Now the law says that banks shall keep open _during certain _A Simple Explanation of Modern Banking Customs

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

+-----------+---------------+---------------+---------------+

+-----------+---------------+---------------+---------------+

| | 1 day | 1 day | |

+-----------+---------------+---------------+---------------+

| | 2 days | 1 day | 1 day |

+-----------+---------------+---------------+---------------+

| | 1 day | 1 day | 2 days |

+-----------+---------------+---------------+---------------+

| | | 1 day | 1 day |

+-----------+---------------+---------------+---------------+

| | 1 day | 1 day | 2 days |

+-----------+---------------+---------------+---------------+

| | | 1 day | less 2 days |

+-----------+---------------+---------------+---------------+

+-----------+---------------+---------------+---------------+

+-----------+---------------+---------------+---------------+

| | | 1 day | 1 day |

+-----------+---------------+---------------+---------------+

| | 1 day | 1 day | 2 days |

+-----------+---------------+---------------+---------------+

| | | 1 day | 2 days |

+-----------+---------------+---------------+---------------+

| | 1 day | 2 days | |

+-----------+---------------+---------------+---------------+

| |

| ~EXAMPLE.~--Paper dated March 15th at 90 days is |

| due June 13th. |

| |

| ~TO PROVE.~--Exclude day of date, then 16 days in |

| March, plus 30 days in April, 31 days in May, 13 days |

| in June equals 90 days. |

| |

| Paper apparently due, from this table, on February |

| 30th, is, of course, due March 2d, or apparently due |

| April 31st, is, of course, due May 1st. |

| |

| In Leap Year allowance must be made for 29 days in |

| February. |

| |

| For paper payable in States allowing grace use table, |

| then add days of grace. |

+-----------------------------------------------------------+

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.

Now the law says that banks shall keep open _during certain hours_ on