^ <^l 

 
 PRACTICAL BANKING 
 
 WITH A SURVEY 
 
 OF THE 
 
 FEDERAL RESERVE ACT 
 
 BY 
 
 RALPH SCOTT HARRIS 
 
 BOSTON NEW YORK CHICAGO 
 
 HOUGHTON MIFFLIN COMPANY
 
 COPYRIGHT, 1915, BY RALPH SCOTT HARRIS 
 ALL RIGHTS RESERVED 
 
 CAMBRIDGE . MASSACHUSETTS 
 U . S . A 
 
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 DEDICATED TO MY 
 MOTHER AND FATHER
 
 PREFACE 
 
 In putting this volume before the public, the 
 writer has in mind at least two purposes which he 
 hopes to fulfill: (1) to draw with certain accuracy 
 of detail a plan of the structure — the mechan- 
 ism — of the modern bank in America; (2) to 
 reduce all this to untechnical language and yet 
 include suflficient of exact financial information to 
 enable the "layman" who is interested in the 
 general methods of banking to grasp the subject 
 substantially without laborious and endless effort. 
 
 There is no subject, not essentially fiction, 
 which yields such stimulating or romantic reac- 
 tions as the study and practice of banking. In- 
 deed, writers on the matter are more wont to use 
 literary imagery than are delineators of science 
 in general. Thus, one speaks of London as "the 
 financial Rome of civilized nations," while an- 
 other says that between the gold reserves on "the 
 face of the earth " there is "the same aflSnity as 
 between the blood corpuscles circulating in the 
 organism." 
 
 The very words "Wall Street," "Lombard 
 Street," "Threadneedle Street," "The Bourse" 
 suggest the boundless optimism of man, his 
 (often) day-dreams and visions, his plans dashed 
 to fragments or culminating in success. After all, 
 finance is so intimate to every one of us we cannot 
 but find an innate interest in the contemplation 
 of it. The prosperity of nations is closely bound
 
 VI PREFACE 
 
 up in the success or failure of its banking system. 
 Thus a writer, speaking of the necessity of guard- 
 ing in some way the metalHc reserve required for 
 a country's own banking, says: "When a nation, 
 carried away by the bhnd confidence of an already 
 long period of easy credit and great prosperity, 
 neglects more and more the metallic basis and the 
 progress of other nations toward a clearing sys- 
 tem, and thinks it can forever increase credit and 
 exalt speculation, the crisis is at hand and will 
 suddenly appear; then, as the penalty for ignor- 
 ing the necessarily slow processes of evolution, 
 it must submit to the humiliation of asking the 
 world for help." ^ 
 
 But, curiously enough, finance is blind to such 
 considerations as patriotism and money seeks its 
 best market, be it where it may. This levels the 
 supply of gold in a country to what is necessary 
 and, as Mr. Patron points out, results in an 
 ironical situation often enough. He cites the 
 transfer of two hundred million francs into France 
 as the result of buying the Panama Company. 
 This money, it seems, had largely come to the 
 United States from Japan in payment of war 
 material. France loaned a large part of it to 
 Russia, and we had Japan actually furnishing 
 gold to her enemy. 
 
 This little volume, however, is not concerned 
 in particular with world finance, but rather with 
 the interior conduct of the average American 
 bank. I have sought to make it intimate and, as 
 far as it was interesting and profitable, to intro- 
 
 ^ Maurice Patron, The Bank of France, in the National Mone- 
 tary Commission Series.
 
 PREFACE vii 
 
 duce the reader to some of the officers and officials 
 of the bank, acquaint him with their duties, and, 
 in fine, describe the actual conduct of banking 
 from the mechanistic side. There are also several 
 chapters dealing with more general phases of 
 banking, such as that concerning "What is a 
 Bank?" and the chapters on "The Clearing 
 House," "National Bank Currency," "Foreign 
 Exchange," and "The Federal Reserve Act." 
 
 The writer does not presume to have said the 
 final word on banking; indeed, he only assumes 
 a certain originality as far as his observations and 
 treatment are concerned. On the other hand, he 
 has not altogether depended on his own experi- 
 ence, but has sought the advice of numerous prac- 
 tical banking men in New York and elsewhere, 
 and has, moreover, searched the writers for con- 
 firmation of his theories or for additional infor- 
 mation. A working bibliography on banking is 
 appended to this book. A number of other books, 
 not specially consulted by the author for this 
 book, are referred to in various places throughout 
 the work. 
 
 Finally, the main object of this work must not 
 be forgotten, namely, that it is intended for the 
 student of finance who wishes a glimpse into the 
 practical conduct of the bank or for the business 
 man who daily has relations with the bank and 
 yet, as is most natural, is unfamiliar with the 
 details of this most important institution of 
 modern civilization. 
 
 The personal acknowledgments of the author 
 in the preparation of this little labor of love are
 
 viii PREFACE 
 
 many and the obligations real. Without those 
 whose names follow, the book would not have 
 been possible. 
 
 To Professor John Erskine, of Columbia Uni- 
 versity, I owe most in this undertaking. It was he 
 who first suggested it, and his patient criticism of 
 the structure of the book was invaluable. Mr. 
 John H. Frye, president of the Traders' National 
 Bank, of Birmingham, Alabama, is responsible for 
 several years of discipline and experience, wherein 
 I received a first practical insight into bank meth- 
 ods, and for innumerable courtesies. The late 
 J. H. McEldowney, formerly vice-president of 
 the National City Bank of New York, was of 
 great assistance to my book in its inception. Hon. 
 Oscar W. Underwood assisted me with the com- 
 plete report of the National Monetary Commis- 
 sion and valuable documents relating to the 
 Federal Reserve Act. Mr. H. H. Powell, cashier 
 of the Importers' and Traders' National Bank of 
 New York, and Mr. William Scherer, manager of 
 the New York Clearing House, furnished me with 
 definite information in their respective fields. Mr. 
 William E. Hollo way, banker. New York, read 
 the manuscript and criticized it, as did Professor 
 Charles A. Beard, of Columbia University, Mr. 
 H. E. Davisson, formerly of the Foreign Depart- 
 ment of the National City Bank, New York, and 
 Mr. Olaf Olsen, vice-president of the First 
 National Bank of Boston. The Librarian of 
 Congress provided a bibliography on currency 
 legislation. I am indebted to Mr. F. R. Macau- 
 lay, Columbia University, for suggestions. Mr. 
 Frederic Erb, Supervisor of the Loan Division,
 
 PREFACE ix 
 
 Columbia University Library, was untiring in 
 his courtesies from time to time. I gratefully 
 acknowledge the assistance of Mr. Stanley V. 
 La Dow, New York, in reading the proofs of 
 this volume. 
 
 Those whose books have proven more than 
 valuable in preparing this work are too numerous 
 to mention and must be looked for in the biblio- 
 graphy. However, I will make particular mention 
 of the following: Charles A. Conant, A History 
 of Modern Banks of Issue; Wesley C. Mitchell, 
 Business Cycles; James G. Cannon, Clearing 
 Houses; and articles by Paul M. Warburg. 
 
 Ralph Scott Harris. 
 
 Columbia University, 
 October 2, 1914.
 
 CONTENTS 
 
 I. What is a Bank? 1 
 
 n. The Stockholders and the Board of Di- 
 rectors 28 
 
 m. The President 35 
 
 IV. The Cashier 43 
 
 V. The Paying Teller 51 
 
 VI. The Receiving Teller 61 
 
 Vn. The Loan and Discount Department . 73 
 Vm. The Foreign Cash Items or Transit De- 
 partment 84 
 
 IX. The Collection Department ... 91 
 X. The Domestic Exchange Department . 97 
 
 XI. The Individual Ledger 104 
 
 Xn. The Reciprocal or Bank Ledger . .110 
 
 XIII. The General Books 118 
 
 XIV. The Savings Department .... 123 
 XV. The Formation and Powers of the Na- 
 tional Bank: 134 
 
 XVI. National Bank Notes 146 
 
 XVII. The Clearing House 161 
 
 XVin. Foreign Exchange 178 
 
 XIX. Crises in the United States . . .211 
 XX. The Federal Reserve Act .... 258 
 
 Appendix 289 
 
 Bibliography 297 
 
 Index 301
 
 PEACTICAL BANKING 
 
 CHAPTER I 
 
 WHAT IS A BANK? 
 
 When one ascends marble steps into some 
 wonder of the American builder's art; as he moves 
 through offices magnificently finished, seeing here 
 a long line of wickets, each manned by a well-kept 
 teller, who waits on the public; behind them a 
 vast crowd of bookkeepers, listers, watchmen, 
 collectors, and messengers; as he sees there desk 
 after desk occupied by suave, sharp-eyed officers 
 and assistants; as he notes with what smoothness, 
 what consummate ease the business is divided 
 and handled, like some huge power-machine, 
 made of the best metal, — he is struck with 
 admiration for a thing so immense, so far- 
 reaching, yet so graceful and perfect. It is diffi- 
 cult to imagine that the science which it is prac- 
 ticing and developing — the science of banking 
 and finance — had a beginning long, long ago, 
 and that in the beginning it was a tiny, rude, 
 undeveloped happening, not even a definite 
 calling. 
 
 Our task, in this chapter, will be to give, in a 
 brief and succinct sketch, the origin and progress 
 of banking. It is not within our province to go 
 very deeply into the details of this theme, which
 
 2 PRACTICAL BANKING 
 
 itself might fill several portly volumes. But the 
 intention is to cover generally the historical devel- 
 opment of the bank, touching, however, only the 
 great peaks, and to discuss the modern bank, and 
 particularly the National Bank, in the United 
 States. 
 
 Those principles which underhe banking or 
 finance, as we know it, have been applied since 
 the first day men began to cooperate with each 
 other. ^ It is the process of obtaining some desired 
 article for an article which can be more easily 
 spared. In those days there was no fixed stand- 
 ard, like our currency, by which articles could 
 be compared. Consequently, nothing like a regu- 
 lar market could be instituted; each transaction 
 stood on its own merit. There was exchange of 
 articles which, on account of their practically 
 equal utility to those trading, were of an equal 
 commercial value. But this exchange was and is 
 the basis of our banking system. As soon as you 
 substitute the abstract for the concrete, the pay- 
 ment or the promise to pay in an accepted medium 
 for actual payment with an article of a practically , 
 equal trading value, you have a modern banking 
 system. 
 
 In the rudest and most barbarous people of 
 whom we have any historical record, glimpses of 
 the employment of these general laws may be had. 
 At first, it was a very simple exchange. A man 
 had a very desirable dog, slave, or ox which he 
 
 ^ The ultra-radical would say that they had been applied, not 
 from the day men commenced cooperating, but from that day when 
 the stronger began to oppress the weaker. I refrain from any com- 
 ment on this distinction.
 
 WHAT IS A BANK? 3 
 
 would trade for a weapon, a skin, or a woman to 
 work for him. Gradually rare substances, because 
 of their comparatively little bulk or weight, be- 
 came the more generally accepted medium of 
 exchange, of which gold, silver, and bronze finally 
 became the most common. That is, instead of a 
 man waiting until his heifer had become a full- 
 grown cow, which he might "swap" for a wife, he 
 took an appropriate quantity of the medium, 
 which he had obtained by digging or trading, and 
 made the exchange. 
 
 By slow degrees — for these evolutionary pro- 
 cesses, it must be understood, were matters of 
 many centuries of gradual development — people 
 came to feel the inconvenience of carrying around 
 coin or bullion in any quantity. Doubtless this 
 was felt to an extraordinary degree in the city 
 where iron was declared the standard money. 
 So, finally, but with as much tardiness and suspi- 
 cion as that which attended Charles Lamb's 
 Chinese learning to roast pig without burning 
 down a house, they became satisfied to accept, 
 in place of money, the written promise to pay a 
 specified sum at a definite time and place, and 
 they had the genesis of paper currency. This 
 paved the way, ultimately, for the creation of the 
 bank, the check, and the currency bill. 
 
 The function of banking which has to do with 
 the extending of loans is spoken of in the far 
 depths of history. In the early chronicles of the 
 Hebrews are found injunctions against the taking 
 of usury. But this, undoubtedly, preceded the 
 actual business of lending. Then it was but the 
 occasional lending by any man so inclined to one
 
 4 PRACTICAL BANKING 
 
 who wished to borrow. In other words, it was not 
 yet a definite calHng. 
 
 Banking, crude but genuine, may go back as far 
 as a thousand years before Christ. Prior to that 
 we have no assurance. It is probable that no 
 institutional or private banking took place before 
 that date, for, although it is estimated that man 
 has been in his present physical and mental stage 
 for something like 250,000 or 300,000 years, it is 
 only within the last 5000 or 6000 years that he 
 has accumulated enough experience — handed 
 down mostly by tradition — to enable him to 
 begin cooperative institutions. Taking, then, the 
 familiar clock illustration, if the face represents 
 250,000 years, it has only been possible for banks 
 to exist a httle over a minute now, and the 
 national bank in the United States is not quite a 
 second old. 
 
 Assyria, as early as the seventh and even the ninth 
 century before Christ, possessed a system of commer- 
 cial instruments, which included promissory notes, 
 bills of exchange, and transfer checks, not unlike the 
 modern bank check. As this system was in operation 
 before the use of coined money, these documents usu- 
 ally stipulated for the payment of a given weight of 
 silver or copper. They were not inscribed on paper, 
 but on small clay tablets about the size of a piece pf 
 toilet soap. After the contract had been written in the 
 soft earth, it was baked so as to render it unalterable 
 and indestructible. Such a form of paper naturally 
 could not be subjected to indorsement or acceptance 
 hke modern commercial paper; but this defect was 
 supplied by the presence of witnesses, usually having 
 a religious or legal authority. The original was placed 
 Jov safe-keeping in either the temple or the record room
 
 WHAT IS A BANK? 5 
 
 of the city, inclosed in a clay envelope or case, while 
 copies went to one or both of the contracting par- 
 ties.^ 
 
 Banking flourished in ancient Greece and Rome, 
 though it was not a patrician calling. It exercised 
 nearly all the fundamental functions of later 
 banking, except the issuance of circulating notes. 
 Deposits, payable on demand or at a stipulated 
 time, were received. Sometimes interest was paid 
 on these deposits. Bankers derived most of their 
 profits from the lending of money at a high rate. 
 They also engaged in the exchange of foreign 
 money for that of Athens and Rome, and in the 
 buying and selling of bills of exchange. Many 
 complained of the high rates of interest, but bank- 
 ers declared that they had to charge high interest 
 in self-defense, because of the defective laws, 
 
 ' ^ Charles A. Conant, A History of Modern Banks of Issue, p. 1. 
 Mr. Conant gives the best account of the history of banking on the 
 market. 
 
 It is a fantastic and grotesque picture which one gets by mentally 
 comparing the ancient Assyrian with a twentieth-century New 
 Yorker. Say " Presto! " and suddenly discover yourself an interested 
 onlooker in the capital of some old potentate like Tiglath Pileser II 
 about three thousand years ago. Go into one of the Oriental, square, 
 stone houses and see the lender and the borrower. The lender is 
 clothed in shabby pale-yellow robes, unfaced and, alas, unwashed. 
 His beard is that of Shylock and of every usurer who ever lived. He 
 stands weighing out small blocks of silver to an anxious, nervous 
 little fellow, type of the perennial money-borrower. Now, see the 
 skillful fingers of Shylock guiding his cuneus through the wet clay. 
 "Put the note on in two layers for safety," suggests little Lamb, 
 and Shylock glares. Several funereal figures in spotless white have 
 hovered silently by all the time. See them step up, examine the 
 tablet, verify the weight, accept a cash offering for the gods from 
 little Lamb, and carry away the note to bake it and put it in safe- 
 keeping. Is it possible that the priests and Shylock exchange know- 
 ing looks? No matter! Have we changed so much?
 
 6 PRACTICAL BANKING 
 
 which gave debtors every facility for escaping 
 their obligations. 
 
 Mr. Charles A. Conant^ has very interestingly 
 pointed out that usurious rates led the plebeians 
 to withdraw to the Sacred Mountain in 494 B.C. 
 and to the Janiculum in 278 b.c. This, however, 
 does not seem to have been the fault of the regular 
 money-lenders at Rome, but of the patricians in 
 their business intercourse with the plebeians. The 
 evolution of banking at Rome was the same as 
 everywhere else. "The argentarii (Roman bank- 
 ers) were first money-changers, then receivers of 
 deposits, then lenders at interest, both of their 
 own money and of that entrusted to them, and 
 purchasers of bills of exchange." 
 
 After the fall of the Roman Empire in the West 
 comes a gradual retrenchment of banking policy. 
 This was a natural consequence upon the upset 
 economic and trade conditions. Banking, even 
 as it was known then, was dependent upon com- 
 merce. Chaos followed the conquest ; the arteries 
 of trade, the magnificent Roman military roads, 
 fell into neglect, became infested by robbers, and 
 were little frequented. Secondly, the predatory 
 character of the unsettled and low-rumbling cen- 
 turies, known as the "Dark Ages," rendered 
 private property unstable; hence did away with 
 credit security. These conditions inevitably drove 
 metallic money to shelter. Therefore, we find a 
 financial stagnation and chaotic situation in 
 matters of banking until about the year 1100, 
 when, with apparent suddenness, one encounters 
 
 * Charles A. Conant, A History of Modern Banks of Issue. Mr. 
 Conant cites Gustave Cruchon, Les Banques dans V AntiquiU.
 
 WHAT IS A BANK? 7 
 
 a reawakening of interest in cooperation and 
 institutions. 
 
 Now, when banking does revive in western 
 Europe, it is seen undergoing the same process of 
 evolution which took place in Assyria, Greece, 
 and Rome. It began with the money-changers. 
 Many people have called the famous "Bank of 
 Venice" (1171) the first modern bank; but it 
 exercised none of the modern bank's functions. 
 It is thought that the word "bank" in this case 
 simply refers to two forced public loans, which 
 gave rise to this institution as a convenient 
 method of repayment.^ 
 
 Modern banking, however, may be more 
 directly traced to the money-lenders of Florence, 
 who flourished with a high reputation in the thir- 
 teenth century. In the fourteenth century oc- 
 curred the failure of two of Europe's greatest 
 bankers, and for a time there was widespread dis- 
 trust of the growing profession. But bankers had 
 so far recovered lost ground that as early as the 
 first generation of the fifteenth century there were 
 eighty banks in Florence, although none were 
 under state control. 
 
 There has been a violent dispute as to the 
 derivation of the word "bank" as we know and 
 use it. Some have contended with much specious- 
 ness that our word comes from the Italian 
 "banco" meaning "bench," and refers to the 
 boards which the money-changers of mediaeval 
 Florence used as counters. These show that when 
 a money-lender failed, his bench was broken in 
 
 * It must be noted in a moment that the Bank of England 
 originated in a somewhat similar way.
 
 8 PRACTICAL BANKING 
 
 token of his disgrace. Hence, from the words 
 "banco" and "rotto," "to break," we get our 
 word "bankrupt." Another faction contends, 
 with perhaps even more speciousness, that they 
 have no reference to benches, but mean "pubHc 
 loans," a German word having been substituted 
 for the Itahan.^ 
 
 Toward the end of the sixteenth century 
 bankers began to issue promissory notes payable 
 to bearer, which passed from hand to hand and 
 had a limited circulation. The institutions put- 
 ting such notes into circulation earned the name 
 of banks of issue. In comparatively recent years, 
 
 ^ Charles A. Conant, A History of Modern Banks of Issue, p. 8: 
 "The word 'bank' is derived from the public loans, made by Italian 
 towns, rather than from the business of banking as understood in 
 later times. The usual Italian word for a public loan was ' monte,' 
 meaning a joint-stock fund. The Germans, who were influential in 
 the Venetian forced loan of 1171, had a word for joint-stock fund, 
 'banck,' which meant a heap or mound. This the Italians converted 
 into ' banco ' and used for an accumulation of either stock or money. 
 The word was later adapted for English usage with the indifferent 
 meaning of public loan or stacks of money. Benbrigge, in 1646, 
 speaks of the 'three bankes' of Venice, meaning the three public 
 loans or 'monti.' The issue of paper money directly by the state 
 was spoken of as raising a 'banke' in colonial days in Massachusetts, 
 the word ' bank ' standing for the money rather than the institution." 
 
 Henry D. MacLeod, The Theory and Practice of Banking, vol. 
 I, p. 259: " It is popularly supposed (Gilbart's Practical Treatise on 
 Banking, vol. i, p. 1) that the word Bank comes from the Italian 
 word banco, a bench or table, because the money-dealers or money- 
 changers kept their money piled on benches or tables, whence it is 
 said they were called banchieri. . . . Nevertheless, there can be no 
 possible doubt but that this derivation is a pure illusion; for the 
 money-changers, as such, were never called banchieri in the Middle 
 Ages." 
 
 MacLeod quotes Blackstone as follows: "At Florence, in 1344, 
 Government owed £60,000, and being unable to pay it, formed 
 the principal into an aggregate sum, called, metaphorically, a Mount 
 or Bank."
 
 WHAT IS A BANK? 9 
 
 however, it has come to be more and more gener- 
 ally believed that the issuance of circulating notes 
 should fall within the province of the Govern- 
 ment, or at least of banks under state control. 
 
 Among the very earliest of these banks of issue 
 was the Bank of Amsterdam, which in the seven- 
 teenth century received deposits of gold or silver 
 bullion, for which it issued certificates or receipts. 
 These receipts passed from person to person and 
 served as a somewhat rude circulating medium. 
 They were redeemable at the bank in the metal 
 which they represented through the payment of 
 a small premium. 
 
 This very famous bank was formed in 1609 un- 
 der the direction of the city and was governed by 
 a secret municipal committee. It was ostensibly 
 founded to remedy the chaos which prevailed in 
 the city at the time on account of sharply com- 
 peting money-receivers and on account of the 
 confused coinage. Persons were forbidden, by 
 city ordinance, to place their money in the hands 
 of any deposit-receiver save their personal agents. 
 All bills of exchange were required to be negoti- 
 ated through the new bank. The bank professed 
 not to lend, but to retain in its coffers the actual 
 money deposited, charging a small percentage for 
 safe-keeping. These deposits were represented 
 by receipts which were transferable. Later, the 
 bank accepted deposits of foreign coin at their 
 intrinsic value and issued receipts payable in 
 "gulden." Upon this professed basis the bank 
 had a long and prosperous career. However, it 
 had actually violated its charter within a half- 
 century after its foundation by allowing consider-
 
 10 PRACTICAL BANKING 
 
 able overdrafts, and in the eighteenth century it 
 extended huge loans to the Dutch East India 
 Company. The depositors learned of this in 1790, 
 and in 1794 discovered that it could not pay its 
 liabilities. Its notes fell from a premium of five 
 per cent to a discount of sixteen per cent. It was 
 governmentally dissolved in 1819, and its place 
 was taken by the Bank of the Netherlands, 
 founded in 1814. 
 
 Banking methods seem to have been introduced 
 into England in the seventeenth century by 
 London goldsmiths, who probably borrowed them 
 from the Dutch. It is related that the goldsmiths 
 or "new-fangled bankers," as they were called, 
 soon gained such a foothold that they were able, 
 at considerable profit to themselves, to supply 
 Cromwell with funds in advance of the revenues. 
 At the time, one Sir Josiah Child violently at- 
 tacked the new profession, though, curiously 
 enough, he later became a banker himself, and his 
 firm, with one other, are the only private houses 
 still in existence which were established earlier 
 than the Bank of England. 
 
 The Bank of England was organized in 1694 
 for the purpose of extending a loan of £1,200,000 
 to the Government for public service. The sub- 
 scribers to this fund were to receive eight per cent 
 per annum as interest, and £4000 per year as 
 running expenses for the bank. How this institu- 
 tion has developed into the greatest financial 
 agency in the world, controlling the discount 
 rates of every English banking house and setting 
 the foreign exchange rate, will be spoken of from 
 time to time in the following chapters.
 
 WHAT IS A BANK? 11 
 
 In 1619 the Bank of Hamburg, Germany, was 
 formed on the same principles that the Bank of 
 Amsterdam professed- It had good management 
 throughout. In the different German States, 
 banks were formed from time to time under their 
 own pecuHar laws. In 1875 the Imperial Bank 
 of Germany (the "Reichsbank") was authorized, 
 which is the bank of Germany to-day. 
 
 At present there are about one hundred and 
 forty banks doing business in Germany aside from 
 the government banks. For it must not be 
 thought that the "Reichsbank" is the only gov- 
 ernment bank in the empire, though it is undoubt- 
 edly the controlling financial agency. The five 
 banks having the right of uncovered note issue, 
 with the amounts permitted to be issued, are: — • 
 
 Imperial Bank of Germany $115,000,000.00 
 
 Bank of Saxony 4,000,000.00 
 
 Bank of Bavaria 8,000,000.00 
 
 Bank of Wurttemberg 2,500,000.00 
 
 Bank of Baden. 2,500,000.0 
 
 $132,000,000.00 
 
 About a century after the founding of the Bank 
 of Hamburg, — 1716, to be exact, — John Law 
 organized the Banque Generate in France. It was 
 favored by the Government and seemed to have 
 in store a promise of financial and economic stim- 
 ulation. But Law undertook to affiliate it with his 
 gigantic "Occidental" schemes, and in 1718 found 
 it necessary to ask for governmental aid. The 
 institution became known in that year as the 
 Banque Royale; its notes were guaranteed by the 
 king. But Law's "Mississippi scheme" was too 
 much, and though advantages were offered to
 
 12 PRACTICAL BANKING 
 
 those who paid taxes in bank bills, and though 
 cash money was forbidden, confidence so fell that 
 in 1721 the bank was closed, through the influence 
 of Paris-Duverney, Law's bitterest opponent. In 
 1767, under the eminent economist, Turgot, the 
 bank was revived and existed on a pretty sound 
 basis till it became involved in the issuance of 
 assignats during the Revolution and was closed 
 by the Convention in 1793. 
 
 No financial institution was again attempted 
 until 1800, when Napoleon founded the present 
 Bank of France. A solid foundation was not se- 
 cured until 1806. Its capital at first was 30,000,000 
 francs. It made large loans to the Provisional 
 Government and to the city of Paris in 1848, and 
 was near failure. But the Government came to 
 the rescue, allowing it to stop cash payments and 
 declaring its notes legal tender. 
 
 For nearly fifty years the Bank of France was 
 only one of a number of banks having a note 
 issue. Until 1848 departmental banks of issue 
 existed. These, however, and the Bank of Savoy 
 were absorbed by 1863; since then, the Bank of 
 France has been supreme. Its capital at the pres- 
 ent time is 182,500,000 francs, held by about 
 30,000 shareholders, of whom about 10,000 do not 
 own more than one share. It has had a vigorous 
 administration and is to-day one of the best regu- 
 lated financial institutions in the world. It has 
 one hundred and eighty-eight branches (comp- 
 toirs) and two hundred and seventy-nine agen- 
 cies. Every class has derived benefit from this 
 bank, but none more than have the agriculturists. 
 This is because the bank accepts bills as low as $1
 
 WHAT IS A BANK? 13 
 
 and loans as low as $50. In 1906, it discounted 
 $2,500,000,000 in bills and loaned $500,000,000 
 on securities. Three names are usually required 
 on bills. This bank's deposits are comparatively 
 small, being only $175,000,000. But it has an 
 enormous note issue — $900,000,000 in 1906. In 
 its vaults (1906) it had $575,000,000 in gold and 
 $200,000,000 in silver. On account of its large 
 cash reserve, it can keep discount rates at a 
 rather uniform level. From 1900 to 1906 the 
 rate (3%) did not change. Bank of France notes 
 are more popular as exchange than checks. 
 
 With regard to the banking history of the 
 United States, only a few words are necessary 
 here. Before 1776 there was very little attempt at 
 banking for commercial purposes. Many crude 
 attempts were made, but mainly for the issuance 
 of paper money. However, in 1740, this was 
 stamped out by the extension of the "Bubble 
 Act" to the colonies. The first real bank was an 
 institution organized by the citizens of Penn- 
 sylvania to supply the patriot army with rations. 
 Its bills were not more than promissory notes, 
 signed and warranted by the bank's founders. 
 These were supposed to be guaranteed by govern- 
 ment bills on American citizens abroad for $750,- 
 000. It is doubtful, however, if they could have 
 been negotiated. The attempt was not made. 
 
 In 1781, Congress authorized William Morris to 
 organize the Bank of North America at Phila- 
 delphia. It took over the business of the Bank 
 of Pennsylvania. There was so much doubt as 
 to the right of Congress to carry on a banking 
 business that the institution was incorporated
 
 14 PRACTICAL BANKING 
 
 under the laws of Pennsylvania, and so continued 
 until 1863, when it became a national banking 
 association. 
 
 In the year 1791 the Bank of the United States, 
 with a capital of $10,000,000, was chartered 
 by Congress.^ The United States Government 
 bought one fifth of the stock. Notwithstanding its 
 government patronage, a number of state banks 
 sprang up. But by its superior capital and several 
 branches, the Bank of the United States domi- 
 nated the finances of the country. It refused de- 
 posits of notes of banks which it considered un- 
 sound, and thus tended to keep down "wild cats." 
 
 In 1811 the charter expired and no vigorous 
 effort was made to renew it. In 1816, however, it 
 was renewed with a capital of $35,000,000, of 
 which the Government took $7,000,000. Presi- 
 dent Jackson, by his veto of the second renewal 
 charter in 1832, practically crushed the bank. 
 
 From that time state banks sprang up with great 
 rapidity, so that in 1837 there were 634 of them 
 with a capital of $291,000,000, of which $149,000,- 
 000 was in circulating notes and $127,000,000 in 
 deposits. Loans and discounts amounted to $525,- 
 000,000. The enormous crop of cotton in 1836 
 and the subsequent fall of prices came as a begin- 
 ning of the inevitable crash. In 1837 there was 
 suspension of cash payments. By strict laws of 
 Congress and the state legislatures, the country 
 nearly recovered by 1844. ^ 
 
 ^ It was decided in the famous case of McCulIough vs. Maryland 
 that the Federal Government could operate a bank. 
 
 2 Mr. Conant gives a lucid account of this in A History of Modern 
 Banks of Issue.
 
 WHAT IS A BANK? 15 
 
 The panic of 1837 was the deathblow to the 
 United States Bank. After President Jackson's 
 action, it had operated for a time under the laws 
 of Pennsylvania. Following the downfall of the 
 central bank, the United States adopted the in- 
 dependent treasury system. The New York safety 
 fund plan, upon which our contemporary bank- 
 ing methods in this country are based, was worked 
 out between 1837 and 1844. In 1864, to create a 
 market for its bonds, the United States Govern- 
 ment passed an act providing for the national 
 bank, which was to be a bank of issue. The field 
 was cleared of state banks of issue, as competi- 
 tors, by a prohibitive tax on their circulation. 
 
 With some alterations, the banks thus author- 
 ized are the national banks of to-day. With regard 
 to state banks, it is hard to find general terms to 
 describe them, since every State has its own 
 peculiar banking laws. They have grown at an 
 amazing rate, notwithstanding governmental 
 favor toward the national bank, until there are 
 to-day upward of ten thousand of them in the 
 country. In general, the state banks are regulated 
 very much like the national banks, and exercise 
 practically the same functions, except in the mat- 
 ter of issuing circulating notes and acting as regu- 
 larly designated federal depositories.! 
 
 II 
 
 Fundamentally and largely, the business of the 
 bank is an exchange of credit. Mr. Frank A. 
 Vanderlip, in his Columbia University lecture on 
 
 ^ See Digest of State Banking Statutes, by Samuel A. Welldon, 
 National Monetary Commission Series.
 
 16 PRACTICAL BANKING 
 
 the "Modern Bank," says: "The business of a 
 bank is not in the main the reception of money 
 and its safe-keeping, nor is it the lending of 
 money. The money transactions of a bank are, 
 under ordinary conditions, comparatively insig- 
 nificant; almost its entire business consists of 
 receiving, from its customers, their evidences of 
 indebtedness, which have a narrow currency, and 
 giving to these customers in exchange the bank's 
 evidences of indebtedness, which have a wide 
 currency. These evidences of a bank's indebted- 
 ness are then transferred from one individual to 
 another and from one bank to another. And in 
 that way, the credits created serve the purpose of 
 the medium of exchange, by wliich perhaps ninety- 
 five per cent of the exchange transactions of com- 
 merce take place." 
 
 Then follow these sentences, which will throw 
 rather a new light on the matter for most people: 
 "It is a misconception to suppose that a bank 
 first accumulates deposits and then loans them 
 out to borrowers. The operation is the reverse. 
 The bank first makes a loan to the borrower, 
 and in so doing creates a deposit. The borrower 
 exchanges his evidence of indebtedness for the 
 bank's credit, a deposit balance. The creation of 
 these credits has relation to production; their 
 liquidation is related to consumption. If produc- 
 tion increases, the demand for this exchange of 
 individual credit for bank credit increases; and 
 the indebtedness incurred is liquidated as the ar- 
 ticles upon which the financial credit was based 
 enter into consumption." 
 
 This, then, puts an aspect on the matter which
 
 WHAT IS A BANK? 17 
 
 many have not thought of. Doubtless a large 
 percentage of bank customers, without any partic- 
 ular reflection, imagine their deposits represented, 
 as in the old Bank of Amsterdam, by huge bags 
 and trays of money stowed away in the vaults. 
 
 How a bank makes its money without lending 
 is a question which may not enter these people's 
 minds. They have an idea that, in some mysteri- 
 ous way, all will go well with the bank, that from 
 unknown sources it will be miraculously supplied 
 with funds from which to extend loans. They 
 even conceive that a bank lends them actual 
 money, simply because it offers its credit and 
 promises to redeem in cash, if demanded, any 
 drafts against this credit. As a matter of fact, 
 very few loans are made in cash. This holds true 
 among the larger banks in a greater degree than 
 among the smaller. 
 
 Just so, it follows that most deposits are not 
 made in cash money, but in discounts or credits of 
 other banks, i.e., checks. And in the same sense 
 it is true that the larger the bank, the nearer it 
 comes to depending entirely on the buying of 
 paper and extending of loans for creating deposits, 
 or, in other words, the "exchanging of the custom- 
 er's credit with a narrow currency for the bank's 
 with a wide currency." 
 
 It must not be misunderstood that small banks 
 do not receive a large block of their deposits from 
 cash sources, for they do; but averaging the 
 deposits of the banks of the country, it will be 
 found that probably far over fifty per cent of the 
 deposits consists of those created by extension of 
 credit.
 
 18 PRACTICAL BANKING 
 
 Now, expanding somewhat Mr. Vanderlip's 
 last statement, we may see directly how the crea- 
 tion of credits relates to production, and liquida- 
 tion of debts relates to consumption. Take a 
 merchant who wants to buy a supply, say, of 
 cotton or woolen goods. It may, for many reasons, 
 be inconvenient for him to pay cash for them out 
 of his assets — in fact, he probably keeps most of 
 his cash working; or he may venture somewhat 
 beyond his present assets, in which there is surely 
 nothing illegitimate, for only thus is business 
 progress made. 
 
 So he goes to his bank, with which he probably 
 has an arrangement for credit, and exchanges his 
 note, or discounts obligations of others in his 
 favor, for a credit on the bank ledger. 
 
 It should be parenthetically observed here that 
 banks do not ordinarily tie up their credit in per- 
 manent or long-time investments, as they must 
 arrange the maturity of paper so that there is a 
 continual stream of repayment. 
 
 Now the bank's credit to the merchant has 
 made it possible for the manufacturer to produce 
 the goods. It might have been simpler to have 
 taken the case of the manufacturer in the first 
 instance, but the merchant was chosen to show 
 that it works back to the production in any event. 
 Under normal conditions, the merchant disposes 
 of his purchases in due time, and, with the pro- 
 ceeds, is enabled to liquidate his indebtedness at 
 its maturity. Thus is production directly related 
 to the extension of credit, and consumption to the 
 liquidation of debt.
 
 WHAT IS A BANK? 19 
 
 III 
 
 After what has been said, it must be plain that 
 a bank cannot hold cash against the total of its 
 deposits, since so many of its deposits are created 
 by the extension of a credit on its books, in which 
 transaction no cash enters. And if it only received 
 cash deposits, for which it actually held cash in 
 reserve, it could only lend out its capital stock; 
 in which case where would be the necessity of 
 depositors at all? 
 
 As a matter of fact, a certain volume of cash is 
 held in reserve against all probable demands; for 
 extraordinary demands the bank depends on its 
 ability to call in loans and obtain cash from other 
 banks. All national banks and most state banks 
 are required to carry a certain amount of cash 
 reserve. 
 
 Cities and towns in the United States under the 
 National Banking Act, are divided into three 
 classes, as regards national banking reserves: 
 (1) central reserve cities; (2) reserve cities; (3) 
 those cities and towns not included under the 
 two previous heads. There are three central re- 
 serve cities — New York, Chicago, and St. Louis 
 — in which, by United States statute, national 
 banks must keep an amount of cash reserve in 
 their vaults equal to twenty-five per cent of their 
 deposits, not including deposits of public money, 
 i.e., federal deposits. Banks in these cities may be 
 used as depositories of a certain part of the reserve 
 of other banks. Banks in forty-seven reserve cities 
 must keep a reserve of twenty-five per cent of their 
 deposits, but one half of it may consist of deposit
 
 20 PRACTICAL BANKING 
 
 balances in central reserve cities. All other na- 
 tional banks need carry a reserve of only fifteen 
 per cent, of which two fifths must be carried in 
 their vaults, while three fifths may consist of de- 
 posit balances in either central reserve or reserve 
 cities. A national bank's reserve has to consist 
 of gold or silver, or its equivalent.^ 
 
 From this it may be seen that banks could not 
 redeem all their deposits in cash on demand if 
 there should be a sudden demand for all at one 
 time. This reflects not at all on the institutions, 
 for every customer is in just the same position, 
 else he would not borrow. If every bank should 
 demand immediate payment of all its credits, 
 how many customers could comply.? Since few 
 could, the matter of demand of payment should 
 be cooperative. The customer should be as fair 
 with the bank as he expects the bank to be with 
 him. Too many people cannot understand why 
 perfectly solvent banks are sometimes tempora- 
 rily embarrassed. This lack of consideration is 
 one of the chief reasons. Many a good bank goes 
 down undeservedly because of this lack of cooper- 
 ation. 
 
 Banks conduct their business — and this is 
 surely a matter of common knowledge — solely 
 for lucrative results. They are not philanthropic 
 institutions. They are selfish and make profits as 
 large as possible. Therefore, it is perfectly reason- 
 able to believe that they will lend as much as 
 possible, still retaining a safe margin for demands. 
 
 It is not the purpose of this book, however, to 
 
 * Since reserve requirements will be readjusted under the Federal 
 Reserve Act, it will be well to refer to chap, xx for this information.
 
 WHAT IS A BANK? 21 
 
 disparage the value of a required reserve. It is 
 one of the most salutary provisions of our banking 
 system. It prevents dangerous inflation, which 
 would most certainly take place unless there 
 were this necessary check. It is by no means 
 advised that every bank customer should trust 
 his banker blindly, or even trust him at all. But 
 the banker ought to be shown every reasonable 
 consideration which one business man looks for 
 from another. 
 
 To round off this discussion of the reserve, and 
 
 to give an idea of the comparatively little cash 
 
 in the country, a few figures are appended. It 
 
 simply goes to prove our earlier remarks in regard 
 
 the to the most of our business, which is conducted 
 
 that iJong lines of credit. Cash, after all, has the same 
 
 At thfc'ity in business that it has in the clearing house 
 
 announcecin foreign exchange. It merely represents 
 
 c^^g^^te^jjjlifference between debits and credits. 
 
 presume tte figures show the amount of cash money in 
 
 now after , . 
 
 Germany aiuitcd States on January 3, 1910: — 
 
 territory t' 
 
 KeliCid coin, including bullion in the 
 
 The Sh Treasury. Of this about one half 
 
 demned ^g^g jjj j-j^g Treasury to secure gold 
 
 K^TGse certificates $1,638,108,821 
 
 Stat" Standard silver dollars. Of this four 
 
 fifths was to secure silver certificates. . . 564,334,719 
 
 Subsidiary silver 162,801 ,137 
 
 Treasury notes of 1890 3,942,000 
 
 United States notes 340,681,016 
 
 National bank notes 710,354,253 
 
 Total .$3,426,221,946 
 
 This total was just $2,380,102 less than on 
 December 1, 1909, or about thirty days previous.
 
 22 PRACTICAL BANKING 
 
 However, January 3, 1910, shows $6,797,402 less 
 in gold than on December 3, 1909. This was prob- 
 ably caused by the redemption of many gold 
 certificates with gold bars and coin. About this 
 time, Americans had to pay an immense lump of 
 dividends on their securities held by foreigners. 
 If the exchange market was short, as it usually is 
 at this time of the year, it was necessary to export 
 gold to pay our debts. Therefore, a major portion 
 of the difference in gold for the two dates was 
 probably exported coin and bullion. But six and 
 three quarter millions is not a great sum for pay- 
 ing our obligations at dividend time, when we 
 read on April 25, 1910, that five New York banks 
 in one day engaged to ship over the ocean $12,- 
 500,000. The truth is, the six and three quarter 
 millions was merely the difference between our 
 available credits and what we owed abroad. 
 
 The silver and national bank note accounts 
 gained January 3, 1910, $4,457,800, or just enough 
 to offset the loss in gold, a slight decrease in 
 treasury notes of 1890, and leave the total slump 
 of $2,380,102. 
 
 The amount of money in circulation of January 
 3, 1910, was $3,122,154,538, as against $3,092,- 
 315,703 for January 2, 1909, as against $816,266,- 
 721 on January 1, 1879. The amount of money 
 held in the Treasury as cash assets of the Govern- 
 ment on January 3, 1910, amounted to $304,067,- 
 408. This did not include, however, government 
 deposits in national banks amounting to $35,- 
 324,066.85.
 
 WHAT IS A BANK? 23 
 
 IV 
 
 Since the lending of credits is so important a 
 part of the bank's business, it is well to give a 
 little time to an explanation of the principal 
 methods of extending credit, namely, commercial 
 paper and secured paper. With regard to ma- 
 turity there are two divisions, — time and de- 
 mand loans. 
 
 Probably two thirds of the credit extended in 
 the United States, by and large, consists of com- 
 mercial paper. This is simply the promise of an 
 individual, group of individuals, or corporation to 
 pay a certain sum either on demand or at some 
 definite time. This paper is made in settlement of, 
 or to provide funds for, some commercial trans- 
 action, hence the name "commercial." A note for 
 a stock of dry goods or for a car of wheat would 
 be a piece of commercial paper. Although it is 
 true that a large part of this paper is given with- 
 out collateral security, this should not be taken 
 as a primary distinction. The real distinction 
 between commercial paper * and ordinary loans is 
 that the former is considered a piece of merchan- 
 dise,^ so rendered by the fact that it liquidates 
 itself, while the latter consist(l) of "receivables" 
 taken in the ordinary course of business for debts, 
 and (2) of loans based on collateral. 
 
 ^ Just what will constitute " commercial paper" under the Fed- 
 eral Reserve Act is in doubt. (See chap, xx.) But genuine com- 
 mercial paper should be self-liquidating, that is, represent trans- 
 actions which will before maturity of the note put sufficient cash 
 in the obligee's hands to pay it. 
 
 ^ Hence, one occasionally hears it called "mercantile" paper in 
 some banks.
 
 24 PRACTICAL BANKING 
 
 A secured paper is a note whose payment is 
 guaranteed by collateral, such as stocks, bonds, 
 notes, and, in some cases, mortgages on real 
 estate. It would be safe to say that in this class 
 of loans, the banker depends less on the signer 
 than on the collateral. But this is natural, for 
 such loans are the more important ones, so far as 
 individual amounts are concerned, and individual 
 and personal promises are not usually considered 
 acceptable. The larger the city and the larger the 
 bank, the more impersonal become these trans- 
 actions. The amount loaned on collateral varies 
 as the reputation of the security. It is customary 
 to demand collateral at least twenty per cent in 
 excess of the amount of the loan. Sometimes, as 
 in the case of real estate, more excess is required, 
 while at other times, in such cases as United 
 States gold, interest-bearing bonds, less excess or 
 none at all is required. 
 
 Under the new Federal Reserve Act, national 
 banks, hitherto denied the privilege, may make 
 loans on farm lands, provided the lending banks 
 are not located in central reserve cities. Generally 
 speaking, however, loans on real estate are con- 
 fined to savings banks and trust companies. 
 
 It is imperative, as we have seen, that the 
 banker so arrange his paper that it is constantly 
 maturing. To be sure, the credits are immediately 
 reloaned, but for the sake of good banking, repay- 
 ments must be so pouring in that, in case of an 
 unexpected heavy demand, within a few days the 
 bank could gather enough, together with its call 
 loans, to meet the emergency. So it is not custom- 
 ary to make long investments, beyond a certain 
 small percentage.
 
 WHAT IS A BANK? 25 
 
 The call loan of New York is distinct from that 
 of other parts of the country and yet it probably 
 illustrates the principle of call or demand loans 
 better than any other. The New York call loan 
 represents a sum loaned out, usually on the secur- 
 ity of stocks or bonds. It may be demanded at 
 any time by the lender or paid at any time by 
 the borrower. There is, however, a long-observed 
 custom of neither demanding nor tendering pay- 
 ment after one o'clock of a business day. 
 
 When there is a financial stringency, it will be 
 observed that the great bankers take more call 
 loans than usual, though it be at a lower rate. 
 They prefer to have the option of immediate col- 
 lection in case of emergency. So the prices charged 
 for call money vary from day to day as there is 
 greater or less demand than supply. 
 
 Many firms take advantage of the call money 
 market for a part of their borrowing. For in- 
 stance, they carry one third to one half of their 
 line of credit in time loans, and depend on favor- 
 able chances on the call market for the balance, 
 as it is needed. 
 
 Call loans are made in two ways: first, in pri- 
 vate, that is, at the lending bank; and second, at 
 the "money post" on the Stock Exchange. 
 
 Of the first, there is nothing to remark beyond 
 the fact that the prospective borrower with his 
 security makes a loan from the bank ofifering the 
 best inducements. 
 
 The " money post " on the Stock Exchange floor 
 is the place where the representatives of the banks 
 and the brokers meet at eleven o'clock each busi- 
 ness day. Banks have at that time heard from the
 
 26 PRACTICAL BANKING 
 
 clearing and have calculated whether they can 
 lend or must call in. On the other hand, the brok- 
 ers probably know whether they have a surplus 
 or need to borrow. In about an hour the transac- 
 tions are largely over. However, around two 
 o'clock there is a little bustle, as unexpected 
 money may have come in or unexpected demands 
 have been made. 
 
 Lending money and issuing circulating notes, 
 then, in a very concrete and tangible way, are the 
 important functions of the bank. These, indeed, 
 are the two functions — and of the two, lending 
 is the greater — upon which the entire banking 
 theory rests. The other functions are merely 
 incidental. As Mr. Vanderlip has shown, banks 
 do not go out and gather in deposits in order to 
 lend; but they make a loan, by which process 
 they create a deposit. Of course, this could not 
 apply to the odds and ends of loans, where a 
 person is paid in cash for the proceeds of his paper, 
 but it is a general rule for the making of loans 
 and amassing of deposits. Deposits are not a 
 bank's desideratum. They are but an incident, 
 a necessary incident, however, to the end of lend- 
 ing more money than the capital stock. 
 
 Looking back over the centuries which have 
 elapsed since the uncouth savage bartered a 
 wild boar's hide for a robust female to cheer his 
 hut; following the ever-ameliorating attempts at 
 banking among the Greeks and Romans; among 
 the Florentines, who were so honest — it is said — 
 that a ruined banker's bench was broken; among 
 the ever-confiding but wrathful Dutch who were 
 swindled by the Bank of Amsterdam; among the
 
 WHAT IS A BANK? 27 
 
 suspicious Englishmen, one of whom thought the 
 new-fashioned bankers preposterous, though he 
 consented to become one himself, — up to the 
 present day with its fine science of finance, we are 
 constrained to feel proud of the race for this 
 achievement alone. To-day our banks unite the 
 aesthetic with the practical. Great marble build- 
 ings, showing the result of centuries of architec- 
 tural progress, are the homes of great financial 
 institutions, reflecting the outcome of centuries 
 of advance toward an*ideal for facilitating busi- 
 ness and making comfort and happiness more the 
 province of all. And to-day's accomplishments 
 are but prophetic fingers pointing to a greater 
 and a better future.
 
 CHAPTER II 
 
 THE STOCKHOLDERS AND THE BOARD OF 
 DIRECTORS 
 
 As we now turn from the foregoing brief 
 account of the beginning of banking and a few of 
 its intricate details to a ghmpse into the different 
 departments, as they are every day, it will be 
 pleasant to fancy ourself^es visiting personally 
 the several officers and employees. With true, 
 financial suavity they will receive us and take 
 great pleasure in explaining the mechanics of their 
 system. It is even possible that occasionally they 
 may take us into their confidence and relate one or 
 two " inside " secrets. But we must not expect too 
 much of this, for, after all, we are on a tour of in- 
 spection of the machinery of banking, and shall 
 not attempt to expose the results of unscrupulous 
 men's tampering with the public trust. 
 
 Why do men organize a bank.^^ First, to increase 
 the facilities for handling a huge credit business, 
 such as ours, and to improve the service by a 
 wholesome competition. Second, to make money, 
 to use their capital in a fashion that will make it 
 "spin out" the farthest. Both these, after all, 
 resolve themselves simply into the American 
 magic passwords, "Make money." So we may 
 look upon the bank as a selfish, not a benevolent, 
 institution. And oftentimes, alas, it is a clever 
 means of exploiting other people's money. But let 
 us consider it here as a square, honest organiza- 
 tion, formed with some idea of cooperation.
 
 STOCKHOLDERS AND DIRECTORS 29 
 
 When a group of men set about to organize a 
 bank, capital stock is one of the first considera- 
 tions. The amount of capital is decided upon, and 
 a certain block of it is put on the market for pur- 
 chase by the public. This may be because they 
 are not able to subscribe it all themselves or — 
 which is more probable — it may be because of 
 the desire to popularize the new company. Thus 
 a portion of the capital stock becomes the prop- 
 erty of a scattered number of people. This is one 
 means of exploiting other people's money, for 
 their scattered and unorganized voice is of little 
 avail, even if combined they own more than one 
 half of the stock. Those who subscribe stock in 
 the bank pay either in cash or on short time. 
 Under most banking laws, they may not exercise 
 the functions of stockholders until they have paid 
 for their shares. Almost the only features of the 
 business in which they actively participate are 
 the election of directors and the reception of divi- 
 dends. The first is a duty; the second, a sweet 
 and pleasing reward of duty well performed. 
 
 Shareholders may authorize the change of 
 name or location of their associations, but this is 
 of little general importance, since the occasion 
 for its exercise rarely arises. They also have the 
 power of allowing the reduction or increase of 
 capital stock. They are liable for all of the debts 
 of the bank, but usually only in the proportion 
 which their stock bears to the total capital. 
 
 Ordinarily, the meeting of the stockholders for 
 the election of directors takes place once per an- 
 num. This meeting is announced generally in 
 several newspapers, and notices of it are mailed to
 
 30 PRACTICAL BANKING 
 
 each qualified participant. The meetings are 
 called at some definite time, provided for by law 
 or by the rules of the association. A majority of 
 the stock is required, either by the presence of its 
 owner or by proxy, to elect. After the directors 
 are chosen, the responsibility of the stockholders 
 is removed and they resume their ordinary voca- 
 tions with an eye on the dividend month, hoping 
 to reap the fruit of their wisdom in an abundant 
 income from their stock. But we may assume that 
 the scattered holdings of stock have little voice 
 in these elections; in fact, rarely attend. 
 
 It may be noted here that, in a great number of 
 instances, a comparatively small coterie of men 
 own a majority of stock; and these men will, of 
 course, constitute the board of directors. The 
 bank is a corporation, — one owned by a large 
 number of people, but actually controlled by a 
 few shareholders, who possess perhaps more than 
 fifty per cent of the stock. However, it is demo- 
 cratic to have the stock distributed among many 
 people; it advertises and popularizes the associa- 
 tion. 
 
 In the case of a newly organized bank, the first 
 oflBcial act of the board of directors, after taking 
 the oath of office and selecting a chairman, is to 
 draw up a set of by-laws and regulations to govern 
 their own procedure and the conduct of the bank. 
 This is often enough submitted to the stockholders 
 for ratification. As soon as possible must come the 
 selection of officers for the bank, — the board's 
 personal representatives. These officers are a 
 president, a cashier, and whatever others it may 
 be necessary to have.
 
 STOCKHOLDERS AND DIRECTORS 31 
 
 The general policy of the bank is in the keeping 
 of the directors. They meet every so often, and as 
 they command, the oflBcers must do. Of course, 
 it would be impracticable for the entire board to 
 try to manage the details of the association. In 
 this business, as in every other, the executive 
 power over affairs of everyday routine should be 
 single, not multiform. 
 
 Yet there is a great variation in the degree of 
 supervision which the directors assume. In some 
 banks they meet as often as three or four times a 
 week, consider every application for credit, and 
 work out in detail plans for the conduct of the 
 business. In others, they are not nearly so active 
 and trust a great deal more to the business ability 
 and integrity of their president. In general, the 
 distinction between the former class and the latter 
 is the distinction between a large and a small 
 bank. 
 
 However, couched in general terms, the duties 
 of the board are largely "legislative, appointive, 
 supervisory, or advisory." The frequency of its 
 meetings varies greatly in different banks. One 
 meeting a year, or two, at which dividends are 
 declared, officers elected, and the past year's prog- 
 ress reviewed, is considered sufficient in some 
 institutions; in others, as already said, a meeting 
 occurs several times weekly. The larger the asso- 
 ciation, as is evident, the more necessary are these 
 meetings. But it has been the practice of the 
 Comptroller of the Currency to try to make 
 directors really direct, that is, meet regularly and 
 as often as necessary. For their attendance the 
 directors are paid from $2.50 to $20 per meeting.
 
 32 PRACTICAL BANKING 
 
 In order to insure prompt attendance, some cor- 
 porations place the fees on the table before each 
 director's place; five minutes after the meeting is 
 called to order, those who are present divide the 
 absentee directors' fees among themselves. This 
 plan has been found to have a marvelous effect 
 in insuring prompt attendance on the part of 
 directors. 
 
 By reason of the trust reposed in him, every 
 director's duty demands that he be absolutely 
 conscientious and that he always act in a manner 
 best calculated to meet the needs of the bank as a 
 whole. 
 
 The board of directors is the source of all mo- 
 tive power in the bank's operation. Upon the 
 directors, finally, depends whether it will succeed 
 or fail. How important that they be men of in- 
 tegrity and honor ! As a rule, the directors of a 
 bank are men of unquestioned ability. If we were 
 to run through the names of the board of some 
 huge New York institution, for instance, we should 
 probably find railroad magnates, mine operators, 
 professional men of note, and wizards of many 
 branches of commerce and trade. When they se- 
 lect the officers of the bank, the directors employ 
 their best judgment. The attitude, ability, and 
 general experience of the president and cashier 
 will count for nearly everything in the earning 
 of profits. Likewise their honesty and trustworthi- 
 ness in carrying out orders, their fidelity to duty, 
 and their high reputation for reliability will be 
 items of vast importance. 
 
 Since the bank must exist and subsist on pub- 
 lic patronage, it is not hard to discover that an
 
 STOCKHOLDERS AND DIRECTORS 33 
 
 officer should either be a man already popular or 
 one hkely to become popular. Other things being 
 equal, a prominent man is preferable. Sometimes 
 a very prominent man, who cannot act, allows his 
 name to be used as president for the prestige it 
 gives his bank. Now, as has been already seen, 
 the power granted the president depends largely 
 on local conditions and the attitude of the direc- 
 torate. Usually, however, the president will be 
 the instrument of the board. He will have much 
 power and much will be left to his discretion, but 
 the board will hedge him in by its resolutions. 
 
 In selecting a cashier, practically the same 
 requisites are asked for. He must be a man of 
 executive talent and one with practical and eco- 
 nomical views. Also he ought to be willing to 
 subordinate his ideas to those of the president. 
 This insures frictionless running for the bank. 
 
 Directors are supposed to keep vigilant eyes 
 on the officers for the protection of stockholders 
 and depositors. This vigilance extends to actual 
 auditing, in large banks, at least. The writer 
 knows of many banks, for instance, where every 
 year a committee of directors counts all of the 
 cash in the bank and, approximately, at least, 
 makes it balance with the general bookkeeper's 
 record. The board also watches "Liabilities and 
 Resources," seeing that resources are properly 
 apportioned. For instance, "Loans and Dis- 
 counts" might run above a safe figure and need 
 reducing, or — for some reason — "Reserve" 
 might be too low and need increasing. On the 
 other hand, the executive may sometimes have to 
 be gently prodded for overconservatism, amount-
 
 34 PRACTICAL BANKING 
 
 ing even to sluggishness. Also the bank may not 
 be growing and expanding as it should, or its serv- 
 ice may not be satisfactory; the board sets about 
 to correct the defects. This may extend even to 
 displacing officers and employees. 
 
 The directors lend stimulus to the business. 
 Their influence brings desirable patrons and adds 
 prestige to the institution. They give additional 
 security to the depositors; it is harder to find ten 
 dishonest men than one. Their usefulness con- 
 sists in the very diversity of their vocations. 
 Discussion and varied experience will always 
 evolve better general working principles than the 
 reflections of a single mind. They are the repre- 
 sentatives of the stockholders, and act as checks 
 on the conduct and manipulations of the oflBicers.
 
 CHAPTER III 
 
 THE PRESIDENT 
 
 The primary power in the government of the 
 bank Hes, of course, in the stockholders. But it 
 would be the height of absurdity to contemplate 
 the entire body of shareholders trying to manage 
 the bank personally. The directorate is small; it 
 may be composed of only five men. But even the 
 directors are busy men, engaged so deeply in com- 
 mercial or professional activities that they could 
 not find time personally to conduct the bank's 
 transactions. Further, it is a very well-believed 
 doctrine that many hands in the personal control 
 of an enterprise tend to disrupt it rather than to 
 bind and cement it. 
 
 These complications are anticipated by our 
 national and state banking laws, which require 
 the election, by the stockholders, of a directorate, 
 and by it, of a suitable number of ofiicers. The 
 directors have general control of the policy of 
 the bank, while the officers personally carry out 
 these policies and work out the details. However, 
 it must be understood that the subordinate officers 
 are under the direct command of the president, 
 who is chief executive and plans the large features 
 of the bank's work. 
 
 The president is, then, the personal representa- 
 tive and, after a fashion, the mouthpiece of tlie 
 directorate, primarily, and of the stockholders, 
 indirectly.
 
 36 PRACTICAL BANKING 
 
 There are all sorts of presidents and presiden- 
 cies. They are found in the range from the little 
 two-clerk bank at the cross-roads, through the 
 gamut of town and city banks, to the largest 
 institutions of the metropolis. It is natural that 
 the duties and requirements of a president, the 
 capital of whose bank is $10,000, will differ funda- 
 mentally and in detail from those of the president 
 whose bank is capitalized at $25,000,000. In the 
 little bank, while crops are growing and business 
 is dull, the president is likely to take down his 
 faithful breech-loader and go out for a day's hunt. 
 In the great city, he is constantly at his desk, 
 poring over schemes for making a little shorter 
 cut than a competitor. He carries his business 
 to his home and to his bed. For perhaps a month 
 in the year, he may steal away for a hurried trip 
 to Europe or a scurry over the western wonders 
 of our own land. But even there, he is in constant 
 communication with his institution, and not in- 
 frequently directs some of its important functions. 
 
