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 ¥• -f. y. T»-
 
 HAND-BOOK 
 
 FOR 
 
 Bank Officers 
 
 BY 
 
 Geo. M. Coffin, 
 
 AUTHOR OF 
 
 "Hand-Book for National-Bank Shareholders." 
 
 WASHINGTON, I). C, 
 
 H. L. McQuKEN, Publisher. 
 189T.
 
 V y 
 
 Kntered according to a(5l of Congress, in the year iSgi, by 
 
 Geo. M. Coffin, 
 
 In the office of the Librarian of Congress, at Washington, D. C. 
 
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 (.S 
 
 PREFACE 
 
 
 >' TN preparing this (the third) edition of this work, some important 
 ^ 1 additions have been made, the chief of which are the two new 
 5 chapters on the powers and duties of the President and Cashier, 
 respectively. 
 
 Though treating specially of the law and practice governing National 
 
 ^ banks, the volume, as it now stands, will be found valuable and useful 
 
 ~ to the officers of any commercial bank, for the reason that the National 
 
 ^ banking system embodies the very best features of commercial banking, 
 
 as is conclusively shown by the wonderful success, growth and strength 
 
 attained by it in a period of about twenty-five years. 
 
 Perhaps the best proof of the merit of the work is the fact that it has 
 J reached a third edition in sixteen month's time, a result largely owing 
 to the commendation kindly expressed by some of the most prominent 
 and successful bankers in all sections of the country. 
 
 January, iSgi. 
 
 38642*?
 
 CONXKNXS. 
 
 PART ONE. 
 
 Lawful-Money Reserve. 
 
 CHAPTER I. 
 
 Page. 
 
 Legal requirements i 
 
 Required on deposits only 3 
 
 Ivist of reserve cities 3 
 
 Classification of banks with regard to percentage of reserve 
 
 required 4 
 
 Various forms of lawful money available for reserve 5 
 
 Deposits, and sundry items which are allowed to offset deposits 7 
 
 Reciprocal accounts with reserve agents 8 
 
 Examples showing how reserve should be computed in ordi- 
 nary cases 9 
 
 Exceptional cases 12 
 
 Rules for finding exact excess with reserve agents and for ap- 
 plying it to reduction of liability on deposits 12 
 
 Examples showing how reserve should be computed in excep- 
 tional cases 15*" 
 
 CHAPTER II. 
 
 Explanation of rules applying in exceptional cases 17 
 
 Explanation of case of 25 per cent, reserve bank 17 
 
 Explanation of case of 15 per cent, reserve bank 19 
 
 Simple method of keeping the 5 per cent, redemption fund 
 
 account 20 
 
 How to compute average reserve 22 
 
 Form of application for Comptroller's approval of reserve agent 22 
 
 PART TWO. 
 
 CHAPTER I. 
 
 ORGANIZATION OF NATIONAL BANKS. 
 
 Minimum capital stock required 24 
 
 Increase and reduction of capital stock 24 
 
 Minimum bond deposit requirements 25
 
 vi CONTENTS. 
 
 CHAPTER II. P^ee- 
 
 QUALIFICATIONS, DUTIES, AND LIABILITIES OF DIREC- 
 TORS. 
 
 General information as to duties 27 
 
 How directors should be chosen 30 
 
 Scope of powers conferred upon directors — Specific duties . . 31 
 Decisions as to liabilities — What would constitute violation of 
 law " knowingly " committed or permitted 33 
 
 CHAPTER III. 
 
 BOOKS, ACCOUNTS, AND RECORDS. 
 
 Form for daily statement of resources and liabilities 41 
 
 CHAPTER IV. 
 
 GENERAL BANKING POWERS CONFERRED BY SECTION 
 5136, PARAGRAPH 7. 
 
 Court decisions construing these 42 
 
 Power to borrow money — Power to issue time certificates of 
 
 deposit 45 
 
 Bills payable defined 48 
 
 Post-notes defined 49 
 
 Right to deal in stocks and bonds denied by the courts ... 50 
 
 * Purchasing commercial paper 54 
 
 CHAPTER V. 
 TRANSACTIONS IN REAL ESTATE. 
 
 Restrictions imposed by law 57 
 
 Securities based on real estate values 59 
 
 Supreme Court decisions 61 
 
 CHAPTER VI. 
 RESTRICTIONS AS TO LOANS IMPOSED BY SECTION 5200. 
 Examples illustrating excessive loans and such as are not 
 
 excessive 64 
 
 Deposits with banks and bankers regarded as loans 68 
 
 Exceptions as to discounts, and examples illustrating these . 69 
 Overdrafts are loans 72 
 
 CHAPTER VII. 
 
 RESTRICTIONS WITH REGARD TO A BANK'S ACQUIRING 
 AND HOLDING ITS OWN STOCK. 
 
 Penalty for holding beyond time limit 73
 
 CONTENTS. Vll 
 
 CHAPTER VIII. 
 
 EARNINGS, SURPLUS AND DIVIDENDS. Page. 
 
 Legal requirements regarding net profits and surplus — Bad 
 
 debts defined 76 
 
 Legal requirements with regard to reports of dividends and 
 
 earnings — How to make these up 78 
 
 Capitalization of surplus 80 
 
 CHAPTER IX. 
 
 REPORTS OF CONDITION REQUIRED BY SECTION 521 1. 
 
 Information with regard to same, filling out schedules ... 82 
 
 Verification and Attestation 86 
 
 How to proceed in absence of three directors or of both presi- 
 dent and cashier 87 
 
 Penalty for delay in forwarding reports 87 
 
 CHAPTER X. 
 
 MATTERS OF MANAGEMENT AND POLICY. 
 
 Overdrafts 89 
 
 Renewing paper by noting payment of interest on same . . . 91 
 
 Renewal of discounted commercial paper 91 
 
 Borrowing money on certificates of deposit 92 
 
 CHAPTER XI. 
 
 DIGEST OF NATIONAL-BANK CASES 93 
 
 CHAPTER XII. 
 
 THE PRESIDENT. 
 
 His powers and duties 95 
 
 The vice-president — powers and duties 97 
 
 CHAPTER XIII. 
 
 THE CASHIER. 
 
 His powers and duties 98 
 
 CHAPTER XIV. 
 
 GENERAL REMARKS, IN CONCLUSION, REGARDING THE 
 NATIONAL-BANK SYSTEM 105
 
 Notes. 
 
 Additional Reserve Cities. 
 
 On page 3 of this volume it is stated that there 
 are nineteen reserve cities, and on page 4 a list of 
 these cities is given. To this list should now be 
 added the names of three more which have recentl}- 
 become reserve cities — making a total of twenty-two 
 (22) reserve cities at present (December, 1890). 
 
 The following is a list of the three cities referred 
 
 to and the dates upon which they were approved 
 
 by the Comptroller: 
 
 Minneapolis, Minn., approved July 5, 1890. 
 St. Paul, " " July 8, 1890. 
 
 Brooklyn, N. Y. " July 14, 1890. 
 
 Lawful Money. 
 
 To the list of various forms of lawful monej^ on 
 page 6 should now be added U. S. Treasury Notes 
 issued under act July 14, 1890, which are also avail- 
 able for lawful money reserve.
 
 I-Iand=Book 
 
 FOR 
 
 BANK OFFICBRS. 
 
 PART ONE 
 
 CHAPTER I. 
 
 I.AWFUL-MONEY RESERVE. 
 Legal Requirements. 
 
 The "reserve" of a bank is that proportion of its 
 "deposits" or liabilities payable on demand, which 
 it is reqnired, by law, "at all times" to "have on 
 hand in lawful mone}^ of the United States." 
 
 The law bearing on the subject is to be found 
 in sections 5191, 5192, and 5195, United States 
 Revised Statutes, chapter 4, National-bank Act ; in 
 sections 2 and 3 of the act of June 20, 1874 ; and 
 in sections i and 2 of the act of March 3, 1887. 
 All of these will be found in the "National-bank
 
 2 HAND-BOOK FOR BANK OFFICERS. 
 
 Act," edition of 1888, compiled under direction of 
 the Comptroller of the Currency. 
 
 The cash resources which the law requires a 
 bank to lay aside at all times in this way constitute 
 the sheet-anchor of safety in stormy financial 
 weather, and as a matter of policy alone, apart from 
 other considerations, too great stress can not be 
 laid upon the importance of a faithful and uniform 
 compliance with the law in this particular, in spirit 
 as well as in letter. 
 
 Striking proof that this view of the subject is 
 held and practiced by bank managers as a body is 
 found in the fact that although the law requires 
 National banks located outside of reserve cities 
 (over 2,800 in number) to maintain a reserve of 15 
 per cent, only, their reports show that these banks 
 habitually carry a reserve equal to an average on 
 the whole of over 28 per cent. (See page 195, 
 Comptroller's Report for 1888.) 
 
 That the framers of the law evidently realized 
 the importance of this feature also, is apparent from 
 the fact that the law prescribes for habitual viola- 
 tions of the statute, in this particular, the summary 
 and severe penalty applying in only a few other 
 places, viz., the appointment of a receiver to wind 
 up the bank's affairs. (See section 5 191.)
 
 LAWFUI.-MONEY RESERVE. 3 
 
 Required on Deposits only. 
 
 Attention is here called to the fact that previous 
 to the passage of the act of June 20, 1874, the law 
 required National banks to maintain a reserve on 
 their "circulation" outstanding as well as on their 
 "deposits," but this requirement was repealed b}^ 
 the act named, and since then a reserve has been 
 required on "deposits" only. The act of 1874 also 
 provided that each bank should keep on deposit 
 with the Treasurer of the United States an amount 
 of lawful money equal to 5 per cent, of its "circu- 
 lation," for the redemption of which at the United 
 States Treasury this act provides, but the bank 
 was at the same time permitted to count this " 5 
 per cent, redemption fund" as a part of its reserve 
 on "deposits." 
 
 List of Reserve Cities. 
 
 There are at present nineteen "reserve cities," 
 
 as per list given below, sixteen of which were des- 
 ignated in section 5 191, while three others, viz.: 
 Kansas Cit}^, Mo., St. Joseph, Mo., and Omaha, 
 Nebr., have been recently added under the opera- 
 tion of the act of March 3, 1887. 
 
 Chicago and St. Louis, which had been "reserve 
 cities" previously, became "central reserve cities" 
 under the provisions of the act of March 3, 1887. 
 
 See note on page facing first page.
 
 4 HAND-BOOK FOR BANK OFFICERS. 
 
 Central Reserve Cities: 
 
 New York City, N. Y. 
 Chicago, 111. St. Louis, Mo. 
 
 Reserve Cities : 
 
 Albany, N. Y. Milwaukee, Wis. 
 
 Baltimore, Md. New Orleans, La. 
 
 Boston, Mass. Washington, D. C. 
 
 Cincinnati, Ohio. Omaha, Nebr. 
 
 Cleveland, Ohio. Philadelphia, Pa. 
 
 Detroit, Mich. Pittsburgh, Pa. 
 
 Kansas City, Mo. San Francisco, Cal. 
 
 Louisville, Ky. St. Joseph, Mo. 
 
 Classification of Banks with regard to Percentage 
 of Reserve required. 
 
 It will be found, from the portions of the law 
 quoted, that in the matter of reserve requirements 
 the National banks are divided into three distinct 
 classes, according to location, viz.: 
 
 1. Those located in the three "central reserve cities," 
 which are required to maintain a reserve equal to 25 per cent, 
 of their "deposits," and to keep the entire amount on hand 
 in bank. 
 
 2. Those located in the sixteen other "reserve cities," 
 which must also maintain a reserve of 25 per cent, on " de- 
 posits," but are required to keep only one- half oi same on 
 hand /;/ bank, while they may keep the remainder on deposit 
 with any National bank, or banks, located in any of the 
 '* central reserv^e cities." 
 
 3. Those located outside of the nineteen "reserve cities," 
 which are required to maintain a reserve of only 15 per cent, 
 on "deposits," and to keep on hand in bank only two-fifths 
 
 See note on page facing first page.
 
 r 
 
 tAWFUIv-MONEY RESERVE. 5 
 
 of this, while the remainder may be kept on deposit with any 
 National bank, or banks, located in an}^ of the nineteen "re- 
 serve cities." 
 
 Of course, if any bank of the second or third class 
 does not avail itself of the privilege of keeping a 
 portion of its reserve with "reserve agents," it 
 must keep the entire required amount on hand in 
 bajik. 
 
 It will be observed that while section 5192 in- 
 cluded banks located in Richmond and Charleston 
 among those privileged to act as "reserve agents" 
 for the 15 per cent, banks, section 5 191 did not im- 
 pose upon them the necessity for keeping a reserve 
 eqtial to 25 per cent, of their "deposits," as was re- 
 quired of banks located in the other cities named in 
 section 5192, and for this reason the privilege of 
 acting as "reserve agents" has never been accorded 
 by the Comptroller's of6.ce to National banks in 
 those two cities. 
 
 Various forms of Lawful Money available for Reserve. 
 
 As the law prescribes that the reserve of a bank 
 must be in "lawful mone}^ of the United States," 
 the term "lawful money" is defined as follows: 
 
 Previous to the resumption of specie payments, 
 on the ist of January, 1879, "lawful money" vir- 
 tually meant United vStates "legal-tender" notes,
 
 6 HAND-BOOK FOR BANK OFFICERS. 
 
 gold and silver coin being, until then, at a premium, 
 and not in general circulation, but since then the 
 term has embraced various forms of currency, 
 which it is important for every bank to know, in 
 order that it may intelligently carry out the re- 
 quirements of the law in the matter of reserve. 
 The following list of the various forms of "lawful 
 money" available for reserve purposes existing at 
 present is, therefore, given: 
 
 1 . Gold coin of the United States. 
 
 2. "Standard" silver dollars of the United States. 
 
 3. Fractional silver coin of the United States. 
 
 4. Certificates for gold coin deposited with the Treas- 
 
 urer of the United States. 
 
 5. Certificates for silver dollars deposited with the 
 
 Treasurer of the United States. 
 
 6. United States "legal-tender" notes. 
 
 7. Certificates for "legal-tender" notes deposited with 
 
 the Treasurer of the United States. 
 
 8. Gold clearing-house certificates. 
 
 In order that reserve may readily be computed 
 at any time, and that the information required for 
 reports of condition (which are always called for 
 past dates) may be fully and accurately stated, it 
 is absolutely necessary that a daily and exact re- 
 cord of the amount of each kind of the various kinds 
 of currency should be kept for this purpose. That 
 this may be done, it will of course be necessary to 
 
 See note on page facing first page.
 
 I^AWFUL-MONEY RESERVE. 7 
 
 assort the cash on hand at close of business each 
 day, and in doing this, National-bank currency 
 should be separated from other forms of paper cur- 
 rency, and in case a bank has any notes of its own 
 issue on hand, these should in turn be separated 
 from those issued by other banks. 
 
 Deposits, and Sundry Items which are allowed to 
 Offset Deposits. 
 
 The term ''deposits," used in those portions of 
 the law which bear on the subject of reserve, em- 
 braces not only all classes of what are known as 
 '' individual deposits " held b\^ a bank, but deposits 
 made by the United States Government and by its 
 disbursing officers also. 
 
 Balances due to other National banks and to State 
 and private banks and bankers, being, as a rule, 
 payable on demand, have always been regarded as 
 "deposits" also, and any bank holding these has 
 been required to maintain a reserve upon such bal- 
 ances, balances due from other banks and bankers 
 being allowed to "offset" the balances due to them; 
 but when in au}^ case the amount due from banks 
 and bankers exceeds the amount due lo them, such 
 excess can not be applied in reduction of liability on 
 other "deposits," and amounts due from and to 
 banks and bankers are then excluded from both
 
 8 HAND-BOOK FOR BANK OFFICERS. 
 
 sides of the calculation necessary for determining 
 "deposits" and reserve required thereon. 
 
 The other items of a bank's "resources" which, 
 under the various rulings of the Comptroller's 
 office, are admitted to offset or reduce its liability 
 on "deposits" are as follows: 
 
 1. " Exchanges for clearing-house," viz.: checks on other 
 banks in same place, which are members of a clearing-house. 
 
 2. " Checks on other banks in same place." 
 
 3. "Bills of other National banks" held by the bank. 
 Bills of the bank's own issue are, of course, not admitted to 
 offset its liabilities on ' ' deposits. ' ' 
 
 Reciprocal Accounts with Reserve Agents. 
 
 It is the custom with some banks to keep recip- 
 rocal ^.o.down'i.^ with their "reserve agents," and in 
 such cases the question arises as to how these items 
 should be treated. 
 
 As the law provides that a portion of a bank's 
 "reserve may consist of balances due to" it " from 
 associations approved by the Comptroller of the 
 Currency," such items should, as a rule, be treated 
 as follows in computing reserve: 
 
 1. If the balance oi any such "reciprocal account" is an 
 amount ^mq^ from the "reserve agent" bank, ?m<i\i balance 
 may be treated as available for reserve. 
 
 2. But, if such balance represents an amount due to the 
 "reserve agent," then it should be regarded as " due ^'t? other 
 National banks, ' ' and so treated.
 
 LAWFUL- MONEY RESERVE. 9 
 
 -*■ 
 
 Examples showing how Reserve should be com- 
 puted in Ordinary Cases. 
 
