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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 semi-annual 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 12 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 104.068, and that the prevailing rate of interest in the money market is 6%.

Cost of bonds (Oct., 1922).

$104,068.00 Circulation obtainable

100,000.00 Interest received on bonds....

4,000.00
Interest on circulation at 6%, less 5% redemption fund.. 5,700.00
Total gross receipts..
Deduction for tax...

.$1,000.00 Deduction for expenses..

62.50 Deduction for sinking fund..

1,669.15 Total deductions

$9,700.00

2,731.65

.

Net receipts (difference between gross receipts and total deductions). 6,968.35 Interest on cost of bonds at 6%...

6,244.08

$724.27 .696%

Profit on circulation in excess of 6% on the investment..
Extra profit in terms of per cent...

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 CapitalA 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.

A copy of the formal application to increase capital is shown below:

19....

To the Comptroller of the Currency,

Washington, D. C.

Sir:

Acting under the authority of a resolution of the Board of Directors, I request approval of this application to increase the capital stock of The.....

. National Bank of.. from $.

to $......

and that the necessary blanks and instructions be furnished. It is proposed to declare a dividend of

per cent, or $.

..., payable as follows: .. per cent., or $...,

to be paid in cash to enable shareholders to make payment on the new stock. ...per cent., or $.......

.to be made by a stock dividend from the undivided profits of the bank.

That portion of the increased capital which is to be paid for in cash, will be sold at $.

per share, and the present shareholders will be permitted to subscribe for the new stock in proportion to the amount of stock now held by them.

The purchase of the business of the
bank is contemplated in connection with the increase.
On this date the books of this bank show the following:
Capital

.$.
Surplus
Undivided profits
Total deposits
Total resources

$.
(Population of place in which bank is located..

.)

President or Cashier.

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 58-59.)

No increase is valid until the whole amount is paid in, certified to the Comptroller, and his certificate of approval is issued.

Increase of Capital by Stock DividendIn view of the fact that the net profits of a bank in excess of the required surplus may be distributed by means of a dividend and the proceeds made available in effecting an increase in capital, the Comptroller of the Currency holds that such application may be made directly, that is, by means of a stock dividend.

In the event that the net undivided profits are not sufficient such an amount as may be necessary may be transferred, by authority of the directors, from surplus to the undivided profit account, provided that the surplus is not reduced below twenty per cent. of the capital as increased.

The initial proceedings in a stock dividend increase are the same as in an ordinary increase of capital, that is, the submission to the Comptroller of a formal application from the Board and report of the vote of the shareholders authorizing the capital increase.

In addition there is required a report of the dividend and certification by the president or cashier of the payment of the increase. It is permissible to effect an increase of capital in whole or in part by means of a stock dividend (see page 44, forms of applications, resolution and certificate).

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 examina

tion 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 ex

aminer'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 par

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