 If the bank is new, he organizes the work. He 
 has so many vice-presidents, a cashier, and so 
 many assistant cashiers at his disposal to begin 
 with. Provision is also made for the employment 
 of a suitable number of clerks. He puts the cashier 
 in charge of the clerical force generally. 
 
 In small banks the president's duties include 
 many of those held by active vice-presidents and 
 cashiers in larger ones. In this case he is much 
 nearer the employees and therefore can attend 
 to many more details of the business. 
 
 In a nutshell, the president seems to be look- 
 ing out for the growth of the bank along proper
 
 THE PRESIDENT 37 
 
 and legitimate lines ; seeking to increase the total 
 resources; endeavoring to expand it, making it 
 huge, powerful, and rich. His task is to make a 
 maximum dividend for the stockholders, but by 
 legitimate methods always. It seems that his 
 ability to do this is incompatible with too much 
 devotion to the details of the actual clerical force. 
 It is an old-fashioned idea, now almost eliminated 
 in the largest institutions, that the president 
 should run every wheel in the bank and see that 
 each is properly oiled. Rather, it seems the better 
 plan to have some capable and responsible sub- 
 ordinates who can be trusted to attend to the 
 smaller transactions and to the routine. This idea 
 is prevalent among the great financial houses of 
 the country. In their case, the president simply 
 cannot devote his time to see that every pass- 
 book is properly balanced. 
 
 In his effort to expand the bank and earn goodly 
 dividends, the president meets his greatest diffi- 
 culty and principal duty — that is, in the grant- 
 ing of loans to banks, corporations, and individ- 
 uals. In the first chapter the different kinds of 
 loans have been explained in some detail. 
 
 The systems of extending their credit are per- 
 haps the most individualistic and variant features 
 of different banks. In some, the directorate is a 
 powerful and active factor, which passes on every 
 application for credit. In such a case there is a 
 meeting of the directors once, twice per week, or 
 perhaps daily. The chairman of the board becomes 
 a potent officer. In other institutions the direc- 
 torate is much less active, contenting itself with 
 periodic reviews of the bank's progress, giving 
 
 38SG00
 
 88 PRACTICAL BANKING 
 
 general advice to the president and allowing him 
 the power of granting loans. With the first type 
 of association, we have dealt in some detail in the 
 preceding chapter. We shall busy ourselves for 
 the time being with the latter type, i.e., where the 
 president has the loan-granting power. 
 
 It would be impossible, in a bank of any con- 
 siderable size, for the president to pass on every 
 loan and discount. A large number of these are 
 put in the hands of vice-presidents or cashiers. 
 However, it is considered proper for the president 
 to conduct negotiations on most applications for 
 credit from new customers. Likewise, he feels it 
 incumbent upon him personally to attend to the 
 requests of distinguished or prominent patrons. 
 
 In the granting of loans, especially to new cus- 
 tomers, the president or his assistant must observe 
 many precautions, for there is no business so haz- 
 ardous as the lending of other people's money. 
 Since there is such hazard, it is necessary that the 
 lender feel amply justified in making the loan, 
 either by virtue of the good credit of the signer 
 or indorser, or because of the excellence of the 
 security. And one who is unknown should never 
 complain if the bank demands plenty of good 
 security of him. It is customary to require gilt- 
 edge security from 100 to 120 per cent on $100, 
 and, of course, the ratio increases as the security 
 offered is lessened in value. 
 
 Another item! By reason of the hazard of 
 money-lending — which is greater than in most 
 other businesses — it ought not to be held against 
 a bank that it charges a reasonable rate of interest. 
 This rate must necessarily differ as the security
 
 THE PRESIDENT 39 
 
 and signer are the very best or only medium, or 
 as the discountee may or may not do a large 
 volume of business at the bank. Also the ratio of 
 supply to demand of credit is bound to play an 
 important part in determining the interest or dis- 
 count rate. 
 
 From A. B. Johnson's treatise on banking, the 
 following excellent commentary is taken : — 
 
 A banker should possess a sufficiency of legal knowl- 
 edge to make him suspect what may be defects in prof- 
 fered security, so as to submit his doubts to authorized 
 counselors. He must, in all things, be eminently prac- 
 tical. Every man can tell an obviously insufficient 
 security as well as an obviously abundant security; 
 but neither of these constitutes any large portion of the 
 loans that are offered to a banker. Security practi- 
 cally sufficient for the occasion is all that a banker can 
 obtain of the greater part of his loans. If he must err 
 in his judgment of securities, he had better reject fifty 
 good loans than make one bad debt. But he must 
 endeavor not to err on the extreme of caution or the 
 extreme of temerity ; and his tact in these particulars 
 will, more than any other, constitute the criterion of 
 his merits as a banker. 
 
 Of the credit of a bank, a certain part is in- 
 vested in very short-time and demand loans to 
 provide for extraordinary demands. Most, how- 
 ever, is in two, three, and four months' paper. 
 The amount for longer time than four months 
 will not exceed a very small per centum of the 
 whole, for good banking principles demand a con- 
 tinual process of repayment and relending. 
 
 If there is any one thing that distinguishes a 
 wise president from a foolish one, it is the manner
 
 40 PRACTICAL BANKING 
 
 in which he has the maturing paper collected. 
 Stacks of past-due and uncollected paper speak 
 eloquently of mismanagement, of bad loans, per- 
 haps, but more frequently of vacillating and lax 
 methods of enforcing payment. The successful 
 president so orders things that there shall be no 
 dilly-dallying about pressing collection. In cases 
 of aggravated obduracy with regard to payment, 
 the paper is turned over to an attorney for suit at 
 law. 
 
 Another item which the banker watches most 
 carefully is overdrafts. A certain small percent- 
 age of overdrafts must and will creep in. It is 
 either impossible or impolitic to refuse payment 
 of some checks, even though the account may 
 not, at the time, be sufficient to cover the checks. 
 But the sagacious banker keeps these as low as 
 practicable. An overdraft is equivalent to a loan 
 without interest or security. Most banks have 
 bridged this difficulty by making a temporary 
 loan to cover the overdraft, exacting security 
 where it is feasible. 
 
 The president of a great bank has no more of a 
 lease on life than the beggar, and although the 
 heavens themselves may blaze forth his death, 
 yet he can no more defer its inevitable coming 
 than an ant. It therefore behooves him to keep 
 his work so ordered that he may leave the bank 
 each night as though it were his last. If he does 
 not, he is not faithful to his high trust, he is not 
 true to himself or to his friends. For a great 
 bank, though it stops to drop a tear on the fallen 
 chief's grave, cannot swerve from its course for 
 its own safety. There are so many things which.
 
 THE PRESIDENT 41 
 
 if left undone overnight and death should call, 
 could not be adjusted so nicely, if at all. 
 
 The president represents his institution before 
 the public. Popularly, he is almost conceived to 
 be the hank. He has many means of being useful 
 besides guarding the executive duties of the bank. 
 His personal influence and popularity will be of 
 aid in getting desirable customers for the bank, 
 both corporate and individual. His occasional 
 visit to and personal acquaintance with the larg- 
 est of the bank's dealers are of infinite service. 
 
 The president's position in the bank may be 
 illustrated by a rather homely simile. He may be 
 likened to one of the pilots on the ferry-boats 
 which cross and recross the Hudson at the lower 
 end of New York City. Through the swirling 
 water, keeping a sharp lookout for craft of every 
 description, blowing the hoarse whistle occasion- 
 ally to warn some little tug, the pilot guides his 
 heavy boat. Above his head are the general rules 
 which he must observe — the United States 
 Government regulations. One moment's neglect 
 of his duty would be sufficient to send his boat 
 crashing into some danger. But day and night, 
 winter and summer, he stands skillfully at the 
 wheel, and brings his boat safely to her destina- 
 tion. 
 
 The vice-president's position is hard to gener- 
 alize. As a rule, the position is an honorary one. 
 In some cases, however, where the president is 
 an honorary dignitary himself, the vice-president 
 may be the executive head of the bank. In the 
 larger banks, active vice-presidents tend to spe- 
 cialize in certain of the executive functions. For
 
 42 PRACTICAL BANKING 
 
 instance, the duty of one may be to visit the 
 bank's correspondents or to receive their repre- 
 sentatives when they call to pay their business 
 respects; of another, to act as a specialist in the 
 granting of certain lines of credit — and so on !
 
 CHAPTER IV 
 
 THE CASHIER 
 
 The cashier is subordinate in rank to the presi- 
 dent. He has direct charge of the force of em- 
 ployees. If the president's office is the great brain 
 of the bank, certainly the cashier's office is the 
 great arm. 
 
 Ordinarily, the cashier has only such duties as 
 are necessary to move the machinery of the bank, 
 but, in the absence of the president, he sometimes 
 assumes the highest executive functions. He 
 keeps the men in line, so to speak, and adjusts 
 all local difficulties. To him the men come with 
 their problems. To him they report progress or 
 failure. He personally supervises their work. 
 
 Often, during the day, things arise to be settled, 
 over which tellers or other clerks have no author- 
 ity, but which do not properly come under the 
 president's duties. The cashier undertakes to 
 adjust such matters. Examples of these may be, 
 the question of cashing foreign checks for persons 
 carrying no account, or the granting of a tempo- 
 rary overdraft to a good customer. 
 
 In a great banking institution of the metrop- 
 olis, the duties of the cashier become very com- 
 plex and taxing. He has so many tasks crowding 
 in upon him, and so much to look after, that it is 
 necessary to provide him with assistants, who 
 form a grade still nearer the rank and file and 
 have jurisdiction over special phases of the work.
 
 44 PRACTICAL BANKING 
 
 To take a supposititious case: say one assistant 
 cashier is in charge of the bank's bookkeeping; 
 another of the tellers; a third supervises exchange, 
 collections, and perhaps the note department; a 
 fourth opens accounts and is a lobbyist — that is, 
 he has a desk in the lobby, greeting customers, 
 when it is good policy to do so, and performing 
 other duties which may arise. It should be paren- 
 thetically stated that many banks designate one 
 of the clerical force to open accounts, but in a 
 bank of moderate size, it has proved very satis- 
 factory to attach this duty to the cashier or one of 
 his assistants. 
 
 In that very important branch of a bank, its 
 relations with other banks, the cashier is always 
 active. He carries on most of, the ordinary corre- 
 spondence with them, makes arrangements for 
 the advantageous handling of items, secures ac- 
 counts and rights differences which may come up 
 between his bank and another. 
 
 Another duty which requires much time from 
 him and his assistants is the signing of checks and 
 other documents. That common instrument, the 
 cashier's check, drawn by the bank on itself, is 
 so called because it is usually signed by him. This 
 check is used to discharge local debts of the bank, 
 to pay dividends, and is sometimes issued to per- 
 sons who prefer it to other forms of exchange. 
 The proceeds of some loans and discounts are also 
 paid by means of it. 
 
 Then, too, every draft of a bank on its corre- 
 spondents must be signed by the cashier. These 
 amount to many in a day: remittances sent for 
 cash items received; remittances for banks which
 
 THE CASHIER 45 
 
 order a part or all of their balance forwarded; 
 checks for people who buy exchange on other 
 cities. In addition to these checks and drafts, the 
 cashier signs various government and state 
 reports, acknowledges remittances of interest or 
 advises credit of same. 
 
 In controlling the work of the departments, 
 the cashier must pay especial attention to means 
 for preventing fraud. This is likely to come up in 
 more guises than simple forgery or counterfeiting. 
 Stopping payment of checks unnecessarily is often 
 an attempt at fraud. "Kiting" is another form. 
 "Kiting" consists in drawing a check on one bank 
 and depositing it at another; then issuing checks 
 against the account and trying to get them paid 
 before the deposited check is presented at the 
 other bank. Or perhaps, the "kiter" also deposits 
 a check at the other bank on the first one. Then, 
 if the check from the first is sent over to the 
 second, in the confusion, it may be certified, for 
 apparently the "kiter" has a credit balance on 
 the books. Most banks obviate this source of 
 danger by refusing to honor checks on an account 
 opened with a check until that check has been 
 paid. But it does happen in the case of persons 
 who have been carrying accounts and suddenly 
 begin "kiting." 
 
 Another form of fraud is by means of "dum- 
 mies." These, as the name implies, are fictitious 
 persons in other cities on whom people make 
 drafts for pretended indebtedness. If the luckless 
 teller pays such a one or the cashier authorizes 
 payment, it is simply a question of how great the 
 loss is.
 
 46 PRACTICAL BANKING 
 
 An important duty of the cashier, one that 
 cannot be overlooked, is the rather frequent 
 auditing of the work of each of the clerks. It is 
 much better to do this often and thoroughly than 
 to let it lag and never know how "crooked" the 
 work of some of the clerks may be. Confidence 
 in men is by no means infallible protection against 
 their dishonesty. No man ever defaults who is 
 suspected at first; his very occupancy of a respon- 
 sible position is proof of confidence. 
 
 The paying teller's cash is in most instances 
 audited at least once a month. This clerk, unfor- 
 tunately, has had more falls than any other of the 
 subordinate employees of the bank. His tempta- 
 tions are great, and if he is weak and knows that 
 no frequent audits will be made of his cash, he 
 may fall. There is a distinct moral effect in know- 
 ing that his cash is going to be audited carefully 
 rather frequently. 
 
 Not only should the paying teller's cash be 
 audited, but the ledgers of the bank ought to be 
 checked up every so often. One big bank in 
 New York audits the whole institution once a 
 month. The assistant cashiers take turns in con- 
 ducting the examination. In counting the cash of 
 the paying teller and in other detail, several 
 clerks are taken out of their departments to assist, 
 for which they receive extra remuneration. This 
 same bank — as many banks do — shifts its men 
 from position to position, never letting them fall 
 into ruts in any one place. As a friend of the 
 author's once rather fancifully put it, no bank 
 should ever let an employee think that his posi- 
 tion was "his own horse, and that no one else
 
 THE CASHIER 47 
 
 could ride it." This habit of shifting certainly 
 lessens the chance of dishonesty. 
 
 In this particular, I am reminded of how an 
 individual bookkeeper, perfidious and dissatis- 
 fied with his compensation, cleverly contrived a 
 scheme for getting a tidy sum quickly. He selected 
 an account little checked on, and forged a check 
 for $10,000 on it. Next he deposited the check 
 to his credit in a suburban bank where he was not 
 known. When it came through the clearing for 
 payment, he took it from the other checks, posted 
 it to the account and slipped it into the check file, 
 not leaving it to be examined by the persons who 
 looked over the day's checks. After this he went 
 out to his bank and withdrew the $10,000 and 
 had his book balanced. He destroyed his pass- 
 book and the check with which he had withdrawn 
 his balance, and settled back to his position as if 
 nothing had happened. About a year later, the 
 patron whose account had thus suffered ordered 
 his book balanced. He was much chagrined to 
 find a charge of $10,000 against him. Examining 
 the check, he declared it a forgery. The book- 
 keeper stoutly denied any knowledge of the for- 
 gery until the suburban bank, whose indorsement 
 appeared on the back, identified him. He had n't 
 had nerve enough to destroy the check when it 
 came back, or he possibly would not have been 
 caught. 
 
 The subject of "reserve" has been rather fully 
 discussed in the first chapter, and is only men- 
 tioned here in connection with the cashier's 
 duties. He usually has charge of these funds, if, 
 as in many banks, they are separate from current
 
 48 PRACTICAL BANKING 
 
 funds. By reserve in this sense is meant not neces- 
 sarily the whole amount of lawful money on hand, 
 but that part, aside from that for daily use, which 
 is kept for extraordinary demands. The cashier 
 sees that a proper amount of reserve is always on 
 hand. A minimum reserve is set for all national 
 and most state banks, but in some localities and 
 under some conditions it is necessary to keep a 
 larger volume on hand than is actually required. 
 
 In the certification of checks the signature of 
 some oflBcer is usually necessary, though in many 
 places the paying teller assumes this duty. Gen- 
 erally, however, this is done by the cashier or an 
 assistant. It is a very delicate step, as it is abso- 
 lutely necessary to ascertain accurately that the 
 check is "good" before certifying. Whether it be 
 "good" or "bad," it must be paid when once it 
 is certified. Furthermore, the officer in a national 
 association, who certifies a check where there are 
 insufficient or no funds, is liable to federal prose- 
 cution. 
 
 In a number of banks, usually the smaller ones, 
 the cashier has some loan-granting power. And 
 in a bank where the only other lending officer is 
 the president, it amounts to considerable im- 
 portance, especially when the chief is absent. 
 However, this power does not often extend be- 
 yond discounts for persons having a standing 
 credit, except in the case of certain small loans. 
 But this is not an infallible rule, for in some large 
 banks the cashier has broad loan-granting power. 
 
 The general and current expense items of the 
 bank are ordinarily subject to the control of the 
 cashier. He does not allow bills of expense to
 
 THE CASHIER 49 
 
 stand out longer than reasonable — usually not 
 more than a month from the date of the debt's 
 contraction. In the prompt payment of the bank's 
 debts, he lays on one of the small stones which 
 form finally the strong wall of the institution's 
 integrity. Often he receives bids from several 
 good houses on large purchases of supplies and 
 sundries, so that he may obtain the most ad- 
 vantageous rates. 
 
 He pays the salaries of the clerks. To discharge 
 this duty, he issues checks or cash, or even, in 
 some instances, places a credit on the bank's in- 
 dividual ledgers for the men, against which they 
 may draw. 
 
 Many cashiers keep or cause to be kept a huge 
 book, on which is entered in the minutest detail 
 every expenditure which the bank makes. This 
 may take the form of a voucher registration when 
 vouchers are used to charge expense items to their 
 proper accounts. This register is divided into 
 sections, showing in vertical columns the amount 
 of expense under appropriate heads, such as 
 "salary," "insurance," and "taxes." 
 
 In deciding matters of policy with customers 
 or others who ask accommodation of various 
 sorts, the cashier has need of all the firmness he 
 can command. He finds himself importuned at 
 every step by people who must be refused. But 
 they respect him the more for his firmness. A 
 good friend once said to the writer, and he has 
 always remembered it, "A business man often 
 has occasion to act with decision and prompti- 
 tude. And most frequently a firm decision, 
 though erroneous, will be more beneficial than a
 
 50 PRACTICAL BANKING 
 
 wavering tendency." Sometimes, too, crises come 
 which demand the utmost positiveness. In time 
 of panic every cashier knows what it is to be be- 
 sieged with requests of accommodation for all 
 sorts of emergencies. Sometimes it is wise to as- 
 sent; frequently, however, a refusal, firm and 
 final, must be given. 
 
 Even with all this necessity for staunch abid- 
 ing by the right course, the cashier cannot afford 
 to lose his consideration for the feelings of others. 
 He never fails to find a reward for courtesy and 
 equanimity. One officer of the writer's acquaint- 
 ance is so affable and hearty to every one that it 
 has been said of him that many people applying 
 for credit had rather be turned down by him than 
 be accepted by another man. 
 
 In leaving the cashier's desk to take up in de- 
 tail the work of the departments under him, let 
 us remember that he, as the bank's arm, furnishes 
 the power to do the work planned by the bank's 
 brain, the president.
 
 CHAPTER V 
 
 THE PAYING TELLER 
 
 How many people, when they pass their checks, 
 properly signed and indorsed, through the wicket 
 and receive the amount of cash called for, ever 
 stop to think of the tremendous responsibility of 
 the man behind the counter. Most, we may pre- 
 sume, with a half-envious glance at the stacks of 
 currency and trays of coin, dismiss all thought of 
 the teller and of how his department is conducted. 
 And yet, in importance, his is second to none in 
 the bank. Though we carry on more than ninety 
 per cent of our business by credit, that is, by 
 check or draft, we Americans have not yet 
 reached that state of refinement where we may 
 do away with all cash payments and deal alone 
 in exchange or credits. There is a good deal of the 
 Missouri spirit in the most of us on certain oc- 
 casions. We like to see "the coin." And so, our 
 banks cannot do without the paying teller. 
 
 Some one has remarked that a bank is the pulse 
 of business generally in a town or community. 
 It may be further said that the paying depart- 
 ment is the pulse of the bank, and faithfully reg- 
 isters whether the management is conservative or 
 radical. 
 
 Here, as in no other department, an experi- 
 enced, capable man is required. It is almost es- 
 sential that a paying teller should have a good 
 knowledge of bookkeeping, as his duties contin-
 
 52 PRACTICAL BANKING 
 
 ually bring him in touch with the books of the 
 bank. He should be well acquainted with the 
 general status of as many of the bank's cus- 
 tomers as possible. Also, he must have an accur- 
 ate knowledge of the signatures of customers; 
 he should always have the signatures of the 
 bank's depositors, for reference, in a convenient 
 file. 
 
 It is obviously impossible for a paying teller to 
 know the status and signature of every customer 
 in a large bank. Some banks have supplied their 
 tellers with sheets on which the approximate 
 balances of customers is entered. Many others 
 adopt the plan of having the checks passed back 
 to the bookkeepers for certification before pay- 
 ment. These methods do not always expedite 
 matters during rush hours. In Australia, I be- 
 lieve, some banks have adopted what appears to 
 be a practicable scheme. Those having checks to 
 cash go to a window where the check is certified 
 after identification and verification. Then they 
 file on to the paying window, where the checks 
 are promptly paid. 
 
 As the name implies, the primary duty of the 
 paying teller is to pay out money. This primary 
 duty involves many accompanying duties of 
 almost equal importance. 
 
 The paying teller has charge of the money 
 vaults and safes containing current funds. The 
 reserve, as defined in the foregoing chapter, is 
 usually kept separately in the charge of an officer 
 of the bank. The duty of keeping the money 
 vaults is not a light one, for the teller must at all 
 times proceed most carefully in setting time locks.
 
 THE PAYING TELLER 53 
 
 He must also keep his money in good order and 
 see that a certain volume is always on hand to 
 meet any emergency. This last duty is also im- 
 posed upon one of the officers of the bank, as it is 
 of prime importance. In the great banks, no one 
 man knows the entire combination to the money 
 vaults, but two or three each know a part of it, 
 so that the presence of all is required to unlock. 
 
 Some banks employ more than one paying 
 teller. In that case there is a senior teller who has 
 charge of the vaults, and who supplies the assist- 
 ants with a certain amount of money each day. 
 
 In the paying-out process, our teller must 
 maintain his mental equilibrium if he hopes to 
 be in any way successful. For a man to "lose" 
 his head with a long line of impatient customers 
 before his window is disastrous. Men in this con- 
 dition have made and do make errors that are 
 dangerous ; they may seriously misread the amount 
 of a check involving a difference of many dollars ; 
 they may accept a forged check or one dated 
 ahead; they may fail to require proper identifica- 
 tion or indorsement; they may not catch a check 
 on which payment has been ordered stopped. In 
 fine, the paying teller may soon ruin himself, and 
 perhaps the bank, if he is easily flurried. 
 
 He must carry on his work easily and smoothly. 
 Numerous incidents occur to irritate him; some- 
 times strangers insist upon the cashing of foreign 
 or even of home checks without identification; 
 people sometimes unnecessarily hurry a teller 
 who is working "tooth and nail"; and some come 
 after hours and ask accommodation when he is 
 busy proving up his work.
 
 54 PRACTICAL BANKING 
 
 One is reminded of the little old man who 
 comes in every Friday afternoon, just after bank- 
 ing hours, by the side door. He always leaves his 
 book to be balanced, to be sure that "the bank 
 has made no mistake" in his $105 account. Then, 
 to prove for himself that the institution is still 
 solvent, he invariably drops by the paying win- 
 dow to get two dollars and a half in cash. Such 
 incidents from a distance wear a ludicrous air, 
 but the vivid reality often makes them a cause 
 for bitter and impotent grinding of teeth. 
 
 We have enumerated but a few of the many in- 
 stances which may cause friction between the 
 teller and certain customers. But the successful 
 teller learns to be cool and polite under the most 
 trying conditions. He must pour oil on the trou- 
 bled waters, so to speak. 
 
 The paying teller is more likely to encounter 
 frauds than any other clerk, and, if heedless, is 
 sure to pay bitterly for napping. Counterfeit cur- 
 rency is a common source of trouble. Now and 
 then, persons, consciously or unconsciously, pass 
 bills in for change, etc., that are counterfeit. And 
 some of this worthless currency is so cleverly ex- 
 ecuted that it is next to impossible to detect it. 
 However, the following are common defects. 
 Either the paper is of an inferior quality, or the 
 engraving is rough, or else there is a slight varia- 
 tion in the frieze. Then, too, there are genuine 
 notes whose value has been raised. Some of these 
 are exceedingly dangerous. The best way for a 
 teller to detect counterfeits is, first, to have an 
 accurate knowledge of the different notes in cir- 
 culation, so as to be able to catch any ordinary
 
 THE PAYING TELLER 55 
 
 imitation, and then, to keep posted through the 
 secret service of the existence of any fine counter- 
 feits. 
 
 It is a comparatively easy matter for an ex- 
 perienced teller to detect a spurious coin, since 
 it is usually oversized or under. A bad coin is 
 frequently detected by its ring or by its color. 
 
 Counterfeit gold coins are more dangerous than 
 silver, for their large value makes it worth while 
 to spend much time on their execution. In one 
 famous case the counterfeiter took a genuine 
 double-eagle and cut its edges to a depth of about 
 a quarter of an inch. He next turned back the 
 sides and removed two thirds of the gold, leaving 
 only the shell of the coin. He filled up the space 
 ¥'ith a foreign metal of about the same density 
 us gold, closed it and covered the split edge with 
 gold to conceal the spurious metal. The gold 
 counterfeit can usually be detected by ringing it 
 on the marble or by examining closely the work- 
 manship. 
 
 Forgeries are by no means negligible. This 
 kind of fraud is largely of two kinds; namely, 
 forging the signature of a bank's customer, and 
 passing a check signed by a person who has no 
 account. 
 
 Forging the signature of another person is not 
 an easy matter, but it is rather commonly in- 
 dulged in. This sketch will not permit of an ade- 
 quate discussion of the different methods of forg- 
 ing a bank customer's check. However, one or 
 two clever schemes are worth noting. 
 
 In a certain Western town, a man, purporting 
 to be a representative of the Government, distri-
 
 56 PRACTICAL BANKING 
 
 buting certain pamphlets of the Department of 
 Agriculture, approached one of the leading citi- 
 zens to supply him with a copy, requiring only 
 his receipt in a small notebook. The citizen 
 readily signed the notebook and thought no more 
 of it. In reality, under the sheet which he signed 
 was a draft on his bank to which his signature was 
 fixed by means of a carbon sheet. The pseudo- 
 government man filled out the draft for a large 
 amount and presented it for payment. But the 
 teller, suspecting something wrong, held the man 
 pending an investigation of the check. Of course, 
 the forger received his just punishment. 
 
 The following incident is from an address of Mr. 
 Cullom W. Kay before the American Institute of 
 Banking: — 
 
 Not long ago, on a busy Saturday, a well-dressed 
 fellow joined the line, and in his turn presented a check 
 for $3500 to one of our tellers. It was recognized im- 
 mediately to be a forgery of the personal or individual 
 signature of a member of a prominent local business 
 firm, and the teller was aware of the fact that he did 
 not keep a personal account, so the detection was easy 
 enough to make. To make the fellow believe he was 
 going to get the money, he was told to wait a moment 
 in order that we might see if the check was good, the 
 teller in the mean time waiting on the customers as 
 they came up to the window one after another and 
 keeping his eye on the fellow and the bank's detective 
 to see that they did not get too far apart. When the 
 assistant teller returned the check and stated there was 
 no account under that name as an individual, the 
 forger was politely asked to go to the office in the rear. 
 Apparently he felt so sure that he would get the money 
 that he did not hesitate to follow the teller to the
 
 THE PAYING TELLER 57 
 
 cashier's rail, where the teller turned the check over to 
 that official and introduced the forger as an interesting 
 person, who would have to account for having such 
 a check in his hands. The teller sent the detective 
 back to the rear office almost immediately afterward 
 to "stand by," and then went on with his work, and 
 shortly afterwards noticed above the heads of the 
 crowd of customers that the rascal went out with the 
 local detective and was placed in an automobile and 
 taken to prison. The fellow was convicted and is now 
 serving fifteen years in the penitentiary. The cus- 
 tomers did not notice anything unusual, and the teller 
 did not lose three minutes from his work. The effect 
 of this kind of experience to one who handles many 
 checks is that he is worried for days afterwards, and 
 strains his eyes looking for defects in signatures and 
 is very apt to be unusually nervous for some time. 
 
 In regard to the forging of the name of a person 
 to whose credit there is no money, let it suffice to 
 say that this is frequently done, but the check is 
 usually cashed at a bank other than the one on 
 which it is drawn, or else it is foisted on some 
 luckless shopkeeper. 
 
 Garnishments are generally served on the 
 cashier or paying teller, and in either case the 
 teller, as well as the proper individual book- 
 keeper, must have a memorandum of them be- 
 fore him in order to prevent payment of checks 
 against the accounts garnished. 
 
 There are always some people who issue checks 
 and wish to have payment stopped on them. 
 Whether it be that some contract has been vio- 
 lated by the payee or whether, for some strange, 
 unknown, subterranean reason, the maker does 
 not wish his check honored, payment must be
 
 58 PRACTICAL BANKING 
 
 declined or the bank will be liable for the amount 
 of the check and will, most probably, incur the 
 lasting enmity of the customer. So the paying 
 teller keeps a file of orders stopping payment of 
 checks. As a bank is liable to accumulate a num- 
 ber of persons who more or less frequently stop 
 payment of checks for no good reason apparently, 
 the paying teller should note the ones who make 
 a practice of it, and, after conference with the 
 proper officer, should request that the accounts 
 be closed. 
 
 After the bank is closed, the teller begins work 
 for his balance. He must count his money, take 
 into consideration any money which he may have 
 distributed to other tellers, and record all home, 
 clearing, and foreign checks taken in by himself. 
 If he has opened new accounts, as he does in some 
 banks, he must have a record of their deposit 
 slips. He probably has taken in all cash deposits 
 from other banks. His balance of cash for the 
 previous day, together with all credit items, such 
 as deposits, new currency put into circulation, 
 exchange collected, general expense credits, items 
 sent to the clearing house, etc., must be made to 
 balance with the present amount of cash on hand, 
 along with all disbursements on checks, general 
 expense, notes discounted, exchange, amount of 
 checks received from the clearing house, etc. 
 
 It should be noted, however, that many banks 
 have the clearing charged directly to a clearing 
 clerk. But in many others the charges and credits 
 for the same run through the paying teller's book. 
 
 It has been a popular saying among paying 
 tellers generally that it is impossible to balance
 
 THE PAYING TELLER 59 
 
 consistently in the paying window *'to a cent"; 
 that is, there is almost always an overage or 
 shortage, great or small. The writer became pay- 
 ing teller imbued with this venerable idea. It so 
 happened that the president of the bank was not 
 a man to be tied down to tradition, and one of his 
 theories was that a teller, as well as a bookkeeper, 
 should be held responsible for an exact balance, 
 despite the fact that, if a teller paid out too much 
 money to a person, he rarely got it back. So a 
 scheme was evolved for balancing exactly, put 
 into practice, and, it must be said, it worked mar- 
 velously well, so well, indeed, that, in one period 
 of nine months, there were only a half-dozen 
 misbalances. After having his theory shattered, 
 the writer began to investigate the records of 
 other tellers more closely and discovered that, in 
 most cases, the teller who balanced ojtenest was 
 the man of whom it was required to balance with 
 a fair degree of regularity. 
 
 We must pass to a brief consideration of a few 
 of the remaining important duties of the paying 
 teller. He collects all cash after balances and 
 stows it away in the vaults until the following 
 business day. Frequently, in the smaller banks, 
 the paying teller is assigned to the duty of verify- 
 ing dates, signatures, and indorsements on home 
 checks. In the national associations, he some- 
 times receives government and post-office de- 
 posits and sends weekly transcripts of the govern- 
 ment account to Washington. Likewise, if it be 
 a bank under United States supervision, the pay- 
 ing teller must keep his currency segregated. In 
 banks where his duties are more or less light, he
 
 60 PRACTICAL BANKING 
 
 frequently has some miscellaneous duties, such 
 as control of the record of canceled and outstand- 
 ing cashier's and certified checks, certificates of 
 deposit, etc.
 
 CHAPTER VI 
 
 THE RECEIVING TELLER 
 
 We need give no formal introduction to the 
 receiving teller, for everybody knows him. In- 
 deed, many people will wonder at a discussion of 
 his duties, for they seem so apparent. Yet there 
 are probably many inside features of a receiving 
 teller's work quite unknown to the average bank 
 customer. We are familiar with the cheerful 
 little man behind the window, who passes a pleas- 
 ant word about business or the weather, while he 
 energetically counts over our currency and veri- 
 fies the check entries on our deposit slips. The 
 functions of his position, to a casual observer, 
 seem quite simple — indeed, just taking in a huge 
 mass of checks, coin, and bills, assorting them 
 quickly, and checking them off the ticket; just 
 adding up the little slips and glancing at the in- 
 dorsements on the checks; just making a hasty 
 entry on your pass-book, and then — "Next!'* 
 But we shall soon see that these primary duties 
 involve a complexity of secondary or incidental 
 tasks. 
 
 It would be about as easy to discover accurate 
 generalities in describing the receiving tellers in 
 over twenty thousand banks as it would be in 
 discussing, with a few bold and well-selected 
 strokes, "The Growth of the Spirit of Resistance 
 in New England." For in every bank, no matter 
 how inconspicuous, there are certain peculiar
 
 62 PRACTICAL BANKING 
 
 methods of handling the business, due to the nec- 
 essary adaptation to local conditions. It would 
 hardly be an exaggeration to say that there are 
 individuality and originality in the division and 
 allotment of duties in every bank in the country. 
 Therefore, it will be necessary to construct an 
 ideal receiving teller, one whose clerical obliga- 
 tions include those which appear best to pertain 
 to his office. It may be that some duty of a New 
 York teller may stand side by side with that of a 
 country clerk. 
 
 There are from one to a half-dozen receiving 
 tellers in a bank, the number, of course, depend- 
 ing on the volume of individual depositing. Save 
 for a head of the department in large banks, who 
 is responsible for the work of his subordinates, 
 the receiving tellers are on an apparently equal 
 footing, and their duties are essentially the same. 
 In many banks, each is assigned to a certain di- 
 vision of the alphabetically arranged bank's cus- 
 tomers. This alphabetical division, however, is 
 not the universal practice. 
 
 Some one has said that the receiving teller's 
 window is the cleanest clerical position in the 
 bank, because he begins each day on a fresh sheet, 
 with no differences carried over. WTien the bank 
 opens, his trays and money drawers are empty 
 and his record clean. After his proof each day, 
 he turns over his cash to the paying teller, his 
 clearing to the clearing clerk, his foreign items to 
 the transit department, etc., having charged, in 
 each case, the proper amount to the appropriate 
 department. Then he is ready to start another 
 day.
 
 THE RECEIVING TELLER 63 
 
 But to resume with our ideal teller on an ideal 
 day ! Soon after the bank opens its doors his work 
 begins and continues, with perhaps occasional 
 lulls, until banking hours are over — far longer, 
 probably, but the actual receipt of deposits ends 
 with the closing hour. 
 
 In the course of the day, many things will arise 
 which require open-eyed attention. Perhaps there 
 is a forged check or one which has some evident 
 informality. These he watches out for. There 
 may be a long line of customers before his win- 
 dow and yet he cannot afford to become excited 
 and so overlook some apparent fraud. As a general 
 rule, it may be said that checks, forged or other- 
 wise invalid, are not as likely to cause actual loss 
 to him or to the bank, as in the case of the paying 
 teller. This is readily seen, for in almost every 
 instance such checks may, on discovery of their 
 invalidity, be charged back to the depositor's 
 account. 
 
 But to protect the bank and himself against 
 possible loss, he closely watches for all invalid 
 checks, especially those rendered so by lack of 
 indorsement. The latter is important because 
 frequently an unindorsed check cannot be charged 
 back to customers, since it is not known by whom 
 it was deposited. Of course, it can often be traced 
 by comparing check entries on the deposit slips 
 of the day with all lists of checks taken from his 
 window, but this is tedious and uncertain at best. 
 
 The teller knows too well how common rogues 
 are, and how prolific their handiwork is in the 
 shape of counterfeited money, to be anything 
 short of vigilant. We have shown some of the
 
 64 PRACTICAL BANKING 
 
 means of detecting counterfeits in the foregoing 
 chapter, and will not discuss them again here. 
 
 Our teller is successful; therefore, he has a cool 
 head, and a quick and accurate perception. It 
 seems to an old teller that one of the supreme 
 shortcomings of the human race is its inaccu- 
 racy in making out deposit slips. It would take 
 tomes to tell of the thousand and one peculiar 
 and ludicrous mistakes which some bank cus- 
 tomers commit when preparing their deposits. 
 Did we say "ludicrous mistakes".'' Often they 
 smack of tragedy. It may be funny enough to 
 remind a patron that the "$10 in Gold" listed 
 on his slip must be in his vest pocket; but during 
 the tedious process of checking over deposit slips 
 till late at night to find a "balance" in some man's 
 ticket with an item listed wrong, the disappointed 
 teller may feel any way but humorous. His mood 
 may approximate Malvolio's, but certainly not 
 Feste's. 
 
 It may be argued that a teller should detect all 
 errors as he takes in the deposits, but in a "rush" 
 it is practically impossible to do everything as 
 thoroughly as it ought to be done. It seems to be 
 the better plan to check off the items as carefully 
 as possible and note the indorsements, leaving 
 verification in other particulars for a later hour, if 
 necessary. 
 
 Too many slips are filled out with one or two 
 very ambiguous figures. In checking items off the 
 ticket rapidly, the teller may easily take such a 
 figure to be what the check reads, when a careful 
 footing up would show that it was added in as 
 something else.
 
 THE RECEIVING TELLER 65 
 
 Not only does our teller realize the time gained 
 by watching these items, but he is aware of the 
 absolute indispensableness of requiring indorse- 
 ments on checks. Several imperative reasons are 
 apparent for this. First of all, if an indorsement 
 does not appear on the check, the payee may 
 claim not to have received the money on the 
 check and may demand repayment. Second, if 
 the payee makes no complaint, the drawer or 
 maker may refuse to have the check charged to 
 his account unless properly indorsed. It may be 
 remarked here that thousands of purely technical 
 errors in indorsing — where good faith is evident — 
 are corrected by tellers. These are such as leaving 
 the "&" out in "Smith, Jones & Perry." Third, 
 absence of indorsement prevents ready and easy 
 *' charging back " of invalid checks to the proper 
 parties. 
 
 Exchange charges is an item which may, by 
 strict application, cease to be a source of loss to 
 the bank. So many people cannot understand 
 why, if they keep a hundred dollars on deposit, 
 the bank should not accept foreign checks for 
 them without charge for collection. Waiving the 
 exchange which banks in some cities are obliged 
 to charge on certain checks, on account of clear- 
 ing-house regulations, it is perfectly rational that 
 a bank, accommodating a small depositor on gen- 
 eral principles, — for no one accuses it of making 
 money from him, — should charge an exchange 
 rate on checks which in all probability it will have 
 to pay to get collected. Naturally enough, to a 
 certain class of customers, all checks are accepted 
 at par, so far as it does not conflict with any 
 clearing house rule.
 
 66 PRACTICAL BANKING 
 
 A knowledge of the signatures of the bank's 
 customers should come within the range of the 
 receiving teller's duties. With this knowledge he 
 is in position to detect many frauds in the at- 
 tempt to deposit bogus or forged home checks. 
 
 After a day full of nerve-trying experience with 
 irascible patrons, who rage because of collection 
 charges, "not good" checks, or counterfeit notes 
 in their deposits; after an effort to assuage their 
 irritability by the " oil-on-the-water " method; 
 after being interrupted time and again to give 
 some trivial information; after tiring himself out 
 with the exercise of constant wariness to detect 
 frauds and to be perfectly accurate, the teller 
 prepares to try for a balance as quickly as possi- 
 ble. 
 
 In some banks, where two or more tellers are 
 employed, several balances are taken during the 
 day. The operation is simple. Number one 
 teller, say, closes his window, thus turning his 
 depositors through number two. Number one 
 then quickly balances and gives over his deposit 
 slips and his checks — home, clearing, and for- 
 eign — to their appropriate departments, charges 
 himself with the amount of cash which he has and 
 reopens his window. In other banks, where only 
 one balance per day is taken, the deposits and 
 checks are collected once or twice during hours, 
 listed and carefully verified. 
 
 When the bank closes, the teller first lists, or 
 has listed, all deposit slips and cash items in his 
 cage. This must be done at once in order not to 
 delay the bookkeepers. After this, he begins the 
 task of segregating and counting his currency.
 
 THE RECEIVING TELLER 67 
 
 This may be quite an arduous undertaking in 
 many banks, while in others, which receive the 
 vast majority of their deposits in checks and dis- 
 counts, it may not be so taxing. As a rule, how- 
 ever, it may be said that the smaller the bank, the 
 more it caters to cash depositors and the less it 
 depends on lending and discounting to create its 
 deposits. It is quite possible that the teller may 
 do much of this counting, bundling up, and segre- 
 gating at odd moments during the day. By seg- 
 regation is meant not only separation into their 
 respective denominations, but also, and especially 
 so in the national bank, the separation into the 
 different kinds of bills, e.g., gold certificates, 
 silver certificates, national bank notes, etc. 
 
 It has been found convenient among clearing- 
 house associations to adopt some regular scheme 
 for bundling up the currency bills of its members. 
 Many use the fifty bill standard; that is, each 
 package contains fifty bills of the same denomi- 
 nation. The various denominations are distin- 
 guished by different colored bands with which the 
 packages are bound. The color, then, of the band 
 at once shows what amount is in the bundle as 
 well as the denomination. The banks themselves 
 usually require the teller who counts out the pack- 
 age to initial it. Thus one city has white bands 
 inclosing $50 each for ones and twos; blue bands 
 inclosing $250 each for fives; yellow bands inclos- 
 ing $500 each for tens ; and red bands inclosing 
 $1000 each for twenties. The United States Treas- 
 ury has a custom of putting one hundred bills of 
 each denomination to the package. 
 
 Coin is counted and put up in two ways. First,
 
 68 PRACTICAL BANKING 
 
 in trays. These trays are built in varying sizes, 
 generally to accommodate five hundred coins. 
 They are only used for the three highest silver 
 coins, and for gold. In many instances a tray 
 contains five rows of five stacks each of coins, 
 each stack containing twenty pieces. Dimes, 
 nickels, and cents for current use are usually put 
 up in small envelopes containing $5, $2.50, or 
 $1. The second method of putting up coins is in 
 packages. This applies to fractional silver, nickels, 
 and copper coins more readily than to dollars. 
 Gold is not put up in these packages at all. The 
 package is nothing more than a small cylindrical 
 piece of stiff paper fastened about a stack of coins, 
 each containing ten dollars in the case of halves 
 and dollars, five dollars in the case of quarters, 
 and five, two, or one dollar in the case of smaller 
 coins. Coins are kept in stout, canvas bags when 
 stowed away in safes and vaults. 
 
 It is very interesting to note the parts of the 
 country where coins are most used. In the North 
 and East, coins — especially the large silver 
 pieces — are scarcely used at all. In one large 
 bank, in the author's mind, with deposits far up 
 in the tens of millions, two or three thousand 
 silver dollars and a small amount of subsidiary 
 silver is found to be quite suflBcient for all de- 
 mands. Gold is rarely used except for reserve and 
 for transactions between banks. A glance at the 
 receiving-teller's cage with a scant number of 
 trays poorly filled convinces one that coins are 
 not popular in this part of the country. In the 
 South and Southwest, silver and gold are very 
 much in demand and in evidence. A bank in Ala-
 
 THE RECEIVING TELLER 69 
 
 bama with a capital of $100,000 will probably 
 keep more silver on hand than a bank in New 
 York with $1,000,000. In the Far West, gold is 
 most popular, and it is related that many of the 
 natives look with great suspicion on paper cur- 
 rency, and that country shopkeepers are likely 
 to refuse it. 
 
 Where there is much to handle, the counting of 
 fractional coins would be almost an endless task 
 but for the counting-machines which the larger 
 banks use. These machines may be adjusted to 
 count dollars, halves, quarters, and smaller 
 change. By simply dumping the coins into a pan 
 and turning a crank, one may count almost as 
 fast as he pleases. A small indicator registers the 
 number of pieces handled, or one may set a pin 
 to stop the counter automatically when the de- 
 sired number of coins is reached. Street railways, 
 motion-picture theaters, and popular summer at- 
 tractions pour vast streams of small coin into 
 their banks. It is in packages when deposited and 
 for the time is accepted at its face value, but the 
 count must be verified. In the days before the 
 money counting-machine, one bank of my ac- 
 quaintance used to press all of its tellers and some 
 utility clerks into service once a week to count 
 the street-car company's deposited change. 
 
 After his money is counted, the teller makes an 
 entry on the debit side of his book for its total. 
 Then on the same side he lists the totals of the 
 bundles of checks and other cash items which he 
 has turned over to the individual books, to the 
 clearing clerk, to the foreign department, and 
 those which he still has on hand. On the credit
 
 70 PRACTICAL BANKING 
 
 side of his record appears the total of deposits 
 and the exchange collected. The problem is to 
 make the footing of the two sides of his book 
 coincide. 
 
 Some of the stumbling-blocks to a speedy bal- 
 ance are errors in counting money, errors in the 
 addition of deposit slips, and errors in entering 
 items on the deposit slip. 
 
 Errors in counting money are of three kinds : — 
 
 First, the money may have been miscounted 
 when the deposit was made. If it was incorrectly 
 entered on the slip, and, in his haste, the teller's 
 count coincided with the amount entered; or, 
 when it was correctly set down, if he changed the 
 entry to agree with his calculation, there is small 
 chance that he will be able to recover a shortage 
 or refund an overage. If, however, the error was 
 committed on the slip of a firm keeping an ac- 
 curate set of books, the difference may often be 
 located. In that instance it is practically always 
 noticed by the firm. But in the case of nine out of 
 ten individuals, the discrepancy would not be 
 noted. 
 
 Second, the teller may have assorted his paper 
 currency wrong; e.g., put a five-dollar bill in a 
 package of tens. This rather common error ought 
 to be found on a second count of the packages. 
 Mistakes of this kind in counting coins are not 
 frequent, though they sometimes happen. 
 
 Third, he may have actually miscounted the 
 bills or coins. This is purely a mechanical error 
 which is quickly discovered by the experienced 
 teller. 
 
 We have spoken earlier in the chapter of the
 
 THE RECEIVING TELLER 71 
 
 errors of addition in deposit slips, and mistakes 
 in entering items on deposit slips. 
 
 Transposition of figures, which is easily enough 
 made, is occasionally a source of annoyance. 
 However, the teller has a venerable idea regard- 
 ing transpositions, handed down from generation 
 to generation of bookkeepers, which serves fre- 
 quently to locate this sort of discrepancy. If the 
 difference (the shortage or overage) is divisible 
 by nine, then a transposition is possible. So when 
 he discovers that his difference can be divided by 
 that number, he immediately suspects a transposi- 
 tion, and sets to work to check his deposit slips 
 with his lists of checks. 
 
 Our teller, being a good one, is not without 
 resource if he is out of balance. Often, stopping 
 to think clearly for a moment, it comes to him 
 like a flash that he has failed to credit the indi- 
 vidual books with a check that was missorted and 
 which was charged to them, or that he has not 
 credited himself with some change in packages 
 which he has that day furnished the paying teller. 
 Sometimes he will be looking over his deposit 
 slips, when out of balance, and suddenly get the 
 impression very vividly that a certain check is 
 listed incorrectly on such and such a ticket. Look- 
 ing it up, he finds his impression correct. Occa- 
 sionally he remembers that he changed the figures 
 on a certain ticket that morning to agree with his 
 computation. He calls up the depositor, inquires 
 about it, and quite often discovers his difference. 
 Then, too, there remain all the ways of checking 
 back items with lists and tickets. 
 
 After a day as strenuous as we have described.
 
 72 PRACTICAL BANKING 
 
 one may easily picture our ideal teller lying down 
 to sleep the ideal sleep of the weary. Of course, 
 no clerk could well experience such a vicissitudin- 
 ous day, as we have mentioned most of the possi- 
 ble problems which might arise in the ordinary, 
 day-in-and-day-out performance of his duties.
 
 CHAPTER VII 
 
 THE LOAN AND DISCOUNT DEPARTMENT 
 
 A bank is a manufactory of credit and a machine of exchange. 
 
 Horace White. 
 
 Next to depositing and checking, there is prob- 
 ably no feature of banking more familiar to the 
 public than the lending of credit. In the course of 
 his life nearly every man has occasion to borrow 
 from a bank. Many persons are inclined to tra- 
 duce the usefulness of the bank as a lending 
 agency. Yet it has been the means of more prog- 
 ress, of making more comforts the property of all, 
 of more civilization, probably, than any other 
 institution of modern times. 
 
 The lending of money or credit is essentially 
 the most vital function of banking. "The Loan 
 Department is not only the most important, but 
 it is the money-making end of the business. If 
 it makes no loans, it will pay no dividends. If, on 
 the other hand, it makes bad loans, it will go out 
 of existence." ^ Not only is it the money-making 
 side of the bank, but it is a source of deposits. 
 In the first chapter we have quoted Mr. Vander- 
 lip to show that banks do not first gather deposits 
 in order to lend, but extend loans, thereby creat- 
 ing deposits. Probably the relation of bank 
 
 • Humphrey Robinson, A Simple Explanation of Modern Bank' 
 ing. p. 82.
 
 74 PRACTICAL BANKING 
 
 deposits from credit sources — i.e., loans and 
 discounts — to cash money deposits is as high 
 as 5 to 1. 
 
 Regarding the creation of deposits by discount- 
 ing, Mr. Horace White, in his work on Money and 
 Banking, has in part quoted Mr. H. D. McLeod 
 as follows : — 
 
 He — the banker — now begins to discount the 
 commercial paper of his customers running say ninety 
 days at six per cent. When he discounts a bill of ex- 
 change for $1000, he deducts the interest for ninety 
 days ($15) and credits the customer with the remainder 
 ($985) on his books. This $985 is called a deposit, be- 
 cause the customer has the right to draw it out by his 
 check exactly as he could draw out an equal sum of 
 gold deposited by him in the same bank. In the eye of 
 the banker, and of the customer, and of the law, it is a 
 deposit. In ordinary' times it is like any other deposit. 
 That is, the proportion remaining uncalled for at any 
 time will be about the same as the proportion of actual 
 money deposited. Yet it is nothing but a bank credit. 
 Hence the word "deposit," when thus used, is clearly 
 a misnomer, since, by derivation and common under- 
 standing, a deposit means a thing laid away, or given 
 in charge of somebody. 
 
 Thus, it can be clearly inferred that the pro- 
 ceeds of a very small fraction of the average 
 bank's loans and discounts are paid in cash. The 
 author has one bank in mind which, according to 
 an official, never pays any cash on paper, and but 
 rarely issues cashier's checks for the proceeds of 
 a note. When arrangements are made with a bank 
 for credit, the customer nearly always agrees to 
 keep a certain deposit balance on the books.
 
 LOAN AND DISCOUNT DEPARTMENT 75 
 
 Assume that a man wishes to open a credit at 
 a certain bank. He arms himself with whatever 
 collateral or evidences of debt due him he may 
 de»ire to offer, and repairs to the bank. There he 
 must conform to one of two methods of proced- 
 ure. Either his application will be considered by 
 the board of directors or by certain officers of the 
 bank. In the latter event those having the power 
 of extending credit to a new customer are the 
 president, vice-president, or the cashier — per- 
 haps all three. Some institutions permit certain 
 clerks to discount paper for those having an 
 established line of credit, but generally speaking, 
 no person, unless he is an officer, has the power of 
 extending the bank's credit. 
 
 Now our man, who has made application for a 
 credit, has submitted either his collateral or notes 
 which he wishes to discount. If he wishes a credit 
 of say $100,000, the bank may require an average 
 balance of $10,000 to $20,000. Mr. Humphrey 
 Robinson, in his book on the modern bank, says, 
 "In New York the banks generally require a 
 regular customer to keep an average balance of 
 not less than twenty per cent of the loans made 
 him. Most interior banks consider ten per cent 
 about the right proportion." For his own notes 
 the customer probably pledges security. His 
 indorsement on receivables (i.e., the obligations 
 of others in his favor) is sufficient. When the 
 amount of credit, the rate of interest, and the 
 security have been agreed upon, the paper is 
 turned over to the discount clerk, who figures the 
 interest or discount, takes the paper in, and has 
 the proceeds credited to the new customer's ac-
 
 76 PRACTICAL BANKING 
 
 count. From time to time the customer proba- 
 bly has commercial paper discounted for the 
 credit of his account. He is free to make 
 as many drafts against his bank credit as he 
 pleases, provided his average balance is that 
 agreed upon. 
 
 The extension of a bank's credit on time loans 
 is based largely on commercial paper. ^ In fact, 
 probably two thirds of the credit in our country is 
 based on commercial paper. When a security 
 loan is made it is customary to require about 
 twenty per cent more collateral than the amount 
 of the loan. If, however, the security be of the 
 very best grade, no excess may be required. On 
 the other hand, if the security, such as real estate, 
 is not easily and quickly convertible, a larger per- 
 centage is required. National banks, of course, 
 may not accept real estate mortgages as security 
 for any loan at the time of making. To prevent 
 loss, they may afterward accept such for loans 
 made in good faith. 
 
 Bonds of all kinds, stocks, mortgages on real 
 estate and on personal property, and private 
 obligations of other kinds, are deemed legitimate 
 and acceptable collateral. In accepting stocks 
 for collateral, it is important to see that they are 
 properly indorsed with the power of attorney to 
 transfer their title on the stock ledger of the issu- 
 ing corporation. 
 
 The rate of interest on loans and discounts 
 varies from two to eight per cent. A maximum 
 rate is fixed by statute in nearly all the States. 
 National banks in places where the rate is regu- 
 
 * See page 23, note, and the chapter on the Federal Reserve Act.
 
 LOAN AND DISCOUNT DEPARTMENT 77 
 
 lated by the State may charge legal interest; in 
 States where it is not specifically fixed, they may 
 charge seven per cent and no more. Yet the rate 
 is constantly fluctuating as the ratio of supply 
 to demand changes. From the Financial Age of 
 July 18, 1910, the following report of the New 
 York money market is taken : — 
 
 The feature of the week has been an extensive in- 
 quiry for six months' accommodation. Lenders can 
 now obtain 5j per cent, and even at this rate the 
 supply is not abundant. Higher charges are levied for 
 all periods, although sixty day money is occasionally 
 available at 3^ per cent. The detailed range at the 
 close of the week was as follows: Sixty days, 3| per 
 cent; 90 days, 4j to 4| per cent; four months, 4^ to 
 4| per cent; five months, 4f to 5 per cent; and for six 
 months 5j per cent. The maximum quotation on call 
 for the week was 3 per cent. The average ruling rate 
 for the week has been a shade over 2| per cent, the 
 minimum 2 per cent. 
 
 The rate for call money, in New York espe- 
 cially, fluctuates even from hour to hour. This 
 is because there is no definite supply or constant 
 demand, for the call money market consists 
 largely of the overage of banks on the one hand 
 and the shortage of brokers on the other. The 
 necessity for such investment is felt to a very 
 great degree in New York, where all clearing- 
 house banks are required to carry a cash balance 
 on hand equal to twenty-five per cent of their 
 deposits. They do not normally carry much if any 
 more than this, and so a debit of a million or more 
 dollars in the clearing would probably seriously 
 affect their reserve. They must call in. But on
 
 78 PRACTICAL BANKING 
 
 the other hand, if they have a large credit in the 
 clearing, they find it very undesirable to coop it 
 up inactive in their vaults, and consequently 
 they invest it in call loans. They usually are able 
 to invest it in this manner, since brokers are con- 
 stantly needing large sums of money for short 
 time. 
 
 It has been argued by some people that banks 
 doing a business of discounting small notes almost 
 exclusively and paying many of them in cash, 
 should be permitted to charge one per cent per 
 month. It is shown that it requires as much time 
 and space to accept and keep a fifty-dollar loan 
 as one of one thousand dollars. 
 
 The period of the average time loan is probably 
 ninety days. Four months' paper is also much in 
 evidence; five and six months' paper is rarer; and 
 long-time paper is seldom seen in a commercial 
 bank, beyond a small block which may be safely 
 invested to offset somewhat the loss incurred by 
 the bank's entire credit not being extended at 
 certain times. 
 
 When a note is made payable at a fixed date, 
 it is customary in most instances to deduct for 
 the exact number of days from the day of dis- 
 count to the day of maturity. In some States the 
 banks are permitted to charge interest for the day 
 of discount as well as the day of maturity. The 
 three-days-of -grace rule still exists in some of the 
 States, though its usefulness has long since passed. 
 Interest is charged for days of grace. 
 
 For computing the day on which a note falls 
 due at so many days from date, charts are used. 
 These charts likewise show the number of days
 
 LOAN AND DISCOUNT DEPARTMENT 79 
 
 between two dates, making allowance for a holi- 
 day if the note matures on one. Reference to a 
 book in which interest is figured at different rates 
 for any length of time on any amount saves time 
 and insures accuracy. The reduction of the dis- 
 count clerk's work in this particular to a purely 
 mechanical process is certainly a reduction of 
 error. 
 
 Some note forms contain clauses in which the 
 signer waives all exemption from debt as pro- 
 vided by law, and agrees to the confiscation of 
 any of his property which the bank may hold if 
 he defaults in the payment of the note at ma- 
 turity ; in these notes he also assents to the forced 
 collection of the paper, in default of payment, by 
 an attorney, whose fee he agrees to pay. In addi- 
 tion, the collateral notes provide, in his failure to 
 pay, for the sale of the securities, the proceeds of 
 which may be applied to the face of the note and 
 accumulated interest. If there is anything left, 
 it is paid to the former owner of the securities or 
 his personal representative, appointed in his will 
 or by the law. A banker may demand more or 
 other security at any time if he thinks that which 
 he holds is declining in value, and upon the bor- 
 rower's refusal to comply he may even sell it. 
 
 All discounted notes are indorsed. Frequently 
 in this class of paper, it is desirable for the in- 
 dorser to waive protest on the note. Why this 
 is so will now be shown. Many a bank customer 
 discounts the note of a man that he knows is per- 
 fectly good for the amount. But there is a possi- 
 bility that he may not be able to meet his obliga- 
 tion on the day of its maturity. Now, if the signer
 
 80 PRACTICAL BANKING 
 
 is a good patron of the bank customer, it would 
 not be good policy to have the note protested, for 
 even if such action caused immediate payment of 
 the debt, it probably would incur the lasting 
 enmity of the patron ; if it did not cause the pay- 
 ment of the paper, the customer would be liable, 
 not only for the note, but also for the protest fees. 
 So in a large number of cases, commercial paper 
 is taken nonprotestable. 
 
 Primarily, of course, the maker of a note is 
 responsible for its payment, but in his default 
 each indorser is responsible for a part or all of the 
 note. 
 
