THE PRACTICAL WORK OF A BANK BANKERS PUBLISHING COMPANY m NEW YORK THE PRACTICAL WORK OF A BANK A TREATISE ON PRACTICAL BANKING WHICH AIMS TO SHOW THE FUNDAMENTAL PRINCIPLES OF MONEY; THE PRACTICAL WORK OF A BANK IN DETAIL, AND PARTICULARLY, CREDIT IN ITS RELATION TO BANKING OPERATIONS By WILLIAM H. KNIFFIN, JR. Vice-President, Bank of Rockville Center, New York, Author of " The Savings Bank and Its Practical Work,' 1 "The Easiness Man and His Bank," 'Commercial Paper and The Analysis of Credit Statements," etc. SIXTH EDITION (REVISED) NKW YORK THE BANKERS PUBLISHING COMPANY 1921 Copyright 1915, 1916, 1917, 1919, 1921 THE BANKERS PUBLISHING COMPANY NEW YORK -. Li!). WG /60' TO MY FRIEND VICTOR A. LERSNER IN APPRECIATION OF A LONG AND HELPFUL FRIENDSHIP Fia^T EDITION August, 1915 SECOND EDITION August, 1916 THIRD EDITION August, 1917 FOURTH EUITION January, 1919 FIFTH EDITION September, 1919 SIXTH EDITION February, 1921 PREFACE The methods and machinery of practical banking do not materially change with the passing of the years. The changes that take place from time to time are mechanical rather than fundamental. The one drastic innovation of the past decade has been the introduction of the Numerical Transit System, which substitutes numbers for names an obvious con- servator of time. While the technique of banking has not undergone any decided de- parture from established principles, the machinery of banking has, how- ever, gone through a process of evolution, as the increasing demands of the business world have made shorter and quicker methods necessary in order to cope with the added volume of work without unduly increasing the cost. The adding machine and the adding typewriter, particularly, have come into play as time and labor savers of the highest usefulness, without which the labor cost of banking would be much greater than the profits would warrant. Nevertheless, there would seem to be room for a new work on practical banking, dealing with the subject in a form different from any which have heretofore appeared; and this work is in no way intend- ed to supplant, but rather to supplement, those which have gone before, whose excellence will for many years be recognized. It has been the author's aim to collate the best thought of the past ten years relative to the practical conduct of a bank, particularly from men who have written and spoken concerning the work in which they have had long experience. Especially is this true of the men of the American Institute of Banking, from whom much help has been re- ceived, and which is here gratefully acknowledged. It is difficult, if not impossible, in a work of this kind, to avoid ap- parent repetition, as the work is viewed from different angles; for the work so dovetails that in describing one process, or the work of one de- partment, other processes and departments must of necessity be men- tioned, but such duplication has been avoided as much as possible. It is hoped the work will prove constructive in its development, con- cise and correct in its statements, and readable withal. W. H. K., JB. vii abeam CONTENTS PAOB CHAPTER I. THE THING WE CALL MONEY 1 Exchange; barter; trade; demand and supply; a common denominator of values; what is money; characteristics of money; paper money; the evo- lution of a bank. CHAPTER II. THE BANK AS A CREDIT MACHINE 12 Metallic money; trust the basis of the credit system; manufacturing credit; operating a credit machine; forms of bank credit; bank-note credit; certification credit; acceptance credit; the limits of bank credit; clearing of bank credits; international clearings. CHAPTER III. BANKS, BANKERS AND BANKING 27 Banking machinery necessary; the private banker; banks distinguished; banks defined and classified; the functions of a bank deposit, discount, note issue. CHAPTER IV. THE ORGANIZATION AND ADMINIS- TRATION OF A BANK . . 38 The men behind the bank; surplusage of banks; the charter; directors; the "one-man bank"; the president; vice-president; cashier; "ink-spots on the ledger"; the banking house; the banking room; "Philip an Institution." CHAPTER V. DEPOSITS AND THE RECEIVING TELLER 58 New York the deposit center; competition for bank deposits keen; opening an account; the bank and its depositors; the pass-book; the re- ceiving teller; duties and qualifications of the receiving teller; good money and bad; making a deposit; checks for deposit; endorsements; corporation checks; third party endorsements; the deposit ticket; right name should be on the ticket; the depositor should make the ticket; proving the ticket; the machinery of banking; the teller's records and proofs; the block sys- tem; a day with the receiving teller; legal tender. CHAPTER VI. THE PAYING TELLER, HIS PAYMENTS AND HIS CASH 88 Receiving vs. paying teller; qualifications and essentials of the paying teller; the paying teller's duties and responsibilities; the teller's cash; cash- ing a check; words and figures on checks; identification; crossed checks; stop payments; the clearings; bearer checks; certification of checks; pro- tection of bank checks; ease of obtaining checks for raising; cashing a stop payment check; how to stamp checks; sample checks care of; how safeguarded; how to protect against check frauds; educating depositors; payrolls; the teller's mistakes; the money teller; figuring the reserve; the unit system; proverbs of a paying teller; the acid test for coins; liability on forged and altered checks. CHAPTER VII. CLEARINGS AND CLEARING-HOUSES.. 145 Origin of clearing-houses; the largest check ever paid; varieties of clearing-houses; clearing-house terms and instruments; getting ready for the clearing; the clearing process; settling the balances; clearing-house set- 1 tlements; clearing-house activities; clearing for non-members; clearing country checks; the weekly report. CHAPTER VIII. COLLECTIONS AND THE MESSENGER. 164 The messenger; the messenger's valuables; old employees; meeting men; the law of collections; collecting direct from payee banks; endorse- ments; the machinery of collections; the note teller; out-of-town collec- tions; coupons; savings bank books, iz PAGR CHAPTER IX. LENDING THE BANK'S MONEY 205 Loans and discounts distinguished; loans and credit; deposits often loans; liquid loans; applying for a loan; collateral loans; listed and un- listed securities; the margin; watching the ticker; "good delivery"; form of collateral note; time loans; bookkeeping of the loan; loan register; ma- turity record; the borrower's liability; substitutions; when the due date arrives; unearned discount; accounts receivable as collateral; interest; payment of call loans; loans for the bank's correspondents; warehouse loans; bills of lading. CHAPTER X. THE BANK AS AN ACCOUNTING MACHINE 2 * 9 Presentation of accounting facts; the accounts of a bank; banks agree in essentials; corporate records; stock certificate book; stock subscrip- tions; transfer of stock; dividends; the books of record; the journal; the equation of accountancy; the statement of condition and its analysis; assets; liabilities; the bookkeeping force; the application for employment; available men; the new recruit; the art of handling men; the chief clerk; days off; employees' pensions; purpose of the records; controlling accounts; the general ledger; the accounts with depositors; the Boston Ledger; the average book; accounts stated; the statement system; opening a new ledg- er; balancing pass-books; stationery and supplies; expenses; petty cash; changes in accounts; care of tickets and vouchers; keeping the bank's books by machinery; bank statements by machinery. CHAPTER XI. CHECKS AND THEIR COLLECTION 319 Checks circulating currency; growth of the use of bank checks; defects in the present system of finance; checks defined; checks classified; com- pensating balances; the country banker and his city correspondent; the jour- ney of a bank check; the transit department; collection of bank checks; exchange charges; the numerical transit system; the operation of the tran- sit department. CHAPTER XII. BANK EXAMINATIONS AND AUDITS. . . 349 The right to examine, police power; classes of bank examinations; ex- aminations by directors; what the examiner should know; the psychology of errors; how to make an examination; cash and exchanges, verification of; collateral loans; unsecured loans; government moneys and securities; amounts due from banks; verifying the liabilities; clearing-house examina- tions; benefits of clearing-house examinations; little points for the exam- iner; various matters concerning which the Comptroller requires detailed information. CHAPTER XIII. ESSENTIALS IN GRANTING CREDIT. . 871 The nature and functions of credit; credit in economics; credit in law; credit in business; the field of credit broad; credit a science; credit is old; credit a fine piece of mechanism; credit a transfer; credit a law- ful right; credit is capital; credit an asset; credit is reputation; credit is willingness; credit is ability; credit is resources; credit is confidence; the psychology of credit; mental processes; all men not honest; two men bet- ter than one; past performances; property and property rights; collateral loans not essentially credit transactions. PERSONAL CEEDIT Personal credit distinguished; the granting of per- sonal credit; references; personal credit ratings; individual vs. mercantile credit; the charge account; the growth of personal credit; period of per- sonal credit; losses in personal credit; personal credit the foundation of the credit system. MERCANTILE CEEDIT Benefits of mercantile credit; bank credit rests upon mercantile credit; bank credit should facilitate exchanges; channels , of commercial credit; buying and selling without cash; changing conditions in mercantile credit; mercantile credit terms; instruments in mercantile credit; books accounts as security; assigned accounts a menace; dating ahead; the mercantile credit field; enormous cost of retail selling; frauds in mercantile credit; the mercantile statement; how to figure the turnover; FAGB granting mercantile credit; why men fail; development of the retail store; profits; losses; business risks; the wholesaler and the retailer; standards of credit; the credit department; the bank and its correspondents; credit information; how credit information is kept; classification of risks; the credit man; losses expected; the essentials of a good loan; elements of sound credit; the man the moral risk; his methods the business risk; his resources the property risk; the statement the borrower's estimate of himself; standardized forms of credit statements; the statement must be recent; false statements; statement reciprocal in value. ANALYZING A STATEMENT OF CONDITION Two to one; cash; bills re- ceivable; accounts receivable; merchandise; inventory; trust receipts; cap- ital assets; machinery and fixtures; liabilities; accounts payable; ratio of plant to capital; net worth; depreciation; bank connections; liabilities to capital; accrued assets and liabilities; good will; integrity of organization. THE PASSING OF A LOAN Comment by the credit man; what the credit man wants to know; commercial paper; commercial paper, liquid re- serves; the cash discount system; what it costs the retailer not to take his discounts; commercial paper and the Federal Reserve Banks; two-name paper; the discount market; the commercial paper broker; buying paper on option ; answering credit inquiries ; deductions of a credit man in analyzing business statements; qualities of a credit man; the credit man's tools; the deductive process; the three C's of credit; essentials in a credit statement; four actual statements analyzed and commented upon. CHAPTER XIV. THE BANK MAN IN THE MAKING 603 The banker in fiction; the bank man's wage; two schools of banking; the country bank and the city bank; proper training essential to success; pivotal points in a bank man's life; learning by doing; every man can bet- ter himself; a definite aim; taking himself for granted; definite methods; what is education?; experience a dear teacher; education a definite process; more bread and butter; the bank man's twenty-four hours; things the bank- er must know. CHAPTER XV. THE MORNING MAIL 618 Handling the mail in a large city bank; outgoing mail; improved method of folding letters; record of stamps used; filing correspondence; a practical filing system. CHAPTER XVI. COST ACCOUNTING AND ANALYSIS OF ACCOUNTS 637 Bank profits; profitable and unprofitable accounts; the bank's services to the depositor; the quality of the account its influence; penalizing small balances; cost accounting in banking; administrative costs; exchange charges interest; the earning power of money; special costs; three theories of apportionment; units of cost; a cost system based upon expenses; analyzing the expense account; cost of handling an item. CHAPTER XVII. FOREIGN AND DOMESTIC EXCHANGE. 669 Settling debts without money; origin of foreign debts; the demand for foreign bills; forms of bills of exchange; how exchange is quoted; the basis of exchange; causes that effect exchange rates; imports; exports; profits in foreign exchange; cables; domestic exchange. INDEX . 691 CHAPTER I. THE THING WE CALL MONEY At the beginning of the economic process each man got from Nature the things he needed to satisfy his simple wants. He could maintain himself and family by his fishing and hunting exploits ; but the individualistic life led by Robinson Crusoe is possible only in fiction, and mankind soon discov- ered that community life is necessary both for protection and for companionship. It soon developed that the various mem- bers of the tribe were adapted to various pursuits. Some would be proficient hunters or fishermen, while others would be adept at manufacturing the simple tools and implements needed for the tribe's existence. Therefore, one would trade with the other on such basis as was mutually agreed. This is, in its primitive form, what the economist calls barter, or the exchange of article for article, and in its world-wide devel- opment is commerce. Trade is barter, and barter is trade. As soon as men began to trade with one another the first difficulty they encountered was to find a buyer and a seller, both wanting the article the other had to trade. The maker of baskets had to find a hunter or a fisherman who wanted baskets, and, on the other hand, the hunter had to find a basket maker who wanted meat, and not only desired the arti- cle, but in such quantity as would make a fair exchange pos- sible. This is the difficulty in all exchanges of goods for goods. It soon became apparent that if some article of universal desirability could be found, by which other articles could be measured, and which everybody would receive in exchange for the product of their labor, not only could a fair exchange be effected, but the exchange process could be greatly facili- tated ; and so each tribe or nation selected for itself some arti- cle or commodity which was universally prized by its own people, and this became the medium of exchange or the yard- ilt must be borne in mind, however, that all trade is barter, even when the precious metals are employed as intermediaries the latter being articles of barter also, and possessing the same value as the things for which they are exchanged. The whole science of money hinges on this fact. White, "Money and Banking," p. 10. 2 THE PRACTICAL WORK OF A BANK stick by which exchanges were measured. The article might not have answered our present idea of what money should be, and it may have lacked the essential qualities of money as we shall presently discuss them, but in a crude way it answered the purpose of money, for it was a measure of value and the basis of exchange. DEBTS SETTLED BY EXCHANGING COMMODITIES Communities differ and nature's products are not evenly distributed. One community can best produce one thing; another, another. One community can produce wheat and the other grind it into flour. Where wheat is in abundance, water power may be scarce. And as one section produces one thing and another produces another, community debts are settled by an exchange of goods for goods, the same as between individuals. Thus, New England buys wheat from Dakota and gives shoes. For our cotton England gives us manufactured goods. For the debts we owe her for ship- ping, freights, insurance and interest on our debt to her, we send, not gold, but wheat and cotton. We pay, as a rule, not in money, but in goods. j _ DEMAND AND SUPPLY The amount of product one man will give for a certain amount of another depends upon the amount he has at hand, the labor involved in producing, 2 and other factors entering into the scheme of production. That which is scarce will have a higher exchange value than that which is plentiful. This condition tends to correct itself by labor going into those channels where scarcity exists, and producing enough to effect an equilibrium. Thus, if cattle are scarce and meat high, unless by some operation such as a meat trust, whereby prices can be maintained by artificial means (although not for long) men will engage in raising meat animals until the supply balances the demand and prices fall. Only as the consumptive power of the people increases faster than the productive power can high prices in food products long exist. As civilization has developed, men's wants have become aMoney is always the product of labor. Nobody could give that which has cost him labor in exchange for something which he could obtain without labor. White, p. 9. THE THING WE CALL MONEY more complex, so that as wants have increased, ways and means have been found to satisfy them; and little by little through the centuries we have biiilt up the present world structure of commerce arid industry, the ultimate end and aim of which is to satisfy the three fundamental wants of the human race food, clothing and shelter with all the ramifications that result from the satisfaction and gratifica- tion of the five senses. And as time went on, increased facilities for the produc- tion of goods have been devised, labor has been divided and sub-divided, each doing best that for which he is most fit by training, education and temperament, so that out of it all has arisen what we call "exchange," meaning the giving of one thing for another, whether it be money or goods or services, or a combination of these elements. EARLY RECOLLECTIONS Very early in life we came to realize that there was a differ- ence between the things which belonged to us and the things which belonged to others. We were jealous of our toys. We were impressed with the idea that over the things which were ours we were allowed to exercise dominion; we had special rights. We were early taught to respect the rights of others. We learned that the things that were displayed in the candy store were not ours and could not be had for ask- ing, but could only be obtained by giving something in exchange. Just what the penny we had to spend was in the economic scheme what the storekeeper did with it we did not know or care. And whether we were receiving value in return, we did not have much thought ; but we did know that we could exchange the penny for something that appealed to us. The first thing we learned, therefore, before acquiring possession of the property of others was that permission of the owner must be obtained, or something given in exchange. If the permission was without an exchange it became a gift and not an exchange. We might, however, get possession by promising to give something, sometime, and thereby ob- tain the article on a deferred payment, and thus obtain it on credit. We have, therefore, unconsciously as children used the two fundamentals of banking money and credit. 4 THE PRACTICAL WORK OF A BANK A COMMON DENOMINATOR OF VALUES Before any exchange of goods can be made, not only must consent be given by both parties, but there must be an agreement as to what shall constitute the basis of the trade what shall measure the value. The consent must be to the same thing. It matters not, so far as the fairness goes, if each were to agree that thirty inches are a yard, neither would be the loser, for in fixing the value this would be considered. As labor became divided each man to his trade and all trading together, exchanging goods for goods it was found that a common denominator of values was necessary. It was needful that the man who made a pair of shoes should have something by which to measure the labor and material involved therein, so that he might exchange his labor as rep- resented thereby for other things. The shoes must represent so many units 3 We did not progress very far in life before we discovered that there was a common thing that would be accepted by all men as the basis of all exchanges and for all things, namely, money. It might be in the form of paper, or it might be metallic money, but it was money. And we fur- ther learned that if we did not want to exchange the money we had at the time for some other article, we could keep it and use it at a future time, and it would be as good then as at first; and thus money came to have power in reserve stored energy as well as exchange power. We could save it as well as trade with it. Moreover, we could put it in a sit is plain that in the first society (that is, in the household) there was no such thing as barter, but that it took place when the community became en- larged; for the former had all things in common, while the latter, being sepa- rated, must exchange with each other according to their needs, just as many barbarous tribes now subsist by barter; for these merely exchange one useful thing for another. This kind of trading is not contrary to nature, nor does it resemble gainful occupation, being merely the complement of one's natural in- dependence. From this, nevertheless, it came about logically, that as the machin- ery for bringing in what was wanted, and sending out the surplus, was incon- venient, the use of money was devised as a matter of necessity, for not all necessities of life are easy of carriage. Therefore, to effect their exchanges men contrived something to give and take among themselves, which, being valuable in itself, had an advantage of being easily passed from hand to hand for the needs of life such as iron or silver or something else of that kind, of which they first determined merely the size and weight, but eventually put a stamp on it in order to save the trouble of weighing, for the stamp was placed there as a sign of its value. Aristotle, Politics, p. 9. THE THING WE CALL MONEY 5 bank and get a pass-book or a certificate of deposit for it, and when we wanted it the banker would give us, not the identical money we left with him, but its equivalent, and thus we discovered that money would not only exchange for goods and keep its power to exchange for goods, but could be exchanged for a credit. And it may be we found that if we left it for a length of time, the banker would give us a little more than we deposited, and money came to have an earning power; that is, the banker paid us for the privilege of having our money to loan to other men who wanted to use it and would pay for its use, and thus we became acquainted with the principle, if not the theory, of interest and the uses of money. A MEDIUM OF EXCHANGE It was not long after men began trading that they real- ized that they needed a common medium of exchange 4 and a common denominator of prices. And by common con- sent this medium of exchange is called money. "When I save enough money, I am going into business," says the clerk; meaning that when he gets enough of one thing to exchange for other things, he will give the other things in exchange for the thing he first had and, therefore, do a business as a trader, using money as a medium of exchange and a basis for the exchange values. He buys new goods only when he has the money in hand or in prospect to exchange for them. The contractor on the sewer system will exchange his money, saved it may be by working on a sewer job himself, for the labor of the men in the trench, who will exchange that money for things to eat ; and the merchant will exchange the money for more goods to exchange again for money. The merchant looks in his till and finds it empty. "I must collect some money," says he; meaning that he must turn his book accounts into money to exchange for goods. 4Men discover the need of a common medium of exchange as soon as society emerges from the patriarchial state, where each group of persons is sufficient unto itself. They learn by experience that one who wants wheat and has only skins to exchange for it, must meet someone who has wheat and wants skins, and that much time and labor may be lost before the two can find each other. Then more time may be lost before they can agree upon the ratio of exchange at which the two articles should be exchanged for each other. The few and simple words with which Aristotle has treated this subject cannot be bettered. Whole tomes have been written to say the same things and have ended without saying them. White, p. 9. 6 THE PRACTICAL WORK OF A BANK Whether it is a Wall Street broker buying stocks and bonds by the million, or the driver of a truck, or the sales- girl in a department store, or the grocer or the butcher, or the man who digs in the trench, the common end of all is to get the thing we call money, in order that they may ex- change it for the things they want, knowing that as soon as they get money they can satisfy their wants, however simple or complex. WHAT is MONEY? Money is a commodity which mankind voluntarily ac- cepts in exchange for all other commodities and services a Any commodity to answer as money must have certain qual- ities. It must exist in such quantities as to permit of its being obtained without great hardship, although not without some labor and hardship, so that its rarity will make it of value ; for if it be free for the taking no one will give in ex- change for it anything of value. A people cannot use as money the thing they do not possess either substantively or potentially. It must be possible of obtainment. Whatever value to the individual it may have, it must have a value to the community as a whole, or it will not answer as money. The things that have, the world over, been used as money- hides, shells, tobacco, etc. have all had a community value; and gold and silver have for centuries had this quality for reasons hereafter mentioned. A commodity to answer as money should be ductile ; that is, it must be capable of being smelted, purified and "coined" by being turned into discs, stamped with the insignia of value, and, therefore, readily distinguishable as money and the value certain. It must permit of being divided into parts, each of which is equal to every other part, and the sum of the parts equal to the whole. There may be fifty fleeces of sheep, all subject to cleans- ing and, therefore, pure from dross, but no two would be alike in weight or fineness, and certainly not suitable as money. A skin might have answered as money for primi- tive man, but would be totally inadequate for present-day needs. And to attempt to exchange an article of smaller value B White, p. 9. THE THING WE CALL MONEY 7 for a skin would be impossible, for to cut the skin might ruin it, and the sum of the parts would not be equal to the whole. It becomes necessary, therefore, to find something that can be divided into minute parts, coined, and of sufficient hard- ness to take a stamp and hold it, and to represent in small compass much value that is, exchangeability. It must be easily carried about, and, therefore, small in its dimensions. The things that have been used as money include skins, dried meat, fish, tobacco, shells, cattle, silk, cocoanut oil, wheat, rice, corn, iron, copper, nickel, silver and gold. What- ever will be generally acceptable to the people will answer in a limited sense for money, but not in its widest sense, nor over a wide territory. Moreover, not all these articles have lasting character. They will not stand the elements, nor are they divisible as is metal. All metals have been used at one time or another, but gold and silver are now the only basic metals, copper and nickel being used only in subsidiary coin. The story is told of a Connecticut collector of taxes who received his taxes in peas a current article used as money; but in rowing his load of "money" down the Connecticut River, a rain came up and his "tax money" spoiled. While all the articles mentioned as having been used as money answered for a time and to a limited degree, they had many disadvantages that were apparent even to primitive peoples, and so by a process of evolution, gold and silver have come to be used the world over as the money of the nations, 6 substitutes in the form of paper, and credit instru- ments in the form of bank notes, taking their places only that the supply might be safeguarded, the risk of loss re- duced, and the abrasion and the annoyance of transferring the heavy article avoided. The physical difficulties in using metallic money will be seen any day around Wall Street and the Sub-Treasury, where the shipping of gold is as interesting a process as the unloading of a ton of coal. In the call for the first pay- ment on the part of member banks to the funds of the Federal Reserve Banks, it was suggested that gold certifi- AI1 writers are agreed that the five requisites to a good kind of money are: Portability, uniformity, durability, cognizability, and stability of value. Long experience has taught mankind that these qualities are best embodied in the metal, gold. White, p. 12. 8 THE PRACTICAL WORK OF A BANK cates be sent and not the metal, in order to obviate the physi- cal labor of counting the coin. The desire on the part of men to adorn themselves has had much to do with the use of silver and gold as money, and these metals have a commodity value by reason of their uses in the trades, and this feature has added much to their worth. Whatever man uses for adornment he can use for money, if it be generally desirable, but the trouble with such a thing as a watch, even though gold, is readily apparent. The funds which pass current in a community and answer as the common denominator of values as men trade with men are two: (a) Money funds, being accumulations of gold, silver, bank notes, gold and silver certificates, and other forms of paper money, these passing from hand to hand at their face value and freely accepted by all; and (b) credit funds, such as checks, bank certificates of deposit, bills of exchange and promissory notes. The bank is the accumulator of the money funds of the community and the clearing house for the credit funds. The credit funds in their net balances are settled by money funds and one is as important as the other. PAPER MONEY Metal in itself has a value. It has many uses. It is scarce. It involves labor, risk. Although the one thing to be desired of all material things, it is cumbersome and un- satisfactory as a medium of exchange. We are now speaking of real money, not of promises to pay money. All of our circulating media and all of our smaller coins are, either directly or indirectly, promises to pay money. In paper money the promise is stamped upon it. In metallic money it is merely expressed in the laws. The difference between real money and a promise to pay money is the same as between a meal and a meal ticket or between a trunk and a trunk check. 7 Metallic money may have a good substitute. As long as people know they can get the metallic money, they will be satisfied with a representative. They must, however, have confidence that back of the representative money there is T White, p. 1. THE THING WE CALL MONEY 9 real money that may be had upon demand; and the faith that this is so is the basis of all monetary systems. It is not needful that for every dollar of paper money there shall be a gold dollar, for the holders of paper dollars will not all want gold dollars at the same time. Therefore, on the same principle that all the depositors in a bank will not want their money at the same time, paper money may be issued on the theory that all holders of these promises to pay will not pre- sent them at the same time. Thus our Government agrees to pay to any holder of a greenback the equivalent in gold; but against $346,000,000 of greenbacks it holds but $150,- 000,000 of gold. And this has, as a rule, proven sufficient. Such paper money currency is generally issued by a large bank that is empowered to do so by law, or individual banks under governmental supervision. In England the Bank of England issues practically all notes, these being es- sentially gold certificates, it being the policy of the Bank to have a pound sterling in gold for each pound note issued, there being also a small amount of paper money based on Government securities. In France, the Bank of France issues the notes, and in Germany, the Reichsbank. In this country the note-issue privilege is restricted to the national banks and to the Federal Reserve Banks. In order that these notes may pass current, be above suspicion, and freely accepted by the people, the underlying requirement is that there shall be no doubt about the ability of the issuing institution to pay real money (gold) upon demand. THE EVOLUTION or A BANK The evolutionary process already referred to may be seen the more easily by using a simple illustration, which begins with barter and exchange and ends in a bank. Let us suppose that a blacksmith holds out to the people of his community the offer that he will shoe horses and take in exchange for each shoe a dozen eggs. He has shoes to sell (barter) for eggs. The farmers have eggs to sell (exchange) for horseshoes. Therefore, he works on that proposition. But in the course of time he has a large sup- ply of eggs and cannot use them all. He makes it known that he will exchange eggs for meat, potatoes, coffee, etc., and thus supplies the wants of his family by trading the 10 THE PRACTICAL WORK OF A BANK eggs which he gets for shoeing horses, for other things. Bj and by he has a large and varied assortment of things foi which he has traded and cannot use. He is "stocked up." He then ponders the question and decides upon a new move He concludes that trading is not satisfactory, because there is no unit of value. He cannot exchange a beef for eggs : for it would require too many to make the trade fair. He finds eggs breakable and hard to keep. Therefore, he hits upon a new device. He takes a lot of horseshoe nails and stamps his initials upon them, and in return for various com- modities gives his tokens of value so many nails for an egg, a peck of potatoes, etc. These he agrees to take back from anyone in exchange for goods or services. He will give three eggs for three nails. Or, if he takes eggs for flour, shoes, etc., and there is a balance that the other party does not wish to trade out, he simply hands him the horse- shoe nails, good for commodities when presented by anyone. We thus have token money. The blacksmith's nails would be good only where he is known and trusted. They could not circulate far from home. They are local money only. Let us suppose that he adopts a higher standard of value copper discs instead of iron nails; then silver discs, more carefully made; then gold coins with his monogram. Each of better metal, more lasting and more scarce. In the course of time these, too, become inconvenient to carry, and he issues instead paper certificates, agreeing to give metallic discs in return for the paper, which answers the purposes fully so long as no doubt exists as to the blacksmith-banker being able to make good his promises. To carry on the simile, suppose further that a farmer wants to buy something the blacksmith has not on hand. The farmer gives him a written promise that he will re- turn ten nails at the end of the month if the blacksmith will loan him eight nails for that time. The blacksmith has made a loan. Another farmer brings in a load of produce. He does not want nails, he may lose them; they are heavy. He prefers to trust the blacksmith with his produce and asks simply that he get a receipt. The blacksmith, therefore, opens a book account with the farmer, gives him a receipt, and credits him with the amount agreed upon, subject to the latter's order. He can come in person and demand the re- turn of the amount due him, or he can transfer his THE THING WE CALL MONEY 11 right to another. From time to time he gives orders to his neighbors to go to the blacksmith and get nails on his ac- count. He has thus opened a deposit and checking account. Suppose two farmers have traded together and settled the debt, one by giving the other his promise to pay at a certain time, in nails of the horseshoer. The seller wants the tokens to use for other purposes. He, therefore, takes his neighbor's promise to pay, to the blacksmith and the latter buys (discounts) it, charging him for the accommodation. He has thus made a discount. And so we have a "bank," loaning, discounting and receiving deposits. And many a prosperous bank to-day is the outgrowth of just such a sim- ple process, varied, of course, as conditions vary, but funda- mentally the same. Traders become merchants; merchants, bankers; and bankers, banks. If we apply the same reasoning to a higher realm of ac- tivity and instead of the blacksmith we have a number of men a corporation authorized by law to issue paper money, to loan money, open checking accounts, etc., who as evidence of good faith have invested their own money in the enterprise, we have a bank. If instead of the horseshoe nails, we have finely coined gold and silver, carefully made to indicate the exact weight and quality, we have govern- ment metallic money. If, instead of the blacksmith's prom- ise to take in exchange, we have the general promise or will- ingness of all the people to accept because of faith in the issuing power, we have the thing we call money and a money system. With this brief introduction into the nature and uses of money we are prepared to see how it is used in banking; leaving it to the chapter on credit to treat of the nature and uses of credit as it applies to banking transactions. CHAPTER II. THE BANK AS A CREDIT MACHINE Metallic money proving expensive and inconvenient, the paper substitute was devised, and credit operations evolved, so that money in the metal is now mainly used only in the final settlements and as the basis of the credit system. The inconvenience of making payment every time a trade was consummated resulted in the system of deferred payments, the seller accepting in lieu of his goods a promise in some form which, in his estimation, is equivalent to the thing it- self. The farmer who takes a load of produce to market may be willing to let his account with the buyer run, and settle at some future time in a manner satisfactory to himself ; and there arises the book account form of credit. He may take the buyer's note, and there arises a negotiable instru- ment. He may accept a check on a bank, and there comes into being another form of credit instrument, in wide use and in popular favor. He may take the promise of a bank to pay money coin on demand and there is issued to him another form of credit instrument, the bank note; or he may take a greenback, which is a Government promise to pay money. It is for him to decide who his creditor will be, but most likely it will be a bank. But whatever form the pay- ment takes, it will be some variety of credit, unless the mat- ter is settled in gold or silver, which is not the common practice. If he were a European farmer he might draw a draft on the merchant, which the latter would "accept," and the farm- er could either keep it until maturity, or sell it to a bank, and in this we would have acceptance credit, as described hereafter in detail. If the farmer becomes suspicious of the merchant, he will ask that the book account be settled; if he questions the ability of the maker of the negotiable instrument to meet it at maturity he will either refuse it or ask a surety; if he questions the solvency of the maker of the check, or the soundness of the bank, he will cash it or have it certified as soon as possible; if he questions the bank's ability to meet the THE BANK AS A CREDIT MACHINE 19 notes issued by it, he will ask for gold; if he distrusts the greenback (as many did in 1893) he will also turn it into gold. Confidence in the instrument is the basic point, and as long as this confidence exists the credit instrument will answer all the purposes of money, and be cheaper. And so these periodic panics, particularly banking pan- ics, are due to the distrust of the community in the ability of the debtor to fulfill engagements. The general desire on the part of the people at such times is to change their debtors. A run on a bank is simply this and nothing more. The people prefer to trust the bank on its notes rather than on deposit account, and so withdraw their deposits. If they distrust the bank note, they will ask for gold. A general liquidation is therefore a general change in the relation of debtors and creditors. ! TRUST THE BASIS OF THE CREDIT SYSTEM In the end someone must be trusted. The laborer must trust his employer from week to week, that he will get his wage at the appointed time ; the clerk or salaried man trusts the firm from month to month. The physician trusts his patient, the minister Ms congregation. The farmer trusts the wholesaler, arid the jobber the retailer. The retailer trusts the consumer and the consumer trusts the employer, so that it completes the cycle of credit. Trust that at the appointed time payment in money or its equivalent will be made, is the very bedrock of all national and individual well- being. And in the confidence that men will keep their en- gagements business moves. Moreover, out of this system of trusting, interest as a compensation for the use of money or credit arises. It is the business of the bank to deal in money, credit and credit instruments; to safeguard metallic money and create "paper money"; to buy credit instruments and lend its funds on the strength of credit instruments. A bank is an institution where deposits of money are received and paid, where credit is manufactured and extended to borrowers, and where the exchange of property is facilitated. Having first acquired the confidence of the community, the bank extends its credit by purchasing interest-bearing securities, 14 THE PRACTICAL WORK OF A BANK mainly business men's notes, payable at a fixed time, and giving the sellers the right to draw checks upon itself pay- able at sight. The amounts thus authorized to be drawn are termed deposits, the bank being liable for them in the same way as for actual money deposited. It is found in practice that a bank may safely extend its credit to an amount much larger than its cash on hand, the excess being an inexpen- sive but useful addition to the world's instruments of ex- change. 1 MANUFACTURING CREDIT We have said that a bank is a credit manufactory. This is its chief benefit to the community at large. It has the power to create credit, to make it effective. The ordinary American bank, whether a national bank, a State bank, a trust company or a private bank, is an organization designed to collect the unemployed funds of the community in which it is located and to lend these funds to the borrowing community, which in a general way may be classified as the trading element of that community. In short, the business of banking embraces primarily the func- tion of collecting and lending capital. Banking, therefore, is the business of dealing in credits. 2 Let us follow briefly this creation of credit. Let us sup- pose that an individual starts a bank to all intents and purposes as effective a credit machine as a corporation. He has $10,000 capital of his own. His cash deposits reach the sum of $50,000 and he has thus $60,000 in cash, con- sisting of gold, silver, gold and silver certificates and other forms of currency. He knows that as a general rule all the $50,000 deposits will not be called for at the same time. Ordinarily this is true, and payment of only a small part will be required at one time; but when a larger portion than was anticipated is called for, suspension of payment results. Moreover, there will be deposited daily, as a rule, about as much as is drawn out, so that the amount of cash is at the $60,000 point most of the time. The banker argues that if with $10,000 of his own and a reputation for honesty and iWhite, "Money nnd Banking," p. 226. zj. H. Talhert, Late Vice-President National City Bank, New York, lecture before New York Chapter, American Institute of Banking. THE BANK AS A CREDIT MACHINE 15 business sagacity, the public will trust him with $50,000 on the strength of his original capital, he can further extend his operations by using the whole fund as a basis of credit. He can begin to operate a credit machine. His statement would now appear as follows: ASSETS LIABILITIES Cash on hand $60,000 Capital $10,000 Due depositors 50,000 Total $60,000 Total $60,000 OPERATING A CREDIT MACHINE The banker now begins to discount promissory notes and to make loans. He has found by experience that $10,000 in cash meets all his liabilities, and he can therefore safely extend credit to four times his cash holdings. He does not pay out money for the loans he makes, nor for the dis- counts, his clients being satisfied, and preferring, to have credit on his books for the amount, against which they can draw their checks. The proceeds of the loans are placed on deposit and we therefore find his statement to be as follows : ASSETS. LIABILITIES Cash on hand $60,000 Capital $10,000 Loans and discounts 200,000 Due depositors 250.000 Total $260,000 Total $260,000 If by this process the banker with but $60,000 in money has created something that will take the place of money in payment of obligations, he has created a new force in the world, and this force is credit. If all the depositors should draw their checks for the full amount due them and put them in circulation and they came home for payment in a short time, with but $60,000 to meet them, the banker would soon become insolvent unable to meet his obligations; but against the debts he has incurrea he has obligations due to him; and he, therefore, has taken the loans and discounted the notes with a view to their maturity, and out of the pro- ceeds of the maturing loans he expects to pay those who pre- sent checks. There is, therefore, a constant inflow and out- flow of cash, the one offsetting the other. Just what proportion of cash he must keep on hand to be safe, is the art of banking. To keep his assets "liquid" 16 THE PRACTICAL WORK OF A BANK that is, running all the time, so that as funds are demanded funds will be received is to keep his bank safe. If too large a portion of cash is on hand, evidently the profits will be less ; if too little, a heavy demand cannot be met without sacrifice of some of the securities or calling loans. Some banks in the war period of 1914 had as high as fifty-one per cent, of their liabilities in cash a very large and unprofit- able amount. They were fearful that heavy demands would be made on them, and, therefore, allowed cash to accumulate until satisfied that there was enough. On the other hand, however, in ordinary times as low as fifteen per cent, is suf- ficient, and in savings banks, with the notice of withdrawal permissible by law and the widely scattered depositors and the constant inflow of cash, a reserve of less than ten and as low as five per cent, is sufficient. The checks which are drawn against the deposit liability of the banker are as effective as the cash itself to settle debts. They do not circulate with the same freedom as money, inas- much as they are of non-uniform denominations, are not so widely known as bank notes, and subject to fraud and for- gery; but they are a very potent force in the business world, it being estimated that fully ninety-five per cent, of the transactions are carried on by their use, and in the wholesale trades in some sections ninety-eight per cent, of the bank deposits are in form of checks. FORMS OF BANK CREDIT As a credit machine the bank creates two main forms of circulating credits: bank notes and checks. The bank notes are merely its promises to pay on demand. The checks are simply the representatives of the book accounts. Thus, I have an account with a bank. The bank owes me so much money. The evidence consists of my account on its books . and its account with me in the pass-book furnished for that purpose. I draw my check as my lawful right and send it to my creditor. I put that much of my account in circu- lation. It passes from hand to hand, place to place, until it comes back to the bank for payment, when the debt to me is cancelled and the instrument no longer in effect. It is the same with the bank note. I borrow, say, $100 from the bank. I receive in return for my note the prom- THE BANK AS A CREDIT MACHINE 17 ises of the bank to pay to bearer the amount, which is repre- sented by twenty of its promises to pay to bearer $5 each on demand. I pay one debt after another, and place these in circulation. They remain out longer than my check, for anyone will accept them at their face value, and consequent- ly they circulate more widely than my check, which has no standing where it is not known ; for while checks come home quickly for payment, bank notes remain out longer. But both are obligations of the bank to pay money. BANK-NOTE CREDIT The banker, therefore, creates a very powerful form of credit in the bank note, which is nothing but his promise to pay to the holder of the note the amount named. It is, of course, issued in more elaborate form than the check, and is usually finely engraved to prevent counterfeiting. It may be secured by a general lien upon the banker's assets, as in Canada; by a deposit of certain United States bonds, as in the case of the national bank notes ; or by a combination of bonds and commercial paper, as in the case of the emergency currency issued by the banks in the summer of 1914; or by part gold and part commercial paper, as are the notes issued under the Federal Reserve Bank System, and as now obtains in Germany ; but the elementary principle is the same in all cases -it is a promise of the bank to pay. There may be a fund held by some central authority out of which the notes will be paid as presented; or a fund lodged to guaranty the payment of all notes issued by all banks, as obtains in Canada; but the point we now emphasize is the fact that by issuing notes the bank incurs the same obliga- tion that it does in certifying a check. The obligations of the bank on the checks of its depositors and on its notes are identically the same both are demand obligations. The customer issues his checks as needed, while the bank issues its notes where checks are not acceptable, and as the needs of the business world require. For instance, a customer wishes a loan of $1,000 for the purpose of paying off the farm hands. Checks will not do. Wages, as a rule, must be paid in money. Therefore, the banker issues $1,000 of his own promises to pay bank notes which he may create 18 THE PRACTICAL WORK OF A BANK for this express transaction. He turns the note into his own promises pays for an obligation running to himself by issu- ing obligations against himself. People generally have come to prefer paper money to metallic, using the latter chiefly for small change operations. The farm hands pay their grocer and butcher, who may in turn pass the notes on, or deposit them in the bank; and thus in due course they will come back like the check, and if the holder so demands, will be paid in coin as the promise contemplates. The bank notes will be paid out of the same fund as the checks, it being the privilege of the borrower to name which form of bank credit he prefers. The banker has no option in the matter, but inasmuch as he deals largely with his own customers, he takes it for granted that most of his loans and discounts will become deposits. It matters but little to the banker which form of credit instrument is issued, but the bank check is less expensive than the notes, there being no tax on the former; but the latter stay out longer and are usually considered distinctly profitable in their issue. AN EXCHANGE OF CREDITS When the banker makes a loan or a discount he merely exchanges one form of credit instrument for another. For instance, he takes my note for $1,000 and hands me $1,000 of his bank notes. The obligation I have assumed to him is an asset; the obligation he has assumed on the notes is a liability. The one appears on the left of the statement; the other on the right. And in the discount operation for cash (bank notes) the bank has exchanged its notes for my note. In the discount of commercial paper,* the bank has ex- changed a less-known credit for a well-known credit. The credit of the maker of the note is not generally known, and, as in cases where commercial paper is bought in the open market from brokers, the credit of the maker is more or less a banking secret. The banker passes upon this credit, and becoming satisfied that it is good, issues in return for it his own credit instruments, and he has thus turned an unknown into a known credit. He has made a non-circulating credit Meaning its purchase by issuing bank notes for the proceeds. THE BANK AS A CREDIT MACHINE 19 circulating. He has made the credit divisible, usable and good. Bank notes, like checks, stay out only so long as they are needed. The individual who has a check, as a rule, deposits it promptly for collection; at least he should. He does not want to carry it around ; it is idle money to him ; he does not want to take the risk of the bank failing before the check is paid, and so sends it home promptly for redemption. The bank note follows the same rule. It circulates only so long as it is needed. If there is an active demand for money, as, for instance, in moving crops, there will be large amounts of bank notes issued. As soon as the holder has no further use for the notes he deposits them in his bank, which in turn forwards them for redemption to the issuing bank (through the Treasury Department at Washington), and so bank notes appear and disappear as business demands, and checks likewise. CERTIFICATION CREDIT The bank not only creates credit and credit instruments, but certifies to credit. In the certified check it exchanges its own for the maker's credit. The credit of the merchant or tradesman may be more limited than that of the bank, and by certifying to the maker's credit, it makes it more accept- able. It supplants his credit with its own. This function is quite largely an American development. The certifying of a check is simply adding "accepted," "good," "good when properly endorsed," "certified," etc., on the face, after which when properly signed it becomes the obligation of the bank and not of the depositor. It means in banking practice that the bank has charged the amount to the drawer's account and credited the same to "certified check account," and holds the fund awaiting the return of the check for payment. It is most commonly used in Stock Exchange transactions, such operations being carried on quite largely by the use of certified checks.* In the certification of checks the banker has, therefore, simply certified to credit. He has created no new credit, but a better class. The credit must be existent when the Where the certification is made at the request of the holder, the maker is absolutely released. If roade at the request of the maker, before the check is negotiated, the maker is still liable. 20 THE PRACTICAL WORK OF A BANK certification is made, and the act of certification in effect says to the world: "The depositor whose name appears as maker of this check has the amount to his credit in this bank. The signature is genuine. We certify to the same and agree to pay to the party to whose order this check is regularly in- dorsed the amount for which we have certified. The maker is discharged of his liability and we assume it." It can readily be seen that this results in the check hav- ing a wider and freer circulation than would the maker's individual order; for his was an order, while the bank's cer- tification has made it a promise. And certified checks to a very large extent circulate as money, being freely accepted, and are the medium of the large payments, as bank notes are the medium of the small. Of course, there is such a thing as a false certification, made in fraud, and this has no weight to bind the bank ; but the certification, if regular, works as above noted, and the bank is responsible for the amount of its certification even though it has certified a raised check. But the bank could only charge the maker in the amount originally drawn. Having established his own credit, the banker thus trades upon that credit, by adding to, or supplementing, the credit of others, and he thus operates a credit machine. ACCEPTANCE CREDIT One striking difference between European and Amer- ican banking lies in the form of credit extended. In the American bank a loan is primarily a cash advance. The banker may not actually lend the cash, but he must stand ready to redeem the checks drawn against the credit which he passes when a loan is made. If he is asked for a loan, he looks in his till, and if he finds a dollar he may lend four; and if he lends four, he must keep one in his till. Our sys- tem of reserves requires it. He must regulate his affairs according to his cash; while the European banker lends his credit. He does not concern himself about the cash, for the contract of the one for whom he makes the advance is that he will have the funds in the banker's hands when the ac- ceptance is due. The acceptance is highly developed in European coun- tries, being a very common form of credit instrument. The THE BANK AS A CREDIT MACHINE 21 operation of a bank acceptance will be seen by taking a typical English case. Let us assume that an importer of coffee in London is about to bring in a shipment from Bra- zil. He is in good standing at his bank and arranges the transaction through its office. The bank agrees with him that upon the presentation of a draft with documents attached, signed by the seller of the coffee, they will accept it, and give him an instrument called a "letter of credit" to this effect. He sends the letter of credit to the coffee merchant in Brazil, who draws a bill of exchange on the London merchant, ships the coffee, attaches the bill of lading and insurance papers, and takes them to his local bank. The local bank being assured of having the bill taken care of in London, buys it of the coffee merchant and forwards the draft to the London bank for acceptance. Upon reaching the latter, it will be ''accepted," after which it can be sold in the open market ; for having the acceptance of a well-known London bank it becomes "prime" paper the very best. Let us see what this means. The bank has parted with no money. It has simply agreed that at the end of three months from the date of acceptance there will be paid at its banking house, to the holder in due course, the amount of the bill. The merchant for whom the acceptance was made has agreed with the bank that he will have the funds in its hands to meet the acceptance. By arranging the acceptance the merchant may obtain the goods and in the course of the term of credit turn them into funds, and with the proceeds of the sale make provision for the debt when due; and he has, without involving any money of his own, except his busi- ness capital, carried through a business transaction. The bill might have been drawn on the buyer arid ac- cepted for his account by the bank, or upon the bank direct ; but by writing its name across the face the bank has given new power to a credit instrument put it in position to cir- culate freely in the money market, and be taken without question by anyone looking for an investment. For thus lending his credit the banker will charge usu- ally a quarter of one per cent, for three months ; but since it involves no cash, but only credit, it is all profit to the bank. The rate at which paper bearing a first-class bank accept- ance will be discounted is so favorable that it will be profit- 22 THE PRACTICAL WORK OF A BANK able for the merchant to pay the bank's commission in order to obtain the lessened discount rate. The acceptance form of bank credit is not as yet a factor in American banking methods, but under the Federal Re- serve Act arid the New York Banking Law banks may make these acceptances and are already doing so in large amounts. The report of the New York Federal Reserve Bank as of March 1, 1919, showed $43,000,000.00 of accept- tances held. 3 This power to make an acceptance is the highest form of bank credit and enables a bank to capitalize its credit and make it effective. Imagine with what readiness a draft ac- cepted by the National City Bank of New York would sell anywhere. The buyer would not care who made the draft, or on whom drawn, as long as the name of the National City Bank appeared thereon it would pass in any market where the National City Bank was known. And all this without the use of a single dollar of money. The great London banks have out in acceptances about $100,000,000 all the time, and by so doing they add this much to the working capital of the country. In times of stress these acceptances may be discounted freely at the central banks, being "two-name paper" as re- quired by their rules; and by the rediscount system they are turned into a circulating medium bank notes, freely accepted everywhere. In the acceptance credit we have a form of pure credit, although it may have security ultimately back of it; but as it operates, it is essentially credit, being based upon the standing of the acceptor, as a promissory note is based upon the credit of the maker. THE LIMITS OF BANK CREDIT There is a limit to bank credit in this country, based upon our system of rigid reserves, which until the enactment of the Federal Reserve Law was as high as twenty-five per cent., now reduced to eighteen per cent. Part of this could "On March 6, 1915, the acceptances of the Federal Reserve Banks constituted 23 per cent, of the commercial paper held, which amounted to $25,731,000. On Tune 10, 1916, acceptances formed 32.2 per cent, of the total assets of the Federal Reserve Banks. On July 7, 1917, acceptances formed 49.7 per cent, of the total resources of the Federal Reserve Banks. On July 25, 1919, "Bills purchased in open market" were $375,556,000 out of total resources of $5366,371,000. On De- cember 4, 1920, the latter item was $243,055,000 out of total resources of $6,303,- 879,000. THE BANK AS A CREDIT MACHINE 28 be kept in other banks, and part in cash in the vaults ; but the reserve must be maintained as a matter of complying with the law. But whatever the amount of the cash in reserve, it is obvious that the bank with $60,000 in cash cannot meet a sudden demand on the part of its depositors for four times that amount unless it can quickly obtain the money due it on loans. These may not mature quickly enough to satisfy the demands of depositors, and nothing but bankruptcy fol- lows. If there can be found a way by which these promis- sory notes may be turned into money before they are** due their payment anticipated; if the bank which holds them can sell them to some other bank that may have money to spare, such a condition can be avoided. There has probably never been a case where all the bank's deposits were called for at one time, but something approaching it was experienced in 1907 when one bank paid out as high as seventy per cent, of its deposits in a few weeks. This is said to have been the most memorable run ever experienced by a bank without closing its doors. Up to the present time, we have had no institution or class of institutions equipped for rediscounting, and banks facing a sudden demand for liquidation by depositors could only gain help by selling (rediscounting) their note holdings to a correspondent, or by selling securities. The former might not be possible and the latter costly. But under the Federal Reserve Act a bank can now send the paper it holds to its Federal Reserve Bank for rediscount, the latter mak- ing payment for the same by issuing its notes on the secu- rity of the commercial paper so deposited. In other words, on the strength of the promises of a number of approved merchants and others to pay a certain amount at a certain time, the Federal Reserve Bank will issue its notes which promise to pay on demand a specified sum. This is the principle of the clearing-house loan certificate elsewhere described. Thus we have a bank and a central bank creat- ing credit instruments, making circulating credits out of fixed credits, backed in the main by other credit instruments promises to pay and ultimately gold. There is thus a limit to a bank's discounting powers this limit being the probable call of its depositors. The law may estimate that twenty-five per cent, cash on hand is sufficient; but the banker himself must be the best judge. 34 THE PRACTICAL WORK OF A BANK The penalty for over-discounting is the probable difficulty that might arise if more than the usual portion of deposits is demanded at one time. The advantage of large discounts and low cash is the profit that arises; for the larger the loans and the less the idle money, the more the resultant profit to the bank. In England there is no law as to re- serves, the banks being free agents, regulating their reserves according to the conditions, expanding and contracting as the occasion warrants; and English banks have an enviable reputation for the quality of their administration. But the great central bank stands as the backbone of the banking system, operated not for profit but service, and which can and in Europe does carry large cash reserves (in France as high as seventy-five per cent, at times), so that demands can be met and rediscounts made under all condi- tions. The strength of the Bank of England was never better shown than in the present war, during which it has accumulated the largest gold fund in its history, discounting at normal rates, and throughout the crisis proven its title as "the greatest bank in the world," because greatness in in- stitutions as well as men is measured by the way they con- duct themselves in trying times. THE CIJEARING OF BANK CREDITS The bank, in its broadest sense, acts as a credit clearing- house. The scope may be local, national or international; but its function as a credit machine is to offset debits against credits, and the process that obtains in a small com- pass operates in a wider sphere. Let us suppose that there are ten merchants in a town doing business with each other. They all have accounts in the local bank. They buy and sell among themselves, and in payment give checks on the bank. These are deposited, and all the bank does is to charge the one and credit the other. It "clears" the credits. If they should all go out of business, the bank would pay each, in cash, the net balance that resulted from their oper- ations. In other words, it would "settle" the balances in cash. And expanded to its ultimate horizon, this is what the bank does as a credit-clearing machine. The bank receives checks from all sources, particularly its customers, and sends them for collection through routes THE BANK AS A CREDIT MACHINE 25 and machinery described in the chapter on checks; hut it does not ask that the checks be paid in money; all it wants is a draft on some large city bank. If two banks are in the same town, each morning they will exchange checks, and the balance will be adjusted by the debtor bank drawing its check on its reserve correspondent in settlement. In some cities operating clearing-houses, checks will be exchanged through the clearing-house, the banks which owe balances, sending their draft to the clearing agent, and the clearing agent settling with the creditor banks. No money passes, the drafts on New York, Chicago, or other large city, being the medium of payment. In large cities only the net balances of clearing operations are paid in money. Checks deposited by customers are credited to their accounts; notes are col- lected and credited as a deposit; checks drawn by depositors are paid by clearing, or by drafts, as above noted ; bank notes are issued on the credit of the bank, arid so banking from first to last is a credit operation. INTERNATIONAL CLEARINGS While the clearing process may seem complex, especially in foreign exchange transactions, it is based upon the funda- mental proposition of two men meeting and adjusting their debts. In the place of men, however, we have banks, com- munities and nations. If merchants in the United States sell to merchants in England a million dollars' worth of goods, and English merchants sell our merchants five hun- dred thousand, obviously England as a mercantile commu- nity owes the United States half a million dollars. Our bankers might be and generally are satisfied to have credit with English bankers for the amount, against which they can sell exchange that is, take money on this side and give orders on the English bankers which the latter will honor. But if the American bankers should want payment in cash, gold would be sent by steamer to New York, and we would thus have a "gold movement." The elementary principle throughout all these transac- tions, from the settling of a debt between two merchants, by one giving the other a check on his bank, which is deposited in the same bank ; the merchants of a city settling their debts the one against the other through the medium of the banks; 26 THE PRACTICAL WORK OF A BANK the banks settling through the clearing-house; the settling of balances due from place to place, country to country, through the selling of bankers' orders, involves the same idea an exchange of credits. Banks are the medium through which these exchanges are made, money being used, if at all, only to adjust the net balances. This credit machine is a wonderfully delicate machine, and of great usefulness. It moves silently and effectively, and works perfectly under ordinary conditions, and only under such unusual conditions as are brought about by a great war is the equilibrium disturbed. J$y gathering the idle capital of the community as deposits, and thereby sup- plementing its own; by creating credit instruments; by ex- tending credit; by certifying checks; by keeping its reserve as a safeguard to its credit operations and by paying its de- positors' checks, the bank acts as a vast credit machine in the mercantile world a public benefactor as well as a source of private gain. CHAPTER III. BANKS, BANKERS AND BANKING The four most important industries are agriculture transportation, manufacturing and banking. Agriculture produces the raw material; transportation carries it to the manufacturer and to the consumer; the manufacturer turns the raw material into finished and usable products, and banking provides the financial and credit machinery by which these processes are made possible. The peculiar func- tion of the bank is to furnish the capital and the credit The other industries employ it. Without the bank, trade and industry could not have attained the present high state of development, for banking has been the chief motive powei in the advance of material civilization. The marvellous development of Germany as a nation demonstrated this fact ; and that development was largely due to the interest taken by the banks in the material welfare of the country. The German banks are closely connected with all sorts of improvement schemes. They are represented on the boards of directors; they keep in close touch with the businesses which they have financed. For instance: a steam- ship company is formed to operate a new line of steamers The bank becomes, in a sense, a partner. It provides the capital necessary to develop the company, taking back bonds or stock in payment. When the project is finished, the se- curities are sold to the clients of the bank, with the latter's moral, if not legal, guarantee that the proposition is sound and worthy of investment, and a new fund is in hand for an- other work. By thus getting close to the actual work of de- velopment, these banks have played a most, if not the most, important role in the marvellous growth of the German Empire.* BANKING MACHINERY NECESSARY It is not enough to produce to manufacture there must be the financial machinery to carry the burden of *This was no doubt part of her comprehensive scheme of world-wide dominion, now happily prevented by her collapse as a military power. (March, 1919.) 27 28 THE PRACTICAL WORK OF A BANK growing the crops, of taking to market, of turning raw ma- terial into usable form, all of which calls for credit, which credit can best be furnished by banking; for by the opera- tion of banking credit, one dollar of money does the work of four, and by using money as the basis of credit, credit may, in ordinary times, be extended on the ratio of four to one, thus multiplying the usefulness and effectiveness of metallic money fourfold. Banking makes money a potent force. It makes credit elastic and safe. THE PRIVATE BANKER The first bank was a banker. The individual who con- ducted a banking business as part of his mercantile opera- tions soon found that he could employ more capital than he had, and so he associated others with him. It thus became a partnership. In the course of time it was found advisable to incorporate under the banking laws, or to apply for spe- cial charter (in early days most banks were created by spe- cial act), in order that the business might be perpetuated and that it might expand with the changing needs of the community. Banking was originally a common law right. Any citi- zen could be a banker if his neighbors would trust him ; but the business being more or less of a public character, inas- much as it deals with money, credit and credit instruments, and by the functions it enjoys touches the public intimately, soon became a special privilege, granted by law or the leg- islature. While some men could be trusted to use these privileges wisely, it would not do to permit anyone to re- ceive deposits, issue notes and loan money, for the power would be abused. Therefore, public control, both in the granting of the privilege and inspection thereafter, became necessary for the common good. Even as late as 1913, the right to do business as a private banker was not restricted or supervised in the great State of New York, and only grave abuses at an opportune time led the revision commit- tee of 1914 to make adequate provision for the regulation of private bankers. There are many cases, however, where the community would not have banking facilities at all, were it not for the private banker, who combines banking with other business, BANKS, BANKERS AND BANKING 29 and fulfills a very necessary place in the community's life; but with the capitalization requirements only $25,000 for country banks in the National Banking Act, and in some places but $10,000 under State laws, the organization of a bank is not a difficult matter; and in many, if not most, small towns and villages the incorporated bank will now be found. But the day of the private banker is over, for in the course of events the corporation has become the recog- nized form, and only those who are already in the business are likely to operate as such. And even these are taking on the corporate form as time goes on. Not only was banking once incidental to other business. but the legislatures were often hostile to granting bank charters, and only by subterfuge could a bill be gotten through. Thus the famous Chemical National Bank was originally the banking department of the New York Chem- ical Manufacturing Company. The Farmers Loan and Trust Company was the banking end of the Farmers Fire Insurance Company. The most notable case is that of the Bank of the Manhattan Company, which was chartered pri- marily as a water company with banking privileges, but de- veloped its banking function much more rapidly than its water works, whether by design or not is not the question; the fact remains that it is a large and influential bank at pres- ent, but the original well and the tank on the roof still re- main as evidence that it is a water company primarily and a bank secondarily, by charter if not by practice. The char- ter after granting it powers incidental to a water company empowered it "to utilize its surplus funds in the purchase of public or other stocks, or in any other moneyed transactions or operations, etc." And thus an innocent appendage to a charter to operate a water company opened the door to banking functions. For thirty years it was a water com- pany, but for a century it has been a bank. BANKS DISTINGUISHED We must distinguish between those institutions which in a sense create capital, from those which work on capital al- ready accumulated. Of the former class are to be men- tioned particularly the mutual savings banks, which have no capital, and whose funds are obtained by receiving the sav- 80 THE PRACTICAL WORK OF A BANK ings of the small depositor and combining them into a com- mon fund large enough to make profitable and effective in- vestment in mortgage loans and other securities. The banks of discount and other capitalized banking in- stitutions have as the foundation for their operations the funds which have been in a sense made capital prior to in- vestment in the enterprise. The stockholder in a bank of discount has saved his money until he has accumulated a fund sufficiently large to make investment in a bank possi- ble. He must have at least $100 in order to become a mem- ber of the corporation, while the savings bank opens its doors to the man with one dollar and often to the child with ten cents. In the one you must be a small capitalist before "joining the bank," while in the other you become a small capitalist through the bank. The savings bank is the receiv- ing reservoir for the little streams, out of which pours the larger stream, while the bank of discount utilizes power al- ready assembled. In the savings bank every depositor is in a sense a stockholder and stands on the same footing; while in a bank of discount the depositors are creditors and the stockholders are owners. The savings bank depositor is a partner; the bank of discount depositor is a creditor. The savings bank agrees to pay back the money on due notice; the bank of discount on demand. The savings bank is a mutual investment concern more than it is a bank; while the bank of discount and the trust company as generally oper- ated, are essentially banks. The savings bank never discounts notes, nor issues money, nor, as a rule, does it allow check- ing privileges, although in some States it does make collat- eral loans to a considerable degree. In New York this is permissible, but not indulged in to any great extent. We do well to get the distinction between the two clearly in mind, for much confusion and misunderstanding of the nature and functions of a savings bank have existed, and the line of demarcation is sharp and well drawn. Having the differences between the two classes of institutions clearly un- derstood we are the better able to take up the functions of a bank of discount. BANKS DEFINED AND CLASSIFIED Banks may be divided into seven classes: (a) Banks of discount, comprising national banks, State banks, private SI and individual bankers, (b) Trust companies. These in most, if not all, instances do a banking business, and in con- nection, a trust, and in some cases, a savings bank business, (c) Savings banks, which are essentially investment insti- tutions, receiving small deposits for cooperative investment. These are further divided into mutual and stock savings banks, the latter predominating in the West and South, and the former almost exclusively in the Eastern and New Eng- land States, (d) Building and loan associations, (e) Mort- gage companies, (f) Safe deposit companies, (g) Loan companies, personal and chattel. A bank of discount may be defined as a moneyed corpo- ration, authorized by law to receive deposits and pay checks ; discount and negotiate promissory notes, drafts, bills of ex- change, and other evidences of debt; to lend money on real or personal security; to buy and sell gold and silver bullion, foreign coins and bills of exchange; to issue its circulating notes; to make collections; and such other moneyed trans- actions as are not inconsistent with its charter or the laws under which it operates. Horace White, in "Money and Banking," defines a bank as "An institution where deposits of money are received and paid, where credit is manufactured and extended to borrow- ers, and where exchange of property is facilitated. Having first acquired the confidence of the community, the bank ex- tends its credit by purchasing interest-bearing securities, mainly business men's notes, payable at a fixed time and giv- ing the sellers the right to draw checks upon itself payable at sight. The amounts thus authorized to be drawn are termed deposits, the bank being liable for them in the same way as for actual money deposited. 1 * In "The Savings Bank and Its Practical Work" the author of the present work defines a savings bank as "A mutual cooperative institution conducted without profit to the managers, for the purpose of receiving on deposit and for safekeeping such sums as may be offered, limited by the law of the State, and investing the same for account of the depositors jointly and severally in such manner as shall be i White, p. 227. *Under powers recently conferred, national banks and state banks in some jurisdictions may exercise trust functions, so that they enjoy all the privileges heretofore reserved to trust companies. 82 THE PRACTICAL WORK OF A BANK prescribed by law, and paying to the depositors as interest all the earnings of the institution except the amount paid for expenses and such part as may be set aside and held in reserve as a guaranty fund for the benefit and protection of all." Technically speaking, a trust company is a corporation organized for the purpose of accepting and executing trusts, acting as trustee under wills, bond issues, registrar of bonds and stocks, executor or administrator of estates, etc., al- though by law and practice trust companies may do a gen- eral banking business, but do not issue currency. Building and loan associations are mutual organizations formed for the purpose of assisting men to own their own homes. They accumulate savings and in many cases do a savings bank business, but they are essentially for the pur- pose of helping people save by regular monthly installments for the purpose of home ownership, lending only to members on real estate security. Mortgage, or mortgage investment companies, are de- fined in the New York law as "corporations other than an insurance company formed under the laws of this or any other State for the purpose of selling, offering for sale, or negotiating to individuals other than bankers, bonds or notes secured by deeds of trust or mortgages on real property or choses in action, owned, issued, negotiated or guaranteed by it, or for the purpose of receiving any money or property, either from its own members or from other persons, and en- tering into any contract, engagement or undertaking with them for the withdrawal of such money or property at any time with the increase thereof, or for the payment to them or to any person of any sum of money at any time, either fixed or uncertain." Safe deposit companies are those renting out safes in vaults for the protection of valuables in any form. Personal loan companies are those which make a busi- ness of loaning on personal security to needy borrowers, generally in small sums. Of this class are pawnbrokers and other lending concerns which loan on pledge of jewelry, etc., or personal indorsement of a third party. This work has particular reference to banks of discount, but aside from the trust functions, applies equally to trust company operations. BANKS, BANKERS AND BANKING 88 THE FUNCTIONS OF A BANK The functions of the bank are fivefold: (1) To assemble capital and make it effective. This it does by assembling capital of its own, and by attracting private capital. In the organization of a bank the stockholders "subscribe" to the stock, which simply means that they unite their private capital with that of the other stockholders, so that the ag- gregated fund becomes the "capital stock" or "capital" of the bank. The stockholders are the partners in the enter- prise. The profits, if any, belong to them; the losses, if any, must be shared by them. In proportion to their holdings they are entitled to the profits and likewise must be account- able for the losses. As a general rule the liability is twice the amount of stock held ; that is, if a stockholder owns $500 worth of stock, he is liable to have his stock cancelled and be subject to an assessment of $500 in addition, in case the bank fails. This is generally spoken of as the "stockholder's double liability." With this fund as a starting point, the bank is ready to do business. It loans this fund to borrow- ers and thus makes its profits. But if the capital fund were all the bank had with which to work, it would not prove a profitable undertaking, for after deducting expenses and losses, the profits, if any, would be small. It, therefore, in- vites the public to open accounts with it, and it thus assem- bles another fund, the deposits, which it employs in making loans, buying securities, etc., so that we have not only an additional fund, but another function of the bank, i. e. (2) To receive deposits. Contrary to the prevailing idea, the bank does not receive the money offered it for safekeeping. Neither does it receive the fund for mutual investment as is the case in mutual corporations such as savings banks; but the bank of discount in receiving the deposit becomes the absolute owner of the fund, and the relation of debtor and creditor is established between the bank and the depositor. The bank thereafter owes the depositor the amount, and agrees to pay the same upon demand. It is interesting to note in passing, that while fully ninety-five per cent, of the force of the bank is engaged in the work arising from the ramifications of the deposit func- tion in banking, their efforts produce no income except the incidental item of "Exchange." It is the service rendered by 84 THE PRACTICAL WORK OF A BANK them, however, which in a large measure attracts and retains the balances which make possible the exercise of the discount and lending functions. BANK DEPOSITS The deposits of the bank are divided into three main classes, namely, general, specific and special. The general deposit is the most common. The bank receives the fund de- posited as its debt to the depositor, mingles the money with other funds of like nature and pays the depositor as he or- ders, usually upon his check, which will be treated subse- quently. The contract with the bank in general deposits is never that of a bailment, where the bailee receives property with the agreement to return the same identical thing. In the case of a bank deposit the agreement is simply to return money of equal amount. In case of insolvency of the bank every general depositor is a creditor of the bank. Technically every creditor is a general creditor. If one is entitled to payment in full, it is either because the bank holds a special deposit or security, which has always remained the depositor's property, the bank being bailee under agreement, or because the bank violated a trust arid by reason of the wrong holds a special fund which belongs to the depositor. In a national bank all general depositors and other creditors share alike. In some States the depositors in State banks are by statute preferred over other creditors and are paid in full before other claimants. Frequently when a bank fails attempts are made to es- tablish rights to preferences by showing that certain deposits were special deposits. But the ordinary manner in which banks do and in these days must do their business, to satis- fy the demands of commerce, facilitate negotiations and meet the customs which present-day business methods re- quire, and the general intentions of those who do business wjth banks, when sifted out, will show the fallacy of this claim for preferences, as well as the obvious injustice of the claims. Even though the money is deposited for a specified time, or upon unusual conditions, if there is no understanding that BANKS, BANKERS AND BANKING 85 the money is not to be mingled, the bank will mingle the amount received with the general mass of its property, and in most States the deposit is a general one, to be repaid out of the general mass of the bank's assets. 2 The fact that a general deposit is a debt has been held by the courts the country over, and as in the case of all debts, it can be extinguished only by payment. A specific deposit is a deposit made for a specific pur- pose, and the bank has instructions to apply the fund for that particular purpose and no other; as, for instance, to pay off a mortgage, or to pay a note of the depositor. The money cannot lawfully be mingled with the funds of the bank, it being a separate fund for the particular purpose. Special deposits are those where the identical thing is to be returned. It is in a sense a bailment. Thus, if money were left in a package; bonds or stocks, etc., left with the bank (not in its safe deposit vault but with the bank as a bank) it would constitute a special deposit with it, if the articles or money were left on such conditions. Having distinguished between the various classes of de- posits, we are concerned mainly with the first class, namely, the general deposits, for these carry another important func- tion as well as duty of the bank, i. e., to make payment when, to whom and in the amounts designated by the depos- itor, commonly called the (8) Checking function, which has grown to such proportions, and is such an economic neces- sity, that it may be considered one of the elemental and most important functions of banking, although it necessarily follows the deposit function. Briefly stated, the checking function gives the depositor the right to draw checks on the bank in such sums as he may choose, payable on demand, to the party designated or to bearer, together with the right to rescind the order before payment, and the bank is bound to pay on regularly issued orders as long as the maker has credit for the amount named with it. (4) The function of discount, which includes the loan, the distinction being trifling between the two. In a dis- count the process is usually as follows: A presents a note payable to his order to the bank and asks, not that the bank 2"The Law of Bank Deposits," Weitzel, p. 8, 86 THE PRACTICAL WORK OF A BANK make a loan on it, but that the bank discount (buy) it. This it does by deducting the interest from the amount and turn- ing the proceeds over to him. If he had presented his own note to its order and asked for the money, the bank would not make a discount in the technical sense 3 , but loan him the amount, taldng his note in evidence thereof; and whether the interest was deducted when the discount was made or col- lected at maturity, it would be a loan and not a discount. These advances are usually reported under the head, "Loans and Discounts," the former including demand and collateral loans as well as the time loans. In the matter of commercial paper, the bank is frequent- ly spoken of as "buying" the paper; while in the strict sense it has made a loan through the agency of the commercial paper broker. The last and a very important function is the issue of money, or, to be correct, currency, commonly referred to as (5) the note issue power. Bank notes are known to have been issued as far back as 1670, when instruments of writing were issued by the goldsmiths to people who had left money in their care. These were in substantially the same form as bank notes of to-day, promising to pay on demand a speci- fied sum. The right to issue such notes was never ques- tioned. They were simply evidences of claims against the goldsmiths for money left in their care. As the business grew and the quantities of notes called for increased, it be- came more convenient to print blank forms, to be filled out with the names of the depositors and the amounts due them. Still later notes were printed for round sums five pounds, etc. which could be handled in quantities, and these were made payable to order or bearer, according to the wish of the depositor. The business of discounting commercial paper was added to the goldsmith's vocation very soon after the practice of depositing money with him became common, and then the notes were issued if desired to the persons get- ting the discounts. 4 The principle of issuing such notes was recognized as a right, so long as anybody would take them. But experience lt is the common practice, however, to consider all loans where the interest is collected in advance as "discounts" and where the interest is collected at maturity or periodically as "loans." 4 White, p. 225. BANKS, BANKERS AND BANKING 87 soon taught that such a right was subject to abuse, as was evidenced by the early days of banking in this country, when thousands of merchants and dealers the country over put out their promises to pay, until the condition became chaotic, and it was recognized here as well as in the early days of banking in other lands, that this right to issue cir- culating notes was a function that for the good of all had to be regulated by the State. Banks were, therefore, char- tered with implied or express power to issue notes. Other groups of individuals had this right without incorporation as a bank, it being the first function of some corporations to issue notes before being chartered as a bank. Thus, the Bank of New York issued circulating notes seven years before it was chartered as a bank. 5 In the early days of American banking the bank was an association of individuals whose main business was to issue currency. By the grant of "banking powers" was meant the power to issue its notes, and the profit came from the power to thus issue notes, charging interest to borrowers, and in many cases without capital of its own to safeguard the issues. Without adequate redemption features, and by fraudulent practices these privileges were abused so that banking was looked upon with disfavor by legislators, and charters at times difficult to obtain. Daniel Webster is said to have observed that the power to issue notes to circulate as money was the feature which distinguished a bank from every other institution. 6 The issue of notes is not now the function of State banks, the National Banking Act placing a tax of ten per cent, on all issues of State bank notes, so that it becomes unprofitable, and no State notes have been issued in many years. In the revision of the New York Banking Law in 1913 the sections relating to note issues in the old law were entirely eliminated, it being considered that the issue of notes by State banks in New York was no longer a probability and the law therefore makes no pro- vision for such operations. 5 White, p. 225. 6 White, p. 217. CHAPTER IV. THE ORGANIZATION AND ADMINISTRATION OF A BANK The organization of a bank may be due to any one of several reasons, such as a desire on the part of a bank man for an official position; an attorney desirous of bank patron- age; dissension among the directors or stockholders of one bank, which results in a rival institution : public spirit, which appreciates the need of and benefits of a banking institution; the work of a professional promoter, etc.; but in the last analysis, the bank results from the desire on the part of those who have capital to employ it effectively through such an institution. Otherwise the capital stock could not be assembled. There may, of course, be ulterior motives back of it all, such as a desire to secure large accommodations as borrow- ing directors, but the reason last noted must be controlling if the bank is to secure support from moneyed interests. Through the agency of the bank funds which are idle are brought into use and employed profitably. Through the medium of the bank the man who needs and can use funds meets the man who has funds to loan. Thus produc- tion is greatly stimulated and capital increased. And for the bringing together the banker is entitled to his profit, as well as is the capitalist, large or small, who furnishes the means that make the banking operations possible. It is possible to conceive a bank starting with no funds of its own, but holding itself out as willing to loan the funds of others who will entrust their property to it; but in such a process there would be no assurance of the wise use of the funds so deposited, or their return at the appointed time. And for the sake of having loanable funds at the opening of the bank, and a fund to safeguard those who will trust their money to its use, a capital fund of its own is necessary. The trouble with many of the old State banks was the lack of capital, except in the form of promises, and debts cannot long be paid by promises. And inasmuch as banking is a credit operation, and the bank a credit machine, it must have 38 BANK ORGANIZATION AND ADMINISTRATION 89 credit before it can operate profitably and successfully, and to do this capital is necessary and a surplus or guaranty fund quite as much so. To organize a bank, therefore, there must be an accumu- lation of capital which has already been gathered by individ- uals. As a basis of its own credit this is absolutely essen- tial. To allow a body of men to receive deposits without some property back of their promises would be foolhardy, and the law stipulates how much capital there shall be, and regulates the capital to the place where the bank operates. This is fundamentally wrong, for the capital should not be adjusted to the place but to the volume of business. But it works out fairly well, for as a broad proposition a country bank will not have the growth that will attend a city bank. A national bank was chartered in Oklahoma to operate on the outskirts of Oklahoma City. The capital by law was but $25,000. In the expansion of the city the territory was included, and the bank became a city bank, and sought to operate on its old capital. The Comptroller of the Cur- rency forbade it to continue to do business under its old cap- ital, and suit was brought, and it was held that it must make its capital conform to its new environment, the logical result being that in a large city its deposit liabilities would in- crease faster than in a rural setting, and result in a top- heavy and unsound condition. The law contemplates that there shall be some proportion between capital and liabil- ities. THE MEN BEHIND A bank is merely an aggregation of men and it can be no better than its men. A bank never goes wrong of itself; it goes wrong because of the men behind it. It may be due to any one of several causes, but failure is, in the last analysis, the failure of men. "There is no question that we as business men cannot solve," said a boastful young man just organizing a bank. And not one of the organizers was a banker by training or instinct, and yet they proposed to run a bank without the assistance of any experienced bank man. But they found as will others that the rules that apply to business in some forms will not fit banking; and to be able to run a factory is not to be capable of running a bank. 40 THE PRACTICAL WORK OF A BANK Most of all the men must be those who will inspire con- fidence. They must have "made good" in their own lines and bear a reputation for honesty, sagacity and business prudence. The man who has been "tricky" in business; who has roade money by unsavory methods; who has the gam- bler's instinct and cannot draw the line between other peo- ple's money and his own, has no place in banking. And yet such men get in by the force of the dollar, and often carry their bank down when they must get out. A SURPLUSAGE or BANKS If he who makes two blades of grass grow where but one grew before is a philanthropist, what shall be said of the man who plants two banks where only one ought to exist; and by creating the second makes them both unprofitable and great success impossible? There are many towns where one bank could serve every need, and would grow into a healthy size; and along comes a professional organizer, or a disgruntled stockholder, or an ambitious fellow, and starts another. And they both just manage to exist. Of the making of banks there seems to be no end. But this is not to say there should not be a bank in every community. The great development of this country is due to its independent banking system, where under liberal rules as to capitalization every little town and hamlet that can raise the necessary capital can have its bank. But the first essential to the organization of a bank is that it shall have a fair chance of success. And how some banks manage to live and pay the modest rent and the salary of the cashier and a dividend large enough to satisfy the directors and stockholders, is a mystery. THE CHARTER The organization of a bank is a legal matter that must follow certain prescribed lines, and conform to legal re- quirements. The National Banking Act and the various State laws prescribe just what steps are necessary in ordef to form a bank. There must first be the association of a certain number of men, usually five or more, who unite themselves together for such purpose and apply for a char- BANK ORGANIZATION AND ADMINISTRATION 41 ter. The application must be made to the Comptroller of the Currency, if a national bank and to the State depart- ment which has banks in charge, if a State institution. This is generally called the banking department, and the official, "Superintendent of Banks," ""Auditor" (Illinois), "Com- missioner of Banking and Insurance" (New Jersey), or "Commissioner of Banking" (Massachusetts). The in- formation generally required is the names of the proposed incorporators, the name (which must not duplicate or con- fuse with any existing bank in the same jurisdiction), the place of business and the amount of capital. The latter is important, and the law usually stipulates what the capital shall be for various places, it being the intent that the cap- ital shall be large in large places and small in small places. For national banks the minimum is $25,000 in country places, while in some States in the South and West, State banks may be formed with capital as low as $10,000. Upon filing the application for charter, certain formali- ties are necessary as to advertising, so that the banking world and especially the bank's competitors in the same dis- trict may be apprised of the fact. Duplicate papers must also be filed in the county clerk's office, as matters of record. The State official in charge of banks* then looks into the matter to assure: (a) That the incorporators are acting in good faith; are representative men of business, whose con- nection with a bank will bring credit and probable success to the institution; (b) that it has a fair chance of success; and (c) that the capital requirements have been complied with; for it is essential that the bank have the capital fund really in hand before opening its doors and transacting business. Under the old State regime, banks would organ- ize with capital only in the form of promissory notes, and promises are a poor foundation on which to build a bank. The process necessary to establish a bank differs mate- rially in the different States, so that specific description would be futile, and those interested in the subject must re- fer to original sources for directions in forming a bank, and follow the law most carefully. But when formalities are complied with there will be forthcoming the charter which authorizes the corporation to transact a banking business. *In national banks, the Comptroller of the Currency. 