THE ABC OF BANKS AND BANKING. CHAPTER I. BANKING IN GENERAL. THE general term "Banking" is applied to the businesɛ of dealing or trading in money, checks, drafts, promissory notes, bonds, mortgages and other printed or written obligations for the payment of money or its equivalent. By "money" is meant gold, silver, nickel and copper coin, Treasury certificates for gold and silver coin, Treasury notes and National Bank notes. Another term for this is "cash" or "currency," and the term "funds," when used, means not only money, cash, or currency, but checks, drafts, and other written or printed instruments which can quickly and easily be converted into money. This business, like all others, is done for the purpose of profit, mainly derived from the interest or percentage paid for the use of banking funds by those who borrow or "hire" them. Banking in the United States is done either by firms or individuals called "private bankers," or by corporations, made up by aggregations of individuals, or other parties, to do business either as (1) commercial banks, (2) savings banks, or (3) loan and trust companies, each of which does a different kind of banking, to be defined in the next chapter. The funds contributed to the business of banking by the private banker or bank are called "capital," or "capital stock." In the case of a corporation, this capital stock is contributed by the "shareholders," or "stockholders," the contributions in each case being represented by a certain number of "shares," usually of $100 a share each, but sometimes for smaller amounts. This capital, which may be increased or decreased from time to time, under certain conditions, is in the nature of a permanent investment, the profits arising from its use going, of course, to the owners or shareholders. It serves, also, as a protection to any creditors the bank may have in case of loss incurred on any of its loans or other investments, the loss, of course, falling on the shareholders, who take all the risks of profit or of loss arising from the business. In addition to the capital stock, a large proportion of the funds used in banking consists of "deposits," or funds "deposited" or placed in the bank for safe keeping by the "depositors." In the case of "mutual savings banks" (which have no capital stock), the business is done entirely with the "deposits." The relation between the bank and the depositor is that of debtor and creditor; the bank, undertaking the safe-keeping of his funds, stands ready to repay him a part or the whole amount of his deposit, either on demand or at some future date, as may be agreed between the two parties. But in safe-keeping these deposits the bank is always at certain expense in providing a banking office, with proper vaults or safes to protect its valuables from loss by fire or theft, in paying officers and clerks, and for books, stationery, postage and other expenses necessary to conduct the business. In consideration of this responsibility and expense, the bank is permitted by law to loan out or otherwise invest a certain proportion of its deposits, the proportion not so invested being called the "reserve" against deposits. This reserve consists either entirely of cash or partly of cash and partly of deposits in other banks, from which cash can usually be obtained on short notice. As a rule a part of the profits of banking is paid out to the shareholders in "dividends," or divided among them semi-annually or quarterly, but usually a part of these profits is retained by the bank, and is then called either "undivided profits" or "surplus fund," the theory of this being to keep on hand a fund besides the capital stock from which any unusual losses incurred in the business may be paid without impairing the capital stock. Another way in which a bank sometimes procures banking funds is by the issue of what are known as "circulating notes." At present only National banks, organized under United States law, are permitted to issue such notes, and in the following manner: The bank purchases United States bonds in the open market, so investing some of its banking funds in the bonds, which it deposits with the United States Treasury as security for circulating notes, furnished by the Government, equal to the par value of the bonds, which notes it can pay out to its customers as money. In effect, the Government makes the bank a loan of these notes on the security of its own bonds, which the Government holds as security. Should the bank fail, the Government sells the bonds and uses the proceeds to pay the holders of the circulating notes as they are presented for payment or "redemption." While the bank notes issued under this plan are as good as the |