These notes are secured by collateral, that is, the public is secured against loss in the event of the failure of the bank, by a deposit of bonds placed with the Treasurer of the United States. This is called the currency principle of note issue. Nearly all other countries use bank notes issued under the banking principle, in which no collateral is put up and the notes are secured by the general assets of the bank. This is the more scientific principle, since the needs of trade, rather than the scarcity or abundance of bonds or other collateral security governs the elasticity of the issue.

Turning to the assets or resources of the bank, the first classification of items consists of the investments. These vary as to kind and ratio to the other figures of the statement as between different kinds of banks. They will also vary in the same kind of banks but located in different sections of the country. The commercial bank must keep its assets liquid; that is, constantly turning or moving because its depositors are making active use of their funds at all times. Loans and discounts, the largest investment item of the commercial bank, have fixed maturities and, therefore, the bank also buys bonds because they can be readily sold and converted into money in case of need. Bonds are sometimes called "secondary reserve" for this reason. Until the passage of the Federal Reserve Act, national banks were compelled to invest a certain proportion of their capital in government bonds. This provision grew out of the necessities imposed by the Civil War. At that time the credit of the government was at a low ebb and purchasers for bonds could not be found.

It is not amiss to pause a moment and take note of the scars that have been left upon our national life by the four years' war between the states. On the map there is the state of West Virginia; in every town and city, North and South, are noble monuments to commemorate the deeds of brave men; in the pages of history will live forever in solemn grandeur the figure of Abraham Lincoln; in the world of music there are the stirring strains of a hundred songs and battle hymns; and, coming down to the more sordid affairs of men, in our banking and currency systems we have the justly deplored "greenback," or U. S. note, which was forced into circulation at the time of the war, and the national banking system.

Before leaving this momentary digression, it is well to call the attention of the student to the experiences met with in connection with the issue of "greenbacks," or fiat money. When Congress first authorized their issue in 1862, to be used as money, they caused gold to go to a premium. It required at one time $258 of greenbacks to secure $100 of gold. They did not possess the qualities that good money must have, and it was not until the policy was adopted by the government of redeeming them in gold on demand that they approached par value. They illustrate the fact that man-made laws cannot upset economic laws any more than water can be made to run up hill by an act of legislation.

In some states trust companies are prohibited from discounting, that is, loaning money on promissory notes. This law is evaded by "purchasing" the notes outright, a distinction in law but with little difference in actual practice. Both trust companies and savings banks invest largely in bonds and mortgages. They are able to loan their money in this way because trust funds and savings deposits are not constantly turning; they are of the nature of long-time investments. Many states have laws which prescribe certain limitations governing the purchase of bonds. In such states bond issues are advertised as "legal investments" for savings banks and trust funds. In other words, the state protects the depositors by permitting their money to be loaned only in the safest securities. Good banking principles require that all banks should so loan or invest their funds that the loans are of different kinds and maturities follow each other regularly. If stress should occur, if an unusual number of depositors want their money, the bank will have loans coming due to meet the demands, and if these funds are not sufficient the bank can fall back on its "secondary reserve," that is, sell its bonds, which, if they are first class, will command a ready market.

The items "due from banks," "checks and cash items," "exchanges for the clearing house," are amounts due by other banks and are payable on demand. They may represent two different kinds of accounts, however. Amounts due from other banks may be checks in process of collection, that is, checks payable at other banks either in the city or elsewhere, which have been sent out for collection, or they may represent funds which have been collected, but which are on deposit with another bank - known as a "reserve agent" - and are subject to draft.

The cash items, actual money, usually classified as to kinds, are self-explanatory. This is the "till money" of the bank to care for currency needs. It is also the bank's reserve and it is based by law upon the amount of net (i. e., collected) deposits. The percentage of reserve required varies with the kind of bank, this being a natural result of the fact that one kind of bank will not have the same demands as another. This money represents the uninvested portion of the bank's funds.

The building, furniture and fixtures are carried as a resource, usually at a figure less than their actual cost. This is done not only as a margin of safety, but also because few banks would be able to sell their property at short notice for its full value. This item should, therefore, be given close scrutiny in determining the strength of the bank. Sometimes very strong banks "charge the item off" entirely out of surplus on the other side of the statement. Others do not own their buildings, but pay rent.