42 THE PRACTICAL WORK OF A BANK THE BOAED OF DIEECTOKS Having received permission to do a banking business, the organization of the board of directors follows, these be- ing elected by the stockholders. The directors choose the executive officers, who will have actual charge of the ad- ministration of the bank. The magna charta of the bank is its by-laws. These are its working rules and principles. It is important that they be complete, comply with the law, and cover all possible operations in general principles. Inasmuch as the stockholders own the bank, they are the controlling factors. They elect the directors and the direct- ors elect the officers, and the officers select the clerical staff. The qualifications for director in a bank differ in the va- rious States, but the general qualification is that he shall own a certain number of unpledged shares of stock of the bank, and, in addition, must control enough votes to elect him. As a rule, the first directors are named in the certificate of organization, these serving as the first board until their successors are chosen. The administration of a bank centers in the board of directors, the court of last resort, presided over by the pres- ident. Of late years there has been a growing tendency to create something like a "president emeritus" office, designat- ed as "chairman of the board," the object of which is to honor one who by long service has won his spurs and desires to withdraw from the active management of the bank, but still hold a rein over the institution. He is, in a large meas- ure, an advisory officer, a "big man," and one whose counsel in matters of finance, both within and without the bank, is respected. The directors operate through committees of various sorts, the principal one of which is the loan committee, whose function is to pass on loans and discounts, and whose judgment may make or break the bank. It is customary to delegate certain prerogatives to the attending officers, and permit them to make loans up to a designated amount with- out reference to the committee; or to grant a line of dis- count to a certain individual or firm, it being the function of the attending officers to see that the line is kept within the limits. It not infrequently happens that the president is the BANK ORGANIZATION AND ADMINISTRATION 48 dominating force of the bank, and his judgment obtains. If he is a man of sound judgment, a student of business af- fairs, he is often trusted with the management of the bank without much supervision on the part of the directors or loan committee. In fact, he is often the bank, and domi- nates its policies absolutely. And it sometimes happens that he rules with such an iron hand that he not only dom- inates the bank, but wrecks it. More than one bank has gone to the wall because its president insisted upon a cer- tain line of action, and either in his eagerness to build up the bank or in his ambition or indiscretion in other lines, ill- advised or too liberal credits, brought his bank to disaster. THE "ONE-MAN" BANK The "one-man" bank has been the subject of many pointed remarks. It is everywhere to be found. It exists in the little hamlet, and in the big city. The one man may be the cashier, the president, a director, or what not, but he dominates the bank, either by force of will or force of money, or force of neglect on the part of other men. This condition is so aptly set forth by Mr. Oscar Tell- ing, National Bank Examiner and Chief of Reports Divi- sion of the Comptroller's Office at Washington, that I quote him at length. In an address before Washington Chapter of the American Institute of Banking, he said: "The examiners and the Comptroller's Office alike dread the so-called 'one-man bank,' conveniently placed in one of the following classes: "First The family bank. "Second The bank whose board is dominated by an in- dividual, usually an active officer, who controls the annual election by owning a control of the stock or obtaining such control with the assistance of the 'dummy' stockholder who gives his proxy for the asking. "Third The bank whose board is dominated by a 'com- munity of interests.' By the expression 'community of in- terests' I wish to be understood as defining a condition usu- ally brought about by the dominating influences on the board, or their financial associates, borrowing an undue amount of the bank's funds. In common parlance, being a case of 'you scratch my back and I will scratch yours' or 'the pouring of the bank's funds into one pot.' 44 THE PRACTICAL WORK OF A BANK "The shadow lines of these three classes of banks so com- pletely overlap each other as to make it difficult to locate the exact line of demarcation, but when trouble comes it usually spells disaster to all concerned. Although theoreti- cally the stockholders elect the directors, who in turn elect or appoint the active officers, in actual practice just the re- verse is true, especially in the 'one-man bank.' "The individual, the family, or the community of inter- ests, as the case may be, elect the directors, the result of which election is the most grotesque of all hybrid financial creatures 'the dummy director.' ' THE PRESIDENT The president's duties may be simple or complex. He may spend his time running the bank or in reading the daily paper. He may draw ten thousand for knowing how, or nothing for doing nothing. He may be a banker or he may be a farmer. He may be aged and infirm or young and active. He may be the bank or only part of it; but he has certain duties defined by law, among which are: to sign certain papers; to attest certain reports and to preside at the meetings of the board. He has the by-laws as his guide and can make his office a big one or a little one as he chooses. As a broad proposition bank presidents are chosen be- cause of their success in other callings. Few grow up in the ranks, for most of the reputed wealth of bank presidents has been made in some other line than banking. "He made good as a druggist and they made him a banker," is the key to many a bank president's enviable reputation. And if he made good as a druggist he might make good as a presi- dent. And again he might not. It depends upon how near the bank he runs can be run like the drug store he ran. One such made good, did good and was good, both as a druggist and as a banker. THE VICE-PRESIDENT The vice-president is next to the president in power, often takes his place and acts in his stead. In large banks there are many vice-presidents, who are active officers, hav- BANK ORGANIZATION AND ADMINISTRATION 45 ing certain duties to perform. Some act as credit men, out- of-town representatives, chief clerks, etc., and are part of the every-day organization of the bank. In large banks the work of various departments, such as the credits, the securing new business, the foreign ex- change, the transits, the investments, the buying of paper, and other matters of management, are frequently delegated to vice-presidents, who are often specialists chosen because of business and social connections. It is not uncommon for a bank to elect an officer from a certain section largely be- cause of his banking connections in that section. For in- stance, a bank may want Southern business, and, therefore, elects to a vice-presidency, or some other office, the secretary of a Southern bankers' association, who capitalizes his ac- quaintance among banks and bankers. BANKS AND BANKS There are bank officers and bank officers. Some will take authority or assume it, and act without being told by a com- mittee. Such are men of initiative who do things. There are others who fear to assume any responsibility, to say ;< yes" or "no" to a proposition, to take an aggressive stand, or any stand at all, and always refer all matters to some other one, or to the board. And there are boards and boards. Some will be con- tent to delegate the actual running of the bank to the offi- cers where it belongs and be content to supervise, hold- ing the officers responsible for results and not the process by which they were obtained. There are boards that will not allow an executive to buy a bill of stationery without referring the same to them; and others who never delve into such details at all. In fact, they should not ; for if an officer be fit to be an officer, he is fit to assume some responsibility. And responsibility makes executives. THE CASHIER Ordinarily the cashier is the "big man" of the bank, par- ticularly in small places. He is at the bank all the time, and to him all matters are referred. He is sometimes an executive and sometimes a combination of executive and 46 THE PRACTICAL WORK OF A BANK clerk. In country places he not only signs the official docu- ments, and directs the workings of the bank, but also acts as teller, bookkeeper and collection clerk. He may be simply a clerk with a title. Like a good housewife, he is usually busy with many things about the bank. He takes the minutes of the board meetings, makes reports of various kinds, interviews cus- tomers, protests checks, signs drafts, passes upon loans, and is the managing head of the bank. The daily statement is his guide to the condition of the bank, and he watches two things particularly: the reserve and the loans. He is spe- cially charged with keeping the bank within the law in its reserve requirements. He is paid to run the bank, some- times to get new business, and to show a profit at the end of the year. Doing this, he need not worry. Whether the management is by the president, or a vice- president, or cashier; and whether there is one vice-president or ten, matters not the bank must be managed; and in this management is the secret of the atmosphere that sur- rounds it. It may be one of good will and helpfulness, broadmindedness, kindness; or it may be one of ill will, jealousy, meanness and littleness. In "The Bankers Magazine" for June, 1914, the author expressed himself on the subject of bank management, writ- ing under the caption, "Ink Spots on the Ledger," which was published anonymously. He here takes the credit for the authorship of the article. THE INK SPOTS ON THE LEDGER There is a story current in banking circles of a voucher check returned to the drawer by a Western bank, with an inkspot on it, which resulted in the resignation of several of- ficials and ultimately the establishment of a rival institution. Just how the blot got there, or what the wrathy and irritated depositor did to cause the upheaval, is not public property; but the fact remains, the incident caused a tem- pest in a teapot and the pot boiled over. Perhaps the blot was inadvertently made, as many are, and could not be erased. Perhaps it was carelessness on the part of some clerk. It may have been due to an antiquated inkwell, full of dust and clotted ink. It may have been a scratchy pen; it may have been spite. BANK ORGANIZATION AND ADMINISTRATION 47 DON'T-CABE SPOTS Ink spots are often "don't-care spots"; and for the don't care, there may be a reason. Take a live, energetic bank man, full of vim and vigor, willing to work his head off to get somewhere ; hungry for recognition and success ; anxious to please the powers that be ; spending his spare time in self- improvement take such a fellow and criticise everything he does; praise nothing he accomplishes; belittle his learning (which may be greater than his critic's) ; drive him in a cor- ner and break his spirit with a bale-stick of abuse, and like the high-spirited horse that has had the bale-stick applied, he may mind you thereafter with fear and trembling, but it will be a service of fear and not loyalty. Perhaps he has worked hard and faithfully, believing that merit would find its reward; and, believing in himself and in his job, has fitted himself for larger and better things, and knows he can rise to the occasion and make good when the opportunity arrives. It comes. With eager anticipation he awaits the outcome, only to find some fa- vored son of some favored sire in the job he should have had, and the ink spot is one of hate. Perhaps familiarity has bred contempt; and knowing him from a little boy up, the administration has forgotten that little boys sometimes grow up to be men. His accom- plishments and his talents may be underestimated, or for- gotten, or seen at too close range to get the proper perspec- tive, and in looking for a man he is overlooked. Perhaps some jealous mortal in the same institution has concluded that danger lies ahead of him (or her) if this aspiring youngster climbs up, and by skillful maneuvering convinces the judge and jury that it is for the best interests of the bank that no clerk shall ever get out of the underling class. In some banks, therefore, a Chinese wall, unsealed and unscalable by any in the ranks, separates the office from the force, and the ink spots on the ledgers are ink spots of despair. Do you wonder that men do careless work when their initiative is killed, their hope gone? Do you wonder that men learn to hate, when hatred is in the air? Do you won- der that men become anarchists when the only door of hope seems through a little hole in the ground in a quiet church- yard, which cures many ills? 48 THE PRACTICAL WORK OF A BANK Do you wonder that under conditions such as are sug- gested above (and they do exist) the men should not care? Why should they care, when no one cares for them? Like begets like. Some men cannot be driven; most men can be won. A spirit of kindness and good-will will do more by far to generate a spirit of loyalty than all the bale-sticks in the world. THE OPTIMIST'S "GOOD MORNING" A certain bank in New York took on a new clerk. The president came in. "Good morning, Mr. President," said the youngster, with boldness and courage. "No one here says 'good morning' to me, and don't you begin it," was the tart reply. The messenger quit his job, and the president should have quit his. Not long ago there died a man of the opposite stamp. He was a member of one of the big Wall Street firms. He was on friendly terms with every man in the office. He had a cheery smile and a greeting for everyone from the porter up. Ajid when he died they had a memorial dinner with a vacant chair, and more than one eye was moist as they re- membered the man. BOWLING ALLEYS AND CHOCOLATES Imagine, if you can, the spirit that animates the institu- tion whose president put in a set of bowling alleys for the boys, and bowls with them! Or the atmosphere of another where several boxes of chocolates are kept in a cupboard where the boys may help themselves (at a cent apiece), the profits going to charity. Contrast this with the institution whose executive officer (a big man in his own estimation) goes around with note-book in hand and huge specs on his nose, seeking whom he may devour. Or another where the spirit of espionage is so cruel that a false motion of a teller is likely to be taken for theft. Ink spots on the ledgers? No, first, ink spots on the hopes and ambitions of men; then ink blots on their work. "Cut deep enough," said Napoleon to his surgeon, "and you'll find the Emperor." Cut deep enough, Mr. Banker, and in every clerk you'll find a man. And to get the best out of him you must recognize his aim (if he has any and BANK ORGANIZATION AND ADMINISTRATION 49 if he hasn't any, give Mm one) and encourage his ambition, engender hope and create an atmosphere of good-will. To the good man whose work avails naught there comes de- spair, deep and bitter. He may be to blame; you may be to blame. But when he concludes that good work gets him nothing, and poor work can do him no more harm, he is apt to say, "Well, what's the use?" and this is the beginning of the ink-spot period of life, where work is a grind and life a dull, desultory thing. For the man who is careless, there is no excuse. Gentle admonition first, then warning, then a vacant stool. But the fault as often lies without the man as within. And the man higher up is frequently so perfect in his own estimation, so infallible in his judgment, so unerring in his conclusions, and so kind ( ?) withal, that to hold up a mirror and show him what sort of a chap he really is, is to invite the bale-stick, and bale-sticks break men as well as horses. "THE FAULT, DEAR BRUTUS" But there's another side to the question. The fault with this maker of ink spots may not lie with his superiors, but with himself, that he is an underling. He may not have seen his opportunity. He may be so close to himself that he cannot see himself. His eyes may have been on the cal- endar and clock instead of on his work. When pay-day takes a man by surprise, some day he'll be surprised on pay- day. Good bank men are not paid by the hour, but by the job. Perhaps our disgruntled friend has been frittering his time away dabbling in a thousand and one things outside his institution. While every man should have a wholesome hobby and be a man among men, and have an interest in all that goes to make life worth while, still his job should be the thing of his life. He may be working on the false theory that he has a mortgage on the job ahead just because he has a life lease on the job behind. The job ahead does not always go to the man behind, for the man behind the man behind may be so much better qualified that he jumps the job ahead into the job ahead of the job ahead. Then again he might be so puffed up over himself that to give him any more honor or responsibility would simply 50 THE PRACTICAL WORK OF A BANK burst the boiler of self-conceit. Two bank officers in New York openly boast that they know so much that they don't need books! And their very boast is the measure of the men. When a wise man gets into the company of his supe- riors, he keeps quiet, listens and learns the fool talks. Self -judgment is a bad thing. It is biased. It is un- fair. Our man may have analyzed his desire to get up for ability to make good. His longing for notoriety may simply be mistaken for ambition. The despair he sometimes feels may be due to bad digestion, bad disposition, cigar- ettes, drink, laziness. What he needs may not be a raise, but a long walk. Not all failures are due to official mis- judgment, however much the rank and file may disagree with the executives in their conclusions. But granting that banking is full of heartaches and heart breaks, some just and others imaginary, nevertheless the man who can do good work under adverse conditions, and keep sweet and wholesome, is bound to win. If he can't do his best under the conditions that surround him, he owes it to himself to get another job. Round men never fit into square holes. But the man who can smile when it hurts, and keep sweet when others are sour, hold himself in check when others let go, and do good work when the temptation is to be careless, indifferent and cross, has in him some of the ele- ments, at least, that make for success. Faithfulness, loyalty, efficiency and length of service count for much in banking; and while the few can sit before the roll-top and pass on loans, all can help in keeping the machine running smoothly and efficiently, doing its best work, for out of efficient ser- vice come salaries, dividends and promotions. THE HOUSE IN WHICH IT LIVES After obtaining a charter and electing the board of di- rectors and selecting the officers, it follows that the next thing is to provide the bank with a home. Few banks start with a building erected especially for them or by them, it being against good banking principles to make an invest- ment in real estate that has a limited utility so soon; it should be built from the bank's earnings, and not out of capital investment. A great many banks have, however, opened their doors in a building erected especially for their BANK ORGANIZATION AND ADMINISTRATION 61 use, sometimes out of their own funds and frequently by syndicates formed in the board of directors who erect and equip the building, taking as remuneration a certain rental, usually on a sliding scale, so that as the bank grows the rental charge will grow with it. To discuss the relative merits of different bank arrange- ments, the lay-out, the equipment, the vaults, etc., is quite beside the scope of the present work, there being much in- formation on the subject to be had when the occasion re- quires. There are firms which now specialize in bank equip- ment and bank buildings, and will contract to erect the building, furnish the working fixtures even down to the ink wells, and deliver the same ready for business. There are other concerns that specialize on bank vaults and their con- struction. Others specialize on bank interior arrangement, viewed from the standpoint of utility, and any bank con- templating the erection of a new building will do well to consult with these firms, inasmuch as their experience is wide and their judgment good, and there are numerous little "kinks" that will help in the work of the day, and make the machinery run the more smoothly. More and more banks are realizing the advertising value of a good outfit. It impresses the public. It looks stable. It looks prosperous. There are some large and powerful banks housed in quarters that are totally inadequate and unsuited to the dignity and standing of the bank, just as there are some wealthy men living in modest homes; but the bank is entitled to good quarters. It pays to dress well, individually and corporately. This is not to say that the bank should squander its money as some have no doubt done, but it should have the setting that is compatible with dignity. THE BANKING ROOM Marble and bronze are quite largely used for the counter screen and lobby fittings, and steel desks and filing cabinets are replacing wood. The object is twofold: To eliminate the risk of fire and to beautify. One large savings bank in New York has no other protection for its records than its fireproof building, erected for its own use, and keeps all books of records in steel cases, in the open room. The chances of fire are very remote, if not entirely negligible. -LXKLL? N010NIUCVM 52 NIVW A MODERN BANKING ROOM BANK ORGANIZATION AND ADMINISTRATION 58 The tellers are arranged with the idea of being accessible to the public, but protected by wire cages and bronze grat- ings, the doors of the former being self-closing, and locked from the inside so that access can be had only by consent of the teller. Some years ago a package of money amounting to a con- siderable sum disappeared from a trust company in New York. It vanished as completely as if the earth had swal- lowed it. The teller's cage had been locked; no one but he had been in during the day, except an officer, and where and how it got away still remains a mystery so far as the public records are concerned. It is the custom not to allow anyone back of the screen but officers and clerks whose employment takes them within the cage. It is a necessary protection to the teller. It is also a growing custom to place the officers where they are readily accessible to the public, usually sep- arated only by a hand-rail. It would seem that in a bank of discount with assets of two hundred million and more, the tellers would be very busy men. They are; but it is safe to say that the sav- ings bank teller in a bank of one-eighth the size is a much busier man with the public. The reason is that banks of discount do not carry the same proportionate number of ac- counts as do savings banks. A savings bank with $25,000,000 of deposits will have over 50,000 accounts; while a bank of discount of the same size may not have five thousand. Of course, the latter are all active and require much more de- tailed labor to handle than do the fifty thousand in the sav- ings bank, but the work of the latter is over the counter, while the work of the bank of discount is largely through the clearing-house and the mails. Therefore, the lobby of the savings bank will be a busy place, while the lobby of the bank of discount will often be practically deserted. To prove this, go into any goodly sized savings bank on Mon- day the busy day of the week. You will find long lines, mostly women. Go into a bank of discount of the same size, and you will find perhaps half a dozen men, or boys, mes- sengers of business houses, etc., delivering stocks and bonds, obtaining certifications, making collections, deposits and va- rious other errands. This statement does not apply, how- ever, to banks doing a large commercial business, or those operating savings departments, where the crowd is really maic UJTTTTT T 54 PLAK OF JIASEMLNT IK A MODEHK BAKJ BANK ORGANIZATION AND ADMINISTRATION 55 savings bank crowd and not commercial depositors; nor to the large "commercial banks." The foregoing remarks are particularly true of large city banks, which deal mostly with large concerns and have a few active and large accounts, rather than a host of small ones. There are, of course, banks of discount which have a large number of small depositors, because of their situation in retail districts, which makes an active counter trade. But the teller of the bank of discount has much greater responsibilities than does the teller of a savings bank, for as will be shown in the chapter on that subject, his work is involved with much banking law. He must pass judgment on many matters that are peculiar to his position. He must take risks that the savings bank teller never assumes. He handles more checks in a day than the savings bank man does in a month; and in the handling of checks there is always risk. The lobby is, therefore, arranged according to the needs of the bank. Some would want a large space, especially if they ever expected to run a "Christmas club," which would bring thousands of depositors to the bank every week; a smaller one if their business was largely through the mail and clearing-house. Many New York banks have the bookkeeping staff away from the main room, sometimes on an upper floor, with di- rect communication by means of telephone, telautograph, elevator, tube, etc. This is done on account of the space saved for the lobby, officers and tellers, as well as to reduce the rental for ex- pensive ground floor space, and also to avoid the confu- sion that follows the click of many adding machines and typewriters. But whatever the arrangement there must be quick and silent communication between the bookkeepers and tellers, so that depositors' balances may be verified with- out acquainting the customers with the fact that the account is being looked up. Special attention, and properly so, is given to vault equipment, it being not only the bank's strong box, but also its show place and frequently its silent partner, when boxes are rented out. VAULTS A whole book might be written about vaults and their construction, and to trace the evolution from the wooden 56 THE PRACTICAL WORK OF A BANK chest with a few iron bands, and two or three padlocks, to the massive modern vault, with walls two feet thick consist- ing of layers of steel bolted together, a filling of concrete, in which steel rails are embedded, doors three feet thick, inner chests, steam jets so arranged as to fill the space with live steam in a few moments, and in which no man could live, electric wires connecting with the outer world, and so ar- ranged that to bore a hole as big as a silver quarter would bring the police, would be interesting reading, and for such information the reader is referred to works on the subject of vaults and safe-deposit operations. Suffice it to say here that modern vault making is an art, and as the science has progressed, burglary methods have improved, so that good vault equipment is a proper investment and brings its ample return. The custom now is to build money vaults within easy ac- cess of the tellers, and record vaults within easy access of the bookkeepers, and storage vaults for the storage of records and papers in some cellar or sub-cellar, where space is not so valuable. An important and quite necessary official in the bank is the guard. He stands in the lobby and directs customers where to go for the service they need. He answers ques- tions. He can be a mighty force in making the customers feel at home. He is sometimes a special officer, and in case of any attempt at fraud would be empowered to make an arrest. Some men have the faculty of being polite yet not offi- cious ; serving and yet not appear to serve ; humble yet digni- fied ; useful yet not important ; out of the way yet in the way when wanted. There is one such in New York, in a bond house a colored man. He will inquire your business, take your hat and coat, ask you to have a seat, hand you a paper, take your message, carry your card ; usher you into the place you want to go with the grace of a Beau Brummel, and yet do it so smoothly, so unofficiously, so acceptably withal, that j^ou immediately feel that here is a real gentleman, and here a good firm; and you like to come back. There is "Philip" of the First National Bank of Bos- ton. He is so admirably described and so delightfully pic- tured by a depositor in that institution, that I have consid- ered it a classic and worthy of perpetuation. BANK ORGANIZATION AND ADMINISTRATION 67 PHILIP AN INSTITUTION (An Appreciation by a Depositor) WHENEVER I enter or leave the First National Bank of Boston I am sure to receive a courteous greeting and smile from Philip. Philip is the gentleman of color who officiates upon the main floor, answers questions, and directs strangers to their proper anchorage. He wears, in addition to his smile, a smart uniform of blue with white gloves, and West Point itself, even upon a field day, does not boast of a more soldier-like personage. Any bank can take and safeguard your money, and even pay it out to you again on demand. Any bank can, upon the presentation of proper collateral, make you a loan, and there are many other conveniences and courtesies which can be ex- tended; but there is only one bank, to my knowledge, that possesses a Philip. "Philips," like poets, are born and not made, and so there will never, even during bumper crop sea- sons, be many of them. Philip has that rare quality of not knowing or appearing to know what manner of man or woman you are. To Philip every person entering or leaving this (I came near saying his) bank is a potentate and deserving of all the courtesy and attention supposedly due a potentate. It makes no difference to him whether my clothes are ready-made and old or the latest creation of a master, whether I am about to deposit millions or seek a small loan I am a vis- itor and a customer, and am, therefore, entitled to instant rec- ognition and courtesy or, if I require it, attention and help. In a bank, capital and surplus are necessary; officers with brains and business acumen are necessary; conveniences and assistance are a part of the service you expect; clerks and tellers must naturally be in attendance. But besides and be- yond all these there is something more to be desired, and Philip supplies it. Cold winds may blow or summer's sun beat down, rains may descend and floods come, but the cheer- ful smile and inherent good nature of Philip are undis- turbed. Like the brook, they go on forever. Most of us are very human, and we may, at times, be scant with our courtesy, yet kindliness on the part of others we never fail to observe and appreciate. The little things of life are important. A par- ticle of grit may not wreck the machinery of a great estab- lishment, but it disturbs smoothness, and makes the cylin- ders knock. A lubricant is a fine thing to have handy when the gears grind. Philip helps supply the "grease." He makes things run easier, he saves "horse-power," he helps us to the best of his ability to conserve our energy. What the world needs is more kindness; what the individual needs is more patience; and what banks need is a Philip, for he is more than a faithful watchman, more than an efficient servant he is an institution. CHAPTER V. DEPOSITS AND THE RECEIVING TELLER It was said in a former chapter that one of the functions of a bank is to receive deposits. A bank with the aver- age capitalization would prove a poor investment for the stockholders and a poor asset to the community if it had only its own capital with which to work, for the income from the capital investment would barely pay expenses. It, therefore, invites deposits, it seeks deposits, it pays *for de- posits and sometimes buys deposits. In fact, some banks pay too much for deposits (allow too much interest or on too liberal terms), compete with other banks by unsafe methods, and so come to grief. Bank profits come largely from loans and investments, and in order to lend money the bank must have money. If it has, as we have seen before, a dollar in money, it can lend four dollars in credit. It can receive interest on four dol- lars and only pay interest on one. Some bank men fail to grasp this fact, in theory, although they practice it. Most banks have more deposits than capital. The deposits earn dividends for the capital, and it is good banking to attract all the deposits possible and pay as little for them as is necessary. NEW YORK THE DEPOSIT CENTER By virtue of the fact that New York is the commercial arid money center of the country, and particularly by rea- son of the fact that there is always a demand for money to "carry" Stock Exchange loans meaning that money can be loaned on demand or call in New York at any time at a price, sometimes high and sometimes low, but always at some rate; and by reason of its being a Central Reserve City under the National Banking Act, money from all parts of the country finds its way to New York from out-of- town banks when there is no use for funds in the country districts. These deposits of country banks constitute their reserves. The interest on these reserve balances varies. *In service and other reciprocal arrangements. 68 THE RECEIVING TELLER 59 but is usually around two per cent. ; and when money is un- employed in other parts of the country, it is sent to New York, either for loaning out for the bank's account, or de- posited with the city bank on interest according to agree- ment. THE COMPETITION FOR BANK DEPOSITS KEEN The competition for these balances is extremely keen, banks operating departments whose sole duty is to solicit such accounts. Recently it was announced that a promi- nent New York bank would be absorbed. Within a few days another bank had fifteen men out in various parts of the country soliciting the accounts that the first-mentioned bank was carrying, it being possible for one bank to know approximately who the depositors of the other banks are by keeping record of checks that pass through its hands. Some banks make this a settled policy. And by all manner of means such as convention attendance, advertising, service of various sorts, personal acquaintance, corporate connection, etc., deposits are sought, and secured, sometimes under duress. In soliciting a country bank's account, particular stress is laid upon the facilities of the city correspondent to serve the country bank, especially in the line of furnishing credit information. It will supply data regarding borrowers, buy paper for its correspondents, care for securities, make loans, collect checks on agreed terms, and render all manner of little services in return for the balance, and sometimes agree to send the bank a certain amount of business, such as collec- tion of notes, drafts, checks, etc., in a certain district, that will be a distinct profit. It is a case of one serving the other and the results to the city bank are shown in the total deposits. DEPOSITORS POSSIBLE BORROWERS It is an axiom of banking that a good borrower is as much, if not more, benefit than a good depositor. And much importance attaches to the customer being a probable borrower. In fact, the bank wants him to borrow; it is profitable to both that he should. And since his borrowing is part of the deposit plan, it must be ascertained, in the 60 THE PRACTICAL WORK OF A BANK first instance, that he is a desirable customer before he is allowed to open an account and on the strength thereof become a borrower. OPENING AN ACCOUNT Everyone who approaches the teller of a bank of dis- count and expresses a desire to open an account is not re- ceived; first, for the reason that the bank may have rules as to the minimum balance. Thus, in one large bank in New York the rule is that a balance of at least $5,000 must be kept or they do not want the account. Other banks are not so harsh in their rules, but will generally request that a min- imum balance be maintained, and this is understood when the account is opened. It may run from $50 in a country bank to from $300 to $500 in city banks; but the bank de- sires that it shall be able to make a profit on the account, and by the process of analysis that will be explained in the chapter on analysis and cost accounting, it has been deter- mined that an account that does not show a certain balance is a loss to the bank, for to it must be charged, theoretically, the proportionate cost of managing the bank, rent, heat, col- lection costs, etc., and to it credited the interest on the money available for investment. And for the privilege of drawing checks and having the bank collect the checks de- posited, the bank is by all the rules of equity entitled to a profit. While the applicant's pedigree is not inquired into as closely in a bank of discount as in a savings bank, a proper identification is essential. The applicant may be introduced by another depositor, or someone known to the bank's offi- cials, but no conservative bank will open an account with those who do not come properly introduced. A card of introduction is often necessary and always desirable, for banks are, as a rule, not given to opening ac- counts with strangers. So many frauds have been prac- ticed upon banks by those who have, with or without intro- duction, opened accounts and then used the medium thus af- forded to work a fraud and bring loss to the bank, that banks in large cities, especially, now require introduction before laying themselves liable to frauds possible in banking arith strangers. THE RECEIVING TELLER 61 Signatures are taken on as many cards as the bank has departments wherein the signature will be verified. The officers may have one card, the tellers another and the book- keeping department another. In the case of corporations GETS $3,400 ON $34 CHECK. Brooklyn Police Seek Man Who Raised Watchman's Pay Draft. A forger who raised a "pay check is- sued by the Ocean Parkway Building Company from $34 to $3,400 and collect- ed the money is sought, by the Brook- lyn police. The check, payable to a night watch- man employed by the company, was lost in the' street. The finder added two ciphers, opened an accoufil with a Ipcal trust company, and later deposited "the raised check. On- Saturday last toe Xorger -drew V>ut the entire '"deposit. -The police say that they have a clue ttJ'Ufe man and expect to arrest hirfti, THE REASON BANKS ABE LOTH TO OPEN ACCOUNTS WITH STRANGERS, AND INCIDENTALLY TO SHOW THE RISKS OF BANKING. THE BANK CAN ONLY CHARGE THE MAKER THE ORIGINAL AMOUNT. FROM NEW YORK TIMES, DEC. 16, 1914. arid banks, all the officers who are authorized to sign will affix their signatures to the cards, and the bank will some- times ask for a copy of the by-laws which give the corpora- tion's rules as to the signing of checks, together with a statement showing who the officers are and when elected and for what term, this statement being certified to by the secretary or officer other than the ones empowered to sign. After taking signature, business address, etc., a pass-book is made out, check-book furnished and account opened on the ledger. THE BANK AND ITS DEPOSITORS Right here it may be well to stop for a time to consider the relation that exists as soon as the bank has thus opened account with a depositor. It is a settled principle of law that the relation between a bank and its depositors is that of debtor and creditor; meaning to say, the bank by accept- ing the account and the money and negotiable instruments that will be deposited from time to time, becomes the legal owner of the same, and simply agrees to repay the amount upon demand. 62 THE PRACTICAL WORK OF A BANK So many people have the idea that the bank is custodian bailee of the funds. They speak of having so much money in the bank, forgetting that they have nothing in the bank, but do have a credit on its books, and what they hold is an "account payable" of the bank. The bank in law and practice agrees to pay the sum on deposit to the parties and in the amounts ordered by the depositor, and he has the right to recall his orders to pay at any time prior to the actual payment; i. e., to "stop payment" on his checks, and this is frequently done. THE PASS-BOOK The depositor's pass-book is his evidence of the deposit. In it are entered the deposits and sometimes the payments. In order that the bank may not be held liable for deposits entered as cash, which are in reality merely collection items, and to have it distinctly understood that all checks are re- ceived subject to collection, and only become cash when col- lected, many banks now have a statement in their books to the effect that "Checks and drafts are received and credited subject to the following agreement: This bank assumes no responsibility for the collection of checks, and reserves the right to withhold payment on checks drawn against uncol- lected funds, and reserves the right to charge back any checks not paid, or the remittances for them that are not re- ceived. The bank also reserves the right in its discretion to send items to the drawee bank direct for payment, and when so sent the above conditions are still assented to." Another form reads: "This bank in receiving out-of-town checks and other collections acts only as agent of the depos- itor, and does not assume any responsibility beyond due dili- gence, and the same care it uses in collecting its own paper." Still another form has it as follows: "This bank receives collections and deposits only on the following conditions, to wit: This bank shall be bound to use no more than ordinary diligence in endeavoring to make collection of any item left with it for collection or by it passed to the credit of any cus- tomer. It shall not be liable for the neglect or failure of the channels or parties to or through which such item has to be sent; nor shall it be liable for the returns received thereon until such returns have been cashed. And in case of loss on any item for failure to collect or failure of returns, this bank THE RECEIVING TELLER 68 shall be entitled to charge such loss back to its customer or to collect the same from the customer at once." It frequently happens that a bank will accept a check on deposit on an out-of-town institution, and collection is, NOTICE This book is to be used only for the entry of deposits. A statement of the account and can- celled vouchers will be returned to each depositor on or about the first of every month. In collecting out of town items this vond thp fxercise of due diligence Please notify us immediately of any change in your address. Guaranty Trust Company of New York NOTICE OF TERMS ON WHICH DEPOSITS ARE RECEIVED PRINTED IN THE PASS BOOK therefore, necessary through the mails, and before returns come in the collecting bank fails. The instrument may be correct in every respect, and no question as to its goodness arises ; the loss is due to the collecting agent. It would seem proper that the bank should charge the check back to its de- positor; but where no definite agreement is made as to the liability assumed in such matters, in some jurisdictions it is 64 THE PRACTICAL WORK OF A BANK held that the bank is sort of a sub-agent in the matter and not agent. And in such a case, where the bank fails to make the collection through the fault of its correspondent, it is held liable. In other States it is held that in receiving an out-of-town check on deposit and for collection, the bank is agent for the depositor and the correspondent banks are its sub-agents, and if any of these fail before remittance is re- ceived, the loss is the depositor's and not the bank's, provided it has used reasonable diligence and care in selecting its correspondents. The latter view would seem to be the most reasonable and fair. Depositors must know that a bank cannot guar- antee the collection of checks deposited. It must collect the same through the usual channels and depositors are bound to know the course of such transactions. And if the bank uses care and judgment in sending the check for payment, no liability should attach if the chain breaks before the funds are in hand. Banks should in all cases have it plainly stated on their pass-books and deposit slips that they assume no liability until funds are received; but that the bank's position may be clear, notice to depositors should be given, as above noted. THE RECEIVING TELLER The individual with whom the depositor comes into con- tact most frequently is the receiving teller. While most of the checks that are drawn by depositors are paid through the clearing-house or through the mails, the deposits, as a rule, all go through the receiving teller's window, except it may be those made by mail, and these are not in great num- ber if we omit those remittances in the nature of deposits, but which are rather collection items, that come from corre- spondents, and which go through a separate department in the large banks. These, of course, are an important part of the bank's work, and constitute a very large portion of the liabilities in many cases, but they are not over-the-counter deposits such as we now have in mind. In smaller banks, however, the mail deposits go thrcfugh the teller's cash. While the officers meet the borrowers from time to time the teller is apt to meet all patrons, sooner or later, and can do much to make his bank popular with its clients. Here THE RECEIVING TELLER 65 courtesy is a real asset. It will riot do to watch the clock too closely, for the day's work cannot be measured by the hour. While a bank should close as promptly as it opens, and should not encourage its depositors in the habit of coming at HEW ACCOU1IT TELLERS' RECORD QASD. A CAHD FOR KEEPING RECORD OF BUSINESS SECURED THROUGH FRIENDS OF THE' BANK any time of the day and expect to find it open, there should be reasonable allowance for delays incident to business, and if the window has to be opened for a late comer, do it with a smile. THE TELLER AN IMPORTANT PERSONAGE It is apparent that the receiving teller is important in the role he plays. He meets the customers. It is his concern to treat them right; to be pleasant, yet avoid conversation. He must bind the customer to the bank by the quality of his service as he binds the bank in the acts he performs con- stantly. Let him, therefore, be careful. And it is to re- mark here that the teller should so conduct himself as to make a good impression. He should not dress gaudily, wear much jewelry, or use tobacco in business hours. He should. 66 THE PRACTICAL WORK OF A BANK most of all keep clean hands. In making deposits, the cus- tomer is very apt to watch the receiving teller closely, and if he is unkempt, it is quickly noticeable, and neatness is an asset for its own sake. And remember, that it is not neces- sary to wear a diamond to carry prestige. A smile will do as well and costs less. The receiving teller is sort of an educational medium. To him falls the duty of instructing his depositors in the proper method of making out tickets, endorsing checks, sorting money, etc., and with the cooperation of the depositors, much of the annoyance of badly prepared deposits may be avoided. THE WORK OF THE RECEIVING TELLER The work of the receiving teller resolves itself into two main functions: (a) To prove the deposit ticket and re- ceipt for items so received; and (b) to sort the checks and currency into groups before turning over to other depart- ments. He is accountable for all funds received by him un- til they are surrendered. The cash which he takes in is de- livered to the paying teller, or to some officer who has charge of the cash. The checks on banks in town go to the clearing- house department; other items on local banks to the collec- tion department; the out-of-town items to the transit de- partment. And thus, he receives his deposits, makes his own records and distributes the items all over the bank, and his day ends as it began without cash in his drawer. In a small bank the receiving teller after receipting for the amounts in the customers' pass-books, sorts the items into city and foreign, and all city items that go through the clearing-house are listed for the clearing. Other items re- quiring presentation by runner are given to the department that has charge of collections. Items out of town are sent to correspondent banks. The teller must be particular about many things: (a) That his money is correct in count. The bank is responsible for whatever he receipts for to the depositor. A receiving teller at one time in a rush could not handle the crowd and took a deposit and laid it aside to prove later, giving the de- positor credit on the book. He found the cash $100 short ind so notified the depositor, who insisted that the count was THE RECEIVING TELLER 67 correct and claimed the deposit as entered and got it. (b) That his money is genuine. If counterfeits creep in, and he cannot trace where they came from, the bank must, of course, lose, (c) That checks are not dated ahead, and are indorsed ; for while these errors might not result in loss, they require adjusting with the depositor and cause annoyance. Checks are often dated ahead, or dates are obscure or omitted. Often they lack previous indorsement or they are indorsed by an attorney without adequate proof of his au- thority. The sum in the body of the check may not corre- spond with the figures or may be entirely missing. In banking transactions, especially in Wall Street loans, it frequently becomes important to know the exact time a deposit was received, particularly in bankruptcy proceed- ings. A time stamp is often used to indicate the exact time a deposit was received or a check paid, the stamp changing every minute. GOOD MONEY AND BAD It is a first requisite of a receiving teller to be able to distinguish good money from bad; or rather bad money from good; and by an instinct that comes from long hand- ling of money learn to know bogus money by touch. It is a peculiar fact and apropos to the 'subject to say that the author in an experience covering thirty years in banking never had the pleasure (?) of throwing out a counterfeit bill. It may have been due to his ignorance of bad money, or it may have been due to the honesty of the patrons of the banks in question, yet the fact remains that in three in- stitutions under his observation for that length of time, less than twenty-five dollars in counterfeits were detected. To become an efficient teller, take your counterfeit de- tector and study page by page by comparison with genuine notes. Take a strong magnifying glass and examine the good bills; then, locate the defects on the counterfeits. Go from one denomination to another until the looks of the gen- uine bills and the weak spots of counterfeits are engraved on your memory. Then you know where to look for the vul- nerable spots whenever you handle money, and will have no need to scrutinize the bills as a whole. Another good prac- tice is to cut out all newspaper items or telegrams relating to 68 THE PRACTICAL WORK OF A BANK bad money and how banks are duped. Paste these in a con- venient place and read them occasionally. Experts do not judge so much by the appearance of a note as they do by its feeling, that is, by the way it slips through the fingers; but it takes years of experience to acquire the necessary firm touch, and even then it is not always reliable. When notes are received that are counterfeit it is the duty of the receiving teller to return them to the depositor at once. The National Bank Act requires national banks to stamp or write in plain letters the words "counterfeit," "al- tered" or "worthless" on all fraudulent notes that come into their possession. There is sometimes a delicate duty to per- form, when the teller has to say to a depositor who has pre- sented a note that is fraudulent that he must stamp and re- turn it to him. Of course the object of so doing is to stop its circulation. And this is naturally unpleasant to the cus- tomer but that is the law. In many cases the receiving teller is not so sure that the note is a counterfeit, and should he make a mistake, the bank would be liable for the amount. The error can be remedied easily by sending the note for re- demption stating the fact, and getting a new one from the Government, so that the danger of loss to a bank ought not to deter a teller from performing this clearly defined duty. In cities where there are sub-treasuries it is the general cus- tom to refer all doubtful money to them to pass upon. In receiving coin, and especially gold, one is inclined to be deceived by its weight. On the Pacific Coast, where it is in more general use than in the East, as the loss from abra- sion is inevitable, the law would be unjust if every coin fall- ing below the standard weight was declared uncurrent. .On the contrary, it expressly provides for the redemption of coins in weight within certain limits, as follows: "Any gold coins of the United States, if reduced in weight by natural abrasion, not more than one-half of one per cent, below the standard weight prescribed by law, after a circulation of twenty years, as shown by the date of coinage, and at a ratable proportion for any period less than twenty years, shall be received at their nominal value by the United States Treasury and its officers, under such regulations as the Secretary of the Treasury may prescribe, for the protection of the Government against fraudulent abrasion or other practices. * * * Any gold coin in the Treasury of the United THE RECEIVING TELLER 69 States when reduced in weight by natural abrasion more than one-half of one per cent, below the standard weight pre- scribed by law, shall be recoined." Coins twenty years of age may, therefore, be one-half of one per cent, below the standard weight and still be current. A coin of light weight, unlike a counterfeit note, cannot be stamped "light weight" or with any words to indicate its imperfect character. There is no law permitting anyone to so mark a coin. There is a provision, however, which directs that "every person who fraudulently, by any act, way or means, defaces, imitates, impairs, diminishes, falsifies, scales or lightens the gold and silver coins which have been, or which may hereafter be, coined at the mints of the United States, or any foreign gold or silver coin which is by law made current or in actual cir- culation as money within the United States, shall be impris- oned not more than two years and fined not more than $2,000." 1 MAKING A DEPOSIT The first thing that is required of a depositor in making a deposit is to make out a deposit slip. This is an original entry in the eyes of the law and an important document. It is the bank's record of what the depositor offers for deposit. The original tickets, after the receiving teller has finished with them, are passed to the bookkeeper and then filed. They often become exceedingly valuable for reference in case dif- ferences and misunderstandings occur as to credit dealings with depositors. All deposits received by mail must have prompt acknowledgment. All errors and discrepancies, if not discovered at the time of deposit, must be immediately advised by telephone, if possible, in the case of city cus- tomers, and otherwise by letter. The deposit items are separated into bills, gold, silver and checks, some banks requiring out-of-town checks to be listed separately from the local items, in order that the ex- change charges may be ascertained. In presenting a deposit the depositor should use care that all bills are right side up. denominations separate, the large bills first, and checks all properly indorsed, on the left hand end as the check is turned over. Silver should be iHorace F. Fuller, Receiving Teller, Second National Bank, Boston, before Boston Chapter. 70 THE PRACTICAL WORK OF A BANK wrapped in standard packages, in wrappers which the bank will furnish. The depositor's initials should be written on the rolls of silver so that in case discrepancies are found they may be corrected. Bills in quantities should be put into standard packages. It is customary to strap bills in units of fifty bills in each package; thus, fifty ones and twos (sometimes thirty ones and ten twos) ; fifty fives, making a package of $250; fifty tens, making $500; and fifty twen- ties, making $1,000. Small change is wrapped as follows: Pennies, 25 cents to a roll; nickels, $2; dimes, $5; quarters, $10; halves, $10. Gold is placed in bags of usually $1,000 each, and strongly tied. Silver dollars are, as a rule, placed in bags of $100 each. Customers should follow the bank's methods in this. Some banks in strapping in the receiving cage put up odd amounts for payroll purposes, as, for in- stance, $125, $150, $175, etc., in fives or fives and tens. Also even hundreds are put up in fives and tens for quick use without counting when they are paid out. Coupons offered for deposit should be placed in coupon envelopes with the name of the depositor, the name of the company, the due date, the number and denomination, where payable, and total. 2 Little attention is paid by the teller to the signature on checks, except checks drawn on his own bank, it being more important that the check be properly in- dorsed. He cannot know the genuineness of the signature on checks drawn on other banks, but can know the last in- dorsement. The first indorsement should be the same as on the face. Where there is any doubt regarding the instrument, par- ticularly as to its regularity and the probability of its being paid, it should be received for collection and not entered as a deposit. It may be "short extended," i. e., entered in the inside column, with memorandum that it is for collection. THE DEPOSITOR SHOULD MAKE THE TICKET The reason banks require customers to make out their own tickets is to have first-hand evidence of the original transaction. A customer might claim to have deposited a certain amount, or a certain check, but when confronted with the deposit ticket in his own writing further proof is not likely to be required. 2See p. 903. THE RECEIVING TELLER 71 Two cases will illustrate why the depositor should make his own ticket. A doctor went into a bank and offered for deposit a single bill, claimed to have been $1,000. The clerk, who had never seen a bill of that denomination, evidently mistook it for a $100 bill, made out a ticket, and gave the doctor credit accordingly. Without looking at his pass- book the doctor began to check against the account and soon found that he had overdrawn the amount. Upon re- ceipt of overdraft notice he explained the transaction and claimed credit for the additional $900. The deposit slip being in the clerk's handwriting, and the pass-book calling for a like amount, the bank insisted that the doctor was mistaken, inasmuch as its cash balanced on that day. Suit was subsequently brought and only be- cause the doctor could prove he received the bill, and traced it from the time he received it to the bank counter, did he win his case. Had he made his own ticket, the error would not have happened. In another case a woman intended to send $200 for de- posit by her daughter. Having an extra $20, she decided to make it $220, but said nothing to the daughter. The latter handed it in as $200 ; the teller received it as $200, and where the $20 went is still a mystery. The woman had no other proof than her word, and the teller was sure it was but $200 when he counted it. It was embarrassing on both sides. When the receiving teller has counted the money, proven the checks, etc., the amount is entered in the pass-book. As the checks are verified by the receiving teller, a mark is made alongside the item to designate its class, as, for instance, "N. Y.," means a New York item, "34" a check on Bank No. 34 in the clearing-house, etc. This custom, of course, varies with the banks.* When a customer representing a branch house makes a deposit, a duplicate ticket is often presented to be stamped by the receiving teller, this stamp giving the date and the name of the bank. This is sometimes forwarded by the bank to the customer's head office. *Many tellers now take the transit number, to be found after the bank's name on all checks (see Numerical Transit System), to indicate the bank drawn on; while large city banks make no check at all, on the theory that the depositor should keep a record of his check deposits for his own protection. 72 THE PRACTICAL WORK OF A BANK CHECKS FOR DEPOSIT INDORSEMENTS The items offered for deposit will be : Checks upon banks in the same city and clearing through the clearing-house or collectible by messenger within the next business day; checks on out-of-town banks: coupons, requiring special care and registry in the mails, notes falling due, and other instru- ments, such as drafts upon merchants, drafts with bills of lading attached, etc. The latter are, of course, segregated and not credited, but entered for collection, either by the teller or by the collection clerk. The busy teller has no time to verify indorsements other than the last. At times when checks are rapidly received for deposit it is impossible to examine them carefully; hence the greater need of looking at the indorsement of a depositor. When checks are finally paid by the drawee institution, errors are sure to be de- tected, and, of course, the bank receiving them ought always to know from what source they came, in order to ascertain what to do. Checks should be endorsed exactly as they are drawn. If a check is drawn to the order of "William B. Smith," it should be endorsed that way and not "W. B. Smith." If the name is wrong or wrongly spelled, then in- dorse as on the face of the check with the correct name un- derneath. If a check is endorsed by one person for another under power of attorney, it should be endorsed by the princi- pal as by the attorney, and the power lodged as evidence of that authority. It is permissible and often obtains, that a bank will re- ceive a check improperly drawn or endorsed to be passed to the credit of the depositor. If it goes to the credit of the de- positor it can only be drawn by check, properly signed, and so the bank is protected in accepting an irregular indorse- ment only if the check is for credit to the account of the de- positor. Checks irregularly indorsed should never be cashed, nor is it fair to the drawee bank to pass such checks on with- out calling attention to the irregularity, so that the matter will not be overlooked when it reaches the place of payment. CORPORATION CHECKS In dealing with corporations, the receiving teller should be careful to see that all checks are endorsed by the corpora- THE RECEIVING TELLER 78 tion and not by an officer as such. A proper indorsement is "The Century Company, by James Smith, Treas.," and not simply "James Smith, Treas." And a receiving teller should never accept corporation checks for credit to personal ac- count. Suppose the above-named treasurer is empowered to endorse checks, and to draw checks. He comes in with, a check drawn by himself, as treasurer, to his own order and offers the same for deposit. It should be refused. The bank has notice on its face that the treasurer is using if not mis- using the funds of the company for his personal affairs. If the check were signed by two other officers the case would be different. For this reason certain well-managed bond houses will not accept in payment for bonds purchased through them the checks of bank officers signed by them- selves, but request their personal check. It can, therefore, never be charged with knowingly accepting bank funds for securities sold to bank officers. It has been held that a bank is liable for accepting checks drawn by corporation officers to their own order, in such a way as to carry notice of irregularities on their face. Such checks are often drawn innocently and in good faith; but if the matter is diplomatically explained to the depositor he will understand. The safe way in dealing with corpora- tion officers is to explain the rule at the beginning, so that no trouble will arise on this score. Checks to the order of corporation officers should always be signed by one other than the officer interested and offering the same for deposit as a matter of sound banking policy. Checks drawn by one acting in a representative capacity and drawn to the per- son's order as an individual, should never be accepted with- out careful inquiry as to the right of the one so drawing to draw to his own order. Thus, an executor or administrator of an estate might draw to his order as an individual for ex- penses or other charges, and it might be perfectly proper; but the check has notice on its face that it is trust funds go- ing to an interested party and should be verified by requir- ing court sanction to the transaction. It has been held that if a check is offered for deposit in the same bank as drawn on, and credit given, the credit can- not be rescinded, as the teller has means of knowing if the check be good or not. Therefore, the teller should be wary as to how he credits checks drawn on his own bank. 74 THE PRACTICAL WORK OF A BANK THIRD PARTY INDORSEMENTS Third party endorsements are a source of never-ending annoyance, except, of course, when received from depositors of long standing and known reliability. For the benefit of those who may not understand, I will explain that a third party endorsement is another endorsement on a check be- side the depositor's. If a check is drawn to the order of a depositor, it may be received on deposit and placed to his credit without endorsement of the payee without the slight- est danger of any question being raised as to the endorse- ment which the bank cannot face with impunity. The books will show that he got credit for it, and that he received the proceeds. But when the check is drawn to another or third party there is, first, the danger of forging; then there is diversion of funds, which means that the check was intended for one purpose and used for another. Then if the payee of the check is a corporation or trade name, there comes in the question of power to endorse on the part of the party who actually wrote the endorsement. Again, to make myself clear, I will say that power to sign and endorse for a corporation can only be given by the board of directors of that corporation. To be sure that an endorsement of a corporation is correct, it is necessary to have a copy of the resolutions of the board giving power to a particular officer, we will say treasurer, and a copy of the minutes of the meeting of the board, showing the individual elected to such office. These copies must be certified to un- der seal by one of the officers, usually the secretary. Where a check is drawn to the order of a trade name company, a certificate is necessary, certified by the county clerk, as a correct copy of the original on file in his office, showing that certain persons are doing business under that name. When a check is drawn to the order of a person deceased and en- dorsed by the executor, it is necessary that a surrogate's certificate should be had, showing who was named or ap- pointed as executor or administrator of the estate. If the check is drawn to the order of a person arid endorsed by an- other for him it is necessary to have a power of attorney. If it is drawn to a corporation and endorsed by the treasurer and placed in his own account there may be diversion of funds in which the bank may be involved. I am citing all THE RECEIVING TELLER 75 of the above as necessary in third party endorsements, if there should be a dispute over the endorsement in the future. Of course, in the case of a reliable depositor who is solvent when the check is returned, the bank simply demands the funds from him or charges his account. But some depositors are here to-day and there to-mor- row. If the depositor cannot be found or is insolvent the bank cannot charge his account. Then if a dispute arises the bank must have the papers mentioned above, to support its contention that the endorsements are good. This, of course, is supposing that there is no forgery involved, in which case no papers can save the bank. 8 THE RIGHT NAME SHOULD BE ON THE TICKET It is important that the deposit ticket and the bank book which accompanies it shall be in the same name; for if the ticket and book are not in agreement, the ledger account and bank book will not tally. This is especially true where there is more than one depositor of the same name, as frequently obtains in the city banks. It is not unusual to find banks with two or three accounts bearing the same name, and to distinguish one from another numbers are sometimes given; and these should always appear on the ticket, so that the bookkeeper will not post to the wrong account. Not only would an error of this sort lead to trouble and confusion, but it might result in lawsuit and loss to the bank. For instance, suppose a deposit is wrongly credited, and the account to which it should have gone becomes over- drawn and the bank refuses payment on a check which would be good had the credit been properly made. In a case of unwarranted protest, the bank would be liable in damages if protest followed where the account was good for the amount. A case was recently tried in the New York courts where it was sought to hold a bank liable for the amount of a deposit wrongly credited to a depositor of a similar name, the one to whose account the entry was wrong- ly made seeking to hold the bank for the amount, on the ground that it had made similar mistakes before and this was quite likely a blunder on its part for which it should suffer. The claimant for the wrongly-credited deposit lost. N. D. Ailing, Assistant Cashier, Irving National Bank, New York, before New York Chapter. 76 In cases of wrongful credit it is sometimes difficult to make a correction, especially with an unscrupulous depositor, who, for the sake of the amount involved, would not despise perjury. If the teller will verify the name on the slip and that on the book such errors will be avoided. Qf course, should the error be due to the depositor's neglect, another situation would arise; and it is entirely possible that con- cerns having several bank accounts, or several concerns working under one management, might get the pass-books mixed and present the wrong ticket with a book and thus be responsible for the error. Therefore, the name of the de- positor should be on the inside of the book as well as out- side, and the teller should see that it agrees with the ticket. Deposits are often made without the book, a practice that should not be encouraged, but is permitted because there seems to be no way of avoiding it. But subsequent en- tries should not be made until the book has been to the book- keeper and verified with the ledger and if possible the de- posit slip. Bookkeepers usually make such entries. It is the rule in many banks that only cash or its equiva- lent may be immediately credited to a depositor's account and he allowed to check against it, especially where the aver- age balance is not large and the depositor is working on a small margin. If, however, the depositor maintains a gen- erous balance, of course all items can go into the credit. But cash and exchanges for the clearing-house, which include all checks on banks in the same place which will be paid within the next business day, may be entered as cash. PROVING THE TICKET It is usual for the teller to check the items as he proves them, for only by so doing can he ascertain that all are in hand. It is often the case that silver is carried in the de- positor's pocket, and if not asked for is likely at times to be forgotten, and checking is the only way by which to over- come the tendency to forget. It is a very good rule for the teller to have a stated method of verifying the deposit slip. He should first take the bills, then the silver, then the checks. If he follows this arrangement, he will be sure to get the money, the hardest thing to prove he did not get if any dispute should arise. THE RECEIVING TELLER 77 It is possible that a crafty clerk would devise a scheme to trap the unwary teller by withholding part of the deposit, and if not noticed pocket the funds. It is an easy matter to hold back a ten-dollar gold piece or a roll of silver, but if the items are checked in the order they appear on the slip such things are not likely to happen. And if a clerk were to suc- cessfully operate such a trick, he might easily explain that the money had been overlooked. One of the duties of the receiving teller is to collect the exchange charges, or deduct the same from the deposit. Some banks keep these records and make the charge at the end of a month, or half yearly, but the calculations are usually made in the receiving teller's department. The teller should be familiar with these charges. From the receiving teller the checks and other items go to the proper departments ; cash to the paying teller ; collections to the collection department; transit items to the transit de- partment ; foreign items to the foreign department ; coupons to the bond and coupon or collection department. The credit instruments may merely be sorted into checks on the deposi- tary bank : checks to go to New York or other reserve point, and collections to go to the clerk who has the mail in charge, and who, in small banks, is collection clerk, transit man, clearing-house settling clerk, and several other positions combined into one. THE MACHINERY OF BANKING If we were to trace a check on the depositary bank from the receiving teller back to the depositor we would get a very good idea of the working machinery of a bank as respects the handling of a check drawn on itself. If we were to fol- low the route of a local check through the clearing-house we would get a very good idea of the clearing of checks. If we were to go with the messenger on his route, we would get a working knowledge of how a check, note or draft is collected by presentation over the counter of the drawee bank, or how an item such as a draft is collected from the drawee. If we were to trace a check drawn on an out-of-town bank from the receiving teller to the transit department, then through the mails, and into the bank upon which it was drawn, and see how payment is made, we would have a 78 THE PRACTICAL WORK OF A BANK working knowledge of bank collections; and if we were to trace the money we would have an idea of how paper money is made, issued and redeemed; and this in substance is what the present work proposes to do. And by reason of the fact, DEPOSITS CASH RECAPITULATION CHECKS CURRENCY Vn!t 1> and 2j Counter Mutilated coin S1IVFR V.nlt MINOR COIN Din, N;,-k,>i ITEMS TOTAL C. i I. CM!I to First Teller Cash Flush Cash Short On Hand Yesterday PROOF TOTALS TELLER No.. JATE .. . THE NATIONAL EXCHANGE BANK OF ROANOKE, VA l*m K-100-I-1-11 TELLER'S CASH SHEET heretofore stated, that the deposits of banks are upwards of ninety per cent, in checks, these are the most important items the bank handles. THE TELLER'S RECORDS AND His PROOF The receiving teller, as a rule, needs only two books a cash book for all debit entries and accounts with other de- THE RECEIVING TELLER 79 partments of the bank and a credit book for all deposits and letters. In addition he must have sheets for his city clearings and his cash items ; also proof sheets for his lots or blocks of credits. These proof sheets are ruled and are of a size to be used in the adding machines. After the teller has taken the cash and coin out of a deposit and substituted a ticket in its place, the checks and credits are given to an assistant to sort, following the headings printed at the top. The one marked "Clearing-House" means the city checks; the "New York" one means New York City items; the "O. C.'s," other checks on points which the bank's correspondents in and outside of New York City, and the points South and West cover; "sundry," points not reached by the regular correspondents; "cash," the tickets substituted for bills and coin; "own checks," checks drawn on themselves; "miscel- laneous," checks or drafts on brokers and checks on banks that another bank may be clearing-house agent for; and "credits," a list of the deposits or letters. The three latter, after the items have been listed and proved on the machine, are stamped with the lot number for future reference. As soon as a proof is made the checks are immediately sent forward, except the checks on the bank itself, which have to be stamped with the receiving teller's stamp and sorted out by ledgers, and then listed on the cash book and turned over to the bookkeeper to whom they be- long. The clearing-house checks are stamped and sorted in racks; the New York, O. C. and sundry checks are given to the corresponding clerks. It is obvious that if the receipts are listed as they come in, and the items are then separated into different depart- ments and the departments charged with the same, the total of the amounts charged to departments must equal the total as shown by the first listing. This is the "proof" that all items received have been charged out and nothing has gone astray. This, of course, does not insure that a check which properly belongs in the clearing-house checks may not go to the transit department; but as soon as the check reaches the transit department it will be discovered that it is out of its place. In a small bank where the receiving and paying is done at the same window, and by the same man, the same proof cannot be had, for he handles many different transactions 80 THE PRACTICAL WORK OF A BANK and he must, therefore, work with a teller's proof sheet, which consists of the cash balance at the beginning of the day, the receipts and the payments, the result being the cash on hand at the close of the day. He enters receipts and For Nation*! Ron TELLER'S CASH BOOK. a * Sonv N. V T. C A. Stock ) CASH ITEMS IN DRAWER ITEMS AMOUNT Dun DRAFTS CHICKS ' CHECKS Gold in Vault. Gold in Tray. Gold Certificates. Silver Certificates. Treasury Certificates, Silver $1 in Vault, Fractional Silver in Vault. Silver $1 in Tny, Silver Me. in Tray, Silver Me. in Tray, Silver lOc. in Tray. TOTAL COIN. Legal Tender, TOTAL RESERVE, National Bank Notes, Nickels & Pennies in Vault, Nickel: in Tray, Pennies in Tray, Mutilated Currency, N.TCASM, Cash Items. TOTAL CASH, Cash Over, Cash Short. JOVKNAL BAXJUfCl. TELLER'S CASH BOOK pajinents as made and any error made during the day would show up when cash is balanced at night. As oppor- tunity affords the teller lists his out-of-town checks and charges the same to the clerk or department that makes up I he mail collections. The checks on his own bank he lists and charges to the bookkeeping department. He also lists THE RECEIVING TELLER 81 the deposit tickets and charges these to the bookkeeping department. These lists are often in sheets and when bound form a permanent record of the receiving teller's work. As the day passes accumulations are treated as just shown, so that at the end of the day he has simply his proof to make up. Usually the assistant does this while the teller receives the deposits at the window. The totals of the checks he has charged out to various departments, plus the cash on hand, must equal the total receipts of the day as shown by his total of deposit tickets. When proof has been struck, his cash is turned over to the paying teller and the day's work is done. His desk is clean for another day, and to-morrow will be another to-day. THE "BLOCK" SYSTEM The most expeditious and practical method of balancing the day's work in a bank is the "batch" or "block" system. Under this system the teller verifies the currency and checks off the items, but does not prove the addition of the ticket or examine the checks except to note that they have been endorsed and to calculate the exchange charges to be deducted from the total. When the checks and deposit tickets have accumulated sufficiently to permit a "run," they are taken by a clerk who sorts the checks into the several divisions or departments. Each division of checks is then listed upon an adding ma- chine, a separate total taken of each as a separate list and total of the cash deposited, and the amount of the exchange charges deducted. The lists of the two latter items are made up from the amounts as shown upon the deposit tickets. The aggregate of these totals, less the total exchange charges, should equal the total amount of the deposit tickets. Should there be a difference the work must be checked back immedi- ately and the error discovered, which may consist of error in listing on deposit ticket, or error in addition of deposit tickets or error in listing on the adding machine. The small number of items constituting a "run" permits immediate checking in case of error, consuming but a minute or so of time. When found correct, the total of each 82 THE PRACTICAL WORK OF A BANK division is posted separately upon the "block" sheet under its proper heading and the items turned over to their re- spective departments. This operation is repeated as often as the volume of the work justifies, until the business of the day has ceased. After all deposits and items have passed out of hand, CR. CLEARING TELLER'S CASH SHEET, WHICH DISTRIBUTES THE ITEMS the balance sheet is then footed and a grand total is made of each heading, which aggregated should agree with the grand total of the deposit tickets, provided every "run" or batch has been balanced and properly listed on the balance sheet. This not only provides an absolute figure for amount of items charged to the various departments, but also pro- vides an absolute figure for the amount of cash (currency or coin) received over the counter. The cash upon actual count by the receiving teller him- THE RECEIVING TELLER 88 self should correspond with the total amount of cash as shown by the balance sheet. Differences in this respect are only due to the teller's careless handling or inability to see that the proper amount of cash (currency or coin) is re- ceived when the deposit is made. In the larger banks which handle a large line of depos- its the work should be systematized among the teller's as- sistants, so that one, or if the work justifies, two, will con- fine their attention to checking the items on the deposit tickets and sort the items for a "run." The other assistant or assistants confine their attention to the listing and prov- ing of the different "runs," and posting them upon the bal- ance sheet. The advantage of this system is evident in that it detects immediately any error in the deposit ticket, pro- vides a proof of the actual cash (currency or coin) received, and balances the work as it progresses. The receiving teller's work is practically balanced as soon as the last "batch" is run off and no longer is he compelled to go over the footings of the deposit tickets or to check back each separate item, as is necessary in case of a difference under the obsolete system formerly in general use.* A DAY IN THE TELLER'S CAGE The foregoing is a composite picture of the work of the receiving teller, gathered from many sources. The work of the receiving teller for a day has been fully and admirably covered by Mr. Horace F. Fuller, receiving teller of the Second National Bank of Boston, in a paper read before Boston Chapter, A. I. B. He says: "Beginning the day's work in an active city bank where the receiving department handles all the incoming cash items, the first duty is the morning mail. As soon as re- ceived, the letters are separated into the city or clearing- house letters and the foreign. The clearing-house letters are immediately checked off or proved on the adding machines; the clearing-house checks separated from the rest and stamped, sorted in racks and listed on the clearing-house sheets, and the slips proved. This is very important, as it must be done and down at the clearing-house at ten o'clock, ir Legal Tender Certificates Old Res. \ . Ncw /Gold " " Old 1 New /Silver Certificates Old " " New VAULT " \ Off 1 Legal Tender Certificates Old Res. " " " New Gold " " Old New Silver Certificates Old " New Off Legal Tender Certificates Old and " " New Kes Gold " " Old " " New C. H. Certificates Gold Gold Certificates- Old New VAULT Legal Tender Certificates Old New Silver Certificates Old New Gold Coin Silver Coin C. H.- Certificates Gold " Notes Treas. . to order Gold Certificates Silver Certificates Silver in Trays Nickels and Pennies Federal Reserve C'y Irving National C'y Other " " Ass't. Treas. Receipts BOX TOTAL CASH LIST OF CASH ON HAND. THIS BANK KEEPS THREE RESERVES : ONE IN CHARGE OF AN OFFICER AND MEMBER OF COMMITTEE OF DIRECTORS ; ANOTHER IN CHARGE OF TWO OFFICERS; THE THIRD IN CHARGE OF OFFICER AND TELLER. THE FIRST TWO ARK DISTURBED ONLY AT TIME OF AUDIT; THE LAST IS IN DAILY USE. THE PAYING TELLER 93 THE PAYING TELLER'S CASH The paying teller originally was custodian of all the bank's cash, all other departments handling money turning the same over to him: but as banks grew in size and their cash holdings became larger, in many banks the cash has been placed in charge of one or more officers, who control all or part, the teller accounting to them and they supplying him as his needs require. The reserve cash is usually placed by itself in large bundles, added to or taken from as the counter needs and the needs of correspondents require. At times the teller has access to all cash in conjunction with an officer, or it may be he will have access only to his counter cash. Cus- toms vary. The paying teller should plan to have in his cage at the opening of business an ample supply of both bills and coin to meet any demand made at the counter. Of course, in making shipments to correspondents the supply in the vault may be drawn upon, but there should be such a stock in the cage that no customer will be obliged to wait for a trip to be made to the vault. The teller can soon gauge his require- ments, and will arrange his bills and coin in suitable quanti- ties to be handled rapidly without counting. Flat coin trays for rolled coin not only facilitate paying but aid in counting at the time of settlement. There are various coin racks for the counter, holding just such quantities of silver coin as are most frequently called for during the day, and the automatic cashiers for paying odd change are great time savers. Within the last few years a machine has been introduced into the banking business which, next to the adding machine, is the greatest time saver ever given to the teller's depart- ment. This is the automatic coin-rolling machine, which, under electric power, counts, rolls and wraps tightly nnd very speedily and accurately all classes of fractional and minor coin. The edges of the wrappers are tightly crimped like those of a paper cartridge, leaving exposed a coin on each end of the roll. The wrapper cannot be opened with- out tearing, and by rolling with the machine all coin depos- ited, one can avoid the predicament of a bank which found in its cash some neatly measured lengths of gas pipe masque- rading as rolled coin. THE PRACTICAL WORK OF A BANK THE PAYING TELLER 95 The teller's cash is sorted into the various classes for making up the reserve, for all cash cannot be held in the reserve; therefore, the cash is classified and a record kept of the gold and silver, gold and silver certificates, legal tenders (greenbacks), national bank notes, clearing-house certifi- cates, Federal Reserve notes and the subsidiary coin. The various amounts are listed on the tally slip which forms part of his daily proof. Systematic arrangement of his money is essential if he is to work quickly, as well as efficiently knowing just where to find what he wants, in the form wanted. 1 Of course, all cash is put in the vaults at night, but many a teller has gone back after supper to be sure he left no cash out, and one Boston janitor is on record as having taken a long trip on the money a forgetful (they are never careless) teller left in the drawer. An amusing story is told of a teller who purposely left all his counterfeit accumulations in the drawer and in the days of the "wild cat banks" it was plentiful. One day he was off his post and a director took his place. Coming back the next day he was rebuked for his carelessness for leaving money in the till over night. "What did you do with the money you found in the drawer?" was the teller's first query. "Paid it out, of course," replied the director-teller. Many banks place the cash under two combinations, re- quiring two men to operate. This is along the line of the policy of safeguarding the bank against the possibility of a large loss through carelessness or dishonesty or even by ac- cident, such as occurred in one of our banks some thirty years or so ago. The paying teller of this bank found his cash $10,000 short one day, and though he searched high and low he found no trace of the money nor any clue to its whereabouts. He lost his position and was for a number of years an object of espionage and suspicion, and, of course, suffered severely both mentally and financially. A number of years later, in making some changes in the bank's vault, $10,000 in large bills was found that had slipped behind or fallen beneath a partition of the safe in such a manner that only the recon- struction of the safe revealed its hiding-place. p. 136 for latest ruling on this subject. a o o fe v * 2 s Q g a tf W O ^ a X < 8 o a ^ * r i 4 H o H 5 5 O ^* r^ ' 6x3 H O x a M S g g i ?! EH fe 5 8* B O W ^ O H g O P >> o ft o a ^ S 2? sle^ ft " 8 THE PAYING TELLER 97 One of the developments of modern banking is the tre- mendous demand for new bills which imposes an additional burden upon the paying teller that of keeping an ample supply of all denominations of new bills and coin not only for his counter use, but to meet the requests of correspondent banks. This has had a beneficial effect upon the quality of the ordinary counter-money put in circulation, because the banks are obliged to sort their soiled and mutilated bills very carefully, which results in a high average of clean bills in daily use. Unfit bills are sent to the Treasurer of the United States in Washington or to any Sub-Treasury for redemption, and return as new bills, and form what is practically the only source of supply of new currency. These "unfit" bills, as they are called, must be sorted into the various kinds gold or silver certificates, legal tender or Treasury notes and national bank notes. In making up packages of bills for redemption, not more than 100 bills, and of one denomination only, may be con- tained in a strap or band. Each strap must state the kind, denomination and number of bills enclosed, and must have the sender's name upon the strap. Only one kind of bills in multiples of $50 may be sent in a package, and not over 4,000 bills may be enclosed in one package. The express rate, including that for the new bills re- turned, is forty cents per $1,000, except for national bank notes for which the rate is twenty cents per $1,000. All bills received from the Treasury Department are in packages of 100, the last number of the bill number run- ning consecutively. Many banks have rules of their own as to the strapping of money, due to the trade they handle, and endeavor to accommodate themselves to it. Silver comes from the Treasury in bags of $1,000 for halves, quarters and dimes; nickels in bags of $200, consisting of four $50 bags; cents in bags of $10. The wrapping of coin has already been mentioned in this chapter. Upon the paying teller devolves the duty of filling the orders of correspondent banks for bills and coin. In the case of a bank with a large number of correspondents this is a daily occurrence, and the ingenuity of the paying teller is often taxed to comply with these requests and still maintain \J X lll!l O H ^ ^ . M S k BP B ~ P H Q H S . > S K < KB s S w ^ K m Q ^ tfi < 8 SH& & X a 5 S 5 S S to - J W - & >5 ss 2 P tn H i s p o ~ *N * O 3s 100 THE PAYING TELLER 101 CASHING A CHECK Who has not had a check cashed? And who has not watched the teller quickly scrutinize it, reach for the bills, pass them swiftly through his hands, hand them out and place the check on the spindle? But what happens when you pass in a check and say: "Ten fives and five ones, please, new bills"? What are his mental processes as he pays your check and listens to your comment on the topic of the day? It looks so easy just count money all day, and go home at three o'clock or six! Nice job this! No, not a "job," but a position, for while he was listening to you he was glancing that check over. He must assure himself: First, that it is genuine. He might know the signature well enough to pass on it without reference to the signature card in the little drawers back of him. It might be drawn by an at- torney, an executor, a trustee, a guardian, an agent; and he must not only know that the signature is genuine, but that the authority is on file and in force. The paying teller pays a forgery at the bank's peril. He is bound in law to know genuine signatures. He must be a handwriting expert. Checks are often drawn carelessly. Some people can never write twice alike (and, as a matter of fact, no two signatures are ever exactly alike this being one test of forgery), but the characteristics are the same, and can easily be detected. Checks may be signed with gloved hands, cold hands, in cramped places, etc., and while genuine, are difficult to pass upon quickly, and the teller must not refuse a bona fide check, for if he does he may invite trouble. Checks of cus- tomers doing an active business are easily remembered; it is the infrequent depositor who makes reference to the signa- ture files necessary, as well as corporation checks where several officials are authorized to sign. Second, he must know that the check has not been raised. If he pays a forged check the bank is liable. If he pays a raised check the bank is liable for all over the original amount. Therefore, he must see that it is untampered with sometimes a most difficult feat. A check may easily be altered by erasing the amount and figures and substituting others. This may be done very skillfully with a knife or with acids. Sometimes checks are < E U u X 102 o as;; 5)5 6, < * u U ^ N 3 8 < S % a .- S as *< 54 , >J >* | S - W o o - < P M U w fe H 8 C a P o fe o * h THE PAYING TELLER 108 so carelessly drawn that fraud is easy, and it is a question if the fraud was invited by carelessness. It has been held that a bank depositor is liable where he draws a check care- lessly and makes fraud easy. The use of safety paper a paper with a thin coating on it which prevents any erasure without becoming noticeable is becoming more and more common. WOEDS AND FIGURES Checks usually have the amount in two places, expressed in both words and figures. If these two are in agreement, there is no question as to the maker's intention as to amount; but if they vary, the question arises as to which controls. The Negotiable Instruments Law gives the following in- structions: "Where the sum payable is expressed in words and also in figures, and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount." The teller is, therefore, justified and protected in paying the amount expressed in words, the law recognizing the fact that a man is more apt to express his intentions when writ- ing the amount in words with deliberation than in making figures, although in practice it is quite likely to be the re- verse. Some tellers make it a rule to pay the lesser amount, irrespective of whether words or figures express it. Any erasures should be carefully investigated, for any material alteration will void the instrument. The use of safety paper is to be encouraged in this respect, inasmuch as any change, however slight, will readily appear. Third, he must see that it is not dated ahead. The authority of a bank to pay is only good when the date of the check is of the same day or an antecedent day. The teller must not pay a check to-day which is dated to-morrow, for by to-morrow the maker may put a stop order on it and can- cel the check. He must watch the dates. If the check is not dated at all the teller can be satisfied about that detail, for the Negotiable Instruments Law pro- vides that "where the instrument is not dated, it will be con- sidered to be dated as of the time it was issued." The teller can fill in the date as of the day presented, without incur- c^A *' ^V-' rsXv \LV-Ni i-*** ItlP^lS. =* * 1. ^\ V^-* J5 '*& <* . BBS r* THE PAYING TELLER 105 ring responsibility, although it would seem a better practice to have the person presenting the check attend to this. If the check is post-dated the teller should refuse to pay until the date borne by the check arrives. If he should pay before the date and the maker of the check suffers any dam- age by reason of it, the bank is liable. Should the check bear a date considerably previous to the time of presentation, it is what is known as a stale check and puts the teller on inquiry. As to how old a check must be to be considered stale, has not been decided by the law. A check a month old has been decided not to be stale, but one five months old has been so considered. The teller must de- cide this question after a consideration of all the facts. If he knows the maker and the person presenting and indors- ing it; if he feels certain it is all right and the maker has funds to pay it, he can take the chance. He should, however, come to this conclusion bearing clearly in mind that he is assuming some risk. IDENTIFICATION Fourth, he must know you, or you must be identified. The check, presuming it to be drawn by a third party to your order, or indorsed to your order, is payable to you, and payment to anyone else is unwarranted, and not good. It may be a bearer check, payable to holder, but most checks are payable to designated payees, and this one, let us sup- pose, is payable to you. Therefore, he must pay you and you only. And to identify you may be difficult. You are not known. You offer to bring in your chauffeur; your lawyer; your wife; and the teller, sad to relate, does not know either. You produce a letter addressed to yourself and say: "There, you see. I got this check in a letter this morning." "Yes," the teller observes, mentally, "but you might have stolen it from the mails. How do I know?" Of course, the teller doesn't say so in words, but shakes his head and says: "We must have someone whom we know." He must use judgment and tact in getting identification, and in the case of small checks, such matters as letters, mon- ograms and other documents in the bearer's possession may be accepted. The indorsement of one of the bank's cus- tomers is, of course, the best identification if it is genuine. 106 THE PRACTICAL WORK OF A BANK THE PAYING TELLER 107 And in being firm but kind, the teller often has to take abuse for being so "very particular" "finicky," as a woman would put it, forgetting what the risk really is and how many losses and headaches tellers have had by taking a chance and losing. One instance will illustrate the attitude of mind of some people toward the paying teller. Some years ago a man presented for payment a check for a fairly large amount and had some difficulty in producing satisfactory evidence of his identity. Finally, he rolled back his sleeve and showed his arm upon which was tattooed his full name. "There, young feller," he exclaimed to the teller, "do you think I stole the skin?" In another case a woman presented a check for too large an amount to take a chance on, and after telephoning to the drawer and getting a satisfactory identi- fication the teller cashed the check. As the woman took her money she said: "You must have a lot of crooks coming in here." As to telephone identification, unless the teller is quite familiar with the voice of the party claiming to be talk- ing, such identification is dangerous to accept. A few years ago, on a Saturday morning, the paying teller of a bank was called up on the telephone by a man representing himself to be the cashier of a corporation keep- ing a large account with the bank. He stated that the clerk who ordinarily went to the bank was sick, and that he was sending a new man with a check for $1,200, which he wished to have cashed, and gave a full description of the man who would call for the money. This seemed all in good form, and later on a young man answering the telephone descrip- tion appeared at the teller's window with the described check. He remarked to the teller that the cashier telephoned about his calling for the money. Something aroused the teller's suspicion, and he immediately telephoned the cor- poration office for a confirmation and found that no such message or messenger had been sent. The impostor made his escape, leaving the check, which proved to have been taken from the back of the check book and the signatures cleverly forged. It is suggested that when identification is obtained it be in the nature of an indorsement if possible, so that in case of subsequent trouble the one identifying the party to whom payment was made may at least be located, if not held liable for the fraud. 108 THE PRACTICAL WORK OF A BANK IRVING NATIONAL BANK TO irwiiNO i NEW YORK. PLEASE STOP PAYMENT ON OUR- DATED NUMBERED TO THE ORDER OF FOR $ WHICH HAS NOT BEEN CHARGED AGAINST OUR ACCOUNT ON THE STATEMENT FOR ANY PREVIOUS MONTH. IF DUPLICATE OF ABOVE IS PRESENTED, PLEASE PAY AND CHARGE TO OUR ACCOUNT. WE UNDERSTAND THAT YOU WILL USE YOUR BEST EFFORT TO AVOID PAYMENT OF THE ITEM MENTIONED ABOVE. BUT AGREE NOT TO HOLD YOU LIABLE ON ACCOUNT OF PAYMENT CONTRARY TO THIS REQUEST SHOULD IT BE OCCASIONED THROUGH INADVERTANC6 OR ACCIDENT SIGNATURE. ADDRESS THIS REQUEST TO BEAR ONLY SIGNATURE AUTHORIZED ON CHECKS. IF ORIGINAL BE RETURNED PLEASE CANCEL THIS ORDER. IN ISSUING DUPLICATE CHECK PLEASE WRITE DUPLICATE ACROSS FACE OF CHECK OVER AUTHORIZED SIGNATURE STOP PAYMENT NOTICE THE PAYING TELLER 109 CROSSED CHECKS In England the banks have been by law relieved of re- sponsibility for cashing checks without identification, and an English teller will hand out money all day without thought as to whether the one standing at the window is entitled to the funds or not. But the English custom gives the bank protection in what is known as the "crossed check," which is merely the drawing of two parallel lines across the face of the check and writing "& Co." between. This, in effect, re- stricts the presentation of the check for payment by any other than a bank. And, in effect, it prohibits the party from collecting the check except through his bank. By act of Parliament a bank is prohibited from paying checks that are crossed over the counter. If the drawer knows the payee's bank, he can cross it "specially" by writing the name of the bank between the lines, and it can then only go through that channel. STOP PAYMENT Fifth, the teller must assure himself that payment has not been stopped on the check. It is the maker's right to draw checks as often and for as much as his bank balance warrants; and he has the legal right to stop payment on a check at any time before it is actually paid; therefore, if he notifies the bank not to pay his check and payment is made, the bank cannot charge his account with the amount. These stop payment orders cause much confusion and give the tellers much concern, and are a source of annoyance; but as long as this is the law and the custom, it must be part of the teller's duties to watch out for the stop payments. It is one of the paying teller's duties to see that no such check shall be cashed by him. A card is made out for the paying teller's cage which has a space for the date, number, amount, payee's name and signature of the depositor, and also for the date when the order to stop payment was received by the bank. Below there are spaces to record the date of presentation for pay- ment, and for date of cancellation over the depositor's signa- ture, also for the bookkeeper's initials, to show his receipt of the notice. A second form is for the bookkeeper and con- tains the essential data of the other card. 110 THE PRACTICAL WORK OF A BANK These stop-payment cards should be filed in the paying teller's cage in some form for instant reference. In addition, a visible file may be used containing the most recent stops, for these are the most dangerous. A check which is long antedated will almost surely catch the teller's eye and send him to his stop-payment file, for the best of memories is a treacherous faculty. In filling out these stop-cards the de- positor's signature is always to be obtained when possible. If the request to stop payment is received by telephone a confirmation by letter should be asked for, and when a stop- payment letter is received that fact should be noted on the card with the date of receipt, and the letter preserved for reference either in a file for that purpose or among the let- ters of the day. The cancellation of a stop-payment order should always be made over the signature of the drawer, either upon the card itself or by letter. These are by their nature a matter of record, an essential point in any trans- action involving the payment of money. Checks coming through three sources, the paying teller, the clearing-house and the mails, there must be a record of a stop payment in each place where the check will be passed upon before paying. In some banks this is merely a memo- randum placed somewhere where the bookkeeper or teller, or both, can see it; but such methods are not to be encouraged; there should be order above all things. Of course, when a check upon which payment has been stopped is presented it is so marked that it cannot circulate further. A slip may be attached or memo made on the back, preferably the former. Payment may be stopped on a check by legal process. The law may prevent its payment. The account may be gar- nisheed, and if so, no checks should be paid while the process is effective. And in case of controversies in organizations, where factional fights have developed, payment may be sus- pended until the bank is certain of its authority to pay, es- pecially if it has had notice that there is irregularity in the election of officers or other causes of which it should take cognizance. If the ownership of the account is in doubt, the easier course is to pay the money into court and let the disputants settle the matter between them. Lastly, the teller must be certain that the drawer is good for the amount. In a small bank, the teller may keep his ledger where the cashier keeps his credit department Fona ir-BM-4-fS-S. STOP PAYMENT THE PAYING TELLER Copy to all otkr Tcllm onj 111 National Exchange Bank Roanolce, VirninU Check of. Number - Doled ,.... Amount, f.. Payable to..... Duplicate Issued < Memo: KM Information Receited by. (Letter Authority < 'Phone Filed.. I Personal AM. P.M. Stop Payment Withdrawn _.. STOP PAYMENT CARD FILED IN TELLER'S AND BOOKKEEPER'S DEPARTMENTS "under his hat" ; but in a large bank this is impossible. Of course, some accounts are so steady that the teller knows that they are never overdrawn, always good for all checks issued and need concern himself only that the above tests are met ; while other accounts are so uncertain, so generally near the danger line, that to make a payment without verifying the balance would invite an overdraft. Credit is a timid creature and easily shocked; and the credit of the maker must not be injured while the teller is verifying the balance. To shout out so that all in the lobby can hear: "Is William Smith good for fifty-five dollars?" STOP PAYMENT ACCOUNT OF HECEIVEO OATI CM'E'OK PAYABLE TO NUMBER Of AMOUNT ITtH ictivEO DUPLICATE REMARKS STOP PATMENT LOOSE LEAF REGISTER 112 THE PRACTICAL WORE OF A BANK would do Mr. Smith an injury and certainly be undiplo- matic on the part of the teller. He must get the information in some quiet manner. In the unit system, elsewhere de- scribed, he can refer the check to the bookkeeper, who is near at hand, but in some banks, this individual is far away, it may be ten stories above, and so other methods are used. First comes the telautograph which reproduces the hand- writing of the teller on a roll of paper in the other depart- ment. He, therefore, presses a button and writes "William Smith fifty-five?" The clerk at the other end writes back, "yes," and the teller pays it, and no one but the two know about the trans- action by wire. There is also the interior telephone, the pneumatic tube and messengers, but the end and aim of all is to get the information quietly and quickly. And becom- ing satisfied on all these points, he pays the money as you direct him, in "ten fives and five ones," spindles the check 2 and the transaction is closed. It may have taken but a few seconds' time, but much has been done in that short period. Checks are occasionally made out in pencil, and this prac- tice, while rare, is sometimes bothersome. Such a check may be easily altered; and while the law would, no doubt, hold such a check good, it being nowhere said that a pencil is not a proper writing instrument, yet the practice is so fraught with danger that only small checks should be so accepted. The risk of the bank is great enough in any event without adding the temptation to easy alteration. BEARER CHECKS A check payable to bearer, "cash," "currency," or to a fictitious payee is payable to bearer and the teller may cash it without identification or indorsement. It is negotiable by delivery. But as a matter of precaution all such checks should be indorsed, and bearer checks should not be encour- aged. So far as the author has been able to determine, there is no case which covers the point as to whether or not a bank may insist upon indorsement as a requisite to cash- ing a check payable to bearer; but as a matter of record, to trace the course of the instrument and to fix the liability of the party, his indorsement should be obtained. A man who *The mutilation or cancellation is to prevent further negotiation. THE PAYING TELLER 113 will not indorse a check upon which he receives payment is either worthy of suspicion or a stickler for conventionalities. Mr. William McChesney Martin of the St. Louis Fed- eral Reserve Bank tells of this incident: "An account was opened for ahout seven hundred dol- lars. When the book was first balanced all had been drawn out except about fifty dollars. Shortly after receiving his cancelled checks the depositor came in and claimed that some three hundred and fifty dollars had been paid out on forged checks. He exhibited these checks. They were all for small amounts payable to bearer, and none of them had been en- dorsed. Upon an investigation it seemed clear that the checks in question had all been signed by the depositor him- self, but in a disguised hand, his intention being to claim that they were forgeries. Every handwriting expert to which they were submitted came to this conclusion and detec- tives reported that the man was a member of a gang who were equal to this kind of thing. The bank refused to con- sider the checks forgeries and refund their amount and the depositor sued. In the search that was commenced for evi- dence, it developed that someone had handed these bearer checks to some mature newsboys found on the street, and would give them a quarter or half dollar to go in and cash them. The boys, however, who actually cashed the checks could never be found, with the result that the bank had to go to trial without any witnesses except handwriting ex- perts. The case was compromised, the bank being glad to get off with a partial payment of the amount claimed, though certain it was being imposed upon. If these bearer checks had contained the names of the persons presenting them, these persons could have been found, and the bank would not have been a victim of fraud. Since the experience of that bank, it has never cashed a bearer check without re- quiring the name of the person presenting it." THE CERTIFICATION OF CHECKS The certification of a check being essentially payment (the depositor's account is charged and certified checks ac- count credited), and the holder being powerless to revoke the check after it is certified, and the bank becoming liable for the check as soon as it certifies, it follows that the sanr* 114 ceremony is necessary as obtains in paying a check; except that the bank need not assure itself that the holder is the rightful owner, for it may certify "Good when properly in- dorsed." The usual method is to write the words : Certified for $. Date Signature Right here let it be said that the certification stamp should have plenty of ink on it. So very many certifications are faint and hardly discernible that it must be exceedingly annoying to have to strain the eye to ascertain the certifica- tion. And where it is certified, as frequently happens, "Cer- tified, payable at the Blank Trust Company" a custom that obtains in many large cities, where small banks will cer- tify through their clearing agent, a little care as to ink pads will be timely, and save a multitude of harsh thoughts. The bank is, as above stated, liable for its certification whether the drawer is good or not, and should only certify against actual balances. There was a custom, now fast dying out, particularly in stock exchange transactions, for banks to over-certify, in fact, certify to that which did not exist. This is against good banking principles. The bank would often agree to certify up to a certain amount, and thus become liable for the amount so certified irrespective of Hie borrower's account. One large bank in New York was vrecked by this practice. It is no longer in favor with good banks, being a loan without security, and in many jurisdic- tions is forbidden by law. In certifying, a record is kept of the number and mnount of the check, date and depositor's name and payee. This is generally put through by the teller in the form of ticket, which becomes the bookkeeper's authority to make the charge. When the check comes in it will be filed with the ticket among the vouchers. The general bookkeeper has a certified check rec- ord giving the full details, and enters the date of payment against the items. The balance of this account is the total amount of certified checks outstanding. In cities where stock exchange transactions are numer- ous, certification plays an important part in the financial operations and is a very important function of the teller. He is furnished every morning with a list of brokers and their morning balances. Provision is made for the entry of THE PAYING TELLER 115 deposits and checks that pass through during the day. The receiving teller advises the paying teller of deposits made on these accounts, and the paying teller enters checks certified, so that he has the balance always before him. As soon as the clearings of the day are over and charges made to the ledgers these amounts are deducted from the morning balance as shown on the sheet, so that the teller has accurate informa- tion all day as to the status of the broker's account. The payment of a debt in the form of a certified check does not become effective if the bank fails before the check can be presented. An action would lie against the bank as well as against the one from whom it was received; but where a check is given for payment and the holder has it certified and the bank fails before making payment, the maker or indorser cannot be held, on the ground that the holder had the option of taking money or certification, and by taking the certification absolutely released the maker of the check. It is settled law that a bank does not have to certify a check. It can only be required to pay the money, but if ft sees fit to assume the responsibility of certifying, it has a perfect right to do so. It also has a right to charge the drawer's account with the amount of the check, even though the request to certify the check is an oral direction and the only evidence the bank has of a proper demand is the word of its teller as recorded in the certified check register. In a Missouri case, Bank of Springfield v. The First National Bank of Springfield (30 Mo. App. 271), the rea- son is well explained. The court said: "The certification r.f checks is well known to be one of the greatest dangers to the irtegrity of their funds with which banks have to contenJ. The power to certify checks, unless guarded and restrained, is nothing less than the power of a corrupt teller, or other servant, to give away the funds of the bank. Such abuses have been produced by the exercise of this power that pru- dent banks, as is well known, have generally discontinued the practice of certifying checks and have substituted there- for the practice of taking up the check tendered for certifica- tion and issuing in its place their own cashier's check which is tantamount to their own promissory note." It is a common practice for all New York City banks to certify checks. This is doubtless due to the fact that many 116 THE PRACTICAL WORK OF A BANK large payments are made daily and this is the easiest way to handle them. Checks are also certified to a considerable ex- tent by banks throughout the country. In St. Louis and other places, however, financial institutions make it a rule not to certify checks, and whenever they do so are certain that it is impossible for their customer to transact the par- ticular business in hand without such accommodation. Another point is to guard against certifying before or after bank hours for any person except the drawer of the check. Of course a bank will accommodate a depositor by certifying upon his demand whenever there is a proper of- ficer to sign, but there is an element of danger in certifying before and after hours for a third party. A condition of affairs like this might arise : A depositor might issue a check after bank hours and then find that there was an error in the amount or that the check was fraudulently procured and would wish to stop payment. Relying upon the lateness of the hour he might notify the bank by mail to stop payment, knowing that the notice would be received by the bank be- fore it opened for business the next morning; or he might even telephone at the time of discovery, only to learn in either case that it was too late. It would doubtless result in loss to the bank. THE PROTECTION OF BANK CHECKS The principal risk which a bank runs to-day is not that of the burglar or the sneak thief, although they are oper- ating everywhere, particularly in the small places; but even in the large cities, the sneak thief occasionally manages to make a good haul in broad daylight and in a bank using every precaution. In a recent instance in Brooklyn, $10,000 was stolen from the cage during the noon hour, while the teller was for the moment disengaged. In 328 cases of bank frauds in a single year, all but twenty were cases of forgery, and the risk in banking to- day is that of the check forger, who either passes bogus checks or raised instruments. Speaking on this subject at various times, William J. Burns, the famous detective, has said: 8 From "What Burns Says," pamphlet issued by the G. W. Todd Co., of Rochester, N. Y. THE PAYING TELLER 117 "Now, as between merely forged documents (manufac- tured 'out of whole cloth') and the genuine document on which the amount is 'raised' or altered, the danger to those signing and handling the altered instrument is infinitely greater. In fact, from some of the remarkable examples of 'raised' checks, drafts, stock certificates and promissory notes that I have examined lately, it would indicate that the 'raised' amount is more dangerous to the financial peace of organized society than the nitro-glycerine can of the profes- sional dynamiter. EASE OF OBTAINING GENUINE CHECKS FOR "RAISING" "The methods of the forger, too, in obtaining checks signed by responsible men and business houses are most in- teresting, as showing how difficult it is to guard against the 'check raiser.' For instance, they have developed a trick lately of sending a small but perfectly good check of their own to some business house. Then, after there has been plenty of time for it to be duly deposited, there follows a polite letter, notifying the intended victim that a mistake was made in sending this check, that it should have been ad- dressed to another house of similar name in another city, and will they kindly return the money? "In complying with this perfectly proper (?) request, the average business concern naturally responds by sending its own check for the amount to the writer of the letter, ex- plaining that his check had been deposited before his letter arrived. And this check, by the way, is invariably for a very small amount, as the 'check raiser' does not care to in- vest more actual money than is really necessary. "You will see that a $5 check signed by a good concern is just as good for his purpose as a $5,000 one, because he can twist the 'five' into 'five thousand' with very little trouble and only a drop or two of acid and another drop or two of ink provided the concern has not taken the thoughtful pre- caution to protect its check before sending it to the polite stranger. (And, by the way, it is amazing how many other- wise conservative concerns there are in this country that will safeguard everything connected with their business except their own signatures which represent all the rest of their property put together!) "On receiving the little genuine check, the forger then 118 THE PRACTICAL WORK OF A BANK performs his interesting operation by the use of bleaching acids, removing the design of the paper if necessary, and re- storing it after the amount has been altered to suit his needs. He fills up perforations, or punchings, if necessary, and the inks of the best manufacturers are scarcely proof against his skill, since he can remove even printing and lithographic ink when necessary. Moreover, in many cases, it is not required to remove anything at all, as many small amounts can be changed by 'penning' simply adding a few pen strokes to the original amount and there you are! "When the alteration is finally discovered by the concern that issued the check, the question is, 'How are you going to prove the alteration ?' Or, 'Which one of the several endors- ers on this check was the guilty party ?' It is a very difficult situation, and one that can rarely be cleared up to the satis- faction of the bank, its depositor, the correspondent banks, and others concerned. "I might mention that we have recently investigated cases where they managed to alter checks in such a way that they actually left no loophole through which to prove the fraud and indict them for forgery and they accomplished it in somewhat the following manner: CASHING A "STOP PAYMENT" CHECK "Orders had been given to a bank to stop payment on a certain check for a certain amount, payable to a wholesale house, dated on such a day, number so-and-so. It was be- lieved that the check had been stolen. Twice within two months the bank was reminded to be on the lookout for this check and then, in the last hour of a busy Saturday morn- ing during the third month, the check slipped through. But the bank was not to blame. "The forger had first 'raised' the amount by several hun- dred dollars. Then he changed the number of the check, and brought the date right up to that very day, as though the check had been given to him only a few minutes previous to his appearance at the bank although the check was really nearly four months old. Lastly, he had removed the name of the rightful payee (the wholesale house) and written his own name instead, so that he did not have to forge an in- dorsement. He was properly identified, indorsed the check with his own name, took the money and disappeared. THE PAYING TELLER 119 There was absolutely nothing of the original writing left but the genuine signature. How could you blame the bank? "Moreover, the work was so perfectly executed that it is doubtful if it would have been possible to prove the altera- tion even if the swindlers had been caught. They were not, for the fraud was not discovered until nearly two weeks later, when the signer of the check looked over his bank ac- count and found it short. "I have told you all of this in detail, so you will under- stand that I have a reason for the statement that it behooves eveiy bank to see to it and every business house as well that all precautions are taken in making out their checks, regardless of the responsibility or honesty of the party to whom they are issued. "The most practical plan, I think, up to the present time at least, is to use a Protectograph, limiting the amount of the check by forcing a heavy ink into the body of the paper under high pressure. This limit does not leave any profit- able margin to pay the swindlers for their exacting work and the risk of punishment, so it may be considered scien- tific protection, and represents the highest development thus far in the field of anti-forgery devices. (See note page 144.) ADVISE DEPOSITORS How TO STAMP CHECKS "I would suggest in using the Protectograph that the limit be stamped just above the signature and in close prox- imity to it, so that any attempt to tamper with the check will necessarily result in defacing the signature, which alone gives the check its value. "In New York and other cities we are constantly find- ing proof of the cunning employed by these crooks to gain their ends, and I will give you a few illustrations to show how difficult it is to safeguard yourself against their methods. "We will say that a band of swindlers desires to know what amount it will be safe to use in tampering with the check of a certain concern, what number to use, etc. "About five o'clock in the afternoon a young man calls at the office of the concern arid states that he understands his employers have had complaints from the head of this firm about the paper furnished for its checks fading out or 120 THE PRACTICAL WORK OF A BANK turning color. The head of the business has gone home and the bookkeeper suggests to this young man that he call the following day. "The young man then asks if he may examine some of the cancelled checks to see what reason there may be for the complaint. He asks to see some of the old checks and also some of the recent ones, for purposes of comparison, which seems reasonable, and some of the checks are produced from the vault. "By a little sleight-of-hand, which is part of his business, the rascal manages to abstract one of the recent checks, and thus goes away armed with all the working material and in- formation that he needs. He may utilize the old cancelled check by filling in the 'Paid Stamp' perforations and chang- ing the amounts, dates, etc. At any rate, he has possession of a genuine check, which is a mighty dangerous instru- ment in such hands. SAMPLE CHECKS MUST BE SAFEGUARDED "In one case the swindlers desired to use the sample check merely as a 'model' from which to prepare a big forged check, and they managed without much trouble to get possession of some blank check forms of this concern, on which they did a very neat piece of work and secured about $10,000 from one of the biggest banks in New York. "The checks being printed specially with the name of the concern in peculiar type, and on a special tinted paper manufactured only for this particular bank, in connection with other circumstances surrounding the case, the deduc- tion was that the blank check must have come from the printer who made the checks for this bank. "I called upon the printer, and he told me that it was absolutely impossible for any person to secure one of these checks. I asked him what precaution he took for safeguard- ing the checks. He went to a drawer and brought out a large book, containing samples of the various checks he had printed. I asked: 'Wouldn't it be possible to get some of those?' He answerd: 'Oh, no!' I then told him my pur- pose, that I was there as a representative of the American Bankers Association, to determine how the forger had se- cured those checks, and he assured me it was absolutely im- THE PAYING TELLER 121 possible, that the checks in question must have been stolen from the firm or counterfeited. "Then I asked: 'Would it be possible to get them from the pressman?' "No, because we count out the sheets given to him, and he accounts for them.' So I asked: 'Would it be possible to get them from the bookbinder?' 'No,' he re- plied again, 'because the same method is followed with the bookbinder.' "I then pulled from my pocket ten of these checks, and said: 'Where do you suppose I got these?' "He looked at them in astonishment, and said: 'Why, I don't know.' "I said, 'Why, I just pulled them off your wall, among six or seven hundred other samples hanging there. You did not see me get them?' 'Well,' he said, 'that couldn't happen but once.' "So I left him and went to the press room, and there I succeeded in finding a number of samples of checks, but not of this particular sort. I next called at the bookbind- er's, and there obtained twenty of the same identical checks, thrown to one side by the binder. I carried those back to the printer, and I said to him: 'What is the use of a bank taking any precaution to pay for security in printing of this character, when any person who wants to do so can get the checks at will? And moreover,' I pursued, 'the very as- sumed security of this work you are doing makes it all the more dangerous to your customers; because these checks are supposed to be safeguarded, and the banks generally so regard them, and when they get in circulation, as in this case, they are calculated to fool not only the banker, but the merchant, anywhere, because it is supposed to be im- possible for outsiders to get possession of such checks.' How BANKERS CAN PROTECT THEIR DEPOSITORS AGAINST CHECK FRAUDS "These are some of the questions, gentlemen, that the bankers must take up for the protection of the world of banking and business. They must see to it, first of all, that the printer who prints their checks takes greater precau- tions toward preserving those checks from crooks. Then, in the next place, they must use their good offices with deposi- 122 THE PRACTICAL WORK OF A BANK tors to see that they are careful as to the manner in which they issue their checks. "I do not mean that depositors can avoid giving checks to strangers because the strangers will find a thousand ways of getting them, anyway but they can write them in such a manner that they will not be a positive invitation to crookedness, as so many checks are at the present day." EDUCATING THE DEPOSITOR The bank owes it to itself to educate the depositor in the proper method of drawing checks. The raising of a. check by a clever forger is easy. It can be made difficult, if not quite impossible, by these precautions which every bank should bring to the notice of its depositors: (1) Use safety paper, good ink and plenty of it. This reduces the chances considerably, although not entirely; (2) write the figures well up against the dollar sign; make the figures strong, the "00/00" in such a way as to leave no room for other cy- phers; (3) write the words in a heavy hand, beginning well to the left and filling all spaces with a bold wavy line: (4) use the best protecting device that can be found; (5) issue no checks to strangers; (6) balance the book with the check book and prove the indorsements as soon as vouchers are returned. By promulgating these simple rules, much loss and annoyance may be saved. It is a rule of law that the bank pays forgeries at its peril, and cannot be held blameless if it pays forged or raised instruments; but many checks are issued in such open defi- ance of all due precaution that it would be a manifest injus- tice to the bank to hold it liable for raised checks made easy by the careless drawing on the part of the depositor. The author has found no adjudicated case where the loss has been placed on the maker by a court of high standing; but it is certain that if the depositor follows the rules above laid down he could not be held liable; while on the other hand, if he invites loss to the bank it would be unjust to hold him harmless. DUTY OF DRAWER TO EXERCISE CARE IN PREPARING CHECK It has been held in many jurisdictions that where the drawer or maker of a bill or note prepares it so carelessly that alteration may easily be made, either by insertion or erasure, THE PAYING TELLER 128 without defacing the instrument or exciting the suspicion of ti careful man, and the opportunity thus afforded is embraced and the instrument raised in amount, the maker or drawer will be liable upon it as raised to any holder in due course. This holding has been placed on several different grounds: first, that the drawer is estopped by his negligence; second, that where one of two innocent persons must suffer a loss through the wrong of a third person he shall sustain the loss who put it in the power of the third person to commit the wrong; third, that it is the duty of one issuing commercial paper to guard not only himself but the public as well, by refusing to sign an instrument in such form as to permit of alteration with ease and without ready detection ; and, fourth, that the free interchange of commercial paper requires such a rule. Other authorities refuse to hold to this doctrine upon any ground, claiming that the person who issues a negotiable instrument owes no duty to subsequent purchasers and that he is entitled to rely upon the presumption that it will not be criminally altered. But whatever may be the just rule in respect to promis- sory notes and ordinary bills of exchange, it is apparent that there is a ground on which to distinguish checks, for the rela- tion between a bank and its depositor is essentially different from that which is found to exist between the parties to a promissory note or ordinary bill of exchange. In regard to a bill or note no one is bound, in the absence of special agreement, to purchase it or become a party to it in any man- ner. But a bank is bound to honor its depositor's checks at its peril. Hence it is a just rule to require the depositor to exercise reasonable care in the preparation of his checks to the end that loss may not be thrown unnecessarily upon the bank. Trust Co. of America v. Conklin, 65 Misc. Rep. 1, 119 N. Y. Supp. 367. In an early English decision it appeared that the plaintiff, having occasion to be absent from home, left with his wife certain checks signed by him in blank, to be filled in by her and used as business might require. She delivered one of these checks to the plaintiff's clerk to be filled in for the sum of fifty pounds. The clerk wrote the word fifty in the middle of the blank line left for that purpose and began it with a small letter. He showed the check to the plaintiff's wife, who directed him to draw the cash. Before doing so he raised the check to three hundred and fifty pounds, the altera- 124 THE PRACTICAL WORK OF A BANK tion being rendered easy of accomplishment by the manner in which the check was prepared, and drew the larger sum. It was held in this case that the plaintiff could not recover from his banker the money which he claimed had been paid out without authority. Young v. Grote 4 Bing (Eng.) 253. This case was followed in a recent New York decision, in which it appeared that a wife signed a check which her hus- band had filled out for the sum of $900, leaving space which enabled him to raise the check to $4,900. He raised the check in this manner and withdrew the entire amount. In an action by the wife against the drawee bank it was held that the ques- tion whether the wife was so negligent as to preclude her from recovering from the bank was a matter for the determination of the jury. Timbel v. Garfield Nat. Bank, 121 N. Y. App. Div. 870, 106 N. Y. Supp. 497. In the opinion it was said: "The text books are quite unanimous in asserting that, where a drawer of a check has prepared his check so negligently that it can be easily altered, without giving the instrument a suspicious appearance and alterations are afterwards made, he can blame no one but him- self, and that in such case he cannot hold the bank liable for the consequences of his own negligence in that respect. If a check appears to have been altered the banker is put on inquiry as to the correctness of the alteration and he pays it at his own peril. Where, however, the alteration is such as to excite no suspicion because the check has been drawn by the maker in such a way as to invite an unsuspicious alteration, the law makes an exception to the rule that a banker pays at his own peril and permits him to assert negligence on the part of the maker in so drawing his check." Citing 5 Cyc. 544; Daniels on Negotiable Instruments, 5th Ed., Sec. 1659; Morse on Banks and Banking, 4th Ed., Sec. 480; Zane on Banks and Banking, Sec. 154; Story on Promissory Notes, 7th Ed., 675. It is held, however, that while the drawer of a check may not recover from his banker where he draws the instrument in such an incomplete state as to facilitate or invite fraudulent alteration, he is not bound so to prepare the check that nobody can successfully tamper with it. (Critten v. Chemical Nat. Bank, 171 N. Y. 219.) (Brady, Law of Bank Checks, 157.) The following citations are also in point: THE PAYING TELLER 125 "If by any act or negligence on the part of the drawer, as by so carelessly writing the check as to render it easily open to material alteration without leaving evident traces of such alteration, the customer has furnished the opportunity for the fraud which has deceived the bank, he must suffer the just consequences of his carelessness by bearing the loss himself." Morse on Banks and Banking, Sec. 480; and Young vs. Grote, 4 Bing. 253. "For clearly a bank has a right to demand some duties from its customers, in such an important matter as protec- tion from fraud, in a business where frauds of a particularly skillful and ingenious nature are continually in course of perpetration." Morse on Banks, 235. "The drawee can be held bound only to know the signa- ture of the depositor, and not the handwriting of the body of the check, the money paid in good faith and without neg- ligence on an altered check, may be recovered by the bank." United States Espey vs. Cincinnati Bank, 18 Wall (U.S.) 614. "The maker of check is bound to use recognized safe- guards in protecting his check against alteration, where an innocent holder may sustain loss." Daniel on Negotiable Instruments. THE BANK'S PAYROIJL. The payroll is often made up by the paying teller, or by an officer. This is usually done so that the employees will not know what each other receives. There are two sides to this question. It may spur a man on to know what the man ahead of him earns, or it may lead to jealousies as to the other's worth. Some banks have a payroll so that all sala- ries are receipted for by the men, each knowing what the other receives ; while others have a payroll book, in which the clerk simply signs for the salary for the period and no amount named, the amount being covered by a receipt which is enclosed in an envelope with no other marking than his name, so that he alone knows the amount. On pay day the envelopes are passed around, generally with new money, the receipts enclosed therein, to be signed and dropped in a box, and checked against the payroll in the book. One of the duties that falls to the lot of the paying teller is to furnish money for payroll purposes for customers ; and in large establishments this is a big item, and one of the 126 THE PRACTICAL WORK OF A BANK principal avenues for the utilization of the bank's cash. As an act of courtesy to the teller, payroll money should be asked for as early as possible, so as to give him time to put it up without undue haste, and also not to keep a line wait- ing. If if can be furnished early in the morning, or a day before, so much the better. The requisition for payroll money is usually made on forms provided for that purpose indicating just the various denominations required. Some banks in an effort to get business have agreed to put up the payroll at the bank, and this is a heavy task to place upon the paying teller, as it involves much labor. THE TELLER'S MISTAKES The paying teller should have all due protection from outside interference, so that any shortages will be directly traceable to him and nowhere else. He should be caged, and the cage locked against all comers. In case of shortages, where more than one or possibly two have access to the funds, the question arises as to who is responsible, and if clerks are allowed to enter the cage, abstractions might take place, and while small to the teller or to the bank, would look large to the pilferer, and might be large in their conse- quences. Where the receiving and paying is done at the same win- dow, notes arid drafts collected, change made, and all sorts of transactions put through, there is more liability for error than where the work is specialized, and only one class of transactions handled. But whatever the cause, the error should be reported. It is but fair that it be so ; for if it be covered up it will surely lead to trouble, and any bank officer who is fair-minded, ex- perienced, and fit to hold his position, will understand that such things are liable to happen. An error against the bank is, as has been well said, "a fight with conscience"; while if it is against the de- positor he will hastily report it. An "over," if a short pay- ment (to be paradoxical), will quickly rectify itself. But cohsidering the amount of money handled, and the time in which it is handled, the wonder is that so few mistakes are made. Herein the savings bank teller has the advantage. He has the signature of all his depositors. He has their pedi- THE PAYING TELLER 127 gree. He does not have to take chances he can use his machinery. He can be reasonably certain of his payments. He can use due care always. Some banks require tellers to make good their "shorts," but do not permit them to retain the "overs" a poor prac- tice. The principle is wrong, and all discrepancies should, after due search, be carried to "overs and shorts," until such time as the balance may be charged to profit and loss as in- cidental to the business. The moral punishment is sufficient, and no teller is knowingly careless. THE PAYING TELLER'S RECORDS AND FILES The items received by the paying teller are usually all debits, for he pays out. The checks drawn on his own bank are charged to the bookkeeping department; other checks are charged to the transit department. If the teller makes the clearing-house settlements, these checks will be held for the morning clearing. Having the cash balance of the day before, he charges himself with all receipts from the receiv- ing teller, and credits himself with all payments, the balance being the net cash on hand. If he receives from or pays to the clearing-house, he debits or credits himself accordingly. The bookkeeping in the paying teller's cage is very simple. He has a cash book or blotter in which are recorded all items passing through his cage. This book is arranged in columnar form, with a debit column for each teller and bookkeeper to whom he may have occasion to charge items, and a credit column for those from whom he may receive them. The adding machine can be used for listing and the slips pasted in their respective places. This will frequently save considerable time. The totals of the several credit col- umns show the cash, checks and credits to general accounts received from the receiving teller, note teller, and so forth, and the exchanges from the clearing-house. These are added to the previous day's balance. From this amount is taken the total of the various debit columns, which represent checks charged to the individual bookkeepers, and checks on other banks charged to the receiving teller or clearing-house or transit department, and charges against accounts on the general ledger. The balance should agree with the teller's cash and cash 128 THE PRACTICAL WORK OF A BANK items. If correct it is entered in the teller's daily cash sheet, and with the balances of the other tellers, makes up the cash balance for the day. This total will balance with the gen- eral cash book of the bank. The paying teller's department has in its custody the files containing the signatures of customers and those authorized to sign on behalf of persons, co-partnerships and corpora- tions having accounts with the bank. These are filed in an orderly and readily accessible manner. The certification register, the teller's check list and the teller's proof book complete his books of entry or record. Signatures may be as follows: Individual. Joint one or more persons interested in the same account. Co-partnership signatures of either one or more part- ners binding a firm. Corporation by officers authorization showing officers empowered to sign on behalf of corporations as shown by ex- cerpt from by-laws or resolutions passed at meetings of di- rectors, and a copy of the minutes of the meeting at which these officers authorized to sign on behalf of the corporation were elected This extract or copy being signed by the sec- retary of the meeting and impressed with the seal of the corporation, is kept in files at the bank where it may be readily referred to. Banks' signature cards showing specimens of signatures of those authorized to sign on behalf of such banks should be certified to over the signature of the cashier and kept in signature card files. Power of Attorney Signature by attorney is a signa- ture of a person or persons appointed to sign in the name of another person, company or officer of a corporation, and these powers should also be kept in files where they are read- ily accessible. Some are executed to give a limited authority, and others are sufficiently general in their scope to permit the attorney to do all of the things in connection with the Bank account that the principal may be permitted to do. Agent, Manager, Special, Etc. When signing in this manner the principal need not necessarily be revealed. Administrator, Executor, Trustee Must be accompa- nied by a proper authorization, and these very titles are suf- THE PAYING TELLER 129 ficient in themselves to put the banker upon notice that proper authorization is required. The Certification Register The teller's check list, and the teller's proof book admit of a range from which a selec- tion may be made from a number of good forms to suit the requirements and needs of each bank according to the size of the bank, the arrangement of the department or the size of the community in which the bank is located. 4 WHAT I Do BY ANOTHER I Do BY MYSELF What a man may do by himself he may do by his agent; and the acts of the agent within the scope of his authority are the acts of the principal ; therefore, a depositor in a bank may delegate his right to draw upon the bank by proper authority, which is most frequently by power of attorney. This may be limited or unlimited, and includes, as a rule, the right to indorse. The right to indorse only may be given, but the right to indorse does not include the right to draw checks. The power must be in writing, explicit, and cover the ground fully, so that the bank will know that the agent or attorney has exact powers and what they are. Such signatures should always be in the form: "A, by B, at- torney," and not simply "B, attorney, agent, etc." A knowl- edge of the law of agency is here applicable and the teller should know how far the principal is liable and how far the agent, and see that in the acts authorized the agent binds the principal and not himself. Sometimes he binds neither. The death of the drawer of a check revokes his order and the teller is charged with notice not to pay as soon as knowl- edge of the maker's death is received. THE MONEY TELLER Having considered the paying teller's department from the standpoint of the average teller in the average bank, let us look at another phase of the subject, that of the paying teller in the large bank, say, with deposits of $60,000,000 to $100,000,000 or more. In a bank of this size the first paying teller needs to give *Henry Billman, Cashier North Side Bank of Brooklyn, before New York Chapter. 180 THE PRACTICAL WORK OF A BANK all his time to the care and distribution of the bank's cash, leaving to the other tellers the paying of checks, waiting upon depositors and all other details of the department. He will have under his charge a cash balance varying from $5,000,000 to $15,000,000 of actual money. The larger the institution the greater will be the fluctuations in the bank's holdings of cash. This money comes into the bank from two sources, the greater part of the bills of the smaller denominations being deposited with the receiving tellers, while those of large denominations come from clearing-house balances and the Sub-Treasury. The small bills are depos- ited in sums varying from a few dollars from individual de- positors up to great bundles brought in by large corpora- tions, railroads and from correspondent banks. The loose bills are verified by the receiving tellers and sorted into the tills to be made up into packages as soon as time permits. It is customary for banks to furnish their depositors with bill straps, with printed spaces for the amount, the de- positor's name and date of deposit. During the day these bills are sent to the bill teller's department in their original wrappers. In a large bank it is not an uncommon occur- rence to receive as large a sum as $700,000 in a day, and the bill teller's department in such a bank is a busy one. In this department there may be fifteen to twenty bill counters, whose duty it is to verify all these various pack- ages of currency, to cull out the unfit bills, and to sort and arrange the good bills in form suitable for use at the pay- ing teller's windows and for shipment to correspondent banks. An average of from thirty to forty per cent, of cur- rency so deposited is unfit for circulation. These bills are counted so that ones and twos are in $100 straps; fives in $500 straps; tens in $1,000 straps, and twen- ties in $2,000 straps, the straps being of different colors that they may be readily distinguished. At the close of the day the even packages are sent to the paying teller, the odd amounts and unverified packages remaining with the bill teller, who keeps a debit and credit account with the paying and receiving tellers. With this amount of cash it is extremely important that it shall be stored in the vault in such shape that it may be readily verified. Uniform sized bundles of the different de- nominations may be made up containing twenty packages THE PAYING TELLER 181 each of the various denominations, so that each bundle of ones and twos would contain $2,000, the fives would be in a $10,000 bundle and the tens in a $20,000 bundle, the differ- ent colored straps instantly indicating the denomination. Then each denomination being stored by itself it is a mat- ter of a very short time to verify a large balance of cash. For the purpose of having an accurate record of this cash a vault book is kept showing the actual amount of each denomination. The daily changes are recorded by a debit and credit account in the vault book, charging the vault with such amounts as are put in, and crediting it with amounts withdrawn, striking a balance at the close of the day; then, as the vault total is entered as one item on the teller's settle- ment, any error or omission is bound to show in the settle- ment. The bills of the larger denominations, excepting national bank notes, form the greater part of the bank's reserve against deposit liability, and are practically all gold cer- tificates, fifties, one hundreds, five hundreds, one thousands, five thousands and ten thousands. The fifties and one hun- dreds are usually counted into packages of $5,000 each, and the larger denominations into such sized packages as is most convenient to the teller, an accurate record of which is also kept in the vault book. A few of the largest banks, by an arrangement with the Treasury Department, and a large number of country banks, receive directly from Washington all the new currency is- sued to those banks to replace their unfit bills which have been destroyed. This amounts to a very large sum in the course of a year, and adds very materially to the large bank's supply of new bills. The large bank maintains a completely equipped print- ing office which prints upon the bills the signatures of the respective officers and cuts and trims the sheets of bills. Re- cently in one of our largest banks 20,000 bills were pre- pared for circulation in less than two days. A surprisingly large amount of fractional currency is used daily in a large bank, it not being an uncommon oc- currence to pay out $50,000 in a day. This fractional cur- rency is rolled and packed in heavy, flat, tin trays holding one layer of coin, and is stacked up in the vault, each de- 132 THE PRACTICAL WORK OF A BANK nomination by itself, in the same manner as the bills, and a similar record kept in the vault book. Financial affairs are so susceptible to conditions the worlbl over that while to-day the banks may have a surplus supply of cash some untoward happening might start to- morrow a demand which would exhaust the supply of every bank in a fortnight. Such was the situation in 1907 when bills sold at a premium of four dollars per thousand. The value of a large bank was well demonstrated at that time, for during the three months of the currency stringency one of our largest banks collected $13,000,000 in small bills, and besides taking care of their own depositors distributed them from Maine to California where they were the most needed, and that without paying or charging a cent of premium. During certain seasons of the year currency flows into the city banks in large volume, and then at other seasons the tide turns and the flow is all outward. It is the duty of the paying teller to anticipate these seasonable movements of money and to accumulate or distribute his cash as the case may require. It is much easier to relieve a surplus than a shortage. Every department of a large bank is an almost inde- pendent organization. The executive officers, being occu- pied with their own duties, must depend upon the heads of these departments for details; so it is necessary that the paying teller's records shall enable him to answer promptly and accurately any question concerning the bank's cash. The daily routine of the first paying teller may follow somewhat upon these lines : Long before the bank opens for business he has received and filled the requisitions for bills and coin from the other paying tellers, perhaps from $200,- 000 to $400,000 each, according to the day of tlie week or season of the year. Then the requests from correspondent banks are made up and sent to the express companies. In a year of good business the banks in manufacturing centers make heavy demands for currency for payrolls. Between nine and ten o'clock the brokers' clerks bring in their checks for certification, and in an active stock market these cer- tifications will run into the hundreds daily. At ten o'clock THE PAYING TELLER 183 the Sub-Treasury opens for business, and large deposits are made daily, on account of the five per cent, funds of correspondent banks, for shipments of silver, transfer of funds, etc.; and so through the day constant demands are made upon the paying teller until the closing hour, and then if remittances are very large and New York funds are scarce and at a premium he may have to ship $1,000,000 in small bills to a dozen New York correspondents. The duty of caring for such large sums of cash and of anticipating the needs of the future call for good judgment, ability, experience, energy and integrity. 5 FIGURING THE RESERVE One of the features that distinguishes European from American banking methods is the reserve. In Europe the reserve is optional, while in this country it is obligatory. In European countries no reserve is stipulated by law, the banks being left to themselves in this matter, to carry as much or as little as the occasion requires. The Bank of England has had as low as fourteen per cent, and as high as fifty-seven. The Bank of France sometimes has as high as seventy-five per cent., but in the United States the re- serve requirements have never been over twenty-five per cent, for reserve and central reserve cities and less in other places, although banks have carried as high as fifty per cent, at times. There is no uniformity in this country except under the Federal Reserve Act, which specifies the reserve that must be carried by all member banks. State banks and trust companies which are not members are subject to State laws and in these there is no uniformity. The reserve, however, is always larger in the large cities than in country districts, and the reserve on time deposits smaller than on demand deposits. The lawful reserve of a bank consists of its balances with reserve agents and its money holdings of such character as the law stipulates shall constitute reserves. B From an address delivered by E. W. Jones, paying teller of National Shawmut Bank before Boston Chapter, A. I. B., Nov. 19, 1912. 184 THE PRACTICAL WORK OF A BANK The method of computing the reserve to be carried with Federal Reserve Bank by all member banks not located in reserve or central reserve cities is as follows: DEMAND DEPOSITS. 1 Deposits, other than United States Government deposits, payable within thirty days 2 Balances due to banks, other than Federal Re- serve Banks LESS : 3 Balances due from banks, other than Federal Re- serve Banks . $ 4 Checks on other banks in the same place ! 5 Exchanges for clearing house ! Total Deductions (Items 3, 4 and 5) 6 Net balance due to banks 7 TOTAL DEMAND DEPOSITS (Items 1 and 6) TIME DEPOSITS. 8 Savings accounts (subject to not less than thirty days' notice before payment) 9 Certificates of deposit (subject to not less than thirty days' notice before payment) 10 Other deposits payable only after thirty days.. 11 Postal Savings deposits 12 TOTAL TIME DEPOSITS (Items 8, 9, 10 and 11).. Seven per cent, of Demand deposits (Item 7) ... Three per cent, of Time deposits (Item 12) Total reserve to be maintained with Federal Reserve Bank Balance on deposit with Federal Reserve Bank. Excess Deficiency Should the aggregate "due from banks" (Items 3, 4 and 5) exceed the ag- gregate "due to banks," both items must be omitted from the calculation. THE PAYING TELLER 185 PRESENT RESERVE REQUIREMENTS FOR NATIONAL BANKS. The amendments to the Federal Reserve Act, approved June 21, 1917, require all National Banks to keep their re- serves only in the Federal Reserve Banks of their districts, as follows 7 : * COUNTRY BANKS. Seven per cent, on Demand Deposits. Three per cent, on Time Deposits. RESERVE CITY BANKS. Ten per cent, on Demand Deposits. Three per cent. on. Time Deposits. CENTRAL RESERVE CITY BANKS. Thirteen per cent, on Demand Deposits. Three per cent, on Time Deposits. "Demand deposits" within the meaning of the Act comprise ALL DEPOSITS PAYABLE WITHIN THIRTY DAYS. "Time deposits" comprise all deposits which CANNOT BE WITH- DRAWN within thirty days; all "savings accounts" and "certificates of deposit" which are SUBJECT to not less than THIRTY DAYS' NO- TICE, before payment, and all POSTAL SAVINGS DEPOSITS. Government deposits, other than Postal Savings deposits, are not sub- ject to reserve requirements, having been exempted by the provisions of Section 7 of the Act of April 24, 1917. By a ruling of the Comptroller of the Currency as of July 19, 1917, National Banks are no longer required to segregate their money holdings as heretofore, into various classes, and will hereafter report their cash under the following heads : Gold Coin. Silver and Minor Coins. Clearing House Certificates based on specie and currency (Section 5192, U. S. R. S.). Paper Currency. Under the latter head banks will include all Gold Certifi- cates, Silver Certificates, National Bank Notes, Treasury Notes, United States Notes, Federal Reserve Notes, and Federal Reserve Bank Notes. This ruling will materially reduce the labor of tellers in national banks. ?It will thus be seen that National Banks are required to keep but ONE re- serve fund, namely, that in the Federal Reserve Bank, the cash in vault and with correspondent banks being optional. 136 THE PRACTICAL WORK OF A BANK Banking principles are the same, whether it be in a fifty- million-dollar bank or in a modest hundred-thousand-dollar institution in some small hamlet where the cashier is the whole bank, knows everybody and everybody's business, whose credit department is "under his hat" and whose identi- fication book is his knowledge of the people of the town. He may open the bank, build the fire, get the mail, answer letters, attend at the window and the board meetings, and be the whole bank in himself; and the modern bank, with its vast and seemingly complex organization, is but the evolu- tion of this one-man institution. No matter how large or how small a bank may be, the work divides itself into three departments, the executive, the teller's and the accounting. And every detail of the work must come under one of these classifications. If a letter comes in with collection items, it is the teller's work to prove the listing, and the accounting department's function to record and acknowledge. It may not be the money teller or a designated mail teller, but it is teller's work, nevertheless. If new men are to be employed, it is executive work. If a letter of inquiry comes in, it may be part of the accounting function to get the facts for the executive's information. These functions lock and interlock, so that it may seem com- plex in a large bank, and exceedingly simple in a small one ; but the only difference is in the degree and not in the kind of work involved. One man may perform all three func- tions, or only one; but the same work must be done in every bank whether it handles millions or only thousands. These functions, of course, are closely allied, the one be- ing dependent upon the other. The work may be highly de- partmentized as in large city banks, or done by one man who is executive, teller and clerk. But by reason of the in- dependence, to a certain extent of each department, it may be segregated and perform most of its functions alone, being united to the others through the executive and supervising departments. And as one department may be separated so two may be, and the unit system contemplates taking the teller's and the bookkeeper's work and uniting them into a little bank, completely equipped to handle the depositor's business in all things except the granting of loans. As the business of banking grew in popularity and vol- THE PAYING TELLER 187 ume, new ways and methods were devised to meet the in- creasing demands, first, by adding more men to the force, and then by departmentizing the work, so that each man had his special work to do, and all dovetailed together. In- timacy could no longer be the rule and machinery had to take the place of personality, and the personal equation no longer obtained. The most logical development was to di- vide the work of the tellers and bookkeepers into sections, preferably by alphabetical arrangement. By this method the tellers became acquainted only with depositors in their section. For instance, the tellers in the A, B and C window never met the depositors in F, G and H. There was thus lost that personal contact with all depositors that is so de- sirable in banking. As a solution of the difficulty, and to expedite the work, we have the unit system, by which the work of paying and receiving is done at the same window. The author found this system in use in Canada a few years ago, but the credit for introducing it in this country be- longs to Mr. Stoddard Jess, vice-president of the First National Bank of Los Angeles. The depositors are classi- fied according to alphabet, and the work of receiving, pay- ing and bookkeeping for each group is done as a unit. The window work is performed by as many tellers as necessary, and in close proximity are the bookkeepers and statement clerks, so that the whole work of caring for the current needs of a group of depositors is performed in a limited area and each is complete in itself. Numerous banks throughout the country have used this system with satisfaction, particularly the Irving National Bank of New York, the First National Bank of Denver, Colorado, and others. It is especially adapted to banks hav- ing a large counter trade, but does not work so well where the bulk of the transactions are through the clearing-house or by mail. Moreover, the equipment must be arranged for such work, and in building new buildings this system is often introduced. In such a system there must be a controlling account to assemble and prove the figures of all the units, the latter turning over to this head unit, or chief bookkeeper, all ex- cess cash, and obtaining from him all supplies of money. Both deposits and withdrawals being handled at the same window, there is a movement of money both ways, so that 188 THE PRACTICAL WORK OF A BANK only net cash is dealt with. There is, of course, liability of confusion due to handling two kinds of work, which did not obtain under the old system of segregating the work into receiving and paying departments. In a Chicago bank the accounts are divided into groups, but the receiving and paying is done by different men. In this bank each unit is complete in itself, inasmuch as the customer can make deposits, cash checks, and obtain certifi- cations, statements, vouchers and stationery at the same window. The unit tellers' system was devised by the First Na- tional Bank of Los Angeles, CaL, to meet the growing needs of the bank due to the increasing business with de- positors, which was caused by the growth of the bank in popularity, and by taking over other institutions. The prob- lem was to take care of about 15,000 open accounts, requir- ing forty individual ledgers. The result was the bank was divided up into several little banks, as a department store is composed of several smaller stores, each complete up to a certain point, and this is the key to the unit system. Mr. Stoddard Jess, who devised the system tells how he intro- duced the idea in the bank, from which it has spread to sev- eral other banks with like problems. Writing in "The Bankers Magazine," he said: "In the spring of 1905 the First National Bank of Los Angeles had about eight thousand accounts with individual depositors on its books, the business being handled by three receiving and two paying tellers in rather an unsatisfactory manner, for the reason that notwithstanding the fact that the work was divided alphabetically among the tellers, still the number of depositors presenting themselves at each pay- ing teller's window was about four thousand too large a number for the tellers to know personally. Another diffi- culty seemed to be that at certain hours of the day the pay- ing tellers were kept very busy while the receiving tellers had but little to do; again, at other times and particularly just before the closing hour, long lines would form before the receiving tellers' windows, and business in the paying tellers' cages would be slack. Just at this time, and with these conditions existing, it was decreed that the First Na- tional Bank should take over the business of two other na- tional banks in the city, with nearly seven thousand addition- THE PAYING TELLER al accounts. The problem this brought was how to arrange to care for nearly fifteen thousand accounts requiring forty individual ledgers to hold them in a manner to give satis- factory service to the depositors. "At some time in my life I picked up the idea that if anything was too large to handle as an entirety, the proper solution was to reduce it into parts; and recognizing the successful application of this principle in the organization of the modern department store, which is nothing more than an aggregation of small stores and up to a certain point un- der separate control and management, I asked myself the question, Why not divide the bank up into a number of small banks, in alphabetical sub-divisions, each to have its own clientage and each to be under the control of one teller who should receive as well as pay and who should have an assist- ant to do such work as the teller might see fit to turn over to him thus following out the methods of the smallest country bank. "While this plan recommended itself theoretically, and seemed to offer a satisfactory solution of the problem, it was such an innovation in the field of commercial banking that it was with some hesitation that I advanced the idea. Our tellers unanimously pronounced it entirely impracticable for them to both pay and receive. Not believing their position to be well taken, having performed the same duties in a country bank myself, I concluded to make the innovation and give the scheme a trial. To do 'this required a change in the construction of the counter line. I arranged to divide the bank, as it were, into nine small banks one for lady customers exclusively, and eight according to the following sub-divisions of the alphabet: A-B, C-D, E-G, H-K, L-M, N-R, S, T-Z. "In carrying out the plan, eight cages were constructed on one side of the bank, the ladies' department being re- moved for convenience' to another location; each cage of the same size, nine feet long and six feet wide, with two win- dows in each at the counter line, one marked 'Teller' and one 'Assistant,' with a compartment back of each cage four and one-half feet wide by nine feet long, for a bookkeeper to handle the detailed ledger containing the accounts of the depositors whose names commenced with the letters on the front of the cage. 140 THE PRACTICAL WORK OF A BANK "In the working out of the system the amount of cash necessary, and to be adjusted from time to time, is given into the custody of each teller to remain in his possession and under his control, a coin truck being provided for each, which is locked and wheeled into the coin vault at night and taken out each morning by the teller and placed in the cage under the counter in a place provided for it between the teller's and assistant's windows. Both the teller and his assistant handle the cash, ,and at the close of the day's work both are required to count it and initial the teller's sheet which is turned into the auditor. It is made the duty of the auditor to count the cash in the possession of each teller at irregular intervals, not more than six days apart, and turn in a report of his findings to the cashier. "The object of having the bookkeeper immediately be- hind the cage is for the convenience of the teller or his as- sistant in securing information in regard to the condition of the depositor's account. "The objects gained by the system are: "First Retaining the personal equation between the teller and his customer. By dividing the alphabet so that all customers whose names begin with A-B, etc., transact their business at one cage, it makes a clientage for each cage of from 1,500 to 1,700 depositors, a number that it is entire- ly possible for the teller to know personally, giving the teller the advantage of being able to call his customer by name and to become acquainted with the standing of the depositor and the character of his account, allowing the teller to render better and prompter service than would otherwise be possible. "Second The system properly handled prevents the for- mation of long lines before the tellers' windows, thus ex- pediting the transactions of business and preventing con- gestion in the lobby. All customers fall in line in front of the teller's window. The duty of the* assistant is only to do such things as the teller may direct and not take any busi- ness on his own initiative. When a customer presents himself at the teller's window desiring an assortment of change to make up a payroll, or with a long list of items on a deposit slip to check up, transactions that take time and so impede the progress of the line, the teller passes the trans- action over to his assistant and requests the customer to fall THE PAYING TELLER 141 back to the assistant's window and receive his payroll or his pass-book containing the proper credit entry. If the teller uses discretion in .handling the business as indicated, it re- sults in the formation of two lines one a fast-moving line in front of the teller's window, and, when necessary, a slow- moving line at the assistant's window, each customer in which, if kept waiting, keeps somebody else waiting in turn and consequently has no just cause of complaint. "Third The advantage to the customer in allowing him to transact all of his business with one teller at one window. The depositor that desires to cash a check as well as make his deposit appreciates the opportunity of being able to do both at one window rather than to be obliged to work his way up in line to a receiving teller's window and then fall back and work his way up again in a line to the paying teller's window. "After a trial of over a year and a half, all our tellers are convinced that the method is entirely feasible and say that they cannot see how the same volume of business could be handled by the old system of segregating the paying and receiving tellers; the customers express their appreciation of the service rendered, and the management of the bank feel that the innovation has succeeded in solving the difficult problem of handling the large number of accounts in a manner far ahead of all expectations. "To give some idea of the volume of business passing through the bank, I would state that in one day recently we handled in the various departments over twenty-two thousand items." PROVERBS or A PAYING TELLER.* It is more blessed to pay than receive, for at the end of the month thy recompense is greater than his. Moreover in union there is strength: therefore happy is he whose salary is fixed by the board, rather than by the officer. My son, despise not an overage and in the latter day it shall requite thee, for a false balance is an abomination; but a five-dollar shortage is simply . 8 J. S. MacDonnell of the First National Bank of Pasadena, Cal. Paper read before Los Angeles Chapter, American Institute of Banking. 142 THE PRACTICAL WORK OF A BANK The forward man stoppeth payment upon a check; and she that loseth a voucher diggeth a pit. Better is a little cash and a just balance than much cur- rency and a shortage therewith. The foolish woman telephoneth for her balance; but the wise teller seeth her first. He that is short-changed returneth again; but the one with the extra ten tarrieth not. The cashier hath forbidden an overdraft and pay-day is afar off; but he knoweth not that the employee's check is in the cash. The customer layeth wait and the messenger lurketh privily to destroy thee without a cause ; but a good endorse- ment is a strong tower. Who hath woes, who hath sorrow, who hath redness of eyes, even he that cometh upon a counter error two days afterward. Verily he seeketh in vain for help. Seest thou thy neighbor diligent in checking over the day's work? Say not, "Hast thou a difference?" Even a fool, when he holdeth his peace, is counted wise. Mayhap he practiceth penmanship or seeketh some reason why his salary has been raised. As a man that taketh away a garment in winter, so is he that singeth songs when thou hast a difference. He that whistleth over his work and he that robbeth a dead body are on their way to the same place. The Treasury sendeth new currency and the clerk cut- teth it asunder; but the naughty person winketh with his eyes and sayeth, "Aha, aha, thou art making money fast." Of the surety, one generation passeth away and another gen- eration cometh; but that joke abideth forever. Seest thou a man getting a check book for his wife? Jest not with him, lest he tell thee that hoary one regarding her overdraft and all the stubs she had remaining. This have I observed one man hideth his money in his bosom and another putteth it in his trousers' pocket ; but the stout woman hath them skinned to death for a safe place. I had rather be a doorkeeper in the house of the Lord than count the collections therefrom on Monday. Six things do I hate, yea, seven are an abomination unto me; a stop payment, a go-back, an overdraft, he that coughs in thy face, -he that dabbleth in the cash, the deaf man that THE PAYING TELLER 148 cannot be identified and one from just beyond the Needles, who speaketh as a wise man of the East. Hearest thou one that saith, "Lo, this is done in the East," or "Lo, it was never on this wise in the East." Pass not nigh unto him, for a hayseed lurketh in his hair, neither hath he at any time been a day's journey from his own dunghill. One woman leaveth her glasses at home and another is nervous in the morning; but she that signeth her name with- out making excuse, the same is not a bride. Happy is the woman that findeth new currency, for the merchandise of it is better than the merchandise of silver. He that bringeth a "go-back" in season receiveth fine gold, but a slothful messenger receiveth a fine without gold. The nervous man rusheth in haste to the wicket, he snatcheth the coin and hasteth away; also he treadeth heav- ily upon the feet of the innocent; but the prudent one catch- eth the same car, neither forgetting his umbrella. Once have I observed this, yea, twice have I known it; for the simple one sayeth, "It is all one, pay me silver or gold, large money or small, it matters not, seeing it is soon spent." Possess thy soul and wait upon him patiently, for he will not depart until thou hast changed all his money seven fold. He that introduceth a friend and will not endorse for him, hath not understanding, and to argue with him is like casting pearls before swine. The foolish one saith, "Lo, I have covenanted with a gold piece for a newspaper, and with a five-dollar piece have I purchased a ride on a street car, therefore pay me in cur- rency, lest my riches depart from me for that which is naught." My son, refrain thyself from him, for he never had more than four dollars. My son, put not thy trust in perfume. Follow hard after her if thou wilt, but look up her check first. THE ACID TEST FOR COINS Formulas to make the acids for the tests of gold and silver are as follows : For gold : Six and one-half drams nitric acid, one-quarter dram of hydrochloric acid and five drams of water. 144 THE PRACTICAL WORK OF A BANK For silver: Twenty- four grains silver nitrate, thirty drops of nitric acid and one ounce of water. If after a careful examination of the coin the first sus- picion is not allayed, the acid test may be used. If it does not affect the coin, then the metal is genuine, but if it turns it black, the coin is counterfeit. LEGAL-TENDER AND REDEMPTION QUALITIES OF UNITED STATES MONEY The money in circulation in the United States consists of gold, silver, nickel, and bronze coins, certificates representing coin, and notes, all issued by the Government, and notes issued through the Federal reserve banks and national banks under Government regulations. The gold dollar is the stand- ard unit of value. Both gold coins and standard silver dol- lars are standard money. Lawful money is a term used to denote the legal-tender quality of money and first originated in the act of February 25, 1862. authorizing the issue of United States notes. Legal tender is a quality given a cir- culating medium by Congress, and possessing this quality it becomes lawful money. All forms of money do not possess full legal-tender qualities, yet each kind has attributes as to give it currency, and all forms are convertible into standard money. The Secretary of the Treasury is required to main- tain the parity of all kinds of money with the standard unit of value, and if necessary to maintain such parity he is author- ized to borrow or buy gold. The status of each kind of money is as follows : 1. Gold coin is legal tender at its nominal or face value in payment of all debts, public and private, when the coin is not below the standard weight and limit of tolerance pre- scribed by law, and when below such standard weight and limit of tolerance it is legal tender in proportion to its weight. Being standard money, gold coins are not redeemable. . 2. Gold certificates are now legal tender, and are receiv- able for all public dues and when so received may be reissued, Note: There are several protecting devices on the market, some cutting the figures out of the paper, others stamping the words "not over Dollars" into the fibre of the paper. Other devices called "check writers" impress the exact amount in words into the paper on the line provided for writing the words. The author leaves it to the reader's judgment as to the mechanical qualities of each. They are all based on the one idea of impregnating the paper with an acid-proof ink in such manner as to destroy the surface of the paper and prevent alteration. THE PAYING TELLER 144a and they may be held by Federal reserve and national banks as lawful reserve. Gold certificates are receipts for actual deposits of gold in the Treasury and are redeemable in gold coin by the Treasurer and all assistant treasurers of the United States. 3. Standard silver dollars are legal tender at their nom- inal or face value in payment of all debts, public and private, without regard to the amount, except where otherwise ex- pressly stipulated in the contract. Being standard money, standard silver dollars are not redeemable. 4. Silver certficates are not legal tender, but like gold certificates they are receivable for all public dues and when so received may be reissued, and they may be held by Federal reserve and national banks as lawful reserve. Silver certifi- cates are receipts for actual deposits of standard silver dollars in the Treasury and are redeemable in such dollars only. 5. Treasury notes of the act of July 14, 1890, are legal tender for all debts, public and private, except where other- wise expressly stipulated in the contract. They are redeem- able in United States gold coin or in standard silver dollars at the option of the holder by the Treasurer and all assistant treasurers of the United States. When received by the Treasurer they are canceled and replaced by silver certificates. 6. United States notes (also known as greenbacks and legal tenders) are legal tender for all debts, public and pri- vate, except duties on imports and interest on the public debt. Upon the resumption of specie payments January 1, 1879, these notes were accepted in payment of customs dues and have been freely received on that account since though the law has not been changed. They are redeemable in United States gold coin in any amount by the Treasurer or any assist- ant treasurer of the United States, and when received are reissued. 7. Federal reserve notes are not legal tender, but are re- ceivable by the Government for all public dues and are receiv- able on all accounts by all Federal reserve banks, national banks and other banks members of the Federal Reserve Sys- tem. They are redeemable in gold coin of the United States by the Treasurer and in gold or lawful money by any Federal reserve bank. 8. Subsidiary silver coins are legal tender for amounts not exceeding $10 in any one payment. They may be pre- sented in sums or multiples of $20 to the Treasurer or any 10 144b THE PRACTICAL WORK OF A BANK assistant Treasurer of the United States for redemption or exchange into lawful money. 9. Minor coins of nickel and bronze are legal tender to the extent of 25 cents. They may be presented for redemp- tion or exchange under the same conditions as are provided for subsidiary coins. 10. National bank notes are not legal tender, but are re- ceivable for all public dues except duties on imports, and may be paid out by the Government for all purposes except inter- est on the public debt and for redemption of national bank notes. They are redeemable in lawful money of the United States by the Treasurer, but not by the assistant treasurers, and are also redeemable at the bank of issue. 11. Federal reserve bank notes are identical in all their attributes with national bank notes. Foreign coins are not legal tender. Section 3584 of the Revised Statutes of the United States provides that no for- eign coin shall be a legal tender in the United States. "Coin" obligations of the Government are redeemed in gold coin when gold is demanded and in silver when silver is demanded. CHAPTER VII. CLEARINGS AND CLEARING-HOUSES The settlements which a bank makes with its customers are riot in the main in cash over the counter, but through the medium of bank clearing machinery which offsets the debts of one bank against the debts of another in total, whatever difference there exists being paid in money. It is apparent that if a bank were to assemble all the checks it receives in the course of the day on every other bank, and present them over the various counters and receive payment in cash, it would not only require the use of a large amount of money, but consume time, involve risk and prove highly unsatisfactory to all concerned. The most likely substitute would be for the banks to exchange checks, and adjust the differences. If there were not many banks in the same city the interchange of checks in this manner might be satisfac- tory, but it would be cumbersome: and if messengers were to be sent out to do this work, they would no doubt soon evolve a plan whereby they might meet at some central point and make their exchanges. The clearing-house has been defined as "an institution maintained by an association of banks, acting under self- governing rules, for the purpose of facilitating concerted action among its members in adjusting accounts against each other with the greatest ease and at a minimum cost, and to strengthen the credit of all members by mutual watchful- ness and assistance in times of stringency." The clearing-house is not, as a rule, finely housed as is the New York Clearing-House, whose palace of marble and bronze is one of the ornaments of lower New York, but it is more often a simple organization of banks, meeting in a convenient place from time to time, and making the daily settlements through a bank selected for that purpose. It is the greatest embodiment of the "get-together" idea in banking circles. Through it the use of banking credit reaches its highest perfection and cash is reduced to its proper place in the economic scheme the settler of balances. The New York Clearing-House has settled exchanges 145 146 THE PRACTICAL WORK OF A BANK amounting to $3,570,157,362,589.60 in sixty-seven years, with but $207,269,155,417.66. ORIGIN or THE CLEARING-HOUSE The clearing-house, although originally intended as a simple arrangement to assist members in making a daily exchange of checks and settlement of balances, has grad* ually become the effective medium of cooperation among banks in all matters of mutual interest and in matters affect- ing the financial well-being of the community served. In the development of the movement, new functions have been added and each step has been taken with the idea of protect- ing its members and insuring banking and business stability. In each financial crisis clearing-houses have taken the initia- tive in suggesting and causing the members to adopt reme- dial measures in the interest of the banks and the general public. The clearing principle dates back to about 1775, al- though before that time it is possible men balanced their affairs by an exchange of credit. The clearing-houses of old were the great periodical fairs, whither went merchants, great and small, bringing their "tallies" to settle their mu- tual indebtedness. "Justiciaries" were set over the fairs to hear and determine all commercial disputes, and to prove the "tallies" according to the commercial law, if the plaintiff desired this. These "tallies" were notched sticks of hazel- wood, split down the center, one part going to the debtor and the other to the creditor. The most famous of these fairs in England was that of St. Giles, while probably the most famous in all Europe were those of Champagne and Brie in France, to which went merchants and bankers from all countries. Exchange booths were established and debts and credits were cleared to enormous amounts without the aid of a single coin. 1 Claim is made that as early as the fifteenth century the merchants of Naples had an arrangement for the clearing of claims. About 1773, in London, the collecting clerks con- nected with banking houses arranged, for their own con- venience, to meet at an agreed point to exchange checks and A. Mitchell Inness, "What is Money." CLEARINGS AND CLEARING-HOUSES 147 items. The merchants and bankers recognized the saving of time and expense in having a convenient place to make ex- changes and provided a building for the purpose. In this, the first clearing-house, the members had not only the advan- tage of a common meeting place, but they were able to make use of the clearing principle, which is the offsetting of debts and credits and the settlement of balances. This system was soon followed in continental countries. In 1858, the London Clearing-House established a depart- ment for the collection of country checks. The problem in the European countries is somewhat different from ours. There the banking is highly centralized. In England, for instance, there are but few banks, but the banks have hun- dreds of branches scattered throughout the country, the activities, however, centering in London. Each bank is real- ly a clearing-house in itself, at least of credit and trade in- formation. The London Clearing-House has but few members, but the banks with their numerous branches represent a large portion of the banking power of England. The clearing- house itself is a wonderful institution, existing primarily for the exchange of checks. There are two clearings a day, balances being settled by drafts on the Bank of England. In the United States the first suggestion in regard to clearing-houses was made by Albert Gallatin in 1831. In 1853 the bank messengers in New York were in the habit of meeting at a point in Wall Street to exchange checks and notes. As in the case of the London clerks, this ar- rangement was for convenience. The necessity was recog- nized by the bankers and on November 11, 1853, represen- tatives of fifty-two banks met and adopted a plan for the daily clearing of checks and settlement of balances and a building was provided for the purpose. The action of the New York bankers was followed in Boston in 1856, Phila- delphia in 1858, Chicago 1865, St. Louis 1868 and at other points, until to-day there are about one hundred and eighty-two regularly organized clearing-house associations. In about fifty other localities clearing arrangements exist. How effectively the clearing-house obviates the use of money will be seen from the fact that a Boston bank sent to the Boston Clearing-House checks to the amount of $11,- 000,000 and had a debit balance of only $2,800.49. At an- 148 THE PRACTICAL WORK OF A BANK other time it settled a debit against it of $6,180,000 with $167.31. The largest transactions during any one day in 1919 in the New York Clearing House were $1,384,614,- 055.95 December 16, 1919, the largest on record. The small- est exchanges were those of April 3, 1920, $473,298,385.51. The total clearings made during the 67 years the New York Clearing House has been in operation aggregate the enor- mous sum of $3,570,157,362,589.60. The largest average daily clearings were in 1920 $830,060,031.13. The largest debit balance paid by any one institution to the New York Clearing-House was for $37,661,685.00 on October 3, 1905. The largest balance received by any member from the clear- ing-house was for $34,086,068.54 on January 23, 1914. The smallest balance ever settled at the clearing-house was for $0.01 on September 22, 1862. Seven millions on a credit sheet have been settled through the clearing-house for ten cents. The Boston City Bank has settled a day's clearings without having any balance, but these instances are rare. THE LARGEST CHECK EVER PAID* (See footnote page 150.) The largest check on record was drawn by Kuhn, Loeb & Company on the National Bank of Commerce in payment for $49,000,000 of four and one-half per cent, bonds re- cently sold to them by the Pennsylvania Railroad. The check, which included accrued interest, was for $49,- 098,000. Two Pennsylvania officials came over from Phila- delphia to receive it, and deposited it in the National Bank of Commerce to the credit of the railroad. The principal transaction thus involved no actual money payment, but was accomplished by a book entry, the Nation- al Bank of Commerce charging the amount to one depositor and crediting it to the other. For this reason there was no enormous balances at the clearing-house on account of this bond sale, as there was when payment was made by Kuhn, Loeb & Company and W. A. Read & Company for $51,000,000 bonds of the State of New York a year ago, when $34,000,000 in cash was taken away in one day by the Bank of the Manhattan Company. New York "Times," February 18, 1915. CLEARINGS AND CLEARING-HOUSES 149 Yesterday was not only the time set for Kuhn, Loeb & Company to pay for the bonds, but also for payment to be made to them by the individuals, insurance companies, sav- ings banks, estates, or others who had subscribed for them when publicly offered by the bankers. These subscribers paid five per cent, of the amount subscribed for about two weeks ago and the balance due on the bonds awarded to them yesterday. The issue was oversubscribed five times and in general the bidders got about eighteen per cent, of the amounts they sought, so that the five per cent, payment on their bids amounted to fully twenty-five per cent, of the total pay- ments to be made, and the balances paid yesterday were less than seventy-five per cent. GOES BACK TO ORIGINAL BANKS In the aggregate these payments, including the first five per cent., were more than $49,000,000. The payments were, therefore, $50,715,000 and accrued interest. Most of these payments, including the checks received yesterday, were de- posited by Kuhn, Loeb & Company in the National Bank of Commerce and constituted the bulk of the credit against which Kuhn, Loeb & Company drew the $49,000,000 check. The Pennsylvania Railroad having deposited the check and established a credit of that amount in the bank, next drew a series of checks to distribute the amount among a number of banks. The usual practice in these transactions is to distribute the proceeds among the banks on which the ultimate pur- chasers of the bonds drew their checks. This is done, of course, only as to substantial amounts, and other variations generally enter into the shifting of credits, but if the Penn- sylvania adopted this course, and if it were carried out in every detail the net result would be that the Bank of Com- merce would have no more and no less deposits on account of the bond sale at the end of the day than at the beginning, except for the profits of the sale. This also disregards the fact that the Bank of Commerce may have participated as a member of the syndicate and simply considers it as the in- termediary through which the payments were effected. In that case the checks drawn by the purchasers of the bonds on various institutions would be offset in the clearings 160 THE PRACTICAL WORK OF A BANK to-day by checks drawn on the Bank of Commerce and de- posited in the various institutions, just as the big check was offset by its own deposit. The whole process would result in each institution charging the accounts of its depositors who were purchasers with the amounts of their checks and cred- iting the Pennsylvania Railroad with the same aggregate amount. While it is not supposed that the transactions were arranged with this exactitude, it is believed that rough- ly this is what took place, if the Pennsylvania followed the usual practice. (See addenda below.) VAUIETIES OF CLEARING-HOUSES Clearing-houses are of two kinds: Clearing-houses and clearing and supervision houses. The first kind merely clears the checks and collects and settles the balances in one way or another ; the others not only clear the checks, but supervise the banks through examiners, fix the rates of exchange (see chapter eleven), interest paid on balances, and promulgate other stringent rules that must be adhered to under severe penalties. They are further classified into those which settle their balances in cash or its equivalent the clearing-house certificate, or due bill, and those which settle their differences by draft. The term "clearing-house" has reference to the associa- tion more than to the institution, although it is easier to con- ceive of a "house" being a finely adorned palace than a mere meeting place. Trade being to a considerable extent local, it is but nat- ural that a large part of the checks received through the re- ceiving teller's window should be on banks in the neighbor- Addendum to second edition On March 16, 1916, a check for $43,538,131.11, drawn to the order of the Guar- anty Trust Company of New York, passed through the New York Clearing-House. As far as can be learned, this is the largest bank check that has ever passed through a clearing-house in the United States. This check was drawn in payment for the issue of Midvale Steel and Ordnance Company five per cent, convertible bonds, which were recently sold by the syndi- cate headed by Lee, Higginson & Co., the Guaranty Trust Company and the National City Bank. (The Bankers Magazine, April, 1916.) Addendum to third edition The largest check which has ever passed through the New York Clearing House so far as the records show was paid by the Liberty National Bank during the week of August 11, 1917, amounting to $96,111,111.11, drawn by Messrs. J. P. Morgan & Company, to the order of the Agents of the Bank of Montreal for the credit of the Minister of Finance and Receiver-General of Canada. CLEARINGS AND CLEARING-HOUSES 151 hood, and these are collected through the clearing-house to- gether with items received by the bank from its corre- spondents for collection. While the methods of settling balances differ in localities, they are all based on the one idea to pay only the balance. Not only are checks paid thus, but drafts, notes falling due, certificates and cash in- struments in general are also cleared by having them prop- erly accepted and made payable through the clearings. The territory served by the clearing-house is usually local, being confined to the limits of a city; but a few, no- tably the Boston and the Kansas City Clearing-Houses, cover a wide territory and act as the clearing medium for hundreds of banks. (See chapter eleven.) CLEARING-HOUSE TERMS AND INSTRUMENTS It would naturally be inferred that the term "payable through the clearing-house" meant physically passing the instrument through the building, while in practice it merely means to pass through a process of "clearing." And this "clearing" simply means that the checks of one bank are settled by an exchange of checks on the other. Checks are often drawn payable through the clearing-house only, and this in times of stress obviates the use of money over the bank's counters, and prevents the crowd from gathering in the lobby. Such restrictions were largely used in 1907. To "clear" a check is to take it to the clearing-house, clearing- room or bank, and there exchange it for another check, pay- ing the difference in cash. "Clearing-house exchanges" means simply the checks and the amount thereof on hand, which will be offered for "clearing" through the clearing- house. The "clearing-house balance" means, in the nomen- clature of banking, the amount that the bank owes or has due to it from the members of the clearing-house. "Clear- ing-house certificates" are certificates issued by the clearing- house for gold deposited in its vaults. These certificates are essentially cash, and so regarded in settlements and in figuring the reserve. They are issued in large denominations $5,000 and $10,000 and are good only between banks. About one-quarter of the 182 clearing-houses of the country use these certificates, about forty per cent, settling by draft on other cities. The "clearing-house due bill" is given for items not 152 THE PRACTICAL WORK OF A BANK cleared for some reason, or given in lieu of certification, as a cashier's check, or for use in payment of notes or other obligations where cash is demanded. They are also used to pay balances under $5,000. They are payable only through the clearing-house the day after issue. These due bills are deposited by the manager to his credit in a member bank and checked against in favor of creditor banks. "Clearing-house loan certificates" are used in time of financial stringency to dispense with the use of cash. They were first issued in 1860, and in 1861, 1863, 1884, 1890, 1907 and 1914. They are secured by deposit of stocks and bonds and commercial paper and release that much cash for other purposes. High interest is charged the bank obtaining them and they are, therefore, retired as soon as their usefulness is over. In some places they have been issued in denomina- tions small enough to circulate as money, and were to all intents and purposes an asset currency. In New York they have never passed current except between banks. On ac- count of the interest that follows, banks will riot allow them to remain out longer than the conditions warrant. In times of panic the "loan committee" performs a very important function in its morning meetings, when it passes upon the collateral offered as security for these clearing-house cer- tificates, the usual margin being twenty-five per cent. The collateral is pledged with the clearing-house with power to collect and sell if the certificates are not paid. The collat- eral consists of stocks, bonds and commercial paper, the lat- ter predominating. In order to understand the magnitude of the work that leads up to the morning's clearings, we shall need to go back to the receiving teller's department. A pen picture of this work is here presented as typical of a large New York bank. At this desk the half-dozen tellers are busily engaged all day receiving the deposits. These deposits range from petty sums up to millions. To handle the man}' millions of dollars deposited each day requires not only a large force of men, but necessitates a division of the work, so that a proof can be made within a reasonable time. In this particular bank the receiving teller has sub-divided his department into three parts the main department, of which he takes immediate charge; the special department, in charge of an assistant, and the annex, in charge of another assistant. Up to two CLEARINGS AND CLEARING-HOUSES 158 o'clock, as fast as the teller receives the deposits, they are turned over to the special department. This special depart- ment has a force of ten to twelve experienced men. Four checkers are the first to receive the deposits. Each man takes a deposit, checks it, putting on the deposit slip the clearing- house number of the bank on which the check is drawn, the letter "C" if it is a cash item, or "S. D." if it is a sight draft. This is done so that in case any question comes up re- lating to the deposit or the check, the item or items could easily be located. After the checking process the items are given to two men who put the "Paid" stamp on them. When the stampers turn the checks over to the sorters, it is the duty of this force to sort the checks into the boxes marked with the names of the banks on which the checks are drawn. This work finished, the machine men come into play. Each man has a number of boxes (representing so many banks) assigned to him, and his duty is to list the checks drawn on each bank. For instance, he has checks drawn on No. 8 (National City Bank). He lists them, puts them aside and continues this operation with the numerous checks until the time arrives for the closing of this department, which is two o'clock, when they make their proof. Then the annex is called into action, and what is prob- ably the busiest part of the receiving teller's day begins, for it is at this time that the brokers and trust companies hand in their deposits. There are times when it is a very ordinary occurrence for deposit tickets yards in length to be received, and upon the annex devolves the duty of getting them out of the way. A large force takes hold of this work, and at half -past four they are ready to strike a proof. While the annex is working its way out, the main di- vision is busily engaged in taking care of the deposits that go to the credit of individual depositors. Each sub-division makes its own credits, and, after the checks are all taken care of, they make a separate proof. If all three divisions prove, the receiving teller and his active men are disengaged until the following day. We now have the receiving teller proved, and having charged the total of his exchanges over to the night force. This force is com- posed of fourteen men, who arrive at the bank at midnight. Along with this force comes the mail, with its out-of-town checks and drafts that go to make up the credits of the hun- 154 THE PRACTICAL WORK OF A BANK dreds of banks and trust companies that do business with this institution. The night force, using the letters as credits, handle the checks in about the same manner as described in the receiv- ing teller's work. A second mail is received at three A. M. and again another one at seven o'clock. If, by chance, the night force has not proved when eight o'clock arrives, they go, the difference being turned over to the main department. This department now takes hold of the machinery of the bank. For general activity the mail department is in a class by itself. Here is where the reserves of the bank are called into action. One hundred and twenty-five men are at the disposal of a clear-headed individual, upon whom rests the responsibility of getting in shape to be cleared the many millions of dollars in checks that must be ready at 9.45* At this time the captain is given control. He places every man at his station. Each one knows what his particular duties are, and when 9.30 arrives and the captain orders "all in," the general proof begins. The total of the slips are listed on the envelopes printed with the name of the bank upon which the checks are drawn, and the totals of the envelopes are called off, being listed by two men ; one taking down the amount in the long book and the other on the clearing-house sheet. If the totals of the long book and the sheet prove, the settling clerk goes to the clearing-house. The clearing clerk, with his assistants, now loses no time in getting the boxes, containing probably forty-five to fifty thousand checks, and representing millions in money, also to the clearing-house. 4 THE CLEARING PROCESS The clearing process is simple : All checks to go through the clearing-house are sorted into batches representing the various banks and those for whom they clear. The amounts are carried to a "clearing-house settling sheet," which con- tains the names of all the clearing-house members. The amount set opposite each name is the total of the checks en- closed in an envelope, and which the presenting bank will *Three clearings are now made daily in New York: 9, 10 and 3 o'clock, the last for the purpose of clearing the return checks of the earlier clearings. There is no proof struck at the 9 o'clock clearing, the object being to get an early start The amounts cleared at 9 o'clock are charged against each other through the 10 o'clock clearing (March, 1919). ** i (<._.. jas been regularly presented at your office 5 o o for payment. It will be held by Collection Jgpa^megi until 3 o'clock this day. WM. C. EDWARDS, Treasurer. o w New York by. KOTICE LEFT BY MESSENGER WHEN DRAWEE IS NOT FOUND another bank is in existence in the same town, and not know- ing the law involve his bank in loss. He can make no better use of his spare time than to study case law ; for what happened in one bank may happen in another; and case law being simply the result of errors made, he can avoid the same errors by knowing the result of other like errors. By being a thoughtful collection man he can not only make money for his bank, but save money for it, and it is as important to avoid losses as it is to make profits. A LITTIJE or THE LAW OF COLLECTIONS The collection of a note is governed by law so strict that careful attention must be given the timing, the presentation, the protest and the notice of protest, and the form of money that is accepted in payment. The law does not recognize ^ DO HOT PROTCiT THIS 1TTN. Plan main this slip from tkt item before it is pnstnttd for payminl. If not paid,- return t enc, with rcuoo, to THE CLEARFIELD NATIONAL BANK. CLEARFIELO. PA. TIME DRAFT "NO PROTEST" 170 THE PRACTICAL WORK OF A BANK payment in any other form than cash, but the custom among the New York banks is to accept a certified check on a clearing-house bank drawn to the order of the collecting bank; or if drawn to a third party and duly indorsed, the indorsement must be known to the bank which accepts it. Briefly stated, the law in regard to presentation is that a note must be presented at the place where it is made pay- able, if such a place is named. If not stated, at the maker's place of business, if known, or at his residence or at any place where he may be found on the day of maturity. Bank- ing customs make the hours from 10 A. M. to 3 P. M., but it is often very convenient to fall back on the law which permits the presentation at a later hour when the occasion requires. In protesting a note which bears an indorser it is absolutely necessary that it be presented by a notary pub- lic of record on the day the note falls due, and that notices of such protest be sent to all parties concerned and such no- tices must be mailed by an early mail on the day following. This protest holds all the indorsers in turn, but it is not necessary to protest to hold the maker, although it is best to have a note protested, as it is a sworn statement beyond dispute in case of a suit that the note was presented and refused at the place of payment on the due date. By the Negotiable Instruments Law in force in forty - six States and territories, protest is necessary only on for- eign bills of exchange checks, notes and bills drawn in one State and payable in another; but as a common banking practice protest is made of all instruments that are not paid. The purpose of protest is to hold the indorsers, for un- less protest is properly made the indorsers are discharged. And when properly protested the paper needs no other evi- dence in court as to having been presented for payment. To be on the safe side some banks protest all paper that is un- paid, unless specifically instructed to the contrary. But be- fore protest is made, all due effort should be made to reach the party on whom drawn and be certain that payment has been refused before resorting to protest. Protest of checks is, of course, a common matter, and presentment to the bank drawn on and refusal to pay is all that is necessary to make protest warranted. COLLECTIONS AND THE MESSENGER 171 SENDING COLLECTIONS DIRECTLY TO DRAWEE BANKS 1 1. Collecting Bank Guilty of Negligence in Sending Check to Drawee. In the collection of checks deposited with it a bank frequently finds it convenient, if not neces- sary, to send them directly to the banks on which they are drawn. The collecting bank may have no correspondent at the place where the drawee of a check, deposited with it for collection, is located. The drawee bank may, in fact, be the only bank at that place. The collection of a check through the medium of intermediate or correspondent banks might involve sending the check over a circuitous course, which, in addition to consuming time might actually jeopardize the chances of successful collection. Exchange charges some- times influence the bank as to the manner in which the col- lection is conducted. These and other considerations, in the eyes of the banker, are often deemed sufficient reason for col- lecting a check, placed with him by a depositor, by sending the check directly to the drawee bank. There are undoubtedly many instances in which a bank- er would consider any other method of collection opposed to good banking. But, in the making of such collections, the banker must take into consideration the fact that the courts have evolved certain rules of law, by which to deter- mine who shall bear the loss, when a loss occurs in the col- lection of a check. And these rules sometimes conflict with the banker's idea of the proper way to collect a check. The courts lay down the rule that, where a bank receives a check for collection, and through its negligence the check is not collected, it is responsible for the amount of the loss to the owner of the check. No one can doubt the sound- ness of this doctrine. The courts go further and declare that the sending of a check by a collecting bank directly to the bank on which it is drawn amounts to negligence and renders the collecting bank liable to its depositor in the event that the collection is not made. Bankers may doubt the fairness, as well as the soundness, of this doctrine. But the rule is so well established in this country that time spent in doubting it in any manner is wasted. With the exception of New York, every State in which the question has arisen has held that the sending of a check iJohn Edson Brady in the April, 1914, Banking Law Journal. 172 THE PRACTICAL WORK OF A BANK directly to the drawee bank is negligence on the part of the collecting bank. As the courts see the situation, the loss in such a case usually occurs because the drawee bank sends its own paper in payment of the check and fails before the Please advise payment or non-pay- ment by telegrapfy, as soon, as paid or refused to Bank of Montclair, MONTCLA1R. N. J. ITEM FOR COLLECTION WITH INSTRUCTIONS TO "WIRE NON-PAYMENT" same is presented for payment; if the check had been sent to a correspondent bank, it might have been presented be- fore the failure of the drawee, paid in cash, and remitted for by the correspondent. It matters not that loss might also occur, even by making the collection through a correspond- ent; this does not enter into the question. The rule, which makes it negligent for a collecting bank to send a check directly to the bank on which it is drawn, is generally placed on the ground that, in so doing, the collect- ing bank makes the debtor an agent for the purpose of col- lecting the debt. The reason is expressed as follows in the case of German National Bank v. Burns, 12 Colo. 539: "Even if we can conceive of such an anomaly as one bank acting as the agent of another to make a collection against itself, it must be apparent that the selection of such an agent is not sanc- tioned by businesslike prudence and discretion. How can the debtor be the proper agent of the creditor in the very matter of collecting the debt? His interests are all adverse to those of the principal. If the debtor is embarrassed, there is the temptation to dela)^; if wanting in integrity, there is the opportunity to destroy and deny the evidence of the indebtedness." COLLECTIONS AND THE MESSENGER 178 The following cases support the rule that it is negligence for a bank to send a check, entrusted to it for collection, di- rectly to the drawee and indicate how firmly the rule is fixed: Lowenstein v. Bresler, 109 Ala. 326; German Na- tional Bank v. Burns, 12 Colo. 539; Drovers' National Bank v. Anglo-American Packing and Provisions Com- pany, 117 111. 100; Anderson v. Rodgers, 53 Kans. 542; First National Bank v. Citizens' Savings Bank, 123 Mich. 336; Minneapolis Sash and Door Company v. Metropolitan Bank, 76 Minn. 136; American Exchange National Bank v. Metropolitan National Bank, 71 Mo. App. 451 ; Western Wheeled Scraper Company v. Sadilek, 50 Neb. 105; Na- tional Bank v. Johnson, 6 N. D. 180; Wagner v. Crook, 167 Pa. 259; Hazlett v. Commercial National Bank, 132 Pa. 118; Harvey v. Girard National Bank, 119 Pa. 212; Merchants' National Bank v. Goodman, 109 Pa. 422 ; Givan v. Bank of Alexandria, Tenn., 52 S. W. Rep. 923; Win- chester Milling Company v. Bank of Winchester, 120 Tenn. 225; First National Bank v. City National Bank, 12 Tex. Civ. App. 318; First National Bank v. Fourth National Bank, 56 Fed. Rep. 967; Farwell v. Curtis, 7 Biss. 160, Fed. Cas. No. 4, 690; Jefferson County Savings Bank v. Hendrix, 147 Ala. 670, 1 L. R. A., N. S., 246; Farley Na- tional Bank v. Pollak & Bernheimer, 145 Ala. 321 ; Carson v. Fincher, 129 Mich. 687; Bank of Rocky Mount v. Floyd, 142 N. C. 187. In some of the cases the bank in which a check is de- NO PROTEST. Kindly THE FARMERS NATIONAL BANK, Rome, N. Y. PEOMI3SOEY NOTE, IK PROCESS OF COLLECTION 174 THE PRACTICAL WORK OF A BANK posited for collection escapes liability to the depositor for a loss resulting from sending the check directly to the drawee bank, by reason of another bank intervening between it and the drawee. That is, the initial bank, instead of mailing the check to the drawee, forwards it to a suitable correspondent bank, which in turn sends it to the drawee. The corre- spondent bank is then held to be the agent of the depositor and not of the forwarding bank, and the latter is not re- sponsible for the default of the correspondent. Givan v. Bank of Alexandria, Tenn., 52 S. W. Rep. 923, is a case of this kind. The plaintiff deposited in the defendant bank two checks on the bank of A. Byram & Company, of Water- town, Tenn. On the same day the defendant bank for- warded the checks to the First National Bank at Nash- ville. This bank sent the checks directly to the drawee bank, but they were never paid, because of the drawee's suspen- sion. Although the court stated that the Nashville bank was guilty of negligence in sending the checks directly to the drawee, it was held that the defendant bank was not liable for that default. The court said: "Assuming, then, that un- der the rules stated the check may be sent to the place of payment through intermediate banks, it follows, under the rule, that the initial bank discharges its duty to the person who deposits the check for collection if such intermediate bank or banks are suitable persons for the performance of the business; and, in event such proper selections are made, such intermediate bank or banks, down to the last one in the chain, become the agents of the owner of the paper, and re- sponsible to him as such." Many of the States hold, contrary to the rule here ex- pressed, that the initial bank is liable to its depositor for losses occurring through the negligence or default of a cor- respondent bank, to which a check is sent for collection. 2. The Rule in New York. The State of New York stands alone in this country in its opposition to the general rule, under which a bank is deemed guilty of negligence in sending a check directly to the bank on which it is drawn. But even in New York there is no decision of the highest court, deciding the question squarely. The case of Mclntosh v. Tyler, 47 Hun (N. Y.) 99, was an action by the payee of a check against its drawers. COLLECTIONS AND THE MESSENGER 175 The check was deposited by the plaintiff in a bank for col- lection, and the bank in which it was so deposited sent it directly to the bank on which it was drawn. The drawee bank charged the check to the drawer's account and stamped it paid. A draft on New York for the amount of the check was filled out, but was not signed and was subsequently de- stroyed. At the close of the day on which the drawee bank received the check it suspended business. It was held that the drawer was liable to the payee on the check, the court saying: "The fact that a check mailed by the holder to the drawee for payment is not paid, when it would have been had it been presented at the payee's counter, is not, it seems, in this State, a defense in favor of the drawer, though by the transaction the drawer lost his deposit, though it has been held otherwise." While this was an action against the drawer of the check, brought by the payee, and not by the holder against a bank in which the check was deposited for collection, it has been generally accepted as an authority for the proposition that a bank in which a check is deposited for collection is not guilty of negligence in forwarding the check directly to the drawee for payment, and is not liable to the holder, by whom the check was deposited, for a loss occurring therefrom. This New York decision is based on the authority of two earlier New York cases, Indig v. National City Bank, 80 N. Y. 100, and Briggs v. Central National Bank, 89 N. Y. 182. Referring to these cases it is said in a note in 27 L. R. A. 248: "Careful analysis of these New York cases, there- fore, shows that there is no direct decision of the court of last resort, upholding the practice of mailing checks directly to the drawee. On the contrary, there is a mere expression not necessary to the decision in the Indig case approving the practice of mailing a note to the bank at which it is pay- able, and a recital of this decision in the case of Briggs v. Central National Bank, 89 N. Y. 182, as if it were the case of a check mailed to the drawee. Therefore the decision of the general term of the supreme court (Mclntosh v. Tyler, supra) denying the doctrine of the other States in reliance on the authority of these two cases is in itself the only direct authority in New York State to that effect. This decision itself is weakened by the fact that it is based on cases which do not exactly support it." 12 176 THE PRACTICAL WORK OF A BANK 3. Where There is No Other Bank in Town Where Drawee is Located. What is a bank to do when it receives for collection a check drawn on a bank where there is no other bank in the same town? The law leaves the bank no alternative but to collect the check through the medium of an express company, if it has an agency at that point, or send a special messenger with instructions to collect the check in cash over the drawee's counter. Possibly the best plan would be to enter into an express agreement with the depositor of the check, giving the bank authority First -National Bank, Norwich. Conn. Siitrtag SnB.&r. tk iKttMS NOTE RETURNED UNPAID REASOX CHECKED to send the check to the drawee direct, and releasing it from any liability for loss resulting therefrom. At any rate, if the bank sends the check directly to the drawee, without ex- press instructions to do so, it is guilty of negligence, just as it would be in a case where there is more than one bank in the town in which the drawee is located. Some of the writers on this branch of the law have ex- pressed the opinion that there is an exception to the general rule in the case where the drawee is the only banlpng in- stitution in its town, but no support for this view is found in the authorities. The case of Minneapolis Sash and Door Company v. Metropolitan Bank, 76 Minn. 136, involved a check drawn on the only bank in a certain town. On the trial the plain- tiff was allowed to show that it was usual and customary for banks to send checks and drafts, payable by other banks at COLLECTIONS AND THE MESSENGER 177 distant points, directly to the drawee by mail, provided there was no other bank of good standing in the same town. In the opinion it was said: "We fail to see what possi- ble effect upon a case of this kind the fact that the drawee is the only bank in good standing in the town can have upon the duty of a bank which undertakes a collection. Any rea- son for such a course is equally as sound where there are two or more banks in the town as where there happens to be but one. * * * We cannot agree with counsel that the usage and custom here relied upon is a defense to the claim that the defendant was negligent when forwarding the check to the Mapleton Bank (drawee) for presentation and pay- ment. As a general rule usage and custom will not justify negligence. It may be admitted that such a course is fre- quently adopted, but it must be at the risk of the sender, who transmits the evidence of indebtedness upon which the right to demand payment depends, to the party who is to make the payment. Such a usage and custom is opposed to the policy of the law, and is unreasonable and invalid." Another such case is Pinkney v. Kanawha Valley Bank, 68 W. Va. 254. It there appeared that, on September 25, 1900, the plaintiff Pinkney received a check, payable to his order, which he deposited in the defendant bank for collec- tion. The drawee of this check was the only banking insti- tution located at that point. On the following day the de- fendant sent the check to the drawee by mail, with instruc- tions to ship the amount, for which it was drawn, in cur- rency. The currency was not shipped and the drawee bank subsequently closed for good. In its defense the defendant bank claimed that, under the circumstances, and in view of the fact that there was no other bank at the place where the drawee bank was located, it was not negligent in sending the check directly to the drawee. It was argued that, as the plaintiff had been a customer of the defendant bank for years, and accustomed to do business in Charleston, where the defendant bank was located, and, as he lived at Montgomery, where the drawee bank was located, and knew that the drawee was the only bank at that point, he was chargeable with knowledge of the custom on the part of the bank to send such checks directly to the drawee, and was bound thereby. The court, however, held that an exception to the general rule, which 178 . THE PRACTICAL WORK OF A BANK makes it negligence to send a check directly to the drawee, to be applied in cases where there is no other bank at the place where the drawee is located, is contrary to the weight of authority and reason. The defendant in Wilson v. Carlinville National Bank, 187 111. 222, was a depositor in the plaintiff bank and the action was brought to recover the amount of a check which he had deposited and which he had been allowed to draw against, the check being afterwards dishonored. The facts concerning the collection were these: On June 1st, 1893, CASH lit*. NO PROTEST. Kindly remove thU slip before presenting item. If not paid five reason. COWLJTZ COUNTY BANK, 5 Kalama, Wash. CASH ITEM WITH "NO PROTEST" SLIP ATTACHED r the defendant deposited in the plaintiff bank a check for $300, drawn on the Citizens' Bank of Gillespie, Gillespie being a nearby town. The amount was subsequently with- drawn by the defendant. On the day of receipt the check was sent to the plaintiff's St. Louis correspondent. That bank sent it to a Chicago bank which sent it directly to the drawee, by which it was received on June 5th. On the 7th the drawee sent its draft on St. Louis for the amount of the check, but payment of the draft was refused because of the failure of the Gillespie bank on the 8th. Illinois is one of the States which holds that a bank in which a check is deposited for collection is not liable to the depositor for the default of a correspondent bank, where it uses due care in '. the forwarding of the check and in the selection of a bank to handle the collection. The defendant contended that, if the plaintiff bank knew that its correspondent, by itself or through another bank, would send the check direct- ly to the drawee, which it appears was the only bank at that COLLECTIONS AND THE MESSENGER 179 point, then the plaintiff did not act with reasonable care in the selection of its correspondent and should bear the loss. It was held, however, that since the depositor was aware of the fact that the drawee was the only bank at Gillespie he was estopped from claiming that the plaintiff was negli- gent in sending the check forward for collection in accord- ance with the custom in such cases. The reasons are found in the following statement taken from the opinion: "The evidence further sufficiently established that appellant (de- positor) knew there was but one bank in Gillespie, namely, the Citizens' Bank, upon which the check he held was drawn. It was also shown by the proofs that the appellant had, on prior occasions, deposited with the appellee bank (plaintiff) other checks on out-of-town banks, and availed himself of the facilities offered by the system adopted and in vogue only among banks and bankers for the collection of that class of paper. He may not have known the details of the system or custom in force among banks for the collection of such checks, but he knew the collection was to be made, without expense to him, through banks cooperating togeth- er, in compliance with certain usages and customs existing between such institutions to enable such collections to be so made. He knew there was but one bank in Gillespie, and that the one on which the check was drawn. The coopera- tion of that bank was essential to the operation of the mode of collection of the check; for there was no other bank at Gillespie to act in the matter. With this knowledge the appellant accepted the benefit of the facilities for the collec- tion of his check which the banks held out to their customers. The usages and customs thus availed of by appellant con- templated the sending of the check directly to the bank on which it was drawn, there being no other bank at that point. The appellant having knowledge that there was but one bank at Gillespie, and that his check was to be collected without cost or expense to him, through the medium of busi- ness usages and customs in force only between banks and bankers, could not be permitted to accept the facilities thus afforded by the appellee bank for his accommodation, and afterwards insist that compliance by the appellee bank with the usages and customs, the benefit whereof he sought to avail himself of, should constitute actionable negligence." This case is, therefore, not a direct authority for the 180 THE PRACTICAL WORK OF A BANK SIGHT DRAFT RETURNED UNPAID WITH REASOX INDICATED proposition that a bank, in which a check is deposited for collection, may forward the check directly to the drawee, if it appears that the drawee was the only bank at that place. It holds merely that the bank, in which the check is deposit- ed, is not liable to the depositor, where it sends the check to a correspondent bank, by which it is forwarded to the drawee bank, in a case where it is shown that the depositor knew that there was no other bank at the place where the drawee is located and was aware of the fact that the check would Returned to No , by Guaranty Trust Co. of New York FOR REASON MARKED X X Guarantee of Endorsement Pilling Signature Incorrect Endorsement of each Payee Signature Missing Missing Endorsement Sent Wrong Date Guarantee of Amount No Account Insufficient Funds Account Closed Written Official Endosement Bank Stamp SLIP ATTACHED TO RETURNED ITEMS GIVING REASON FOR THE RETURN COLLECTIONS AND THE MESSENGER 181 be collected without expense to him through other banks in accordance with banking usages. Where the depositor assents to the sending of the check straight to the drawee, the bank will not be held liable. The plaintiff bank, in the case of First National Bank v. Citi- zens' Savings Bank, 323 Mich. 336, sent to the defendant bank for collection a certificate of deposit, issued by D. F. Parsons, a private banker at Burr Oak, Mich. The certifi- cate was accompanied by the following letter: "We send this C-D for $165,000 and int. to you for collection, as we note that you have a correspondent at Burr Oak, Mich. Please collect for us at your best rate of exchange and oblige." The defendant's correspondent was the banker by whom the certificate was issued, and as there was no other bank or banker at Burr Oak, the certificate was forwarded to him direct. The certificate was not collected, owing to Parsons' failure after the receipt of the certificate by him. It was held that the letter sent to the defendant by the plaintiff, along with the certificate of deposit, was equiva- lent to an instruction to send the certificate directly to Parsons. 4. Effect of Custom to Send Checks Direct to Drawee Banks. Custom will sometimes sanction a practice which would otherwise be declared invalid. But the fact that it is customary to send checks directly to a drawee bank for col- lection does not render such practice proper in the eyes of the law. The question was raised in the case of Farley Na- tional Bank v. Pollak & Bernheimer, 145 Ala. 321. The plaintiffs deposited a check for collection and the bank in which it was deposited forwarded it directly to the drawee, which sent back a draft on New York for the amount of the check. The draft was not paid on presentment because of the failure in the meantime of the bank on which the check was drawn. In disapproving the custom among banks to send checks deposited for collection directly to the banks on which they are drawn, the court said : "It may be admitted that a party committing a paper to a bank for collection may be bound by a custom which is reasonable and sufficiently general to presume that it is known. * * * Undoubtedly an agent who undertakes to collect a claim, although by custom he may be allowed to employ sub-agents, yet is certainly bound to select 182 THE PRACTICAL WORK OF A BANK his sub-collecting agents with judgment and care, and one of the first elements of care is to select a sub-agent who is not adversely interested in the subject matter. What would be the use of a party placing his claim in the hands of a bank for collection, if that duty could be performed by merely indorsing the paper by mail to the party who is obligated to pay it and receive his check on New York? The owner of the paper could send it directly and receive his New York exchange in much less time. A custom must be reasonable, and the best considered cases hold, not only that the bank or party who is to pay the paper is not the proper party to whom the paper should be sent for collec- tion, but also that a custom to that effect is unreasonable and bad." Such a custom, however, has been held valid, as applied to a check made payable to the order of the collecting bank. Kershaw v. Ladd, 34 Oregon 375. The plaintiff sent for collection to the defendants, who were bankers at Portland, a check drawn on a bank at Sheridan, Oregon, fifty miles distant from Portland. The check was drawn by the plain- tiff and was payable to the order of the defendants. It was received by the defendants on the 16th and forwarded di- rectly to the drawee bank on the same day, by whom it was received the next day. On the 23d the drawee drew a draft on its correspondent at Portland, which it sent to the de- fendants on the 24th, and which was received by the defend- ants on the same day. On presentment payment was re- fused for the reason that the Sheridan bank had closed its doors on the 24th. It appeared that there was a reliable express agency at Sheridan and that there was also another bank located there. The bank, however, had been doing business for a short time only and it was not shown that the defendants had any knowledge of its existence. The parties agreed that there was a well established cus- tom among the banks of Portland to the effect that, when a bank received for collection an ordinary check, drawn on a bank in another place, the collecting bank would forward the check directly to the drawee for collection and returns, pro- vided that the collecting bank had no agent or correspond- ent at the place where the drawee bank was located. It was held that this custom was reasonable, in so far, at COLLECTIONS AND THE MESSENGER 183 least, as it applied to an unindorsed check, payable to order of collecting bank. ENDORSEMENTS. The question of endorsements is one of considerable im- portance. Up to 1898 the restrictive form of endorsement was used on all items whether taken as cash or for collection, the form generally reading "Pay to the order of receiving bank for collection, for account of sending bank." The matter of bank endorsements was revolutionized by the now DBAFT WITH BELL OF TAKING ATTACHED "ARRIVAL DRAFT." famous decision in National Park Bank v. Seaboard Na- tional Bank, 114 N. Y. 28. In this case a check drawn on the National Park Bank for $18 was raised to $1,800 and sent to the Seaboard Bank for collection and credit and en- dorsed "for collection only." The check was paid by the Park Bank for $1,800 and later it was discovered that it was raised. The Park Bank sought to hold the Seaboard Bank, which had turned over the proceeds to its correspondent, the account having been closed. It was held that neither the Seaboard Bank nor the bank sending to the latter was liable under the restrictive endorsement. The case created considerable excitement in banking circles and led to the widespread use of unrestricted endorse- ments, making the endorsers liable as such on all items. The New York Clearing-House abolished all restrictive endorse- 184 THE PRACTICAL WORK OF A BANK ments on paper passing through its channels. The rule has been adopted throughout the country. In handling collections banks should exercise due care in selecting agents. The Supreme Court of the United States lays down the general rule of law to be that the initial bank it liable for such damage as has been sustained by the negli- gence of its sub-agent or collecting bank. This rule is mod- ified in many of the States and is as follows: "The initial bank, if it selects as an agent one who is competent and worthy of trust and transmits the paper to him, its duty is done, and the owner of the collection must look to the sub- agent for any default of which he is guilty." A bank, however, may vary its contract by express agree- ment, and this banks seek to do by printed notices on their deposit tickets, or on the inside cover of pass-books, to the effect that the bank assumes no responsibility for the collec- tion of any item beyond due care and diligence in the selec- tion of collecting agents, and that items are taken at the risk of the customer and that the bank will not be respon- sible for any loss through failure or default of the bank's agent. (See chapter on Receiving Teller.) The above case held that the bank receiving paper in- dorsed to it "for collection" was a mere agent and not re- sponsible for genuineness after paying over the proceeds to its principal. The rule adopted by the New York Clearing-House and substantially followed by the other clearing-house associations throughout the country exclud- ing all restrictively endorsed paper unless guaranteed, ap- plies only to items collected through the exchanges. Usually these items represent cash, having been received on deposit and credit given therefor, or the cash paid out at once, by the initial bank; the exceptions being collection items in the form of notes or acceptances made payable at a bank, or an occasional check. While the strict language of the resolution adopted by the New York Clearing-House Association limits the opera- tion of the rule to items collected through the exchanges, yet in all of the principal cities where banks are located which do collecting for other banks, these collecting banks have quite generally set their faces against restrictive endorse- ments for the reason that they wish to be protected in any contingency which might arise, by the warranties that go COLLECTIONS AND THE MESSENGER 185 with a general endorsement. Some authorities insist, how- ever, that a bank in acting as the agent in the collection of items should never assume the warranties of a general en- dorser. This contention would more naturally appeal to country bankers, and an argument in support of the restric- tive form of endorsement is given briefly, as follows: It is a settled principle of law that in the absence of an indica- tion to the contrary, the form of the endorsement controls the title or ownership to negotiable paper. The title to or ownership of an item left with a bank for collection remain- Report by No. 5235 Union Bank & Trust Company Jackson, Tenn., .191. We encloce for collection and remittance: (M OOMXD BY DtftuiN*. Co Items $(0.00 and under no protest. Protest items not marked X. Deliver documents only on payment of items. Teleeraph non-payment of items over $50000. COLLECTION LETTER ing in the customer and the bank's relation being simply that of an agent, this form of endorsement gives to all par- ties through whose hands it passes, notice of this owner- ship, and that the collecting bank or its agents acquire no title therein. Where a collecting bank has notice that the prior bank has no interest in an item transmitted for collection and that it is acting merely in the capacity of an agent, the col- lecting bank cannot under any circumstances retain the pro- ceeds as against the true owner. But where the collecting bank has no notice and the prior bank is indebted to it in 186 THE PRACTICAL WORK OF A BANK AMOUNT I WHERE PAYABLE I PUE ENDORSER Oriel nal, foea with the Item. PROTEST tf no. paid. THE FAVOR OF PROMPT RETURNS IS REQUESTED UPON THE ITEM HEREWITH ENOjOSED FOR COLLECTION. RESPECTFULLY, IRVING NATIONAL BANK NEW YORK. AMOUNT I WHERE PAYABLE DUE Acknowledgement, returned to banld Above itfrA received and entered for collection, PLEASE SIGN AND RETURN BY FIRST MAIL To Irving National Bank New York. AMOUNT WHERE PAYABLE DUE Held In bank until item is paid. gent to customer. Date Advised Paid CREDIT BILLS DISCOUNTED. DEBIT AMOUNT WHERE PAYABLE DUE This copy forms the charge ticket to the collecting tank. COLLECTION LETTER FOR BANK'S OWN PAPER THREE CARBONS AND ONE ORIGINAL general balance, in the event of the failure of the prior bank, it is generally held that the collecting bank can hold the pro- ceeds of a collection against the true owner. The right of lien rests upon the further consideration, viz., that in the case of negotiable paper one who successfully enforces a lien must be a holder for value and without notice. In COLLECTIONS AND THE MESSENGER 187 most of the States, in fact, in all of the States which have adopted the Negotiable Instruments Law (Wisconsin ex- cepted), an antecedent or preexisting debt constitutes value. The qualification without notice expressed in full is "with- out notice of equities existing between prior parties." It may be contended that these considerations are of in- terest to the customer of a bank rather than to a bank, and that the customer should safeguard his own interests by using the appropriate form of endorsements on his collec- tion items, rather than expecting the bank to protect these interests for him. It may also be claimed that where the customer leaves an item for collection endorsed in blank, or to order, and the item is sent direct to the collecting bank, that in the event of default by either bank, the position of the customer will not be improved by the mere fact that the sending bank had endorsed the item restrictively. As to the latter contention, we answer that neither is the position of the bank or its customer made worse by the use of the restrictive form of endorsement, and that where one or more banks intervene between the initial and the collecting banks in the chain of transmission, the rights of the bank and of its customer are preserved by the use of such endorsement in any contingency which may arise. As to the first contention, a bank has items to be col- lected which belong to it, viz.: discounted bills or notes. It will surely not be denied that its duty to its stockholders makes it incumbent on a bank to take every precaution in the collection of this paper, so as to protect the bank against possible loss. As this is the course which prudence dictates in such a case, and as it is the duty of the bank as agent to act as a prudent man would in his own affairs, it becomes its duty in the forwarding of items left for collection to use that form of endorsement which will best preserve the rights of a customer in possible contingencies which might arise. There is perhaps no better general rule of business policy for a bank to adopt in the management of its collection de- partment than that quoted as the measure of its legal duty, and if a bank uses "ordinary care and diligence," always "keeping in mind the best interests of its principal," its suc- ress in holding old and in securing new business should be 188 THE PRACTICAL WORK OF A BANK assured ; provided, of course, that it is in a position to collect as cheaply as will its competitors. 2 THE MACHINERY OF COLLECTIONS Collections consist of all forms of commercial paper and include many items which are not commercial paper, strictly speaking. A bank may handle under this classification in the course of a year's business, bonds, coupons, notes, mort- gages ; sight, demand, time, domestic and foreign drafts ; bill of lading drafts, every known form of insurance claim and voucher; certificates of deposit, checks and bank drafts, checks on savings accounts with pass-books attached; muti- lated coin and currency, foreign money, even pawn tickets and tickets for winnings on races and prize fights. Checks are payable on demand ; time items when due, as indicated on the face. If they are sent for acceptance before due, the drawee writes the word "accepted" and his name, when the item is held until due and presented for payment. Sight drafts are payable on presentation. They may be paid by accepting, payable at the bank, and this is authority for the bank to charge the customer's account and remit. A "city collection" is one which is to be presented by the messenger. A foreign collection is one to go through the mails, the holding bank being simply a link in the chain of collection. If an item subject to protest is lost it may be protested by a description, so it becomes needful that the record be complete as to details. Banks should follow the advice of their correspondents in the matter of protest, and banks should indicate their wishes in the letter accompany- ing the item. Protest where protest is instructed; and if there is an indorser who would be released if protest were not made, the item should be protested. Unpaid items should be returned promptly; advice given of paid items, or remittance for the same the day received, and indirect routing avoided in collection items. If items are returned, always give the reason. Time drafts should be presented promptly for acceptance. The items which a bank handles may be divided into two 2 Pamphlet on Clearing-House, etc., issued by American Institute of Banking. COLLECTIONS AND THE MESSENGER 189 IRVING NATIONAL BANK NEW YORK. D.T. .,Cn,.D NUM.C. A Y I AMOUNT DUtf D,.PO.,T,0. This copy goes to the cui tODMSn. IRVING NATIONAL BANK NEW YORK. CATC RECEIVED NUM... ,.,..- .MOUNT DU. roi.Tio. an This copy goes to the bo >kkeeper. IRVING NATIONAL BANK NEW YORK. ^^^^ DAT. ..CC.V.O NUM. uowrr DUE O...O..T.ON MATUR1 TY S LIP IRVING NATIONAL BANK NEW YORK. o- OAT. .(C.IV.O AMOUNT DU. D..*O..T,ON This copy forms the per manent re :ord. CITY COLLECTION FORM ONE ORIGINAL, THREE CARBONS SEE EXPLANATION ON FORM main groups: The cash items and the collection items. The latter may be still further classified into items immediately payable and essentially cash items, and the time items. The former class includes all drafts and notes which are payable at sight; while the latter includes those payable at a fixed time, and are usually received or sent in advance of the time 190 THE PRACTICAL WORK OF A BANK of payment so that they will be ready for presentation at the date due. Cash items are immediately convertible into money, and time items are to be turned into money. To facilitate the handling of these items, it has been found best to divert them into two channels, and this is done in cooperation with the depositor, who is advised to list all checks separately and all collection items, including drafts, coupons, etc., likewise. A "collection" is, therefore, RECALL NOTICE Irving: National Bank 191 Please Return Without Protest Youn rapectfully. Collision Clak RECALL NOTICE FOR COLLECTION ITEM an item to be collected. And in order to have a clear under- standing of just what happens in this connection, it may be well to anticipate the chapter on the "Mail," and follow a sack of mail as it comes from the post office. As the letters are opened their contents are sorted, the cash items, checks, etc., being placed by themselves and collections by them- selves. We are concerned now with a collection only. There must first be a complete record of the paper, and the item must have care while in custody of the bank until it is final- ly disposed of by payment or returned to the source from whence it came. Its due date is the most important part. The clerk compares the item with the letter which ac- companies it, noting instructions as to whether to protest COLLECTIONS AND THE MESSENGER 191 or not. The instructions on collection letters differ, some banks directing that all items riot marked "no protest" should be protested; others that only items over a certain amount must be protested, and others mark all items to be protested; but whatever the rule the notice should be heeded and passed on to the next in line unless the instructions are to be changed. The drafts which the collection clerk will receive for col- lection are sight drafts payable on presentation; time drafts payable a certain time after date or at a designated date; drafts with bills of lading, the latter to be surrendered upon paying the draft or accepting it, and drafts drawn "on ar- rival" of the goods. When the latter are received they are listed in the "arrival book" and the drawee notified. They are held until called for and payment made and often accompany large shipments moving by slow freight. Sight drafts are presented as soon as received ; time drafts are held until their due date, but are generally presented for ac- ceptance as soon as they are received. By accept- ing the time draft, the acceptor engages that he will pay when due. It makes it a promissory note. If the no- tice is sent by mail, note is made of the fact in the record, and if the drawee does not respond (he has twenty-four hours in which to accept), it is returned. If a bill of lading or other papers are attached, the instructions as to dis- position are noted and followed. Let us take a note of John Smith for $500, payable June 1st, 1915, at the First National Bank, New York, received from the First National Bank of Philadelphia. The number on the note is 15,534. It is first verified as to maturity, and the maturity usually indicated in colored pencil. Being a home note, it is recorded in the home tick- ler, or city collection register, under June 1. The data re- corded is: Date, time to run; name of maker; where pay- able; when received; from whom received; the number, amount, protest or not; our number (indicated by number corresponding to line on which it is entered), fate and re- marks. The data may be considerably abbreviated by us- ing such abbreviation marks as 1/14, 1st. Phil., etc. The column of "fate" is left open, of course, until the item is paid, returned unpaid, protested or recalled. If protested 13 Original , coe with item for collection. NO PROTEST Th favor of PROMPT RETURN3 ! rqu*t*d upon th Item hrwUll olo. IK UNPAID F-LBA3B OIVK FULL REASON Irving National Bank New York. This copy held In bank for traclne purposes. Tracing Slip Irving National Bank New York. IXA.XCC BKttT R A W K K AMOUNT | DUE | mUtt MPMHIS BNOOn.IH This copy the t>t s permanent reclord o r the Iteo. Irving National Bank Xw Yorlt. this copy eoes to customer as advice, of payme IRVINO NATIONAL BANK New Yorlc. Ad-vioe for This copy formsthe credit ticket to customer licuiw .Mccnns to customer 1 . X J .. i :.- _Net Crwdli Irving National Bank New Yorlc. DEBIT copy constitutes the charge ticket tc the coll^c'-.ing VanV. Irving National Bank New Yorlt. COLLECTION LETTER SIX CAUON8, ONE OBIOINAL SEE EXPLANATION" OTX FORM 192 COLLECTIONS AND THE MESSENGER 19S the word "Notary" is entered opposite with the date indi- cating that it went to the bank's notary for protest on that date. NOTIFICATION It is customary for banks holding items for collection to mail notice to the maker or drawee a week or so before the item is due. The next step is to make out a credit and advice slip, which are to be used if the note is paid. Carbon is used and two copies made. In one large city bank all city items requiring presentation or payable through the clearing-house are written up on carbon books, whereby credit ticket advice of credit and file record are made in one operation, then they are sent out by messengers for presen- tation to the parties on whom they are drawn. The messen- gers make their returns to the note teller, who puts through the credits for them. Time items presented for acceptance are returned to the collection department, after acceptance, when they are treated as notes. The city and country notes are separated, the maturity dates and interest are figured on the city items and they are entered on a collection tickler under maturity dates, also in an index book under the name of the correspondent from whom received, so that they can be located in case the owner should enquire about or recall them. Then a credit ticket and advice (original and duplicate) are made and attached to each item and they are delivered to the note teller, for col- lection at maturity. The collection tickler is a loose leaf book, and each day the leaf for that day is turned over to the note teller, who must account at the close of the day's business for each item listed on it. When paid the credit ticket is sent to the bookkeeper and the duplicate to the owner. The ticket contains the number, name of maker, amount, when due, and where pay- able. Open-faced "window" envelopes are used to avoid ad- dressing envelopes. After recording the items thej^ are held until maturity, and if a note-teller's department is operated, they are turned over to him for collection on the due date. The work of this department, therefore, follows. 