CHAPTER XX

REAL ESTATE AND INSURANCE

Lands, buildings, and houses are called real property or real estate, and the business pertaining to them, the real estate business. Every one of us has more or less to do with this business. If we do not own property, we payrent. Rent is the money paid for the use of a piece of land, or a building, or part of a building, and is usually paid at certain stated intervals of time—monthly, for example. The owner of the building is called thelandlord;the one who rents, thetenant. Sometimes there is no condition as to how long a tenant shall remain in one place and pay rent, but, as a rule, the landlord requires the tenant to sign alease. This is a contract between the landlord and the tenant, stating that in consideration of the landlord's furnishing the tenant a place in which to live with certain conveniences—such as heat, hot water, and other services—the tenant agrees to pay rent for a certain length of time, usually a year or more. If the tenant moves out before his lease expires and refuses to pay the rent, he breaks the contract and, as is usually the case when a contract is broken, a lawsuit may follow. In large cities where land is in some places very valuable, owners may not care to sell the property on which others wish to build, but lease it to the builders for a certain term of years, usually ninety-nine years.

Suppose you no longer wish to pay rent, but to own the house in which you live. If you buy a piece of property from John Smith and pay him your money for it, you wish to be assured that after a few months John Smith will notcome to you and claim the property as his. To protect you John Smith gives you adeedto the property. A deed is a contract between the buyer and the seller of the property. It states that, in consideration of the buyer's paying a certain stipulated sum of money, the seller releases and conveys the property to the buyer. This deed shows that you now own the property. At the same time you should receive aclear titleto the property; that is, you wish to be sure that no one else has a claim on the property. If John Smith guarantees that the title is clear, he gives you awarranty deedfor the property, in which he will "warrant and defend the same against all lawful claims whatsoever." If, however, he simply turns over the property to you as it stands, he gives you aquitclaim deed, in which he relinquishes or quits all his interest in it. If you have no debts on the property, you own it infee simple.

Very often in buying property, the purchaser pays only a part of the purchase price himself, paying for the balance by borrowing the necessary amount from a third party. For example, if the house you bought from John Smith cost $6,000 and you had only $4,000, you would be forced to borrow the other $2,000 to pay John Smith. You would then go to your bank or to some person who had money to invest and would borrow the required amount, and to guarantee that you would pay the money back, you would give amortgageon the property. A mortgage is a contract which states that, in consideration of one party's giving the second party a certain sum of money, the second party agrees to pay interest on that money at a stipulated rate, and at the end of a certain length of time agrees to pay the money back; and that, in case the second party does not pay back the amount at the end of the time, the first party is empowered to take possession of the property, to sell it, and to get the amount due him. This last procedure is calledforeclosing the mortgage. It is a common practice tomortgage property; almost all the property in a city is mortgaged.

Some men and firms make a special business of transferring property, buying and selling it for others, making leases, and collecting rents. They are called real estate agents, and for their services get acommission, which is a certain percentage of the purchase or the selling price and a certain percentage of the amount of rent collected. This percentage varies according to whether the amount of money involved is large or small, the percentage being larger when small sums of money are involved than when large sums are involved.

Exercise 295Oral

1. What is a lease?2. Explain why owners of valuable property lease it.3. What is a deed? Explain the two kinds.4. What is meant by a clear title?5. What is meant by fee simple?6. Why is it important to be careful about the title?7. What is a mortgage?8. Explain why property is often mortgaged. Does the mortgage benefit the owner? Explain.9. What is meant by foreclosing?10. What is an agent? How is he usually paid?11. Why do people employ real estate agents to take care of renting? To sell their property?12. Why is property near a railroad valuable? For what?13. Why is a corner lot worth more than an inside lot?14. Why is property on a car line more valuable than on a side street?15. What effect would the building of a new street car line have on the value of adjacent property? Why?

1. What is a lease?

2. Explain why owners of valuable property lease it.

3. What is a deed? Explain the two kinds.

4. What is meant by a clear title?

5. What is meant by fee simple?

6. Why is it important to be careful about the title?

7. What is a mortgage?

8. Explain why property is often mortgaged. Does the mortgage benefit the owner? Explain.

9. What is meant by foreclosing?

10. What is an agent? How is he usually paid?

11. Why do people employ real estate agents to take care of renting? To sell their property?

12. Why is property near a railroad valuable? For what?

13. Why is a corner lot worth more than an inside lot?

14. Why is property on a car line more valuable than on a side street?

15. What effect would the building of a new street car line have on the value of adjacent property? Why?

Exercise 296Oral

1. Suppose that you are a landlord and that in your lease no mention is made of giving your tenants janitor service, but youyourself take care of the furnace. Other landlords in the block supply janitor service. After one of your tenants has moved in, he demands that the back porch be scrubbed once a week and the garbage emptied daily. What would you do? Consider the points for and against.2. Suppose some boys playing ball on the street break a plate glass window in the store you own. Would you expect your tenant to pay for repairs?

2. Suppose some boys playing ball on the street break a plate glass window in the store you own. Would you expect your tenant to pay for repairs?

