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Inasmuch as the American banking system is an indigenous outgrowth of our distinctive economic environment, it is not surprising that in both organization and practical operations it is found to differ much from the European and Canadian types. One factor accounting for many of these differences in scheme and method of operation is the fact that the banks served a community rich in undeveloped resources but chronically deficient in capital, and therefore they were always pressed for funds by applicant borrowers. In the case of commodities, a sellers' market puts the seller in an advantageous position whereby he can exact terms and conditions from the buyer not possible where supply exceeds demand. The situation is similar in the market for loans where funds are scarce relative to the demand, a condition prevailing in a new country with boundless opportunities and aggressive promotive business men; the bargaining advantage being in his favor, the banker is then in a position to levy terms upon his borrowing customers which promote his profits or security, as well as the permanence of his customers' accounts.

NATURE OF THE REQUIREMENT

One such requirement from borrowers is that they maintain a fair "balance" of account, in an amount varying as among the banks from 10 to 25 per cent of the borrowings, the most common proportion probably being 20 per cent. The base of the percentage is sometimes the full "line of credit," at other times the portion of the line of credit commonly used; occasionally some such percentage as 10 per cent of the full line plus 20 per cent of the used line is asked; and it may be a percentage of the actual borrowings or of the average borrowings over a period of time. Some banks are content to state the requirement in the elastic phrase that the borrower is expected to "treat the bank right." It is obvious that to allow loans in an amount equal to a multiple of balances which have been, and presumably will be, kept does not differ from requiring a borrower to leave a percentage of his loan with the bank.

A wide diversity of practice exists as among the banks and as among their customers in the amount of balance required and in the insistency of the requirement. Among the factors causing this variation the following may be mentioned:

1. Local custom.-For instance, it may be that 10 per cent has become the common proportion, or that the practice never was well started, or that during a period of intense competition the requirement was not enforced and died out. Or possibly the terms are determined largely by past experience and differ with the conditions prevailing in the various places.

2. Locality and type of prevailing industry.-In certain agricultural regions it is less commonly demanded; likewise in communities where the people are thrifty but there are not sufficient local industries to absorb their surplus savings.

3. Size of the bank. Among the larger banks, particularly in Reserve cities, the practice is nearly universal, whereas in parts of the Mid-West where banks are more numerous and small, it may be infrequent.

4. Conditions of the money market.—When the banks are flush with funds and borrowers are few, the bargaining advantage is

with the borrowers, and the lending banks are more willing to waive the balance requirement altogether or to be content with a smaller percentage. This state of easy money may, of course, be seasonal or cyclical or simply occasional.

5. Open-market loans.-Lending in the open market by purchasing commercial paper and acceptances is more frequent when the bank has funds in excess of the local demand, and such exten sions of credit are made to non-depositors and no balance is required.

6. Competition. In any city where, on account of the excess number of banks or other cause, the banks compete very keenly for business, the balance requirement may be waived altogether or be made an inconsiderable and elastic requirement.

7. Special features of the accounts.-If the applicant borrower carries his main account in a bank in another state or district, or if the applicant's account is very active and therefore expensive to handle, or if it does not have any important relationship with getting or maintaining other important accounts, the applicant cannot expect much favor in the way of low balance requirement from the bank.

8. Secured loans. In most cases the lending bank discriminates against unsecured loans by requiring a fair balance, whereas little or no balance may be asked in case of loans supported by adequate collateral. The range of application of the balance requirement is "no distinction," "only against unsecured," "higher against unsecured," "not so strict in case of secured," "against secured loans to non-depositors only."

9. Character of management.-The views of the bankers on the subject of balance requirement are very diverse and often quite positive, some bankers holding that such requirement is both fair and necessary, others that there is no warrant whatever for it.

The practice of requiring proportionate balances from borrowers is therefore not universal, and it is difficult to determine whether it is on the wane or not, but since both the reason for it and the opportunity for enforcing it are declining, it seems logical to suppose it is not holding its own. It is not enforced by the foreign branches of American banks, nor by the British and Canadi

an banks, which instead employ the system of account-current, under which loans, exclusive of purchased bills, are made by overdrafts, which fluctuate from day to day, as does the ordinary balance account, and interest is charged at one rate for overdrafts and credited at a lower rate for credit balances, the bank expecting the customer to carry credit balances part of the time.

ORIGIN OF THE REQUIREMENT

It seems impossible positively to identify the origin of the American method of balance requirement. The writer has found twenty-one explanations in banking literature and in letters from bankers, but most of these explanations are mere guesses or suggestions, and when examined prove empty of fact. A common error in explaining its origin is to mistake its adoption in a locality for the beginning of the method in the country as a whole; such, for example, is undoubtedly the case with those who suggest its origin in the scarcity of funds in the panic of 1907, inasmuch as bankers who have been in business forty or fifty years in some cities testify that the custom arose before their time. In certain parts of the country, banking methods received a more permanent stamp of the English and Scotch model than did others; in many instances, banks in California, for example, up to the time of the establishment of the Federal Reserve, used the European accountcurrent or over-draft method of extending credit; only the establishment of the Federal Reserve and its facilities for rediscounting longer-term paper under more uniform conditions brought about an adjustment to the usages of other parts of the country.

This adjustment in California probably gives a proper cue to the origin of the balance requirement, namely, the decline in the influence of European banking upon American methods. The very rapid development of banking in the United States just before and after the Civil War, the establishment of the national bank system, and the post-war adoption of the cash-discount, open-account, and single-name-paper system in place of the receivables system-methods quite distinct from the European— evidence a growing sense of independence from the European in

fluence which made easy the shift from the overdraft system to the balance-requirement system. The impossibility of finding a definite origin for the practice probably means that it grew up quite unconsciously and that it did not spread by imitation from a single institution, but was rather adopted wherever and whenever conditions made it desirable and feasible, i.e., (1) when business in the bank's community or line of industry came to be handled on the open-account and unsecured-loan basis, (2) when open-market borrowing arose and a bank's customers periodically resorted to the open market to take advantage of lower interest rates, and devices such as the balance requirement were thought useful to tie the customers to the bank, (3) when the market was tight and the lending bank was in a position to exact stricter terms from borrowers, or (4) when for some reason the costs of running the bank increased and the increase was shifted to the borrowers through the balance requirement. Whenever it became practicable and desirable for a bank to prefer its own customers in making loans, the practice of comparing balances with loan applications grew until those accounts which carried balances of approximately 20 per cent were regarded as the desirable accounts. The more conservative banks, being in a position to select their business, confined their loans, so far as possible, to those people who in the ordinary course of business carried balances against their loans. This practice, becoming more generally known, suggested to properly managed business concerns that it was to their interest to conduct their business so that they would fall into the class of accounts considered desirable by the banks. The practice grew until in some places it is now an arbitrary rule in credit-granting that the maximum amount of loans allowed be some definite multiple of the average balance carried. Probably the development of credit men's associations, with the spread of education in credit-granting and the adoption of uniform guiding principles, has promoted the use of the balance requirement. Undoubtedly the 20 per cent requirement found great favor with the banks because, under the semblance of a low rate of interest on 100 per cent of a loan, the bank was getting a higher rate, since only 80 per cent of the loan was really taken from the bank. The device

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