194 THE PRACTICAL WORK OF A BANK COLLECTION DEPARTMENT TRACER Guaranty Trust Company of New York New York, Dear Sir Please report on the following collections: Guaranty Trust Company of New York COLLECTION DEPARTMENT TRACER THE NOTE TELLER / The items that come to the note teller may be from the bank's correspondents, or the bank's own paper that must be collected, and items received from the tellers for like purpose. Inasmuch as the note teller handles the same class of items as the collection clerk he makes the same records, but his work involves considerable cash, since the items will be paid for in cash, checks, etc. The note teller, therefore, carries a cash balance since he is receiving pay for maturing notes and drafts constantly. In some banks he is also charged with the collection of interest on loans, the list of for. W-WnSMai'- Qty* ilarkrt anil Julian &atun New York,_ Please report BY RETURN MAIL on the following items: tal lank. 191 NAME PLACE SENT DUE | AMOUNT ANSWER HERE Mr IF NOT PAID. RETURN AT ONCE -w Yours respectfully, JOHN H. CARR, Cashier. TRACER FOR COLLECTION ITEBIS COLLECTIONS AND THE MESSENGER 195 amounts due being furnished him, notices being sent out, and as payments are made they are taken off the list, the amount unpaid being known from this list. Exchange charges are also listed and collected by him, some customers preferring to pay these charges in cash rather than to have them deducted from the deposits. As the note teller's cash be- comes more than he needs, he will turn it over to the pay- ing teller. He receives from the discount clerk the day's maturities, and is accountable for all that he receives, and must return the items or the cash at the end of the day. Notes that are to be paid through the exchanges are, of course, put in with the exchanges of the day, and those to be presented by messenger sent out on the route. If a note is to be paid the note teller will have instruc- tions to honor it through the exchanges, and these items are sent to him, and if not instructed otherwise, they are paid by him and charged to the customer's account. The making of a note payable at a bank where the maker carries his ac- count is equivalent to an order on the bank to pay the same, and unless instructed otherwise the bank will do so. Notes are often presented over the counter, and the bank will accept the note, payable through the clearing-house, and so stamp it, and it becomes a cash item for the next day's clearings. All notes coming through the clearing-house for which no provision has been made as to payment are sent back to the bank from which they came before the expira- tion of the time limit. Notes that at the end of the day have not been paid are protested, by handing to the bank's notary, who makes out formal notice of protest and mails copies of the same to the indorsers. After the notary has made legal presentment and protest, the item is returned from whence it came, and the fees charged to the indorser. If it is the bank's own paper, it is held for adjustment among the past due items. The teller proves by taking the cash balance at the be- ginning of the day, and adding what he received and credit- ing himself with payments made, the balance being the amount called for in his cash. After the day's work is ove* except balancing, the teller will have on hand, cash, coin, checks on local banks, and it may be a few on out-of-town banks. These are charged to the different departments, and surplus money turned over to the paying teller. All cash NEW YORK. CAPITAL $4.000.000 SURPLUS S3.000.000 New York, N? 2286 We enclose the following items for Collection and Remittance. Your* truly. Telegraph Non-Payment of items ex- MARRY r WARD ceeding $500.00. Items under $25.00 and those marked X NO PROTEST Cashier. PLEASE SIGN AND RETURN IMMEDIATELY IRVING NATIONAL BANK NEW YORK. The within described Cash Letter ]^O 2286 has been received with enclosures as stated. Yours truly, NAME OF BANK Remarks : IRVING NATIONAL BANK NEW YORK. Our Cash Letter ]^9 Acknowledgement Received- Traced CASH TRANSIT LETTER LOWE* PAST IS CARBOIT COPY KEPT FOR TRACING COLLECTION 16 AKD TKAVUT LETTERS ABE CHECKED IV THIS BANK BT XUMBEU COLLECTIONS AND THE MESSENGER 197 might be so turned in, the note teller making no payments in cash, his cash being incoming only. If he should be charged with honoring notes payable at his bank, payment would be by cashier's checks, clearing-house due bill, or an acceptance payable through the clearing-house the next day. OUT-OF-TOWN COLLECTIONS The term "transit item" is properly applied to those items received in the regular course of business which are immediately credited and which are treated as cash. These are largely, if not quite altogether, checks; while collections are made up principally of notes, drafts, bills of exchange and other items left for collection by customers, credit to be given only when, as and if collected. These items do not appear on the statement of condition, and are not assets of the bank, nor does any liability accrue until collection is made, except it be for the use of care. The collection department is closely associated with the receiving teller's department, since it is charged with the col- lection of all items received by him that do not (a) go direct to the bookkeepers; (b) items that do not go through the clearing-house, and (c) transit items, which are to go out as cash. The transit and collection departments may be one, or two, as the needs of the bank require; or this work may, as frequently obtains, be part of the bookkeeping system and be done in connection with the duties of other men; but whatever the machinery of the bank, the purpose is to ob- tain payment for such items as are not to be regarded as cash by the receiving teller, and to turn into cash the items, such as coupons, etc., cashed by the paying teller or received from correspondents. The out-of-town collections will consist of all instru- ments that are not regarded as cash, or which require more care and attention than a cash item is given, as, for instance, a block of bonds for registry, or a deed to be delivered upon receipt of the money, etc. Of late years it has been the cus- tom among merchants to draw on their debtors if the bill is not paid according to pre-arranged terms, and these drafts are sent out by large firms by the hundreds. They must be presented for payment, and this is part of the work of the collection department and the messenger. 198 THE PRACTICAL WORK OF A BANK A great many of these collection items are frequently no more or less than "duns," and many are returned with the notation "will send check." Some merchants expect that their firms will draw on them and make it a policy to honor such drafts, as a simple and easy way of making pay- ment, leaving it to the firm to use its judgment as to when to draw. Some banks refuse to handle such items unless a modest fee accompanies, arid in this they are fully justified, for the process consumes time, expense and labor and is N? 18892 Maturity April l r Endorser Sep. W. Evans Amount, $. 1915 Interest, $_ Total, $. 8QQ. QQ Maker . Mr. E. J. Balloy, City THIS SLIP ATTACHED TO NOTE UNTIL DISPOSED OF BY RENEWAL OR PAYMENT largely a courtesy, the profit being inconsiderable. Drafts accompanying shipments of merchandise are also collected in this way. The maturity dates of country notes are figured and noted on each and they are listed in a register and numbered to correspond with the numbers on the register. Then they are endorsed to the bank's various correspondents in the towns where the items are payable, and a letter written to accom- pany each item. The letters are written on a form, using a carbon sheet, which makes a copy of the letter on a card, and the name of the owner of the item is written or stamped at the top of the card. These cards are then filed according COLLECTIONS AND THE MESSENGER 199 to maturity dates, and the cards under each date arranged alphabetically according to the place where payable. This system will be found very convenient for handling country collections. The register refers to the card by means of maturity date and town where payable and the card to the register by means of the number, so that it is always possible to locate an item from the owner's tracer, and one can always tell at a glance what items are due or past due. Correspondents, when writing or telegraphing about an item, or when remitting for paid collections, often neglect to give proper description of the items. It is very desirable, therefore, to be able to locate such items quickly on your records. This card record makes it possible to locate items readily even though imperfectly described. After the items are paid, or otherwise disposed of, the cards are filed in an- other file under the name of the owner of the note. Credit tickets for these items and all other out-of-town items are made when payment is received, on a duplicate form, using a carbon sheet ; the carbon copy being the advice of credit and the original the credit ticket ; the original going to the bookkeeper and the duplicate to the customer. Let us suppose that June 2nd arrives and in the morn- ing mail there is advice to the effect that No. 15,534 sent to the First National Bank of New York has been paid. Turning to the cabinet the clerk finds the duplicates of the slips that have gone to the First National Bank of New York and takes out the three connected with this item. He compares the number and amount with the advice re- ceived. He marks the item paid in the tickler, sends one slip to the bookkeeper for credit to the depositor from whom received, one to the bookkeeper to charge against the bank crediting the item, and one is kept for record. Where the bank has no regular correspondent in the place, it will send to the nearest town where it has connec- tions, and thus from bank to bank the item will go until it reaches the place of payment. Frequently the bank, in order to save time, will despatch the item in a more direct route, to some bank in the place where the instrument is payable, preferably some other bank than the one drawn on, and by using the bank directories such a proper collecting agency will be selected. To OTTI INT ;.. U m! > * t MIIHIIT Endorser Orl final. Thle copy e es with the Item. PROTEST unlew otherwise inrtructecl The favor of PROMPT RETURNS u requeued upon the item herewith enclosed for collection. IRVING NATIONAL BANK NEW YORK. To j _ M i. h item, tube slgnedjar.d retw Endorser This copy goes with th Item, td be signed, ar.d returned IRVING NATIONAL BANK NEW YORK. To ... oc4Mmrr M Endorser This copy is held In the Ijank fcr tracing. Piled under dates. Maturity Slip IRVING "NATIONAL BANK NEW YORK. i Thia Is "th tank's pemknent record. Piled under customer Customer To be filed under Customer IRVING NATIONAL BANK NEW YORK. Advice For This copy goes to ..the customer when the itei is paid. Expense IRVING NATIONAL BANK NEW YORK. t._..__ I ._.._. 1 j r eeper ae a credit) tc Disposition Debit IRVING NATIONAL BANK NEW YORK. Endorser ^E*> This dopy oecomes the chire* ticket to the bank coljectln the item. IRVING NATIONAL BANK NEW YORK. FORM USED IN COLLECTION DEPARTMENT, IRVING NATIONAL BANK, NEW YORK. SKK EXPLANATION IN THE FORM. SIX CARBONS AND ONE ORIGINAL 200 COLLECTIONS AND THE MESSENGER 201 Some banks have running accounts in all principal cities, settled periodically or daily. Thus, if a bank in New York has an item to collect in Cleveland, Ohio, it will send the item to its Cleveland correspondent for that purpose. The Cleveland bank will present the instrument through its mes- senger and either return the item unpaid or credit the amount to the New York bank and so advise it. If it has no account, it will remit by a draft less its charges for the service. SUNDRY ITEMS There is a class of items that pass through the bank as cash and go to banks where no regular correspondent exists. To open account for each bank so used would be needless and consume time and space. Therefore, an account is kept with "sundry banks" in the general ledger, to which is charged items that are sent to other than regular corre- spondents, and returns credited, the balance representing the amount so outstanding. COUPONS A coupon has been defined as a "little promise to pay" as distinguished from the parent bond, which is the "big promise to pay." Coupons are payable to bearer and usually regarded as good as money, are finely engraved, difficult at times to read, small, and generally difficult to handle. They are usually payable at the fiscal agency of the issuing com- pany, which is not always named in the coupon, and this information has to be obtained from other sources. Banks usually require interest coupons to be inserted in envelopes containing on the outside the name of the deposi- tor, name of issuing company, when due, where payable, number of coupons and the amount. If they are due they are generally treated as cash. If not, they are held for col- lection. They come through the various departments of the bank, receiving teller, mail, express, or from the special safe- keeping department of the bank, or are cut from bonds held as investment or collateral. If they are for collection they are sent through the collection department; if as cash they may go through the transit department, and are sent by 202 THE PRACTICAL WORK OF A BANK SLXIF. PHILADELPHIA, PA. COUPON SLIP registered mail, insured, to the place of payment. If pay- able in the same place, they are, of course, presented by mes- senger and payment in satisfactory form returned. Being in the nature of cash they are handled with special care and receipted for as they pass from hand to hand. Under the Income Tax Law, it is required that coupons be accompanied by proper certificate of ownership and state- ment as to whether or not exemption is claimed. Banks there- fore carry in stock a supply of the various blanks for this purpose and receive for collection coupons only when accom- panied by certificate properly signed. They do not, however, vouch for the statements made by the owner of the bonds, nor pass upon any point in connection with the tax. It is their function only to see that the certificate accompanies and is properly filled out. SAVINGS BANK BOOKS Savings bank accounts are frequently collected through other banks, and where the account is not closed out, require the return of the book. The book frequently goes astray unless special note is attached indicating what disposition is to be made of it when the collection is made. In sending such collections through a chain of banks, the book usually returns through the same channel through which it came, and it is very apt to find a lodging place somewhere en route and become lost or mislaid in the files of some collecting bank, there to remain until hunted down a process which is annoying and should be unnecessary. How much better it would be for the bank receiving the item in the first place, COLLECTIONS AND THE MESSENGER 203 NATIONAL BANK OF SGHWENKSYILLE. SCHWENKSV1LLE, PA. Coupons of. -e** DO NOT ENCLOSE COUPONS OF DIFFER- ENT COMPANIES IN SAME ENVELOPE. '. 190 J- Payable at..., *'IF COUPONS ARE NOT PAID. RETURN IN THIS ENVELOPE WITH REASON. Mat-urn tririii tun. COUPON ENVELOPE to attach a slip to the book, directing that the book be re- turned to the owner direct from the paying bank. But banks are so in the habit of returning items through the same channel as received, and the average teller being all too glad to get the transaction closed with as little delay as possible, does the simplest and easiest thing pays the item, if regular, and hands the book back to the presenting bank, which in remitting should not only send its draft, but the book also. A little thought in the first instance will save a lot of trouble in the future. Lost savings bank books are not easy to replace, some banks requiring bond of indemnity, advertising, etc. z I t LAST ENDORSER 5 3 !s o cr I r n FOREIOK COLLECT 1 s 1 - m - M X CHAPTER IX. LENDING THE BANK'S MONEY The success of a banking undertaking depends alto- gether upon the loans. Bank profits come from lending money and getting it back, with interest; and if the bank gets neither, it fails to make a profit and suffers loss. There- fore the department of loans requires the greatest care, for here credit operations will take place, and whatever profits and losses accrue in the course of the year will be due to the judgments here made. The function of loaning naturally follows that of de- posit, the two being dependent upon one another. If the bank had no deposits, it would have no funds but its capital to loan, and in that measure would prove a poor investment. If a bank could continue to loan by crediting its loans as deposits, it would make money, provided the deposits were not subject to call; but inasmuch as deposits, irrespective of whether they are the proceeds of loans and discounts or not, are payable on demand, when the loans are out of propor- tion to the cash in hand, inflation, as it is called, obtains and the bank is in a weakened state. But it is the loan itself and not the granting of the credit that we now consider, the im- portant subject of banking credit being reserved for an- other chapter. LOANS AND DISCOUNTS DISTINGUISHED Bank loans are made for a stated period of time, or are payable on demand; secured or unsecured. In the nomen- clature of banking, a loan is made when the interest is paid periodically or at the time the loan matures, as distinguished from a discount, where the interest is taken out at the time the loan is put through. Bankers generally speak of their "discounts" as the notes of customers they have bought or discounted, and their "loans" as the advances they have made to their customers. Their "bought paper" consists of loans made through brokers commercial paper. Loans are also spoken of, when referring to advances made on collateral and 90S 206 THE PRACTICAL WORK OF A BANK payable on demand, as "call" or "street" loans. It is obvi- ous that a discount must be a loan since it is an advance of money; but a loan need not be a discount, although it may be made so by taking out the interest in advance. A discount may be based altogether upon the worth of the party offering the paper for discount, or on the joint worth of indorser and maker; while the loan on collateral would be based largely upon the value of the collateral. The borrower's standing may remotely affect the col- lateral loan, but in the last analysis the lender depends upon the security pledged. Loans are rarely made to the full value of the collateral, a margin being left for shrinkage. Where the business warrants there may be a loan de- partment charged with the duty of following all loans and keeping watch of the margin. This is especially true of the great Wall Street banks which loan millions to stock ex- change brokers, and whose margin must be kept good. And where the market is fluctuating, or is in a panicky condition, this department must keep careful watch on security prices as a matter of protection to the bank. This is called the "Loan Department" to distinguish it from the "Discount Department" which handles only the paper of customers on their indorsement. The loan department would properly handle all loans on collateral whether on stocks and bonds, warehouse receipts, or other forms of collateral. The difference between secured and unsecured loans lies largely in the fact that one has security definitely pledged, while the other has none, other than the names and credit standing of the parties. The latter cannot be watched with the same degree of care as the call loan, which can be and is given constant attention. LOANS AND CREDIT A loan is a present advance of cash or credit against the belief in its future payment. The form the loan takes will depend upon the maker's desires. It may be a cash advance ; art open book account ; the indorsement of a note ( a loan of credit) ; the giving of a note, or the acceptance of a bill of exchange. But when the loan is made, or the credit created, a new force begins to work, and this force is as effective in the business world as money, and is cheaper. LENDING THE BANK'S MONEY 207 Banks by their natural tendency to collect unemployed funds become reservoirs of capital; and by the exercise of their lending powers become centers of credit and extin- guishers of trade indebtedness. Their power to cancel in- debtedness, by setting off debit against credit, is their great- est usefulness to the community at large. This power we see most readily in the clearing function. The ultimate test of the soundness of a loan is its ability to liquidate itself at maturity. And that is the reason why a mercantile loan is better than the stock excjiange loan and so regarded in European circles. The stock exchange loan can only be liquidated by a sale; the mercantile loan by the process of consumption. For four months in 1914 there was no open market for securities. During August, September and October there was not a stock exchange open in the world. You could not get a quotation from any public source; you could not sell a bond or a share of stock any- where in the world except by a private bargain. You could not publicly offer to buy or sell. There was no "market" even at war prices; and all loans based upon securities were in a state of chaos, with no hope of prompt liquidation and no means of turning into cash. But a loan on wheat, or corn, or leather, or iron, would by the law of consumption soon turn itself into money; for although the world had stopped buying stocks and bonds, it had not ceased to eat and build houses. We have based our faith on the stock exchange loan and made it our liquid security, which it is not and never can be; for in critical times it fails; but the merchandise loan the loan based upon an exchange of goods redeems itself, war or no war, panic or no panic. DEPOSITS ARE OFTEN LOANS The manner in which a bank builds up its deposits by making loans may easily be seen from the following illus- tration: Let us suppose a bank has capital of $100,000 and no deposits. It begins business by making a loan to a certain individual of $10,000. He does not desire the cash, and prefers to have credit on the books of the bank for the amount, with the privilege of checking out the amount as he needs the money to pay his bills. The bank now has de- posits of $10,000. Another borrows $10,000 and deposits 14 208 THE PRACTICAL WORK OF A BANK the proceeds of the loan and the deposits become $20,000. The bank might loan its whole capital this way, but for a provision in the law, national as well as State, varying only in the amount required and not in the principle involved, and known as the reserve requirement. By this a bank is required to set aside in cash or keep on deposit with ap- proved reserve agents a portion of its deposits, running from ten to sixteen per cent., depending upon the nature of the obligation created, whether time or demand, the place and the character of the bank. 1 The danger in banking may be seen from the extension of this loaning process. Let us suppose that a bank has a capital in cash of $100,000 and no deposits. It must set aside by law ten per cent, of its deposits as reserve. It begins to make loans. It loans A $20,000 (which he deposits) and it sets aside $2,000 as reserve, crediting him with the loan. Let us assume it puts the $2.000 in a vault by itself. It loans B $20,000, set- ting aside $2,000 more, and credits B with $20,000. It loans C and D $20,000 each likewise, setting aside $4,000, and credits the amount. There is now in its reserve $8,000, and $92,000 of its capital still in cash, with which it buys securities. The transaction tabulated will look like this: Capital Cash to loan Loans Reserve Deposited $100,000 $100,000 (A)$20,000 $2,000 $20,000 98,000 (B) 20,000 2,000 20,000 96,000 (C) 20.000 2,000 20,000 94,000 (D) 20,000 2,000 20,000 92,000 securities . .... (Cash paid) $80,000 $8,000 $80,000 The balance sheet will then be: ASSETS LIABILITIES Loans and discounts $80.000 Capital $100,000 Cash 8.000 Deposits 80,000 Securities 92,000 $180,000 $180,000 - If only A and B ask for their money it will have but $8,000 to pay $40,000 of debts created by crediting its loans as deposits, and cannot meet its engagements. under "Reserves" for the reserve requirements of banks in the Federal System (page 135). LENDING THE BANK'S MONEY 209 By experience it has been found that a reserve of about twenty-five per cent, is ample in the large cities to carry the banks in normal times, and the National Banking Act so re- quired; but the Federal Reserve Act makes the proportion sixteen per cent, which, by virtue of the rediscount machin- ery, is considered ample; but the principle is the same a cash fund from which to meet the daily demands of the de- positors. In Europe there is no obligatory reserve, this be- ing left to the judgment of the bankers; and how much re- serve to carry and do full justice to the bank (the reserve is a source of loss) and still be within the limits of safety is the art of banking. It is when the deposits are fictitiously increased by mak- ing too free credits, extending credit unwisely, and allowing the reserve to decrease until it becomes out of proportion to the debts that danger accrues. We then have inflation. It has been ascertained that the danger point under past conditions was about twenty-one per cent. ; that is, when the reserve stood at about twenty-one per cent, for the country as a whole it was too low and loans should then be restricted. What the Federal Reserve Banks will do in alleviating all such reserve evils remains to be seen. LIQUID LOANS The secret of sound banking is to have a steady stream of money coming in by way of maturing loans, so that the constant stream of obligations falling due daily by reason of the demands of the checking depositors may be met. A demand obligation cannot be met by a time security, and only as the bank keeps its funds liquid that is, flowing in and out can it meet every demand made on it without hardship. Banks all over the country when in funds send them to New York to their correspondents, for lending in the market, or on deposit. The New York bank may lend for the country bank's account in the market, or lend for its own account, and pay interest; but whatever the method, the money finds its way into collateral loans secured by stocks and bonds, and when money is plentiful and cheap we have an era of speculation; and if for any reason the loans must 210 THE PRACTICAL WORK OF A BANK be called, it leads to a sudden contraction of credit and the whole country suffers. The fact that the loan can be called at any time, and in the event of failing to realize upon it, the bank may sell the security, is in a sense a menace to the peace of mind of the debtors. A large number of banks make loans for correspondents, using the same care as with their own loans. Where one bank acts as an agent for another in loaning funds it is only PAPER DISCOUNTED AND OFFERED FOR DISCOUNT #* ending 191 PA1D$ ;_ M. DISCOUNTED $. :M. OFFERING SHEET AND RECORD OF PAPER DISCOUNTED required to use the ordinary care which is customary in the transaction of business of that nature; that is, the bank is not a guarantor. APPLYING FOB A LOAN As soon as a request for a loan or a discount is made, the credit machinery begins to work. The credit department will be charged with obtaining the information needed to pass upon the loan. It may be in the files, or it may have to be obtained. If the offering is made formally, it will be on an "offering slip." It may be in an offering book. If it is commercial paper offered through a broker, it will likely be on a list of offerings prepared by him, and submitted either by mail or by representative. The offerings go before the proper officials, either the LENDING THE BANK'S MONEY 211 officers or the discount committee. Usually an officer is des- ignated to pass on the offerings, and the committee sanctions his judgment either by attesting the offering book or with some mark on the discount register to indicate their approval of the loan. Loans are sometimes submitted in a written report to the board and ratified by making the offerings and acceptances part of the board records. COLLATERAL LOANS If the maker of the note wishes to reinforce his credit, he will offer the bank collateral, i. e., he will lodge with it certain stocks and bonds or other securities to support the loan, and these the bank may sell in the event that the maker fails to pay his note as agreed at the appointed time. We, therefore, have the collateral loan. And in the latter case, it is not the borrower's credit that is the pivotal point, but the quality of the collateral. The collateral loan is made for two purposes: First, to allow the broker (most collateral loans are to brokers and dealers in securities) to buy and sell with the funds of the bank, using but little of his own capital. In fact, a broker with good banking connections can buy and sell with almost no capital at all. And secondly, to permit security holders to use the capital invested therein for a time (or perma- nently) without selling the security. It is profitable to borrow on a bond that pays five per cent, at two or three per cent, even with the margin. Thus the bond pays, say $50 interest yearly. The owner pledges it with a bank for a $900 loan and pays four per cent., or $36 a year, and he is $14 ahead on the transaction. He has had the use of part of the money and at the same time has drawn interest on all. Only when he must pay more than five per cent, will it be more profitable to sell, even at cost, than to borrow. And with a rate of two per cent, possible in New York dur- ing ordinary times, to pledge a bond or stock that nets five per cent, and only pay two per cent, is distinctly profitable. By our system of centering money in New York we have specialized in Wall Street loans and made them the liquid asset of the country. 212 THE PRACTICAL WORK OF A BANK B DEMAND Date Amount Rate / Original Present COLLATERALS Price Value STREET DEMAND Date, Amount Rate Original Present COLLATERALS Price Value LOAN RECORD CARDS LENDING THE BANK'S MONEY 21S LISTED AND UNLISTED SECURITIES In making a collateral loan several elements enter, the important ones being : The collateral, what is it ? What is it worth? Is it "straight" or "mixed"; listed or unlisted; high grade or low grade, or doubtful? Has it a ready market, and broad? A bank president when urged lo equip his new building with a vault of the heaviest armor plate, replied: "It is not armor plate that is wanted, but a vault that will keep out bad collateral." Securities pledged as collateral are of two main classes: listed and unlisted. The former includes all securities dealt in on the exchanges whose value may be ascertained from the published figures of stock market quotations. Unlisted securities are those that are dealt in on the "Curb," and, therefore, quoted in the curb quotations, and those other securities issued by companies and corporations everywhere, some good, very good, some half good and some all bad. Some can be sold in a few hours, or in a few minutes, and some couldn't be given away. This is not to say that unlist- ed stocks are all bad or any of them bad, for such high-grade stocks as Standard Oil are unlisted and are of the very best; but the reference is to mining stocks, oil stocks, and others of like character whose value is undeterminable by any process known to the banking fraternity. Municipal bonds are generally unlisted, except a few issues such as New York City, State of New York, Government bonds, and the like. But a mixture of quickly salable bonds and high-grade ^ stocks makes the most desirable collateral. The unlisted bonds and stocks often pay interest and dividends regularly and are of intrinsic value, but not being listed on any of the exchanges, command a limited market, so that in times of stress they are likely to join that class known as "indigestible." To handle this kind of collateral calls for keen judgment, for otherwise the necessity may arise at any time of carrying such securities for a long period pending an opportunity to unload. Then again there are certain good listed stocks of in- trinsic value, but with only a moderate^ active market, the selling price of which may be materially affected if any large quantity is offered for sale. The question of mar- gin enters quite largely into consideration in making loans SLOW TIME No. Out Amount 1 Rate Due . ., Original Present COLLATERALS Price Value SLOW TIME DISCOUNTED Address Line _ _ t TOTAL LOANS Required Balances Loan Dated Rate Due Amount Remarks Original COLLATERALS Present Receivables Aggregating Margin Required % COLLATERAL LOAN RECORD CARDS LENDING THE BANK'S MONEY 216 on collateral of this class, and it should be the policy of one finding it necessary to liquidate such loans to put out the securities in small blocks. THE MARGIN It is impossible to express a hard and fast rule governing securities pledged for loans, for the reason that the nature of the loan is dependent upon the contract between the bor- rower and the lender. As a general rule twenty per cent, margin is required to be kept good. In some cases even greater margins are required. Where high-grade bonds form the security a much smaller margin is exacted. Dur- ing the panic days of 1907, forty per cent, margin was in certain cases demanded by the banks on loans. Some lend- ers insist on all dividend-paying railroads, others are willing to lend on various mixtures of railroads and industrials, and this is the general rule. The ordinary Wall Street loan is secured by about sixty per cent, railroads and forty per cent, industrials, sometimes half and half, sometimes seventy and thirty per cent, respectively, and sometimes all industrials. Generally in the case of a preponderance of industrials a slight advance over the current rate of interest is asked. The reason why mixed collateral is preferred is the fact that in case the loan has to be called and the security sold, there will not be forced on the market a large quantity of one stock, thus depressing the price. On securities of high quality a less margin may be car- ried with safety. Thus, on a New York City bond, a loan may be made up to nearly the full face value, while in a more speculative stock, a larger margin is necessary. High-grade railroad bonds are of more stable nature than railroad stocks, and the margin in one case would be less than in the other. In times of stringency and market activity values fluctuate widely in most stocks, particularly the active stocks, and a wider margin is required if safety is to be assured than if a high-class bond were pledged. In Kirkbride and Sterret's Modern Trust Company it is said: "In New York two tests are applied to a collateral loan, the first requiring that the value of the securities must have a margin equal to twenty per cent, above the amount of the loan, and the second that the loan must have ten Form 822 LOAN AT To DATE MADE DATE DUE @ $ REMARKS: SECURITIES EXVELOPE FOR LOAN COLLATERAL* 916 LENDING THE BANK'S MONEY 217 points margin. That is, the amount loaned must be per share less than the market value of the stock. This is reckoned by dividing the number of shares of stock (or if bonds $10,000 are equivalent to one hundred shares of stock) into the margin. "For example, if there were 2,000 shares of mixed stock in a loan of $100,000, divide this number of shares into $20,- 000 (the twenty per cent, margin) and the result shows the average margin of ten points on each share held. "If the ten-point rule is strictly adhered to it has the 3 SHREVEPORT. LA. - ^ - 191. , the dsnen, endarxn. turerJet. and all of of, to soldo, promtoe to pa> tothe order of ~& TRUST COMPANY, * * *>* taShreport, LouUana. the mm of DOLLARS ==- fa value received. v*k Interest thereon, at the rate of eight per cent per I This note Is secured by pledge and delivery ofr the securities mentioned on the reverse hereotj JIDDITIONAL SECURITIES, utlifactory to the holder of this nole. to cover such decline, t Should this note not BE PAID AT MATURITY, or whe[> It BECOMES DUE by failure hall be applied ( TRUST COMPANY, sentatlon (or payrn< DUE ^|f aald CONT urltloi at theli D due as aboTe. irney for col i It b otherwise -p. COLLATERAL TIME KOTE effect of discriminating against low-priced, non-dividend- paying stocks, while the twenty per cent, clause requires an ample margin on high-priced stocks. There are a few in- stitutions in New York that require nearly fifteen points with the twenty per cent, margin, and some which do not adhere strictly to the ten per cent, requirement." The usual margin required is from twenty to twenty-five per cent. ; that is, on a hundred dollars' worth of stock from seventy-five to eighty dollars would be loaned. "WATCHING THE TICKER" In a large and active bank making a specialty of collat- eral loans, there is careful watch kept over all securities on which the bank loans. In a room with a stock ticker and other news agency reports there is a clerk who has a record 218 THE PRACTICAL WORK OF A BANK N E\V YOR K , .......,........ .....-.......-..._...- ...- ._ . ...__....... after date without grace, tlie undersigned, for value received, promise to pay to the Guaranty TfUSt Company Of New York, or order, at the office of said Trust Company in tlie City of New York, in funds current at the New York Clearing House, with interest at the rate of per cent per annum, payable quarterly on the first days of January, April, July and October, having deposited with said Trust Company as collateral security for the payment of this or any other liability or liabilities of the undersigned to the Trust Company, due or to become due, or which may hereafter be contracted or existing, including as well promissory notes, bills of exchange, and other evidences of indebtedness made, endorsed or accepted by the undersigned and purchased or owned by the Trust Company, the following property, viz.: The undersigned hereby agree to deposit with the Trust Company such additional collateral security as the Trust Company may from time to time demand , and also hereby give to the Trust Company a lien for the amount of all the liabilities aforesaid upon all the property of the undersigned at any time coming into the possession of the Trust Company, and also upon any balance of the deposit account of the undersigned with the Trust Company. On the non-performance of the foregoing agreements as to furnishing additional collateral, or upon t!ie non-payment of any of the above-mentioned liabilities, then and in either such case the Trust Company is hereby authorized to sell, assign and deliver, the said property, or any substitutes therefor, or any additions thereto, or any such other property, at such time or times and in such several parts or parcels as the Trust Company or either of its officers may decide, and to sell the whole or any of said parts or parcels, either at any broker's board, or at public or private sale, either for cash, upon credit or for future delivery, at the option of the Trust Company, or of any of its officers, without advertisement, or notice, which are hereby expressly waived. Upon the non-payment or the non- fulfillment of any of the conditions of this note, then the whole or any designated part of the liabilities of the undersigned to the Trust Company shall mature at the election of the Trust Company by presentation thereof for payment. In case of any sale by the Trust Company, of any of said property on credit or for future delivery, the property sold shall be retained by the Trust Company until the selling price is paid by the purchaser, but the Trust Company shall incur no liability in case of failure of the purchaser to 'ike up and pay for the property so sold. In case of any such failure the property may be again sold. At any sale hereunder the Trust Company may itself purchase the whole or any part of the property sold, free from all right of redemption on the part of the under- signed, . which is hereby waived and released. In the ease of any sale the Trust Company may first deduct all the expenses for collection, sale, and delivery of the property so sold, and any other expenses incurred by the Trust Company in connection with such sale; and may then apply the residue to any one, or more, or all, of the said liabilities, whether due or not due, returning the overplus, if any, to the undersigned, who shall remain liable to the Trust Company for any deficiency arising upon any such sale. The undersigned do hereby further authorize the Trust Company at its option at any time, to appropriate and apply to the payment of any of said liabilities, whether now existing or hereafter contracted, auy and all moneys or other property now or hereafter in the hands of the Trust Company on deposit or otherwise, to the credit of or belonging to the undersigned, whether the said liabilities are then due or not due. The undersigned further agree that, upon any transfer of this note, the Trust Company may deliver the property held as security, or any part thereof, to the transferee, who shall thereupon become vested with all the powers and rights above given to the Trust Company in respect thereto, and the Trust Company shall thereafter be forever relieved and fully discharged from any liability or responsibility in the matter. COLLATERAL XOTE of all collateral loaned upon and the price at which the loan was made and the name of the borrower. As changes occur in the market, notation is made and when the margin gets too close additional security is called for. THE BORROWER The second element to consider is the standing of the borrower. If the borrower is doubtful, the bank may have LENDING THE BANK'S MONEY 219 to sell its collateral, and this it does not desire to do. It makes a loan hoping to receive the funds back. It does not want the proceeds of collateral. It dislikes to go on the auc- tion block. If not reliable, the borrower may skirmish for time, and find some technicality to prevent a sale. It may mean trouble, and trouble the bank does not want. TITLE TO THE COLLATERAL "GOOD DELIVERY" It is important that title to the collateral be vested in the borrower and that it be conveyed in proper form to the bank, so that it becomes "good delivery" that is, will be transferred upon the books of the issuing corporation or its fiscal agent. The rules of the New York Stock Exchange are said to be the most strict of any in the country and if transfer is in accordance therewith, it will probably pass anywhere. If title is defective the bank will have trouble in collecting its money. If it holds bogus stocks and bonds it has no collateral at all. What is good delivery depends upon the usages of the trade and the rules and regulations of the stock exchange in listed securities, and in the case of un- listed securities, the rules and regulations of the issuing company. Certificates of stock received as security should be dated, signed, sealed and duly attested by the registrar. Powers of attorney upon the back of certificates should be carefully filled in, leaving the name of attorney and of the party to whom the transfer shall be made in blank. The signature to the power must correspond with the name upon the face of the certificate and should be wit- nessed. Bonds offered as collateral should be closely scanned to note if registered. If so, power of attorney must accompany. Signature, date, seal and next maturing coupon must all be in place. FORM OF COLLATERAL NOTE To those who are in the habit of handling stocks and bonds, 7 't may seem superfluous to consider for a moment any questions pertaining to the form of note or power of attorney used in connection with collateral loans; but we 220 THE PRACTICAL WORK OF A BANK shall take it for granted that there are some to whom a few suggestions will not go amiss. The form of note should provide for a call of margin, with the privilege to sell the collateral in event of the failure of the borrower to maintain the margin. It is also advisable to have a clause in the obligation to cover any direct or contingent liability. Care should be taken in the execution of the power of at- torney in order that certificates of stock may be a good de- livery; the name of a bank or any of its officers should not be included in the assignment, either as transferee or at- torney. The signature to assignments must be technically correct; i. e., it must correspond with the name as written upon the face of the certificate or bond in every particular, without alteration or enlargement or any change whatever. Several powers of attorney should be required when a large block of stock is pledged, as considerable difficulty may arise in selling the collateral if the whole block must be sold. It should be the habit of the one intrusted with the hand- ling of collaterals to daily follow quotations closely, and yet there are many instances where sales are "washed" to bolster values and consequently create fictitious quotations ; general- ly, however, the public expression, as represented by sales on the stock exchange, is a good barometer of actual values. To those who desire to become competent to look after the collaterals I would advise, in the first place, careful read- ing of the best newspapers and journals, whose equipment is especially adapted to wants of investors, and secondly, actual contact in the practical work of the department wherein you get accustomed to handling the various stock certificates, bonds, etc. 2 TIME LOANS Aside from the demand note, there are two main forms of notes used in banking, the first of which promises to pay a certain sum a specified number of days or months after zLouls N. Spielberger in The Bankers Magazine. LENDING THE BANK'S MONEY 221 date. The other promises to pay the amount on a certain date. In the first case the maturity must be figured, and due allowance made for the different rules regarding Satur- days, Sundays and holidays in the different States, as well as days of grace, now fast becoming a thing of the past, as they should be. Notes are usually made payable at some bank and must be presented there. Bankers' guides are pub- lished giving the laws of the States regarding grace, pro- test, holidays, etc., for use in timing notes. These, of course, are part, and a necessary part, of every bank's outfit. THE BOOKKEEPING OF THE LOAN As soon as the loan or the discount is accepted the loan records begin to take shape. The note must be made out and signed. If it is already in signed form, as in the case of a discount, it must be properly indorsed. If it is a collateral note with finely printed terms, the bank will insist that the note be on its own form. If securities are to be delivered, they must be brought in and examined. Having the note in hand we must determine: when it matures; the value at maturity, including interest, if inter- est is to run; the time in days until day of payment, for in- terest calculations; the interest or the discount, and the pro- ceeds. Having determined the proceeds the amount is cred- ited to the customer, the interest to interest account, and the face amount charged to loans and discounts. Tickets for the various entries are sent to the several departments; or in the case of a small bank put through the journal records. We have thus kept the equilibrium heretofore mentioned, for, supposing the note to be for $100, six months to run, at six per cent., we would credit the depositor $97, interest $3, and charge discounts $100, maintaining the balance. In timing the item, the due date is placed upon it in some conspicuous place, generally provided for in notes. If interest is to be added this is figured and noted usually over or under the figures in red ink. If cash is paid for the loan, cashier's check is drawn, New York draft issued, or the cash itself may be paid. But the more frequent way in the case of home loans would be to pass the same to the credit of the borrower. But in buy- 222 THE PRACTICAL WORK OF A BANK DISCOUNT DATE OF -NOTE Our Number Tbelr DRAWER OR MAKER DRAWEE OS ENDORSER WHERE PAVABLZ ni 02 03 : 04 , 05, 1 DISCOUNT ing commercial paper, draft is, of course, sent to the broker in payment of the paper purchased. It is important that the laws of the various States as to holidays be known in timing notes, for while days of grace are generally abolished, holidays differ and the laws relative to presentment of paper are not uniform. In some, the paper is due the day before a holiday and in others the day after. Paper due on Sunday is, as a rule, payable on Mon- day. The uniform Negotiable Instruments Act will be a safe guide in this respect. The next step is to enter the item on the discount register the "history book" of the discount department recording as one banker puts it "the birth of every loan and its death." The loan register contains full details as to maker, in- dorser, date, time, where due, maturity, amount, rate of interest, interest or discount, exchange, and other details that are necessary to completely describe the paper. This discount register is a book of original entry and constitutes one of the most important records of the bank. MATUEITY RECORD Record is also kept of the maturity of the loans by a maturity register, which classifies the notes according to due dates. After entry on the discount register, it is entered on the maturity book, first that it may have attention when due, and also to ascertain how much is maturing each day for reinvestment purposes. By referring to this book, the loan or discount department may tell at a glance what notes are coming due, and how much will be in hand for reinvestment. From this record notes are turned over to the collection de- partment for collection, if not presented by the loan or dis- count department through messengers. The maturity book LENDING THE BANK'S MONEY REGISTER 228 TIME When Discounted WHEN DUE AMOUNT Dj"1> AMOUNT PA!D WHEN PAID REMARKS* REGISTER is a most important record, for it checks the notes falling due, and keeps the payments up to date. Presentment is a most, if not the most, important detail in the discount de- partment, and failure to present a note may lead to losses. Simpler things than this have brought litigation, and some debtors are only too glad for an opportunity to escape liability. When the loan is properly recorded, and classified as to due date, it is filed in a document case, constructed espe- cially for this purpose, and divided into days and months. Special trucks are sometimes provided for these maturity records, the truck being wheeled into the vault at night. The notes therein contained are exceedingly valuable, for if lost or destroyed endless confusion would result. It is suggested that the bank's own paper paper of its own customers running to it be kept in another ink to dis- tinguish from the paper of customers discounted for them. THE BORROWER'S LIABILITY Thus far we have discounted the note, sent the credits and the debits to the proper departments, or made the prop- er entries, informed ourselves when to look for payment, and there remains to discover how much the discounter or borrower owes on similar obligations. This is recorded on liability cards or ledgers, the record including what the party owes directly and contingently to the bank, and is a useful and necessary part of the bank's information in making loans. It becomes exceedingly important that the bank follow the law in the matter of loans, in that it shall not lend to any one party or interest more than a certain percentage of its capital, or capital and surplus. The law is strict in this 15 224 THE PRACTICAL WORK OF A BANK LOAN DEPARTMENT PROOF SHEET For 191 DBBITS Folio ACCODNI CKBDITS Debit Clerk Credit Clerk Collection Department Coupon Department Paying Teller Receiving Teller Trust Department Reorganization Department Securities Department Foreign Department Total Departmental Balance! Demand Loans Time Bills Purchased Customers' Loam Accrued Interest Receivable Expenses Interest Due Customers Customers' Collateral Commissions Treasurer's Checks Fifth Avenue Branch Loan Balances Demand t T!m * . 11 PROOF SHEET LOAN DEPARTMENT and must be obeyed, for many banks have come to grief through overloaning to one party, and it is both good bank- ing and good business to scatter the risks, and not put too many eggs in one basket. The discount register will show how much the bank has LENDING THE BANK'S MONEY 225 LOCATION NAME. ACCOUNT OPENED UUUm .. . LOA (.... -0T.) IO.N <,... or) PCBAUAHY MARCH APP.lt JUKI AUGUST SCPTCMBCH OCTOBER AVERAGE BALANCE AXD AVERAGE LOAN CARD loaned, but it does not show how much to A, B and C, and we must, therefore, segregate these items so that the liability of each borrower, direct and contingent, shall be known. This is important, not only that the law may be obeyed, but UNION BANK & TRUST CO.. JACKSON. TK* LIABILITY LEDGER also that the bank may be within the limits of safety; and unless it can follow the changing liability of the borrower from day to day will be all at sea as to its risks. This lia- bility is of three classes: (a) Direct; (b) as indorser, and (c) as discounter. With a system of recording this liability Into raDO&SIR FOR 1 r.t IUi ** ; z hi, J.J S.H. M Z Dr. TUP. . fin. i 4* fedora ir OK1URIS T.TABU.TTY TJOOK LENDING THE BANK'S MONEY 227 rAior me federal litle & Trust Co. ^,A&&B- No OF BEAVER FALLS. PA. Date Purchased Maker - First Purchased Number Amount. J Renewed by Number Purchased from Where Payable Address B*TI OF WCH TIKI MT FCl IHTOKT HIT AUOUHT * COttATlllAL 1] HOKT. | .^ M .NTIR1ST | MOUNT | a.L.NCl ^K ^ ^^W ^^^ LIABILITY SHEET The above liability sheet is used in a manifold system with different colored sheets, the record being made by one operation. The original is the direct liability, the first copy the maturity sheet, the third the discount register, and the last the contingent liability. As soon as a note is recorded the sheets are filed in their respective binders. The liability ledger is indexed alphabetically, sub- divided further if desired. The direct as well as the contingent liability sheet is filed under proper division. The sheets constituting the discount register are listed on the recapitulation sheet and the total charged in the day's business on the journal. The sheets for the different bills purchased, together with recapitulation, are filed in the discount ledger until removed. The maturity sheets are filed according to due date, and a statement taken at any time from the maturity tickler will indicate the aggregate of the loans. At the beginning of the day's business the sheets are taken from the maturity tickler, then from the liability ledger, both direct and contingent sheets being removed, and all attached to the note falling due. As soon as the item is paid or renewed the sheets are pinned together and filed on a check file, and at the close of the day's business are listed on the recapitulation sheet and the totals parried to the journal. The sheets are then filed in their transfer binders. the bank can tell at a glance how much its borrowers are indebted to it. A liability book is, therefore, kept, showing how much each borrower is indebted to the bank, directly and indirect- ly, and the bank can ascertain at any time just how much risk it is carrying with one person, firm or corporation. The risks might still be further divided in classes of dealers, it being good banking to have many rather than a few baskets in which to carry the eggs. A good bank would not and 228 THE PRACTICAL WORK OF A BANK Guaranty Trust Company of New York Fifth Avenue Branch 140 Broadway London Office Fifth Avenue and 4Srd. Stwrt 33 Lombard Street, B. C. New York, ..... 191 Dear Sirs: We beg to advise the following substitutions, which were made to-day in your loans, as listed below: Yours very truly, Guaranty Trust Company of New York W. C. EDWARDS, Treasurer By NOTICE OF SUBSTITUTIONS IN COLLATERAL LOAN should not loan all its funds to a single line, such as milli- nery, dry goods, leather, manufacturers, etc., for many a bank has gone down by not heeding the truth of the maxim above quoted. Some banks, in order to keep track of their collateral loans, have an index arrangement showing how much they have loaned on each class of stocks or bonds, and to whom the loan is made. This is to prevent a bank from becoming overloaned on one particular stock. But a good loan clerk will at least keep a mental memorandum of the prevalence of a certain stock and guide his actions accordingly. In collateral loans the note, properly executed, should be placed in a heavy manilla envelope. On the envelope is re- corded the number of the loan, borrower's name, date, amount, rate per cent., a full description of the securities and the value. The value should be kept in lead pencil, so it can be readily changed. All envelopes are filed alphabeti- cally. A record of the loan is also made in a loan book, LENDING THE BANK'S MONEY 229 which is an account of each day's loans. This book goes to the board of directors for their examination. A record is also made on a card, which is practically a duplicate of the envelope, except there are spaces for the change in interest rates, and for part payments. This . information may be kept on the envelope if desired. SUBSTITUTIONS In collateral loans substitutions are allowed from time to time, as the stocks are sold and others bought. When a broker sells stocks he must deliver them, and if he has them on loan he withdraws them from the loan and substitutes others. The loan clerk is f amiliar with the terms of the loan, knows what stocks to accept and what to reject to keep the margin good, and follows the trend of the market closely, so that the margin will be maintained at all times. In his de- sire to make money for the bank, he must analyze with minute care stocks that have a narrow market, stocks that are subject to wide fluctuations and stocks of doubtful in- trinsic value brought into prominence through manipulation. If stocks of this description are accepted by the loan clerk he should see to it that they form only a small percentage of the collateral. In making substitutions, "substitution sheets" are used. These are filed with the securities and show the authority for making changes in the loan collateral. As substitutions are made they are added and the old records crossed off. If only part of the securities are re- moved, the figures are changed. The intent of the record is to keep track of all the securities held on the loan and that the list shall be as in the envelope and the market values shown either on a card or on the envelope itself. Collateral loans are made frequently through brokers. As soon as the bank ascertains what it will have to loan for the day, after receiving the morning's clearings, it will com- municate with brokers and off er them funds at certain rates ; or, it may place the same in the hands of brokers on the stock exchange floor to be loaned out to clients, the borrower paying a small commission for the favor. 280 THE PRACTICAL WORK OF A BANK WHEN THE DUE DATE ARRIVES When the due date arrives, the note must be paid, or re- newed, and it, therefore, follows that we must turn it into money or into a new obligation. Custom decrees that makers be given ten days' notice of maturing paper and it is neces- sary that the maturing notes be sent to the correspondent for collection in due time so that such notice may be given. In the case of home paper, of course, the notices can be sent each day for the maturities of ten days in advance. By con- 0* [VJ &4 I We hold your Note Jor $ 1,000.00 Which will be due May 22, 1913 Interest, $ 20.00 ^ rW ^ John Jones & Coll Totaf * $ 1,020100 8 SSi Mr. Jas. Smith, 1014 Texas Street, City. i NOTICE TO BORROU'ER OF MATURING XOTE suiting the maturity tickler out-of-town items may be for- warded and notation made in the proper space. Some banks keep the foreign items separately. In clearing-house cities notes due are sent through the clearing-house, unless by custom they are collected by messenger. For instance, in Boston, notes of over $2,500 are presented through messengers, while under that amount through the clearing-house. Notes paid or charged to the customer's account are cred- ited to bills receivable, and the balance of the liability regis- ter, maturity tickler and total of the notes themselves should agree with the balance of the controlling account on the gen- eral ledger. Items in the form of notes sent out for collec- LENDING THE BANK'S MONEY 281 tion are charged to the collection department as any other collection. Notes falling due in other places may be charged to the bank to which they are sent, to be charged back if not paid, if the bank be a correspondent, or charged to the tran- sit account as a collection item to be collected and credit passed, or sent out on memorandum. As soon as the note leaves the loan department it is credited to the bills receiv- able account, and charged to "collections" or "transit ac- count," and when payment is made or credit passed upon advice of payment, the transit account or collection account is credited, and the collecting bank charged. In discounting notes payable out of town, the exchange is taken out at the time of discount, and is no longer a charge against the collection of the note. If the item is protested, it must be taken up by the borrower and the fees paid in addition ; or if pajnnent cannot be obtained at once, it is car- ried in a suspense account for later adjustment. UNEARNED DISCOUNT* When the discount is made, the interest is deducted and credited as an earning. This, of course, makes the period in which the note is discounted show an earning that may lap over into another period. For instance: A loan of $100 is made March 1st, due July 1st. The dividend figures are made up on April 1st. To consider the interest for the full time as an earning for the period ending April 1st is to de- ceive ourselves, and only that part of the earnings which properly belong in the period should be reckoned as an earning. Therefore the interest for March only is properly part of the earnings for the period, and all well-managed banks endeavor to so apportion interest earnings. Likewise, loans where the interest is paid at maturity must have the earnings for the time thev have run until divi- <-j / dend time entered as accrued interest, thereby swelling the earnings of the bank by the amount due but unpaid. These accruals can only be determined by taking each note and apportioning the interest over the term, entering under each month the interest that is earned during the month, so that at any time the true earning power may be known. Mr. Howard M. Jefferson, auditor of the New York *For a simple method of figuring interest accrued and unearned discount, see appendix "A" (Note to Fifth Edition). 282 THE PRACTICAL WORK OF A BANK CO O w Q W 5 v | Is 1 si o o o 1 o i 2 s - o o o O ^i o o o o ^^ " ^f ^^ c 6 o s o o o 1 1 o o o 8 i i 10 o C4 s 52 35 2 32 o ^ e e e ^ i li 1 o 8 "3 i 4 * 1 o o 10 > * ^s e ,| N. (N CO cc -H > | >> h a -. V ta p < - > v e3 <-> -9 1? * Q | 5 -S 1 1 *0 ^ >> 9 a i Tuesday. Wednesda Thursday _rt c Saturday. c CO Monday. . Tuesday . . Wednesda u-Reductior Da. LENDING THE BANK'S MONEY INTEREST ACCRUED 288 CR. Date Memoranda Amount Date Memoranda Amount June 27 Int. Acc'd Rec. $4 44 June 30 Cash $ 13 03 " 28 13 47 July 5 " 154 ^ " 29 ii i a 17 M " 30 a a n 13 19 July 1 a n a 28 19 4 90 83 Total $167 76 Total $167 7ti Note: The credit entry of $13.03 should be $13.33. Form was photographed as Mr. Jefferson had it W. H. K., Jr. DR. INTEREST ACCRUED RECEIVABLE CR. Date Memoranda Amount Date Memoranda Amount June 30 Profit and Loss $48 74 June 27 Int. Accrued $4. 44 a 28 n it 13. 47 " 29 n u 17. 64 :io II 1C 13. 19 Total $48 74 Total $48. 74 July 1 Int. Accrued $28. 19 4 90. 83 FORM C 284 THE PRACTICAL WORK OF A BANK Federal Reserve Bank, has made a specialty of accrued in- terest receivable and payable and in the text book on "Banking" of the Alexander Hamilton Institute course says in this respect : "A very simple method of accruing interest receivable day by day on loans will be explained in detail. Application of this principle may be made to bonds and mortgages, stocks and bonds, interest payable on accounts and certifi- cates of deposit. "A columnarized sheet as shown in Form A will do for the daily record. Accounts should be set up in the general ledger as shown in Forms B and C. The accounts shown in Forms D and E will already be on the ledger. We will carry the work over the end of the fiscal period to show how the books would be closed and will, therefore, begin our record on Monday, June 27, and run to Wednesday, July 6, closing the books on June 30. "The following transactions take place: June 27, loans made, $20,000 at five per cent and $10,000 at six per cent. These loans should be entered as per Form A. At the end of the day, which is equal to the opening of the day follow- ing, 'interest accrued' is charged and 'interest accrued re- ceivable' is credited with one day's interest on the loans made at the respective rates. $20,000 at 5% for one day $2.77 10,000 at 6% for one day 1.6? Total (See Forms B and C) $4.44 "If the loans are not very active, the same sheet may be used from day to day. If very active it will be better to open a new sheet each day with the balances outstanding at the various rates on the day previous. "On the 28th two new loans were made, $50,000 at four per cent, and $25,000 at five per cent. These are entered in the proper columns on the daily sheet. At the close of the day 'interest accrued' is charged and 'interest accrued re- ceivable' is credited with one day's interest on the total amount of locns held by the bank at the various rates as follows : $50,000 at 4% for one day $5.55 45,000 at 5% for one day 6.25 10,000 at 6% for one day 1.67 Total (See Forms B and C) $13.47 LENDING THE BANK'S MONEY 285 "On the 29th three loans of $10,000 each are made at four, five and six per cent, respectively and entries made as per the figures. The accrued accounts receive the entries on $60,000 at 4% for one day $6.67 55,000 at 5% for one day 7.64 20,000 at 6% for one day 3.33 Total (See Forms B and C) $17.64 "On the 30th two loans are paid with interest, $20,000 at five per cent., the company receiving three days' interest amounting to $8.33, and $10,000 at six per cent., the com- pany receiving three days' interest amounting to $5.00. These payments are entered on the daily sheet in red and de- ducted from the balance of the previous day. The $13.33 received as interest is charged to 'cash' and credited to 'inter- est accrued' as per Forms B and D. The accrued accounts receive the usual charges and credits for the interest on the balances in the loans at the different rates : $60,000 at 4% for one day $6.67 35,000 at 5% for one day 4.86 10,000 at 6% for one day 1.66 Total (See Forms B and C) $13.19 "At this juncture the books are closed for the six months. 'Interest accrued receivable' is closed into 'profit and loss.' "On July 1 two new loans are made, $75,000 at four per cent, and $40,000 at six per cent. The usual entries are made in the accrued accounts : $135,000 at 4% for one day $15.00 35,000 at 5% for one day 4.86 50,000 at 6% for one day 8.33 Total (See Forms B and C) $28.19 "The second, being Saturday, but one loan is made, $15,000 at five per cent. Sunday and Monday being holi- days it will be necessary to accrue for three days instead of one : $135,000 at 4% for three days $45.00 50,000 at 5% for three days 20.83 50,000 at 6% for three days 25.00 Total (See Forms B and C) $90.8.'i 286 THE PRACTICAL WORK OF A BANK DR. CASH CR. Date Memoranda Amount Date Memoranda Amount June 30 Interest Accrued $ 13 33 July 5 a n 154 43 FORM D DR. PROFIT AND LOSS Date Memoranda Amount Date Memoranda Amount June 30 Interest Acc'd Receivable $48 74 "On the fifth all loans are paid with interest as follows: $50,000 seven days at 4% 25,000 seven days at 5% ' 24.31 10,000 six days at 4% 6.66 10,000 six days at 5% 8.33 10,000 six days at 6% 10.00 75,000 four days at 4% 33.33 40,000 four days at 6% 26.66 15,000 three days at 5% 6.25 $235,000 $154.43 "The interest received, $154.43, is charged to 'cash' and credited to 'interest accrued,' closing the latter. "The paid loans are entered in red on the daily sheet and deducted, leaving no loans on which to accrue interest at the close of the fifth day. LENDING THE BANK'S MONEY 287 "It is a little difficult to apply this system to deposits upon which interest is paid on average daily balances, but even this may be accomplished if these accounts are segre- gated from the non-interest bearing. It may be applied with no trouble at all to certificates of deposit and other special accounts." ACCOUNTS RECEIVABLE AS COIXATERAJL There is a class of collateral loans that is coming to be common in banking, but more especially in mercantile circles, based upon accounts receivable. Where a merchant is not in the best of credit, and has no better security to offer, and cannot borrow on his own name unsecured, and does not take notes from his debtors, he may pledge his accounts re- ceivable, meaning his book accounts. Next to cash these are his most liquid asset and his best security (if good) and some banks will loan on the strength of these accounts. They are usually assigned to the lending bank, and notice served on the debtors that the accounts have been pledged and that payment must be made to the bank instead of the merchant. At times the accounts are merely pledged and collections made in the usual way. There are "commercial bankers" who make a business of loaning on, or, to speak more correctly, buying, these ac- counts. There is also what is known as the "factor," or com- mission merchant, who not only sells goods for customers and mills for whom he acts as selling agent, but also finances manufacturing operations. It is done largely through the medium of the accounts receivable. A simple illustration will show how these operations are carried on. Let us sup- pose a manufacturer of woolen cloth sells a bill of goods to a well-known clothing firm. The terms of the sale are three months, with a discount. The manufacturer cannot wait that long for his money, being short of capital funds, and has no banking connection that will loan on his note or on his accounts receivable. He, therefore, arranges with the factor to buy this account, and the factor will do so. The latter operates a very finely organized credit department that keeps in touch with all leading merchants the country over and can judge the credit risk with considerable accu- racy. The factor will advance the manufacturer, say, eighty 288 THE PRACTICAL WORK OF A BANK per cent, of the amount of the bill, and charge him interest at the legal rate for the time it has to run. If the twenty per cent, is also desired, which in effect is a guaranty of payment of the full amount of the bill, the factor will charge an extra percentage for the risk he runs. The bill is as- Interest Statement Rate % In Account with the Guaranty Trust Company of New York Date Balance (Hundreds)" No. of Days Aggregates (Hundreds) Interest From To INTEREST STATEMENT signed to the factor and the advance made in cash. Some manufacturers and merchants do this as a steady policy, so much so that their bill-heads are printed: "This bill assigned to Blank & Company, Factors, and all payments must be made direct to them." A bank making advances on such accounts must know that they are bona fide debts, and that the debtors are good for the amount of the bills. Considerable margin is allowed LENDING THE BANK'S MONEY 239 for the shrinkage inevitable in all such matters and when made with a reliable firm, and ample margin allowed, are a good security, but not in general favor. INTEREST ) The banking custom, sanctioned by law, is to consider 360 days to the year, thirty days to the month and charge discount for every day from date of credit to date of ma- turity, excluding the former and including the latter. The rate of interest changes frequently on "Street Loans." Payment of interest is usually made monthly. The interest can be calculated by multiplying the rate per cent, by the number of the days it stood at that rate, or by the use of interest tables. Find total of these products, add four decimal places, then divide by thirty-six. The answer will be the interest on $100,000.00 in dollars and cents. Thus, $100,000.00 loaned Oct. 1, 1910, at three per cent., changes Oct. 4 to two and one-half, Oct. 8 to four per cent., and Oct. 10 to three and one-half, paid Oct. 15, 1910: Oct. 1 to 4 at 3 per cent.. 3 days $9.00 Oct. 4 to 8 at 2y 2 per cent., 4 days 10.00 Oct. 8 to 10 at 4 per cent., 2 days 8.00 Oct. 10 to 15 at 3y 2 per cent., 5 days 17.50 $44.50 36)44.5000(123.61 This rule may also be stated as follows: Multiply the rate per cent, by the number of days for each interest interval, add the successive products, multiply the sum of the products by the principal and divide by 36,000. The answer will be interest due in dollars and cents. Some banks keep a daily skeleton balance ledger of the loans at the rate per cent, the loans are made, posting the new loans and payments under the rate per cent. This 16 Aso * Daily Balances of with Guaranty Trust Company of New York. Interest Account foe Month ending 191 Dr. 0. 26 27 28 29 30 I 2 3 4 5 6 7 8 9 10 ii 12 14 15 16 17 18 9 20 21 22 23 24 25 lute at 240 INTEREST STATEMENT BASED ON DAILY BALANCES LENDING THE BANK'S MONEY 241 enables the bank to tell at once just at what rates all the loans stand. 8 In discounting interest-bearing instruments, it is the cus- tom to discount the interest as well as the principal. A note of $1,000 running one year and bearing interest at six per cent, amounts to $1,060, but when discounted the amount of the proceeds would be $996.40 and not $1,000. It is a good custom each week to make out a maturity sheet, showing a list of notes due during the following week for which a part renewal may be asked. Record on this sheet makers and indorsers, amount, when due, total due on own paper and receivables, also the average balance for the past six months. This enables the officers to look the matter up before the request for renewal is made. Occasionally the officers or directors want to know the amount of unearned interest, that is, the amount that would be charged to profit and loss if every note was rebated. First find the average rate by multiplying each rate by the total discounted at that rate, add the results together and divide by the total amount under discount. Then find the average time by multiplying total of each day's notes by number of days they have to run; add the results of these totals, and divide by total amount under discount. Having the average rate, and the average time, you can easily tell amount of unearned interest. In a book with an index, having spaces ruled off on each page, keep a profit and loss record of unpaid matured dis- counted paper. Have each space numbered. In these spaces record a full description of each item to whom it has been turned over for collection, if any part payment is made, etc. The items themselves, or a copy, if they are out of your possession, should be placed in envelopes and these envelopes marked with the same number as the space in the profit and loss record. These envelopes should be filed numerically so the paper can be readily located, however many years it may be old. The envelopes save the items from wear and tear. 4 It is not the custom for banks to give receipts for collat- eral, for the receipt would be evidence of the existence of the . M. Rosendale, Assistant Cashier Market & Fulton National Bank, New York, before Pittsburgh Chapter, A. I. B. fWm. M. Rosendale in The Bankers Magazine, 242 THE PRACTICAL WORK OF A BANK collateral and the ownership in the borrower, and might lead to hypothecation and other irregularities. And where sub- stitutions are frequently made, as is the case in stock ex- change loans, these receipts would be a nuisance and are given if at all only under protest and are most generally refused. PAYMENT OF CALL LOANS The New York Stock Exchange has no set rules govern- ing loans. The payment of call loans may be demanded up to one o'clock, and custom requires that they shall be paid by two o'clock. The law, however, gives them until three o'clock. The time up to which renewals may be made on call loans is one o'clock. The renewal rate on call loans is made in accordance with the supply and demand on the floor of the New York Stock Exchange any time before one o'clock. After the stock exchange rate has been communi- cated to the various offices renewals of the entire list are made on that basis between lender and the borrower direct. The rate of money after one o'clock frequently differs from the renewal rate. Receipts for the return of the collateral are taken on the cards. All letters, memoranda, etc., are filed in the enve- lopes. It is also a good plan when stamping the note "Paid" to have it read "Collateral Returned." If there is anything in a loan that requires attention on a certain date, record it under the proper day in a diary or better by card system. LOANING FOR THE BANK'S CORRESPONDENTS When the country banker decides that his New York ac- count is not earning enough, and makes up his mind to loan in the market on his own account, he will so notify his cor- respondent. When rates are high this is in vogue and the country banks benefit; when rates on call loans are low, the funds will be placed back on interest, usually at two per cent., and the city bank loses. These loans are usually made to stock exchange firms, and are payable on demand. There is what is called the participation loan, by which several small banks, not being willing, or being prohibited from loaning an amount sufficiently large to go into the market LENDING THE BANK'S MONEY 248 (Wall Street loans being in the sum of $50,000 or over, as a rule), several banks may combine, and through the city bank, or the bank acting for several, make a participation loan, each bank sharing in its proportion. All that has been said regarding demand loans is ap- plicable here, the principles being the same. In the National Park Bank the following method is pursued: Upon receipt of a request from a correspondent to make a demand loan, the amount is charged directly against the account of that correspondent through the cashier's check book, when the check is drawn and delivered to the broker to whom the loan is made. Upon payment of the loan, the broker's check is credited to the account of the correspondent through the general book in the note teller's department. The color of the cashier's check delivered to the brokers, and of the card showing the record of the collateral for loans made for cor- respondents is yellow ; so that at a glance the auditor and his assistants can classify the loans made for customers, since the checks and cards used in loans made for the bank are white. This method of keeping the records of loans for cor- respondents makes it possible for the auditor to eliminate these figures from the general proof of the bank's work. The auditor receives from the loan department each day and enters in a memorandum book the total amount of loans made for correspondents, as well as the total amount of loans paid on account of correspondents; the difference represents the amount of loans outstanding. This method combines simplicity with safety. 3 WAREHOUSE LOANS A warehouse or commodity loan is one based upon com- modities held by a warehouseman and evidenced by ware- house certificates. It is essentially the purchase of the goods for the account of the borrower and the loan is as good as the goods and no better. The essentials are the same as in all collateral loans and all that has been said under collateral loans here applies. There is, however, the danger of deteri- oration in merchandise that does not obtain in the case of . C. Macavoy of the National Park Bank, New York, before New York Chanter. 244 THE PRACTICAL WORK OF A BANK Guaranty Trust Company of New York 140 BROADWAY NEW YORK, For purpose of audit and verification we beg to advise you that we are loaning you at the close of business to-day,. the sum of $ with securities mentioned below as collateral. If the amount and collateral is correct, kindly sign acknowledgment at the foot of this statement and return at once in enclosed envelope. Yours very truly, RALPH DAWSON, Auditor, The above statement is correct VERIFICATION OF COLLATERAL LOAN SENT TO BORROWER FOR SIGNATURE security loans, the physical qualities being no element in the latter and the vital factor in the former. In the first place, we must have a bona fide warehouse receipt, properly executed, as evidence that the property is in the custody of the warehouseman ; second, the goods must be what they purport to be, and, thirdly, they must be in good condition. As evidence of the former, the bank mak- ing the loan must know the signatures and forms of the warehouse as it would know the signatures on a check. To verify the condition of the goods only physical inspection can assure quality and quantity. A receipt acknowledging LENDING THE BANK'S MONEY 245 so many barrels "said to contain" a certain article, might contain something else. Banks should loan, if at all, only on staple products, in steady demand, not subject to fashion, and with a fair mar- gin for shrinkage. It is conceded that the risk in warehouse loans is consid- erable on account of the physical difficulties; but inasmuch as it is the business of the bank to assist commerce and in- dustry, it is needful and proper that it assume legitimate risks for the good of the common weal; and the bank that will not assume the risks of trade is not fulfilling its right- ful place in the economic scheme. If every bank were to require security in the form of lawful money (and banks have made loans on actual money, the owner requiring the identical bills in a few days, and chose to obtain a loan rath- er than take the chance and trouble of getting others) they would be asking impossible security; while the woman who wanted a loan on her fire insurance policy was offering secu- rity of the other extreme. Somewhere in between the two lies the middle ground of safety and service. Granting that the borrower meets the conditions named in the chapter on "Essentials in Granting Credit," and the receipt is bona fide, our chief concern will be with the class of goods. As above stated, they must be staple. To loan on orna- ments for my lady's dress would not be very good banking; but to loan on silk to make it for her would. The latter security would be stable, both in price and in demand. Of this class are loans on wheat, cotton and other cereals. But the wheat should be of the quality claimed, and this can be ascertained by requiring the inspection certifi- cate issued at the ports on the Great Lakes, or in New York, and which are recognized everywhere as authentic certification of the grade. And wheat so graded will hold its grade the world over. Wheat flour is good security, but apt to spoil under unfavorable conditions. Corn will "heat" if improperly kept. Only a recent inspection certificate will safeguard these tendencies. Cotton is ordinarily prime secu- rity. Its value may be ascertained at any time; but the cotton must be cotton and not the fag ends of the picking linters. The prices of staple commodities may be ascertained 246 THE PRACTICAL WORK OF A BANK from public quotations in the trade papers, which are gen- erally reliable, but at times should be checked up independ- ently, to be certain that prices are not "washed" for an oc- casion. The goods, of course, must be insured, and certifi- cates of this fact required. Having an authentic document, goods of the weight and quality claimed, at an ascertained price and insured, and a margin for shrinkage, both in price and quantity, and a responsible borrower, the loan is as safe as the needs of men are constant. BILLS or LADING The bill of lading is an instrument acknowledging the receipt of certain goods to be transported under stipulated conditions. When issued in certain form it contracts to de- liver the goods to the consignee only, or on his order, and the delivery of the bill of lading is necessary to obtain the goods, and possession of the bill is warrant to the carrier to deliver. In other forms the bill is not required as a requi- site to delivery. It is, of course, as history has demonstrated, an easy matter for a railroad agent to issue a bill which represents nothing but a fraud. Such blanks are easily obtained, and easily issued, and gross frauds and severe losses have been visited upon American banks through bogus bills of lading. The tendency of the times is to require the transportation companies to use due care in the selection and authorization of agents and to hold them responsible for fraudulent bills. The cotton frauds of a few years ago in the Knight, Yancy matter in the South arose through bogus bills of lading. Fraudulent bills were issued, and on the strength thereof, drafts were drawn, sold and sent to Europe for payment, only to find that the cotton supposed to follow did not exist, and the bill of lading a forgery. The case is still in the courts, but thus far it has been held that the one accepting and paying the drafts must lose, as the drafts were accepted on the credit of the drawer and not on the cotton fictitiously shipped. The dangers arising from bills of lading shipments are indicated by a set of instructions sent out by the American Bankers Association a few years ago. Summarized they are as follows: (a) Except in a few States, a bill of lading does not guarantee delivery of the article listed in the bill. LENDING THE BANK'S MONEY 247 The road is responsible only for the goods actually received, even though the agent signed for more, (b) The bill of lading does not guarantee the quality of the goods. It gives a list merely of the goods as furnished by the shipper. So many boxes "said to contain" of a certain weight, (c) It may be issued in fraud and, therefore, not binding upon the company, (d) Bills may be issued in sets, and dupli- cates outstanding not marked arid delivery already made on the original, (e) Part of the goods may have been deliv- ered, and not endorsed on the bill, (f) The goods may have deteriorated. There is now issued by all leading railroads the uniform bill of lading, which has standardized the form, so that it is easily recognized. The "order" bill of lading makes indorse- ment necessary in order to secure the goods. Thus, a bill might consign goods to order of "William Williams" and he must indorse the bill to obtain delivery, and the com- pany will not deliver the goods without the bill. The other form is the "direct" bill, which contemplates delivery with- out the bill and goods consigned on such a bill to "William Williams" will be delivered without the bill to anyone who represents him. Bills issued on grain shipments on the Great Lakes are in sets, and possession of any one of the set is sufficient to warrant delivery, and in such cases the entire set must be delivered as a requisite to a loan. Mr. Thomas B, Nichols, assistant cashier of the Produce Exchange Bank of New York, which deals largely in such loans, and from whom many of the foregoing suggestions have been obtained, suggests as a safeguard against forged bills that the arrival notice be required. This is sent to the consignee when the goods arrive, and by checking the name, goods, date and car number, the authenticity may be established. The cotton frauds mentioned above have re- sulted in a validation bureau, the cotton bills being certified to as genuine by the railroad issuing the same, and copy for- warded to the validation bureau in New York which com- pares the bills and attaches its certificate that the bill is gen- uine. Stale bills bills that are old should be investigated very carefully. Goods may have been sidetracked, spoiled damaged or destroyed, and an old bill is a red flag of danger. Elevator receipts are in the nature of warehouse receipts, these being for grain held in storage and in process of trans- 248 THE PRACTICAL WORK OF A BANK fer to another carrier. A loan on goods in transit is prac- tically the same as on goods in storage. Large amounts are constantly outstanding secured by grain en route from the West to New York. The bills of lading and draft traveling faster than the goods, are, nevertheless, pledged, and ad- vances made, the security attaching wherever the goods may be. A very excellent paper on "The Discount Department" has been written by Herbert E. Stone of the Second National Bank, Boston, from which much information may be gathered and to whom acknowledgement is here made for suggestive thoughts in this chapter. Addendum to fifth edition: TIMING NOTES In timing notes the following rules will be helpful: If the note is made payable a certain number of months after date, it is due on the same date in the month indicated. Thus a note dated March 5th, 1919, for three months is due June 5th. If it is made payable a certain number of days after date, it is due that many days from date. For instance, a note for ninety days, dated March 5th, 1919, is due June 3d. If the note is payable on a certain date, figure the time in days from the date to maturity. Thus a note dated March 5th, payable April 15th, carries 41 days' interest. If dated March 1st, with interest, the interest should be figured for 45 days and added to the face, and the whole amount dis- counted. Exclude the date of date and include day of pay- ment. If the note is discounted after its date and carries interest, figure the interest for the full time from date and discount it for the full amount with interest as of the date the credit is made. If the note carries no interest, time it from its date and discount it as of the day the credit is made. If the due date falls on Saturday or Sunday, it is, as a rule, due on Monday. If on a holiday, on the next day, un- less that day be Saturday or Sunday, when it would be due on Monday; if Monday is a holiday, then it is due on Tuesday. For timing notes, calendars are prepared giv- ing numbers to the days of the year, and these are a great help.- January 2d would be day number 2, and a note due in 90 days would be due on the 92d day. A note for three months discounted on the 76th day and due on the 166th day (Saturday) would be due on the 168th day, and carry inter- est for 92 davs. CHAPTER X. THE BANK AS AN ACCOUNTING MACHINE The purpose of accounting, whether financial or mer- cantile is (1) to show a chronological record of the trans- actions which occur in a concern that affect the increase or decrease of values; (2) to determine the financial position at any given time the possession of and liability for values ; and (3) to determine the profit or the loss for the period. The accounting records if properly kept will show (a) what the concern owns on the one hand, and (b) what it owes on the other. They will show from whom value was re- ceived and to whom value is due. And that accounting sys- tem is wrong in principle and technique that does not accu- rately record these facts and bring them to a focal point at stated times, omitting nothing that properly belongs in these records. PRESENTATION OF ACCOUNTING FACTS It is a principle of accounting that the financial condition of an individual, firm or corporation can best be understood by a simple statement conveying a single idea, which ex- presses much in that idea. Thus, we may state that a man is worth a million dollars. This conveys a single idea of his aggregate wealth. We may then amplify the idea, divide and sub-divide the constituent parts into as many as may be necessary to designate precisely of what the original state- ment is composed. We, therefore, proceed to classify his wealth into two forms, real and personal, by saying that he has half a million in real estate and half a million in stocks and bonds. We then classify the stocks and bonds and real estate into sub-divisions, so that in the process we have analyzed the elements that constitute his aggregate wealth. We may present this idea as follows: r Factory properties, $100,000 (Details) J Tenements, 200,000 (Details) $500,000 [^ Apartments, 200,000 (Details) Totai wealth, $1,000,000 Real estate, Stocks and bonds, $500,000 Railroad stocks, $100,000 (Details) Industrial stocks, 100,000 (Details) / Municipal, $100,000 (Details) Bonds 1 Rails, 100,000 (Details) ' Public Utility, 100,000 (Details) 249 250 THE PRACTICAL WORK OF A BANK Upon this idea all bookkeeping rests. There must be the recording of details, the aggregation of these details, first in one record which assembles and classifies the original transactions, from which they are carried to controlling ac- counts, and these into a statement or balance sheet which summarizes the whole process for ready reference. We have, therefore, a record of the transactions and the result of the transactions. And the bookkeeping system that does not do this is weak at its basic point. THE ACCOUNTS OF THE BANK The accounts of a bank differ somewhat from the ac- counts in a mercantile house in that the records of a bank all have to do in the main with cash. There is no merchan- dise to handle or account for; no "accounts receivable," for nothing is sold; no returned sales or inventories. Bank bookkeeping is an exact science. And yet between mercantile and financial accounting there is some agreement. We have many accounts payable not for merchandise bought, but for money deposited. We have no cash discounts ; but we do have exchange, which cor- responds. And if we take no inventory of stock, w r e do verify the bonds and commercial paper. We render state- ments of reciprocal accounts and have the "account stated" of the mercantile world. We buy cash for credit and pay credit in cash. The bank has a single unit the dollar; the merchant the yard or the pound as measured into the dollar. Bank accounts may be divided into three classes: (a) The accounts with persons and corporations; (b) the accounts with property, real or personal, but mostly per- sonal; (c) the nominal accounts. To these might be added the general or controlling accounts, from which is made up the statement of condition or balance sheet. The accounts with individuals depositors, and with banks, which are in a sense depositors measure the indebt- edness of the bank for money deposited. The accounts with property record the investments, collections, transit items, etc. (property of the bank in process of collection, or prop- erty of the depositor to become property of the bank) , and other property of the bank; while the nominal accounts record such items as expenses, interest, profit and loss, etc., BANK ACCOUNTING ACCOUNTS OPENED DATE. 251 NAME ADDRESS AMOUNT BUSINESS ACCOUNTS CLOSED DATE NAME ADDRESS Date Opened BALANCE AVERAOE BALANCE BUSINESS RECORD OF ACCOUNTS OPENED AND CLOSED FOR GUIDANCE OF OFFICERS and assemble or hold in abeyance the amounts for a time which are periodically closed out into the controlling ac- counts. Of course, all accounts are representative of cash in some form, for the bank handles nothing else, and the records all have to do with the increase or decrease of cash values near or remote, and the elements which affect these values. BANKS AGREE IN ESSENTIALS Essentially the same work must be done in every bank, whether it be large or small. The difference lies, not in the way it is done particularly, but who does it. In a large city bank the receiving teller may simply prove the cash as it 252 THE PRACTICAL WORK OF A BANK comes in over the counter, leaving the verification of the checks, their endorsements and the proof of the ticket to his assistant or clerks in the "hlock system proof" (which see), while the teller in a small bank will do it all himself. Likewise the collection clerk. He may have charge of nothing but the collections of the bank, while this may be but part of the many duties of the general bookkeeper of the country bank. As banks grow in size, the work must be divided and sub-divided into as many parts as need- ed in order to make a finely organized piece of machinery, but the seemingly complex machine with hundreds of men does no different work than the more simple machine that runs with three. And when in this work we speak of turning an item over to a department, we mean that it goes through a certain process as well as through a distinct department of the bank's work. It is impossible to describe the bookkeeping of the aver- age bank, for the "average bank" does not exist; we must either take a large city bank; a bank in a moderately large city or a country bank; but wherever the bank exists, or whatever the size, certain fundamentals of the bookkeeping must be observed in order to keep the records in proper shape. These records expand with the changing needs of the business ; but in their essentials they all agree. If we under- stand a large bank we shall easily understand a small one, since those departments of a large bank which are necessary to the conduct of the small one are condensed or combined with other work. Thus the credit work may be finely organized into a dis- tinct department, and have elaborate information regarding borrowers at hand, and officers who specialize in different lines of business; but in a country bank the cashier must have, somewhere in his head, the same information if he would extend credit wisely. If a hardware dealer applies to a certain Chicago bank for a loan, he will be referred to the vice-president who knows the hardware line and follows it closely; but if he makes application to the little bank the cashier must know practically the same things about the hardware business if he would act with discretion. It is the difference between the general practitioner and the specialist, BANK ACCOUNTING 258 FUNDAMENTALS ALIKE IN ALL BANKS The fundamentals of practical banking are alike in all banks, the difference being in the methods and machinery by which the fundamentals are put into execution. Thus, there is the department of receiving and paying money, mak- ing loans, keeping books, rendering statements, and direct- ing the policies of the institution. The work may be highly departmentized, or done by a force of three or four men; but the same work must be done in its essence. While no two banks are alike in their details, the work as a whole fol- lows lines more or less standardized. If the student understands the nature and intent of the work in mind, the tools with which to accomplish the results will readily be found, and too much minutia leads to confu- sion. Moreover, to describe books of record is not as inter- esting as to see them, for that is the purpose of illustrations ; and to understand them one must see and not simply read about them. In other works will be found many of the present-day systems which are old and tried in their funda- mentals, as well as in their machinery, and to attempt here to describe the different books of record in minute detail would be to repeat what other authors have said, which is far from the present purpose. Therefore, we will confine ourselves to broader views, and refer to other works as occasion warrants. CORPORATE RECORDS The records of a bank may be divided into: (a) The corporate records and (b) the financial records. The cor- porate records consist of (1) the minute book; (2) the stock ledger; (3) the stock certificate book; and (4) the stock transfer book. All other records are financial and not cor- porate. The minute book should contain a complete chronological record of the corporate affairs of the bank. The election of officers, their terms and compensation, amendments to by- laws, issue of capital, declaration of dividends, ratification of loans, and all matters which come before the board of directors, are recorded in the minute book. The record is best kept in typewriting, and the bound book is recommended as the safer way, inasmuch as the cor- 254 THE PRACTICAL WORK OF A BANK porate history and the formal procedings of the directors are of utmost importance and should not be open to the frauds and abstractions possible in the loose leaf. The book typewriter is, therefore, a helpful adjunct to this end. The record should begin with the place and date, the fact that the meeting has been duly called and who presides. Then follows the names of those present, in order to show a quorum, and to fix responsibility for the acts there done. The minutes of the last meeting are read and approved, and routine business transacted, following the prescribed order laid down in the by-laws. This usually takes the form of reports and resolutions. The former are incorporated in the record in full or referred to as "on file," while the latter are transcribed in full, giving the name of the one who of- fers, the one who seconds, and the adoption or rejection of the resolution. Some matters require roll call and others a mere "aye and nay" vote. The minutes are duly attested by the secretary or cashier, and become the official history of the bank. They should be carefully indexed as to names and sub- jects, every proper name being indexed and every subject and resolution indexed and cross-indexed if necessary to make ready reference possible. Stockholders' meetings are recorded in the same manner, the number of shares held by each stockholder present in person or by proxy being also stated. The minute book should contain a history of the bank as it is made in the board meetings. It should fully set forth the proceedings, and completely describe the action taken. Some banks record the vote on every question submitted, even to calling the roll on every loan; but this would seem needless except in those cases where the law requires roll call, or in matters where dispute has arisen, when the vote should be fully recorded. In routine matters, details of the vote are not essential. Record should also be kept of every director, when elect- ed, when resigned, when deceased, etc., for biographical and historical purposes. In elections, the law must be closely followed, both before and during the meeting, so that the election may be regular. One of the functions of the board is to pass on loans, and where the volume is large, to cumber the records with offer- BANK ACCOUNTING 255 ings would confuse the other records, and so an offering book may be used to list the offerings, and the action of the board on the various items indicated by proper entry, and certified to by the attestation of the cashier or other officer, and signed by the discount committee. The idea in mind is to fasten the responsibility for the loan beyond per- adventure. Reports of examinations by directors, public accountants and State and Government authorities should also be en- tered in the minutes. STOCK CERTIFICATE BOOK The stock certificate book contains the certificates of stock which are evidence of the ownership of shares. This is similar to a check book in that it has a stub giving the name of the stockholder, date, number of certificate, number of shares and sometimes from whom the certificate was re- ceived for transfer after its original issue. Provision is also made for a receipt on the bottom of the stub for the ac- knowledgment of the receipt of the certificate. The stock book records the ownership of the stock in de- tail, giving the name of each owner. The New York law re- quires that a stock book be kept, setting forth in alphabeti- cal arrangement the names of stockholders, the address of each, number of shares owned, when acquired, and amounts paid thereon. Thus, if John Jones bought ten shares of the bank's stock on March 1, 1915, represented by certificate No. 210, and sold five shares to William Smith on April 1st, repre- sented by certificate No. 220, Jones receiving new certificate for five shares, the account would look like this: JOHN JONES Ctf. Ctf. Amt. To whom Date issued cancelled Dr. Cr. Bal. paid issued Mch. 1, 1915 210 10 10 full Apr. 1, 1915 210 10 Wm. Smith (5) Apr. 1, 1915 221 5 5 full Account would then be opened with William Smith as was done for Jones. The total of this book as representing shares outstanding must equal "Capital Stock" account in the general ledger, which stands at the amount of authorized capital and is a credit balance. 17 S00 THE PRACTICAL WORK OF A BANK In banks where the stock is active a stock transfer jour- nal is sometimes used, which is a chronological record of changes in stock ownership, giving on one side the date, number of the transfer, number of certificate, and from whom received and to whom the new certificate is issued. On the right-hand page is the same information as to the new certificate or certificates; for one certificate may be split up into several, and several might be combined into one. The journal merely records the transactions day by day as a guide for posting in the stock ledger. STOCK SUBSCRIPTIONS Subscriptions to capital stock are generally paid for in installments (in a new bank) and receipts issued for the same. When the final payment is made the stock certificate is issued. The details are noted on the stub for record pur- poses and all certificates are numbered. Each must be ac- counted for, either as outstanding, or as having been issued and cancelled, or destroyed because of errors. Cancelled certificates are usually attached to the stubs. It is as important that there shall be a record of trans- fers as there shall be record of issues. When transfers are made, the old certificate should always be cancelled and new ones issued for the new allotments, so that each certificate will represent a certain number of bona fide shares out- standing, with a clear-cut record of their issue. Old certifi- cates are cancelled by stamping, or otherwise indicating their cancellation, or by slightly mutilating the signatures. A rubber stamp "cancelled" is quite sufficient. TRANSFER OF STOCK Authority to transfer stock may be made on the back of the certificate in places provided for such transfers, or by a separate instrument. Some banks have a transfer book for this purpose, but this prevents the transfer being recorded unless the parties are present, which does not always follow. Care should, of course, be taken to ascertain that the trans- fers are regular and forgery does not enter. Transfers made by agents, executors, trustees, etc., must have proper authority accompanying. BANK ACCOUNTING 257 A record of stockholders should be kept, by name, ad- dress, number of shares held, when issued and address. As changes are made, the list is changed, so that a correct list of stockholders is always at hand, the total number of shares outstanding being the amount of the capital of the bank. DIVIDENDS Before declaring dividends, the earnings of the bank for the period must be ascertained, the expenses paid and ac- crued deducted, losses charged off, and from the net profits the dividend may be declared, after passing to surplus fund the amount required by law. The law usually stipulates what the minimum surplus shall be and what portion of the profits shall be carried to surplus until it reaches that figure. After this has been done, the dividend may be de- clared as the profits warrant. After being authorized by the board, the amounts are set opposite the various names entitled thereto, as of a cer- tain date (no transfers being made for a certain length of time in order to allow for the closing of the books and the paying of the dividend to the proper persons) and checks mailed to the various stockholders. The total amount of shares listed must correspond with the total stock authorized, and the total of the checks equal the dividend. The divi- dend checks are usually distinctive checks, indicating that they are dividend checks, and after the dividend has been credited to "Dividend" in the general ledger, the checks are charged against it as they come in, the unpaid checks repre- senting the "unpaid dividends" on the liability side of the statement. Reports of dividends are usually required by the super vising authorities, the intent being to check the extrava- gance of the bank in respect to its distribution of profits. THE BOOKS OF RECORD The books of record of a bank may vary to a certain de- gree, according to the size of the bank, but there are certain records that must be kept by all banks, whatever their methods or however small the bank may be. It is impossible to conduct a bank without them. As the business grows 258 THE PRACTICAL WORK OF A BANK and is divided and sub-divided, other books will be used, but they are merely offshoots of the original forms. The neces- sary books are: The minute book to record the proceedings of the board meetings (there may also be various minute books for committees) ; the stock certificate book; stock reg- ister and transfer book; stock ledger; the general cash book or journal; the general ledger; daily statement book; certifi- cate of deposit register; cashier's check register; register of drafts issued; individual or dealers' ledgers; check and de- posit scratchers; discount and loan registers; maturity tick- lers; liability book; offering book; note tickler; collection register; teller's settlement books (teller's cash) ; dividend book and payroll, etc. The uses of these books will be apparent as the work pro- gresses, and description of either their form or purpose would be needless repetition here. The main books of record are: (a) The journal, which is a chronological record of the transactions which take place. When these transactions are assembled, sorted out as it were, each class by itself, we have (b) the ledger, which is an assembly of journal entries. The ledger may be a general ledger, an individual ledger, an investment ledger, a mort- gage ledger; but it is merely the assembly of journal entries in some form; which journal entries are transcripts of or the original entries, but most likely transcripts of some form of original entry, such as the deposit tickets, collection or discount tickets made at the time of the original transaction. And all the accounts come together in large banks and small in the (c) statement book. THE GENERAL JOURNAL The general journal is the aggregation of all the work of the bank for the day in bulk, as the other journal records are the aggregation of the individual transactions. It bal- ances the work of the whole bank, as the other books balance the work of a single department. From the various depart- ments, or from the various books of the bank, these items are assembled on the journal for proving purposes and also for the purpose of carrying to the general ledger. Thus, the receipts from depositors will be entered, either from the teller's window list, or from the receiving teller's depart- BANK ACCOUNTING 259 ment; payments from the paying teller. Discounts are taken from the discount clerk or discount register. Drafts issued, expenses paid, interest received, etc., are properly recorded, so that in the final test everything that has gone through the bank for the day will be entered. Of course, GENERAL BALANCE JOURNAL each item could be so entered, and some savings banks do enter every deposit and every draft, every check drawn and each item of interest ; but it answers the same purpose to do so in bulk, making the original entry at the window or at the place of receipt. When the work of the day is over, each department reports to the journal clerk its receipts for the day and its payments, or the difference, and the work of the whole must balance as has the work of each branch. As soon as the journal balances the work for many of the em- 260 THE PRACTICAL WORK OF A BANK ployees is over. The difference between the two sides of the journal is the cash balance on hand. From the journal the entries are posted to the general ledger. Where the work is voluminous a journal may be kept for each class of business, as, for instance, the "foreign journal" is the journal for out-of-town accounts. These in some banks are numerous and inasmuch as each correspond- ent has a debit and credit each day, these records necessi- tate much space and can best be kept separately, and the controlling figures passed through the general journal. There may be a debit and a credit journal, and still further divided into groups by alphabetical or geographical ar- rangement. THE EQUATION or ACCOUNTING All accounting records are based upon the principle that there shall be an equilibrium; that the business is always in a state of balance. For every asset there must be a corre- sponding liability. If an asset is increased some liability must be increased. If an asset is reduced, some liability is reduced. If one asset or liability is increased another may be reduced. If cash goes out, a liability is reduced; if it comes in, assets are increased and liabilities likewise. There may be a shifting about, but unless the affairs are in bal- ance error has been made somewhere that must be corrected by another entry to effect the balance. And until the bank man learns the fundamentals involved in the brief statement of accounting principles above given, he cannot keep a set of books. The equation of all accounting is: Assets minus liabilities equals capital. You may state this in several ways and it always re- mains true. Assets minus capital equals liabilities. Liabilities plus capital equals assets. And the bank man must know this, or he will never keep his books in balance. And be- sides he must know what is an asset or asset value, and why, and what is a liability and why. When he pays the salaries, he carries the item for a time on the asset side because he has set up a nominal asset to take the place of the real asset (cash) which has gone out. And when he receives interest he makes it appear as a liability, because he has increased his assets and must have a liabilitv to offset. And thus there BANK ACCOUNTING 261 is a constant offsetting of debits and credits, so that the statement is always in balance; and to keep it so is the art of batik accounting. THE STATEMENT OF CONDITION The financial condition of all concerns is expressed in the statement of condition. In mercantile or trading concerns this is made periodically; but in banks it is made, as a rule, daily, reported to the authorities as called for and published as the law requires. This does not, however, always express the true condition, for the element of accrued earnings is not generally given in banks of discount, but is, as a rule, in sav- ings and investment institutions. Neither is accrued inter- est payable stated, but for general purposes the statement gives all the information usually desired, leaving it for peri- odical audits and examinations to determine the technically correct condition. The records of all banks agree in their essentials. There may be a few books of record under a single man, or there may be many under many men. but when these records come together in the statement, there is a unity of arrangement and classification. PURPOSE OF THE STATEMENT The statement of condition has two purposes in mind: (a) To show the bank to be in a state of equilibrium, and that all assets and liabilities have been accounted for (ex- cept it may be a counterbalancing error, not likely to happen often; and ^b) to guide the executive officers in their ad- ministration of the bank, and to inform the public and supervising officials of the condition. The form which accounts for all the various items, and which is in general use by all classes of banks is in the fol- lowing arrangement : ASSETS. 1. Loans and Discounts. 2. Overdrafts. 3. U. S. Bonds to Secure Circulation. 4. U. S. Bonds to secure Deposits (par value). 5. Other Bonds to secure U. S. Deposits. 6. U. S. Bonds on hand (par value). 262 THE PRACTICAL WORK OF A BANK 7. Premium on bonds for Circulation; Premium on other U. S. Bonds. 8. Bonds, Securities, etc., including Premium on same. 9. Banking House; Furniture and Fixtures. ^ 10. Other Heal Estate Owned. 11. Due from National Banks (not approved Reserve Agents). 12. Due from State and Private Banks and Bankers, Trust Companies, and Savings Banks. 13. Due from approved Reserve Agents. 14. Due from Federal Reserve Bank. 15. Checks and other Cash Items. 16. Exchanges for Clearing House. 17. Notes of other National Banks. J8. Fractional Paper Currency, Nickels, and Cents. 19. Lawful Money Reserve in Bank, (a) Specie; viz.: Gold Coin, Gold Certifi- cates, Gold Certificates payable to order, Clearing House Certificates, Silver Dollars, Silver Certificates, Fractional Silver Coin, (b) Legal Tender Notes. 20. Redemption Fund with U. S. Treasurer (not more than 5% on Circulation) 21. Due from U. S. Treasurer. LIABILITIES. 1. Capital Stock paid in. 2. Surplus Fund. 3. Undivided Profits (including sums, if any, set aside for special purposes, except reserve for taxes). 4. Circulating notes secured by U. S. Bonds (less amount on hand and in Treasury for redemption or in transit.) 5. State Bank Circulation outstanding. 6. Due to National Banks (not approved Reserve Agents). 7. Due to State and Private Banks and Bankers. 8. Due to Trust Companies and Savings Banks. 9. Due to approved Reserve Agents. 10. Dividends unpaid. 11. Individual Deposits subject to check. 12. Savings Deposits. 13. Demand Certificates of Deposit. 14. Time Certificates of Deposit. 15. Certified Checks. 16. Cashiers' Checks outstanding. 17. United States Deposits. 18. Deposits of U. S. Disbursing Officers. 19. Bonds Borrowed. 20. Notes and Bills rediscounted. 21. Bills payable, including Certificates of Deposit for money borrowed. 22. Reserved for Taxes. 23. Liabilities other than those stated. (See p. 318h.) To understand the various items that go to make up a hank statement is to understand bank accounting, and each item, therefore, will be traced to its source to see what it represents. ASSETS 1. Loans and Discounts. This represents the amount the bank has loaned either on straight loans or by way of discounting paper of its customers. As loans are made and paid off, record is made in the discount depart- BANK ACCOUNTING ment or on the loan journal, the total being carried to the general journal, thence to the general ledger, and from there to the statement book. National banks are required to report their loans by classes, as (a) "Demand Loans," one or two names; (b) "Demand Loans," secured by collateral ; (c) "Time Loans," two or more names; (d) "Time Loans," single name; (e) "Time Loans," secured by collateral. The ledger account should correspond with this classification. 2. Overdrafts. This item is made up of amounts by which depositors have overdrawn their accounts, and is in OVERDRA D/ FTS .TF NAME ADDRESS AMOUNT AVERAGE BALANCE REMARKS 1 BOOKKEEPER'S REPORT OF OVERDRAFTS the nature of loans without interest or security ; and since the bank has paid value for them, they must appear as an asset, to measure the indebtedness of the depositors to the bank as contra distinguished from the debt due the depositors were the balance due to and not due from the depositors. To effect the balance, the individual deposits are increased by the same amount, the total being the gross deposits. This item is not carried on the general ledger, as a rule, the fig- ures being obtained from the ledger bookkeepers who make notations of overdrafts, and report to the general ledger bookkeeper, who also keeps a record of these amounts. If the net deposits only were shown as a liability, the amount due to the bank from depositors who have overdrawn would not appear as a resource, which it properly represents. 1 *By a recent ruling by the Comptroller of the Currency overdrafts in national banks are now forbidden. 264 THE PRACTICAL WORK OF A BANK 3. U. S. Bonds to Secure Circulation. 4. U. S. Bonds to Secure Deposits. 5. Other Bonds to Secure U. S. Deposits. 6. U. S. Bonds on Hand. National banks upon their organization are required to invest a certain portion of their capital in United States bonds, 2 against which they may issue their notes. That is, upon purchasing bonds and depositing them with the Treas- ury Department, circulating notes are issued to the bank in the par amount. The bank, therefore, draws interest on the bonds and when the notes are paid out in the form of loans, the bank receives interest on the loan also, thus making ad- ditional profit. Thus, if the bank draws interest on the loan at six per cent., and two per cent, on the bonds, it is getting eight per cent, on the money; but the cost attending the issue of bank notes reduces the profit on the bonds to about one and a half per cent., and many banks do not take out more circulation than the law requires, while others take out large amounts. Before a bank may obtain a deposit of Government funds, it must lodge with the Treasury Department security in the form of bonds, either United States or other bonds, and items four and five represent these bonds which belong to the bank, but are held in Washington for its account. United States bonds on hand merely means bonds which the bank owns and has in its vaults and unpledged either for de- posits or for currency purposes. 7. Premium on Bonds for Circulation; Premium on Other U. S. Bonds. This represents the premium paid on bonds, the securities being carried at par. The premium is really part of the cost of the bonds, and a part of the mar- ket value. But it is the rule in many banks to carry securi- ties (especially "Governments") at par and the premium separately. This is charged off from time to time as condi- tions warrant. 8. Bonds,, Securities, etc.,, Including Premium on the Same. This represents other bonds and stocks held by the bank, and includes the premium, which makes the amount of par and premium their cost, which should be scaled by the process of amortization so that the bonds stand on the books 2 Repealed by the Federal Reserve Act. BANK ACCOUNTING 265 at their present investment value as determined by amortiza- tion, the deductions on premium bonds and additions to dis- count bonds being made from time to time so that the pres- ent investment value is shown. Especially is this true of bonds for permanent investment. 