Bank Credit A Study of the Principles and Factors Underlying Advances Made by Banks To Borrowers 4 Book

Bank Credit A Study of the Principles and Factors Underlying Advances Made by Banks To Borrowers 4 Book
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    BANK CREDITA STUDY OF THE PRINCIPLES AND FACTORSUNDERLYING ADVANCES MADE BYBANKS TO BORROWERSBYCHESTER ARTHUR PHILLIPS, PH.D.PBOFESSOR OF ECONOMICS IN DARTMOUTH COLLEGE AND PROFE88OBOF BANKING AND FINANCE IN THE AMOS TUCK SCHOOLOF ADMINISTRATION AND FINANCE£fom CorkTHE MACMILLAN COMPANY1931

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    v COPYRIGHT, 1920,B Y THE MACMILLAN COMPANY.All rights reserved — no part of thisbook may be reproduced in any formwithout permission in writing fromthe publisher.Set up and electrotyped. Published August, 1930..RUNTED IN THE UNITED STATES OF AMEXICABY BERWICK * SMITH CO.

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    PREFACEThe purpose of this study is two-fold: to develop theprinciples of bank credit considered in the abstract andto set forth the main factors underlying the loansmade, the credit extended, by banks to borrowers.Part One is devoted mainly to an explanation of theway in which cash in banks beco...

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    vi PREFACEceedings of the various state bankers' associations,reports of the Comptroller of the Currency, andbanking periodicals. Information embodied chiefly inchapters VII-XI and XVI, and unobtainable fromthe ordinary sources, was secured by extensive corre-spondence and interviews with bankers...

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    TABLE OF CONTENTSCHAPTER PASSI. INTRODUCTION 1The Nature of Bank Credit 1The Bank Acceptance as Bank Credit 1Are Deposits Bank Credit 2Bank Credit vs. Commercial Credit 3The Legitimate Scope of Bank Credit Extension.... 4PART 1QUANTITATIVE ASPECTS OF BANK CREDITII. THE NATURE OF COMMERCIAL BANKIN...

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    viii TABLE OF CONTENTSGHAPTEB PAGEQualifications of the Formula 57The Distribution of New Reserve as the Foundationof Manifold New Loans 59Relation of Loans to Deposits 63How the Withdrawal of Cash from an IndividualBank Effects a Wide-Spread Contraction of Loansand Deposits 64Why Banks Compete f...

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    TABLE OF CONTENTS ixPART IIQUALITATIVE ASPECTS OF BANK CREDITCHAPTER PAGEVII. RECENT CHANGES IN OUR BANK CREDIT ARRANGE-MENTS 123Evolution in the Form of the Borrower's Obligation. 123The Growth of Note Brokerage 131Seasonal Demands for Funds in Relation to theGrowth of Note Brokerage 138Independ...

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    X TABLE OF CONTENTSCHAFTBB PAGEOpen Accounts 191Chattel Mortgages 192Bonded Debt and Interest Thereon 192Deposits of Money with Us 193Other Liabilities 194Capital and Surplus, Proprietorship Interest, or NetWorth 196Ratio of Quick Assets to Current Liabilities 197Relation of Net Worth to Credit W...

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    TABLE OF CONTENTS JÙCHAPTER PAGBRules for Controlling Overdrafts 239Depend upon Bank Supervision 240An Index of the Soundness of the Bank 241XTV. LOANS OF COUNTRY BANKS 242Distinctive Features of Country Bank Loans 242Rules for Reducing Slow and Past Due Paper 248Loans to Tenants 249The Rate of ...

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    xii TABLE OF CONTENTSCHAPTER PAGEAPPENDIX A. Questions, Exercises, and Problems 319APPENDIX B. Borrowers' Statement Forms Designed and Ap-proved by the American Bankers Association,Including the Report of Committee on CreditForms 356

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    FOREWORD TO TEACHERSThe main circumstance prompting the publication ofthis volume is the lack of any work well designed tofamiliarize the student with the theory of banking inboth its abstract and concrete aspects. At a time whenbanking policy promises for years to come to be thecontinuing source...

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    XÎV FOREWORD TO TEACHERS3. Pages 32-51 and relative questions and problems1-10.4. Pages 52-63 and relative questions and problems11-25.5. Pages 63-74 and relative questions and problems26-37.The method of handling other works used jointlywith Bank Credit ma y be passed over without commentexcept...

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    BANK CREDIT

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    BANK CREDITCHAPTER IINTRODUCTIONThe Nature of Bank CreditBank credit, as the term is used in this volume,stands for credit extended by banks to borrowers.Bankers frequently use the term in the plural, meaningadvances made to their borrowing customers. Whetherthe borrower withdraws the amount of t...

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    2 BANK CREDITof the draft out of funds provided by the drawer. Theaccepting bank has faith in the willingness and abilityof the drawer to provide the funds required to meet thedraft when it matures, but the üability assumed is es-sentially contingent, the advance being made by thebank or discoun...

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    INTRODUCTION 3credit extended by the bank's customers to the bank.However, partly out of deference to the reader who mayinsist that deposits also are bank credit, and partlybecause of the close relation of deposits to loans, a dis-cussion of the deposit item in its relation to loans, sur-plus and...

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    4 BANK CREDITone per cent of his turnover.1 It was estimated in 1892,by Mr. E. S. Lacey, a former Comptroller of the Cur-rency, that the losses on loans and discounts made bynational banks at that time amounted to 1/200 of oneper cent.2Another distinctive feature of bank credit is that abank is c...

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    INTRODUCTION 5others, cannot advisedly place those funds where solarge a risk would obtain.The merchant might secure his capital through thepartnership form of organization or,conceivably, throughthe issue and sale of corporate securities. In any eventthe bank would have to insist that the mercha...

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    6 BANK CREDITtinction between fixed capital requirements and thosecredit requirements of a business which recur annuallyor seasonally. Separate and distinct methods ought tobe observed in meeting each class of requirement.Business men should first provide for the capital req-uisite to start busin...

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    INTRODUCTION 7It is also true that commercial banks customarilyinvest a part of their funds in long-time securities, es-pecially bonds, a practice that carries with it a dangerof shrinkage in value due to changes in the long-timerate of interest. Large cash holdings and other liquidassets in ampl...

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    8 BANK CREDITtribution. Every new labor saving device introducedhas involved an increase in capital needed in the linein which that device is used, relative to the amount ofliquid or short time funds required.1In one sense continuously floating paper, when mar-keted by note brokers, is liquid, an...

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    INTRODUCTION 9capital or net worth of the borrower ample, and theother elements in the situation favorable.What the commercial banker ought assiduously toavoid, even where loans are based on time deposits,is the unliquid condition of the loan item that existswhen his funds are invested heavily in...

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    PART IQUANTITATIVE ASPECTS OF BANKCREDIT

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    CHAPTER IITHE NATURE OF COMMEBCIAL BANKINGThe lending functions of a commercial bank areso radically different from those of the money lender,putting out only his own funds, that it will be desirableat the outset to consider carefully the nature of bank-ing, the essence of which consists in the p...

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    14 BANK CREDITwhich case the reader may have difficulty in bearingclearly in mind that capital really means, not the cashpaid in by the shareholders, but what the bank as aninstitution owes the shareholders on account of theircash contributions to the enterprise. Capital stock orcapital is always...

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    THE NATURE OF COMMERCIAL BANKING 15posit with banks in centers to which the locality of agiven bank is commercially tributary are (1) that thelocal bank may be able to sell drafts on those centers,for the accommodation of its customers who may de-sire to remit drafts as means of payment, and (2) ...

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    16BANK CREDITof the statement; deposits will be increased by theamount of the proceeds of the loans; the discount,which is profit undivided and belonging to the share-holders, will be recorded as a liability under the head ofundivided profits. Assets and liabilities have grown tothe following pro...

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    THE NATURE OF COMMERCIAL BANKING 17a sum in excess of his balance, is a form of loan, anasset, but generally bears no interest. Short andCompany having a deposit balance of $200 at the banksend a check for $210 to a New York wholesaler inorder to pay an overdue bill. The check is depositedby the ...

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    18 BANK CREDITaverage time of the paper bought is 4 months, the rate6 per cent, and the discount $200. New York andChicago drafts, drawn for a total of $9,800, are givenin payment.Without reproducing the statement of the bank,we may indicate the changes which the purchase of thepaper in the open ...

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    THE NATURE OF COMMERCIAL BANKING 19A local patron of a Chicago mail order house, payscash for a Chicago draft for $88.60, for the issue ofwhich the bank charges ten cents exchange. Thedraft is a check of one bank upon another. The smallexchange charge is a form of undivided profits. Thebuyer of t...

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    20BANK CREDITLoans and Discounts $ 70,000.00Overdrafts 10.00Real Estate 5,000.00Furniture and Fixtures 12,000.00U.S. Bonds 30,000.00Due from OtherBanks 34,901.40Redemption Fund.. 1,250.00Cash 89,273.70LiabilitiesCapital $100,000.00UndividedProfits.. $541.77Less Ex-penses. . 65.00476.77Circulating...

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    THE NATURE OF COMMERCIAL BANKING 21ual bank consists in the fact that loans result in an in-crease in deposits, and as deposits increase a givenreserve becomes less and less adequate to sustaintheir growing volume. Moreover, when the proceedsof loans are left on deposit with the bank, the balance...

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    22 BANK CREDITbanks, its balance sheet would present an appearanceabout as follows:Assets LiabilitiesLoans and Discounts $540,760.28 Capital Stock $100,000.00Overdrafts 120.16 Surplus 50,000.00U.S. Bonds 50,000.00 Undivided Profits... 13,271.19Other Bonds 20,200.00 Circulating Notes.. 12,500.001 ...

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    THE NATURE OF COMMERCIAL BANKING 2 3surplus tends to be reflected in the market value of therelative stock certificates. Surplus also differs fromcapital in that it is commonly earned, whereas capitalis commonly paid in by the shareholders. Bank sur-plus differs from the surplus of most business ...

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    24 BANK CREDITbank stocks to the full extent of their fortunes. Menshunned the latency of limitless debt, which "appallsthe imagination and breaks the heart of effort," and theownership of banks in the United Kingdom was rapidlypassing from those who had much to lose to those whohad lit...

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    THE NATURE OF COMMERCIAL BANKING 25holders and managements having widely differenttemperaments and policies. The English bank manage-ment is able to regulate the security underlying theultimate payment of deposits and other creditor liabili-ties through the reserve liability as well as through th...

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    26 BANK CREDITthe balance sheet. I t is an egregious mistake to thinkof the surplus or capital stock or undivided profits asbeing normally invested in any one asset item or in anyparticular group of asset items. That such is not thecase will be clear from an extreme, but legitimate,illustration. ...

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    THE NATURE OF COMMERCIAL BANKING 27out infringing upon the other resources of the bank, and forthe equalization of dividends.1Capital and surplus are represented as funds. Thepractice of so representing surplus and capital mayhave been prompted by the following provision (section5199) of the Nati...

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    28 BANK CREDIThas been confusion between surplus and cash or reservewhich, in a strict sense, is a fund. Our frequent use ofthe term surplus reserve, i. e., the reserve held in excessof legal requirements, is not intended to sharpen thedistinction current between surplus and reserve. Sur-plus is ...

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    THE NATURE OF COMMERCIAL BANKING 2Ôdepen*d appreciably on the temperament and disposi-tion of the bank management. Where conservatismin valuation prevails,—as is probably true generally inbanking, in contradistinction, perhaps, to ordinarybusiness circles,—assets are likely to be undervalued...

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    30 BANK GREDITment that the shareholders might not draw out theamount and that they should receive no interestthereon.1 Also, dividends have not been declared, byagreement among the stockholders, profits being con-cealed by issuing a certificate of deposit to some personas trustee for the stockho...

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    THE NATURE OF COMMERCIAL BANKING 31financial statement on page 22 is correct, it will beevident that the bank represented could sustain a lossof $163,271.19 and still pay its creditors in full, withoutlevying an assessment on the shareholders in connec-tion with the liability for the amount of th...

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    CHAPTER IIITHE PHILOSOPHY OP BANK CREDITThe prime purpose of the present chapter will be todraw a sharp line of distinction between credit ex-tension by an individual bank and that of banks takenin the aggregate. The accepted statements of bankingtheory, with scarcely an exception,1 have made nos...

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    THE PHILOSOPHY OF BANK CREDIT 33whether additions to his volume of deposits have theirorigin in the receipt of lawful money or in the form ofvarious credit instruments, bank notes, checks, drafts,that are readily exchangeable for or convertible intolawful money.It has long been observed that the ...

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    34 BANK CREDITditional primary deposits enables an individual bankto expand its loan item by little more than the amount ofsuch deposits.1 But how can a given amount of cashbecome the basis of manifold loans and deposits in abanking system if the acquisition of that amount by anindividual bank ha...

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    THE PHILOSOPHY OF BANK CREDIT 35with his good reputation, is considered by the public aguarantee for $50,000, then the whole $60,000 will serve as aguarantee for a much larger sum. When he begins, hisbalance sheet reads in this way:Resources LiabilitiesCash $60,000 Capital $10,000Deposits 50,000$...

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    36 BANK CREDITResources LiabilitiesCash $ 60,000 Deposits $247,000Loans and Discounts... 200,000 Capital 10,000Profit 3,000$260,000 $260,000Thus the business venture called a "bank" owes to de-positors and to the banker himself $260,000; and it has assetswhich will produce that amount, ...

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    THE PHILOSOPHY OF BANK CREDIT 37last sentence quoted above, may be disposed of atonce. The error there involved is that small loansmade today, January 1, will when they mature, April1, bring in money with which to meet the banker'sliabilities arising from heavier loans made April 1. Ifthe funds r...

