Banking Laws

aws affecting banking by which banks are organized, regulated and controlled in their relations with the public and with each other, are the result of many years' of experience in banking. As we have had occasion to note in the opening chapters, banking is based primarily on natural or economic laws. Statute laws pertaining to banking have been added to and revised from time to time, not because there has been any appreciable change in the fundamentals of business, but because men through experience and a study of the lessons taught by experience have found how to correct flaws in banking methods and so avoid the dangers and pitfalls of a previous generation. Thus banking systems have undergone a gradual but steady change toward safer and more efficient standards. It is like the discovery of a safe channel in a narrow and dangerous waterway. After there have been many wrecks and disasters the difficult harbor is finally reached in comparative safety by following buoys and lights that mark the location of submerged rocks. So with banking laws. Each is a lighthouse that safeguards all who would embark in this business of chance and risk, from losing ship and cargo upon the same treacherous reef that has wrecked many another.

A study of financial history with its eras of commercial prosperity alternating with crises and depressions will disclose the reason for many present-day banking laws. In our own country where each state has had and still has a banking code of its own, modified it is true by the national system made necessary by one of the most terrible wars of modern times, we can trace the effect of all these factors upon our latest legislation, the Federal Reserve Act.

It is not within the scope of the present volume to discuss the Federal Reserve Act. Before the student is able to grasp the true significance of its provisions, he must first have a clear conception of the underlying principles involved in banking and banking laws, and it is with this elementary phase of the subject that we are here concerned. We may, therefore, discuss briefly a few typical national bank laws that will serve to illustrate the nature and purpose of all banking legislation, whether state or national.

Many of the more important regulations have to do with the capital, in fact nearly all the privileges and restrictions of the business are based directly or indirectly upon this first item of the bank's liabilities. The minimum amount of capital is fixed by the population of the town or city where the bank is located; the larger the city the greater the amount of capital required. The reason for this is that since there can be no limit to the amount of business a bank may do, it is necessary to anticipate the probable security that must be given to prospective depositors who would very likely be more numerous in a large city than in a small village. To make the security even greater, stockholders of all national banks and also in many state institutions are doubly liable. That is, if the bank should fail with not enough assets to meet the claims of depositors and other creditors, not only would the money due the stockholders represented by the capital and surplus be forfeited, but the stockholders may be assessed an amount up to the par value of their stock to meet any deficiency. A bank may not hold or purchase its own stock since the effect of such a privilege would be to reduce the amount of the capital by that much. Not all the provisions in law tax the stockholder or owner of the bank to safeguard the interests of those who trust their deposits with the institution. There is one provision which protects the capital as well as the deposit. National banks are required to build up a surplus until that item is at least 20 per cent, of the capital stock.

Any losses can then be charged to this fund without depreciating the capital. Thus it is the aim of all well-managed banks to create as large a surplus as possible which gives additional strength and has a tendency to attract deposits.

One of the greatest financial dangers that beset a nation is credit inflation. In "boom" times, when all lines of trade are active, crops good, labor well employed and everybody enjoying unusual prosperity, there is a national tendency for men to reach out for even greater riches. This is the result of that predominant characteristic of human wants which we noted in an early chapter, the insatiability of men's desire for more and better things. During such periods as we have described, men are apt to become overly optimistic as to their prospects. The result is that credit is often extended too freely, being based upon hopes founded on fancy rather than on fact. When several important ventures collapse, the credit that was based upon them becomes valueless and then a sudden fear takes hold of the public. The result is a "panic." It is the purpose of such laws as the Federal Reserve Act not only to curb an undue expansion of credit, but also to help banks prevent a panicky situation from spreading.

There are many safeguards provided by law against credit inflation. As the first may be set down the trained judgment of the sagacious banker who investigates his customer's statements upon which the loan is to be based. The banker knows that if the loan cannot be paid at maturity, his bank may lose money. Then there is the scrutiny of the bank examiner to be counted on; will that loan pass his inspection? There is the further restriction that not more than 10 per cent, of the capital and surplus can be loaned to one interest. This, too, has a tendency to prevent too wide an extension in any one direction. It prevents the bank from risking too many eggs in one basket. Next, then, is the provision in the Federal Reserve Act which restricts rediscounting to loans growing out of actual commercial transactions. That is, the loans must be "self-liquidating" or payable out of the proceeds of the sale of the commodity the loans represent. It will not do to rediscount real estate loans, because real estate is a fixed and constant quantity which does not increase merely by change of ownership, whereas staple goods that men use in the satisfaction of wants are produced, bought and sold - and paid for - at all times and in ever - increasing amounts. And when more money is needed to handle the increase of business, the issue of Federal reserve notes must be "covered" by 100 per cent, of paper representing these liquid commercial loans. The issue must also be backed by 40 per cent, gold reserve. If we trace the entire process back to the original loan we discover that at every step the law throws one safeguard or another against inflation.

The successful banker, therefore, is not he who is satisfied merely to avoid losses and make profits for his stockholders; he is the man trained not only in local credits, but also in national and international conditions. He is well versed in fundamental economics; he knows the financial history of his own and other countries, he does not protest against sound bank laws because he knows why those laws are written. In fact, for him there is no law, because his judgment is proof against those errors which law seeks to prevent. And finally, he never forgets that banking is conducted for the benefit of all the people and not for the exclusive profit of the banker; that it is other people's money as well as his own that is entrusted to his care, that it may be wisely used for the welfare of all men.

Bank Examinations

Against the liabilities the bank must hold an equal amount of assets, otherwise the bank is insolvent and must close its doors. If we go into a restaurant for luncheon we are not satisfied merely to read the bill-of-fare; we want to try some of the dishes for ourselves. If we order chicken soup and the waiter brings us a bowl of warm water, we refuse to accept it, no matter if the proprietor insists that it is chicken soup that has been set before us. But when a man wishes to purchase the stock of a bank or deposit money with it, he cannot personally test for himself the quality or quantity of the assets set forth on the bank's statement and thus assure himself that the bank is sound. There may be no intention whatever on the part of the bank to deceive or defraud. The bank itself may be deceived in its ability to pay the amount of the deposit on demand just as borrowers often honestly overestimate their ability to repay a loan when it is due. Therefore the law provides an official examiner who "tests the soup" for the general public who may deposit or invest their money in the bank.

The purpose of bank examination is twofold; first, to see that the institution is solvent, having a dollar of assets with which to pay every dollar of liabilities; and, second, to ascertain that the bank is obeying the law. From the examiner's viewpoint the principal reason for insisting upon a strict observance of the law is that the bank may continue to be solvent. The nature of these laws will be explained in the final chapter.

Bank examinations are of four kinds, two of which may be said to be internal and two external. In the first class are examinations by a committee of the directors and examinations by certified public accountants whom the directors may employ to make this audit and examination for them. The official Federal, or State examinations, and clearing house examinations may be classed as external examinations. The internal examinations are, of course, not unexpected by the officers of the bank, who, with the directors, arrange for them. The official or external examinations are never announced in advance, and hence they may be said to be more effective if there should exist any condition due to fraud or weakness that might be covered up temporarily.

It is rather difficult to draw the line clearly between an audit and an examination; yet the examination by directors or accountants for the directors is more in the nature of an audit than an examination. It is the duty of the auditor of a bank to see that all settlements are properly made by the various clerks and departments, to check all cross entries on the books, to prove interest calculations, to reconcile accounts with other banks and to supervise the entire accounting system generally. In small banks one of the officers has charge of this work. When the directors make their annual or semi-annual examination they certify to the correctness of all transactions as of a certain day. Their examination includes a proof of the cash and a checking up of the loans and discounts. In very large banks they usually have the assistance of the clerks who are interchanged so that the same men will not be used in proving any books or cash to which they have previously had access. Bank directors make their examinations to assure themselves that the bank's affairs are in proper condition. Although they may commit the operation of the bank to the authorized officers, the directors cannot thus escape their responsibility or liability under the law for the safe administration of the institution. The employment of a certified public accountant to do this work is a more thorough way of making an internal examination, since the accountant and his assistants are trained men and have the advantage of a disinterested point of view.

The National or State examiners make their visits without notice; usually just after the bank has closed for the day. The settlement for that day's business is then checked and all cash, checks and securities are put under seal so that no substitution can be made over night. The examination then proceeds the following days until every detail of the business is investigated and accounted for. The general policy of the bank is taken into consideration, as indicated by the nature of the loans, the borrowing habits of the customers, the methods of accounting used and the general observance of safe and conservative business rules. Like the physician who examines a patient, the official examiner bases his methods upon the assumption that there may be something wrong which it is his duty to detect and remedy.

The clearing house examination plan is a sort of combination between the directors' examination by certified accountants and the official examination. The clearing house examiner is employed jointly by all the banks of a city and his examination is made for them, but in his power of criticism and in the timing of his visits he is independent. His examination is just as thorough as that made by the Federal or State examiner, in fact, in some cities the two examinations are conducted jointly. Where the clearing house examination differs is in the attention given to the loans and discounts. The clearing house examiner makes a record of all loans over a certain amount in every bank in the Association, so that he is able to base an intelligent opinion on the true value of the bank's largest group of assets. This information is kept under lock and key by the examiner and is used by him as credit memoranda. He is thus able to advise the banks if any local dealer is borrowing more heavily than his business warrants. The official examiners are limited in their powers of criticism to infringement of the laws, but it is the duty of the clearing house examiner to act in an advisory capacity, and to seek to prevent any unsound condition from arising. The Federal Reserve Act provides for special examinations of member banks for the purpose of informing the reserve banks of the lines of credit being extended by member banks. In principle, these special examinations are similar to clearing house examinations.

Clearing Houses

A bank check may be defined as a written order drawn upon a bank by a depositor directing the bank to pay a certain sum of money to bearer, to a payee named on the instrument, or to someone else named by the payee. In the majority of cases the payee does not himself present the check for payment. Instead he deposits it to his credit in another bank, thus constituting that bank his agent. The principal business dealings that banks have with each other grow out of the use of checks by individuals and their presentation and collection by banks.

The extensive use of the check is interesting from the bank clerk's point of view. Approximately 90 per cent, of payments are made by check. These settlements are not made in money but in credit. That is to say, the credit that A has with his bank is transferred to B in the payment of debt through the use of the check. Very little money, in comparison with the volume of transactions involved, ever changes hands. This use of the credit instrument instead gives employment to probably more than 75 per cent, of all the employees of banks doing a commercial business. Tellers, bookkeepers and their assistants in all departments are engaged principally in keeping the records incidental to deposits and withdrawals by check.

In a small town having but one bank all of the checks growing out of purely local business are drawn upon that institution. Let us suppose that A and B are both depositors in the same bank. A gives B his check for $100.00 in payment for a horse. It is not necessary for B to present the check, receive the money and then redeposit the cash to his own credit. Instead, he deposits the check, the bank crediting his account and charging the account of A. The same process is being followed by all the depositors in making settlements with each other. No actual cash changes hands; there is merely an offsetting of debits with credits on the books of the bank. This is known as the "clearing principle."

Banks make use of this principle in settling accounts with each other. The agency through which they avoid the constant transfer of money among themselves is the Clearing House. The term is used to apply either to the building used for this purpose or to the organization or association of the banks united together for this and other purposes. In its practical sense the clearing house represents a plan rather than a tangible thing. Let us suppose there are five banks which are members of a clearing house. At the end of the day's business each member finds itself with checks drawn upon the other four. The checks of each are endorsed with the bank stamp, enclosed in a separate envelope for each bank and a total of the checks is listed on the outside. The totals are then listed opposite the bank names on a double column sheet and a footing is struck. In theory each bank assumes that these checks are not payable by the individual banks but by the "clearing house." Therefore, at a fixed time, usually about ten o'clock A.M., each bank sends a messenger to the clearing house with its checks against the other banks. In a small town the office of one of the members is used as a clearing house and an officer of that bank acts as "manager." The packages are then exchanged. Each clerk writes opposite the proper name, the amount of the checks on his bank presented by the others.

These amounts are added up and the smaller amount is subtracted from the larger. If the messenger receives more checks on his own bank than his bank had on the others, then he is a "debtor." If the reverse is true then he is a "creditor." The manager then takes the record of the debtor and creditor balances which, of course, must be equal, thus proving the correctness of the exchange. The clerks return to their respective banks having checks only on themselves, whereas they came to the clearing with checks only on their neighbors. The whole transaction will not have consumed more than ten minutes. Even in the very largest cities, with millions of dollars involved, the exchange is made almost as quickly. The large cities usually have a separate building for clearing purposes and employ a regular manager who is in charge of the clearing process.

The exchanges having been made, the banks now prepare to settle the balances. There are various ways of doing this, depending upon the size of the city and the number of banks in the clearing house. In the smaller towns the manager of the clearing house draws drafts upon the debtor banks which he gives to the creditors, who then present them and receive either the cash or its equivalent. Or the manager may deposit the drafts of the debtor banks with one of the members and draw his own checks against this deposit in favor of the creditors. Another method is to make payment by draft upon the Federal Reserve Bank of the district or upon other reserve agents. In the larger cities settlement is made in cash or its equivalent, payment being made by the debtor banks to the clearing house which acts as agent in paying over the money to the creditor banks. To avoid the handling of even this money, many clearing houses conduct a depository where deposits of gold and currency are received, and certificates in large denominations, $5,000.00 and $10,000.00 are then issued. Settlements made with these certificates are upon a cash basis, yet the danger of loss or error in handling the actual money is avoided. The saving of time and the use of money is well illustrated by the fact that in New York Cityevery clearing house member is enabled to exchange checks with every other member in about fifteen minutes each day, and the balances to be settled average less than 5 per cent, of the total checks exchanged.

Certain rules are prescribed by clearing house associations covering the method of conducting the exchanges and regulating in general the business which the banks do with each other. For example, the rules fix the hour for clearing, method of making settlements, returning of unpaid items, hours for opening and closing the banks, and many other matters that are adjusted in the interest of regularity and uniformity.

Some of the associations employ an official clearing house examiner who supplements the examination by the national or state bank examiner, paying particular attention to the loans and discounts. He is employed by the banks to give them advice as to their methods of doing business, his information and suggestions being extremely confidential. He makes record of the lines of credit being extended by the various member banks and is thus able to check unsound lines before any damage is done. His functions will be described in greater detail in the next chapter.

The clearing principle as applied to check collection is not limited to the items payable in one city. Many clearing houses have also a department for the clearing of country checks. In such cases all the member banks send their out-of-town items within a certain district to the clearing house which operates as one bank acting for all. Thus, instead of receiving a daily letter from each bank in the city, the country bank gets all its checks from that city in one letter from the clearing house, to which it then remits with a single draft. The Federal Reserve Act has carried this process one step further by requiring the Federal reserve banks to act as clearing houses for their member banks. Checks which each member bank sends to the Federal reserve bank acts as the credit offset to the checks which the Federal reserve bank receives on that member. It may be said that much of the Federal Reserve Act is the result of experience with clearing house methods and regulations.

