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O. HOWARD WOLFE



AMERICAS! IK8T T.TUTE OF BANKING



Elementary Banking



BY



O. HOWARD WOLFE

Associate, American Institute of Banking

Assistant Educational Director, A. I. B.

Past President, New York Chapter



CORRESPONDENCE CHAPTER, Inc.
AMERICAN INSTITUTE OF BANKING

FIVE NASSAU STREET, NEW YORK



, x



Copyright, 1915
By O. HOWARD WOLFE



M. B. BROWN PRINTING ft BINDING CO.
37-41 CHAMBERS ST. NEW YORK CITY



Preface

This book is not the result of any preconceived theories
on methods of education in banking. Neither does it make
any pretense of being complete as to the subjects covered
nor exhaustive in its treatment of them. It is based on
fifteen years of practical experience, beginning with a small
country bank and extending through eleven years with a
large city bank. To this first-hand knowledge of the edu-
cational needs of the beginner in banking has been added
four years spent in the teaching of banking subjects to
young men in the various chapters of the American Institute
of Banking. The subject matter presented herewith con-
sists in the main of a series of lectures delivered to a class
of younger men in New York Chapter. This book is in-
tended for the young man just entering the bank from
school and too new in the business to be able to undertake
the regular Institute study course. No other text book so
far as the writer knows is designed to meet this particular
need. The method of treatment is to explain the underlying
principles not only of bank accounting, but of the everyday
transactions that are common to all forms of banking. The
danger of the small bank is that it tends to narrow the
horizon of the young banker, while in the large bank the
beginner too often regards his institution as something
inhuman that moves along as entirely independent of him
or his associates as if it were a part of the solar system.
Another difficulty confronting the beginner is that when he
does feel the need of instruction he is apt to fall a victim to
the advice of well-meaning but untrained "instructors,"
who attempt to teach him banking by explaining the use of
accounting forms.

The two most prevalent misconceptions that tend to
restrict banking progress are first, that the bank clerk or



PREFACE

officer needs no other technical education than the experience
gained at his own desk, and as a result of the first idea, that
banking is a matter of accounting systems only. It is the
hope of the author that this little volume in spite of its
manifest limitations may be the means of assisting the boy
through that very trying period, his first year in a banking
house.

O. H. W.



"A successful banker is composed of about one-fifth
accountant, two-fifths lawyer, three-fifths political economist,
and four-fifths gentleman and scholar total ten-fifths
double size. Any smaller person may be a pawnbroker
or a promoter, but not a banker." Geo. E. Allen.



Elementary Banking

Banking as a Vocation

Every young man who goes into a bank, whether from the
schoolroom or from some other business, should make up
his mind very early that the work is not easy and the only
way he may succeed is to begin a systematic study of banking
as a science. This study, supplemented by diligent attention
to his work, will secure to him that success which is the only
sure kind of success, built upon his own ability rather
than upon the favor of his superior officers. Those personal
qualities such as honesty, courtesy, cleanliness and punc-
tuality, which have been impressed upon him as abstract
virtues in the everyday walks of life, in the banking business
become concrete necessities.

Physical strength, endurance, a clear eye, speed and
stamina are sought after by every manly youth, whatever
his occupation, but to the professional ball player they are
his stock in trade. So it is with banking. The commonest
daily transactions are of such a nature that virtues which
we would admire in the average individual are absolutely
necessary to the banker, whether he be officer or clerk.
The bank will be successful to the extent that its depositors
and other clients have confidence in it and those associated
with it, not only as regards their judgment in business
matters, but also their moral character. It, therefore, be-
comes a part of the education of the bank man to fix in his
mind certain rules of conduct which may be here set down
as a sort of ten commandments.

