ch balances in a
hand-to-hand money form. An increase in the rate of discount at a
given point tends to attract funds from other points where the rates
are lower and thus to increase reserves. A decrease of rates produces
opposite effects all along the line.

_4. Protection against Unsound Practices_

Commercial banks are an essential part of the machinery by which the
agriculture, industry, and commerce of a country are carried on, and
their proper conduct is, therefore, a matter of public concern. On
this account they have long been subjects of legislation and of public
supervision and control. The methods evolved for safeguarding the
public against abuses and unsound practices differ considerably among
different nations and to some extent among the different states of the
United States, and could only be adequately explained by a history of
banking in each nation. Only the more important and most widely used
of them will be described here.

(_a_) _Capital and Surplus Requirements and Double Liability of
Stockholders._--A very common, indeed, almost universal, legal
requirement is that before beginning business the proprietors of a
commercial bank shall contribute a fund to be known as the _capital
stock_, and that an additional fund, usually called the _surplus_,
shall afterwards be set aside from profits. These funds are required
to be maintained intact, so long as the bank continues in business,
and to be used for the payment of losses in case of failure or
liquidation for any reason. In this country it is also customary to
hold the proprietors legally liable in case of failure for an
assessment equal to the amount of their capital stock. In foreign
countries it is a common practice to have the subscribed considerably
in excess of the paid-in capital, the balance being subject to call by
the directors at any time, and being available for the payment of
losses in case of failure.

These funds serve not only as a protection against loss to the
customers of a bank in case of failure, but also as a restraining
influence on the managers in the everyday conduct of the bank's
affairs. They constitute the proprietors' stake in the business, what
they are likely to lose if the management is imprudent, dishonest, or
inefficient. The absence of such funds would put a premium on rashness
and speculation and tempt into the business the unscrupulous and the
unfit.

In the determination of the size of capital and surplus