Trust Companies

A trust is anything of value, such as money or personal property which is committed into the care of another for the safekeeping, use or benefit of the owner. This implies confidence on the part of the owner in the integrity and reliability of the person trusted who is called the trustee. Trustees are appointed because those who have property either cannot or, for one reason or another, prefer not to act for themselves. Thus, while all banks are in a broad sense trustees for their depositors in that they care for the deposits of their customers, a certain group of banks are organized primarily for the purpose of administering trusts and acting in a fiduciary capacity generally. Such banks are called Trust Companies. Trust companies are of comparatively recent origin and they are the newest of the three great groups of banks. The step in their development or evolution has not been from the bank to the trust company, but from the individual trustee to the corporate trustee or trust company. In the early days of the country, individuals assumed the obligation of trustees for other individuals and in fact this custom still obtains, especially in sparsely settled districts. As men have become more wealthy and as accumulations of property have increased, there has arisen the need for some organized and efficiently trained body of men who could administer the estates and affairs of other men whether living or dead. There are many reasons why the trust company is better fitted than the individual to perform the functions of a trustee. The individual trustee may die, or move away, or become incapacitated through illness or lack of knowledge of the law. The trust company may be said to be perpetual; it is managed by men trained both in law and in finance who give their entire time to this particular business.

Trust companies act not only for individuals, but also for societies, corporations and municipalities. Their principal functions are to act as executor of wills, administrator of estates, guardian of minors, agents for individuals, trustee under mortgages, transfer agent and registrar for corporations, fiscal agent for governments, states and municipalities, and receiver for firms and corporations. As executor or administrator they administer the estate of the deceased according to the law, and the fees for such service are fixed by law at the same rates as individuals are permitted to charge for like services. As agents for individuals they may care for property, collect rents and perform whatever other duties they may be charged with. As trustee under mortgages, the trust company safeguards the interests of the mortgagee and will foreclose the mortgage if principal or interest are unpaid at maturity. This particular feature of the trust company's business is usually confined to acting as trustee under a bond issue which is secured by a mortgage upon corporation property. As transfer agent and registrar, the trust company certifies as to the genuineness of either a stock or bond issue and records all transfers of such stock or bonds. The company does not guarantee the payment of bonds or of dividends upon stock; it merely vouches for the regularity of issue and the validity of the transactions involved. As fiscal agent for civic divisions, money is collected and disbursed upon warrants and in the payment of interest on bond issues, etc. In addition to the above, trust companies act in various other capacities of a similar nature.

The banking department of a trust company is conducted like any other bank. Deposits are received subject to check, interest is allowed on savings deposits, and in practically every particular this branch of the business is the same as that of the ordinary bank of deposit and discount.

Tellers receive and enter deposits, pay checks, collect drafts and notes; bookkeepers keep ledgers and make credit and debit records just as the work is done in any other bank, and similar books and systems of accounting are used. In Minnesota, Michigan and Wisconsin, trust companies are not permitted to do an active banking business, but are restricted to the handling of trusts and other fiduciary matters. As to loans and investments permitted trust companies, state laws differ, but the general statement is true that they employ their funds just as do the commercial state banks.

It is chiefly in the trust department that the functions of a trust company are distinctive. The estates and funds of both the living and the dead are cared for by this department. The organization of the trust department is kept separate from the banking department. As money is received by the trust department representing the income from property or investments of funds held in trust, it is deposited in the banking department and is checked against by the trust department as if the department were an outside depositor or customer. It would be possible for either department to exist without the other. The field of the trust company has become so highly developed and its trust functions have become so well understood by the public that there is a growing demand for a further extension of trust company powers. This is evidenced by one of the provisions of the Federal Reserve Act, which gives to national banks the privilege of acting in a fiduciary capacity when not in contravention of state laws.

Savings Banks

As we have seen, banks belong to three main groups - commercial, savings and trust. It would be more exact to say that there are in general three kinds of banking, because one bank may, and often does, transact these different kinds of business under one roof. National banks are essentially commercial banks, yet many of them conduct savings departments, and the Federal Reserve Act permits them to act as trustee, executor, registrar, etc. - trust company functions - when not in contravention of state laws. State commercial banks are like national banks in these respects. Deposits in commercial banks may be made up largely of loans, or, putting it differently, there are deposits of credit as well as deposits of money. In the sense that deposits of cash are deposits of money that has been "saved," all banks may be said to be institutions for the receipt and safeguarding of savings. This use of the word savings is, therefore, quite common in bank names, although a bank using the word in its title may in reality be a commercial bank. In the State of Iowa the law provides for the organization of two kinds of banks, "state" banks and "savings" banks, and the designation, savings, is required by the code. Inasmuch as there are certain advantages to be derived in organizing under the savings part of the code, we find many savings banks, so called, in Iowa which are in point of fact ordinary commercial banks. The attention of the student is directed to this point because of the confusion that exists on account of the variation in the use of terms in different states. Thus in Massachusetts reference to a bank directory will disclose but three kinds of bank titles - national banks, savings banks and trust companies. These last are virtually commercial state banks with the privilege of doing "trust" business if they so desire.

Savings banks in the strict meaning of the term are banks organized to receive the savings of depositors, to invest them in loans and securities of the very safest kind, and to pay the depositors a fair rate of interest. The relation between the savings bank and its customers is of a close and confidential nature. The depositors are for the most part of the poorer classes, the working people and the thrifty of all sexes and ages who seldom accumulate enough money to invest it for themselves even if possessed of sufficient business judgment to warrant their doing so. We find that both the laws of the state and the rules of savings banks throw every possible safeguard around the savings bank depositor. In many states not only are savings banks restricted as to the kind of investments they may make, but the law even goes so far as to designate a list of specific securities which are classed as "legal investments for savings banks and trust funds." The two most common forms of investments for savings banks are mortgages upon real estate, preferably homes, and bonds. Among the latter railroad and municipal or civic bonds are given the preference, since the margin of safety is greater. Such investments are possible since savings deposits are of a permanent nature. The savings bank is the depository for money laid by for a "rainy day," old age, sickness and similar needs. Parents open accounts for their children, partly to teach them the habit of thrift, partly to defray the expenses of education. The young married couple will deposit the funds resulting from little household economies that they may build themselves a home, and there are thousands of savings accounts the owners of which may have no other definite purpose in mind except the instinct to save, which is natural to the normal human being, a habit that man has in common with other creatures of the earth.

There are two kinds of savings banks in the United States, the stock savings bank and the mutual savings bank. The stock savings bank, as the term implies, has capital stock and is organized for profit. The mutual savings bank, found almost exclusively in the section east of Ohio and north of Virginia, has no capital stock, the profits belonging to the depositors and being paid to them as interest upon balances. The stock savings bank has a board of directors and the affairs of the institution are managed very much along the lines of the average commercial bank. The mutual savings banks are managed by a board of trustees, which is a self-perpetuating body chosen for their integrity and standing in the community. Of the two, the mutual banks are by far the largest, there being at least four with deposits of over one hundred millions of dollars. The report of the Comptroller of the Currency for 1913 showed total deposits in mutual savings banks to be over four billions of dollars, while the deposits in stock savings banks were less than one billion. The postal savings bank system, conducted by the postoffice department, is a concession to those who for one reason or another do not trust banks. Money that would otherwise be hoarded is put into productive channels through the operations of the postal savings system.

