Having thus taken a general view of the nature of banking operations, it is now necessary that we should enter upon the consideration of some of their details.

For a bank, as well as for any other business, it is requisite that a capital should be provided at the outset. There can be no constant proportion between the amount of this capital and the extent of the business which may be built up by its means. The larger the business that can be carried on with safety with a given capital, the larger will be the field from which profits can be earned, and the higher the proportion which the profits will bear to the original investment; but the point at which the extension of the business passes the line of safety, varies with the circumstances of the particular bank, the kind of business carried on by those dealing with it, and the condition of the community in which it is established. The attempt has sometimes been made to limit by law for incorporated banks the proportion of transactions for a given amount of capital.1 Recent legislation in a few of the Western States limits the acceptance of deposits to ten times the paid-in capital or capital and surplus. It is plausibly argued that such provisions have no foundation except a conjectured average, too rough to be of service in any individual case, and that the judgment of the persons most interested, acting under the law of self-preservation, is far more trustworthy than any legislative decision. But in the United States, where banking is conducted by thousands of local banks many of which are very small and managed by men of limited business experience, these considerations lose much of their force. The capital and surplus of a bank provide a margin of safety against loss to those whose funds have been entrusted to it. Those who manage or control the undertaking should have something at stake, and this stake may very properly be enlarged with the growth of the enterprise. It is therefore to be anticipated that an increasing number of States in which there are many small banks will adopt the policy of requiring a capital investment in some definite proportion to the deposits acquired.

The capital to be provided at the outset is, of course, in the case of a private bank, the contribution of the partners, as in any other undertaking.

1 E. g., the law in Massachusetts formerly limited loans to double the amount of the capital. See General Statutes of 1860, c 57, § 25.

In the case of an incorporated bank the capital is divided by law into equal shares or units of fixed amount; as e. g., under the law of the United States, a capital of $100,000 is divided into 1,000 shares of $100 each; and these shares are contributed by the individual shareholders, in such proportion as they please. The law may as a matter of public policy limit the proportion of capital stock to be owned by any one individual or firm, and it may also limit the liability of shareholders for debts due by the bank, in case of its failure; but in general, in the absence of special provisions to the contrary, the powers, rights, and liabilities of every shareholder are now usually determined by the number of shares of the stock contributed or owned by him. In the election of directors and of other officers, for the immediate management of the business, every share entitles its owner to cast one vote; the dividend of profit is allotted in the ratio of shares owned, and contributions to meet losses, if required by law, are called for in the same ratio.

The capital subscribed by the intending shareholders must necessarily be paid in in money or in the legal tender of the country. It is not necessary that the whole should be paid in at the outset, but the payment of the whole usually precedes the full establishment of the business; and, in the case of incorporated banks, the law often requires that some definite proportion, as e. g., one half, shall be paid in before the opening of business, in order to insure good faith and a solid basis for the business undertaken.1

If, now, we undertake to represent by a brief statement of account the condition of a bank having a capital of $100,000 paid in, in specie, on the morning when it opens its doors for business, we shall have the following:

It may at first sight appear to be a contradiction in terms, that the capital should be set down as a liability and not as a resource. But we must here distinguish between the financial liability for what has been received from the shareholders and the right of property in the thing received. The bank has become accountable to its shareholders for the amounts paid in by them respectively, but the money actually paid in has become the property of the bank; or, in the language of accountants, the bank has become liable for its capital, and the money in hand is for the present its resource for meeting this liability, or for explaining the disposition made of what has been received.

1 The English joint-stock banks present some remarkable cases of partially paid capital. Thus the Capital and Counties Bank has £10 of the £50 subscribed paid up, and the London Joint-Stock Bank has £15 in the £100. In these cases, the business having been fully established by means of a part only of the nominal capital, the liability of the shareholders to contribute the remainder in case of need constitutes a species of guaranty fund of great amount. The value of this guaranty is sustained by the practice among English banks of requiring the approval of the board of directors before shares can be transferred.

As the bank requires banking-rooms and a certain supply of furniture and fixtures for the convenient transaction of its business, we may suppose it to expend $5,000 of its cash in providing this equipment. The property thus procured, with the remaining $95,000 in cash, will then be the aggregate resources by means of which the capital is to be accounted for, and the account will stand as follows: