does not include United States government deposits, for these require no legal reserves. Checks which have been certified by the bank or drawn by its cashier are carried as separate entries, and items 2, 3, 4, 5 together constitute the total sums due to other banks. These four accounts represent the gross liabilities due to other banks, and from the sum a deduction of the assets due from other banks must be allowed. These accounts arise either from balances carried with correspondents or from items being collected by the Federal Reserve Bank, the clearing house, or the bank's messengers. These amounts are indicated by items 6, 7, 8, and 9, which together represent the amount due from other banks. The difference between the total of items 2, 3, 4, and 5, the amount due to other banks, and the total of items 6, 7, 8, and 9, the aggregate due from other banks, is indicated by item 10, which is the net balance due to other banks.

A bank does not always owe to other banks an amount larger than that of their indebtedness to it, and at times the sum of interbank credits more than offsets the total debits. From this situation the bank derives no advantage, for under the Federal Reserve plan when the total due from banks exceeds the amount due to banks, both groups of items must be entirely omitted from the calculation of reserves. In this case the bank carries a reserve only against item 1, its individual deposits. If there is a net balance due to other banks as shown in item 10, it is added to item 1, and these two accounts together form the total net demand deposits.

Less difficulty is encountered in calculating time deposits, which include the following items: (11) Savings accounts, (12) certificates of deposit, (13) other deposits payable only after thirty days, and (14) postal savings deposits. As mentioned above, a time deposit is any account which is payable only after a notice of thirty days.

In the illustration under consideration the net demand deposits amount to $264,594, and time deposits to $9,710. Assuming that this bank is located in the non-reserve class, it is required to hold as reserve 7 per cent of its demand

deposits and 3 per cent of its time deposits. Its reserve against demand deposits will thus amount to $18,521.58, against time deposits, $291.30, and these two sums together $18,812.88. Although reserves must be computed every day, the bank's required amount is counted not as a daily, but as an average, monthly balance, and a deficit on one day may be offset by a surplus at another time.

X. LIQUIDATION OF BANKS.

Notwithstanding the above regulations of the government, banks at times become insolvent. It is interesting to note the principal causes of failures among national banks since the inauguration of the national banking system, as indicated in the report of the Comptroller of the Currency for 1920 (Vol. I, p. 183).

The public supervisors of banks have only limited power in closing banks which are headed for insolvency. The federal Comptroller or the State Superintendent can take action against a bank only if it commits a clear violation of

the law. If a bank arbitrarily exceeds the powers authorized by its charter, if it continually fails to maintain its reserve, or when it willfully impairs its capital, such offenses may lead to its ultimate dissolution. For these contingencies the national and state laws have given their supervisory officials powers of varying scope. In some states the superintendent of banks must apply to the courts for the appointment of a receiver. Until the application is granted valuable time may be lost and the condition of the offending bank may become increasingly unsatisfactory. In other states, laws empower the superintendent to take immediate possession of the bank's affairs. This official then requests a court to nominate a receiver, who takes charge of the assets and liabilities of the bank. The National Bank Act not only permits the Comptroller of the Currency to assume immediate charge over the affairs of the bank, but also allows him to appoint the receiver.

CHAPTER XV

INTERBANK RELATIONS

WHAT has thus far been said about banking deals chiefly with relations between the bank and the individual or between the bank and the public. It must be remembered, however, that in most countries there are many banks. In some, where branch banking is followed, these banks are not independent of one another in the sense of having a different corporate existence, but they are different offices of the same institution. In others, however, they are separately organized and are in other respects independent banks. In the United States we have about 28,000 independently organized banks, each with its own charter. Of these banks about 8,000 have been chartered by the federal government, while others have been chartered by the state governments. Still others are "private banks" or partnerships. In foreign countries the number of independent banks is usually very much smaller, but they are authorized to establish branches. Thus in Canada at the present time, for example, the number of banks is 12, but the various banks are authorized to establish branch offices. It is probable that in Canada there is an even larger number of bank offices open to the public than in the United States in proportion to population, the total number of branches there being 4,029. Exactly how many independent banks or branch-bank offices there should be in a country depends upon circumstances. There is no definite rule in the matter. Conditions of transportation and volume of business available in various communities determine the number of offices thus to be established.

Whether the banks are independently organized or are simply different offices of the same general organization, it still remains true that they must have various relation

ships with one another. Not all persons do business with the same bank, and consequently every bank obtains claims upon other banks or has to pay claims held by others. Thus it becomes essential to develop a definite system of dealings among banks. These dealings may be classified in a general way as collection and remittance, deposit, and rediscount. There are other functions which are performed by banks for other banks, but they are of the same general description that may be performed by any business house for another. Those that have just been mentioned are distinctly banking operations, and as such they require a particular kind of banking organization in order that they may be successfully carried on.

I. INTERBANK RELATIONSHIPS.

1. Collection.

The simplest type of interbank relationship is that of collection. Bank A receives from a depositor a check on bank B. It credits this check to the depositor that is to say, it undertakes to pay him the face of the check on demand. This necessitates action on its own part for the purpose of collecting the check from the bank on which it is drawn. It might send the check to the other bank and ask for cash, the messenger turning in the check over the counter, getting the money, and bringing it back with him. Sometimes this plan is still employed, but it is a primitive and unsatisfactory way of doing business. The second method is that of accumulating checks on other banks and eventually offsetting them against checks accumulated in the same way by other banks against it. This is called "clearing." A third method of disposing of the check is that of depositing it with some other bank-perhaps the one on which it is drawn-which thereupon gives credit for it. In this case the bank receiving the check is said to be a depository and the two banks are termed correspondents.

2. Clearing

The most familiar type of relationship between banks is that of clearing, and for purposes of convenience it is cus