Savings bank accounting differs from other bank accounting only to the extent that the business is conducted with a different class of depositors, whose needs are not the same as the needs of the business man and merchant. Savings accounts, being comparatively inactive and small as compared with commercial accounts, are usually recorded upon ledgers and other records by number. Savings bank balances are not subject to check as a rule, nor could they very well be since the investments of the bank are not sufficiently liquid to permit withdrawal without due notice. Some banks have a fixed rule requiring two weeks' notice before money may be withdrawn; others pay upon the presentation of the pass-book, but practically all of them reserve the right to take advantage of the law, when necessary, which permits a savings bank to demand sixty days' notice of the withdrawal of funds. The pass-book used by a savings bank is used as a voucher or a receipt, both for money deposited and money withdrawn. It is also evidence of the contract between the bank and the depositor. The pass-book must always be presented when money is withdrawn, the depositor being required to identify himself not only by possession of the book, but by his signature and his ability to answer test questions, for example, his mother's maiden name. The bank is not required by law to be familiar with the signature except that it is a means of identification. Many of the depositors may be illiterate or they may be children whose handwriting undergoes rapid changes, consequently many savings banks use the fingerprint method of identification. These precautions are necessary to prevent money being paid out to imposters who may have gotten illegal possession of a pass-book. In order to prevent depositors from using the bank as a temporary depository for idle funds there is usually a limit placed upon the amount anyone may deposit in a single year, and balances over a certain amount, $3,000.00 for example, do not draw interest.

Stocks And Bonds

A bank was described as a storehouse where this accumulated surplus is gathered together and loaned out to those who need it in carrying on agricultural, industrial and commercial enterprises. Not all capital is of the same kind; it is either "fixed" or "circulating." Fixed capital is represented by such things as buildings, tools, machinery, rolling stock, etc. It is fixed in the sense that it needs to be renewed only at long intervals. Circulating capital, on the other hand, must be constantly renewed and it is represented by the things for which money is borrowed from banks - raw materials, fuel, funds for wages, etc. Fixed capital may be defined as money that is invested; circulating capital is money that is loaned. These are not exact economic definitions, but they will serve to show the difference between the two from the banker's point of view.

With the supplying of fixed capital the commercial banker has nothing to do. The money entrusted to his care must be so loaned as to be available upon the demand of his depositors, or at least within a reasonable interval. Obviously money invested in the fixed capital of any business cannot be withdrawn at will. Stocks represent this kind of capital. The stockholder becomes part owner of the business in proportion to the amount of capital stock owned. He shares the risks incidental to the business and he also enjoys the profits if the venture is successful. Stocks have neither maturity nor a fixed return in the shape of interest. The only way the stockholder can recover his share of the capital is to sell it to someone else. For returns he must look to the dividends which are paid only if profits are made.

Indeed, the stockholder as part owner is liable to an assessment to make good when losses occur. Stockholders of national banks, for instance, may be assessed an additional amount equal to their stock if the assets of the bank become reduced through losses and are not sufficient to meet the liabilities.

Bonds, on the other hand, are loans. The bond-holder has loaned the "obligor," or the corporation issuing the bond, a sum of money represented by the amount of his bonds. The bond is a promise to pay. It has a fixed and definite maturity and yields a known rate of interest. Therefore bonds are suitable investments for banks, whereas stocks are not. The difference between bonds and ordinary promissory notes is one of dimensions. A bond issue is for millions, rather than hundreds, of dollars; the bonds fall due after a period of years instead of months or days, and they are issued by large corporations, municipalities and governments, rarely by individuals. The issue is split into parcels of $1,000 or less, so that the loan may be widely distributed. Capital is accumulated into stocks, bonds or bank deposits in much the same way, that is, by large or small amounts in proportion to the surplus-wealth-creating ability of the investor or depositor.

The study of the value of bonds is of a technical nature and closely resembles the study of credits. The bond expert is one who is familiar with the conditions surrounding every issue of bonds. He is able to appraise the value of the security back of them, he has exact knowledge of the business of the obligor, or, if issued by a municipality, he investigates the amount of taxable property, the interest on an issue of school bonds, for instance, being paid out of taxes upon property owners. In addition to purchasing bonds for investment, many banks also have a bond department. This department buys large blocks of various issues, which are then sold to regular customers of the bank at a profit or commission. The principal book of record in this department is the bond register upon which is entered a full description of the bonds held. Bonds take their titles from certain characteristics, as, for instance, "government,", "railroad," "school,"- character of the obligor; "extension," "refunding," "water-supply," - purpose of issue; "4's," "5's,"- rate of interest, etc.

A place where buyer and seller may come together and trade is known as a market. By the establishment of markets the seller is provided with a place where he may look for prospective purchasers and vice versa. Stocks and bonds are dealt in in stock markets or exchanges. Those who buy and sell stocks and bonds for others are "stock brokers." All securities are practically sold at auction, the broker being paid a commission for his services. The prices at which sales are made are published broadcast, so that the banker who accepts stocks or bonds as collateral security for loans is able to estimate their value even if he is unfamiliar with all the conditions that give value to them. All bankers should familiarize themselves with local issues of both stocks and bonds, and they should know where to get reliable information concerning other issues which may either be offered for sale or used as collateral upon loans. Such information is secured through investment specialists, who may be described as credit men who specialize in information regarding corporations, firms, or municipalities borrowing money through bond issues.

Loans And Discounts

Banks exist, as we have learned, in order that the surplus wealth which is stored up may be loaned out and put to use through commerce, trade and industry in the production of more wealth. Banks perform this function through the medium of loans and discounts. The difference between the two terms is purely technical. All bank investments, whether by the discount of promissory notes, straight loans, mortgages or bonds, are loans.

We can best understand this subject from the viewpoint of the borrower. A purchases $1,000.00 worth of leather from B, which A intends to manufacture into shoes, which he will sell at a profit. The whole operation, from the time the leather is secured until the shoes are sold, will take A three months, let us say. He, therefore, executes a note in which he promises to pay B $1,000.00 ninety days from date. B, however, prefers not to wait until the note matures, that is to say, the time A will have received the money for the shoes with which he will pay for the leather used. B can use the money in his own business at the present time. He takes the note, A's promise to pay, to the bank and the bank "discounts" it; that is, the bank gives B credit for the amount of the note less the interest for ninety days. In effect, the bank has loaned B $1,000.00 for three months, but at the end of that time, when the note falls due, it is A who repays the bank and not B. Discounting may be defined as the process through which future maturities are converted into immediate cash.

In the above case the bank has loaned B money on the security of A's note. This transaction, in which three parties are involved, A, B and the bank, is commonly called "discount." The technical term "loan" is applied when there are only two parties directly concerned, the bank and the borrower. For instance, let us suppose A, a regular customer of B, has bought $1,000.00 worth of leather. Two other methods of making payment in which banking is involved are possible in addition to the first example given. B may offer A a discount if the bill is paid in cash within ten days. In order to take advantage of this discount, A will go to the bank and borrow the $1,000.00 with which to make immediate payment. He makes the note payable to the bank instead of to B, secures the money and makes payment, thus getting the advantage of the discount offered by B. It will be noticed that B is put to practically the same expense in either case. Still another practice would be for B to extend credit to A on what is known as "open account." That is, for a certain period agreed upon between buyer and seller, B's books will show that A owes him $1,000.00. But B needs cash. He does just what A did in the preceding example: he borrows money from the bank on his own note.