Written

3. Write to Francis L. Russell, a real estate agent, asking his terms for collecting the rent of —— (tell the location of the house, the number of the tenants, and the rent you receive).4. As if you were Francis L. Russell write a reply, saying that you will undertake the collection for a commission of 5%.5. Imagine you are a tenant in the same building. The kitchen sink cannot be used in your flat because of a stoppage in the plumbing. You have told the agent once. Write him (see 3) again, stating that unless he sends a plumber you will not pay your next month's rent. (Is there any reason for writing this, rather than telephoning it?)6. The plumber has submitted a bill of $5.98 for the repairs suggested in (5). The agent writes to the landlord, enclosing a check for the rent that he has collected, less the amount of the plumber's bill and his commission.7. You are a lawyer. Write to the landlord, informing him that the mortgage which your client holds against the landlord's property expires in thirty days. Ask the landlord whether he expects to pay the money or whether he wishes a renewal of the loan for three years. Your client is willing to give such a renewal.8. The landlord replies that he is enclosing $100 to pay the interest due on the mortgage and that he desires a renewal of the loan. If the lawyer will prepare the papers, he will come to sign them at the specified time. Write the letter.9. You are an insurance agent. Write to the landlord that the fire insurance on his property expires in sixty days. Ask him to allow you to write a new policy. Inform him that the rate now will be 3¾% instead of if 1¾% as it was formerly, because a garage has been erected one door north of his property. (Why should the rate be higher?)10. One of the tenants has paid no rent for two months. You decide that he never will be able to pay. As landlord you makeout and deliver to him aFive days' notice of removal. At the same time, you write a letter to your lawyer, explaining the state of affairs and asking him to take charge of enforcing the notice. (This means that if the tenant does not move, the case must come up in court. If it is decided in the landlord's favor, the tenant must move. If he refuses, the lawyer engages a constable to eject him.) Write the letter.11. Francis L. Russell writes three short advertisements, offering for sale (1) a large 12 room residence, mortgage $6,000, price $15,000; (2) a 3 apartment building, clear, price $16,000; (3) a large 12 apartment building, mortgage $25,000, price $41,000, terms to suit. Where would you advertise? Write the advertisements.12. You get inquiries about all of the above. Write answers describing the buildings more fully, and make appointments with the writers to inspect the property.13. A man is interested in the 12 flat building, but he has only $10,000. Offer him the property for $40,000 on these terms: $10,000 down, a first mortgage for $20,000 to run 10 years at 5%, and a second mortgage for $10,000 to run 5 years at 5½%, $2,000 to be paid each year with interest. Make it as attractive as possible. Tell him you will arrange for the mortgages.14. (a) Write to your bank, the First National, and explain that, although the first mortgage on the 12 flat building for $25,000 still has 3 years to run, you would like to arrange for a 10 year mortgage for $20,000, if your prospective buyer takes the property. (b) Write to George R. Scott, who owns the building, offering him the second mortgage. Explain that although it is a second mortgage the fact that $2,000 of the principal is paid each year makes it attractive. (How would the owner benefit if the buyer failed to make his payments after 2 years?) Sign yourself Francis L. Russell.15. You have put through the deal. Write to the new owner, offering to take care of the renting for a commission equal to 2½% of the amount collected.

3. Write to Francis L. Russell, a real estate agent, asking his terms for collecting the rent of —— (tell the location of the house, the number of the tenants, and the rent you receive).

4. As if you were Francis L. Russell write a reply, saying that you will undertake the collection for a commission of 5%.

5. Imagine you are a tenant in the same building. The kitchen sink cannot be used in your flat because of a stoppage in the plumbing. You have told the agent once. Write him (see 3) again, stating that unless he sends a plumber you will not pay your next month's rent. (Is there any reason for writing this, rather than telephoning it?)

6. The plumber has submitted a bill of $5.98 for the repairs suggested in (5). The agent writes to the landlord, enclosing a check for the rent that he has collected, less the amount of the plumber's bill and his commission.

7. You are a lawyer. Write to the landlord, informing him that the mortgage which your client holds against the landlord's property expires in thirty days. Ask the landlord whether he expects to pay the money or whether he wishes a renewal of the loan for three years. Your client is willing to give such a renewal.

8. The landlord replies that he is enclosing $100 to pay the interest due on the mortgage and that he desires a renewal of the loan. If the lawyer will prepare the papers, he will come to sign them at the specified time. Write the letter.

9. You are an insurance agent. Write to the landlord that the fire insurance on his property expires in sixty days. Ask him to allow you to write a new policy. Inform him that the rate now will be 3¾% instead of if 1¾% as it was formerly, because a garage has been erected one door north of his property. (Why should the rate be higher?)

10. One of the tenants has paid no rent for two months. You decide that he never will be able to pay. As landlord you makeout and deliver to him aFive days' notice of removal. At the same time, you write a letter to your lawyer, explaining the state of affairs and asking him to take charge of enforcing the notice. (This means that if the tenant does not move, the case must come up in court. If it is decided in the landlord's favor, the tenant must move. If he refuses, the lawyer engages a constable to eject him.) Write the letter.

11. Francis L. Russell writes three short advertisements, offering for sale (1) a large 12 room residence, mortgage $6,000, price $15,000; (2) a 3 apartment building, clear, price $16,000; (3) a large 12 apartment building, mortgage $25,000, price $41,000, terms to suit. Where would you advertise? Write the advertisements.

12. You get inquiries about all of the above. Write answers describing the buildings more fully, and make appointments with the writers to inspect the property.

13. A man is interested in the 12 flat building, but he has only $10,000. Offer him the property for $40,000 on these terms: $10,000 down, a first mortgage for $20,000 to run 10 years at 5%, and a second mortgage for $10,000 to run 5 years at 5½%, $2,000 to be paid each year with interest. Make it as attractive as possible. Tell him you will arrange for the mortgages.

