Bank Statements.

With this explanation of the various items, we can now use an outline of our bank statement to show how the institution "works."

Assets

Liabilities

Loans........$400,000.00

Capital........ $100,000.00

Bonds........ 100,000.00

Surplus....... 75,000.00

Due from banks 50,000.00

Circulation.......... 75,000.00

Banking house. 50,000.00

Deposits...... 450,000.00

Cash......... 100,000.00

$700,000.00

$700,000.00

Assuming that the bank has started with capital fully paid in and with some deposits, a building is secured, a few loans made, bonds purchased and the proper proportion of cash or reserve is placed in the vaults. Accounts are opened with other banks, a part of the earnings is set aside in the surplus fund and the bank finally grows to the dimensions shown in the statement. Now let us reverse the process, and see what happens if a panic should occur or the depositors want their money. We must keep in mind the fact that both sides of the statement are always equal. As the deposits begin to fall, the cash is the first resource available to meet the drain. Then the amount due from banks is called upon and other institutions pay this amount with cash which helps to keep the bank going. Loans are falling due, and as they are paid this money also goes to the depositors. Then perhaps the bonds are sold and so until all the resources are realized upon and the depositors are paid off. In actual practice, however, when trouble starts, all the depositors want their money at the same time and they want it right away. They do not know that basis-of - credit money or deposits cannot be converted into medium-of - exchange money at short notice. When this situation arises, banks are compelled to suspend specie payments because there is not enough specie to go around. Making use of the note issue function, the bank would pay the depositors with its own notes or promises to pay which circulate as money. Now we see why note issue is such an important matter. Bank notes to be useful, as money, must enjoy the confidence of the people or they will not be accepted. Now let us apply the Federal Reserve Act to our bank statement. Under this Act the bank, instead of being obliged to suspend payment to its depositors, can take a part of its loans and discounts to the Federal Reserve Bank and the Reserve Bank will give its own notes in payment. In the statement this reduces the bank's loans and increases its cash. The public, knowing that these great banks must keep a large gold reserve, will accept the notes and the panic or demand for money slowly subsides. The scare being over, and having no use for the money as a medium of exchange, the people redeposit it in the banks, the banks deposit the Federal reserve notes in the reserve banks and they are then cancelled and retired from circulation.

Let us suppose our bank has made some "bad loans" that are not paid when due. This reduces the assets so that they will not equal the liabilities. What happens? The bank reduces the surplus fund the same amount so that there is no loss to the depositors. If, however, the bad loans are larger than the surplus, the bank will be closed by the Banking Department or the Comptroller of the Currency, and the stockholders are then liable for an assessment equal to the amount of stock they hold to make up the loss.