STANDARD BANKING American Institute of Banking Section American Bankers Association Five Nassau Street New York City Copyrigth, 1921 by American Institute of Banking SEP -8 1921 ©CI.A624231 PREFACE STANDARD BANKING" aims to combine banking principles and banking practices. Some of the material used in previous publications of the American Institute of Banking — material that has stood the test of time and experience — has been utilized in revised form in this work. To such material much original matter has been added. The result of such combination is a new text-book adapted alike to class and correspondence instruction. The work of preparing "Standard Banking" has been done jointly by E. W. Kem- merer, Professor of Economics and Finance in Princeton University; George E. Allen, Educational Director of the American Institute of Banking, and other officers of the Insti- tute. Other professional educators and practical bankers have participated in the work of composition and revision. Among those to whom particular credit is due are : C. W. Allendoerf er, Vice-President of the First National Bank of Kansas City; Robert H. Bean, Executive Secretary of the American Ac- ceptance Council; Godfrey F. Berger, Bank Examiner in the New York State Banking Department; James B. Birmingham, Assistant Cashier of the National City Bank of New York; Edward M. Earle, Department of Extension Teaching of Columbia University; Fred W. Ellsworth, Vice-President of the Hibernia Bank and Trust Company of New Orleans; William Feick, Assistant Cashier of the Irving National Bank of New York; B. L. Gill, Vice-President of the Seaboard National Bank of New York; George A. Kinney, Trust Officer of the Chase National Bank of New York; Ernest T. Love, Assistant Cashier of the Chase National Bank of New York; Fred L. O'Hair, Assistant Cashier of the National City Bank of New York; Thomas B. Paton, General Counsel of the American Bankers Association ; Gardner B. Perry, Vice-Presi- dent of the American Trading Company of New York ; James Rattray, Assistant Vice-President of the Guaranty Company of New York; O. M. W. Sprague, Professor of Banking and Finance in Harvard University; and Wilbert Ward, Assistant Cashier of the National City Bank of New York. 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 profession 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." CONTENTS CHAPTER PAGE I. Money 7 II. Credit 44 III. Banks and Banking 76 IV. Bank Operation 120 V. Collections 218 VI. Loans and Discounts 253 VII. Collateral Loans 279 VIII. Agricultural Loans 311 IX. Acceptances 347 X. Stocks and Bonds 379 XI. Systems of Banking 415 XII. International Exchange 442 WHO IS A BANKER? A SUCCESSFUL BANKER is composed of about one-fifth accountant, two-fifths lawyer, three- fifths political 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. Standard Banking CHAPTER I Money MONEY is a comparatively modern device. Our earliest record of coined money dates back to only the seventh century before Christ. Goods were exchanged long before money existed. The exchange of one commodity for another when neither commodity is money is called barter. For thousands of years of the world's history barter was the usual method of exchange. The savage exchanged a stone axe for a shell necklace, or a few arrow-heads for a fox skin. Barter is still practiced on a large scale in the more backward parts of the world, as in Central Africa, the interior communities of China and many parts of Russia. In our own country it is not unknown. Farmers still exchange eggs and butter for groceries, and often give the local miller grain for grinding their wheat into flour. Automobiles are ex- changed. Domestic servants receive a substantial percentage of their compensation in the form of board and lodging. LIMITATIONS OF BARTER.— As the popu- lation grows and the number of goods to be ex- changed increases, barter tends to break down. The chief trouble with it is what is known as "lack of double coincidence" in desires. One savage, for ex- 8 STANDARD BANKING ample, may have a fox skin that he wishes to ex- change for arrow heads ; the second savage, however, who has a good supply of arrow heads, may not want a fox skin at all, but may want a shell necklace, so that an exchange is impossible. For effective barter not only must A want what B has to give, but B must want what A has to give; and the wants must be for such quantities of the respective articles as to make an exchange possible and desirable for both parties. Under a barter economy some kinds of articles that are in widespread demand are more easily exchanged than others. Arrow heads and ornamental shells, for example, may be in great demand among a primitive hunting people, cattle and sheep among a pastoral people, and grain among an agricultural people. In each case the man who has a supply of the most high- ly desired article is likely to find no difficulty in ex- changing it for the other things he wants. It is the man who has the article that very few people want and who wants an article that very few people have, who has the most difficulty in a barter regime. Often his only way of getting the desired article is by a round- about series of exchanges. If he wants to exchange article A for article F, but finds that none of the peo- ple who have F care anything about A, he may be able to exchange A for B, an article of limited popu- larity, but still more widely desired than A, and then be able to exchange B for C, an article of somewhat greater popularity, and then C for D, an article of great popularity — perhaps ornamental beads — and then he will have no difficulty in finding some pos- STANDARD BANKING 9 sessor of article F that will be glad to part with it for D. Such roundabout exchanges are common in primitive communities. MEANING OF MONEY.— In this way people come to understand that, from the standpoint of get- ting what one wants by barter, it is a wise policy to keep a part of one's wealth always in the form of one of these widely desired and highly exchangeable arti- cles, and this may even be true of people who have no desire to use for their direct needs any more of the particular article. A hunter, for example, may have all the arrow heads he needs for his own hunting and yet be glad to accumulate more for purposes of ex- change, after he learns that arrow heads are highly exchangeable. In this way articles of a high degree of exchangeability come to serve as common media of exchange. People receive them for the most part, not with the idea of using them directly, but of pass- ing them on to others in exchange for what they want. This was true of wampum beads among some of the North American Indians, of furs in the Hudson Bay Colony, of arrow heads in parts of Mexico, and of cattle among the patriarchs of the Old Testament and in Homeric times. It