3 9. Banking House, Furniture and Fixtures. This rep- resents the real estate occupied by the bank as its banking house, the cost of the furniture and fixtures, vaults, etc., which should be properly scaled down from profits, until the furniture is entirely eliminated, or if held at all, only at second-hand prices, and the real estate at its fair market value. 10. Other Real Estate Owned. Banks are not, as a rule, permitted to hold real estate, except for banking pur- poses, unless the same be taken for debts due the bank. They cannot acquire it as an investment, and consent of authorities is necessary to hold for a period of time. Real estate is not a good banking asset, and the reason why so many private banks and bankers have come to grief is the fact that they have invested in real estate, first and second mortgages, and tied up deposits payable on demand in a long-time and un- liquid security. Real estate is a precarious investment and is well tabooed in banking circles. 11. Due from National Banks not Reserve Agents. This represents, in national banking circles, the amount due from banks that are not reserve agents, on deposit account, items charged to other banks and in process of collection, and overdrafts of banks (not included in overdrafts of cus- tomers) ; balances due from other banks against which drafts are sold. 12. Due from State Banks,, Bankers, etc. These are balances of the same nature as the above, due from State banks, bankers and trust companies, against which the de- positing bank draws its drafts, and to which it sends its collection items. 13. Due from Approved Reserve Agents. Before a bank can act as a reserve agent for another as the law re- quires, or at least allows, consent must be obtained from the governing authority, unless the law makes the provision gen- 3For full discussion of this principle see chapter on "Bond Accounting in Theory and Practice" in "The Savings Bank and its Practical Work," by the author. 266 THE PRACTICAL WORK OF A BANK eral. In national banks the consent of the Comptroller of the Currency is necessary, and in order to determine the amount of these balances with approved agents, and, there- fore, allowable in the reserve account, they are reported sep- arately. 14. Due from Federal Reserve Bank represents the reserve carried with the Federal Reserve Bank of the dis- trict, and is of the same nature as No. 13. 15. Checks and Other Cash Items. This includes all checks and other items which must be collected by messenger, or which for some reason or other cannot be sent out for payment or charged to some account, but must be held in the cash. They should never be items for money advanced, "I. O. U.'s" or anything of the sort. The cash should be "clean." 16. Exchanges for the Clearing -House. This is the amount of the checks and other items that will be sent to the clearing-house the next morning, and for which payment will be made the next day. 17. Notes of Other National Banks. These are nation- al bank notes separated from the notes of the issuing bank and reported independently. In national banks they cannot count as reserve, but may in State institutions.* 18. Fractional Paper Currency, Nickels and Cents. The fractional paper currency is a relic of the Civil War, and a few of these old notes for less than one dollar are still in circulation, or held by banks as souvenirs. They are an obligation of the Government and are still good. One bank has carried seventy-five cents' worth of these on its daily statement for nearly thirty years. 19. Lawful Money Reserve. This is the lawful reserve of the bank, and includes : Gold and silver coin, gold certifi- cates, gold certificates payable to order, clearing-house cer- tificates, silver dollars, silver certificates, fractional silver coin, legal tender notes (greenbacks), and Federal Reserve Notes. 20. Redemption Fund with the U. S. Treasurer. (Not More than Five Per Cent, of the Circulation). National banks are required to keep on deposit with the Treasurer at Washington a fund of five per cent, of the circulation to re- *The reserves of banks that are members of the Federal Reserve System are now carried with the Federal Reserve Bank of the district Cash in vault is optional. BANK ACCOUNTING 267 deem the notes as presented through the Treasury Depart- ment. The Treasurer credits notes received against this fund, and charges notes issued, and this fund is part of its reserve. Upon advice from Washington that a certain amount of notes have been redeemed, or retired, the bank's circulation account is charged and the redemption fund is credited. The fund must be kept at five per cent. 4 21. Due from the U. S. Treasurer. This is a transit account for currency which may be mutilated or good, sent to Washington for redemption. When currency is sent out it is charged to this account and when returned the account is credited with the amount. In the accounts with banks, as listed above, the following remarks are opportune: Remittances of cash items are charged as of the date when sent out and appear in the balance although en route. Collection items are charged only on receipt of advice. When currency is shipped it is charged to the bank upon memo, from the paying teller. Drafts on banks are credited in total from the draft records. Where no account is kept with a bank and the item is sent out as cash, it is charged to a "transit account" or some similar name, to indicate items out in the process of collec- tion, and not sent to regular correspondents. LIABILITIES The liabilities of a bank are of three classes: (a) Liabil- ity to the owners or stockholders; (b) liability to the depos- itors and to other banks; (c) liability on its notes. 1. Capital Stock. This measures the proprietary inter- est of the owners. The amount is regulated by law and the bank in its organization must have the required capital paid in in cash. The record of these payments is made in the capital stock account, and the evidence of the interest of the stockholders is the stock book, which has a record of all stock issued and cancelled. Stock is issued in shares, and there should always be the authorized number of shares out- standing. The stockholders are the owners, entitled to the profits and liable for the losses, and capital is always a liability. It is the debt which the corporation as a corporation owes the stockholders. They cannot, of course, collect this debt. 4Tbe Federal Reserve Act repeals the reserve effect of this fund. 268 THE PRACTICAL WORK OF A BANK There is no process by which a stockholder can compel the corporation to give him back his investment. He can only surrender his ownership by transferring his shares to another, and the stock records show such transfers. 2. Surplus. This may consist of amounts originally contributed by the stockholders in addition to their stock. It is additional protection to the depositors. When a bank is started, it frequently happens that the stock will be offered at, say, $125 per share. The $100 is carried to capital ac- count and the $25 to surplus fund. The stockholder thus contributes a bonus of $25, hoping the bank will become so prosperous that the stock will, as an investment, be worth $125 or more on the market. The surplus also includes the profits of the bank which have not been paid out in dividends. As a rule banks are required to set aside from earnings a certain portion before, dividends are declared, this going to the surplus fund until it reaches a certain percentage of the capital. The surplus affords additional working capital on which no dividends are paid, and is one of the highly protective features of banking and all banks strive to accumulate a surplus of con- siderable magnitude. It is an evidence of good management. The surplus fund is more or less stationary, additions being made from time to time out of undivided profits. Some banks have large capital and large surplus funds; others have small capital and large surplus funds, the most notable being the Chemical National Bank of New York, which until 1907 had capital of $300,000 and an enormous surplus, and for that reason its stock was selling at about $4,400; but the capital has since been increased by stock div- idends to $3,000,000 so that the present capital is $4,500,- 000.00 and surplus $15,000,000.00 making a very strong institution. It stands to reason that a bank whose capital and sur- plus is, say, a million dollars, and whose debts (deposits) are five millions, is stronger than the bank which has but half as much capital and surplus and the same liability; for in the former case, the bank must lose a million before its depositors would be injured, while in the other case a loss of half as much would affect the depositors. The pride of banking is to have a large capital, ample surplus, and to build up the latter out of earnings, thereby increasing the BANK ACCOUNTING 269 value of the shares as well as offering added protection to depositors. 3. Undivided Profits. The undivided profits represent the bank's undistributed earnings. The profits arise from the loans and investments, interest paid on balances in other banks, and exchange charges received for drawing drafts, or collected from its customers. The following are the charges against the earnings : Overhead expenses, such as rent, light, taxes, salaries, together with stationery, interest paid on de- posits, exchange paid for collecting checks, losses. The bal- ance is the undivided profits, from which additions are made to surplus. The undivided profits' account is the profit and loss account of the bank, to which are carried the earnings and against which are charged the expenses and the resul* is the net profits. 4s. Circulating Notes Issued, Secured by Bonds. As was said under the resource item corresponding to this, be- fore notes can be issued bonds have to be purchased and lodged with the Treasurer at Washington. After the cur- rency notes have been issued by the Comptroller of the Cur- rency they are sent to the bank and signed by the proper officers and placed in the till for paying out. They are, like the deposits, a liability of the bank. 5 Notes on hand, in Washington for redemption, or in transit must be deducted and only net amount outstanding shown. 5. State Bank Circulation. This no longer obtains, there being a tax of ten per cent, on State bank issues and none are now in circulation. 6. Due to National Banks not Reserve Agents. This is the amount due other national banks on open account, items received for collection as cash, and for which credit has been given. 7. 8, 9. Due State, Private, Savings Banks, Trust Companies, and Approved Reserve Agents. These are the balances due other banks, against which drafts are drawn by them and on which interest is, as a rule, paid. Amounts due savings banks and trust companies are report- ed separately to the Comptroller. Overdrafts of banks are not regarded as overdrafts, but amounts due to or from banks; hence the liability must include the overdrafts of the B See under bank notes, chapter 2. 270 THE PRACTICAL WORK OF A BANK bank, and the asset side show the amount included in the amounts due from banks. 9. Due to Approved Reserve Agents. This has al- ready been sufficiently explained. It is segregated in order to determine the net liability of the reserve agents' account. 10. Dividends Unpaid. When a dividend is declared it is charged to the undivided profits and credited to divi- dend account. Checks are mailed to stockholders, and as presented are charged to the dividend account. The balance is represented in this item. Dividends are frequently un- paid for years. 11. Individual Deposits Subject to Check. This is the 25614 SF~ od %> f .Aay^Jfy&AtMrtyfr S* T^^Ti^g^y ^/^^f^n^^m^^^^^^%^e^/^^>^e(^;^ nl.r.il will b. paid on thi Ctrtifii > rate of thrM per cunt, ptr annum If left ir month*, and four per c.nt. If left iix nthi. No Intomt after six month*. CERTIFICATE OF DEPOSIT principal item of a bank's liability. It may arise from de- posits of cash or checks, or from the proceeds of loans which are credited to the checking accounts; but it is the chief lia- bility of the bank and all but the time deposits are payable on demand. The custom is to show only the net individual deposits on the general ledger. This is the deposits less overdrafts. The overdrafts are, as before stated, really a loan without secu- rity. The statement shows the gross liabilities, and contra on the asset side the overdrafts which effect the balance. In a pamphlet on bank accounting issued by the American In- stitute of Banking, it is stated in this regard: "It is not possible for the general ledger bookkeeper having before him the daily statement of the previous day and the total debits and credits of the current date to deter- BANK ACCOUNTING 271 mine the amount of the overdrafts and the individual de- posits. He can, however, determine the deposits less over- drafts and this he does in the general ledger. Later, when he receives from the individual bookkeeper a memorandum of the amounts of the overdrafts, he enters that amount in the daily statement and increases his ledger balance in the deposit account by that amount for the daily statement." 12. Savings Deposits. These are the deposits received in the savings department, subject to withdrawal, generally upon notice, and represented by pass-books. The totals are received from the savings tellers and carried to the gen- eral ledgers as in the case of individual deposits. There are no overdrafts. 13, 14. Certificates of Deposit. These are of two classes: (a) Demand and (b) Time. These certificates are in the nature of savings deposits, left with the bank on in- terest and for which a receipt in the form of a "Certificate of Deposit" is issued, which promises to pay the amount upon demand or at a stated time. 15. Certified Checks. These are the checks which the bank has certified and become liable for payment. They are, when certified, charged to the drawer's account and carried to the certified check account, and the balance due on these items here appears. The checks when paid are charged to the account and the amounts reported to the general ledger bookkeeper for his records. 16. Cashier's Checks Outstanding. A cashier's check is an order drawn by the bank on itself. They are issued for paying the bank's expenses, and other expenditures, and are often issued for local purposes in lieu of a New York draft, and are sometimes exchanged for the customer's check in preference to making a certification. In some places this is quite common. A cashier's check account is kept in de- tail and the amounts issued and paid are reported to the general ledger bookkeeper for making his statement. 17. 18. United States Deposits, etc. These are de- posits of the United States from funds in the Treasury, or from customs duties, taxes, etc., or any other source, and for which the bank has lodged bonds as security, as men- tioned on the resource side of the statement. Postal sav- ings deposits are in this class and are usually reported separately. 18 w oa c PJ GO O uu a; CO O CL UJ Q a. O u-j y S: H o^: UJ u r 2 rt Q s H CQ Q u H O a- BANK ACCOUNTING 278 19. Bonds Borrowed. It sometimes happens that a national bank will borrow bonds to secure its circulating notes rather than buy them. A fee is paid to the owner for their use and security given. These bonds are reported sep- arately, since they are not the property of the bank. The bonds appear on the other side of the statement among the bonds deposited with the Treasurer, and the liability is here shown. 20 S 21. Rediscounts and Bills Payable. It frequently happens that a bank will have call for more money than it has to spare. It cannot credit a loan on deposit account, for by so doing it would reduce its reserve below the required amount. It cannot pay out the cash, for this effects the same result. It, therefore, must turn into money some of its securities, either by: (1) Calling upon borrowers whose loans are due to pay. This will bring in cash, or reduce its liabilities by reducing deposits; (2) selling securities, and it may be take a loss; (3) selling outright some of its loans, and so anticipate their payment. It has no further liability if it sells "without recourse"; (4) rediscounting some of its notes and bills. This is the European custom. If it retains any liability for their payment, it must carry the amount as a contingent liability. This it does by the item of "redis- counts." Of course if they are actually sold without liabil- ity, no further record appears. An asset has gone out and in its place has come another; i. e., loans and discounts have been reduced and cash increased, or the amount due from banks added to, or in some other form the balance has been maintained, and it has available funds for loan purposes. It may sell or rediscount outside paper for loaning in the home market. Frequently banks rediscount with their city corre- spondents, and under the Federal Reserve System the redis- count of notes and commercial paper will be one of the chief avenues for aid in times when banks need funds and the greatest value of the Federal Banks to the financial opera- tions of the country will come through the privilege member banks will have of turning their good assets into cash by this means; (5) by borrowing on its own note and this forms a liability reported under bills payable. 22. Reserved for Taxes. In all accounting processes it is a rule that accruing obligations shall be allowed for, preferably by setting aside an amount to cover the charge. 274 THE PRACTICAL WORK OF A BANK Taxes and other yearly charges accrue constantly. It is not fair to say that suddenly on a certain date the amount be- came due ; for part was due each day. Just the exact amount cannot be determined until the tax is levied; but in cases such as rent, if paid yearly, the exact amount is known, and can be determined as a liability at any time; therefore, all well-managed concerns make such allowances, and banks create a book liability by setting up an account called "Re- served for Taxes" which is carried and added to from time to time, until the amount is paid, when the liability disap- pears. The amount can be fairly determined from past payments. 23. Oilier Liabilities. These are for other liabilities not stated or covered in the foregoing, and might include salaries, pensions, interest on deposits unpaid, etc. We have thus gone through a statement to determine what each item means, where it came from and what its place is in the accounting scheme. (Note to Third Edition, ee p. 319h.) THE BOOKKEEPING FORCE The individual who is responsible for the bookkeeping of the bank may be termed by various names, such as head bookkeeper, auditor, chief clerk, comptroller, assistant cashier, etc., but his duties are in the main the same to keep the bookkeeping machinery working smoothly. He must- keep the statement in balance. He must handle the men. The head of the accounting force comes into closer con- tact with the rank and file of the force than any other man in the bank. He is immediately responsible for what they do, and is the "general" who uses the forces supplied him to produce certain results. It is, therefore, proper at this point to discuss the force ; how it is recruited ; how governed, before taking up what it does in a mechanical way. Most banks work from the bottom up, to a large extent, and train their own men. Boys are taken in as messengers at from fourteen to eighteen years of age, and as they be- come familiar with their surroundings are advanced as va- cancies occur, if in the opinion of their superiors such ad- vancement is warranted. BANK ACCOUNTING 275 THE APPLICATION The application for employment is usually in writing, both to test the handwriting of the applicant and to ascer- tain his general qualifications. Some banks prefer a letter of application to a formal document, to test the resourceful- ness of the applicant and the way he goes at things. If the applicant is favorably considered lie may then file a formal application as a matter of record. After this application has been received in formal shape, it becomes necessary to check the statements made therein, and this is done by communicating with the references given. This may be done by a letter of inquiry, or by a printed form asking certain questions. It is opportune to say here that it is sometimes unfair to the applicant to judge too much by what may have hap- pened in another place of employment, without knowing both sides of the story. Of course, if a man were discharged for indulgence in liquor, this is an obvious fault; but if it were a matter of temper or temperament, he might under more favorable conditions make an exceedingly valuable employee. Some of the lamentable failures in banking are due to wrong environment. And not knowing what that environment was, we cannot pass judgment, or at least should not unjustly. Some banks prefer to take men out of employment; for if they do not fit, they are no worse off; but to take a good man out of a position which he already fills to satisfaction is risky, especially for him. AVAILABLE MEN Inasmuch as most banks have occasions when they may need men at short notice they should have a file of applica- tions, giving the general qualifications of men and boys, so that when the need comes there will be available candidates. It is important that the bank have the experiences of those advanced in life as a guide to what they have done, as well as an indication as to what they claim to be able to do. Boys should be investigated particularly as to their home life, for this is the essential element. A boy who has a good mother is a safe risk. The boy who keeps questionable company, is out late nights, and has no restraining influences, is a doubtful risk. 276 THE PRACTICAL WORK OF A BANK IRVING NATIONAL BANK New York, 191 APPLICATION FOR EMPLOYMENT Full name of applicant Age Residence Are you single, married or a widower? Do you live with your parents? Do you own or rent the house in which you live, or do you board? Have you a family? If so. number of children, and number of persons in all dependent on you for support? Are you at present employed or unemployed? If unemployed, how long have you been out of employment? By whom were you last employed? Their address? How long were you in their employ? Salary? Why did you leave? SERVICE Or PU> Oil coupon..) KIASOH rdll UUVINO | Have you any income from sources other than that of the salary to be received? What are your habits in regard to liquors and tobacco? Other Reference*: It is understood thnt any employment is to be by the month and from month to month only. (Signature) *" '- * _____ , APPLICATION FOR EMPLOYMtST BANK ACCOUNTING 877 Some banks make it a rule to obtain help by advertising in the newspapers, filing application with the Y. M. C. A. and other high-grade agencies, never, of course, giving the name of the bank. This is often done to prevent directors from favoring their friends. From the answers to these ad- vertisements applicants are interviewed and selections made. The knack of choosing men is an art acquired by few. The ability to get men who can do things better than your- self is a fine science, especially if in the doing they reflect credit upon themselves and you and you do not become jealous. First impressions count. And while it is not fair to judge a man or a boy under severe nervous strain, the impression is important. The author once had the pleasure of attending a meeting of an organization committee of a new bank, where applicants for an executive position were to be interviewed. Man after man was ushered in, and cross-examined, rather too pointedly for the applicant's com- fort ; but when the right man came along, it did not take long to arrive at a decision. THE NEW RECRUIT When the new recruit arrives he should be shown around the bank, made acquainted with the men, where they are, their names, and his general duties. He should be told cer- tain things and not be left to find them out for himself. He should have the rules of the bank explained to him, and be placed in charge of the one next higher up for coaching. In New York there is a little book which gives the clearing- house numbers, location of banks, etc., all of which he will speedily learn as he begins his work. Clerks who handle money or valuables of any sort, in fact, all bank men are, as a rule, bonded. Personal bonds are now quite rare, the usual surety bond being common, easy to get and affording no embarrassment to anyone. The fee is usually paid by the bank, as it should be. One of the requisites of a bank clerk is that he be a good adder, and the beginner cannot do better than to take a few lessons in adding. Let him, as he gets an odd moment, make a few slips of figures on the adding machine, and add them up, turning the footings under until he has finished. The machine will correct his mistakes. Let the list be made 278 THE PRACTICAL WORK OF A BANK longer and longer, until it assumes considerable length, and he will soon learn the fine art of addition. Let him also prac- tice on the adding machine and typewriter as occasion war- rants, until he can operate both with ease. Some clerks by reason of the mechanical adders have become so accustomed THE ADDING MACHINE AND IT8 WORK (Courtesy of the Adder Machine Co., Wllkesbarre, Fa.) to machine additions that after being in a bank two or three years are still unable to add correctly a half-dozen amounts. I have seen a clerk leave his desk and take as much time in walking to a machine as would be required to foot the few amounts he may have on a little piece of paper. Again, I have seen a bookkeeper who lacked confidence in his own mathematics, with a ledger propped up on two or three stools, footing his pages, with the aid of an adding ma- BANK ACCOUNTING 279 chine. And the chances are that when he copies the foot- ings he will get them on the wrong pages. Of course, it is against the rules, but I suppose the poor fellow's brain is so fagged with its unaccustomed task that he feels he must call in some mechanical aid. I have heard that in some banks a rule is in force that no clerk shall foot less than a certain number of items on a machine. But I don't know who watches them and counts the items. The department heads must have little time for anything else. 6 Arithmetic, especially interest computations, may well be studied. Many large institutions keep a record of all employees, when they begin work, salary, time of arrival at and de- parture from the bank, vacations, sickness, etc., as a check upon the man himself as well as a part of the machinery of the bank. Some check by time clock, others by a record kept at the door, 7 and signed by the employee, and some banks keep a record of errors made. THE CHIEF CLERK The executive head of the accounting force is the chief clerk, or some other official, who does the same work under another title, sometimes assistant cashier, who is charged with the duty of keeping the machinery working smoothly. He endeavors to get the best results with the least expendi- ture of the bank's time and money, remembering that cheap- ness is not always conducive to economy in the long run. He controls the records of the bank. He not only sees that they are properly kept but properly stored and made avail- able for reference. Sometimes the hiring of the force is left to the chief clerk, although applicants may be inter- viewed by men higher up. A good man quickly distinguishes himself. He stands out by the quality of his work. It is so in school; it is so in life and in business we can pick the winners. Bank clerks are but men, and it is a fine art to select the apt and the quick from the plodders; the ambitious from the satis- fied, the slothful, the indolent. The thing to do is to get the force, which may be a mixture of all, working together N. D. Ailing before New York Chapter, A. I. B. *There is a time-keeper in New York, who knows at sight each of the five hundred employees, and keeps a record of their coming and going. 280 THE PRACTICAL WORK OF A BANK smoothly; prevent jealousies; deal out justice; pay fairly; promote wisely; and in all things remember that the Golden Rule has its place in banking. The chief clerk will be on the lookout for improved sys- tems, short and better methods, aiming to keep the expenses of the bank down by using mechanical appliances wherever possible doing with a rubber stamp or the printing press many things that have heretofore been done by hand. RUBBER STAMPS It is amazing and amusing to discover how short-sighted many in authority are. In a certain department store send- ing out thousands of bills monthly, the management never thought so far as to have the date printed on enough forms for a month's use; for to write the date and the words "To bill rendered," five thousand times must have taken at least one day's time of the clerks who made out the statements. It is in the little things that time and energy are saved. The motto should be: "Never do by hand that which can be done better by machine; and never attempt to do by ma- chine that which requires a head." It is well to distribute the work so that there will be an even grind and not spasmodic rushes. Men do good work under pressure, but they should not be rushed. It is better to have an even pace than a lull and a rush, a rush and a lull, for the tension is relaxed and it is difficult to speed up. In one large bank there are two busy periods, July and January, with only a moderate amount of work in between, because the management could not devise a scheme to dis- tribute the work more evenly. For six weeks in the year the clerks are literally worked to death; while in the other forty-six they are just comfortably busy. In large banks a force, sometimes known as "floaters'" or "the flying squadron," is kept available to be pressed into service in various departments at different times in the day, in order to have a large force where the volume of work re- quires. Where the work is heaviest the reserves are placed to strengthen the regular employees of the department. A savings bank in Brooklyn makes it the rule to keep its men busy; not too busy, but occupied all the time. If a clerk remains after the others have finished, the cause is BANK ACCOUNTING 281 inquired into and if he is overworked, the burden is dis- tributed. If he is slow he is coached ; if he is lazy his health is inquired into, and if he is unfit they get him another job. If work must be done on a holiday the clerks may come, though not compelled to, and get a generous fee for sacri- ficing the holiday but the whole force shows up. But this institution is one of the few conducted on a broad plane of humanity, with an exceedingly fine esprit de corps. THE ART OF HANDLING MEN It is a fine art this art of handling men; of winning their confidence. When your force works because they like you, and not because they are afraid of you; when they do as good work while the schoolmaster is out as when he is in; when they give up a holiday willingly because they see the CREDIT CLERK-PROOF SHEET For 191 DI;BI rs Folio ACCOUNT CREDITS Debit Clerk Loan Department Collection Department Coupon Department Paying Teller Receiving Teller Trnst Department Reorganization Department Securities Department Foreign Department Transfer Department Mail Teller Total Departmental Balances Banks and Bankers Ledger A B C-E G H-I F-J K L M O P-R S T Z Suspended Balance* PROOF SHEET CREDIT CLEHK 282 THE PRACTICAL WORK OF A BANK need, and do it for your sake then you have won your men, and you will have no trouble with anarchy in the ranks or ink spots on the ledger. In a large bank it seemed needful at one time that the force be corrected for a few things that were occurring that did not make for discipline. The officer nearly as young as the youngest called them together and said a few kind words, which they understood and obeyed willingly, be- cause they understood and saw the logic of it all; and as they went back to work, one by one they thanked him for what he had said, but most of all, the way in which he had said it. You need not knock a man down to make him see the point it may be he will see it easier if you lift him up! A certain other bank worked on the principle that to do anything for the men would show that the administration was kind which wasn't so. When a rebuke was necessary, it was given in such a way as to leave a sting. When ac- tual correction was needful it was not correction, but abuse. The county fair was a yearly occurrence. It was the big event of the year. The bank work was brisk in the morn- ing and slack in the afternoon; yet for ten years not a clerk in the bank had seen the fair. The manager didn't think it necessary that they should. He didn't care about it, why should they? But when a new officer took hold and suggested that by dividing the work property all could have an afternoon but himself it was found that no one was injured, all were pleased, and nothing happened. It was merely a bit of thoughtfulness. It is needless to say that errors should not be covered up. Some banks will not allow an ink eraser in the place, requiring all errors to be initialed and crossed out, while others are more liberal ; but it must be understood that errors must be reported, and if the rebuke is kind, but firm, it will have its effect. Be frank with your men; ask them to be frank with you, but above all things remember that to be kind costs no more than to be ugly and you lose more than they by ill treatment. It may be necessary in some banks to place the men under a time-clock or similar check as to their going and coming; but if the force is not too large it will do as well to BANK ACCOUNTING 283 put the men on their honor. All men have that, or it can be developed, and it is better to work on this than to place too many checks on the moral side of their work. DAYS OFF Some men will take advantage of a bank's goodness in allowing days off, and while a day off is not to be despised, it can be overdone. Some savings banks give each man a day's vacation a month, so that there is no excuse for ask- ing for any additional time unless necessary. Other banks never allow any days off except the regular vacations. A book might be kept or a card record, showing the days off, and the reason. Vacations should be insisted upon, both as a matter of good health and as affording an opportunity to check the work, particularly if it is handling money. It gives the other men a chance to learn the work, and is a de- sirable thing all 'round, except in those banks where the force is so small and overworked that it means temporary help, which is always more or less unsatisfactory, or over- burdening those who remain behind. Some banks have for- mal blanks for leave of absence, and these when filed may be used as the basis of the records of the employees. There must be a system in a large bank if all these minute details are to be properly recorded. PENSIONS FOR EMPLOYEES Some banks operate a pension system for their em- ployees. A small percentage of their wages is withheld each month, going to the credit of a fund in the name of the employee, and when the employee leaves the service of the bank before the age of retirement for any cause other than disability occasioned by illness, the amount which has been contributed by him to the fund is returned. Semi-annually the bank contributes to the fund an amount equal to or in excess of the aggregate of the con- tributions by all of the employees, and from this fund, made up of voluntary contributions from both bank and em- ployees, a percentage of his average wage during his time of service is paid from the time of his retirement semi- monthly during life. 284 THE PRACTICAL WORK OF A BANK PURPOSE OF THE RECORDS The bookkeeping records of the bank culminate and find expression in the statement of condition, which has already been analyzed. The "Statement of Condition" must be dis- tinguished from the "general ledger statement" which it re- sembles, and from which it is made. The distinction lies in the fact that in the statement of condition the nominal ac- counts, such as expense, interest, rents, etc., are omitted, and only the real assets and liabilities are shown. The statement of condition goes to the Comptroller of the Cur- rency and to State supervising officials and is published in the newspapers in condensed form; while the statement taken from the general ledger daily is used for the guidance of the bank's officers, as well as to test the balancing of the books. The purpose of the records is, to repeat what has been said at the beginning of the chapter: (1) To keep a chronological record of the increase or decrease of the assets of the bank; from whom value is received and to whom value is due; (2) the profit or loss that attends the opera- tion of the bank; and (3) the financial status. If we had no record of the daily events, we would not be able to know the state of or the avenues of the indebtedness as it exists; and if we had no record of the property which came in or the property which went out of the bank, we could not know the financial position or status at a given time. We could not keep the equilibrium. The purpose of the accounting records is, therefore, to keep this balance, and for every debit there must be a credit somewhere. If the depositor's account is increased, as ex- pressing the increased liability of the bank, there must be an asset to correspond. The reason we have an "over" or a "short" is, the equilibrium has been disturbed. The teller has, for instance, increased the liability of the bank, say $100, by receipting for the $100 in the depositor's pass- book, and, therefore, set up a liability to the depositor in that sum. He has, however, on the other side but $90 as an asset in cash, or a check for coJ lection, or some other item, and the equilibrium is out of true, and there is a "shortage." He can only right the balance by a journal entry, which sets up a nominal account in place of the missing asset. There- fore, he makes a charge to "Overs and Shorts" in the sum BANK ACCOUNTING 285 of $10, which takes the place of the $10 in the cash. He might charge the depositor the $10 and thus reduce the lia- bility of the bank; but he cannot do this without warrant, and so must proceed on the first mentioned plan. With this brief statement of the fundamentals of accounting, which every bookkeeper must do, if not understand, we are prepared to spend a little time in the bookkeeping depart- ment to see how these records are kept; not going into de- tail too closely, but working on general principles, for in the last analysis they are all alike in principle but differ in detail. There must be an account with every asset, real and nominal, and with every liability, all coming together in the general ledger, and finally in the statement. THE GENERAL LEDGER The general ledger, following the accounting principle that a ledger is but a summation of the other records, which it controls, holding the totals, while the other records con- tain the details, must have an account for every class of property, every class of instrument, and every nominal ac- count that is needed to record the work of the bank. As new elements arise, new accounts are opened. If the bank had no banking-house of its own, there would be no "bank- ing house" account. If it received no rents, there would be no "rent" account; but as soon as it bought a site for a banking-house, there would be raised a real estate account to record the purchase. If it rented part of the building, it would set up a rent account, and so on, the ledger build- ing itself to conform to the changing status of the bank. This record is preferably kept in loose leaf form, unless the bank officials are biased against this method, when it would be a bound volume. It lasts considerably longer than other books of record, and may be properly bound, but the loose leaf book has so many advantages, such as dividing the book into sections, large or small as needs require, etc., that the loose leaf form is highly efficient as a book for the general records. CONTROLLING ACCOUNTS It would be possible, of course, to keep all accounts di- rectly in the general ledger, even those with depositors, but this would be such an overwhelming task that it has been 286 THE PRACTICAL WORK OF A BANK found necessary to take the accounts one by one out of the general ledger, as the work became too voluminous for that book, and segregate the work into units, carrying the totals only to the ledger. And so as one class of accounts become numerous they are taken out of this record and placed in another book. Accounts with banks are of this sort. A country bank hav- ing but a few correspondents could easily carry them in the general ledger; while a city bank, whose accounts num- ber thousands, would divide and sub-divide these accounts, alphabetically, or geographically, into as many groups as were necessary. The controlling account on the general ledger is charged with all debits made to these accounts and credited with all credits, so that the sum of the balances on the one will equal the balance shown on the other. The principle of the con- trolling account is the same as if we were dealing with a person, crediting him with what he brings and charging him with what he takes. If we deliver to a ledger fifty items, we charge the ledger that amount; if fifty items are paid out on a ledger we give it credit, and the balance is the amount due from that ledger to the accounting system. The accounts 8 that ordinarily would be found in a gen- eral ledger are: ASSETS. Demand loans (classified if desired). Time loans (classified if desired). Discounts. United States Bonds to secure circulation. United States Bonds to secure United States Deposits. United States Bonds on hand. Bonds and Stocks (total or in detail). Banking House and lot. Other Real Estate. Furniture and fixtures. Due from Federal Reserve Bank. Due from approved reserve agents. Due from other banks and bankers, savings banks and trust companies. Cash. Redemption fund with the U. S. Treasurer. Expense account. Taxes. Rent account (if bank own its building). Salaries. Interest accrued. Exchange paid. Interest paid on securities bought, etc. Premiums. Other nominal accounts. "See p. 318h. BANK ACCOUNTING 287 LIABILITIES. Capital. Surplus. Undivided profits. National Bank Notes Outstanding. Due to banks and bankers. Due trust companies and savings banks (generally reported separately as to savings banks. Dividends unpaid. Individual deposits. Demand certificates of deposit. Time certificates of deposit. Certified checks outstanding. Cashier's checks outstanding. United States deposits. Interest received (income). Discount received. Exchange received. Other nominal liabilities. On the general ledger or in the bond ledger there would be a separate account for each bond or block of bonds bought; each piece of real estate, etc. If the accounts with other banks were numerous as obtains in New York and other reserve cities, these would be taken out of the general ledger and kept in a separate book, totals only being carried to the general ledger. JOUENAL ENTEIES The journal is used to record the items day by day that go through the bank, and from which postings are carried to the general ledger. The totals from the discount book, in- dividual ledger records, etc., are carried to the journal and from thence to the ledger. The ledger is not a book of INDIVIDUAL LEDGER 288 THE PRACTICAL WORK OF A BANK original entry, and the journal is used as in all bookkeeping methods to record the daily events, but not to classify them. Therefore, we run the journal for this purpose. If real estate were bought, bonds bought or sold, salaries paid, etc., it would be a proper journal entry. Each department might run its own journal, or the totals might be reported to the journal clerk for entry on the general journal. Thus, if individual deposits as ascertained from the slips and from teller's record were $10,000, "individual deposits'" would be credited with the same amount, and technically cash would be charged. But since all records are of cash, the charge to cash does not appear. Likewise checks paid are charged to individual deposits and cash technically credited. Items coming in from other banks are credited to them ; items sent them are charged. Expenses are likewise charged, and in- terest credited. There is no journalizing as journalizing is commonly known, the journal being a cash journal, the en- try on one side or the other operating to debit or credit cash. Thus we do not say "Cash Dr. to Individual De- posits," for the mere entering on the credit side operates to charge cash. It is the purpose of the journal to assemble the amounts from all over the bank and aggregate them for posting to the general ledger. THE ACCOUNTS WITH DEPOSITORS The individual ledger bookkeeper has no easy task. His work is a grind. In some banks he is an old man, in others a mere boy; but whatever the age, he grinds, and grinds, and grinds. He should, first of all, be easy with the pen, and make good figures. Good figures carefully made make good-looking books, but in the haste to get the grind over for the day much damage has been done to the looks of the books and ink spots follow. It is the duty of the individual ledger bookkeeper to Keep the accounts with the individual depositors. He should not write up pass-books, this balancing being done in large banks by statement and balancing clerks, who make the debit entries in the pass-book or on the statement sheet from the vouchers, as a check upon the work. These accounts are kept in the main by the Boston Ledger, an old idea, but still used to a veiy large extent. BANK ACCOUNTING 289 THE BOSTON LEDGER Briefly described the Boston Ledger is a large book, with the names of depositors, as a rule, printed down the left- hand margin, or left and right both, or center, allowing space for new accounts. Running across the page there are a number of spaces, one for each day, with a column for the deposits, checks and balance. Some have a column for the items in detail and a column for the total, so that one sub- traction only is necessary. The total of the deposits must equal the total received by the teller and charged to the bookkeeping department, and the total checks must equal the total checks charged likewise by the paying teller. Over- drafts are carried in red in the balance column, and so are not footed. Each page may be proven by itself. The old Boston Ledger is a long-time favorite and has many devotees. The names are usually printed in alphabet- ical arrangement, spaces being left for new accounts in their proper place. The author has found that a scheme of bookkeeping can better be understood by a study of the form than by an attempt to describe it, and the reader is, therefore, referred to forms shown herewith for ideas as to the work of the Boston Ledger. It has been in use so long and in so many banks that it has become part of the banking machinery of the country and recognized everywhere as a labor saver. The work of an individual bookkeeper consists largely of adding credits to and subtracting the debits from the old balance. The deposits are posted separately, but it is com- mon practice to post the checks in total, several checks con- stituting one charge. Before the items are entered on the ledger it is customary to run them off on an adding ma- chine or on a "scratcher," so that the total debits and credits to that ledger may be known to effect the proof. Items other than regular deposits and checks are designated by the letters "N" for note; "D" for discount, and "C" for collection. Some banks have a column to which are posted the clearing-house items, the total of this column equaling the total clearings received. Some banks list these items in a journal, using the adding machine, and write the name of the maker in between the figures, as a skeleton proof of k> 13 290 BANK ACCOUNTING 2dl the clearings. If this is divided according to ledgers, of course the amount that goes on the ledger must be the same as the machine list. Where the pass-book is balanced a mark is made oppo- site the date to indicate that up to that point the vouchers have been returned and the book balanced. It is well to use the abbreviation "Bal." in red to indicate the fact. MERITS OF THE BOSTON LEDGER The advantages of the Boston Ledger are the quickness of posting and the daily proof, it being ideal in this respect. Of course, it does not show the depositor's record over a length of time, usually not longer than six months, but this information can be kept on the average book. The disadvantage of the Boston Ledger is the fact that unless much space is given to active accounts the details of the checks cannot be crowded in. Where a firm is known to have a large number of items, the account can be carried at the back, on a page ruled for that purpose. Or, the checks might be added by machine, the slip attached and the total listed as one item, as, for instance, "7 $175.63," means that seven checks total $175.63, and are posted as one, and will be found pinned together in the files. By this arrangement a great many checks may be entered with a few charges. Postings are made directly from the tickets and checks, and the total of the credits must equal the total received by the receiving teller, and the total of the debits the total of the checks turned in by the paying teller. It is, there- fore, easy to locate an error. Each page may be bal- anced by itself, still further running the error down to a single page. Some banks enter the different transac- tions in colored inks; as, for instance, the clearing-house debits in green; checks paid over the counter in black; bal- ances in red, etc., the intent being to designate the class to which the item belongs. There are many modifications of the Boston Ledger, all based on the original idea that of reducing the work to the minimum, making the postings quickly, and with ready proof. A bank contemplating a change in its methods CO S g i-l D -9 DO o . o i o h - " c "rt n ^ IQ u .s J rt-g H u g O a. Q 1 u c "a en p J5 n ca 8 o < U - S w & p i O < 2 "o U i^ n X o i a -2 I 03 V NAMES 292 BANK ACCOUNTING 293 should investigate the different forms for itself, and decide upon the one best suited to its needs. THE SKELETON PROOF As a check upon the work of the individual ledger book- keeper a skeleton ledger is often kept in loose leaf form, additions and deductions being made one day late. Thus all entries are made at one time and if the skeleton ledger is used as a statement system, the sheet goes to the depositor as a statement at the end of the month, the balance of which must agree with the ledger balance. It stands to reason that if the same computations are made independently of each other and from the same original sources the results must agree; and not only the results but the items must be classi- fied the same or discrepancy will result. In making charges to the ledger the clerk must be on the watch for: Overdrafts; stop payments; forgeries; raised checks; post-dated checks; stale checks; payment against uncollected funds ; alterations in the check ; figures and writ- ing being different; signatures; indorsements; voucher checks to be properly receipted; checks of deceased persons; protested checks with fees accompanying; impression of STATEMENT 1>i E NATIONAL EXCHANGE BANK or ROANOKE, VIRGINIA FORM USED IN STATEMENT SYSTEM 294 THE PRACTICAL WORK OF A BANK In Account with Manchester National Bank of New York. For Month of CREDITS Ol> Oetcrlptlon Amount DM Description mount tALANCE TOTAL CREDITS TOTAL CHARGES DEDUCTED BALANCE Please examine the account, as this statement will be considered correct unless we are notified to the contrary within one month. Please notify of any permanent change in address. ACCOUNT STATED BANK ACCOUNTING 200 protecting devices must agree with figures; signatures to checks under power of attorney; transfer of funds of cor- poration by officer to individual account; certified checks; notes that are to be charged to customer's account must be due; "no account" careful search being made before re- turning the item as unpaid. The bookkeepers in large cities are often mere boys, and generally not mature men, and, therefore, need attention and coaching. They must be warned to look out for sus- picious points about a check. They must be on guard to catch forgeries. They must post the right amount to the right account, and not get names confused. There is a great difference in bookkeepers in this regard. Some will post anything as long as it resembles or reads like the man's name. In fact, the color of the check is enough sometimes, while another will detect a discrepancy in a signa- ture in an instant. This idea of instructions might be ap- plied to all of the other departments, but I have particularly mentioned bookkeepers as they are apt to be younger as a class, because it is the first responsible position that a clerk usually is given. 8 THE AVERAGE BOOK It is customary to keep a record of all depositors, par- ticularly with reference to their average balance. This is done on a card, properly ruled, showing the actual or aver- age balance at certain periods. By the use of the balance ledger it is an easy matter to obtain this information, the balance for each day being listed on an adding machine and divided by the number of days. Some banks loan ac- cording to the average balance and it is important to know what the average balance is. This may be the average daily balance, or the average monthly balance, preferably the aver- age daily balance, as it more accurately portrays the actual condition of the account. The average monthly balance is obtained by dividing the average daily balance for the twelve months by twelve. The average amount of discounts is also sometimes kept, in order to ascertain the proportion of loans to deposits; but the customer's liability to the bank, direct and contingent, is often kept by the liability ledger, N. D. Ailing before New York Chapter. 296 THE PRACTICAL WORK OP A BANK which shows the amount of the customer's direct indebted- ness and the amount for which he is secondarily liable on discounts. RENDERING ACCOUNTS STATED The old method of rendering an account stated with the depositor of a bank was to balance his pass-book, return his vouchers, and if no complaint was made, to consider the balance as correct. This still obtains in many places, the returned vouchers being listed on an adding machine and only the total carried into the book "as per list." But nu- merous cases of forgery having gone through the courts where depositors have made claims against the bank for forgeries that occurred a considerable length of time before complaint was made, legislation has now in many cases made it obligatory upon the depositor to make claim for forged checks within a certain length of time after receiving his balanced account stated or be estopped to claim the ben- efit of the law of forged instruments. Banks, as a rule, now require the statement to be acknowledged, and vouchers re- ceipted for as a record that the account is in agreement with the customer's account and the vouchers have been exam- ined. *;*r^ It is but fair that the bank be put on guard if any ir- regularities exist in the relations with the customer, and the verification of vouchers and acknowledgment of the cor- rectness of the account are of utmost importance to both. If irregularities exist they will the sooner be detected if prompt and authentic verification obtains; and as a matter of good business and good banking eveiy concern should have prop- er reconcilement made with its bank periodically. It should be done by one other than the regular clerk or officer who draws the checks and handles the cash.* THE STATEMENT SYSTEM The statement system is a sort of duplicate ledger, kept as a check upon the work of the individual bookkeepers and as a record to send to the depositor at the close of the month; for statements are rendered, as a rule, monthly in this scheme. Moreover, it keeps the vouchers from accu- mulating, some concerns under the old method sending in *In New York the law provides that any claim against the bank for forgery or alteration must be made within one year after the return of the voucher. BANK ACCOUNTING 297 their pass-book only at long intervals and then only when requested. The writer knows of a lawyer who drew hun- dreds of checks and had not reconciled his pass-book with the bank for three years. The statement system has many points of advantage. First, it checks the postings; second, it checks the balances; and third, it eliminates the writing up of the pass-book. Guaranty Trust Company of New York B ** Guaranty Trust Company or New York STATEMENT USED IN THE STATEMENT SYSTEM IN PLACE OF BALANCING PASS-BOOK When the bookkeeper has made his postings, the tickets and checks are sent to the statement clerk who enters the items on his sheet in detail or in total as may be decided upon, .and strikes the balance, extending the same to a per- forated stub at the side. At the close of the day the bal- ances are called back, and must agree. If error has oc- curred in posting to wrong account, or a check omitted, it will here be detected. At the close of the month the vouch- ers are checked back with the statements, and a balance struck, and the sheet with vouchers sent to the depositor for In Account with Jrwittg Nattnnal NEW YORK. Pre Tob nous balance and ere llof : -I dits Ii*ted below 'ebits as per machin alanre forward Tor i reported within ten $__ . list R Please .examine at once. If no ei day* the account will be considered correct DUDJ.'ci CREDITS ONLY F.X.-Foreign Exchange Date Item Amount Date Item Amount Balance Please call for your statement on the SECOND BUSINESS DAY OF EACH MONTH and 1 preserve it carefully uiing PASS BOOK as Receipt for Deposits. STATEMENT RENDERED TO DEPOSITORS BANK ACCOUNTING 299 his guidance, the stub remaining in the bank. Balances are, of course, carried over to a new sheet for each depositor as the basis for the next month's work. The addressing ma- chine is coming into play here as a ready means of listing ADDRESSING MACHINE AND ITS WORK ( BELOW ) (Courtesy of the Addressograph Co., Chicago, 111.) the headings for these accounts. It is a quick and most excellent method of keeping the accounts with depositors. A slip is enclosed, asking the depositor to report promptly the receipt of vouchers and to verify the balance. V.J ANDERSON & CRAWFORD, 1921 BROADWAY, NEW YORK.N.Y. (' v Business Catalogues ^ 1 Rating.... 1 i Customer. 4 \ C __v ; / 1__^ v "'"( 1:>^"^_ i| - ':'". . ~ -':- ~ ::.. . 3 Ui^I^A.SI^ & 'lilQr3$mGC$isfk'- ,T 5T,C)T mtt * - '. .'" ; ,.' -. ' : ''"': ,.,: 1 1 800 THE PRACTICAL WORK OF A BANK OPENING A NEW LEDGER Comparatively a few years ago the only system of keeping the individual accounts in hanks was the old three-column balance ledger and the "Boston" ledger. Both of these ledgers were permanently bound volumes, and when one was filled up it was necessary to open a new book and transfer all the names and balances from the old ledger. Within recent years, however, there has been almost a transformation in bank bookkeeping. Improved methods have been introduced. One of the most important is the loose-leaf system of keeping the individual ledger. The greatest value of the loose-leaf ledger lies in the fact that it eliminates the necessity of opening new ledgers and transferring accounts. There are also other advantages which it possesses. In spite of these facts, however, there are still many banks that cling to the old bound ledgers. The opening of the individual ledger in a bank is a diffi- cult task. The individual bookkeeper's time in the aver- age bank is usually fully taken up with the daily routine of posting and proving his ledger, and although the opening of a ledger requires hours of extra work, it must not inter- fere with his regular daily transactions. This is possible only by putting in a great deal of time after the usual bank- ing hours. Some bookkeepers have been known to work all night in order to get all the balances transferred from one A E I U Y Totals A 60 100 55 40 25 10 290 B 110 140 96 103 80 30 559 C 79 93 52 60 24 11 319 Total No. of pages for accte. 2.49 333 203 203 129 51 1168 BANK ACCOUNTING 801 ledger to another. Because it is such a tremendous task, they are apt to put it off as long as possible. When they do so the accounts soon begin to "overlap," and when they are thus confused, posting is slower and less accurate. Some banks that use the bound ledger purchase books only of ordinary size and have a custom of opening new ledgers at certain regular periods, usually January first of each year. Even though the old ledger is not filled a new book is opened at these stated periods. It is advisable, how- ever, to use ledgers as large and thick as possible, and yet capable of being properly handled. The longer the book can be made to last the better it is. It not only defers the arduous labor of opening a new ledger, but it is more con- venient for reference, etc., as it keeps the accounts under one cover extending over longer periods. When an individual ledger is to be opened the first thing to be done is the "spacing" of the new ledger. In order to properly space the ledger the bookkeeper must ap- proximate the number of pages that are to be assigned to each account from the old ledger. To do this he must go over the accounts carefully in the old ledger and determine how much space each has used within a given time. Some bookkeepers simply begin by copying the names from the old ledger approximating the amount of space to be given to each as they go along, and following the order of the accounts in that ledger. This, however, is a poor method, as the accounts in the new ledger in nine cases out of ten should not follow in the same order as those in the old ledger. The chances are that some accounts have over- lapped and many have been crowded into spaces in which they do not logically belong. The pages cannot be appor- tioned with any degree of accuracy at all when this scheme is used. Of course, in spacing a ledger and entering the names of the depositors, the balances are not forwarded at the same time. The spacing is accomplished and all the names are entered before any of the balances are transferred. The bookkeeper does not attempt to space his ledger and for- ward all the names in one day. In fact, most of them be- gin about a month before the date set for forwarding the balances to apportion the pages arid copy the accounts. Another method used is to write the names of depositors 80* THE PRACTICAL WORK OF A BANK on slips of paper, with the number of pages to be allotted to each account, and insert each slip in the ledger at the page the account is to occupy. This method, though not entirely satisfactory, is much better than the first. If the spacing does not work out right under certain letters of the alphabet, the slips may be easily removed and replaced to readjust the apportionment. After the slips are all insert- ed, the names are copied in the book from them. The loca- ADDINO MACHINE AS USED FOR BANK STATEMENTS SPECIMEN OF WORK P. SOS (Courtesy of the Adder Machine Co., Wilkesbarre, Fa.) tion of each following account is determined by the location of the slip in the ledger and the number of pages indicated on the slip. MAKING ALLOWANCES FOR NEW ACCOUNTS In spacing a new ledger, allowance must of course be made for new accounts which are likely to be opened during the life of the ledger. This space should be apportioned as accurately as possible, as a failure to do so is sure to cause the overlapping of the accounts. For instance, suppose the space apportioned to the vowel "i" under A has been filled with new accounts and a man by the name of Aikens opens an account. This account will then have to be entered under some other vowel in the space probably already apportioned to some other account. This account will consequently run BANK ACCOUNTING 303 into the account which has been crowded into the space which did not belong to it. To secure accuracy in the spacing of a new ledger it is necessary to divide and sub-divide the ledger; that is, so many pages are first to be apportioned to each letter of the alphabet and each letter is sub-divided into vowels, so many pages being given to each vowel. Of course, all ledgers should have the vowel index, as with it the accounts can be located with greater ease and dispatch. The index is usual- ly bound in a separate cover from the ledger, as an index in a large, cumbersome ledger would be rather inconvenient for reference. Mc.SUj By. t D.l , ACCOUNT WIT* UNITED STATES NATIONAL BANK in OHAIIA.XKII. June 111 1 " 1 1 c 111 4? 400 00 J2 .....cc 1 500 00 un fnn M\ ?n 1 fi7 2 2 50 3i Jfl ^ o m QO 16 70 710 00 I : 91 91 75 7 1 ! 1] 40 1 50 75 71 n 00 - 1 160.75 a 114 S 00 4n 10 2 717 nno 7S nn i ?J _J f?t ^R i i 10 nr Q 4 i* 9? 1 nn u 2 OfK> no : 1 C R . g ^ 0.3. JQ9_41 .1 7 70 1? a 200 00 11 1 inn on 709 * i ^ 70 00 45 74 10 00 16 TO 00 4?? SB 071 03 i '? Or 2^4 9* 65 00 03 43 8 561 43 i fl 71 41 00 125 no 19 5 no 304 THE PRACTICAL WORK OF A BANK One method used by some banks, which will probably secure the most accurate spacing of the ledger is that out- lined by Mr. Patten in his work on "Practical Banking," as follows: "We should now take the old ledger and ascertain the length of time it has been used and estimate the number of pages each account will require in the new ledger, noting same in pencil in front of the name in the index. After this process has been completed, add the number of pages allowed for the accounts in each vowel, then prepare a dia- gram like Figure 1, which is prepared on a basis of an A to C, 1,500-page, ledger, and enter the number of pages allowed for each vowel. "On the diagram shown there is a total of 290 accounts in 'A' divided among the vowels; 'B,' 559; 'C,' 319; making a total of 1,168 open accounts. The footing of the accounts is proven by both vertical and horizontal addition of totals, which should always be done, or one may be thrown out on the general result. Deduct the whole number of pages al- lowed to the accounts on the index from the total number of pages in the ledger, and you ascertain the number of pages to be dstributed among the vowels. "In the illustration there are 332 extra pages (1,500 minus 1,168 equals 332) ; therefore that number of pages is to be divided equally among the vowels. To find the num- ber of pages to be allotted after each vowel, divide decimally the total of the extra pages allowed for the accounts, as follows: 332 divided by 1,168 equals .2842. Now multiply this quotient by the total number of pages allowed for each vowel, and the result, as per Figure 2, gives the number of pages to each vowel. These totals are also proved horizon- tally and vertically, which is of importance. Of course, in figuring decimally, one may be obliged on account of frac- tions to allot a few extra pages to the larger vowels to make the scheme prove, deducting them from another vowel. "After you have carefully schemed out the number of pages, as in Form 2, add the total allowed in your estimate to the total of extra pages for 'A,' and the result gives you the page on which that letter should end, in this case page 373. Letter 'B' should commence on the following page and end on page 1091. 'C' should commence on page 1092 and continue to the end of the ledger. After this has been BANK ACCOUNTING 305 A E I U T Totals A 17 28 16 12 7 AT oo B 51 40 27 29 2 1 ? 9 1^9 22 26 15 17 7 3 90 Total No. of extra pages.. 70 94 58 58 37 15 332 FIGURE 2. done enter in ink opposite each name in the index the num- ber of the page on which the account is to commence, keep- ing a tally by adding to the page. number the number of pages allowed for the account in question as per your pencil memoranda. Proceed carefully through the index, proving each vowel by adding the total allowed for that vowel to the previous footing, thus: Total number of pages allowed for "Aa," as per scheme 60 (Last "Aa" should be entered on page 60.) Extra pages allowed for "Aa" - 17 (Therefore the first "Ae" should be on page 78.) Total number of pages allowed for "Ae" , (Last "Ae" should be entered on page 177.) Extra pages allowed for "Ae" (Consequently the first "Ai" should be on page 206.) V 100 28 205 "And thus proceed through the entire index. Any dif- ferences should be corrected, and each letter should end on the page previously determined upon." A chart very similar to the one just described and rep- resented by Figure 3 is used by some bookkeepers. In the extreme left-hand column are placed the letters of the alpha- bet, the six following columns are for the vowel sub-divisions of each letter. The last column shows the number of pages assigned to each letter. The large figures under each vowel represent the number of pages which are to be assigned to 806 THE PRACTICAL WORK OF A BANK A E I U V Total A / 60 6/ 100 // 55 a,/ 6 40 A 4*6 25 5L*/ 10 290 B a?/ 110 vo/ 140 Sff 96 637 105 740 80 ff&o 30 559 c f$~o 79 1M 93 /oaa 53 /or* ' 60 /'3-p 24 114-9 11 319 Total itoi 249 tilt 333 >rsv 203 tisv 203 a./^7 129 iaT6 51 1168 FIGURE 3. it. The small figures in the upper left-hand corner of each division show the number of the page upon which the book- keeper is to begin writing the names under each vowel. In spacing a ledger the bookkeeper should remember that as a rule the letters of the alphabet requiring the larg- est number of pages are B, C, H, M, S, and W. The let- ters U, X, Y and Z usually require fewer pages than any other letters. In fact, it is hardly necessary to subdivide these letters into vowels. Another suggestion which might be of some advantage in spacing the ledger is to enter the letter and vowel on the upper corner of each page to which it belongs. This method practically indexes the ledger all the way through and makes it unnecessary to consult a separate index. It will also assist in posting. When the bookkeeper has succeeded in spacing his ledger the most important part of the task of opening the new ledger is accomplished. Taking the index or the charts as prepared, he can enter the ledger headings with sufficient assurance that in the end it will figure out right. After the new ledger has been properly spaced and all the names transferred, the next step is to transfer the balances. Before doing this some accounts that have been car- ried for some time in the old ledger can be weeded out. Some accounts will perhaps have only a few cents' balance which has been standing for a long period, ^ome of them BANK ACCOUNTING 307 may have been dead for months. The balances have been left standing either because the depositor is dead, has moved from the city, or has simply neglected to withdraw it and close the account. When such balances are only a few cents, the bank is usually safe in charging them off and closing the account. These balances may be credited to profit and loss, but of course a proper memorandum should be made of the transaction, so that any time the depositor asks for a state- ment of the account, the amount could be credited back to his account. There will be other accounts with larger balances, which perhaps have been opened temporarily for some particular purpose, and although dead, the depositor has neglected to withdraw his balance. Such depositors should be notified to check out the balance so that the account can be closed and a statement rendered. Some bookkeepers transfer all the balances on the ledger the same day the last posting is made for that day. This is a tremendous task and will probably keep the bookkeeper busy until the "wee hours" of the morning, but it is no doubt the most satisfactory way when completed. Just be- fore transferring the balances to the new ledger it is neces- sary when this method is pursued to first take off a trial balance of the old ledger. If the trial balance does not come out right every effort is made to find the discrepancy. The balances are very carefully checked over from the ledger at least once, to see that they have been properly copied. It is not absolutely essential, however, that the trial bal- ance of the old ledger comes out right before the balances are transferred to the new ledger. In fact, in order to ac- complish the task within the allotted time it is necessary to begin transferring the accounts as soon as the trial balance is taken off and checked up. As soon as all the accounts are transferred a trial balance is then taken off of the new ledger. If the trial balance of the old ledger does not agree with the trial balance of the new ledger it is, of course, evi- dence that the balances have not all been transferred cor- rectly. The quickest way then of finding the error is to check up the trial balances with each other. As soon as the two trial balances are made to agree it is ample proof that the balances have been correctly transferred from the old ledger to the new. This much accomplished, the bookkeep- THE PRACTICAL WORK OF A BANK TRIAL BALANCE SHEET New Balances Old Balances 5 # 4 2 0.3 5 2 3.4 5 1 31.03 4.251 21.0 4 5.701 1.251 New Overdft 3 6.0 8 1 20:5 61 1,0 80.2 7 305.911 3 01.O3 3 4.0 5 1 Old Overdft 4 O.5 6 2.45 6 3.0 4 1 13.35 4.251 2.0 3 0.4 5 1,0 2 3.0 5 1 41.0 4 6.001 3 00.00 4 4-0 1 New Account 3 3 0.5 20.4 5 1 5.0 6 1 5 3 0.8 5 3.0 1 72.3 7 4 0.6 6 1 7 7 3.0 4 0.7 1 Old Overdft 5 2.4 72.04 5 0.2 4 1 7 7 2.0 4 40.071 8 4.2 5 00.7 61 52.04 6 0.3 5 i New Account 8 0.4 3 1.25 3 1.0 3 1 3.4 5 2.4 51 4.0 5 1.5 51 8.301 Closed Account 4 4 6.0 9 1 5.0 9 1 3 6.0 30.071 72.00 6.031 1 2.4 5 1 Wew-Overdft 3 3 4.0 5 3 1.0 5 1 Total Dr 9,3 1 4.8 1 * - 2,663.34$ Total Cr A TlllAL HAI.ANCK SHEET MADE ON A BURROUGHS DUPLEX MACHINE. BOTH AEE LISTED AT THE SAME OPERATION AND INDEPENDENT TOTALS TAKEN AT THE SAME TIME BANK ACCOUNTING 809 er may then search for the difference which may exist be- tween the trial balances and the balance as shown by the general ledger. Some bookkeepers do not take a trial balance off of the old ledger before transferring the balances to the new ledger. They simply transfer the balances to the new ledger and take off a trial balance of that ledger only. The defect of this method, however, is apparent. By this method the only way the bookkeeper has of proving that he has forwarded THE BURROUGHS DUPLEX MACHINE THE MACHINE WITH THE DOUBLE SET OF ADDING WHEELS all the balances correctly is by checking up the trial balance of the new ledger, or the new ledger itself, with the balances on the old ledger. This is not only a more arduous task, but takes longer, and even when the process is completed is not conclusive proof. One bookkeeper has a rather unusual method of trans- ferring accounts. from the old ledger to the new. He trans- fers them in sections. That is, one day he will transfer the balances under a certain number of the letters of the alpha- bet. He takes, say, the balances under A, B, C, and D, the first day, those under E, F, G, and H, the second day, and so on, until all are forwarded. Each section transferred to the new ledger is proven with the corresponding section of 810 THE PRACTICAL WORK OF A BANK the old ledger. As each section is forwarded, no more items are posted to that section on the old ledger. The posting is done to the accounts that have been transferred to the new ledger, while the posting is still done to the accounts in the old ledger that have not been transferred. Under this method the posting is done in two separate ledgers until all the accounts are forwarded. There is a great deal of risk about this, owing to the danger of getting the ledgers con- fused. For this reason most bookkeepers would not ap- prove of such a method. There is another method by which only part of the bal- ances are transferred each day, but from the first day any of the balances are transferred the posting is done from that date in the new ledger. For instance, the balances under A, B, C, and D only are transferred. Deposits and checks, however, are posted to the accounts under the remaining letters of the alphabet, just as if the balances had been for- warded from the old ledger. Of course, for the time being the postings cannot be added or deducted from the previous balances, which have not as yet been transferred, and car- ried to the balance column. As soon as these balances are forwarded, however, the accumulated credits and debits are added or deducted separately from the balance and each balance is forwarded to the balance column. As soon as all the balances are transferred the trial balance must agree with the old ledger, 9 The sheets that are shown on the flat platen of this ma- chine 10 are the monthly statement of account on top, the ledger page between the two carbon strips, and the proof sheet, or auditor's journal page at the bottom. The machine can be operated on just the ledger page, or the ledger page and auditor's proof sheet without the statement, if so de- sired. The registers at the top of the picture accumulate totals and the crossfooter at the right figures each account as the postings are made. The operation is as follows: The old or last balance is typed into the first column, and as it is typed, without any other operation, it is picked up or accumulated in the cross- footer at the right. The next four columns are checks paid, and as these are typed they are added in the registers at the Edgar G. Alcorn in Tht Bankers Magazine. "Shown on page 311. BANK ACCOUNTING 811 BANK BOOKKEEPING MACHINE LISTS DEPOSITS AND MAKES ITS OWN ADDITIONS AND SUBTRACTIONS IT OPERATES AS DESCRIBED ON PAGE 310. top of the machine and are automatically subtracted in the crossfooter from the old or last balance. The next column is for deposits, and as the deposit is typed it adds in the register at the top of the machine, and also, without further operation, adds in the crossfooter. The crossfooter now shows the depositor's new balance, and the new balance is then typed in the last column, and as it is typed it subtracts in the crossfooter and the cross- footer clears. The fact that the crossfooter clears proves that the entry has been accurately made, or else figures would remain in the crossfooter. The checks paid accumu- late in the registers at the top and the deposits accumulate and show at the end of the day a total of all checks paid and a total of deposits. One of the most valuable features of this machine is the auditor's journal, or proof sheet. All transactions of the day that are entered on the machine are entered on the proof sheet so that the cashier or whoever is responsible for the 312 THE PRACTICAL WORK OF A BANK control of accounts has the complete detail before him, which shows the name of the bookkeeper that makes the en- try, and name of each individual depositor whose account has been affected and shows his last and his new balance. This picture shows operation on loose leaf ledgers, but the machine is also constructed for holding an entire ledger, so that each account may be posted without taking the leaves out of the ledger. 11 BALANCING PASS-BOOKS In the balancing of the depositor's pass-book the bank comes into close personal touch with its depositors, and should not regard this as a necessary evil, for it should be a very essential detail. Entries should not be made carelessly, as if it did not matter, for the book is the depositor's re- ceipt for his deposit, and is important both to him and the bank. A slovenly kept book will indicate that the bank is careless, which it cannot afford to be. However ill the depositor may treat the book, the bank should use care. Some depositors do not want a statement rendered, but want their book balanced, and vouchers listed in the book; and if so, it pays to accommodate them they may have a reason; and a bank must live by its depositors. The old Irishwoman had it right when she said: "It's the likes o' me that keeps the likes o' you on your job." This balancing should not be done by the bookkeeper, nor from the ledgers, and deposits not entered by the teller should be entered from the slips. Some banks are, of course, so small that balancing must be done by the bookkeepers, or some clerk who is general utility man. When the account is overdrawn the account cannot, of course, be balanced and the vouchers should not be returned until the overdraft has been made good. The vouchers are the bank's evidence of payments and should not be returned until the matter is adjusted. Books should be balanced frequently, and if not sent in should be called for and not allowed to run long without balancing. This should be insisted upon. Country banks are more lenient than city, as their methods are not so rigid "By courtesy of the Elliott-Fisher Co., Harrisburg, Pa. BANK ACCOUNTING 818 and their help often insufficient to do all things as per schedule. In the statement settlements, some banks do not render the statement without the book, making the balance therein, while others ignore the book and render statements month- ly. Checks are now usually run off on the adding machine unless for some reason they are to be listed in the book in ink. Deposits without the book are a nuisance, and inas- much as the entry must be made from the ticket, which has been filed away, such practices are not to be encouraged. Duplicate deposit tickets are sometimes issued as a receipt, to be entered in the book when presented. Moreover, when the book is left for balancing, the entries cannot be made while the book is in the bank's possession and for this reason the statement system is the better way. THE STATIONERY AND SUPPLIES Buying stationery is like buying a woman's garment you can pay as much as you like, and must be a judge of quality, or you pay too much. The waste in supplies la enormous. Buying is often done without regard to the util- ity of the article, or the needs of the business. Scratch pads are often made of finely engraved linen letter heads which could have been cut down and used for better purposes. Pencils, pens, erasers and stationery in general are wasted for lack of system. A bank of all institutions should not be small, and should buy for quality as well as for cost ; but it can be sav- ing. Ink should be bought in quantities and kept in good, non-evaporating ink wells. Pens should be purchased in great gross lots and doled out as needed. Books should be ordered in time to allow for proper "seasoning" or they will come in "green" and, therefore, warp, and prove unsatis- factory. Where there is likelihood of frequent change of officers, letter heads should not be bought in large quantities, for a change makes the old valueless. Check-books and pass-books constitute a very large item of the stationery expense and should be bought in quantities after competitive bidding on the same paper and for the same amount. So close does this competition at times be- come, that it is reported that a firm lost money on a bid of a 814 THE PRACTICAL WORK OF A BANK million checks where it neglected to estimate the cost of the string and delivery charges, the checks going to different branches at different times during the year. Stationery is best kept in a stock room arranged in the form of a card cabinet with compartments of various sizes, labeled or numbered. The forms should be inde'xed as to number and particularly as to title. The printer should number the form as, for instance, "55-1,000 6/9/14," indi- cating that the order was placed on June 9, 1914, for 1,000 and is number 55 in the index of forms. The cost can be indicated in the index of this form. When the order has been placed and delivered and the receipt of goods checked by the clerk in charge, the bill is referred to the proper officer for payment. The stock is checked over occasionally and when the sup- ply of any article is running low, a new order placed. No form should be ordered without going over carefully to see if it cannot be improved. Few forms are perfect. One large bank in New York keeps account with each form, accounting for all received by a careful system of audits. One bank keeps its records of stationery and supplies by a regular double entry system of bookkeeping. When a new order of envelopes is received, the "envelopes" account is debited with, say, 25,000 and a general account credited with the same amount and the cost put opposite the entry in this account. When some department needs envelopes a requisition is made on the stationery department, and the amount charged to the account of that department, and credited to the envelope account. Charges are made to the accounts of the various departments which use the enve- lopes to ascertain the cost of operation. Thus, a balance sheet can be taken off proving the exact amount in the supply man's hands. Moreover such procedure shows ex- actly how much stationery has gone to each department and its cost. The time involved in keeping such a system makes it more expensive than the amount saved would warrant, except in the case of very large banks where some exact sys- tem is absolutely necessary. In a smaller bank a careful watch for wastefulness and a reasonable investigation of requests for supplies will serve the purpose. The chief clerk often has the care of the records of the bank, by which is meant books, letters, tickets, etc., which BANK ACCOUNTING 815 have ceased to be used by the various departments, and have become the past records of the bank. In many grow- ing banks, and where consolidations have taken place, this is a serious matter. One man should see that everything is properly labeled, dated and stored away where it can al- ways be found quickly. The deposit tickets, exchange slips, letters of the correspondence department, etc., should be kept about six years. All books should be retained for about the same period, except the ledgers which should be retained as long as possible. It is advantageous to keep records and items which are likely to be called for at fre- quent intervals, in such shape for a year or more back, that they can be gotten at quickly. Unless a very complete sys- tem of storing all these records or vouchers is devised and very carefully followed up by some one in authority, they are bound to get into a chaotic condition. THE BANK'S EXPENSES In paying the bank's expenses, no better form could be devised than the voucher check, which classifies the charge for entry to expense account. After the invoice has been properly verified and payment authorized, the amount is entered on a voucher record with the name, amount, date and purpose, and classification, and voucher check issued. When this comes back it is charged to expense account un- der its regular heading as indicated on the voucher. The unpaid vouchers would indicate the amount of unpaid bills. Or, if desired, the entry could be made against expense ac- count as soon as the check was issued, which would be preferable. Some banks pay by cashier's check, cash over the counter, and take simply the receipted invoice as voucher. But a uniform record is much to be desired, and the original invoice can be attached to the voucher check after it has been paid. Some banks make the expense items a matter of record on the minutes, which would seem a waste of time and effort, a proper audit by a committee being all that is neces- sary. But having done so in the past they must always continue to do so. 316 THE PRACTICAL WORK OF A BANK PETTY CASH There are many petty items that must be paid for and for which no voucher can be had, such as car fare, stamps, etc., and these should have tickets properly initialed; but petty cash can best be kept by the "imprest system." Some banks keep these petty items and hold them as cash for a time and charge them up. The imprest method is better. In this system, the teller is charged with an amount sufficient to cover a month's petty expenses, and this charge stands against him, the cash being segregated from his coun- ter money. As he pays bills, his petty cash runs down, until it becomes necessary to replenish the petty cash, when he renders account of the items paid. Check is drawn to cover, or cash taken out of regular cash, which restores the account to its original amount. This is recommended by ex- perienced accountants as the proper way. A petty cash- book may have columns to provide for classifying the pay- ments as expense account classifies the larger payments. Expense account should be run on the columnar idea, with a column for each class of expense, such as light, heat, stationery, incidentals, etc., so that the aggregate of the ex- pense items may be known, and if desired compared from year to year to ascertain the relative cost of management and expenses. CHANGES IN ACCOUNTS For the information of the officers, changes in accounts are noted from day to day, particularly those that have been closed. The reason is ascertained, if possible, so that any error or misunderstanding may be corrected. It costs con- siderable to secure an account, and it should not be lost to the bank without good reason. Accounts opened and closed are reported to the officers daily, with details concerning balances, etc., for their guidance. In the competition for accounts, some banks make note of checks going through their hands and thus obtain a list of the depositors of other banks. This gives the executive force definite information to work upon in securing new business. And as soon as a liquidation or an absorption is rumored, the competitor banks bestir themselves to obtain BANK ACCOUNTING 817 the accounts of the bank going out of business and this is the clue upon which they work. CARE OF CHECKS AND DEPOSIT TICKETS Until the vouchers are returned and the account recon- ciled, the checks paid by the bank are important documents and are given careful attention. They are filed in check files, under the name of the depositor, as they are paid and not according to their date. The pass-books are written up AVc Dtauuu ~=_'^ . - t"*r<* />*- K*"!" "- ACCOUNT CLOSED c^^f^l-Z-lTT Remittance Dept. X"" . O A 2 Jfame.. *xerv/W. ^3> . JV\a_fcDt^c v ' P /I U Addres* .1 o q ^> (3 **_ . JTS*^. ... ..,. B - * ~"'- M /TN z Date closed^. ^-c-V , & 3 _ Balance wllhdravm _.sJ -C^r . -vSi: J __ O Reason for Closing :_"^fewfc..-jBU*VMt, ..^w-V- rf- 6nAA. 5B *-^^- e -* - g fiewwir/fc.- JV H C 33 W C! MEMO. OF ACCOUNT CLOSED, FOR INFORMATION OF CREDIT DEPARTMENT from these vouchers and in the statement system they are used independently of the ledger records. Checks are can- celled by mutilating as soon as they are paid. Deposit tickets are filed according to date and the sub- division of the ledgers. They are, of course, not returned to the depositor, being kept for a certain length of time and then destroyed. Some banks keep them indefinitely. One large New York bank keeps the letters which come from depositors, and are used as deposit tickets, for a certain length of time after the account has been reconciled, and this is given careful attention. After reconciliation the let- ters are destroyed after a stated time. 818 THE PRACTICAL WORK OF A BANK KEEPING THE BANK'S BOOKS BY MACHINERY In the preface of this work it is said that the only material change that has taken place in banking methods during recent years has been the installation of mechanical appliances for CHECK CANCELLING MACHINE AND ITS WORK (Courtesy of B. F. Cummins Co., Chicago, 111.) bookkeeping purposes ; and nowhere is this change more no- ticeable or effective than in keeping the accounts with depos- itors, in respect to both the internal and external operations. Mechanical bookkeeping is as far in advance of the pen- and-ink method as the typewritten letter is preferable to the hand-inscribed missive. The mechanical bookkeeper has for BANK ACCOUNTING 318a \ u * * ft O* * * #***:# * * z 2 oS o^ wo*" C "oSSomo * D OH o 10 co H o\ CT> o in u> f> tN >o H t*- O\H B vo in oo f\ *o oo o\ H ooinGonmn oco Z 5fin von n -NOkOO fxo c , H H"H rTrT rirT i c TIN n * o < J c c E 1 a: or ge y aKKK ex ot* m m m rn m rn m in in CVI rltO H S \ nHifuni iiiiiiiiiii CT 000 0^ ^voon lOCDtOMCOCDCO ^t QOin Q^ ojQ^Oi ^ ^Oiocootf^o f** u OOr< O IT) COTiO\O* O lf>lO(Or*"VOHt* Ok u z ovom coto \o coo^ tH ooioconmia u> tn-^m u>io ta ^m oo^ch^^ovoo n a " T^ T1 T^ tn Tl i o o y si8b THE PRACTICAL WORK OF A BANK its aim: first, the saving of time in the more rapid posting possible; second, the elimination of the nerve strain of con- stant mental addition and subtraction; third, automatic pre- vention of overdrafts; fourth, the improved appearance of the books; fifth, the avoidance of opening new ledgers; and last, but by no means least, is the abolition of the pass book, other than as a memorandum of deposits. The statement system which coordinates with the machine- posted ledger, acts as a check on the work, and at the end of the month constitutes the "account stated" with the depos- itor, thus eliminating the writing up of pass books. In the average bank, running one or two old style and pen-kept ledgers, the writing up of pass books necessitates consulting the ledger for missing entries, and this cannot be done with- out disturbing the bookkeeper, and results in night work with all its attendant unpleasantness. By merely pressing the keys and the electric release, the machine does in one operation what would require the follow- ing five operations by hand : 1. Writing the record. 2. Adding deposits to old balances. 3. Subtracting checks. 4. Extending balances. 6. Inserting the date for each entry. (The machine is set for the day with proper date, and prints the date for each item until the date key is changed.) Speed is obviously possible when it is considered that the machine prints dates and ciphers automatically and finds its own proper columns without using a "spacing key." The operator is concerned only with getting the items on the proper sheets and pressing the keys correctly. The time re- quired to take a sheet from the ledger, insert in the machine, "pick up" the old balance, list three checks and one deposit, and strike the balance is not over fifteen seconds, the book- keepers of the First National Bank of Jamaica, New York City, maintaining this speed for hours. How THE LEDGER Is POSTED BY MACHINE Loose-leaf ledgers or cards are used, each page represent- ing an individual account. These are arranged alphabetically in binders convenient for carrying the sheets in such a way BANK ACCOUNTING S18c that the account can easily be located. The headings are made by the Addressograph, shown on page 299. The machine operator opens the ledger at the first ac- count for which he has checks or deposit slips. He drops the ledger sheet in the machine carriage and throws it into print- ing position. MAKING A LEDGER POSTING BY MACHINE He then lists the old balance, the checks, and deposits. The machine spaces itself, not even requiring the spacing key used on some typewriters. The old balance and deposits are automatically added, the checks automatically subtracted, and the new balance is extended simply by depressing the total key. The sheet is thrown out by one pull of a lever on the carriage. 318d THE PRACTICAL WORK OF A BANK OVERDRAFTS AUTOMATICALLY DETECTED An overdraft is immediately detected, because the oper- ator is unable to take a total in the balance column. Inability to take a total warns the operator of the overdraft. He shifts the control lever to "subtract" position, takes two spac- ing strokes, and takes a total which is marked "QD." The method of posting that has been in use in the First THE BURROUGHS BOOKKEEPING MACHINE National Bank of Jamaica for a period of five years, and has worked without an error, is as follows : As the checks leave the teller's cage they are listed and turned over to a clerk who examines them for signature, fill- ing, dates, and endorsements, and sorted alphabetically; they are then arranged, checks in one pile and deposits slips in another. Postings are made by the Burroughs Machine shown herewith, the "short items" being taken out and sub- BANK ACCOUNTING 318e /"^ / s 1 fi ! * * 10 I 0> i _JL i * * * o * 3* * * # g 4 oo o 1 * 'frvooin o to co to to 03 CD co TJ-ON qirj q^ ovq-^oj ^ < q to, co q iq q t^^ OH om cDrirjkO* o m m to r vo H r^ din vom c0to *o oo o ri oomcotointo ^co rT rTrT rTrT HrT o rl Tt rlrlrlrllMNCM M to II II Illl 1 Illllll || THE FIRST NATIONAL BANK MONTH UF APRIL OF JAMAICA. NEW YORK CITY 95 VOIIPHFBS RFTiiRNFn In Account WKh .XiforJA/SiV MEMBER John Doe, rif^^Mri FEDERAL RESERVE BANK 121g j ferket p^^ ^jj^Sj? i M O o o in oo oo ooooooo omoo oo oo qq qq iqqqqqoq o\ooo oo oo Ok | ri CO eo rl" O 1 rM Oahnl^ IN -leMvl C. C. OrtitW Owd PJaseeiamin thia statement upon receipt and report at once if you find any difference ao ! N. D.-NU. DI...I.I.J F. C.-EC~td D.M-DiUMo*, that we may know definrtety whether our books agree with your own. II no error la reported in | a.-Oliiiiin RT.-HI l EX-firtim ton days the account will be conaiderad correct All ems are credited subject to final payment r o oo oin cvioooodo oiridd do do oo ow rimooomw o oo * mo rlrl Wrl tf> N W W W CM rl N * ^ rf t II II Illllll Illl II II CHECKS IN DETAIL i 1 1 1 1 1 1 1 II 1 Illl 1 1 o oooooo oo o oooo o m o oooooo oo o oooo o t^ 1 Ul in to n o o in m oo d m rl tO H O * LJ 1 1 1 1 1 1 1 1 1 1 1 1 Illl 1 1 ooooooooooo o oomo * o OOOOOOOOOOO O OOl^O JO, iq o r o L r- * b o in ** * m <* o u> * m in o omvom (M w in to o o m H H rl tO VO 1 1 1 1 1 1 1 1 1 1 1 1 1 1 t 1 1 1 1 1 1 1 oooovjoooinvso o oomo oooooo O in o in IQ o o o ^ in in o o O t^ in O in in o o O in 10 in CM ^ o o o in ^ ^ m o ^o ^o "^ ^ "^ ^ ^ ^ ^ * * H 10 o o t*- m m in in m m in m m N HtO rl i UHUIIUI jnn T s i ooo o^f ^t^oo\to to tocototocooooo ^J* qqin q-^ o\q-*cA ^ XQ'Oopqioq t>; ddri din CDHO\O\ o in in 10 r oin coto vo CDO ri oomoDtomto vo initm vom to * o O\CAM^O\OO to THE PRACTICAL WORK OF A BANK tracted from the adding machine list. The deposits and checks are then run on the permanent check and deposit reg- isters by the adding machine, and the total must agree with the list first made, less the short items.* The next morning the statement clerk makes the same entries on the statement sheets, "off-setting" his sheets as the bookkeeper has already done. The accounts that have been changed, which are indi- cated by the off -set sheets, are called back as to the net bal- ance only, which of course must agree with the ledger ac- counts, for the same work has been done by two different men on two different sheets from the same original items. The deposit tickets are bundled and filed for the day, and the checks are filed in the check files. Before the installation of the machine system, the clerks were obliged to work from two to four nights a week, prin- cipally writing up pass books ; whereas after the machine sys- tem was introduced night work was reduced to one night a month, at which time the vouchers are prepared for distribu- tion. More work is done with fewer men in from one to two hours less a day than formerly was the case. SAFEGUARDING THE LEDGER SHEETS As a safeguard to the ledger sheets, each sheet may be numbered. A bank officer may have charge of all ledger sheets and new signatures, and make a record of each sheet number when it is issued to the bookkeeper. When a cus- tomer's ledger sheet is filled, the bookkeeper must turn it in to him and a new one is issued to take its place. This plan overcomes any possible objection to loose leaf ledgers and avoids the possibility of substitution of ledger leaves. THE BOOKKEEPING MACHINE FOR BANK STATEMENTS Banks all over the country have discontinued balancing customers' pass books, sending out a monthly statement in- stead. The statement system eliminates the month end conges- tion, due to writing up of pass books, because the work of *It has since been found better to post first and make the check list after- ward, thus assuring that checks and deposits are in the same order on ledger and check and deposit lists, and to avoid changing the totals. BANK ACCOUNTING 318g making statements is distributed through every day in the month. A great deal of interest has developed in the statement plan as applied to customers' accounts and the number of users is constantly on the increase, because the balancing of pass books has always been a problem to bankers, and they are quick to appreciate a system which, besides saving time and expense, is in line of efficient service to customers. s SHUT _ ,_ J.I.Hoort .'..Moor. ssJ^rS:-; 5 -' "^ The Fort Worth National Bank, T*"" ' ._..,r. B ^ r ... CHECKS DIBITS LA.VC i, 3 as 51.5 500-' 3. 00- 5.00- s -SO - 4 7 .0 - 3 3.5 - es'.J 86.2 512 20.50 815.18 s 0.00 - * .5 - t r OOO- 3. 00- 55.00 - s 1.00 - 25 - A 0.00 - 3 .00 - s 5.00 - Kf 500- .50- 45. 00- xr 320- .50- ur 3 0.00- 47 .00- 2-0.0 r SIP 92 7 - 3 J - itf 1 2 * 3.5 - =f 1,225.00 nr 229.75 :- 1 o 100.00 e < 877.73. !_ T71JZ5* :^10 366^5* ^ 1 a 351iS *r 11 3 0.0 icro B74.45 > 112.75 ^ so-ii 81SJ.8*. I-t. 6 55.4 3 ! [in n n n J CUSTOMERS MONTHLY STATEMENT MADE OUT ON A BURROUGHS LEDGER POSTING AND STATEMENT MACHINE The First National Bank of Jamaica, New York City, whose form is shown, illustrates the method of handling state- ments under the daily posting method. The Statement Machine subtracts withdrawals as each individual check is listed, adds deposits, prints dates, and automatically marks balances and overdrafts. The statement form when finished is an exact duplicate of the ledger page. In some banks the checks are listed in vertical columns; while in others the paper carriage cross-tabulates automati- cally, listing the checks in three different spaces across the 31 8h THE PRACTICAL WORK OF A BANK sheet. The machine is so constructed that it may be readily adjusted to handle the work either way. A daily balance may be secured by adding the old bal- ances and subtracting the new on all active accounts. *The difference must equal the difference between checks and de- posits for the day. For taking off old and new balances a special key can be set on the machine which causes it to alter- nately add and subtract. Before sending statements to customers the perforated margins are torn off and retained for analyzing the accounts or calculating interest on daily balances. The procedure in making up statements should be as follows : (a) See that the checks are all of the same name. (b) Count the checks (while verifying the fact that they are all alike). (c) Check off on statement sheet. (d) Count number of items on sheet and see that it agrees with number of vouchers. (e) Wrap with name plainly visible. *Or a proof of the group may be taken daily, semi-weekly, etc. Note to Third Edition: Two new items are now appearing in bank state- ments that heretofore have not formed a part of the same, namely (a) "Liability of Customers on Account of Acceptances." This represents the obligation of cus- tomers to the bank arising out of acceptances made for their account. It may be represented by promissory notes, trust receipts or other instruments, by which the customer becomes obligated to the banH to reimburse it for the amount of acceptances so made, and is as a rule in the same amount as the item (b) "Acceptances Outstanding' 1 on the liability side, which represents the obligation of the bank arising from the same source. When a bank accepts a draft for a customer it is obligated to meet the same at maturity, and must therefore set up a liability for the same amount and as an offset it has the obligation of the customer to it. Otherwise the bank would have outstanding obligations in the nature of contingent liabilities unaccounted for; and having this contingent liability it must for bookkeeping reasons, as well as for security purposes, have an offsetting asset. These two items will usually be found in the s.ime amount on both sides of the statement. CHAPTER XI. CHECKS AND THEIR COLLECTION Through the disappearance of sectional lines and the knitting of the country together by the railroads, has come the growth of commerce, so that no section is now sufficient unto itself. The apples of Oregon are sold in New York; the fruit of California in Boston; and the shoes of Massa- chusetts in Texas. Trading is no longer confined to a neighborhood. Com- mercial transactions are largely between the principal cities, and between smaller places and the principal cities. For instance, the trade between New York and St. Louis is large, and between St. Louis ahd the surrounding towns likewise large, every large city acting as a distributing cen- ter for the adjacent territory. Banking in turn follows the course of trade. The suburban merchant remits to his job- ber in the territorial distributing point, and he in turn to the house in the large city. The check which settles the debt follows or should follow approximately the same route as the trade, both in paying the debt and in the collection of the check itself, it being the function of banking to settle the debts trade creates. Domestic trade exchanges do not balance any more than foreign exchanges. The farming sections produce more than they consume. The crops in some sections are large, while in others small. Manufactured goods are exchanged for raw material and foodstuffs, section to section, but there is always a balance which must be paid in cash. When the crops are being marketed, funds due Western banks pile up in the New York banks. But when the farmers need funds for planting and harvesting, these debts must be paid in money. The home bank gives the farmer credit for his wheat draft and itself gets credit in New York. By com- mon consent New York funds the country over are the basis of domestic exchange, for the reason that New York funds are desired everywhere, and generally are worth par or better. New York being our chief commercial city, the demands of business make it necessary that most banks have 319 820 THE PRACTICAL WORK OF A BANK a New York balance, and by virtue of this desire and even necessity of maintaining a New York account, New York has become the banking center of the country. Wherever commerce goes banking facilities must fol- low as a necessity, and the greater the trade, the greater the need for banking accommodations. The merchant in Texas who buys a lot of shoes from a Massachusetts manufac- turer pays by drawing his check on his local bank and sending to the seller, who must turn the check into money as soon as possible. The buyer might, but it is not likely that he will, purchase a New York or Boston draft (do- mestic exchange) from his local bank and forward this in payment; he is more apt to send his own check, for two reasons: First, because it is the simplest and easiest way and costs him nothing in time or money; and secondly, be- cause until the check comes home for payment he will have the use of the amount represented thereby, it may be with interest. CHECKS CIRCULATING CURRENCY The check thus sent may be out for ten days or two weeks, passing from hand to hand; from bank to bank; settling debt after debt; providing reserve balances for various banks, and circulating to all intents and purposes as money, and answering the functions of money admirably, so long as conditions are normal. A check, however, is not money, and even though it may answer the purposes of money, must finally be redeemed in money, and back of it, therefore, must be a propor- tionate amount of money or suspension of payment results. Banking functions, particularly in connection with bank checks, are becoming better understood as the rank and file of the people become better versed in the ways of business. The use of the bank check is coming to be common ; its util- ity as a voucher, its convenience as a mode of payment, and its safety and cheapness as a form of remittance more fully appreciated as banking has expanded and new banks have been created. GROWTH OF THE USE OF BANK CHECKS The use of bank checks has grown enormously of late years. With the multiplication of banks, so that every town CHECKS AND THEIR COLLECTION 821 and hamlet has its local institution, encouraging people to open checking accounts, the use of the bank check has be- come almost as common as the use of paper money. With the growing use of checks as a form of circulating currency has come the development of the transit department, so that everywhere are to be found banks featuring their collection service. One large bank in Philadelphia has handled over a billion dollars in its transit department in the course of a single year. It is estimated that twenty years ago the amount out- standing in the form of collections was $25,000,000, repre- senting 3,800 banks. In 1902 4,600 banks had $50,000,000 outstanding. The New York Federal Reserve Bank in March, 1919, was handling over 200,000 checks a day. On December 5, 1920, the Federal Reserve Banks had in the course of collection checks to the amount of $734,523,000. DEFECTS IN THE PRESENT SYSTEM But in spite of the widespread use of checks and their many advantages as a circulating medium (checks being the almost perfect medium of the large and distant payments, as bank notes are the perfect medium of the small and local payments), they must be redeemed in money; they must be paid on demand. This demand often takes on a silent form through the clearing-house, and a "clearing-house run" may take place, as disastrous as a run over the counter. The bank must either redeem its checks in money or suspend. The trouble with the American currency system has been that heretofore there has been no way by which a bank could turn its assets into a circulating medium, to redeem the checks of its depositors when the usual reserve proved inadequate. The banking system that does not permit the resources of the bank to be turned into circulating credits to redeem check obligations is vitally defective. The de- posits being payable on demand, and this demand taking the form of bank checks, it becomes necessary either to carry large reserves or to have some way by which these demands can be satisfied by the issue of an instrument that will freely circulate when the bank check proves inadequate. In other words, checks must be redeemed in bank notes, created by turning commercial paper into bank notes; for checks being of non-uniform denominations and unknown 822 THE PRACTICAL WORK OF A BANK outside their immediate circle can only pass as currency where well known and under normal conditions. The Fed- eral Reserve System will make this possible by its rediscount operations. CHECKS DEFINED A check is best defined as "a bill of exchange drawn on a bank and payable on demand." And as a bill of exchange it is subject to all the laws governing bills of exchange. Commentators on the laws of negotiable instruments usually give but little space to checks, treating them under the gen- eral classification of bills of exchange; although there are peculiarities surrounding checks that do not attend ordinary bills of exchange, and the law of bank checks is a study in itself. Like bills of exchange, checks are regarded as "Inland" and "Foreign," depending upon whether they are payable within the State or without. But for practical banking pur- poses a check payable outside the jurisdiction of the local clearing-house, or outside the city if such institution does not exist, is regarded as "foreign" meaning the mails and the transit department must be used to make the collection BANK CHECKS Ci OVHI v HLKSS OTHERWISE DUTHOCTSD. WIKK NON-PAYMENT OF ITKMk JMO OK OVER. IDHRENDKR DOCUMENTS TTcaKD ON PAYMENT ONI.Y. We enclose the following items for collection and credit* iry truly, ft. M. MoKnWEY, Cashie IMP t TRADERS (NAT BK 2ND NAT BK UNION EXCH BK 2 000 00 30 ooo oo 12 500 00 ILL SEWING WACH CO M PHILIPSBORN NAT BK COM NAT PARK BK IMP 4 TRADERS NAT BK NAT BK COM UNION BK BROOKLYN NAT 3X COM NAT CITY BK, IMP & TRADERS NAT 3 200 00 1 078 90 2 500 00 2 119 45 1 615 17 10 000 00 1 568 00 2 020 41 G WACKENREUTER STEcRIN MAYER & CO PACIFIC COAST BORAX CO NAT WASHBOARD CO 13 N W TR & SAFE SEATTLE CHG PNEU TOOL CO J V FARVVELL CO 68 601 93 SPECIMEN TRANSIT LETTER THE NAMKS OF THE BANKS IN THE COLUMN AT THE LEFT WOULD, UNDER THE NUMERICAL TRANSIT SYSTEM, BE DESIGNATED MERELY BY NUMBERS THUg "1-54" WOULD INDICATE THE NATIONAL PARK BANK IN THE FIFTH LINF separate their items, i. e., the clearing-house checks and the out-of-town items, so that when the remittances are received, all that is necessary is to put the total on each package, charge to the proper department and they are obliged to prove all such packages. After the packages are proven, then take a recapitulation of the package totals and this will tell if they have been run off correctly. A machine is now on the market which assists in proving the packages by hav- ing the grand total ready when the last package has been proven. As the "in-mail" book takes all the cash remittances after CHECKS AND THEIR COLLECTION 813 they have been checked by the checkers this work is best illustrated by the f orm as follows : C.H. Singles Gen'l Bks. C.H. Packages New York Nat. Bks. A. to K. Nat. Bks. L. to Z. Debit Transit Singles Credit Bk. & Bkrs. A. to K. Bk. & Bkrs. L. to Z. Note Teller Dfts. Exch. The "in-mail" work should be balanced according to lots or batches, say any number one to five or more, which would enable you to locate a difference in a very short time. After each department has balanced with this clerk, he then takes a trial balance and if the figures agree, slips can be filled out and the figures turned over to the note teller or transfer teller, as follows: Mail Debit. Date. Clearing House : New York : Remittances (transit) : Remittances (transit) : Note Teller : Currency : Coupons : Total . : Mail Credit. Date. General Books Nat'l Books A to K Nat'l Books L to K B. & B. Books A to K B. & B. Books L to Z Country Individual Accts... Drafts Exchange Total . In transit departments where both incoming and out- going mail is handled, there should be clerks to handle all cash "charge-up" items returned unpaid, transfers to New York and other cities, advising shipments of currency, as well as remittances to banks for items received for collection from banks that have no regular account on the books. 23 THE PRACTICAL WORK OF A BANK These clerks can arrange to advise all credits received from correspondents, after they have been entered on the books by each bookkeeper who receives the credits from the "in- mail" book previously mentioned. It is necessary to have some kind of record of the terms with each correspondent bank, and a card with this informa- tion already printed on gives a clerk an idea of what to follow. After the account has been opened the information necessary can be added to that already on the card and on the reverse side a memorandum can be kept of special agree- UNION BANK & TRUST CO. Jacfaoit, Ham. , IS DmSin Endanipttatt Ottd tar Collection and items enumerated Mow. FROTEST ALL PATES VNLESS OTHERWISE O/STKVCTED. TRANSIT LETTER FOB CASH ITEMS CARBON AND PENCIL PROCESS ments, but all letters pertaining to these arrangements should be kept in a special file for that purpose. It is also well to know what your correspondent banks are charging and a card with the itemized rates will be found useful. In fact, the card system has been found a most important part in the keeping of records in a transit department and is re- ferred to frequently. This does away with trying to keep records with too many different clerks or in books where the information is not always readily accessible. In most large banks it is so arranged that a certain clerk is given charge and perhaps is called the manager. He must see to it that the work is divided among his many assistants so that no part of the book work is to be done by him; he should have the power of making terms for handling his items; must c< instantly be on the lookout for new arrange- CHECKS AND THEIR COLLECTION 345 merits that would benefit the bank; must arrange for the par points to be given to the bank's correspondents; must see that all large items are given special attention and especially cost items, and must endeavor to obtain special rates on the same. He must also educate his assistants to handle this part of his work and must have at least one clerk who may be called his first assistant, trained so that the work of the bank or department will not be dependent upon one person only. This rule should be applied to each and every mem- ber of the department and each clerk should have a set of rules or instructions pertaining to his work, so that a change can be made at any time without inconvenience. The foregoing gives an idea of the general routine of the work before we take up that part of the department which will now be outlined after the "in-mail" clerk sorts his tran- sit items. You will notice on a previous chart that they are listed so that the packages are in one column, singles in another. In the department there should be a clerk called "scratcher" man, who receives these items from the mail book and after listing the packages they are proven as pre- viously stated and as each package is ready, it is delivered to the "head router" and it is here where a most important part of the work of the handling of the outgoing items com- mences. The manager of the department should arrange it for this clerk so that he can assort his items in the best manner possible; and while some banks arrange the sorting of their items by lists, a very good way is to copy the lists of your correspondents into a book, using a bankers' direc- tory specially made for that purpose and by this method it does away with having to look after too many records per- haps kept in different places. When obtaining lists from your correspondent banks, you should ascertain what points are handled direct by them and what indirectly and this in- formation should show in the book mentioned. You agree upon certain marks for a "direct" point and when not marked the point will be considered "indirect." When re- ferring to this book you will readily find whether it would be to the bank's interest to route indirectly a very large item, and it perhaps would be well to give instructions to the head router not to send items in that manner when over a certain amount. New lists should be received from your corre- 846 THE PRACTICAL WORK OF A BANK spondents at certain intervals, so that the records would be up to date. The head router should have a desk or table so arranged that the items could be assorted in different boxes and he should .have sufficient time to enable him to assort his items correctly. The work should be arranged in sets, so that, for exam- ple, all items that go to correspondents in large cities where accounts are kept are in charge of a clerk and the work, which is of sufficient quantity, will indicate that large letters are necessary. This work can be done on machines which are specially built for that purpose, such as a Remington typewriter machine with Wahl adding attachment, Elliott- Fisher machine and others. The Burroughs Adding Ma- chine Company are advocating the handling of transit let- ters on their machine, by using the number system for en- dorsements and the number system for the drawee, for items on banks in large cities, i. e., large letters. It is well to have the work so arranged that each clerk receiving a certain amount of items is charged with that to- tal, so that he can balance his work independently of anoth- er. This can be arranged according to the amount of work each bank handles and if the volume of business is large, the work can be so fixed that one or more States can be divided according to the amount of business on each State, and this will assist the head router in knowing just where to sort his items. The items are assorted according to the town by the alphabet by some banks, but this can be worked out very easily according to the way each bank prefers. This ap- plies principally to that part of the items for which the banks remit by draft. All "charge up" items can be assort- ed to clerks who have accounts that allow banks to charge items to their accounts, and this can be divided by calling the divisions, say: "National charge up accounts," "Banks and bankers charge up accounts," and would be arranged in sets according to the number of bookkeepers in each bank. These can be run on books of small letters which are carbon copy, say twenty letters or more to each page, using a num- ber for banks that remit for items and for all small "charge- up" letters of same size it is not absolutely mecessary to have the number system, the date being sufficient in tracing an acknowledgment. CHECKS AND THEIR COLLECTION 847 All "large" letters that banks allow to be charged to their account can be handled on the large machine sheets just mentioned. After receiving his checks each clerk should make a list of them on the adding machine before sorting them to charge to his correspondents on his set and keep adding to his list after he has assorted the first lot. The sum of all these lists must agree with the totals of the letters and he will know his work has been balanced each day. Then each clerk should give the totals of his lists to a clerk in the de- partment who should have charge of what is called a "proof scratcher" and the sum of these lists on his scratcher should agree with the total amount charged to the other scratcher, which is a proof on the work received from the mail book and tellers. The "proof scratcher" should see to it that fig- ures are then turned over to the general bookkeeper repre- senting the total of the work handled in the department for the day. Some banks handle as cash a large amount of drafts with bills of lading attached. These are handled in the transit department and if the volume of business is sufficiently large, a special book can be used to record each draft, so that full costs can be recovered, i. e., exchange and interest for time drafts were outstanding over a certain number of days. All work in the department should be carbon copy. Many banks throughout the United States have their work so arranged that practically all of it is done by machines previously mentioned. Banks are continually on the watch for systems that will improve the work in this department and it is safe to say that there is no department in a bank that requires as many changes as the transit department, and usually the new innovations are an improvement, so that the department is bound to be one of the best in a bank, when properly man- aged. There was a time when the work was done by pen and ink and copied in a copy book. Registers were kept and in many instances banks kept a complete record of each check. The changes that have been made certainly are won- derful. The work of the transit clerk is best illustrated when you consider that he must see that his items are sent to the right correspondent ; he must see that the proper instructions 848 THE PRACTICAL WORK OF A BANK are entered on his letter; he must watch to see that all items are endorsed correctly. Some banks have clerks whose spe- cial duty it is to endorse the items. Some endorse them "Pay any bank or banker," etc., and many prefer to endorse them to the bank to which they are sent. The latter is the proper way and does away with the question of a qualified or restrictive endorsement. The transit clerks must also see that all items are paid or advised promptly, and if not, notify the customer; should balance his outstanding or unpaid items regularly and also trace those not accounted for, collect interest on overdue drafts and watch for other similar matters which may oc- cur from day to day. It is well to keep a record of the number of checks each transit man handles; this gives you a good idea of the amount of business transacted and the information proves very interesting from year to year. As each clerk should balance his work separately as pre- viously stated, a special book should be kept by the man- ager of the department or his assistant, of the amount each clerk has outstanding and the totals in such book should agree with the amount outstanding according to the total or the general books. Some banks have their work so arranged that when the letters are ready to be sent out, they are delivered to the messenger department and under the direction of the head messenger he has the clerks in his department handle the outgoing mail by allotting a certain number of letters of the alphabet to each man according to the volume of business. By this arrangement, they are able to enclose items from the different departments all in same envelope when in- tended for a certain bank, thereby saving quite a sum to the bank in postage, and at the same time have the mail in such shape so that it can be handled by the correspondents in a more satisfactory manner than if they were to receive prob- ably half a dozen or more letters from a bank daily, espe- cially where banks in large cities deal extensively with banks in other large cities. 