THE PRACTICE OF PAYING 
 INTEREST ON DEPOSITS— 
 SHOULD IT BE ENCOUR¬ 
 AGED? s o o DELIVERED 
 BEFORE THE KENTUCKY 
 BANKERS ASSOCIA TION, A T 
 LOUISVILLE, OCT. 22, 1891. 
 
 SY E. C. BOHNE. 
 
 PRESS OF 
 
 JOHN P. MORTON AND CO 
 LOUISVILLE, KY. 
 
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ADDRESS. 
 
 
 Mr. President and Gentleynen of the Convention : 
 
 The Committee of Arrangements has selected me to address 
 you on the subject of “ The Practice of Paying Interest on 
 Deposits, Should it be Encouraged? ” As an abstract question, 
 I would answer unhesitatingly. No! If a simple edict of mine 
 would abolish the practice, it would be unceremoniously, im¬ 
 mediately, and forever done away with. Considering generally 
 accepted custom, and sharp competition between different cities 
 and among banks themselves, I am inclined to answer that the 
 practice of paying interest on deposits should be exercised less 
 liberally and more judiciously. 
 
 The term “ deposit ” means money, or its equivalent, left 
 in a bank for safe keeping, and subject to immediate with¬ 
 drawal in whole or in part. The safety against theft and the 
 elements offered by the banks for the keeping of such funds, 
 the convenience of withdrawing them at any time and in such 
 sums as suits the depositor, the record of the transactions, the 
 legal safeguard as to evidence readily to be established with 
 regard to their nature between parties at issue, and the neces¬ 
 sity of keeping accurate book accounts of the same were, 
 until quite recently, considered‘a fair and sufficient equivalent 
 for the profit which a bank might earn by the temporary bal¬ 
 ances in its hands. The desire to increase traffic by offering 
 extraordinary inducements, more or less wise and business¬ 
 like, caused some banks to offer interest on call deposits 
 respectively on the balances in their hands. At first the rate 
 of interest so allowed was low, while the rate of (interest 
 received by the bank was high, leaving a handsome margin 
 for profit on such tran.sactions. 
 
2 
 
 ADDRESS. 
 
 Gradually competition, thoughtlessness, and recklessness 
 in management increased the rate paid for deposits, at the 
 same time decreasing the rate obtained on loans, making the 
 margin for profit more and more problematical, and in some 
 cases actually working with loss. From the standpoint of an 
 individual it may be nobody’s affair whether or not a business 
 transaction is profitable; but if a bank manager loses sight of 
 the fact that in handling his bank’s capital he is handling other 
 people’s investments, he does not only fail in his duty to his 
 stockholders by working without adequate profit, but he also 
 demoralizes the business for other more conservative bank 
 officers by working for nothing, and such practice should be 
 frowned down. In order to demonstrate to you the correct¬ 
 ness of my remarks as to the unprofitable nature of the inter¬ 
 est-paying business, I will have to annoy 3^ou with a few cold 
 figures, which will no doubt astonish those who have paid but 
 little attention to the subject at issue. 
 
 We will take for example an account averaging $ 20,000 
 dail}^ balances at 3 per cent interest, credited monthl3\ The 
 interest charge per annum will be $616.70. The daily trans¬ 
 actions of that account amount to, say $8,000. The cost (ex¬ 
 penses and taxes) of transactions per $1,000 are about 5^ 
 cents per da3^ Hence the cost for $8,000 transactions is 44 
 cents per day, or per annum $160.60, making total charges 
 paid for that deposit $777-30. Of the $20,000 balance there is 
 available for loans what is left after deducting the reserve held 
 by the bank. The average reserve of all National Banks in 
 the United States on July 9, 1891, was, in strictly reserve items, 
 22.63, actually, counting all immediately available items, 
 29.41. In the reserve cities the available items reached 35 per 
 cent. ■ My own experience during the last five 3'ears shows a 
 reserve of 29.14 actual reserve item, and 41.51 per cent of 
 available items. Taking as norm the average of above ex¬ 
 treme figures, it is safe to say that 32.67 per cent are at all 
 times held by banks in reserve cities in such assets as are 
 
ADDRESS. 
 
 3 
 
 available for the immediate discharge of liabilities on deposit 
 account. At this rate $6,414 of the $20,000 are held by the 
 bank as reserve, and only $13,586 are available for loans. 
 
