58. The making of loans and discounts is a primary function of banking, and the power to make loans and discounts is usually expressly conferred upon incorporated banks.

RESTRICTIONS UPON POWER TO LOAN

59. Restrictions upon the power to loan are often imposed by limitation of the amount that may be lent, or of the character of the securities upon which money may be lent, or in other respects; but, unless the unauthorized transaction be declared void, it is generally held that the evidence of debt or the security, although unauthorized, may be enforced, and that the only remedy is a direct proceeding by the government against the bank for violation of its charter.

TIFF.BKS.& B.-15

MEANING OF DISCOUNT

60. Discount, or strictly bank discount, is a deduction of interest made when a bank loans money to a borrower upon his negotiable paper or other evidence of debt executed by him to the bank and payable at a future day, or when the bank advances money to the holder of negotiable paper or other evidences of debt so payable which he transfers to the bank; the interest being computed at an agreed rate upon the amount promised in the paper for the time it has to run, and deducted in advance. Discount may, therefore, be by way of loan or of purchase. By weight of authority, the power to discount includes the power to discount by way of purchase; but, even where the contrary doctrine prevails, it is held that upon a discount by way of purchase the evidence of debt may be enforced, although the discount was unauthorized.

In General

As has been explained, the making of advances by way of loan and discount is one of the primary and essential functions of banking. Most of the questions which arise under this chapter are not questions of general commercial law, but relate to the powers of, and restrictions imposed upon, incorporated banks in the making of loans and discounts, and to the interest or rate of discount which may be charged. These questions, as a rule, do not concern private bankers, although the laws concerning usury sometimes have particular application to them, as well as to incorporated banks.2

1 Ante, p. 1.

2 See In re Samuel Wilde's Sons (D. C.) 133 Fed. 562; Perkins v. Smith, 116 N. Y. 441, 23 N. E. 21. See "Banks and Banking," Dec. Dig. (Key No.) §§ 176, 177; Cent. Dig. §§ 653-655.

Power to Loan-Restrictions

4

6

Usually the power of lending money is among the express powers conferred upon incorporated banks. The power is often restricted by limitation of the amount that may be loaned to officers or others, by forbidding loans to officers, or by designating the character of the securities on which money may be lent. Such restrictions are imposed primarily for the benefit of the stockholders, depositors, and other persons interested in the bank, and although the particular transaction may be unauthorized, or even forbidden, it is generally held that, unless it is declared to be void, the debt or security may be enforced; the remedy, if any, being a direct proceeding by the state against the bank for the violation of its charter. Illustrations of this are frequent under the National

3 See Detroit Sav. Bank v. Truesdail, 38 Mich. 430; Bank of New Hanover v. Williams, 79 N. C. 129. See "Banks and Banking," Dec. Dig. (Key No.) § 176; Cent. Dig. § 653.

4 Richmond Bank v.

Robinson, 42 Me. 589; Pemigewassett Bank v. Rogers, 18 N. H. 255. See "Banks and Banking," Dec. Dig. (Key No.) 178; Cent. Dig. § 660.

5 Murry Nelson & Co. v. Leiter, 190 Ill. 414, 60 N. E. 851, 83 Am. St. Rep. 142. See "Banks and Banking," Dec. Dig. (Key No.)

§ 176; Cent. Dig. § 653.

6 Fisher v. Murdock, 13 Hun (N. Y.) 485. See "Banks and Banking," Dec. Dig. (Key No.) § 178; Cent. Dig. § 660.

7 Post, p. 246.

8 President, etc., of Western Bank v. Mills, 7 Cush. (Mass.) 539; Mills v. Rice, 6 Gray (Mass.) 458. See "Banks and Banking," Dec. Dig. (Key No.) § 178; Cent. Dig. §§ 656-666.

