» 
 
 O. HOWARD WOLFE 
 
 AMERICAN lftSTnt!TE OF BAKKIMG 
 
Digitized by the Internet Archive 
 
 in 2007 with funding from 
 
 Microsoft Corporation 
 
 http://www.archive.org/details/elementarybankinOOwolfrich 
 
Elementary Banking 
 
 BY 
 
 O. HOWARD WOLFE 
 
 Associate, American Institute of Banking 
 
 Assistant Educational Director, A. I. B. 
 
 Past President, New York Chapter 
 
 CORRESPONDENCE CHAPTER, Inc. 
 AMERICAN INSTITUTE OF BANKING 
 
 FIVE NASSAU STREET, NEW YORK 
 

 Copyright, 1915 
 By O. HOWARD WOLFE 
 
 M. B. BROWN PRINTING ft BINDING CO. 
 37-41 CHAMBERS ST. NEW YORK CITY 
 
Preface 
 
 This book is not the result of any preconceived theories 
 on methods of education in banking. Neither does it make 
 any pretense of being complete as to the subjects covered 
 nor exhaustive in its treatment of them. It is based on 
 fifteen years of practical experience, beginning with a small 
 country bank and extending through eleven years with a 
 large city bank. To this first-hand knowledge of the edu- 
 cational needs of the beginner in banking has been added 
 four years spent in the teaching of banking subjects to 
 young men in the various chapters of the American Institute 
 of Banking. The subject matter presented herewith con- 
 sists in the main of a series of lectures delivered to a class 
 of younger men in New York Chapter. This book is in- 
 tended for the young man just entering the bank from 
 school and too new in the business to be able to undertake 
 the regular Institute study course. No other text book so 
 far as the writer knows is designed to meet this particular 
 need. The method of treatment is to explain the underlying 
 principles not only of bank accounting, but of the everyday 
 transactions that are common to all forms of banking. The 
 danger of the small bank is that it tends to narrow the 
 horizon of the young banker, while in the large bank the 
 beginner too often regards his institution as something 
 inhuman that moves along as entirely independent of him 
 or his associates as if it were a part of the solar system. 
 Another difficulty confronting the beginner is that when he 
 does feel the need of instruction he is apt to fall a victim to 
 the advice of well-meaning but untrained "instructors," 
 who attempt to teach him banking by explaining the use of 
 accounting forms. 
 
 The two most prevalent misconceptions that tend to 
 restrict banking progress are first, that the bank clerk or 
 
 3 
 
 337388 
 
PREFACE 
 
 officer needs no other technical education than the experience 
 gained at his own desk, and as a result of the first idea, that 
 banking is a matter of accounting systems only. It is the 
 hope of the author that this little volume in spite of its 
 manifest limitations may be the means of assisting the boy 
 through that very trying period, his first year in a banking 
 house. 
 
 O. H. W. 
 
 "A successful banker is composed of about one-fifth 
 accountant, two-fifths lawyer, three-fifths political economist, 
 and four-fifths gentleman and scholar — total ten-fifths — 
 double size. Any smaller person may be a pawnbroker 
 or a promoter, but not a banker." — Geo. E. Allen. 
 
Elementary Banking 
 
 Banking as a Vocation 
 
 Every young man who goes into a bank, whether from the 
 schoolroom or from some other business, should make up 
 his mind very early that the work is not easy and the only 
 way he may succeed is to begin a systematic study of banking 
 as a science. This study, supplemented by diligent attention 
 to his work, will secure to him that success which is the only 
 sure kind of success, built upon his own ability rather 
 than upon the favor of his superior officers. Those personal 
 qualities such as honesty, courtesy, cleanliness and punc- 
 tuality, which have been impressed upon him as abstract 
 virtues in the everyday walks of life, in the banking business 
 become concrete necessities. 
 
 Physical strength, endurance, a clear eye, speed and 
 stamina are sought after by every manly youth, whatever 
 his occupation, but to the professional ball player they are 
 his stock in trade. So it is with banking. The commonest 
 daily transactions are of such a nature that virtues which 
 we would admire in the average individual are absolutely 
 necessary to the banker, whether he be officer or clerk. 
 The bank will be successful to the extent that its depositors 
 and other clients have confidence in it and those associated 
 with it, not only as regards their judgment in business 
 matters, but also their moral character. It, therefore, be- 
 comes a part of the education of the bank man to fix in his 
 mind certain rules of conduct which may be here set down 
 as a sort of ten commandments. 
 
 1. Keep clean physically, mentally and morally. 
 
 2. Cultivate a wide acquaintance, but choose your 
 associates from among those known to be of good character. 
 
 5 
 
ELEMENTARY BANKING 
 
 3. Live within your income and look upon money saved 
 as a part of your fixed expenses. 
 
 4. Be exact in all your dealings and always keep your 
 word. 
 
 5. Pay your debts and meet your obligations when they 
 are due. 
 
 6. Pay strict attention to orders and obey them implicitly. 
 
 7. Show a willingness to do more, rather than less, than 
 is expected of you. 
 
 8. Know your job and don't be content with less than 
 all there is to know about it. 
 
 9. Spend a part of each year in systematic study and 
 reading on banking subjects. 
 
 10. Keep in strict confidence every transaction of the 
 bank of whatever nature. 
 
 There are many other such rules that might be suggested, 
 but these must not be passed over as mere platitudes. 
 Nearly all large financial institutions have similar instruc- 
 tions prominently posted and any infraction of the regulations 
 is met with immediate dismissal. One large Canadian 
 bank' hands to each employee a bound copy of rules that 
 are to govern his conduct in all matters. 
 
 The next important fact that must be accepted is that 
 banking is a profession based upon scientific data. The 
 physician cannot hope to learn medicine through personal 
 experience and experiment upon his own body in curing all 
 the diseases and disasters that flesh is heir to. Many 
 bankers, and especially the younger and inexperienced, 
 deceive themselves with the idea that they can learn all 
 they need to know by close application to their own im- 
 mediate desks, counters and communities; Just as the 
 science of surgery and medicine is based upon the natural 
 laws of the human body, so the science of banking grows 
 
 6 
 
ELEMENTARY BANKING 
 
 out of economic laws that are at the base of all business 
 activity. 
 
 The young man who has adopted banking as a career, 
 must decide, therefore, what his attitude will be toward 
 these conditions which he can not escape although they can 
 be mastered. Every town, if indeed not every bank, can 
 furnish at least one example of the man who thought other- 
 wise until it was too late. It is not to be imagined that by 
 following a certain formula of conduct any clerk may rise 
 by regular stages until he will become cashier or president 
 of his bank. By increasing his own efficiency, he uncon- 
 sciously is elevating banking standards, which in turn, will 
 react upon him to his lasting benefit. Every man in the 
 bank should be a banker, although in different degrees of 
 development, whether he be messenger or chairman of the 
 board of directors. 
 
 In the thickly settled and highly developed countries of 
 Europe, it is said that it is the aim of all those who work 
 for salaries or wages, not to try to secure better positions, 
 but to hold what they already have. Fortunately, we are 
 not confronted with this condition in America, but we are 
 fast approaching it. Efficiency will ultimately determine 
 every man's status whether he be banker or bricklayer. 
 
Wealth and Money 
 
 Banks are institutions with a threefold relation to money; 
 they receive money on deposit, they loan money and they 
 issue money. There are two additional functions closely 
 related to the others, if not identical with them; banks 
 borrow money and invest money. It may be added that 
 banks also transfer money, but this applies to credit rather 
 than to money. In the popular mind and in actual practice 
 banks are identified with the use of money to such an extent 
 that it is impossible to get a clear conception of banking 
 functions without some knowledge of money. This involves 
 study of economic laws which, as we have intimated, are 
 the forces that control banking just as natural laws govern 
 engineering, medicine, navigation or other sciences. 
 
 All our modern complicated systems of commerce, trade 
 and business in general grow out of the simple fact that man 
 has certain wants which must be satisfied. He must be 
 fed, clothed and housed. These are the primary wants. 
 After them come education, religion and social needs and 
 so on from the sheer necessities of life, to the luxuries. The 
 predominant characteristic of human wants is that they are 
 unlimited; each want satisfied leads to another and in the 
 effort to secure what we need, habits are formed which, in 
 turn, fix standards of living for men and nations. 
 
 The term used to define things that satisfy wants is 
 wealth, which consists of anything that ministers to our 
 pleasure or happiness and serves to keep away pain or 
 discomfort. Three factors enter into the creation of wealth: 
 land, labor and capital. The first includes the surface of 
 the earth and all that is above or below it, in short, land is 
 natural resources. The second factor is man himself, who 
 by the application of his strength and skill converts the raw 
 material of the field, the forest or the mine into such form 
 
 8 
 
ELEMENTARY BANKING 
 
 that he can make use of the wealth thus created. This is 
 labor. The third factor is capital. 
 
 Of all economic terms in common use, the three most 
 generally confused are capital, wealth and money. They are 
 not by any means synonymous. We have seen, first, what 
 wealth is, and we have learned that there are three factors 
 that go to produce it. The first two produce directly, while 
 capital produces indirectly through the other two. Capital 
 is wealth that works in the production of more wealth. For 
 example, the miner applies his labor to the vein of coal and 
 produces wealth in the form of fuel. He uses a pick and 
 other implements; a track is built into the mine over which 
 cars are hauled by a small compressed-air motor; at the 
 mouth of the shaft is an elevator operated by an engine and 
 other machinery. These implements, tools, machinery, etc., 
 are capital. If the capital of the mine is $100,000, it means 
 that this machinery cost that amount of money. The money 
 itself is gone into other hands in the process of circulation. 
 In the banking business, money is the raw material so to 
 speak, so that the terms capital and money are nearly 
 synonymous as applied to banks. How capital arises will 
 be discussed later. 
 
 An object is said to have utility when it satisfies a want. 
 Value exists, however, only when an effort or sacrifice of 
 some sort is required to secure the object having utility. 
 The value, therefore, depends largely on the extent or degree 
 of the sacrifice necessary to obtain use of the thing desired. 
 Let us suppose a man owns a farm in one corner of which 
 he finds a hard, black stony deposit not useful for anything 
 so far as he can discover. A neighbor, upon experiment, 
 learns that the black stones will burn and so possess utility. 
 Thereupon he gives the man who owns the coal some of his 
 wheat in exchange for the fuel and thus the coal becomes 
 valuable. It is power of exchange that bestows value. 
 
 9 
 
ELEMENTARY BANKING 
 
 Thus a thing may be very useful, as for example, water, but 
 of no value unless it can be exchanged for something else. 
 
 Exchange is the process of giving and taking one thing 
 for another. It is not necessary for each of us to produce 
 for ourselves all the things that we need. The farmer 
 raises potatoes, but he does not need to make his own 
 shoes. He may exchange his potatoes with a shoemaker 
 for a pair of boots. But this would be a clumsy process 
 since each one who had anything to trade would need to 
 find someone who was willing to exchange for something 
 else that was wanted. Therefore, a medium of exchange 
 becomes necessary and this medium of exchange we call 
 money. Money may be anything that the producer will 
 accept in exchange for his product, but it must have value 
 in itself or else we will not be able to exchange our money 
 for other goods. It must be something that does not exist 
 in too abundant quantity else it will require no sacrifice to 
 secure it and it will, therefore, lose its value. It must be 
 easily recognized or else it may be counterfeited and so there 
 will be no confidence in it. It must contain large value in 
 small bulk, or it will not be convenient for use. It must be 
 durable, so that it can be stored up for future use. Finally, 
 it must be of a material that will not be destroyed, by being 
 divided and redivided, which is necessary since the same 
 quantity or values will not always be offered in exchange. 
 There is but one material that possesses all these qualities 
 and that is gold. Hence, by a long process of experiments 
 and eliminations, all large nations have come to the con- 
 viction that gold is the ideal medium of exchange. In order 
 to prevent any controversy that might arise between the 
 buyer and seller as to the purity or weight of the gold offered 
 in exchange, the government coins it in metal discs and 
 then by a stamp, certifies as to the quantity and quality of 
 the bullion contents. This is called coinage. 
 
 10 
 
ELEMENTARY BANKING 
 
 Not all money is gold, however. There are three kinds 
 in all, standard money, which is usually gold; credit money, 
 generally made of paper; and token money, which is the 
 small change, the bullion contents of which are less than the 
 coin value. In the United States there are more varieties 
 of these three kinds of money in circulation than in any 
 other country. We have gold coins ; gold certificates, which 
 are practically the same thing; standard silver dollars and 
 silver certificates; fractional silver; nickels and cents; 
 Treasury notes, which were issued to purchase silver bullion 
 and are then redeemed when presented, the bullion having 
 been coined; U. S. notes, or "greenbacks," which are called 
 "fiat" money because the government forces their circula- 
 tion; and bank notes. For some years to come, we will 
 have three kinds of bank notes in circulation; the national 
 bank notes, Federal reserve notes, and the notes issued by 
 the Federal reserve banks, secured by U. S. bonds which, 
 beginning Dec. 23, 1915, they may buy from national banks. 
 
