tained with the Treasurer. The directors first authorize the purchase of $20,000 worth of United States 2-per-cent bonds bearing the circulation privilege and, let us assume, selling at a par value of $100, for which cash is paid.

At the same time the bank sends to the Treasurer $1,000 as the required deposit of 5 per cent in the Redemption Fund.

Having observed all regulations, the bank now issues its notes to the amount of $20,000. These instruments are placed in circulation by giving them to customers who have received credit from the bank. It can thus grant loans by increasing the deposit accounts of its customers or by giving them its circulating notes.

In addition to buying United States bonds, the bank invests its funds in the form of short-term government obligations issued since 1917, known as certificates of indebtedness. The bank buys $5,000 worth of these securities which, let us assume, have just been issued, and so no accrued interest need be paid.

With these securities as collateral the bank is able to obtain a fifteen-day loan of $3,000 from the Federal Reserve bank. This step is taken in order to establish the legal percentage of reserve which it is required to maintain

against the deposits of its customers. This reserve is carried in the form of an account with the Federal Reserve bank. Thus the X Bank gives its note, which becomes a bill payable, and in return it receives credit to its reserve account with the Federal Reserve bank. In analyzing this transaction, it must be remembered that as a matter of practical operation the X Bank would not receive a loan until it is a going institution and until an increase in its demand deposits necessitates this step.

The same general relationship exists between the Federal Reserve bank and the X National Bank as between the latter institution and its own customers. As indicated above, they received credit from the X Bank through the granting of loans on their obligations secured by collateral, or through the discounting of notes received from their own customers. In the above transaction the Federal Reserve bank granted an advance to the X Bank on its note accompanied by certificates of indebtedness as collateral. In like manner, the X Bank may bring certain classes of notes which it has discounted to the Federal Reserve bank for rediscount. In a previous transaction the bank discounted a sixty-date note of $10,000 for a manufacturer. This obligation, accompanied by a satisfactory financial statement of the manufacturer, meets the required tests of eligibility, and so the Federal Reserve bank rediscounts it at the rate of 5 per cent for sixty days. It may extend this credit by adding the amount to the deposit of the X Bank. This institution feels that its balance is sufficient and therefore prefers to take out the proceeds of the rediscount in the form of Federal Reserve notes, which it can in time pay out as depositors make withdrawals.

It is quite necessary for a country bank to establish correspondent relations with an institution located in a large money center, therefore the X Bank opens an account with a bank in New York City by giving it a cash deposit of $20,000.

Various withdrawals are made by customers against their accounts. A check of $1,000 is drawn by one depositor in favor of another customer of the bank. This transaction involves merely the debiting of one balance and the crediting of another on the individual ledger, but no change is made in the account of deposits on the general ledger of the bank, as its total deposits remain the same. A number of customers draw checks amounting in all to $15,000 in favor of depositors in banks at other points. These institutions send the checks to the X Bank, which creates a new liability account by crediting these other banks and at the same time deducting the amount from its depositor's accounts.

A customer draws to an amount which exceeds his balance by $150. This overdraft is practically a forced loan, and so the same entries are made as if the bank had extended credit to the customer. His account is increased by $150, and as an offset the same amount is carried as an overdraft.

A customer requests the bank to certify his check for $500. His account is examined by the bookkeeper and shows a balance sufficient to cover the amount. In certifying a check the bank transfers the liability for payment

from the drawer to itself. Therefore the amount of the check is deducted from the depositor's balance and set aside in a special account for certified checks.

The bank installs a vault at a cost of $2,000 and pays for it with a cashier's check.

At the request of a customer the bank issues a letter of credit amounting to $3,000. Although this liability is fully undertaken by the bank, at the same time it is covered by an equal obligation of the customer.

Assuming that these transactions have occurred consecutively in the course of several days' business, the completed statement of the bank will read as per table on page 181. V. CLASSIFICATION OF ASSETS AND LIABILITIES.

The bank's assets and liabilities first were viewed as independent items and in the previous section they were considered in relation to one another. From this survey, it is evident that the accounts fall logically into several distinct classes which will be briefly analyzed. In general, assets may be divided on the basis of liquidity as follows: (1) cash in the bank, (2) amounts due from banks, (3) loans and investments, (4) real property. Naturally cash is the most liquid resource, and a certain amount must be kept in the till as a means of immediate payment, and in the bank vault as a dormant reserve for emergency. But this money is idle, and an oversupply tends to reduce earnings.

The second group, due from banks, includes: (a) lawful reserves from Federal Reserve banks, (b) due from other banks, (c) exchanges for the clearing house, (d) checks on other banks in the same city, (e) items with the Federal Reserve bank or with correspondents in process of collection. An account with the Federal Reserve bank can be drawn upon immediately and is thus the equivalent of cash. Similar availability is found in balances due from other banks. Exchanges on the clearing house and checks on other banks in the same city are practically demand claims. Items in process of collection, of course, are payable only after a period of time which may take several days.

The third group of loans and investments will vary in liquidity, depending upon the maturity of the loans and the marketability of the investments.