13. This bank has evidently exercised its option under the Federal Reserve Act to establish branches abroad.
14. "Exchanges for clearing house" are checks, drafts and other claims which are to be presented thru the clearing house on the day following.
15. This item includes checks and drafts on banks in the city which are not members of the clearing house and do not clear thru it.
16. In addition to fractional currency and a few small advances such as salaries paid in advance, car fare, telegraph charges, and other petty cash pay ments to be charged to expense in one amount, this item includes checks on out-of-town banks which have not been forwarded for collection. As soon as they are forwarded and charged to correspondent banks, they will appear in item "due from banks and bank ers" which is (11) above.
17. A national bank is not allowed to count the notes of other national banks as part of its lawful re serve. It is to its interest, therefore, to have as few of them on hand as possible. Consequently, they are paid out before any other form of currency, except the bank's own notes which it is anxious, of course, to keep out. Notes of other banks may be sent to Washington' for redemption.
18. These notes have been obtained by payments, made to the bank or by rediscounting at the Federal Reserve Bank. They will be discussed in connection with the Federal Reserve Act.
19. "Lawful reserve" includes all kinds of money on hand which the bank is permitted to count as part of its required reserve. Specie includes gold and sil ver certificates, as well as coins, because they represent actual coin deposited for their redemption on demand. Legal tender notes include greenbacks and Treasury notes of 1890. The latter are now scarce.
Every bank that is a member of the Federal Re serve system is required to carry at least A certain part of its required reserves in the vaults of the Fed eral Reserve bank of its district. These reserve re quirements are discussed elsewhere.
20. Gold bullion is usually obtained by importa tion. If it is not needed for re-export it is sent to the Federal Treasury and exchanged for coin or certifi cates.
21. Every national bank is required to keep on de posit with the Treasury of the United States a fund equal to five per cent of its outstanding circulation. Before the passage of the Federal Reserve Act this deposit could be counted as part of the lawful reserve which the banks must carry against deposits; now, the deposit must be maintained, but it may not be counted as part of the reserve. Since the total re serves have been lowered materially, this requirement works no hardship on the banks.
The item "due from the United States Treasury" includes any amounts due from the Treasury other than the five per cent fund. Money is constantly passing between the bank and the Treasury. Sub sidiary coins and bank notes are sent in for redemp tion, money is sent for exchange into subsidiary silver, bonds are sent in for redemption and other transac tions are carried on.
6. Liabilities: letters of credit.—In the bank whose statement we are considering, there are items both in the resources and in the liabilities which have to do with letters of credit. These are items which are not commonly well understood; and, before pro ceeding with a discussion of the successive items of liabilities in the bank's statement, it seems desirable to make clear the nature and function of these in struments.
The letter of credit can be explained best by an il lustration. Duggan buys a quantity of goods in In dia. He is not known there and the goods will not be shipped on his credit. On the other hand, he not want to pay before the goods are sent. He goes to the bank and applies for a letter of credit, which is nothing more than a paper issued by his bank instruct ing its correspondent bank, say, in London, to "ac cept" a draft, drawn by the Indian merchant up to a certain amount and under certain conditions. The conditions, with regard to attaching the bills of lad ing, insurance certificates, etc., to the draft, are all specified in the credit.