This bank was organized in June, 1867, as a savings bank, and commenced business with a capital stock paid in of $60,000. Upon an examination of its affairs by the first Board of Bank Commissioners, in 1878, worthless investments were found, exhausting the reserve fund and impairing the capital. As the bank was engaged in the business of lending upon personal security, the Board demanded the increase of the capital to $300,000, that such loans might be lawful in accordance with Sections 571 and 574, Civil Code. The bank was unable to comply with this demand within the time specified, and suspended on the third of September, 1878. The amount due depositors was $373,674 70. The general depression in real estate at this time, and during several years following, was disastrous to the creditors of the bank, then most urgent for their money. The best property held by the bank was forced on the market at the worst period, leaving the poorest and most undesirable on hand when real estate values commenced to improve. We submit in this report and appendix: Semi-annual statements from the Savings, Commercial, Foreign, and Private banks, and from the banks in liquidation. Also, by their courtesy, annual statements from the National banks. Statistical information from the Savings banks. Statements of the condition of the incorporated banks taken from the books at the time of the inspection by members of this Board. Semi-annual tabular statements. Comparative statement of the Savings, Commercial, Foreign, and Private banks for July, 1888, and January and July, 1889, with aggregates. Comparative statements of the National banks for July, 1888, and July, 1889. Abstract of the reports from all the banks for July, 1887, 1888, and 1889. Respectfully submitted. 1 W. W. MORELAND, COMPARATIVE STATEMENTS. Savings. COMPARATIVE STATEMENTS—Continued. Private. COMPARATIVE STATEMENT-Continued, Commercial. *Including real estate by purchase. NATIONAL AND STATE BANKING. Savings banks are specifically restricted by the Codes of this State in some particulars of the banking business, and are specially privileged in others. They are not allowed to borrow money, lend to their own officers, nor deal in real estate. They are not allowed to loan on personal security, unless the paid up capital is at least $300,000, and not then unless such loans are specially authorized by the by-laws. They are permitted "to prescribe the time and conditions on which repayment is to be made to depositors." Commercial banks, as such, are not specially restricted nor privileged. The laws do not define the different kinds of banks. In some banks the business is such that classification is not clear, and sometimes titles are misleading In considering State banking by comparison with National, we do not refer to Savings, nor Foreign and Private banks, although the business of the two last mentioned is substantially commercial, bringing them in competition with National banks. For the present purpose we mean by "State banks," all incorporated associations organized and managed locally, that are strictly commercial in their dealings, as well as all similarly incorporated associations that are conducting a business partaking of the character of both Savings and Commercial, or "mixed" banks, as they are sometimes called. The first difference between the two systems-National and State-is manifest in the inception of a business. The organization in any town of any number of State banks is not regulated by State laws. In the pamphlet "containing instructions as to the method of organization and the proper management" of National banks, may be found set forth as the initiatory step the necessity of making a "written application to the Comptroller, giving the desired title, the location, the proposed capital, and the names of at least five persons who contemplate being stockholders in the organization." Furthermore, the application should be indorsed by the Representative in Congress, or "accompanied by letters from other persons of prominence, vouching for the character and responsibility of the parties, and the necessities of the community where the bank is to be located." If the application meets with the approval of the Comptroller, the necessary blanks for organizing the bank are forwarded to the parties. The second distinction between National and State banks arises when the amount of capital for the new bank is to be decided. National banks cannot be organized with less than $50,000 capital, under any circumstances, and, in fact, with less than $100,000 only by special permission. The entire capital must be paid up within six months. In this State the law does not prescribe the amount of capital necessary to engage in business, nor the time in which to pay the capital subscribed. The investment of capital in banks in the State system is left to the discretion of the managers. In the National system the law prescribes the investment of a portion of it, and, in requital, offers to each bank the opportunity to circulate its own paper money. The Constitution of this State provides that banks shall "not issue nor put in circulation as money anything but the lawful money of the United States." National banks were created to compel loans of banking capital to the Government, and to provide a currency uniform throughout the country. All of them must invest in United States bonds, according to the amount of their capital. The system is founded on a National debt, and the banks depend for existence upon its continuation, unless a substitute for it, or a new charter, can be agreed upon by Congress and the banks. The discussion of this particular branch of the subject takes a wide range. In contemplation of the high price of bonds, and the possible extinguishment altogether of the public debt, the suggestion has been made that the bonds of our country be replaced by those of other nations of approved credit, or by State and county bonds. Bonds to secure circulation must be deposited with the Treasurer of the United States, whereupon the bank, at its option, is entitled to receive from the Comptroller circulating notes equal in amount to ninety per cent of the par value of the bonds. The privilege is not always accepted, about ten banks, in a total of over three thousand, declining to issue their own notes. Of this number, five are in New York, two of these being very large institutions-the "Chemical," and the "American Exchange." Banks of issue must at all times keep in the Treasury of the United States a deposit in lawful money equal to five per cent of their circulation, to be held and used for the redemption of such circulation. The average amount of the notes in circulation is taxed one per cent per annum. Banks liquidating must provide and deposit with the Government a sum sufficient to redeem their circulation; hence all notes lost or destroyed afford just so much profit to the Government, not to the banks. The business of circulation, even when subjected to National limitations, has been highly profitable. The following calculation was published by the Comptroller in 1883. We present it for the reason that it shows almost a balance in profit and loss on circulation: $100,000 fours at 21 per cent premium, annual interest.. $4,000 $90,000 4,500 In this computation the premium is deducted in twenty-three and one half equal annual installments, and the 5 per cent fund is regarded as reducing the loanable circulation. If the interest to be derived from successive reinvestments of all receipts be taken into the computation, the profits are greater. If the rate of interest was 7 per cent there would be no profit. The annual profit on $100,000 44 per cent bonds at 14 per cent premium, the rate of interest being 6 per cent, would be $110, and at 7 per cent there would be no profit. The next calculation, by Mr. W. P. St. John, President of the Mercantile National Bank, of New York, was published in the "Times" in October, 1888. Recent treasury purchases of bonds have been made (prices net of accrued interest) at 129 for the 4 per cents, and at 108 for the 4 per cents, the former being now within about eighteen and one fourth years and the latter two and three fourths years of the date when they are to be redeemable at par. The sums required to be annually set aside at interest in order to sink these premiums of 29 per cent and 8 per cent in the periods named, if we assume a 6 per cent value for the money, and a bank is supposed to constantly employ all its money, may be estimated at 1.48 per cent and 2.77 per cent, to be annually deducted from the 4 per cent and 4 per cent of income from the bonds, respectively: For 4 per cents, at 129, the outlay is $12,900, which sum at ordinary 6 per Employed for note issue, we have income from the bonds 4 per cent, less Less tax, 1 per cent, and expenses, $10. Net annual loss on circulation upon each $10,000 of 4 per cent bonds.. Employed for note issue we have income from the bonds, less 4 per cent Net annual loss on circulation upon each $10,000 of 4 per cent bonds... $774 $252 $540 100 440 692 $82 648 $173 $540 100 440 613 $35 An investment one year hence in bonds for note issue, at prices reduced in each case by the respective sinking fund amounts, would yield identical results, i. e., one year hence the 4 per cents taken at 127.52, and the 44 per cents at 106.27, must be carried at the above estimated annual loss, respectively. Shareholders in National banks are responsible for all debts to the extent of the amount each has invested, and for as much more. The laws of this State provide that each stockholder in corporations is "individually and personally liable for such proportion of all its debts and liabilities contracted or incurred during the time he was a stockholder as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock." A decided advantage over all other banks is conferred on Nationals by Section 5153, Revised Statutes, which provides that such of them as may be designated by the Secretary of the Treasury, for the purpose, shall be depositaries of public money, under such regulations as may be prescribed by the Secretary, and they may be also employed as financial agents of the government. The associations thus designated must give satisfactory security in bonds, or otherwise, for the safe keeping and prompt payment of the public money deposited with them. The legal questions remaining for consideration refer to the conduct of the business of the banks. Several sections of the Revised Statutes impose restrictions upon the National banks, subjecting the system to adverse criticism, and causing a spirit of hostility in some of the banks which results, as we are informed, in actual evasion. Section 5137 provides, in substance, that no bank shall take a mortgage on real estate, except "in good faith by way of security for debts previously contracted." The law does not fix the time which must elapse in such a contingency between contraction of the debt and execution of the mortgage. The period may be long or short. The law does not prevent a bank from lending to a solvent agent, who lends on mortgage, in the interest of the bank, and at its profit or loss. As our laws permit loans on real estate by all banks, the State bank can do openly that which the National must do covertly. The National banking law assumes that all banks organized under its provisions are intended for commercial business, and that real estate loans by such banks are not advisable. There is no doubt that all loans by Commercial banks should be readily convertible, and real estate investments are not always so, though they may be well secured. The business of commercial banking is not profitable in some parts of California, unless the banks are able to employ part of their capital in accommodating the farmers. Banks that are formed to meet the varied wants of town and country customers have proved exceedingly successful in this State when properly managed. Section 5200 provides that the total amount of money borrowed by any one firm or person from National bank shall at no time exceed one tenth part of the capital of the association. any Opinions differ as to the propriety of this regulation. The Hon. Hugh McCulloch, the first Comptroller, expressed the opinion that "it should be struck out entirely." The Hon. W. L. Trenholm, in his report for 1887, remarks: "This is a perplexing subject, and it is difficult to regulate it by statute satisfactorily, yet experience proves that existing restraints have been on the whole salutary in their character, for in many cases disaster has followed the disregard of them." Under our Codes this question is left entirely to the discretion of the managers of the banks. We have no knowledge of any attempt to legislate on the subject of mercantile honor, business credit, or personal security. The operation of this law makes it unlawful for any National bank to deposit a sum in excess of ten per cent of its capital in any State bank. The effect of this construction is, occasionally, an inconvenience to a National, and, apparently, a reflection on a State bank. Under this law National associations have been censured for deposits in State banks which have, at other times, accommodated or patronized them to their great profit. Section 5208 was adopted to prevent a dangerous practice in some of the New York banks. Checks were certified for brokers for large amounts, not at the time of the credit of their accounts, but to be deposited later in the same day. This law makes it "a criminal offense for any officer of a bank to certify the check of a customer who may overdraw, even inadvertently, his account for a few dollars, in the payment of an ordinary obligation, though "checks so certified are good and valid obligations against the bank." Opposition to such a law was manifested, and friends of the National system have condemned it. An open attempt was made to evade it by accepting" checks, but this plan failed. The bank officer was prosecuted by the Government, and the Courts decided the case against him. The records do not show whether any movement to escape the statute by "paying" checks that could not be "certified" has ever been discovered, yet the ingenuity employed to justify "accepting" checks might succeed in prompting such a course. To the majority of National bank managers no legal decision is necessary to demonstrate that checks that cannot be certified must not be accepted nor paid, forcing the conclusion that overdrafts are unlawful. It is true |