regulation, to develop machinery for controlling themselves as a system. At certain points, however, and at certain times, as has been noted, these voluntary associations have proved inadequate to the requirements of the situation. The government has therefore been looked to for the direction and control of banking-in the interests of the banks themselves and through them of the entire economic system.

Governmental supervision of banks has assumed various forms. In addition to requiring banks to incorporate, and thereby to conform with certain general provisions with reference to organization, the government has laid down numerous regulations pertaining to the character and extent of loans and the amount and nature of the reserve that must be held against deposits. Both national and state governments have developed regulations along these lines, and in the main they have based them on principles that have been developed out of many years of actual banking experience.

The most important feature of government regulation of banking, however, has been in connection with the issue function. While deposits have gone largely unregulated, bank notes have from the very beginning of our banking history been subject to numerous regulations. This special attention to the issue function is due in part to the fact that it was long the primary form in which bank obligations were manifested, in part to the fact that bank notes pass from hand to hand without regard to the character of those who hold them and thereby form a part of the money supply of the country quite as much as do gold and silver or government paper, and in part to the fact that we must look to the notes to give flexibility to the currency system as a whole.

The regulation of note issues has taken many forms, and the discussions of the principles underlying bank currency have been as vigorous and prolonged as the controversy over bimetallism. There are two fundamental problems in connection with the regulation of bank notes: that of making them safe and that of making them elastic, that is, responsive to the varying requirements of trade. Until the Civil War we had no national system of banking, and as a whole our bank currency was in a chaotic condition, lacking safety, uniformity, and elasticity. Here and there sound banking principles were being developed: in numerous instances bank notes were reasonably secure; in some sections of the country there was developed more or less uniformity; and now and then a measure of

elasticity was found. But on the whole the situation could hardly have been worse.

The national banking system made a great step in advance when it eliminated all state bank issues and gave us a safe and uniform national currency based on the deposit of government bonds in the federal Treasury. But this system of bond-secured notes did not provide for an elastic medium of exchange; and since we depend upon bank notes to furnish us virtually all the elasticity we have in our monetary system (aside from deposit currency), one of our most serious banking problems has remained for solution until the present day. It is believed, however, that the federal reserve system has solved the problem of an elastic currency.

A. Governmental Supervision

96. INCORPORATION1

BY WILLIAM A. SCOTT

It is generally admitted nowadays that no one ought to be permitted to engage in the banking business without special authority from the state. The reason for this is the need, in the interests of safety, of the public regulation and supervision of this business. Experience has shown that this can best be secured by the requirement of incorporation through special charter or in accordance with general laws, such charters or laws prescribing the conditions under which the business must be carried on. Without incorporation it is difficult, if not impossible, to separate banking from other lines, and consequently to know precisely who are engaged in it and how it is being conducted. Under such conditions certain persons are sure to escape the regulations prescribed by law and designed for the safeguarding of the public.

As between incorporation by special charter or under general laws, practice in the past has varied widely, but general banking laws are fast becoming the rule the world over. They prevent favoritism and secure uniformity. Only in the cases of highly specialized institutions of peculiar character, like the great central banks of Europe, is the special-charter method of incorporation likely to survive. The differentiation of the banking from the general incorporation laws of a state, that is, those applicable to other kinds of industrial

'Adapted from Money and Banking, pp. 131-32. (Henry Holt & Co., 1910.)

corporations, is also desirable on account of the peculiarities and public importance of this business. Such differentiation is rapidly becoming the rule in this country.

The need of incorporation applies to savings banks and trust companies quite as much as to commercial banks. Incorporation may be either under state or national law.

97. ADOPTION OF THE SYSTEM OF FREE BANKING' BY HORACE WHITE

The system of free banking, or incorporation under the provisions of a general law, had its origin in the State of New York in 1838, although the State of Michigan had something resembling it a year earlier. Prior to that time bank charters in New York were a part of the spoils system of politics. Accustomed as we are to the spoils system of today, it nevertheless sounds oddly to read that bank charters were granted by Whig and Democratic legislatures only to their own partisans. Not only was this the common practice, but the shares in banks, or the rights to subscribe to them, were parceled out by political "bosses" in the several counties. Of course, corruption flourished in such soil. The people became exasperated by the indecencies witnessed at Albany. A reaction in favor of equal rights was the natural consequence, and out of this came the FreeBanking Law of 1838. Under this law the Comptroller was authorized to issue circulating notes to any association organizing itself as a bank and depositing stocks of the United States, or any State, or bonds secured by mortgage on real estate of a certain specified grade. The system had a bad start. Within five years after the law was passed twenty-nine banks that had organized under it failed, and the deposited securities realized only seventy-four cents on the dollar of the outstanding notes. This led to changes in the law by which all State bonds were ruled out except those of New York, and the mortgage securities were keyed up to a high pitch, but still not high enough.

