elementary banking - american institute of banking

ELEMENTARY BANKING American Institute of Banking Section American Bankers Association Five Nassau Street New York City Copyright 1922 by American Institute of Banking GIFT OF^ i^ „ •:» * •„^" - ^ -»< CONTENTS CHAPTER PAGE I. Elementary Essentials 7 II. Bank Departments and Operations 35 III. Deposits and Checks 61 IV. Promissory Notes and Discount 97 V. Drafts and Acceptances 127 VI. Exchanges and Transfers 155 VII. Bills of Lading and Other Documents 185 VIII. Federal Reserve System. 211 IX. Essentials of Contracts 229 X. Special Problems in Law 255 XI. Bank Statements 281 XII. Illustrative Entries 309 XIII. Bank Ledgers and Department Bookkeeping 375 XIV. Accrued Items and the Audit 436 900737 PREFACE THE Institute course of study in Elementary Banking, was originally adopted in 1918. Many experienced bank clerks had left their institutions and entered either the military or naval service. Their places were filled by young men and women with little, if any, business training or ex- perience. With the idea of providing a practical and logical course of study for these newcomers in the banking profession, as well as a foundation for the Institute Standard courses of study, a text-book covering the elements of banking and law seemed to be desirable. J. F. Ebersole of the University of Minnesota, who had been teaching an elementary banking course in Minneapolis Chapter, was selected to prepare such a book, based on the lectures given in Minneapolis Chapter. That book has been a distinct success. The present text en- titled "Elementary Banking" is based on the book just re- ferred to. However, the original text literature has been completely revised and brought to date, in some cases being rewritten and rearranged, and, in addition, four chapters on bank bookkeeping and accounting have been added. Chapters I, II, III, IV, V, VI, VII and VIII have been revised by James B. Birmingham, Assistant Cashier of the National City Bank of New York ; chapters IX and X have been revised and rearranged by Richard W. Hill, Member of the New York Bar and Secretary of the American Institute of Banking ; and chapters XI, XII, XIII and XIV were prepared by Arthur K. Schulz of the Chase National Bank of New York. John M. Chapman, Lecturer on Banking in the School of Business of Columbia University, assisted in the necessary rearrangement of the text. Thomas Ritchie, Comptroller, and Martin L. L. Henry, Auditor, both of the Chase National Bank of New York, were generous with constructive criticisms of the ac- counting material. INSTITUTE PLATFORM RESOLUTION adopted at the New Orleans Convention of the American Institute of Banking, October 9, 1919: "Ours is an educational association organized for the benefit of the banking fraternity of the country and within our membership may be found on an equal basis both em- ployees and employers; and in full appreciation of the oppor- tunities which our country and its established institutions afford, and especially in appreciation of the fact that the pro- fession of banking affords to its diligent and loyal members especial opportunities for promotion to official and managerial positions, and that as a result of the establishment and main- tenance of the merit system in most banks a large number of Institute members have through individual application achieved marked professional success, we at all times and under all circumstances stand for the merit system and for the paying of salaries according to the value of the service rendered. "We believe in the equitable cooperation of employees and employers and are opposed to all attempts to limit indi- vidual initiative and curtail production, and, insofar as our profession is concerned, are unalterably opposed to any plan purporting to promote the material welfare of our members, individually or collectively, on any other basis than that of efficiency, loyalty and unadulterated Americanism." A successful banker is com- posed of about one-fifth accountant, two-fifths lawyer, three-fifths polit- ical economist, and four - fifths gentleman and scholar — total ten- fifths —double size. Any smaller person may be a pawnbroker or a promoter, but not a banker. — George E. Allen. Elementary Barikiiig CHAPTER I Elementary Essentials THE beginner in a bank usually discovers that he does not have at his command a sufficient knowledge of commercial documents and banking practice. Later on, also, he often realizes that he did not start out with the best principles of personal conduct or a proper attitude or view of his own job. It is the object of this book to help the beginner to acquire this necessary information at the earliest possible moment. He may then become a very efficient helper within a short time. The managers of banks who are obliged to train begin- ners find this to be a problem of some difficulty and considerable expense. It has been estimated that the training of the average beginner costs a bank about two hundred dollars in the form of unearned wages at the start, valuable time consumed by the officers or men in the bank who supervise the in- struction of beginners, losses through errors due to ignorance, and waste due to inefficient utilization of time and energy. WHAT IS A BANK?