 It must be remembered that these provisions 
 are not necessarily universally observed. For 
 instance, it is not the custom in the Eastern 
 States for notes to contain clauses as to waiver 
 or attorneys' fees. 
 
 II 
 
 In keeping record of their notes, banks have 
 different systems. The general bookkeeper has 
 the loan and discount account on his ledger. With 
 this account the notes themselves are balanced 
 every so often. For ready reference many banks 
 use two books which we shall call a register and 
 a ledger. 
 
 The register is a sort of journal, showing in 
 detail each day's loans and discounts. Columns 
 are ruled off for the number of the paper, the 
 maker, the indorsers, the date of making, the 
 date of discount, the amount, the discount or 
 interest, and any general remarks. This last 
 column may include such information as whether
 
 LOAN AND DISCOUNT DEPARTMENT 81 
 
 the note is secured by collateral or not, whether 
 the note is a renewal, and whether the signer has 
 in the past been prompt in liquidating his in- 
 debtedness. 
 
 The ledger is a book which, like any other 
 ledger, has a sheet or space for each customer. 
 On these sheets are entered the notes as they are 
 taken. The ruling is similar to that of the reg- 
 ister. 
 
 The notes are entered on these books and then 
 filed away till maturity. Banks usually file their 
 notes alphabetically, or, as seems more conven- 
 ient, by the date of their maturity. 
 
 It is a good plan to get out a month's notes, 
 say ten days before the first one matures. No- 
 tices are sent to the makers of these notes a week 
 or ten days before they fall due. 
 
 At the time the ensuing month's notes are 
 taken out of the file, it has been found desirable 
 to enter them on a book called the "tickler," 
 according to the dates of maturity. This book 
 need only show the date due, the maker's name, 
 and the amount. It is very handy in making 
 records of notes paid and renewed. A sufficient 
 amount of data can be set down in the latter case 
 to show the number of times renewed and the 
 date of the original loan. Thus the tickler can be 
 used as a quick-reference book, saving the neces- 
 sity of looking up the note. It is also well adapted 
 for making monthly, semiannual, or annual re- 
 capitulations of just what percentage of loans and 
 discounts has been paid, renewed, and unpaid. 
 In many banks, however, this tickler is not run 
 up once a month, but daily. In this case the
 
 82 PRACTICAL BANKING 
 
 notes are entered on the day that they come into 
 the bank. 
 
 It may seem that some of these books are use- 
 less, but such a number has proved very conven- 
 ient in many cases. Some banks use more. The 
 writer knows of one bank, for instance, that seeks 
 to have at least three checks on all its work. Since 
 the bank clerk is made of the same fallible dust 
 as everybody else, he will make mistakes, be he 
 ever so accurate. It is unlikely, however, that the 
 same error will be made on two books, and for 
 many practical purposes the books mentioned 
 above will act as checks on each other. 
 
 Ill 
 
 Although nearly all banks of any considerable 
 size provide separate departments for the receipt 
 and the collection of loans and discounts, this 
 chapter purports to cover both under the single 
 title. They are closely allied, have many points 
 in common, and therefore it is quite feasible to 
 treat them together. 
 
 When the notes fall due, the bank's business is 
 to collect them. There is nothing which so elo- 
 quently attests to loose management in a bank 
 as a great stack of past-due notes, uncollected 
 because of the lack of suflBciently energetic efforts. 
 There is nothing which the bank examiner so 
 vigorously insists upon as that overdue paper held 
 an unreasonable time be charged to "profit and 
 loss," and that collection, if desired, be pushed 
 through other channels. 
 
 Many notes are made payable in some other city 
 than that where they are discounted. They are 
 
 /
 
 LOAN AND DISCOUNT DEPARTMENT 83 
 
 forwarded some time before maturity to a bank 
 in that city. That bank collects them, if it can, 
 and remits with a check on a par city, usually 
 deducting exchange and collection charges. This 
 method of collection will be more fully discussed 
 in a subsequent chapter. 
 
 It is frequently necessary to turn over a paper 
 to an attorney to collect through the courts. He 
 is authorized to bring suit on behalf of the bank 
 and to obtain judgment for his fee as well as for 
 the debt. 
 
 If a protestable note is not paid on the day of 
 its maturity, it must be protested for nonpayment 
 by a notary, unless it mature on a holiday or a 
 half-holiday, when it is due and payable on the 
 following business day. Failure to protest a note 
 makes the bank liable for its amount, but protest 
 where it is waived makes the bank liable only for 
 the notary's fees, although it might lead to trouble 
 with the indorser or maker. Ordinarily, if protest 
 has been made in due form, the fees must be paid 
 by the maker, or, if he default, by the indorser.
 
 CHAPTER VIII 
 
 THE FOREIGN CASH ITEMS OR TRANSIT 
 DEPARTMENT 
 
 In every bank there are certain facilities for 
 handling foreign cash items and in a large bank 
 there is a regular, well-organized department 
 with its head and its corps of workers. There may 
 be one or two clerks, or there may be a dozen in 
 the department, depending on the volume of for- 
 eign business handled. In a huge bank of the 
 metropolis, twenty thousand or more checks are 
 daily run through this department. It is neces- 
 sary to keep a night shift in some of the greatest 
 institutions to open mail and "run off" the in- 
 coming checks on the adding-machine. 
 
 Foreign checks, as referred to here, are usually 
 those drawn against banks situated in places 
 other than the one where the collecting bank is 
 located. The line which defines them most fully 
 seems to be, "checks that are collected by mail, 
 but not on foreign countries." Checks on foreign 
 countries are handled through the "foreign de- 
 partment," and will be discussed in a subsequent 
 chapter. 
 
 Most people have only a vague idea of the exist- 
 ence of the department under consideration, and 
 many never dream of it, dismissing all thought of 
 how a foreign check is collected the moment they 
 pass it over the counter of the bank. Few, in- 
 deed, realize the actual importance of the transit
 
 TRANSIT DEPARTMENT 85 
 
 department — how it is skillfully manipulated 
 to throw balances first in one locality, then in 
 another; how it is operated to curtail the heavy 
 expense of domestic exchange; how it is used as 
 the instrument of getting accommodation and 
 courtesies otherwise unobtainable. 
 
 Suppose, now, that in a bank taking in through 
 its windows alone a thousand foreign checks daily, 
 drawn probably on two hundred banks, an at- 
 tempt should be made to send out each check to 
 the bank on which it was drawn. The exchange 
 would be more than doubled, as banks generally 
 charge as much to collect a single check of five 
 dollars as one of twenty-five dollars. Then there 
 would not be half the efficiency and celerity in 
 getting returns, as the bank does not hurry as 
 much to accommodate an occasional customer as 
 one sending many checks daily. 
 
 Further, in many cities and towns a bank could 
 get a reduced exchange rate or even a par ar- 
 rangement by throwing all its checks for a certain 
 territory into one association; at least, it could 
 be done by carrying an account in the association 
 in addition to allowing it the collecting privilege 
 for a certain area. The clearing houses of many 
 cities, however, prohibit any special exchange 
 arrangements and establish a uniform rate to be 
 charged by all its members. These provisions of 
 the clearing house, moreover, are usually en- 
 forced by the attachment of a heavy penalty for 
 their violation. For example, the New York 
 Clearing House Association imposes a fine of 
 five thousand dollars upon a member for the 
 first violation of its exchange rules, and pro-
 
 86 PRACTICAL BANKING 
 
 vides for the forfeiture of membership on second 
 offense. . 
 
 These foreign cash items come from many 
 sources: from the paying teller who cashes them; 
 from the receiving teller who accepts them as de- 
 posits; from the note department in payment of 
 notes and drafts; from banks depositing them or 
 sending them for collection. 
 
 Generally it is found wise to collect these items 
 two or three times daily from the several depart- 
 ments, making an adding-machine list of each 
 package to turn over to the appropriate teller. 
 The checks thus collected are "run in" with any 
 foreign checks which may have been held over 
 from the last emission and assorted into pigeon- 
 holes or files, which divide them conveniently for 
 routeing. 
 
 These items are usually divided into two parts: 
 namely, those sent for "returns," and those sent 
 for "credit." By "returns" is meant that the 
 bank which receives them shall collect and return 
 a draft for the amount, minus exchange charges. 
 These return drafts, as a rule, are on New York, 
 Chicago, or some city whose exchange is accepted 
 at par. By "credit" is meant that the proceeds 
 of the collected checks — deducting exchange, if 
 there be any charged — are to be credited to the 
 account of the sending bank. 
 
 Now, having collected into a separate package 
 the checks to be sent to each bank, the clerks sit 
 down to write. The letters are printed duplicate 
 forms with instructions at the head, stating 
 whether they are sent for returns or credit, that 
 for a certain amount dishonor of the items is to be
 
 TRANSIT DEPARTMENT 87 
 
 wired, and that under specified conditions items 
 are to be protested. Below on the blank space 
 each check inclosed is fully described, the name 
 of the bank on which it is drawn, the maker, or, 
 most usually, the last indorser, and the amount of 
 the item being given. Many banks still use the 
 old method of writing these letters with pencil, 
 but most up-to-date institutions use machines, 
 having the essential advantages both' of the type- 
 writer and the adding-machine. By means of 
 these the letters are quickly and neatly written 
 and footed up. Some write their letters on the 
 plain typewriter and sum the amounts on an 
 adding-machine. 
 
 When the letters are written, it remains to 
 prove them. Very apparently the amount of 
 checks held over from the last balance added to 
 the amount of the checks collected should equal 
 the amount of the letters plus the present hold- 
 over. The matter of balancing may become, in 
 some instances, a very difficult matter, especially 
 if the clerks do not keep their eyes open and their 
 wits alert, for figures on bank checks, contrary to 
 the desideratum, are not always very legible. At 
 least, they are frequently ambiguous to such an 
 extent that an error is quite easy. 
 
 After the balance, the checks are all indorsed 
 with the bank stamp. Then the original letters, 
 with items inclosed, are mailed to their respective 
 destinations, but the duplicates are put on file 
 for record, the returns being carefully separated 
 from the credits. To insure record of these checks 
 out for collection, the amount sent to each bank 
 is also entered on a sheet or book, the reverse
 
 88 PRACTICAL BANKING 
 
 side of which is often used to record remittances 
 on letters sent for returns. 
 
 There is another side of this department not 
 yet mentioned, namely, the receiving of remit- 
 tances. The returns should be demanded in a 
 reasonable time. It is rare that banks are not 
 prompt in remitting for items sent them, as they 
 are usually glad to get the business, but occasion- 
 ally there will be only one bank in a small town, 
 and if facilities are poor for handling its checks 
 except through it directly, one must "pamper it 
 mightily," or it will let one's items be unremitted 
 for during week after week. In many cases it has 
 been expedient, though not on the whole desir- 
 able, to use the express companies to collect such 
 checks. These little banks become very irate if, 
 in order to get better service, resort is had to the 
 express company for collection. In one particular 
 case, for instance, it is related that the bank paid 
 one of the checks thus presented to it in coin 
 entirely, putting the limit of small coin in the bag, 
 and covering the whole with a liberal coat of 
 molasses. But this sort of petty spite is rare, as 
 it is not conducive to advantage, but leads to 
 certain detriment. It behooves the clerk in charge 
 of the transit department to keep an eye vigilant 
 to see that remittances and credits are made 
 promptly. If there appears to be any unwarrant- 
 able delay, he sends a tracer asking why advice 
 has not been forwarded on the items mailed. 
 
 As fast as the drafts come in for return letters, 
 the duplicates which they represent are taken off 
 the current file and placed on the permanent file. 
 The amount of each letter is entered on a sheet
 
 TRANSIT DEPARTMENT 89 
 
 for the purpose, sometimes the reverse of the 
 sheet on which the outgoing letters are entered. 
 At the side there is a cokimn in which can be put 
 the amount of exchange charged in each instance. 
 
 The drafts thus received in payment of items 
 sent to be collected are drawn on New York, 
 Chicago, or some par city. 
 
 Often, however, checks sent out are unpaid 
 for one reason or another, and are consequently 
 returned. In this case the remittance is relatively 
 smaller. These unpaid, returned checks are 
 charged back to the account of the bank, firm, or 
 individual which deposited them. 
 
 Usually checks are sent protestable, and if un- 
 paid are to be duly presented by a notary and 
 protested. A failure to protest, when ordered, 
 renders the offending bank liable for the amount 
 of the check. If the bank sending a check pro- 
 testable has no account, the protester can only 
 write and request a remittance to cover the fees. 
 He may be able to compel the payment of fees, 
 but, as a matter of practice, these fees are usually 
 most promptly paid. In the case where the check 
 was deposited, it is easy to charge it and the pro- 
 test fees to the account. 
 
 In the matter of exchange charges, the clerk in 
 charge of this department has an excellent oppor- 
 tunity, if he keeps his eyes open, to save the bank 
 money. Many little banks take delight in charg- 
 ing exorbitant exchange rates if they are suffered 
 to do so with impunity. However, a letter re- 
 questing the refund of excess charges for exchange 
 is usually a sufiicient reminder to discourage for 
 some time any attempts to overcharge. This may
 
 90 PRACTICAL BANKING 
 
 appear a small item, but if there are a dozen banks 
 overcharging five cents per hundred dollars for 
 three hundred days in the year, the bank's loss 
 from this source alone may soon creep up to an 
 appreciable figure. 
 
 Items sent for the credit of a bank's account 
 are handled a little differently. As soon as they 
 are mailed, they are charged on the reciprocal or 
 bank ledger to the institution to which they were 
 sent. The duplicate letters are kept on a current 
 file until advice is received that the items have 
 been credited. They are then transferred to 
 permanent files.
 
 CHAPTER IX 
 
 THE COLLECTION DEPARTMENT 
 
 As one naturally infers from its name, the col- 
 lection department is that division which collects 
 drafts, checks, notes, and other instruments left 
 with it or sent to it. It must not, however, be 
 confused with the transit department which col- 
 lects items sent as cash. The collection depart- 
 ment is operated for the accommodation of banks 
 and other customers. Yet it would not be quite 
 accurate to say that it was operated purely for 
 accommodation. There is much advantage for 
 the bank to derive from it; reciprocal favors of 
 banks elsewhere, the patronage of companies and 
 individuals, and collection charges. 
 
 Without the collection department, the hand- 
 ling of items, on out-of-town parties especially, 
 would indeed be awkward. Drafts, notes, checks, 
 - — not sent in cash letters, — etc., would have to 
 be collected in one of two ways : by personal agent 
 in the town of the drawee, or by "putting them 
 through" the transit department as cash items. 
 But to secure a special agent in each case would be 
 impracticable, though no more so than to send 
 them as cash items, since there is express desire 
 neither to have them remitted for before collec- 
 tion, as cash items sometimes are, nor to have 
 them credited to the account of the sender. They 
 are not cash, and are not to be treated as such. 
 Therefore, the collection department came into
 
 92 PRACTICAL BANKING 
 
 existence to handle just this sort of business, but 
 it probably evolved after most of the other depart- 
 ments were organized. Now, items for collection 
 come to this department in two ways and are 
 payable in two places. They come from out-of- 
 town sources, and are payable either in the city 
 or elsewhere; and they come from local customers, 
 and are payable either in the city or elsewhere. 
 Most that come from out of town are payable 
 locally, and most that come from local customers 
 are payable out of town. 
 
 First, to take up those items payable locally. 
 A vast number of checks are sent for collection, 
 the proceeds of which are to be remitted as in- 
 structed. Now, as in the transit department, 
 because of better exchange and collection arrange- 
 ments, items are frequently not sent direct to 
 their destination. But direct connection has the 
 advantage of celerity. 
 
 Checks are sent through the collection depart- 
 ment, first, when payment of them is doubtful and 
 the payees are unwilling to have them credited 
 to their accounts before they are collected. Again 
 they are sent by persons who have no affiliation 
 with a bank by which they can get them cashed 
 before collection is effected. Lastly, checks, sent 
 as cash items from out-of-town banks but dis- 
 honored for insufficiency of funds, are often sent 
 back for collection with instructions to hold them 
 over for a time in case of nonpayment. But 
 checks do not form any large percentage of the 
 items handled through this department. 
 
 Even more numerous than checks, in this de- 
 partment, are drafts. As some one has said, the
 
 THE COLLECTION DEPARTMENT 93 
 
 distinction between a check and a draft is that one 
 is a command to pay, while the other is a request 
 to pay. The indebtedness, of which the draft is 
 supposed to be evidence, is generally of three 
 sorts: namely, (1) for goods delivered; (2) for 
 goods deliverable on payment or acceptance of 
 draft; (3) for services rendered. 
 
 (1) Most drafts for goods delivered are made 
 payable on demand or at sight. These terms are 
 identical, save in those places where the days-of- 
 grace custom still holds forth. There the draft 
 "at sight" is payable three days after sight. All 
 drafts may be sent with or without exchange. If 
 "with exchange," the drawee not only pays the 
 face of the draft, but the exchange charges. Other- 
 wise, the collecting clerk deducts the charges on 
 remitting to the sender, although there are fre- 
 quent inter-bank arrangements whereby no col- 
 lection charges are made. 
 
 (2) Drafts covering a shipment of goods with 
 bills of lading attached are not always payable 
 at sight on demand, but frequently at thirty, 
 sixty, or ninety days' sight. However, a discount 
 is sometimes offered for the payment of these 
 before maturity. Bill-of-lading drafts, not pay- 
 able at sight, are presented by the collecting bank 
 for acceptance, which is the written agreement to 
 pay them at maturity. When acceptance is ob- 
 tained, the bill of lading is in many cases released, 
 and the draft, which has become as binding as 
 any form of note, is filed away till the day for its 
 collection. But this is a matter regulated by 
 statute and no absolute rule can be laid down. 
 
 (3) Finally, there are drafts for services rend-
 
 94 PRACTICAL BANKING 
 
 ered. Quite commonly agents and salesmen draw 
 on their employers for expenses, commissions, and 
 salaries. Usually these drafts are accompanied by 
 orders or itemized expense bills. Not infrequently, 
 also, an oflBcer draws against his company for 
 certain sums which he has need of. 
 
 Notes are much in evidence, though on the 
 whole not as much as drafts. The notes handled 
 are easily arranged into four classes, as follows: 
 
 (1) those covering purchases of merchandise; 
 
 (2) those coming from persons who will not or 
 cannot discount them; (3) those pledged as col- 
 lateral; (4) loans and discounts. 
 
 (1) Many companies sell vast quantities of 
 merchandise to foreign, that is, out-of-town, 
 buyers. Often, instead of a draft with bill of lad- 
 ing attached, especially if payment is divided 
 into several installments, a note or a series of 
 notes is signed for the debt. These notes are 
 made payable in the place wh^re the signer has 
 his business. The notes are forwarded for collec- 
 tion to some bank in the city where they mature. 
 Thus, if a small merchant buys a cash register for 
 fifty dollars, he may have it broken up into five 
 notes of ten dollars each, payable one per month. 
 The bank to which they are forwarded collects 
 them as they fall due and remits the proceeds to 
 the sender. One may wonder why these notes are 
 not discounted, but are sent direct. Sometimes 
 they are discounted, but they are not always de- 
 sirable to banks on account of their small amount. 
 Likewise, the company usually does not wish to 
 discount them, since, if it carries on an extensive 
 business of this kind, it finds it more profitable to
 
 THE COLLECTION DEPARTMENT 95 
 
 hold the notes and collect them independently, 
 thus saving a large discount bill. It all depends 
 upon whether they could utilize the capital in- 
 volved to such advantage that it would amount 
 to more than the discount. 
 
 (2) Many people have good reason for not dis- 
 counting paper which they hold. Possibly they 
 do not need the value of it, and are content to 
 wait till the notes fall due and then present them 
 through collection channels. On the other hand, 
 they may not be able to get them discounted 
 either because of no bank affiliation or because 
 of the poor character of the paper. 
 
 (3) Banks and others very often accept notes 
 as collateral. These are transferred to the bank 
 or person holding them. In case this collateral 
 matures before the paper it secures, the possessor 
 is generally authorized to make the collection of 
 it, the proceeds to be applied to the secured note. 
 A large volume of this class of collections is 
 handled by every bank. 
 
 (4) The most numerous class of notes handled 
 through the collection department is that which 
 covers the discounts of other banks. Every bank 
 takes a large amount of paper maturing in other 
 cities. These are presented for payment through 
 the collection department of some bank in the 
 place where they are payable. In this particular 
 the collection department is well-nigh indispens- 
 able, as it insures prompt and energetic attention 
 to matters which otherwise would have to go 
 through endless irregularities. 
 
 Now, the last class of items handled by the 
 collection department consists of sundry other
 
 96 PRACTICAL BANKING 
 
 instruments, on which there is a certain sum to 
 be paid before their deHvery. This includes 
 stocks, bonds, mortgages, deeds, etc., to which 
 are usually attached drafts, calling for an amount 
 which is the cost of the stock or bonds with the 
 commission, the face and interest of the mort- 
 gage, or the price of the property which the deed 
 conveys. 
 
 It must be understood that the collection de- 
 partment not only handles those items sent to it 
 for collection locally, but that it forwards those, 
 payable elsewhere, to the proper banks where 
 they are handled in an identical manner. 
 
 When collection has been made, it is the duty 
 of the clerk to remit the amount paid — minus 
 the exchange and collection charges — to the 
 sender of the item. Of course, the remittance 
 should be in such exchange that it may be used 
 at par. 
 
 We may conclude that the collection depart- 
 ment is a necessary division of the bank, organized 
 to facilitate the handling of instruments not sent 
 as cash. Its relation to the transit department is 
 close. They use similar methods of mailing out 
 items to be collected elsewhere; both have partic- 
 ular banks to which they send their letters, be- 
 cause of favorable exchange or collection rates. 
 
 In nearly every preceding chapter, mention 
 has been made of exchange and exchange rates. 
 This very essential and convenient feature of 
 the banking business is the subject of the next 
 chapter.
 
 CHAPTER X 
 
 THE DOMESTIC EXCHANGE DEPARTMENT 
 
 This department is operated for the buying 
 and selling of exchange on different parts of the 
 country. "Exchange" is the term which has 
 come to denote the bank's check on some bank in 
 another place, for which you exchange your 
 money or your check. And the name of the city 
 prefixed to the word "exchange" exposes the 
 city on which the check is drawn, not the one 
 which draws it. Thus, Chicago exchange would 
 be a bank's check on some bank in Chicago. 
 
 Preeminent among exchange cities of the coun- 
 try is New York. It is the financial center of the 
 United States. Wall Street — which is really 
 only a term that represents the aggregate finan- 
 cial interests of the country — controls the policy 
 of national finance. The thirty-eight national 
 banks in New York City, in the year ending Sep- 
 tember 1, 1909, made loans amounting, in round 
 figures, to $926,000,000, or about twenty per 
 cent of all the loans made by national associations 
 in the United States. 
 
 New York's position as a central reserve city 
 secures her a vast amount of deposits from other 
 cities, for outside national banks may carry from 
 one half to three fifths of their reserve as deposit 
 balances in that city.^ Practically, every bank 
 
 ^ See chapter xx for the new reserve requirements. In 1914 five 
 or six great New York banks held three fourths of the reserves 
 deposited in that city.
 
 98 PRACTICAL BANKING 
 
 in the country, from the little one-clerk institu- 
 tion at the forks of the road to the largest urban 
 bank, carries an account in New York. What 
 is true of New York is true in a less degree of 
 Chicago and St. Louis, and, in a still less degree, 
 of Philadelphia, Washington, Boston, and San 
 Francisco. But we shall treat most specifically 
 of New York exchange, as it plays the leading role 
 in this department. 
 
 In 1912, Congressman Vreeland, of New York, 
 explained New York City's importance as an 
 exchange city as follows : — 
 
 Under existing conditions the banks of New York 
 are charged with the responsibility of maintaining 
 credit and of maintaining cash payment in the United 
 States. New York holds the ultimate reserves of the 
 country. The surplus money of banks may be de- 
 posited in San Francisco or New Orleans or St. Louis 
 or Chicago, but ultimately those not needed at home 
 find their way to the banks of New York. This is true 
 because New York has the only real call (loan) market in 
 the United States.^ 
 
 During the last few years Washington has 
 assumed the proportions of an important finan- 
 cial factor, through the action of ex-Secretary 
 Cortelyou, who, during the financial crisis of 
 1907, distributed government deposits in such a 
 way as to strengthen a large number of banks 
 throughout the country. Some have gone so far 
 as to declare that this custom will ultimately 
 
 * From a speech in the House of Representatives, February 6, 
 1912. The next sentence should be borne in mind in regard to what 
 we shall see in chapters xix and xx: "It is a real call market nine 
 years out of ten, but in the tenth year they often call in vain."
 
 DOMESTIC EXCHANGE DEPARTMENT 99 
 
 transfer the control of finances from Wall Street 
 to the Capitol, and they assert, in their enthusi- 
 asm, that this will be the end of the "money 
 kings'" czar-like tyranny over our finance. But 
 they forget that the Administration is already a 
 powerful factor in national finances, and that it 
 can create, as well as dispel, panics. They also 
 forget that there is just the same potentiality 
 for the "money kings" controlling the situation 
 through Washington as through Wall Street. 
 
 In the very near future there will be a tendency 
 for national finances — so far as commercial bank- 
 ing is concerned — to cluster around twelve 
 centers, with a central supervision in Washington. 
 We refer, of course, to the effect of the operation 
 of the Federal Reserve System.^ Nevertheless, 
 New York's reserve bank is the largest and will 
 be the most influential for some time to come. 
 At least for the present, the nation's financial 
 offices are still located in the shadow of old Trin- 
 ity Church tower. 
 
 Banks carrying desirable accounts in New 
 York are able to obtain interest on their daily 
 balances, usually two per cent. Thus, a bank's 
 account in New York for a part of its reserve is 
 a better arrangement than to keep it all lying in- 
 active in its vaults. If judiciously placed, these 
 funds are just as safe ^ as though within one's 
 own safe, and almost as available, for it is rare 
 that a bank is not able to dispose of a large block 
 
 ^ See chapter xx for a full discussion of the new system. Banking 
 practice regarding exchange and collections will be gradually 
 changed; it will require three years, at the least, for readjustments 
 to be made. 
 
 * With the exception cited in a previous footnote.
 
 100 PRACTICAL BANKING 
 
 of New York exchange, if not at a premium, at 
 least at par. 
 
 But though national banks carry a part of their 
 reserve in New York for the interest, what 
 further condition makes every bank, large or 
 small, keep a certain volume of New York funds? 
 The answer: In a country where ninety-five per 
 cent of all transactions are carried on by check 
 and where a large percentage of these transactions 
 are interurban and interstate, it is necessary to 
 have some common, standard exchange. From 
 the very status rerum. New York exchange be- 
 came the standard. In certain sections, Chicago 
 and St. Louis exchange are also first class. 
 
 Being prime. New York exchange is theoreti- 
 cally payable at par. But in practice this is a 
 matter of supply arid demand. Sometimes a dis- 
 count must be paid to convert it into cash. This 
 is rare in the case of individuals trying to cash 
 small drafts; but if a hapless traveler chances 
 to be stranded in a village with one bank, he will 
 probably be charged a fee for negotiating his 
 New York check. 
 
 The discounting of New York exchange occurs 
 somewhat more frequently in the case of inter- 
 bank transactions. The larger institutions usually 
 take in enough New York drafts from their cus- 
 tomers to keep their reserve account more than 
 replenished. Consequently, they sometimes wish 
 to dispose of a block of, say, ten to fifty thousand 
 dollars on New York for cash. Usually they can 
 sell the exchange at par or even at a premium. 
 On the other hand, if the prospective pur- 
 chaser is independent and the would-be seller
 
 , DOMESTIC EXCHANGE DEPARTMENT 101 
 
 is anxious to get the cash, a discount may be 
 exacted. 
 
 There are several sources of a bank's supply of 
 New York exchange, aside from outright pur- 
 chase. First, for every cash letter sent out for 
 returns, proceeds are remitted in the form of a 
 New York draft. Sometimes remittances are on 
 banks in other cities, but not as a rule. Then 
 every bank has a number of accounts of other 
 banks, carried for the sake of special accommoda- 
 tions in the matter of exchange charges or credit, 
 or even because of reciprocal accounts. These 
 accounts are replenished by checks, frequently 
 collectible in New York exchange at par, or by 
 direct deposit of drafts on the metropolis. Third, 
 every association receives from its depositors, 
 along with other foreign checks, a large volume 
 of New York drafts. Added to this is the num- 
 ber of checks on the big city cashed through 
 the paying window and received in payment of 
 notes, etc. 
 
 Now, it may be quickly seen what demands 
 are ordinarily made for New York exchange. 
 First, reciprocally the bank, deducting fees, must 
 remit for cash items, sent it for collection, in the 
 standard exchange. Second, it is necessary to 
 carry accounts with banks in many places and 
 often convenient to make deposits of exchange. 
 Next, depositing banks are liable at any time to 
 request the remittance of a fraction or all of their 
 balance in New York funds. Last, banks and 
 individuals buy exchange constantly. 
 
 The exchange department is operated because 
 it is necessarily incidental to the conduct of the
 
 102 PKACTICAL BANKING 
 
 banking business. It is not usually a money- 
 making branch. " It is a fact that an examination 
 of this account — the exchange account — on the 
 books of any city bank almost invariably will show 
 that it is a source of loss rather than profit."^ 
 
 Yet, properly conducted, a large bank ought to 
 make rather than lose on this department. For it 
 takes in great quantities of New York exchange 
 from its depositors — individual and bank. True, 
 it must pay exchange charges on remittances for 
 a large volume of outgoing checks, but the very 
 volume of these checks enables the bank to make 
 arrangements for cheap collection. Then it sells 
 an immense amount of exchange to its customers 
 at the regular rate. 
 
 On the other hand, the small bank, unless 
 shrewdly managed, is disadvantageously placed, 
 and stands to lose money. Usually, it cannot 
 make the profitable arrangements for the hand- 
 ling of its items by other banks; it has few bank 
 depositors; its individual depositors supply only 
 a limited amount of New York funds. Conse- 
 quently, it has to buy outright for its New York 
 account or ship currency to the metropolis. 
 
 In connection with this department in inland 
 banks is usually operated the sale of travelers' 
 cheques. Travelers' cheques, issued by certain 
 express companies and banks, and payable at al- 
 most any point in the world, are a source of great 
 convenience. We are all familiar with the form 
 of this cheque — its line of figures across the face, 
 showing the value in different countries; the line 
 
 ^ Humphrey Robinson, A Simple Explanation of Modern Bank- 
 ing.
 
 DOMESTIC EXCHANGE DEPARTMENT 103 
 
 for the buyer's signature, by which he is identi- 
 fied in a strange place. In a subsequent chapter 
 this form of exchange will be more fully discussed. ^ 
 
 An idea of how New York predominates in the 
 financial world in one respect can be gathered 
 from the following comparisons, arrived at from 
 the Report of the Comptroller of the Currency for 
 1909. The net deposits in New York national 
 banks were almost three times those in both Chi- 
 cago and St. Louis, the other two central reserve 
 cities; were equal, approximately, to the net de- 
 posits of the other forty-six reserve cities; were 
 equal to one fourth of the entire deposits of all 
 national banks, excluding its own; and were equal 
 to about one fifth of all national bank deposits in 
 the United States. The net deposits in New York 
 national associations, at that time, amounted to 
 $1,179,000,000 in round numbers. Now, state 
 bank deposits have not been concentrated as 
 much in one city, but when we remember that 
 the deposits of national banks equal thirty-nine 
 per cent of all deposits in the country, it is not 
 marvelous that New York's influence is so great. 
 
 But New York exchange is by no means the 
 only kind dealt in. It is necessary for large banks 
 to keep accounts in many prominent cities to 
 accommodate demands, both private and corpo- 
 rate. Persons who buy exchange of a bank are 
 charged a small fee, usually only a trifle over cost. 
 Naturally enough, however, certain designated 
 customers, by virtue of the excellence of their 
 accounts, are allowed exchange without extra 
 charge. 
 
 ' Chapter xviii.
 
 CHAPTER XI 
 
 THE INDIVIDUAL LEDGER 
 
 A BANK ledger of individual accounts is an inno- 
 cent looking book which contains more mischief 
 and hard knocks than the casual observer would 
 believe. It is the simplest of all books, having 
 merely columns for dates, debits, credits, and 
 balances. But the manner in which work must 
 be done in it, as will be shown later, makes it the 
 young bank man's bugbear. Ask any old bank 
 employee what the most thankless job about the 
 institution is, and nine times out of ten he will 
 tell you the individual books. However, we must 
 not therefore infer that they are unimportant, 
 for in this set of books are kept the records of 
 debits, credits, and balances of all the bank's 
 commercial creditors — not including, of course, 
 any accounts of other banks, of States, or of the 
 United States, which properly belong to the re- 
 ciprocal or bank ledgers. 
 
 The individual ledger must be posted and 
 proved up, as a rule, daily, and a very large num- 
 ber of debits and credits must be entered thereon 
 each day. It differs from the individual ledger of 
 the ordinary business house in that work on it 
 must necessarily be done very rapidly and accu- 
 rately, and that the books must be clean and in 
 balance before the doors of the bank are reopened 
 for business. 
 
 In addition to posting, which we shall presently
 
 THE INDIVIDUAL LEDGER 105 
 
 discuss in more detail, the individual bookkeeper 
 must watch and keep an accurate record of all 
 overdrafts allowed, and of new, reopened, and 
 closed accounts. He must likewise furnish the 
 proper officer, at stated periods, with a list of 
 customers who seem undesirable, because of low 
 balances or frequent overdrafts; also, of those 
 who make a frequent habit of stopping payment 
 on checks, of issuing checks dated ahead, or of 
 leaving technical errors in their drafts intention- 
 ally. While there is usually an officer whose duty 
 it is to examine checks at the close of business 
 each day and pass upon signatures, dates, indorse- 
 ments, etc., the bookkeeper is in no way relieved 
 of the responsibility, for he may often detect a 
 discrepancy in time to save money for the bank, 
 while, if it were allowed to wait over till after 
 hours, the chances of remedying the error would 
 be lessened. 
 
 The individual ledger of to-day is usually a 
 loose-leaf book. The advantages and conven- 
 iences of this form of book are too apparent to 
 require any elucidation. But a great many very 
 large banks use a permanent sheet ledger. The 
 ordinary ledger sheet has space reserved and lined 
 off at the top for name and address. Below, the 
 paper is so ruled that there is a column on the 
 left-hand edge for the date, a wider column next 
 divided into small spaces for amounts of checks in 
 detail, then narrower vertical rulings for checks 
 in aggregate, deposits, and balances. 
 
 Now twice, and sometimes oftener, during the 
 day, collection is made of home checks from the 
 tellers, the general bookkeeper, the collection and
 
 106 PRACTICAL BANKING 
 
 the exchange departments, it being so arranged 
 that one of these collections shall be made at the 
 time when the clearing returns are received. At 
 the same time collection is made of all deposit 
 slips. These, being distributed alphabetically, are 
 turned over to the several bookkeepers, who 
 immediately set to work. It must be nip and tuck 
 to finish as quickly as possible; at the same time 
 they are to see that accuracy is maintained both 
 in calculating and in posting to the right ac- 
 counts. 
 
 A very important feature of posting is to ob- 
 serve due care in putting down dates correctly. 
 This should be done not only as regards the days 
 and months, but as regards the years also. It 
 has come within the experience of the writer to 
 be involved in several complications, always 
 embarrassing, and in at least one instance serious, 
 because a bookkeeper has been careless in this 
 particular. It is also of the utmost importance 
 that care be exercised in placing debits and credits 
 to the proper account. For instance, suppose 
 John W. Smith has this morning made a deposit 
 of four hundred dollars and the bookkeeper hast- 
 ily credits it to the account of John M. Smith. 
 Now, if John M. Smith be an unscrupulous man, 
 nothing is easier than to write a check for the 
 total amount shown to his credit, cash it, and 
 escape. Even if he is caught, it is a question 
 whether he could be handled legally. It is even as 
 important to see that no check is charged to the 
 wrong account, for the double reason that a man 
 mav overdraw his account without his or the 
 bank's knowledge, and that the institution is
 
 THE INDIVIDUAL LEDGER 107 
 
 extremely likely to lose what may be a valuable 
 account and earn the customer's enmity. 
 
 When all checks and deposits have been posted 
 and the bank is closed for the day, the time for 
 proving the day's work is at hand. As a prelim- 
 inary step a journal is made of the individual 
 checks and deposits on different sheets. This is 
 done with the adding-macliine, the credits and 
 debits being so di\'ided as to fall into sections cor- 
 responding to the different ledgers. Now, the 
 total of deposits for each section is added to the 
 balance of that section for the previous day; the 
 checks are subtracted. With a total of these bal- 
 ances the amounts on the books must be made to 
 coincide. The summa summarum of these sec- 
 tions should agree with the general bookkeeper's 
 record of the total balance of individual deposits 
 for that day. Then comes the actual proving-up 
 of the ledgers. There are three well-known 
 methods of balancing the ledger; namely, (1) the 
 trial balance; (2) the statement-duplicate; (3) the 
 debit and credit "tab." 
 
 The trial balance is the oldest system, one that 
 has about suffered natural and eminently satis- 
 factory death. The clerk has a second book by 
 him in which are the names of the customers in 
 his ledger. As he posts, he writes down the bal- 
 ance of each customer opposite his name on the 
 trial-balance book. If, when he has compared an 
 addition of his totals with the balance of his sec- 
 tion as obtained above, there should not be ex- 
 act coincidence of amounts, he must search for 
 the difference even to the last penny. In all cases 
 overdrafts, which are usually brought down in
 
 108 PRACTICAL BANKING 
 
 red ink, must be subtracted from a list of balances 
 for the day. 
 
 The statement-duplicate system is different. 
 Here every check and deposit is posted twice 
 daily — each time by a different man in a differ- 
 ent book. In the afternoon the names and bal- 
 ances affected during the day by posting are 
 called from one book and verified on the other. 
 In this event, it is only necessary to prove up the 
 ledger once a week, for it is the rarest thing that 
 two experienced bookkeepers will make the same 
 error. This system has the advantage of making 
 pass-book balancing easy. One merely gets the 
 checks out of the file and enters their totals on the 
 pass-book, for the duplicate record in the ledger 
 can be torn out and used as an itemized statement. 
 
 The debit and credit "tab" method is perhaps 
 the easiest to handle of all. Placing a debit or 
 credit "tab" in those accounts only that are 
 changed for any one day, the bookkeeper makes 
 a separate list of the balances of these accounts 
 for the present and previous day. Their differ- 
 ence should just equal the difference between the 
 checks and deposits for that particular section 
 on that particular day. The advantage of this 
 method lies in the fact that the possibility of error 
 in adding and checking is reduced and confined 
 to the number of accounts changed for any one 
 day, and only in those accounts need the book- 
 keeper look for his error. Once in a fortnight, 
 however, the entire ledger should be balanced. 
 
 There remains the simple method of posting 
 the checks and deposits on the regular ledger and 
 then adding up balances to make them, in toto.
 
 THE INDIVIDUAL LEDGER 109 
 
 agree with the general bookkeeper's record. This 
 is the downright, bludgeon method, taking advan- 
 tage of none of the short cuts. 
 
 Finally, either in the afternoon following the 
 balance, or before hours on the next business day, 
 all entries of checks and deposits should be veri- 
 fied by a man, other than the one who posted 
 them, for the purpose of detecting errors that 
 may exist of credits or debits to wrong parties.
 
 CHAPTER XII 
 
 THE RECIPROCAL OR BANK LEDGER 
 
 Every bank which accepts deposits of checks 
 — and all do — receives daily a large number on 
 banks in places more or less distant. These items 
 are sent for collection, as described in an earlier 
 chapter, and unless some definite arrangement 
 exists between the sender and the receiver, no 
 special accommodations are extended and the 
 maximum exchange rate is charged. But every 
 bank has special agreements, and of these this 
 chapter has to treat. 
 
 Arrangements are based on two things: first, 
 reciprocal agreement by which mutual special 
 privileges are granted; second, the carrying of 
 accounts. The latter naturally includes those ac- 
 counts created by extension of credit. These two 
 methods result in quick and courteous attention, 
 and in minimum or advantageous exchange rates. 
 
 The reciprocal agreement consists generally of 
 the promise of one bank to handle certain items 
 at a definite exchange rate in return for a similar 
 favor. In this manner banks can mass items on a 
 wide territory into their letters to certain associa- 
 tions, which can handle them conveniently at a 
 rate from one half to one fourth what they would 
 cost if sent direct to each bank. Reciprocall3% the 
 senders handle, for the other banks, checks on 
 institutions which they may collect at a low rate 
 or even at par.
 
 RECIPROCAL OR BANK LEDGER 111 
 
 This agreement necessitates, as a natural con- 
 sequence, an account on the reciprocal or bank 
 ledger of each bank. On the ledger of the sender 
 a charge to the association to whom the items 
 were sent ; on the receiver's ledger, a credit for the 
 sender. The forming of these accounts is per- 
 fectly incidental and may be only temporary. 
 
 The second arrangement may consist of the 
 promise of one bank to carry a certain balance in 
 another, in return for which it secures interest on 
 daily balances and favorable collection rates. 
 There may be an agreement to carry mutual 
 accounts, or agreements combining the first 
 method with this one. All of these are reciprocal 
 accounts. 
 
 "Reciprocal accounts are such accounts as bear 
 only on transactions between banks, the term 
 'reciprocal' being given these accounts because 
 of the mutual exchange of business." In many 
 associations these are not known as reciprocal 
 accounts, nor is the ledger known as the recipro- 
 cal ledger; they are bank accounts and it is the 
 bank ledger. But reciprocal expresses the mutu- 
 ality of the accounts so well that we shall use it 
 by preference. 
 
 Unless permanent by agreement, these accounts 
 are cleared by remittance; that is, the collecting 
 bank sends its check on New York or some other 
 city of par standing for the amount of the items, 
 less the exchange. Sometimes the accounts are 
 only remitted for on demand. In other cases the 
 bank having the credit asks its clearance once or 
 twice monthly. At that time it requests the 
 amount to be remitted to it or placed to its credit
 
 112 PRACTICAL BANKING 
 
 with a correspondent. However, the creditor 
 bank is likely, at any time it may have need of 
 funds, to order a certain amount remitted to it or 
 sent, either in check or currency form, to one of 
 its agents. 
 
 The book on which reciprocal accounts are 
 kept is no more than an ordinary bank ledger. 
 Its pages are ruled off for the title and appropri- 
 ate information at the top, with columns below 
 for date, amount of credit or debit, and credit 
 or debit balance; for on reciprocal sheets, by their 
 very nature, there need not necessarily be credit 
 balances. If a bank has an amount on deposit in 
 another bank, it has a credit balance there, but 
 if it is keeping in its bank a deposit of the other 
 institution, it has a debit balance there. It is the 
 case of the individual customer and his bank over 
 and over. The bank has on its books a credit for 
 him; he has on his books a debit against it. To 
 be sure, with the individual customers it remains 
 always in this sense, save in the case of over- 
 drafts, while with reciprocal accounts a double- 
 action process is possible; that is, it may be a 
 credit balance to-day and a debit balance to- 
 morrow. 
 
 It is easy to see how closely this department is 
 allied to the transit department, for most of the 
 checks, drafts, and charges against and to the 
 credit of the reciprocal customers are handled 
 by the foreign cash items men. The innumerable 
 items sent out in cash letters are frequently 
 charged on the bank ledger from the sheet, 
 already described, filled out in the transit depart- 
 ment.
 
 RECIPROCAL OR BANK LEDGER 113 
 
 The items received by the paying teller, receiv- 
 ing teller, and other clerks, drawn against their 
 own bank by other associations, are charged on 
 their books to the proper banks, to be transferred 
 to the reciprocal ledger by the bookkeeper, or, as 
 seems more regular, to be charged to the recip- 
 rocal bookkeeper, who receives them and makes 
 the proper entries from the original items. 
 
 Most of these bank accounts are created and 
 maintained by an agreement which offers a cer- 
 tain amount of interest on daily balances. This 
 is in addition to usual arrangements for a line of 
 credit — but that's another story. Two, three, 
 or even four per cent is paid on such accounts. 
 In most cases interest is figured about the first of 
 every month. The method in general vogue of 
 computing the amount of interest due on average 
 balances is to discover the total amount of deposit 
 for one day and figure on such a basis. The old 
 arithmetical rule says, "Multiply the deposit bal- 
 ance for one day by the number of days in the 
 interest period to find a total for one day." But 
 in bank accounts, the balances vary from day to 
 day. So the same result is obtained by simply 
 adding up on the machine the balances for each 
 day. Of course, for holidays, the balance of the 
 previous business day is repeated. 
 
 "WTien the interest has been figured and verified, 
 it is entered to the credit of the proper bank, and 
 a notification card is sent out to the bank, stating 
 that such and such an amount has been placed 
 to its credit as interest on average daily balances 
 for the month. It is then verified by the receiving 
 bank, and if any mistake has been made, ncgotia-
 
 114 PRACTICAL BANKING 
 
 tions are commenced for its correction. These 
 difficulties, however, are not usually serious. 
 
 What is a more arduous task is the reconcile- 
 ment of accounts. By reconcilement is meant the 
 comparing of the two banks' records of their 
 mutual accounts. This is done about the last of 
 the month. 
 
 There is during the month, if the account be 
 active, a large volume of transactions of the books 
 of the two associations. Suppose A carries an 
 account with B. B is in a large city, and so checks 
 drawn on it are in constant demand. A pays his 
 remittances to banks, sending him collections, in 
 checks on B, subtracting a suitable exchange fee. 
 He also sells a good deal of exchange of B to 
 customers and others desiring it, likewise charg- 
 ing a fee. Possibly he draws on B to place other 
 deposits or to cover the proceeds of a discount, 
 or to transmit funds to the United States Treas- 
 urer. At least, at the end of the month he has 
 made quite a few drafts. 
 
 So B gets out all the drafts and other charges 
 which have been made against A's account, and 
 discovers whether their total subtracted from the 
 former balance and all subsequent deposits leaves 
 the present balance on the ledger. If so, it pro- 
 ceeds to itemize the deposits and subtract the total 
 of charges on a statement form, which it incloses 
 with the paid checks. Then comes the rub. 
 
 It maybe claimed, and I think it will be granted, 
 that bank men are very accurate in their work. 
 The nature of their business demands it. But they 
 are heirs to all human fallibility, including the 
 liability to clerical error. Add to this human fail-
 
 RECIPROCAL OR BANK LEDGER 115 
 
 ing a distance of several hundred miles, the multi- 
 plicity of checks, and the long interval in which 
 no attempt is made to reconcile the accounts, 
 and we have some cause for occasional variance 
 of the two accounts. Further, there is the matter 
 of charge tickets, of which something will be said 
 presently. 
 
 If a bookkeeper has many accounts to keep and 
 little time, he must work very rapidly. He may 
 post a check erroneously, — that is, to the wrong 
 account, — and if he makes the proper deduction, 
 his balance will not show the discrepancy. This 
 is true of deposits in even a greater degree. The 
 bookkeeper will detect most of his errors of post- 
 ing to the wrong account when he rechecks his 
 work, but if the drafts of the banks involved in 
 such an error are very similar, he may not catch it 
 even then. He may, under these conditions, not 
 detect the mistake in making out the statements, 
 so that one sometimes finds in the checks charged 
 against his bank checks drawn by another bank 
 whose draft form is similar to his. But this rarely 
 occurs. 
 
 It is quite possible, and sometimes actually 
 happens, that deposits in form of cash letters of 
 drafts and checks fail to reach their due destina- 
 tion. This is in time detected and traced by the 
 credit notification plan. But if the deposit be sent 
 near the close of the month and does not reach its 
 destination, time enough may not have elapsed 
 to take up the matter of failure to receive notifica- 
 tion before the statements are sent out. 
 
 Let it not be misunderstood, however, that 
 these errors are everyday happenings. In fact,
 
 116 PRACTICAL BANKING 
 
 expert bookkeepers rarely make them, or, at least, 
 quickly detect them. But they are possible, and 
 occasional mistakes show along what line the 
 bookkeeper has to be most careful. 
 
 So the statement is made out according to B's 
 ledger and forwarded, together with the drafts, 
 to A. A may find some charges of which he knows 
 nothing, or he may discover some other bank's 
 check among his and charged to him. On the 
 other hand, he may find no trace of what a certain 
 charge stands for, and in that case, barring mathe- 
 matical errors, he suspects some "charge slip" of 
 which he has no record. Or it may be that some 
 deposit has not been credited or has not reached 
 its destination. Anyway, he immediately sets to 
 work, with B's assistance, to locate the error. 
 
 In the matter of "charge tickets" or "charge 
 slips " a word of explanation is necessary. When 
 a bank sends items for collection and they are 
 immediately placed to its credit pending collec- 
 tion, it is often necessary to charge off some or all 
 of them, because of their subsequent dishonor. 
 This is not done by check, of course, but by a 
 ticket specifying the charge and its cause, and 
 signed by some proper oflBcer. The unpaid items, 
 with a memorandum, are sent to the bank from 
 which they came. Each bank then makes a cross- 
 entry and the affair is closed. The charge tickets 
 are sometimes not included with the checks at the 
 end of the month. So it is possible that some 
 return of unpaid items may have strangely failed 
 of its destination, and the bank to which it was 
 charged does not have a record of the debit. But 
 in most banks, charge slips are returned.
 
 RECIPROCAL OR BANK LEDGER 117 
 
 There is usually no trouble in reconciling these 
 differences when they do occur. But now and then 
 a hard case will come up. The writer has in mind 
 an instance where a small check, returned for non- 
 payment, was apparently lost in the mails. At 
 least, the bank to which it was directed claimed 
 not to have received it. The statement at once 
 showed a discrepancy. The other bank wrote 
 promptly about it. The item was traced, but no 
 vestige could be found. So the one bank con- 
 tinued in its charge of the check, and the other 
 continued to carry the balance on its book, as 
 though no such charge had been made. Thus it 
 went on merrily for several months, each state- 
 ment being followed by a letter from the irascible 
 cashier of the other bank, demanding that the 
 charge be taken off. At last, the signer of the 
 check, who had meantime made it good, con- 
 sented to issue a duplicate check in its place. 
 
 It has been seen that the reciprocal bookkeeping 
 department is one of the main arteries of the bank. 
 It caters to a certain kind of customer from whose 
 accounts much general profit can be derived. 
 Through these customers avenues are opened up 
 for getting accommodation and advantageous 
 terms for a large volume of its business. It is just 
 a process — as the name implies — of giving and 
 receiving, of offering certain rates here for certain 
 rates there, of exchanging deposits, etc.
 
 CHAPTER XIII 
 
 THE GENERAL BOOKS 
 
 It has been shown that each phase of the bank's 
 work is detailed to some particular department — 
 deposits to the receiving teller, disbursements to 
 the paying teller, loans and discounts to the loan 
 clerk. It has also been shown that each daily 
 balances his credits with his debits. 
 
 But for the sake of convenience, and because 
 good business methods imperatively call for it, 
 there must be some general department where all 
 the transactions of the bank, in compact form, 
 are gathered, compiled, and tabulated. It is ne- 
 cessary to provide means for a general survey or 
 recapitulation of total resources and liabilities. 
 This is accomplished by the use of the general 
 ledger. In addition to collecting one day's trans- 
 actions into one book, the general ledger has some 
 special functions of which we shall speak in the 
 proper place. 
 
 As a basis for this treatment of the accounts 
 handled on the general ledger, it is necessary to 
 summarize briefly the kinds of business handled 
 by the several departments. The paying teller 
 handles home, clearing and foreign items, cash, 
 loans and discounts, exchange, etc. ; the receiving 
 teller, home, clearing and foreign items, deposits, 
 cash, and exchange. So, we might continue 
 through the whole gamut of bank departments, 
 and probably we should find that the following
 
 THE GENERAL BOOKS 119 
 
 accounts were necessary on the general ledger: 
 bank, individual and savings deposits, loans and 
 discounts, interest and discount, interest on de- 
 posits, interest from banks, expense accounts, 
 exchange, certificates of deposits, certified and 
 cashier's checks. If to these are added accounts 
 for capital stock, surplus, undivided profits, furni- 
 ture, real property, bonds, and the clearing house, 
 the principal accounts on the general books are 
 named. 
 
 General accounts, as a rule, do not record in- 
 dividual transactions, but show in aggregate each 
 day's transactions under their proper heads. 
 
 Although not first in the enumeration, capital 
 stock deserves the first place in a logical discus- 
 sion of these accounts. Capital stock, of course, 
 is the working basis of the bank, subscribed by 
 persons who believe it to be good investment. 
 Before a national bank can open its doors for 
 business, fifty per cent of the capital stock must 
 be paid in. It therefore always owns a credit 
 place on the ledger. 
 
 From time to time, banks add part of their 
 earnings to a surplus account. This simply in- 
 creases the ratio which assets bear to liabilities 
 and increases the book value of the capital stock. 
 Before declaring each dividend, national associa- 
 tions have to set aside a certain part of their 
 earnings as surplus, until it reaches a figure equal 
 to twenty per cent of the capital. 
 
 The name "undivided profits" completely be- 
 trays its utility. Credits made to it are transfers 
 from income-bearing accounts, such as interest 
 and discount or bond income. Charges against
 
 120 PRACTICAL BANKING 
 
 it are usually transfers to the surplus account, and 
 to cashier's checks, the latter of which is in turn 
 reduced by dividend checks for the amount of 
 the transfer. 
 
 Fluctuating and constantly changing, the loans 
 and discounts account is rapidly filled and refilled 
 with entries. This is caused by the continual 
 liquidation of debts and the relending of the 
 bank's credit. This account will show at a glance 
 just the total amount owing the bank for notes 
 and other discounts. Many banks keep separate 
 accounts of demand and time loans. 
 
 There are always several deposit accounts. In 
 general, they are public, bank, individual and 
 savings, and certificates of deposit. Public de- 
 posits include federal, state, or county deposits, 
 usually put at interest and not actively drawn 
 against. Bank deposits, steady or temporary, are 
 reciprocal. Individual deposits refer, naturally, 
 to the commercial or checking accounts of per- 
 sons, firms, or corporations. Savings accounts, 
 with certificates of deposit in a slightly different 
 sense, are accounts little drawn against and put 
 at interest. 
 
 On the ledger there are also accounts to show 
 the debit and credit of cashier's checks, of certi- 
 fied checks, of exchange collected and paid, of 
 interest and discount, of interest on deposits, and 
 of interest received from other banks. A word of 
 explanation may not be amiss in regard to the 
 last-named. The account for interest from banks 
 records the interest for balances carried in those 
 banks. More of this bank interest has been spoken 
 of in the previous chapter. The bond income ac-
 
 THE GENERAL BOOKS 121 
 
 count, as the name suggests, shows the result of 
 the work which the investment in bonds is doing. 
 The actual account of bonds belonging to the 
 bank is quite another account. 
 
 In cities where there are clearing houses, the 
 members carry clearing-house accounts on the 
 general ledger, which show just how the bank 
 fared on each day's clearing, whether debited or 
 credited. The best business methods prompt the 
 collection and payment of clearing-house bal- 
 ances each day, so that this account is always 
 balanced off at the close of the day. But in cities 
 where, instead of actual money being paid into 
 the clearing house for balances and collected from 
 it, drafts are issued in favor of credit banks and 
 against debit banks, this account is not always 
 balanced out. Frequently, in such cities, the 
 clearing-house draft is sent through as a clearing 
 check itself. This is not always a sound policy, 
 however. Another clearing-house account is kept 
 on the general books in cities where, as in New 
 York, the associated members carry large amounts 
 on deposit in the vaults of the clearing house. 
 
 On the national bank ledger is found a five- 
 per-cent-redemption account. It must always 
 show a credit equal to five per cent of the bank's 
 circulation, and must be kept on deposit with the 
 Treasurer of the United States, to cover redemp- 
 tions of the bank's circulation. 
 
 The methods of general bookkeeping depart- 
 ments are almost as many and varied as there are 
 different banks and different officers. There is 
 the same fundamental organization, the same pur- 
 pose, but the details are worked out to comply
 
 122 PRACTICAL BANKING 
 
 with local conditions. In describing this depart- 
 ment, therefore, we are endeavoring to give as 
 general an account as possible, selecting for the 
 different features the methods which seem best to 
 accomplish their intended end. 
 
 On account of the diversity and entirely dif- 
 ferent style of accounts, the general ledger is more 
 engaging work than the individual book. The 
 latter, by reason of its routine, is likely to grow 
 monotonous. 
 
 In the larger banks several men are employed 
 for the general ledger alone; in the smaller ones, 
 only one. Sometimes the general and bank 
 ledgers are kept by the same man, and, if we but 
 go far enough and look in at the country book- 
 keeper, we may see him driving away at all of the 
 books, general, bank, and individual, with, per- 
 haps, the whole between two covers. 
 
 Many associations require the general book- 
 keeper to keep a " cash sheet," which shows at a 
 glance how much money the bank has in its vaults 
 on a certain day, the amount taken in and dis- 
 bursed by all the departments, including letters 
 received containing items for collection and credit, 
 notes discounted and paid, remittances made, and 
 exchange. It simply is a convenient method for 
 spreading such information on one sheet as may 
 be necessary to show the transactions of one day. 
 Close akin to this, in one respect, is a loose-leaf 
 sheet, generally kept by the transit department, 
 showing on one side the remittances received for 
 cash letters sent out, along with the exchange paid, 
 and on the reverse side the amount of cash letters 
 mailed on the same day.
 
 CHAPTER XIV 
 
 THE SAVINGS DEPARTMENT 
 
 As we have seen, the modern bank has grown 
 to be a general exchange mart of credit. It has 
 come to be the medium through which people 
 may expeditiously handle business based on faith 
 in each other. Accounts are formed, by a process 
 of credit, for the purpose of making drafts against 
 them to liquidate other indebtednesses. 
 
 I 
 
 But there is a class of accounts which cor- 
 responds closely to those contained in such in- 
 stitutions as the old Bank of Amsterdam, namely, 
 accounts which represent money deposited for 
 safe-keeping. As there is a larger cash basis for 
 them and as they are not actively checked against, 
 they are more profitable to banks, in proportion 
 to their amount, than ordinary commercial ac- 
 counts. This, with the fact that money can al- 
 ways demand a certain percentage of interest 
 outside, has led to the general bank practice of 
 offering interest on savings accounts. 
 
 There are, of course, institutions which con- 
 duct a purely savings business, but their scope is 
 too broad for consideration here. We shall, there- 
 fore, devote ourselves to a short discussion of the 
 savings department of the commercial bank, 
 though, perforce, frequent reference may be 
 made to savings banks.
 
 124 PRACTICAL BANKING 
 
 In his Report for 1909, the Comptroller of the 
 Currency says : — 
 
 Peculiar interest attaches to statistics relating to 
 savings institutions, inasmuch as they are the reposi- 
 tories of the accumulations of wage-earners mainly 
 and an index to thrift. The functions of these institu- 
 tions are essentially different from those of commercial 
 banks, as savings banks are a part of a system the aim 
 of which is the safe and profitable investment of the 
 funds of those who are not so situated as to invest 
 their own money, and in this respect a mutual savings 
 institution is the property of its depositors. 
 
