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URGENT NEED OF PRACTICING ECONOMY IN BANKING

ERIOUS burdens and handicaps are im

Sposed upon banks and trust companies

by the abnormal conditions created by the war including an extraordinary increase in operating expenses, higher wages and impairment of staffs because of the large number of young bank men who have been and will be called into National service. This strain upon banks and trust companies has been rendered more acute because of the tendency of recent fundamental changes in banking methods to reduce earning capacity. At the same time, while banks and trust companies are compelled by war-time problems to maintain even greater staff efficiency and care for a much larger amount of gratuitous business for the Government and their own patrons, they receive no direct benefits from "war profits." Banking commodity is about the only thing on the market not benefitted by "war prices." The operation of the Federal Reserve system has thus far produced few if any compensating advantages for the loss of interest on reserves maintained in the Federal Reserve Banks and the elimination of exchange charges through the establishment of a continental system of "par" check collection, the latter innovation bearing particularly upon country banks. Co-incident with the introduction of the new Federal banking system there has been a prolonged period of low, unremunerative money and loan rates while competition continues the pernicious practice of offering excessive interest rates for deposits and carrying unprofitable accounts. Super-imposed upon all these handicaps there is the general pledge on the part of bank and trust company managements to grant generous consideration to employees who are called to the colors. "Bank economy" should therefore become the strident slogan of the day. Even a casual study of present day banking and trust company methods affords convincing proof that there is unlimited scope for such greater economy. Loss of earnings may be largely offset by voluntary, co-operative effort to reduce interest payments on all classes of deposits, similar to the united action recently taken by the Delaware Bankers Associations and by group organizations in various other sections of the country. The conditions now prevailing also justify every bank and trust company in requiring a fee for deposit balances below a certain mini

mum.

There is also no excuse for a bank or

trust company failing to introduce systems of cost accounting and analysis. The best method yet devised for analyzing accounts with a view of ascertaining whether they are carried at a loss or profit is that devised and issued by the Federal Reserve Bank of New York and described in its Circular No. 46, published in August, 1916. Readers of TRUST COMPANIES Magazine desiring this short system of analysis of accounts" may obtain copies by writing either to TRUST COMPANIES or the Federal Reserve Bank of New York. It enables the banker to ascertain net and gross profit or loss on accounts; expense of handling individual deposit or bank items, domestic and foreign, etc.

There are many costly leaks in daily bank and trust company routine which may be eliminated. In the first place the banker is guilty of short-sightedness who does not avail himself of the ingenious mechanical and labor saving devices such as adding, statement, computing and automatic bookkeeping machines, addressograph, telautograph, coin separating and wrapping machines, check protectors and perforators, dictaphone, multigraph, calculator to ascertain dates of note maturity, monthly statement sheets, loose-leaf books, bond cutters, numbering machines and scores of other tried and proven devices.

There are other refinements of economy which should receive prompt attention. Wastage of supplies must be avoided by placing an employee in charge of stationery and supply stocks who is responsible for all that comes in and goes out. How essential this is may be understood when it is recalled that careless and extravagant methods have been responsible for 24 per cent. of bank failures.

STATUS OF FEDERAL FARM

LOAN BONDS

A

HAPERONED, supported and controlled by the Government the Federal Farm Loan system with its twelve land banks and 2,000 incorporated farm loan associations, has now been duly launched as the so-called "Magna Charta of American Agriculture." syndicate, composed of representative banking firms of New York and other cities has taken over half of the initial issue of $60,000,000 four and a half per cent. Federal farm loan bonds, offering them to investors, banks and trustees at a price of 101 and accrued interest. The high character of the firms composing the syndicate and their facilities for National distribution,

aside from the investment status of the bonds, are expected to assure a ready market. It is also reported that the twelve land banks have loan applications on file, subject to approval, amounting to $100,000,000.