— A bank may be defined as a credit institution. It is an institution which studies, deals in and guarantees credit. While the bank receives and pays out large sums of money in 7 8 ELEMENTARY BANKING the form of deposits, .such operations are subordinate to the one great fuiiction —that of granting credit. If we view, then, the bank from this standpoint, its purpose is to facilitate the exchange of goods with- out the use of money. Banking has been developed to meet the needs of business. Hence, the more highly developed business becomes, the more exten- sively bank credit is used and the more important banking becomes in the transaction of business with the use of a minimum amount of money. THE FUNCTIONS OF BANKING. — The most important functions of banking may be classi- fied as follows: (1) to assemble capital and make it effective; (2) to receive deposits and make collec- tions; (3) to check out and transfer funds; (4) to discount or lend; (5) to exercise fiduciary or trust powers; (6) to issue circulating notes. Every bank which expects to succeed must first of all prove its value to the community. The services which a bank performs are so generally taken for granted that the public is unaware of the real extent of the facilities offered. Banks are equipped to utilize funds, for either a short or long period of time, safely, and with some profit. Depositors individually do not enjoy the same ability. An individual's unused funds are perhaps small in amount, cannot be loaned to advan- tage with the assurance of immediate return when desired, and the care of the money involves worry and risk. The bank, on the other hand, possesses the necessary men, machinery and experience. By ob- taining deposits, each perhaps small in itself, from ELEMENTARY BANKING 9 many people, it acquires a large reservoir of funds. From this supply, which is constantly being increased by additional deposits and decreased by withdrawals according to the needs and circumstances of the de- positors, the bank can now make loans and other investments from time to time. It is known as a place where loans may be sought, and it is protected in making these loans of funds which it has had left with it on deposit by the law of averages which usually operates in such a way that withdrawals and deposits about balance each other, the normal ten- dency being in favor of a net increase. By receiving deposits and making collections the bank saves the depositor much personal effort. To receive or deposit in one city a check made payable in another, hundreds or thousands of miles away, to convert that check in a relatively short time into cash available for the depositor's use, and all this with no direct assistance from the customer and at a very slight expense to him or no«e at all, is indeed service. So also is the willingness of the bank to collect promissory notes, drafts and other negotiable paper in a similar way. In addition to taking care of funds without charge and making collections, the bank provides the means of withdrawing and transferring funds readily by giving its customer a book of blank checks. If a depositor owes another man one hundred dollars, the depositor need not go to the bank, withdraw the cash and pay his debt. He can give his creditor an order on the bank, which can be presented at the bank in person and the cash obtained, or it can be 10 ELEMENTARY BANKING deposited in this or another bank. By lending money the bank benefits the community to the extent that it supplies funds to assist worthy business. Temporary working capital to assist in the commercial, agricul- tural or industrial life of a community is very im- portant. Borrowers logically look to a bank for such assistance and are thereby saved the necessity of either going without the funds they need or spending an endless amount of time and effort in negotiating many small loans from individuals. Note issue, orig- inally a common right of a bank, is now restricted by law to National banks, Federal Reserve banks and the Government, and is chiefly valuable as a means of putting additional currency in circulation according to the needs of trade. There has been such an enor- mous growth in the business done by trust companies and by trust departments of banks in the last few years by acting in various fiduciary capacities that it seems necessary to include this as one of the im- portant banking functions, which will be more fully discussed a little later. TYPES OF BANKING.— According to their functions, banks may be classified into four chief types, namely, commercial, savings, trust, and invest- ment. The deposits of commercial banks are re- ceived largely from individuals, firms and corpora- tions in all lines of business, are repayable on demand, and are mostly invested in short time loans for com- mercial business purposes, these loans having a ma- turity of perhaps three to six months, and enabling the bank to keep its assets comparatively liquid and [...]