BANKING, LOANS, MONEY AND CREDITS
153. Banks Defined and Classified. A bank may be defined to be an institution authorized to receive money for deposit, to make loans, and to issue its promissory notes payable to bearer. A bank may have any one, or all of the above enumerated powers. Some banks have powers in addition to those above enumerated. In the absence of prohibiting statute, any person may operate a private bank. The states generally have statutes authorizing the creation and regulation of banks. At the present time, most banks are incorporated companies.
As to the source of their existence, banks may be said to be national and state. National banks are organized under United States statutes regulating their creation and existence. National banks are discussed more at length under a separate section. All banks other than national are created under state laws, and are called state banks.
As to their nature, banks are generally divided into three kinds, banks of deposit, banks of circulation and banks of discount. Banks authorized to receive money for safe keeping are banks of deposit. Banks authorized to purchase commercial paper by charging interest in advance are banks of discount. Banks authorized to issue their own promissory notes payable to bearer, and actually issuing such notes, are banks of circulation. A single bank may be a bank of discount, of circulation, and of deposit, or it may be a bank of discount, of circulation or of deposit. The ordinary savings bank is a common example of a bank of deposit. A national bank issuing its notes is a common example of a bank of circulation. A national bank usually purchases notes for less than their face value, or makes loans upon notes deducting its interest in advance, making it also a bank of discount.
154. Functions and Powers of Banks. At the present time most banks are incorporated companies. Their authority to exist is given them by the state. Their powers are limited by the provisions of their charter. This question is discussed at length in the section on corporations. A bank cannot engage in business outside the provisions of its charter. Incorporated banks are permitted to pass by-laws by which their functions may the more readily be carried out, and by which the duties of their agents are restricted or defined. Reasonable by-laws, if brought to the notice of third persons, also well recognized customs and usages, bind third persons in their dealing with banks. Ordinarily, banks have the power to borrow money, but do not have the power to deal in real estate. National banks have no power to loan money on real estate, but they are permitted to take real estate mortgages to prevent losses on loans already made. A bank may also purchase real estate sufficient for the construction of a banking building. Banks have the power to collect their own paper, and to act as agents for persons and banks in collecting their paper. The ordinary functions and powers of banks are discussed under separate sections.
155. Deposits. The primary function of a bank is to receive money from third persons and to loan money to third persons. Money received from third persons is money received on deposit. Banks cannot be compelled to receive money for deposit from anyone. They are permitted to exercise their discretion and reject such deposits as they choose. The ordinary method of making deposits is by delivery of currency consisting of gold, silver, copper, and nickel coin, bank notes and checks to an agent of the bank. The agent authorized to receive deposits is usually called the receiving teller. Deposits are usually entered by the receiving teller in the customer's pass book. In commercial banks, deposits are ordinarily withdrawn by check, without presenting the pass book. Savings banks ordinarily do not permit their customers to use checks, but require them to present their pass books when drawing money. The amount withdrawn is entered in the pass book, and the balance brought down. When money is deposited generally, the bank has the right to mingle it with its own funds. It then becomes the debtor of the depositor in the amount of the deposit. If a fund is deposited with a bank for a special purpose, and the bank is so notified, or if papers, such as securities, bonds and certificates of stock are deposited for safe keeping only, they are known as special deposits and are not mingled with the general funds. Subject to the reasonable rules of the bank, a general deposit is subject to withdrawal at the will of the depositor.
156. Checks. A check is a written order upon a bank for the payment of a specified sum of money payable upon demand. Commercial banks generally do a checking business. Some banks, such as savings banks, do not permit depositors to draw checks against their deposits. Savings banks not doing a checking business, usually require their depositors to present their pass books when drawing money. Even though written orders are given to third persons, the pass book must be presented by the third person to enable him to obtain the money on the order. In case of banks which do a checking business, the depositor is permitted to draw checks in any amount, payable to any person. The bank must honor these checks so long as the maker's deposit is sufficient to pay them, and the person presenting them is properly identified. Upon payment of a check, the bank keeps it and deducts the amount from the maker's deposit. These paid checks, or vouchers, are usually returned by the bank to the customer, every thirty days, with a statement of his account. The customer then examines these checks and compares them with his books, and the bank's balance with his balance, for the purpose of discovering errors.
A check is payable on demand and should be presented for payment within a reasonable time after receipt. If the receiver lives in the same place as the maker, the check should be presented during the business hours of that day. If the receiver resides in a distant place, the check should be presented as soon as possible under the circumstances. As long as the bank has funds of the maker, it must honor his checks. If the bank has some funds of the maker, but not sufficient to pay the check presented, it should refuse to pay anything thereon. If the bank refuses to honor a check when the maker has sufficient funds to meet it, the bank is liable at the suit of the depositor, for any damages suffered.
Receiving a check does not of itself extinguish the debt. The taker of the check may present it for payment, and if payment is refused by the bank, and the maker is notified promptly, the taker may sue the maker on the check, or on the debt for which the check was given. Certified checks are discussed under the section on negotiable instruments.