 To clearly illustrate how the reserve of a bank 
 should be computed in any ordinary case, two ex- 
 amples are given here; the first (Form A) of a 
 bank which should have 25 per cent, on hand; the 
 second (Form B) of a bank which should have 15 
 per cent, on hand. Each of these examples is 
 computed on a form identical in every respect with 
 the printed blanks now used in the Comptroller's 
 office for this purpose. 
 
 The great advantage of this form consists in the 
 fact that down to the point of finding the amount 
 of "deposits" upon which reserve is to be main- 
 tained, the process is the same iox all banks regard- 
 less of location. Beyond this point it is only neces- 
 sary to apply the proper proportion required by 
 each case (viz., 25 per cent, or 15 per cent.), and 
 the proper distributioii of the reserve in bank and 
 i7t hands of agents required in such case. 
 
 In exceptional cases, which are defined and illus- 
 trated on pages 12 to 20, all that is needed is 
 to extend the ordinary computation a little further 
 b}' a very short and simple calculation. Concise 
 rules for this calculation are given on page 12. 
 
 With a copy of this general printed form, and the 
 few rules referred to, the computation of reserve in 
 the case of any bank, under any circumstances, be- 
 comes an easy and simple matter.
 
 lO 
 
 HAND-BOOK FOR BANK OFFICERS. 
 
 Form A. ^Calculation of the Lawful-Money Reserve of National 
 
 Banks Located in Reserve Cities and Central Reserve Cities. 
 
 Items on Which Reserve is to be Computed. 
 
 LIABILITIES. 
 
 Due to National Banks* 1235,866 
 
 Due to State banks and bankers 25,559 
 
 1261,425 
 
 LESS 
 
 Due from other National banks 125,335 
 
 Due from State banks and bankers .... 100,000 
 
 *Should the aggregate "Due 
 from " exceed the aggregate " Due 
 to" banks, both items must be 
 omitted from the calculation 
 
 225,335 
 
 Dividends unpaid 
 
 Individual deposits .... 
 United States deposits . . . 
 Deposits of U. S. dis. ofl&cers 
 
 136,090 
 
 3,867 
 
 2,857,628 
 
 705,000 
 
 Gross amount 13,602,585 
 
 DEDUCTIONS ALLOWED. 
 
 Exchanges for clearing-house 
 
 Checks on other banks in the same place . . 
 National-bank notes 
 
 5107,950 
 
 513 
 
 17,340 
 
 Twenty-five per cent, of this total amount Jl®" 
 
 125,803 
 
 ,476,782 
 
 is the entire reserve required, which is 869,195 
 
 Deduct 5 % redemption fund with Treasurer U. S. . 2,250 
 
 Net reserve to be held |866,945 
 
 Items Composing Net Reserve and Distribution of Same. 
 
 One-half of the net reserve 
 
 is* 1433,472 
 
 *If reciprocal accounts are 
 kept with reserve agents, only 
 the net amount due from such 
 agents is available for reserve. 
 
 Balances with approved re- 
 serve agents amount to 440,067 
 
 Excess with reserve agents 
 
 6,595 
 
 One-half of net reserve is |433,473 
 Items in bank's pos- 
 session to make up 
 the same, viz. : 
 Fractional silver 129,885 
 Silver dollars . . 
 Silver Treas. cert. 
 Gold coin .... 
 Gold Treas. cert. 
 Legal-ten'r notes 
 U. 8. cert, of de- 
 posit for legal- 
 tenders . . . 
 Gold C. H. cert's 
 
 1,090 
 
 22,060 
 
 300,050 
 
 50,000 
 
 12,000 
 
 20,000 
 
 Excess in items held by the 
 bank 
 
 435,085 
 
 $1,612
 
 LAWFUL-MON:eY RESERVE. 
 
 II 
 
 Form B. — Calculation of the Lawful- Money Reserve of National Banks 
 
 Not Located in Reserve Cities or Central Reserve Cities. 
 
 Items on Which Reserve is to be Computed. 
 
 WABIWTIES. 
 
 Due to National banks* 182,946 
 
 Due to State banks and bankers 16,735 
 
 l99,68i 
 
 I^ESS 
 
 Due from other National banks 1:25,043 
 
 Due from State banks and bankers .... 5,695 
 
 * should the aggregate "Due 
 from " exceed the aggregate " Due 
 to" banks, both items must be 
 omitted from the calculatiou. 
 
 30,738 
 
 168,943 
 
 Dividends unpaid 621 
 
 Individual deposits 728,423 
 
 United States deposits . . . 55,ooo 
 
 Deposits of U. S. dis. officers . 36,098 
 
 Gross amount 
 
 DEDUCTIONS ALIvOWED. 
 
 Exchanges for clearing-house 
 
 Checks on other banks in the same place ... 
 National-bank notes , 
 
 1889,085 
 
 fe,S94 
 1,650 
 
 Fifteen per cent, of this amountg@° 
 
 5.544 
 3-541 
 
 is the entire reser\'e reqtiired, which is I'i32,53i 
 
 Deduct 5 %■ redemption fund with Treasurer U. S. . 1,125 
 
 Net reserve to be held 1131,406 
 
 Items Composing Net Reserve and Distribution of Same. 
 
 Three-fifths of the net re- 
 serve is* 178,844 
 
 *If reciprocal accounts are 
 kept with reserve agents, only 
 the Hi't amount due from such 
 agents is available for reserve. 
 
 Balances with approved re- 
 serve agents amount to 50,796 
 
 Two-fifths of net reserve is ^2,562 
 Items in bank which 
 may lawfully make 
 up the same, viz. : 
 Fractional silver ^2,094 
 Silver dollars . . 4,450 
 Silver Treas. cert. 8,575 
 Gold coin . . . 51,896 
 Gold Treas. Cert. 3,000 
 Legal-ten'r notes 15,025 
 U. S. cert, of de- 
 posit for legal- 
 tenders 
 
 Gold C. H. cert's . . . 
 
 Deficiency with reserve 
 
 agents 128,048 
 
 RECAPITULATION 
 
 Excess in the entire reserve held 
 
 85,040 
 
 Excess in the two-fifths 
 
 reserve held $32,478 
 
 14,430
 
 12 HAND-BOOK FOR BANK OFFICERS. 
 
 Exceptional Cases. 
 
 It sometimes happens that, while the "aggre- 
 gate" reserve of a bank located outside of a "cen- 
 tral reserve city" is more than sufficient, it has not 
 a sufficient amount on hand in bank; in other 
 words, it has more than is. necessary in the hands 
 of " reserve agents." In such a case, while the law 
 does not permit such excess with " agents " to offset 
 a deficiency in the reserve needed in bank^ such 
 "excess" may be regarded as "due from other 
 banks," and, as such, applied in the same way to 
 reduce liability on " deposits," with the result some- 
 times of so reducing the amount of reserve needed 
 in bank as to show that the "lawful money" on 
 hand is sufficient. 
 
 In order to find and apply the exact excess in the 
 hands of "reserve agents" use the following: 
 
 Rules for finding Exact Excess with Reserve Agents 
 and for applying it to Reduction of Liability on 
 "Deposits." 
 
 From the amount actually in hands of " reserve 
 
 agents," deduct the amount which by the ordinary 
 
 method of computation it seems should be there; 
 
 the remainder will be the "apparent excess." 
 
 I. In the case of a " reserv^e city" bank, add one-seventh 
 of the "apparent excess" to such "apparent excess" and
 
 LAWFUL-MONEY RESERVE. 1 3 
 
 their sum will be the ' ' exact excess ' ' which may be applied 
 to reduction of liability on "deposits." 
 
 II. In the case of a 15 per cent, bank, add yiine-ninety-firsts 
 of the ' ' apparent excess ' ' to such ' ' apparent excess, ' ' and 
 their sum will be the ' ' exact excess. ' ' 
 
 Having ascertained the "exact excess" in this 
 way proceed to apply it to reduction of liability on 
 "deposits" and to the consequent decrease of re- 
 serve apparently required to be in bank as follo\vs: 
 
 I. Where the "exact excess" equals or exceeds 
 the balance due to other banks and bankers, as 
 shown by ordinary method of computation, the 
 amotmt by which the reserve apparently required 
 in bank may be decreased wall be — 
 
 {a) In the case of a "reserve city" bank, one-eiglitli of the 
 balance due to other banks and bankers. 
 
 {U) In the case of a 15 per cent, bank, 6 per cent, of the 
 batance due to other banks and bankers. 
 
 Note. — The reason for this is, that in such a case the treatment of 
 the "excess" with "agents" as an amount <hxii. frotn banks and bank- 
 ers causes the amount A.\x^ from to offset the amount due to other, 
 banks and bankers and so eliminates the balance due to them from the 
 computation, and therefore renders it unnecessar}' to provide for a re- 
 serve on such balance. 
 
 II. Where the "exact excess" is less than the 
 
 balance due to other banks and bankers, the amount 
 
 by which the reserve apparently required /// bank 
 
 may be decreased will be — 
 
 (a) In the case of a "reserve city " bank, one-seventli (|) 
 of the ' ' apparent excess. ' '
 
 14 HAND-BOOK FOR BANK OFFICERS. 
 
 {b) In the case of a 15 per cent, bank, six-ninety-firsts (^) 
 of the '' appa7'-ent excess.'' 
 
 As ^ of any amount is a little less than one-fifteenth 
 (-(fo) of such amount, it will involve less labor to find y\ of 
 the ' ' apparent excess ' ' and this portion will be nearly 
 enough correct, unless the ' ' excess " is a large amount. 
 
 Note. — The reason for this is that in such a case the treatment of 
 the " excess" with "agents" as an amount due /"row other banks has 
 the effect of reducing the liability on the balance due to other banks, 
 and therefore renders it unnecessary to provide for a "reserve " on the 
 amount of such "excess." 
 
 To illustrate tlie application of these rules for 
 "exceptional" cases, two examples are given: the 
 first (Form A) illustrating the case of a 25 per 
 cent, bank ; the second (Form B) illustrating the 
 case of a 15 per cent, bank, each of which has an 
 amount with " agents" in excess of legal require- 
 ments. 
 
 Note. — In all computations for ascertaining reserve it should be dis- 
 tinctly understood that any excess in the hands of agents can not be 
 counted as reserve for the reason that the law (Sees. 5192 and 5195) 
 fixes a limit to the amount in the hands of agents which may so be 
 counted, and au}'^ amount over and above the designated limit or pro- 
 portion has not the legal status of reserve and can not so be regarded.
 
 LAWFUL-MONEY RESERVE. 
 
 15 
 
 Form A. — Calculation of the Lawful-Money Reserve of National 
 
 Banks Located in Reserve Cities and Central Reserve Cities. 
 
 Items on Which Reserve is to be Computed. 
 
 LIABIUTIES. 
 
 Due to National Banks* |i59,387 
 
 Due to State banks and bankers 6,041 
 
 1165,428 
 
 LESS 
 Due from other National banks ..... 89,072 
 Due from State banks and bankers .... 20,861 
 
 * Should the aggregate "Due 
 from " exceed the aggregate " Due 
 to" banks, both items must be 
 omitted from the calculation 
 
 109,933 
 
 Dividends unpaid 
 
 Individual deposits .... 
 United States deposits . . . 
 Deposits of U. S. dis. officers 
 
 155,495 
 
 5,488 
 
 618,978 
 
 110,000 
 
 Gross amount 1789,961 
 
 DEDUCTIONS ALLOWED. 
 
 Exchanges for clearing-house 
 
 Checks on other banks in the same place . . 
 National-bank notes 
 
 80,696 
 1,020 
 8,326 
 
 Twenty-five per cent, of this total amount fi®" . . 
 
 is the entire reserve required, which is 
 
 Deduct 5 % redemption fund with Treasurer U. S. . 
 
 90,042 
 1699,919 
 
 174,979 
 4,500 
 
 Net reserve to be held 1170,479 
 
 Items Composing the Net Reserve and Distribution of Same. 
 
 One-half of the net reserve 
 
 is* 185,239 
 
 *If reciprocal accounts are 
 kept with reserve agents, only 
 the lief amount due from such 
 agents is available for reserve. 
 
 Balances with approved re- 
 serve agents amount to 144,936 
 
 One-half of net reserve is ^85,240 
 Items in bank's possession 
 to makeup the same, viz.: 
 Fractional silver f4,209 
 Silver dollars . . 2,006 
 vSilver Treas. cert. 4,500 
 Gold coin .... 41,695 
 Gold Treas. cert. 12,050 
 Legal-ten 'r notes 14,280 
 
 78,740 
 
 "Apparent excess" with 
 reserve agents .... $59,697 
 
 To find "exact excess" add 
 
 one-seventh of this = 8,528 
 
 Apparent deficiencj' of re- 
 serve in bank $6,500 
 
 As "exact excess" exceeds 
 balance due banks ($55,495), 
 take one-eighth of such bal- 
 ance 6,937 
 
 "Exact excess" with re- 
 serve agents is ... . $68,225 
 
 RECAl'ITULATION. 
 
 JSxcess in the entire reserve held 
 
 Showing actual excess of 
 reserve in bank of . . 
 
 • 1437- 
 
 1437
 
 i6 
 
 HAND-BOOK FOR BANK OFFICERS. 
 
 Form B. — Calculation of the Lawful- Money Reserve of National Banks 
 
 Not Located in Reserve Cities or Central Reserve Cities. 
 
 Items on Which Reserve is to be Computed. 
 
 WABIIvITIES. 
 
 Due to National banks* 139,873 
 
 Due to State banks and bankers 4,261 
 
 LESS 
 Due from other National banks . . 
 Due from State banks and bankers 
 
 ^7,382 
 2,543 
 
 * Should the aggregate "Due 
 from ' ' exceed the aggregate ' ' Due 
 to" banks, both itenas must be 
 omitted from the calculation. ■ 
 
 144,134 
 
 9.925 
 
 134,209 
 
 Dividends unpaid 410 
 
 Individual deposits 241,444 
 
 United States deposits . . . 110,000 
 Deposits of U. S. dis. officers . ... 
 
 Gross amount 1386,063 
 
 DEDUCTIONS AI<I,OWED. 
 
 Exchanges for clearing-bouse 
 
 Checks on other banks in the same place . . . . $2,263 
 
 National-bank notes 5,33o 
 
 7,593 
 
 Fifteen per cent, of this amountg^^ 1378,470 
 
 is the entire reserve required, which is $56,770 
 
 Deduct 5 % redemption fund, with Treasurer U. S. . 2,250 
 
 Net reserve to be held 
 
 154,520 
 Items Composing the Net Reserve and Distribution of Same. 
 
 |2i,8o8 
 
 Three-fifths of the net re- 
 serve is* 132,712 
 
 *If reciprocal accounts are 
 kept with reserve agents, only 
 the }iel amount due from such 
 agents is available for reserve. 
 
 Balances with approved re- 
 serve agents amount to 61,832 
 
 ' ' Apparent excess ' ' with 
 
 reserve agents .... $29,120 
 To find "exact excess" 
 
 add Ti'j of this = , . . 2,880 
 
 Two-fifths of net reserve is 
 
 Items in bank which may 
 
 up the 
 
 Showing actual 
 
 Exact excess with reserve 
 
 agents is $32,000 
 
 RECAPITUIvATION 
 
 Excess in entire reserve held . . 
 
 lawfully make 
 same, viz.: 
 Fractional silver $2,012 
 Silver dollars . . 540 
 
 Silver Treas. cert. 3, 165 
 Gold coin . . . 3,946 
 Gold Treas. Cert. 2,780 
 Legal-ten'r notes 8,000 
 
 » 
 
 Apparent deficiency of re- 
 serve in bank .... 
 As "exact excess " is less 
 than balance due banks 
 ($34,209), take vfi of 
 " apparent excess " . . 
 
 20,443 
 $1,365 
 
 1,920 
 
 excess of $555 
 $555-
 
 LAWFUIv-MONEY RESKRVE. 1 7 
 
 CHAPTER II. 
 
 LAWFUIv-xAIONEY RESERVE. 
 
 Explanation of Rules applying in Exceptional Cases. 
 
 As some readers will naturally wish to know 
 the reasons for applying the rules for " exceptional " 
 cases given in the preceding chapter, the following 
 explanation in each of the two cases therein illus- 
 trated is given here. 
 
 Explanation of Case of 25 Per Cent. Reserve Bank. 
 
 It is evident, at a glance, that when the '' apparent 
 excess" of $59,697 is considered as "due from 
 other banks," and is applied to reduction of liability 
 on "deposits," it will have the effect of making a 
 proportionate reduction in the amount of reserve 
 required. The reserve allowed with "agents" 
 being one-half of one-fourth, or one-eigJitJi of the 
 amount of "net deposits," the reduction here will 
 be in the proportion of one dollar of reserve to every 
 eiglit dollars applied in reduction of "deposits." 
 
 This being the established ratio, we know that 
 the "additional excess" with "agents" must be 
 onc-cigJitJi of the "exact excess" to be applied in 
 reduction. We also know that this " exact excess"
 
 1 8 HAND-BOOK FOR BANK OFFICERS. 
 
 will consist of the "apparent excess" ($59,697), 
 increased by the "additional excess," and knowing 
 so much, we can readily ascertain the amount of 
 "additional excess." 
 
 To simplify the illustration, let us assume that 
 X represents the unknown "additional excess," 
 and, from what has just been stated, we obtain the 
 following equation : 
 
 Eight times X is equal to $59,697 increased by 
 X; or, taking the amount X from each side of the 
 equation, seven times X is equal to $59,697, and 
 dividing each side by seven we find that X, or the 
 "additional" amount, is equal to $8,528; and that 
 $68,225 (eight times X) is the exact amount that 
 can be applied to reduction of liability on " de- 
 posits." 
 
