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diff --git a/43663-0.txt b/43663-0.txt new file mode 100644 index 0000000..ca981ee --- /dev/null +++ b/43663-0.txt @@ -0,0 +1,1654 @@ +*** START OF THE PROJECT GUTENBERG EBOOK 43663 *** + +Note: Images of the original pages are available through + Internet Archive. See + http://archive.org/details/simpleexplanati00robi + + +Transcriber's note: + + Text enclosed by underscores is in italics (_italics_). + + Text enclosed by tilde characters is in bold face (~bold~). + + + + + +A SIMPLE EXPLANATION OF MODERN BANKING CUSTOMS + +by + +HUMPHREY ROBINSON + +Edited from a Legal Standpoint by W. Overton Harris, Former Judge of +the Jefferson County (Kentucky) Circuit Court, Dean of the Louisville +(Kentucky) Law School + +Designed for the promotion of closer and more satisfactory relations +between the public and the banks; for the information of depositors +generally, and of those just entering the banking business. + + + + + + + +Boston +Small, Maynard & Company +Publishers + +Copyright, 1909, 1910 +By Humphrey Robinson + +Entered at Stationers' Hall + + + + +CONTENTS + + + PAGE + + I. General Remarks 9 + + II. The Choice of a Bank 14 + + III. Opening a Bank Account 17 + + IV. How to Deposit 22 + + V. Your Account on the Bank's Books 26 + + VI. Stopping Payment of a Check 32 + + VII. How the Bank Collects the Checks you Deposit 33 + +VIII. The Clearing House 36 + + IX. A Certified Check 49 + + X. Protesting Notes, Drafts, etc.,--why Necessary + and how it is Executed 53 + + XI. The Local Collection Department 64 + + XII. The Loan Department 77 + +XIII. New York Exchange 99 + + XIV. The Method of Issuing National Bank Notes 102 + + XV. The So-called "Special Privileges" of Banks 109 + + + + +A SIMPLE EXPLANATION OF MODERN BANKING CUSTOMS + + + + +I + +GENERAL REMARKS + + +After some years of work in a bank, it has been impressed daily upon +the writer that, if the depositors were fully informed about the +details of the conduct of banks, closer and more satisfactory relations +would result. Hence this attempt to explain, in a simple and concise +way, avoiding as much as possible the use of technical terms, certain +things that every depositor should know. + +For ten years the writer was "in business." For an equal length of time +he has been connected with a large city bank. He remembers his utter +lack of comprehension of banks and their ways, and his consequent +mistakes, perplexity, and embarrassment in dealing with them. Also the +unfairness and prejudice with which he often judged them. + +Recalling all this, he believes that, without giving offense, he can +state these facts. + +Many men having constant transactions with the banks do not realize the +importance of the choice of a bank; few understand the correct way in +which a note should be drawn, or how to determine the exact due date of +a sixty or ninety-day note, or acceptance; what "protesting" a note or +draft really means, and what effect it has on the drawers or endorsers; +the functions of the Clearing House and the simplicity of its methods; +why the banks are compelled to pursue a certain course in the +collection of paper sent them, even though this course may be very +objectionable to the payers; how checks are collected; the effect of +certifying a check; and many other details. Also that very few +depositors have ever seen a copy of the National Bank Act, or are +familiar with the laws governing their own State Banks and Trust +Companies. + +This lack of knowledge of the laws and customs, from which there can be +no safe departure, is undoubtedly the cause of many unreasonable +requests; assertions of fancied rights; remonstrances, and irritating +misunderstandings. This condition should not exist. One explanation for +it may be, that the work in a bank is so strenuous, everything having +to be accomplished in so short a time, that the officers and employes +do not have the opportunity to explain fully the reason why. + +Many seem to think that the details of banking are very complicated. +But there is no mystery about these details. They are very simple and +sane. The methods of bookkeeping are really elementary, principally +mere addition and subtraction. Of course the science of banking and +political economy involves deep and profound study, but these are not +treated here, and the writer has attempted merely to give an idea of +the daily routine of a bank. + +This can be stated with certainty. The interests of the public and the +banks are identical; and an acquaintance with banking customs will +enable any man to conduct his business with much greater intelligence, +satisfaction and profit. Also that banks want to accommodate, as far as +possible, not only their own customers, but others, because they are +possible customers. + +It is hoped that this writing, in some small degree, may hasten the +time, when the political orators, remembering that the day of the +private banker has passed, and that the people now own the banks, will +cease inciting the public against them; when the law makers, elected by +the stockholders and depositors of banks, will cease oppressing them by +unequal and unjust taxation; when the public generally, realizing the +necessity and importance of banks to every community, will cease being +prejudiced against them and their ways, and, by reason of a better +understanding, will feel closer and more cordial toward them. + +So "here's to a better acquaintance" between the public and the banks. + + + + +II + +THE CHOICE OF A BANK + + +The choice of a bank should be most carefully considered, especially by +a business man. + +The same care should be exercised in selecting a bank as would be used +in choosing your lawyer or your doctor. Having done this, make it a +rule to be as frank and open and straightforward with your banker as +with your lawyer or your doctor. You will never lose by it. All banking +relations must be founded on mutual confidence. Once let your banker +get the idea that you have deceived him, and naturally he is forced to +view your statements with suspicion. Tell him the whole truth about +your business and your resources, even though it hurts sometimes. It is +primarily to his interest to help all his customers build up their +business as much as possible, and to keep them going, and your success +contributes to the general success of your bank. He should be, not only +your banker, but your intimate financial adviser and your very good +friend. + +In deciding upon your bank, did you inquire into the character and +disposition of its President and Cashier? Are they men whose business +sagacity and honorable careers are such that you are glad to seek their +advice; and can you repose every confidence in their keeping inviolate +your business secrets? Will they fulfill to the letter their promises +of protection to the best of their ability in times of financial +stress? Or, have they exaggerated their resources and facilities and +made all kinds of suave, but very general promises in order to get your +account? + +Have you gone a little further and considered the personnel of the +Board of Directors of your chosen bank? That Board is supposed to +approve or disapprove all loans and business arrangements. Or, did you +open your account with some bank merely because of convenience of +location, or because some friend suggested that institution? + + + + +III + +OPENING A BANK ACCOUNT + + +In opening your account with a bank, you will be asked to give your +signature and your address. Write your name naturally, as you are in +the habit of signing it. The paying teller has to accustom himself to +the peculiarities of the signature of every patron of the bank, and has +to be constantly on the lookout for forgeries; for if he pays a +forgery, the bank must stand the loss. He soon gets to know your +signature as he knows your face. So don't have your signature on the +bank's books as, John P. Williams, for instance, and then sign numbers +of your checks, J. P. Williams. The letter "J" might stand for James or +Joseph, and, if the account is in the name of John P. Williams, the +bank is taking an unreasonable risk in paying out your money on a check +signed, "J. P. Williams." It would have to make good any loss that +might result thereby. A woman, for instance, will open an account as +Florence Perkins Smith, and then send out checks signed "Florence P. +Smith"; or "F. P. Smith"; or if married, will sign, Mrs. Harry B. +Smith. + +Then the paying teller must see that every endorsement on the check is +technically correct. For instance, that a check made payable to John P. +Williams is not endorsed "J. P. Williams," and again that a check +payable to "J. P. Williams, Trustee," is not endorsed by J. P. Williams +only, and not as "Trustee." + +Before going to the paying teller's window you should endorse any check +you are collecting; even though it is made payable to "Cash" or to +"Bearer." If the check should turn out "no good," the teller can then +see at a glance who cashed it, and communicate with the proper party. +Compliance with these points saves much delay. + +Every check should be endorsed exactly as it is made payable on its +face. Many firms, as well as individuals, overlook this point daily. + +The paying teller must watch for raised or altered checks. The law +holds that any legal instrument is void if altered in any material way. + +So many people, if they make a mistake in writing a check, will erase +or alter the amount or the name, instead of taking a little more time +and making out a new one. The banks have to be very cautious and +particular about paying such checks, for they are paying out actual +cash on doubtful orders. According to law, they must suffer the +consequences if they pay to the wrong person or pay the wrong amount. + +But all depositors must use every reasonable precaution to keep their +checks from being altered in any way. Many people, especially in the +rural districts, write checks in lead pencil. How easy it is for such +checks to be changed if they fall into the hands of