 The average earning rate for discounts, according to my ex¬ 
 perience of the last five years, was equal to 7.106 per cent, which 
 is equal to a possible earning on the loanable surplus of $13,586 
 of $965.42, against $777.30 cost, leaving a profit of $188.12 on 
 the $20,000 average deposit, equal to .94 per cent, and counting 
 nothing at all for risk by theft, robbery or losses, nor for cost of 
 exchange or interest, nor loss of time on foreign items sent by 
 the depositor and taken for immediate credit. This small 
 margin of profit increases and decreases with the percentage 
 of reserve held by the interest-paying bank. The most reck¬ 
 lessly conducted bank makes the most money out of such 
 transactions, while the most conservative often actually loses 
 money, if it attempts to do such business. Hence the practice 
 of paying interest on deposits results in a premium on reck¬ 
 less and a detriment to conservative banking, and .should not 
 only not be encouraged, but, if possible, entirely abolished. 
 
 The possibility of .so doing is, however, very remote, unless 
 competition between the different interest-paying banks is re¬ 
 moved, and concerted action with this regard is brought about. 
 As it is, it would be detrimental for any one city to abolish 
 paying interest as long as another neighboring city offers to 
 do so, because interest-seeking depositors would leave the 
 one and go to the other. But a correct understanding of the 
 subject, and consequent thought upon it will certainly, at a 
 future day, open the eyes of intelligent bank officers all over 
 the country, and will lead to a considerable reduction, if not 
 to entire abolition of the pernicious practice. 
 
 So far for interest on call balances. We will now consider 
 interest paid on time deposits. And right here at the outset I 
 would state that, in my opinion, the word “ deposit” in connec¬ 
 tion with these kind of transactions is a misnomer. A deposit 
 left with a party for any specified length of time, with interest 
 
4 
 
 ADDRESS. 
 
 if left for that length of time, is a loan rather than a deposit. A 
 bank receiving such time deposits, and claiming the right to 
 pay them back at the time of maturity only, should consider 
 such certificate or evidences of indebtedness issued by it as 
 “bills payable” and not as deposits, and should enter them 
 upon its books accordingly, and publish them as such in its 
 statements. The practice of increasing deposits in that way 
 is, strictly speaking, not sound banking, and under all circum¬ 
 stances the statement of liabilities of the bank should show 
 plainly the issue of “ bills payable,” and the bank should be 
 
 ready to bear the odium connected with the fact of a more or 
 
 * 
 
 less great amount of that sort of indebtedness upon its pub¬ 
 lished statement of condition. If the receiving bank chooses 
 to put money received on time under the head of deposits, it 
 should have the required reserve to meet same at all times if 
 it proposes to pay them upon maturity only, it should put such 
 funds under the head of bills payable, in which latter case it 
 would not need to keep any money reserve whatever against 
 such liability. If a reserve is maintained against amounts 
 received on time deposits, the interest must be proportionately 
 lower than if the liability is considered a bill payable and no 
 reserve is maintained. The public is entitled to a clear under¬ 
 standing of its rights and status in such matters, and I hope 
 that the honorable Comptroller of the Currency and the State 
 bank examiner, if such an ofiicer is created by law, will see 
 that this point is definitely settled. Under the present custom 
 the matter is much muddled, and conservative banks have to 
 suffer under the odium caused by unbusiness-like proceedings 
 of competitors, who, if it suits them, pay the certificates issued 
 to the public for time loans upon presentation, and refuse to 
 pay them until maturity, if that is more convenient. There 
 should be some uniform and clearly defined principle of the 
 matter between lender and borrower, which would operate so 
 as to avoid any misunderstanding, or any conflict of interest, 
 in justice to both public and banks. 
 
ADDRESS. 
 
