RESOURCES LIABILITIES Cash $1,000 Deposits $5,000 Loans and discounts 4,000 On the basis of the original $1,000 cash deposit, for which the bank pays little or no interest, $4,000 of interest-bearing loans are made. If the bank pays no interest on deposits, and charges 6 per cent on loans, it makes a gross profit at the rate of $240 a year.
6. Inducements to is keen com petition among banks for deposit accounts. In re turn for the use of the general deposit, which is so profitable, banks have been led by competition among themselves to offer many valuable inducements to de-. positors. Among these are the following: (a) Checks—The bank pays the checks of the de positor, taking the risk of their being genuine and assuming that the money is paid to the person desig nated by the depositor or by his order. This service is of great value to the depositor, for it saves him the inconvenience and the expense of making cash pay ments.
(b) Collections—The bank collects the checks and all other items of credit for the depositor, often at considerable expense. It offers the depositor a cheap and easy way to collect amounts due by drawing sight drafts on his debtor and collecting them thru his bank. Since the establishment of the custom of sending local checks in making small payments to creditors located in the larger cities, the associated banks in several of the larger cities have been compelled to charge a uni form fee for collecting out-of-town checks, the rate being usually one-tenth of one per cent, with a mini mum charge of ten cents per check. Even this cost to the depositor has been lowered thru the fed eral reserve clearing system.
(c) Safety—The bank relieves the depositor of the risk of caring for his money.
(d) Loans—The bank usually feels under obliga tion to lend to a depositor on more advantageous terms, and usually with less rigid requirements, than to others. It can do so because it is more or less ac quainted with the affairs of the depositor and can ac cept personal credit when collateral security would be required of non-depositors. The greatest advan tage, however, comes in time of panic, when funds are needed most and when all the banks are refusing to lend except to their depositors.
(e) Increased credit—The bank connection fre quently increases the credit of the business man. A good banking reference is often of great advantage in business. The banks must be constantly on their guard against persons who use their connection with the bank to gain unmerited credit.
(f) Interest on balances.—Sometimes the banks pay interest on the daily balances. This practice was an innovation of the trust companies and was due to the fact that the deposits in the banking department of the earlier trust companies were practically time deposits. When the character of the deposits grad ually changed to demand deposits, the custom still prevailed. Competition of trust companies is forc ing many commercial banks to pay interest on the daily balances of their larger depositors.
7. Should interest be paid on of the reasons advanced by those who think interest should be paid on deposits are the following: First, because it is right to share with a depositor the profits earned on his deposit.
Second, because interest must be paid in order to compete with trust companies and private banks and bankers. This is a convincing argument. Many business men carry two accounts, one with a trust company, at interest; the other with an ordinary bank, < without interest. Of course, the cream of the deposits, the ones least often disturbed or used, go to the trust company. This may turn out to be a short-sighted policy for the depositor. If his banker finds it out, he may lose favor, and justly so. A time may come when he will have to call on his regular banker, and not on the trust company, for some accommodation.
Third, in foreign countries bankers uniformly pay interest. Why should ours refuse? Fourth, banks depositing with other banks demand and obtain interest. Is it not illogical for them to refuse interest to depositors who are furnishing the very funds which are redeposited? An argument advanced against paying interest is that banks will take greater risks in lending in order to earn the interest they have promised. The argu ment has much truth in it, and for this reason some states forbid or regulate the payment of interest.