dishonest parties. +The rejection of the account of any person, who will be so careless, is +plainly only the part of safety. + +The figures should be placed close to the dollar mark. In writing the +amount of the check in words, begin close to the left hand margin, and +when the amount is written, draw a line in the blank space left between +the amount, and the word "dollars." The law says that where the figures +and the written amount differ, the written amount shall govern. + + + + +IV + +HOW TO DEPOSIT + + +In making your deposit, always head your deposit ticket with your name +exactly as you wrote it when leaving your signature with the Paying +Teller, otherwise, it might be credited to some other person. Also, +fill in the amount of your deposit as plainly, and as legibly as +possible. After the receiving teller has checked off your deposit +ticket, it is passed on to the individual bookkeeper who has charge of +your account. He is only human, and any bad figures on your ticket may +lead to mistakes and consequent irritation to you. + +Always make out your own Deposit Ticket. The Receiving Teller should +not be asked to do this. There are generally other people in line, and +they, as well as the Teller, have a right to complain if he has to stop +and do this for you. + +List your _money_ separately as _gold_ and _silver_, and, in entering +your _checks_, write against each amount the name of the Bank drawn on, +and the town, as plainly and briefly as possible. Then add the various +amounts and hand the slip to the teller. + +When depositing currency arrange the bills so that the ones and twos +will be together, the fives together, the tens together and so on. Have +the bills straight and face upward. With the gold and silver follow the +same idea. If your deposit is large put the money in packages and label +with amount and your name. + +By following these directions you will put the Receiving Teller under +everlasting obligations. He has a very short time in which to +accomplish a great deal, and his position at best is nerve racking. + +In endorsing a check, either simply write your name on the back, or +write "Pay to the order of ---- Bank" and then sign your name. When a +check is undoubtedly intended for you, and your name is not stated +correctly on its face, endorse it _exactly_ as it is made payable, +and then endorse as you generally do. For instance, if a check intended +for Brown Bros. & Co. is made payable to Brown Bros., it should be +endorsed first Brown Bros., and then Brown Bros. & Co. + +Checks should be deposited or cashed promptly. You have only until the +next succeeding business day in which to collect, or deposit for +collection, any check. If you hold a check longer than forty-eight +hours, and the bank on which it is drawn should fail in the meantime, +you have released the drawer and must take your chances with the other +claimants against the bank. For this reason the banks send out all +checks deposited with them for collection on the same day, or the next +succeeding business day; otherwise they have released both the drawer +and the endorsers, if the paying bank should fail or any loss should +result by reason of their delay. + +Checks drawn on banks in the same town, and which are deposited after +the clearing hour, are held over at the depositor's risk, until the +next day. + + + + +V + +YOUR ACCOUNT ON THE BANK'S BOOKS + + +There is no mystery about bank bookkeeping. It is about the simplest +known. The total amount of your deposit is added to the balance you +already have in the bank; then the total amount of your checks, that +reach your bank that day, is deducted; the result is your balance. + +Right here it is well to emphasize that the great majority of the banks +_keep no record of the names of the parties from whom you receive +checks which you deposit; nor do they keep any record of the names of +the people to whom you make your checks payable_. + +When you deposit a check, the only record generally kept by the banks +is the date that you deposited it, the amount, and the town in which it +is payable. If it is on a bank in the _same city_, your bank will keep +a record of the name of that bank, but not otherwise. + +In handling thousands of checks daily, it can be seen what a stupendous +task it would be for a bank to keep a complete record of the drawers +and _all_ the endorsers on every check. Its force of clerks would have +to be doubled or trebled. + +The bank should not be expected to keep your private memoranda, and it +is the duty of the depositor to keep a complete record of the parties +from whom he gets the checks that he deposits or cashes. + +If a check is lost in the mails, the bank has a perfect right, after +giving the depositor the amount, the date on which it was deposited, +and the town in which it was payable, to charge the amount to the +depositor's account until he furnishes a duplicate of the lost check. +So, if you cash a check drawn by John B. Smith, for example, and +payable to James A. Jones, and then endorsed by several other parties; +it is your duty, and not the bank's, to keep a record of the person +from whom you received that check, and obtain a duplicate if it is lost +before reaching its destination. Also with all other checks which you +deposit or cash. + +Many retail firms cash checks for customers; and after endorsing, will +deposit them for collection; keeping absolutely no record of the +sources from which they received them. For example,--Mrs. Brown, of St. +Louis, receives a check from her son in Cincinnati. She gets it cashed +at the dry goods store with which she deals. Then the merchant deposits +it, with numerous other checks, in his bank for collection. If the +check is returned unpaid, the bank certainly has a perfect right to +call on the merchant to pay it. The merchant then calls on Mrs. Brown +to pay him. Now if that check is lost in the mails, say burned in a +railroad wreck, the bank has the same right to call on the merchant for +a duplicate. And it is no valid excuse for him to say that he has no +record of the person from whom he received it. + +In short, each person endorsing a check should keep a record of the +person from whom he received it, or for whom he endorsed it. + +On the last business day of every month your statement is made up and +you should call for it as soon after as convenient. Then you should +assort your canceled checks according to the dates or numbers of same, +and compare them with the stubs in your check book. This is _very +important_ in order that you may detect any forged or raised checks and +_promptly_ inform your bank. If such checks are not reported to the +bank in a reasonable time, you will have to stand the loss. The total +amount of the checks _not_ returned by the bank should be the exact +amount of the difference between the balance as shown by your check +book and your bank book. For example,--you give a check on the last day +of the month; it does not reach your bank until the first, second or +third day of the next month. It can not be charged to your account +until it does reach your bank; therefore, the bank's statement will +generally show a larger balance than your check book. The difference is +the amount of checks that are out. + +Banks do not like to tell the amount of your balance over the +telephone. They can not identify you "over the 'phone," and some +person, who has no business to know, may be inquiring into your +affairs. For the same reason they do not like to state the amount of +your balance to any one in person, unless you authorize it. That is a +confidential matter between you and the bank, and they make this rule +for your protection as much as their own. + + + + +VI + +STOPPING PAYMENT OF A CHECK + + +If, for any reason, you desire to stop payment on a check, communicate +with the paying teller as quickly as possible. Give him a full +description of the check, the name of the party to whom it is made +payable, the number, the date, and the amount. Then _always_ confirm +this action in writing. If, after examination of your checks, the bank +informs you that this particular one has not been paid, you can safely +issue another, if desired. Inform your bank, however, that you are +issuing a duplicate, and write the word "duplicate" across the face of +the check. + + + + +VII + +HOW THE BANK COLLECTS THE CHECKS YOU DEPOSIT + + +When your deposit is handed in to the Receiving Teller, he assorts the +checks you give him into "foreign" and "clearing" items. + +The "foreign" items, that is, checks or drafts on banks in other towns, +are then passed on to the route clerk. He, in turn, assorts them so +that they may be sent to the banks that will collect them for the least +possible cost. For instance, if your bank is situated in the middle +West, the checks you deposit on the far West will be sent to a Chicago +or St. Louis bank. Checks on Eastern cities, except New York possibly, +will be sent to Philadelphia or Baltimore. Checks on nearby towns +probably will be sent direct to banks in those towns. The reason for +not sending checks direct to the towns on which they are drawn, is, +that often they can be collected much more cheaply by sending them +through other large cities. + +The less expense your bank incurs in collecting, the less it will have +to charge you. The depositor should understand that the bank's charges +for these collections are figured at about cost. + +It is a fact that an examination of this account on the books of any +city bank almost invariably will show that it is a source of loss +rather than profit. In other words, the city banks really charge their +depositors less than it actually costs for collections on other towns. + +The "clearing" items, that is, checks on banks in your own town, are +passed to the Clearing House clerks. The collection of these checks +through the Clearing House, and the operation of that institution, are +next explained. + + + + +VIII + +THE CLEARING HOUSE + + +The Clearing House is simply a meeting room for the convenience of the +different banks in a city; a place in