was true also of tobacco in Colonial Virginia. When one of these articles reaches such a high degree of exchangeability as to become a common medium of exchange, it becomes money. Following the lead of Francis A. Walker, therefore, we may say that "money is as money does," and that the first and most fundamental thing that money does, the thing that constitutes it money, is to serve 10 STANDARD BANKING as a common and generally accepted medium of ex- change for goods and services, a medium that is readi- ly accepted without reference to the character or credit of the person who offers it. Other functions of money, all of which are derived from this primary function, are (1) common measure of value, (2) standard of deferred payments, (3) storehouse of value, and (4) bank reserves. COMMON MEASURE OF VALUE. — We measure length in terms of a unit of length that we call the foot or the meter ; we measure weight in terms of a unit of weight that we call the pound or the kilo- gram, and we measure value in terms of a unit of value that we call in the United States the dollar. We know how much the dollar is worth because in using dollars as media of exchange we are continually comparing dollars with the values of all sorts of goods which we are buying or selling. We are testing out its value every day in the process of exchange. Every time we buy an article for money we measure the value of the article by the money given ; so also does the seller of the article. In serving as a common me- dium of exchange, therefore, money becomes a com- mon measure of value. We measure and express the values of all commodities in terms of the value of the dollar. STANDARD OF DEFERRED PAYMENTS. — Deferred payments are payments that are post- poned. A purchase or sale is a two-sided proposition. If the seller receives his money at the time he delivers the goods, we call the transaction a cash transaction ; [...]... and downs of silver that determine the value of the standard dollar and of all other forms of money with which the standard dollar is interchangeable A country whose unit of value consists of commodity money made of gold is called a monometallic gold standard country and one whose unit of value consists of commodity money made of silver called a monometallic silver standard country is STANDARD BANKING. .. MONEY.—Money may be NON -STANDARD classified as standard money and non -standard money Standard money is money that stands on its own bottom It independently represents the unit of value, and to its money conform, rising as it rises and falling as it falls All money that is not standard money is non -standard money value the values of other kinds of and depends for its value largely on standard money Standard money... STOREHOUSE OF VALUE.—Another function of money is that of serving as a store house of value By this is meant that people keep a part of their wealth the miser, most of his in the form of money Sometimes money is hoarded for long periods; more often it is kept only short periods and then passed on in exchange for goods The average length of time that most of us keep a piece of money in our pockets now-a-days... form of actual money, whether it be for a week or for ten years, we if, — — are using it as a storehouse of value — We use money as a storehouse of value because of its high degree STANDARD BANKING 12 of exchangeability, because, of all goods, the money is most marketable BANK RESERVES.—The money to be considered is last function of that of serving as bank This is one of the most important functions of. .. from 1862 to 1879, when the money of current use is as, for of the present standard of STANDARD BANKING 29 at a discount in terms of the legal standard money was during this greenback period that the United States Supreme Court in a series of famous cases, It known as the "legal tender cases," settled the American interpretation of the legal tender quality The chief of these cases (1868) 7 Wallace 71;... coin in sums of not less than $20 and the issue of gold certificates therefor in denominations of not less than $10 Gold certificates were made payment of all debts and dues, public by the act of Congress passed Decem- legal-tender in and private, ber 24, 1919 SILVER CERTIFICATES.—The act of Feb- ruary 28, 1878, authorizing the issue of the standard silver dollars, provided that any holder of such dollars... the value of the gold dollar So long as we maintain the gold standard, whenever the value of gold rises the value of our gold dollar rises, and with it and exactly to the same extent the value of a dollar of every kind of money in circulation in the United States, regardless of variations in the value of the material (e g., silver and copper) out of which the other money is made In a silver standard. .. dollars of so-called United States Notes or "greenbacks." These paper money notes were not STANDARD BANKING 26 redeemable in gold from the time of their original issue in 1862 to Jan 1, 1879 Their value in terms of gold greatly depreciated, at one time reaching the low figure of thirty-five cents gold to a dollar of greenbacks Meanwhile under the force of Gresham's Law the greenbacks drove out of circulation... dollar during those years was the actual standard of value although itself varying in value from day to day as the result of the interaction of the forces of demand and supply Legally the country was on a bimetallic commodity money standard but actually it was on a fiduciary money greenback standard STABILITY OF VALUE.—The ment of a good monetary system is first require- that the monetary unit shall be reasonably... change except through changes in one or more of the three factors: (1) Money in circulation; (2) rate of monetary turnover, and (3) number of commodity units sold Here we have the law of demand and supply in its simplest form applied to a regime in which only one kind of money circulates and in which credit is un- STANDARD BANKING 17 This expression of the law of demand and known supply in its application . STANDARD BANKING American Institute of Banking Section American Bankers Association Five Nassau Street New York City Copyrigth, 1921 by American Institute of Banking SEP -8 1921 ©CI.A624231 PREFACE STANDARD BANKING& quot; aims to combine banking principles. B. Perry, Vice-Presi- dent of the American Trading Company of New York ; James Rattray, Assistant Vice-President of the Guaranty Company of New York; O. M. W. Sprague, Professor of Banking and Finance in Harvard University; and Wilbert Ward, Assistant Cashier. Bankers Association Five Nassau Street New York City Copyrigth, 1921 by American Institute of Banking SEP -8 1921 ©CI.A624231 PREFACE STANDARD BANKING& quot; aims to combine banking principles and banking practices. Some of the material used in previous publications of the American Institute of Banking — material