A Simple Explanation of Modern Banking Customs

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Title: A Simple Explanation of Modern Banking Customs
Author: Robinson, Humphrey
Language: English
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A SIMPLE EXPLANATION OF MODERN BANKING CUSTOMS

HUMPHREY ROBINSON

Edited from a Legal Standpoint by W. Overton Harris, Former Judge of
the Jefferson County (Kentucky) Circuit Court, Dean of the Louisville
(Kentucky) Law School

Designed for the promotion of closer and more satisfactory relations
between the public and the banks; for the information of depositors
generally, and of those just entering the banking business.

Boston
Small, Maynard & Company
Publishers

Entered at Stationers' Hall

CONTENTS

PAGE

I. General Remarks 9

II. The Choice of a Bank 14

III. Opening a Bank Account 17

IV. How to Deposit 22

V. Your Account on the Bank's Books 26

VI. Stopping Payment of a Check 32

VII. How the Bank Collects the Checks you Deposit 33

VIII. The Clearing House 36

IX. A Certified Check 49

X. Protesting Notes, Drafts, etc.,--why Necessary
and how it is Executed 53

XI. The Local Collection Department 64

XII. The Loan Department 77

XIII. New York Exchange 99

XIV. The Method of Issuing National Bank Notes 102

XV. The So-called "Special Privileges" of Banks 109

A SIMPLE EXPLANATION OF MODERN BANKING CUSTOMS

GENERAL REMARKS

After some years of work in a bank, it has been impressed daily upon
the writer that, if the depositors were fully informed about the
details of the conduct of banks, closer and more satisfactory relations
would result. Hence this attempt to explain, in a simple and concise
way, avoiding as much as possible the use of technical terms, certain
things that every depositor should know.

For ten years the writer was "in business." For an equal length of time
he has been connected with a large city bank. He remembers his utter
lack of comprehension of banks and their ways, and his consequent
mistakes, perplexity, and embarrassment in dealing with them. Also the
unfairness and prejudice with which he often judged them.

Recalling all this, he believes that, without giving offense, he can
state these facts.

Many men having constant transactions with the banks do not realize the
importance of the choice of a bank; few understand the correct way in
which a note should be drawn, or how to determine the exact due date of
a sixty or ninety-day note, or acceptance; what "protesting" a note or
draft really means, and what effect it has on the drawers or endorsers;
the functions of the Clearing House and the simplicity of its methods;
why the banks are compelled to pursue a certain course in the
collection of paper sent them, even though this course may be very
objectionable to the payers; how checks are collected; the effect of
certifying a check; and many other details. Also that very few
depositors have ever seen a copy of the National Bank Act, or are
familiar with the laws governing their own State Banks and Trust
Companies.

This lack of knowledge of the laws and customs, from which there can be
no safe departure, is undoubtedly the cause of many unreasonable
requests; assertions of fancied rights; remonstrances, and irritating
misunderstandings. This condition should not exist. One explanation for
it may be, that the work in a bank is so strenuous, everything having
to be accomplished in so short a time, that the officers and employes
do not have the opportunity to explain fully the reason why.

Many seem to think that the details of banking are very complicated.
But there is no mystery about these details. They are very simple and
sane. The methods of bookkeeping are really elementary, principally
mere addition and subtraction. Of course the science of banking and
political economy involves deep and profound study, but these are not
treated here, and the writer has attempted merely to give an idea of
the daily routine of a bank.

This can be stated with certainty. The interests of the public and the
banks are identical; and an acquaintance with banking customs will
enable any man to conduct his business with much greater intelligence,
satisfaction and profit. Also that banks want to accommodate, as far as
possible, not only their own customers, but others, because they are
possible customers.

It is hoped that this writing, in some small degree, may hasten the
time, when the political orators, remembering that the day of the
private banker has passed, and that the people now own the banks, will
cease inciting the public against them; when the law makers, elected by
the stockholders and depositors of banks, will cease oppressing them by
unequal and unjust taxation; when the public generally, realizing the
necessity and importance of banks to every community, will cease being
prejudiced against them and their ways, and, by reason of a better
understanding, will feel closer and more cordial toward them.

So "here's to a better acquaintance" between the public and the banks.

THE CHOICE OF A BANK

The choice of a bank should be most carefully considered, especially by
a business man.

The same care should be exercised in selecting a bank as would be used
in choosing your lawyer or your doctor. Having done this, make it a
rule to be as frank and open and straightforward with your banker as
with your lawyer or your doctor. You will never lose by it. All banking
relations must be founded on mutual confidence. Once let your banker
get the idea that you have deceived him, and naturally he is forced to
view your statements with suspicion. Tell him the whole truth about
your business and your resources, even though it hurts sometimes. It is
primarily to his interest to help all his customers build up their
business as much as possible, and to keep them going, and your success
contributes to the general success of your bank. He should be, not only
your banker, but your intimate financial adviser and your very good
friend.

In deciding upon your bank, did you inquire into the character and
disposition of its President and Cashier? Are they men whose business
sagacity and honorable careers are such that you are glad to seek their
advice; and can you repose every confidence in their keeping inviolate
your business secrets? Will they fulfill to the letter their promises
of protection to the best of their ability in times of financial
stress? Or, have they exaggerated their resources and facilities and
made all kinds of suave, but very general promises in order to get your
account?

Have you gone a little further and considered the personnel of the
Board of Directors of your chosen bank? That Board is supposed to
approve or disapprove all loans and business arrangements. Or, did you
open your account with some bank merely because of convenience of
location, or because some friend suggested that institution?

III

OPENING A BANK ACCOUNT

In opening your account with a bank, you will be asked to give your
signature and your address. Write your name naturally, as you are in
the habit of signing it. The paying teller has to accustom himself to
the peculiarities of the signature of every patron of the bank, and has
to be constantly on the lookout for forgeries; for if he pays a
forgery, the bank must stand the loss. He soon gets to know your
signature as he knows your face. So don't have your signature on the
bank's books as, John P. Williams, for instance, and then sign numbers
of your checks, J. P. Williams. The letter "J" might stand for James or
Joseph, and, if the account is in the name of John P. Williams, the
bank is taking an unreasonable risk in paying out your money on a check
signed, "J. P. Williams." It would have to make good any loss that
might result thereby. A woman, for instance, will open an account as
Florence Perkins Smith, and then send out checks signed "Florence P.
Smith"; or "F. P. Smith"; or if married, will sign, Mrs. Harry B.
Smith.

Then the paying teller must see that every endorsement on the check is
technically correct. For instance, that a check made payable to John P.
Williams is not endorsed "J. P. Williams," and again that a check
payable to "J. P. Williams, Trustee," is not endorsed by J. P. Williams
only, and not as "Trustee."

Before going to the paying teller's window you should endorse any check
you are collecting; even though it is made payable to "Cash" or to
"Bearer." If the check should turn out "no good," the teller can then
see at a glance who cashed it, and communicate with the proper party.
Compliance with these points saves much delay.

Every check should be endorsed exactly as it is made payable on its
face. Many firms, as well as individuals, overlook this point daily.

The paying teller must watch for raised or altered checks. The law
holds that any legal instrument is void if altered in any material way.

So many people, if they make a mistake in writing a check, will erase
or alter the amount or the name, instead of taking a little more time
and making out a new one. The banks have to be very cautious and
particular about paying such checks, for they are paying out actual
cash on doubtful orders. According to law, they must suffer the
consequences if they pay to the wrong person or pay the wrong amount.

But all depositors must use every reasonable precaution to keep their
checks from being altered in any way. Many people, especially in the
rural districts, write checks in lead pencil. How easy it is for such
checks to be changed if they fall into the hands of dishonest parties.
The rejection of the account of any person, who will be so careless, is
plainly only the part of safety.