157. Loans and Credits. One of the primary functions of banks is to make loans. Different kinds of banks are authorized to make different kinds of loans. Savings banks generally are authorized to make loans on real estate. National banks are not permitted to loan on real estate. Banks ordinarily are permitted to discount notes. By discounting promissory notes is meant purchasing them at a sum less than their face value, partially, at least, on the credit of the seller. Banks are not permitted to discount notes at usurious rates of interest. Banks are restricted by their corporate charters as to the nature of the loans they can make.
Credit is the term applied to a present benefit obtained for an agreement to do something in the future. A person's credit depends largely upon his business reputation and assets. Companies called mercantile agencies are organized for the sole purpose of furnishing credit information. These companies publish books giving the trade records and estimated assets of business men in the various cities and towns of the different states. These books are sold to wholesalers, or to anyone desiring credit information. Companies also employ men to obtain and furnish special reports on people's assets and business reputation. The bulk of business is done on credit. Compared with the total amount of business transacted, a small amount is done for cash. Credit is an important part of a business man's capital.
158. Rights and Obligations of Banks in Case of Forged, Lost, or Stolen Checks. Forgery or material alteration of a negotiable instrument renders it void. Banks are authorized by depositors drawing checks to pay valid checks, but not forged ones. Ordinarily, a bank must stand the loss if it pays a forged check. The only exception is in case the depositor has so carelessly drawn the check that it can be forged without the bank being able to discover the forgery by the exercise of due care. Most jurisdictions also hold that a depositor must examine his returned checks within a reasonable time after their return by the bank. If a forgery is not reported within a reasonable time after the return of the check by the bank, the check is presumed to be genuine, and the depositor cannot thereafter complain. Where a check is payable to bearer, or payable to order, and indorsed in blank by the payee, making it payable to bearer, and is lost or stolen, an innocent party purchasing it from the finder or thief gets good title to it. Such paper circulates like money without further indorsement. A bank in paying such a check to a bona fide holder who takes it from a thief or finder without notice of its having been lost or stolen, is not liable to the maker for the loss.
DEPARTMENT OF RECORDS, AMERICAN SCHOOL OF CORRESPONDENCE
159. National Banks. The constitution of the United States does not expressly give Congress the power to create national banks but it gives Congress the power to collect taxes, duties and imports, to borrow and coin money and to make all loans necessary to carry into execution the powers expressly given. To carry into effect the powers given relating to money, Congress is deemed to have the power to create national banks. Congress has passed laws under which national banks may be organized by associations consisting of not less than five natural persons who are required to sign and file articles with the comptroller of currency at Washington, D. C., which articles shall specify the name of the proposed bank, its place of operation, its capital, the names and residences of its shareholders, and the number of shares held by each. National banks may be organized with a capital of not less than twenty-five thousand dollars ($25,000.00) in cities whose population does not exceed three thousand, and with a capital of not less than fifty thousand dollars ($50,000.00) in places whose population does not exceed six thousand inhabitants, and with a capital of one hundred thousand dollars ($100,000.00) in places whose population does not exceed fifty thousand inhabitants, and with a capital of not less than two hundred and fifty thousand dollars ($250,000.00) in places exceeding fifty thousand inhabitants.
Before commencing business, national banks are required to transfer and deliver to the treasurer of the United States, United States registered bonds, in amount not less than thirty thousand dollars ($30,000.00), and not less than one third the paid-in capital stock. Upon making such a deposit of bonds, the comptroller of currency is authorized to issue to the bank, notes of the bank in different denominations, equal to 90% of the market value of the bonds deposited. These are the only circulating notes national banks are authorized to use. The comptroller of currency is authorized to replace worn notes or returned notes, proof of the destruction of which is furnished. National banks in the seventeen largest cities of the United States are required to keep on hand, money equal to 25% of their circulating notes and deposits. National banks of all other places are required to keep on hand, money equal to 15% of their circulating notes and deposits. National banks are not permitted to make loans on real estate or on their own stock, except to protect loans already made. In case of insolvency of a national bank, the stockholders are liable in an amount equal to the par value of their stock, in addition to their liability to pay the par value of their stock subscriptions. The shareholders having legal title to the stock at the time of insolvency of the bank are the ones liable for the additional liability. National banks may charge the rate of interest authorized by statute of the state where the bank is located. If unlawful interest, called usury, is charged, the bank forfeits the entire interest. If the usurious interest has been paid by the borrower, double the amount of the usury may be recovered from the bank by the borrower.
National banks are authorized to buy drafts and notes, to discount commercial paper, to borrow and loan money, to deal in government bonds, to loan money on collateral, but not to guarantee or indorse commercial paper, except in the transaction of their legitimate business. They are permitted to discount or purchase bills and notes, but not to charge more than the legal rate of interest, even though the paper is purchased. They may charge reasonable rates for exchange in addition to interest.
