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Chapter XXIV

Banks and Insurance Companies.

§1. Banks, we are told, were first instituted in Italy, where certain Jews assembled, seated on benches, ready to lend money, and to exchange money and bills; and _banco_ being the Italian name for bench, banks took their title from this word. The first banks are said to have been only places where money was laid up or deposited for safe-keeping. But banks at the present day are not used for depositing alone.

§2. Banks in this country can be established only by authority of law. They are incorporated by an act of the legislature. The capital stock is raised by the sale of shares, and issue of certificates, as in the case of rail-roads. (Chap. XXIII., §13.) The stockholders elect of their number (usually) thirteen _directors_, who choose one of themselves as _president_. The president and directors choose a cashier and clerks.

§3. Merchants and others in commercial places, deposit in banks, for safe-keeping, the money they receive in the course of business, and then draw it out on their written orders as they have occasion to use it. An order of this kind is called a _check_.

§4. Persons depositing money only once, or very seldom, and intending to draw for the same at once, usually receive from the cashier a _certificate of deposit_, which states the name of the depositor, the sum deposited, and to whose order it is to be paid. For the use of money deposited for any considerable period, banks agree to pay interest, usually less, however, than the rate established by law. Certificates of deposit may, by indorsement, be made transferable as promissory notes and other negotiable paper, (Chap. LX., §2,) and are often remitted, instead of money, to distant places, where, by presenting them at a bank, they may, for a trifling compensation, be converted into money.

§5. A material part of the business of banks is to assist merchants and others in transmitting money to distant places. Thus: A, in New York, wishing to send $1,000 to B, in Philadelphia, puts the money into a bank in New York, takes for it an order, called _draft_, on a bank in Philadelphia, for that amount, to be paid to B. The draft is sent by mail to B, who presents his draft at the bank, and receives the money; and the bank charges the amount to the New York bank.

§6. But persons unacquainted with commercial business, especially young persons, may not know how the bank in Philadelphia is to be repaid. In the course of trade between the two cities, business men are constantly remitting money both ways through the banks, which thus receive the money and draw upon each other. Thus millions of dollars may be annually transmitted between the two cities, without any expense except the small charge of the banks for doing the business, and without the risk of loss by accident or robbery which attends the conveyance of money in person.

§7. Banks also lend money. The borrower gives a note for the sum wanted, signed by himself, and indorsed by one or more others as sureties. The cashier pays the money for the note, retaining out of it the interest on the sum lent, instead of waiting for it until the note becomes due. This is called _discounting_ a note.

§8. The bills of banks pass as money. A bank bill or note is a promise of the bank to pay the bearer a certain sum on demand, signed by the president and cashier. It passes as money, because the bank is bound to pay it in specie if it is demanded. Paying notes thus is _redeeming_ them. When a bank is unable to redeem all its bills, it is said to have failed, or to be broken; and the bill holders suffer loss, unless some security has been provided. This has been done in some states by making the stockholders individually liable for the redemption of the bills; that is, the property owned by them as individuals may be taken and sold on execution for that purpose. Such security, however, has never been generally provided.

§9. But a system of banking, sometimes called _free banking_, has more recently been adopted in some states. It is so called, because the business of banking is thrown open to all by a _general law_. Any person, or any number of persons, may, by complying with the provisions of this general law, establish a bank without a special law for this purpose. Hence it is also called the _general banking_ system.

§10. Persons, before commencing business under this law, must put into the hands of the proper state officers ample securities for the redemption of their bills; and they may not issue bills to a greater amount than the amount of their securities. These securities must consist of approved state stocks, or United States stocks, or partly of public stocks, and partly of real estate. When a bank fails, the lands and stocks held in pledge by the state are sold, and the avails are applied to the redemption of the bills. This system of banking seems to be growing into public favor.

§11. _Insurance companies_ also are authorized by law. Their business is to insure persons against loss by fire. The corporators, on being paid a small sum, consisting generally of a certain percentage on the amount for which the property is insured, promise to pay such amount if the property shall be destroyed by fire. There are companies also for insuring vessels at sea; and _life_ insurance companies, that agree to pay, in case of the death of the person insured, a certain sum for the benefit of his family, or of some other person named in the policy. The word _policy_ as here used, means the writing containing the terms or conditions on which the company agrees to indemnify the person insured in case of loss. The money paid to obtain insurance, is called _premium_.

§12. The profits of the stockholders consist of the excess of money received for premiums over the amount paid out for losses. Thus, if a company has issued 2,000 policies, each covering property of an average amount of $1,000, the amount of risk is $2,000,000; and if the rate of insurance is one per cent., the amount received in premiums is $20,000. Hence, if none of the 2,000 buildings is burned within the time the insurance is to run, the $20,000 are gained. If ten of them should be burned, there would still be a gain of $10,000. If twenty should be destroyed, there would be no gain, but an actual loss to the amount of the expenses of the concern.

§13. But from the average number and amount of losses annually for many years, companies are enabled so to fix the rates of insurance as to give the stockholders a fair profit on their capital. The rates are not the same on all kinds of property; a higher per centage is charged on that which is deemed hazardous, or more exposed to fire, than on that which is less exposed. The profits on the business of the company, or the _dividends_, as they are called, are annually or semi-annually divided among the stockholders, in proportion to the amount of their respective shares.

§14. There is another kind of insurance companies, which differ materially from the _stock_ companies described in the preceding sections. They are _mutual_ insurance companies. They are so called because the members unite in insuring each other. Every person having his property insured by such a company is a member of it. He has his buildings and the property in them valued; and pays a certain rate per cent. on such valuation. A fund is thus raised out of which any member suffering loss by fire is paid the amount for which the property was insured. When the fund is exhausted, it is again supplied by a tax assessed upon the members in proportion to the amounts for which they are respectively insured.