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BULLETIN o f the
National Association of Credit Men
Vol. X V I.

A P R IL , 1916

The Improvement of Credit Department Methods in
and Reserve Banks
*B y \

Chairman o f the Board o f Federal Reserve
Bank o f St. Louis.

Financial history can be divided into three eras— the era o f
barter, the era o f money, and the era o f credit. W e are at present
in the era o f credit, and at a time when the financial statement o f
the borrow er is an absolute necessity. W hen we look at it now, it
seems strange that twenty-six years ago there was no such thing
in existence in this country as an organized credit department in a
bank. F or many years previous to this, business houses, doing
business on credit, had organized credit departments and were
making a m ore or less successful effort in getting statements from
customers, yet though banks were lending large sums o f money, and
in some cases were getting what purported to be statements o f the
borrowers, they had no credit departments, to which these state­
ments were sent, analyzed, and what we may call “ standardized”
fo r comparison from year to year.
I have been unable to find a record o f any bank that had a
credit department prior to the year 1890 . About this time, some
o f the large banks in the East, doubtless made uneasy by the ex­
pansion o f credit that preceded the panic o f 1893 , were led to
establish credit departments fo r their protection. It is probably
safe to say that the banks, which had taken this precaution, were
in better condition to stand the stress when it came than those
which had not so acted. Perhaps it was the panic o f 1893 that
caused the awakening. A nyhow , from that time on, the develop­
ment o f organized credit departments in banks in large centers was
comparatively rapid. They realized that the old way o f coming
to a general conclusion as to the status o f a borrower, based on
m ore or less haphazard statements and investigations, confirmed
by the general knowledge o f the discount committee and board o f
directors, was dangerous. They saw that definite, tangible inform a­
tion was necessary, and realized that it was well worth while to
have men whose business it was to get this information and keep
it up to date. The larger banks have realized the situation fo r a
number o f years, but the smaller or country banks, have not yet
com e to a complete realization o f the necessity o f credit records.
^Presented to Conference of Banking and Currency Committee of

the National Association of Credit Men, January 20, 1916.


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CREDIT M E N ’S BULLETIN

Prior to the opening o f the Federal Reserve Banks on N ovem ­
ber 16 , 19 14 , I had talked to many country banks throughout the
United States and while as a rule they would agree that credit
records were a good thing, they seldom seemed to think it was
worth while making any effort to establish them in their banks.
O f course, every bank that ever made a loan had something in the
nature o f a credit department, but, in the m ajority o f cases, it was
a nook in the cashier's brain, and it is self-evident that such a de­
partment was sure at times to have inform ation much too general.
W hen the Federal Reserve Board issued the regulation, warn­
ing all members o f the Federal Reserve System that, in time, it
would desire statements from the makers o f all notes offered for
rediscount, a great step was made toward having all member banks,
at least, establish credit departments. This first circular was issued
by the board on November 10 , 19 14 . In its Circular No. 3 , Regula­
tion B, Series o f 1 9 15 , issued January 25 th, which superseded this
circular, the following is contained:
“ It is recommended that every member bank maintain
a file which shall contain original signed statements o f the
financial condition o f borrowers, or true copies thereof,
certified by a member bank or by a notary public designating
where the original statement is on file. Statements should
contain all the information essential to a clear and correct
knowledge o f the borrow er’s credit and o f his method o f
borrow ing.”
In an appendix to this circular is given the information that is
desired in credit files o f member banks, as fo llo w s :
“ The credit files o f member banks, referred to in the
above regulation, should include inform ation concerning
the following matters:
(a ) The nature o f the business or occupation o f the
b o rrow er;
(b ) if an individual, information as to his indebtedness
and his financial responsibility;
( c ) I f a firm or corporation, a balance sheet showing
quick assets, slow assets, permanent or fixed assets, current
liabilities and accounts, short-term loans, long-term loans,
capital and surplus;
(d ) All contingent liabilities, such as indorsements,
guaranties, etc.;
(e ) Particulars respecting any* mortgage
whether there is any lien on current assets;

debt

and

( f ) Such other information as may be necessary to de­
termine whether the borrower is entitled to credit in the
form o f a short-term loan.’’
This, at least, set up a standard, showing the character o f the
information that it was thought wise should be carried on the
credit records o f all banks.
The first thing the Federal Reserve Banks had to do, when
 were established, was to open up credit departments, since
they