 In addition to being used as a medium of exchange, 
 money has two other uses. It is used as a standard of 
 value and as a basis of deferred payments or credit. The 
 value of every form of wealth is quoted in terms of money 
 and in this sense money is used as a standard of value. 
 This use of money causes many people to confuse money 
 with wealth. The third use of money, as a basis of credit, 
 or payments to be made at a later date, is an important one 
 from a banking viewpoint because it is this use of money 
 that is involved in bank deposits. Bank deposits, for ex- 
 ample, may be set down for the entire country at about 18 
 billions of dollars (1915), whereas there are less than 4 
 billions of money, the medium of exchange in the United 
 States. 
 
 It is not necessary that there should be as much money 
 as is represented by other forms of wealth. Using money 
 
 11 
 
ELEMENTARY BANKING 
 
 as a standard of value, we may say a certain building is 
 worth $10,000, an automobile, $1,000, your watch, $20, your 
 hat, $2, and so on. But since these things are not pur- 
 chased by each of us every day, the nation as a whole will 
 need only as much money as is required to make exchanges. 
 And so with bank deposits. If every depositor wished to 
 withdraw his balance in cash daily, there could not be a 
 larger amount of bank deposits represented by a money 
 value, than there was actual money in the country. Panics 
 are due to the fact that people confuse values with money 
 and when everyone tries to "sell" or convert his standard- 
 of-value money and basis-of-credit money into medium-of- 
 exchange money, there isn't enough to go around. Banking 
 comes to the rescue in such a situation with the note-issuing 
 function which will be explained later. 
 
 Through the use of checks and banking mechanism, bank 
 deposits are also a form of credit money. If A wishes to 
 pay B ten dollars, both having bank accounts, A writes his 
 check or order upon his bank for that amount and gives it 
 to B, who deposits the check to his credit. No actual money 
 changes hands, the entire transaction consisting of debit 
 and credit book entries. Here again we see why it is not 
 necessary to have as much medium of exchange money as 
 we have bank deposits. 
 
 12 
 
Why Banks are Necessary 
 
 We have discussed the relation of banks to money in the 
 previous chapter. We have seen how money is necessary 
 to industrial and commercial progress, not because of its 
 own intrinsic worth but because it makes exchange possible. 
 We can next take up a consideration of the part that banks 
 play in the development of industry and wealth. Of all the 
 great institutions that serve the people, such as schools and 
 colleges, churches, railroads, the postofiice, newspapers and 
 banks, the public knows least about banks. To the average 
 person, they are places fitted up with vaults where savings 
 may be stored, where clerks keep records of the balances 
 which the bank will pay back, plus the interest that in some 
 mysterious way has accumulated. And too often the bank 
 clerk is content to think of the bank only as an institution 
 that requires him to report at a certain hour in the morning, 
 post figures in books, the real nature of which he does not 
 understand, and then go home at night after he has struck 
 a balance. The bank clerk ought to know why banks are 
 necessary and how important are their functions, not only 
 because it will enable him to work more intelligently, and 
 with greater interest in his work, but he will also be able to 
 explain the nature of banking to other people, many of whom 
 distrust banks because they do not understand them. 
 
 Banks owe their origin to the simple law of nature that 
 everything that lives grows and expands. 
 
 Nature is very generous and has so arranged her scheme 
 of production and increase that every one, in fact every 
 living thing, has in him or it the power to produce more than 
 is needed for immediate consumption to sustain life. The 
 bee, the ant and the squirrel store up surplus summer food 
 for the winter; the mountain uplands and valleys nourish 
 the deer and other wild creatures with an abundance each 
 
 13 
 
ELEMENTARY BANKING 
 
 season renews. And man, in a civilized state of industry, 
 can through his labor in any direction, produce more than 
 he needs for his own sustenance. Perhaps it is nature's 
 plan that he shall produce in his youth what he must consume 
 in his old age. 
 
 With the development of exchange and the use of money 
 this power to create surplus wealth is harnessed. The sur- 
 plus wealth, converted into money, is laid aside — deposited 
 in banks — for future consumption and thus capital, the third 
 factor of production, has its origin. Wealth instead of being 
 allowed to lie idle, is set to work to produce more wealth, 
 which is good, since wealth is anything that adds to human 
 welfare. Let us see how the bank sets money — the result 
 of work — to work in turn. 
 
 Without exchange, when man was in the savage or pas- 
 toral stage, he produced for himself everything he consumed. 
 As soon as he began to confine his labor to one particular 
 thing which he would sell or exchange when completed, he 
 began to feel the need of credit, that is, the power to borrow 
 from his neighbor for sustenance until he was able to use 
 or sell his own product. Of course, he would borrow not 
 the actual goods, but the money to purchase them. Under 
 modern conditions, money is borrowed and loaned for hun- 
 dreds of purposes and in many different ways, but the 
 underlying principle is always the same. 
 
 For example, the farmer plants his crop in the spring; 
 he must buy seeds, pay for labor and keep his family in food 
 and clothing until the fall when his harvest ripens and can 
 be sold. The store-keeper or merchant fills his shelves with 
 endless variety of goods, part of which he has bought with 
 his own capital and part with money he has borrowed to be 
 paid back when his goods are sold. The builder erects a 
 dwelling or larger edifice for which he must buy labor and 
 material. He will need money until his contract is com- 
 
 14 
 
ELEMENTARY BANKING 
 
 pleted. Railroads are built, mines developed, crops must be 
 moved, new enterprises financed and so on without limit, 
 borrowed money making possible all these vast facilities that 
 are indispensable to modern civilization. 
 
 These conditions would be as nearly impossible without 
 banks as would be an efficient exchange system without 
 money. If everyone who needed to borrow money was 
 forced to search about for someone who had just the right 
 amount to loan, there wouldn't be much business. Fur- 
 thermore, those who had money to loan would need to be 
 acquainted in each case with the borrower's ability to repay 
 the debt else there would be loss and ultimate ruin. 
 
 Banks are storehouses where the equivalent of surplus 
 wealth — money — may be accumulated and loaned for the 
 purpose of creating more wealth. Thus it will be seen that 
 still another virtue, thrift, which we are accustomed to urge 
 upon men as bringing its own reward, is after all a cold 
 business necessity. Men must work, produce surplus 
 wealth, save a part of it or there will be no storehouse of 
 money and credit which is so essential to the production 
 of both the necessities and luxuries of life. The humble 
 wage earner who puts aside even a small fraction of his 
 income is doing more than fortify himself against the 
 future. His accumulated savings added to those of all 
 other classes, rich and poor, placed in banks and by them 
 loaned out, make possible the industry that gives work and 
 sustenance to all. 
 
 There are many ways in which money is deposited and 
 loaned or invested. For this reason, there are several dif- 
 ferent kinds of banks. The same principles are involved 
 in each case, however, and the young bank man who would 
 become a banker is cautioned against the common error of 
 thinking that each kind of bank is peculiar unto itself and 
 so requiring a different course of study. 
 
 IS 
 
Classes of Banks 
 
 It is conceivable that one kind of bank could meet the 
 banking needs of all the people, and in fact such a condition 
 is approximated in a little one-bank town where the institu- 
 tion may be either a state or national bank, a savings banl: 
 or a trust company. Sometimes it is a private bank. Gen- 
 erally speaking, however, the so-called commercial bank is 
 the variety to be found where there is but a single bank. 
 Similarly, in larger cities, we find trust companies which, 
 when the state laws do not contravene, perform practically 
 every financial service except that of note issue. 
 
 Banks are generally classified as follows: Commercial 
 banks (either national or state), trust companies, savings 
 banks and private banks. The building and loan associa- 
 tion is, in principle, a banking organization and some forms 
 of life insurance are closely allied to banking. Each has its 
 particular specialty or function which characterizes it. The 
 fact that there are these different groups, instead of one 
 general kind of bank, is due partly to natural development 
 and partly to design. Since all banking in principle is 
 identical and governed by the same economic laws, it is not 
 surprising to note the tendency in legislation to bring them 
 all closer together. For example, the Federal Reserve Act 
 provides that trust companies may take out national charters 
 under certain conditions, while at the same time, national 
 banks, when not in contravention with state laws may act 
 in a "fiduciary capacity," that is, perform functions usually 
 limited to trust companies. The right of both commercial 
 banks and trust companies to accept savings deposits is 
 universally conceded. They frequently conduct bond de- 
 partments, thus encroaching upon what was formerly the 
 especial field of the private banker who is usually an "in- 
 vestment banker." The private banker, in turn, very fre- 
 
 16 
 
ELEMENTARY BANKING 
 
 quently does a large commercial business and many states 
 are revising their banking laws, which will bring him under 
 the direct supervision of the banking department. The 
 conclusion, therefore, is that although the specialist is more 
 in demand than ever, every banker should be trained along 
 broad lines. 
 
 The close relation between banks of different kinds will 
 be demonstrated more clearly by referring to the organiza- 
 tion charts and the statements of condition shown on pages 
 22 and 23. The difference between banks is precisely the 
 difference between the classes of people whom they serve. 
 The savings bank is usually the bank of the small depositor, 
 the wage earner and the thrifty of all classes; the trust 
 company gives its services more especially to those who 
 have fixed incomes from investments; land owners and 
 corporations. The commercial bank, as the name signifies, 
 does business with manufacturers, tradesmen, merchants 
 and others v/ho "turn" their money at seasonal intervals. 
 Thus we have the "Dime Savings Bank," "Home," "First 
 Penny," "Dollar Savings Bank" and similar suggestive 
 titles. Among trust companies common names are "Fidel- 
 ity," "Guarantee," "Provident" and "Security." When the 
 National Bank Act was first passed it attempted to restrict 
 the titles of the banks to "First," "Second," "Third," etc., 
 but the commercial state banks refused to accept the new 
 charters with this provision, so the act was amended. Hence 
 we have the "Merchants," "Tradesmens," or "Commer- 
 cial" national banks, while in the agricultural districts, where 
 the farmer is the business man, the "Farmers Bank" is 
 common. 
 
 The commercial banks may be said to be the most im- 
 portant since they come into close contact with the industrial 
 world. Upon them falls the function of note issue as well 
 as the other two, deposit and discount. This is due to 
 
 17 
 
ELEMENTARY BANKING 
 
 natural causes, since the greater the trade and commerce, 
 the greater will be the need for money or a medium of 
 exchange. Bank notes give the needed elasticity to cur- 
 rency issues. If our crops were always the same each 
 season, if the population remained fixed in numbers, if each 
 citizen on a given day of each week, year in and year out, 
 purchased the same article of food, furniture or clothing, 
 then our money supply would not need to possess the power 
 to expand or contract. But conditions are fortunately other- 
 wise. Until the Federal Reserve Act became law the issue of 
 notes was a prerogative of the national banks. Ultimately 
 this function will be taken over by the Federal reserve 
 banks. The process of note issue is quite simple: the 
 issuing bank circulates its notes — promises to pay on demand 
 — as money. In order that there shall be confidence in the 
 notes, the bank must be solvent and the notes must be 
 redeemed without question. There must be proper super- 
 vision and control, else there is danger of inflation or too 
 extensive an issue. Bank laws in every country are con- 
 structed to guard against improper issues since banking 
 systems have proved successful or failures in accordance 
 with the soundness of note issues. 
 
 Banking history and business experience have taught the 
 lesson that there are times when there must be a bank of 
 banks. The great central banks of Europe perform this 
 service abroad, and in our own country the Federal reserve 
 banks act as the fly-wheel and governor of our financial 
 machinery. Banks need to borrow just as do individuals, 
 and they can concentrate their surplus or reserve in the 
 reserve banks just as people accumulate their savings in 
 ordinary banks. 
 
 18 
 
Bank Organization and 
 Administration 
 
 It will not be necessary for present purposes to describe 
 the detail of organization of each of the three main classes 
 of banks. The commercial bank plan of organization will 
 serve as a model and, in fact, state laws are often based 
 upon the national bank act in this respect. 
 
 So far as organizing a bank is concerned, the law makes 
 no distinction between the large bank and the small; in the 
 eyes of the law they are identical. In the early days, im- 
 mediately following the independence of the United States, 
 all banks received their charters direct from Congress. 
 Owing to the misconception of banking and the popular 
 distrust of banks, it was a hard matter to secure a charter, 
 consequently abuses developed to such an extent that what 
 were known as "free banking laws" were passed in the 
 several states to correct the political evils incident to bank 
 organization. This plan of procedure obtains to the present 
 day, and any number of "natural" persons, not less than 
 five, may organize a bank. Articles of Association are 
 drawn up and a Certificate of Organization is executed. 
 The capital is subscribed and at least half of it must be paid 
 in in money before the bank may commence business. The 
 balance must be paid in in regular installments within five 
 months. The minimum amount of capital is based on the 
 population of the city or town where the bank is located. 
 The Comptroller of the Currency has power to authorize the 
 organization of a national bank. 
 
 The bank must have a president, a cashier, and at least 
 five directors. The directors must own at least ten shares 
 of stock, except when the capital is not more than $25,000, 
 when five shares are required. The directors are elected 
 by, and represent, the stockholders who are the owners of 
 
 19 
 
ELEMENTARY BANKING 
 
 the bank. They meet at least once a month and direct the 
 policy of the bank. The directors elect the officers, a presi- 
 dent, vice-president, cashier and assistant cashier, who are 
 the executive heads of the institution and are charged with 
 the duty of administering its affairs. The number of vice- 
 presidents and assistant cashiers depends upon the size of 
 the bank. The clerks divide naturally into two groups, 
 tellers and bookkeepers. 
 
