This section is from the "The Science Of Wealth" book, by Amasa Walker.
Loans. — This item includes the sum total due the bank from its customers for discount and advances, and for which the banks hold notes or other obligations, payable at some future time; say, from one day to four or six months, as the case may be.
Stocks. — Banks are large purchasers of the various State and national stocks, and also those of towns, cities, railroad companies, &c. The whole amount so held is included in the term " stocks."
Real Estate. — A place of business being indispensable to the operations of banking, buildings are erected for such purposes. These, being often beyond the needs of the bank, are rented in part.
Other Investments. — A general term that includes all kinds of property the bank may hold, from necessity or choice, not embraced in any preceding title.
Notes of other Banks. — As banks, in the course of business, are constantly receiving each other's notes, they must necessarily have, in the aggregate, a large amount, which appear among their assets. Notes thus held in no essential particular affect the general character of the currency: they only concern the relations of the banks to each other. In their nature, they do not differ from other notes in circulation: they are held by corporations, instead of individuals. They would not assist a bank in meeting immediate demands, as they are not legal tender.
Cash Items. — Many banks have the practice of reckoning certain assets they hold as equivalent to cash, and class them as " cash items " in their returns. For example, a bank may hold a check upon another bank for a given sum, which, in its account with that bank, and for many other purposes, may be equally available for the time being, with money actually in hand. Checks drawn by individuals on other banks, foreign exchange, sight drafts, and the like, are often reckoned among these items. But, whatever their origin or character, they add in no degree to the strength of the currency. They may help the individual bank that holds them, as compared with the debtor banks, but not the general mass.
Reserved Profits. — Although no such item appears in the returns published by the national government, it is one of some importance. In most banks, it is customary to reserve a certain sum from the profits of each year, to ensure against unexpected losses or contingencies. In some cases, this reserve is large; in others, small. In Massachusetts, in 1863, the amount so reserved was nearly five millions, equal to eight per cent on the capital. This, while it does not in any way change the character of the currency, gives the bank greater ability to make loans. It is, for the time being, an increase of banking capital. It adds nothing to the convertibility of current notes.
With this explanation of the terms employed, we proceed to give such statistics of the banks of the United States as shall exhibit the character of the currency they issue.
The first point to be noticed is the aggregate capital of these banks, which we find to be $421,880,095, on the 1st of January, 1860. We have selected that point of time, because the country was then undisturbed, and the currency in its natural condition. This capital, as we have already explained, is the amount which the banks have at their command, and which it is their business to loan out to the public; and, let it be recollected, this is all which they can loan, except their own credit, issued in the form of bank-notes, or inscribed in their books as " deposits," in exchange for the notes of individuals or business firms and corporations.
The next point to be noticed is the aggregate of all the assets or property of these banks; and by ascertaining this, and subtracting therefrom the capital, as before stated, we shall find to what extent the banks have loaned their credit,
Showing the immediate Liabilities and immediate Resources of the Banks of the United States in 1860. and, of course, to what extent credit enters into the currency. The statistics are presented in the form of a diagram, as annexed. See Diagram No. 1.
From the foregoing, it will be seen that the whole property in possession of the banks was (Fig. 1) $887,789,762 From which deduct the aggregate capital (Fig. 2) . 421,880,095
Total credit issued by the banks.....$465,909,867
On this amount the banks were receiving interest, or income beyond that received for their actual capital. This " total credit" issued by the banks was —
It will be observed, that the " total credit" does not exactly correspond with the " total currency." This may be accounted for by the consideration that the item of " reserved profits," though given in the returns of some of the State banks, are not noticed in the returns made to the general government; so that, as those " profits " increase the actual capital of the banks, some unimportant discrepancies may be found in the accounts.
This remarkable difference, then, between the capital of the banks and their property in possession, is the first thing to be noticed in regard to the mixed-currency system, because it shows how it is that large profits may be made upon mixed-currency banking. Interest is obtained upon twice the amount of actual capital. This income, however, is not uniformly distributed among the banks acting under the system. Some obtain more; others, less.