14. (a) Write to your bank, the First National, and explain that, although the first mortgage on the 12 flat building for $25,000 still has 3 years to run, you would like to arrange for a 10 year mortgage for $20,000, if your prospective buyer takes the property. (b) Write to George R. Scott, who owns the building, offering him the second mortgage. Explain that although it is a second mortgage the fact that $2,000 of the principal is paid each year makes it attractive. (How would the owner benefit if the buyer failed to make his payments after 2 years?) Sign yourself Francis L. Russell.

15. You have put through the deal. Write to the new owner, offering to take care of the renting for a commission equal to 2½% of the amount collected.

Exercise 297—Farm Lands

1. You own a large tract of land in the South, West, or Southwest. Choose your own locality. Prepare a pamphlet setting forth the advantages of this particular spot in a series of paragraphs: (1) scenery, (2) climate and healthfulness,(3) crops, (4) profits from the crops, (5) price of labor, (6) chances for pleasure, e.g., hunting, fishing, etc., (7) transportation facilities, (8) price of the land. Use a firm name and address.

2. Arrange and punctuate:

Nov. 1, 19— [For the introduction supply the same firm name used in (1)]. Gentlemen I have just returned from an extended trip through (the district spoken of above) with reference to the forty acres I purchased from you I desire to say that I am convinced that it will prove a paying investment I am so pleased that I shall certainly try to induce several of my friends to purchase near my site while on the property I carefully inspected the farm worked by Mr S R Jackson I must say what he is accomplishing the immense crop of vegetables and fruit he is marketing amazed me no doubt what he is doing I may do for I made sure by careful examination that the soil on my land is exactly like his you may depend upon it that within the next two months I shall move my family upon the land for I am eager to develop it sincerely yours F W Farrell

What advantage would there be in including such a letter as (2) in the booklet spoken of in (1)?

3. To prove the possibilities of the land spoken of in (1), you intend to start a model farm. Advertise for a farmer. Your plan is to give him 60 acres to develop for himself, in return for which he shall demonstrate the possibilities of the land.

4. Write a letter applying for the position. You must have farming experience, some money, a knowledge of crops, and a good deal of enthusiasm.

5. Write an advertisement of your land for a big newspaper. Exploit its most striking features, especially the price. Study such advertisements before you write yours.

6. Reproduce a letter you received in answer to (5), asking for more information concerning the lands.

7. Write the reply to (6). Say you are enclosing thebooklet spoken of in (1); tell of the model farm being established (3); and induce the inquirer to become a purchaser.

8. Prepare a series of three follow-up letters to be sent out to prospective purchasers who write as in (6) but who do not answer your letter in (7). Make each letter set forth one of the following advantages of buying a piece of your land: (1) The profits from the crops are large; (2) The conditions are ideal—mention climate, water, neighbors, transportation; (3) It is a good investment, since the land will certainly rise in value—tell of other land in the neighborhood that has risen in value within the last year. Arrange the letters in the order that you think will be most effective.

Exercise 298Topics for Investigation and Discussion

1. The cause of changes in city real estate values.2. The price of downtown property in your town.3. The rise in property values in the last few years.4. The causes of the rise.5. Stove heated or steam heated property—which is the better income producer?6. The Mortgage.—(a) Why people mortgage their property; (b) Why people loan money on mortgages.7. The increase in the total value of farm lands during the last ten years.8. The decrease in the value of farm lands in the East.9. The reasons for the growth of the West.10. Will the South be a new West?11. The reclamation of swamp lands.12. The success of irrigation.

1. The cause of changes in city real estate values.

2. The price of downtown property in your town.

3. The rise in property values in the last few years.

4. The causes of the rise.

5. Stove heated or steam heated property—which is the better income producer?

6. The Mortgage.—(a) Why people mortgage their property; (b) Why people loan money on mortgages.

7. The increase in the total value of farm lands during the last ten years.

8. The decrease in the value of farm lands in the East.

9. The reasons for the growth of the West.

10. Will the South be a new West?

11. The reclamation of swamp lands.

12. The success of irrigation.

Exercise 299—Insurance

An exposition of the subject of insurance is hardly in place here, especially as every one, to a certain extent at least, is acquainted with the fundamental reasons why insurance is purchased. The questions below should be used as a rudimentary review that will prepare for the letters that follow.

Oral

1. What is the object of insurance?2. What is meant by a policy?3. By the premium?4. By the beneficiary?5. By life insurance?6. By fire insurance?7. By accident insurance?8. By marine insurance?9. What is the difference between a straight life and a 20 year endowment policy?10. Between the above and a 20 year pay policy?11. Between the above and a term policy?12. Why is it that the mortgagee, and not the owner, holds the fire insurance policy? Why must the amount of insurance equal or exceed the amount of the mortgage?

1. What is the object of insurance?

2. What is meant by a policy?

3. By the premium?

4. By the beneficiary?

5. By life insurance?

6. By fire insurance?

7. By accident insurance?

8. By marine insurance?

9. What is the difference between a straight life and a 20 year endowment policy?

10. Between the above and a 20 year pay policy?

11. Between the above and a term policy?

12. Why is it that the mortgagee, and not the owner, holds the fire insurance policy? Why must the amount of insurance equal or exceed the amount of the mortgage?