If we accept, at face value, the roseate promises of the sponsors of the Federal Farm Loan system the American farmers' only cares in the future will be those attending an embarrassment of riches and keeping tab on his swelling bank account. While railroads plead in vain for "living rates" and other less favored petitioners for credit and capital must struggle against all the odds of war-time costs, the farmer as the anointed protege of a benign Government will have an inexhaustive supply of cheap credit at his constant command. Indeed, it will be forced upon him whether he wants it or not. The Federal Farm Loan system is but another sample of the species of "Federalization" whereby the Government invades the precincts of private business and appropriates all the discriminatory advantages of tax exemption and Government control. By a new process of Congressional logic the Federal farm loan bonds are

classed as "instrumentalities of the Government of the United States." They are put out with exemption from Government, State, municipal taxation and immunity from Federal income tax. The system receives the benefit of a Government subsidy in the form of Government ownership of $8,800,000 of the original issue of $9,000,000 of the capital stock of the land banks.

However desirable national co-operation may be during this war period in producing maximum results from farms it remains an open question whether the Government rural credit system will prove superior or more efficient than the machinery provided by stock companies, farm mortgage bankers and the banks and trust companies which have built up expensive and expert farm loan departments. The Attorney-General of the United States and former Justice Charles E. Hughes have given their opinions as approving the validity of the Farm Loan Act and the tax exemption provisions. It remains to be seen whether any further effort will be made to test the constitutionality of these exemption features by an appeal to the U. S. Supreme Court.

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TEACHING WOMEN THE MYSTERIES OF BANKING

Many classes are being organized, similar to the above, by big Wall street banks and trust companies, training

women to take the places of men who are called to the colors

THE TRUST COMPANY IN

WAR-TIME

RUST companies, because of their many

Tsided activities and because they come

into such close contact with a vast number of people through their banking, savings, trust, bond and other departments, have proven to be particularly efficient and serviceable in war-time. The great part they played in helping to finance the first Liberty Loan is now a matter of record. Hardly less important, however, is the influence which they exert in the support of business, financial, mercantile and industrial relations. They are also showing themselves equal to the grave task of conserving billions of individual and corporate property subject to various kinds of trust indentures with values undergoing far-reaching changes and with re-adjustment in the air. Notwithstanding the broader privileges conferred upon member banks of the Federal Reserve system it is interesting to note that the number of new trust companies organized within the past six months exceeds considerable the record for the previous half year.

The added reliance placed in trust company management is signally demonstrated by the latest official statements of the trust companies of New York City, which, on June 20th last, reported the greatest aggregate of deposits in their history amounting to $2,180,992,300. The increase of $32,000,000 made since the previous returns of February 28th is interesting in view of the general tendency of bank deposits to show a decrease during this period on account of preliminary war loan operations. As compared with June 30th, one year ago, deposits have increased $160,000,000 and as compared with June 23, 1915 the gain has been no less than $694,000,000 and over one billion since the corresponding date in 1913. The past year has also witnessed a marked increase in the amount of capital stock of New York City trust companies from $75,550,000 to $94,550,000 with two new trust companies added to the list. Another important item, revealing the extent to which the trust companies are contributing toward the establishment of a broad acceptance market is shown in the increase of foreign and domestic acceptances during the past year from $55,000,000 to $94,484,000. The fact that trust companies are able to maintain their ratio of progress despite the complex problems of war is indicated by the increased deposits shown in the latest state

ments of trust companies in other cities, besidesNew York. Trust department and fiduciary business has likewise shown a record increase in volume.

LIABILITY FOR PAYMENT OF UNAUTHORIZED CHECKS

Court of Appeals of New York ren

Tdered a decision recently holding that a

bank taking a check payable to a corporation must assume the consequences if the agent endorsing it is without authority. The Standard Steam Specialty Company, a corporation, kept its bank account in the Greenwich Bank. It provided an employee with a rubber stamp with which to indorse checks for deposit as follows: "Pay to the order of the Greenwich Bank. The Standard Steam Specialty Co." The authority of the employee to indorse was limited strictly to the use of this stamp, to be followed by the words in her handwriting, "Percy H. Pinder, Treasurer." She indorsed, however, these checks wholly in her own handwriting with the words, "Standard Steam Specialty Company, Percy H. Pinder, Treasurer," and also indorsed her own name. The checks were then cashed for her, nine by one business man and two by another, who deposited them to their credit in a New York bank, which collected them and paid out the proceeds to their depositors in the regular course of business. The employee converted the money thus obtained to her own use. The Standard Steam Specialty Company thereupon sued the New York bank to recover the sums represented by these checks and the Court of Appeals of New York holds that it is entitled to a recovery. Miss Cohen had no authority to indorse the checks in blank. She had authority only to make a restrictive indorsement for deposit in the Greenwich Bank.