 As this "exact excess" ($68,225) exceeds the bal- 
 ance due to banks and bankers ($55,495) it will 
 have the effect of eliminating the latter item from 
 the computation, and of converting the " apparent 
 deficiency of reserve in bank " ($6,500) into an 
 actual excess of $437 instead. (See Rule I, clause 
 (^), page 13.) 
 
 As the " apparent excess " in this example was 
 of itself greater than the balance due to banks,
 
 LAWFUL-MONEY RESERVE. I9 
 
 it was not necessary to carry out the computa- 
 tion to find " exact excess," but this has been done 
 simply to show how it should be done when cir- 
 cumstances require. 
 
 Explanation of Case of 15 Per Cent. Reserve Bank. 
 
 In the case of this 15 per cent, reserve bank, the 
 excess with reserve agents can be applied in the 
 same way to reduction of liability on "deposits," the 
 prop07'tion^ of course, being changed. 
 
 With such a bank the law allows a portion of 
 its reserve equal to 9 per cent, of net deposits to 
 be kept with "agents;" therefore, the proportion 
 that "reserve with agents" should bear to "de- 
 posits" is as 9 to 100. 
 
 Applying the same line of reasoning as in the 
 case of the 25 per cent, bank, we find that the 
 " apparent excess " is $29,120, and assuming that X 
 represents the whole "excess" that can be applied, 
 we know that 9 per cent, of X, or yf of X, will 
 be the "additional" excess which can be released 
 from its function as reserve and applied to reduction 
 of liability, and also that the "exact excess" will 
 be the "apparent excess" increased by this "addi- 
 tional excess."
 
 20 HAND-BOOK FOR BANK OFFICERS. 
 
 We have, therefore, from this the following equa- 
 tion : X equals $29,1 20, increased by g per cent, of X; 
 and, deducting 9 per cent, of X from each side of 
 the equation, we have X less xo of X, or tVo of X 
 equals $29,120; and from this, yio of X, or i per 
 cent, of X, equals $320; and 9 per cent, of X equals 
 $2,880, which is the " additional " excess to be added 
 to $29,120 to make $32,000, the "exact excess" 
 which can be applied to reduction of liability. 
 
 As the ratio of " reserve in bank" to "deposits" 
 is 6 per cent., when the "deposits" are reduced by 
 $32,ooo,'$i,920 less "reserve "will be needed /;^ bank. 
 But, $1,920 is just -gr of $29,120, the "apparent ex- 
 cess," so that the amount by which the reserve ap- 
 parently required in bank may be decreased will be 
 g-T of the "apparent excess" with agents. (See 
 Rule II, clause [b)., page 14.) 
 
 Simple Method of keeping the 5 Per Cent Redemp- 
 tion Fund Account. 
 
 As it appears to be the custom with many banks 
 to credit their circulation account with all of their 
 notes, both " fit" and "unfit," which have been re- 
 deemed and returned by the United States Treas- 
 urer, and to charge this account with all amounts 
 remitted to the Treasurer to reimburse their 5 per 
 cent, fund, it is suggested that all such redemption
 
 LAWFUL-MONEY RESERVE;. 21 
 
 transactions should be entered in the 5 per cent, 
 fund account on the books of the bank, and not in 
 the circulation account, which should show a fixed 
 balance, representing the circulation issued to the 
 bank on its bonds, and should not be altered at any 
 time, except to be increased by the amount of cir- 
 culation issued to it on deposit of additional bonds, 
 or to be decreased by the deposit of lawful money 
 with the United States Treasurer for the purpose 
 of reducing circulation and withdrawing bonds. 
 
 To illustrate how entries should be made in the 
 5 per cent, fund account, let us assume that the 
 Treasurer has on deposit for the bank a fund of 
 $2,250, and that he redeems for the bank $1,000 of 
 its notes, of which $500 are "fit" and $500 are 
 "unfit." Upon receipt of the $500 "fit" notes the 
 bank should debit "Cash" and credit its 5 per 
 cent, fund account, and make a similar entry when 
 it receives the $500 incomplete currenc}^ from the 
 Comptroller's office in replacement of the " unfit " 
 redeemed by the Treasurer and destroyed. These 
 entries woul4 reduce the 5 per cent, fund account 
 to $1,250 debit balance, and it would be restored to 
 its proper amount, $2,250, when the bank remits 
 $1,000 to reimburse its account with the Treasurer,
 
 22 HAND-BOOK FOR BANK OFFICERS. 
 
 for then the account would be debited with $i,ooo, 
 and " Cash" credited with the same amount. 
 
 This method of treatment would be very simple ; 
 the account would always exhibit the exact balance 
 in hands of the Treasurer, and, in fact, would be 
 practically the counterpart of the account as kept 
 on the books of the Treasurer. 
 How to Compute Average Reserve. 
 
 In each report of condition a bank is required to 
 state its average reserve on deposits for the pre- 
 ceding 30 days. To obtain this, take the percent- 
 age of reserve for each business day during the 30 
 days preceding date of report and add these per- 
 centages together. Divide the aggregate so ob- 
 tained by the number of business days and the 
 result will represent the average ratio desired. (See 
 note, page 14, as to excess with reserve agents in 
 computing reserve.) 
 
 Form of Application for Comptroller's Approval of 
 Reserve Agent. 
 
 To THE Comptroller of the Currency, 
 
 Washington, D. C. 
 
 Sir: Application is hereb}^ made for your approval of the 
 
 National Bank as an association with which 
 
 a portion of the lawful money reserve of this bank may be 
 kept in accordance with law. 
 
 Respectfully yours, 
 
 (To be signed by Cashier or other officer of bank making application.) 
 Note. — National banks in reserve cities may select 2My National 
 bank or banks in any of the "central" reserv'e cities only. Those lo- 
 cated outside of reserve cities may select any National bank or banks 
 in any reser^-e city or cities ' ' central ' ' or other. All selections are sub- 
 ject to approval of the Comptroller.
 
 ORGANIZATION OP NATIONAI^ BANKS. 2$ 
 
 PART TWO. 
 
 CHAPTER I. 
 
 ORGANIZATION OF NATIONAL BANKS. 
 
 The law relating to the organization of National 
 banks is to be found in sections 5133, 5134, 5135, 
 and 5136 United States Revised Statutes, National- 
 bank Act. 
 
 It has not been deemed necessary to introduce 
 into this little work all the details of information 
 and printed forms pertaining to the organization of 
 a National bank for the reason that a pamphlet 
 containing all such information and forms, entitled 
 " Instructions in regard to the Organization, Ex- 
 tension, and Management of National Banks," 
 compiled in the year 1884, under direction of the 
 Comptroller of the Currency, can be obtained free, 
 upon application to his office, by any person desir- 
 ing a copy, together with any further information 
 on the subject which may not appear to be em- 
 braced in the pamphlet.
 
 24 HAND-BOOK FOR BANK OFFICERS. 
 
 Minimum Capital Stock Required. 
 
 It may be well to state here that the minimiim 
 capital stock required of each National bank (see 
 section 5 1 38) is based upon the population of the place 
 in which it is located, at date of its organization, as 
 follows : 
 
 1 . $50,000 for a bank organized in a place having 
 6,000 inhabitants, or less. 
 
 2. $100,000 for a bank organized in a city having 
 over 6,000, but not more than 50,000 inhabitants. 
 
 3. $200,000 for a bank organized in a city having 
 over 50,000 inhabitants. 
 
 Increase and Reduction of Capital Steele. 
 
 This pamphlet also contains the information and 
 forms necessary to enable a bank to increase or re- 
 duce its capital stock as provided by sections 5142 
 and 5143, respectively. 
 
 Since the pamphlet was prepared, section 5142 
 has been amended by "Act approved May i, 1886, 
 (see page 75, National-bank Act, edition of 1888), 
 section i of which provides that a National bank 
 may "increase its capital stock in. accordance with 
 
 * 
 
 existing laws, to any sum approved b}^ the said 
 Comptroller, notwithstanding the limit fixed in its 
 original articles of association and determined by 
 said Comptroller."
 
 ORGANIZATION OP NATIONAIy BANKS. 25 
 
 Prior to the passage of tliis act, in 1886, the banks 
 had been limited in any proposed increase of capi- 
 tal to the maximnm of increase which was named 
 and provided for in their articles of association at 
 time of organization. 
 
 « 
 
 Extension of Charter. 
 
 The pamphlet also gives the forms and infor- 
 mation necessary for procuring an extension of 
 corporate existence beyond the limit fixed in the 
 original charter granted at time of a bank's organ- 
 ization. The law on this subject is to be found 
 in the act of July 12, 1882 (pages 68-73, National- 
 bank Act, 1888), entitled "An act to enable Na- 
 tional banking associations to extend their cor- 
 porate existence, and for other purposes." 
 
 Minimum Bond Deposit Requirements. 
 
 Section 8 of the act just mentioned amended the 
 law with regard to the amount of bonds to be depos- 
 ited by banks already organized, or to be afterward 
 organized, having a capital of $150,000, or less^ to 
 the effect that such banks should not be required 
 to deposit United States bonds to any amount in 
 excess of one-fourth of their capital stock. 
 
 The minimiiin bond deposit required of banks 
 having capital in excess of $150,000 is uniforml}^ 
 $50,000. (See section 4, act of June 20, 1874.)
 
 26 HAND-BOOK FOR BANK OFFICERS. 
 
 CHAPTER II. 
 
 QUAI.IFICATIONS, DUTIES, AND IvIABII^ITIES OF 
 
 DIRECTORS. 
 
 Sec. 5146. Every director must, during his whole term of 
 service, be a citizen of the United States, and at least three- 
 fourths of the directors must have resided in the State, Ter- 
 ritory, or District in which the association is located for at 
 least one year immediately preceding their election, and must 
 be residents therein during their continuance in office. Every 
 director must owni, in his own right, at least ten shares of 
 the capital stock of the association of which he is a director. 
 Any director who ceases to be the owner of ten shares of the 
 stock, or who becomes in any other manner disqualified, shall 
 thereby vacate his place. 
 
 Sec. 5147. Each director, when appointed or elected, shall 
 take an oath that he will, so far as the duty devolves on him, 
 diligently and honestly administer the affairs of such asso- 
 ciation, and will not knowingly violate, or willingly permit 
 to be violated, any of the provisions of this Title, and that 
 he is the owner in good faith, and in his own right, of the 
 number of shares of stock required by this Title, subscribed 
 by him, or standing in his name on the books of the associa- 
 tion, and that the same is not hypothecated or in any way 
 pledged as security for any loan or debt. Such oath, sub- 
 scribed by the director making it, and certified by the officer 
 before whom it is taken, shall be immediately transmitted to 
 the Comptroller of the Currency, and shall be filed and pre- 
 served in his office.
 
 DUTIES OF DIRECTORS. 27 
 
 Sec. 5239. If the directors of any National banking asso- 
 ciation shall knowingly violate, or knowinglj' permit any of 
 the officers, agents, or serv^ants of the association to violate 
 any of the provisions of this Title, all the rights, privileges, 
 and franchises of the association shall be thereby forfeited. 
 Such violation shall, however, be determined and adjudged 
 by a proper circuit, district, or territorial court of the United 
 States, in a suit brought for that purpose by the Comptroller 
 of the Currency, in his own name, before the association shall 
 be declared dissolved. And in cases of such violation, every 
 director who participated in or assented to the same shall be 
 held liable in his personal and individual capacity for all 
 damages which the association, its shareholders, or any other 
 person shall have sustained in consequence of such violation. 
 
 General Information as to Duties. 
 
 The oath, which every director of a National bank 
 is required to take before he is qualified to act in 
 that capacity requires him, among other things, to 
 swear or affirm " that he will, so far as the duty de- 
 volves on him, diligently and honestly administer 
 the affairs of such association, and will not know- 
 ingly violate, or willingly permit to be violated, 
 any of the provisions of this 'Title" (/. e.^ the Na- 
 tional-bank Act). 
 
 As a director receives no compensation for his 
 services, the extent to \vhich the duty of adminis- 
 tering the affairs of the bank devolves on him is a 
 matter which his own conscience must decide, for 
 the law imposes a penalty on him only for such
 
 28 HAND-BOOK FOR BANK OFFICEIRS. 
 
 violations of the law as he "knowingly" commits, 
 or "knowingly" permits any of the employes to 
 commit. 
 
 This being the case, it would not be a difficult 
 matter for a director to avoid incurring any legal 
 liability by habitually absenting himself from meet- 
 ings of the board and from the bank, and generally 
 keeping himself out of the way of information with 
 regard to the bank's affairs, and the only incentive 
 such a director would have to restrain him from 
 pursuing this course would be his interest in $i,ooo 
 of stock in the bank, which every director is com- 
 pelled by law to own in his own right. 
 
 Such instances as this are, no doubt, extremely 
 rare, yet, at the same time, it is certain that in a 
 measure the same bad results are attained through 
 indifference and carelessness on the part of directors, 
 arising from a wrong conception of their duty to 
 the stockholders, whose interests they are pre- 
 sumed to represent, and also from their ignorance 
 of che law governing the bank whose affairs they 
 are chosen to administer. 
 
 Directors do not, perhaps, always realize to what 
 extent the stockholders are compelled to rely upon 
 tnem for seeing that the capital they invest is used
 
 DUTIES OF DIRECTORS. 29 
 
 profitably and honestly, but, as a matter of fact, 
 outside of sucli information as the officers may be 
 disposed to furnish them, the only reliable data as 
 to the bank's affairs accessible to stockholders are 
 those furnished by the sworn reports of condition, 
 which are published in the newspapers five times a 
 year. 
 
 When this responsibility to stockholders is fully 
 realized, it would seem that a prudent and consci- 
 entious man of business would hesitate to act as 
 director, unless he intended to inform himself as to 
 his duties, and, having done this, to "diligently 
 and honestly administer the aff"airs of the bank." 
 
 Such a director will inquire how he may most 
 readily, and without too much research, acquire 
 such reliable information as will enable him to dis- 
 charge his duties intelligentl}^ ; and partl}^ with a 
 view to furnishing in concise form and plain terms 
 some of the information needed this little work has 
 been prepared, embracing only such subjects as 
 most commonly present themselves to bank officers 
 in the regular current of business. 
 
 The construction of law and rules of practice 
 here given are those which at present seem to ob- 
 tain in the Comptroller of the Currency's office as
 
 30 HAND-BOOK FOR BANK OFFICERS. 
 
 the outcome of information and experience accumu- 
 lated during a quarter of a century, from intimate 
 and constant of&cial intercourse with the banks, 
 supplemented by careful examination of all legal 
 decisions bearing on their operations. In this con- 
 nection it is suggested that in all cases of doubt as 
 to a proper construction of law, or as to correct and 
 sound practice, directors or other bank officers 
 should promptly apply for information to the 
 Comptroller's office, as in doing so they obtain the 
 benefit of a large experience gained in dealing with 
 the affairs of over 3,300 banks. 
 
 How Directors should be Chosen. 
 
 The law relating to this subject is contained in 
 sections 5145, 5148, and 5149, and is so explicit as to 
 leave but little room for misunderstanding. Great 
 care should be taken, however, to see that all the 
 details therein prescribed are carried out with pre- 
 cision, as the failure to do this in any one particular 
 might, under certain circumstances, permit the 
 raising of some question as to the validity of acts 
 performed by the directors capable of being decided 
 by the courts adversely to the interests of such 
 directors, or of the stockholders whom they repre- 
 sent.
 
 DUTIES OP DIRECTORS. 3 1 
 
 Scope of Powers conferred upon Directors; Specific 
 Duties. 
 
 Paragraphs 6 and 7, section 5136 (see page 9, 
 National-bank Act, edition 1888), contain a sum- 
 mary of the general powers conferred by statute 
 upon the directors of a National bank, and prescribe 
 how some of these powers may be delegated by 
 them to the officers whom they appoint. 
 
 Section 5145 (see page 13, National-bank Act, 
 1888), in prescribing that "the affairs of each 
 association shall be managed by not less than five 
 directors," clearly contemplates that its affairs 
 should receive the constant and personal super- 
 vision of the board as a whole, or where this is not 
 practicable, that it should be accomplished through 
 committees selected from their number chareed 
 with special duties in this respect. 
 
 The scrutiny of all loans and discounts made is a 
 matter which should always receive the particular 
 attention of the board as a whole, or of its com- 
 mittee selected specially for this purpose, but per- 
 haps the most important duty devolving on direc- 
 tors is that of making a thorough and searching 
 examination of the assets, books, and accounts of 
 the bank, without previous notice, at reasonable 
 intervals between the dates of the Government
 
 32 HAND-BOOK FOR BANK OFFICERS. 
 
 examiner's visits. These examinations should be 
 made by such of the directors as are most familiar 
 with figures and expert at accounts, otherwise they 
 will not always disclose the actual condition of the 
 bank's affairs. 
 
 Every bank officer and clerk who is faithfully 
 discharging his duties will gladly welcome such a 
 verification of the trust confided to his care, and, 
 through fear of discovery by this means, the would- 
 be dishonest official or employe may be restrained 
 from acts ruinous to himself and detrimental to 
 the interests intrusted to his keeping. 
 