 The student must not imagine that each bank, in its inter- 
 nal affairs, is a law unto itself and that the duties and re- 
 sponsibilities of directors, officers and clerks depends upon 
 the size and location of the bank. An acorn dropped into 
 the ground will dig into the soil with its tiny roots, and send 
 up a green shoot bearing two or more perfect leaves. So 
 far as plant organization is concerned, the embryo tree is 
 identical with the giant oak with its sturdy roots and trunk 
 and far-spreading branches and leaves. So it is with banks. 
 The duty goes with the office rather than with the man. 
 The responsibility of the directors is the same in all cases. 
 In the very large banks, we find the board organized into a 
 discount committee, a finance committee, examination com- 
 mittee, etc., in order that the directors may the better keep 
 in touch with the affairs of the bank and fulfill their moral 
 and legal obligations to stockholders and depositors. 
 
 In the small country towns the president is usually inac- 
 tive. He may be a business man who drops into the bank 
 once a day to consult with the cashier who also acts as teller. 
 There will be a bookkeeper, who keeps all the records and 
 acts as general clerk. Such an organization does not mean 
 that the bank has no teller, nor individual ledger bookkeeper, 
 nor discount clerk; the same man (or men) fills several 
 positions, and his responsibilities are those that go with the 
 particular work in hand. Bank work may be roughly grouped 
 into three divisions: executive, teller and bookkeeping, and 
 
 20 
 
ELEMENTARY BANKING 
 
 this classification holds, no matter what the size of the bank 
 or whether it is commercial, trust or savings. 
 
 In large banks, for example, discount or loan clerks relieve 
 the officers of the detail work incidental to the making of 
 loans, or a credit man is employed to collect and keep 
 records that in a small bank are kept in the president's 
 head. Instead of a single teller, there will be two or more, 
 one to pay, another to receive, another to make collections, 
 and so on. The work of all tellers is alike in that they come 
 into direct contact with the bank's customers. The book- 
 keepers are divided into those who keep the general accounts 
 and those who keep the accounts of individual depositors. 
 These last may be redivided into alphabetical groups. 
 
 Reference to the organization chart shown on page 23 
 will assist the student in grasping the general plan of bank 
 organization. The chart will also indicate the usual methods 
 of division of the work as the bank increases in size. The 
 administration and organization divisions printed in capitals 
 are common to all banks, although in some cases they may 
 be known by different terms. For instance the directors 
 of a mutual savings bank are called "trustees." 
 
 21 
 
ELEMENTARY BANKING 
 
 
 
 
 
 
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 23 
 
Departments in a Bank 
 
 As soon as it becomes necessary, on account of volume of 
 business, to divide the work in a bank into divisions, each 
 employing a group of clerks, such division is organized into 
 a department having a department head who is usually a 
 teller, a head bookkeeper, or perhaps a junior officer. In 
 the very large banks the executive staff is itself organized 
 into groups, and there may be a vice-president and one or two 
 assistant cashiers in charge of each important department. 
 
 The work of a department in a large bank is nothing more 
 nor less than the work of a single man in a small bank, 
 apportioned among several men. For example, the receiv- 
 ing teller in a five-man bank will take the deposit, count the 
 cash, examine the checks, assort them as to place payable, 
 enter them upon the proper records and make a settlement 
 or proof at the end of the day. In a large bank each of these 
 operations is performed by a different man or group of clerks 
 under the direction of the receiving teller, who is head of 
 the department. It may be that he himself will do very 
 little if any of the detail work. He becomes the manager. 
 Frequently we find a department within a department, as for 
 example, the money department within the paying teller's 
 department. 
 
 The ordinary departments, classified as to group, may be 
 described as follows: 
 
 Paying Teller's Department (Teller): Pays or certifies 
 checks. In charge of the signature book or cards bearing 
 the authorized signatures of all depositors. Ships currency. 
 In charge of the vault cash and reserves. 
 
 Receiving Teller's Department (Teller): Receives de- 
 posits. Distributes checks to bookkeepers and other depart- 
 ments. Prepares exchanges for clearing house. Turns cash 
 over to the paying teller at end of day. 
 
 24 
 
ELEMENTARY BANKING 
 
 Note Teller's Department (Teller) : Collects notes and 
 drafts due at the bank or elsewhere in the city. Usually 
 in charge of the runners or messenger department, which 
 is a subdivision. 
 
 Collection Department (Teller) : Collects notes, drafts, and 
 other "time" items when payable out of town. Credits 
 accounts of depositors when collections are advised paid. 
 
 Transit Department (Teller) : This is a subdivision of the 
 receiving teller's department and may be known by other 
 terms, such as correspondence, foreign check, miscellaneous 
 check or country check department. Assorts checks pay- 
 able out of town, endorses them and lists them on letters 
 addressed to other banks. Gives totals of outgoing or re- 
 mittance letters to general ledger bookkeeper at end of day. 
 
 Loan or Discount Department (Executive) : Receives notes 
 submitted for discount or makes loans. Figures discount 
 and interest. Has charge of collateral securing loans. 
 
 Credit Department (Executive) : Secures and collects in- 
 formation relating to borrowers. Checks statements sub- 
 mitted by them. In charge of credit files which contain 
 information as to the reliability, business habits and finan- 
 cial strength of borrowers. 
 
 Analysis or Statistical Department (Executive): Usually 
 found in city banks. Analyzes the accounts of depositors 
 to determine which are profitable and which are losing 
 accounts. Makes monthly reports to officers. In charge of 
 statistics relating to the bank's accounts. 
 
 Individual Ledger Department (Bookkeepers) : Keeps the 
 records of the balances of individual depositors. May be 
 subdivided as to kind of accounts (savings, dealers), in 
 addition to ordinary alphabetical division. May balance 
 pass-books or there may be a separate department for this 
 purpose using the statement system. Figures interest 
 on accounts. 
 
 25 
 
ELEMENTARY BANKING 
 
 General Ledger Department (Bookkeepers): Keeps the 
 general or control accounts of the bank. Makes up the 
 bank's statement of condition. 
 
 Country Bank Account Department (Bookkeepers) : Con- 
 fined to city banks. Keeps the accounts of other banks, 
 usually consisting of reserve accounts. 
 
 Auditor's Department (Executive): Responsible for the 
 settlement of the various departments. Reconciles the ac- 
 counts with other banks. Certifies interest calculations. 
 
 In addition to these departments, there are others to be 
 found either in very large banks or even in small banks 
 operating special features. Among the first might be noted 
 the coupon department, exchange department, purchasing 
 department, filing department, interest department, new 
 business department, etc., all of which terms are self- 
 explanatory. Among special departments may be mentioned 
 the bond department, safety deposit department, special 
 deposit department (securities and valuables stored with the 
 bank, but not placed in private boxes). In trust companies 
 there is the trust department which may have a complete 
 independent organization of its own, with officers, book- 
 keepers and other clerks. This department has charge of 
 the trust accounts. All these various departments will be 
 explained in more detail in separate chapters. 
 
 26 
 
Bank Statements 
 
 RESOURCES 
 
 LIABILITIES 
 
 Loans and Dis- 
 
 
 Capital 
 
 $100,000.00 
 
 counts $400,000.00 
 
 Surplus 
 
 70,000.00 
 
 U. S. Bonds to 
 
 
 Undivided Profits 
 
 5,000.00 
 
 Secure Circu- 
 
 
 Circulation 
 
 75,000.00 
 
 lation 
 
 75,000.00 
 
 Individual De- 
 
 
 Other Bonds and 
 
 
 posits 
 
 350,000.00 
 
 Securities . . . 
 
 25,000.00 
 
 Certificates o f 
 
 
 Due from Re- 
 
 
 Deposit 
 
 50,000.00 
 
 serve Agents. 
 
 45,000.00 
 
 Certified Checks 
 
 20,000.00 
 
 Due from State 
 
 
 Cashier's Checks 
 
 10,000.00 
 
 Banks 
 
 3,000.00 
 
 Due to Banks. . 
 
 20,000.00 
 
 Exchanges for 
 
 
 
 
 Clearing 
 
 
 
 
 House 
 
 2,000.00 
 
 
 
 Banking House. 
 
 50,000.00 
 
 
 
 Gold 
 
 25,000.00 
 
 
 
 Legal Tender 
 
 
 
 
 Notes 
 
 15,000.00 
 
 
 
 Silver Certifi- 
 
 
 
 
 cates 
 
 40,000.00 
 
 
 
 National Bank 
 
 
 
 
 Notes 
 
 15,000.00 
 
 
 
 Fractional 
 
 5,000.00 
 
 1 
 
 
 $700,000.00 
 
 5700,000.00 
 
 A good way to understand the nature of banking functions 
 is to examine a bank statement and study the various items 
 of assets and liabilities. Issuing a statement of condition 
 is not left to the discretion of the bank; it is required by 
 law. The national bank act provides that national banks 
 shall publish their statements at least five times yearly, on 
 
 27 
 
ELEMENTARY BANKING 
 
 the call of the Comptroller of the Currency. It may be said 
 then, that banks issue their statements for two reasons; 
 because their semi-public nature makes it legally necessary, 
 and because it is useful as an advertisement. Few people, 
 comparatively speaking, understand how to read a statement 
 so that much of the value is lost both to the bank and to the 
 public. Some banks are beginning to explain the meaning 
 and force of the statement in their advertisements. More 
 should do so. 
 
 For the purposes of illustration, the statement of a national 
 bank may be said to be typical, since it includes more general 
 items than the figures of a state or savings bank. All bank 
 statements are similar, as will be seen by reference to the 
 forms shown on page 22. There are two sides to a state- 
 ment: the liabilities show what the bank owes, the re- 
 sources what the bank owns, or rather what it has 
 wherewith to pay its debts. 
 
 The creditors of the bank may be divided into three 
 groups: (1) the stockholders, (2) the depositors, (3) the 
 general public. The first group are inclined to examine the 
 statement to determine if the bank is earning money, the 
 second group satisfy themselves that the bank is safe, and 
 the third group look to the government for protection since 
 they have no voice in the management of the bank, nor any 
 choice in accepting their relation to the bank. The re- 
 sources may also be roughly divided into three kinds: (l) 
 loans and investments having a fixed maturity, (2) amounts 
 due from other banks usually payable on demand or subject 
 to draft, (3) actual money or cash. There is also the bank 
 building and with this item there is included the amount 
 of money representing the vault, furniture and fixtures. 
 
 These various items all bear relation to each other, and 
 the trained observer is able to base an intelligent opinion 
 on the condition of the bank and the sagacity of its officers 
 
 28 
 
ELEMENTARY BANKING 
 
 by a study of the proportion of one figure to another. A 
 complete analysis, however, is not possible except by com- 
 paring a series of statements covering a long period. This 
 enables one to tell if the bank is growing or doing a profit- 
 able business. 
 
 The first liability item of importance is the capital. This 
 should be large enough to give strength to the bank and 
 enable the institution to accommodate the needs of its 
 customers. Many transactions are by law based on the 
 amount of capital. For example, national banks can loan 
 no more than 10% of the capital and surplus to one individ- 
 ual or interest, and no matter how large the surplus may be, 
 no single loan larger than 30% of the capital can be made. 
 Members of the Federal reserve system are required to 
 subscribe 6% of their capital and surplus to the capital 
 stock of the Federal Reserve Bank of their district. The 
 total amount of mortgage loans is also restricted to a cer- 
 tain proportion of capital. Banks try to sell their stock as 
 widely as possible because if it is held by a great number 
 of people, more business is attracted to the bank and it is 
 hard for anyone to get possession of the greater part of the 
 stock and thus control the bank. 
 
 The surplus also belongs to the stockholders. This fund 
 represents earnings that are set aside to give added strength. 
 If "bad loans" are made, the loss may be charged to the 
 surplus fund, thus securing the depositors. National banks 
 are required to set aside 10% of net earnings as a surplus 
 fund until such fund shall amount to 20% of the capital 
 before a dividend may be declared. 
 
 Deposits are of several kinds. The term "individual 
 deposits" is, by custom, applied to deposits that are subject 
 to check, that is, payable on the order of the depositor 
 this order being written on an instrument called a "check." 
 Savings, or time, deposits are also due to individuals, but 
 
 29 
 
ELEMENTARY BANKING 
 
 not subject to check, that is, the bank may require notice 
 of withdrawal to be given. Certificates of deposits are 
 written acknowledgments made by the bank that a deposit 
 has been made and the bank will pay the amount named 
 upon presentation of the certificate properly receipted on 
 the back, or endorsed. Certificates of deposit may be 
 payable either at sight or on a given date, and are known 
 as demand or time certificates respectively. Deposits made 
 by one bank in another are sometimes called bank deposits, 
 but such accounts are officially reported as "due to banks." 
 There are no restrictions as to the amount of deposits a 
 bank may receive nor need they be limited by the amount 
 of capital stock. It has been set down as a good banking 
 principle, however, that the capital and surplus of a com- 
 mercial bank should approximate 10% of the total deposits. 
 This, however, is a statement of opinion, rather than of fact. 
 
