Part 1

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A SIMPLE EXPLANATION OF MODERN BANKING CUSTOMS

by

HUMPHREY ROBINSON

Edited from a Legal Standpoint by W. Overton Harris, Former Judge of the Jefferson County (Kentucky) Circuit Court, Dean of the Louisville (Kentucky) Law School

Designed for the promotion of closer and more satisfactory relations between the public and the banks; for the information of depositors generally, and of those just entering the banking business.

Boston Small, Maynard & Company Publishers

Copyright, 1909, 1910 By Humphrey Robinson

Entered at Stationers' Hall

CONTENTS

PAGE

I. General Remarks 9

II. The Choice of a Bank 14

III. Opening a Bank Account 17

IV. How to Deposit 22

V. Your Account on the Bank's Books 26

VI. Stopping Payment of a Check 32

VII. How the Bank Collects the Checks you Deposit 33

VIII. The Clearing House 36

IX. A Certified Check 49

X. Protesting Notes, Drafts, etc.,--why Necessary and how it is Executed 53

XI. The Local Collection Department 64

XII. The Loan Department 77

XIII. New York Exchange 99

XIV. The Method of Issuing National Bank Notes 102

XV. The So-called "Special Privileges" of Banks 109

A SIMPLE EXPLANATION OF MODERN BANKING CUSTOMS

I

GENERAL REMARKS

After some years of work in a bank, it has been impressed daily upon the writer that, if the depositors were fully informed about the details of the conduct of banks, closer and more satisfactory relations would result. Hence this attempt to explain, in a simple and concise way, avoiding as much as possible the use of technical terms, certain things that every depositor should know.

For ten years the writer was "in business." For an equal length of time he has been connected with a large city bank. He remembers his utter lack of comprehension of banks and their ways, and his consequent mistakes, perplexity, and embarrassment in dealing with them. Also the unfairness and prejudice with which he often judged them.

Recalling all this, he believes that, without giving offense, he can state these facts.

Many men having constant transactions with the banks do not realize the importance of the choice of a bank; few understand the correct way in which a note should be drawn, or how to determine the exact due date of a sixty or ninety-day note, or acceptance; what "protesting" a note or draft really means, and what effect it has on the drawers or endorsers; the functions of the Clearing House and the simplicity of its methods; why the banks are compelled to pursue a certain course in the collection of paper sent them, even though this course may be very objectionable to the payers; how checks are collected; the effect of certifying a check; and many other details. Also that very few depositors have ever seen a copy of the National Bank Act, or are familiar with the laws governing their own State Banks and Trust Companies.

This lack of knowledge of the laws and customs, from which there can be no safe departure, is undoubtedly the cause of many unreasonable requests; assertions of fancied rights; remonstrances, and irritating misunderstandings. This condition should not exist. One explanation for it may be, that the work in a bank is so strenuous, everything having to be accomplished in so short a time, that the officers and employes do not have the opportunity to explain fully the reason why.

Many seem to think that the details of banking are very complicated. But there is no mystery about these details. They are very simple and sane. The methods of bookkeeping are really elementary, principally mere addition and subtraction. Of course the science of banking and political economy involves deep and profound study, but these are not treated here, and the writer has attempted merely to give an idea of the daily routine of a bank.

This can be stated with certainty. The interests of the public and the banks are identical; and an acquaintance with banking customs will enable any man to conduct his business with much greater intelligence, satisfaction and profit. Also that banks want to accommodate, as far as possible, not only their own customers, but others, because they are possible customers.

It is hoped that this writing, in some small degree, may hasten the time, when the political orators, remembering that the day of the private banker has passed, and that the people now own the banks, will cease inciting the public against them; when the law makers, elected by the stockholders and depositors of banks, will cease oppressing them by unequal and unjust taxation; when the public generally, realizing the necessity and importance of banks to every community, will cease being prejudiced against them and their ways, and, by reason of a better understanding, will feel closer and more cordial toward them.

So "here's to a better acquaintance" between the public and the banks.

II

THE CHOICE OF A BANK

The choice of a bank should be most carefully considered, especially by a business man.

The same care should be exercised in selecting a bank as would be used in choosing your lawyer or your doctor. Having done this, make it a rule to be as frank and open and straightforward with your banker as with your lawyer or your doctor. You will never lose by it. All banking relations must be founded on mutual confidence. Once let your banker get the idea that you have deceived him, and naturally he is forced to view your statements with suspicion. Tell him the whole truth about your business and your resources, even though it hurts sometimes. It is primarily to his interest to help all his customers build up their business as much as possible, and to keep them going, and your success contributes to the general success of your bank. He should be, not only your banker, but your intimate financial adviser and your very good friend.