In the case of the discount, if A fails to pay the note when due, the bank may look to B, who has endorsed the note, upon the strength of which B was able to borrow from the bank. In the case of the loan, however, with no third party involved, the bank often requires protection in the shape of collateral, such as stocks, bonds, warehouse receipts or any other negotiable paper. Or the security may be real estate, if the bank is permitted by law to make loans secured by real estate.

There is a wise provision in the National Bank Act which limits the amount a bank may loan to one individual or interest to 10% of the bank's capital and surplus. Many states have a similar law, the purpose of which will be discussed in a later chapter. It becomes necessary, therefore, for large industries which borrow heavily to distribute their loans among many banks. This is accomplished through note brokers, who "buy" the notes of such firms and then "sell" them to any bank having more funds than there is demand for from their own local customers. These notes are known as "commercial paper." Banks often find themselves in the same need of cash for reserve or other purposes as individuals or corporations, and they, too, take advantage of the process of discounting by re-discounting their loans with the Federal reserve banks.

Loans are of several kinds in addition to the ordinary commercial loans or discounts which we have been discussing. People who deal in goods, such as manufacturers, jobbers, retailers and the like, need money at certain seasons to buy raw materials, replenish stock, pay for labor, etc. Loans for these purposes have fixed maturities because the money will be "turned over" in a definite time, represented by the period between the production and consumption of the commodity dealt in. Dealers in credit and money, investors, brokers and kindred lines borrow money for indefinite periods, since there are no certain rules which govern the demand for their goods. A man will buy an overcoat in the fall of the year, but he may buy a bond or a piece of property at any time. Hence we have the "demand loan" which may be paid at any time at the option of either the borrower or the bank. The "call loan," usually found in cities where there is a stock exchange, is of the same nature. Call and demand loans are almost invariably secured by collateral. Mortgage loans are loans secured by a pledge of real estate or personal property. In the West growing crops or live stock are frequently used as mortgage security.

Loans and discounts are handled by an officer of a small bank, but in larger institutions a separate department has charge of the records and the mechanical details of the work, although the actual loaning of the bank's money is always done by an officer of the institution, regardless of its size or kind. A kind of journal record is kept of the loans made each day. Sometimes this book is known as the "Offering Book," in which is entered every note offered for discount. Those not accepted, or undesirable loans, are stricken off this original book of entry. The loans made are transferred to the loan or discount register. This is usually a double page book, the record extending across two pages. In columns of suitable width are entered the following records of each loan: maker, endorser (or collateral), amount, where payable, when due, rate, discount, proceeds. This record may vary as to details. For example, one register may be used for both time and demand loans, secured or unsecured, etc., while other banks may find it advisable to use a separate register for each kind of loan, or if a single register is used, further detail is provided for.

The loans are then posted on the Liability Ledger. This record consists of the "liability balance" of each borrower, either on notes he has signed or notes he has endorsed. His liability as borrower is kept in columns separate from his - liability as endorser or surety. The first record may be used in accounting, since the sum of the balances due by all borrowers will prove the corresponding figures on the general ledger, while the figures showing liability as endorser or surety are useful chiefly for credit purposes. The loans are next posted on the maturity tickler, which is simply a daily memorandum of loans as they fall due. This completes the records, the notes being then filed in a portfolio in the order of their maturity. Collateral is listed upon cards and then placed in a proper vault, or the collateral may be recorded upon the face of an envelope in which it is enclosed. Provision is made for keeping records of substitutions of collateral, and when the borrower pays the loan he signs a receipt for the collateral which is returned to him.

The bank, if it be a commercial bank, is always careful to invest its money in loans that mature in regular order. That is, unless loans are falling due each day, the bank will not be in position to extend credit to its customers as they need it. The loaning officers keep close watch on the maturity tickler which guides them in placing loans. There are seasonal demands for money, as for example, the crop moving period, when there must be plenty of money available for the needs of borrowers. Not all the bank's customers are borrowers, however; the needs of the depositor must also be taken into consideration. When a bank makes a loan, the usual practice is to increase the deposit account of the borrower by the amount of the loan. As a depositor the borrower is given the privilege of drawing checks against his balance, and the bank must be in position to meet not only normal demands, but also unusual and at times unexpected withdrawals. It would not be able to do this if all the loans were of one kind. A certain proportion of its funds may be loaned on "commercial paper," that is, notes bought from brokers which the bank is under no obligation to renew at maturity. Still another portion may be invested in good bonds that will find a ready market in case of need. These may be sold if it is necessary to increase the supply of cash. Bonds furnish such an excellent form of liquid investment in this connection that they are sometimes called "secondary reserve." Before taking up the subject of bonds and their uses, we will discuss the credit department.

Let us go back to our little country bank, situated in a town of five hundred people. Here we would find every member of the board of directors, the president, cashier and the general clerk of the bank more or less intimately acquainted with every business man in town. If a customer of the bank offers a note for discount, the cashier seldom needs to ask questions. He knows the character of the borrower, his next door neighbor, perhaps. He knows about his client's business needs and habits, because he himself does business with him. He is therefore able to decide whether or not the loan is a "safe risk" out of his own knowledge of the facts. In a larger community it would be impractical, if not impossible, for the cashier, in addition to his other duties, to keep track of every local borrower and the bank may employ a "credit man" who specializes in credits. The next step is the organization of a credit department usually in charge of one of the officers of the bank.

The credit department collects and files every available bit of information concerning people or firms that borrow money. This material consists of financial reports, press clippings, personal interviews, statements of condition and, in fact, every item that has even a remote bearing upon the standing of borrowers. It requires technical training of a high order to properly classify and analyse this data, but the fundamental idea is to get down to the same knowledge of the true facts as our country bank cashier has at his command, with respect to his neighbor. Credit is based upon character or, as bankers put it, the "moral risk." A simple, but practical definition of credit is "the ability to buy with a promise to pay." He who has "good credit" can command either goods or money because of the faith or belief that others have in his promise. The word "credit" is derived from the Latin "Credo" - I believe. It is not only essential that the borrower have the ability to pay his note when it is due; he must also have the desire or inclination to pay. To be able to loan money wisely and to those who are entitled to it, in short, the ability to distinguish between a safe risk and an unsafe one, is the quality that marks the good banker.

BAnks's General Ledger

The general ledger bookkeeper is the Bookkeeper of the Bank. It may be said that all other books and records are a part of the general ledger. Every transaction of whatever nature gravitates to this ledger. The keeper of the general ledger may be said to be the dealer in wholesale figures; the other clerks are the retailers. He has to do with totals of completed transactions; the tellers and other bookkeepers are concerned with the details. The accounts on the general ledger consist of the items in the bank's statement of condition, known as the "control accounts."

The general ledger bookkeeper makes his postings at the end of the day or the first thing in the morning before the bank has opened for business. No matter how large the bank may be, this posting of debit and credit totals takes but very little time, and in small banks the cashier may do this work. More often the clerk who "runs" the individual ledger is also responsible for the general ledger.

In large banks the head bookkeeper (as he is sometimes called) is given additional duties and responsibilities. He makes the daily calculation of reserve and keeps the record of the earnings and similar data. Most banks keep a book which is known as the "daily comparative statement" book. In this book a record is kept showing the figures of each day side by side with the same items of that day the previous year or years. These "vital statistics" are of great interest and value to the officers and directors and often serve as a guide that will indicate what may be expected. With this knowledge thus tabulated, the bank is able to serve its patrons more intelligently, since by using the law of averages a reasonable forecast can be made and the needs of depositors and borrowers may be anticipated.

