Banks that pay interest will not do so much to accommodate their depositors in the way of making loans. This thought prevents many depositors from demanding interest. In 'Europe, where interest is demanded, the depositors are not so dependent on the banks for loans as are business men in the United States. European borrowers take their notes to the bill-brokers, who, in turn, negotiate them with the banks or sell them in the general market.
On the whole, it appears that the depositor who carries a large balance steadily can ask for in terest. It will be shown in the next section that the small depositor is in no position to ask favors. In practice, it may often be wise for even the large de positor to forget the interest payment. Our depos itors get from the banks many things for which they pay nothing. When they are as independent of the banks in borrowing as Europeans are, they may begin to demand interest with some prospect of getting it. Many banks now find it wise, even necessary, to pay interest on their more important accounts.
8. Minimum recent years, banks have been paying more attention to the cost of carrying accounts than they did formerly. They now insist that accounts be maintained on a profit-making basis. In New York City, some banks have gone so far as to set a minimum average balance to be maintained, and to charge a depositor when the balance falls below that figure. Some banks simply refuse to carry small balances. This interests the depositor of personal funds more than it does the depositor of business funds. The minimum balance is usually set so low that it does not affect the business man even if the volume of his business is small, provided his account is carefully managed.
Some bankers deal with the problem in a general way. They hold that since a bank receives its charter from the state, it is a public institution, and that, there fore, it should conduct its business as a lawyer or a doctor conducts his, taking every account that is of fered, except those of depositors who would abuse the privilege, and making the good accounts offset those which carry only a small balance.
Other bankers believe that it is not the amount of balance maintained, but the amount of work that an account gives the bank, which should determine whether or not the account is profitable. They en deavor to find out the actual cost of carrying the ac counts and to settle each case on its merits. The
number of bankers who hold this view is increasing yearly.
Accounts differ in the amount of trouble they give and in their worth to the bank. An account main taining a balance of $10,000 is worth many times as much as the account that carries a $1,000 balance. On the other hand, it may happen that the small ac count will wield ten times as much influence as the large one in connection with other accounts.
9. deposits.--Three reasons are pri marily responsible for banks making deposits with one another. The first is that banks want balances in other cities against which they may draw drafts. As will be shown in the Modern Business Text on "Do mestic and Foreign Exchange," New York exchange is the business man's money in the United States. A Louisville buyer sends a New York draft to his cred itor in Seattle. Because of the demand for drafts on New York, banks all over the country carry balances with some bank or other in New York City. The New York banks, in turn, send to their depositing banks items for collection in their vicinity. The banks that do business with one another in this way are called correspondent banks. The larger banks have foreign as well as domestic correspondents. If a bank has a great number of branches, as, for exam ple, the Canadian banks have, the need for corre spondents is lessened.
Banks often deposit with other banks funds which they regard as reserves, but for which there is no im mediate need. Under the Federal Reserve Act, na tional banks are no longer permitted to deposit any of their required reserves with other national banks. They may deposit excess reserves, however, and state banks may deposit a part of their legal reserves. Most of these deposits go to New York City banks. The reason for this, and the results of the practice, will be explained in a later chapter.
A bank often finds itself with more cash than it needs for loaning purposes in its own community. It has made all the loans it can make with safety and at a profitable rate of interest. To loan more may mean either or both of two things, loaning to specu lative and risky enterprises, or bringing the local rate of interest to a point so low that the business will not be profitable. After the rate has once been lowered it may not be easy to raise it again. The way out of the difficulty is to send the funds to some other com munity that can use them.