Varieties of Banks

VARIETIES OF BANKS The foregoing description is applicable to the ordinary bank of discount and deposit, which combines the functions (I) of sup plying credit money as a means of payment (current accounts) ; (2) of giving facilities for the temporary investment of balances (deposits subject to notice) ; and (3) of short-term lending. But there are other activities, more or less closely related to these, which are undertaken by banks, and some concerns which special ize in these other activities are commonly given the name of bank.

Acceptances.

It was mentioned above that banks allow their customers to arrange for bills of exchange to be drawn on them. The customer, when he buys goods, can tell the seller to draw a bill on the bank, and the bank will accept the bill. A bill accepted by a bank can be discounted on more favourable terms than one accepted by an ordinary trader. It should be borne in mind that the bill will be drawn by the seller of the goods and will be dis counted by the seller's bank; the buyer's bank will only see it when it is presented for acceptance and later on for payment. There is nothing to prevent a bank buying its own acceptances if offered in the market, but banks do not make a practice of doing so. On any bill which a bank has accepted it is the principal debtor, and it shows its acceptances in its balance-sheet among its liabilities. On the credit side the bank shows an exactly equal sum, being the liability of its customers to provide the means of paying the bills on maturity. The charge made for accepting takes the form of a commission.

Accepting Houses.

In international trade it often happens that the bank where an importer of goods keeps his account is not of sufficient reputation outside its own country for bills accepted by it to command a good price. He may then arrange for bills to be accepted by some financial house of world wide credit in a foreign centre. The centre chosen will be one where it is convenient to get the bills discounted. London, with its highly developed free discount market has long been pre-eminent in this respect, though since the World War there has been a rapid and important devel opment of facilities in New York. This accepting on behalf of clients in foreign countries is sometimes undertaken by banks (especially those with branches abroad), but also by concerns which specialize in the business. These latter are known as accept ing houses.

Merchant Bankers.

Merchant bankers are a special class of bankers, peculiar (at any rate under that name) to London. Their characteristic is that they do not depend mainly on deposits like an ordinary bank, but use their capital and the power of their credit to carry on certain classes of business involving the move ment of large sums, and remunerated by commission. The accept ing of bills is one of these. Foreign exchange business is another. A third, and one which diverges more markedly from the functions of an ordinary bank, is the issuing of new capital. Issuing houses (as the merchant bankers who undertake this business are called) act as intermediaries between the company promoters or public authorities who seek to raise capital, and the investment market which provides it. They do not necessarily provide any of the capital themselves, nor even act as underwriters. It is their function to provide channels of approach through the market to the investors, and to find underwriters who will guarantee the sub scription of any part of the desired capital which the investors do not in the first instance supply. Every financial centre has fi nancial houses of some kind to do the work which in London falls on the issuing houses. In the United States, they are called invest ment bankers, in France banques industrielles. In many countries the function is combined with ordinary banking. In London itself this practice is growing among the banks. The merchant bankers differ from ordinary bankers in that they are usually private part nerships, not companies or corporations. Exceptions have begun to appear in recent times (e.g., Barings and Lazards are both lim ited companies). The name merchant banker has a historical sig nificance, in that the firms which bear it were evolved from mer cantile concerns. The merchant engaged in international trade was likely frequently to find himself either with liquid funds to spare at any of the centres at which he carried on business, or short of funds and obliged to borrow temporarily. He was com pelled to keep in touch with all the facilities for temporary lending and borrowing and for the transfer of funds from place to place. The big merchant was in a position to make a profit by allowing, at a suitable charge, his smaller colleagues to share in these facilities.

Exchange Banks.

Banks with branches in several different countries form a special class. They tend to specialize in foreign exchange and in the bills drawn to finance international trade, and they may be called (as in India) exchange banks, though the name is not in general use. In general an exchange bank has its head office or a branch at some big financial centre (such as Lon don, New York, Paris or Amsterdam), and is constantly buying from its customers at its other branches bills drawn on this centre. These bills it sometimes sells and sometimes holds till maturity. The London discount market buys the greater part of its supply of commercial bills from the exchange banks. The exchange banks also do acceptance business.