2 O t ! I 348 A z o z cc c 848 CHAPTER XII. BANK EXAMINATIONS AND AUDITS The examination of a bank has for its purpose the deter- mination: (a) That the bank is solvent; (b) that it has, as it claims to have, assets of certain worth; (c) that its methods are clean and its management conservative and sound; (d) that the technique of its operation is efficient and modern, and to suggest changes in the system to make it a smooth running accounting machine. The examiner going from bank to bank acquires a fund of information that he can use to advantage, if the bank be in a receptive mood and is anxious to improve its service, and can advise the officers in many things to their profit. Frequently we see men overworked for no useful pur- pose; doing things in the hardest way; doing the same work twice when once should suffice; writing where a rubber stamp would be far better, and failing to appreciate the usefulness of the carbon sheet and other labor-saving de- vices that make for efficiency in the day's work. But such are the conditions in large and presumably well-managed banks that lay claim to aggressiveness. The author once had the pleasure of drawing up a plan to reduce the opera- tions from seven to four in handling mail items, only to find the Chinese wall "We have always done it with seven, why four?" in his way; and they do it with seven yet. In another case the deposits were listed on sheets each day and the entries on each sheet counted to record the number of items. And no one had ever thought of numbering the lines ! RIGHT TO EXAMINE, POLICE POWER This right to examine is recognized as part of the police power of the State, for the good of all; and while in Eng- land there is no such thing as bank examinations, each bank being a law unto itself, such a condition here would lead to chaos in the banking world; for we need the steadying hand of supervision to keep the ships off the rocks, even the little ones. 349 9SO THE PRACTICAL WORK OF A BANK The ultimate end and aim of the examination is to pro- tect the stockholder and the depositor from losses due to unsound banking operations. The large stockholder needs protection from the directors and other stockholders, the little stockholder needs protection from the big stockhold- ers, the depositor needs protection from both, and the di- rectors need protection from themselves. While the law imposes a liability of twice the capital holdings, it is seldom if ever collected in full, and the pen- alty if enforced upon the little fellow would be difficult to recover; and even though it were not so, to protect him for his own sake is worth while. Many a stockholder invests with no thought of his risk, looking only to his dividends; and in his ignorance he should be assured of sound policies and solvent condition. It goes without saying that the de- positor needs, and is entitled to, all the protection that prop- er examining methods can give. BANK EXAMINATIONS or Two CLASSES Bank examinations may be divided into two classes: (1) External examinations performed by the Comptroller of the Currency, State banking departments, clearing-houses and periodical audits by certified public accountants; and (2) internal examinations or audits made by the bank's auditing staff or public accountants. The latter is in the nature of an internal audit by an outside source, but the audit is by order of the bank and not by an independent supervising body. The most common form of internal audit is the examination by the directors a bank examining itself. Checking the books of a bank does not warrant the solvency of the bank any more than checking the books of a mercantile house warrants profits. It is not an audit. The examination should be what the accountant would call an investigation; as if the books of the bank were destroyed, and the problem was to ascertain what the bank owned and what it owed independent of its records. And without using the books of record, except as a guide, a bank may be fully examined. EXAMINATIONS AND AUDITS 851 EXAMINATIONS BY DIRECTORS It is reasonable to conclude and easy to prove that an audit of a bank cannot properly be made by a committee of directors. In the first place they do not know how, and are often coached by one of the bank's administrative heads ; secondly, they have not the time to do it properly, and as a rule verify the things that hardly need verifying, and over- look the things they should inquire into. With all the solemnity of a judge of the Supreme Court, they will come in, without warning, count the cash, call for the bonds, and perhaps look over the loans and discounts, and it may be verify the bank balances; but overlook the most important thing the accounts with depositors. Some well-managed banks are now recognizing the fact that the board of directors cannot make a proper audit and so employ outside accountants for this purpose, and this is as it should be. An accounting firm of high standing submit the follow- ing as their conception of a true audit: First. We count the cash in detail at the date of our audit. Second. We submit a detailed report of all cash items which are being carried by the bank. Third. We verify the balances due, to and from other banks, by corre- spondence. Fourth. We submit a detailed list of all overdrawn accounts showing the date the overdraft commenced. Fifth. We verify all loans and submit a detailed statement of each borrow- er's, director's, officer's, and clerk's liability as maker and endorser. Sixth. We submit a detailed statement of all suspended or past due paper. Seventh. We verify all securities owned, by count of same. Eighth. We verify all deposits by trial balance of the ledgers, and we examine all pass-books presented during our stay at the bank. Ninth. We verify the outstanding capital stock by examining the stock records. Tenth. We place a sufficient force of accountants on the work so that our examination will be completed promptly. Eleventh. We submit a complete, detailed, typewritten report, covering our audit, and we include therein all suggestions for improving the accounting system. This report is addressed to the president, or to some one authorized by the board of directors. Twelfth. There are other features of our examination which we would not care to reveal, as they are safeguards which we employ to detect shortages or manipulations. Mr. E. P. Moxey of the Comptroller's office in Wash- ington tells this incident : "While preparing a bank case for trial I was much amused by reading, in the minutes of the meetings of the 852 THE PRACTICAL WORK OF A BANK board of directors, a report of a committee of the board on the result of their examination of the bank. As far as 1 recall the wording was somewhat to this effect: 'Your ex- amining committee begs leave to report as follows: We met at the banking house on Thursday last, after the close of business, and counted all the cash in the possession of the several tellers and that in the vaults of the bank, and found the same to agree with the amount called for by the books We examined all the loans and discounts, with the collateral securing the same, also the stocks, bonds and securities owned by the bank and found the same to be correct. We also examined all the books and accounts of the bank, and found the same correct in every particular. The income and expense accounts for the past six months were carefully audited by us, and are correct. We completed our examina tion and adjourned at six-thirty P. M.' "And the report might have added 'in time for supper in the board room.' ' WHAT THE EXAMINER SHOULD KNOW The qualifications which must be possessed by anyone who wishes to be considered a competent bank examiner are : First He must have a pleasing personality, tact and character. Second He must be an accountant of experience. Third He must have had business and banking train- ing. Fourth He must be thoroughly versed in all the minute details of the banking business and know some of the ave nues of fraud. Fifth He must be well posted on financial subjects. Personality plays an important part in the qualities oi the examiner. A certain gentleman creates a most unfavor- able impression while examining a bank, on account of an unfortunate trait in acting as though he considered everj clerk in the institution a thief. As a consequence, and prop erly so, he is thoroughly detested by them, and instead of re- ceiving their hearty cooperation in his work, every obstacle is thrown in his way to impede his progress. A thorough knowledge of accounts, not only those of financial institutions, but of other lines as well, must be pos- EXAMINATIONS AND AUDITS 858 sessed by the competent bank examiner. This knowledge should be acquired preferably through experience, but the general principles on which all accounting rests may be acquired from those institutions which offer courses in higher accounting. The more experience a person has had in ac- counting work the better bank examiner he makes. Of course the most important thing that makes for com- petency in a bank examiner is a thorough familiarity with every detail of the banking business. Unless a man knows the various books and records used in each department of a bank it is impossible for him to make a proper examination. Not many years ago a leading member of Congress pre- vailed upon the then Comptroller of the Currency to ap- point as national bank examiner for his district a gentle- man whom he praised highly as being thoroughly qualified for the position. As a matter of fact that gentleman in question had never been inside of a bank in his life, except to make a deposit, draw a check or have a note discounted. It is needless to say that his examinations were mere farces, and the story goes, that the cashier of one of the banks he was trying to examine, out of the goodness of his heart, made out for him his report to the Comptroller. 1 The examiner should not approach his examination as a detective looking for a criminal, but as a big-hearted indi- vidual looking for an opportunity to help; to give a clean bill of health if possible, but to discover the weaknesses if any exist; to build up by testing and not destroy by criti- cism. And if he goes at it aright, makes friends with the men. is dignified but agreeable, he can get much help from the force. THE PSYCHOLOGY OF ERRORS The knowledge that one's work is to be scrutinized tends to make one careful in that work. The exercise of care soon becomes a habit. And careful habits lead to efficiency. And efficiency leads to promotion and success. Errors are usual- ly the result of inefficiency. I have in mind a case of a large bank where the force of an entire department worked until late at night in the en- deavor to locate an error of $5,000 in the day's work. When iE. P. Moxey before New York Chapter. 854 THE PRACTICAL WORK OF A BANK this was finally discovered it proved to be an item for $5,000 added to a remittance letter after the same had been footed without a corresponding change being made in the total. The person directly responsible for this error was a young fellow whose thoughts were not centered upon his work. Not all errors, however, are made unintentionally. There may be those who have been unfaithful to the trust reposed in them, and who have applied the funds and moneys of the bank to their own use. This stamp of man lives in constant dread of detection, for, by an unexpected examination of his books, should he be a clerk or bookkeeper; or by a verifica- tion of the securities owned by the institution or held by it as collateral for loans, of which he may be the custodian; or by a count of the money on hand, should he be a teller, he real- izes that detection is inevitable. 2 An error known to exist should never be allowed to run long without locating it, unless certain that it is not the be- ginning of a trail. It is the examiner's duty to trace little things to their end and find out what they mean, for they may lead to serious developments. On a certain day in a large city bank the incoming mail department found at the close of the day's work a shortage of a few hundred dollars. The work of the day was checked and the auditor discovered that several checks of even amounts, as shown by the incoming letters, had not been ac- counted for. He immediately secured complete descriptions of the items, and learned from the bank where they were payable that they had been paid two days later than the date of receipt. The next move was to check the day's work on which these items were actually paid, and the examina- tion brought out the fact that these checks had been inserted and other checks of the same amount taken out. The same process was then used in locating the checks of the second day, and the examination proved that this substitution was made every second day. This process was continued for a period of about two weeks. The party, then thinking he had covered his tracks so that tracing of the items was al- most impossible, drew several fictitious checks to the amount of the items already out, and drew them on a bank that it 2E. P. Moxey. EXAMINATIONS AND AUDITS 855 was customary for him to list in preparing the clearing- house exchanges. He then proceeded to open an account in a small out-of-town bank (this bank being a correspond- ent of the employing bank) , and when the checks were for- warded to their correspondent for payment, they were sub- stituted for the amount taken out two days before, and of course destroyed. 8 How TO MAKE AN EXAMINATION The word assets comes from the French assez, meaning "enough," and the question to determine here as in the granting of credit is, "Is there enough?" The examination of the resources usually takes the larger part of the exam- iner's tune, while little attention is given to the liabilities, which is no doubt due to the limited amount of time at his disposal. While proper attention should be given to the assets, as much, if not more thought should be given to the liabilities, for the individual ledger is probably one of the most fertile fields in which to detect wilful wrongdoing, and this usually receives the least attention from the bank exam- iner. 4 In the small country banks, where the duplicate system is not in use, there is very little check on this portion of the work. The bookkeeper in charge of the ledger also balances the pass-books, so that he is in almost complete control of this particular portion of the work. The following directions for an audit, taken from a work on accounting over four hundred years old, are interesting, both for the language and the exactness of the procedure: "And for the more expedition and clearness, ye shall keep this order, which is that ye take and assign one of your fel- lows to help you ; for it were much labor and overtedious for one alone to examine all that belongeth to this act. Where- fore for the more speed, first deliver to your fellow the Jour- nall and hold yourself the ledger. Then request your fellow that hath the Journall to begin with the first parcel of said a Address before New York chapter. Author prefers not to be quoted. *An examiner of country-wide reputation stated to the author recently that he always examines the individual ledgers personally, for some of his greatest achievements as an examiner have resulted from clues which began with suspi- cious entries on the individual ledgers particularly "kiting" operations. 856 THE PRACTICAL WORK OF A BANK Journall, and that he tell you the name and the thing and in what leaf of the ledger it standeth, in debtor or creditor, so that you may perceive to what leaf he sendeth you. "And when you have found the parcel by the showing of him that hath the Journall, then mark and make a token in said ledger in the same parcel with a tick upon the amount, or some other sign so that it be no blemish in the book. That done, say to him that hath the Journall, that he also make a tick or sign of your concordance. And beware that none of you, without consent of the other, mark any parcel, by rea- son whereof might grow grievous labors to reform the cor- rection again of the same. For the parcels discreetly pe- rused and so marked, testifyeth a due examination. "Then proceed ye forth to your work and by examining your Journal and Ledger together of all the parcels both Debtors and Creditors by the which doing, thoroughly ex- amined ye shall perceive and find if your said ledger be per- fectly governed and compiled or not. And note you also that every one parcel in your Journall must for the concord- ance have two ticks, because it ought to accord with two parcels in your ledger, one in debit and the other in credit." As to the bookkeeping end, the first thing to do is to close the books and take a statement, so that a basis of reckoning may exist. Some banks, particularly savings banks, do not take a daily statement of the general ledger and the books would have to be closed to get this informa- tion. The examiner might use the ledger for this, but a statement from the ledger should be taken as a guide and also as a record of how the bank stood when the examination was made. Upon beginning the examination, the examiner places his seal on all vault compartments, so that substitutions and manipulations are impossible. If the securities are kept in another safe-deposit box or in another city, as frequently happens in the case of country banks which keep their bonds in New York or other large city, the sealing should be done by a representative. In New York, the Banking Depart- ment is communicated with and a representative of the de- partment seals the box wherever it may be. This of course requires credentials and such are furnished the one sealing. If securities are held in other banks on loan, for special de- posit, or other purpose, the holding bank is notified of the EXAMINATIONS AND AUDITS 857 fact that the bank is under test and to hold the securities accordingly. CASH AND EXCHANGES Cash is, of course, counted first, and it should all be brought to the examiner at one time and kept by him until verified. Packages may be verified first in bulk and then in detail, or vice versa. Ones and twos if in large volume are not counted except in bulk, or tests made to verify a package occasionally. No serious loss could come through such a medium and it is essential not to block the wheels by too many small details that lead nowhere. Gold and silver are sometimes verified by weight if the quantity is large. There is what is called in accounting "lapping," which consists in holding out from the cash items sufficient to cover a shortage so that the cash will show the balance called for. Thus, a teller might hold out enough deposit tickets at the end of the day to make good a shortage, since he would not have to account to the bank for the deposits until the next day, when he would hold out some more and so on. Such a process is, of course, difficult to check except by pass- ing the deposit through two hands, or substituting tellers so that such manipulations are difficult. After the cash has been carefully counted the matter of arranging for the verification of the exchanges should be taken up, in fact, these two items cash and exchanges should be taken up together if the force of examiners war- rants. In the clearing-house banks of New York City the following plan for the verification of exchanges has been worked out with splendid results. The examiner in charge of verifying exchanges takes off a list of the amounts due from each bank as they appear on the envelope about to be sent through the exchanges, placing in the envelope a request for verification of the amount, and seals the envelope with the seal of the banking department. Later the verification is sent to the examiner in charge of the metropolitan dis- trict by the receiving banks. COLLATERAL LOANS A list of the demand loans should then be made and the amount proved with the general ledger. This may be ac- 24 858 THE PRACTICAL WORK OF A BANK complished by listing the amount shown on the several loan cards, and the total of such cards should prove with the amount shown on the daily proof. The cards should then be retained in the examiner's possession until tne securities have all been verified. The collateral to these loans should then be examined and the securities checked with the record as shown on the loan cards. The market value of the col- lateral should also be checked to ascertain if the necessary twenty per cent, margin is in hand. If the examination is a thorough one, the amount of the loans and collateral pledged should be confirmed by the parties to whom the loans have been made. Defalcations have frequently occurred by the failure of the loan clerk to endorse partial payments, or amounts paid on loans, before they become due. The usual custom in such matters is to endorse the amount paid on the back of the note and credit the amount to the proper account through the note teller's department. If the loan clerk is so disposed, these payments may be easily kept from the records until the notes mature. One means of defalcation is for a loan clerk to withhold a portion of the securities pledged for a certain loan. For example, here is a loan to a customer for, say, $100,000, and the collateral deposited to secure such loan has a market value of $135,000, or a margin of thirty-five per cent. The loan clerk may account for $125,000 worth of these securi- ties and appropriate the balance of $10,000 to his own use. He has made a record of but $125,000, so that in the audi- tor's examination the securities in hand check with the cards. To guard against this, a blank should be sent to each bor- rower requesting him to give the amount of his loan and list of securities. The examiner does not display his hand, and so sends to borrowers a letter, enclosing statement of the loan and col- lateral, with instructions to verify and return, "to facilitate the audit of the bank." The letter might be addressed to the sending bank with the initials of the examiner in the corner, but the intent is to prevent it coming into the hands of any bank employee. The loans may be classified according to the books, or ac- cording to the examiner's notions into: (a) Collateral loans secured by stock exchange collateral, and those secured by EXAMINATIONS AND AUDITS 859 other collateral ; (b) loans secured by real estate ; (c) single- name paper; (d) two-name paper. Further, if desired, into "own paper" (customers), and paper bought through brokers. The stock exchange loans will, therefore, be by themselves and can be quickly tested; while the other loans might need more attention. Loans secured by real estate should have the bond and mortgage properly recorded or assigned, insurance, title search or abstract, and appraisal by a committee or by an independent party. The value of the property is the essen- tial element here, real estate loans scarcely ever being made on the basis of moral or financial worth, the loan being based solely upon the property pledged, and a list once made in a bank carrying any such as a steady policy should be kept for future reference. UNSECURED LOANS Promissory notes, whether paper bought in the market, or home paper, must, of course, be dated, unmatured, properly executed, without alteration, and regular in every form. In the analysis of the loans the item of "Past Due*' should be first taken up. A careful list should be made of the various items, giving in detail the date of the instrument, maker, all indorsements, due date, whether or not the note has been protested and the present status: that is, what the possibilities of the col- lection are, making a note at the same time of the name of the attorney if the item is in suit. The amount due from various parties, especially di- rectors, should be inquired into, and if the bank does not keep a liability book it should do so. The paper must be what it purports to be, and the parties good. Often the examiner will have a wide credit acquaintance, and know many of the makers of commercial paper. For instance, the name of a Chicago packing house would be known to every bank examiner and finding such paper he knows just how good it is. Local paper is best known to the directors and they should be called in and asked to pass upon paper of that sort. As a rule the directors know nothing of outside firms selling paper through brokers and this appraisement can best be done by the examiner. Of course, if time peri 860 THE PRACTICAL WORK OF A BANK mitted the statement of each borrower could be checked, but this would be a lengthy task. In order to keep tabs on borrowers in New York State, and to ascertain the line they are carrying, the New York State Banking Department is now operating a credit bureau which lists every loan of $5,000, with full details of the trans- action. This gives the department a check on large borrow- ers in every bank in the State. Borrowers have been found having lines of credit in thirty different banks. The bills discounted or bills purchased should be checked with the discount ticklers. The discount tickler is a record of the bills discounted assembled under the different dates in which they become due. As the notes themselves are filed in a cabinet in the same manner, the checking of the items to the tickler becomes a very simple matter. The total of these books, together with the past due notes, should correspond with the amount of bills discounted on the general ledger. All notes which have been forwarded for collection must be verified by correspondence, as well as all collateral held by other institutions. Totals made by adding machine should be proven, and no clerk allowed to make these lists. Noth- ing should be taken for granted. GOVERNMENT MONEYS AND SECURITIES The receipts from the United States Government for bonds deposited to secure circulation and United States de- posits should be carefully checked. All United States bonds to secure circulation, United States and other bonds to se- cure United States deposits, must be deposited with the Treasurer at Washington, for which he issues a receipt. These securities must be verified by the receipt in possession of the bank. Receipts are also given for bonds held by other public officials. Federal Reserve and other banks as security for loans or deposits. DUE FROM BANKS A list of the items composing the balance due from banks should be made and the amounts forwarded to the resnective hanks for verification. The account of "Due from United States Treasurer" is also verified and the amounts checked from the advices received from the Treasury at Washington. 361 VERIFYING THE LIABILITIES The liabilities of the bank should be verified with even more care than the assets, for these are easily under- stated. The capital stock of the bank may be verified by listing the outstanding stock certificates, and this may be readily accomplished if the cancelled certificates are fastened to the stub from which they were originally taken. The liabilities are best verified by correspondence or by cooperation with the creditors. But the main liability being on the deposit accounts it becomes very important that this liability be not understated. There is no way by which this can be done except by communication with the depositors in some way. In a savings bank this is done by examining the pass-books as they come in and calling them in. In Massachusetts all books are required to be presented once in three years for verification purposes and all banks advertise for books and in some cases verify as high as ninety-five per cent. But in a bank of discount the verification is not so easy a matter. In a majority of the larger banks the use of pass-books has been discarded, except as a receipt book for deposits, and statements similar to those used for correspondent banks have been substituted. This method is an improvement over the old one, as it enables a bank to have its accounts balanced each month and mailed to the respective customers from whom a report is usually received in a few days. These statements should be sent out and checked as to reconcilia- tion by the examiner. If the old pass-book method obtains, the books may be sent for and written up. Depositors cannot verify their bal- ances without knowing what checks are unpaid, and, of course, vouchers must be returned with any statement of reconciliation. The correctness of balances due other banks may be veri- fied by statements rendered or received, which serve as the basis for reconcilement reports, disclosing the outstanding items of difference, which must be satisfactorily adjusted. The New York State Banking Department has desig- nated a man to handle the verification of these accounts and all data received by him from the examiners is used for this 862 THE PRACTICAL WORK OF A BANK purpose. The result is a very thorough verification of this item. Items in the assets requiring careful analysis and verifica- tion are furniture and fixtures, accrued interest and suspense account. Very often there will he found charges to furni- ture and fixture account which are not proper items to be carried in the assets. Accrued interest will often be found to be a harbor for items which cannot be regarded as assets and the same may be said of suspense accounts. Loans have been charged off as uncollectible and the accrued interest on same still carried as an asset. It has also been found that the fur- niture and fixture account has been padded by charges for repairs and alterations to building. Accrued interest, furni- ture and fixtures and suspense account are too often accept- ed by an examiner at the book value. It is also important that a careful analysis of the assets should be made for the purpose of ascertaining the percen- tage of quick assets to deposits, or, in other words, what portion of the assets is readily available for liquidation of the deposits. The paid cashier's checks and certificates of deposit must be carefully checked and a proof made of the outstanding items. The usual custom of keeping the record of cashier's checks is to list all such items in a register provided for that purpose, giving the number of the check and the amount. The total of all cashier's checks issued is credited to such an account on the individual ledger, and when such items are paid, they are, of course, charged against this same account. The paid items are then checked off the register and the total of all open or unchecked amounts must correspond with the balance in the ledger. In some institutions each cashier's check has a stub attached which is removed by the officer who signs the voucher. All such stubs are forwarded to the auditor and the amount of checks issued is verified by means of such tickets. In a detailed audit care should be given the expense ac- count, and in auditing this account great care should be ob- served to see that every bill presented has been checked and initialed by the proper officer. A voucher must be kept for every item charged to this account to enable the examiner to readily check the amounts debited. All "overs" or "shorts" in the different departments must be promptly located by EXAMINATIONS AND AUDITS 368 the auditor and the amount adjusted to guard against the possibility of a defalcation. The location of differences in the departments has been simplified by the installation of the sectional proof. The proofs enable the heads of departments to so divide their work that an error may be easily located. CLEARING-HOUSE EXAMINATIONS The clearing-house has come to be recognized more and more as a regulating force to make for good banking, as well as quick and expeditious banking; and clearing-house examination is a large step forward. The people have come to look to the clearing-house to keep banking sound; to eliminate the bad; sustain the good and protect all. For the good of all concerned there will come a time when all loans in the banks of a clearing-house district will be listed with the clearing-house, for the infor- mation of all members. Such a bureau is promised for the Federal Reserve Banks. It must be very embarrassing for a bank to find that it has loaned a firm up to the limit and another bank has done the same; when by an exchange of information both could have been warned. The banker who knows how much his borrower owes can make safe loans; the banker who does not, cannot. And the borrower who will not let his bank into these secrets had better be left alone. It was the Walsh bank failures in Chicago that resulted in the carrying out of the idea to have the banks that are members of the clearing-house association, and banking in- stitutions that enjoy clearing-house privileges, examined by examiners who were appointed by the association. The mat- ter had been talked of before the Walsh failures, but no definite action had been taken to inaugurate the work. The Chicago Clearing-House Association formulated the plan, created the department and the office in 1906, and in June of that year the plan became operative. Speaking of the plan and its operation, Mr. McDougal, the clearing-house bank examiner for Chicago, said: "Having from the clearing-house committee assurances that every facility would be furnished to make the operations of the department successful, I was instructed to engage the necessary help, and to proceed upon my o^n judgment as to 364 THE PRACTICAL WORK OF A BANK the details and manner of examination. General directions were given me by the committee to make such examinations as would enable me to give them a correct impression of the general condition of each bank as examined. As a matter of course, what the committee particularly wished to know was the general condition of each bank, the character of its assets, and the manner of conducting its current business. "After each examination a detailed report is prepared in duplicate, setting forth a description of the bank's assets, including all loans, either direct or indirect, to officers, di- rectors or employees of the bank, or to corporations in which they are interested, also describing the condition as found and the work done in every department. One of these re- ports is filed in the vaults of the clearing-house in custody of the examiner. The other is handed to the bank's presi- dent for the use of its directors. The individual directors are then notified that the examination has been made, and that a copy of the examiner's report has been handed to the president. By so doing every director is given opportunity to see the report and to cooperate in maintaining a high standard in his bank. The examiner has in every case insist- ed upon receiving acknowledgments of these notices to directors. "The detailed report referred to is not examined by the clearing-house committee, unless unusual conditions make it necessary. A special report is prepared and read before the clearing-house committee at meetings called for that pur- pose, expressing in general terms the examiner's opinion of the condition of each bank as he finds it, describing the gen- eral character of its assets and calling attention to any un- warranted conditions or gross irregularities, should they exist." BENEFITS DERIVED Among the benefits derived from these examinations the following have been named : "Mistakes of policy, as well as of judgment, have received timely correction; jealousies have been overcome; and suspicion and distrust, which not infre- quently exist among banks having no real knowledge of the condition of each other's affairs, have been supplanted by re- spect and confidence. Closer, more satisfactory, and perfect- EXAMINATIONS AND AUDITS 865 ly harmonious relations have been established and are main- tained." In the extension of the idea of clearing-house examina- tions of the banks, the California Bankers Association has set an example for other State associations. It has divided the State into eleven sections, each of which is to have an ex- aminer. The Minnesota Association, or the individual groups, have done practically the same thing. In California one of the sections is San Francisco, and Los Angeles is another section. The remaining sections take in counties or portions of counties. At present clearing-house examina- tions are being conducted 'in St. Louis, Kansas City, Minne- apolis and St. Paul, etc., while in many other cities the sub- ject is being considered and many bank officials are very anxious to have the plan put into operation. 5 LITTLE POINTS FOR THE EXAMINER The examiner should look particularly to little things. He should investigate any cash items that may be in the cash; check the petty cash fund; verify the day's exchanges and drafts sent out for collection ; see that the last coupon is on all bonds. Mortgages should be properly recorded and taxes paid. Mortgage must not exceed the legal limits, usually sixty per cent, of the valuation of the property. Real estate owned should be evidenced by deeds, title policy and insurance should be in force. Overdrafts should not be of long standing. Liability of officers and directors should be investigated. Furniture and fixture account should not be excessively carried. See that no graft exists in renting the building. Banks sometimes give away offices for a pur- pose. Check rents on bank building, and ascertain if any other money comes into the bank and is not made part of the accounting records. Such items as appraisals for real estate loans are often not made part of the bank's records. All cash that comes into the bank should be recorded, and then paid out by proper authority. Considerable opportunity exists in little things to do petty grafting. Dormant ac- counts should be investigated. Test interest calculations oc- casionally. Certificates of deposit long outstanding should be verified. Partial payments should be endorsed on the sCharles W. Reihl in The Banker* Magazine. 866 THE PRACTICAL WORK OF A BANK stub, or better, old certificates should be cancelled and new ones issued. Verify cashier's checks in the same manner. Verify certifications. Verify margins on warehouse loans. Check back last published statement. Look over the minute book. See that it is properly kept. See if there are any excessive lines of credit. Are any advances made on the se- curity of the stock of the institution? Are the officers and clerks sufficiently bonded? Are meetings well attended? Does the bank earn what it claims to earn? Banks have been known to report impossible earnings. Are the premises properly protected, vaults and safes modern, and other safe- guards taken? Do the minutes provide for help without calling a special meeting of the board? Are the books al- ways in balance? Are shortages frequent? Are the officers careful about the little things of the bank? Are interest computations properly checked by another clerk? Are sup- plies safeguarded, such as pass-books and loose leaf sheets? To give a general idea of how a bank should be conduct- ed in regard to some matters, the Comptroller of the Cur- rency requires the following information : Directors Opposite the name of each director enter full amount of all paper in bank upon which his name (in- dividual or firm) appears as maker, indorser, or guarantor, but where two or more directors are liable on the same paper, deduct from the total the duplicate liabilities, so as to show the net liabilities of all directors. Give the postoffice address of each director, his occupation and estimated worth and the number of shares held by him. State how often directors meet as board; whether they authorize or approve loans and discounts; in what form such approval is recorded; whether they have an active discount committee; whether they have an active examining committee ; whether loans and discounts to their firms and corporations are specially acted upon by the board; whether the records show the directors who ap- prove excessive loans. Ascertain, if possible, whether any director has become disqualified by hypothecation of stock; how often non-resident directors and officers meet with the board. Officers and Employees State the liability of each as payer, endorser or guarantor of any paper held by the bank, the amount of salary, bond, and whether engaged in any other occupation. Give number, aggregate salaries, etc., of EXAMINATIONS AND AUDITS 867 employees below the grade of teller and bookkeeper. State whether official bonds are in force ; in whose custody lodged ; who keeps the individual ledger ; who balances the pass-books and when last balanced; whether compared by some one else; whether any employee receives deposits and makes en- tries in the individual ledger; who keeps the general ledger; who reconciles bank balances; whether they are verified by some one else. Books and Accounts State how often general ledger is balanced ; what form of individual ledger is used, give forms of savings department and inactive ledgers; how often bal- anced; how often loans and discounts are verified; how often accounts with correspondent banks are reconciled; to what extent the envelope or statement system is used for depos- itors' accounts; how are certificates of deposit proved, and how often; how are paid certificates filed; are canceled cer- tificates and drafts properly filed; are pass-books balanced frequently and noted on ledger; are proper entries made in redemption fund and circulation accounts ? Loans and Discounts The loans and discounts and other securities must be carefully verified and every dis- crepancy noted. Give the total amount of loans and dis- counts and list separately the amount of bad debts as de- fined in the National Bank Act and other overdue paper itemizing doubtful items and losses. Itemize the loans ex- ceeding the limit prescribed by the bank act, showing the names of the borrowers, the value of pledged securities and the financial standing of makers and indorsers. Give the name, amount and security of excessive lines of accommo- dation to one individual or interest, or affiliated individuals or interests. Include notes, bonds, stocks, and other forms of credit. If any portion of these lines constitutes an ex- cessive loan, it should also be shown. State genera] char- acter of loans; whether well distributed; general character of collaterals; whether corporations or enterprises in which directors or officers are interested borrow to an undue ex- tent; any large liability of director or officer as maker or indorser describe fully. State whether all paper claimed by the bank as its property, including collateral, is properly indorsed or assigned to it, and all mortgages properly re- corded; give current rate of interest obtained. Itemize losses; does the bank place paper with other banks and to 868 THE PRACTICAL WORK OF A BANK what extent; are they liable in any way; do they take loans to accommodate other banks and to what extent; is sending bank in any way liable; list loans secured by other national bank stock, when the borrower is an officer or director in the bank whose stock he puts up. Give list of doubtful paper other than previously itemized under past due and bad debts; include doubtful real estate paper. State the aggre- gate amount on which real estate security has been taken for debts previously contracted, and the amount on which real estate security has been taken in violation of law. Give the amount of real estate owned other than the banking house, listing separately the amount taken for debts previ- ously contracted and the amount acquired in violation of law. Bonds, Securities, etc. Enter number of shares of stock or face value of bonds, and state whether bonds or stocks. Give name of corporation issuing stocks, bonds, etc., amount at which carried on books, estimated actual market value. State whether taken for "debts previously contracted," or otherwise, and if interest or dividends are not regularly paid, etc. Indicate those loaned or pledged in any way. If val- uable assets of this class are charged off, list them. Overdrafts (Overdrafts are regarded as loans.) State whether habitually granted and what amount is un- secured. Verify amount at date of examination and com- pare amount stated in last report of condition with amount shown by the books for same date. List those remaining in bank six months or longer. Itemize overdrafts of officers and directors and state whether habitual. 6 Banking House State whether suitable and convenient ; for what other purpose used; whether carried at fair value on books; whether insured; if deed is in name of bank; whether vault and safe are good and secure; whether bank- ing room is used by any other banking institution; whether furniture and fixtures are worth book value; give assessed valuation and gross rental. Cash Items Describe any irregular items and itemize losses estimated. Reserve Is an exactly daily record kept of the different kinds of money on hand? (1) Is total reserve sufficient? 6By a recent ruling of the Comptroller overdrafts are forbidden. EXAMINATIONS AND AUDITS 869 (2) Is reserve in bank sufficient? (3) Was the average re- serve for the last thirty days in the bank sufficient, if not, what was the percentage? (4) Was the average reserve for the last thirty days with agents sufficient; if not, what was the percentage? Capital Stock State whether stock certificate book is properly kept; whether surrendered certificates are proper- ly assigned, cancelled and attached to stubs; whether any stock certificates are signed in blank; whether stock ledger is properly kept; whether amount of stock outstanding was verified; whether bank owns any shares of its own stock, and if so, how and when acquired; whether bank holds any shares of its own stock as collateral, and if so, how acquired. Affiliated Bank (1) State whether there is an affilia- tion with any State bank, savings bank, or trust company through a controlling ownership of stock by the same share- holders, by practically the same management, or in any other manner, giving name of affiliated bank. ( 2 ) If trans- fer of certificates of stock of the national bank transfers ownership of stock of the affiliated bank, state that fact. (3) State whether stock of affiliated bank owned by sharehold- ers of national bank is held by them individually or as a cor- poration. (4) State whether stock of affiliated bank is trus- teed for benefit of shareholders of national bank. (5) State whether any director or other officer is an officer of any other bank. Dividends and Surplus Give date of last dividend rate and amount and state whether semi-annual or other- wise; state amount carried to surplus. State reason, if any, why bank should not declare a dividend at end of current dividend period ; whether you compared bank's last report of earnings and dividends with the amount of profits shown by its books at same date; whether interest paid is deducted from gross earnings and whether any profits are irregularly carried on the individual ledger, in special accounts, or charged off the books. Is itemized expense account kept and did you examine that account to date of previous ex- amination? Did you examine earnings? Due from Reserve Agents, Trust Companies, Banks and Bankers State what rate of interest received on balances and whether certificates of deposit issued by other national banks are secured by collateral. List reserve balances. 370 THE PRACTICAL WORK OF A BANK Due to Reserve Agents, Trust Companies, Banks and Bankers State whether amounts due are on open account or on demand or time certificates of deposit; whether they are secured by collaterals and rate of interest paid. (For- ward report promptly without awaiting verification.) List reserve balances. Individual Deposits State rate of interest paid; wheth- er a* proper record of all certificates of deposit, cashier's checks, and certified checks issued is regularly kept in a book for that purpose, and give rate of interest. If bank conducts "savings department," give method of verifying pass-books and rate of interest. State whether previous no- tice of deposit withdrawals are provided for. If bank holds State, county, municipal, insular possession, or any very large balances subject to check, give list and rate of inter- est paid. Give total of inactive ledger. State whether sur- rendered certificates are properly cancelled and filed in numerical order for auditing. State whether properly audited by this method. Rediscounts and Borrowed Money List amounts of money borrowed, whether on bills payable, rediscounts, open accounts, certificates of deposit, bonds, or otherwise, and state where borrowed and date, interest rate, date of ma- turity, security, whether all liabilities are shown on books, whether authorized by the board of directors, whether bank borrows habitually. Recapitulation Recapitulate the following resources, showing whether doubtful, or indicating loss. Give the esti- mate value of assets in each class not shown on the books. Bad debts, other overdue paper; all other loans and dis- counts, overdrafts, premiums on United States bonds, bonds, securities, etc., banking house, furniture and fixtures, other real estate, cash items. Show the total amount of surplus and profits less taxes, expenses, etc. General Remarks as to Condition of Bank Summarize matters to which special attention should be called. Include certificate relative to solvency, by-laws, management, and condition of books. Was a meeting had with the board of directors? Were all matters subject to criticism considered with them? What elements of danger are in the bank? 7 TWith acknowledgment to pamphlet on "Bank Accounting" issued by the American Institute of Banking, CHAPTER XIII. THE ESSENTIALS IN GRANTING CREDIT THE NATURE AND FUNCTIONS OF CREDIT Credit is the life-blood of business, one of the "essential elements" in banking and finance. Without it, the present high state of business would not have come to pass, nor could it long continue. Credit constructs railroads, opens mines, spans rivers, paves streets, improves farms, builds homes, moves the commerce of the country and wages war. "Credit," says Webster, "has done more a thousand times to enrich the nations than all the mines in the world." Credit transfers large sums cheaply. It employs capi- tal productively. It enlarges a man's earning powers, and through its use the lender and borrower meet to their mu- tual profit. Credit is a far better instrument of production than an equal quantity of coined money ; for while money is an indispensable denominator of prices, and the medium of the smaller exchanges, credit is the instrument of larger ex- changes, and larger production. Moreover, as an instru- ment, it is economically costless and not like money with a commodity value and expensive. CREDIT IN ECONOMICS In political economy, credit is power to borrow; the ability to command capital. As nature abhors a vacuum, so capital abhors idleness, and it rapidly and automatically seeks profitable employment. Where the credit system is highly developed, active and profitable demand for capital exists. Where credit is undeveloped, we shall find business still in a crude state, wages small, and finances generally in an unsatisfactory condition. CREDIT IN LAW In law, credit is the present right to a future payment; the right to demand something from some one at a stated 371 872 THE PRACTICAL WORK OF A BANK time. Thus, when a bill of goods is sold, the legal title passes to the buyer, and the seller simply holds the right to collect the equivalent at the time and place appointed. He can retake the goods only under certain conditions, and his principal right is one of settlement. He can sell this right and the holder in due course will have good title to this right of enforcement. CREDIT IN BUSINESS In banking and business, credit is the estimate of the ability and willingness of an individual, firm or corporation to meet their business engagements. This estimate was for- merly based chiefly upon: (1) Reputation; (2) capital. But with the advent of the mercantile agency and the credit de- partment, a more accurate and trustworthy basis of credit has been formed, thus: (a) A closer examination as to the character of the man and the business; (b) total net worth, the element of contingent liabilities being given due con- sideration; (c) other facts bearing upon the probability of the success or the failure of the enterprise. The basis of all such credit is confidence. In fact, every modern financial system is built upon confidence, and our whole financial structure has become a system of credit clearings a system of substituting the token of confidence for the payment in money. This confidence must not only assure that a man is willing, but is also able to meet his en- gagements; not only able, but also willing. 1 THE FIELD or CREDIT BROAD The field of credit is an inexhaustible one, and the last word has yet to be said. Like all other subjects, it has two sides the theoretical and the practical. To apply the theory is as important, if not more so, than to understand it. Much has been said and written concerning credit in the abstract and much in the concrete, but the trouble has been that, as a rule, application has been made of broad rules and principles so broad that their definite application has been difficult for the beginner to understand. iFrom the "Essentials In Granting Credit" by the author. Awarded the Cannon Prize, New York Chapter, American Institute of Banking, September, 1911. ESSENTIALS IN GRANTING CREDIT 878 Credit is no longer granted on mere personal acquaint- ance with the borrower and his business, but upon his state- ment of condition. The use of commercial paper as a bank TO CITIZENS BANK OF BUFFALO Location* Business _ . For the purpose of procuring credit from lime to time, borrowing money and obtaining discounts bom you, the undersigned declare the following to be an accurate, true and full statement of the financial condition of the undersigned on . 191 , understanding that the officers of the bank in granting said credits rely upon the accuracy of this statement. If at any time the condition of the undersigned should be materially changed, notice will be given you immediately, in writing, staling the nature of such changed condition, and in the event of not doing so it shall be evidence that the condition is unchanged. If any judgment shall be entered against the undersigned or the undersigned should become financially embarrassed, all obligations of what- soever name, kind or nature held by you from the undersigned shall, at your option, be and become due immediately, notwithstand- ing the date of payment as fixed by the obligation then held by you. RESOURCES Total value Personal Property, REAL ESTATE LIABILITIES Rill, payable t Total Liabilities, Total worth In and out of business. Have yon PAST DUE indebtedness? ,. If so. designate item and the amount. Please list real estate in detail on other side. CREDIT STATEMENT INDIVIDUALS investment has become more common as its worth has be- come better known, so that to-day it forms a large part of the assets of our commercial banks. 25 374 THE PRACTICAL WORK OF A BANK To properly judge the quality of the paper, dependence must be placed on the statement, and it is necessary to ana- lyze the statement of condition correctly. To do this re- quires experience. Here the theory is applied. And any bank man who expects to make safe loans must be able to judge a credit statement. It is not enough that the city correspondent recommends the paper it, too, may be mis- taken in its opinion, or biased in its judgment. Nor is it enough that other banks have found it satisfactory, impor- tant as this may be as corroborative of present opinion. The banker should be able to do this for himself. CREDIT A SCIENCE In so far as the principles of credit have been worked out, systematized, clearly expressed and carefully applied, the granting of credit may be said to be a science. While not so exact as some sciences, such as mathematics, yet the fundamental principles are now generally recognized in all credit circles. Thus, it is accepted that character, capacity and capital are necessarily present in some degree in every credit operation; and while the proportion may differ, yet they must exist. To ascertain if they exist and in a safe degree is the work of the credit man. To determine the degree and the consequent safety of the loan based upon such analysis is to grant sound credit; to misjudge the qual- ity of the credit is to make unsound loans and invite loss. CREDIT is OLD Credit is old older perhaps than the instruments which represent credit. It is conceivable that primitive man trust- ed primitive man with goods, upon a promise to return 01 repay in kind or in value. The evidence would be parol and not documentary, but the element credo to believe was present nevertheless. Credit instruments are of sufficient age to prove the an- tiquity of even the documents of credit, there being in exist- ence at the present time perfectly preserved credit instru- ments dating back to 2500 B. C. 2 21n the Metropolitan Museum of Art in New York will be found Babylonian promissory notes on clay tablets, dating back to 2500 B. C., in a perfect state of preservation. ESSENTIALS IN GRANTING CREDIT 875 CREDIT A FINE PIECE OF MECHANISM Credit is a fine piece of mechanism. It works silently and smoothly most of the time ; but when it is thrown out of gear, it disrupts the whole commercial structure. Ordi- narily large sums are easily and cheaply transferred from place to place, country to country; enormous shipments of merchandise are bought and paid for, and the operations of trade and commerce move without a hitch; but once the credit system goes wrong, the whole fabric feels the shock. In the collapse of the credit machine due to the late war, new problems confronted the business world. It was necessary to devise other ways and means to promote credit transfers. The credit instruments in the hands of travellers, which ordinarily were accepted as cash everywhere because of the smooth working of the credit machine, were practi- cally worthless for ordinary purposes. Gold had to be sent abroad to redeem the instruments which, under normal con- ditions, transfers of credit would have accomplished. The established order of things had to give way to new ideas to meet new conditions. In this country new forms of bank- notes and clearing-house certificates appeared, based, not on gold, in whole or in part, but upon commercial paper. Thus credit was piled upon credit, to keep the wheels of industry from breaking down entirely. And it worked perfectly. CREDIT A TRANSFER Credit is a transfer or rather it arises out of a trans- fer. All credit is based upon a transfer of property. With- out the interchange of property credit cannot exist. I may trust a man, but for what? My trust is merely good opinion. It is a compliment to him, but of no use until I trust him with something. Then it takes tangible form and out of the transfer true credit arises. I trust him to return the article or the value at the appointed time, and I have given him credit. I have confidence in him, and this con- fidence expressed in a transfer is credit. Credit depends upon an exchange and time. Something of value must be exchanged for a promise to pay at a time certain to arrive. If goods are sold for cash, no credit en- ters. Trust or confidence may arise as to the quality of the 876 THE PRACTICAL WORK OF A BANK goods, the weight or measure; but this is a different sort of credit than that we are dealing with. The payment must be deferred if the credit element is to enter. TO CITIZENS BANK OF BUFFALO Name {Firm style) _,.--.,, OBJIIJfJJ _,. ,..., Location .Branches. For lh purpose of procuring credit from lime to time, borrowing money and obtaining discounts from you, the undersigned declare ike following to br an accurate, true and full statement of the financial condition of the undersigned . . , L lo1 understanding that the officers of the bank in granting laid credit* rely upon the accuracy of this statement. If *t any time the condition of the undersigned should be materially changed, notice will be given you immediately, in writing. Mating the nature of such changed condition, and in the event of not doing so it shall be evidence that the condition is unchanged. If any judgment shall be entered against the undersigned or the undersigned should become financially embarrassed, all obligations of what- soever name, kind or nature held by you from the undersigned shall, at your option, be and become due immediately, notwithstand- ing the date of payment as fixed by the obligation then held by you. ASSETS LIABILITIES Cash in Citizens Bank of Buffalo.. ._ Cash in other Banks... Bills Receivable 'from Customers, (good) Accounts Receivable from Customers, (good) Accounts and Bills Receivable. due from Partners... Accounts and Bills Receivable, doubtful , Merchandise finished (how valued) Merchandise unfinished how valued) Raw material 'how valued). Real Estate in fee belonging to Firm Real Estate in fee belonging to Partners individually . Machinery and fixtures ,. Building! - * TOTAl Bills Payable, for Merchandise. Direct Loan from Citizen! Bank of Buffalo.. Direct Loan from other Banks Bills Payable to others. Bills Receivable, discounted Open Accounts, past due Mortgage or Lien on Real Estati Chattel Mortgage or other Lien! Honey Deposited with us.. Total Liabilities Net Worth. Please list real estate in detail on ether aide. modations on Endorsements itees on Bonds., Contingent ) Liability I ' Accommodation Paper Outstanding , Do you pledge, sell or otherwise dispose of any of jour accounts receivable ? If so, to what extent an any of the accourts in above statement so disposed of? Date and Expiration of Partnership . When was Business Established Special Partners .... _ ,.,. _ __ u.__,_.For what Period and An Worth of Partners outside of Items scheduled ->" a , Salei for year ending. , n , _, r - r .... Average terms of sale Amount of rent paid per annum -., , .. , Anioonta charged off for depreciation and bad debt* ,. , , An account! insured, and if. jo, in what Company ? Machinery . and Fixtures CREDIT STATEMENT F1BM In the eyes of the law a contract is a sacred thing. It surrounds a promise with all its powerful legal machinery, to protect the rights and enforce the liabilities of the parties. ESSENTIALS IN GRANTING CREDIT 877 And credit instruments being contracts, find the strong arm of the law raised in their behalf, to enforce them according to their terms. CREDIT A LAWFUL RIGHT Credit is a lawful right. If I have a negotiable instru- ment payable to me, I can sell this instrument, and thereby transfer my right to receive payment to another. This is called negotiation, and the element of transfer by indorse- ment, negotiability. If I sell a man a bill of goods on open account, I can sell this account, and vest in the buyer all my rights to collect from the debtor. In some cases the indorsee of a negotiable instrument will have better rights than the original party. Anything which I own I can sell. Credit, therefore, is bought and sold like other commodities because of its standing in law. CREDIT is CAPITAL Credit is power to borrow. And the power to borrow is capital; therefore, credit is capital. It is reasonable to con- clude that if I have $10,000 in cash and can borrow $30,000 more, the $30,000 is as effective for capital purposes as if it were all my own, except that the loan might be called at a time when not convenient to repay; but when employed it is capital in my hands. The industries of the world are car- ried on through borrowed capital capital assembled in pri- vate hands and in banks, and then loaned to those who can best employ the assembled funds. And when in the bank the credit which the owner transfers to the bank becomes loanable in larger proportion, so that banking credit becomes capital to those who can offer necessary proof of character, capacity and capital to employ the credit profitably. 8 There is some dispute as to whether credit is or is not capital. It is at least equivalent, in its effect, to capital. While it may not increase the amount of capital, it transfers capital from one having idle funds to one who can use them at a price. It makes unproductive capital productive. And in the accept- ance form of credit, it does not even involve the use of funds, nor does the capi- tal fund need to be in existence when the credit is extended. Acceptance credit involves pure credit, and capital only remotely, and when so used, is capital. 378 THE PRACTICAL WORK OF A BANK CREDIT AN ASSET Credit is an asset. If I have a promise which I am rea- sonably sure of being fulfilled, I may contract other prom- TO CITIZENS BANK OF BUFFALO Name ( Corporate style under charter) Business - - ._,_ ~ - Location , Branches. * For the purpose of procuring credit from time to time, borrowing money and obtaining discounts from you, the undersigned declare! the following to be en accurate, true and full statement of the financial condition of the undersigned on 191 , understanding that the officers ol the bank in granting said credit! rely upon the accuracy of this statement. If at any time the condition of the undersigned should be materially changed, notice will be given you immediately, in writing, stating the nature of such changed condition, and in the event ol not doing so it shall be evidence that the condition is unchanged. If any judgment shall be entered against ' .e undersigned or the undersigned should become financially embarrassed, all obligations of what- soever name, kind or nature held by you from the undersigned shall, at your option, be and become due immediately, notwithstand- ing the date of payment as fixed by the obligation then held by you. ASSETS LIABILITIES Cash on hand | jj BUli Payable, for Merchandise Cash in Citizens Bank of Buffalo Direct Loan from Citizens Bank of Buffalo.. Cash in other Banks ! Direct Loan from other Banks Bills Receivable from Customers, (good) Bills Payable toothers Accounts Receivable from Customers, (good) |... . Bills Receivable, discounted Accounts and Bills Receivable, due from Officers. ..] i Open Accounts, not due Accounts and Bills Receivable, doubtful ; Open Accounts, past due Merchandise finished (how valued) ' Mortgage or Lien on Real Estate Merchandise unfinished (how valued) I ' i Chattel Mortgage or other Liens Raw material (how valued) ' i Bonded Debt ""' E (M"ketv3ue) f Corponltion : Interest Due on Bonded Debt Machinery and firtures Money Deposited with us. ... Balance due for stock subscription Treasury stock |j j 1,1 Treasury bonds ; ! f 1 * Good will and patents j | * J 1 Total Liabilities Capital | J ' Surplus, including undivided profits TOTAI. ..! I ' TOTAL I i ^__________ Co l i n ' J Gmrantees on Bond. Liability j ' Accommodation Paper OvUtanding _ Sales for year ending Average terms ot sale... Amount of rent paid per annum _.._ Are accounts insured, and if to. in what Company? Do you pledge, sell or otherwise dispoae of any of your accounts receivable ?. *-. If so, to what ettent are any of the accounts in above statement so disposed of? - PLEASK GIVE PARTICULARS OF EACH PARCEL OF REAL ESTATE OWNED BY CORPORATION. and Nnnba Gty To*, .rd StaK T| in N. ol EttnMed V.liK Moflpfts Equiy CREDIT STATEMENT CORPORATION ises on the strength of receiving that which is due to me, in time to pay that which I owe. And in that confidence busi- ness moves. It is, when smoothly running, as effective to ESSENTIALS IN GRANTING CREDIT 379 keep the wheels of commerce moving as gold; and its cost is cheaper. One dollar of credit will do the work of four in money, and do it just as well. It is intangible, yet tangible. It cannot be seen, yet is powerful. Like electricity, its force may be seen by its effectiveness. It is the "silent partner" of business. CREDIT is REPUTATION Credit is reputation. A man may have a very good name and yet have no credit, for credit is due to business character. And business character is simply reputation for promptness, square dealing, efficiency. It is not moral char- acter, however important that may be; for some men whose moral character is undoubtedly bad may have a high sense of business honesty and build up an enviable reputation in business circles. And on the contrary, a man may be ever so good, say long prayers and be however devout, and yet have no business reputation and, therefore, no credit. CREDIT is WILLINGNESS Credit is willingness to pay as agreed. It matters not how able a man may be, if he is not willing, he can circum- vent the law. He must have a desire to be honest, a willing- ness to be fair, a high regard for business ethics. The will- ing man will usually find a way or make one. It is vital that this element be in evidence in all credit transactions. CREDIT is ABILITY Credit is ability. Incompetency is the rock upon which many a business goes to ruin. It matters not how honest a man may be, if he lacks ability, he cannot succeed. He must "know how." The knowing how may be an inherent knowledge, or it may be acquired. It may be a knack, or it may be an accomplishment; but the "know how" must be there, if the venture is to succeed. Many a business built up by long years of faithful work has been left in prime condition to a family only to be wrecked because the father's ability did not descend to the son, and the son could not see that it was necessary to develop ability or to buy it. 380 THE PRACTICAL WORK OF A BANK CREDIT is RESOURCES Credit is resources. It is axiomatic that if a man would pay, he must have the wherewithal. He cannot pay a prom- ise with a promise for long ; and unless back of the promise Incorporated under LAWS of. ..., Prt*....-.,.. m ..- m ^ur-^ JI , J . J u...^...T...C'""'"*c'*J business Authorized Capital __*_. Ptr value of shares , subscribed Paid fa How paid In, Cash....... .-___ _ .......- Other property- _ _ _ _ - -.; Description of other property, and how valued. .._ What portion of real estate, if any, has been acquired through bad debta _ .... _ ... In whose name is title to real estate held _ Any mortgage against it _ Are stockholders liable beyond amount paid on stock If so, to what extent _ Average annual business v -- ......,-. - Annual expenses Annual dividends . . When was last dividend declared - _ Rate Any mortgage on real estate, or other assets (give particulars) .; ,. Bond issue when due _ Rate of interest . Regular time of taking inventory .-. _ ; _ dive basis of this statement, whether inventory or estimate . _.. _ . What amount of accounts and bills receivable not charged off, is past due, extended or renewed Amount charged off for bad debts last year Amount collected on bad debts during same period. Do you charge off on plant annually.. -...How much last year , State last date of taking Trial Balance _ Row often taken. Number of bank accounts and where kept _. _, . .... OFFICERS N'HES IN FULL ADDRESS President _ ^ Vice-President ..._ .... ..... Secretary ._ , _., Please sign Company's name here -_._. ...._ ., Ju _. i , ,, ^ 1 - r -.- niri . ._.,_.. _ IMJ ., _, . By Address ^ Date signed DETAILS OF CORPORATE AFFAIRS FOR CREDIT PURPOSES REVERSE OF PRECEDING FORM and the promisor there is property that will turn itself into money in due course, sound credit cannot arise. This prop- erty need not be in land and buildings, machinery and fix- ESSENTIALS IN GRANTING CREDIT 381 tures some credit men prefer that it should not. It may be in rights to collect, cash, merchandise, raw material and other forms of assets, but it must exist in some form, and that form preferably of quick convertibility, so that the debts which are of short duration may be met by credits of like duration, the one offsetting the other. CREDIT is CONFIDENCE Whatever credit is, it arises out of confidence be- lief that the debt will be paid; confidence that the trust will be fulfilled. No man parts with property unless he expects to get its equivalent at the appointed time. Even in collateral loans the credit is extended first on the faith in the borrower's ability to pay the loan, and this failing, in the confidence that the security will sell for enough to reim- burse the lender; so that it is confidence in both that under- lies the credit. In fact, most of the credit, particularly banking credit, is based upon the latter proposition; for back of the greater part of banking credit is value in some form. It may be stocks and bonds, warehouse receipts, grain, real estate, merchandise, "receivables," specifically pledged or not, to secure the loan; but upon faith of ulti- mate redemption in money the loan is made. In the granting of credit on open account, the confidence lies in the ability of the business to make money. And the likelihood of making money is based upon the condition of the business as expressed in cold facts. The ultimate secu- rity lies in the capital worth of the debtor, so that while credit is confidence, it is ultimately based upon value in some form. Just so soon as confidence in the property value is lost, credit is destroyed. Witness a war. As soon as the war clouds begin to gather, the people begin to curtail their credit their confidence. They draw upon their bank ac- courits, preferring to hold metal to credit tokens. They are fearful that the credit token will not exchange for property, while money tokens will. They fear that the earning power of properties will be cut off, and with earning power goes interest and dividends. They therefore prefer certainty to credit, and the credit machine suffers. But credit is fundamentally confidence. Where confi- dence is most fully developed, credit will be cheap; where 382 THE PRACTICAL WORK OF A BANK it is uncertain it is dear. When it is lost, credit is im- possible. THE PSYCHOLOGY OF CREDIT Expressed in simplest language, credit is, therefore, the belief that men will keep their engagements. It is confi- dence that the promise will be fulfilled. It matters not whether the promise is one of a government to pay a million dollars, or that of a laborer to pay the grocery bill he runs at the local store, the credit is extended upon the belief that the debt will be paid. The granting of credit is a psychological process a mental gymnastic. From the facts submitted the credit man must determine the likelihood of the debt being paid. He weighs the pros and cons and makes his decision. He plays the role of the juryman, whose duty is to seek the truth and apply the law to the particular state of facts. He knows men. He knows business and business risks. He knows the customs of the trades. He knows the condi- tion of trade and the condition of trades at a particular time. It may be, for instance, that he has an application for credit from a suit and cloak firm. He will know if styles have suddenly changed, leaving manufacturers stranded with an avalanche of cancelled orders. He will know that a back- ward season has hurt sales. He will know that collections in certain sections are slow; in others good. In one part of the country crops may be good and money will be plen- tiful and cheap; in another dear. Just now he must weigh the probabilities of a great war. The collapse of the world's credit machine is a new force for him to reckon with. He must be a seer one who sees; a prophet one who looks ahead. How he gets his information is the secret of the profession. MENTAL PROCESSES The credit man's risks are the outcome of his mental processes. He expresses his hopes and his fears by granting or withholding credit. He first gets his facts, then forms his conclusions, passes judgment and awaits the result. He may be influenced by friendship, pity, family ties, hesitance to say "no" fear. He may be inexperienced in the ways of men and a poor judge of human nature. He ESSENTIALS IN GRANTING CREDIT 383 may be reckless, or ambitious to build up a business or a bank, and extend credit to those unworthy. He may be a poor psychologist and prove a poor credit man; but what- ever the result of his labors, every credit is the result of men- tal conclusions, either carefully or carelessly formed. It may be mere hope that the borrower will pay; it may be knowledge that the borrower will, in all human probabil- ity, pay. And having come to the latter decision, he has done all that the occasion requires. If he has simply acted upon the former impulse, he has scarcely made a good be- ginning. And many a bank loan rests upon the insecure foundation of hope. ALL MEN NOT HONEST The mental exercise through which the lender goes be- fore credit is extended may be simple or complex, scientific or careless, but follows one of four general lines : (1) The belief that all men are honest, which isn't so. Any concern which extends accommodation upon the as- sumption that credit may be granted to all who ask, upon the broad proposition that the human race is imbued with inherent honesty and all men regard their word as good as their bond, and their debts sacred obligations to be met if humanly possible, will soon find its shelves empty, its bank account exhausted, and its books full. This, no doubt, is the reason for the many bankruptcies in the retail trades. The failures in general stores and dealers handling groceries, meats, fish, etc., amounted in number to over 4,300 in 1913 with liabilities of over $28,000,000. Credit in such estab- lishments can be extended on no other basis than faith; for even a near-scientific method is quite impossible. Large mercantile houses and department stores, how- ever, operate credit departments which make an investiga- tion into the risk before opening a credit with a customer; but even this can go but little way to protect the creditor if the buyer is dishonest. And even with the utmost care and good judgment errors will be made and losses sustained. But in the smaller establishments credit is based upon per- sonal knowledge, often more or less casual, and the hope that the buyer is honest. Frequently payment is made promptly for a time in or- 384 THE PRACTICAL WORK OF A BANK der to establish credit relations, and gradually the account is built up until it assumes dangerous proportions and loss results. The retail grocers are subject to this experience most of all. Weekly or monthly bills are contracted and promptly met for a time. Then part of the amount due is paid, buying still continuing, small payments being made, Guaranty Trust Company of New York COMPARISON OF STATEMENTS ASSETS Cain on Hand and on Deposit Nous Receivable Account! Receivable Merchandise Machinery and Fixture* Real Estate and Building! Prepaid Expensea MUcellaneoui TOT.l. LIABILITIES Notes Payable Accounts Payable Moneys on Deposit with us Accnied Liabilities Dividends Miaollaneooa Mortgages on Real Estate Bonds Total Liabilitiea Net Worth Capital Surplus Reserves TOTAL TOTAL QUICK ASSETS , LIABILITIES EXCESS QUICK Annual Sales Contingent Liability COMPARISON OF STATEMENTS until the debt grows larger instead of smaller, and often the debtor moves to parts unknown, leaving the dealer's profit, and sometimes his capital, on his books as a worthless account receivable. There is now a movement to register all customers of grocers, so that a blacklist may be kept of all bad risks, and reported to the trade in general as a protection against ESSENTIALS IN GRANTING CREDIT 385 abuses. Credit that is extended upon such grounds is not only unsound, but highly dangerous quicksand to engulf the unwary. Bank credit is often granted on the same principle. The bank man knows, or thinks he knows, his borrower. He deems him honest. He takes his note, renews it from time to time, worries over it, endeavors to get it reduced, or get an indorser; but after renewing until hope is lost, charges it off. But all credit granted upon such belief is costly, whether in banking or mercantile life, and is rapidly giving way, particularly in banking and large enterprises, to more scientific methods. Two MEN BETTER THAN ONE (2) The belief that if one does not pay, another will; therefore to the credit of the borrower is added that of an- other person, either upon indorsement or guaranty. This is more often used in banking than in other lines, it being frequently required that there shall be more than one party to the credit "two-name paper." In European practice this is quite the general rule, credit instruments carrying at least two names being necessary to obtain the rediscount privileges of the central banks. But in smaller transactions it would be impossible to obtain this safeguard, the small debtor finding it difficult to obtain a guarantor of his debt, although in the cooperative credit systems of Europe this form of credit is most common; but this is due to the close association of years, family descent and personal contact that warrants risks of this kind. PAST PERFORMANCES (3) The belief that having paid in the past, the bor- rower will continue to pay in the future. The credit of the borrower may be ascertained from his "past performances." This may take on the character of close investigation into previous business dealings, or it may be based upon per- sonal knowledge of the debtor's record. Thus, a country grocery may change hands. The previous owner may place in the hands of the new proprietor a list of all customers known to be good pay. They have paid him regularly ; they 386 THE PRACTICAL WORK OF A BANK doubtless will continue to pay regularly. They may be trusted. Other customers may be trusted to limited amounts; some not at all. In the retail trades the inquiry often takes the form of an investigation into the applicant's promptness in paying among dealers with whom he has carried an account. It may be an inquiry of the butcher, the tailor, the grocer; or it may be ascertained from a classified list compiled by com- mercial agencies giving the experiences of such dealers; or it may be a special report, carefully gathered. In banking the inquiry assumes the form of an investi- gation by a bank buying commercial paper, to ascertain if all such debts have been promptly met in the past, by corre- spondence among banks that have held such paper, and their opinion of the paper; or it may be an investigation by a bank or mercantile house as to the promptness with which the debtor has met his bills. If he has taken his trade dis- counts it is a sure indication of good management. His reputation with the trade is important. ! I PROPERTY AND PROPERTY RIGHTS (4) Belief that the borrower has property or property rights sufficient to warrant the risk and assure payment. Credit is extended largely upon the debtor's financial condi- tion. This, too, may be elementary, and consist merely of the knowledge that the debtor owns a house and lot, or a business, or other property, which warrants the conclusion that he will pay because he has the means. Or, it may be the result of more careful methods, such as an inquiry into his financial affairs which finds expression in a statement of condition which, if honest and conservative, will reveal his financial standing. COLLATERAL LOANS NOT ESSENTIALLY CREDIT TRANSAC- TIONS A loan based upon collateral is not in the true sense a credit; for in the last analysis the advance is not made on the credit of the borrower, but upon the value of the property pledged as security. The mental process which obtains in such a transaction is not such as precedes the granting of ESSENTIALS IN GRANTING CREDIT 387 an open credit; for the creditor says to himself: "I have property worth so much, under my control, belonging to my debtor. I think he will pay; I hope he will but if he doesn't, I have enough of his property pledged to me to reimburse me, even though it declines in value." This is particularly true in mortgage and collateral loans. Upon these simple thought processes all credit operations rest. And the quality of the credit depends upon the degree in which these principles exist in a given transaction. But they are capable of infinite expansion and of manifold com- binations so that no two credit risks are exactly alike, and general rules must be applied in the light of the business under test. It is as difficult to apply abstract rules in credit as to ap- ply abstract rules in mathematics. But if the rule is ex- plained by applying it to a problem, clearness follows, and the student grasps the theory by having it applied. It is so in law, or any other department of learning. It is so in credit. PEESONAL CREDIT By the term personal credit is meant credit based upon persons as distinguished from credit based upon property. Many who apply for credit, and are perfectly good risks, have nothing but themselves to offer as security, their prop- erty being of little or no consequence as collateral. To the essential element of honesty, there must, however, be added the security of an assured earning power. It is an obvious truth that if a man would pay, he must have the funds in hand or in expectancy. His honesty may be above criticism, his record unblemished, and yet if he hat no income, his credit cannot be safe. And his credit is safe only in proportion to his income. This is the reason so many professional men are poor credit risks. Their income, while in a measure sure, is small, and frequently, as in the case of some ministers and lawyers, spasmodic. All those who appear before the public must maintain an appearance of neatness, if not prosperity. It is their misfortune and not their fault. They often use their credit to bolster up appearances and the creditor suffers. A man earning fifty dollars a month is most assuredly not a good 388 THE PRACTICAL WORK OF A BANK BILLS RECEIVABLE (HIT) ACCOUNTS RECEIVABLE (NCT) OOMMMOTtWi ec or PROCURING CREDIT FROM TW TO TIME wrm YOU FOR OUR NEGOTIABLE w on oTMEJtwm, wi FURNISH THE FOLLOWING VOnABLE CHANGE IH OUR FINANCIAL OOXWTKW, AND IN TMi ABSENCE Of SUCH NOTICE OR Of A NIW ADD FULL WRITTEN STATE- A CONTINUING STATEMENT AND SUBSTANTIALLY CORRECT 1 AND IT IS HERESY EXPRESSLY AGREED THAT UPON APPLICATION FOR iHALL HAVE THE SAME FORCE AND EFFECT AS If DELIVERED AS AN ORIGINAL STATEMENT OF OUR FINANCIAL CONDITION AT THE TIME NOTES PAYABLE ACCOUNTS PAYABLE DEPOSITS BONDED OEST MORTGAGES ACCRUED LUWUTIM CAPITAL SURPLUS-PROFIT* RESERVES CONTINGENT LIABILITIES. ON BILLS I ILLS RECEIVABLE. FUL, NOT FROM CUSTOMERS OR I MERCHANDISE. FINIS O. DESCRIBE BRIEFLY- BUILDINGS. COST | ECTORS, SUV-COMPANIES OR SIMILAR SOURCES I. HOT REALIZABLE WITHIN IMMEDIATE FUTURE AT COST 0* MARKET I IS ALL SA1 ASSESSED VALUE MARK MACHINERY AND FIXTURES. OTHER ASSETS. INSURANCE. STATE KIND AND I 1OTES PAYABLE. To OWN BAI .VAILABLE FOR PAYING DEBTS l_ ACCOUNTS PAYABLE. -CO YOU DISCOUNT AND ANTICIPATE t. DEPOSITS. TO 3ONOED DEBT AND MORTGAGES. 'CCnuEO LIABILITIES. ITEMU RESERVES, rr ED PUBLIC ACCOUNTANT! * SO, OIVI NAME Of FIRM ADD DATE OP ( CORPORATE "'" OTHERWISE, WE FURNISH CONDITION, AHD I ME ABSENCE OP SUCH I FIRM HE FOLLOWING YOU IMMEDIATELY L WRITTEN iTATE- I APPLICATION FOM r AJ IF DELtVEREO A* A ASSETS LIABILITIES CASH BILL* RECEIVABLE (HIT) ACCOUNT* RICHVAIU (MT) MERCHANOK UNO BUILOINO* MACHINERY-FIXTURE* NOTES PAYABLE ACCOUNT! PAYABLE DEPOSITS MORTGAGE* ACCRUED LlAaiUTIE* _^_ - TOTAL NET WORTH RESERVES TOTAL - - CONTINGENT LIABILITIES. ABLE DOCOUNTEO CASH. ON HAND AND V BILLS RECEIVABLE. EMBERS OF FIRM OR SIMILAR SOURCES I. MERCHANDISE. FINISHE LAND. DESCRIBE B BUILDINGS. COST MACHINERY AND FIXTURES. OTHER ASSETS. INSURANCE. STATE I ' ASSETS UNAVAILABLE FOR I -DEMUICIATION- NOTES PAYABLE. MROUOM BROKER; ACCOUNTS PAYABLE. TERMS OF F DEPOSITS. TIME c MORTGAGES. DUE -ON WHAT ASSETS / ACCRUED LIABILITIES. ITEMU NET WORTH GENERAL PARTNERS SPECIAL PARTNERS 18 THE FIRM, OR ANY MEMBER THEREOF, C RESERVES. TOIM NET BALES LAST FISCAL .YEAR . . . COST OF SALES . MTEDEST, TAXES, DEPRECIATION, I WITHDRAWALS BY PARTNERS GAIN FOR YEAR . . . HAVE THE BOOKS BEEN AUDITED I ADORE** AND OATS _IF 80, GIVE NAME OF FIRM AND DATE OP AUDIT- STANDARD FORM OF CREDIT STATEMENT FOR FIRMS ADOPTED BY AMERICAN BANKERS ASSOCIATION AND NEW YORK STATE BANKERS ASSOCIATION and good character, and the garnishee process where such is possible, lies in the fact that the applicant has steady em- ployment. But many who are on the charge ledgers of the great stores do not even bring the qualification of an assured income, being salesmen, clerks, and others whose earnings are largely dependent upon commissions and the state of trade. ESSENTIALS IN GRANTING CREDIT 891 THE GRANTING OF PERSONAL CREDIT In the granting of personal credit two things are neces- sary to determine : ' First, that the applicant is honest and well regarded by those in position to know; and, secondly, that he has the funds, in anticipation, at least, to meet the debt as it falls due. He has "discounted the future" will the future bear discounting? These are the questions to determine. The starting point lies in the application. This prefer- ably is an envelope of good quality, so that the information may be filed therein, with the original data written on the outside. Too much cannot be known about the applicant. The problem is to get it diplomatically, and correctly, and without offense to the delicacy that attends the asking for credit, particularly personal credit. The application includes: First, the full name of both husband and wife. Most of the credits in retailing are opened by the wife who does the shopping, and generally in her own name. (It is estimated that fully eighty per cent, of personal credit is with women.) But the husband being the bread-winner is the important element to consider. Next, the residence and how long there. Long tenancy is a good omen. "Movers" are not, as a rule, desirable, either as tenants or as credit risks. Husband's occupation and how long employed in present and past positions. Refer- ences come next. These are usually two in number, and are preferably those who have dealt in a business way with the applicant, and especially on credit. REFERENCES Bank references are most satisfactory, and are attended with no embarrassment to the applicant. But it is surpris- ing how many who have bank accounts buy furniture on the installment plan, as an easy way of saving (?) money; or, to speak correctly, an easy way of paying for such arti- cles, frequently unnecessary. Savings banks, as a rule, do not give references without explicit order from the depos- itor, and such references are not usually satisfactory, while banks of discount are, as a rule, glad to extend the courtesy, but without obligation on their part. 892 THE PRACTICAL WORK OF A BANK It is interesting to note that many who have gone through life on the pay-as-you-go-or-don't-go basis, find it embarrassing, to say the least, to give references when ap- plying for credit. Only personal friends can be used as references in such cases, and many a proud spirit rebels at letting even their closest associates into their personal secrets. Diplomacy is a fine art here, and many a sale has been lost because a deli- cate situation was badly handled. PERSONAL CREDIT RATINGS Having the application as a starting point, the investi- gation follows. The first step is to look up the applicant in the credit rating books. These are compilations made from careful investigations by credit reporting companies, giving the experiences of those who have sold the parties named therein. By a system of letters or figures these ex- periences are summarized, as, for instance: "John Smith, 402 West Seventy-second street, PPP," means that three dealers have sold to John Smith and found him satisfactory and prompt in his payments. If more detail is wanted a special report can be obtained for a small fee, and this goes quite extensively into the applicant's record. The attempt to classify and rate personal credit risks is to be encouraged. At best it is not absolutely accurate ; but working upon the theory that having paid one merchant the buyer will pay another, some degree of safety may be obtained. Blacklists have been made out, and experiences exchanged, which when made with care are a safeguard not to be despised in the granting of personal credit. Next, the references are written to, the letter being couched in such terms as to hide the real reason for the re- quest except that it is an inquiry into the person's habits and general financial situation. Next comes the "neighborhood" inquiry. This usually consists of a personal investigation, looking into the person's desirability as a tenant, a neighbor, a boarder, etc. Nearby stores are frequently visited to as- certain if the party trades with them and if so upon what basis and with what results. All this is done as by an ama- teur detective, so that embarrassment does not follow. Last- ly, but in many cases, first, comes the verification of the ESSENTIALS IN GRANTING CREDIT 398 business connection. This is often done so cleverly that the applicant himself is interviewed without knowing the ob- ject of the visit, and many credits are opened on this test alone. Many applicants for credit do not want their superiors to know of their condition, while others do not care. Length of service counts for much and some credit men will pass an application upon the strength of long employment in one place, and well they might. Where the applicant is a public officer, whose habits are well known, and whose com- pensation is a matter of record, no other investigation need follow. For instance, in New York a list is published of all municipal employees and school teachers, so that such in- formation is easy to obtain. This, too, is often deemed sufficient to open a credit. INDIVIDUAL CREDIT vs. MERCANTILE CREDIT Individual credit is to be distinguished from mercantile credit. While individual credit is credit extended by a busi- ness concern to an individual as such, mercantile credit is the credit extended by one business house to another as such. The credit which John Smith the individual seeks for his household purposes differs from that which he seeks as a trader. The one is consumptive credit; the other trading credit. The same process which obtains in the granting of per- sonal credit takes place in extending mercantile credit, in its essentials, but has surer grounds upon which to work, and usually has property as a basic element. Honesty, business sagacity and a good record among the trade are as essen- tial in mercantile credit as the qualifications mentioned above are essential in personal credit. In the place of the references above indicated, we have the trade references. In the place of the neighborhood in- quiry, we have the banking and mercantile inquiry, seeking to discover how the borrower has conducted his affairs in the past. And lastly, in the place of earning power as an in- dividual we have earning power as a trader, and this is evi- denced by his statement which reveals his present condi- tion, and in comparison with previous statements and profit and loss accounts indicates the profitableness of the business 394 THE PRACTICAL WORK OF A BANK Individual credit has well been called consumptive credit ; for the credit is used, as a rule, in order to satisfy present needs from future income. Retail credit is quite general QUESTIONAIRE ASSETS CASH MOW MANY BANK ACCOUNTS t '. BILLS RECEIVABLE (NET) ANY EXCEPT FOR MERCHANDISE SALES T ANY DISCOUNTED 1- ACCOUNTS RECEIVABLE (NET) WHAT 18 ITS CONDITION? ANY OLD OR UNSALABLE t- REAL ESTATE AND BUILDINGS CONDITION OF STORE OR PLANT OTHER ASSETS 13 THERE ANY LIEN ON SO-CALLED QUICK ASSETS T _ LIABILITIES NOTES PAYABLE DO YOU USE BROKERS AND AT SAME TIME BORROW FROM YOUR BANKS f ACCOUNTS PAYABLE DO YOU DISCOUNT ALL YOUR BILLS r DO YOU ANTICIPATE t- DEPOSITS ARE THEY ON TIME OR DEMAND r FROM WHOM! BONDED DEBT AND MORTGAGES HOW SECURED! ANY CHATTEL MORTGAGES OUTSTANDING _ OTHER LIABILITIES-CONTINGENT OR OTHERWISE! MISCELLANEOUS CAPITAL PREFERRED COMMON NET WORTH ANY OUTSIDE INTERESTS OF FIRM OR MEMBERS I- RESERVES DESCRIBE , INSURANCE DESCRIBE. SALES (NET) TO PUBLIC. GAIN FOR YEAR AFTER PAYING ALL EXPENSES, INCLUDING DIVIDENDS OR WITHDRAWALS- BOOKS EXAMINED BY CERTIFIED PUBLIC ACCOUNTANT f NATURE OF BUSINESS THIS dUESTIONAIRE IS TO BE USED BY BANK OFFICERS OR HEADS OF CREDIT DEPART- MENTS IN DISCUSSING STATEMENTS HANDED IN BY THE MAKERS IN EXAMINING STATEMENTS BANK OFFICERS CAN CHECK OFF THOSE POINTS WHICH THEY WISH INVESTIGATED FURTHER BY THE CREDIT DEPARTMENT THIS SHOULD BE USED WITH A CARBOV, THUS GIVING A DUPLICATE RECORD ESSENTIALS IN GRANTING CREDIT 895 for the necessities of life and sometimes the luxuries. It is not based upon an exchange of goods. It does not bridge the time from one process to another, but is extended that present wants may be purchased upon expectancy. It is an annuity working backwards. Commercial or mercantile credit, however, has produc- tion in mind. It "carries" a business transaction. It fills the void between purchase and sale. It gives the buyer time to turn the goods into money before he pays for them. It gives the manufacturer time to turn raw material into fin- ished products before payment is due. It provides working capital. It is productive credit, and the whole process of production, transportation and distribution is based upon it. THE CHARGE ACCOUNT To distinguish again by example, let us take a typical illustration of an application for personal credit. A school teacher, for instance, applies to a department store for a monthly charge account. The reasons may be few or many. She may be short of funds and trading upon her expected salary. She may prefer to shop on a charge account be- cause it eliminates the carrying of money and simplifies the return of goods. She may like the prestige a charge ac- count gives her. She may have been solicited to open such an account. She buys, not to sell again, but to consume. Not a single purchase is for reselling, but for the satisfac- tion of her wants. Proving satisfactory upon investigation as to her position and personal habits, she gets the credit. But John Smith, the merchant, buys to sell again. He has property. He has a record; he has a reputation. His affairs are easily checked. He makes a statement of condi- tion, which if wilfully wrong is a felony. We find that for every dollar he owes he has one, two, or two and a half in hand or due him. We can have an audit. We can with a fair degree of accuracy judge our risk, and know that by the extension of the credit he will make a profit and we will make a customer. We base one credit solely upon the person ; the other, in" a very large measure, upon the property. In the former we expect to find but one (perhaps two) of the "big C's of credit" (Character, Capacity and Capital) namely, character. In the latter, 896 THE PRACTICAL WORK OF A BANK we must have all in some degree, and preferably all in a large degree. But the capital element is generally entirely lacking in personal credit, while an essential element in trading credit. Lack of capital is responsible for more fail- ures than any single cause. THE GROWTH OF PERSONAL CREDIT The growth of individual credit may be ascribed to three causes: (a) The desire to extend business. Many concerns catering to the retail trade encourage charge accounts and carry thousands of them on their books, knowing full well that credit accommodations lead to over-buying. Well- rated people are constantly solicited to open such accounts; and not knowing how their names are secured, take it as a compliment and are flattered thereby, (b) The fear of of- fending customers by refusing credit. This is particularly true in very small establishments, where to refuse the request to "charge it" would lead to loss of custom. Moreover, it is harder to refuse a small credit than a bank loan. One is strictly personal in its setting, while the other may be re- ferred to that impersonal "discount committee" which exists often in name only, but is a good bumper between the offi- cial and the applicant, (c) The all- too-prevalent tendency to live beyond's one's means, making it necessary to live on expectancies rather than realities. Personal credit is often used to bolster up a tottering man. It is used to create impression. Credit men could tell tale after tale of charge accounts abused, and install- ment buying resorted to by those who would ordinarily dis- dain such a transaction, for no other reason than to make an appearance. The credit that wrecks business in New York is not Third Avenue credit, but Fifth Avenue and River- side Drive credit. Third Avenue may have a certain kind of credit (usually the dollar-a-week credit), while Riverside Drive has credit (or gets it) and rarely thinks of paying cash. A Fifth Avenue tailor told the writer recently that his accounts run from two to four years, and "a little cash now and then looks mighty good to him." This abuse of personal credit is notorious among the rich, the idle rich, the would-be rich, or the was-rich. This condition may be due to the mental conclusion that because ESSENTIALS IN GRANTING CREDIT 897 they are good for their debts, they need not hurry to pay them; or it may be due to ignorance of what the tardiness costs them. The tailor above mentioned admitted that he got ample interest on his money by the long delay, the in- terest charge being concealed in the price of the garment. But were he given his choice, he would doubtless choose shorter credit and less profit. The credit man of one of the large department stores that caters to Fifth Avenue trade states that Fifth Avenue pays as promptly as can be expected if proper credit methods are used. If the risks are selected and the credit machinery effective, no complaint will arise as to the desir- ability of the patronage of the wealthy. The tailor does not select his risks. PERIOD OF PERSONAL CREDIT The period for which individual credit is extended should coincide with the debtor's periods of income. In the case of the wage-earner, who receives his pay weekly, weekly credit would be justified, but prompt settlement should be demanded in order that the debt might not overlap into an- other period. Salaried men who are paid monthly may safe- ly be carried for a month, but the same rule applies. Those whose earnings are dependent upon fees, which may be more or less uncertain or spasmodic, cannot in the nature of ffew Btumeti-. , ..- Check Dtik !< NBW ACCOUNT. oa *. />*/. .* xX-M*J^*AAA^..-^*> ,, Q Ctrrttpmdrna Depl S Remittance Depl. .i*T- t& First Deposit fo/a-So Date opened. - Introduced by ...... kA-ift- T -sn_o ---------------- ..... ., ..... . Reference, -- . fiwour-SCl- *~- k o. ~ Succeeds a/c of ----- jjjrvs**. _ Remarks: EECOBO OF HEW ACCOUNTS, FILED IK CREDIT OFFICE 398 THE PRACTICAL WORK OF A BANK things be in funds regularly, and credit in such cases is of longer duration than in the case where income is steady even though small. The time element is a factor of no mean import in in- dividual credits. The obligation of the merchant has a fixed maturity, if in the form of a note, and generally so, if in the form of a book account, especially with the system of cash discounts now so generally prevailing. He expects to meet his bill or his note at maturity. Not so, however, in per- sonal credit. While the terms may be thirty or sixty days, this means nothing to the charge customer. He pays when convenient. Ask the average charge customer what are the terms of his credit, and when he pays his bills, and he will answer, if honest, "At my convenience"; and sometimes "Never!" While in a measure personal credit is perhaps the most risky, yet on the broad assumption that the average man is honest, it need not be attended with undue dangers. It re- quires diplomacy, skill, knowledge of human nature, tact, courtesy, firmness. To get business; to hold it; to say "no" and do it kindly; to be liberal, yet safe; to select the good and discard the bad all this falls to the lot of the personal credit man. LOSSES IN PERSONAL CREDIT The losses in personal credit must in the aggregate be enormous. The losses compiled by the agencies do not and cannot include those unrecorded losses suffered by retail merchants the country over. Thousands of small groceries, laundries and butchers accept these little, and sometimes big, losses as a matter of fact a necessary evil in their busi- ness and make the best of it, satisfied to make a living in spite of them. From the small corner grocery to the huge department store, whose losses are kept down by better methods, this evil appears, as an open sore, to be kept under some control, but not entirely healed. It is no wonder that the merchant thrives who sells for cash only. His profits, though small, are certain, and a dollar in the till is worth two on the books. Lawyers cannot collect for their legal services; doctors for their professional calls; the latter being especially sub- ESSENTIALS IN GRANTING CREDIT 399 ject to this abuse, not to speak of those losses taken by in- dividuals who loan their friends money, in the hope that payment will some time be made, and find they have mis- taken a loan for a gift. PERSONAL CREDIT THE FOUNDATION OF THE CREDIT SYSTEM It is obvious that personal credit is the very foundation of the whole credit structure. If the retailer extends credit unwisely, so that his bills cannot be promptly met, the job- ber or wholesaler cannot meet his. The manufacturer in turn cannot meet his, and the weakness extends to the whole system. If, on the other hand, the retailer extends credit only to those worthy and prompt (as all well regulated credit departments endeavor to do) or trades for cash, the next in line feels the stimulus, and so on through the whole course of trade. Business cannot long be conducted on mere book ac- count. While the account receivable is a simple and ordi- narily a good credit instrument, prompt settlement is the very essence of sound business. Payment in some more desirable form of credit instrument must not be long de- layed, for with the assets of business in form of accounts receivable the burden of carrying the credit becomes too great a strain upon banking capital, and bankruptcy en- sues. Many a business has been wrecked upon the quick- sand of personal credit. 5 Whom to trust is the problem of all business. To get the money for goods sold is the function of the credit department as well as to decide who shall have goods on credit and upon what terms. And to collect money is as fine an art as to sell goods. MERCANTILE CREDIT In its economic sense mercantile credit is the power to secure goods for the purpose of exchange in return for a valuable consideration promised in the future. It is a sale of goods on time. 6 &The accounts of a large department store in New York were scaled down twenty-live per cent, upon a careful audit a very large shrinkage, due in the main to too liberal credit methods. 6Hagerty, "Mercantile Credit." 400 THE PRACTICAL WORK OF A BANK In a previous paragraph we have discussed productive credit and consumptive credit; and while personal credit is largely consumptive credit, mercantile credit is quite alto- gether trading credit carrying credit. Commercial credit and personal credit combined are like the piers of the Brooklyn Bridge they carry the load. It must be sound, or the credit system collapses. Weakness in the credit methods of the retailer or the jobber carries weakness to all above him. Take the case of cotton. The farmer having pledged his crop to feed his hands and grow his crop, has expected to pay the merchant when he sells his cotton. He cannot sell. The merchant, not receiv- ing his money, cannot pay his jobber. The jobber cannot pay the manufacturer, and he cannot pay his bank. And so, one is dependent upon the other, as current history demon- strates, and strength for one is strength for all; and weak- ness in one spells weakness for all. BENEFITS OF COMMERCIAL CREDIT The benefits of commercial credit are so well understood that the primary benefit only needs to be mentioned to sug- gest others, that is, the enhanced profit that follows the use of credit. For instance: A merchant has a capital of $10,- 000 and borrows $40,000. Suppose he makes a gross profit of ten per cent, on the capital employed, and has, therefore, $5,000 as the result of his trading. He pays five per cent, on his borrowed capital, which reduces the profit to $3,000. But if he had not borrowed, and used only his own capital at the same rate, he would have netted but $1,000; therefore, by using the credit that rested upon his original capital rein- forced by his ability and integrity, he has made $2,000 as a reward for knowing how to employ banking credit. BANK CREDIT RESTS UPON MERCANTILE CREDIT The credit with which a bank deals consists in issuing bank notes, redeeming checks and certifications, meeting its acceptances and lending money. Its credit operations, how- ever, would be largely impossible were it not for mercantile credit. The functions of note issue and deposit exist be- cause of business dealings; and if there were no business ESSENTIALS IN GRANTING CREDIT 401 debts settled by negotiable paper the function of discount could not obtain. It is the function of the bank to carry the debts that business creates ; and as these debts are sound, the banking operations based thereon are sound. This is the reason the Federal Reserve Board has been so particu- lar that the bills offered for discount shall arise out of mer- cantile dealings productive and consumptive processes, and not speculative. The basic principle laid down in their defi- nition of November 10, 1914, was that the debt shall be self- $ Answered Enquiry from.. See Letter Booted? A- Folio MEMO OF INaUIRY ANSWERED REGARDING CUSTOMER'S STANDING liquidating, of short duration, to cover the time lapsing be- tween one process and another, the longer time paper neces- sary for agricultural and stock-raising purposes being limit- ed to twenty-five per cent, of the capital of the Reserve Bank paid in. The power to create credit in banking rests to a consid- erable extent upon mercantile credit. The merchant takes a note to the bank, and gets it discounted. He does not want gold, or bank credit in the form of bank notes, but a credit on its books. The banker, therefore, places the amount to his credit and permits him to draw checks against it. On the asset side of the statement the banker has the obligation of the maker of the note, reinforced by the indorsement of 402 THE PRACTICAL WORK OF A BANK the one discounting; and as a b'ability he has the debt cre- ated by the above credit. On the soundness of the asset de- pends the soundness of the liability; for the banker's chance of receiving back the funds he disburses in paying the checks depends upon the goodness of the instrument in his leather portfolio. BANK CREDIT SHOULD FACILITATE EXCHANGES Theoretically, no advance of bank credit should be made in any form except to facilitate a socially productive ex- change of wealth, the final payment for which is temporarily deferred. Bank credit is a medium of exchange whose ex- istence is made possible by the assumption on the part of the bank of a corresponding liability to pay cash on demand. The nature of this liability precludes the use of bank credit for any but short periods of deferred payments and for any purposes except bona fide exchange transactions. It bridges the gap between the surrender of capital and the receipt of payment for it. Its purpose is to anticipate a credit al- ready established rather than to create one anew. Loans made simply to enable an owner of commodities to hold them for a rise do not grow out of exchange trans- actions. An additional medium of exchange is needed only when there are additional exchanges, and the holding of goods back from exchange reduces and does not add to the number of such exchanges. However profitable speculative and similar loans may be to those immediately concerned, they are not a safe basis for advances by note-issuing or reserve-holding banks. 