Suppose next that depositors draw upon their accounts to the extent of $10,000, receiving their pay in cash. The item deposits will then stand at $256,970 and the reserve at $78,000. This again reduces the proportion of the reserve to demand liabilities. If these depositors had accepted bank-notes instead of cash, the result would have been different. The reserve would have remained as before; the deposits would have been diminished to the extent of $10,000, and a new item of $10,000, namely notes, constituting also a demand liability, would have been introduced on the side of liabilities. In this case, the proportion between reserve and demand liabilities remains unchanged.

Let us suppose next that loans to the extent of $10,000 fall due and are paid in cash. The item loans will then stand at $258,750, having been reduced to the extent of $10,000, and the cash reserve will have been increased to the same extent. The payment of these loans might equally well have been accomplished by a corresponding diminution of the item deposits. If the persons whose notes have fallen due are also depositors, they may hand to the cashier of the bank their checks for the amount. It is noteworthy that in either case the proportion of reserve to demand liabilities is increased.

A fourth supposition will enable us to appreciate the effect of investments in long-time securities. When the accounts of the bank were in the condition represented by the statement on p. 147, suppose that $50,000 had been invested in bonds and stocks. The cash reserve would have been reduced to $38,000, thus enormously diminishing its proportion to the demand liabilities, and in no respect increasing the bank's ability to command cash on short notice, except through the plan of throwing its bonds and stocks upon the market for sale.

It thus becomes evident that many of the essential fea

tures of the banking business are revealed in such simple statements of aggregated items as have been described. The proportion of the capital and the cash reserve to the other liabilities, the extent of the bank's ability to meet cash demands made upon it and the aggregate of such liabilities, the amount of the total resources invested in mercantile securities as distinguished from stocks, bonds, etc., the extent of liabilities to other banks as well as of the claims upon them, ought all to become clear upon the examination of such an account. Adequate provision for supervision and examination by public officials ought to guarantee the correctness of the accounts, and make bank officials careful regarding the character and soundness of the men whose paper they discount.

8. Importance of honesty, wisdom, and discretion in bank officials. Since the chief reliance of a bank, beyond its actual reserve, must be placed upon the short-time business paper which it holds, it follows that the best security for its safety must be the honesty, wisdom, and discretion of its officers. Upon these rests the responsibility of selecting the bank's creditors. If these are reliable, if they always meet their obligations when they fall due, and if their business is sound, the bank will be safe, provided a proper proportion between the demand liabilities and the cash reserve is maintained. What this proportion should be is a matter which, as we have shown, must be left to the discretion of bank officials.

In this connection it is interesting to note that the interest of bankers as a class is in the maintenance of sound rather than loose methods. To no group of business men is an unimpeachable reputation for financial soundness and reliability more vital. The banker's stock in trade is his credit. If that goes, his business is ruined. Under these circumstances he is like a retail merchant with no goods

upon his shelves. He has nothing to sell. He is really much worse off than the merchant, since the latter can stock up his store with fresh goods which will tempt the public to buy, while the banker can rarely buy back his lost or shattered credit. There is no such thing in the market for sale, and if he ever recovers it, it will be by the slow process of a life of business integrity, thus convincing the public that he is worthy of confidence. In view of this fact, bankers are apt to be conservative and to constitute a check each upon the other.

REFERENCES

For the methods actually employed in the regulation of commercial banking in this country the national banking act and the banking laws of the various states should be consulted. An excellent digest of the latter has recently been compiled by Mr. Samuel A. Welldon and published by the National Monetary Commission. The annual reports of the Comptroller of the Currency and of the banking departments of the various states are also valuable. For foreign countries consult the publications of the National Monetary Commission, especially Koch, German Imperial Banking Laws; Flux, The Swedish Banking System; Conant, The National Bank of Belgium, and the Banking System of Mexico; Landmann, The Swiss Banking Law; The Beichsbank, 18761900; and Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy.

Consult also Macleod, v. II, chs. xviii and xix; Dunbar, History and Theory of Banking, chs. vi-xi; Report of the Monetary Commission of the Indianapolis Convention, pp. 244-246; Gilbart, The History and Principles of Banking, v. 1, ch. xxi; Wagner, Zettlebankgesetzgebung, ch. ii, sec. 3, and ch. iii, secs. 2 and 4, and his Kredit und Bankwesen, ch. ii, sec. 2; Scharling, Bankpolitik; Hague, Bank Reserves, and Stewart, A Composite Bank Statement, in Journal of the Canadian Bankers' Assn., v. 1, p. 107, and v. XI, p. 40, respectively.

CHAPTER X

BANKING IN THE UNITED STATES

DURING the early years of the history of this country every community suffered from the lack of an adequate medium of exchange and from an insufficiency of capital. The degree of the need felt for these two essentials of industrial progress was greatest on the frontier, but it was everywhere present, even in the largest towns. Before the adoption of our present constitution, and for many years thereafter, our supply of specie came from foreign countries as the result of the operation of our foreign commerce, and what we obtained in this way was chiefly used in the operations of the government and in the purchase of foreign commodities. The supply was almost always short of the demand and in frontier communities frequently nil. As for capital, the majority of the settlers on the frontier had little more than the bare necessities for a farming establishment in the wilderness. The accumulation of anything more was a slow process on account of the lack of adequate markets for their produce, a situation the remedy for which had to wait for the development of means of transportation adequate to connect scattered communities with each other and with the older countries beyond the seas.

The colonial governments put forth their best endeavors to supply these needs, and the people attempted to help themselves. Unfortunately both confused the need for a currency with that for capital with the result of attempting to make the same instrumentality answer both purposes. The most commonly employed expedient was bills of credit

issued in a form suitable for circulation as money. The colonial governments frequently made such issues on their own credit, using the notes in the payment of their expenses or loaning them to people on mortgage or personal security. Private individuals and associations often did the same thing. The notes thus issued circulated within a limited territory only and at a depreciated value, thus performing very imperfectly the functions of a medium of exchange, but they were considered so much better than nothing that the people resented attempts made by the English government to interfere with their right to use them. During its early years the Revolutionary war was chiefly financed by similar notes issued by the Continental Congress.

In spite of the extended use of these notes and the sensitiveness of the public regarding interference with their right to use them, their imperfections as a circulating medium were so well understood by well informed people at the time of the adoption of our constitution that the convention which framed that document incorporated in it a clause prohibiting the states in the future to emit bills of credit or to make anything except gold and silver coin legal tender in payment of debts. It also gave to the federal government the exclusive right to manufacture such coins. However, the needs which were primarily responsible for the issue of these bills of credit remained and clamored for satisfaction for many years after the new government went into operation, and the means devised for their satisfaction were banks of issue chartered by the federal government and by the states, or established by private individuals under authority of the common law.

1. The earliest banks.-The pioneer institution of this type was incorporated by the Continental Congress Dec. 31, 1781, under the name of the Bank of North America. The plan for it was devised by Gouverneur Morris, but its pro