One of the important items in the general ledger is the discount account in which the earnings of the bank are entered. When a loan is made the interest charged by the bank is entered in this account. At regular intervals, usually once each six months, discount account is charged and the expense account is credited a sufficient amount to pay for salaries and other expenses. If the bank has been prosperous a dividend is declared and an amount set aside among the liabilities as "Dividend Number 74," or whatever the number may be. Checks bearing this dividend number, signed by the cashier, are then mailed to the stockholders, and as they are presented for payment they are charged to dividend account. Any additional sum remaining in discount account may then be carried into "Undivided Profits," or, if large enough, will be added to the surplus. The stock book which contains the names of the stockholders and the number of shares held by each, may also be kept by the head bookkeeper.

The general bookkeeper usually has charge of the accounts with other banks. These are kept just as the individual accounts are, and are subject to the same kinds of debits and credits. In addition to the credit accounts, or those accounts which represent the balances of other banks, there are usually many debit balances, which in total are carried on the general ledger as "due from banks." As each day's letters containing checks are sent to correspondent banks, the amount of such checks are debited to these banks. As remittances are received in payment, the accounts are credited. A daily record is kept of each account, known either as the "statement" or "account current," and at the end of the month this statement is ruled up and forwarded to the correspondent banks for "reconcilement."

Since there are letters in transit, drafts not yet paid, collection credits, returned items and other entries constantly "in the air" between two banks that do business with each other, this reconcilement is necessary if the accounts are to be settled as of any given day. It is very interesting work and an example of the method used may be given. We will assume that a city bank has sent a monthly statement to a country bank showing the actual debits and credits for the month and the balance due to the country bank. The country bank would then fill out a reconcilement blank about as shown on the previous page and mail it to the city bank.

Note Teller

Negotiable instruments are forms used in the business world for the transfer of values. In the ordinary transactions of commerce, they take the place of actual money. We have learned in an earlier chapter that money represents value and negotiable instruments are used as substitutes for money. They are of several kinds. Checks and bank drafts are payable by banks on demand and hence may be treated as cash. Notes and drafts, however, do not ordinarily possess this facility, since they are usually payable on a certain date and they are paid by individuals rather than by banks. Therefore they must be handled by banks as individual, separate pieces, each requiring care and diligence in presentation and collection. Drafts on individuals must be presented to the drawee either for payment or acceptance, and notes must be at the place where they are made payable on the day they are due. Banks undertake to collect these items for their customers and pass the proceeds to the credit of their depositors. This function is incidental to commercial banking, the bank acting as the agent of the owner of the paper to be collected.

In small banks it is not unusual to see a brass sign displayed at the receiving teller's window, reading "pay notes here." Although they are not required to do so by law, all banks send notices to the makers of notes or the drawees of drafts that they hold the note or draft awaiting payment, and some one of the tellers or clerks is assigned the duty of receiving payment. As the bank grows, a separate department is organized for this purpose and a note teller is appointed. He is usually in charge of the messengers or runners. Instead of sending out notices, the bank may render its customers better service by having its messengers present the items for payment at the place of business of the payer. The messengers also present checks for payment at banks not represented in the clearing house, collect coupons and return unpaid checks to depositors. It is necessary that they should exercise great care in all these transactions, since, for the time being, they are the accredited representatives of the bank and the bank is bound by their actions.

We can show this by discussing the duties and responsibilities of the note teller, the messengers being his assistants. He keeps a register record of all the "time" items that are placed in his hands for collection. This record consists of the name of the payer, the endorser, or the owner of the item for whom the bank is making collection, the date of maturity, the amount, and whether the item is to be protested or not if unpaid. There may be other instructions, as, for example, a request for telegraphic advice of payment. A column is used to record the final disposition of the item which in banking parlance is called "fate." Usually a separate register is used for drafts because they may require particular care. They are often accompanied by bills of lading or other documents that are to be delivered only when the drawee has paid the draft. Drafts are often made payable "on arrival of goods," and the note teller keeps in touch with the drawee so that there may be no unreasonable delay after the goods covered by the draft have reached their destination.

The chief responsibility resting upon the note teller and his assistants is to see that all items are properly presented to the right parties and at the right time. What due presentment consists of is a legal point which we need not discuss here, except to say that the bank must do its utmost to reach the payer and secure payment. Only cash can be accepted in payment, although all banks will take checks from responsible parties when drawn upon solvent banks.

The custom is to require that checks presented in payment of notes or drafts should be certified. (When a check is certified the bank charges the account of the drawer at once, and the check becomes an obligation upon the bank rather than upon the drawer.)

When checks, notes or drafts are not paid when due or when properly presented for payment they may be protested. This consists of presentation by the bank's legal representative who demands payment. If the item is then unpaid, notice to that effect is sent to the maker or drawer and all endorsers. The endorsers on negotiable instruments are under obligations to pay in case the drawer or drawee does not, provided they are served with notice that payment has been legally demanded and refused. The protest is notice to them that proper presentation has been made.

In making his proof the note teller enters on one side of a sheet the name and amount of each note, draft or check which is to be collected on that day. As the items are paid, he extends the amount in another column and opposite he makes a memo of the funds he has received. This memo is technically called the "satisfaction" of that particular entry. The total of the items thus "satisfied" at the end of the day must be equalled by the cash and checks which the note teller hands over to the paying and receiving tellers.

A subdivision of the note teller's department is the collection department, although some banks are organized with the latter as a subdivision of the transit department. The collection teller, as the head of the department may be known, is charged with the collection of notes and drafts payable out of town. These items cannot be listed with checks and cash items, but are entered on separate sheets. The same methods of bookkeeping and collection apply as with out-of-town cash items, except that credits and debits are made only upon receipt of advice that the items are paid. Checks and cash items, on the other hand, are credited to the depositors on the day of deposit, subject, of course, to final payment. That is, if the items are "not good," they will be returned and the account of the depositor will be charged. This plan is adopted for mutual convenience made necessary by the great numbers of checks that are deposited daily in every bank. If every separate item required a special advice of payment and would be credited only upon receipt of such advice, banks would be compelled to increase the number of their clerks enormously.

Out-of-town collections are governed by the same rules as city collections. The collection clerk or teller makes a register record of the name of the payer, the place payable, the endorser, and the amount together with other instructions. Usually this record is entered on slips made with carbon copies, and the slips are filed in drawers or cases until advice is received. If the bank is notified by its bank correspondent that an item has been paid, the slip is taken out and marked "Paid." It is then handed to the bookkeepers. Using the slip as a debit or credit memorandum the account of the depositor is credited and the account of the bank to whom the item was sent is debited.

The collection teller is responsible for the items entrusted to his care. He must see to it that notes reach the town where they are payable before maturity, that drafts are sent to responsible banks for collection, that all instructions sent with the items are fully obeyed and that correct and prompt advice of payment or dishonor is received.

Paying Teller

The paying teller's duties are the direct opposite of the receiving teller's. It is often said that the paying teller has the most important position in the bank because on him falls the responsibility of paying out the bank's funds. It is not questioning the measure of his responsibility to point out that it is not the bank's funds, but the depositors' money that he is called upon to pay. If this money is paid to the wrong person, the bank is liable to pay it again to the proper payee, and if the teller pays out some of the bank's money, as well as the depositor's, in other words, permits an overdraft, then again the bank loses. This teller, therefore, stands between the bank and loss. Even more than the receiving teller, his personality, his mental and physical make-up must leave nothing to be desired. He must be courteous, patient, alert, well-informed as to business methods in general, keen and resourceful. Above all, the teller, whether paying or receiving, must know his own bank thoroughly. Tellers almost invariably are graduates of many years' experience in the bank.