 From 1820, with 10 savings banks in the coun- 
 try having deposits equal to $1,138,576, or an 
 average of twelve cents per capita in the United 
 States, to 1911, with 1884 savings banks having 
 deposits amounting to $4,212,583,598, or an 
 average of $44.82 per capita in the United States, 
 we made gigantic strides in the development of 
 this important branch of banking. The increase 
 in per-capita savings from 1909 to 1911 was 
 $3.07. This large advance is probably due to the 
 recuperation of savings after the stringency fol- 
 lowing the flurry in 1907. The progress of savings 
 deposits is a tribute to the thrift and energy of 
 American blood. In 1911 there were 9,794,000 
 depositors, or one in every ten inhabitants.^ 
 
 But not only is there a vast amount deposited 
 in strictly savings institutions, but a huge num- 
 ber of banks, doing a commercial business, have 
 savings departments. On September 1, 1911, the 
 national banks of our country and island pos- 
 
 * See Report of the Comptroller of the Currency, 1911. For postal 
 savings figures, which are separate from these, see infra, pp. 131^.
 
 THE SAVINGS DEPARTMENT 125 
 
 sessions had on savings deposit $659,501,543.90, 
 and the state banks had $574,936,098.65. The 
 total savings in 24,392 banks in the United States 
 and islands amounted to $5,445,724,306.77. This 
 was exclusive of about $1,900,000,000 placed on 
 certificates of deposit. 
 
 It is natural to wonder why it is profitable to 
 conduct a savings bank or a savings department. 
 At first blush, it would seem less lucrative than a 
 commercial banking business, and perhaps, all 
 and all, it is. Yet a savings bank may be so man- 
 aged as to net large dividends. Savings deposi- 
 tors are steadier — that is, they draw less against 
 their accounts — than those doing a mercantile 
 business. Thus, there is a larger amount per hun- 
 dred dollars deposited that may be looked upon 
 as permanently available for lending. Then, too, 
 since there are fewer transactions, there is a 
 smaller expense incurred in operating than in the 
 commercial department. Last, the savings bank 
 can safely invest a much larger percentage of its 
 deposits than a bank doing a mercantile business. 
 In 1908 the average ratio of cash in savings banks 
 to deposits was 1.25 per cent; in 1909, it was 
 .88 per cent.^ 
 
 Thus it may be seen that the savings depart- 
 ment is a highly desirable adjunct to any bank. 
 Were there less profit in it, most banks would 
 operate it, nevertheless, in order to supply every 
 demand made upon them by their customers for 
 banking facilities. 
 
 * Usually no cash reserve is required of savings banks. Usually, 
 too, they may demand sixty days' notice on any withdrawals. See 
 Digest of State Banking Statutes, by S. A. Welldon, National Moni- 
 tary Commission Series.
 
 126 PRACTICAL BANKING 
 
 The savings department is not intended for 
 and does not appeal to firms, corporations, or 
 even individuals who check regularly against 
 their accounts. It aims, primarily, to cater to 
 those wishing to accumulate, by degrees, with 
 little or no withdrawals, a snug sum. Next, it 
 appeals to treasurers, guardians, and trustees, 
 who have money, not often drawn upon, to put 
 at interest. Then it accommodates many indi- 
 viduals who like to put on interest any surplus 
 which they are holding temporarily, in contempla- 
 tion of a future investment elsewhere. 
 
 Some banks place a minimum figure for bal- 
 ances, say twenty-five or fifty dollars, since 
 otherwise a "raft" of very small accounts, not 
 worth the cost of handling, will accumulate. 
 This must be contended with by banks which 
 open accounts as small as fifty cents or one dollar. 
 For on the impulse of the moment, many persons 
 will make a resolve to start saving, and will de- 
 posit one or two dollars, after which their zeal 
 cools and they proceed to neglect their account. 
 There it stands on the bank's ledger taking as 
 much space and nearly as much time as a five 
 thousand dollar account. To cater especially to 
 this small depositor, the postal savings bank, 
 which will be discussed farther on, was created. 
 
 The banks which do seek the very small de- 
 positor sometimes employ a corps of paid solici- 
 tors who scour the community, trying to secure 
 a large number of beginners, hoping to obtain 
 some very desirable accounts by the gradual sift- 
 ing process. These banks have numerous ways 
 of "tempting" the pubhc. They get out beauti-
 
 THE SAVINGS DEPARTMENT 127 
 
 ful little safes, some containing a register of con- 
 tents; some a clock; others are in the form of neat 
 little books which can be stowed away in the 
 pocket. There are hundreds of different styles 
 of "banks" which are placed in the hands of peo- 
 ple, for the loan of which only a small cash de- 
 posit is required. As a rule, however, the larger 
 the bank, the less desirable are such accounts. 
 
 Interest on savings accounts varies from two 
 to four per cent. In 1909 savings banks paid an 
 average of 3.72 per cent on savings deposits; na- 
 tional banks, 3.34 per cent; state banks, 3.71 per 
 cent; and private banks, 3.43 per cent. 
 
 A brief word about certificates of deposit. 
 These certificates are issued by every bank, and 
 read to the effect that such a person has deposited 
 a stated amount, to draw interest if it remains on 
 deposit for a certain length of time. Some banks 
 stop the interest accruing at the end of the speci- 
 fied period unless the certificate is renewed; 
 others will pay interest for the total life of the 
 paper. Still others specify in the body of the 
 certificate that the principal deposited may not 
 be withdrawn until the date of maturity. The 
 total amount of money invested in demand certi- 
 ficates of deposit and time deposits in the United 
 States for the year 1911 was $1,900,000,000. 
 
 Another form of certificate which is popular 
 with transients is that which shows at a glance 
 what the interest amounts to for a certain time. 
 These certificates are issued on printed forms for 
 twenty-five, fifty, seventy-five dollars, etc. In 
 a space below is given the interest that will ac- 
 cumulate in three months, six months, twelve
 
 128 PRACTICAL BANKING 
 
 months, etc. In other words, one can tell in an 
 instant the value of his certificate. The name of 
 the buyer of the certificate is filled in and he is 
 required to sign his name in a designated place, 
 by which he may, after the fashion of traveler's 
 checks, be identified. The proper officer's signa- 
 ture validates the certificate. In the case of at 
 least one large bank, these certificates contain, 
 on the reverse side, a list of banks scattered 
 throughout the country which will honor these 
 certificates and pay the proper interest. 
 
 II 
 
 The large associations not only have a separate 
 department for the handling of savings accounts, 
 but they also have a force under the direction of 
 a savings manager or secretary. Under this secre- 
 tary are the tellers and bookkeepers. The tellers, 
 whose duties largely involve the receiving of 
 money, have functions partaking both of the 
 paying and receiving tellers, though exactly like 
 neither. As a rule, they do not have to rush 
 through their work like their fellows in the com- 
 mercial department, for, as has been remarked, 
 the transactions on savings accounts, in propor- 
 tion to the amount of deposits, are much fewer 
 than on checking accounts. The result is that 
 the tellers have more time to cultivate that pleas- 
 ant familiarity with customers which is such an 
 asset in a department where women and children 
 and others who like personal notice have to be 
 waited upon. But, like the other tellers, they are 
 constantly on their guard against frauds and mis- 
 takes of their own. A plan, followed by some
 
 THE SAVINGS DEPARTMENT 129 
 
 banks to check with the ledgers the balances on 
 pass-books, is to have the teller jot down on every 
 deposit slip or check the pass-book balance. This 
 may be compared with the ledger as posting is 
 done. 
 
 Twice or four times annually interest is cal- 
 culated on each savings account and credited. 
 The most laborious part of the work is saved by 
 tables which show the amount of interest — at 
 the given rate — for one month on all amounts. 
 The calculator only has to discover the average 
 balance for one month, multiply it by the num- 
 ber of months, and he has the sum on which in- 
 terest is to be figured. Reference to the tables 
 speedily shows the amount of interest. Every 
 calculation should be, and generally is, carefully 
 verified by a second man. The interest, once 
 verified, is "run through" the teller's book as a 
 deposit, offset in his cash by a voucher properly 
 signed. It is a simple matter to add the interest 
 to each person's account, but it is not such a 
 simple matter to get it credited on the pass-books. 
 It is always tedious to wait for them to be brought 
 in voluntarily, and, therefore, in many banks, a 
 call is made for them when interest is paid. 
 
 Ill 
 
 Like the foreign exchange department, the 
 savings department of a large association is really 
 itself a bank in miniature. It is a means of safe 
 and profitable investment for the wage-earner, 
 for the woman and the child, for trustees, and 
 those having money on hand for temporary de- 
 posit.
 
 130 PRACTICAL BANKING 
 
 But as we remarked earlier in the chapter, 
 many banks do not encourage very small ac- 
 counts. For some years the matter of the estab- 
 lishment of government banks, to cater to the 
 depositor who wishes to start with little and 
 gradually build up a neat balance, was agitated. 
 The Postal Savings Bank Bill was passed in 1910. 
 
 Mr. Thomas B. Paton thus succinctly describes 
 the postal savings bank: ^ 
 
 The Postmaster-General, the Secretary of the Treas- 
 ury, and the Attorney-General are constituted a board 
 of trustees with authority to designate such post- 
 offices as the board may select to be postal savings 
 depository offices to receive deposits of funds from the 
 public. The minimum deposit which will be received 
 is one dollar, and deposits may be of a larger amount 
 in multiples thereof, not exceeding one hundred dollars 
 in any calendar month, and the maximum deposit of 
 any one depositor is fixed at five hundred dollars, ex- 
 clusive of accumulated interest. The bill provides for 
 the sale of adhesive "postal savings stamps" to be 
 attached to a postal savings card in order that smaller 
 amounts may be accumulated for deposit; when such 
 cards contain stamps in amounts of one dollar, or 
 multiples thereof, they are acceptable as deposits. The 
 law provides that interest at the rate of two per cent 
 shall be credited to the depositor each year. It pro- 
 vides that postal savings funds shall be deposited in 
 solvent banks, whether organized under national or 
 state laws, such banks being subject to national or 
 state supervision and examination, and the deposits 
 in banks to bear interest at the rate of not less than 
 two and a quarter per cent per annum, which rate 
 shall be uniform throughout the country. Provision 
 
 ^ Journal of the American Bankers' Association, July, 1910.
 
 THE SAVINGS DEPARTMENT 131 
 
 is made that funds received at postal savings deposi- 
 torj'- offices shall be deposited in banks in the same 
 locality. A reserve of five per cent of postal savings 
 funds is to be kept with the Treasurer of the United 
 States. 
 
 Any person ten years or over in age can open 
 an account in his or her own name; any woman 
 can have an account in her own name and "free 
 from any control or interference by her husband." 
 However, no person may have a deposit in more 
 than one postal savings bank.^ 
 
 Clearly this act appeals to the small depositor. 
 The savings, national, and state banks of the 
 nation retain practically all their big savings de- 
 positors, a large number of their smaller ones, 
 
 ^ Perhaps no better idea of how the postal savings bank makes its 
 appeal can be got than from the following letter to the author from 
 the Honorable T. L. Weed, then director of the postal savings sys- 
 tem, dated August 3, 1912: — 
 
 "While the acceptance of deposits of small amount and the sale 
 of ten-cent savings cards and stamps make the postal savings sys- 
 tem of special value to wage-earners and children, the patronage of 
 the system is by no means confined to those classes. In fact over 
 twelve per cent of the depositors up to June 30, 1911, were engaged 
 in what are classed by the Bureau of the Census as 'proprietary, 
 oflScial, and supervisory occupations,' and nineteen per cent of the 
 remainder followed professional and clerical occupations." 
 
 The following data, furnished the author by the Honorable A. M. 
 Dockery, Third Assistant Postmaster-General, indicates the official 
 status of the postal savings system on July 21, 1914: — 
 
 "On June 30, 1914, there were 9(i44 offices with 10,352 deposi- 
 tories (including 708 branches and stations) in operation in the 
 United States and of these 9644 offices 8.505 were of the presidential 
 grade and 11.39 fourth-class. On this date the number of depositors 
 was about 397,000, and the amount on deposit was approximately 
 $43,100,000, or an average of $109 per depositor. Of the $43,100,- 
 000 on deposit about $31,200,000, or over seven tenths (72.4 per 
 cent), was held in the 271 offices having deposits of $20,000 and 
 over, and about $22,700,000, or over one half (53.9 per cent), in the 
 45 offices having $100,000 and over. Over one fifth of the total
 
 132 
 
 PRACTICAL BANKING 
 
 and at the same time are able to secure postal 
 deposits at two and one quarter per cent. As the 
 postal savings bank's sponsors claimed, it has 
 drawn a vast amount of money, formerly hoarded, 
 into banks, and is apparently encouraging thrift 
 
 amount on deposit was held in the four offices (New York, Chicago, 
 Brooklyn, and Boston) having over $1,000,000 on deposit. The 
 offices having $100,000 and over, with the amount of funds held by 
 each, are as follows : — 
 
 1. New York City $4,394,059 24. 
 
 2. Chicago, 111 2,305,932 26. 
 
 3. Brooklyn, N.Y 1.501.446 26. 
 
 4. Boston, Mass 1,133,009 27. 
 
 6. Portland, Greg 897,498 28. 
 
 6. San Francisco, Cal 875.446 29. 
 
 7. Cincinnati. Ohio 690,030 30. 
 
 ' 8. St. Paul. Minn 689.445 31. 
 
 9. Kansas City, Mo 586.865 32. 
 
 10. Pittsburg, Pa 586,759 33. 
 
 11. Columbus, Ohio 668.623 34. 
 
 12. Los Angeles. Cal 647.152 36. 
 
 13. Detroit. Mich 646.296 36. 
 
 14. Philadelphia. Pa 630,964 37. 
 
 15. St. Louis. Mo 507,406 38. 
 
 16. Milwaukee, Wis 463.956 39. 
 
 17. Butte, Mont 408,046 40. 
 
 18. Denver, Colo 401.630 41. 
 
 19. Cleveland. Ohio 387.223 42. 
 
 20. Seattle, Wash 341,170 43. 
 
 21. Tacoma, Wash 316,940 44. 
 
 22. Washington, D.C 263.978 45. 
 
 23. Toledo, Ohio 249.669 
 
 Newark, N.J $237,976 
 
 Omaha, Neb 234,370 
 
 Oakland, Cal 222,291 
 
 Louisville, Ky 217,760 
 
 Minneapolis, Minn 206.923 
 
 Providence, R.I 187,375 
 
 Leadville, Colo 183,025 
 
 Duluth, Minn 176,048 
 
 San Diego. Cal 170,950 
 
 Buffalo, N.Y 166,113 
 
 Indianapolis, Ind 162.128 
 
 Kansas City, Kan 154,284 
 
 Dallas. Tex 153,915 
 
 Ironwood, Mich 150,080 
 
 Memphis, Tenn 133,194 
 
 Akron, Ohio 121,645 
 
 Dayton, Ohio 121.122 
 
 Erie. Pa 111,403 
 
 Roslyn, Wash 106.464 
 
 New Orleans, La 105,703 
 
 Astoria, Oreg 104.100 
 
 Bellingham, Wash 100,309 
 
 "The $43,100,000 on deposit is exclusive of $4,635,820, which is 
 the sum withdrawn by depositors prior to July 1, 1914, for the pur- 
 pose of buying postal savings bonds. Applications amounting to 
 $872,240 were received for the issue of July 1, 1914, and this amount 
 will be withdrawn in July. 
 
 "The Postal Savings Act provided that the funds received shall 
 be deposited in solvent banks, and that are organized under national 
 or state laws and subject to national or state supervision and ex- 
 amination, it being stipulated that the word ' bank ' shall! be held 
 to include savings banks and trust companies doing a banking busi- 
 ness. Under these provisions 6715 banks in the United States have 
 qualified to receive postal savings funds, classified as follows: 3627 
 national banks; 2099 state banks; 347 savings banks; 617 trust 
 companies; 25 'organized' private banks."
 
 THE SAVINGS DEPARTMENT 133 
 
 in those who either had no facilities or hesitated 
 because of the smallness of their deposits. 
 
 If one wishes, he may surrender his deposit in 
 sums of twenty, forty, sixty, eighty, one hundred 
 dollars, and multiples thereof, and receive in 
 lieu United States coupon or registered bonds 
 bearing two and one half per cent interest an- 
 nually.
 
 CHAPTER XV 
 
 THE FORMATION AND POWERS OF 
 THE NATIONAL BANK 
 
 During the Civil War the Federal Govern- 
 ment was financially embarrassed. The gigantic 
 struggle emptied the Treasury more rapidly than 
 the revenues of the country could refill it. To 
 assist the Washington Government, the clearing 
 houses of the East came forward with loans; the 
 Government itself issued bonds, but buyers were 
 few and suspicious. Then, some of the financial 
 geniuses of the time conceived the idea of tempt- 
 ing purchasers by allowing them special privileges 
 in certain instances. The name of Salmon P. 
 Chase is foremost among these astute construc- 
 tive financiers.^ 
 
 The National Bank Act was the fruit of their 
 ideas. Banks formed under this act were allowed 
 
 * The National Bank Act, as we now know, did not prove to be 
 a measure which would prevent panics. At best, it standardized 
 bank notes. But then it must be remembered that it was not in- 
 tended primarily as a currency reform, but to provide a market for 
 United States bonds. At the same time it would be unfair to Chase 
 to say that he merely stumbled into a system engendered by the 
 ercigencies of the times. Andrew McFarland Davis, in The Origin of 
 the National Banking System, National Monetary Commission 
 Series, shows that Chase's mind had attacked the financial system 
 of the United States as a currency problem. Had the necessities of 
 the Civil War not intervened as they did, who can tell but what we 
 should have had, from the brain of Chase and his contemporaries, 
 some scheme for providing a currency based on actual business 
 transactions? 
 
 For the provisions for such a currency, see chapter xx.
 
 THE NATIONAL BANK 1S5 
 
 circulating notes, to be secured, however, by 
 United States bonds deposited with the Treas- 
 urer of the United States. There was, however, 
 one obstruction to the success of the plan. State 
 banks were issuing circulating notes, and there 
 was no direct power to stop them. To remove 
 this competing institution, therefore, a prohibi- 
 tory tax of ten per cent was placed on all circu- 
 lating bank notes save those authorized by the 
 National Bank Act. Thus, state banks either be- 
 came national banks — and therefore had to pur- 
 chase federal bonds — or gave up the advantage 
 of a circulation. 
 
 The act has provided a safe currency, but not 
 one calculated to alleviate or prevent periodic 
 financial stringencies. It does not expand and 
 contract to suit the exigency of the season or the 
 general financial situation. True, it has a cer- 
 tain elasticity, but it is only the elasticity "of the 
 old rubber band which may be stretched to a cer- 
 tain extent, but which does not contract again." 
 The act has had many new and helpful provi- 
 sions, however, and we have at last evolved a 
 system which will meet the demands of the coun- 
 try and not cater merely to the convenience of 
 the Government — since that necessity has dis- 
 appeared long ago. 
 
 A national bank may be formed by a group of 
 persons, not less than five in number.^ 
 
 ^ "In view of these provisions, it has been the uniform policy of 
 the Comptroller to investigate carefully each application to enable 
 it to be determined whether or not the case is entitled to favorable 
 consideration before definite action is taken by the prospective 
 incorporators. 
 
 "It has been for some time past the practice of this ofBce to refer
 
 136 PRACTICAL BANKING 
 
 The first step toward organization is the adop- 
 tion of articles of association, which state briefly 
 the object of the organization, and which also 
 contain provisions necessary for the general con- 
 duct of its business, provided such regulations are 
 consistent with law. A copy of these articles 
 signed by the organizers must be transmitted to 
 the Comptroller of the Currency. 
 
 Second, an "organization certificate" is drafted 
 which enumerates : — 
 
 (1) The name assumed by the association 
 (subject to the approval of the Comp- 
 troller of the Currency). 
 
 (2) The exact location of its offices. 
 
 (3) The amount of capital stock. 
 
 (4) The names and residences of the stock- 
 holders, and the number of shares each 
 holds. 
 
 Upon filing the articles of association and the 
 organization certificate, the bank becomes a 
 corporate body, and has the power : — 
 
 to national-bank examiners all applications received for the organi- 
 zation of national banks. 
 
 "Some of the points to be covered in the investigation are: — 
 
 " (A) The standing of the applicants in the community. 
 
 " (B) Are the directors to be local men with an active interest in 
 the bank. 
 
 " (C) In case the question turns on whether or not there is need 
 of another bank, submit a statement showing the amount of 'pur- 
 chased paper' held by the bank or banks in the place, and state the 
 percentage of such ' purchased paper ' to the total amount of loans 
 and discounts of the bank. 
 
 "(D) In cases where the necessity for another bank is open to 
 question, please state whether or not the bank, if established, would 
 obtain entirely new business or would draw such business from ex- 
 isting institutions." Re-port of the Comptroller of the Currency, 1911, 
 pp. 77-78.
 
 THE NATIONAL BANK 137 
 
 (1) To have succession for twenty years, un- 
 less otherwise dissolved. 
 
 (2) To elect or appoint directors, who shall 
 select the president, cashier, and other 
 officers, defining their duties, requiring 
 bonds, and having power of dismissal. 
 
 (3) To adopt by-laws, not inconsistent with 
 law, for regulating the appointment of 
 oflScers, the transference of stock, and the 
 conduct of the business of the bank. 
 
 (4) To exercise by its board of directors, or 
 duly authorized officers, the power of carry- 
 ing on business by "discounting and nego- 
 tiating promissory notes, drafts, bills of 
 exchange, and other evidences of debt; by 
 receiving deposits; by buying and selling 
 exchange, coin, and bullion; by loaning 
 money on personal security; and by ob- 
 taining and issuing circulating notes." 
 
 A very important feature of a bank's organiza- 
 tion is its capital stock, and it must here be some- 
 what explained. Amendments to the statutes in 
 1900 allow the organization of banks with $25,000 
 capital in towns of 3000 inhabitants or less; with 
 $50,000 in towns of 6000 inhabitants or less; and 
 with $100,000 in other towns; except that a 
 bank in a city of 50,000 population or more can- 
 not be organized with less than $200,000 capital 
 stock. 
 
 Before a national bank can begin business, the 
 capital, divided into shares of one hundred dol- 
 lars each, must have been at least half paid up. 
 And at the end of each month after it opens its 
 doors, ten per cent of the whole must be paid, till
 
 138 PRACTICAL BANKING 
 
 the entire subscribed and authorized capital is 
 paid in. 
 
 Any association may, upon the vote of holders 
 of two thirds, of the shares, increase its capital 
 stock to any sum approved by the Comptroller 
 of the Currency, notwithstanding any limit fixed 
 by its articles of organization. Likewise, those 
 holding two thirds of the stock may authorize 
 the reduction of its capital to any figure, subject 
 to two conditions : first, that it shall not be under 
 the amount of capital required for organization; 
 and, second, that it shall not be less than the 
 amount of outstanding circulation.^ At elections, 
 the shareholders may vote by proxies, duly au- 
 thorized in writing, but no officer or employee of 
 the bank may act as proxy. No shareholder may 
 vote whose liability is past due and unpaid. 
 
 In a previous chapter,- we have considered the 
 relation of the directors to the bank in the practi- 
 cal conduct of its affairs. Let us now look for a 
 moment at their technical duties, privileges, and 
 qualifications in the national bank. 
 
 They are elected annually on such a day in 
 January as may be selected, and hold office for 
 one year. The law requires that at least five di- 
 rectors shall be elected, all of whom must be 
 citizens of the United States, and three fourths of 
 whom must have resided in the State, Territory, 
 or District in w^hich the bank is located for one 
 year previous to their election. All are required 
 to reside there during their incumbency. 
 
 * Under the Federal Reserve Act, reductions cannot be made 
 without the approval of the Federal Reserve Board. 
 ^ Chapter n.
 
 THE NATIONAL BANK 139 
 
 Every director must own in his own name ten 
 or more shares of stock, unless the capital of the 
 bank be as low as $25,000, in which case he must 
 be the owner of at least five shares of stock. If he 
 ceases to be qualified in any way, he forfeits his 
 place on the board. All vacancies on the board 
 are filled by appointment by the remaining di- 
 rectors, and the appointee holds ofiice until the 
 next annual election. 
 
 Upon entering his ofiice, the director, whether 
 appointed or elected, must take oath that he will 
 honestly and diligently perform his duties and 
 will not knowingly violate or permit to be vio- 
 lated any of the provisions governing the bank's 
 organization and regulation. He also swears that 
 he is the owner, in his own right, of the requisite 
 number of shares of stock, and that this stock is 
 unincumbered. 
 
 Now, the most apparent advantage of organiz- 
 ing a national bank is its ability to issue circulat- 
 ing notes. ^ These notes are delivered to the bank 
 by the Comptroller of the Currency upon the 
 receipt of United States bonds, which, at par 
 value, will cover the notes issued. It must be 
 understood, however, that very little actual profit 
 accumulates from investment in circulating notes. 
 The Report of the Comptroller of the Currency for 
 1909 contains the following figures : — 
 
 In October, 1909, the market price (of 2 per cent 
 consols) has fallen to $101,052, when the profit on 
 
 ' This was a fact until 1913, when the passage of the Federal 
 Reserve Act provided that national banks need not issue circulating 
 notes. Under the new law there are other methods of expanding the 
 currency and investing funds than by issuing circulating notes.
 
 140 PRACTICAL BANKING 
 
 circulation (on such a basis) increased to 1.334 per 
 cent. Panama Canal bonds were $100,595 in October, 
 1909, the rate of profit being 1.384 per cent. . . . The 
 profit on circulation secured by these bonds (4 per 
 cent loan of 1925, October, 1909, quotation, $117,320) 
 was 1.211 per cent. 
 
 Mr. Humphrey Robinson shows the method 
 of ascertaining the profit on circulation.^ He 
 figures on a basis of $100,000 circulation: — 
 
 Bonds purchased: U.S. registered two per cent 
 bonds to be paid at par in 1930. Price of bonds 
 at 104 $104,000 
 
 Par value of bonds purchased 100,000 
 
 Money worth six per cent. 
 
 Income from bonds 2,000 
 
 Income from circulating notes loaned at six per 
 
 cent 6,000 
 
 Total income $8,000 
 
 Less deductions : — 
 
 Annual tax on circulating notes $500 
 
 Sinking fimd to retire premium on bonds at 
 maturity, amount to be charged ofif each 
 
 year 181 
 
 Expenses (plates, express charges, etc.) 75 756 
 
 Net income from circulating notes $7,244 
 
 Net income from loaning $104,000 (net cost of 
 
 bonds purchased) at six per cent 6,240 
 
 Net profit on circulation $1,004 
 
 On such a basis we see that there is a profit of 
 1.004 per cent on the amount in circulation, which, 
 however, is a profit of only .965 per cent on the 
 amount invested ($104,000). 
 
 A Simple Explanation of Modern Banking, p. 104. 
 
 1
 
 THE NATIONAL BANK 141 
 
 All associations having on deposit, to secure 
 their circulation, United States bonds bearing 
 two per cent interest, including Panama Canal 
 bonds, must pay the Treasurer in January of each 
 year a tax of one fourth of one per cent per half- 
 year on all of their circulation based on such 
 bonds. Banks having on deposit, to secure cir- 
 culation, United States bonds bearing more than 
 two per cent interest must pay semiannually 
 one half of one per cent tax on such notes as are 
 based on these bonds. 
 
 Every association having circulating notes 
 based on securities other than United States and 
 Panama Canal bonds must pay for the first three 
 months a tax ^ of three per cent per annum on the 
 average amount of such circulation, and after- 
 wards a tax of one half of one per cent per annum 
 for each month until a tax of six per cent is 
 reached, and thereafter a tax of six per cent per 
 annum on the average amount of such circula- 
 tion. This tax is imposed to secure the quick re- 
 tirement of emergency currency issued under the 
 Act of May 30, 1908. 
 
 The Treasurer at Washington has a deposit 
 from every national bank amounting to five per 
 cent of its circulation. This fund is used as an 
 account against which national bank note re- 
 demptions are charged. Whenever national bank 
 currency, worn, mutilated, or otherwise unfit for 
 use, is presented to the Treasurer, he redeems it in 
 United States money. The banks to whom it be- 
 
 ^ This tax is meant to apply to emergency currency issued under 
 the Aldrich-Vreeland Act of 1908, but is a reduction, mad(! by the 
 Federal Reserve Act of 1913, of the original tax. For provisions of 
 the Aldrich-Vreeland Act, see page 157 et seq.
 
 142 PRACTICAL BANKING 
 
 longs are notified, and when redemptions amount- 
 ing to five hundred dollars or more for one bank 
 have accumulated, the bank deposits forthwith 
 with the Treasurer a sum equal to the redemp- 
 tions, and receives new blank currency for the 
 redeemed notes. ^ 
 
 There are other advantages in conducting a 
 national bank, not the least of which is the des- 
 ignation as a United States depository. Such as 
 are selected by the Secretary of the Treasury 
 receive deposits of public money, which, it is 
 unnecessary to remark, is useful at all times and 
 especially in times of financial flurry. For in- 
 stance, the author remembers one bank, ordi- 
 narily-shaving $50,000 of United States deposits, 
 which received $300,000 during the panic of 
 1907-08. 
 
 For the guaranty of the safe and prompt pay- 
 ment of these deposits, United States and other 
 bonds or securities must be deposited in the Treas- 
 ury in amount satisfactory to the Secretary of 
 the Treasury. The Secretary is enjoined by law 
 to apportion these deposits equitably among the 
 States. 
 
 At such a rate as the Secretary may prescribe 
 — not less than one per cent per annum — in- 
 terest is paid on average monthly balances. This 
 includes special and additional deposits of public 
 money in the regular depositories and such asso- 
 ciations as may be selected as temporary deposi- 
 tories. 
 
 ^ Under the old National Banking Law, national banks might 
 count the five per cent redemption fund as a part of their re- 
 quired reserve. The Federal Reserve Act repeals this privilege.
 
 THE NATIONAL BANK 143 
 
 Banks in certain cities in the United States, 
 designated as reserve cities, must carry a reserve 
 equal to twenty-five per cent of their deposits, 
 exclusive of Federal deposits. However, they may 
 carry one half of this as deposit balances in one 
 or all of the three central reserve cities. These 
 central reserve cities — New York, Chicago, and 
 St. Louis — must keep a reserve of twenty-five 
 per cent of their deposits in cash or in certain 
 credits which the Government recognizes. All 
 other national banks need carry a reserve of only 
 fifteen per cent. And of this, three fifths may 
 consist of credit balances in banks, in either re- 
 serve or central reserve cities, while two fifths 
 must be in their vaults. In addition to legal 
 tender, clearing-house certificates, for which law- 
 ful money has been deposited, may be held as 
 reserve by a member of the issuing clearing 
 
 house. ^ 
 
 It will be observed that banks no longer are 
 required to hold reserve against their circula- 
 tion, as was originally provided. They base their 
 reserve on the amount of deposits they have, 
 exclusive of federal deposits. 
 
 A national bank may charge such a rate of 
 interest as is permitted or authorized by the 
 State, Territory, or District in which it is situ- 
 ated. If no state law regulates this point, seven 
 per cent and no more may be charged. This, 
 however, does not preclude the charge of exchange 
 or collection fees on drafts, bills of exchange, and 
 discounts payable elsewhere. 
 
 ^ Again see chapter xx for reserve requirements under the Fed- 
 eral Reserve Act.
 
 144 PRACTICAL BANKING 
 
 A national bank may not accept its own stock 
 as collateral for a loan, nor may it buy its own 
 stock except to prevent loss on a debt previously 
 contracted in good faith. In that case the stock 
 must be sold again within six months. National 
 banks may not accept United States notes or 
 notes of national banks as collateral. 
 
 A national bank cannot accept real estate as 
 collateral for a loan, but there are a few cases 
 in which it may own the title to realty, namely: 
 
 (1) Property for its own housing and accom- 
 modation. 
 
 (2) Property that may be mortgaged to it in 
 good faith, as security for debts previously 
 made. 
 
 (3) That which may be deeded to it in pay- 
 ment of debts previously contracted in its 
 ordinary transactions. 
 
 (4) Such as it may purchase at a sale under 
 judgment held by itself, or may purchase 
 to secure debts due it. 
 
 But no national bank may hold longer than 
 five years any mortgage or title taken or pur- 
 chased for the security of a debt. 
 
 Semiannually, the directors may declare a 
 dividend of the net earnings of the association, 
 but before doing so they must add one tenth of 
 the net earnings of the previous half-year to the 
 surplus fund, until it has reached an amount 
 equal to twenty per cent of the capital stock. 
 
 The Federal Reserve Act (1913) amended the 
 section of the Revised Statutes concerning what 
 liabilities a national bank may have exceeding in 
 amount its capital stock. These are the obliga-
 
 THE NATIONAL BANK 145 
 
 tions which it may not have, in amounts greater 
 than its capital stock : — 
 
 (1) Notes of circulation. 
 
 (2) Moneys deposited with or collected by the 
 association. 
 
 (3) Bills of exchange or drafts drawn against 
 money actually on deposit to the credit of 
 the association or due thereto. 
 
 (4) Liabilities to the stockholders of the asso- 
 ciation for dividends and reserve profits 
 (i.e., dividends on stock in the Federal 
 Reserve Banks.) 
 
 (5) Liabilities incurred under the provisions of 
 the Federal Reserve Act. 
 
 From 134 national banks capitalized at $16,- 
 000,000 to 7488 national banks capitaHzed at 
 $1,056,345,000 is huge progress; it represents the 
 growth of national banks in this country from 
 1863 to 1913 or during the first half-century of 
 their history. Other figures may be interesting. 
 In 1864, the national banks were in number equal 
 to only 9.6 per cent of the reporting banks of the 
 United States, with a capital equal to 3.7 per 
 cent of the capital of the reporting banks. In 1913, 
 the number of national banks was equal to 28.8 
 per cent of all reporting banks of the country, 
 and their capital equal to 513 per cent of the re- 
 ported bank capital. Thus, while the ratio of the 
 number of national banks to the whole is 300 per 
 cent of what it was in 1864, the ratio of the capi- 
 tal to the entire capital is now 1360 per cent of 
 what it was in 1864.
 
 CHAPTER XVI 
 
 NATIONAL BANK NOTES 
 
 In an earlier chapter I have suggested how 
 paper money came, as a matter of convenience, 
 to be substituted for coin or bulHon. This, how- 
 ever, does not explain the security for most of the 
 "paper money" of to-day. For example, on a 
 certain day the Bank of England had issued 
 £51,000,000 of notes, for which £32,000,000 was 
 held in gold; the Bank of France had issued 
 £197,000,000 in circulating notes, against which 
 was held £175,000,000 in coin and bullion; and 
 the Imperial Bank of Germany had issued £98,- 
 000,000 of notes, for the security of which £49,- 
 000,000 was held. What, then, is the guaranty 
 for the large "uncovered" portions of these 
 issues.'* For the most part, the discrepancies are 
 represented by loans to the , Government, treas- 
 ury notes, or individual bills rediscounted. 
 
 But suppose, you say, that every one should 
 suddenly demand gold or silver for his bank 
 notes. ^ Indubitably, that would amount to a ca- 
 
 1 The story of the growth of the use of gold and silver as media 
 of exchange is told in a lively, if somewhat inaccurate, fashion in a 
 book, A History of the Precious Metals, by Alexander Del Mar, pub- 
 lished in 1880. 
 
 The author traces the coinage of the precious metals into money 
 to Phidon of Argos (about the ninth century B.C.), but intimates 
 that the practice may have been prevalent in India at a much more 
 remote date. In fact, much evidence tends to indicate that coined
 
 NATIONAL BANK NOTES 147 
 
 tastrophe — in a teapot. It would reveal only 
 this, that there is no good reason why we should 
 
 money was used in countries from Egj^pt to India — Thibet, Lydia, 
 Phry-gia, and Crete — as early as the fourteenth century B.C. The 
 evidence mainly relied upon is the Code of Menes, relating the 
 ratio between gold and silver, which Wilkinson places as early as 
 2950 B.C. Mr. Del Mar instances the change in the ratio of gold and 
 silver between the fifteenth century B.C. and the nineteenth century 
 A.D., which was from " 1 silver equals 10 gold" to " 1 gold equals 20 
 silver." 
 
 Mr. Del Mar had a " purpose," and that was to prove a new inter- 
 pretation of history, namely, one based on the production of gold 
 and silver. Part of his interesting collection of historical items fol- 
 lows. 
 
 Many Argonautic expeditions existed in antiquity. Jason's was 
 not the first; at any rate, his seems to have been largely piratical. 
 "Sardinia at that time contained rich placers of gold, and it was 
 probably to obtain this metal that Jason and his companions under- 
 took that part of their memorable voyage which carried them west- 
 ward." 
 
 Then, it seems, the Phoenicians worked the gold sands of Sarabat. 
 About 500 B.C., Darius undertook his conquests for the sake of 
 money. Alexander the Great was a gigantic plunderer and — ac- 
 cording to the author — secured pecuniary results in his campaigns 
 amounting to a billion dollars, in addition to slaughtering several 
 million human beings. The writer continues with an observation 
 that quartz mining was attended with unusual danger and cruelty. 
 He quotes Diodorus, who visited Egypt about fifty years B.C. and 
 found well-nigh intolerable conditions in the quartz mines, where the 
 overseer " lashes them [the miners] severely. Deprived of all hope, 
 these miserable creatures expect each day to be worse than the last; 
 and long for death to end their griefs." 
 
 Next, Mr. Del Mar cites the constant contests for Spain as a fur- 
 ther proof of his contention that " in the search of gold, whole races 
 of people have been put to the sword, continents subjugated, re- 
 ligions and civilizations destroyed." Then comes the case of the 
 conquest of America by the Spaniards. 
 
 An interesting side-light may be thrown on the origin of the hesi- 
 tancy of Orientals to exploit natural resources by the author's sug- 
 gestion that the Chinese long opposed the mining of gold and silver 
 because it would force people into servitude. 
 
 The remarkable conclusion to which Mr. Del Mar comes is that 
 the desire for precious metal has furnished all ages with an " irresist i- 
 ble motive for cruelty, injustice, and oppression. In the Middle
 
 148 PRACTICAL BANKING 
 
 not represent, in tangible, movable form, other val- 
 ues than those of silver and gold. It would disclose 
 only this "mystery," that merchants and farmers 
 had borrowed small sums — for which they had 
 pledged property of some sort — from their local 
 banks, which had, in turn, indorsed the notes or 
 "bills" and rediscounted them at the central 
 bank of issue. There is no sane argument against 
 issuing circulating notes on the security of such 
 property. Intrinsically, a house or an iron safe is 
 quite as valuable, if not more valuable, than a 
 lump of gold or silver. Abroad this truism has 
 long been recognized and even we Americans 
 have finally come to the conclusion that we may 
 very cautiously pass notes on the basis of other 
 security than the precious metals or bonds. 
 
 In the United States there is at present approx- 
 imately $2,250,000,000 in coin and bullion, of 
 which $1,300,000,000 is represented by gold and 
 
 Ages it stimulated the internecine strife into which Europe was for 
 6ve centuries plunged" and which was terminated only by the dis- 
 covery of America. 
 
 One takes a deep breath when he finishes this — a breath of relief. 
 To what extent would the author go? He has confused, in his en- 
 thusiasm for his thesis, economics with money, when as a matter of 
 fact economics has been connected only incidentally, when at all, 
 with money. He overlooks such considerations as bread and meat, 
 pasturage, farming land, benign climates, and other impulses to- 
 ward strife. Most of all, he forgets entirely the most frequent im- 
 mediate causes of invasions and wars — namely, greed for power. 
 In the last analysis, even this can be reduced to my first proposition 
 above, namely, a question of livelihoods and comforts. I fear the 
 author has been carried away by the literary appeal of his imposing 
 aggregation of historical (?) personages. What they wanted is what 
 men mostly want to-day — the power over other men's bodies and 
 minds. Money chanced to be the medium through which this desire 
 was manifested. It is no fault of "money" itself, which is well-nigh 
 indispensable, but of man's uncurbed, elemental craving for power.
 
 NATIONAL BANK NOTES 149 
 
 silver certificates. In addition, there is about 
 $700,000,000 in national bank notes, secured by 
 United States bonds, and about $350,000,000 
 United States notes, issued on the credit of the 
 Government, against which, however, may be 
 counted almost an equal amount of money held 
 in the Treasury as assets. No one can say our 
 system is not safe. 
 
 A special chapter will subsequently be devoted 
 to a discussion of how, fraught with politics and 
 urged or retarded by politicians, a new system, 
 which is even now receiving its first practical 
 test, has been evolved from the currency question. 
 For the present purpose, a description of the 
 issue of national bank notes under the original 
 National Bank Act of 1863, with the supplemen- 
 tary scheme of 1908, will suffice. 
 
 A national bank note is the promise of the 
 issuing bank to pay a certain sum of money 
 on demand, — nothing more. The United States 
 Government guarantees the payment of this cur- 
 rency, but stands to lose nothing, as it is secured 
 by bonds deposited with the Treasurer. If they 
 are simply negotiable I.O.U.'s, why do not state 
 banks, as well as national banks, issue circulating 
 notes .^^ Just because the Federal Congress, in 
 organizing the national banking system, laid a 
 prohibitive tax, as we have seen, of ten per cent 
 on all notes issued by other than national banks. 
 This forced the state bank currency out of exist- 
 ence, since ten per cent is far more than could be 
 earned on the currency issued. On the other 
 hand, it had the tendency of inducing many 
 state banks, which desired the power of circula-
 
 150 PRACTICAL BANKING 
 
 tion, to become national associations. As we 
 have observed in the foregoing chapter, the act 
 creating national banks was simply a measure to 
 make a ready market for United States bonds. 
 
 Every national bank is required to issue a cer- 
 tain amount of circulating notes. If the associa- 
 tion's capital be more than $150,000, it need carry 
 only $50,000 in notes; if its capital be $150,000 
 or less, its circulation must at least be equal to 
 one fourth of its capital stock. 
 
 The circulating notes are issuable in denomina- 
 tions ranging from five to ten thousand dollars, 
 but not more than one third of the bank's cir- 
 culation may consist of five-dollar notes. No 
 notes larger than one thousand dollars have been 
 issued. When the national bank was organized 
 in 1864, it was provided that notes of less than 
 five dollars value might be issued, but in quantity 
 not to exceed one sixth of the bank's circulation. 
 This provision became inactive upon the resump- 
 tion of specie payments in January, 1879. There 
 are still approximately $500,000 in national bank 
 "ones" and "twos" outstanding. On October 
 31, 1911, there were in round numbers $740,000,- 
 000 of national bank notes of various denomina- 
 tions in circulation and in the banks. 
 
 Before any bank may commence business, it 
 must transfer and deliver to the Treasurer of the 
 United States registered, interest-bearing bonds 
 of the United States in such amount as, at par 
 value, will cover the circulation which it proposes 
 to take out.^ It may deposit, however, Panama 
 
 ^ The Federal Reserve Act repeals those statutes which require 
 that "before any national banking association shall be authorized
 
 NATIONAL BANK NOTES 151 
 
 Canal two per cent bonds in lieu of the regular 
 United States bonds. ^ If the market value of the 
 bonds deposited falls below par, bonds in amount 
 sufficient to cover the notes at the market value 
 of the bonds will be required of the association 
 by the Comptroller of the Currency. 
 
 After depositing bonds, the association is en- 
 titled to receive from the Comptroller of the Cur- 
 rency national bank notes in blank, signed by 
 the Treasurer and the Register of the Treasury. 
 The notes bear the promise of the issuing bank to 
 redeem them in money at its own counter. Below 
 this promise is space for the signatures of the 
 president or vice-president and the cashier of the 
 bank. 
 
 On the back of the notes there is the declara- 
 tion of the United States Government that they 
 may be tendered in payment of taxes, excises, 
 public lands, and all other dues to the United 
 States except duties on imports; that they are 
 also receivable for all salaries and other debts and 
 demands except interest on public debt and in 
 redemption of the national bank currency. 
 
 National bank notes sent to the Comptroller of 
 the Currency for redemption are, if they are fit 
 for circulation, sent to the issuing banks upon 
 remittances of lawful money covering them. If 
 
 to commence a banking business, it shall be required to transfer and 
 deliver to the Treasurer of the United, States a stated amount of 
 United States bonds." 
 
 ^ It may be of interest to note that on a given date — say in 
 August, 1911 — the profit on issuing national bank notes based on 
 Panama Canal bonds was 1.410 per cent, while that based on the 
 consols of 1930 was 1.393 per cent and on the loan of 1925 1.22G per 
 cent.
 
 152 PRACTICAL BANKING 
 
 they are badly worn or mutilated, they are de- 
 stroyed by maceration in the presence of four 
 persons, namely, one representing the Secretary 
 of the Treasury, one the Treasurer, one the Comp- 
 troller of the Currency, and one the bank whose 
 notes are thus destroyed. A certificate of the 
 maceration is signed by the witnesses in dupli- 
 cate, one copy of which is filed in the office of the 
 Comptroller of the Currency, and one forwarded 
 to the association. This certificate is necessary, 
 since it would be the height of folly to remit for 
 currency which was only supposed to be de- 
 stroyed, but which might at some future time 
 reappear for redemption. The certificate guar- 
 antees the maceration of the old notes and there- 
 fore protects the bank against any possible loss. 
 
 In place of the currency thus redeemed and 
 destroyed new notes in blank are sent to the asso- 
 ciation upon receipt of the remittances of lawful 
 money covering them. These notes are secured 
 by the bonds which represented the destroyed 
 currency. 
 
 There is another sort of national bank which is 
 provided for by the statutes, but which is little 
 heard or known of at large, namely, national asso- 
 ciations for issuing gold certificates. They may 
 be organized under the same general provisions 
 as the other national banks, but bonds which 
 they offer for security of circulation must be 
 United States bonds bearing interest in gold. 
 Notes are issued for only eighty per cent of the 
 par value of these bonds. The lowest denomina- 
 tion is five dollars. These notes specify that they 
 are payable in gold money of the United States
 
 NATIONAL BANK NOTES 153 
 
 on presentation at the office of the issuing bank. 
 National gold associations must keep a reserve 
 of twenty-five per cent of their outstanding cir- 
 culation in gold and silver coin. In 1910 there was 
 only $75,000 of gold national bank certificates 
 outstanding, so it is apparent that gold banks are 
 not popular, and it is easy to see, from the re- 
 quirements, why they would not ordinarily be so. 
 
 II 
 
 The national bank currency has been severely 
 criticized time and again. The old saying is that 
 it will expand under certain arbitrary and artifi- 
 cial conditions and will contract in the same way. 
 The charge is that it does not expand naturally 
 — responding to industrial and agricultural de- 
 mands; nor contract naturally — when these de- 
 mands are satisfied. It has been pointed out time 
 and time again that there is no inevitable rela- 
 tion between the needs of the season and the sup- 
 ply of currency. This irregularity has in effect 
 made our financial panics more disastrous and 
 enduring than they would have otherwise been. 
 
 The great depression of 1907-08 served to 
 bring the matter to a head. On May 30, 1908, 
 along with the passage of the bill which created 
 national currency associations (described below), 
 a National Monetary Commission was authorized 
 which was required "to inquire into and report 
 to Congress, at the earliest date practicable, what 
 changes are necessary or desirable in the mone- 
 tary system of the United States." 
 
 This Commission, which was composed of some 
 of the most distinguished men in Congress,
 
 154 PRACTICAL BANKING 
 
 planned and executed an investigation of mone- 
 tary conditions all over the world and published 
 reports and papers by experts which ran to sixty 
 volumes and pamphlets.^ 
 
 In January 1912, the Commission, through 
 Senator Aldrich, its chairman, reported its labors 
 complete and submitted a plan for a great na- 
 tional clearing house, tobe known as the National 
 Reserve Association. The plan would have, in 
 general, given unity and centralization to the 
 enactment of 1908 described below. It was never 
 enacted into law.^ 
 
 One of the great collection of publications of 
 the Commission is of particular interest here. It 
 is a monograph by Mr. Alexander D. Noyes, on 
 the History of the National Bank Currency. 
 
 In this pamphlet Mr. Noyes has very clearly 
 shown what we have mentioned above, namely, 
 that the expansion and contraction of the na- 
 tional bank currency does not inevitably reflect 
 agricultural and industrial demands. In fact, he 
 states that, so far from moving in the same direc- 
 
 ^ The personnel of the Commission was as follows: Nelson W. 
 Aldrich, Rhode Island, chairman; Edward B. Vreeland, New York, 
 vice-chairman; William B. Allison, Iowa; Julius C. Burrows, Michi- 
 gan; Eugene Hale, Maine; Philander C. Knox, Pennsylvania; Theo- 
 dore E. Burton, Ohio; John W. Daniel, Virginia; Henry M. Teller, 
 Colorado; Hernando D. Money, Mississippi; Joseph W. Bailey, 
 Texas; Frank P. Flint, California; James P. Taliaferro, Florida; 
 Boies Penrose, Pennsylvania; James Overstreet, Indiana; John W. 
 Weeks, Massachusetts; Robert W. Bonynge, Colorado; Sylvester C. 
 Smith, California; Lemuel P. Padgett, Tennessee; George P. Bur- 
 gess, Texas; Arsene P. Pujo, Louisiana; George W. Prince, Illinois; 
 James McLachlan, California. 
 
 ^ The suggested remedy of the National Monetary Commission will 
 be discussed more fully in chapter xx, dealing with the steps which 
 finally led up to the passing of the Owen-Glass Currency Bill in 191d
 
 NATIONAL BANK NOTES 155 
 
 tion as trade, bank-note circulation is likely to 
 operate in an exactly opposite direction. 
 
 He shows that the operation which requires 
 an expansion of currency tends to make national 
 bank notes scarce. For instance, we have a year 
 of great prosperity and trade activity. There 
 must be an expansion in national bank notes; it 
 means the purchase of bonds by the banks. The 
 same prosperous condition fills the Federal 
 Treasury to overflowing, and consequently, the 
 Government reduces its debt by buying up its 
 bonds. This raises the price and discourages the 
 buying for purposes of security on circulation. In 
 1879 the government debt was $1,797,000,000. 
 Beginning then, under piping times of prosperity, 
 it redeemed its debt until, in 1887, this was $1,- 
 021,000,000, and in 1892 was reduced to only 
 $585,000,000. The result was that bonds which 
 sold for 99 in 1879 sold for 121f in 1882. Banks 
 were tempted to sell and make the profit; also to 
 abstain from buying, at these tip-top prices, for 
 circulation purposes. This condition, together 
 with a large amount of "Government 3's" which 
 were called by the Treasury, caused the national 
 bank issue to fall from $361,800,000, in 1883, to 
 $296,500,000 in 1886. In 1891 the issue was only 
 $167,577,000. And this was at a period when the 
 growth of the country demanded a large amount 
 of currency. In fact, in a nutshell, the use for 
 money for purposes of trade, evidenced by the 
 amount of exchanges in the clearing houses, be- 
 tween 1883 and 1891 increased fifty -four per 
 cent, while national bank currency actually de- 
 creased fifty- three per cent.
 
 156 PRACTICAL BANKING 
 
 On the other hand, as Mr. Noyes goes on to 
 show, the same inconvenience was experienced 
 when a decrease in currency was natural. The 
 crash of 1893 brought down the prices of bonds; 
 the Government, in financial straits, issued $100,- 
 000,000 in new bonds. They were bought largely 
 by national banks, because the low price made 
 them attractive circulation investments, and they 
 were used as a basis for additional currency. And 
 this at a time when clearing-house exchanges 
 showed a large decrease.^ So that between 1892 
 and 1894 trade activity had decreased twenty 
 six per cent, while bank notes had increased 
 eighteen per cent.^ 
 
 Mr. Noyes concludes that there is no "remedy 
 for this abnormal situation except the substitu- 
 tion of some other system for that which pre- 
 scribes the United States government bond as a 
 basis for bank-note issues." 
 
 This pamphlet was written in 1910. In 1908 
 a patchwork system had been adopted which, it 
 was hoped, might tend to avert any return of the 
 catastrophe of 1907. 
 
 This system was outlined and provided for in 
 the so-called Aldrich-Vreeland Act of May 30, 
 1908, aiming to give relief to the currency strin- 
 
 * See chapter on "The Clearing House." Also the section ia 
 chapter xix, on the crisis of 1893. 
 
 ''■ I suppose, as a matter of fact, that this increase in bank notes 
 would relieve the stringency and make money easier to obtain. But 
 the diflSculty is, the flood of money does not come till ajter the panic, 
 which is too bad. Also, in normal times, when trading is dull from 
 no reason such as a panic, the tendency would be to increase the 
 bank-note issue, which, in turn, would encourage risky lending. At 
 any rate, I think Mr. Noyes makes out his case very well. The old 
 national bank notes certainly do not respond to natural demands. 
 
 4
 
 NATIONAL BANK NOTES 157 
 
 gency during certain parts of the year and during 
 panics by the estabhshment of national cur- 
 rency associations. The main provisions of this 
 act endeavored to create an elastic, emergency 
 currency, to be issued on other security than 
 United States bonds, and to be retired as soon as 
 the "tightness" of the situation had blown over.^ 
 
 A national currency association, for the issu- 
 ance of additional circulating notes, may be 
 formed by not less than ten national banks, each 
 having an unimpaired capital and a surplus of at 
 least twenty per cent of its capital. But the ag- 
 gregate capital and surplus of the currency asso- 
 ciation is not to be less than $5,000,000. The 
 association can be formed in one State, in parts 
 of one State, or in contiguous parts of more than 
 one State. Any bank within a certain territory, 
 having the necessary qualifications for member- 
 ship, cannot be denied the rights and privileges 
 of the association in that territory. 
 
 In each of these associations there is a board 
 consisting of one member from each of the asso- 
 ciate banks. This board has the general manage- 
 ment of the association, and, for its control, 
 passes rules, not repugnant to law. It also elects 
 a president, vice-president, secretary, treasurer, 
 and executive committee of five or more members. 
 The executive committee transacts the duties of 
 the general board, except those of electing officers 
 and executive committee, and of passing by-laws. 
 The withdrawal of any bank from the associa- 
 tion does not affect its existence unless the num- 
 
 * The tax, which would force retirement of these notes as soon as 
 the stringency was past, is mentioned on page 141.
 
 158 PRACTICAL BANKING 
 
 ber of affiliated banks is thereby reduced below 
 ten. 
 
 Any bank which is a member of a national 
 currency association may apply through the asso- 
 ciation to the Treasury Department for additional 
 currency, to be based on securities other than 
 United States bonds, including commercial paper. 
 Commercial paper here means notes "represent- 
 ing actual commercial transactions, which when 
 accepted by the association shall bear the names 
 of at least two responsible parties and have not 
 exceeding four months to run." 
 
 When such security is deposited with the cur- 
 rency association, it makes application to the 
 Comptroller of the Currency, who, after consult- 
 ing the Secretary of the Treasury, issues, if con- 
 ditions warrant it, an amount of circulating notes 
 in a certain proportion to the cash value of the 
 securities, not, however, to exceed seventy-five 
 per cent in the case of commercial paper or ninety 
 per cent in the case of state, county, or municipal 
 bonds. The currency associations take charge of 
 these securities for the United States. 
 
 The total assets of the several banks in each 
 association are liable for the redemption of the 
 notes issued by any of its members, but each only 
 in the proportion that its capital and surplus 
 bears to the total capital and surplus. 
 
 The association may at any time require of any 
 bank more or other securities to cover its addi- 
 tional circulation, and if, on ten days' notice, this 
 order has not been complied with, the associa- 
 tion may sell the securities and apply the pro- 
 ceeds to the redemption of its notes.
 
 NATIONAL BANK NOTES 159 
 
 If, for any reason, it is impracticable for a bank 
 to be a member of a national currency associa- 
 tion, under certain conditions it is not deprived of 
 the right to issue additional notes. If it has a 
 surplus equal to twenty per cent of its capital 
 stock, it can make application to the Comp- 
 troller of the Currency for additional currency to 
 be based on bonds other than those of the United 
 States Government. In this case securities eligi- 
 ble for additional circulation are state bonds and 
 interest-bearing obligations of any county, town, 
 or city which has been in existence for ten years 
 past and has not defaulted in the payment of its 
 obligations. 
 
 The five per cent redemption fund applies to 
 additional currency issue as it does to the regular 
 bond-secured currency. It was originally pro- 
 vided that there should at no time be more than 
 $500,000,000 of additional circulating notes out- 
 standing, but an amendment passed August 4, 
 1914, provided that each bank might issue addi- 
 tional circulating notes to an amount equal to 
 125 per cent of its unimpaired capital and sur- 
 plus. This increased the possible issue to about 
 $1,760,000,000. 
 
 This act was to expire in 1914, but the Federal 
 Reserve Act extended it to June 30, 1915. Under 
 it, up to August 22, 1913, twenty associations 
 were formed with over $675,000,000 capital and 
 surplus. During the financial stringency of the 
 summer and fall of 1914, the provisions of the act 
 were beneficent, in that a panic was avoided and 
 business was " tided over" until the establishment 
 of the Federal Reserve Banks could be effected.
 
 160 PRACTICAL BANKING 
 
 The great difficulties with this scheme seem to 
 be: (1) that it lacked centralization, and therefore 
 could not be uniform in its operation nor public 
 in its control; (2) that it exhibited much of the 
 old super-cautiousness of the national bank note 
 based on United States bonds; and (3) that it 
 made no provision for the protection of the coun- 
 try's gold reserve. But it was, after all, only in- 
 tended as a makeshift, put together to safeguard 
 the country's financial interests during a period 
 in which something satisfactory, constructive, 
 and lasting was produced.
 
 CHAPTER XVII 
 
 THE CLEARING HOUSE 
 
 Some time ago the writer asked a business 
 friend for his definition of a clearing house. He 
 said that he understood it to be a place where 
 associated banks exchanged checks drawn against 
 each other and paid or collected the balances in 
 money. That is about what any man, not in the 
 banking business, would say. As a general defi- 
 nition it is very good. Yet there are some func- 
 tions which the clearing house assumes and some 
 points of interest in its mechanism which may be 
 suggested with profit. Indeed, the most important 
 features of the clearing house are not suggested 
 at all in the average business man's rule. 
 
 A very simple and sufficient definition for the 
 clearing house in its primary functions is "an 
 association of banks and bankers in some partic- 
 ular locality, organized for the mutual exchange 
 of checks, drafts, and other instruments which 
 may be agreed upon. Settlement for the differ- 
 ence between the aggregate of items delivered 
 and the aggregate of items received is usually 
 paid and received in cash or in some form of certif- 
 icate which the banks accept among themselves 
 as cash." 
 
 In many cities and towns the clearing house 
 has not accomplished more than such simple 
 functions. But in New York and Chicago, and
 
 162 PRACTICAL BANKING 
 
 in many smaller cities, its scope has widened 
 until it has become an active means of general 
 cooperation among the banks composing it. 
 
 Mr. James G. Cannon, in his article on the 
 clearing house, says: ^ 
 
 But we must go further than this; for, though origi- 
 nally designed as a labor-saving device, the clearing 
 house has expanded far beyond those limits, until it 
 has become a medium for united action among the 
 banks that did not exist even in the imagination of 
 those who were instrumental in its inception. A clear- 
 ing house, therefore, may be defined as a device to 
 simplify and facilitate the daily exchanges of items and 
 settlements of balances among banks, and a medium 
 for united action upon all questions affecting their 
 mutual welfare. . . . The tendency has been marked, 
 especially in recent years, to include within the legiti- 
 mate field of clearing houses all questions affecting the 
 mutual welfare of the banks and the community as a 
 whole. The bankers west of the Mississippi have 
 given to the country the most striking examples of the 
 possibilities of clearing houses exercising various spe- 
 cial functions, while the great associations of the East, 
 and especially that of New York, have exemplified the 
 utility and value of the clearing-house loan certificate. 
 
