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+The Project Gutenberg EBook of Banking, by William A. Scott
+
+This eBook is for the use of anyone anywhere at no cost and with
+almost no restrictions whatsoever.  You may copy it, give it away or
+re-use it under the terms of the Project Gutenberg License included
+with this eBook or online at www.gutenberg.org
+
+
+Title: Banking
+
+Author: William A. Scott
+
+Release Date: April 17, 2010 [EBook #32027]
+
+Language: English
+
+Character set encoding: ISO-8859-1
+
+*** START OF THIS PROJECT GUTENBERG EBOOK BANKING ***
+
+
+
+
+Produced by The Online Distributed Proofreading Team at
+https://www.pgdp.net (This file was produced from images
+generously made available by The Internet Archive/American
+Libraries.)
+
+
+
+
+
+
+
+
+
+                                BANKING
+
+
+                                  BY
+
+                    William A. Scott, Ph.D., LL.D.
+
+          Director of the Course in Commerce and Professor of
+           Political Economy in the University of Wisconsin
+
+
+                                CHICAGO
+                          A. C. McCLURG & CO.
+                                 1914
+
+
+                               Copyright
+                          A. C. McCLURG & CO.
+                                 1914
+
+                         Published April, 1914
+
+                     Copyrighted in Great Britain
+
+
+                 W. F. HALL PRINTING COMPANY, CHICAGO
+
+
+
+
+EDITOR'S PREFACE
+
+
+In Europe the average man looks upon the bank as a benefactor. Through
+its agency he secures capital at low rates for his business. In
+America the bank is too often regarded as a necessary evil, certainly
+not with affection. Yet it plays a most important rôle in the nation's
+economy. Our banking laws are obsolete, unsatisfactory, and actually
+in some instances detrimental to the best and widest use of the
+nation's resources. Europe has many lessons for us in the problem of
+how best to use our accumulations. With agriculture demanding and the
+railroads calling for more capital, the question of scientific banking
+assumes new proportions. This book, with its chapters on commercial
+and investment banking, will help to a better knowledge.
+
+                                                            F. L. M.
+
+
+
+
+AUTHOR'S PREFACE
+
+
+The purpose of this book is to supply the general reader with a simple
+statement of the principles and problems of banking. Since it is
+designed primarily for American readers, special attention has been
+given to conditions in this country. An effort has been made clearly
+to draw the line between commercial and investment banking and to
+indicate the problems peculiar to each. That it may assist the average
+person in understanding present-day banking problems and thus
+contribute towards the formation of a sound public opinion regarding
+them, is the author's hope and desire.
+
+                                                       WM. A. SCOTT.
+
+  _University of Wisconsin._
+
+
+
+
+CONTENTS
+
+
+                                                                PAGE
+
+  Chapter I. The Nature, Functions, and Classification of
+             Banking Institutions,                                 1
+
+    1. Services Performed by Banking Institutions,                 1
+    2. The Economic Functions of Banks,                            4
+    3. Classification of Banking Institutions,                     6
+
+  Chapter II. The Nature and Operations of Commercial Banking,    11
+
+    1. Commercial Paper,                                          11
+    2. The Operation of Discount,                                 13
+    3. The Conduct of Checking Accounts,                          15
+    4. The Issue of Notes,                                        19
+    5. Collections,                                               22
+    6. Domestic Exchange,                                         25
+    7. Foreign Exchange,                                          31
+
+  Chapter III. The Problems of Commercial Banking,                35
+
+    1. The Supply of Cash,                                        35
+    2. The Selection of Loans and Discounts,                      40
+    3. Rates,                                                     44
+    4. Protection against Unsound Practices,                      46
+        (a) Capital and Surplus Requirements and Double
+            Liability of Stockholders,                            46
+        (b) Inflation and Means of Protecting the Public
+            against It,                                           49
+        (c) Other Means of Safeguarding the Interests of
+            the Public,                                           59
+    5.  Adequacy and Economy of Service,                          62
+
+  Chapter IV. Commercial Banking in the United States,            68
+
+    1. State Banks,                                               68
+    2. National Banks,                                            70
+    3. The Independent Treasury System,                           75
+    4. The Interrelations of These Institutions,                  78
+    5. Operation of the System,                                   82
+        (a) Conflict of Functions and Laws,                       82
+        (b) Loan Operations,                                      85
+        (c) Treasury Operations,                                  88
+        (d) Operation of the Reserve System,                      91
+        (e) Lack of Elasticity in the Currency,                   95
+    6. Plans for Reform,                                          97
+
+  Chapter V.  Commercial Banking in Other Countries,             101
+
+    1. Common Features,                                          101
+    2. The English System,                                       104
+    3. The French System,                                        111
+    4. The German System,                                        119
+    5. The Canadian System,                                      126
+
+  Chapter VI. Investment Banking,                                136
+
+    1. Saving and Savings Institutions,                          136
+    2. Trust Companies,                                          141
+    3. Bond Houses and Investment Companies,                     144
+    4. Land Banks,                                               147
+    5. Stock Exchanges,                                          163
+    6. Some Defects in Our Investment Banking Machinery,         166
+
+  References,                                                    171
+
+  Index,                                                         173
+
+
+
+
+BANKING
+
+
+
+
+CHAPTER I
+
+THE NATURE, FUNCTIONS, AND CLASSIFICATION OF BANKING INSTITUTIONS
+
+
+The terms, "bank" and "banking," are applied to institutions and to
+businesses which differ considerably in character, functions, and
+methods, but which nevertheless have certain common features which
+justify their being grouped together. We can best prepare the way for
+a discussion of these differences and common features by a description
+of the services which these institutions perform in modern society.
+
+
+_1. Services Performed by Banking Institutions_
+
+From the point of view of their customers these services may be
+grouped under the following heads: The safekeeping of money and other
+valuables; the making of payments; the making of loans; and the making
+of investments. It is a common practice everywhere, and in some
+countries, notably the United States, almost a universal practice for
+people to intrust their money to banks for safekeeping. To a degree,
+hoarding, in the sense of locking up money in private vaults and other
+receptacles and keeping it under the eye and in the personal care of
+the owner, is still practiced, but it is doubtless on the wane in all
+civilized countries. The practice of intrusting to banks the
+safekeeping of other valuables, such as important documents, jewelry,
+plate, etc., is also widespread and growing.
+
+The service of the safekeeping of money naturally leads to the second,
+the making of payments. When we intrust our means of payment to a
+bank, it is natural that we should also make it our treasurer and
+disbursing agent, and so we do. If we have payments to make to people
+at home, in other cities of our own country, or in other countries, we
+usually order our bank to perform the service for us.
+
+Loans of almost all kinds are made by banks, and certain kinds,
+namely, those to business men for the everyday conduct of commerce and
+industry, are made almost exclusively by them. For the most part these
+are short-term loans. For long-term loans banks are also one of the
+chief resorts, but in some countries these are not to so great a
+degree monopolized by them as the short-term variety.
+
+For the investment of the surplus funds of people banks are the chief
+agencies. This function takes the form mainly of the sale of stocks,
+bonds, and mortgages, and sometimes of the promotion of new
+enterprises.
+
+None of these services are performed by banks exclusively. For the
+safekeeping of valuables, and sometimes of money, there are in some
+places safe deposit companies to which the term "banks" is not
+applied. In the making of payments the post office departments of
+governments and express companies participate, and in the making of
+loans and investments brokers, loan companies, lawyers, etc.,
+participate. The peculiarity of banking institutions consists not in
+the performance of any one of these services, but in the fact that
+they specialize in them all, or in a combination of them. Merely to
+keep money and valuables on deposit, or to act as paymaster, or to
+make loans, or to sell bonds, stocks, and mortgages would not make an
+institution a bank or an individual a banker; but to make a business
+of performing most or all of these services for the public involves
+the use of certain machinery and certain methods of procedure, and the
+assumption of a rôle in the nation's economy which is distinctive and
+peculiar, and which has set these institutions apart in every country
+as objects of legislation and of scientific treatment, as well as in
+the thought and regard of the people.
+
+
+_2. The Economic Functions of Banks_
+
+Viewed from the standpoint of the nation rather than from that of
+individuals, the functions of banks may be described as those of
+intermediaries in exchanges and in the investment of capital. In the
+former capacity they supply the world with the major part of its
+medium of exchange and serve as distributing agents for that portion
+of the supply which comes from other sources. They create a medium of
+exchange through a process of bookkeeping which is world-wide in
+extent, and through which the mutual indebtedness of individuals,
+cities, and other subdivisions of countries and nations, brought about
+by purchases and sales on credit, are offset without the use of money.
+
+The practice of depositing surplus funds with banks for safekeeping
+and consequently of using them as paymasters has resulted in the
+reliance of everybody upon banks for currency in any form, and has
+thus thrown upon them the responsibility of directly utilizing all the
+sources of money supply. Thus while the mints of the United States and
+most other countries coin gold bullion, and supply subsidiary silver
+and copper and nickel coins to private persons on the same terms as to
+banks, as a matter of fact few private persons take advantage of this
+privilege, finding it more convenient and profitable to get the coin
+they want from banks. The same is true of government notes in
+countries in which such notes constitute a portion of the currency.
+
+The accumulation of a nation's capital and its investment require the
+cooperation of numerous agencies of which banks are the chief. They
+collect the savings of the people, combine them into amounts of
+sufficient size for investment purposes, and invest them temporarily
+and sometimes permanently. Cooperating agencies in this work are
+insurance companies, societies of various kinds for the promotion of
+saving, stock exchanges, promoters, etc. Some of these take the place
+of banks in the performance of these services, while others supplement
+and aid them.
+
+
+_3. Classification of Banking Institutions_
+
+Banks differ from one another chiefly in the nature and degree of
+their specialization, in legal status, and in the place they occupy in
+the system to which they belong. Some banks devote the major portion
+of their effort to the conduct of exchanges and are called
+_commercial_ banks, others to investment banking and are called
+_investment_ banks. The most common subclasses under the latter head
+are savings banks, land or mortgage banks, and bond houses. Savings
+banks specialize in the collection and investment of small savings;
+land banks are primarily intermediaries between capitalists and people
+who wish to invest capital in land, building operations, and
+agriculture; and bond houses are intermediaries between capitalists
+and those who wish to invest capital in industrial, commercial, and
+transportation enterprises, or loan it to states, cities, or other
+public corporations.
+
+Commercial banks rarely confine themselves exclusively to the conduct
+of exchanges. Most of them also conduct savings departments and invest
+the funds intrusted to them through such departments in agricultural,
+industrial, or commercial enterprises or loan them to public
+corporations. Commercial banking, however, is their main concern,
+their other departments being side issues of greater or less
+importance according to circumstances. Investment banks also
+frequently carry on commercial banking as a side issue. These two
+lines of business are sometimes mixed in such proportions as to render
+classification difficult.
+
+From a legal point of view the banks of nearly all countries may be
+classified as _private_ or unincorporated, and _incorporated_,
+sometimes also called joint-stock banks. Private banks are started by
+individuals or firms, like any other private enterprise, without the
+formality of application for permission to some public officer, and
+without compliance with a set of legally prescribed regulations. They
+are subject to the laws of the country governing all kinds of private
+business enterprises and sometimes to special laws applying
+specifically to them. In some of the states of the United States such
+banks are prohibited by law.
+
+Incorporated banks are usually started by private initiative but owe
+their actual legal existence and status to a special law, to the
+requirements of which they must conform before they are permitted to
+do business. Their right to do business is usually evidenced by a
+document known as a charter, executed and delivered by a public
+officer legally endowed with the requisite authority, or passed in the
+form of a law by the legislative organs of the state. Charters of the
+latter kind are known as special charters and are rarely used
+nowadays, except in the case of institutions of a peculiar character,
+endowed with special functions. The central banks of Europe owe their
+existence to such charters, as did also the first and second United
+States banks. In the early history of the United States special
+charters were uniformly employed by the states, but for many years
+general incorporation laws have been the rule, on compliance with the
+requirements of which persons who desire to incorporate banks can
+secure charters.
+
+In federal states, both the federal government and the governments of
+the constituent states frequently have and exercise the right to
+incorporate banks. In the United States, banks incorporated by the
+federal government under the terms of a general law, originally passed
+in 1863 and many times amended since that date, are known as
+_national_ banks, and those incorporated by the states under the
+terms of general banking acts or of general incorporation laws are
+known as _state_ banks. These latter are endowed with privileges which
+enable them to exercise commercial and some investment banking
+functions. Other banks also are incorporated by our states under the
+terms of general laws, which are known as savings banks and trust
+companies. The former, as the name implies, are institutions primarily
+designed for the encouragement, collection, and investment of savings.
+The latter are called trust companies because the earliest
+institutions of this type made the execution of trusts of various
+kinds their exclusive business. Banking functions were later added and
+in many cases have now assumed chief importance.
+
+The nature of the banking business requires some kind of organization
+of the individual institutions in which certain ones will assume to a
+degree at least the rôle of bankers' banks. In most European countries
+this position is occupied by single institutions specially chartered
+and endowed with special privileges and usually described as central
+banks. Examples are the Bank of England in England, the Bank of France
+in France, and the Imperial Bank of Germany in Germany. Around these
+are grouped the other institutions in a kind of hierarchy, certain
+large banks in the larger cities forming centers about which smaller
+institutions group themselves. In the United States there is no single
+central institution, but a small group of banks in New York City are
+the real centers of the system. Around these are grouped the banks in
+the other large cities of the country and these in turn perform
+important services for banks in the surrounding smaller towns and
+country districts.
+
+
+
+
+CHAPTER II
+
+THE NATURE AND OPERATIONS OF COMMERCIAL BANKING
+
+
+In the preceding chapter commercial banking has been defined as the
+conduct of exchanges by means of a world-wide process of bookkeeping.
+We must now describe this process. Its essential features are the
+discount of commercial paper, the conduct of checking accounts, and
+the issue of notes.
+
+
+_1. Commercial Paper_
+
+By commercial paper is meant the credit instruments or documents which
+the credit system now in general use throughout the commercial world
+regularly brings into existence and liquidates.
+
+The essence of this system is buying and selling _on time_. The farmer
+buys seed, implements, fertilizer, labor, etc., and pays for them
+after the crops have been harvested and sold. The manufacturer buys
+raw materials and pays for them after they have passed through the
+transformation process which he conducts and the completed goods have
+been marketed. He frequently sells them to jobbers or wholesalers on
+time and these in turn sell them on time to retailers and these to
+consumers. Farmers, manufacturers, and merchants both buy on time and
+sell on time, and are thus both debtors and creditors, and each
+expects that his sales will ultimately pay for his purchases.
+
+The obligations involved in these transactions are represented and
+recorded in the form of book accounts, promissory notes, or bills of
+exchange, the latter being written or printed, or partly written and
+partly printed, orders of creditors on debtors to pay to themselves or
+to third parties the sums indicated. These documents are being
+constantly made and constantly paid as the processes of agriculture,
+industry, and commerce proceed. Indeed, their creation and liquidation
+is a normal phenomenon of our modern economic life.
+
+The term commercial paper, as we are using it, applies to such
+promissory notes and bills of exchange as belong to this credit
+system. It does not apply to such notes and bills when they owe their
+existence to credit operations of a different kind, such for example
+as accommodation loans or investment operations. Indeed, the
+essential characteristic of commercial paper is not revealed in the
+form of the credit document but in the fact that it is a link in this
+chain of exchange operations by which modern commerce is carried on.
+
+This use of the term should also be distinguished from the one common
+among bankers and others. In this popular usage these documents are
+called commercial paper because they are themselves objects of
+commerce. In our use of the term the adjective "commercial" applies to
+them only when they play the rôle of intermediary in a process of
+exchange through credit. In this sense it is a matter of indifference
+whether they pass through the hands of brokers or not, and the fact of
+their being objects of purchase and sale does not confer the quality
+of commercial paper upon documents having an origin and character
+other than that above described.
+
+
+_2. The Operation of Discount_
+
+Every person in this chain of credit is confronted with the problem of
+paying his debts as they mature by the use of the amounts due him from
+other people. Since it is rarely possible to arrange maturities on
+both sides in such a way that the amounts due to be paid him at a
+given date shall at least equal those he is due to pay on that date,
+some means of transforming claims against other people due in the
+future into present means of payment must be found. The one
+universally employed is the discount of commercial paper. By this is
+meant the exchange at a bank of his own promissory notes due at times
+when debts of equal or greater amount due him mature, or of bills of
+exchange drawn against his debtors, for cash or credits on a checking
+account. These latter are available as means of payment at any time.
+
+As a consideration for this accommodation, the bank charges interest
+for the period intervening before the maturity of the paper
+discounted. Sometimes this charge is paid at the time the paper is
+purchased and sometimes at the date of its maturity. The term
+"discount" technically means taking interest in advance by making
+available as means of present payment in any of the above mentioned
+forms a sum less than the amount the bank expects to collect at the
+date of the maturity of the discounted paper. If the interest is paid
+when the discounted paper matures, the process is technically called
+a loan. However, since the time of collecting interest makes no
+essential difference in the nature of the transaction, the process is
+commonly described as the discount of commercial paper, regardless of
+whether the interest is collected in advance or not.
+
+
+_3. The Conduct of Checking Accounts_
+
+A checking account is an ordinary book account on which are credited
+the cash deposited by a customer and the proceeds of collections,
+loans, and discounts made on his behalf, and on which are debited
+payments made to him in cash or on his behalf to other people or to
+the bank itself. These payments are made on orders signed by the
+customer and known as checks.
+
+The ordinary customer of a commercial bank every day brings to the
+bank the cash he receives as the result of the day's business, and the
+checks received, drawn on his own and other banks, and is credited
+with the amount on the books of the bank as well as on a passbook
+which he himself retains. If he needs cash during the day, he presents
+to the bank a check payable to himself for the amount needed, and
+receives the kinds and denominations wanted; and if he wants to make
+payments to his creditors in other forms than cash, he sends them
+checks on his bank payable to their order, or a check drawn by his
+bank on some bank in another place, usually called a draft, which he
+has obtained by exchanging for it a check drawn to the order of his
+bank. To the amount of these payments his account at the bank is
+debited, and from time to time his passbook is left at the bank for
+the entry therein of the debits made to date and its subsequent return
+to him.
+
+The customer must take care that his account is not overdrawn, that
+is, that the debits on his account do not exceed the credits, since
+overdrafts, except by accident or for very short periods and small
+amounts, are not allowed in this country, and in other countries,
+where they are allowed, they must be provided for in advance by a
+special agreement between the bank and the customer, which usually
+involves the deposit with the bank of ample security. In order to
+avoid overdrafts, the customer in this country agrees with his banker
+on what is known as a "line," that is, a maximum amount of loans or
+discounts to be allowed. Whenever his credit balance falls to a
+certain minimum, also established by agreement with the bank, the
+latter discounts for him the paper of his customers, that is, bills of
+exchange drawn on them or their promissory notes in his favor, or his
+own promissory notes. The proceeds of these discounts are credited on
+his account like deposits of cash or of checks for collection.
+
+So long as the discounts are confined to commercial paper the bank's
+part in these transactions consists almost exclusively of bookkeeping
+between its customers and between itself and other banks. Ordinarily,
+what is debited on one man's account is credited on another's, the
+cash received nearly balancing that paid out. To the extent that the
+cash receipts and payments do not balance, the bank either has a
+surplus or is obliged to provide for the meeting of a deficit. The
+means available for this latter purpose will be explained in
+subsequent sections, as well as some of the details of this
+bookkeeping process. For the present it is important to note precisely
+how the discount of commercial paper is related to this bookkeeping
+process.
+
+As explained in Section 1, commercial paper is an essential part of
+the process of exchanging goods through credit. A person buys on time
+and sells on time and expects to pay for his purchases by the
+proceeds of his sales. So long, therefore, as the processes of
+commerce and industry proceed in a normal fashion, the paper
+discounted by a bank will be paid at maturity and the credit balance
+created by means of such discounts offset by corresponding debits.
+Ordinarily the credits created through discounts during a given
+period, say a day or a week, in favor of one set of customers will be
+balanced during this same period by the payment of notes previously
+discounted for other customers. Within a complete trading area this is
+certain to happen, since purchases and sales of goods are equal and
+what is credited to one man is debited to another.
+
+The result is very different if a bank discounts investment paper,
+that is, credit documents which represent the unproductive consumption
+of individuals or of public and private corporations, or which
+represent the purchase on time of the instruments of production rather
+than the production of goods through the use of such instruments and
+their transfer from the producer to the consumer. The means of payment
+of such documents can only be created gradually by the application of
+the profits of the enterprises in which the investments were made, or
+by taxes spread over a series of years, or by a slow process of
+saving. If a bank issues its own demand obligations in exchange for
+such documents, it cannot make its books balance and it will be
+constantly exposed to the danger of forced liquidation. If it attempts
+to protect itself by requiring that the discounted paper shall mature
+in a short period, the necessity of liquidation will be forced upon
+customers who are responsible for the payment of the discounted paper;
+that is, such customers will be obliged to sell at such prices as they
+can command the property in which the investments were made, or some
+other property. Such liquidation always results in forced
+readjustments of prices and business depression, and sometimes in
+commercial crises.
+
+
+_4. The Issue of Notes_
+
+As an alternative for or a supplement to the conduct of checking
+accounts a commercial bank may issue its promissory notes payable to
+bearer on demand. By the issue of notes is meant their transfer to
+customers in exchange for cash, for checks left for collection or
+drawn against a credit balance in a checking account, or for
+discounted notes and bills.
+
+By the use of these notes commercial banking can be carried on
+without checking accounts. In that case the notes are issued in
+exchange for cash and discounted bills, and notes are returned to the
+bank in exchange for cash or when discounted bills or notes mature and
+are paid. In the bookkeeping process which has been described bank
+notes thus issued and returned perform precisely the same function as
+checking accounts, and are related to the discount of commercial paper
+and the credit system of the country in precisely the same manner as
+such accounts.
+
+Most banks of issue at the present time conduct checking accounts
+also, using the one instrumentality or the other as their customers
+desire. In this case notes are issued in exchange for checks drawn
+against credit balances on checking accounts or deposited for
+collection as well as in exchange for discounted notes and bills and
+cash.
+
+By the use of both notes and checking accounts, a bank can supply most
+of the needs of its customers for a circulating medium, the notes
+serving as hand-to-hand money, and the checking accounts, practically
+all other purposes. Being the direct obligations of banks attested by
+the signatures of their responsible officers, and being payable to
+bearer on demand and capable of being issued in all necessary
+denominations, such notes can be transferred without indorsement, can
+be used for making change and payments of small and moderate size for
+which checks are not convenient, and they do not need to be presented
+at a bank for the test of their validity. If the bank or banks which
+issue them are properly conducted and supervised and properly
+safeguarded by law, such notes will circulate freely through the
+length and breadth of a country.
+
+Checking accounts meet in the most satisfactory manner all currency
+needs for which hand-to-hand money is not well adapted, such as large
+payments and payments at a distance. With a few strokes of a pen
+payments of the greatest magnitude can be made through their agency.
+Checks can be sent through the mails at slight expense and without
+danger of loss of the amount involved. By the devices known as
+travelers' and commercial letters of credit, checking accounts supply
+the most convenient form of currency for travelers and for merchants
+engaged in foreign trade.
+
+Besides bank notes and checking accounts the only forms of currency
+needed in any community are standard and subsidiary coins, the former
+for use as ultimate redemption material for all other forms of
+currency and for the payment of international and other balances, and
+the latter for small change. Even these forms of currency are supplied
+by commercial banks, but since they do not create them, ways and means
+of procuring them in the quantities needed constitute one of their
+peculiar problems.
+
+
+_5. Collections_
+
+One of the most important functions of commercial banks is the
+collection for their customers of checks and drafts drawn on other
+institutions. When these documents are received, the accounts of
+customers who deposited them are credited with the amounts, less a
+small fee for collection, unless by agreement this service of
+collection is performed free of charge. The checks are then assorted
+according to the banks upon which they are drawn and the cities in
+which those banks are located.
+
+Checks drawn upon home banks are collected either through messengers
+who present the checks at the counters of the banks upon which they
+are drawn and secure payment therefor, or through the local clearing
+house. This is a place where representatives of the banks meet for the
+exchange of checks. After the representative of each bank has
+distributed all the checks held by his institution against the others
+participating in the clearing, and received from them those drawn
+against his bank, a balance sheet is prepared showing the balance due
+by or to his bank after the total of the checks distributed has been
+balanced against the total received. If said balance is adverse, it is
+paid to the master of the clearing house, and if it is favorable, it
+is received from him.
+
+The checks received through the clearing house or presented by
+messengers from other banks and paid, are debited to the accounts of
+the persons who drew them and returned to such persons as vouchers,
+the net result of the entire transaction being the same as if all the
+parties involved had been customers of a single bank, with the
+exception that some means of paying balances had to be found. Since
+balances are sometimes paid by checks on some central institution in
+which credit balances may be obtained by rediscounts of commercial
+paper, this necessity can be met without the use of any form of
+currency other than that furnished by banks themselves.
+
+Checks drawn upon out-of-town banks are, in this country, collected
+through so-called correspondents. Each bank enters into an
+arrangement with a few other banks, distributed throughout the country
+and conveniently located for the purpose, by which the correspondent
+bank agrees to conduct with it a checking account on which it will
+credit at par or at a stipulated discount the checks sent it for
+collection and debit checks drawn against such an account. A
+comparatively small number of such correspondents suffices, since
+certain banks in the larger cities, by making a business of such
+collections, conduct checking accounts with a large number of banks,
+and can thus make collections by mere transfers of credits on their
+own books or by the use of the local clearing house. The so-called
+reserve cities in this country constitute clearing centers for the
+territories contiguous to them, and New York, Chicago, and St. Louis,
+for the entire country.
+
+Checks received from correspondents and drawn against themselves are
+debited to the accounts of the customers who drew them and returned as
+vouchers in the same manner as checks received through the clearing
+house or paid over their own counters.
+
+Through this interchange of checks between banks and the conduct of
+checking accounts with each other, intermunicipal and international
+exchanges are conducted through the bookkeeping processes of
+commercial banks with the same ease and economy as are exchanges
+between people living in the same town.
+
+
+_6. Domestic Exchange_
+
+The accounts of a bank with its correspondents are a record of the
+transactions of its customers with the outside world, the checks they
+receive as a result of sales to outsiders of merchandise, real estate
+or other property, or as a result of gifts by outsiders to them being
+credited on such accounts, while the checks they draw or the drafts
+they purchase in payment for merchandise, real estate or other
+property purchased of outsiders, or of gifts made to them are debited.
+When in a given period, say a day or a week, the receipts of the
+customers of a bank from outsiders, as a result of current or past
+sales and gifts, exceed the payments made by them as a result of
+purchases and gifts, its credit balances with its correspondents will
+increase, and under opposite conditions they will decrease. If the
+payments should continue in excess for a considerable period, the
+credit balances of a bank with its correspondents would be exhausted
+and some means of replenishing them would have to be found, and under
+the opposite conditions too large a portion of the bank's resources
+would accumulate with its correspondents and some means of withdrawing
+funds would have to be found.
+
+When a bank needs to replenish its credit balances with its
+correspondents, it may ship cash or purchase drafts from other home
+banks, which it can send to its correspondents for collection like
+checks deposited in the ordinary course of business. The latter
+resource will of course be available only when these other banks'
+balances with their correspondents are not exhausted. Should the
+balances of all the banks of a town with their out-of-town
+correspondents be nearly or quite exhausted, shipments of cash to
+correspondents could not be avoided. If a bank wishes to withdraw
+funds from its correspondents for home use, it may order cash shipped
+or it may, perhaps, be able to sell drafts for cash to other home
+banks.
+
+The expenses involved in shipments of cash, loans, or purchases or
+sales of drafts for the purpose of replenishing balances with or
+withdrawing them from out-of-town correspondents, give rise to what is
+called the _rate of exchange_. If, in order to make out-of-town
+payments for its customers, a bank is obliged to pay the expense of
+shipping cash to its correspondents or to pay a premium on drafts
+purchased from other banks, the natural method of reimbursement will
+be a premium charge on drafts sold equal to the amount of the expense
+incurred. If it wishes to withdraw a balance with its correspondent,
+since to order cash shipped will involve expense, it will be glad to
+sell drafts for cash at a discount not to exceed such expense.
+
+The rate of exchange, or the price of drafts on a given point, may,
+therefore, fluctuate between a premium equal to the cost of shipping
+cash to that point and a discount of the same amount. Beyond these
+extremes, these fluctuations cannot ordinarily go, because customers
+may demand cash of their banks in payment of checks against their own
+credit balances and ship it to their out-of-town creditors at their
+own expense, and would do so if the rates charged on drafts should
+make such procedure profitable. The actual rate of exchange will not
+ordinarily reach either of these extremes, on account of competition
+either between the banks which are desirous of selling drafts on their
+correspondents or between those which are forced to buy as an
+alternative to cash shipments. If the aggregate balances of the banks
+of a town with their out-of-town correspondents are large and
+increasing, the pressure to sell drafts will be greater than that to
+buy and the rate of exchange will go to a discount, the amount of
+which, however, will be fixed by competition between the selling
+banks. In the opposite case, the rate will go to a premium and be
+fixed by competition between the buying banks.
+
+In most towns in the United States there is little or no competition
+between banks in the business of buying and selling drafts and
+consequently no open market for exchange and no quotations of exchange
+rates. In such cases each bank acts more or less independently;
+shipments of cash to or from correspondents are the ordinary means of
+regulating balances; and the cost of such shipments are charged to the
+general expense account of the bank and taken out of customers either
+by a fixed and more or less invariable charge on drafts sold, or in
+other ways.
+
+Since the balances of the banks of a town with their out-of-town
+correspondents depend primarily upon the commercial and gift relations
+of their customers with the outside world, it is pertinent to inquire
+whether as a result of a long continued excess of purchases from
+outsiders over sales to them and of gifts to over gifts from them, the
+cash resources of a community might not be completely exhausted, and
+if not, how such an outcome is prevented.
+
+Bankers have no direct control over the purchases and sales of their
+customers, but through the rate of interest they charge on loans and
+discounts and their ability absolutely to discontinue such
+accommodations they exert a very potent indirect influence. The rates
+of interest and discount charged are an important element in the cost
+of doing business and, if loaning and discounting is discontinued,
+sales of property to meet maturing obligations are forced, with the
+result of price readjustments between the town in question and the
+outside world which speedily change the relations between purchases
+and sales.
+
+When the cash resources of the banks of a town approach the limit of
+safety and their balances with their correspondents fall to an
+ominously low point, the normal method of procedure is to raise the
+rates on loans and discounts, and if conditions grow worse, to raise
+them higher still and as a last resort to cease temporarily to make
+them at any price. By increasing the cost of doing business this rise
+in the rates will check purchases by diminishing or annihilating the
+profits resulting, and will stimulate sales by rendering it more
+profitable for some customers to secure funds by sales to outsiders at
+lower prices than were formerly asked rather than by borrowing from
+banks. Under ordinary circumstances this procedure will be sufficient
+to change an unfavorable into a favorable balance of indebtedness with
+the outside world, with the result that more checks on outside
+institutions will be deposited with the banks and a smaller amount of
+drafts purchased. Bankers' balances with their correspondents will,
+therefore, increase, and with them their ability to command cash in
+case of need. The demands made upon them for cash will also decrease,
+since the volume of loans and of business transacted will fall.
+
+If the banks stop discounting, a more or less violent readjustment
+with the outside world results. Business men who have obligations to
+meet, and most of them will belong to this class, are obliged to sell
+their goods and property at whatever prices are necessary and to stop
+purchasing entirely. The outcome, so far as the banks are concerned,
+is as above indicated. If conditions are such that sales at any price
+cannot be forced, a crisis ensues; that is, business operations are
+temporarily suspended and transfers of property in settlement of
+obligations are made through bankruptcy and other court proceedings.
+
+
+_7. Foreign Exchange_
+
+The business relations between banks located in different countries do
+not differ in any essential respect from those between banks located
+in the same country. Interchange of checks, the conduct of checking
+accounts, shipments of cash, and borrowing and lending proceed in the
+same manner as between domestic institutions. The chief peculiarities
+of the foreign exchanges are due to the fact that different units of
+value and sometimes different standards must here be reckoned with,
+and that the precious metals, chiefly gold, are used in the settlement
+of balances. Drafts drawn in the United States on English points, for
+example, call for the payment of pounds sterling, those on French
+points for francs, and those on German points for marks, while all
+must be paid for in dollars.
+
+The translation of the language of values of one country into that of
+others thus involved requires the calculation of a so-called _par of
+exchange_. By this is meant the relation between the weights of pure
+metal contained in their respective units of value, if the countries
+in question have the same standard, and the relation between the
+market values of the metallic content of their units, if their
+standards are different. Thus the par of exchange between this country
+and England is $4.8665, since our dollar contains 23.22 grains of pure
+gold and the English pound sterling 4.8665 times as many grains, or
+113.0016. Our par of exchange with France is 19.294 cents, the
+quotient of 4.4802, the number of grains of pure gold in the French
+franc, divided by 23.22. Between China and the United States the par
+of exchange is the market value in our dollars of the amount of silver
+contained in the tael, the Chinese unit.
+
+Another technical term employed in connection with the foreign
+exchanges is _the gold points_. These are the points above and below
+the par of exchange fixed by the addition in the one case, and the
+subtraction in the other, of the cost of shipping gold between the two
+places in question. They are the points between which the rates of
+exchange fluctuate, or the points at which, when the rate of exchange
+reaches them, gold moves between gold standard countries. Assuming
+for example, that the cost of shipping gold between New York and
+London is two cents per pound sterling, the gold points are 4.8865 and
+4.8465, it being profitable to ship gold from New York to London when
+sterling exchange reaches the former figure and to import gold from
+London when it reaches the latter figure.
+
+In the conduct of the foreign exchanges several classes of bills are
+employed upon which the quotations differ, in part on account of
+differences in their quality and in part on account of the interest
+element entering into the value of time bills. For example, New York
+regularly quotes on London _cables_, _demand_, and _sixty-day_ bills.
+The rates on a certain date were: Cables, 4.8860; demand, 4.8790; and
+sixty days, 4.8370. Inasmuch as these are all bankers' bills and
+consequently of the same quality, the differences in their quotations
+are due to the interest element and to the fact that in the case of
+the cables the cost of the cablegram is included.
+
+When a New York banker sells a cable on London, his balance with his
+correspondent is reduced by the amount in a few hours, and the
+interest he receives on such balances is proportionately diminished at
+once, and he is also out the cost of the necessary cablegram. When he
+sells a demand bill, his account with his London correspondent remains
+undiminished during the time required for sending the bill by mail
+across the Atlantic and for its presentation for payment. He draws
+interest on his entire balance during this period. When he sells a
+sixty-day bill, his balance does not suffer diminution on its account
+for sixty days. In order to place these bills on a footing of equality
+so far as he is concerned, therefore, he must quote demand and
+sixty-day bills lower than cables; the former by the cost of the
+cablegram plus interest on the amount of the bill, say for ten days,
+at the rate he receives on his London balance, and the latter by the
+amount of the cablegram plus interest on the amount for sixty days at
+the same rate.
+
+Trade, or mercantile, as well as bankers' bills are also frequently
+and, in some markets, regularly quoted. Being of a quality ranked as
+inferior to bankers' bills, they must be negotiated at a lower rate
+and are quoted accordingly.
+
+
+
+
+CHAPTER III
+
+THE PROBLEMS OF COMMERCIAL BANKING
+
+
+The conduct of commercial banking presents problems both to the
+bankers and to the public, the methods of solution of which will be
+given attention at this point. The problems concerning the bankers
+primarily may be grouped under the heads, supply of cash, selection of
+loans and discounts, and rates; and those which primarily concern the
+public may be grouped under the heads, protection against unsound
+practices, and adequacy and economy of service.
+
+
+_1. The Supply of Cash_
+
+The credit balances on checking accounts and the notes of commercial
+banks are payable on demand in the legal-tender money of the nation to
+which they belong, and such banks must at all times be prepared to
+meet these obligations.
+
+The term employed to designate the funds provided for this purpose is
+_reserves_, and in this country they consist of money kept on hand
+and of credit balances in other banks. In other countries there is
+also included under this head commercial bills of the kind which can
+always be discounted. The term _secondary reserve_ is sometimes
+employed in this country to designate certain securities, such as
+high-class bonds listed on the stock exchanges, which can be sold
+readily for cash in case of need.
+
+The amount of reserve required can be determined only by experience.
+In ordinary times it depends chiefly upon the habits of the community
+in which the bank is located regarding the use of hand-to-hand money
+as distinguished from checks and upon the character of its customers.
+These habits differ widely in different nations, and considerably in
+the different sections and classes of the same nation. In most
+European and Oriental countries, for example, checks are little used
+by the masses of the people, while in the United States and England
+they are widely used. In these latter countries, however, they are
+less widely used by people in the country than in the cities, and by
+the laboring than the other classes in the cities. Within the same
+city one bank may need to keep larger reserves than another on account
+of the peculiarities of the lines of business carried on by its
+customers and the classes of people with whom it deals.
+
+In times of crisis and other periods of extraordinary demand, bank
+reserves must be much larger than in ordinary times. Hoarding,
+unusually large shipments of money to foreign countries and between
+different sections of the same country, and payments of unusual
+magnitude, increase the demands for cash made upon banks at such
+times.
+
+The manner in which clearing and other balances between banks are met
+also has an influence on the amount of reserves required. If such
+balances are paid daily and always in cash, the amount needed for this
+purpose is much larger than if they are paid in checks on some one or
+a few institutions and at longer intervals.
+
+The note issue privileges of a bank also affect its reserve
+requirements. Since, if not prohibited by law, notes may be issued in
+all denominations needed for hand-to-hand circulation within a nation,
+and since for all purposes except small change such notes are as
+convenient as any other form of currency, a bank with unrestricted
+issue privileges can supply all the demands of its customers for
+currency for domestic use, except those for small change, without
+resort to outside sources of supply. In this case, however, it needs
+to keep a reserve in order to meet demands for the redemption of
+notes. Such demands arise on account of the need of coin for small
+change or for shipment abroad or of means for meeting domestic
+clearing and other bank balances. The aggregate needed for the supply
+of such demands, however, is much less than would be required if the
+privilege of issuing notes did not exist.
+
+In the maintenance of reserves the chief reliance of commercial banks
+is the circulation of standard coin within a nation and the
+importation of such coin. The coin within the borders of a nation
+passes regularly into the vaults of banks by the process of deposit,
+and on account of the credit balances they carry with foreign
+institutions, the loans they are able to secure from them, the
+commercial paper they hold which is discountable in foreign markets,
+and the bonds and stocks sometimes in their possession which are
+salable there, they are able to import large quantities in case of
+need. Since the standard coin in existence in the world adjusts itself
+to the need for it in substantially the same manner that the supply of
+any other instrument or commodity adjusts itself to the demand, banks
+ordinarily have no difficulty in supplying their needs, and under
+extraordinary circumstances, though difficulties along this line
+sometimes arise, means of overcoming them are available which will be
+discussed in the proper place.
+
+If, as is the case in the United States, certain forms of government
+notes are available as bank reserves, these find their way into the
+banks' vaults by the process of deposit in the same manner as coin.
+The possession of such notes by a bank enables it, to the extent of
+their amount, to throw the responsibility for the supply of standard
+coin upon the government, and in the circulation of the country such
+notes take the place of an equivalent amount of standard coin. Whether
+or not a government ought to assume such a responsibility is a
+question which will be discussed in a subsequent chapter.
+
+For the nation as a whole, the balances in other banks and the
+discountable commercial paper and bonds which a bank may count as a
+part of its reserves are not reserves except to the extent that they
+may be employed as a means of importing gold. They are only means
+through which real reserves of standard coin are distributed. The
+payment in cash of a balance with another bank or the discount of
+commercial paper with another domestic bank or the sale of bonds on
+domestic stock exchanges do not add to the sum total of the cash
+resources of the banks of a nation. Their only effect is to increase
+the cash resources of one bank at the expense of another.
+
+Adequate facilities for the distribution of the reserve funds of a
+country, however, are second in importance only to the existence of
+adequate supplies of standard coin. If such facilities are lacking,
+existing reserves can be only partially and uneconomically used, with
+the result that much larger aggregate reserves are required than would
+otherwise be necessary and that the entire credit system is much less
+stable than it otherwise would be.
+
+
+_2. The Selection of Loans and Discounts_
+
+The problem of the reserves is vitally connected with that of the
+selection of loans and discounts. As was shown in the preceding
+chapter, the chief business of a commercial bank is to conduct
+exchanges by a process of bookkeeping between individuals, banks,
+communities, and nations. This process consists primarily in the
+converting of commercial bills and notes into credit balances and
+bank notes, in the transfer of such balances and notes between
+individuals and banks, and in the final extinguishment of such
+balances and the return of such notes at the maturity of the
+commercial bills and notes in which the process originated.
+
+In this process there is little need for cash, provided the
+arrangements between banks for clearing checks and for the interchange
+of notes are complete and efficiently administered. But when a bank
+accepts investment in lieu of commercial paper, its need for cash at
+once increases, because the demand obligations created by the credit
+balances or the bank notes into which this paper was converted are not
+extinguished by payments for goods purchased, but must be met by cash.
+
+To distinguish between commercial and investment paper is, therefore,
+one of the chief problems confronting commercial bankers. For its
+solution an accurate knowledge of the business operations of customers
+is necessary. An inspection of the paper presented and a general
+knowledge of their wealth and business capacity are important, but not
+sufficient. The forms of the paper employed in both commercial and
+investment operations may be the same, and the possession of wealth
+does not ensure the payment of the paper at maturity.
+
+The chief means available for the acquisition of this knowledge are
+the requirement from customers of frequent statements of their
+operations, on properly prepared forms; the use, wherever possible, of
+the documented commercial bill of exchange; and the maintenance of
+credit departments equipped with the means of accurately studying
+commercial, industrial, and agricultural operations, and of diagnosing
+economic conditions. The study of carefully prepared statements of
+customers made at frequent intervals reveals to the banker not only
+the nature of the operations represented by the paper presented for
+discount, but the trend of the business of his customers and, through
+them, of the entire country. With such knowledge, he is not only able
+to protect his institution against improper loans and discounts, but
+to give valuable advice to his customers, advice which no one else is
+in a position to give so accurately.
+
+By a documented bill of exchange is meant a bill drawn by a seller
+upon the purchaser of goods, accompanied by documents evidencing the
+transaction; such, for example, as bills of lading, warehouse
+receipts, and insurance policies. The names on such bills guide the
+banker in his efforts to trace the transaction in which it originated
+and the documents enable him absolutely to identify it, and constitute
+security for the loan.
+
+Instead of such bills, promissory notes made payable to banks are
+commonly used in this country, greatly to the disadvantage of the
+banking business. Such a note reveals nothing to the banker concerning
+the purpose for which the loan is made, while a commercial bill, even
+without documents, reveals the names of the principals of the
+transaction in which the banker is asked to participate. Acquaintance
+with these men and knowledge of the business in which they are engaged
+at once suggests the probable origin of the bill and furnishes the
+clue needed for subsequent investigation.
+
+A properly equipped credit department will keep on file and at all
+times available for use the data requisite for the information of the
+officers upon whom the responsibility of selecting the loans and
+discounts rests. Such data will not only concern the character and
+business of each customer and the bank's previous dealings with him,
+but general economic conditions, the operations and experiences of
+other banks, other business institutions, governments, etc.
+
+
+_3. Rates_
+
+Besides rates of exchange considered in the preceding chapter,
+commercial banks are concerned with loan and discount rates.
+
+Rates on deposits, though sometimes employed, have no place in
+commercial banking, since commercial deposits are only the credit
+balances resulting from loans and discounts or from funds intrusted to
+the bank for temporary safekeeping or disbursement in the interest of
+the depositor. In every case they represent a service rendered the
+depositor for which the bank must be paid, and, when interest is
+allowed, the depositor must repay it in some form with an increment
+sufficient to remunerate said service.
+
+Commercial banks may and usually do conduct savings accounts also, for
+which an interest payment is not only defensible but in every sense
+desirable, but in so doing they are going beyond the sphere of
+commercial banking, which alone is under consideration at this point.
+
+Rates charged on loans and discounts are the chief means through which
+commercial banks are remunerated for the services they perform. In the
+long run these rates are determined by competition, and represent the
+current market value of the services performed by bankers. Custom
+often affects them temporarily and sometimes for long periods prevents
+their response to influences tending to produce change, but in the
+long run they yield to economic force and conform to the laws of
+value.
+
+Variations in the rate of discount are the most efficient means
+employed by commercial banks for the regulation of the volume of their
+loans and discounts and for changing the percentage their reserves
+bear to deposits and note issues. An increase of these rates tends to
+check loans and discounts, to decrease deposits and note issues, to
+increase reserves, and consequently to raise the percentage of
+reserves to deposits and issues.
+
+It checks loans and discounts by increasing the expense of conducting
+business operations on a credit basis, thus diminishing profits and
+sometimes causing losses, checking enterprise and decreasing the
+volume of commercial transactions. A decrease of loans and discounts
+correspondingly diminishes deposits or note issues, or both, since
+these are simply the counterpart or representative of such loans and
+discounts in the form of credit balances in the checking accounts
+conducted by the banks or the equivalent of such 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 funds and of
+the amount of the liability of stockholders for subscriptions in case
+of failure, no well-founded principles have been developed for the
+guidance of legislators. They should be great enough to cover
+prospective losses and to induce conservatism, honesty, and efficiency
+in management, and not so great as to prevent the free flow of an
+adequate amount of capital into the business. Unfortunately, the
+statistics of losses in cases of failure are not a sufficient guide.
+In some cases they bear a large proportion to the volume of business
+transacted and in others a very small one, and the number of cases
+available are too small to give much value to averages. The amount
+necessary to secure the best possible management is also purely
+problematical.
+
+In lieu of well-founded principles, the practice has developed in this
+country of making the minimum capitalization permitted depend upon the
+population of the town in which the bank is located. This seems to be
+a very crude and indirect method of proportioning capital to the
+volume of business transacted. The fixing of such a proportion, or of
+a proportion which no bank should be permitted to exceed, is probably
+the best method of solving this problem, but it should be done
+directly and not by the roundabout method which has been mentioned
+above.
+
+A proportion of ten to one between capital and aggregate demand
+obligations would probably be justified by American experience. The
+present practice of fixing the surplus fund at twenty per cent of the
+capital would be justifiable if the capital fund were properly
+regulated in amount.
+
+(_b_) _Inflation and Means of Protecting the Public against It._--The
+greatest abuse to which the business of commercial banking is subject,
+and against which the public most needs protection, is inflation. This
+is a condition difficult to diagnose, and not well understood by the
+general public and even by bankers. The most easily recognized symptom
+of its existence is the forced liquidation of credits; that is, forced
+sales of property in order to meet maturing obligations to banks.
+When, for example, the people whose notes or bills have been
+discounted by banks default in large numbers, and the collateral
+deposited as security has to be sold, or, in the absence of
+collateral, the courts must order the sale of their property, the
+presence of inflation may be suspected.
+
+The chief cause of inflation is the issue by commercial banks of
+demand obligations against investment securities. The means of
+liquidating such securities are the profits of the enterprises in
+which the investments were made and in the nature of the case several
+years are required for the accomplishment of this end. Meantime the
+demand obligations of the banks issued against them in the form of
+balances on checking accounts or notes must be met and, the funds
+regularly deposited with them as a result of the operation of such
+enterprises being inadequate, other means must be found. The only one
+available is the sacrifice, at forced sales, of the property in which
+the investment was made or of some other property in the possession of
+the persons responsible to the bank.
+
+The banks usually protect themselves against such forced liquidation
+by the requirement that the paper they discount shall mature at short
+intervals, usually not to exceed four to six months, and accept the
+long-time securities, such as bonds, stocks, and mortgages, only as
+collateral. By this means they are able to force the liquidation on
+their customers. Otherwise they would be obliged themselves to endure
+it, with the result that their capital and surplus funds would be
+impaired and perhaps exhausted; and, if they should prove inadequate,
+failure would be inevitable.
+
+The evil involved in the forced sales of property caused by inflation
+is the readjustment of prices through which it is accomplished, and
+the depression and, sometimes, panic which follow. When the prices of
+many kinds of property must be greatly depressed in order to induce
+their transfer to other hands, the machinery of commerce and industry
+is thrown out of adjustment and is sometimes rendered temporarily
+useless. This result is due to the fact that the relations between
+costs of production and the returns from the sale of finished products
+are so changed that profits are reduced or annihilated, and many
+persons are financially ruined. Readjustments of the prices of raw
+products, labor, and finished goods, and the transfer of plants to new
+hands, are, therefore, necessary before industry, commerce, and
+agriculture can again operate in a normal way, and during the period
+of readjustment some enterprises must entirely stop operations, and
+all must slow down. At such times many laborers are thrown out of
+employment, many more work part time only, the wages of nearly all
+are lowered, and most other classes of income are cut down. Depression
+and, in extreme cases, panic are the result, and these have serious
+consequences other than financial.
+
+The means employed for the protection of the public against inflation
+are crude and inadequate. They may be grouped under the heads:
+regulations regarding investments, reserves, and note issues. Under
+the first head belong in the banking legislation of this country
+limitations on real estate investments and on the amount that may be
+loaned to a single firm or individual. Our national banking act and
+most of our state banking acts prohibit banks from holding real estate
+except for their own accommodation, and as a means of reimbursing
+themselves for defaulted loans, and our national banking act prohibits
+the taking of real estate security for loans, and many of our state
+banking acts limit the amount of such security that may be held. Our
+national banking act limits the amount that may be loaned to a single
+firm or individual to one-tenth of the bank's capital and surplus, and
+similar regulations are common in state banking legislation.
+
+The purpose of these regulations is to confine the investments of
+banks to what are called liquid securities, but they fail to evince a
+proper conception on the part of their authors of what really makes a
+security liquid. Apparently legislators and their advisers have felt
+that if the securities held by the banks mature in short periods, or
+are listed on a stock exchange, they are liquid; but such is not
+necessarily the case.
+
+Commercial paper only is really liquid, since it represents a current
+commercial process which will soon be completed and the completion of
+which automatically provides the means for its payment. Such paper
+usually matures in short periods, but the characteristic of liquidity
+results not from the date at which it is made to mature, but from the
+commercial process which called it into existence and will ultimately
+retire it. In this country very often paper of short maturity is so in
+form only, its makers expecting to renew it, instead of pay it, at
+maturity.
+
+Bonds and stocks, even though they may be listed on a stock exchange
+and daily bought and sold, are not liquid securities in the proper
+sense of that term. An individual bank may be able to sell them in
+case of need, but such sale is simply the transfer of the investment
+to another bank or person, and not its liquidation. The security
+still exists and must be paid, while its liquidation would take it out
+of existence.
+
+Foreign legislators have approximated more closely than ours what is
+needed in the regulation of bank investments. In the case of their
+central banks, many of them, notably those of France and Germany, have
+recognized the fundamental distinction between commercial and
+investment paper, and have required them to hold the former against
+their demand obligations, especially their notes.
+
+The regulation of reserves has become a subject of legislation in this
+country only. Our national banking act classifies national banks into
+three groups, called country, reserve city, and central reserve city
+banks, and requires those in the first mentioned group to keep cash in
+their vaults to the amount of at least six per cent of their deposits,
+and balances in approved reserve city banks sufficient to bring the
+total amount up to fifteen per cent of their deposits.
+
+Banks in reserve cities are required to keep in their vaults cash to
+the amount of at least twelve and one-half per cent of their deposits,
+and balances in central reserve cities sufficient to bring the total
+up to twenty-five per cent of their deposits. Banks in central reserve
+cities are required to keep at least twenty-five per cent of their
+deposits in cash in their vaults. When the reserves of a bank fall to
+the prescribed minimum, all discounting must cease. Regulations
+essentially similar are found in the banking laws of most of our
+states.
+
+The purpose of these regulations is to set a limit to the extent to
+which banks may expand the volume of their loans and discounts, in the
+belief, apparently, that, if at least the prescribed proportion of
+cash is all the time kept on hand, the banks will be able to meet
+their obligations. As in the case of the regulations concerning
+investments, the authors of these failed to recognize the
+significance, from the point of view of the cash demands likely to be
+made upon banks, of the kind of paper admitted to discount. If
+discounts be confined to commercial paper, the demand obligations they
+create will be met for the most part by transfers of credits on the
+banks' books or by the return of the notes issued, and, as foreign
+experience has demonstrated, the adjustment of cash resources to needs
+can safely be left to the judgment of the bankers themselves, who,
+through variations in the discount rate, rediscounts, and other means,
+can regulate it with ease. If investment paper is admitted to
+discount, reserves less than one hundred per cent of the demand
+obligations thereby created are unsafe, since a less amount is likely
+to force liquidation on the banks' customers, with the results above
+indicated.
+
+The most elaborate regulations for the prevention of inflation have
+been developed in connection with legislation concerning note issues.
+The reason for this is the fact that commercial banking was at its
+origin and for a long time thereafter carried on almost exclusively
+through note issues, the conduct of checking accounts being a
+comparatively recent development. The phenomenon of inflation was,
+therefore, first observed in connection with note issues and
+associated with them. Even now the essential similarity of note issues
+and checking accounts as banking instrumentalities is not universally
+recognized.
+
+The means of safeguarding note issues which have been incorporated
+into legislative enactments are the prior lien on assets, the safety
+fund, the requirement and sometimes the mortgaging of special assets,
+and the limitation of the total issues. By the prior lien is meant the
+provision that in case of failure the note holders shall be paid in
+full before any of the assets are distributed among other creditors.
+By the safety fund is meant a required contribution from each bank,
+usually a percentage of the amount of notes issued, placed in the
+hands of some public official and kept for the redemption, in case of
+failure, of such of the notes of failed banks as cannot be redeemed
+out of the assets of the banks themselves. Additional contributions
+from the solvent banks are required for the replenishment of the fund
+when it has been depleted.
+
+The practice of different countries regarding the requirement of
+special assets to be held against note issues, as well as regarding
+the mortgaging of such assets, is not the same. Germany and France,
+for example, require their banks to cover their note issues by
+designated proportions of commercial paper and coin, while the United
+States requires its banks of issue to cover their notes by government
+bonds and to contribute a five per cent redemption fund in addition,
+and England requires the Bank of England to cover a designated amount
+of its issues by government and other securities and the remainder by
+coin. Unlike the others, the United States mortgages to the note
+holders the securities, that is, the government bonds, required to be
+held against the notes, by providing that in case of failure these
+securities shall be sold and the proceeds used for the settlement of
+their claims.
+
+In all of these provisions, the protection of note holders against
+loss in case of failure has been an influential consideration, and in
+the cases of the prior lien and the safety fund, the only one. The
+prevention of inflation may have entered into consideration in the
+other cases, but among the states mentioned the regulations of France
+and Germany alone are efficient in this direction, since they alone
+prohibit note issues against investment securities. The above
+mentioned regulations of England and the United States tend rather to
+promote, than to prevent, inflation, since they require the holding of
+investment securities against note issues.
+
+The limitation of the aggregate amount of notes that may be issued is
+a common legislative regulation. In the United States the limit set is
+the amount of the capital stock, and in France it is an arbitrary
+figure from time to time changed as the needs of the bank seem to
+require. As a safeguard against inflation, the value of such
+limitation depends upon the basis of the issues. If it is investment
+securities, as in the case of the United States, limitation to a low
+figure, not in any case to exceed the capital stock, is desirable,
+since such limitation keeps the inflation within such bounds that the
+banks themselves may be able to withstand the effects of it by selling
+upon foreign markets, without great and perhaps without any loss, the
+securities in which their capital and surplus funds are invested. If
+the basis of issues be commercial paper, such limitation is
+unnecessary, since inflation in such a case is improbable, and
+pernicious, unless it be placed above the point which the volume of
+issues is likely in ordinary cases to reach.
+
+(_c_) _Other Means of Safeguarding the Interests of the
+Public._--Experience has shown that publicity is a valuable safeguard
+against bad bank practices, and legislation has, therefore, provided
+for it by the requirement that statements of banking operations shall
+be published from time to time. The national banking act of the United
+States and many of our state banking acts, for example, provide for
+the publication five times a year of bank balance sheets, drawn up
+according to prescribed forms.
+
+The inspection of banks by public examiners and the requirement of
+detailed reports to public officials are also provided for in our
+federal and state legislation. Canada requires the reports but not
+the inspection by public officials, on the ground that the latter
+cannot be thorough and efficient, and is, therefore, likely to mislead
+the public and cause it to be less vigilant than it otherwise would be
+in the use of other means of safeguarding its interests.
+
+Legislation in this country has also concerned itself with the duties
+of bank directors and the enforcement of their performance, and with
+the relations of bank officers to their banks, particularly those
+involved in borrowing for their own uses or for firms or corporations
+in which they are interested.
+
+A recent legislative experiment along quite a new line has been
+undertaken in this country in the form of laws providing for the
+mutual insurance of depositors. Oklahoma started this experiment, and
+her example has been followed by other states. The essence of the
+experiment consists in the provision of a fund out of which is paid to
+the depositors of failed banks that portion of their claims which
+cannot be met from the liquidation of the assets of the defunct banks,
+such fund to be contributed by the other banks belonging to the
+system.
+
+The protection of depositors against loss is a commendable aim of
+legislation, but this method of attaining this aim is open to the
+serious objection that it removes from depositors all concern
+regarding the proper management of the bank with which they do
+business, and thus gives the unscrupulous, dishonest, and plunging
+banker an advantage. Attraction of depositors is the chief field in
+which competition between banks is carried on, and when the power of
+good management in this direction is removed, high rates on deposits,
+high lines of credit, low or no rates of exchange, extravagance in
+equipment, etc., remain the only attractions, and in the offer of
+these the unscrupulous and plunging banker will always outdo the
+conservative.
+
+It is impossible to overcome this objection by public supervision, and
+more frequent and rigid examinations. No public officer can equip
+himself to pass judgment on the relations of a bank with each
+customer, or to detect secret contracts and unwritten understandings,
+or to keep unscrupulous people out of the banking business. There can
+be no doubt that a reputation for conservatism, good judgment, strict
+integrity, and careful management is, at the present time, the most
+valuable asset a banker can have, because customers know that they are
+in danger to the extent that these qualities are lacking. To
+substitute for the present basis of competition between banks that
+established by mutual insurance laws is to undermine the foundations
+of our credit system and to invite disaster and ruin.
+
+
+_5. Adequacy and Economy of Service_
+
+From the point of view of adequacy and economy of service, two types
+of banking systems require attention; namely, that characterized by a
+large number of relatively small local independent banks, chartered
+under general laws, and exemplified in this country; and that
+characterized by a relatively small number of large banks endowed with
+the privilege of establishing branches, and exemplified in the other
+leading nations of the world.
+
+Under our system each community is encouraged to look after its own
+banking needs. Local initiative in the establishment of new
+institutions is given free play and local capital and local talent is
+attracted. Outside promoters and outside capital are not excluded,
+but, if they come, they do so as colonists expecting to cast in their
+lot with the community and to become identified with it. The managers
+of our banks for the most part are local men who are the real heads of
+the institutions they manage and whose careers and prosperity depend
+on the success of these institutions.
+
+The localism which characterizes this system contributes elements both
+of strength and of weakness. It develops local talent, and promotes
+mutual understanding and cooperation between the banks and the
+business enterprises of the community, and conformity of organization
+and methods to local needs. Its weakness consists in the financial
+isolation and the narrowness of vision and training which are its
+natural accompaniments. Under this system capital does not easily and
+quickly move from place to place and readily distribute itself
+according to the relative needs of different communities. In
+consequence, rates of interest are apt to vary widely, some
+communities to be under- and others over-capitalized, and the capital
+of the nation as a whole to be inefficiently employed. Under this
+system the opportunity of bankers for training is meager, since the
+broader and more fundamental aspects of the business are rarely
+brought to their attention, and in the smaller towns and country
+districts they are apt to be recruited from people of mediocre ability
+and often from those not well fitted by nature and education for this
+branch of commercial enterprise.
+
+The system of branch banking, almost universally employed elsewhere,
+is strong where our system is weak, but it has weaknesses of its own.
+It promotes distribution of capital according to relative needs, and
+consequently efficiency in the application of a nation's capital as a
+whole, and it offers a wide field of training for the people engaged
+in the business, and draws its recruits from every quarter. It can
+readily supply banking facilities to communities too small or too poor
+to provide for an independent bank, and more readily than our system
+can adjust itself to rapidly growing communities.
+
+Its chief weakness consists in the lack of independence of the
+managers of the branches and the consequent danger that local needs
+may not be fully satisfied. The manager of a branch is usually granted
+freedom of action only in routine matters. Any business out of the
+usual order must be referred to higher authorities connected or
+associated with the main office; and, even with the advice of the
+manager, who alone is familiar with local conditions, the decision
+cannot be made with that intimacy of knowledge of and sympathy with
+the business and aspirations of the individual or firm under
+consideration that full justice to him and his town may require. In
+the matter of adequacy and character of service, therefore, the city
+in which the main office is located has an advantage over those in
+which the branches are located.
+
+In this connection it should also be noted that, while the branch
+banking system is able to adjust itself to the capital requirements of
+towns of all sizes more readily than the independent banking system,
+and thus to secure a better distribution of the banking capital of the
+community, it does not follow that it will do so. On account of
+ignorance of conditions, insufficiency of capital or inability readily
+to increase it, or inertia on the part of the head office, a town may
+have to wait for the establishment of a branch longer than it would
+for the establishment of an independent bank.
+
+Whether or not this will be the case, however, depends to a
+considerable extent upon the keenness of the competition between the
+big banks with branches. The big central banks of Europe, which have
+no competition within their field, have been slow to establish
+branches. The coercive force of the government has been necessary in
+many cases to secure their proper expansion. In the case of the other
+big banks, however, both of Europe and of Canada, competition has
+resulted in very rapid expansion during the last half century,
+probably as rapid as could be desired.
+
+Regarding adequacy of service, the method of granting charters and the
+attitude of the government towards private banking is important. If
+banks are allowed to spring up spontaneously, like manufacturing and
+commercial establishments and farms, they are likely to be plentiful
+and to be located wherever needed. Experience, however, has shown that
+private banks cannot be adequately regulated in the interest of the
+public and that incorporation under public auspices should be
+required.
+
+Two methods of incorporation are employed, those of the special
+charter and of the general law. Except in the case of special
+institutions, like central banks, the former is objectionable, since
+it opens the doors to political favoritism and is likely to result in
+bad distribution, lack of uniformity in regulation, and lack of
+steadiness and regularity in development. Incorporation under general
+laws, or the free banking system, as it is sometimes called in this
+country, is unquestionably the best from every standpoint. All the
+necessary checks and balances can be incorporated in these laws, and
+the supervision of public officers, together with the necessary
+administrative machinery, provided for. This is the only practicable
+method to employ in an independent system like ours.
+
+The special charter method works best in connection with the branch
+bank system, in which the question of chartering new institutions only
+occasionally arises, and in which delay is not so serious.
+
+
+
+
+CHAPTER IV
+
+COMMERCIAL BANKING IN THE UNITED STATES
+
+
+The commercial banking system of the United States consists of several
+elements which have been contributed at different periods in our
+history. The most important of these are state banks, national banks,
+and the independent treasury system.
+
+
+_1. State Banks_
+
+From the very beginning of our national history institutions enjoying,
+among others, the privilege of commercial banking have been chartered
+by our states. For several years after the adoption of our
+constitution it remained an open question whether the incorporation of
+such institutions was not their exclusive privilege, but in the case
+of McCulloch v. Maryland, in 1819, the Supreme Court decided that the
+federal government also had this right.
+
+During the years 1791-1811, and 1816-1836, the state banks had as
+competitors the first and second United States banks, and in 1863
+so-called national banks entered the field, and, more recently still,
+trust companies. Private banks have also existed from the beginning,
+but their number and relative importance have declined in recent
+years. At the present time the number of state banks exceeds that of
+all other classes of banking institutions combined, but in capital and
+resources they are inferior to both national banks and trust
+companies.
+
+Since each state has had a free hand in the matter of legislation
+concerning the banks chartered under its auspices, uniformity in the
+regulations imposed upon and in the kind and degree of supervision
+exercised over this class of institutions, is lacking. In most cases,
+however, as compared to national banks, the amount of capital required
+is smaller; they have greater freedom in the making of loans,
+especially upon real estate security; and they are not so carefully
+examined and supervised by public officials. The most frequently
+imposed legislative requirements are: the accumulation of a surplus
+fund from earnings; double liability of stockholders; a minimum cash
+reserve to be kept in the vaults, and an additional reserve on deposit
+in other banks; the organization of a banking department for the
+administration of the laws pertaining to them; regular reports and
+examinations; and some limitation on real estate holdings and on the
+amount of loans to be made on real estate security. On account of the
+relatively low capital requirements imposed upon them, and the
+liberality of the laws concerning them in other respects, state banks
+have been able to prosper where national banks and trust companies
+could not exist, and on this account in many parts of the South and
+West they do most of the banking business in small towns and country
+districts. They generally perform a wide range of banking functions,
+including those of investment and savings as well as of commercial
+banks.
+
+
+_2. National Banks_
+
+Our national banking system owes its existence to financial exigencies
+of the federal government experienced during the Civil War. For a
+considerable period preceding the outbreak of that struggle the
+expenses of the government had exceeded its receipts. The deficit was
+greatly increased as soon as the war began, and Congress did not find
+it possible immediately to devise adequate new sources of revenue,
+including a market for government bonds. It was, therefore, forced to
+the issue of legal-tender notes under authority of an act passed
+February 25, 1862.
+
+After three issues of these notes, amounting to $400,000,000, had been
+exhausted, and the value of the notes had depreciated to such an
+extent that persistence in this method of financiering portended
+speedy financial disaster, Congress adopted a suggestion made early in
+the war by Secretary Chase, to the effect that a market for government
+bonds might be created by compelling banks to purchase them as
+security for their note issues. An act passed February 25, 1863,
+provided for the incorporation of banks with the right to issue notes
+on condition that they purchase government bonds and deposit them with
+an official to be known as Comptroller of the Currency.
+
+It was the expectation of the authors of this act that the state
+banks, then numbering over one thousand, would exchange their state
+for national charters and purchase bonds sufficient to secure their
+circulation under the terms of the new act, but, since they showed
+reluctance so to do, in 1865 force was applied in the form of a tax of
+ten per cent on bank notes otherwise secured. Under this pressure most
+of the state banks reorganized as national institutions, but a few
+retained their state charters and formed the nucleus of the state
+system of the present day. On account of the ten per cent tax,
+however, the issue of notes by this remnant became unprofitable, and
+the new national banks have to this day remained the sole banks of
+issue in the country.
+
+The act of 1863 has been amended several times, notably in 1864, 1870,
+1874, 1875, 1882, 1887, and 1900. In its present form it permits the
+organization of banks with a capitalization as low as $25,000 in towns
+of 3,000 inhabitants or less, and with a capitalization as low as
+$50,000 in towns of 6,000 or less. Banks organized under this act must
+put ten per cent of their profits into a surplus fund until said fund
+amounts to twenty per cent of the capital; must invest at least
+twenty-five per cent of their capital, if it is less than $200,000,
+and at least $50,000, if it is $200,000 or more, in government bonds;
+and may deposit said bonds with the Comptroller of the Currency and
+receive circulating notes to the amount of their par value, provided
+their market value is par or above.
+
+The rights and privileges of these banks are stated in very broad and
+general terms, a fair interpretation of which permits them to engage
+in both commercial and investment banking under certain specified
+limitations, of which the most important are the following: they must
+not invest in or hold real estate beyond their owns needs for suitable
+quarters, or temporarily for the purpose of collecting debts due them;
+they must not accept real estate as security for loans; they must not
+loan more than ten per cent of their capital and surplus to any one
+person or firm; and they must keep reserves to the amount of fifteen
+per cent of their deposits, if they belong to the group known as
+country banks, and to the amount of twenty-five per cent of their
+deposits, if they belong to either the reserve city or the central
+reserve city group.
+
+In the case of country banks, at least two-fifths of the required
+reserves, and in the case of reserve city banks, at least one-half,
+must consist of specified forms of money in their own vaults. The
+remainder may be balances payable on demand in approved banks in
+reserve or central reserve cities in the case of country banks, and in
+the central reserve cities in the case of reserve city banks. In the
+case of banks in central reserve cities, the entire reserve prescribed
+by law must consist of money in the vaults. These required minimum
+reserves must not be infringed upon. When a bank's cash and balances
+with its reserve agents fall to the prescribed minimum, discounting
+must be stopped under penalty of suspension of privileges and
+liquidation by the Comptroller of the Currency.
+
+At five dates each year, selected by the Comptroller of the Currency,
+national banks must make detailed reports of their condition on
+prescribed blanks and publish abstracts of such reports in local
+newspapers. They must also submit to examination by persons appointed
+for that purpose by the Comptroller as often as this official may deem
+necessary and proper.
+
+National banks have been organized in every state of the Union, and in
+Maine, Massachusetts, and Vermont they have completely supplanted the
+state banks. Elsewhere they exist side by side with state banks and
+compete with them. In some states they are more and in others less
+numerous than state banks. In the kind of business transacted the only
+important difference between the two classes of institutions consists
+in the loans on real estate security, which national banks are
+prohibited, and state banks allowed, to make. The latter, therefore,
+share this class of business with the trust companies only, and where
+it predominates have a distinct advantage in competition over the
+national institutions.
+
+
+_3. The Independent Treasury System_
+
+While not a banking institution, the Treasury of the United States
+handles its funds in such a manner and performs such functions with
+reference to the currency that it has become an important part of the
+banking system of the country.
+
+Previous to 1840 the funds of the federal government were kept on
+deposit in banking institutions, during the greater part of the time
+in the First and Second United States banks. Friction between
+President Jackson and the Second United States Bank resulted in their
+withdrawal from that institution in 1834 and their deposit in selected
+state banks, several of which failed and all of which suspended specie
+payments during the crisis of 1837. The embarrassment which the
+treasury experienced in consequence, combined with previous
+unsatisfactory relations between the government and its depositories,
+convinced President Van Buren that the Treasurer ought himself to keep
+and to disburse the funds of the government. He made a recommendation
+to this effect to Congress, which in accordance therewith enacted the
+first independent treasury act in 1840. The revival of agitation for a
+third United States Bank led to the repeal of this act the following
+year, but in 1846 it was reenacted and with modifications has remained
+upon our statute books to the present day.
+
+In its original form this act provided for the acquisition of vaults
+in certain cities, in which should be deposited the funds of the
+government as soon as possible after they came into the hands of the
+receiving officers, and out of which should be taken, upon drafts
+issued by the Secretary of the Treasury, the money needed for the
+payment of the government's obligations. It further provided that all
+dues to the government in the future should be paid either in coin or
+in currency issued exclusively by the government, and that all
+expenses should be paid in the same forms of money.
+
+Important modifications in this act were made during and after the
+Civil War. In 1863 permission was granted the Secretary of the
+Treasury to deposit in national banks funds accumulated in the
+treasury, and derived from any source except duties on imports,
+provided the banks selected for this purpose should deposit with him
+government bonds for their security. Subsequently the discretionary
+power of the Secretary in this direction was extended so that at the
+present time he is authorized at his discretion to deposit in national
+banks surplus funds derived from any source, trust funds alone
+excepted, and to accept as security therefor other securities than
+government bonds. Other laws have made national bank notes acceptable
+for certain public dues, and have given the Secretary authority to
+issue gold and silver certificates against gold coin and silver
+dollars deposited in corresponding amounts, and to redeem United
+States notes in gold coin and to keep on hand for that purpose a gold
+reserve of $150,000,000.
+
+In its operation, this independent treasury system affects the
+reserves of the banks and through them their discounts and the
+commerce of the country. Whenever the receipts of the government
+exceed its expenditures, money accumulates in the treasury and the
+reserves of the banks are diminished; and, under opposite conditions,
+they are increased. The return of accumulated surplus funds to the
+banks is possible when the Secretary of the Treasury decides that such
+return is desirable or necessary and when the banks are able and
+willing to supply the bonds demanded as security. In case a deposit is
+agreed upon the funds go to a relatively small number of national
+banks selected as depositories by the Secretary of the Treasury, the
+amount allowed each depository also being determined by him.