The court said: "Any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority, unless the corporation is negligent or is otherwise precluded by its conduct from setting up such lack of authority in the agent. The business man who authorizes his clerk to take his checks to his bank for deposit does not vest in her so dangerous a power as to preclude him from setting up her lack of authority if she indorses his name thereon in blank and innocent persons cash the checks for her without inquiry."

WAR-TIME BANKING PROBLEMS AND NEED OF
IMPROVED CREDIT MACHINERY

GREATER STABILITY THROUGH BROADER USE OF TRADE AND BANKERS'

ACCEPTANCES

DR. J. T. HOLDSWORTH

Dean of the School of Economics, University of P.ttsburgh

(EDITOR'S NOTE: The author of the following article says truly that instead of deluding urselves with the belief that business should or may be conducted as usual during these strenuus times of war we should adopt the slogan “Sounder business than usual." This applies parcularly to the adjustment of banking and credit relations, demanding the abolition of the clumsy, unfair "open book account" system and substituting the more scientific acceptance devices of redit created by the Federal Reserve Act and authorized by various State legislatures. Dr. Holdsworth likewise makes clear the advantages of utilizing acceptances as a means of preserving the flexible and liquid basis of banking credits.)

"Business as usual" is a catchy slogan much quoted of late in some quarters, but one which will not stand critical and sober analysis. The serious use of this phrase taken literally would seem to indicate that those who use it have not yet awakened to the grim fact that this country ́s at war, and that the complete fulfilment of our part in that war will call for the most stupendous effort and the most heroic sacrifices. It is blind folly to talk of "business as usual" in the face of the cold, unyielding facts of business disturbances and readjustments necessitated by the war in England, France, and the other warring nations. Can the business of the United States hope, should it expect, to proceed "as usual," in view of the relentless facts of the war situation? What are some of these facts? The first fundamental fact is that our Government, yours and mine, must be assured hat it has the first, and if necessary the last, call upon every man, every dollar, and every other resource, which this nation needs in order that the victory for liberty and democracy may he won as early as possible, and with the minimum of sacrifice in men and resources. We may as well face fairly the stern realization that this involves temporary business disturbance and maladjustment. And because of our comparative unpreparedness when it became necessary to enter the world conflict to defend our national honor and our national ideals, our fighting program must necessarily involve greater business disturbance and more patriotic sacrifice.

If the war continues for two or three years, as seems probable, millions of our most ener

getic young men will be withdrawn from trade and industry. The first draft upon our financial resources, a loan to the Government of $7,000,000,000, the largest single loan ever offered in the history of the world, has been made, with the reasonable prospect of other large loans to follow. And wisely, the Government has decided to make a "forced draft" in the form of taxation sufficiently heavy to pay the interest on war borrowings and amortize the principal of the debt within a comparatively short time. Government loans will temporarily absorb billions of dollars that otherwise would be available for investment in business and industry. To be sure practically all of the proceeds of these taxes and loans, including the amounts advanced to our allies, will be expended in this country, yet it remains true that the diversion of these vast sums of money from normal channels to war purposes must necessarily result in business and credit disturbance. The burden of war taxes, even under the most skilfully-drawn revenue measures, will rest heavily upon business and personal profits and incomes.

Mobilizing Productive and Distributive Agencies

The vigorous and intelligent prosecution of war policies involves, furthermore, direct interference with and control, partial or complete, of certain of our productive and distributive agencies. Not until England had undertaken an extensive "socialization" of her industrial and man resources, did she bring her real strength to bear upon the enemy. We may not have to go to the same lengths in this country, yet business should be prepared and willing to

undertake the necessary readjustments to the end that peace may be restored, and quickly.

