BANKS AS BENDERS. From the services which the bank renders those from whom it borrows, we may turn briefly to the more obvious services, rendered to those to whom it loans. Bank loans are, in form, time-loans for a definite period of days or months, and call-loans, upon which instant payment may be demanded at will. Either form of loan may be made on the personal credit of the borrower, though this is not considered good banking, and can be safely done only in eases of persons of unexceptionable standing. Loans are made, as a rule, itiron mercantile paper and upon col lateral. The time of the loan is definitely fixed by the face of the instrument, and the amount loaned is that stated in the note or draft, less the interest upon the same for the unexpired time. Loans upon collateral are either for a definite period of time or on call. As in the latter case the amount of interest cannot he fixed in advance, it is customary to loan a defi nite sum, and at the expiration of the loan collect also the interest at a rate agreed upon for the duration of the loan. The collateral or security consists of stocks or bonds greater in value than the amount of the loon and probable interest, which are for the time being deposited with the bank. In the event of failure to pay the loan, the bank secures the satisfaction of its claim by the sale of the securities. In the case of discounts of mercantile paper, the bank relies upon the good faith and general property of the several parties to the note or draft, without having a claim against any specific property.
It is clear that in so far as a bank makes its loans from its capital, it can use for that pur pose all that is not needed for running ex penses. It should be remarked that commercial banks insist have a considerable capital of their own, not only for running expenses, but also as a guaranty to depositors. The larger the capi tal of the bank, the greater the feeling of security among the depositors that, the personal property of the, bankers being embarked in the enterprise, caution and prudence will guide its steps, and that in the event of bad investments, the bank will yet be able to meet its obligations as trustee of their funds. But if a bank can employ all its capital. it is obvious that it cannot employ all deposits in making loans, be cause occasions are always occurring for remov ing deposits, as well as making them. Business nmen, for example, day by day, deposit with their hankers the cheeks or sums of money which they receive in the course of their business; and, on the other hand, day by day, draw out such sums as they require for the payment of purchases of goods, wages, rent, and other expenditure. A
bank, therefore, while continually receiving de posits, is continually repaying deposits; and the amount uncalled for is subject to a daily fluctua tion. At one period of the year, or in a certain condition of trade, the amount of deposits may be high; at another, low. As it is a principle at the very root of banking that money deposited shall be returned, either on demand, or punc tually at the expiration of a stipulated notice, it follows that banks must always have at hand as much of the money deposited with them as may in any emergency be called for. When busi ness is in its ordinary condition, a bank can, after some experience, approximate pretty nearly to the amount of the greatest demand for a re turn of deposits throughout the year, and provide accordingly. But sometimes the credit of a bank becomes doubted, either from causes peculiar to itself, or on occasions of a panic or general dis trust, when all who own money wish to have it in their own possession. In these eases, there is a run. on the bank for repayment of its deposits, and the amount called for may be far beyond the maximum demanded in ordinary times. If the hank has not retained a sufficient amount of de posits to meet the demand, it is said to suspend payment, and, as a genera) rule, it must wind up its business, the confidence of the public that it will in future restore its deposits on demand being now destroyed. There are two prime rules in safe banking: the one is, that the bank shall lend its deposits only on undoubted and readily reliable securities, however low the profit; and the other that tho. bank shall retain a sufficient amount of its resmirces—and this is called the reserve—to meet the possible demands of the depositors even in cases of a 11111, although there may be no reason to expect one; for when a run comes, it seldom casts its shadow before. But it is evident that the greater the reserve of a bank, the less the amount of deposits which it can lend out and draw for; hence the temptation which banks lie under of imprudently lending out a too great proportion of their de posits; and it is their yielding to this temptation that almost always precipitates the failures of banks.