In deciding upon your bank, did you inquire into the character and disposition of its President and Cashier? Are they men whose business sagacity and honorable careers are such that you are glad to seek their advice; and can you repose every confidence in their keeping inviolate your business secrets? Will they fulfill to the letter their promises of protection to the best of their ability in times of financial stress? Or, have they exaggerated their resources and facilities and made all kinds of suave, but very general promises in order to get your account?

Have you gone a little further and considered the personnel of the Board of Directors of your chosen bank? That Board is supposed to approve or disapprove all loans and business arrangements. Or, did you open your account with some bank merely because of convenience of location, or because some friend suggested that institution?

III

OPENING A BANK ACCOUNT

In opening your account with a bank, you will be asked to give your signature and your address. Write your name naturally, as you are in the habit of signing it. The paying teller has to accustom himself to the peculiarities of the signature of every patron of the bank, and has to be constantly on the lookout for forgeries; for if he pays a forgery, the bank must stand the loss. He soon gets to know your signature as he knows your face. So don't have your signature on the bank's books as, John P. Williams, for instance, and then sign numbers of your checks, J. P. Williams. The letter "J" might stand for James or Joseph, and, if the account is in the name of John P. Williams, the bank is taking an unreasonable risk in paying out your money on a check signed, "J. P. Williams." It would have to make good any loss that might result thereby. A woman, for instance, will open an account as Florence Perkins Smith, and then send out checks signed "Florence P. Smith"; or "F. P. Smith"; or if married, will sign, Mrs. Harry B. Smith.

Then the paying teller must see that every endorsement on the check is technically correct. For instance, that a check made payable to John P. Williams is not endorsed "J. P. Williams," and again that a check payable to "J. P. Williams, Trustee," is not endorsed by J. P. Williams only, and not as "Trustee."

Before going to the paying teller's window you should endorse any check you are collecting; even though it is made payable to "Cash" or to "Bearer." If the check should turn out "no good," the teller can then see at a glance who cashed it, and communicate with the proper party. Compliance with these points saves much delay.

Every check should be endorsed exactly as it is made payable on its face. Many firms, as well as individuals, overlook this point daily.

The paying teller must watch for raised or altered checks. The law holds that any legal instrument is void if altered in any material way.

So many people, if they make a mistake in writing a check, will erase or alter the amount or the name, instead of taking a little more time and making out a new one. The banks have to be very cautious and particular about paying such checks, for they are paying out actual cash on doubtful orders. According to law, they must suffer the consequences if they pay to the wrong person or pay the wrong amount.

But all depositors must use every reasonable precaution to keep their checks from being altered in any way. Many people, especially in the rural districts, write checks in lead pencil. How easy it is for such checks to be changed if they fall into the hands of dishonest parties. The rejection of the account of any person, who will be so careless, is plainly only the part of safety.

The figures should be placed close to the dollar mark. In writing the amount of the check in words, begin close to the left hand margin, and when the amount is written, draw a line in the blank space left between the amount, and the word "dollars." The law says that where the figures and the written amount differ, the written amount shall govern.

IV

HOW TO DEPOSIT

In making your deposit, always head your deposit ticket with your name exactly as you wrote it when leaving your signature with the Paying Teller, otherwise, it might be credited to some other person. Also, fill in the amount of your deposit as plainly, and as legibly as possible. After the receiving teller has checked off your deposit ticket, it is passed on to the individual bookkeeper who has charge of your account. He is only human, and any bad figures on your ticket may lead to mistakes and consequent irritation to you.

Always make out your own Deposit Ticket. The Receiving Teller should not be asked to do this. There are generally other people in line, and they, as well as the Teller, have a right to complain if he has to stop and do this for you.

List your _money_ separately as _gold_ and _silver_, and, in entering your _checks_, write against each amount the name of the Bank drawn on, and the town, as plainly and briefly as possible. Then add the various amounts and hand the slip to the teller.

When depositing currency arrange the bills so that the ones and twos will be together, the fives together, the tens together and so on. Have the bills straight and face upward. With the gold and silver follow the same idea. If your deposit is large put the money in packages and label with amount and your name.

By following these directions you will put the Receiving Teller under everlasting obligations. He has a very short time in which to accomplish a great deal, and his position at best is nerve racking.

