From How to Make Money; and How to Keep it, Or, Capital and Labor based on the works of Thomas A. Davies Revised & Rewritten with Additions by Henry A. Ford A.M. – 1884
BANKING AND INSURANCE.
I wish I could write all across the sky, in letters of gold, the one word, SAVINGS-BANK. Rev Wm. Marsh
The relations of the banking system to the operations of general trade are so intimate and indispensable that every man of buisness should be acquainted with their nature and extent. James D. Mills
Insurance is to-day recognized as not only an integral and necessary factor in the commerce of nations, but it is imperatively demanded for the establishment and maintenance of commercial credit among all civilized peoples. To such importance has it grown that governments have acquired immense revenues by taxing the income derived from it, and have in some instances assume greater or less control over it. Insurance Year Book
BANKS are of three kinds -of discount and deposit, individual or private, and savings-banks. They have all but one object—to make money with money. This principle is all-important with the money-maker; and to know how this is done is to accomplish a great object. This chapter will not presue to give such institutions or individuals any information how it is to be done; for their success generally is a proof that they understand that. Further, it is an occupation—that may me considered a trade within itself— requiring long experience, large knowledge of values, good judgment, rare firmness, and in fact every business qualification in high perfection. Reference to banking as one of the most extensive means of making money with money, is simply to show the moneymaker, after he has got his dollar, how others manage their dollars to advantage, so that he may know the danger of managing his own with his trifling information—a subject which requires superior knowledge and high acquirements to do well.
No statistics are at hand to compare directly any other trade or business with banking in the particular of success. An interesting fact, however, was asserted by an officer of an old Boston bank, that an investigation of their books revealed the fact that, of the one thousand accounts opened with it in starting, only six remained with it forty years afterwards. The parties to all the others had either failed or died destitute of property. The bank had stood, while nine hundred and ninety-four traders out of one thousand had gone down. It can probably be asserted with safety that not five per cent of failures occur in any regular banking business, while there are ninety to ninety-five per cent among commercial houses. Both deal substantially in the same things, the one class in the articles themselves, the other in the paper representing their value. This fact is sufficient to awaken the mind of the merchant or trader to an investigation of the manner in which banks handle their values—what they do, how and when they do it, and how they happen to succeed when so many others lose and fail. And now, Mr. Trader, or Sir Merchant, if you are wide awake enough to this fact to push the investigation and profit by it, you are prepared for a better day’s work than you ever did in your life. But more likely you will say, “Pooh! a bank is one thing, a mercantile business another.” You say the truth, indeed, as both are conducted at the present day. The result, however, is that the one is a success, while the other is a failure.
But not the trader alone is interested in this question: it is for every one who has made a dollar or who is in the way of making it, to be interested in knowing the machinery of banking, how money is made from money, and further, to know that it requires machinery of a peculiarly delicate nature, and specially well managed, to accomplish the object, at least in this particular way of making money with money. More than half the people who have labored for their dollar do not know that such machinery can have the least bearing upon what they have made, and that putting it through this machine, or some process like it, will send it forth increased in value. The trouble is that they generally put it into some kind of a machine which never allows them to see it again at all, much less any increase from it.
Can the fine, exact machinery of a mint be made by a novice? or can it be managed by one totally ignorant of its construction’? Just as well might a man attempt to increase his means without some knowledge of the necessary machinery, as to coin a standard dollar without knowing the process by which it is coined, and having the faculty to use bis knowledge in the coinage. The trade of multiplying dollars by making dollars work is not caught up in the inspiration of the moment, and he who has a dollar to set at work must know well how the work is to be done; he must find a machine that is known to do this kind of work well, or loss of it is the inevitable result. Hence the long, sad list of failures and wide-spread poverty among our most worthy and energetic men—not to accomplish or earn, or even to amass, but to save, because their dollar has gone into the wrong machine.