160. Savings Bank and Trust Companies. All banks other than national are organized under state laws, and are known as state banks. The most common kinds of state banks are savings banks and trust companies. Savings banks ordinarily receive money for safe keeping, acknowledging receipt by entering deposits in a pass book which the depositor presents upon making deposits, and upon withdrawal of funds. Upon drawing funds, the amount is deducted from the balance shown in the pass book and the balance brought down. Savings banks ordinarily do not permit depositors to draw checks against their accounts. They are required to present their pass books in person, or to give them to an agent or payee designated in a written order to be presented in withdrawing deposits. If pass books are lost, savings banks are not obliged to pay deposits unless indemnified against loss by the depositor. Savings banks are permitted to make loans on real estate.
Trust companies usually have all the power of savings banks with the added power to act in trust capacities as trustees of estates and for bond holders, as executors, etc. They usually do a checking business for the accommodation of their depositors.
161. Clearing Houses. A clearing house is an association of banks of a certain locality, usually of a city, organized for the convenience of its members in making settlements with each other. As a matter of practice, holders of checks do not personally present them for payment at the banks on which they are drawn, but deposit them with the bank with which they do business. These banks collect them from the banks on which they are drawn. Each day, a city bank has deposited with it a large number of checks drawn on other banks of the same city. It would involve much labor to present these checks for payment on the banks on which they are drawn, and secure currency or checks therefor. For convenience, banks organize clearing houses for the purpose of making daily exchanges, with each other, of checks. If Bank A has deposited with it $1,000.00 of checks on Bank B, and Bank B has deposited with it $1,100.00 of checks on Bank A, the agents of the two banks meet at the clearing house, and exchange checks and Bank A pays Bank B the difference between the total amount of checks exchanged, or $100.00. If the membership of the association consists of twenty-five banks, the principle is the same, the members exchange checks and pay each other the difference in amount. Clearing houses have rules by which members are required to return checks not properly drawn, over-drafts, forged paper, etc. within a certain time to the paying bank, or be precluded from raising objections to the clearing house balance.
162. Money. Ordinarily the term, money, is used to designate any medium accepted by a seller from a purchaser in the sale of property. It is the thing that passes current among business men in their dealings with each other. Bank notes, checks, gold and silver, nickel and copper coin, as well as United States certificates, are money. Money is sometimes used to designate legal tender. Legal tender is the medium of exchange which creditors are obliged by law to accept in payment of debts. United States notes, except for duties and interest on public debts, and gold certificates are legal tender. Gold coin and silver dollars are legal tender. Subsidiary silver coin, or half dollars, quarters and dimes, in amount not exceeding ten dollars are legal tender. Nickels and pennies are legal tender in amount not exceeding twenty-five cents. Silver certificates and national bank notes are not legal tender.
163. Discount. Discount is money paid in advance for the use of money. It is interest paid in advance. One of the primary functions of banks is to discount negotiable paper. The states generally have laws fixing the legal and maximum rates of interest. If banks or individuals charge interest in excess of these rules, they subject themselves to the fixed penalties. In connection with usury laws, some confusion has arisen as to what constitutes a purchase and what constitutes a discount. A person is permitted to make contracts and make as large a profit as possible, if no fraud is used. If the contract involves the purchase of a negotiable instrument, as distinguished from a loan of money, he may make as large a profit as he is able. If X desires to borrow $100.00 of Y and Y gives him the money and takes X's promissory note, Y can deduct only the lawful rate of interest. If, however, X holds Z's promissory note indorsed in blank, or payable to bearer, Y may purchase the note from X for any price he is able, and if he makes half the face value of it by the transaction, it is regarded as a sale, and not as a loan. This transaction does not come within the usury laws. A bank, however, by the weight of authority is not permitted to make purchases of notes in this sense. The purchase above described, if made by a bank, would be regarded as usurious. Banks may purchase notes if so authorized by their charter, but may not charge more than the lawful rate of interest as profit.
164. Exchange. Exchange is the term applied to methods of cancelling debts and credits between persons of different places. If X, in Cleveland, owes Y, in New York, $100.00, and Z, in New York, owes X, in Cleveland, $100.00, it is cheaper and safer for X to send Y an order on Z for $100.00 than to send legal tender from Cleveland to New York. This transaction is called exchange. If made between persons of the same country, it is called domestic exchange; if between persons of different countries, it is called foreign exchange. Banks of one city keep deposits in other cities for the purpose of selling drafts thereon to customers.
165. Interest. Interest is the money paid for the use of money. Most states have statutes fixing the rate of interest in transactions where no rate is specified, and fixing the highest rate that may be agreed upon. The following are the rates of interest in the different states:
166. Usury. Usury is the term applied to interest charged in excess of the rate allowed by law. The states differ in the rate fixed by statute as the legal rate. The most common penalty fixed by statute of the different states, is forfeiture of all interest.