CREDIT DEPARTMENT IMPROVEMENTS

283

it was self-evident that they should not accept rediscounts without
having credit information, at least concerning their member banks.
Every Federal Reserve Bank found that it had two classes o f member
banks to deal with— first, the banks in the large cities, all o f which
had some kind o f credit departments, and some o f which had highly
developed, credit departm ents; and second, the country banks, the
m ajority o f which were operating under the old system o f having
the entire credit department in the cashier’s brain. The problem
before the Federal Reserve Banks then, w a s : first, to establish their
own credit departments, knowing that the larger banks could furnish
credit inform ation; and, second, to educate the country banks to
realize the necessity o f and help them inaugurate the plan o f keep­
ing credit records. It seems strange that the requirement o f a
Statement from customers should have been considered by many
o f them as a hardship and caused the cry to go up that there was
too much “ red-tape” in the system. H owever, it has not been so
long ago that even a borrow er in a large city could be found, who,
when asked fo r a statement, would draw himself up and act as if
insulted, and this is still the attitude o f those in small centers, who
have not been helped to a realization o f the need o f a statement by.
their local banks. I might state here that, while the regulations o f
the Federal Reserve Board, under certain conditions, waived state­
ments at the inauguration o f the system, the Federal Reserve Bank
o f St. Louis felt that it could not do a higher service to the com ­
munity than that o f requiring statements to accompany all notes
offered to it fo r rediscount. It felt that the sooner this was the
custom in its district, the easier it would be for the banks and the
better fo r the district. The consequence is that we have never
accepted a note fo r rediscount that was not accompanied by a state­
ment in regard to the maker or o f the party, such as an endorser,
upon whose credit the local bank granted the loan. W e have tried
to have a signed statement o f the maker o f the note, but where
this was impossible, upon the theory that the local bank did not
grant a loan without knowing something about the borrower, where
necessary, have accepted a statement made by the bank on behalf
o f the borrow er, giving approximately what he owned and what
he owed. It is extremely gratifying to report that, with many
banks, the trouble they anticipated in getting statements from
farmers and other borrow ers was never realized. In fact, where
the bank has asked fo r such statements tactfully, as a rule, they
have succeeded in getting them. It is also interesting to find out
from experience that the statement has frequently been o f even
more benefit to the maker o f the statement than to the bank that
required it.' I f there were time, interesting experiences could be
told in regard to this.
Reduced to their simplest terms, the problems have b een :
F irst. T o get the large city banks, which already maintained
credit departments, to require their customers, who in the main
have very large businesses, to give more satisfactory statements.
I think it is fair to say that, in the last year, many commercial houses
have been taught to make better and more nearly uniform state­
ments o f condition than heretofore they have thought necessary.

There is
http://fraser.stlouisfed.org/ a decided tendency toward requiring an audited statement
Federal Reserve Bank of St. Louis

