The nature of banking operations will be made clearer by an examination of the following statement of the condition of a national bank:




Loans and discounts .


Capital stock paid in $50,000.00

Overdrafts ....


Surplus fund . . . 15,000.00

U. S. bonds ....


Undivided profits . . 3,149.64

Stocks, securities, etc.


National bank notes

Bank building, furni-


outstanding . . . 11,250.00



Individual deposits . 247,739.25

Due from approved


reserve agents . .



Checks and other cash






Bills of other national






Fractional currency,


nickels and cents .





Legal tender notes .



Redemption fund with


U. S. treasurer . .





Notice that on the liability side the first three items are liabilities in a different sense from the last two: for the capital stock, surplus, and profits the bank is liable to its stock-holders; for circulating notes and deposits, it is liable to outside persons. Also, notice the relation between the total amount of cash on hand and the deposits, and compare the total investment of the stock-holders with the amount of loans and discounts.

Clearing-houses. Clearing-houses were originally contrived by the employees of banks with the object of saving time and labor. Banks in a city have continual dealings with one another. A regular customer of a bank deposits with it all the checks that he receives, no matter on what bank they may have been drawn. It therefore happens that every bank in any of our cities receives checks every day drawn on the other banks, while the other banks receive checks on it. Formerly there was continual running back and forth among banks to balance their accounts. Now the representatives of all the banks in clearing-house cities meet daily in the clearing-house and exchange their obligations, only the differences between the sums due being paid. These differences are paid by the debtor banks to the clearing-house, and by the clearing-house in turn to the creditor banks.

Clearing-house statistics show the inadequacy of money alone to do the business of the modern industrial world. The total transactions of the clearing-houses in the cities of the United States for the year ending September 30, 1903, amounted to $114,068,837,569, or about forty-two times as much as all the money in the country, bank notes included; for the money in the country August 1, 1902, in the United States Treasury and in circulation, was only $2,695,440,174. The small proportion of actual money transfers necessary in paying clearing-house balances illustrates the same fact. Thus in the year ending September 30, 1903, the New York Clearing-house, which includes 56 banks in its membership, cleared transactions amounting to 870,833,655,940, by making money payments for total balances of only $3,315,516,487. The average daily clearings were $233,005,447, while the average daily balances paid in money amounted to only $10,906,304, so that the balances were only 4.68 per cent of the clearings.

The Advantages of Credit. It remains for us to sum up in separate paragraphs the advantages and evils which attend the great development of credit in modern industrial society.

1. Credit saves time and labor by furnishing a more perfect and convenient means of payment in large sums and between distant places than is furnished by the precious metals. Thus in international trade, relatively small sums of money have to be sent from one country to another, only balances being paid in money. If certain London merchants owe New York merchants 1,000,000 for cotton shipped, while the same or other New York merchants owe the same or other London merchants 1,000,000 for importations from Europe, it is obvious that no money need leave either country. The London merchants may send orders to their New York debtors to pay their New York creditors. This is the simplest kind of cancellation of indebtedness. In actual life, the process is more complex, but the underlying principle is the same. New York merchants owe London merchants; Paris merchants owe New York merchants; London merchants owe Paris merchants, etc. By exchanging orders among the different debtors and creditors a large part of the total debts may always be paid without the shipment of money.

2. Credit saves capital by taking the place of corresponding amounts of gold and silver. In this way society is enabled to employ a larger portion of the precious metals for other useful purposes.

3. Credit renders capital more productive. Under our credit system he who possesses capital, but is unable to use it, may transfer it for a compensation to another person who can employ it productively, and thus both debtor and creditor, as well as the public economy, are benefited. Other things being equal, capital is loaned to those who will pay the most for it, and under normal conditions these must be the ones who can employ it most productively There are evidently two sides to this advantage. On the one hand, as we have just said, credit enables those who have capital, but who are without the disposition or ability to use it productively, so to place their capital that they themselves receive benefit while furthering social production. On the other hand, credit enables those who have great business qualifications, but who have inadequate capital or no capital at all, to employ their energies and talents for their own benefit in furthering the welfare of society. In many cases credit brings together capital without directive power and directive power without capital, and thus serves to unite capital and labor.

4. Credit furthers the accumulation of capital by gathering together the very smallest sums, as, for instance, in savings banks. Such small sums, forming in the aggregate large masses of capital, are loaned out by those who are responsible for them to joint-stock companies and other productive concerns. In this way the capital itself is concentrated while its returns are scattered widely among the people. Moreover, credit furthers the accumulation of capital by promoting thrift, since it both helps and encourages men to provide for emergencies and for old age. This is particularly the case with institutions that supply capital to the poorer classes, and with American building associations, which furnish the same classes with capital for the construction of homes.