 As directors are empowered by section 5136, par. 
 5, to ''require bonds of" the officers whom they 
 appoint "and fix the penalty thereof" a sufficient 
 bond should be required of every officer or employe 
 intrusted with the keeping of valuables or of the 
 books in which account of such is kept. Such a 
 course certainl}^ is prudent as affording to stock- 
 holders and depositors some measure of protection 
 against official negligence or dishonesty. 
 
 In this connection it is suggested that, as the 
 necessary bonds may now be procured from com- 
 panies specially organized for the purpose of fur- 
 nishing such, at very low rates, the premium on
 
 DUTIES OF DIRECTORS. 33 
 
 these bonds might be paid, and in some instances 
 is paid, by the bank, instead of by the officers 
 bonded. 
 
 There is fully as much reason and warrant for 
 paying for such suret}^ or guarantee of official 
 integrity as there is for the paj^ment of premium for 
 insurance of the bank building and other property 
 against the risk of destruction by fire, and surel}^ 
 there is no question as to the duty of directors in 
 this latter case. 
 
 Another important matter demanding their at- 
 tention is of course the provision of a suitable, con- 
 venient, and secure office in which the business of 
 the bank may be carried on entirely separate and 
 apart from any other business. 
 
 It is also necessary that a fire-proof and burglar- 
 proof safe should be provided for the safe keeping 
 of its cash, bills receivable, securities and other 
 valuables, and also of its books and records. Where- 
 ever the safe will not accommodate the latter, a 
 suitable fire-proof and burglar-proof vault for them 
 should be provided in addition to the safe. 
 
 Decisions as to Liabilities; What would constitute 
 Violations of Law "Knowingly" Committed or 
 Permitted. 
 
 With regard to what constitutes violation of law 
 ''knowingly" committed or permitted by a director,
 
 34 HAND-BOOK FOR BANK OFFICERS. 
 
 resort must be had to the many legal decisions on 
 this point, two of the most recent of which by Fed- 
 eral courts are those in the cases of " Movius vs. 
 Lee (30 Fed. Rep., 298)," and "Witters vs. Sowles 
 (31 Fed. Rep., i)." 
 
 For general and reliable treatment of this sub- 
 ject, reference may be had to the work of "Morse 
 on Banks and Banking," third edition, by Parsons, 
 chapter IX, where these two and other leading 
 decisions are referred to. 
 
 In general terms it would seem that if a d'irector 
 has no official knowledge of a violation of the bank- 
 ing law he is not to be held personally liable for 
 any loss or damage resulting therefrom, but if, at 
 a board meeting or elsewhere, he officially assents 
 to any transaction which on its face constitutes a 
 violation of law, he may be held liable personally 
 for any resulting loss or damage; and ignorance 
 of the law under such circumstances could not be 
 set up as a defense, for it is to be assumed that a 
 person acting in such a capacity should have such 
 a correct knowledge of the law under which he acts 
 as is readily obtainable by a practical man of affairs.
 
 BOOKS, ACCOUNTS, AND RECORDS. 35 
 
 CHAPTER III. 
 
 BOOKS, ACCOUNTS, AND RECORDS. 
 
 One of the essentials of successful banking is 
 that the records of all transactions should be kept 
 in a clear, simple, and systematic manner. 
 
 The number and character of books for keeping 
 these will vary with the volume and special fea- 
 tures of the business done b}^ each bank, but cer- 
 tain of them are necessary in every case, and of 
 these a slight sketch is here given. 
 
 A book should first be provided in which the 
 minutes of all meetings of stockholders and meet- 
 ings of directors should be promptl}- recorded, giv- 
 ing tersely but clearly an account of all business 
 transacted at such meetings. 
 
 All certificates of stock should be bound in book 
 form, with a stub to each certificate, upon which 
 stub the name of shareholder, the number of shares 
 issued to him, and the date when issued, should be ' 
 carefull}' noted before the certificate is detached. 
 This book should also be used in cases of all trans- 
 fers of stock, a new certificate being issued in the
 
 36 HAND-BOOK FOR BANK OFFICERS. 
 
 case of every transfer, made out in the name of the 
 new shareholder in place of the original certificate, 
 which should be taken up and cancelled. 
 
 All transactions shown by this stock-certificate 
 book should be posted to the stock ledger^ which 
 should contain a separate account for each share- 
 holder, so kept as to readily show at any time the 
 name and address of every shareholder, and the 
 number of shares standing in the name of each. 
 
 Certificates of deposit^ like stock certificates, 
 should always be issued from a book with a stub to 
 each for noting the necessary data. The practice 
 of noting partial payments on these certificates is 
 apt to cause confusion in accounts. The simpler 
 and better wa}^ in such cases is to take up and 
 cancel the certificate first issued and issue a new 
 one for the reduced amount. The custom which 
 some ofi&cers have of signing these certificates in 
 blank before they are needed is not a safe one and 
 should as a rule be avoided. 
 
 Cashier's checks and all checks and d^^afts on other 
 banks and bankers should also always be issued 
 from a book having a stub upon which the neces- 
 sary data regarding each check or draft drawn 
 should be noted before it is detached.
 
 BOOKS, ACCOUNTS, AND RECORDS. 37 
 
 All deposits subject to check should be posted 
 daily to a ledger, showing the account with each 
 depositor, and to this ledger all checks drawn against 
 deposits should, of course, be posted daily also, in 
 order that the balance of any depositor's account 
 may be readil 3^ ascertained. 
 
 This ledger, generally known as the "individual 
 ledger," should be balanced at least once a month, 
 and at the same time all depositors' pass-books 
 should be balanced and compared with the ledger, 
 and all differences looked up and reconciled. 
 
 It is the custom with some banks to send to each 
 depositor, at intervals, a statement exhibiting the 
 balance of his account, as shown by the books of 
 the bank, with the request that he verify this bal- 
 ance by his pass-book and return the statement to 
 the bank, and this method serves to develop errors 
 and sometimes false entries on the books of the 
 bank. 
 
 In the same way all current accounts with other 
 banks and bankers should be verified and recon- 
 ciled at least once a month. 
 
 Appropriate books should be provided for record- 
 ing all loans and discounts, or "bills receivable," 
 showing names of makers and indorsers, acceptors, 
 
 386427
 
 38 HAND-BOOK FOR BANK OFFICERS. 
 
 or guarantors, with memoranda of all collateral se- 
 curity lodged with same, and the dates on which 
 the paper is made as well as those upon which it 
 will mature. 
 
 All stocks, securities, judgments, claims, other 
 real estate and mortgages owned, and other assets, 
 should be so recorded as to show readily a detailed 
 account of these in order that the information 
 needed for reports of condition and by the bank 
 examiner may be obtained at any date without 
 difficulty. 
 
 As soon as paper becomes overdue a separate 
 record of such should be made, and when any over- 
 due paper passes into the class of " bad debts as de- 
 fined by section 5204," such items should again be 
 separated from other overdue paper. Such treat- 
 ment of all overdue paper and " bad debts " is nec- 
 essary in order that these items may be held under 
 special observation and that the information re- 
 quired by reports of condition may readily be fur- 
 nished. 
 
 A general cash-book should contain a daily record 
 of aggregate transactions in the various general ac- 
 cou7its^ viz., deposits, loans and discounts, interest, 
 exchange, current expenses, etc., and the resulting
 
 BOOKS, ACCOUNTS, AND RECORDS. 39 
 
 balance of cash on hand, showing in detail the va- 
 rious items of which this balance is composed. 
 
 The placing in ''cash itcms^'' of such items as past 
 due paper, dishonored checks, or drafts, expense 
 items, etc., except temporarily, should be avoided, 
 as the term when representing such assets is mis- 
 leading. Items of this character should be trans- 
 ferred to appropriate accounts, and "cash items " 
 should include only such as represent readily con- 
 vertible value. 
 
 All items entered on the general cash-book should 
 be posted daily to appropriate accounts on 'Oci^ gen- 
 eral ledger^ the daily balances of which should be 
 exhibited on a statement or balance book for the 
 purpose of showing in condensed form the resources 
 and liabilities of the bank and the condition of its 
 lawful-money reserve from day to day. 
 
 A form for such a daily statement is offered by 
 way of suggestion on page 41. 
 
 A careful review of all the assets should be made 
 frequently, and their book value, as far as practi- 
 cable, adjusted to actual values, so that the books 
 and reports of the bank may, as nearly as possible, 
 represent the true condition of its affairs. 
 
 During recent years great improvements have 
 been made in the methods of bank book-keeping
 
 40 HAND-BOOK I^OR BANK OFFICERS. 
 
 with the result of simplifying these and saving 
 time and labor. Information as to these may 
 readily be obtained from leading banking periodi- 
 cals, and also from the examiners and from banks 
 in the larger cities where these methods have been 
 generally adopted. 
 
 In conclusion, it is suggested that it is all-im- 
 portant that the accounts and books of a bank 
 should be posted up to date, as far as this may be 
 possible, and that frequent trial balances and veri- 
 fications are very necessary for the purpose of 
 developing and rectifying errors which, in spite of 
 all precautions will inevitably occur.
 
 BOOKS, ACCOUNTS AND RE;C0RDS. 
 
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 at
 
 42 HAND-BOOK. FOR BANK OFFICERS. 
 
 CHAPTER IV. 
 
 GENERAL BANKING POWERS CONFERRED BY 
 SECTION 5136, PAR. 7. 
 
 To exercise by its board of directors, or duly authorized 
 officers or agents, subject to law, all such incidental powers 
 as shall be necessary to carry on the business of banking; 
 by discounting and negotiating promissory notes, drafts, bills 
 of exchange, and other evidences of debt; by receiving de- 
 posits; by buying and selling exchange, coin and bullion; by 
 loaning money on personal security; and by obtaining, issu- 
 ing, and circulating notes according to the provisions of this 
 Title. 
 
 Court Decisions Construing These. 
 
 As it is very important to know what powers are 
 granted to a National. bank under its charter, the 
 following extracts from two decisions are quoted, as 
 throwing some light on this subject, and as show- 
 ing what a bank may safely and prudently do with- 
 out exceeding the powers clearly granted by its 
 charter. 
 
 From the decision of the Supreme Court of Penn- 
 sylvania, in Fowler z^s. Scully, in 1873 (Thomp- 
 son's National Bank Cases, p. 856), we quote, as 
 follows, on this point:
 
 GENERAL BANKING POWERS. 43 
 
 In view of the rule of interpretation of such charters given 
 to us by the Federal courts, and the maxim expressio luiius 
 est excliisio alterius, the argument might close with the terms 
 of the power to loan money on personal security; for agree- 
 ably to this rule and maxim no other securitj^ than personal 
 can be taken for money lent. This is the law of the bank's 
 capacity and of its control. It accords also with the nature 
 of banking as a business, which is precisely described in the 
 language of the law itself ; the disco2inting and negotiating 
 of promissory notes, drafts, bills, and other evidences of debt 
 (meaning, of course, debts ejusdem ge7ieris, such as checks, 
 certificates of deposit, etc.); the buying and selling of bills 
 of exchange, bullion, and lending of money on personal se- 
 curity. The reasons are manifest. The business of a bank 
 is commercial, not that of dealing in real estate, brokerage, 
 etc. It, therefore, does not buy and sell real estate, ground- 
 rents, mortgages, stocks, produce, etc. 
 
 And, further, from United State.s Supreme Court 
 decision (First National Bank of Charlotte vs. Na- 
 tional Exchange Bank of Baltimore, Thompson's 
 National Bank Cases, p. 128), as follows : 
 
 Authority is thus given to transact such a banking busi- 
 'ness as is specified, and all incidental powers necessary to 
 carry it on are granted. These powers are such as are re- 
 quired to meet all the legitimate demands of the authorized 
 business, and to enable a bank to conduct its affairs within 
 the general scope of its charter safely and prudently. This 
 neces.sarily implies the right of a bank to incur liabilities in 
 the regular course of its business, as well as to become the 
 creditor of others. Its own obligations must be met, and
 
 44 HAND-BOOK FOR BANK OFFICERS. 
 
 debts due to it collected or secured. The power to adopt 
 reasonable and appropriate measures for these purposes is an 
 incident to the power to incur the liability or become the 
 creditor. Obligations may be assumed that result unfortu- 
 nately, lyoans or discounts may be made that can not be 
 met at maturity. Compromises to avoid or reduce losses are 
 oftentimes the necessary results of this condition of things. 
 These compromises come within the general scope of the 
 powers committed to the board of directors and the officers 
 and agents of the bank, and are submitted to their judgment 
 and discretion, except to the extent that they are restrained' 
 by the charter or by-laws. Banks may do, in this behalf, 
 whatever natural persons could do under like circumstances. 
 To some extent it has been thought expedient in the Na- 
 tional banking act to limit this power. Thus, as to real es- 
 tate, it is provided (Revised Statutes, sec. 5137; 13 Stat., 107, 
 sec. 28) that it may be accepted in good faith as security for, 
 or in payment of, debts previously contracted; but, if ac- 
 cepted in payment, it must not be retained more than five 
 years. So, while a bank is expressly prohibited (sec. 5201; 
 13 Stat., no, .sec. 35) from loaning money upon or purchas- 
 ing its own stock, special authority is given for the accept- 
 ance of its shares as security for, and in payment of, debts 
 previously contracted in good faith; but all shares purchased 
 under this power must be again .sold or disposed of at private 
 or public sale within six months from the time they are ac- 
 quired. 
 
 Qtiotation.s from this decision will also be found 
 in paragraph on dealing in stocks and bonds (p. 
 50).
 
 GENERAL BANKING POWERS. 45 
 
 Power to Borrow Money; Power to issue Time Cer- 
 tificates of Deposit. 
 
 As the question whether a National bank has 
 the power to borrow money involves the question 
 as to its right to issue time certificates of deposit, 
 the following extracts from third edition of " Morse 
 on Banks and Banking," by Parsons, to which we 
 are indebted for quotations made on other topics in 
 this work, are given as a summary of judicial 
 decisions bearing on this subject. 
 
 Business Pozvers. Par. 51, sec. 5. As invoh^ed in the 
 power to receive deposits, a bank may issue certificates of 
 deposit, which in Massachusetts and Pennsylvania are not 
 regarded as negotiable paper; but in other States they are 
 considered promissory notes (which seems clear upon any 
 defini-ion of a note to be found in the authorities), negotiable 
 under the same limitations as notes 
 
 They are used to save carrying money; but as they do not 
 pass by delivery, but only by indorsement, they are not in- 
 tended to circulate as money in the sense of a banking law, 
 such as the National or New York law; and, therefore, the 
 prohibition in those acts of issuing notes to ciradate as money, 
 other than those provided for or named in said acts, does not 
 interfere with the power of a bank to issue certificates of 
 deposit. 
 
 They may be payable on demand or on time, if the circum- 
 stances justify the bank in borrowing on time (see par. 63), 
 unless there is a restriction in the organic law or by statute. 
 If a bank can not issue its negotiable promissory note on 
 time, neither can it issue a negotiable certificate of deposit of
 
 46 HAND-BOOK FOR BANK OFFICERS. 
 
 this description. If the note would be void, so, likewise, is 
 the certificate. If, however, the bank is empowered to issue 
 promissory notes, subject only to the restriction that it shall 
 issue none which are designed to pass into circulation as cur- 
 rency, but only such as become necessary in the ordinary" 
 course and conduct of its affairs, and are strictly business 
 paper, then it may issue certificates of deposit, whether pay- 
 able on demand or otherwise, subject only to the same restric- 
 tion. By reason of the ease with which such instruments 
 may be used for circulation, the courts have often been rigid 
 in scrutinizing them, and applying the strict letter of the law 
 to them; but they have never, that we have found, substan- 
 tially modified or departed from the general principles above 
 laid down. 
 
 Business Powers. Par. 63, sec. 9. So far as it is involved in 
 receiving deposits, borrowing is a part of banking, but bor- 
 rowing strido scnsu, taking a loan for a defiiiite time, instead 
 of one payable on demand, as ordinary deposits are, is not a 
 part of the business of banking, nor a necessary incident 
 thereof as s. contimcoiis practice ; but (like every other corpora- 
 tion in the United States) a bank has an inherent right to 
 borrow money whenever it is reasonably necessary in the 
 proper conduct of its business, unless specially restricted. 
 The privilege is the child of necessity, and is limited by the 
 same necessity or intrinsic propriety which gives it birth. 
 The borrowing must be incidental to the legitimate banking 
 business of the association, otherwise the act is tiltra vires; 
 as if the money is obtained for speculation. Aside from the 
 theory of law, as no one but the bank can well judge whether 
 a loan is reasonably necessary or not, the practical fact is 
 that a bank can borrow money whenever it wishes to, and, if 
 the money is used in its proper business, no fault will be found, 
 and even if wrongly applied, it will not affect the validity 
 of the loan as between the parties ordinarily. * * *
 
 GENERAL BANKING POWERS. 47 
 
 The right to borrow money is also clearl}' im- 
 plied in section 5202, which fixes the limit for such 
 borrowing as follows: 
 
 No association shall at any time be indebted, or in any way 
 liable, to an amount exceeding the amount of its capital stock 
 at such time actually paid in and remaining undiminished by 
 losses or otherwise, except on account of demands of the na- 
 ture following: 
 
 First. Notes of circulation. 
 
 Second. Moneys deposited with or collected by the asso- 
 ciation. 
 
 Third. Bills of exchange or drafts drawn against money 
 actually on deposit to the credit of the association, or due 
 thereto. 
 
 Fourth. Liabilities to the stockholders of the association 
 for dividends and reserve profits. 
 
