The reduction in liabilities and increase in cash through the payment of maturing loans will not be secured unless the bank refrains from making new loans to an equivalent extent, and this course of action is frequently beset with serious obstacles. If a bank is to continue as a going concern engaged in a profitable business, it cannot entirely discontinue its lending operations. It holds its business depositors largely through its readiness at all times to furnish them a reasonable amount of accommodation. Moreover, in times of acute financial strain general loan contraction has invariably been found to be impossible. These are matters which will receive more detailed consideration in subsequent chapters.

To return, in conclusion, to the account given on p. 32; we have there among the liabilities certain sums classified as "surplus" and as "undivided profits." Taken together these sums represent the profits which have been made, but not divided among the stockholders, and which are therefore to be accounted for by the bank. The surplus is that portion of these profits which as a matter of policy it has been determined not to divide and pay over to the stockholders, but to retain in the business, as in fact, although not in name, an addition to the capital. The remaining portion, the undivided profits, is the fund from which, system by Samuel Hooper, Theory and Effects of Laws Regulating Specie in Banks, 1860. For the law itself, Acts of the Fifteenth Legislature of Louisiana, 1842, p. 34.

To illustrate what has been said in this chapter we will now suppose the bank, with its affairs standing as on page 32, to make the following operations: a. To add to its securities $20,000, by discount of three-months paper at six per cent., three fourths being provided for by increasing liabilities, and one fourth by the expenditure of cash. The account would then stand as follows:

b. To retrace its steps, by diminishing its "discounts" or holding of securities to the extent of $50,000, of which four fifths are paid to it by the surrender of demands for deposits to a like amount and one fifth in cash; to pay $1,250 for current expenses; and further to increase its reserve by the sale of bonds and stocks to the amount of $10,000. The following would then be the state of the account:

c. To sell $2,000 of its other assets for cash with a loss of $500; to make a semi-annual dividend of four per cent., of which one half is credited to stockholders who happen to be depositors also, and one half is paid in cash; to sell $4,000 of bonds at a profit of fifteen per cent.; and to carry $1,000 of its undivided profits to surplus. The account would then stand at the beginning of the new half-year as follows:

NOTE

It will be observed that in the present chapter the term "reserve" is used strictly as denoting the provision of cash which a bank keeps at command to meet its demand liabilities, - these being its liability for deposits in the case now under consideration, and for notes in cases to be taken up later. Balances with other banks, in particular those with central banking institutions, are also commonly regarded as a part of the reserve of a bank. It is in this sense that the term is now generally used in the discussion of banking questions in this country and in Eneland and in the national bank legislation of the United States. The term is used, however, with a different application on the Continent of Europe, and occasionally even in English-speaking countries. In the French and German legislation it is used constantly in the sense of "surplus," as in the acts concerning the Bank of France and the Reichsbank, and so also in those concerning Italian and Austrian banks. It is also occasionally used, as in the phrase "reserve capital," to denote the unpaid capital which shareholders in many English joint-stock banks are bound to contribute in case of need, as explained at the beginning of this chapter. In the present discussion the term is used solely in the restricted sense noted above.