The process of banking is the machinery required in order to make money with money. What is this process? In banks of discount and deposit, a number of capitalists generally put in a sum of money apiece, and receive therefor certificates of stock, according to the amount of their subscriptions. The stockholders duly assemble and choose several of their own number for directors, who in turn meet and elect a president, cashier, and sometimes other officers. In their bank people leave (deposit) their money for safekeeping within convenient reach; and the original money subscribed by the stockholders, with the deposits, makes a capital with which to purchase moneyed, interest-bearing securities—generally notes of hand, representing property of different kinds. The bank is then ready for business—to loan the money on short dates for an increase.
The whole matter is very simple to this point, and almost anyone could go through it. But now comes the tug of war, for success or failure, even in this business. A merchant enters with a note he has taken for goods sold, and says to the Cashier, “I wish you would give me the money on this.” The answer is, “I will hand it to the President, and give you a reply after the Board meets.” The President lays the applicant’s paper before the Board of Directors; and if it is strongly endorsed and has collateral security enough to make the loan perfectly safe, the note is “done,” as it is called, and the merchant gets his money.
Do you see anything in this process to attract attention? When you take a note, or part with property or money, do yon do anything of this kind? Do you submit your financial transactions for the approval or rejection of two shrewd, trained business men, who, not content to rely solely upon their own
judgment, summon to their aid a number of other first-class business men, to pass upon the security offered? Bear in mind that in the very first instance they require at least two good, strong names to start with, or equally safe collateral security, and then that the line of payment is usually very short— from thirty to ninety days. Sometimes a bank loses even with these precautions ; but not very often. By requiring two names and making the time of payment short, one or the other is pretty certain to save the loan. No business transaction has not some risk, the main thing being to reduce that risk by every devisable precaution as low as possible. In the matter of taking a note, twelve to fourteen able and longtrained business men carefully consult as to the value of the security proposed, and everyone is pecuniarily interested in the result. An isolated person, then, who has a security to take, can consult no one else who has a like intercst with him. Such investments are generally made upon reference to persons who have no interest with the one who parts with his property, but whose interest as a general rule is to have you part with your property, that they may get pay for the property with which they have parted.
Now, do you think a bank would part with its money on such terms or such representations? If it did, anyone knows what would be the result. Do you wonder, then, that on such a system of credits traders fail, or that banks succeed by such care, caution, and scrutinizing discrimination? The banks divide their earnnings periodically among the stockholders, who make new investments in similar kind; while the trader declares no dividend, puts nothing away to the good, but keeps all his eggs in one basket, subject to the vicissitudes of trade.
Banks of discount and deposit are useful, as a means of making money with money, to those who have com, comparatively large sums to set at work. But there is a class of moneyed institutions called savings-banks, in which any person can in like manner set any sum at work, from one dime upward. But the amount of profit derived is not generally so great as in the banks of discount and deposit. The savings-banks will receive separate treatment presently.
Although banks present so far the nearest approach to perfection in the interchange of values represented by paper, there are certain general principles that will materially increase these earnings. They may briefly
be stated to be,—
- First, the business qualifications of its officers.
- Second, judicious selection of its credit.
- Third, the current expenses.
- Fourth, general reputation.
The personal popularity of the officers of a bank, and the manner in which customers or depositors are treated, either win or lose money for the concern, the same general rules of courtesy holding in these cases as in transactions between merchants, or between them and their customers. No thoughtful business man will neglect this principle, whether he is in a bank or any other business where his profits depend upon people who have a choice, and can take their money at discretion to one or to another. If a depositor goes into a bank to get some of his money, and a teller makes him wait while he finishes a long chat with a fellow-clerk or adds up a column of figures as long as his arm, which he could just as well postpone a moment, the underling is unfit for his place and is a damage to the bank—money actually lost to it. Say what you will, the waiting man feels uncomfortable; and instead of using his influence to advance the interests of that institution, he will hold it back, if he does not inflict damage in some way. Instead of an active friend, the bank will have but a cool one, if not an open enemy; and there is no telling when his influence, by a single word, may not strike to its damage or loss. So any other carelessness or neglect, on the part of a bank officer or employee, will tend to the same result.
