BANKS AND BANKING 



578 



BANKS AND BANKING 



time loans. A modern savings bank, viewed 

 as a borrower, has practically the same func- 

 tions as the earliest banks in Europe. It re- 

 money on deposit, and issues a receipt, 

 in the form of a pass-book or bank-book, which 

 is merely a convenient way of keeping a num- 

 ber of receipts together. If the depositor wants 

 to draw all or part of his money, he must take 

 his pass-book to the bank, where the proper 

 deduction is entered on his account (see SAV- 

 INGS BANK, with subtitles Postal Savings Bank; 

 School Savings Bank). 



In large cities the banks sometimes become 

 borrowers in a technical sense, borrowing sunqs 

 of money at fixed rates of interest and promis- 

 ing payment on or after specified dates. In 

 such cases certificates of deposit are issued as 

 evidence of the banks' obligations. Such sums 

 are really lent, and they are not subject to 

 withdrawal by check. It should be noted that 

 the aggregate of certificates of deposit of all 

 the banks in the United States, both state and 

 national, would represent but a very small 

 percentage of the total deposits of all the 

 banks. 



Banks as Lenders. Loans by banks are either 

 call loans or time loans. Call loans must be 

 repaid on demand; time loans are made for a 

 definite period. Banks usually lend money on 

 commercial paper, or on personal notes secured 

 by the deposit of collateral, usually stocks or 

 bonds. In the majority of cases the borrower 

 gets his loan in the form of a deposit credit, 

 against which he may draw checks. In cities, 

 where the check system is fully developed, this 

 is sufficient ; but in country districts, where 

 checks are not accepted so freely, a substitute 

 is sometimes needed. Country banks some- 

 times issue certificates of deposit in lieu of 

 notes accepted for discount, but this course is 

 rather unusual and not altogether approved by 

 the best banks. 



The money which a bank lends is either its 

 capital or the deposits it has received. Its 

 capital, incidentally, must be enough to inspire 

 confidence in the public. The larger the bank's 

 capital, the more the bankers themselves have 

 at stake, the greater the feeling among the 

 depositors that the bank will be managed con- 

 servatively. Practically the whole of the bank's 

 capital can be used in its business. Of its 

 deposits, however, a varying portion must, be 

 held as a reserve. The bank's customers are 

 constantly adding to and drawing from their 

 accounts, and the bank must keep enough 

 cash on hand to meet ordinary demands. At 



en tain periods, for example, in the harvest 

 season, the banks are usually paying out larger 

 amounts than they are taking in. Experienced 

 bankers make allowances for such conditions. 

 If the bank is unable to meet the demands 

 made upon it for cash, it is said to suspend 

 payment, and is usually forced to wind up its 

 business. If the public has not lost confidence 

 in the management, a reorganization, involving 

 the addition of new capital, sometimes takes 

 place. On the other hand, it is the business 

 of the banker to anticipate demands and have 

 currency ready, but if demands are unexpected 

 and he has paper of value, he can always 

 rediscount this paper with the banks in reserve 

 cities, if not with the Federal Reserve Bank; 

 thus he has the ability to supplement his cash 

 with quick returns by the rediscount of paper 

 of a certain character. 



Banks organized under charters from the 

 Canadian and United States governments are 

 required by law to keep their reserves at a 

 point thought to be safe in normal times (see, 

 below, Bank Reserves; Banking in Canada). 

 In some states, however, there is no restriction 

 on private bankers, who are thus allowed to 

 keep any reserve they think adequate.. The 

 danger from this source has been often demon- 

 strated, and the regulated banks, those under 

 the supervision of the state or nation, are 

 always using their influence to secure legisla- 

 tion on the subject. But as yet there are many 

 states in which nothing exists to prevent any- 

 body from displaying a sign, "Bank," and taking 

 all the deposits he can get. If he proves to 

 be reckless or dishonest the depositors may 

 be able to have him imprisoned, but in such 

 a case they are almost sure to lose their 

 savings. 



Trust Companies. A trust company may or 

 may not be a bank. In some of the Eastern 

 United States the trust company has no gen- 

 eral banking powers, but throughout the South 

 and West it is more likely to be a general 

 bank. As the name indicates, trust companies 

 were originally chartered to perform the duties 

 and assume the responsibilities of trustees of 

 estates. The advantages of such organization 

 are clear; the company is a corporation and 

 it exists indefinitely, while an individual trustee 

 may die the day after he is appointed. The 

 care of estates naturally meant that such a 

 company would have the money of estates to 

 invest, and also investment propositions which 

 needed money. Trust companies are chartered 

 under state or provincial laws. 