Mortgage Banks.

The designation bank is sometimes given to institutions which raise money by the issue of shares or deben tures and lend it on mortgage to farmers and others who seek cap ital to develop land. When such institutions do not receive any money on deposit it is hardly correct to call them banks. They are rather investment companies or finance companies. But as usage allows them to be called banks, they require mention here.

See also BANKS, HISTORY OF; MONEY; MONEY MARKET; CUR RENCY; DISCOUNT AND DISCOUNT HOUSES ; MERCHANT BANK ERS; CENTRAL BANK; BANK OF ENGLAND; CHEQUE; BILL OF EXCHANGE; BANKERS CLEARINGHOUSE; INFLATION AND DE FLATION.

The general term "bank" in the United States means an insti tution chartered by the State or National Government to accept the care of money belonging to individuals, firms and corpora tions, thereby, among other things, relieving them of the risk of keeping large sums of money in their possession. It is also a grantor of credit, and is the medium through which all general business transactions are ultimately cleared. There are, however, many kinds of banks. There is the bank of deposit, just described, and there are savings banks, trust companies, private banks, banks of discount, acceptance banks, and the Federal Reserve Banks.

Savings Banks.

A savings bank is one in which people de posit in a savings account money which they do not expect to use immediately, and upon which they can receive payments of interest which are not allowed by banks of deposit. Such pay ments of interest are possible because the account is not a cheque drawing one as in a bank of deposit, consequently the operations of savings banks are much simpler and the expenses not as high as in banks of deposit. The amount any one person may deposit in a savings bank is usually limited.

Federal Reserve Banks.

There are 12 Federal Reserve Banks in the United States. The depositors of the Federal Re serve Banks are the banks of deposit that are members of the Federal Reserve system. Their deposits include the reserves re quired by law for all banks of deposit. Each bank of deposit in the Federal Reserve system is a stockholder in the Federal Reserve Bank, its holdings being in proportion to the capitalization of the banks of deposit. There are no other stockholders in the Federal Reserve Banks. The Federal Reserve Banks, however, are of much greater importance than mere custodians of the reserves for banks of deposit, as they are the principal means of procuring an elastic currency to meet the credit needs of the country. This is accomplished principally by permitting banks of deposit (which are members of the Federal Reserve system) to rediscount certain classes of commercial paper with the Federal Reserve Banks, for which the Federal Reserve Bank pays the bank of deposit in Fed eral Reserve notes, which currently pass as money. The method of conducting this transaction is for a bank of deposit requiring additional money to take to the Federal Reserve Bank paper (notes) arising out of a business transaction, such paper being sub ject to certain restrictions making it eligible. The Federal Re serve Bank then gives the bank of deposit Federal Reserve notes equal in amount to the full face value of the paper accepted for discount. The Federal Reserve Bank then pledges 6o% of such paper, together with 4o% of gold certificate, with the U.S. Gov ernment as collateral for the Federal Reserve notes which were given to the bank of deposit in exchange for the paper.

In theory, the Federal Reserve notes issued when the individual's note is discounted or pledged with the Federal Reserve Bank are retired when the individual pays his note at maturity. The indi vidual then gets back his note and the Federal Reserve Bank gets back the Federal Reserve notes issued therefor, which are sent to Washington for redemption and cancellation. Thus everything re verts to the same condition that existed before the individual's note was taken to the Federal Reserve Bank. This produces an elastic currency, making a greater amount of money available when needed, and retiring the money as soon as the need for addi tional credit has passed. As a practical matter, it is not possible to use the identical Federal Reserve notes to pay off the individual's note at maturity, nor is it practicable always to pay off the notes with the Federal Reserve notes issued through any particular Fed eral Reserve Bank. Therefore, Federal Reserve notes issued through any Federal Reserve Bank can be used for this purpose, so that the individual is relieved of the task of hunting around to secure any particular Federal Reserve notes, and the burden of sorting out the notes falls on the Federal Reserve Banks. As a matter of practice, the individual merely gives his cheque to the bank of deposit that took his note in the first place, and that bank makes the necessary settlement with the Federal Reserve Bank.