The figures should be placed close to the dollar mark. In writing the
amount of the check in words, begin close to the left hand margin, and
when the amount is written, draw a line in the blank space left between
the amount, and the word "dollars." The law says that where the figures
and the written amount differ, the written amount shall govern.

HOW TO DEPOSIT

In making your deposit, always head your deposit ticket with your name
exactly as you wrote it when leaving your signature with the Paying
Teller, otherwise, it might be credited to some other person. Also,
fill in the amount of your deposit as plainly, and as legibly as
possible. After the receiving teller has checked off your deposit
ticket, it is passed on to the individual bookkeeper who has charge of
your account. He is only human, and any bad figures on your ticket may
lead to mistakes and consequent irritation to you.

Always make out your own Deposit Ticket. The Receiving Teller should
not be asked to do this. There are generally other people in line, and
they, as well as the Teller, have a right to complain if he has to stop
and do this for you.

List your _money_ separately as _gold_ and _silver_, and, in entering
your _checks_, write against each amount the name of the Bank drawn on,
and the town, as plainly and briefly as possible. Then add the various
amounts and hand the slip to the teller.

When depositing currency arrange the bills so that the ones and twos
will be together, the fives together, the tens together and so on. Have
the bills straight and face upward. With the gold and silver follow the
same idea. If your deposit is large put the money in packages and label
with amount and your name.

By following these directions you will put the Receiving Teller under
everlasting obligations. He has a very short time in which to
accomplish a great deal, and his position at best is nerve racking.

In endorsing a check, either simply write your name on the back, or
write "Pay to the order of ---- Bank" and then sign your name. When a
check is undoubtedly intended for you, and your name is not stated
correctly on its face, endorse it _exactly_ as it is made payable,
and then endorse as you generally do. For instance, if a check intended
for Brown Bros. & Co. is made payable to Brown Bros., it should be
endorsed first Brown Bros., and then Brown Bros. & Co.

Checks should be deposited or cashed promptly. You have only until the
next succeeding business day in which to collect, or deposit for
collection, any check. If you hold a check longer than forty-eight
hours, and the bank on which it is drawn should fail in the meantime,
you have released the drawer and must take your chances with the other
claimants against the bank. For this reason the banks send out all
checks deposited with them for collection on the same day, or the next
succeeding business day; otherwise they have released both the drawer
and the endorsers, if the paying bank should fail or any loss should
result by reason of their delay.

Checks drawn on banks in the same town, and which are deposited after
the clearing hour, are held over at the depositor's risk, until the
next day.

YOUR ACCOUNT ON THE BANK'S BOOKS

There is no mystery about bank bookkeeping. It is about the simplest
known. The total amount of your deposit is added to the balance you
already have in the bank; then the total amount of your checks, that
reach your bank that day, is deducted; the result is your balance.

Right here it is well to emphasize that the great majority of the banks
_keep no record of the names of the parties from whom you receive
checks which you deposit; nor do they keep any record of the names of
the people to whom you make your checks payable_.

When you deposit a check, the only record generally kept by the banks
is the date that you deposited it, the amount, and the town in which it
is payable. If it is on a bank in the _same city_, your bank will keep
a record of the name of that bank, but not otherwise.

In handling thousands of checks daily, it can be seen what a stupendous
task it would be for a bank to keep a complete record of the drawers
and _all_ the endorsers on every check. Its force of clerks would have
to be doubled or trebled.

The bank should not be expected to keep your private memoranda, and it
is the duty of the depositor to keep a complete record of the parties
from whom he gets the checks that he deposits or cashes.

If a check is lost in the mails, the bank has a perfect right, after
giving the depositor the amount, the date on which it was deposited,
and the town in which it was payable, to charge the amount to the
depositor's account until he furnishes a duplicate of the lost check.
So, if you cash a check drawn by John B. Smith, for example, and
payable to James A. Jones, and then endorsed by several other parties;
it is your duty, and not the bank's, to keep a record of the person
from whom you received that check, and obtain a duplicate if it is lost
before reaching its destination. Also with all other checks which you
deposit or cash.

Many retail firms cash checks for customers; and after endorsing, will
deposit them for collection; keeping absolutely no record of the
sources from which they received them. For example,--Mrs. Brown, of St.
Louis, receives a check from her son in Cincinnati. She gets it cashed
at the dry goods store with which she deals. Then the merchant deposits
it, with numerous other checks, in his bank for collection. If the
check is returned unpaid, the bank certainly has a perfect right to
call on the merchant to pay it. The merchant then calls on Mrs. Brown
to pay him. Now if that check is lost in the mails, say burned in a
railroad wreck, the bank has the same right to call on the merchant for
a duplicate. And it is no valid excuse for him to say that he has no
record of the person from whom he received it.

In short, each person endorsing a check should keep a record of the
person from whom he received it, or for whom he endorsed it.

On the last business day of every month your statement is made up and
you should call for it as soon after as convenient. Then you should
assort your canceled checks according to the dates or numbers of same,
and compare them with the stubs in your check book. This is _very
important_ in order that you may detect any forged or raised checks and
_promptly_ inform your bank. If such checks are not reported to the
bank in a reasonable time, you will have to stand the loss. The total
amount of the checks _not_ returned by the bank should be the exact
amount of the difference between the balance as shown by your check
book and your bank book. For example,--you give a check on the last day
of the month; it does not reach your bank until the first, second or
third day of the next month. It can not be charged to your account
until it does reach your bank; therefore, the bank's statement will
generally show a larger balance than your check book. The difference is
the amount of checks that are out.

Banks do not like to tell the amount of your balance over the
telephone. They can not identify you "over the 'phone," and some
person, who has no business to know, may be inquiring into your
affairs. For the same reason they do not like to state the amount of
your balance to any one in person, unless you authorize it. That is a
confidential matter between you and the bank, and they make this rule
for your protection as much as their own.

STOPPING PAYMENT OF A CHECK

If, for any reason, you desire to stop payment on a check, communicate
with the paying teller as quickly as possible. Give him a full
description of the check, the name of the party to whom it is made
payable, the number, the date, and the amount. Then _always_ confirm
this action in writing. If, after examination of your checks, the bank
informs you that this particular one has not been paid, you can safely
issue another, if desired. Inform your bank, however, that you are
issuing a duplicate, and write the word "duplicate" across the face of
the check.

VII

HOW THE BANK COLLECTS THE CHECKS YOU DEPOSIT

When your deposit is handed in to the Receiving Teller, he assorts the
checks you give him into "foreign" and "clearing" items.

The "foreign" items, that is, checks or drafts on banks in other towns,
are then passed on to the route clerk. He, in turn, assorts them so
that they may be sent to the banks that will collect them for the least
possible cost. For instance, if your bank is situated in the middle
West, the checks you deposit on the far West will be sent to a Chicago
or St. Louis bank. Checks on Eastern cities, except New York possibly,
will be sent to Philadelphia or Baltimore. Checks on nearby towns
probably will be sent direct to banks in those towns. The reason for
not sending checks direct to the towns on which they are drawn, is,
that often they can be collected much more cheaply by sending them
through other large cities.

The less expense your bank incurs in collecting, the less it will have
to charge you. The depositor should understand that the bank's charges
for these collections are figured at about cost.

It is a fact that an examination of this account on the books of any
city bank almost invariably will show that it is a source of loss
rather than profit. In other words, the city banks really charge their
depositors less than it actually costs for collections on other towns.

The "clearing" items, that is, checks on banks in your own town, are
passed to the Clearing House clerks. The collection of these checks
through the Clearing House, and the operation of that institution, are
next explained.