 From these it will appear that a bank has un- 
 doubted right to borrow money whenever it be- 
 comes necessary to do so in the regular course of 
 business, but that it should not make a practice of 
 doing so continuously. Whenever it becomes nec- 
 essary for a bank to borrow money habituall}^ in 
 order that it may be able to suppl}^ its regular cus- 
 tomers with accommodations, it is evident either 
 that its resources are locked up in inconvertible 
 forms, or that its capital is insufficient. 
 
 In the former case, ever}' effort should be made 
 to convert its assets into available funds, and in
 
 48 HAND-BOOK FOR BANK OFFICERS. 
 
 the latter it should seek to increase its capital 
 stock to the extent of its regular needs, for it is 
 neither safe nor prudent to allow its customers to 
 depend for accommodation upon funds procured 
 frequently from a distance, which may at any time 
 be withdrawn by the lenders; and, further, if a 
 bank can make a profit by regularly lending money 
 for the use of which it has to pay interest, it would 
 seem that it has the ability to make the invest- 
 ment of additional capital stock profitable to those 
 by whom it may be contributed. 
 
 In conclusion, this power of a bank to borrow 
 money is one that should be exercised only by the 
 board of directors, or by the managers of the bank 
 with the special sanction and approval of the board. 
 It is a power intended for use in cases of emergency 
 only, and should be carefully held in reserve for 
 such occasions. 
 
 Bills Payable Defined. 
 
 It is a question with a bank sometimes to deter- 
 mine what items, if any, of its liabilities should be 
 included under the head of " bills payable" on its 
 books, and in its reports of condition. Strictly 
 speaking, all deposits with a bank are loans to it, 
 and the marked distinction between a "deposit"
 
 GENERAL BANKING POWERS. 49 
 
 with a bank and money loaned to, or borrowed by, it 
 seems to consist in the circumstance that a "depos- 
 it" usually voluntarily seeks the bank, while a loan 
 to it is money which the bank seeks to borrow for 
 a longer or shorter period. But money may be 
 borrowed by a bank either on the condition that it 
 is returnable to the lender on demand^ or at some 
 fixed future date. It would seem that this then 
 should be the dividing line between "deposits," or 
 amounts " due to other banks," and "bills payable," 
 namely, that if the amount borrowed is payable to 
 the lender only at some fixed future date, it should 
 be entered as "bills payable," but if payable on 
 demand^ as "deposits" or "due to other banks or 
 bankers." In the latter case it is necessary that 
 reserve should be maintained on the amount bor- 
 rowed, as is required on all liabilities payable on 
 demand, but no reserve is required on "bills pay- 
 able." It matters not whether money is borrowed 
 by a bank on promissory note, certificate of deposit, 
 open account, or otherwise; if it is not returnable 
 on demand it should be classed as "bills payable." 
 
 Post-Notes Defined. 
 
 It has at times been questioned whether the re- 
 striction as to issuing "post-notes" contained in
 
 50 HAND-BOOK FOR BANK OFFICERS. 
 
 section 5183 did not extend to the issuing of time 
 drafts, time certificates of deposit, and other obli- 
 gations of the bank conditioned for payment at 
 some future time, but a recent court decision (Rid- 
 dle vs. National Bank, Butler, Pa., 27 Fed. Rep., 
 503) has declared that time certificates of deposit 
 are not to be regarded as "post-notes." This de- 
 cision, considered in connection with the well-settled 
 principle that a bank has the right to borrow money 
 when necessary, would make it appear that the 
 term " post-notes " used in the statutes was intended 
 only to prevent the issue of such notes to circulate 
 as money. 
 
 Right to Deal in Stocks and Bonds Denied by tiie 
 Courts. 
 
 With regard to the right of a bank to deal in 
 
 s/oc/js, the Supreme Court (First National Bank of 
 
 Charlotte z's. National Exchange Bank of Baltimore, 
 
 92 U. S., 122) expressed the following opinion: 
 
 Dealing in stocks is not expressly prohibited; but such a 
 prohibition is implied from the failure to grant the power. 
 In the honest exercise of the power to compromise a doubtful 
 debt owing to a bank, it can hardly be doubted that stocks 
 may be accepted in payment and satisfaction, with a view to 
 their subsequent sale or conversion into money, so as to 
 make good or reduce an anticipated loss. Such a transaction 
 would not amount to a dealing in stocks.
 
 GENERAL BANKING POWERS. 5 1 
 
 In support of this decision we find in the National- 
 bank Act itself internal evidence to the same effect. 
 Section 5154, in providing for the conversion of 
 State banks to National banking associations, 
 makes an exception in the matter of the par value 
 of the shares of such State banks, and another ex- 
 ception with regard to their holding stock in other 
 banks as follows: 
 
 And any State bank which is a stockholder in any other 
 bank, by authority of State laws, may continue to hold its 
 stock, although either bank, or both, nia^' be organized under 
 and have accepted the provisions of this Title. 
 
 The only reasonable inference to be drawn from 
 this special provision of the law, in favor of State 
 banks converting to the National system, is that 
 it was not intended that National banking associa- 
 tions — originally organized as such — should have 
 the power to purchase and hold such stocks as 
 investments. 
 
 And so with regard to the right of a bank to deal 
 in bonds. We quote, as follows, from the decision of 
 a Maryland court (Weckler v. First National Bank, 
 42 Md., 581): 
 
 To the u.sual attributes of banking, consisting of the right 
 to issue notes for circulation, to discount commercial paper, 
 and to receive deposits, this law adds the special power to
 
 52 HAND-BOOK FOR BANK OFFICERS. 
 
 buy and sell exchange, coin, and bullion; but we look in vain 
 for any grant of power to engage in the business charged in 
 this declaration. It is not embraced in the power to ' ' dis- 
 count and negotiate" promissory notes, drafts, bills of ex- 
 change, and other evidences of debt. The ordinary meaning 
 of the term ' ' to discount " is to take interest in advance, and 
 in banking it is a mode of loaning money. It is the advance 
 of money not due until some future period, less the interest 
 which would be due thereon when payable. The power to 
 ' ' negotiate ' ' a bill or note is the power to indorse and deliver 
 it to another, so that the right of action thereon shall pass to 
 the indorsee or holder. No construction can be given to these 
 terms, as used in this statute, so broad as to comprehend the 
 authority to sell bonds for third parties on commission, or to 
 engage in business of that character. The appropriate place 
 for the grant of such a power would be in the clause confer- 
 ring authority to " buy and sell; " but we find that limited 
 to specific things, among which bonds are not mentioned, 
 and upon the maxim expressio rinius est exclusio alterius, and 
 in view of the rule of interpretation of corporate powers be- 
 fore stated, the carrying on of such a business is prohibited ■ 
 to these associations. Nor can we perceive it is anywise nec- 
 essary to the purpose of their existence, or in any sense inci- 
 dental to the business they are empowered to conduct, that 
 they should become bond-brokers, or be allowed to traffic in 
 every species of obligation issued by the innumerable cor- 
 porations, private or municipal, of the country. The more 
 carefully thej^ confine themselves to the legitimate business 
 of banking, as defined in this law, the more effectually will 
 they subserve the purposes of their creation. By a strict ad- 
 herence to that they will best accommodate the commercial 
 community, as well as protect their shareholders. Such is 
 our construction of this statute, and it is supported by the
 
 GENERAL BANKING POWERS. 53 
 
 best considered authorities and the decided preponderance of 
 judicial opinion in other States. 
 
 From these decisions it would appear that, while 
 it is lawful for a bank to acquire stocks or bonds in 
 good {aiih/or the purpose of securing debts previously 
 C07itracted^ the power to "traffic" in them — that is, 
 to buy them with a view of selling them at a profit — 
 or to hold them as investments, is not among the 
 incidental powers enumerated in section 5136, and 
 is, therefore, a power which it has no legal right to 
 exercise. 
 
 From the general tenor of the law, and the re- 
 strictions therein imposed, and the construction 
 placed upon the law by numerous court decisions, 
 it would appear that the framers of the law in- 
 tended to prevent the banks, as far as possible, 
 from getting their assets into any inconvertible 
 form, and for this reason the restrictions as to real 
 estate transactions are imposed. 
 
 If the investment of their resources in stocks or 
 bonds, except to save debts previously contracted^ 
 would have the same effect of locking up their 
 funds as do investments in real estate, and experi- 
 ence proves that frequentl}'- it does, then it would 
 seem that such investments should be avoided by
 
 54 HAND-BOOK FOR BANK OFFICERS. 
 
 all bank managers who desire to be on tbe safe side 
 of the law. 
 
 The accumulation of a large fund of surplus and 
 undivided profits in a bank which it is unable to 
 invest profitably in such loans and discounts as are 
 permitted by law, make it apparently necessary for 
 the bank to purchase stocks, bonds, and other se- 
 curities as investments for these "surplus funds" 
 as they are sometimes termed, in order that the 
 stockholders may realize dividends on these funds, 
 and this will account mainly for the large holdings 
 of some banks. 
 
 It would seem, however, that the same ends could 
 be attained if these surplus funds or accumulated 
 profits were distributed in dividends to the stock- 
 holders and invested by them in the same securi-" 
 ties, either as individuals, or by trustees acting for 
 them in groups or as a whole, and such a course 
 would certainly remove any question as to the le- 
 gality of such investments when made by the bank 
 in its corporate capacity. 
 
 Purchasing Commercial Paper. 
 
 It is the custom of some banks to purchase com- 
 mercial or business paper, either from brokers or 
 from the actual owners of such paper without re-
 
 GENERAL BANKING POWERS. 55 
 
 course to such brokers or owners, or in other 
 words, without their guarantee or indorsement. 
 Whether or not the power to do this is granted by 
 law to a National bank, has never been decided by 
 the United States Supreme Court, and the decis- 
 ions rendered by various State courts have been 
 both favorable and adverse to this view. (See 
 "Morse on Banks and Banking," third edition, 
 by Parsons, pars. 72 and 73.) 
 
 The whole question appears to hinge upon the 
 proper definition of the word "negotiating" occur- 
 ring in par. 7, section 5136. On this point, as on 
 some others, the National-bank Act appears to con- 
 tain some internal evidence as to the intended 
 meaning of this term, for in section 5200 w^e find 
 that "the discount of commercial or business 
 paper actually owned by the person negotiating 
 the same" is excepted from the limit as to amount 
 which is applied to direct loans, or " money bor- 
 rowed." As used in this section it is clear beyond 
 question that the word "negotiating" means sim- 
 ply "offering for discount," and, as elsewhere sug- 
 gested in this work, the evident reason for the 
 exception of such discounted paper from the limit 
 applying to "money borrow^ed," was that it was
 
 56 HAND-BOOK FOR BANK OPF'ICKRS. 
 
 of course presumed that the person actually own- 
 ing and negotiating such paper would indorse 
 it, or guarantee its payment by the maker. If 
 this view is incorrect we look in vain for any 
 valid reason for the exception made in its favor. 
 
 It seems not unreasonable to assume, therefore, 
 that the word " negotiating," as used in par. 7, sec- 
 tion 5136, and following so closely after the word 
 "discounting" in the same clause, has the same sig- 
 nificance as that implied in section 5200, and that it 
 was intended to confer upon a bank only the power 
 to "offer for discount" or to "rediscount" paper 
 which, under the power granted in the same para- 
 graph, it had already "discounted." 
 
 At all events, so long as this point is not defi- 
 nitely adjudicated by the Supreme Court, it would, 
 seem to be the safer course for such National banks 
 as claim the right to exercise this power to purchase 
 paper without indorsement or guarantee, that they 
 should consider money invested under such cir- 
 cumstances practically as "money borrowed" by 
 the makers of the paper or as direct loans to them; 
 and, therefore, should limit such purchases in each 
 and every case to an amount not exceeding one- 
 tenth part of their capital stock as prescribed by 
 section 5200.
 
 TEANS ACTIONS IN REAI< ESTATE. 57 
 
 CHAPTER V. 
 
 TRANSACTIONS IN REAI. ESTATE. 
 
 Sec. 5157. A National banking association may purchase, 
 hold, and convey real estate for the following purposes, and 
 for no others: 
 
 First. Such as shall be necessar}^ for its immediate accom- 
 modation in the transaction of its business. 
 
 Second. Such as shall be mortgaged to it in good faith by 
 way of security for debts previously contracted. 
 
 Third. Such as shall be conveyed to it in satisfaction of 
 debts previously contracted in the course of its dealings. 
 
 Fourth. Such as it shall purchase at sales under j udgments, 
 decrees, or mortgages held by the association, or shall pur- 
 chase to secure debts due to it. 
 
 But no such association shall hold the possession of any 
 real estate under mortgage, or the title and possession of any 
 real estate purchased to secure any debts due to it, for a longer 
 period than five j-ears. 
 
 Restrictions Imposed by Law. 
 
 It will be clearly perceived from the language of 
 this section that the only purpose for which a 
 National bank may lawfully " purchase, hold, and 
 convey real estate" (other than its "banking house") 
 is b\^ way of securit}^ for "debts previousl}- con- 
 tracted." This is emphasized by the use of the
 
 58 HAND-BOOK FOR BANK OFFICERS. 
 
 words "and for no others" in the first paragraph 
 of the section, and altogether the intent of the 
 statute is as explicitly expressed as plain language 
 .can do this, yet in case any doubt arises as to this 
 intent^ we have further the plain construction placed 
 upon it by the Supreme Court in the decision 
 already quoted on page 44 in the following lan- 
 guage : 
 
 Thus, as to real estate, it is provided (section 5137) that 
 it may be accepted in good faith as security for, or in paj^ment 
 of, debts previously contracted; but if accepted in payment, it 
 must not be retained more than five years. 
 
 This limit of five years was probably fixed by 
 the framers of the law as affording ample time for 
 disposing of such real estate. 
 
 It is presumed in some cases where a bank is' 
 either unable or unwilling to dispose of real estate 
 at the end of the five-year limit, that it conforms to 
 the legal requirement when it charges the value of 
 the real estate .off its books, but this is a mistaken 
 view of the law, which requires that the title to, or 
 mortgage on, real estate should be disposed of, and 
 makes no reference to the appearance of its value 
 among the assets of the bank. 
 
 In some cases the law on this particular point of
 
 TRANSACTIONS IN REAL ESTATE. 59 
 
 holding possession is construed as referring to 
 the actual occupancy by the bank of the real estate 
 for which the bank holds title or mortgage. It is 
 scarcely necessary to state that the word "posses- 
 sion" refers to the holding of the written legal 
 instrument by the bank, and not to the actual occu- 
 pancy by the bank of the property over which the 
 title or mortgage gives it legal control. 
 
 4 
 
 Securities Based on Real Estate Values. 
 
 Besides titles and mortgages, however, there are 
 so many other forms under which an interest in 
 real estate may be acquired, to which the letter of 
 the law does not apply, and with regard to the hold- 
 ing of which the question of legality will arise, that 
 the language of the opinion of the United States 
 Supreme Court, in its decision in the case of Union 
 National Bank vs. Matthews (98 U. S., 658), is 
 quoted below as bearing directly on this question. 
 
 The court, with regard to section 5136, which 
 permits a bank to loan money "on personal secu- 
 rity," said: ■ 
 
 Section 5136 does not, in terms, prohibit a- loan on real 
 estate, but the inii:)lication to that effect is clear. What is so 
 implied is as effectual as if it were expressed.
 
 6o HAND-BOOK FOR BANK OFFICEIRS. 
 
 Passing on to the restrictions imposed by section 
 5137, it defined the object of these as follows: 
 
 The object of the restrictions (in section 5137) was obviously 
 threefold. It was to keep the capital of the banks flowing in 
 the daily channels of commerce, to deter them from embark- 
 ing in hazardous real estate speculations, and to prevent the 
 accumulation of large masses of such property in their hands 
 to be held, as it were "in mortmain." The intent, not the 
 letter of the statute, constitutes the law. 
 
 With this language in view, it would appear 
 that the holding of real estate in any form ex- 
 cept for the purposes clearly stated in section 
 5137 should be carefully avoided by all bank 
 managers who desire to conform to the "intent 
 of the statute." 
 
 For this reason, the holding, as investments^ of 
 any and all stocks, bonds, or other securities, 
 the value of which rests directly upon real estate, 
 except to save debts previously contracted^ should 
 be regarded by such managers as violations of 
 the spirit of the law, if not of its letter. 
 
 Some of the forms, other than deeds and mort- 
 gages, in which real estate values present them- 
 selves, are the following: land debenture bonds; 
 the stocks and bonds of land improvement compa- 
 nies, mortgage and trust companies, building and 
 loan associations; of companies whose capital is
 
 TRANSACTIONS IN REAL ESTATE. 6 1 
 
 wholly invested in theatres, opera-honses, hotels, 
 elevators, cotton-presses, warehouses, and the 
 stocks or bonds of an}^ similar enterprises where 
 the capital is invested mainly, or entirely, in 
 real estate. 
 
 In connection with this subject of holding or 
 dealing in real estate securities, what is said else- 
 where with regard to dealing in stocks and bonds 
 generally (page 51) should also be taken into con- 
 sideration. 
 
 As such stocks, bonds, and other securities of 
 like nature, though depending largely or entirely 
 upon real estate for their value, are personal secu- 
 rity^ the holding of them as collaieral security for 
 loans appears to be warranted by law, which per- 
 mits "the loaning of money on personal security." 
 (Section 5136.) 
 Supreme Court Decisions. 
 
