Banks of deposit or commercial banks are business men's banks. Their two principal functions are (1) receiving money for safe-keeping on deposit, and (2) loaning money to business men at interest. The deposit function is based on confidence and credit. The business man takes his money to the bank not only because it is convenient for him to do so, but also because he has confidence that the money will be more carefully protected than if he kept it in his own possession. In depositing his money in the bank, the business man uses a deposit slip such as the one illustrated here. The teller puts down the amount in the bank book of the depositor, who is credited with that amount on the bank's books. He is entitled to draw just that much actual cash or that much credit in the form of checks. (See [page 339].) Most firms do not deposit a sum of money and then promptly draw it out again in the form of checks to pay current liabilities, but maintain a fairly steady balance in the bank. On large average monthly balances most banks allow interest, varying from one per cent on balances of one thousand dollars to three per cent on balances of ten thousand dollars or more.
Discount
Because a large bank has many depositors, the aggregate of all the balances makes a considerable sum of money. Bankers have learned by experience just what proportion of their deposits they can depend on to remain steadily on deposit as a balance, and thus they know what proportion of their deposits it is safe to use for the purpose of discount. The simplest case of the discount function is the discount of a promissory note. In the note shown in the illustration after ninety days John H. Blodgett will receive from Lucius Thomas five hundred dollars with interest. But perhaps Blodgett cannot wait ninety days for his money. In this case, he takes the note to his banker, who will pay him the five hundred dollars less a certain percentage or discount, which is the bank's profit on the transaction. The bank then collects the note when it becomes due.
Promissary Note
Collateral
Instead of cashing a note held by one of its customers, the bank may itself loan money at interest for a short period of thirty, sixty, or ninety days, taking the note of the business man to whom the money is loaned. In most cases, however, unless the bank knows the business man well, a certain amount of collateral is demanded as an assurance that the borrower will pay the loan when it becomes due. The amount of collateral deposited with the bank is usually 10% to 25% in excess of the amount loaned, and it may take the form of stocks or bonds; mortgages on real estate; liens on stock, fixtures, or personal property; or warehouse receipts. When the amount borrowed is paid, the collateral is returned; if it is not paid within a reasonable time, the collateral is sold, and the amount loaned, with interest to date, is taken from the proceeds.
There are, of course, other functions of banks of deposit practised quite generally by all banks, and these will be explained later. The functions just described, however, distinguish banks of deposit in a general way from the other two classes.
Savings Banks