When a check is presented for payment at the window, the teller must be assured of the following facts: that the signature of the drawer is genuine; that the person presenting the check is the payee, or if the check has more than one endorsement, that such endorsements are all present and the person who asks payment is the last endorser; that the balance of the drawer is sufficient to cover the amount of the check; that the check is not dated ahead; that there is no order from the drawer on file to stop payment. The teller must be certain of all these provisions; he can not afford to take any chances. Furthermore, he must have all necessary information at his fingers' ends. The average bank customer does not realize that it is for his good that the teller hesitates or insists upon identification. He immediately thinks his own credit is in question. Consequently the trained teller is diplomatic and will engage the payee in conversation while an assistant may look up the required information, or he may satisfy himself in other ways that everything is all right without irritating the holder of the check. When a check is presented for certification, the paying teller takes the same precautions with respect to the genuineness of the signature, balance of the drawer and the question of payment being stopped as if the check were presented for payment. The matter of endorsement will be taken care of when the certified check is finally presented for payment. Checks are certified by writing or stamping across the face "Certified. Good when properly endorsed." The date and name of the bank with the signature of an officer or teller is added. The account of the drawer is charged at once and the effect is that the bank thereupon assumes the liability for the payment of the check.

The paying teller is the guardian of the bank's funds. He usually has custody of the vault and reserve cash. He sees that the supply of money in various denominations is at all times sufficient for the needs of the customers and is properly arranged for quick handling. Money paid out is counted twice before leaving his hands, but in order to avoid one handling while the fine before his window waits, he will have bills crossed in piles, or under bands, containing so many one's, two's, or five's, as the case may be. Coins are neatly piled or rolled in sealed wrappers. This work is done by assistants during the day.

The bulk of the vault or reserve cash, which we will discuss later, is seldom disturbed. It is usually kept in an inner compartment requiring a duplicate key held by an officer. The teller has a record of the total of this money and of the denominations into which it is divided. The amount of counter or window cash which is brought from the vault to the cage each day is listed in the settlement book, and with this money the teller begins the day's work. During the entire day he is paying out cash for checks, or shipping it to out-of-town correspondents of the bank upon their written or telegraphic order. His settlement at the end of the day is even more simple than the receiving teller's. The amount of the checks he has cashed and handed to the bookkeepers (or if they are payable at other banks, to the receiving teller), plus the amount of cash on hand, must equal the amount he began the day with. As soon as he has settled, he adds to his own cash the cash which is handed him by the receiving and other tellers, and this sum is then carried forward to begin the next day's work.

The settlement of a teller who is both paying and receiving teller is a combination of the two. The teller begins the day with a cash balance on hand. He adds to this amount the deposits, receipts for interest on loans, drafts sold, exchange, etc., received during the day. At the close of business, the total of his cash on hand plus checks for other banks and checks on his own bank (which have been cashed), must equal his total receipts.

Since the paying teller has charge of the reserve funds of the bank, we will discuss briefly the principles of calculating reserve. Bank reserve may be defined as the funds of the bank that are uninvested. In this country the law prescribes both the percentage of reserve that must be kept and also where and of what kind it must be. In nearly all other countries, however, the rate of reserve to deposits is not fixed by law, but is left to the experienced judgment of the bank itself. The purpose of reserve is not only to care for the normal cash needs of the depositors, but also to prevent undue expansion of bank loans.

Receiving Teller

A bank teller is a senior clerk who deals with the bank's customers - chiefly depositors - in daily transactions across his counter. In very small banks one man will act both as receiving teller and paying teller, as well as note teller and collection teller; he is the Teller, and he may be an official as well. In many large banks, particularly in the west, an arbitrary alphabetical division is made of the accounts of the bank and each group is treated as a separate unit. Under this plan, it is as if there were several small banks operating under one roof. Each teller acts as both paying and receiving teller for his own group, to which bookkeepers are also assigned. This plan has several advantages. The depositors are not often held up in a single long line on busy days; the teller is not put to the strain of knowing the faces and signatures of all the depositors; the money can be handled more easily and if differences should occur they are confined within limits.

But, as has been stated, the duty goes with the office rather than with the man, and whether the bank employs a separate receiving teller or not, there are certain duties and responsibilities peculiar to the position. Therefore, in this chapter, as in those following, we will assume, for convenience of illustration, that a separate employee is assigned to each of the desks or departments thus described.

The principal business of the receiving teller is to receive deposits. Responsibility of no mean order rests upon the teller, because he acts as the agent of the bank in the relation established between the depositor and the institution. He must be on his guard at all times. His first care is to assure himself that the deposit is intended for his bank. Many people have two or more bank accounts and sometimes confuse the pass-books. The amount of the deposit is entered in the pass-book as a receipt. In a savings bank the pass-book is more than a receipt: it is a voucher or evidence of contract between the bank and the depositor.

If the bank is one that deals with a large number of depositors who make deposits of any size or quantity of checks, the teller will merely satisfy himself that the checks are endorsed by the bank's customer, enter the amount in the pass-book and examine or prove the ticket later. This prevents a long line of depositors from becoming impatient of delay. If errors are found they are reported by telephone, and since the bank will have been careful in the first place as to whom it accepts as depositors, there is but slight risk that an error may not be satisfactorily adjusted at the end of the day, without loss to the bank. But whether it is done first or last, by the teller himself or by his assistants, each deposit is subjected to the same process of proving. The cash is counted and care taken that there are no counterfeit bills or coins included. The checks are examined to see that they are properly listed and endorsed. In cities where the banks charge their customers exchange on out-of-town checks, the receiving teller sees to it that the proper amount of exchange is deducted. As for checks on his own bank that may be deposited, the receiving teller is governed by the same rules that apply to the paying teller, that is, he must know the signature and also be certain that the check is "good," etc. Finally, he proves or tests the addition of the ticket. The total is listed on his blotter or scratcher and the ticket is then given to the bookkeeper.

The various items that make up the deposit are then ready for distribution. The checks on the bank itself go to the bookkeepers; checks on other banks in the same town go either to the clerks making up the exchanges for the clearing house or to the runners' or messengers' department for presentation. Out-of-town checks go to the "transit department," where they are assorted as to place payable and forwarded for collection and returns. If the bank is small, the receiving teller may handle all these various checks in his own department, but ordinarily they will be distributed to other departments which are really subdivisions of the receiving teller's department. The most important of these departments in point of size and responsibility is the transit department.

We will describe such a department in a city bank. It so happens that out-of-town, or "country checks," can be handled and collected more economically in quantities, hence country banks and many city trust and savings institutions send these items to a city commercial bank which may make a specialty of collecting them. The receiving teller, theoretically at least, will receive these items through the mail, although when so deposited they actually do not leave the hands of the transit clerks who open and prove the incoming remittances or deposits. The teller adds the figures of the mail deposits to those of counter or "window" deposits. The transit clerks assort the checks geographically, placing together checks that are payable in the same part of the state or country. They are then endorsed with the bank's stamp and listed on letters addressed to the bank's correspondents. At the end of the day the totals of the outgoing letters must equal the total of the checks which are charged to the transit department by the receiving teller. The bookkeeper charges the total of each individual outgoing letter to the bank to whom sent, and the grand total increases the general ledger item "due from banks" by that amount.

