2% consols of 1930. 2% Panama Canal bonds. These bonds cannot be procured from the Treasury Department, but may be purchased in the open market through dealers in securities, such as The National City Company and others. For a number of months past none of the Panama Canal bonds have been available in the open market, practically all of them being deposited in Washington to secure existing bank circulation. The 2% consols in recent months have been selling at about 102 and interest, and the 4%'s have been selling at from 1051⁄2 to 106 and interest. Where a bank determines to issue currency, it purchases in the open market bonds having a par value equivalent to the amount of circulation to be issued, and sends these to the Comptroller of the Currency for deposit with the Treasurer of the United States. Only registered bonds are eligible as security for circulation, but where coupon bonds of either of the eligible issues are presented, they will be exchanged by the Comptroller for the registered bonds. The Comptroller authorizes payment of interest on the bonds of the bank depositing them, and the Treasurer of the United States will pay the interest, by check, to the order of the depositing bank at the office of any United States Assistant Treasurer or any United States depository. All details in connection with the issuance of bank circulation are cared for by the Comptroller's office. This includes the engraving of plates, printing, etc. Ordinarily a period of about 40 days is required to engrave the plates and print bank notes, but at present (end of 1920) more than three months is required. No order for circulation is acted upon until bonds have been deposited to secure the proposed circulation and advanced payment of the cost of engraving ($130 per plate) has been made. National bank notes are issued in denominations of $5, $10, $20, $50, and $100. Up until late in 1917 banks were prohibited from circulating notes of less denomination than $5, but the only limitation upon the denomination of bank notes as the law now stands is that no bank may have in circulation at any one time more than $25,000 in $1 and $2 notes. However, up to the present time, no plate designs for notes of $1 or $2 denominations have been approved, consequently no national bank notes of these denominations have thus far been printed. The Comptroller of the Currency will supply detailed information as to forms that should be observed in ordering circulation and as to the mechanical details of which it is necessary to take cognizance in this connection. The profit which a bank makes upon its circulation is determined chiefly by two factors: the average rate of interest in the money market, and the price at which bonds to secure the circulation are purchased. Circulation secured by the 2% bonds is subjected to a semiannual tax of 4 of 1%; circulation secured by bonds bearing a rate of interest higher than 2% is subjected to a semi-annual tax of 1⁄2 of 1%. Other expenses in connection with national bank circulation include (1) 5% of the total amount of circulation, which must be kept on deposit in actual money, without interest, with the Treasurer of the United States to redeem notes sent into the Treasury; (2) the sum that must be set aside as a sinking fund to absorb the premium on bonds which, purchased above par, the government must ultimately redeem at 100; and (3) the small expense in connection with redemptions, etc. The profit on circulation, therefore, above what might be obtained by loaning a sum of money equivalent to the cost of the bonds in the open market, is equal (say in a 6% market, to take a concrete case) to the net receipts minus 6% on the cost of the bonds. The method of computing this profit may be illustrated much more simply by the following tabulation, which shows each step taken in the calculation. The hypothesis is that $100,000 worth of circulation has been taken out, secured by 4% bonds selling at 1061⁄2, and that the prevailing rate of interest in the money market is 6%. Interest on circulation at 6%, less 5% redemption Net receipts (difference between gross receipts and total deduc tions) Interest on cost of bonds at 6%... 7,657.36 6,390.00 $1,267.36 Profit on circulation in excess of 6% on the investment. 1.19% It is provided by the Federal Reserve Act that any bank desiring to retire all, or a part, of its circulating notes may file with the Treasurer of the United States an application to sell for its account, at par and accrued interest, the bonds held as security for circulation that is to be retired. CHANGES IN CAPITAL 1. Increase of Capital-A bank contemplating increase of its capital should first communicate with the Comptroller, since that official's approval is necessary. Accompanying the notification that his consent to the increase has been given, the Comptroller will send the proper forms and instructions. The affirmative vote of the owners of two-thirds the bank's capital stock is necessary, and the shareholders must be given notice (usually 30 days in advance) of the meeting at which the proposition is to be submitted, as required by the bank's Articles of Association. Shareholders unable to be present at the meeting may be represented by proxy. (See "Proxy," pages 57-58.) No increase is valid until the whole amount is paid in cash, certified to the Comptroller, and his certificate of approval is issued. When any bank that is a member of the Federal Reserve System increases its capital and surplus, it is obliged to file with its Federal Reserve Bank an application (form furnished by Federal Reserve Bank) for an additional amount of capital stock of the Federal Reserve Bank of its district equal to 6% of such increase. Upon approval of the application by the Federal Reserve Agent, and the Federal Reserve Board, the applying bank pays to its Federal Reserve Bank one-half the amount of its additional subscription; the remaining half is subject to call when deemed necessary by the Federal Reserve Board. Federal law makes no provision governing the distribution of new national bank stock when the capital is increased, but under the common law, (where not modified by statute) the shareholders of a corporation have the right to participate in the increase in capital proportionately to the number of shares held by each. Waiver of that right should be obtained before allotting any of the shares to others. The right of a shareholder to subscribe to new stock, however, must be exercised within a fixed or reasonable period of time. 2. Reduction of Capital-Approval of the Comptroller and also of the Federal Reserve Board must be obtained before a national bank may reduce its capital stock. A bank contemplating such action should advise the Comptroller, giving the reasons for the proposed reduction, and should similarly advise the Federal Reserve Bank of its district. On receipt of the application, the Comptroller will advise the bank what conditions must be met before approval may be given, viz.: (a) That, if the bank has not been examined recently, or if its affairs were not satisfactory at the last examination, a special examination be made. (b) That any losses which may have been sustained be charged off. (c) That any loans which are excessive, or will become excessive by reason of the reduction, be reduced to the legal limit. (d) That any other conditions shown to be unsatisfactory by the examiner's report be corrected. When all matters have been satisfactorily adjusted, (providing adjustment is necessary) the Comptroller will indicate his approval of the reduction, but will not give his formal certificate of approval until a resolution favoring the plan has been adopted by the owners of two-thirds the bank's stock, and has been certified to him. Proper notice, as provided for in the Articles of Association, must be given all shareholders in advance of the date of the meeting at which the question is to be submitted. The bank's circulation (if excessive) must be reduced to not more than the amount of capital after reduction, by the deposit of lawful money with the Treasurer of the United States. The reduction of capital becomes operative upon issuance of the Comptroller's certificate. Each shareholder has the right to participate in the reduction in proportion to the number of shares held, and receive cash in payment, unless the whole, or a portion of the amount represented by the reduction, is to be charged off losses. In this event, the assets so charged off should |