This section is from the "Practical Banking" book, by Albert S. Bolles.
As we have seen, the profits of banking are composed of interest on money—in other words, of interest, discount and exchange. The loans are called discounts, because the interest is paid in advance and deducted from the amount due to the borrower. But if a bank were to deduct seven dollars from a hundred dollar loan, payable a year after date, the bank would receive seven dollars for
a loan of only ninety-three dollars. If the bank paid the borrower $93.46, this sum at seven per cent, interest for a year would amount to a hundred dollars, the sum expressed in the note. Banks are permitted by law to deduct interest in advance in this manner, at the rate prescribed, without rendering themselves liable for usury The difference, therefore, between interest and discount in bank practice is, the former is a sum of money payable for the use of money at the end of a given term, while discount is the money reserved from another sum at the beginning of the term for which it is loaned.
When a bank discounts a note the interest is deducted at once, and the borrower receives credit for the balance.
The Offering Book, containing a record of the notes offered for discount, we have described elsewhere. The form of Offering Book, however, is not the same in all banks. Some dispense with the balance column, and some add another, showing the liquidations before the next discount day. Some banks enter in this book loans already made to the borrower so that directors may have before them, when they meet, all the essential facts necessary to transact their business intelligently.
Accepted paper is now taken by the discount clerk, who first examines the notes for filling and general character, and then "times" each note, i'. e., writes in pencil on the back the due date of the note. The notes are then entered in what is termed the " Dealers Discount Book," which usually is ruled to permit, first, the maker's name, then the endorser's, the place of payment, due date, and the number of days to run, discount, amount of exchange charged, and net proceeds. For the latter amount there is a separate column for each of the ledgers, so that all the amounts belonging to any one ledger appear only in one column. From this discount book the discount clerk makes his statement, and posts his ledger, or bill book, and his Ticklers. Before putting away the notes he "checks" them back on the "Ticklers." These "Ticklers" are very important books. Why they have been so called is scarcely known, but probably from the habit of ticking or checking off the entries. There is usually one tickler for each month in the year, and one or more pages for each day, with the pages on the left side reserved for notes payable in the city, and those on the opposite side for notes payable out of town. The total footings of these Ticklers will present the total amount of "Bills Discounted," and the proof of these total daily amounts is taken at least as often as once each month, and proved with the General Ledger.
There are discount ledgers, which are opened in the same manner as personal ledgers, but embrace the accounts only of customers who get notes discounted. They contain a record of every note discounted, the date of discount, the endorser or security therefor, and the time of maturity. They also show the liability of each customer as endorser for others on discounted paper. It is desirable to keep this record to guard against losses. If two dealers should exchange notes or endorsements and put them in the same bank, these books would bring the fact to light. They are placed on the directors' table on discount days.
From these ledgers the discount clerk ascertains the amount of discounts set down in the Offering Book. He keeps daily supervision over them, cancelling the paid notes as fast as they mature, by drawing a line across the figures without obliterating the record.
Some banks number their notes on the back and end with red ink, and file them in packets. A good many banks, however, do not number their notes, and are careful not to mar them, even by a pin hole, so that if, for any reason, they should wish to dispose of them, this could be done without the paper showing any indications of having been in the possession of a bank. For the same reason also, it is not desirable for a bank to have a note made payable to its own order. When thus made, it would appear on its face to be given in liquidation of an obligation of the maker to the bank. It is, therefore, desirable that notes be made to the maker's order, and endorsed to the bank if taken direct from him.
Notes are also transcribed on the Discount Ticklers; each note is under the date of its maturity, with a number and name of the payer and amount. The Ticklers, which, as previously explained, are books of monthly duration, continue to receive additions by new discounts until within a few days of the transpiring date. They are kept added in pencil until that time and are finally closed in ink.
In some banks notes are filed without number. Those of each day are kept in a separate packet, and the packets are arranged in a consecutive order of dates. This plan is regarded more convenient when there are very many notes.
The discount clerk has the possession of the greater part of bills receivable, in which the resources of the bank are invested. These are in his custody, are deposited by him at night in a compartment of the vault assigned to him, and taken out on the next morning by himself. If any of the officers wish to examine notes hey do so in his presence, or require him to show them. By this method his responsibility is kept distinct from that of the other clerks and officials.
The discount clerk is in frequent intercourse with the customers of the bank. The offerers apply to him after adjournment to find out what disposition has been made of their application. We are now speaking of the larger banks where such a clerk is employed. In a small bank the cashier may transact the entire business described in this chapter. When he appears at his desk to answer the questions of applicants on occasions when the money market is right, his duty is by no means a pleasant one. Customers press toward his gate at the earliest moment, to ascertain whether their offerings "have been accepted or rejected, and the letters A and R enable him to give a very short answer. When notes are rejected hey are returned to the offerer in the original envelope.
The discount clerk, as will be seen from the foregoing description of his duties, does not receive or pay out any money. It is not easy therefore for him to perpetrate a fraud on the bank. Gibons relates an instance which occurred in the second Bank of the United States. The discount clerk selected some notes after they had been discounted and filed away, which he thought would be east likely to be wanted before maturity, and through the help of an outsider, hypothecated them for a loan of money. When the time of maturity drew near he selected others of longer date, and substituted them for those first abstracted, which were restored to heir proper places in the files. The trick was discovered by the maker of one of the hypothecated notes, who called at the bank to ay it before maturity.
Sometimes a bank will rediscount a portion of its notes with other banks. It may desire to get possession of more funds, in order to pay the demands of depositors, or through fear of an increased demand. In other words, the loans which it may have made are transferred to another institution.
Discounted notes payable in other cities are transmitted by mail, d when advice of their payment is received a journal entry is made, charging the collecting bank and crediting "Bills Discounted" in the usual commercial form. Discount notes which are payable in other cities, are transmitted two or three weeks previous to their turity.