On the other hand, to be polite, attentive, agreeable to all, at the same time doing business on business principles, will bring many dollars into the deposit-line, and long keep them there. The bank will make powerful friends, whose influence will be exerted to bring it new business and open new avenues of profit. An interest in the welfare and prosperity of the institution is lighted up, that will serve as a watchfire for its interests, and give the alarm when danger of loss appears. A general reputation and thrift will be infused into its whole business, which will roll in heavily on the deposit-line and out heavily on the dividends. In time of trouble all will pay such an institution who can.
Savings-banks are organized and conducted by persons of much practical knowledge and financial skill, for the benefit of those who desire to save and improve small sums of money, but do not know where or how to place them at interest, and yet have them subject to their call. The savings-bank was started by Miss Priscilla Wakeham, of the Parish of Tottenham, Middlesex, England, nearly a century ago, and after some years had a yery rapid growth. The plan is eminently useful and truly charitable. It requires a convenient building for its business, and the usual officers to conduct it. They take deposits, large or small, and invest them in good-sized sums at higher rates of interest than they pay depositors, the difference being used for current expenses and salaries. The interest received is usually seven per cent or more, and that paid depositors is four to five per cent, and even less for very short periods of deposit.
The bank holds itself ready to meet obligations to depositors at all times, on demand. The advantage resulting to the depositor is apparent, since he can not invest small sums safely in any other way. He generally knows nothing of practical financiering, and it would be costly for him to get security by any other means. Other securities, too, are not always convertible into cash without some percentage of loss.
Too much can hardly be said in favor of savings institutions for the protection of earnings and as incentives to economy. They supply a safe and certain means by which in a few years, as we have already seen, an independence can be attained, and the money that represents it is always within reach. The money that a mechanic, day-laborer, domestic, operative, or other wage-worker, spends in trifles that add neither to his comfort nor happiness, is a powerful stream of wealth, which, if poured into a savings-bank, soon becomes a large amount of money. The first dollar thus saved and fast anchored, becomes the nucleus of further and rapid additions, and the taste for economy and desire of accumulation will grow with every successive deposit. Such a person becomes a conservative member of society, a good, prosperous citizen. When a man or woman has made the first deposit, from that moment his or her services are more valuable, and higher wages can be commanded. It is a guarantee or endorsement that the depositor’s course of life is to be governed by principles of economy and habits of saving, and that the property of an employer is not to be wasted or destroyed. Noon, then, should fail to make a first deposit, or to train himself to strict principles of economy, the cutting off of such expenses as are not really necessary for either comfort or respectability. It should be remembered, also, that such a course commands general respect and uplifts the depositor’s character. One feels more independent, and carries the evidence of it in his whole bearing and demeanor, when he is free of debt and has money at interest. If this statement should be challenged by anyone, let him try it, and he will find, from the instant of success, that he lives in a new world. Any person, no matter what his walk in life, is more esteemed and more deferred to by his fellows if he is known to be without embarrassments or encumbrances, and has, money at his disposal. The same rule governs the coachman, the housemaid—classes of persons. Let it become known that an industrious young working man or woman has a bank account, with his bank-book as the evidence of it; and though the amount of his deposit be wholly unknown, the mere fact of it gives one importance and influence. There is no surer way for a young woman to get a husband, and most likely a good one, than to have a good sum in bank.
Upon the next two pages we give tables showing the wonderful results of compounding interest for terms of one year to one hundred years, and at rates from one to eight per cent. Upon the basis of the one dollar given, the amount for any sum may be computed. Thus, to find what $50 will come to in twenty years, at four per cent interest, find the result for one dollar in the table, which is $2.19, and multiply it by fifty, which gives $109.50. These tables are highly interesting and valuable, and should be carefully studied.