+
+Through its ability to issue gold and silver certificates, its
+obligation to redeem United States notes in gold on demand, its
+administration of the United States mints and assay offices and the
+laws regulating the supply and distribution of subsidiary coin, the
+United States Treasury cooperates with the banks in the supply and
+distribution of the circulating medium of the country. The people
+apply to the banks for the forms of money and currency desired and
+these institutions meet the demand by means of the funds deposited
+with them or by their exchange at the various subtreasuries, if the
+forms of money deposited do not correspond with these demands.
+
+
+_4. The Interrelations of These Institutions_
+
+Under the operation of the national banking act, New York, Chicago,
+and St. Louis have been designated as _central reserve_, and
+forty-seven other cities as _reserve_ cities. The national banks in
+these reserve cities act as reserve agents for national banks in the
+cities and towns not so designated and ordinarily receive on deposit
+the major part of their reserves plus surplus funds not needed for
+local purposes. Banks in the central reserve cities act as reserve
+agents for the banks in the reserve cities as well as for country
+banks, and on account of their importance as commercial and investment
+centers receive and hold in the form of bankers' balances a large part
+of the reserve funds as well as the surplus investment funds of the
+national banks of the entire country.
+
+State banks and trust companies manage their reserve and surplus
+investment funds in substantially the same manner as national banks,
+using national banks in the reserve and central reserve cities as
+their reserve agents. State laws usually allow approved state banks
+and trust companies also to act as reserve agents for the banks and
+trust companies under their jurisdiction, but these approved banks are
+generally located in the reserve and central reserve cities, and
+themselves employ the national banks there located as their reserve
+agents, thus forming simply an additional conduit through which the
+reserve and surplus investment funds of state banks and trust
+companies reach the central money reservoirs administered by national
+banks in the central reserve cities.
+
+National banks in the reserve and central reserve cities are also
+clearing centers for the enormous volume of checks and drafts which
+the administration of the checking accounts of the banks and trust
+companies of the country bring into existence. They act as
+correspondents as well as reserve agents for these other banks and
+trust companies, and in this capacity collect out-of-town checks and
+drafts and conduct checking accounts for them. Within these cities, as
+well as in hundreds of others, clearing house associations conduct the
+local clearings and also act as agencies through which national and
+state banks and trust companies cooperate in the promotion of common
+interests.
+
+The center of the entire system is in New York City. The clearing
+house association of that city, consisting of over fifty national and
+state banks and trust companies, includes the banks the vaults of
+which constitute the central money reservoir of the country and which
+constitute the center of the country's clearing system. Through the
+New York subtreasury pass the greater part of the receipts and
+disbursements of the government, and the chief assay office in the
+country is located there. The New York stock exchange is our only
+stock and bond market of national scope, and consequently the
+investment center of the country.
+
+The Associated Banks of New York City, as the members of the clearing
+house association are called, hold the greater part of the reserves of
+the banks and trust companies not required by law to be kept in the
+local vaults, as well as the greater part of the surplus investment
+funds of the entire country. It is through the operation of the New
+York subtreasury on the reserves of the Associated Banks that the
+chief influence of the independent treasury system on the banking
+business of the country is exerted, the greater part of the
+government's receipts coming directly out of those reserves, and a
+large part of the expenditures going into them, and the greater part
+of the money deposited in national banks by the Secretary of the
+Treasury going directly or indirectly into New York institutions. Most
+of the exports and imports of coin and bullion pass through New York,
+and the major portion of the foreign exchanges of the entire country
+are there effected. The New York Assay Office receives and distributes
+the greater part of the new supplies of gold and silver bullion which
+come from our mines and transforms into bullion the major part of
+these metals that come to us from abroad and do not find employment as
+foreign coin. The New York Stock Exchange is the medium through which
+a large part of the surplus savings of the country are invested in our
+industries or loaned for the use of our national, state, municipal,
+and other local governmental agencies.
+
+
+_5. Operation of the System_
+
+The most noteworthy features of the working of this machinery may be
+discussed under the heads: conflict of functions and laws; loan
+operations; treasury operations; reserve system; absence of elasticity
+in the currency.
+
+(_a_) _Conflict of Functions and Laws._--The two classes of banking
+institutions which have been described (state banks and national
+banks) and trust companies, described in a subsequent chapter, exist
+side by side in many communities, and in the performance of certain
+services compete for the patronage of the public. As has already been
+pointed out, state and national banks differ little in their functions
+except in their relation to real estate loans, and in some states
+trust companies perform all the functions of these institutions and
+many others besides. In the performance of these common services,
+however, they are rarely regulated by the same laws or subjected to
+the same kind or degree of public supervision. The competition between
+them, therefore, is not always on a fair basis and the temptation to
+violate restraining laws and administrative regulations is strong. The
+supervising officers recognize the situation as a rule and go to the
+extreme limit of leniency in administering laws and regulations which
+operate to the manifest disadvantage of the institutions over which
+they have jurisdiction, but even then it is often impossible to render
+the basis of competition fair and equitable.
+
+This condition of affairs has resulted in the devising of ways and
+means of circumventing obnoxious laws and in some cases in practices
+which are pernicious in themselves. As examples may be mentioned the
+widespread practice of national banks, which are prohibited by law
+from making loans on real estate security, of making loans to
+customers who can offer no other collateral, on the security of their
+personal notes only, or of making loans secured by real estate by a
+three cornered operation utilizing a director or officer or some other
+third party as intermediary. All three classes of institutions
+compete in soliciting the savings deposits of the community, with the
+result that the trust companies and savings banks, which often have
+the advantage here, sometimes force upon their state and national bank
+competitors a higher rate of interest on such deposits than they ought
+to pay. The differing regulations in some places in force regarding
+the amount that may be loaned to a single individual or firm has also
+resulted in some cases in devious and uncommendable practices.
+
+For the remedy of these conditions the first desideratum is the
+careful differentiation of the various functions performed by all
+these institutions, and the devising of appropriate legal and
+administrative regulations for each one. These regulations should then
+be incorporated into the legislation and the administrative practices
+of the federal government and of each state, and any institution which
+performs any of these functions should be obliged to submit to the
+regulations pertaining thereto. The difficulties in the way of
+securing such a differentiation of functions and such community of
+action between the federal government and our states are too obvious
+to require statement, but they should not prevent the formulation of
+ideal conditions, and a conscious and persistent effort to attain
+them.
+
+(_b_) _Loan Operations._--In making loans, a typical method of
+procedure for a business man is to arrange with a bank for what is
+technically called a "line," that is, the maximum amount he may expect
+to be able to borrow under normal conditions. This "line" determined,
+he borrows from time to time according to his needs, giving as
+security his personal note, payable in one, two, three, four, or six
+months. Sometimes an indorser is required, and sometimes the deposit
+of collateral, mortgages on real estate, bonds, stocks, and warehouse
+receipts being the most commonly used securities employed in such
+cases. Ordinarily, when a note falls due, he expects the bank to renew
+it, if its payment at the time is not convenient, the agreement on a
+"line of credit" ordinarily carrying with it that implication, though
+not legally, probably not morally, binding the bank so to do. Indeed,
+the customer ordinarily counts the amount of his "line" as a part of
+his working capital and expects to keep it in use a large part, if not
+all, of the time.
+
+In the determination of the amount of these "lines of credit," the
+judgment of some one or more bank officers, assisted by a discount
+committee and sometimes, though not as a rule, by a specially
+organized credit department, rules. In forming these judgments, the
+bankers of the United States as a class are not guided by any
+universally recognized and well established principles. The best ones
+require from their customers carefully prepared statements showing the
+nature and volume of the business they transact, and a careful
+classification of their assets and liabilities. Others, and these are
+a large majority, rely upon the knowledge they already possess, gained
+by general observation, and supplemented by verbal inquiries made from
+time to time and by the voluntary statements of the customers
+themselves.
+
+The significance of the distinction between commercial and investment
+operations in the business of banking is not generally understood, and
+is consequently little regarded. The dominant question in the mind of
+the average banker, both in determining the amount of a customer's
+line and in making loans to him after the line is fixed, is how much
+he is "good for," and on this point the total net worth, rather than
+the nature of the business operations, of the customer is likely to be
+decisive. Of course, the banker is also influenced by the customer's
+reputation for both integrity and business ability.
+
+This method of procedure has the advantage of rendering access of
+people to the banks easy and of promoting their extensive use, but it
+has the grave disadvantage of opening the doors wide to inflation of
+credit. The majority of our bankers do not know whether more or less
+than their savings deposits and their capital and surplus, the only
+funds which can safely be invested in fixed forms, is so invested. The
+promissory notes of their customers, which constitute the major part
+of their assets, give no information on this point, and they have not
+made the investigations necessary to determine with certainty the
+destination of the funds they have loaned. They are satisfied with the
+knowledge or the conviction that their loans can be collected, not at
+maturity--they know very well that many, probably most, of them can
+not--but ultimately. The result is that unconsciously and gradually
+the banks create their demand obligations in the form of balances on
+checking accounts against fixed investments in machinery, buildings,
+lands, mines, etc., and, when the payment of these obligations is
+demanded, the reserves fall below the danger point and they are forced
+to require payment at maturity of paper which the maker had counted
+upon having renewed indefinitely, and the payment of which is only
+possible by the forced sale of the property in which the borrowed
+funds were invested, or of some other property in his possession. If
+only a single bank or a comparatively few banks find themselves in
+this condition, relief may be found in the rediscount of paper with
+other banks, in direct loans, or in the sale of securities on the
+exchanges; but, if the condition is general, relief by these means is
+impossible, and widespread forced liquidation becomes necessary. An
+aggravated situation of this kind causes panic and results in a
+commercial crisis.
+
+(_c_) _Treasury Operations._--The operation of our independent
+treasury system produces arbitrary fluctuations in the reserves of the
+banks and prevents that degree of prevision which is essential to the
+most economical and the safest practices. The funds needed for current
+purposes are withdrawn from the banks and kept under lock and key in
+the treasury vaults, thus diminishing reserves to the extent of their
+amount. Surplus funds likewise accumulate in the vaults with the same
+result, until the Secretary of the Treasury sees fit to deposit, and
+the banks find it possible to receive them. Even then the depository
+banks alone are directly benefited, and no one of these knows long in
+advance how much it is going to receive or when funds left on deposit
+will be withdrawn.
+
+Since the volume of the business of the government is very large, the
+effects produced by the movement of its funds are of such magnitude as
+to give them national importance, the ability of banks to loan and to
+meet obligations already incurred being profoundly affected by them.
+Among these effects must also be noted the inability of the banks to
+calculate these movements in advance, as they to a degree can those
+produced by the operations of their commercial customers, and the
+relation between them and the Secretary of the Treasury, which
+results. The relation between the receipts and the disbursements of
+the government vary greatly from month to month and year to year, so
+that, on the basis of past experience, it is impossible to predict
+when the banks will gain from or lose to the treasury. The action of
+the Secretary of the Treasury regarding deposits of surplus funds is
+equally uncertain and unpredictable. No fixed policy regarding this
+matter has yet been established by precedent or determined by law.
+Each secretary follows his own judgment and is influenced by current
+events and conditions.
+
+The uncertainty which results creates a speculative atmosphere about
+the money market and renders the banks dependent upon the secretary
+and the secretary influential on the money market in a manner which is
+unfortunate for both. Since they cannot be indifferent to the
+operations of the treasury, and cannot predict them, banks are obliged
+to speculate regarding them, and, if they err, they are likely either
+to over-extend their credit operations or unduly to contract them. The
+former will result when they expect an increase in their reserves from
+treasury sources and do not get it, and the latter when contemplated
+withdrawals of funds do not occur.
+
+The Secretary of the Treasury is not in a position properly to
+exercise the power conferred upon him. He is outside the channels of
+commerce and industry, and must, therefore, secure at second hand the
+information necessary for intelligent action. Such sources of
+information are frequently unreliable and inaccurate and their use
+subjects him to the charge of favoritism and to the danger of acting
+in the interest of special groups or special localities.
+
+(_d_) _Operation of the Reserve System._--Each national bank now keeps
+locked up in its vaults money to the amount of at least six to
+twenty-five per cent of its deposits and a balance with banks in
+reserve and central reserve cities sufficient to bring the total to at
+least fifteen per cent of deposits in the case of country banks, and
+twenty-five per cent of deposits in the case of reserve city banks. In
+addition, it is customary for most banks to carry as a secondary
+reserve high-grade bonds which can be readily sold in case of need.
+The practice of state banks is practically the same as that of
+national, and that of trust companies differs only in the amount of
+reserves carried and in the proportion between the different items.
+
+This system has many disadvantages. Among them the most obvious,
+perhaps, is the withdrawal of enormous sums from the current use of
+the agriculture, industry, and commerce of the country. That portion
+of these reserve funds which is required to be kept under lock and key
+in the vaults, amounting in the aggregate to a billion and a half of
+dollars or more, is not available for use in ordinary times, and is
+practically useless even in times of stringency, since according to
+present law, when the reserves fall to the minimum prescribed by law,
+banks must stop discounting, under penalty of being put in the hands
+of a receiver. The other portions of these funds, namely, those
+deposited with banks in reserve cities and those invested in bonds,
+are likewise withdrawn from the uses of current commerce, since a
+large part of the former is only available for use on the New York
+Stock Exchange, and the latter are invested in railroads, mines,
+factories, land, etc.
+
+The explanation of the devotion of the redeposited portion of the
+reserves to the operations of the New York Stock Exchange is to be
+found in the fact that that exchange furnishes a regular market for
+call loans on a large scale. Since these funds are held subject to the
+call of the banks which deposited them, and interest at the rate of at
+least two per cent is paid upon them, the depository banks are bound
+to seek investment for them, and call loans on collateral listed on
+the exchange under ordinary circumstances are best suited to their
+purposes.
+
+Another disadvantage of this reserve system is the dangerous situation
+in which it places banks from time to time, and the tendency to panic
+which it fosters. The demands made upon banks for both cash and credit
+vary with the seasons. In the fall and spring they are much greater
+than in the winter and summer. They also vary regularly through
+periods of years, increasing during the up-grade of a credit cycle and
+decreasing for a longer or shorter period after a crisis. Irregular
+and unexpected events also cause variations. On account of the
+rigidity of this reserve system and the lack of elasticity in our
+currency, the means available to banks for meeting increased demands,
+especially those of an irregular and unexpected character, are
+inadequate, and their employment is often dangerous. These means are:
+keeping in the vaults in slack times a large amount of unused cash, a
+practice too expensive to be employed; keeping surplus balances with
+correspondents at two or three per cent interest, not a sufficiently
+remunerative practice to be employed on a sufficiently extensive
+scale; rediscount with correspondents of some of their customers'
+paper, or loans from them on the security of their own signatures or
+on such security supplemented by collateral; and sale of bonds at such
+prices as they will bring.
+
+None of these expedients is certain at all times and under all
+conditions, and some of them are precarious at all times. Surplus
+balances with correspondents are most reliable, but they occasionally
+fail on account of the inability of correspondents to realize upon
+their call loans. When calls for the payment of balances are large and
+general, it is impossible for brokers whose loans are called by one
+bank to transfer them to another. The collateral deposited as security
+must, therefore, be offered for sale on the stock exchange, and the
+very stringency which resulted in their being so offered renders their
+sale, even at slaughter prices, difficult and sometimes impossible.
+The result at the best is a heavy fall in the prices of stock-market
+securities, and at the worst a stock-market panic and a suspension of
+payments by the banks.
+
+Rediscounts and loans from correspondent banks cannot be depended on.
+Correspondents are under no obligation to make them. They will usually
+do so as a favor, if their condition warrants, otherwise not. Sales of
+bonds on the stock exchange are difficult and sometimes impossible in
+times of emergency, and are usually attended with loss.
+
+On account of this uncertainty and the danger attending it, when new
+and unusual conditions likely to result in increased demands upon them
+arise, banks are likely to act "panicky"; to call in their balances
+from correspondents; to sell bonds; to call loans; and greatly to
+curtail or absolutely to cut off new discounts. This action spreads
+the panicky feeling among their customers, and creates such pressure
+at the reserve centers as to cause curtailment of accommodations and
+panic there.
+
+At the very best, this reserve system is accompanied by high discount
+and loan rates and by speculation on the stock market. High rates
+result inevitably from the hoarding of currency which it involves, the
+supply of loan funds being abnormally diminished, and speculation
+follows from the concentration in slack times of funds in New York
+City, which can only be employed in call loans on stock-exchange
+collateral. Stock brokers regularly take advantage of this situation,
+speculate themselves and inspire speculation among their customers.
+The mutual dependence of the stock and money markets thus produced by
+this reserve system is disadvantageous to both, fluctuations in
+values, uncertainty, and irregularity on both being the result.
+
+(_e_) _Lack of Elasticity in the Currency._--The money of the United
+States consists of four main elements, gold and silver coin, United
+States notes, and national bank notes, and none of these fluctuate in
+volume in accord with the needs of commerce.
+
+The gold element depends primarily upon the output of our gold mines
+and upon the international movement of gold, increasing when that
+output increases and when our imports of gold exceed our exports, and
+decreasing under opposite conditions. These fluctuations, however, are
+quite independent of our commercial needs. Silver dollars, which
+constitute the major part of our silver currency, for several years
+have been unchanged in quantity, and the volume of United States notes
+has remained at $346,681,016 since the resumption of specie payments,
+January 1, 1879.
+
+National bank notes fluctuate in volume as a result of changes in the
+number of national banks and in the prices of government bonds.
+Whenever a new national bank is organized, a specified portion of its
+capital must be invested in government bonds, which bonds are usually
+deposited with the Comptroller of the Currency in exchange for notes;
+and, when the price of government bonds rises, banks holding more than
+the minimum required by law frequently retire a portion of their
+circulation in order to recover their bonds for sale at the enhanced
+price. When the price of government bonds falls, many banks purchase
+additional quantities and increase their circulation.
+
+Changes in the price of government bonds and in the number of national
+banks, however, have no connection whatever with changes in our
+currency needs, and no more do the fluctuations in the volume of the
+currency as a whole, made up of these various elements combined. As a
+result of this condition, rates on loans and discounts fluctuate
+greatly on account of wide variations between the demand and the
+supply of loan funds, and commerce is hampered at certain seasons and
+overstimulated at others. As was indicated above, this lack of
+elasticity in our currency aggravates the defects of our reserve
+system and also aids in the production of financial panics.
+
+
+_6. Plans for Reform_
+
+On account of the defects in our system of banking, there has been
+long-continued agitation for reform, increasing in scope and intensity
+in recent years. After the crisis of 1907, which revealed these
+defects to many persons who had not observed them before, Congress
+appointed a commission to make investigations and to prepare a reform
+measure. In January, 1912, this committee submitted a report which
+embodied a bill for the incorporation of a National Reserve
+Association, to be made up of a federation of local associations of
+banks and trust companies. The purpose of this association was to
+supply a market for commercial paper, an elastic element in the
+currency, a place for the deposit of the bank reserves of the country
+and of the funds of the government, as well as proper machinery for
+the administration of this market and these funds.
+
+For various reasons, the plan of the monetary commission did not meet
+with universal favor. It was condemned in particular by the Democratic
+party, which was victorious at the polls in the fall elections, and
+installed a new administration in Washington, March 4, 1913. A special
+session of the new Congress was called to consider the tariff
+question, and to it was submitted another plan for the reform of our
+banking system, which was enacted into law December 23, 1913.
+
+This law provides for the incorporation of so-called "Federal Reserve
+Banks," the number to be not less than eight or more than twelve. The
+country is to be divided into as many districts as there are Federal
+Reserve Banks, and the national banks in each district must subscribe
+six per cent and pay in three per cent of their capital and surplus to
+the capital stock of the Federal Reserve Bank located in that
+district. State banks and trust companies may contribute on compliance
+with the same conditions as national institutions. If, in the judgment
+of the organization committee, the amount of stock thus subscribed is
+inadequate, the public may be asked to subscribe, and as a last resort
+stock sufficient to raise the total to an adequate figure may be sold
+to the Federal Government. Cooperation between these Federal Reserve
+Banks and a degree of unity in their administration are provided for
+through a Federal Reserve Board of seven members, two ex officio and
+five to be especially appointed by the President of the United States.
+For the administration of each Federal Reserve Bank, a board of
+directors of nine members is provided for, six to be appointed by the
+member banks and three by the Federal Reserve Board, one of those
+three to be designated as Federal Reserve Agent and to be the
+intermediary between the Federal Reserve Board and the bank of whose
+directorate he is a member.
+
+The proposed Federal Reserve Banks are to hold a part of the reserves
+of member banks and to rediscount commercial paper, administer
+exchange accounts, and conduct clearings for them. They are also to
+serve as depositories for the United States government, and to issue
+treasury notes obtained from the Federal Reserve Board in exchange for
+rediscounted commercial bills, these notes to be redeemable on demand
+by them and to be a first lien on all their assets. Their retirement,
+when the need for them has passed, is provided for by the requirement
+that no Federal Reserve Bank shall pay out any notes except its own,
+all others being sent in to the issuing bank or to the treasury for
+redemption. Against outstanding note issues a reserve of at least 40
+per cent in gold must be maintained, and against deposits one of at
+least 35 per cent in gold or lawful money.
+
+This law provides remedies for the chief defects of our system;
+namely, a market for commercial paper which will enable a properly
+conducted bank at any time, through rediscounts, to secure notes,
+legal-tender money, or checking accounts in the amounts needed; a
+system of note issues which will fluctuate automatically with the
+needs of commerce for hand-to-hand money; a more economical
+administration of the reserve funds of the country, unattended by the
+dangers of the present system, and an administration of the funds of
+the federal government which is free from the evils of the independent
+treasury system.
+
+
+
+
+CHAPTER V
+
+COMMERCIAL BANKING IN OTHER COUNTRIES
+
+
+In contrast with that of the United States, the characteristic
+features of the commercial banking systems of Europe are the central
+bank performing important functions for all other financial
+institutions and for the government; a relatively small number of
+large institutions with many branches mediating between the central
+bank and the people; and the use of commercial and bank bills instead
+of promissory notes as the chief instruments of loans and discounts.
+
+
+_1. Common Features_
+
+The central banks differ considerably in organization and business
+methods, but perform essentially the same functions; that is, they act
+as financial agents for their respective governments; discount
+high-grade commercial and bankers' bills for other banks and usually
+for private persons; administer the cash reserves of the entire
+country; and furnish the greater part and, in some cases, the entire
+supply of bank notes.
+
+The other large banks do most of the business with the public, the
+central bank's relations being chiefly with them and with the
+government. They conduct checking accounts with merchants,
+manufacturers, farmers, and others; receive and invest savings
+deposits, and deal in certain classes of investment securities;
+conduct the domestic and foreign exchanges; discount various kinds of
+commercial and banking bills, frequently those not available for
+discount at the central bank; and make advances on personal and other
+kinds of security. Their main offices are located either in the
+central money market of the country or in important financial centers,
+and their branches are extended to all places in which banking
+facilities are supposed to be needed. As a rule, they are less
+restricted by legislative provisions than are the national and state
+banks and trust companies of the United States, and are less carefully
+supervised and inspected by public officers.
+
+Commercial and bankers' bills are widely used as credit instruments
+between buyers and sellers and between bankers and their customers. A
+common method of procedure, when a sale is made on time, is the
+drawing of a bill for the amount due, by the seller upon the buyer,
+payable at the end of the credit period agreed upon, and accepted by
+the buyer, and the discount of the bill by the seller's bank. In
+foreign and in some branches of domestic trade, the banker's bill is
+used on account of its more general acceptability as an object of
+discount, such bills usually being discountable by the central bank
+and by banks far distant from the place in which the bill originated.
+
+In case a buyer desires to furnish his creditors with bills of this
+kind, he arranges with his banker for a line of "acceptance" credit,
+which permits people who sell goods to him to draw bills upon his
+banker instead of himself, the banker agreeing to accept the bill and
+guaranteeing its payment at maturity. The seller will usually have no
+difficulty in discounting such a bill at his own bank, no matter how
+far removed it may be from the home of the buyer, the character of the
+accepting bank being known throughout the financial world. "Acceptance
+lines" are usually granted only on condition that the customer agrees
+to supply the bank with the funds necessary for meeting the accepted
+bills as they fall due, and to pay a fee for the accommodation. Ample
+security that these obligations will be met is usually demanded.
+
+
+_2. The English System_
+
+In the English system, the central bank is the Bank of England, with
+the possible exception of a few private banks, the oldest financial
+institution in the country. It is privately owned and privately
+governed. Its board of directors, chosen by the stockholders, consists
+of twenty-four persons, a portion of whom are practically life
+members, being regularly reelected when their terms of office expire.
+The others usually serve alternate years only, vacancies being filled
+by promising young men selected from the business houses of London.
+The oldest director is regularly elected to the office of governor of
+the Bank, and the next oldest to that of deputy governor, both serving
+two years, the deputy governor regularly succeeding to the office of
+governor, and the ex-governors forming the life members of the board
+and constituting a kind of advisory council to the governor, and known
+as the Board of Treasury.
+
+The head office of the Bank of England is in London, and there are
+eleven branches, two in London and nine in the provinces. By a law
+passed in 1844, the Bank was divided into two departments, called
+respectively the banking and the issue departments, the latter having
+exclusive charge of the issue of notes, and the former of all other
+branches of the bank's business.
+
+This same law prescribed the conditions under which notes could be
+issued. It provided that the Bank of England might issue Ł14,500,000
+of notes in exchange for securities, and any amount in addition in
+exchange for an equal amount of coin or bullion. Additions to the
+amount issued in exchange for securities might be made by order of the
+government to the extent of two-thirds the amount of issues
+relinquished by the other issuing banks, all such banks in existence
+at the time the act was passed being permitted to retain, without
+increasing, their existing issues. Most of these other issues having
+been abandoned since 1844, the Bank of England is now permitted to
+issue in exchange for securities Ł18,450,000. The securities against
+which these issues are made were transferred to the issue department
+by the banking department, and consist of the debt owed by the
+government to the bank and of other government or governmentally
+guaranteed securities. The issue department freely issues additional
+notes in exchange for an equal amount of gold coin or bullion, and on
+demand redeems notes in gold coin. Since the amount of notes all the
+time outstanding greatly exceeds Ł18,450,000, the business of the
+issue department is confined to the exchange of notes for gold coin
+and bullion and the redemption of notes in gold.
+
+The banking department receives and disburses the funds of the
+government, manages the public debt, and serves as the government's
+agent in most of its other financial operations; receives on deposit
+from other financial institutions the money which comes into their
+possession, and supplies them with such money funds as they need from
+day to day in payment of checks drawn against their balances;
+discounts bills of exchange with a minimum maturity of four, and in
+exceptional cases six, months; and to a limited extent makes advances
+on and invests in high-grade public and other securities. Besides the
+English government and financial institutions, it has other customers,
+but it is to be presumed that these are of a special character, since
+the conditions under which it does business with private persons are
+in most cases more onerous than those prescribed by other banks, and
+consequently not attractive to the ordinary business man.
+
+The so-called English Joint-Stock Banks are classified into three
+groups, known as metropolitan, metropolitan and provincial, and
+provincial banks. The metropolitan banks have their head offices in
+London, and do not, as a rule, extend their branches beyond the
+suburbs of the metropolis. The metropolitan and provincial banks have
+their head offices in London and branches scattered throughout the
+provinces, as well as in various parts of the city and suburbs, and
+the provincial banks have their head offices in the larger provincial
+cities, and each one confines its branches usually to the town and
+country districts tributary to the city in which its head office is
+situated. Often the provincial banks establish branches in London.
+
+For banking purposes, these banks are the chief reliance of the
+agriculture, industry, and commerce of the country, but competing with
+and supplementing them are the bill brokers and discount houses, the
+private banks, and the foreign and colonial banks. The bill brokers
+and discount houses make a business of dealing in foreign and domestic
+bills of exchange. They buy in the first instance a large percentage
+of the bills brought to market, keep some of them until maturity, and
+sell the remainder to the other banks, usually indorsing them first. A
+large part of the capital employed in their business is obtained by
+loans made from the other banks, subject to call and secured by the
+bills they purchase deposited as collateral.
+
+The private banks are the remnant left of the oldest group in the
+country. There were private banks in London centuries before the Bank
+of England was incorporated, and previous to 1826 the Bank of England
+was their only competitor. Since 1844 their number has steadily
+diminished. Those which remain have, as a rule, built up a special
+constituency, to the special interests of which they cater. Among them
+are strong institutions, but as a class their importance in the system
+is not great, and is waning.
+
+The foreign and colonial banks are branches of important institutions
+in foreign countries and the English colonies which have a
+considerable volume of business to transact in London. They serve as
+intermediaries between their respective countries and the English
+money market, and on account of the enormous volume of foreign
+commerce which is financed in London, their number is large, and the
+rôle they play on that market is important.
+
+In the operation of this machinery, the most noteworthy features are
+the reserve system, and the administration of the discount rate of the
+Bank of England. There is no law on the English statute books
+prescribing the amount of cash which banking or other financial
+institutions shall keep in their vaults. The custom of these
+institutions regarding that matter is to keep on hand relatively small
+sums and to rely upon the Bank of England or some other London banking
+house for the replenishment of their supply as needed. For this
+purpose, London and many provincial banks keep balances with the Bank
+of England, and other banks maintain balances with other London
+institutions. These balances may be obtained by the deposit of coin or
+Bank of England notes or by rediscounts. Another widely used resource
+is the calling of loans made to bill brokers or discount houses. Such
+loans or a considerable volume of bills of the kind discounted by the
+Bank of England, or both, are regularly carried by London banks and
+counted as a part of their reserves.
+
+On account of these practices, surplus cash not needed in the conduct
+of the current business of the country speedily finds its way into the
+vaults of the Bank of England, and additional supplies, when needed,
+come from this source. The administration of the cash reserves of the
+country thus becomes one of the important duties of the Bank of
+England, in the performance of which variation of the rate charged on
+discounts is the most important device.
+
+Many years' experience has enabled the Bank to determine with a
+considerable degree of accuracy the volume of the demands for cash
+likely to be made upon it from day to day, and consequently the amount
+that it should keep on hand in the vaults. Whenever this amount
+approaches the minimum regarded as consistent with safety, the
+directors raise the rate of discount, and when the amount on hand
+becomes excessive, they lower it. The efficiency of this procedure in
+increasing the reserves in the one case and in decreasing them in the
+other is due to certain conditions and practices which deserve
+attention at this point.
+
+Long-established custom has made the rate of interest paid on deposits
+in London and other parts of England vary with the discount rate of
+the Bank, and on this account the market rate of discount also varies
+in the same manner. The Bank of England is thus ordinarily able to
+regulate the market for commercial paper. Since paper payable in
+London is a favorite form of investment for continental bankers, by
+raising its rate of discount and with it the market rate above the
+level of the rates of some or all of the continental centers, the
+Bank of England is able to induce these bankers to send money to
+London for investment and thereby to increase her reserves, and by
+lowering its rate below the level of the rates in these continental
+centers, she is able to induce them to sell some of the paper they
+already hold, and thus to furnish a market for her surplus funds and
+diminish her reserves.
+
+On account of the readiness with which the international gold movement
+responds to variations in the discount rate of the Bank of England,
+the need for an elastic system of bank note issues is not felt in
+England to the same extent as in other countries. It is this fact,
+doubtless, which explains the retention to the present day of the
+essentially inelastic bank note system created by the act of 1844.
+
+
+_3. The French System_
+
+In France, the Bank of France is the central institution. It is the
+oldest of the important French banks of the present day, having been
+established in 1800 by Napoleon the First. Its capital, amounting at
+the present time to 182,500,000 francs, or approximately $36,500,000,
+is supplied by about 30,000 private stockholders, about 10,000 of
+whom own only one share each.
+
+The two hundred largest stockholders appoint a General Council,
+consisting of fifteen regents and three censors. Five regents and all
+the censors must be chosen from the commercial and industrial classes,
+and three of the remaining ten regents must be selected from the
+_tresoriers payeurs généreaux_, an important group of representatives
+of the public treasury scattered throughout the country. The General
+Council as well as the stockholders' assembly is presided over by a
+governor, who, together with two sub-governors, is appointed by the
+President of the Republic upon the nomination of the Minister of
+Finance. The governor is the chief executive officer of the bank and
+the final source of authority in most matters of vital importance. He
+is responsible to the government rather than to the stockholders, and
+is subject to removal only by the power which appointed him.
+
+The Bank of France has about two hundred branches and sub-branches
+located in Paris and all the important cities and towns in the
+Republic, also over three hundred so-called agencies located in
+smaller places and transacting only a limited line of business. Each
+branch has a manager appointed in substantially the same manner as
+the governor, and the sub-branches and agencies are administered
+through the branches. Through this network of offices, every part of
+the country is brought into direct and easy access to the Bank.
+
+The Bank of France is the only institution in the country privileged
+to issue circulating notes. The maximum allowed it is regulated by law
+and is increased from time to time. At present it amounts to
+5,800,000,000 francs, or approximately $1,160,000,000. The bank is
+obliged to redeem these notes on demand in gold coin or silver
+five-franc pieces, but it is free to determine how much cash it shall
+keep on hand for that purpose, and when and under what conditions it
+shall issue them.
+
+Its discount operations are limited by law to bills maturing in not
+more than three months, and bearing the signatures of at least three
+solvent persons, or two signatures and secured in addition by
+specified forms of collateral. It is also permitted to make loans or
+advances, as they are called, on securities of the French government
+maturing at fixed dates, gold and silver bullion, and the money of
+foreign countries, and obligations of the French railroads, French
+cities, and departments, the Crédit Foncier, and the Société
+Algerienne. It is also obliged to loan 180,000,000 francs
+($36,000,000) to the government without interest.
+
+One of the chief branches of the business of the Bank of France is the
+service of the public treasury and the performance of other financial
+duties imposed upon it by the government. It serves as the depository
+and disbursing agent for the government, and performs important
+functions connected with the public debt, the mints, the savings
+institutions, and publicly administered trusts of various kinds. It is
+also the depository for the banking reserves of the country. In
+France, as in England, it is not the custom of banking and other
+financial institutions to hoard money in their vaults, but to depend
+upon the Bank of France for supplies as needed. To this end they keep
+funds on deposit there, and regularly rediscount the paper of their
+customers when balances need to be replenished.
+
+Through its network of branches and agencies spread over the entire
+country, the Bank of France is able economically and expeditiously to
+conduct the intermunicipal exchanges of the country. It participates
+in local clearings through membership in the clearing houses, at which
+balances are paid by checks drawn against credits on its books
+maintained for that purpose by all members, and it conducts so-called
+transfer accounts with other banks and financial institutions against
+which drafts can be drawn payable at any place where one of its
+offices is located. Such drafts constitute the chief means through
+which transfers of funds are made between different places.
+
+The business of the Bank of France with private persons is limited by
+the requirement that all paper discounted must have three signatures,
+or two signatures and collateral security, and that advances can only
+be made on the security of the forms of collateral indicated above.
+Most business men find it either inconvenient or impossible to comply
+with these conditions, and consequently transact most of their
+business with other banking institutions. The third signature on paper
+discounted by the Bank is, therefore, usually supplied by these
+institutions, which thus act as an intermediary between the Bank and
+the commercial world.
+
+Next to the Bank of France, the most important banking institutions of
+the country are the Crédit Foncier, the Crédit Lyonnais, the Comptoir
+d'Escompte de Paris, the Société Générale, and the Crédit Industrielle
+et Commercial. The Crédit Foncier is principally engaged in extending
+credit based on real estate security, but it also discounts large
+amounts of commercial paper. Its organization is modeled after that of
+the Bank of France, and, like that institution, it is controlled by
+the state. Since it is primarily an investment bank, a description of
+its principal operations will be deferred to the next chapter.
+
+The four other banks mentioned are a product of the commercial life of
+modern France, all having been established since the revolution of
+1848. They are all heavily capitalized, the smallest, the Crédit
+Industrielle et Commercial, having a capital of 100,000,000 francs
+($20,000,000), and the largest, the Société Générale, having a capital
+of 400,000,000 francs ($80,000,000), and all extend their business by
+means of branches. The Crédit Lyonnais and the Comptoir d'Escompte
+have branches in France itself, the French colonies, and a number of
+foreign countries; the Société Générale, throughout France, in London,
+and San Sebastian, Spain; and the Crédit Industrielle et Commercial,
+in Paris and its suburbs. Taken together, these four institutions
+supply the French people in Paris and the Provinces with banking
+facilities for both their domestic and their foreign business. While
+in some of the larger provincial cities local banks with branches in
+surrounding towns and sometimes in Paris are to be found, branches of
+one or more of these four institutions are the chief reliance in
+nearly all places.
+
+These institutions cater to all the financial needs of their
+constituents. They supply their needs for cash and for exchange;
+conduct checking accounts for them, although these are not used in
+France to the same extent as in the United States; discount their
+commercial paper and make loans to them on personal and other
+security; and receive on deposit their savings and provide them with
+investments. In performing these functions they make extensive use of
+the Bank of France and of the stock exchanges of the country. With the
+former they conduct checking and transfer accounts and rediscount
+their customers' bills, by these means procuring the coin, bank notes,
+and exchange needed; and from the latter they obtain the investment
+securities required for the satisfaction of both their own and their
+customers' needs.
+
+Gold and silver coin and the notes of the Bank of France constitute
+the hand-to-hand money of the country. The latter form the elastic
+element, and their operation approximates perfection. When demand for
+money increases for any reason, more commercial bills are presented
+for discount to the banks, which, after indorsement, exchange them at
+the Bank of France for the notes with which they supply their
+customers' needs. The note issues of the Bank thus expand in direct
+and immediate response to the needs of the country for more currency.
+When such needs have passed, the discounted bills, in exchange for
+which these notes were issued, mature and are paid in greater volume
+than new bills are created and presented for discount, and notes, or a
+corresponding amount of coin, accumulate in the vaults of the Bank.
+The notes are cancelled and destroyed and the coin is kept in store
+until it again passes into circulation through exchange for notes
+still outstanding, or for discounted bills.
+
+On account of the elasticity of its note issues, and the extent to
+which they are used in the commerce of the country, the Bank of France
+has occasion to change its rate of discount less frequently than any
+other bank in Europe. The result is that the country enjoys the
+advantage of steady and low rates, since in France, as in England, the
+discount rate of the central bank controls the market rate, and the
+ease and inexpensiveness with which the notes are issued make low
+rates possible.
+
+
+_4. The German System_
+
+The Imperial Bank, with head offices in Berlin, and about one hundred
+branches and more than four hundred sub-branches scattered throughout
+the country, plays essentially the same rôle in the German banking
+system that the Bank of England and the Bank of France play in the
+English and French systems, respectively. It was established in 1875
+by an act which also profoundly affected the entire banking system of
+the country, and its development has been aided and directed by
+several acts passed subsequently.
+
+Its capital, supplied by the general public, amounts at the present
+time to 180,000,000 marks ($45,000,000), and it is governed by three
+boards, known respectively as the Curatorium, the Direktorium, and the
+Central Ausschuss.
+
+The Curatorium is composed of five members, of which body the
+Chancellor of the Empire is ex-officio chairman. A second member is
+appointed by the Emperor, and for that position he has always selected
+the Prussian Minister of Finance, and the three remaining members are
+appointed by the Bundesrath. It meets quarterly and reviews all the
+operations of the bank. It, or rather, the Chancellor, its chairman,
+has supreme power, which, however, he has never exercised except on
+one occasion, when he ordered the bank not to accept Russian
+securities as collateral for loans, an order since revoked.
+
+The administration of the bank's affairs is chiefly in the hands of
+the Direktorium, consisting of a president, vice president, and seven
+other persons, all of whom are appointed by the Emperor for life, from
+a list of candidates recommended to him by the Bundesrath. This board
+selects the staff of bank officers and clerks, and superintends the
+daily conduct of the bank's business.
+
+The Central Ausschuss is a committee of fifteen persons elected by and
+representing the stockholders. It holds monthly meetings; has the
+right to demand complete information concerning the bank's operations,
+to discuss all matters freely, and to tender advice and counsel; but
+it has no power to control except regarding two matters: it can set a
+limit to the amount of securities the bank can purchase, and can veto
+any proposed transactions with the Imperial Government or with the
+governments of any of the states.
+
+Like the other central banks described above, it receives on deposit
+and disburses the funds of the Imperial Government; administers the
+coin reserves of the country; conducts the domestic exchanges, and
+serves as a bankers' bank. It is free to do business with the general
+public, but the legal and other limitations under which it must
+operate give the other banking institutions of the country the
+advantage in competition for this kind of business.
+
+It shares the right of note issue with four other banks, which, out of
+thirty-two that retained that privilege at the time the Imperial
+banking system was established, alone retain it at the present time.
+The issues of these four institutions, however, are relatively small
+in volume, and the Imperial Government has the right to deprive them
+of it January 1, 1921, or any tenth year thereafter, on condition of
+giving one year's notice of its intention so to do. The issues of the
+Imperial Bank are subject to the following regulations: they must be
+covered by cash and discounted bills maturing in not more than three
+months, and signed by at least two solvent persons, the proportion of
+cash being not less than one-third of the total. If the total amount
+issued exceeds the Bank's holdings of gold bullion, specie, and
+government notes by more than 750,000,000 marks at the end of March,
+June, September, and December, and 555,000,000 marks at other times, a
+tax of five per cent per annum is levied on the excess.
+
+The law confers upon the Bank the following powers:
+
+     a. To buy and sell gold and silver coin and bullion.
+
+     b. To discount, buy and sell bills of exchange whose
+     maturity shall be three months at the longest, and for which
+     usually three, and in no case less than two, accredited
+     vouchers shall stand good; furthermore, to discount, buy and
+     sell bonds of the Empire or of any German state, or domestic
+     municipal corporations, provided such bonds mature within
+     three months at the longest and conform to the new standards
+     of value.
+
+     c. To grant interest-bearing loans for terms no longer than
+     three months, upon movable security (lombard, or deposit
+     loan business), such as: gold and silver, coined or
+     uncoined; interest-bearing or non-transferable bonds
+     maturing within a maximum term of three months, whether of
+     the Empire, a German state, or of domestic municipal
+     corporations; interest-bearing non-transferable bonds on
+     which the interest is guaranteed by the Empire or by any one
+     of the German states; capital stock and stock priority
+     shares, fully paid up, of German railway companies in
+     actual operation; mortgage bonds of the provincial,
+     municipal, or other land credit institutions of Germany that
+     are subject to state control, including shares of German
+     mortgage banks to an amount never exceeding three-fourths of
+     their market value; interest-bearing non-transferable bonds
+     of foreign states, and foreign railway priority bonds,
+     covered by state security, in amounts not exceeding 50 per
+     cent of their market value; bills of exchange of recognized
+     soundness, after deducting at least 5 per cent of their
+     market value; and pledges of native merchandise, in amounts
+     within two-thirds of their value.
+
+     d. To negotiate collections for the account of individuals,
+     institutions, and governing boards; and upon security, as
+     before mentioned, to furnish payments, and make orders or
+     conveyances on the branch banks or on correspondents.
+
+     e. Upon prior security, to buy on behalf of outside parties,
+     effects of all kinds, including the precious metals; and
+     after delivery to sell the same.
+
+     f. To receive money for circulation or on deposit, with or
+     without interest, the sum of interest-bearing deposits not
+     to exceed that of the capital stock and reserve fund.
+
+     g. To accept the custody or other management of objects of
+     value.
+
+Besides the Imperial Bank there are in Germany eight very large and
+powerful banking institutions and a considerable number of smaller and
+less powerful ones. The eight great ones have each its head office in
+Berlin, and connections, through branches, agencies, and controlled
+institutions, in other parts of the Empire, the German colonies, and
+foreign countries. Together they control about eighty per cent of the
+entire banking capital of the Empire. In reality they are federations
+of banking institutions, many of which were once independent, and some
+of which were promoted and established in the interests of the group.
+
+While these eight institutions are primarily engaged in commercial
+banking, they are also promoters on a large scale of German industry
+and commerce, both at home and abroad. Through interlocking
+directorates, stock ownership, and in other ways, they are closely
+allied with the leading industrial and transportation interests of the
+Empire, and they have been and are leaders in the promotion of these
+interests in other parts of the world, notably in the Orient, South
+America, and Africa. They are, therefore, leaders on the stock as well
+as the discount markets of the country, and are widely influential in
+investment as well as commercial banking affairs.
+
+These, as well as the other commercial banks, consisting for the most
+part of local institutions and those catering to special interests,
+use the Imperial Bank for rediscounts, for transfers of funds between
+different parts of the country, and as a depository for surplus funds.
+They do not normally keep on hand more cash than is needed for till
+purposes. Being in easy reach of an office of the Imperial Bank,
+supplies can be obtained at any time by checks drawn against credit
+balances or through rediscounts of commercial bills. Special accounts
+are carried for transfer purposes and are used even in the transfer of
+funds between different offices of the same institution.
+
+On account of its right to issue notes against commercial securities,
+the Imperial Bank has the power to meet the demands made upon it and
+to supply the country with an elastic medium of exchange. The levy of
+a tax upon the excess of the issues above a prescribed maximum
+prevents perfect elasticity, unless this maximum be kept above the
+highest point which the circulation would normally reach, since the
+actual levy of the tax forces the rate of discount to such a point as
+to seriously restrict commercial operations. However, since the line
+between commercial and investment banking is not drawn by the great
+Berlin banks with the care that is desirable, and since they have been
+able at times, especially on account of their foreign connections, to
+embarrass the Imperial Bank in its efforts to maintain adequate specie
+reserves, such a tax is probably a desirable safeguard against
+over-expansion of credit.
+
+
+_5. The Canadian System_
+
+In important respects the Canadian banking system differs from those
+of the European countries which have been described and from that of
+the United States. It consists of a varying number of relatively large
+institutions, each with several offices administered from a common
+center, but without a central bank. For some time the total number has
+decreased, since 1900 from thirty-six to twenty-seven, in spite of the
+fact that the Canadian law, like that of the United States, provides
+for the formation of new banks at any time, on compliance with certain
+prescribed conditions, including a subscribed capital of at least
+$500,000 and a paid-up capital of at least $250,000. The number of
+branches, however, has increased rapidly, much more rapidly than the
+population.
+
+The most noteworthy legal provisions pertaining to the banking
+business in Canada concern note issues and loans and discounts.
+Regarding the establishment of branches, the amount, and, with one
+exception, the composition of the reserves, and many other matters
+carefully regulated by law in the United States, Canadian bankers are
+left free to follow their own judgment. Neither is there public
+examination of banks in Canada. Reports must be regularly made to the
+Minister of Finance, and he may call for special reports whenever he
+desires so to do; but neither he nor any other public officer has the
+right to examine a bank's books or to quiz its officers or directors.
+In contrast with banking legislation in the United States, another
+peculiar feature of Canadian law is the incorporation of the Canadian
+Bankers' Association, an organization resembling in essentials the
+American Bankers' Association, and the assignment to it of important
+functions connected with the issue of notes and the winding up of the
+affairs of failed banks.
+
+Regarding note issues, the chief provisions of the Canadian law are as
+follows: Each bank is permitted at any time to issue circulating notes
+to the amount of its capital stock, and between October 1 and January
+1 an additional amount, equal to fifteen per cent of its combined
+capital and surplus, may be issued on payment of a tax to be assessed
+by the Governor in Council, not to exceed five per cent per annum.
+The notes are a first lien on all the assets of the bank that issued
+them, and must be redeemed on demand at the head office and at such
+other places as are designated by a committee of public officials
+known as the Treasury Board. As such redemption centers, this board
+has named Toronto, Montreal, Halifax, Winnipeg, Victoria, St. John,
+and Charlottetown. Each bank must also deposit with the Minister of
+Finance a sum of money equal to five per cent of its average
+circulation. The aggregate of the amounts thus deposited by all the
+banks is known as the "circulation redemption fund," and may be used
+in the redemption of the notes of a failed bank. In case the fund is
+so used, and the liquidated assets of the bank prove to be inadequate
+for its complete replenishment, a tax sufficient to meet the deficit
+is levied on the solvent banks in proportion to their circulation.
+
+Regarding loans and discounts, the law aims rather to protect than to
+restrict the operations of the banks. They may "deal in, discount, and
+lend money, and make advances upon the security of, and may take as
+collateral security for any loans, ... bills of exchange, promissory
+notes, and other negotiable securities, or the stocks, bonds,
+debentures, and obligations of municipal and other corporations,
+whether secured by mortgage or otherwise, or Dominion, provincial,
+British, foreign, and other public securities." The only important
+restriction placed upon their loaning activities is the prohibition of
+making advances on the security of landed or other immovable property.
+
+In making loans to wholesale dealers and shippers of produce, the law
+safeguards the banks by allowing them to take a blanket lien on the
+goods dealt in by the borrower. This lien applies not only to the
+goods in possession at the date of making the loan, but to any others
+which may be substituted for them or manufactured out of them. This
+lien is prior to that of any other unpaid vendor, except one acquired
+before the bank's lien was established.
+
+The chief officers of a Canadian bank are the general manager, the
+chief accountant, the superintendent of branches, the inspector, and
+the secretary, all connected with the head office, and the managers of
+the branches.
+
+The general manager is the chief executive and the chief in authority.
+While he is subject to the board of directors, on account of his wide
+experience and knowledge his judgment is usually followed. The other
+officers are appointed by him with the approval of the board, but,
+almost without exception, from persons who have served the bank in
+subordinate capacities. The general manager himself is nearly always a
+man who has passed through the hierarchy of positions from the bottom
+up, and is therefore thoroughly familiar with every detail of the
+bank's business and history. The inspector has charge of the
+examination of the branches, and this work is so carefully and
+thoroughly done that examination by public officials is not considered
+necessary, or regarded as desirable by most Canadian bankers.
+Regarding this matter, however, there are differences of opinion, and
+changes in the near future are not improbable. The managers of the
+branches are in strict subordination to the authority of the general
+manager, though they are necessarily allowed a large amount of
+discretionary authority in matters pertaining to the branch over which
+they preside. Unless prevented by distance, they are in daily
+communication with the head office or with one of its representatives.
+
+In the operation of the Canadian system, noteworthy features are the
+methods of controlling credits, of managing the issues and the
+reserves, and of securing unity or at least harmony of action. It is
+the usual practice in Canada for a business man to do all his banking
+with one institution. This practice is rendered possible because most
+of the banks are large enough to take proper care of almost any
+business establishment in the Dominion, and because experience has
+demonstrated its wisdom.
+
+The banks compete vigorously for new business but do not attempt to
+attract one anothers' customers. Indeed a customer who desires to
+change his banking connections is looked upon with suspicion and is
+subjected to a very careful examination by the bank that is asked to
+take him on, including a careful discussion of all the aspects of the
+matter with the bank he desires to leave. The result of this practice
+is that a man's banker is thoroughly familiar with his affairs,
+especially his credit relations, and at the same time feels under
+obligations to render him such support and guidance as he deserves. On
+account of this practice, also, commercial paper brokerage does not
+flourish in Canada.
+
+The notes of the Canadian banks constitute practically all of the
+hand-to-hand money of the country in denominations above two dollars.
+The one and two dollar denominations are supplied by Dominion
+notes--all but $30,000,000 of which are represented by gold coin or
+bullion--and the lower denominations by subsidiary silver supplied by
+the government.
+
+Each bank pays out its notes freely to supply the cash demands of its
+customers, and receives from them on deposit, without hesitation or
+depreciation, the notes of other banks as well as its own. The former,
+however, are either sent in for redemption as soon as received or used
+in making payments to the banks which issued them. Thus notes are
+cleared as readily as checks and the volume in circulation expands and
+contracts in automatic response to business needs. The fact that these
+notes are neither legal tender nor guaranteed by the government does
+not interfere with their circulation--daily clearings, the first lien
+on assets, and the redemption fund amply protecting holders against
+the possibility of loss--but does prevent their being hoarded as
+reserves or for any other purpose and thus contributes towards their
+elasticity.
+
+The connection now established by law between the maximum volume of
+bank note issues and the capitalization of the banks renders necessary
+the increase of the latter in correspondence with the expansion of
+commerce in order to prevent a contraction of credit. Present law,
+however, does not provide for such an increase. It is left to the
+voluntary action of the banks, which seem inclined to increase surplus
+funds rather than capital. The permission granted in 1908 to extend
+issues beyond the amount of capital during the crop moving season, on
+payment of a tax, is a makeshift and not a solution of the difficulty,
+since a tax on issues is a means of forcing contraction of credit and
+not of adjusting issues to legitimate needs.
+
+Since Canadian banks are able to meet the greater part of the public
+demand for hand-to-hand money by means of their own notes, they do not
+need to carry in their vaults large amounts of gold and silver coin
+and Dominion notes. They keep on hand only so much as experience
+indicates they are likely to be called upon to supply to their
+customers, plus a reasonable margin for safety and for the payment of
+clearing house balances. The greater part of their reserves consists
+of balances in banks outside of Canada, especially in the United
+States and England, call loans in New York City, and easily salable
+securities. In case of an emergency of any kind these resources may be
+transformed into gold or their customers supplied with foreign
+exchange, which is often as much or even more needed. Gold can at any
+time be exchanged for Dominion notes if that is the currency wanted.
+
+The lack of a central bank and of a rediscount market is to a degree
+compensated by unity of action among the banks. This is the result not
+so much of law as of conditions, among which the most important are:
+the fact that the six largest banks do fifty per cent of the business
+and that one of these, the Bank of Montreal, holds most of the
+deposits of the government and is generally spoken of as the
+government bank; the fact that the general managers are experts, in
+first-hand touch through their branches with business conditions in
+Canada and other parts of the world, and in possession of the same
+data concerning these conditions, and through the same kind of
+acquired skill and similar experiences likely to draw the same or at
+least similar conclusions from this data; common interests in the
+prosperity of the country and in the prevention of speculative
+excesses and mutual interdependence in the successful conduct of their
+everyday business as well as in times of emergency and stress: and the
+Bankers' Association, which through its journal gives authoritative
+expression to the best banking opinion and actually acts for the banks
+in many matters of common interest. To what extent this community of
+action takes the form of rediscounts for each other in ordinary times
+it is impossible for an outsider to say, but that it is operative in
+times of stress is indicated by the manner in which the failures of
+the Bank of Ontario in 1906 and the Sovereign Bank in 1908 were
+handled.
+
+In both of these cases the public was protected against loss and panic
+was averted by the cooperative action of the other banks in assuming
+the obligations of these institutions to the public, and in winding up
+their affairs in such a manner as to occasion little disturbance.
+
+While Canadian banks are free to carry on investment as well as
+commercial banking operations, their published reports indicate that
+they take care to avoid confusion of the two, or the infringement of
+one upon the other. Their holdings of investment securities are kept
+well within the limits set by their aggregate capital, surplus, and
+savings funds, and their method of handling commercial business, based
+as it is on accurate knowledge of their customer's operations and upon
+the lien upon produce heretofore described, prevents their acceptance,
+through ignorance, of investment securities under commercial
+disguise.
+
+
+
+
+CHAPTER VI
+
+INVESTMENT BANKING
+
+
+In the economy of nations the encouragement and promotion of saving
+and the accumulation, distribution, and investment of capital are as
+essential as the conduct of exchanges, but the performance of these
+functions has not been segregated and institutionalized to the same
+extent as has commercial banking. Vast amounts of capital are invested
+directly by the people to whom it belongs without the aid of middlemen
+and large amounts are also invested through brokers of one kind and
+another who can hardly be classed as bankers. The most important types
+of institutions which have been developed in connection with these
+functions are savings banks, trust companies, bond houses and
+investment companies, land banks, and stock exchanges.
+
+
+_1. Saving and Savings Institutions_
+
+Saving is an individual matter for which the essential conditions are
+the development of the instinct to make provision against
+uncertainties of future income and to better the material condition of
+one's self and family, and a surplus of income above necessary daily
+expenditures. In order to secure the realization of these conditions
+to as great an extent as possible, many agencies cooperate in all
+modern nations, among them savings institutions. Included among these
+are various forms of provident associations, sometimes independently
+organized and sometimes connected with other organizations, insurance
+associations of many kinds, building and loan societies, and savings
+banks.
+
+The need for savings institutions varies greatly among the different
+nations and among different classes of people in the same nation.
+Among people of great wealth the surplus of income above expenditures
+is so great that large savings can hardly be avoided, and among all
+the well-to-do classes the margin from which savings are possible is
+sufficiently large and the desire to save sufficiently great to insure
+large accumulations of capital. Among these classes there is little or
+no need for institutions designed primarily for the development of the
+saving instinct. What they need are institutions for the safe keeping,
+accumulation, and investment of the savings which they are constantly
+making. The principal work of savings institutions, therefore,
+pertains to the classes of people who are not well-to-do and who need
+encouragement and help in their efforts to improve their material
+condition, if they are so inclined, and stimulus to make such efforts,
+if they are not so inclined.
+
+The means available to savings institutions for the accomplishment of
+these ends are the urging of the importance of saving upon the
+attention of people who do not adequately appreciate it, the placing
+at their easy disposal of facilities for making savings when they have
+the ability and inclination to save, and the application of pressure
+of various kinds to compel or induce saving.
+
+In the application of these means the methods employed by the various
+groups of institutions mentioned differ widely and they are efficient
+in different degrees, partly because they have other objects in view
+besides the promotion of saving and partly because they deal with
+different classes of people. Savings banks constitute the only group
+to which the term bank can properly be applied and consequently the
+only one to which attention will here be given.
+
+In a book entitled, _Savings and Savings Institutions_, written by
+Professor Hamilton of Syracuse University, the following definition is
+given:[Pages 161 and 162.]
+
+    Savings banks are institutions established by public
+    authority, or by private persons, in order to encourage
+    habits of saving by affording special security to owners of
+    deposits, and by the payment of interest to the full extent
+    of the net earnings, less whatever reserve the management may
+    deem expedient for a safety fund; and in furtherance of this
+    purpose bank offices are located at places where they are
+    calculated to encourage savings among those persons who most
+    need such encouragement.
+
+Professor Hamilton classifies these institutions as trustee,
+cooperative, municipal, and postal savings banks. In the first group
+he places institutions managed by boards of philanthropically inclined
+persons who serve without pay; in the second, those managed
+cooperatively by the people who make use of them; in the third, those
+established and administered by municipalities; and in the fourth,
+those connected with the post-office departments of governments. The
+strength of trustee savings banks lies in the comparatively low costs
+of their administration and in the fact that in their investments
+they are likely to enjoy the advantages of the judgment and enthusiasm
+of people skilled in the investment business; that of cooperative
+savings banks, in their adaptability to the special needs of their
+constituents and in the education which cooperative administration
+involves; and that of municipal, and especially of postal savings
+banks, in their capacity to place their services within the easy reach
+of all who need them and in the confidence which their public
+character inspires.
+
+In the investment of the funds intrusted to savings banks, safety and
+as large returns as are consistent with it, rather than ease of
+liquidation, are the prime considerations, and hence they usually take
+the form of high grade investment securities rather than of commercial
+paper. Their deposits are usually subject to withdrawal only after due
+notice, and, being savings deposits, their withdrawal usually follows
+only after the lapse of a considerable period of time.
+
+The purpose of their withdrawal is frequently investment and this is
+sometimes made through the agency of the bank which held the deposit
+and may involve merely a transfer of securities.
+
+Outside of the New England and middle states, savings banks were rare
+in this country previous to the inauguration of our postal savings
+bank system in 1911. The explanation of this condition is doubtless to
+be found chiefly in the wide extension of private, state, and national
+banks, and trust companies, practically all of which conduct savings
+departments and solicit the patronage of savers. These institutions
+have coveted this field and have not encouraged the establishment of
+savings banks. There is reason to believe, however, that they have not
+worked the field as thoroughly as savings banks would have done and
+that, on account of the dominance of their other interests, they are
+not as well fitted as savings banks to work the field thoroughly.
+Moreover it is probable that they are not able to pay as high a rate
+on deposits as well conducted savings banks would be able to pay.
+There seems, therefore, to be room, and probably need, here for the
+development of savings banks of some at least, if not all, of the
+types above described.
+
+
+_2. Trust Companies_
+
+Within a comparatively short period of time the trust company has
+developed into an institution of prime importance in the United
+States. In the beginning of its history it was, as its name implies,
+simply an institution for the administration of trusts of various
+kinds, such as the execution of wills, the guardianship of minors and
+other dependent persons, the administration of the estates of persons
+either unable or unwilling to administer them for themselves, and
+trusteeship under corporate mortgages, especially those of railroads.
+In the latter capacity they became mortgagees in trust for
+bondholders, registering the bonds, collecting the interest as it
+became due, paying the bonds at maturity, and in case of default
+taking the legal steps which were necessary for the protection of the
+bondholders.
+
+The execution of these trusts involved in most cases the custody and
+investment of funds, so that investment banking became a part of their
+business almost from the beginning, and, in time, in states in which
+the laws passed for their regulation did not prevent, they added
+commercial banking to their other functions. In some cases they have
+also become promoters of enterprises, taking the initiative in the
+organization of corporations for various industrial and commercial
+purposes. In New York City, and in individual cases in some other
+large cities, the commercial end of the business has become the
+dominant one; in the former case on account of the ability of these
+companies, unrestricted by certain laws applying to state and national
+banks, to offer to commercial customers better terms than their
+competitors. In most states, however, especially in the large cities
+in which they chiefly flourish, trust companies have become primarily
+investment banking institutions, their other functions being carried
+on as side lines and assuming, of course, in some cases greater
+importance than in others.
+
+Since they are still in the early stages of their development, the
+status of trust companies in the banking system of the United States
+is not yet definitely determined. Legislation concerning them varies
+considerably in different states, as do also their relations with
+other banking institutions. The competitive character of these
+relations has resulted in some cases in legislation which has aimed to
+differentiate and define the various functions which all these
+institutions perform, and to prescribe the conditions under which each
+one or each group must be performed, regardless of the way in which
+they are combined, and in others, in their practical consolidation
+with national or state banks, or both, through community of stock
+ownership, interlocking directorates, etc.
+
+From the point of view of the convenience of the public there are
+advantages in the combination of all the banking functions in a single
+institution, and the success of trust companies to some extent has
+been due to this cause, but they have also profited from the unequal
+competition which exemption from certain limitations imposed on state
+and national banks has enabled them to enjoy. The removal of the
+conditions which result in this unequal competition, a process already
+in progress and likely to continue to completion, will reveal the
+strength of the advantages of combination versus specialization of
+functions. Previous to such a revelation it will be impossible to
+determine whether or not the trust company form of organization is
+destined to become the dominant one.
+
+
+_3. Bond Houses and Investment Companies_
+
+A large part of the business of investment banking in the United
+States is conducted by corporations and firms organized for the
+purpose of buying and selling investment securities, especially bonds
+and mortgages. Rarely, if ever, do these concerns conduct savings
+accounts. Ordinarily they confine their attention exclusively to the
+investment end of the business and act in the capacity of jobbers, or
+brokers, or both.
+
+Within the investment field some of them specialize closely and others
+deal in a wide range of securities. The specialties most frequently
+followed are government, state, and municipal bonds, railroad bonds,
+public service securities, timber bonds, irrigation bonds, and real
+estate mortgages. Specialization involves the development of expert
+knowledge of the class of securities dealt in and thus of special
+serviceableness to both investors and the promoters of the enterprises
+or the public bodies which issue the securities. These specialists
+sometimes serve as middlemen between the issuers of securities and
+other investment banks, as well as between them and the real owners of
+the capital invested, their expert knowledge being of service to the
+former as well as the latter.
+
+Until recently there have been few attempts to regulate the operation
+of these institutions by law, but the fraudulent practices of some of
+them, and the ignorance and weakness of perhaps the majority of
+investors, have recently created in some quarters a strong public
+sentiment in favor of such regulation. In several states legislation
+has resulted, of which the most noteworthy is the so-called "blue sky
+laws" of Kansas and some other states.
+
+In details these laws differ widely from one another, but they are
+alike in that they impose upon some branch of the state government the
+obligation of supervising both companies which issue securities and
+those which offer securities for sale. The Kansas law, the first of
+this kind passed in the United States, has been considered too drastic
+by most of the companies that have attempted to operate under it, but
+the Wisconsin law, which went into effect October 1, 1913, is looked
+upon with more favor.
+
+In formulating these and other laws for the proper regulation of these
+concerns, it has been found difficult to provide adequate protection
+to the investing public without unduly hampering the issue and
+negotiation of securities, but this difficulty should, and in time
+doubtless will, be overcome. A free and open market for bonds, stocks,
+and other evidences of indebtedness is essential to freedom of
+enterprise and mobility of capital, which are in turn essential to the
+economic prosperity of any country. On the other hand, investors
+undoubtedly need and deserve the protection of the state against
+misrepresentation and fraud. It is practically impossible for them in
+many, perhaps in most, cases to obtain the information necessary for
+self-protection. The matters and conditions to be dealt with in such
+legislation are so complex and subject to such frequent change that
+laws are apt to be imperfect, inefficient, or obstructive. It seems
+probable that those which do not attempt to be specific and detailed,
+but give wide powers and discretion to administrative boards or
+commissions, are most likely to be successful.
+
+
+_4. Land Banks_
+
+In Europe an important group of institutions has developed for the
+supplying of agriculture and the building industries with the capital
+needed in their operations. The greatest number and variety of these
+are in Germany, in which their development has been continuous since
+the days of Frederick the Great.
+
+In order to assist in the recuperation of his kingdom from the
+devastation caused by the Seven Years' War, Frederick caused the land
+owners of certain provinces to be organized into associations called
+Landschaften, which were authorized to issue mortgage bonds on the
+joint security of the lands of all the members of the association in
+exchange for mortgages on the lands of individual members who needed
+funds for the improvement of their estates. These mortgages were made
+payable to the association in the form of small annuities, to which
+were added the interest paid on the bonds and an increment for the
+payment of the expenses of the association.
+
+These associations were governed by the members through a general
+assembly, representative boards, and elected officers, and were
+supervised by the state and carefully regulated by law. Regulations
+were carefully worked out pertaining to the ratio that the loan should
+bear to the value of the estate mortgaged, methods of valuation, ways
+and means of maintaining an equilibrium between the bonds issued and
+the mortgages held, the treatment of defaulting members, etc., etc.
+Machinery for the sale of the mortgage bonds delivered to members was
+also created, and in some cases later on these sales were made
+directly by the associations themselves, and cash paid to the maker of
+the mortgages.
+
+Five of these original Landschaften have continued to the present day,
+and others modeled after them were subsequently established. In 1909
+in all Germany twenty-five were in operation, of which eighteen were
+in Prussia. The newer ones have not in all respects followed their
+models. Unlike the original five, membership in them is not limited to
+the nobility and is not compulsory; the liability of the members for
+the payment of the bonds issued has in some cases been limited to a
+percentage of the total; the loans are usually paid in cash; and the
+bonds are sold directly by the associations; but the principles of
+mutual liability and mutual control which were basic in the old
+organizations have not been violated in any case. Both old and new are
+organized in the interests of borrowers on real estate mortgage
+security, and aim to secure funds for these on the lowest possible
+terms and for long periods of time, by making the security offered the
+lenders greater than any single borrower could supply.
+
+The degree of their success is indicated by the fact that in 1909 the
+amount of their outstanding mortgage loans amounted to nearly a
+billion dollars, and that their mortgage bonds rank on the exchanges
+with Prussian state bonds and have at times outranked them.
+
+Another type of land bank appeared in the early part of the
+nineteenth century as a result of the movement for the freeing of the
+serfs and their transformation into freehold peasants. The lands of
+these cultivators were burdened with a variety of feudal dues and
+charges which had to be commuted before they could become freeholds.
+In order to facilitate this process banks were established which
+assumed the obligations of a peasant towards his feudal superior in
+return for a mortgage on his holding, repayable with interest in the
+form of an annuity, and in amount equal to the sum to be paid to the
+feudal superior for the total extinguishment of all feudal
+obligations.
+
+Some of these banks were established and administered by states,
+provinces, and communes, and some by private parties. The public ones
+obtained the funds they needed partly from subsidies and partly from
+the sale of guaranteed mortgage bonds and the private ones wholly from
+the sale of mortgage bonds.
+
+The completion of the work for which these banks were originally
+established put an end to their development about 1883, but similar
+institutions have since been established in Prussia to assist
+colonists in the purchase and equipment of their farms, and in central
+and western Germany to promote general agricultural and urban real
+estate operations. The colonists sent into Poland for the
+Germanization of that province were in this way assisted by the
+Prussian government, and in some parts of Germany the same means have
+been employed for the purpose of aiding in the process of breaking up
+large estates into small holdings, in the construction of dikes,
+roads, and reservoirs, and in changing the courses of streams.
+
+Next to the Landschaften the most important intermediaries between
+capitalists and investors in real estate in Germany are the so-called
+Hypothekenaktienbanken, or joint-stock mortgage banks. These are
+private corporations, capitalized by the sale of stock shares to the
+general public, and controlled by their stockholders through
+directorates, like industrial corporations the world over. Their
+business is the making of long-period loans on real estate security,
+and the funds thus employed are obtained by the sale of mortgage bonds
+secured by the real estate mortgages in which the proceeds are
+invested and by their own capital, surplus, and other funds.
+
+They differ from the Landschaften in that they are not cooperative or
+mutual institutions, but strictly business enterprises run in the
+interests of their stockholders. Their primary aim is to earn
+dividends rather than to secure the lowest possible loan rates and
+other favorable terms for borrowers. As a matter of fact they are
+forced by competition and by the principles of good business to make
+loans at reasonable rates and on favorable terms regarding repayment
+and other matters, and they successfully compete with the Landschaften
+and other cooperative credit institutions of Germany. Their mortgage
+loans are usually made repayable on the annuity plan, one-half per
+cent each year being the common rate of payment, and they loan about
+the same percentage of the value of the lands mortgaged, as do the
+Landschaften and other land banks, and the rate of interest charged is
+the market rate, into the determination of which, of course, the
+competition of all other institutions enter.
+
+While these institutions loan in the aggregate enormous sums on farm
+property, their chief field of operations is urban real estate, and
+particularly the industry of residence, or as we would call it in this
+country, apartment-house construction. It is on this account that the
+period of their most rapid development coincides with that of the
+recent rapid industrial and commercial development of Germany, which
+dates back only to the establishment of the Empire in 1870. Most of
+them began operations in the decade 1862-1872, but the most rapid
+growth in the magnitude and scope of their business operations has
+come in recent years.
+
+In 1899 there were forty institutions of this kind in operation in the
+German Empire. The number at the present time is probably considerably
+greater, since for obvious reasons combinations among them are not
+promoted by the same kind of economic pressure that in recent years
+has operated so efficiently in Germany in the field of commercial
+banking.
+
+Two other groups of German institutions merit attention in this
+connection, namely, the so-called Schulze-Delitzsch and the Raiffeisen
+Credit Associations.
+
+The Schulze-Delitzsch societies were the direct outcome of the period
+of dearth and famine through which Germany passed in the years
+immediately preceding the revolution of 1848. The first one was not a
+credit association, but a cooperative buying society, organized by a
+local judge named Schulze for the aid of his needy neighbors of the
+small trading class in the town of Delitzsch. In 1850 a credit
+association on the same plan was organized. Others followed, in rapid
+succession in and after the seventies, until at the present time they
+are numbered by the thousands and their members by millions, and they
+are scattered throughout the entire empire.
+
+The principle of their organization is the association of a
+comparatively small group of neighbors, or of people who know one
+another well, or who may easily come to know one another well, by each
+making a contribution to a common fund to be loaned out to individuals
+on personal security chiefly, and which, together with the credit of
+the entire group, may be made the basis of security for larger funds
+to be borrowed on the open market. They are carefully organized on the
+cooperative principle, each member having an equal voice in a general
+assembly which chooses a board of directors and a small administrative
+board, to which is intrusted the actual management and administration
+of the affairs of the society.
+
+Loans are made to members only, usually for short periods of time, on
+the personal security of the borrower and of others who are willing to
+vouch for him, and on the unusually favorable terms which the credit
+of the entire organization and very low costs of administration render
+possible. The knowledge which each member has of the character and
+business methods of his fellow members who borrow, and of the use to
+which borrowed funds are put, and the stake which each one has in the
+financial stability and success of the organization, bring the
+percentage of losses to a very low figure, and make it possible for
+these societies to grant their members maximum accommodations at
+minimum prices.