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    38 BANK GREDITno cash over the counter but would certainly drawchecks against the proceeds of their loans depositedwith the bank. The checks would be sent to theircreditors in New York and elsewhere. Checks for arelatively small amount would be deposited for creditat the Hanover National Bank, ef...

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    THE PHILOSOPHY OF BANK CREDIT 39serve, c, would enable the institution to lend, in addi-tion to its normal amount of loans outstanding,cg· — cThis is true because the deposit arising from the cash,c, would itself call for a reserve equal to Re, leavingc-Rc as reserve for deposits arising from ...

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    40 BANK CREDITWe have seen that the loan expansion in an iso-lated bank or in the banking system, as the result of theacquisition of a given amount of reserve, is severaltimes greater than the loan expansion practicable foran individual bank acquiring the same amount. Whatis true for the banking ...

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    THE PHILOSOPHY OF BANK CREDIT 41pation of the repayment of a loan. Whether springingfrom loan-proceeds left with the bank—which willlater be largely, if not entirely, drawn out by check toserve the purpose for which the loan was made—orarising from the placement of funds in the bank inorder t...

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    42 BANK CREDITnounced changes in magnitude. The nature of pri-mary deposits is easily understood. Derivative de-posits, invariably tied closely to loans, require furtherexplanation.A typical bank borrower does not at once check outthe entire amount borrowed and, furthermore, for ashort time just ...

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    THE PHILOSOPHY OF BANK CREDIT43typical depositor-borrower is measured by the verticaldistance above the 0 P axis.Thus, before borrowing, the bank customer, whoseaccount is pictured in the diagram, had a balance ofO M. Just after leaving on deposit the proceeds of aloan, he had a balance of O M pl...

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    44 BANK CREDITrepresented by diagram 1, as invalidating the theorydeveloped, is urged to peruse the exercises and prob-lems bearing upon this chapter given in Appendix A.The Ratio of Derivative Deposits to LoansThe average magnitude of the derivative depositbalance, represented by the average hei...

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    THE PHILOSOPHY OF BANK CREDIT 45Location of Bank Ratio of Derivative Deposits to LoansBoston, Mass 10 per centSalem, Mass 20 " "Rockport, Mass 7.5 " "Claremont, N. H 10 " "Manchester, N. H 10 " "Milford, N. H 10 " "Newport, N. H.i 3 " "N...

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    46 BANK CREDITLocation of Bank Ratio of Derivative Deposits to LoansMorgan City, La 10 per centCorpus Christi, Tex. 15Oskaloosa, la 2Pierre, S. D 5Denver, Colo 10i Francisco, Cal.1 10It seems safe to conclude that for our banks takenin the aggregate the derivative deposit-loan ratio liessomewhere...

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    THE PHILOSOPHY OF BANK CREDIT 47be whittled down still further. The higher the interestrate charged by the bank, the stronger will be the ten-dency for the borrower to make the inception of hisloans synchronize with the initial date of the period forwhich he needs funds, and the maturity of the l...

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    48 BANK CREDITa considerable proportion of loans may be productiveof no large volume of derivative deposits. When alarge proportion of a bank's advances take the form ofpaper bought from paper dealers—notes of distantborrowers—the ratio of derivative deposits to com-bined advances made to dep...

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    THE PHILOSOPHY OF BANK CREDIT 49or, funds may become available from some othersource definitely in the borrower's mind from the be-ginning of the loan, and the collateral may be freed bythe application of such funds. Whenever a bankermakes most of his advances on collateral, he may al-most certai...

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    50 BANK CREDITup in compensating balances with their bank." Thesmall business man, whose scale of borrowing opera-tions is not large enough to arouse the interest of thecommercial paper broker is apparently subject to arestraining influence in the withdrawal of borrowedfunds that does not st...

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    THE PHILOSOPHY OF BANK CREDIT 51insistent demands of borrowers for funds during aperiod of expansion, rising prices, and swollen profits,place the lending banker in an advantageous positionto exact the maintenance of high balances in relationto loans. "You are straining your credit," sa...

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    52 BANK CREDITAggregate Derivative Deposits Tend to Remain Constantin AmountAfter a bank has struck its pace, so to speak, and itsloans have begun to mature, aggregate derivativedeposits tend to remain constant in amount. This isshown in diagram 2, which is a series of derivativedeposits curves e...

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    THE PHILOSOPHY OF BANK CREDIT 53Q

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    54 BANK CREDITper cent; the average derivative deposit balance being20 per cent. Whatever point of time is taken, thederivative deposits are substantially the same inamount.If the diagram were drawn with derivative depositcurves asymmetrical and representing loans of varyingmaturities, irregulari...

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    THE PHILOSOPHY OF BANK CREDIT 55Since (1—k) is equal to the percentage of loanschecked against by borrowers, it follows thatd = (l-k)x.Since the lending banker will make his loans of suchan amount that the cash left in the bank after the over-flow cash has been paid out will be equal to the res...

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    56 BANK CREDIT10 per cent and a derivative deposit-loan ratio of 20per cent.Under these conditionsc =$1,000 r = .10 and k = .2O.Making substitutions in the formula, in order to ascer-tain the loan expansion practicable on the basis of thenew deposited cash amounting to $1,000, we haveThe applicat...

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    THE PHILOSOPHY OF BANK CREDIT 57Cash-DepositRatio5 per centI¦T tt t(10 " "13 " "15 " "17 " "20 " "andandandandandandandDerivative Deposil·Ratio5.26 per cent7.52 " "11.11 " "14.94 " "17.64 " "20.48 " &...

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    58 BANK CREDITmunity, section and section, are so numerous and ofsuch far reaching ramifications as to make certain thevery early drawing of checks by customers of the bankthat receives an addition to its primary deposits infavor of creditors that are not depositors in the drawers'bank.But we wil...

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    THE PHILOSOPHY OF BANK CREDIT 59being less than the advance itself, overflow cash wouldbe correspondingly reduced, and the loan expansionat the time somewhat greater than if the bank deductedno compensation.Perhaps we shall give due weight to the qualifyingfactors just mentioned, if we think of t...

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    60 BANK CREDITcomes widely distributed as the basis of new andmanifold loans in the banking system.It has been seen that the deposit of a given sum ofnew reserve typically admits of the extension of loanssomewhat in excess of that sum by the bank receivingthe deposit, and that the loan expansion ...

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    I3I

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    62 BANK CREDITaddition to its cash. Accordingly, rectangle x, repre-senting loans made as a result of the lodgment of thereserve, is somewhat larger than rectangle c. As aconsequence of making loans represented by rectanglex, the bank loses cash, "overflow" cash, indicated byrectangle c...

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    THE PHILOSOPHY OF BANK CREDIT 63ftin turn equals =r-· (In this chapter r is used to indicatexíthe reserve-deposits ratio of the individual banks, and R,the reserve-deposits ratio in the system as a whole.Since the system of banks is assumed, for the sake ofsimplicity, to be homogeneous, r=R.)Re...

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    64 BANK CREDITof any given bank, (bank A in the diagram, for exam-ple,) also result in derivative deposits for that bank ofsuch magnitude that, if added to the primary depositsmade in bank or group of banks B, as a result of theloans made by bank A, will equal the loans made bybank A. It follows ...

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    ÍH E PHILOSOPHY OF BANK CREDIT 65contraction would be made up of cash held as a 10 percent reserve against (a) the primary deposit of $1,000-,000, now being withdrawn, and (b) the derivative de-posit of $219,512.19.If the deposit account of Barker, Brown and Com-pany is transferred from the Chas...

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    66 BANK CREDITaccount necessitated in the case of the Chase. Just asit was necessary for the Chase to contract its loansonly slightly in excess of the amount of the balancetransferred in order to meet the unfavorable balancearising from the transfer, so the loan expansion of theChemical that was ...

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    THE PHILOSOPHY OF BANK CREDIT 67to the cash acquired, it should be pointed out thatbankers would scarcely feel constrained to make so lowa bid for deposits as they now make, if their lendingpower were enhanced by eight or ten times the amountof the deposit. If a banker were able to lend $50,000 a...

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    68 BANK CREDITcharged its borrowing customers 5 per cent on theirloans. The expenses of the business might absorb one-half or three-quarters of the gross earnings and stillleave an amount ample for dividend purposes. Bank-ing is profitable, not because an individual bank canlend ten dollars as a ...

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    THE PHILOSOPHY OF BANK CREDIT 69How much can this bank lend without impairing itscash-deposits ratio, and without obtaining additionalprimary deposits, if a cash-deposits ratio of 1 to 10 isdetermined upon as affording a maximum profit con-sistent with reasonable security against a shortage ofcas...

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    70 BANK CREDITits loans to $658,536.57. Its volume of deposits wouldthen be raised to $731,707.30 and its cash to $73,170.73,and the statement would stand as follows:Assets LiabilitiesLoans and Discounts.. $658,536.57 Capital $100,000.00U. S. Bonds 75,000.00 Deposits 731,707.30Real Estate, Furni-...

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    THE PHILOSOPHY OF BANK CREDIT 71extension of loans amounting to $12,195.12, if a cash-deposits ratio of 10 per cent is adhered to and 20 percent of the funds borrowed are left on deposit on theaverage.1 As 80 per cent of $12,195.12 or $9,756.10would be checked against on the average, a reservewou...

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    72 BANK CREDITstatement will reflect the condition of a bank assimi-lated to the system:Assets LiabilitiesLoans and Discounts. .$670,731.69 Capital $100,000.00U.S. Bonds 75,000.00 Undivided Profits 10,000.00Real Estate, Furni- Deposits 734,146.32ture and Fixtures... 25,000.00Cash 73,414.63$844,14...

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    THE PHILOSOPHY OF BANK CREDIT 73called residual cash or residual reserve, is only a frac-tion, on the average throughout the loan period, ofadditional loans made. The residual cash supportsloans,—and deposits,—several times as great as itself,but the residual cash is only a fraction of the ca...

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    74 BANK CREDITthe manner of the loan expansion of an individual bankand that of the banking system is at once the founda-tion and pinnacle of the theory here advanced.Anticipated Criticism AnsweredIt is anticipated that criticism of the theory devel-oped in this chapter will center around the con...

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    THE PHILOSOPHY OF BANK CREDIT 75from sources outside the banking system—importedor newly mined gold. If additional cash is received byany bank from sources outside the system that circum-stance would not impel other banks in the system atonce to expand their loans, thereby accommodatinglypreven...

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    76 BANK CREDITThe old contention that no cash would be lost by thebank that increased its loans, under the conditionsgiven, that counterclaims would still balance, was thefruit of confusing the operations of a bank with theoperations of a banking system. Some serious, if notsurprising, consequenc...

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    CHAPTER IVINTER-RELATIONS OF CASH, LOANS AND DEPOSITSCONSIDERED FURTHERThe preceding chapter, which drew a sharp line ofdistinction between loans of individual banks and thoseof the banking system, has paved the way for furtherconsideration of certain inter-relationships of items ofthe balance sh...

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    78 BANK CREDITsystem1 are increasing their loans and investments atthe same rate, the cash of any one bank will tend toremain constant. This is true because (a) direct with-drawals of cash by borrowers from any one bank will beoffset by the deposit of actual cash coming from otherbanks into the h...

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    INTER-RELATIONS OF CASH, LOANS AND DEPOSITS 79Regulation of Ratio of Cash to Deposits in IndividualBankingWhen a certain more or less normal or representativeratio of cash to deposits has been reached in the lifehistory of a bank, that is, when the individual bank hasbecome assimilated to the ban...

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    80 BANK CREDITby adding to his holdings of cash through curtailmentof loans rather than by seeking a reduction in deposits,for the withdrawal of deposits would tend to reducecash correspondingly. Although the correction of theratio of cash to deposits when cash is low in relation todeposit liabil...

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    INTER-RELATIONS OF GASH, LOANS AND DEPOSITS 81being expanded,—both these conditions are constantly-subject to correction. One day or one week or evenmonth the banker lends or buys commercial paperfreely, and the next day or next week or month trimshis sails. The banker's cash-deposit ratio at t...

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    82 BANK CREDITBut suppose the reserves of an individual bankare excessive in relation to deposits. Under thiscondition not fear or prudence or respect for bankinglaw, but desire for greater profit becomes the motiveunderlying the correction or restoration of the reserve-deposits ratio, and the ba...

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    INl¾R-RELATIONS OF GASH, LOANS AND DEPOSITS 83are a function of cash.1 An increase of cash in thebanking system tends to be followed by a manifoldincrease in loans, the proceeds of which cause thedeposits of the system to swell in approximately thesame proportion as the loans. An increase in the...

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    CHAPTER VSURPLUS IN RELATION TO LOANS, DEPOSITS ANDRESERVESProbably no phase of banking has been treated soinadequately and erroneously as has surplus, itsnature, functions and relation to other items in thebank balance sheet. The defective treatment has beentraceable measurably to factors alread...

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    SURPLUS IN RELATION TO LOANS, ETC. 85us that deposits arise out of loans and that the twomagnitudes are, in the banking system as a whole,approximately equal. The simplified balance sheetfrom which his argument proceeds is as follows:Assets LiabilitiesGash $100,000 Capital Stock $100,000Loans 600...

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    86 BANK CREDITthe kernel of Professor Moulton's contention that theaccumulation of a surplus tends to impair the chanceof the ultimate payment of creditor liabilities.The same bank (i. e., the bank whose balance sheet waslast given) in time accumulates a surplus of $20,000. Let usassume that the ...