which to swap checks. Small towns +have none. Ordinarily no figuring is done here except addition and +subtraction. Its operation is simple. + +Suppose you owe Brown $10.00, and you owe Jones $5.00. + +Then suppose Brown owes you $5.00, and owes Jones $4.00. + +Then suppose Jones owes you $3.00, and owes Brown $5.00. + +Now, instead of each of you going around to two other places, you three +meet in a certain conveniently located room to square, or clear up, +accounts. This saves time and steps. A clerk is in this room to do the +sums for you. + +With a little addition and subtraction he has the following: + + You owe Brown and Jones together $15.00 + Brown and Jones together owe you 8.00 + ------ + Therefore, you owe Brown and Jones together $ 7.00 + + You and Jones together owe Brown $15.00 + Brown owes you and Jones together 9.00 + ------ + Therefore, you and Jones together owe Brown $ 6.00 + + You and Brown together owe Jones $ 9.00 + Jones owes you and Brown together 8.00 + ------ + Therefore, you and Brown together owe Jones $ 1.00 + +The clerk then announces that you owe $7.00 here; Mr. Brown is entitled +to receive $6.00, and Mr. Jones is entitled to $1.00. Then he gives Mr. +Brown an order on you for $6.00, and Mr. Jones an order for $1.00. +Nothing complex about this if you know how to add and subtract. + +Now just substitute for your name, the First National Bank; for +Brown's, the Second National Bank; for Jones', the Third National Bank. +Then put the figures up into the thousands or hundreds of thousands of +dollars in place of the small ones given above. Then name the room +where you met, the Clearing House, and call the clerk who did the sums, +the Clearing House Manager. Then call the orders he has given, the +Clearing House Manager's checks. No matter how many banks in any one +city, or how large the figures, this simple method of settling is in +operation daily. + +Say there are twenty banks in your city. Your bank receives through the +mails, and from its local depositors, numbers of checks on the other +nineteen banks in the same town. The clerk, who goes to the Clearing +House, and his assistants, assort these checks into nineteen different +piles. Each bank goes by a number at the Clearing House. Then these +checks are stamped on the back about like this--"Paid through the ---- +Clearing House"; then follows the date, and name, and number of the +bank which sends them. These nineteen piles of checks are added up into +nineteen different totals; the checks on each bank being kept in +separate bundles. The nineteen totals are added into one grand total. +The clerk then starts for the Clearing House with nineteen bundles of +checks; and a sheet which shows how much his bank has against each of +the other banks; and the grand total it has against all the other banks +combined. Therefore, at a certain hour, generally noon, on each day, +twenty clerks, one from each bank, meet at the Clearing House. Each one +takes his stand at his desk. When the manager taps the bell, every +clerk makes the round of all the other desks, and leaves the bundle of +checks he has against each bank with a slip showing the total amount of +the package. When this is over, each desk has nineteen bundles of +checks on it and nineteen slips showing the different totals. + +Each clerk then adds up these nineteen totals, and the grand total +resulting shows what all the other banks have against his bank. He then +reports two amounts to the Manager of the Clearing House,--the grand +total of the checks he has brought in, and the grand total of the +checks which have been brought in against him. + +Say he has brought in $100,000.00 worth of checks against the other +nineteen banks, and they have brought in $90,000.00 worth of checks +against his bank. Then his bank has a credit at the Clearing House of +$10,000.00. + +After the Manager figures up from these totals handed him by the +different bank clerks, he finds that certain banks brought more than +was brought against them, and that certain other banks brought less +than was brought against them. In other words certain banks have "lost" +at Clearing while others have "gained" and at a later (designated) hour +of the day, the debtor banks pay in their losses at the Clearing House +and the creditor banks receive their gains, the total losses and gains, +of course, exactly offsetting each other. + +While the systems employed at the Clearing Houses of the various cities +of the United States may vary in some particulars, they are all founded +on the principles stated in the preceding paragraphs. These principles +have been so perfected that the clerks from the different banks are at +the Clearing House for a few minutes only each day. The Manager imposes +a fine of several dollars on the bank for every mistake in calculation +its Clearing House clerk makes; also for tardiness. + +To return to the checks which have been brought back from the Clearing +House. If, on examination, the Paying Teller has discovered any +forgeries, or irregular or missing endorsements, or anything suspicious +about any checks; or if the bookkeepers have found that any check +overdraws the account of the depositor, the bank has only until the +close of banking hours to return such checks and collect from the banks +that sent them through the Clearing House. So the examination of these +checks must be made carefully and very quickly. + +The "_Clearing House Association_" in your city is what might be +called a Mutual Aid Society, which the banks have organized for +purposes of mutual convenience and protection. This Association pays +the expenses of the Clearing House; the Manager's salary; the rent; +etc. It adopts rules and by-laws and fixes fines and penalties for +breaking them. But it is not an incorporated body and can not sue or be +sued. + +In time of panic, the Association is a tower of strength, not only for +the banks themselves, but for the whole community. The associated +banks, at such times, have it in their power to make or break the +business interests of their city. _But their interests are identical +with the interests of their patrons._ Remember the banks are owned +by the people, not by two or three private individuals. The failure of +any one bank, or of any one business house, increases the panicky +feeling. Therefore, the Clearing House Association naturally and from +very self-interest, must do its utmost to keep its members and their +customers on their feet. In financial storms, the Association may adopt +certain rules and regulations which may seem unreasonable to the +public; but these methods are put in force for "the greatest good of +the greatest number"; not only for the protection of the banks, but of +their customers and depositors. It is a time for the public to be as +reasonable as possible; to uphold the banks and their officers and +directors. It is a time for the public and the banks to come closer +together. Rest assured the banks have no desire to see any firm or +person fail in times of panic, or any other time. They make their +largest dividends when business is brisk and everything is prosperous. + +What every Clearing House Association does want to wipe out, however, +is the dishonest and reckless banker. He is a menace and source of +anxiety to every bank in the community. The sooner the other banks can +detect and expel him from the business, the better. In some cities, +notably Chicago and St. Louis, the Clearing House Association regularly +employs expert accountants to make periodical and unexpected +examinations of the banks in the Association. If any bank is found to +be doing a reckless business and not living up to the rules and +regulations of the Clearing House, it is heavily fined or expelled. And +expulsion from the Clearing House means ruin for that bank as soon as +the business community learns of it. All Clearing House Associations +should adopt this strict supervision. + +Many a bank was saved embarrassment and possible failure in the recent +panic of 1907 by the wise methods put into effect by the Clearing House +Association. Selfishness and enmity were ordered to the rear. There are +always banks whose officers have less foresight and wisdom than others. +Some of these had been lending too freely, and their actual cash +reserves were not sufficient to meet the storm of checks of their +frightened depositors; frightened mainly because of ignorance, for, +with a few exceptions, the banks were in good condition. To call in +their loans and replenish their supply of cash would cause business +failures and add to the panic. + +So the Clearing House Associations of the different cities determined +that the strong and wise banks should help the weak and foolish ones. +Loan Committees were appointed to sit daily at the Clearing House. The +various banks brought to this Committee notes they had discounted, or +stocks and bonds owned by them. If the Committee thought them good, +the Clearing House Association would lend the bank bringing them, up +to about 75% of their face value. Of course, the Clearing House +Association did not lend these banks actual cash, but they issued them +Clearing House certificates, bearing interest, which could be used +among the banks in settling daily claims against each other; just as if +the banks had deposited actual cash at the Clearing House. In this way, +if Bank Number One had the Clearing House Manager's check on Bank +Number Two for $50,000.00, in settlement of some daily balancing at the +Clearing House, Bank Number Two could pay Bank Number One with Clearing +House certificates instead of actual cash. In other words, the banks +which had a number of good notes, or stocks and bonds, but a small +amount of cash, were saved by the combined, unselfish and patriotic +action of all the banks working together for the common weal. + +If the public generally knew of the many instances of generosity and +unselfishness that were shown in the Clearing Houses in this and other +panics, the banks, as a class, would not be denounced and condemned as +they sometimes are. And this