+
+To the funds accumulated from initiation fees, membership dues and the
+sale of the associations' credit have been added, in constantly
+increasing amounts in recent years, the savings of the members
+themselves. Many societies have such an amount of funds intrusted to
+them in this way that they are not only entirely freed from the
+necessity of borrowing, but are obliged to seek opportunities for
+investment outside their own group.
+
+This condition of affairs, in addition to many other common interests,
+led to the federation of the Schulze-Delitzsch societies into larger
+groups, and these in turn into state and national associations,
+through which surplus funds in one could be made to serve the needs of
+others inadequately supplied, and through which all the societies
+could be brought into efficient connection with the general money
+market of the country. For a number of years these federated
+societies conducted a large central institution, first in Frankfurt
+and afterwards in Berlin, known as the Deutsche Genossenschaftsbank.
+In 1904, however, this institution was absorbed by the Dresdener Bank,
+one of the eight great private banking corporations of Germany, which
+now serves as the central agency for all these societies.
+
+The membership of these associations is not restricted to any class of
+persons, and they actually include a very large number of small
+farmers. An inquiry made in 1885 showed that in 545 of them, with a
+total membership of 270,808, there were 72,994 farmers, and that
+one-fifth of the total loans of these associations were made to this
+class of their members. They must, therefore, be numbered among the
+land banks of the Empire, or at least among the institutions which are
+helping to solve the credit problem for the agricultural classes.
+
+The Raiffeisen societies resemble the Schulze-Delitzsch in many
+particulars and differ from them in others. Like them they are
+strictly cooperative in character, and, when organized for credit
+purposes, designed to supply members with loans on the most favorable
+possible terms. Their development was also due to the hard economic
+conditions of the period immediately succeeding the revolution in
+1848.
+
+They differ from the Schulze-Delitzsch societies chiefly in the
+following particulars: They charge no initiation fees and do not rely
+to the same extent on the proceeds of the sale of shares, the amount
+of which they place at a very low figure, often the lowest permitted
+by law; they make long-period as well as short-period loans, indeed
+the former chiefly; they do not pay dividends on their share capital,
+but instead put all profits into reserve funds or prevent their
+accumulation by keeping the loan rates low; they exercise more care
+than do the Schulze-Delitzsch associations to keep their societies
+small, laying great emphasis upon the importance of personal
+acquaintance between members and thus upon mutual watchfulness; and,
+in their origin, they were peasant organizations pure and simple, and
+hence more strictly land banks.
+
+Their founder, F. W. Raiffeisen, Burgomeister of a small village in
+Westphalia, Prussia, wanted to rescue the poor peasants of his and
+other districts from the clutches of the usurers, into whose hands
+they had fallen and by whom they were being exploited in a most
+shameful manner. Since it was loans that these people needed and
+since their cash resources were always very low and in many cases nil,
+he felt that to require, as a condition of membership, entrance fees
+and the purchase of one or more shares of stock, however small, would
+be fatal to the success of his plans. He also firmly believed that in
+the integrity, industry, frugality, and agricultural skill of these
+people was the basis for sound credit and that cooperation was a means
+by which these elements of sound credit could be made available and
+attractive on the money market. At the beginning, therefore, no
+entrance fees or share subscriptions were required. Later Prussian law
+made share subscriptions compulsory and they were, of course,
+introduced, but they were made so low, and the acquisition of the
+money for their purchase so easy, that they have not been a serious
+obstacle.
+
+From the beginning Raiffeisen invited to membership in his societies
+the well-to-do and substantial people as well as peasants. Of course
+these people did not require the society for the satisfaction of their
+own credit needs, but Raiffeisen saw that they would greatly
+strengthen the credit of the societies and he was able to appeal to
+them on philanthropic grounds. This class of people have a leading
+part in the administration of the societies of which they are members
+and have contributed greatly to their success.
+
+At the outset the Raiffeisen societies had to rely chiefly on
+borrowing for the acquisition of the capital needed, but with time and
+success savings deposits, surplus funds accumulated out of profits,
+and lastly the proceeds of the sale of shares have played an
+increasing rôle. At the present time many societies are not obliged to
+borrow at all, and not a few have surplus funds which are placed at
+the disposition of other societies which are still obliged to borrow.
+
+Like the Schulze-Delitzsch societies the Raiffeisen associations have
+federated. At present there are thirteen so-called unions, and at the
+head of all is a central bank with head office at Berlin and branches
+at Königsberg, Danzig, Breslau, Cassel, Frankfurt, Coblenz, Brunzwick,
+Strassburg, Nuremberg, Posen, and Ludwigshafen. The central bank is a
+joint-stock company, organized on the principle of limited liability,
+the stock of which is owned by the local societies. It formerly had
+close relations with the Imperial Bank, but is now associated with the
+so-called Centralgenossenschaftskassa, endowed by the state of
+Prussia, in such a way that advances and discounts are extended to it
+on favorable terms.
+
+The Raiffeisen societies rival the Schulze-Delitzsch in the rapidity
+of their growth and in the rôle they play in the economic life of
+modern Germany. In 1908 they numbered 5,047, of which 4,340 were
+credit associations. The collective balance sheets of these societies
+in 1907 showed 490,734,834 marks assets, 489,234,357 marks
+liabilities, and a membership of 405,819.
+
+While Germany was the pioneer in the establishment of land credit
+institutions, and while such institutions have attained a greater
+variety of form and a higher degree of perfection in that country than
+in any other, other countries have advanced along similar lines and
+now have institutions and a fund of experience well worthy of study.
+The institutions of Germany have in most cases served as models in
+these other countries, the mortgage banks and the Schulze-Delitzsch
+and Raiffeisen societies having been most frequently copied. These
+models have been adapted to foreign conditions and modified in
+interesting and instructive ways as well as copied without essential
+change.
+
+Among the mortgage banks developed outside of Germany the Crédit
+Foncier of France is especially noteworthy. In its organization it
+was modeled after the Bank of France and is second only to that
+institution in the magnitude of its operations and the scope of its
+influence. Its head office is in Paris and it has at least one branch
+in each department. Its capital stock owned by private parties amounts
+to about $40,000,000, its surplus to over $4,000,000, its loans
+secured by mortgage to over $400,000,000, and its total resources to
+about $1,000,000,000.
+
+Like the German mortgage banks, it secures the greater part of its
+loan funds through the issue of mortgage bonds and a large percentage
+of its loans are made on mortgage security for long periods of time
+and are repayable on the annuity plan. However, it transacts a greater
+variety of business than does the typical mortgage bank of Germany. It
+loans on city and farm real estate and to communes, and it transacts a
+large commercial banking business, though this is distinctly a side
+issue, incorporated with its other business in order to give
+profitable employment to funds, sometimes large in amount, which are
+temporarily on hand awaiting investment.
+
+At various times it has absorbed competing institutions and at times
+it has established collateral institutions to transact lines of
+business for which its own constitution and legal limitations did not
+fit it. Among these the most important are the Crédit Agricole and the
+Foncier Algierienne. It was obliged ultimately to absorb and liquidate
+the former, but the latter still flourishes in the colony of Algiers.
+
+Mortgage banks have also gained a footing in most of the other
+countries of continental Europe. In Italy they passed through a period
+of storm and stress, owing to their connection with the issue banks of
+that country and the consequent confusion between commercial and
+investment banking which resulted, but they have recently been
+established on an independent basis and are now developing along right
+lines and with apparent success.
+
+The Schulze-Delitzsch and Raiffeisen societies have been imitated in
+Austria, Hungary, Belgium, Switzerland, and, to some extent, in France
+and India. The so-called "Banche Populari" and "Casse Rurali" of Italy
+are respectively modified forms of these two German types, and rank
+among the most important means employed in that country for the
+improvement of the condition of the peasants and small tradesmen.
+State, provincial, and communal aid for these institutions has been
+more frequently evoked and more extensively employed outside than
+inside of Germany, and other important modifications of the German
+prototypes have been made in Italy and elsewhere.
+
+
+_5. Stock Exchanges_
+
+An essential part of the machinery of investment banking is the stock
+exchange. This is a place where the buyers and sellers of securities
+or their agents regularly meet for the transaction of business. It may
+be a portion of a street or a market place or a room in a building. A
+fully equipped modern exchange contains a large room equipped with
+telegraphic and telephonic communication with the most important parts
+of the country in which it is located and of the world, with apparatus
+for registering prices and easily communicating information to its
+members, and with the offices needed for the accommodation of the
+clerks and other employees required. Either by posts or in some other
+manner the precise places in it in which each security or group of
+securities is to be dealt in is also usually indicated.
+
+The purpose of the stock exchange is to facilitate and to regulate
+dealings in securities. It facilitates such dealings by providing as
+nearly perfect means as is possible for putting buyers and sellers
+into communication with each other, and for collecting and making
+available to them the information they need. To this end they provide
+for daily meetings at fixed hours; they make and publish lists of the
+securities dealt in; they speedily record and, through the telegraph
+and the telephone, communicate to all quarters of the globe the prices
+at which securities change hands; and through the meeting room
+equipped as before described they make it possible for buyers and
+sellers, no matter where located, to communicate with each other in a
+very short period to time. They regulate such dealings by establishing
+and rigidly enforcing rules and regulations for listing, transferring,
+clearing, and paying for securities and for other matters pertaining
+to the conduct of their members.
+
+These institutions serve investment banks as well as private
+investors, constituting the machinery which connects them all. They
+thus enlarge the area and scope of the markets for securities, and
+greatly increase the mobility of capital. Without them the surplus
+savings of one locality would only very slowly and with difficulty
+find their way to other localities where they are needed, with the
+result that capital would lie idle or be very inefficiently employed
+in some places while in others natural and human resources would be
+undeveloped or very inefficiently developed.
+
+Existing stock exchanges differ considerably in the manner in which
+they are organized and managed, in methods of doing business, and in
+the scope of their operations. Some of them are incorporated and
+others unincorporated; some restrict their membership to a prescribed
+number, others admit as many as are able and willing to comply with
+the conditions imposed; some are local in their scope, some national,
+and others international. In this country all the exchanges deal in
+local securities chiefly, except the one in New York City, which is
+national in its scope. The London exchange does a larger business in
+international securities than any other, but the Paris and Berlin
+exchanges, as well as those located at the other important European
+capitals, and the one at New York share in it to a greater or less
+degree.
+
+Stock exchanges have suffered in reputation, and their real functions
+and merits have been obscured by the abuses to which they have been
+subjected. Connected with their legitimate business of facilitating
+the investment of capital, various forms of speculation have
+developed which in some cases have degenerated into gambling pure and
+simple. The better managed ones have striven to rid themselves of
+these abuses, and in some countries, notably in Germany, legislative
+bodies have taken a hand. The results, however, have proved only
+partially successful.
+
+Some forms of speculation are not only legitimate but necessary in
+modern business life, and these shade into the illegitimate,
+unnecessary, and positively harmful forms by such short and easy steps
+as to render it difficult, and perhaps impossible, to draw a line
+between the two which can serve as a guide for regulations of an
+administrative or legislative kind.
+
+
+_6. Some Defects in Our Investment Banking Machinery_
+
+A comparison of our investment banking machinery with that of European
+countries, especially Germany, reveals important differences. Among
+these the most notable are the wide use there and the almost complete
+absence here of the following: (a) the resort to cooperation as a
+means of revealing and making available the basis for credit of large
+numbers of people who lack capital but could use it to the advantage
+of themselves and of the nation; (b) the long-period mortgage loan
+repayable on the annuity plan and the mortgage bond as a means of
+accumulating capital for such loans; and (c) the cooperation of the
+state and other public bodies and of capitalists and philanthropically
+disposed persons in developing the credit possibilities of the masses
+and in directing the flow of proper portions of the stream of capital
+in their direction.
+
+In the development of investment banking institutions in this country,
+individual initiative prompted by self-interest has been the chief,
+and except in the case of savings banks, the sole motive force. The
+result is that most of them have been organized in the interests of
+lenders rather than borrowers and serve best the purposes of big
+business and of persons already possessed of large credit by virtue of
+their wealth or their business reputations. Under these conditions,
+while enormous amounts of capital in the aggregate have been invested
+in agriculture and urban real estate, the former has suffered
+relatively in comparison with transportation, manufacturing, and
+speculation.
+
+Contributory causes in the development of this situation have been the
+great need for capital for the development of our transportation
+system, the stimulation of manufactures by high protective duties, and
+the enormous area of our public domain which was given or sold to
+settlers on very easy terms. Inasmuch as our transportation system and
+our manufacturing industries have now attained a high degree of
+development, our public domain has been nearly exhausted, and land
+values and the cost of living are rapidly rising, the needs of
+agriculture are pushing themselves into the foreground, and we are
+beginning to look to European experience for suggestions regarding the
+best methods of diverting to that industry a larger part of our
+rapidly accumulating capital resources.
+
+There are obvious difficulties in the way of the application of
+cooperation to the solution of the problem of agricultural credit in
+this country. In spite of the fact that immigration is constantly
+bringing to us people from the very foreign countries in which
+cooperative credit associations flourish, our agricultural population
+is still dominated by the spirit of individualism which has been and
+is one of our dominant national traits. Our farmers are also more
+widely scattered than is the case in Europe, and consequently less
+closely knit together in social units. Their holdings are also
+larger, their capital needs greater, and their business instincts more
+highly developed.
+
+There seems to be no good reason, however, why the joint-stock
+mortgage bank should not flourish here as well as in Europe. It is a
+purely private business enterprise of the kind with which we are
+perfectly familiar. The mortgage bond ought to appeal to our
+investors, many of whom have exhibited a strong predilection for
+mortgage security and real estate investments, and long-period
+mortgage loans, repayable on the annuity plan, would meet the needs of
+many land purchasers and of people who need to invest considerable
+sums in drainage, irrigation works, etc., better than our present
+methods. In most, if not all, of our states, trust companies could
+develop these new lines of finance without prejudice to the other
+branches of their business.
+
+The use of state, county, and municipal subsidies or credit in
+enterprises of this kind is rendered difficult, if not impossible, in
+this country, by strong prejudice against the use of public funds in
+private enterprises, and in some states by constitutional
+prohibitions. This prejudice is based upon unfortunate experiences,
+and is at least partially justified by the laxness of our
+administrative methods and the prevalence of graft, which expose us
+to the danger of the improper use of public funds devoted to
+enterprises of this kind. There is no reason, however, why our states
+should not take the initiative in the improvement of our investment
+banking machinery and why private capitalists and philanthropists
+should not turn some of their energy into this channel.
+
+Suggestion and leadership are needed in this field quite as much as
+legislation tending to restrict and regulate the operations of
+existing institutions.
+
+
+
+
+REFERENCES
+
+
+The following books are comprehensive in character, treating most of
+the subjects covered in the foregoing chapters:
+
+  MACLEOD, H. D., Theory and Practice of Banking.
+  GILBART, J. W., History and Principles of Banking.
+  BAGEHOT, WALTER, Lombard Street.
+  DUNBAR, CHARLES F., History and Theory of Banking.
+  SCOTT, WM. A., Money and Banking. Rev. Ed.
+  WHITE, HORACE, Money and Banking.
+  FISK, A. K., The Modern Bank.
+
+
+The subject of clearings and the exchanges are discussed in the
+following books:
+
+  CANNON, J. G., Clearing Houses.
+  CLARE, GEORGE, The A, B, C of the Exchanges.
+  CLARE, GEORGE, A Money Market Primer and Key to the Foreign
+          Exchanges.
+  MARGRAFF, A. W., International Exchange.
+  ESCHER, F., Foreign Exchange.
+
+
+The following cover the history and present condition of banking in
+the leading countries:
+
+  CONANT, C. A., Modern Banks of Issue.
+  KNOX, J. J., A History of Banking in the United States.
+  SUMNER, WM. G., A History of Banking in the United States, being
+          Vol. I of a History of Banking in all the leading nations.
+  KIRKBRIDE & STERRETT, J. E., The Modern Trust Company, Its Functions
+          and Organization.
+  BRECKENRIDGE, R. M., The History of Banking in Canada.
+  LAUGHLIN, J. L., Editor, Banking Reform.
+  JOHNSON, J. F., The Canadian Banking System.
+  WITHERS, HARTLEY, PALGRAVE, R. H., and others, The English Banking
+          System.
+  LIESSE, A., Evolution of Credit and Banks in France.
+  NATIONAL MONETARY COMMISSION, The Reichsbank, 1876-1900.
+  RIESSER, J., The German Great Banks and Their Concentration.
+
+
+On investment banking see:
+
+  WOLFF, H., People's Banks.
+  PETERS, E. E., Co-operative Credit Associations.
+  HAMILTON, J. H., Saving and Savings Institutions.
+  PRATT, S. S., The Work of Wall Street.
+  CONANT, C. A., Wall Street and the Country.
+
+
+
+
+INDEX
+
+
+  "Acceptance" credit and lines, 103
+
+  Accommodation loans, 12, 13
+
+  Accounts overdrawn, 16
+
+  Agriculture, capital for, 168;
+    individualism in, 168
+
+  Assets, prior lien on, 56;
+    special, 57
+
+
+  Balances, 16, 17, 23, 28
+
+  Banche Populari, 162
+
+  Bank of England, 104-111
+
+  Bank reserves, 35-40
+
+  Bank of France, 111-119
+
+  Banker's banks, 9;
+    bills, 33, 34;
+    most valuable assets, 61;
+    making loans, 86
+
+  Banking, act, 54, 78;
+    adequacy and economy of service, 62, 66;
+    branch, 64, 65;
+    business, 9;
+    commercial, nature and operation of, 11-67;
+    commercial in the United States, 68-100;
+    commercial in other countries, 101-135;
+    Canadian, 126-135;
+    defects and reforms in banking systems, 97-100;
+    English, 104-111;
+    French, 111-119;
+    functions in single institutions, 144;
+    German, 119-126;
+    incorporation, 66;
+    investment, 136-170;
+    Kansas "blue sky laws," 146;
+    problems of commercial, 35;
+    reserve, 78;
+    services rendered by, 1-3;
+    Wisconsin regulations, 146;
+    local, 62, 63
+
+  Bank notes, see _notes_
+
+  Banks, bond houses, 6;
+    Canadian, 126-135;
+    central of Europe, 101;
+    central reserve, 78;
+    classified, 6;
+    classification of national, 54;
+    collections, 22;
+    commercial, 6, 7;
+    cooperative, 139;
+    correspondent, 24, 25;
+    England, bank of, 104-111;
+    European land banks, 147-163;
+    European central, 9;
+    federal, 8;
+    federal reserve, 98-100;
+    France, bank of, 111-119;
+    French land, 160-163;
+    functions of, 4;
+    German Imperial, 119-123;
+    German land, 147-163;
+    incorporated, 7;
+    inspection of, 59;
+    interest charges, 14;
+    investment, 6, 7;
+    Italian land, 160-163;
+    joint stock, 7;
+    land, 6;
+    loan-making, 86;
+    municipal, 139;
+    national, 8, 70-75;
+    note issue privileges, 37, 38;
+    of issue, 20, 21;
+    postal saving, 139;
+    private, 7;
+    protection against unsound practices of, 46-62;
+    real estate, 6, 52;
+    savings, 6, 136-141;
+    services rendered by, 1-3;
+    state, 9, 68-70;
+    supply currency, 22;
+    trustee, 139
+
+  Berlin stock exchange, 165
+
+  Bills of exchange, 12, 17;
+    documented, 42
+
+  "Blue sky laws" of Kansas, 146
+
+  Bond houses, 144-147
+
+  Bonds, government, 96, 97;
+    mortgage, 148, 150, 169
+
+  Bonds and stocks, not liquid securities, 53
+
+  Book accounts, 12
+
+  Branch banking, 62, 64, 65
+
+  Bullion, 81, 82;
+    in Canada, 132;
+    in England, 105;
+    in France, 113;
+    in Germany, 122
+
+  Buying and selling on time, 11, 12
+
+
+  Cables in foreign exchange, 33
+
+  Canadian banking system, 126-135
+
+  Capital and surplus requirements for banks, 46-48;
+    stock, 47, 48
+
+  Cash, supply of, 35-40;
+    demands on banks, 55;
+    resources, 29
+
+  Casse Rurali, 162
+
+  Central banks of Europe, 8, 9, 65, 101;
+    England, 104-111;
+    France, 111-119;
+    German, 119-123
+
+  Charters, 8;
+    special, 66, 67
+
+  Checking accounts, 15, 20, 21, 24, 35
+
+  Checks, 15, 16, 21-24;
+    abroad, 36
+
+  Chicago, clearing center, 24;
+    central reserve banks, 78
+
+  Clearing house, 22-24;
+    center in New York, 80
+
+  Coin, 21;
+    and bank reserves, 38;
+    in England, 109;
+    in France, 117;
+    in Germany, 121, 122;
+    standard and subsidiary, 21;
+    supply, 40
+
+  Collections, 22, 25
+
+  Commercial banking, collections, 22;
+    currency, 21, 22;
+    domestic exchange, 25;
+    nature and operations of, 11-67;
+    other countries, 101-135;
+    problems of, 35;
+    promissory notes, 19;
+    protection against unsound practices of, 46-62;
+    savings accounts, 44;
+    in the United States, 68-100
+
+  Commercial paper, 11-14;
+    discount of, 14, 15, 17;
+    and investment paper, 41, 42;
+    liquid security, 53;
+    market for, 100
+
+  Competition in banking, 83
+
+  Comptoir d'Escompte de Paris, 115, 116
+
+  Conflict of functions and laws, 82
+
+  Cooperative banks, 139
+
+  Correspondent banks, 24, 25
+
+  Credit "acceptance" line, 103;
+    balance, 16, 18-20, 23, 25;
+    cooperation in, 166-168;
+    department in banks, 43, 86;
+    inflation of, 87;
+    "line" of, 16, 85, 86;
+    subsidies, state, county, and municipal, 169;
+    system, 11-13
+
+  Credits, forced liquidation of, 49
+
+  Crédit Agricole, 162;
+    Foncier, 113;
+    Industrielle et Commercial, 115, 116;
+    Lyonnais, 115, 116
+
+  Crisis, commercial, 19, 31, 88
+
+  Currency, 21, 22;
+    lack of elasticity, 95-97
+
+
+  Debt paying, 13, 14
+
+  Debits, 15-18
+
+  Demand in foreign exchange, 33, 34
+
+  Deposits, 2-4
+
+  Depositors, mutual insurance of, 60-62
+
+  Discount, defined, 14;
+    loans and discounts, selection of, 40-43;
+    loans and rates, 44;
+    operation of, 13;
+    rate, Canadian, 128, 129;
+    bank of England, 108;
+    bank of France, 113;
+    reserve system, 95, 97;
+    stopped, 30
+
+  Discounted paper, 14, 15, 17-19, 55
+
+  Documented bill of exchange, 42
+
+  Domestic exchange, 25
+
+  Drafts, 16, 27, 28;
+    foreign payments, 31
+
+
+  England, bank of, 9, 104-111;
+    banking system, 104-111;
+    foreign and colonial, 108;
+    joint stock banks, 106;
+    metropolitan, 107;
+    private, 108;
+    provincial, 107;
+    reserve system, 108
+
+  Europe, commercial banking in, 101-126;
+    central banks of, 101-126;
+    land banks, 147-163
+
+  European investment banking machinery, 166
+
+  Exchange operations, 11-13;
+    checks, 22-24;
+    domestic, 25-31;
+    foreign, 31-34
+
+
+  Federal Reserve Banks, 98-100;
+    Federal Reserve Board, 99, 100
+
+  Foncier Algierienne, 162
+
+  Foreign exchange, 31-34;
+    _par of_, 31, 32;
+    classes of bills used, 33
+
+  France, bank of, 9, 111-115
+
+  French banking system, 111-119
+
+
+  German banking system, 119-126;
+    hypothekenaktienbanken, 151, 152;
+    investment banking machinery, 166;
+    land and mortgage banks, 147-161;
+    landschaften, 147-149;
+    Schulze-Delitzsch, 153-162;
+    Raiffeisen, 156-162
+
+  Germany, bank of, 9, 119-123
+
+  Gold element of currency, 5, 96;
+    points, 32, 33;
+    and silver coin in England, 105, 106;
+    in France, 113;
+    Canada, 133
+
+
+  Incorporation, 7;
+    should be required, 66
+
+  Independent treasury system, 75-78
+
+  Inflation, 49-53, 56-59;
+    of credit, 87
+
+  Inspection of banks, 59, 60
+
+  Insurance, mutual of depositors, 60, 62
+
+  Investment, banking, 136-170;
+    commercial paper, 41, 42;
+    confined to liquid securities, 52;
+    defects in machinery, 166;
+    improvement of machinery, 170;
+    paper, 18, 35, 41, 55;
+    of surplus funds, 3
+
+  Italy, land banks, 162, 163
+
+
+  Joint-stock mortgage banks, 169;
+    English joint-stock banks, 106;
+    German, 151-159
+
+
+  Kansas "blue sky laws," 146
+
+
+  Land banks, 147-163
+
+  Letters of credit, 21
+
+  "Line" of credit, 16, 85, 86
+
+  Liquidation, forced, 19, 88;
+    of credits, 49, 50;
+    protection against, 52
+
+  Liquid securities, 53
+
+  Loan operations, 85-88
+
+  Loans, 2, 3, 15, 86;
+    and discounts, selection of, 40-43;
+    Canadian system, 128, 129;
+    fluctuations, 97;
+    German land bank, 147-162;
+    in the interest of big business, 167;
+    limits to, 52, 55;
+    long-term, 2;
+    pernicious practice of national banks, 83;
+    and reserve system, 95;
+    short term, 2
+
+  Local banking, 62, 63
+
+  London stock exchange, 165
+
+
+  Mints, 5
+
+  Monetary commission, 97, 98
+
+  Money of the United States, 95
+
+  Mortgage banks, 169;
+    France, 160-162;
+    Germany, 148-163;
+    Italy, 162;
+    mortgage bonds, 169;
+    mortgage loans, long period, 167
+
+  Municipal banks, 139
+
+
+  National banks, 8, 9, 54, 70-75, 80, 82;
+    federal reserve, 98, 99;
+    money in vaults, 91;
+    notes, 96;
+    pernicious loan practices, 83;
+    subscribed to federal reserve banks, 98
+
+  National Reserve Association, 98
+
+  New York City, assay office, 81;
+    central reserve bank, 78;
+    clearing center, 24, 80, 81;
+    stock exchange, 81, 82, 92, 165
+
+  Notes, bank, 19-21;
+    central banks of Europe and supply of, 102;
+    Canadian, 126-133;
+    bank of England, 105;
+    of France, 117, 118;
+    of Germany, 121;
+    issue of, 19-21;
+    issue privileges, 37, 38;
+    government, 39;
+    limitation of issue, 58;
+    promissory notes, 43;
+    regulations regarding, 52;
+    safeguarding issue, 56;
+    volume of United States, 96
+
+
+  Oklahoma, mutual insurance plan, 60
+
+  Overdrafts, 16
+
+
+  "Panicky" conditions and feeling, 94, 95, 97
+
+  Par of exchange, 31, 32
+
+  Paris stock exchange, 165
+
+  Passbook, 15, 16
+
+  Postal savings banks, 139, 141
+
+  Promissory notes, 12, 14, 19-22, 43
+
+  Prior lien, on assets, 56, 58
+
+  Protection against unsound practices of banks, 46-52; 59-61
+
+  Publicity, a safeguard, 59
+
+
+  Rate of discount, law in France, 118;
+    of exchange, 26, 27
+
+  Rates, 44-46;
+    raising on loans and discounts, 29
+
+  Real estate and banks, 52
+
+  Reserve banks, Federal, 98-100;
+    central reserve, 78;
+    cities, 24, 78
+
+  Reserves, administration of funds, 100;
+    bank, 35;
+    English system, 108-110;
+    in national banks, 73;
+    operations of system, 91-94;
+    regulations regarding, 52, 54;
+    secondary, 35-40;
+    in state banks, 69;
+    in country banks, 73
+
+
+  Safety, in savings banks, 140;
+    fund, 56, 57
+
+  Savings banks, 6, 9;
+    defined, 139
+
+  Saving and saving institutions, 136-141
+
+  Secretary of the Treasury and surplus funds, 88-90
+
+  Securities, dealings in the stock exchange, 163, 164
+
+  Security, liquid, 53
+
+  Silver dollars, 96
+
+  Sixty-day bills in foreign exchange, 33, 34
+
+  Société Algerienne, 114
+
+  Société Generale, 115, 116
+
+  State banks, 9, 68-70, 79, 82;
+    and Federal reserve, 99
+
+  St. Louis, central reserve bank, 78;
+    clearing center, 24
+
+  Stock exchanges, 163-166
+
+  Stockholders, liability of, 46-48
+
+  Surplus, 17, 47
+
+
+  Trade or mercantile bills, 34
+
+  Treasury of the United States, 75-78;
+    operations, 88-90
+
+  Trust companies, 9, 141-144
+
+  Trustee banks, 139
+
+
+  United States, notes, volume of, 96;
+    subtreasury, 80, 81;
+    treasury, 75-78
+
+  Units of value and foreign exchange, 31
+
+
+  Vouchers, 23
+
+
+  Wisconsin, regulation laws, 146
+
+
+
+
+                  The National Social Science Series
+
+               _Edited by Frank L. McVey, Ph.D., LL.D.,_
+                          _President of the_
+                     _University of North Dakota_
+
+
+                              Now Ready
+
+    MONEY. WILLIAM A. SCOTT, Director of the Course in Commerce,
+    and Professor of Political Economy, University of Wisconsin
+
+    TAXATION. C. B. FILLEBROWN, President Massachusetts Single
+    Tax League, Author of _A B C of Taxation_
+
+    THE FAMILY AND SOCIETY. JOHN M. GILLETTE, Professor of
+    Sociology, University of North Dakota
+
+    BANKING. WILLIAM A. SCOTT
+
+
+                            In Preparation
+
+    THE CITY. HENRY C. WRIGHT
+
+    TRUSTS AND COMPETITION. JOHN F. CROWELL
+
+    THE COST OF LIVING. WALTER E. CLARK
+
+    STATISTICS. W. B. BAILEY
+
+    BASIS OF COMMERCE. E. V. ROBINSON
+
+    PUBLIC FINANCE. CARL C. PLEHN
+
+
+                        Each, Fifty Cents Net
+
+
+               A. C. McCLURG & CO., PUBLISHERS, CHICAGO
+
+
+
+
+
+End of the Project Gutenberg EBook of Banking, by William A. Scott
+
+*** END OF THIS PROJECT GUTENBERG EBOOK BANKING ***
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+  <head>
+    <meta http-equiv="Content-Type" content="text/html;charset=iso-8859-1" />
+    <title>
+      The Project Gutenberg eBook of Banking, by William A. Scott.
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+
+The Project Gutenberg EBook of Banking, by William A. Scott
+
+This eBook is for the use of anyone anywhere at no cost and with
+almost no restrictions whatsoever.  You may copy it, give it away or
+re-use it under the terms of the Project Gutenberg License included
+with this eBook or online at www.gutenberg.org
+
+
+Title: Banking
+
+Author: William A. Scott
+
+Release Date: April 17, 2010 [EBook #32027]
+
+Language: English
+
+Character set encoding: ISO-8859-1
+
+*** START OF THIS PROJECT GUTENBERG EBOOK BANKING ***
+
+
+
+
+Produced by The Online Distributed Proofreading Team at
+https://www.pgdp.net (This file was produced from images
+generously made available by The Internet Archive/American
+Libraries.)
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+
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+
+
+
+
+<h1>BANKING</h1>
+
+<h3>BY<br />
+<big>William A. Scott, Ph.D., LL.D.</big><br />
+
+<small>Director of the Course in Commerce and Professor of<br />
+Political Economy in the University of Wisconsin</small></h3>
+
+<h3>CHICAGO<br />
+A. C. McCLURG &amp; CO.<br />
+1914</h3>
+
+<hr style="width: 65%;" />
+<h5>
+Copyright<br />
+A. C. McCLURG &amp; CO.<br />
+1914<br />
+<br />
+Published April, 1914<br />
+<br />
+Copyrighted in Great Britain<br />
+<br />
+<br />
+<small>W. F. HALL PRINTING COMPANY, CHICAGO</small><br />
+</h5>
+
+
+
+<hr style="width: 65%;" />
+<h2>EDITOR'S PREFACE</h2>
+
+
+<p>In Europe the average man looks upon the
+bank as a benefactor. Through its agency
+he secures capital at low rates for his business.
+In America the bank is too often regarded
+as a necessary evil, certainly not with
+affection. Yet it plays a most important r&ocirc;le
+in the nation's economy. Our banking laws
+are obsolete, unsatisfactory, and actually in
+some instances detrimental to the best and
+widest use of the nation's resources. Europe
+has many lessons for us in the problem of how
+best to use our accumulations. With agriculture
+demanding and the railroads calling for
+more capital, the question of scientific banking
+assumes new proportions. This book, with
+its chapters on commercial and investment
+banking, will help to a better knowledge.</p>
+
+<p class="author">F. L. M.</p>
+
+
+<hr style="width: 65%;" />
+<h2>AUTHOR'S PREFACE</h2>
+
+
+<p>The purpose of this book is to supply the general reader with a simple
+statement of the principles and problems of banking. Since it is
+designed primarily for American readers, special attention has been
+given to conditions in this country. An effort has been made clearly
+to draw the line between commercial and investment banking and to
+indicate the problems peculiar to each. That it may assist the average
+person in understanding present-day banking problems and thus
+contribute towards the formation of a sound public opinion regarding
+them, is the author's hope and desire.</p>
+
+<p class="author"><span class="smcap">Wm. A. Scott.</span></p>
+
+<p><i>University of Wisconsin.</i></p>
+
+<p><span class='pagenum'><a name="Page_-3" id="Page_-3">[Pg -3]</a></span></p><p><span class='pagenum'><a name="Page_-4" id="Page_-4">[Pg -4]</a></span></p>
+
+
+<hr style="width: 65%;" />
+<h2>CONTENTS</h2>
+
+
+<table border="0" cellpadding="5" cellspacing="0" summary="Table of Contents">
+<tr>
+  <td>&nbsp;</td>
+  <td align="right"><small>PAGE</small></td>
+</tr>
+<tr>
+  <td><b>Chapter I. The Nature, Functions, and Classification of Banking Institutions,</b></td>
+  <td align="right"><a href="#Page_1">1</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 1. Services Performed by Banking Institutions,</td>
+  <td align="right"><a href="#Page_1">1</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 2. The Economic Functions of Banks,</td>
+  <td align="right"><a href="#Page_4">4</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 3. Classification of Banking Institutions,</td>
+  <td align="right"><a href="#Page_6">6</a></td>
+</tr>
+<tr>
+  <td><b>Chapter II. The Nature and Operations of Commercial Banking,</b></td>
+  <td align="right"><a href="#Page_11">11</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 1. Commercial Paper,</td>
+  <td align="right"><a href="#Page_11">11</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 2. The Operation of Discount,</td>
+  <td align="right"><a href="#Page_13">13</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 3. The Conduct of Checking Accounts,</td>
+  <td align="right"><a href="#Page_15">15</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 4. The Issue of Notes,</td>
+  <td align="right"><a href="#Page_19">19</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 5. Collections,</td>
+  <td align="right"><a href="#Page_22">22</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 6. Domestic Exchange,</td>
+  <td align="right"><a href="#Page_25">25</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 7. Foreign Exchange,</td>
+  <td align="right"><a href="#Page_31">31</a></td>
+</tr>
+<tr>
+  <td><b>Chapter III.  The Problems of Commercial Banking,</b></td>
+  <td align="right"><a href="#Page_35">35</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 1. The Supply of Cash,</td>
+  <td align="right"><a href="#Page_35">35</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 2. The Selection of Loans and Discounts,</td>
+  <td align="right"><a href="#Page_40">40</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 3. Rates,</td>
+  <td align="right"><a href="#Page_44">44</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 4. Protection against Unsound Practices,</td>
+  <td align="right"><a href="#Page_46">46</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; &nbsp; &nbsp; (a) Capital and Surplus Requirements and Double Liability of Stockholders,</td>
+  <td align="right"><a href="#Page_46">46</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; &nbsp; &nbsp; (b) Inflation and Means of Protecting the Public against It,</td>
+  <td align="right"><a href="#Page_49">49</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; &nbsp; &nbsp; (c) Other Means of Safeguarding the Interests of the Public,</td>
+  <td align="right"><a href="#Page_59">59</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 5. Adequacy and Economy of Service,</td>
+  <td align="right"><a href="#Page_62">62</a></td>
+</tr>
+<tr>
+  <td><b>Chapter IV. Commercial Banking in the United States,</b></td>
+  <td align="right"><a href="#Page_68">68</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 1. State Banks,</td>
+  <td align="right"><a href="#Page_68">68</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 2. National Banks,</td>
+  <td align="right"><a href="#Page_70">70</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 3. The Independent Treasury System,</td>
+  <td align="right"><a href="#Page_75">75</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 4. The Interrelations of These Institutions,</td>
+  <td align="right"><a href="#Page_78">78</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 5. Operation of the System,</td>
+  <td align="right"><a href="#Page_82">82</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; &nbsp; &nbsp; (a) Conflict of Functions and Laws,</td>
+  <td align="right"><a href="#Page_82">82</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; &nbsp; &nbsp; (b) Loan Operations,</td>
+  <td align="right"><a href="#Page_85">85</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; &nbsp; &nbsp; (c) Treasury Operations,</td>
+  <td align="right"><a href="#Page_88">88</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; &nbsp; &nbsp; (d) Operation of the Reserve System,</td>
+  <td align="right"><a href="#Page_91">91</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; &nbsp; &nbsp; (e) Lack of Elasticity in the Currency,</td>
+  <td align="right"><a href="#Page_95">95</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 6.  Plans for Reform,</td>
+  <td align="right"><a href="#Page_97">97</a></td>
+</tr>
+<tr>
+  <td><b>Chapter V. Commercial Banking in Other Countries,</b></td>
+  <td align="right"><a href="#Page_101">101</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 1. Common Features,</td>
+  <td align="right"><a href="#Page_101">101</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 2. The English System,</td>
+  <td align="right"><a href="#Page_104">104</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 3. The French System,</td>
+  <td align="right"><a href="#Page_111">111</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 4. The German System,</td>
+  <td align="right"><a href="#Page_119">119</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 5. The Canadian System,</td>
+  <td align="right"><a href="#Page_126">126</a></td>
+</tr>
+<tr>
+  <td><b>Chapter VI. Investment Banking,</b></td>
+  <td align="right"><a href="#Page_136">136</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 1. Saving and Savings Institutions,</td>
+  <td align="right"><a href="#Page_136">136</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 2. Trust Companies,</td>
+  <td align="right"><a href="#Page_141">141</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 3. Bond Houses and Investment Companies,</td>
+  <td align="right"><a href="#Page_144">144</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 4. Land Banks,</td>
+  <td align="right"><a href="#Page_147">147</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 5. Stock Exchanges,</td>
+  <td align="right"><a href="#Page_163">163</a></td>
+</tr>
+<tr>
+  <td>&nbsp; &nbsp; 6. Some Defects in Our Investment Banking Machinery,</td>
+  <td align="right"><a href="#Page_166">166</a></td>
+</tr>
+<tr>
+  <td><b>References,</b></td>
+  <td align="right"><a href="#Page_171">171</a></td>
+</tr>
+<tr>
+  <td><b>Index,</b></td>
+  <td align="right"><a href="#Page_173">173</a></td>
+</tr>
+</table>
+
+
+
+<hr style="width: 65%;" />
+<p><span class='pagenum'><a name="Page_1" id="Page_1">[Pg 1]</a></span></p>
+<h1>BANKING</h1>
+
+
+
+<h2>CHAPTER I<br /><br />
+
+<span class="smcap">The Nature, Functions, and Classification of Banking Institutions</span></h2>
+
+
+<p>The terms, "bank" and "banking," are
+applied to institutions and to businesses
+which differ considerably in character, functions,
+and methods, but which nevertheless
+have certain common features which justify
+their being grouped together. We can best
+prepare the way for a discussion of these
+differences and common features by a description
+of the services which these institutions
+perform in modern society.</p>
+
+
+<h4><i>1. Services Performed by Banking Institutions</i></h4>
+
+<p>From the point of view of their customers
+these services may be grouped under the following
+heads: The safekeeping of money and
+other valuables; the making of payments; the
+making of loans; and the making of invest<span class='pagenum'><a name="Page_2" id="Page_2">[Pg 2]</a></span>ments.
+It is a common practice everywhere,
+and in some countries, notably the United
+States, almost a universal practice for people
+to intrust their money to banks for safekeeping.
+To a degree, hoarding, in the sense of locking
+up money in private vaults and other receptacles
+and keeping it under the eye and in the
+personal care of the owner, is still practiced,
+but it is doubtless on the wane in all civilized
+countries. The practice of intrusting to banks
+the safekeeping of other valuables, such as
+important documents, jewelry, plate, etc., is
+also widespread and growing.</p>
+
+<p>The service of the safekeeping of money
+naturally leads to the second, the making of
+payments. When we intrust our means of payment
+to a bank, it is natural that we should
+also make it our treasurer and disbursing
+agent, and so we do. If we have payments
+to make to people at home, in other cities of
+our own country, or in other countries, we
+usually order our bank to perform the service
+for us.</p>
+
+<p>Loans of almost all kinds are made by banks,
+and certain kinds, namely, those to business
+men for the everyday conduct of commerce
+and industry, are made almost exclusively by
+them. For the most part these are short-term<span class='pagenum'><a name="Page_3" id="Page_3">[Pg 3]</a></span>
+loans. For long-term loans banks are also
+one of the chief resorts, but in some countries
+these are not to so great a degree monopolized
+by them as the short-term variety.</p>
+
+<p>For the investment of the surplus funds of
+people banks are the chief agencies. This function
+takes the form mainly of the sale of
+stocks, bonds, and mortgages, and sometimes
+of the promotion of new enterprises.</p>
+
+<p>None of these services are performed by banks
+exclusively. For the safekeeping of valuables,
+and sometimes of money, there are in some
+places safe deposit companies to which the
+term "banks" is not applied. In the making
+of payments the post office departments of governments
+and express companies participate,
+and in the making of loans and investments
+brokers, loan companies, lawyers, etc., participate.
+The peculiarity of banking institutions
+consists not in the performance of any one of
+these services, but in the fact that they specialize
+in them all, or in a combination of them.
+Merely to keep money and valuables on deposit,
+or to act as paymaster, or to make loans, or
+to sell bonds, stocks, and mortgages would not
+make an institution a bank or an individual a
+banker; but to make a business of performing
+most or all of these services for the public<span class='pagenum'><a name="Page_4" id="Page_4">[Pg 4]</a></span>
+involves the use of certain machinery and certain
+methods of procedure, and the assumption
+of a r&ocirc;le in the nation's economy which is distinctive
+and peculiar, and which has set these
+institutions apart in every country as objects
+of legislation and of scientific treatment, as
+well as in the thought and regard of the people.</p>
+
+
+<h4><i>2. The Economic Functions of Banks</i></h4>
+
+<p>Viewed from the standpoint of the nation
+rather than from that of individuals, the functions
+of banks may be described as those of
+intermediaries in exchanges and in the investment
+of capital. In the former capacity they
+supply the world with the major part of its
+medium of exchange and serve as distributing
+agents for that portion of the supply which
+comes from other sources. They create a
+medium of exchange through a process of
+bookkeeping which is world-wide in extent,
+and through which the mutual indebtedness of
+individuals, cities, and other subdivisions of
+countries and nations, brought about by purchases
+and sales on credit, are offset without
+the use of money.</p>
+
+<p>The practice of depositing surplus funds
+with banks for safekeeping and consequently<span class='pagenum'><a name="Page_5" id="Page_5">[Pg 5]</a></span>
+of using them as paymasters has resulted in the
+reliance of everybody upon banks for currency
+in any form, and has thus thrown upon them
+the responsibility of directly utilizing all the
+sources of money supply. Thus while the
+mints of the United States and most other
+countries coin gold bullion, and supply subsidiary
+silver and copper and nickel coins to
+private persons on the same terms as to banks,
+as a matter of fact few private persons take
+advantage of this privilege, finding it more
+convenient and profitable to get the coin they
+want from banks. The same is true of government
+notes in countries in which such notes
+constitute a portion of the currency.</p>
+
+<p>The accumulation of a nation's capital
+and its investment require the cooperation of
+numerous agencies of which banks are the
+chief. They collect the savings of the people,
+combine them into amounts of sufficient size
+for investment purposes, and invest them
+temporarily and sometimes permanently. Cooperating
+agencies in this work are insurance
+companies, societies of various kinds for the
+promotion of saving, stock exchanges, promoters,
+etc. Some of these take the place of
+banks in the performance of these services,
+while others supplement and aid them.</p>
+<p><span class='pagenum'><a name="Page_6" id="Page_6">[Pg 6]</a></span></p>
+
+<h4><i>3. Classification of Banking Institutions</i></h4>
+
+<p>Banks differ from one another chiefly in
+the nature and degree of their specialization,
+in legal status, and in the place they occupy
+in the system to which they belong. Some
+banks devote the major portion of their effort
+to the conduct of exchanges and are called
+<i>commercial</i> banks, others to investment banking
+and are called <i>investment</i> banks. The
+most common subclasses under the latter
+head are savings banks, land or mortgage
+banks, and bond houses. Savings banks
+specialize in the collection and investment of
+small savings; land banks are primarily intermediaries
+between capitalists and people who
+wish to invest capital in land, building operations,
+and agriculture; and bond houses are
+intermediaries between capitalists and those
+who wish to invest capital in industrial, commercial,
+and transportation enterprises, or loan
+it to states, cities, or other public corporations.</p>
+
+<p>Commercial banks rarely confine themselves
+exclusively to the conduct of exchanges. Most
+of them also conduct savings departments and
+invest the funds intrusted to them through
+such departments in agricultural, industrial, or<span class='pagenum'><a name="Page_7" id="Page_7">[Pg 7]</a></span>
+commercial enterprises or loan them to public
+corporations. Commercial banking, however,
+is their main concern, their other departments
+being side issues of greater or less importance
+according to circumstances. Investment banks
+also frequently carry on commercial banking
+as a side issue. These two lines of business
+are sometimes mixed in such proportions as
+to render classification difficult.</p>
+
+<p>From a legal point of view the banks of
+nearly all countries may be classified as
+<i>private</i> or unincorporated, and <i>incorporated</i>,
+sometimes also called joint-stock banks.
+Private banks are started by individuals or
+firms, like any other private enterprise, without
+the formality of application for permission
+to some public officer, and without compliance
+with a set of legally prescribed regulations.
+They are subject to the laws of the country
+governing all kinds of private business enterprises
+and sometimes to special laws applying
+specifically to them. In some of the states of
+the United States such banks are prohibited
+by law.</p>
+
+<p>Incorporated banks are usually started by
+private initiative but owe their actual legal
+existence and status to a special law, to the
+requirements of which they must conform<span class='pagenum'><a name="Page_8" id="Page_8">[Pg 8]</a></span>
+before they are permitted to do business. Their
+right to do business is usually evidenced by a
+document known as a charter, executed and
+delivered by a public officer legally endowed
+with the requisite authority, or passed in the
+form of a law by the legislative organs of the
+state. Charters of the latter kind are known
+as special charters and are rarely used nowadays,
+except in the case of institutions of a
+peculiar character, endowed with special functions.
+The central banks of Europe owe their
+existence to such charters, as did also the first
+and second United States banks. In the early
+history of the United States special charters
+were uniformly employed by the states, but
+for many years general incorporation laws
+have been the rule, on compliance with the
+requirements of which persons who desire to
+incorporate banks can secure charters.</p>
+
+<p>In federal states, both the federal government
+and the governments of the constituent
+states frequently have and exercise the right
+to incorporate banks. In the United States,
+banks incorporated by the federal government
+under the terms of a general law, originally
+passed in 1863 and many times amended since
+that date, are known as <i>national</i> banks, and
+those incorporated by the states under the<span class='pagenum'><a name="Page_9" id="Page_9">[Pg 9]</a></span>
+terms of general banking acts or of general
+incorporation laws are known as <i>state</i> banks.
+These latter are endowed with privileges which
+enable them to exercise commercial and some
+investment banking functions. Other banks
+also are incorporated by our states under the
+terms of general laws, which are known as savings
+banks and trust companies. The former,
+as the name implies, are institutions primarily
+designed for the encouragement, collection, and
+investment of savings. The latter are called
+trust companies because the earliest institutions
+of this type made the execution of trusts of
+various kinds their exclusive business. Banking
+functions were later added and in many
+cases have now assumed chief importance.</p>
+
+<p>The nature of the banking business requires
+some kind of organization of the individual
+institutions in which certain ones will assume
+to a degree at least the r&ocirc;le of bankers' banks.
+In most European countries this position is
+occupied by single institutions specially chartered
+and endowed with special privileges and
+usually described as central banks. Examples
+are the Bank of England in England, the Bank
+of France in France, and the Imperial Bank
+of Germany in Germany. Around these are
+grouped the other institutions in a kind of<span class='pagenum'><a name="Page_10" id="Page_10">[Pg 10]</a></span>
+hierarchy, certain large banks in the larger
+cities forming centers about which smaller institutions
+group themselves. In the United
+States there is no single central institution,
+but a small group of banks in New York City
+are the real centers of the system. Around
+these are grouped the banks in the other large
+cities of the country and these in turn perform
+important services for banks in the surrounding
+smaller towns and country districts.</p>
+
+
+
+
+<hr style="width: 65%;" />
+<p><span class='pagenum'><a name="Page_11" id="Page_11">[Pg 11]</a></span></p>
+<h2>CHAPTER II<br /><br />
+
+<span class="smcap">The Nature and Operations of Commercial Banking</span></h2>
+
+
+<p>In the preceding chapter commercial banking
+has been defined as the conduct of exchanges
+by means of a world-wide process of
+bookkeeping. We must now describe this
+process. Its essential features are the discount
+of commercial paper, the conduct of checking
+accounts, and the issue of notes.</p>
+
+
+<h4><i>1. Commercial Paper</i></h4>
+
+<p>By commercial paper is meant the credit
+instruments or documents which the credit system
+now in general use throughout the commercial
+world regularly brings into existence
+and liquidates.</p>
+
+<p>The essence of this system is buying and selling
+<i>on time</i>. The farmer buys seed, implements,
+fertilizer, labor, etc., and pays for them
+after the crops have been harvested and sold.
+The manufacturer buys raw materials and pays<span class='pagenum'><a name="Page_12" id="Page_12">[Pg 12]</a></span>
+for them after they have passed through the
+transformation process which he conducts and
+the completed goods have been marketed. He
+frequently sells them to jobbers or wholesalers
+on time and these in turn sell them on time to
+retailers and these to consumers. Farmers,
+manufacturers, and merchants both buy on time
+and sell on time, and are thus both debtors and
+creditors, and each expects that his sales will
+ultimately pay for his purchases.</p>
+
+<p>The obligations involved in these transactions
+are represented and recorded in the form
+of book accounts, promissory notes, or bills
+of exchange, the latter being written or printed,
+or partly written and partly printed, orders of
+creditors on debtors to pay to themselves or
+to third parties the sums indicated. These
+documents are being constantly made and constantly
+paid as the processes of agriculture, industry,
+and commerce proceed. Indeed, their
+creation and liquidation is a normal phenomenon
+of our modern economic life.</p>
+
+<p>The term commercial paper, as we are using
+it, applies to such promissory notes and bills
+of exchange as belong to this credit system.
+It does not apply to such notes and bills when
+they owe their existence to credit operations of
+a different kind, such for example as accom<span class='pagenum'><a name="Page_13" id="Page_13">[Pg 13]</a></span>modation
+loans or investment operations.
+Indeed, the essential characteristic of commercial
+paper is not revealed in the form of the
+credit document but in the fact that it is a link
+in this chain of exchange operations by which
+modern commerce is carried on.</p>
+
+<p>This use of the term should also be distinguished
+from the one common among bankers
+and others. In this popular usage these documents
+are called commercial paper because they
+are themselves objects of commerce. In our
+use of the term the adjective "commercial"
+applies to them only when they play the r&ocirc;le of
+intermediary in a process of exchange through
+credit. In this sense it is a matter of indifference
+whether they pass through the hands of
+brokers or not, and the fact of their being
+objects of purchase and sale does not confer
+the quality of commercial paper upon documents
+having an origin and character other
+than that above described.</p>
+
+
+<h4><i>2. The Operation of Discount</i></h4>
+
+<p>Every person in this chain of credit is confronted
+with the problem of paying his debts
+as they mature by the use of the amounts due
+him from other people.  Since it is rarely<span class='pagenum'><a name="Page_14" id="Page_14">[Pg 14]</a></span>
+possible to arrange maturities on both sides
+in such a way that the amounts due to be paid
+him at a given date shall at least equal those
+he is due to pay on that date, some means of
+transforming claims against other people due
+in the future into present means of payment
+must be found. The one universally employed
+is the discount of commercial paper. By this
+is meant the exchange at a bank of his own
+promissory notes due at times when debts of
+equal or greater amount due him mature, or
+of bills of exchange drawn against his debtors,
+for cash or credits on a checking account.
+These latter are available as means of payment
+at any time.</p>
+
+<p>As a consideration for this accommodation,
+the bank charges interest for the period intervening
+before the maturity of the paper discounted.
+Sometimes this charge is paid at the
+time the paper is purchased and sometimes at
+the date of its maturity. The term "discount"
+technically means taking interest in advance by
+making available as means of present payment
+in any of the above mentioned forms a sum
+less than the amount the bank expects to collect
+at the date of the maturity of the discounted
+paper. If the interest is paid when the discounted
+paper matures, the process is tech<span class='pagenum'><a name="Page_15" id="Page_15">[Pg 15]</a></span>nically
+called a loan. However, since the time
+of collecting interest makes no essential difference
+in the nature of the transaction, the
+process is commonly described as the discount
+of commercial paper, regardless of whether the
+interest is collected in advance or not.</p>
+
+
+<h4><i>3. The Conduct of Checking Accounts</i></h4>
+
+<p>A checking account is an ordinary book
+account on which are credited the cash deposited
+by a customer and the proceeds of collections,
+loans, and discounts made on his behalf,
+and on which are debited payments made to
+him in cash or on his behalf to other people or
+to the bank itself. These payments are made
+on orders signed by the customer and known
+as checks.</p>
+
+<p>The ordinary customer of a commercial bank
+every day brings to the bank the cash he
+receives as the result of the day's business, and
+the checks received, drawn on his own and
+other banks, and is credited with the amount on
+the books of the bank as well as on a passbook
+which he himself retains. If he needs cash
+during the day, he presents to the bank a check
+payable to himself for the amount needed, and
+receives the kinds and denominations wanted;<span class='pagenum'><a name="Page_16" id="Page_16">[Pg 16]</a></span>
+and if he wants to make payments to his creditors
+in other forms than cash, he sends them
+checks on his bank payable to their order, or a
+check drawn by his bank on some bank in
+another place, usually called a draft, which he
+has obtained by exchanging for it a check
+drawn to the order of his bank. To the
+amount of these payments his account at the
+bank is debited, and from time to time his passbook
+is left at the bank for the entry therein
+of the debits made to date and its subsequent
+return to him.</p>
+
+<p>The customer must take care that his
+account is not overdrawn, that is, that the
+debits on his account do not exceed the credits,
+since overdrafts, except by accident or for
+very short periods and small amounts, are not
+allowed in this country, and in other countries,
+where they are allowed, they must be provided
+for in advance by a special agreement between
+the bank and the customer, which usually
+involves the deposit with the bank of ample
+security. In order to avoid overdrafts, the customer
+in this country agrees with his banker
+on what is known as a "line," that is, a maximum
+amount of loans or discounts to be
+allowed. Whenever his credit balance falls
+to a certain minimum, also established by<span class='pagenum'><a name="Page_17" id="Page_17">[Pg 17]</a></span>
+agreement with the bank, the latter discounts
+for him the paper of his customers, that is,
+bills of exchange drawn on them or their
+promissory notes in his favor, or his own
+promissory notes. The proceeds of these discounts
+are credited on his account like deposits
+of cash or of checks for collection.</p>
+
+<p>So long as the discounts are confined to commercial
+paper the bank's part in these transactions
+consists almost exclusively of bookkeeping
+between its customers and between itself
+and other banks. Ordinarily, what is debited
+on one man's account is credited on another's,
+the cash received nearly balancing that paid
+out. To the extent that the cash receipts and
+payments do not balance, the bank either has a
+surplus or is obliged to provide for the meeting
+of a deficit. The means available for this latter
+purpose will be explained in subsequent sections,
+as well as some of the details of this
+bookkeeping process. For the present it is important
+to note precisely how the discount of
+commercial paper is related to this bookkeeping
+process.</p>
+
+<p>As explained in Section 1, commercial paper
+is an essential part of the process of exchanging
+goods through credit. A person buys on
+time and sells on time and expects to pay for<span class='pagenum'><a name="Page_18" id="Page_18">[Pg 18]</a></span>
+his purchases by the proceeds of his sales. So
+long, therefore, as the processes of commerce
+and industry proceed in a normal fashion, the
+paper discounted by a bank will be paid at
+maturity and the credit balance created by
+means of such discounts offset by corresponding
+debits. Ordinarily the credits created
+through discounts during a given period, say
+a day or a week, in favor of one set of customers
+will be balanced during this same period
+by the payment of notes previously discounted
+for other customers. Within a complete trading
+area this is certain to happen, since purchases
+and sales of goods are equal and what
+is credited to one man is debited to another.</p>
+
+<p>The result is very different if a bank discounts
+investment paper, that is, credit documents
+which represent the unproductive consumption
+of individuals or of public and private
+corporations, or which represent the purchase
+on time of the instruments of production rather
+than the production of goods through the use
+of such instruments and their transfer from
+the producer to the consumer. The means of
+payment of such documents can only be created
+gradually by the application of the profits of
+the enterprises in which the investments were
+made, or by taxes spread over a series of years,<span class='pagenum'><a name="Page_19" id="Page_19">[Pg 19]</a></span>
+or by a slow process of saving. If a bank
+issues its own demand obligations in exchange
+for such documents, it cannot make its books
+balance and it will be constantly exposed to
+the danger of forced liquidation. If it attempts
+to protect itself by requiring that the discounted
+paper shall mature in a short period, the necessity
+of liquidation will be forced upon customers
+who are responsible for the payment of the
+discounted paper; that is, such customers will
+be obliged to sell at such prices as they can
+command the property in which the investments
+were made, or some other property. Such
+liquidation always results in forced readjustments
+of prices and business depression, and
+sometimes in commercial crises.</p>
+
+
+<h4><i>4. The Issue of Notes</i></h4>
+
+<p>As an alternative for or a supplement to the
+conduct of checking accounts a commercial
+bank may issue its promissory notes payable to
+bearer on demand. By the issue of notes is
+meant their transfer to customers in exchange
+for cash, for checks left for collection or drawn
+against a credit balance in a checking account,
+or for discounted notes and bills.</p>
+
+<p>By the use of these notes commercial bank<span class='pagenum'><a name="Page_20" id="Page_20">[Pg 20]</a></span>ing
+can be carried on without checking
+accounts. In that case the notes are issued in
+exchange for cash and discounted bills, and
+notes are returned to the bank in exchange for
+cash or when discounted bills or notes mature
+and are paid. In the bookkeeping process
+which has been described bank notes thus
+issued and returned perform precisely the same
+function as checking accounts, and are related
+to the discount of commercial paper and the
+credit system of the country in precisely the
+same manner as such accounts.</p>
+
+<p>Most banks of issue at the present time conduct
+checking accounts also, using the one
+instrumentality or the other as their customers
+desire. In this case notes are issued in exchange
+for checks drawn against credit balances
+on checking accounts or deposited for
+collection as well as in exchange for discounted
+notes and bills and cash.</p>
+
+<p>By the use of both notes and checking accounts,
+a bank can supply most of the needs
+of its customers for a circulating medium, the
+notes serving as hand-to-hand money, and the
+checking accounts, practically all other purposes.
+Being the direct obligations of banks
+attested by the signatures of their responsible
+officers, and being payable to bearer on demand<span class='pagenum'><a name="Page_21" id="Page_21">[Pg 21]</a></span>
+and capable of being issued in all necessary
+denominations, such notes can be transferred
+without indorsement, can be used for making
+change and payments of small and moderate
+size for which checks are not convenient, and
+they do not need to be presented at a bank for
+the test of their validity. If the bank or banks
+which issue them are properly conducted and
+supervised and properly safeguarded by law,
+such notes will circulate freely through the
+length and breadth of a country.</p>
+
+<p>Checking accounts meet in the most satisfactory
+manner all currency needs for which
+hand-to-hand money is not well adapted, such
+as large payments and payments at a distance.
+With a few strokes of a pen payments of the
+greatest magnitude can be made through their
+agency. Checks can be sent through the mails
+at slight expense and without danger of loss
+of the amount involved. By the devices known
+as travelers' and commercial letters of credit,
+checking accounts supply the most convenient
+form of currency for travelers and for merchants
+engaged in foreign trade.</p>
+
+<p>Besides bank notes and checking accounts
+the only forms of currency needed in any community
+are standard and subsidiary coins, the
+former for use as ultimate redemption material<span class='pagenum'><a name="Page_22" id="Page_22">[Pg 22]</a></span>
+for all other forms of currency and for the
+payment of international and other balances,
+and the latter for small change. Even these
+forms of currency are supplied by commercial
+banks, but since they do not create them, ways
+and means of procuring them in the quantities
+needed constitute one of their peculiar
+problems.</p>
+
+
+<h4><i>5. Collections</i></h4>
+
+<p>One of the most important functions of commercial
+banks is the collection for their customers
+of checks and drafts drawn on other
+institutions. When these documents are received,
+the accounts of customers who deposited
+them are credited with the amounts, less
+a small fee for collection, unless by agreement
+this service of collection is performed free of
+charge. The checks are then assorted according
+to the banks upon which they are drawn
+and the cities in which those banks are located.</p>
+
+<p>Checks drawn upon home banks are collected
+either through messengers who present the
+checks at the counters of the banks upon which
+they are drawn and secure payment therefor,
+or through the local clearing house. This is a
+place where representatives of the banks meet
+for the exchange of checks. After the repre<span class='pagenum'><a name="Page_23" id="Page_23">[Pg 23]</a></span>sentative
+of each bank has distributed all the
+checks held by his institution against the
+others participating in the clearing, and received
+from them those drawn against his
+bank, a balance sheet is prepared showing the
+balance due by or to his bank after the total
+of the checks distributed has been balanced
+against the total received. If said balance is
+adverse, it is paid to the master of the clearing
+house, and if it is favorable, it is received
+from him.</p>
+
+<p>The checks received through the clearing
+house or presented by messengers from other
+banks and paid, are debited to the accounts of
+the persons who drew them and returned to
+such persons as vouchers, the net result of the
+entire transaction being the same as if all the
+parties involved had been customers of a single
+bank, with the exception that some means of
+paying balances had to be found. Since balances
+are sometimes paid by checks on some
+central institution in which credit balances
+may be obtained by rediscounts of commercial
+paper, this necessity can be met without the
+use of any form of currency other than that
+furnished by banks themselves.</p>
+
+<p>Checks drawn upon out-of-town banks are, in this country, collected
+through so-called cor<span class='pagenum'><a name="Page_24" id="Page_24">[Pg 24]</a></span>respondents. Each bank enters into an
+arrangement with a few other banks, distributed throughout the country
+and conveniently located for the purpose, by which the correspondent
+bank agrees to conduct with it a checking account on which it will
+credit at par or at a stipulated discount the checks sent it for
+collection and debit checks drawn against such an account. A
+comparatively small number of such correspondents suffices, since
+certain banks in the larger cities, by making a business of such
+collections, conduct checking accounts with a large number of banks,
+and can thus make collections by mere transfers of credits on their
+own books or by the use of the local clearing house. The so-called
+reserve cities in this country constitute clearing centers for the
+territories contiguous to them, and New York, Chicago, and St. Louis,
+for the entire country.</p>
+
+<p>Checks received from correspondents and drawn against themselves are
+debited to the accounts of the customers who drew them and returned as
+vouchers in the same manner as checks received through the clearing
+house or paid over their own counters.</p>
+
+<p>Through this interchange of checks between banks and the conduct of
+checking accounts with each other, intermunicipal and inter<span class='pagenum'><a name="Page_25" id="Page_25">[Pg 25]</a></span>national
+exchanges are conducted through the bookkeeping processes of
+commercial banks with the same ease and economy as are exchanges
+between people living in the same town.</p>
+
+
+<h4><i>6. Domestic Exchange</i></h4>
+
+<p>The accounts of a bank with its correspondents are a record of the
+transactions of its customers with the outside world, the checks they
+receive as a result of sales to outsiders of merchandise, real estate
+or other property, or as a result of gifts by outsiders to them being
+credited on such accounts, while the checks they draw or the drafts
+they purchase in payment for merchandise, real estate or other
+property purchased of outsiders, or of gifts made to them are debited.
+When in a given period, say a day or a week, the receipts of the
+customers of a bank from outsiders, as a result of current or past
+sales and gifts, exceed the payments made by them as a result of
+purchases and gifts, its credit balances with its correspondents will
+increase, and under opposite conditions they will decrease. If the
+payments should continue in excess for a considerable period, the
+credit balances of a bank with its correspondents would be exhausted
+and some<span class='pagenum'><a name="Page_26" id="Page_26">[Pg 26]</a></span> means of replenishing them would have to be found, and under
+the opposite conditions too large a portion of the bank's resources
+would accumulate with its correspondents and some means of withdrawing
+funds would have to be found.</p>
+
+<p>When a bank needs to replenish its credit balances with its
+correspondents, it may ship cash or purchase drafts from other home
+banks, which it can send to its correspondents for collection like
+checks deposited in the ordinary course of business. The latter
+resource will of course be available only when these other banks'
+balances with their correspondents are not exhausted. Should the
+balances of all the banks of a town with their out-of-town
+correspondents be nearly or quite exhausted, shipments of cash to
+correspondents could not be avoided. If a bank wishes to withdraw
+funds from its correspondents for home use, it may order cash shipped
+or it may, perhaps, be able to sell drafts for cash to other home
+banks.</p>
+
+<p>The expenses involved in shipments of cash, loans, or purchases or
+sales of drafts for the purpose of replenishing balances with or
+withdrawing them from out-of-town correspondents, give rise to what is
+called the <i>rate of exchange</i>. If, in order to make out-of-town<span class='pagenum'><a name="Page_27" id="Page_27">[Pg 27]</a></span>
+payments for its customers, a bank is obliged to pay the expense of
+shipping cash to its correspondents or to pay a premium on drafts
+purchased from other banks, the natural method of reimbursement will
+be a premium charge on drafts sold equal to the amount of the expense
+incurred. If it wishes to withdraw a balance with its correspondent,
+since to order cash shipped will involve expense, it will be glad to
+sell drafts for cash at a discount not to exceed such expense.</p>
+
+<p>The rate of exchange, or the price of drafts on a given point, may,
+therefore, fluctuate between a premium equal to the cost of shipping
+cash to that point and a discount of the same amount. Beyond these
+extremes, these fluctuations cannot ordinarily go, because customers
+may demand cash of their banks in payment of checks against their own
+credit balances and ship it to their out-of-town creditors at their
+own expense, and would do so if the rates charged on drafts should
+make such procedure profitable. The actual rate of exchange will not
+ordinarily reach either of these extremes, on account of competition
+either between the banks which are desirous of selling drafts on their
+correspondents or between those which are forced to buy as an
+alternative to cash ship<span class='pagenum'><a name="Page_28" id="Page_28">[Pg 28]</a></span>ments. If the aggregate balances of the banks
+of a town with their out-of-town correspondents are large and
+increasing, the pressure to sell drafts will be greater than that to
+buy and the rate of exchange will go to a discount, the amount of
+which, however, will be fixed by competition between the selling
+banks. In the opposite case, the rate will go to a premium and be
+fixed by competition between the buying banks.</p>
+
+<p>In most towns in the United States there is little or no competition
+between banks in the business of buying and selling drafts and
+consequently no open market for exchange and no quotations of exchange
+rates. In such cases each bank acts more or less independently;
+shipments of cash to or from correspondents are the ordinary means of
+regulating balances; and the cost of such shipments are charged to the
+general expense account of the bank and taken out of customers either
+by a fixed and more or less invariable charge on drafts sold, or in
+other ways.</p>
+
+<p>Since the balances of the banks of a town with their out-of-town
+correspondents depend primarily upon the commercial and gift relations
+of their customers with the outside world, it is pertinent to inquire
+whether as a result of<span class='pagenum'><a name="Page_29" id="Page_29">[Pg 29]</a></span> a long continued excess of purchases from
+outsiders over sales to them and of gifts to over gifts from them, the
+cash resources of a community might not be completely exhausted, and
+if not, how such an outcome is prevented.</p>
+
+<p>Bankers have no direct control over the purchases and sales of their
+customers, but through the rate of interest they charge on loans and
+discounts and their ability absolutely to discontinue such
+accommodations they exert a very potent indirect influence. The rates
+of interest and discount charged are an important element in the cost
+of doing business and, if loaning and discounting is discontinued,
+sales of property to meet maturing obligations are forced, with the
+result of price readjustments between the town in question and the
+outside world which speedily change the relations between purchases
+and sales.</p>
+
+<p>When the cash resources of the banks of a town approach the limit of
+safety and their balances with their correspondents fall to an
+ominously low point, the normal method of procedure is to raise the
+rates on loans and discounts, and if conditions grow worse, to raise
+them higher still and as a last resort to cease temporarily to make
+them at any price. By increasing the cost of doing business this<span class='pagenum'><a name="Page_30" id="Page_30">[Pg 30]</a></span> rise
+in the rates will check purchases by diminishing or annihilating the
+profits resulting, and will stimulate sales by rendering it more
+profitable for some customers to secure funds by sales to outsiders at
+lower prices than were formerly asked rather than by borrowing from
+banks. Under ordinary circumstances this procedure will be sufficient
+to change an unfavorable into a favorable balance of indebtedness with
+the outside world, with the result that more checks on outside
+institutions will be deposited with the banks and a smaller amount of
+drafts purchased. Bankers' balances with their correspondents will,
+therefore, increase, and with them their ability to command cash in
+case of need. The demands made upon them for cash will also decrease,
+since the volume of loans and of business transacted will fall.</p>
+
+<p>If the banks stop discounting, a more or less violent readjustment
+with the outside world results. Business men who have obligations to
+meet, and most of them will belong to this class, are obliged to sell
+their goods and property at whatever prices are necessary and to stop
+purchasing entirely. The outcome, so far as the banks are concerned,
+is as above indicated. If conditions are such that sales<span class='pagenum'><a name="Page_31" id="Page_31">[Pg 31]</a></span> at any price
+cannot be forced, a crisis ensues; that is, business operations are
+temporarily suspended and transfers of property in settlement of
+obligations are made through bankruptcy and other court proceedings.</p>
+
+
+<h4><i>7. Foreign Exchange</i></h4>
+
+<p>The business relations between banks located
+in different countries do not differ in any essential
+respect from those between banks located in
+the same country. Interchange of checks, the
+conduct of checking accounts, shipments of
+cash, and borrowing and lending proceed in the
+same manner as between domestic institutions.
+The chief peculiarities of the foreign exchanges
+are due to the fact that different units of value
+and sometimes different standards must here be
+reckoned with, and that the precious metals,
+chiefly gold, are used in the settlement of balances.
+Drafts drawn in the United States on
+English points, for example, call for the payment
+of pounds sterling, those on French
+points for francs, and those on German points
+for marks, while all must be paid for in dollars.</p>
+
+<p>The translation of the language of values of
+one country into that of others thus involved
+requires the calculation of a so-called <i>par of<span class='pagenum'><a name="Page_32" id="Page_32">[Pg 32]</a></span>
+exchange</i>. By this is meant the relation between
+the weights of pure metal contained in
+their respective units of value, if the countries
+in question have the same standard, and the
+relation between the market values of the
+metallic content of their units, if their standards
+are different. Thus the par of exchange
+between this country and England is $4.8665,
+since our dollar contains 23.22 grains of pure
+gold and the English pound sterling 4.8665
+times as many grains, or 113.0016. Our par
+of exchange with France is 19.294 cents, the
+quotient of 4.4802, the number of grains of
+pure gold in the French franc, divided by 23.22.