1. Keep clean physically, mentally and morally.

2. Cultivate a wide acquaintance, but choose your
associates from among those known to be of good character.

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ELEMENTARY BANKING

3. Live within your income and look upon money saved
as a part of your fixed expenses.

4. Be exact in all your dealings and always keep your
word.

5. Pay your debts and meet your obligations when they
are due.

6. Pay strict attention to orders and obey them implicitly.

7. Show a willingness to do more, rather than less, than
is expected of you.

8. Know your job and don't be content with less than
all there is to know about it.

9. Spend a part of each year in systematic study and
reading on banking subjects.

10. Keep in strict confidence every transaction of the
bank of whatever nature.

There are many other such rules that might be suggested,
but these must not be passed over as mere platitudes.
Nearly all large financial institutions have similar instruc-
tions prominently posted and any infraction of the regulations
is met with immediate dismissal. One large Canadian
bank' hands to each employee a bound copy of rules that
are to govern his conduct in all matters.

The next important fact that must be accepted is that
banking is a profession based upon scientific data. The
physician cannot hope to learn medicine through personal
experience and experiment upon his own body in curing all
the diseases and disasters that flesh is heir to. Many
bankers, and especially the younger and inexperienced,
deceive themselves with the idea that they can learn all
they need to know by close application to their own im-
mediate desks, counters and communities: Just as the
science of surgery and medicine is based upon the natural
laws of the human body, so the science of banking grows

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ELEMENTARY BANKING

out of economic laws that are at the base of all business
activity.

The young man who has adopted banking as a career,
must decide, therefore, what his attitude will be toward
these conditions which he can not escape although they can
be mastered. Every town, if indeed not every bank, can
furnish at least one example of the man who thought other-
wise until it was too late. It is not to be imagined that by
following a certain formula of conduct any clerk may rise
by regular stages until he will become cashier or president
of his bank. By increasing his own efficiency, he uncon-
sciously is elevating banking standards, which in turn, will
react upon him to his lasting benefit. Every man in the
bank should be a banker, although in different degrees of
development, whether he be messenger or chairman of the
board of directors.

In the thickly settled and highly developed countries of
Europe, it is said that it is the aim of all those who work
for salaries or wages, not to try to secure better positions,
but to hold what they already have. Fortunately, we are
not confronted with this condition in America, but we are
fast approaching it. Efficiency will ultimately determine
every man's status whether he be banker or bricklayer.



Wealth and Money

Banks are institutions with a threefold relation to money;
they receive money on deposit, they loan money and they
issue money. There are two additional functions closely
related to the others, if not identical with them; banks
borrow money and invest money. It may be added that
banks also transfer money, but this applies to credit rather
than to money. In the popular mind and in actual practice
banks are identified with the use of money to such an extent
that it is impossible to get a clear conception of banking
functions without some knowledge of money. This involves
study of economic laws which, as we have intimated, are
the forces that control banking just as natural laws govern
engineering, medicine, navigation or other sciences.

All our modern complicated systems of commerce, trade
and business in general grow out of the simple fact that man
has certain wants which must be satisfied. He must be
fed, clothed and housed. These are the primary wants.
After them come education, religion and social needs and
so on from the sheer necessities of life, to the luxuries. The
predominant characteristic of human wants is that they are
unlimited; each want satisfied leads to another and in the
effort to secure what we need, habits are formed which, in
turn, fix standards of living for men and nations.

The term used to define things that satisfy wants is
wealth, which consists of anything that ministers to our
pleasure or happiness and serves to keep away pain or
discomfort. Three factors enter into the creation of wealth:
land, labor and capital. The first includes the surface of
the earth and all that is above or below it, in short, land is
natural resources. The second factor is man himself, who
by the application of his strength and skill converts the raw
material of the field, the forest or the mine into such form

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ELEMENTARY BANKING

that he can make use of the wealth thus created. This is
labor. The third factor is capital.