In endorsing a check, either simply write your name on the back, or write "Pay to the order of ---- Bank" and then sign your name. When a check is undoubtedly intended for you, and your name is not stated correctly on its face, endorse it _exactly_ as it is made payable, and then endorse as you generally do. For instance, if a check intended for Brown Bros. & Co. is made payable to Brown Bros., it should be endorsed first Brown Bros., and then Brown Bros. & Co.

Checks should be deposited or cashed promptly. You have only until the next succeeding business day in which to collect, or deposit for collection, any check. If you hold a check longer than forty-eight hours, and the bank on which it is drawn should fail in the meantime, you have released the drawer and must take your chances with the other claimants against the bank. For this reason the banks send out all checks deposited with them for collection on the same day, or the next succeeding business day; otherwise they have released both the drawer and the endorsers, if the paying bank should fail or any loss should result by reason of their delay.

Checks drawn on banks in the same town, and which are deposited after the clearing hour, are held over at the depositor's risk, until the next day.

V

YOUR ACCOUNT ON THE BANK'S BOOKS

There is no mystery about bank bookkeeping. It is about the simplest known. The total amount of your deposit is added to the balance you already have in the bank; then the total amount of your checks, that reach your bank that day, is deducted; the result is your balance.

Right here it is well to emphasize that the great majority of the banks _keep no record of the names of the parties from whom you receive checks which you deposit; nor do they keep any record of the names of the people to whom you make your checks payable_.

When you deposit a check, the only record generally kept by the banks is the date that you deposited it, the amount, and the town in which it is payable. If it is on a bank in the _same city_, your bank will keep a record of the name of that bank, but not otherwise.

In handling thousands of checks daily, it can be seen what a stupendous task it would be for a bank to keep a complete record of the drawers and _all_ the endorsers on every check. Its force of clerks would have to be doubled or trebled.

The bank should not be expected to keep your private memoranda, and it is the duty of the depositor to keep a complete record of the parties from whom he gets the checks that he deposits or cashes.

If a check is lost in the mails, the bank has a perfect right, after giving the depositor the amount, the date on which it was deposited, and the town in which it was payable, to charge the amount to the depositor's account until he furnishes a duplicate of the lost check. So, if you cash a check drawn by John B. Smith, for example, and payable to James A. Jones, and then endorsed by several other parties; it is your duty, and not the bank's, to keep a record of the person from whom you received that check, and obtain a duplicate if it is lost before reaching its destination. Also with all other checks which you deposit or cash.

Many retail firms cash checks for customers; and after endorsing, will deposit them for collection; keeping absolutely no record of the sources from which they received them. For example,--Mrs. Brown, of St. Louis, receives a check from her son in Cincinnati. She gets it cashed at the dry goods store with which she deals. Then the merchant deposits it, with numerous other checks, in his bank for collection. If the check is returned unpaid, the bank certainly has a perfect right to call on the merchant to pay it. The merchant then calls on Mrs. Brown to pay him. Now if that check is lost in the mails, say burned in a railroad wreck, the bank has the same right to call on the merchant for a duplicate. And it is no valid excuse for him to say that he has no record of the person from whom he received it.

In short, each person endorsing a check should keep a record of the person from whom he received it, or for whom he endorsed it.

On the last business day of every month your statement is made up and you should call for it as soon after as convenient. Then you should assort your canceled checks according to the dates or numbers of same, and compare them with the stubs in your check book. This is _very important_ in order that you may detect any forged or raised checks and _promptly_ inform your bank. If such checks are not reported to the bank in a reasonable time, you will have to stand the loss. The total amount of the checks _not_ returned by the bank should be the exact amount of the difference between the balance as shown by your check book and your bank book. For example,--you give a check on the last day of the month; it does not reach your bank until the first, second or third day of the next month. It can not be charged to your account until it does reach your bank; therefore, the bank's statement will generally show a larger balance than your check book. The difference is the amount of checks that are out.

Banks do not like to tell the amount of your balance over the telephone. They can not identify you "over the 'phone," and some person, who has no business to know, may be inquiring into your affairs. For the same reason they do not like to state the amount of your balance to any one in person, unless you authorize it. That is a confidential matter between you and the bank, and they make this rule for your protection as much as their own.

VI

STOPPING PAYMENT OF A CHECK

If, for any reason, you desire to stop payment on a check, communicate with the paying teller as quickly as possible. Give him a full description of the check, the name of the party to whom it is made payable, the number, the date, and the amount. Then _always_ confirm this action in writing. If, after examination of your checks, the bank informs you that this particular one has not been paid, you can safely issue another, if desired. Inform your bank, however, that you are issuing a duplicate, and write the word "duplicate" across the face of the check.

