Part 2

Say he has brought in $100,000.00 worth of checks against the other nineteen banks, and they have brought in $90,000.00 worth of checks against his bank. Then his bank has a credit at the Clearing House of $10,000.00.

After the Manager figures up from these totals handed him by the different bank clerks, he finds that certain banks brought more than was brought against them, and that certain other banks brought less than was brought against them. In other words certain banks have "lost" at Clearing while others have "gained" and at a later (designated) hour of the day, the debtor banks pay in their losses at the Clearing House and the creditor banks receive their gains, the total losses and gains, of course, exactly offsetting each other.

While the systems employed at the Clearing Houses of the various cities of the United States may vary in some particulars, they are all founded on the principles stated in the preceding paragraphs. These principles have been so perfected that the clerks from the different banks are at the Clearing House for a few minutes only each day. The Manager imposes a fine of several dollars on the bank for every mistake in calculation its Clearing House clerk makes; also for tardiness.

To return to the checks which have been brought back from the Clearing House. If, on examination, the Paying Teller has discovered any forgeries, or irregular or missing endorsements, or anything suspicious about any checks; or if the bookkeepers have found that any check overdraws the account of the depositor, the bank has only until the close of banking hours to return such checks and collect from the banks that sent them through the Clearing House. So the examination of these checks must be made carefully and very quickly.

The "_Clearing House Association_" in your city is what might be called a Mutual Aid Society, which the banks have organized for purposes of mutual convenience and protection. This Association pays the expenses of the Clearing House; the Manager's salary; the rent; etc. It adopts rules and by-laws and fixes fines and penalties for breaking them. But it is not an incorporated body and can not sue or be sued.

In time of panic, the Association is a tower of strength, not only for the banks themselves, but for the whole community. The associated banks, at such times, have it in their power to make or break the business interests of their city. _But their interests are identical with the interests of their patrons._ Remember the banks are owned by the people, not by two or three private individuals. The failure of any one bank, or of any one business house, increases the panicky feeling. Therefore, the Clearing House Association naturally and from very self-interest, must do its utmost to keep its members and their customers on their feet. In financial storms, the Association may adopt certain rules and regulations which may seem unreasonable to the public; but these methods are put in force for "the greatest good of the greatest number"; not only for the protection of the banks, but of their customers and depositors. It is a time for the public to be as reasonable as possible; to uphold the banks and their officers and directors. It is a time for the public and the banks to come closer together. Rest assured the banks have no desire to see any firm or person fail in times of panic, or any other time. They make their largest dividends when business is brisk and everything is prosperous.

What every Clearing House Association does want to wipe out, however, is the dishonest and reckless banker. He is a menace and source of anxiety to every bank in the community. The sooner the other banks can detect and expel him from the business, the better. In some cities, notably Chicago and St. Louis, the Clearing House Association regularly employs expert accountants to make periodical and unexpected examinations of the banks in the Association. If any bank is found to be doing a reckless business and not living up to the rules and regulations of the Clearing House, it is heavily fined or expelled. And expulsion from the Clearing House means ruin for that bank as soon as the business community learns of it. All Clearing House Associations should adopt this strict supervision.

Many a bank was saved embarrassment and possible failure in the recent panic of 1907 by the wise methods put into effect by the Clearing House Association. Selfishness and enmity were ordered to the rear. There are always banks whose officers have less foresight and wisdom than others. Some of these had been lending too freely, and their actual cash reserves were not sufficient to meet the storm of checks of their frightened depositors; frightened mainly because of ignorance, for, with a few exceptions, the banks were in good condition. To call in their loans and replenish their supply of cash would cause business failures and add to the panic.

So the Clearing House Associations of the different cities determined that the strong and wise banks should help the weak and foolish ones. Loan Committees were appointed to sit daily at the Clearing House. The various banks brought to this Committee notes they had discounted, or stocks and bonds owned by them. If the Committee thought them good, the Clearing House Association would lend the bank bringing them, up to about 75% of their face value. Of course, the Clearing House Association did not lend these banks actual cash, but they issued them Clearing House certificates, bearing interest, which could be used among the banks in settling daily claims against each other; just as if the banks had deposited actual cash at the Clearing House. In this way, if Bank Number One had the Clearing House Manager's check on Bank Number Two for $50,000.00, in settlement of some daily balancing at the Clearing House, Bank Number Two could pay Bank Number One with Clearing House certificates instead of actual cash. In other words, the banks which had a number of good notes, or stocks and bonds, but a small amount of cash, were saved by the combined, unselfish and patriotic action of all the banks working together for the common weal.

If the public generally knew of the many instances of generosity and unselfishness that were shown in the Clearing Houses in this and other panics, the banks, as a class, would not be denounced and condemned as they sometimes are. And this unselfishness was not exercised by the banks for the salvation of the banks alone, but for the business interests of the whole community as well; for, as has been pointed out, _the interests of the banks and the people are one_.

IX

A CERTIFIED CHECK

Your check is nothing but a piece of paper on which is written an order on your bank to pay some one a certain sum. Strangers might not like to accept this piece of paper in payment of debts due them. In many cases your check should be "certified."