 5 
 
 The question of time deposits, their nature and effect, and 
 the want of uniformity of understanding, has caused a great 
 deal of harsh censure, indulged in by the public against the 
 banks, and is for that reason alone greatly to be regretted. In 
 the present day, when the state of public sentiment is so de¬ 
 plorably prejudiced against banks and bankers, it behooves us, 
 as repsesentatives of that honorable and essential branch of 
 the public economy, to do every thing in our power to clear 
 the situation, and to bring about a better understanding of the 
 relations between banks and the public, and it is particularly 
 our duty to avoid every thing by which that unfortunate hos¬ 
 tility against the corporations we represent might be increased 
 or seemingly justified. The public mind is biased against 
 financial institutions by many untoward circumstances, para¬ 
 mount among which is the widespread publicity which news¬ 
 papers seem to delight in giving to the defalcations occurring 
 in banking circles, which are generally greatly exaggerated. 
 I speak from personal knowledge when I say that there is 
 nothing more deplored by bank officers than the laxity and 
 perv^ersion of the law which permits criminals in banking 
 circles to escape just punishment. What, among fair-minded 
 people, simply reflects upon the deficiencies of the criminal 
 statute and the indolence of the law in this State is charged 
 by the public at large to the banks, who, apparently above the 
 law, are consequently duly hated and proposed to be downed 
 by unreasoning people. Every honest banker feels how per¬ 
 nicious to the interest of banks, and how hurtful to the repu¬ 
 tation of bankers as a class, such cases of dishonesty are, and 
 consequently feels particularly aggrieved at the want of retri¬ 
 bution and the failure of the law to punish dishonest men, 
 and by those means to stop knavery, or at least to adequately 
 punish it. Considering the number of persons engaged in 
 banking, considering that over ninety-five per cent of all 
 financial transactions of the people are made through banks, 
 and considering the temptations to and offered facilities for 
 
6 
 
 ADDRESS. 
 
 dishonest}^ I venture to say, without fear of successful contra¬ 
 diction, that there is not another class of men whose integrity 
 is so intact and whose honesty ranks as high as that of bank¬ 
 ers. Because of the knowledge of that fact in the mind of 
 our fraternity we should guard that reputation with the great¬ 
 est jealousy, and we are particularly severe upon financial un¬ 
 faithfulness and criminality. Hence we are, more than any 
 other class of men, aggrieved when notorious wreckers and 
 criminal abusers of confidence escape punishment upon tech¬ 
 nicalities. Yet the people, who are primarily responsible for 
 the faults in the law, instead of having such faults remedied, 
 abuse the banks and cast unkind reflections upon thousands of 
 honest men who are every day occupied in serving the public 
 in important fiduciary functions. 
 
 Another great cause of the unpopularity of banks is the 
 necessity of adhering to strict business rules in performing 
 their functions, caused by the exacting position of responsi- 
 bilit}^ of a person taking care of other people’s money, which 
 position necessitates that minuteness and apparent austerity 
 in a bank’s dealings with the public, and which causes the 
 people at large, unjustly and unreasonably, to consider banks 
 unnecessarily obstinate, ceremonious, and constrained. It 
 behooves us to counteract these adverse circumstances b}'' in¬ 
 forming the public of the position and functions of a bank, of 
 its general usefulness, and of its absolute necessity to the 
 commercial, industrial, and agricultural interests of the pres¬ 
 ent day, by dwelling upon the faithful and honest work which 
 banks do in the interest of all members of the communit}^ in 
 augmenting the functions of money and in increasing its 
 powers for utility. We should show how banks represent the 
 accumulated savings of the people and are run for the benefit 
 of the people, and we should especially clearly demonstrate 
 and impress upon the public mind the fact that the banks are 
 the only successfully available safeguards of the people against 
 the aggressions of large capital, and that they, by helping 
 
ADDRESS. 
 
 7 
 
 the mass of people with moderate means, act against the de¬ 
 plorable tendency of the times, which seems to be in favor of 
 a rapid accumulation of wealth in the hands of the few, and 
 that the banks are hence the people’s best friends. 
 
 You will kindly excuse this digression from my subject. I 
 
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 was led to these reflections by an inexorable chain of thought, 
 and, since they are down upon the paper, will let them go for 
 what they are worth. Every thing tends to show that only 
 in approved business methods, conservatively administered 
 with regard to interest in deposits as well as to every thing 
 else, lies the good of stockholders and public both, lies the 
 safet}^ of the banks, and the successful refutation of the unjust 
 adversity of public opinion. 
 
 In conclusion, I would answer the question put to me by 
 the Committee of Arrangements, after considering it in all its 
 aspects, that the practice of paying interest on call balances is 
 certainly unprofitable to a conservatively managed bank, and 
 that it .should be the aim of all good banks in all parts of the 
 country to abolish it, or at least to materially reduce the rate 
 of interest paid. As to interest on funds left with banks on 
 time, I have shown that they are not really deposits, but par¬ 
 take of the nature of bills payable, and that, in my opinion, 
 such funds should be treated as such a liability, principal being 
 payable only at maturity, and interest at such rate as may be 
 profitable to the borrowing bank, and that where such loans 
 are payable on demand the same remarks as made with regard 
 to interest paid on call loans hold good. 
 
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