Imágenes de páginas
PDF
EPUB

time without seriously impairing their credit standing, but a bank must meet its credit obligations promptly as they mature, or close its doors. The most imperative obligations of a bank are the calls for money by its depositors. To meet these demands banks must keep a cash reserve, the minimum amount or proportion of which is fixed by law in this country, though in most other countries it is left to the discretion of the banks. Since, however, the bank's chief business is loaning or exchanging its credit for short periods, and since its credit obligations are usually several times the amount of money available in the bank to redeem them, it is important that its loans shall be of such a nature that a fair share of them can be quickly converted into cash. To have at all times that quick control over its assets that is indispensable to its solvency, a commercial bank must largely confine the investment of its funds to short-time loans based on mercantile transactions. Until the enactment of the Federal Reserve Act in 1913, national banks were not permitted to make loans on real estate, and even under the terms of that act such loans are carefully restricted. Real estate has not been regarded as a liquid asset, that is, one that can quickly be turned into money. The function of the commercial bank is not to supply industry with permanent capital, but rather to loan its credit temporarily to business men, the nature of whose business is such that they can confidently count on repaying what they have borrowed within a comparatively short time. This takes the form mainly of the purchase of "business paper" consisting of promissory notes and bills of exchange running from thirty days to four months, which from the viewpoint of the bank become "loans and dis

[merged small][ocr errors]

Another important service of banking credit is to supply a medium of exchange by the issue of circulating notes or by means of deposit accounts which circulate in the form of checks and drafts. Both are used in making advances to customers or in exchange for commercial credit in the form of promissory notes or bills of exchange. Both bank

notes and deposits are demand obligations of the bank and as a medium of exchange they discharge substantially the same functions in the business world. Bank notes are used as hand-to-hand money because they are payable to bearer, are issued in fixed denominations, and pass freely everywhere, even among strangers. In country districts where banking facilities are not so general or convenient, the bank note rather than the check must be used as a means of payment. Checks, representing deposits, are more serviceable to the business man since they can be drawn for any amount and can be transferred from one person to another by indorsement; they are more convenient and safe than coin or notes for sending through the mail; if a check is lost a duplicate can be issued and payment of the original stopped at the bank; and, of not least importance, a cancelled check constitutes a voucher or receipt showing that the obligation for which it was drawn has been paid. Because of these and other advantages, deposit currency in the form of checks finds steadily increasing use as an instrument of credit.

61. Instruments of banking credit. The chief instruments of banking credit, other than bank notes, are checks, bank drafts, and letters of credit. A check is a written order on a bank for money drawn by one who has a deposit there. Checks are usually made payable to someone's "order," and must then be indorsed by the payee before they can be negotiated further or cashed. A check drawn. to "bearer" is payable to any person who holds it. Technically, a check is only an order on the bank, but legally it is an implied promise to pay on the part of the drawer of the check, and any person "giving a check upon a bank in which he has no deposit account is liable to prosecution for obtaining money under false pretences." A depositor, wishing to make a payment at a distance where he is not known, or being required to present unquestionable evidence of his financial ability to fulfill his agreement in some contract, or bid for bonds, or the like, may request his bank to certify his check. The cashier writes or stamps

across the face of the check the word "certified" or "good when properly indorsed," followed by his signature. The check then becomes the bank's promise to pay or guarantee and the depositor's account is at once debited as if the check had been paid. Where a bank does not make a practice of certifying checks, it may instead issue a bank draft or a cashier's check payable to the order of the depositor, or to the person whom he designates.

[merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small][ocr errors][merged small][merged small]

A bank draft is an order drawn by one bank on another bank. Practically all banks keep funds on deposit with banks in other cities, especially in the large financial centers, in order that they may be able to meet the demands of their customers for a form of payment which will be accepted without question. The banks draw upon these accounts and sell their drafts to their customers, making a small profit on the charge for "exchange." Bank drafts pass as cash practically anywhere in the country and constitute an important method of making remittances from one part of the country to another. Drafts on New York, commonly known as "New York Exchange," are acceptable all over the country, owing to the fact that New York is the commercial and financial center of the country and that business men everywhere have dealings with that city. The following transaction will illustrate the use of the New York draft. Smith Brothers of Indianapolis want to

remit $2,500 to a concern in Providence, R. I., for goods to be shipped at once. They send down to their bank a check for the amount, writing in the place of the payee's name the words "New York Draft." The bank makes out a draft on its New York correspondent for $2,500, payable to Smith Brothers. They indorse the draft, making it payable to the Providence creditor, and mail it to him. In having the draft drawn to their own order, instead of to the order of the creditor, it serves as a direct evidence of the transaction, and acts as a voucher when indorsed and transferred.

[graphic][subsumed][subsumed][ocr errors][subsumed][subsumed][subsumed][subsumed][subsumed][ocr errors][subsumed][ocr errors][merged small][ocr errors][merged small][merged small][merged small][merged small]

A cashier's check is an order on a bank drawn by its own cashier. It differs from a bank draft in being drawn by the cashier upon his own bank instead of on some other bank. It is used when the bank has payments to make, just as an individual uses his check. It is also issued to customers to be remitted to their creditors like a bank draft; and it is sometimes used in lieu of certification where it is not the custom of the bank to certify.

A letter of credit is a document issued by a bank or banker directed to its correspondents authorizing the bearer to draw upon the issuing bank or some central agent up to a certain amount. A traveler, before starting abroad, buys a letter of credit from his bank. In any

foreign city, as he may have need for the money current in that country, he goes to the office of the correspondent named in his letter of credit, and makes out a draft for the amount he needs. The draft will be cashed, after comparison of the signature on the draft with that on the face of the letter, and the amount withdrawn, plus commission, will be entered on the letter. Thus the letter will show at any time how much of the credit remains unused. Commercial letters of credit provide a convenient means of paying for goods bought in any part of the world or of receiving payment for goods exported.1

To meet the demands of travelers for a convenient, safe and economical method of carrying funds, the express companies and some international bankers issue "travelers' cheques." They are issued for fixed amounts, ranging from $10 up to $100, and show the equivalents in the money of the principal European countries. To provide a simple means of identification and security against loss of the cheques, the intended user places his signature upon each cheque. When he wants to obtain funds at the bank or express office, or to pay his hotel bill he again signs his name in the proper place on the cheque, thus completing the issuance and insuring the identification of the rightful owner, as the two signatures must agree. The advantage of these cheques is that the value of each cheque in the money of the leading European countries is plainly printed on them, and they are cashed without discount or commission by bankers, agents of express companies, and the leading hotels in Europe, the United States, and Canada. They are convertible into money at almost any time and place.

62. Effect of credit on prices.-In discussing the value of money and price changes in a previous chapter, frequent reference was made to the fact that under modern conditions a considerable proportion of commercial transactions are performed by means of credit and credit instruments. Having now considered the nature, functions and opera1 See pp. 239-243.

« AnteriorContinuar »