Part 6

When drafts have Bills of Lading attached, and the draft states on its face that it is payable on arrival of the goods, the bank can hold it until the goods arrive; but if the draft calls for payment on presentation, even though it has a Bill of Lading attached, the bank holding it, until the arrival of the goods, does so at its own risk. As has been stated, and it can't be stated too forcibly, the presenting bank has no option and must obey orders to the letter. If it does not, it must suffer any resulting loss. It is only an agent and can not regard the wishes of the payer.

Another point you should bear in mind. The bank must not only pay strict attention to the instructions of the sender of the collection, but it must follow the law. In self-protection a bank must keep itself informed about the laws regarding collections and any changes in these laws.

If a bank accepts anything but the actual cash in payment of a collection, it does so at its own risk, and not at the risk of the sender. For instance, a bank has a draft on Smith, or holds Smith's note for collection. Smith offers his check in payment. If the check turns out "no good" the bank must recover the paper immediately, and any document which might have been attached; otherwise the sender can hold the bank for the amount. Therefore, when you tender your check to a bank in payment for collections, you are asking them to take a risk. If you are not well known in the bank, it is only a reasonable request for the bank to ask you to have your check certified. Don't ask the bank to have it certified; for, as has been explained in the remarks on "Certified Checks," the bank by so doing would release you, and could hold only the paying bank. You might just as well ask a strange bank to cash your check as to offer it your uncertified check for a collection on you. You would hardly cash a check for a stranger. Why should the bank take an equal risk for you? Yet nothing seems to rouse the ire of the average man more, than for the collection clerk to ask him to have his check certified.

It is a well-nigh universal rule in all Clearing House Associations, that the banks, which are members thereof, shall not collect checks on each other before the daily hour for meeting. Also it is a general custom not to collect from each other, checks that are deposited, or taken in payment for paper due, after that hour. Hence, when a bank accepts uncertified checks in payment before the clearing hour, it will know before closing time whether such checks are good. But, if a bank accepts an uncertified check in payment after the clearing hour, either, it must have it certified, and thereby release the drawer; or, it must hold it until the next day at its own risk. The banks always respect the man who has his check certified, if tendered after the clearing hour.

For these same reasons you can see why a bank can not take a check on a bank in some other town in payment of a collection. It then would be several days before the bank would know whether the check was good or not. Also the bank would be out that amount of money for the length of time it takes to collect that check; for every bank must remit to the sender on the very day it puts its "Paid" stamp on a collection and delivers it to the payer.

Therefore, when a bank notifies you that it holds your note, or a draft drawn on you, for collection, bear in mind four points. First: the bank must follow the instructions of the sender or owner of the paper. Second: it can not disregard the law. Third: you are benefiting yourself more than the bank by paying your paper promptly. Fourth: the bank is taking a risk every time it accepts anything other than actual cash for a collection.

The collecting bank can not consider the instructions of any one but the bank or persons from whom it receives the item. For instance, you live in St. Louis, and have sent your note to Brown & Co. of Bridgeport, Conn. Brown & Co. discount your note with their bank, or give it to their bank for collection. Before it is due the Bridgeport bank forwards this note to a Philadelphia bank, which in turn forwards it to a St. Louis bank. You are duly notified by the St. Louis bank. For various reasons you may not wish to pay. In that event, positively the only way to have this note recalled is for you to communicate with Brown & Co. Then they must request its recall by the Bridgeport bank, which in turn instructs the Philadelphia bank. Then that bank instructs the St. Louis bank to return the note. In other words, all instructions must come through the same channels by which the note was originally sent. Bear in mind that you are not the owner of this paper, nor is the bank which receives it for collection.

When a draft has the words "with exchange" on its face the drawer is asking the payer, not only to pay the amount of the draft, but also the bank charges for collecting. Unless the presenting bank has instructions to collect this exchange or return the draft, it can accept the amount of the draft and deduct its charges when it remits for the collection. So don't feel resentment toward the bank when it asks you to pay for collection charges. Many people do. But the bank is only following instructions and cares nothing whether you, or the fellow at the other end, pays the cost.

Because it is human nature to object to paying out money, the Local Collection Department is the recipient of more complaints and unreasonable requests than any other department of the bank. Any number of actual happenings could be set down.

Now the law says that banks shall keep open during certain hours on every business day, which is not a legal holiday. After the closing hour there is a tremendous amount of work to be done. The tellers must balance their cash; the bookkeepers must take off a balance of every account on their particular set of books; and every check and draft deposited, or received through the mails, and payable in other towns, must be listed and forwarded for collection. Nothing can be held over without risk, no matter how heavy the day's work. The rule in every bank is to clean up all the work on the very day it is received. None of this daily balancing of cash, or books, can be commenced until the last check has been cashed, the last depositor has come in, and the last payer of a collection has settled. For instance, the payment of a single draft or note after banking hours, necessitates the holding open of several sets of books or the erasure and changing of various totals by the bookkeepers. It is a very mistaken, but popular, idea that the bank employes practically are through with their duties at the close of banking hours. The fact is, that the usual hours for the employes are from eight till five, and it is no uncommon thing for the clerk and officers to be hard at work many hours after the business houses have closed.

Yet many persons think the bank very disobliging if it refuses to transact business after hours. One unreasonable individual insisted that he had until sundown to pay his note on the day it was due. When the collecting bank told him it would be protested if not paid before the end of banking hours, he became very abusive and wanted to know who gave that bank the power to say how late he could pay. He was politely referred to the law makers, but this did not lessen his resentment against the bank.

The foregoing are statements of actual daily occurrences and are only fair samples of the injustice with which many persons treat the banks. And it is mainly the result of ignorance of the laws and customs, which the banks must obey.

XII

THE LOAN DEPARTMENT

As a preface to the remarks on this department, the following simple and concise statement is taken, by permission, from that excellent book, "Money and Banking," by Mr. Horace White. (Book II, Chapter I, page 235, Edition of 1895.)

"FUNCTION OF A BANK"

"A bank is a manufactory of credit and a machine of exchange. Mr. H. D. McLeod's analysis of the mechanism of banking is substantially this: A man has $5,000.00 of his own money. He starts a bank. His neighbors deposit $45,000.00 with him. This money becomes the absolute property of the banker. The depositors have simply a right to withdraw an equal amount whenever they like, which right can be enforced by law. The banker owns the money and the depositor has a claim, or right of action, against him for an equal sum. But the depositors will not draw the money out immediately; if they had intended to do so, they would not have deposited it at all. The banker finds by experience that some of his customers will deposit as much money as others draw out, so that $50,000.00 is on hand all the time. He concludes that if his own $5,000.00 in connection with his good reputation, is considered by the public a guarantee for $45,000.00, then the whole $50,000.00 will serve as a guarantee for at least $200,000.00. When he begins, his balance sheet reads in this way:

LIABILITIES. ASSETS. Deposits $45,000.00 Cash $50,000.00

"He now begins to discount the commercial paper of his customers running say ninety days at 6%. When he discounts a bill of exchange for $1,000.00, he deducts the interest for ninety days ($15.00) and credits the customer the remainder ($985.00) on his books. This $985.00 is called a deposit, because the customer has the right to draw it out by his check exactly as he could draw out an equal sum of gold deposited by him in the same bank. In the eye of the banker, and of the customer, and of the law, it is a deposit. In ordinary times it is like any other deposit. That is, the proportion remaining uncalled for at any time will be about the same as the proportion of actual money deposited. Yet it is nothing but a bank credit. Hence the word deposit, when thus used, is clearly a misnomer, since, by derivation and common understanding, a deposit means a thing laid away, or given in charge of somebody. It must be borne in mind, therefore, that bank deposits consist of two different things, namely, (1) money, (2) bank credits, and that the latter may be four or five times as large as the former.

"The process continues till the banker has $200,000.00 of discounted bills in his portfolio. Then his accounts stand thus--

LIABILITIES. ASSETS.

Deposits $242,000.00 Cash $ 50,000.00 Profit 3,000.00 Loans & Discounts 200,000.00 ----------- ----------- $245,000.00 $250,000.00

"This is Mr. McLeod's exposition and it is the correct one. It follows that the banker has manufactured something which serves as a medium of exchange to the extent of nearly $200,000.00. This something is credit. Goods can be bought and sold with it as readily as with money, since the checks drawn against these deposits are universally accepted. The whole $200,000.00 of bills are not discounted in a lump, but gradually, so that some are always maturing and bringing money in to meet the checks of customers, in an endless chain of deposits and discounts. It is found in practice that $200,000.00 of loans and discounts may be easily carried on $50,000.00 of cash. Thus, the loans of all the National banks in the United States in October, 1894, were $2,000,000,000.00, and their cash (including silver certificates and silver dollars) was a trifle less than $400,000,000.00, or only one-fifth of the amount of the loans. The other four-fifths was credit, and perfectly sound credit too, for it had passed through one of the severest panics in our history."

The foregoing quotation is an unanswerable argument for the need of banks as manufacturers of credit in every community. The greater the banking capital in any section, the easier it will be for the people of that section to carry on and enlarge their business.

The Loan Department is not only the most important, but it is the money-making end of the bank. If it makes no loans it will pay no dividends. If, on the other hand, it makes bad loans, it will go out of existence.

It can be understood readily that the successful bank officer, whose duty it is to accept or reject loans, must be a person of large experience and wide knowledge of men and affairs. He must be an excellent judge of human nature. Not too conservative, nor yet too venturesome. He must be a constant student of financial conditions; and must expand or contract his loans as the sea of finance is placid or stormy. His responsibility is great. He must lend, but he must lend judiciously, millions of other people's money. He can not allow feelings of personal friendship to warp his judgment. He must be thoroughly familiar with the laws concerning the making and the collection of notes.

In an address to the National Banks in 1863, the Hon. Hugh McCulloch, the first Comptroller of the Currency, gave this sound advice:

"Do nothing to foster and encourage speculation. Give facilities only to prudent and legitimate transactions. Distribute your loans rather than concentrate them in a few hands. Pursue a straightforward, upright, legitimate banking business. Treat your customers liberally, bearing in mind that a bank prospers as its customers prosper."