 Certified checks and cashiers' checks are used when the 
 holder or the maker of a check wishes to exchange his 
 credit, which may have only a local value, with the 
 credit of the bank, which has a general value. That is, the 
 account of the depositor is charged the amount of the check, 
 which then becomes a liability upon the bank, payable 
 when properly endorsed. Note that the deposit obligation 
 has not been discharged so far as the bank is concerned 
 until the check is paid, hence in calculating reserve, cer- 
 tified checks and cashiers' checks are included as a part 
 of the deposits. Except that they are payable to a named 
 payee, they are practically the same as bank notes which 
 are payable to bearer — they are obligations of the bank 
 due the general public. 
 
 The circulation item, meaning the notes of the bank for 
 use as money, is to be found only in the statement of the 
 national bank, and in course of time all bank note issue 
 will be the exclusive function of the Federal reserve banks. 
 
 30 
 
ELEMENTARY BANKING 
 
 These notes are secured by collateral, that is, the public 
 is secured against loss in the event of the failure of the 
 bank, by a deposit of bonds placed with the Treasurer of 
 the United States. This is called the currency principle 
 of note issue. Nearly all other countries use bank notes 
 issued under the banking principle, in which no collateral 
 is put up and the notes are secured by the general assets 
 of the bank. This is the more scientific principle, since the 
 needs of trade, rather than the scarcity or abundance of 
 bonds or other collateral security governs the elasticity of 
 the issue. 
 
 Turning to the assets or resources of the bank, the first 
 classification of items consists of the investments. These 
 vary as to kind and ratio to the other figures of the state- 
 ment as between different kinds of banks. They will also 
 vary in the same kind of banks but located in different 
 sections of the country. The commercial bank must keep 
 its assets liquid; that is, constantly turning or moving 
 because its depositors are making active use of their funds 
 at all times. Loans and discounts, the largest investment 
 item of the commercial bank, have fixed maturities and, 
 therefore, the bank also buys bonds because they can be 
 readily sold and converted into money in case of need. 
 Bonds are sometimes called "secondary reserve" for this 
 reason. Until the passage of the Federal Reserve Act, 
 national banks were compelled to invest a certain propor- 
 tion of their capital in government bonds. This provision 
 grew out of the necessities imposed by the Civil War. At 
 that time the credit of the government was at a low ebb 
 and purchasers for bonds could not be found. 
 
 It is not amiss to pause a moment and take note of the 
 scars that have been left upon our national life by the four 
 years' war between the states. On the map there is the 
 state of West Virginia; in every town and city, North and 
 
 31 
 
ELEMENTARY BANKING 
 
 South, are noble monuments to commemorate the deeds 
 of brave men; in the pages of history will live forever in 
 solemn grandeur the figure of Abraham Lincoln; in the 
 world of music there are the stirring strains of a hundred 
 songs and battle hymns; and, coming down to the more 
 sordid affairs of men, in our banking and currency systems 
 we have the justly deplored "greenback," or U. S. note, 
 which was forced into circulation at the time of the war, 
 and the national banking system. 
 
 Before leaving this momentary digression, it is well to 
 call the attention of the student to the experiences met 
 with in connection with the issue of "greenbacks," or fiat 
 money. When Congress first authorized their issue in 
 1862, to be used as money, they caused gold to go to a 
 premium. It required at one time $258 of greenbacks to 
 secure $100 of gold. They did not possess the qualities 
 that good money must have, and it was not until the policy 
 was adopted by the government of redeeming them in gold 
 on demand that they approached par value. They illus- 
 trate the fact that man-made laws cannot upset economic 
 laws any more than water can be made to run up hill by 
 an act of legislation. 
 
 In some states trust companies are prohibited from dis- 
 counting, that is, loaning money on promissory notes. This 
 law is evaded by "purchasing" the notes outright, a dis- 
 tinction in law but with little difference in actual practice. 
 Both trust companies and savings banks invest largely in 
 bonds and mortgages. They are able to loan their money 
 in this way because trust funds and savings deposits are 
 not constantly turning; they are of the nature of long-time 
 investments. Many states have laws which prescribe cer- 
 tain limitations governing the purchase of bonds. In such 
 states bond issues are advertised as "legal investments" 
 for savings banks and trust funds. In other words, the 
 
 32 
 
ELEMENTARY BANKING 
 
 state protects the depositors by permitting their money to 
 be loaned only in the safest securities. Good banking 
 principles require that all banks should so loan or invest 
 their funds that the loans are of different kinds and matur- 
 ities follow each other regularly. If stress should occur, 
 if an unusual number of depositors want their money, the 
 bank will have loans coming due to meet the demands, and 
 if these funds are not sufficient the bank can fall back on 
 its "secondary reserve," that is, sell its bonds, which, if 
 they are first class, will command a ready market. 
 
 The items "due from banks," "checks and cash items," 
 "exchanges for the clearing house," are amounts due by 
 other banks and are payable on demand. They may repre- 
 sent two different kinds of accounts, however. Amounts 
 due from other banks may be checks in process of collection, 
 that is, checks payable at other banks either in the city or 
 elsewhere, which have been sent out for collection, or they 
 may represent funds which have been collected, but which 
 are on deposit with another bank — known as a "reserve 
 agent" — and are subject to draft. 
 
 The cash items, actual money, usually classified as to 
 kinds, are self-explanatory. This is the "till money" of 
 the bank to care for currency needs. It is also the bank's 
 reserve and it is based by law upon the amount of net (i. e., 
 collected) deposits. The percentage of reserve required 
 varies with the kind of bank, this being a natural result of 
 the fact that one kind of bank will not have the same de- 
 mands as another. This money represents the uninvested 
 portion of the bank's funds. 
 
 The building, furniture and fixtures are carried as a 
 resource, usually at a figure less than their actual cost. 
 This is done not only as a margin of safety, but also because 
 few banks would be able to sell their property at short 
 notice for its full value. This item should, therefore, be 
 
 33 
 
ELEMENTARY BANKING 
 
 given close scrutiny in determining the strength of the 
 bank. Sometimes very strong banks "charge the item 
 off" entirely out of surplus on the other side of the state- 
 ment. Others do not own their buildings, but pay rent. 
 
 With this explanation of the various items, we can now 
 use an outline of our bank statement to show how the insti- 
 tution "works." 
 
 ASSETS 
 
 LIABILITIES 
 
 Loans $400,000.00 
 
 Bonds 100,000.00 
 
 Due from banks 50,000.00 
 Banking house. 50,000.00 
 Cash 100,000.00 
 
 Capital $100,000.00 
 
 Surplus 75,000.00 
 
 Circulation. . . . 75,000.00 
 Deposits 450,000.00 
 
 $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 dimen- 
 sions 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 
 
 34 
 
ELEMENTARY BANKING 
 
 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 de- 
 positors with its own notes or promises to pay which cir- 
 culate 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 pay- 
 ment. 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 
 
 35 
 
ELEMENTARY BANKING 
 
 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. 
 
 36 
 
Bank Accounting 
 
 Bank accounting consists in making written, permanent 
 records of every transaction. Every penny must be ac- 
 counted for. The statement of the bank, which we have 
 just discussed, shows the general, or control, accounts of 
 the bank, and the various books of the bank show the detail 
 of these items. It would not be impossible, but it would 
 be entirely impractical, to enter every figure directly on the 
 statement of condition. We might imagine an enormous 
 sheet on which the capital is entered as to the ownership 
 of each share of stock. Instead of total deposits, the bal- 
 ance of each depositor would appear opposite his name. 
 On the other side, instead of loans and discounts, there 
 would be an itemized list of the loans with the names of 
 the borrowers. With such a sheet spread out over a floor 
 space of great area, we might imagine the clerks crawling 
 up and down the columns like flies making debits and 
 credits. This is, of course, absurd, but it is precisely what 
 happens, except that the entries are made on books, loose 
 leaves or cards, and the final results are posted on the 
 statement of condition which is thus altered day by day. 
 
 As in other matters we have mentioned, banks are also 
 alike with respect to bank accounting, the same principles 
 govern whether the bank is large or small, national bank 
 or trust company. All the books are a part of the general 
 books, and the extent to which they are divided depends 
 on the size of the bank. Division is made to fit the capacity 
 of the clerk. When any part of the work becomes too bur- 
 densome for one man, he may be given an assistant or the 
 books and records will be further divided, so that two men 
 can do the same thing without conflicting. In very large 
 banks a clerk may spend all his time listing checks upon 
 a sheet, or adding up certain columns of figures or doing 
 
 37 
 
ELEMENTARY BANKING 
 
 any one of a thousand things that must be done in the 
 process of keeping accounts. Unless he is studious and 
 observant, he loses sight of the fact that his work is a part 
 of the whole, he becomes mechanical, falls into a rut and 
 banking, instead of being an interesting employment full of 
 possibilities, is to him mere drudgery. He is standing so 
 close to the machinery that he allows it to master him 
 instead of broadening his vision by study and thus master- 
 ing his task. 
 
 The first principle in bank accounting, as in all other 
 bookkeeping, is that for every debit there must be a credit, 
 and vice-versa. In accordance with this fundamental 
 theory the books must always be in balance. As we have 
 seen with respect to the statement, every dollar of liabilities 
 is accounted for by another dollar of resources. This is 
 true of every bank. If the institution is large enough to 
 be divided into departments, such departments are charged 
 with all funds passing through their hands, and they must 
 show on their records what has become of every penny. 
 Similarly each clerk, bookkeeper or teller accounts at the 
 end of the day for each item of cash he has handled. When 
 he has done so he is said to have * 'settled," "balanced" or 
 "struck a proof." Every bank clerk has had the experi- 
 ence of remaining at his desk until a late hour at night 
 checking up his day's work searching for a difference of a 
 few cents. Often he becomes embittered at what seems 
 to him a tyranny when the small sum of money involved 
 is considered. The reason he must settle, however, is not 
 on account of the possible loss of ten cents, but because the 
 most important principle in bank accounting is involved. 
 "Accuracy first" is a motto that should be framed, figura- 
 tively at least, upon the wall of every banking room. 
 
 The books used by a bank are of various kinds and then- 
 purpose is indicated by name. A ledger is a book used to 
 
 38 
 
ELEMENTARY BANKING 
 
 keep a record of balances. To "post" means to enter in 
 the proper columns either the debits or credits on the ledger, 
 and the difference between them represents the balance 
 either due by or to the bank. Most banks are doing away 
 with bound books, especially ledgers, and substituting 
 cards or loose leaves. This plan enables several men to 
 work on the same records, which would be impossible if they 
 were bound in a single book. Alphabetical division is also 
 easier of adjustment and "inactive" accounts can be readily 
 separated from "active" accounts. Totals of balances can 
 be listed upon adding machines for proof more easily from 
 loose sheets than from bound books. But whether bound 
 or not, records of balances are kept upon ledgers. 
 
 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. 
 
 A depositor of the bank wishes his account to be charged 
 and the money paid to a named payee. The piece of paper 
 upon which he writes this order is a "check." If he de- 
 posits money, he writes the memorandum of the amount 
 upon a ruled slip of paper and this is the "deposit ticket." 
 Bookkeepers enter debit and credit records upon their 
 journals directly from these items. Money, however, may 
 change hands or from one account to another, in other ways; 
 by letter, telegram or other debit and credit advice. In 
 such cases a "charge ticket" or "credit slip," as the case 
 may be, is signed or initialed by an officer of the bank, and 
 entry with full explanation is made upon a book from which 
 
 39 
 
ELEMENTARY BANKING 
 
 record the bookkeeper makes his entries. This book is 
 known as a "scratcher," "tickler" or a "blotter." The 
 terms mean practically the same thing. A book upon which 
 a complete description of a negotiable instrument or trans- 
 action is made for a permanent record or for reference, is 
 called a register. For example, bond register, collection 
 register, etc. 
 
 All other books, cards, sheets of whatever nature are a 
 part or subdivisions of these books. Often they become 
 known among the clerks by some other name descriptive 
 of their general appearance. For instance, the general 
 ledger scratcher in one bank is known as the "red book," 
 while the collection department scratcher is the "black 
 book." These names have stuck through generations of 
 clerks, and a young man going into another bank has been 
 known to ask for the "black book," and being untrained 
 in accounting, he had difficulty in making himself under- 
 stood. Similarly, in New York City banks the pigeon- 
 holed desk where checks are assorted for the clearing 
 house is generally known as the "clearing house rack." 
 A New York bank clerk visiting a Philadelphia institution and 
 asking to see the "rack" would probably be shown a hat room. 
 
 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 in- 
 stance, 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. 
 
 40 
 
ELEMENTARY BANKING 
 
 As 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 lia- 
 bilities 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 corre- 
 sponding reduction in deposits taking place. How these 
 various transactions are recorded will be discussed in more 
 detail in the following chapters. 
 
 41 
 
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 sep- 
 arate 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 deposi- 
 tors; the money can be handled more easily and if differ- 
 ences 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 con- 
 venience 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 rela- 
 tion 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 some- 
 times confuse the pass-books. The amount of the deposit 
 
 42 
 
ELEMENTARY BANKING 
 
 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 tele- 
 phone, 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 assist- 
 ants, 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 cer- 
 tain 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' de- 
 
 43 
 
ELEMENTARY BANKING 
 
 partment 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 re- 
 sponsibility 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 insti- 
 tutions 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 geographic- 
 ally, 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 
 
 44 
 
ELEMENTARY BANKING 
 
 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 recapitu- 
 
 45 
 
ELEMENTARY BANKING 
 
 lated, 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. 
 