 As has been intimated, the clearing houses may 
 be divided, in regard to the mode of settlement 
 for balances, into two types: first, those whose 
 members make settlement in cash or some sub- 
 stitute for cash, agreed upon by them; and sec- 
 ond, those whose members may settle their bal- 
 ances with checks on large banking centers. And 
 it should be noted that there are two classes of 
 
 * Columbia University Lectures on the Currency Problem, 1908.
 
 THE CLEARING HOUSE 163 
 
 clearing houses in respect to the functions which 
 they perform; namely, those which simply offer 
 a means of exchanging items, and those which, 
 in addition, have the control of certain matters 
 pertaining to the common welfare of all. 
 
 New York has the most perfectly developed 
 clearing house in the country, showing every 
 phase of progress in that direction.^ In this sketch 
 we shall deal specifically with it, contenting our- 
 selves with a casual remark on other associations. 
 
 The New York clearing room is a large square 
 chamber in a beautiful white stone building oc- 
 cupied jointly by the Clearing House and the 
 Chase National Bank. Across one side and ele- 
 vated some fifteen feet is the manager's gallery, 
 where he supervises the making of exchanges. 
 Four long lines of standing desks run up to this 
 end of the chamber. Between each two lines there 
 are a screen and coat rack. 
 
 The exchanges are made at ten o'clock in the 
 morning of each business day. A few minutes 
 before the hour the messengers from the several 
 banks begin arriving. Each member sends a de- 
 livery messenger who brings the items against the 
 other banks, and a settling clerk, with frequently 
 an assistant, who receives the exchanges from the 
 other banks and remains till a proof is made of the 
 clearing. 
 
 When he arrives at the Clearing House, every 
 settling clerk furnishes the proof clerk in the gal- 
 lery with a ticket showing the amount brought to 
 the clearing. This is entered on the clearing bal- 
 
 1 If we except clearing house foreign departments, which are dis- 
 cussed later in this chapter.
 
 164 PRACTICAL BANKING 
 
 ance sheet as a credit to the bank. This column 
 for credits, together with one for credit balances, 
 constitutes one side of the balance. 
 
 The delivery clerks come in with huge boxes 
 and bags filled with their bank's items against 
 its fellow members. The items on each bank are 
 done up in a separate package, upon the outside 
 of which there is a list showing the amount con- 
 tained. 
 
 At 9.59 the manager, having shortly before 
 entered the gallery, strikes a bell as a signal for 
 the messengers to be in readiness to clear. Every 
 settling clerk takes his desk, with an assistant 
 usually at his side, and each delivery messenger 
 stations himself, box of items in hand, in front of 
 his settling clerk's desk. At precisely ten o'clock 
 a second bell is struck and the delivery messen- 
 gers start moving in a steady line, beginning with 
 the desk next to their own, where they leave the 
 proper package, receive the initial of the settling 
 clerk on their clearing slip, and deposit a ticket 
 in the desk showing the amount of the package 
 delivered. Thus, in regular rotation, they move 
 around the room and, in seven or eight minutes, 
 arrive again at their starting-points. They now 
 take over the items received by their settling 
 clerks, pack them away in their bags, and depart 
 for their respective banks. 
 
 As soon as all deliveries are made, the settling 
 clerks check back their debit slips — the slips on 
 which they have recorded the amounts of checks 
 delivered to them — with the tickets deposited 
 by the several delivery messengers. Now, they 
 foot up their debit slips and transfer the totals of
 
 THE CLEARING HOUSE 165 
 
 the items delivered and received to another 
 ticket, finding the balance, which they mark 
 "debit" or "credit" as the case may be. These 
 tickets are passed up to the proof clerk in the 
 gallery, who enters the total debit on the left side 
 of his proof-sheet by the bank's name, and the 
 debit or credit balance on the appropriate side of 
 his sheet. Next he proceeds to add, in order to 
 see that the debit side exactly offsets the credit. 
 In a few minutes he is ready to announce whether 
 a balance has been reached or not. If it has, the 
 clerks are at liberty to leave. Otherwise, they 
 must remain till the error is discovered. 
 
 In case of misbalance, the settling clerk may 
 have copied down the wrong total from some 
 package as it was delivered to him. In this event 
 he probably locates it in rechecking his work with 
 the slips left in his desk by the several delivery 
 clerks. On the other hand, the proof clerk may 
 have erred in transcribing to his book the amounts 
 from the tickets handed him. He rechecks and 
 can readily tell whether the error has been com- 
 mitted by him. It is possible, of course, to make 
 purely mathematical errors in adding up the dif- 
 ferent sheets. This ought to happen rarely, and 
 ought to be easily found, though the writer re- 
 calls an instance where it was otherwise. One of 
 the settling clerks in a smaller clearing house 
 invariably made an error in footing up his debit 
 sheet. The singular part of it was that he was 
 rarely able to find the error himself, and, after 
 hastily going over his figures, would sit back com- 
 placently and wait for one of the other clerks to 
 locate it. After a few minutes of consternation
 
 166 PRACTICAL BANKING 
 
 and surprise, one of the clerks would suggest that 
 some one go over this fellow's figures. In a mo- 
 ment or two the difference would be found. As 
 there was a fine attached for errors, the bank send- 
 ing this man soon discovered that it was conven- 
 ient to replace him. 
 
 In cities where every minute is valuable to 
 banks, especially about the clearing hour, it is 
 imperative that clerks arrive at the clearing 
 house promptly. Most cities impose a fine for 
 tardiness. New York sets this fine at two dollars. 
 
 It is obviously improbable that any bank's 
 credits will offset exactly its debits. In the New 
 York Clearing House's history it has not hap- 
 pened once, though at one time an exact balance 
 was only missed by ten cents. Every bank carries 
 back items in aggregate amount more or less than 
 it brings; that is, it has a debit or credit balance 
 after the exchange of items. Of course, the total 
 debits of the Clearing House will just equal the 
 total credit balances. By 1.30 p.m. each debtor 
 bank has paid to the Clearing House the amount 
 of its debit balance, and has received a receipt 
 for the same from an appropriate officer. Then 
 the creditor banks receive payment for the 
 amount of their credit balances. But no money 
 is paid to creditor members until every debit bal- 
 ance has been paid in. 
 
 This is a precautionary measure. For suppose 
 that all save one bank had paid in their debits, 
 and all of this had been paid to creditor banks as 
 they came. It is obvious that some bank or banks 
 would not have received their credits. Now, sup- 
 pose the delinquent bank should suddenly dis-
 
 THE CLEARING HOUSE 167 
 
 cover its inability to pay its debit. All save one 
 or two members received their balances all right. 
 Those one or two, however, must stand to lose 
 their credits entirely, since it would be hard to 
 find any of the others so philanthropic as to de- 
 sire to divide their credits with them. Under New 
 York's system no such occurrence could take 
 place. 
 
 In some cities where the clearing houses are 
 smaller and where the proximity of the banks 
 makes it practicable, the clearing-house manager 
 writes checks in favor of creditor banks for their 
 exact balances and drawn against debtor banks 
 in just the amount necessary to cover their bal- 
 ances. These checks are subsequently collected 
 in cash or sent through the clearing on the fol- 
 lowing day. This plan necessitates the "splitting- 
 up" of debits and credits which would, in a large 
 city like New York or Chicago, cause much in- 
 convenience in the collection. This plan has the 
 same disadvantages that the New York plan 
 would have if any creditor was paid before all 
 debtors had settled. But it permits a cheaper 
 means of conducting the clearing-house exchanges. 
 
 In New York the following are recognized as 
 media for paying and receiving clearing balances : 
 except for fractional amounts — legal tender 
 notes, gold. United States or Clearing House 
 gold certificates, or (in times of financial strin- 
 gency) Clearing House loan certificates. 
 
 Now, what has happened? Fifty banks from 
 many parts of the city have gathered in the clear- 
 ing room with packages containing items against 
 each other. They have made the exchanges, each
 
 168 PRACTICAL BANKING 
 
 taking what it is listed with and leaving what it 
 has listed against the others. Hundreds of mil- 
 lions of dollars of credit have been exchanged 
 and only about five per cent — in fact only the 
 balances — have been transferred in cash. The 
 Clearing House's operation saves much time and 
 expense. It provides for the deliberate verifica- 
 tion of the checks as to signatures, dates, amounts, 
 and indorsements. All checks which a bank de- 
 cides not to pay, either for lack of funds, because 
 of payment ordered stopped, or because of in- 
 formality of signature, are returned by messen- 
 ger to the bank which sent them. All checks not 
 accepted purely for lack of indorsement are certi- 
 fied and returned through the clearing the next 
 day to the bank by which presented. When they 
 are properly indorsed, they may again be sent 
 through the clearing and in due order paid. 
 
 The New York Clearing House is in its sixty- 
 first year. It is composed of thirty-two national 
 banks, eighteen state banks, and the Assistant 
 Treasurer at New York. Besides these there are 
 thirty-odd banks and trust companies which 
 make their exchanges through members of the 
 association. When the organization began its 
 operations in 1853 it had just fifty members. This 
 number has fluctuated, falling as low as forty-six 
 and reaching as high as sixty-seven. All members 
 of the association must keep a reserve of twenty- 
 five per cent.^ 
 
 The association's officers are a president, a 
 secretary, a manager, and an assistant mana- 
 
 ^ This provision has been revised in accordance with the Fed> 
 eral Reserve Act.
 
 THE CLEARING HOUSE 169 
 
 ger. The following are the standing committees : 
 the Clearing-House Committee, the Conference 
 Committee, the Nominating Committee, the 
 Committee on Admissions, and the Arbitration 
 Committee. 
 
 For the year 1909 the average daily transac- 
 tions were $340,303,113.28, of which $326,505,- 
 468.45 was in exchanges and $13,797,644.83 in 
 balances. In the first full year of its organiza- 
 tion (1854) the average daily transactions were 
 $20,092,583.00, of which $19,104,504.94 was ex- 
 changes and $988,078.06 balances. 
 
 The largest day on record was January 3, 1906, 
 when the total transactions amounted to $712,- 
 467,035.83. The largest balances (paid in cash, 
 of course) were on October 3, 1905, when they 
 came to $42,331,709.02. The total transactions 
 since the Clearing House's inception are (to 1909) 
 $2,123,395,038,959.60. The total balances paid 
 into the Clearing House during the year 1909 
 were $4,194,484,028.37. They were made as fol- 
 lows : — 
 
 United States bearer gold certificates $1,292,304,000.00 
 
 United States order gold certificates 555,140,000.00 
 
 Clearing House gold certificates 1,831,410,000.00 
 
 Clearing House note depository certifi- 
 cates for — 
 
 legal tenders 8,595,000.00 
 
 gold certificates 11,145,000.00 
 
 silver certificates 11,210,000.00 
 
 United States legal tenders and change . . 184,080,028.37 
 
 $4,194,484,028.37 
 
 ' From Mr. William Shcrer's Report for 1909. Mr. Sherer i.s the 
 third incumbent in the office of manager of the New York Clearing
 
 170 PRACTICAL BANKING 
 
 II 
 
 We may now proceed to discuss the more spe- 
 cial functions of the clearing house. It may be 
 said to have the following special facilities in its 
 most highly developed form : — 
 
 (1) Making loans to the Government in time 
 of need. 
 
 (2) Fixing uniform exchange and collection 
 
 House, and has honorably discharged his duties since 1892. The 
 writer remembers most pleasantly two days spent in the Clearing 
 House under the kind courtesies of Mr. Sherer. 
 
 Attention must here be called to a scheme in operation in Boston 
 whereby checks received by clearing-house members on some six 
 himdred banks throughout New England are handled by clearing- 
 house facilities. The results of this plan have been highly successful 
 since its establishment in 1900, the yearly totals averaging about 
 $575,000,000. The cost of collecting "foreign" checks in this way 
 has been approximately seven cents per one thousand dollars. At- 
 lanta, Georgia, and Kansas City, Missouri, also conduct a "foreign 
 department" in their clearing houses. 
 
 The best account of the scope and possibilities of clearing houses, 
 an economic expedient as well as an institution of local convenience, 
 is to be found in the volume. Clearing Houses, by Mr. James G. 
 Cannon, vice-president of the Fourth National Bank, New York. 
 It is published in the National Monetary Commission Series. The 
 volume is clear and complete; it is abundant in specific illustrations 
 taken from clearing houses in every part of the country. Mr. Cannon 
 realizes that it is, strictly speaking, impossible to generalize very 
 satisfactorily on the subject, because clearing houses have grown up 
 spontaneously in various cities and often without reference to any 
 particular model. At the same time it is important to note that 
 there is a growing "class consciousness" among clearing houses; 
 that is, they are beginning to realize the existence of a sort of affinity 
 between themselves. They are studying each other's methods and 
 imitating good qualities. The result is the awakening of a spirit of 
 cooperation between clearing houses. This is cleverly outlined and 
 new functions consequently suggested in chapter iv of Clearing 
 Houses, cited above. Mr. Cannon's own lucid expositions of the 
 duties and privileges of clearing-house associations and his very 
 large collection of exact data for comparison have contributed con- 
 spicuously to the development of "clearing-house consciousness."
 
 THE CLEARING HOUSE 171 
 
 charges ; also regulating the rate of interest 
 which its members may pay on deposits. 
 
 (3) Mutual assistance of its members. 
 
 (4) Issue of clearing-house loan certificates. 
 
 (5) Issue of certificates in form of checks on its 
 members for general circulation. 
 
 (1) During the Civil War, the clearing houses 
 of the great Eastern cities came to the assistance 
 of the embarrassed Government and helped 
 finance the struggle for the preservation of the 
 Union. It is even possible that the war might 
 have been a failure but for the support of these 
 associations. It is not the purpose of this para- 
 graph to inquire as to whether patriotic or eco- 
 nomic motives, or both, moved the clearing 
 houses to this action, but only to point out the 
 wide potentialities of such associations to the 
 Government in a time of public financial embar- 
 rassment. 
 
 (2) In many cities prescribing the rate of ex- 
 change charged for handling out-of-town checks 
 has seemed to come within the province of the 
 clearing house. In these places it has proved a 
 source of protection for the members, though it 
 is argued that it keeps a certain amount of busi- 
 ness from such cities. Some clearing houses also 
 regulate rates charged on collections. New York 
 has such an arrangement. Her rates vary from 
 par to one tenth and one fourth per cent on items 
 drawn on the United States or Canada. The 
 penalty for violation of this ruling is a fine of 
 five thousand dollars for the first ofi'ense and 
 possible expulsion from the clearing house for 
 second offense. As to fixing the rate of interest
 
 172 PRACTICAL BANKING 
 
 payable on deposits, clearing houses have not 
 been so successful as might be expected. Some 
 associations, usually in the smaller cities, have 
 been able to regulate this, with the result that it 
 has been highly satisfactory to all concerned. The 
 difficulty has not been altogether the lack of sup- 
 port of clearing-house members, but the fact that 
 banks outside the association have waged un- 
 relenting warfare on the members by offering 
 higher rates than have been agreed upon in the 
 clearing house. ^ 
 
 (3) In times of financial anxiety and unrest it 
 often happens that a perfectly solvent bank is 
 temporarily embarrassed. It may be because of 
 some malicious or careless rumor; it may be be- 
 cause of the sudden calling-in of a large block of 
 loans to cover some unlooked-for demand which 
 excites the suspicion of the over-wary. But, be 
 the cause what it may, the depositors are panic- 
 stricken and stampede the bank to withdraw their 
 funds. If the run is uninterrupted by a reestab- 
 lishment of the customers' confidence, the bank 
 may speedily find itself in an exceedingly embar- 
 rassed position, unable to extend any loans, un- 
 able to redeem checks against accounts on its own 
 books. This may not reflect on the bank, since it 
 is impossible to think of carrying an amount of 
 cash anywhere near equaling the deposit liabili- 
 ties of the bank. The banker could not afford to 
 lock up his total deposits in his vaults, even if he 
 were able to turn all the resources representing 
 deposits into cash, which, in a system based as 
 much on credit as ours, is impracticable. He has 
 
 ^ See James G. Cannon, Clearing Houses, p. 14.
 
 THE CLEARING HOUSE 173 
 
 to calculate as accurately as possible the probable 
 demand for cash and invest the remainder as 
 safely and profitably as he can. To be sure, he 
 should very much limit the long-time paper, and 
 should arrange to have a constant stream of re- 
 payments flowing into the bank. But in case of 
 an unforeseen run, the bank's assets cannot al- 
 ways be converted quickly enough to supply the 
 demands made upon it. Yet, when it is in good 
 standing, its clearing-house associates are usually 
 willing to assist it over the rough place. This ac- 
 tion is not without its selfish side, for the "easing- 
 up" of the panicky fever among depositors can- 
 not but have a desirable effect upon all the banks. 
 But if the aflflicted institution is in bad manage- 
 ment and is a drag to the association, the clear- 
 ing house is likely to let it go, glad to be rid of a 
 weak member. 
 
 (4) What is probably the most important spe- 
 cial function of the clearing house is the issue of 
 clearing-house loan certificates. These may be 
 defined as secured loans made by associate mem- 
 bers to other members, by means of which they 
 may pay their clearing balances. Fifty years and 
 more ago. New York bankers devised the scheme 
 of issuing clearing-house loan certificates, and 
 they have served long and faithfully. Since 1860 
 no less than nine times has the New York Clear- 
 ing House come to the rescue of the banking in- 
 terests of New York City with the loan certifi- 
 cate.^ During these nine times not a single dollar 
 has been lost in this manner. The community has 
 
 ' There have been approximately $270,000,000 of clearing-house 
 loan certificates issued in New York.
 
 174 PRACTICAL BANKING 
 
 come to look to these certificates as a source of 
 relief. 
 
 Since the adoption of this plan in New York, 
 many clearing houses throughout the country 
 have taken it up. By means of these certificates 
 members pay their balances at the clearing house, 
 and so retain cash for demands at the bank. 
 
 During times of financial disturbance, the New 
 York Clearing-House Association appoints five 
 bank officers from its members who, with the 
 president of the association, form the loan com- 
 mittee. It is the particular duty of this committee 
 to meet each morning and consider the collateral 
 offered by members for loan certificates. These 
 certificates have been issued in amounts varying 
 from fifty to one hundred dollars on one hun- 
 dred dollars' worth of collateral. The certificates 
 have ranged in denomination from one hundred 
 thousand dollars to twenty-five cents. 
 
 In 1907 the Association realized that the bank- 
 ing interests of the city demanded a larger com- 
 mittee, and accordingly an associate loan com- 
 mittee of five was authorized and appointed to 
 assist the general loan committee. On the loan 
 committee of the New York Clearing House have 
 served some of the country's most brilliant and 
 versatile bankers. 
 
 Now the issuance of loan certificates through 
 the clearing house is purely a self-preservative 
 measure. Moreover, it is intended to be tem- 
 porary. Thus, it is customary to issue the certifi- 
 cates payable with six per cent interest per annum. 
 The interest is payable by the bank using the 
 certificate and is receivable by the member which
 
 THE CLEARING HOUSE 175 
 
 accepts it in lieu of cash. The idea is to fix the 
 rate of interest high so that it will be undesir- 
 able to have certificates outstanding after the 
 strain is over. In actual practice they are very 
 promptly retired. When a bank desires to take 
 up any or all of its outstanding certificates, it 
 notifies the loan committee, which fixes a day on 
 which interest shall cease on the certificates and 
 serves notice to that effect on the bank or banks 
 holding them. In due time, they are sent through 
 the clearing for redemption. 
 
 When the certificates have been retired, the 
 banks issuing them can present them to the loan 
 committee and obtain the collateral securing 
 them. Thus, the loan certificates, while not used 
 and paid out of the bank as cash, have the effect 
 of taking its place among clearing-house members. 
 Actual money is left for the necessary demands 
 on the bank. 
 
 (5) During the panic of 1907-08, many clear- 
 ing-house associations throughout the country 
 authorized their members to issue certificates in 
 the form of checks payable to bearer, drawn 
 against the bank putting them into circulation. 
 These were equivalent to cashiers' checks, and 
 for a time were used in place of much regular 
 currency. Most were guaranteed by bonds and 
 other securities deposited with the clearing house. 
 Others were unsecured. It was surprising to find 
 how they circulated throughout the country. It 
 was nothing unusual to have certificates presented 
 for payment issued by banks far distant. They 
 were accepted on the same basis as other cashiers' 
 checks, and were handled either as clearing items
 
 176 PRACTICAL BANKING 
 
 — if they were on local banks — or through the 
 transit department, if they were on out-of-town 
 banks. ^ 
 
 In conclusion, it may be of interest to observe 
 a few figures on the transactions of clearing houses 
 throughout the country and their relation to 
 population. The first matter which will appeal 
 to the eye is that the population per bank has 
 dechned almost fifty per cent between 1880 and 
 1909; this will emphasize the rapid growth of 
 banking since that time, particularly when it is 
 remembered that the population in the same 
 
 1 This practice was originated in Atlanta, Georgia, in 1893. As 
 Mr. Cannon points out, it was perfected in the same year in Birm- 
 ingham, Alabama. The writer, who was a resident of the latter city 
 in 1907-08 and paying teller in one of the city's banks, well remem- 
 bers how it worked out. Certificates as small as twenty-five cents, 
 payable to bearer, were issued and used, not only to pay off clearing 
 debits, but to honor checks over the counter. At one time the clear- 
 ing house limited its members to the payment of twenty-five dollars 
 in cash weekly to each customer, except, as I remember, in the case 
 of certain pay-rolls. The issuance and circulation of these notes were 
 successful in the extreme. The writer, however, feels that much was 
 due to the loyal support of merchants of the city, many of whom 
 offered five and ten per cent premium on this "scrip" used in pay- 
 ment of merchandise. 
 
 The question is raised, no doubt, as to how these certificates 
 escaped the federal tax of ten per cent on all currency issued other- 
 wise than as authorized by the national banking laws. Certainly 
 they were used as emergency currency and served every local need 
 for money. Assuredly the practice was radical in so far as it not only 
 rendered mutual assistance between banks, but actually increased 
 the available cash for general purposes many millions of dollars. To 
 tell the truth, the writer suspects that the Treasury Department was 
 willing to make a rather liberal construction of the usage of clearing- 
 house certificates as circulating notes in view of the general financial 
 disturbance of the whole country. The notes seemed "safe" inas- 
 much as from thirty-three and one third to one hundred per cent 
 collateral additional to the face value of the notes were required. 
 Furthermore, they could easily be regarded as cashiers' checks 
 secured by a special deposit of collateral with trustees.
 
 THE CLEARING HOUSE 
 
 177 
 
 period has increased from about fifty millions to 
 about eighty-nine millions. During the same 
 time clearings reported from twenty-four cities 
 with $50,000,000,000 cleared have soared to 
 $165,000,000,000 from one hundred and twelve 
 cities, an increase of two hundred and ten per 
 cent, while the population has increased nearly 
 ninety per cent. It will be interesting to know 
 that New York City has maintained almost the 
 same relation to the total clearing, although the 
 number of cities reporting has increased about 
 three hundred sixty-six per cent. In 1880 New 
 York's clearings were seventy-six per cent of the 
 total, and in 1909 they were sixty-two per cent 
 of the total. 
 
 
 1880 
 
 1890 
 
 1900 
 
 1909 
 
 Total number of banks 
 
 
 
 
 
 of all kinds 
 
 6,532 
 
 8,201 
 
 10,378 
 
 22,459 
 
 Number of inhabit- 
 
 
 
 
 
 ants to each bank. . 
 
 7,678 
 
 7,635 
 
 7,337 
 
 3,934 
 
 Number of cities re- 
 
 
 
 
 
 porting clearing 
 
 Amount cleared in the 
 
 24 
 
 56 
 
 87 
 
 112 
 
 
 
 
 
 year 
 
 $50,766,000 
 
 $60,623,000 
 
 $86,205,000 
 
 $165,608,000 » 
 
 ^ Figures compiled from the volume, Statistics for the United 
 States, JS67-1909, by A. Piatt Andrew, in the National Monetary 
 Commission Series.
 
 CHAPTER XVIII 
 
 FOREIGN EXCHANGE 
 
 Foreign exchange is that branch of banking, 
 created by and built up through the commercial 
 and financial intercourse of nations. Every year 
 we export manufactured articles, produce, and 
 raw material from this country in scarcely cal- 
 culable amounts. Every year we import measure- 
 less quantities of every product of nature's 
 bounty and man's ingenuity. Our citizens scour 
 the face of the earth and even penetrate its 
 bowels or seek the space above the earth in search 
 of art, recreation, and learning. All these things 
 require vast outlays of credit. The consequence 
 is that for our expenditures we owe creditors 
 across the water, and for their purchases they 
 owe us. The foreign exchange is the medium of 
 settling these international debts. ^ 
 
 A bill of exchange is a draft against a credit 
 abroad, payable on demand or on a specified 
 date.^ 
 
 ' * There are, to be sure, bills to create credit, but more of them 
 anon. 
 
 * Note the lucidity of Mr. Franklin Escher's description of the 
 ultimate basis of foreign exchange: "Not all international obliga- 
 tions are settled by having the creditor draw direct on the debtor. 
 Sometimes, gold is actually sent in payment. Sometimes, the debtor 
 goes to a bank engaged in selling drafts on the city where the obli- 
 gation exists, gets such a draft from him. and sends it. But in a vast 
 majority of cases payment is effected as stated — by a draft drawn
 
 FOREIGN EXCHANGE 179 
 
 By far the greater part of our exports are to 
 Europe and the greater part of our imports 
 thence or, at least, through bankers there. There- 
 fore, for the purposes of this article, we shall 
 chiefly content ourselves with a discussion of 
 America's dealings with Europe. 
 
 Now, when we say that New York draws many 
 finance bills, or that Paris bills are a drug on the 
 London market, it must not be imagined that 
 New York, Paris, and London are each a solidly 
 organized market of traders, each threatening 
 the other and trying to outwit him. Quite the 
 reverse is true. These markets are composed of 
 bankers and brokers each competing sharply 
 with his fellow and frequently cutting his next 
 neighbor, though he thereby accommodate a 
 foreign correspondent. So let us not think of New 
 York or London as a compact combination of 
 bankers, but as an aggregation of individuals 
 trying to outdo each other. The rate of dis- 
 count on bills is said to be regulated by the 
 supply and demand of foreign bills of exchange, 
 but there is no general exchange at which rep- 
 resentatives of bankers meet to fix the price. 
 Brokers go from bank to bank getting the prices 
 both on selhng bills to them and buying bills from 
 them. There is, however, no lack of coopera- 
 tion between correspondents in different markets. 
 
 directly on the buyer of the goods. John Smith in London owes me 
 money. I draw on him for £lOO, take the draft around to my bank, 
 sell it at, say, 4.8G, getting for it a check for $i80. I have my money 
 and I am out of the transaction. . . . The buying and selling and 
 discounting of countless such bills of exchange constitute the very 
 foundation of the foreign exchange business." — Foreign Exchange, 
 pp. 3, 4.
 
 180 PRACTICAL BANKING 
 
 If Americans have a large amount of credit in 
 Europe, bills of exchange — that is, drafts against 
 these credits — are comparatively cheap; whereas, 
 if our credit abroad does not bear a generous 
 ratio with the demand here for bills against Eu- 
 rope, the price naturally rises. Tabulating, we 
 find that the items working toward an accumula- 
 tion of credit in our favor abroad are, in chief, as 
 follows : — 
 
 (1) Exportation of cotton, wheat and other 
 commodities, and manufactured goods. 
 
 (2) The purchase by foreigners of American 
 securities, for the payment of which bills 
 are drawn by American brokers. 
 
 (3) The payment of interest or dividends on 
 foreign securities, held by American in- 
 vestors. 
 
 (4) Loans, made to Americans abroad for 
 which bills are drawn. 
 
 (5) Expenditures of foreign tourists in the 
 United States who draw for funds on home 
 concerns. 
 
 On the other hand, those items operating 
 against America and tending to raise the price of 
 exchange here are : — 
 
 (1) Immense importation to the United States, 
 for which Americans must remit in ex- 
 change. 
 
 (2) The liquidation of foreign loans to America 
 which mature abroad. 
 
 (3) The enormous sum spent by American 
 tourists and residents in Europe. 
 
 (4) The purchase by Americans of securities 
 in European markets.
 
 FOREIGN EXCHANGE 181 
 
 (5) The interest and dividends payable on 
 American securities held by foreigners. 
 
 Generally speaking, foreign exchange is the 
 means by which individuals or firms on this side 
 pay then* foreign creditors and collect from their 
 foreign debtors. This applies in a similar sense 
 to London, Paris, Berlin, and Amsterdam. If, 
 as is sometimes the case, the supply of foreign 
 bills of exchange is too low for the demands, or 
 if it fails altogether, we pay our foreign debts by 
 exporting gold. If, on the other hand, the de- 
 mand for exchange is small and there is a large 
 amount for sale, we collect our credits abroad by 
 importing gold. 
 
 It is obvious, therefore, that the highest point 
 to which the price for foreign bills of exchange 
 can, under normal conditions, reach, is the gold 
 export price — that is, the point at which it is as 
 cheap to ship gold to pay one's obligations as it 
 is to buy bills. This is true, for a further advance 
 would simply mean that gold would be shipped 
 to pay debts. On the other hand, the limit to 
 which the market can, under normal conditions, 
 decline is naturally the cost of importing gold. 
 For, with little demand and a large accumulation 
 of exchange credits abroad, the prices fall, but 
 when they reach the point where the loss on sell- 
 ing exchange is just the cost of importation of 
 gold, why, of course, the fall is arrested, for a 
 lower decline would simply mean the importa- 
 tion of gold. Sometimes, however, gold is im- 
 ported when the price is above the import point; 
 ordinarily, this is done when, as in time of strin- 
 gency, there is a more profitable field here for
 
 182 PRACTICAL BANKING 
 
 gold than for exchange. This was done in 1907, 
 when there was a considerable premium on cur- 
 rency. 
 
 In his paper on "Foreign Exchange,^ Mr. 
 Albert Strauss thus lucidly describes the exporta- 
 tion and importation of gold : — 
 
 The pure gold contained in one English sovereign 
 is equivalent exactly to $4.8665 of our gold coins; so 
 that, apart from charges and expenses, $4.8665 of our 
 gold will, when sent abroad, produce a credit of one 
 pound sterling; to this cost must be added freight, in- 
 surance, and other expenses, amounting to about one 
 fourth of one per cent. This brings the cost of one 
 pound through shipment to about $4.88, which is, 
 roughly, the gold-export point for full-weight coin. . . . 
 The British sovereign, if full weight, will when sent 
 here and melted down yield gold for which the United 
 States Assay Office will pay $4.8665; the expense of 
 sending the sovereign, freight, insurance, cartage, and 
 kegs will amount to about one quarter of one per cent, 
 so that the net yield of the full-weight sovereign in 
 dollars will be $4.85f . But between the day on which 
 the banker buys the bill of exchange in New York and 
 the day on which he receives in New York the gold 
 which the bill entitled him to collect in London, there 
 must elapse the time necessary to send the bill to 
 London, plus the time needed to send the gold back, 
 — roughly, fifteen days, — during which time the 
 banker loses the use of the money. This loss of interest 
 must be deducted from the net yield of the imported 
 sovereign, and thus, if money is worth six per cent per 
 annum, the net yield of full-weight sovereigns is 
 brought down to about $4.84j, which is the gold-im- 
 port point for demand exchange when money is worth 
 
 * Columbia University Lectures, Currency Problem, 1908.
 
 FOREIGN EXCHANGE 183 
 
 six per cent per annum. Losses by abrasion will bring 
 down this point by perhaps one tenth per cent, to 
 about $4.83f. When money is higher the import 
 point will be lower, and vice versa. There is, therefore, 
 a margin of profit in buying demand bills and im- 
 porting gold sovereigns against the purchase whenever 
 the rate for demand bills falls below the gold-import 
 point. 
 
 But extraordinary decline in the quotation of 
 foreign bills is speedily stopped, for there is a rush 
 by bankers to buy bills in order to import gold, 
 and this quickly restores the rate to normal. 
 
 Since London is similarly situated regarding 
 the exportation and importation of gold, there is 
 always an accumulation of foreign gold coins in 
 the vaults of the Bank of England, of which no 
 inconsiderable part consists of United States coin. 
 As Mr. Strauss further points out, these are to 
 be obtained, usually, at a somewhat better price 
 than sovereigns, for it saves the cost of coining 
 just so many pieces. Sometimes one can also get 
 bullion at a favorable rate.^ The buyer has some 
 advantage in taking used United States coin, for 
 he buys them in England by weight and sells 
 them in this country at their face value, unless 
 they be under weight. Thus he gains the ad- 
 vantage of the abrasion. It is curious to see the 
 way gold is shipped from London to America. 
 The British, for instance, put them up in bags 
 whose contents weigh five hundred ounces. The 
 bags will frequently contain foreign gold coin of 
 various kinds, and if the coin do not weigh up 
 
 ' But any one holding Bank of England notes will get sovereigns 
 unless he makes special arrangements.
 
 184 PRACTICAL BANKING 
 
 exactly, they throw in some chopped-off frag- 
 ments of coins until the exact weight is reached. 
 
 When an American banker or broker exports 
 gold, he is liable to lose about one tenth per cent 
 by abrasion if he uses ordinary United States 
 coins, since he can receive value in England only 
 by their weight. But by the payment of a much 
 smaller fee than the loss by abrasion would come 
 to, he is usually enabled to get gold bars from the 
 United States Assay Office, buying them by 
 weight. He naturally prefers this method; the 
 office is willing, since the reduction of the coun- 
 try's circulation would necessitate the coining 
 of more gold at an added expense. 
 
 In many respects European money markets 
 are superior to ours. For instance, England is 
 what is called an open discount market. English 
 banks buy bankers' or first-class merchants' ac- 
 ceptances and hold them till maturity or, if cash 
 be desired, rediscount them in the open market. 
 There are many houses in London which make 
 a specialty of these rediscounts. Rediscounting 
 has rarely been done in America even in case of 
 first-class commercial paper. But with the ad- 
 vent of the federal reserve system, an almost 
 completely open discount market will be erected.^ 
 
 Another form of income-earning transaction 
 quite unknown to American banking is the ac- 
 cepting of long drafts, for which a commission is 
 charged. This is common in Europe. The com- 
 mission is, of course, based on the security of the 
 draft, both as regards documents attached and the 
 responsibility of the client for whom it is done. 
 
 ^ See chapter xx for the provisions of the new system.
 
 FOREIGN EXCHANGE 185 
 
 In Germany, the Reichsbank has established 
 a system called the "Giro Conto," by which 
 money is forwarded free of exchange for cus- 
 tomers to any places where the Reichsbank has 
 a branch. Since the Reichsbank has branches in 
 every important city in Germany, it is of great 
 value to merchants, most of whom carry ac- 
 counts with the Reichsbank, although no interest 
 is allowed on balances. 
 
 Two other conveniences of European banking 
 are "Del Credere" and "Bank Post Remit- 
 tances." By "Del Credere" is meant the cus- 
 tom which European bankers have of insuring the 
 pajTiient of time bills at maturity. Rates for 
 doing this vary from one fortieth per cent to one 
 and one half per cent, according to the responsibil- 
 ity of the drawee or according to the time for 
 which the bills live.^ We have nothing equivalent 
 to it in this country. 
 
 A bank in the United States may accept a cer- 
 tain amount of money from a person to be re- 
 mitted to some one at his particular address in 
 Europe. This brings us to the "Post Remit- 
 tances" of the Continent. The American bank 
 simply sends to its foreign correspondent in the 
 country concerned the name of the person to 
 whom the money is to be remitted, with his exact 
 address. Upon this authorization the European 
 banks turns over the money to the Government, 
 which delivers it to the remittee through the mail 
 service, exacting a small fee for guaranteeing de- 
 livery. This transaction is called the "Bank Post 
 Remittance." 
 
 ^ See Anthony W. Margraff, International Exchange, p. 190.
 
 186 PRACTICAL BANKING 
 
 II 
 
 The foreign department of a bank is in reality 
 a complete bank in itself, having its own tellers, 
 bookkeepers, and officers. Not only in New York, 
 the great financial center of the nation control- 
 ling the foreign transactions in this country, are 
 there banks having foreign departments, but far 
 and wide over the United States large banks have 
 established and are establishing foreign depart- 
 ments with direct relations with the Old World. 
 
 Why, then, do banks have foreign depart- 
 ments? The reasons have been well tabulated 
 by one writer ^ and in terse form they are : — 
 
 (1) The foreign department opens means for 
 the general clientele of the bank to transact 
 all their business in the bank. This avoids 
 the possibility of losing good accounts be- 
 cause of the superior facilities offered by a 
 rival bank. 
 
 (2) It serves as a good advertisement for the 
 bank. 
 
 (3) It affords the bank oppK)rtunities for plac- 
 ing loans at good rates in Europe's money 
 market by purchases of foreign bills of ex- 
 change for investment, by the purchase of 
 finance bills or bankers' long bills, as they 
 are called. 
 
 (4) It places a bank in position to subscribe 
 to Euroi>ean national loans, since foreign 
 correspondents usually invite their Ameri- 
 can friends to help underwrite these loans. 
 
 The foreign exchange transactions are actually 
 
 * Anthony W. Margraff, International Exchange.
 
 FOREIGN EXCHANGE 187 
 
 carried on by the drawing and accepting, the buy- 
 ing and selling of bills of exchange. Bills of ex- 
 change are simple drafts against credits abroad, 
 or for the creation of credits abroad. The most 
 common of the forms are the cable transfer, the 
 demand bill, and the long bill. These bills are 
 commonly payable in the currency of the coun- 
 try on which they are drawn. All bills are drawn 
 in duplicate and distinctly marked ''original" 
 and "duplicate," or "first" and "second," of ex- 
 change. 
 
 Ill 
 
 As we begin the discussion of bills of exchange, 
 let us bear in mind that the exchange market 
 does not consist alone in liquidating debts con- 
 tracted or in collecting credits accumulated 
 abroad in the ordinary conduct of business. These 
 commercial transactions, however, are the ulti- 
 mate cause of the market. 
 
 With keen eyes scanning the financial horizon, 
 exchange bankers speculate, buying bills on a 
 city with a large supply and little demand here, 
 and authorizing their agents in other foreign 
 cities, where there is little supply but great de- 
 mand for this particular exchange, to draw 
 against their credit. 
 
 Competition is sharp among the astute, open- 
 eyed bankers who deal in foreign exchange. This, 
 of course, tends to reduce the percentage of profit 
 on exchange transactions. It is not uncommon to 
 hear of bankers making a purchase on which a 
 profit of only 1-128 per cent can be made. The 
 exchange rates fluctuate constantly. Bankers buy
 
 188 PRACTICAL BANKING 
 
 at what they consider a good price, and sell their 
 own checks against the credit, established by re- 
 mitting the purchased bill, hoping to obtain a 
 slightly better price than they paid. 
 
 Since bills are drawn against credits abroad, 
 let us see who, in the ordinary course of events, 
 have them for sale. First, must be mentioned the 
 cotton planter of the South and the wheat-raiser 
 of the West. We undoubtedly export more cot- 
 ton and wheat than anything else. We also export 
 all sorts of manufactured articles and raw goods. 
 So the exporter draws a bill against his purchaser 
 across the sea and offers it for sale. Then finance 
 bills create credits abroad, against which bills 
 may be drawn; these will be discussed a little 
 later. Next, brokers who buy American securi- 
 ties for foreigners make drafts on their clients 
 for the cost of the securities together with their 
 commissions. In this case the securities are in- 
 variably attached to the bill. This class of bill 
 is commonly offered for sale. 
 
 The demands come from importers of foreign 
 commodities and manufactured goods; from cor- 
 porations remitting interest on American securi- 
 ties held abroad; from bankers who sell cable 
 transfers and other forms of exchange; and from 
 American tourists. 
 
 As has been already said, the exchange banker 
 scans the world's market closely and seeks to 
 find where the prices are cheap and where the 
 demand is great. By cablegram he is kept in- 
 formed at all hours of the day regarding the 
 foreign market's want and supplies. Now, if he 
 finds in New York a large demand for Amsterdam
 
 FOREIGN EXCHANGE 189 
 
 bills with but little supply in sight and a large 
 supply of Berlin bills with little demand, he will 
 buy Berlin bills, send them to Amsterdam for 
 credit, and draw his bills against Amsterdam.^ 
 Theoretically, this should work out beautifully 
 with considerable profit, but the market is com- 
 posed of a vast crowd of eager bankers and brok- 
 ers, and the price for Berlin is not likely to fall 
 to the import point, nor does the Amsterdam price 
 soar up to the point of exportation. The very buy- 
 ing and selling prevents either alternative. 
 
 IV 
 
 Gold always takes the shortest path to its final 
 destination when it is sent in settlement of dif- 
 ferences. Of course, this is no peculiar virtue of 
 the metal, but is caused by the exchange bankers, 
 who cut every corner and take advantage of 
 every infinitesimal profit. This, however, needs 
 a concrete illustration. 
 
 Suppose that some year we export a huge crop 
 of cotton to England, but do not buy in return. 
 On the other hand, suppose we buy wines and 
 manufactured goods from France, but do not sell 
 them much. A lumbering process of settlement 
 would be to import gold from London and then 
 export it back to Paris. As a matter of fact, the 
 gold is shipped directly to Paris from London. 
 This is an example on a large scale of what is ac- 
 tually happening in a smaller way perhaps many 
 times a year. It need not be a great crop of cotton 
 which we export or wines which we import; the 
 phenomenon, indeed, may not be caused by ex- 
 
 ^ This transaction is known as "arbitraging in exchange."
 
 190 PRACTICAL BANKING 
 
 ports or imports at all, but by the accumulation 
 of debt in one city, caused by finance bills matur- 
 ing, and the credit in another, due to the proceeds 
 of some discounted paper. 
 
 From this we arrive at a curious but economi- 
 cal scheme, arising not from international charity 
 but from international desire to secure every jot 
 and tittle of profit. Mr. Strauss speaks of " the 
 exchange market as an economical mechanism, 
 automatically making delicate international ad- 
 justments." 
 
 London is a free gold market, and, to judge 
 from the past, is the only reliable one. Berlin is 
 nominally a free gold market, although it some- 
 times has difficulty in paying in gold. Paris is not 
 a gold market, although it usually remits in gold. 
 However, it reserves the right to charge a prem- 
 ium for gold. New York is also nominally a free 
 gold market and was considered reliable until the 
 panic of 1907 when it proved that the reverse 
 was true. 
 
 London owes much of her prominence in 
 finance to her free gold market, and New York 
 cannot hope to exert a controlling influence upon 
 the world of finance until it becomes a free gold 
 market, absolutely and reliably. 
 
 V 
 
 Demand bills are those payable at presenta- 
 tion. There is nothing complicated about them, 
 so we turn to a discussion of long bills, which offer 
 opportunity for careful study. 
 
 A long bill is " international credit." If this 
 credit fails, as in panics, resort must be had to
 
 FOREIGN EXCHANGE 191 
 
 the unwieldy method of paying and collecting by 
 the shipment of gold. We have all read of the 
 slow, irksome process of separating the cotton 
 fiber from the seed in the days before the inven- 
 tion of the gin. It is said that an expert planta- 
 tion hand could separate no more than a few 
 pounds in a day. The modern gin seizes upon the 
 cotton as it is brought from the field and in a short 
 time separates many hundred pounds of seed and 
 fiber. The movement of gold to pay and collect 
 balances is as awkward as the old hand-method 
 of separating cotton. 
 
 In general, there are two kinds of long bills, 
 namely: Bankers' long bills or finance bills, and 
 commercial long bills. 
 
 Bankers' long bills, or finance bills as they are 
 frequently called, are simply drafts from an 
 American bank on a foreign correspondent, pay- 
 able usually at sixty or ninety days' sight. Most 
 of this class of bills are drawn on England, and are 
 accompanied in many cases by stocks or bonds 
 listed on the New York Stock Exchange. Such 
 collateral or any at all, however, is a matter of 
 negotiation and it usually happens that, if the 
 drawer is a house of excellent and world-wide 
 reputation, no collateral whatever is required. 
 This class of international loan provides an excel- 
 lent means of leveling world money rates. Bankers 
 make use of them to take advantage of the dif- 
 ference in interest rates between that in their 
 city and that in some foreign city. 
 
 Suppose that on a certain day, the interest 
 rate in New York is five per cent, while that in 
 London is only three per cent. After paying the
 
 192 PRACTICAL BANKING 
 
 necessary expenses on a finance bill, such as a 
 bill stamp and commission to the London house 
 for accepting the bill, the New York banker has 
 an opportunity to make his money in two ways, 
 as follows: First, by the investment of the pro- 
 ceeds at a higher rate than he paid, which we 
 assume in this case; second, by buying a demand 
 bill on London at the maturity of his paper at a 
 lower rate than he sold his long bill for. These 
 may conversely prove sources of loss. 
 
 Say, the New York banker draws a ninety-day 
 bill on his London correspondent for $100,000. 
 Let us figure how much he would probably make 
 on it under ideal conditions. London bankers 
 charge varying commissions for accepting these 
 bills. In this case, say, the commission is one 
 eighth per cent for ninety days. The English 
 bill stamp is one twentieth per cent, and the 
 annual discount rate, as we have assumed, is 
 three per cent. Resolving all these to rates per 
 annum, we have — 
 
 Commission 5 per cent 
 
 English bill stamp ^ 
 
 English discount rate on bill 3 
 
 3^ 
 
 — which is the cost of the bill. 
 
 Now, if the proceeds can be invested at five 
 per cent, there is a net profit of one and three 
 tenths per cent per annum on the transaction. 
 This, of course, neglects the loss of interest on 
 the discount, which is not, however, consider- 
 able. On $100,000 for ninety days, this net profit 
 would be roughly $325. This assumes that he 
 bought a demand bill to pay his maturing bill at
 
 FOREIGN EXCHANGE 193 
 
 the same rate at which he sold his finance bill. 
 If he buys a bill to pay his obligation at a lower 
 rate, he makes more profit; if he has to pay a 
 higher price for his demand bill, he makes less, 
 or even loses. Sometimes bankers guard against 
 the possibility of loss in this fashion by arranging 
 in advance for the delivery of demand bills to 
 them just before their long bills mature abroad. 
 
 The exchange banker is frequently content to 
 make a little outside of the profit on exchange 
 when he can sell his bill at a very high price. He 
 has little doubt that he can buy to meet his obli- 
 gation at a much lower rate, since there is a limit, 
 at least theoretically speaking, to its rise, and 
 since it is likely to fall because of the resultant 
 eagerness to supply the demand. It is a curious 
 fact that when the market is short and there are 
 few bills in sight, the rising price brings out an 
 ever-increasing supply. Mr. George Clare, in his 
 book on Foreign Exchange, describes this rather 
 felicitously: "But the bidding need only be roused 
 a centime or two to tap an almost inexhaustible 
 source of supply — that of bankers' drafts. In 
 other words, if the remitter cannot obtain a ready- 
 made bill, he must only pay a little more and have 
 one made to order." 
 
 Finance bills present attractive lines of invest- 
 ments to foreigners. They are advantageous in 
 that they keep gold within the country. 
 
 Mr. Albert Strauss tells of an amusing occur- 
 rence in regard to the issuing of finance bills in 
 1907. It seems that during the summer English 
 houses grew quite distrustful of American bankers' 
 bills (finance bills), and discriminated against
 
 194 PRACTICAL BANKING 
 
 them, buying only a very few. In the fall we ex- 
 ported an immense crop of wheat to supply Eu- 
 rope whose crop had failed. As there were com- 
 paratively few outstanding finance bills to be 
 paid, the inevitable happened. American bankers 
 imported great quantities of gold, which did 
 a good turn in helping to alleviate the stringency 
 here. At the same time Americans had additional 
 credit because of the heavy purchase by Eu- 
 ropeans of our securities at the low panic prices. 
 The London bankers had destroyed one of the 
 financial adjusters by their action and were un- 
 protected against huge demands for gold. 
 
 This system of selling finance bills and buying 
 demand bills to meet them at maturity is the 
 frequent cause of a peculiar situation. Say, a 
 bank has a long bill maturing in London. It 
 often happens that this bank buys the long bill 
 of another bank, for which it charges a rate 
 slightly above the regular discount, since there 
 is a certain element of risk. Sending this pur- 
 chased bill to London and discounting it there, 
 a credit is formed against which it may draw de- 
 mand bills to pay its obligation. At the same 
 time it may be selling its own long bills to another 
 bank in order to invest the proceeds profitably. 
 
 Thus, with Mr. Strauss, we may conclude that 
 if the exchange and interest rates of a market are 
 high, we have ample reason for increasing the 
 number of long bills. But if the interest rate is 
 about equal in the two markets, exchange is the 
 item whence profit is to flow. If, again, the exchange 
 rates are about equal, interest is to be considered. 
 
 A cable transfer is nothing more than a tele-
 
 FOREIGN EXCHANGE 195 
 
 graphic order to a foreign correspondent to pay 
 a certain sum on receipt of the cable instead of on 
 receipt of a bill of exchange by steamer. The rate 
 for cable transfers is somewhat higher than for 
 ordinary demand bills, because the seller loses 
 interest on the sum transferred by cable for the 
 number of days required to send a demand bill 
 across. In abnormal times the rates for cable 
 transfers soar. As a rule those selling cable trans- 
 fers carry substantial credit balances abroad, re- 
 plenished by forwarding demand bills to the credit 
 of their accounts. There is little risk in this kind 
 of business; but the percentage of profit is small. 
 The average profit on this transaction on the New 
 York market is fifteen one hundredths of a cent 
 per pound sterling. ^ Occasionally bankers will be 
 able to sell a cable at a price which warrants the 
 replenishing of their account by buying a cable 
 of some one else. Often enough, too, a cable is sold 
 against balances which have accumulated from 
 deposits of all kinds of bills, such as are herein 
 described. 
 
 VI 
 
 Commercial long bills are those which are 
 drawn by persons, firms, or corporations in this 
 country against credits abroad. Like finance bills, 
 they are in most cases drawn for sixty or ninety 
 days. They are accompanied almost invariably 
 by documents such as bills of lading, shippers' 
 invoice, and marine insurance policy. 
 
 The financier is always alert to employ his 
 capital in some profitable yet safe investment. 
 
 1 Franklin Eschcr, supra, p. 73.
 
 196 PRACTICAL BANKING 
 
 In frequent instances commercial long bills are 
 admirably fitted to fulfill these conditions. 
 
 Suppose money went begging in New York at 
 three and one half per cent, while in France five 
 per cent could be obtained. Assume that the 
 banker bought a ninety-day bill on some first- 
 class merchant in France. This bill would in all 
 probability have documents attached. On the 
 day of purchase the banker sends the first of ex- 
 change to his French correspondent for accept- 
 ance. He also sends the documents with orders 
 to surrender the same on acceptance of the first 
 of exchange. The banker notes on the remaining 
 second that the first is accepted and held by such 
 and such a correspondent.^ 
 
 He now files away the second until a short time 
 before its maturity when he takes it out, indorses 
 
 * Two points must here be noted: First, that documentary com- 
 mercial long bills are of two kinds, "acceptance" and "payment" 
 bills. "Acceptance" bills are handled as described above, while 
 "payment" bills provide that the documents shall not be surrend- 
 ered until payment is made. Bills drawn on banks are always "ac- 
 ceptance" bills. Of coiu-se, an "acceptance" bill may be discounted 
 and converted into cash as soon as accepted, and so, as a rule, bring 
 higher prices than a "payment" bill, which may be allowed to run 
 to maturity without any cash being paid on it. But "payment" 
 bills drawn against shipments of perishable goods must be paid by 
 the drawees before maturity to prevent the merchandise spoiling. 
 This payment is subject to a rebate, which is, however, lower than 
 the discount rate for the time of the bill, and consequently is an ad- 
 vantage to the owner of the bill. An example of a "payment" bill 
 of this kind is one drawn against the shipment of grain. A cotton 
 bill, on the other hand, is usually an "acceptance" bill. See pages 
 198 and 203. "Payment" long bills can be discounted in the French 
 market. 
 
 The second point to remember is that some commercial long bills 
 are known as "clean" bills; that is, free from documents. Such bills 
 arise from transactions in which the goods are delivered before the 
 draft is made.
 
 FOREIGN EXCHANGE 197 
 
 it, and sends it to some foreign agent to collect 
 and credit the proceeds. With the indorsed sec- 
 ond the agent can procure the accepted first and 
 present both for payment at maturity. 
 
 If the same rate of exchange prevails when the 
 proceeds are credited which prevailed when the 
 banker bought the bill, he makes the interest on 
 the investment. If the exchange rate is higher, 
 he makes more, and if it is lower, his profit is re- 
 duced. Since, however, these bills are usually 
 bought when exchange rates are down, there is 
 not much chance for loss on that score. 
 
 These bills are very attractive in that, although 
 they are to run for a certain time, they may imme- 
 diately be turned into a credit by discount abroad. 
 
 The three most desirable kinds of bills to pur- 
 chase are : — 
 
 (1) Bankers' drafts on foreign agents for cred- 
 its there. These, of course, are accepted 
 on the same basis as any other piece of ex- 
 change drawn by the bank. 
 
 (2) Bills of merchants accompanied by docu- 
 ments covering a shipment of goods. This 
 shipment should consist of goods that 
 could be easily resold in case of necessity. 
 
 (3) Bankers' long (sixty or ninety days') bills on 
 their foreign correspondents. The finan- 
 cial status of the drawers of these bills 
 should regulate chiefly the amount of them 
 bought, although in many cases, accom- 
 panying security, such as first-class stocks 
 and bonds, is to be taken into consideration. 
 
 In the case of acceptance long bills, accom- 
 panied by documents, the attached papers are
 
 198 PRACTICAL BANKING 
 
 to be surrendered, as before remarked, at the ac- 
 ceptance of the bill. These documents consist of 
 bill of lading, exporter's certificate, marine in- 
 surance policy, and at times consular invoice. 
 Across the sides of these bills frequently is written 
 the name and address of an agent to be notified in 
 case of the refusal of the drawees to accept or pay 
 the bill. By referring it to an agent, the drawer is 
 saved the expense of protest fees, cable charges, etc. 
 
 VII 
 
 It is now in order to treat of a special form of 
 merchants' long bill, that accompanied and 
 guaranteed by a commercial letter of credit. 
 
 A commercial letter of credit is a letter ad- 
 dressed by a bank in behalf of a customer to a 
 foreign merchant, authorizing him to draw on the 
 issuing bank's correspondent in a certain place 
 for a specified amount to be the cost price of goods 
 ordered by the bank's customer. The letter 
 further specifies that all drafts shall be accom- 
 panied by the proper documents. 
 
 Commercial letters of credit are the source of a 
 good deal of benefit both to the importer and the 
 exporter. 
 
 (1) They insure for the importer prompt ser- 
 vice; they enable the exporter actually to 
 manufacture goods to order. 
 
 (2) They permit the importer to deal on a cash 
 basis, while payment is actually deferred 
 sixty or ninety days; they permit the ex- 
 porter to sell his goods practically for cash. 
 
 These letters are issued in four parts; one sent 
 to the foreign agent on whom the exporter's drafts
 
 FOREIGN EXCHANGE 199 
 
 will be made, one to the exporter, and one to the 
 importer. The remaining part is kept by the issu- 
 ing bank. 
 
 Now, if we suppose that a New York merchant 
 has purchased a cargo of coffee in Java, the ex- 
 porter may call upon him to pay before the goods 
 arrive. The importer may not wish to pay cash 
 for these goods before their arrival; in fact, may 
 not be able to do so. It would seem natural that 
 the exporter should simply draw against the im- 
 porter, and this is sometimes done. But usually 
 the bill is drawn on England, for reasons that we 
 shall presently tabulate. 
 
 We shall assume that the bill for the cargo in 
 question was drawn on England, with documents 
 attached, and in accordance with certain require- 
 ments which are to be brought out later. Now, 
 why was the bill drawn on England.'* 
 
 (1) The pound sterling has been long and still 
 is the international standard. Also, the most 
 reliable bank in Batavia — where the bill is prob- 
 ably sold — is possibly a British bank. Even 
 though it is not a British bank, it is in closer 
 touch with the London market than with any 
 other. Bankers in the Orient keep in rather inti- 
 mate communication with the English market, 
 while they scarcely know anything of the cur- 
 rent condition of the New York market. These 
 circumstances have resulted in habits of long 
 standing regarding the buying of bills on London, 
 and it is useless to oppose them. 
 
 (2) The exporter in Java may not care to send 
 his goods if he has to sell his bill on New York, 
 because, upon arrival of the goods in New York,
 
 200 PRACTICAL BANKING 
 
 the purchaser may refuse to pay the draft on some 
 pretext. In that event the seller has a cargo on his 
 hands in New York but no cash credit. In such a 
 case the cargo might easily prove a loss to him. 
 
 (3) The importer himself does not desire a bill 
 on him directly, since it would arrive before the 
 goods and would have to be paid. This, then, 
 would defeat the very reason he had for not de- 
 siring to pay in cash. 
 
 Thus, we have a pretty problem. The Java mer- 
 chant, the Java bank, the American importer find 
 it undesirable to utilize what seems to be the most 
 natural means of transacting the affair. Handling 
 the deal through England, on the other hand, 
 would be satisfactory to all. Happily the problem 
 is solved, by the " commercial letter of credit." 
 
 The New York merchant, when he contem- 
 plates this purchase, goes to his bank, to get a 
 commercial letter of credit. His bank should be 
 an institution of wide reputation. It authorizes 
 its London correspondent to accept a bill for 
 sixty or ninety days when drawn by the Java 
 exporter and attached to the proper documents 
 such as bills of lading, marine insurance, etc. It 
 then authorizes the Java merchant to draw on 
 London, under certain conditions, for the amount 
 of the credit. This credit is the letter of credit 
 described above. The New York merchant sends 
 this authorization in the form of the bank's letter 
 to the Java merchant with his order. 
 
 Assume that the Java merchant draws his bill 
 for ninety days on London, attaching all specified 
 documents and the letter of credit. He takes it 
 to his bank, which discounts it for him at the
 
 FOREIGN EXCHANGE 201 
 
 current rate for London bills. It then forwards the 
 bill to its agent in London, who immediately pres- 
 ents it to the New York bank's correspondent for 
 acceptance. Upon acceptance, the accompanying 
 documents are surrendered. They are forthwith 
 shipped to the New York bank, which turns them 
 over to the merchant in time to receive his cargo. 
 
 The New York merchant receives, sells, and 
 delivers his goods. With the proceeds he must 
 remunerate the bank in time to pay the bill ma- 
 turing in London in ninety days. The bank, of 
 course, charges for this extension of its credit to 
 the merchant. The commission varies as the value 
 to the bank of the merchant's patronage and as 
 his financial responsibility. As it is a matter of 
 negotiation there is no definite charge. 
 
 For a moment let us watch the accepted paper 
 in London. It is quite an acceptable and negoti- 
 able paper, being signed by the Java merchant, 
 indorsed by his banker and the London agent, and 
 lastly accepted by the New York bank's London 
 correspondent. With ninety days to run after its 
 acceptance, it is in all probability sold to one of 
 the London discount houses which make a spe- 
 cialty of discounting acceptances. When the bill 
 is sold the London agent credits his Java client, 
 who is thereby reimbursed for the amount which 
 he advanced to the exporter. 
 
