OPERATIONS OF A COMMERCIAL BANK 1. Commercial banks.—Nearly all the business of buying and selling, and much of the producing and manufacturing, is of such a nature that the banking needs can best be taken care of by commercial banks. For this reason a great part of the present Text will be devoted to the study of this type of banking house. Moreover, a thoro understanding of the principles of commercial banking will make easy the study of finan cial banking.
The business of banking can be explained most clearly, perhaps, by outlining some of the funda mental operations and showing how they appear upon the books of the bank.
2. bank, like any other business con cern, must-have capital. What should be the propor tion of capital to the total volume of business done? This is one of the most perplexing questions in the whole field of banking, and it cannot be answered in general terms. Each bank must consider its own case separately, having in mind the kind of business it expects to do, the nature of the business carried on by its customers, its relation to other banks, and the general condition of the community in which it is located.
Some countries fix a minimum legal ratio between capital and the volume of business. The minimum capital for national banks in the United States is regulated according to the population of the town or city in which the bank is to be established. Such re quirements as these can only approximate the general average. They are of little assistance to the indi vidual banker when he tries to work out his own prob lem. The one thing he does know is, that the greater the volume of business that may be done safely on a given amount of capital, the higher is his rate of profit. The law tells him only what his minimum capital must be ; experience will deterniine the maximum.
Canada, intending evidently that no banks shall be established to do a small business, requires a large capital of all banks. Happily, the large banks are permitted to establish branches to take care of the smaller communities, which could not have a bank otherwise.
The capital of a bank should be paid in cash, be cause so many of the liabilities are payable on demand that some cash at least must be available with which to meet them from the very day the bank doors are opened. Generally, the law requires that a certain amount of capital be paid in cash before the bank be gins business, and that the balance be paid soon there after. In some communities, the requirement is that a certain capital must be subscribed, but that only a part of it need be paid in cash. The unpaid capital must then be paid in case of insolvency, or it may be subject to call by the directors.
3. Liability of has just been stated, the stockholders are liable for the stock for which they have subscribed, but for which they have not paid. This is true generally of all corporations. The principle of limited liability is almost universal in corporation law and, as a rule, stockholders cannot be made liable for further payments on their stock if it has been fully paid. Limited liability, of course, makes it possible for persons, who are not willing to take unlimited risk in becoming partners in an enter prise, to become stockholders with a maximum risk of losing only what they have paid in or subscribed. In the case of banks, however, it has become the fixed custom in many countries to place a double liability upon stockholders for the better protection of depos itors. A man who has bought $1,000 worth of bank stock is thus liable to lose not only his thousand in the case of failure, but another thousand as well if that much should be needed to pay his share of the debts. If he has subscribed for $1,000 worth of stock and has paid only $500, he is liable for the unpaid $500 and the extra $1,000 also, or so much of it as is needed.
Double liability is imposed by Federal law upon stockholders of national banks and Federal Reserve banks. Most of the state banking laws follow the lead of the national law in this respect. Some states prescribe double liability for corporations other than banks.