 With regard to making loans, secured by pledge 
 of notes or bonds secured by liens on real estate 
 (such as mortgages, deeds of trust, and the like) 
 as collateral security for such loans, the Supreme 
 Court, in the case of Union National Bank vs. 
 Mattheivs^ already referred to, decided that the 
 taking of such collateral security is not unlaw- 
 ful, inasmuch as the mortgage or its equiva-
 
 62 HAND-BOOK FOR BANK OFFICERS. 
 
 lent in such cases does not run directly to 
 the bank, but to the borrower. 
 
 In the Matthews case, the court was asked 
 to decide as to the legality of the following 
 transaction : 
 
 A National bank loaned a mercantile firm $15,000 
 on its promissory note. The firm assigned to the 
 bank, as collateral security for this loan, a note for 
 a like amount made by two persons in favor of the 
 firm, which note was secured by a deed of trust on 
 real estate, executed by one of the makers of the 
 collaters.1 note. The firm failed to repay their loan 
 at maturity, and the bank proceeded to realize upon 
 the real estate^ whereupon the maker of the deed 
 attempted to enjoin the bank from doing this, 
 "upon the ground that the loan was made upon 
 real security, which was forbidden b}^ the statute." 
 
 The court decided that the loan was not unlawful, 
 
 and the grounds upon which it reached its decision 
 
 on this point are given in the following passage 
 
 from its decision in the case of National Bank vs. 
 
 Whitney (103 U. S., 99), in which the court clearly 
 
 restated the Matthews case, and used the following 
 
 language : 
 
 In coming to this conclusion this court considered the 
 transaction in two aspects: first, as not being within the let-
 
 TRANSACTIONS IN REAL ESTATE. 63 
 
 ter of the statute, because the deed of trust was not executed 
 to the bank. * * * 
 
 Viewed in the first aspect, the court held that, as a mort- 
 gage, the deed of trust was merely an incident to the note, 
 and a right to its benefit, whether it was delivered or not 
 with the note, passed with the transfer of the latter. If the 
 loan had been made upon the note alone, the benefit of the 
 deed as a mortgage would have inured to the bank by oper- 
 ation of law. Of course, that which the law would give 
 independently of a direct transfer by the mortgagee, the 
 statute did not intend to defeat, because such transfer was 
 made. 
 
 The decision appears to have been based upon 
 the view, first, that the collateral note, even though 
 secured by the deed of trust, ^2JS, personal security; 
 and, secondly, that the deed of trust (which it re- 
 garded as the equivalent of a mortgage) was not 
 executed directly io the bank. 
 
 In making loans on such collateral security, 
 however, the object of the restrictions contained in 
 section 5137, and the "intent of the statute," as 
 defined by the Supreme Court in the Matthews 
 decision, should always be held in mind; and the 
 decision of the court in this case is not to be con- 
 strued as warranting loans on such securit}^, which 
 do not in reality, as well as in appearance, fully 
 conform to the actual conditions of the case upon 
 which the decision was rendered.
 
 64 HAND-BOOK FOR BANK OFFICERS. 
 
 CHAPTER VI. 
 
 RESTRICTIONS AS TO LOANS IMPOSED BY SEC- 
 TION 5200. 
 
 Sec. 5200. The total liabilities to any association, of any 
 person, or of any company, corporation, or firm for money 
 borrowed, including, in the liabilities of a company or firm, 
 the liabilities of the several members thereof, shall at no time 
 exceed one-tenth part of the amount of the capital stock of 
 such association actually paid in. But the discount of bills 
 of exchange drawn in good faith against actually existing 
 values, and the discount of commercial or business paper 
 actually owned b}^ the person negotiating the same, shall not 
 be considered as money borrowed. 
 
 Examples Illustrating Excessive Loans and Such as 
 are Not Excessive. 
 
 There is probably no section of the National- 
 bank Act that leaves more doubt as to its true and 
 exact application than this which prescribes a limit 
 to loans. 
 
 As far as the iJitent of the framers of this section 
 can be divined it appears to make a distinction be- 
 tween "loans" and "discounts." The restriction 
 is limited to "money borrow^ed" by an}?- "person," 
 "company," "corporation," or "firm," including in 
 the liabilities of a company or firm for money bor-
 
 RESTRICTIONS AS TO LOANS. 65 
 
 rowed, the liabilities of the several members thereof, 
 and ill order to determine whether a "loan" is ex- 
 cessive or not, it is important to know who gets the 
 benefit of the "money borrowed" from the bank. 
 
 The paper npon which loans are made varies so 
 mncli in form that nothing but the knowledge of 
 the actual facts connected with each transaction 
 can enable the officers of a bank to determine 
 whether or not they are violating this section of the 
 law. 
 
 The number of phases in which the question 
 presents itself to a bank is almost limitless, but a 
 few examples are given, by way of illustration, 
 which, it is hoped, will make the general meaning 
 more clear than it appears from the text. 
 
 I. Taking a bank with a capital of $100,000 act- 
 ually "paid in," and assuming that the firm or 
 company of John Smith & Co. wishes to "borrow 
 money" from the bank, up to the limit, it would not 
 be lawful to loan them more than $10,000 (one- 
 tenth of the "capital stock"); and the fact that 
 John Smith & Co. were able to give the strongest 
 and best indorsers for an amount greater than 
 $10,000, or to put up collateral securit}^ of ample 
 and undoubted market value, would not entitle them
 
 66 HAND-BOOK FOR BANK OFFICERS. 
 
 lawfully to borrow one dollar more than $10,000, as 
 the law makes no exception in such cases, the limit 
 applying solely to the amount of the loan without 
 reference to its security. 
 
 2. If, before the firm applied for a loan, John 
 Smith or any one partner had borrowed $10,000 
 for his individual benefit^ then it would not be law- 
 ful to loan anything to the firm, for their limit for 
 "money borrowed" would have already been ex- 
 hausted by the loan to such member of the firm. 
 
 3. It is questionable whether it would be lawful 
 in such a case for the bank to loan any money on the 
 paper of any person, firm, or corporation, with John 
 Smith & Co., as indorsers of such paper, if it were 
 known that John Smith & Co. were directly tO get 
 the benefit of the money so borrowed, for this would 
 appear to be an evasion of the law ; but if any per- 
 son, firm, or corporation, whose paper was indorsed 
 by John Smith & Co., wanted to borrow money on 
 such paper for his or its individual benefit, the fact 
 that it was indorsed by John Smith & Co. would 
 not make a loan to such person, firm, or corpora- 
 tion unlawful. 
 
 4. In case John Smith & Co., as a firm, had bor- 
 rowed no money of the bank it would be lawful to
 
 RESTRICTIONS AS TO LOANS. 67 
 
 loan to each member of the firm, upon his individual 
 credit and responsibility, an amount equal to the 
 limit, provided the money so borrowed by each 
 partner was for his individual benefit, and not for 
 the benefit of the firm. 
 
 5. Again, if John Smith & Co. had "borrowed 
 money" up to the limit, and any other person, firm, 
 or corporation should choose to borrow money of 
 the bank upon his or its own responsibility and 
 credit, it would be lawful for any such person, 
 firm, or corporation, to let John Smith & Co. have 
 the benefit of the money so borrowed. It is no 
 affair of the bank to know what disposal is made 
 by the borrower of the money borrowed. 
 
 6. It sometimes happens that several different 
 firms have one or more partners in common, and 
 the question will arise whether it is lawful to loan 
 each one of the firms an amount equal to the limit. 
 In such a case it would seem that if such firms are 
 doing business entirely upon the capital owned 
 solely by such common partner, or partners, they 
 should be regarded virtually as one firm, and the 
 total of loans to them should not exceed the limit; 
 but if each of the different firms really represents 
 separate and distinct capital invested in its business,
 
 68 HAND-BOOK FOR BANK OFFICERS. 
 
 it appears that loans up to the limit may lawfully 
 be made to each firm. 
 
 Deposits with Banks and Bankers regarded as 
 Loans. 
 
 Amounts on deposit with State and private banks 
 and bankers in excess of one-tenth of the capital 
 stock, have always been held by the Comptroller's 
 of&ce to be violations of this section also, for the 
 following reasons : 
 
 In the decision of Bank vs. Lanier (ii Wallace, 
 369), which was on some other point of law, the 
 Supreme Court pronounced the following opinion 
 as to "deposits," viz.: 
 
 But a deposit is nothing but a loan of money. * * * 
 It is well known that country' banks keep on deposit in New 
 York with bankers and merchants a considerable amount of 
 money for their own convenience, for which they receive 
 more or less of interest. But whether interest be obtained 
 or not, these deposits are, equally with paper discounted over 
 the counter of the bank, loans of money, and the reason of 
 the rule is equally applicable to them. The banker is ac- 
 countable for the deposits he receives as a debtor, and the 
 individual borrower of money from the bank sustains no 
 other relation to it. In both cases money is borrowed, to be 
 returned in a greater or less period of time, according to the 
 contract of the parties. 
 
 In this view of the case, deposits are loans, and 
 as a State bank, a private bank, or a banker is
 
 RESTRICTIONS AS TO LOANS. 69 
 
 either a person, a company, a corporation, or a firm, 
 any deposit with any such person, company, cor- 
 poration, or firm is regarded as a loan, or "money 
 borrowed," and is subject to the restriction as to 
 amount, which is prescribed by section 5200. It 
 ma}^ be that the courts would not hold that amounts 
 in excess of the limit sent to such banks or bankers 
 for collection are to be regarded as in violation of 
 law, but measures should be taken to reduce such 
 amounts within the limit as soon as it is ascer- 
 tained that the collections have been made b}^ the 
 bank or banker receiving the same. 
 
 Exceptions as to Discounts and Examples Illus- 
 trating These. 
 
 Coming, then, to the case of "discounts," which 
 
 are excepted from the restriction as to amount, two 
 
 exceptions are made, as follows : 
 
 " I. The discount of bills of exchange drawn in good faith 
 against actually existing values;" and, 
 
 "2. The discount of commercial or business paper actually 
 owned by the person negotiating the same." 
 
 Such paper as is clearly embraced in these two 
 classes, the law says, "shall not be considered as 
 money borrowed," and is, therefore, to be excepted 
 from the restriction as to amount.
 
 70 HAND-BOOK FOR BANK OFFICERS. 
 
 As an illustration under the first exception, if 
 the firm of John Smith & Co., who had already 
 " borrowed money " to the extent of the limit, should 
 offer the same bank bills of exchange drawn against 
 shipments of cotton, wheat, corn, iron, or any other 
 merchandise which is readily convertible into 
 money, it would be lawful for the bank to discount 
 such paper to any limit which it considered safe. 
 Such bills or drafts are generally secured by the 
 attachment of bills of lading for the shipments 
 against which the bills are drawn, but if the bank 
 is satisfied of the actual existence of the values 
 and with the good faith of the parties to the trans- 
 action, the security of bills of lading, though 
 desirable, is not absolutely essential. 
 
 With regard to the scope of the second excep- 
 tion, it will be assumed, for the sake of example, 
 that the firm of John Smith & Co., who have 
 already "borrowed money" up to the legal limit, 
 offer to the same bank for discount paper which 
 they have taken from their customers either for 
 merchandise sold, money loaned, or other valuable 
 consideration. In such a case, if John Smith & 
 Co. are the bona fide owners of such paper, the
 
 rkstrictions as to loans. 7t 
 
 bank may discount it for John Smith & Co. as 
 "commercial or business paper actually owned by 
 the person negotiating the same" to an}' limit 
 which, in the judgment of the directors of the bank, 
 it may be considered safe to do so. 
 
 Again, if the business paper of John Smith & 
 Co. were offered to the bank for discount by any 
 person, firm, company, or corporation actually 
 owning such paper, it would be lawful for the bank 
 to discount the same, although John Smith & Co. 
 had already "borrowed money" of the bank to the 
 legal limit. 
 
 It would seem that the intent of the framers of 
 this section was, using a homel}' phrase, to prevent 
 a bank from putting " all its eggs into one basket" 
 by making direct loans to any one person, firm, or 
 corporation, for even if the borrower were abun- 
 dantly good, or could lodge with the bank ample, 
 undoubted securit}^ for the " money borrowed," tlie 
 loan of a large amount to any one part}- able to offer 
 such security might operate to deprive others of 
 their due share of the benefits afforded b}' a bank, 
 which is established for the accommodation of the 
 public at large.
 
 72 HAND-BOOK FOR BANK OFFICERS. 
 
 The exceptions noted were probably made be- 
 cause the transactions covered by them were not 
 only regarded as being generally better secured by 
 reason of the guarantee of both parties to such 
 transactions, but also because in this way the bene- 
 fits of the bank's resources would be better dis- 
 tributed to the public for whose accommodation it 
 is established. 
 
 Overdrafts are Loans. 
 
 Overdrafts are temporary direct loans to the 
 parties making them, or "money borrowed" in the 
 least desirable form, and, as such, should be so re- 
 garded and treated in computing the total liabilities 
 to the bank of any person, firm, company or cor- 
 poration for " money borrowed."
 
 HOLDING ITS OWN STOCK. 73 
 
 CHAPTER VII. 
 
 RESTRICTIONS WITH REGARD TO A BANK'S AC- 
 QUIRING AND HOLDING ITS OWN STOCK. 
 
 ' Sec. 5201. No association shall make any loan or discount 
 on the security of the shares of its own capital stock, nor be 
 the purchaser or holder of any such shares, unless such se- 
 curity or purchase shall be necessary to prevent loss upon a 
 debt previously contracted in good faith; and stock so pur- 
 chased or acquired shall, within six months from the time of 
 its purchase, be sold or disposed of at public or private sale; 
 or, in default thereof, a receiver may be appointed to close up 
 the business of the association, according to section 5234. 
 
 Penalty for Holding beyond Time Limit. 
 
 It will be observed that the law provides a pen- 
 alty which may be summarily applied by the 
 Comptroller to an}^ violation of the law in this re- 
 spect, and the reason for this it is not dif&cult to 
 find. 
 
 Whenever a bank uses any portion of its capital 
 to make a loan on its own shares, or to purchase 
 them, it reduces or impairs its capital stock by such 
 an amount, and, in addition, deprives its creditors 
 of the additional security afforded b}^ the contingent
 
 74 HAND-BOOK FOR BANK OFFICERS. 
 
 liability attaching to the shares, if held by a solvent 
 shareholder. 
 
 Violations of the spirit of this section, if not of 
 the letter, not infrequently occur upon the organi- 
 zation of a bank, where shareholders are allowed to 
 give their notes for a portion or the whole of their 
 holdings, without being required to lodge their 
 stock with the bank as security, in direct violation 
 of the letter of the law. 
 
 Such evasions of law by officers, on the threshold 
 of a bank's career, do not augur well for its future 
 success, which must depend largely upon honest 
 and fair dealing with all parties having intercourse 
 with it. 
 
 The term of six months, during which a bank is 
 allowed to hold its own stock taken for debt, was 
 probably fixed because regarded as ample time in 
 which to arrange for its disposal.
 
 EARNINGS, SURPLUS, AND DIVIDENDS. 75 
 
 CHAPTER VIII. 
 
 EARNINGS, SURPLUS, AND DIVIDENDS. 
 
 Sec. 5199. The directors of any association may, semi- 
 annually, declare a dividend of so much of the net profits of 
 the association as they shall judge expedient; but each asso- 
 ciation shall, before the declaration of a dividend, carry one- 
 tenth part of its net profits of the preceding half year to its 
 surplus fund until the same shall amount to twenty per 
 centum of its capital stock. 
 
 Sec. 5204. No association, or any member thereof, shall, 
 during the time it shall continue its banking operations, 
 withdraw, or permit to be withdrawn, either in the form of 
 dividends or otherwise, any portion of its capital. If losses 
 have at any time been sustained by anj^ such association, 
 equal to or exceeding its undivided profits then on hand, no 
 dividend .shall be made; and no dividend shall ever be made 
 b}' an}' association, while it continues its banking operations, 
 to an amount greater than its net profits then on hand, de- 
 ducting therefrom its lo.sses and bad debts. All debts due to 
 any a.ssociations, on which interest is past due and unpaid 
 for a period of six months, unless the same are well secured, 
 and in process of collection, shall be considered bad debts 
 within the meaning of this section. But nothing in this sec- 
 tion shall prevent the reduction of the capital stock of the 
 association under section fifty-one hundred and fort> -three. 
 
 Sec. 5212. In addition to, the reports required by the pre- 
 ceding section, each a.ssociation shall report to the Comp- 
 troller of the Currency, within ten days after declaring any
 
 76 HAND-BOOK FOR BANK OFFICERS. 
 
 dividend, the amount of such dividend, and the amount of 
 net earnings in excess of such dividend. Such reports shall 
 be attested by the oath of the president or cashier of the 
 association. 
 
 Legal Requirements regarding Net Profits and Sur- 
 plus; "Bad Debts" Defined. 
 
 Section 5199 empowers the directors to declare a 
 dividend semi-annnally, if the "net profits" of the 
 bank will admit; and, as there appears to be no pro- 
 hibition in the law against their declaring dividends 
 oftener than this, or less frequently, they are per- 
 mitted to do so, provided they comply with all the 
 requirements of the law in respect to surplus, divi- 
 dends, and earnings. Before declaring a dividend 
 it is necessary, of course, to know whether the "net 
 profits "will admit of this, and section 5204 requires 
 that "net profits" must be arrived at by deducting 
 from gross earnings, or "undivided profits" from 
 all sources, the following items: 
 
 1. Expenses and taxes paid. 
 
 2. Losses which have been sustained from any cause. 
 
 3. The amount of "bad debts" as these are clearly defined 
 by section 5204. It will be observed here that these debts, 
 which are technically "bad," are not to be confused with 
 those which are known to be actually bad, for these latter 
 should be classed with ' ' losses tustained ; ' ' but, at the same 
 time, section 5204 requires that debts which are "bad" 
 technically should always be taken into account in comput-
 
 EARNINGS, SURPI.US, AND DIVIDENDS. 77 
 
 ing net profits before declaring a dividend, whether they are 
 charged off the books of the bank or not. 
 