 TYPICAL DISTRIBUTION SHEET USED IN THE 
 BLOCK SYSTEM 
 
 Country Checks 
 
 City Checks 
 
 Checks on 
 this bank 
 
 Cash 
 
 $162.29 
 
 15.27 
 
 222.12 
 
 83.33 
 
 1,000.00 
 
 $29.16 
 
 4.22 
 
 .87 
 
 926.12 
 
 $110.28 
 
 92.15 
 
 47.16 
 
 523.06 
 
 10.00 
 
 $116.22 
 
 $960.37 
 
 
 $1,483.01 
 
 $782.65 
 
 
 
 Recapitulation 
 
 Deposits 
 
 Depositors 
 
 
 $1,483.01 
 960.37 
 782.65 
 116.22 
 
 $1,826.10 
 
 4.22 
 
 1,511.93 
 
 Smith & Co. 
 John Doe 
 S. Williams 
 
 
 $3,342.25 
 
 $3,342.25 
 
 
 46 
 
Paying Teller 
 
 The paying tellers 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 over- 
 draft, 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 pre- 
 senting 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 en- 
 dorser; 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 pay- 
 ment. 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 
 
 47 
 
ELEMENTARY BANKING 
 
 his good that the teller hesitates or insists upon identifica- 
 tion. 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 pre- 
 sented 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 sig- 
 nature 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 line before his window waits, 
 he will have bills crossed in piles, or under bands, con- 
 taining 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 dis- 
 cuss 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 
 
 48 
 
ELEMENTARY BANKING 
 
 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 tel- 
 ler'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 receiv- 
 ing 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 calculat- 
 ing 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. If there were 
 
 49 
 
ELEMENTARY BANKING 
 
 no legal or ordinary business restriction on bank loans we 
 might expect to see all the bank's funds loaned out, and we 
 have seen in an earlier chapter how unsafe such a condition 
 would be. 
 
 Reserve is calculated on net deposits, that is, deposits 
 that have been collected. Referring to the outline of the 
 bank statement again, we understand that if a check for 
 $1,000.00 payable in Chicago is deposited in a Boston bank, 
 the deposits of the Boston institution have apparently in- 
 creased $1,000.00 and the item, "due from banks," on the 
 other side, has increased the same amount. The $1,000.00 
 is really not a part of the deposits because it is not yet 
 collected, and good banking does not permit a depositor to 
 draw against uncollected funds. Therefore, in estimating 
 reserve, we subtract from the gross deposits all the items 
 on the resource side representing unpaid checks. We 
 except "due from reserve agents," because such amounts 
 are collected funds subject to the draft of the bank. A 
 certain percentage of the net deposits must be kept as a 
 reserve, part of which must be in cash and another part 
 may.be with a reserve agent, but the full amount must be 
 carried or the bank may not make any new loans or declare 
 a dividend until the reserve is restored. The percentage 
 varies depending upon the kind and location of the bank. 
 One of the functions of the Federal reserve banks is to 
 carry the reserves of the national and other member banks, 
 or that part of the reserves which banks may keep on 
 deposit outside their own vaults. The importance of this 
 provision of the Act is indicated by the fact that it is en- 
 titled the Reserve Act. Under it the reserves of all the 
 member banks are concentrated in the Federal reserve 
 bank of the district. The combined reserves of which the 
 deposits of the reserve banks consist, are thus available for 
 the relief of any member needing additional cash. The 
 
 50 
 
ELEMENTARY BANKING 
 
 member borrows money from the reserve bank by re- 
 discounting its commercial loans, which increases the 
 amount "due from the Federal reserve bank" by the 
 amount re-discounted. 
 
 51 
 
ELEMENTARY BANKING 
 
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Note Teller 
 
 Negotiable instruments are forms used in the business 
 world for the transfer of values. In the ordinary transac- 
 tions of commerce, they take the place of actual money. 
 We have learned in an earlier chapter that money repre- 
 sents value and negotiable instruments are used as sub- 
 stitutes 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 pay- 
 ment 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 act- 
 ing as the agent of the owner of the paper to be collected. 
 
 In small banks it is not unusual to see a brass sign dis- 
 played at the receiving tellers 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 de- 
 partment 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 
 
 54 
 
ELEMENTARY BANKING 
 
 the payer. The messengers also present checks for pay- 
 ment at banks not represented in the clearing house, col- 
 lect 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 responsi- 
 bilities 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 pro- 
 tested or not if unpaid. There may be other instructions, 
 as, for example, a request for telegraphic advice of pay- 
 ment. A column is used to record the final disposition of 
 the item which in banking parlance is called "fate." Usu- 
 ally 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 deliv- 
 ered 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 pre- 
 sentment 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. 
 
 55 
 
ELEMENTARY BANKING 
 
 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 pro- 
 tested. 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 instru- 
 ments 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 col- 
 lection 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 
 
 56 
 
ELEMENTARY BANKING 
 
 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 deposi- 
 tor will be charged. This plan is adopted for mutual con- 
 venience 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 instruc- 
 tions. 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 book- 
 keepers. 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. 
 
 57 
 
Individual Ledgers 
 
 The individual ledgers are the books upon which the 
 detail records of the deposits are kept. Such records con- 
 sist of either debits or credits and the balance. Modern 
 ledgers allow three columns to each account, one for debits, 
 one for credits and one for the balance, although many 
 banks still use the two-column ledger, the credits being 
 posted beneath the balance which is extended in red ink. 
 Bound ledgers are gradually giving way to loose sheets or 
 cards, each account having a separate leaf or card. This 
 plan is much more convenient since closed or "dead" 
 accounts can be eliminated and inactive accounts can be 
 kept separate from those that are active. It is also easier 
 to make alphabetical splits in the ledgers when an increase 
 of work makes it necessary. 
 
 While there are several bookkeeping systems employed 
 by banks, they are all alike in principle and vary only be- 
 cause the business of the customers warrants different 
 labor-saving methods on the part of the bank. For ex- 
 ample, active commercial accounts require considerable 
 posting of checks and deposit tickets daily and the balances 
 are constantly changing. Savings banks, on the other 
 hand, deal with a class of people who make deposits only 
 at irregular intervals and withdrawals are also infrequent. 
 We will discuss the methods usually employed in a com- 
 mercial bank using the three-column, loose-leaf ledger. 
 
 The bookkeeper receives checks from both the paying 
 and receiving tellers, although in some very large banks 
 they come to him from the check teller who assorts the 
 checks as to the ledgers and examines the signatures and 
 the endorsements. Sometimes the bookkeeper is held re- 
 sponsible for the payment of a check bearing a forged or 
 incorrect signature or endorsement, but usually his liability 
 
 58 
 
ELEMENTARY BANKING 
 
 in this direction is limited to * 'stop-payments." A good 
 bookkeeper, however, whether he is specifically charged 
 with this duty or not, is always on guard against irregular- 
 ities. Checks come in "courses" from the tellers, that is, 
 at certain times during the day, after exchanges are re- 
 ceived from the clearing house, or the morning mail is 
 opened and at other fixed periods, batches of checks come 
 into the bookkeeper's hands. He assorts them alphabetic- 
 ally and enters them upon a journal which is usually a loose 
 sheet that fits into an adding machine. A total of the 
 checks of each depositor is struck and these totals are then 
 posted in the debit columns against the proper accounts. 
 There are ledgers in use which have an extra column for 
 detail checks, so that no journal is necessary. As the 
 bookkeeper posts, he watches the balances to see that the 
 accounts are not overdrawn. He must be extremely care- 
 ful not to post checks to the wrong account. This is very 
 apt to happen if the bookkeeper is careless, because nearly 
 all banks have accounts of similar, and sometimes identical 
 names. If a check drawn by John A. Smith is refused as 
 not good because the account has been apparently over- 
 drawn by certain checks that should have been charged to 
 John E. Smith, the bank is not only apt to lose a good 
 account, but may even be liable to John A. Smith for what- 
 ever damage his credit has suffered. 
 
 Alternating with the posting of debits, the bookkeeper 
 posts the credits or deposit tickets which also run in 
 "courses." In making credit entries as much care must 
 be observed as in posting debits and for the same reasons. 
 In addition to the deposit ticket entries there may be other 
 kinds of credits. If the depositor has received a loan, the 
 bookkeeper receives advice of the amount from the loan 
 clerk and opposite the amount in the credit column he may 
 place a mark, "L" meaning loan, "N" meaning note, or 
 
 59 
 
ELEMENTARY BANKING 
 
 "D" meaning discount. If a collection item has been paid, 
 the credit will be marked "C." These marks are merely 
 an abbreviated method of identifying entries, of assistance 
 in the process of examining the accounts of the bank. 
 
 At the end of the day the bookkeeper puts all his checks 
 together in alphabetical order and arranges the deposit 
 tickets similarly. Most banks are now using the "state- 
 ment system" of balancing pass-books. This work is 
 done by a separate clerk or subdivision of the bookkeeping 
 department. Each depositor has a separate sheet or state- 
 ment on which are entered the daily transactions. This is 
 sometimes called the "skeleton ledger," because its chief 
 purpose is to show the daily balance of each account rather 
 than the detail. Since all the checks and deposit tickets 
 are posted the following day, and hence are available for 
 posting without any delay, the statement clerk is able to 
 handle many more accounts than the bookkeeper whose 
 work comes to him in relays. After the checks and tickets 
 are entered on the statement, they are filed away, the 
 deposit tickets remaining in possession of the bank and the 
 checks being handed to the depositor at the end of the 
 month. Time was when the checks were also retained (as 
 they still are in some foreign banks), but the custom has 
 grown in this country to regard the endorsement on a check 
 as a receipt in payment of a debt. The completed monthly 
 statements, showing the balance of each depositor, are 
 compared with the ledger balances to prove the correctness 
 of the amounts and they are then given to the depositors. 
 Under the pass-book settlement system, the deposit entries 
 in the book are added to the last settlement balance, the 
 checks are listed on an adding machine and the total is 
 deducted, showing the new balance which must agree with 
 the ledger balance. 
 
 Probably the first thing the bookkeeper will do in the 
 
 60 
 
ELEMENTARY BANKING 
 
 morning is to make up a list of balances of all the important 
 accounts. This is usually a pencil memorandum and is 
 handed to the paying teller or an officer for their informa- 
 tion and guidance. Another duty to be performed at odd 
 moments during the day is keeping the record of interest 
 bearing balances. Banks differ as to the method of cal- 
 culating the net balance upon which interest is allowed. 
 The usual, and incidentally, the soundest method is to 
 deduct from the balance the amount of checks presented 
 against it that day and the amount of uncollected checks 
 represented by deposits of out-of-town items deposited dur- 
 ing the preceding days. The length of time such deductions 
 cover is governed by the distance and time taken in collect- 
 ing them. Interest is then allowed on the net balance 
 since this represents the true balance of the depositor 
 available for loans. The principle is the same as that 
 underlying the calculation of reserve. 
 
 INDIVIDUAL BOOKKEEPER'S SETTLEMENT 
 
 Paying Teller Balance Aug. 1 . $206,142.10 
 
 checks $29,316.10 Deposits 52,143.16 
 
 Receiving Teller Collections 1,624.15 
 
 checks 11,416.05 Loans 2,500.00 
 
 Balance Aug. 2 . 221,677.26 
 
 $262,409.41 $262,409.41 
 
 Few modern banks — if we except the mutual savings 
 banks — use the "trial balance" system of settlement for 
 the individual ledgers. Settlement is made daily. The 
 bookkeeper begins the day with a total of all the balances 
 as they were at the close of the preceding day's business. 
 
 61 
 
ELEMENTARY BANKING 
 
 After he has finished the day's postings, he makes his proof 
 by adding all the credits to this balance total and then sub- 
 tracts the debits or total of checks as shown on his journals. 
 The sum of the new balances which he gets by running his 
 accounts on an adding machine must equal the figures shown 
 on his calculation. 
 
 As an illustration of the way in which the figures of one 
 clerk serve as a check on the figures of another, the book- 
 keeper's proof furnishes a good example. The totals of 
 checks charged against the various accounts are taken from 
 the bookkeeper's journal and these totals must agree with 
 the figures the tellers use in their own settlements. This 
 is also true of the total of deposits, etc. 
 
 62 
 
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 what- 
 ever 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 pre- 
 vious 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 
 
 63 
 
ELEMENTARY BANKING 
 
 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 what- 
 ever 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 ac- 
 counts 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 cor- 
 respondent 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 con- 
 
 64 
 
ELEMENTARY BANKING 
 
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 H t ort 
 
 I 
 
ELEMENTARY BANKING 
 
 stantly "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 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 purpose of the reconcilement, as will be seen, is to 
 account for the difference between the balances shown on 
 the books of the two banks on the same date. Errors or 
 omissions of debit or credit entries are then adjusted. 
 