VIII

THE CLEARING HOUSE

The Clearing House is simply a meeting room for the convenience of the
different banks in a city; a place in which to swap checks. Small towns
have none. Ordinarily no figuring is done here except addition and
subtraction. Its operation is simple.

Suppose you owe Brown $10.00, and you owe Jones $5.00.

Then suppose Brown owes you $5.00, and owes Jones $4.00.

Then suppose Jones owes you $3.00, and owes Brown $5.00.

Now, instead of each of you going around to two other places, you three
meet in a certain conveniently located room to square, or clear up,
accounts. This saves time and steps. A clerk is in this room to do the
sums for you.

With a little addition and subtraction he has the following:

You owe Brown and Jones together $15.00
Brown and Jones together owe you 8.00
------
Therefore, you owe Brown and Jones together $ 7.00

You and Jones together owe Brown $15.00
Brown owes you and Jones together 9.00
------
Therefore, you and Jones together owe Brown $ 6.00

You and Brown together owe Jones $ 9.00
Jones owes you and Brown together 8.00
------
Therefore, you and Brown together owe Jones $ 1.00

The clerk then announces that you owe $7.00 here; Mr. Brown is entitled
to receive $6.00, and Mr. Jones is entitled to $1.00. Then he gives Mr.
Brown an order on you for $6.00, and Mr. Jones an order for $1.00.
Nothing complex about this if you know how to add and subtract.

Now just substitute for your name, the First National Bank; for
Brown's, the Second National Bank; for Jones', the Third National Bank.
Then put the figures up into the thousands or hundreds of thousands of
dollars in place of the small ones given above. Then name the room
where you met, the Clearing House, and call the clerk who did the sums,
the Clearing House Manager. Then call the orders he has given, the
Clearing House Manager's checks. No matter how many banks in any one
city, or how large the figures, this simple method of settling is in
operation daily.

Say there are twenty banks in your city. Your bank receives through the
mails, and from its local depositors, numbers of checks on the other
nineteen banks in the same town. The clerk, who goes to the Clearing
House, and his assistants, assort these checks into nineteen different
piles. Each bank goes by a number at the Clearing House. Then these
checks are stamped on the back about like this--"Paid through the ----
Clearing House"; then follows the date, and name, and number of the
bank which sends them. These nineteen piles of checks are added up into
nineteen different totals; the checks on each bank being kept in
separate bundles. The nineteen totals are added into one grand total.
The clerk then starts for the Clearing House with nineteen bundles of
checks; and a sheet which shows how much his bank has against each of
the other banks; and the grand total it has against all the other banks
combined. Therefore, at a certain hour, generally noon, on each day,
twenty clerks, one from each bank, meet at the Clearing House. Each one
takes his stand at his desk. When the manager taps the bell, every
clerk makes the round of all the other desks, and leaves the bundle of
checks he has against each bank with a slip showing the total amount of
the package. When this is over, each desk has nineteen bundles of
checks on it and nineteen slips showing the different totals.

Each clerk then adds up these nineteen totals, and the grand total
resulting shows what all the other banks have against his bank. He then
reports two amounts to the Manager of the Clearing House,--the grand
total of the checks he has brought in, and the grand total of the
checks which have been brought in against him.

Say he has brought in $100,000.00 worth of checks against the other
nineteen banks, and they have brought in $90,000.00 worth of checks
against his bank. Then his bank has a credit at the Clearing House of
$10,000.00.

After the Manager figures up from these totals handed him by the
different bank clerks, he finds that certain banks brought more than
was brought against them, and that certain other banks brought less
than was brought against them. In other words certain banks have "lost"
at Clearing while others have "gained" and at a later (designated) hour
of the day, the debtor banks pay in their losses at the Clearing House
and the creditor banks receive their gains, the total losses and gains,
of course, exactly offsetting each other.

While the systems employed at the Clearing Houses of the various cities
of the United States may vary in some particulars, they are all founded
on the principles stated in the preceding paragraphs. These principles
have been so perfected that the clerks from the different banks are at
the Clearing House for a few minutes only each day. The Manager imposes
a fine of several dollars on the bank for every mistake in calculation
its Clearing House clerk makes; also for tardiness.

To return to the checks which have been brought back from the Clearing
House. If, on examination, the Paying Teller has discovered any
forgeries, or irregular or missing endorsements, or anything suspicious
about any checks; or if the bookkeepers have found that any check
overdraws the account of the depositor, the bank has only until the
close of banking hours to return such checks and collect from the banks
that sent them through the Clearing House. So the examination of these
checks must be made carefully and very quickly.

The "_Clearing House Association_" in your city is what might be
called a Mutual Aid Society, which the banks have organized for
purposes of mutual convenience and protection. This Association pays
the expenses of the Clearing House; the Manager's salary; the rent;
etc. It adopts rules and by-laws and fixes fines and penalties for
breaking them. But it is not an incorporated body and can not sue or be
sued.

In time of panic, the Association is a tower of strength, not only for
the banks themselves, but for the whole community. The associated
banks, at such times, have it in their power to make or break the
business interests of their city. _But their interests are identical
with the interests of their patrons._ Remember the banks are owned
by the people, not by two or three private individuals. The failure of
any one bank, or of any one business house, increases the panicky
feeling. Therefore, the Clearing House Association naturally and from
very self-interest, must do its utmost to keep its members and their
customers on their feet. In financial storms, the Association may adopt
certain rules and regulations which may seem unreasonable to the
public; but these methods are put in force for "the greatest good of
the greatest number"; not only for the protection of the banks, but of
their customers and depositors. It is a time for the public to be as
reasonable as possible; to uphold the banks and their officers and
directors. It is a time for the public and the banks to come closer
together. Rest assured the banks have no desire to see any firm or
person fail in times of panic, or any other time. They make their
largest dividends when business is brisk and everything is prosperous.

What every Clearing House Association does want to wipe out, however,
is the dishonest and reckless banker. He is a menace and source of
anxiety to every bank in the community. The sooner the other banks can
detect and expel him from the business, the better. In some cities,
notably Chicago and St. Louis, the Clearing House Association regularly
employs expert accountants to make periodical and unexpected
examinations of the banks in the Association. If any bank is found to
be doing a reckless business and not living up to the rules and
regulations of the Clearing House, it is heavily fined or expelled. And
expulsion from the Clearing House means ruin for that bank as soon as
the business community learns of it. All Clearing House Associations
should adopt this strict supervision.

Many a bank was saved embarrassment and possible failure in the recent
panic of 1907 by the wise methods put into effect by the Clearing House
Association. Selfishness and enmity were ordered to the rear. There are
always banks whose officers have less foresight and wisdom than others.
Some of these had been lending too freely, and their actual cash
reserves were not sufficient to meet the storm of checks of their
frightened depositors; frightened mainly because of ignorance, for,
with a few exceptions, the banks were in good condition. To call in
their loans and replenish their supply of cash would cause business
failures and add to the panic.

So the Clearing House Associations of the different cities determined
that the strong and wise banks should help the weak and foolish ones.
Loan Committees were appointed to sit daily at the Clearing House. The
various banks brought to this Committee notes they had discounted, or
stocks and bonds owned by them. If the Committee thought them good,
the Clearing House Association would lend the bank bringing them, up
to about 75% of their face value. Of course, the Clearing House
Association did not lend these banks actual cash, but they issued them
Clearing House certificates, bearing interest, which could be used
among the banks in settling daily claims against each other; just as if
the banks had deposited actual cash at the Clearing House. In this way,
if Bank Number One had the Clearing House Manager's check on Bank
Number Two for $50,000.00, in settlement of some daily balancing at the
Clearing House, Bank Number Two could pay Bank Number One with Clearing
House certificates instead of actual cash. In other words, the banks
which had a number of good notes, or stocks and bonds, but a small
amount of cash, were saved by the combined, unselfish and patriotic
action of all the banks working together for the common weal.

