Tlbe Conservative *
NATUIli ; OF A HANK.
nv .1. I.AUKKXCI : LAUUIIMN.
In its simplest function a bank lias a
co-operative quality. It does for ninny
persons cheaply what , without it , each
would be obliged to do at considerable
expense for himself. A trustworthy
bank , with vaults giving protection
against fire and robbery , serves for each
one of many persons ; while to gain like
security a single individual could ill
afford so expensive a vault. In short ,
by the division of labor , a separate pro
fession has been evolved in society
which performs certain services whereby
all who need them are convenienced
and saved expense. If this were all ,
however , a bank would be no more than
a safe place of deposit ; but it is much
more than this.
A natural consequence of the deposit
of money with a bank for convenience
and safe keeping was the creation of
methods by which the ownership of
these deposits could be transferred with
out actually moving the money itself.
In early banks , devices for this purpose
were already used. In modem times
the transfer is promptly and easily made
by a check , or draft , which is merely an
order upon the bank by the depositor to
credit a certain sum to the person
named. In this way a deposit becomes
as available for payments as if actual
money were passed from hand to hand.
A savings bank , or a loan company , is
not a commercial bank in the proper
sense. Depositors furnish the total
funds ( or capital ) loaned by a savings
bank on time-securities ; and it is under
stood that they need not expect to have
deposits paid back on demand. Most
savings banks , because their resources
are invested in time-loans , properly re
serve the right to exact a notice of per
haps sixty days in case of intended with
drawal of deposits. A loan company ,
whose funds are paid in by shareholders ,
is not very different in kind from a sav
ings bank. The funds are subscribed to
bo loaned out on mortgages or time-
securities. Since savings banks are
provided for those who are less able to
invest 011 their own account , legal pre
cautions hedge in the kind of invest
ments they can make ; while a loan com
pany takes its own risks without much
limitation , its shareholders talcing their
chances. In neither case do these in
stitutions receive deposits which take
the form of demand liabilities.
A commercial bank , however , not
only receives deposits , but it is particul
arly distinguished by the fact that it
engages to repay a deposit on demand.
The banker finds that it is not neces
sary for him to retain all of the money
in his vaults to enable him to do this ;
because not all of the depositors will
want to draw out their funds at the
same time. Some will ask for payment
today , but others will bo making do-
posits. As a result , ho ascertains by ex
perience that if ho keeps on hand in
cash a proportion only say one-fourth
or one-third of the resources which
have been entrusted to him , he will still
be able to meet 011 presentation all de
mands of depositors or noteholders. Ho
is , therefore , enabled to loan the bal
ance of these funds just as he can loan
his own capital. Thus another function
of n bank is developed that of loan
ing , or discounting.
Many persons and firms have balances
which they are not ready to invest pcr-
man eiitly , and
THE BANKS
these nro freely clc-
CAPITAL. posited in banks.
Small sums , cacli of little effect by it
self , are accumulated in great numbers ,
and make very large amounts in the
aggregate. So that , bits of capital that
would bo ineffective for serious produc
tive operations on a great scale , are thus
placed where they may be put to im
portant uses. In this way , the savings
of the small , or uninformed capitalists
are made efficient for the productive
use of active members of the commun
ity to whom they may be loaned. Al
though banks do not actually increase
the wealth of society , they lead to the
productive use of amounts which , with
out banks , would remain inactive.
They place funds where society gets the
most from them , by allowing them to
pass into the hands of the most efficient
members of the community.
This process of uniting scattered sums
into large capitals which can be effec
tively employed , is , of course , not only
the function of commercial banks , but
equally that of savings banks or build
ing and loan associations. The distin
guishing function of commercial banks ,
however , is the creation by them of a
demand liability through which the
sums left with them may serve as a cur
rency , since by the use of notes or of
deposits and checks , they are available
purchasing power in the hands of their
owners. The investor in a building and
loan association or savings bank , on the
other hand , loses the opportunity to
use his money in other ways because
no demand obligation is credited to him.
That is to say , the deposit in a commer
cial bank performs a currency function ,
while the deposit in a building and loan
association or savings bank is no longer
currency , but an investment , since in
the former case the depositor receives a
claim payable on demand and in the
latter case ho does not. This is the
primary distinction between a bank and
other financial institutions.
Banks cannot make something out of
nothing. They cannot coin wealth or
money out of any
intangible thing.
BASKINO. The operations of
legitimate banking are always based on
property ; whenever these operations
are not BO based , they cease to be
legitimate , and become speculative.
The profit of banking arises from the
discount operation or lending. Of
course , supposing the rate of interest to
bo fixed , the more a bank can lend , the
more its profits will bo. What , then ,
can it lend ? It has its capital ; it can
lend that. It has also the resources en
trusted to it by the public through the
discount operation ; it can loan such part
of these resources as it does not need
to hold in cash to meet the demands of
depositors and noteholders. This , then ,
is the limit placed upon its power to
loan its own capital and the resources
of others entrusted to it ( except so much
thereof as must be held as a reserve ) .
It does not "coin its credit. " If a bank
has won the confidence of the public by
the safe and conservative management
of its loans and investments , it will re
ceive largo deposits. The larger its deposits -
posits , the larger the sums it can loan ;
and hence the larger its profits.
The bank becomes responsible , whenever -
over it loans its depositors' funds , that
the titles to these funds may bo reali/-
able upon in cash ; and quickly in case
of suddenly increased demands in time
of emergency. It assumes this respon
sibility to the full extent of its capital ,
which must meet any losses due to bad
judgment. Upon the banker , then ,
rests the responsibility of deciding that
the security for n loan is realizable in a
kind of property that is always salable.
Hence every business transaction in
volving a loan from a bank must pass
the judgment of the banker who is act
ing with full knowledge that an error
will be followed by financial loss. This
is the reason why it is possible to say
that the resources of a bank , received
as the security for loans reflect quite
accurately the character and soundness
of the business transactions of the
couutr3r.
The profit of banking arises from the
discount operation. The bank buys and
sells so moth ing ,
BAXKi-uurrra.
nnd nmkoS R gnill
thereby in the same way as other com
mercial institutions. In making a loan ,
the bank buys the right ( well secured )
to receive a given sum of money at
some future date ; for this it gives an <
eqxial sum less the interest. The bor
rower gets this amount in cash or moro
often in the form of a liability of the
bank to pay on demand. The profit 4
consists in the fact that the demand-
liability given the borrower is always
less ( by the profit ) than the amounts to
bo received in the future. The bor
rower needs immediate means of pay
ment ; and the bank can give this to
him in either of several forms , which
ever the customer prefers. It can give
him actual money from its uninvested r
resources ( either n portion of its own 4 < ,
capital or moiioy left with it by others ) ;
or it can give him its circulating notes ;
or it can give him a credit on its books
a deposit account. The two forms of
payment last mentioned are those