Written

1. You are an insurance agent. A man came to your office to-day to inquire about a life insurance policy. Write him a letter, repeating what you told him, advocating his taking out a straight life policy.2. A new building has just been erected in your neighborhood. Write to the owner, soliciting him to let you write the fire insurance policy.3. Write to a man who rides downtown on the train every day. Convince him that he needs to take out an accident insurance policy. Point out that the premium is only $25 a year. If the man is injured he will receive $25 weekly; if he is killed by accident, his beneficiary will receive $5,000; if he is killed on a train or in an elevator, $10,000.4. Write to one of your clients, informing him that the premium on his life insurance policy falls due in ten days.5. Write to another of your clients, informing him that the insurance on his property runs out in ten days. Inform him that, if he wishes the policy renewed, he should let you know at once and remit the premium.6. From the client mentioned in (5) you receive a letter in which he explains that the paint store which formerly adjoined his property has been replaced by a grocery. He would like anew policy at a lower rate. Reproduce the letter. A paint store is insured at the highest, or hazard, rate. The rate on property adjoining a paint store would also be very high.7. You investigate the matter and find that the facts are as stated in (6). Write your client, offering him a rate of 1½% and enclosing a bill for $45.8. He replies that, since the risk of fire is now so much less, he wishes to take only $2,000 worth of insurance. He asks you to write such a policy, and he encloses his check for $30. Write the letter.9. A man writes to you, saying that he wishes to take out an endowment policy for his fifteen year old daughter, who has already been examined. He wishes to give the insurance to her as a birthday present. He encloses a check for the premium and asks you to send the contract to her on her birthday (Name the date). Write the father's letter.10. Write a letter to accompany the birthday present. Remember you do not know the daughter.

2. A new building has just been erected in your neighborhood. Write to the owner, soliciting him to let you write the fire insurance policy.

3. Write to a man who rides downtown on the train every day. Convince him that he needs to take out an accident insurance policy. Point out that the premium is only $25 a year. If the man is injured he will receive $25 weekly; if he is killed by accident, his beneficiary will receive $5,000; if he is killed on a train or in an elevator, $10,000.

4. Write to one of your clients, informing him that the premium on his life insurance policy falls due in ten days.

5. Write to another of your clients, informing him that the insurance on his property runs out in ten days. Inform him that, if he wishes the policy renewed, he should let you know at once and remit the premium.

6. From the client mentioned in (5) you receive a letter in which he explains that the paint store which formerly adjoined his property has been replaced by a grocery. He would like anew policy at a lower rate. Reproduce the letter. A paint store is insured at the highest, or hazard, rate. The rate on property adjoining a paint store would also be very high.

7. You investigate the matter and find that the facts are as stated in (6). Write your client, offering him a rate of 1½% and enclosing a bill for $45.

8. He replies that, since the risk of fire is now so much less, he wishes to take only $2,000 worth of insurance. He asks you to write such a policy, and he encloses his check for $30. Write the letter.

9. A man writes to you, saying that he wishes to take out an endowment policy for his fifteen year old daughter, who has already been examined. He wishes to give the insurance to her as a birthday present. He encloses a check for the premium and asks you to send the contract to her on her birthday (Name the date). Write the father's letter.

10. Write a letter to accompany the birthday present. Remember you do not know the daughter.

Exercise 300

Write the following from dictation:

1Must Reform our Farming

The average yield of wheat in the United States for the five years ending in 1910 was eight-tenths of a bushel per acre more than in the five years ending in 1905, but it was less than four-tenths of a bushel more than for the ten ending in 1900. The average corn product for the ten years ending in 1910 was a little less than for the ten years ending in 1875. Thirty-five years had not advanced us a step. European countries—Great Britain, France, Germany—with inferior soils and less favorable climate produce crops practically double our own. In our studies of conservation we find no waste comparable, either in magnitude or importance, to this. The farm will fail, and the foundations of our prosperity be undermined, unless agriculture is reformed. The percentage of our people actively engaged in farming had fallen from 47.36 in 1870 to an estimated 32 in 1910. Every man on the farm to-day must produce food for two mouths against one forty years ago.—J. J. Hill.

—J. J. Hill.

2The Farming Specials

One of the latest and most successful activities of the railroads is the practice of carrying knowledge of the best farming methods to the farmers by means of special trains equipped like agricultural colleges. These trains, bearing experts and all the equipment for exhibiting the new methods of agriculture, bring the knowledge to the farmers free, and the railroads are glad to give it, for every bit of knowledge comes back to them in a hundred fold profit in freight. In the summer eager audiences all over the country listen to the preaching of better methods and larger crops. Dozens of special trains travel through the agricultural regions disseminating information. The "Breakfast Bacon Special" has been run to encourage Iowa farmers to raise more hogs to take advantage of the high price of bacon. The Cotton Belt Route southwest of St. Louis runs the "Squealer Special" to prove to the Arkansas and Panhandle farmers the money-making advantages of blooded hogs over the razor-back variety. Down the Mississippi Valley the Illinois Central sends the "Boll Weevil Special" to conduct a campaign against that pest. The Harriman lines have six trains operating in California every year. In one year they visited more than seventy-five thousand people. Better farming specials run in practically every state south of the Ohio and Potomac and west of the Mississippi. The New York Central also has two trains in operation in New York.—The Business Almanac.

A large proportion of farmers give little or no attention to the selection of seed; yet it has been demonstrated that a careful selection would add hundreds of millions of dollars to the total value of the crops. If, for example, a variety of wheat were developed capable of producing one more kernel to the head, it would mean an addition, so Burbank says, of 15,000,000 bushels to our average wheat crop. It is possible, however, to do even more than this. At the Minnesota station a variety, selected for ten years according to a definite principle, yielded twenty-five per cent more than the parent variety. Applied to our average crop, that increase would amount to 185,000,000 bushels, worth about $140,000,000. As for corn, it has been officially stated thatour average yield could easily be doubled. After exhaustive experiments the Department of Agriculture says that by merely testing individual ears of seed corn and rejecting those of low vitality an average yield of nearly fourteen per cent could be secured, adding about $200,000,000 to the value of the crop. Does scientific seed selection seem worth while?—The Wall Street Journal.

