banks and are payable on demand of the bearer. Before a national bank
may issue such notes, it must own United States government bonds of at
least the amount for which it issues notes. These bonds are held by the
Treasurer of the United States as security that the bank will pay its
notes. According to the Owen Glass Bill, passed in December of 1913,
national bank notes may at the option of the banks be gradually
withdrawn from circulation.
Credit
_Credit_ is a promise to pay at some future time for a thing which you
receive now. Its use is probably as old as the practice of exchange and
quite as important. The simplest and most extensive form of credit is
"book" credit, such as you get at the grocer's or butcher's or at the
department store. To explain a little more complex kind of credit:
Suppose you owe Smith one hundred dollars. At the same time Smith owes
Jones one hundred dollars. Because you owe Smith, he may give Jones an
order to collect the money from you. With this order Jones may pay his
lawyer, let us say. Perhaps the lawyer has bought a bill of goods from
you. He pays you with the same order. You destroy the "note," and thus
four actual transactions have been taken care of without the use of any
money. The business institution which deals especially with credits is
the bank.
Banks
A bank which fulfills every banking function must have these three
departments: (1) the commercial department, (2) the savings department,
(3) the trust department. Some institutions specialize in one department
more than in either of the others, and thus, taking the name from their
principal function, banks are known as follows: (i) commercial banks or
banks of deposit, (2) savings banks, (3) trust companies.
Banks of Deposit
[Illustration]
Banks of deposit or commercial banks are business men's banks. Their two
principal functions are (1) receiving money for safe-keeping on deposit,
and (2) loaning money to business men at interest. The deposit function
is based on confidence and credit. The business man takes his money to
the bank not only because it is convenient for him to do so, but also
because he has confidence that the money will be more carefully
protected than if he kept it in his own possession. In depositing his
money in the bank, the business man uses a _deposit slip_ such as the
one illustrated here. The teller puts down the amount in the _bank book_
of the depositor, who is credited with that amount on the bank's books.
He is entitled to draw just that much actual cash or that much credit in
the form of _checks_. (See page 339.) Most firms do not deposit a sum of
money and then promptly draw it out again in the form of checks to pay
current liabilities, but maintain a fairly steady balance in the bank.
On large average monthly balances most banks allow interest, varying
from one per cent on balances of one thousand dollars to three per cent
on balances of ten thousand dollars or more.
Discount
Because a large bank has many depositors, the aggregate of all the
balances makes a considerable sum of money. Bankers have learned by
experience just what proportion of their deposits they can depend on to
remain steadily on deposit as a balance, and thus they know what
proportion of their deposits it is safe to use for the purpose of
_discount_. The simplest case of the discount function is the discount
of a promissory note. In the note shown in the illustration after ninety
days John H. Blodgett will receive from Lucius Thomas five hundred
dollars with interest. But perhaps Blodgett cannot wait ninety days for
his money. In this case, he takes the note to his banker, who will pay
him the five hundred dollars less a certain percentage or discount,
which is the bank's profit on the transaction. The bank then collects
the note when it becomes due.
[Illustration: PROMISSORY NOTE]
Collateral
Instead of cashing a note held by one of its customers, the bank may
itself loan money at interest for a short period of thirty, sixty, or
ninety days, taking the note of the business man to whom the money is
loaned. In most cases, however, unless the bank knows the business man
well, a certain amount of _collateral_ is demanded as an assurance that
the borrower will pay the loan when it becomes due. The amount of
collateral deposited with the bank is usually 10% to 25% in excess of
the amount loaned, and it may take the form of stocks or bonds;
mortgages on real estate; liens on stock, fixtures, or personal
property; or warehouse receipts. When the amount borrowed is paid, the
collateral is returned; if it is not paid within a reasonable time, the
collateral is sold, and the amount loaned, with interest to date, is
taken from the proceeds.
There are, of course, other functions of banks of deposit practised
quite generally by all banks, and these will be explained later. The
functions just described, however, distinguish banks of deposit in a
general way from the other two classes.
Savings Banks
A savings bank accepts from its depositors small amounts of money which
are not subject to withdrawal by check, but on which it pays a low rate
of interest. As a general rule, an account may be opened with one
dollar; and when the initial deposit is made, the depositor is furnished
with a pass book, similar to the bank book, in which further deposits,
interest credits, and withdrawals are recorded. Interest is compounded
every four or six months, and money must, as a general rule, remain on
deposit until an interest payment date before the depositor receives any
interest on it. The usual rate of interest is three per cent, although
four is often paid. Frequently, before banks allow deposits to be
withdrawn, they demand a certain number of days' notice, usually thirty.
It is well to investigate the conditions under which the depositor
places his money in the safe-keeping of the bank, because the withdrawal
requirements are often stringent. Because of the stability of this
class of deposit, banks are always anxious to increase their savings
accounts, as a large proportion of the funds may be used for loans.
A form of the savings bank established in the United States in 1911 is
the postal savings bank, in which the post-office is made the depository
for savings. The post-office in the town deposits its funds in the local
national or state bank, which, as security for safe-keeping, must
deposit with the Treasurer of the United States bonds at least equal in
value to the amount of savings deposited in the bank. Postal savings
banks are practically absolutely safe, because, if the bank which takes
care of the funds should fail, the bonds may be sold, so that the savers
will receive their money. From deposits made in the postal savings bank,
the return to the depositor is only two per cent, whereas the return
from deposits made in the bank's own savings department is three, three
and a half, and sometimes four per cent.
Trust Companies
_The Richards' Baby Stocking Fund_
A miner named Richards was killed in an accident in an
Alaska mine. Among his possessions were found a number
of letters and a baby stocking containing a little
gold dust. The letters told that Richards had a little
six-year-old daughter, who was now left destitute. The
rough miners made up a fund of $2,500 in gold dust,
depositing it with the United States Commissioner of
the Territory of Alaska, to be held by him until the
proper disposition of it could be made. A committee
was appointed, who agreed that one hundred dollars a
year for ten years should be used to give the child a
common school education, and then five hundred dollars
each year to give her a college education. A legal
guardian was appointed, and the Kansas City Trust
Company asked to act as co-guardian to invest the
money and make the required remittances. The funds
were first deposited by the commissioner in a bank in
Portland, which sent them to the Kansas City Trust
Company. Correspondence was of course carried on at
the same time, the Kansas City Trust Company agreeing
to accept the trust without remuneration. They have
invested the money in five per cent bonds, thus
increasing the fund yearly.
This is called a _trust_ because the money is entrusted for safe-keeping
and investment to the bank, which is called the _trustee_. A bank may
also become the trustee for property left at the death of a person, both
when there is a will and when there is none. When there is no will and
the bank takes charge of the affairs of the deceased, the bank is called
the _administrator_; when there is a will, the _executor_. Another
important function of the trust company is acting as _receiver_ for a
company which has failed; that is, adjusting the company's affairs in
the way fairest both to the stockholders and to the company's creditors.
The trust company often acts, also, as _agent_ for its clients'
property, performing the same duties as a real estate agent.
Form of Remittance
Banks as a class are distinguished one from the other according as they
specialize in one or more of the functions described above. However,
there are certain services that all banks perform and certain facilities
that they all offer in connection with the payment of money from one
person to another. These concern the forms of remittance.
If you have studied business arithmetic or bookkeeping, you very likely
know the definite forms that are used. At all events, you know that
currency should never go through the mails. The following is a brief
review of the more important forms that may be used. Study the
illustrations carefully, noticing particularly the similarity of form in
all. Uniformity in such matters is desirable because it saves time as
well as misunderstandings. The forms we shall consider are: