CHAPTER VII

THE DEPOSITOR AND HIS BANK

DEPOSITS in the broad meaning are created from: (1) actual cash, (2) credit instruments left by customers, and (3) credit extended by the bank itself. Discussion of the third type will be deferred until the following chapter, while in the present attention will be directed to the subject of deposits in the sense of actual property or titles to property left with the bank by its customers. Such deposits constitute the very foundation on which a bank is able to erect its structure of credit, for without sufficient deposits of cash (or cash items) it would be impossible to grant loans to borrowers. From this viewpoint of deposits the chapter will consider their classification, the relation between bank and depositor, the opening of accounts, inducements offered to secure new customers, and the payment of interest on deposits.

I. CLASSES OF DEPOSITS.

1 Special Deposits.

Deposits from the standpoint of the bank may be classified either as special or general. The legal nature of a special deposit is quite similar to that of cotton or any other commodity stored in a warehouse. The warehouseman is expected to maintain the goods securely and deliver them intact to the owner at his request. In the same way, the banker is intrusted with money, jewelry, or other valuables which must be kept in a safe place and returned to the depositor whenever he calls for them. He has a right to demand the identical deposit, for he always retains title to it. The bank is in no case the owner of a special deposit, but is only the trustee. In this capacity the bank is ex

pected to exercise reasonable care in safeguarding special deposits and provide at least the same protection as for its own property.

2. General Deposits.

A general deposit differs from the special in respect to composition, title, and liability. A general deposit consists largely of money orders or cash items which include checks, drafts, notes and coupons. The actual ownership passes immediately from the depositor to the bank, which does not segregate each deposit but combines them indiscriminately. In exchange for his deposit the customer receives a claim in his favor on the books of the bank, which then assumes the position of a debtor. The depositor, as creditor, has the right to demand payment for all or part of the amount left with the bank, which in turn is bound to refund this sum from its general assets.

General deposits are payable either on demand or after a certain period of time. Demand deposits may be withdrawn immediately from the bank by means of checks, while time deposits are payable only after a lapse of a certain number of days. Sums left with savings institutions are really time deposits, for the banks may in an emergency insist upon a notice of thirty to sixty days from depositors who wish a refund of their money. Commercial or business banks handle mainly demand accounts, but receive also time or savings deposits which are payable only after notice, usually of thirty days, has been filed by the customer. As the bank is thus relieved of the necessity of effecting payment at sight, it is able to invest these funds in slower assets. Besides, a bank which is a member of the Federal Reserve system derives a further advantage from deposits which can be withdrawn only after thirty days' notice, since these require the maintenance of a lower percentage of legal reserve than against demand deposits. The bank is, therefore, solicitous of securing time deposits, and so as an inducement offers its customers a rate of interest higher than that paid on demand deposits.

3. Certificates of Deposit.

General deposits are recorded by entries in a pass book, or evidenced by certificates of deposit. These are instruments in which a bank acknowledges that it has received a sum of money from an individual and promises that the amount will be repaid.. The certificate of deposit thus is both a receipt and a promissory note. It may be either negotiable or non-negotiable in form. If negotiable it is payable to the bearer or to the order of a designated party, who may transfer it by indorsement as in the case of any other negotiable instrument. A certificate of deposit payable directly to a specified party is non-negotiable, and may be assigned to another person only by changing the entries on the books of the bank. The certificate of deposit is payable either on demand or on time. The demand certificate is used as an instrument for guaranteeing the cash payment of obligations or for the transferring of funds from one place to another, and therefore serves the same purpose either as a certified check or a bank draft. Consequently the demand certificate must be negotiable, so that it can readily be transferred by the depositor to his creditor. This party to the transaction is usually prompt in cashing the instrument, as it is generally non-interest bearing. As time certificates of deposit, on the other hand, are non-negotiable, they yield a reasonable rate of interest and thus offer profitable means of investing funds which would otherwise remain idle. Time certificates are payable at either a definite or an indefinite date of maturity. One class matures on a set date, while the other is payable thirty days after any date on which the holder has filed notice of his intention to withdraw his deposit. In general, certificates of deposit differ from ordinary deposits in that the amount of the former remains unchanged, for it can neither be increased by deposits of additional sums nor decreased by withdrawals through checks.

The various forms of deposits may be summarized as follows:

Viewed from the standpoint of origin, the deposits of a commercial bank may be grouped as public or private. The United States government maintains accounts with many of the large national banks throughout the country, and likewise states and municipalities deposit their funds in local institutions. Banks are always desirous of receiving these funds because of the added confidence of the community in depositories of government moneys. These balances in themselves are especially valuable, as they are not generally subject to unexpected withdrawals and so remain relatively constant in amount. Public deposits are created either from receipts of taxes, customs duties, and other revenues, or from loans by banks to governments through the purchase of bonds, certificates of indebtedness, and other public securities. However, the bulk of bank deposits are derived not from public, but private sources. In the United States the system of making payments through checks has. developed so extensively that even persons of moderatemeans carry bank accounts for handling their domestic disbursements. A banking connection is essential to the small business man as well as to the large firm. The accounts of persons, partnerships, and corporations are all grouped together as individual deposits, to distinguish them from balances left with a bank by other banks. Country banks maintain accounts with correspondents in the large cities in order to draw drafts against these funds and sell them to local customers who wish to remit funds to New York, Chicago, Boston, and other business centers. Because of the inability at times to find suitable placement at home, country banks are forced to send their surpluses to metropolitan correspondents, which may lend them on the open money market and are thus able to allow interest. Banks also maintain reciprocal balances to facilitate the collection

of items drawn by their customers on banks or business houses in other cities.

Deposits are also made by trustees acting in such capacities as guardians of minors or executors of estates. The funds are left with the bank until suitable opportunity for investment arises or final settlement of an estate is effected. Thus private deposits may be classified as individual, bank, and fiduciary.

Accounts differ somewhat as to the method in which each is opened. A bank will accept a new fiduciary account only if the trustee can show an order from the court appointing him as guardian, executor, receiver, or in some other fiduciary capacity. When a corporation opens a new account it is necessary for the organization to submit a certified copy of the by-laws or resolutions authorizing the deposit of funds and empowering an officer such as the treasurer to draw checks against these deposits. A bank usually insists upon identification before accepting a new account from an individual. He may bring written references or be personally introduced by another depositor of the bank. These precautions must be taken by the bank for it assumes a certain amount of risk in giving a checking account to a stranger, who may use it to perpetrate a fraud. If the credentials of the applicant are unsatisfactory, the bank will deny his request for an account. In fact, the bank has a right either to refuse or later to close an account at any time if such step is warranted by the actions of the de positor. However, a new account is seldom rejected and the applicant soon finds himself an accepted depositor of the bank after complying with certain formalities. The applicant for an account fills out a card supplying information concerning his business, a statement agreeing to observe the bank's regulations, and a blank giving a specimen of his signature.

III. METHODS OF SECURING NEW ACCOUNTS.

Deposits are essential to the continued existence of any bank, and so there is keen competition to retain old accounts and secure new ones. Banks formerly regarded the