Already certain forms of speculation affecting the necessaries of life have been brought under legislative restriction. A food administrator has been appointed, with the prospect of other war necessities being subjected to similar regulation. The railroads of the country which apparently were drifting helplessly toward Government ownership, because of their inability to secure the money necessary for continued expansion, have agreed to operate the transportation business of the country as a unit during the war, merging all competitive activities in order that the nation may obtain the maximum of transportation economy and efficiency. Scores of plants, and in some instances whole industries have patriotically offered their entire industrial facilities to the Government to be used as seems best; in other forms of production or distribution it may become necessary, as the other fighting nations found it necessary, practically to "commandeer," or to control rigidly certain economic activities and resources in order that the maximum of power may be put into the conflict.

"Business as Usual" A Misleading Slogan In the light of these business phenomena thus suggested and of the experiences of our allies during the three years of war, the slogan "business as usual" becomes not merely empty-it is misleading. The sooner business as well as the individual citizen recognizes that we are actually engaged in the greatest struggle of all time, that war is for the time being our main job, demanding not an organized army but an "organized nation," and that it means loss and sacrifice, the better it will be for all of us.

Instead of the misleading slogan, "business as usual," shall we not rather adopt the slogan, "Sounder business than usual"? Alike because of the economic readjustments and business perplexities ahead of us, and because the necessities of the war demand the largest and most economical production possible, it is imperative that business shall be prosecuted vigorously, with the highest measure of economy and efficiency, and according to an intelligently-planned program. Waste and inefficiency must be reduced, better cost accounting systems installed, business methods standardized and improved, and, above all, a much larger proportion of business and credit media must be made liquid and kept so. Business and banking owe to themselves and to the nation as a patriotic duty to keep credits as liquid as possible. The Civil War with its violent commercial and political disturbances led to the introduction of the greenback, a new banking system, the open book account; this war should see the introduction of such sound business and credit methods and machinery as

shall insure us against the destructive business collapses of the past.

In the lives of men of this generation there has never been a time when the need for sound business and liquid credits was more imperative than now. The absorption for war purposes of billions of dollars of capital and income and the expending of these billions for the furtherance of a war program without direct reference to the effect upon private interests challenge business everywhere to the highest measure of liquidity attainable. In no other single particular can this attainment be realized as effectively and profitably as by the substitution of acceptances for the open book account. All the weight of the indictments against the book account and the arguments adduced in favor of the acceptance in normal times apply with double force in these times of war need.

Fundamental Weakness of Our "Open Book Account" System

These indictments may be briefly stated. The open book account operates upon a fundamentally wrong business principle in that it puts upon the seller the burden of extending credit to the buyer thus tying up his invested or borrowed capital for an indefinite period. Usually the seller who is compelled by custom to carry buyers on open account has to put himself in funds by discounting his single name paper at his bank or selling it through note brokers. Because of the lack of reliable information as to the character of the accounts receivable and because of their inconvertibility the lending bank must require that the borrower's statement shall show a large margin, usually not less than two to one, of quick assets over liabilities. If the trade acceptance be substituted for the open account, the seller has a field credit instrument which he can readily exchange for bank credit by the process of discounting, and so transfer to the bank, where it belongs, the function of financing commercial credit. The necessity for the large margin disappears; lower interest rates are possible because the bank in turn has an instrument which it can promptly convert into cash by rediscounting; and lower prices to the buyer are likewise possible.

The abuse and unfair practices which have grown up around the open account are wellrecognized and universally deprecated.. It breeds unfairness and trade discriminations, and tends to encourage over-buying. It allows the weak or injudicious buyer to use the seller as an involuntary banker after the buyer has reached his legitimate borrowing limit at his bank, and that, too, without paying interest for the accommodation. Sellers, compelled to borrow money at interest, but lending their credit to buyers without interest, must recoup themselves

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