If the public generally knew of the many instances of generosity and
unselfishness that were shown in the Clearing Houses in this and other
panics, the banks, as a class, would not be denounced and condemned as
they sometimes are. And this unselfishness was not exercised by the
banks for the salvation of the banks alone, but for the business
interests of the whole community as well; for, as has been pointed out,
_the interests of the banks and the people are one_.

A CERTIFIED CHECK

Your check is nothing but a piece of paper on which is written an order
on your bank to pay some one a certain sum. Strangers might not like to
accept this piece of paper in payment of debts due them. In many cases
your check should be "certified."

When a depositor presents a check to his bank to be certified, it
should be handed to the Paying Teller. He, in turn, hands it to the
individual bookkeeper having charge of that depositor's account. If the
bookkeeper finds the balance sufficient to cover the amount of the
check, he stamps across its face the words "Good for $---- (the sum
named in the check) when properly endorsed." Then the Teller or some
officer of the bank, signs that statement and the amount of the check
is immediately charged to that depositor. In other words, the bank
guarantees or certifies that your check is good.

The bank must be very particular about certifying a check. If any
officer or employe of a National Bank certifies a check, which calls
for more than the maker of the check _actually_ has to his credit,
such officer, or employe, has committed a penitentiary offense. This
provision of the National Banking Act is most strictly enforced, and
the penalty is severe.

When certification is necessary, the maker of the check should be the
one to have it certified. If you take Brown's check to his bank and
have it certified, you release Brown entirely and can only hold the
bank. For example,--a man sold a piece of land, and, on delivering the
deed, took the purchaser's uncertified check. After the purchaser had
left with the deed, the seller, thinking the check might not be good,
had it certified. The bank failed that afternoon. The purchaser proved
that he had more than the amount of the check to his credit on the
bank's books. On consultation with his lawyers, the seller found that
he had no claim on the drawer of that check and could only file his
claim against the bank with its other depositors. And he only received
about fifty cents on the dollar when the bank's affairs were finally
wound up. All because he did not insist on the purchaser of the land
having his own check certified. If he had done this he could have held
both the purchaser and the bank.

By having your check certified, you practically exchange your check for
one guaranteed by the bank. For example, the bank certifies your check
for $100.00. It immediately _charges_ your account with the $100.00,
and _credits_ its "certified check account" with $100.00. Then when
your certified check comes back to the bank, through the person to whom
you delivered it, the bank _charges_ its "certified check account" with
$100.00, and the transaction is closed.

Therefore, if, for any reason, you decide not to use a check after you
have had it certified, _do not destroy it as you would an uncertified
check_. Be sure to bring it back to the bank so that the amount may be
_credited_ your account, and be _charged_ to the bank's "certified
check account."

Otherwise your account will remain charged with the amount and your
balance will show that much less.

PROTESTING NOTES, DRAFTS, ETC. WHY NECESSARY AND HOW IT IS EXECUTED

Protesting notes, drafts, checks, or other commercial paper is simply
warning or giving notice to people, _secondarily_ liable on that paper,
that it has not been paid when due. The person who ought to pay the
paper is _primarily_ liable. All other persons who have endorsed the
paper or drawn it on another person, firm or bank are _secondarily_
liable.

You have endorsed Brown's note. Brown does not pay it when due. If you
do not receive a prompt notice of this, you might endorse another note
for Brown under the false impression that he had paid the first one.

Likewise, if you have endorsed Jones' draft on his firm, or his check,
and his firm, or his bank refuses to pay such draft or check, both you
and Jones should receive prompt notice that payment was refused. With
such notice you would not endorse for Jones a second time unless he
made good to you, and explained matters satisfactorily. If Jones was
honest in drawing his draft or check he is entitled to prompt notice of
non-payment so that he can take immediate steps to get his money.
Possibly his firm is embarrassed financially, or his bank has failed.

Say Smith & Co. have drawn a draft on a customer and have taken it to a
bank and secured the money on it. If the customer refuses to pay the
draft, the bank wants prompt notice so it can collect from Smith & Co.
And Smith & Co. want prompt notice so they can take legal steps at once
to protect themselves, and probably stop further shipments to this
customer. Various other instances might be given where endorsers or
drawers of paper might suffer loss or damage from lack of notice of its
non-payment.

The law holds that this giving of notice is of such grave importance,
that, if the bank receiving paper for collection does not promptly
notify all persons, _secondarily liable_, of non-payment, all such
persons are released from obligation, and the collecting bank must take
its chances on making the amount from the payer. This statement must be
qualified to this extent. If a _check_ is not protested, the maker of
the check must _prove_ that he has suffered loss by not receiving
notice of non-payment. But the drawer of a draft, or the endorsers on
any check, draft, or note are released, whether they suffer damage or
not. Generally speaking, a check is a written request of a depositor to
his bank to pay a certain sum to a certain party; whereas a draft is a
written request of any one to a firm or individual, to pay a certain
sum to a certain party.

Of course, if the bank receives orders from the parties sending them,
_not_ to protest certain notes, checks, or drafts, it must obey these
orders. But if no such instructions accompany the paper, the bank
_must_ protest or make itself liable.

Every bank of any size has one of its employes appointed a Notary, or
it can employ a Notary on the outside. He is an officer appointed by
the State, and is under bond to the State to perform all his duties
according to law.

When the bank hands protestable paper to a Notary, it is his duty to
make a formal demand at the proper place on the person who should pay
it. If payment is refused, the Notary makes an exact copy of the note,
draft or check at the top of a printed form used for this purpose.
Then, over his signature as a Notary, accompanied by his official seal,
he states that he has made a demand in person for payment of the paper
described by him; and, on payment being refused, he has "protested" the
non-payment. Also that he has mailed or delivered notices of this
non-payment to all the parties secondarily liable on this paper and
states their names. The Notary's official statement is called the
"Instrument of Protest." The notices he mails are called the "Notices
of Protest." Certain fees are allowed the Notary by law for protesting.
These are called "Protest Fees," and become a part of the debt.

Of course, the person who ought to have paid the paper gets no "Notice
of Protest." He certainly knows if he has not paid. The Notary must
keep a copy of all his "Instruments of Protest." This is a public
record, just as any court record is, and as accessible to the public.
It is rarely examined, however.

So, from the language prescribed by law, that the Notary uses in his
"Instrument of Protest," comes the common use of the terms "protest"
and "no protest" paper.

To bind the parties _secondarily_ liable a Notary can protest paper
only on the _exact_ day it is due. Otherwise he might put it off
several days, or demand payment before it was due, and damage might
result in either case. So, if the protesting is not done on the exact
date when the paper is due, it is of no avail.

The maturity of a draft reading so many days, or months, after _date_
must be calculated from the date of the draft itself. But the maturity
of a draft reading so many days, or months, after _sight_ must be
calculated from the date it was presented to the sight of the payer and
accepted. It is very necessary to date acceptances of time drafts
reading "after sight."

_Demand for payment must be made at the proper place during business
hours._ A check of course is payable at the bank on which it is drawn,
during banking hours. A draft on a firm is payable at its office;
likewise a draft on an individual is payable at his office, or if he
has none, then at his residence. Notes or accepted drafts are payable
at the place stated on their face. But, when no place of payment is
stated, demand for payment must be made at the office of the maker of
the note, or the acceptor of the draft; or if he has no office, then at
his residence. When you draw up a note it is the proper thing to state
on its face "payable at ---- bank" (giving the name of your bank); or
"payable at my office"; or "payable at my residence."

