bank examination. H. R. Hulburd, for example, wrote in his Report in 1869: "Perhaps no one thing has done more to promote the safety and sound management of national banks than their liability to examination without previous notice. . . ." John J. Knox expressed similar sentiments: "The excellent system now in operation is in strong contrast with the generally lax systems of bank reports and supervision which prevailed previous to the passage of the national-bank act." 17 He held that it was "the duty of the examiner to ascertain whether the officers of the bank and its directors are complying with the requirements of the law and whether they are in any way violating any of its provisions, to the end that in such case they may be enforced by the proper authority." 18 In Knox's view the role of the government was to stir directors and officers to full and active responsibility, while at the same time supervisory officials could in no way accept responsibility for the management of a bank's funds. Knox went on to note that though the detection of embezzlement might occur as an incident of an examination it was certainly not the principal object of examination. "It is scarcely to be expected," he wrote, “if a robber or a forger is placed in control of all of its assets, that a national bank can be saved from disaster by the occasional visits of an examiner.” 19 Knox's successor, Henry W. Cannon, generalized further the functions of an examiner. Examination, in his opinion, went beyond a mere inspection of ledgers to a close scrutiny of the business of the bank—that is, the responsibility and prudence of its management and the total quality of its loans and its investment portfolio. Examiners, he believed, should consult with officers and directors concerning broad principles of bank management and should be especially solicitous to see that banks were maintaining their prescribed lawful money reserves and that banks were not themselves borrowing from other banks. Although Comptrollers as early as Freeman Clarke wrote letters to banks commenting upon the results of examination reports and requesting correction of weakness, Comptroller Cannon made critical analysis from Washington an integral part of examination. Cannon established the tradition that it was the function of supervision to correct basic managerial difficulties when they were incipient and not simply to perform what amounted to routine audits. He insisted that malfeasance could best be prevented through examination of the bank by a committee of directors, that it was not the function of examination to attend to minute details: there are many ways of evading [the] law, and it is a physical impossibility for the Government to maintain constant espionage over the affairs of the national banks. . . . Any attempt to direct the making of loans and to 17 Comptroller of the Currency, Annual Report, 1869, p. x; Comptroller of the Currency, Annual Report, 1878, p. 17. 18 Comptroller of the Currency, Annual Report, 1881, pp. 35-36. 19 Ibid., p. 38. Portrait of Henry W. Cannon, fifth Comptroller of the Currency, who served from May 1884 to March 1886. dictate to the directors and managers would. . . be impracticable. . . . it is not the intention of the bank act to interfere with the business of [an] association....20 Comptrollers Trenholm, Lacey, and Eckels successively dwelt on the importance of supervision of a bank's affairs by its board of directors, and by 1900 the idea of the fundamental responsibility of boards of directors for detecting embezzlement and other dishonesty was accepted. With experience, the Office of the Comptroller of the Currency made other suggestions for improvement of the supervisory system. In both his Annual Reports Trenholm recommended the appointment of supervisory examiners to be paid by the Treasury rather than by bank assessment. Trenholm enumerated four advantages to be secured from this change in supervisory procedures: 20 Comptroller of the Currency, Annual Report, 1884, pp. xlix-1. 1. Banks could be specially examined at any time between the dates of ordinary examinations without exciting alarm in a community or reflecting upon the management of a bank. 2. Protection against arbitrary or improper conduct upon the part of a local examiner would be afforded banks, especially those in remote localities. 3. Supervising examiners would carry throughout the country a knowledge of correct and uniform methods of business and could instruct both local examiners and bank officers. A plea for reimbursement from a bank examiner who received his compensation under the fee system. Dear Sir Sandusky Aug 31.1865. "Enclosed please find list of National Banks of this Examined commissions, for which, if found correct, please remiti pory Respectfully, H. R. Hulburd Bags Wishey Bank Examiner, 21 4. Since their circuits would begin and end in Washington, the special examiners would supply the Comptroller with comprehensive information, enabling the Office to understand needs and circumstances that must vary according to the peculiarities of different sections of the country.2 Trenholm's successor, Edward Lacey, continued to insist upon the appointment of supervisory examiners to be paid from public funds. Comptroller Eckels likewise asked for two general examiners. At last, in 1899 Comptroller Charles G. Dawes (one day to be Vice President of the United States) persuaded Congress to provide funds for special examiners. Comptroller Lawrence O. Murray, who came to the Office in April of 1908, took the questionnaire approach toward improving supervision. In September he wrote to the presidents of all national banks asking their opinion of the examination procedure and their suggestions as to how it might be improved. Of the more than 3,600 replies, slightly over half viewed the current system as entirely satisfactory. But a large number of bank presidents were not loath to offer opinions as to how the service might be improved. Among a host of recommendations, the most important were that examiners should be paid salaries instead of fees, that more time should be devoted to examination, and that the number of supervisory examiners be increased. A surprisingly large number of respondents suggested that bank examiners should indeed make careful audits in order to assist bankers in detecting skullduggery. Not surprisingly, bankers in large cities favored establishing agencies whereby there could be some collusion in collecting credit information and in enabling bankers to determine the advisability of extending credit to large borrowers. Comptroller Murray worked harder, perhaps, than anyone in the history of the bureau to improve bank supervision. Like his predecessors, he urged the appointment of directors' committees to supplement the work of national bank examiners, in the summer of 1912 going so far as to ask that committee reports of examination be forwarded to Washington. Through these reports, Murray felt, dishonest employees could be detected, forged paper discovered, and losses that had escaped official examination turned up. But to his disappointment, Murray found that a large portion of such examinations were altogether ineffective and that a large percentage of bank directors did not have the slightest notion of what constituted an effective inspection. So the Comptroller replied with a circular to all banks outlining proper procedures. Murray's main contribution to supervisory procedures seems to have been his insistence that the examination of charter applications be done in person rather than by correspondence. Despite Murray's efforts, on September 9, 1913, in reporting the bill creating the Federal Reserve System 21 Comptroller of the Currency, Annual Report, 1886, p. viii; Comptroller of the Currency, Annual Report, 1887, p. 10. to the House of Representatives, Carter Glass could remark with truth: "For some years the national banking act has been found to be seriously defective in its provisions for examinations. In attempting the organization of a more closely woven system of banking the committee therefore feels impelled to urge the necessity of stiffening existing examination requirements. . . ." 22 The Fee System. If examination of national banks was not entirely satisfactory after half a century of experience, the difficulty could be largely attributed to the method of paying the examining staff. Pay was hardly munificent, but it was the method by which examiners were reimbursed that was most at fault. Both the 1863 and 1864 laws provided that: every person appointed to make such examination shall receive for his services at the rate of five dollars for each day by him employed in such examination, and two dollars for every twenty-five miles he shall necessarily travel in the performance of his duty, which shall be paid by the association by him examined. 22 Comptroller of the Currency, Annual Report, 1914, p. 116. |