There is no settled practice among American banks regarding the payment of interest on individual demand deposits. Unless the bank and the depositor enter into a special agreement, a demand deposit, by implication, draws no interest. An analysis of this subject in New York State in 1918 disclosed the fact that most commercial banks and trust companies allowed no interest on checking accounts. In many sections of the country where there is keen competition among local banks, they frequently grant such allowances as inducements to win new deposits or to maintain old accounts. Banks often find it necessary to grant interest to depositors who might otherwise keep their balances down to a minimum sufficient only for their checking needs. Rates as high as 5 per cent have been offered, with the result that institutions have at times been finally forced into insolvency. In order to restrain such unwholesome competition, clearing-house associations have frequently established regulations limiting the maximum rate which member banks are permitted to grant on checking accounts. This rate usually varies from 2 to 2 1/4 per cent per annum. In fact, the rate should not be constant in amount, but rather should vary with the condition of the money market. As the discount rate rises and falls, a consequent adjustment should be made in the interest allowed on bank deposits.

Where interest is allowed the method of computation depends upon such factors as time, balance, and rate. Interest may be allowed over a period of time covering half or quarter of a year, but it is more customary to reckon on the balance deposited within a month. The balance thus used as a basis for computation may be the lowest amount which has been credited to the customer's account on any one day within the month. This plan is rather inequitable from the viewpoint of the depositor, who may have allowed his account to run low on this particular day because of heavy disbursements. A more satisfactory basis of reckoning is the average daily amount maintained within the month. The more exact method is to calculate interest on the customer's balances separately for each day of the month. As checking accounts are quite active and are continually changing in amount, interest computation is no little task for the book-keeping department. An added difficulty is encountered because interest cannot be calculated merely on the gross balance credited to the customer on the books of the bank. This amount cannot be regarded as the customer's net cash deposits, for it includes all checks, drafts, and other items which have been credited but are still uncollected and so are not yet available to the bank for the purpose of making loans. The true interest balance for any day may be expressed in a formula which reads as follows: interest balance = net cash balance at the opening of the day + net cash and cash item deposits credited to the account - checkings and other withdrawals debited during the day.

The rate allowed on a balance is fixed by special agreement between depositor and bank, but it usually depends upon such factors as amount, activity, and composition of balance. A large city bank seldom grants interest on balances which fall below an average daily amount of one thousand dollars, for the overhead cost of a small account is about the same as of a large balance. An account which remains dormant may command an interest allowance, while little can be granted by a bank on an active balance against which checks are continually drawn. A bank must also consider the relative proportion of cash in an account as compared with the amount derived from loans granted to the customer.