The receiving teller's settlement is quite simple. He begins the day without any funds. As deposits come in he lists them, as to totals on a scratcher, writing the name of the depositor opposite the amount. At the end of the day the totals of the checks he has received and charged to the different departments of the bank according to place of payment, plus the cash he holds, must equal the total deposits for that day. Settlement being made, he then turns his cash over to the paying teller, who usually does not count it until the next morning. In many banks the receiving teller acts as the "clearing house" for the other departments. For instance, checks on other institutions will be cashed by the paying teller, or given to the note teller in payment of notes, or paid to the loan clerk for loans, or the bank's draft on another city may be bought with a personal check. All these departments may give over such receipts to the receiving teller who adds the totals to his individual deposits in making his settlement. Charge and credit tickets would be handled similarly. The student should keep it clear that such work is incidental to the business, and it does not follow that because it may be the note teller, paying teller or some other clerk who does this internal accounting for various kinds of receipts, that his bank is "different."

The general adoption of the "batch" or "block" system has been a boon to the accounting done by the receiving teller, and this plan is now in operation in all modern banks. Under this system the correctness of the deposit ticket is not tested as to listing or addition when received. Instead, the ticket is handed to an assistant, who assorts the items in groups, for example, self-checks, clearing house checks, non-clearing local checks, out-of-town checks and money. Further division may be made of any of these groups if the size of the bank warrants. The items are then listed on an adding machine in parallel columns, each of which is headed by the name of the department which will receive the checks. The totals are then "picked up" or recapitulated, and must agree with the total of the ticket which is listed in another column on the sheet and the name of the depositor added opposite. If the deposits are small, several are combined on one sheet. At the end of the day a total is made of each column on all the sheets, or "blocks," and these being recapitulated must equal the total deposits which is the teller's proof. The advantages of this plan are many. No effort or time is lost in the original proof of the ticket. As the items are listed in separate columns, a total is arrived at which not only proves the ticket, but gives separate totals which other departments use to prove their own work against. If differences occur, they are segregated into groups and thus can be more easily located.

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.

A working Example

s has been said, every transaction ultimately affects the bank's statement of condition by debit or credit. Refer again to the outline statement shown in the preceding chapter. A deposit of $1,000.00 is made, consisting of $200.00 cash, and checks as follows: $200.00 on the bank itself and $600.00 payable in another city. At the end of the day (assuming this to be the only deposit), on the liabilities side there is an increase of $800.00, all of which appears in the item "deposits" being the total $1,000.00, less the check for $200.00 which is charged to the account of the drawer. On the resource side, then, we must have a corresponding increase of $800.00, and this is made up by an increase in the cash of $200.00 and an increase of $600.00 in the item "due from banks." Or a transaction may appear on one side of the statement only. The bank has sold $5,000.00 of the bonds it owns. The bond item of resources would show a reduction of this amount, and either "cash" or "due from banks" would be increased, depending whether payment was made in cash or by check. If payment for the bonds is made with a check on the bank itself, both sides of the statement are affected, a corresponding reduction in deposits taking place.

What are tellers?

The records made by one clerk upon one set of books, in a well-appointed accounting system, go to check the records of another clerk upon a different set of books. For instance, the paying teller and the receiving teller will each keep a record of checks cashed or deposited payable within the bank. The debit postings of the individual bookkeeper would agree with the teller's figures. Skillful accounting lies in making the fullest possible use of original entries, at the same time having a check on all figures to guard against either error or fraud. Many young bank men have materially increased their salaries and rate of promotion by devising improved accounting methods.

Bank's Journal

A journal is a book in which daily transactions are listed in regular order as to accounts, and the total debit or credit is then posted on the ledgers. Journals, too, may be loose sheets so that they can be inserted in the carriage of an adding machine; indeed, machines have been invented upon which both debits and credits may be written and the machine will automatically subtract or add and print the new balance. The journal, then, is merely a subdivision of the ledger.

DEPOSITER

A depositor of the bank wishes his account to be charged and the money paid to a named payee. The piece of paper upon which he writes this order is a "check." If he deposits money, he writes the memorandum of the amount upon a ruled slip of paper and this is the "deposit ticket." Bookkeepers enter debit and credit records upon their journals directly from these items. Money, however, may change hands or from one account to another, in other ways; by letter, telegram or other debit and credit advice. In such cases a "charge ticket" or "credit slip," as the case may be, is signed or initialed by an officer of the bank, and entry with full explanation is made upon a book from which record the bookkeeper makes his entries. This book is known as a "scratcher," "tickler" or a "blotter." The terms mean practically the same thing. A book upon which a complete description of a negotiable instrument or transaction is made for a permanent record or for reference, is called a register. For example, bond register, collection register, etc.

Principle of Bank Accounting

he first principle in bank accounting, as in all other bookkeeping, is that for every debit there must be a credit, and vice-versa. In accordance with this fundamental theory the books must always be in balance. As we have seen with respect to the statement, every dollar of liabilities is accounted for by another dollar of resources. This is true of every bank. If the institution is large enough to be divided into departments, such departments are charged with all funds passing through their hands, and they must show on their records what has become of every penny. Similarly each clerk, bookkeeper or teller accounts at the end of the day for each item of cash he has handled. When he has done so he is said to have "settled," "balanced" or "struck a proof." Every bank clerk has had the experience of remaining at his desk until a late hour at night checking up his day's work searching for a difference of a few cents. Often he becomes embittered at what seems to him a tyranny when the small sum of money involved is considered. The reason he must settle, however, is not on account of the possible loss of ten cents, but because the most important principle in bank accounting is involved. "Accuracy first" is a motto that should be framed, figuratively at least, upon the wall of every banking room.

Bank Accounting

Bank accounting consists in making written, permanent records of every transaction. Every penny must be accounted for. The statement of the bank, which we have just discussed, shows the general, or control, accounts of the bank, and the various books of the bank show the detail of these items. It would not be impossible, but it would be entirely impractical, to enter every figure directly on the statement of condition. We might imagine an enormous sheet on which the capital is entered as to the ownership of each share of stock. Instead of total deposits, the balance of each depositor would appear opposite his name. On the other side, instead of loans and discounts, there would be an itemized list of the loans with the names of the borrowers. With such a sheet spread out over a floor space of great area, we might imagine the clerks crawling up and down the columns like flies making debits and credits. This is, of course, absurd, but it is precisely what happens, except that the entries are made on books, loose leaves or cards, and the final results are posted on the statement of condition which is thus altered day by day.

As in other matters we have mentioned, banks are also alike with respect to bank accounting, the same principles govern whether the bank is large or small or trust company.All the books are a part of the general books, and the extent to which they are divided depends on the size of the bank. Division is made to fit the capacity of the clerk. When any part of the work becomes too burdensome for one man, he may be given an assistant or the books and records will be further divided, so that two men can do the same thing without conflicting. In very large banks a clerk may spend all his time listing checks upon a sheet, or adding up certain columns of figures or doing any one of a thousand things that must be done in the process of keeping accounts. Unless he is studious and observant, he loses sight of the fact that his work is a part of the whole, he becomes mechanical, falls into a rut and banking, instead of being an interesting employment full of possibilities, is to him mere drudgery. He is standing so close to the machinery that he allows it to master him instead of broadening his vision by study and thus mastering his task.