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"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

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Country checks, other cash items, and fractional currency

114,730.52

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Redemption fund with U.S. Treasurer (5 per cent of circu

lation)...

Due from U.S. Treasurer.

Total.....

Report of condition at close of business, March 4, 1915.

$415,263,936.48

120,604,371.93

2,317,760.60

178,137.50

42,000.00

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A state bank at Taylor, Lackawanna County, Pennsylvania, at close of business November 2, 1914.

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Due to banks and trust companies, etc., not in reserve

Total...

132.21

20.00

954.70

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20. ANALYSIS OF A BANK STATEMENT

As in any other business, the statement of a bank aims to show at a glance the financial condition of the institution. All of the debts or obligations owed by the bank are arrayed under the heading of Liabilities, and all the property of the bank together with the debts or obligations owing to the bank are grouped under Assets or Resources. In the typical statement published for the examination of the general public the form is usually condensed to ten or a dozen items, though in the fuller account submitted periodically to the Comptroller of the Currency these are subdivided into more than a score of items on either side.

The liabilities of a bank are of two classes: those to the stockholders of the corporation, and those to the creditors or customers of the bank. Under stockholders' liabilities may be classified three items: Capital, surplus, and undivided profits. To understand clearly why capital should be set down as a liability of the bank, it is necessary to conceive of the banking corporation as in itself a business entity to which the stockholders have intrusted their funds. The capital is not owned by the banking institution, but by the individuals who have bought its certificates of stock. These stockholders have the shares as evidence of the obligation of the bank to them; and in turn the bank must enter on its books a statement of the amount of capital thus owed to stockholders.

Capital is to be carefully distinguished from specie or cash. The difference can best be made clear by reference to the first entries that would have to be made on the books of a newly organized bank.

If $100,000 is raised from the sale of 1,000 shares of stock at $100 per share, the following entry would be made on the bank's books:

Cash....

Resources

$100,000

Capital.....

Liabilities $100,000

As already indicated, the entry of Capital is the recording of the bank's obligations to its owners. The entry of a like amount under Cash means that there is in the vaults of the bank specie to the amount of $100,000 available for the use of the bank. The Capital item will remain unchanged so long as no new stock is issued or existing stock diminished, but the Cash entry changes constantly as the bank engages in its daily operations. Instead of using the term Cash, however, the term Reserve is ordinarily employed.

The item Undivided Profits states the amount of earnings that have been accumulated since the last dividend date. It is a liability, because the dividends are, like the Capital, owed to the stockholders. Like Capital, also, it is represented on the resources side of the account by Cash. When dividends are declared and paid the Undivided Profits account is lessened by the amount of the dividend payment, and the Cash item is reduced by the same amount, provided the dividends are paid in the form of cash.

Surplus is closely akin to Capital. It may arise in at least two ways. When stock of the par value of $100,000 is sold above par, say for $110,000, the account would appear as follows:

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This Surplus may be increased from year to year through a policy of not paying all the earnings of a bank to the stockholders in the form of dividends. Suppose a bank has Undivided Profits to the amount of $20,000. If the Capital is $100,000 the bank could pay a 10 per cent dividend to the stockholders and keep $10,000 in the business to supplement the existing capital. When this is done it is carried to Surplus. The Capital account, however, and in consequence the number of shares of stock outstanding, are kept the same as before. And dividends are computed on the Capital only-never on Surplus.

The other liabilities of a bank take two main forms, that of Deposits and that of Circulation or Notes. The latter item is a statement of the total amount of obligations the bank has outstanding in the form of its own notes or promises to pay. Anyone who

holds a bank note has a claim for cash against the bank that issued it for the amount stated on the face of the note. Bank notes are always payable on demand.

Deposits are of three classes: Individual, Bank, and Government deposits. The first is a statement of the amount owed by the bank to persons holding, not notes of the bank, but a right to draw upon the bank for funds, as evidenced by a certificate of deposit, balanced passbook, or monthly statement of account. Such deposits may be payable either upon demand or upon notice given a certain number of days in advance. Bank deposits is a statement of the obligations of the bank to other banks, and is often entered merely as "Due other banks." In a more detailed statement this item is divided into: Due national banks, Due state banks, Due trust companies and savings banks. Government deposits do not differ from the others in principle; they are merely funds owing to the government.

Other items found among liabilities in the typical statement are Certified checks and Cashiers' checks. The former arises as follows: Depositor X writes a check against his account for, say, $100 and asks the cashier of the bank to certify that the account is good for the amount, and hence that the check will be paid at maturity, by writing "Certified" across the face of the check and signing his name thereto. When the cashier does this the bank becomes directly liable for the payment of the check, and consequently immediately deducts the amount from Individual deposits (X's account) and adds it to Certified checks. A Cashier's check is an order on the bank to pay a certain sum drawn by the cashier rather than by an individual depositor.

Acceptances based on imports and exports represent obligations resulting from the bank's accepting drafts drawn against it by persons engaged in international trade. Accepting a draft is equivalent to a promise to pay. Letters of credit also arise in international transactions. The bank agrees to guarantee the credit of a merchant who wishes to buy goods abroad. The bank in this case does not accept drafts drawn against it, but asks a London correspondent to accept the drafts, the bank agreeing to collect from the merchant and forward the funds to its correspondent before the date of maturity of the drafts. Such business is done on a commission basis.

On the resources side of a bank statement we find first the item of Loans, or Loans and discounts. This item indicates that the bank has claims against individuals who have borrowed funds to the amount

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