BANKING

Imaginethat you are a druggist in a small town. Suppose that a woman comes in to buy two ounces of camphor and in exchange gives you three eggs. In a few moments, perhaps, a man enters to buy a safety razor and brings with him wheat enough to pay the bill. Another, again, wishes to trade a turkey for a fountain pen. You can readily see the inconvenience to which you would be put in such exchange of actual commodities; yet this was the method used in primitive times, a method calledbarter.

To overcome the inconvenience of barter, as civilization advanced, it became necessary to establish a common medium of exchange, which could be accepted for anything one had to sell and with which one could buy anything he wished. This is what we callmoney. To meet the requirements, money must not be bulky, must be durable, and must not readily change in value. In civilized countries gold and silver are the bases of exchange.

But gold and silver are heavy and inconvenient to carry about in large, or for that matter in small, quantities, and for convenience the following kinds of paper money have been established:

1.Gold Certificatesare issued with the government's guarantee that there is gold deposited in the Treasury equal to the amount of the face of the bill. At any time the one holding such a bill may demand of the Treasury that he receive gold for it.

2.Silver Certificatesare similar to gold certificates, except that silver is deposited in the Treasury instead of gold.

3.United States Treasury Notesare promissory notes of the government to pay the sum indicated. They are not payable on demand.

4.National Bank Notesare promissory notes issued by the national banks and are payable on demand of the bearer. Before a national bank may issue such notes, it must own United States government bonds of at least the amount for which it issues notes. These bonds are held by the Treasurer of the United States as security that the bank will pay its notes. According to the Owen Glass Bill, passed in December of 1913, national bank notes may at the option of the banks be gradually withdrawn from circulation.

Credit

Creditis a promise to pay at some future time for a thing which you receive now. Its use is probably as old as the practice of exchange and quite as important. The simplest and most extensive form of credit is "book" credit, such as you get at the grocer's or butcher's or at the department store. To explain a little more complex kind of credit: Suppose you owe Smith one hundred dollars. At the same time Smith owes Jones one hundred dollars. Because you owe Smith, he may give Jones an order to collect the money from you. With this order Jones may pay his lawyer, let us say. Perhaps the lawyer has bought a bill of goods from you. He pays you with the same order. You destroy the "note," and thus four actual transactions have been taken care of without the use of any money. The business institution which deals especially with credits is the bank.

Banks

A bank which fulfills every banking function must have these three departments: (1) the commercial department, (2) the savings department, (3) the trust department. Some institutions specialize in one department more than in eitherof the others, and thus, taking the name from their principal function, banks are known as follows: (i) commercial banks or banks of deposit, (2) savings banks, (3) trust companies.

Banks of Deposit

Deposit slip

Banks of deposit or commercial banks are business men's banks. Their two principal functions are (1) receiving money for safe-keeping on deposit, and (2) loaning money to business men at interest. The deposit function is based on confidence and credit. The business man takes his money to the bank not only because it is convenient for him to do so, but also because he has confidence that the money will be more carefully protected than if he kept it in his own possession. In depositing his money in the bank, the business man uses adeposit slipsuch as the one illustrated here. The teller puts down the amount in thebank bookof the depositor, who is credited with that amount on the bank's books. He is entitled to draw just that much actual cash or that much credit in the form ofchecks. (Seepage 339.) Most firms do not deposit a sum of money and then promptly draw it out again in the form of checks to pay current liabilities, but maintain a fairly steady balance in the bank. On large average monthly balances most banks allow interest, varying from one per cent on balancesof one thousand dollars to three per cent on balances of ten thousand dollars or more.

Discount

Because a large bank has many depositors, the aggregate of all the balances makes a considerable sum of money. Bankers have learned by experience just what proportion of their deposits they can depend on to remain steadily on deposit as a balance, and thus they know what proportion of their deposits it is safe to use for the purpose ofdiscount. The simplest case of the discount function is the discount of a promissory note. In the note shown in the illustration after ninety days John H. Blodgett will receive from Lucius Thomas five hundred dollars with interest. But perhaps Blodgett cannot wait ninety days for his money. In this case, he takes the note to his banker, who will pay him the five hundred dollars less a certain percentage or discount, which is the bank's profit on the transaction. The bank then collects the note when it becomes due.

Promissory NotePromissary Note

Collateral

Instead of cashing a note held by one of its customers, the bank may itself loan money at interest for a short period of thirty, sixty, or ninety days, taking the note of the businessman to whom the money is loaned. In most cases, however, unless the bank knows the business man well, a certain amount ofcollateralis demanded as an assurance that the borrower will pay the loan when it becomes due. The amount of collateral deposited with the bank is usually 10% to 25% in excess of the amount loaned, and it may take the form of stocks or bonds; mortgages on real estate; liens on stock, fixtures, or personal property; or warehouse receipts. When the amount borrowed is paid, the collateral is returned; if it is not paid within a reasonable time, the collateral is sold, and the amount loaned, with interest to date, is taken from the proceeds.

There are, of course, other functions of banks of deposit practised quite generally by all banks, and these will be explained later. The functions just described, however, distinguish banks of deposit in a general way from the other two classes.