7 CHANNELS OF MERCANTILE CREDIT The channels of mercantile credit are four: (a) Finan- cing the raw material. The production of raw goods on the farm is carried on largely through private capital or person- al credit, there being no goods to pledge except those in ex- pectancy. The crop-lien system of the South is illustrative of this. The farmer having no funds to plant and fertilize his crop, secures credit by pledging his expected crop to the ^Eugene E. Agger, Columbia University, in "Journal of Political Economy.' ESSENTIALS IN GRANTING CREDIT *08 banker, or most likely to the merchant, who advances the fertilizer, the food for the hands, and the implements, taking as security a mortgage on the crop. The wheat farmer may borrow on his note at the bank, with or without security, or likewise obtain credit at the merchant's; but the crop lien is peculiar to the South. The cattle-raiser may obtain a chat- tel loan with his cattle as security, and so on down the list, the producer pledging the thing he expects to raise, is rais- ing, or hopes to raise, most frequently to a bank, as security for his advances. From the producer the goods go to (b) the manufactur- er, who turns them into finished products. But this is to a large extent (on the producer's end) a cash transaction, the bank making the advance on the goods when shipped. Raw material, wool, cotton, wheat, etc., moves on bills of ex- change with bills of lading attached. These are sold to banks, one after another, until the goods reach the manu- facturer, who not having capital enough to carry the raw articles, pledges them to a bank, takes them out of ware- house as needs require, and pays for the same from the sales of finished products. (c) Next come the wholesalers, jobbers and middle- men, who find the retailer. These finance their transactions either by giving the manufacturer their notes, or by borrow- ing in the market and paying cash. The banks still carry the debt by buying the receivables, single-name paper, or by loans direct to the dealer. (d) The retailers now come in to dispose of the goods to the final consumers, and herein comes largely the book account credit. Of course, this form of credit exists in many of the other processes, but in retailing especially. These ac- counts are frequently pledged to banks; single-name paper is sold largely on the strength thereof, so that the bank in the end carries the credit operation, and this is its proper function. But in all these processes, the factor of commercial credit runs. If the mercantile credit is sound, the banking credit will be sound; and unsoundness in the one works havoc with the other. And in the line of descent, each factor has the means of ascertaining with considerable nicety the quality of the credit, except the retailer, and upon him rests the greatest risk. IP llf 03 31 e S o o r i h. O O " 1 I INDORSEES ITERAL 83 H X ts 2 1 I S 1 * K " 1 ^ 1 " 1 * . j t ?g - ^i "o 8 ESSENTIALS IN GRANTING CREDIT 405 The tendency of the times is to eliminate the middleman, and sell from mill to retailer and cut out the additional profits that must be added to selling prices as more handling becomes necessary. For every process there must be a profit. If the manufacturer sells to the jobber in the large city, and he to the jobber in the small city, and he to the merchant, and he to the consumer, there must be the cost of many handlings and a profit for the capital that is neces- sary in the various transactions, together with remuneration for the proprietor. BUYING AND SEIZING WITHOUT CASH Whatever the financial process, the bank intervenes and buys the credit instrument. It is possible to carry a cargo of cotton from planting to consumption by the use of mer- cantile credit reinforced by banking capital to buy the in- struments. To illustrate: the cotton planter in the South has no money. He goes to the bank and gives his note, se- cured by a crop in expectancy. He might, as many now do, and as has been the custom in the past quite largely, go to the village storekeeper and get his seed and his plow and groceries for the hands and himself while the crop is matur- ing, turning in his cotton when harvested to pay his debt and carry him until planting time comes again; but in the end the bank will carry the burden, for the merchant will borrow of the bank to biay the goods that feed the farmer. The crop matures. It is gathered, ginned, baled and shipped, and the loan to the bank or merchant is cancelled. In order to show further the practical uses of commer- cial credit, and the possibility of moving a consignment of goods from producer to consumer without the use of indi- vidual capital, and, in fact, without the use of money ex- cept in the open markets of Europe, it is proposed to trace such a transaction in detail. The incidental expenses such as freight and insurance, etc., must be paid for in cash; but the merchandise is paid for from money accumulations in the broad market. Let us suppose that a Texas merchant becomes a cotton buyer. He has no adequate funds, and, therefore, arranges with his bank to honor checks given by him to various farm- ers for cotton purchases, the security to be the cotton placed 97 K)6 THE PRACTICAL WORK OF A BANK in warehouse and warehouse receipts lodged with the bank as security for the advances. As the checks are presented they are credited to the farmers' accounts. The Texas buyer sells the cotton to a New York ex- porter. Draft for the amount is drawn, documents at- tached, and handed to the Texas bank for credit to the mer- chant's account, which pays his debt to the bank. The Texas bank sends the draft to its New York corre- spondent for collection and credit. The New York bank presents the draft to the exporter and is told that a like amount of cotton of the same grade has been sold to a Liverpool merchant and is ready to move. The exporter, therefore, makes payment by handing a draft with shipping documents, to the bank, which sells the draft and from the proceeds paj^s the Texas draft, by crediting the Texas bank with the amount. In handling commodities which move by slow freight, and which are of standard grades, it is common practice to honor drafts against the same, which, of course, travel faster, by securing bank loans on the commodity, lodging the bills of lading as security for goods in transit, and ware- house receipts for goods in storage. When a quantity of goods is sold and is to be released, the bank would, of course, credit the shipper with the draft presented as an offset to his loan. If more margin should be required, it would be furnished by lodging additional bills of lading, even for goods not yet arrived. In the grain trade there is a con- stant shifting of bills of lading as goods move in and out of the merchant's possession; the idea being that the bank shall have a lien on the goods, irrespective of where they may be. It makes advances against goods coming in, and credits payments against goods moving out, the security in both cases being in its possession of the bills of lading. The New York bank forwards the draft to a Liverpool bank which presents to the spinner. He accepts, the draft is sold in the market and proceeds credited to New York. Having sold the cotton to a spinner on a sixty-days' draft, the cotton goes to the mill for manufacturing into cloth. The cotton having been turned into cloth, is sold, let us assume, to a New York jobbing house. The goods go for- ward, draft is drawn on London, where an acceptance has ESSENTIALS IN GRANTING CREDIT 407 been arranged by the New York house. The draft is pre- sented to the London bank, accepted and sold in the mar- ket, documents released and sent to New York. From the proceeds of this draft the spinner will meet his acceptance due in Liverpool. The goods are now in the jobber's hands, a note running to the New York bank to secure it for the acceptance, in the latter's possession. The jobbing house has sold the goods to the same mer- chant in Texas who purchased the cotton from the farmers. The goods are shipped and payment made therefor, by note at sixty days, which the New York house lodges with the New York bank. On the strength of this note, the New York bank could remit, several days before the acceptance which it arranged with the London bank is due, an amount sufficient to take up the acceptance. But having credit with the Liverpool bank for the proceeds of the cotton draft, it sends a banker's draft for the amount and the transaction is closed. The goods are sold to the farmers on thirty days' book credit. When the farmers pay their debts, they will draw checks on the bank to the order of the merchant, which the merchant will 'deposit to his account, and when his note is due, the New York bank which discounted the note will send it home for payment, and it will be charged to his ac- count, and paid by New York draft against the balance of the Texas bank. From start to finish, therefore, the bank- ing machinery here crudely outlined will have carried the debts as they passed from one stage to another. Out of these operations in mercantile credit arise the in- struments of banking credit, promissory notes, bills of ex- change, drafts and book accounts. The mercantile world furnishes the transaction and the instrument; the banking world the cash for the foundation and the machinery for the credit operations. The evidence of one debt is the founda- tion for another. Thus the note of the merchant discounted by a bank affords the basis of the credit to the discounter's account, against which he checks ; and now affords the founda- tion for the issue of our currency, for by the Federal Reserve Act, Federal Reserve notes may be issued secured by paper eligible for rediscount, the Federal Reserve Bank carrying a reserve of forty per cent, in gold and 100 per cent, in commercial paper against notes so issued. The 1-08 THE PRACTICAL WORK OF A BANK debt of one country to another, of the bank to the depos- itors, and the bank to the public in general, rests in the last analysis upon the credit instrument which arises from the transaction between two dealers. Prendergast in "Credit and Its Uses" well says: "Commercial credit merges itself into banking credit by purely natural processes, which in turn assume the control of the commercial market in a uni- versal sense." CHANGING CONDITIONS IN MERCANTILE CREDIT The changing conditions in mercantile credit are the out- come of the Civil War. Prior to that time the merchants bought on long-time credit, giving their notes. But the un- certainties of the value of the greenbacks led merchants to offer cash discounts for prompt payment, and in order to take these discounts, which are often liberal and highly profitable, the merchant now sells his paper through brokers and pays cash within the discount period. Thus we have the cash discount system and the single-name paper. The longest terms known to the writer on open account are in the textiles, where discounts are allowed as long as four months from date of invoice, and this frequently dated ahead. The buyer no longer takes his semi-annual trips to mar- ket, being visited by travelling salesmen weekly, monthly or seasonally. Although, where it is a matter of style, buyers to a large extent still make their periodical trips to the large city to see the assortments. The mercantile agency has made it no longer necessary that the buyer and seller know each other personally. Some large houses sell by catalogue only and the personal equation never exists. Moreover, the cold analysis of the credit department, now a part of all large concerns, makes personal contact unnecessary to de- termine the risk, important as personal contact may be. MERCANTII.E CREDIT TERMS The terms of mercantile credit should be on an economic basis. They should not be longer than is needed to turn the goods into the next process. The buyer should pay for his goods as soon as he has sold them; for in selling, an instru- ESSENTIALS IN GRANTING CREDIT 409 ment will arise that can be turned into money to liquidate the first debt. As wholesale groceries can be turned in from one to two months they should be paid for within that time and the credit term be no longer. The farmer needs longer time to turn soil chemicals into wheat and six months might not be too long for him. Retail groceries may be turned two or three times a month and meats two or three times a week, and, therefore, short credit arises; while dry goods would take longer, being less perishable but slower in selling, and subject to fashions. The cash discount is so firmly es- tablished that it is now a fixed policy, and this makes the credit term, as a rule, short. Banking credit is longer, has no premium on promptness, but a penalty on laxness. INSTRUMENTS or CREDIT IN MERCANTILE TRANSACTIONS The credit instruments used in mercantile dealings are: (a) Book accounts. It may seem superfluous to describe the book account as a credit instrument, but analyzed it simply means that the seller delivers the goods, charges the buyer on his ledger, renders invoice and statement, with terms of sale, collects at the end of the credit term, payment probably being made by check, and the transaction is closed. No circulating credit has arisen; and until recent years no pledgable security came out of the operation; it was strictly between the two. But the seller can now avail himself of the proceeds of the sale by hypothecating the book account as hereafter described. The book account has no evidence on the part of the buyer that he agrees to the terms of the sale, except the ac- count stated, which is passive and not active assent. In a negotiable instrument, however, the maker consents to the time, the amount of the credit, and agrees to pay it. The dishonor of a book credit is not so serious a matter as the dishonor of a promissory note. If the book account be paid a few days after its due date, it is quite satisfactory, and the cash oliscount often allowed; but to allow a note to run over even a day is to invite protest, and protest means dis- credit. 410 THE PRACTICAL WORK OF A BANK BOOK ACCOUNTS AS SECURITY Book accounts open credits, dealer with dealer are presumed to be settled at the end of the credit term, but are not rigid in their maturity as are negotiable instruments. They are sometimes settled by note, as in lumber, raw silk, etc., but generally in cash, which is obtained from the sale of single-name paper. They are frequently used as the basis of credit, by pledging with bankers, factors and "commer- cial bankers," who make a business of loaning on accounts receivable. So common is this practice that many firms have their bill-heads printed with the notation: "This bill assigned to and all payments must be made to them." Large and important houses in New York and other cities now buy these book accounts, and make advances in part or up to the full amount, charging in proportion to the risk assumed and the amount advanced. A del credere commission man or factor is one who insures the credit he opens when he makes a sale of his principal's goods, and guarantees the payment of the same, for which guaranty he receives a large fee and assumes great risks. Some banks will loan on book accounts and others will not; but they are coming to be quite a common security. The methods of utilizing book accounts as security are two: (a) Selling outright, the buyer assuming the risk of collection, for which risk he charges his full toll; (b) pledg- ing the accounts as security, receiving only part of their value, the pledger agreeing either to turn in others to keep the margin good, or to turn all proceeds over to the lender as payments are made. It has been held recently in New York that such an operation is in violation of the banking and corporation laws which forbid other institutions than banks doing a discounting business, and such a contract of sale is void. The factor is in some cases a firm of considerable wealth, able to maintain a large organization, and employ a highly- paid credit man, and is able to borrow in the open market on single-name paper or by banking connections obtain the credit needed to carry on the discounting operations. The selling of book accounts is liable to gross frauds, and it becomes needful that the account be confirmed over ESSENTIALS IN GRANTING CREDIT 411 the debtor's signature to be sure that the account is not a fictitious one. ASSIGNED ACCOUNTS A MENACE The growing practice of loaning on assigned accounts constitutes a constant menace to the banker whose advances are made on the general security of the assets, particularly those described as quick. The number of corporations or- ganized for financing in this way is steadily increasing and the ease with which credit can be obtained is a constant temptation to the small borrower to overtrade. It has also Business Loans. Forty-five cunts a Una. Manufacturers, wholesalers, outstanding ac counts financed, notes discounted. KOtyn, 194 Bowery. (Bank Building.) Manufacturers' and wholesalers' outstanding accounts financed, notes purchased. N*>- sau Finance. 119 Nassau. Merchants and manufacturers' accounts . notes, second mortgages. Victor Beaver 39 East 42d. Make loans outstanding accounts, notes, bank books. Security Finance Co., 149 ADDITIONAL CAPITAL REQUIREMENTS furnished to manufacturers and wholesalers; advances on accounts and merchandise. Con- fldentlal. Principals only. Wormser & Co., Commercial Bankers, 95 Sth Av., N. T. City. ADVERTISEMENTS IX THE NEW YORK TIMES OF CONCERNS DISCOUNTING BOOK ACCOUNTS given rise to a species of fraud which, unless promptly checked, will prove very dangerous for those who make such advances. A New York manufacturing concern with a number of subsidiaries recently went into bankruptcy and the active official disappeared from his accustomed haunts. It soon developed that in addition to direct loans from banks he had been financing his enterprises by the sale of accounts to two large commission houses in New York City who make a specialty of cashing accounts. It is alleged that concern "A" would ship goods to "B" and pledge the invoice with the commission merchant. "B" would ship the goods to "C," make out a bill, go to the commission merchant and secure a loan on it. "C" would repeat the operation to "D" 8K. B. Snyder, Assistant Cashier First National Bank, Philadelphia, before Philadelphia Chapter, A. I. B, 412 THE PRACTICAL WORK OF A BANK and "D" to "E" and "E" to "A" until five advances had been made on the same lot of goods. The skilled financier was later found across the Mexican border where he had gone, as he said, for his health. His illness must have had a very deteriorating effect on his memory as he was traveling under a name entirely different from the one by which he was known in New York. Pledging accounts may serve as a useful purpose with certain classes of merchants who can thus obtain funds to discount their bills when their bank credit is not sufficiently good for single-name accommodation. The discounts, however, must be very substantial as the esti- mated cost of this method of borrowing is from seventeen to thirty-six per cent. Where it is indulged in the banking of the borrower should all be done with the institution mak- ing such advances and his financial affairs should at all times be the subject of the closest scrutiny. DATING AHEAD The dating ahead principle arose from the necessities of manufacture. In such lines as staples, small stocks may be carried, and bought as required: while in fashionable goods, they must be made to order and to suit the tastes of the buyer. Thus, in a line such as ladies' garments, samples are made up and taken out to the retailers for inspection, and orders taken months in advance of the season. Orders for spring goods are taken in the fall and vice versa. As soon as the goods are made up, they are delivered as per agreement, the invoice to be dated ahead. For instance, the goods would be delivered for the spring trade in January, the invoice to be dated as of March 1st, and the terms of credit would run from that time. Thus, a department store may have a sale of furs in August, agreeing that no pay- ments are to be made until November 1. It must either carry the credit itself, or pass it back to the fur manufac- turer. This it does by having the invoices dated as of No- vember 1, the term of credit running from that time, and it will meet its bills as the customers meet theirs. The man- ufacturer may in turn sell his book accounts. In dating ahead the buyer is not only entitled to the cash discount, but to interest for the unexpired time. For in- stance, a bill of goods is delivered on February 1. The dat- ESSENTIALS IN GRANTING CREDIT 418 ing is March 1, 2/10 net 30, and the bill becomes due March 31. If it is paid any time before March 10, the discount follows. But if paid, let us say, February 15, not only would the two per cent, be deducted, but also interest at the legal rate for the unexpired time of the credit. Department stores frequently agree to date bills ahead to attract trade and to avoid holiday rushes. Thus, pur- chases made in October may be dated as of December 1, bringing the maturity of the bill over into the new year. The second form of mercantile credit is the promissory note, which needs no comment. It may be single-name or two-name, but it is a promissory note whatever the form. There is also the bill of exchange by which the seller draws on the buyer, as in grain and other basic products, raw mate- rial moving, as a rule, on draft with bill of lading. There will come to be shortly, as now obtains quite generally in Europe, the acceptance credit, whereby the buyer accepts the bill of exchange and thereby agrees to pay it at matu- rity, the instrument going into the money market as an "acceptance," and settling the book account as the promis- sory note now does in this country. Late reports of the Federal Reserve Banks show about thirty-six per cent, of their loans to be in the form of acceptances purchased. THE MERCANTILE CREDIT FIELD The mercantile credit man labors in a field widely differ- ent from that of the bank credit man. Many of the credits granted in the day's work in a business house are so small as to require but little investigation, other than looking up in the agency reports, and the loss would be trifling; while in banking, especially in large cities, the loans are of much larger average. A business house has also the advantage of being able to adjust its prices to the risk, and may, in a measure, in- sure the credit by an advance in prices; but the bank man has but one price to all and this is fixed by law. Moreover, the mercantile credit man deals largely with those in one line and can specialize, while the banker, unless he too specializes and this he should not do must know many. The giving of statements in mercantile credit is not so H4 THE PRACTICAL WORK OF A BANK general as in banking credit, the information being ob- tained from other sources, although the statement is here becoming recognized as necessary also. Not only is the character of the credit on a less secure foundation as it gets nearer the final consumer, but the property risk is less valuable as a backbone to the structure. For instance, the accounts receivable of a wholesale house are good collateral they have been selected; they are good liquid assets; but the accounts on the books of the village grocer are uncertain of collection, slow and highly danger- ous as credit risks. He has not selected his risks as care- fully as has the man higher up. He did not know how, and could not be very strict if he did. And if he borrows he must do so from his local bank on his general reputation, THE ENORMOUS COST OF RETAIL SELLING All well-managed concerns analyze their business. De- partment stores do so for each department, carefully analyz- ing prices, mark-ups and mark-downs, sales, discounts and expenses. Conditions vary so greatly that one merchant cannot guide himself by the experiences of another. One may pay a rent of $50,000 and the other but half that sum, and both sell to the same trade. Three stores are men- tioned as selling approximately $1,500,000 yearly, one paying $65,000 rent in Indiana, one $45,000 in New York, and one $30,000 in Ohio. One pays ten times more for in- surance than does the other. Obviously their selling prices for the same articles will vary. One store will consider a gross profit of thirty-three per cent, ample; while others will be satisfied with less. The mark-ups range from twentj^ to fifty per cent., depending upon the department, but the average is from thirty to thirty-three per cent. When you go into a department store and select a pair of gloves and leave your address, and expect to find them when you arrive home for dinner, you give little thought to the cost of placing those gloves in your possession. You have become so accustomed to service, quick, efficient and accurate, and to include the little things of life, that you take it as a matter of course. Without much argument it must be apparent that to ESSENTIALS IN GRANTING CREDIT 415 conduct a large establishment, with thousands of clerks, ex- pensive rent, quick and extensive deliveries, is costly. And every purchase must bear its proportion of that cost; and the consumer pays. The cost of the article is but a part of its selling price. The shopper comes into contact with a salesperson, and forgets the vast army of employees out of sight, but no less necessary to the smooth working of the machinery. There must be the buying force, the stock force, the selling force, the credit force, the accounting force, the delivery force, and the supervising and executive force. And your pair of gloves must pay something to each. The cost of doing business has increased so fast of late years that it is officially stated that large concerns are satis- fied to make as net profit their cash discounts. In a pamphlet issued by Ernst and Ernst, certified public accountants, New York, the pair of gloves referred to are thus analyzed to show the distribution of cost of sale : 9 VOST OF THE SALE OF PAIR OF $1.50 GLOVES. .6667% Manufacturer's price $1.00 .0067% Freight, &c 01 .08% Salesperson 12 .02% Rent 03 .0067% Insurance and taxes 01 .02% Advertising 03 .0533% Office expense 08 .0666% General store expense 10 .04% Delivery expense 06 $1.44 .04% Profit 06 100.00% $1.50 FRAUDS IN MERCANTILE CREDIT Great frauds are possible in mercantile credit because of the ease with which statements and accounts may be jug- gled and frauds covered. This is particularly true of mer- chandise, where a few figures, more or less, are easy to make and hard to discover. The picture was recently pre- sented in court of a prominent merchant compelling his book- keeper to inflate the merchandise account in order to show a profit where a loss occurred. In a big concern, handling New York Times, April 6th, 1914. 416 THE PRACTICAL WORK OF A BANK CQ ol ^H * ^ oo H | s 4! a* .s ! i | o o "3 t! _, 1 c 3 y -. 2 1 .s a | 3 i 3 i O " i i 1 ! s 1 1 S a TS a a 1 : 1 V S H B J M JO PUB 'SJ3SSY fliOO ESSENTIALS IN GRANTING CREDIT 417 : : i : ' *t ': ': ': ': : . ' '' i! : : : i : ; j ' :& : * : i i : : i ; :g ; | a ; : : : i ; ; ; JB is v n - LIABILITIES. g J 2 : I ::.::::: : 2 :::::::: o-28 : <:!:!:::: >gy g 2 .":: :::...:: liiiiii 1 1 i ! Nj j SIlHUl 1 j TOTAL, :K ASSETS -QUICK a o c 3 * o- ;-:; : : -S -S ftttll'i Mil 3 g 0> h! (/ t/ b c* 2P t*4 y w u 3 t2 (2 o < < -a ' ' ^ - j t S 3 a. pasodmiMiBiiMjo |15 55-03 P "ainawapin TO) TOTAL LIABIL1 t. X (i SALES.. 418 THE PRACTICAL WORK OF A BANK millions of dollars' worth of goods yearly, and whose stock runs into the six figures, to add a few ciphers here and there to the inventory is not difficult, and only a physical revaluation will disclose the exact state of affairs, although an expert accountant could, verify an inventory to a fair de- gree of certainty without this lengthy process. The amount of goods on hand at the beginning of the term, plus the purchases, minus the sales, must equal the present inven- tory; but if accurate records are not kept, or other frauds indulged in, it is not easy to detect an irregularity, and only re-inventory will accurately determine conditions. The banker must pin some faith in the statement of con- dition, and cannot always require an expensive and ex- haustive audit for credit purposes, and the remedy would seem to be to severely penalize false statements. The ad- vent of the Federal Reserve Banks and the credit opera- tions outlined in their ruling of November 10, 1914, indi- cate a step in the right direction; for it is the obvious pur- pose to require statements of all firms whose paper is of- fered for rediscount, attested by oath, and it will doubtless follow that certified audits will presently be required. Clear- ing-houses have already taken such steps as a matter of good banking policy. The uncertainty of mercantile credit and the frauds pos- sible in such lines have resulted in credit bureaus, connected with all the leading industries that specialize in the credits of their own trade. These credit bureaus have such complete reports of the men engaged in the particular line that a detailed history of the individual may be obtained upon request. They keep close watch upon the operations of the men in the trade, and follow up bankruptcies and assignments. For instance : the best hat manufacturers sell their product through about a dozen commission houses. These commission men work in harmony, employ an actuary to whom all orders and payments are reported. Having a record of past pur- chases and payments, the actuary is able to check the busi- ness operations of the trade. He will know if a merchant is buying beyond his means. Business is not spasmodic, but of slow growth, and a sudden, heavy order ma}' be the forerunner of a failure. The actuary will detect the dishonest buyer, perhaps in time to report him as unde- ESSENTIALS IN GRANTING CREDIT 418 sirable. The way a man takes his discounts, cancels orders, returns goods, etc., may all be known because of the har- mony in the central credit bureau. These credit bureaus go into the moral side of a man closer than the large agencies are able to do, for they cover a special field, and can concentrate. They know the field, the various towns and cities, from their particular view- point. For instance, in a city like Schenectady, N. Y., em- ploying large numbers of men, hats and men's wear in gen- eral would find a profitable field; but if a strike should occur in the General Electric works it would soon affect every line catering to men. Thus, the special credit bureau follows economic conditions, and advises its clients accord- ingly. Likewise a failure of crops in an agricultural sec- tion will have its effect upon certain lines. Associations of credit men are operating local credit bu- reaus which check local credits, and interchange with other local credit bureaus, so that first-hand information may be had of any merchant in any town supporting a credit man's association. In Philadelphia there are eighteen jobbing houses which handle a product of such bulk that the retailer, in order to make a profit, must purchase in his home market, as freight is practically prohibitive. These eighteen houses have an association which conducts a small mercantile agency con- taining the names of all purchasers in this particular line. Each member furnishes the agency at regular intervals with a statement of the retailer's standing with him, which is in turn transmitted to the other members. In this way it is possible to keep a complete check on all houses in this line and losses from bad debts can be practically eliminated unless the jobber goes against the unfavorable experience of his associates. THE MERCANTILE STATEMENT The property of a mercantile dealer can be correctly as- certained only from his statement, and this is coming to be the focal point of all credit operations. Not what the man says he is worth; not what he seems to be worth; not what his bank thinks he is worth; but what he is worth as tested by an audit made by an independent party who knows how, and does it with full knowledge of accounting principles, can be the foundation of safe credit. 420 THE PRACTICAL WORK OF A BANK No man can go into a store and look around, and say: "This man is good for a thousand dollars' credit." The goods may be on consignment, or mortgaged, the book ac- counts large, the bank account empty, the merchant's house mortgaged to the limit, his garage bill unpaid, his tailor's bill a year overdue; and unless the property is set forth in cold figures, no man living can judge the risk advisedly. Moreover, the merchant must be required to keep books. He must know what comes in; what goes out; if he gets his pay, and from whom; what his profits ought to be, and what they are; how much his sales are, and what the cost of selling. The average merchant guesses at his selling price. The cost, plus the freight, plus what he thinks he ought to get, means his selling price, regardless of other conditions. Competition often sets the price, and the merchant paying high rent must compete with the one paying a low rent. Likewise standardized goods must be sold at fixed prices ir- respective of the cost of handling. A drug store on Sixth Avenue, New York, can afford to sell a proprietary article cheaper than one on Fifth Avenue. It may do more busi- ness at less expense and can afford to take close profits; while the other has high rent and other expenses in pro- portion. The average merchant knows nothing about his turn of stock. He is satisfied to keep it up, make a living, pay his bills, but cares not for the process by which the results are achieved. Increased sales do not always mean increased profits unless the same volume can be handled at the same cost. How TO FIGURE THE TURN-OVER While the final net profit of retail dry goods stores is small, this is often offset by a large volume of sales as compared with the average amount of merchandise on hand throughout the year. This is what is known as the "turn- over," and the thing all merchants are striving to make as high as possible. A high turn-over indicates that the stock is moving well and that good judgment is being used in buy* ing and selling, while a low turn-over shows the stock is not selling properly and that obsolete stock may be accumu- lating. ESSENTIALS IN GRANTING CREDIT 421 The amount of turn-over, of course, varies with different departments in the same store and with different stores, de- pending on their location with respect to the source of supply. Merchandise subject to change in styles is turned over much more often than staples. For example, millinery and ladies' ready-to-wear clothing are usually turned from six to ten times per year, while carpets, linens, dress goods, etc., are commonly turned only two or three times. The correct method of computing the turn-over is an im- portant matter and is often improperly determined by many merchants. The proper way to do this is to divide the aver- age monthly stock at retail into the sales at retail or, what is virtually the same thing, by dividing the average stock at cost into the sales at cost. Some merchants incorrectly divide the stock at retail as taken at inventory periods into sales at retail or, what is worse, divide the stock at cost at inventory periods into sales at retail. This latter method would give a turn-over at least fifty per cent, more than the real turn-over. 10 The following on the subject of turn-over is well worth quoting: 11 "My judgment of the great importance of the turn of stock and the lack of appreciation by the merchant is such that I desire to make my point as impressive as possible and I will give you a few illustrations. Now, you who are not merchants would be surprised how few merchants realize the importance of this turn of stock and it is so simple that I know you will agree with me that it is really the A B C of business. Take an illustration which I have sometimes given to the college boys : "A young man had $5,000 and wanted to go into the men's furnishing business. He came to me for advice and I said: 'You take $2,500 of that $5,000 and bury it in the ground, then take $2,500 and buy goods.' Now, it is very clear that the $2,500 in the ground is inactive. In other words that $2,500 invested in goods has got to be active for both. He is worth $5,000, $2,500 of which is dead, in- loErnst & Ernst, official auditors and systematize^, the National Retail Dry Goods Association, in The New York Times. "E. M. Skinner of Wilson Bros., Chicago before Chicago Chapter, A. I. B. 38 122 THE PRACTICAL WORK OF A BANK active, does not move. The $2,500 of active, new, salable goods is doing the work for the $5,000. "Take the United Cigar Stores. I have used this illus- tration a great many times and I have not as yet received any letters from the United Cigar Stores putting me on the payroll and I never talked with any of their officials to know if this is their system. "I have been in the habit of going into the store near our establishment and buying a certain cigar. Well, just assume for the sake of argument that I buy twenty-five of this cigar once every two weeks. That would be twenty-six boxes of cigars I would buy of this store every year. Now, the clerk always brought down three boxes of cigars of this particular brand. I said to him one day: 'Is this your entire stock of this cigar?' He said: 'Yes, sir.' That is the best illustration I can give you. Here is one store that sells one customer twenty-six boxes a year. In other words, they turn the stock of that one cigar over eight times a year. Now, you know vvhat that means. It means that on every dollar invested in that cigar they make eight profits, because they turn it eight times. As I say, I don't know, but I am positive this is their system. The sale of that box of cigars goes down on a sale- sheet and I will bet you that their sale-sheet of to-day is their order-sheet of to-morrow morning, and when that great truck comes around in the morning they bring in that box of cigars and it is put in there with the other two re- maining." GRANTING MERCANTILE CREDIT In the granting of mercantile credit, all the elements that enter into personal credit are desirable and even neces- sary. First, we must have an honest man. He must have demonstrated this by his past conduct. Then we must have an able man, and this we can easily determine by his past and present performances. He must have demonstrated that he .can run a business for mercantile credit is granted to run business and not to furnish a home or keep an auto- mobile. We can tell what sort of trader he is by his methods of advertising, credits and general aspect of his business. A store that is well located, well arranged and neat, stock fresh and well selected, employees loyal, well paid and fairly treat- ed, is presumably prosperous. We can tell his credit methods ESSENTIALS IN GRANTING CREDIT 428 by his accounts receivable. This should be the focal point. It matters not how much goods he sells, if he doesn't get his pay, of what avail? Anyone can sell goods only the good business man can get the money for them. Too liberal credit is conducive to large sales and slow pay. Does he pay his personal debts promptly? Does he live within his means and does he always take Ms discounts? Does he borrow at the bank, and if so, how much? Does he bear a good reputa- tion in the trade? What is the worth of the concern? How much capital? Assets minus liabilities equal proprietorship, and unless the equation shows an overplus of assets, the business is insolvent, and unless there is sufficient capital success cannot follow. Business failures, in the main, are caused by lack of capital. WHY MEN FAIL The causes of business failures have been analyzed from time to time by the mercantile agencies, and the reasons are stated in percentages as follows: Per cent. Lack of capital 29.7 Incompetence 30.2 Inexperience 4.6 Bad credits 2. Competition 1 .0 Fraud 10.3 Neglect 2. Personal extravagance .7 Speculation .8 Other causes 17.8 A private investigation of the causes of 500 partial or total collection losses resulted in finding the causes of fail- ure to be similar, as follows: Per cent. Lack of capital 29.5 Incompetence 24. Bad credits 4.4 Heavy expense 3. Poor location 2.2 Expansion 2. Fraud 4. Neglect 4. Extravagance 4.8 Speculation 2.1 Intemperance 2. Other causes 11.60 424 THE PRACTICAL WORK OF A BANK THE DEVELOPMENT OF THE RETAIL STORE 12 It is illuminating and instructive to look back for a mo- -ment and follow the development of the retail store in its relation to this most important matter of retail credit. In the early days of our retail business a store was started to supply the demand of the community for certain necessities of the people. If a town needed a store, a general store was started. It carried everything the community needed. Later if there became a demand for a more complete line of dry goods, or clothing, a separate store was started and so on along the line of specialization. If the community grew, more stores were started of the same kind, but only as the demand made them or seemed to make them necessary. These stores catered to the actual needs of the people. As time went on and our present-day methods of intense living came into existence, no longer was it sufficient to sim- ply fill the demand, but a demand was created, and then that great modern force known as advertising came into exist- ence. It became the duty of advertising not so much to in- dicate why we should use this or that necessity, but to show us why this or that was a necessity, until to-day we are all, those of small means as well as those of large (and unfortu- nately those of us of small means are the more easily per- suaded) just as sure we need a talking machine or an auto- mobile as we are we should use Ivory Soap, Old Dutch Cleanser, or one of Heinz's 57 varieties, and so it goes along the line of merchandising, even as the advertising expert will tell you, first attention, then a desire for things is created. Now, if this desire was created only among those who could afford the article, well and good, but like the rain, it falls upon the just and unjust, and those who cannot af- ford become even more intense in their desire than their more prosperous brothers. And so we have our present-day con- dition of the over-expansion of abuse of retail credit until it has in reality become a menace not only to the merchant and to the individual, both man and woman, but to the commu- nity itself. What would happen if all your merchants insist- ed upon all their accommodation credit accounts being paid promptly in thirty days? 12 E. M. Skinner, of Wilson Bros., Chicago. ESSENTIALS IN GRANTING CREDIT 425 Another of our modern methods is the competition in credit as well as merchandise. In the strife for business it is not only the goods and the price but the willingness to trust. This is one of the great evils of present-day methods, an evil that like other evils is difficult at first, easier afterwards, until later on we become unconscious to the re- sult of it. And it has seemed to me that with the man who wants to "feather our nest with no cash down," the piano dealer who will sell a $150 piano for $250 and take $10 down and monthly payment leads. The legitimate retail deal- er is somewhat to blame for permitting his charge accounts to grow until they consume one-half, two-thirds or perhaps all of his capital and at the same time educate the man, or more particularly the woman, to go in debt beyond his or her means or immediate ability to discharge. Unless your capital is sufficient you are losing your discounts, you are paying in- terest, you are slow in meeting your obligations, you are allowing your credit or at least, your methods to be ques- tioned and you are building up an asset of so questionable a character that if you desired to sell your business the would- be purchaser would not take it. PROFITS In a day of competition, business can no longer be done by hit or miss methods. The business man must know what his goods cost to manufacture; what to market. He must know details from a scientific standpoint. It no longer suf- fices to know what his rental charge is he must know how much of that charge belongs in a certain article. The prof- its of to-day are made from the wastes of yesterday. And the wastes of to-day will be the profits of to-morrow. It is one thing to make profit from waste and another to waste profits. A perfectly conducted business should make a legitimate profit on every dollar of merchandise sold; but as we are all human and must make mistakes, as the public is fickle and styles change all too quickly, there is reason for a sale at the end of a season of odds and ends of merchandise that the merchant has not been able to properly judge as to its salability; but for the loss of profit on sales before the end of the season, for the selling of a large proportion of the season's purchase in this manner is commercial suicide. The 126 THE PRACTICAL WORK OF A BANK merchant must have profit or he cannot succeed he cannot charge an exorbitant profit on some goods to make up his loss of profit on others he must find some way to sell the bulk of his goods profitably or he will surely drop by the wayside as one of the unfit. We cannot do business solely on "bargain sales." Speaking of the profits that attend merchandising, Messrs. Ernst and Ernst say : "From a wide experience in many retail dry goods and department stores we have accumulated a large amount of data on expense of operation. It would not be satisfactory or fair to attempt to compare the results of various stores with respect to the individual items on account of the vary- ing conditions. "We have, therefore, picked twenty-five stores in differ- ent cities throughout the United States and find the average per cent, of gross profits (total net sales less cost of inven- tory value of goods sold), per cent, of net profit, and per cent, of overhead expenses to net sales are as follows: Gross Overhead Net Profit. Expenses. Profit. P. C. P. C. P. C. Average 25 stores 30.42 23.84 6.58 Highest single store 35.10 28.00 10.66 Lowest single store : 27.33 18.02 3.50 "From the above it will be seen that the average cost of the merchandise was 69.58 per cent, of the net sales, and that the cost of doing business was approximately one-third of the original cost of the merchandise. In other words, when a customer buys an article for one dollar, sixty-nine cents goes to pay for the cost of it and twenty-three cents pays for the expense of the merchant in supplying him with the article. "The modern retail dry goods store of to-day, conducted along the right lines, has its business divided into many dif- ferent departments, each being conducted independently, so to speak, from the others. The departments are little stores in themselves. This plan is followed so that the gross and net profit or loss can be ascertained as to each department. The merchandise, when purchased, is charged to the depart- ment to which it goes, the overhead expenses are pro rated over the various departments, and likewise the sales are kept ESSENTIALS IN GRANTING CREDIT 427 separate. This is the only method by which a merchant can tell whether a department is profitable or not. The percen- tages shown above, of course, refer to all departments taken as a whole. "It must, of course, be understood that the gross profit finally realized is usually much less than the original gross profit at which the merchandise is marked up to sell. The losses on account of markdowns, special low-price sales, loss of merchandise, stolen goods, etc., are all absorbed in the final gross profit as determined for the year." 1 LOSSES The losses in retail credits as ascertained by an investiga- tion of 1,000 stores covering various lines were as follows : Per Cent, of Net Sales Furniture 1.94 Groceries .47 Clothing 34 Vehicles 33 Hardware .31 Jewelry .23 Dry goods .21 Department stores .19 Drugs 18 Shoes .11 Variety goods None The secretary of the Retail Grocers Association of Kan- sas City figures that a loss of one per cent, of sales is nor- mal for an $18,000 a year grocery. The most successful methods of reducing mercantile losses used by 286 merchants are: (1) A distinct under- standing as to terms and limits of the credit; (2) individual- izing customers that is, knowing the man. One credit man states that he met one of his customers for the first time at a meeting of creditors; but if he had met him sooner there would have been no meeting of creditors; (3) cooperation with trade and trade bureaus; (4) monthly collections and good collection methods; (5) care in accepting new accounts. BUSINESS RISKS Business is divided into four main groups: Manufactur- ing, wholesaling, jobbing and retailing. The risk the man- York Timef, April 13th. 1914. 128 THE PRACTICAL WORK OF A BANK ufacturer runs is that he may not get hack the cost of his material plus the cost of manufacturing, and, therefore, lose not only his profit, but the capital invested or borrowed. He must have a good cost system in order to know what it costs .to produce his article. Then he must sell it. It may be he manufactures an article that is in steady and wide demand, and the profits, while they may be small, are steady and certain. But if he manufactures an article subject to chang- ing fashions, the whims of the season novelties a change of public opinion may seriously affect his business. The manufacture of clothing, especially that for women, which is highly a matter of fashion, is precarious when the styles are radical and the changes come suddenly and without warning. The weather, the seasons, crops and so many factors enter into the consideration of a manufacturing credit risk that it is perhaps the most difficult class to judge. Labor strikes, the tariff, loose credit methods, depreciation of plant and machinery, and improper bookkeeping methods, are all factors to be considered in manufacturing credit risks. Manufacturing may be divided into two general classes: The manufacture of goods for consumption and the manu- facture of goods for production. The manufacture of con- sumptive goods divides itself into goods for necessities, goods for comfort and goods for luxuries. The first class would include such products as meat, cereals, canned goods, cloth- ing, etc. in fact anything to eat or wear that is not dis- tinctly a luxury. Such articles as perfumes and toilet ac- cessories are distinctly luxuries and could well be spared to a very large extent. As comforts may be included all those things useful but not necessary, which add to the conven- iences of life. It is obvious that an article such as meat will have a wide and constant demand, and a stock of such could be quickly turned into money. "Packing-house paper," as it is called meaning the commercial paper issued by the great meat houses is highly regarded everywhere. Likewise groceries of staple character which are, like meat, in con- stant and widespread demand. Such articles as canned goods and food products in general that will not spoil, cof- fee, rice, etc., are good security for loans from a realization standpoint; but perishable articles, such as butter and eggs, vegetables, while good as collateral for bill-of -lading loans, ESSENTIALS IN GRANTING CREDIT 429 are not of sufficient durableness to make them good for a long-time loan. Wholesale hardware is a staple article, in constant demand, and not perishable, and, therefore, well regarded. Bankers favor print cloths, staple fabrics, wool- ens, white goods and staple lines of textiles. Anything that is a necessity of life is a good foundation for credit and any well-managed concern dealing in such generally a good risk. Production goods are such articles as are necessary in the economic development. Such would be electrical goods, farm machinery, goods used in construction work, and those articles which are used to promote industry and efficiency. But business depressions affect all lines of activity, and even though the article be in the class of productive goods that have wide and steady consumption, depressions will natural- ly curtail production and competition will cut profits. Thus, a lull in building will have its effect upon electrical goods, elevators and other articles entering into construction work. Likewise furniture, while a necessity, will have its dull sea- sons when the economies of the people cut down expendi- tures to low ebb, for a large part of house-furnishing goods may well be classed as luxuries. THE WHOLESALE AND THE RETAILER The wholesaler is not burdened with a plant to maintain, machinery to wear out, a class of labor that is always crying for more wages, but he must have an expensive selling or- ganization. The wholesaler can buy even seasonable and fashionable goods as wanted, and need not stock up heavily. The retailer is last in the list. More and more business is getting down to a cash basis, and with the extension of the department store idea, and the advantages of cash dealings growing in popular favor, the retailer as a credit risk is com- ing to be better understood. Moreover, his assets are largely quick assets merchandise and accounts receivable. In the chain of merchandising the greatest risk is taken by the manufacturer. Some credit men eliminate the manufac- turer and loan to him, if at all, only when they have gone carefully into his affairs and become satisfied of his stand- ing. One New York bank is said to have an officer who spends most of his time going around among manufacturers 430 THE PRACTICAL WORK OF A BANK and inspecting their plants. Photographs are taken and the affairs given most careful study. STANDARDS Banking credit standards are of the highest, and the test put by the banker is more severe than by the merchant. The latter wants trade; he does not want to lose a customer; his profits are larger than bank profits, and he can afford to assume risks; first, because it is his own money, and second, for the profit that eventually attends. Moreover, the mer- chant-creditor may extend the credit while the banker- creditor cannot. When the book account is due it may be extended, or allowed to run until by the slow process of the law it is col- lected ; but the bank cannot extend its debts. They are pay- able on demand, and it cannot settle one debt by incurring another as does the merchant, but it must pay or suspend. Under the Federal Reserve Act, banks will now be able to turn good mercantile credits into bank-note credits, and as long as they keep their paper in conformity with the rulings of the Federal Reserve Board, can depend upon being able to quickly turn good assets into circulating credits. THE CREDIT DEPARTMENT The division of credit which will particularly engage our attention, however, is that of bank credit. A bank has been likened to the human body, with the executive force as its head, the tellers its hands, the runners its legs, and further likenesses which imagination will readily supply. The life blood of this body is its loans and investments, and the credit department is analogous to the lungs and heart which keep the loans pure, liquid and circulating. To properly perform these functions, the credit department must be properly equipped and properly directed. In the early days of American banking, loans were largely local. The cashier was chosen for his knowledge of local conditions. The bank made its loans with the expecta- tion that they would run for a long time, and were often se- cured by real estate mortgages, and were in the nature of borrowed capital rather than working capital. The home ESSENTIALS IN GRANTING CREDIT 481 demand absorbed the loanable funds and a bank rarely thought of going outside its immediate field for investment. But with the development of the country and the concentra- tion of wealth, and the growth of banking resources, wider fields had to be found both for the borrower and the lender, resulting in the credit department and the commercial paper broker the one to buy and sell the paper and the other to pass upon its quality. Thirty years ago, the credit department was unknown, but to-day it is part of the organization of every well-man- aged bank, with its officer in charge, files and elaborate in- formation concerning not only its borrowers, but large con- cerns all over the country. The machinery of the credit de- partment depends upon the size of the bank and the scope of its activities, the country bank needing less elaborate ma- chinery than the city bank which furnishes information to its thousands of correspondents. THE BANK AND ITS CORRESPONDENTS Elsewhere it has been stated that the competition among the large banks for out-of-town accounts is keen. It is extremely so. Most of the large banks have men who do nothing but follow up prospects and keep in touch with cus- tomers. If a new bank is proposed, as soon as the fact be- comes known and sometimes before it becomes public property the machinery will begin to move to get that account. The bank will have its representative busy himself imme- diately, and he will offer to see the bank through its organ- ization period, help it select its books of accounts, attend to its affairs in Washington, if it be a national bank, get it a cashier, and altogether be a "big brother" to it until it can walk alone. And where banks are organized every day by men who have no banking knowledge it becomes needful that some guiding hand be at the helm to steer the new ship safe- ly. Herein the big bank comes into its own. It knows just what to do to get the charter, to buy the bonds, lodge them for security, make the records, open the books, lay out the banking room, and in a thousand different little ways comes to the rescue of "the bank that would be." It may be friend- ship that gets the account, but more often it is service. And *82 THE PRACTICAL WORK OF A BANK this service is real, helpful and to the point, at the time when it is most needed. The city bank not only assists in the organization of the country bank, makes loans 15 and keeps securities for it, but the principal sendee to its correspondents is the furnishing of credit information. It places its credit files at the com- mand of its clients freely. It will recommend paper, buy it, and attend to its collection, all gratis, as part of the service rendered in return for the account. It, therefore, becomes necessary to have extensive credit facilities if it would give good service, and this it does. CREDIT INFORMATION The credit department is a bureau of information. It gathers information, classifies it and presents it when needed. It does not, as a department, as a rule, pass upon the loans, but furnishes the credit information that is essential to the granting of credit. The methods and the machinery may differ slightly in different banks, but the principles and the modus operandi are the same in substance. The information is generally kept in envelopes or folders, all data concerning one individual or corporation being filed together. The information that finds lodgment in the credit de- partment consists of: (a) The information furnished by the borrower, both direct and indirect ; his statement of condition, preferably for a series of years, and other information con- cerning him that the credit department may obtain through conversations with him and reports concerning him. (b) Information gained through the "trade," meaning the business concerns with which the party does business. This includes the promptness with which he meets his bills; whether he takes his discounts, and his general reputation as a credit risk, from a mercantile standpoint. (c) Information gained from banks that have dealt with the concern, and especially in the line of loans and discounts, and as a depositor. (d) Mercantile reports from the great reporting agen- cies, Dun and Bradstreet's. (e) Miscellaneous information gleaned from various "Loaning the Bank's Money," page 242. ESSENTIALS IN GRANTING CREDIT 488 sources, such as newspaper reports of judgments, assign- ments, bankruptcies and other published information that affects the credit standing of the party. A record of the past performances of the borrower, his habits, his associations, his business record, is important; also a record of his average balances, 16 his average borrowings; his promptness in paying; whether or not his paper has gone to protest; how much credit has been asked for and how much granted. If he issues paper on the market, this will be known, through whom, in what amounts, and how it is regarded in the banks handling it. To get information as to his balances and borrowings on cards the method in use in some banks is to fix some date in the month when the work of the bookkeepers is liable to be the lightest, and have the credit department on this day send the cards to them. As soon as the information is filled in, the cards are returned to the credit department. In some of the larp-e banks in New York where balance ledgers are kept, it is the custom for a man from the credit department each month to place the information on the cards, getting the average balances from the balance ledgers, the discounts from the discount department and the loans from the loan department. One card when completely filled will contain the monthly and yearly average balances for ten years on one side, and on the front the maximum and minimum loans and discounts and information for about ten years. HOTV CREDIT INFORMATION is KEPT Credit information is best kept in manilla folders such as used in filing letters, these being numbered, with the name on the outside. A digest of the statement is generally made on a form provided for that purpose, for the sake of uni- formity and ready reference. This gives only the main facts in round figures. This appears first, the other information io"Most modern banking institutions, especially in the well settled sections of the Atlantic seaboard, have adopted a ratio of balances to loans which they expect the borrower to maintain. It is ordinarily as one is to five. This pro- portion was fixed in the same manner as the 25 per cent, reserve which banks were expected to maintain. Both percentages are based on the experience of credit grantors which has proven that one dollar in cash will support a credit structure of from five to eight dollars. The maintenance of these balances is, in a measure, a check against over extension of credits, and provides a reserve against liability for the customer." t34 THE PRACTICAL WORK OF A BANK following in uniform order. The folders are indexed as to names in a separate drawer. But if the volume of credit names is not large the folders might be filed alphabetically. Inasmuch as credit information is cumulative, and becomes more complete and, therefore, the more valuable, it is need- less to add that the information should be safe from fire. The credit files might be classified into "Own customers," "Paper offered in the market" (names being obtained as of- ferings come in), and "Others," such as prospects, large firms in the locality, etc. And if a bank discounts as a steady proposition for certain correspondents, it will have a file for such firms as it will accept for rediscount. The Federal Reserve Bank proposes to have a central bureau of credit information, to assemble information con- cerning all large borrowers whose paper is offered for re- discount. CLASSIFICATION OF RISKS Credit department work bears endless classification and sub-classification, and extensive data can be obtained for the guidance of the officers, by classifying the paper held. The different lines of industry that are included in the bank's borrowings may be given a page or section in a loose leaf ledger, and the paper of the different firms com- ing under that classification listed as to amount bought, amount paid and balance for each month, the total being the amount outstanding against that particular line at any one time. A classification may also be made of paper held in various sections of the country so as to scatter the risks geographically. It is also suggested that banks keep a record of the in- quiries coming in as a guide for future information. For instance, a bank answers an inquiry along certain lines, and if this inquiry is listed on a card, it would be a clue for an- swering similar inquiries in the future. Some banks run a statement tickler, to keep track of when statements are made by firms, or when audits are due, and thus keep their statements up to date ; but the same pur- pose can be accomplished by running through the statements on file and bringing down to date any showing a year's age. ESSENTIALS IN GRANTING CREDIT 435 THE CREDIT MAN The man who presides over this particular branch of the banking business must have many and varied qualifications. He must know men ; he must know business. He must have a wide knowledge of how business is done, the terms of credit and the trade secrets. He should be analytic. He should understand accounting. He should know the law. He must be an observer, both of men and events. He must be systematic and conservative. He cannot afford to be reck- less. Probably the first essential is a healthy curiosity, which leads him to inquire into and ascertain the reason for condi- tions which only serve to excite the passing comment of the ordinary observer. To this must be added something of the traits of a Sherlock Holmes well-trained observation, de- ductive skill and the ability to draw accurate conclusions. There is undoubtedly an intuition developed by the credit man which is sometimes called "credit sense." Some fortu- nate ones may be born with this invaluable aid, but it comes to the ordinary student only by the consideration of count- less cases and by arriving at conclusions through painstaking analysis. The credit officer is brought into direct contact with the executives; his work is under their eye and gains immedi- ate recognition. He not onlv meets men, but learns business as a broad science, and in a few years has a large fund of valuable information. While his work may be pressing, it is varied, so that the grind that obtains in many departments of the bank's work is not manifest here. On one of the clay tablets of the Babylonian period, re- cording the business transactions of the time, there is an in- scription to the effect that "In the month of Ab of the first year of Neriglissar, King of Babylon, I (Belilit 1 ^ sold Ba- zuzu, my slave, for half a mana, five shekels of money, to Nabu-akhi-iddin, son of Shula, son of Egibi. I took his note, but he has not paid the money," showing that even in those days bad credit risks were in existence and good credit men necessary. 486 THE PRACTICAL WORK OF A BANK LOSSES EXPECTED In mercantile transactions each sale carries a profit, and if the losses are kept within bounds (one-quarter to one-third of one per cent, of the sales) the merchant is satisfied. He must take risks in order to make profits; and if he accepts only those orders which will surely be paid promptly and without effort, he will lose much valuable trade. He ex- pects losses, provides for them and accepts them as inci- dental to the business. The banker does not expect losses; he does not arrange his prices with losses in view, and en- deavors to avoid them entirely. Moreover, the merchant is dealing in goods to which he has title and the losses are large- ly his own losses ; whereas the banker is lending money which belongs to other people, and which he has obligated himself to pay on demand. THE ESSENTIALS OF A GOOD LOAN Good credit is the bedrock of business success; poor credit is the quicksand of disaster. As a general statement, that credit is good which is based upon an exchange of com- modities. The only exceptions are those loans which are in the nature of an accommodation, and yet have behind them the strength and financial soundness of one whose name and credit standing are sufficient to offset the lack of an ex- change in values. It is no function of a bank to furnish its patrons with permanent working capital, and good banking credit is based upon loans made after due consideration of the borrower and his standing, and supported by collateral, whether pledged or not, that is subject to prompt and full liquidation. An authority on banking states that a well-managed bank should have twenty per cent, of its investments in high-grade secu- rities; twenty per cent, in commercial paper which it is under no obligation to renew, and purchased in the open market; and sixty per cent, in loans to its customers. The bank must meet its obligations as the merchant meets his by the maturity of its credits ; and the credit that does not promptly redeem itself is unsound. The greatest measure of safety in the credit system lies in the fact that no great part of the outstanding obligations will have to be ESSENTIALS IN GRANTING CREDIT 487 met at any one time. Experience has proven this beyond peradventure, and when a quick demand for unusual re- demption occurs, panic results and the credit system col- lapses. It is needless to add that good credit does not con- sist in the banker lending to himself. He cannot be a judge of his own affairs. The Comptroller of the Currency has digested the causes of failure of 418 banks, and finds that 214 were caused by excessive loans to officers and directors, fraudulent management and embezzlement. ELEMENTS OF SOUND CREDIT By weight of authority, it is conceded that in granting credit three elements must be considered, namely: (a) Character (b) Capacity (c) Capital (a) Reliability (b) Capability (c) Resources (a) The man (b) The methods (c) The means (a) The moral risk (b) The business risk (c) The property risk r^Sfe* Every application for credit does not possess all three, nor does it need to. But good credit, however, depends upon the degree in which these elements enter into the risk. The man with character, but no ability or capital, is doomed to failure. He has neither funds of his own nor the ability to safely use the funds of others. Good intentions never pay bills. He who has ability but no character is a bad risk he may use his ability to defraud. Lack of ability and capital accounts for three-fifths of the business failures. The business that "turns over" frequently can run with less cap- ital than that which must be done on long credit. But even though his capital be small, the man with character and ability will be a safe risk. The ideal risk, however, is ade- quate capital, unimpeachable character and sound business methods. THE MAN THE MORAL RISK Character means more than mere honesty. It means habits, companionships, past record, antecedents. Business character is business reputation, built up by long years of fair dealing. The man who claims to be honest must prove his claim by squaring himself with the world and keeping himself so. In the cooperative credit banks of Europe, 29 138 THE PRACTICAL WORK OF A BANK which have been eminently successful in the granting of credit, character is made the basis of all loans, and the losses have been remarkably few. While credit deals less with men than with things, the man must be analyzed as well as his possessions, for the statement, being a matter of honor (unless made by an independent audit) must be character- ized by good faith or it is worthless. His METHODS THE BUSINESS RISK It is not enough that a man be good he must be good for something. We test his ability by the manner in which he conducts his business, and by the character of that busi- ness. Is it, first of all, a legitimate business and sound; or illegitimate and full or risk? Is it stable, or subject to sud- den fluctuations one that the whims of fashion may jeop- ardize overnight? Has the owner demonstrated his ability to manage a business; does he manage this one well? Has he built it up himself, or did he inherit it?> Is he experi- enced or is he a novice? (Experience must precede the em- ployment of capital, else the latter may be lost while the former is being acquired.) Is it well stocked and well lo- cated? Are the profits ample, and are the expenses reason- able? Does he grant credit with care, or indiscriminately? Does he over-buy, over-trade, over- trust? Is he prompt in his collections and prompt in his payments? His RESOURCES THE PROPERTY RISK Behind every good loan there must ultimately be prop- erty, tangible and convertible into money without great cost and undue delay. It is not enough that there be stock it must be salable and seasonable, and of such nature as to help, not hinder, the business. The kind is as essential as the degree. It is not enough that there be book accounts they must be collectible. Many a man has failed with a fortune on his books. A large business does not necessarily mean a safe business its very largeness may carry it to de- struction. Is the capital borrowed or inherited, and if so are there any "strings" to it? Is the capital ample? Will the lack of money make over-borrowing necessary, and bur- den the business with too heavy interest charges? It takes ESSENTIALS IN GRANTING CREDIT 489 money to do business, and while a large amount of ready cash need not, and should not, be idle in the bank, it should be quickly available by the maturity of obligations to meet current demands. THE STATEMENT THE BORROWER'S ESTIMATE OF HIMSELF Modern credit is based upon statements prepared with the end in view of showing the true condition of the busi- ness at a stated time. Unless made by an independent audi- tor who has no interest, aside from accuracy, it resolves it- self into a man's estimate of himself. Its purpose is: To reduce losses; to minimize risks; to assist the worthy; to eliminate the unworthy. The statement consists of two parts: (a) Assets (from the French "Assez" meaning "enough"), and (b), the Lia- bilities. After making due allowance for the shrinkage in- evitable in all business, the assets must equal or exceed the liabilities or a state of insolvency exists. The assets readily divide themselves into (1) Liquid or quick assets, such as cash on hand and in bank, securities, collectible book accounts, bills receivable, marketable mer- chandise, and any other resources that may be turned into money or used as security. (2) Fixed, or non-liquid as- sets, such as real estate, furniture and fixtures, machinery, horses and trucks, etc. The question, therefore, to be decided in analyzing every statement is this: Is there enough? Not, will this man pay his obligations; but can he meet them as they fall due? Not, has he made money in the past ; but will he continue to make money in the future? Is this a "going" concern and likely to continue so? No two statements are alike and no general rule will apply to all; each application must be judged by itself. It is needless to say, however, that in granting credit, neither friendship, religion, politics, social or family ties, or senti- ment, should play any part simply the cold, critical, analy- tical judgment that comes from experience, observation and study. The weakness of the statement lies In the fact that the borrower is tempted to unduly appreciate his assets and de* preciate his liabilities. And it is the credit man's particular THE PRACTICAL WORK OF A BANK business to see that the assets are not unduly magnified. Current liabilities cannot be met from fixed investments such as real estate and machinery, and the burden of carry- ing the business falls upon the liquid assets, leaving it to the fixed assets to add strength and stability to the structure- backbone, as it were. Some credit men are of the opinion that the fixed assets should be eliminated from consideration entirely, while others hold that they should be scaled at least fifty per cent, from the borrower's figures, and then re- garded as security only. But however this may be, if the fixed assets bear a large proportion to the liquid, they are an element of danger and tend to weakness; if small, they tend to strength. Just the proper proportion of capital to volume of busi- ness; whether or not the business "turns over" promptly and profitably; whether accounts receivable are too large or too slow in maturing, can only be learned by experience. To correctly judge these elements in the granting of credit is to be a good credit man. And in passing upon credits, it must be realized that it is the business of the bank to loan money, and the credit that is refused because the applica- tion has been incorrectly analyzed has worked an injustice to the bank and perhaps an injury to the borrower. Profits arise solely from sound credits; losses from the unsound. The credit man must, therefore, play a double role: for the sake of his bank, and for the sake of the borrower, he must accept the good; and for the sake of his bank, irrespective of the borrower, he must reject the bad, and only training and experience can teach him to distinguish the one from the other. 17 STANDARDIZED FORMS OF CREDIT STATEMENT Credit was formerly based upon the knowledge possessed by the bank, either through its cashier, its loan committee or directors, of the borrower's affairs. His balance at the bank was known only in a general way and his trade con- nections and standing only by whether or not he had drafts made upon him by his creditors. Statements of condition are a development of the past ""Essentials in Granting Credit," ante p. 372. ESSENTIALS IN GRANTING CREDIT 440a Federal Reserve Bank of New York Statement Form INDIVIDUAL STATEMENT OF BUSINESS ADDRESS. MERCHANT, MANUFACTURER, ETC. To BANE OP I make the following statement-of all my assets and liabilities at the close of business on and give other material information for the purpose of obtaining advances on notes and bills bearing my signature or indorsement, and for obtaining credit generally upon present and future applications. CFLCASC ANSWER ALL QUESTIONS AND FILL IN ALL BLANKS) ASSETS LIABILITIES Cash on Hand and in Bank, Accounts Receivable Notes Receivable Merchandise Other Quick Assets (Itemize) Accounts Payable . Notes Payable to Banks , Notes Payable to Others Other Current Liabilities (Itemize) . Quick Auet> Land and Buildings (See schedule on back).. . Machinery and Fixtures Other Assets (Itemize) Current Liabilities Mortgages Other Liabilities (Itemize) Current and Deferred Liabilities Net Worth... Merchandise. On what basis valued, cost or market? Finished $ Unfinished* Raw $ If any goods on consignment, state amount and circumstances Do you take advantage of all trade discounts? Sales and Profits Last Fiscal Year. Net sales $ Net profits $ Accounts and Notea Receivable. If any are past due or doubtful, state amount and circumstances Contingent Liability. As indorser $ As guarantor $ No accounts have been sold or assigned ex- cept as follows: Accounts and Notes Payable. If any are past due state amount and circumstances Current Liabilities. During last fiscal year, current liabilities were at a maximum ($ ) on and at a minimum (S ) on Mortgages and Other Liens. State due date of mortgages and on what assets a lien If any are due from employees, relatives or similar sources, arc included in assets, state amount and circumstances Is mortgage a lien on any current assets' . . ither liens on assets, state amount and circumstances. Bonds and Stocks. State general character and if readily salable at values stated : Insurance. Fire, on Buildings t Merchandise f Life t Who. is .beneficiary? Afte. My Age is Date started present business Audits. Are books audited by a certified public accountant? . Give date of last audit I hereby certify that the foregoing figures are taken from my books and that they and the statements contained on both sides of this sheet are true and give a correct showidg of my financial condition. Signed this day of 191 Name .. Proprietor (OVER) CREDIT STATEMENT INDIVIDUALS USED BY FEDERAL RESERVE BANK, NBW YORK THE PRACTICAL WORK OF A BANK Federal Reserve Hank of New York, Statement Form FIRM To ' We make the following statement.of all the assets and liabilities of and give other material information for the pur MX of obtaining adv obtaining credit generally on present and future applications.. ances on notes and bills bearing our signature or indorsement, and for ASSETS LIABILITIES Cash n Hand and in Banks Notes Payable to Banks Notes Receivable Other Current Liabilities (Itemize) Quick Assets. f d .p; xtures Current and Deferred Liabilities. Net Worth TOTAL TOTAL Merchandise. On what basis valued, cost or market Contingent Liability. As indorser $ Finished $.. Unfinished $ Raw If any goods arc on consignment, state amount and circumstances AsguarantorJ No accounts have been sold or Accounts and Notes Payable. If any ai e past due state amount Sales and Profits Last Fiscal Year. Net sales $ During last fiscal year current liabilities were at ma (S ) on .and at a m ximum nimum Accounts and Notes Receivable. If any >ast due or doubtful state (J ) on Mortgages and Other Liens. State due date of mortgages and on If any amounts are due from members of the firm, employees, branches or similar sources, state amounts and circumstances Is mortgage a lien on any cu I f any other liens on assets, state amount and ci rrent assets ? . . . Bonds and Stocks. State general charactc r and if readily salable at value stated vision is made Insurance. Fire, on Buildings $ M erchan dise $. . .* Life, in favor of firm $ We hereby certify that the foregoing figures arc takoa from the books of our firm and that they and the statements contained on both this sheet are true and give a correct showing of our financial condition. Signed this day of 191 ..... Firm K'a m sides of By. ... IOVER; Member of Firm CREDIT STATEMENT FIRMS USED BY FEDERAL RESERVE BANK, NEW YORK ESSENTIALS IN GRANTING CREDIT 440c Federal Reserve Rank of Now York Statement Form. CORPORATION. STATEMENT OF. BUSINESS ADDRESS. To SANK OF We make the following; statement of all the assets and liabilities of i his company at the close of business on and give other material information for the purpose of obtaining advances on notes and bills bearing out signature or indorsement, and for obtaining credit generally on present and future applications. ASSETS LIABILITIES 1 Notes Payable to Banks Notes Payable to Others Deposits Other Current Liabilities (Itemize) Quick Assets. Current Liabilities. , Bonded Debt Other Liabilities (Itemize) Current and Deferred Liabilities. Capital Stock Preferred , Capital Stock Common Surplus and Undivided Profits .... TOTAL TOTAL Merchandise. On what basis valued, cost or ma Finished $ Unfinished $ If any goods are on consignment, state amount ket? Contingent Liability. Asindorser$ RawJ and circumstances. . As guarantor $ No accounts have been sold or assifjncl except as follows: Accounts and Notes Payable. If any ar : past due state amount Sales and Profits Last Fiscal Year. Net s fa i... and circumstances Net profits $ Dividends paid f Accounts and Notes Receivable. If any are past due or doubtful During last fiscal year current liabilities were at a maximum ($.. )on Mortgages and Bonds. State due dates of mortgages and on what If any amounts arc due from directors, officers, employees, subsi branches, or similar sources, state amounts and circumstances liarics, State due date of bonds and on what assets a lien Bonds and Stocks. State general character and whether readily Are mortgages or bonds a lien on any current assets? If any other liens on assets, state amount and circumstances salable at value stated Reserves and Depreciation. State what prc vision is m. de chandise f Life, in favor of company S We hereby certify that the foregoing figures arc taken from the books of this company and that they and the statements contained on bot of this sheet are true and give a correct showing of the financial condition of the company. both sides Signed this. .day of 191.... Name. I!. (OVER) CREDIT 8TATEMEKT CORPORATION. USED BY FEDERAL RESERVE BANK, NEW YORK 440d THE PRACTICAL WORK OF A BANK CR-12 Federal Reserve Bank of Now York Statement Form. INDIVIDUAL STATEMENT or FAHMEB o LIVE STOCK DEALER. BUSINESS ADDRESS To BANK OF I make the following statement of all my assets and liabilities as at the close of business on . . , and give other material information for the purpose of obtaining advances on notes and bills bearing my signature or indorsement and for obtaining credit generally upon present and future applications. (PLIASr ANSWER All QUISTIOHS AND Fill IH ALL LANK1 ASSETS LIABILITIES _ , Cash on hand and in bank Accounts owed by me Accounts due to me Good Notes owed by me without security. Unsecured loans due to me Good Notesowed by me with security other than real estate. Secured loans due to me .Notes or mortgages owed by me with Mortgage loans due to me real estate as security . Farm products on hand Notes owed by me with chattel Live stock on hand mortgage as security . Farmland (See schedule) j Other indebtedness (Itemize). "Buildings Farm implements and machinery. Other property (Itemize) Total Liabilities Net Worth . TOTAL TOTAL Location of Land Owned Acres , t , a _ tefl Assessed at Mtgd. for Insured for Title. The legal and equitable title to all pieces of above described real estate is in my name solely, except as follows: Buildings. State general character Contingent Liability. As indorser f Ever destroyed by fire? As guarantor $ As bondsman for others t Implements. State general character of those listed'as assets Accounts and Notes Payable. II any are past due state amounts and , . . . reasons Growing Crops. Outlay to date is as follows: Cost of seed t Maximum Debt. During last calendar year, my total indebtedness " " fertilizer f wMata maximum ($ ...)on and " " labor $ at a minimum ($ )on Other costs (Itemize) ? Other Liens. If any other liens on assets, state am't and circumstances Total $ Insurance. Fire ? Life? , Who is beneficiary? Age. My Age is Married or Single I hereby certify that the figures and statements contained on both sides of this sheet are true and give a correct showing of my financial condition. Signed this day of 197 Name ,. ,.. eril both to the economic and moral health of the business and bank- ing structure. And for these reasons, we urge that in exer- cising your right of determination and definition, or with- holding from the present exercise of that right as you deem most proper, you will agree with us "that commercial paper in the present form and use be accepted by the Federal Re- serve Board from member banks for discount and currency issue purposes." APPENDIX Computation showing result in terms of commercial paper issues and of office detail, of changing (a) the pres- ent short-time system of settlement in sales of manufactured goods to (b) that of settlement by four months' bills of exchange. The merchandise is supposed to be, at first cost, of $12,- 000 annual value, distributed from manufacturer to whole- saler at the rate of $1,000 per month in two equal shipments of $500 each; and from wholesaler to retailers, with twenty per cent, gross profit, also in equal monthly installments in forty shipments averaging $30 each. Notes Debt A. On present terms Created Created Constant debt from wholesaler to manufacturer, open acct. . . $500 Note of manufacturer to carry this debt with 20 per cent. margin $400 On average of forty days, constant debt from retailer to wholesaler 1,600 Note of wholesaler to carry same with 20 per cent, margin. . 1,300 Constant debt created, notes and open accts $1,700 $3,100 in one year, total of six months paper, pieces created 4 478 THE PRACTICAL WORK OF A BANK B. On four months credit settled by bill of exchange or note 1 Transaction between manufacturer and wholesaler, due continually 4x1000 2 Transactions between wholesaler and retailers, due con- tinually 4x1200 Constant debt created $8,800 Notes needed to settle debt from wholesaler to manufac- turer, 8, of $500 each equals $4,000 Notes needed to settle debts from retailers to wholesalers, 160, of $30 each equals 4,800 Notes constantly in circulation $8,800 In one year, total number of pieces created of four months paper, 168x3 equals 50; Results compared: Amount Piec-t-- Note settlement basis paper outstanding $8,800 (Notes annually required) 504 Present settlement basis paper outstanding 1,700 (Notes annually required) 4 Increase $7,100 500 Increase in amount of outstanding paper 417% Increase in annual office operations 12500 per cent. It will be observed that under present terms the amount of paper created to carry the entire series of transactions is less than the total amount of debt created by such transactions, while under the bill of exchange plan the notes are equal to the debt created. This means a lowering of the self-liquidating quality of the bill of exchange, as compared to the promissory note, with margin, based on book accounts receivable. THE COMMERCIAL PAPER BROKER The commercial paper broker is a development of the last fifteen or twenty years. His business is now enormous, covering the whole country, both in buying and selling paper. He has a finely organized credit department, and a body of trained salesmen. He is the go-between for the bor- rower desiring accommodation and the banker desiring in- vestment. He fulfills a very important and useful service in the economic scheme. He knows where paper can be sold. He knows where paper can be bought. He "makes" the money market, or at least knows where it is. At first he was strictly a broker. He got his commission for selling, and paid for the paper only when sold. But he has grown to such proportions and is of such wealth and with such good banking accommodations that he can now send his check upon receipt of the paper, less his commission, usually one-quarter of one per cent, for three months' paper. In many cases he now buys the paper outright, pledging it as security with his bank, if need be, or, as is the case in a ESSENTIALS IN GRANTING CREDIT 479 few instances, is strong enough in his own capital to pay outright for it. If he has no market he may advance on the paper; or if the market is too high, he may do likewise, and sell when conditions are better. The broker sells for cash, but often under a week or ten days' option. He does not indorse the paper, nor guarantee its payment ; but he does morally and legally guarantee that it is regular. He has the facilities to determine this. His credit department has records of every borrower, who should sign, and under what conditions, and the fact that he offers it is guarantee of its genuine character and of his opinion as to its worth. It has been discovered that firms which could not sell their single-name paper, have, at the instigation of unscrup- ulous brokers, drawn notes in odd amounts, and exchanged them, each indorsing for the other, and when offered on the market as receivables, they have all the earmarks of legiti- macy, but are accommodation paper, pure and simple. Of course such a firm should be eliminated from the loaning list as soon as this is discovered, and no reputable broker will handle their paper. Competition has, of course, brought some undesirable elements into the field, but as a whole commercial paper brokers are of high character. BUYING PAPER ON OPTION Many banks buy on option running from a week to the date of the next board meeting. Paper so bought is put under examination and if it does not meet full approval is returned. When returned the interest earned during the time the bank had the paper is, of course, paid. Banks dealing with one or two houses will, in the course of time, establish favorable relations and deal in all fairness one with the other. The average banker is not in a position to judge a risk a thousand miles away. He cannot analyze a statement; he depends upon his city correspondent to select his paper and buys on the latter's recommendation. But it requires no more ability to judge foreign paper, than it does to judge a loan at home, provided the two are analyzed from the same data. The concerns may be larger and, therefore, a little 480 THE PRACTICAL WORK OF A BANK more difficult to pass judgment upon, but the principles are the same. A bank may select a few well-known names and, becoming familiar with these, make its purchases accord- ingly. Whether a bank buys on its own investigation or on the advice of its correspondent, it should make the research as a matter of knowledge, and cover practically the same ground as its correspondent has covered in order to recom- mend the paper. Paper offered by the broker is accom- panied by a statement of condition, with names of banks that have bought the paper, and trade references. The bank- er should analyze the statement, communicate with the ref- erences, and, in addition to suggestions already made, ob- serve the following : The broker Is he well known, well established, conser- vative, and offering the best names on the market? Is he morally and financially responsible? Is he merely a broker an offerer or does he buy and sell outright? Is he a strong man? The city correspondents will advise on this point. Is the business of the borrower a substantial one? How old? Is it a staple line? Is it a different line than you loan to locally? Has the borrower ample capital? What is the purpose of the paper offered? Is the management honest, capable and energetic? You must know that the business is administered by brains, or it is not a safe risk. No plungers, or get-rich-quick propositions, and the men must know econ- omy and practice it. Does the statement analyze well? Does the trade think well of the concern? What do the local banks say? What do his competitors say? Buy of large concerns, those having total assets of, say, half a million or more. Scatter the risks. Check carefully through banks having held the paper. Check through the trades. Buy only where the margin of safety assets to liabilities is at least two to one, except it may be in such lines as meats, etc., where a less margin is permissible. Buy paper of firms which have been recently audited by certified public accountants. Buy of established firms dealing in staple products and not those arising from fashions and luxuries. Eliminate the fixed assets entirely from the credit statement and regard them only as backbone to strengthen the credit structure. 481 It is well to classify paper by States or districts, and for this a loose-leaf ledger is used. The name of the city, town or State is placed opposite the months of the year running across the page. Each State may be given a section in the book and the various places separate leaves, so that the exact amount of paper in each large city will be known. Paper held may also be classified by industries, so that the risk in each line may be known ; for what will affect one line will not affect another. A good season in one industry may be a poor one in another, and it is well to have the lines scattered as to industries as well as to sections. The location is important. The retailer should be in a good shopping district, the manufacturer near good ship- ping facilities. The latter 's transportation costs are a main factor, both as a saving in freight and also in cheapness of raw material. Labor supply and living conditions affect manufacturing, while the appearance of the store, the stock, and the general aspect of the place are important in selling goods, and have their bearing on the credit risk. As a rule, not more than from one-fourth to one-third the excess of quick assets over quick liabilities is considered the limit of borrowing, where the ratio of quick assets to liabilities is two to one. The credit is rapidly restricted where the ratio is less. Where the assets are practically cash, as in cotton or grain, the ratio may be larger with safety. It is the policy of some firms to clean up and go out of debt at various times, and while such concerns as meats and groceries will have a steady output of paper, because of the steady trade, such a line as millinery, which is seasonal, should clean up when the selling season is over and the stocks have been turned into money. Likewise wool. It is all bought in a few months, but sold throughout the year, and so wool debts should grow less and less as the season wanes. It is important to know the borrower's annual sales in order to know how often he turns his capital over. If the capital is turned but twice a year it indicates slow sales ; but if turned six times it means that one dollar does the work of six, and costs the price of one. The business is liquid only as it turns the stock, bringing in a constant stream of new goods and money, and getting rid of the old. It is told of the late Benjamin Altman that he had as 82 482 THE PRACTICAL WORK OF A BANK a settled policy the quick moving of goods. An article was placed on sale at its regular selling price. If it did not move quickly at that price, it was reduced. If then it did not move, it was marked down every Friday until it sold; and such a policy resulted in quick sales, and no dead stock. The loan to a manufacturer is for the purpose of bridg- ing the time between raw material and finished product, and should liquidate itself when the material is turned into fin- ished form. Loans to farmers are for the purpose of plant- ing, fertilizing and harvesting and should liquidate them- selves when the harvest is gathered. A wholesaler who turns his stock six times a year should not borrow over one-sixth of his sales, and his terms of credit should not be longer than his terms of sale. Loans to a retailing merchant are to enable him to carry his stock until sold, and if the stock is liquid and his sales quick, and his management active and aggressive, he should promptly liquidate his debt; but if he buys unseasonable stock, unsal- able stock, and has poor selling methods, he cannot pay, for goods on the shelf never pay bills. ANSWERING CREDIT INQUIRIES 26 Much of the credit information is obtained by corre- spondence. In writing the answer to a credit inquiry, you are generally justified in assuming that your correspondent, unless he has indicated special information desired, wants to know about the same things you would under similar cir- cumstances. A well balanced letter gives first, a brief his- tory of the business, its form, whether firm or corporation; if the first, the members; if incorporated, the date, State laws, authorized and paid-in capital, and essential facts re- garding important changes, special processes owned or con- ditions which give the concern an advantage or operate against it. The next paragraph may be devoted to the consideration of the financial standing. If you have figures which can be used without breach of confidence and the nature of the in- quiry indicates that your correspondent does not have them, it is well to briefly summarize the statement. If the subject 2F. B. Snyder ante. ESSENTIALS IN GRANTING CREDIT 483 of your letter sells paper in the street and the inquirer would ordinarily have a statement furnished by the broker, it is well to make such comment on the various items as your investigations justify. In writing regarding one of your own customers, a brief explanation of some unusual feature in his statement will often clear up a vexing point and make a sale of his paper. The third paragraph is devoted to a summary of the re- sults of such bank and trade investigation as you have made and is complete opinion of other people regarding the name. The letter may well be concluded with a short explanation of your own opinion and your attitude toward the risk. REDISCOUNT OF PAPER IN FEDERAL RESERVE BANKS Commercial paper will, under the Federal Reserve Sys- tem, have added usefulness and dignity, in that it will be readily discounted by the Federal Reserve Banks and will form the basis of the Federal Reserve notes. In defining commercial paper the Federal Reserve Board announced certain fundamental principles. In brief they are : That no bill shall be admitted to rediscount by a Reserve Bank the proceeds of which have been or are to be applied to a permanent investment. Maturities of discounted bills should be well distributed, so that a Reserve Bank should be in a position to liquidate one-third of all its investments within thirty days. Bills presented for rediscount should be "essentially self-liquidating," which as the board explained means that they should represent some distinct step in the productive or olistributive process and be of such character that it is reasonably sure that they can be collected at matu- rity. In addition to these principles the board requires that such paper be indorsed by the member bank offering it for rediscount ; that the indorser bank waive demand notice and protest ; that such paper be issued or drawn for agricultural, industrial or commercial purposes or the proceeds of which have been so used; that if in the form of acceptances they must be based on transactions involving the importation or 484 THE PRACTICAL WORK OF A BANK exportation of goods and have a maturity of not longer than three months. Acceptances must be indorsed by a member bank, and the total amount made by any member bank shall not exceed one-half its paid-up capital and surplus." The board also announced that for the present it has fixed the limit which a Reserve Bank may rediscount paper "for agricultural purposes or based on live stock" having not more than six months maturity at twenty-five per cent, of the capital of the bank. This limit may be increased in agricultural districts in time of need. Temporarily certified public accountant's statements will not be required, but it will eventually lead to this. The statement must be under oath. It should describe the busi- ness. It should contain the balance sheet and profit and loss account. Assets should be divided into quick and liquid assets, and liabilities likewise. Short-term paper should not be sold against permanent improvements. The statement must show the maximum amount the firm expects to borrow in the market. Consent of the member bank must be ob- tained if this limit is exceeded. The affixing of the stamp is equivalent to a declaration that the statement has been analyzed. Notes, drafts and bills of exchange which are issued or drawn for the purpose of carrying or trading in stocks, bonds or other investment securities (except bonds and notes of the United States) are clearly excluded. The act further excludes notes, drafts and bills of exchange cov- ering "merely investments," and from this point of view are to be excluded all bills whose proceeds have been or are to be used in permanent or fixed investments of any kind. Agricultural, industrial and commercial purposes cannot be held to include investments in land, plant, machinery, per- manent improvements or transactions of a similar nature. Bills must arise out of actual commercial transactions, and the proceeds must have been used or are to be used for agri- cultural, industrial or commercial purposes. They are not eligible when drawn to cover merely speculative investments. Briefly stated the present (July, 1917) rules for the dis- count of acceptances in the Federal Reserve Banks are as follows : 2?By the amendment of June 21, 1917, the Federal Reserve Board may allow banks to accept up to the amount of their capital and surplus. Domestic ac- ceptances are now permitted. (July, 1917.) ESSENTIALS IN GRANTING CREDIT 486 An acceptance is eligible for rediscount at the Federal Re- serve Banks, provided it has arisen out of an actual com- mercial transaction, domestic or foreign. That is, it must be a bill which has been drawn for agricultural, industrial or commercial purposes, or the proceeds of which have been used or are to be used for the purpose of producing, carrying, or marketing goods in one or more of the steps of production, manufacture or distribution. It must have a maturity of not more than three months, exclusive of days of grace, and must have been drawn under a credit opened for the purpose of conducting or settling accounts resulting from a transac- tion involving: (a) Shipment of goods between the United States or any foreign country, or between the United States and any of its dependencies or insular possessions, or between foreign countries, (b) The shipment of goods within the United States, provided the bill is accompanied at the time of its acceptance by shipping documents, (c) The storage within the United States of readily marketable goods, provided the acceptor of the bill is secured by a warehouse terminal or similar receipt, (d) The storage within the United States of goods which have been actually sold, pro- vided the acceptor of the bill is secured by the pledge of such goods. DEDUCTIONS OF A CREDIT MAN IN ANALYZING BUSINESS STATEMENTS 28 No department of businsess administration offers a broader or more inviting field than the credits ; for in the ad- ministration of a credit department, all that a man may know of men, business and business methods can be applied in full measure. The credit department is a department of opportunity and applied knowledge. The credit man meets the executives and his work is executory. Whatever he ac- complishes is quickly noticeable and his work gains immedi- ate recognition. It, therefore, is attractive from the stand- point of its possibilities. Inasmuch as one of the fundamen- tal functions of the bank is to loan money, and its profits 28Address by the author before Baltimore Chapter, American Institute of Banking, January 7, 1915, which summarizes and applies the foregoing principles in the analysis of credit statements. 486 THE PRACTICAL WORK OF A BANK Borrower Business Address Security held Line of Credit, $ AS MAKER AS ENDORSER . AVERAGE BALANCES DIGEST OF STATEMENT MWrth Av. Balance Month AT. Balance Assets Cash. Aec'U Receivable. Bills Receivable. Merchandise Total . X Realty Equities. Other _ Liabilities Acc'ts Payable. Bills " Total 1 .Net Worth. .--,-,- Ratio. i_ Sate. ..i...-..,-. LIA1JILITY UECOKI) WITH DIGEST OK STATEMENT ESSENTIALS IN GRANTING CREDIT 187 come from loaning money safely, the credit department be- comes largely responsible for the success of the institution. QUALITIES OF A CREDIT MAN The individual who presides over this department must have certain qualities that are essential. First, he must have due regard for system, for the information must be so ar- ranged as to be quickly obtainable and complete when it is wanted. He must have a broad knowledge of business methods and practices. He must know the terms of business and the state of business. He must know trade secrets not to give them away, but to use. He must be somewhat of an accountant, for unless he has the analytic mind that ac- countancy develops, he cannot make proper deductions. He must know how books are kept and how to keep books. He must be a surgeon able to dissect, and a physician able to prescribe. He must have the 'Credit sense" the detective's instinct, to quickly perceive a clue that may begin with a button and end in a conviction. He mustknow something of law the law of collections, of negotiable instruments, of bankruptcy. Like a good trial attorney, all that he may know will come into play sometime and somewhere. His work is not like much of the work in a bank, a daily grind; for while each day has its duties, and each day its problems, to-day will not be a yesterday, nor will to-morrow be another to-day. THE CREDIT MAN'S TOOLS The tools with which a credit man works have become quite as much standardized as the carpenter's saw and ham- mer. First, of course, his brains. While every workman needs a proper proportion of gray matter, the credit man needs a generous supply, for in many instances he will have no one to tell him what to do. And the gray matter should be well polished by study and well nourished by exercise. He can acquire much of the needful in his calling by tutor- 488 THE PRACTICAL WORK OF A BANK ing under the slow but thorough schoolmaster, experience. The deductive ability of the credit man will be used in various ways, but principally in analyzing men and figures. Here he can "use his head" to advantage. He must know men. He must know human nature. He must know that certain classes of men are good or poor risks, and why. He must know what men, as a class, do under certain conditions. He must be a good mixer and a good artist at painting mental pictures. He must be a good tailor and able to take correct measures. It would seem that the collar and the tie, the jewelry and the clothes, have nothing to do with credit; yet the credit man will tell you it does. The man careful and tasty about his dress will be likely to be careful about other things. He wh'o is reckless in spending money for pleasure may be reckless in spending money in business. Big traits manifest themselves in little things. The next in the list of tools are the recognized agency re- ports. Not that they are more important than other tools, but they are the foundation for much of the credit work. These agencies are so well established and cover the field so thoroughly, that they are used everywhere by banks and business houses as commonly as the fountain pen. The two "eading agencies classify and rate practically every business house in the country, and, supplemented by the agencies that report on the more personal side of individuals, they afford the beginning of every credit investigation. To the pub- lished ratings are added special reports, that go into minute details regarding the person, his habits, his record, and other information concerning the moral and financial standing of the applicant. Supplementing this still further are the reports of banks, and firms in the trade, which have intimate knowledge of the party, experiences in lending money and dealing in general with him, and can state with authority the habits of pay. Next come the published reports of mortgages, judg- ments, bankruptcies and failures, assignments, etc., which are all important as danger signals. Then there are those underground channels of informa- tion, gossip, bits of information gathered from various sources, all bearing upon the credit risk. ESSENTIALS IN GRANTING CREDIT 489 Lastly and by no means the least important, is the state- ment of condition, which, unless made by an independent audit, has well been termed "the borrower's estimate of him- self." This may be the beginning from which all other sources of information radiate, or the focal point to which FOUB-DRAWEH STEEL CREDIT FIUE they all gather. But whether the beginning or the end of the inquiry, the statement is the one factor that is coming to be given its proper place in the credit scheme. All the above finds lodgment in the credit department files as tools for the credit man's work. 490 THE PRACTICAL WORK OF A BANK Whether the credit department is a finely organized part of the bank, with its chief, its clerks and its files, or one of the many nooks in the brain of a busy bank official, the pur- pose of the credit department is twofold; (a) to assemble in- formation, and (b) to use it. The first deduction which the credit man will insist upon being satisfactorily established is that the applicant is honest. This may seem a trifle threadbare; but it is a truth that is admitted by all who understand credit science, and is recog- nized as an essential, if not the essential element. This hon- esty does not necessarily mean that the applicant shall have all the Puritanistic virtues of the ethical code of long ago, go to church and say long prayers for some credit men prefer that he should have his religion on the inside and not as an adornment. But he must be a man of strict integrity, as integrity goes in business, deal fairly, and, to quote the great commentator Blackstone, "live honestly, harm nobody and render every man his due." He must give full measure, do no tricky thing, fail only because there is no other way, and have that reputation as a business man which stamps him worthy of his citizenship. In the second place he must be able as well as honorable ; he must be a man who can. Thirty per cent, of business fail- ures are due to lack of ability. The art of management is a fine one and all cannot acquire it. Business cannot run it- self; there must be the ''know how" behind it; and this know how cannot be learned at the bank's expense. It must preferably be learned in the school of experience as an un- derling, else as a superior he may lose his own capital and that of others while acquiring the ability to administer. Thirdly, there must be the assurance of adequate capital, for thirty per cent, of the business failures are due to lack of capital, this cause contributing as many failures as lack of ability. How much that capital should be is a credit deduc- tion to be determined from the facts. It must be enough. Business can run on credit for a time, and in a limited way, but there must be the backbone of invested capital to sup- port the credit structure, or it will collapse under strain. Capital is like the underpinning of a building it gives support to the structure while the work is being carried on. ESSENTIALS IN GRANTING CREDIT 191 Credit makes a beautiful structure ; but it needs the stability of capital to insure lasting qualities. And every business must of necessity have its adequate capital investment or it fails. "THE THREE C's OF CREDIT" For the present purposes we will assume that the three C's of credit Character, Capacity and Capital are in evidence in each of the problems under review. In just what proportion is not essential for the time being, it being enough that they exist in a measure sufficient to pass the test. How this is ascertained depends upon the loan, whether local or foreign. If the applicant is a depositor, we will have his average card to judge the quality of his bank ac- count ; he may be known personally ; we may get a report on him; we may inquire among the business houses where he trades. If the borrower is not known, as most of the bor- rowers in the open market are riot, we ascertain the moral standing by communicating with the banks and trade con- nections given as references. But being satisfied on the es- sential points suggested above, the proposition gets down to an analysis of the statement, in order to ascertain the prob- ability of the loan being paid from the property worth, ir- respective of its moral setting; for ultimately the loan must be paid from the earnings and assets of the business. If there be honesty and ability but no resources, the former qualities, however much in evidence, will make a poor paymaster. From the business as a business, buying and selling, trading and taking trading profits, the loan must be paid, and it is now to inquire if, in the probabilities of business, the appli- cant will, in the course of time, be able to make good on his promise. This is the purpose of the statement. We shall, therefore, take four representative statements actual statements, in different lines of business: (a) Meats, because of the liquidity of the assets and their quick convertibility; (b) groceries, because of their wide demand, and likewise quick convertibility; (c) millinery, because of its seasonable character and risky qualities; (d) a manufac- turer of brass beds, to illustrate points found only in manu- facturing statements. By dissecting these statements we shall unconsciously apply many credit principles, and not 492 THE PRACTICAL WORK OF A BANK only endeavor to arrive at proper conclusions, but under- stand the logic by which they are obtained. For every de- duction there is a reason, the reason being better understood by applying a principle than merely talking about it. ESSENTIALS IN A CREDIT STATEMENT Forming as it does the foundation of the credit man's deductions, two things are essential in a statement: (a) That the statement be an authentic summary of the borrower's financial condition. It should be accompanied by a profit and loss statement to show the progress of the business as the statement shows its position. This statement should preferably be made by an independent auditor whose sole purpose is reliability and conservatism ; for if made by the borrower or under his direction it is not only apt to be biased in his favor, but overstate the assets and understate the liabilities, human nature being prone to make allowances for itself. If it is certified by a recognized firm of public ac- countants, so much the better; if not, all that the credit man may know concerning the integrity of the would-be borrower will be opportune. It has been well said that it is not the crooked borrower who is most to be feared but the deceived borrower the one who is himself misinformed as to his condition, and who passes the deception on to his bank. A crooked borrower may be a good window dresser, but a deceived borrower is a false window dresser. He mistakes wax figures for human beings, and papier mache for oak. He does not know the real from the false, (b) The statement must be of recent date six months should be the limit, for much can happen in a few months, and semi-yearly statements are none too frequent. In the analysis of a credit statement the first things to be noticed are: (1) The line whether staple or seasonal; a novelty or a necessity. Obviously the broader the market, the more steady the demand; and the nearer it approaches the abso- lute necessities of life the better. We can get along with last year's bonnet, but we cannot live on last year's bread. If the application is from an out-of-town borrower commercial paper, it should not be in the same line as the loans that predominate in the home trade. Thus, a bank loaning largely on lumber should not buy lumber paper; ESSENTIALS IN GRANTING CREDIT 498 and the one that loans on cotton should not buy cotton paper. Scatter the eggs rather than scramble them. A bank like an individual thrives best under a varied diet. (2) The ratio of quick assets to quick liabilities. It is apparent that maturing debts can be met only by maturing credits. The assets must turn into money to meet the ma- turing obligations, and unless there is a sufficiency of assets, they may shrink before realization to the danger point. Book accounts are never worth their face. The shrinkage depends upon the character of the business, the care used in the credit department, the efficiency of the collecting system and the state of trade; but there must be a margin for safety. Credit men differ as to the proper proportion of quick assets to quick liabilities, but the ratio should run from one and one-half to three to one, depending upon the nature of the business. A quick asset like meat will require less mar- gin than a slow asset like a stock of rare drugs. This ratio is quickly determined, the standard statement giving the quick assets and quick liabilities segregated, so that com- parison is quickly made. This being satisfactory, we are prepared to make other deductions looking to the desirabil- ity or undesirability of the extension of credit. We will take, first, the statement of a wholesale meat concern. STATEMENT No. 1. The Packing Company. November 1, 1914. ASSETS. i Cash $164,000 Accounts receivable 242,000 Merchandise 423,000 $829,000 Plant 373,000 $1,202,000 LIABILITIES. Bills payable $391,000 Accounts payable 41,000 432,000 Net worth $770,000 Capital $5,000,000 Surplus 271,000 Sales 7,500,000 Ratio of quick assets to quick liabilities: about 2 to 1. 494 THE PRACTICAL WORK OF A BANK COMMENT ON STATEMENT No. 1 First, we note the class of business meats. These obvi- ously are in constant demand, have no seasons, can be turned into money in a few days at the longest, and are steady in price and the value certain. Meat, like wheat, is "as good as gold." Next the date recent. Good. But it is uncertified. The firm, however, bears a good reputation among the trade, are well regarded by their own banks, and the reports are all favorable. (Information obtained from the credit files, through correspondence with the banks where they keep ac- count and among the wholesale meat trade.) Ratio of quick assets to quick liabilities, about two to one. It is considered in the meat trade that one and a half to one is sufficient for reasons above noted; and this firm quali- fies with a margin considerably over the standard set by credit men. Cash, $164,000. We find that by dividing the annual sales by 300 (the number of working days in a year) that they sell about $25,000 a day. Inasmuch as they sell for cash, they should buy for cash and must have an ample bal- ance. The cash on hand amounts to six days' purchases and owing to the short term of credit this is sufficient. There- fore, the cash balance while seemingly large is not too large for a cash business. The firm has no bills receivable. Ac- counts receivable are, next to cash, the quick assets of a firm. They represent merchandise gone out of stock. They are merchandise turning into cash. The volume of ac- counts receivable indicates the credit operations of the firm. If the terms of credit are thirty days, they should not, at the most, have more than one-sixth of the total sales on their books, and this would be extending the period of credit unduly. In this case we assume that the credit terms are not over ten days ; cash at the end of the week, most likely, and there is, therefore, about ten days' sales on their books, a normal amount. Merchandise in this case represents meats and other food products that are essentially as good as cash. This does not always obtain in merchandise accounts as will be noted sub- sequently; but in this instance we pass the merchandise item ESSENTIALS IN GRANTING CREDIT 495 with but a single deduction, i. e., that they have about two weeks' supply on hand. The plant, while it may be valuable for its terminal or water-front location, is worth the ground value only, the buildings being little suited for anything else. We discard it entirely. Bills payable, $391,000; accounts payable, $41,000, or less than two days' sales. The firm evidently borrows in the open market on its single-name paper and with the proceeds buys cattle for cash, and the statement so indicates. They have borrowed about one-half their net worth, and from every standpoint this statement presents a healthy condition. They do not and should not have many accounts payable on their books. They borrow to pay cash and this firm no doubt does, the $41,000 representing accounts in process of audit. Capital, $5,000,000. Whatever this is, in the present case it means nothing, for the net worth is $770,000 and they do not show assets to balance the statement if capital be in- cluded. You may loan them or buy their paper with assur- ance that it is good. The surplus in any corporate statement simply repre- sents the difference between assets and liabilities at the values stated. It is not a cash surplus unless the assets realize their listed value, being merely an adjustment to make the state- ment balance; and the surplus might be eliminated through a shrinkage in merchandise valuation. Reversely, it might be created by an overvaluation of merchandise. But in a packer's statement it would be nearly a cash surplus, al- though in this case it might be represented in part by the overvaluation of plant. STATEMENT No. 2. Brown $ Jones, Wholesale Grocers. October 1, 1914. ASSETS. Cash $410,000 Accounts receivable 1,021,000 Merchandise 1,301,000 $2,732,000 Real estate $297,000 Machinery and fixtures 62,000 Good will 2,000,000 2,359,000 $5.091.000 496 THE PRACTICAL WORK OF A BANK LIABILITIES. Bills payable $930,000 Accounts payable 61,000 Dividends payable 45,000 1,036,000 Capital $3,500,000 Surplus 555,000 4,055,000 Net worth (eliminating good will) $2,055,000 $5,091,000 Ratio of quick assets, 2.6 Sales, $10,360,000. Profits, $252,000. Dividends, $190,000. Certified to by the Accountancy Co., as per their audit, October 10, 1914. COMMENT ON STATEMENT No. 2 First, the class of trade food stuffs, in constant de- mand, profits small but sure, terms reasonably short, and the merchandise quickly turnable into money. Not so quick- ly, however, as meat, but within a short period. Therefore, the goods are essentially money, if well selected and staple, rare articles being handled only on order. We note that the statement is certified; therefore, it is from an independent source. The auditing firm is well known for its knowledge of the grocery business, and gives particular attention to inventory. We, therefore, accept it with confidence. The ratio of assets to quick liabilities is 2.6 a goodly ratio in this business and, therefore, we start off well. Two to one would be ample. Cash, $410,000, enough to pay nearly half the bills payable, or six times the accounts pay- able. We find the sales to be $10,360,000, or about $850,000 a month. The accounts receivable are equal to about five weeks' sales and this shows that thev are close in their credits V and collect promptly. The terms in the grocery trade are not over thirty days, cash in most instances and a week's credit in others. The merchandise is equal to about six weeks' sales and this is another good omen. They are turn- ing over the stock frequently. Against total quick assets of $2,732,000 they owe only ESSENTIALS IN GRANTING CREDIT 497 $1,036,000. Their liabilities are in the main for money bor- rowed on their notes probably single-name paper sold through brokers. Their accounts payable amount to but $61,000. This is as it should be. They borrow or ought to in order to take trade discounts. The statement indi- cates that to be the case. It could be certified by communi- cating with the trade. They should not have accounts pay- able in large volume on their books. These are doubtless in process of payment, and may be eliminated from the debts. The dividend is probably accrued to the time of the state- ment and is properly listed as a liability, although not neces- sarily quick. The capital and surplus represent the net worth over four million (two million, eliminating the good will), and their debts are but one-quarter of the net worth. As to slow assets and supporting the quick, we have real estate of $297,000. This is probably in the wholesale dis- trict, well located for business purposes and if properly scaled or conservatively appraised,, is allowable at that figure. Machinery and fixtures, $62,000, may well be eliminated; for such is special machinery, and would be scrapped in case of liquidation. But it is not a large item, and may be disre- garded. Good will, $2,000,000. Good will has been defined as "the tendency of trade to follow established lines." It may be that this firm has valuable trade-marks, brands of canned goods, coffees; or has taken over such from other concerns, issuing stock therefor, and it depends altogether upon what this good will account represents whether it is inflated or not. The good will of Ivory soap, Uneeda biscuit, and other widely advertised articles is enormous and may well be capitalized. This good will may be in the same class. The firm has earned about seven per cent, on the capital ; paid dividends of about five and one-half per cent, and added $62,000 to its surplus during the year. But aside from all other considerations, we have over three millions of good assets and debts of only a million, and, therefore, this firm has borne the acid test and is good Buy their paper without hesitation. 