of the deposits was required until the state fund amounted to two million dollars. Now every year each bank makes whatever payment is necessary to maintain the fund, but no payment can be called for in

excess of two per cent of the daily average deposits of the bank. If a new bank starts it pays into the fund three per cent of its capital and surplus and at the close of the year the amount is, adjusted on the basis of its deposits. Instead of each bank being required to make payments in cash to the fund, it is provided that one fourth be paid in cash, and the other three fourths be kept as a deposit to the credit of the state banking board and subject to its call. If a bank fails the depositors are paid from the guaranty fund. The fund has by law a first lien on the assets of the bank and as it liquidates the fund recovers a part or all of its advances to the depositors. During the 40 months prior to June, 1923, the fund made good to depositors about $10,000,000, of which losses 70 per cent were said to be due to fraud and speculation.

Those who favor the guaranty of deposits do so because they regard it as a form of insurance in behalf of depositors. The plan is opposed on the ground that strong banks have little risk of failure, and it is therefore believed to be unfair to tax the deposits of sound, well-managed banks in order to create confidence in banks which may be weak or poorly managed. In some states there has been a tendency for strong state banks to become national banks in order to avoid the burdens of the guaranty plan. Oklahoma, which originated the plan, repealed its guaranty law in 1923. The National City Bank of New York reports the experiences of some of the other states as follows: 2

"The State of Washington in 1917 established a guaranty system which was voluntary, upon the theory that the banks would enter it from choice, for the security offered to depositors. By 1920 116 banks, with deposits of $65,000,000, had entered it. The failure of the Scandinavian-American Bank of Seattle with $15,800,000 of deposits broke the fund, and the system collapsed.

2 National City Bank of New York, Economic Conditions, June 1923, p. 90.

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"The Legislative Committee of the Minnesota Bankers Association is authority for the statement that since November 15, 1920, the losses chargeable against the bank guaranty fund of North Dakota are estimated at between $4,000,000 and $5,000,000. Under the law the maximum amount that can be raised by assessments is $275,000 annually. Allowing interest on the deposits at 5 per cent, this maximum assessment will just about pay the interest on the liability without reducing it.

"The State of Nebraska has a bank guaranty law, and the experience of the solvent banks under it has been a bitter one. The maximum assessment under the law, one and one-tenth per cent upon all deposits, was levied in each of the years, 1920, 1921 and 1922, and one-half of one per cent has been levied already for 1923. The last legislature, however, reduced the maximum assessment in one year to one-half of one per cent, which makes it easier on the member banks hereafter, but at the expense of the security. It amounts to a partial retraction of the principle upon which the law is founded."

236. Issue of national bank notes. Federal reserve and national banks have a monopoly of note issue in the United States. It is unprofitable for any state bank to issue notes on account of the law "that every person, firm, association, other than national bank associations, and every corporation, state bank, or state banking association, shall pay a tax of ten per centum on the amount of their own notes used for circulation and paid out by them." It is estimated that when the national bank act was passed in 1863 there were about 239 million dollars of notes of state banks in circulation.

National bank notes may be of the denominations of $1, $2, $5, $10, $20, $50, $100, $500, and $1000. They are the promise of the bank to pay on demand, and are attested by the written or engraved signatures of the pres

ident, or vice-president, and cashier. They must be secured by U. S. bonds which have the circulation privilege and which have been deposited with the Treasurer of the United States. The bonds thus used are 2 per cent consols of 1930, the 4 per cent bonds of 1925, and the 2 per cent Panama Canal bonds of 1916-1936 and 1918-1938. Almost all the bonds available for circulation are used for that purpose. A bank's notes are also a first lien on its assets. No note holder has ever suffered loss from a failure of a national bank.

Any national bank may deposit such bonds as are named above with the Treasurer of the United States and receive notes equal in amount to the par value of the bonds deposited. The total amount may equal but not exceed the paidin capital stock of the bank. Should the bonds fall below par in value the Comptroller is authorized to call for additional deposits of bonds or lawful money.

Every national bank is required to accept at par for any obligation due it, the notes of any national bank. These notes are also receivable "in payment of taxes, excises, public lands, and all other dues to the United States, except duties on imports; and also for all salaries and other debts and demands owing by the United States to individuals, corporations, and associations within the United States, except interest due on the public debt, and in redemption of the national currency.'

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Each bank maintains with the Treasurer a redemption fund to the amount of five per cent of its circulation. The Treasurer redeems notes presented in lots of $1000 or multiples thereof, charging each bank with its share. When a bank has had $500 worth redeemed it is notified to send an equal amount of U. S. notes to reimburse its fund. The notes that have been redeemed are then sent back to the bank which issued them for reissue. About

3 Revised statutes, section 5182.

ISSUE OF NATIONAL BANK NOTES 307

one half of all national bank notes are redeemed each

year.

Worn-out or mutilated notes are sent to the Comptroller and destroyed by maceration. New notes are then issued to the bank whose notes they were.

A national bank may retire its notes in whole or in part at any time by depositing lawful money with the Treasurer of the United States in sums of not less than $9000 to take up its bonds, whereupon the Treasurer redeems the notes and destroys them.

A national bank may also apply to the Treasurer to have the whole or part of its bonds sold at par and accrued interest for its account. Every three months the Treasurer delivers the list of such applications to the Federal Reserve Board. That Board has the power to require the Federal reserve banks to buy these bonds, each its share in proportion to its capital and surplus, but not in excess of $25,000,000 in any one year. The reserve banks pay the Treasurer and the Treasurer deducts enough to redeem the notes and turns over the balance to the banks. The Federal reserve banks may then in turn deposit these bonds with the Treasurer and issue against them their own notes, called Federal reserve bank notes.

The profit on national bank notes is small. It is calculated by assuming that the notes can be loaned to the same advantage as the money paid for the bonds, and finding out what the interest on the bonds deposited yields in excess of the expenses. The government requires the banks to pay for the plates, to pay transportation, and assorting charges on redeemed notes, and to pay a tax on the average amount of notes in circulation, 14% each half year if based on the deposit of 2% bonds, and 12% each half year if based on the deposit of bonds of a higher rate. The profit on the issue of national bank notes fluctuates from 11% to 12%.