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CREDIT M EN ’S BULLETIN

from commercial houses, and these interests, themselves, are be­
ginning to see the wisdom o f it.
Second. It has been necessary to convince the country banks
that general statements o f condition o f customers are dangerous,
that from their smaller local business interests a signed statement
from the books is necessary, and that it is as necessary fo r the
farmer to give a statement as for any other business man in the
community to do so.
Finally, the Federal Reserve Banks have had to establish credit
departments o f the very highest efficiency possible.
There are certain essentials which it is necessary to know
before a conclusion can be reached as to the credit standing o f
anyone. They are as fo llo w s :
F irst. It is necessary to know the man, his moral respon­
sibility, and his business methods.
Second. The business, its character and relation to the com ­
munity, whether the capital is sufficient under the circum stances;
what proportion is fixed and what proportion circulating or liquid.
Does it keep its liabilities well within its assets?
Third. W ill the man, firm or corporation, plus that particular
business, result in profits and the payment o f obligations? It is
the duty o f any credit department to find out these things, not any
one o f them, but all o f them. Its duty is to gather the data, analyze
and systematize it, so that conclusions can be promptly reached.
In order to get these essentials o f credit information, banks
must get certain data, and I believe that all the information neces­
sary can be gathered from the follow ing sources:
First. The record o f past experiences with the borrower,
whether interest was paid promptly and principal met at maturity,
the extensions asked for, etc.;
Second. The average monthly balances o f the depositor who is
a borrow er;
Third. The statement o f condition furnished by the borrower.
and;
Fourth. The replies to inquiries made through correspondence
in regard to the borrower and his business; the result o f personal
investigation among the trade; clippings from newspaper, and
agency reports.
Sources one and two, above mentioned, are within the bank,
and a good way to keep a record o f the loans and average monthly
balances is by cards. The third source, is a statement o f condition
o f the borrower, and the fourth source, is work o f the credit de­
partment, itself, acting as an investigator. This data should be
systematized and kept up to date, so that whenever a loan is pre­
sented, the second time, it takes but an instant’s reference to the
records fo r the bank to come to a conclusion as to whether it is a
good loan or not.
Statements o f condition that come to a bank are made by the
business men o f the community, and when I say business men, I
mean to include farmers. F or some reason, the latter have too
long been considered in a class by themselves, when, in reality, the

operation o f a farm, to make a living, is as much o f a business as


CREDIT D E P A R T M E N T IM P R O V E M E N T S

285

the manufacturing o f steel. These statements should not be so
long as to be burdensome to the one making them out or to the
one who has to analyze them, but it is necessary that they be thorough
and give the essential information. They should also be as nearly
uniform as is practicable. A great step towards uniform ity o f
statements was made by the establishment o f the Federal* Reserve
Banks. F or instance, the Federal Reserve Bank o f St. Louis, in
order to have uniform statements used throughout its district, has
with great care prepared three form s o f statements, which are be­
lieved to be applicable to all characters o f business arising in this
district. Since in agricultural communities particularly, the getting
o f statements was in the nature o f pioneer work, our farmer's
statement is in as simple a form , and still thorough, as we
know how to devise. It contains no such words as “ credit” and
“ debit” or “ quick assets” and “ current liabilities,” but simply asks
that the farmer put down what he owns and what he owes. Our
second form o f statement is for use by merchants, whether in­
dividuals, corporations, or partnerships. Our other form o f state­
ment is fo r use by manufacturers, miners, quarriers and other
producers. These last two statements are very nearly the same
in wording, but the latter statement asks for a little more inform a­
tion than the former, such as raw material, machinery and fixtures
used in the business, and one or two other items. These statements
also include the profit and loss account, not in the usual form , but
asking fo r the debits and credits in this account, so that the way the
profit and loss is arrived at is shown by the figures. In the mer­
chant’s statement, we also ask fo r merchandise purchased since last
statement and merchandise sold. This gives us the “ turn-over”
and also serves as a check on the profit and loss statement.
I do not mean to say that our statements are the best that can
be devised, but, as they are furnished free to all member banks o f
the St. Louis district, which in turn distribute them to their cus­
tomers, we are getting established uniform statements in this district.
As the system develops, it would seem that it might be advisable for
the twelve Federal Reserve Banks to com e together and agree on
uniform statements to be used f o r the different characters o f busi­
ness. This is a practicable way by which uniform statements can
be introduced throughout the United States; fo r non-member banks
that wish to keep themselves in safe condition will see the wisdom
o f also requiring statements from customers, and I believe will
follow the standards suggested by the Federal Reserve Banks.
As I have intimated, in my judgment, it is necessary that the
Federal Reserve Banks have established what may be called model
credit departments. They should be as nearly perfect as possible^
in every detail. These departments have to analyze two types 6t
statements— first, the statements o f the makers o f the notes, which’
come through the local bank to the Federal Reserve Bank; and
second, the statements o f the member banks, which endorse the
paper offered for rediscount.
These credit departments have to know tw o things about the
offerings— first, is the paper eligible commercial paper under the
Federal Reserve A c t; and second, is it safe? B efore the paper
can be accepted for rediscount by a Federal Reserve Bank, it must
be both eligible and safe. T w o factors are looked fo r in all state


