The bank's object must be primarily that of insuring its own liquidity and solvency at the same time that it distributes its funds fairly and equitably among the different elements in its clientele. First of all, it needs to analyze its liabilities in a careful and scientific manner. We may assume that the bank has, let us say, $250,000 of capital and that it has succeeded in developing a deposit line of, say, $750,000. Analysis shows that of this deposit line $250,000 is in time deposits or certificates of deposit which move very slowly and are practically continuously renewed. This leaves $500,000 of demand deposits, and a study of them makes it reasonably sure that there will be a rapid turnover only, say, in the spring and again in the autumn. The bank is therefore in position first of all to invest its funds in assets of fairly long and non-liquid character corresponding to its $250,000 of inactive deposits. Perhaps it may carry a part of this amount in real-estate mortgages or it may think well to invest a portion in sound bonds or government obligations. It thus has as the basis of its portfolio some long-term securities, part of which (the real-estate securities) will not mature for a great while and hence are not liquid, while other portions (government securities) will not mature for a long time, but are very salable and hence may be realized in case of necessity. These may be considered Section 1 of its portfolio.

Behind the demand-deposit line the banker probably has an approximately equal amount of current notes and other relatively short-term obligations. These may run from a few days up to six months or more, and it should be the effort of the banker first of all to arrange their maturities in such a way as to have them fall due steadily and successively, so as to provide him with the cash he needs to meet the current drafts upon him. For instance, if he has found that during the months of March and April of each year, and again during the months of September and October, he is obliged to make very heavy outlays, his depositors drawing on him and reducing their deposits correspondingly in order that they may liquidate indebtedness for goods, or may transfer their funds to other places, he evidently needs to have maturities of fully equal amount fall due at about that time. This is for the purpose of providing him with cash in order that he need not reduce his reserve below its normal or average level.

Section 2 of his portfolio may, therefore, be conceived of as consisting of fairly long-term loans which, however, are unquestionably payable at maturity and which have been "bunched" so that their maturities will fall due in such a way as to meet the demands which are brought to bear upon the banker at the "peak" periods.

The banker, however, has to reckon upon a regular steady flow of funds out of the bank. He is providing cash for the community, and, while he expects about an equal amount of income, he cannot be absolutely sure of it. He will therefore endeavor to carry enough paper falling due from day to day or from week to week to enable him, if he finds it necessary, to reduce his portfolio by failing to make new loans or refusing to renew old ones, and thus get in the cash which he needs to meet the regularly recurring demands to which reference has just been made. This element of relatively short-time paper, which probably consists in his case primarily of the obligations of local merchants, may be regarded as Section 3 of his portfolio.

The banker, however, will not have been in business very long before he will find that a good many of the assets in Sections 1, 2, and 3 of his portfolio have a purely local value and market. For instance, the note of A, secured by a mortgage on his farm, could be sold to some local investor if one could be found, but it cannot be disposed of elsewhere. The note of B, a local merchant, may have been made in such a way as to have been rediscountable at the Federal Reserve bank of his district, but on the other hand it may not have been made thus "eligible." The banker in lending to B and to others in a like situation will probably endeavor to have their obligations made, so far as possible, on a rediscountable basis, but his efforts to bring that about will be only partially successful. He probably will come to the conclusion, therefore, that it is desirable for him to have in his portfolio an element of what is called "purchased paper," which means paper that he has bought outside of his own immediate community and which represents obligations of large concerns to whom he has no direct or personal relationship, and which, therefore, can be collected presumably without effort on the part of their makers to obtain extensions.

This element of paper, which we may designate as Section 4 of the portfolio, is obtained through note brokers or dealers in commercial paper in the financial sections of the country. How great it shall be is always a matter of some doubt, depending in a measure upon the extent to which the banker can actually spare funds from his community. The banker, moreover, will find that he is frequently called upon to furnish exchange, and while he may do this through his Federal Reserve bank so far as the demand is of a domestic nature, the local factory to which reference has already been made may occasionally want a draft on some foreign country in order to purchase goods from abroad. To supply such demands the banker must either open accounts abroad or else operate through another bank which has done so, and in ordinary circumstances the latter will be the course pursued by him. He will maintain an account with, let us say, a New York bank which has foreign connections, and by arrangement with this bank he will sell exchange drawn upon those foreign connections. He may also discount the paper drawn by the local factory upon foreign buyers, and thus he may establish a small element in his portfolio which can be designated as Section 5, consisting of actual documentary bills of exchange.

If it be desired to complete the classification, we may speak of his balance with the Federal Reserve bank and with a correspondent bank or banks in neighboring cities as Section 6 of the portfolio, consisting of claims on other banks part of which are reserve and part of which, although not technically reserve, can easily be converted into that class.