Savings Banks

A savings bank accepts from its depositors small amounts of money which are not subject to withdrawal by check, but on which it pays a low rate of interest. As a general rule, an account may be opened with one dollar; and when the initial deposit is made, the depositor is furnished with a pass book, similar to the bank book, in which further deposits, interest credits, and withdrawals are recorded. Interest is compounded every four or six months, and money must, as a general rule, remain on deposit until an interest payment date before the depositor receives any interest on it. The usual rate of interest is three per cent, although four is often paid. Frequently, before banks allow deposits to be withdrawn, they demand a certain number of days' notice, usually thirty. It is well to investigate the conditions under which the depositor places his money in the safe-keeping of the bank, because the withdrawal requirements are oftenstringent. Because of the stability of this class of deposit, banks are always anxious to increase their savings accounts, as a large proportion of the funds may be used for loans.

A form of the savings bank established in the United States in 1911 is the postal savings bank, in which the post-office is made the depository for savings. The post-office in the town deposits its funds in the local national or state bank, which, as security for safe-keeping, must deposit with the Treasurer of the United States bonds at least equal in value to the amount of savings deposited in the bank. Postal savings banks are practically absolutely safe, because, if the bank which takes care of the funds should fail, the bonds may be sold, so that the savers will receive their money. From deposits made in the postal savings bank, the return to the depositor is only two per cent, whereas the return from deposits made in the bank's own savings department is three, three and a half, and sometimes four per cent.

Trust CompaniesThe Richards' Baby Stocking Fund

A miner named Richards was killed in an accident in an Alaska mine. Among his possessions were found a number of letters and a baby stocking containing a little gold dust. The letters told that Richards had a little six-year-old daughter, who was now left destitute. The rough miners made up a fund of $2,500 in gold dust, depositing it with the United States Commissioner of the Territory of Alaska, to be held by him until the proper disposition of it could be made. Acommitteewas appointed, who agreed that one hundred dollars a year for ten years should be used to give the child a common school education, and then five hundred dollars each year to give her a college education. A legal guardian was appointed, and the Kansas City Trust Company asked to act as co-guardian to invest the money and make the required remittances. The funds were first deposited by the commissioner in a bank in Portland, which sent them to the Kansas City Trust Company. Correspondence was of course carried on at the same time, the Kansas City Trust Company agreeing to accept the trust withoutremuneration. They have invested the money in five per cent bonds, thus increasing the fund yearly.

This is called atrustbecause the money is entrusted for safe-keeping and investment to the bank, which is called thetrustee. A bank may also become the trustee for property left at the death of a person, both when there is a will and when there is none. When there is no will and the bank takes charge of the affairs of the deceased, the bank is called theadministrator;when there is a will, theexecutor. Another important function of the trust company is acting asreceiverfor a company which has failed; that is, adjusting the company's affairs in the way fairest both to the stockholders and to the company's creditors. The trust company often acts, also, asagentfor its clients' property, performing the same duties as a real estate agent.

Form of Remittance

Banks as a class are distinguished one from the other according as they specialize in one or more of the functions described above. However, there are certain services that all banks perform and certain facilities that they all offer in connection with the payment of money from one person to another. These concern the forms of remittance.

If you have studied business arithmetic or bookkeeping, you very likely know the definite forms that are used. At all events, you know that currency should never go through the mails. The following is a brief review of the more important forms that may be used. Study the illustrations carefully, noticing particularly the similarity of form in all. Uniformity in such matters is desirable because it saves time as well as misunderstandings. The forms we shall consider are:

1. The checka.Personalb.Certified2. The money ordera.Expressb.Postal3. The bank draft4. The time draft5. The sight draft

Check.—A check is a written order on a bank, signed by a depositor, directing the bank to pay a certain person a certain sum of money. When the bank pays the order, it deducts the amount from the depositor's account. The one who signs the check is called thedraweror maker; the person to whom or to whose order a check is made payable is called thepayee;the bank on which a check is drawn is called thedrawee.

Check and StubCheck and Stub

Of course, before you could write a check for one hundred dollars, you must have deposited at least one hundred dollars in the bank on which the check is drawn. The bank supplies you with a check book, consisting of blank checks, each attached to a stub. When you write a check, you put the same information on the stub to be kept for reference. Then you tear off the check through the perforated line, using it to pay for whatever you may have purchased.

Certified Check.—Suppose, however, that you are writing this check to pay a debt to a stranger who lives in anothercity. He may hesitate to accept it as money. That he may have no cause to doubt your ability to pay the check, you take it to your bank to have the cashier investigate your account. If he finds that you have sufficient funds, he writes or stampsAcceptedorCertifiedon the check and signs his name. At the same time the amount of the check is deducted from your account. Such a check is accepted without question when the holder is properly identified.

Endorsement.—If A gives you his check for twenty-five dollars, you could not receive the money until you had endorsed the check; that is, put your name on the back, which is, in effect, giving a receipt for the money. You may do this in various ways. You may endorse:

1. In blank; that is, merely write your name across the back.2. In full, by saying, "Pay to the order of ——" and signing your name.3. By restricting the payment to a particular person; as, "Pay to ——" This check cannot now be cashed by anyone except the one named in the endorsement.

1. In blank; that is, merely write your name across the back.

2. In full, by saying, "Pay to the order of ——" and signing your name.

3. By restricting the payment to a particular person; as, "Pay to ——" This check cannot now be cashed by anyone except the one named in the endorsement.