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    SURPLUS IN RELATION TO LOANS, ETC. 87of a surplus, $500,000 (loans) + $100,000 (cash) + $100,000(double liability on capital stock) = $700,000 — to $480,000= 35 : 24 or 1.458 to 1. In the second case it becomes$600,000 (loans) + $120,000 (cash) + $100,000 (doubleliability on capital stock) = $8...

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    88 BANK CREDITseveral-fold expansion of loans and deposits in the man-ner described in the excerpts reproduced on pages 86,87.It was shown in a preceding chapter that the ac-cumulation of surplus represented by an addition of agiven amount of cash to the reserves of an individualbank would enable...

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    SURPLUS IN RELATION TO LOANS, ETC. 89It must be clear that as long as the surplus wasrepresented by cash it afforded additional protectionto depositors and other general creditors. It must alsobe clear that when the surplus ceased to be representedby cash and that very cash, as a result of loan e...

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    90 BANK CREDITsurplus accumulating and the additional reserve?What would attract the cash from circulation into thebanks? Not surplus "represented by cash," becausesuch surplus would not come into being until the corre-sponding cash had come into the banks! It is inad-missible to assume...

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    SURPLUS IN RELATION TO LOANS, ETC. 91tion to cash. Such a reduction, if it is assumed to takeplace, would be favorable to the ultimate redemption ofcreditor liabilities. The accumulation of additionalsurplus amounting to 1 billion would neither increasenor diminish cash—although cash might incr...

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    92 BANK CREDITpositors is centered around the balance sheet of anindividual bank, even though his own injunction is toemphasize the banking system as a whole as distinctfrom individual banks as units in that system. Itwill therefore be well to observe that the creationby an individual bank of a s...

  • Page 104

    SURPLUS IN RELATION TO LOANS, ETC. 93be an increase in the ratio of surplus to deposits. Inone case the surplus in the system does not increase; inthe other, surplus in the system increases but depositsdo not. Evidently, if surplus increases in the bankingsystem as a whole and deposits and other ...

  • Page 105

    94 BANK CREDITsurplus in a banking system1 brought into being acorresponding accretion to the cash of the system, de-posits in the system would tend to expand as indicatedin the statements quoted on pages 85, 86 and theaccumulation of surplus would tend to lessen thechances of the ultimate redemp...

  • Page 106

    SURPLUS IN RELATION TO LOANS, ETC. 95of the ultimate convertibility of deposits in the case ofany given bank, a large surplus in relation to creditorliabilities should and does prove attractive to bothactual and potential depositors. A relatively largesurplus is probably more influential in deter...

  • Page 107

    96 BANK CREDITin direct proportion. Also if both ratios changed atthe same rate and in the same direction, any change incash would be accompanied by an exactly correspond-ing change in surplus. In American banking duringthe last generation the two ratios have changed in thesame direction, but not...

  • Page 108

    SURPLUS IN RELATION TO LOANS, ETC. 97those deposits and other creditor liabilities. Increas-ing conservatism and prudence as to cash tends to bematched by increasing conservatism as to surplus.Individual cases of increasing caution and prudence asto cash and the reverse as to surplus are probably...

  • Page 109

    98 BANK CREDITorder to meet extraordinary needs. The centraliza-tion of reserves and the creation of assured facilitiesfor rediscount enable the representative banker toconduct his business on an appreciably lowered reservewith even greater assurance of an unfailing adequacyof cash.Mr. E. D. Hulb...

  • Page 110

    SURPLUS IN RELATION TO LOANS, ETC. 99banks converted over $200,000,000 of commercial paper intoreserves in one day and met the emergency. No one, outsideof the banks in the central reserve cities, knew that a crisishad occurred. Most of this loan was repaid to the FederalReserve banks inside of t...

  • Page 111

    100 BANK CREDITbusiness failures, supporting and stabilizing bankassets underlying the ultimate convertibility of cred-itor's claims. Such an improvement in banking facil-ities as was effected by the establishment of the FederalReserve System is calculated, through a reduction incommercial losses...

  • Page 112

    SURPLUS IN RELATION TO LOANS, ETC. 101declining ratio of surplus (and the other protectiveitems) to creditor libilities may be outweighed by im-provement in the conditions underlying bank solvencythan the declining percentage of loss to the amount ofall deposits in our national banks since 1880. ...

  • Page 113

    102 BANK CREDITThe Relation of Cash to Deposits vs. the Relation of Surplusto Creditor LiabilitiesThe dependence of immediate convertibility ofdepositors' claims upon the provision of a cash re-serve is of a different order from the dependence of theultimate convertibility of creditors' claims up...

  • Page 114

    CHAPTER VIBANKERS' BANES AND CREDIT EXTENSIONThe Nature of Bankers' BanksWhat the ordinary commercial bank does for itscustomers a bankers' bank does for banks. An indi-vidual bank economizes, mobilizes, and makes flexiblein amount the funds of its depositing and borrowingcustomers; a bankers' ba...

  • Page 115

    104 BANK CREDITBankers' Banks Dilute CashThe way in which bankers' banks dilute cash may bemade clear in the statement that the deposit liabilitiesof bankers' banks may constitute legal reserve for com-mercial banks; and the lower the cash-deposits ratio ofthe bankers' banks (and the lower, also,...

  • Page 116

    BANKERS' BANKS AND CREDIT EXTENSION 105they were required to purchase stock, equal to 3 percent of their capital and surplus in each case and tosubscribe for an additional 3 per cent, in the FederalReserve bank of the district, and to keep a part of theirreserves on deposit with the regional inst...

  • Page 117

    106 • BANK CREDITcontrol th e Federa l Reserv e banks , are compelled t okeep thei r require d reserves on deposit wit h th eFedera l Reserv e banks . Th e cash reserves of th ecommercial banks , lodged wit h th e Federa l Reserv ebanks , becom e th e basis of multiplied loans t o th ecommercia...

  • Page 118

    BANKERS' BANKS AND CREDIT EXTENSION 107Assets LiabilitiesLoans $3 billions To Shareholders...! .17 billionsCash 2 " Notes 3 "Other Assets, 1 " Deposits 2 "Other Liabilities.. .83 "$6 billions $6 billionsIf now a billion dollars were lodged by the memberbanks in the vaults...

  • Page 119

    108 BANK CREDITcannot be used to satisfy the legal reserve requirementsof national and some state banks, notably all NewYork State banks, is partially offset by another cir-cumstance which has often been overlooked. Nationalbanks, in accordance with provisions of the FederalReserve Act, keep thei...

  • Page 120

    BANKERS' BANKS AND CREDIT EXTENSION 109/¢/»/¾e«*/AM«ïLOANS ^«°TkERefiotSéDEPOSITS** MEMeeiè BANKS,2û Û/LLIONS.1FEOEIZALJ2eseev£NOTES.3BILUONS.Jð£S£XV£DEPOSITS.2BUU.IQNS.LOANS a*fi`eoœAL· æes¢×veJBAMHS.S BILLIONS.Diagram 4Government deposits, $75,587,000, and "other depo...

  • Page 121

    110 BANK CREDITferent from that involving an expansion of notes be-cause the new deposits, constituting legal reserve formember banks, would enable those member bankstaken in the aggregate to expand their loans and de-posits by approximately 10 times 1.7 billions. That isto say, if the maximum cr...

  • Page 122

    BANKERS' BANKS AND CREDIT EXTENSION 111Would member banks have the same volume ofloans and deposits, 20 billions in round numbers, if thecash of national and state banks had not been gatheredtogether in the vaults of the regional or bankers' bankswhere now it serves to support both notes and de-p...

  • Page 123

    112 BANK CREDITto render the higher service of bank reserves, in bankswhere reserves have a maximum of credit supportingpower. Wherever Federal Reserve notes release lawfulmoney in circulation for the higher work of bank re-serves, wherever they prevent a depletion or loss ofbank reserves during ...

  • Page 124

    BANKERS' BANKS AND CREDIT EXTENSION 113chiefly gold certificates, silver certificates, and green-backs—still circulate outside the vaults of the FederalReserve banks as potential reserve. Through a sub-stitution of Federal Reserve notes for lawful money,the latter may be obtained by the Federal...

  • Page 125

    114 BANK CREDITThe Rediscount Rate as a Factor in Credit ExtensionWithin the limits indicated the extension of the loansand resulting reserve deposits or Federal Reserve notesof the Federal Reserve system and hence the futureextension of loans and deposits of our commercialbanks will be determine...

  • Page 126

    BANKERS' BANKS AND CEEDIT EXTENSION 115period since 1914 as a new era in bank opera-tion.The following table gives an itemized account ofthe advances made by the twelve regional banks asof January 23, 1920:xBills discounted secured by Government warobligations $1,386,348,000All other bills discou...

  • Page 127

    116 BANK CREDITrowed. A rate of rediscount, therefore, that equals orexceeds the rate of discount tends strongly to checkborrowing by the commercial banks. This is true,even if the commercial banks are borrowing freely andsimultaneously. Under those circumstances an in-dividual member bank would ...

  • Page 128

    BANKERS' BANKS AND CREDIT EXTENSION 117borrowed funds would become distributed widelythrough the banking system as the residualized founda-tion of manifold loans and deposits. In that process,however, the Mad River National Bank would retainonly a small proportion, $100,000—$97,600 or $2,400,as...

  • Page 129

    118 BANK CREDITpa¤sion of loans and deposits resulting from a reductionin the rediscount rate would tend to be absorbed inhigher prices for an unchanged volume of exchangeablegoods. A change in the rate of rediscount tends tobe reflected in changes in the price level and, generally,in the physic...

  • Page 130

    BANKERS' BANKS AND CREDIT EXTENSION 119"A high discount rate for the Reserve banks is mainlyimportant for its moral effect. It does not make itunprofitable for the banks to rediscount. A bank inNew York City may rediscount $13,000 of commercialbills and pay 6 per cent for so doing, but it th...

  • Page 131

    120 BANK CREDITas well as commercial lending agencies before the es-tablishment of the Federal Reserve system in 1914 andthat many still so serve, but on a relatively restrictedscale. The outstanding circumstance that distin-guishes the work of the Federal Reserve banks fromthat of our national a...

  • Page 132

    PART IIQUALITATIVE ASPECTS OF BANK CREDIT

  • Page 133

    CHAPTER VIIRECENT CHANGES IN OUR BANK CREDITARRANGEMENTSThe principal changes in our bank credit arrange-ments since the Civil War and more especially duringthe last twenty-five years, relate to the form of thebank borrower's obligation, the development of thenote brokerage business, the rise of ...

  • Page 134

    124 BANK CREDITOne of the outstanding features of our bankingpractice during the last half century or more is thechange of emphasis placed on the personal standing ofthe borrower. Fifty or sixty years ago single namepaper was scarcely known. Banks refused to makeadvances on the security afforded ...

  • Page 135

    RECENT CHANGES IN CREDIT ARRANGEMENTS 125paper, with a heavy sprinkling of endorsed trade paperand acceptances, bulked large in bankers' receivablesbefore the disturbing effects of the Civil War werefelt.The evolution from this system of endorsed accom-modation paper and endorsed trade paper, i. ...

  • Page 136

    126 BANK CREDITdirectly from banks to enable them to do so.1 Thissystem developed until it has become so general apractice that we may profitably note the forces under-lying its development.The Civil War with the greenbacks depreciated andfluctuating in value, and the demand for commoditiesoutrun...

  • Page 137

    RECENT CHANGES IN CREDIT ARRANGEMENTS 127directly from their banks in order to take advantageof the discounts offered.1The system of borrowing by the buyer on his ownresponsibility, which was a consequence of the intro-duction of cash discounts, has in the minds of manyproved superior to the old ...

  • Page 138

    128BANK CREDITPea CENT.10090807O60SO40ÒO2010 V¦>o L707S 7860 J885 t89O 189S tSOODiagram 5ill\\i//^^ -ENDOR¿SlN<}LE,Secuee•—•—.NAME A¤¿OANy/«z./\\«—-Pen CENTtoo9OSo7o60SO403020toO/sos røro rsrsthat single name paper in that year constituted 9.8 percent of the total, and end...

  • Page 139

    RECENT CHANGES IN CREDIT ARRANGEMENTS 129too90807060JO40302010AI(//\•ENOOfå'SINGLE-Secua¿SEOfM*N*ME fì-¤¿OANÍrøekP£R —!·too9 0eo4Oso20toieeo teas reso re9s ta<×r taosia*sDiagram 6grain 6.x Changes in the classification of loans after 1914render the extension of the curves beyond ...

  • Page 140

    130 BANK CREDITState banks and trust companies show a strikinglysmaller percentage of both single name and of endorsedpaper than do national banks. The ratio of singlename paper to total loans of state banks and trustcompanies in 1910 was only a scant 10 per cent, andendorsed paper constituted ap...

  • Page 141

    RECENT CHANGES IN CREDIT ARRANGEMENTS 131ways on time, never on demand. As the followingpages will show, the beginnings of the note brokeragesystem reached back far into the last century.The Growth of Note BrokerageThe development of the work of note brokerage orcommercial paper houses in the Uni...

  • Page 142

    132 BANK CREDITIt was by this method that my firm soon became the largestdealers in mercantile paper, which business had formerly beencontrolled by two other firms for at least a quarter of a cen-tury, and whose old fogy methods were by my innovationseasily eclipsed.The merchants at that time wou...

  • Page 143

    RECENT CHANGES IN CREDIT ARRANGEMENTS 133The two firms whose paper I was unable to dispose of wereabout the first to fail, and before the maturity of any of thebalance of the paper which I had successfully negotiated boththe drawers and endorsers thereon, without an exception, allcollapsed.1The f...