 66 
 
Loans and Discounts 
 
 Banks exist, as we have learned, in order that the sur- 
 plus wealth which is stored up may be loaned out and put 
 to use through commerce, trade and industry in the pro- 
 duction 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 in- 
 vestments, 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 reoays the bank and not B. Dis- 
 counting 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 
 
 67 
 
ELEMENTARY BANKING 
 
 and the borrower. For instance, let us suppose A, a regu- 
 lar 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 dis- 
 count, 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, ware- 
 house 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, there- 
 fore, for large industries which borrow heavily to distribute 
 their loans among many banks. This is accomplished 
 
 68 
 
ELEMENTARY BANKING 
 
 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 dis- 
 cussing. People who deal in goods, such as manufac- 
 turers, jobbers, retailers and the like, need money at cer- 
 tain seasons to buy raw materials, replenish stock, pay 
 for labor, etc. Loans for these purposes have fixed matur- 
 ities 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 
 
 69 
 
ELEMENTARY BANKING 
 
 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 collat- 
 eral), amount, where payable, when due, rate, discount, pro- 
 ceeds. 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 collat- 
 eral may be recorded upon the face of an envelope in which 
 it is enclosed. Provision is made for keeping records of sub- 
 stitutions of collateral, and when the borrower pays the loan 
 he signs a receipt for the collateral which is returned to him. 
 
 70 
 
ELEMENTARY BANKING 
 
 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 de- 
 positor 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 draw- 
 ing 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 connec- 
 tion 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 cus- 
 tomer of the bank offers a note for discount, the cashier 
 
 71 
 
ELEMENTARY BANKING 
 
 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 
 chppings, 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 in- 
 clination to pay. To be able to loan money wisely and to 
 those who are entitled to it, in short, the ability to dis- 
 tinguish between a safe risk and an unsafe one, is the 
 quality that marks the good banker. 
 
 72 
 
Stocks and Bonds 
 
 In a previous chapter we discussed the importance of 
 capital and how it arises as the result of the creation of 
 surplus wealth. 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 bor- 
 rowed from banks — raw materials, fuel, funds for wages, 
 etc. Fixed capital may be defined as money that is in- 
 vested; 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. Obvi- 
 ously 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. 
 
 73 
 
ELEMENTARY BANKING 
 
 Indeed, the stockholder as part owner is liable to an assess- 
 ment 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 ordi- 
 nary 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 surround- 
 ing 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 de- 
 partment. This department buys large blocks of various 
 
 74 
 
ELEMENTARY BANKING 
 
 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 in- 
 stance, "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 ser- 
 vices. 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 them- 
 selves 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 cor- 
 porations, firms, or municipalities borrowing money through 
 bond issues. 
 
 75 
 
Savings Banks 
 
 As we have seen, banks belong to three main groups — 
 commercial, savings and trust. It would be more exact to 
 say that there are in general three kinds of banking, be- 
 cause one bank may, and often does, transact these differ- 
 ent kinds of business under one roof. National banks are 
 essentially commercial banks, yet many of them conduct 
 savings departments, and the Federal Reserve Act permits 
 them to act as trustee, executor, registrar, etc. — trust com- 
 pany functions — when not in contravention of state laws. 
 State commercial banks are like national banks in these 
 respects. Deposits in commercial banks may be made up 
 largely of loans, or, putting it differently, there are deposits 
 of credit as well as deposits of money. In the sense that 
 deposits of cash are deposits of money that has been * 'saved," 
 all banks may be said to be institutions for the receipt and 
 safeguarding of savings. This use of the word savings is, 
 therefore, quite common in bank names, although a bank 
 using the word in its title may in reality be a commercial 
 bank. In the State of Iowa the law provides for the organ- 
 ization of two kinds of banks, "state" banks and "savings" 
 banks, and the designation, savings, is required by the 
 code. Inasmuch as there are certain advantages to be 
 derived in organizing under the savings part of the code, 
 we find many savings banks, so called, in Iowa which are 
 in point of fact ordinary commercial banks. The attention 
 of the student is directed to this point because of the con- 
 fusion that exists on account of the variation in the use 
 of terms in different states. Thus in Massachusetts refer- 
 ence to a bank directory will disclose but three kinds of 
 bank titles — national banks, savings banks and trust com- 
 panies. These last are virtually commercial state banks with 
 the privilege of doing "trust" business if they so desire. 
 
 76 
 
ELEMENTARY BANKING 
 
 Savings banks in the strict meaning of the term are 
 banks organized to receive the savings of depositors, to 
 invest them in loans and securities of the very safest kind, 
 and to pay the depositors a fair rate of interest. The rela- 
 tion between the savings bank and its customers is of a 
 close and confidential nature. The depositors are for the 
 most part of the poorer classes, the working people and 
 the thrifty of all sexes and ages who seldom accumulate 
 enough money to invest it for themselves even if possessed 
 of sufficient business judgment to wariant their doing so. 
 We find that both the laws of the state and the rules of 
 savings banks throw every possible safeguard around the 
 savings bank depositor. In many states not only are sav- 
 ings banks restricted as to the kind of investments they 
 may make, but the law even goes so far as to designate a 
 list of specific securities which are classed as "legal in- 
 vestments for savings banks and trust funds." The two 
 most common forms of investments for savings banks are 
 mortgages upon real estate, preferably homes, and bonds. 
 Among the latter railroad and municipal or civic bonds are 
 given the preference, since the margin of safety is greater. 
 Such investments are possible since savings deposits are of 
 a permanent nature. The savings bank is the depository 
 for money laid by for a "rainy day," old age, sickness and 
 similar needs. Parents open accounts for their children, 
 partly to teach them the habit of thrift, partly to defray the 
 expenses of education. The young married couple will 
 deposit the funds resulting from little household economies 
 that they may build themselves a home, and there are 
 thousands of savings accounts the owners of which may have 
 no other definite purpose in mind except the instinct to 
 save, which is natural to the normal human being, a habit 
 that man has in common with other creatures of the earth. 
 
 There are two kinds of savings banks in the United 
 
 77 
 
ELEMENTARY BANKING 
 
 States, the stock savings bank and the mutual savings 
 bank. The stock savings bank, as the term implies, has 
 capital stock and is organized for profit. The mutual sav- 
 ings bank, found almost exclusively in the section east of 
 Ohio and north of Virginia, has no capital stock, the profits 
 belonging to the depositors and being paid to them as 
 interest upon balances. The stock savings bank has a 
 board of directors and the affairs of the institution are 
 managed very much along the lines of the average com- 
 mercial bank. The mutual savings banks are managed by 
 a board of trustees, which is a self-perpetuating body chosen 
 for their integrity and standing in the community. Of the 
 two, the mutual banks are by far the largest, there being 
 at least four with deposits of over one hundred millions of 
 dollars. The report of the Comptroller of the Currency for 
 1913 showed total deposits in mutual savings banks to be 
 over four billions of dollars, while the deposits in stock 
 savings banks were less than one billion. The postal sav- 
 ings bank system, conducted by the postoffice department, 
 is a concession to those who for one reason or another do 
 not trust banks. Money that would otherwise be hoarded 
 is put into productive channels through the operations of 
 the postal savings system. 
 
 Savings bank accounting differs from other bank ac- 
 counting only to the extent that the business is conducted 
 with a different class of depositors, whose needs are not the 
 same as the needs of the business man and merchant. 
 Savings accounts, being comparatively inactive and small 
 as compared with commercial accounts, are usually re- 
 corded upon ledgers and other records by number. Savings 
 bank balances are not subject to check as a rule, nor could 
 they very well be since the investments of the bank are 
 not sufficiently liquid to permit withdrawal without due 
 notice. Some banks have a fixed rule requiring two weeks' 
 
 78 
 
ELEMENTARY BANKING 
 
 notice before money may be withdrawn; others pay upon 
 the presentation of the pass-book, but practically all of 
 them reserve the right to take advantage of the law, when 
 necessary, which permits a savings bank to demand sixty 
 days' notice of the withdrawal of funds. The pass-book 
 used by a savings bank is used as a voucher or a receipt, 
 both for money deposited and money withdrawn. It is also 
 evidence of the contract between the bank and the deposi- 
 tor. The pass-book must always be presented when money 
 is withdrawn, the depositor being required to identify him- 
 self not only by possession of the book, but by his signature 
 and his ability to answer test questions, for example, his 
 mother's maiden name. The bank is not required by law 
 to be familiar with the signature except that it is a means 
 of identification. Many of the depositors may be illiterate 
 or they may be children whose handwriting undergoes rapid 
 changes, consequently many savings banks use the finger- 
 print method of identification. These precautions are neces- 
 sary to prevent money being paid out to imposters who may 
 have gotten illegal possession of a pass-book. In order to 
 prevent depositors from using the bank as a temporary 
 depository for idle funds there is usually a limit placed upon 
 the amount anyone may deposit in a single year, and bal- 
 ances over a certain amount, $3,000.00 for example, do not 
 draw interest. 
 
 Savings banks specialize in mortgage loans which are 
 loans secured by real estate. A mortgage is a conditional 
 deed conveying the property of the mortgagor, the borrower, 
 to the mortgagee, the bank. The instrument is conditional 
 in that it is void if the borrower meets the conditions im- 
 posed, namely, the payment of interest and principal when 
 due. The papers incidental to a mortgage loan are the 
 note or bond which is the evidence of debt; the mortgage 
 duly executed which is the security; the abstract of title, 
 
 79 
 
ELEMENTARY BANKING 
 
 which indicates that there are no prior liens against the 
 property; the insurance papers which protect the bank 
 against loss if the mortgaged property is destroyed by fire. 
 In applying for a mortgage loan, the applicant describes the 
 property and states the amount of money desired. The 
 value of the property is then estimated by the bank's ap- 
 praiser, while an attorney, or a title insurance company 
 makes a * 'search" to determine if the owner's title is "clear." 
 Only first mortgages are permitted as investments by sav- 
 ings banks. The amount of money that may be loaned is 
 also limited by law varying from 50% to 60% of the ap- 
 praised value of the real estate. The essentials of security 
 in a mortgage loan consist of such considerations as the 
 up-keep of the property, its location with respect to transit 
 facilities, chances of depreciation in neighborhood values, 
 adaptability of buildings for more than one use, etc. 
 
 As a banking problem, mortgage loans offer an interest- 
 ing field for investigation and discussion. How is it that 
 loans based upon the best security in the world, improved 
 real estate, cannot be so regulated as to permit commercial 
 banks to invest in them? The argument against such loans 
 by commercial banks is that they cannot be readily con- 
 verted into cash in case of need ; they are for long periods, 
 and in case of foreclosure, which is the sale of the property 
 in case the principal or interest is not paid, there is a con- 
 siderable amount of time lost in the legal proceedings 
 involved. For these reasons national banks have not been 
 permitted to loan money upon real estate mortgages. Re- 
 cently they have been given permission to make such 
 loans subject to certain restrictions, provided under the 
 Federal Reserve Act. The difficulty has been that mort- 
 gage loans have been allowed to drift into the class of 
 permanent investments. Provided the security is good and 
 the interest has been paid promptly, the banks have been 
 
 80 
 
ELEMENTARY BANKING 
 
 content to allow the loans to run. The borrower, instead of 
 paying off his mortgage loan when he is in funds, has thus 
 been tempted to invest in more property, paying back the 
 loan only when he sells the property that has been mort- 
 gaged. Abroad, the borrower begins to pay back the loan 
 in installments at each interest period, the result being that 
 mortgage loans are as liquid an investment as are bonds in 
 this country. 
 
 As has been stated, certain bond issues are designated 
 by law in many states as legal investments for savings 
 banks. While municipal and railroad bonds are given the 
 preference it does not follow that all bonds of these classes 
 are acceptable, nor is the discrimination made along arbi- 
 trary lines. Railroads must measure up to a high standard 
 of efficiency and management before their bonds may be 
 designated as legal investments for savings banks. So 
 also with the bonds of a city or state. The total bonded 
 indebtedness of the city must not exceed a certain percent- 
 age of the value of taxable property. 
 
 The accumulation of a reserve or surplus by a savings 
 bank is very essential. Conforming to the accounting 
 principle that both sides of the statement must always 
 balance, the bank must have a dollar of assets for every 
 dollar of liabilities at all times. The market value of the 
 investments of savings banks, consisting largely of secur- 
 ities, are subject to fluctuations, hence it is necessary that 
 a margin of safety shall be provided in the surplus fund 
 which is created out of the earnings. Bonds are rarely 
 bought at par value; if the interest paid is fairly high and 
 the security very good, bonds will sell at a premium. Let 
 us suppose an issue of bonds is bought by a savings bank 
 as an investment at 105. That means each $1,000.00 bond 
 has cost $1,050.00. If the bonds fall due in twenty years, 
 at the end of that time the savings bank will not get back 
 
 81 
 
ELEMENTARY BANKING 
 
 $1,050.00 for each bond, the price paid, but $1,000.00 or 
 par. How, then, shall the savings bank account for this 
 apparent loss of $50.00 on each bond? Out of the interest. 
 At each interest period, or once each six months, the inter- 
 est coupons being usually paid twice yearly, a part of the 
 income is applied to the premium that was paid for the 
 bond, so that by the time the bond matures the entire 
 premium of $50.00 is restored. The process by which this 
 is accomplished is called amortization. The same prin- 
 ciple is applied but with reverse effect, when a bond is 
 bought at a discount or at a lower price than par. 
 
