prepared and submitted to the conference which met at Saratoga in August, 1896, and, with some amendments, was adopted, and is known as "The Negotiable Instruments Law." Following this, steps were at once taken to secure the adoption of the bill, thus approved, in every state in the Union. Again the state of New York took the lead by passing the law in 1897. Since then this bill has become a law in forty-three states, Alaska, the District of Columbia, Hawaii, and the Philippine Islands; in a few instances, however, with more or less important modifications. IV PRINCIPLES OF "COMMERCIAL" BANKING Introduction As has been indicated in chapter ii above, credit in its various forms has come to play so important a rôle in the modern business world that present-day economy is often called a credit economy. Within this great and complicated credit structure banking institutions occupy a position of unique importance. In fact, banks are often called credit institutions, or manufactories of credit, because they create credit instruments that are used as currency quite as are the ordinary media of exchange. While, as we shall presently find, this is a more or less narrow view of the relations of banking to business in general, it is none the less true that banking is vitally related to the entire system of credit that has been developed. In our study of banking we are to consider first the so-called commercial bank. It is necessary to say so-called commercial bank, or to place the word commercial in quotation marks, for the reason that much of the business performed by the banks thus designated is really of an investment nature. A commercial bank is generally defined as an institution which exchanges present for future rights, that is, which gives an individual the right to receive funds now, or on demand, in exchange for the right of the bank to receive funds from the individual at some future date. Under this definition come all our national banks and a large proportion of the banks chartered under the laws of various states. When viewed from the standpoint of the uses to which the funds borrowed are put, however, these banks which thus create demand obligations are by no means strictly engaged in furthering commercial as distinguished from investment business. It was originally intended that the banks which created these demand obligations in exchange for short-time promises to pay would as a matter of course, and virtually of necessity, make loans for strictly commercial purposes, for unless they made commercial loans the obligations could not be liquidated within a short time. In practice, however, a large proportion of the loans made by "commercial" banks are for investment purposes, and out of this practice have grown some of our most serious banking problems. It is highly important, therefore, at the very beginning of the study of banking to bear in mind that "commercial" banking is only partly commercial. The full significance of this fact, however, will not be apparent until the last chapter of the volume is reached. Our present purpose is merely to discuss the working of the "commercial" bank as a type of business institution. An understanding of the practical operations and the functions of a bank may best be gained by approaching the subject through the medium of a bank's accounts or financial statement. The practical problems based on the statements given below serve to elucidate the everyday business transactions of a bank in dealing with its customers. In connection with the economic functions that are performed by banks while conducting their daily operations, selections Nos. 21 and 22 discuss the subject from different points of view; together they serve to bring out clearly the essential nature of the commercial banking business as the economist sees it. However, from the point of view of the business man who is interested in banks from the standpoint of the use he may make of them, as distinguished from that of the economist who is interested in banking from the standpoint of its relation to the entire economic system, "commercial" banks are primarily loaning institutions to which he may look for assistance in carrying on his business. Similarly, from the standpoint of the banker himself, a bank is an institution out of which profits may be made, and its practical operations are conducted with this single end in mind. It is important to an understanding of the entire problem of banking that all these points of view be kept in mind; to consider the subject from any one angle alone is to get but a very inadequate grasp of its manifold nature. From every point of view, however, the granting of loans is the most important part of banking. It is from this source that the banker derives his chief profits; it is in this way that the commercial bank chiefly serves the business world and justifies its right to exist. from a business point of view; and it depends upon the character of the loans made whether the bank will be sound and safe and whether it properly fulfils its functions in relation to the economic system as a whole. It is in connection with the analysis of the loan items, moreover, that one may expect to find the investment operations, already noted, that are so commonly conducted in the name of "commercial" banking. From the standpoint of the bank there are two classes of loans: those that are based on unsecured promissory notes or bills of exchange and those that are secured by the deposit of collateral. This classification, it should be observed, is from a purely banking viewpoint; collateral is or is not required, depending upon whether the banker believes that the borrower can reasonably be expected to pay the loan at maturity. It does not necessarily touch the question in which we are interested from the economic point of view; namely, the uses to which the borrowed funds are put and the consequent relation of banking to commercial and investment development. A. Analysis of Banking Operations and Accounts 19. TYPICAL BANK STATEMENTS1 THE NATIONAL CITY BANK OF NEW YORK Country checks, other cash items, and fractional currency 1,000,000.00 1,000,000.00 75,000.00 5,000,000.00 22,880,392.67 114,730.52 19,962,842.81 1,252,563.50 69,045.00 736,500.00 $69,914,025.86 23,020,000.00 Deposit in Federal Reserve Bank... 27,670,346.07 Gold bullion... lation)... Redemption fund with U.S. Treasurer (5 per cent of circu Due from U.S. Treasurer. 120,604,371.93 2,317,760.60 178,137.50 42,000.00 Total... Report of condition at close of business, March 4, 1915. $415,263,936.48 |