  • Page 144

    134 BANK CREDITment was very common. Since that time the practicehas fallen increasingly into disfavor. The volume ofpaper handled on a commission basis has dwindled andalmost disappeared. Commercial paper houses nowbuy paper outright almost invariably, and to theextent that they hold it, whether...

  • Page 145

    RECENT CHANGES IN CREDIT ARRANGEMENTS 135that the first brokerage connections established be-tween the East and the West should have resulted in aflow of capital westward.As potential borrowers from banks in any particularlocality sold their paper more and more through notebrokers, surplus funds ...

  • Page 146

    136 BANK CREDITThe a priori notion that the purchase of paper bybrokers must have created a demand for paper on thepart of banks whose borrowing customers were inducedto dispose of their obligations through brokers, tallieswith the contention, based in part on the table given,that the market for ...

  • Page 147

    REGENT CHANGES IN CREDIT ARRANGEMENTS 137The situation in the country as a whole was, never-theless, one where the solicitation of paper by thebrokers had almost unique results: their success inweaning customers away from banks was productiveof a corresponding demand for the very paper acquiredby...

  • Page 148

    138 BANK CREDITmay buy, but it is only after the credit department,employing methods and having interests similar tothose of the bank credit department, has approved anadvance of funds, that the paper is bought. The sel-ling department sells both "by list" and through per-sonal solicita...

  • Page 149

    RECENT CHANGES IN CREDIT ARRANGEMENTS 139case so well as selected notes of distant concerns.Twenty years ago when loans were almost entirelylocal, surplus funds of country banks were investedlargely in high class bonds and similar securities, whichwere held with the idea of sale when the local de...

  • Page 150

    140 BANK CREDITpersistent disparity between the lending power of localbanks and the effective demand for bank credit hasconstituted the note brokers' opportunity, and thebrokerage houses have been keenly responsive inaffording facilities for putting banks having surplusfunds in touch with distant...

  • Page 151

    RECENT CHANGES IN CREDIT ARRANGEMENTS 141maximum of broker's paper are relieved of strain in astringency, while others with less paper and heavierlocal loans meet the demands of their borrowers withless ease. The branch banking system may be likenedto a system of reservoirs with inter-connecting ...

  • Page 152

    142 BANK CREDITfirst came prominently forward with his wares twenty-five years ago. Previously to the panic of 1907, whichsubjected commercial paper marketed by the broker-age houses to a crucial test, bankers were inclined toshake their heads. The crisis of 1907 and the events of1914, however, d...

  • Page 153

    RECENT CHANGES IN CREDIT ARRANGEMENTS 143mensurate with its importance. It should be theinner chamber in all respects. .. . Its mechanism ofblanks, files, vaults and office fixtures should beperfectly adapted to its service, and every meansthat ingenuity can devise should be utilized to assistits...

  • Page 154

    144 BANK CREDITfor the use of the bank or dictated as a letter to aninquiring correspondent, as the case may be.1The First Phase of the Development of Credit ResearchThe establishment of credit departments in Ameri-can banking institutions dates from about 1890. Theexact date of the establishment...

  • Page 155

    RECENT CHANGES IN CREDIT ARRANGEMENTS 145edge and enthusiasm. The subject of bank creditswas discussed before many state bankers associationsduring the mid-and late nineties, and the close of thelast century witnessed the successful operation of agrowing, if not large, number of well organized cr...

  • Page 156

    146 BANK CREDITstatements of the various groups might recommend.'*Nearly all of the groups of the New York State Bank-ers' Association adopted uniform statement blanks andthe example thus set was followed by many associa-tions in other states.1In 1898 the National Association of Credit Men,even t...

  • Page 157

    RECENT CHANGES IN CREDIT ARRANGEMENTS 147and really scientific character of the work of investiga-tion. The way in which the importance of adequateand systematically recorded credit information hasbeen recognized geographically and chronologicallysince 1900 may be made plain by the following tabu...

  • Page 158

    148 BANK CREDITThe Underlying ForcesThe conditions or forces that underlay the rise anddevelopment of the bank credit department have beennumerous. First, perhaps, in point of time, was agradual change of method employed in the buying andselling of commercial paper. Borrowers were discov-ering th...

  • Page 159

    RECENT CHANGES IN CREDIT ARRANGEMENTS 149But the ability and willingness of the city bank to fur-nish the desired information to its country corre-spondents was a magnet attracting new accounts andholding old ones against a growing competition.1It must not be understood that the work of commer-ci...

  • Page 160

    150 BANK CREDITWith the rapid growth of our cities and the growingdisposition of an increasing number of borrowers,—merchants, manufacturers, contractors, promoters,capitalists, and banks themselves,—to use borrowedfunds, the borrowing demands upon banks became soheavy that an individual offi...

  • Page 161

    RECENT CHANGES IN CREDIT ARRANGEMENTS 151vìdual lines of credit to one-tenth of the paid-up capitaland surplus hampered their activity in such a way asto suggest an enlarged capital and surplus as the legalbasis of lending capacity adequate to meet the needs oftheir biggest borrowers. Growth in ...

  • Page 162

    152 BANK CREDITThere is no doubt that actual losses occurring underthe old system, or lack of system, have been an imme-diate and inciting cause of action taken with a view tothe installation of complete credit files. "Losses underthe old system," says one banker in the Northwest,"...

  • Page 163

    RECENT CHANGES IN CREDIT ARRANGEMENTS 153more officers are charged with the duty of building upthe business, and to this end call, or have representa-tives call, upon existing or prospective customers andcorrespondents, presenting their claims, describingtheir methods, equipment and facilities. A...

  • Page 164

    154 BANK CREDITcount rates than prevailed in the West because of thegreater abundance of money in the Eastern bankingcenters. Banks in New York City, in particular, aresaid to resort to lower rates as a means of securing newaccounts, except in periods of stringent money.Again, the offer of a more...

  • Page 165

    RECENT CHANGES IN CREDIT ARRANGEMENTS 155do their banking business and enable the city banks topass by, as if undesirable, the customers of friendlyinstitutions and to seek out depositors of banks forwhose goodwill the soliciting bank has no special con-cern or regard.The activity of the new busi...

  • Page 166

    156 BANK CREDITThe Influence of the Federal Reserve System upon theKind and Quality of Bank LoansThe Federal Reserve system also has had a markedinfluence upon the kind and quality of our bank loans.The establishment of the system has had a strongtendency to increase local loans with a correspond...

  • Page 167

    RECENT CHANGES IN CREDIT ARRANGEMENTS 157funds for the currency of the loan. Instead of lendingto his correspondent on demand at two per cent, thebanker may now lend to his customers at a higher rate,but with as great freedom from apprehension concern-ing the future.1 It is easily seen that this ...

  • Page 168

    158 BANK CREDITject to call on demand. Both may be disappointed.The growth of the Federal Reserve system in magni-tude and influence, and of the practice of rediscountingat the regional banks, must tend to eliminate paper ofthe kind described and to put two kinds in its place:paper that is payabl...

  • Page 169

    RECENT CHANGES IN CREDIT ARRANGEMENTS 159A bank acceptance differs from a trade acceptancein that the bank acceptance is executed by a bank, orother corporation, firm or person engaged in the busi-ness of granting acceptances. Whatever its founda-tion, whether domestic or foreign trade, the banka...

  • Page 170

    160 BANK CREDITratic market following the cessation of hostilities thesame banks were heavy and stabilizing purchasers.The growth of the bank acceptance market has beenlittle short of phenomenal, but the trade acceptancehas had a hard struggle to gain recognition. Commer-cial paper houses have op...

  • Page 171

    CHAPTER VIIITHE BANK BORROWER'S STATEMENT:ASSETSThe credit worth of a borrower, which may bedefined as the amount which he will be able and willingto repay at maturity or to the reasonable satisfactionof the lender, depends upon three factors: capital,1business ability or capacity, and character....

  • Page 172

    162 BANK CREDITbe studied with a view to discover what light it throwson the borrower's capital and capacity. From theborrower's statement experienced credit men are ableincidentally to make important deductions bearingupon his character. Information concerning the char-acter of the borrower, how...

  • Page 173

    THE BANK BORROWER'S STATEMENT 163here to present a statement for study with all but itsmost essential features pared away.AssetsCash on hand $Cash in bankAccounts and notes receivableMerchandise:Finished $In processRaw materialReal EstateMachinery and fixturesOther Assets, and of what composedTot...

  • Page 174

    164 BANK CREDITQuestions are inserted, following this statement,concerning contingent liabilities, insurance, deprecia-tion, total sales for previous year, terms of sale, an-nual expenses, dividends, etc.Obviously the most liquid asset of a business enter-prise must be its cash. Next are accounts...

  • Page 175

    THE BANK BORROWER'S STATEMENT 165many instances, be more properly treated as a currentobligation.The capital of the borrower, by which is meantthe proprietors' interest in the case of a partnershipand the net worth in the case of an individual entre-preneur, is equal to the assets minus the liabi...

  • Page 176

    166 BANK CREDITon hand in time of monetary stringency or crisis hasan enviable purchasing position.1The credit man considers cash on hand and in bankfrom two angles, quality and quantity. In quality theitem is likely to be adulterated. Besides the legitimatecurrency, checks, and bank deposits, th...

  • Page 177

    THE BANK BORROWER'S STATEMENT 167and to have been stolen by employees. Cash on de-posit at the bank may be tied up by liens against it, ormay be in the form of a special deposit which is not tobe withdrawn except after a time notice. Cash onhand at the date of the statement has been known todisap...

  • Page 178

    168 BANK CREDITshould maintain an average balance equal to at least20 or 25 per cent of the loans extended. Such a balanceis justifiable on the ground that the bank itself keepsbalances in numerous and widely scattered banks ascompensation for clearing and collecting items withintheir territory. ...

  • Page 179

    THE BANK BORROWER'S STATEMENT 169makes it a rule to bank all cash as it is received. Theman who does otherwise is likely to be careless aboutother and more vital features of his business.1Accounts and Notes ReceivableNotes receivable, once an important item in thebalance sheet of American busines...

  • Page 180

    170 BANK CREDITknowledge of trade and financial conditions. Anyreasonable banker would expect an increase in the ratioof receivables to sales during a crisis.In the second place there may have been a falling offin the efficiency of the credit and collection depart-ments of the business of the bor...

  • Page 181

    THE BANK BORROWER'S STATEMENT 171likelihood of having the bulk of them in territory wherebusiness is depressed? A concern whose accountswere mainly in the cotton states in the fall of 1914was in an unenviable position. To what extent areaccounts in the hands of attorneys for collection?What is th...

  • Page 182

    172 BANK CREDITbe past due. Let the credit man ascertain whether allthe notes have arisen from the regular course of busi-ness. Some may represent loans to officers or employeesor other individuals. In corporations, shareholderssometimes give notes in payment of capital stock.Notes of subsidiary ...

  • Page 183

    THE BANK BORROWER'S STATEMENT 173matures. In the case of an open account, on the otherhand, the legal means of recovery are quickly avail-able.1Where the banker is distrustful of the items ofaccounts and notes or bills receivable, his suspicionsmay be confirmed or removed by obtaining an itemized...

  • Page 184

    174 BANK CREDITfrom the credit department, after becoming thoroughlyfamiliar with the stock of merchandise composing theinventory, not only audit the books of the borrowerbut make a careful appraisal of assets as well. Inmany cases an acquaintance in the trade can be reliedupon, particularly by b...

  • Page 185

    THE BANK BORROWER'S STATEMENT 175The location of goods inventoried, is, however, ofmuch less interest and import to the banker than themethod of valuation. Inventories will frequently varyin the ratio of 1 to 6, according to the basis or methodof valuation, and allowance for obsolete, deteriorate...

  • Page 186

    176 BANK CREDITinventory. During a period of rapidly rising prices,on the other hand, cost of replacement may justifiablybe made the basis of inventory appraisal. Fire in-surance conditions on occasion may even make thisprocedure imperative.1The banker ought to guard against the occasionaland obv...

  • Page 187

    THE BANK BORROWER'S STATEMENT 177perhaps, to the borrower, the practice is fraught withdeception to the banker.1Statements of manufacturing concerns should class-ify stock as among raw materials, goods in process, andfinished products. Haw materials and supplies2 likecotton, wool, metals, fuel, a...

  • Page 188

    178 BANK CREDITknows better than the experienced lending officer of abank how seriously injudicious buying and the accum-ulation of undesirable stock will impair the resourcesof a concern. "Goods well bought are half sold."Shrewd buying has its reflection in a clean and salableinventory...

  • Page 189

    THE BANK BORROWER'S STATEMENT 179ship with another bought the stock of a bankruptconcern in Boston and cleared one hundred thousanddollars in ten months. The creditors were banksimpatient for a settlement. They got it, "reasonablyquick and unreasonably small."1Real Estate, Machinery and...

  • Page 190

    180 BANK CREDITthe borrower. The plant of a manufacturer should bevalued higher ordinarily, it is maintained, than realestate owned by a jobber which is not a necessary ad-junct to his business. Brick, mortar and equipmentwhich might not realize twenty five cents on the dollarunder forced sale sh...

  • Page 191

    THE BANK BORROWER'S STATEMENT 181die, would have to be remodelled and newly equippedbefore the creditor bank would be able to realizeon the capital advanced as a loan, the credit man hadbetter insist on a nominal valuation. If on the otherhand the plant is well located in an industrial centerand ...

  • Page 192

    182 BANK CREDITusually for much more than its value as scrap. It isfar removed from being a quick asset and can be al-lowed weight in the consideration of the credit manonly when he knows the applicant for the loan is pros-perous, is adding to working capital from year to year,and that all the el...

