CHAPTER XIII

DEPOSITS AND DEPOSITORS

97. Kinds and sources of deposits. As previously stated the main function of the commercial bank is the buying of deposits and the selling of credit in the form of loans. Making loans through the purchase or discount of commercial paper is the chief business of the bank and the one that makes money for its owners, but the bank's loanable funds come mainly, not from its own capital, but from funds deposited by its customers. These funds also supply the basis for deposit currency with which the great bulk of our business exchanges and transactions are carried on.

Bank deposits are of two general kinds-special and general. Special deposits consist of money, bonds, jewels, anything of value left with the bank for safe-keeping. General deposits consist of money or the right to receive money. Legally the relation created between the bank and the customer by a general deposit is that of debtor and creditor. The bank in accepting the deposit contracts to pay the debt or any part of it on demand, or in the case of a time deposit on or after a stipulated time. On the other hand the title to a special deposit does not pass to the bank, but remains in the depositor. It has been held that a bank is bound to exercise only reasonable care in protecting a special deposit, the same care as in protecting its own securities; but greater care must be exercised if it accepts a consideration for keeping such deposits.

Many banks now provide safe deposit vaults in which boxes are rented to customers for the safe-keeping of securities, wills, deeds, jewels and other valuables. Not only is this a direct source of profit to the bank, but it also brings customers into touch with the bank and its officers and thus leads them to open savings and commercial accounts with these departments of the bank.

The general deposits of a bank come from various and varied sources. In these days every business man keeps an account at a bank. It provides credit facilities which he cannot do without. He deposits the cash received from day to day: "cash items," that is, checks, drafts and bills of exchange which the bank collects for him; and he sells to the bank promissory notes and acceptances, received in the course of business transactions and usually discounted and deposited to his credit. Deposits flow in from corporations of all kinds in the same way. Many persons who are not engaged in active business keep "accounts" at the bank. More and more, too, people of smaller means are finding it advantageous to deposit their salaries, wages, or other income and check upon their deposits in payment of their bills. Banks in the larger financial centers, especially in New York, get a large volume of deposits from banks in smaller cities. These "country" banks keep "accounts" in New York for two reasons: first, in order that they may meet the demands of their customers for bank drafts or "exchange;" second, because they cannot always lend their funds at home and the banks of the large centers pay them a small rate of interest. The banks of New York especially can afford to pay interest on "bankers' balances" as they can lend these funds on call to brokers and others engaged in stock transactions. Finally, many national banks receive deposits, temporary or permanent, from the United States Government. Banks receive deposits also from other public sources-state governments, municipalities and school districts.

Because a bank's loaning capacity, and consequently its earning power, depends largely upon its deposits, it is al

ways striving for more customers and larger deposits. In the better type of bank, however, close attention is given to the character of its customers and the probability of profit from their accounts. Usually a person wishing to open a general deposit account with a bank, unless he is personally known to the officers or is introduced and recommended by another customer of the bank, should present letters testifying to his character and financial reliability. In some banks, each new customer is required to fill out a blank giving his name and address, his business and its location, and the names of his sponsors. He writes his

signature in one or more books kept for the purpose or on a signature card which is filed so that his signature upon checks, notes and other instruments that will be presentel for payment may easily be verified.

98. Deposit ticket and pass book. The customer in making his deposit fills out a blank deposit ticket or slip furuished by the bank with the date and his name at the top. He enters separately the different kinds of funds he wishes to deposit-cash, each check or draft with the name of the bank on which drawn, money orders, interest coupons, etc., and foots up the total. The deposit slip, the deposit items and the customer's pass book, which is given to him at the time he opens his account, are handed in at the receiving teller's window. The teller counts the money, examines the checks, being careful to see that they are properly dated and indorsed, verifies the slip, and enters the total in the pass book, which is then returned to the customer. It should be explained, perhaps, that the pass book contains the bank's account with the customer, not his account with the bank, so that the sums deposited by him are entered on the debit side of his pass book as they are debits of the bank.

Formerly it was the common practice for depositors to leave their pass books at the bank from time to time to be balanced. Many banks have abandoned this practice, however, sending instead a monthly or periodic statement of the depositor's account. Where the former method is used the bank credits itself on the page opposite the deposits with all payments that have been made on the customer's checks and all charges to his account. Formerly, in writing up and balancing the pass book each check item was entered separately in the pass book. In this day of labor-saving devices the checks or vouchers are listed and added on the adding machine and only the total is entered, with a statement of the number of checks involved. The balance is then struck and the amount to the credit of the depositor is entered on the debit side of his pass book. The slip showing the separate check items and the total is returned with the pass book and the cancelled checks to the customer. The account thus balanced should be compared with the customer's own check book record and mistakes or discrepancies adjusted at once. Frequently a dis

crepancy does appear owing to the fact that checks drawn by the customer and mailed to creditors have not yet been returned to the bank. The cancelled checks should becarefully filed for future reference. A dispute may arise over the payment of some bill or obligation, and the cancelled check may be useful as a receipt showing that the disputed bill has been paid.

99. Interest on deposits.-As a general rule banks do not pay interest on general or demand deposits. Many trust companies, and in recent years commercial banks also, do allow a low rate of interest on daily balances where the average is above a certain minimum. Not a little controversy has arisen regarding the paying of interest on general deposits. The arguments for and against the practice may be briefly summarized.1

In favor of paying interest it is urged that the bank should share with the depositor the profits earned on his deposit. Since the deposits constitute the principal source of the bank's loanable funds and consequently profit, it is contended that the bank should share with the depositors a portion of the profits. Trust companies and private banks · pay interest on deposits; commercial banks must do likewise in order to get and hold them. Because the trust companies have for years paid interest on deposits, many of their accounts being inactive, many people have the habit of dividing their bank accounts, banking most of their funds with a trust company, and keeping with the commercial bank only such balances as are necessary for their daily business needs. To meet this competition of trust companies for deposits, commercial banks more and more find it necessary to pay interest. Again it is urged that since banks demand interest on their deposits kept in other banks, the customer should likewise receive interest for it is his deposits, or a portion of them, that the bank deposits with the correspondent bank.

Against paying interest on deposits it is claimed that if banks engage to pay interest they will take greater risks 1 Bolles: Money, Banking and Finance, p. 69,