Likewise, when accepting a draft, write the date, then "accepted,
payable at ----" (stating your bank, or residence) across the face of
the draft over your signature. Therefore when a note, or an accepted
draft is made payable at a certain bank, demand for payment _must_ be
made at that bank, and _not_ on the maker of the note, or the acceptor
of the draft. Most notes and accepted drafts are made payable at the
bank of the payer. All of them should be. In this way, if you keep
money enough in your bank to meet your notes and acceptances, just as
you keep money there to meet your checks, the bank will save you all
worry about their payment in case you or your bookkeeper overlook them.
Under such circumstances your paper would never be protested.

In accepting a note from a customer, _do not have it made payable at
your bank_. Have the drawer make it payable _in his own town and at his
own bank_. Demand for payment must be made at the exact place stated in
the note. As every business man is particular about protecting his
credit in his own town, and _especially_ at his own bank, it is obvious
that he will be most diligent about providing for the payment of paper
made payable at the bank with which he is doing business.

Notes and accepted drafts should be sent, a week or two in advance of
their maturity, to the town in which they are made payable. If paper,
made payable at New Orleans, for instance, is not in New Orleans _when
due_, proper demand for payment can not be made and the drawers or
endorsers might be released.

_There is absolutely no law requiring a bank to send you a notice that
it holds your note, or draft accepted by you, for collection and due at
some future date._ It is customary for banks to send such notices, but
it is only a courtesy. It is _your_ duty to keep account of when your
paper is due, and to have funds at the place of payment when it is due.
The banks that do so are very careful about sending out these notices,
but the public should regard it as a favor shown them and not as their
lawful right. Many people do not know or appreciate this fact. You
should always put your street address just below your signature on a
note so that notice can be addressed properly. Also, in drawing a
draft, always put the name of the person or firm, on which it is drawn,
in the lower left hand corner, and _invariably_ state the street
address.

THE LOCAL COLLECTION DEPARTMENT

A bank has a perfect right to refuse to accept and to return any
checks, notes, drafts, etc., sent it for collection. But if it does
accept them, it must obey the instructions of the sender, literally and
exactly. The bank has absolutely no right to disregard these
instructions, no matter how obnoxious or disagreeable they may seem to
the payer of the paper.

Many people regard all collectors as offensive and unwelcome. They wish
to take their own time about paying their debts. Please mark this
difference between the collector of your grocer's or druggist's bill,
and the city bank as a collector of your note, or of a draft on you.
The monthly collector must turn in cash for the majority of the bills
given him or lose his position. But it really makes little difference
to the bank whether you refuse or pay the note or draft that some other
bank has sent it.

When collections are sent to a bank direct by firms, or by banks in
another city, that do not keep an account with it; the collecting bank
makes small fees, but these fees are very insignificant.

So, by prompt payment of notes and drafts, you are conferring more of a
favor on yourself than on the bank. It is wise to protect your credit
with strange banks as well as your own. Every bank receives many
confidential inquiries concerning the financial standing of firms and
persons in its city. If not personally known to the officer in charge
of this correspondence, he invariably inquires of the collection
department as to the promptness with which the parties in question meet
their notes and drafts. And even though you are not a patron, a bank in
your own city would rather give you a good financial reputation than a
poor one.

The collecting bank must regard most carefully the instructions of the
sender, especially about protesting or not protesting. Also about
telegraphing payment or non-payment, and whether to hold the paper
after it is due or not. In no case must it surrender any documents
attached to a draft until the draft is paid, or accepted; and, in case
of acceptance, documents attached must not be surrendered unless the
sender so directs.

When drafts have Bills of Lading attached, and the draft states on its
face that it is payable on arrival of the goods, the bank can hold it
until the goods arrive; but if the draft calls for payment on
presentation, even though it has a Bill of Lading attached, the bank
holding it, until the arrival of the goods, does so at its own risk. As
has been stated, and it can't be stated too forcibly, the presenting
bank has no option and must obey orders to the letter. If it does not,
it must suffer any resulting loss. It is only an agent and can not
regard the wishes of the payer.

Another point you should bear in mind. The bank must not only pay
strict attention to the instructions of the sender of the collection,
but it must follow the law. In self-protection a bank must keep itself
informed about the laws regarding collections and any changes in these
laws.

If a bank accepts anything but the actual cash in payment of a
collection, it does so at its own risk, and not at the risk of the
sender. For instance, a bank has a draft on Smith, or holds Smith's
note for collection. Smith offers his check in payment. If the check
turns out "no good" the bank must recover the paper immediately, and
any document which might have been attached; otherwise the sender can
hold the bank for the amount. Therefore, when you tender your check to
a bank in payment for collections, you are asking them to take a risk.
If you are not well known in the bank, it is only a reasonable request
for the bank to ask you to have your check certified. Don't ask the
bank to have it certified; for, as has been explained in the remarks on
"Certified Checks," the bank by so doing would release you, and could
hold only the paying bank. You might just as well ask a strange bank
to _cash_ your check as to offer it your uncertified check for a
collection on you. You would hardly cash a check for a stranger. Why
should the bank take an equal risk for you? Yet nothing seems to rouse
the ire of the average man more, than for the collection clerk to ask
him to have his check certified.

It is a well-nigh universal rule in all Clearing House Associations,
that the banks, which are members thereof, shall not collect checks on
each other before the daily hour for meeting. Also it is a general
custom not to collect from each other, checks that are deposited, or
taken in payment for paper due, after that hour. Hence, when a bank
accepts uncertified checks in payment before the clearing hour, it will
know before closing time whether such checks are good. But, if a bank
accepts an uncertified check in payment after the clearing hour,
either, it must have it certified, and thereby release the drawer; or,
it must hold it until the next day at its own risk. The banks always
respect the man who has his check certified, if tendered after the
clearing hour.

For these same reasons you can see why a bank can not take a check on a
bank in some other town in payment of a collection. It then would be
several days before the bank would know whether the check was good or
not. Also the bank would be out that amount of money for the length of
time it takes to collect that check; for every bank must remit to the
sender on the very day it puts its "Paid" stamp on a collection and
delivers it to the payer.

Therefore, when a bank notifies you that it holds your note, or a draft
drawn on you, for collection, bear in mind four points. First: the bank
must follow the instructions of the sender or owner of the paper.
Second: it can not disregard the law. Third: you are benefiting
yourself more than the bank by paying your paper promptly. Fourth: the
bank is taking a risk every time it accepts anything other than actual
cash for a collection.

The collecting bank can not consider the instructions of any one but
the bank or persons from whom it receives the item. For instance, you
live in St. Louis, and have sent your note to Brown & Co. of
Bridgeport, Conn. Brown & Co. discount your note with their bank, or
give it to their bank for collection. Before it is due the Bridgeport
bank forwards this note to a Philadelphia bank, which in turn forwards
it to a St. Louis bank. You are duly notified by the St. Louis bank.
For various reasons you may not wish to pay. In that event, positively
the only way to have this note recalled is for you to communicate with
Brown & Co. Then they must request its recall by the Bridgeport bank,
which in turn instructs the Philadelphia bank. Then that bank instructs
the St. Louis bank to return the note. In other words, all instructions
must come through the same channels by which the note was originally
sent. Bear in mind that you are not the owner of this paper, nor is the
bank which receives it for collection.

When a draft has the words "with exchange" on its face the drawer is
asking the payer, not only to pay the amount of the draft, but also the
bank charges for collecting. Unless the presenting bank has
instructions to collect this exchange or return the draft, it can
accept the amount of the draft and deduct its charges when it remits
for the collection. So don't feel resentment toward the bank when it
asks you to pay for collection charges. Many people do. But the bank is
only following instructions and cares nothing whether you, or the
fellow at the other end, pays the cost.