  • Page 193

    THE BANK BORROWER'S STATEMENT 183good will, and such deferred assets as insurance paid,organization expenses, taxes paid in advance.Stocks and BondsUnder the head of other assets, or otherwise, theitem of stocks and bonds appears in a large numberof borrowers' statements. When the securities areg...

  • Page 194

    184 BANK CREDITliability in connection with the instalments not yetdue.1Unissued stocks and bonds of a borrowing corpora-tion are not an asset and should not be so shown.Treasury stock, or stock which has been repurchased,must be regarded as a slow asset unless a wide marketfor the stock exists. ...

  • Page 195

    THE BANK BORROWER'S STATEMENT 185Trade-marks are probably easier of satisfactoryappraisal than patents, copyrights and good will.Nevertheless bankers are not infrequently influencedfavorably by the known existence of value attachingto such assets as we have under consideration, eventhough they ar...

  • Page 196

    186 BANK CREDITLife InsuranceIncreasingly banks are including in the blank state-ments furnished their borrowing customers one or morequestions as to life insurance.Life insurance is not infrequently used to supportthe element of moral hazard. Even insurance thatdoes not carry with it cash value ...

  • Page 197

    THE BANK BORROWER'S STATEMENT 187useful and proper purpose. life insurance is contin-gent capital.Policies are now being written, frequently in largeamounts, to cover losses contingent upon the death ofpartners, the managing geniuses of corporations,inventors connected with business enterprises a...

  • Page 198

    188 BANK CREDITWe have dwelt at length on the treatment of theassets side of the borrower's balance sheet becausethere concealed are most of the banker's pitfalls. Whata borrower's assets amount to is, as we have seen,largely a matter of appraisal. His liabilities, on theother hand, need only to ...

  • Page 199

    CHAPTER IXTHE BANK BORROWER'S STATEMENT:LIABILITIESLiabilities have already been classified and we maypass at once to their analysis and interpretation,following the order of the liability items of the balancesheet given near the beginning of the previous chapter.Bills Payable for MerchandiseThis...

  • Page 200

    190 BANK CREDITinquiries, that their borrowers are not taking advan-tage of the best trade discounts, the matter is broughtto the attention of borrowers at once. There are timesof course when abnormal business conditions preventthe banker from being exact in enforcing this rule.Usually its enforc...

  • Page 201

    THE BANK BORROWER'S STATEMENT 191country bank may resell paper to one of the banks overwhich the clearing house examiner has supervision.There is at least a moral effect.Open AccountsBankers should ascertain how the amount of ac-counts payable is ascertained. When this item issmall it may be expl...

  • Page 202

    192 BANK CREDITchanging the net worth of a concern does give its state-ment an improved appearance. Many borrowersbelieve, with some reason, that they have presented astronger statement when they show assets of, say,$150,000 with nominal liabilities than if they showedassets of $200,000 and liabi...

  • Page 203

    THE BANK BORROWER'S STATEMENT 193Whether a borrowing concern has mortgage bondsoutstanding or has borrowed on the simple securityof real estate pledged by mortgage, the bank creditman usually scrutinizes the indenture in order to as-certain whether the instrument covers the land andbuildings only...

  • Page 204

    194 BANK CREDITpreviously to the collapse of the concern paid off or se-cured at the expense of the other creditors.1The contention of many business men that theappearance of large deposit accounts in the statementindicates additional security, as those closely inter-ested are shown to be willing...

  • Page 205

    THE BANK BORROWER'S STATEMENT 195The borrower would have, according to this statement,a ratio of quick assets to current liabilities equal to4:1. If a bank loaned the maker of the statement$50,000, the ratio of quick assets to current liabilitieswould be 2½ to 1, a ratio that is commonly regarde...

  • Page 206

    196 BANK CREDITexactly the operating results of the period under re-view and the condition of the affairs of the concern atthe date of statement. The discovery only after in-vestigation that taxes or interest in large amount, butnot mentioned in the statement, are soon to fall due isnot calculate...

  • Page 207

    THE BANK BORROWER'S STATEMENT 197When the borrowing concern is an individual or apartnership, capital and surplus combined take theform of net worth. Relatively small net worth may-be fully offset occasionally by other and outside re-sources of the borrower. The reader will of coursehave in mind ...

  • Page 208

    198 BANK CREDITRelation of Net Worth to Credit WorthWhat is the proper and safe relation between networth, the proprietorship interest, or capital and sur-plus on the one hand and credit worth on the other?It is maintained in banking circles that unsecured loansshould not be made greatly to excee...

  • Page 209

    CHAPTER XTHE BANK BORROWER'S STATEMENT:THE INCOME ACCOUNTAlthough the asset and liability statement is some-times submitted with an application for credit, withouta statement of income and expenses, the latter is ofindispensable value to the credit man in reaching anintelligent decision. The one ...

  • Page 210

    200 BANK CREDITmust make sure that the credits do not represent salesof assets. Let him also compare the debts with prev-ious statements in order to check the omission or re-duction of charges like depreciation, a practice some-times resorted to in order to make a creditable showingof earnings in...

  • Page 211

    THE BANK BORROWER'S STATEMENT 20 1Items among the expenses that call especially forcomment are expenses of conducting the business,salaries paid officers, and depreciation. The othersare self-explanatory or scarcely call for comment.The actual expense of conducting the business isan index of capa...

  • Page 212

    202 BANK CREDITits members for living expenses, such withdrawals maythrow strong light on the moral risk. High living hasa doubly unfavorable action. There is an actual andperhaps serious danger to the stability of the businessoccasioned by the withdrawal of funds to meet theexpenses of an extrav...

  • Page 213

    THE BANK BORROWER'S STATEMENT 203to grow in relation to its capitalization. Many NewEngland cotton mills have followed this policy to suchan extent that the value of their output is frequentlyseveral times their capitalization. As a result theyhave distinctly enhanced their credit position. NewEn...

  • Page 214

    204 BANK CREDITdoes not pay to move them when the supply becomesexhausted. With such companies it is usually calcu-lated that their plants should not exceed one dollarper thousand feet of timber owned by them. How-ever, in some cases where large supply of custom timberis available, such a rule sh...

  • Page 215

    THE BANK BORROWER'S STATEMENT 205ing his statement in October, an inventory almostequal to his year's business.1Again, a comparison of sales and accounts receivableenables the credit man to determine the age of thelatter. Where merchandise is small and accountsreceivable large there is an indicat...

  • Page 216

    206 BANK CREDITnet worth was large. Earnings for a long period hadbeen strikingly good. Investigation, however, devel-oped the fact that a lucrative contract which was thebasis of the concern's large earnings and then flourish-ing condition was about to expire without possibilityof renewal.Divide...

  • Page 217

    THE BANK BORROWER'S STATEMENT 207The Borrower's CapacityThe banker scrutinizes the borrower's statement inorder to discover evidence of good or bad management,and naturally enough his attention is directed chieflyto earnings. Earnings that are known to the bankerto be real and legitimate over a l...

  • Page 218

    208 BANK CREDITtal," while not of immediate interest to the banker, isnevertheless of vital interest to him inasmuch as hemay be compelled to fall back upon the excess of assets,however slow they may be, over liabilities in the eventof misjudgment or mishap. The third is that if state-ments ...

  • Page 219

    THE BANK BORROWER'S STATEMENT 209Reciprocal Benefits of Bank Borrowers' StatementsThe interests of the banker and his borrowingcustomers are, or should be, very closely allied; what-ever benefits the borrower benefits the banker in turn.The direct benefits to the bank of the practice ofborrowers ...

  • Page 220

    210 BANK CREDIThim as the result of a careful study of the details of hisbusiness in the preparation of the statement, is thedecided advantage of the close contact and relation-ship thus established between the two parties. Busi-ness men are being inquired about constantly as totheir financial re...

  • Page 221

    THE BANK BORROWER'S STATEMENT 211A customer gave his report to us in January; I looked itover, compared it with his previous statement, and he ap-peared prosperous; but in looking it over more carefully, Idiscovered a greater volume of business, but a lesser volumeof profit, and in going still fu...

  • Page 222

    212 BANK CREDITbe that their condition would be found too prosperousand invite others to enter the business and compete.In these instances there is no defined rule to be laiddown as to the extension of credit. All the circum-stances must be taken into consideration and the casedecided on its meri...

  • Page 223

    THE BANK BORROWER'S STATEMENT 213court investigation.1 Where an applicant for a loanrefuses to make a statement or give credit informationthe way in which the refusal is made may be a clearindication of his condition.1 Lowrie C. Blanding, The Study of Commercial Credits, Proceed-ings, Eleventh An...

  • Page 224

    CHAPTER XIINVESTIGATING THE CREDIT RISKAs we have observed, the purpose of the banker inasking the borrower to submit a statement, whateverform that statement may take, is to discover the truthconcerning the business condition of the applicantfor credit. The measure of truth revealed by a state-m...

  • Page 225

    INVESTIGATING THE CREDIT RISK 215is made, through tapping a large number of sources ofinformation, to supplement and to test the borrower'sestimate of himself, an estimate that experience hasgenerally shown to be too high.Handbooks as a Source of InformationBanks having large and active credit de...

  • Page 226

    216 BANK CREDITThe TradeProbably the most important single source ofinformation for the banker is the "trade." Checksand drafts passing through the bank give the names ofhouses with which the depositor deals and these housesare a source of information as to how accounts formerchandise a...

  • Page 227

    INVESTIGATING THE CREDIT RISK 217tions of the bank man are of great value. He oftenwants to know from what source they emanate andprecisely why they are made. The mercantile creditman may often receive more information than he im-parts.1 "Scanty fare for one will ofttimes make aroyal feast f...

  • Page 228

    218 BANK CREDITDo you think they are making money?Have you heard anything said about their respon-sibility or character?It need scarcely be said that the investigator willnot be satisfied with equivocal or fragmentary infor-mation and a considerable number of inquiries mayhave to be made before c...

  • Page 229

    INVESTIGATING THE CREDIT RISK 219note for discount at his bank on long time and at a lowrate. He may favor one and oppose the other.1Bankers sometimes inquire for information, in thecase of paper offered by brokers, directly of the con-cern the purchase of whose notes is under considera-tion. Suc...

  • Page 230

    220 BANK CREDITcertain manufacturing concern had good local creditstanding. At that time each of the four bankers wascarrying the paper of the concern and knew that it wasnot "an available asset." Subsequently,—perhapsafter the bankers had sloughed off some of their ownholdings,—los...

  • Page 231

    INVESTIGATING THE CREDIT RISK 221the cultivation of cordial relations is of mutual impor-tance and advantage.1The InterviewThe banker who is able to interview his borrowingcustomers has a decided advantage. The bank officerwho interviews applicants for credit ought to be a goodjudge of faces and ...

  • Page 232

    222 BANK CREDITand come to a conclusion from an analytical as well asfrom a personal standpoint. Some of the best talkersand some of the most attractive personalities areamong the poorest business men.1 Accordingly, whenthe banker feels the personal influence or persuasivepower of a prospective b...

  • Page 233

    INVESTIGATING THE CREDIT RISK 223with whom the concern would also, almost of necessity,maintain an account. Inquiries would also be ad-dressed to banking connections that the concern mighthave in other cities. The New York bank would alsocommunicate with banking friends, from whom closeinformatio...

  • Page 234

    CHAPTER XIISECURED LOANSThe principal kinds of secured loans made by ourbanks are those collateralled by stocks or bonds, thosesecured by warehouse receipts, and those backed bymortgages. The volume of our secured bank loans incomparison with those represented by paper unsup-ported by valuables p...

  • Page 235

    SECURED LOANS 225place like Baltimore, for instance, and among thecountry banks, the collateral value of a security isgauged by what the banker considers its "intrinsic"value. New York bankers are chiefly concerned withthe resiliency of the market,—whether suddenly throw-ing large blo...

  • Page 236

    226 BANK CREDITsurance policies are superior to stocks and bonds assecurity for loans. Such policies, it has long beenrecognized, are worth as collateral security whatevertheir cash surrender value may be, and they are freelyaccepted by banks as good collateral on satisfactoryassignment. The surr...

  • Page 237

    SECURED LOANS 227willing to lend gold on the pledge of these commoditiesas security. Preference for these staples as securityhas generally given way so that at present and formany years past warehouse loans have been made inless desirable lines of trade, where the solidity of theborrower has offs...

  • Page 238

    228 BANK GREDITquality and value of the goods by a trustworthy ex-pert, we add carefulness and watchfulness as to chang-ing values and markets, insurance, duties, etc., wehave in mind by far the most weighty considerationsaffecting the safety of this growing class of loans.1The commodity stored, ...

  • Page 239

    SECURED LOANS 229during the movement of the crop. When the receiptsare pledged as collateral the borrower is expected tomaintain the value of the security at ten per cent abovethe face of the loan. Rigid inspection, weighing, andstoring practices have caused the receipts to be re-garded as thorou...

  • Page 240

    230 BANK CREDITpresses and stores for future delivery to spinners or forexport. The compress, upon getting possession of thecotton, issues warehouse receipts in the name of theconsignee in individual lots, marked and numbered tocorrespond to the tags and marks on each bale ofcotton. The receipts ...

  • Page 241

    SECURED LOANS 231let us say, of all loans made by the bank be invested inother lines of farming. The man with cattle and a silo,some hogs and brood mares, need not be feared whenborrowing to put out cotton, wheat or other crop.1Loans to farmers on cotton as sole security shouldnot exceed 60 or 65...