Of all economic terms in common use, the three most
generally confused are capital, wealth and money. They are
not by any means synonymous. We have seen, first, what
wealth is, and we have learned that there are three factors
that go to produce it. The first two produce directly, while
capital produces indirectly through the other two. Capital
is wealth that works in the production of more wealth. For
example, the miner applies his labor to the vein of coal and
produces wealth in the form of fuel. He uses a pick and
other implements; a track is built into the mine over which
cars are hauled by a small compressed-air motor; at the
mouth of the shaft is an elevator operated by an engine and
other machinery. These implements, tools, machinery, etc.,
are capital. If the capital of the mine is $100,000, it means
that this machinery cost that amount of money. The money
itself is gone into other hands in the process of circulation.
In the banking business, money is the raw material so to
speak, so that the terms capital and money are nearly
synonymous as applied to banks. How capital arises will
be discussed later.

An object is said to have utility when it satisfies a want.
Value exists, however, only when an effort or sacrifice of
some sort is required to secure the object having utility.
The value, therefore, depends largely on the extent or degree
of the sacrifice necessary to obtain use of the thing desired.
Let us suppose a man owns a farm in one corner of which
he finds a hard, black stony deposit not useful for anything
so far as he can discover. A neighbor, upon experiment,
learns that the black stones will burn and so possess utility.
Thereupon he gives the man who owns the coal some of his
wheat in exchange for the fuel and thus the coal becomes
valuable. It is power of exchange that bestows value.

9



ELEMENTARY BANKING

Thus a thing may be very useful, as for example, water, but
of no value unless it can be exchanged for something else.

Exchange is the process of giving and taking one thing
for another. It is not necessary for each of us to produce
for ourselves all the things that we need. The farmer
raises potatoes, but he does not need to make his own
shoes. He may exchange his potatoes with a shoemaker
for a pair of boots. But this would be a clumsy process
since each one who had anything to trade would need to
find someone who was willing to exchange for something
else that was wanted. Therefore, a medium of exchange
becomes necessary and this medium of exchange we call
money. Money may be anything that the producer will
accept in exchange for his product, but it must have value
in itself or else we will not be able to exchange our money
for other goods. It must be something that does not exist
in too abundant quantity else it will require no sacrifice to
secure it and it will, therefore, lose its value. It must be
easily recognized or else it may be counterfeited and so there
will be no confidence in it. It must contain large value in
small bulk, or it will not be convenient for use. It must be
durable, so that it can be stored up for future use. Finally,
it must be of a material that will not be destroyed, by being
divided and redivided, which is necessary since the same
quantity or values will not always be offered in exchange.
There is but one material that possesses all these qualities
and that is gold. Hence, by a long process of experiments
and eliminations, all large nations have come to the con-
viction that gold is the ideal medium of exchange. In order
to prevent any controversy that might arise between the
buyer and seller as to the purity or weight of the gold offered
in exchange, the government coins it in metal discs and
then by a stamp, certifies as to the quantity and quality of
the bullion contents. This is called coinage.

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ELEMENTARY BANKING

Not all money is gold, however. There are three kinds
in all, standard money, which is usually gold; credit money,
generally made of paper; and token money, which is the
small change, the bullion contents of which are less than the
coin value. In the United States there are more varieties
of these three kinds of money in circulation than in any
other country. We have gold coins ; gold certificates, which
are practically the same thing; standard silver dollars and
silver certificates; fractional silver; nickels and cents;
Treasury notes, which were issued to purchase silver bullion
and are then redeemed when presented, the bullion having
been coined; U. S. notes, or "greenbacks," which are called
"fiat" money because the government forces their circula-
tion; and bank notes. For some years to come, we will
have three kinds of bank notes in circulation; the national
bank notes, Federal reserve notes, and the notes issued by
the Federal reserve banks, secured by U. S. bonds which,
beginning Dec. 23, 1915, they may buy from national banks.