Because it is human nature to object to paying out money, the Local
Collection Department is the recipient of more complaints and
unreasonable requests than any other department of the bank. Any number
of actual happenings could be set down.

Now the law says that banks shall keep open _during certain hours_ on
every business day, which is not a legal holiday. After the closing
hour there is a tremendous amount of work to be done. The tellers must
balance their cash; the bookkeepers must take off a balance of every
account on their particular set of books; and every check and draft
deposited, or received through the mails, and payable in other towns,
must be listed and forwarded for collection. Nothing can be held over
without risk, no matter how heavy the day's work. The rule in every
bank is to clean up all the work on the very day it is received. None
of this daily balancing of cash, or books, can be commenced until the
last check has been cashed, the last depositor has come in, and the
last payer of a collection has settled. For instance, the payment of a
single draft or note after banking hours, necessitates the holding open
of several sets of books or the erasure and changing of various totals
by the bookkeepers. It is a very mistaken, but popular, idea that the
bank employes practically are through with their duties at the close of
banking hours. The fact is, that the usual hours for the employes are
from eight till five, and it is no uncommon thing for the clerk and
officers to be hard at work many hours after the business houses have
closed.

Yet many persons think the bank very disobliging if it refuses to
transact business after hours. One unreasonable individual insisted
that he had until sundown to pay his note on the day it was due. When
the collecting bank told him it would be protested if not paid before
the end of banking hours, he became very abusive and wanted to know who
gave that bank the power to say how late he could pay. He was politely
referred to the law makers, but this did not lessen his resentment
against the bank.

The foregoing are statements of actual daily occurrences and are only
fair samples of the injustice with which many persons treat the banks.
And it is mainly the result of ignorance of the laws and customs, which
the banks _must_ obey.

XII

THE LOAN DEPARTMENT

As a preface to the remarks on this department, the following simple
and concise statement is taken, by permission, from that excellent
book, "Money and Banking," by Mr. Horace White. (Book II, Chapter I,
page 235, Edition of 1895.)

"FUNCTION OF A BANK"

"A bank is a manufactory of credit and a machine of exchange. Mr. H. D.
McLeod's analysis of the mechanism of banking is substantially this: A
man has $5,000.00 of his own money. He starts a bank. His neighbors
deposit $45,000.00 with him. This money becomes the absolute property
of the banker. The depositors have simply a right to withdraw an equal
amount whenever they like, which right can be enforced by law. The
banker owns the money and the depositor has a claim, or right of
action, against him for an equal sum. But the depositors will not draw
the money out immediately; if they had intended to do so, they would
not have deposited it at all. The banker finds by experience that some
of his customers will deposit as much money as others draw out, so that
$50,000.00 is on hand all the time. He concludes that if his own
$5,000.00 in connection with his good reputation, is considered by the
public a guarantee for $45,000.00, then the whole $50,000.00 will serve
as a guarantee for at least $200,000.00. When he begins, his balance
sheet reads in this way:

LIABILITIES. ASSETS.
Deposits $45,000.00 Cash $50,000.00

"He now begins to discount the commercial paper of his customers
running say ninety days at 6%. When he discounts a bill of exchange for
$1,000.00, he deducts the interest for ninety days ($15.00) and credits
the customer the remainder ($985.00) on his books. This $985.00 is
called a deposit, because the customer has the right to draw it out by
his check exactly as he could draw out an equal sum of gold deposited
by him in the same bank. In the eye of the banker, and of the customer,
and of the law, it is a deposit. In ordinary times it is like any other
deposit. That is, the proportion remaining uncalled for at any time
will be about the same as the proportion of actual money deposited. Yet
it is nothing but a bank credit. Hence the word deposit, when thus
used, is clearly a misnomer, since, by derivation and common
understanding, a deposit means a thing laid away, or given in charge of
somebody. It must be borne in mind, therefore, that bank deposits
consist of two different things, namely, (1) money, (2) bank credits,
and that the latter may be four or five times as large as the former.

"The process continues till the banker has $200,000.00 of discounted
bills in his portfolio. Then his accounts stand thus--

LIABILITIES. ASSETS.

Deposits $242,000.00 Cash $ 50,000.00
Profit 3,000.00 Loans & Discounts 200,000.00
----------- -----------
$245,000.00 $250,000.00

"This is Mr. McLeod's exposition and it is the correct one. It follows
that the banker has manufactured something which serves as a medium of
exchange to the extent of nearly $200,000.00. This something is credit.
Goods can be bought and sold with it as readily as with money, since
the checks drawn against these deposits are universally accepted. The
whole $200,000.00 of bills are not discounted in a lump, but gradually,
so that some are always maturing and bringing money in to meet the
checks of customers, in an endless chain of deposits and discounts. It
is found in practice that $200,000.00 of loans and discounts may be
easily carried on $50,000.00 of cash. Thus, the loans of all the
National banks in the United States in October, 1894, were
$2,000,000,000.00, and their cash (including silver certificates and
silver dollars) was a trifle less than $400,000,000.00, or only
one-fifth of the amount of the loans. The other four-fifths was credit,
and perfectly sound credit too, for it had passed through one of the
severest panics in our history."

The foregoing quotation is an unanswerable argument for the need of
banks as manufacturers of credit in every community. The greater the
banking capital in any section, the easier it will be for the people of
that section to carry on and enlarge their business.

The Loan Department is not only the most important, but it is the
money-making end of the bank. If it makes no loans it will pay no
dividends. If, on the other hand, it makes bad loans, it will go out of
existence.

It can be understood readily that the successful bank officer, whose
duty it is to accept or reject loans, must be a person of large
experience and wide knowledge of men and affairs. He must be an
excellent judge of human nature. Not too conservative, nor yet too
venturesome. He must be a constant student of financial conditions; and
must expand or contract his loans as the sea of finance is placid or
stormy. His responsibility is great. He must lend, but he must lend
judiciously, millions of other people's money. He can not allow
feelings of personal friendship to warp his judgment. He must be
thoroughly familiar with the laws concerning the making and the
collection of notes.

In an address to the National Banks in 1863, the Hon. Hugh McCulloch,
the first Comptroller of the Currency, gave this sound advice:

"_Do nothing to foster and encourage speculation. Give facilities only
to prudent and legitimate transactions._ Distribute your loans rather
than concentrate them in a few hands. Pursue a straightforward,
upright, legitimate banking business. Treat your customers liberally,
bearing in mind that a bank prospers as its customers prosper."

In lending, the bank should encourage the _business interests_ of its
community and should discourage speculation.

If every one, before asking a loan, would put this question to himself,
"Would I take this risk," his banker would be saved much embarrassment.
On the other hand, if you know your security is good, there is no
reason why you should feel any degree of awe or nervousness in offering
your own or your customer's notes. That is what the bank is in business
for, and your proposition, if not made for purposes of reckless
speculation, is welcomed in ordinary times.

Bear in mind, however, that your banker may, at times, have to refuse
your paper, because he has seen clouds on the financial horizon of
which the average person is ignorant, and he is endeavoring to protect,
not only his stockholders, but his patrons, from the storms that are
imminent. It is advisable for you to consider his views carefully, and
probably to curtail business expansion.

_Your average balance on the bank's books has a great deal to do with
the amount of the loans, no matter how well secured, that you can ask
reasonably._

Every bank has a number of customers who expect to be taken care of in
the loan department. But, if all the bank's patrons are borrowers, it
soon will have loaned out all of its funds. The bank must have
depositors also. While some depositors do not ask for loans, experience
has shown that the proportion of a customer's balance to his loans must
be sustained in order to keep the bank adjusted. In New York the banks
generally require a regular customer to keep an average balance of not
less than twenty per cent. of the loans made him. Most interior banks
consider ten per cent. about the right proportion. For example, in the
interior cities, if your account shows an average balance of $200.00,
you can reasonably request loans, properly secured, of $2,000.00. An
average balance of $1,000.00 should entitle the depositor to loans of
$10,000.00 and so on. Experience proves that if the banker does not
keep this important point in mind, his machinery will be "out of gear."

Speaking generally, it will pay any concern to _borrow_ money, if
necessary, to show a fair balance to its credit. Bankers are only
human, and all business is selfish. Every bank will be disposed to take
care of its best paying customers first in times of financial storms.
Every merchant looks out for his best customers first. Why not a
banker? When a firm attempts to hold its bank down to the last cent of
profit, keeps no balance to speak of, and subjects the bank to endless
expense in the collection of its checks and drafts, it can not
reasonably expect as liberal treatment in "squally times" as the
concern which pursues the broader policy of "live and let live."

Some firms, if they would figure it out, could see plainly that the
bank was handling their account at a loss; yet, they think they are
conferring a great favor in placing their business with any bank.

A large concern was pursuing this narrow policy. Among other things it
made a practice of borrowing large sums in other cities at four or five
per cent. when the local rate was six. The recent panic came on. Money
advanced to fifty, to one hundred per cent. in New York. The local
banks were having all they could do to take care of their own good
customers. The result was that this firm came to the verge of an
assignment. And, if it had not happened that the banks of its city did
generously come to its rescue, it would have collapsed.

It is well to remember, that, while the rates of interest in New York
are temptingly low at times, they fluctuate violently and often without
warning; also that the bankers in a strange city have no personal
interest or local pride in your success or failure.

Money is only a commodity, and rates of interest are governed by supply
and demand. Now the _supply_ of money in the New York banks varies
tremendously, by millions of dollars in fact. This variation comes from
many causes. On the other hand, the _demand_ for money in New York is
constantly changing. The reasons for this are manifold. But in the
smaller cities, both the supply and demand are much more uniform and
steady. Hence the rates of interest, outside of New York, are much less
liable to change. Therefore, unless the demands of your business exceed
the banking facilities of your town, it is _very_ advisable for you to
confine your loans to the local banks.

The loan department is restricted by certain laws, just as the other
departments. State and Savings Banks, and Trust Companies must obey the
laws of their particular State, but any bank having the word "National"
as part of its name, or the letters "N. A." (National Association), or
the letters "N. B. A." (National Banking Association) following its
name, must adhere strictly to the provisions of the National Bank Act.
The Congress of the United States has forbidden the use of the word
"National" as part of the name of any Bank or Trust Company which does
not comply with all of the sections of the National Bank Act.

As the statutes differ in each of the separate States, only the laws
governing National Banks will be considered here.

The whole spirit of the National Bank Act in relation to loans is to
prevent the advancing of money on anything but "quick assets." In other
words, loans must not be made on any security, that can not be turned
into money quickly. For this reason a National Bank can not lend on
real estate as a security. Also it should not accept notes having
longer than ninety days or four months to run. The fundamental
principle of the law is the guarding of the depositors' money; to
have it ready for them at all times. But the _whole fabric and theory
of banking is founded on the fact_, demonstrated by centuries of
experience, that at no _one_ time do _all_ the depositors want to draw
_all_ their money from _all_ the banks. Also that every day some loans
are due and can be converted into cash if necessary.

Payment of demand, or "call," loans can be demanded any day. On time
loans, payment can not be asked for until the maturity of the note, the
day agreed upon by the bank and the borrower.

On demand, or "call," loans the interest must be paid at the end of
every three months, or when the loan is paid. On time loans, the
interest, or discount, is paid in advance.

Notes reading one, two, three, or four months after date are due, of
course, one, two, three or four months after the date of the notes. But
thirty, sixty, or ninety-day paper is not due in one, two, or three
months. This is a common error. The exact number of days must be
calculated. The following table for determining the maturity, or "due
date," of thirty, sixty, or ninety-day paper is herewith given:

TABLE FOR FINDING MATURITY OF NOTES AND DRAFTS

At 30, 60, and 90 Days

National Banks can lend only a certain proportion of their deposits.

In New York, Chicago, and St. Louis, called Central Reserve Cities,
National Banks must keep on hand, in lawful money, a reserve of
twenty-five per cent. of their deposits.

In Albany, Baltimore, Boston, Cincinnati, Cleveland, Detroit,
Louisville, Milwaukee, New Orleans, Philadelphia, Pittsburg, San
Francisco and Washington, called _Reserve Cities_, the National Banks
must have the same reserve of twenty-five per cent. of their deposits.
But the National Banks in these last-named thirteen cities can keep
one-half of _their_ reserve in National Banks located in any of the
three Central Reserve Cities, viz.: New York, Chicago and St. Louis.

In all other cities or towns the National Banks must have a reserve of
fifteen per cent. of their deposits, but nine per cent. of _their_
reserve can be kept in National Banks located in any of the thirteen
"Reserve Cities"; or in National Banks in the three Central Reserve
Cities.

"Approved Reserve Agents" are the banks of the larger cities, selected
by the banks of smaller cities or towns, in which to carry part of
their reserve. These selections _must_ be approved by the Comptroller
of the Currency, the executive head of the National Banking System.

A National Bank is forbidden to lend more than ten per cent. of its
combined capital and surplus to any one firm or individual. "But the
discount of bills of exchange drawn in good faith against actually
existing values, and the discount of commercial or business paper
actually owned by the person negotiating the same, shall not be
considered as money borrowed." Also no National Bank can lend on its
own stock as security.

The Comptroller of the Currency can have an examination made, as often
as he may deem proper, of the condition of any National Bank. The
visits of the National Bank Examiners are never announced in advance.
They come suddenly and without warning. Their duties are not only to
balance the books and count the cash, but also _critically to examine
each loan and its security_; and to give especial attention to loans
to any director or officer, and to any concerns in which they may be
financially interested.

If the bank is overloaned, that is, has loaned more than the law
allows, the examiner immediately reports it, and the Comptroller of the
Currency orders that bank to cease lending, and to require payment of
enough of its loans to make good the reserve required by law. And if
the bank does not court disaster and the closing of its doors, it
hastens to obey orders and to "get in line."

The supervision of the National Banks is not perfunctory or careless.
It is very strict.

The inquisitorial powers of the National Bank Examiners are practically
unlimited. They have a legal right to put any bank officer on oath in
questioning the affairs of the bank. They look into every department in
the most searching way, and any disobedience of the law is reported
promptly to the Comptroller. These Examiners are appointed by the
United States Government; and if they want to hold their positions,
they must be strictly impartial in their reports to the authorities.

The provisions of the National Bank Act have been so rigidly enforced,
_that in forty-four years, or since the Act was passed by Congress, the
average annual loss to depositors in National Banks, has been only
thirty-seven one thousandths part of one per cent. of their deposits_.
Practically no loss at all.

Isn't that a tribute to the wisdom of that law; to the strict
supervision of the Government; and to the honesty and integrity of the
officers of National Banks; past and present? It has happened, of
course, that some spoilers have occasionally obtained control of a
National Bank, and have dishonestly used the depositors' money in risky
ventures for their own profit. But the officials of the Treasury
Department have soon sized them up, and such men shortly find the
banking business not to their liking, especially with "Uncle Sam" as a
supervisor.