  • Page 242

    232 BANK CREDITcash. Allowance should be made for interest duringthe time required for the process of foreclosure, cost offoreclosure, and depreciation, which may be seriousduring the time of foreclosure.Vacant properties held for speculative purposesare most dangerous, and more than half the for...

  • Page 243

    SECURED LOANS 233ownership, and its corollary, the condition of indebted-ness of the community. In the event of adversity,such as crop failure, a community lacking in thrift andaccumulated wealth in forms other than equity in landnot only fails to pay interest but, in the absence of readycash to ...

  • Page 244

    234 BANK CREDITtwo appraisers employed by the same lending com-pany, and both experienced men, appraised the samefarm and were so far apart in their valuations that thedifference was greater than either the margin or theequity on the basis of what the owner himself wouldhave regarded as a fair lo...

  • Page 245

    CHAPTER XIIIOVERDRAFTSThe overdraft, much less common in Americanbanking than in England and Scotland,1 representsa loan. The overdraft is, therefore, one form of bankcredit.Now an overdraft is frequently the result of error.If, however, errors are large and frequent, they areprobably not merely ...

  • Page 246

    236 BANK CREDITdraw their accounts. Farmers, eager to "get out ofdebt" and having an almost insatiable appetite formore land, as a rule maintain either no bank accountsor only small balances. The farmer may leave a stand-ing order at the bank to call him up if he overdraws.1Banks, as we...

  • Page 247

    OVERDRAFTS 237with a private or state bank operated under less strictexamination and supervision and find it difficult tokeep its ledger free from overdrafts on account of thatcompetition. Such a national bank in Ohio (Mt.Sterling) at one time had total resources of approx-imately $400,000 and ov...

  • Page 248

    238BANK CREDITat best represented only a hope.1 It is probably truethat a banker able to say no when he feels a loan is un-safe often permits an overdraft rather than protest acheck.In State and National BanksState banks, as well as national, have been grossoffenders in respect to overdrafts. The...

  • Page 249

    OVERDRAFTS 239Currency,—in which is shown the ratio of overdrafts toloans. It is clear from the diagram that the trouble-some item is passing. State banks and trust companieshave shown the same tendency, only less strong, toreduce this red ink item. From 1910 to 1916 the ratioof overdrafts to l...

  • Page 250

    240 BANK CREDIT7. Educate the merchant and others to purchasedrafts, rather than send personal checks.8. There is a type of depositor that insists on makinguse of the overdraft in order to avoid paying intereston funds he might not use. He may be going out oftown and is not sure he will need addi...

  • Page 251

    OVERDRAFTS 241less than two and a half years later.1 Bankers them-selves, supervision apart, are able to keep this fractiousitem within narrow bounds only through the executionof a firm and tactfuï policy.An Index of the Soundness of the BankOverdrafts are, it follows, an index of the charactero...

  • Page 252

    CHAPTER XIVLOANS OF COUNTRY BANKSDistinctive Features of Country Bank LoansThere are several features of loans made by countrybanks * that contrast sharply with credit extended bythe banking institutions of the cities. In the first placethe basis of the country bank loan is highly personal.The co...

  • Page 253

    LOANS OF COUNTRY BANKS 243What the country bank lacks in credit files and in"credit men" is offset in part by the fact that directorsas well as the lending officers of such banks have thisclose acquaintance with the affairs of borrowers. Thedirectorates of country banks are so constitut...

  • Page 254

    244 BANK CREDIThappy credit state where borrowing is no longernecessary.1In the next place, the extension of credit by citybanks is frequently based in part on the averagemonthly balance maintained. In country banks this isscarcely a governing factor inasmuch as it often hap-pens that the most so...

  • Page 255

    LOANS OF COUNTRY BANKS 245The loans of the country bank are also "slow" incomparison with loans made by city institutions.Loans of country banks to their merchant borrowersare likely to be characterized by renewals due to thehabitual slowness of merchants in making collections.The count...

  • Page 256

    246 BANE CREDITate their loans at the bank.1 This condition of havingall loans retired is cited because of its exceptionalnature.A country banker addressing the Missouri Bankers'Association in 1911, stated that during a single month,not especially chosen, for which computation had beenmade, 65 pe...

  • Page 257

    LOANS OF COUNTRY BANKS 247from the bank without getting security and feelingcomplimented and not under the necessity of gettingother names on his renewals he finds that renewaleasy.1 Single name borrowers are prompt in meetingtheir bank obligations and bankers have learned toavoid taking endorsed...

  • Page 258

    248 BANK CREDITThe borrowers of country banks frequently keepno record of and do not know the amount of theirnotes held by their bank and consequently inquireof the banker habitually as to the number, amounts,maturities, and perhaps the security of their obliga-tions. If the banker has to look th...

  • Page 259

    LOANS OF COUNTRY BANKS 249good prompt customer, how you make a special effortto help that class of borrowers in a stringency.12. Accept no notes that do not provide for waivingprotest, notice of protest, and for cost of collection.3. Send notices to borrowers from five to ten daysbefore date of m...

  • Page 260

    250 BANK CREDITbankers, except in the rural South and in connectionwith financing the operations of cattle feeders in thecentral and southwestern states.The variety of notes that the country banker haslearned by experience to prefer is given in jauntyfashion by Mr. E. R. Gurney.1We like notes tak...

  • Page 261

    LOANS OF COUNTRY BANKS 251little rake-off above that" has been not an uncommoncharge that the borrower has borne. In justificationof such high rates the banker concerned contends,first, that he has to charge a great deal more than city-banks because he renders more expensive service. Thecity...

  • Page 262

    252 BANK CREDITgradually by means of checks. On these checks thebanker may earn additional profit in the form of ex-change. The farmers may pay two per cent morethan the merchants, but their paper runs for six totwelve months. Very few farmers keep any balance,nor is much exchange earned on the a...

  • Page 263

    CHAPTER XVLOANS OF BANKS TO BANKSThere are several ways in which one bank may lendto another. The most common is, and has long been,on the note of the borrowing bank secured by accom-panying collateral in the form of stocks or bonds orcustomers' notes. A second method is to lend on theunsecured n...

  • Page 264

    254BANK CREDITCitiesNo.ofbanksDirect andindirectloans tobanksSecurities, etc., pur-chased from bankswith agreement toNew England States.... 59 $ 8,042,115 $ 295,042Eastern States 181 62,309,711 894,550Southern States 81 9,528,530 23,500Middle States 124 65,125,350 4,445,322Western States 38 17,99...

  • Page 265

    LOANS OF BANKS TO BANKS 255it is found to be unsatisfactory, substitution may beasked for. The amount of the collateral, whether ratedor unrated paper, is maintained, when maturities oc-cur, through substitution. The margin of the collateralover the face of the loan may run all the way from tento...

  • Page 266

    256 BANK CREDITInvestigating the Borrowing BankCity banks employ a great variety of methods inattempting to ascertain the standing of a bank thathas applied or that may apply for a loan. Many NewYork institutions having bond salesmen and solicitorsof new business at work in the territory of their...

  • Page 267

    LOANS OF BANKS TO BANKS 257Non-liability paper is also used in making replies toinquiries concerning non-bank borrowers.The practice of city banks sending representatives,frequently vice-presidents, over the country to attendbankers' conventions has two purposes: (a) to securenew business and (b)...

  • Page 268

    258 BANK CREDITto which it pertains and serves as an important help inpassing intelligently and fairly upon applications forcredit coming from the interior bank.1The way in which a bank handles its accounts withthe city correspondent is also an indication of char-acter. Balances and loans over lo...

  • Page 269

    LOANS OF BANKS TO BANKS 259found out about the standing of the Weston bank bywriting to banking friends in Toledo, lima and perhapselsewhere. The lending officer of the New York bankalso has at his fingers' ends figures showing how profit-able the account has been, and facts as to the prompt-ness...

  • Page 270

    CHAPTER XVICOMMERCIAL PAPER HOUSES AS INTERMEDIARIESBETWEEN BORROWERS AND BANKSIn an earlier chapter attention was directed to therise and development of our commercial paper or notebrokerage houses as important institutions in ourrecent financial evolution. It will be our purpose in thepresent c...

  • Page 271

    COMMERCIAL PAPER HOUSES 261and has the advantage of direct and centralized con-trol. The unlimited liability feature of the ordinarypartnership is no disadvantage inasmuch as our notebrokers, unlike the English bill brokers, do not endorseor guarantee, except in rare instances, the paper boughtan...

  • Page 272

    262 BANK CREDITabundant.1 Even when money is plethoric in localitiesnear at home they direct their salesmen where paperis less likely to sell, in distant cities and towns, againstthe time when the near-by market may be wholly orpartly closed.As a matter of necessity, the typical successful notebr...

  • Page 273

    COMMERCIAL PAPER HOUSES 263Double name trade paper, i. e., promissory notesgiven in settlement for goods purchased, and endorsedby the seller, makes up a very small percentage ofbrokers' paper, five per cent being a broker's estimate.Non-trade paper bearing endorsement constitutes, per-haps, 30 o...

  • Page 274

    264 BANK CREDITwith the obligations of mercantile or manufacturingconcerns.Paper is made in amounts running from $2,500 tovery large sums. A variety of denomination enablesthe broker to meet the demands of different customers.Small denominations like $2,500 or $5,000 are frequentlyemployed becaus...

  • Page 275

    COMMERCIAL PAPER HOUSES 265annual volume of such paper sold by note brokersthrough the country was $2,000,000,000.2 No author-itative figures are obtainable.Ten Days' OptionAn appreciable part of the large volume of paperhandled by the brokers is sold on a ten days' option.If the purchasing bank'...

  • Page 276

    266 BANK CREDIThe does, the genuineness of the signature withoutendorsing the paper, may make more or less thanhis commission. If the market rate rises after he haspurchased a given block of paper, he may lose evenmore than the one-fourth per cent commission. If themarket rate falls, he stands to...

  • Page 277

    COMMERCIAL PAPER HOUSES 267fully with banks lending directly. It may make forclarity to point out that one-fourth of one per centcommission on a sixty day loan is equivalent to a rateof interest of one and one-half per cent per annum.The same rate of commission on paper running sixmonths would be...

  • Page 278

    268 BANK CREDITAct on loans to any single borrowing concern to one-tenth of the capital and surplus of the bank—a pro-vision that has its rough counterpart in many of ourstate banking statutes—necessitated resort to morethan one bank. But it was inconvenient and unpleas-ant to keep a balance ...

  • Page 279

    COMMERCIAL PAPER HOUSES 269rather tha¤ be subject to credit influences withinnarrowly circumscribed areas. The fact that suchborrowers sell their paper does not imply that they arecompelled to seek credit away from home but, instead,that they have attained the enviable position of beingable to s...

  • Page 280

    270 BANK CREDITBesides securing funds at a lower rate and tappinga greatly enlarged number of capital sources, the con-cern borrowing through note brokers strengthens itsborrowing position at home. If paper stands theinvestigation of alert credit men in buying banks andtheir correspondent institu...

  • Page 281

    COMMERCIAL PAPER HOUSES 271brokerage system, passing now to a consideration of theadvantages of broker's paper to buying banks.Advantages of the Note Brokerage System to BanksThe broker is frequently of invaluable assistanceto the banks. Bankers with surplus funds not onlywelcome the broker with ...

  • Page 282

    272 BANK CREDITsome thought as to whether they can use the additionalfunds to advantage, usually decide that they can savesome small discounts or expand their business a little.The money under those circumstances goes out and thebanker later discovers that he has made a long timeloan.1 By dealing...

  • Page 283

    COMMERCIAL PAPER HOUSES 273Even local loans made in the regular course ofbusiness are usually slow, often being renewed and intimes of stringency are likely to be increased ratherthan liquidated. One banker has asserted that "theonly certainty about local loans is that in time of stressthey ...

  • Page 284

    274 BANK CREDITsense such notes are not liquid, but from the standpointof individual banks they are highly so.Another advantage of buying broker's paper is thatit enables the banker to inject variety into his loans.The danger of holding a relatively large amount ofany one class of loans, a danger...

  • Page 285

    COMMERCIAL PAPER HOUSES 275Bankers buying commercial paper axe able alsoto obtain maturities that satisfy their prospectiverequirements. If a banker knows that he will probablysuffer a withdrawal of deposits or meet new demandsfor loans at the expiration of three months, he can buythe required am...

  • Page 286

    276 BANK CREDITrecognition of his obligation to take care of the bor-rowing needs of his depositors. Long years of squaredealing and personal acquaintance establish a confi-dence which would not be warranted by a close scrutinyof neglected credit factors. In the next place a specialplea based upo...

  • Page 287

    COMMERCIAL PAPER HOUSES 277Disadvantages to the BankWhat does the banker have to pay for these num-erous advantages? In the first place he pays the dif-ference between the relatively low and variable rateobtained from investment in broker's paper and therelatively high and stable yield on "s...

  • Page 288

    278 BANK CREDITbrokerage system as an institution results at times in aloose but powerful regulative control over the activityof our banks, both in particular and in the aggregate,that is both far-reaching and objectionable. Duringperiods of both easy and tight money the influence ofthe note brok...

  • Page 289

    COMMERCIAL PAPER HOUSES 279distributor of bank credit, an active competitor of thebanks. Individual bankers purchase the notes offeredby the broker, even if the rates of discount are belowthose quoted to their regular customers, in an endeavorto prevent a break in local rates; but brokers' low bi...

  • Page 290

    280 BANK CREDITof their action. If rates fall, their low bids are justified;if they rise the margin of commission is likely to beadequate to protect them against loss.1It should not be overlooked that progressivelylower money rates result in advancing profits for thebroker. If he buys paper today...

