7. How A Bank Can Make A Profit On Them

The reader may wonder how, if all demand deposits are payable on demand, they can be converted into a great source of profit. The answer is, although they are thus payable, a bank takes the chances of such a demand and lends the larger portion of them, either on demand or for short periods of time, and receives interest thereon. And this constitutes the chief peculiarity of the banking busi ness. Yet the risk is not so great as the above statement might lead one to believe, for the reason that depositors do never intend to draw out all their deposits unless under exceptional circumstances. On the contrary, they generally seek to preserve a very considerable and fairly uniform balance; and a depositor who should not observe this principle, - who should deposit a large sum to-day and draw out nearly all to-morrow, should deposit checks and draw against them before the money was collected, and should do these things constantly, - would be told by the president or cashier after a time that his account was not worth having. This, however, is not the course of depositors generally. They seek to maintain a regular deposit, and this is especially true of larger depositors. Thus banks come to have a large fund, a reservoir which, though as fluid as water, preserves nearly the same level. Knowing this from long experience, a bank is perfectly safe in lending a large portion.

8. Whence Do Deposits Flow Into A Bank?

Every business man keeps an account with a bank. He needs the facilities it affords. To discharge indebtedness always by the payment of money would be an awkward way of transacting business. A merchant deposits the money paid to him, also the checks he receives, which are collected for him by the bank. Many possessors of wealth who are not engaged in business do the same thing. It is more convenient and safer to deposit their income and pay it out by check than to make any other temporary disposition of it. All corporations also have accounts with banks. Finally persons who possess smaller means are getting more and more in the way of depositing what they receive and checking it out in payment of their debts.

Sometimes a depositor has a somewhat costly account to keep because he puts into his bank a large number of small checks, each of which requires just as much bookkeeping and other attention as large deposits. Consider a newspaper with a large subscription list, in which payment is made chiefly by checks; or a life insurance company with its thousands of small checks received for the payment of premiums on policies. Are such accounts worth having? The newspaper or insurance company makes the account desirable by keeping a large balance in the bank as a mode of payment for doing the business. The banks in the large cities, especially in New York, get a large amount of deposits from banks in the country. Almost every bank and banker in other places has an account with a bank in that city. Banks outside New York keep deposits there for two reasons : first, in order to draw against them; second, because it can not always lend its funds at home. As a New York bank can profitably lend them, it is willing to pay something, perhaps two per cent or more, for the use of them. It so happens that the banks there can lend money when banks in other places can not; for a large class of speculators live, or try to live, by speculating, who, like gamblers in all countries and ages, are willing to try their fortunes so long as they Can borrow money, and the New York banks lend to them.