... functions similar to those of State banks of deposit and dis- ELEMENTARY BANKING 16 count, and frequently State banks and trust com- not especially organized for the purpose, endeavor to obtain savings deposits panies, BANK ADMINISTRATION.—Banks are gov- erned by boards of directors elected by the stock- By holders law, the directors are primarily re- sponsible for the administration of the bank Bank chosen... attached to the face of the check These rules are of importance and should be followed for perfect work (8) In the case of non-payment or non-accept- it ance, leave plain Remember and that the "notice" bank from a lawsuit paper legible "notices," in all cases The notice is is left to safeguard your for not having presented the proof of presentation If en- trance to office or residence of drawee is locked,... bookkeeper at end of day This department often keeps the records of exchange charged on out -of- town checks, and of delayed credits on interest balances made necessary because of uncollected funds deposited (3) Paying Teller's Department (Teller)— Pays or certifies checks, is in charge of the signature book or cards bearing the authorized signatures of all depositors, ships currency, is in charge of the vault... executor of wills, (2) administrator of estates, (3) trustee under agreement, will or deed of trust, (4) guardian of minors and incompetents, (5) conservator or comB mittee of incompetents, (6) agent of individuals ELEMENTARY BANKING — (1) 15 agent and registrar, (2) fiscal agent, (3) trustee under mortgage, (4) assignee and receiver of bankrupts (individuals or corporations), (5) guarantor of titles,... desire of a bank to handle all of the business of its customers which it readily can terest rate, the mand advance notice of ELEMENTARY BANKING 12 KINDS OF BANKS.— The kind of bank which formed in any community is largely determined by the needs of that community Under the will be general types just discussed classifications : we find the following National, State and private banks, and the banking. .. Sub- State, according to its charter ment Such of —National or —the manage- to governmental authority any bank is its board of directors by the stockholders The vested in directors are elected directors elect the officers, president, vice-president, cashier and assistant cashier, who are the executive heads of the institution and are charged with the duty of administering its affairs The number of. .. law and the conditions of the trust Investment banks receive their deposits from well-to-do people who wish their funds held for investment and which are in due course converted into bonds, acceptances and A particular other so-called investment securities bank may perform functions of more than one type of banking as the recent tendency in banking is towards an ever greater scope of business, partly... i-h S So: -^ -s clj 17 s ? i « s ^^ Din M O ;uioddv to to O CO rt ^ Xoiduia ^ CO W ^ J 5 ELEMENTARY BANKING 18 begin, whether his social position is at the beginning or the end of an ancestral line should systematize — routine work into habit, thereby simplifying physical movements, diminishing fatigue and assuring speed and accuracy Uniform and continued practice will create well-beaten channels of. .. banks Many people judge a bank by its messengers because they see the messengers often and may never actually come to the bank to see any one else While the officers often meet the public in the making of loans and the transacting of other business, yet the messengers are very important from the ELEMENTARY BANKING 20 standpoint of appearances, for they assist in collecting the obligations due to a bank... drawee is absent a presentation of the draft at his place of business and the leaving of a notice may be sufficient, but whenever possible see the drawee in person documents at the cashier's office of the concern, and be careful to distinguish between documents which are obligations of the firm and others that are personal obliga(6) Present all firm or corporation tions of its officers or employees is refused . ELEMENTARY BANKING American Institute of Banking Section American Bankers Association Five Nassau Street New York City Copyright 1922 by American Institute of Banking GIFT OF^ i^ „ •:» * •„^" - ^ - < CONTENTS CHAPTER PAGE I. Elementary Essentials 7 II. Bank. on any other basis than that of efficiency, loyalty and unadulterated Americanism." A successful banker is com- posed of about one-fifth accountant, two-fifths lawyer, three-fifths polit- ical economist, and four - fifths gentleman. more highly developed business becomes, the more exten- sively bank credit is used and the more important banking becomes in the transaction of business with the use of a minimum amount of money. THE FUNCTIONS OF BANKING. — The most important functions of banking may be classi- fied as follows: (1) to assemble capital and