 Just prior to the maturity of the bill the New 
 York bank, which has meanwhile been repaid by 
 the importing merchant, draws its demand bill 
 on London to meet the maturing long bill.^ 
 
 * The above transaction has been suggested by Margraff, supra, 
 and by Strauss, supra.
 
 202 PRACTICAL BANKING 
 
 The whole difficulty has thus been overcome. 
 By the New York bank's extension of credit to 
 the merchant, forming a debt for which it does 
 not itself have to answer till the end of ninety 
 days, the merchant has been able to trade on a 
 cash basis. There is no difficulty in getting the 
 bill discounted in London, since it has become a 
 first-class negotiable instrument. 
 
 What is true of London in the matter of com- 
 mercial letters of credit is also true of Berlin, 
 Paris, and Amsterdam. 
 
 We might further point out that under cer- 
 tain conditions these long bills discounted by the 
 London, Paris, and Berlin discount houses could 
 be rediscounted at the Bank of England, the 
 Reichsbank, or the Banque de France. These 
 banks control the private discount rate as well 
 as their own, for when too great a volume of bills 
 accumulates they simply raise the discount rate, 
 and further transactions of the kind are stopped. 
 
 Foreign investments, like the foregoing, how- 
 ever, are not very attractive to Americans. We 
 must conclude that this is because of the enormous 
 resources and the ever-increasing enterprise of the 
 country, and because of the fact that the country 
 is so sparsely settled that most of our capital is 
 invested in home ventures. New York might be 
 able to control the world market at times if there 
 were a greater tendency to make foreign loans. 
 As it is, our harvest frequently enables us to 
 exercise considerable influence on prices. 
 
 Mr. Strauss says: "Until it [New York] has 
 acquired a vast amount of fluid capital ready to 
 seek temporary investment in the best-paying
 
 FOREIGN EXCHANGE 203 
 
 market, it will not be a financial arbiter among 
 nations." The Americans have been strangely 
 suspicious in their foreign investments, and yet 
 they certainly possess daring enough for anything, 
 to judge from some of the wild investments made 
 in home enterprises whose stock has been judici- 
 ously watered, etc. Transactions like the dis- 
 counting of the Java bill have never appealed 
 greatly to their fancy. We must again conclude 
 that the virgin resources of our country have 
 proved the attraction which has worked against 
 our having a city controlling in world finance. 
 
 The provisions of the Federal Reserve Act will 
 undoubtedly tend to encourage foreign invest- 
 ments of the kind just described. Banks and 
 federal reserve banks will discount acceptances 
 based on the exportation and importation of 
 goods. Banks that are members of the reserve 
 system are authorized to accept drafts against 
 them based on the importation and exportation 
 of goods. ^ 
 
 VIII 
 
 Merchants or tourists going abroad wish, 
 usually, to have some convenient exchange which 
 they can easily convert into cash, in part or en- 
 tirely. The traveler's check, issued by bankers 
 and express companies, fulfills this demand to a 
 certain extent, but the traveler's letter of credit, 
 issued by many prominent banks in this country, 
 seems at present to be the most popular mode of 
 carrying the desired credit abroad, any part of 
 which may be collected, practically at any place. 
 
 ^ See chapter on "The Federal Reserve Act," p. 258 et seq.
 
 204 PRACTICAL BANKING 
 
 The letters are usually drawn in pounds ster- 
 ling, and the drafts against credit are consequently 
 directed to the New York bank's correspondent 
 in London. 
 
 The following is a form used for travelers* 
 letters of credit : — 
 
 FIRST NATIONAL BANK OF NORTHPORT, 
 
 INDIANA. 
 
 Northport, Ind 19. . 
 
 No.... 
 
 Sterling. 
 
 To the Manager: — 
 
 This letter will introduce to you 
 
 M 
 
 in whose favor we have opened a credit of 
 
 Sterling, 
 
 and whose sight drafts to that extent upon 
 
 Bank 
 
 of London, we engage shall meet with due honor, if 
 negotiated within. . . months from this date. 
 
 The amount of each payment please indorse on 
 this letter, and your negotiation of the draft will be 
 considered a guaranty that the requisite indorse- 
 ments have been made. 
 
 You will observe that all such drafts be drawn 
 against the letter of credit of the First National 
 Bank of Northport, No. . . This letter must be at- 
 tached and remitted with the last draft. 
 
 Recommending M 
 
 to your usual courtesy. 
 
 Very truly yours. 
 
 To Messieurs, our correspondents, and all other 
 banks or bankers to whom this credit may be pre- 
 sented.
 
 FOREIGN EXCHANGE 
 
 205 
 
 {Reverse side.) 
 
 Paid by 
 
 Amount in letters 
 
 Amount in figures 
 
 Along with the letter, but usually separate from 
 it, is a list of the agents of the issuing bank 
 throughout the world who will negotiate a part 
 or all of the draft. On this list is a card which 
 introduces its bearer as the holder of letter of 
 credit so and so. 
 
 It is customary to engage, as one's agents for 
 the purpose of negotiating letters of credit, the 
 foreign correspondents of one's London agent, in- 
 asmuch as all the drafts are to be made payable 
 by him. 
 
 The London bank is immediately advised of the 
 issue of a letter of credit, is furnished with the 
 signature of the letter's owner, and is instructed to 
 pay drafts signed by this person in certain amounts. 
 
 The holder of the letter, if he be in Berne, 
 Switzerland, say, goes to the office of the banker 
 noted in his list. There his card of introduction 
 and possession of the letter are sufficient to obtain 
 payment of any part of the draft he desires. The 
 banker pays him the money and receives a draft 
 on the London bank signed by his customer. He 
 then notes on the back of the letter the amount 
 paid and the transaction is ended. 
 
 When the draft is presented for payment in 
 London, the signature is looked up, and, if cor-
 
 206 PRACTICAL BANKING 
 
 rect, the draft is paid and charged to the issuing 
 banker's account. It is then forwarded to him. 
 The issuer of the letter of credit charges it against 
 the credit which the purchaser of the letter has 
 created for the purpose. 
 
 IX 
 
 Although all the European countries handle 
 American accounts on practically the same basis, 
 there is some dissimilarity of detail. 
 
 When we glance over the foreign money 
 markets, we have no difficulty in agreeing that 
 England is paramount. There are more trans- 
 actions of bankers through London than through 
 any other city in the world, and, as a natural 
 consequence, Americans keep their most import- 
 ant accounts in London, Therefore the London 
 account deserves first place in our discussion. 
 
 The great Bank of England is the most power- 
 ful instrument in finance. By its discount rate it 
 has a distinct influence on the whole world. The 
 discount rate of the Bank of England is the lowest 
 point at which it will discount bills for English 
 bankers. It is fixed at a meeting of the board of 
 governors which convenes every Thursday. In 
 times of panic or financial uneasiness, meetings 
 are, of course, more frequent. "This rate acts as 
 the barometer of the financial conditions of the 
 various nations, and any factors of political or 
 financial significance are reflected by its course." ^ 
 
 In tabular form the discount rate of the Bank 
 of England performs the following important 
 functions : — 
 
 1 Margraff, supra.
 
 FOREIGN EXCHANGE 207 
 
 (1) It protects the gold reserve by an advance 
 in the rate. 
 
 (2) It regulates the discount rate of the open 
 market in Great Britain on bills. 
 
 (3) It establishes its own minimum discount 
 rate. 
 
 (4) It may affect the value of foreign bills in 
 all countries since it may cause a lower or 
 higher exchange rate on sterling drafts, and 
 therefore depreciates or enhances the value 
 of long bills by an increase or reduction of 
 its foreign discount rate. 
 
 (5) It determines the rate of interest allowed 
 on credit balances in London and the rate 
 charged on debit balances or overdrafts, 
 since these are from one half to one and 
 one half per cent higher and lower than the 
 bank's rates. 
 
 (6) It fixes the rate of interest of the joint- 
 stock companies on short-time deposits, 
 inasmuch as this is usually one and one 
 half per cent below it. 
 
 Unlike some of the European countries, Eng- 
 land charges a commission on all business handled 
 except cash items sent for credit and unaccom- 
 panied by documents. There is no definite rate, 
 and, as it is a matter of negotiation, the larger and 
 more prominent the bank, the better arrange- 
 ment it will doubtless be able to make. 
 
 Documentary payment bills are those long bills 
 from which the documents will not be detached 
 until payment. These may, however, be taken 
 up before maturity by the drawee. In the Eng- 
 lish market such bills cannot be discounted, as
 
 208 PRACTICAL BANKING 
 
 their liability to be paid makes them undesirable 
 investments. The rate at which the interest on 
 these is rebated, if they are taken up before 
 maturity, is called the "retirement rate of dis- 
 count" in England. It is calculated for the un- 
 expired time of the bill and is usually one per 
 cent below the Bank of England discount rate. 
 
 Owing to the branch banking system in Eng- 
 land, it is only necessary to open an account with 
 a prominent London bank to have facilities for 
 carrying on business throughout the country. 
 The branch banking system is in vogue rather 
 generally among European countries. 
 
 If one wishes accommodations in France, one 
 can very well succeed by having an account v/ith 
 a Paris bank of importance. But many large 
 American banks find it convenient to carry ac- 
 counts with banks in more than one city. The 
 same holds true in Germany. The French ac- 
 count is comparatively an expensive one, for 
 besides a commission for handling one's business, 
 overdrafts cost a higher rate than in any other 
 country. Checks drawn against this account are 
 charged on the day that the advice of their issue 
 is received in Paris. There is frequently a con- 
 siderable loss of interest thereby. The French 
 market will discount the documentary payment 
 bills which the English market refuses. 
 
 The German branch system of "Filialen" 
 insures one of banking facilities throughout the 
 empire if one carries an account with a prominent 
 Berlin bank. 
 
 Though the Germans do not charge commis- 
 sions for handling accounts, they make amends
 
 FOREIGN EXCHANGE 209 
 
 for this shortcoming by charging checks to their 
 accounts as soon as advice of their issue arrives, 
 and by beginning the payment of interest on 
 credits from the day after remittances are credited. 
 
 If a bill is discounted in the German market 
 for M. 10,000 or more, discount is figured at the 
 Reichsbank rate for the last five days of its life; 
 if it be for less than M. 10,000, interest at the 
 Imperial Bank rate is charged for the last ten days 
 of its life. 
 
 The three foregoing accounts — the English, 
 German, and French — absorb by far the greater 
 part of American business. Our trade with other 
 foreign countries is immense, but is mainly 
 banked through these countries. They have been 
 aptly called the "clearing houses of nations." 
 
 The fundamental principles of the banking 
 systems of the other European countries, from 
 Denmark and Scandinavia through Holland and 
 Austria to Italy, are the same. Holland offers, 
 by means of correspondents and branches, the 
 same facilities as do Switzerland and Italy with 
 their branch banking. 
 
 Our exports to Italy are on the increase, and 
 so we frequently accumulate larger credits there 
 than are necessary. These are remitted every so 
 often to some European correspondent, usually 
 the French, where the funds are more serviceable. 
 Italy charges about one fourth per cent for col- 
 lecting bills and remitting the proceeds to Paris. 
 
 Bills on Russia are not greatly in demand in 
 this country. Indeed, there is no present means 
 of directly supplying such a demand in great 
 quantity, — save by actual deposit of credits
 
 210 PRACTICAL BANKING 
 
 there, — for we export little to Russia direct, 
 and few American banks have affiliations there. 
 
 Foreign exchange, then, consists of the results 
 of world intercourse. The more we trade with 
 each other, the more we visit the places of beauty 
 and fame in each other's lands, the more we come 
 to trust and believe in each other, the greater 
 will become this phase of banking. And it is on 
 the steady increase. It has gained such momen- 
 tum now that, though it may be retarded, it may 
 not be stopped. As we approach the world or 
 international epoch in our history, this commer- 
 cial, social, and intellectual intercourse between 
 nations increases. The modern means of rapid 
 transportation and communication both on land 
 and sea are making the lands of the earth, though 
 separated by thousands of miles of ocean, next- 
 door neighbors. We are being brought together 
 by bonds — social and commercial — which can- 
 not be broken. 
 
 It is not uninteresting, therefore, to have dis- 
 cussed and studied one of the great early pro- 
 ducts of general international intercourse — the 
 foreign exchanges. Their importance to-day is 
 so vast that prominent banks, be they in the 
 center of the country or in one of the great sea- 
 ports, are making affiliations with foreign insti- 
 tutions. Some time in the future it will be just as 
 important that an American bank have its Lon- 
 don agent as it is now that it have its New York 
 agent.
 
 CHAPTER XIX 
 
 CRISES IN THE UNITED STATES 
 
 To-day, seven years after the last great crisis 
 in the United States, one hears occasional re- 
 echoes of the crash. The country is emerging 
 from the depression succeeding that crisis, and 
 one is tempted to ask: "What are crises? How 
 do they arise? Are they necessary evils, like 
 lightning which comes to clear a torrid atmo- 
 sphere?" 
 
 These are matters which it is proposed to broach 
 in this chapter, and, together with a succinct 
 sketch of the history of financial disturbances in 
 the United States, to seek some conclusion as to 
 the nature of crises. For our purpose it will be 
 more satisfactory to discuss a few results of in- 
 vestigations into crises and their composition 
 than to launch ourselves bodily forth into an 
 almost illimitable analysis of detail.^ Within the 
 scope of this volume it will be possible only to 
 state the case, as it were, in chapter heads. 
 
 There is no phase of banking which is more 
 alluring to the historically practical mind than 
 the subject of those mysterious disturbances 
 
 ^ For those who would study figures and enter minutely Into ana- 
 lytical research, most of the books cited in footnotes in this chapter 
 will offer a tempting starting-point, especially Charles A. Conant, 
 A History of Modern Banks of Issue, and Wesley C. Mitchell, Busi- 
 ness Cycles.
 
 212 PRACTICAL BANKING 
 
 which have visited us every ten or a dozen years 
 in the form of a contraction of loans, a scarcity 
 (sometimes) of currency, a lost stock exchange 
 equilibrium, a derangement of relative credits, 
 both in domestic and foreign exchanges. Why, 
 in the midst of piping prosperity, need and dis- 
 tress should seize our financial and economic sys- 
 tem — that is the question. 
 
 It has not been adequately answered. There 
 exists a wide difference of opinion among practi- 
 cal financiers and theoretical economists. But 
 one point has been settled: the old notion that 
 crises are abnormal phenomena is abandoned. 
 "On the contrary, explanations in favor to-day 
 ascribe the recurrence of crises after periods of 
 prosperity to some inherent characteristic of 
 economic organization or activity. . . . The in- 
 fluence of special conditions is admitted, of course, 
 but rather as a factor which complicates the pro- 
 cess than as the leading cause of crises." ^ That 
 is to say, by the very nature of our mode of pro- 
 ducing and consuming, "business" moves in a 
 circle from prosperity to a crisis to a depression; 
 then to prosperous and booming times again. 
 This seems to be the order, although artificial 
 causes may intervene, as, for instance, to bring 
 or end a crisis sooner than would occur under the 
 rule. Then, too, each circle or cycle — consisting 
 of prosperity, crisis, and depression — is different 
 from every other one in circumstances. For ex- 
 ample, in 1837, $100,000,000 worth of new canals 
 in a few years had boomed certain enterprises 
 and investments. In 1873, it was said that 
 
 ' Mitchell, supra, p. 6.
 
 CRISES IN THE UNITED STATES 213 
 
 extensive railroad construction contributed to the 
 overextension of credit; in 1893, a wild scramble 
 toward real estate and city development.^ 
 
 What we are interested in does not compre- 
 hend an economic study of the endless details 
 which enter into the evolution of the three essen- 
 tial elements of a business cycle. Nevertheless, we 
 shall do well to remember that underlying every 
 crisis there are scores of economic forces, which 
 we but little understand, and over which there is, 
 at present, great controversy. This much seems 
 to be settled: prosperity begets a crisis with 
 dramatic resistlessness; a crisis is followed by a 
 period of general depression just as inevitably; 
 finally, prosperity is again brought into exist- 
 ence.^ 
 
 * Conant, supra, pp. 672-73. 
 
 ^ Wesley Clair Mitchell, in his book Business Cycles (University 
 of California Press, 1913), has made the most complete, up-to-date 
 study of statistics relating to the course which economic conditions 
 take. He has massed in the beginning a summary of the explana- 
 tions offered by leading writers on the subject, a few of which are 
 here digested to throw some light on contemporary theories : — 
 
 W. H. Beveridge, in his volume on Ujiemployment, says that busi- 
 ness cycles are due to the "simple and well-nigh universal fact of 
 industrial competition." He says that in times of prosperity com- 
 petition tends to overload, to "glut" the market. When goods can- 
 not be sold, the whole structure of commerce and industry, thus sup- 
 ported, threatens to topple or topples. A crisis is at hand, to be fol- 
 lowed by a period of depression which continues until the demand 
 exceeds the supply, when competition begins in earnest, anew. 
 R. E. May {Das Grundgesetz der Wirtschaftskrisen) explains the 
 "glutting" of the market by saying prices in times of prosperity 
 rise, whereas the growing output of production can only be sold if 
 prices are low. 
 
 An interesting theory is advanced by A. Aftalion {Essai d'une 
 thiorie des crises gSnSrales et p6riodiques), who sets aside the objec- 
 tion to an "overproduction" theory on a basis of marginal utilities. 
 He says that production increases in good times, but that there
 
 214 PRACTICAL BANKING 
 
 All the authorities cited below analyze the 
 situation more or less accurately, but none are 
 
 comes a time when, though all human wants may not be gratified, 
 they are sufficiently gratified from goods on the market to cause the 
 marginal utility of the goods (that is, their potentiality to sell at 
 some profit) to decline. A general fall in prices ensues. So, in good 
 times the rise in prices grows out of the relative scarcity of goods in 
 relation to the community's wants. Then M. Aftalion answers the 
 query, "Why this over- and under-production?" The cause, he 
 says, lies in the awkward methods of capital. Where a promising 
 field opens itself, capital flows in in volumes and prepares to supply 
 the field. High prices prevail. But after the new factories are com- 
 pleted and have begun to produce, the time is short before the 
 market becomes overstocked. Then the crisis appears, followed by 
 a depression. When some machinery has gone out of repair, without 
 replacement, and some factories have closed; in fine, when produc- 
 tion is again less than the demand, good times return. 
 
 Hobson {The Industrial System) has a theory of "oversaving." 
 Since a considerable proportion of capital invested and wealth pro- 
 duced belongs to a comparatively small class, its income rises 
 more rapidly than its consumption, there always being a limit of 
 consumption, no matter how affluent the consumer. Therefore the 
 reinvestment of this surplus of capital has a tendency to "glut" the 
 market. M. Bouniatian {Studien zur Tkeorie und Geschichte der 
 Wirtschaftskrisen) has a theory of overcapitalization resembling 
 Hobson's oversaving. 
 
 George H. Hull {Industrial Depressions) maintains an enthusi- 
 astic thesis. It is bristlingly practical. Agriculture, commerce, and 
 finance, says he, fluctuate within relatively narrow limits. Agricul- 
 ture provides the necessities of life; commerce distributes them, and 
 finance pays the accounts. On the other hand, he continues, indus- 
 try fluctuates greatly. Three fourths of industry consists in con- 
 struction. Of this construction two thirds is necessary, the rest 
 optional. Optional construction is undertaken when investors can 
 see a goodly profit in so doing. The necessary plus the optional con- 
 struction causes a boom and prices of construction go up. Shrewd 
 investors then defer contracting for a time; prices tumble. Hull 
 says industrial depressions are caused by high prices of construction 
 and foreshadowed by high prices of iron. He favors the Government 
 collecting and publishing monthly "all pertinent information in 
 relation to the existing volume of construction under contract for 
 future months, and all pertinent information in relation to the 
 capacity of the country to produce construction materials to meet 
 the demand thus indicated."
 
 CRISES IN THE UNITED STATES 215 
 
 so comprehensive as Mr. Mitchell. His theory of 
 business cycles is so complete that the writer 
 ventures, in order to provide a suitable back- 
 ground for a historical summary of crises in the 
 United States, to give a very brief review of Mr. 
 Mitchell's results. 
 
 He has conceived his problem to be a quantita- 
 tive one and so has treated his subject statisti- 
 cally. His clue, to begin with, is that "the in- 
 dustrial process of making and the commercial 
 process of distributing goods is thoroughly sub- 
 ordinated to the business of making money." 
 
 Supposing we start at a point where a revival 
 of trade may be first noticed in the business cycle. 
 The elements entering into industrial and com- 
 mercial intercourse are: low prices, reduced cost 
 of doing business, small profits, large bank re- 
 serves, conservative capitalization, moderate 
 granting of credit, fair stock of goods, and cauti- 
 ous buying. Such conditions will be accompanied 
 by an increase in the physical volume of trade — 
 slow but cumulative. Then it is only a question 
 of time until the momentum of increased trade 
 will convert a period of dullness into one of activ- 
 ity. It would come slowly if left alone, but a 
 bumper crop or an increased demand abroad for 
 home products is likely to accelerate the coming 
 of prosperity. The activity is contagious and 
 spreads through innumerable lines of intercon- 
 nection to industries other than that which may 
 have received the first stimulus. More labor is 
 used, more money is borrowed, profits are higher. 
 The resulting increase in incomes causes an ever- 
 accelerated demand for every commodity. "All
 
 216 PRACTICAL BANKING 
 
 this while the revival of activity is instilling a 
 feeling of optimism among business men, and 
 this feeling both justifies itself and heightens the 
 forces which engendered it by making every one 
 readier to buy with freedom." Prices rise. Then 
 producers begin to foresee orders exceeding their 
 capacity; this raises prices in advance. "The 
 expectation of its coming hastens the advance. 
 Buyers are anxious to secure or to contract for 
 large supplies while the low level of quotations 
 continues, and the first definite signs of an up- 
 ward trend of quotations brings out a sudden 
 rush of orders." In fine, the cumulative process 
 has converted a revival of trade into intense 
 prosperity. 
 
 Meanwhile, Mr. Mitchell's thesis continues, 
 there is also a slow accumulation of stresses. 
 There is an increase in the cost of doing business. 
 Higher rates of interest prevail, due to greater 
 demand for accommodation. Salaries and wages 
 go up; equipment must be enlarged and improved. 
 The scarcity of labor, necessitating the acquire- 
 ment of inferior workmen, and overtime labor 
 decrease eflBciency, which, when added to waste 
 in doing a "rushing" business, becomes an ap- 
 preciable item. Then a tension on the bond and 
 money market is felt, arising from the super- 
 abundance of securities and notes offered. The 
 demand for credit is growing beyond the ability 
 of accommodation. Such manufactories as steel 
 mills, iron works, lumber mills, and cement 
 plants feel the strain first. It is because they 
 manufacture industrial equipment for which 
 demand decreases when prices — as controlled
 
 CRISES IN THE UNITED STATES 217 
 
 by the difficulty of getting loans — rise. Con- 
 structing companies and contractors are also 
 among the first to feel the result of a tight money 
 market. As the interest rate rises and, conse- 
 quently, security for credits decreases, and, 
 moreover, as profits seem to waver, cautious 
 lenders refuse to renew notes. Liquidation sets 
 in. 
 
 When once this process of liquidation of obh- 
 gations has begun, piping times of prosperity are 
 doomed to give way to a crisis. Liquidation con- 
 tinues, partially because the caution of some 
 creditors is contagious, partially because the pres- 
 sure for payment is passed down the line, as from 
 A to B for B's indebtedness to A, then from B to C 
 for C's indebtedness to B. The question with 
 business men becomes not so much one of profits 
 but of solvency. Since resources have to be care- 
 fully guarded, sales are not pushed. Orders for 
 goods fall off. Business in general decreases; ex- 
 pansion gives way to contraction. Meanwhile, 
 the demand for loans becomes more acute with 
 the inevitable result that discount rates rise and 
 the value of securities falls. 
 
 Liquidation continues steadily, though with- 
 out any paroxysms, until in the chain some weak 
 link gives way, until there is some conspicuous 
 failure. Immediately (under the old system in the 
 United States) intense alarm reigns; banks are 
 frantically besought for loans and are besieged 
 by depositors. If the banks can meet both de- 
 mands without difficulty, the alarm passes; other- 
 wise it becomes a panic. In the wake of the panic 
 there are suspended cash payments at the banks.
 
 218 PRACTICAL BANKING 
 
 the issue of clearing-house certificates, hoarding 
 of cash, and premium on currency. Interest rates 
 soar. There are bankruptcies and — what is 
 worse for the situation — rumors of bank- 
 ruptcies. 
 
 The Government does what it can by deposi- 
 ting Treasury funds with the banks. The banks 
 help themselves to some extent by the slow and 
 uncertain process of increasing their circulation. 
 Very little cash money is in circulation; individu- 
 als and banks alike hoard it. 
 
 The total result is the closing of many busi- 
 nesses and the partial operation of others. Work- 
 men are discharged, commodities are sold at 
 sacrifice, and the volume of business is greatly 
 contracted. 
 
 Because of unemployed wage-earners, the de- 
 crease in savings, and the encroachments on the 
 incomes of those most fortunately situated, — 
 because of the impoverished ability to buy, — 
 consumers' demands are greatly reduced. The 
 shrinkage here goes down the entire line during 
 the gradual period of readjustment. Construc- 
 tion is almost at a standstill. Now the con- 
 traction in the physical volume of business be- 
 comes cumulative. Competition is keener because 
 there is a reduced demand. Pessimism reigns 
 supreme.^ 
 
 When the "market" supply is less than the 
 demand, or rather when the consumption has 
 caught pace with production, — in short, when 
 business has adjusted itself to new condi- 
 
 1 It is at tbis time that good Americans begin to vilify Washing- 
 ton, D.C., regardless of the party in power.
 
 CRISES IN THE UNITED STATES 219 
 
 tions, — the seeds are sown for a revival of ac- 
 tivity.^ 
 
 II. THE CRISES OF 1814 AND 1819 
 
 On the 31st of August, 1814, the banks of 
 Philadelphia suspended specie payments and on 
 the next day the New York banks did likewise. 
 This was the weak link in the chain which ac- 
 companied the first great liquidation of credits 
 in the United States. 
 
 Owing to the economic result of such govern- 
 mental acts as the Embargo, the trade of the 
 United States had fallen, until the fiscal year 
 ending September 30, 1814, indicated the smallest 
 foreign trade in the nation's history. ^ Also the 
 Government pursued a method of borrowing 
 instead of taxing to carry on the War of 1812, 
 which tended to take investment capital out of 
 circulation. This reacted on the already declin- 
 ing trade. Government expenditures doubling 
 receipts in 1813 and 1814 exercised a bad psy- 
 chological effect on business. But what contrib- 
 uted as much, perhaps, as anything else to the 
 crisis of 1814 was the establishment of a large 
 number of state banks without adequate capital, 
 which emitted floods of poorly secured circulating 
 notes. The growth of these banks was encouraged 
 by the lapse of the charter of the first United 
 
 ^ Of course, in our limited treatment of the subject, we shall not 
 endeavor to trace all these influences, but shall merely show the 
 principal trend of industry and investment which eventually culmi- 
 nates in a money stringency and a crisis. 
 
 ^ Theodore E. Burton, Crises and Depressinns, pp. 273-76. The 
 total exports and imports for the fi.scal year 1814 were $19,602,103, 
 as against a total of more than $42,000,000 in 1790.
 
 220 PRACTICAL BANKING 
 
 States Bank in 1811. The amount of specie in 
 the country would not begin to support the huge 
 volume of credit which was extended by these 
 banks. "A veritable banking mania prevailed for 
 several years in the Middle, Southern, and West- 
 ern States." ^ The country's credit was, as it were, 
 on stilts which but required some extraordinary 
 event to overtopple. This event was the capture 
 of Washington by the British, August 24, 1814. 
 After 1814 the United States had a period in 
 which an unnatural trade growth took place. Im- 
 ports increased to $194,000,000 in 1816, amount- 
 ing to more than twice the value of the exports. 
 But this expansion relaxed when Americans 
 found how impoverished they were. In August, 
 1819, there were twenty thousand unemployed 
 in Philadelphia, with a similar situation prevail- 
 ing in other cities.^ But while commerce and 
 industry had grown to such proportions — as 
 compared with the year 1814 — bank-note circu- 
 lation had fallen from $110,000,000 in 1815 to 
 $65,000,000 in 1819. This retrenchment had been 
 induced partly by the chartering of the second 
 United States Bank in 1816 and its conservative 
 influence on speculation, and partly by the banks' 
 realizing from their experience in 1814 that there 
 was not enough specie to back the immense bank- 
 note circulation. But the mischief was done. 
 Huge sums were invested in real estate and other 
 speculative enterprises. The contraction of the 
 currency caused a great fall in prices, and ruin 
 followed to those dependent on bank accommo- 
 
 ^ Conant, A History of Modern Banks of Issue, p. 617. 
 2 Ibid., p. 618.
 
 CRISES IN THE UNITED STATES 221 
 
 dation or on the continuance of a boom to realize 
 on their speculations. 
 
 This crisis — or series of crises lasting from 
 1814 to 1819 — is to be set chiefly to the score of 
 a defective monetary system. It shows how poorly 
 business and finance were coordinated in those 
 days It has been somewhat improved to-day. 
 In 1814, observe, there was a contraction of busi- 
 ness but a huge supply of wretched currency. 
 Business said, "Go to, we shall avail ourselves of 
 this credit." Note the resulting increase in im- 
 ports. Bankers, influenced by their experience 
 and curbed by the new United States Bank, 
 rapidly contracted their circulation. Thus in 
 1819 the situation was reversed. There was a 
 large amount invested in business enterprises, 
 but the ability of the banks to finance this in- 
 creased business had disappeared. The banks, 
 for the reasons we have noted, had destroyed 
 their own ability to do so.^ 
 
 III. THE CRISIS OF 1837 
 
 The eighteen years which preceded 1837 — 
 years of international peace — were years of 
 growing-pains with regard to territorial and busi- 
 ness development, including the beginnings of 
 transportation expansion. It was also charac- 
 terized by a leap in immigration figures as well 
 as the negotiation of large foreign loans. Manu- 
 facturing had recovered from the depression fol- 
 lowing the crisis in 1819. 
 
 ^ These twin crises illustrate, in a simple way, better than any 
 others, how awkwardly business and finance tug at cross-purposes 
 when there is no centralized coordination of resources.
 
 222 PRACTICAL BANKING 
 
 The Erie Canal, finished in 1825 at a cost of 
 more than seven millions, was but one of a large 
 number of canals; a network of canals were 
 opened in Ohio, Pennsylvania, New Jersey, and 
 Illinios. Railroad building began in 1830. The 
 highways were improved. It was an era of inter- 
 nal improvements. The canals tempted home- 
 stead seekers to forsake the seaboard and plunge 
 inland toward the rich interior farming lands. 
 The Cumberland Road was black with traveling 
 settlers. States sprang into being; population 
 bounded upward at a rapid rate. Between 1820 
 and 1840, the States of Ohio, Indiana, Illinois, 
 and Michigan increased in population from 792,- 
 000 to 2,893,000. In this period was laid the 
 working foundation of the United States of to- 
 day. There was an increase in the means of pro- 
 ducing commodities; likewise, an expansion of 
 mineral and agricultural products due to better 
 transportation facilities. This tended to over- 
 speculation and overdevelopment. 
 
 Land speculation was the underlying cause of 
 the forthcoming crisis. The Government was 
 lenient in exacting payment for lands. Prospec- 
 tive buyers were induced, by the jump in the 
 selling price of the land, to borrow. They found 
 ready accommodation in the banks. It was an 
 easy-money time. Frequently, the Government 
 redeposited the purchase money in the bank from 
 which it was borrowed; the bank then loaned it 
 to another land buyer. It does not require a great 
 power of deduction to suspect speculation. It 
 not only existed, but, under these favoring con- 
 ditions, increased by headlong leaps. In 1837 the
 
 CRISES IN THE UNITED STATES 223 
 
 Government was still selling land at the early- 
 price of $1.25 per acre. Right up to the crisis, 
 speculators realized immediate profits. The fig- 
 ures are in 1834, 4,659,218 acres were sold; in 
 1836, 20,074,870 acres.^ 
 
 Land speculation was not confined to the West, 
 but extended to the cotton lands of the South. 
 Cotton production increased from 536,000 bales 
 in 1833 to 916,000 bales in 1837.2 
 
 By the process of redepositing purchase money 
 in local banks, the United States and these banks 
 became involved in a network of credits; banks 
 were established purely to carry on this kind of 
 business, relying solely for their existence on land 
 purchasers' loans. This policy could be pursued 
 the more readily since, for some years past, the 
 Government had accepted bank notes in pay- 
 ment of the public lands. 
 
 Financial uneasiness began to be engendered 
 by the veto of the bill to recharter the United 
 States Bank. The Jackson Administration had 
 set about to " smash" the Bank; it did so.^ The 
 deposits were gradually withdrawn. On Novem- 
 ber 1, 1836, there were public deposits in eighty- 
 nine "pet" state banks of $49,378,000.* But the 
 causes of the crisis were deeper than the poli- 
 tical creed of Andrew Jackson and his kitchen 
 
 1 WTiat an inflation this really was may be gathered from the 
 sales in 1842 after the crisis had subsided. In that year the sales 
 amounted to $14,17,972, or a little more than a million acres. 
 
 " Davis Rich Dewey, Financial History of the United States. 
 p. 227. 
 
 * Jaclcson was sincere in his belief that the United States Bank 
 was unsound, saying, when he heard of certain transactions, "I tell 
 you, sir, she's brpke." 
 
 * Dewey, supra, 210.
 
 224 PRACTICAL BANKING 
 
 cabinet. As Mr. Conant, in his excellent work, 
 says : — 
 
 The crisis of 1837 in the United States was one of 
 the results of that discounting of the future in a new 
 country, which results in overspeculation and the 
 sinking of capital in unproductive enterprises. For- 
 eign capital became available in great quantities for 
 the use of the American people after the recovery from 
 the crisis of 1825 in England, and specie imports kept 
 company with an excess of imports of merchandise, 
 amounting in seven years to $140,700,000 as evi- 
 dence of the heavy loans which Europe was willing 
 to make in the United States. The fact that the United 
 States succeeded in wiping out their entire public debt 
 and accumulating a surplus seemed,^ among the finan- 
 ciers of European countries, burdened under millions 
 of debt and annual interest charges, to be a proof of 
 great prosperity. ^ 
 
 The practice of receiving bank notes in pay- 
 ment of public lands did not appeal favorably 
 to the Administration. On July 11, 1836, the 
 Treasury Department issued a " Specie Circular" 
 in which instructions were given to land com- 
 missioners to receive only specie in payment of 
 public lands. It was believed that this would re- 
 duce or eliminate speculation. It did — some- 
 what. But two factors interfered with the success 
 
 1 On January 1, 1837, there was more than $42,000,000 surplus in 
 the United States accounts. Congress voted to distribute, as a loan, 
 among the States according to population, all save $5,000,000. 
 Three of four projected installments were paid when it was found 
 that the Government could only pay in state bank notes, and the 
 distribution was never completed. It was not the intention of Con- 
 gress ever to collect the loan, and until this day the account (some 
 $28,000,000) is carried on the books of the Treasurer. 
 
 * Conant, supra, p. 624.
 
 CRISES IN THE UNITED STATES 225 
 
 of the measure: first, speculators were those who 
 would most likely have ready money; second, it 
 cut out the props from many banks in the West, 
 together with their affiliations in many cases in 
 the East. 
 
 So the speculation continued, though some- 
 what abated, and many banks were weakened. 
 The situation was not helped — rather, embar- 
 rassed so far as the United States Treasurer's ac- 
 counts were concerned — by the distribution of 
 the surplus already alluded to.^ Added to the 
 other complications was a change in the ratio of 
 gold and silver by the Government which threat- 
 ened to take silver out of circulation on account 
 of the premium on it. The crisis was affected to 
 some extent by the failure, in November, 1836, 
 on the London Stock Exchange of the three W's, 
 which had the closest credit relations with 
 America.^ Premonitions of a financial distur- 
 bance seemed to be felt on account of the high 
 prices and expanded loans. Popular meetings of 
 protest were held in New York in the early part 
 of 1837, some degenerating into destructive riots. 
 
 The stage was set. Everything was ready for 
 the curtain to rise.^ 
 
 The cue was given in April, 1837. One hun- 
 dred and twenty-eight failures occurred in New 
 
 ^ For the effect on the South and European investors of the spec- 
 ulations of Biddle, president of the United States Bank of Pennsyl- 
 vania, see Conant, supra, p. 627, and also (there cited) Juglar, Dea 
 Crises Commerciales, etc., p. 402, et seq. 
 
 ^ The houses of Wilkes, Wilde, and Wiggins. 
 
 * The crisis of 1837 was aggravated by the failure of the American 
 wheat crop. Exports of wheat fell off a million dollars, while im- 
 ports increased four and a half millions.
 
 226 PRACTICAL BANKING 
 
 York between April 1 and April 11. Cotton fell 
 fifty per cent in value. On May 10 the banks of 
 New York suspended specie payment and were 
 followed on the next day by banks in large cities 
 throughout the East. Within a few days banks 
 all over the country had suspended specie pay- 
 ments. Suspension of specie payments greatly 
 affected the Government. Its funds were de- 
 posited in the state banks. It could get only bank 
 notes. Besides, its accounts were low; Congress 
 had foolishly distributed a handsome portion of 
 its surplus. Public revenues fell off. On October 
 12, 1837, Congress met in special session to devise 
 means of assisting the embarrassed Government. 
 It authorized the issuance of Treasury notes, 
 pledging the credit of the nation. President Van 
 Buren advocated an independent treasury, but a 
 bill providing for this was not passed until 1840. 
 The Government's immediate needs cared for, 
 it sought to relieve the general distress by various 
 methods: it gave importers additional time to 
 settle for their duties; it withdrew its deposits 
 slowly; it required no more interest on its de- 
 posits. 
 
 The distress occasioned by the crisis was deep; 
 it gave the entire country a severe shock. Previ- 
 ous experiences had not compared with this one 
 in magnitude and effect. It was not till the latter 
 part of 1838 that banks in general resumed specie 
 payments. Indeed, the Philadelphia banks had 
 to suspend again and were not reliable specie 
 disbursers before 1842. The Government's rev- 
 enues had, as we have hinted, been ruined. From 
 $35,000,000 in 1835 and $50,000,000 in 1836, they
 
 CRISES IN THE UNITED STATES 227 
 
 fell to $24,000,000 in 1837. From 1837 to 1844 
 the Treasury had a deficit, with the exception of 
 the year 1838 when there was a small surplus. 
 Altogether in these seven years there was a net 
 deficit of $38,000,000. 
 
 This crisis was like the later ones and quite un- 
 like those of 1814 and 1819. The earlier crises 
 were due particularly to monetary disorders. 
 The crisis of 1837 was merely localized in a money 
 situation. It had a great economic development 
 behind it. It even showed symptoms of an in- 
 dustrial complication, a factor which, we shall 
 find, is of supreme importance in the great crises 
 to follow. 
 
 By 1843 the end of the depression was reached 
 and conditions looked up again. 
 
 IV. THE CRISIS OF 1857 
 
 It may seem inexplicable to those who have 
 become piously resigned to a crisis (usually with 
 that attendant money scramble, the panic) in 
 this country every dozen years to observe that 
 our narrative leaps from 1837 to 1857. Indeed, 
 but for unusual — abnormal, we may say — 
 conditions there would have been a severe crisis 
 about 1848. In that year, there was a financial 
 stringency, but no crisis of any magnitude. It 
 was a year of crisis in Europe, and but for the 
 export of huge food supphes, the United States 
 might have suffered. America is always subject 
 to a reflection of a European crisis; there are so 
 many foreign interests in our securities and bor- 
 rowing. Again, we import so largely from Europe 
 that, granting a crisis abroad and a lull in our
 
 228 PRACTICAL BANKING 
 
 exports therefrom, we lose considerable gold re- 
 serve. However, in 1848 we were able to offset 
 the effect of the crisis by our exportations. It has 
 been thought that the Mexican War tended to 
 curb that superdevelopment, that optimistic cap- 
 italizing of optimism itself, which eventually 
 leads to a crisis. But the war's effect was prob- 
 ably very slight. Two items, ^ indeed, tended to 
 delay the crisis. One was the discovery of gold, 
 which in the end helped lead to the crisis, in 1848, 
 affording a new source of development along lines 
 which did not strain the financial situation. The 
 other was the Crimean War (1854-55) which 
 caused high prices for American goods. 
 
 On the whole, the period from 1838 to 1857 was 
 one of remarkable industrial growth and pros- 
 perity, marred only by a couple of economic dis- 
 turbances of no magnitude. As contrasted with 
 canal digging during the period of development 
 immediately preceding 1837, this period was one 
 of great activity in railroad building. In no year 
 before 1849 had railway construction exceeded 
 eight hundred miles, but in 1856 it ran to 3642 
 miles. 2 The total railway mileage had, in 1857, 
 reached 27,000 miles, of which 21,000 had been 
 built in the previous nine years.^ Consider the 
 financing necessary to construct 21,000 miles of 
 railroad, — and in nine years. 
 
 Banks had increased in numbers from 715 in 
 1847 to 1416 in 1857; loans and discounts had 
 risen from approximately $310,000,000 to ap- 
 proximately $684,000,000; bank-note circulation 
 
 * Cited by Burton, supra, p. 214. 
 
 2 Burton, supra, p. 284. ^ Conant, supra, p. 640.
 
 CRISES IN THE UNITED STATES 229 
 
 had expanded one hundred per cent to $214,- 
 000,000.^ "At all times the proportion of specie 
 held by the banks to their loans and circulation 
 was dangerously small, even when the most con- 
 servative management was maintained." ^ A de- 
 fective currency was a feature of this period. 
 
 The introduction of large quantities of foreign 
 capital kept the pot boiling. As one writer puts 
 it, "Foreign capital continued to flow into the 
 United States and the bubble of speculation to be 
 blown to the extremist tension." 
 
 In addition to the construction of railroads 
 during the period prior to 1857 and, indeed, aid- 
 ing and abetting railroad constructing, the dis- 
 covery of gold in the United States in 1848 played 
 a leading role in developing the acute situation 
 leading to the crisis. The discovery of silver and 
 gold in America soon after Columbus's voyage 
 to the New World had wrought a revolution in 
 the value of money. The gold production from 
 1492 to 1850 had averaged about $9,000,000 per 
 year; imagine the impetus given trade by the 
 increase to about $133,000,000 per year from 1851 
 to 1860.^ This great unexpected addition to the 
 gold supply had two effects: it hastened the set- 
 tlement of a proper ratio between gold and silver, 
 and it stimulated commerce to an unusual and 
 
 ' Conant, supra, p. 640. Circulation fell in 1858, after the panic, 
 to $155,000,000, and the specie held by the banks rose from $58,- 
 000,000 in 1857 to $74,000,000 in 1858 to $104,000,000 in 1859. 
 
 ^ Burton, supra, p. 284. 
 
 * Conant, supra, p. 637. Mr. Conant quotes from Adolph Soot- 
 beer's Bimetallism in Europe. From 1493 to 1850 the estimated 
 gold production of the world was $3,150,000,000, while from 1851 
 to 1885 it was $4,250,000,000.
 
 2S0 PRACTICAL BANKING 
 
 abnormal extent. Strangely, it did not act as a 
 strong agency to raise prices, although in a well- 
 developed country this would be the result. The 
 extraordinary effort of the newly discovered pre- 
 cious metal was bent toward a " lateral expansion 
 of commerce in quantity"; that is, the energy 
 was diffused, not concentrated. 
 
 It was an era of unprecedented expansion in 
 enterprises of all kinds. The effect of railroad con- 
 struction and the discovery of gold, however, led 
 the way toward overinvestment which charac- 
 terized the period. 
 
 There were indications of a money stringency 
 several times before 1857. New business opera- 
 tions swallowed the credit based on the new gold 
 and asked for more. The crop failure in the West 
 in 1853 tended to arouse anxiety; several banks 
 failed as a result. Lastly, the dearness of silver — 
 due to the great quantities of gold — compli- 
 cated the problem, as we have seen. 
 
 The signal for the crash was the failure on 
 August 24, 1837, of the Ohio Life Insurance and 
 Trust Company, a corporation with offices jn 
 New York. The liabilities of this concern were 
 about $7,000,000. As we have observed, some 
 conspicuous failure is enough to ignite a train of 
 powder. A panic ensued on the Stock Exchange. 
 Then banking, unprotected by a safe currency 
 or a centralized reserve, took its ordinary course : 
 money was hoarded; loans were procurable only 
 at an excessive interest; deposits disappeared 
 from the banks. 
 
 A run was made on the banks of Philadelphia 
 in September, and on the 26th of the month they
 
 CRISES IN THE UNITED STATES 231 
 
 were forced to suspend specie payments. Mean- 
 while, the first part of October had seen several 
 important commercial failures; the Illinois Cen- 
 tral and other railroads were put into receivers' 
 hands. A run followed on New York banks, and 
 they, too, suspended specie payments, October 
 13.^ The crisis, on the whole, was a financial 
 crisis and was characterized by a large number 
 of failures. Prices of commodities tumbled along 
 with the depreciation of stocks and real estate. 
 But the succeeding depression was not long-lived, 
 as we shall see. 
 
 This crisis has been frequently attributed to 
 the tariff of 1857 which generally reduced import 
 duties. It is argued that the reduction of duties 
 stimulated importations which had to be paid for 
 in specie and that this drain inevitably brought 
 the panic. 
 
 It is too much to claim that this widespread shock 
 was due to the tariff of 1857 which had been in opera- 
 tion but for a few months, or even to the tariff of 1846. 
 To be sure, imports had increased and there had been 
 a heavy export of specie to pay for them, but at the 
 same time the production of specie in the United 
 States had been more than enough to cover this de- 
 mand and to leave a generous amount in the country 
 for domestic needs . . . [Also] in connecting cause and 
 effect it must be borne in mind that commercial de- 
 pressions have for a century returned in almost mathe- 
 matical regularity, and that it is hardly reasonable 
 
 ^ Conant, supra, p. C40, note: "The constitution of the State of 
 New York forbade suspension of specie payments directly or indi- 
 rectly, but the judges of the Supreme Court met and agreed not to 
 grant any injunction unless the bank appeared to be insolvent or 
 guilty of fraud."
 
 232 PRACTICAL BANKING 
 
 to hold alone responsible a tariff which had appar- 
 ently brought no disturbance during a period of ten 
 years. ^ 
 
 V. THE CRISIS OF 1873 
 
 The depression which followed the crisis in 
 1857 reached its worst point in 1859, and after 
 that prospects were good for a revival. But an 
 abnormal event — war — caused a liquidation 
 in the latter part of 1860 and 1861, thus delaying 
 the acceleration of business activities.^ On the 
 other hand, the large number of men engaged on 
 the battlefield and the impetus given certain 
 activities prevented a depression. 
 
 The year 1865 ushered in a period of awakening 
 industrialism — at least, in those sections which 
 had been free from the ravages of war. A pro- 
 tective tariff fostered home manufacturing; the 
 demand in this country for American-made goods 
 was enormous. Agricultural products, of course, 
 were greatly in demand after the exhausting four 
 years, particularly since the South was tempo- 
 rarily disorganized and comparatively unproduc- 
 tive. "The return of much more than a million 
 men seemed to cause no embarrassment. All 
 could find employment. With slight reactions in 
 
 * Dewey, supra, pp. 264-65. Conant (p. 638) quotes from Von 
 Hoist's Constitutional and Political History of the United States 
 (vol. Ill, pp. 51-52), to show that the tariff had nothing to do with 
 the crisis ; he also cites Max Wirth, who makes no mention of the 
 tariff. 
 
 * The European political situation in July, 1914, caused a rapid 
 liquidation of securities, so extensive, indeed, that all the stock 
 exchanges in the world closed to prevent the selling of securities in 
 such quantities as to destroy values, and thus, in the United States 
 at least, jeopardize a great portion of bank loans.
 
 CRISES IN THE UNITED STATES 233 
 
 1867 and 1869, the onward movement continued 
 until 1873." ^ 
 
 The crisis was preceded by four years of general 
 economic activity. Manufacturing and trans- 
 portation facilities were greatly developed, but, 
 as in 1857, a serious weakness was disclosed in 
 railroad construction. The average increase in 
 railway mileage between 1860 and 1867 was 1311 
 miles per year; in 1869 it was almost 5000 miles; 
 in 1870, 5690 miles; in 1871, 7600 miles; and in 
 1872, over 6000 miles. ^ Bonds sold at a heavy 
 discount. Many roads were left partially com- 
 pleted owing to inability to arrange finances; 
 when they were completed, they frequently could 
 not pay such fixed charges as interest on bonds. 
 
 The capital invested in all varieties of enter- 
 prises in the ten years prior to the crisis was enor- 
 mous. "Facihties for the production of certain 
 commodities had increased beyond consumption." 
 
 The crisis of 1873 was due; mathematically, it 
 was overdue. Had it not been for the extraordi- 
 nary conditions of war, it probably would have 
 come in 1866 as a reflection of the European sit- 
 uation of that year. 
 
 The latter part of 1872 and the first half of 
 1873 saw a continuous stringency in the money 
 market. From September, 1872, to May, 1873, 
 the money "tightness" prevailed, "at times 
 almost prohibiting the sale of new railroad bonds 
 and requiring the issue of large amount of rail- 
 road paper for the prosecution of the several 
 enterprises. Together with this came the failures 
 of quite a number of smaller railroad companies 
 
 ' Burton, supra, pp. 286-87. ' Dewey, supra, p. 370.
 
 234 PRACTICAL BANKING 
 
 to pay their interest, causing a feelmg of distrust 
 and aversion toward new railroad bonds, which 
 has been quite perceptible for some months 
 past." 1 
 
 The crash came on September 8, when the New 
 York warehouse and Produce Company, which 
 was engaged in the financing of the Missouri, 
 Kansas and Texas Railway, suspended. Kenyon, 
 Cox and Company, who had indorsed $1,500,000 
 of Canadian Southern Railroad paper, suspended 
 on September 13, the reason being inability or 
 unwillingness to pay that part of the paper 
 maturing on the 15th. On the 18th the house of 
 Jay Cooke and Company failed. This firm was 
 the agent of the Government and the leader of 
 the syndicate handling the refunding of the 
 public debt. This failure was brought about by 
 heavy deposit withdrawals and advances to the 
 Northern Pacific Railroad. The next day Fisk 
 and Hatch, stock brokers, were forced to close 
 because of the depreciation of securities on which 
 they had call loans. A number of stock exchange 
 firms followed this dignified lead. Saturday, the 
 20th, was a day long remembered in Wall Street. 
 The excitement in that famous lane was unprece- 
 dented. Interest was somewhat centered about 
 the runs on the Fourth National Bank and the 
 Union Trust Company. The former succeeded 
 in meeting all demands. A defalcation on the 
 part of the secretary of the Trust Company, in 
 addition to an important loan to the Michigan 
 
 * Commercial and Financial Chronicle, September 20, 1873, cited 
 by Professor O. M. W. Sprague, History of Crises under the National 
 Banking System, National Monetary Commission Series, p. 36.
 
 CRISES IN THE UNITED STATES 235 
 
 Southern Railway, brought the close of its doors. 
 On the same day the Commonwealth Bank closed. 
 Excitement was so high and price-slumping so 
 imminent that the Stock Exchange was closed 
 at eleven o'clock on Saturday, remaining closed 
 until September 30.^ 
 
 Runs on the banks took place in Washington, 
 Philadelphia, and Brooklyn, nineteen banks and 
 trust companies closing on September 19. "Fail- 
 ures followed each other in quick succession, 
 mills and foundries stopped, production ceased, 
 and for six years the pall of depressed industry 
 lay over the United States. Deposits in the 
 national banks fell from $641,121,775 on June 13, 
 1873, to $540,510,602 on December 26. Failures 
 for four years showed aggregate liabilities of 
 $775,865,000, and the railway bonds in default 
 on January 1, 1876, amounted to $789,367,655." ^ 
 
 The Secretary of the Treasury paid out $24,- 
 000,000 in the purchase of bonds, but little of it 
 reached New York and the Eastern cities ; ' 
 clearing-house certificates were issued, amount- 
 ing in New York to $26,505,000 and in Phila- 
 delphia to $6,785,000. 
 
 It has been pointed out that the action of 
 the New York City banks in 1873 was quite the 
 reverse, in regard to reserves, of that in 1893 and 
 
 * This was the only closing in the history of the New York Stock 
 Exchange until July 31, 1914, when, due to the closing of all the 
 important European bourses, it was thought necessary to close in 
 order to prevent the flood of selling orders from Europe overturning 
 prices. The closing of the Consolidated Stock Exchange and the 
 Curb Market of New York followed, as did that of the exchanges all 
 over the country. 
 
 * Conant, supra, pp. G55-56. ' Ibid.
 
 236 PRACTICAL BANKING 
 
 1907. In 1873 the New York banks adopted not 
 only the clearing-house loan certificate, but also 
 a scheme of equalizing reserves, which was 
 devised in 1860. In this way, the New York 
 Clearing House Committee, having charge of the 
 combined reserves, enabled New York banks to 
 continue paying considerable cash to country 
 banks. New York savings banks, and customers, 
 although cash payments had been authorized to 
 be suspended September 24. The legal tender 
 reserve in the clearing-house banks of New York 
 was, on October 14, $5,800,000, having been 
 reduced from $34,000,000 on September 20.^ 
 This bears eloquent testimony to the valiant 
 efforts of New York bankers to make good as the 
 country's reserve agents; their generous disburse- 
 ments differed from bank action in 1893 and 1907. 
 "In making free use of their reserves the Clearing 
 House Committee exhibited a determination and 
 strength of purpose which cannot be too highly 
 praised." ^ 
 
 Finally, in order to review some of the causes 
 of the crisis, it becomes important to glance at 
 the condition of the national banks. ^ Did they 
 contribute too liberally with loans? Was the 
 proper relation of reserve to loans and deposits 
 disturbed? From 1869 to 1873 the number of 
 national banks increased from 1619 to 1968; 
 capital and surplus increased from $548,000,000 
 to $662,000,000; and loans from $686,000,000 to 
 
 ^ Sprague, supra, pp. 155-156. ^ Ibid. 
 
 ' The analysis above is a summary of that advanced by Professor 
 Sprague in his excellent monograph, supra, p. 4 et seq. National 
 banks were authorized in 1863 and for a time there were compara- 
 tively few state banks.
 
 CRISES IN THE UNITED STATES 237 
 
 $926,000,000. The increase of thirty-five per cent 
 in loans is not considered unsafe in view of tw6 
 facts: first, $114,000,000 addition had been made 
 to the working capital; second, eighty-nine per 
 cent of the new banks were established in the 
 South and West, which were poorly supplied 
 with banks. ^ 
 
 Finally, it should be noted that in New York, where 
 the railroads were largely financed and where the 
 failures occurred which precipitated the crisis, there 
 was strikingly little loan increase [from 1869 to 1873], 
 only $21 ,000,000 — from $174,000,000 to $195,000,000. 
 The conclusion seems clear that the national banks 
 cannot be held very largely responsible for creating 
 unhealthy conditions by an unwise policy of rapid 
 loan expansion during the year immediately preced- 
 ing the crisis of 1873.2 
 
 The general causes which led to the disturbances [in 
 1873] were so plain as to eliminate from attention those 
 exceptional features which are often mistaken for the 
 true causes. There was an enormous absorption of cir- 
 culating capital in fixed capital. Railways, as well as 
 docks, buildings, and factories had been constructed 
 on an unprecedented scale. All the equipment for fu- 
 ture production was increasing at a more rapid pace 
 than ever before. In these expenditures we have the 
 effect of capital invested for objects not immediately 
 remunerative. The opening-up of wide areas of terri- 
 tory in the West for settlement by farmers, while 
 greatly increasing agricultural production, rendered 
 less valuable, in some cases almost useless, very large 
 tracts near to the Atlantic seaboard. . . . Railroads 
 preceded settlement, while in previous eras they had 
 followed it.^ 
 
 ^ Sprague, supra, p. 4 et seq. * Ihid., p. 4 ef »eg» 
 
 * Burton, supra, p. 280.
 
 238 PRACTICAL BANKING 
 
 The depression continued till 1879. It was a 
 period of the blackest despair. The process of 
 readjustment was slow because development had 
 run so far ahead of demand. Production seems to 
 have had a uselessly large expansion. After 1879, 
 however, the country arose, shook off the dust of 
 depression, and, with one or two growing-pains, 
 leaped and bounded until 1893. 
 
 VI. PANIC OF 1884 AND THE FINANCIAL 
 STRINGENCY OF 1890^ 
 
 The panic of 1884 was in the nature of a finan- 
 cial spectacle and did not involve all the funda- 
 mentals of an economic crisis. There were num- 
 erous failures and general business was for a time 
 seriously threatened. 
 
 On May 5, the Marine Bank of New York 
 closed its doors; shortly afterward occurred the 
 failure of the Metropolitan Bank. Great excite- 
 ment and uneasiness attended the exposure of a 
 group of bankers and their methods. Money 
 went to one per cent a day; country banks called 
 for their deposits and it was hard to get credit 
 on any security. Clearing-house loan certificates 
 were successfully used to save the day. 
 
 The causes for the panic may be found in two 
 situations: first, a general decline in business 
 activity in 1883, following four years of economic 
 expansion. Reductions of stocks and the failure 
 of several railroads were subsequent to the panic. 
 
 * Whereas, for the purposes of this chapter "panic" and "crisis" 
 are synonymous, "panic" is used in this section because it better 
 describes the financial exhibition. "Panic" is frequently used in the 
 section on the crisis of 1907 to refer to the spectacular money 
 scramble, the details of which are fuller there than elsewhere.
 
 CRISES IN THE UNITED STATES 239 
 
 Second, the money question. The addition of two 
 milHon silver dollars each month to the circula- 
 tion alarmed many European investors, who sold 
 their securities. The tlnited States exported 
 immense quantities of gold — nearly $30,000,000 
 in March and April, 1884.^ The successive breaks 
 in the stock market brought the failure of broker- 
 age houses, with their creditor banks in their 
 wake. It was known on May 13 that the president 
 of the Second National Bank had stolen $3,000,- 
 000 worth of securities. 
 
 But the New York banks met every demand, 
 with the exceptions noted; the panic was local- 
 ized, and, in a few weeks, past. 
 
 The crisis in Europe in 1890, characterized by 
 the great Baring failure in London, was converted 
 into a financial stringency in this country. Had 
 it not been for the excess of $68,000,000 of exports 
 over imports that year, which cut down the export 
 of gold to $4,000,000, and the inflation of the 
 currency with silver certificates — had it not 
 been for these two factors, we should probably 
 have had the crisis three years earlier. 
 
 Secretary Windom, between June 30 and Sep- 
 tember 30, disbursed more than $98,000,000 in 
 redeeming unmatured government bonds. This 
 was his method of relieving the stringency. Fail- 
 ures occurred in November. The Treasury was 
 empty. 
 
 VII. THE CRISIS OF 1893 
 
 During the period of prosperity preceding the 
 1893 crisis, the country was on fire with "get- 
 
 ^ Sprague, supra, p. 109.
 