 Having arrived at the "net profits " in this way, 
 it is necessary that every»bank whose "surplus 
 fund " is less than 20 per cent, of its capital stock 
 should, before declaring a dividend, carr}' at least 
 10 per cent, of these profits to this fitnd as required 
 by section 5199. The bank may, if it so desires, 
 carry to the fund an amount greater than the re- 
 quired 10 per cent, of its "net profits," but, once 
 this is done, the law makes no provision for with- 
 drawing the excess so. carried for the purpose of 
 declaring a dividend so long as the surplus is less 
 than the required 20 per cent. '^'Vhile the law is 
 entirel}^ silent as to the purposes for which the 
 surplus is created and may be used, the presump- 
 tion is that the object of its accumulation is to 
 provide a fund for meeting unexpected or unusual 
 losses without resorting to an assessment of tlie 
 stockholders, in case such losses exceed the "un- 
 divided profits" on hand at the time; and, in this 
 view of the subject, a bank whose surplus is 20 
 per cent, or less is allowed to use the whole or a 
 portion of it to make good such losses, but only 
 then after it has first exhausted all of its " undi-
 
 78 HAND-BOOK FOR BANK OFFICERS. 
 
 vided profits" on hand. In such a case, a bank 
 having to use all of its undivided profits for 
 making losses good, has, of course, nothing 
 wherewith to declare a dividend, and must per- 
 force pass its dividend for such a period. As soon 
 thereafter, however, as its " net profits " will admit, 
 it may declare a dividend, but before doing this it 
 will be necessary to carry one-tenth of such profits 
 to the surplus fund, which has been reduced below 
 20 per cent., and to continue to do this at the end of 
 each dividend period until this fund again reaches 
 the required limit of 20 per cent. 
 
 Whenever the surplus of a bank exceeds 20 per 
 cent, of its capital, it is lawful for the directors to 
 use the excess for declaring a dividend or for 
 making losses good, and in this latter case it will 
 not be necessary to pass any dividend, provided 
 the excess over 20 per cent, in the surplus is suffi- 
 cient to provide for such losses. 
 
 Legal Requirements with regard to Reports of Div- 
 idends and Earnings; How to Make These Up. 
 
 As section 5212 prescribes that "each asso- 
 ciation shall report to the Comptroller of the 
 Currency within ten days after declaring any 
 dividend, the amount of such dividend, and the
 
 EARNINGS, SURPLUS, AND DIVIDENDS. 79 
 
 amount of net earnings in excess of such dividend," 
 and further, that " such reports shall be attested by 
 the oath of the president or cashier of the asso- 
 ciation," it is necessary that banks should make 
 reports to the Comptroller, not only at their regular 
 semi-annual dividend periods, but also of any quar- 
 terly or special dividends they may declare between 
 those periods; and, in order to comply with the 
 requirements of the law, reports of any such 
 special dividends should be made in the same 
 form as reports of earnings and dividends made 
 at the regular semi-annual periods,, so as to show 
 not only the net profits on hand at date of 
 previous report, but also the gross earnings from 
 all sources since, as well as deductions for all 
 expenses and taxes paid, losses incurred, and 
 "bad debts," as defined by section 5204. Other- 
 wise its "net earnings, in excess of such divi- 
 dend," can not be truly shown by the report. 
 
 In making such special dividend reports, it is 
 not necessar}'- that a bank should close the accounts 
 on its books, if it does not desire to do so, but it is 
 essential that all items showing profit and loss for 
 the period covered by the report should be fully 
 entered in the report.
 
 8o HAND-BOOK FOR BANK OFFICERS. 
 
 Capitalization of Surplus. 
 
 While a bank having a surplus equal to, or less 
 than, the required 20 per cent, may not be permit- 
 ted by the Comptroller to capitalize such surplus 
 in case of any increase of its capital, any bank 
 having a surplus exceeding this limit is, of course, 
 permitted to convert the amount in excess of the 
 20 per cent, into capital if it so desires, for such 
 excess practically represents "undivided profits." 
 
 Where the surplus is equal to, or less than, 20 
 per cent., the original shareholders may, however, 
 utilize a portion of this surplus in the following 
 manner: 
 
 The capital being $50,000, the surplus $10,000, 
 and the proposed increase $50,000, the ratio of the 
 surplus ($10,000) to the increased capital ($100,000) 
 will be 10 per cent. If the new stock be placed at 
 no (its true value) a premium of $5,000 will be 
 realized on the increase when sold, which premium 
 should properly go to the original shareholders 
 (the owners of the surplus) who in place of the 
 premium so collected relinquish to the new share- 
 holders a corresponding interest in the surplus 
 fund. 
 
 The rate of premium in any given case may be 
 obtained by dividing the amount of surplus by the 
 amount representing the total capital stock after 
 the proposed increase is added.
 
 REPORTS OF CONDITION. 8 1 
 
 CHAPTER IX. 
 
 REPORTS OF CONDITION REQUIRED BY SECTION 
 
 5211. 
 
 Sec. 52 1 1 . Every association shall make to the Comptroller 
 of the Currency not less than five reports during each year, 
 according to the form which maybe prescribed by him, veri- 
 fied by the oath or afiirmation of the president or cashier of 
 such association, and attested by the signature of at least 
 three of the directors. Each such report shall exhibit, in 
 detail and under appropriate heads, the resources and liabili- 
 ties of the associations at the close of business on any past 
 day by him specified; and shall be transmitted to the Comp- 
 troller within five days after the receipt of a request or requi- 
 sition therefor from him, and in the same form in which it is 
 made to the Comptroller shall be published in a newspaper 
 published in the place where such association is established, 
 or if there is no newspaper in the place, then in one pub- 
 lished nearest thereto in the same county, at the expense of 
 the association; and such proof of publication shall be fur- 
 nished as may be required by the Comptroller. The Comp- 
 troller shall also have power to call for special reports from 
 any particular association whenever in his judgment the 
 same are necessary in order to a full and complete knowledge 
 of its condition. 
 
 Sec. 5213. Every association which fails to make and 
 transmit any report required under either of the two preceding 
 sections shall be subject to a penalty of one hundred dollars 
 for each day after the periods, respectively, therein men-
 
 82. HAND-BOOK FOR BANK OFFICERS. 
 
 tioned, that it delaj^s to make and transmit its report. 
 Whenever any association delays or refuses to pay the pen- 
 alty herein imposed, after it has been assessed by the Comp- 
 troller of the Currency, the amount thereof may be retained 
 by the Treasurer of the United States, upon the order of the 
 Comptroller of the Currency, out of the interest, as it may 
 become due to the association, on the bonds deposited with 
 him to secure circulation. All sums of money collected for 
 penalties under this section shall be paid into the Treasury 
 of the United States. 
 
 AN ACT 
 Defining the Verification of Returns of National Banks. 
 
 Be it enacted by the Senate and House of Representatives 
 of the United States of America in Congress assembled^ 
 That the oath or affirmation required by section fifty-two 
 hundred and eleven of the Revised Statutes, verifying the 
 returns made by National banks to the Comptroller of the 
 Currency, when taken before a notary public properly au- 
 thorized and commissioned by the State in which such 
 notary resides and the bank is located, or any other officer 
 having an official seal, authorized in such State to admin- 
 ister oaths, shall be a sufficient verification as contemplated 
 b):- said section fifty-two hundred and eleven : Provided^ 
 That the officer administering the oath is not an officer of 
 the bank. 
 
 Approved February 26, 1881. 
 
 Information with regard to Same; Filling Out Sched- 
 ules. 
 
 The examination of five reports of condition a 
 year from each of over 3,300 banks necessarily 
 involves a large amount of correspondence betw^een
 
 REPORTS OF CONDITION. 83 
 
 the Comptroller's office and the banks. Much of 
 this correspondence relates to violations of law, 
 such as excessive loans, loans on, and investments 
 in, real estate, deficient reserve, etc., but a very large 
 proportion is made necessary by omissions on the 
 part of those who make up the reports to fully fill 
 out schedules on the back of the report, and a little 
 more care in this respect would relieve the banks 
 from the trouble and annoyance of replying to the 
 thousands of letters which are addressed to them 
 for the purpose of obtaining information which 
 should be given in the report when rendered. 
 
 The law requires the banks to make these re- 
 ports to the Comptroller " five times a year," "ac- 
 cording to the form which may be prescribed by 
 him," and, under this authority, he calls for cer- 
 tain information in the schedules on the back, 
 which it is important to have in order to know the 
 true condition of each bank, and whether its opera- 
 tions are conducted in conformity to law or not. 
 
 When it is remembered that, as a rule, the ex- 
 aminer visits each bank only once a year, it is 
 very important that these sworn statements of 
 condition should be full and complete in every re- 
 speqt. In very many cases violations of law and
 
 84 HAND-BOOK FOR BANK OFFICERS. 
 
 incorrect practices, which occur through ignorance 
 or inexperience, are developed by these reports, 
 and timely warning and suggestion from the 
 Comptroller's office are all that is necessary to 
 prevent recurrence. 
 
 The items which are most frequently omitted 
 from the schedules are the following: 
 
 Bad debts, as defined by section 5204, Revised Statutes. 
 
 Other suspended and overdue paper. 
 
 lyiabihties of directors (individual and firm) as payers. 
 
 Under the first of these three the bank is re- 
 quired to state, not debts that are actually worth- 
 less, but all such as are technically "bad debts" 
 as clearly defined by section 5204. The amount of 
 "bad debts" on the books of a bank has a very 
 important bearing on its condition, for if this 
 exceeds the sum of its surplus fund and net un- 
 divided profits, it is an indication that its capital 
 may be impaired. 
 
 The schedule of "stocks, securities, judgments, 
 claims, etc.," should clearly show the different 
 items composing the total of these, and is in- 
 tended to embrace only such items as are owned 
 by the bank. Any such items held as collateral 
 for loans should not be entered here, but in the
 
 REPORTS OF CONDITION. 85 
 
 appropriate place in schedule of "loans and dis- 
 counts." No real estate items should be entered 
 here, but in the schedule for " loans and discounts," 
 if held as collaterals, and in schedule for "other 
 real estate and mortgages owned," if owned by 
 the bank. In this latter schedule, as also in the 
 schedules provided for listing "loans and dis- 
 counts, secured b}^ mortgages or other real estate 
 security," it is important to state Jiow and luJien 
 such investments or collaterals were acquired, in 
 order to show whether they were acquired in con- 
 formity to provisions of section 5137, and whether 
 they have been held longer than five years. 
 
 In a great many cases replies from the banks 
 show that no entries are to be made in the schedules 
 left blank, but as it is impossible to infer this from 
 the face of the report in the case of bad dchis^ over- 
 due paper ^ liabilities of directors^ and excessive loans ^ 
 it is necessary to address a letter of inquir}' to the 
 bank in each case. For this reason a note in red 
 ink is printed conspicuousl}' on the back of the 
 report, requesting the bank to "fill all schedules, 
 writing in the word ' none ' wherever no amount is 
 to be entered."
 
 86 HAND-BOOK FOR BANK OFFICERS. 
 
 Verification and Attestation. 
 
 After seeing that a report of condition has been 
 properly filled out, both with regard to the items of 
 " resources " and " liabilities " on its face and the 
 schedules on the back, it is necessary to see that it 
 is signed, sworn to, and attested as required by 
 law. It must be signed either by the president or 
 cashier, as no other officer is e77tpowered by section 
 ^211 to do tJiis^ and attested by three directors, as 
 required by the same action. The officer signing 
 the report, if a director, should not sign in attesta- 
 tion of his own signature, as it is hardly to be sup- 
 posed that this was contemplated by the law; and 
 finally the officer signing should swear to it before 
 a notary public, or other officer having an of&cial 
 seal, and authorized to administer oaths, as required 
 by the act approved Februar}^ 26, 1881. As this 
 act provides that the officer administering the oath 
 should not be "an officer of the bank," the oath 
 should not be administered by a director acting in 
 that capacity, for the reason that in section 5497, 
 enacted prior to the act of Februai;y 26, 1881, a di- 
 rector is evidently regarded as an officer^ inasmuch 
 as the following language is used: " Every presi-
 
 REPORTS OF CONDITION. 87 
 
 dent, cashier, teller, director, or other officer of any 
 bank or banking association." 
 
 How to Proceed in Absence of Three Directors, or of 
 both President and Cashier. 
 
 Should it ever happen that the signatures of three 
 attesting directors required by law can not be pro- 
 cured within five days after receipt of report blanks, 
 or should it be impossible to obtain the signature 
 of either the president or the cashier in time, through 
 the absence or disability of both these officers, all 
 that can be done is to make up a temporary report 
 signed by some other officer, attested by the signa- 
 tures of as many directors (not over three), as it is 
 possible to obtain, and promptly forward this to the 
 Comptroller within the five days allowed. In such 
 cases, a letter explaining the circumstances should 
 always accompany the report, and a complete re- 
 port, inade up in all respects as required by law, 
 should be forwarded to him at the earliest possible 
 day thereafter 
 
 Penalty for Delay in Forwarding Reports. 
 
 It will be observed that section 5213 prescri1)es a 
 penalty of $100 a day for each da3'''s delay beyond 
 the period named for forwarding reports of condition,
 
 88 HAND-BOOK FOR BANK OFFICERS. 
 
 and for this reason particular care should be taken 
 to forward these reports to the Comptroller's office 
 "within five days after the receipt of a request or 
 requisition therefor from him;" that is, within five 
 days after the date upon which the "call" and re- 
 port blanks are received by the bank.
 
 MATTERS OF MANAGEMENT AND POLICY. 89 
 
 CHAPTER X. 
 
 MATTERS OF MANAGEMENT AND POLICY. 
 
 Overdrafts. 
 
 The practice of allowing customer's accounts to 
 be overdrawn is one that pretty generally prevails 
 in the banking business without reference to local- 
 ity, and so long as a due regard to the security of 
 such overdrafts is had, the policy of allowing them 
 is not necessarily attended with danger. It is a 
 privilege, however, that may very readily be abused 
 by the customers of a bank, unless great care and 
 prudence is exercised by its officers, and undue 
 laxity on the part of one bank is very apt to induce 
 its competitor to pursue a similar course through 
 fear of losing business. 
 
 In certain portions of the countr}^ and at certain 
 periods of the year — notably in the South and 
 West — the rapid marketing of the great crops of 
 cotton, wheat, corn, etc., creates conditions under 
 which overdrafts are for a season practically un-
 
 90 HAND-BOOK FOR BANK OF^FICERS. 
 
 avoidable, and under such circumstances it is only 
 necessary that the bank should look carefully to 
 securing itself for these temporary loans, by ware- 
 house or elevator receipts, or bills of lading, further 
 protected by fire or marine insurance, in order to 
 eliminate from the practice the chief elements of 
 danger. Whenever it is practicable to do so, demand 
 notes for the average amount of accommodation 
 granted in this manner should be taken, and, of 
 course, interest should always be charged for the 
 use of money loaned in this way. 
 
 In reporting overdrafts in statements of condition 
 to the Comptroller, the amount of same should not 
 be deducted from " deposits " so as to decrease liabili- 
 ties shown under this item in the report, but entered 
 as an item of "resources." In classifying them in 
 schedule on back of report, the " secured" should be 
 separated from the "unsecured," and in s;^ating 
 amounts "standing" for certain periods of time 
 named in the schedule, only overdrafts that have 
 been continuously standing at fixed amounts for 
 the periods named, without any change in the 
 accounts in which they appear should be stated as 
 "standing."
 
 MATTERS OP MANAGEMENT AND POLICY. 9I 
 
 Renewing Paper by noting Payment of Interest on 
 Same. 
 
 With some banks it is the custom to renew paper 
 at maturity by simply noting or indorsing the pay- 
 ment of interest on it. The distance at which the 
 customers of a bank live from it in some localities, 
 the inconvenience the}^ would undergo in coming 
 personally to renew their notes at maturity, and 
 other circumstances, make this course necessary 
 in such cases, and sometimes desirable; but care 
 should always be taken by the bank to see that no 
 claim on any indorser or suret}^ on the paper is 
 forfeited by failure to give such indorser or surety 
 proper and full notice, by protest or ether means, 
 of its non-payment at maturity, and this precaution 
 should be always taken when paper becomes over- 
 due, whether interest is paid at maturit}- or not. 
 
 In extending paper by pa3nnent of interest, a full 
 memorandum should be noted on it, in ink, of the 
 amount of interest paid, the date on which it is 
 paid, and the period of time for which it is agreed 
 to extend it, so that these data may show the basis 
 of the new transaction. 
 
 Renewal of Discounted Commercial Paper. 
 
 It sometimes occurs that paper originally dis- 
 counted by a bank as "commercial or business
 
 92 HAND-BOOK I^OR BANK OFFICERS. 
 
 paper " is, at maturity, renewed with the mutual 
 consent of all parties concerned. Unless the con- 
 ditions warranting the discount of such paper re- 
 main practically unchanged- at time of renewal, it 
 is a question whether it does not then become ac- 
 commodation paper, and as a consequence subject 
 to the restrictions^ applying to " money borrowed." 
 Borrowing Money on Certificates of Deposit. 
 
