In this process there is little need for cash, provided the arrangements between banks for clearing checks and for the interchange of notes are complete and efficiently administered. But when a bank accepts investment in lieu of commercial paper, its need for cash at once increases, because the demand obligations created by the credit balances or the bank notes into which this paper was converted are not extinguished by payments for goods purchased, but must be met by cash.
To distinguish between commercial and investment paper is, therefore, one of the chief problems confronting commercial bankers. For its solution an accurate knowledge of the business operations of customers is necessary. An inspection of the paper presented and a general knowledge of their wealth and business capacity are important, but not sufficient. The forms of the paper employed in both commercial and investment operations may be the same, and the possession of wealth does not ensure the payment of the paper at maturity.
The chief means available for the acquisition of this knowledge are the requirement from customers of frequent statements of their operations, on properly prepared forms; the use, wherever possible, of the documented commercial bill of exchange; and the maintenance of credit departments equipped with the means of accurately studying commercial, industrial, and agricultural operations, and of diagnosing economic conditions. The study of carefully prepared statements of customers made at frequent intervals reveals to the banker not only the nature of the operations represented by the paper presented for discount, but the trend of the business of his customers and, through them, of the entire country. With such knowledge, he is not only able to protect his institution against improper loans and discounts, but to give valuable advice to his customers, advice which no one else is in a position to give so accurately.
By a documented bill of exchange is meant a bill drawn by a seller upon the purchaser of goods, accompanied by documents evidencing the transaction; such, for example, as bills of lading, warehouse receipts, and insurance policies. The names on such bills guide the banker in his efforts to trace the transaction in which it originated and the documents enable him absolutely to identify it, and constitute security for the loan.
Instead of such bills, promissory notes made payable to banks are commonly used in this country, greatly to the disadvantage of the banking business. Such a note reveals nothing to the banker concerning the purpose for which the loan is made, while a commercial bill, even without documents, reveals the names of the principals of the transaction in which the banker is asked to participate. Acquaintance with these men and knowledge of the business in which they are engaged at once suggests the probable origin of the bill and furnishes the clue needed for subsequent investigation.
A properly equipped credit department will keep on file and at all times available for use the data requisite for the information of the officers upon whom the responsibility of selecting the loans and discounts rests. Such data will not only concern the character and business of each customer and the bank's previous dealings with him, but general economic conditions, the operations and experiences of other banks, other business institutions, governments, etc.
3. Rates
Besides rates of exchange considered in the preceding chapter, commercial banks are concerned with loan and discount rates.
Rates on deposits, though sometimes employed, have no place in commercial banking, since commercial deposits are only the credit balances resulting from loans and discounts or from funds intrusted to the bank for temporary safekeeping or disbursement in the interest of the depositor. In every case they represent a service rendered the depositor for which the bank must be paid, and, when interest is allowed, the depositor must repay it in some form with an increment sufficient to remunerate said service.