The extent to which these rediscounting transactions can be em ployed is limited by the supply of gold certificate in the Federal Reserve Bank, for the latter must deposit gold certificate with the U.S. Government to the extent of 4o of the amount of notes issued.

Banks of deposit may also borrow from the Federal Reserve Banks by pledging U.S. Government bonds as collateral.

Banks of Deposit.

Banks of deposit may be generally classi fied as National banks, State banks and trust companies. The prin cipal difference between National banks and State banks origin ally was that the National banks could issue bank-notes, while a State bank or trust company could not.

Under recent laws, national banks, as a general rule, can per form all the fiduciary acts of a trust company, so that the dif ference between the three classes of banks today is considered of small importance, particularly among members of the Federal Reserve system.

The chief functions of a bank of deposit are in acting as custo dian for the money of individuals, firms and companies, making collections for such customers and supplying credit facilities for the transaction of business. In its simplest form, the bank of de posit accepts deposits and moneys subject to cheque and lends out the funds during the period in which the money is not required by depositors. A bank's most common service to its depositors is the collection of cheques, drafts, coupons, etc., which makes necessary a vast machinery for the smooth and speedy handling of these items. The collection of items deposited by customers not only includes cheques and drafts drawn on other banks, in the same city or in other cities, but also the collection of enormous amounts for export of cotton, oil, wheat and other materials to foreign countries, and provides the necessary machinery to enable the farmer and manufacturer to market their products abroad. These latter transactions are usually financed by drafts drawn on foreign banks, which are purchased by banks of deposit, the purchase price being based on rate of exchange, interest rate, time required for collection of drafts, etc. Through the issuance of import letters of credit the banks also facilitate the importation of products required in this country.

Another universal service that a bank of deposit renders is the payment of cheques drawn by its depositors as they spend their money. To render them this service it is necessary for a bank to keep records showing at all times how much balance each depositor has in his account. These operations may appear simple, but they necessitate the employment of officers and clerks and involve various expenses that the bank must earn by loaning out a portion of the deposits in its possession. If a bank allows interest on deposits, such interest also must be earned. A bank affords de positors a cheap and safe way of transacting their financial affairs, and, as compensation for this service, the bank has the use of part of the money while it is on deposit. The bank can use only part of the money because a portion of the deposits must be held under the law as legal reserve, to facilitate payments in the event of heavy, unexpected withdrawals of deposits. The amount of legal reserve varies according to the population of the city or town in which the bank is located.

On the other side of the picture, there is the loaning of funds by the banks, a function necessary to meet the credit needs of business and to supply the banks with revenue to meet expenses, pay taxes and declare dividends to their stockholders. In loaning out its money, a bank must look first to the safety of the loan; whether it will be paid promptly at maturity and whether the collateral, if it is a secured loan, will have a ready market value in case of default of the loan, at maturity ; or, if it is an unsecured loan, whether the borrower can pay ioo cents on the dollar in event of forced liquidation. A bank must next consider whether, in view of the maturities of its other loans and the probable with drawal of deposits at certain seasons of the year, it is justified in lending money for the period desired by the borrower. It must also determine whether, if it advances the full loan desired, it may later be obliged to refuse loans to other depositors who may desire accommodation during the period involved. For a bank must keep in a liquid position and at the same time endeavour to arrange its affairs to take care of all its customers. It will lose business if it attempts to cater to a favoured few.

Other Banks.

Private banks consist of individuals or firms engaged in the banking business. Such banks accept deposits, but cannot avail themselves of the privileges of the Federal Reserve system, and hence usually make their collections through some bank of deposit where they have accounts. Banks of discount con fine their activities largely to discounting commercial paper, accep tances and bills of exchange, and are comparatively new institu tions in the United States. Acceptance banks primarily accept bills drawn by their customers, which are then usually sold in the open market. For guaranteeing the credit of their customers in this manner, the acceptance bank receives compensation from its customers, the principal source of revenue. (S. H. P. X.) For our present purpose we include in this description all paper substitutes for metallic currency, whether issued by banks, governments or other financial institutions. Metal and leather have been used as tokens in many parts of the ancient world, but they need not here be considered.

