The service of the com mercial bank to a community. CHAPTER XII THE COMMERCIAL BANK IN getting together materials and organizing service for business on a modern basis, of highest importance are arrangements for current funds--cash resources. These are necessary to exchange. Neither mechanical equipment, supplies, nor skilled labor can be obtained to advantage without a working cash capital. He who is prepared to furnish such funds is equipped to render a service for which the farmer, the manufacturer, and the merchant-all who are engaged in the active management of industry—are willing to pay. To illustrate Brown has purchased a mill and water-power conveniently located on the edge of the great wheat belt. For this he has paid $150,000, but many of the machines are antiquated, and expensive to operate. Sixty thousand dollars more are expended in improvements. He now has his mechanical equipment. Still there is much lacking. Grain must be purchased; labor must be employed and wages paid; transportation charges must be settled, and current expenses must be met. All these outlays must be made before return may be had on sales of goods purchased. He must Necessity for look for profits for the year in the margin of current funds gain between total outlay and total receipts talization of from sales measured in terms of the common industry. standard of value. The outlay must be made weeks before return is had, and this, too, must be commensurate with the size of the working plant and the volume of business handled. The element of time necessary to the in the capi most advantageous production and distribution of goods requires that he provide a working capital (current funds) of about $100,000. Obstacles to business without a bank. The question now presents itself, How shall these funds be carried? Shall he lay in a stock of money? A delivery of gold will satisfy demands on contracts for labor and material; but the dangers entailed in keeping such an amount of money as is needed, the breadth of the field covered in his business transactions, the variety of interests involved, and the number of payments to be made, would render this a highly expensive form of cash assets. Every consideration disposes him toward a more economical form of "current funds," if such may be had. But the miller is not alone in this desire. His is not the only business interest in the community. Falls City, the place where Brown's mill is located, is a town of 10,000 inhabitants. There are a number of other industries, each of which is in need of working capital. The town is a local trade center, and merchants of every class are there with stocks of goods to supply the wants of country and town. If money were the most available means of effecting exchanges, each would suffer the same inconvenience—each would be under the necessity of keeping a "strong box," fire-proof and burglar-proof; even then they would not be secure against loss. Current funds are an absolute necessity; with a stock of money provided, each would have to keep a guard, for no box is too strong to be "cracked" with modern instruments, and there is no combination lock that may not be "worked" if time and opportunity be given. The expense and risk of the money system would not end here. Brown is doing a business that would involve the handling of from $5,000 to $20,000 per day; much of this outlay is made in transactions of small amount; it would be necessary to have a comparatively large, highly paid, and responsible clerical force to count out the money and make change. The business organization of the whole place would be encumbered with expense and inconvenience, and transactions at a distance would be made extremely difficult. Such conditions as these furnish the business opportunity for such service as the commercial bank is organized to render. The service and the profits made and the mutual advantages gained by the first bank in Falls City suggests the organization of another, and still another, until at the present time there are six banks in the place, all doing a thriving business. nishes cur the form of "bank credit." With this equipment, instead of carrying a large amount of money in purses and vaults, and keeping a guard and a 1. Bank fur- large corps of money-changers, the miller has on his desk a "check-book." His $100,000 rent funds in "cash" capital is divided between his local town and New York. Temporarily he has $50,000 in gold locked up in "safe deposit.” This he withdraws and sends by express from New York to Falls City. On arrival at his place of business he orders the express company to deliver the gold to the Falls City Bank; with this he buys a bank account of $50,000—i. e., he "deposits" the amount, and receives credit to like amount 66 on the books of the bank.” 2. Exchanges He also takes all moneys received by him in the course of his business to the Falls City Bank and exchanges them for bank credit. Now, when grain is purchased from the farmers around, or from the local dealer, or when wages are paid or machinery money. and supplies are bought, or transportation charges are to be settled, Brown signs a check for the amount involved. He draws against Falls City or New York, as may be to his greatest advantage. For local payments he makes out a local check; if an Eastern account is to be settled, he checks against New York. It costs him nothing to pay in New York what he owes there, whereas he would have to pay "exchange"-i. e., cost of collection -if he sent a Falls City draft. 3. Allows its "bank credit." But the bank renders another service. Nearly all payments made to the miller for goods sold are in the form of credit. "Cash" sales are for checks and drafts of customers; sales on "time" are exchanges of goods for notes or credit accounts-credit credit" into obligations of purchasers to pay money at a future time. None of these may be used to advantage by Brown as "current funds"; neither can he present them for payment at the time and place specified; nor can collections be made to advantage by Brown personally. The places are widely scattered; it is important also that he give his time to other matters of business than the collection of checks and drafts and credit obligations. He therefore writes his name across the backs of checks and drafts (indorses them) and turns them over to the bank. The bank not only assumes to attend to their presentation and collection, but it credits Brown at once in full with the amount turned over. The miller has a pass-book-i. e., a book of convenient size to be carried in his pocket-in which the receiving clerk at the bank enters the amount of the checks and money received " for deposit on the debit side. The debit side of this book represents Brown's credit at the bank-the amount that the bank is indebted to Brown. Periodically-say once a month-this pass-book is turned over to the bookkeeper at the bank, and he enters on the credit side all the items paid out by the bank on Brown's order. The bookkeeper then strikes a balance and makes a new entry of the amount still owing by the bank on the debit side. Each afternoon Brown's bookkeeper makes a memorandum of all the money and checks received in the course of the day's business on what is known as a "deposit slip." This, together with money, checks, and pass-book, he takes to the bank and hands to the receiving teller for a new entry to Brown's account. In exchange for the checks, drafts, and notes (commercial paper) sent in for "deposit," Brown receives "bank credit," the bank relying on Brown's guarantee of indorsement on the commercial paper deposited. 4. Serves as If, however, Brown does not wish to assume the responsibility of indorsing the checks and drafts "for deposit," or if the bank does not care to exchange its credit deposit" for these checks, drafts, and notes on even terms; or, again, if there are notes and accounts that have been obtained by Brown in the course of his business that he does not care to exchange for "cash," these may be turned over to the bank on Brown's indorsement "for collection." The bank in this case does not at once give Brown the right to draw against it. It does not exchange anything for these credits so turned over. It simply assumes to act as Brown's agent for the purpose of presentation and collection, and when collection is made sends notice of the fact. 5. Acts as trustee. The funds so held are trust funds, and they remain "in trust" with the bank until order is received from Brown to place them to his general account; in which case, if the bank acts upon his order, an exchange is made of "bank credit" of like amount for "trust funds" held, and the trust ended. It may be to Brown's advantage at times to withdraw a certain amount of money from the bank; in other words, to exchange "credit" to his account for "money," which amount so withdrawn may be placed with the bank in trust for some special use or business purpose. This will also place the bank in relation of trustee instead of debtor, and the funds so held will be held for Brown and subject to Brown's order and direction; they can not be used by the bank as assets of its own. The bank may serve the business community in many other ways as trustee in the caring for and handling of current funds. Brown's New York may wish to increase it. bank account may run low, and he |