unselfishness was not exercised by the +banks for the salvation of the banks alone, but for the business +interests of the whole community as well; for, as has been pointed out, +_the interests of the banks and the people are one_. + + + + +IX + +A CERTIFIED CHECK + + +Your check is nothing but a piece of paper on which is written an order +on your bank to pay some one a certain sum. Strangers might not like to +accept this piece of paper in payment of debts due them. In many cases +your check should be "certified." + +When a depositor presents a check to his bank to be certified, it +should be handed to the Paying Teller. He, in turn, hands it to the +individual bookkeeper having charge of that depositor's account. If the +bookkeeper finds the balance sufficient to cover the amount of the +check, he stamps across its face the words "Good for $---- (the sum +named in the check) when properly endorsed." Then the Teller or some +officer of the bank, signs that statement and the amount of the check +is immediately charged to that depositor. In other words, the bank +guarantees or certifies that your check is good. + +The bank must be very particular about certifying a check. If any +officer or employe of a National Bank certifies a check, which calls +for more than the maker of the check _actually_ has to his credit, +such officer, or employe, has committed a penitentiary offense. This +provision of the National Banking Act is most strictly enforced, and +the penalty is severe. + +When certification is necessary, the maker of the check should be the +one to have it certified. If you take Brown's check to his bank and +have it certified, you release Brown entirely and can only hold the +bank. For example,--a man sold a piece of land, and, on delivering the +deed, took the purchaser's uncertified check. After the purchaser had +left with the deed, the seller, thinking the check might not be good, +had it certified. The bank failed that afternoon. The purchaser proved +that he had more than the amount of the check to his credit on the +bank's books. On consultation with his lawyers, the seller found that +he had no claim on the drawer of that check and could only file his +claim against the bank with its other depositors. And he only received +about fifty cents on the dollar when the bank's affairs were finally +wound up. All because he did not insist on the purchaser of the land +having his own check certified. If he had done this he could have held +both the purchaser and the bank. + +By having your check certified, you practically exchange your check for +one guaranteed by the bank. For example, the bank certifies your check +for $100.00. It immediately _charges_ your account with the $100.00, +and _credits_ its "certified check account" with $100.00. Then when +your certified check comes back to the bank, through the person to whom +you delivered it, the bank _charges_ its "certified check account" with +$100.00, and the transaction is closed. + +Therefore, if, for any reason, you decide not to use a check after you +have had it certified, _do not destroy it as you would an uncertified +check_. Be sure to bring it back to the bank so that the amount may be +_credited_ your account, and be _charged_ to the bank's "certified +check account." + +Otherwise your account will remain charged with the amount and your +balance will show that much less. + + + + +X + +PROTESTING NOTES, DRAFTS, ETC. WHY NECESSARY AND HOW IT IS EXECUTED + + +Protesting notes, drafts, checks, or other commercial paper is simply +warning or giving notice to people, _secondarily_ liable on that paper, +that it has not been paid when due. The person who ought to pay the +paper is _primarily_ liable. All other persons who have endorsed the +paper or drawn it on another person, firm or bank are _secondarily_ +liable. + +You have endorsed Brown's note. Brown does not pay it when due. If you +do not receive a prompt notice of this, you might endorse another note +for Brown under the false impression that he had paid the first one. + +Likewise, if you have endorsed Jones' draft on his firm, or his check, +and his firm, or his bank refuses to pay such draft or check, both you +and Jones should receive prompt notice that payment was refused. With +such notice you would not endorse for Jones a second time unless he +made good to you, and explained matters satisfactorily. If Jones was +honest in drawing his draft or check he is entitled to prompt notice of +non-payment so that he can take immediate steps to get his money. +Possibly his firm is embarrassed financially, or his bank has failed. + +Say Smith & Co. have drawn a draft on a customer and have taken it to a +bank and secured the money on it. If the customer refuses to pay the +draft, the bank wants prompt notice so it can collect from Smith & Co. +And Smith & Co. want prompt notice so they can take legal steps at once +to protect themselves, and probably stop further shipments to this +customer. Various other instances might be given where endorsers or +drawers of paper might suffer loss or damage from lack of notice of its +non-payment. + +The law holds that this giving of notice is of such grave importance, +that, if the bank receiving paper for collection does not promptly +notify all persons, _secondarily liable_, of non-payment, all such +persons are released from obligation, and the collecting bank must take +its chances on making the amount from the payer. This statement must be +qualified to this extent. If a _check_ is not protested, the maker of +the check must _prove_ that he has suffered loss by not receiving +notice of non-payment. But the drawer of a draft, or the endorsers on +any check, draft, or note are released, whether they suffer damage or +not. Generally speaking, a check is a written request of a depositor to +his bank to pay a certain sum to a certain party; whereas a draft is a +written request of any one to a firm or individual, to pay a certain +sum to a certain party. + +Of course, if the bank receives orders from the parties sending them, +_not_ to protest certain notes, checks, or drafts, it must obey these +orders. But if no such instructions accompany the paper, the bank +_must_ protest or make itself liable. + +Every bank of any size has one of its employes appointed a Notary, or +it can employ a Notary on the outside. He is an officer appointed by +the State, and is under bond to the State to perform all his duties +according to law. + +When the bank hands protestable paper to a Notary, it is his duty to +make a formal demand at the proper place on the person who should pay +it. If payment is refused, the Notary makes an exact copy of the note, +draft or check at the top of a printed form used for this purpose. +Then, over his signature as a Notary, accompanied by his official seal, +he states that he has made a demand in person for payment of the paper +described by him; and, on payment being refused, he has "protested" the +non-payment. Also that he has mailed or delivered notices of this +non-payment to all the parties secondarily liable on this paper and +states their names. The Notary's official statement is called the +"Instrument of Protest." The notices he mails are called the "Notices +of Protest." Certain fees are allowed the Notary by law for protesting. +These are called "Protest Fees," and become a part of the debt. + +Of course, the person who ought to have paid the paper gets no "Notice +of Protest." He certainly knows if he has not paid. The Notary must +keep a copy of all his "Instruments of Protest." This is a public +record, just as any court record is, and as accessible to the public. +It is rarely examined, however. + +So, from the language prescribed by law, that the Notary uses in his +"Instrument of Protest," comes the common use of the terms "protest" +and "no protest" paper. + +To bind the parties _secondarily_ liable a Notary can protest paper +only on the _exact_ day it is due. Otherwise he might put it off +several days, or demand payment before it was due, and damage might +result in either case. So, if the protesting is not done on the exact +date when the paper is due, it is of no avail. + +The maturity of a draft reading so many days, or months, after _date_ +must be calculated from the date of the draft itself. But the maturity +of a draft reading so many days, or months, after _sight_ must be +calculated from the date it was presented to the sight of the payer and +accepted. It is very necessary to date acceptances of time drafts +reading "after sight." + +_Demand for payment must be made at the proper place during business +hours._ A check of course is payable at the bank on which it is drawn, +during banking hours. A draft on a firm is payable at its office; +likewise a draft on an individual is payable at his office, or if he +has none, then at his residence. Notes or accepted drafts are payable +at the place stated on their face. But, when no place of payment is +stated, demand for payment must be made at the office of the maker of +the note, or the acceptor of the draft; or if he has no office, then at +his residence. When you draw up a note it is the proper thing to state +on its face "payable at ---- bank" (giving the name of your bank); or +"payable at my office"; or "payable at my residence." + +Likewise, when accepting a draft, write the date, then "accepted, +payable at ----" (stating your bank, or residence) across the face of +the draft over your signature. Therefore when a note, or an accepted +draft is made payable at a certain bank, demand for payment _must_ be +made at that bank, and _not_ on the maker of the note, or the acceptor +of the draft. Most notes and accepted drafts are made payable at the +bank of the payer. All of them should be. In this way, if you keep +money enough in your bank to meet your notes and acceptances, just as +you keep money there to meet your checks, the bank will save you all +worry about their payment in case you or your bookkeeper overlook them. +Under such circumstances your paper would never be protested. + +In accepting a note from a