XIII

NEW YORK EXCHANGE

Practically every bank in the United States keeps part of its funds in
banks in New York City, the money center of the country. All National
Banks are allowed to keep part of their reserve in the National Banks
of New York, Chicago and St. Louis, the three Central Reserve Cities.
For these reasons checks drawn on banks in these three cities are
generally accepted at par, that is, collected without cost to the
depositor.

In this connection, the word "exchange" comes from the fact that you
_exchange_ your personal check for the bank's check on another bank,
located in some other city.

In remitting for collections, or for balances due, the banks outside of
the three Central Reserve Cities, generally send their checks on one of
these cities, according to their location.

Under certain conditions you will notice your local newspapers quoting
New York Exchange at so much premium or so much discount. These rates
are generally in use only between the different banks in your city. The
banks do not charge a depositor any premium for its checks on other
cities, unless the amount of the checks called for is large.

The proper way to draw your check when you want New York Exchange, is
to make it read "Pay to the order of New York Exchange." The bank then
makes out its check on a New York bank payable to your order. Then you
should endorse the bank's check to the order of the party to whom you
are remitting.

Banks do not like to sell their checks on other banks to strangers.
Some expert at raising checks may buy New York Exchange for ten dollars
and raise it to ten thousand. Also he might buy the bank's check with
the idea of obtaining the Cashier's signature for the purpose of
forgery.

XIV

THE METHOD OF ISSUING NATIONAL BANK NOTES

Many people have the idea that a National Bank, having a capital of,
say one hundred thousand dollars, can call on the United States
Treasury Department for an equal amount of National Bank Notes, without
expense to the bank; and thus have double the amount of its capital to
lend at the start.

The National Bank Act does say that each National Bank _must_ issue
currency equal to a certain per cent. of its capital; and further, that
each National Bank _can_ issue currency equal to the full amount of its
capital. But the profit on taking out this currency, or circulating
notes, is so very small that many banks do not issue as much as the law
allows.

These circulating notes must be issued under certain expensive
conditions. First--the bank must purchase and deposit with the
Treasurer of the United States an amount of registered United States
Bonds, equal at their par value, to the amount of the circulating notes
called for. Second--dependent on the kind of bonds deposited, the bank
must pay a tax on its circulating notes. Third--the bank must stand the
expense of plates for printing and the express charges for sending it
the original issue of its notes. Also, when any of its worn-out or
mutilated notes are sent to the Treasury Department, they are
destroyed, and the bank then has to pay the expense of re-issue and the
express charges for sending them to the bank that originally issued
them. The signature of the President and Cashier of the bank must be
affixed.

Therefore National Banks, in calculating the possible profit on taking
out circulating notes, have the following example to be considered in
issuing every one hundred thousand dollars of their notes:

Bonds purchased: United States
Registered 2% bonds to be paid
at par in 1930.

Price of bonds 104 $104,000.00
Par value of bonds purchased 100,000.00
Money worth 6%.
Income from bonds $2,000.00
Income from circulating notes loaned at 6% 6,000.00
---------
$8,000.00

_LESS DEDUCTIONS._

Annual tax on circulating notes $500.00
Sinking Fund to retire premium
on bonds at maturity, amount
to be charged off each year 181.00
Expenses (plates, express charges,
etc.) 75.00 756.00
---------
Net Income from Circulating Notes $7,244.00
Net Income from loaning $104,000.00 (net
cost of bonds purchased) at 6% 6,240.00
---------
Net profit on taking out $100,000.00 of
circulating notes $1,004.00

Hence the net percentage of profit on taking out National Bank notes on
this class of bonds, is about one per cent., based on their _present_
market price.

The profit on taking out circulation on other United States bonds is
even less.

Suppose the market price of the 2% bonds purchased was higher, say 108,
as it was several years ago, the profit would be even less. Also, if
the bonds decline in market value below par (as in case of war, for
instance), the bank must stand that loss; and purchase and deposit an
additional amount of bonds, so as to make the market value of the bonds
deposited equal to the amount of its outstanding circulating notes.

In order to retire its circulating notes and obtain possession of its
United States Bonds, deposited as security therefor, the bank must send
the Treasury Department an amount of lawful money equal to the amount
of the circulating notes it wishes to retire. It can then "withdraw a
proportionate amount of the bonds held as security for its circulating
notes."

But the law says that not more than nine millions of National Bank
Notes can be retired in any one month. Therefore, if the market price
of United States bonds goes up to a point where all profit on its
circulation is wiped out, the bank may have to wait several months
until previous requests for retiring circulation are out of the way. In
the meantime United States bonds may have gone down in price.

As has been stated, a National Bank _can_ take out an amount of
circulating notes, or National Bank currency, equal to the amount of
its capital. But the profit on the operation is so small (leaving out
the chances of actual loss) that many banks do not issue notes to the
full amount allowed. The following figures relative to the total
capital of all the National Banks, and the total circulation of these
banks on the dates stated, conclusively prove this fact. (These figures
are taken from the annual report of 1907 of the Comptroller of the
Currency.)

November 12, January 26, March 22,
1906. 1907. 1907.
Capital
Stock $847,514,653.00 $860,930,624.00 $873,669,666.00

Circulating
Notes 536,109,931.00 545,481,870.50 543,320,375.00

May 20, August 22,
1907. 1907.
Capital
Stock $883,690,917.00 $896,451,314.00

Circulating
Notes 547,918,696.00 551,949,461.50

It can be seen from these figures that the National Banks _could_ have
taken out _over three hundred millions_ more of circulating notes than
they _actually_ issued during the time stated. And these figures are
not exceptional.

Banks, other than National, "shall pay a tax of ten per centum on the
amount of their own notes used for circulation and paid out by them."
This tax is prohibitive and no State Banks issue circulating notes for
this reason.

THE SO-CALLED "SPECIAL PRIVILEGES" OF BANKS

In every political campaign, especially the National ones, the orators
talk a great deal about the "special privileges" of banks. But they are
never defined exactly.

According to them, one privilege (?) the bank enjoys is the power to
lend a certain per cent. of its depositors' money. But if it could not
do this, what reason would the bank have for existing? That is its
principal real source of profit.

Practically the only other privilege the National banks have, is the
right to take out National Bank Notes, or currency. As has been shown
in the remarks on "The Method of Issuing National Bank Notes," this
privilege allows so little profit that the banks do not use it to the
full extent of the law.

On the other hand, consider a few of the many risks the bank is
constantly taking. Every loan it makes is a risk. A few bad loans, made
through dishonest or visionary representations of its customers, may
blot out the bank's profits for a year or more. Every check or draft
cashed is a risk. Every check, draft, or note it takes for collection
is a risk. In fact, every transaction the bank undertakes is more than
ordinarily hazardous. Moreover the profits of the average city bank are
not large. Considering their responsibilities and the innumerable ways
by which they may involve the bank, the salaries paid the employes,
from the President to the messengers, are small. Also remember there is
no "water" in the stock of banks. The capital of every National Bank
must be fully paid in, before it is allowed to open for business; and
in most of the States, the banks, other than National, must have their
entire capital paid up within a year from their beginning. The net
profits of successful banks, located in cities with a population of one
hundred thousand or over, average about six to ten per cent. The
business man, when considering an investment in a mercantile or
manufacturing enterprise, generally counts on double that amount of
dividends.

If, as the politicians state, the banks enjoy so many "special
privileges"; it is strange that the people of every section of the
country do not rush in to organize and take stock in banks.

* * * * * *

Transcriber's note:

Minor typographical errors have been corrected without note.

Irregularities and inconsistencies in the text have been retained
as printed.

*** End of this LibraryBlog Digital Book "A Simple Explanation of Modern Banking Customs" ***

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