In addition to being used as a medium of exchange,
money has two other uses. It is used as a standard of
value and as a basis of deferred payments or credit. The
value of every form of wealth is quoted in terms of money
and in this sense money is used as a standard of value.
This use of money causes many people to confuse money
with wealth. The third use of money, as a basis of credit,
or payments to be made at a later date f is an important one
from a banking viewpoint because it is this use of money
that is involved in bank deposits. Bank deposits, for ex-
ample, may be set down for the entire country at about 18
billions of dollars (1915), whereas there are less than 4
billions of money, the medium of exchange in the United
States.

It is not necessary that there should be as much money
as is represented by other forms of wealth. Using money

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ELEMENTARY BANKING

as a standard of value, we may say a certain building is
worth $10,000, an automobile, $1,000, your watch, $20, your
hat, $2, and so on. But since these things are not pur-
chased by each of us every day, the nation as a whole will
need only as much money as is required to make exchanges.
And so with bank deposits. If every depositor wished to
withdraw his balance in cash daily, there could not be a
larger amount of bank deposits represented by a money
value, than there was actual money in the country. Panics
are due to the fact that people confuse values with money
and when everyone tries to "sell" or convert his standard-
of-value money and basis-of-credit money into medium-of-
exchange money, there isn't enough to go around. Banking
comes to the rescue in such a situation with the note-issuing
function which will be explained later.

Through the use of checks and banking mechanism, bank
deposits are also a form of credit money. If A wishes to
pay B ten dollars, both having bank accounts, A writes his
check or order upon his bank for that amount and gives it
to B, who deposits the check to his credit. No actual money
changes hands, the entire transaction consisting of debit
and credit book entries. Here again we see why it is not
necessary to have as much medium of exchange money as
we have bank deposits.



12



Why Banks are Necessary

We have discussed the relation of banks to money in the
previous chapter. We have seen how money is necessary
to industrial and commercial progress, not because of its
own intrinsic worth but because it makes exchange possible.
We can next take up a consideration of the part that banks
play in the development of industry and wealth. Of all the
great institutions that serve the people, such as schools and
colleges, churches, railroads, the postoffice, newspapers and
banks, the public knows least about banks. To the average
person, they are places fitted up with vaults where savings
may be stored, where clerks keep records of the balances
which the bank will pay back, plus the interest that in some
mysterious way has accumulated. And too often the bank
clerk is content to think of the bank only as an institution
that requires him to report at a certain hour in the morning,
post figures in books, the real nature of which he does not
understand, and then go home at night after he has struck
a balance. The bank clerk ought to know why banks are
necessary and how important are their functions, not only
because it will enable him to work more intelligently, and
with greater interest in his work, but he will also be able to
explain the nature of banking to other people, many of whom
distrust banks because they do not understand them.

Banks owe their origin to the simple law of nature that
everything that lives grows and expands.

Nature is very generous and has so arranged her scheme
of production and increase that every one, in fact every
living thing, has in him or it the power to produce more than
is needed for immediate consumption to sustain life. The
bee, the ant and the squirrel store up surplus summer food
for the winter; the mountain uplands and valleys nourish
the deer and other wild creatures with an abundance each

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ELEMENTARY BANKING

season renews. And man, in a civilized state of industry,
can through his labor in any direction, produce more than
he needs for his own sustenance. Perhaps it is nature's
plan that he shall produce in his youth what he must consume
in his old age.

With the development of exchange and the use of money
this power to create surplus wealth is harnessed. The sur-
plus wealth, converted into money, is laid aside deposited
in banks for future consumption and thus capital, the third
factor of production, has its origin. Wealth instead of being
allowed to lie idle, is set to work to produce more wealth,
which is good, since wealth is anything that adds to human
welfare. Let us see how the bank sets money the result
of work to work in turn.