Early bank-notes were simply printed forms in which the amounts were written by hand. They were usually for large amounts (L4o and upwards) and were printed upon water-marked paper ; and, although no precautions were taken in the engraving to prevent fraudulent imitation, forgeries were comparatively rare. But, when at the end of the i8th century small notes for f r and L2 were put in circulation, forgery became rife, as many as 352 persons being convicted of this crime in England in a single year ; and a constant trial of skill has since been going on between the makers of bank-notes and the counterfeiters. Engine-turned ornaments and emblematical figures or views introduced in the engraving, in conjunction with special water-marks in the paper, held the forgers somewhat in check until the discovery of photog raphy put into the hands of the counterfeiter a most dangerous weapon, by the aid of which complicated patterns and vignettes could be reproduced. To prevent such reproduction Henry Brad bury, in 1856, introduced anti-photographic bank-note printing, in which the essential portions of the note were printed in one colour and over this another protective colour was placed. A photograph of a note printed in this way presented a confused mingling of the two colours.

The advance of photographic knowledge provided a means of obtaining a photograph of one or both of the colours that were in use in these early notes, and in order to make reproductions still more difficult a third colour was introduced.

Modern currency notes have for their security certain features which experience has found are not easily reproduced. The quality of the paper and its water-marking have long been regarded as providing elements of security of no mean importance, because it is not easy to make paper which has the characteristic rattle of some bank-notes, nor can the water-marking be copied very easily. The water-marking may take two forms. It may be an over-all water-mark, which forms a continuous pattern, and is not registered with the note, or the water-mark may be registered with the printing so that it always forms a characteristic pattern of the note, and this scheme has in many modern notes been elaborated to the extent of producing designs and even borders in several tones, two and three plane water-marks.

When a good portrait water-mark is registered in a conspicuous window in the note, it forms a feature which the eye can pick out immediately, and it requires very considerable skill on the part of the counterfeiter to copy sufficiently well. The effect of water marking is to give different thicknesses and hence different de grees of translucence to the paper, but with modern papers, especially the so-called mould-made papers, the thinning produced by the water-mark is not sufficient to reduce the strength of the paper unduly.

All three possible methods of printing have been employed for the printing of paper currency : intaglio printing, where the design is recessed into the surface of a plate or cylinder; lithographic printing, where the printing is on a flat surface of lithographic stone or grained metal plate; and letterpress printing, where the design is raised as in ordinary type.

The most widely used method has been plate printing, an in taglio process of printing from steel plates. The engraving in this case is carried out in lines and dots, and since the printing is from the recessed portion of the plate it is possible to transfer to the paper considerable quantities of ink, so that great variation in the strength of the print may be made according to the depth and width of the engraved lines. Thus in a single design rich bold lines fade away to extremely fine and delicate shading. Excellent samples of this are seen in the United States currency. Work of this kind, produced by engraving lines upon metal, is known as black line work, but much use has been made of geometrical pat terns with white lines. In this case it is the space between the lines which is printed, and the lines are left clear of ink. Work of this kind is naturally very difficult to imitate by hand engraving, and it is in this that its value chiefly lies.

British Currency Notes.

Another notable example of in taglio printing is the head of H.M. King George V. on the British f r treasury notes introduced during the World War, which are produced by rotary photogravure. The printers of this note had to overcome the difficulty of printing by this method on a hard and dry paper, but so well was this done, that the head has re tained that characteristic richness which is always associated with the photogravure process. In this case, as in so many other cases of intaglio printing, further printings by other processes have been added in order to render the work difficult to copy by photography.