  • Page 291

    COMMERCIAL PAPER HOUSES 281While the note brokerage system is to be creditedwith a strong tendency toward equalizing discountrates territorially, it must be charged with accentuatingdifferences in rates in point of time. The possiblespread between the rates of Newark and Kansas Cityat any given t...

  • Page 292

    282 BANK CREDITgone by, and by whom he expects to stand in the years tocome, when those times come—and come they will. Whatkind of an answer is he to dictate to his stenographer to writeback to the banker in Chicago or New York about that cus-tomer? Give him a good bill of credit, put him in go...

  • Page 293

    COMMERCIAL PAPER HOUSES 283The note brokerage business has so facilitatedborrowing in the open market in normal times thatcredit is frequently granted too liberally; too liberallyas to both rate and amount. The significance of abnor-mally low rates in this connection is that they gohand in hand w...

  • Page 294

    284 BANK CREDITness beyond prudent and safe limits, and, when disturb-ances occur in the business world, be unable to meethis obligations for borrowed funds. The broker, incontradistinction to the banker, ordinarily owns foronly a short time the paper which he sells and hasaccordingly less incent...

  • Page 295

    COMMERCIAL PAPER HOUSES 285now be only apparent owing to the wide and contin-uous market for paper which makes it possible for aborrower to take up his notes through the sale offresh obligations in other quarters. The paper dealers,in other words, tend to promote reliance of the bor-rower upon th...

  • Page 296

    286 BANK CREDITkey to the explanation of the willingness of bankers tobuy paper offered under such uncertain conditions wasthe personal esteem in which Mr. H. B. Claflin, thehead of the concern, was held. One of the foremostcitizens of the metropolis, of unquestioned integrityand business capacit...

  • Page 297

    COMMERCIAL PAPER HOUSES 287had prolonged the life of the company at the expenseof the banks.CorrectivesOne method of eliminating the disastrous competi-tion that the note brokers generate would consist inbanks withholding credit information sought by otherinstitutions for use in passing judgment ...

  • Page 298

    288 BANK CREDITon the part of borrowers in periods of cheap money,merits serious consideration. Let the banker, it isurged, educate his customer to appreciate the personalcharacter of their mutual relations and the value of thewillingness of the banker to be of the greatest servicein case of need...

  • Page 299

    COMMERCIAL PAPER HOUSES 289in checking up borrowings as to "shut and bar thedoor" against unsafe and overexpanded makers ofpaper.Many of the most serious disappointments bankershave had with brokerage paper have resulted from thepurchase of notes whose makers failed to submit aud-ited s...

  • Page 300

    290 BANK CREDITof the trouble. Fifteen failures out of twenty one weredue to over-extended credit. Two were caused by dryrot, poor business and poor management. One casewas the result of labor troubles combined with poorbusiness. One was due to internal dissensions. Inanother, the working capital...

  • Page 301

    COMMERCIAL PAPER HOUSES 291The registration of commercial paper as a method ofpreventing its over-issue was widely discussed a fewyears ago, after the panic of 1907, and was hailed as agreat forward movement advantageous to both bor-rowers and lenders, saving time in the inquiry ofbuying banks an...

  • Page 302

    292 BANK CREDITYork, February 1, 1911, and the announcement offacilities for registration by other prominent financialinstitutions has made little impression upon our greatborrowing concerns and the movement has made nosubstantial progress, receiving meager support, evenpositive opposition, from ...

  • Page 303

    COMMERCIAL PAPER HOUSES 298of the amounts and maturities of paper outstandingat the time of issue, instead of a short time in advanceof maturity, as is now customary, the objections toregistration that it would permit of too much publicityand involve objectionable red tape would be, in largemeasu...

  • Page 304

    294 BANK CREDITand friendly personal relations between banks andtheir borrowers, combined with more searching andexacting methods of investigation by the banks, andclose cooperation between note brokers and banks,would tend to curb over-expansion and to stabilizeinterest rates by keeping the oper...

  • Page 305

    CHAPTER XVIIBANK SUPERVISION IN RELATION TO BANKCEEDITThe most valuable service of a bank examiner hasto do with his wholesome influence on the quality andvolume of the loans of the institutions supervised. Byenabling banks under his jurisdiction to avoid unsafeand dangerous loans the examiner re...

  • Page 306

    296 BANK CREDITlike the initiative taken, is public or quasi-publicin character. Internal examinations, on the contrary,are private in nature and restricted in scope to thework and condition of the institution examined. Thepurpose of an internal examination is to correct andeliminate practices th...

  • Page 307

    BANK SUPERVISION 297reference to the soundness and liquidity of bank loans.Examiners had for years worked in the same district,conferred with nobody, each following his own meth-ods, which were often faulty and crude, knowing verylittle of borrowers' standings and the value of secur-ities. The po...

  • Page 308

    298 BANK CREDITreports made by the district chairman. Furthermore,as a copy of the report of each chairman is sent to eachof the other chairmen, and as the reports are accessibleto the individual examiners, it is possible for any exam-iner who is interested in any particular line of credit tofind...

  • Page 309

    BANK SUPERVISION 299national bank; to serve as officers or directors of anycorporations which borrow from a national bank; toengage in any business except examining banks.1The modifications of the methods and machineryof national bank supervision introduced under thedirection of the Comptroller o...

  • Page 310

    300 BANK CREDITpurging the contents of the banks' portfolios of inferiorand worthless paper. The supervision of New YorkState banks is serving as a guide to the banking de-partments of other states and deserves attention be-cause of the numerous and important measures thathave been taken to raise...

  • Page 311

    BANK SUPERVISION 301the total of a borrower's bank loans and the number ofState institutions lending to the borrower, without, ofcourse, disclosing the names of the lending banks.1The State bank department of Indiana also keepsa record of all loans in excess of $2,500; which in-cludes paper bough...

  • Page 312

    302 BANK CREDITbegun in 1908, is now the rule. A conference of theexaminers after the examination tends to bring to lightthe true condition of the affairs of the banks through anexchange of credit and other information.1 Clearinghouse bank examiners are also cooperating with bothstate and federal...

  • Page 313

    BANK SUPERVISION 303of three failed banks,—the Walsh banks,—a nationalbank, a savings bank, and a trust company, which hadbeen forced to close their doors on account of misman-agement and misplaced loans. At this juncture asystem of bank examination under the direct and closesupervision of an...

  • Page 314

    304 BANK CREDITThe System DescribedWithout notice and of his own volition, the ex-aminer, with his assistants, enters a bank or trustcompany and begins the examination. To both thebooks and information of officers and employees he hasfree access. Having completed the examination hemakes duplicate...

  • Page 315

    BANK SUPERVISION 305the Committee of Management of the clearing house isso notified and the duplicate report is placed in theexaminer's files. Under such condition the reportis seen by no one except the officers and directors ofthe examined bank or trust company.If on the other hand the examiner ...

  • Page 316

    306 BANK CREDITtioned. The clearing house interferes if only thestatement of condition returned to the Comptroller ofthe Currency or to the state banking authorities, asthe case may be, does not show a true condition ofexisting affairs as discovered and reported upon bythe local examiner.1Mr. J. ...

  • Page 317

    BANK SUPERVISION 307fiable assaults, and delicate credit situations againstunfavorable influences. Mr. Ralph Van Vechten, anardent champion of clearing house bank examination,illustrates the efficacy of the system in this connection.During one of the recent stringencies one of the smallerbanks wa...

  • Page 318

    308 BANK CREDIThe works. He knows much more intimately than itis possible for examiners presiding over larger territoryto know, not only the accounts of the business men butalso their personal history, methods and character.One of the chief and distinctive merits of clearinghouse bank supervision...

  • Page 319

    BANK SUPERVISION 309illation received by him in his own work as the stateand'national examiners have it within their power toacquire this information for themselves.1The highest degree of usefulness and success ofbank examination under the auspices of clearing houseassociations will be attained o...

  • Page 320

    310 BANK CREDITticularly of the smaller banks. In Los Angeles ninetenths of the knowledge obtained regarding collateralstocks of known value came from the larger banks;nine tenths of the stocks of unknown value used ascollateral were found in the smaller banks.Some of the details of the way in wh...

  • Page 321

    BANK SUPERVISION 311analysis of the cards serves to bring weak borrowers tothe surface. Sometimes the banks are requested byway of a friendly hint to have a given note securedby acceptable collateral or call the loan. The banksknow of the information in the possession of the exam-iner and make ma...

  • Page 322

    312 BANK CREDITbanks of those cities. Lines of credit of a local naturebut of vast importance in the particular communityare under no control except through the clearing housesupervision of banks. If a given bank desires to ascer-tain whether a certain concern is expanding too fast,whether it is ...

  • Page 323

    BANK SUPERVISION 313Clearing house examination has been at once apowerful corrective of weak loans already made and apositive deterrent to the further accumulation of simi-lar paper. The dread of a report from the clearinghouse examiner has been sufficiently strong to makebanks extremely careful ...

  • Page 324

    314 BANK CREDITexamination of banks has resulted in the eliminationof a great many institutions throughout the countrywhich did not deserve to remain in the banking busi-ness. It has also brought about a more friendlyfeeling among banks, paving the way for consolidations,a circumstance which has ...

  • Page 325

    BANK SUPERVISION 315beneficial results to the establishment of credit depart-ments by our leading banks. The use of the credit de-partment and the advent of the independent examina-tion of clearing house members have created a new eramarked by higher standards imposed upon the sellers ofcommercia...

  • Page 326

    316 BANK CREDITtheir work as bank examiners is represented by a New-York firm, Marwick, Mitchell & Co., in its system ofexamination and exchange of credit information forGroup 1 of the New Jersey Bankers' Association,consisting of the banks of Middlesex County, includingsuch towns as New Brun...

  • Page 327

    BANK SUPERVISION 317It is a merit of the New Jersey plan that its adoptionis an encouragement to borrowers to employ charteredaccountants to certify to the statements submitted tobankers when application for accommodation is made.According to an officer of one of the leading banksconcerned, this ...

  • Page 328

    318 BANK CREDITexaminer being unacquainted with local credit linesand securities was unable to ascertain and report thevalue of many of the assets of the bank examined."1Our bank directors have it within their power greatlyto improve the quality of American bank loans andinvestments.Conclusi...

  • Page 329

    APPENDI X AQUESTION, EXERCISES, AND PROBLEMSCHAPTER I1. Define bank credit.2. In what sense is a bank acceptance bank credit? Inwhat not?3. What circumstances, if any, justify the applicationof the term bank credit to deposits?4. Indicate points of similarity and of difference betweenbank credit ...

  • Page 330

    320 APPENDIX Ameant the way in which capital is raised, whether by bonds,preferred stock, common stock, etc.) Would the business ofreceiving deposits argue against the issue of bonds by abank? Why?4. Why does the Fletcher American National Bank ofIndianapolis keep balances on deposit with New Yor...

  • Page 331

    APPENDIX A 321given represents the greater protection afforded depositors,assuming, of course, that the book values represent the ac-tual values and that the shareholders are fully responsiblefor the double liability attaching to their stock?No. 1Loans and Discounts. $1,000,000 Capital $ 25,000Ot...

  • Page 332

    322 APPENDIX A17. What are concealed assets?18. Cite methods of concealing assets.19. Why are assets ever concealed? Why are liabilitiesconcealed? Why are assets more likely to be concealed inbanking than in non-banking business enterprises?20. Items relating to the banks of Greenville, S. C , at...

  • Page 333

    APPENDIX A323from a correspondent bank and then made an addition toits loans of $30,000, two thirds of the proceeds being drawnagainst by check and surrendered through the clearing houseto other banks?24. Which balance sheet subjoined indicates the moreliquid banking condition?No. 1Unsecured Loan...

  • Page 334

    324 APPENDIX ADraw up a new balance sheet after the following trans-actions have been completed:a. Lend $2,000 for 6 months at 6%, one fourth in cash andthree fourths in deposits.b. Sell $2,000 worth of other assets for $2,500.c. Pay dividend of 4%, one half the amount being lefton deposit; one h...

  • Page 335

    APPENDIX A 325(a) What would be the effect on the balance sheet givenabove if the bank to which it pertains, introducing moredetailed and more exact accounting methods, discoveredthat the balance sheet was correct except that discountcollected but unearned amounted to $2,000 and that interestearn...

  • Page 336

    326 APPENDIX Akeeps an average balance of $5,000, and makes deposits andchecks out each day. He comes in and hires $2,000 becauseof a shipment of goods totaling this amount and pays in-voice. As far as we know he used this $2,000, but he mayhave paid from the $5,000, leaving his promissory note t...

  • Page 337

    APPENDIX A 327own money; in other words, their balances would equal orperhaps exceed the amount they are borrowing, but theyneed such balances. ... "What is the derivative deposit-loan ratio maintained bysuch borrowers?14. "A given concern feels that they need a balance ofsay $25,000.00...

  • Page 338

    328 APPENDIX A17. Memorize the formula x = —-—zL·.kr+l-k18. A New York bank whose borrowing customers on theaverage leave 15 per cent of their loans on deposit has areserve-deposit ratio of 13 per cent. How great an additionto its loans can be made as a result of the acquisition of newdeposi...

  • Page 339

    APPENDIX A 329ing individual bank loan expansion on the basis of cash ac-quired through deposit and calculate the loan expansion ofsuch a bank as mentioned above, using $1.00 for c and 10per cent for r.23. A typical American bank can ordinarily increaseits loans by an amount approximately equal t...

  • Page 340

    330 APPENDIX AB, has $20,000 in cash and $200,000 in each deposits andloans. A depositor withdraws $10,000 in gold from bank Band lodges it with bank A. Would the cash of bank A nowconstitute potential support for $200,000 each of loans anddeposits? Why not?28. Would the purchase by a bank of new...