Without exchange, when man was in the savage or pas-
toral stage, he produced for himself everything he consumed.
As soon as he began to confine his labor to one particular
thing which he would sell or exchange when completed, he
began to feel the need of credit, that is, the power to borrow
from his neighbor for sustenance until he was able to use
or sell his own product. Of course, he would borrow not
the actual goods, but the money to purchase them. Under
modern conditions, money is borrowed and loaned for hun-
dreds of purposes and in many different ways, but the
underlying principle is always the same.

For example, the farmer plants his crop in the spring;
he must buy seeds, pay for labor and keep his family in food
and clothing until the fall when his harvest ripens and can
be sold. The store-keeper or merchant fills his shelves with
endless variety of goods, part of which he has bought with
his own capital and part with money he has borrowed to be
paid back when his goods are sold. The builder erects a
dwelling or larger edifice for which he must buy labor and
material. He will need money until his contract is com-

14



ELEMENTARY BANKING

pleted. Railroads are built, mines developed, crops must be
moved, new enterprises financed and so on without limit,
borrowed money making possible all these vast facilities that
are indispensable to modern civilization.

These conditions would be as nearly impossible without
banks as would be an efficient exchange system without
money. If everyone who needed to borrow money was
forced to search about for someone who had just the right
amount to loan, there wouldn't be much business. Fur-
thermore, those who had money to loan would need to be
acquainted in each case with the borrower's ability to repay
the debt else there would be loss and ultimate ruin.

Banks are storehouses where the equivalent of surplus
wealth money may be accumulated and loaned for the
purpose of creating more wealth. Thus it will be seen that
still another virtue, thrift, which we are accustomed to urge
upon men as bringing its own reward, is after all a cold
business necessity. Men must work, produce surplus
wealth, save a part of it or there will be no storehouse of
money and credit which is so essential to the production
of both the necessities and luxuries of life. The humble
wage earner who puts aside even a small fraction of his
income is doing more than fortify himself against the
future. His accumulated savings added to those of all
other classes, rich and poor, placed in banks and by them
loaned out, make possible the industry that gives work and
sustenance to all.

There are many ways in which money is deposited and
loaned or invested. For this reason, there are several dif-
ferent kinds of banks. The same principles are involved
in each case, however, and the young bank man who would
become a banker is cautioned against the common error of
thinking that each kind of bank is peculiar unto itself and
so requiring a different course of study.

15



Classes of Banks

It is conceivable that one kind of bank could meet the
banking needs of all the people, and in fact such a condition
is approximated in a little one-bank town where the institu-
tion may be either a state or national bank, a savings banl:
or a trust company. Sometimes it is a private bank. Gen-
erally speaking, however, the so-called commercial bank is
the variety to be found where there is but a single bank.
Similarly, in larger cities, we find trust companies which,
when the state laws do not contravene, perform practically
every financial service except that of note issue.

Banks are generally classified as follows: Commercial
banks (either national or state), trust companies, savings
banks and private banks. The building and loan associa-
tion is, in principle, a banking organization and some forms
of life insurance are closely allied to banking. Each has its
particular specialty or function which characterizes it. The
fact that there are these different groups, instead of one
general kind of bank, is due partly to natural development
and partly to design. Since all banking in principle is
identical and governed by the same economic laws, it is not
surprising to note the tendency in legislation to bring them
all closer together. For example, the Federal Reserve Act
provides that trust companies may take out national charters
under certain conditions, while at the same time, national
banks, when not in contravention with state laws may act
in a "fiduciary capacity," that is, perform functions usually
limited to trust companies. The right of both commercial
banks and trust companies to accept savings deposits is
universally conceded. They frequently conduct bond de-
partments, thus encroaching upon what was formerly the
especial field of the private banker who is usually an "in-
vestment banker." The private banker, in turn, very fre-

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ELEMENTARY BANKING

quently does a large commercial business and many states
are revising their banking laws, which will bring him under
the direct supervision of the banking department. The
conclusion, therefore, is that although the specialist is more
in demand than ever, every banker should be trained along
broad lines.

The close relation between banks of different kinds will


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