 Enough has been said of savings banks, their purpose, 
 methods of receiving deposits and making loans to indicate 
 that they perform a very important service in the business 
 world. They accumulate the small savings of the multi- 
 tude of wage earners, money which, if hoarded or squan- 
 dered, would be of use to nobody. Through the loaning 
 power that savings banks acquire, the result of the thrift 
 of their depositors, men are able to borrow money with 
 which to build and own their homes. The home owner is 
 a much more valuable member of society than the man 
 who owns no property. These same savings, that have 
 come out of wages, are often turned back into the very 
 business or industry that has produced them through loans 
 made by savings banks. If there were no funds to pur- 
 chase bonds there would be little industrial or civic devel- 
 opment in the shape of railroads, telephone, electric lights, 
 reservoirs, sewage systems, schools and a hundred other 
 modern conveniences that not only add to our comfort and 
 pleasure, but also furnish employment for thousands. 
 Thrift, then, is more than an abstract virtue; it is an eco- 
 nomic necessity. Men who are thrifty are usually indus- 
 trious, self-respecting, sober and law-abiding. Hence, we 
 find that the savings banks are beginning to spread thrift 
 
 82 
 
ELEMENTARY BANKING 
 
 propaganda through advertising and in other ways, not only 
 because it helps their business, but because it has a ten- 
 dency to raise the standard of the people in general. Schools 
 are installing savings systems that make it possible for 
 very young children to open savings accounts. They are 
 thus not only taught the value of the saving habit at an 
 early age, but they become familiar with banking methods. 
 
 83 
 
Trust Companies 
 
 A trust is anything of value, such as money or personal 
 property which is committed into the care of another for 
 the safekeeping, use or benefit of the owner. This implies 
 confidence on the part of the owner in the integrity and 
 reliability of the person trusted who is called the trustee. 
 Trustees are appointed because those who have property 
 either cannot or, for one reason or another, prefer not to 
 act for themselves. Thus, while all banks are in a broad 
 sense trustees for their depositors in that they care for the 
 deposits of their customers, a certain group of banks are 
 organized primarily for the purpose of administering trusts 
 and acting in a fiduciary capacity generally. Such banks 
 are called Trust Companies. Trust companies are of com- 
 paratively recent origin and they are the newest of the 
 three great groups of banks. The step in their develop- 
 ment or evolution has not been from the bank to the trust 
 company, but from the individual trustee to the corporate 
 trustee or trust company. In the early days of the country, 
 individuals assumed the obligation of trustees for other 
 individuals and in fact this custom still obtains, especially 
 in sparsely settled districts. As men have become more 
 wealthy and as accumulations of property have increased, 
 there has arisen the need for some organized and efficiently 
 trained body of men who could administer the estates and 
 affairs of other men whether living or dead. There are 
 many reasons why the trust company is better fitted than 
 the individual to perform the functions of a trustee. The 
 individual trustee may die, or move away, or become in- 
 capacitated through illness or lack of knowledge of the law. 
 The trust company may be said to be perpetual; it is man- 
 aged by men trained both in law and in finance who give 
 their entire time to this particular business. 
 
 84 
 
ELEMENTARY BANKING 
 
 Trust companies act not only for individuals, but also for 
 societies, corporations and municipalities. Their principal 
 functions are to act as executor of wills, administrator of 
 estates, guardian of minors, agents for individuals, trustee 
 under mortgages, transfer agent and registrar for corpora- 
 tions, fiscal agent for governments, states and municipali- 
 ties, and receiver for firms and corporations. As executor 
 or administrator they administer the estate of the deceased 
 according to the law, and the fees for such service are 
 fixed by law at the same rates as individuals are permitted 
 to charge for like services. As agents for individuals they 
 may care for property, collect rents and perform whatever 
 other duties they may be charged with. As trustee under 
 mortgages, the trust company safeguards the interests of 
 the mortgagee and will foreclose the mortgage if principal 
 or interest are unpaid at maturity. This particular feature 
 of the trust company's business is usually confined to acting 
 as trustee under a bond issue which is secured by a mort- 
 gage upon corporation property. As transfer agent and 
 registrar, the trust company certifies as to the genuineness 
 of either a stock or bond issue and records all transfers of 
 such stock or bonds. The company does not guarantee 
 the payment of bonds or of dividends upon stock; it merely 
 vouches for the regularity of issue and the validity of the 
 transactions involved. As fiscal agent for civic divisions, 
 money is collected and disbursed upon warrants and in the 
 payment of interest on bond issues, etc. In addition to the 
 above, trust companies act in various other capacities of a 
 similar nature. 
 
 The banking department of a trust company is conducted 
 like any other bank. Deposits are received subject to 
 check, interest is allowed on savings deposits, and in prac- 
 tically every particular this branch of the business is the 
 same as that of the ordinary bank of deposit and discount. 
 
 ' ' 85 
 
ELEMENTARY BANKING 
 
 Tellers receive and enter deposits, pay checks, collect 
 drafts and notes; bookkeepers keep ledgers and make 
 credit and debit records just as the work is done in any 
 other bank, and similar books and systems of accounting 
 are used. In Minnesota, Michigan and Wisconsin, trust 
 companies are not permitted to do an active banking busi- 
 ness, but are restricted to the handling of trusts and other 
 fiduciary matters. As to loans and investments permitted 
 trust companies, state laws differ, but the general statement 
 is true that they employ their funds just as do the com- 
 mercial state banks. 
 
 It is chiefly in the trust department that the functions 
 of a trust company are distinctive. The estates and funds 
 of both the living and the dead are cared for by this depart- 
 ment. The organization of the trust department is kept 
 separate from the banking department. As money is re- 
 ceived by the trust department representing the income 
 from property or investments of funds held in trust, it is 
 deposited in the banking department and is checked against 
 by the trust department as if the department were an out- 
 side depositor or customer. It would be possible for either 
 department to exist without the other. The field of the 
 trust company has become so highly developed and its trust 
 functions have become so well understood by the public 
 that there is a growing demand for a further extension of 
 trust company powers. This is evidenced by one of the 
 provisions of the Federal Reserve Act, which gives to 
 national banks the privilege of acting in a fiduciary capacity 
 when not in contravention of state laws. 
 
 86 
 
Clearing Houses 
 
 A bank check may be defined as a written order drawn 
 upon a bank by a depositor directing the bank to pay a 
 certain sum of money to bearer, to a payee named on the 
 instrument, or to someone else named by the payee. In 
 the majority of cases the payee does not himself present 
 the check for payment. Instead he deposits it to his credit 
 in another bank, thus constituting that bank his agent. 
 The principal business dealings that banks have with each 
 other grow out of the use of checks by individuals and their 
 presentation and collection by banks. 
 
 The extensive use of the check is interesting from the 
 bank clerk's point of view. Approximately 90 per cent, of 
 payments are made by check. These settlements are not 
 made in money but in credit. That is to say, the credit 
 that A has with his bank is transferred to B in the payment 
 of debt through the use of the check. Very little money, 
 in comparison with the volume of transactions involved, 
 ever changes hands. This use of the credit instrument 
 instead gives employment to probably more than 75 per cent, 
 of all the employees of banks doing a commercial business. 
 Tellers, bookkeepers and their assistants in all depart- 
 ments are engaged principally in keeping the records inci- 
 dental to deposits and withdrawals by check. 
 
 In a small town having but one bank all of the checks 
 growing out of purely local business are drawn upon that 
 institution. Let us suppose that A and B are both deposi- 
 tors in the same bank. A gives B his check for $100.00 in 
 payment for a horse. It is not necessary for B to present 
 the check, receive the money and then redeposit the cash 
 to his own credit. Instead, he deposits the check, the bank 
 crediting his account and charging the account of A. The 
 same process is being followed by all the depositors in 
 
 87 
 
ELEMENTARY BANKING 
 
 making settlements with each other. No actual cash 
 changes hands; there is merely an offsetting of debits 
 with credits on the books of the bank. This is known as 
 the "clearing principle." 
 
 Banks make use of this principle in settling accounts 
 with each other. The agency through which they avoid 
 the constant transfer of money among themselves is the 
 Clearing House. The term is used to apply either to the 
 building used for this purpose or to the organization or 
 association of the banks united together for this and other 
 purposes. In its practical sense the clearing house repre- 
 sents a plan rather than a tangible thing. Let us suppose 
 there are five banks which are members of a clearing house. 
 At the end of the day's business each member finds itself 
 with checks drawn upon the other four. The checks of 
 each are endorsed with the bank stamp, enclosed in a 
 separate envelope for each bank and a total of the checks 
 is listed on the outside. The totals are then listed opposite 
 the bank names on a double column sheet and a footing is 
 struck. In theory each bank assumes that these checks 
 are not payable by the individual banks but by the * 'clear- 
 ing house." Therefore, at a fixed time, usually about ten 
 o'clock A.M., each bank sends a messenger to the clearing 
 house with its checks against the other banks. In a small 
 town the office of one of the members is used as a clearing 
 house and an officer of that bank acts as "manager." The 
 packages are then exchanged. Each clerk writes opposite 
 the proper name, the amount of the checks on his bank 
 presented by the others. 
 
 These amounts are added up and the smaller amount is 
 subtracted from the larger. If the messenger receives more 
 checks on his own bank than his bank had on the others, 
 then he is a "debtor." If the reverse is true then he is a 
 "creditor." The manager then takes the record of the 
 
ELEMENTARY BANKING 
 
 debtor and creditor balances which, of course, must be 
 equal, thus proving the correctness of the exchange. The 
 clerks return to their respective banks having checks only 
 on themselves, whereas they came to the clearing with 
 checks only on their neighbors. The whole transaction 
 will not have consumed more than ten minutes. Even in 
 the very largest cities, with millions of dollars involved, the 
 exchange is made almost as quickly. The large cities 
 usually have a separate building for clearing purposes and 
 employ a regular manager who is in charge of the clearing 
 process. 
 
 The exchanges having been made, the banks now pre- 
 pare to settle the balances. There are various ways of 
 doing this, depending upon the size of the city and the 
 number of banks in the clearing house. In the smaller 
 towns the manager of the clearing house draws drafts upon 
 the debtor banks which he gives to the creditors, who then 
 present them and receive either the cash or its equivalent. 
 Or the manager may deposit the drafts of the debtor banks 
 with one of the members and draw his own checks against 
 this deposit in favor of the creditors. Another method is 
 to make payment by draft upon the Federal Reserve Bank 
 of the district or upon other reserve agents. In the larger 
 cities settlement is made in cash or its equivalent, payment 
 being made by the debtor banks to the clearing house which 
 acts as agent in paying over the money to the creditor 
 banks. To avoid the handling of even this money, many 
 clearing houses conduct a depository where deposits of gold 
 and currency are received, and certificates in large de- 
 nominations, $5,000.00 and $10,000.00 are then issued. 
 Settlements made with these certificates are upon a cash 
 basis, yet the danger of loss or error in handling the actual 
 money is avoided. The saving of time and the use of 
 money is well illustrated by the fact that in New York 
 
 89 
 
ELEMENTARY BANKING 
 
 City every clearing house member is enabled to exchange 
 checks with every other member in about fifteen minutes 
 each day, and the balances to be settled average less than 
 5 per cent, of the total checks exchanged. 
 
 Certain rules are prescribed by clearing house associa- 
 tions covering the method of conducting the exchanges and 
 regulating in general the business which the banks do with 
 each other. For example, the rules fix the hour for clear- 
 ing, method of making settlements, returning of unpaid 
 items, hours for opening and closing the banks, and many 
 other matters that are adjusted in the interest of regularity 
 and uniformity. 
 
 Some of the associations employ an official clearing house 
 examiner who supplements the examination by the national 
 or state bank examiner, paying particular attention to the 
 loans and discounts. He is employed by the banks to give 
 them advice as to their methods of doing business, his in- 
 formation and suggestions being extremely confidential. 
 He makes record of the lines of credit being extended by 
 the various member banks and is thus able to check un- 
 sound lines before any damage is done. His functions will 
 be described in greater detail in the next chapter. 
 
 The clearing principle as applied to check collection is 
 not limited to the items payable in one city. Many clear- 
 ing houses have also a department for the clearing of country 
 checks. In such cases all the member banks send their 
 out-of-town items within a certain district to the clearing 
 house which operates as one bank acting for all. Thus, 
 instead of receiving a daily letter from each bank in the 
 city, the country bank gets all its checks from that city in 
 one letter from the clearing house, to which it then remits 
 with a single draft. The Federal Reserve Act has carried 
 this process one step further by requiring the Federal 
 reserve banks to act as clearing houses for their member 
 
 90 
 
ELEMENTARY BANKING 
 
 banks. Checks which each member bank sends to the 
 Federal reserve bank acts as the credit offset to the checks 
 which the Federal reserve bank receives on that member. 
 It may be said that much of the Federal Reserve Act is the 
 result of experience with clearing house methods and 
 regulations. 
 
