Government itself, still the plan has the effect of slightly decreasing the ability of the bank to lend money or credit. To illustrate this, if a bank buys $100,000 in United States 2 per cent. bonds and pays $106,000 for them, deposits them with the Treasury and gets $100,000 in bank notes, it will have $6,000 less banking funds to lend or invest than if it had not taken out the circulation. The bank receives from the Government interest on the bonds deposited and interest on the bank notes which it loans out or invests, but, on the other hand, has to pay a slight tax on the circulation, and some expenses for "redeeming" its notes and renewing them when they wear out, so that the net result is a profit of from one-half of one per cent. to one per cent. greater than if the bank had not invested its money in the bonds and taken out the circulation.

The various sources from which a bank derives its funds or "resources" for doing business are, therefore:

1. Capital, or capital stock;

2. Deposits;

3. Accumulated profits--either surplus or undivided profits, or both;

4. Circulating notes issued and outstanding.

The aggregate of these is sometimes called "banking power," or the ability to do a banking business.

The chief business of banking is the lending or loaning of money or funds, called also the "granting of accommodations," or "of credit." It is generally supposed that most of the transactions in banking are made in actual money of some kind, but this is a popular mistake. Statistics from

the most reliable sources show that the "deposits" made in a large number of banks on a given day consisted only of from five (5) to ten (10) per cent. of actual money or currency of any kind, while from 90 to 95 per cent. consisted of checks, drafts, or other equivalents of money, called sometimes "instruments of credit." Illustrating the extent to which banking is done on credit is the fact that in 1900 the total "resources" of all banks in the United States aggregated $12,000,000,000, while the whole stock of money of all kinds in the banks and outside in circulation was but $2,000,000,000, or only one-sixth the amount of the total

resources.

So in banking the lending is more of credit than of money, and whoever borrows this money or credit gives the bank some written evidence of his indebtedness, either a promissory note, a draft, a bond, a mortgage, or some other promise or obligation which will be more fully described elsewhere. While some of this credit is granted on the simple written "promise to pay" of the borrower, a large part of these credits or loans is "secured" by different kinds of property, like stock certificates, bonds, chattel mortgages, or other forms of what is known as "personal property" of a movable nature, or by "real estate security," the value of which latter rests entirely or largely on land, or "real estate." Security of any kind given for money borrowed is usually called "collateral," or "collateral security."

Another function of banking is the making of "collections" for its customers, who lodge with the bank checks, notes, drafts and other obligations payable at cities and other

places away from the bank. These are sent to other banks, which get payment for them and return the funds collected or "remit the proceeds" to the bank which sends them. Usually a small percentage, varying from 1-20th to 1-4th of 1 per cent. is charged for this service, the bank sending them and the bank collecting them usually dividing the percentage or discount paid by the owner of the "collection items."

The collection charge is usually based (1) upon the cost of "transferring" funds, by express or otherwise, between two points, and (2) a charge for interest for the use of money advanced on the "collection item" while it is "in transit" between the two banks handling it.

Intimately connected with the "collection" business is that of buying and selling "exchange," and in this the banks generally perform a very valuable public service, for they furnish the facilities for safely sending or "remitting" funds from one part of the country to another.

This business of making "collections" and "buying and selling exchange" all grows out of business transactions between people in different parts of the country or of the world who, by buying or selling to each other, make "exchanges" of their products. One party in Texas, California or Illinois will buy goods from another in New York or Boston, or a party in New York or Boston will buy cotton in Texas, or wheat in Illinois, or fruit in California, and all the checks or drafts or notes by which the buyer settles for his purchases with the seller are called in general terms "bills of exchange" or "exchange," and are usually handled or collected by the banks

The details showing how this exchange business is done will be given in an appropriate chapter.

One other function of banking is the borrowing of money or funds by the bank should this ever become necessary. This power is exercised to procure funds in addition to its capital, deposits and circulating notes, with which to grant additional loans or credit to its customers, and again, when a bank has a sudden and unusual demand for funds from its depositors. In the latter case it is a matter of self-preservation, for if the bank were not to meet such legitimate demands it would be insolvent and would have to cease business. So it does the best and only thing it can to save its business. It borrows funds, usually from some other bank, either with or without the collateral security of its assets, uses the funds to meet the demands made, stops. lending money or credit, and collects enough from its loans or other investments to pay off the borrowed money.

This power to borrow money should always be reserved for emergencies and not habitually used to procure banking funds in the normal and ordinary course of business.

Banks are usually required by law to publish, from time to time, statements or reports of their condition, for the information of the public who make deposits or deal with them in any way, and of their shareholders, who have their money invested in the capital stock.

These statements on one side show the "liabilities" of the bank, or the amounts for which it is liable or indebted to various parties.

On the other side they show the "assets" or "resources"

of the bank, or the various forms in which its funds are invested.

The "liabilities" usually consist of:

1. Capital stock, surplus fund and undivided profits, for which the bank is liable to the shareholders or stock

holders to whom they belong.

2. Deposits of all kinds, for which the bank is liable to the depositors who placed them with the bank.

3. Circulating notes outstanding, for which the bank is liable to whoever holds or owns the notes issued by the bank.

4. Borrowed money of any kind, for which the bank is liable to the party or parties from whom it has borrowed any funds.

All the parties, except the shareholders, to whom a bank is liable or indebted, are called "creditors" of the bank. The "resources" or "assets" usually consist of:

1. Loans and discounts, represented by notes, drafts, or any such instrument upon which funds have been loaned out by the bank.

2. Bonds, stocks, real estate mortgages, or any "securities" of this kind which are owned by the bank as investments.

3. Real estate which the bank owns, such, for instance, as the building in which it does business, or such as it has been compelled to take in payment of loans made on security of real estate.

4. Amounts due from other banks and bankers, consisting of deposits made with them, or amounts due for "collections" sent them.