VII

HOW THE BANK COLLECTS THE CHECKS YOU DEPOSIT

When your deposit is handed in to the Receiving Teller, he assorts the checks you give him into "foreign" and "clearing" items.

The "foreign" items, that is, checks or drafts on banks in other towns, are then passed on to the route clerk. He, in turn, assorts them so that they may be sent to the banks that will collect them for the least possible cost. For instance, if your bank is situated in the middle West, the checks you deposit on the far West will be sent to a Chicago or St. Louis bank. Checks on Eastern cities, except New York possibly, will be sent to Philadelphia or Baltimore. Checks on nearby towns probably will be sent direct to banks in those towns. The reason for not sending checks direct to the towns on which they are drawn, is, that often they can be collected much more cheaply by sending them through other large cities.

The less expense your bank incurs in collecting, the less it will have to charge you. The depositor should understand that the bank's charges for these collections are figured at about cost.

It is a fact that an examination of this account on the books of any city bank almost invariably will show that it is a source of loss rather than profit. In other words, the city banks really charge their depositors less than it actually costs for collections on other towns.

The "clearing" items, that is, checks on banks in your own town, are passed to the Clearing House clerks. The collection of these checks through the Clearing House, and the operation of that institution, are next explained.

VIII

THE CLEARING HOUSE

The Clearing House is simply a meeting room for the convenience of the different banks in a city; a place in which to swap checks. Small towns have none. Ordinarily no figuring is done here except addition and subtraction. Its operation is simple.

Suppose you owe Brown $10.00, and you owe Jones $5.00.

Then suppose Brown owes you $5.00, and owes Jones $4.00.

Then suppose Jones owes you $3.00, and owes Brown $5.00.

Now, instead of each of you going around to two other places, you three meet in a certain conveniently located room to square, or clear up, accounts. This saves time and steps. A clerk is in this room to do the sums for you.

With a little addition and subtraction he has the following:

You owe Brown and Jones together $15.00 Brown and Jones together owe you 8.00 ------ Therefore, you owe Brown and Jones together $ 7.00

You and Jones together owe Brown $15.00 Brown owes you and Jones together 9.00 ------ Therefore, you and Jones together owe Brown $ 6.00

You and Brown together owe Jones $ 9.00 Jones owes you and Brown together 8.00 ------ Therefore, you and Brown together owe Jones $ 1.00

The clerk then announces that you owe $7.00 here; Mr. Brown is entitled to receive $6.00, and Mr. Jones is entitled to $1.00. Then he gives Mr. Brown an order on you for $6.00, and Mr. Jones an order for $1.00. Nothing complex about this if you know how to add and subtract.

Now just substitute for your name, the First National Bank; for Brown's, the Second National Bank; for Jones', the Third National Bank. Then put the figures up into the thousands or hundreds of thousands of dollars in place of the small ones given above. Then name the room where you met, the Clearing House, and call the clerk who did the sums, the Clearing House Manager. Then call the orders he has given, the Clearing House Manager's checks. No matter how many banks in any one city, or how large the figures, this simple method of settling is in operation daily.

Say there are twenty banks in your city. Your bank receives through the mails, and from its local depositors, numbers of checks on the other nineteen banks in the same town. The clerk, who goes to the Clearing House, and his assistants, assort these checks into nineteen different piles. Each bank goes by a number at the Clearing House. Then these checks are stamped on the back about like this--"Paid through the ---- Clearing House"; then follows the date, and name, and number of the bank which sends them. These nineteen piles of checks are added up into nineteen different totals; the checks on each bank being kept in separate bundles. The nineteen totals are added into one grand total. The clerk then starts for the Clearing House with nineteen bundles of checks; and a sheet which shows how much his bank has against each of the other banks; and the grand total it has against all the other banks combined. Therefore, at a certain hour, generally noon, on each day, twenty clerks, one from each bank, meet at the Clearing House. Each one takes his stand at his desk. When the manager taps the bell, every clerk makes the round of all the other desks, and leaves the bundle of checks he has against each bank with a slip showing the total amount of the package. When this is over, each desk has nineteen bundles of checks on it and nineteen slips showing the different totals.

Each clerk then adds up these nineteen totals, and the grand total resulting shows what all the other banks have against his bank. He then reports two amounts to the Manager of the Clearing House,--the grand total of the checks he has brought in, and the grand total of the checks which have been brought in against him.