 91 
 
Bank Examinations 
 
 In a previous chapter we have discussed the bank's 
 statement of condition which sets forth in detail the various 
 amounts the bank owes to its stockholders, depositors and 
 the general public. Against these liabilities the bank must 
 hold an equal amount of assets, otherwise the bank is 
 insolvent and must close its doors. If we go into a res- 
 taurant for luncheon we are not satisfied merely to read 
 the bill-of-f are ; we want to try some of the dishes for our- 
 selves. If we order chicken soup and the waiter brings us 
 a bowl of warm water, we refuse to accept it, no matter if 
 the proprietor insists that it is chicken soup that has been 
 set before us. But when a man wishes to purchase the 
 stock of a bank or deposit money with it, he cannot person- 
 ally test for himself the quality or quantity of the assets 
 set forth on the bank's statement and thus assure himself 
 that the bank is sound. There may be no intention what- 
 ever on the part of the bank to deceive or defraud. The 
 bank itself may be deceived in its ability to pay the amount 
 of the deposit on demand just as borrowers often honestly 
 overestimate their ability to repay a loan when it is due. 
 Therefore the law provides an official examiner who "tests 
 the soup" for the general public who may deposit or invest 
 their money in the bank. 
 
 The purpose of bank examination is twofold; first, to 
 see that the institution is solvent, having a dollar of assets 
 with which to pay every dollar of liabilities; and, second, 
 to ascertain that the bank is obeying the law. From the 
 examiner's viewpoint the principal reason for insisting upon 
 a strict observance of the law is that the bank may continue 
 to be solvent. The nature of these laws will be explained 
 in the final chapter. 
 
 Bank examinations are of four kinds, two of which may 
 
 92 
 
ELEMENTARY BANKING 
 
 be said to be internal and two external. In the first class 
 are examinations by a committee of the directors and ex- 
 aminations by certified public accountants whom the direc- 
 tors may employ to make this audit and examination for 
 them. The official Federal, or State examinations, and 
 clearing house examinations may be classed as external 
 examinations. The internal examinations are, of course, 
 not unexpected by the officers of the bank, who, with the 
 directors, arrange for them. The official or external exam- 
 inations are never announced in advance, and hence they 
 may be said to be more effective if there should exist any 
 condition due to fraud or weakness that might be covered 
 up temporarily. 
 
 It is rather difficult to draw the line clearly between an 
 audit and an examination; yet the examination by directors 
 or accountants for the directors is more in the nature of an 
 audit than an examination. It is the duty of the auditor of 
 a bank to see that all settlements are properly made by the 
 various clerks and departments, to check all cross entries 
 on the books, to prove interest calculations, to reconcile 
 accounts with other banks and to supervise the entire 
 accounting system generally. In small banks one of the 
 officers has charge of this work. When the directors make 
 their annual or semi-annual examination they certify to 
 the correctness of all transactions as of a certain day. Their 
 examination includes a proof of the cash and a checking 
 up of the loans and discounts. In very large banks they 
 usually have the assistance of the clerks who are inter- 
 changed so that the same men will not be used in proving 
 any books or cash to which they have previously had access. 
 Bank directors make their examinations to assure them- 
 selves that the bank's affairs are in proper condition. Al- 
 though they may commit the operation of the bank to the 
 authorized officers, the directors cannot thus escape their 
 
 93 
 
ELEMENTARY BANKING 
 
 responsibility or liability under the law for the safe admin- 
 istration of the institution. The employment of a certified 
 public accountant to do this work is a more thorough way 
 of making an internal examination, since the accountant 
 and his assistants are trained men and have the advantage 
 of a disinterested point of view. 
 
 The National or State examiners make their visits with- 
 out notice; usually just after the bank has closed for the 
 day. The settlement for that day's business is then checked 
 and all cash, checks and securities are put under seal so 
 that no substitution can be made over night. The exam- 
 ination then proceeds the following days until every detail 
 of the business is investigated and accounted for. The 
 general policy of the bank is taken into consideration, as 
 indicated by the nature of the loans, the borrowing habits 
 of the customers, the methods of accounting used and the 
 general observance of safe and conservative business rules. 
 Like the physician who examines a patient, the official 
 examiner bases his methods upon the assumption that 
 there may be something wrong which it is his duty to detect 
 and remedy. 
 
 The clearing house examination plan is a sort of com- 
 bination between the directors' examination by certified 
 accountants and the official examination. The clearing 
 house examiner is employed jointly by all the banks of a 
 city and his examination is made for them, but in his power 
 of criticism and in the timing of his visits he is independent. 
 His examination is just as thorough as that made by the 
 Federal or State examiner, in fact, in some cities the two 
 examinations are conducted jointly. Where the clearing 
 house examination differs is in the attention given to the 
 loans and discounts. The clearing house examiner makes 
 a record of all loans over a certain amount in every bank 
 in the Association, so that he is able to base an intelligent 
 
 94 
 
ELEMENTARY BANKING 
 
 opinion on the true value of the bank's largest group of 
 assets. This information is kept under lock and key by 
 the examiner and is used by him as credit memoranda. 
 He is thus able to advise the banks if any local dealer is 
 borrowing more heavily than his business warrants. The 
 official examiners are limited in their powers of criticism 
 to infringement of the laws, but it is the duty of the clearing 
 house examiner to act in an advisory capacity, and to seek 
 to prevent any unsound condition from arising. The Fed- 
 eral Reserve Act provides for special examinations of mem- 
 ber banks for the purpose of informing the reserve banks 
 of the lines of credit being extended by member banks. 
 In principle, these special examinations are similar to 
 clearing house examinations. 
 
 95 
 
Banking Laws 
 
 Laws affecting banking by which banks are organized, 
 regulated and controlled in their relations with the public 
 and with each other, are the result of many years' of experi- 
 ence in banking. As we have had occasion to note in the 
 opening chapters, banking is based primarily on natural or 
 economic laws. Statute laws pertaining to banking have 
 been added to and revised from time to time, not because 
 there has been any appreciable change in the fundamentals 
 of business, but because men through experience and a 
 study of the lessons taught by experience have found how 
 to correct flaws in banking methods and so avoid the dan- 
 gers and pitfalls of a previous generation. Thus banking 
 systems have undergone a gradual but steady change toward 
 safer and more efficient standards. It is like the discovery 
 of a safe channel in a narrow and dangerous waterway. 
 After there have been many wrecks and disasters the diffi- 
 cult harbor is finally reached in comparative safety by 
 following buoys and lights that mark the location of sub- 
 merged rocks. So with banking laws. Each is a lighthouse 
 that safeguards all who would embark in this business of 
 chance and risk, from losing ship and cargo upon the same 
 treacherous reef that has wrecked many another. 
 
 A study of financial history with its eras of commercial 
 prosperity alternating with crises and depressions will dis- 
 close the reason for many present-day banking laws. In 
 our own country where each state has had and still has a 
 banking code of its own, modified it is true by the national 
 system made necessary by one of the most terrible wars of 
 modern times, we can trace the effect of all these factors 
 upon our latest legislation, the Federal Reserve Act. 
 
 It is not within the scope of the present volume to discuss 
 the Federal Reserve Act. Before the student is able to 
 
 96 
 
ELEMENTARY BANKING 
 
 grasp the true significance of its provisions, he must first 
 have a clear conception of the underlying principles involved 
 in banking and banking laws, and it is with this elementary 
 phase of the subject that we are here concerned. We 
 may, therefore, discuss briefly a few typical national bank 
 laws that will serve to illustrate the nature and purpose of 
 all banking legislation, whether state or national. 
 
 Many of the more important regulations have to do with 
 the capital, in fact nearly all the privileges and restrictions 
 of the business are based directly or indirectly upon this 
 first item of the bank's liabilities. The minimum amount 
 of capital is fixed by the population of the town or city where 
 the bank is located; the larger the city the greater the 
 amount of capital required. The reason for this is that 
 since there can be no limit to the amount of business a bank 
 may do, it is necessary to anticipate the probable security 
 that must be given to prospective depositors who would 
 very likely be more numerous in a large city than in a small 
 village. To make the security even greater, stockholders 
 of all national banks and also in many state institutions 
 are doubly liable. That is, if the bank should fail with 
 not enough assets to meet the claims of depositors and 
 other creditors, not only would the money due the stock- 
 holders represented by the capital and surplus be forfeited, 
 but the stockholders may be assessed an amount up to the 
 par value of their stock to meet any deficiency. A bank 
 may not hold or purchase its own stock since the effect of 
 such a privilege would be to reduce the amount of the 
 capital by that much. Not all the provisions in law tax the 
 stockholder or owner of the bank to safeguard the interests 
 of those who trust their deposits with the institution. There 
 is one provision which protects the capital as well as the 
 deposit. National banks are required to build up a surplus 
 until that item is at least 20 per cent, of the capital stock. 
 
 97 
 
ELEMENTARY BANKING 
 
 Any losses can then be charged to this fund without de- 
 preciating the capital. Thus it is the aim of all well-managed 
 banks to create as large a surplus as possible which gives 
 additional strength and has a tendency to attract deposits. 
 
 One of the greatest financial dangers that beset a nation 
 is credit inflation. In "boom" times, when all lines of 
 trade are active, crops good, labor well employed and every- 
 body enjoying unusual prosperity, there is a national ten- 
 dency for men to reach out for even greater riches. This 
 is the result of that predominant characteristic of human 
 wants which we noted in an early chapter, the insatiability 
 of men's desire for more and better things. During such 
 periods as we have described, men are apt to become overly 
 optimistic as to their prospects. The result is that credit is 
 often extended too freely, being based upon hopes founded 
 on fancy rather than on fact. When several important ven- 
 tures collapse, the credit that was based upon them becomes 
 valueless and then a sudden fear takes hold of the public. 
 The result is a * 'panic." It is the purpose of such laws as 
 the Federal Reserve Act not only to curb an undue expan- 
 sion of credit, but also to help banks prevent a panicky 
 situation from spreading. 
 
 There are many safeguards provided by law against 
 credit inflation. As the first may be set down the trained 
 judgment of the sagacious banker who investigates his 
 customer's statements upon which the loan is to be based. 
 The banker knows that if the loan cannot be paid at maturity, 
 his bank may lose money. Then there is the scrutiny of 
 the bank examiner to be counted on; will that loan pass his 
 inspection? There is the further restriction that not more 
 than 10 per cent, of the capital and surplus can be loaned 
 to one interest. This, too, has a tendency to prevent too 
 wide an extension in any one direction. It prevents the 
 bank from risking too many eggs in one basket. Next, 
 
 98 
 
ELEMENTARY BANKING 
 
 then, is the provision in the Federal Reserve Act which 
 restricts rediscounting to loans growing out of actual com- 
 mercial transactions. That is, the loans must be "self- 
 liquidating," or payable out of the proceeds of the sale of 
 the commodity the loans represent. It will not do to redis- 
 count real estate loans, because real estate is a fixed and 
 constant quantity which does not increase merely by change 
 of ownership, whereas staple goods that men use in the 
 satisfaction of wants are produced, bought and sold — and 
 paid for — at all times and in ever-increasing amounts. 
 And when more money is needed to handle the increase 
 of business, the issue of Federal reserve notes must be 
 "covered" by 100 per cent, of paper representing these 
 liquid commercial loans. The issue must also be backed 
 by 40 per cent, gold reserve. If we trace the entire process 
 back to the original loan we discover that at every step 
 the law throws one safeguard or another against inflation. 
 
 The successful banker, therefore, is not he who is satis- 
 fied merely to avoid losses and make profits for his stock- 
 holders; he is the man trained not only in local credits, 
 but also in national and international conditions. He is 
 well versed in fundamental economics; he knows the 
 financial history of his own and other countries, he does 
 not protest against sound bank laws because he knows 
 why those laws are written. In fact, for him there is no 
 law, because his judgment is proof against those errors 
 which law seeks to prevent. And finally, he never forgets 
 that banking is conducted for the benefit of all the people 
 and not for the exclusive profit of the banker; that it is 
 other people's money as well as his own that is entrusted 
 to his care, that it may be wisely used for the welfare of 
 all men. 
 
 99 
 
American Institute of Banking 
 
 Organized Education 
 
 The American Institute of Banking Section of the American 
 Bankers Association is devoted to the education of bankers 
 in banking and the establishment and maintenance of a 
 recognized standard of education by means of official 
 examinations and the issuance of certificates of graduation, 
 To qualify students for official examinations for Institute 
 certificates, which are termed final examinations, the 
 Institute provides a standard course of study in the form 
 of serial text-books and collateral exercises. No additional 
 text-literature is required. Such study course is divided 
 into two parts. Part I pertains to Banking. Part II 
 pertains to Law. In suitable cities bank employees are 
 organized in chapters for educational work in accordance 
 with the class method of instruction. Students outside of 
 city chapters are associated in the Correspondence Chapter 
 and provided with instruction by mail. Chapter organization 
 and education are thus made uniform and universal. In 
 correspondence instruction each student is supplied with 
 the serial text-books and collateral exercises. The exercises 
 in connection with each lesson are to be submitted to in- 
 structors whenever done. The work of students thus 
 produced is corrected and returned with such criticisms and 
 suggestions as may be helpful in each case. To individual 
 students the cost of correspondence instruction thus provided, 
 including text-books and all serial as well as final examina- 
 tions, is $15 for Part I pertaining to Banking and $15 for 
 Part II pertaining to Law. Payment for each of the two parts 
 may be made separately. One-third reduction from such rates 
 is made to individual students who are employees of institu- 
 tions that are members of the American Bankers Association. 
 Any additional information will be furnished on application. 
 
 AMERICAN INSTITUTE OF BANKING 
 Five Nassau Street New York City 
 
UNIVERSITY OP CALIFORNIA LIBRARY 
 
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