Chapter XIV: The Method of Issuing National Bank Notes

Many people have the idea that a National Bank, having a capital of, say one hundred thousand dollars, can call on the United States Treasury Department for an equal amount of National Bank Notes, without expense to the bank; and thus have double the amount of its capital to lend at the start.

The National Bank Act does say that each National Bank _must_ issue currency equal to a certain per cent. of its capital; and further, that each National Bank _can_ issue currency equal to the full amount of its capital. But the profit on taking out this currency, or circulating notes, is so very small that many banks do not issue as much as the law allows.

These circulating notes must be issued under certain expensive conditions. First--the bank must purchase and deposit with the Treasurer of the United States an amount of registered United States Bonds, equal at their par value, to the amount of the circulating notes called for. Second--dependent on the kind of bonds deposited, the bank must pay a tax on its circulating notes. Third--the bank must stand the expense of plates for printing and the express charges for sending it the original issue of its notes. Also, when any of its worn-out or mutilated notes are sent to the Treasury Department, they are destroyed, and the bank then has to pay the expense of re-issue and the express charges for sending them to the bank that originally issued them. The signature of the President and Cashier of the bank must be affixed.

Therefore National Banks, in calculating the possible profit on taking out circulating notes, have the following example to be considered in issuing every one hundred thousand dollars of their notes:

Bonds purchased: United States
Registered 2% bonds to be paid
at par in 1930.

Price of bonds 104 $104,000.00
Par value of bonds purchased 100,000.00
Money worth 6%.
Income from bonds $2,000.00
Income from circulating notes loaned at 6% 6,000.00
---------
$8,000.00

_LESS DEDUCTIONS._

Annual tax on circulating notes $500.00
Sinking Fund to retire premium
on bonds at maturity, amount
to be charged off each year 181.00
Expenses (plates, express charges,
etc.) 75.00 756.00
---------
Net Income from Circulating Notes $7,244.00
Net Income from loaning $104,000.00 (net
cost of bonds purchased) at 6% 6,240.00
---------
Net profit on taking out $100,000.00 of
circulating notes $1,004.00

Hence the net percentage of profit on taking out National Bank notes on this class of bonds, is about one per cent., based on their _present_ market price.

The profit on taking out circulation on other United States bonds is even less.

Suppose the market price of the 2% bonds purchased was higher, say 108, as it was several years ago, the profit would be even less. Also, if the bonds decline in market value below par (as in case of war, for instance), the bank must stand that loss; and purchase and deposit an additional amount of bonds, so as to make the market value of the bonds deposited equal to the amount of its outstanding circulating notes.

In order to retire its circulating notes and obtain possession of its United States Bonds, deposited as security therefor, the bank must send the Treasury Department an amount of lawful money equal to the amount of the circulating notes it wishes to retire. It can then "withdraw a proportionate amount of the bonds held as security for its circulating notes."

But the law says that not more than nine millions of National Bank Notes can be retired in any one month. Therefore, if the market price of United States bonds goes up to a point where all profit on its circulation is wiped out, the bank may have to wait several months until previous requests for retiring circulation are out of the way. In the meantime United States bonds may have gone down in price.

As has been stated, a National Bank _can_ take out an amount of circulating notes, or National Bank currency, equal to the amount of its capital. But the profit on the operation is so small (leaving out the chances of actual loss) that many banks do not issue notes to the full amount allowed. The following figures relative to the total capital of all the National Banks, and the total circulation of these banks on the dates stated, conclusively prove this fact. (These figures are taken from the annual report of 1907 of the Comptroller of the Currency.)

November 12, January 26, March 22,
1906. 1907. 1907.
Capital
Stock $847,514,653.00 $860,930,624.00 $873,669,666.00

Circulating
Notes 536,109,931.00 545,481,870.50 543,320,375.00

May 20, August 22,
1907. 1907.
Capital
Stock $883,690,917.00 $896,451,314.00

Circulating
Notes 547,918,696.00 551,949,461.50

It can be seen from these figures that the National Banks _could_ have taken out _over three hundred millions_ more of circulating notes than they _actually_ issued during the time stated. And these figures are not exceptional.

Banks, other than National, "shall pay a tax of ten per centum on the amount of their own notes used for circulation and paid out by them." This tax is prohibitive and no State Banks issue circulating notes for this reason.