CHAPTER IV CHECKING ACCOUNTS — DEPOSITS 49. The basis of checking accounts. Every business and every individual for that matter requires a certain minimum of cash. It may be enough to pay expenses for a week, two weeks, or a month. Minimum cash is a reserve against daily demands. Income is expected to more than equal outgo, but if there is any delay to the income, the minimum balance takes care of necessities, which cannot be postponed. If the checking system had never developed it would be convenient to have a safe place to keep this balance. Cash on hand is nearly always greater than this minimum. Before one can pay out there must have been income. If $10,000 comes in, it may be several days or weeks before it is paid out. In the meantime the cash balance is increased. It is likely to be especially large at the close of a year's business. On the last day of business for each of the last five years the largest corporation in the United States reported cash of 185 million dollars, 174 million dollars, 167 million dollars, 124 million dollars, and 117 million dollars, respectively. The largest automobile company reported cash of 19 million dollars, 31 million dollars, 48 million dollars, 48 million dollars, and 40 million dollars at the close of each of the five years, respectively. In 1923 the Ford Motor Co. was reported to have a cash balance of over 159 million dollars. If cash is kept in bank and accounts are paid by check, the bank pays out the cash, or credits another account, not when the check is written, but when it is sent in for payment, one or more days later. Obligations in process of settlement by check leave the bank balance greater than it otherwise would be, increasing the amount of funds at the banker's disposal. This margin is the banker's own making and morally belongs to him; though not legally, for the bank is not liable to the holder unless, or until, it accepts, or certifies, the check.1 Cash, whether funds out of which expenses and debts are being paid, or the minimum reserve, is kept for use at a moment's notice. If deposited in a bank it must be payable on demand. Modern business requires that it be paid on order as well as in person. To get the use of idle funds and at the same time make them available to the depositor, or his order at the moment needed, banks have devised the checking account. About one-half of the individual bank deposits of the United States are subject to withdrawal by check without notice. 50. Form and nature of a check. The depositor who has a checking account in a bank withdraws his funds by writing an order upon the bank to pay. This order is called check (see 18). One of the services of bank is the furnishing of check blanks free for the use of depositors. These are to be filled out according to law and custom, else one cannot be sure of his rights and obligations. A check must show (1) the bank (the drawee) which is to pay the money; (2) that it is payable on demand; (3) to whom (the payee) or to whose order it is to be paid; (4) the amount of money which is to be paid; and (5) the signature of the person who writes the check. It should always have the date of the order and the place where it is drawn. If the date is missing it can be inserted by any holder, and the drawer cannot com 1 John J. Crawford's Annotated Negotiable Instruments Law. Sec. 325. (Baker Voorhis and Co., New York. 1916.) 2 Ibid., Sec. 20. ADVANTAGES OF CHECKS 55 plain even if he intended to date the check so it could not be paid until a future time. He has impliedly asked any holder to date it to suit himself and must bear the consequences of his own negligence.3 A check is not a legal TO THE THE CITY NATIONAL BANK COLUMBUS, OHIO.July! James Leinster One hundred in 25-3 1923 $10000 DOLLARS Andrew Windsor A check. The "25-3" in the upper right hand corner is the bank's transit number. The large "4" in the lower middle shows that the bank is in the district of the Federal Reserve Bank of Cleveland (see 196). payment. It is a payment on condition that the amount of the check is duly collected. The debt stands until the check is paid. 51. Advantages of checks. - Checks as a means of payment are safer, cheaper, more convenient than money, and furnish in themselves evidence of the use to which they have been put. Money lost in transmission from buyer to seller, or from debtor to creditor, is probably gone beyond recovery, but if Brown with due diligence to prevent fraud writes a check payable to the order of White, he is sure in the United States (see 147) that no one except White can use the check, as the bank guarantees that only White, or his order, can get the money. An employee cannot abscond with cash that is in bank to the credit of a firm, or corporation. For this reason it costs much less to bond 3 John J. Crawford's Annotated Negotiable Instruments Law. Sec. 25. a treasurer. He may handle a million dollars a year; there may be balances of five or six figures; but if he makes a deposit each day, there may never be more than ten thousand dollars in his hands at one time. Besides, most of these receipts are checks which can be deposited only to the credit of the business. Money shipped from one part of the country to another costs freight and insurance, expenses which increase with the amount and the distance. Any amount can be sent by check by mail for two cents. It is more trouble to write a check for one dollar than to pay in money, but most checks are for large amounts. In 1922 J. P. Morgan & Co. gave the U. S. Government a check for $50,000,000 in payment for interest on Great Britain's war loan. How long would it take an employee to count 50,000 thousand-dollar notes? While a check may or may not be final proof of the payment of an account, its face contains evidence that must be attacked, and it can be drawn so as to be unquestionable. More and more houses are printing their statements with a detachable coupon containing the name and amount of the account upon which is printed "If check is mailed and no receipt is desired, send only this coupon detached." Others upon receipt of a check hold the receipted invoice until the next month's statement is rendered, when both are sent in the same envelope. Check registers, or stubs, are convenient primary records of expenditures from which entries are made into other accounting books. Because of their advantages checks are used in 50% to 60% of retail transactions, 70% of pay roll payments, and 90% of wholesale transactions.4 52. The risk in taking a check. Anyone who takes a check and parts with value for it must be sure of the iden 4 David Kinley, Use of Credit Instruments, pp. 200-1. (Report of National Monetary Commission, Government Printing Office, Washington, 1910.) COLLECTION OF CHECKS AND DRAFTS 57 tity of the person offering it. In most cases he must also be certain of the sound credit of that person. If Baker writes a check payable to Reynolds, and offers it to Reynolds, Reynolds must be certain that it is genuine and that Baker has the funds in bank. If Baker writes a check to Morgan, and Morgan, indorsing it, presents it to Reynolds, Reynolds must know (1) that Morgan will make it good if the check is bad, or (2) that Morgan is who he claims to be, and that the check is genuine and good at the bank. If the identity and honesty of the payee is certain, the check can be accepted from the payee on the drawer's credit. If the genuineness of the check and all the indorsements are not known, everything is risked upon the identity and the responsibility of the negotiator. Everybody who handles a check takes a risk and does it on account of his confidence in, and his willingness to favor, the one who presents it. A stranger has no right to ask a bank, or anyone else, to cash a check. Months later it may appear that the check was altered; or an indorsement, or the check signature, may prove to have been a forgery. It is therefore a common practice to require the person who identifies a stranger to indorse the check he presents. 53. Collection of checks and drafts. It is necessary to the popularity of checks that they be easily collected. A check would not be so easily accepted, unless it was as easy to use as currency. If accounts are paid by check on account of the ease and the record, currency, when received, would be taken to the bank for deposit. It is just as easy it is safer to take a check, if the bank will accept it. The bank performs one of its great services to the individual and society, when it acts as a collection agency. Not only checks, but all sorts of negotiable instruments are handled. The daily mail of a business house may contain money orders, and checks and notes that are payable hundreds |