Under the head of Insurance are classed several varieties—among the more common fire, marine, inland, accident, and life, among the rarer tornado, livestock, and plate-glass insurance. All belong to the class of business we are considering—money-making with money. They are further subdivided into cash and mutual companies, and are here considered more as examples how money can be made with money, and s0 of peculiar interest to the money-maker, than with a view to special commendation of them, as the most or the least profitable method of so doing. It is rather also to explain their existence as means of saving than of making.
Like banks, insurance companies are usually conducted by superior business men, and upon the same general principles. They have become genuine necessities to all who have property at the risk of the elements, and can not afford to insure themselves—that is, to lose without embarrassment. To the moneymaker they are invaluable, not only as a means of offset against loss, but to make accumulated money gain money. Sometimes the profits of such a business are very large—and at times, too, more frequently than in banking, there is a total loss of the capital invested. It may be said, indeed, that in all business where profits are large, corresponding risks of loss are run. In this branch the chances of gain are greater on marine than on fire insurance, other things being equal.
But the chief benefit of such institutions to the money-maker is that, if his property is in such shape that it can be destroyed by the elements, and it is so
destroyed, wholly or partly, he can cover his loss by the payment annually of a comparatively small sum. Every one, therefore, who is endeavoring to make
money should keep all his endangered property fully insured. An hour’s neglect may lose you many years of toil, as has repeatedly occurred. Take especial care when yon settle’ your agreements with the company’s agent; see that all stipulations are written into the body of the policy, and read it over when completed, with cautious criticism of every point and particular. Observe what you agree, and what they agree, to do. Probably not one-half the policies which are signed and accepted are read over in detail. People presume as of course that they are all right. So they may be; but enough unpleasant surprises and serious losses have resulted from this neglect to put you upon thorough watchfulness in the matter.
If, too, you do not know the officers of a company to be honest and reliable men, with a high standing as such in the community, let it alone; it will probably not pay you in case of loss, if it can get out of it. And if you hear of a company whose” adjuster” is forever chaffering, and screwing and sealing down a loss, and never paying fairly full amounts, especially when a poor man or woman has sustained the loss, have nothing to do with that company; its managers will deal with you so in your day of distress. They have been paid your premiums to pay your loss in full to the extent of your policy, and should do so as cheerfully as they have taken your money. Look more to these than to the capital of the company; but look well to both. Don’t trust your property in the hands of those whom you do not know, personally or by authentic reputation, “down to the ground.” Better pay a fair, reputable company—one that will take pains at once to find out what is your entire loss, and then pay it promptly—a large price at first, than have ten times the sum pared off by a rascally adjuster when your loss occurs. No company, it is true, will undertake this unless steeped in ignorance of its true interests; nor will it retain an official for one moment who tries to save dishonestly on a loss. They lose more by him in the end than do the insured. It is the style in which losses are settled that mainly draws business or repels it. No one forgets the company or the man who does the dishonest thing under such painful circumstances, or the one who deals fairly and uprightly with the misfortune.
The insured may be called upon to take the company’s promise-to-pay for a large amount. Ask yourself, then, Would a bank take their note for this sum, and pay the face of it? Following fully the bank example, you would have to inquire of twelve or fourteen good business men whether they would do so, and trust the company if they would, taking your insurance accordingly.
But on the other hand, the company may be, and often is, subject to fraud by the insured. It is for its interest never to presume fraud without positive proof, at least such proof as would convince a jury. It may better pay, and look next time more carefully to the policy-holder’s character. More money will be made in the long-run by this course. For its own interest, too, there should be no long delay or palaver about the payment of a loss, unless it is intended to contest the case in the courts. A compromise will lose the company more than the sum apparently saved, since one-half of those who hear of it will take for granted that it was an unjust settlement.
The same exercise of civility and pleasant manners, and of interest in the insured, that was recommended to bank officers and employees, is necessary also in the insurance business. All courtesies tell to the profit of the company, the enlargement of its dividends; and in general there is no business in which sound judgments, honest purposes, good reputation, and a fair policy, are rewarded with more promptness and fullness than in this.