  • Page 341

    APPENDIX A 331serve-deposits ratio? If other banks were contracting theirloans? Explain.35. Assets LiabilitiesLoans and Discounts.. .$200,000 Capital $ 50,000Bonds 50,000 Surplus 50,000Banking House 25,000 Undivided Profits 25,000Other Assets 25,000 Deposits 210,000Cash 210,000 Other Liabilities ...

  • Page 342

    332 APPENDIX Ain the system were investing in new banking houses or longterm bonds, instead of increasing their loans. Why?2. The banker regulates his cash-deposits ratio throughhis control over cash. If his cash-deposits ratio fell belowthe limits of law or prudence, would it be practicable to i...

  • Page 343

    APPENDIX A3334. Show, by reference to a consolidated balance sheet,what takes place within a banking system when surplusis accumulated in relation to cash and creditor liabili-ties.5. State and explain the causal relation between cash anddeposits and between deposits and surplus.6. Enumerate (a) ...

  • Page 344

    334 APPENDIX AFirst Bank of the United States(Incorporated by Congress in 1791 for 20 years)(In millions of dollars)Resources January, 1811 LdabilüiesLoans and discounts $14.6 Capital $10.0U. S. 6 per cent and other Surplus 5United States stock.... 2,8 Circulation 5.0Due from other banks 9 Indiv...

  • Page 345

    APPENDIX A 335CHAPTER VI1. What is the essential difference between a bankers'bank and a commercial bank?2. How do bankers' banks dilute cash reserve?3. Why is the term "reserve deposits" not a contradic-tion in terms?4. (a) Why do reserve deposit liabilities tend merely to betransferre...

  • Page 346

    336 APPENDIX Aissues were kept at a minimum while deposits of FederalReserve banks were extended to a maximum?10. Draw a diagram showing the quantitative relationthat would obtain between cash reserves in the FederalReserve system and deposits of member banks if all loanexpansion of the Federal R...

  • Page 347

    APPENDIX A 337volume of loans of member banks, (b) deposits on the booksof member banks, and (c) the volume of trade.18. What would be the effect upon general prices, if,during a period of rising prices and of great industrial andcommercial activity, such as precedes a crisis or stringency,an add...

  • Page 348

    338 APPENDIX Abe reached and passed. (For an exhaustive treatment ofthe business cycle, see Wesley C. Mitchell's admirable workBusiness Cycles, The University of California Press, 1913.Pages 571-579 contain a summarized statement of the theorythere developed.)21. What distinguishes the work of Fe...

  • Page 349

    APPENDIX A 339from banks created a corresponding demand among banksfor the paper purchased. Explain.12. What degree of concentration marks the note-broker-age business?13. Briefly describe the internal organization of a moderncommercial paper house.14. What is the causal connection between the se...

  • Page 350

    340 APPENDIX AWhy might an institution buy its own acceptances in pref-erence to those of a competing bank if there was no differ-ence in the discount rate?CHAPTER VIII1. What is a borrower's credit worth?2. Under what conditions may character become rela-tively inconspicuous as one of the pillar...

  • Page 351

    APPENDIX A 34115. Why is the open account preferable to the note fromthe standpoint of taking quick legal action?16. Why is it desirable to have an audit by accountantsor special appraisers follow closely the annual or periodicinventory?17. What is the banker's interest in the location of thegood...

  • Page 352

    342 APPENDEXJÀ4. Why is it desirable for the lending banker to knowthe maximum amount borrowed from all sources during theprevious fiscal year?5. Why is the amount of "bills payable for paper sold"less likely to be understated now than in 1905 ?6. Indicate the importance to the banker ...

  • Page 353

    APPENDIX A 343planters or roasters and jobbers of coffee? Retailers of hard-ware or of groceries and green vegetables? Why?17. A given firm shows the following condition:Feb. 1st April 1stCash $20,000 $ 7,000Bills Receivable 120,000 63,000Merchandise 220,000 170,000Total Quick Resources $360,000 ...

  • Page 354

    344 APPENDIX Aeffects upon a concern whose ratio of working capital tofixed assets was low?Would an examination of the yearly changes in thisratio throw light on whether the concern was graduallyconverting quick into fixed assets?20. What is a proper or safe relation of net worth to creditworth?C...

  • Page 355

    APPENDIX A 345being 30 days net. In which case, presumably, is the qual-ity of the receivables the higher?11. What would be your interpretation of increasing salesfrom year to year coupled with a declining ratio of sales tomerchandise?12. Where sales terms are sixty days net, how wouldthe sales t...

  • Page 356

    346 APPENDIX Acash $189,000, accounts receivable $382,500, inventory$1,236,550, marketable securities $353,500, advances on woolbought $298,500, real estate $20,000, equipment and machin-ery $16,000, other fixed assets $9,000, bills payable $722,325,acceptances (payable) $216,510, accounts payabl...

  • Page 357

    APPENDIX A 347ment might cause a banker to suspect an overlapping inden-ture?Are there any other elements of weakness in the state-ment?(f) The moral risk being sound, what is the amount upto which you would be willing as a lending officer to extendfurther credit?23. Draw up the financial stateme...

  • Page 358

    348 APPENDIX ALiabilitiesCapital Liabüitim:Preferred Stock $50,000,000.00Less Uniasued 21,615,800.00— $28,384,200.00Common Stock $50,000,000.00Less Unissued 18,344,800.00$31,655,200.00Total Capital Stock Outstanding $ 60,039,400.00First Mortgage:b% 20-Year Convertible Gold Bonds, due Oct. 1,19...

  • Page 359

    APPENDIX A 349«auct:Dividends on Preferred Stock ( 1,659,896.33Dividends on Common Stock 1,813,125.20* 3,473.021.63Surplus for the Year 886,848.MSurplus June 30, 1919 117,080,478.46Profits and Dividends Since Organization, Ì8ÕSTotal Profits to June 30, 1918 $53,679,003.68Profit for the year en...

  • Page 360

    350 APPENDIX Aquiries, (b) the credence of the banker's testimony, (c) thedifficulty of obtaining first hand information.8. Formulate interview questions bearing upon thefollowing aspects of the bank customer's business:Profits, dividends, business experience, reserves, lifeinsurance, accounts re...

  • Page 361

    APPENDIX A 35110. Why are vacant properties dangerous as security forloans? A costly property in a poor neighborhood?11. Enumerate and appraise the most important circum-stances affecting the value of farm land as security.12. Why are loans on high-priced land likely to be sounderthan those on lo...

  • Page 362

    352 APPENDIX A3. Why does the balance of the typical country bankborrower run low as compared with the same in city banks?4. Characterize the country banker's demand loansagainst collateral.5. What are "sleepers?" Why are they more common inthe country than in city banks?6. Under what c...

  • Page 363

    APPENDIX A 353eount with the city correspondent is a significant indicationof the character of the borrowing institution. Amplify.6. Give an account of the method of investigation em-ployed by a bank in New York preparatory to making a loanto one of its correspondents.CHAPTER XVI1. Account for th...

  • Page 364

    354 APPENDIX A14. The note brokerage system has tended to equalizediscount rates territorially. Can as much be said of thesystem in relation to periods of time?15. Under what conditions during a period of tightmoney would the proceeds of bank loans made directly toborrowers returning from the bro...

  • Page 365

    APPENDIX A 356S. What merits are peculiar to the clearing house systemof bank examination?9. What has been the effect of clearing house examinationupon the loans of small banks?10. How has clearing house bank examination reduceddouble or multiple borrowing?11. What incidental effects on loans and...

  • Page 366

    APPENDIX BREPORT OF COMMITTEE ON CREDIT FORMS1MADE TO THE AMERICAN BANKERS' ASSOCIATION ATATLANTIC CITY, N. J., SEPTEMBER 28, 1917Your Committee on Credit Forms practically completedits labors when the three specimen forms were submitted tothe membership of the Association through the medium ofth...

  • Page 367

    APPENDIX B 357we examined and with these ideas as a basis, three differentforms have been prepared which your committee believesare sufficient to cover practically all cases.The first of these forms is for the farmer or individual; thesecond for the firm or individual engaged in the mercantileor ...

  • Page 368

    358 APPENDIX BYour committee, believing it has now accomplished theend for which it was formed, asks to be discharged.Respectfully submitted,NELSON N. LAMPERT,WM. A. LAW,W. P. SHABEB, CHAIRMAN.The action of the Convention was as follows:President Goebel: Gentlemen, you have heard the mostexcellen...

  • Page 369

    APPENDIX B 359(Please answer all questions and fill in all blanks)Assets LiabilitiesCash on hand and in bank Accounts and notes owed by meLoans and accounts due to me without security(good) Notes or mortgages owed by meFarm products with real estate as securitylive stock Notes owed by me with cha...

  • Page 370

    360 APPENDIX B(The balance of this space may be used for printing any questionsdesired to be asked amplifying statement of condition as shown onopposite page.)Form No. 2Firm or Inàimàvxã,Manufacturer or MerchantName BusinessAddressTo the BankFor the purpose of procuring and maintaining credit ...

  • Page 371

    APPENDIX B 361Between the date of the above inventory and the present time wehave had no serious losses through bad debts or otherwise (except)and our condition to-day is fully as good as setforth by the above figures.Condensed Profit and Loss Statement for Fiscal Year Ending19...Bxpmte IncomeCoo...

  • Page 372

    36 2 APPENDI X BWe have no interest in any other concern (except—name affiliationsand location)There are no suits pending against our firm (except)The form of obligation used in the financing of our business is theplain note of the firm (endorsed by)None of the endorsers guarantee or endorse th...

  • Page 373

    APPENDIX B 363claims and demands against the undersigned, the undersignedsubmits the following as being a true and accurate statement of itsfinancial condition on the. day of , 19..,and agree that if any change occurs that materially reduces themeans or ability of the undersigned to pay all claim...

  • Page 374

    364 APPENDIX BReconcilement of SurplusUndivided surplus at close of previous fiscal year $Less charges not applicable to current year $ $.Add not profits as above $•dividend. {5ïï£ïï?}:::::SïSSÎ::::·.·.·.·.·.·.::·.·.:::::::: 5:::::Undivided surplus $Reverse Side of Form No. 3Cont...

  • Page 375

    APPENDIX B 365Oi hnnks / ar e no* 1 ^di* ^ by a certified public accountant....1 are JThe date of last audit was made byBank Account! Lines Granted Under Discount on Statement Dot*Principal Creditor! ReferencesOfficers Directors..: PresidentVice-PresìdentTreasurerSecretary(Please sign here)ByDat...

  • Page 376

    INDEXAccommodation paper, 124,125Accounts receivable, 169-172Accrued liabilities, 195,196Adams, A. E., 7,273Adams, Norman I., 4,166Agger, Eugene E., 66American Bankers' Association,146Assimilation of the individualbank to the system, 68-72Assumption, Illinois, 45Atlantic National Bank of Jack-son...

  • Page 377

    368INDEXBorrowers' statements, form of,162-164Boston, Massachusetts, 45, 137Branch banking, in relation tonote brokerage, 140, 141Brokers' paper, new attitude ofbankers toward, 141Byerly, T. J., 236Cannon, J. G., 146,216,221Capital and surplus of bankborrower, 161, 165, 196, 197Carthage, Illinois...

  • Page 378

    INDEX369Criticism, anticipated, an-swered, 74, 76Country banks, 104Credit worth, 161,198Current liabilities, 162, 164,197Davis, C. H., 6Deane, D. H., 234Deferred assets, 185Deferred liabilities, 195Deming, J. K., 134Denver, Colorado, 46Deposits, are deposits bankcredit? 2, 3; why banks com-pete f...

  • Page 379

    370INDEXFlatau, Herman, 192Flynn, S. R., 216, 219Forgan, James B., 124,125,126,222Foster, A. C , 207Fourth National Bank of NewYork, 145Fourth National Bank of At-lanta, Georgia, 147Frankfort, Kentucky, 45Freeport, Illinois, 45Gage, William T., 186, 226Galesburg, Illinois, 45Goodwill, 185Gordon, ...

  • Page 380

    INDEX371Loans; secured, 224r-234; ware-house, 226; cotton, 229, 230;crop, 230,231; secured by realestate mortgage, 231-234; ofcountry banks, 242-252; totenants, 249; of banks tobanks, 253-259Long, R. A., 210Lowry National Bank of At-lanta, Georgia, 147Lynch, Jas. K., 244Machinery and equipment, 1...

  • Page 381

    372INDEXNew York banks, loans of, 127,128New York, N. Y., 45, 137Non-liability paper, 256Note brokerage system; weak-nesses of, 277-287; correc-tives, 287-294; growth of,131-141Notes receivable, 169,172O'Brien, W. H., 301Open accounts, "frozen" credit,158; in borrowers' statements,191Op...

  • Page 382

    INDEX373Regional banks (Federal Re-serve banks) regarded as onebank of branches, 106,107Registration of commercial pa-per, 291-293Reserve, relation of, to demandliabilities, 20, 21Reserve deposits, defined, 106;volume of, 109Reserve liability, 23-25Reserves, legally required, 108;centralization o...

  • Page 383

    374INDEXTraditional theory of banking, acritical analysis of, 34-38Tregore,J.H.,176Turnover, 204,205Undivided profits, 25-29United States National Bank ofPortland, Oregon, 147Valuation of assets, 27, 29Van Vechten, Ralph, 280, 289,293, 307, 312, 313Weston, W. S., 211, 244Wexler, Sol, 313, 314Whee...