customer, _do not have it made payable at +your bank_. Have the drawer make it payable _in his own town and at his +own bank_. Demand for payment must be made at the exact place stated in +the note. As every business man is particular about protecting his +credit in his own town, and _especially_ at his own bank, it is obvious +that he will be most diligent about providing for the payment of paper +made payable at the bank with which he is doing business. + +Notes and accepted drafts should be sent, a week or two in advance of +their maturity, to the town in which they are made payable. If paper, +made payable at New Orleans, for instance, is not in New Orleans _when +due_, proper demand for payment can not be made and the drawers or +endorsers might be released. + +_There is absolutely no law requiring a bank to send you a notice that +it holds your note, or draft accepted by you, for collection and due at +some future date._ It is customary for banks to send such notices, but +it is only a courtesy. It is _your_ duty to keep account of when your +paper is due, and to have funds at the place of payment when it is due. +The banks that do so are very careful about sending out these notices, +but the public should regard it as a favor shown them and not as their +lawful right. Many people do not know or appreciate this fact. You +should always put your street address just below your signature on a +note so that notice can be addressed properly. Also, in drawing a +draft, always put the name of the person or firm, on which it is drawn, +in the lower left hand corner, and _invariably_ state the street +address. + + + + +XI + +THE LOCAL COLLECTION DEPARTMENT + + +A bank has a perfect right to refuse to accept and to return any +checks, notes, drafts, etc., sent it for collection. But if it does +accept them, it must obey the instructions of the sender, literally and +exactly. The bank has absolutely no right to disregard these +instructions, no matter how obnoxious or disagreeable they may seem to +the payer of the paper. + +Many people regard all collectors as offensive and unwelcome. They wish +to take their own time about paying their debts. Please mark this +difference between the collector of your grocer's or druggist's bill, +and the city bank as a collector of your note, or of a draft on you. +The monthly collector must turn in cash for the majority of the bills +given him or lose his position. But it really makes little difference +to the bank whether you refuse or pay the note or draft that some other +bank has sent it. + +When collections are sent to a bank direct by firms, or by banks in +another city, that do not keep an account with it; the collecting bank +makes small fees, but these fees are very insignificant. + +So, by prompt payment of notes and drafts, you are conferring more of a +favor on yourself than on the bank. It is wise to protect your credit +with strange banks as well as your own. Every bank receives many +confidential inquiries concerning the financial standing of firms and +persons in its city. If not personally known to the officer in charge +of this correspondence, he invariably inquires of the collection +department as to the promptness with which the parties in question meet +their notes and drafts. And even though you are not a patron, a bank in +your own city would rather give you a good financial reputation than a +poor one. + +The collecting bank must regard most carefully the instructions of the +sender, especially about protesting or not protesting. Also about +telegraphing payment or non-payment, and whether to hold the paper +after it is due or not. In no case must it surrender any documents +attached to a draft until the draft is paid, or accepted; and, in case +of acceptance, documents attached must not be surrendered unless the +sender so directs. + +When drafts have Bills of Lading attached, and the draft states on its +face that it is payable on arrival of the goods, the bank can hold it +until the goods arrive; but if the draft calls for payment on +presentation, even though it has a Bill of Lading attached, the bank +holding it, until the arrival of the goods, does so at its own risk. As +has been stated, and it can't be stated too forcibly, the presenting +bank has no option and must obey orders to the letter. If it does not, +it must suffer any resulting loss. It is only an agent and can not +regard the wishes of the payer. + +Another point you should bear in mind. The bank must not only pay +strict attention to the instructions of the sender of the collection, +but it must follow the law. In self-protection a bank must keep itself +informed about the laws regarding collections and any changes in these +laws. + +If a bank accepts anything but the actual cash in payment of a +collection, it does so at its own risk, and not at the risk of the +sender. For instance, a bank has a draft on Smith, or holds Smith's +note for collection. Smith offers his check in payment. If the check +turns out "no good" the bank must recover the paper immediately, and +any document which might have been attached; otherwise the sender can +hold the bank for the amount. Therefore, when you tender your check to +a bank in payment for collections, you are asking them to take a risk. +If you are not well known in the bank, it is only a reasonable request +for the bank to ask you to have your check certified. Don't ask the +bank to have it certified; for, as has been explained in the remarks on +"Certified Checks," the bank by so doing would release you, and could +hold only the paying bank. You might just as well ask a strange bank +to _cash_ your check as to offer it your uncertified check for a +collection on you. You would hardly cash a check for a stranger. Why +should the bank take an equal risk for you? Yet nothing seems to rouse +the ire of the average man more, than for the collection clerk to ask +him to have his check certified. + +It is a well-nigh universal rule in all Clearing House Associations, +that the banks, which are members thereof, shall not collect checks on +each other before the daily hour for meeting. Also it is a general +custom not to collect from each other, checks that are deposited, or +taken in payment for paper due, after that hour. Hence, when a bank +accepts uncertified checks in payment before the clearing hour, it will +know before closing time whether such checks are good. But, if a bank +accepts an uncertified check in payment after the clearing hour, +either, it must have it certified, and thereby release the drawer; or, +it must hold it until the next day at its own risk. The banks always +respect the man who has his check certified, if tendered after the +clearing hour. + +For these same reasons you can see why a bank can not take a check on a +bank in some other town in payment of a collection. It then would be +several days before the bank would know whether the check was good or +not. Also the bank would be out that amount of money for the length of +time it takes to collect that check; for every bank must remit to the +sender on the very day it puts its "Paid" stamp on a collection and +delivers it to the payer. + +Therefore, when a bank notifies you that it holds your note, or a draft +drawn on you, for collection, bear in mind four points. First: the bank +must follow the instructions of the sender or owner of the paper. +Second: it can not disregard the law. Third: you are benefiting +yourself more than the bank by paying your paper promptly. Fourth: the +bank is taking a risk every time it accepts anything other than actual +cash for a collection. + +The collecting bank can not consider the instructions of any one but +the bank or persons from whom it receives the item. For instance, you +live in St. Louis, and have sent your note to Brown & Co. of +Bridgeport, Conn. Brown & Co. discount your note with their bank, or +give it to their bank for collection. Before it is due the Bridgeport +bank forwards this note to a Philadelphia bank, which in turn forwards +it to a St. Louis bank. You are duly notified by the St. Louis bank. +For various reasons you may not wish to pay. In that event, positively +the only way to have this note recalled is for you to communicate with +Brown & Co. Then they must request its recall by the Bridgeport bank, +which in turn instructs the Philadelphia bank. Then that bank instructs +the St. Louis bank to return the note. In other words, all instructions +must come through the same channels by which the note was originally +sent. Bear in mind that you are not the owner of this paper, nor is the +bank which receives it for collection. + +When a draft has the words "with exchange" on its face the drawer is +asking the payer, not only to pay the amount of the draft, but also the +bank charges for collecting. Unless the presenting bank has +instructions to collect this exchange or return the draft, it can +accept the amount of the draft and deduct its charges when it remits +for the collection. So don't feel resentment toward the bank when it +asks you to pay for collection charges. Many people do. But the bank is +only following instructions and cares nothing whether you, or the +fellow at the other end, pays the cost. + +Because it is human nature to object to paying out money, the Local +Collection Department is the recipient of more complaints and +unreasonable requests than any other department of the bank. Any number +of actual happenings could be set down. + +Now the law says that banks shall keep open _during certain hours_ on +every business day, which is not a legal holiday. After the closing +hour there is a tremendous amount of work to be done. The tellers must +balance their cash; the bookkeepers must take off a balance of every +account on their particular set of books; and every check and draft +deposited, or received through the mails, and payable in other towns, +must be listed and forwarded for collection. Nothing can be held over +without risk, no matter how heavy the day's work. The rule in every +bank is to clean up all the work on the very day it is received. None +of this daily balancing of cash, or books, can be commenced until the +last check has been cashed, the last depositor has come in, and the +last payer of a collection has settled. For instance, the payment of a +single draft or note after banking hours, necessitates the holding open +of several sets of books or the erasure and changing of various totals +by the bookkeepers. It is a very mistaken, but popular, idea that the +bank employes practically are through with their duties at the close of +banking hours. The fact is, that the usual hours for the employes are +from eight till five, and it is no uncommon thing for the clerk and +officers to be hard at work many hours after the business houses have +closed. + +Yet many persons think the bank very disobliging if it refuses to +transact business after hours. One unreasonable individual insisted +that he had until sundown to pay his note on the day it was due. When +the collecting bank told him it would be protested if not paid before +the end of banking hours, he became very abusive and wanted to know who +gave that bank the power to say how late he could pay. He was politely +referred to the law makers, but this did not lessen his resentment +against the bank. + +The foregoing are statements of actual daily occurrences and are only +fair samples of the injustice with which many persons treat the banks. +And it is mainly the result of ignorance of the laws and customs, which +the banks _must_ obey. + + + + +XII + +THE LOAN DEPARTMENT + + +As a preface to the remarks on this department, the following simple +and concise statement is taken, by permission, from that excellent +book, "Money and Banking," by Mr. Horace White. (Book II, Chapter I, +page 235, Edition of 1895.) + + +"FUNCTION OF A BANK" + +"A bank is a manufactory of credit and a machine of exchange. Mr. H. D. +McLeod's analysis of the mechanism of banking is substantially this: A +man has $5,000.00 of his own money. He starts a bank. His neighbors +deposit $45,000.00 with him. This money becomes the absolute property +of the banker. The depositors have simply a right to withdraw an equal +amount whenever they like, which right can be enforced by law. The +banker owns the money and the depositor has a claim, or right of +action, against him for an equal sum. But the depositors will not draw +the money out immediately; if they had intended to do so, they would +not have deposited it at all. The banker finds by experience that some +of his customers will deposit as much money as others draw out, so that +$50,000.00 is on hand all the time. He concludes that if his own +$5,000.00 in connection with his good reputation, is considered by the +public a guarantee for $45,000.00, then the whole $50,000.00 will serve +as a guarantee for at least $200,000.00. When he begins, his balance +sheet reads in this way: + + LIABILITIES. ASSETS. + Deposits $45,000.00 Cash $50,000.00 + +"He now begins to discount the commercial paper of his customers +running say ninety days at 6%. When he discounts a bill of exchange for +$1,000.00, he deducts the interest for ninety days ($15.00) and credits +the customer the remainder ($985.00) on his books. This $985.00 is +called a deposit, because the customer has the right to draw it out by +his check exactly as he could draw out an equal sum of gold deposited +by him in the same bank. In the eye of the banker, and of the customer, +and of the law, it is a deposit. In ordinary times it is like any other +deposit. That is, the proportion remaining uncalled for at any time +will be about the same as the proportion of actual money deposited. Yet +it is nothing but a bank credit. Hence the word deposit, when thus +used, is clearly a misnomer, since, by derivation and common +understanding, a deposit means a thing laid away, or given in charge of +somebody. It must be borne in mind, therefore, that bank deposits +consist of two different things, namely, (1) money, (2) bank credits, +and that the latter may be four or five times as large as the former. + +"The process continues till the banker has $200,000.00 of discounted +bills in his portfolio. Then his accounts stand thus-- + + LIABILITIES. ASSETS. + + Deposits $242,000.00 Cash $ 50,000.00 + Profit 3,000.00 Loans & Discounts 200,000.00 + ----------- ----------- + $245,000.00 $250,000.00 + +"This is Mr. McLeod's exposition and it is the correct one. It follows +that the banker has manufactured something which serves as a medium of +exchange to the extent of nearly $200,000.00. This something is credit. +Goods can be bought and sold with it as readily as with money, since +the checks drawn against these deposits are universally accepted. The +whole $200,000.00 of bills are not discounted in a lump, but gradually, +so that some are always maturing and bringing money in to meet the +checks of customers, in an endless chain of deposits and discounts. It +is found in practice that $200,000.00 of loans and discounts may be +easily carried on $50,000.00 of cash. Thus, the loans of all the +National banks in the United States in October, 1894, were +$2,000,000,000.00, and their cash (including silver certificates and +silver dollars) was a trifle less than $400,000,000.00, or only +one-fifth of the amount of the loans. The other four-fifths was credit, +and perfectly sound credit too, for it had passed through one of the +severest panics in our history." + + +The foregoing quotation is an unanswerable argument for the need of +banks as manufacturers of credit in every community. The greater the +banking capital in any section, the easier it will be for the people of +that section to carry on and enlarge their business. + +The Loan Department is not only the most important, but it is the +money-making end of the bank. If it makes no loans it will pay no +dividends. If, on the other hand, it makes bad loans, it will go out of +existence. + +It can be understood readily that the successful bank officer, whose +duty it is to accept or reject loans, must be a person of large +experience and wide knowledge of men and affairs. He must be an +excellent judge of human nature. Not too conservative, nor yet too +venturesome. He must be a constant student of financial conditions; and +must expand or contract his loans as the sea of finance is placid or +stormy. His responsibility is great. He must lend, but he must lend +judiciously, millions of other people's money. He can not allow +feelings of personal friendship to warp his judgment. He must be +thoroughly familiar with the laws concerning the making and the +collection of notes. + +In an address to the National Banks in 1863, the Hon. Hugh McCulloch, +the first Comptroller of the Currency, gave this sound advice: + +"_Do nothing to foster and encourage speculation. Give facilities only +to prudent and legitimate transactions._ Distribute your loans rather +than concentrate them in a few hands. Pursue a straightforward, +upright, legitimate banking business. Treat your customers liberally, +bearing in mind that a bank prospers as its customers prosper." + +In lending, the bank should encourage the _business interests_ of its +community and should discourage speculation. + +If every one, before asking a loan, would put this question to himself, +"Would I take this risk," his banker would be saved much embarrassment. +On the other hand, if you know your security is good, there is no +reason why you should feel any degree of awe or nervousness in offering +your own or your customer's notes. That is what the bank is in business +for, and your proposition, if not made for purposes of reckless +speculation, is welcomed in ordinary times. + +Bear in mind, however, that your banker may, at times, have to refuse +your paper, because he has seen clouds on the financial horizon of +which the average person is ignorant, and he is endeavoring to protect, +not only his stockholders, but his patrons, from the storms that are +imminent. It is advisable for you to consider his views carefully, and +probably to curtail business expansion. + +_Your average balance on the bank's books has a great deal to do with +the amount of the loans, no matter how well secured, that you can ask +reasonably._ + +Every bank has a number of customers who expect to be taken care of in +the loan department. But, if all the bank's patrons are borrowers, it +soon will have loaned out all of its funds. The bank must have +depositors also. While some depositors do not ask for loans, experience +has shown that the proportion of a customer's balance to his loans must +be sustained in order to keep the bank adjusted. In New York the banks +generally require a regular customer to keep an average balance of not +less than twenty per cent. of the loans made him. Most interior banks +consider ten per cent. about the right proportion. For example, in the +interior cities, if your account shows an average balance of $200.00, +you can reasonably request loans, properly secured, of $2,000.00. An +average balance of $1,000.00 should entitle the depositor to loans of +$10,000.00 and so on. Experience proves that if the banker does not +keep this important point in mind, his machinery will be "out of gear." + +Speaking generally, it will pay any concern to _borrow_ money, if +necessary, to show a fair balance to its credit. Bankers are only +human, and all business is selfish. Every bank will be disposed to take +care of its best paying customers first in times of financial storms. +Every merchant looks out for his best customers first. Why not a +banker? When a firm attempts to hold its bank down to the last cent of +profit, keeps no balance to speak of, and subjects the bank to endless +expense in the collection of its checks and drafts, it can not +reasonably expect as liberal treatment in "squally times" as the +concern which pursues the broader policy of "live and let live." + +Some firms, if they would figure it out, could see plainly that the +bank was handling their account at a loss; yet, they think they are +conferring a great favor in placing their business with any bank. + +A large concern was pursuing