This section is from the "Practical Banking" book, by Albert S. Bolles.
The ticklers of a bank are books which show in detail the debts due, prospectively to a bank, and the days of payment. The aggregate footing of the ticklers will accordingly exhibit the amount of loans not yet matured, and inductively the amount that is past due. The information which relates to the amount past due is often given reluctantly, but a knowledge of it is vastly important in the proper supervision of a bank; and when tested by the ticklers, the information cannot well be deceptious, or evaded. In knowing the amount of past due loans, the board can pretty accurately conjecture the character of the bank's customers. Such loans should be satisfactorily explained by the manager, and the means he is taking in their collection. The like may be said of over-drafts,* which are rarely permitted by American bankers, though in England they seem to constitute one of the regular modes of advancing money to customers. Whether they shall be permitted is within the proper discretion of the board, and should they occur, inadvertently, the occurrence ought to be manifested to the board. An exemption from losses is impracticable in long-continued operations; yet all grades of intellect are procurable, hence the retention of an officer is unwise when his results are unsatisfactory. Every man can adduce excuses which no person may be able to controvert; but when miscarriages are frequent, or important, the board should assume that something wrong exists and eludes detection, rather than that nature deviates from her accustomed processes, making vigilance unsafe, and skill unprofitable. The examination of vaults, and counting of money, rarely reveal defalcations, till the defaulter no longer endeavors to conceal his delinquencies. The counting is not pernicious, if the board choose to amuse their vigilance therewith; but we have not attempted to designate modes in which frauds are detectable; the ingenuity of concealment being naturally as great as the ingenuity of detection. Besides, the detection of skillful frauds requires a greater familiarity with banking accounts, and a more laborious inspection of bank books, than can ordinarily be expected of bank directors. For the detection of frauds, therefore, the best practical reliance is a supervision, in the way we have indicated, of the bank's business, and a familiar observation of the general conduct, habits and expenses of the manager, as well as of all the subordinate officers; the latter, however, are more especially within the duties of the manager. The ruin of a bank, by fraud, commences usually in the personal embarrassment of the delinquent, contracted by improper self-indulgences, or the assumption of secret hazards. Men rarely plunder till their conduct is otherwise disorganized, external symptoms of which observant directors may discover. A bank officer, therefore (and the higher his official position the more urgent the rule), who will not keep disengaged from all suretyship and from business that may render him pecuniarily necessitous, is as unfit to be intrusted with a bank, as a nurse who frequents small-pox hospitals, is unfit to be trusted with unvaccinated children. In menageries, animals are kept peaceful by preventing the cravings of hunger; bank executives require a similar assuasive; not by glutting them with great salaries, but by preserving them from expenditures unsuited to their income, and from pecuniary liabilities. A bank manager of undoubted wealth presents therein the best attainable guaranty against misconduct, and is entitled to greater freedom of action in his personal transactions than officers of ordinary circumstances; still we will terminate this first part of our undertaking, by venturing the advice, that when a man wants to be more than a bank manager, especially when he wants to employ much more than his own funds, he had better cease from occupying a station which he is too ambitious, or too avaricious to fill under restraints, which experience shows are alone safe.
* The term "overdraft" means that the depositor has drawn for more money than the balance to his credit.
We shall now consider the function performed by a bank in discounting paper. First, however,* it is necessary to say a few words respecting capital, since it is from the peculiar use made of capital, in the production and distribution of wealth, that the necessity for banks arises.
Capital used in production, is either fixed or floating. Fixed capital is invested in lands, buildings, machinery, mines, canals, railways and their equipments, telegraphs, &c, all these being used in the creation and distribution of wealth. Floating capital is invested in the things produced, whether raw materials, or articles completed, or in process of completion. It also pays for the labor and other service (wages and salaries) necessary to production and to the distribution of products. The processes of production are very numerous and distinct. Each producer, when he has completed his part of these processes, desires to sell his product, realize his profit, and begin again with fresh materials. The quicker he can do this, and the oftener he can repeat it, the greater will be his profit; for, in a normal state of things, each repetition brings a profit. All the floating capital which he requires is enough to enable him to do this easily, and without friction. If each article were sold for cash, as soon as completed, and no store of raw materials had to be kept in excess of immediate wants, the minimum of floating capital would be attained; and if the fairly estimated profit were always realized, the wealth of the producer would be constantly increasing, and his business might either be enlarged, or a surplus safely withdrawn for outside uses. But immediate sale of products by the producer, and immediate payment for them by the buyer, are practically impossible. A long process of digestion must be gone through with before ultimate payment and the final payer (who is the consumer) are reached; and consequently the producer cannot immediately sell, and the buyer cannot immediately pay. Markets may be dull, or overstocked, and buyers may be either slow to come forward, or come without ready money. Hence, the producer requires additional floating capital to carry his products till sold; and the buyer requires credit till he can get the means to pay for the property bought by its resale. But a sale on credit is to the producer, so far as the use of capital is concerned, precisely like carrying the property without sale. Till he gets back the value of his production, he must depend on other means to carry on his business. He must find the necessary capital elsewhere, or his production stops till payment by the buyer enables him to start again. But a healthy business cannot stop; it must go on constantly and evenly, if the highest economy is to be attained. Stoppage means idle factories, rusting machinery, unemployed workmen. The friction and loss incident to stopping and starting would eat up a large profit, and would destroy the even current of production upon which stability of prices largely depends. The producer cannot stop; he must from some source, get the money to go on with, and fortunately his business furnishes the basis on which to get it. He must borrow money on the faith of the property sold. He cannot, it is true, pledge the property specifically, for he has sold it and parted with possession, and hence, I say, he must borrow on the faith and not on the pledge of it. But though he cannot pledge the property itself, he pledges what represents it, namely, the written promise of the buyer to pay the price of it at a fixed future date. In mercantile language, he gets the buyer's note or bill discounted, and here comes in the first legitimate function of the bank, a function which underlies all its operations, and is the touch-stone of the regularity of its business.