 240 PRACTICAL BANKING 
 
 rich-quick" schemes involving speculation in 
 mineral and farm lands, oftentimes cases of pure 
 fraud. Suburban development began in the shape 
 of city "additions" which have become familiar 
 to American eyes. Railroads continued to be 
 built, though not to the extent which character- 
 ized the previous period. But electrical develop- 
 ment created a demand for electric street railways. 
 It was a period "booming" with optimism gone 
 wild. Outwardly, the country was very prosperous. 
 The English crisis of 1890 made itself distinctly 
 felt in the United States in 1893. After 1890 
 Europeans began withdrawing their loans and 
 returning American securities at an alarming 
 rate. Only the exportation of large crops in 1891 
 and 1892, somewhat offsetting the European 
 balance, deferred the crisis. In 1891 there was, on 
 the international ledgers, a balance in favor of 
 Europe of about $68,000,000, and in 1893 this 
 balance — still in favor of Europe — was about 
 $87,000,000. 
 
 The withdrawal of this capital — even the mere sus- 
 pension of the process of reinvesting it — meant heavy 
 payments in gold or merchandise to Europe without 
 compensation in returning gold or goods. The with- 
 drawal of a large part of this productive loan (it was 
 estimated at about two billion dollars) was the price 
 the United States were called upon to pay for political 
 manoeuvres which aroused the fear that they would 
 abandon the gold standard and make silver the basis 
 of their monetary system.^ 
 
 Why did silver play a part? In 1890 the Sher- 
 man Silver Bill was passed, providing for the 
 
 * Conant, supra, p. 670.
 
 CRISES IN THE UNITED STATES 241 
 
 purchase, by the Secretary of the Treasury, of 
 4,500,000 ounces of silver each month, and the 
 issue therefor of Treasury notes of full legal 
 tender value. These were redeemable in silver 
 or gold, at the option of the Secretary of the 
 Treasury. The Treasury interpretation of the 
 law was, redeemable in "gold or its exact equiva- 
 lent." This, of course, obliged the Government 
 to pay practically gold for the redemption of 
 these certificates. At this time the result of 
 Secretary Windom's action in buying unmatured 
 bonds instead of depositing the funds in the 
 national banks was realized. The Treasury was 
 so nearly depleted that it was not prepared to 
 withstand the demands made on it. 
 
 The Sub-Treasury in New York reversed its 
 custom of paying for its clearings in gold, which 
 had come to be looked upon by the banks as a 
 means of maintaining their gold supply.^ In 1890 
 the Treasury began paying its clearings with 
 Treasury notes, and in 1891 it " increased the use 
 of the older United States notes and held on to the 
 gold reserve." The result was, the banks presented 
 government notes for redemption in gold.^ 
 
 1 Dewey, supra, pp. 443-44. In the fiscal year 1889-90, the bal- 
 ances paid in clearings amounted to $230,000,000, and in 1890-91 
 to $212,000,000. 
 
 * Conant, supra, p. 671. The total gold in the Treasury on June 
 SO, 1889, was $303,504,319, of which $186,711,560 was in reserve; 
 on June 30, 1890, the total was $321,612,424, of which $190.2.32,405 
 was in reserve; on June 30, 1891, the total was $238,518,122, of 
 which $1 17,667,723 was in reserve; on June 30, 1892, the total was 
 $255,577,705. of which $114,342,367 was in reserve; on June 30, 
 1893, the total was $188,455,432, of which $95,485,413 was in 
 reserve. The reserve continued to decline until June 30, 1894, when 
 it was $64,873,025. The difference between the total gold and the 
 gold reserve represents the gold cerliOcates outstanding.
 
 242 PRACTICAL BANKING 
 
 The net gold exports from the United States 
 from June 30, 1890, to June 30, 1893, were more 
 than $156,000,000. All this time the Sherman 
 law was causing four and a half million ounces 
 of silver to be bought and placed in circulation 
 each month. 
 
 A special session of Congress was called by- 
 President Cleveland for August 7 for the purpose 
 of repealing the Sherman Silver Act. It was high 
 time some governmental action were taken regard- 
 ing the situation, as we shall see. It was October 
 30 before the repeal of the silver law could be 
 forced through the Senate. President Cleveland's 
 appeal to the national banks for assistance re- 
 sulted in more than $7,000,000 in gold being 
 added to the Treasury's reserve in June and 
 July. 
 
 Meanwhile, Bradstreet's reported 905 failures 
 in April, 1893, as compared with 703 in April, 
 1892; in May they increased to 969. On May 9, 
 the Chemical National Bank, and on May 11, 
 the Columbia National Bank, both of Chicago 
 and each capitalized at a million dollars, closed 
 their doors. Private and state banks followed; as 
 did business firms and corporations. Credit waw«" 
 paralyzed.^ 
 
 Banks all over the country refused to pay 
 checks except in certified or clearing-house checks. 
 Currency was at a premium. Philadelphia banks 
 issued clearing-house loan certificates on June 16; 
 New York followed on June 21; Boston and 
 Baltimore, on June 27. New York, Philadelphia, 
 Boston, Baltimore, and Pittsburg together issued 
 
 ^ Conant, supra, p. 674.
 
 CRISES IN THE UNITED STATES 243 
 
 $63,000,000 of clearing-house certificates.^ Banks 
 all over the country pursued the same course. 
 
 There were during the year failures of 15 
 national banks, 172 state banks, 177 private 
 banks, 47 savings banks, 13 loan and trust com- 
 panies, and 6 mortgage companies. Depositors 
 were tremendously frightened. The clearings 
 were the lowest since 1885. 
 
 A general depression followed the crisis. The 
 output of pig iron decreased from 9,157,000 tons 
 in 1892 to 6,657,000 tons in 1894. New railroad 
 construction almost ceased. In 1894 there were 
 156 railways — operating approximately 39,200 
 miles — in the hands of receivers, among others, 
 the Erie, Northern Pacific, and Union Pacific. 
 One fourth of the country's railway capital was 
 in bankruptcy. The commercial failures increased 
 from 10,344, in 1892, with liabihties of $114,000,- 
 000, to 15,242, in 1893, with liabilities of $346,- 
 000,000.2 
 
 The problem of unemployment was acute and 
 widespread. Food was distributed to the needy 
 in the large cities. Labor strikes and riots char- 
 acterized the distress in Chicago. The spring of 
 1894 was one of gaunt want. 
 
 VIII. THE CRISIS OF 1907 
 
 The depression subsequent to the crisis in 1893 
 lasted three or four years. Industry, indeed, 
 aroused itself feebly in 1895, but it was in 1897 
 that a genuine revival of activity came. The 
 revival was not necessarily delayed by the presi- 
 dential election in 1896, although the then pre- 
 
 ' Conant, supra, p. 681. ^ Dewey, supra, p. 446.
 
 244 PRACTICAL BANKING 
 
 vailing lack of confidence in the retiring ad- 
 ministration may have prevented the upward 
 movement gaining cumulatively. Financiers and 
 manufacturers, however, were generally pleased 
 at the outcome of the election, and their optimism 
 proved to be the stimulus the country needed. 
 
 Exports of merchandise increased by leaps and 
 bounds, from $882,606,938 in 1896 to $1,394,483,- 
 082 in 1900, and to $1,743,864,500 in 1906. ^ 
 Imports rose, too; from $8.05 per capita in 1898, 
 imports increased to $16.54 per capita in 1907.^ 
 
 From 1897 to 1907 the United States experi- 
 enced a corporate expansion hitherto undreamed 
 of. The railroads were a conspicuous example. 
 There was not a great increase in mileage as com- 
 pared with other years, but improvements such 
 as the construction of bridges, double tracks, 
 stations, and the providing of better roadbeds, — 
 new ballasting and grading, — the necessary 
 addition to equipment of more and better engines, 
 sleeping-cars, chair cars, vestibuled coaches, and 
 thousands of new freight cars, — improvements 
 of this kind called for an enormous outlay of 
 capital, additional issues of stocks and bonds. 
 In 1905 the steam railway securities outstanding 
 in the United States amounted to the staggering 
 figure of $12,600,000,000 par value. 
 
 But the period was also notable for growth of 
 enterprises laterally. Electrical supply plants, 
 waterworks, improved sanitation, the building 
 of great piers and dry docks, the construction of a 
 giant navy, street railways, cotton manufactories, 
 automobile factories, sky-scrapers, the expansion 
 
 ' Conant, supra, pp. 698-99. ^ Ibid.
 
 CRISES IN THE UNITED STATES 245 
 
 of the great universities — these required a cor- 
 porate organization themselves and gave rise to 
 a horde of corporations to supply equipment. 
 Manufacturing was promoted and protected, 
 from steel girders to shoe buttons. There was 
 no item of human demand which was overlooked. 
 Jinrickshas were made in the United States and 
 successfully sold in Japan in competition with 
 centuries-old industry. So great was American 
 energy and so astute the manipulation of prices 
 that, under the beneficent provisions of a pro- 
 tective tariff, certain Chicago hams were sold in 
 Johannesburg, South Africa, cheaper than they 
 could be bought here. 
 
 New York saw a phenomenal real estate de- 
 velopment after 1900; this boom found its way 
 into other parts of the country. Mining and oil 
 exploitation progressed — fortunes were made in 
 legitimate and illegitimate projects. It is esti- 
 mated that shortly before the crisis these inter- 
 ests had outstanding over $3,000,000,000 worth of 
 par value securities, ranging in prices on the market 
 from ten cents per share to two hundred dollars. 
 
 Gold production increased in the five years 
 preceding the crisis at an average of over $371,- 
 000,000 per year. In the period from 1890 to 1897, 
 as Mr. Conant observes, the gold output reached 
 a mark more than equal to half the production of 
 the four preceding centuries.^ This, of course, 
 tended to raise prices and encourage speculative 
 ventures. 
 
 As the number of banks rapidly increases to 
 supply the demand for credit accommodation, 
 
 ' Conant, supra, p. 703.
 
 246 PRACTICAL BANKING 
 
 and even — when optimism is running high — 
 precede the demand and further bolster optimism 
 and the capitahzation of prospects, we shall not 
 be surprised to note the increase from 1893, with 
 9492 banks having a capital of $1,091,800,000 
 and a surplus of $689,300,000, to 1906, with 
 17,905 banks having a capital of $1,565,300,000 
 and surplus of $1,558,900,000. In the same pe- 
 riod bank notes increased from $155,100,000 
 to $510,900,000, and loans and discounts from 
 $4,368,600,000 to $9,893,700,000. ^ Thus, the 
 total banking capital increased in about the same 
 ratio as loans and discounts. The great demand 
 for credit made the increase in bank-note circu- 
 lation profitable. Although in the case of national 
 banks, the reserves bore a definite and, on the 
 whole, satisfactory relation to gold, the laws 
 regarding state banks and trust companies were 
 lax, permitting, in most cases, an inadequate 
 reserve and a reserve which might even be held 
 in bank notes. As a matter of fact, in the years 
 immediately preceding 1907, the liabilities of 
 state banking institutions increased thirty-five 
 times as rapidly as cash reserves, while bank notes 
 increased two and one half times as rapidly as 
 cash reserves. " As these bank notes are secured 
 by evidences of the public debt and not to any 
 appreciable extent by gold reserves, it becomes 
 apparent how one form of credit was built upon 
 another, until the whole fabric became a house of 
 cards which a zephyr might topple in ruins." ^ 
 
 ^ Re-port o/ the Comptroller oj the Currency, 1913. The figiires for 
 surplus include also profits. 
 * Conant, supra, p. 707.
 
 CRISES IN THE UNITED STATES 247 
 
 But after all, the bank conditions are but 
 reflections of the business, commercial, and in- 
 dustrial condition of the country. The fever of 
 enterprise continued to fix capital more and more 
 in permanent investments until a time came 
 when there was no longer capital for expansion; 
 then, to every one's chagrin, there was not enough 
 to supply the demand for a continuance of mer- 
 cantile transactions. Our monetary system did 
 not provide a method for converting mercantile 
 transactions into security for currency; in order 
 to extend credit on mercantile transactions, 
 banks must have a cash reserve or a currency 
 reserve based ultimately on an outlay of cash. It 
 is estimated that in 1905 there were outstanding 
 securities in the United States, including the 
 public debt, equal at their par value to $35,000,- 
 000,000.^ In the first six months of 1907 not 
 less than $1,279,000,000 of new securities were 
 authorized and put on the market.^ 
 
 There began to be premonitions of a liquida- 
 tion. Professor F. W. Taussig, in the spring of 
 1907, delivered an address before the Economics 
 Club of New York on " Panics," in which he de- 
 plored the fact that commercial banks had lost 
 their ideal, which he said was to occupy a "judi- 
 cial position, standing aloof from other business 
 than that of banking proper." He said the tend- 
 ency of the t>anks had been to become associated 
 with investment houses and private firms promot- 
 ing new business ventures, with trust companies 
 and men whose primary business was other than 
 that of banking. In May, Mr. F. A. Goddard, 
 
 ' Conant, swpra, p. 702. ^ Financial Age, July 8, 1907.
 
 248 PRACTICAL BANKING 
 
 president of the Fort Dearborn National Bank of 
 Chicago, said to the Missouri Bankers' Associa- 
 tion: "What I want to get at is this: we are in 
 somewhat of an epidemic of money-mad conta- 
 gion and excitement. . . . These prosperous times 
 have brought to the front all kinds of propositions 
 and schemes for investment — some legitimate, 
 some a mere chance, and some fakes." About 
 this time Mr. Eugene V. Debs, the Socialist, pro- 
 phesied an era of financial depression, to be at- 
 tended, he said, "by great railroad strikes." 
 
 On April 29, 1907, in an editorial, the Financial 
 Age said : — 
 
 When the course of values on the New York Stock 
 Exchange first assumed a clearly established downward 
 trend, the Financial Age ventured the opinion that a 
 business recession was being discounted. During the 
 past few weeks there has been a growing disposition 
 on the part of commentators to take cognizance of 
 certain happenings which previously they were in- 
 clined to overlook entirely or else treat as matters of 
 little importance. They now observe that several of 
 our large railroad corporations are retrenching in many 
 directions, canceling orders for new equipment, and 
 modifying their plans for terminal and other improve- 
 ments; it is remarked also that reports from iron and 
 steel centers tell of a slight falling-off in the consump- 
 tion of these products, while the market for copper 
 metal is losing some of the remarkable strength that 
 has characterized it during the past year or two. Deal- 
 ers in automobiles and other luxuries, it is also ad- 
 mitted, are doing a somewhat smaller business than 
 formerly, while railroad earnings do not compare at 
 all favorably with those of the corresponding period 
 in 1906.
 
 CRISES IN THE UNITED STATES 249 
 
 Any of these developments, taken singly, may not 
 indicate any general change in the state of trade, but 
 collectively may quite properly be regarded as fore- 
 shadowing a slackening in the speed with which our 
 business machine has been driven in the last half- 
 dozen years. 
 
 On May 13 the same paper pointed out that rail- 
 roads could borrow money for improvements 
 only by paying extortionate rates of interest: — 
 
 It is a striking commentary on the present state of 
 their credit that the railroads cannot raise funds for 
 extensions and improvements and for other purposes 
 by the sale of stocks and bonds the same as in former 
 years. 
 
 The early months of 1907 saw the disintegra- 
 tion of the real estate boom, especially about 
 New York. Even new buildings were almost 
 without tenants, and second mortgages, usually 
 desirable, went begging. Bankers were warned 
 by the financial papers to reduce their loans based 
 on real estate, as the trying second part of the 
 year would find this kind of security even harder 
 to convert. 
 
 The situation in the middle of the year was 
 peculiar. Superficially conditions were favorable, 
 there being lower rates for short-time and call 
 money than for some time past. But long-time 
 loans could only be made at high rates. 
 
 Heavy exportations of gold were made to 
 London and Paris and bank reserves were unusu- 
 ally low as July 1 approached. Tightening money 
 conditions continued throughout June and July. 
 The Treasury withdrew $30,000,000 government 
 deposits. Early July saw a bull effort to " boost"
 
 250 PRACTICAL BANKING 
 
 certain stocks on the market. About the same 
 time James J. Hill spoke regretfully of national 
 extravagance. The meager increase in savings 
 banks deposits was cited. 
 
 Some fright was caused in the New York Stock 
 Exchange by the Administration's declaration 
 that "trust-busting" would continue; it was 
 heightened by the attacks on railroads in the 
 South. There were distinct signs of a panic on 
 the Exchange, although, in the face of unprece- 
 dented slumps in prices, there were but three fail- 
 ures on the Exchange in the first six months of 1907. 
 
 It was felt in every circle that business trem- 
 bled on the edge of an abyss. Wavering public 
 confidence was assigned as the cause, and finan- 
 ciers, as well as financial papers, endeavored by 
 argument and persuasion, to allay fear. Mr. A. 
 Barton Hepburn, then president of the Chase 
 National Bank, said in June that, although credit 
 had been used too freely, the country was in fine 
 condition and that he believed the danger of a 
 disastrous slump was past. 
 
 Under title of " Two Kinds of Hysteria," the 
 Financial Age, August 19, 1907, assured its read- 
 ers that the hot August days were responsible for 
 the uncertain conditions. It said : — 
 
 When the silly season has passed and the autum- 
 nal breezes sweeten the tempers of the corporation 
 baiters and ease the brows of the Wall Street pessi- 
 mists, they will realize that this is n't such a bad coun- 
 try after all, and that it still has a good many genera- 
 tions of prosperity ahead of it.^ 
 
 ^ The attitude of bankers and financiers was sharply divided 
 between those who were " pro- Administration " and those who were
 
 CRISES IN THE UNITED STATES 251 
 
 Toward the latter part of August, realizing 
 what a strain the continued stringency would 
 prove to business, Secretary Cortelyou began 
 making deposits in banks and accepting as 
 security state, municipal, and railroad bonds. 
 At the same time the Curtiss-Leggett Company, 
 shirt manufacturers, failed, on account of the 
 money stringency, having assets of $3,000,000 
 against liabilities of only $1,100,000. 
 
 Beginning with September there was a tone of 
 ill-concealed fright among the most hopeful. The 
 financial papers still attempted to coax investors 
 back into the old confidence. " All will be well in 
 sixty days." 
 
 During the second week in October call loans 
 in New York ranged from two and a haK to six 
 per cent; time loans from six to seven per cent; 
 commercial paper from seven to seven and a half 
 per cent. In these two weeks there were twice as 
 many failures as in the same period of 1906. 
 According to Dun's Review, there were five times 
 as many manufacturing failures in September, 
 1907, as in September, 1906. 
 
 A series of bank failures precipitated the spec- 
 tacular part of the crisis of 1907. 
 The first intimation of a serious upheaval in 
 New York was the failure of the Stock Exchange 
 firm of which Mr. Otto C. Heinze was the head. 
 In an effort to corner the copper market this firm 
 was embarrassed by having cartloads of stock 
 
 "anti-Administration." Jacob 11. Schiff, of Kuhn, Loeb & Com- 
 pany, said the tightness was due to overcapitalization. Ex-Secre- 
 tary of the Treasury Leslie M. Shaw said that economic legislation 
 had destroyed public confidence.
 
 252 PRACTICAL BANKING 
 
 delivered to it; it suspended. There was a well- 
 defined suspicion that Mr. F. Augustus Heinze, 
 president of the Mercantile National Bank, was 
 interested in his brother's ventures and that his 
 bank was being "used" in this connection. 
 Heinze's supposed allies — Messrs. E. R. and 
 O. P. Thomas and C. W. Morse — fell into public 
 distrust. Depositors began rapid withdrawals. 
 Seven banks and a trust company, with capital 
 and surplus of $21,000,000 and deposits of more 
 than $71,000,000, were dominated by these inter- 
 ests. Believing them unable to weather the storm 
 the Clearing House Association agreed to help 
 them out if Heinze, Morse, and the Thomases 
 were eliminated. This was done; it was hoped 
 on Sunday, October 20, that a panic had ceased 
 to threaten. On Tuesday, however, the National 
 Bank of Commerce refused to clear any longer for 
 the Knickerbocker Trust Company, whose presi- 
 dent was thought to be allied with the Morse 
 interests.^ The result was a run on the Knicker- 
 bocker Trust Company which — after paying out 
 $8,000,000 in three hours — closed its doors. 
 Runs followed on the Lincoln Trust Company, 
 which was forced to suspend, and on the Trust 
 Company of North America. Following several 
 conspicuous commercial failures, such as some of 
 
 1 Some radical writers have suggested that the only trouble with 
 Heinze, Thomas, and Morse was that they had formed a chain of 
 banks too formidable to suit the "Wall Street crowd," and so were 
 punished. Also, that the run on the Knickerbocker Trust Company 
 was part of this plan, which included an effort of the United States 
 Steel Corporation to obtain control of the Tennessee Coal, Iron and 
 Railroad Company. See Twentieth-Century Socialism, by Edmund 
 Kelly.
 
 CRISES IN THE UNITED STATES 253 
 
 the Westinghouse companies and the closing of 
 the Pittsburgh Stock Exchange on October 23, 
 other banks in New York closed for safety's sake. 
 
 Meanwhile, the money scramble began. ^ Banks 
 in New York were forced to try to call loans in 
 order to be prepared for the demands of banks 
 and individual depositors. The Secretary of the 
 Treasury had a conference with Messrs. Morgan, 
 Stillman, Vanderlip, Banker, and Rockefeller. 
 The result was the deposit of $35,000,000 in na- 
 tional banks in New York in four days. 
 
 Stock Exchange prices were veritably collaps- 
 ing. On Thursday, October 24, a syndicate, 
 headed by the late J. P. Morgan, stated that they 
 would stand under the market and placed 
 $25,000,000 on call at ten per cent; on Friday 
 $10,000,000 more was made available at fifty 
 per cent, the high price being fixed to discourage 
 speculation, as money ranged from fifty to one 
 hundred and thirty per cent. Up to this time 
 New York bank reserves had been but little dis- 
 turbed, the government deposits about offsetting 
 withdrawals. But on October 26, the banks 
 began to restrict cash payments; clearing-house 
 loan certificates were issued. The demand for 
 cash started a currency premium the next week, 
 prices, for small denominations especially, going 
 to four per cent. Indeed, this premium continued 
 
 * See the following news item: "Boston, Mass., Nov. 25, 1907. 
 One of the city's banks made an arrangement with the Harvard 
 Athletic Association to take over all the bills and silver taken in 
 exchange for tickets to the Harvard- Yale football contest. A pre- 
 mium of 3.8 per cent is to be paid which will net something over 
 $1000 by the transaction. The arrangement was a result of the 
 scarcity of currency here."
 
 254 PRACTICAL BANKING 
 
 the rest of the year. It offered an incentive for 
 withdrawals of deposits. Two large failures oc- 
 curred at this time, the Southern Steel Com- 
 pany, capitalized at $25,000,000, and the Arnold 
 Print Works, with liabilities of $8,500,000, the 
 two employing about ten thousand men. Money 
 stringency was assigned as the cause. On 
 November 9 arrived the first shipment of more 
 than $100,000,000 in gold, imported to relieve 
 the money stringency. The banks had also in- 
 creased their circulating notes at this time. 
 
 But in the mean time the panic had seized the 
 interior. Banks in most of the cities of over 
 twenty-five thousand population suspended cash 
 payments. The clearing houses stood guaranty 
 on certificates.^ It is estimated that over $500,- 
 000,000 of substitute paper was issued.^ Those 
 country banks, having no clearing-house affilia- 
 tions, were likely to suffer most. Many failures 
 occurred among them. 
 
 Shipments of money to the West from New 
 York continued. For the week ending October 19 
 these amounted to $4,400,000 ; the next week it 
 was $16,300,000; the week of November 2 it was 
 about $17,000,000, November 9 about $17,400,- 
 000, November 16 about $22,600,000, and so on 
 till the last of December in gradually declining 
 quantities. In the week ending January 4 the 
 tide turned and $5,500,000 was shipped to New 
 York. According to Mitchell ^ this was three 
 
 1 See chapter on the "Clearing House." 
 ^ Dr. A. Piatt Andrew. 
 
 ^ Mitchell, supra. Many of the interesting figures from now on are 
 from this excellent work.
 
 CRISES IN THE UNITED STATES 255 
 
 weeks later than the usual turning of the tide. 
 The New York banks supplied the country with 
 $125,000,000 between the beginning of the panic 
 and the first of 1908. Nevertheless, the reserves 
 of the Clearing-House banks were never lower 
 than 19.98 per cent of the deposits, the importa- 
 tions of gold and the federal deposits having 
 almost offset the loss of cash. Local drains were 
 the real causes of the drop in reserves.^ 
 
 Domestic exchange was paralyzed, New York 
 drafts selling from sixty cents discount to ten 
 dollars premium in different parts of the country, 
 and being absolutely unsalable in San Francisco 
 part of the time. 
 
 As for foreign exchange, the ordinary rules 
 applying were suspended. Drafts on London 
 were bought when the export point had been 
 passed, the reason prompting buyers being their 
 ability to sell gold at a premium. 
 
 Common stocks fell, as did preferred stocks 
 and bonds, although not to so low a point. By 
 the first of the year securities took a brighter 
 outlook on life. In addition to the $35,000,000 
 syndicate pool to sustain the stock market, 
 
 1 Between September 30 and the first of the year almost $120- 
 000,000, representing money derived from importations of gold and 
 Treasury deposits, was put into circulation. If this could have been 
 used as a forty per cent cash reserve for emergency currency, further 
 secured by commercial paper, $300,000,000 of new circulating notes 
 could have been added, almost enough, together with $84,000,000 
 new national bank circulation, to have prevented the necessity of 
 clearing-house loan certificates and the restriction of payments. 
 And this would have been what might have been added merely from 
 the addition to the supply of cash reserve in the banks. Under the 
 new Federal Reserve Act some such arrangement will be possible. 
 It would have had tiie added value of encouraging the discounting 
 of commercial paper which suffered most in New York in the panic.
 
 256 PRACTICAL BANKING 
 
 New York national banks increased loans and dis- 
 counts some $63,000,000 between August 22 and 
 December 3, 1907.^ This increase was to replace 
 the loans contracted by the trust companies and 
 banks outside the Clearing House, and to prevent 
 a further collapse of securities. Of the $63,000,000 
 $54,000,000 was of Stock Exchange origin, show- 
 ing, as Mr. Mitchell observes, the lack of liquid- 
 ness of the New York call loan. 
 
 Reserves piled up in the country banks. Be- 
 tween August 22 and December 3, New York 
 City national banks lost $41,700,000, Chicago, 
 $12,100,000; St. Louis, $5,800,000; and the other 
 reserve cities $27,700,000, while the country 
 banks gained $46,400,000. On December 3 re- 
 serves in New York equaled 20.5 per cent (25 per 
 cent par); in Chicago, 23.1 per cent (25 per cent 
 par) ; in St. Louis, 19.6 per cent (25 per cent par) ; 
 in other reserve cities, 12.9 per cent (12.5 per cent 
 par); and in country banks 9.9 per cent (6 per 
 cent par).^ 
 
 Perhaps the panic could have been localized 
 had New York bankers been able to meet all 
 demands without restriction. But restriction 
 inspired country banks with a zeal to provide for 
 any disaster. Hoarding followed. In December 
 most country banks had higher reserves than at 
 the beginning of the panic. The question, of 
 course, is, Could the New York banks have con- 
 tinued cash payments? They did, to some extent, 
 in 1873. They did not in 1907. Therefore, the 
 
 ^ National banks outside of New York contracted loans and dis- 
 counts about $156,000,000. 
 ^ Sprague, supra, p. 305 et seq.
 
 CRISES IN THE UNITED STATES 257 
 
 practical question each country banker asked 
 himself was. Can I afford to be less cautious than 
 other bankers when I know the psychology of 
 "panics" and "runs" and the like as I do? 
 
 The failures drop thick and fast when the panic 
 is past. The old financial battlefield is gory with 
 the slain and, what is more, the trampled. And 
 failures after the depression sets in are larger and 
 more important. From 3635 failures in the last 
 three months in 1907, bankruptcies increased to 
 4909 in the first quarter in 1908. 
 
 What the depression has been since 1907 is 
 common knowledge and common experience. 
 The year 1914, with its elaborate preparations for 
 currency rejuvenation and with large crops in 
 prospect, and with the iron and steel industry 
 showing distinct signs of " picking up," seemed 
 destined to behold the general return of the 
 country to prosperity. The European war has 
 temporarily and artificially raised the price of 
 provisions and made certain crops like cotton 
 seem less profitable to their prospective owners. 
 But notwithstanding the temporary embarrass- 
 ment of agricultural lines and the shaky securities 
 situation, the ultimate outcome of the European 
 struggle will greatly redound to the benefit of 
 this country.
 
 CHAPTER XX 
 
 THE FEDERAL RESERVE ACT 
 
 In this chapter our purpose is to indicate some 
 of the more conspicuous currency shortcomings 
 under the National Bank Act; to outhne the plan 
 of the National Monetary Commission, and the 
 Federal Reserve Act; and finally, to introduce 
 criticisms of the new law — to point out what is to 
 be expected of it and, chiefly, its advantages. 
 
 Up to the time of the passage of the Owen- 
 Glass Currency Bill in December, 1913, there 
 had never been a financial system in the United 
 States worthy of the name.^ The National Bank 
 Act had, indeed, systematized bank notes and 
 raised them to the level of a respectable and 
 reliable currency, but otherwise it had not so 
 worked as to coordinate banking operations; no 
 definite system was produced. There were a few 
 rules looking toward certain uniform practices in 
 banking; the safety of the depositor and the 
 standardization of the bank note were more 
 nearly accomplished; but no scheme had been 
 evolved to place banking in closer touch with 
 agricultural and business activities. In fact, the 
 tendency under the act was to encourage credit 
 expansion on a basis of stock exchange quotations 
 
 1 The first and second United States Banks had, indeed, formed 
 the basis of a quasi-systematic financial scheme, but they did not 
 bear suflBciently close relations to banking in general to be alto- 
 gether satisfactory.
 
 THE FEDERAL RESERVE ACT 259 
 
 rather than on actual business transactions; that 
 is, banking came to have too direct a connection 
 with the capitaHzed earning power (sometimes 
 fancied and represented by speculation) of great 
 corporations and too indirect a relation with pro- 
 duction and consumption. This was a hardship 
 on the corporations themselves, for no method 
 was open to them for the free discount of paper 
 representing the business they carried on. Of 
 course, in times of an abundant money market, 
 they could discount notes given for commercial 
 transactions, but when prosperity had built up 
 so gigantic a trade that money began to be short, 
 as is shown in the chapter on "Crises," they had 
 difficulty. This difficulty would have been obvi- 
 ated could the banks have expanded their ability 
 to extend credit by rediscounting these notes to 
 some bank of issue. But no such bank was avail- 
 able. The only method was the cumbersome pro- 
 cess of issuing new circulating national bank notes, 
 based on United States bonds. These, as we have 
 seen, were less and less profitable to banks as 
 times grew more prosperous. 
 
 Then again, no satisfactory method was offered 
 for the utilization of reserves. Each bank kept 
 its own reserves. Reserves were individualized 
 and to the extent to which they were deposited 
 in reserve or central reserve cities, they ceased to 
 have, in reality, more than one quarter of their 
 face value, — that is, as actual reserves, — for 
 reserve city banks kept only twenty-five per cent 
 reserve against these deposits. When country 
 banks, ^ in times of financial stringency, demanded 
 
 * Country banks arc those not located in reserve or central reserve 
 cities.
 
 260 PRACTICAL BANKING 
 
 their balances, they were hkely to want a large 
 part of them, and, in time of panic, far more than 
 twenty-five per cent of them. 
 
 In short, reserve in the reserve cities was not a 
 reliable reservoir. This was not because of the 
 unwillingness of reserve bankers to pay, but 
 because of their inability. In New York, for 
 instance, the call loan grew up to provide an 
 investment for funds for which payment on de- 
 mand might be readily pressed. The amazing dis- 
 covery has been that call loans have proved the 
 most inflexible, the most unliquid, of loans. ^ 
 Banks simply cannot afford to demand payment 
 — in times of financial stringency — of all call 
 loans; they support the Stock Exchange; they 
 must not be contracted suddenly or securities 
 would fall, the Exchange would topple to ruin, 
 and collateral for most of the loans made in New 
 York would be impaired beyond reparation.^ 
 
 ^ Representative Bulkley, in the House of Representatives, Sep- 
 tember 12, 1913, said: "Let us keep clearly in mind the distinction 
 between a fixed investment and a commercial or liquid asset. Cor- 
 porate stocks and bonds, lands and buildings, are fixed investments. 
 However valuable they may be, their conversion into cash depends 
 upon finding some one who believes that under all the circumstances 
 it will be profitable for him to buy them as an investment. Growing 
 crops, goods in process of manufacture or in transit, and mercantile 
 stocks are commercial or liquid assets, generally speaking; certainly 
 they are liquid to the extent that they are products on some stage 
 of the way toward consumption. The sale of such products does not 
 depend upon finding a willing investor and does not have to be 
 forced, but comes about naturally in response to the ordinary neces- 
 sities of mankind. Such assets constantly liquidate themselves, 
 because, of necessity, they must be paid for when consumed." 
 
 ^ As is shown elsewhere, most of the loans made in New York are 
 based on Stock Exchange security. During the crisis in 1907 call 
 loans were increased by the national banks in New York upward of 
 sixty millions.
 
 THE FEDERAL RESERVE ACT 261 
 
 We have seen that under the National Bank 
 Act there was no form of domestic loan which 
 offered a means of expanding the currency by 
 simple, direct operation. Currency was more or 
 less fixed; at least, it had no rational relation to 
 the agricultural and commercial needs of the 
 country. The result was that, instead of the cur- 
 rency expanding and contracting to fit the legiti- 
 mate demands for loans, loans had to expand and 
 contract to fit the volume of credit which the 
 given amount of currency justified.^ 
 
 Under the national banking regime the only 
 kind of loan which tended, in time of financial 
 stringency, to increase the volume of currency 
 was "bills of exchange drawn against the ship- 
 ment of products that may be termed the neces- 
 saries of life, such as cotton, wheat, corn, flour, 
 and other articles, shipped abroad." ^ At other 
 times this category might be supplemented by 
 finance bills and bills drawn for the payment of 
 American securities.^ 
 
 In the next place, an indictment may be drawn 
 against the system before the passage of the 
 Federal Reserve Act on the ground of making no 
 positive and reliable provision, first, for any busi- 
 ness man who, at any time, had merchantable 
 commercial paper, and second, for the agricul- 
 turist. 
 
 It is not necessary to go into detail as to the 
 
 ^ As will be seen from Mr. Noyes's analysis, mentioned in the 
 chapter on "National Bank Notes," this form of currency was not 
 coordinated with the upward or downward demand for credit. 
 
 ^ From a speech of Senator Knute Nelson, in the United States 
 Senate, December 11, 1913. 
 
 ' See chapter on "Foreign Exchange."'
 
 262 PRACTICAL BANKING 
 
 first ground. Every man knows that there are 
 times when the best commercial paper cannot be 
 sold. The failures of many large solvent corpora- 
 tions may be attributed to such situations. The 
 reason is not far to seek and has already been 
 hinted more than once. Business grows apace in 
 times of prosperity until there comes a time when 
 the banks cannot safely extend credit in a greater 
 ratio to lawful money. Clearly, banks must either 
 discontinue the expansion of loans and discounts 
 or increase their cash supply. The only sure 
 method to increase cash supply is by increasing 
 circulating notes, but, as we have seen, the issu- 
 ance of national bank notes is increasingly unat- 
 tractive to the banks as times grow more booming. 
 Plainly, some system was needed which would 
 insure a sale for good, short-time, commercial 
 paper at any time. 
 
 Now as to the farmer. A member of Congress ^ 
 in 1913 said eloquently: "The agricultural classes 
 have always been compelled to pay a high rate of 
 interest. In my district the farmers never could 
 borrow more than forty per cent of values and the 
 rate was from eight per cent up — mostly up. 
 The poorer the man the higher the interest that 
 is charged. In other words, if he is poor, he is 
 going to be kept poor." 
 
 But the plight of the farmer was due to the sys- 
 tem. National banks were forbidden to make 
 any loans on real estate. As to accommodation, 
 during crop-moving time, that involved the fail- 
 ure of the national bank currency to respond to 
 seasonal demands. 
 
 ^ Representative Quin.
 
 THE FEDERAL RESERVE ACT 263 
 
 Apropos of seasonal demands, Representative 
 Bulkley, computation expert for the House Com- 
 mittee on Money and Banking, said in a speech 
 on September 12, 1913: — 
 
 It happens that at the seasons when our great agri- 
 cultural crops are harvested and moved, there is need 
 for a larger amount of currency in circulation than is 
 required at other seasons. This is only another way of 
 saying that at these seasons the amount of transac- 
 tions evidenced by the payment of cash or currency 
 is larger in proportion to the credit transactions than 
 it is at other times. It is easy to see that when large 
 amounts of cash are drawn out of the banks to pay 
 farm hands and for other purposes, the amount of 
 reserve money held by the banks is reduced and 
 hence their loaning power is impaired, and this is 
 the explanation of the annual autumn money string- 
 ency. 
 
 The banks can to some extent protect themselves 
 against paying out their reserve money by the issue 
 of national bank notes, but inasmuch as these notes 
 are based on the fixed amount of United States bonds 
 bearing the circulation privilege, and the profitable- 
 ness of their issue depends to some extent upon their 
 being kept constantly in circulation without reference 
 to the country's demand for currency, it is apparent 
 that there can be no elasticity in the amount of such 
 notes. In other words, the amount of our currency 
 does not rise and fall in response to the need for it. It 
 is most desirable that the amount of our currency 
 should be made more elastic, because the seasonal 
 demand for currency is a perfectly normal and natu- 
 ral thing, and, as has been said, results only from the 
 fact that at certain seasons it is necessary to do a re- 
 latively large proportion of the country's business 
 with currency.
 
 264 PRACTICAL BANKING 
 
 In summary, the principal defects of the cur- 
 rency and credit system as worked out under the 
 National Bank Act were: — 
 
 (1) An inelasticity of the currency, bringing 
 in its train all the dire consequences of 
 financial stringencies and money scram- 
 bles. 
 
 (2) An ineffectual and antiquated use of our 
 gold supply, which could never be concen- 
 trated and moved freely from place to 
 place as occasion demanded. 
 
 (3) The tendency of bank reserves to dissolve 
 in times of panic. 
 
 (4) A lack of coordination of the banking oper- 
 ations of the country. 
 
 (5) The independent treasury system, which 
 often caused millions of gold to lie idle in 
 treasury vaults while business and agricul- 
 tural interests cried for help. 
 
 II 
 
 A provision of the Aldrich-Vreeland Emergency 
 Currency Act of May 30, 1908, created the 
 National Monetary Commission, requiring it to 
 make a comparative study of financial systems 
 throughout the world and report to Congress a 
 feasible scheme for the reorganization of the 
 United States currency system. The Commis- 
 sion's report was submitted to Congress on Jan- 
 uary 8, 1912, and included a plan, familiarly 
 known as the " Aldrich scheme," for a centralized 
 coordination of the banking interests of the 
 United States. The bill containing this plan was 
 not passed, but it exhibits a step toward the
 
 THE FEDERAL RESERVE ACT 265 
 
 Federal Reserve Act of December, 1913, and so 
 deserves a short exposition. 
 
 The bill contemplated the erection of a Na- 
 tional Reserve Association with fifteen branches, 
 representing fifteen districts into which the coun- 
 try was to be divided. Each district was to be 
 subdivided into local associations consisting of at 
 least ten banks representing at least $5,000,000 
 capital and surplus. Now, observe how the cen- 
 tral control was to be built up. Three fifths of 
 the directors of each local association were to be 
 selected by member banks polling one vote each; 
 two fifths were to be selected by the banks cast- 
 ing one vote for each share of stock which they 
 held in the National Reserve Association. (Each 
 eligible bank in the country was authorized to 
 subscribe to an amount of stock in the National 
 Reserve Association equal to twenty per cent of 
 its paid-up capital.) Now, the branches of the 
 National Reserve Association were each to have 
 a board of directors, to be elected by the local 
 association in each district as follows : one half to 
 be elected on a basis of one vote for each associa- 
 tion, one third to be elected on a basis of the stock 
 which the members of each association held in 
 the National Reserve Association, and one sixth 
 to be chosen by the directors already selected 
 and to represent "the agricultural, commercial, 
 industrial, and other interests of the district." 
 From this intermediate stage thirty-nine directors 
 of the National Reserve Association were to be 
 elected as follows: fifteen to be elected, one by the 
 directors of each hriincl\;fffeen more to be elected, 
 one by the directors of each branch, fairly rcpre-
 
 266 PRACTICAL BANKING 
 
 senting the "agricultural, commercial, industrial, 
 and other interests of the district" ; and finally 
 nine more to be elected by the branches on a 
 basis of one vote for each share which member 
 banks held in the National Reserve Association. 
 There were to be seven ex officio members of the 
 "Big Board," the Governor of the National 
 Reserve Association (also chairman of the board 
 of directors), two deputy governors, the Secre- 
 taries of the Treasury, of Agriculture, and of 
 Commerce and Labor, and the Comptroller of the 
 Currency. 
 
 Now, the governor was to be appointed by the 
 President, from a list of not less than three to be 
 submitted by the board of directors of the Na- 
 tional Reserve Association. He might be removed 
 for cause by two thirds of the board. The two 
 deputy governors were to be appointed by the 
 board. The managers and deputy managers of 
 the branches were to be appointed by the gover- 
 nor and the manager was to be chairman of the 
 board of directors of his branch. 
 
 Thus it can be seen that a highly centralized 
 authority was to be built up, almost beyond any 
 governmental supervision, although the Govern- 
 ment's funds and credit were to support it. It 
 was this feature, together with the danger of a 
 small clique of banks controlling the whole, 
 which brought down upon the bill unmerciful 
 criticism and led to the eventual construction of 
 another bill along somewhat different lines. 
 
 The purpose of the Aldrich Bill was, first, to 
 provide an elastic currency based, not on govern- 
 ment bonds, but on business transactions and
 
 THE FEDERAL RESERVE ACT 267 
 
 representing automatically liquidating assets, 
 such as notes or bills of exchange given for the 
 sale of commodities or manufactures; second, to 
 provide an agency for regulating the flow of gold 
 by discount rates; third, to standardize foreign 
 exchange transactions. 
 
 These in general are the purposes of the new 
 Federal Reserve Act and will be more minutely 
 discussed below. It is not profitable to go more 
 fully into the details of the Aldrich Bill, as it was 
 never enacted into law. There was a considerable 
 feeling of suspicion on the part of legislators and 
 of the public and a disinclination to entrust the 
 national finances to a private bank; it was feared, 
 with the substantial minority of the directors 
 which "big banks" would be able to elect all the 
 way up the scale, plus the influence which their 
 size would give them in any event, that the bill 
 made potential a "money trust" of the most 
 secure and dangerous variety. It was compared 
 to the well-known "holding company," except 
 that here the " big banks" would hold the "hold- 
 ing company" instead of the "holding company" 
 holding the banks; which, after all, would be the 
 most secure method. 
 
 In the campaign of 1912 the Democrats went 
 on record as opposed to this type of a central 
 bank. In fulfillment of platform pledges they 
 have enacted the Federal Reserve Act, which, in 
 the large, is the work of Secretary of the Treas- 
 ury McAdoo, Senator Owen, and Representative 
 Glass. It is an improvement on the Aldrich Bill 
 in general and has been hailed as such by a num- 
 ber of leading economists. From the point of view
 
 268 PRACTICAL BANKING 
 
 of the business man and the farmer and of most 
 banks, it offers immediate prospects of more 
 favorable conditions, and after a few years of 
 readjustment it will be just as advantageous to 
 the reserve city, and, particularly, the central 
 reserve city banks. 
 
 A great many ideas have been borrowed from 
 the Aldrich plan for the new law, and the striking 
 differences consist in the composition and con- 
 struction of the direction of the system. The 
 Aldrich plan suggested a highly centralized bank- 
 ing system, a highly centralized reserve, a highly 
 centralized note-issuing power — almost entirely 
 under the control of the banks themselves. The 
 Federal Reserve Act provides for decentrahzed 
 administration and decentralized reserves (to a 
 limited degree), with a central supervisory and 
 judicial institution. 
 
 The Federal Reserve Act designated the Secre- 
 tary of the Treasury, the Secretary of Agricul- 
 ture, and the Comptroller of the Currency as 
 an organization committee to make preliminary 
 plans for the inauguration of the new system. 
 Among their first activities was the division of the 
 country into twelve regions, which should follow 
 as nearly as possible "the convenience and cus- 
 tomary course of business" and not necessarily 
 state lines, and the indication of a city in each 
 district to be the headquarters of the federal 
 reserve bank of that district.^ But reserve and 
 central reserve cities under the National Bank 
 Act are not changed. 
 
 The act contemplates a simpler system than 
 
 * See Appendix m.
 
 THE FEDERAL RESERVE ACT 269 
 
 the Aldrich plan. There are twelve federal reserve 
 banks, one in each of the districts. These banks 
 are independent of each other and each does the 
 actual business of a central bank in its district, 
 rediscounting paper, making collections, carrying 
 on a foreign business, discounting acceptances, 
 and issuing, under the direction of the Federal 
 Reserve Board, circulating notes, based on com- 
 mercial transactions, and limited in amount only 
 by a stated relation to the gold reserve. Federal 
 reserve banks will establish appropriate branches 
 in their districts. Above the federal reserve banks 
 is a sort of supreme court and legislature of the 
 system, the Federal Reserve Board, which super- 
 vises and systematizes operations. 
 
 The act requires all national banks and allows 
 all state banks, fulfilling certain conditions herein- 
 after recited, to enter the system. National banks 
 failing to comply with these provisions within 
 sixty days after the passage of the act ceased to 
 act as reserve agents and those that failed to com- 
 ply within a year lost their charters.^ 
 
 Upon vote of fifty-one per cent of the shares 
 of its capital stock a state bank, with sufficient 
 unimpaired capital to become a national bank, 
 may be converted into a national bank, with the 
 privileges and obligations of such, provided it 
 does not contravene state law. 
 
 The Federal Reserve Board will prescribe 
 further rules for the admission of state banks as 
 members of the federal reserve system. A few 
 provisions have been made by the Organization 
 
 ' Only twenty-eight national banks failed to come in within sixty 
 days.
 
 270 PRACTICAL BANKING 
 
 Committee. Applying state banks must observe 
 the capital and reserve requirements for national 
 banks; also the National Bank Law respecting 
 the limitation of liability which may be incurred 
 by any person, firm, or corporation, the prohibi- 
 tion against the purchase of or loan on the stock 
 of national banks, and the withdrawal or impair- 
 ment of capital, or the payment of unearned divi- 
 dends. State banks failing to conform to these 
 regulations after admission to the system shall 
 forfeit membership. Their stock shall be bought 
 by the appropriate federal reserve banks and 
 canceled. 
 
 Each bank entering the federal reserve system 
 must subscribe a sum equal to six per cent of its 
 paid-up capital and surplus in the capital of the 
 federal reserve bank in its district. Of this, one 
 sixth is payable on call, one sixth in three months 
 thereafter, and one sixth in six months there- 
 after. The remainder or any part of it is subject 
 to call by the Federal Reserve Board. Stock sub- 
 scriptions must be paid in gold or gold certificates. 
 
 No federal reserve bank can begin business 
 with less than $4,000,000 capital, divided into 
 shares having a par value of $100. If the subscrip- 
 tions to the stock of any federal reserve bank, in 
 the opinion of the Organization Committee, are 
 insufficient, the public may be permitted to sub- 
 scribe in blocks not greater than $25,000 to one 
 subscriber; if they are still insufficient, such a 
 quantity as is necessary shall be allotted to the 
 United States to be disposed of for the benefit of 
 the United States at not less than par. Only stock 
 held by member banks may vote. The shares of
 
 THE FEDERAL RESERVE ACT 271 
 
 member banks may not be transferred or hypothe- 
 cated. The capital stock of the federal reserve 
 banks will automatically increase or decrease as 
 members are admitted or dropped. 
 
 The Comptroller of the Currency designated 
 five applying banks in each reserve district to 
 execute the organization certificate of the appli- 
 cant banks. When this certificate was filed and 
 approved, the federal reserve bank of that dis- 
 trict became a body corporate with the ordinary 
 powers of a corporation and others hereinafter 
 mentioned. 
 
 Each federal reserve bank is to be governed by 
 a board of nine directors to be known as Class A 
 (with three directors) , Class B (with three direct- 
 ors), and Class C (with three directors). 
 
 Class A and Class B directors are to be selected 
 — by preferential ballot — by the member banks, 
 the sole distinction between these classes being 
 that Class A directors may, and probably will, 
 be bankers, while Class B directors must be ac- 
 tively engaged "in commerce, agriculture, or 
 some other industrial pursuit." Class C directors 
 are appointed by the Federal Reserve Board ; two 
 of each group of three must be men of tested 
 banking experience. Directors of the federal 
 reserve banks hold ofiice three years, provided 
 that the first groups of directors so arrange their 
 terms that one director of each class shall be 
 selected each year. 
 
 One of Class C directors shall be designated by 
 the Federal Reserve Board as chairman of the 
 board of directors of his bank and as federal 
 reserve agent. Another Class C director shall
 
 272 PRACTICAL BANKING 
 
 be designated as deputy chairman and deputy 
 federal reserve agent. The federal reserve agent 
 shall maintain a local office of the Federal Reserve 
 Board and shall act as its official representative 
 in performance of the functions conferred on it. 
 He shall receive a compensation, fixed by the 
 Federal Reserve Board and paid by the federal 
 reserve bank.^ 
 
 For the convenience of business, the federal 
 reserve banks are authorized to establish branches 
 where they seem appropriate. Each branch shall 
 have seven directors, three selected by the Fed- 
 eral Reserve Board and four by the parent bank, 
 one of the latter to be designated as manager. 
 Each group of directors shall hold office during 
 the pleasure of the board appointing it. 
 
 Federal reserve banks are expressly exempted 
 from all taxation whatever save tax on real estate. 
 
 After paying necessary expenses of operation, 
 federal reserve banks may pay dividends of six 
 per cent per annum and no more. The remainder 
 of the net earnings shall be divided equally be- 
 tween the bank's surplus account and a franchise 
 tax payable to the United States. When the sur- 
 plus reaches an amount equal to forty per cent of 
 the capital of a federal reserve bank, then the 
 entire net earnings, after paying dividends, shall 
 be transferred to the United States as a franchise 
 tax. 
 
 To unify the operations of the federal reserve 
 
 ^ The act is silent concerning the fixing of the salary of the deputy 
 federal reserve agent, and apparently it is to be done by the re- 
 serve bank, although it would seem more regular for it to be fixed 
 in the same manner as that of the federal reserve agent.
 
 THE FEDERAL RESERVE ACT 273 
 
 banks, there is set up the Federal Reserve Board, 
 with headquarters in Washington. It consists 
 of seven members, namely, the Secretary of the 
 Treasury, the Comptroller of the Currency, and 
 five appointees of the President of the United 
 States, who shall, after the first group is so 
 arranged that one term expires every two years, 
 hold office for ten years. The five appointees 
 receive annual salaries of $12,000 plus actual 
 traveling expenses. The Comptroller of the Cur- 
 rency is to receive $7000 additional for his ser- 
 vices on the board. 
 
 Appointed members of the board may be 
 removed by the President for cause. That vir- 
 tually means that they hold office, within the 
 limitation of their terms, during good behavior. 
 
 In Congress a bitter strife was waged over the 
 composition of the board, a certain faction trying 
 to prevent the creation of a "money trust" and 
 another endeavoring to obviate a "political ma- 
 chine." Theoretically, both contingencies have 
 been largely avoided.^ 
 
 It is provided that the Secretary of the Treas- 
 ury will not lose any prestige. In the first place, 
 he is ex officio chairman of the Federal Reserve 
 Board, and, in the second place, wherever his 
 authority apparently conflicts with some power 
 delegated to the Federal Reserve Board, it is 
 provided that this power shall be exercised sub- 
 ject to his control. 
 
 ^ It is worth while noting that the Aldrich plan proposed to char- 
 ter the National Reserve Association unqualifiedly for fifty years, 
 while the Owen-Glass Act incorporates federal reserve banks for 
 twenty years unless they be dissolved by Congress or forfeit their 
 charters.
 
 274 PRACTICAL BANKING 
 
 A novel feature of the system is the creation 
 of the Federal Advisory Council, consisting of 
 twelve members, one elected by each federal 
 reserve bank. The powers of this body include 
 the right "to call for information and to make 
 recommendations in regard to discount rates, 
 rediscount business, note issues, reserve condi- 
 tions, in the various districts, the purchase of 
 gold or securities by reserve banks, open-market 
 operations by said banks, and the general affairs 
 of the reserve banking system." 
 
 The principal powers of the Federal Reserve 
 Board are as follows : — 
 
 (1) To examine federal reserve banks and 
 member banks and to publish weekly 
 reports as to the condition of federal re- 
 serve banks. 
 
 (2) To permit or require, on the affirmative 
 vote of five members of the board, federal 
 reserve banks to rediscount the discounted 
 paper of other federal reserve banks at 
 rates of interest to be fixed by the board. 
 
 (3) To suspend for not more than thirty days, 
 with possible extensions of fifteen days, 
 reserve requirements. 
 
 (4) To supervise the issuance and retirement 
 of federal reserve bank notes. 
 
 (5) To remove any officer or director of any 
 federal reserve bank for cause. 
 
 (6) To suspend and administer the business of 
 any federal reserve bank for the violation of 
 any provisions of the Federal Reserve Act. 
 
 (7) To grant national banks the privilege of 
 doing a trust company business.
 
 THE FEDERAL RESERVE ACT 275 
 
 (8) To supervise and determine the discount 
 rates to be observed in federal reserve 
 banks. 
 The federal reserve banks have, in tabular 
 form, the power : — 
 
 (1) To receive deposits from member banks or 
 the United States; or, purely for exchange 
 purposes, from other federal reserve banks. 
 
 (2) To discount, on the indorsement of a mem- 
 ber bank, notes, drafts, and bills of exchange 
 arising out of actual commercial transac- 
 tions; "that is, notes, drafts, and bills of 
 exchange issued or drawn for agricultural, 
 industrial, or commercial purposes," the 
 Federal Reserve Board having the right to 
 define eligible paper, provided no paper 
 based on staple agricultural products or 
 other goods, wares, or merchandise shall 
 be barred and no paper secured by stock 
 or bonds, save United States bonds, shall 
 be eligible. Such discounts shall have not 
 exceeding ninety days to run. But paper 
 issued for agricultural purposes or based on 
 live stock, with not more than six months 
 to run, may be discounted at a rate set by 
 the Federal Reserve Board. 
 
 (3) To discount acceptances based on the 
 exportation or importation of goods, pro- 
 vided the acceptances have no more than 
 three months to run and are indorsed by a 
 member bank. 
 
 (4) To buy and sell in the open market cable 
 transfers and bankers' acceptances. 
 
 (5) To buy and sell the notes and bonds of the
 
 276 PRACTICAL BANKING 
 
 United States and "bills, notes, revenue 
 bonds, and warrants with a maturity from 
 date of purchase of not exceeding six 
 months, issued in anticipation of the receipt 
 of assured revenues by any State, county, 
 district, political subdivision, or munici- 
 pality in the continental United States, 
 including irrigation, drainage, and recla- 
 mation districts, such purchases to be made 
 in accordance with rules and regulations 
 prescribed by the Federal Reserve Board." 
 
 (6) "To establish from time to time, subject 
 to review and determination of the Fed- 
 eral Reserve Board, rates of discount to be 
 charged by the federal reserve bank for 
 each class of paper, which shall be fixed 
 with a view of accommodating commerce 
 and business." 
 
 (7) To buy and sell, through foreign agencies, 
 bills of exchange arising out of actual com- 
 mercial transactions which have not more 
 than ninety days to run and which bear the 
 signature of two or more responsible 
 parties. 
 
 The act permits the Secretary of the Treasury 
 to deposit all government monies, except the 
 redemption fund for national bank notes and 
 federal reserve notes, in the federal reserve banks, 
 reserving for him, however, the privilege of using 
 member banks as depositories. 
 
 One of the greatest improvements which the 
 act endeavors to bring about is the issuance of 
 federal reserve notes based on commercial paper. 
 The Federal Reserve Board is to have general
 
 THE FEDERAL RESERVE ACT 277 
 
 charge of this operation and will pass on applica- 
 tions from federal reserve banks for federal 
 reserve notes. 
 
 These notes may be issued in denominations of 
 $5, $10, $20, $50, and $100, and the notes of each 
 federal reserve bank shall have a distinctive mark. 
 
 In the matter of issuing notes, the federal 
 reserve agent in each federal reserve bank shall 
 act as representative of the Federal Reserve 
 Board and receive from the applying bank col- 
 lateral in amount equal to the sum of notes 
 applied for. At any time the Federal Reserve 
 Board may require additional security. The col- 
 lateral eligible are the notes and bills, accepted 
 for rediscount from member banks, covering com- 
 mercial, agricultural, or industrial transactions, 
 and acceptances based on the exportation or 
 importation of goods, all to have not exceeding 
 three months to run. 
 
 These federal reserve notes are receivable by 
 national and member banks and federal reserve 
 banks, and for all taxes, customs, and other public 
 dues. They are redeemable in gold at the Treas- 
 ury or in gold or lawful money at any federal 
 reserve bank. Behind them is pledged the credit 
 of the United States. Every federal reserve bank 
 must keep a gold reserve of forty per cent against 
 all outstanding federal reserve notes, including 
 such an amount as the Secretary of the Treasury 
 shall deem necessary (though not less than five 
 per cent) to be deposited in the Treasury for 
 redemption purposes. This reserve requirement 
 is the only restriction of the amount of outstand- 
 ing federal reserve notes.
 
 278 PRACTICAL BANKING 
 
 The notes of one federal reserve bank, when 
 received by another, shall not be paid out again, 
 but shall be sent for credit or redemption to the 
 bank through which they were issued. 
 
 "Every federal reserve bank shall receive on 
 deposit at par from member banks or from federal 
 reserve banks checks and drafts drawn upon any 
 of its depositors, and when remitted by a federal 
 reserve bank, checks and drafts drawn by any 
 depositor in any other federal reserve bank or 
 member bank upon funds to the credit of said 
 depositor in said reserve bank or member bank.'* 
 The Federal Reserve Board shall from time to 
 time fix collection rates to be charged by mem- 
 ber banks for items cleared through the federal 
 reserve banks. These provisions will be spoken 
 of a little later. 
 
 The act further provides for the retirement of 
 national bank circulation. The bonds represent- 
 ing this circulation may, in the discretion of the 
 Federal Reserve Board, be allotted to the federal 
 reserve banks in due proportion, which shall form 
 the basis of a note issue for these federal reserve 
 banks, subject to the ordinary conditions for 
 national bank notes. The federal reserve banks, 
 however, may see fit to exchange these bonds 
 with circulation privilege for thirty-year three 
 per cent United States bonds and one-year gold 
 United States notes (three per cent) — not more 
 than half of the amount to consist of the thirty- 
 year bonds. The holders of the one-year gold 
 notes are obligated for thirty years to buy, at 
 each expiration of these notes, an equal amount 
 of one-year gold notes of the United States.
 