Express Money OrderExpress Money Order

Express Money Order.—An express money order is much like a check, except that it is drawn on an express company instead of on a bank and reads, for example: Continental Express Company agrees to transmit and pay to the orderof —— (the one to whom you are sending the money) —— (the amount). The order is signed by the treasurer of the company and countersigned by the agent who sells it. You can buy such an order at any express office. It may be endorsed like a check.

Postal Money OrderPostal Money Order

Postal Money Order.—The other form of money order, the postal, is an agreement signed by the postmaster of one city that the postmaster of another city will pay the amount of money named in the order to the person named in the order.

Bank Draft.—A bank draft is very much like a check, except that instead of two individuals dealing with each other two banks conduct the transaction, their places of business being in different cities or villages. A bank draft is sometimes called a bank check, because in the case of both a draft and a check one party draws upon another with whom the first has funds deposited. As a general rule, banks and business houses require that remittances be sent to them by drafts drawn on New York or Chicago banks, as there is a charge calledexchangemade in the collection of checks drawn on local banks.

In the draft that follows, the State Bank of Utah, of which Henry T. McEwan is Assistant Cashier, makes out the draft. The bank which is ordered to pay the money is theNational Park Bank of New York. The money is to be paid to Henry L. Fowler. The State Bank of Utah is called the drawer; the National Park Bank of New York, on whom the draft is drawn, is the drawee; Henry L. Fowler is the payee.

Bank DraftBank Draft

EndorsementEndorsement

The payment indicated above was probably made without actually sending the money from Salt Lake City to New York. It was done in this way:

Henry L. Fowler of Salt Lake City owes one hundred dollars to a man living in an Eastern city, let us say Charles Emery of Rochester, N. Y. Mr. Fowler goes to the State Bank of Utah in Salt Lake City and "buys a draft on New York," made payable to himself. The bank makes out the above, charging Mr. Fowler one hundred dollars plus a fraction of one per cent for its trouble. Mr. Fowler endorses it in full to Mr. Emery of Rochester and sends the draft to the latter. He has the draft made payable to himself so that theendorsement will constitute a full record of the transaction. Mr. Emery takes the draft to his own bank in Rochester, endorses it in blank, and receives the one hundred dollars. Thus Mr. Fowler has paid out the money and Mr. Emery has received it.

The way the banks conduct the transaction is as follows: There are certain big money centers in the country; e.g., New York, Chicago, St. Louis, San Francisco. Important banks in other places have money on deposit in at least one bank in each of these centers. The banks which thus deal with one another are calledcorrespondents. The National Park Bank is the correspondent of the State Bank of Utah. When Mr. Emery cashes the draft at his Rochester bank, the latter sends it to its New York correspondent, and at the same time charges the correspondent one hundred dollars. The correspondent presents the draft to the National Park Bank, which pays the money and charges the same amount to the State Bank of Utah. Explain how this settles the transaction.

Time Draft.—A time draft is much like a bank draft, in that two banks conduct the principal part of the transaction for two individuals, but no money is actually paid at the time the draft is drawn. The details of a transaction of this kind are explained on the following page.

Time DraftTime Draft

Horace Prang of 1008 Elm Street, Columbus, Ohio, owes Loetzer & Co. five hundred dollars, due August 27, 1915. Loetzer & Co. make out the draft above and deposit it in the Bank of Buffalo. The latter sends the draft to its correspondent in Columbus, which presents the draft to Horace Prang. If he is willing to pay the note when it falls due, he writes across the face of it, "Accepted" adds the date, and signs his name. It is now returned to the Bank of Buffalo. The Bank of Buffalo will then discount the draft for Loetzer & Co.

Sight Draft.—A sight draft is much like a time draft, except that the amount is paid by the person on whom it is drawn as soon as it is presented, instead of after a stipulated length of time.

Sight DraftSight Draft

Suppose the Empire Elevator Co. of Buffalo has sold $420 worth of grain to the Smith Milling Co. of Springfield, Mass. When the grain is loaded on the cars, the railroad company gives the Empire Elevator Co. a bill of lading. Now, the Smith Milling Co. must possess this bill of lading before it can take the grain from the cars at Springfield. The Empire Elevator Co. deposits the bill of lading with the above draft in the Marine National Bank of Buffalo. This bank sends both to its correspondent in Springfield. The Springfield bank presents the draft to the Smith Milling Co., who may takethe grain from the cars on payment of the draft. In case of non-payment, both draft and bill of lading are returned to the Marine National Bank of Buffalo, and the Empire Elevator Co. must make arrangements for the return or the disposal of the grain.

