CHAPTER 7

THE FUNCTIONS OF BANKS

REFERENCES.

_Cleveland, F. A._, Funds and their uses. 1902.

_Conant, C. A._, History of modern banks of issue. 5th ed., 1915.

_Dunbar, C. F._, Theory and history of banking. 2d ed., 1901.

_Fisk, A. K._, The modern bank. 1903.

_Holdsworth, J. T._, Money and banking. 1914.

_Kinley, David_, The specie reserve in a banking system. J. P. E., 20: 12-24. 1912.

*_Phillips_, chs. IX, X.

_Scott, W. A._, Money and banking. 1903.

_Veblen, T._, Theory of business enterprise. 1904.

*_White_, bk. III, chs. I-III.

QUESTIONS.

1. What does a bank do for a community?

2. What are the functions performed by a bank?

3. What are the sources of income to a bank?

4. Explain the most important ways in which the deposits of commercial banks originate; and state which of these ways creates the greatest amount of demand liabilities of the banks.

5. Do all banks issue notes? Why?

6. What is the advantage to a bank of the right to issue bank notes?

7. How does the issue of bank notes differ from the lending of funds to depositors?

8. Can a bank that issues its own notes afford to lend cheaper than the ordinary capitalist?

9. Two men A and B have notes each for $1000 discounted at the same bank. A is credited on the bank's books with the right to draw $950. B receives $950 in the circulating notes issued by this bank. Are the bank's liabilities increased to precisely the same extent by the two transactions? Does either transaction immediately lessen the bank's cash reserve?

10. The following are the items of a report of a National Bank: Capital stock, $50,000; Cash on hand and in banks, $77,066.21; Circulation, $49,400; Bills payable, $10,000; United States and other bonds, $239,050; Deposits, $465,417.41; Surplus and net undivided profits, $30,952.58; Loans and investments, $289,653.78.

(a) Separate and arrange these items in accordance with a regular bank statement and prove your answer.

(b) Show how these items illustrate the essential functions of a bank, explaining in detail the nature of these functions.

11. Sort out from the following items the resources and liabilities and show the equality of total resources and total liabilities:

Unpaid dividends $ 782.00 Reserved for payment of taxes due 10,000.00 Undivided profits 85,228.57 Capital stock 500,000.00 Surplus fund 250,000.00 Cash items (checks to be presented for settlement in next day's exchanges) 280,347.43 Loans and discounts 2,782,713.15 U. S. legal tender notes and notes of national banks 435,296.00 Specie 278,304.48 Deposits 4,057,934.61 Overdrafts (checks paid in excess of deposits) 2,842.10 Due from banks and bankers 370,142.02 Real estate 43,900.00 Mortgage owned 1,000.00 Bonds 709,400.00

12. Classify the following items as resources or liabilities of a national bank and give reasons for your classification of the 1st, 4th, 6th, and 7th: (1) Capital stock, $50,000; (2) Real estate, furniture, fixtures, etc., $15,046.14; (3) Cash, $69,343.34; (4) Surplus and net undivided profits, $19,257.43; (5) United States bonds, $108,951.50; (6) Loans and discounts, $242,546.36; (7) Deposits, $301,679.91; (8) Circulation (i.e., notes outstanding), $64,950.

Prove that your classification is correct by balancing the account. Then show the changes made in the account by the following transaction: The bank loans $25,000.00 for 90 days at 6 per cent. interest, and the borrower draws out one-half the amount, with which he is credited after the bank has made the proper deduction for interest.

13. The week's averages of the New York banks for the third week in May compare as follows in 1905 and 1904:

1905. 1904. Loans $1,120,426,800 $1,056,553,500 Deposits 1,165,151,700 1,100,586,100 Circulation 45,308,300 36,480,400 Specie 215,174,200 210,002,800 Legal tenders 84,333,700 78,143,000

Explain why loans and deposits in the above table show practically the same increase from 1904 to 1905.

14. How would the balance sheet of a commercial bank issuing an ordinary asset bank-note currency stand after the following operations?

The bank opens business with a paid-up capital of $2,000,000 and a surplus of $400,000. It spends $50,000 in its own bank notes for furniture and fixtures. It discounts at six per cent. for various customers $4,000,000 of 60-day notes and bills receivable, the borrowers taking one-fourth of the proceeds in cash, one-fourth in the bank's own bank notes, and leaving the balance on deposit. Customers cash checks on their accounts for $600,000 receiving two-thirds of the amount in the bank's own bank notes and the other third in coin and other kinds of "lawful money." Other customers make deposits of $900,000, of which one-third is in "lawful money," one-third in the bank's own bank notes, and one-third in the checks of other depositors in the same bank. The bank buys at par $1,200,000 of railroad bonds, paying for them in its own bank notes. It pays with its own bank notes expenses for wages, stationery and taxes to the amount of $10,000. (b) What percentage of reserve is it carrying at the end of these operations?

15. Statement of a national bank.

LIABILITIES | RESOURCES $ Thousand | $ Thousand Capital, 464. | Loans and discounts, 708. Surplus, 203. | Over-drafts, .1 Undivided profits, 53. | Bonds to secure circulation Circulation, 404. | (par value) 450. Deposits, 419. | Other stocks and bonds, 163. Due banks, 29. | Due from reserve agents, 105. | Due from banks, 21. | Banking house, 32. | Current expenses and taxes, 3. | Checks and cash items, 4. | Exchange for Clear. House, 11. | Notes of other banks, 15. | Gold, 30. | Silver, .9 | Legal tenders, 9. | Redemption fund in U. S. T. 20. ------- | ------- 1,572. | 1,572.

What can you learn from this statement about the kind of business which the bank is carrying on, and its power to withstand a financial storm?

16. How would the balance sheet of a commercial bank stand after the following operations? The bank begins business with a paid-up capital of $300,000 and a surplus of $60,000. It discounts for customers $600,000 of four-months notes and bills receivable, at 6 per cent., the borrowers taking one third of the proceeds in cash (i.e., lawful money), and leaving two-thirds on deposit. Customers deposit $200,000, of which one-half is in cash, one-quarter is in checks drawn on this bank, and one-quarter is in checks drawn on other banks.

17. Suppose that this bank now reorganizes as a national bank and, to secure the privilege of note issue, buys United States 2 per cent. bonds of a par value of $90,000 at $102. These bonds it deposits with the Treasurer of the United States and receives the full amount of national bank notes to which it is entitled. Depositors withdraw by check $180,000, the bank giving them $45,000 in its notes and the balance in lawful money. A dividend of 2 per cent. is declared, and is paid, one-half in lawful money and one-half in the form of deposits. Present the balance sheet.