The free-banking system made little headway in other eastern states, but it was quite generally adopted in the West during the decade just preceding the Civil War. While the early experience under free banking was generally disastrous, the fault lay, not in the general incorporation law, but in the inadequate regulation of the conditions under which banks thus organized were operated."

* Adapted from "National and State Banks," Sound Currency (1894–95), II, 7–8. For other features of the free-banking system, see selection No. 121.-EDITOR.

98. THE KIRBY PRIVATE BANK FAILURE'

The Kirby Savings Bank, at 5019 South Ashland Ave., was closed when its proprietor, Dr. William P. Kirby, was adjudged insane by the county court. The assets discovered amounted to $856, of which $206 is cash; liabilities totaled $150,000. Possession of the defunct bank was effected by the receiver only with the assistance of the police, a woman reported to be the owner of the building endeavoring to prevent its seizure by means of a double-barreled shotgun. The cashier of that bank, who is a relative of Dr. Kirby, is but seventeen years old. He was arrested on a charge of passing a worthless check for $1,000, as agent for Dr. Kirby.

The Kirby Savings Bank was a private institution. It was conducted by a physician, who may or may not have had some knowledge of banking methods. Regardless of his fitness or unfitness to run a bank, he was free to put up a sign and invite deposits, no supervision or inspection of any kind being applied to the concern by the public authorities.

99. THE POSITION OF PRIVATE BANK DEPOSITORS

A private banker never having become incorporated or subjected to supervision or control of either the national, state, or municipal government occupies exactly the same position in the eyes of the law as does a private citizen. The assets and liabilities of his business are a part of his personal estate and are included with those of his private ventures. Consequently when he dies the debts of not only his banking business, but of all of his private enterprises as well, are liens against his estate, which, like that of any other individual, must go through the probate court for settlement. The depositors of the bank share pro rata with the other creditors of the estate, for it has been held by the courts that the relation existing between a bank and a depositor is simply that of debtor and creditor, which does not entitle the latter to a preference in the distribution of the assets.

While the banking business conducted by a private individual may be perfectly solvent, the liabilities of his other private ventures may be of such magnitude as to render his estate as a whole insolvent. In other words, the depositors in his bank are obliged to stand the losses suffered by him in businesses absolutely foreign to that of banking. Only the other day we read of a saloonkeeper who died while

2

I

Quoted from the Chicago Banker, November 9, 1912, p. 15.

From an editorial in the Chicago Banker, December 21, 1912, pp. 16-17.

running a private bank as a side line; he also conducted a barber shop and a steamship agency. If any of these prove to be a failure, it is more than probable that the depositors will be very much disappointed when the estate is wound up. The same situation would prevail should the insolvent decide to avail himself of the emergency defense of insanity.

One does not have much sympathy for educated people so careless as to place their funds in unstable banking institutions; he cannot, however, help but feel for the ignorant foreigners who have come to this "land of promise" with the hope and expectation of accumulating a little something as a provision for the proverbial "rainy day." To them the word "bank" has a certain trust-inspiring significance, creating a feeling of the utmost faith and confidence. They do not know that there is any distinction between state, national, or private banks; they place all banks in one class as a place where they can deposit their savings and withdraw them any time they so desire. They do not know anything about the probate court nor of other creditors. Is it any wonder, then, that they sometimes resort to attempted acts of violence when the savings gleaned as a result of years of toil are denied them?

The argument has been advanced on behalf of the private bankers opposing supervision in Illinois that because conditions are "rotten. in Chicago it does not necessarily follow that they are in the rest of the state-all of which will be conceded; but why should a private banker on a perfectly solvent basis and who is conducting his business honestly oppose an opportunity to show to his clients the exact status of his bank and the manner in which the money of its depositors is being used, thereby taking them into his confidence? The answer is that he doesn't. It is the crafty, hard-hearted, dishonest man who is willing to allow a lot of simple, uneducated people to contribute to his support with money earned by the sweat of their brows, while he in return gives them nothing but the "honor and prestige" of being depositors of his "bank." There is a vast difference, too, between "personal" and bank taxes.

100. THE NATURE OF GOVERNMENT SUPERVISION OF

NATIONAL BANKS

"There shall be established in the Treasury Department a separate Bureau, which shall be charged with the execution of all laws passed by Congress relating to the issue and regulation of national currency secured