Letterpress printing has been used considerably for bank-note work, and also for printing stamps. This method has the advan tage of being rapid and much cheaper than plate printing, as the work is done on ordinary letterpress printing machines. Such printing is characterized by the lines and dots having sharp edges, but the amount of ink which is transferred to the paper is much less than in plate printing, so that the raised lines and rich effects of the, latter method are wanting. The method has, however, sev eral important advantages. In the first place, the printing plates can be duplicated to any desired extent by electrotyping, and provided that these electros are replaced before they are badly worn, great numbers of impressions can be secured which are all exactly alike.

Bank of England Notes.

The notes issued from the Bank of England are printed from such relief or letterpress plates. Here the security lies very largely in the paper with its characteristic rattle and water-marking, but the printing is very carefully and uniformly carried out, so that any attempts at forgery can only be successful when both the paper and the high quality letterpress printing are well imitated. The comparative immunity of these notes from forgery is also partly due to the fact that they are usually examined with some care when they pass from hand to hand. Their average life is quite short, so that old and worn notes are rarely seen, and the return of every note is checked before it is destroyed. This latter precaution is hardly possible with notes having very large circulations, such as the British Li and r os. notes or the United States or Canadian $5 and $T notes. Letter press printing has also been largely used for supplementary print ings in notes where the main printing may be plate work. Besides intaglio and letterpress printing, lithographic printing has been used for security work in the form of offset printing, where the design is photographed upon the thin zinc plate that replaces the lithographic stone, and the lithographic impression is not made directly from the zinc on to paper, but from zinc on to a rubber blanket, which delivers the ink image to the paper. The advantage of this is that very fine lines can be printed upon paper which is by no means smooth. It has, of course, the further advantage of being much cheaper than plate printing, but the amount of ink carried to the paper is, in most cases, even less than with letter press printing.

Photography a Danger.

The steady progress which has been made in photography is a constant menace to the security of paper money, and those responsible for the production of notes have so to utilize additional printings as to make photographic copying impossible, or at any rate extremely difficult ; this has often determined the choice of the colours blended together on the notes, and many beautiful designs have had to be disfigured by over-printings in order to prevent their easy photographic reproduction. The addition of too many elements of security in one note may, however, defeat its own ends, for there is a danger that notes may become so complicated and the paper so covered with a multiplicity of designs and colours that no one can carry with him a mental picture of the genuine note.

In Great Britain a wise restraint has been shown in avoiding much over-elaboration, and in not covering up the whole of the paper with printing, so that the texture and water-marking retain their value.

Designs which are too simple can be imitated by a skilful en graver; and there have even been cases in which individual notes have been drawn by hand with some little success.

Complete security is perhaps impossible, but a high degree of security may be obtained by careful attention to the following points: (I) identity of appearance of all the notes of an issue; (2) arrangement of colour scheme so that none of the printings can be secured by photographic copying; (3) use of paper which itself contains elements of security in its quality and water marking. (A. J. B.) In the United States, the treasury department has always relied on finely executed intaglio engraved plated printing and a high-grade distinctive paper having, since 1885, two rows of col oured silk fibre in the body of the paper, from top to bottom of the note. The serial number and seals on the face of the note are of a different colour than the black face printing, and the back of the note is generally an elaborately engraved plate impression. A study of the existing paper currency of the United States was undertaken by the Bureau of Efficiency in 1925 at the request of the Treasury Department. Estimates placed the life of the most popular note in circulation, the dollar bill, at eight months, while the cause of damage by wear was attributed chiefly to folding. The bureau found that the life of the currency could be lengthened by producing a better paper, permitting the paper to season after each process of manufacture in the Bureau of Engraving and Printing, and by suitably surface treating the bills before they were issued. In 1927 the Treasury Department adopted a paper money of new size and redesigned it in the interest of security, simplification and economy. The new note is 2 by 6 5/16in., about one third less than the older in size. The principal notes in use are Federal Reserve notes and silver certificates. As fast as they are presented to the Federal Reserve Banks all national bank notes, gold certificates and Federal Reserve Bank notes are retired. The Bureau of Engraving and Printing at Washington prints all U.S. paper currency and, although the total in circula tion fluctuates little, it is constantly producing new notes to take the place of old ones unfit for further use.