 THE FEDERAL RESERVE ACT 279 
 
 The nature of reserves under the new reserve 
 system will best be comprehended by an examina- 
 tion of the accompanying tables. As will be seen, 
 it is provided that reserves on deposit in reserve 
 city banks under the old National Bank Law are 
 to be withdrawn gradually through three years. 
 During those three years, the difference between 
 what is carried in a bank's vaults and in the 
 federal reserve bank and the amount of reserve 
 required may be carried in reserve city banks, or 
 in the federal reserve banks, or in the member's 
 own vault — all or any part of it. It will be seen 
 that, in the case of country banks and reserve 
 city banks, the amount to be carried as reserve 
 with the federal reserve banks increases from 
 two twelfths to five twelfths and from three 
 fifteenths to six fifteenths respectively. Thus the 
 remainder — or optional part — decreases. These 
 changes take place in periodic installments dur- 
 ing the first three years. At the end of three 
 years, reserves will be arranged as follows: 
 Country banks will carry twelve per cent reserve 
 on demand deposits and five per cent on time 
 deposits,^ four twelfths of which will be in their 
 vaults, five twelfths with their appropriate fed- 
 eral reserve banks, and the remaining three 
 twelfths either in their own vaults or in the 
 Federal reserve banks. Banks in reserve cities 
 will carry fifteen per cent reserve on demand 
 deposits and five per cent on time deposits, five 
 
 ' " Demand deposits within the meaning of the act shall comprise 
 all deposits payable within thirty days, and time deposits shall com- 
 prise all deposits payable after thirty days, and all savings accounts 
 and certificates of deposit which arc subject to not less than thirty 
 days' notice before payment."
 
 280 
 
 PRACTICAL BANKING 
 
 
 
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 THE FEDERAL RESERVE ACT 281 
 
 fifteenths of which will be in their vaults, six 
 fifteenths with their appropriate federal reserve 
 banks, and the remaining four fifteenths either 
 in their own vaults or in the federal reserve banks. 
 Banks in central reserve cities will carry eighteen 
 per cent reserve against demand deposits and five 
 per cent against time deposits, six eighteenths of 
 which shall be in their own vaults, seven eight- 
 eenths with their appropriate federal reserve banks, 
 and the remaining five eighteenths either in their 
 own vaults or in the federal reserve banks. ^ 
 
 Federal reserve banks may receive as reserve 
 from member banks such paper as it is permitted 
 to discount in the open market, but in amounts 
 not exceeding fifty per cent of any installment. 
 
 Twice a year examinations shall be held into 
 the condition of member banks. In addition to 
 examiners appointed by the Comptroller of the 
 Currency, the Federal Reserve Board may 
 authorize state banking authorities to examine 
 state banks in the system. The federal reserve 
 banks may conduct examinations into the condi- 
 tion of their members. Once a year the Federal 
 Reserve Board shall cause each federal reserve 
 bank to be examined. On petition of ten mem- 
 ber banks, a special examination shall be held for 
 a federal reserve bank. 
 
 The two final sections of the act provide, first, 
 for loans by banks other than those in central 
 reserve cities on improved and unencumbered 
 
 1 It is provided that, where a state bank or trust company is re- 
 quired by state law to keep a part of its reserve with another state 
 bank or trust company, such state bank or trust company shall be 
 looked upon as a national bank in reserve cities for a period of three 
 years.
 
 282 PRACTICAL BANKING 
 
 farm land for not more than five years; and 
 second, for the estabhshment, by member banks 
 having a capital and surplus of $1,000,000, of 
 foreign branches. 
 
 Additional advantages arising out of the new 
 act are: (1) the privilege to member banks of 
 accepting drafts or bills of exchange based on the 
 importation or exportation of goods, having not 
 more than six months' sight to run; and (2) the 
 privilege of organizing national banks without 
 the purchase of United States bonds, which 
 means the ability to organize without having to 
 issue circulating notes. 
 
 Ill 
 
 It but remains to round off our resume of re- 
 cent currency legislation with a few practical hints 
 as to the operation of the new Federal Reserve 
 Act. What will be the effect on banking methods? 
 "V^Tiat will be the probable effect on business? 
 These are sahent questions. By way of answer, 
 it is the purpose to supplement our views with a 
 diminutive symposium of writers on the subject. 
 
 One of the first points noticeable to one familiar 
 with foreign systems is the great dissimilarity of 
 organization of the new American system to that 
 of any foreign bank. 
 
 We have not set up a central bank at all, and 
 only in a limited way have we set up twelve cen- 
 tral banks. Senator Aldrich was pleased to call 
 his National Reserve Association a great clearing 
 house. At most, the federal reserve system but 
 coordinates and unifies the twenty-five thousand 
 individual banks of the nation — it does not dis-
 
 THE FEDERAL RESERVE ACT 283 
 
 place them. It was the conscious purpose of the 
 framers of the bill to observe the advantages of 
 individual banking, such as adaptability to local 
 needs, the investment of local capital, the interest 
 of local citizens. 
 
 Now, the Federal Reserve Act seeks to retain these 
 great, though unobtrusive advantages of flexibility 
 and local interest while securing the advantages of com- 
 bined action in meeting strains. It centralizes reserves, 
 it makes the currency elastic, and it provides for re- 
 discounting of commercial paper; but it does not set 
 up a central bank or remove the present restrictions 
 upon branch banking. Accordingly, as reorganized 
 under the new act, the American banking system will 
 still diflPer from all the great foreign systems. ^ 
 
 What will constitute "commercial paper"? 
 That is one of the interesting and important ques- 
 tions. Within very general limits the Federal 
 Reserve Board is to define it. Mr. Stoddard Jess ^ 
 thinks that "undoubtedly the Federal Reserve 
 Board will be inclined to give a broad interpreta- 
 tion of the term 'commercial paper' during the 
 period when the banks and business community 
 are adjusting themselves to the Federal Reserve 
 Act, but will gradually narrow down their inter- 
 pretation until only such paper will be accepted 
 as possesses a self-liquidating quality, for only 
 such paper can be considered as within the spirit 
 of the act." We should be inclined to think that 
 the board would accept only "self-liquidating" 
 
 1 W. C. Mitchell, "The New Banking Measure in the United 
 States," The Economic Journal, March, 1914. 
 
 2 "Probable Changes in Bank Methods under the Federal 
 Reserve Act," Financial Age, January 20, 1914.
 
 284 PRACTICAL BANKING 
 
 paper from the start, since it alone " can be con- 
 sidered as within the spirit of the act." 
 
 Some of the changes in banking requirements 
 and practices will be : — 
 
 (1) A material reduction of reserves, as we 
 have seen, and the division of deposits — 
 for reserve purposes — into demand and 
 time deposits. It is also to be noted that 
 certain parts of the reserves on deposit 
 with the federal reserve banks may be paid 
 in discountable paper within the meaning 
 of section 14 of the act. On the other hand, 
 the reserve requirement for federal reserve 
 banks will be high. 
 
 (2) The creation of a collection department for 
 "transit" checks. "It seems clear that 
 sections 13 and 16 limit the scope of the 
 collection business of the federal reserve 
 banks to the handling of checks of member 
 banks, of the United States, and of other 
 federal reserve banks." ^ This is more fully 
 discussed later. 
 
 (3) Loans on farm lands by national banks. 
 
 (4) Rediscounting by the federal reserve banks. 
 
 (5) The gradual retirement of circulating notes 
 by national banks. 
 
 (6) Open market operations by the federal 
 reserve banks. 
 
 (7) The limitation of dividends of the federal 
 reserve banks and the consequent applica- 
 tion of the reserve banks' energies to bet- 
 tering banking accommodations. 
 
 ^ Thomas Conway, Jr., " Probable Changes in the Assets of Member 
 Banks under the Federal Reserve Act," Financial Age, June G, iai4.
 
 THE FEDERAL RESERVE ACT 285 
 
 (8) The provision for the aboHtion of the inde- 
 pendent treasury system, save such part 
 of it as is necessary to care for the redemp- 
 tion funds. 
 
 (9) The issuance of federal reserve notes based 
 on the actual agricultural, commercial, and 
 industrial needs of the country as evidenced 
 by "commercial paper." 
 
 (10) The creation of a standard discount rate. 
 
 (11) The publication by the Federal Reserve 
 Board of weekly reports of the condition 
 of the federal reserve banks, by which 
 business conditions in various parts of the 
 country maybe more intelligently gauged. 
 
 Under it [the Act] every solvent business man who 
 can provide commercial paper of standard quality 
 should be able to obtain bank loans, whatever be the 
 condition of business, by paying the rate of dis- 
 count. For practically every banking enterprise in the 
 country can qualify to enter the system if it so desires, 
 and every member bank can rediscount the paper it has 
 bought with its federal reserve bank, and the latter 
 at need may rediscount again with one of its fellows 
 in another district.^ 
 
 A revolution is to be worked in the collection 
 of checks on member banks by the federal reserve 
 banks. Under the old system — as we have seen 
 in the chapters on " The Collection Department " 
 and "The Transit Department" — checks were 
 sent in indirect routes to take advantage of low 
 exchange rates and to accumulate balances in 
 certain cities. 
 
 ' Mitchell, Economic Journal, supra.
 
 286 PRACTICAL BANKING 
 
 Checks on all member banks shall be received at 
 par by reserve banks. 
 
 Reserved banks will also receive at par or at a very 
 slight charge, checks drawn on banks that are mem- 
 bers of other districts, although it is not so stated in the 
 bill. It is implied in the sentence providing that the 
 reserve banks can exchange with one another checks 
 in their respective districts.^ 
 
 Mr. WoKe forecasts the collection of checks 
 something like this: Member bank A sends its 
 checks to the federal reserve bank for collection; 
 they will immediately be credited to bank A, 
 but will not count as reserve until paid. Checks 
 against bank A will be charged to its account 
 after they pass through the reserve bank to bank 
 A. Bank A is thus saved the necessity of making 
 remittances for checks against it. Unpaid items 
 will be sent directly to the bank which deposited 
 them with the reserve bank and a charge ticket 
 will be sent to the reserve bank. Bank A's account 
 is then credited with the unpaid items and the 
 depositor's account is charged, and the incident 
 is closed. 
 
 Transfers of balances to and from correspond- 
 ents will simply be made on the books of the fed- 
 eral reserve bank; for banks will still have corre- 
 spondents to collect checks on either member or 
 non-member banks and to collect notes, drafts, etc. 
 
 The cost of collection through the reserve 
 banks, where it is charged, will be applied in a 
 manner quite the opposite of the present practice. 
 The bank on which a check is drawn will pay the 
 
 1 O. Howard Wolfe, "Check Collection under the Federal Re- 
 serve Act," The Chicago Banker, June 20, 1914.
 
 THE FEDERAL RESER\TE ACT 287 
 
 charges. Mr. Wolfe calculates that the total cost 
 of collection will average about ten cents per one 
 thousand dollars, and in time only haK that. 
 This will prove an enormous saving to banks. As 
 a result of the collection possibilities under the 
 new act, checks, " passing at par or almost at par 
 all over the country, tend to produce an ideal 
 bank note." 
 
 The last proposition to which we turn is. What 
 effect will this truly "business man's law" have 
 on business.'^ 
 
 Under the old system, as we have said many 
 times before, banking was too largely dependent 
 on speculation. Rates of discount have been con- 
 trolled, not by the demand for commercial dis- 
 count, but by the call-money market. Further- 
 more, commercial transactions suffered in times 
 of crisis because bankers had to support the then 
 inflexible call loan as far as possible. The Federal 
 Reserve Act seeks to standardize commercial 
 paper and thus to insure a response to the genu- 
 ine industrial needs of the country. 
 
 Under the heading of " How to take Advantage 
 of the Law," Mr. Henry P. Willis ^ says: — 
 
 If the business community contents itself with simply 
 continuing its present methods of operations, it will 
 derive great advantage from the law. It will find (1) 
 that local banks will be able, by rediscounting the 
 paper of local enterprises, to provide the funds needed 
 by such enterprises in their operations; (2) that there 
 will be no such wide fluctuations of interest rates, 
 either geographically or from season to season, as now 
 
 ' " Effect of Bank Act on Business," Rand-McNally Bankers' 
 Monthly, February, 1914.
 
 288 PRACTICAL BANKING 
 
 exists : (3) that there will be no necessity of emergency 
 measures to safeguard the country from the possible 
 results of financial panic or stringency. 
 
 [But] to get the full advantage of the system the 
 business man needs to arouse himself to a new concep- 
 tion of his functions and duties. He needs to bring his 
 methods of borrowing and his view of commercial paper 
 into harmony with European practice, to accustom 
 himself to prompt payment of notes and bills without 
 extended renewals, and to the putting of his business 
 upon a short-term cash basis. He needs further to 
 familiarize himself with the idea of banking in the 
 larger senses as distinct from a mere note-shaving and 
 stock-manipulating occupation, and to prepare to share 
 actively in the management of the new reserve banks 
 and their branches, in which important places have 
 been reserved for him. 
 
 As to what foreigners think of the new system, 
 the Financial Chronicle quotes Mr. Moreton 
 Frewen, a London financial writer : — 
 
 At the close of 1913 London anticipated a bank rate 
 on discounts of six per cent. It has fallen in a fortnight 
 from five to three per cent. Why.? Why have consols 
 jumped 5 points.'' The answer is the new American 
 currency act. Here is Uncle Sam with the power of a 
 hundred Morgans entering the bill-discounting busi- 
 ness and prepared to do the world's business. There- 
 ifore, every banker knows that stringency and con- 
 traction have disappeared, and that a new day has 
 dawned. The act is a bigger thing by all odds for the 
 world's trade than the Panama Canal. The passage 
 of the measure was a greater discovery than half a 
 dozen African gold fields.^ 
 
 ^ This quotation is given by B. D. Harris in Rand-McNally 
 Bankers' Monthly, April, 1914, under head of " The Federal Re- 
 serve Act."
 
 APPENDIX 
 
 The following illustrations from the speech of 
 Representative Seldomridge in the House of Represen- 
 tatives, September 11, 1913, indicate, with a few minor 
 changes, how the Federal Reserve Act proposes to 
 lend an elastic currency: — 
 
 Jones is a merchant who desires to borrow one thousand 
 dollars from his bank in order to purchase goods for his fall 
 trade. Under the operation of this bill he would take his 
 note to his banker and request the loan of one thousand 
 dollars for sixty days. The banker accepts his note and the 
 transaction as far as Jones is concerned is closed until the 
 note matures. Other merchants find themselves in need of 
 funds and they, too, discount their paper with the banker. 
 Later on the banker finds himself unable to meet the demand 
 made upon him for loans, and in order to meet these de- 
 mands, which are legitimate and for commercial purposes, 
 he takes the notes made by Jones and other merchants to 
 the federal reserve bank of his district and offers them for 
 rediscount. The federal reserve bank, finding that the paper 
 presented comes within the provisions of the law, accepts it 
 for rediscount, taking the bank's indorsement as security. 
 If the federal reserve bank finds itself unable to issue cur- 
 rency for the paper without encroaching upon the reserve 
 requirement of this bill, it will take the paper presented for 
 rediscount to the Federal Reserve Board at Washington and 
 request the issuance of Treasury notes (federal reserve notes) 
 to the amount of paper presented. The Federal Board will 
 grant the request if it is satisfied the security is sufficient, 
 and will issue the Treasury notes upon the indorsement of 
 the federal reserve bank. The transaction is a simple one 
 and the borrowers have received the accommodation desired.
 
 290 APPENDIX 
 
 which has enabled them to purchase the goods for their 
 customers and helped the producer to that extent. 
 
 Let us take another illustration : It is harvest time in the 
 West; farmers are bringing their wheat to the market and 
 are anxious to secure currency with which to pay their debts 
 which have accumulated during the winter and spring 
 months. The resources of the banks have been taxed to the 
 utmost and many bankers find themselves at the limit of 
 their loaning power. Under the present law there is no place 
 to which they can go for relief except to the large central 
 reserve banks. It is possible that they may be able to find 
 funds with which to supply their customers, but these are 
 often procured at an additional interest cost; or it may be 
 that they will find the funds in the city absolutely unavail- 
 able, and then the cry goes up for help from the Treasury 
 Department. But what will happen in this crop emergency 
 under the present bill? The agricultural bank will find ample 
 facilities for the rediscount of its agricultural paper and the 
 stress upon our banking institutions at times of crop move- 
 ment will be largely relieved. It is a strange paradox that a 
 wealthy nation like ours should find itself annually in a con- 
 dition of financial inability to meet the needs of our agricul- 
 tural sections. 
 
 The currency which will be issued against the paper 
 described in the bill will have back of it several guarantors; 
 First, it has the liability of the original maker; second, it has 
 the indorsement of the local bank, which carries with it not 
 only all of its assets, but also the double liability of its stock- 
 holders; third, it has the indorsement of the federal reserve 
 bank, which carries with it the assets of all the member 
 banks, together with the double liability of their stockholders 
 and also the assets of the federal reserve bank, including a 
 gold reserve of thirty-three and a third [forty] per cent; 
 and fourth, it has the guaranty of the general Government.
 
 II 
 
 The appended clipping from the New York Times of 
 March 4, 1914, shows how, under the provisions of the 
 new Federal Reserve Act, the withdrawal of required 
 reserves, of federal deposits (if carried out), and the 
 payment of stock subscriptions to the federal reserve 
 banks would affect the national banks of the three 
 classes during the first year. It indicates that none of 
 the three divisions (country, reserve, and central 
 reserve) would, in the aggregate, have to rediscount 
 paper to pay their share into the new reserve banks. 
 
 COUNTRY BANKS 
 
 Commercial deposits January 13, 1914 $2,982,076,000 
 
 Reserve required against same, 12 per cent $357,849,000 
 
 Savings deposits $755,914,000 
 
 Reserve required against same, 5 per cent 37,795,000 
 
 Total reserve required $395,644,000 
 
 Deposit in federal reserve banks, two twelfths of required reser\'e. . $65,940,000 
 Capital and surplus January 13, 1914, $994,066,000 : 3 per cent sub- 
 scription 29,821,000 
 
 United States deposits January 13, 1914 34,264,000 
 
 $130,025,000 
 
 Withdrawals would be 
 
 Two fifths from central reserve city banks $52,010,000 
 
 Three fifths from reserve city banks 78,016,000 
 
 $130,025,000 
 
 Present balances with reserve agents $524,688,000 
 
 Withdrawals 130,025,000 
 
 Leaving balance of $394,663,000 
 
 RESERVE CITY BANKS 
 
 Commercial deposits $1,808,770,000 
 
 Less country bank withdrawals 78,015,000 
 
 $1,730/755,000 
 
 Reserve required against same, 15 per cent $259,613,000 
 
 Savings deposits $98,696,000 
 
 Reserve required against same, 5 per cent 4,934,000 
 
 Total reserve required $264,547,000 
 
 Deposit in federal reserve banks : three fifteenths of required reserve $52,!)0(),()66 
 
 Capital and surplus $447,856,000 ; 3 per cent subscription 13,435,000 
 
 United States deposiU 33,620,000 
 
 Payment account of reserve banks $99,970,000 
 
 Payment account of country banks 78,015,000 
 
 ToUl payments $177,985,000
 
 292 
 
 APPENDIX 
 
 Present cash holdings 
 
 New requirement, six fifteenths of required reserve . 
 Release 
 
 Payment made — 
 
 Cash 
 
 From reserve agents. 
 
 Total 
 
 Present balances with central reserve agents . 
 
 Withdrawals 
 
 Leaving balance of 
 
 CENTRAL RESERVE CITY BANKS 
 
 $268,681,000 
 
 105,818,0 00 
 
 $162,863,000 
 
 $162,863,000 
 15,122,000 
 
 $177,985,000 
 
 $278,098,000 
 15,122,000 
 
 $262,976,000 
 
 Commercial deposits January 13, 1914 $1,579,645,000 
 
 Withdrawals — 
 
 Country banks $52,010,000 
 
 City banks 15,122,000 
 
 Total withdrawals 67,132,000 
 
 Leaving $1,612,513,000 
 
 Reserve required against same, 18 per cent 
 
 Savings deposits $1,244,000 
 
 Reserve required against same, 5 per cent 
 
 Total reserve required 
 
 Deposit in federal reserve banks ; seven eighteenths of required 
 
 reserve 
 
 Capital and surplus, $348,195,000 ; 3 per cent subscription 
 
 United States deposits 
 
 Payment required for own account 
 
 Payment required for account of reserve banks. . 
 Payment required for account of country banks . 
 
 Total 
 
 Present cash holdings, January 13, 1914 
 
 New requirement; eleven eighteenths of required reserve. 
 
 Release 
 
 Total payments required 
 
 Free balance 
 
 [$272,252,000 
 
 62,000 
 $272,314,000 
 
 $105,896,000 
 
 10,445,000 
 
 8,925,000 
 
 $125,266,000 
 15,122,000 
 52,010,000 
 
 $192,398,006 
 
 $429,198,000 
 166,41 8,000 
 
 $262,78bTob6 
 192,398,000 
 
 $70,382,000 
 
 RECAPITULATION 
 
 Banks 
 
 Capital 
 
 Reserve 
 
 U.S. Deposits 
 
 Total 
 payments 
 
 Country . 
 
 $29,821,000 
 13,435,000 
 10,445,000 
 
 $65,940,000 
 
 52,909,000 
 
 105,896,000 
 
 $34,264,000 
 
 33,626,000 
 
 8,925,000 
 
 $130,025,000 
 
 
 99,970,000 
 
 Central Reserve 
 
 125,266,000 
 
 Total 
 
 $53,701,000 
 
 $224,745,000 
 
 $76,815,000 
 
 $355,261,000 
 
 
 
 HOW PAID 
 
 Banks 
 
 Country 
 
 Reserve 
 
 Central Reserve 
 
 Total 
 
 Cash 
 payment 
 
 By draft on 
 reserve banks 
 
 None 
 $162,863,000 
 192,398,000 
 
 878,015,000 
 
 $355,261,000 $78,015,000 
 
 By draft on 
 central re- 
 serve banks 
 
 $52,010,000 
 15,122,000 
 
 $67,132,000
 
 m 
 
 SCOPE AND STATISTICS OF RESERVE BANK 
 
 DISTRICTS 1 
 
 District 1. Location of reserve bank, Boston. 
 Capital at organization, $9,931,740; national banks in 
 district, 446; area of district (square miles), 66,465; 
 population of district, 6,557,841. Territory: Maine, 
 New Hampshire, Vermont, Massachusetts, Rhode 
 Island, and Connecticut. 
 
 District 2. Location of reserve bank, New York. 
 Capital at organization, $20,687,616; national banks 
 in district, 478; area of district (square miles), 49,170; 
 population of district, 9,113,279. Territory: the State 
 of New York. 
 
 District 3. Location of reserve bank, Philadelphia. 
 Capital at organization, $12,993,013; national banks 
 in district, 800; area of district (square miles), 39,865; 
 population of district, 8,110,217. Territory: New 
 Jersey, Delaware, and all of Pennsylvania east of 
 western boundary of McKean, Elk, Clearfield, 
 Cambria, and Bedford Counties. 
 
 District 4. Location of reserve bank, Cleveland. 
 Capital at organization, $11,621,535; national banks 
 in district, 724; area of district (square miles), 183,995; 
 population of district, 7,961,022. Territory: Ohio, all 
 of Pennsylvania not in District 3, the counties of 
 Marshall, Ohio, Brooke, and Hancock in West Vir- 
 ginia, and all of Kentucky east of western boundary 
 of Boone, Grant, Scott, Woodford, Jessamine, Garrard, 
 Lincoln, Pulaski, and McCreary Counties. 
 
 District 5. Location of reserve bank, Richmond. 
 1 From Trust Companies, April, 1914.
 
 294 APPENDIX 
 
 Capital at organization, $6,543,281; national banks in 
 district, 475; area of district (square miles), 173,818; 
 population of district, 8,519,313. Territory: District 
 of Columbia, Maryland, Virginia, North Carolina, 
 South Carolina, and all of West Virginia not in Dis- 
 trict 4. 
 
 District 6. Location of reserve bank, Atlanta. 
 Capital at organization, $4,702,780; national banks in 
 district, 372; area of district (square miles), 233,865; 
 population of district, 6,695,341. Territory: Alabama, 
 Georgia, Florida, all of Tennessee east of western 
 boundary of Stewart, Houston, Wayne, Humphreys, 
 and Perry Counties; all of Mississippi south of north- 
 ern boundary of Issaquena, Sharkey, Yazoo, Kemper, 
 Madison, Leake, and Neshoba Counties; all of the 
 southeastern part of Louisiana east of western bound- 
 ary of Pointe Coupee, Iberville, Assumption, and Terra 
 Bonne Counties. 
 
 District 7. Location of reserve bank, Chicago. 
 Capital at organization, $13,115,925; national banks 
 in district, 984; area of district (square miles), 176,940; 
 population of district, 12,630,383. Territory: Iowa, all 
 of Wisconsin south of northern boundary of Vermont, 
 Sauk, Columbia, Dodge, Washington, and Osaukee 
 Counties; all of the southern peninsula of Michigan; 
 all of Illinois, north of southern boundary of Hancock, 
 Schuyler, Cass, Sangamon, Christian, Shelby, Cumber- 
 land, and Clark Counties; all of Indiana north of 
 southern boundary of Vigo, Clay, Owen, Monroe, 
 Brown, Bartholomew, Jennings, Ripley, and Ohio 
 Counties. 
 
 District 8. Location of reserve bank, St. Louis. 
 Capital at organization, $6,219,323; national banks in 
 district, 434; area of district (square miles), 146,474; 
 population of district, 6,726,611. Territory: Arkansas, 
 all of Missouri east of western boundary of Harrison, 
 Daviess, Caldwell, Ray, Lafayette, Johnson, Henry,
 
 APPENDIX 295 
 
 St. Clair, Cedar, Dade, Lawrence, and Barry Counties; 
 all of Illinois not in District 7; all of Indiana not in 
 District 7; all of Kentucky not in District 4; all of 
 Tennessee not in District 6; and all of Mississippi not 
 in District 6. 
 
 District 9. Location of reserve bank, Minneapolis. 
 Capital at organization, $4,702,864; national banks in 
 district, 687; area of district (square miles), 437,930; 
 population of district, 5,724,893. Territory: Montana, 
 North Dakota, South Dakota, Minnesota; all of Wis- 
 consin not in District 7; and all of Michigan not in 
 District 7. 
 
 District 10. Location of reserve bank, Kansas 
 City. Capital at organization, $5,594,916; national 
 banks in district, 835; area of district (square miles), 
 509,649; population of district, 6,306,850. Territory: 
 Kansas, Nebraska, Colorado, Wyoming, all of Missouri 
 not in District 8; all of Oklahoma north of southern 
 boundary of Ellis, Dewey, Blaine, Canadian, Cleve- 
 land, Pottawatomie, Seminole, Okfuskee, Mcintosh, 
 Muskogee, and Sequoyah Counties; all of New Mexico 
 north of southern boundary of McKinley, Sandoval, 
 Santa Fe, San Miguel, and Union Counties. 
 
 District 11. Location of reserve bank, Dallas. 
 Capital at organization, $5,634,091 ; national banks in 
 district, 726; area of district (square miles), 404,826; 
 population of district, 5,310,561. Territory: Texas, all 
 of New Mexico not in District 10; all of Oklahoma not 
 in District 10; all of Louisiana not in District 6; and 
 the Counties of Pima, Graham, Greenlee, Cochise, and 
 Santa Cruz in Arizona. 
 
 District 12. Location of reserve bank, San Fran- 
 cisco. Capital at organization, $8,115,524; national 
 banks in district, 514; area of district (square miles), 
 693,658; population of district, 5,389,303. Territory: 
 California, Washington, Oregon, Idaho, Nevada, and 
 Utah, and all of Arizona not in District 11.
 
 I
 
 BIBLIOGRAPHY 
 
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 1910. 
 Breckinridge, . "The Relation of State Banks and Trust 
 
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 Clare, George. The A B C of the Foreign Exchanges. Macmil- 
 
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 Conant, Charles A. A History of Modern Banks of Issue. 
 
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 15, 17, 18, 19. 
 Conway, Thomas, Jr. "Probable Changes of the Assets of 
 
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 ** Currency Bill; how the Bill Operates; the History of the 
 
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 Dewey, Davis Rich. Financial History of the United States. 
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 Escher, Franklin. Elements of Foreign Exchange. Bankers' 
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 Hulbert, E. D. "Inauguration of New Banking System In- 
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 Jess, Stoddard. "Probable Changes in Banking Methods 
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 1914. 
 
 Johnson, A. B. Treatise on Banking. Utica, 1850. 
 
 Kay, Cullom W. Address before the American Institute of 
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 Letter from the Secretary of the National Monetary Com- 
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 Lipman, F. L. "Operation of Federal Reserve." Rand- 
 McNally Bankers' Monthly, May, 1914. 
 
 Margraff, Anthony W. hiternational Exchange. Fergus 
 Printing Company, Chicago, 1903.
 
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 McLeod, Henry D. The Elements of Banking. Longmans, 
 
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 Noble, John A. "Europe favors the Establishment of 
 
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 National Monetary Commission Series, 61st Congress, 
 
 2d Session, Senate Document 572. 
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 Post Office Department. Sundry Documents regarding 
 
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 Publications of the National Monetary Commission (upward 
 
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 Robinson. Humphrey. A Simple Explanation of Modern 
 
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 United States Statutes (National Bank Act, Emergency- 
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 Vreeland, Edward B. Speech in the House of Representa- 
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 Withers, Hartley. Money Clianging. Smith, Elder & Co., 
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 INDEX 
 
 Acceptance of long bills. See For- 
 eign exchange, and Federal Re- 
 serve Act. 
 
 Aftalion, A., Essai d'une theorie 
 des crises genirales el 'p^ri- 
 odiques, 213, and note. 
 
 "Aldrich scheme," a plan for a 
 centralized banking system, 
 264 et seq.; description of con- 
 trol and management, 265, 266; 
 purpose of the proposed sys- 
 tem, 266, 267. 
 
 Aldrich- Vreeland Act, tax on cir- 
 culation, 141; amendment by 
 Federal Reserve Act, 141, note; 
 passage, 156; notes issuable on 
 other security than United 
 States bonds, 156; national 
 currency association, forma- 
 tion and scope, 157; direction 
 and management, 157, 158; 
 application for additional cur- 
 rency, 158; ratio of currency 
 to security, 158; provisions for 
 non-member banks, 159; total 
 notes issuable under, 159; ob- 
 jections to the scheme, 160. 
 
 Andrew, A. Piatt, 177, 254. 
 
 Antiquity of banking practices, 
 2; contrast of theories of con- 
 servative and radical, 2, and 
 note; Assyria, 4, 5, and note; 
 Greece and Rome, 5, 6; Europe, 
 7 et seq. 
 
 Assistant cashier, 43, 44. 
 
 Auditing bank, 46. 
 
 Bank, meaning of the word, 7, 8, 
 and note. 
 
 Bankers' long bills, 191-95; lev- 
 elers of world interest rates, 
 191; illustration. 191-93; prof- 
 its arising from interest and ex- 
 change, 193-95. 
 
 Bank functions, antiquity of loan- 
 making, 3 et seq.; a credit ex- 
 changing institution, 15, 16; 
 lending of credit, 73. 
 
 Banks not philanthropic institu- 
 tions, 20. 
 
 Banking in France, John Law's 
 Banque Generale, 11; under 
 Turgot, 12; Napoleon and the 
 Bank of France, 12; figm-es 
 for present Bank of France, 12, 
 13; notes, 146; French accom- 
 modations for foreign corres- 
 pondents, 208. 
 
 Banking in Germany, Reichs- 
 bank, 11; other banks of issue, 
 11; notes, 146; accommoda- 
 tions for foreign correspond- 
 ents, 208, 209; Filialen, 208. 
 
 Banking in Italy, 209, 210. 
 
 Banking in the United States, be- 
 fore 1781, 13; Bank of North 
 America, its purpose and foun- 
 der, 13; First Bank of the 
 United States, 14, 219; Presi- 
 dent Jackson and the Second 
 Bank of the United States, 14, 
 223; state banks, 1832-37, 15; 
 death of the central bank under 
 Pennsylvania law, 15; New 
 York safety fund, 15; indepen- 
 dent treasury, 15; national 
 banks, 15; growth of national 
 banks, 145; state bank.s, 1811- 
 18, 223, 228, 229; national 
 banks and crisis of 1873, 236, 
 237; New York banks in 1873, 
 235, 230. 
 
 Bank of Amsterdam, formation, 
 how governed, nature of assets, 
 9, 10. 
 
 Bank of England, formed, 10; 
 notes, 146; its functions, 200- 
 08.
 
 302 
 
 INDEX 
 
 Bank of Hamburg, 11. 
 
 Bank of Netherlands, 10. 
 
 Bank of Venice, origin and func- 
 tions, 7. 
 
 Bank ledger. See Reciprocal ac- 
 counts. 
 
 Bank post remittances, 185. 
 
 Bankrupt, alleged meaning of 
 word, 7, 8. 
 
 Baring failure, 239. 
 
 Beveridge, W. H., Unemploy- 
 ment, 213, note. 
 
 Bibliography, 297-300. 
 
 Bills of exchange. See Foreign 
 exchange. 
 
 Bill stamp, 192. 
 
 Branch banking in England, 208. 
 
 Bulkley, Representative, 260, 
 note; 263, 291. 
 
 Burton, Theodore E., Crises and 
 Depressions, 219, and note; 
 228, 229. 
 
 Business poorly accommodated 
 under National Bank Act, 261- 
 63. 
 
 Cable transfers, 194-95. 
 
 Canals, 222. 
 
 Cannon, James G., Clearing 
 Houses, 162, 170, note. 
 
 Capital stock, general consid- 
 eration, 29; why it should be 
 widely distributed, 29; account 
 on general books, 118; of na- 
 tional banks, 137. 
 
 Cashier, nature of his functions, 
 43; signing checks and other 
 documents, 44, 45, 48; loan- 
 granting powers, 48; expense 
 items of the bank, 48, 49; rela- 
 tion to public, 49, 50. 
 
 Central bank. See Aldrich 
 scheme, and Federal Reserve 
 Act. 
 
 Centralization of executive pow- 
 er in bank, 35. 
 
 Certificates of deposit, 127, 128. 
 
 Certification of checks, 48. 
 
 Charge slips, 116. 
 
 Chase, Salmon P., 134, and note; 
 his attack of financial situation 
 
 a currency problem, 134, note. 
 
 Checks, stopping payment, 57, 
 58; informahties, 63, 65. 
 
 Circulating notes. See National 
 Bank notes. Federal Reserve 
 Act, and Aldrich- Vreeland Act. 
 
 Clare, George, A B C of the For- 
 eign Exchanges, 193. 
 
 "Clean" bills, 196, note. 
 
 Clearing houses, regulation of ex- 
 change rates, 85, 171, 172; 
 clearing-house certificates as 
 reserve, 143; definition, 161; 
 broadest functions, 162; New 
 York Clearing House, 163; a 
 morning's clearing, 163-65, 
 167; fines, 166; collections of 
 credits and payment of debits, 
 166, 167; media for payment 
 of balances, 167; statistics for 
 New York Clearing House, 169; 
 more special functions, 170, 
 171; possibilities, 170, note; 
 loans to government, 171 ; mu- 
 tual assistance of members, 
 172, 173; clearing-house loan 
 certificates, 173-75, 236; other 
 certificates, 175-76, 176, note; 
 query as to the legality of these 
 other certificates, 196, note; 
 growth of clearing-house activ- 
 ities in the United States, 
 176, 177. 
 
 Cleveland, President, and the 
 Sherman Silver Act, 242. 
 
 Collateral security, 38, 76. 
 
 Collection department, distin- 
 guished from Transit depart- 
 ment, 91; items handled in, 91 
 et seq.; utility of, 91; why some 
 checks are sent through for col- 
 lection, 92; indebtedness liquid- 
 ated by drafts, 93, 94; collec- 
 tion department notes, 94, 95; 
 stocks, bonds, mortgages, etc., 
 95, 96; value of reciprocal ac- 
 counts, 110, 111. 
 
 Commercial letters of credit, 
 definition, 198; benefits, 198; 
 supposititious case, 199-202. 
 
 Commercial long bills, nature.
 
 INDEX 
 
 303 
 
 195, 196, note; of advantage 
 to bankers, 196, 197; kinds of 
 bills, 197. 
 
 Commercial paper, 76, 283, 284. 
 
 Commissions for accepting fi- 
 nance bills, 192. 
 
 Conant, Charles A., History of 
 Modern Banks of Issue, 5, 6, 8, 
 211, 220; 224, 228, 229, 231, 
 240, 241. 244. 
 
 Conway, Thomas, Jr., 284. 
 
 Cooperation between banks and 
 their customers, 20. 
 
 Correspondence of the bank, 44. 
 
 Cortelyou, Secretary of the 
 Treasury, 251, 253. 
 
 Counterfeits, 55. 
 
 Credit, lending of, the vital func- 
 tion of banking, 73; balances 
 required on lines of credit, 75. 
 
 Crises in the United States, the- 
 ories, 212-14, 213, note, 214, 
 note; Mitchell's views, 215- 
 18; panic of 1884 and financial 
 stringency, see under these 
 headings. 
 
 Crises of 1814 and 1818, govern- 
 ment indebtedness and trade 
 declensions, 219; state bank- 
 ing, 219, 220; trade conditions 
 after 1814, 220; decrease in 
 state-bank circulation, 220; a 
 depression due to defective 
 moneta,ry system, 221. 
 
 Crisis of 1837, preceded by great 
 territorial and business expan- 
 sion, 221; canals, 222; popula- 
 tion, 222; land speculation, 
 222, 223; cotton lands, 223; 
 "pet" banks of Jackson, 223; 
 efforts to smash the Bank of 
 the United States, 223; "specie 
 circular," 224; speculation in 
 land the basis of crisis, 224, 
 225; rapid liquidation from 
 April, 1837, 225, 226; distress, 
 226, 227. 
 
 Crisis of 1857, precedent period 
 filled with railroad construc- 
 tion, 227-29; increase in bank- 
 ing facilities, 228-29; discov- 
 
 ery of gold and increased pro- 
 duction, 229, and note; failure 
 of crops, and great business 
 expansion, 230; crash, 230, 231; 
 suspension of specie payments, 
 231; causes, 231, 232. 
 
 Crisis of 1873, accelerated activ- 
 ity after war, 232, 233; in- 
 creased railroad facilities, 233; 
 securities at heavy discount, 
 233; money stringency, 233; 
 crash, 234; involved railroad 
 companies and security bank- 
 ers, 234; other banks, 234, 235; 
 closing of the Stock Exchange, 
 235; action of New York banks 
 in pooling reserves, 235 ; clear- 
 ing-house loan certificates, 236; 
 national banks' relation to cri- 
 sis, 236, 237; imprecedented 
 depression, 238. 
 
 Crisis of 1893, variety of "get- 
 rich-quick" speculations, 239, 
 240; electrical development, 
 240; land "booms," 240; Eng- 
 lish crisis of 1890 felt in 1893, 
 240; part silver played, 240, 
 241; demand of gold for silver 
 certificates, 241; sub- treasury's 
 action, 241; gold exports, 242; 
 repeal of Sherman Act, 242; 
 bank failures, 242, 243; cur- 
 rency at premium, 242; failures, 
 243; railroads in bankruptcy, 
 243. 
 
 Crisis of 1907, increase in mer- 
 chandise exported, 244; great 
 lateral manufacturing expan- 
 sion, 244; protective tariff, 245; 
 mining "booms," 245; gold 
 production, 245; increase in 
 banking facilities, 245, 246, 
 257; value of securities out- 
 standing, 247; premonitions 
 of approaching li((uidutions, 
 247-50; early failures, 251; 
 Mercantile National liank and 
 the Clearing House, 252; run 
 on Knickerbocker Trust Com- 
 pany, 252; other runs, 252, 
 253; Morgan syndicate places
 
 304 
 
 INDEX 
 
 $35,000,000 on call, 253; cur- 
 rency shortage, 253, and note; 
 other failures, 253, 254; panic 
 spreads to interior banks, 254 ; 
 shipments of money West, 254; 
 paralysis of exchanges, 255; 
 fall in prices of securities, 255, 
 256; increase in call loans, 256; 
 reserves, 256; New York banks, 
 action contrasted with that in 
 1873, 256, 257. 
 
 Davis, Andrew MacFarland, on 
 the national bank, 134, note. 
 
 Days of grace, 78. 
 
 Debs, Eugene V., 248. 
 
 "Del Credere," 185. 
 
 Del Mar, Alexander, his theory 
 of money, 146; its fallacies, 
 146-48, note. 
 
 Demand bills, 190. 
 
 Deposits, creation of, by lending 
 credit, 16, 73, 74; cash, 17, 73, 
 74; individual, lOiet seq.; bank, 
 110 et seq.; accounts on gen- 
 eral books, 118 et seq.; federal 
 deposits, 142. 
 
 Development of a medium of ex- 
 change, 3; inconvenience of 
 bullion, 3. 
 
 Dewey, Davis Rich, Financial 
 History of the United States, 
 223, 233, 241, 243. 
 
 Directors, their duties and obli- 
 gations, 30, 31; bank's policy 
 in their keeping, 31; variation 
 in activities of directorates, 31 ; 
 novel plan to insure attendance 
 at meetings, 32; motive power 
 of bank, 32; directors of na- 
 tional banks, 138, 139. 
 
 Directors of federal reserve banks. 
 See Federal reserve banks. 
 
 Discount rates {see Loans and dis- 
 counts); on finance bills, 192. 
 
 Dividends, payable by national 
 banks semi-annually, 144; by 
 federal reserve banks, 272. 
 
 Dockery, A. M., 131, note. 
 
 Documentary acceptance bills, 
 196, note. 
 
 Documentary payment bills, 196, 
 note; 207, 208. 
 
 Domestic exchange department. 
 See Exchange department. 
 
 Drafts and checks sent at " cash." 
 See Foreign cash items depart- 
 ment. 
 
 Drafts and checks sent for "col- 
 lection." See Collection de- 
 partment. 
 
 "Dummies," 45, 46. 
 
 Embargo, effect of, 219. 
 
 Emergency Currency Act of 1908. 
 See Aldrich-Vreeland Act. 
 
 EngUsh banking, 10. See also 
 Bank of England. 
 
 Erie Canal, 222. 
 
 Escher, Franklin, Foreign Ex- 
 change, 178, note. 
 
 European accounts, England's 
 supremacy, 206; exchange 
 functions of Bank of England, 
 206-08; the French account, 
 208; German account, 208-09; 
 other accounts, 209. 
 
 Exchange charges (see also Ex- 
 change department, and For- 
 eign exchange), 65, 85, 89, 100, 
 101. 
 
 Exchange department, signifi- 
 cance of the word "exchange," 
 97; New York an "exchange" 
 center, 97; reason for New 
 York's preeminence, 97-99; ef- 
 fect of federal reserve system, 
 99, and note; premium and dis- 
 count on exchange, 100, 101, 
 255; sources of bank's supply 
 of exchange, 101; can be con- 
 ducted profitably, 102; travel- 
 ers' cheques, 102, 103; value of 
 reciprocal arrangements, 110, 
 111. 
 
 Farm loans, 281, 282. 
 
 Federal Advisory Council, 274. 
 
 Federal Reserve Act, amend- 
 ment to Aldrich-Vreeland Act, 
 141, note; limitation of 5 per- 
 cent redemption fund, 142,
 
 INDEX 
 
 S05 
 
 note; provision for liabilities ex- 
 ceeding capital stock, 144, 145; 
 national banks not required 
 to have circulating notes, 
 150, note; open discount mar- 
 ket, 184, and note; condition of 
 currency before passage of act, 
 258-63; seasonal demand for 
 expansion of currency, 262, 
 263; reserve requirements, 279, 
 280, 281 ; does not create a cen- 
 tral bank, 282, 283; "commer- 
 cial paper," 283, 284; changes 
 in banking requirements and 
 practices, 284, 285 ; how it oper- 
 ates, 289, 290; movements of 
 reserves, 291, 292. 
 
 Federal Reserve Banks, organ- 
 ization, 268; regional banks, 
 269; banks capable of mem- 
 bership, 269; capital subscrip- 
 tion requirements, 270, 271; 
 directors, 271, 272; branches, 
 272; exempt from taxes, 272; 
 dividends, 272; powers, 275, 
 276; deposits of public monies, 
 276; notes, 276, 277, 278; col- 
 lections, 278, 285-87; retire- 
 ment of national bank circula- 
 tion, 278; reserve requirements, 
 279-81; examinations of mem- 
 ber banks, 281 ; farm loans, 281, 
 282; additional powers, 282; 
 federal reserve districts, 293, 
 295. 
 
 Federal Reserve Board, promul- 
 gation of rules for regional 
 banks, 269, 270; a supreme 
 court of the system, 273; mem- 
 bership, 273; powers, 274, 275. 
 
 Filialen, 208. 
 
 Finance bills. See Bankers' long 
 bUls. 
 
 Financial stringency of 1890, 2.39. 
 
 Financial Age, 245, 219, 283, 
 284. 
 
 Fisk and Hatch, failure of, 234. 
 
 Foreign cash items dcpartrnenl, 
 large volume of out-of-town 
 items, 84; use of this depart- 
 ment to reduce exchange 
 
 charges, 85, 98; clearing-house 
 regulation of exchange, 85; 
 "credits" and "returns," 86; 
 sending letters, 86, 87 ; indorse- 
 ment, 87; remittances, 88; un- 
 pleasant experiences in collect- 
 ing, 88; unpaid items, 89; pro- 
 tested checks and drafts, 89; 
 relation to reciprocal accounts, 
 112; handled through clearing 
 house, 170, note. 
 
 Foreign exchange, basis of, 178; 
 settlement of international 
 debts and credits, 178, 179; the 
 market individualistic, 179; 
 items of credit and debit, 180, 
 181; gold export point, 181, 
 182, 255; gold import point, 
 181, 182, 183, 184; buying bul- 
 lion in England and United 
 States, 183, 184; European dis- 
 count markets, 184; accept- 
 ance of long bills, 184; "Giro 
 Conto," 185; "Del Credere," 
 and " Bank Post" remittances, 
 185; foreign department a com- 
 plete bank, 186; reasons for 
 conducting a foreign depart- 
 ment, 186; "first" and "sec- 
 ond" of exchange, 187; sharp 
 competition in the market, 187; 
 fluctuations on markets, 187, 
 188; those who have commer- 
 cial bills to sell, 188; demand 
 for exchange, 188; "arbitrag- 
 ing in exchange," 189; illustra- 
 tion of gold's short path to its 
 destination, 189, 190; free gold 
 markets, 190; demand l)ills, 
 190; long bills, 190, 191; bank- 
 ers' long bills, 191-94 ( see also 
 under Bankers' long bills); ca- 
 ble transfers, 195; commercial 
 long bills (see Commercial long 
 bills); commercial letters of 
 credit, 198-202; travelers' let- 
 ters of credit, 203, 200; Euro- 
 pean accounts (see European 
 accounts); conclusion, 210. 
 
 Formation of national banks. 
 See National bunks.
 
 306 
 
 INDEX 
 
 Fraud, prevention of, by cashier, 
 
 45; by paying teller, 54, 55. 
 Frewen, Moreton, 288. 
 
 Garnishments, 57. 
 
 General books, necessity of some 
 recapitulation, 118, 119; gamut 
 
 , of general accounts, 118, 119; 
 capital stock, 119; surplus and 
 undivided profits, 119; loan 
 and discount account, 120; in- 
 dividual, bank, and public de- 
 posits, 120; cashiers' checks, 
 120; clearing-house accounts, 
 120; miscellaneous accounts, 
 120, 121. 
 
 "GiroConto," 185. 
 
 Glass, Carter, 267. -See also Fed- 
 eral Reserve Act. 
 
 Goddard, F. A., before Missouri 
 Bankers' Association, 248. 
 
 Gold production, 229, and note; 
 245. 
 
 Harris, B. D., 288, note. 
 Heinze, F. Augustus, 252. 
 Heinze, Otto C, 251. 
 Hepburn, A. Barton, 250. 
 Hull, George H., Industrial De- 
 pressions, 214, note. 
 
 Illinois Central Railroad Com- 
 pany, receivership of, 231. 
 
 Independent treasury, adopted, 
 15; abolished (see Federal Re- 
 serve Act). 
 
 Individual ledger, simple records 
 of individual depositors, 104; 
 speedy work required, 104; 
 collateral duties of individual 
 bookkeeper, 104, 105; nature 
 of individual ledger, 105; fre- 
 quent posting, 105, 106; book- 
 keepers' snares, 105; balancing, 
 three principal methods, 107- 
 09. 
 
 Indorsed notes, 79. 
 
 Inexpediency of 100 per cent re- 
 serves, 17. 
 
 Interest and discount, 76 ; fluctu- 
 ation in rates, 77; high rates 
 
 for small loans, 78; charts for 
 computing, 78, 79; interest on 
 savings accounts, 121; charged 
 by national banks, 143. 
 International financial adjust- 
 ments, 22. See also Foreign 
 Exchange. 
 
 Jay Cooke and Company, failure 
 
 of, 234. 
 Jess, Stoddard, 283. 
 Johnson, A. B., 39. 
 
 Kay, CuUom W., 56. 
 
 Kelly, Edmund, Twentieth-Cen- 
 tury Socialism, 252, note. 
 
 Kenyon, Cox and Company, fail- 
 ure of, 234. 
 
 "Kiting," 45. 
 
 Knickerbocker Trust Company, 
 run on, 252. 
 
 Ledger. See Reciprocal accounts, 
 and Individual ledger. 
 
 Letters of credit. See Travelers' 
 letters of credit; Foreign ex- 
 change. 
 
 Liabilities of national banks 
 which may exceed capital 
 stock, 144, 145. 
 
 Liability of shareholders in gen- 
 eral, 29. 
 
 Lincoln Trust Company, run on, 
 252. 
 
 Loans and discounts, principal 
 divisions, 23, 24; time of ma- 
 turity, 24, 40, 78; loans on farm 
 lands, 24 ; call loans, 25 ; collat- 
 eral, 39, 76; collection, 40; man- 
 ner of making loans and dis- 
 counts, 73 et seq.\ rate, 76, 77; 
 life of paper, 78; waivers and 
 agreements in note forms, 79; 
 indorsements, 79; protests, 79, 
 83; bank record of loans and 
 discounts in register, ledger, 
 and tickler, 80, 81; collection 
 of out-of-town obligations, 82, 
 83, 94, 95; account on general 
 books, 120. 
 
 Long bills, 190 et seq. 
 
 I 
 1
 
 INDEX 
 
 307 
 
 McAdoo, William G., 267. 
 
 McLeod, H. D., Elements of Bank- 
 ing, 74r. 
 
 Margraff, International Exchange, 
 185, 201. 
 
 May, R. D., Das Grundgesetz der 
 Wirtschaftskrisen, 213, note. 
 
 Medium of exchange, develop- 
 ment of, 3; inconvenience of 
 bullion, 3. 
 
 Meetings of shareholders, 29. 
 
 Missouri, Texas and Pacific Rail- 
 road Company, 234. 
 
 Mitchell, Wesley C, Business Cy- 
 cles, 211, 212, 215-18, 254; 
 Economic Journal article, 283, 
 285. 
 
 Money in the United States, 21. 
 
 Money-changers of Florence, 7. 
 
 Morgan, J. Pierpont, 253. 
 
 Morse, C. W., 251, and note. 
 
 Motives for organizing a bank, 
 28. 
 
 National banks, 15; a war meas- 
 ure, 134; natm-e of the nation- 
 al bank currency, 135; first 
 steps in organization, 135, 136; 
 Comptroller's inquiries, 135, 
 note; capital stock, 137; in- 
 crease or reduction of capital, 
 137, 138; participation of share- 
 holders, 138; directors, 138, 
 139; depository for United 
 States funds, 142; interest on 
 federal deposits, 142; banks 
 classified according to reserve, 
 143, 279, 280; authorized rate 
 of interest, 143; incapacity to 
 accept its stock as collateral, 
 144; limited ability to hold 
 realty, 144; dividends, 144; lia- 
 bilities exceeding capital stock, 
 144, 145; growth, 145; required 
 circulation, 150; not required 
 to have circulating notes under 
 Federal Reserve Act, 150, note; 
 278; purchase of bonds, 150; in 
 1873, 230, 237. 
 
 National bank notes, 135; profit 
 on investment, 139, 140; tax 
 
 on notes issued under Act of 
 May 30, 1908, 141, and note; 
 security for paper currency, 
 141, 146, 147; reducing com- 
 mercial values to currency, 
 147, 148; super-safety of na- 
 tional bank notes, 148, 149; a 
 bank note a guaranteed I O U, 
 149; state circulation taxed, 
 135, 149; denominations, 150; 
 receivable for what, 151 ; meth- 
 od of redeeming notes, 151, 
 152; gold certificates issued by 
 national banks, 152; criticism 
 of national bank currency, 153- 
 55, 258-60; awkward expansion 
 and contraction, 155, 156; pro- 
 visions for emergency currency, 
 see Aldrich-Vreeland Act. 
 
 National cmrency associations. 
 See Aldrich-Vreeland Act. 
 
 National Monetary Commission, 
 its formation, duties, and ac- 
 complishments, 153, 154; its 
 personnel, 154, note; report of 
 Senator Aldrich, 154. 
 
 New York, exchange center, 97- 
 99; relative importance of New 
 York in national bank depos- 
 its, 103. 
 
 New York Warehouse and Pro- 
 duce Company, 234. 
 
 Northern Pacific Railroad Com- 
 pany, 234. 
 
 Noyes, Alexander D., History of 
 the National Bank Currency, 
 154-56, and 156, note. 
 
 Ohio Life Insurance and Trust 
 Company, failure of, 230. 
 
 Overdrafts, 40. 
 
 Owen-Glass Currency Bill. See 
 Federal Reserve Act. 
 
 Panic of 1884, a financial spec- 
 tacle, 2.38; causes, 238, 239. 
 
 Paton, Thomas B., 130. 
 
 Paying teller, his department 
 pulse of the bank's policy, 51; 
 familiarity with signatures and 
 accounts, 51, 52; his charge of
 
 308 
 
 INDEX 
 
 money and vaults, 52, 53; ne- 
 cessity for clear-headed teller, 
 53; frauds and counterfeits, 54, 
 55; garnishments, 57; "stop 
 payment" checks, 57, 58; ex- 
 amination of signatures on 
 day's checks, 59; balance, 59. 
 
 Personnel of bank directorates, 
 30. 
 
 Postal savings banks, organized, 
 130; provides for small deposi- 
 tor, 130; banlcs acting as reposi- 
 tories of deposits, 130, 132, 
 note; interest, 130; character 
 of depositors, 131, note; statis- 
 tics, 131; note, 132, note; con- 
 version of deposits into bonds, 
 132, note; 133. 
 
 Powers of national bank. See 
 National banks. 
 
 Presidencies, range of, 36. 
 
 President, selection, 35; organ- 
 izes work of new bank, 36; 
 cares for broad development of 
 bank's reputation, 36, 37; his 
 extension of the bank's credit, 
 37 et seq.; the dangers in lend- 
 ing, 38 et. seq.; collateral secur- 
 ity, 38; legal knowledge, 39; 
 necessity for completing work 
 each day, 40, 41; popular con- 
 ception of president. 
 
 Promissory note, origin, 8. 
 
 Quin, Representative, 262. 
 
 Railroads, 228. 
 
 Real estate mortgages, 76; abil- 
 ity of national banks to hold, 
 144. 
 
 Receiving tellers, nimiber and 
 distribution of work, 62; dili- 
 gence required in discovering 
 check informalities, 63-65 ; 
 common mistakes in deposit 
 slips, 64; ambiguous figures, 
 64 ; collecting exchange charges, 
 65; balance, 66-71; counting 
 money, 67-69; hindrances to 
 speedy balances by, 70, 71. 
 
 Reciprocal accounts, based on 
 
 mutual exchange of business 
 between banks, 110; favorable 
 exchange and collection rates, 
 110, 111; accounts cleared im- 
 mediately on demand or pe- 
 riodically, 111, 112; rulings of 
 the ledger, 112; relation to 
 . transit department, 112; checks 
 received from various depart- 
 ments and charged, 113; in- 
 terest on reciprocal accounts, 
 113; reconcilement of accounts, 
 114-16; differences in accounts 
 explained, 115-17; "charge 
 slips," 117. 
 
 Regional banks. See Federal re- 
 serve banks. 
 
 Relation of lending to production 
 and liquidation to consump- 
 tion, 18. 
 
 Reserve, nature of, 19 et seq.; re- 
 serve under national bank act, 
 19, 20, 143; savings banks' re- 
 serve, 125; awkwardness under 
 the National Bank Act, 259. 
 
 Reserve in 1907 crisis, 256. 
 
 Reserve under Federal reserve 
 system, 279-81. 
 
 Reserve banks. See Federal re- 
 serve banks. 
 
 Robinson, Humphrey, 73,75, 140. 
 
 "Runs" on banks. See Crises. 
 
 Savings department, profitable- 
 ness of savings accounts to 
 banks, 123; growth of savings 
 institutions, 124; savings ac- 
 counts in commercial banks, 
 124, 125; reserve, 125; charac- 
 ter of savings deposits, 126; 
 schemes to induce savers, 126, 
 127; interest, 127; certificates 
 of deposit, 127, 128; organiza- 
 tion of department, 128, 129; 
 postal savings banks, see under 
 Postal savings banks. 
 
 Scherer, William, 169, note; and 
 170, note. 
 
 Schiff, Jacob H., 251, note. 
 
 Seldomridge, Representative, 
 287.
 
 INDEX 
 
 309 
 
 Shaw, Leslie, M., 251, note. 
 
 Sherman Silver Bill, 240, 241, 
 repeal of, 242. 
 
 "Specie Circular," 224. 
 
 Sprague, O. M. W., History of 
 Crises under the National Bank- 
 ing System, 234, 236, 237, 239, 
 256. 
 
 Stock exchange and the national 
 bank, 260, 261. 
 
 Stockholders, 28-30; of national 
 banks, 138. 
 
 Strauss, Albert, Columbia Uni- 
 versity lecture on Foreign Ex- 
 change, 182, 183, 190, 193, 194, 
 201. 
 
 Surplus account on general books, 
 119. 
 
 Taussig, F. W., before Economics 
 
 Club, 247. 
 Thomas, E. R., 252, and note. 
 Thomas, O. P., 252, and note. 
 Three VV's, the failure of, 225, 
 
 and note. 
 
 Transit department. See For- 
 eign cash items department. 
 
 Travelers' cheques, 102, 103. 
 
 Travelers' letters of credit, uses, 
 203; form, 204; identification, 
 205; how charges are made, 
 205, 206. 
 
 Trust Company of North Ameri- 
 ca, run on, 252. 
 
 Undivided profits account on 
 general books, 119. 
 
 Vanderlip, Frank A., 15, 16, 253. 
 Vaults, 52, 53. 
 Vice-president, 41, 42. 
 
 Weed, T. L., 131, note. 
 
 Welldon, Samuel A., Digestof State 
 Banking Statutes, 15, note. 
 
 White, Horace, 73, 74. 
 
 Willis, Henry P., 287, 288. 
 
 Windom, Secretary of the Treas- 
 ury, 239, 241. 
 
 Wolfe, A. Howard, 286, 287.
 
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