33 4,98 THE PRACTICAL WORK OF A BANK STATEMENT No. 3. Doe $ Co., Wholesale Milliners. July 1, 1914. ASSETS. Cash ............................................. $ 56 000 Bills receivable ................................... 15,000 Accounts receivable .............. .' ................ 209,001 $484,000 Machinery ........................................ 3,000 Advances ......................................... 40,000 Other assets ...................................... 90,000 133,000 $617,000 LIABILITIES. Bills payable ..................................... $75,000 Accounts payable ................................. 9,100 Deposit of money ........ ......................... 1,000 Commissions . ..................................... 17,000 Loan ............................................. 50,000 152,100 Net worth Ratio of quick assets to quick liabilities, 3.18. Sales, $2,489,000. COMMENT ON STATEMENT No. 3 I have next selected a millinery statement because of its highly fashionable atmosphere, its seasonal buying, and the deductions that it invites. Here we find a ratio of 3.18 a goodly proportion and well we might. I do not know the exact terms in millinery, but such goods are bought for two seasons, the spring and fall. The popularity of a certain style may suddenly change, if some Parisian model appears at the races with a new creation that will set all the world of fashion agog, and place millinery houses on the anxious seat, wondering if their advance orders will be cancelled and a season's work in a large measure discounted. Such goods are sold to large and small dealers all over the country, and the terms of credit cannot be rigid, depend- ing upon the weather in a large measure. While the profits in retail millinery are large, they must necessarily be so, for the busy season must pay for the dull. How risky is a stock of millinery may easily be understood. If the fashions change, or the women do not take to the styles of the house, or the buying has been without good taste, the stock may be unsalable at any price. ESSENTIALS IN GRANTING CREDIT 499 We note that the statement is as of July 1st, when the buying season is over, and the statement should, therefore, show merchandise reduced, accounts receivable large, but maturing rapidly, the cash running up and the debts run- ning down. We should have a statement at the height of the season and one at the ebb, to determine the true condi- tion at the present time. At the beginning of the season the stock will be large, cash reduced, accounts receivable cleaning up, bills and accounts payable large, or just the reverse of the condition at the end of the season. Here we find that there is no comparative statement, and so we do the best we can with the one in hand. Sales were about $2,500,000. This cannot be spread over months, for they are as aforesaid, seasonal. Allowing four months of slack seasons, we have eight months of ac- tivity, and the sales would then average $300,000 a month. The merchandise is less than a month's sales, and has prob- ably been cleaned up pretty well and the profits taken. The accounts receivable are not large in comparison with sales, about one-twelfth. Bills receivable are not large and should not be, such goods being sold on book account and not on notes of hand. If larger these might be investigated to as- certain if they are for old accounts. They might be for borrowed money. Inasmuch as the merchandise is last sea- son's stock, we eliminate it largely and cut it down at least one-half. No careful credit man will loan on a statement showing assets largely in merchandise. It is not goods on the shelves that pays debts, but goods sold to good customers represent- ed by book accounts ; and while the stock should be ample, it should not predominate, with little cash or accounts receiv- able. How quickly merchandise can be turned into money depends entirely upon the goods. Groceries can be turned into cash in a very short period ; a stock of trimmings for my lady's dress in a time that is doubtful. Salable goods that is the crucial point. It is said that the United Cigar Stores keep only a few boxes of each brand of cigars at each store. But they keep ordering as fast as the stock goes down, and the sales sheet of one day is the order sheet for the next. They know how to turn stock. This is a business asset. Reducing the stock by half, we then have net quick as- sets of $384,000, and allow $50,000 for shrinkage in collec- 500 THE PRACTICAL WORK OF A BANK tions. Against this we have hills and accounts payable ot $84,000, commissions of $17,000 probably due salesmen and, therefore, quick liabilities, and a loan of $50,000. This should also be investigated to see to whom it is due, and when. There is also the deposit of $1,000 from employees, probably, and if larger this would be an element to consid- er, but even so, for debts of $152,000 we have twice that amount in liquid assets and this makes a good statement. But the character of the goods makes care necessary, and the point to be emphasized is the season. This stock may be wholly unsalable next season, and if so, it is a dead loss. A ratio of three to one is not, therefore, unduly large for safety's sake. STATEMENT No. 4. The Brass Bed Company. February 1, 1914. ASSETS. Cash $411,000 Bills receivable 271,000 Accounts receivable 712,000 Merchandise 1,547,000 Real estate $1,254,000 Machinery and fixtures 1,072,000 Investments 134,000 Patents 1,376,000 Other assets 88,000 LIABILITIES. Bills payable $1,187,000 Accounts payable 36,000 Capital $4,000,000 Reserve 252,000 Surplus and profits 1,390,000 $2,941,000 3,924,000 $6,865,000 $1,223,000 5,642,000 $6,865,000 Ratio quick assets to quick liabilities, 2.4. Net worth, $4,266,000. Sales, $6,150,000. Profits, $550,000. Dividends, $306,000. COMMENT ON STATEMENT No. 4 We note first that the firm has taken considerable in notes from its customers. If it issues paper on the market, these should be in its possession, for two kinds of paper (single- 501 name and receivables) should not be on the market at the same time. It evidently sells both on book account and note; but the bills receivable should be investigated to as- certain if they are good, if given for old accounts or re- newed. A statement might be asked for giving the maturity of these, classified into thirty, sixty and ninety days, and whether for old or new invoices. While bills receivable are notes received by the firm in payment of bills, it depends altogether upon the nature of the business whether they should be in evidence. In a de- partment store selling for cash or on charge account, we should find but few, if any, of these items, for if so they have been taken for accounts hopeless of collection by the regular methods. If the concern were a lumber company, an agri- cultural machinery company, which sell largely on these in- struments, we may expect to find them in large volume and properly so; but not in a cash or semi-cash concern. For instance, in raw silk the terms are six months' note, and we may expect to find receivables in quantities, and it becomes needful for the credit man, as aforesaid, to know the terms of business in order to pass upon these items in- telligently. Receivables should never be for loaned money; for why should a firm lend and borrow at the same time ? They may be given by the partners, or interested parties, and if so they are doubtful ; at any rate, they are not a good asset. The accounts receivable are about one-ninth of the sales, and the two items bills receivable and accounts receivable represent about two months' sales, showing that these items are not unduly large, the terms in furniture being upwards of two months. Merchandise, $1,547,000. This will also admit of test. Is it raw material, or manufactured articles, or both? When was it inventoried? By whom? This is a large item, and amounts to one-quarter of a year's sales. It is probably brass or iron tubing, metals of other kinds, and, therefore, has a value as raw material in itself. But merchandise being so uncertain in its valuation, such a large item would bear in- vestigation before placing much faith in it. We then have real estate the plant, of one and a quar- ter millions. This doubtless is valuable for its location, but should have been appraised by an independent appraiser and 502 THE PRACTICAL WORK OF A BANK properly scaled down to at least its market value, irrespec- tive of its value as a factory for a particular purpose. Credit men do not lay much stress upon real estate, and especially factories. Machinery and fixtures, $1,072,000 another large item. This is special machinery and has little value except for its particular purpose. We, therefore, discard it entirely from our calculations. Patents, $1,376,000. These may be very valuable and may be properly capitalized. How long have they to run? Is there any litigation concerning them that may cost the firm heavily if adverse decisions are rendered? Investments and other assets, $232,000. These should be scheduled before accepting, to ascertain what they are, for they may be of doubtful value in the statement. Bonds of allied concerns and the like are questionable at times, but often valuable for the business they control. We note on the liability side that the firm has borrowed $1,187,000 presumably on its paper in the market. The ac- counts payable are not large, $36,000, and it quite likely takes advantage of the cash discounts. It has cleaned up its bills as rapidly as could be expected. But eliminating all slow assets, we have quick assets of $2,941,000 to meet quick liabilities of $1,223,000, and it is in a healthy condi- tion, able to stand considerable strain, with ample cash on hand, and allowing all assets at their listed amount, a net worth of over five millions, or five to one of liabilities. Of course in the credit files there will be letters from banks which have accounts with these firms, letters from the trade connections, stating whether they take their dis- counts steadily or not, their general habits of pay, and the moral standing of the members of the various firms, their living habits and general reputation in the community. The above is only a partial review of the credit man's mental processes as he glances over a statement; but I have in a small measure endeavored to indicate his train of thought, as he passes judgment on a request for a loan. NOTE: For further treatment of borrower's statements, see "Commercial Paper" by the same author. CHAPTER XIV. THE BANK MAN IN THE MAKING If the average bank man were asked why he chose bank- ing as a career, he would doubtless confess that he didn't choose it, but just drifted in. This desire to work in a bank, so frequently found in young men, is easily accounted for, for there is an attraction in banking which seems to appeal to young men, and the impression is quite rampant, errone- ous though it may be, that the hours are short, the pay good, and the work easy. He may have done as one young man did, look into the fine banking room and becoming impressed with the gran- deur of the marble and the bronze, decided that it was "good enough for him," and got a job therein. Or, he may have seen the sign on the doors: "Open from 10 to 3 Saturdays until 12," and become impressed with the shortness of the hours, as another did, and chose his calling accordingly. THE BANKER IN FICTION The banker is pictured in fiction as a tall, slim, dignified, gracious individual, with gray hair and a beard, given to patting children on the head, and doling out pennies or dis- pensing advice in matters personal, religious or political with equal ease a leading citizen, if you please, with a halo about his head and a fat wallet in his pocket. And, making up his mind that he, too, would like to raise a beard, wear a halo, dispense pennies and free advice, and carry a fat wal- let, many a youth has, undoubtedly, sought this profession as affording all these luxuries ; but whether his dream comes true or not depends largely upon the man. THE BANK MAN'S WAGE No doubt banking offers exceptional opportunities for making money. The banker's name stands for something; his support lends weight to an enterprise. Therefore, he is let in on a great many projects and by virtue of his finan- 504 THE PRACTICAL WORK OF A BANK cial training becomes a good judge of investments and is able to distinguish between good risks and bad. He some- times fails to distinguish between the two, speculates with his own and the bank's funds and the old story follows. But the man who enters banking "for the money that's in it" will either fail to realize his ambition or miss the chief charm of the profession; for success here cannot be measured by the dollar standard. Banking is a dignified calling and worthy of any man. It is a field of exceeding usefulness ; and the banker imbued with high motives and a kindly heart can do much good in a quiet, unostentatious way. Banking is not a bed of roses, and the banking world is full of disappointed and dissatisfied men. There are, perhaps, more disgruntled men than contented. The officers seem to have such an easy time. They receive callers ; write letters ; attend meetings ; examine statements ; draw fat sala- ries; attend conventions; play golf. And all would, there- fore, be officers. But many a grumbling clerk forgets that some men are paid, not for doing things, but for knowing how. Even the gentle art of saying, "How do you do!" is an asset to their bank, and likewise the gentler art of saying "no"; and not all men are artists at shaking hands and saying "no." The average messenger in a large bank receives, as a be- ginner, about $25 per month. From this he will be advanced as he progresses until he receives about $1,000 a year (or less) to run a ledger. Tellers in New York receive from $1,800 to $4,000, depending upon the bank, the length of service, the size and spirit of the institution. Twenty-five hundred would, perhaps, be a fair average. In country towns ten to twelve hundred dollars is a good salary for tellers and bookkeepers, and from two to three thousand is considered good pay for officials. The president frequently gets nothing but honor; but in large places he is the highest paid official, and will receive from five to twenty-five thou- sand, a few in very large banks passing this figure, but the number is small. Two SCHOOLS or BANKING Bankers may be divided into two schools, those who be- lieve experience is the great (and only) teacher, and those THE BANK MAN IN THE MAKING 505 who believe in a combination of experience and book learn- ing. The former must go through an experience before they can profit by it; must have law suits in order to learn the law, and losses in order to learn how to invest. They will point with pride to the fact that they never had a loss and turn around and make a wrongful payment that a little book knowledge would have prevented. They will rule on legal questions according to a decision discarded by the courts years ago. They will cite law that is not law because it is bad, and law is never bad although legislation may be. They must burn their fingers to prove that fire is hot. They do things a certain (foolish) way for no better reason than that they have always done them that way, and become old in the service before they learn that books are men's experi- ences, and through the experience of others we can avoid the pitfalls ourselves. The other school says: "Give us books. Tell us what other men have done and gotten into trouble, that we may be on guard against the same things. History repeats itself. What happened in one bank may happen in another; there- fore, show us the law not that we would be lawyers but just good bankers, and, therefore, keep out of court. Teach us economics that we may understand the trend of events and discern the signs of the times; grammar that we may write good letters ; credits that we may make safe loans ; the theory of money that we may understand currency problems, and history, that we may judge the present in the light of the past." And you do well if you decide to take up this calling, to join the latter school, for these are the men whose future is before and not behind them the optimists who know how to say "good morning!" Of necessity the beginner will, as a rule, have to start at the bottom. Let experience go hand in hand with study. You will better understand what you read about if you are doing the very things, than if you attempt to get the theory without the practice. And if you get into a good bank, work hard, keep your eyes and ears open; spend your spare time along definite, constructive lines; it may be that you will get to the top, for the top is never crowded. If the question were, therefore, put: Shall I go into banking? The answer would be: That depends upon you 506 THE PRACTICAL WORK OF A BANK and the bank; first, you and then the bank. If you have not the banking instinct and temperament a liking for the things the banker must know and do, then the best training school in the land cannot make you a banker, but simply a bank clerk; and if the bank has not the environment and the opportunities that make a banker, a good man will not linger long after he discovers it. COUNTRY BANK OR CITY BANK? The question arises whether a country bank is a better training school than a city bank. It depends. If the coun- try bank is a well-managed bank, broad in its views, liberal in its outlook, progressive in its management, not hidebound by tradition and a slave to the laws of the Medes and Per- sians, and the clerk is allowed the freedom of the place and permitted to learn the workings of the whole bank, he, no doubt, will acquire a better loiowledge of banking, as a whole, than if he were to go into a highly departmentized bank and work from one department to another, acquiring only part information at a time. On the other hand, he will get a broader outlook in the city bank, and cosmopolitan advantages that smaller places do not afford. Let him, above all things, unite with the American Institute of Bank- ing and take its study courses, a very excellent training in the theory and practice of banking. Whether he becomes merely a machine or not, and whether he succeeds or not, depends as much upon the man as upon the bank; but if success comes it will be a combina- tion of both ; and if he fails it may be the fault of both. And failure is a relative term. Some failures are successes, after all. I would rather be a Philip in the First National Bank of Boston than certain dead men who once were bank pres- idents. PROPER TRAINING ESSENTIAL TO SUCCESS The ultimate success that the bank clerk attains will, in a very large measure, be governed by the training school in which he works. If he makes a failure, it may be because he did not have the discipline and the coaching that he should have had in early days. If a young man in the bank is do- ing things he should not do, in or out of the bank, the proper THE BANK MAN IN THE MAKING 607 course is not to discharge him, but to take him in hand and show him the error of his way, and correct him. If he will not learn, then severer measures may be necessary. As a boy he will not see things in the light of the man, but the man can see things in the light of the boy ; and every banker owes it to himself, as a trainer of men, and as a man who should be interested in boys, to give them proper encourage- ment. If he is frittering his time away after bank hours, a course of study may be suggested. If he shows an apti- tude for any one branch of banking, give him a chance. A boy with an overwhelming ambition to know and to do needs right direction, or he will be likely to scatter his energies. The banker owes it to himself and to his men to find out the things that interest them; to encourage them in the right, and advise them if in the wrong. If a man shows an inclina- tion to study, see that he studies the right things the things the banker should know. Make it easy for him to get in- formation. Subscribe to the financial papers. Put them where the bank men can get them. Do as one bank in New York does, subscribe for the best magazines in sufficient quantities so that all may read who care to, and be sure to read them yourself. PIVOTAL POINTS IN THE BANK MAN'S LIFE But whatever the motive that induced our man to become a bank clerk, his banking career will, if he is successful, di- vide itself into three periods or epochs : the period of observa- tion; the period of application, and the period of adminis- tration. Just where one begins and the other ends is not easy to say. He can make these periods long or short as he will ; and whether or not his career shall end in the period of close application where every to-day is a yesterday and every to-morrow will be another to-day, is for him to determine. Little things often turn the current of life's events for better or for worse, and no man can tell when an event, in- signjficant in itself, may make or mar his future. Therefore, let us not despise the little things, for, as Michael Angelo observed, "trifles make perfection, and perfection is no trifle." And so, let every day be the great day, and every chance the great chance, for if the task be worthy, it de- 508 THE PRACTICAL WORK OF A BANK serves our very best, and good work well done, like the chickens, surely comes home to roost. LEARNING BY DOING The period of observation begins as he enters the bank as a runner. Here he will learn to do by doing. If he is a good messenger, he will have no other ambition than to do his daily work well, and whatever banking knowledge he ac- quires, will not be from books, but from practice. He will not even know the reason why he does some things it is not essential that he should; he will do as he is told, simply be- cause obedience is the order of the day. But as he works his way up through one department after another, he will ac- quire the practical end of banking, as a sponge absorbs water, without effort, and in due course will come into the period of close application where the mill grinds swiftly and often exceedingly fine. As bookkeeper, teller, loan clerk, or what not occupa- tions requiring concentrated attention his time will be fully occupied with detail work, monotonous in its grind, and often severe in its demands upon his strength, and it is in this period that he often longs for the more enjoyable experi- ences of banking on the "sunny side of the street." And if in the period of observation he is keen and alert, and in the period of close application faithful and accurate, the time will come when there will open to him the period of adminis- tration the goal of every ambitious bank man. EVERY MAN CAN BETTER HIMSELF We err greatly in holding out to Young America the hope that any boy can be President of the United States; for as a matter of history, less than forty have ever achieved this honor, and less than forty will during the present cen- tury; for while it is not an impossible goal, it is an improb- able achievement. But when we make the statement that every bank man can better his condition, improve his mental caliber, and increase his income, we state a fact which is borne out by current events in banking history every day. And when the banking world says to the men in the ranks, "You can climb, if you will ; you need not stay in the period THE BANK MAN IN THE MAKING 509 of observation very long, nor work in the grinding school of concentration always, but you can, if you will, lift yourself round by round into the happier experiences that attend the period of administration," it offers a proposition upon which it can make good. To accomplish this desirable result, several factors must be taken into consideration. First of all, the man must have a definite aim, and worthy; for if it is not definite, his ener- gies will be scattered, and if it is not worthy, he cannot or ought not give it his best endeavor. Better to aim at the moon and hit a church steeple than to aim at a barn door and hit nothing. The human mind is ever open to distractions and is apt to follow the line of least resistance, and because it is so difficult to resist the tendency to mental wandering, a capacity for definite, constructive work is one of the great- est conquests a man can make over himself. Much of our reading is merely mental dissipation and what we need is to be able to concentrate our attention on one subject until it leaves a lasting impression upon the mind. It is better to know a few things well, very well, than to know a great many things casually, and, certainly, far better than to know a great many things that are not so. The unthinking man is not necessarily a dull man; he has probably occupied himself with unimportant things; and un- til he gets a definite aim in life a master passion as it were he will never rise to his highest level of achievement; and if that passion is to know, he will either find a way or make one. TAKING HIMSELF FOR GRANTED The great temptation of the average man is to take him- self for granted; to get the idea that because he can do to- day's work as well as can be expected of him, at least so well that no criticism is hurled at him, he, therefore, has done all that the occasion requires. Particularly is this true if he has had a small measure of success without unduly exerting himself. In this he greatly errs, for if he is a sensible fellow he will not be satisfied by the mere fact that he holds down a job he should hold it up giving it dignity and distinc- 510 THE PRACTICAL WORK OF A BANK tion by the excellency of his work. And more than this, he ought to have his eye on the job ahead. Many a man owes his success to the fact that in an emergency he could step in and do the work of the man ahead, and many a man owes his defeat to the fact that when the opportunity was his, he could not rise to meet it. A great opportunity makes a man ridiculous unless he is prepared for it. The man whose hori- zon is bounded by the four walls of his cage, and who can- not see in the job ahead his opportunity will live to regret it. And if he cannot get in the departments higher up, let him get those departments in him. This taking one's self for granted is deceitful in the ex- treme, and such an one is apt to discover too late that he doesn't know what he thinks he knows; and many of the things he thinks he knows really aren't so. But he who would succeed in this war of brains must be willing to put himself to the test, taking nothing for granted, and demon- strate that he not only knows, but that he knows he knows what he knows, and what he knows is so. Many an energetic bank man, ambitious to rise in the world, grants you that "knowledge is power," and if success could be bought, would pay a goodly sum for it; but inas- much as knowledge is not a commodity measured by the dollar standard, the toll is often too great. Who has not seen the man who would not in a single hour like to learn some of the deep things of life, and willingly would he give the hour and the teacher's fee; but no educator can in an hour, a week, or a year, impart the information it has taken him a lifetime to acquire. And until our bank man is will- ing to pay the price in years he cannot hope for lasting re- sults. DEFINITE METHODS But the man with a definite aim must have a definite way of going at it, else the definiteness of the aim will be futile on account of the scattered energies. It is simply the case of the shotgun against the rifle; one scatters many shot the other sends one bullet home. Many an ambitious bank man is willing to work for success, but needs direction as to how to make his willingness effective. Ambition often needs proper direction or the ambition is apt to turn into despair, and the purpose of banking education is to direct the man THE BANK MAN IN THE MAKING 511 with a definite aim into the definite methods by which he can achieve a definite goal. WHAT is EDUCATION? Education has been defined as a process by means of which experiences are acquired that will assist in rendering more efficient future actions; a course in discipline; a sys- tematic development and cultivation of the mind and other powers by examples, experiences and impressions ; or, as the German has it, erziehen, "to draw out." But whatever the definition, education must help a man think; to be orderly and logical in his thought processes ; accurate in his observa- tion of men and things; discriminating in his judgments and charitable in his conclusions. This process may be formal or informal. Informal edu- cation is the education that the bank man obtains through- out his business career without conscious effort to this end; experience, if you please. Such knowledge is absorbed with- out much thought or definite intent. In such a process a man is like a child, in that he gives matters passive attention and the activity is characterized by an interest in the process rather than in the finished product. He is absorbed in what he is doing for the time being and the end to be gained does not unduly concern him. EXPERIENCE A DEAR TEACHER No one will deny that experience is a good teacher. The lessons she teaches are long remembered; but the trouble is, she is a slow and expensive teacher and in such a school, one learns only those things with which he has come into contact, and profits not by the experiences of others. A burnt child dreads the fire much more than one who has simply read of fires in books ; but the trouble is the scar. And he who learns only in the school of bitter experience must expect to become scarred while learning. The great trouble with this form of education is that it is unsystematic. It fixes the experiences that happen to come, but makes no provision for the experiences that may come and are unfamiliar. And more, it is a time consumer and wasteful. Take a simple illustration. You burn your 512 THE PRACTICAL WORK OF A BANK finger. Some one who has burned theirs and found sweet oil effective, promptly prescribes sweet oil; but this burn may not be a "sweet oil burn" and you call the doctor. He has not only had experience with burns of your kind, but with others as well ; moreover, he has studied burns in books. He draws not only upon his own experiences, but upon the ex- periences of others and immediately knows what treatment your burn needs. This is as true in banking as in medicine. The banker who relies upon his own experiences is helpless when his ex- perience has not covered that particular thing. He has not learned to reason; he cannot draw upon similar experiences of other men ; he has riot trained himself to put facts togeth- er and draw conclusions ; to apply a rule to a set of facts and derive a correct solution. We would not belittle experience it is most valuable ; but experience should be supplemented by study, and study by experience to make the all round bank man. i < i ' ' . i 1,1 It . 4 1 EDUCATION A DEFINITE PROCESS Formal education is a graduated, definite process. It be- gins where it finds the man, gently leads him step by step into the higher realms of knowledge, adapts the process to the man and remembers his shortcomings. The great trou- ble with so many energetic bank men is, that not knowing where to begin they plunge blindly in, reading anything that bears on finance and banking; and this reading being non- constructive in its nature, accomplishes but little. It is high- ly essential that the student be well grounded in the funda- mentals before proceeding with the superstructure. This is the curse of ill-advised home study it is unsystematic. The man starts wrong and ends wrong. And the great aim and purpose of education is to direct the man into those channels that will produce the best results at the least cost of time and effort. It leads him from the simple to the complex; from the concrete to the abstract ; supplementing theory with practice ; the law with the application thereof. Behind every scheme of education, whether it be a college course or a system of home training, there are two control- THE BANK MAN IN THE MAKING 518 ling motives, both of which are worthy ; first, the bread-and- butter motive, and, second, knowledge-for-its-own-sake mo- tive. It is just as much a function of the school to teach men how to earn a living as it is to teach them how to live; and just as essential to teach them how to live as it is to fit them to earn a living; and the greater the knowledge, the greater the earning power, provided the knowledge be of the right sort. We live in the age of efficiency. The machinery of to- day is in the scrap-heap to-morrow. The old is supplanted by the new. Every machine must do its best, no lost motion no idle time. We demand in every line of activity that the man be capable. We pay good money for ability, and get it, whatever the cost. He who can do things is well paid; he is well paid because he can do things. We do not always award the race to the swift, nor the battle to the strong; for behind the swiftness there must be sureness, and behind the strength, accuracy. Of what avail is a hard blow if it does not hit the mark? He who runs swiftly must be sure of his footing. He is the winner in the battle for bread who can do things and do them well. Carlyle reminds us that the German word "koenig" (king) comes from the verb "konnen" (to be able) ; there- fore, a king is one who is able a man who can ; and because banking continually demands kings men who can he who has his eye on the future must not ignore this call for effi- ciency, and is fully justified in his argument, that as he knows more he will get more; and when he knows more about one particular thing than anyone else, the world will rate him a specialist and pay him specialist's wages. The second motive for education is that we may know the truth, for the search for truth is the master passion of the human race. Not that we may merely hoard facts and figures, for such hoarding makes us misers as truly as the hoarding of money, but in storing up information there comes power in reserve. And in this storing process there are pleasures keen as the world affords. The enjoyments of the mind are as sure as those of the body, and the great truth is, the mental are the more enduring. Who will be so bold as to deny that the man who gets his amusement in a good book has not as gen- uine pleasure as he who must find his amusement in dissipa- 34 514 THE PRACTICAL WORK OF A BANK tion? It is a law of hygiene that he who would do his best work to-morrow must not spend to-night in riotous living, and the prodigal loses at both ends. The story of the night is writ large in the work of the next day. It is admitted that to learn to appreciate knowledge for its own sake is not an easy task, but, nevertheless, it has its compensations. It does not demand its toll in strength, and in its possession there is in the present, satisfaction, and in the future, power. Therefore, let the bank man, while striving for more (or better) bread and butter, not forget that while he should be a specialist in banking, and, therefore, narrow, he may and should be broad as well; for back of keenness there must be breadth or the keenness becomes ineffective. And when knowledge for its own sake ceases to attract its devotees the human race will be in a bad way. THE BANK MAN'S TWENTY-FOUR HOURS To the bank man who really wants to know there is no measure of time. The days are all too short and the nights too long for him who is in earnest about his education. Three o'clock the "quitters' delight" never comes to the man who wants to know. The man who endeavors to excuse his shortcomings by saying "my education was neglected" offers an excuse as full of holes as a sieve. Neglected by whom? Does he work so long and so hard that he never has a mo- ment for self -improvement? Are his days so crowded with work that his nights must be given to resting for the next day? Does he not give enough time to the newspaper in five years to give him a college education, if he would only get started right and use well the spare moments? Could he not, if he would, find a spare hour or two every day and a few at the end of the week for definite, constructive, edu- cational work ? It is the idle man who has no time ; the busy man has all the time there is ! Do you not know that in two and a half million /ears the bodily structure of the human rfrce has remained practically the same, and the only marked change has been in the size of the brain? How useless, therefore, to spend time in a vain endeavor to improve our looks; we are not responsible for our faces nor for the size of our hats our head ceased growing when we were eight years old but we are responsible for what is under the hat, and brain polish was never so cheap as now. THE BANK MAN IN THE MAKING 515 It is admitted that this educational work is not easy. It is hard, for the reward lies in the distant and often misty future, and only the bravest of men can work against time. Play is always easy, for its reward pleasure is immediate ; but what bank man wants to be eternally playing just be- cause it is easy? We need the inspiration that overcomes the dragweight of despondency which is so apt to set in and tempt us to say "Well, what's the use?" And what shall be this inspiration? Shall it not be the secret thought that somewhere and sometime a golden op- portunity will knock at our door and we must be ready? It may knock only once, and lasting will be the regret of him who must let it pass by. There is a secret satisfaction, impossible to describe, when the world singles you out as a "man who can," and stamps your self-denial as admirable, your zeal commendable, your enthusiasm catching, your example inspiring, your person- ality pleasing, your character honorable, your work worthy and well done; and as evidence that this is no vain flattery, hands you out the coin of the realm, the world's best evi- dence that it means what it says. Men usually get what they go after, if they go at it in earnest; and you can get what you go after if you go after it aright. The bank man, young or old, who resolves with a quiet resolution, as unshakable as the mountains, that he will not be an apprentice forever; that he will not spend all his days bending over a ledger; that his measure of time shall be full of hard work for future success; that he will climb because others have inspired him and shown him how is bound to win. Are you that man? And he who gets the inspiration of an ideal, and applies himself along definite lines reads that he may know, and knowing, do, will not only have the satisfaction of knowing that his work has been well done, his time well spent, his opportunities improved, his ambitions rightly directed, but will receive the more tan- gible evidence that he, too, is a king because he can. 1 iMr. Joseph Chapman, Jr., vice-president, Northwestern National Bank. Minneapolis, Minn., has for some years past, at each convention of the American Institute of Banking, offered a cash prize for the best paper on some phase of Institute work. The foregoing, prepared by the author, then Secretary of New York Chapter, was awarded the prize at the Rochester Convention, September, 1911, and is here presented in slightly altered and enlarged form. In its original state it was issued as a pamphlet on Education by the New York State Bankers Association for distribution in New York State only. 516 THE PRACTICAL WORK OF A BANK THINGS THE BANKER MUST KNOW Business success is not, like war, to the strongest, but to the fairest, the just, the shrewd, the far-sighted, the prophets and those who, in the struggle for money, know the game and play it well, and who use every just advan- tage to their own profit. In every contest, however simple or complex, there are two conditions for success: (1) A knowledge of the rules, and (2) skill in performance. There must be recognized rules and principles to govern this contest for business success, else men would trade unfairly. Some would get more than they were entitled to, and defraud the weak and the unwary; therefore, we have business law the evolution of the methods and customs of merchants as handed down through the centuries the equitable basis of men's dealings with one another then and now. The banker must know this law and follow it. Success can only come to the banker as he understands these rules and precedents; the functions of money; the nature of business; the customs of business, and the condi- tion of business. He touches business life very intimately. His success is coincident with the success of others. Only as the merchant succeeds can the banker succeed. Every banker can and should acquire a taste for banking law. He should, above all things, become thoroughly ac- quainted with the Negotiable Instruments Law, for this is the basic law in each of the forty-six States and territories where it has been enacted, and it will settle many disputes. The author has had the privilege of answering some of the questions that have come up in banking practice as viewed in the light of the law, and as a general proposition it may be stated that the banker could have answered his own query from this now widely adopted law. He should learn to read banking cases understandingly. They may look unin- teresting because of their legal dress; but they can, after a little experience, easily be understood. He must know how to profitably employ the funds in his possession ; whom to trust ; how to buy securities ; how to collect checks; how to run a bank. And knowing the law and the practice he becomes a good banker. The banker must know how to employ the products of THE BANK MAN IN THE MAKING 517 others to use men. He cannot do it all himself; he must delegate his authority. Therefore, he must know how to get results. Banking, like business, is cooperative, and the bankers must work together. The trouble in this country has been they have worked alone, every man for himself and every bank for itself. We have needed a spirit of "get to- gether" and all profit by the getting together. The banker should know banking history. "I have only one guide," said Patrick Henry, "and that is the light of ex- perience." The banker can understand the present better if he understands the past. Banking has been an evolution. Past dangers are guide posts to present safety. What hap- pened once may happen again. Panics have fundamental causes. What were they? Do they now obtain? He should know the banking practices of other countries. The Federal Reserve System is based on banking practices and experiences the world over. How do they do things in England, France and Germany, and what is the secret of their success, or the cause of their failure? How does the central bank do its work, and what are the lessons it would teach? This is banking history applied. And all history can be applied. It repeats itself. CHAPTER XI'. THE MORNING MAIL The mail of a large city bank is enormous, both the in- coming and the outgoing; while that of a country savings bank is insignificant. It is valuable mail which, if lost, en- tails a large amount of labor to replace. The wonder is so little goes astray. The mail of a large bank will amount to upwards of 3,000 letters a day, containing from 35,000 to 40,000 checks, often representing in value as much as $30,- 000,000. But whether large or small it must have prompt atten- tion, for it may contain valuable instruments which must have immediate attention, and promptness is a virtue for its own sake. Two-thirds of the mail arrives during the night and in some banks is handled by a force of from twelve to twenty men. A few banks have men who work in shifts all night, so that the work is fairly well in hand in the morning, the mail coming in during the night being collected from the postoffice at various times so that it does not accumulate. Some banks are opposed to night work and so handle it all in the morning. The Chase National Bank, which has very extensive connections with out-of-town banks, is of the lat- ter class. The incoming mail will consist of (a) letters which are in the form of deposits remittances for credit and collec- tion, which sometimes contain cash items, collection items, coupons, drafts and credit inquiries; and each must have proper attention; (b) acknowledgments of mail received and credits made, and returns of uncollected items; (c) spe- cial letters regarding loans, investments, credits, and other personal matters that must have attention by the executive force; and (d) circulars, magazines, bond offerings, etc. There is also mail for the employees a practice which some banks discourage, others encourage and others just permit. In clearing-house cities the mail becomes an important part of the day's work inasmuch as a large part of the con- tents must go through the morning clearings, and quick and accurate work is, therefore, necessary. 618 THE MORNING MAIL 519 Only in large city banks will it be necessary to have a "mail teller" whose duty it is to take charge of the mail, opening it promptly, proving its contents, and despatching the outgoing letters. The work is sometimes delegated to a junior officer, chief clerk or other employee who takes charge of the force and keeps the machinery working smoothly. It is the first thing that requires attention in the morning, and the last thing at night. The contents of the mail will classify itself into (a) Checks on local banks to go through the exchanges, and are turned over to the paying teller; (b) collections in the city, turned over to the collection or note teller; (c) checks on the bank itself, turned over to the bookkeeping department; (d) foreign items, turned over to the collection or transit depart- ment; (e) cash, to the receiving teller; (f) coupons, to the collection department; (g) credit inquiries, to the credit de- partment; (h) other correspondence to the proper officials and employees ; (i) second-class mail too often to the waste basket. If there is a mail teller, of course he charges himself with the total of the letters, taking credit for what he turns over to other departments, and his day ends as it begins, with nothing. As the letters are opened and checked, the contents are assorted, clearing-house and other cash items being kept in a pile by themselves. Cash is sometimes left with the letter until the clearing items are disposed of, as are also other collections that do not require haste. Where the clearing-house items of the day before are separately listed, the items coming in through the mail will be added and will constitute the "morning additions." In some cases where it is impossible for the work to be com- pleted in time for the clearing, all large items are taken out and the others held over. The total charged out to the va- rious departments must, of course, balance with the total of the cash items received in the mail. The letters are treated as deposit tickets, sorted out according to the divisional ar- rangements of the bank, and may first be listed as deposit tickets in a scratcher for proving purposes. The mail department, or the mail work, is identical with that of the receiving teller's work, the only difference being in the impersonal depositors. 520 THE PRACTICAL WORK OF A BANK The routine in a large bank is described by Mr. A. K. Moore, formerly of the Chase National Bank, New York, as follows i 1 HANDLING THE MAIL IN A LARGE CITY BANK "The first batch of letters arrives at 6.30 and every half- hour afterward up to 9.30. The envelopes are cut and the MAIL TELLER-PROOF SHEET For 191 DEBITS Folio ACCOUKT CREDITS Debit Clerk Credit Clerk Loan Department Collection Department Coupon Department Paying Teller Receiving Teller Trust Department Reorganization Department Securities Department Foreign Department Transfer Department Total Departmental Balances To-day's Clearings Exchanges Suspense Account Exchange Fifth Avenue Branch PROOF OF MAIL TRANSACTIONS contents placed on the desks of all the clerks so that on the arrival of the force at 8.30, each man has his share in front qf him. At least ninety per cent, of the entire force of the bank has to work on the mail. As the letters are checked, the contents are placed in four piles clearing-house items, cash routes, such as items on bankers, trust companies, mer- chants, commission houses, etc., checks on ourselves, and for- eign items. 'Before New York Chapter. THE MORNING MAIL 521 "These items are collected by boys, each boy having one kind to collect. The clearing-house items go to the stamp- ers and then to the sorters, and finally reach the machines where each bank is listed and the amount proved. The for- eign checks go to the head of the department, who looks them over, keeping a careful watch for items that should not be sent to us, and at the same time taking memoranda of exchange charges. They are then sent to the collection de- partment, where they are sorted and listed, and the total charged to the collection clerk in the daily proof. "The checks on ourselves are sorted, listed and proved by machines, charged to the check department and placed with the exchanges received from the clearing-house, the check clerk carrying the total in his proof at night. The route items are sorted into the different routes, being listed on sheets for the use of the mail department and in route books for use of the note teller. A proof is made by a com- parison from sheet to book, and the total charged to the note teller. "As this work must be finished by ten o'clock, you can readily see that some strenuous work is necessary. Our mail averages about 1,500 letters daily except Monday, when it is double that figure. In checking off the letters any item having the appearance of a collection is left in the letters for examination by the collection clerk or the note teller, who has charge of the city and foreign collections. "As the letters are checked, they are collected and taken to the mail department, where the collection items are signed for by the collection clerk and note teller. They are then sorted numerically (our accounts run by numbers and not alphabetically as in most banks), listed in credit books, and strung by cords according to the ledgers, then go to the bookkeepers for credit on the ledgers. "During the day they reach the advice department, where their receipt is acknowledged. Later on they reach the check department, where the credit is made on the ac- count current. "In no other department of a bank is there so much chance for error. Our correspondents, having no knowledge of our way or mode of doing the inside work of the bank, the chances of error are increased. Errors caused by the nountry clerk when not caught by his city brother are sure to 522 THE PRACTICAL WORK OF A BANK make trouble. The difference has to be located, and the hunt for a difference is very tiresome and tedious. "After the struggle to get to the clearing-house and to give to the different departments the work that comes with the mail (the mail department is the source from which all the inside daily work of the bank originates), to find late in the day that you have a difference, does not tend to fill one with the sense of happiness that work should bring." Mr. Moore advocates the use of a uniform remittance letter, and cites in support of his claim the following inci- dent: "Some time since we received a letter by registered mail from a bank in a large Western city. It contained five items listed as cash and footed. The first item was a clearing- house check for a large amount. The second, five railroad bonds listed at par, to be sold at best market rate (which at that time was considerably above par) ; third, a draft on Tokio with a bill of lading attached, calling for a number of crates of bicycles; four, coupons not yet due; fifth, a sight draft on a flour firm with bill of lading attached for two hundred barrels of flour, the draft to be paid on arrival of the flour. The total of the letter was about $35,000 arid that amount was charged to our bank by the Western bank. When we had passed it to the different departments to which it belonged, it looked more like a Chinese laundry check than a bank remittance. "As the only strictly cash item in the letter was the clear- ing-house check, the Western bank when it received our ac- knowledgment could not have easily located it, as their books showed no such amount forwarded that day. Suppose through our efforts in this direction, in a year from now the banks having a large out-of-town business should receive a quarter of their mail in this shape all strictly cash items listed and footed; all drafts subject to payment on the arri- val of goods listed on a letterhead stating plainly that the item is for collection only, with a request to report payment by a collection number; all foreign items reading, "Tres octo Trientes dies vista," or written in foreign languages; cou- pons for collection, in fact all items not payable on demand or where there is a question of immediate payment should go under this collection heading. "If a request for a discount is made and mailed to the THE MORNING MAIL 528 discount clerk, or personal letter to an officer; if all ship- ments of currency for credit are on separate letters and reg- istered or expressed; if coupons the bane of a bank clerk's life should come on separate letters with a statement whether they are to be taken for cash or collection; if stocks, bonds or securities for sale were listed and written on sepa- rate letters and not on the bottom of a cash remittance let- ter as they frequently are; if, in fact, the items could be handled by the different departments without the original letter going from one department to another, would it not' lessen our work and the work of the officers ; would it not les- sen the number of apologies written by officers in explana- tion of clerical errors? I know it would. No officer in a city bank would ask a country correspondent to change its system so as to more readily conform with the work of the system in the city bank. My idea carries with it little or no change in systems only suggests a little care that should be used in forwarding cash or collection items so that the city bank could be reasonably sure of the wishes of its coun- try customer. It would make little or no more work and would be a great benefit at both ends of the banking line." OUTGOING MAIL The proper handling of the outgoing mail of a bank is one of its most important features and one in which great care is necessary. How often it has occurred that a bank iias made a remittance to its correspondent in a reserve city, calculating to have a certain balance to draw upon for an important matter, and has had its plans delayed, and pos- sibly frustrated, because the letter was returned for want of postage, or had been mailed to the wrong bank. The prompt despatching of the mail is important, and its prompt arrival equally so. Law suits sometimes hang on the arrival of the mail. In a recent case it was attempted to show that a letter containing a large check did not arrive at the time claimed. If the letter arrived on Saturday morn- ing, there was a balance sufficient to cover it, and the bank was liable; if it did not arrive until Sunday morning, the balance was insufficient on Monday morning and the bank was not liable. But the evidence strongly pointed to the fact that the bank held the check over from Saturday, the 524 THE PRACTICAL WORK OF A BANK court presuming the mails to have arrived in due course, which the postmarks evidenced. While no one is infallible, yet such a systematic arrange- ment can be made as to reduce the liability of errors to a minimum. After the letters are written, checked and copied, they are, in large banks, turned over to the mailing department to mail. They must go to the right banks, with sufficient post- STAMPING MACHINE AFFIXES AND REGISTERS THE STAMPS AS USED (Courtesy National Automatic Machine Co., Brattleboro^Vt.) age attached. The postage cost must be ascertained in total and in detail. In the mailing department the envelopes for the one thousand or more correspondents are addressed by the ad- dressograph in lots of twenty-five to one hundred of each, and these are assorted and distributed in tills or files, a com- partment for each bank, arranged alphabetically. In some very large banks a separate set of compartments is used for various divisions of the United States, each division consti- tuting several States. The letters for foreign countries have separate compartments. THE MORNING MAIL 825 Before these tills or compartments is a wide shelf, at a convenient height for one to work at when sitting on a stool or chair. There are a number of mailing clerks, each at- tending to only a portion of the alphabet. The head mail- ing clerk knows how many banks each of his assistants has to attend to, and every morning issues the proper amount of two-cent stamps so that one envelope, the one on top, in each compartment receives a two-cent stamp and is ready for the final work. At the close of the day these envelopes are taken from their compartments and placed in trays on edge, retaining their alphabetical arrangement. The trays are of wood, about seven inches wide, three inches deep, and two feet long. As fast as the letters are completed, they, with their en- closures, are given to their respective mailing clerks. These letters are placed in piles, laid flat. The mailing clerks sit- ting before the shelf, or a table, with the tray at their right hand and the piles of letters and enclosures at the left hand, select their envelopes from the trays according to the address on the letters and proceed to fold the enclosures in the let- ters, and to insert them in the envelopes, these then being placed in another tray. IMPROVED METHOD OF FOLDING LETTERS An improved method has been adopted by many banks in folding the letters. The letters with their enclosures are folded ready for the envelopes by the men who write them, thus greatly reducing the danger of getting the enclosures in the wrong letters. Instead of the letters being folded as customary, the reverse method is adopted, with the writing on the outside and the address at the head of the letter show- ing prominently. The letter writers put a rubber band around each letter to carefully retain the enclosures, and these folded letters are placed in trays and sent to the mail- ing clerks. From the address on the outside the mailing clerk readily selects the proper envelopes. As the envelopes are filled they are taken to the sealers, where they are sealed by a machine run by electricity. The letters requiring more than two cents postage are then sep- arated from the others, weighed, and placed in bins that are labeled according to the postage required, those requiring 526 THE PRACTICAL WORK OF A BANK only two cents postage having already been placed in a bin labeled accordingly. A great many postal cards are used as mere acknowledg- ments. If there are letters to the banks to which any postal cards are addressed they are enclosed in the letters. If not, they are, of course, mailed with the one-cent postage. "THE NATIONAL" AUTOMATIC SEALING AND STAMPING MACHINE WITH THIS MACHINE IT IS POSSIBLE TO SEAL AND STAMP, SUCCESSFULLY, 10,000 ENVELOPES AN HOUR OR TO SEAL ALONE 15,000 AN HOUR IT WILL HANDLE ANYTHING FROM, A SINGLE SHEET OF PAPER TO A 36-PAGE CATALOGUE IT COUNTS AND REGISTERS EVERY STAMP USED, THUS ELIMINATING THE LOSS OF STAMPS THROUGH MISUSE OR CARELESSNESS (Courtesy of National Automatic Machine Co., Brattle-born. Vt. i The bins mentioned are built on the back part of the mailing table. They are about eighteen inches square, made about one foot high at the back and low in front (about four inches). They are generally in two rows, eight or ten in a row, one row above and a little back of the other, each bin being labeled with the proper postage denomination. One is marked for the registered mail. It often occurs, particularly on the last day of each month, that many packages must be mailed requiring large THE MORNING MAIL 527 envelopes. These are sorted out and given to a clerk who attends to that especially. The mail having been sealed and weighed, and dis- tributed to the bins, stamps are now issued by the head mail- ing clerk for all extra postage (over the two cents). The stamping is then completed, the letters are put up in pack- ages of fifty in each bin, and then the counting for the proof of the postage takes place. This being completed, and the statement made, the mail is ready for the postoifice. The registered mail, containing as it does packages of value, should be recorded in a book prepared for that pur- pose, and when the postoffice receipt for the same is returned it should be noted in this register and the receipt filed by number. RECORD OF STAMPS USED The proper care and handling of the postage stamps in a large bank is an important feature. The stamps are pur- chased in large quantities, and are generally taken care of by an officer of the bank. When the purchases are made a charge ticket is sent to the general ledger charging postage stamp account with the amount of money so expended. Each day the head mailing clerk makes out a requisition for the stamps he will probably need, and this is given to the officer in charge of the stamps. When the letters have all been stamped and counted a statement blank is filled out showing the number of letters and their respective value in stamps. Such a statement sheet is here shown: 'f DAILY STATEMENT OF POSTAGE USED 628 THE PRACTICAL WORK OF A BANK A statement is sent to the officer having charge of the stamps at the close of each day. The amount shown by the "cash balance" of this state- ment must agree with the value of stamps and unused stamped envelopes on hand with the head mail clerk. The amount as shown by this statement as "stamps used $118.12" should be reported to the general ledger bookkeep- er by charge and credit tickets to charge an account styled "Mail Acct." and to credit the "Postage Stamp Acct." r. . . / SUmp* OB hud. . . . Stampa receded; . . . Total l*e tfftj 33 f nr //f *-9 On hand Receipt* Total Diab'nd Caih Balance 1 1*0> t(o / .7 f-fo Jo* T /6*j f *v /If SV / 9 c Total atampi ed Balance tamp* on band. Value in denominations. ** \%.f A*W *- 4- zr JL* / / f / to ~rr : 3 1 II u - * JJ 1 i 8 - ii ! " - < j ' ' 1 ^ i 1 f 5 I | 5 * , F , ^ 1 I \ -- 1 S - si |- 1 ! " ? ! ; J | s 1 1 3 " "7 ^ : || s 5 1 8 1 5 1 y a I f 1 s : 546 ANALYSIS OF ACCOUNTS 51? count is much greater than on the accounts as a whole, and its greater cost should not be placed on the ordinary ac- counts, which have no such special favors. In return the company carries a large and profitable balance. For every bank to go into the matter of cost accounting extensively and scientifically, would not be warranted; neither would the other extreme of too much laxness be wise. A scheme too elaborate might cost more than it would save; therefore, a middle ground might be chosen that will give the results desired without the burdensome expense at- tending. Cost accounting simply aims to furnish information, but does not attempt to dictate the policy of the bank toward a customer. That an account shows a loss, is not to say it should be closed. The analysis is a straw to show which way the wind blows and the officials must decide what policy to pursue. A wide divergence of opinion exists in these matters and is easily accounted for, as men differ as to what is or is not a proper charge against an account, and the methods by which this charge is to be ascertained. Given the same prob- lem and the same state of facts surrounding it, no two would agree in the result. Mr. E. H. Ensell of the National City Bank, New York, has made a close study of this question, and shows the possibilities of error in these calculations to be great. Writing at different times and in different places, Mr. Ensell says : THREE THEORIES or APPORTIONMENT "There are three distinct and separate theories in exist- ence with regard to the apportionment of the earnings and expenses among the accounts. The first theory is that all the service of the different departments of a large commer- cial bank should be held at the indiscriminate disposal of all the customers; there should be no distinction made between a maximum use or a minimum use of the benefits of the vari- ous departments; no discrimination between an account that requires much labor or little labor in its handling. This theory works well where there is no wide margin of differ- ence between the most active and the most inactive account. "The second theory is that all the service of the different 548 THE PRACTICAL WORK OF A BANK departments represents some definite cost that may be traced to the accounts that take advantage of this service and should be compensated for either directly or indirectly in each case. This theory represents the ideal condition, but could never exist on account of the indirect influences con- tinually at work, and which do not always appear on the surface. "The third theory is a combination of, or a compromise between the other two theories; that is, some of the depart- ments exist as a general accommodation, the value of which may not be determined in dollars and cents, but that the service of other departments represents a definite expense that may be found to exist for the benefit of one certain class of depositors over another class. It is on the basis of this third theory, the reasonable middle course, we have the two natural units of cost in the banking business. First, the unit of cost on the basis of dollars of balance to be adminis- tered ; second, the unit of cost on the basis of labor, or items to be handled. "In order to arrive at these two units of cost it is neces- sary to separate the cost of the two different classes of ser- vice. The administration expenses must be separated from the labor expenses. In considering the labor expenses only the departments whose time is continually occupied in hand- ling items should be included, such as, the receiving teller, the mail teller, the check desk and bookkeepers, the transit and city collection department, in short, all the labor depart- ments. All other departments, such as the loan department, the credit department, the discount department, etc., are oc- cupied in the earning operation. They handle a minimum number of the items and the cost of these departments is to be applied to the accounts on the basis of dollars of balance to be administered. "The accounts then are the raw materials with which a bank does business. It is no longer a question of how much the accounts cost or earn since all the cost and earning has to be passed back to the accounts but how to apportion the cost and earning on an equitable basis. "There are two fundamental mechanical operations in the banking business. First, the earning, and second, the labor operation. The earning operation is principally the lending of money. It is on this operation we have the unit ANALYSIS OF ACCOUNTS 549 of cost on the basis of the dollars of balance to be loaned or administered. The second unit of cost in the labor operation is best reduced to the handling of items, and we have the unit of cost of each item handled in each different depart- ment. UNITS OF COST "The question now arises how to figure out the units of cost on these two different operations. There are a number of methods, some very complex and complicated, others that are simple and direct. Some of the methods attempt to ap- portion the floor, desk room, overhead and fixed charges, and to divide the clerks' and officers' time, etc. This method is complicated and defeats its own purpose. "The most direct and simple method that would include all the elements, both clerical labor and a right proportion of the fixed charges, overhead expense, and administration expenses, of cost in handling items in the items department would be to charge into the items department: First, those expenses that are direct, such as clerk hire, bookkeepers, books and stationery, etc. ; second, to include in this amount already charged to the different items departments a fair proportion of the other fixed charges. This amount may be best found by adding the totals of the direct expenses charged to the different items departments and see what ratio they bear to the total of all other operating expenses, and by reducing the general operating expenses an amount in proportionate ratio which the direct figures already in the items departments bear to the general operating expenses, and distributing this amount deducted proportionately among the items department we now have a very accurate proportion of fixed charges, overhead expenses and adminis- tration expenses in the items departments to cover the indi- rect expenses in handling the items. "The remainder of the general operating expenses would be applied to the dollars of balances left on deposit to be ad- ministered. By dividing these general operating expenses by the number of dollars of deposits would give the unit cost on one dollar of deposit to cover the expense of adminis- tration. By dividing the total of both direct and indirect ex- penses of the different items departments by the number of tfisf ! sj \ <0 O-oo OCJ3- i nn! i*! *\ f Or ^ iiii=! i| - ! 0^ I* 3 <*t & *> 0~ 6u K!J 3:^6 B -I ui 1 ^ "1 M ? i sJ 888 . J ^ K JB "c = i-l ^ 3 3 2S % 1 -! a 2 1 2 ! i h * ! ! * J S g i si H- 3- 5^ ^ SW c \S \r ri ^ ^ oi a* S 1 5| z 3 o => It," * >a ^~ N C c p ., B. << 1 < 2 ! O o < , 2 4 e * =^ J =! It. o 3 ^' ^ ^ 11 N t< *< O VJ i a | 0) . S .5 ~j - 2 ! 4 ill | .s i |3j j$ 07 $ * S 2 S S CO i? - 2| c 1 * < ^ S. j||j r f x ^ pl^X 4 T! I < s M b 2s z^f e/io vt - 2 | 1= 2 H 3 w o & 1 ^ sl ^s W >J K " Hi .1 3 S * ej lo ^* . ^ S3 S | - 5 ! 1 U) ? -^ 3- fc i 5 ! f Z < II 1: II II II II 1 T ac ~ ii 2! c , o- ^V~ t^ c< ^ r*- 5- 60 3" ^ s i ^ ;. sl < ^ e' ^*' <^ i < h- Z =3 O SI 1* S H j . . : : : i i .1 II a ' * n in 10 00 * i o _M5l i <* 1 ; ! 3 t i ANALYSIS OF ACCOUNTS 551 items in each department would give the unit of cost for handling one item in each of the items departments. "The analysis of an account after any direct elements of cost were charged directly, would appear like this: In the first place, you have the general daily average balance; this is the average balance as shown by the ledger. It is neces- sary to reduce this average by the average amount of cash that has already been credited up, but is continually out- standing in the process of collection; the remainder of the average balance thus reduced would have to be further re- duced by the percentage of reserve that a bank is required, either by the national or State law, to keep idle in the vault. The final result is the available loanable balance with which a bank has to do business. This available balance at the average earning rate of interest will be the amount the ac- count would earn. To this amount earned must be added the amount of exchange earned by the account. The two added together would give the total earning capacity of the account for the period under consideration. "On the other side of the analysis would appear the daily average balances at the unit of cost per dollar for adminis- tration, the number of items handled in each department at the unit of cost for each class of items, the amount of inter- est paid to an account on its net average balance, and the amount of exchange paid for handling the out-of-town items for the account. All the costs to be added. The difference between the two sides of the analysis would show what an ac- count earned or cost during the period. "In all banks there are a number of accounts having some peculiar cost or earning feature attached to them by reason of which they could not be considered in a class with any other account; such accounts would have to be analyzed separately. It would be impossible to analyze each account separately, however, therefore, the accounts must be an- alyzed by classes or groups. "For this reason the result of three different methods of analysis will be compared. A wide margin of difference will be shown to exist between the results of the different methods: (a) The lax method of analyzing an account by approximating its cost through estimating the cost of labor to handle it; (b) the more definite analysis of an account, but still without proper regard for the indirect or 'overhead' 652 THE PRACTICAL WORK OF A BANK charges; and (c) the analysis of an account on the approved scientific basis. "In order to make the illustration more clear the same large, very active account with an average balance of, say, $1,000,000 will be used in each case. The period of time under consideration is one year. Regarding the compara- tive worth of the different methods used and the results ob- tained certain definite conclusions may be arrived at. The account used to illustrate may be said to be an extreme ex- ample; still it is a possible one and the final result in exam- ple 'C' will indicate how unproductive an apparently valu- able account may be. "In the first example, 'A', a common method used at present is to attempt to arrive at the cost of an account by determining the labor or clerk hire expense. This is accom- plished by averaging the cost of clerk hire and estimating its value as in the following illustration. Some bank officers are willing to guess at the earning capacity of an account. They consider only the cost of handling on a direct basis, elimi- nating the important elements of administration expenses, fixed and overhead charges attached to the handling. They merely make a mental calculation to allow for expenses that do not appear on the surface and assume that roughly an account is worth what it may earn on the gross daily average balance less the direct expense of handling. To make the contrast between the three different methods of analysis more striking the average balance in example 'A' will not be reduced by the amount in transit or the reserve held against the deposit. EXAMPLE "A". ESTIMATED COST ACCOUNT Daily average balance, $1,000,000. Average earning rctr 4y 2 % $45,000.00 line man 2% hours dai^ account current for year $757.30 Two men 15 minutes daily to handle acceptances 151.30 Three men 2% hours 4 times a year, account dividends 30.00 One man 10 minutes daily to examine indorsements 32.00 Four men 20 minutes daily examining signatures 99.40 One man four times a year 15 minutes, special 79.00 One man 10 minutes daily handling checks 50.50 Total cost of handling account 1,199.50 Estimate value of account for year $43,800.50 ANALYSIS OF ACCOUNTS 558 "According to the foregoing example 'A' the estimated labor cost of handling the account for the year would amount to $1,199-50, while the daily average balance of $1,- 000,000 would have earned $45,000 at the average earning rate of four and one-half per cent. "The estimated cost of clerk hire in connection with an account, however, is not accurate enough to cover the cost of handling even without considering any other direct or indi- rect expenses attached to an account. There is considerable time of clerk hire which is lost or unaccounted for; therefore, this method of estimating the cost of an account is very in- accurate. Further, to assume that a daily average balance, as shown by the books represents actual loanable funds, is a false position, for a daily average balance usually contains items taken for cash that are outstanding in the process of collection; and also no allowance has been made for the twenty-five per cent, reserve. "In the following example 'B' all the direct cost of labor will be charged to each of the 'labor' or 'items' departments, so that the lost time unaccounted for above may be included. Dividing the total cost of labor charges to each of the 'items' or 'labor' department by the number of items handled in each department during the period will give the unit of cost for each item on the basis of direct expense only. EXAMPLE "B". A MORE CAREFUL ANALYSIS OF THE FACTS. Daily average balance $1,000,000 Less average amount in transit 200,000 $800,000 Less 25% reserve 200,000 Actual usable balance 600,000 Earning at average 4%% on $600,000 $27,000.00 270,000 items receiving teller at .004= 1,080.00 202,000 items clearing house at .0011 = 222.20 85,000 items check desk at .0075 = 265,50 32,000 items city collections at .01 = 320.00 1,000 items transit desk at .005 = 5.50 104,000 items from clearing house at .0075 = 780.00 $2,673.20 Value of the account for year $24,326.80 564 THE PRACTICAL WORK OF A BANK "In the foregoing example 'B' the direct cost of labor alone has been charged to each department, eliminating the indirect charges. The unit of cost of each item in each dif- ferent department has been found by dividing the direct ex- penses charged to each department by the number of items handled. Multiplying the number of items handled for the account in each department by the unit of costs for items of its class, will give the total cost for all items of that particu- lar class. In this example the daily average balance has been reduced by $200,000, the average amount in transit, and also by a further reduction of $200,000 for the twenty- five per cent, reserve. The earning capacity of the account in example 'A' was $45,000, no allowance being made for transit items, or reserve, while in example 'B' the earning capacity was $27,000 after proper allowance has been made for transit items and reserve. But this is not the real point of difference between the two, for if no actual calculation were made to cover transit items and reserve in example 'A' a certain mental allowance would be made for same. The real difference between example 'A' and example 'B' is that the cost of handling items for the account is more than double in the latter where the unit of cost per item is used as a basis, than in the former where the approximate aver- age time of clerk hire is used as a basis. "In neither of the foregoing examples has attention been paid to the apportionment of the overhead charges, the fixed charges, or the administration expenses that are incurred in- directly. Many other important elements have also been purposely omitted from examples 'A' and 'B' in order to emphasize their value and importance. These elements should be included in any analysis that is to be complete and accurate. These elements are cost of administration ex- penses attached to the handling of the dollars of balance, in- terest paid to the depositor on his average balance, special work and specific expenses. "In the following example 'C' all the scientific principles that have been evolved to date will be used to demonstrate the correctness of the theories set forth: ANALYSIS OF ACCOUNTS 655 EXAMPLE "C". APPLICATION OF THE SCIENTIFIC PRINCIPLES. Daily average balance $1,000,000 Less average amount in transit 200,000 Net average balance 800,000 Less 25% reserve 200,009 Actual usable balance $600,000 Earning an average of 4y 2 % on $600,000 27,000 Exchange received A 20 Total earning capacity $27,020.00 Cost of handling: 270,000 items receiving teller at .008 $2,160.00 202,000 items clearing house at .0022 444.40 35,000 items check desk, in, at .015 525.00 32,000 items city collections at .02 640.00 1,000 items transit desk at .011 11.00 104,000 items check desk, out, at .015 1,560.00 Currency, one man 1 hour daily 150.00 Special work 43.81 Clearing House 36.84 Exchange cost 5.00 $1,000,000 daily average balance, cost of administration 5,000.00 2% interest on net average balance of $800,000 16,000.00 $26,576.05 Net value of the account for year $443.95 "It will be noticed in example 'C' the unit of cost of handling an item is twice the amount of the corresponding unit of cost as shown in example 'B', for the reason that the direct expenses together with a proper proportion of the overhead charges have been added; that is, the direct and also the indirect expenses are included in the unit of cost in example 'C'. Further it will be noticed example 'C' con- tains other expenses and outlays that do not appear in either of the other two examples. "In the scientific analysis 'C' it is intended to include every possible cost attached to an account, and also to show every earning made by an account ; therefore, certain factors that have a prominent place in the accurate analysis 'C' have no place in either of the other examples- -'A' and 'B'. "In comparing the earning capacity of the three methods of analysis it would be unfair to assume that in example 'A' $45,000 would actually represent what the account earned, for certain mental allowances are to be made for outstanding cash in transit and also the twenty-five per cent, reserve. The important thing is to definitely state the daily 666 THE PRACTICAL WORK OF A BANK average balance properly reduced by these two factors in the analysis, as is done in the case of examples 'B' and 'C'. It is also important to make allowance for the exchange earnings, even though the amount appears to be small. "There are two elements of expense in example 'C': the cost of administering the dollars of balance, $5,000, and the interest paid to the depositor, $16,000. While some mental allowance has been made for these items in example 'A' and example 'B' they do not definitely appear on the analysis sheets now in common use. In connection with the interest paid by banks to their depositors it is well to note that banks pay interest on the net average balance, that is, the net aver- age balance before it has been reduced by the twenty-five per cent, reserve which has to be kept idle and unproductive in the vault; furthermore, the banks pay a flat rate of two per cent, rather than a graduated rate that bears some rela- tion to the fluctuating earning rate." "By comparing the final results of the three different methods it will be seen, how easy it is to be misled in guess- ing at the value of an account. In example 'A' the cost of handling the account by averaging clerk hire, was $1,199.50; in example 'B' by using the direct elements of expense only, the cost was $2,673.20; while in example 'C', where both direct and indirect elements were employed, the cost was $5,576.05. Assuming that the mental allowance of interest, $16,000, and cost of administration balance, $5,000, were equal in all three examples the application of the scientific principles of cost accounting, which includes all elements of cost earning, is the only accurate method of measuring the value of an account. "In order to arrive at the different units of cost, both the unit of cost on the basis of items to be handled, and the univ of cost on the basis of dollars to be administered, it is neces- sary to separate the two different classes of expense appli- cable to each. The total gross operating expense is a cer- tain amount which includes every outlay of every character, the proper proportion of which must be borne by the labor or 'items' departments, on the basis of items to be handled; and the proper proportion must also be borne by the earn- ing or administration departments on the basis of dollars of balance, left on deposit, to be administered. The accounts must bear the total gross operating expenses evenly appor- ANALYSIS OF ACCOUNTS 557 tioned, both on the basis of balance loaned and on the basis of items handled. "Reducing the total gross operating expenses by the amount of direct expense charged to the different 'items' departments, and distributing it among the 'items' depart- ments, will leave an amount of general operating expense. Beside the direct expense charged to 'items' departments a proper proportion of indirect expense must also be charged to cover 'overhead' and administration cost; then according to the theories set forth herein before, the proportionate rates which the direct expense of all the 'items' departments bear to the general operating expenses (that is, the total gross operating expenses after they have been reduced by the direct expenses charged to the items departments), is the amount to be further deducted and distributed proportion- ately among the different 'items' departments for the indi- rect expense. "To illustrate : In the receiving teller's department there is a direct expense of, say, $10,000 or $15,000 which gives a unit of cost in example 'B' of .004 per item. However, to this direct expense must be added the proper proportion of indirect expense, say, in this case, some $10,000 or $15,000 more; these direct and indirect expenses added together and divided by the number if items handled, gives the unit of cost in example 'C' .008, or twice the amount of the corre- sponding unit of cost in example 'B'. The same rule holds for all the other items departments. "The remainder of the general operating expenses after direct and indirect expenses of 'items' department have been deducted, is the net general operating expense or cost for administering the dollars of deposit. Dividing this amount by the daily average of all deposits will give the unit of cost on one dollar, in this case .005." Like all other matters of arithmetical calculation cost accounting can be carried to such an extreme that only a mathematician can understand the process, but all will agree that it is worthy of the study the problem invites. It is bet- ter to be too analytic than too lax; to be over- technical than careless. Mr. W. A. Buckley, assistant cashier of the Fourth Street National Bank of Phila., Pa., has given close and careful study to the question, and approaches the sub- ject with an eye to minutiae that is admirable. By reason of 558 THE PRACTICAL WORK OF A BANK the care, the thought and the scientific results possible in such process, the paper read by Mr. Buckley before the conven- tion of the American Institute of Banking at Rochester in 1911 is herewith given in full: COST SYSTEM BASED ON EXPENSES "The cost system that should, appeal to bankers is one, by the use of which, it will not be necessary to make an anal- ysis more than once in, say, two years. Such a method should necessitate a minimum amount of effort, as the cost units once found are practically permanent. "The following described method is based entirely upon the expenses of the bank, which are separated into two classes; those caused by lending funds, and those caused by the activity of accounts. "If all of the expense caused by an account for one month be deducted from its possible gross earning capacity, based on the average loanable rate of funds for the month, the result will be the net profit. "With the method herein suggested, it will be necessary to have an analysis card for each account, with space for twelve months' figures. The card should show for each month the average ledger balance, the average amount of out-of-town items in the process of collection, the net work- ing balance in bank, the amount of interest paid, the cash cost of collecting out-of-town items. In the latter column should be entered in red ink the cost of special check books. A column should be provided for the cost of administration based upon the number of items handled for the account in a given month. "With the data on the analysis card, the profit on the account can be readily ascertained by using the average rate per cent, on loans and investments for the month. "Illustration: Suppose the data to be as follows: Aver- age ledger balance, $10,000; average amount outstanding, $2,500; net working balance, $7,500; interest paid, $16.43; cash cost of collecting out-of-town items (exchange paid), $3.50; average loanable rate on loans and investments, 4.5 per cent, (approximated) , ANALYSIS OF ACCOUNTS 559 Average balance $10,000.00 Outstanding 2,500.00 Net working balance $7,500.00 Income on three-fourths of this amount, one-fourth in reserve (reserve city basis) at 4.5 per cent, for one month $21.08 Income from reserve agents at 2 per cent, on one-eighth of the amount 1.54 Less interest paid $16.43 Exchange paid 3.50 19.93 Profit for month $2.69 "If a bank collects all of its out-of-town items through its reserve agents at par, it is under no expense in this re- spect, except for postage and stationery, and the ordinary analysis referred to above is unnecessary. Where, however, a bank is under expense in collecting any out-of-town items deposited, either in exchange charges or in time outstanding before returns are received, such items should be subjected to an analysis. As nearly all banks make some attempt at an analysis covering out-of-town business, it will not be necessary to go into further details. "If a bank's accounts were all inactive, the only em- ployees necessary would be the officials required by law, clerks for the discount, collateral and credit departments, together with sufficient office-room for their accommodation, a board room, a vault and space for bookkeeping. The items of postage and stationery would not be worth consid- eration, and the other expenses enumerated above would be properly chargeable to the income on loans and investments, because it is incurred in the making and caring for loans. In addition to the expense of making and caring for loans, the handling of cash and time collections deposited, deposit tickets, cash and collection letters, the currency received and paid, and the checks and drafts paid and charged to ac- counts cause the expenses chargeable to administration. ANALYZING THE EXPENSE ACCOUNT "The cost of administration is composed of two elements : (a) The expense of lending the money deposited; (b) the expense caused by the activity of accounts. If the propor- tionate amount of the expense of administration be ascer- tained and added to the cost shown by the usual analysis, the worth of every account is known. 560 THE PRACTICAL WORK OF A BANK "In order to ascertain the proportionate amount of ex- pense chargeable to A and B, it will be necessary to careful- ly analyze the expense account for a period of six months, and then take the average amount for one month. If some expenses are paid annually, only one-half of such sums may be included; and if any expenses are heavier in one semi- annual period than the other, they should be analyzed for one year and then averaged for one month. "An approximation should be made of the percentage of the floor space used by the several departments to the total space occupied, to ascertain the proportionate cost of each department for rental. If the bank owns its building, the amount at which it is carried on the books, taken at the aver- age loanable rate on money during the preceding six months should be used for rental cost, taking one month's rental as a basis. Banks carrying on their books the amount expend- ed for furniture and fixtures should figure the interest on such sum for one month. If this has been absorbed in the expense account, the amount may be approximated and the interest for one month ascertained. "Expenditures for new typewriters, listing and adding machines and other labor-saving devices, should not be in- cluded; but the yearly cost (for one month) of such ma- chines should be entered under the salaries of the depart- ments using them. The yearly cost is ascertained by taking the original price, less the rebate allowed when it is ex- changed for a new one, and dividing the amount by the num- ber of years the machine can be used. "(A) As it is impossible to make and care for loans without incurring some expense, it is essential, for the pur- poses of analysis, to know the cost of keeping funds in the form of loans and investments. To ascertain this cost it will be necessary to bring together the expenses of the officials who pass upon loans and credits and the discount, collateral and credit departments for salaries, surety bonds, rental for floor space, stenographic work, luncheons, light, heat, tele- grams, telephone service, expressage, postage, stationery and sundries. To this amount should be added: Retaining fee to counsel. Government excise tax, rental for floor space occupied by the board room, vault and corridor space lead- ing to the quarters of the officials who pass upon loans and credits, compensation to directors (if any), subscriptions to ANALYSIS OF ACCOUNTS 561 various trade organizations, credit bureaus, etc. The total is the expense of making and taking care of loans for one month. "After deducting the various expenses mentioned above, the following are found to be chargeable to the activity of accounts: Rental for space occupied by departments hand- ling items and quarters of the cashier, assistant cashier, ste- nographers and audit departments, lobby space used by cus- tomers leading to the various departments, stationery closets, letter files and lockers; salaries of officers in charge of administration, salaries of departments handling items, and, in addition, salaries of audit department, stenographers, telegraph clerk, telephone operator, day and night watch- men, letter filing clerk, messengers and porters; clearing- house expenses, luncheons; expense for postage, stationery, light, heat, premium on surety bonds of officials and clerks named above, telephone service, telegrams, expressage and sundries. "As the analysis card shows the amounts of interest and exchange paid, and cost of special check books, these ex- penses should not be included. The following named ex- penses are not chargeable to either A or B: State tax; properly chargeable to income derived from the capital stock. Semi-annual duty on circulation; expressage on cir- culation, and other expenses on circulation, all of which are properly chargeable to income received on United States Government bonds. "The cost of clearing-house, Government and other ex- aminations should be approximated between A and B. "Whether or not certain expenses are chargeable to A or B is certainly a proper subject for careful consideration and discussion, and in formulating a system for ascertain- ing cost-units every bank must decide them for itself. The following have not been included under either A or B : Cost of analysis department; advertising, and postage used in connection therewith; salary and expenses of traveling man; losses on loans and fees to counsel (other than the annual retainer) . " (A) It is suggested that the expense incurred in mak- ing and taking care of loans be considered as a certain per- centage of the average loanable rate on funds, and that when this percentage is ascertained it be deducted from the 37 562 THE PRACTICAL WORK OF A BANK rate, using the reduced rate in computing the profit on an account. "To find the rate per cent, on loans representing the expense of making and caring for loans, ascertain the aver- age daily balance of loans and investments, not including United States bonds and premium on United States bonds for a period of six months. Multiply the loan expense by twelve (to get the yearly expense). Divide this amount by the average daily amount of loans and investments. The result will be the rate per cent, to be deducted from the aver- age loanable rate for funds. "Illustration: Suppose the average loanable rate for funds for a given month to be 5.25 per cent, and that for the past six months the balance of loans and investments, not including United States bonds and premium on United States bonds, averaged $18,978,000. Expense incurred in lending funds (for one month) is $3,352.78. Multiplying this amount by twelve (to get the yearly expense) gives $40,233. Dividing this amount by $18,978,000 gives .00212 or .212 per cent.; subtracting .212 per cent, from the rate for funds, 5.25 per cent., gives 5.038 per cent., which, therefore, should be used as the net loanable rate for funds in computing the profit on accounts. "This formula apportions the expense on the average amount of loans and investments and, therefore, gives to the capital stock, surplus and net profits, which are, of course, in the form of loans and investments, their proportionate amount of the expense incurred. " (B) To ascertain the cost units for the various classes of items passing through the bank, it will be necessary to count the number of items received by the bank for one month from each individual and bank account, and the num- ber of checks and drafts paid and charged to each account. "The analysis of the expense account should embrace a thorough examination of the amount expended for station- ery, so as to apportion it among the several departments handling items. This amount goes into the first element of cost (see First Cost) . Stationery used by officials and other departments in which items are not handled goes into the second element (see Second Cost). "As certain expenses are incurred because of individual depositors alone, it is suggested, if extreme accuracy be de- ANALYSIS OF ACCOUNTS 568 sired, that they be apportioned only to this class of deposi- tors on the basis of the number of items handled for each account. In this class of expenses may be mentioned : Rental of lobby space used by customers in front of receiving, pay- ing and other departments handling business for individual depositors only; salaries of clerks at counters in these de- partments; cost of stock check-books, deposit-tickets and pass-books. "When the number of items handled during the month has been ascertained, the record will show the number de- posited, by each individual and bank account, of each of the following mentioned items : City collections, out-of-town col- lections, city clearing-house and runners' items, out-of-town cash items, and, in addition, the number of checks and drafts paid and charged to each individual and bank account. In the case of city items (both cash and time) it would be well to count separately the clearing-house items, trust company items, and other items requiring presentation by the runners. "As the figures for any one month will, in the majority of cases, be a fair index to the average number of items handled for an account, the number of each kind of items should be entered on the analysis cards for reference. It is hardly practicable to approximate the cost of handling coin and currency, and it would be well to assume that every account makes deposits and withdrawals thereof in fair pro- portion to the number of items deposited. Due allowance should be made, of course, for accounts that are exceptions to this general rule. As the number of deposit-tickets and letters received must necessarily be much smaller than the number of items which accompany them, it would likewise be well not to compute the cost of these separately, but to let it go into the cost of handling the items. "If it be desired to know the cost of issuing drafts drawn on reserve agents and other out-of-town correspondents, it will be necessary to divide the salary of the exchange clerk, together with the cost of the drafts, advices and postage thereon, into the number issued during the month. Should the exchange clerk have other duties, approximate the time given to writing drafts and advices. "The cost of handling time collections is considerably greater than that of cash items, because of the complete record that has to be made of the former, the separate en- 564 THE PRACTICAL WORK OF A BANK tries that have to be made of each time collection in the bookkeeping department, tracing, advising payment and other details. In the case of city collections there is an ad- ditional expense for postage on notices and the cost of tele- phone service, which materially increases the cost. "It will be found that it costs more to handle items de- posited by individuals than by banks, that out-of-town cash items are more expensive than clearing-house items; that trust company items are more expensive than clearing-house items; that other runners' items are much more expensive than trust company items ; that the drafts paid and charged to accounts are considerably more expensive than out-of- town cash items, and that time items are from six to eight times as expensive as out-of-town cash items. "In making up the cost unit it must be borne in mind that it consists of five elements: First, the expenses of the several departments that handle the items; second, the ex- penses of the officials and clerks who do not directly handle the items, and sundry other expenses; third, clearing-house expenses; fourth, postage; and fifth, cost of telephone ser- vice. "First Cost. In order to ascertain the first cost the fol- lowing departments must be considered, because they direct- ly take care of the items : Paying, receiving and note tellers, runners, transit, out-of-town collection, city collection, in- dividual ledger and bank ledger. "From the analysis already made of the expense account the cost of each of these departments has been ascertained for salaries, premiums on surety bonds, rental of adding and listing machines and typewriters, stationery and rent. It will not be necessary to ascertain the cost per item for these separately, as by adding them the net result is obtained by a single operation. THE COST OF HANDLING AN ITEM "To ascertain the cost of handling an item as it goes through the bank, make a record of the number of items handled by each department. As all items are handled more than once, it is necessary to make a record of them in every department through which they pass; and, if they are handled twice in any department, the number so rehandled ANALYSIS OF ACCOUNTS 566 must be set down twice. This must be done so that the class of items handled twice may bear its proportionate amount of expense to the department. Divide the total ex- pense of each department by the number of items handled. The result will be the cost in the department for each sepa- rate item. The runners collect items drawn on trust com- panies, etc., not represented in the clearing-house, and other items drawn on individuals, firms and corporations. As these latter items take up a considerable portion of the run- ners' time, an approximation of the time given to handling such items should be made so that the proper cost unit for this class can be ascertained. "The total cost of each class of items is made up of the expense incurred in the handling of them in the several de- partments through which they pass. It is necessary, there- fore, to multiply the cost unit in each department by the number of items in each class which it has handled during the month. When this has been done the several costs of each class of items are to be brought together to ascertain the total cost. Divide the total cost by the total number of items in the class to ascertain the cost of each separate item in the particular case. "Illustration: Suppose the receiving department handles during the month the following: Deposited by in- dividuals: 53,866 clearing-house items, 70,949 runners' items; 113,517 out-of-town cash items. Deposited by banks: 53,185 clearing-house items; 49,238 runners' items; 110,527 out-of-town cash items; total number of items handled, 451,- 282. The clearing-house items are taken care of in the re- ceiving department. This brings the total number of items handled up to 558,333 (451,282 plus 53,866 plus 53,185). If the salaries paid to this department amount to $765, the premium on surety bonds to $32, the rental value of adding machines to $56, the rental value of floor space to $103 and the stationery cost of $32, the total expense is $988. Divid- ing the expense by 588,333 gives the cost of each item, name- ly, $0.001769. Multiplying the number of items in each class by the cost unit gives the cost of each class in the de- partment as follows: Deposited by individuals, clearing- house items, $95; runners' items, $126; extra cost of handling clearing-house items, $95; out-of-town cash items, $201. Deposited by banks, clearing-house items, $94; run- 566 THE PRACTICAL WORK OF A BANK ners' items, $87 ; extra cost of handling clearing-house items, $94 ; out-of-town cash items, $196 ; total, $988. "It will be noticed that the cost of the clearing-house items is made up of the cost of the first handling and the second handling. The analysis of the runners' department will give the cost of handling the runners' items in that de- partment. The analysis of the transit department will give the cost of handling the out-of-town items in that depart- ment. As an illustration, the cost of out-of-town items de- posited by individuals will be taken not only for the first cost, but for the several costs making up the total expense. Suppose the cost in the transit department is $538. As the cost in the receiving department is $201, the total cost is $739, or $0.00651 per item. "Second Cost. To get the cost per item in this class divide the total number of items of all classes handled dur- ing the month into the total of the following expenses : Sala- ries of officials and clerks who do not directly handle the items, which will include salaries of the audit department, messengers, porters, day and night watchmen, stenograph- ers, telegraph clerk and filing clerk, rental value of the ex- ecutive offices, lobby, stenographers' and audit departments, letter files, lockers and stationery closets, rental value of add- ing, listing machines and typewriters; luncheons, light, heat, premium on surety bonds, telegrams, expressage, sundries and stationery used by officials and clerks who do not direct- ly handle the items. "Suppose the cost per item to be $0.006309. "Third Cost. Clearing-house expenses should be appor- tioned to checks and drafts paid and charged to each ac- count and to city items only. To get the cost per item, di- vide the clearing-house expenses by the number of city cash and time items, and checks and drafts paid and charged to each account. "There is no expense for out-or-town items in the third cost. "Fourth Cost. From the amount of postage properly chargeable to administration expenses, deduct the amount used by the city collection and runners' departments in mail- ing notices concerning notes and drafts, which should be added to the cost of city collections and runners' items. Into the net amount of postage divide the number of out-of-town ANALYSIS OF ACCOUNTS 567 collections and out-of-town cash items handled. The result will be the cost per item for postage in these respective classes. "Suppose the cost of out-of-town cash items to be $0.003049 per item. "Fifth Cost. This embraces telephone service, includ- ing salary of operator. As the cost of out-of-town calls made for customers and correspondents is usually charged to their accounts, such part of the expense should be omitted. The remaining portion of cost of telephone service should be apportioned to city collections, city cash items and drafts and checks paid and charged to each account. Approximate the number of telephone calls made during the month in con- nection with city collections, runners' items and drafts and checks paid, and apportion the cost thereof to the respective classes of items. Apportion the remaining cost to city cash items. To get the cost per item, divide the number of items in the class into the cost of service. "There is no expense for out-of-town items in the fifth cost. "If it be determined to apportion to individual depositors alone the salaries of the clerks at the counters in the receiv- ing and paying tellers' departments, the rental value of the lobby space used by customers and the cost of stock check- books, pass-books and deposit-tickets, there will be a cost per item for the expense. "Suppose the cost per item to be $0.003187. "The five costs enumerated, and the extra cost noted above, should be brought together and the total will be the cost of handling each item in each class. "Illustration: Cost of out-of-town items deposited by individuals : First cost $0.006510 Second cost 0.006309 Third cost 0. Fourth cost 0.003049 Fifth cost 0. Extra cost , 0.003187 Total cost per item $0.019055 "To find the cost of an account for the month, multiply the number of items in each class handled by the proper cost unit and bring together. The total is the cost of adminis- tration for the account. 868 THE PRACTICAL WORK OF A BANK "It is but fair to assume that most accounts deposit, on the average, about the same number of items every month, and for this reason it is not necessary to ascertain the admin- istration expenses oftener than once every year or two. If there be a change in the character of the account, the analy- sis department should make a recount of the number of items handled. The same method can be used (with mod- ifications, of course) by State banks and trust companies. In the case of trust companies, however, the analysis would apply to the banldng department only. "While at first it may seem difficult to make an analysis on the lines outlined, it will be found upon examination that the procedure is not involved and will be very interesting and the results obtained of great importance to any bank, as the worth of each account will be definitely known." Note Mr. Buckley's paper has, in substance, appeared in the Banking Law Journal and Journal of American Bankers Association. Printed here by cour- tesy of the author. Mr. EnselFs matter revised and arranged by himself. W. H. K., Jr. CHAPTER XV 11. FOREIGN AND DOMESTIC EXCHANGE It would be quite impossible in the scope of this work to deal extensively or adequately with the subject of foreign exchange. Therefore, but a brief resume of the subject can be undertaken, covering (a) the origin of foreign exchange; (b) the instruments; and (c) the general principles of for- eign exchange transactions. In the opening chapter it was said that trade is merely the exchange of commodities for commodities. This is true both in domestic and foreign affairs. One section sells an- other section, and one country another. The South sells New England cotton and buys manufactured goods. The West sells the East meat, fruits and grain, and buys all sorts of manufactured goods. Likewise in the affairs between nations. France sells the United States silks, jewels, wines, etc.; England, the prod- uct of her mills; Germany, dyestuffs, toys and articles pe- culiar to German manufacture. All three nations take in exchange wheat, cotton, meats, raw material of various kinds, metals, and manufactured goods. But inasmuch as the amounts traded in do not balance, one country buying more than it sells, there is a difference arising that must be settled in money. If the merchants of England bought of the merchants of the United States, and the American mer- chants bought of English houses an equal amount of goods, the merchants of England could pay one another and the merchants of America likewise, and there need be only a transfer of debts to affect the balance. Such a course obtains only in a limited sense and by a complicated process, but the principle is easily understood. SETTLING DEBTS WITHOUT MONEY The method by which debts are settled by offsetting one against the other is simple. If two men owe each other cer- tain amounts, instead of each paying the other what is due, they meet and adjust the difference; they have "cleared" 569 670 THE PRACTICAL WORK OF A BANK their debts and settled the balance. Likewise several men may settle their differences by a few payments in cash. Debts are settled by mutual cancellations. To illustrate how an international debt is cancelled with- out the use of money, take a simple proposition. Let us sup- pose that a New York merchant sells to an English mer- FIG. 7. BILL OF EXCHANGE (iN DUPLICATE) chant $1,000 worth of goods. An English merchant has sold a New York merchant a bill of goods likewise amount- ing to $1,000. Payment for these debts might be made by the Englishman sending gold to New York, and likewise New York sending gold to England. But why this double trip across the Atlantic? Why not let the merchants in New York settle with each other, and the English merchants settle with each other and effect the same result? Therefore, the first mentioned New York merchant draws an order on FOREIGN AND DOMESTIC EXCHANGE 571 his English debtor and takes it to the other New York mer- chant, who is in debt to an Englishman. The debtor mer- chant pays the creditor merchant on this side. The bill is sent to the creditor merchant on the other side who collects from the debtor merchant there, and both transactions are closed. Thus, the two debts have been paid without ship- ping the coin. Upon this simple principle of offsetting debt against debt depends all exchange operations, foreign and domestic. Of course, direct dealing does not so obtain, but through the medium of banks and foreign exchange houses, essentially the same process takes place; the instruments in one country being gathered and sent to the other for collec- tion and credit, whatever balance remains being adjusted from time to time in gold. ORIGIN or FOREIGN DEBTS Debts created abroad arise from three main sources: (a) Goods purchased abroad; (b) insurance and freights paid by American merchants to foreign houses. England being the great insurance and carrier nation of the world, the freights carried in English vessels are one of the principal items in the balance against us; (c) securities held abroad upon which interest must be paid (also maturing securities or those sold by foreign holders) ; (d) travelers' expenses while abroad, which are enormous. The "balance of trade" is the net amount due to or from another country, and depends upon the volume of trading one country does with another. The nation that buys more than it sells owes more than it has due to it is the debtor nation, and the trade balance is against it, and must settle in money at the will of the creditor. The sources of foreign exchange are: (1) Merchandise shipped abroad against which drafts are drawn and sold in the exchange market; (2) securities sold, the seller drawing on the buyer; (8) foreign money loaned in this market, the operation consisting of drawing drafts on the lender; (4) finance bills, arising from the banker abroad allowing a banker here to draw on him, the drafts being sold and pro- ceeds used in financial transactions until the draft is due. 1 lEscher, "Elements of Foreign Exchange." 572 THE PRACTICAL WORK OF A BANK Whenever a consignment of merchandise goes abroad, as a rule, a draft is drawn on the buyer by the seller, and sold in the market, the seller coming into immediate possession Guaranty Ttust Company of Kwlbrk LETTEH OF CREDIT of his money. The trade movements, therefore, regulate the number and volume of these bills, since they are as volumi- nous as commerce is brisk or dull. When ocean transit op- erations are at a practical standstill, as obtained during the FOREIGN AND DOMESTIC EXCHANGE 578 early part of the present war, no bills arise, for no goods move, and rates are, therefore, high. Large stocks of bonds and securities are held abroad, the European nations being large investors in American securi- ties. When a transaction is consummated, the securities are forwarded and draft attached. And the movements of secu- rity holdings, therefore, affect the supply of bills. In making loans, bankers do not send the cash, but al- low their correspondents to draw on them. Thus, if an Eng- lish bank were to lend a million dollars in this market, it would authorize its representative to draw on it, and these drafts are sold and the proceeds used as agreed upon. Take an actual case. A wholesale house desires a loan, say, of $50,000. It deposits with its New York banker security in the form of its bills receivable, and the banker draws his draft on the English house, sells it and turns the proceeds over to the borrower. When rates abroad are low, this may be a profitable form of borrowing. If money rates are high in New York, the foreign bankers may allow their corr^ spondent to draw on them for money to loan out for joint account, and this gives rise to what is called "finance bills.'* THE DEMAND FOR BILLS The demand for instruments of exchange arises from the following sources: (a) The payment for imports; (b) payment for securities purchased by us in Europe; (c) re- mittances on account of interest and dividends on stocks and bonds held abroad; (d) remittances for freight and in- surance due to foreign companies; (e) tourists' expendi- tures; (f) payment for short-time and other loans that are maturing. The most important item is the payment for merchandise purchased abroad. As each shipment is paid for by draw- ing a bill of exchange, these instruments come into the mar- ket in large numbers and for large amounts, and are a source of constant supply of bills. As interest is due and dividends are declared, holders abroad must be placed in funds, and, therefore, a demand arises for a bill for the purpose of remitting. Likewise pur- chases of securities. Whenever these are purchased abroad, 674 THE PRACTICAL WORK OF A BANK whether our own or foreign issues, a demand arises for a bill of exchange with which to make payment. Many of the large insurance companies are foreign cor- porations, doing business in this country amounting to mil- Guaranty Trust Company of New York Foreign Department Gentlemen: We hereby ^authorize you to value on (^uaranty Trust Compin^of^Xew York, Hew York, for aCCOUnt Of //.. t