9 Bates v. State Bank, 2 Ala. 451; Savings Bank of San Diego County v. Burns, 104 Cal. 473, 38 Pac. 102; Brittan v. Oakland Bank of Savings, 124 Cal. 282, 57 Pac. 84, 71 Am. St. Rep. 58; Bond v. Central Bank of Georgia, 2 Ga. 92; Murry Nelson & Co. v. Leiter, 190 Ill. 414, 60 N. E. 851, 83 Am. St. Rep. 142; Richmond Bank v. Robinson, 42 Me. 589; Fargason v. Oxford Mercantile Co., 78 Miss. 65, 27 South. 877; St. Joseph Fire & Marine Ins. Co. v. Hauck, 71 Mo. 465 (cf. McClintock v. Central Bank of Kansas City, 120 Mo. 127, 24 S. W. 1052); People's Trust Co. v. Pabst, 113 App. Div. 375, 98 N. Y. Supp. 1045; Bank of Middlebury v. Bingham, 33

Bank Act.10 Thus a violation of the provision that the total liabilities to a national bank of any person for money borrowed shall at no time exceed one-tenth of the amount of its capital stock actually paid in will not enable a borrower to avoid payment of a loan.11 In construing this section the court said: "We do not think it required by public policy, or that Congress intended, that an excess of loans beyond the proportion specified should enable the borrower to avoid. payment of the money actually received by him. This would be to injure the interests of creditors, stockholders, and all who have an interest in the safety and prosperity of the bank."

9912

Meaning of Discount-Loan or Purchase

"A discount by a bank means, ex vi termini, a deduction or drawback made upon its advances or loans of money, upon negotiable paper or other evidences of debt, payable at a future day, which are transferred to the bank." 13 Discount is thus "the difference between the price and the amount of the debt, the evidence of which is transferred, and that difference represents interest charged, being at some rate, according

Vt. 621. See, also, Rome Sav. Bank v. Krug, 102 N. Y. 331, 6 N. E. 682; Dunn v. O'Connor, 25 App. Div. 73, 49 N. Y. Supp. 270. Contra: Workingmen's Banking Co. v. Rautenberg, 103 Ill. 460, 42 Am. Rep. 26. See "Banks and Banking," Dec. Dig. (Key No.) §§ 176, 178; Cent. Dig. §§ 653-666.

10 Post, p. 295.

11 Union Gold Min. Co. v. Rocky Mountain Nat. Bank, 96 U. S. 640, 24 L. Ed. 648; The Seattle, 170 Fed. 284, 95 C. C. A. 480; Richeson v. National Bank of Mena (Ark.) 132 S. W. 913; Maryland Trust Co. v. National Mechanics' Bank, 102 Md. 608, 63 Atl. 70. See "Banks and Banking," Dec. Dig. (Key No.) § 269; Cent. Dig. $$ 1014-1022.

12 Union Gold Min. Co. v. Rocky Mountain Nat. Bank, 96 U. S. 640, 24 L. Ed. 648. See "Banks and Banking," Dec. Dig. (Key No.) § 269; Cent. Dig. §§ 1014–1022.

13 Fleckner v. Bank of United States, 8 Wheat. 350, 5 L. Ed. 631, per Story, J. See "Banks and Banking," Dec. Dig. (Key No.) § 177; Cent. Dig. §§ 654, 655.

to which the price paid, if invested until the maturity of the debt, will just produce its amount." 11 Strictly speaking, therefore, discount consists in finding that sum which, if put at interest until the maturity of the debt at the particular rate, will then amount to the face of the debt, or, in other words, in finding the present worth of the debt under the conditions. stated. It is to be observed, however, that bank discount, as it is practiced, gives a somewhat different result from discount in the strict sense of the term, for it is customary to calculate the interest upon the debt until its maturity and to deduct this interest; the proceeds received by the customer being therefore a little less than the present worth of the debt, the bank thus securing a slight profit in addition to that afforded by true discount.15 The transaction, whereby the bank pays or advances to the holder of paper the amount of the debt thereby evidenced less the amount of the interest deducted in consideration of the transfer of the paper to the bank by the holder, is itself termed a "discount," and the paper is classified among the assets of the bank under the head of "loans and discounts."

In the transaction just described the paper is transferred by the holder to the bank, which acquires his right to receive payment of the debt thereby secured from the maker, drawer, or acceptor as the case may be. The transaction is thus a sale, and not a loan; for, even if the transferror indorses the paper, his liability to pay is only secondary.16 On the other hand, the bank may discount the customer's own paper, executed by him to the bank, by deducting the interest in advance. In this case the transaction is a loan by way of discount; the borrower's indebtedness to the bank being evidenced.

14 National Bank of Gloversville v. Johnson, 104 U. S. 271, 26 L. Ed. 742. See "Banks and Banking," Dec. Dig. (Key No.) § 177; Cent. Dig. §§ 654, 655.

15 See Dunbar, Theory & History of Banking, p. 10. 16 Post, p. 233.