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Bank Notes
Source: Encyclopedia
of Banking & Finance (9h
Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order
it here)
A bank’s own promise to pay
to bearer upon demand, and intended to be used as money.
Bank notes are often referred to as circulating notes or circulation.
The current emission of note issue in the
U.S.
is now confined to the Federal Reserve banks, which
issue FEDERAL RESERVE NOTES. Power
to issue notes still exists in national banks, but no government bonds bearing
the circulation privilege are issued or outstanding.
So does the power to issue bank notes continue to exist in state
banks, but federal 10% tax thereon in the Internal Revenue Code continues
to bar issue as a matter of feasibility.
Since March, 1935, funds have been on deposit with the Treasurer
of the U.S.
to cover retirement of all FEDERAL
RESERVE BANK NOTES and, since August, 1935, to cover retirement of all outstanding
NATIONAL BANK NOTES.
Bank Commercial Paper
(Promissory Notes).
The question of whether a
member bank may issue its own commercial paper in the open market found
the Comptroller of the Currency and the Board of Governors of the Federal
Reserve System divided.
The Comptroller has ruled
that a national bank may do so (Par. 7530, Rulings).
A national bank may issue at par or discount its negotiable or nonnegotiable
promissory notes of any maturity. The
provisions of Regulation 16 (12 CFR 16) should be consulted for registration
requirements if there is to be a public offering of such notes or a series
thereof. In its latest form,
however, Par. 7530 of the Comptroller’s Rulings omits former additional
matter as follows: “Such promissory
notes, issued in the regular course of business to obtain working funds
for use in making loans and the performance of ordinary banking functions,
represent liabilities of the nature excepted from the provisions of 12 U.S.C.
82 (note: the general limitation
on indebtedness of a national bank to the amount of its capital stock plus
50% of unimpaired surplus fund). Such
notes may, therefore, be issued without regard to the limitations or indebtedness
contained in that section. Notwithstanding
the provisions of Regulations Q and D issued by the Federal Reserve board,
it is the position of the Comptroller of the Currency that the proceeds
of such notes do not constitute deposits and that the provisions of 12 U.S.C.
461, 462, and 1813 relating to reserves, interest limitations, and deposit
insurance are not applicable.” The
Board of Governors of the Federal Reserve System disagreed.
In their Regulation D, as amended effective January 1, 1967, definitions
of deposits subject to legal reserve requirements included “any promissory
note, acknowledgement of advance, due bill, or similar instrument that is
issued by a member bank principally as a means of obtaining funds to be
used in its banking business, except any such instrument (1) that is issued
to another bank, (2) that evidences an obligated to repurchase, or (3) that
has an original maturity of more than 2 years and states expressly that
it is subordinated to the claims of depositors” (exempting any instrument
issued before June 27, 1966). Similar
provision was found in the board’s Regulation Q, as amended effective
January 1, 1967
, relating to regulation of interest on deposits.
BIBLIOGRAPHY
Bank Finance.
“A Note on Banknote Characteristics and the Demand for Currency By
Denomination. Journal of
Banking and Finance, September, 1988.
ZWEIG, J.
“From Munis to Money.” Forbes,
February 10, 1989 .
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