 By the very nature of the terms in which it is 
 couched a certificate of deposit evidences that a 
 deposit of money has been made with the bank 
 issuing the certificate prior to its issue, and it 
 would seem proper and good banking practice, 
 therefore, to confine the use of these certificates to 
 this legitimate function, and that they should not 
 be used in the stead of promissory notes for bor- 
 rowing money, especially in cases where the money 
 is not actually received by the bank until after the 
 certificate of deposit has been issued. 
 
 It may be well to note here that certificates of 
 deposit — which after a customary form bear interest 
 if the deposit remains for a certain stipulated period 
 of time— are in effect </^;;2^/2^ certificates, for by waiv- 
 ing the claim to interest the holder of such a certificate 
 may demand payment of the deposit at any time. 
 
 These should not be confounded with time cer- 
 tificates, under the terms of which the holder has 
 no right to demand payment except at the expira- 
 tion of the period of time named in the certificate.
 
 DIGEST OF NATIONAI, BANK CASES. 93 
 
 CHAPTER XI. 
 
 DIGEST OF NATIONAL BANK CASES. 
 
 Commencing with the year 1875 each annual 
 report of the Comptroller of the Currency has con- 
 tained a digest of court decisions in cases concern- 
 ing National banks, and this digest, which has 
 carefully been revised and added to from time to 
 time, has now grown to be a very valuable feature 
 of these reports. 
 
 In it the salient points in each case are stated 
 as briefly and concisely as possible, conveniently 
 arranged for reference, under the following 
 general heads, taken from the index of contents 
 appearing on pages 8y and 88 of volume I, 
 Comptroller's report for 1889: 
 
 I. Constitutional law; 2. Powers and liabilities of National bank- 
 ing associations; 3. Ultra vires; 4. Stock; 5. Shareholders; 6. Offi- 
 cers; 7. Interest; 8. Insolvent associations; g. Receivers; 10. Taxation; 
 II. Jurisdiction; 12. Suits; 13. Evidence; 14. Crimes. 
 
 The decisions therein cited occupy twenty-five 
 pages of the report (89 to 113 inclusive) and fur- 
 nish a most reliable and convenient fund of iiifor-
 
 94 HAND-BOOK FOR BANK OFFICERS. 
 
 matioii to the bank officer or attorney in many 
 questions presenting doubt or difficulty. A copy 
 of the Comptroller's report is sent eacli year to 
 every National bank, and one may be had free, 
 upon application, by any one in need of the infor- 
 mation it contains. 
 
 In addition to this digest just described, "A 
 Digest of Recent Decisions in Banking Law" is 
 also to be found in the 1888 report, on pages 127 to 
 138. This digest will be found to contain much 
 valuable and interesting matter of a general nature, 
 on the topics of "Banks and Banking," "Bank 
 Officers," and "Business." 
 
 To the banker or bank attorney who desires a 
 standard work, however, embracing the law and 
 usage relating to the banking business in all its 
 phases, the work of" Morse on Banks and Banking," 
 third edition, by Parsons, can not be too highly 
 recommended. It is full and complete on ever}'' 
 branch of the subject, and is recognized everywhere 
 as a standard authority.
 
 THE PRESIDENT. 95 
 
 CHAPTER XII. 
 
 THE PRESIDENT. 
 
 His Powers and Duties. 
 
 Section 5150 prescribes that " one of the directors, 
 to be chosen by the board, shall be the president of 
 the board," and, although the law does not in terms 
 so prescribe, this director, in practice, is the presi- 
 dent of the bank also. 
 
 In the index of the National-bank Act, edition 
 of 1888, will be found reference to all portions of 
 this act which specifically define what the president 
 
 should do and should not do; and these statutory 
 requirements apply also in nearly every particular 
 to the cashier of a National bank. 
 
 Besides these statutory requirements, the by-laws 
 of National banks, prescribed by the directors, gen- 
 erally make the president "responsible for all such 
 sums of money and property of every kind as may 
 be intrusted to his care or placed in his hands by 
 the board of directors, or b}' the cashier, or other- 
 wise come into his hands as president," and pre- 
 scribe further that "all contracts, checks, drafts, 
 etc., and all receipts for circulating notes received
 
 96 HAND-BOOK FOR BANK OFFICERS. 
 
 from tlie Comptroller of the Currency sliall be 
 signed by the president or cashier." 
 
 In this connection it may be noted that the 
 general form of by-laws for National banks usually 
 provides as to the "conveyance of real estate^^ as 
 follows : 
 
 All transfers and conveyances shall be made by the bank 
 and under the seal thereof, in accordance with the orders of 
 the board, and shall be signed by the president or cashier. 
 
 From this, it is clear that neither the president 
 nor the cashier is competent to transfer or convey 
 real estate^ which is the property of the bank, to 
 any other party unless specially authorized to do 
 so by order of the board of directors. . 
 
 It is customary for the president to sign the min- 
 utes of all business meetings (which should also be 
 attested by the cashier) and also (with the cashier) 
 to sign all certificates of stock issued. 
 
 Be3^ond the duties here enumerated, and such 
 others as may be specially delegated to him by the 
 board, the authorit}^ of the president does not gen- 
 erally exceed that of any other director, although, 
 as he usually receives a regular salary for his 
 services, he is expected to devote more of his time 
 to the supervision of the business of the bank.
 
 THE PRESIDENT. 97 
 
 The Vice-President— Powers and Duties. 
 
 As to the powers and duties of the vice-preside7tt^ 
 the articles of association usually prescribe that the 
 board of directors "shall have power to elect a vice- 
 president, who shall also be a member of the board 
 of directors, and who shall be authorized, in the ab- 
 sence or inability of the president from any cause, 
 to perform all acts and duties pertaining to the 
 office of president, except such as the president 
 only is authorized by law to perform." 
 
 The signing of circulating notes is the only act 
 that the vice-president is specially authorized by 
 law to perform, and he is not therefore legally 
 qualified to act in the place of the president in 
 performing any other act prescribed by statutes 
 for the president.
 
 98 HAND-BOOK FOR BANK OFFICERS. 
 
 CHAPTER XIII. 
 
 THE CASHIER. 
 
 His Powers and Duties. 
 
 By long-established usage the cashier of a bank 
 is regarded by all concerned as its chief executive 
 officer, whose duty it is to see that the policy and 
 plans formulated by the directors — ^who are the 
 responsible managers — are properly carried into 
 execution. 
 
 As the success and welfare of every banking 
 institution necessarily depends in large measure 
 upon the ability, integrity, and skill of its cashier, 
 it is important that this officer should have a clear 
 comprehension of the responsibilities devolving on 
 him and the powers with which he is invested for 
 the proper discharge of his duties. 
 
 Much of what is contained in this chapter will 
 apply to the cashier of any commercial bank, but 
 the duties of the cashier of a National bank, which 
 are here specially considered, may properly be 
 divided into two classes, as follows:
 
 THE CASHIER. 99 
 
 1 . Those which are distinctly defined by the National-bank 
 Act. 
 
 2. Those which are inherent in his office, whether pre- 
 scribed by law or delegated to him by the directors, who 
 appoint him ; being such as by well-established usage he is 
 expected to perform by virtue of his office. 
 
 As to the duties of the first class above named, 
 reference to all of these may be found in the index 
 of the National-bank Act, edition of 1888, on page 
 91. The duties which he is by law required to 
 perform consist, chiefly, of the verification of va- 
 rious reports and certificates under oath, and the 
 signing of circulating notes, and certain statutory 
 restrictions also prohibit his performing acts which 
 would be either dishonest or injurious to the in- 
 terests of all concerned. 
 
 In this connection it is to be noted that wherever 
 the statute specifically prescribes that an instru- 
 ment is to be signed by the cashier or the president, 
 no other officer of the bank is legally qualified to 
 sign in the place of either of these officers. 
 
 Particular attention is directed to the require- 
 ment with regard to the certification of checks. 
 Section 5208 makes it "unlawful for any officer, 
 clerk or agent of any National banking association 
 to certify any check drawn upon the association
 
 lOO HAND-BOOK FOR BANK OFFICERS. 
 
 unless the person or company drawing the check 
 has on deposit with the association at the time such 
 check is certified an amount of money equal to the 
 amount specified in such check," and further pre- 
 scribes that while "any check so certified by duly 
 authorized of&cers shall be a good and valid obliga- 
 tion against the association," its certification by any 
 ofiicer, clerk, or agent would subject the association 
 to the penalty of being placed in the hands of a 
 receiver by the Comptroller. 
 
 Apparently to correct abuses in this respect, Sec- 
 tion 13, act July 12, 1882, was afterwards enacted, 
 which makes the officer, clerk, or agent wilfully over- 
 certifying a check personally liable, on conviction, 
 to severe penalties of fine and imprisonment. This 
 section is more explicit in its terms than Section 
 5208, and prescribes penalties for anj^ officer, clerk, 
 or agent who shall wilfully violate Section 5208, 
 " or who shall resort to any device, or receive any 
 fictitious obligation, direct or collateral, in order to 
 evade the provisions thereof, or who shall certify 
 checks before the amount thereof shall have been 
 regularly entered to the credit of the dealer upon 
 the books of the banking association." 
 
 The second class embraces a wide range of duties,
 
 The cashier. ioi 
 
 the chief of wliicli perhaps are embodied in the fol- 
 lowing extracts from a general form for by-laws 
 usually adopted by the directors of associations at 
 time of organization, viz.: 
 
 Under the caption of "Officers" section 7 of this 
 form prescribes that " the cashier * * '^ shall 
 be responsible for all the moneys, funds, and val- 
 uables of the bank " ; and under the caption " Con- 
 tracts" section 21 prescribes that "all contracts, 
 checks, drafts, etc., and all receipts for circulating 
 notes received from the Comptroller of the Cur- 
 rency shall be signed by the (president or) cashier." 
 
 These practically commit to the cashier's safe 
 keeping and control all the negotiable personal 
 property of the bank and confer upon him certain 
 included powers necessary to the proper discharge 
 of the responsible functions of his office. 
 
 Such, for instance, are the giving of certificates 
 of deposit, cashier's checks and other vouchers for 
 money or valuables intrusted to the safe keeping 
 of the bank ; the certification of checks ; the signing 
 of checks and drafts for the purpose of transferring 
 the funds of the bank from one place to another, 
 or for paying its current expenses or other obliga- 
 tions ; the buying and selling of exchange, coin and
 
 I02 HAND-BOOK FOR BANK OFFICERS. 
 
 bullion where this is a part of the bank's regular 
 business. The cashier also has the power to in- 
 dorse paper intrusted to the bank for collection, 
 and upon receipt of money in payment of contracts 
 to indorse and deliver paper and collateral security 
 representing the same ; but he has no inherent right 
 to indorse non-negotiable paper, or to compromise a 
 debt to the bank, or change the terms of an original 
 contract without express authorit}^ from the board of 
 directors. Of course he has no right in his official 
 capacity to indorse his own individual paper. 
 
 In cases of emergency he may, for the purpose 
 of meeting the obligations of the bank, rediscount 
 negotiable paper or pledge negotiable securities 
 in order to borrow money, and even execute a 
 promissory note for this purpose; but he is not 
 empowered to borrow money continuously and 
 habitually for the purpose of providing additional 
 capital in this way. As a rule, however, it is better 
 that all borrowings by the bank should be made 
 with the knowledge and under the express instruc- 
 tions of the board of directors. 
 
 It is within the power of the directors to limit 
 these powers of the cashier; but in case he exer- 
 cised them in spite of such restrictions his acts
 
 THE CASHIER. 103 
 
 would bind the bank to outside parties who were 
 without notice of such limitations to powers ordi- 
 narily inherent in the cashier. 
 
 In this connection, the following extract from the 
 decision of the U. S. Supreme Court in Merchants' 
 Bank vs. State Bank (lo Wall., 649), defining in 
 general terms the authority of the cashier, will be 
 found valuable and interestinsf: 
 
 ■^t) 
 
 The question we are now considering is the authority of 
 the cashier. It is his duty to receive all the funds which 
 come into the bank, and to enter them upon its books. The 
 authority to receive implies and carries with it authority to 
 give certificates of deposit and other proper vouchers. Where 
 the money is in the bank he has the same authority to certify 
 a check to be good, charge the amount to the drawer, appro- 
 priate it to the payment of the check, and make the proper 
 entry on the books of the bank. This he is authorized to do 
 virtute officii. The power is inherent in the office. 
 
 The cashier is the executive officer, through whom the 
 whole financial operations of the bank are conducted. He 
 receives and pays out its moneys, collects and paj'S its debts, 
 and receives and transfers its commercial securities. Tellers 
 and other subordinate officers maybe appointed, but they are 
 under his direction, and are, as it were, the arms by which 
 designated portions of his various functions are discharged. 
 A teller may be clothed with the power to certify checks, but 
 this in itself would not affect the right of the cashier to do 
 the same thing. The directors may limit his authority as 
 they deem proper, but this would not affect those to whom 
 the limitation was unknown.
 
 I04 HAND-BOOK FOR BANK OFFICERS. 
 
 As chief executive officer, the cashier ordinarily 
 conducts the correspondence of the bank and super- 
 vises the subordinate officers and clerks in their 
 duties of receiving and paying money and keeping 
 the books and accounts. He also sees that proper 
 notices of meetings are sent to shareholders and 
 directors and that the necessar}^ minutes of such 
 meetings are properly recorded, to be afterwards 
 signed by the president and attested by himself. 
 It is customary, too, for the cashier (and the presi- 
 dent) to sign all certificates of stock issued by the 
 bank. 
 
 In conclusion, it may be said that while the 
 cashier has no pow.er to shape or direct the policy 
 of the bank's business, it is his duty to see that all 
 the details of such polic}^ — not inconsistent with 
 law — as the directors may adopt, are carried out 
 with the utmost faithfulness, diligence, and skill.
 
 GENERAL REMARKS. 1 05 
 
 CHAPTER XIV. 
 
 .GENERAlv REMARKS, IN CONCEUSION, REGARD- 
 ING THE NATIONAL BANK SYSTEM. 
 
 In the preparation and compilation of this work 
 certain conclusions have forced themselves upon 
 the mind of the author, which he ventures to em- 
 body with the work, and to give for what they may 
 be worth. 
 
 By requiring the maintenance of a " lawful- 
 money " reserve upon deposits, imposing upon the 
 banks restrictions in the matters of real estate 
 transactions, and holding their own stock, and in 
 failing to grant them the power to deal in stocks 
 and bonds, it would appear that the framers of the 
 law, in the light of past experience, aimed to create 
 a banking S3\stem, the resources of which should, 
 in convertibility and activity resemble the blood 
 circulating through a healthy human bod}', and to 
 prevent the clogging of its arteries and veins with 
 impediments which tended to produce financial 
 torpor, disease, and death. How wisel}' these law- 
 makers builded is attested by the existence to-day
 
 Io6 HAND-BOOK FOR BANK OFFICERS. 
 
 of over 3,300 banks iu active operation. The splen- 
 did success so far attained by National banks, as a 
 whole, is the best evidence of the integrity and 
 ability of those who have been charged with their 
 management, and should stimulate officers of newly 
 organized banks to emulate the fair dealing, pru- 
 dence, and conscientious desire to act within the 
 law, which, to a striking degree, characterize Na- 
 tional-bank officers as a class. 
 
 In effect, the law has operated, as was intended, 
 to make National banks distinctively banks of de- 
 posit and discount, and as such they have taken 
 root, grown up, and flourished wherever the en- 
 vironment has been favorable to such growth. 
 Whenever a National bank is organized or operated 
 for the purpose of speculating in real estate, dealing 
 in stocks and bonds, or for other illegal purposes, 
 the promoters will sooner or later be compelled to 
 yield unwilling compliance to the law, or to accept 
 the alternative of voluntary or involuntary liqui- 
 dation. 
 
 The great confidence reposed by the general 
 public in National banks is based mainly upon the 
 knowledge that they are held to a strict account- 
 ability to the law by means of intelligent and
 
 GENERAL REMARKS. I07 
 
 tliorough governmental supervision, and whenever 
 a charter conferring this great advantage is ac- 
 cepted by the managers of a bank, they should also 
 in good faith accept whatever apparent disad- 
 vantages are imposed by the law under which the 
 charter is granted. 
 
 The circulation feature, which for a time when 
 bonds were low in price and interest rates were high, 
 was very profitable, and which must in time nec- 
 essarily disappear on redemption of the bonds upon 
 which this circulation is issued, has now become, 
 to a great extent, a mere incident of the system, 
 and where rates of interest are high — as in the 
 West and South — operates to prevent its natural 
 growth, because, under these circumstances, the en- 
 forced investment of capital in high-priced bonds 
 inflicts actual loss of profit on the margin invested. 
 
 Various plans for removing this obstacle to the 
 growth of the system have been proposed from time 
 to time, but so far no action in this direction has 
 been taken by Congress. It is more than jDrobable, 
 however, that a solution of the difficulty for the 
 present, at least, will be found in the course rec- 
 ommended by the Comptroller, viz., a reduction 
 in the minimum bond deposit limit fixed by the 
 law as it now stands.
 
 
 UNIVERSITY OF CALIFORNIA AT LOS ANGELES 
 
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