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 Obviously money invested in the fixed capital of any business cannot be withdrawn at will.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.
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.
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.
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.
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.
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.
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.
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