When a depositor presents a check to his bank to be certified, it should be handed to the Paying Teller. He, in turn, hands it to the individual bookkeeper having charge of that depositor's account. If the bookkeeper finds the balance sufficient to cover the amount of the check, he stamps across its face the words "Good for $---- (the sum named in the check) when properly endorsed." Then the Teller or some officer of the bank, signs that statement and the amount of the check is immediately charged to that depositor. In other words, the bank guarantees or certifies that your check is good.

The bank must be very particular about certifying a check. If any officer or employe of a National Bank certifies a check, which calls for more than the maker of the check _actually_ has to his credit, such officer, or employe, has committed a penitentiary offense. This provision of the National Banking Act is most strictly enforced, and the penalty is severe.

When certification is necessary, the maker of the check should be the one to have it certified. If you take Brown's check to his bank and have it certified, you release Brown entirely and can only hold the bank. For example,--a man sold a piece of land, and, on delivering the deed, took the purchaser's uncertified check. After the purchaser had left with the deed, the seller, thinking the check might not be good, had it certified. The bank failed that afternoon. The purchaser proved that he had more than the amount of the check to his credit on the bank's books. On consultation with his lawyers, the seller found that he had no claim on the drawer of that check and could only file his claim against the bank with its other depositors. And he only received about fifty cents on the dollar when the bank's affairs were finally wound up. All because he did not insist on the purchaser of the land having his own check certified. If he had done this he could have held both the purchaser and the bank.

By having your check certified, you practically exchange your check for one guaranteed by the bank. For example, the bank certifies your check for $100.00. It immediately _charges_ your account with the $100.00, and _credits_ its "certified check account" with $100.00. Then when your certified check comes back to the bank, through the person to whom you delivered it, the bank _charges_ its "certified check account" with $100.00, and the transaction is closed.

Therefore, if, for any reason, you decide not to use a check after you have had it certified, _do not destroy it as you would an uncertified check_. Be sure to bring it back to the bank so that the amount may be _credited_ your account, and be _charged_ to the bank's "certified check account."

Otherwise your account will remain charged with the amount and your balance will show that much less.

X

PROTESTING NOTES, DRAFTS, ETC. WHY NECESSARY AND HOW IT IS EXECUTED

Protesting notes, drafts, checks, or other commercial paper is simply warning or giving notice to people, _secondarily_ liable on that paper, that it has not been paid when due. The person who ought to pay the paper is _primarily_ liable. All other persons who have endorsed the paper or drawn it on another person, firm or bank are _secondarily_ liable.

You have endorsed Brown's note. Brown does not pay it when due. If you do not receive a prompt notice of this, you might endorse another note for Brown under the false impression that he had paid the first one.

Likewise, if you have endorsed Jones' draft on his firm, or his check, and his firm, or his bank refuses to pay such draft or check, both you and Jones should receive prompt notice that payment was refused. With such notice you would not endorse for Jones a second time unless he made good to you, and explained matters satisfactorily. If Jones was honest in drawing his draft or check he is entitled to prompt notice of non-payment so that he can take immediate steps to get his money. Possibly his firm is embarrassed financially, or his bank has failed.

Say Smith & Co. have drawn a draft on a customer and have taken it to a bank and secured the money on it. If the customer refuses to pay the draft, the bank wants prompt notice so it can collect from Smith & Co. And Smith & Co. want prompt notice so they can take legal steps at once to protect themselves, and probably stop further shipments to this customer. Various other instances might be given where endorsers or drawers of paper might suffer loss or damage from lack of notice of its non-payment.

The law holds that this giving of notice is of such grave importance, that, if the bank receiving paper for collection does not promptly notify all persons, _secondarily liable_, of non-payment, all such persons are released from obligation, and the collecting bank must take its chances on making the amount from the payer. This statement must be qualified to this extent. If a _check_ is not protested, the maker of the check must _prove_ that he has suffered loss by not receiving notice of non-payment. But the drawer of a draft, or the endorsers on any check, draft, or note are released, whether they suffer damage or not. Generally speaking, a check is a written request of a depositor to his bank to pay a certain sum to a certain party; whereas a draft is a written request of any one to a firm or individual, to pay a certain sum to a certain party.

Of course, if the bank receives orders from the parties sending them, _not_ to protest certain notes, checks, or drafts, it must obey these orders. But if no such instructions accompany the paper, the bank _must_ protest or make itself liable.

Every bank of any size has one of its employes appointed a Notary, or it can employ a Notary on the outside. He is an officer appointed by the State, and is under bond to the State to perform all his duties according to law.

When the bank hands protestable paper to a Notary, it is his duty to make a formal demand at the proper place on the person who should pay it. If payment is refused, the Notary makes an exact copy of the note, draft or check at the top of a printed form used for this purpose. Then, over his signature as a Notary, accompanied by his official seal, he states that he has made a demand in person for payment of the paper described by him; and, on payment being refused, he has "protested" the non-payment. Also that he has mailed or delivered notices of this non-payment to all the parties secondarily liable on this paper and states their names. The Notary's official statement is called the "Instrument of Protest." The notices he mails are called the "Notices of Protest." Certain fees are allowed the Notary by law for protesting. These are called "Protest Fees," and become a part of the debt.

