So far as developed in the preceding sections, the operations of White, the bank, might result in a capital statement such as the following:

Assets

Loans and Discounts.......... $304,395

Cash:

Gold And Silver

Dollars.......... $22,104

Government Paper

Money.......... 3,033

Subsidiary Silver... 273

Minor Coins....... _____15 25,425

Investments.................. 68,945 $398,765

Liabilities

Capital...................... $100,000

Surplus..................... 50,000

Undivided Profits............ 10,323

Deposits.................... 218,442

Bank Notes Outstanding....... 20,000 $398,765

It is now proposed to explain certain other simple but typical operations, and indicate their effects upon the bank's statement.

The accounts entitled "Due from Banks" and "Due to Banks " arise because the bank finds it expedient to open accounts with other banks, and to deposit certain of its funds with them. These depository banks are called "correspondents." Such accounts serve among others the following purposes:

1. They enable the bank to sell drafts against this distant metropolitan correspondent and charge exchange for the service.

2. The banks may arrange mutually to act as collecting agent one for the other, and possibly charge for the service.

3. In time of stress the local bank can count on accommodation from the metropolitan correspondent.

4. The correspondent may furnish special services for the local bank, such as credit advice, investment of funds, safe-keeping of securities, and the like. The local bank may in turn carry accounts of banks for which it acts as correspondent.

Whenever a statement of the bank is made, therefore, among the assets will appear Due from Banks, and among the liabilities Due to Banks.

If a draft is sold by the local bank, the Due from Banks is reduced by the face amount of the draft. Undivided Profits is increased by the charge for exchange, and, if the face of the draft and the exchange charge are paid in cash, Cash will be increased by these amounts. If, however, the buyer of the draft pays by check on the selling bank, Deposits is reduced, and if by check on other banks, Due from Banks is increased.

When items are received for collection and credit, the local bank credits the remitter's (or depositor's) account with the face amount of the items - that is, credits Deposits and carries items among the assets as Collection Items in process of collection; when collected, either Cash or Due from Banks is increased. Checks on local clearing house banks are usually separated from checks on out-of-town banks and are reported as Clearing House Items.

The purchase of a site, a building, furniture, and fixtures, reduces the bank's Cash or its balances Due from Banks. Such payments by the bank are usually made by cashier's checks or drafts; while these checks are outstanding they appear among the liabilities, and when they are presented for payment, Cash will be reduced.

Stationery, wages, salaries, rent, taxes, and so forth are expense items that will likewise be paid by cashier's checks. Temporarily they will appear as Expense among the assets and Cashier's Checks among the liabilities; the ultimate disposition will be the reduction of Cash by payment of the checks and the reduction of the Undivided Profits.

Customers may deposit cash funds and take certificates of deposit, which will thereafter appear among the liabilities.

These certificates state that the customer deposited a certain amount on a given date, which will be repaid to him with interest at a stated rate provided payment is not demanded within a stipulated time.

If a depositor overdraws his account, the drawee bank may-exercise its discretion at paying the amount. If allowed the drawer's account (his Deposits) is wiped out, and the bank has a presumptive claim against the drawer for the deficit, which it lists among its assets as Overdrafts. Cash is reduced by the face amount. If this check had been presented through a correspondent bank the Due from Banks would be reduced by the face amount.

In the case of the issue of bank notes by a national bank, the issuing bank must first buy or borrow United States bonds to pledge with the United States Treasury as security; this reduces Cash and increases Investments, or else puts among the liabilities Bonds Borrowed and adds to Investments. The National Bank Law requires that a redemption fund of 5 per cent of the notes issued also be kept in gold at Washington; this reduces Cash but adds a new item, Redemption Fund, to the assets. The bank notes come to the paying teller, and he puts them into the Cash of the bank, and an equivalent liability, Bank Notes Outstanding, appears in the statement. Whenever any of the notes are presented to the bank for redemption, Cash in the statement is unaffected, for one form of cash is simply substituted for another; but when presented at Washington for redemption, the Redemption Fund is reduced and Bank Notes Outstanding is also reduced.

If Undivided Profits becomes large, the directors may decide to increase Surplus and declare dividends. Then Undivided Profits will be reduced at once by the amount put into surplus and dividends; the dividends will be carried temporarily as Dividends Declared but Unpaid; when paid, this item will disappear and Cash be reduced.

If the book values of certain assets are found too high, because they were originally overvalued or have meanwhile depreciated or have proved uncollectible, and it is necessary to scale down the valuations, the asset, Investments, or Loans and Discounts, or Real Estate, Buildings, Fixtures, or whatever asset it may be, is reduced, and Undivided Profits is reduced a like amount.

The local bank may be pressed for funds, and be forced to borrow from its correspondent on the basis of its promissory note secured by discount paper from its note pouch. Its Cash and Due from Banks will be increased and Bills Payable will then appear among its liabilities.

The bank may issue letters of credit by which it agrees to accept certain drafts or bills of exchange drawn upon it. Later when these are presented for acceptance, the bank will incur specific liability for Acceptances. These liabilities are equalized by the introduction of the corresponding assets, Customers' Liability Under Letters of Credit, and Customers' Liability for Acceptances Executed. The nature of these operations will be detailed in a later chapter (see Volume V, Chapter LXI.