this narrow policy. Among other things it +made a practice of borrowing large sums in other cities at four or five +per cent. when the local rate was six. The recent panic came on. Money +advanced to fifty, to one hundred per cent. in New York. The local +banks were having all they could do to take care of their own good +customers. The result was that this firm came to the verge of an +assignment. And, if it had not happened that the banks of its city did +generously come to its rescue, it would have collapsed. + +It is well to remember, that, while the rates of interest in New York +are temptingly low at times, they fluctuate violently and often without +warning; also that the bankers in a strange city have no personal +interest or local pride in your success or failure. + +Money is only a commodity, and rates of interest are governed by supply +and demand. Now the _supply_ of money in the New York banks varies +tremendously, by millions of dollars in fact. This variation comes from +many causes. On the other hand, the _demand_ for money in New York is +constantly changing. The reasons for this are manifold. But in the +smaller cities, both the supply and demand are much more uniform and +steady. Hence the rates of interest, outside of New York, are much less +liable to change. Therefore, unless the demands of your business exceed +the banking facilities of your town, it is _very_ advisable for you to +confine your loans to the local banks. + +The loan department is restricted by certain laws, just as the other +departments. State and Savings Banks, and Trust Companies must obey the +laws of their particular State, but any bank having the word "National" +as part of its name, or the letters "N. A." (National Association), or +the letters "N. B. A." (National Banking Association) following its +name, must adhere strictly to the provisions of the National Bank Act. +The Congress of the United States has forbidden the use of the word +"National" as part of the name of any Bank or Trust Company which does +not comply with all of the sections of the National Bank Act. + +As the statutes differ in each of the separate States, only the laws +governing National Banks will be considered here. + +The whole spirit of the National Bank Act in relation to loans is to +prevent the advancing of money on anything but "quick assets." In other +words, loans must not be made on any security, that can not be turned +into money quickly. For this reason a National Bank can not lend on +real estate as a security. Also it should not accept notes having +longer than ninety days or four months to run. The fundamental +principle of the law is the guarding of the depositors' money; to +have it ready for them at all times. But the _whole fabric and theory +of banking is founded on the fact_, demonstrated by centuries of +experience, that at no _one_ time do _all_ the depositors want to draw +_all_ their money from _all_ the banks. Also that every day some loans +are due and can be converted into cash if necessary. + +Payment of demand, or "call," loans can be demanded any day. On time +loans, payment can not be asked for until the maturity of the note, the +day agreed upon by the bank and the borrower. + +On demand, or "call," loans the interest must be paid at the end of +every three months, or when the loan is paid. On time loans, the +interest, or discount, is paid in advance. + +Notes reading one, two, three, or four months after date are due, of +course, one, two, three or four months after the date of the notes. But +thirty, sixty, or ninety-day paper is not due in one, two, or three +months. This is a common error. The exact number of days must be +calculated. The following table for determining the maturity, or "due +date," of thirty, sixty, or ninety-day paper is herewith given: + + TABLE FOR FINDING MATURITY OF NOTES AND DRAFTS + + At 30, 60, and 90 Days + + +-----------+---------------+---------------+---------------+ + | | AT 30 DAYS | AT 60 DAYS | AT 90 DAYS | + | DATED IN | Will be Due | Will be Due | Will be Due | + | MONTH OF | Same Date in | Same Date in | Same Date in | + +-----------+---------------+---------------+---------------+ + | JANUARY | February less | March plus | April | + | | 1 day | 1 day | | + +-----------+---------------+---------------+---------------+ + | FEBRUARY | March plus | April plus | May plus | + | | 2 days | 1 day | 1 day | + +-----------+---------------+---------------+---------------+ + | MARCH | April less | May less | June less | + | | 1 day | 1 day | 2 days | + +-----------+---------------+---------------+---------------+ + | APRIL | May | June less | July less | + | | | 1 day | 1 day | + +-----------+---------------+---------------+---------------+ + | MAY | June less | July less | August less | + | | 1 day | 1 day | 2 days | + +-----------+---------------+---------------+---------------+ + | JUNE | July | August less | September | + | | | 1 day | less 2 days | + +-----------+---------------+---------------+---------------+ + | JULY | August less | September | October less | + | | 1 day | less 2 days | 2 days | + +-----------+---------------+---------------+---------------+ + | AUGUST | September | October less | November less | + | | less 1 day | 1 day | 2 days | + +-----------+---------------+---------------+---------------+ + | SEPTEMBER | October | November less | December less | + | | | 1 day | 1 day | + +-----------+---------------+---------------+---------------+ + | OCTOBER | November less | December less | January less | + | | 1 day | 1 day | 2 days | + +-----------+---------------+---------------+---------------+ + | NOVEMBER | December | January less | February less | + | | | 1 day | 2 days | + +-----------+---------------+---------------+---------------+ + | DECEMBER | January less | February less | March | + | | 1 day | 2 days | | + +-----------+---------------+---------------+---------------+ + | | + | ~EXAMPLE.~--Paper dated March 15th at 90 days is | + | due June 13th. | + | | + | ~TO PROVE.~--Exclude day of date, then 16 days in | + | March, plus 30 days in April, 31 days in May, 13 days | + | in June equals 90 days. | + | | + | Paper apparently due, from this table, on February | + | 30th, is, of course, due March 2d, or apparently due | + | April 31st, is, of course, due May 1st. | + | | + | In Leap Year allowance must be made for 29 days in | + | February. | + | | + | For paper payable in States allowing grace use table, | + | then add days of grace. | + +-----------------------------------------------------------+ + +National Banks can lend only a certain proportion of their deposits. + +In New York, Chicago, and St. Louis, called Central Reserve Cities, +National Banks must keep on hand, in lawful money, a reserve of +twenty-five per cent. of their deposits. + +In Albany, Baltimore, Boston, Cincinnati, Cleveland, Detroit, +Louisville, Milwaukee, New Orleans, Philadelphia, Pittsburg, San +Francisco and Washington, called _Reserve Cities_, the National Banks +must have the same reserve of twenty-five per cent. of their deposits. +But the National Banks in these last-named thirteen cities can keep +one-half of _their_ reserve in National Banks located in any of the +three Central Reserve Cities, viz.: New York, Chicago and St. Louis. + +In all other cities or towns the National Banks must have a reserve of +fifteen per cent. of their deposits, but nine per cent. of _their_ +reserve can be kept in National Banks located in any of the thirteen +"Reserve Cities"; or in National Banks in the three Central Reserve +Cities. + +"Approved Reserve Agents" are the banks of the larger cities, selected +by the banks of smaller cities or towns, in which to carry part of +their reserve. These selections _must_ be approved by the Comptroller +of the Currency, the executive head of the National Banking System. + +A National Bank is forbidden to lend more than ten per cent. of its +combined capital and surplus to any one firm or individual. "But the +discount of bills of exchange drawn in good faith against actually +existing values, and the discount of commercial or business paper +actually owned by the person negotiating the same, shall not be +considered as money borrowed." Also no National Bank can lend on its +own stock as security. + +The Comptroller of the Currency can have an examination made, as often +as he may deem proper, of the condition of any National Bank. The +visits of the National Bank Examiners are never announced in advance. +They come suddenly and without warning. Their duties are not only to +balance the books and count the cash, but also _critically to examine +each loan and its security_; and to give especial attention to loans +to any director or officer, and to any concerns in which they may be +financially interested. + +If the bank is overloaned, that is, has loaned more than the law +allows, the examiner immediately reports it, and the Comptroller of the +Currency orders that bank to cease lending, and to require payment of +enough of its loans to make good the reserve required by law. And if +the bank does not court disaster and the closing of its doors, it +hastens to obey orders and to "get in line." + +The supervision of the National Banks is not perfunctory or careless. +It is very strict. + +The inquisitorial powers of the National Bank Examiners are practically +unlimited. They have a legal right to put any bank officer on oath in +questioning the affairs of the bank. They look into every department in +the most searching way, and any disobedience of the law is reported +promptly to the Comptroller. These Examiners are appointed by the +United States Government; and if they want to hold their positions, +they must be strictly impartial in their reports to the authorities. + +The provisions of the National Bank Act have been so rigidly enforced, +_that in forty-four years, or since the Act was passed by Congress, the +average annual loss to depositors in National Banks, has been only +thirty-seven one thousandths part of one per cent. of their deposits_. +Practically no loss at all. + +Isn't that a tribute