Of course, the person who ought to have paid the paper gets no "Notice of Protest." He certainly knows if he has not paid. The Notary must keep a copy of all his "Instruments of Protest." This is a public record, just as any court record is, and as accessible to the public. It is rarely examined, however.

So, from the language prescribed by law, that the Notary uses in his "Instrument of Protest," comes the common use of the terms "protest" and "no protest" paper.

To bind the parties _secondarily_ liable a Notary can protest paper only on the _exact_ day it is due. Otherwise he might put it off several days, or demand payment before it was due, and damage might result in either case. So, if the protesting is not done on the exact date when the paper is due, it is of no avail.

The maturity of a draft reading so many days, or months, after _date_ must be calculated from the date of the draft itself. But the maturity of a draft reading so many days, or months, after _sight_ must be calculated from the date it was presented to the sight of the payer and accepted. It is very necessary to date acceptances of time drafts reading "after sight."

_Demand for payment must be made at the proper place during business hours._ A check of course is payable at the bank on which it is drawn, during banking hours. A draft on a firm is payable at its office; likewise a draft on an individual is payable at his office, or if he has none, then at his residence. Notes or accepted drafts are payable at the place stated on their face. But, when no place of payment is stated, demand for payment must be made at the office of the maker of the note, or the acceptor of the draft; or if he has no office, then at his residence. When you draw up a note it is the proper thing to state on its face "payable at ---- bank" (giving the name of your bank); or "payable at my office"; or "payable at my residence."

Likewise, when accepting a draft, write the date, then "accepted, payable at ----" (stating your bank, or residence) across the face of the draft over your signature. Therefore when a note, or an accepted draft is made payable at a certain bank, demand for payment _must_ be made at that bank, and _not_ on the maker of the note, or the acceptor of the draft. Most notes and accepted drafts are made payable at the bank of the payer. All of them should be. In this way, if you keep money enough in your bank to meet your notes and acceptances, just as you keep money there to meet your checks, the bank will save you all worry about their payment in case you or your bookkeeper overlook them. Under such circumstances your paper would never be protested.

In accepting a note from a customer, _do not have it made payable at your bank_. Have the drawer make it payable _in his own town and at his own bank_. Demand for payment must be made at the exact place stated in the note. As every business man is particular about protecting his credit in his own town, and _especially_ at his own bank, it is obvious that he will be most diligent about providing for the payment of paper made payable at the bank with which he is doing business.

Notes and accepted drafts should be sent, a week or two in advance of their maturity, to the town in which they are made payable. If paper, made payable at New Orleans, for instance, is not in New Orleans _when due_, proper demand for payment can not be made and the drawers or endorsers might be released.

_There is absolutely no law requiring a bank to send you a notice that it holds your note, or draft accepted by you, for collection and due at some future date._ It is customary for banks to send such notices, but it is only a courtesy. It is _your_ duty to keep account of when your paper is due, and to have funds at the place of payment when it is due. The banks that do so are very careful about sending out these notices, but the public should regard it as a favor shown them and not as their lawful right. Many people do not know or appreciate this fact. You should always put your street address just below your signature on a note so that notice can be addressed properly. Also, in drawing a draft, always put the name of the person or firm, on which it is drawn, in the lower left hand corner, and _invariably_ state the street address.

XI

THE LOCAL COLLECTION DEPARTMENT

A bank has a perfect right to refuse to accept and to return any checks, notes, drafts, etc., sent it for collection. But if it does accept them, it must obey the instructions of the sender, literally and exactly. The bank has absolutely no right to disregard these instructions, no matter how obnoxious or disagreeable they may seem to the payer of the paper.

Many people regard all collectors as offensive and unwelcome. They wish to take their own time about paying their debts. Please mark this difference between the collector of your grocer's or druggist's bill, and the city bank as a collector of your note, or of a draft on you. The monthly collector must turn in cash for the majority of the bills given him or lose his position. But it really makes little difference to the bank whether you refuse or pay the note or draft that some other bank has sent it.

When collections are sent to a bank direct by firms, or by banks in another city, that do not keep an account with it; the collecting bank makes small fees, but these fees are very insignificant.

So, by prompt payment of notes and drafts, you are conferring more of a favor on yourself than on the bank. It is wise to protect your credit with strange banks as well as your own. Every bank receives many confidential inquiries concerning the financial standing of firms and persons in its city. If not personally known to the officer in charge of this correspondence, he invariably inquires of the collection department as to the promptness with which the parties in question meet their notes and drafts. And even though you are not a patron, a bank in your own city would rather give you a good financial reputation than a poor one.

The collecting bank must regard most carefully the instructions of the sender, especially about protesting or not protesting. Also about telegraphing payment or non-payment, and whether to hold the paper after it is due or not. In no case must it surrender any documents attached to a draft until the draft is paid, or accepted; and, in case of acceptance, documents attached must not be surrendered unless the sender so directs.

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.