2. A special form of collateral note may be used which clothes the loaning bank with certain important privi leges that it would not otherwise enjoy.
This method entails much less clerical work than does rediscounting and there is, therefore, the added advan tage of time saved and possibility of error minimized.
Since there is a reluctance to rediscount on the part both of the country selling banks and of the buying reserve city banks, loan operations between these two classes of banks have generally been by collateral note instead of rediscounts; and this inveterate practice helps to explain the tardy growth of rediscounting with the federal reserve banks.
Guaranties in Lieu of Indorsement All guaranties on loans or discounts are in the custody of this department. They are taken in lieu of indorsements, and the effect is practically the same as that of an indorsement, namely, the effect of an additional security on the paper covered by them. In many cases a borrowing firm wishes to give the bank a personal indorsement on its paper, but it is not convenient for the indorser to be present at all times when bills payable are to be issued; or there may be several persons each living in a different city and all wishing to indorse, and in such an instance all paper issued would have to be sent around from one to another, which would involve risk, inconvenience, and loss of time. To meet such exigencies the method of guaranty was devised. The instruments arc of various kinds, some continuing in force until written notice of their revocation has been received, some running for a certain specified time and void after a certain date, and still others of a specific nature covering only a particular note or series of notes. Usually they state the maximum amount for which the guaranty shall be in force.
Responsibility of Directors for Approval of Discounts The making of discounts is an inalienable function of the directors of the bank. It is exclusive and cannot be delegated to any officers.
[The board may empower an officer or officers] by a single resolution to make a considerable number of discounts or loans, provided they be requested; but this resolution must name the person or persons to whom the loan may be made, the aggregate sum which they must never exceed, the time, and such other particulars as the directors may deem of moment. Thus in fact
though many separate notes may be authorized by this one vote, yet nothing is really done beyond the supervision of the direc tors, or without the active exercise of their discretion. They may order the cashier to let A have such loans as he shall wish, in such sums and at such times as he shall ask, within a certain period, up to the amount of a designated sum, to run for specified times, at rates of interest named, and upon designated condi tions concerning indorsers or collateral security. This does not leave each individual discount made to A to be passed upon by the directors; yet in fact no discount is made to him by any official authority other than that of the board, or at the substan tial discretion of any person save the directors.' This being the law, it becomes a serious problem in a very large bank to have the applications for loans and discount passed upon by the directors themselves; the volume of such applications is large, and the directors are active business men engaged in other lines and only incidentally bank directors, and they cannot sacrifice the time necessary to scrutinize each particular appli cation when it comes up. The directors have weekly or monthly meetings; they cannot be in session continuously. They have several devices for controlling loans and discounts and guarding their responsibility. One is the granting of "lines of credit" for loans and discounts, as indicated in the above quotation from Morse. A second is the use of a discount committee, composed of a few of their number and of officers, who pass upon the appli cations as they come up and bring their approvals to the weekly directors' meeting for final sanction; this committee is clothed with such great responsibility that it is composed of men who are the shrewdest at hand and who give all or nearly all their time to the bank's affairs. A third device is to allocate all loan and discount applications arising from a certain area or kind of busi ness to a vice-president or other high officer who, acting alone or as a member of the discount committee, passes upon the appli cations as they arise, within limitations set by the directors, and these are approved later at the directors' meeting. The treat ment described below is a composite of these methods.