to the wisdom of that law; to the strict +supervision of the Government; and to the honesty and integrity of the +officers of National Banks; past and present? It has happened, of +course, that some spoilers have occasionally obtained control of a +National Bank, and have dishonestly used the depositors' money in risky +ventures for their own profit. But the officials of the Treasury +Department have soon sized them up, and such men shortly find the +banking business not to their liking, especially with "Uncle Sam" as a +supervisor. + + + + +XIII + +NEW YORK EXCHANGE + + +Practically every bank in the United States keeps part of its funds in +banks in New York City, the money center of the country. All National +Banks are allowed to keep part of their reserve in the National Banks +of New York, Chicago and St. Louis, the three Central Reserve Cities. +For these reasons checks drawn on banks in these three cities are +generally accepted at par, that is, collected without cost to the +depositor. + +In this connection, the word "exchange" comes from the fact that you +_exchange_ your personal check for the bank's check on another bank, +located in some other city. + +In remitting for collections, or for balances due, the banks outside of +the three Central Reserve Cities, generally send their checks on one of +these cities, according to their location. + +Under certain conditions you will notice your local newspapers quoting +New York Exchange at so much premium or so much discount. These rates +are generally in use only between the different banks in your city. The +banks do not charge a depositor any premium for its checks on other +cities, unless the amount of the checks called for is large. + +The proper way to draw your check when you want New York Exchange, is +to make it read "Pay to the order of New York Exchange." The bank then +makes out its check on a New York bank payable to your order. Then you +should endorse the bank's check to the order of the party to whom you +are remitting. + +Banks do not like to sell their checks on other banks to strangers. +Some expert at raising checks may buy New York Exchange for ten dollars +and raise it to ten thousand. Also he might buy the bank's check with +the idea of obtaining the Cashier's signature for the purpose of +forgery. + + + + +XIV + +THE METHOD OF ISSUING NATIONAL BANK NOTES + + +Many people have the idea that a National Bank, having a capital of, +say one hundred thousand dollars, can call on the United States +Treasury Department for an equal amount of National Bank Notes, without +expense to the bank; and thus have double the amount of its capital to +lend at the start. + +The National Bank Act does say that each National Bank _must_ issue +currency equal to a certain per cent. of its capital; and further, that +each National Bank _can_ issue currency equal to the full amount of its +capital. But the profit on taking out this currency, or circulating +notes, is so very small that many banks do not issue as much as the law +allows. + +These circulating notes must be issued under certain expensive +conditions. First--the bank must purchase and deposit with the +Treasurer of the United States an amount of registered United States +Bonds, equal at their par value, to the amount of the circulating notes +called for. Second--dependent on the kind of bonds deposited, the bank +must pay a tax on its circulating notes. Third--the bank must stand the +expense of plates for printing and the express charges for sending it +the original issue of its notes. Also, when any of its worn-out or +mutilated notes are sent to the Treasury Department, they are +destroyed, and the bank then has to pay the expense of re-issue and the +express charges for sending them to the bank that originally issued +them. The signature of the President and Cashier of the bank must be +affixed. + +Therefore National Banks, in calculating the possible profit on taking +out circulating notes, have the following example to be considered in +issuing every one hundred thousand dollars of their notes: + + Bonds purchased: United States + Registered 2% bonds to be paid + at par in 1930. + + Price of bonds 104 $104,000.00 + Par value of bonds purchased 100,000.00 + Money worth 6%. + Income from bonds $2,000.00 + Income from circulating notes loaned at 6% 6,000.00 + --------- + $8,000.00 + + _LESS DEDUCTIONS._ + + Annual tax on circulating notes $500.00 + Sinking Fund to retire premium + on bonds at maturity, amount + to be charged off each year 181.00 + Expenses (plates, express charges, + etc.) 75.00 756.00 + --------- + Net Income from Circulating Notes $7,244.00 + Net Income from loaning $104,000.00 (net + cost of bonds purchased) at 6% 6,240.00 + --------- + Net profit on taking out $100,000.00 of + circulating notes $1,004.00 + +Hence the net percentage of profit on taking out National Bank notes on +this class of bonds, is about one per cent., based on their _present_ +market price. + +The profit on taking out circulation on other United States bonds is +even less. + +Suppose the market price of the 2% bonds purchased was higher, say 108, +as it was several years ago, the profit would be even less. Also, if +the bonds decline in market value below par (as in case of war, for +instance), the bank must stand that loss; and purchase and deposit an +additional amount of bonds, so as to make the market value of the bonds +deposited equal to the amount of its outstanding circulating notes. + +In order to retire its circulating notes and obtain possession of its +United States Bonds, deposited as security therefor, the bank must send +the Treasury Department an amount of lawful money equal to the amount +of the circulating notes it wishes to retire. It can then "withdraw a +proportionate amount of the bonds held as security for its circulating +notes." + +But the law says that not more than nine millions of National Bank +Notes can be retired in any one month. Therefore, if the market price +of United States bonds goes up to a point where all profit on its +circulation is wiped out, the bank may have to wait several months +until previous requests for retiring circulation are out of the way. In +the meantime United States bonds may have gone down in price. + +As has been stated, a National Bank _can_ take out an amount of +circulating notes, or National Bank currency, equal to the amount of +its capital. But the profit on the operation is so small (leaving out +the chances of actual loss) that many banks do not issue notes to the +full amount allowed. The following figures relative to the total +capital of all the National Banks, and the total circulation of these +banks on the dates stated, conclusively prove this fact. (These figures +are taken from the annual report of 1907 of the Comptroller of the +Currency.) + + November 12, January 26, March 22, + 1906. 1907. 1907. + Capital + Stock $847,514,653.00 $860,930,624.00 $873,669,666.00 + + Circulating + Notes 536,109,931.00 545,481,870.50 543,320,375.00 + + May 20, August 22, + 1907. 1907. + Capital + Stock $883,690,917.00 $896,451,314.00 + + Circulating + Notes 547,918,696.00 551,949,461.50 + +It can be seen from these figures that the National Banks _could_ have +taken out _over three hundred millions_ more of circulating notes than +they _actually_ issued during the time stated. And these figures are +not exceptional. + +Banks, other than National, "shall pay a tax of ten per centum on the +amount of their own notes used for circulation and paid out by them." +This tax is prohibitive and no State Banks issue circulating notes for +this reason. + + + + +XV + +THE SO-CALLED "SPECIAL PRIVILEGES" OF BANKS + + +In every political campaign, especially the National ones, the orators +talk a great deal about the "special privileges" of banks. But they are +never defined exactly. + +According to them, one privilege (?) the bank enjoys is the power to +lend a certain per cent. of its depositors' money. But if it could not +do this, what reason would the bank have for existing? That is its +principal real source of profit. + +Practically the only other privilege the National banks have, is the +right to take out National Bank Notes, or currency. As has been shown +in the remarks on "The Method of Issuing National Bank Notes," this +privilege allows so little profit that the banks do not use it to the +full extent of the law. + +On the other hand, consider a few of the many risks the bank is +constantly taking. Every loan it makes is a risk. A few bad loans, made +through dishonest or visionary representations of its customers, may +blot out the bank's profits for a year or more. Every check or draft +cashed is a risk. Every check, draft, or note it takes for collection +is a risk. In fact, every transaction the bank undertakes is more than +ordinarily hazardous. Moreover the profits of the average city bank are +not large. Considering their responsibilities and the innumerable ways +by which they may involve the bank, the salaries paid the employes, +from the President to the messengers, are small. Also remember there is +no "water" in the stock of banks. The capital of every National Bank +must be fully paid in, before it is allowed to open for business; and +in most of the States, the banks, other than National, must have their +entire capital paid up within a year from their beginning. The net +profits of successful banks, located in cities with a population of one +hundred thousand or over, average about six to ten per cent. The +business man, when considering an investment in a mercantile or +manufacturing enterprise, generally counts on double that amount of +dividends. + +If, as the politicians state, the banks enjoy so many "special +privileges"; it is strange that the people of every section of the +country do not rush in to organize and take stock in banks. + + + + + * * * * * * + + + + +Transcriber's note: + +Minor typographical errors have been corrected without note. + +Irregularities and inconsistencies in the text have been retained +as printed. + +*** END OF THE PROJECT GUTENBERG EBOOK 43663 *** |