Exercise 301

1. F. R. Thompson, sales manager of the New York Trust and Savings Bank, sends a circular letter to a number of banks, saying that he is enclosing a booklet that describes a number of bonds suitable for the security of postal savings deposits, the legality of which has been carefully investigated. In his letter he mentions especially Omaha, Nebraska, School 4½% bonds, price to net 4.40%; Seattle, Washington, Harbor 5% bonds, price to net 4½%; and Hoquiam, Washington, Bridge 5½% bonds, price to net 5%. Reproduce the letter, addressing it to W. W. Fallows, Cashier of the Mercantile National Bank of Pueblo, Colorado.2. Mr. Fallows answers, saying that his knowledge of the postal savings law is vague and that he would be glad if Mr. Thompson would give him definite information on the subject.3. Mr. Thompson replies that he is enclosing a copy of the postal savings law. He assures Mr. Fallows that he can serve the latter both in buying the proper securities and in depositing them with the Treasurer of the United States. Application for such deposits must be made by the bank itself. Mr. Thompson will gladly inform him if Mr. Fallows does not know the steps to be taken or the report to be submitted.4. Punctuate, using a letterhead:Mercantile Trust Company New York City Dec 2 19— manager the bank of Scotland 3c bishop E C London England dear sir we are sending you herewith advice of the issuance of our circular letter of credit No. 262 in favor of Miss Helen Jackson for 300 pounds sterling Miss Jackson is at present in Paris France and the letter of credit has been forwarded to Messrs Thomas Cooke and Son 1 Place de l'Opera Paris we have requested Messrs Thomas Cooke and Son to forward to you two specimens of Miss Jacksons signature which we have signed and forwarded to Messrs Thomas Cooke and Son for that purpose so that you may have these signatures before any drafts against the letter of credit are presented to you yours very truly James R Hudson treasurer.What is a letter of credit? How did Miss Jackson get it?The Bank of Scotland is the correspondent of the Mercantile Trust Company. Explain.Why should the New York bank forward Miss Jackson's signature?5. Write the letter that the Mercantile Trust Company sends to Messrs. Thomas Cooke and Son.6. Write the letter that Messrs. Thomas Cooke and Son send to the Bank of Scotland.7. W. T. Randall, cashier of the Milwaukee Trust and Savings Bank, Milwaukee, Wis., writes a letter, the purpose of which is to secure savings accounts. A club of 500 members is to be formed. Each member is to buy a share by paying one dollar and to pay one dollar per week per share, the amount to draw interest at 3%. After forty-eight weeks he gets credit for fifty dollars per share, thus securing over 5% interest on his money. Make the offer attractive.8. Some time ago a bank in your city discounted a note held by George Carpenter, signed by Martin Kugerman. The note falls due in ten days. As cashier write to Mr. Kugerman, telling him that you hold the note and that you hope he will be able to remit on the day of maturity.9. Your bank loaned Clarence Wentworth $500 for ninety days, taking as security $700 worth of collateral. The note falls due in a week. Write to Mr. Wentworth, reminding him that the note falls due and asking him whether he wishes to pay it off or whether he wishes it extended.10. John Elsworth, who has an account with you, writes, saying that by registered mail he is sending you certificates of 20 shares Union Pacific common stock, 50 shares National Biscuit Co. preferred stock, 5 (bonds) American Telephone and Telegraph convertible 4½'s, 3 (bonds) New York and East River Gas Co. first mortgage 5's. He asks you to take care of them and collect dividends and interest when they are due, crediting them to his account.11. Your correspondent, the First National Bank of Janesville, Wis., writes, asking you to forward by registered mail $5,000 in currency.

2. Mr. Fallows answers, saying that his knowledge of the postal savings law is vague and that he would be glad if Mr. Thompson would give him definite information on the subject.

3. Mr. Thompson replies that he is enclosing a copy of the postal savings law. He assures Mr. Fallows that he can serve the latter both in buying the proper securities and in depositing them with the Treasurer of the United States. Application for such deposits must be made by the bank itself. Mr. Thompson will gladly inform him if Mr. Fallows does not know the steps to be taken or the report to be submitted.

4. Punctuate, using a letterhead:

Mercantile Trust Company New York City Dec 2 19— manager the bank of Scotland 3c bishop E C London England dear sir we are sending you herewith advice of the issuance of our circular letter of credit No. 262 in favor of Miss Helen Jackson for 300 pounds sterling Miss Jackson is at present in Paris France and the letter of credit has been forwarded to Messrs Thomas Cooke and Son 1 Place de l'Opera Paris we have requested Messrs Thomas Cooke and Son to forward to you two specimens of Miss Jacksons signature which we have signed and forwarded to Messrs Thomas Cooke and Son for that purpose so that you may have these signatures before any drafts against the letter of credit are presented to you yours very truly James R Hudson treasurer.

What is a letter of credit? How did Miss Jackson get it?

The Bank of Scotland is the correspondent of the Mercantile Trust Company. Explain.

Why should the New York bank forward Miss Jackson's signature?

5. Write the letter that the Mercantile Trust Company sends to Messrs. Thomas Cooke and Son.

6. Write the letter that Messrs. Thomas Cooke and Son send to the Bank of Scotland.

7. W. T. Randall, cashier of the Milwaukee Trust and Savings Bank, Milwaukee, Wis., writes a letter, the purpose of which is to secure savings accounts. A club of 500 members is to be formed. Each member is to buy a share by paying one dollar and to pay one dollar per week per share, the amount to draw interest at 3%. After forty-eight weeks he gets credit for fifty dollars per share, thus securing over 5% interest on his money. Make the offer attractive.

8. Some time ago a bank in your city discounted a note held by George Carpenter, signed by Martin Kugerman. The note falls due in ten days. As cashier write to Mr. Kugerman, telling him that you hold the note and that you hope he will be able to remit on the day of maturity.

9. Your bank loaned Clarence Wentworth $500 for ninety days, taking as security $700 worth of collateral. The note falls due in a week. Write to Mr. Wentworth, reminding him that the note falls due and asking him whether he wishes to pay it off or whether he wishes it extended.

10. John Elsworth, who has an account with you, writes, saying that by registered mail he is sending you certificates of 20 shares Union Pacific common stock, 50 shares National Biscuit Co. preferred stock, 5 (bonds) American Telephone and Telegraph convertible 4½'s, 3 (bonds) New York and East River Gas Co. first mortgage 5's. He asks you to take care of them and collect dividends and interest when they are due, crediting them to his account.

11. Your correspondent, the First National Bank of Janesville, Wis., writes, asking you to forward by registered mail $5,000 in currency.

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