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CREDIT M E N ’S BULLETIN

ments— current liabilities and quick assets, and any statement o f
condition to be in satisfactory form , must give sufficient information
to allow the credit department to arrive at these tw o items with
accuracy. Those who are familiar with credits, know the contro­
versies that arise in such business as the lumber business, the min­
ing business, etc., as to what constitute quick assets. I f you do
not wish to have the miner count coal in the ground as a quick asset,
you must have a line in your statement so worded that he will not
include this, or, if he does include it, the statement must be clear to
that effect.
The statements o f customers, which come into a bank, should,
o f course, be standardized on form s which the bank uses, so that a
statement o f one year can be compared with the statements o f other
years. This standardization will be much easier when the state­
ments o f customers become more uniform.
The Federal Reserve Bank, also, has to analyze and stand­
ardize, fo r comparison, the reports o f condition that come in from
member banks. Federal Reserve Banks receive copies o f reports
o f condition as called for by the comptroller o f the currency. Since
the method in use by the Federal Reserve Bank o f St. Louis, for
analyzing and standardizing the statements o f member banks
through one operation, is, as I believe, absolutely new and not in
use in any other place in this country, I am going to describe it
somewhat in detail. This method I think I can say was invented
by T . C. Tupper, vice-chairman and deputy federal reserve agent o f
the. Federal Reserve Bank o f St. Louis, who is in charge o f our
credits. In order to put it into effect, he uses a Burroughs standard
statement machine. The blanks are printed in size 1354 inches long
and io y i inches wide. They contain four columns, so that inform a­
tion gathered from four separate reports o f condition can be in­
serted. These blanks contain thirty-one items, set out under each
other as follow s:
q u ic k

1.
2.
3.
4.
5.
6.

assets:

Cash and Exchange
Loans and Discounts
Overdrafts
United States Bonds
Bonds and Securities
Total Quick

LIABILITIES :

7.
8.
9.
10 .
11.
12 .
13 .
14 .

Circulation
Due to Banks
Individual Deposits, Demand
Individual Deposits, Time
Rediscounts
Bills Payable
Bonds Borrowed
Margin in Quick
s

23.
24 .
25 .
26 .
27 .

In
In
In
In
In

28 .
29 .
30 .
3 1.

Direct
Indirect
Statutory Bad Debts
Other overdue Paper

FIXED ASSETS:

T 5 . Banking H ouse
16 . Furniture and Fixtures
1 7 . Other Real Estate
18 . Other Assets
19 .
.
T
20 . Capital
2 1 . Surplus and Profits
22 . Total Capital and Surplus S




INVESTED:

Banking House
Furniture and Fixtures
Other Real Estate
Bonds and Securities
Loans and Disc.
T

d ir e c t o r s '

l ia b il it y

:

CREDIT D E P A R T M E N T IM P R O V E M E N T S

287

The first five items under quick assets are listed on the ma­
chine and the sub-total key pushed down, which prints the total
quick assets on the sheet. Then the subtracting key is set and items
7 to 1 3 , inclusive, are printed. This makes the machine deduct the
liabilities from quick assets. Then the sub-total key is pushed
again, and this gives item 14 , “ Margin in Quick.” Then, under
fixed assets, items 15 to 18 , inclusive, are printed and the key fo r
totals pushed and the amount printed, thus clearing the machine.
This gives the margin in quick plus fixed assets. Then items 20 and
2 1 are printed, giving item 22 , “ Total Capital and Surplus,” which
should be the same as the sum o f the margin in quick plus fixed
assets as given above. This afifords a machine p ro o f o f the analysis.
W hen item 22 , “ Total Capital and Surplus,” is printed, the sub­
total key is pushed down, the substracting key is set, and then
items 23 to 26 , inclusive, are printed. Then the total key is pushed
down, and the result gives that proportion o f the capital which is
invested in loans and discounts. This last figure is the amount o f
paper that the bank has, which even if bad, leaves the bank solvent
fo r its debts. This operation also clears the machine. Then items
28 to 3 1 are printed on the machine, no total being taken.
On the back o f these statement blanks are lines on which to
insert the names o f the officers and directors o f the bank, also
columns to showT for four years the comparison o f the follow ing
item s:
Earnings, after deducting losses and expenses;
Dividends paid during year;
Net earnings, or surplus after payment dividends.
This gives an accurate analysis o f the bank’s condition so stand­
ardized that it is easy to compare the figures from year to year.
The method also saves a great deal o f time, since, as the statements
com e in, the head o f the credit department can mark them, fo r in­
stance, item 1 on the form above mentioned includes 10 to 20 on the
report o f condition made out in the com ptroller’s form .
This
insures that the report to the comptroller is carefully gone over by
someone who thoroughly understands credits, and after these re­
ports are so gone over and marked, they can be turned over to any
clerk who can run an adding machine, and the form that w e have
adopted be filled out. These, what we may call standardized form s,
are kept in a looseleaf binder and from them, at a glance, the con­
dition o f any member bank can be obtained any instant.
I have mentioned this method in detail, because we have used
it fo r quite a little time now and have found it thoroughly effective
and a great saver o f time. W e believe that by applying the same
principles, a similar machine analysis and standardization can be
made o f statements o f condition o f all borrowers o f money. A s
yet, however, we have not found that statements o f the same b or­
rowers are com ing before us with sufficient regularity to make it
advisable to use this method on them.
The National Association o f Credit Men has done most ex­
cellent work in the way o f getting credit information. Several years
ago it issued an argument fo r the requirement o f statements o f




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condition from all those who do business on credit and the influence
o f the association has had great effect in developing proper credit
standards.
The Federal Reserve System has already demonstrated that it
is effective, and I believe that one o f the greatest results o f its
establishment, though perhaps an indirect one, will be seen in the
improvement in business methods o f business concerns, manu­
facturers, farmers, etc., in the community. Its leadership in ask­
ing for statements o f condition will help all those, who extend
credit, to require such statements, and the farmer, firm or corpora­
tion, that gets in the habit o f at least once a year expressing an
actual financial condition in cold figures, will immediately improve
business methods. An accurate statement may bring about a change
o f policy, which will turn the business from a losing business to a
successful one. I f the individual business man or farmer sees in
black and white his condition and does not continue guessing at
it, as is too often done now, he will commence to stop the small
leaks and will make money by saving it. In fact, proper credit
departments in member banks and Federal Reserve Banks mean
the proper keeping o f accurate records by business interests in
general, and this, in turn, means safe business and profitable busi­
ness, and a great gain for the whole community.

Standards
The fact that they are honored more in the breach than in the
observance does not diminish the value o f standards,— they are
there just the same, and men gradually learn to recognize them.
Take the standards o f credit practices. Many may smile at the
statement o f standards set out as expressing the requirements o f
good order in business and credits, yet it is necessary to have these
standards to guide when the break comes, and violations, conscious
or unconscious, o f the laws o f business and credits, have brought
in full force their demoralizing effects.
This is why the Association undertook to frame canons o f
commercial ethics; not with the expectation that they are going to
be conform ed with, or their value and necessity fully recognized,
but because a clear statement o f standards is good to have. Year
in and year out the successful credit grantor can measure his suc­
cess in the proportion that he has observed consciously good
standards.
The Special Committee on Credit Ethics offers the Eighth
Canon o f Commercial Ethics. It is thoroughly sound and its ob­
servance will insure health, clean conscience and good order to those
who observe it,
“ The stability o f commerce and credits rests upon honora­
ble methods and practices o f business men in their relations
with one another, and it is improper for one creditor to obtain
or seek to obtain a preference over other creditors o f equal
standing from the estate o f an insolvent debtor, fo r in so doing
he takes, or endeavors to take, more than his just proportion
o f the estate, and therefore what properly belongs to others.”
The seven preceding, articles o f the Canons o f Commercial
Ethics can be found on page 34 o f the January, 19 15 , “ Bulletin.”





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102