+Between China and the United States the par
+of exchange is the market value in our dollars
+of the amount of silver contained in the tael,
+the Chinese unit.</p>
+
+<p>Another technical term employed in connection
+with the foreign exchanges is <i>the gold
+points</i>. These are the points above and below
+the par of exchange fixed by the addition in the
+one case, and the subtraction in the other, of
+the cost of shipping gold between the two places
+in question. They are the points between
+which the rates of exchange fluctuate, or the
+points at which, when the rate of exchange
+reaches them, gold moves between gold stand<span class='pagenum'><a name="Page_33" id="Page_33">[Pg 33]</a></span>ard
+countries. Assuming for example, that the
+cost of shipping gold between New York and
+London is two cents per pound sterling, the
+gold points are 4.8865 and 4.8465, it being
+profitable to ship gold from New York to London
+when sterling exchange reaches the former
+figure and to import gold from London when
+it reaches the latter figure.</p>
+
+<p>In the conduct of the foreign exchanges several classes of bills are
+employed upon which the quotations differ, in part on account of
+differences in their quality and in part on account of the interest
+element entering into the value of time bills. For example, New York
+regularly quotes on London <i>cables</i>, <i>demand</i>, and <i>sixty-day</i> bills.
+The rates on a certain date were: Cables, 4.8860; demand, 4.8790; and
+sixty days, 4.8370. Inasmuch as these are all bankers' bills and
+consequently of the same quality, the differences in their quotations
+are due to the interest element and to the fact that in the case of
+the cables the cost of the cablegram is included.</p>
+
+<p>When a New York banker sells a cable on London, his balance with his
+correspondent is reduced by the amount in a few hours, and the
+interest he receives on such balances is proportionately diminished at
+once, and he is also<span class='pagenum'><a name="Page_34" id="Page_34">[Pg 34]</a></span> out the cost of the necessary cablegram. When he
+sells a demand bill, his account with his London correspondent remains
+undiminished during the time required for sending the bill by mail
+across the Atlantic and for its presentation for payment. He draws
+interest on his entire balance during this period. When he sells a
+sixty-day bill, his balance does not suffer diminution on its account
+for sixty days. In order to place these bills on a footing of equality
+so far as he is concerned, therefore, he must quote demand and
+sixty-day bills lower than cables; the former by the cost of the
+cablegram plus interest on the amount of the bill, say for ten days,
+at the rate he receives on his London balance, and the latter by the
+amount of the cablegram plus interest on the amount for sixty days at
+the same rate.</p>
+
+<p>Trade, or mercantile, as well as bankers' bills are also frequently
+and, in some markets, regularly quoted. Being of a quality ranked as
+inferior to bankers' bills, they must be negotiated at a lower rate
+and are quoted accordingly.</p>
+
+
+
+<hr style="width: 65%;" />
+<p><span class='pagenum'><a name="Page_35" id="Page_35">[Pg 35]</a></span></p>
+<h2>CHAPTER III<br /><br />
+
+<span class="smcap">The Problems of Commercial Banking</span></h2>
+
+
+<p>The conduct of commercial banking presents
+problems both to the bankers and
+to the public, the methods of solution of
+which will be given attention at this point.
+The problems concerning the bankers primarily
+may be grouped under the heads, supply of
+cash, selection of loans and discounts, and
+rates; and those which primarily concern the
+public may be grouped under the heads, protection
+against unsound practices, and adequacy
+and economy of service.</p>
+
+
+<h4><i>1. The Supply of Cash</i></h4>
+
+<p>The credit balances on checking accounts and
+the notes of commercial banks are payable on
+demand in the legal-tender money of the nation
+to which they belong, and such banks must at
+all times be prepared to meet these obligations.</p>
+
+<p>The term employed to designate the funds
+provided for this purpose is <i>reserves</i>, and in this<span class='pagenum'><a name="Page_36" id="Page_36">[Pg 36]</a></span>
+country they consist of money kept on hand
+and of credit balances in other banks. In other
+countries there is also included under this head
+commercial bills of the kind which can always
+be discounted. The term <i>secondary reserve</i> is
+sometimes employed in this country to designate
+certain securities, such as high-class bonds
+listed on the stock exchanges, which can be
+sold readily for cash in case of need.</p>
+
+<p>The amount of reserve required can be determined
+only by experience. In ordinary times
+it depends chiefly upon the habits of the community
+in which the bank is located regarding
+the use of hand-to-hand money as distinguished
+from checks and upon the character of its customers.
+These habits differ widely in different
+nations, and considerably in the different
+sections and classes of the same nation. In
+most European and Oriental countries, for
+example, checks are little used by the masses
+of the people, while in the United States and
+England they are widely used. In these latter
+countries, however, they are less widely used
+by people in the country than in the cities, and
+by the laboring than the other classes in the
+cities. Within the same city one bank may
+need to keep larger reserves than another on
+account of the peculiarities of the lines of busi<span class='pagenum'><a name="Page_37" id="Page_37">[Pg 37]</a></span>ness
+carried on by its customers and the classes
+of people with whom it deals.</p>
+
+<p>In times of crisis and other periods of extraordinary
+demand, bank reserves must be
+much larger than in ordinary times. Hoarding,
+unusually large shipments of money to
+foreign countries and between different sections
+of the same country, and payments of
+unusual magnitude, increase the demands for
+cash made upon banks at such times.</p>
+
+<p>The manner in which clearing and other balances
+between banks are met also has an influence
+on the amount of reserves required. If
+such balances are paid daily and always in
+cash, the amount needed for this purpose is
+much larger than if they are paid in checks on
+some one or a few institutions and at longer
+intervals.</p>
+
+<p>The note issue privileges of a bank also affect
+its reserve requirements. Since, if not prohibited
+by law, notes may be issued in all
+denominations needed for hand-to-hand circulation
+within a nation, and since for all purposes
+except small change such notes are as
+convenient as any other form of currency, a
+bank with unrestricted issue privileges can supply
+all the demands of its customers for currency
+for domestic use, except those for small<span class='pagenum'><a name="Page_38" id="Page_38">[Pg 38]</a></span>
+change, without resort to outside sources of
+supply. In this case, however, it needs to keep
+a reserve in order to meet demands for the
+redemption of notes. Such demands arise on
+account of the need of coin for small change
+or for shipment abroad or of means for meeting
+domestic clearing and other bank balances.
+The aggregate needed for the supply of such
+demands, however, is much less than would be
+required if the privilege of issuing notes did
+not exist.</p>
+
+<p>In the maintenance of reserves the chief reliance
+of commercial banks is the circulation of
+standard coin within a nation and the importation
+of such coin. The coin within the borders
+of a nation passes regularly into the vaults of
+banks by the process of deposit, and on account
+of the credit balances they carry with foreign
+institutions, the loans they are able to secure
+from them, the commercial paper they hold
+which is discountable in foreign markets, and
+the bonds and stocks sometimes in their possession
+which are salable there, they are able to
+import large quantities in case of need. Since
+the standard coin in existence in the world
+adjusts itself to the need for it in substantially
+the same manner that the supply of any other
+instrument or commodity adjusts itself to the<span class='pagenum'><a name="Page_39" id="Page_39">[Pg 39]</a></span>
+demand, banks ordinarily have no difficulty in
+supplying their needs, and under extraordinary
+circumstances, though difficulties along this line
+sometimes arise, means of overcoming them
+are available which will be discussed in the
+proper place.</p>
+
+<p>If, as is the case in the United States, certain
+forms of government notes are available as
+bank reserves, these find their way into the
+banks' vaults by the process of deposit in the
+same manner as coin. The possession of such
+notes by a bank enables it, to the extent of their
+amount, to throw the responsibility for the
+supply of standard coin upon the government,
+and in the circulation of the country such notes
+take the place of an equivalent amount of
+standard coin. Whether or not a government
+ought to assume such a responsibility is a question
+which will be discussed in a subsequent
+chapter.</p>
+
+<p>For the nation as a whole, the balances in
+other banks and the discountable commercial
+paper and bonds which a bank may count as a
+part of its reserves are not reserves except to
+the extent that they may be employed as a
+means of importing gold. They are only means
+through which real reserves of standard coin
+are distributed. The payment in cash of a<span class='pagenum'><a name="Page_40" id="Page_40">[Pg 40]</a></span>
+balance with another bank or the discount of
+commercial paper with another domestic bank
+or the sale of bonds on domestic stock exchanges
+do not add to the sum total of the cash resources
+of the banks of a nation. Their only effect is
+to increase the cash resources of one bank at
+the expense of another.</p>
+
+<p>Adequate facilities for the distribution of
+the reserve funds of a country, however, are
+second in importance only to the existence of
+adequate supplies of standard coin. If such
+facilities are lacking, existing reserves can be
+only partially and uneconomically used, with
+the result that much larger aggregate reserves
+are required than would otherwise be necessary
+and that the entire credit system is much less
+stable than it otherwise would be.</p>
+
+
+<h4><i>2. The Selection of Loans and Discounts</i></h4>
+
+<p>The problem of the reserves is vitally connected
+with that of the selection of loans and
+discounts. As was shown in the preceding
+chapter, the chief business of a commercial
+bank is to conduct exchanges by a process of
+bookkeeping between individuals, banks, communities,
+and nations. This process consists
+primarily in the converting of commercial bills<span class='pagenum'><a name="Page_41" id="Page_41">[Pg 41]</a></span>
+and notes into credit balances and bank notes,
+in the transfer of such balances and notes
+between individuals and banks, and in the final
+extinguishment of such balances and the return
+of such notes at the maturity of the commercial
+bills and notes in which the process
+originated.</p>
+
+<p>In this process there is little need for cash,
+provided the arrangements between banks for
+clearing checks and for the interchange of
+notes are complete and efficiently administered.
+But when a bank accepts investment in lieu of
+commercial paper, its need for cash at once
+increases, because the demand obligations created
+by the credit balances or the bank notes
+into which this paper was converted are not
+extinguished by payments for goods purchased,
+but must be met by cash.</p>
+
+<p>To distinguish between commercial and investment
+paper is, therefore, one of the chief problems
+confronting commercial bankers. For its
+solution an accurate knowledge of the business
+operations of customers is necessary. An inspection
+of the paper presented and a general knowledge
+of their wealth and business capacity are
+important, but not sufficient. The forms of
+the paper employed in both commercial and
+investment operations may be the same, and the<span class='pagenum'><a name="Page_42" id="Page_42">[Pg 42]</a></span>
+possession of wealth does not ensure the payment
+of the paper at maturity.</p>
+
+<p>The chief means available for the acquisition
+of this knowledge are the requirement from
+customers of frequent statements of their operations,
+on properly prepared forms; the use,
+wherever possible, of the documented commercial
+bill of exchange; and the maintenance of
+credit departments equipped with the means of
+accurately studying commercial, industrial, and
+agricultural operations, and of diagnosing economic
+conditions. The study of carefully prepared
+statements of customers made at frequent
+intervals reveals to the banker not only the
+nature of the operations represented by the
+paper presented for discount, but the trend
+of the business of his customers and, through
+them, of the entire country. With such knowledge,
+he is not only able to protect his institution
+against improper loans and discounts, but
+to give valuable advice to his customers, advice
+which no one else is in a position to give so
+accurately.</p>
+
+<p>By a documented bill of exchange is meant
+a bill drawn by a seller upon the purchaser of
+goods, accompanied by documents evidencing
+the transaction; such, for example, as bills of
+lading, warehouse receipts, and insurance poli<span class='pagenum'><a name="Page_43" id="Page_43">[Pg 43]</a></span>cies.
+The names on such bills guide the banker
+in his efforts to trace the transaction in which
+it originated and the documents enable him
+absolutely to identify it, and constitute security
+for the loan.</p>
+
+<p>Instead of such bills, promissory notes made
+payable to banks are commonly used in this
+country, greatly to the disadvantage of the banking
+business. Such a note reveals nothing to
+the banker concerning the purpose for which
+the loan is made, while a commercial bill, even
+without documents, reveals the names of the
+principals of the transaction in which the banker
+is asked to participate. Acquaintance with these
+men and knowledge of the business in which
+they are engaged at once suggests the probable
+origin of the bill and furnishes the clue needed
+for subsequent investigation.</p>
+
+<p>A properly equipped credit department will
+keep on file and at all times available for use
+the data requisite for the information of the
+officers upon whom the responsibility of selecting
+the loans and discounts rests. Such data
+will not only concern the character and business
+of each customer and the bank's previous dealings
+with him, but general economic conditions,
+the operations and experiences of other banks,
+other business institutions, governments, etc.</p>
+<p><span class='pagenum'><a name="Page_44" id="Page_44">[Pg 44]</a></span></p>
+
+<h4><i>3. Rates</i></h4>
+
+<p>Besides rates of exchange considered in the
+preceding chapter, commercial banks are concerned
+with loan and discount rates.</p>
+
+<p>Rates on deposits, though sometimes employed,
+have no place in commercial banking,
+since commercial deposits are only the credit
+balances resulting from loans and discounts or
+from funds intrusted to the bank for temporary
+safekeeping or disbursement in the interest
+of the depositor. In every case they represent
+a service rendered the depositor for which the
+bank must be paid, and, when interest is allowed,
+the depositor must repay it in some form
+with an increment sufficient to remunerate said
+service.</p>
+
+<p>Commercial banks may and usually do conduct
+savings accounts also, for which an interest
+payment is not only defensible but in every
+sense desirable, but in so doing they are going
+beyond the sphere of commercial banking, which
+alone is under consideration at this point.</p>
+
+<p>Rates charged on loans and discounts are
+the chief means through which commercial
+banks are remunerated for the services they
+perform. In the long run these rates are deter<span class='pagenum'><a name="Page_45" id="Page_45">[Pg 45]</a></span>mined
+by competition, and represent the current
+market value of the services performed by
+bankers. Custom often affects them temporarily
+and sometimes for long periods prevents
+their response to influences tending to produce
+change, but in the long run they yield to
+economic force and conform to the laws of
+value.</p>
+
+<p>Variations in the rate of discount are the
+most efficient means employed by commercial
+banks for the regulation of the volume of
+their loans and discounts and for changing
+the percentage their reserves bear to deposits
+and note issues. An increase of these rates
+tends to check loans and discounts, to decrease
+deposits and note issues, to increase reserves,
+and consequently to raise the percentage of
+reserves to deposits and issues.</p>
+
+<p>It checks loans and discounts by increasing
+the expense of conducting business operations
+on a credit basis, thus diminishing profits and
+sometimes causing losses, checking enterprise
+and decreasing the volume of commercial transactions.
+A decrease of loans and discounts
+correspondingly diminishes deposits or note
+issues, or both, since these are simply the counterpart
+or representative of such loans and discounts
+in the form of credit balances in the<span class='pagenum'><a name="Page_46" id="Page_46">[Pg 46]</a></span>
+checking accounts conducted by the banks or
+the equivalent of such 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.</p>
+
+
+<h4><i>4. Protection against Unsound Practices</i></h4>
+
+<p>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.</p>
+
+<p>(<i>a</i>) <i>Capital and Surplus Requirements and
+Double Liability of Stockholders.</i>&mdash;A very<span class='pagenum'><a name="Page_47" id="Page_47">[Pg 47]</a></span>
+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 <i>capital
+stock</i>, and that an additional fund, usually
+called the <i>surplus</i>, 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.</p>
+
+<p>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<span class='pagenum'><a name="Page_48" id="Page_48">[Pg 48]</a></span>
+speculation and tempt into the business the
+unscrupulous and the unfit.</p>
+
+<p>In the determination of the size of capital
+and surplus funds and of the amount of the
+liability of stockholders for subscriptions in
+case of failure, no well-founded principles have
+been developed for the guidance of legislators.
+They should be great enough to cover prospective
+losses and to induce conservatism, honesty,
+and efficiency in management, and not so great
+as to prevent the free flow of an adequate
+amount of capital into the business. Unfortunately,
+the statistics of losses in cases of failure
+are not a sufficient guide. In some cases they
+bear a large proportion to the volume of business
+transacted and in others a very small one,
+and the number of cases available are too small
+to give much value to averages. The amount
+necessary to secure the best possible management
+is also purely problematical.</p>
+
+<p>In lieu of well-founded principles, the practice
+has developed in this country of making
+the minimum capitalization permitted depend
+upon the population of the town in which the
+bank is located. This seems to be a very crude
+and indirect method of proportioning capital
+to the volume of business transacted. The
+fixing of such a proportion, or of a proportion<span class='pagenum'><a name="Page_49" id="Page_49">[Pg 49]</a></span>
+which no bank should be permitted to exceed,
+is probably the best method of solving this
+problem, but it should be done directly and
+not by the roundabout method which has been
+mentioned above.</p>
+
+<p>A proportion of ten to one between capital
+and aggregate demand obligations would probably
+be justified by American experience. The
+present practice of fixing the surplus fund at
+twenty per cent of the capital would be
+justifiable if the capital fund were properly
+regulated in amount.</p>
+
+<p>(<i>b</i>) <i>Inflation and Means of Protecting the
+Public against It.</i>&mdash;The greatest abuse to
+which the business of commercial banking is
+subject, and against which the public most
+needs protection, is inflation. This is a condition
+difficult to diagnose, and not well understood
+by the general public and even by bankers.
+The most easily recognized symptom of its
+existence is the forced liquidation of credits;
+that is, forced sales of property in order to
+meet maturing obligations to banks. When,
+for example, the people whose notes or bills
+have been discounted by banks default in
+large numbers, and the collateral deposited as
+security has to be sold, or, in the absence of
+collateral, the courts must order the sale of<span class='pagenum'><a name="Page_50" id="Page_50">[Pg 50]</a></span>
+their property, the presence of inflation may be
+suspected.</p>
+
+<p>The chief cause of inflation is the issue by
+commercial banks of demand obligations against
+investment securities. The means of liquidating
+such securities are the profits of the enterprises
+in which the investments were made
+and in the nature of the case several years are
+required for the accomplishment of this end.
+Meantime the demand obligations of the banks
+issued against them in the form of balances on
+checking accounts or notes must be met and,
+the funds regularly deposited with them as a
+result of the operation of such enterprises being
+inadequate, other means must be found. The
+only one available is the sacrifice, at forced
+sales, of the property in which the investment
+was made or of some other property in the
+possession of the persons responsible to the
+bank.</p>
+
+<p>The banks usually protect themselves against
+such forced liquidation by the requirement that
+the paper they discount shall mature at short
+intervals, usually not to exceed four to six
+months, and accept the long-time securities,
+such as bonds, stocks, and mortgages, only as
+collateral. By this means they are able to
+force the liquidation on their customers. Other<span class='pagenum'><a name="Page_51" id="Page_51">[Pg 51]</a></span>wise
+they would be obliged themselves to endure
+it, with the result that their capital and surplus
+funds would be impaired and perhaps
+exhausted; and, if they should prove inadequate,
+failure would be inevitable.</p>
+
+<p>The evil involved in the forced sales of property
+caused by inflation is the readjustment of
+prices through which it is accomplished, and
+the depression and, sometimes, panic which
+follow. When the prices of many kinds of
+property must be greatly depressed in order
+to induce their transfer to other hands, the
+machinery of commerce and industry is thrown
+out of adjustment and is sometimes rendered
+temporarily useless. This result is due to the
+fact that the relations between costs of production
+and the returns from the sale of finished
+products are so changed that profits are
+reduced or annihilated, and many persons are
+financially ruined. Readjustments of the prices
+of raw products, labor, and finished goods, and
+the transfer of plants to new hands, are, therefore,
+necessary before industry, commerce, and
+agriculture can again operate in a normal way,
+and during the period of readjustment some
+enterprises must entirely stop operations, and
+all must slow down. At such times many
+laborers are thrown out of employment, many<span class='pagenum'><a name="Page_52" id="Page_52">[Pg 52]</a></span>
+more work part time only, the wages of nearly
+all are lowered, and most other classes of
+income are cut down. Depression and, in
+extreme cases, panic are the result, and these
+have serious consequences other than financial.</p>
+
+<p>The means employed for the protection of
+the public against inflation are crude and inadequate.
+They may be grouped under the heads:
+regulations regarding investments, reserves, and
+note issues. Under the first head belong in
+the banking legislation of this country limitations
+on real estate investments and on the
+amount that may be loaned to a single firm or
+individual. Our national banking act and most
+of our state banking acts prohibit banks from
+holding real estate except for their own accommodation,
+and as a means of reimbursing themselves
+for defaulted loans, and our national
+banking act prohibits the taking of real estate
+security for loans, and many of our state banking
+acts limit the amount of such security
+that may be held. Our national banking act
+limits the amount that may be loaned to a
+single firm or individual to one-tenth of the
+bank's capital and surplus, and similar regulations
+are common in state banking legislation.</p>
+
+<p>The purpose of these regulations is to confine
+the investments of banks to what are called<span class='pagenum'><a name="Page_53" id="Page_53">[Pg 53]</a></span>
+liquid securities, but they fail to evince a proper
+conception on the part of their authors of what
+really makes a security liquid. Apparently
+legislators and their advisers have felt that if
+the securities held by the banks mature in
+short periods, or are listed on a stock exchange,
+they are liquid; but such is not necessarily the
+case.</p>
+
+<p>Commercial paper only is really liquid, since
+it represents a current commercial process
+which will soon be completed and the completion
+of which automatically provides the
+means for its payment. Such paper usually
+matures in short periods, but the characteristic
+of liquidity results not from the date at which
+it is made to mature, but from the commercial
+process which called it into existence and will
+ultimately retire it. In this country very often
+paper of short maturity is so in form only, its
+makers expecting to renew it, instead of pay
+it, at maturity.</p>
+
+<p>Bonds and stocks, even though they may be
+listed on a stock exchange and daily bought
+and sold, are not liquid securities in the proper
+sense of that term. An individual bank may
+be able to sell them in case of need, but such
+sale is simply the transfer of the investment to
+another bank or person, and not its liquidation.<span class='pagenum'><a name="Page_54" id="Page_54">[Pg 54]</a></span>
+The security still exists and must be paid, while
+its liquidation would take it out of existence.</p>
+
+<p>Foreign legislators have approximated more
+closely than ours what is needed in the regulation
+of bank investments. In the case of their
+central banks, many of them, notably those of
+France and Germany, have recognized the fundamental
+distinction between commercial and
+investment paper, and have required them to
+hold the former against their demand obligations,
+especially their notes.</p>
+
+<p>The regulation of reserves has become a subject
+of legislation in this country only. Our
+national banking act classifies national banks
+into three groups, called country, reserve city,
+and central reserve city banks, and requires
+those in the first mentioned group to keep cash
+in their vaults to the amount of at least six
+per cent of their deposits, and balances in
+approved reserve city banks sufficient to bring
+the total amount up to fifteen per cent of their
+deposits.</p>
+
+<p>Banks in reserve cities are required to keep
+in their vaults cash to the amount of at least
+twelve and one-half per cent of their deposits,
+and balances in central reserve cities sufficient
+to bring the total up to twenty-five per cent of
+their deposits. Banks in central reserve cities<span class='pagenum'><a name="Page_55" id="Page_55">[Pg 55]</a></span>
+are required to keep at least twenty-five per
+cent of their deposits in cash in their vaults.
+When the reserves of a bank fall to the prescribed
+minimum, all discounting must cease.
+Regulations essentially similar are found in the
+banking laws of most of our states.</p>
+
+<p>The purpose of these regulations is to set a limit to the extent to
+which banks may expand the volume of their loans and discounts, in the
+belief, apparently, that, if at least the prescribed proportion of
+cash is all the time kept on hand, the banks will be able to meet
+their obligations. As in the case of the regulations concerning
+investments, the authors of these failed to recognize the
+significance, from the point of view of the cash demands likely to be
+made upon banks, of the kind of paper admitted to discount. If
+discounts be confined to commercial paper, the demand obligations they
+create will be met for the most part by transfers of credits on the
+banks' books or by the return of the notes issued, and, as foreign
+experience has demonstrated, the adjustment of cash resources to needs
+can safely be left to the judgment of the bankers themselves, who,
+through variations in the discount rate, rediscounts, and other means,
+can regulate it with ease. If investment paper is admitted to<span class='pagenum'><a name="Page_56" id="Page_56">[Pg 56]</a></span>
+discount, reserves less than one hundred per cent of the demand
+obligations thereby created are unsafe, since a less amount is likely
+to force liquidation on the banks' customers, with the results above
+indicated.</p>
+
+<p>The most elaborate regulations for the prevention of inflation have
+been developed in connection with legislation concerning note issues.
+The reason for this is the fact that commercial banking was at its
+origin and for a long time thereafter carried on almost exclusively
+through note issues, the conduct of checking accounts being a
+comparatively recent development. The phenomenon of inflation was,
+therefore, first observed in connection with note issues and
+associated with them. Even now the essential similarity of note issues
+and checking accounts as banking instrumentalities is not universally
+recognized.</p>
+
+<p>The means of safeguarding note issues which have been incorporated
+into legislative enactments are the prior lien on assets, the safety
+fund, the requirement and sometimes the mortgaging of special assets,
+and the limitation of the total issues. By the prior lien is meant the
+provision that in case of failure the note holders shall be paid in
+full before any of the assets are distributed among other cred<span class='pagenum'><a name="Page_57" id="Page_57">[Pg 57]</a></span>itors.
+By the safety fund is meant a required contribution from each bank,
+usually a percentage of the amount of notes issued, placed in the
+hands of some public official and kept for the redemption, in case of
+failure, of such of the notes of failed banks as cannot be redeemed
+out of the assets of the banks themselves. Additional contributions
+from the solvent banks are required for the replenishment of the fund
+when it has been depleted.</p>
+
+<p>The practice of different countries regarding the requirement of
+special assets to be held against note issues, as well as regarding
+the mortgaging of such assets, is not the same. Germany and France,
+for example, require their banks to cover their note issues by
+designated proportions of commercial paper and coin, while the United
+States requires its banks of issue to cover their notes by government
+bonds and to contribute a five per cent redemption fund in addition,
+and England requires the Bank of England to cover a designated amount
+of its issues by government and other securities and the remainder by
+coin. Unlike the others, the United States mortgages to the note
+holders the securities, that is, the government bonds, required to be
+held against the notes, by providing that in case of failure these
+securi<span class='pagenum'><a name="Page_58" id="Page_58">[Pg 58]</a></span>ties shall be sold and the proceeds used for the settlement of
+their claims.</p>
+
+<p>In all of these provisions, the protection of note holders against
+loss in case of failure has been an influential consideration, and in
+the cases of the prior lien and the safety fund, the only one. The
+prevention of inflation may have entered into consideration in the
+other cases, but among the states mentioned the regulations of France
+and Germany alone are efficient in this direction, since they alone
+prohibit note issues against investment securities. The above
+mentioned regulations of England and the United States tend rather to
+promote, than to prevent, inflation, since they require the holding of
+investment securities against note issues.</p>
+
+<p>The limitation of the aggregate amount of notes that may be issued is
+a common legislative regulation. In the United States the limit set is
+the amount of the capital stock, and in France it is an arbitrary
+figure from time to time changed as the needs of the bank seem to
+require. As a safeguard against inflation, the value of such
+limitation depends upon the basis of the issues. If it is investment
+securities, as in the case of the United States, limitation to a low
+figure, not in any case to exceed<span class='pagenum'><a name="Page_59" id="Page_59">[Pg 59]</a></span> the capital stock, is desirable,
+since such limitation keeps the inflation within such bounds that the
+banks themselves may be able to withstand the effects of it by selling
+upon foreign markets, without great and perhaps without any loss, the
+securities in which their capital and surplus funds are invested. If
+the basis of issues be commercial paper, such limitation is
+unnecessary, since inflation in such a case is improbable, and
+pernicious, unless it be placed above the point which the volume of
+issues is likely in ordinary cases to reach.</p>
+
+<p>(<i>c</i>) <i>Other Means of Safeguarding the Interests of the
+Public.</i>&mdash;Experience has shown that publicity is a valuable safeguard
+against bad bank practices, and legislation has, therefore, provided
+for it by the requirement that statements of banking operations shall
+be published from time to time. The national banking act of the United
+States and many of our state banking acts, for example, provide for
+the publication five times a year of bank balance sheets, drawn up
+according to prescribed forms.</p>
+
+<p>The inspection of banks by public examiners and the requirement of
+detailed reports to public officials are also provided for in our
+federal and state legislation. Canada requires the<span class='pagenum'><a name="Page_60" id="Page_60">[Pg 60]</a></span> reports but not
+the inspection by public officials, on the ground that the latter
+cannot be thorough and efficient, and is, therefore, likely to mislead
+the public and cause it to be less vigilant than it otherwise would be
+in the use of other means of safeguarding its interests.</p>
+
+<p>Legislation in this country has also concerned itself with the duties
+of bank directors and the enforcement of their performance, and with
+the relations of bank officers to their banks, particularly those
+involved in borrowing for their own uses or for firms or corporations
+in which they are interested.</p>
+
+<p>A recent legislative experiment along quite
+a new line has been undertaken in this country
+in the form of laws providing for the mutual
+insurance of depositors. Oklahoma started this
+experiment, and her example has been followed
+by other states. The essence of the experiment
+consists in the provision of a fund out of
+which is paid to the depositors of failed banks
+that portion of their claims which cannot be
+met from the liquidation of the assets of the
+defunct banks, such fund to be contributed by
+the other banks belonging to the system.</p>
+
+<p>The protection of depositors against loss is
+a commendable aim of legislation, but this
+method of attaining this aim is open to the<span class='pagenum'><a name="Page_61" id="Page_61">[Pg 61]</a></span>
+serious objection that it removes from depositors
+all concern regarding the proper management
+of the bank with which they do business,
+and thus gives the unscrupulous, dishonest, and
+plunging banker an advantage. Attraction of
+depositors is the chief field in which competition
+between banks is carried on, and when the
+power of good management in this direction is
+removed, high rates on deposits, high lines of
+credit, low or no rates of exchange, extravagance
+in equipment, etc., remain the only attractions,
+and in the offer of these the unscrupulous
+and plunging banker will always outdo the
+conservative.</p>
+
+<p>It is impossible to overcome this objection
+by public supervision, and more frequent and
+rigid examinations. No public officer can equip
+himself to pass judgment on the relations of a
+bank with each customer, or to detect secret
+contracts and unwritten understandings, or to
+keep unscrupulous people out of the banking
+business. There can be no doubt that a reputation
+for conservatism, good judgment, strict
+integrity, and careful management is, at the
+present time, the most valuable asset a banker
+can have, because customers know that they
+are in danger to the extent that these qualities
+are lacking. To substitute for the present basis<span class='pagenum'><a name="Page_62" id="Page_62">[Pg 62]</a></span>
+of competition between banks that established
+by mutual insurance laws is to undermine the
+foundations of our credit system and to invite
+disaster and ruin.</p>
+
+
+<h4><i>5. Adequacy and Economy of Service</i></h4>
+
+<p>From the point of view of adequacy and
+economy of service, two types of banking systems
+require attention; namely, that characterized
+by a large number of relatively small local
+independent banks, chartered under general
+laws, and exemplified in this country; and that
+characterized by a relatively small number of
+large banks endowed with the privilege of
+establishing branches, and exemplified in the
+other leading nations of the world.</p>
+
+<p>Under our system each community is encouraged
+to look after its own banking needs. Local
+initiative in the establishment of new institutions
+is given free play and local capital and
+local talent is attracted. Outside promoters
+and outside capital are not excluded, but, if
+they come, they do so as colonists expecting to
+cast in their lot with the community and to
+become identified with it. The managers of
+our banks for the most part are local men who
+are the real heads of the institutions they man<span class='pagenum'><a name="Page_63" id="Page_63">[Pg 63]</a></span>age
+and whose careers and prosperity depend
+on the success of these institutions.</p>
+
+<p>The localism which characterizes this system
+contributes elements both of strength and of
+weakness. It develops local talent, and promotes
+mutual understanding and cooperation
+between the banks and the business enterprises
+of the community, and conformity of organization
+and methods to local needs. Its weakness
+consists in the financial isolation and the narrowness
+of vision and training which are its
+natural accompaniments. Under this system
+capital does not easily and quickly move from
+place to place and readily distribute itself
+according to the relative needs of different
+communities. In consequence, rates of interest
+are apt to vary widely, some communities
+to be under- and others over-capitalized, and
+the capital of the nation as a whole to be
+inefficiently employed. Under this system the
+opportunity of bankers for training is meager,
+since the broader and more fundamental aspects
+of the business are rarely brought to their
+attention, and in the smaller towns and country
+districts they are apt to be recruited from
+people of mediocre ability and often from those
+not well fitted by nature and education for this
+branch of commercial enterprise.<span class='pagenum'><a name="Page_64" id="Page_64">[Pg 64]</a></span></p>
+
+<p>The system of branch banking, almost universally
+employed elsewhere, is strong where
+our system is weak, but it has weaknesses of
+its own. It promotes distribution of capital
+according to relative needs, and consequently
+efficiency in the application of a nation's capital
+as a whole, and it offers a wide field of training
+for the people engaged in the business, and
+draws its recruits from every quarter. It can
+readily supply banking facilities to communities
+too small or too poor to provide for an independent
+bank, and more readily than our
+system can adjust itself to rapidly growing
+communities.</p>
+
+<p>Its chief weakness consists in the lack of
+independence of the managers of the branches
+and the consequent danger that local needs
+may not be fully satisfied. The manager of
+a branch is usually granted freedom of action
+only in routine matters. Any business out of
+the usual order must be referred to higher
+authorities connected or associated with the
+main office; and, even with the advice of the
+manager, who alone is familiar with local conditions,
+the decision cannot be made with that
+intimacy of knowledge of and sympathy with
+the business and aspirations of the individual or
+firm under consideration that full justice to<span class='pagenum'><a name="Page_65" id="Page_65">[Pg 65]</a></span>
+him and his town may require. In the matter
+of adequacy and character of service, therefore,
+the city in which the main office is located
+has an advantage over those in which the
+branches are located.</p>
+
+<p>In this connection it should also be noted
+that, while the branch banking system is able
+to adjust itself to the capital requirements of
+towns of all sizes more readily than the independent
+banking system, and thus to secure a
+better distribution of the banking capital of
+the community, it does not follow that it will
+do so. On account of ignorance of conditions,
+insufficiency of capital or inability readily to
+increase it, or inertia on the part of the head
+office, a town may have to wait for the establishment
+of a branch longer than it would for
+the establishment of an independent bank.</p>
+
+<p>Whether or not this will be the case, however,
+depends to a considerable extent upon the
+keenness of the competition between the big
+banks with branches. The big central banks of
+Europe, which have no competition within their
+field, have been slow to establish branches.
+The coercive force of the government has been
+necessary in many cases to secure their proper
+expansion. In the case of the other big banks,
+however, both of Europe and of Canada, com<span class='pagenum'><a name="Page_66" id="Page_66">[Pg 66]</a></span>petition
+has resulted in very rapid expansion
+during the last half century, probably as rapid
+as could be desired.</p>
+
+<p>Regarding adequacy of service, the method
+of granting charters and the attitude of the
+government towards private banking is important.
+If banks are allowed to spring up spontaneously,
+like manufacturing and commercial
+establishments and farms, they are likely to be
+plentiful and to be located wherever needed.
+Experience, however, has shown that private
+banks cannot be adequately regulated in the
+interest of the public and that incorporation
+under public auspices should be required.</p>
+
+<p>Two methods of incorporation are employed,
+those of the special charter and of the general
+law. Except in the case of special institutions,
+like central banks, the former is objectionable,
+since it opens the doors to political favoritism
+and is likely to result in bad distribution, lack
+of uniformity in regulation, and lack of steadiness
+and regularity in development. Incorporation
+under general laws, or the free banking
+system, as it is sometimes called in this country,
+is unquestionably the best from every standpoint.
+All the necessary checks and balances
+can be incorporated in these laws, and the supervision
+of public officers, together with the<span class='pagenum'><a name="Page_67" id="Page_67">[Pg 67]</a></span>
+necessary administrative machinery, provided
+for. This is the only practicable method to
+employ in an independent system like ours.</p>
+
+<p>The special charter method works best in
+connection with the branch bank system, in
+which the question of chartering new institutions
+only occasionally arises, and in which
+delay is not so serious.</p>
+
+
+
+<hr style="width: 65%;" />
+<p><span class='pagenum'><a name="Page_68" id="Page_68">[Pg 68]</a></span></p>
+<h2>CHAPTER IV<br /><br />
+
+<span class="smcap">Commercial Banking in the United States</span></h2>
+
+
+<p>The commercial banking system of the
+United States consists of several elements
+which have been contributed at different periods
+in our history. The most important of these
+are state banks, national banks, and the independent
+treasury system.</p>
+
+
+<h4><i>1. State Banks</i></h4>
+
+<p>From the very beginning of our national history
+institutions enjoying, among others, the
+privilege of commercial banking have been
+chartered by our states. For several years after
+the adoption of our constitution it remained an
+open question whether the incorporation of
+such institutions was not their exclusive privilege,
+but in the case of McCulloch v. Maryland,
+in 1819, the Supreme Court decided that the
+federal government also had this right.</p>
+
+<p>During the years 1791-1811, and 1816-1836,<span class='pagenum'><a name="Page_69" id="Page_69">[Pg 69]</a></span>
+the state banks had as competitors the first and
+second United States banks, and in 1863
+so-called national banks entered the field, and,
+more recently still, trust companies. Private
+banks have also existed from the beginning,
+but their number and relative importance have
+declined in recent years. At the present time
+the number of state banks exceeds that of all
+other classes of banking institutions combined,
+but in capital and resources they are inferior to
+both national banks and trust companies.</p>
+
+<p>Since each state has had a free hand in the
+matter of legislation concerning the banks chartered
+under its auspices, uniformity in the regulations
+imposed upon and in the kind and degree
+of supervision exercised over this class of
+institutions, is lacking. In most cases, however,
+as compared to national banks, the amount of
+capital required is smaller; they have greater
+freedom in the making of loans, especially upon
+real estate security; and they are not so carefully
+examined and supervised by public officials.
+The most frequently imposed legislative
+requirements are: the accumulation of a surplus
+fund from earnings; double liability of
+stockholders; a minimum cash reserve to be
+kept in the vaults, and an additional reserve
+on deposit in other banks; the organization of<span class='pagenum'><a name="Page_70" id="Page_70">[Pg 70]</a></span>
+a banking department for the administration of
+the laws pertaining to them; regular reports
+and examinations; and some limitation on real
+estate holdings and on the amount of loans to
+be made on real estate security. On account of
+the relatively low capital requirements imposed
+upon them, and the liberality of the laws concerning
+them in other respects, state banks have
+been able to prosper where national banks and
+trust companies could not exist, and on this
+account in many parts of the South and West
+they do most of the banking business in small
+towns and country districts. They generally
+perform a wide range of banking functions,
+including those of investment and savings as
+well as of commercial banks.</p>
+
+
+<h4><i>2. National Banks</i></h4>
+
+<p>Our national banking system owes its existence
+to financial exigencies of the federal government
+experienced during the Civil War. For
+a considerable period preceding the outbreak of
+that struggle the expenses of the government
+had exceeded its receipts. The deficit was
+greatly increased as soon as the war began,
+and Congress did not find it possible immediately
+to devise adequate new sources of reve<span class='pagenum'><a name="Page_71" id="Page_71">[Pg 71]</a></span>nue,
+including a market for government bonds.
+It was, therefore, forced to the issue of legal-tender
+notes under authority of an act passed
+February 25, 1862.</p>
+
+<p>After three issues of these notes, amounting to $400,000,000, had been
+exhausted, and the value of the notes had depreciated to such an
+extent that persistence in this method of financiering portended
+speedy financial disaster, Congress adopted a suggestion made early in
+the war by Secretary Chase, to the effect that a market for government
+bonds might be created by compelling banks to purchase them as
+security for their note issues. An act passed February 25, 1863,
+provided for the incorporation of banks with the right to issue notes
+on condition that they purchase government bonds and deposit them with
+an official to be known as Comptroller of the Currency.</p>
+
+<p>It was the expectation of the authors of this
+act that the state banks, then numbering over
+one thousand, would exchange their state for
+national charters and purchase bonds sufficient
+to secure their circulation under the terms of
+the new act, but, since they showed reluctance
+so to do, in 1865 force was applied in the form
+of a tax of ten per cent on bank notes otherwise
+secured. Under this pressure most of the state<span class='pagenum'><a name="Page_72" id="Page_72">[Pg 72]</a></span>
+banks reorganized as national institutions, but
+a few retained their state charters and formed
+the nucleus of the state system of the present
+day. On account of the ten per cent tax, however,
+the issue of notes by this remnant became
+unprofitable, and the new national banks have
+to this day remained the sole banks of issue in
+the country.</p>
+
+<p>The act of 1863 has been amended several
+times, notably in 1864, 1870, 1874, 1875, 1882,
+1887, and 1900. In its present form it permits
+the organization of banks with a capitalization
+as low as $25,000 in towns of 3,000 inhabitants
+or less, and with a capitalization as low as
+$50,000 in towns of 6,000 or less. Banks
+organized under this act must put ten per cent
+of their profits into a surplus fund until said
+fund amounts to twenty per cent of the capital;
+must invest at least twenty-five per cent
+of their capital, if it is less than $200,000, and
+at least $50,000, if it is $200,000 or more, in
+government bonds; and may deposit said bonds
+with the Comptroller of the Currency and
+receive circulating notes to the amount of their
+par value, provided their market value is par
+or above.</p>
+
+<p>The rights and privileges of these banks are
+stated in very broad and general terms, a fair<span class='pagenum'><a name="Page_73" id="Page_73">[Pg 73]</a></span>
+interpretation of which permits them to engage
+in both commercial and investment banking
+under certain specified limitations, of which the
+most important are the following: they must
+not invest in or hold real estate beyond their
+owns needs for suitable quarters, or temporarily
+for the purpose of collecting debts due
+them; they must not accept real estate as security
+for loans; they must not loan more than
+ten per cent of their capital and surplus to any
+one person or firm; and they must keep reserves
+to the amount of fifteen per cent of their
+deposits, if they belong to the group known
+as country banks, and to the amount of twenty-five
+per cent of their deposits, if they belong
+to either the reserve city or the central reserve
+city group.</p>
+
+<p>In the case of country banks, at least two-fifths
+of the required reserves, and in the case of
+reserve city banks, at least one-half, must consist
+of specified forms of money in their own
+vaults. The remainder may be balances payable
+on demand in approved banks in reserve
+or central reserve cities in the case of country
+banks, and in the central reserve cities in the
+case of reserve city banks. In the case of
+banks in central reserve cities, the entire reserve
+prescribed by law must consist of money in the<span class='pagenum'><a name="Page_74" id="Page_74">[Pg 74]</a></span>
+vaults. These required minimum reserves must
+not be infringed upon. When a bank's cash
+and balances with its reserve agents fall to
+the prescribed minimum, discounting must be
+stopped under penalty of suspension of privileges
+and liquidation by the Comptroller of the
+Currency.</p>
+
+<p>At five dates each year, selected by the Comptroller
+of the Currency, national banks must
+make detailed reports of their condition on
+prescribed blanks and publish abstracts of such
+reports in local newspapers. They must also
+submit to examination by persons appointed for
+that purpose by the Comptroller as often as this
+official may deem necessary and proper.</p>
+
+<p>National banks have been organized in every
+state of the Union, and in Maine, Massachusetts,
+and Vermont they have completely
+supplanted the state banks. Elsewhere they
+exist side by side with state banks and compete
+with them. In some states they are more and
+in others less numerous than state banks. In
+the kind of business transacted the only important
+difference between the two classes of
+institutions consists in the loans on real estate
+security, which national banks are prohibited,
+and state banks allowed, to make. The latter,
+therefore, share this class of business with the<span class='pagenum'><a name="Page_75" id="Page_75">[Pg 75]</a></span>
+trust companies only, and where it predominates
+have a distinct advantage in competition
+over the national institutions.</p>
+
+
+<h4><i>3. The Independent Treasury System</i></h4>
+
+<p>While not a banking institution, the Treasury
+of the United States handles its funds in such
+a manner and performs such functions with
+reference to the currency that it has become an
+important part of the banking system of the
+country.</p>
+
+<p>Previous to 1840 the funds of the federal
+government were kept on deposit in banking
+institutions, during the greater part of the time
+in the First and Second United States banks.
+Friction between President Jackson and the
+Second United States Bank resulted in their
+withdrawal from that institution in 1834 and
+their deposit in selected state banks, several of
+which failed and all of which suspended specie
+payments during the crisis of 1837. The embarrassment
+which the treasury experienced in
+consequence, combined with previous unsatisfactory
+relations between the government and
+its depositories, convinced President Van Buren
+that the Treasurer ought himself to keep and
+to disburse the funds of the government. He<span class='pagenum'><a name="Page_76" id="Page_76">[Pg 76]</a></span>
+made a recommendation to this effect to Congress,
+which in accordance therewith enacted
+the first independent treasury act in 1840. The
+revival of agitation for a third United States
+Bank led to the repeal of this act the following
+year, but in 1846 it was reenacted and with
+modifications has remained upon our statute
+books to the present day.</p>
+
+<p>In its original form this act provided for the
+acquisition of vaults in certain cities, in which
+should be deposited the funds of the government
+as soon as possible after they came into
+the hands of the receiving officers, and out of
+which should be taken, upon drafts issued by
+the Secretary of the Treasury, the money
+needed for the payment of the government's
+obligations. It further provided that all dues
+to the government in the future should be paid
+either in coin or in currency issued exclusively
+by the government, and that all expenses should
+be paid in the same forms of money.</p>
+
+<p>Important modifications in this act were
+made during and after the Civil War. In 1863
+permission was granted the Secretary of the
+Treasury to deposit in national banks funds
+accumulated in the treasury, and derived from
+any source except duties on imports, provided
+the banks selected for this purpose should<span class='pagenum'><a name="Page_77" id="Page_77">[Pg 77]</a></span>
+deposit with him government bonds for their
+security. Subsequently the discretionary power
+of the Secretary in this direction was extended
+so that at the present time he is authorized at
+his discretion to deposit in national banks surplus
+funds derived from any source, trust funds
+alone excepted, and to accept as security therefor
+other securities than government bonds.
+Other laws have made national bank notes
+acceptable for certain public dues, and have
+given the Secretary authority to issue gold and
+silver certificates against gold coin and silver
+dollars deposited in corresponding amounts,
+and to redeem United States notes in gold
+coin and to keep on hand for that purpose a
+gold reserve of $150,000,000.</p>
+
+<p>In its operation, this independent treasury system affects the
+reserves of the banks and through them their discounts and the
+commerce of the country. Whenever the receipts of the government
+exceed its expenditures, money accumulates in the treasury and the
+reserves of the banks are diminished; and, under opposite conditions,
+they are increased. The return of accumulated surplus funds to the
+banks is possible when the Secretary of the Treasury decides that such
+return is desirable or necessary and when the banks are able and<span class='pagenum'><a name="Page_78" id="Page_78">[Pg 78]</a></span>
+willing to supply the bonds demanded as security. In case a deposit is
+agreed upon the funds go to a relatively small number of national
+banks selected as depositories by the Secretary of the Treasury, the
+amount allowed each depository also being determined by him.</p>
+
+<p>Through its ability to issue gold and silver certificates, its
+obligation to redeem United States notes in gold on demand, its
+administration of the United States mints and assay offices and the
+laws regulating the supply and distribution of subsidiary coin, the
+United States Treasury cooperates with the banks in the supply and
+distribution of the circulating medium of the country. The people
+apply to the banks for the forms of money and currency desired and
+these institutions meet the demand by means of the funds deposited
+with them or by their exchange at the various subtreasuries, if the
+forms of money deposited do not correspond with these demands.</p>
+
+
+<h4><i>4. The Interrelations of These Institutions</i></h4>
+
+<p>Under the operation of the national banking
+act, New York, Chicago, and St. Louis have
+been designated as <i>central reserve</i>, and forty-seven
+other cities as <i>reserve</i> cities.  The<span class='pagenum'><a name="Page_79" id="Page_79">[Pg 79]</a></span>
+national banks in these reserve cities act as
+reserve agents for national banks in the cities
+and towns not so designated and ordinarily
+receive on deposit the major part of their reserves
+plus surplus funds not needed for local
+purposes. Banks in the central reserve cities act
+as reserve agents for the banks in the reserve
+cities as well as for country banks, and on account
+of their importance as commercial and investment
+centers receive and hold in the form
+of bankers' balances a large part of the reserve
+funds as well as the surplus investment funds
+of the national banks of the entire country.</p>
+
+<p>State banks and trust companies manage
+their reserve and surplus investment funds in
+substantially the same manner as national
+banks, using national banks in the reserve and
+central reserve cities as their reserve agents.
+State laws usually allow approved state banks
+and trust companies also to act as reserve
+agents for the banks and trust companies under
+their jurisdiction, but these approved banks are
+generally located in the reserve and central reserve
+cities, and themselves employ the national
+banks there located as their reserve agents, thus
+forming simply an additional conduit through
+which the reserve and surplus investment funds
+of state banks and trust companies reach the<span class='pagenum'><a name="Page_80" id="Page_80">[Pg 80]</a></span>
+central money reservoirs administered by
+national banks in the central reserve cities.</p>
+
+<p>National banks in the reserve and central
+reserve cities are also clearing centers for the
+enormous volume of checks and drafts which
+the administration of the checking accounts of
+the banks and trust companies of the country
+bring into existence. They act as correspondents
+as well as reserve agents for these other
+banks and trust companies, and in this capacity
+collect out-of-town checks and drafts and conduct
+checking accounts for them. Within
+these cities, as well as in hundreds of others,
+clearing house associations conduct the local
+clearings and also act as agencies through
+which national and state banks and trust
+companies cooperate in the promotion of
+common interests.</p>
+
+<p>The center of the entire system is in New
+York City. The clearing house association of
+that city, consisting of over fifty national and
+state banks and trust companies, includes the
+banks the vaults of which constitute the central
+money reservoir of the country and which
+constitute the center of the country's clearing
+system. Through the New York subtreasury
+pass the greater part of the receipts and disbursements
+of the government, and the chief<span class='pagenum'><a name="Page_81" id="Page_81">[Pg 81]</a></span>
+assay office in the country is located there. The
+New York stock exchange is our only stock
+and bond market of national scope, and consequently
+the investment center of the country.</p>
+
+<p>The Associated Banks of New York City,
+as the members of the clearing house association
+are called, hold the greater part of the
+reserves of the banks and trust companies not
+required by law to be kept in the local vaults,
+as well as the greater part of the surplus investment
+funds of the entire country. It is through
+the operation of the New York subtreasury
+on the reserves of the Associated Banks that
+the chief influence of the independent treasury
+system on the banking business of the country
+is exerted, the greater part of the government's
+receipts coming directly out of those reserves,
+and a large part of the expenditures going into
+them, and the greater part of the money deposited
+in national banks by the Secretary of
+the Treasury going directly or indirectly into
+New York institutions. Most of the exports
+and imports of coin and bullion pass through
+New York, and the major portion of the
+foreign exchanges of the entire country are
+there effected. The New York Assay Office
+receives and distributes the greater part of the
+new supplies of gold and silver bullion which<span class='pagenum'><a name="Page_82" id="Page_82">[Pg 82]</a></span>
+come from our mines and transforms into bullion
+the major part of these metals that come to
+us from abroad and do not find employment as
+foreign coin. The New York Stock Exchange
+is the medium through which a large part of
+the surplus savings of the country are invested
+in our industries or loaned for the use of our
+national, state, municipal, and other local governmental
+agencies.</p>
+
+
+<h4><i>5. Operation of the System</i></h4>
+
+<p>The most noteworthy features of the working
+of this machinery may be discussed under
+the heads: conflict of functions and laws; loan
+operations; treasury operations; reserve system;
+absence of elasticity in the currency.</p>
+
+<p>(<i>a</i>) <i>Conflict of Functions and Laws.</i>&mdash;The
+two classes of banking institutions which have
+been described (state banks and national banks)
+and trust companies, described in a subsequent
+chapter, exist side by side in many communities,
+and in the performance of certain services
+compete for the patronage of the public. As
+has already been pointed out, state and national
+banks differ little in their functions except in
+their relation to real estate loans, and in some
+states trust companies perform all the func<span class='pagenum'><a name="Page_83" id="Page_83">[Pg 83]</a></span>tions
+of these institutions and many others
+besides. In the performance of these common
+services, however, they are rarely regulated by
+the same laws or subjected to the same
+kind or degree of public supervision. The competition
+between them, therefore, is not always
+on a fair basis and the temptation to violate
+restraining laws and administrative regulations
+is strong. The supervising officers recognize
+the situation as a rule and go to the extreme
+limit of leniency in administering laws and
+regulations which operate to the manifest disadvantage
+of the institutions over which they
+have jurisdiction, but even then it is often impossible
+to render the basis of competition fair
+and equitable.</p>
+
+<p>This condition of affairs has resulted in the
+devising of ways and means of circumventing
+obnoxious laws and in some cases in practices
+which are pernicious in themselves. As examples
+may be mentioned the widespread practice
+of national banks, which are prohibited by law
+from making loans on real estate security, of
+making loans to customers who can offer no
+other collateral, on the security of their personal
+notes only, or of making loans secured by real
+estate by a three cornered operation utilizing
+a director or officer or some other third party<span class='pagenum'><a name="Page_84" id="Page_84">[Pg 84]</a></span>
+as intermediary. All three classes of institutions
+compete in soliciting the savings deposits
+of the community, with the result that the trust
+companies and savings banks, which often have
+the advantage here, sometimes force upon their
+state and national bank competitors a higher
+rate of interest on such deposits than they
+ought to pay. The differing regulations in
+some places in force regarding the amount that
+may be loaned to a single individual or firm
+has also resulted in some cases in devious and
+uncommendable practices.</p>
+
+<p>For the remedy of these conditions the first
+desideratum is the careful differentiation of
+the various functions performed by all these
+institutions, and the devising of appropriate
+legal and administrative regulations for each
+one. These regulations should then be incorporated
+into the legislation and the administrative
+practices of the federal government and
+of each state, and any institution which performs
+any of these functions should be obliged
+to submit to the regulations pertaining thereto.
+The difficulties in the way of securing such a
+differentiation of functions and such community
+of action between the federal government
+and our states are too obvious to require
+statement, but they should not prevent the for<span class='pagenum'><a name="Page_85" id="Page_85">[Pg 85]</a></span>mulation
+of ideal conditions, and a conscious
+and persistent effort to attain them.</p>
+
+<p>(<i>b</i>) <i>Loan Operations.</i>&mdash;In making loans, a
+typical method of procedure for a business man
+is to arrange with a bank for what is technically
+called a "line," that is, the maximum
+amount he may expect to be able to borrow
+under normal conditions. This "line" determined,
+he borrows from time to time according
+to his needs, giving as security his personal
+note, payable in one, two, three, four, or six
+months. Sometimes an indorser is required,
+and sometimes the deposit of collateral, mortgages
+on real estate, bonds, stocks, and warehouse
+receipts being the most commonly used
+securities employed in such cases. Ordinarily,
+when a note falls due, he expects the bank
+to renew it, if its payment at the time is
+not convenient, the agreement on a "line of
+credit" ordinarily carrying with it that implication,
+though not legally, probably not morally,
+binding the bank so to do. Indeed, the
+customer ordinarily counts the amount of his
+"line" as a part of his working capital and
+expects to keep it in use a large part, if not all,
+of the time.</p>
+
+<p>In the determination of the amount of these
+"lines of credit," the judgment of some one<span class='pagenum'><a name="Page_86" id="Page_86">[Pg 86]</a></span>
+or more bank officers, assisted by a discount
+committee and sometimes, though not as a rule,
+by a specially organized credit department,
+rules. In forming these judgments, the bankers
+of the United States as a class are not guided
+by any universally recognized and well established
+principles. The best ones require from
+their customers carefully prepared statements
+showing the nature and volume of the business
+they transact, and a careful classification of
+their assets and liabilities. Others, and these
+are a large majority, rely upon the knowledge
+they already possess, gained by general observation,
+and supplemented by verbal inquiries
+made from time to time and by the voluntary
+statements of the customers themselves.</p>
+
+<p>The significance of the distinction between commercial and investment
+operations in the business of banking is not generally understood, and
+is consequently little regarded. The dominant question in the mind of
+the average banker, both in determining the amount of a customer's
+line and in making loans to him after the line is fixed, is how much
+he is "good for," and on this point the total net worth, rather than
+the nature of the business operations, of the customer is likely to be
+decisive. Of course, the banker is also influenced by the<span class='pagenum'><a name="Page_87" id="Page_87">[Pg 87]</a></span> customer's
+reputation for both integrity and business ability.</p>
+
+<p>This method of procedure has the advantage of rendering access of
+people to the banks easy and of promoting their extensive use, but it
+has the grave disadvantage of opening the doors wide to inflation of
+credit. The majority of our bankers do not know whether more or less
+than their savings deposits and their capital and surplus, the only
+funds which can safely be invested in fixed forms, is so invested. The
+promissory notes of their customers, which constitute the major part
+of their assets, give no information on this point, and they have not
+made the investigations necessary to determine with certainty the
+destination of the funds they have loaned. They are satisfied with the
+knowledge or the conviction that their loans can be collected, not at
+maturity&mdash;they know very well that many, probably most, of them can
+not&mdash;but ultimately. The result is that unconsciously and gradually
+the banks create their demand obligations in the form of balances on
+checking accounts against fixed investments in machinery, buildings,
+lands, mines, etc., and, when the payment of these obligations is
+demanded, the reserves fall below the danger point and they are forced
+to require payment<span class='pagenum'><a name="Page_88" id="Page_88">[Pg 88]</a></span> at maturity of paper which the maker had counted
+upon having renewed indefinitely, and the payment of which is only
+possible by the forced sale of the property in which the borrowed
+funds were invested, or of some other property in his possession. If
+only a single bank or a comparatively few banks find themselves in
+this condition, relief may be found in the rediscount of paper with
+other banks, in direct loans, or in the sale of securities on the
+exchanges; but, if the condition is general, relief by these means is
+impossible, and widespread forced liquidation becomes necessary. An
+aggravated situation of this kind causes panic and results in a
+commercial crisis.</p>
+
+<p>(<i>c</i>) <i>Treasury Operations.</i>&mdash;The operation of our independent
+treasury system produces arbitrary fluctuations in the reserves of the
+banks and prevents that degree of prevision which is essential to the
+most economical and the safest practices. The funds needed for current
+purposes are withdrawn from the banks and kept under lock and key in
+the treasury vaults, thus diminishing reserves to the extent of their
+amount. Surplus funds likewise accumulate in the vaults with the same
+result, until the Secretary of the Treasury sees fit to deposit, and
+the banks find it possible to receive<span class='pagenum'><a name="Page_89" id="Page_89">[Pg 89]</a></span> them. Even then the depository
+banks alone are directly benefited, and no one of these knows long in
+advance how much it is going to receive or when funds left on deposit
+will be withdrawn.</p>
+
+<p>Since the volume of the business of the government
+is very large, the effects produced by
+the movement of its funds are of such magnitude
+as to give them national importance, the
+ability of banks to loan and to meet obligations
+already incurred being profoundly affected
+by them. Among these effects must also
+be noted the inability of the banks to calculate
+these movements in advance, as they to a
+degree can those produced by the operations of
+their commercial customers, and the relation
+between them and the Secretary of the Treasury,
+which results. The relation between the
+receipts and the disbursements of the government
+vary greatly from month to month and
+year to year, so that, on the basis of past
+experience, it is impossible to predict when the
+banks will gain from or lose to the treasury.
+The action of the Secretary of the Treasury
+regarding deposits of surplus funds is equally
+uncertain and unpredictable. No fixed policy
+regarding this matter has yet been established
+by precedent or determined by law.  Each<span class='pagenum'><a name="Page_90" id="Page_90">[Pg 90]</a></span>
+secretary follows his own judgment and is
+influenced by current events and conditions.</p>
+
+<p>The uncertainty which results creates a speculative
+atmosphere about the money market and
+renders the banks dependent upon the secretary
+and the secretary influential on the money
+market in a manner which is unfortunate for
+both. Since they cannot be indifferent to the
+operations of the treasury, and cannot predict
+them, banks are obliged to speculate regarding
+them, and, if they err, they are likely either
+to over-extend their credit operations or unduly
+to contract them. The former will result when
+they expect an increase in their reserves from
+treasury sources and do not get it, and the
+latter when contemplated withdrawals of funds
+do not occur.</p>
+
+<p>The Secretary of the Treasury is not in a
+position properly to exercise the power conferred
+upon him. He is outside the channels of
+commerce and industry, and must, therefore,
+secure at second hand the information necessary
+for intelligent action. Such sources of
+information are frequently unreliable and
+inaccurate and their use subjects him to the
+charge of favoritism and to the danger of acting
+in the interest of special groups or special
+localities.<span class='pagenum'><a name="Page_91" id="Page_91">[Pg 91]</a></span></p>
+
+<p>(<i>d</i>) <i>Operation of the Reserve System.</i>&mdash;Each national bank now keeps
+locked up in its vaults money to the amount of at least six to
+twenty-five per cent of its deposits and a balance with banks in
+reserve and central reserve cities sufficient to bring the total to at
+least fifteen per cent of deposits in the case of country banks, and
+twenty-five per cent of deposits in the case of reserve city banks. In
+addition, it is customary for most banks to carry as a secondary
+reserve high-grade bonds which can be readily sold in case of need.
+The practice of state banks is practically the same as that of
+national, and that of trust companies differs only in the amount of
+reserves carried and in the proportion between the different items.</p>
+
+<p>This system has many disadvantages. Among them the most obvious,
+perhaps, is the withdrawal of enormous sums from the current use of
+the agriculture, industry, and commerce of the country. That portion
+of these reserve funds which is required to be kept under lock and key
+in the vaults, amounting in the aggregate to a billion and a half of
+dollars or more, is not available for use in ordinary times, and is
+practically useless even in times of stringency, since according to
+present law, when the reserves fall to the minimum prescribed by<span class='pagenum'><a name="Page_92" id="Page_92">[Pg 92]</a></span> law,
+banks must stop discounting, under penalty of being put in the hands
+of a receiver. The other portions of these funds, namely, those
+deposited with banks in reserve cities and those invested in bonds,
+are likewise withdrawn from the uses of current commerce, since a
+large part of the former is only available for use on the New York
+Stock Exchange, and the latter are invested in railroads, mines,
+factories, land, etc.</p>
+
+<p>The explanation of the devotion of the redeposited portion of the
+reserves to the operations of the New York Stock Exchange is to be
+found in the fact that that exchange furnishes a regular market for
+call loans on a large scale. Since these funds are held subject to the
+call of the banks which deposited them, and interest at the rate of at
+least two per cent is paid upon them, the depository banks are bound
+to seek investment for them, and call loans on collateral listed on
+the exchange under ordinary circumstances are best suited to their
+purposes.</p>
+
+<p>Another disadvantage of this reserve system is the dangerous situation
+in which it places banks from time to time, and the tendency to panic
+which it fosters. The demands made upon banks for both cash and credit
+vary with the seasons. In the fall and spring they are<span class='pagenum'><a name="Page_93" id="Page_93">[Pg 93]</a></span> much greater
+than in the winter and summer. They also vary regularly through
+periods of years, increasing during the up-grade of a credit cycle and
+decreasing for a longer or shorter period after a crisis. Irregular
+and unexpected events also cause variations. On account of the
+rigidity of this reserve system and the lack of elasticity in our
+currency, the means available to banks for meeting increased demands,
+especially those of an irregular and unexpected character, are
+inadequate, and their employment is often dangerous. These means are:
+keeping in the vaults in slack times a large amount of unused cash, a
+practice too expensive to be employed; keeping surplus balances with
+correspondents at two or three per cent interest, not a sufficiently
+remunerative practice to be employed on a sufficiently extensive
+scale; rediscount with correspondents of some of their customers'
+paper, or loans from them on the security of their own signatures or
+on such security supplemented by collateral; and sale of bonds at such
+prices as they will bring.</p>
+
+<p>None of these expedients is certain at all times and under all
+conditions, and some of them are precarious at all times. Surplus
+balances with correspondents are most reliable, but they occasionally
+fail on account of the<span class='pagenum'><a name="Page_94" id="Page_94">[Pg 94]</a></span> inability of correspondents to realize upon
+their call loans. When calls for the payment of balances are large and
+general, it is impossible for brokers whose loans are called by one
+bank to transfer them to another. The collateral deposited as security
+must, therefore, be offered for sale on the stock exchange, and the
+very stringency which resulted in their being so offered renders their
+sale, even at slaughter prices, difficult and sometimes impossible.
+The result at the best is a heavy fall in the prices of stock-market
+securities, and at the worst a stock-market panic and a suspension of
+payments by the banks.</p>
+
+<p>Rediscounts and loans from correspondent banks cannot be depended on.
+Correspondents are under no obligation to make them. They will usually
+do so as a favor, if their condition warrants, otherwise not. Sales of
+bonds on the stock exchange are difficult and sometimes impossible in
+times of emergency, and are usually attended with loss.</p>
+
+<p>On account of this uncertainty and the danger attending it, when new
+and unusual conditions likely to result in increased demands upon them
+arise, banks are likely to act "panicky"; to call in their balances
+from correspondents; to sell bonds; to call loans; and greatly to
+curtail<span class='pagenum'><a name="Page_95" id="Page_95">[Pg 95]</a></span> or absolutely to cut off new discounts. This action spreads
+the panicky feeling among their customers, and creates such pressure
+at the reserve centers as to cause curtailment of accommodations and
+panic there.</p>
+
+<p>At the very best, this reserve system is accompanied by high discount
+and loan rates and by speculation on the stock market. High rates
+result inevitably from the hoarding of currency which it involves, the
+supply of loan funds being abnormally diminished, and speculation
+follows from the concentration in slack times of funds in New York
+City, which can only be employed in call loans on stock-exchange
+collateral. Stock brokers regularly take advantage of this situation,
+speculate themselves and inspire speculation among their customers.
+The mutual dependence of the stock and money markets thus produced by
+this reserve system is disadvantageous to both, fluctuations in
+values, uncertainty, and irregularity on both being the result.</p>
+
+<p>(<i>e</i>) <i>Lack of Elasticity in the Currency.</i>&mdash;The money of the United
+States consists of four main elements, gold and silver coin, United
+States notes, and national bank notes, and none of these fluctuate in
+volume in accord with the needs of commerce.<span class='pagenum'><a name="Page_96" id="Page_96">[Pg 96]</a></span></p>
+
+<p>The gold element depends primarily upon the output of our gold mines
+and upon the international movement of gold, increasing when that
+output increases and when our imports of gold exceed our exports, and
+decreasing under opposite conditions. These fluctuations, however, are
+quite independent of our commercial needs. Silver dollars, which
+constitute the major part of our silver currency, for several years
+have been unchanged in quantity, and the volume of United States notes
+has remained at $346,681,016 since the resumption of specie payments,
+January 1, 1879.</p>
+
+<p>National bank notes fluctuate in volume as a result of changes in the
+number of national banks and in the prices of government bonds.
+Whenever a new national bank is organized, a specified portion of its
+capital must be invested in government bonds, which bonds are usually
+deposited with the Comptroller of the Currency in exchange for notes;
+and, when the price of government bonds rises, banks holding more than
+the minimum required by law frequently retire a portion of their
+circulation in order to recover their bonds for sale at the enhanced
+price. When the price of government bonds falls, many banks purchase
+additional quantities and increase their circulation.<span class='pagenum'><a name="Page_97" id="Page_97">[Pg 97]</a></span></p>
+
+<p>Changes in the price of government bonds and in the number of national
+banks, however, have no connection whatever with changes in our
+currency needs, and no more do the fluctuations in the volume of the
+currency as a whole, made up of these various elements combined. As a
+result of this condition, rates on loans and discounts fluctuate
+greatly on account of wide variations between the demand and the
+supply of loan funds, and commerce is hampered at certain seasons and
+overstimulated at others. As was indicated above, this lack of
+elasticity in our currency aggravates the defects of our reserve
+system and also aids in the production of financial panics.</p>
+
+
+<h4><i>6. Plans for Reform</i></h4>
+
+<p>On account of the defects in our system of
+banking, there has been long-continued agitation
+for reform, increasing in scope and intensity
+in recent years. After the crisis of 1907,
+which revealed these defects to many persons
+who had not observed them before, Congress
+appointed a commission to make investigations
+and to prepare a reform measure. In January,
+1912, this committee submitted a report which
+embodied a bill for the incorporation of a<span class='pagenum'><a name="Page_98" id="Page_98">[Pg 98]</a></span>
+National Reserve Association, to be made up
+of a federation of local associations of banks
+and trust companies. The purpose of this association
+was to supply a market for commercial
+paper, an elastic element in the currency, a
+place for the deposit of the bank reserves of
+the country and of the funds of the government,
+as well as proper machinery for the
+administration of this market and these funds.</p>
+
+<p>For various reasons, the plan of the monetary
+commission did not meet with universal
+favor. It was condemned in particular by the
+Democratic party, which was victorious at the
+polls in the fall elections, and installed a new
+administration in Washington, March 4, 1913.
+A special session of the new Congress was
+called to consider the tariff question, and to it
+was submitted another plan for the reform of
+our banking system, which was enacted into
+law December 23, 1913.</p>
+
+<p>This law provides for the incorporation of
+so-called "Federal Reserve Banks," the number
+to be not less than eight or more than twelve.
+The country is to be divided into as many districts
+as there are Federal Reserve Banks, and
+the national banks in each district must subscribe
+six per cent and pay in three per cent of
+their capital and surplus to the capital stock of<span class='pagenum'><a name="Page_99" id="Page_99">[Pg 99]</a></span>
+the Federal Reserve Bank located in that district.
+State banks and trust companies may
+contribute on compliance with the same conditions
+as national institutions. If, in the
+judgment of the organization committee, the
+amount of stock thus subscribed is inadequate,
+the public may be asked to subscribe, and as a
+last resort stock sufficient to raise the total to
+an adequate figure may be sold to the Federal
+Government. Cooperation between these Federal
+Reserve Banks and a degree of unity in
+their administration are provided for through
+a Federal Reserve Board of seven members,
+two ex officio and five to be especially appointed
+by the President of the United States.
+For the administration of each Federal Reserve
+Bank, a board of directors of nine members is
+provided for, six to be appointed by the member
+banks and three by the Federal Reserve Board,
+one of those three to be designated as Federal
+Reserve Agent and to be the intermediary between
+the Federal Reserve Board and the bank
+of whose directorate he is a member.</p>
+
+<p>The proposed Federal Reserve Banks are to
+hold a part of the reserves of member banks
+and to rediscount commercial paper, administer
+exchange accounts, and conduct clearings for
+them. They are also to serve as depositories<span class='pagenum'><a name="Page_100" id="Page_100">[Pg 100]</a></span>
+for the United States government, and to
+issue treasury notes obtained from the Federal
+Reserve Board in exchange for rediscounted
+commercial bills, these notes to be redeemable
+on demand by them and to be a first lien on all
+their assets. Their retirement, when the need
+for them has passed, is provided for by the
+requirement that no Federal Reserve Bank shall
+pay out any notes except its own, all others
+being sent in to the issuing bank or to the
+treasury for redemption. Against outstanding
+note issues a reserve of at least 40 per cent in
+gold must be maintained, and against deposits
+one of at least 35 per cent in gold or lawful
+money.</p>
+
+<p>This law provides remedies for the chief defects of our system;
+namely, a market for commercial paper which will enable a properly
+conducted bank at any time, through rediscounts, to secure notes,
+legal-tender money, or checking accounts in the amounts needed; a
+system of note issues which will fluctuate automatically with the
+needs of commerce for hand-to-hand money; a more economical
+administration of the reserve funds of the country, unattended by the
+dangers of the present system, and an administration of the funds of
+the federal government which is free from the evils of the independent
+treasury system.</p>
+
+
+
+<hr style="width: 65%;" />
+<p><span class='pagenum'><a name="Page_101" id="Page_101">[Pg 101]</a></span></p>
+<h2>CHAPTER V<br /><br />
+
+<span class="smcap">Commercial Banking in Other Countries</span></h2>
+
+
+<p>In contrast with that of the United States,
+the characteristic features of the commercial
+banking systems of Europe are the central
+bank performing important functions for all
+other financial institutions and for the government;
+a relatively small number of large institutions
+with many branches mediating between
+the central bank and the people; and the use of
+commercial and bank bills instead of promissory
+notes as the chief instruments of loans
+and discounts.</p>
+
+
+<h4><i>1. Common Features</i></h4>
+
+<p>The central banks differ considerably in organization and business
+methods, but perform essentially the same functions; that is, they act
+as financial agents for their respective governments; discount
+high-grade commercial and bankers' bills for other banks and
+usually for private persons; administer the cash reserves
+<span class='pagenum'><a name="Page_102" id="Page_102">[Pg 102]</a></span>
+of the entire country; and furnish the greater part and, in some cases,
+the entire supply of bank notes.</p>
+
+<p>The other large banks do most of the business with the public, the
+central bank's relations being chiefly with them and with the
+government. They conduct checking accounts with merchants,
+manufacturers, farmers, and others; receive and invest savings
+deposits, and deal in certain classes of investment securities;
+conduct the domestic and foreign exchanges; discount various kinds of
+commercial and banking bills, frequently those not available for
+discount at the central bank; and make advances on personal and other
+kinds of security. Their main offices are located either in the
+central money market of the country or in important financial centers,
+and their branches are extended to all places in which banking
+facilities are supposed to be needed. As a rule, they are less
+restricted by legislative provisions than are the national and state
+banks and trust companies of the United States, and are less carefully
+supervised and inspected by public officers.</p>
+
+<p>Commercial and bankers' bills are widely used as credit instruments
+between buyers and sellers and between bankers and their customers. A
+common method of procedure, when<span class='pagenum'><a name="Page_103" id="Page_103">[Pg 103]</a></span> a sale is made on time, is the
+drawing of a bill for the amount due, by the seller upon the buyer,
+payable at the end of the credit period agreed upon, and accepted by
+the buyer, and the discount of the bill by the seller's bank. In
+foreign and in some branches of domestic trade, the banker's bill is
+used on account of its more general acceptability as an object of
+discount, such bills usually being discountable by the central bank
+and by banks far distant from the place in which the bill originated.</p>
+
+<p>In case a buyer desires to furnish his creditors with bills of this
+kind, he arranges with his banker for a line of "acceptance" credit,
+which permits people who sell goods to him to draw bills upon his
+banker instead of himself, the banker agreeing to accept the bill and
+guaranteeing its payment at maturity. The seller will usually have no
+difficulty in discounting such a bill at his own bank, no matter how
+far removed it may be from the home of the buyer, the character of the
+accepting bank being known throughout the financial world. "Acceptance
+lines" are usually granted only on condition that the customer agrees
+to supply the bank with the funds necessary for meeting the accepted
+bills as they fall due, and to pay a fee for the accommodation. Ample
+security<span class='pagenum'><a name="Page_104" id="Page_104">[Pg 104]</a></span> that these obligations will be met is usually demanded.</p>
+
+
+<h4><i>2. The English System</i></h4>
+
+<p>In the English system, the central bank is the
+Bank of England, with the possible exception
+of a few private banks, the oldest financial
+institution in the country. It is privately owned
+and privately governed. Its board of directors,
+chosen by the stockholders, consists of twenty-four
+persons, a portion of whom are practically
+life members, being regularly reelected when
+their terms of office expire. The others usually
+serve alternate years only, vacancies being filled
+by promising young men selected from the business
+houses of London. The oldest director is
+regularly elected to the office of governor of
+the Bank, and the next oldest to that of deputy
+governor, both serving two years, the deputy
+governor regularly succeeding to the office of
+governor, and the ex-governors forming the
+life members of the board and constituting a
+kind of advisory council to the governor, and
+known as the Board of Treasury.</p>
+
+<p>The head office of the Bank of England is in
+London, and there are eleven branches, two in
+London and nine in the provinces. By a law
+passed in 1844, the Bank was divided into two<span class='pagenum'><a name="Page_105" id="Page_105">[Pg 105]</a></span>
+departments, called respectively the banking and
+the issue departments, the latter having exclusive
+charge of the issue of notes, and the former
+of all other branches of the bank's business.</p>
+
+<p>This same law prescribed the conditions
+under which notes could be issued. It provided
+that the Bank of England might issue &pound;14,500,000
+of notes in exchange for securities, and any
+amount in addition in exchange for an equal
+amount of coin or bullion. Additions to the
+amount issued in exchange for securities might
+be made by order of the government to the
+extent of two-thirds the amount of issues relinquished
+by the other issuing banks, all such
+banks in existence at the time the act was passed
+being permitted to retain, without increasing,
+their existing issues. Most of these other issues
+having been abandoned since 1844, the Bank
+of England is now permitted to issue in
+exchange for securities &pound;18,450,000. The securities
+against which these issues are made were
+transferred to the issue department by the banking
+department, and consist of the debt owed
+by the government to the bank and of other
+government or governmentally guaranteed securities.
+The issue department freely issues additional
+notes in exchange for an equal amount
+of gold coin or bullion, and on demand redeems<span class='pagenum'><a name="Page_106" id="Page_106">[Pg 106]</a></span>
+notes in gold coin. Since the amount of
+notes all the time outstanding greatly exceeds
+&pound;18,450,000, the business of the issue department
+is confined to the exchange of notes for
+gold coin and bullion and the redemption of
+notes in gold.</p>
+
+<p>The banking department receives and disburses
+the funds of the government, manages
+the public debt, and serves as the government's
+agent in most of its other financial operations;
+receives on deposit from other financial institutions
+the money which comes into their possession,
+and supplies them with such money funds
+as they need from day to day in payment of
+checks drawn against their balances; discounts
+bills of exchange with a minimum maturity of
+four, and in exceptional cases six, months; and
+to a limited extent makes advances on and
+invests in high-grade public and other securities.
+Besides the English government and financial
+institutions, it has other customers, but it
+is to be presumed that these are of a special
+character, since the conditions under which it
+does business with private persons are in most
+cases more onerous than those prescribed by
+other banks, and consequently not attractive to
+the ordinary business man.</p>
+
+<p>The so-called English Joint-Stock Banks are<span class='pagenum'><a name="Page_107" id="Page_107">[Pg 107]</a></span>
+classified into three groups, known as metropolitan,
+metropolitan and provincial, and provincial
+banks. The metropolitan banks have
+their head offices in London, and do not, as a
+rule, extend their branches beyond the suburbs
+of the metropolis. The metropolitan and provincial
+banks have their head offices in London
+and branches scattered throughout the provinces,
+as well as in various parts of the city and
+suburbs, and the provincial banks have their
+head offices in the larger provincial cities, and
+each one confines its branches usually to the
+town and country districts tributary to the city
+in which its head office is situated. Often the
+provincial banks establish branches in London.</p>
+
+<p>For banking purposes, these banks are the
+chief reliance of the agriculture, industry, and
+commerce of the country, but competing with
+and supplementing them are the bill brokers
+and discount houses, the private banks, and the
+foreign and colonial banks. The bill brokers and
+discount houses make a business of dealing in
+foreign and domestic bills of exchange. They
+buy in the first instance a large percentage of
+the bills brought to market, keep some of them
+until maturity, and sell the remainder to the
+other banks, usually indorsing them first. A
+large part of the capital employed in their busi<span class='pagenum'><a name="Page_108" id="Page_108">[Pg 108]</a></span>ness
+is obtained by loans made from the other
+banks, subject to call and secured by the bills
+they purchase deposited as collateral.</p>
+
+<p>The private banks are the remnant left of the
+oldest group in the country. There were private
+banks in London centuries before the Bank
+of England was incorporated, and previous to
+1826 the Bank of England was their only competitor.
+Since 1844 their number has steadily
+diminished. Those which remain have, as a
+rule, built up a special constituency, to the special
+interests of which they cater. Among them
+are strong institutions, but as a class their importance
+in the system is not great, and is waning.</p>
+
+<p>The foreign and colonial banks are branches
+of important institutions in foreign countries
+and the English colonies which have a considerable
+volume of business to transact in London.
+They serve as intermediaries between their
+respective countries and the English money
+market, and on account of the enormous volume
+of foreign commerce which is financed in London,
+their number is large, and the r&ocirc;le they
+play on that market is important.</p>
+
+<p>In the operation of this machinery, the most
+noteworthy features are the reserve system,
+and the administration of the discount rate of
+the Bank of England. There is no law on the<span class='pagenum'><a name="Page_109" id="Page_109">[Pg 109]</a></span>
+English statute books prescribing the amount
+of cash which banking or other financial institutions
+shall keep in their vaults. The custom
+of these institutions regarding that matter is
+to keep on hand relatively small sums and to
+rely upon the Bank of England or some other
+London banking house for the replenishment
+of their supply as needed. For this purpose,
+London and many provincial banks keep balances
+with the Bank of England, and other
+banks maintain balances with other London
+institutions. These balances may be obtained
+by the deposit of coin or Bank of England
+notes or by rediscounts. Another widely used
+resource is the calling of loans made to bill
+brokers or discount houses. Such loans or a
+considerable volume of bills of the kind discounted
+by the Bank of England, or both, are
+regularly carried by London banks and counted
+as a part of their reserves.</p>
+
+<p>On account of these practices, surplus cash
+not needed in the conduct of the current business
+of the country speedily finds its way into
+the vaults of the Bank of England, and additional
+supplies, when needed, come from this
+source. The administration of the cash reserves
+of the country thus becomes one of the important
+duties of the Bank of England, in the<span class='pagenum'><a name="Page_110" id="Page_110">[Pg 110]</a></span>
+performance of which variation of the rate
+charged on discounts is the most important
+device.</p>
+
+<p>Many years' experience has enabled the Bank
+to determine with a considerable degree of accuracy
+the volume of the demands for cash likely
+to be made upon it from day to day, and consequently
+the amount that it should keep on
+hand in the vaults. Whenever this amount
+approaches the minimum regarded as consistent
+with safety, the directors raise the rate of discount,
+and when the amount on hand becomes
+excessive, they lower it. The efficiency of this
+procedure in increasing the reserves in the one
+case and in decreasing them in the other is
+due to certain conditions and practices which
+deserve attention at this point.</p>
+
+<p>Long-established custom has made the rate
+of interest paid on deposits in London and other
+parts of England vary with the discount rate of
+the Bank, and on this account the market rate
+of discount also varies in the same manner.
+The Bank of England is thus ordinarily able to
+regulate the market for commercial paper. Since
+paper payable in London is a favorite form of
+investment for continental bankers, by raising
+its rate of discount and with it the market rate
+above the level of the rates of some or all of<span class='pagenum'><a name="Page_111" id="Page_111">[Pg 111]</a></span>
+the continental centers, the Bank of England
+is able to induce these bankers to send money to
+London for investment and thereby to increase
+her reserves, and by lowering its rate below the
+level of the rates in these continental centers,
+she is able to induce them to sell some of the
+paper they already hold, and thus to furnish a
+market for her surplus funds and diminish her
+reserves.</p>
+
+<p>On account of the readiness with which the
+international gold movement responds to variations
+in the discount rate of the Bank of England,
+the need for an elastic system of bank
+note issues is not felt in England to the same
+extent as in other countries. It is this fact,
+doubtless, which explains the retention to the
+present day of the essentially inelastic bank
+note system created by the act of 1844.</p>
+
+
+<h4><i>3. The French System</i></h4>
+
+<p>In France, the Bank of France is the central
+institution. It is the oldest of the important
+French banks of the present day, having been
+established in 1800 by Napoleon the First.
+Its capital, amounting at the present time to
+182,500,000 francs, or approximately $36,500,000,
+is supplied by about 30,000 private<span class='pagenum'><a name="Page_112" id="Page_112">[Pg 112]</a></span>
+stockholders, about 10,000 of whom own only
+one share each.</p>
+
+<p>The two hundred largest stockholders appoint
+a General Council, consisting of fifteen regents
+and three censors. Five regents and all the
+censors must be chosen from the commercial
+and industrial classes, and three of the remaining
+ten regents must be selected from the <i>tresoriers
+payeurs g&eacute;n&eacute;reaux</i>, an important group of
+representatives of the public treasury scattered
+throughout the country. The General Council
+as well as the stockholders' assembly is presided
+over by a governor, who, together with two
+sub-governors, is appointed by the President of
+the Republic upon the nomination of the Minister
+of Finance. The governor is the chief
+executive officer of the bank and the final source
+of authority in most matters of vital importance.
+He is responsible to the government
+rather than to the stockholders, and is subject
+to removal only by the power which appointed
+him.</p>
+
+<p>The Bank of France has about two hundred
+branches and sub-branches located in Paris and
+all the important cities and towns in the Republic,
+also over three hundred so-called agencies
+located in smaller places and transacting only
+a limited line of business. Each branch has a<span class='pagenum'><a name="Page_113" id="Page_113">[Pg 113]</a></span>
+manager appointed in substantially the same
+manner as the governor, and the sub-branches
+and agencies are administered through the
+branches. Through this network of offices,
+every part of the country is brought into direct
+and easy access to the Bank.</p>
+
+<p>The Bank of France is the only institution in
+the country privileged to issue circulating notes.
+The maximum allowed it is regulated by law
+and is increased from time to time. At present
+it amounts to 5,800,000,000 francs, or approximately
+$1,160,000,000. The bank is obliged to
+redeem these notes on demand in gold coin or
+silver five-franc pieces, but it is free to determine
+how much cash it shall keep on hand
+for that purpose, and when and under what
+conditions it shall issue them.</p>
+
+<p>Its discount operations are limited by law to
+bills maturing in not more than three months,
+and bearing the signatures of at least three
+solvent persons, or two signatures and secured
+in addition by specified forms of collateral. It
+is also permitted to make loans or advances, as
+they are called, on securities of the French
+government maturing at fixed dates, gold and
+silver bullion, and the money of foreign countries,
+and obligations of the French railroads,
+French cities, and departments, the Cr&eacute;dit<span class='pagenum'><a name="Page_114" id="Page_114">[Pg 114]</a></span>
+Foncier, and the Soci&eacute;t&eacute; Algerienne. It is also
+obliged to loan 180,000,000 francs ($36,000,000)
+to the government without interest.</p>
+
+<p>One of the chief branches of the business of
+the Bank of France is the service of the public
+treasury and the performance of other financial
+duties imposed upon it by the government.
+It serves as the depository and disbursing agent
+for the government, and performs important
+functions connected with the public debt, the
+mints, the savings institutions, and publicly
+administered trusts of various kinds. It is also
+the depository for the banking reserves of the
+country. In France, as in England, it is not the
+custom of banking and other financial institutions
+to hoard money in their vaults, but to
+depend upon the Bank of France for supplies
+as needed. To this end they keep funds on
+deposit there, and regularly rediscount the paper
+of their customers when balances need to be
+replenished.</p>
+
+<p>Through its network of branches and agencies
+spread over the entire country, the Bank
+of France is able economically and expeditiously
+to conduct the intermunicipal exchanges of
+the country. It participates in local clearings
+through membership in the clearing houses, at
+which balances are paid by checks drawn against<span class='pagenum'><a name="Page_115" id="Page_115">[Pg 115]</a></span>
+credits on its books maintained for that purpose
+by all members, and it conducts so-called
+transfer accounts with other banks and financial
+institutions against which drafts can be drawn
+payable at any place where one of its offices is
+located. Such drafts constitute the chief means
+through which transfers of funds are made
+between different places.</p>
+
+<p>The business of the Bank of France with
+private persons is limited by the requirement
+that all paper discounted must have three signatures,
+or two signatures and collateral security,
+and that advances can only be made on
+the security of the forms of collateral indicated
+above. Most business men find it either inconvenient
+or impossible to comply with these
+conditions, and consequently transact most of
+their business with other banking institutions.
+The third signature on paper discounted by the
+Bank is, therefore, usually supplied by these
+institutions, which thus act as an intermediary
+between the Bank and the commercial world.</p>
+
+<p>Next to the Bank of France, the most important
+banking institutions of the country are the
+Cr&eacute;dit Foncier, the Cr&eacute;dit Lyonnais, the Comptoir
+d'Escompte de Paris, the Soci&eacute;t&eacute; G&eacute;n&eacute;rale,
+and the Cr&eacute;dit Industrielle et Commercial. The
+Cr&eacute;dit Foncier is principally engaged in extend<span class='pagenum'><a name="Page_116" id="Page_116">[Pg 116]</a></span>ing
+credit based on real estate security, but it
+also discounts large amounts of commercial
+paper. Its organization is modeled after that
+of the Bank of France, and, like that institution,
+it is controlled by the state. Since it is
+primarily an investment bank, a description of
+its principal operations will be deferred to the
+next chapter.</p>
+
+<p>The four other banks mentioned are a product
+of the commercial life of modern France,
+all having been established since the revolution
+of 1848. They are all heavily capitalized,
+the smallest, the Cr&eacute;dit Industrielle et
+Commercial, having a capital of 100,000,000
+francs ($20,000,000), and the largest, the
+Soci&eacute;t&eacute; G&eacute;n&eacute;rale, having a capital of 400,000,000
+francs ($80,000,000), and all extend their
+business by means of branches. The Cr&eacute;dit
+Lyonnais and the Comptoir d'Escompte have
+branches in France itself, the French colonies,
+and a number of foreign countries; the Soci&eacute;t&eacute;
+G&eacute;n&eacute;rale, throughout France, in London, and
+San Sebastian, Spain; and the Cr&eacute;dit Industrielle
+et Commercial, in Paris and its suburbs.
+Taken together, these four institutions supply
+the French people in Paris and the Provinces
+with banking facilities for both their domestic
+and their foreign business. While in some of<span class='pagenum'><a name="Page_117" id="Page_117">[Pg 117]</a></span>
+the larger provincial cities local banks with
+branches in surrounding towns and sometimes
+in Paris are to be found, branches of one or
+more of these four institutions are the chief
+reliance in nearly all places.</p>
+
+<p>These institutions cater to all the financial
+needs of their constituents. They supply their
+needs for cash and for exchange; conduct
+checking accounts for them, although these are
+not used in France to the same extent as in the
+United States; discount their commercial paper
+and make loans to them on personal and other
+security; and receive on deposit their savings
+and provide them with investments. In performing
+these functions they make extensive
+use of the Bank of France and of the stock
+exchanges of the country. With the former
+they conduct checking and transfer accounts
+and rediscount their customers' bills, by these
+means procuring the coin, bank notes, and
+exchange needed; and from the latter they
+obtain the investment securities required for
+the satisfaction of both their own and their
+customers' needs.</p>
+
+<p>Gold and silver coin and the notes of the
+Bank of France constitute the hand-to-hand
+money of the country. The latter form the elastic
+element, and their operation approximates<span class='pagenum'><a name="Page_118" id="Page_118">[Pg 118]</a></span>
+perfection. When demand for money increases
+for any reason, more commercial bills are presented
+for discount to the banks, which, after
+indorsement, exchange them at the Bank of
+France for the notes with which they supply
+their customers' needs. The note issues of the
+Bank thus expand in direct and immediate
+response to the needs of the country for more
+currency. When such needs have passed, the
+discounted bills, in exchange for which these
+notes were issued, mature and are paid in
+greater volume than new bills are created and
+presented for discount, and notes, or a corresponding
+amount of coin, accumulate in the
+vaults of the Bank. The notes are cancelled
+and destroyed and the coin is kept in store
+until it again passes into circulation through
+exchange for notes still outstanding, or for
+discounted bills.</p>
+
+<p>On account of the elasticity of its note issues, and the extent to
+which they are used in the commerce of the country, the Bank of France
+has occasion to change its rate of discount less frequently than any
+other bank in Europe. The result is that the country enjoys the
+advantage of steady and low rates, since in France, as in England, the
+discount rate of the central bank controls the market rate, and the
+ease and inex<span class='pagenum'><a name="Page_119" id="Page_119">[Pg 119]</a></span>pensiveness with which the notes are issued make low
+rates possible.</p>
+
+
+<h4><i>4. The German System</i></h4>
+
+<p>The Imperial Bank, with head offices in Berlin, and about one hundred
+branches and more than four hundred sub-branches scattered throughout
+the country, plays essentially the same r&ocirc;le in the German banking
+system that the Bank of England and the Bank of France play in the
+English and French systems, respectively. It was established in 1875
+by an act which also profoundly affected the entire banking system of
+the country, and its development has been aided and directed by
+several acts passed subsequently.</p>
+
+<p>Its capital, supplied by the general public, amounts at the present
+time to 180,000,000 marks ($45,000,000), and it is governed by three
+boards, known respectively as the Curatorium, the Direktorium, and the
+Central Ausschuss.</p>
+
+<p>The Curatorium is composed of five members, of which body the
+Chancellor of the Empire is ex-officio chairman. A second member is
+appointed by the Emperor, and for that position he has always selected
+the Prussian<span class='pagenum'><a name="Page_120" id="Page_120">[Pg 120]</a></span> Minister of Finance, and the three remaining members are
+appointed by the Bundesrath. It meets quarterly and reviews all the
+operations of the bank. It, or rather, the Chancellor, its chairman,
+has supreme power, which, however, he has never exercised except on
+one occasion, when he ordered the bank not to accept Russian
+securities as collateral for loans, an order since revoked.</p>
+
+<p>The administration of the bank's affairs is chiefly in the hands of
+the Direktorium, consisting of a president, vice president, and seven
+other persons, all of whom are appointed by the Emperor for life, from
+a list of candidates recommended to him by the Bundesrath. This board
+selects the staff of bank officers and clerks, and superintends the
+daily conduct of the bank's business.</p>
+
+<p>The Central Ausschuss is a committee of fifteen persons elected by and
+representing the stockholders. It holds monthly meetings; has the
+right to demand complete information concerning the bank's operations,
+to discuss all matters freely, and to tender advice and counsel; but
+it has no power to control except regarding two matters: it can set a
+limit to the amount of securities the bank can purchase, and can veto
+any proposed transactions with<span class='pagenum'><a name="Page_121" id="Page_121">[Pg 121]</a></span> the Imperial Government or with the
+governments of any of the states.</p>
+
+<p>Like the other central banks described above, it receives on deposit
+and disburses the funds of the Imperial Government; administers the
+coin reserves of the country; conducts the domestic exchanges, and
+serves as a bankers' bank. It is free to do business with the general
+public, but the legal and other limitations under which it must
+operate give the other banking institutions of the country the
+advantage in competition for this kind of business.</p>
+
+<p>It shares the right of note issue with four other banks, which, out of
+thirty-two that retained that privilege at the time the Imperial
+banking system was established, alone retain it at the present time.
+The issues of these four institutions, however, are relatively small
+in volume, and the Imperial Government has the right to deprive them
+of it January 1, 1921, or any tenth year thereafter, on condition of
+giving one year's notice of its intention so to do. The issues of the
+Imperial Bank are subject to the following regulations: they must be
+covered by cash and discounted bills maturing in not more than three
+months, and signed by at least two solvent persons, the proportion of
+cash being not less than one-third of the total.<span class='pagenum'><a name="Page_122" id="Page_122">[Pg 122]</a></span> If the total amount
+issued exceeds the Bank's holdings of gold bullion, specie, and
+government notes by more than 750,000,000 marks at the end of March,
+June, September, and December, and 555,000,000 marks at other times, a
+tax of five per cent per annum is levied on the excess.</p>
+
+<p>The law confers upon the Bank the following powers:</p>
+
+<div class="blockquot"><p>a. To buy and sell gold and silver coin and
+bullion.</p>
+
+<p>b. To discount, buy and sell bills of exchange
+whose maturity shall be three months at the longest,
+and for which usually three, and in no case less
+than two, accredited vouchers shall stand good;
+furthermore, to discount, buy and sell bonds of the
+Empire or of any German state, or domestic municipal
+corporations, provided such bonds mature within
+three months at the longest and conform to the new
+standards of value.</p>
+
+<p>c. To grant interest-bearing loans for terms no longer than three
+months, upon movable security (lombard, or deposit loan business),
+such as: gold and silver, coined or uncoined; interest-bearing or
+non-transferable bonds maturing within a maximum term of three months,
+whether of the Empire, a German state, or of domestic municipal
+corporations; interest-bearing non-transferable bonds on which the
+interest is guaranteed by the Empire or by any one of the German
+states; capital stock and stock priority shares, fully paid up, of
+German <span class='pagenum'><a name="Page_123" id="Page_123">[Pg 123]</a></span>railway companies in actual operation; mortgage bonds of the
+provincial, municipal, or other land credit institutions of Germany
+that are subject to state control, including shares of German mortgage
+banks to an amount never exceeding three-fourths of their market
+value; interest-bearing non-transferable bonds of foreign states, and
+foreign railway priority bonds, covered by state security, in amounts
+not exceeding 50 per cent of their market value; bills of exchange of
+recognized soundness, after deducting at least 5 per cent of their
+market value; and pledges of native merchandise, in amounts within
+two-thirds of their value.</p>
+
+<p>d. To negotiate collections for the account of individuals,
+institutions, and governing boards; and upon security, as before
+mentioned, to furnish payments, and make orders or conveyances on the
+branch banks or on correspondents.</p>
+
+<p>e. Upon prior security, to buy on behalf of outside parties, effects
+of all kinds, including the precious metals; and after delivery to
+sell the same.</p>
+
+<p>f. To receive money for circulation or on deposit, with or without
+interest, the sum of interest-bearing deposits not to exceed that of
+the capital stock and reserve fund.</p>
+
+<p>g. To accept the custody or other management of objects of value.</p></div>
+
+<p>Besides the Imperial Bank there are in Germany eight very large and
+powerful banking institutions and a considerable number of smaller and
+less powerful ones. The eight<span class='pagenum'><a name="Page_124" id="Page_124">[Pg 124]</a></span> great ones have each its head office in
+Berlin, and connections, through branches, agencies, and controlled
+institutions, in other parts of the Empire, the German colonies, and
+foreign countries. Together they control about eighty per cent of the
+entire banking capital of the Empire. In reality they are federations
+of banking institutions, many of which were once independent, and some
+of which were promoted and established in the interests of the group.</p>
+
+<p>While these eight institutions are primarily engaged in commercial
+banking, they are also promoters on a large scale of German industry
+and commerce, both at home and abroad. Through interlocking
+directorates, stock ownership, and in other ways, they are closely
+allied with the leading industrial and transportation interests of the
+Empire, and they have been and are leaders in the promotion of these
+interests in other parts of the world, notably in the Orient, South
+America, and Africa. They are, therefore, leaders on the stock as well
+as the discount markets of the country, and are widely influential in
+investment as well as commercial banking affairs.</p>
+
+<p>These, as well as the other commercial banks, consisting for the most
+part of local institutions and those catering to special interests,
+use<span class='pagenum'><a name="Page_125" id="Page_125">[Pg 125]</a></span> the Imperial Bank for rediscounts, for transfers of funds between
+different parts of the country, and as a depository for surplus funds.
+They do not normally keep on hand more cash than is needed for till
+purposes. Being in easy reach of an office of the Imperial Bank,
+supplies can be obtained at any time by checks drawn against credit
+balances or through rediscounts of commercial bills. Special accounts
+are carried for transfer purposes and are used even in the transfer of
+funds between different offices of the same institution.</p>
+
+<p>On account of its right to issue notes against commercial securities,
+the Imperial Bank has the power to meet the demands made upon it and
+to supply the country with an elastic medium of exchange. The levy of
+a tax upon the excess of the issues above a prescribed maximum
+prevents perfect elasticity, unless this maximum be kept above the
+highest point which the circulation would normally reach, since the
+actual levy of the tax forces the rate of discount to such a point as
+to seriously restrict commercial operations. However, since the line
+between commercial and investment banking is not drawn by the great
+Berlin banks with the care that is desirable, and since they have been
+able at times, especially on account of<span class='pagenum'><a name="Page_126" id="Page_126">[Pg 126]</a></span> their foreign connections, to
+embarrass the Imperial Bank in its efforts to maintain adequate specie
+reserves, such a tax is probably a desirable safeguard against
+over-expansion of credit.</p>
+
+
+<h4><i>5. The Canadian System</i></h4>
+
+<p>In important respects the Canadian banking system differs from those
+of the European countries which have been described and from that of
+the United States. It consists of a varying number of relatively large
+institutions, each with several offices administered from a common
+center, but without a central bank. For some time the total number has
+decreased, since 1900 from thirty-six to twenty-seven, in spite of the
+fact that the Canadian law, like that of the United States, provides
+for the formation of new banks at any time, on compliance with certain
+prescribed conditions, including a subscribed capital of at least
+$500,000 and a paid-up capital of at least $250,000. The number of
+branches, however, has increased rapidly, much more rapidly than the
+population.</p>
+
+<p>The most noteworthy legal provisions pertaining to the banking
+business in Canada concern note issues and loans and discounts.
+Regarding the establishment of branches, the<span class='pagenum'><a name="Page_127" id="Page_127">[Pg 127]</a></span> amount, and, with one
+exception, the composition of the reserves, and many other matters
+carefully regulated by law in the United States, Canadian bankers are
+left free to follow their own judgment. Neither is there public
+examination of banks in Canada. Reports must be regularly made to the
+Minister of Finance, and he may call for special reports whenever he
+desires so to do; but neither he nor any other public officer has the
+right to examine a bank's books or to quiz its officers or directors.
+In contrast with banking legislation in the United States, another
+peculiar feature of Canadian law is the incorporation of the Canadian
+Bankers' Association, an organization resembling in essentials the
+American Bankers' Association, and the assignment to it of important
+functions connected with the issue of notes and the winding up of the
+affairs of failed banks.</p>
+
+<p>Regarding note issues, the chief provisions
+of the Canadian law are as follows: Each bank
+is permitted at any time to issue circulating
+notes to the amount of its capital stock, and
+between October 1 and January 1 an additional
+amount, equal to fifteen per cent of its combined
+capital and surplus, may be issued on payment
+of a tax to be assessed by the Governor in
+Council, not to exceed five per cent per annum.<span class='pagenum'><a name="Page_128" id="Page_128">[Pg 128]</a></span>
+The notes are a first lien on all the assets of
+the bank that issued them, and must be redeemed
+on demand at the head office and at such other
+places as are designated by a committee of public
+officials known as the Treasury Board. As
+such redemption centers, this board has named
+Toronto, Montreal, Halifax, Winnipeg, Victoria,
+St. John, and Charlottetown. Each bank
+must also deposit with the Minister of Finance
+a sum of money equal to five per cent of its
+average circulation. The aggregate of the
+amounts thus deposited by all the banks is
+known as the "circulation redemption fund,"
+and may be used in the redemption of the notes
+of a failed bank. In case the fund is so used,
+and the liquidated assets of the bank prove to
+be inadequate for its complete replenishment, a
+tax sufficient to meet the deficit is levied on the
+solvent banks in proportion to their circulation.</p>
+
+<p>Regarding loans and discounts, the law aims
+rather to protect than to restrict the operations
+of the banks. They may "deal in, discount,
+and lend money, and make advances upon the
+security of, and may take as collateral security
+for any loans, ... bills of exchange, promissory
+notes, and other negotiable securities, or
+the stocks, bonds, debentures, and obligations
+of municipal and other corporations, whether<span class='pagenum'><a name="Page_129" id="Page_129">[Pg 129]</a></span>
+secured by mortgage or otherwise, or Dominion,
+provincial, British, foreign, and other public
+securities." The only important restriction
+placed upon their loaning activities is the prohibition
+of making advances on the security
+of landed or other immovable property.</p>
+
+<p>In making loans to wholesale dealers and
+shippers of produce, the law safeguards the
+banks by allowing them to take a blanket lien
+on the goods dealt in by the borrower. This
+lien applies not only to the goods in possession
+at the date of making the loan, but to any
+others which may be substituted for them or
+manufactured out of them. This lien is prior
+to that of any other unpaid vendor, except one
+acquired before the bank's lien was established.</p>
+
+<p>The chief officers of a Canadian bank are
+the general manager, the chief accountant, the
+superintendent of branches, the inspector, and
+the secretary, all connected with the head office,
+and the managers of the branches.</p>
+
+<p>The general manager is the chief executive
+and the chief in authority. While he is subject
+to the board of directors, on account of his
+wide experience and knowledge his judgment
+is usually followed. The other officers are
+appointed by him with the approval of the
+board, but, almost without exception, from per<span class='pagenum'><a name="Page_130" id="Page_130">[Pg 130]</a></span>sons
+who have served the bank in subordinate
+capacities. The general manager himself is
+nearly always a man who has passed through
+the hierarchy of positions from the bottom up,
+and is therefore thoroughly familiar with every
+detail of the bank's business and history. The
+inspector has charge of the examination of the
+branches, and this work is so carefully and
+thoroughly done that examination by public
+officials is not considered necessary, or regarded
+as desirable by most Canadian bankers.
+Regarding this matter, however, there are
+differences of opinion, and changes in the near
+future are not improbable. The managers of
+the branches are in strict subordination to the
+authority of the general manager, though they
+are necessarily allowed a large amount of discretionary
+authority in matters pertaining to
+the branch over which they preside. Unless
+prevented by distance, they are in daily communication
+with the head office or with one
+of its representatives.</p>
+
+<p>In the operation of the Canadian system,
+noteworthy features are the methods of controlling
+credits, of managing the issues and the
+reserves, and of securing unity or at least harmony
+of action. It is the usual practice in
+Canada for a business man to do all his banking<span class='pagenum'><a name="Page_131" id="Page_131">[Pg 131]</a></span>
+with one institution. This practice is rendered
+possible because most of the banks are large
+enough to take proper care of almost any business
+establishment in the Dominion, and
+because experience has demonstrated its wisdom.</p>
+
+<p>The banks compete vigorously for new
+business but do not attempt to attract one
+anothers' customers. Indeed a customer who
+desires to change his banking connections is
+looked upon with suspicion and is subjected to
+a very careful examination by the bank that
+is asked to take him on, including a careful
+discussion of all the aspects of the matter with
+the bank he desires to leave. The result of this
+practice is that a man's banker is thoroughly
+familiar with his affairs, especially his credit
+relations, and at the same time feels under obligations
+to render him such support and guidance
+as he deserves. On account of this
+practice, also, commercial paper brokerage
+does not flourish in Canada.</p>
+
+<p>The notes of the Canadian banks constitute
+practically all of the hand-to-hand money of
+the country in denominations above two dollars.
+The one and two dollar denominations are supplied
+by Dominion notes&mdash;all but $30,000,000
+of which are represented by gold coin or<span class='pagenum'><a name="Page_132" id="Page_132">[Pg 132]</a></span>
+bullion&mdash;and the lower denominations by subsidiary
+silver supplied by the government.</p>
+
+<p>Each bank pays out its notes freely to supply
+the cash demands of its customers, and receives
+from them on deposit, without hesitation or
+depreciation, the notes of other banks as well
+as its own. The former, however, are either
+sent in for redemption as soon as received or
+used in making payments to the banks which
+issued them. Thus notes are cleared as readily
+as checks and the volume in circulation expands
+and contracts in automatic response to business
+needs. The fact that these notes are neither
+legal tender nor guaranteed by the government
+does not interfere with their circulation&mdash;daily
+clearings, the first lien on assets, and the
+redemption fund amply protecting holders
+against the possibility of loss&mdash;but does prevent
+their being hoarded as reserves or for any
+other purpose and thus contributes towards
+their elasticity.</p>
+
+<p>The connection now established by law between
+the maximum volume of bank note
+issues and the capitalization of the banks renders
+necessary the increase of the latter in correspondence
+with the expansion of commerce
+in order to prevent a contraction of credit.
+Present law, however, does not provide for<span class='pagenum'><a name="Page_133" id="Page_133">[Pg 133]</a></span>
+such an increase. It is left to the voluntary
+action of the banks, which seem inclined to increase
+surplus funds rather than capital. The
+permission granted in 1908 to extend issues
+beyond the amount of capital during the crop
+moving season, on payment of a tax, is a makeshift
+and not a solution of the difficulty, since
+a tax on issues is a means of forcing contraction
+of credit and not of adjusting issues to
+legitimate needs.</p>
+
+<p>Since Canadian banks are able to meet the
+greater part of the public demand for hand-to-hand
+money by means of their own notes,
+they do not need to carry in their vaults large
+amounts of gold and silver coin and Dominion
+notes. They keep on hand only so much as
+experience indicates they are likely to be called
+upon to supply to their customers, plus a
+reasonable margin for safety and for the payment
+of clearing house balances. The greater
+part of their reserves consists of balances in
+banks outside of Canada, especially in the
+United States and England, call loans in New
+York City, and easily salable securities. In
+case of an emergency of any kind these resources
+may be transformed into gold or their
+customers supplied with foreign exchange,
+which is often as much or even more needed.<span class='pagenum'><a name="Page_134" id="Page_134">[Pg 134]</a></span>
+Gold can at any time be exchanged for Dominion
+notes if that is the currency wanted.</p>
+
+<p>The lack of a central bank and of a rediscount
+market is to a degree compensated
+by unity of action among the banks. This is
+the result not so much of law as of conditions,
+among which the most important are: the fact
+that the six largest banks do fifty per cent of
+the business and that one of these, the Bank of
+Montreal, holds most of the deposits of the
+government and is generally spoken of as the
+government bank; the fact that the general
+managers are experts, in first-hand touch
+through their branches with business conditions
+in Canada and other parts of the world,
+and in possession of the same data concerning
+these conditions, and through the same
+kind of acquired skill and similar experiences
+likely to draw the same or at least similar
+conclusions from this data; common interests
+in the prosperity of the country and in the
+prevention of speculative excesses and mutual
+interdependence in the successful conduct of
+their everyday business as well as in times
+of emergency and stress: and the Bankers'
+Association, which through its journal gives
+authoritative expression to the best banking
+opinion and actually acts for the banks in<span class='pagenum'><a name="Page_135" id="Page_135">[Pg 135]</a></span>
+many matters of common interest. To what
+extent this community of action takes the
+form of rediscounts for each other in ordinary
+times it is impossible for an outsider
+to say, but that it is operative in times of
+stress is indicated by the manner in which the
+failures of the Bank of Ontario in 1906 and
+the Sovereign Bank in 1908 were handled.</p>
+
+<p>In both of these cases the public was protected
+against loss and panic was averted by
+the cooperative action of the other banks in
+assuming the obligations of these institutions
+to the public, and in winding up their affairs in
+such a manner as to occasion little disturbance.</p>
+
+<p>While Canadian banks are free to carry on
+investment as well as commercial banking
+operations, their published reports indicate that
+they take care to avoid confusion of the two,
+or the infringement of one upon the other.
+Their holdings of investment securities are kept
+well within the limits set by their aggregate
+capital, surplus, and savings funds, and their
+method of handling commercial business, based
+as it is on accurate knowledge of their customer's
+operations and upon the lien upon
+produce heretofore described, prevents their
+acceptance, through ignorance, of investment
+securities under commercial disguise.</p>
+
+
+
+<hr style="width: 65%;" />
+<p><span class='pagenum'><a name="Page_136" id="Page_136">[Pg 136]</a></span></p>
+<h2>CHAPTER VI<br /><br />
+
+<span class="smcap">Investment Banking</span></h2>
+
+
+<p>In the economy of nations the encouragement and promotion of saving
+and the accumulation, distribution, and investment of capital are as
+essential as the conduct of exchanges, but the performance of these
+functions has not been segregated and institutionalized to the same
+extent as has commercial banking. Vast amounts of capital are invested
+directly by the people to whom it belongs without the aid of middlemen
+and large amounts are also invested through brokers of one kind and
+another who can hardly be classed as bankers. The most important types
+of institutions which have been developed in connection with these
+functions are savings banks, trust companies, bond houses and
+investment companies, land banks, and stock exchanges.</p>
+
+
+<h4><i>1. Saving and Savings Institutions</i></h4>
+
+<p>Saving is an individual matter for which the
+essential conditions are the development of the
+<span class='pagenum'><a name="Page_137" id="Page_137">[Pg 137]</a></span>
+instinct to make provision against uncertainties
+of future income and to better the material
+condition of one's self and family, and a surplus
+of income above necessary daily expenditures.
+In order to secure the realization of
+these conditions to as great an extent as possible,
+many agencies cooperate in all modern
+nations, among them savings institutions. Included
+among these are various forms of provident
+associations, sometimes independently organized
+and sometimes connected with other
+organizations, insurance associations of many
+kinds, building and loan societies, and savings
+banks.</p>
+
+<p>The need for savings institutions varies
+greatly among the different nations and among
+different classes of people in the same nation.
+Among people of great wealth the surplus of
+income above expenditures is so great that large
+savings can hardly be avoided, and among all
+the well-to-do classes the margin from which
+savings are possible is sufficiently large and the
+desire to save sufficiently great to insure large
+accumulations of capital. Among these classes
+there is little or no need for institutions designed
+primarily for the development of the
+saving instinct. What they need are institutions
+for the safe keeping, accumulation, and<span class='pagenum'><a name="Page_138" id="Page_138">[Pg 138]</a></span>
+investment of the savings which they are constantly
+making. The principal work of savings
+institutions, therefore, pertains to the classes of
+people who are not well-to-do and who need
+encouragement and help in their efforts to improve
+their material condition, if they are so
+inclined, and stimulus to make such efforts, if
+they are not so inclined.</p>
+
+<p>The means available to savings institutions
+for the accomplishment of these ends are the
+urging of the importance of saving upon the
+attention of people who do not adequately
+appreciate it, the placing at their easy disposal
+of facilities for making savings when they have
+the ability and inclination to save, and the
+application of pressure of various kinds to
+compel or induce saving.</p>
+
+<p>In the application of these means the
+methods employed by the various groups of
+institutions mentioned differ widely and they
+are efficient in different degrees, partly because
+they have other objects in view besides the promotion
+of saving and partly because they deal
+with different classes of people. Savings banks
+constitute the only group to which the term
+bank can properly be applied and consequently
+the only one to which attention will here be
+given.<span class='pagenum'><a name="Page_139" id="Page_139">[Pg 139]</a></span></p>
+
+<p>In a book entitled, <i>Savings and Savings Institutions</i>, written by
+Professor Hamilton of Syracuse University, the following definition is
+given:<a name="FNanchor_A_1" id="FNanchor_A_1"></a><a href="#Footnote_A_1" class="fnanchor">[A]</a></p>
+
+<div class="blockquot"><p>Savings banks are institutions established by
+public authority, or by private persons, in order to
+encourage habits of saving by affording special
+security to owners of deposits, and by the payment
+of interest to the full extent of the net earnings,
+less whatever reserve the management may deem
+expedient for a safety fund; and in furtherance of
+this purpose bank offices are located at places where
+they are calculated to encourage savings among
+those persons who most need such encouragement.</p></div>
+
+<div class="footnote"><p><a name="Footnote_A_1" id="Footnote_A_1"></a><a href="#FNanchor_A_1"><span class="label">[A]</span></a> Pages 161 and 162.</p></div>
+
+<p>Professor Hamilton classifies these institutions as trustee,
+cooperative, municipal, and postal savings banks. In the first group
+he places institutions managed by boards of philanthropically inclined
+persons who serve without pay; in the second, those managed
+cooperatively by the people who make use of them; in the third, those
+established and administered by municipalities; and in the fourth,
+those connected with the post-office departments of governments. The
+strength of trustee savings banks lies in the comparatively low costs
+of their administration and in the fact that in their <span class='pagenum'><a name="Page_140" id="Page_140">[Pg 140]</a></span>investments
+they are likely to enjoy the advantages of the judgment and enthusiasm
+of people skilled in the investment business; that of cooperative
+savings banks, in their adaptability to the special needs of their
+constituents and in the education which cooperative administration
+involves; and that of municipal, and especially of postal savings
+banks, in their capacity to place their services within the easy reach
+of all who need them and in the confidence which their public
+character inspires.</p>
+
+<p>In the investment of the funds intrusted to savings banks, safety and
+as large returns as are consistent with it, rather than ease of
+liquidation, are the prime considerations, and hence they usually take
+the form of high grade investment securities rather than of commercial
+paper. Their deposits are usually subject to withdrawal only after due
+notice, and, being savings deposits, their withdrawal usually follows
+only after the lapse of a considerable period of time.</p>
+
+<p>The purpose of their withdrawal is frequently investment and this is
+sometimes made through the agency of the bank which held the deposit
+and may involve merely a transfer of securities.</p>
+
+<p>Outside of the New England and middle<span class='pagenum'><a name="Page_141" id="Page_141">[Pg 141]</a></span>
+states, savings banks were rare in this country
+previous to the inauguration of our postal savings
+bank system in 1911. The explanation of
+this condition is doubtless to be found chiefly
+in the wide extension of private, state, and
+national banks, and trust companies, practically
+all of which conduct savings departments and
+solicit the patronage of savers. These institutions
+have coveted this field and have not
+encouraged the establishment of savings banks.
+There is reason to believe, however, that they
+have not worked the field as thoroughly as savings
+banks would have done and that, on
+account of the dominance of their other interests,
+they are not as well fitted as savings banks
+to work the field thoroughly. Moreover it is
+probable that they are not able to pay as high
+a rate on deposits as well conducted savings
+banks would be able to pay. There seems,
+therefore, to be room, and probably need, here
+for the development of savings banks of some
+at least, if not all, of the types above described.</p>
+
+
+<h4><i>2. Trust Companies</i></h4>
+
+<p>Within a comparatively short period of time
+the trust company has developed into an institution
+of prime importance in the United<span class='pagenum'><a name="Page_142" id="Page_142">[Pg 142]</a></span>
+States. In the beginning of its history it was,
+as its name implies, simply an institution for
+the administration of trusts of various kinds,
+such as the execution of wills, the guardianship
+of minors and other dependent persons, the
+administration of the estates of persons either
+unable or unwilling to administer them for
+themselves, and trusteeship under corporate
+mortgages, especially those of railroads. In
+the latter capacity they became mortgagees in
+trust for bondholders, registering the bonds,
+collecting the interest as it became due, paying
+the bonds at maturity, and in case of default
+taking the legal steps which were necessary for
+the protection of the bondholders.</p>
+
+<p>The execution of these trusts involved in
+most cases the custody and investment of
+funds, so that investment banking became a
+part of their business almost from the beginning,
+and, in time, in states in which the laws
+passed for their regulation did not prevent, they
+added commercial banking to their other functions.
+In some cases they have also become
+promoters of enterprises, taking the initiative
+in the organization of corporations for various
+industrial and commercial purposes. In New
+York City, and in individual cases in some
+other large cities, the commercial end of the<span class='pagenum'><a name="Page_143" id="Page_143">[Pg 143]</a></span>
+business has become the dominant one; in the
+former case on account of the ability of these
+companies, unrestricted by certain laws applying
+to state and national banks, to offer to commercial
+customers better terms than their
+competitors. In most states, however, especially
+in the large cities in which they chiefly flourish,
+trust companies have become primarily investment
+banking institutions, their other functions
+being carried on as side lines and assuming, of
+course, in some cases greater importance than
+in others.</p>
+
+<p>Since they are still in the early stages of
+their development, the status of trust companies
+in the banking system of the United States is
+not yet definitely determined. Legislation concerning
+them varies considerably in different
+states, as do also their relations with other
+banking institutions. The competitive character
+of these relations has resulted in some
+cases in legislation which has aimed to differentiate
+and define the various functions which
+all these institutions perform, and to prescribe
+the conditions under which each one or each
+group must be performed, regardless of the
+way in which they are combined, and in others,
+in their practical consolidation with national or<span class='pagenum'><a name="Page_144" id="Page_144">[Pg 144]</a></span>
+state banks, or both, through community of
+stock ownership, interlocking directorates, etc.</p>
+
+<p>From the point of view of the convenience
+of the public there are advantages in the combination
+of all the banking functions in a single
+institution, and the success of trust companies
+to some extent has been due to this cause, but
+they have also profited from the unequal competition
+which exemption from certain limitations
+imposed on state and national banks has
+enabled them to enjoy. The removal of the
+conditions which result in this unequal competition,
+a process already in progress and
+likely to continue to completion, will reveal the
+strength of the advantages of combination
+versus specialization of functions. Previous to
+such a revelation it will be impossible to determine
+whether or not the trust company form
+of organization is destined to become the dominant
+one.</p>
+
+
+<h4><i>3. Bond Houses and Investment Companies</i></h4>
+
+<p>A large part of the business of investment
+banking in the United States is conducted by
+corporations and firms organized for the purpose
+of buying and selling investment securities,
+especially bonds and mortgages. Rarely, if<span class='pagenum'><a name="Page_145" id="Page_145">[Pg 145]</a></span>
+ever, do these concerns conduct savings
+accounts. Ordinarily they confine their attention
+exclusively to the investment end of the
+business and act in the capacity of jobbers, or
+brokers, or both.</p>
+
+<p>Within the investment field some of them
+specialize closely and others deal in a wide
+range of securities. The specialties most frequently
+followed are government, state, and
+municipal bonds, railroad bonds, public service
+securities, timber bonds, irrigation bonds, and
+real estate mortgages. Specialization involves
+the development of expert knowledge of the
+class of securities dealt in and thus of special
+serviceableness to both investors and the promoters
+of the enterprises or the public bodies
+which issue the securities. These specialists
+sometimes serve as middlemen between the
+issuers of securities and other investment
+banks, as well as between them and the real
+owners of the capital invested, their expert
+knowledge being of service to the former as
+well as the latter.</p>
+
+<p>Until recently there have been few attempts
+to regulate the operation of these institutions
+by law, but the fraudulent practices of some
+of them, and the ignorance and weakness of
+perhaps the majority of investors, have recently<span class='pagenum'><a name="Page_146" id="Page_146">[Pg 146]</a></span>
+created in some quarters a strong public sentiment
+in favor of such regulation. In several
+states legislation has resulted, of which the most
+noteworthy is the so-called "blue sky laws" of
+Kansas and some other states.</p>
+
+<p>In details these laws differ widely from one
+another, but they are alike in that they impose
+upon some branch of the state government the
+obligation of supervising both companies which
+issue securities and those which offer securities
+for sale. The Kansas law, the first of this kind
+passed in the United States, has been considered
+too drastic by most of the companies that
+have attempted to operate under it, but the
+Wisconsin law, which went into effect October
+1, 1913, is looked upon with more favor.</p>
+
+<p>In formulating these and other laws for the
+proper regulation of these concerns, it has
+been found difficult to provide adequate protection
+to the investing public without unduly
+hampering the issue and negotiation of securities,
+but this difficulty should, and in time
+doubtless will, be overcome. A free and open
+market for bonds, stocks, and other evidences
+of indebtedness is essential to freedom of enterprise
+and mobility of capital, which are in turn
+essential to the economic prosperity of any
+country. On the other hand, investors undoubt<span class='pagenum'><a name="Page_147" id="Page_147">[Pg 147]</a></span>edly
+need and deserve the protection of the
+state against misrepresentation and fraud. It
+is practically impossible for them in many,
+perhaps in most, cases to obtain the information
+necessary for self-protection. The matters
+and conditions to be dealt with in such legislation
+are so complex and subject to such frequent
+change that laws are apt to be imperfect,
+inefficient, or obstructive. It seems probable
+that those which do not attempt to be specific
+and detailed, but give wide powers and discretion
+to administrative boards or commissions,
+are most likely to be successful.</p>
+
+
+<h4><i>4. Land Banks</i></h4>
+
+<p>In Europe an important group of institutions
+has developed for the supplying of agriculture
+and the building industries with the capital
+needed in their operations. The greatest number
+and variety of these are in Germany, in
+which their development has been continuous
+since the days of Frederick the Great.</p>
+
+<p>In order to assist in the recuperation of his
+kingdom from the devastation caused by the
+Seven Years' War, Frederick caused the land
+owners of certain provinces to be organized
+into associations called Landschaften, which<span class='pagenum'><a name="Page_148" id="Page_148">[Pg 148]</a></span>
+were authorized to issue mortgage bonds on the
+joint security of the lands of all the members
+of the association in exchange for mortgages
+on the lands of individual members who needed
+funds for the improvement of their estates.
+These mortgages were made payable to the
+association in the form of small annuities, to
+which were added the interest paid on the
+bonds and an increment for the payment of the
+expenses of the association.</p>
+
+<p>These associations were governed by the
+members through a general assembly, representative
+boards, and elected officers, and were
+supervised by the state and carefully regulated
+by law. Regulations were carefully worked out
+pertaining to the ratio that the loan should
+bear to the value of the estate mortgaged,
+methods of valuation, ways and means of
+maintaining an equilibrium between the bonds
+issued and the mortgages held, the treatment
+of defaulting members, etc., etc. Machinery
+for the sale of the mortgage bonds delivered
+to members was also created, and in some cases
+later on these sales were made directly by the
+associations themselves, and cash paid to the
+maker of the mortgages.</p>
+
+<p>Five of these original Landschaften have
+continued to the present day, and others<span class='pagenum'><a name="Page_149" id="Page_149">[Pg 149]</a></span>
+modeled after them were subsequently established.
+In 1909 in all Germany twenty-five
+were in operation, of which eighteen were in
+Prussia. The newer ones have not in all
+respects followed their models. Unlike the
+original five, membership in them is not limited
+to the nobility and is not compulsory; the
+liability of the members for the payment of the
+bonds issued has in some cases been limited
+to a percentage of the total; the loans are
+usually paid in cash; and the bonds are sold
+directly by the associations; but the principles
+of mutual liability and mutual control which
+were basic in the old organizations have not
+been violated in any case. Both old and new
+are organized in the interests of borrowers on
+real estate mortgage security, and aim to secure
+funds for these on the lowest possible terms
+and for long periods of time, by making the
+security offered the lenders greater than any
+single borrower could supply.</p>
+
+<p>The degree of their success is indicated by
+the fact that in 1909 the amount of their outstanding
+mortgage loans amounted to nearly a
+billion dollars, and that their mortgage bonds
+rank on the exchanges with Prussian state
+bonds and have at times outranked them.</p>
+
+<p>Another type of land bank appeared in the<span class='pagenum'><a name="Page_150" id="Page_150">[Pg 150]</a></span>
+early part of the nineteenth century as a result
+of the movement for the freeing of the serfs
+and their transformation into freehold peasants.
+The lands of these cultivators were burdened
+with a variety of feudal dues and charges
+which had to be commuted before they could
+become freeholds. In order to facilitate this
+process banks were established which assumed
+the obligations of a peasant towards his feudal
+superior in return for a mortgage on his holding,
+repayable with interest in the form of an
+annuity, and in amount equal to the sum to
+be paid to the feudal superior for the total
+extinguishment of all feudal obligations.</p>
+
+<p>Some of these banks were established and
+administered by states, provinces, and communes,
+and some by private parties. The public
+ones obtained the funds they needed partly
+from subsidies and partly from the sale of
+guaranteed mortgage bonds and the private
+ones wholly from the sale of mortgage bonds.</p>
+
+<p>The completion of the work for which these banks were originally
+established put an end to their development about 1883, but similar
+institutions have since been established in Prussia to assist
+colonists in the purchase and equipment of their farms, and in central
+and western Germany to promote general agricultural and<span class='pagenum'><a name="Page_151" id="Page_151">[Pg 151]</a></span> urban real
+estate operations. The colonists sent into Poland for the
+Germanization of that province were in this way assisted by the
+Prussian government, and in some parts of Germany the same means have
+been employed for the purpose of aiding in the process of breaking up
+large estates into small holdings, in the construction of dikes,
+roads, and reservoirs, and in changing the courses of streams.</p>
+
+<p>Next to the Landschaften the most important
+intermediaries between capitalists and investors
+in real estate in Germany are the so-called
+Hypothekenaktienbanken, or joint-stock mortgage
+banks. These are private corporations,
+capitalized by the sale of stock shares to the
+general public, and controlled by their stockholders
+through directorates, like industrial
+corporations the world over. Their business is
+the making of long-period loans on real estate
+security, and the funds thus employed are
+obtained by the sale of mortgage bonds secured
+by the real estate mortgages in which the proceeds
+are invested and by their own capital,
+surplus, and other funds.</p>
+
+<p>They differ from the Landschaften in that
+they are not cooperative or mutual institutions,
+but strictly business enterprises run in the
+interests of their stockholders. Their primary<span class='pagenum'><a name="Page_152" id="Page_152">[Pg 152]</a></span>
+aim is to earn dividends rather than to secure
+the lowest possible loan rates and other favorable
+terms for borrowers. As a matter of fact
+they are forced by competition and by the
+principles of good business to make loans at
+reasonable rates and on favorable terms regarding
+repayment and other matters, and they
+successfully compete with the Landschaften
+and other cooperative credit institutions of Germany.
+Their mortgage loans are usually made
+repayable on the annuity plan, one-half per
+cent each year being the common rate of payment,
+and they loan about the same percentage
+of the value of the lands mortgaged, as do the
+Landschaften and other land banks, and the
+rate of interest charged is the market rate,
+into the determination of which, of course,
+the competition of all other institutions enter.</p>
+
+<p>While these institutions loan in the aggregate
+enormous sums on farm property, their
+chief field of operations is urban real estate,
+and particularly the industry of residence, or
+as we would call it in this country, apartment-house
+construction. It is on this account that
+the period of their most rapid development
+coincides with that of the recent rapid industrial
+and commercial development of Germany,
+which dates back only to the establishment of<span class='pagenum'><a name="Page_153" id="Page_153">[Pg 153]</a></span>
+the Empire in 1870. Most of them began
+operations in the decade 1862-1872, but the
+most rapid growth in the magnitude and scope
+of their business operations has come in recent
+years.</p>
+
+<p>In 1899 there were forty institutions of this
+kind in operation in the German Empire. The
+number at the present time is probably considerably
+greater, since for obvious reasons combinations
+among them are not promoted by the
+same kind of economic pressure that in recent
+years has operated so efficiently in Germany in
+the field of commercial banking.</p>
+
+<p>Two other groups of German institutions
+merit attention in this connection, namely, the
+so-called Schulze-Delitzsch and the Raiffeisen
+Credit Associations.</p>
+
+<p>The Schulze-Delitzsch societies were the
+direct outcome of the period of dearth and
+famine through which Germany passed in the
+years immediately preceding the revolution of
+1848. The first one was not a credit association,
+but a cooperative buying society, organized
+by a local judge named Schulze for the
+aid of his needy neighbors of the small trading
+class in the town of Delitzsch. In 1850 a credit
+association on the same plan was organized.
+Others followed, in rapid succession in and<span class='pagenum'><a name="Page_154" id="Page_154">[Pg 154]</a></span>
+after the seventies, until at the present time
+they are numbered by the thousands and their
+members by millions, and they are scattered
+throughout the entire empire.</p>
+
+<p>The principle of their organization is the
+association of a comparatively small group of
+neighbors, or of people who know one another
+well, or who may easily come to know one another
+well, by each making a contribution to a
+common fund to be loaned out to individuals
+on personal security chiefly, and which,
+together with the credit of the entire group,
+may be made the basis of security for larger
+funds to be borrowed on the open market. They
+are carefully organized on the cooperative
+principle, each member having an equal voice
+in a general assembly which chooses a board of
+directors and a small administrative board, to
+which is intrusted the actual management and
+administration of the affairs of the society.</p>
+
+<p>Loans are made to members only, usually
+for short periods of time, on the personal
+security of the borrower and of others who
+are willing to vouch for him, and on the unusually
+favorable terms which the credit of the
+entire organization and very low costs of
+administration render possible. The knowledge
+which each member has of the character<span class='pagenum'><a name="Page_155" id="Page_155">[Pg 155]</a></span>
+and business methods of his fellow members
+who borrow, and of the use to which borrowed
+funds are put, and the stake which each one
+has in the financial stability and success of the
+organization, bring the percentage of losses to
+a very low figure, and make it possible for
+these societies to grant their members maximum
+accommodations at minimum prices.</p>
+
+<p>To the funds accumulated from initiation
+fees, membership dues and the sale of the associations'
+credit have been added, in constantly
+increasing amounts in recent years, the savings
+of the members themselves. Many societies
+have such an amount of funds intrusted to
+them in this way that they are not only entirely
+freed from the necessity of borrowing, but are
+obliged to seek opportunities for investment
+outside their own group.</p>
+
+<p>This condition of affairs, in addition to many
+other common interests, led to the federation
+of the Schulze-Delitzsch societies into larger
+groups, and these in turn into state and national
+associations, through which surplus funds in
+one could be made to serve the needs of
+others inadequately supplied, and through
+which all the societies could be brought into
+efficient connection with the general money
+market of the country. For a number of years<span class='pagenum'><a name="Page_156" id="Page_156">[Pg 156]</a></span>
+these federated societies conducted a large central
+institution, first in Frankfurt and afterwards
+in Berlin, known as the Deutsche
+Genossenschaftsbank. In 1904, however, this
+institution was absorbed by the Dresdener
+Bank, one of the eight great private banking
+corporations of Germany, which now serves as
+the central agency for all these societies.</p>
+
+<p>The membership of these associations is not
+restricted to any class of persons, and they
+actually include a very large number of small
+farmers. An inquiry made in 1885 showed
+that in 545 of them, with a total membership
+of 270,808, there were 72,994 farmers, and that
+one-fifth of the total loans of these associations
+were made to this class of their members. They
+must, therefore, be numbered among the land
+banks of the Empire, or at least among the
+institutions which are helping to solve the credit
+problem for the agricultural classes.</p>
+
+<p>The Raiffeisen societies resemble the
+Schulze-Delitzsch in many particulars and
+differ from them in others. Like them they are
+strictly cooperative in character, and, when
+organized for credit purposes, designed to
+supply members with loans on the most favorable
+possible terms. Their development was
+also due to the hard economic conditions of<span class='pagenum'><a name="Page_157" id="Page_157">[Pg 157]</a></span>
+the period immediately succeeding the revolution
+in 1848.</p>
+
+<p>They differ from the Schulze-Delitzsch societies
+chiefly in the following particulars:
+They charge no initiation fees and do not
+rely to the same extent on the proceeds of
+the sale of shares, the amount of which they
+place at a very low figure, often the lowest
+permitted by law; they make long-period as
+well as short-period loans, indeed the former
+chiefly; they do not pay dividends on their
+share capital, but instead put all profits into
+reserve funds or prevent their accumulation
+by keeping the loan rates low; they exercise
+more care than do the Schulze-Delitzsch
+associations to keep their societies small, laying
+great emphasis upon the importance of personal
+acquaintance between members and thus
+upon mutual watchfulness; and, in their origin,
+they were peasant organizations pure and
+simple, and hence more strictly land banks.</p>
+
+<p>Their founder, F. W. Raiffeisen, Burgomeister
+of a small village in Westphalia,
+Prussia, wanted to rescue the poor peasants of
+his and other districts from the clutches of the
+usurers, into whose hands they had fallen and
+by whom they were being exploited in a most
+shameful manner. Since it was loans that<span class='pagenum'><a name="Page_158" id="Page_158">[Pg 158]</a></span>
+these people needed and since their cash resources
+were always very low and in many
+cases nil, he felt that to require, as a condition
+of membership, entrance fees and the purchase
+of one or more shares of stock, however small,
+would be fatal to the success of his plans. He
+also firmly believed that in the integrity, industry,
+frugality, and agricultural skill of these
+people was the basis for sound credit and that
+cooperation was a means by which these elements
+of sound credit could be made available
+and attractive on the money market. At the
+beginning, therefore, no entrance fees or share
+subscriptions were required. Later Prussian
+law made share subscriptions compulsory and
+they were, of course, introduced, but they were
+made so low, and the acquisition of the money
+for their purchase so easy, that they have not
+been a serious obstacle.</p>
+
+<p>From the beginning Raiffeisen invited to
+membership in his societies the well-to-do and
+substantial people as well as peasants. Of
+course these people did not require the society
+for the satisfaction of their own credit needs,
+but Raiffeisen saw that they would greatly
+strengthen the credit of the societies and he
+was able to appeal to them on philanthropic
+grounds. This class of people have a leading<span class='pagenum'><a name="Page_159" id="Page_159">[Pg 159]</a></span>
+part in the administration of the societies of
+which they are members and have contributed
+greatly to their success.</p>
+
+<p>At the outset the Raiffeisen societies had to
+rely chiefly on borrowing for the acquisition
+of the capital needed, but with time and success
+savings deposits, surplus funds accumulated
+out of profits, and lastly the proceeds of
+the sale of shares have played an increasing
+r&ocirc;le. At the present time many societies are
+not obliged to borrow at all, and not a few
+have surplus funds which are placed at the disposition
+of other societies which are still
+obliged to borrow.</p>
+
+<p>Like the Schulze-Delitzsch societies the Raiffeisen associations have
+federated. At present there are thirteen so-called unions, and at the
+head of all is a central bank with head office at Berlin and branches
+at K&ouml;nigsberg, Danzig, Breslau, Cassel, Frankfurt, Coblenz, Brunzwick,
+Strassburg, Nuremberg, Posen, and Ludwigshafen. The central bank is a
+joint-stock company, organized on the principle of limited liability,
+the stock of which is owned by the local societies. It formerly had
+close relations with the Imperial Bank, but is now associated with the
+so-called Centralgenossenschaftskassa, endowed by the state of
+Prussia,<span class='pagenum'><a name="Page_160" id="Page_160">[Pg 160]</a></span> in such a way that advances and discounts are extended to it
+on favorable terms.</p>
+
+<p>The Raiffeisen societies rival the Schulze-Delitzsch
+in the rapidity of their growth and
+in the r&ocirc;le they play in the economic life of
+modern Germany. In 1908 they numbered
+5,047, of which 4,340 were credit associations.
+The collective balance sheets of these societies
+in 1907 showed 490,734,834 marks assets,
+489,234,357 marks liabilities, and a membership
+of 405,819.</p>
+
+<p>While Germany was the pioneer in the establishment
+of land credit institutions, and while
+such institutions have attained a greater variety
+of form and a higher degree of perfection in
+that country than in any other, other countries
+have advanced along similar lines and now
+have institutions and a fund of experience well
+worthy of study. The institutions of Germany
+have in most cases served as models in these
+other countries, the mortgage banks and the
+Schulze-Delitzsch and Raiffeisen societies having
+been most frequently copied. These models
+have been adapted to foreign conditions and
+modified in interesting and instructive ways as
+well as copied without essential change.</p>
+
+<p>Among the mortgage banks developed outside
+of Germany the Cr&eacute;dit Foncier of France<span class='pagenum'><a name="Page_161" id="Page_161">[Pg 161]</a></span>
+is especially noteworthy. In its organization it
+was modeled after the Bank of France and is
+second only to that institution in the magnitude
+of its operations and the scope of its influence.
+Its head office is in Paris and it has
+at least one branch in each department. Its
+capital stock owned by private parties amounts
+to about $40,000,000, its surplus to over $4,000,000,
+its loans secured by mortgage to over
+$400,000,000, and its total resources to about
+$1,000,000,000.</p>
+
+<p>Like the German mortgage banks, it secures
+the greater part of its loan funds through the
+issue of mortgage bonds and a large percentage
+of its loans are made on mortgage security for
+long periods of time and are repayable on the
+annuity plan. However, it transacts a greater
+variety of business than does the typical mortgage
+bank of Germany. It loans on city and
+farm real estate and to communes, and it
+transacts a large commercial banking business,
+though this is distinctly a side issue, incorporated
+with its other business in order to give
+profitable employment to funds, sometimes
+large in amount, which are temporarily on hand
+awaiting investment.</p>
+
+<p>At various times it has absorbed competing
+institutions and at times it has established<span class='pagenum'><a name="Page_162" id="Page_162">[Pg 162]</a></span>
+collateral institutions to transact lines of business
+for which its own constitution and legal
+limitations did not fit it. Among these the most
+important are the Cr&eacute;dit Agricole and the Foncier
+Algierienne. It was obliged ultimately to
+absorb and liquidate the former, but the latter
+still flourishes in the colony of Algiers.</p>
+
+<p>Mortgage banks have also gained a footing
+in most of the other countries of continental
+Europe. In Italy they passed through a period
+of storm and stress, owing to their connection
+with the issue banks of that country and the
+consequent confusion between commercial and
+investment banking which resulted, but they
+have recently been established on an independent
+basis and are now developing along right
+lines and with apparent success.</p>
+
+<p>The Schulze-Delitzsch and Raiffeisen societies
+have been imitated in Austria, Hungary,
+Belgium, Switzerland, and, to some extent, in
+France and India. The so-called "Banche
+Populari" and "Casse Rurali" of Italy are
+respectively modified forms of these two German
+types, and rank among the most important
+means employed in that country for the improvement
+of the condition of the peasants and
+small tradesmen. State, provincial, and communal
+aid for these institutions has been more<span class='pagenum'><a name="Page_163" id="Page_163">[Pg 163]</a></span>
+frequently evoked and more extensively employed
+outside than inside of Germany, and
+other important modifications of the German
+prototypes have been made in Italy and elsewhere.</p>
+
+
+<h4><i>5. Stock Exchanges</i></h4>
+
+<p>An essential part of the machinery of investment
+banking is the stock exchange. This is a
+place where the buyers and sellers of securities
+or their agents regularly meet for the transaction
+of business. It may be a portion of a street
+or a market place or a room in a building. A
+fully equipped modern exchange contains a
+large room equipped with telegraphic and telephonic
+communication with the most important
+parts of the country in which it is located and
+of the world, with apparatus for registering
+prices and easily communicating information
+to its members, and with the offices needed for
+the accommodation of the clerks and other
+employees required. Either by posts or in some
+other manner the precise places in it in which
+each security or group of securities is to be
+dealt in is also usually indicated.</p>
+
+<p>The purpose of the stock exchange is to
+facilitate and to regulate dealings in securities.
+It facilitates such dealings by providing as<span class='pagenum'><a name="Page_164" id="Page_164">[Pg 164]</a></span>
+nearly perfect means as is possible for putting
+buyers and sellers into communication with
+each other, and for collecting and making available
+to them the information they need. To
+this end they provide for daily meetings at
+fixed hours; they make and publish lists of the
+securities dealt in; they speedily record and,
+through the telegraph and the telephone, communicate
+to all quarters of the globe the prices
+at which securities change hands; and through
+the meeting room equipped as before described
+they make it possible for buyers and sellers,
+no matter where located, to communicate with
+each other in a very short period to time. They
+regulate such dealings by establishing and
+rigidly enforcing rules and regulations for listing,
+transferring, clearing, and paying for
+securities and for other matters pertaining to
+the conduct of their members.</p>
+
+<p>These institutions serve investment banks as
+well as private investors, constituting the
+machinery which connects them all. They thus
+enlarge the area and scope of the markets for
+securities, and greatly increase the mobility of
+capital. Without them the surplus savings of
+one locality would only very slowly and with
+difficulty find their way to other localities where
+they are needed, with the result that capital<span class='pagenum'><a name="Page_165" id="Page_165">[Pg 165]</a></span>
+would lie idle or be very inefficiently employed
+in some places while in others natural and
+human resources would be undeveloped or very
+inefficiently developed.</p>
+
+<p>Existing stock exchanges differ considerably
+in the manner in which they are organized and
+managed, in methods of doing business, and in
+the scope of their operations. Some of them
+are incorporated and others unincorporated;
+some restrict their membership to a prescribed
+number, others admit as many as are able and
+willing to comply with the conditions imposed;
+some are local in their scope, some national, and
+others international. In this country all the
+exchanges deal in local securities chiefly, except
+the one in New York City, which is national in
+its scope. The London exchange does a larger
+business in international securities than any
+other, but the Paris and Berlin exchanges, as
+well as those located at the other important
+European capitals, and the one at New York
+share in it to a greater or less degree.</p>
+
+<p>Stock exchanges have suffered in reputation,
+and their real functions and merits have been
+obscured by the abuses to which they have been
+subjected. Connected with their legitimate
+business of facilitating the investment of capital,
+various forms of speculation have developed<span class='pagenum'><a name="Page_166" id="Page_166">[Pg 166]</a></span>
+which in some cases have degenerated into
+gambling pure and simple. The better managed
+ones have striven to rid themselves of
+these abuses, and in some countries, notably in
+Germany, legislative bodies have taken a hand.
+The results, however, have proved only partially
+successful.</p>
+
+<p>Some forms of speculation are not only legitimate but necessary in
+modern business life, and these shade into the illegitimate,
+unnecessary, and positively harmful forms by such short and easy steps
+as to render it difficult, and perhaps impossible, to draw a line
+between the two which can serve as a guide for regulations of an
+administrative or legislative kind.</p>
+
+
+<h4><i>6. Some Defects in Our Investment Banking Machinery</i></h4>
+
+<p>A comparison of our investment banking
+machinery with that of European countries,
+especially Germany, reveals important differences.
+Among these the most notable are the
+wide use there and the almost complete absence
+here of the following: (a) the resort to cooperation
+as a means of revealing and making available
+the basis for credit of large numbers of
+people who lack capital but could use it to the<span class='pagenum'><a name="Page_167" id="Page_167">[Pg 167]</a></span>
+advantage of themselves and of the nation;
+(b) the long-period mortgage loan repayable
+on the annuity plan and the mortgage bond as
+a means of accumulating capital for such loans;
+and (c) the cooperation of the state and other
+public bodies and of capitalists and philanthropically
+disposed persons in developing the
+credit possibilities of the masses and in directing
+the flow of proper portions of the stream
+of capital in their direction.</p>
+
+<p>In the development of investment banking
+institutions in this country, individual initiative
+prompted by self-interest has been the chief,
+and except in the case of savings banks, the sole
+motive force. The result is that most of them
+have been organized in the interests of lenders
+rather than borrowers and serve best the purposes
+of big business and of persons already
+possessed of large credit by virtue of their
+wealth or their business reputations. Under
+these conditions, while enormous amounts of
+capital in the aggregate have been invested in
+agriculture and urban real estate, the former
+has suffered relatively in comparison with
+transportation, manufacturing, and speculation.</p>
+
+<p>Contributory causes in the development of
+this situation have been the great need for capital
+for the development of our transportation<span class='pagenum'><a name="Page_168" id="Page_168">[Pg 168]</a></span>
+system, the stimulation of manufactures by
+high protective duties, and the enormous area
+of our public domain which was given or sold
+to settlers on very easy terms. Inasmuch as our
+transportation system and our manufacturing
+industries have now attained a high degree
+of development, our public domain has been
+nearly exhausted, and land values and the cost
+of living are rapidly rising, the needs of agriculture
+are pushing themselves into the foreground,
+and we are beginning to look to European
+experience for suggestions regarding the
+best methods of diverting to that industry a
+larger part of our rapidly accumulating capital
+resources.</p>
+
+<p>There are obvious difficulties in the way of
+the application of cooperation to the solution
+of the problem of agricultural credit in this
+country. In spite of the fact that immigration
+is constantly bringing to us people from the
+very foreign countries in which cooperative
+credit associations flourish, our agricultural
+population is still dominated by the spirit of
+individualism which has been and is one of our
+dominant national traits. Our farmers are
+also more widely scattered than is the case
+in Europe, and consequently less closely knit
+together in social units. Their holdings are<span class='pagenum'><a name="Page_169" id="Page_169">[Pg 169]</a></span>
+also larger, their capital needs greater, and
+their business instincts more highly developed.</p>
+
+<p>There seems to be no good reason, however,
+why the joint-stock mortgage bank should not
+flourish here as well as in Europe. It is a
+purely private business enterprise of the kind
+with which we are perfectly familiar. The
+mortgage bond ought to appeal to our investors,
+many of whom have exhibited a strong
+predilection for mortgage security and real
+estate investments, and long-period mortgage
+loans, repayable on the annuity plan, would
+meet the needs of many land purchasers and of
+people who need to invest considerable sums
+in drainage, irrigation works, etc., better than
+our present methods. In most, if not all, of our
+states, trust companies could develop these new
+lines of finance without prejudice to the other
+branches of their business.</p>
+
+<p>The use of state, county, and municipal subsidies
+or credit in enterprises of this kind is
+rendered difficult, if not impossible, in this
+country, by strong prejudice against the use
+of public funds in private enterprises, and in
+some states by constitutional prohibitions. This
+prejudice is based upon unfortunate experiences,
+and is at least partially justified by the
+laxness of our administrative methods and the<span class='pagenum'><a name="Page_170" id="Page_170">[Pg 170]</a></span>
+prevalence of graft, which expose us to the
+danger of the improper use of public funds
+devoted to enterprises of this kind. There is
+no reason, however, why our states should not
+take the initiative in the improvement of our
+investment banking machinery and why private
+capitalists and philanthropists should not turn
+some of their energy into this channel.</p>
+
+<p>Suggestion and leadership are needed in this
+field quite as much as legislation tending to
+restrict and regulate the operations of existing
+institutions.</p>
+
+
+
+<hr style="width: 65%;" />
+<p><span class='pagenum'><a name="Page_171" id="Page_171">[Pg 171]</a></span></p>
+<h2>REFERENCES</h2>
+
+
+<p>The following books are comprehensive in
+character, treating most of the subjects covered
+in the foregoing chapters:</p>
+
+<div class="blockquot"><p>
+<span class="smcap">Macleod, H. D.</span>, Theory and Practice of Banking.<br />
+<span class="smcap">Gilbart, J. W.</span>, History and Principles of Banking.<br />
+<span class="smcap">Bagehot, Walter</span>, Lombard Street.<br />
+<span class="smcap">Dunbar, Charles F.</span>, History and Theory of Banking.<br />
+<span class="smcap">Scott, Wm. A.</span>, Money and Banking. Rev. Ed.<br />
+<span class="smcap">White, Horace</span>, Money and Banking.<br />
+<span class="smcap">Fisk, A. K.</span>, The Modern Bank.<br />
+</p></div>
+
+
+<p>The subject of clearings and the exchanges are
+discussed in the following books:</p>
+
+<div class="blockquot"><p>
+<span class="smcap">Cannon, J. G.</span>, Clearing Houses.<br />
+<span class="smcap">Clare, George</span>, The A, B, C of the Exchanges.<br />
+<span class="smcap">Clare, George</span>, A Money Market Primer and Key to the Foreign Exchanges.<br />
+<span class="smcap">Margraff, A. W.</span>, International Exchange.<br />
+<span class="smcap">Escher, F.</span>, Foreign Exchange.<br />
+</p></div>
+
+<p><span class='pagenum'><a name="Page_172" id="Page_172">[Pg 172]</a></span></p>
+
+<p>The following cover the history and present
+condition of banking in the leading countries:</p>
+
+<div class="blockquot"><p>
+<span class="smcap">Conant, C. A.</span>, Modern Banks of Issue.<br />
+<span class="smcap">Knox, J. J.</span>, A History of Banking in the United States.<br />
+<span class="smcap">Sumner, Wm. G.</span>, A History of Banking in the United States, being Vol. I of a History of Banking in all the leading nations.<br />
+<span class="smcap">Kirkbride &amp; Sterrett, J. E.</span>, The Modern Trust Company, Its Functions and Organization.<br />
+<span class="smcap">Breckenridge, R. M.</span>, The History of Banking in Canada.<br />
+<span class="smcap">Laughlin, J. L.</span>, Editor, Banking Reform.<br />
+<span class="smcap">Johnson, J. F.</span>, The Canadian Banking System.<br />
+<span class="smcap">Withers</span>, <span class="smcap">Hartley</span>, <span class="smcap">Palgrave, R. H.</span>, and others, The English Banking System.<br />
+<span class="smcap">Liesse, A.</span>, Evolution of Credit and Banks in France.<br />
+<span class="smcap">National Monetary Commission</span>, The Reichsbank, 1876-1900.<br />
+<span class="smcap">Riesser, J.</span>, The German Great Banks and Their Concentration.<br />
+</p></div>
+
+
+<p>On investment banking see:</p>
+
+<div class="blockquot"><p>
+<span class="smcap">Wolff, H.</span>, People's Banks.<br />
+<span class="smcap">Peters, E. E.</span>, Co-operative Credit Associations.<br />
+<span class="smcap">Hamilton, J. H.</span>, Saving and Savings Institutions.<br />
+<span class="smcap">Pratt, S. S.</span>, The Work of Wall Street.<br />
+<span class="smcap">Conant, C. A.</span>, Wall Street and the Country.<br />
+</p></div>
+
+
+
+<hr style="width: 65%;" />
+<p><span class='pagenum'><a name="Page_173" id="Page_173">[Pg 173]</a></span></p>
+<h2>INDEX</h2>
+
+
+<p>
+"Acceptance" credit and lines, <a href="#Page_103">103</a><br />
+<br />
+Accommodation loans, <a href="#Page_12">12</a>, <a href="#Page_13">13</a><br />
+<br />
+Accounts overdrawn, <a href="#Page_16">16</a><br />
+<br />
+Agriculture, capital for, <a href="#Page_168">168</a>;<br />
+<span style="margin-left: 1em;">individualism in, <a href="#Page_168">168</a></span><br />
+<br />
+Assets, prior lien on, <a href="#Page_56">56</a>;<br />
+<span style="margin-left: 1em;">special, <a href="#Page_57">57</a></span><br />
+<br />
+<br />
+Balances, <a href="#Page_16">16</a>, <a href="#Page_17">17</a>, <a href="#Page_23">23</a>, <a href="#Page_28">28</a><br />
+<br />
+Banche Populari, <a href="#Page_162">162</a><br />
+<br />
+Bank of England, <a href="#Page_104">104-111</a><br />
+<br />
+Bank reserves, <a href="#Page_35">35-40</a><br />
+<br />
+Bank of France, <a href="#Page_111">111-119</a><br />
+<br />
+Banker's banks, <a href="#Page_9">9</a>;<br />
+<span style="margin-left: 1em;">bills, <a href="#Page_33">33</a>, <a href="#Page_34">34</a>;</span><br />
+<span style="margin-left: 1em;">most valuable assets, <a href="#Page_61">61</a>;</span><br />
+<span style="margin-left: 1em;">making loans, <a href="#Page_86">86</a></span><br />
+<br />
+Banking, act, <a href="#Page_54">54</a>, <a href="#Page_78">78</a>;<br />
+<span style="margin-left: 1em;">adequacy and economy of service, <a href="#Page_62">62</a>, <a href="#Page_66">66</a>;</span><br />
+<span style="margin-left: 1em;">branch, <a href="#Page_64">64</a>, <a href="#Page_65">65</a>;</span><br />
+<span style="margin-left: 1em;">business, <a href="#Page_9">9</a>;</span><br />
+<span style="margin-left: 1em;">commercial, nature and operation of, <a href="#Page_11">11-67</a>;</span><br />
+<span style="margin-left: 1em;">commercial in the United States, <a href="#Page_68">68-100</a>;</span><br />
+<span style="margin-left: 1em;">commercial in other countries, <a href="#Page_101">101-135</a>;</span><br />
+<span style="margin-left: 1em;">Canadian, <a href="#Page_126">126-135</a>;</span><br />
+<span style="margin-left: 1em;">defects and reforms in banking systems, <a href="#Page_97">97-100</a>;</span><br />
+<span style="margin-left: 1em;">English, <a href="#Page_104">104-111</a>;</span><br />
+<span style="margin-left: 1em;">French, <a href="#Page_111">111-119</a>;</span><br />
+<span style="margin-left: 1em;">functions in single institutions, <a href="#Page_144">144</a>;</span><br />
+<span style="margin-left: 1em;">German, <a href="#Page_119">119-126</a>;</span><br />
+<span style="margin-left: 1em;">incorporation, <a href="#Page_66">66</a>;</span><br />
+<span style="margin-left: 1em;">investment, <a href="#Page_136">136-170</a>;</span><br />
+<span style="margin-left: 1em;">Kansas "blue sky laws," <a href="#Page_146">146</a>;</span><br />
+<span style="margin-left: 1em;">problems of commercial, <a href="#Page_35">35</a>;</span><br />
+<span style="margin-left: 1em;">reserve, <a href="#Page_78">78</a>;</span><br />
+<span style="margin-left: 1em;">services rendered by, <a href="#Page_1">1-3</a>;</span><br />
+<span style="margin-left: 1em;">Wisconsin regulations, <a href="#Page_146">146</a>;</span><br />
+<span style="margin-left: 1em;">local, <a href="#Page_62">62</a>, <a href="#Page_63">63</a></span><br />
+<br />
+Bank notes, see <a href="#BNOTES"><i>notes</i></a><br />
+<br />
+Banks, bond houses, <a href="#Page_6">6</a>;<br />
+<span style="margin-left: 1em;">Canadian, <a href="#Page_126">126-135</a>;</span><br />
+<span style="margin-left: 1em;">central of Europe, <a href="#Page_101">101</a>;</span><br />
+<span style="margin-left: 1em;">central reserve, <a href="#Page_78">78</a>;</span><br />
+<span style="margin-left: 1em;">classified, <a href="#Page_6">6</a>;</span><br />
+<span style="margin-left: 1em;">classification of national, <a href="#Page_54">54</a>;</span><br />
+<span style="margin-left: 1em;">collections, <a href="#Page_22">22</a>;</span><br />
+<span style="margin-left: 1em;">commercial, <a href="#Page_6">6</a>, <a href="#Page_7">7</a>;</span><br />
+<span style="margin-left: 1em;">cooperative, <a href="#Page_139">139</a>;</span><br />
+<span style="margin-left: 1em;">correspondent, <a href="#Page_24">24</a>, <a href="#Page_25">25</a>;</span><br />
+<span style="margin-left: 1em;">England, bank of, <a href="#Page_104">104-111</a>;</span><br />
+<span style="margin-left: 1em;">European land banks, <a href="#Page_147">147-163</a>;</span><br />
+<span style="margin-left: 1em;">European central, <a href="#Page_9">9</a>;</span><br />
+<span style="margin-left: 1em;">federal, <a href="#Page_8">8</a>;</span><br />
+<span style="margin-left: 1em;">federal reserve, <a href="#Page_98">98-100</a>;</span><br />
+<span style="margin-left: 1em;">France, bank of, <a href="#Page_111">111-119</a>;</span><br />
+<span style="margin-left: 1em;">French land, <a href="#Page_160">160-163</a>;</span><br />
+<span style="margin-left: 1em;">functions of, <a href="#Page_4">4</a>;</span><br />
+<span style="margin-left: 1em;">German Imperial, <a href="#Page_119">119-123</a>;</span><br />
+<span style="margin-left: 1em;">German land, <a href="#Page_147">147-163</a>;</span><br />
+<span style="margin-left: 1em;">incorporated, <a href="#Page_7">7</a>;</span><br />
+<span style="margin-left: 1em;">inspection of, <a href="#Page_59">59</a>;</span><br />
+<span style="margin-left: 1em;">interest charges, <a href="#Page_14">14</a>;</span><br />
+<span style="margin-left: 1em;">investment, <a href="#Page_6">6</a>, <a href="#Page_7">7</a>;</span><br />
+<span style="margin-left: 1em;">Italian land, <a href="#Page_160">160-163</a>;</span><br />
+<span style="margin-left: 1em;">joint stock, <a href="#Page_7">7</a>;</span><br />
+<span style="margin-left: 1em;">land, <a href="#Page_6">6</a>;</span><br />
+<span style="margin-left: 1em;">loan-making, <a href="#Page_86">86</a>;</span><br />
+<span style="margin-left: 1em;">municipal, <a href="#Page_139">139</a>;</span><br />
+<span style="margin-left: 1em;">national, <a href="#Page_8">8</a>, <a href="#Page_70">70-75</a>;</span><br />
+<span style="margin-left: 1em;">note issue privileges, <a href="#Page_37">37</a>, <a href="#Page_38">38</a>;</span><br />
+<span style="margin-left: 1em;">of issue, <a href="#Page_20">20</a>, <a href="#Page_21">21</a>;</span><br />
+<span style="margin-left: 1em;">postal saving, <a href="#Page_139">139</a>;</span><br />
+<span style="margin-left: 1em;">private, <a href="#Page_7">7</a>;</span><br />
+<span class='pagenum'><a name="Page_174" id="Page_174">[Pg 174]</a></span><span style="margin-left: 1em;">protection against unsound practices of, <a href="#Page_46">46-62</a>;</span><br />
+<span style="margin-left: 1em;">real estate, <a href="#Page_6">6</a>, <a href="#Page_52">52</a>;</span><br />
+<span style="margin-left: 1em;">savings, <a href="#Page_6">6</a>, <a href="#Page_136">136-141</a>;</span><br />
+<span style="margin-left: 1em;">services rendered by, <a href="#Page_1">1-3</a>;</span><br />
+<span style="margin-left: 1em;">state, <a href="#Page_9">9</a>, <a href="#Page_68">68-70</a>;</span><br />
+<span style="margin-left: 1em;">supply currency, <a href="#Page_22">22</a>;</span><br />
+<span style="margin-left: 1em;">trustee, <a href="#Page_139">139</a></span><br />
+<br />
+Berlin stock exchange, <a href="#Page_165">165</a><br />
+<br />
+Bills of exchange, <a href="#Page_12">12</a>, <a href="#Page_17">17</a>;<br />
+<span style="margin-left: 1em;">documented, <a href="#Page_42">42</a></span><br />
+<br />
+"Blue sky laws" of Kansas, <a href="#Page_146">146</a><br />
+<br />
+Bond houses, <a href="#Page_144">144-147</a><br />
+<br />
+Bonds, government, <a href="#Page_96">96</a>, <a href="#Page_97">97</a>;<br />
+<span style="margin-left: 1em;">mortgage, <a href="#Page_148">148</a>, <a href="#Page_150">150</a>, <a href="#Page_169">169</a></span><br />
+<br />
+Bonds and stocks, not liquid securities, <a href="#Page_53">53</a><br />
+<br />
+Book accounts, <a href="#Page_12">12</a><br />
+<br />
+Branch banking, <a href="#Page_62">62</a>, <a href="#Page_64">64</a>, <a href="#Page_65">65</a><br />
+<br />
+Bullion, <a href="#Page_81">81</a>, <a href="#Page_82">82</a>;<br />
+<span style="margin-left: 1em;">in Canada, <a href="#Page_132">132</a>;</span><br />
+<span style="margin-left: 1em;">in England, <a href="#Page_105">105</a>;</span><br />
+<span style="margin-left: 1em;">in France, <a href="#Page_113">113</a>;</span><br />
+<span style="margin-left: 1em;">in Germany, <a href="#Page_122">122</a></span><br />
+<br />
+Buying and selling on time, <a href="#Page_11">11</a>, <a href="#Page_12">12</a><br />
+<br />
+<br />
+Cables in foreign exchange, <a href="#Page_33">33</a><br />
+<br />
+Canadian banking system, <a href="#Page_126">126-135</a><br />
+<br />
+Capital and surplus requirements for banks, <a href="#Page_46">46-48</a>;<br />
+<span style="margin-left: 1em;">stock, <a href="#Page_47">47</a>, <a href="#Page_48">48</a></span><br />
+<br />
+Cash, supply of, <a href="#Page_35">35-40</a>;<br />
+<span style="margin-left: 1em;">demands on banks, <a href="#Page_55">55</a>;</span><br />
+<span style="margin-left: 1em;">resources, <a href="#Page_29">29</a></span><br />
+<br />
+Casse Rurali, <a href="#Page_162">162</a><br />
+<br />
+Central banks of Europe, <a href="#Page_8">8</a>, <a href="#Page_9">9</a>, <a href="#Page_65">65</a>, <a href="#Page_101">101</a>;<br />
+<span style="margin-left: 1em;">England, <a href="#Page_104">104-111</a>;</span><br />
+<span style="margin-left: 1em;">France, <a href="#Page_111">111-119</a>;</span><br />
+<span style="margin-left: 1em;">German, <a href="#Page_119">119-123</a></span><br />
+<br />
+Charters, <a href="#Page_8">8</a>;<br />
+<span style="margin-left: 1em;">special, <a href="#Page_66">66</a>, <a href="#Page_67">67</a></span><br />
+<br />
+Checking accounts, <a href="#Page_15">15</a>, <a href="#Page_20">20</a>, <a href="#Page_21">21</a>, <a href="#Page_24">24</a>, <a href="#Page_35">35</a><br />
+<br />
+Checks, <a href="#Page_15">15</a>, <a href="#Page_16">16</a>, <a href="#Page_21">21-24</a>;<br />
+<span style="margin-left: 1em;">abroad, <a href="#Page_36">36</a></span><br />
+<br />
+Chicago, clearing center, <a href="#Page_24">24</a>;<br />
+<span style="margin-left: 1em;">central reserve banks, <a href="#Page_78">78</a></span><br />
+<br />
+Clearing house, <a href="#Page_22">22-24</a>;<br />
+<span style="margin-left: 1em;">center in New York, <a href="#Page_80">80</a></span><br />
+<br />
+Coin, <a href="#Page_21">21</a>;<br />
+<span style="margin-left: 1em;">and bank reserves, <a href="#Page_38">38</a>;</span><br />
+<span style="margin-left: 1em;">in England, <a href="#Page_109">109</a>;</span><br />
+<span style="margin-left: 1em;">in France, <a href="#Page_117">117</a>;</span><br />
+<span style="margin-left: 1em;">in Germany, <a href="#Page_121">121</a>, <a href="#Page_122">122</a>;</span><br />
+<span style="margin-left: 1em;">standard and subsidiary, <a href="#Page_21">21</a>;</span><br />
+<span style="margin-left: 1em;">supply, <a href="#Page_40">40</a></span><br />
+<br />
+Collections, <a href="#Page_22">22</a>, <a href="#Page_25">25</a><br />
+<br />
+Commercial banking, collections, <a href="#Page_22">22</a>;<br />
+<span style="margin-left: 1em;">currency, <a href="#Page_21">21</a>, <a href="#Page_22">22</a>;</span><br />
+<span style="margin-left: 1em;">domestic exchange, <a href="#Page_25">25</a>;</span><br />
+<span style="margin-left: 1em;">nature and operations of, <a href="#Page_11">11-67</a>;</span><br />
+<span style="margin-left: 1em;">other countries, <a href="#Page_101">101-135</a>;</span><br />
+<span style="margin-left: 1em;">problems of, <a href="#Page_35">35</a>;</span><br />
+<span style="margin-left: 1em;">promissory notes, <a href="#Page_19">19</a>;</span><br />
+<span style="margin-left: 1em;">protection against unsound practices of, <a href="#Page_46">46-62</a>;</span><br />
+<span style="margin-left: 1em;">savings accounts, <a href="#Page_44">44</a>;</span><br />
+<span style="margin-left: 1em;">in the United States, <a href="#Page_68">68-100</a></span><br />
+<br />
+Commercial paper, <a href="#Page_11">11-14</a>;<br />
+<span style="margin-left: 1em;">discount of, <a href="#Page_14">14</a>, <a href="#Page_15">15</a>, <a href="#Page_17">17</a>;</span><br />
+<span style="margin-left: 1em;">and investment paper, <a href="#Page_41">41</a>, <a href="#Page_42">42</a>;</span><br />
+<span style="margin-left: 1em;">liquid security, <a href="#Page_53">53</a>;</span><br />
+<span style="margin-left: 1em;">market for, <a href="#Page_100">100</a></span><br />
+<br />
+Competition in banking, <a href="#Page_83">83</a><br />
+<br />
+Comptoir d'Escompte de Paris, <a href="#Page_115">115</a>, <a href="#Page_116">116</a><br />
+<br />
+Conflict of functions and laws, <a href="#Page_82">82</a><br />
+<span class='pagenum'><a name="Page_175" id="Page_175">[Pg 175]</a></span><br />
+Cooperative banks, <a href="#Page_139">139</a><br />
+<br />
+Correspondent banks, <a href="#Page_24">24</a>, <a href="#Page_25">25</a><br />
+<br />
+Credit "acceptance" line, <a href="#Page_103">103</a>;<br />
+<span style="margin-left: 1em;">balance, <a href="#Page_16">16</a>, <a href="#Page_18">18-20</a>, <a href="#Page_23">23</a>, <a href="#Page_25">25</a>;</span><br />
+<span style="margin-left: 1em;">cooperation in, <a href="#Page_166">166-168</a>;</span><br />
+<span style="margin-left: 1em;">department in banks, <a href="#Page_43">43</a>, <a href="#Page_86">86</a>;</span><br />
+<span style="margin-left: 1em;">inflation of, <a href="#Page_87">87</a>;</span><br />
+<span style="margin-left: 1em;">"line" of, <a href="#Page_16">16</a>, <a href="#Page_85">85</a>, <a href="#Page_86">86</a>;</span><br />
+<span style="margin-left: 1em;">subsidies, state, county, and municipal, <a href="#Page_169">169</a>;</span><br />
+<span style="margin-left: 1em;">system, <a href="#Page_11">11-13</a></span><br />
+<br />
+Credits, forced liquidation of, <a href="#Page_49">49</a><br />
+<br />
+Cr&eacute;dit Agricole, <a href="#Page_162">162</a>;<br />
+<span style="margin-left: 1em;">Foncier, <a href="#Page_113">113</a>;</span><br />
+<span style="margin-left: 1em;">Industrielle et Commercial, <a href="#Page_115">115</a>, <a href="#Page_116">116</a>;</span><br />
+<span style="margin-left: 1em;">Lyonnais, <a href="#Page_115">115</a>, <a href="#Page_116">116</a></span><br />
+<br />
+Crisis, commercial, <a href="#Page_19">19</a>, <a href="#Page_31">31</a>, <a href="#Page_88">88</a><br />
+<br />
+Currency, <a href="#Page_21">21</a>, <a href="#Page_22">22</a>;<br />
+<span style="margin-left: 1em;">lack of elasticity, <a href="#Page_95">95-97</a></span><br />
+<br />
+<br />
+Debt paying, <a href="#Page_13">13</a>, <a href="#Page_14">14</a><br />
+<br />
+Debits, <a href="#Page_15">15-18</a><br />
+<br />
+Demand in foreign exchange, <a href="#Page_33">33</a>, <a href="#Page_34">34</a><br />
+<br />
+Deposits, <a href="#Page_2">2-4</a><br />
+<br />
+Depositors, mutual insurance of, <a href="#Page_60">60-62</a><br />
+<br />
+Discount, defined, <a href="#Page_14">14</a>;<br />
+<span style="margin-left: 1em;">loans and discounts, selection of, <a href="#Page_40">40-43</a>;</span><br />
+<span style="margin-left: 1em;">loans and rates, <a href="#Page_44">44</a>;</span><br />
+<span style="margin-left: 1em;">operation of, <a href="#Page_13">13</a>;</span><br />
+<span style="margin-left: 1em;">rate, Canadian, <a href="#Page_128">128</a>, <a href="#Page_129">129</a>;</span><br />
+<span style="margin-left: 1em;">bank of England, <a href="#Page_108">108</a>;</span><br />
+<span style="margin-left: 1em;">bank of France, <a href="#Page_113">113</a>;</span><br />
+<span style="margin-left: 1em;">reserve system, <a href="#Page_95">95</a>, <a href="#Page_97">97</a>;</span><br />
+<span style="margin-left: 1em;">stopped, <a href="#Page_30">30</a></span><br />
+<br />
+Discounted paper, <a href="#Page_14">14</a>, <a href="#Page_15">15</a>, <a href="#Page_17">17-19</a>, <a href="#Page_55">55</a><br />
+<br />
+Documented bill of exchange, <a href="#Page_42">42</a><br />
+<br />
+Domestic exchange, <a href="#Page_25">25</a><br />
+<br />
+Drafts, <a href="#Page_16">16</a>, <a href="#Page_27">27</a>, <a href="#Page_28">28</a>;<br />
+<span style="margin-left: 1em;">foreign payments, <a href="#Page_31">31</a></span><br />
+<br />
+<br />
+England, bank of, <a href="#Page_9">9</a>, <a href="#Page_104">104-111</a>;<br />
+<span style="margin-left: 1em;">banking system, <a href="#Page_104">104-111</a>;</span><br />
+<span style="margin-left: 1em;">foreign and colonial, <a href="#Page_108">108</a>;</span><br />
+<span style="margin-left: 1em;">joint stock banks, <a href="#Page_106">106</a>;</span><br />
+<span style="margin-left: 1em;">metropolitan, <a href="#Page_107">107</a>;</span><br />
+<span style="margin-left: 1em;">private, <a href="#Page_108">108</a>;</span><br />
+<span style="margin-left: 1em;">provincial, <a href="#Page_107">107</a>;</span><br />
+<span style="margin-left: 1em;">reserve system, <a href="#Page_108">108</a></span><br />
+<br />
+Europe, commercial banking in, <a href="#Page_101">101-126</a>;<br />
+<span style="margin-left: 1em;">central banks of, <a href="#Page_101">101-126</a>;</span><br />
+<span style="margin-left: 1em;">land banks, <a href="#Page_147">147-163</a></span><br />
+<br />
+European investment banking machinery, <a href="#Page_166">166</a><br />
+<br />
+Exchange operations, <a href="#Page_11">11-13</a>;<br />
+<span style="margin-left: 1em;">checks, <a href="#Page_22">22-24</a>;</span><br />
+<span style="margin-left: 1em;">domestic, <a href="#Page_25">25-31</a>;</span><br />
+<span style="margin-left: 1em;">foreign, <a href="#Page_31">31-34</a></span><br />
+<br />
+<br />
+Federal Reserve Banks, <a href="#Page_98">98-100</a>;<br />
+<span style="margin-left: 1em;">Federal Reserve Board, <a href="#Page_99">99</a>, <a href="#Page_100">100</a></span><br />
+<br />
+Foncier Algierienne, <a href="#Page_162">162</a><br />
+<br />
+Foreign exchange, <a href="#Page_31">31-34</a>;<br />
+<span style="margin-left: 1em;"><i>par of</i>, <a href="#Page_31">31</a>, <a href="#Page_32">32</a>;</span><br />
+<span style="margin-left: 1em;">classes of bills used, <a href="#Page_33">33</a></span><br />
+<br />
+France, bank of, <a href="#Page_9">9</a>, <a href="#Page_111">111-115</a><br />
+<br />
+French banking system, <a href="#Page_111">111-119</a><br />
+<span class='pagenum'><a name="Page_176" id="Page_176">[Pg 176]</a></span><br />
+<br />
+German banking system, <a href="#Page_119">119-126</a>;<br />
+<span style="margin-left: 1em;">hypothekenaktienbanken, <a href="#Page_151">151</a>, <a href="#Page_152">152</a>;</span><br />
+<span style="margin-left: 1em;">investment banking machinery, <a href="#Page_166">166</a>;</span><br />
+<span style="margin-left: 1em;">land and mortgage banks, <a href="#Page_147">147-161</a>;</span><br />
+<span style="margin-left: 1em;">landschaften, <a href="#Page_147">147-149</a>;</span><br />
+<span style="margin-left: 1em;">Schulze-Delitzsch, <a href="#Page_153">153-162</a>;</span><br />
+<span style="margin-left: 1em;">Raiffeisen, <a href="#Page_156">156-162</a></span><br />
+<br />
+Germany, bank of, <a href="#Page_9">9</a>, <a href="#Page_119">119-123</a><br />
+<br />
+Gold element of currency, <a href="#Page_5">5</a>, <a href="#Page_96">96</a>;<br />
+<span style="margin-left: 1em;">points, <a href="#Page_32">32</a>, <a href="#Page_33">33</a>;</span><br />
+<span style="margin-left: 1em;">and silver coin in England, <a href="#Page_105">105</a>, <a href="#Page_106">106</a>;</span><br />
+<span style="margin-left: 1em;">in France, <a href="#Page_113">113</a>;</span><br />
+<span style="margin-left: 1em;">Canada, <a href="#Page_133">133</a></span><br />
+<br />
+<br />
+Incorporation, <a href="#Page_7">7</a>;<br />
+<span style="margin-left: 1em;">should be required, <a href="#Page_66">66</a></span><br />
+<br />
+Independent treasury system, <a href="#Page_75">75-78</a><br />
+<br />
+Inflation, <a href="#Page_49">49-53</a>, <a href="#Page_56">56-59</a>;<br />
+<span style="margin-left: 1em;">of credit, <a href="#Page_87">87</a></span><br />
+<br />
+Inspection of banks, <a href="#Page_59">59</a>, <a href="#Page_60">60</a><br />
+<br />
+Insurance, mutual of depositors, <a href="#Page_60">60</a>, <a href="#Page_62">62</a><br />
+<br />
+Investment, banking, <a href="#Page_136">136-170</a>;<br />
+<span style="margin-left: 1em;">commercial paper, <a href="#Page_41">41</a>, <a href="#Page_42">42</a>;</span><br />
+<span style="margin-left: 1em;">confined to liquid securities, <a href="#Page_52">52</a>;</span><br />
+<span style="margin-left: 1em;">defects in machinery, <a href="#Page_166">166</a>;</span><br />
+<span style="margin-left: 1em;">improvement of machinery, <a href="#Page_170">170</a>;</span><br />
+<span style="margin-left: 1em;">paper, <a href="#Page_18">18</a>, <a href="#Page_35">35</a>, <a href="#Page_41">41</a>, <a href="#Page_55">55</a>;</span><br />
+<span style="margin-left: 1em;">of surplus funds, <a href="#Page_3">3</a></span><br />
+<br />
+Italy, land banks, <a href="#Page_162">162</a>, <a href="#Page_163">163</a><br />
+<br />
+<br />
+Joint-stock mortgage banks, <a href="#Page_169">169</a>;<br />
+<span style="margin-left: 1em;">English joint-stock banks, <a href="#Page_106">106</a>;</span><br />
+<span style="margin-left: 1em;">German, <a href="#Page_151">151-159</a></span><br />
+<br />
+<br />
+Kansas "blue sky laws," <a href="#Page_146">146</a><br />
+<br />
+<br />
+Land banks, <a href="#Page_147">147-163</a><br />
+<br />
+Letters of credit, <a href="#Page_21">21</a><br />
+<br />
+"Line" of credit, <a href="#Page_16">16</a>, <a href="#Page_85">85</a>, <a href="#Page_86">86</a><br />
+<br />
+Liquidation, forced, <a href="#Page_19">19</a>, <a href="#Page_88">88</a>;<br />
+<span style="margin-left: 1em;">of credits, <a href="#Page_49">49</a>, <a href="#Page_50">50</a>;</span><br />
+<span style="margin-left: 1em;">protection against, <a href="#Page_52">52</a></span><br />
+<br />
+Liquid securities, <a href="#Page_53">53</a><br />
+<br />
+Loan operations, <a href="#Page_85">85-88</a><br />
+<br />
+Loans, <a href="#Page_2">2</a>, <a href="#Page_3">3</a>, <a href="#Page_15">15</a>, <a href="#Page_86">86</a>;<br />
+<span style="margin-left: 1em;">and discounts, selection of, <a href="#Page_40">40-43</a>;</span><br />
+<span style="margin-left: 1em;">Canadian system, <a href="#Page_128">128</a>, <a href="#Page_129">129</a>;</span><br />
+<span style="margin-left: 1em;">fluctuations, <a href="#Page_97">97</a>;</span><br />
+<span style="margin-left: 1em;">German land bank, <a href="#Page_147">147-162</a>;</span><br />
+<span style="margin-left: 1em;">in the interest of big business, <a href="#Page_167">167</a>;</span><br />
+<span style="margin-left: 1em;">limits to, <a href="#Page_52">52</a>, <a href="#Page_55">55</a>;</span><br />
+<span style="margin-left: 1em;">long-term, <a href="#Page_2">2</a>;</span><br />
+<span style="margin-left: 1em;">pernicious practice of national banks, <a href="#Page_83">83</a>;</span><br />
+<span style="margin-left: 1em;">and reserve system, <a href="#Page_95">95</a>;</span><br />
+<span style="margin-left: 1em;">short term, <a href="#Page_2">2</a></span><br />
+<br />
+Local banking, <a href="#Page_62">62</a>, <a href="#Page_63">63</a><br />
+<br />
+London stock exchange, <a href="#Page_165">165</a><br />
+<br />
+<br />
+Mints, <a href="#Page_5">5</a><br />
+<br />
+Monetary commission, <a href="#Page_97">97</a>, <a href="#Page_98">98</a><br />
+<br />
+Money of the United States, <a href="#Page_95">95</a><br />
+<span class='pagenum'><a name="Page_177" id="Page_177">[Pg 177]</a></span><br />
+Mortgage banks, <a href="#Page_169">169</a>;<br />
+<span style="margin-left: 1em;">France, <a href="#Page_160">160-162</a>;</span><br />
+<span style="margin-left: 1em;">Germany, <a href="#Page_148">148-163</a>;</span><br />
+<span style="margin-left: 1em;">Italy, <a href="#Page_162">162</a>;</span><br />
+<span style="margin-left: 1em;">mortgage bonds, <a href="#Page_169">169</a>;</span><br />
+<span style="margin-left: 1em;">mortgage loans, long period, <a href="#Page_167">167</a></span><br />
+<br />
+Municipal banks, <a href="#Page_139">139</a><br />
+<br />
+<br />
+National banks, <a href="#Page_8">8</a>, <a href="#Page_9">9</a>, <a href="#Page_54">54</a>, <a href="#Page_70">70-75</a>, <a href="#Page_80">80</a>, <a href="#Page_82">82</a>;<br />
+<span style="margin-left: 1em;">federal reserve, <a href="#Page_98">98</a>, <a href="#Page_99">99</a>;</span><br />
+<span style="margin-left: 1em;">money in vaults, <a href="#Page_91">91</a>;</span><br />
+<span style="margin-left: 1em;">notes, <a href="#Page_96">96</a>;</span><br />
+<span style="margin-left: 1em;">pernicious loan practices, <a href="#Page_83">83</a>;</span><br />
+<span style="margin-left: 1em;">subscribed to federal reserve banks, <a href="#Page_98">98</a></span><br />
+<br />
+National Reserve Association, <a href="#Page_98">98</a><br />
+<br />
+New York City, assay office, <a href="#Page_81">81</a>;<br />
+<span style="margin-left: 1em;">central reserve bank, <a href="#Page_78">78</a>;</span><br />
+<span style="margin-left: 1em;">clearing center, <a href="#Page_24">24</a>, <a href="#Page_80">80</a>, <a href="#Page_81">81</a>;</span><br />
+<span style="margin-left: 1em;">stock exchange, <a href="#Page_81">81</a>, <a href="#Page_82">82</a>, <a href="#Page_92">92</a>, <a href="#Page_165">165</a></span><br />
+<br />
+<a name="BNOTES" id="BNOTES"></a>Notes, bank, <a href="#Page_19">19-21</a>;<br />
+<span style="margin-left: 1em;">central banks of Europe and supply of, <a href="#Page_102">102</a>;</span><br />
+<span style="margin-left: 1em;">Canadian, <a href="#Page_126">126-133</a>;</span><br />
+<span style="margin-left: 1em;">bank of England, <a href="#Page_105">105</a>;</span><br />
+<span style="margin-left: 1em;">of France, <a href="#Page_117">117</a>, <a href="#Page_118">118</a>;</span><br />
+<span style="margin-left: 1em;">of Germany, <a href="#Page_121">121</a>;</span><br />
+<span style="margin-left: 1em;">issue of, <a href="#Page_19">19-21</a>;</span><br />
+<span style="margin-left: 1em;">issue privileges, <a href="#Page_37">37</a>, <a href="#Page_38">38</a>;</span><br />
+<span style="margin-left: 1em;">government, <a href="#Page_39">39</a>;</span><br />
+<span style="margin-left: 1em;">limitation of issue, <a href="#Page_58">58</a>;</span><br />
+<span style="margin-left: 1em;">promissory notes, <a href="#Page_43">43</a>;</span><br />
+<span style="margin-left: 1em;">regulations regarding, <a href="#Page_52">52</a>;</span><br />
+<span style="margin-left: 1em;">safeguarding issue, <a href="#Page_56">56</a>;</span><br />
+<span style="margin-left: 1em;">volume of United States, <a href="#Page_96">96</a></span><br />
+<br />
+<br />
+Oklahoma, mutual insurance plan, <a href="#Page_60">60</a><br />
+<br />
+Overdrafts, <a href="#Page_16">16</a><br />
+<br />
+<br />
+"Panicky" conditions and feeling, <a href="#Page_94">94</a>, <a href="#Page_95">95</a>, <a href="#Page_97">97</a><br />
+<br />
+Par of exchange, <a href="#Page_31">31</a>, <a href="#Page_32">32</a><br />
+<br />
+Paris stock exchange, <a href="#Page_165">165</a><br />
+<br />
+Passbook, <a href="#Page_15">15</a>, <a href="#Page_16">16</a><br />
+<br />
+Postal savings banks, <a href="#Page_139">139</a>, <a href="#Page_141">141</a><br />
+<br />
+Promissory notes, <a href="#Page_12">12</a>, <a href="#Page_14">14</a>, <a href="#Page_19">19-22</a>, <a href="#Page_43">43</a><br />
+<br />
+Prior lien, on assets, <a href="#Page_56">56</a>, <a href="#Page_58">58</a><br />
+<br />
+Protection against unsound practices of banks, <a href="#Page_46">46-52</a>; <a href="#Page_59">59-61</a><br />
+<br />
+Publicity, a safeguard, <a href="#Page_59">59</a><br />
+<br />
+<br />
+Rate of discount, law in France, <a href="#Page_118">118</a>;<br />
+<span style="margin-left: 1em;">of exchange, <a href="#Page_26">26</a>, <a href="#Page_27">27</a></span><br />
+<br />
+Rates, <a href="#Page_44">44-46</a>;<br />
+<span style="margin-left: 1em;">raising on loans and discounts, <a href="#Page_29">29</a></span><br />
+<br />
+Real estate and banks, <a href="#Page_52">52</a><br />
+<br />
+Reserve banks, Federal, <a href="#Page_98">98-100</a>;<br />
+<span style="margin-left: 1em;">central reserve, <a href="#Page_78">78</a>;</span><br />
+<span style="margin-left: 1em;">cities, <a href="#Page_24">24</a>, <a href="#Page_78">78</a></span><br />
+<br />
+Reserves, administration of funds, <a href="#Page_100">100</a>;<br />
+<span style="margin-left: 1em;">bank, <a href="#Page_35">35</a>;</span><br />
+<span style="margin-left: 1em;">English system, <a href="#Page_108">108-110</a>;</span><br />
+<span style="margin-left: 1em;">in national banks, <a href="#Page_73">73</a>;</span><br />
+<span style="margin-left: 1em;">operations of system, <a href="#Page_91">91-94</a>;</span><br />
+<span style="margin-left: 1em;">regulations regarding, <a href="#Page_52">52</a>, <a href="#Page_54">54</a>;</span><br />
+<span style="margin-left: 1em;">secondary, <a href="#Page_35">35-40</a>;</span><br />
+<span style="margin-left: 1em;">in state banks, <a href="#Page_69">69</a>;</span><br />
+<span style="margin-left: 1em;">in country banks, <a href="#Page_73">73</a></span><br />
+<span class='pagenum'><a name="Page_178" id="Page_178">[Pg 178]</a></span><br />
+<br />
+Safety, in savings banks, <a href="#Page_140">140</a>;<br />
+<span style="margin-left: 1em;">fund, <a href="#Page_56">56</a>, <a href="#Page_57">57</a></span><br />
+<br />
+Savings banks, <a href="#Page_6">6</a>, <a href="#Page_9">9</a>;<br />
+<span style="margin-left: 1em;">defined, <a href="#Page_139">139</a></span><br />
+<br />
+Saving and saving institutions, <a href="#Page_136">136-141</a><br />
+<br />
+Secretary of the Treasury and surplus funds, <a href="#Page_88">88-90</a><br />
+<br />
+Securities, dealings in the stock exchange, <a href="#Page_163">163</a>, <a href="#Page_164">164</a><br />
+<br />
+Security, liquid, <a href="#Page_53">53</a><br />
+<br />
+Silver dollars, <a href="#Page_96">96</a><br />
+<br />
+Sixty-day bills in foreign exchange, <a href="#Page_33">33</a>, <a href="#Page_34">34</a><br />
+<br />
+Soci&eacute;t&eacute; Algerienne, <a href="#Page_114">114</a><br />
+<br />
+Soci&eacute;t&eacute; Generale, <a href="#Page_115">115</a>, <a href="#Page_116">116</a><br />
+<br />
+State banks, <a href="#Page_9">9</a>, <a href="#Page_68">68-70</a>, <a href="#Page_79">79</a>, <a href="#Page_82">82</a>;<br />
+<span style="margin-left: 1em;">and Federal reserve, <a href="#Page_99">99</a></span><br />
+<br />
+St. Louis, central reserve bank, <a href="#Page_78">78</a>;<br />
+<span style="margin-left: 1em;">clearing center, <a href="#Page_24">24</a></span><br />
+<br />
+Stock exchanges, <a href="#Page_163">163-166</a><br />
+<br />
+Stockholders, liability of, <a href="#Page_46">46-48</a><br />
+<br />
+Surplus, <a href="#Page_17">17</a>, <a href="#Page_47">47</a><br />
+<br />
+<br />
+Trade or mercantile bills, <a href="#Page_34">34</a><br />
+<br />
+Treasury of the United States, <a href="#Page_75">75-78</a>;<br />
+<span style="margin-left: 1em;">operations, <a href="#Page_88">88-90</a></span><br />
+<br />
+Trust companies, <a href="#Page_9">9</a>, <a href="#Page_141">141-144</a><br />
+<br />
+Trustee banks, <a href="#Page_139">139</a><br />
+<br />
+<br />
+United States, notes, volume of, <a href="#Page_96">96</a>;<br />
+<span style="margin-left: 1em;">subtreasury, <a href="#Page_80">80</a>, <a href="#Page_81">81</a>;</span><br />
+<span style="margin-left: 1em;">treasury, <a href="#Page_75">75-78</a></span><br />
+<br />
+Units of value and foreign exchange, <a href="#Page_31">31</a><br />
+<br />
+<br />
+Vouchers, <a href="#Page_23">23</a><br />
+<br />
+<br />
+Wisconsin, regulation laws, <a href="#Page_146">146</a><br />
+</p>
+
+
+
+<hr style="width: 65%;" />
+<h2><span class="u">The National Social Science Series</span></h2>
+
+<h4><i>Edited by Frank L. McVey, Ph.D., LL.D.,<br />
+President of the<br />
+University of North Dakota</i></h4>
+
+<h4>Now Ready</h4>
+
+<div class="blockquot"><p>MONEY. <span class="smcap">William A. Scott</span>, Director of the Course in Commerce, and
+Professor of Political Economy, University of Wisconsin</p>
+
+<p>TAXATION. <span class="smcap">C. B. Fillebrown</span>, President Massachusetts Single Tax League,
+Author of <i>A B C of Taxation</i></p>
+
+<p>THE FAMILY AND SOCIETY. <span class="smcap">John M. Gillette</span>, Professor of Sociology,
+University of North Dakota</p>
+
+<p>BANKING. <span class="smcap">William A. Scott</span></p></div>
+
+
+<h4>In Preparation</h4>
+
+<div class="blockquot"><p>THE CITY. <span class="smcap">Henry C. Wright</span></p>
+
+<p>TRUSTS AND COMPETITION. <span class="smcap">John F. Crowell</span></p>
+
+<p>THE COST OF LIVING. <span class="smcap">Walter E. Clark</span></p>
+
+<p>STATISTICS. <span class="smcap">W. B. Bailey</span></p>
+
+<p>BASIS OF COMMERCE. <span class="smcap">E. V. Robinson</span></p>
+
+<p>PUBLIC FINANCE. <span class="smcap">Carl C. Plehn</span></p></div>
+
+
+<h4>Each, Fifty Cents Net</h4>
+
+<h3>A. C. McCLURG &amp; CO., PUBLISHERS, CHICAGO</h3>
+
+
+
+
+
+
+
+
+
+<pre>
+
+
+
+
+
+End of the Project Gutenberg EBook of Banking, by William A. Scott
+
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+The Project Gutenberg EBook of Banking, by William A. Scott
+
+This eBook is for the use of anyone anywhere at no cost and with
+almost no restrictions whatsoever.  You may copy it, give it away or
+re-use it under the terms of the Project Gutenberg License included
+with this eBook or online at www.gutenberg.org
+
+
+Title: Banking
+
+Author: William A. Scott
+
+Release Date: April 17, 2010 [EBook #32027]
+
+Language: English
+
+Character set encoding: ASCII
+
+*** START OF THIS PROJECT GUTENBERG EBOOK BANKING ***
+
+
+
+
+Produced by The Online Distributed Proofreading Team at
+https://www.pgdp.net (This file was produced from images
+generously made available by The Internet Archive/American
+Libraries.)
+
+
+
+
+
+
+
+
+
+                                BANKING
+
+
+                                  BY
+
+                    William A. Scott, Ph.D., LL.D.
+
+          Director of the Course in Commerce and Professor of
+           Political Economy in the University of Wisconsin
+
+
+                                CHICAGO
+                          A. C. McCLURG & CO.
+                                 1914
+
+
+                               Copyright
+                          A. C. McCLURG & CO.
+                                 1914
+
+                         Published April, 1914
+
+                     Copyrighted in Great Britain
+
+
+                 W. F. HALL PRINTING COMPANY, CHICAGO
+
+
+
+
+EDITOR'S PREFACE
+
+
+In Europe the average man looks upon the bank as a benefactor. Through
+its agency he secures capital at low rates for his business. In
+America the bank is too often regarded as a necessary evil, certainly
+not with affection. Yet it plays a most important role in the nation's
+economy. Our banking laws are obsolete, unsatisfactory, and actually
+in some instances detrimental to the best and widest use of the
+nation's resources. Europe has many lessons for us in the problem of
+how best to use our accumulations. With agriculture demanding and the
+railroads calling for more capital, the question of scientific banking
+assumes new proportions. This book, with its chapters on commercial
+and investment banking, will help to a better knowledge.
+
+                                                            F. L. M.
+
+
+
+
+AUTHOR'S PREFACE
+
+
+The purpose of this book is to supply the general reader with a simple
+statement of the principles and problems of banking. Since it is
+designed primarily for American readers, special attention has been
+given to conditions in this country. An effort has been made clearly
+to draw the line between commercial and investment banking and to
+indicate the problems peculiar to each. That it may assist the average
+person in understanding present-day banking problems and thus
+contribute towards the formation of a sound public opinion regarding
+them, is the author's hope and desire.
+
+                                                       WM. A. SCOTT.
+
+  _University of Wisconsin._
+
+
+
+
+CONTENTS
+
+
+                                                                PAGE
+
+  Chapter I. The Nature, Functions, and Classification of
+             Banking Institutions,                                 1
+
+    1. Services Performed by Banking Institutions,                 1
+    2. The Economic Functions of Banks,                            4
+    3. Classification of Banking Institutions,                     6
+
+  Chapter II. The Nature and Operations of Commercial Banking,    11
+
+    1. Commercial Paper,                                          11
+    2. The Operation of Discount,                                 13
+    3. The Conduct of Checking Accounts,                          15
+    4. The Issue of Notes,                                        19
+    5. Collections,                                               22
+    6. Domestic Exchange,                                         25
+    7. Foreign Exchange,                                          31
+
+  Chapter III. The Problems of Commercial Banking,                35
+
+    1. The Supply of Cash,                                        35
+    2. The Selection of Loans and Discounts,                      40
+    3. Rates,                                                     44
+    4. Protection against Unsound Practices,                      46
+        (a) Capital and Surplus Requirements and Double
+            Liability of Stockholders,                            46
+        (b) Inflation and Means of Protecting the Public
+            against It,                                           49
+        (c) Other Means of Safeguarding the Interests of
+            the Public,                                           59
+    5.  Adequacy and Economy of Service,                          62
+
+  Chapter IV. Commercial Banking in the United States,            68
+
+    1. State Banks,                                               68
+    2. National Banks,                                            70
+    3. The Independent Treasury System,                           75
+    4. The Interrelations of These Institutions,                  78
+    5. Operation of the System,                                   82
+        (a) Conflict of Functions and Laws,                       82
+        (b) Loan Operations,                                      85
+        (c) Treasury Operations,                                  88
+        (d) Operation of the Reserve System,                      91
+        (e) Lack of Elasticity in the Currency,                   95
+    6. Plans for Reform,                                          97
+
+  Chapter V.  Commercial Banking in Other Countries,             101
+
+    1. Common Features,                                          101
+    2. The English System,                                       104
+    3. The French System,                                        111
+    4. The German System,                                        119
+    5. The Canadian System,                                      126
+
+  Chapter VI. Investment Banking,                                136
+
+    1. Saving and Savings Institutions,                          136
+    2. Trust Companies,                                          141
+    3. Bond Houses and Investment Companies,                     144
+    4. Land Banks,                                               147
+    5. Stock Exchanges,                                          163
+    6. Some Defects in Our Investment Banking Machinery,         166
+
+  References,                                                    171
+
+  Index,                                                         173
+
+
+
+
+BANKING
+
+
+
+
+CHAPTER I
+
+THE NATURE, FUNCTIONS, AND CLASSIFICATION OF BANKING INSTITUTIONS
+
+
+The terms, "bank" and "banking," are applied to institutions and to
+businesses which differ considerably in character, functions, and
+methods, but which nevertheless have certain common features which
+justify their being grouped together. We can best prepare the way for
+a discussion of these differences and common features by a description
+of the services which these institutions perform in modern society.
+
+
+_1. Services Performed by Banking Institutions_
+
+From the point of view of their customers these services may be
+grouped under the following heads: The safekeeping of money and other
+valuables; the making of payments; the making of loans; and the making
+of investments. It is a common practice everywhere, and in some
+countries, notably the United States, almost a universal practice for
+people to intrust their money to banks for safekeeping. To a degree,
+hoarding, in the sense of locking up money in private vaults and other
+receptacles and keeping it under the eye and in the personal care of
+the owner, is still practiced, but it is doubtless on the wane in all
+civilized countries. The practice of intrusting to banks the
+safekeeping of other valuables, such as important documents, jewelry,
+plate, etc., is also widespread and growing.
+
+The service of the safekeeping of money naturally leads to the second,
+the making of payments. When we intrust our means of payment to a
+bank, it is natural that we should also make it our treasurer and
+disbursing agent, and so we do. If we have payments to make to people
+at home, in other cities of our own country, or in other countries, we
+usually order our bank to perform the service for us.
+
+Loans of almost all kinds are made by banks, and certain kinds,
+namely, those to business men for the everyday conduct of commerce and
+industry, are made almost exclusively by them. For the most part these
+are short-term loans. For long-term loans banks are also one of the
+chief resorts, but in some countries these are not to so great a
+degree monopolized by them as the short-term variety.
+
+For the investment of the surplus funds of people banks are the chief
+agencies. This function takes the form mainly of the sale of stocks,
+bonds, and mortgages, and sometimes of the promotion of new
+enterprises.
+
+None of these services are performed by banks exclusively. For the
+safekeeping of valuables, and sometimes of money, there are in some
+places safe deposit companies to which the term "banks" is not
+applied. In the making of payments the post office departments of
+governments and express companies participate, and in the making of
+loans and investments brokers, loan companies, lawyers, etc.,
+participate. The peculiarity of banking institutions consists not in
+the performance of any one of these services, but in the fact that
+they specialize in them all, or in a combination of them. Merely to
+keep money and valuables on deposit, or to act as paymaster, or to
+make loans, or to sell bonds, stocks, and mortgages would not make an
+institution a bank or an individual a banker; but to make a business
+of performing most or all of these services for the public involves
+the use of certain machinery and certain methods of procedure, and the
+assumption of a role in the nation's economy which is distinctive and
+peculiar, and which has set these institutions apart in every country
+as objects of legislation and of scientific treatment, as well as in
+the thought and regard of the people.
+
+
+_2. The Economic Functions of Banks_
+
+Viewed from the standpoint of the nation rather than from that of
+individuals, the functions of banks may be described as those of
+intermediaries in exchanges and in the investment of capital. In the
+former capacity they supply the world with the major part of its
+medium of exchange and serve as distributing agents for that portion
+of the supply which comes from other sources. They create a medium of
+exchange through a process of bookkeeping which is world-wide in
+extent, and through which the mutual indebtedness of individuals,
+cities, and other subdivisions of countries and nations, brought about
+by purchases and sales on credit, are offset without the use of money.
+
+The practice of depositing surplus funds with banks for safekeeping
+and consequently of using them as paymasters has resulted in the
+reliance of everybody upon banks for currency in any form, and has
+thus thrown upon them the responsibility of directly utilizing all the
+sources of money supply. Thus while the mints of the United States and
+most other countries coin gold bullion, and supply subsidiary silver
+and copper and nickel coins to private persons on the same terms as to
+banks, as a matter of fact few private persons take advantage of this
+privilege, finding it more convenient and profitable to get the coin
+they want from banks. The same is true of government notes in
+countries in which such notes constitute a portion of the currency.
+
+The accumulation of a nation's capital and its investment require the
+cooperation of numerous agencies of which banks are the chief. They
+collect the savings of the people, combine them into amounts of
+sufficient size for investment purposes, and invest them temporarily
+and sometimes permanently. Cooperating agencies in this work are
+insurance companies, societies of various kinds for the promotion of
+saving, stock exchanges, promoters, etc. Some of these take the place
+of banks in the performance of these services, while others supplement
+and aid them.
+
+
+_3. Classification of Banking Institutions_
+
+Banks differ from one another chiefly in the nature and degree of
+their specialization, in legal status, and in the place they occupy in
+the system to which they belong. Some banks devote the major portion
+of their effort to the conduct of exchanges and are called
+_commercial_ banks, others to investment banking and are called
+_investment_ banks. The most common subclasses under the latter head
+are savings banks, land or mortgage banks, and bond houses. Savings
+banks specialize in the collection and investment of small savings;
+land banks are primarily intermediaries between capitalists and people
+who wish to invest capital in land, building operations, and
+agriculture; and bond houses are intermediaries between capitalists
+and those who wish to invest capital in industrial, commercial, and
+transportation enterprises, or loan it to states, cities, or other
+public corporations.
+
+Commercial banks rarely confine themselves exclusively to the conduct
+of exchanges. Most of them also conduct savings departments and invest
+the funds intrusted to them through such departments in agricultural,
+industrial, or commercial enterprises or loan them to public
+corporations. Commercial banking, however, is their main concern,
+their other departments being side issues of greater or less
+importance according to circumstances. Investment banks also
+frequently carry on commercial banking as a side issue. These two
+lines of business are sometimes mixed in such proportions as to render
+classification difficult.
+
+From a legal point of view the banks of nearly all countries may be
+classified as _private_ or unincorporated, and _incorporated_,
+sometimes also called joint-stock banks. Private banks are started by
+individuals or firms, like any other private enterprise, without the
+formality of application for permission to some public officer, and
+without compliance with a set of legally prescribed regulations. They
+are subject to the laws of the country governing all kinds of private
+business enterprises and sometimes to special laws applying
+specifically to them. In some of the states of the United States such
+banks are prohibited by law.
+
+Incorporated banks are usually started by private initiative but owe
+their actual legal existence and status to a special law, to the
+requirements of which they must conform before they are permitted to
+do business. Their right to do business is usually evidenced by a
+document known as a charter, executed and delivered by a public
+officer legally endowed with the requisite authority, or passed in the
+form of a law by the legislative organs of the state. Charters of the
+latter kind are known as special charters and are rarely used
+nowadays, except in the case of institutions of a peculiar character,
+endowed with special functions. The central banks of Europe owe their
+existence to such charters, as did also the first and second United
+States banks. In the early history of the United States special
+charters were uniformly employed by the states, but for many years
+general incorporation laws have been the rule, on compliance with the
+requirements of which persons who desire to incorporate banks can
+secure charters.
+
+In federal states, both the federal government and the governments of
+the constituent states frequently have and exercise the right to
+incorporate banks. In the United States, banks incorporated by the
+federal government under the terms of a general law, originally passed
+in 1863 and many times amended since that date, are known as
+_national_ banks, and those incorporated by the states under the
+terms of general banking acts or of general incorporation laws are
+known as _state_ banks. These latter are endowed with privileges which
+enable them to exercise commercial and some investment banking
+functions. Other banks also are incorporated by our states under the
+terms of general laws, which are known as savings banks and trust
+companies. The former, as the name implies, are institutions primarily
+designed for the encouragement, collection, and investment of savings.
+The latter are called trust companies because the earliest
+institutions of this type made the execution of trusts of various
+kinds their exclusive business. Banking functions were later added and
+in many cases have now assumed chief importance.
+
+The nature of the banking business requires some kind of organization
+of the individual institutions in which certain ones will assume to a
+degree at least the role of bankers' banks. In most European countries
+this position is occupied by single institutions specially chartered
+and endowed with special privileges and usually described as central
+banks. Examples are the Bank of England in England, the Bank of France
+in France, and the Imperial Bank of Germany in Germany. Around these
+are grouped the other institutions in a kind of hierarchy, certain
+large banks in the larger cities forming centers about which smaller
+institutions group themselves. In the United States there is no single
+central institution, but a small group of banks in New York City are
+the real centers of the system. Around these are grouped the banks in
+the other large cities of the country and these in turn perform
+important services for banks in the surrounding smaller towns and
+country districts.
+
+
+
+
+CHAPTER II
+
+THE NATURE AND OPERATIONS OF COMMERCIAL BANKING
+
+
+In the preceding chapter commercial banking has been defined as the
+conduct of exchanges by means of a world-wide process of bookkeeping.
+We must now describe this process. Its essential features are the
+discount of commercial paper, the conduct of checking accounts, and
+the issue of notes.
+
+
+_1. Commercial Paper_
+
+By commercial paper is meant the credit instruments or documents which
+the credit system now in general use throughout the commercial world
+regularly brings into existence and liquidates.
+
+The essence of this system is buying and selling _on time_. The farmer
+buys seed, implements, fertilizer, labor, etc., and pays for them
+after the crops have been harvested and sold. The manufacturer buys
+raw materials and pays for them after they have passed through the
+transformation process which he conducts and the completed goods have
+been marketed. He frequently sells them to jobbers or wholesalers on
+time and these in turn sell them on time to retailers and these to
+consumers. Farmers, manufacturers, and merchants both buy on time and
+sell on time, and are thus both debtors and creditors, and each
+expects that his sales will ultimately pay for his purchases.
+
+The obligations involved in these transactions are represented and
+recorded in the form of book accounts, promissory notes, or bills of
+exchange, the latter being written or printed, or partly written and
+partly printed, orders of creditors on debtors to pay to themselves or
+to third parties the sums indicated. These documents are being
+constantly made and constantly paid as the processes of agriculture,
+industry, and commerce proceed. Indeed, their creation and liquidation
+is a normal phenomenon of our modern economic life.
+
+The term commercial paper, as we are using it, applies to such
+promissory notes and bills of exchange as belong to this credit
+system. It does not apply to such notes and bills when they owe their
+existence to credit operations of a different kind, such for example
+as accommodation loans or investment operations. Indeed, the
+essential characteristic of commercial paper is not revealed in the
+form of the credit document but in the fact that it is a link in this
+chain of exchange operations by which modern commerce is carried on.
+
+This use of the term should also be distinguished from the one common
+among bankers and others. In this popular usage these documents are
+called commercial paper because they are themselves objects of
+commerce. In our use of the term the adjective "commercial" applies to
+them only when they play the role of intermediary in a process of
+exchange through credit. In this sense it is a matter of indifference
+whether they pass through the hands of brokers or not, and the fact of
+their being objects of purchase and sale does not confer the quality
+of commercial paper upon documents having an origin and character
+other than that above described.
+
+
+_2. The Operation of Discount_
+
+Every person in this chain of credit is confronted with the problem of
+paying his debts as they mature by the use of the amounts due him from
+other people. Since it is rarely possible to arrange maturities on
+both sides in such a way that the amounts due to be paid him at a
+given date shall at least equal those he is due to pay on that date,
+some means of transforming claims against other people due in the
+future into present means of payment must be found. The one
+universally employed is the discount of commercial paper. By this is
+meant the exchange at a bank of his own promissory notes due at times
+when debts of equal or greater amount due him mature, or of bills of
+exchange drawn against his debtors, for cash or credits on a checking
+account. These latter are available as means of payment at any time.
+
+As a consideration for this accommodation, the bank charges interest
+for the period intervening before the maturity of the paper
+discounted. Sometimes this charge is paid at the time the paper is
+purchased and sometimes at the date of its maturity. The term
+"discount" technically means taking interest in advance by making
+available as means of present payment in any of the above mentioned
+forms a sum less than the amount the bank expects to collect at the
+date of the maturity of the discounted paper. If the interest is paid
+when the discounted paper matures, the process is technically called
+a loan. However, since the time of collecting interest makes no
+essential difference in the nature of the transaction, the process is
+commonly described as the discount of commercial paper, regardless of
+whether the interest is collected in advance or not.
+
+
+_3. The Conduct of Checking Accounts_
+
+A checking account is an ordinary book account on which are credited
+the cash deposited by a customer and the proceeds of collections,
+loans, and discounts made on his behalf, and on which are debited
+payments made to him in cash or on his behalf to other people or to
+the bank itself. These payments are made on orders signed by the
+customer and known as checks.
+
+The ordinary customer of a commercial bank every day brings to the
+bank the cash he receives as the result of the day's business, and the
+checks received, drawn on his own and other banks, and is credited
+with the amount on the books of the bank as well as on a passbook
+which he himself retains. If he needs cash during the day, he presents
+to the bank a check payable to himself for the amount needed, and
+receives the kinds and denominations wanted; and if he wants to make
+payments to his creditors in other forms than cash, he sends them
+checks on his bank payable to their order, or a check drawn by his
+bank on some bank in another place, usually called a draft, which he
+has obtained by exchanging for it a check drawn to the order of his
+bank. To the amount of these payments his account at the bank is
+debited, and from time to time his passbook is left at the bank for
+the entry therein of the debits made to date and its subsequent return
+to him.
+
+The customer must take care that his account is not overdrawn, that
+is, that the debits on his account do not exceed the credits, since
+overdrafts, except by accident or for very short periods and small
+amounts, are not allowed in this country, and in other countries,
+where they are allowed, they must be provided for in advance by a
+special agreement between the bank and the customer, which usually
+involves the deposit with the bank of ample security. In order to
+avoid overdrafts, the customer in this country agrees with his banker
+on what is known as a "line," that is, a maximum amount of loans or
+discounts to be allowed. Whenever his credit balance falls to a
+certain minimum, also established by agreement with the bank, the
+latter discounts for him the paper of his customers, that is, bills of
+exchange drawn on them or their promissory notes in his favor, or his
+own promissory notes. The proceeds of these discounts are credited on
+his account like deposits of cash or of checks for collection.
+
+So long as the discounts are confined to commercial paper the bank's
+part in these transactions consists almost exclusively of bookkeeping
+between its customers and between itself and other banks. Ordinarily,
+what is debited on one man's account is credited on another's, the
+cash received nearly balancing that paid out. To the extent that the
+cash receipts and payments do not balance, the bank either has a
+surplus or is obliged to provide for the meeting of a deficit. The
+means available for this latter purpose will be explained in
+subsequent sections, as well as some of the details of this
+bookkeeping process. For the present it is important to note precisely
+how the discount of commercial paper is related to this bookkeeping
+process.
+
+As explained in Section 1, commercial paper is an essential part of
+the process of exchanging goods through credit. A person buys on time
+and sells on time and expects to pay for his purchases by the
+proceeds of his sales. So long, therefore, as the processes of
+commerce and industry proceed in a normal fashion, the paper
+discounted by a bank will be paid at maturity and the credit balance
+created by means of such discounts offset by corresponding debits.
+Ordinarily the credits created through discounts during a given
+period, say a day or a week, in favor of one set of customers will be
+balanced during this same period by the payment of notes previously
+discounted for other customers. Within a complete trading area this is
+certain to happen, since purchases and sales of goods are equal and
+what is credited to one man is debited to another.
+
+The result is very different if a bank discounts investment paper,
+that is, credit documents which represent the unproductive consumption
+of individuals or of public and private corporations, or which
+represent the purchase on time of the instruments of production rather
+than the production of goods through the use of such instruments and
+their transfer from the producer to the consumer. The means of payment
+of such documents can only be created gradually by the application of
+the profits of the enterprises in which the investments were made, or
+by taxes spread over a series of years, or by a slow process of
+saving. If a bank issues its own demand obligations in exchange for
+such documents, it cannot make its books balance and it will be
+constantly exposed to the danger of forced liquidation. If it attempts
+to protect itself by requiring that the discounted paper shall mature
+in a short period, the necessity of liquidation will be forced upon
+customers who are responsible for the payment of the discounted paper;
+that is, such customers will be obliged to sell at such prices as they
+can command the property in which the investments were made, or some
+other property. Such liquidation always results in forced
+readjustments of prices and business depression, and sometimes in
+commercial crises.
+
+
+_4. The Issue of Notes_
+
+As an alternative for or a supplement to the conduct of checking
+accounts a commercial bank may issue its promissory notes payable to
+bearer on demand. By the issue of notes is meant their transfer to
+customers in exchange for cash, for checks left for collection or
+drawn against a credit balance in a checking account, or for
+discounted notes and bills.
+
+By the use of these notes commercial banking can be carried on
+without checking accounts. In that case the notes are issued in
+exchange for cash and discounted bills, and notes are returned to the
+bank in exchange for cash or when discounted bills or notes mature and
+are paid. In the bookkeeping process which has been described bank
+notes thus issued and returned perform precisely the same function as
+checking accounts, and are related to the discount of commercial paper
+and the credit system of the country in precisely the same manner as
+such accounts.
+
+Most banks of issue at the present time conduct checking accounts
+also, using the one instrumentality or the other as their customers
+desire. In this case notes are issued in exchange for checks drawn
+against credit balances on checking accounts or deposited for
+collection as well as in exchange for discounted notes and bills and
+cash.
+
+By the use of both notes and checking accounts, a bank can supply most
+of the needs of its customers for a circulating medium, the notes
+serving as hand-to-hand money, and the checking accounts, practically
+all other purposes. Being the direct obligations of banks attested by
+the signatures of their responsible officers, and being payable to
+bearer on demand and capable of being issued in all necessary
+denominations, such notes can be transferred without indorsement, can
+be used for making change and payments of small and moderate size for
+which checks are not convenient, and they do not need to be presented
+at a bank for the test of their validity. If the bank or banks which
+issue them are properly conducted and supervised and properly
+safeguarded by law, such notes will circulate freely through the
+length and breadth of a country.
+
+Checking accounts meet in the most satisfactory manner all currency
+needs for which hand-to-hand money is not well adapted, such as large
+payments and payments at a distance. With a few strokes of a pen
+payments of the greatest magnitude can be made through their agency.
+Checks can be sent through the mails at slight expense and without
+danger of loss of the amount involved. By the devices known as
+travelers' and commercial letters of credit, checking accounts supply
+the most convenient form of currency for travelers and for merchants
+engaged in foreign trade.
+
+Besides bank notes and checking accounts the only forms of currency
+needed in any community are standard and subsidiary coins, the former
+for use as ultimate redemption material for all other forms of
+currency and for the payment of international and other balances, and
+the latter for small change. Even these forms of currency are supplied
+by commercial banks, but since they do not create them, ways and means
+of procuring them in the quantities needed constitute one of their
+peculiar problems.
+
+
+_5. Collections_
+
+One of the most important functions of commercial banks is the
+collection for their customers of checks and drafts drawn on other
+institutions. When these documents are received, the accounts of
+customers who deposited them are credited with the amounts, less a
+small fee for collection, unless by agreement this service of
+collection is performed free of charge. The checks are then assorted
+according to the banks upon which they are drawn and the cities in
+which those banks are located.
+
+Checks drawn upon home banks are collected either through messengers
+who present the checks at the counters of the banks upon which they
+are drawn and secure payment therefor, or through the local clearing
+house. This is a place where representatives of the banks meet for the
+exchange of checks. After the representative of each bank has
+distributed all the checks held by his institution against the others
+participating in the clearing, and received from them those drawn
+against his bank, a balance sheet is prepared showing the balance due
+by or to his bank after the total of the checks distributed has been
+balanced against the total received. If said balance is adverse, it is
+paid to the master of the clearing house, and if it is favorable, it
+is received from him.
+
+The checks received through the clearing house or presented by
+messengers from other banks and paid, are debited to the accounts of
+the persons who drew them and returned to such persons as vouchers,
+the net result of the entire transaction being the same as if all the
+parties involved had been customers of a single bank, with the
+exception that some means of paying balances had to be found. Since
+balances are sometimes paid by checks on some central institution in
+which credit balances may be obtained by rediscounts of commercial
+paper, this necessity can be met without the use of any form of
+currency other than that furnished by banks themselves.
+
+Checks drawn upon out-of-town banks are, in this country, collected
+through so-called correspondents. Each bank enters into an
+arrangement with a few other banks, distributed throughout the country
+and conveniently located for the purpose, by which the correspondent
+bank agrees to conduct with it a checking account on which it will
+credit at par or at a stipulated discount the checks sent it for
+collection and debit checks drawn against such an account. A
+comparatively small number of such correspondents suffices, since
+certain banks in the larger cities, by making a business of such
+collections, conduct checking accounts with a large number of banks,
+and can thus make collections by mere transfers of credits on their
+own books or by the use of the local clearing house. The so-called
+reserve cities in this country constitute clearing centers for the
+territories contiguous to them, and New York, Chicago, and St. Louis,
+for the entire country.
+
+Checks received from correspondents and drawn against themselves are
+debited to the accounts of the customers who drew them and returned as
+vouchers in the same manner as checks received through the clearing
+house or paid over their own counters.
+
+Through this interchange of checks between banks and the conduct of
+checking accounts with each other, intermunicipal and international
+exchanges are conducted through the bookkeeping processes of
+commercial banks with the same ease and economy as are exchanges
+between people living in the same town.
+
+
+_6. Domestic Exchange_
+
+The accounts of a bank with its correspondents are a record of the
+transactions of its customers with the outside world, the checks they
+receive as a result of sales to outsiders of merchandise, real estate
+or other property, or as a result of gifts by outsiders to them being
+credited on such accounts, while the checks they draw or the drafts
+they purchase in payment for merchandise, real estate or other
+property purchased of outsiders, or of gifts made to them are debited.
+When in a given period, say a day or a week, the receipts of the
+customers of a bank from outsiders, as a result of current or past
+sales and gifts, exceed the payments made by them as a result of
+purchases and gifts, its credit balances with its correspondents will
+increase, and under opposite conditions they will decrease. If the
+payments should continue in excess for a considerable period, the
+credit balances of a bank with its correspondents would be exhausted
+and some means of replenishing them would have to be found, and under
+the opposite conditions too large a portion of the bank's resources
+would accumulate with its correspondents and some means of withdrawing
+funds would have to be found.
+
+When a bank needs to replenish its credit balances with its
+correspondents, it may ship cash or purchase drafts from other home
+banks, which it can send to its correspondents for collection like
+checks deposited in the ordinary course of business. The latter
+resource will of course be available only when these other banks'
+balances with their correspondents are not exhausted. Should the
+balances of all the banks of a town with their out-of-town
+correspondents be nearly or quite exhausted, shipments of cash to
+correspondents could not be avoided. If a bank wishes to withdraw
+funds from its correspondents for home use, it may order cash shipped
+or it may, perhaps, be able to sell drafts for cash to other home
+banks.
+
+The expenses involved in shipments of cash, loans, or purchases or
+sales of drafts for the purpose of replenishing balances with or
+withdrawing them from out-of-town correspondents, give rise to what is
+called the _rate of exchange_. If, in order to make out-of-town
+payments for its customers, a bank is obliged to pay the expense of
+shipping cash to its correspondents or to pay a premium on drafts
+purchased from other banks, the natural method of reimbursement will
+be a premium charge on drafts sold equal to the amount of the expense
+incurred. If it wishes to withdraw a balance with its correspondent,
+since to order cash shipped will involve expense, it will be glad to
+sell drafts for cash at a discount not to exceed such expense.
+
+The rate of exchange, or the price of drafts on a given point, may,
+therefore, fluctuate between a premium equal to the cost of shipping
+cash to that point and a discount of the same amount. Beyond these
+extremes, these fluctuations cannot ordinarily go, because customers
+may demand cash of their banks in payment of checks against their own
+credit balances and ship it to their out-of-town creditors at their
+own expense, and would do so if the rates charged on drafts should
+make such procedure profitable. The actual rate of exchange will not
+ordinarily reach either of these extremes, on account of competition
+either between the banks which are desirous of selling drafts on their
+correspondents or between those which are forced to buy as an
+alternative to cash shipments. If the aggregate balances of the banks
+of a town with their out-of-town correspondents are large and
+increasing, the pressure to sell drafts will be greater than that to
+buy and the rate of exchange will go to a discount, the amount of
+which, however, will be fixed by competition between the selling
+banks. In the opposite case, the rate will go to a premium and be
+fixed by competition between the buying banks.
+
+In most towns in the United States there is little or no competition
+between banks in the business of buying and selling drafts and
+consequently no open market for exchange and no quotations of exchange
+rates. In such cases each bank acts more or less independently;
+shipments of cash to or from correspondents are the ordinary means of
+regulating balances; and the cost of such shipments are charged to the
+general expense account of the bank and taken out of customers either
+by a fixed and more or less invariable charge on drafts sold, or in
+other ways.
+
+Since the balances of the banks of a town with their out-of-town
+correspondents depend primarily upon the commercial and gift relations
+of their customers with the outside world, it is pertinent to inquire
+whether as a result of a long continued excess of purchases from
+outsiders over sales to them and of gifts to over gifts from them, the
+cash resources of a community might not be completely exhausted, and
+if not, how such an outcome is prevented.
+
+Bankers have no direct control over the purchases and sales of their
+customers, but through the rate of interest they charge on loans and
+discounts and their ability absolutely to discontinue such
+accommodations they exert a very potent indirect influence. The rates
+of interest and discount charged are an important element in the cost
+of doing business and, if loaning and discounting is discontinued,
+sales of property to meet maturing obligations are forced, with the
+result of price readjustments between the town in question and the
+outside world which speedily change the relations between purchases
+and sales.
+
+When the cash resources of the banks of a town approach the limit of
+safety and their balances with their correspondents fall to an
+ominously low point, the normal method of procedure is to raise the
+rates on loans and discounts, and if conditions grow worse, to raise
+them higher still and as a last resort to cease temporarily to make
+them at any price. By increasing the cost of doing business this rise
+in the rates will check purchases by diminishing or annihilating the
+profits resulting, and will stimulate sales by rendering it more
+profitable for some customers to secure funds by sales to outsiders at
+lower prices than were formerly asked rather than by borrowing from
+banks. Under ordinary circumstances this procedure will be sufficient
+to change an unfavorable into a favorable balance of indebtedness with
+the outside world, with the result that more checks on outside
+institutions will be deposited with the banks and a smaller amount of
+drafts purchased. Bankers' balances with their correspondents will,
+therefore, increase, and with them their ability to command cash in
+case of need. The demands made upon them for cash will also decrease,
+since the volume of loans and of business transacted will fall.
+
+If the banks stop discounting, a more or less violent readjustment
+with the outside world results. Business men who have obligations to
+meet, and most of them will belong to this class, are obliged to sell
+their goods and property at whatever prices are necessary and to stop
+purchasing entirely. The outcome, so far as the banks are concerned,
+is as above indicated. If conditions are such that sales at any price
+cannot be forced, a crisis ensues; that is, business operations are
+temporarily suspended and transfers of property in settlement of
+obligations are made through bankruptcy and other court proceedings.
+
+
+_7. Foreign Exchange_
+
+The business relations between banks located in different countries do
+not differ in any essential respect from those between banks located
+in the same country. Interchange of checks, the conduct of checking
+accounts, shipments of cash, and borrowing and lending proceed in the
+same manner as between domestic institutions. The chief peculiarities
+of the foreign exchanges are due to the fact that different units of
+value and sometimes different standards must here be reckoned with,
+and that the precious metals, chiefly gold, are used in the settlement
+of balances. Drafts drawn in the United States on English points, for
+example, call for the payment of pounds sterling, those on French
+points for francs, and those on German points for marks, while all
+must be paid for in dollars.
+
+The translation of the language of values of one country into that of
+others thus involved requires the calculation of a so-called _par of
+exchange_. By this is meant the relation between the weights of pure
+metal contained in their respective units of value, if the countries
+in question have the same standard, and the relation between the
+market values of the metallic content of their units, if their
+standards are different. Thus the par of exchange between this country
+and England is $4.8665, since our dollar contains 23.22 grains of pure
+gold and the English pound sterling 4.8665 times as many grains, or
+113.0016. Our par of exchange with France is 19.294 cents, the
+quotient of 4.4802, the number of grains of pure gold in the French
+franc, divided by 23.22. Between China and the United States the par
+of exchange is the market value in our dollars of the amount of silver
+contained in the tael, the Chinese unit.
+
+Another technical term employed in connection with the foreign
+exchanges is _the gold points_. These are the points above and below
+the par of exchange fixed by the addition in the one case, and the
+subtraction in the other, of the cost of shipping gold between the two
+places in question. They are the points between which the rates of
+exchange fluctuate, or the points at which, when the rate of exchange
+reaches them, gold moves between gold standard countries. Assuming
+for example, that the cost of shipping gold between New York and
+London is two cents per pound sterling, the gold points are 4.8865 and
+4.8465, it being profitable to ship gold from New York to London when
+sterling exchange reaches the former figure and to import gold from
+London when it reaches the latter figure.
+
+In the conduct of the foreign exchanges several classes of bills are
+employed upon which the quotations differ, in part on account of
+differences in their quality and in part on account of the interest
+element entering into the value of time bills. For example, New York
+regularly quotes on London _cables_, _demand_, and _sixty-day_ bills.
+The rates on a certain date were: Cables, 4.8860; demand, 4.8790; and
+sixty days, 4.8370. Inasmuch as these are all bankers' bills and
+consequently of the same quality, the differences in their quotations
+are due to the interest element and to the fact that in the case of
+the cables the cost of the cablegram is included.
+
+When a New York banker sells a cable on London, his balance with his
+correspondent is reduced by the amount in a few hours, and the
+interest he receives on such balances is proportionately diminished at
+once, and he is also out the cost of the necessary cablegram. When he
+sells a demand bill, his account with his London correspondent remains
+undiminished during the time required for sending the bill by mail
+across the Atlantic and for its presentation for payment. He draws
+interest on his entire balance during this period. When he sells a
+sixty-day bill, his balance does not suffer diminution on its account
+for sixty days. In order to place these bills on a footing of equality
+so far as he is concerned, therefore, he must quote demand and
+sixty-day bills lower than cables; the former by the cost of the
+cablegram plus interest on the amount of the bill, say for ten days,
+at the rate he receives on his London balance, and the latter by the
+amount of the cablegram plus interest on the amount for sixty days at
+the same rate.
+
+Trade, or mercantile, as well as bankers' bills are also frequently
+and, in some markets, regularly quoted. Being of a quality ranked as
+inferior to bankers' bills, they must be negotiated at a lower rate
+and are quoted accordingly.
+
+
+
+
+CHAPTER III
+
+THE PROBLEMS OF COMMERCIAL BANKING
+
+
+The conduct of commercial banking presents problems both to the
+bankers and to the public, the methods of solution of which will be
+given attention at this point. The problems concerning the bankers
+primarily may be grouped under the heads, supply of cash, selection of
+loans and discounts, and rates; and those which primarily concern the
+public may be grouped under the heads, protection against unsound
+practices, and adequacy and economy of service.
+
+
+_1. The Supply of Cash_
+
+The credit balances on checking accounts and the notes of commercial
+banks are payable on demand in the legal-tender money of the nation to
+which they belong, and such banks must at all times be prepared to
+meet these obligations.
+
+The term employed to designate the funds provided for this purpose is
+_reserves_, and in this country they consist of money kept on hand
+and of credit balances in other banks. In other countries there is
+also included under this head commercial bills of the kind which can
+always be discounted. The term _secondary reserve_ is sometimes
+employed in this country to designate certain securities, such as
+high-class bonds listed on the stock exchanges, which can be sold
+readily for cash in case of need.
+
+The amount of reserve required can be determined only by experience.
+In ordinary times it depends chiefly upon the habits of the community
+in which the bank is located regarding the use of hand-to-hand money
+as distinguished from checks and upon the character of its customers.
+These habits differ widely in different nations, and considerably in
+the different sections and classes of the same nation. In most
+European and Oriental countries, for example, checks are little used
+by the masses of the people, while in the United States and England
+they are widely used. In these latter countries, however, they are
+less widely used by people in the country than in the cities, and by
+the laboring than the other classes in the cities. Within the same
+city one bank may need to keep larger reserves than another on account
+of the peculiarities of the lines of business carried on by its
+customers and the classes of people with whom it deals.
+
+In times of crisis and other periods of extraordinary demand, bank
+reserves must be much larger than in ordinary times. Hoarding,
+unusually large shipments of money to foreign countries and between
+different sections of the same country, and payments of unusual
+magnitude, increase the demands for cash made upon banks at such
+times.
+
+The manner in which clearing and other balances between banks are met
+also has an influence on the amount of reserves required. If such
+balances are paid daily and always in cash, the amount needed for this
+purpose is much larger than if they are paid in checks on some one or
+a few institutions and at longer intervals.
+
+The note issue privileges of a bank also affect its reserve
+requirements. Since, if not prohibited by law, notes may be issued in
+all denominations needed for hand-to-hand circulation within a nation,
+and since for all purposes except small change such notes are as
+convenient as any other form of currency, a bank with unrestricted
+issue privileges can supply all the demands of its customers for
+currency for domestic use, except those for small change, without
+resort to outside sources of supply. In this case, however, it needs
+to keep a reserve in order to meet demands for the redemption of
+notes. Such demands arise on account of the need of coin for small
+change or for shipment abroad or of means for meeting domestic
+clearing and other bank balances. The aggregate needed for the supply
+of such demands, however, is much less than would be required if the
+privilege of issuing notes did not exist.
+
+In the maintenance of reserves the chief reliance of commercial banks
+is the circulation of standard coin within a nation and the
+importation of such coin. The coin within the borders of a nation
+passes regularly into the vaults of banks by the process of deposit,
+and on account of the credit balances they carry with foreign
+institutions, the loans they are able to secure from them, the
+commercial paper they hold which is discountable in foreign markets,
+and the bonds and stocks sometimes in their possession which are
+salable there, they are able to import large quantities in case of
+need. Since the standard coin in existence in the world adjusts itself
+to the need for it in substantially the same manner that the supply of
+any other instrument or commodity adjusts itself to the demand, banks
+ordinarily have no difficulty in supplying their needs, and under
+extraordinary circumstances, though difficulties along this line
+sometimes arise, means of overcoming them are available which will be
+discussed in the proper place.
+
+If, as is the case in the United States, certain forms of government
+notes are available as bank reserves, these find their way into the
+banks' vaults by the process of deposit in the same manner as coin.
+The possession of such notes by a bank enables it, to the extent of
+their amount, to throw the responsibility for the supply of standard
+coin upon the government, and in the circulation of the country such
+notes take the place of an equivalent amount of standard coin. Whether
+or not a government ought to assume such a responsibility is a
+question which will be discussed in a subsequent chapter.
+
+For the nation as a whole, the balances in other banks and the
+discountable commercial paper and bonds which a bank may count as a
+part of its reserves are not reserves except to the extent that they
+may be employed as a means of importing gold. They are only means
+through which real reserves of standard coin are distributed. The
+payment in cash of a balance with another bank or the discount of
+commercial paper with another domestic bank or the sale of bonds on
+domestic stock exchanges do not add to the sum total of the cash
+resources of the banks of a nation. Their only effect is to increase
+the cash resources of one bank at the expense of another.
+
+Adequate facilities for the distribution of the reserve funds of a
+country, however, are second in importance only to the existence of
+adequate supplies of standard coin. If such facilities are lacking,
+existing reserves can be only partially and uneconomically used, with
+the result that much larger aggregate reserves are required than would
+otherwise be necessary and that the entire credit system is much less
+stable than it otherwise would be.
+
+
+_2. The Selection of Loans and Discounts_
+
+The problem of the reserves is vitally connected with that of the
+selection of loans and discounts. As was shown in the preceding
+chapter, the chief business of a commercial bank is to conduct
+exchanges by a process of bookkeeping between individuals, banks,
+communities, and nations. This process consists primarily in the
+converting of commercial bills and notes into credit balances and
+bank notes, in the transfer of such balances and notes between
+individuals and banks, and in the final extinguishment of such
+balances and the return of such notes at the maturity of the
+commercial bills and notes in which the process originated.
+
+In this process there is little need for cash, provided the
+arrangements between banks for clearing checks and for the interchange
+of notes are complete and efficiently administered. But when a bank
+accepts investment in lieu of commercial paper, its need for cash at
+once increases, because the demand obligations created by the credit
+balances or the bank notes into which this paper was converted are not
+extinguished by payments for goods purchased, but must be met by cash.
+
+To distinguish between commercial and investment paper is, therefore,
+one of the chief problems confronting commercial bankers. For its
+solution an accurate knowledge of the business operations of customers
+is necessary. An inspection of the paper presented and a general
+knowledge of their wealth and business capacity are important, but not
+sufficient. The forms of the paper employed in both commercial and
+investment operations may be the same, and the possession of wealth
+does not ensure the payment of the paper at maturity.
+
+The chief means available for the acquisition of this knowledge are
+the requirement from customers of frequent statements of their
+operations, on properly prepared forms; the use, wherever possible, of
+the documented commercial bill of exchange; and the maintenance of
+credit departments equipped with the means of accurately studying
+commercial, industrial, and agricultural operations, and of diagnosing
+economic conditions. The study of carefully prepared statements of
+customers made at frequent intervals reveals to the banker not only
+the nature of the operations represented by the paper presented for
+discount, but the trend of the business of his customers and, through
+them, of the entire country. With such knowledge, he is not only able
+to protect his institution against improper loans and discounts, but
+to give valuable advice to his customers, advice which no one else is
+in a position to give so accurately.
+
+By a documented bill of exchange is meant a bill drawn by a seller
+upon the purchaser of goods, accompanied by documents evidencing the
+transaction; such, for example, as bills of lading, warehouse
+receipts, and insurance policies. The names on such bills guide the
+banker in his efforts to trace the transaction in which it originated
+and the documents enable him absolutely to identify it, and constitute
+security for the loan.
+
+Instead of such bills, promissory notes made payable to banks are
+commonly used in this country, greatly to the disadvantage of the
+banking business. Such a note reveals nothing to the banker concerning
+the purpose for which the loan is made, while a commercial bill, even
+without documents, reveals the names of the principals of the
+transaction in which the banker is asked to participate. Acquaintance
+with these men and knowledge of the business in which they are engaged
+at once suggests the probable origin of the bill and furnishes the
+clue needed for subsequent investigation.
+
+A properly equipped credit department will keep on file and at all
+times available for use the data requisite for the information of the
+officers upon whom the responsibility of selecting the loans and
+discounts rests. Such data will not only concern the character and
+business of each customer and the bank's previous dealings with him,
+but general economic conditions, the operations and experiences of
+other banks, other business institutions, governments, etc.
+
+
+_3. Rates_
+
+Besides rates of exchange considered in the preceding chapter,
+commercial banks are concerned with loan and discount rates.
+
+Rates on deposits, though sometimes employed, have no place in
+commercial banking, since commercial deposits are only the credit
+balances resulting from loans and discounts or from funds intrusted to
+the bank for temporary safekeeping or disbursement in the interest of
+the depositor. In every case they represent a service rendered the
+depositor for which the bank must be paid, and, when interest is
+allowed, the depositor must repay it in some form with an increment
+sufficient to remunerate said service.
+
+Commercial banks may and usually do conduct savings accounts also, for
+which an interest payment is not only defensible but in every sense
+desirable, but in so doing they are going beyond the sphere of
+commercial banking, which alone is under consideration at this point.
+
+Rates charged on loans and discounts are the chief means through which
+commercial banks are remunerated for the services they perform. In the
+long run these rates are determined by competition, and represent the
+current market value of the services performed by bankers. Custom
+often affects them temporarily and sometimes for long periods prevents
+their response to influences tending to produce change, but in the
+long run they yield to economic force and conform to the laws of
+value.
+
+Variations in the rate of discount are the most efficient means
+employed by commercial banks for the regulation of the volume of their
+loans and discounts and for changing the percentage their reserves
+bear to deposits and note issues. An increase of these rates tends to
+check loans and discounts, to decrease deposits and note issues, to
+increase reserves, and consequently to raise the percentage of
+reserves to deposits and issues.
+
+It checks loans and discounts by increasing the expense of conducting
+business operations on a credit basis, thus diminishing profits and
+sometimes causing losses, checking enterprise and decreasing the
+volume of commercial transactions. A decrease of loans and discounts
+correspondingly diminishes deposits or note issues, or both, since
+these are simply the counterpart or representative of such loans and
+discounts in the form of credit balances in the checking accounts
+conducted by the banks or the equivalent of such 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 funds and of
+the amount of the liability of stockholders for subscriptions in case
+of failure, no well-founded principles have been developed for the
+guidance of legislators. They should be great enough to cover
+prospective losses and to induce conservatism, honesty, and efficiency
+in management, and not so great as to prevent the free flow of an
+adequate amount of capital into the business. Unfortunately, the
+statistics of losses in cases of failure are not a sufficient guide.
+In some cases they bear a large proportion to the volume of business
+transacted and in others a very small one, and the number of cases
+available are too small to give much value to averages. The amount
+necessary to secure the best possible management is also purely
+problematical.
+
+In lieu of well-founded principles, the practice has developed in this
+country of making the minimum capitalization permitted depend upon the
+population of the town in which the bank is located. This seems to be
+a very crude and indirect method of proportioning capital to the
+volume of business transacted. The fixing of such a proportion, or of
+a proportion which no bank should be permitted to exceed, is probably
+the best method of solving this problem, but it should be done
+directly and not by the roundabout method which has been mentioned
+above.
+
+A proportion of ten to one between capital and aggregate demand
+obligations would probably be justified by American experience. The
+present practice of fixing the surplus fund at twenty per cent of the
+capital would be justifiable if the capital fund were properly
+regulated in amount.
+
+(_b_) _Inflation and Means of Protecting the Public against It._--The
+greatest abuse to which the business of commercial banking is subject,
+and against which the public most needs protection, is inflation. This
+is a condition difficult to diagnose, and not well understood by the
+general public and even by bankers. The most easily recognized symptom
+of its existence is the forced liquidation of credits; that is, forced
+sales of property in order to meet maturing obligations to banks.
+When, for example, the people whose notes or bills have been
+discounted by banks default in large numbers, and the collateral
+deposited as security has to be sold, or, in the absence of
+collateral, the courts must order the sale of their property, the
+presence of inflation may be suspected.
+
+The chief cause of inflation is the issue by commercial banks of
+demand obligations against investment securities. The means of
+liquidating such securities are the profits of the enterprises in
+which the investments were made and in the nature of the case several
+years are required for the accomplishment of this end. Meantime the
+demand obligations of the banks issued against them in the form of
+balances on checking accounts or notes must be met and, the funds
+regularly deposited with them as a result of the operation of such
+enterprises being inadequate, other means must be found. The only one
+available is the sacrifice, at forced sales, of the property in which
+the investment was made or of some other property in the possession of
+the persons responsible to the bank.
+
+The banks usually protect themselves against such forced liquidation
+by the requirement that the paper they discount shall mature at short
+intervals, usually not to exceed four to six months, and accept the
+long-time securities, such as bonds, stocks, and mortgages, only as
+collateral. By this means they are able to force the liquidation on
+their customers. Otherwise they would be obliged themselves to endure
+it, with the result that their capital and surplus funds would be
+impaired and perhaps exhausted; and, if they should prove inadequate,
+failure would be inevitable.
+
+The evil involved in the forced sales of property caused by inflation
+is the readjustment of prices through which it is accomplished, and
+the depression and, sometimes, panic which follow. When the prices of
+many kinds of property must be greatly depressed in order to induce
+their transfer to other hands, the machinery of commerce and industry
+is thrown out of adjustment and is sometimes rendered temporarily
+useless. This result is due to the fact that the relations between
+costs of production and the returns from the sale of finished products
+are so changed that profits are reduced or annihilated, and many
+persons are financially ruined. Readjustments of the prices of raw
+products, labor, and finished goods, and the transfer of plants to new
+hands, are, therefore, necessary before industry, commerce, and
+agriculture can again operate in a normal way, and during the period
+of readjustment some enterprises must entirely stop operations, and
+all must slow down. At such times many laborers are thrown out of
+employment, many more work part time only, the wages of nearly all
+are lowered, and most other classes of income are cut down. Depression
+and, in extreme cases, panic are the result, and these have serious
+consequences other than financial.
+
+The means employed for the protection of the public against inflation
+are crude and inadequate. They may be grouped under the heads:
+regulations regarding investments, reserves, and note issues. Under
+the first head belong in the banking legislation of this country
+limitations on real estate investments and on the amount that may be
+loaned to a single firm or individual. Our national banking act and
+most of our state banking acts prohibit banks from holding real estate
+except for their own accommodation, and as a means of reimbursing
+themselves for defaulted loans, and our national banking act prohibits
+the taking of real estate security for loans, and many of our state
+banking acts limit the amount of such security that may be held. Our
+national banking act limits the amount that may be loaned to a single
+firm or individual to one-tenth of the bank's capital and surplus, and
+similar regulations are common in state banking legislation.
+
+The purpose of these regulations is to confine the investments of
+banks to what are called liquid securities, but they fail to evince a
+proper conception on the part of their authors of what really makes a
+security liquid. Apparently legislators and their advisers have felt
+that if the securities held by the banks mature in short periods, or
+are listed on a stock exchange, they are liquid; but such is not
+necessarily the case.
+
+Commercial paper only is really liquid, since it represents a current
+commercial process which will soon be completed and the completion of
+which automatically provides the means for its payment. Such paper
+usually matures in short periods, but the characteristic of liquidity
+results not from the date at which it is made to mature, but from the
+commercial process which called it into existence and will ultimately
+retire it. In this country very often paper of short maturity is so in
+form only, its makers expecting to renew it, instead of pay it, at
+maturity.
+
+Bonds and stocks, even though they may be listed on a stock exchange
+and daily bought and sold, are not liquid securities in the proper
+sense of that term. An individual bank may be able to sell them in
+case of need, but such sale is simply the transfer of the investment
+to another bank or person, and not its liquidation. The security
+still exists and must be paid, while its liquidation would take it out
+of existence.
+
+Foreign legislators have approximated more closely than ours what is
+needed in the regulation of bank investments. In the case of their
+central banks, many of them, notably those of France and Germany, have
+recognized the fundamental distinction between commercial and
+investment paper, and have required them to hold the former against
+their demand obligations, especially their notes.
+
+The regulation of reserves has become a subject of legislation in this
+country only. Our national banking act classifies national banks into
+three groups, called country, reserve city, and central reserve city
+banks, and requires those in the first mentioned group to keep cash in
+their vaults to the amount of at least six per cent of their deposits,
+and balances in approved reserve city banks sufficient to bring the
+total amount up to fifteen per cent of their deposits.
+
+Banks in reserve cities are required to keep in their vaults cash to
+the amount of at least twelve and one-half per cent of their deposits,
+and balances in central reserve cities sufficient to bring the total
+up to twenty-five per cent of their deposits. Banks in central reserve
+cities are required to keep at least twenty-five per cent of their
+deposits in cash in their vaults. When the reserves of a bank fall to
+the prescribed minimum, all discounting must cease. Regulations
+essentially similar are found in the banking laws of most of our
+states.
+
+The purpose of these regulations is to set a limit to the extent to
+which banks may expand the volume of their loans and discounts, in the
+belief, apparently, that, if at least the prescribed proportion of
+cash is all the time kept on hand, the banks will be able to meet
+their obligations. As in the case of the regulations concerning
+investments, the authors of these failed to recognize the
+significance, from the point of view of the cash demands likely to be
+made upon banks, of the kind of paper admitted to discount. If
+discounts be confined to commercial paper, the demand obligations they
+create will be met for the most part by transfers of credits on the
+banks' books or by the return of the notes issued, and, as foreign
+experience has demonstrated, the adjustment of cash resources to needs
+can safely be left to the judgment of the bankers themselves, who,
+through variations in the discount rate, rediscounts, and other means,
+can regulate it with ease. If investment paper is admitted to
+discount, reserves less than one hundred per cent of the demand
+obligations thereby created are unsafe, since a less amount is likely
+to force liquidation on the banks' customers, with the results above
+indicated.
+
+The most elaborate regulations for the prevention of inflation have
+been developed in connection with legislation concerning note issues.
+The reason for this is the fact that commercial banking was at its
+origin and for a long time thereafter carried on almost exclusively
+through note issues, the conduct of checking accounts being a
+comparatively recent development. The phenomenon of inflation was,
+therefore, first observed in connection with note issues and
+associated with them. Even now the essential similarity of note issues
+and checking accounts as banking instrumentalities is not universally
+recognized.
+
+The means of safeguarding note issues which have been incorporated
+into legislative enactments are the prior lien on assets, the safety
+fund, the requirement and sometimes the mortgaging of special assets,
+and the limitation of the total issues. By the prior lien is meant the
+provision that in case of failure the note holders shall be paid in
+full before any of the assets are distributed among other creditors.
+By the safety fund is meant a required contribution from each bank,
+usually a percentage of the amount of notes issued, placed in the
+hands of some public official and kept for the redemption, in case of
+failure, of such of the notes of failed banks as cannot be redeemed
+out of the assets of the banks themselves. Additional contributions
+from the solvent banks are required for the replenishment of the fund
+when it has been depleted.
+
+The practice of different countries regarding the requirement of
+special assets to be held against note issues, as well as regarding
+the mortgaging of such assets, is not the same. Germany and France,
+for example, require their banks to cover their note issues by
+designated proportions of commercial paper and coin, while the United
+States requires its banks of issue to cover their notes by government
+bonds and to contribute a five per cent redemption fund in addition,
+and England requires the Bank of England to cover a designated amount
+of its issues by government and other securities and the remainder by
+coin. Unlike the others, the United States mortgages to the note
+holders the securities, that is, the government bonds, required to be
+held against the notes, by providing that in case of failure these
+securities shall be sold and the proceeds used for the settlement of
+their claims.
+
+In all of these provisions, the protection of note holders against
+loss in case of failure has been an influential consideration, and in
+the cases of the prior lien and the safety fund, the only one. The
+prevention of inflation may have entered into consideration in the
+other cases, but among the states mentioned the regulations of France
+and Germany alone are efficient in this direction, since they alone
+prohibit note issues against investment securities. The above
+mentioned regulations of England and the United States tend rather to
+promote, than to prevent, inflation, since they require the holding of
+investment securities against note issues.
+
+The limitation of the aggregate amount of notes that may be issued is
+a common legislative regulation. In the United States the limit set is
+the amount of the capital stock, and in France it is an arbitrary
+figure from time to time changed as the needs of the bank seem to
+require. As a safeguard against inflation, the value of such
+limitation depends upon the basis of the issues. If it is investment
+securities, as in the case of the United States, limitation to a low
+figure, not in any case to exceed the capital stock, is desirable,
+since such limitation keeps the inflation within such bounds that the
+banks themselves may be able to withstand the effects of it by selling
+upon foreign markets, without great and perhaps without any loss, the
+securities in which their capital and surplus funds are invested. If
+the basis of issues be commercial paper, such limitation is
+unnecessary, since inflation in such a case is improbable, and
+pernicious, unless it be placed above the point which the volume of
+issues is likely in ordinary cases to reach.
+
+(_c_) _Other Means of Safeguarding the Interests of the
+Public._--Experience has shown that publicity is a valuable safeguard
+against bad bank practices, and legislation has, therefore, provided
+for it by the requirement that statements of banking operations shall
+be published from time to time. The national banking act of the United
+States and many of our state banking acts, for example, provide for
+the publication five times a year of bank balance sheets, drawn up
+according to prescribed forms.
+
+The inspection of banks by public examiners and the requirement of
+detailed reports to public officials are also provided for in our
+federal and state legislation. Canada requires the reports but not
+the inspection by public officials, on the ground that the latter
+cannot be thorough and efficient, and is, therefore, likely to mislead
+the public and cause it to be less vigilant than it otherwise would be
+in the use of other means of safeguarding its interests.
+
+Legislation in this country has also concerned itself with the duties
+of bank directors and the enforcement of their performance, and with
+the relations of bank officers to their banks, particularly those
+involved in borrowing for their own uses or for firms or corporations
+in which they are interested.
+
+A recent legislative experiment along quite a new line has been
+undertaken in this country in the form of laws providing for the
+mutual insurance of depositors. Oklahoma started this experiment, and
+her example has been followed by other states. The essence of the
+experiment consists in the provision of a fund out of which is paid to
+the depositors of failed banks that portion of their claims which
+cannot be met from the liquidation of the assets of the defunct banks,
+such fund to be contributed by the other banks belonging to the
+system.
+
+The protection of depositors against loss is a commendable aim of
+legislation, but this method of attaining this aim is open to the
+serious objection that it removes from depositors all concern
+regarding the proper management of the bank with which they do
+business, and thus gives the unscrupulous, dishonest, and plunging
+banker an advantage. Attraction of depositors is the chief field in
+which competition between banks is carried on, and when the power of
+good management in this direction is removed, high rates on deposits,
+high lines of credit, low or no rates of exchange, extravagance in
+equipment, etc., remain the only attractions, and in the offer of
+these the unscrupulous and plunging banker will always outdo the
+conservative.
+
+It is impossible to overcome this objection by public supervision, and
+more frequent and rigid examinations. No public officer can equip
+himself to pass judgment on the relations of a bank with each
+customer, or to detect secret contracts and unwritten understandings,
+or to keep unscrupulous people out of the banking business. There can
+be no doubt that a reputation for conservatism, good judgment, strict
+integrity, and careful management is, at the present time, the most
+valuable asset a banker can have, because customers know that they are
+in danger to the extent that these qualities are lacking. To
+substitute for the present basis of competition between banks that
+established by mutual insurance laws is to undermine the foundations
+of our credit system and to invite disaster and ruin.
+
+
+_5. Adequacy and Economy of Service_
+
+From the point of view of adequacy and economy of service, two types
+of banking systems require attention; namely, that characterized by a
+large number of relatively small local independent banks, chartered
+under general laws, and exemplified in this country; and that
+characterized by a relatively small number of large banks endowed with
+the privilege of establishing branches, and exemplified in the other
+leading nations of the world.
+
+Under our system each community is encouraged to look after its own
+banking needs. Local initiative in the establishment of new
+institutions is given free play and local capital and local talent is
+attracted. Outside promoters and outside capital are not excluded,
+but, if they come, they do so as colonists expecting to cast in their
+lot with the community and to become identified with it. The managers
+of our banks for the most part are local men who are the real heads of
+the institutions they manage and whose careers and prosperity depend
+on the success of these institutions.
+
+The localism which characterizes this system contributes elements both
+of strength and of weakness. It develops local talent, and promotes
+mutual understanding and cooperation between the banks and the
+business enterprises of the community, and conformity of organization
+and methods to local needs. Its weakness consists in the financial
+isolation and the narrowness of vision and training which are its
+natural accompaniments. Under this system capital does not easily and
+quickly move from place to place and readily distribute itself
+according to the relative needs of different communities. In
+consequence, rates of interest are apt to vary widely, some
+communities to be under- and others over-capitalized, and the capital
+of the nation as a whole to be inefficiently employed. Under this
+system the opportunity of bankers for training is meager, since the
+broader and more fundamental aspects of the business are rarely
+brought to their attention, and in the smaller towns and country
+districts they are apt to be recruited from people of mediocre ability
+and often from those not well fitted by nature and education for this
+branch of commercial enterprise.
+
+The system of branch banking, almost universally employed elsewhere,
+is strong where our system is weak, but it has weaknesses of its own.
+It promotes distribution of capital according to relative needs, and
+consequently efficiency in the application of a nation's capital as a
+whole, and it offers a wide field of training for the people engaged
+in the business, and draws its recruits from every quarter. It can
+readily supply banking facilities to communities too small or too poor
+to provide for an independent bank, and more readily than our system
+can adjust itself to rapidly growing communities.
+
+Its chief weakness consists in the lack of independence of the
+managers of the branches and the consequent danger that local needs
+may not be fully satisfied. The manager of a branch is usually granted
+freedom of action only in routine matters. Any business out of the
+usual order must be referred to higher authorities connected or
+associated with the main office; and, even with the advice of the
+manager, who alone is familiar with local conditions, the decision
+cannot be made with that intimacy of knowledge of and sympathy with
+the business and aspirations of the individual or firm under
+consideration that full justice to him and his town may require. In
+the matter of adequacy and character of service, therefore, the city
+in which the main office is located has an advantage over those in
+which the branches are located.
+
+In this connection it should also be noted that, while the branch
+banking system is able to adjust itself to the capital requirements of
+towns of all sizes more readily than the independent banking system,
+and thus to secure a better distribution of the banking capital of the
+community, it does not follow that it will do so. On account of
+ignorance of conditions, insufficiency of capital or inability readily
+to increase it, or inertia on the part of the head office, a town may
+have to wait for the establishment of a branch longer than it would
+for the establishment of an independent bank.
+
+Whether or not this will be the case, however, depends to a
+considerable extent upon the keenness of the competition between the
+big banks with branches. The big central banks of Europe, which have
+no competition within their field, have been slow to establish
+branches. The coercive force of the government has been necessary in
+many cases to secure their proper expansion. In the case of the other
+big banks, however, both of Europe and of Canada, competition has
+resulted in very rapid expansion during the last half century,
+probably as rapid as could be desired.
+
+Regarding adequacy of service, the method of granting charters and the
+attitude of the government towards private banking is important. If
+banks are allowed to spring up spontaneously, like manufacturing and
+commercial establishments and farms, they are likely to be plentiful
+and to be located wherever needed. Experience, however, has shown that
+private banks cannot be adequately regulated in the interest of the
+public and that incorporation under public auspices should be
+required.
+
+Two methods of incorporation are employed, those of the special
+charter and of the general law. Except in the case of special
+institutions, like central banks, the former is objectionable, since
+it opens the doors to political favoritism and is likely to result in
+bad distribution, lack of uniformity in regulation, and lack of
+steadiness and regularity in development. Incorporation under general
+laws, or the free banking system, as it is sometimes called in this
+country, is unquestionably the best from every standpoint. All the
+necessary checks and balances can be incorporated in these laws, and
+the supervision of public officers, together with the necessary
+administrative machinery, provided for. This is the only practicable
+method to employ in an independent system like ours.
+
+The special charter method works best in connection with the branch
+bank system, in which the question of chartering new institutions only
+occasionally arises, and in which delay is not so serious.
+
+
+
+
+CHAPTER IV
+
+COMMERCIAL BANKING IN THE UNITED STATES
+
+
+The commercial banking system of the United States consists of several
+elements which have been contributed at different periods in our
+history. The most important of these are state banks, national banks,
+and the independent treasury system.
+
+
+_1. State Banks_
+
+From the very beginning of our national history institutions enjoying,
+among others, the privilege of commercial banking have been chartered
+by our states. For several years after the adoption of our
+constitution it remained an open question whether the incorporation of
+such institutions was not their exclusive privilege, but in the case
+of McCulloch v. Maryland, in 1819, the Supreme Court decided that the
+federal government also had this right.
+
+During the years 1791-1811, and 1816-1836, the state banks had as
+competitors the first and second United States banks, and in 1863
+so-called national banks entered the field, and, more recently still,
+trust companies. Private banks have also existed from the beginning,
+but their number and relative importance have declined in recent
+years. At the present time the number of state banks exceeds that of
+all other classes of banking institutions combined, but in capital and
+resources they are inferior to both national banks and trust
+companies.
+
+Since each state has had a free hand in the matter of legislation
+concerning the banks chartered under its auspices, uniformity in the
+regulations imposed upon and in the kind and degree of supervision
+exercised over this class of institutions, is lacking. In most cases,
+however, as compared to national banks, the amount of capital required
+is smaller; they have greater freedom in the making of loans,
+especially upon real estate security; and they are not so carefully
+examined and supervised by public officials. The most frequently
+imposed legislative requirements are: the accumulation of a surplus
+fund from earnings; double liability of stockholders; a minimum cash
+reserve to be kept in the vaults, and an additional reserve on deposit
+in other banks; the organization of a banking department for the
+administration of the laws pertaining to them; regular reports and
+examinations; and some limitation on real estate holdings and on the
+amount of loans to be made on real estate security. On account of the
+relatively low capital requirements imposed upon them, and the
+liberality of the laws concerning them in other respects, state banks
+have been able to prosper where national banks and trust companies
+could not exist, and on this account in many parts of the South and
+West they do most of the banking business in small towns and country
+districts. They generally perform a wide range of banking functions,
+including those of investment and savings as well as of commercial
+banks.
+
+
+_2. National Banks_
+
+Our national banking system owes its existence to financial exigencies
+of the federal government experienced during the Civil War. For a
+considerable period preceding the outbreak of that struggle the
+expenses of the government had exceeded its receipts. The deficit was
+greatly increased as soon as the war began, and Congress did not find
+it possible immediately to devise adequate new sources of revenue,
+including a market for government bonds. It was, therefore, forced to
+the issue of legal-tender notes under authority of an act passed
+February 25, 1862.
+
+After three issues of these notes, amounting to $400,000,000, had been
+exhausted, and the value of the notes had depreciated to such an
+extent that persistence in this method of financiering portended
+speedy financial disaster, Congress adopted a suggestion made early in
+the war by Secretary Chase, to the effect that a market for government
+bonds might be created by compelling banks to purchase them as
+security for their note issues. An act passed February 25, 1863,
+provided for the incorporation of banks with the right to issue notes
+on condition that they purchase government bonds and deposit them with
+an official to be known as Comptroller of the Currency.
+
+It was the expectation of the authors of this act that the state
+banks, then numbering over one thousand, would exchange their state
+for national charters and purchase bonds sufficient to secure their
+circulation under the terms of the new act, but, since they showed
+reluctance so to do, in 1865 force was applied in the form of a tax of
+ten per cent on bank notes otherwise secured. Under this pressure most
+of the state banks reorganized as national institutions, but a few
+retained their state charters and formed the nucleus of the state
+system of the present day. On account of the ten per cent tax,
+however, the issue of notes by this remnant became unprofitable, and
+the new national banks have to this day remained the sole banks of
+issue in the country.
+
+The act of 1863 has been amended several times, notably in 1864, 1870,
+1874, 1875, 1882, 1887, and 1900. In its present form it permits the
+organization of banks with a capitalization as low as $25,000 in towns
+of 3,000 inhabitants or less, and with a capitalization as low as
+$50,000 in towns of 6,000 or less. Banks organized under this act must
+put ten per cent of their profits into a surplus fund until said fund
+amounts to twenty per cent of the capital; must invest at least
+twenty-five per cent of their capital, if it is less than $200,000,
+and at least $50,000, if it is $200,000 or more, in government bonds;
+and may deposit said bonds with the Comptroller of the Currency and
+receive circulating notes to the amount of their par value, provided
+their market value is par or above.
+
+The rights and privileges of these banks are stated in very broad and
+general terms, a fair interpretation of which permits them to engage
+in both commercial and investment banking under certain specified
+limitations, of which the most important are the following: they must
+not invest in or hold real estate beyond their owns needs for suitable
+quarters, or temporarily for the purpose of collecting debts due them;
+they must not accept real estate as security for loans; they must not
+loan more than ten per cent of their capital and surplus to any one
+person or firm; and they must keep reserves to the amount of fifteen
+per cent of their deposits, if they belong to the group known as
+country banks, and to the amount of twenty-five per cent of their
+deposits, if they belong to either the reserve city or the central
+reserve city group.
+
+In the case of country banks, at least two-fifths of the required
+reserves, and in the case of reserve city banks, at least one-half,
+must consist of specified forms of money in their own vaults. The
+remainder may be balances payable on demand in approved banks in
+reserve or central reserve cities in the case of country banks, and in
+the central reserve cities in the case of reserve city banks. In the
+case of banks in central reserve cities, the entire reserve prescribed
+by law must consist of money in the vaults. These required minimum
+reserves must not be infringed upon. When a bank's cash and balances
+with its reserve agents fall to the prescribed minimum, discounting
+must be stopped under penalty of suspension of privileges and
+liquidation by the Comptroller of the Currency.
+
+At five dates each year, selected by the Comptroller of the Currency,
+national banks must make detailed reports of their condition on
+prescribed blanks and publish abstracts of such reports in local
+newspapers. They must also submit to examination by persons appointed
+for that purpose by the Comptroller as often as this official may deem
+necessary and proper.
+
+National banks have been organized in every state of the Union, and in
+Maine, Massachusetts, and Vermont they have completely supplanted the
+state banks. Elsewhere they exist side by side with state banks and
+compete with them. In some states they are more and in others less
+numerous than state banks. In the kind of business transacted the only
+important difference between the two classes of institutions consists
+in the loans on real estate security, which national banks are
+prohibited, and state banks allowed, to make. The latter, therefore,
+share this class of business with the trust companies only, and where
+it predominates have a distinct advantage in competition over the
+national institutions.
+
+
+_3. The Independent Treasury System_
+
+While not a banking institution, the Treasury of the United States
+handles its funds in such a manner and performs such functions with
+reference to the currency that it has become an important part of the
+banking system of the country.
+
+Previous to 1840 the funds of the federal government were kept on
+deposit in banking institutions, during the greater part of the time
+in the First and Second United States banks. Friction between
+President Jackson and the Second United States Bank resulted in their
+withdrawal from that institution in 1834 and their deposit in selected
+state banks, several of which failed and all of which suspended specie
+payments during the crisis of 1837. The embarrassment which the
+treasury experienced in consequence, combined with previous
+unsatisfactory relations between the government and its depositories,
+convinced President Van Buren that the Treasurer ought himself to keep
+and to disburse the funds of the government. He made a recommendation
+to this effect to Congress, which in accordance therewith enacted the
+first independent treasury act in 1840. The revival of agitation for a
+third United States Bank led to the repeal of this act the following
+year, but in 1846 it was reenacted and with modifications has remained
+upon our statute books to the present day.
+
+In its original form this act provided for the acquisition of vaults
+in certain cities, in which should be deposited the funds of the
+government as soon as possible after they came into the hands of the
+receiving officers, and out of which should be taken, upon drafts
+issued by the Secretary of the Treasury, the money needed for the
+payment of the government's obligations. It further provided that all
+dues to the government in the future should be paid either in coin or
+in currency issued exclusively by the government, and that all
+expenses should be paid in the same forms of money.
+
+Important modifications in this act were made during and after the
+Civil War. In 1863 permission was granted the Secretary of the
+Treasury to deposit in national banks funds accumulated in the
+treasury, and derived from any source except duties on imports,
+provided the banks selected for this purpose should deposit with him
+government bonds for their security. Subsequently the discretionary
+power of the Secretary in this direction was extended so that at the
+present time he is authorized at his discretion to deposit in national
+banks surplus funds derived from any source, trust funds alone
+excepted, and to accept as security therefor other securities than
+government bonds. Other laws have made national bank notes acceptable
+for certain public dues, and have given the Secretary authority to
+issue gold and silver certificates against gold coin and silver
+dollars deposited in corresponding amounts, and to redeem United
+States notes in gold coin and to keep on hand for that purpose a gold
+reserve of $150,000,000.
+
+In its operation, this independent treasury system affects the
+reserves of the banks and through them their discounts and the
+commerce of the country. Whenever the receipts of the government
+exceed its expenditures, money accumulates in the treasury and the
+reserves of the banks are diminished; and, under opposite conditions,
+they are increased. The return of accumulated surplus funds to the
+banks is possible when the Secretary of the Treasury decides that such
+return is desirable or necessary and when the banks are able and
+willing to supply the bonds demanded as security. In case a deposit is
+agreed upon the funds go to a relatively small number of national
+banks selected as depositories by the Secretary of the Treasury, the
+amount allowed each depository also being determined by him.
+
+Through its ability to issue gold and silver certificates, its
+obligation to redeem United States notes in gold on demand, its
+administration of the United States mints and assay offices and the
+laws regulating the supply and distribution of subsidiary coin, the
+United States Treasury cooperates with the banks in the supply and
+distribution of the circulating medium of the country. The people
+apply to the banks for the forms of money and currency desired and
+these institutions meet the demand by means of the funds deposited
+with them or by their exchange at the various subtreasuries, if the
+forms of money deposited do not correspond with these demands.
+
+
+_4. The Interrelations of These Institutions_
+
+Under the operation of the national banking act, New York, Chicago,
+and St. Louis have been designated as _central reserve_, and
+forty-seven other cities as _reserve_ cities. The national banks in
+these reserve cities act as reserve agents for national banks in the
+cities and towns not so designated and ordinarily receive on deposit
+the major part of their reserves plus surplus funds not needed for
+local purposes. Banks in the central reserve cities act as reserve
+agents for the banks in the reserve cities as well as for country
+banks, and on account of their importance as commercial and investment
+centers receive and hold in the form of bankers' balances a large part
+of the reserve funds as well as the surplus investment funds of the
+national banks of the entire country.
+
+State banks and trust companies manage their reserve and surplus
+investment funds in substantially the same manner as national banks,
+using national banks in the reserve and central reserve cities as
+their reserve agents. State laws usually allow approved state banks
+and trust companies also to act as reserve agents for the banks and
+trust companies under their jurisdiction, but these approved banks are
+generally located in the reserve and central reserve cities, and
+themselves employ the national banks there located as their reserve
+agents, thus forming simply an additional conduit through which the
+reserve and surplus investment funds of state banks and trust
+companies reach the central money reservoirs administered by national
+banks in the central reserve cities.
+
+National banks in the reserve and central reserve cities are also
+clearing centers for the enormous volume of checks and drafts which
+the administration of the checking accounts of the banks and trust
+companies of the country bring into existence. They act as
+correspondents as well as reserve agents for these other banks and
+trust companies, and in this capacity collect out-of-town checks and
+drafts and conduct checking accounts for them. Within these cities, as
+well as in hundreds of others, clearing house associations conduct the
+local clearings and also act as agencies through which national and
+state banks and trust companies cooperate in the promotion of common
+interests.
+
+The center of the entire system is in New York City. The clearing
+house association of that city, consisting of over fifty national and
+state banks and trust companies, includes the banks the vaults of
+which constitute the central money reservoir of the country and which
+constitute the center of the country's clearing system. Through the
+New York subtreasury pass the greater part of the receipts and
+disbursements of the government, and the chief assay office in the
+country is located there. The New York stock exchange is our only
+stock and bond market of national scope, and consequently the
+investment center of the country.
+
+The Associated Banks of New York City, as the members of the clearing
+house association are called, hold the greater part of the reserves of
+the banks and trust companies not required by law to be kept in the
+local vaults, as well as the greater part of the surplus investment
+funds of the entire country. It is through the operation of the New
+York subtreasury on the reserves of the Associated Banks that the
+chief influence of the independent treasury system on the banking
+business of the country is exerted, the greater part of the
+government's receipts coming directly out of those reserves, and a
+large part of the expenditures going into them, and the greater part
+of the money deposited in national banks by the Secretary of the
+Treasury going directly or indirectly into New York institutions. Most
+of the exports and imports of coin and bullion pass through New York,
+and the major portion of the foreign exchanges of the entire country
+are there effected. The New York Assay Office receives and distributes
+the greater part of the new supplies of gold and silver bullion which
+come from our mines and transforms into bullion the major part of
+these metals that come to us from abroad and do not find employment as
+foreign coin. The New York Stock Exchange is the medium through which
+a large part of the surplus savings of the country are invested in our
+industries or loaned for the use of our national, state, municipal,
+and other local governmental agencies.
+
+
+_5. Operation of the System_
+
+The most noteworthy features of the working of this machinery may be
+discussed under the heads: conflict of functions and laws; loan
+operations; treasury operations; reserve system; absence of elasticity
+in the currency.
+
+(_a_) _Conflict of Functions and Laws._--The two classes of banking
+institutions which have been described (state banks and national
+banks) and trust companies, described in a subsequent chapter, exist
+side by side in many communities, and in the performance of certain
+services compete for the patronage of the public. As has already been
+pointed out, state and national banks differ little in their functions
+except in their relation to real estate loans, and in some states
+trust companies perform all the functions of these institutions and
+many others besides. In the performance of these common services,
+however, they are rarely regulated by the same laws or subjected to
+the same kind or degree of public supervision. The competition between
+them, therefore, is not always on a fair basis and the temptation to
+violate restraining laws and administrative regulations is strong. The
+supervising officers recognize the situation as a rule and go to the
+extreme limit of leniency in administering laws and regulations which
+operate to the manifest disadvantage of the institutions over which
+they have jurisdiction, but even then it is often impossible to render
+the basis of competition fair and equitable.
+
+This condition of affairs has resulted in the devising of ways and
+means of circumventing obnoxious laws and in some cases in practices
+which are pernicious in themselves. As examples may be mentioned the
+widespread practice of national banks, which are prohibited by law
+from making loans on real estate security, of making loans to
+customers who can offer no other collateral, on the security of their
+personal notes only, or of making loans secured by real estate by a
+three cornered operation utilizing a director or officer or some other
+third party as intermediary. All three classes of institutions
+compete in soliciting the savings deposits of the community, with the
+result that the trust companies and savings banks, which often have
+the advantage here, sometimes force upon their state and national bank
+competitors a higher rate of interest on such deposits than they ought
+to pay. The differing regulations in some places in force regarding
+the amount that may be loaned to a single individual or firm has also
+resulted in some cases in devious and uncommendable practices.
+
+For the remedy of these conditions the first desideratum is the
+careful differentiation of the various functions performed by all
+these institutions, and the devising of appropriate legal and
+administrative regulations for each one. These regulations should then
+be incorporated into the legislation and the administrative practices
+of the federal government and of each state, and any institution which
+performs any of these functions should be obliged to submit to the
+regulations pertaining thereto. The difficulties in the way of
+securing such a differentiation of functions and such community of
+action between the federal government and our states are too obvious
+to require statement, but they should not prevent the formulation of
+ideal conditions, and a conscious and persistent effort to attain
+them.
+
+(_b_) _Loan Operations._--In making loans, a typical method of
+procedure for a business man is to arrange with a bank for what is
+technically called a "line," that is, the maximum amount he may expect
+to be able to borrow under normal conditions. This "line" determined,
+he borrows from time to time according to his needs, giving as
+security his personal note, payable in one, two, three, four, or six
+months. Sometimes an indorser is required, and sometimes the deposit
+of collateral, mortgages on real estate, bonds, stocks, and warehouse
+receipts being the most commonly used securities employed in such
+cases. Ordinarily, when a note falls due, he expects the bank to renew
+it, if its payment at the time is not convenient, the agreement on a
+"line of credit" ordinarily carrying with it that implication, though
+not legally, probably not morally, binding the bank so to do. Indeed,
+the customer ordinarily counts the amount of his "line" as a part of
+his working capital and expects to keep it in use a large part, if not
+all, of the time.
+
+In the determination of the amount of these "lines of credit," the
+judgment of some one or more bank officers, assisted by a discount
+committee and sometimes, though not as a rule, by a specially
+organized credit department, rules. In forming these judgments, the
+bankers of the United States as a class are not guided by any
+universally recognized and well established principles. The best ones
+require from their customers carefully prepared statements showing the
+nature and volume of the business they transact, and a careful
+classification of their assets and liabilities. Others, and these are
+a large majority, rely upon the knowledge they already possess, gained
+by general observation, and supplemented by verbal inquiries made from
+time to time and by the voluntary statements of the customers
+themselves.
+
+The significance of the distinction between commercial and investment
+operations in the business of banking is not generally understood, and
+is consequently little regarded. The dominant question in the mind of
+the average banker, both in determining the amount of a customer's
+line and in making loans to him after the line is fixed, is how much
+he is "good for," and on this point the total net worth, rather than
+the nature of the business operations, of the customer is likely to be
+decisive. Of course, the banker is also influenced by the customer's
+reputation for both integrity and business ability.
+
+This method of procedure has the advantage of rendering access of
+people to the banks easy and of promoting their extensive use, but it
+has the grave disadvantage of opening the doors wide to inflation of
+credit. The majority of our bankers do not know whether more or less
+than their savings deposits and their capital and surplus, the only
+funds which can safely be invested in fixed forms, is so invested. The
+promissory notes of their customers, which constitute the major part
+of their assets, give no information on this point, and they have not
+made the investigations necessary to determine with certainty the
+destination of the funds they have loaned. They are satisfied with the
+knowledge or the conviction that their loans can be collected, not at
+maturity--they know very well that many, probably most, of them can
+not--but ultimately. The result is that unconsciously and gradually
+the banks create their demand obligations in the form of balances on
+checking accounts against fixed investments in machinery, buildings,
+lands, mines, etc., and, when the payment of these obligations is
+demanded, the reserves fall below the danger point and they are forced
+to require payment at maturity of paper which the maker had counted
+upon having renewed indefinitely, and the payment of which is only
+possible by the forced sale of the property in which the borrowed
+funds were invested, or of some other property in his possession. If
+only a single bank or a comparatively few banks find themselves in
+this condition, relief may be found in the rediscount of paper with
+other banks, in direct loans, or in the sale of securities on the
+exchanges; but, if the condition is general, relief by these means is
+impossible, and widespread forced liquidation becomes necessary. An
+aggravated situation of this kind causes panic and results in a
+commercial crisis.
+
+(_c_) _Treasury Operations._--The operation of our independent
+treasury system produces arbitrary fluctuations in the reserves of the
+banks and prevents that degree of prevision which is essential to the
+most economical and the safest practices. The funds needed for current
+purposes are withdrawn from the banks and kept under lock and key in
+the treasury vaults, thus diminishing reserves to the extent of their
+amount. Surplus funds likewise accumulate in the vaults with the same
+result, until the Secretary of the Treasury sees fit to deposit, and
+the banks find it possible to receive them. Even then the depository
+banks alone are directly benefited, and no one of these knows long in
+advance how much it is going to receive or when funds left on deposit
+will be withdrawn.
+
+Since the volume of the business of the government is very large, the
+effects produced by the movement of its funds are of such magnitude as
+to give them national importance, the ability of banks to loan and to
+meet obligations already incurred being profoundly affected by them.
+Among these effects must also be noted the inability of the banks to
+calculate these movements in advance, as they to a degree can those
+produced by the operations of their commercial customers, and the
+relation between them and the Secretary of the Treasury, which
+results. The relation between the receipts and the disbursements of
+the government vary greatly from month to month and year to year, so
+that, on the basis of past experience, it is impossible to predict
+when the banks will gain from or lose to the treasury. The action of
+the Secretary of the Treasury regarding deposits of surplus funds is
+equally uncertain and unpredictable. No fixed policy regarding this
+matter has yet been established by precedent or determined by law.
+Each secretary follows his own judgment and is influenced by current
+events and conditions.
+
+The uncertainty which results creates a speculative atmosphere about
+the money market and renders the banks dependent upon the secretary
+and the secretary influential on the money market in a manner which is
+unfortunate for both. Since they cannot be indifferent to the
+operations of the treasury, and cannot predict them, banks are obliged
+to speculate regarding them, and, if they err, they are likely either
+to over-extend their credit operations or unduly to contract them. The
+former will result when they expect an increase in their reserves from
+treasury sources and do not get it, and the latter when contemplated
+withdrawals of funds do not occur.
+
+The Secretary of the Treasury is not in a position properly to
+exercise the power conferred upon him. He is outside the channels of
+commerce and industry, and must, therefore, secure at second hand the
+information necessary for intelligent action. Such sources of
+information are frequently unreliable and inaccurate and their use
+subjects him to the charge of favoritism and to the danger of acting
+in the interest of special groups or special localities.
+
+(_d_) _Operation of the Reserve System._--Each national bank now keeps
+locked up in its vaults money to the amount of at least six to
+twenty-five per cent of its deposits and a balance with banks in
+reserve and central reserve cities sufficient to bring the total to at
+least fifteen per cent of deposits in the case of country banks, and
+twenty-five per cent of deposits in the case of reserve city banks. In
+addition, it is customary for most banks to carry as a secondary
+reserve high-grade bonds which can be readily sold in case of need.
+The practice of state banks is practically the same as that of
+national, and that of trust companies differs only in the amount of
+reserves carried and in the proportion between the different items.
+
+This system has many disadvantages. Among them the most obvious,
+perhaps, is the withdrawal of enormous sums from the current use of
+the agriculture, industry, and commerce of the country. That portion
+of these reserve funds which is required to be kept under lock and key
+in the vaults, amounting in the aggregate to a billion and a half of
+dollars or more, is not available for use in ordinary times, and is
+practically useless even in times of stringency, since according to
+present law, when the reserves fall to the minimum prescribed by law,
+banks must stop discounting, under penalty of being put in the hands
+of a receiver. The other portions of these funds, namely, those
+deposited with banks in reserve cities and those invested in bonds,
+are likewise withdrawn from the uses of current commerce, since a
+large part of the former is only available for use on the New York
+Stock Exchange, and the latter are invested in railroads, mines,
+factories, land, etc.
+
+The explanation of the devotion of the redeposited portion of the
+reserves to the operations of the New York Stock Exchange is to be
+found in the fact that that exchange furnishes a regular market for
+call loans on a large scale. Since these funds are held subject to the
+call of the banks which deposited them, and interest at the rate of at
+least two per cent is paid upon them, the depository banks are bound
+to seek investment for them, and call loans on collateral listed on
+the exchange under ordinary circumstances are best suited to their
+purposes.
+
+Another disadvantage of this reserve system is the dangerous situation
+in which it places banks from time to time, and the tendency to panic
+which it fosters. The demands made upon banks for both cash and credit
+vary with the seasons. In the fall and spring they are much greater
+than in the winter and summer. They also vary regularly through
+periods of years, increasing during the up-grade of a credit cycle and
+decreasing for a longer or shorter period after a crisis. Irregular
+and unexpected events also cause variations. On account of the
+rigidity of this reserve system and the lack of elasticity in our
+currency, the means available to banks for meeting increased demands,
+especially those of an irregular and unexpected character, are
+inadequate, and their employment is often dangerous. These means are:
+keeping in the vaults in slack times a large amount of unused cash, a
+practice too expensive to be employed; keeping surplus balances with
+correspondents at two or three per cent interest, not a sufficiently
+remunerative practice to be employed on a sufficiently extensive
+scale; rediscount with correspondents of some of their customers'
+paper, or loans from them on the security of their own signatures or
+on such security supplemented by collateral; and sale of bonds at such
+prices as they will bring.
+
+None of these expedients is certain at all times and under all
+conditions, and some of them are precarious at all times. Surplus
+balances with correspondents are most reliable, but they occasionally
+fail on account of the inability of correspondents to realize upon
+their call loans. When calls for the payment of balances are large and
+general, it is impossible for brokers whose loans are called by one
+bank to transfer them to another. The collateral deposited as security
+must, therefore, be offered for sale on the stock exchange, and the
+very stringency which resulted in their being so offered renders their
+sale, even at slaughter prices, difficult and sometimes impossible.
+The result at the best is a heavy fall in the prices of stock-market
+securities, and at the worst a stock-market panic and a suspension of
+payments by the banks.
+
+Rediscounts and loans from correspondent banks cannot be depended on.
+Correspondents are under no obligation to make them. They will usually
+do so as a favor, if their condition warrants, otherwise not. Sales of
+bonds on the stock exchange are difficult and sometimes impossible in
+times of emergency, and are usually attended with loss.
+
+On account of this uncertainty and the danger attending it, when new
+and unusual conditions likely to result in increased demands upon them
+arise, banks are likely to act "panicky"; to call in their balances
+from correspondents; to sell bonds; to call loans; and greatly to
+curtail or absolutely to cut off new discounts. This action spreads
+the panicky feeling among their customers, and creates such pressure
+at the reserve centers as to cause curtailment of accommodations and
+panic there.
+
+At the very best, this reserve system is accompanied by high discount
+and loan rates and by speculation on the stock market. High rates
+result inevitably from the hoarding of currency which it involves, the
+supply of loan funds being abnormally diminished, and speculation
+follows from the concentration in slack times of funds in New York
+City, which can only be employed in call loans on stock-exchange
+collateral. Stock brokers regularly take advantage of this situation,
+speculate themselves and inspire speculation among their customers.
+The mutual dependence of the stock and money markets thus produced by
+this reserve system is disadvantageous to both, fluctuations in
+values, uncertainty, and irregularity on both being the result.
+
+(_e_) _Lack of Elasticity in the Currency._--The money of the United
+States consists of four main elements, gold and silver coin, United
+States notes, and national bank notes, and none of these fluctuate in
+volume in accord with the needs of commerce.
+
+The gold element depends primarily upon the output of our gold mines
+and upon the international movement of gold, increasing when that
+output increases and when our imports of gold exceed our exports, and
+decreasing under opposite conditions. These fluctuations, however, are
+quite independent of our commercial needs. Silver dollars, which
+constitute the major part of our silver currency, for several years
+have been unchanged in quantity, and the volume of United States notes
+has remained at $346,681,016 since the resumption of specie payments,
+January 1, 1879.
+
+National bank notes fluctuate in volume as a result of changes in the
+number of national banks and in the prices of government bonds.
+Whenever a new national bank is organized, a specified portion of its
+capital must be invested in government bonds, which bonds are usually
+deposited with the Comptroller of the Currency in exchange for notes;
+and, when the price of government bonds rises, banks holding more than
+the minimum required by law frequently retire a portion of their
+circulation in order to recover their bonds for sale at the enhanced
+price. When the price of government bonds falls, many banks purchase
+additional quantities and increase their circulation.
+
+Changes in the price of government bonds and in the number of national
+banks, however, have no connection whatever with changes in our
+currency needs, and no more do the fluctuations in the volume of the
+currency as a whole, made up of these various elements combined. As a
+result of this condition, rates on loans and discounts fluctuate
+greatly on account of wide variations between the demand and the
+supply of loan funds, and commerce is hampered at certain seasons and
+overstimulated at others. As was indicated above, this lack of
+elasticity in our currency aggravates the defects of our reserve
+system and also aids in the production of financial panics.
+
+
+_6. Plans for Reform_
+
+On account of the defects in our system of banking, there has been
+long-continued agitation for reform, increasing in scope and intensity
+in recent years. After the crisis of 1907, which revealed these
+defects to many persons who had not observed them before, Congress
+appointed a commission to make investigations and to prepare a reform
+measure. In January, 1912, this committee submitted a report which
+embodied a bill for the incorporation of a National Reserve
+Association, to be made up of a federation of local associations of
+banks and trust companies. The purpose of this association was to
+supply a market for commercial paper, an elastic element in the
+currency, a place for the deposit of the bank reserves of the country
+and of the funds of the government, as well as proper machinery for
+the administration of this market and these funds.
+
+For various reasons, the plan of the monetary commission did not meet
+with universal favor. It was condemned in particular by the Democratic
+party, which was victorious at the polls in the fall elections, and
+installed a new administration in Washington, March 4, 1913. A special
+session of the new Congress was called to consider the tariff
+question, and to it was submitted another plan for the reform of our
+banking system, which was enacted into law December 23, 1913.
+
+This law provides for the incorporation of so-called "Federal Reserve
+Banks," the number to be not less than eight or more than twelve. The
+country is to be divided into as many districts as there are Federal
+Reserve Banks, and the national banks in each district must subscribe
+six per cent and pay in three per cent of their capital and surplus to
+the capital stock of the Federal Reserve Bank located in that
+district. State banks and trust companies may contribute on compliance
+with the same conditions as national institutions. If, in the judgment
+of the organization committee, the amount of stock thus subscribed is
+inadequate, the public may be asked to subscribe, and as a last resort
+stock sufficient to raise the total to an adequate figure may be sold
+to the Federal Government. Cooperation between these Federal Reserve
+Banks and a degree of unity in their administration are provided for
+through a Federal Reserve Board of seven members, two ex officio and
+five to be especially appointed by the President of the United States.
+For the administration of each Federal Reserve Bank, a board of
+directors of nine members is provided for, six to be appointed by the
+member banks and three by the Federal Reserve Board, one of those
+three to be designated as Federal Reserve Agent and to be the
+intermediary between the Federal Reserve Board and the bank of whose
+directorate he is a member.
+
+The proposed Federal Reserve Banks are to hold a part of the reserves
+of member banks and to rediscount commercial paper, administer
+exchange accounts, and conduct clearings for them. They are also to
+serve as depositories for the United States government, and to issue
+treasury notes obtained from the Federal Reserve Board in exchange for
+rediscounted commercial bills, these notes to be redeemable on demand
+by them and to be a first lien on all their assets. Their retirement,
+when the need for them has passed, is provided for by the requirement
+that no Federal Reserve Bank shall pay out any notes except its own,
+all others being sent in to the issuing bank or to the treasury for
+redemption. Against outstanding note issues a reserve of at least 40
+per cent in gold must be maintained, and against deposits one of at
+least 35 per cent in gold or lawful money.
+
+This law provides remedies for the chief defects of our system;
+namely, a market for commercial paper which will enable a properly
+conducted bank at any time, through rediscounts, to secure notes,
+legal-tender money, or checking accounts in the amounts needed; a
+system of note issues which will fluctuate automatically with the
+needs of commerce for hand-to-hand money; a more economical
+administration of the reserve funds of the country, unattended by the
+dangers of the present system, and an administration of the funds of
+the federal government which is free from the evils of the independent
+treasury system.
+
+
+
+
+CHAPTER V
+
+COMMERCIAL BANKING IN OTHER COUNTRIES
+
+
+In contrast with that of the United States, the characteristic
+features of the commercial banking systems of Europe are the central
+bank performing important functions for all other financial
+institutions and for the government; a relatively small number of
+large institutions with many branches mediating between the central
+bank and the people; and the use of commercial and bank bills instead
+of promissory notes as the chief instruments of loans and discounts.
+
+
+_1. Common Features_
+
+The central banks differ considerably in organization and business
+methods, but perform essentially the same functions; that is, they act
+as financial agents for their respective governments; discount
+high-grade commercial and bankers' bills for other banks and usually
+for private persons; administer the cash reserves of the entire
+country; and furnish the greater part and, in some cases, the entire
+supply of bank notes.
+
+The other large banks do most of the business with the public, the
+central bank's relations being chiefly with them and with the
+government. They conduct checking accounts with merchants,
+manufacturers, farmers, and others; receive and invest savings
+deposits, and deal in certain classes of investment securities;
+conduct the domestic and foreign exchanges; discount various kinds of
+commercial and banking bills, frequently those not available for
+discount at the central bank; and make advances on personal and other
+kinds of security. Their main offices are located either in the
+central money market of the country or in important financial centers,
+and their branches are extended to all places in which banking
+facilities are supposed to be needed. As a rule, they are less
+restricted by legislative provisions than are the national and state
+banks and trust companies of the United States, and are less carefully
+supervised and inspected by public officers.
+
+Commercial and bankers' bills are widely used as credit instruments
+between buyers and sellers and between bankers and their customers. A
+common method of procedure, when a sale is made on time, is the
+drawing of a bill for the amount due, by the seller upon the buyer,
+payable at the end of the credit period agreed upon, and accepted by
+the buyer, and the discount of the bill by the seller's bank. In
+foreign and in some branches of domestic trade, the banker's bill is
+used on account of its more general acceptability as an object of
+discount, such bills usually being discountable by the central bank
+and by banks far distant from the place in which the bill originated.
+
+In case a buyer desires to furnish his creditors with bills of this
+kind, he arranges with his banker for a line of "acceptance" credit,
+which permits people who sell goods to him to draw bills upon his
+banker instead of himself, the banker agreeing to accept the bill and
+guaranteeing its payment at maturity. The seller will usually have no
+difficulty in discounting such a bill at his own bank, no matter how
+far removed it may be from the home of the buyer, the character of the
+accepting bank being known throughout the financial world. "Acceptance
+lines" are usually granted only on condition that the customer agrees
+to supply the bank with the funds necessary for meeting the accepted
+bills as they fall due, and to pay a fee for the accommodation. Ample
+security that these obligations will be met is usually demanded.
+
+
+_2. The English System_
+
+In the English system, the central bank is the Bank of England, with
+the possible exception of a few private banks, the oldest financial
+institution in the country. It is privately owned and privately
+governed. Its board of directors, chosen by the stockholders, consists
+of twenty-four persons, a portion of whom are practically life
+members, being regularly reelected when their terms of office expire.
+The others usually serve alternate years only, vacancies being filled
+by promising young men selected from the business houses of London.
+The oldest director is regularly elected to the office of governor of
+the Bank, and the next oldest to that of deputy governor, both serving
+two years, the deputy governor regularly succeeding to the office of
+governor, and the ex-governors forming the life members of the board
+and constituting a kind of advisory council to the governor, and known
+as the Board of Treasury.
+
+The head office of the Bank of England is in London, and there are
+eleven branches, two in London and nine in the provinces. By a law
+passed in 1844, the Bank was divided into two departments, called
+respectively the banking and the issue departments, the latter having
+exclusive charge of the issue of notes, and the former of all other
+branches of the bank's business.
+
+This same law prescribed the conditions under which notes could be
+issued. It provided that the Bank of England might issue L14,500,000
+of notes in exchange for securities, and any amount in addition in
+exchange for an equal amount of coin or bullion. Additions to the
+amount issued in exchange for securities might be made by order of the
+government to the extent of two-thirds the amount of issues
+relinquished by the other issuing banks, all such banks in existence
+at the time the act was passed being permitted to retain, without
+increasing, their existing issues. Most of these other issues having
+been abandoned since 1844, the Bank of England is now permitted to
+issue in exchange for securities L18,450,000. The securities against
+which these issues are made were transferred to the issue department
+by the banking department, and consist of the debt owed by the
+government to the bank and of other government or governmentally
+guaranteed securities. The issue department freely issues additional
+notes in exchange for an equal amount of gold coin or bullion, and on
+demand redeems notes in gold coin. Since the amount of notes all the
+time outstanding greatly exceeds L18,450,000, the business of the
+issue department is confined to the exchange of notes for gold coin
+and bullion and the redemption of notes in gold.
+
+The banking department receives and disburses the funds of the
+government, manages the public debt, and serves as the government's
+agent in most of its other financial operations; receives on deposit
+from other financial institutions the money which comes into their
+possession, and supplies them with such money funds as they need from
+day to day in payment of checks drawn against their balances;
+discounts bills of exchange with a minimum maturity of four, and in
+exceptional cases six, months; and to a limited extent makes advances
+on and invests in high-grade public and other securities. Besides the
+English government and financial institutions, it has other customers,
+but it is to be presumed that these are of a special character, since
+the conditions under which it does business with private persons are
+in most cases more onerous than those prescribed by other banks, and
+consequently not attractive to the ordinary business man.
+
+The so-called English Joint-Stock Banks are classified into three
+groups, known as metropolitan, metropolitan and provincial, and
+provincial banks. The metropolitan banks have their head offices in
+London, and do not, as a rule, extend their branches beyond the
+suburbs of the metropolis. The metropolitan and provincial banks have
+their head offices in London and branches scattered throughout the
+provinces, as well as in various parts of the city and suburbs, and
+the provincial banks have their head offices in the larger provincial
+cities, and each one confines its branches usually to the town and
+country districts tributary to the city in which its head office is
+situated. Often the provincial banks establish branches in London.
+
+For banking purposes, these banks are the chief reliance of the
+agriculture, industry, and commerce of the country, but competing with
+and supplementing them are the bill brokers and discount houses, the
+private banks, and the foreign and colonial banks. The bill brokers
+and discount houses make a business of dealing in foreign and domestic
+bills of exchange. They buy in the first instance a large percentage
+of the bills brought to market, keep some of them until maturity, and
+sell the remainder to the other banks, usually indorsing them first. A
+large part of the capital employed in their business is obtained by
+loans made from the other banks, subject to call and secured by the
+bills they purchase deposited as collateral.
+
+The private banks are the remnant left of the oldest group in the
+country. There were private banks in London centuries before the Bank
+of England was incorporated, and previous to 1826 the Bank of England
+was their only competitor. Since 1844 their number has steadily
+diminished. Those which remain have, as a rule, built up a special
+constituency, to the special interests of which they cater. Among them
+are strong institutions, but as a class their importance in the system
+is not great, and is waning.
+
+The foreign and colonial banks are branches of important institutions
+in foreign countries and the English colonies which have a
+considerable volume of business to transact in London. They serve as
+intermediaries between their respective countries and the English
+money market, and on account of the enormous volume of foreign
+commerce which is financed in London, their number is large, and the
+role they play on that market is important.
+
+In the operation of this machinery, the most noteworthy features are
+the reserve system, and the administration of the discount rate of the
+Bank of England. There is no law on the English statute books
+prescribing the amount of cash which banking or other financial
+institutions shall keep in their vaults. The custom of these
+institutions regarding that matter is to keep on hand relatively small
+sums and to rely upon the Bank of England or some other London banking
+house for the replenishment of their supply as needed. For this
+purpose, London and many provincial banks keep balances with the Bank
+of England, and other banks maintain balances with other London
+institutions. These balances may be obtained by the deposit of coin or
+Bank of England notes or by rediscounts. Another widely used resource
+is the calling of loans made to bill brokers or discount houses. Such
+loans or a considerable volume of bills of the kind discounted by the
+Bank of England, or both, are regularly carried by London banks and
+counted as a part of their reserves.
+
+On account of these practices, surplus cash not needed in the conduct
+of the current business of the country speedily finds its way into the
+vaults of the Bank of England, and additional supplies, when needed,
+come from this source. The administration of the cash reserves of the
+country thus becomes one of the important duties of the Bank of
+England, in the performance of which variation of the rate charged on
+discounts is the most important device.
+
+Many years' experience has enabled the Bank to determine with a
+considerable degree of accuracy the volume of the demands for cash
+likely to be made upon it from day to day, and consequently the amount
+that it should keep on hand in the vaults. Whenever this amount
+approaches the minimum regarded as consistent with safety, the
+directors raise the rate of discount, and when the amount on hand
+becomes excessive, they lower it. The efficiency of this procedure in
+increasing the reserves in the one case and in decreasing them in the
+other is due to certain conditions and practices which deserve
+attention at this point.
+
+Long-established custom has made the rate of interest paid on deposits
+in London and other parts of England vary with the discount rate of
+the Bank, and on this account the market rate of discount also varies
+in the same manner. The Bank of England is thus ordinarily able to
+regulate the market for commercial paper. Since paper payable in
+London is a favorite form of investment for continental bankers, by
+raising its rate of discount and with it the market rate above the
+level of the rates of some or all of the continental centers, the
+Bank of England is able to induce these bankers to send money to
+London for investment and thereby to increase her reserves, and by
+lowering its rate below the level of the rates in these continental
+centers, she is able to induce them to sell some of the paper they
+already hold, and thus to furnish a market for her surplus funds and
+diminish her reserves.
+
+On account of the readiness with which the international gold movement
+responds to variations in the discount rate of the Bank of England,
+the need for an elastic system of bank note issues is not felt in
+England to the same extent as in other countries. It is this fact,
+doubtless, which explains the retention to the present day of the
+essentially inelastic bank note system created by the act of 1844.
+
+
+_3. The French System_
+
+In France, the Bank of France is the central institution. It is the
+oldest of the important French banks of the present day, having been
+established in 1800 by Napoleon the First. Its capital, amounting at
+the present time to 182,500,000 francs, or approximately $36,500,000,
+is supplied by about 30,000 private stockholders, about 10,000 of
+whom own only one share each.
+
+The two hundred largest stockholders appoint a General Council,
+consisting of fifteen regents and three censors. Five regents and all
+the censors must be chosen from the commercial and industrial classes,
+and three of the remaining ten regents must be selected from the
+_tresoriers payeurs genereaux_, an important group of representatives
+of the public treasury scattered throughout the country. The General
+Council as well as the stockholders' assembly is presided over by a
+governor, who, together with two sub-governors, is appointed by the
+President of the Republic upon the nomination of the Minister of
+Finance. The governor is the chief executive officer of the bank and
+the final source of authority in most matters of vital importance. He
+is responsible to the government rather than to the stockholders, and
+is subject to removal only by the power which appointed him.
+
+The Bank of France has about two hundred branches and sub-branches
+located in Paris and all the important cities and towns in the
+Republic, also over three hundred so-called agencies located in
+smaller places and transacting only a limited line of business. Each
+branch has a manager appointed in substantially the same manner as
+the governor, and the sub-branches and agencies are administered
+through the branches. Through this network of offices, every part of
+the country is brought into direct and easy access to the Bank.
+
+The Bank of France is the only institution in the country privileged
+to issue circulating notes. The maximum allowed it is regulated by law
+and is increased from time to time. At present it amounts to
+5,800,000,000 francs, or approximately $1,160,000,000. The bank is
+obliged to redeem these notes on demand in gold coin or silver
+five-franc pieces, but it is free to determine how much cash it shall
+keep on hand for that purpose, and when and under what conditions it
+shall issue them.
+
+Its discount operations are limited by law to bills maturing in not
+more than three months, and bearing the signatures of at least three
+solvent persons, or two signatures and secured in addition by
+specified forms of collateral. It is also permitted to make loans or
+advances, as they are called, on securities of the French government
+maturing at fixed dates, gold and silver bullion, and the money of
+foreign countries, and obligations of the French railroads, French
+cities, and departments, the Credit Foncier, and the Societe
+Algerienne. It is also obliged to loan 180,000,000 francs
+($36,000,000) to the government without interest.
+
+One of the chief branches of the business of the Bank of France is the
+service of the public treasury and the performance of other financial
+duties imposed upon it by the government. It serves as the depository
+and disbursing agent for the government, and performs important
+functions connected with the public debt, the mints, the savings
+institutions, and publicly administered trusts of various kinds. It is
+also the depository for the banking reserves of the country. In
+France, as in England, it is not the custom of banking and other
+financial institutions to hoard money in their vaults, but to depend
+upon the Bank of France for supplies as needed. To this end they keep
+funds on deposit there, and regularly rediscount the paper of their
+customers when balances need to be replenished.
+
+Through its network of branches and agencies spread over the entire
+country, the Bank of France is able economically and expeditiously to
+conduct the intermunicipal exchanges of the country. It participates
+in local clearings through membership in the clearing houses, at which
+balances are paid by checks drawn against credits on its books
+maintained for that purpose by all members, and it conducts so-called
+transfer accounts with other banks and financial institutions against
+which drafts can be drawn payable at any place where one of its
+offices is located. Such drafts constitute the chief means through
+which transfers of funds are made between different places.
+
+The business of the Bank of France with private persons is limited by
+the requirement that all paper discounted must have three signatures,
+or two signatures and collateral security, and that advances can only
+be made on the security of the forms of collateral indicated above.
+Most business men find it either inconvenient or impossible to comply
+with these conditions, and consequently transact most of their
+business with other banking institutions. The third signature on paper
+discounted by the Bank is, therefore, usually supplied by these
+institutions, which thus act as an intermediary between the Bank and
+the commercial world.
+
+Next to the Bank of France, the most important banking institutions of
+the country are the Credit Foncier, the Credit Lyonnais, the Comptoir
+d'Escompte de Paris, the Societe Generale, and the Credit Industrielle
+et Commercial. The Credit Foncier is principally engaged in extending
+credit based on real estate security, but it also discounts large
+amounts of commercial paper. Its organization is modeled after that of
+the Bank of France, and, like that institution, it is controlled by
+the state. Since it is primarily an investment bank, a description of
+its principal operations will be deferred to the next chapter.
+
+The four other banks mentioned are a product of the commercial life of
+modern France, all having been established since the revolution of
+1848. They are all heavily capitalized, the smallest, the Credit
+Industrielle et Commercial, having a capital of 100,000,000 francs
+($20,000,000), and the largest, the Societe Generale, having a capital
+of 400,000,000 francs ($80,000,000), and all extend their business by
+means of branches. The Credit Lyonnais and the Comptoir d'Escompte
+have branches in France itself, the French colonies, and a number of
+foreign countries; the Societe Generale, throughout France, in London,
+and San Sebastian, Spain; and the Credit Industrielle et Commercial,
+in Paris and its suburbs. Taken together, these four institutions
+supply the French people in Paris and the Provinces with banking
+facilities for both their domestic and their foreign business. While
+in some of the larger provincial cities local banks with branches in
+surrounding towns and sometimes in Paris are to be found, branches of
+one or more of these four institutions are the chief reliance in
+nearly all places.
+
+These institutions cater to all the financial needs of their
+constituents. They supply their needs for cash and for exchange;
+conduct checking accounts for them, although these are not used in
+France to the same extent as in the United States; discount their
+commercial paper and make loans to them on personal and other
+security; and receive on deposit their savings and provide them with
+investments. In performing these functions they make extensive use of
+the Bank of France and of the stock exchanges of the country. With the
+former they conduct checking and transfer accounts and rediscount
+their customers' bills, by these means procuring the coin, bank notes,
+and exchange needed; and from the latter they obtain the investment
+securities required for the satisfaction of both their own and their
+customers' needs.
+
+Gold and silver coin and the notes of the Bank of France constitute
+the hand-to-hand money of the country. The latter form the elastic
+element, and their operation approximates perfection. When demand for
+money increases for any reason, more commercial bills are presented
+for discount to the banks, which, after indorsement, exchange them at
+the Bank of France for the notes with which they supply their
+customers' needs. The note issues of the Bank thus expand in direct
+and immediate response to the needs of the country for more currency.
+When such needs have passed, the discounted bills, in exchange for
+which these notes were issued, mature and are paid in greater volume
+than new bills are created and presented for discount, and notes, or a
+corresponding amount of coin, accumulate in the vaults of the Bank.
+The notes are cancelled and destroyed and the coin is kept in store
+until it again passes into circulation through exchange for notes
+still outstanding, or for discounted bills.
+
+On account of the elasticity of its note issues, and the extent to
+which they are used in the commerce of the country, the Bank of France
+has occasion to change its rate of discount less frequently than any
+other bank in Europe. The result is that the country enjoys the
+advantage of steady and low rates, since in France, as in England, the
+discount rate of the central bank controls the market rate, and the
+ease and inexpensiveness with which the notes are issued make low
+rates possible.
+
+
+_4. The German System_
+
+The Imperial Bank, with head offices in Berlin, and about one hundred
+branches and more than four hundred sub-branches scattered throughout
+the country, plays essentially the same role in the German banking
+system that the Bank of England and the Bank of France play in the
+English and French systems, respectively. It was established in 1875
+by an act which also profoundly affected the entire banking system of
+the country, and its development has been aided and directed by
+several acts passed subsequently.
+
+Its capital, supplied by the general public, amounts at the present
+time to 180,000,000 marks ($45,000,000), and it is governed by three
+boards, known respectively as the Curatorium, the Direktorium, and the
+Central Ausschuss.
+
+The Curatorium is composed of five members, of which body the
+Chancellor of the Empire is ex-officio chairman. A second member is
+appointed by the Emperor, and for that position he has always selected
+the Prussian Minister of Finance, and the three remaining members are
+appointed by the Bundesrath. It meets quarterly and reviews all the
+operations of the bank. It, or rather, the Chancellor, its chairman,
+has supreme power, which, however, he has never exercised except on
+one occasion, when he ordered the bank not to accept Russian
+securities as collateral for loans, an order since revoked.
+
+The administration of the bank's affairs is chiefly in the hands of
+the Direktorium, consisting of a president, vice president, and seven
+other persons, all of whom are appointed by the Emperor for life, from
+a list of candidates recommended to him by the Bundesrath. This board
+selects the staff of bank officers and clerks, and superintends the
+daily conduct of the bank's business.
+
+The Central Ausschuss is a committee of fifteen persons elected by and
+representing the stockholders. It holds monthly meetings; has the
+right to demand complete information concerning the bank's operations,
+to discuss all matters freely, and to tender advice and counsel; but
+it has no power to control except regarding two matters: it can set a
+limit to the amount of securities the bank can purchase, and can veto
+any proposed transactions with the Imperial Government or with the
+governments of any of the states.
+
+Like the other central banks described above, it receives on deposit
+and disburses the funds of the Imperial Government; administers the
+coin reserves of the country; conducts the domestic exchanges, and
+serves as a bankers' bank. It is free to do business with the general
+public, but the legal and other limitations under which it must
+operate give the other banking institutions of the country the
+advantage in competition for this kind of business.
+
+It shares the right of note issue with four other banks, which, out of
+thirty-two that retained that privilege at the time the Imperial
+banking system was established, alone retain it at the present time.
+The issues of these four institutions, however, are relatively small
+in volume, and the Imperial Government has the right to deprive them
+of it January 1, 1921, or any tenth year thereafter, on condition of
+giving one year's notice of its intention so to do. The issues of the
+Imperial Bank are subject to the following regulations: they must be
+covered by cash and discounted bills maturing in not more than three
+months, and signed by at least two solvent persons, the proportion of
+cash being not less than one-third of the total. If the total amount
+issued exceeds the Bank's holdings of gold bullion, specie, and
+government notes by more than 750,000,000 marks at the end of March,
+June, September, and December, and 555,000,000 marks at other times, a
+tax of five per cent per annum is levied on the excess.
+
+The law confers upon the Bank the following powers:
+
+     a. To buy and sell gold and silver coin and bullion.
+
+     b. To discount, buy and sell bills of exchange whose
+     maturity shall be three months at the longest, and for which
+     usually three, and in no case less than two, accredited
+     vouchers shall stand good; furthermore, to discount, buy and
+     sell bonds of the Empire or of any German state, or domestic
+     municipal corporations, provided such bonds mature within
+     three months at the longest and conform to the new standards
+     of value.
+
+     c. To grant interest-bearing loans for terms no longer than
+     three months, upon movable security (lombard, or deposit
+     loan business), such as: gold and silver, coined or
+     uncoined; interest-bearing or non-transferable bonds
+     maturing within a maximum term of three months, whether of
+     the Empire, a German state, or of domestic municipal
+     corporations; interest-bearing non-transferable bonds on
+     which the interest is guaranteed by the Empire or by any one
+     of the German states; capital stock and stock priority
+     shares, fully paid up, of German railway companies in
+     actual operation; mortgage bonds of the provincial,
+     municipal, or other land credit institutions of Germany that
+     are subject to state control, including shares of German
+     mortgage banks to an amount never exceeding three-fourths of
+     their market value; interest-bearing non-transferable bonds
+     of foreign states, and foreign railway priority bonds,
+     covered by state security, in amounts not exceeding 50 per
+     cent of their market value; bills of exchange of recognized
+     soundness, after deducting at least 5 per cent of their
+     market value; and pledges of native merchandise, in amounts
+     within two-thirds of their value.
+
+     d. To negotiate collections for the account of individuals,
+     institutions, and governing boards; and upon security, as
+     before mentioned, to furnish payments, and make orders or
+     conveyances on the branch banks or on correspondents.
+
+     e. Upon prior security, to buy on behalf of outside parties,
+     effects of all kinds, including the precious metals; and
+     after delivery to sell the same.
+
+     f. To receive money for circulation or on deposit, with or
+     without interest, the sum of interest-bearing deposits not
+     to exceed that of the capital stock and reserve fund.
+
+     g. To accept the custody or other management of objects of
+     value.
+
+Besides the Imperial Bank there are in Germany eight very large and
+powerful banking institutions and a considerable number of smaller and
+less powerful ones. The eight great ones have each its head office in
+Berlin, and connections, through branches, agencies, and controlled
+institutions, in other parts of the Empire, the German colonies, and
+foreign countries. Together they control about eighty per cent of the
+entire banking capital of the Empire. In reality they are federations
+of banking institutions, many of which were once independent, and some
+of which were promoted and established in the interests of the group.
+
+While these eight institutions are primarily engaged in commercial
+banking, they are also promoters on a large scale of German industry
+and commerce, both at home and abroad. Through interlocking
+directorates, stock ownership, and in other ways, they are closely
+allied with the leading industrial and transportation interests of the
+Empire, and they have been and are leaders in the promotion of these
+interests in other parts of the world, notably in the Orient, South
+America, and Africa. They are, therefore, leaders on the stock as well
+as the discount markets of the country, and are widely influential in
+investment as well as commercial banking affairs.
+
+These, as well as the other commercial banks, consisting for the most
+part of local institutions and those catering to special interests,
+use the Imperial Bank for rediscounts, for transfers of funds between
+different parts of the country, and as a depository for surplus funds.
+They do not normally keep on hand more cash than is needed for till
+purposes. Being in easy reach of an office of the Imperial Bank,
+supplies can be obtained at any time by checks drawn against credit
+balances or through rediscounts of commercial bills. Special accounts
+are carried for transfer purposes and are used even in the transfer of
+funds between different offices of the same institution.
+
+On account of its right to issue notes against commercial securities,
+the Imperial Bank has the power to meet the demands made upon it and
+to supply the country with an elastic medium of exchange. The levy of
+a tax upon the excess of the issues above a prescribed maximum
+prevents perfect elasticity, unless this maximum be kept above the
+highest point which the circulation would normally reach, since the
+actual levy of the tax forces the rate of discount to such a point as
+to seriously restrict commercial operations. However, since the line
+between commercial and investment banking is not drawn by the great
+Berlin banks with the care that is desirable, and since they have been
+able at times, especially on account of their foreign connections, to
+embarrass the Imperial Bank in its efforts to maintain adequate specie
+reserves, such a tax is probably a desirable safeguard against
+over-expansion of credit.
+
+
+_5. The Canadian System_
+
+In important respects the Canadian banking system differs from those
+of the European countries which have been described and from that of
+the United States. It consists of a varying number of relatively large
+institutions, each with several offices administered from a common
+center, but without a central bank. For some time the total number has
+decreased, since 1900 from thirty-six to twenty-seven, in spite of the
+fact that the Canadian law, like that of the United States, provides
+for the formation of new banks at any time, on compliance with certain
+prescribed conditions, including a subscribed capital of at least
+$500,000 and a paid-up capital of at least $250,000. The number of
+branches, however, has increased rapidly, much more rapidly than the
+population.
+
+The most noteworthy legal provisions pertaining to the banking
+business in Canada concern note issues and loans and discounts.
+Regarding the establishment of branches, the amount, and, with one
+exception, the composition of the reserves, and many other matters
+carefully regulated by law in the United States, Canadian bankers are
+left free to follow their own judgment. Neither is there public
+examination of banks in Canada. Reports must be regularly made to the
+Minister of Finance, and he may call for special reports whenever he
+desires so to do; but neither he nor any other public officer has the
+right to examine a bank's books or to quiz its officers or directors.
+In contrast with banking legislation in the United States, another
+peculiar feature of Canadian law is the incorporation of the Canadian
+Bankers' Association, an organization resembling in essentials the
+American Bankers' Association, and the assignment to it of important
+functions connected with the issue of notes and the winding up of the
+affairs of failed banks.
+
+Regarding note issues, the chief provisions of the Canadian law are as
+follows: Each bank is permitted at any time to issue circulating notes
+to the amount of its capital stock, and between October 1 and January
+1 an additional amount, equal to fifteen per cent of its combined
+capital and surplus, may be issued on payment of a tax to be assessed
+by the Governor in Council, not to exceed five per cent per annum.
+The notes are a first lien on all the assets of the bank that issued
+them, and must be redeemed on demand at the head office and at such
+other places as are designated by a committee of public officials
+known as the Treasury Board. As such redemption centers, this board
+has named Toronto, Montreal, Halifax, Winnipeg, Victoria, St. John,
+and Charlottetown. Each bank must also deposit with the Minister of
+Finance a sum of money equal to five per cent of its average
+circulation. The aggregate of the amounts thus deposited by all the
+banks is known as the "circulation redemption fund," and may be used
+in the redemption of the notes of a failed bank. In case the fund is
+so used, and the liquidated assets of the bank prove to be inadequate
+for its complete replenishment, a tax sufficient to meet the deficit
+is levied on the solvent banks in proportion to their circulation.
+
+Regarding loans and discounts, the law aims rather to protect than to
+restrict the operations of the banks. They may "deal in, discount, and
+lend money, and make advances upon the security of, and may take as
+collateral security for any loans, ... bills of exchange, promissory
+notes, and other negotiable securities, or the stocks, bonds,
+debentures, and obligations of municipal and other corporations,
+whether secured by mortgage or otherwise, or Dominion, provincial,
+British, foreign, and other public securities." The only important
+restriction placed upon their loaning activities is the prohibition of
+making advances on the security of landed or other immovable property.
+
+In making loans to wholesale dealers and shippers of produce, the law
+safeguards the banks by allowing them to take a blanket lien on the
+goods dealt in by the borrower. This lien applies not only to the
+goods in possession at the date of making the loan, but to any others
+which may be substituted for them or manufactured out of them. This
+lien is prior to that of any other unpaid vendor, except one acquired
+before the bank's lien was established.
+
+The chief officers of a Canadian bank are the general manager, the
+chief accountant, the superintendent of branches, the inspector, and
+the secretary, all connected with the head office, and the managers of
+the branches.
+
+The general manager is the chief executive and the chief in authority.
+While he is subject to the board of directors, on account of his wide
+experience and knowledge his judgment is usually followed. The other
+officers are appointed by him with the approval of the board, but,
+almost without exception, from persons who have served the bank in
+subordinate capacities. The general manager himself is nearly always a
+man who has passed through the hierarchy of positions from the bottom
+up, and is therefore thoroughly familiar with every detail of the
+bank's business and history. The inspector has charge of the
+examination of the branches, and this work is so carefully and
+thoroughly done that examination by public officials is not considered
+necessary, or regarded as desirable by most Canadian bankers.
+Regarding this matter, however, there are differences of opinion, and
+changes in the near future are not improbable. The managers of the
+branches are in strict subordination to the authority of the general
+manager, though they are necessarily allowed a large amount of
+discretionary authority in matters pertaining to the branch over which
+they preside. Unless prevented by distance, they are in daily
+communication with the head office or with one of its representatives.
+
+In the operation of the Canadian system, noteworthy features are the
+methods of controlling credits, of managing the issues and the
+reserves, and of securing unity or at least harmony of action. It is
+the usual practice in Canada for a business man to do all his banking
+with one institution. This practice is rendered possible because most
+of the banks are large enough to take proper care of almost any
+business establishment in the Dominion, and because experience has
+demonstrated its wisdom.
+
+The banks compete vigorously for new business but do not attempt to
+attract one anothers' customers. Indeed a customer who desires to
+change his banking connections is looked upon with suspicion and is
+subjected to a very careful examination by the bank that is asked to
+take him on, including a careful discussion of all the aspects of the
+matter with the bank he desires to leave. The result of this practice
+is that a man's banker is thoroughly familiar with his affairs,
+especially his credit relations, and at the same time feels under
+obligations to render him such support and guidance as he deserves. On
+account of this practice, also, commercial paper brokerage does not
+flourish in Canada.
+
+The notes of the Canadian banks constitute practically all of the
+hand-to-hand money of the country in denominations above two dollars.
+The one and two dollar denominations are supplied by Dominion
+notes--all but $30,000,000 of which are represented by gold coin or
+bullion--and the lower denominations by subsidiary silver supplied by
+the government.
+
+Each bank pays out its notes freely to supply the cash demands of its
+customers, and receives from them on deposit, without hesitation or
+depreciation, the notes of other banks as well as its own. The former,
+however, are either sent in for redemption as soon as received or used
+in making payments to the banks which issued them. Thus notes are
+cleared as readily as checks and the volume in circulation expands and
+contracts in automatic response to business needs. The fact that these
+notes are neither legal tender nor guaranteed by the government does
+not interfere with their circulation--daily clearings, the first lien
+on assets, and the redemption fund amply protecting holders against
+the possibility of loss--but does prevent their being hoarded as
+reserves or for any other purpose and thus contributes towards their
+elasticity.
+
+The connection now established by law between the maximum volume of
+bank note issues and the capitalization of the banks renders necessary
+the increase of the latter in correspondence with the expansion of
+commerce in order to prevent a contraction of credit. Present law,
+however, does not provide for such an increase. It is left to the
+voluntary action of the banks, which seem inclined to increase surplus
+funds rather than capital. The permission granted in 1908 to extend
+issues beyond the amount of capital during the crop moving season, on
+payment of a tax, is a makeshift and not a solution of the difficulty,
+since a tax on issues is a means of forcing contraction of credit and
+not of adjusting issues to legitimate needs.
+
+Since Canadian banks are able to meet the greater part of the public
+demand for hand-to-hand money by means of their own notes, they do not
+need to carry in their vaults large amounts of gold and silver coin
+and Dominion notes. They keep on hand only so much as experience
+indicates they are likely to be called upon to supply to their
+customers, plus a reasonable margin for safety and for the payment of
+clearing house balances. The greater part of their reserves consists
+of balances in banks outside of Canada, especially in the United
+States and England, call loans in New York City, and easily salable
+securities. In case of an emergency of any kind these resources may be
+transformed into gold or their customers supplied with foreign
+exchange, which is often as much or even more needed. Gold can at any
+time be exchanged for Dominion notes if that is the currency wanted.
+
+The lack of a central bank and of a rediscount market is to a degree
+compensated by unity of action among the banks. This is the result not
+so much of law as of conditions, among which the most important are:
+the fact that the six largest banks do fifty per cent of the business
+and that one of these, the Bank of Montreal, holds most of the
+deposits of the government and is generally spoken of as the
+government bank; the fact that the general managers are experts, in
+first-hand touch through their branches with business conditions in
+Canada and other parts of the world, and in possession of the same
+data concerning these conditions, and through the same kind of
+acquired skill and similar experiences likely to draw the same or at
+least similar conclusions from this data; common interests in the
+prosperity of the country and in the prevention of speculative
+excesses and mutual interdependence in the successful conduct of their
+everyday business as well as in times of emergency and stress: and the
+Bankers' Association, which through its journal gives authoritative
+expression to the best banking opinion and actually acts for the banks
+in many matters of common interest. To what extent this community of
+action takes the form of rediscounts for each other in ordinary times
+it is impossible for an outsider to say, but that it is operative in
+times of stress is indicated by the manner in which the failures of
+the Bank of Ontario in 1906 and the Sovereign Bank in 1908 were
+handled.
+
+In both of these cases the public was protected against loss and panic
+was averted by the cooperative action of the other banks in assuming
+the obligations of these institutions to the public, and in winding up
+their affairs in such a manner as to occasion little disturbance.
+
+While Canadian banks are free to carry on investment as well as
+commercial banking operations, their published reports indicate that
+they take care to avoid confusion of the two, or the infringement of
+one upon the other. Their holdings of investment securities are kept
+well within the limits set by their aggregate capital, surplus, and
+savings funds, and their method of handling commercial business, based
+as it is on accurate knowledge of their customer's operations and upon
+the lien upon produce heretofore described, prevents their acceptance,
+through ignorance, of investment securities under commercial
+disguise.
+
+
+
+
+CHAPTER VI
+
+INVESTMENT BANKING
+
+
+In the economy of nations the encouragement and promotion of saving
+and the accumulation, distribution, and investment of capital are as
+essential as the conduct of exchanges, but the performance of these
+functions has not been segregated and institutionalized to the same
+extent as has commercial banking. Vast amounts of capital are invested
+directly by the people to whom it belongs without the aid of middlemen
+and large amounts are also invested through brokers of one kind and
+another who can hardly be classed as bankers. The most important types
+of institutions which have been developed in connection with these
+functions are savings banks, trust companies, bond houses and
+investment companies, land banks, and stock exchanges.
+
+
+_1. Saving and Savings Institutions_
+
+Saving is an individual matter for which the essential conditions are
+the development of the instinct to make provision against
+uncertainties of future income and to better the material condition of
+one's self and family, and a surplus of income above necessary daily
+expenditures. In order to secure the realization of these conditions
+to as great an extent as possible, many agencies cooperate in all
+modern nations, among them savings institutions. Included among these
+are various forms of provident associations, sometimes independently
+organized and sometimes connected with other organizations, insurance
+associations of many kinds, building and loan societies, and savings
+banks.
+
+The need for savings institutions varies greatly among the different
+nations and among different classes of people in the same nation.
+Among people of great wealth the surplus of income above expenditures
+is so great that large savings can hardly be avoided, and among all
+the well-to-do classes the margin from which savings are possible is
+sufficiently large and the desire to save sufficiently great to insure
+large accumulations of capital. Among these classes there is little or
+no need for institutions designed primarily for the development of the
+saving instinct. What they need are institutions for the safe keeping,
+accumulation, and investment of the savings which they are constantly
+making. The principal work of savings institutions, therefore,
+pertains to the classes of people who are not well-to-do and who need
+encouragement and help in their efforts to improve their material
+condition, if they are so inclined, and stimulus to make such efforts,
+if they are not so inclined.
+
+The means available to savings institutions for the accomplishment of
+these ends are the urging of the importance of saving upon the
+attention of people who do not adequately appreciate it, the placing
+at their easy disposal of facilities for making savings when they have
+the ability and inclination to save, and the application of pressure
+of various kinds to compel or induce saving.
+
+In the application of these means the methods employed by the various
+groups of institutions mentioned differ widely and they are efficient
+in different degrees, partly because they have other objects in view
+besides the promotion of saving and partly because they deal with
+different classes of people. Savings banks constitute the only group
+to which the term bank can properly be applied and consequently the
+only one to which attention will here be given.
+
+In a book entitled, _Savings and Savings Institutions_, written by
+Professor Hamilton of Syracuse University, the following definition is
+given:[Pages 161 and 162.]
+
+    Savings banks are institutions established by public
+    authority, or by private persons, in order to encourage
+    habits of saving by affording special security to owners of
+    deposits, and by the payment of interest to the full extent
+    of the net earnings, less whatever reserve the management may
+    deem expedient for a safety fund; and in furtherance of this
+    purpose bank offices are located at places where they are
+    calculated to encourage savings among those persons who most
+    need such encouragement.
+
+Professor Hamilton classifies these institutions as trustee,
+cooperative, municipal, and postal savings banks. In the first group
+he places institutions managed by boards of philanthropically inclined
+persons who serve without pay; in the second, those managed
+cooperatively by the people who make use of them; in the third, those
+established and administered by municipalities; and in the fourth,
+those connected with the post-office departments of governments. The
+strength of trustee savings banks lies in the comparatively low costs
+of their administration and in the fact that in their investments
+they are likely to enjoy the advantages of the judgment and enthusiasm
+of people skilled in the investment business; that of cooperative
+savings banks, in their adaptability to the special needs of their
+constituents and in the education which cooperative administration
+involves; and that of municipal, and especially of postal savings
+banks, in their capacity to place their services within the easy reach
+of all who need them and in the confidence which their public
+character inspires.
+
+In the investment of the funds intrusted to savings banks, safety and
+as large returns as are consistent with it, rather than ease of
+liquidation, are the prime considerations, and hence they usually take
+the form of high grade investment securities rather than of commercial
+paper. Their deposits are usually subject to withdrawal only after due
+notice, and, being savings deposits, their withdrawal usually follows
+only after the lapse of a considerable period of time.
+
+The purpose of their withdrawal is frequently investment and this is
+sometimes made through the agency of the bank which held the deposit
+and may involve merely a transfer of securities.
+
+Outside of the New England and middle states, savings banks were rare
+in this country previous to the inauguration of our postal savings
+bank system in 1911. The explanation of this condition is doubtless to
+be found chiefly in the wide extension of private, state, and national
+banks, and trust companies, practically all of which conduct savings
+departments and solicit the patronage of savers. These institutions
+have coveted this field and have not encouraged the establishment of
+savings banks. There is reason to believe, however, that they have not
+worked the field as thoroughly as savings banks would have done and
+that, on account of the dominance of their other interests, they are
+not as well fitted as savings banks to work the field thoroughly.
+Moreover it is probable that they are not able to pay as high a rate
+on deposits as well conducted savings banks would be able to pay.
+There seems, therefore, to be room, and probably need, here for the
+development of savings banks of some at least, if not all, of the
+types above described.
+
+
+_2. Trust Companies_
+
+Within a comparatively short period of time the trust company has
+developed into an institution of prime importance in the United
+States. In the beginning of its history it was, as its name implies,
+simply an institution for the administration of trusts of various
+kinds, such as the execution of wills, the guardianship of minors and
+other dependent persons, the administration of the estates of persons
+either unable or unwilling to administer them for themselves, and
+trusteeship under corporate mortgages, especially those of railroads.
+In the latter capacity they became mortgagees in trust for
+bondholders, registering the bonds, collecting the interest as it
+became due, paying the bonds at maturity, and in case of default
+taking the legal steps which were necessary for the protection of the
+bondholders.
+
+The execution of these trusts involved in most cases the custody and
+investment of funds, so that investment banking became a part of their
+business almost from the beginning, and, in time, in states in which
+the laws passed for their regulation did not prevent, they added
+commercial banking to their other functions. In some cases they have
+also become promoters of enterprises, taking the initiative in the
+organization of corporations for various industrial and commercial
+purposes. In New York City, and in individual cases in some other
+large cities, the commercial end of the business has become the
+dominant one; in the former case on account of the ability of these
+companies, unrestricted by certain laws applying to state and national
+banks, to offer to commercial customers better terms than their
+competitors. In most states, however, especially in the large cities
+in which they chiefly flourish, trust companies have become primarily
+investment banking institutions, their other functions being carried
+on as side lines and assuming, of course, in some cases greater
+importance than in others.
+
+Since they are still in the early stages of their development, the
+status of trust companies in the banking system of the United States
+is not yet definitely determined. Legislation concerning them varies
+considerably in different states, as do also their relations with
+other banking institutions. The competitive character of these
+relations has resulted in some cases in legislation which has aimed to
+differentiate and define the various functions which all these
+institutions perform, and to prescribe the conditions under which each
+one or each group must be performed, regardless of the way in which
+they are combined, and in others, in their practical consolidation
+with national or state banks, or both, through community of stock
+ownership, interlocking directorates, etc.
+
+From the point of view of the convenience of the public there are
+advantages in the combination of all the banking functions in a single
+institution, and the success of trust companies to some extent has
+been due to this cause, but they have also profited from the unequal
+competition which exemption from certain limitations imposed on state
+and national banks has enabled them to enjoy. The removal of the
+conditions which result in this unequal competition, a process already
+in progress and likely to continue to completion, will reveal the
+strength of the advantages of combination versus specialization of
+functions. Previous to such a revelation it will be impossible to
+determine whether or not the trust company form of organization is
+destined to become the dominant one.
+
+
+_3. Bond Houses and Investment Companies_
+
+A large part of the business of investment banking in the United
+States is conducted by corporations and firms organized for the
+purpose of buying and selling investment securities, especially bonds
+and mortgages. Rarely, if ever, do these concerns conduct savings
+accounts. Ordinarily they confine their attention exclusively to the
+investment end of the business and act in the capacity of jobbers, or
+brokers, or both.
+
+Within the investment field some of them specialize closely and others
+deal in a wide range of securities. The specialties most frequently
+followed are government, state, and municipal bonds, railroad bonds,
+public service securities, timber bonds, irrigation bonds, and real
+estate mortgages. Specialization involves the development of expert
+knowledge of the class of securities dealt in and thus of special
+serviceableness to both investors and the promoters of the enterprises
+or the public bodies which issue the securities. These specialists
+sometimes serve as middlemen between the issuers of securities and
+other investment banks, as well as between them and the real owners of
+the capital invested, their expert knowledge being of service to the
+former as well as the latter.
+
+Until recently there have been few attempts to regulate the operation
+of these institutions by law, but the fraudulent practices of some of
+them, and the ignorance and weakness of perhaps the majority of
+investors, have recently created in some quarters a strong public
+sentiment in favor of such regulation. In several states legislation
+has resulted, of which the most noteworthy is the so-called "blue sky
+laws" of Kansas and some other states.
+
+In details these laws differ widely from one another, but they are
+alike in that they impose upon some branch of the state government the
+obligation of supervising both companies which issue securities and
+those which offer securities for sale. The Kansas law, the first of
+this kind passed in the United States, has been considered too drastic
+by most of the companies that have attempted to operate under it, but
+the Wisconsin law, which went into effect October 1, 1913, is looked
+upon with more favor.
+
+In formulating these and other laws for the proper regulation of these
+concerns, it has been found difficult to provide adequate protection
+to the investing public without unduly hampering the issue and
+negotiation of securities, but this difficulty should, and in time
+doubtless will, be overcome. A free and open market for bonds, stocks,
+and other evidences of indebtedness is essential to freedom of
+enterprise and mobility of capital, which are in turn essential to the
+economic prosperity of any country. On the other hand, investors
+undoubtedly need and deserve the protection of the state against
+misrepresentation and fraud. It is practically impossible for them in
+many, perhaps in most, cases to obtain the information necessary for
+self-protection. The matters and conditions to be dealt with in such
+legislation are so complex and subject to such frequent change that
+laws are apt to be imperfect, inefficient, or obstructive. It seems
+probable that those which do not attempt to be specific and detailed,
+but give wide powers and discretion to administrative boards or
+commissions, are most likely to be successful.
+
+
+_4. Land Banks_
+
+In Europe an important group of institutions has developed for the
+supplying of agriculture and the building industries with the capital
+needed in their operations. The greatest number and variety of these
+are in Germany, in which their development has been continuous since
+the days of Frederick the Great.
+
+In order to assist in the recuperation of his kingdom from the
+devastation caused by the Seven Years' War, Frederick caused the land
+owners of certain provinces to be organized into associations called
+Landschaften, which were authorized to issue mortgage bonds on the
+joint security of the lands of all the members of the association in
+exchange for mortgages on the lands of individual members who needed
+funds for the improvement of their estates. These mortgages were made
+payable to the association in the form of small annuities, to which
+were added the interest paid on the bonds and an increment for the
+payment of the expenses of the association.
+
+These associations were governed by the members through a general
+assembly, representative boards, and elected officers, and were
+supervised by the state and carefully regulated by law. Regulations
+were carefully worked out pertaining to the ratio that the loan should
+bear to the value of the estate mortgaged, methods of valuation, ways
+and means of maintaining an equilibrium between the bonds issued and
+the mortgages held, the treatment of defaulting members, etc., etc.
+Machinery for the sale of the mortgage bonds delivered to members was
+also created, and in some cases later on these sales were made
+directly by the associations themselves, and cash paid to the maker of
+the mortgages.
+
+Five of these original Landschaften have continued to the present day,
+and others modeled after them were subsequently established. In 1909
+in all Germany twenty-five were in operation, of which eighteen were
+in Prussia. The newer ones have not in all respects followed their
+models. Unlike the original five, membership in them is not limited to
+the nobility and is not compulsory; the liability of the members for
+the payment of the bonds issued has in some cases been limited to a
+percentage of the total; the loans are usually paid in cash; and the
+bonds are sold directly by the associations; but the principles of
+mutual liability and mutual control which were basic in the old
+organizations have not been violated in any case. Both old and new are
+organized in the interests of borrowers on real estate mortgage
+security, and aim to secure funds for these on the lowest possible
+terms and for long periods of time, by making the security offered the
+lenders greater than any single borrower could supply.
+
+The degree of their success is indicated by the fact that in 1909 the
+amount of their outstanding mortgage loans amounted to nearly a
+billion dollars, and that their mortgage bonds rank on the exchanges
+with Prussian state bonds and have at times outranked them.
+
+Another type of land bank appeared in the early part of the
+nineteenth century as a result of the movement for the freeing of the
+serfs and their transformation into freehold peasants. The lands of
+these cultivators were burdened with a variety of feudal dues and
+charges which had to be commuted before they could become freeholds.
+In order to facilitate this process banks were established which
+assumed the obligations of a peasant towards his feudal superior in
+return for a mortgage on his holding, repayable with interest in the
+form of an annuity, and in amount equal to the sum to be paid to the
+feudal superior for the total extinguishment of all feudal
+obligations.
+
+Some of these banks were established and administered by states,
+provinces, and communes, and some by private parties. The public ones
+obtained the funds they needed partly from subsidies and partly from
+the sale of guaranteed mortgage bonds and the private ones wholly from
+the sale of mortgage bonds.
+
+The completion of the work for which these banks were originally
+established put an end to their development about 1883, but similar
+institutions have since been established in Prussia to assist
+colonists in the purchase and equipment of their farms, and in central
+and western Germany to promote general agricultural and urban real
+estate operations. The colonists sent into Poland for the
+Germanization of that province were in this way assisted by the
+Prussian government, and in some parts of Germany the same means have
+been employed for the purpose of aiding in the process of breaking up
+large estates into small holdings, in the construction of dikes,
+roads, and reservoirs, and in changing the courses of streams.
+
+Next to the Landschaften the most important intermediaries between
+capitalists and investors in real estate in Germany are the so-called
+Hypothekenaktienbanken, or joint-stock mortgage banks. These are
+private corporations, capitalized by the sale of stock shares to the
+general public, and controlled by their stockholders through
+directorates, like industrial corporations the world over. Their
+business is the making of long-period loans on real estate security,
+and the funds thus employed are obtained by the sale of mortgage bonds
+secured by the real estate mortgages in which the proceeds are
+invested and by their own capital, surplus, and other funds.
+
+They differ from the Landschaften in that they are not cooperative or
+mutual institutions, but strictly business enterprises run in the
+interests of their stockholders. Their primary aim is to earn
+dividends rather than to secure the lowest possible loan rates and
+other favorable terms for borrowers. As a matter of fact they are
+forced by competition and by the principles of good business to make
+loans at reasonable rates and on favorable terms regarding repayment
+and other matters, and they successfully compete with the Landschaften
+and other cooperative credit institutions of Germany. Their mortgage
+loans are usually made repayable on the annuity plan, one-half per
+cent each year being the common rate of payment, and they loan about
+the same percentage of the value of the lands mortgaged, as do the
+Landschaften and other land banks, and the rate of interest charged is
+the market rate, into the determination of which, of course, the
+competition of all other institutions enter.
+
+While these institutions loan in the aggregate enormous sums on farm
+property, their chief field of operations is urban real estate, and
+particularly the industry of residence, or as we would call it in this
+country, apartment-house construction. It is on this account that the
+period of their most rapid development coincides with that of the
+recent rapid industrial and commercial development of Germany, which
+dates back only to the establishment of the Empire in 1870. Most of
+them began operations in the decade 1862-1872, but the most rapid
+growth in the magnitude and scope of their business operations has
+come in recent years.
+
+In 1899 there were forty institutions of this kind in operation in the
+German Empire. The number at the present time is probably considerably
+greater, since for obvious reasons combinations among them are not
+promoted by the same kind of economic pressure that in recent years
+has operated so efficiently in Germany in the field of commercial
+banking.
+
+Two other groups of German institutions merit attention in this
+connection, namely, the so-called Schulze-Delitzsch and the Raiffeisen
+Credit Associations.
+
+The Schulze-Delitzsch societies were the direct outcome of the period
+of dearth and famine through which Germany passed in the years
+immediately preceding the revolution of 1848. The first one was not a
+credit association, but a cooperative buying society, organized by a
+local judge named Schulze for the aid of his needy neighbors of the
+small trading class in the town of Delitzsch. In 1850 a credit
+association on the same plan was organized. Others followed, in rapid
+succession in and after the seventies, until at the present time they
+are numbered by the thousands and their members by millions, and they
+are scattered throughout the entire empire.
+
+The principle of their organization is the association of a
+comparatively small group of neighbors, or of people who know one
+another well, or who may easily come to know one another well, by each
+making a contribution to a common fund to be loaned out to individuals
+on personal security chiefly, and which, together with the credit of
+the entire group, may be made the basis of security for larger funds
+to be borrowed on the open market. They are carefully organized on the
+cooperative principle, each member having an equal voice in a general
+assembly which chooses a board of directors and a small administrative
+board, to which is intrusted the actual management and administration
+of the affairs of the society.
+
+Loans are made to members only, usually for short periods of time, on
+the personal security of the borrower and of others who are willing to
+vouch for him, and on the unusually favorable terms which the credit
+of the entire organization and very low costs of administration render
+possible. The knowledge which each member has of the character and
+business methods of his fellow members who borrow, and of the use to
+which borrowed funds are put, and the stake which each one has in the
+financial stability and success of the organization, bring the
+percentage of losses to a very low figure, and make it possible for
+these societies to grant their members maximum accommodations at
+minimum prices.
+
+To the funds accumulated from initiation fees, membership dues and the
+sale of the associations' credit have been added, in constantly
+increasing amounts in recent years, the savings of the members
+themselves. Many societies have such an amount of funds intrusted to
+them in this way that they are not only entirely freed from the
+necessity of borrowing, but are obliged to seek opportunities for
+investment outside their own group.
+
+This condition of affairs, in addition to many other common interests,
+led to the federation of the Schulze-Delitzsch societies into larger
+groups, and these in turn into state and national associations,
+through which surplus funds in one could be made to serve the needs of
+others inadequately supplied, and through which all the societies
+could be brought into efficient connection with the general money
+market of the country. For a number of years these federated
+societies conducted a large central institution, first in Frankfurt
+and afterwards in Berlin, known as the Deutsche Genossenschaftsbank.
+In 1904, however, this institution was absorbed by the Dresdener Bank,
+one of the eight great private banking corporations of Germany, which
+now serves as the central agency for all these societies.
+
+The membership of these associations is not restricted to any class of
+persons, and they actually include a very large number of small
+farmers. An inquiry made in 1885 showed that in 545 of them, with a
+total membership of 270,808, there were 72,994 farmers, and that
+one-fifth of the total loans of these associations were made to this
+class of their members. They must, therefore, be numbered among the
+land banks of the Empire, or at least among the institutions which are
+helping to solve the credit problem for the agricultural classes.
+
+The Raiffeisen societies resemble the Schulze-Delitzsch in many
+particulars and differ from them in others. Like them they are
+strictly cooperative in character, and, when organized for credit
+purposes, designed to supply members with loans on the most favorable
+possible terms. Their development was also due to the hard economic
+conditions of the period immediately succeeding the revolution in
+1848.
+
+They differ from the Schulze-Delitzsch societies chiefly in the
+following particulars: They charge no initiation fees and do not rely
+to the same extent on the proceeds of the sale of shares, the amount
+of which they place at a very low figure, often the lowest permitted
+by law; they make long-period as well as short-period loans, indeed
+the former chiefly; they do not pay dividends on their share capital,
+but instead put all profits into reserve funds or prevent their
+accumulation by keeping the loan rates low; they exercise more care
+than do the Schulze-Delitzsch associations to keep their societies
+small, laying great emphasis upon the importance of personal
+acquaintance between members and thus upon mutual watchfulness; and,
+in their origin, they were peasant organizations pure and simple, and
+hence more strictly land banks.
+
+Their founder, F. W. Raiffeisen, Burgomeister of a small village in
+Westphalia, Prussia, wanted to rescue the poor peasants of his and
+other districts from the clutches of the usurers, into whose hands
+they had fallen and by whom they were being exploited in a most
+shameful manner. Since it was loans that these people needed and
+since their cash resources were always very low and in many cases nil,
+he felt that to require, as a condition of membership, entrance fees
+and the purchase of one or more shares of stock, however small, would
+be fatal to the success of his plans. He also firmly believed that in
+the integrity, industry, frugality, and agricultural skill of these
+people was the basis for sound credit and that cooperation was a means
+by which these elements of sound credit could be made available and
+attractive on the money market. At the beginning, therefore, no
+entrance fees or share subscriptions were required. Later Prussian law
+made share subscriptions compulsory and they were, of course,
+introduced, but they were made so low, and the acquisition of the
+money for their purchase so easy, that they have not been a serious
+obstacle.
+
+From the beginning Raiffeisen invited to membership in his societies
+the well-to-do and substantial people as well as peasants. Of course
+these people did not require the society for the satisfaction of their
+own credit needs, but Raiffeisen saw that they would greatly
+strengthen the credit of the societies and he was able to appeal to
+them on philanthropic grounds. This class of people have a leading
+part in the administration of the societies of which they are members
+and have contributed greatly to their success.
+
+At the outset the Raiffeisen societies had to rely chiefly on
+borrowing for the acquisition of the capital needed, but with time and
+success savings deposits, surplus funds accumulated out of profits,
+and lastly the proceeds of the sale of shares have played an
+increasing role. At the present time many societies are not obliged to
+borrow at all, and not a few have surplus funds which are placed at
+the disposition of other societies which are still obliged to borrow.
+
+Like the Schulze-Delitzsch societies the Raiffeisen associations have
+federated. At present there are thirteen so-called unions, and at the
+head of all is a central bank with head office at Berlin and branches
+at Koenigsberg, Danzig, Breslau, Cassel, Frankfurt, Coblenz, Brunzwick,
+Strassburg, Nuremberg, Posen, and Ludwigshafen. The central bank is a
+joint-stock company, organized on the principle of limited liability,
+the stock of which is owned by the local societies. It formerly had
+close relations with the Imperial Bank, but is now associated with the
+so-called Centralgenossenschaftskassa, endowed by the state of
+Prussia, in such a way that advances and discounts are extended to it
+on favorable terms.
+
+The Raiffeisen societies rival the Schulze-Delitzsch in the rapidity
+of their growth and in the role they play in the economic life of
+modern Germany. In 1908 they numbered 5,047, of which 4,340 were
+credit associations. The collective balance sheets of these societies
+in 1907 showed 490,734,834 marks assets, 489,234,357 marks
+liabilities, and a membership of 405,819.
+
+While Germany was the pioneer in the establishment of land credit
+institutions, and while such institutions have attained a greater
+variety of form and a higher degree of perfection in that country than
+in any other, other countries have advanced along similar lines and
+now have institutions and a fund of experience well worthy of study.
+The institutions of Germany have in most cases served as models in
+these other countries, the mortgage banks and the Schulze-Delitzsch
+and Raiffeisen societies having been most frequently copied. These
+models have been adapted to foreign conditions and modified in
+interesting and instructive ways as well as copied without essential
+change.
+
+Among the mortgage banks developed outside of Germany the Credit
+Foncier of France is especially noteworthy. In its organization it
+was modeled after the Bank of France and is second only to that
+institution in the magnitude of its operations and the scope of its
+influence. Its head office is in Paris and it has at least one branch
+in each department. Its capital stock owned by private parties amounts
+to about $40,000,000, its surplus to over $4,000,000, its loans
+secured by mortgage to over $400,000,000, and its total resources to
+about $1,000,000,000.
+
+Like the German mortgage banks, it secures the greater part of its
+loan funds through the issue of mortgage bonds and a large percentage
+of its loans are made on mortgage security for long periods of time
+and are repayable on the annuity plan. However, it transacts a greater
+variety of business than does the typical mortgage bank of Germany. It
+loans on city and farm real estate and to communes, and it transacts a
+large commercial banking business, though this is distinctly a side
+issue, incorporated with its other business in order to give
+profitable employment to funds, sometimes large in amount, which are
+temporarily on hand awaiting investment.
+
+At various times it has absorbed competing institutions and at times
+it has established collateral institutions to transact lines of
+business for which its own constitution and legal limitations did not
+fit it. Among these the most important are the Credit Agricole and the
+Foncier Algierienne. It was obliged ultimately to absorb and liquidate
+the former, but the latter still flourishes in the colony of Algiers.
+
+Mortgage banks have also gained a footing in most of the other
+countries of continental Europe. In Italy they passed through a period
+of storm and stress, owing to their connection with the issue banks of
+that country and the consequent confusion between commercial and
+investment banking which resulted, but they have recently been
+established on an independent basis and are now developing along right
+lines and with apparent success.
+
+The Schulze-Delitzsch and Raiffeisen societies have been imitated in
+Austria, Hungary, Belgium, Switzerland, and, to some extent, in France
+and India. The so-called "Banche Populari" and "Casse Rurali" of Italy
+are respectively modified forms of these two German types, and rank
+among the most important means employed in that country for the
+improvement of the condition of the peasants and small tradesmen.
+State, provincial, and communal aid for these institutions has been
+more frequently evoked and more extensively employed outside than
+inside of Germany, and other important modifications of the German
+prototypes have been made in Italy and elsewhere.
+
+
+_5. Stock Exchanges_
+
+An essential part of the machinery of investment banking is the stock
+exchange. This is a place where the buyers and sellers of securities
+or their agents regularly meet for the transaction of business. It may
+be a portion of a street or a market place or a room in a building. A
+fully equipped modern exchange contains a large room equipped with
+telegraphic and telephonic communication with the most important parts
+of the country in which it is located and of the world, with apparatus
+for registering prices and easily communicating information to its
+members, and with the offices needed for the accommodation of the
+clerks and other employees required. Either by posts or in some other
+manner the precise places in it in which each security or group of
+securities is to be dealt in is also usually indicated.
+
+The purpose of the stock exchange is to facilitate and to regulate
+dealings in securities. It facilitates such dealings by providing as
+nearly perfect means as is possible for putting buyers and sellers
+into communication with each other, and for collecting and making
+available to them the information they need. To this end they provide
+for daily meetings at fixed hours; they make and publish lists of the
+securities dealt in; they speedily record and, through the telegraph
+and the telephone, communicate to all quarters of the globe the prices
+at which securities change hands; and through the meeting room
+equipped as before described they make it possible for buyers and
+sellers, no matter where located, to communicate with each other in a
+very short period to time. They regulate such dealings by establishing
+and rigidly enforcing rules and regulations for listing, transferring,
+clearing, and paying for securities and for other matters pertaining
+to the conduct of their members.
+
+These institutions serve investment banks as well as private
+investors, constituting the machinery which connects them all. They
+thus enlarge the area and scope of the markets for securities, and
+greatly increase the mobility of capital. Without them the surplus
+savings of one locality would only very slowly and with difficulty
+find their way to other localities where they are needed, with the
+result that capital would lie idle or be very inefficiently employed
+in some places while in others natural and human resources would be
+undeveloped or very inefficiently developed.
+
+Existing stock exchanges differ considerably in the manner in which
+they are organized and managed, in methods of doing business, and in
+the scope of their operations. Some of them are incorporated and
+others unincorporated; some restrict their membership to a prescribed
+number, others admit as many as are able and willing to comply with
+the conditions imposed; some are local in their scope, some national,
+and others international. In this country all the exchanges deal in
+local securities chiefly, except the one in New York City, which is
+national in its scope. The London exchange does a larger business in
+international securities than any other, but the Paris and Berlin
+exchanges, as well as those located at the other important European
+capitals, and the one at New York share in it to a greater or less
+degree.
+
+Stock exchanges have suffered in reputation, and their real functions
+and merits have been obscured by the abuses to which they have been
+subjected. Connected with their legitimate business of facilitating
+the investment of capital, various forms of speculation have
+developed which in some cases have degenerated into gambling pure and
+simple. The better managed ones have striven to rid themselves of
+these abuses, and in some countries, notably in Germany, legislative
+bodies have taken a hand. The results, however, have proved only
+partially successful.
+
+Some forms of speculation are not only legitimate but necessary in
+modern business life, and these shade into the illegitimate,
+unnecessary, and positively harmful forms by such short and easy steps
+as to render it difficult, and perhaps impossible, to draw a line
+between the two which can serve as a guide for regulations of an
+administrative or legislative kind.
+
+
+_6. Some Defects in Our Investment Banking Machinery_
+
+A comparison of our investment banking machinery with that of European
+countries, especially Germany, reveals important differences. Among
+these the most notable are the wide use there and the almost complete
+absence here of the following: (a) the resort to cooperation as a
+means of revealing and making available the basis for credit of large
+numbers of people who lack capital but could use it to the advantage
+of themselves and of the nation; (b) the long-period mortgage loan
+repayable on the annuity plan and the mortgage bond as a means of
+accumulating capital for such loans; and (c) the cooperation of the
+state and other public bodies and of capitalists and philanthropically
+disposed persons in developing the credit possibilities of the masses
+and in directing the flow of proper portions of the stream of capital
+in their direction.
+
+In the development of investment banking institutions in this country,
+individual initiative prompted by self-interest has been the chief,
+and except in the case of savings banks, the sole motive force. The
+result is that most of them have been organized in the interests of
+lenders rather than borrowers and serve best the purposes of big
+business and of persons already possessed of large credit by virtue of
+their wealth or their business reputations. Under these conditions,
+while enormous amounts of capital in the aggregate have been invested
+in agriculture and urban real estate, the former has suffered
+relatively in comparison with transportation, manufacturing, and
+speculation.
+
+Contributory causes in the development of this situation have been the
+great need for capital for the development of our transportation
+system, the stimulation of manufactures by high protective duties, and
+the enormous area of our public domain which was given or sold to
+settlers on very easy terms. Inasmuch as our transportation system and
+our manufacturing industries have now attained a high degree of
+development, our public domain has been nearly exhausted, and land
+values and the cost of living are rapidly rising, the needs of
+agriculture are pushing themselves into the foreground, and we are
+beginning to look to European experience for suggestions regarding the
+best methods of diverting to that industry a larger part of our
+rapidly accumulating capital resources.
+
+There are obvious difficulties in the way of the application of
+cooperation to the solution of the problem of agricultural credit in
+this country. In spite of the fact that immigration is constantly
+bringing to us people from the very foreign countries in which
+cooperative credit associations flourish, our agricultural population
+is still dominated by the spirit of individualism which has been and
+is one of our dominant national traits. Our farmers are also more
+widely scattered than is the case in Europe, and consequently less
+closely knit together in social units. Their holdings are also
+larger, their capital needs greater, and their business instincts more
+highly developed.
+
+There seems to be no good reason, however, why the joint-stock
+mortgage bank should not flourish here as well as in Europe. It is a
+purely private business enterprise of the kind with which we are
+perfectly familiar. The mortgage bond ought to appeal to our
+investors, many of whom have exhibited a strong predilection for
+mortgage security and real estate investments, and long-period
+mortgage loans, repayable on the annuity plan, would meet the needs of
+many land purchasers and of people who need to invest considerable
+sums in drainage, irrigation works, etc., better than our present
+methods. In most, if not all, of our states, trust companies could
+develop these new lines of finance without prejudice to the other
+branches of their business.
+
+The use of state, county, and municipal subsidies or credit in
+enterprises of this kind is rendered difficult, if not impossible, in
+this country, by strong prejudice against the use of public funds in
+private enterprises, and in some states by constitutional
+prohibitions. This prejudice is based upon unfortunate experiences,
+and is at least partially justified by the laxness of our
+administrative methods and the prevalence of graft, which expose us
+to the danger of the improper use of public funds devoted to
+enterprises of this kind. There is no reason, however, why our states
+should not take the initiative in the improvement of our investment
+banking machinery and why private capitalists and philanthropists
+should not turn some of their energy into this channel.
+
+Suggestion and leadership are needed in this field quite as much as
+legislation tending to restrict and regulate the operations of
+existing institutions.
+
+
+
+
+REFERENCES
+
+
+The following books are comprehensive in character, treating most of
+the subjects covered in the foregoing chapters:
+
+  MACLEOD, H. D., Theory and Practice of Banking.
+  GILBART, J. W., History and Principles of Banking.
+  BAGEHOT, WALTER, Lombard Street.
+  DUNBAR, CHARLES F., History and Theory of Banking.
+  SCOTT, WM. A., Money and Banking. Rev. Ed.
+  WHITE, HORACE, Money and Banking.
+  FISK, A. K., The Modern Bank.
+
+
+The subject of clearings and the exchanges are discussed in the
+following books:
+
+  CANNON, J. G., Clearing Houses.
+  CLARE, GEORGE, The A, B, C of the Exchanges.
+  CLARE, GEORGE, A Money Market Primer and Key to the Foreign
+          Exchanges.
+  MARGRAFF, A. W., International Exchange.
+  ESCHER, F., Foreign Exchange.
+
+
+The following cover the history and present condition of banking in
+the leading countries:
+
+  CONANT, C. A., Modern Banks of Issue.
+  KNOX, J. J., A History of Banking in the United States.
+  SUMNER, WM. G., A History of Banking in the United States, being
+          Vol. I of a History of Banking in all the leading nations.
+  KIRKBRIDE & STERRETT, J. E., The Modern Trust Company, Its Functions
+          and Organization.
+  BRECKENRIDGE, R. M., The History of Banking in Canada.
+  LAUGHLIN, J. L., Editor, Banking Reform.
+  JOHNSON, J. F., The Canadian Banking System.
+  WITHERS, HARTLEY, PALGRAVE, R. H., and others, The English Banking
+          System.
+  LIESSE, A., Evolution of Credit and Banks in France.
+  NATIONAL MONETARY COMMISSION, The Reichsbank, 1876-1900.
+  RIESSER, J., The German Great Banks and Their Concentration.
+
+
+On investment banking see:
+
+  WOLFF, H., People's Banks.
+  PETERS, E. E., Co-operative Credit Associations.
+  HAMILTON, J. H., Saving and Savings Institutions.
+  PRATT, S. S., The Work of Wall Street.
+  CONANT, C. A., Wall Street and the Country.
+
+
+
+
+INDEX
+
+
+  "Acceptance" credit and lines, 103
+
+  Accommodation loans, 12, 13
+
+  Accounts overdrawn, 16
+
+  Agriculture, capital for, 168;
+    individualism in, 168
+
+  Assets, prior lien on, 56;
+    special, 57
+
+
+  Balances, 16, 17, 23, 28
+
+  Banche Populari, 162
+
+  Bank of England, 104-111
+
+  Bank reserves, 35-40
+
+  Bank of France, 111-119
+
+  Banker's banks, 9;
+    bills, 33, 34;
+    most valuable assets, 61;
+    making loans, 86
+
+  Banking, act, 54, 78;
+    adequacy and economy of service, 62, 66;
+    branch, 64, 65;
+    business, 9;
+    commercial, nature and operation of, 11-67;
+    commercial in the United States, 68-100;
+    commercial in other countries, 101-135;
+    Canadian, 126-135;
+    defects and reforms in banking systems, 97-100;
+    English, 104-111;
+    French, 111-119;
+    functions in single institutions, 144;
+    German, 119-126;
+    incorporation, 66;
+    investment, 136-170;
+    Kansas "blue sky laws," 146;
+    problems of commercial, 35;
+    reserve, 78;
+    services rendered by, 1-3;
+    Wisconsin regulations, 146;
+    local, 62, 63
+
+  Bank notes, see _notes_
+
+  Banks, bond houses, 6;
+    Canadian, 126-135;
+    central of Europe, 101;
+    central reserve, 78;
+    classified, 6;
+    classification of national, 54;
+    collections, 22;
+    commercial, 6, 7;
+    cooperative, 139;
+    correspondent, 24, 25;
+    England, bank of, 104-111;
+    European land banks, 147-163;
+    European central, 9;
+    federal, 8;
+    federal reserve, 98-100;
+    France, bank of, 111-119;
+    French land, 160-163;
+    functions of, 4;
+    German Imperial, 119-123;
+    German land, 147-163;
+    incorporated, 7;
+    inspection of, 59;
+    interest charges, 14;
+    investment, 6, 7;
+    Italian land, 160-163;
+    joint stock, 7;
+    land, 6;
+    loan-making, 86;
+    municipal, 139;
+    national, 8, 70-75;
+    note issue privileges, 37, 38;
+    of issue, 20, 21;
+    postal saving, 139;
+    private, 7;
+    protection against unsound practices of, 46-62;
+    real estate, 6, 52;
+    savings, 6, 136-141;
+    services rendered by, 1-3;
+    state, 9, 68-70;
+    supply currency, 22;
+    trustee, 139
+
+  Berlin stock exchange, 165
+
+  Bills of exchange, 12, 17;
+    documented, 42
+
+  "Blue sky laws" of Kansas, 146
+
+  Bond houses, 144-147
+
+  Bonds, government, 96, 97;
+    mortgage, 148, 150, 169
+
+  Bonds and stocks, not liquid securities, 53
+
+  Book accounts, 12
+
+  Branch banking, 62, 64, 65
+
+  Bullion, 81, 82;
+    in Canada, 132;
+    in England, 105;
+    in France, 113;
+    in Germany, 122
+
+  Buying and selling on time, 11, 12
+
+
+  Cables in foreign exchange, 33
+
+  Canadian banking system, 126-135
+
+  Capital and surplus requirements for banks, 46-48;
+    stock, 47, 48
+
+  Cash, supply of, 35-40;
+    demands on banks, 55;
+    resources, 29
+
+  Casse Rurali, 162
+
+  Central banks of Europe, 8, 9, 65, 101;
+    England, 104-111;
+    France, 111-119;
+    German, 119-123
+
+  Charters, 8;
+    special, 66, 67
+
+  Checking accounts, 15, 20, 21, 24, 35
+
+  Checks, 15, 16, 21-24;
+    abroad, 36
+
+  Chicago, clearing center, 24;
+    central reserve banks, 78
+
+  Clearing house, 22-24;
+    center in New York, 80
+
+  Coin, 21;
+    and bank reserves, 38;
+    in England, 109;
+    in France, 117;
+    in Germany, 121, 122;
+    standard and subsidiary, 21;
+    supply, 40
+
+  Collections, 22, 25
+
+  Commercial banking, collections, 22;
+    currency, 21, 22;
+    domestic exchange, 25;
+    nature and operations of, 11-67;
+    other countries, 101-135;
+    problems of, 35;
+    promissory notes, 19;
+    protection against unsound practices of, 46-62;
+    savings accounts, 44;
+    in the United States, 68-100
+
+  Commercial paper, 11-14;
+    discount of, 14, 15, 17;
+    and investment paper, 41, 42;
+    liquid security, 53;
+    market for, 100
+
+  Competition in banking, 83
+
+  Comptoir d'Escompte de Paris, 115, 116
+
+  Conflict of functions and laws, 82
+
+  Cooperative banks, 139
+
+  Correspondent banks, 24, 25
+
+  Credit "acceptance" line, 103;
+    balance, 16, 18-20, 23, 25;
+    cooperation in, 166-168;
+    department in banks, 43, 86;
+    inflation of, 87;
+    "line" of, 16, 85, 86;
+    subsidies, state, county, and municipal, 169;
+    system, 11-13
+
+  Credits, forced liquidation of, 49
+
+  Credit Agricole, 162;
+    Foncier, 113;
+    Industrielle et Commercial, 115, 116;
+    Lyonnais, 115, 116
+
+  Crisis, commercial, 19, 31, 88
+
+  Currency, 21, 22;
+    lack of elasticity, 95-97
+
+
+  Debt paying, 13, 14
+
+  Debits, 15-18
+
+  Demand in foreign exchange, 33, 34
+
+  Deposits, 2-4
+
+  Depositors, mutual insurance of, 60-62
+
+  Discount, defined, 14;
+    loans and discounts, selection of, 40-43;
+    loans and rates, 44;
+    operation of, 13;
+    rate, Canadian, 128, 129;
+    bank of England, 108;
+    bank of France, 113;
+    reserve system, 95, 97;
+    stopped, 30
+
+  Discounted paper, 14, 15, 17-19, 55
+
+  Documented bill of exchange, 42
+
+  Domestic exchange, 25
+
+  Drafts, 16, 27, 28;
+    foreign payments, 31
+
+
+  England, bank of, 9, 104-111;
+    banking system, 104-111;
+    foreign and colonial, 108;
+    joint stock banks, 106;
+    metropolitan, 107;
+    private, 108;
+    provincial, 107;
+    reserve system, 108
+
+  Europe, commercial banking in, 101-126;
+    central banks of, 101-126;
+    land banks, 147-163
+
+  European investment banking machinery, 166
+
+  Exchange operations, 11-13;
+    checks, 22-24;
+    domestic, 25-31;
+    foreign, 31-34
+
+
+  Federal Reserve Banks, 98-100;
+    Federal Reserve Board, 99, 100
+
+  Foncier Algierienne, 162
+
+  Foreign exchange, 31-34;
+    _par of_, 31, 32;
+    classes of bills used, 33
+
+  France, bank of, 9, 111-115
+
+  French banking system, 111-119
+
+
+  German banking system, 119-126;
+    hypothekenaktienbanken, 151, 152;
+    investment banking machinery, 166;
+    land and mortgage banks, 147-161;
+    landschaften, 147-149;
+    Schulze-Delitzsch, 153-162;
+    Raiffeisen, 156-162
+
+  Germany, bank of, 9, 119-123
+
+  Gold element of currency, 5, 96;
+    points, 32, 33;
+    and silver coin in England, 105, 106;
+    in France, 113;
+    Canada, 133
+
+
+  Incorporation, 7;
+    should be required, 66
+
+  Independent treasury system, 75-78
+
+  Inflation, 49-53, 56-59;
+    of credit, 87
+
+  Inspection of banks, 59, 60
+
+  Insurance, mutual of depositors, 60, 62
+
+  Investment, banking, 136-170;
+    commercial paper, 41, 42;
+    confined to liquid securities, 52;
+    defects in machinery, 166;
+    improvement of machinery, 170;
+    paper, 18, 35, 41, 55;
+    of surplus funds, 3
+
+  Italy, land banks, 162, 163
+
+
+  Joint-stock mortgage banks, 169;
+    English joint-stock banks, 106;
+    German, 151-159
+
+
+  Kansas "blue sky laws," 146
+
+
+  Land banks, 147-163
+
+  Letters of credit, 21
+
+  "Line" of credit, 16, 85, 86
+
+  Liquidation, forced, 19, 88;
+    of credits, 49, 50;
+    protection against, 52
+
+  Liquid securities, 53
+
+  Loan operations, 85-88
+
+  Loans, 2, 3, 15, 86;
+    and discounts, selection of, 40-43;
+    Canadian system, 128, 129;
+    fluctuations, 97;
+    German land bank, 147-162;
+    in the interest of big business, 167;
+    limits to, 52, 55;
+    long-term, 2;
+    pernicious practice of national banks, 83;
+    and reserve system, 95;
+    short term, 2
+
+  Local banking, 62, 63
+
+  London stock exchange, 165
+
+
+  Mints, 5
+
+  Monetary commission, 97, 98
+
+  Money of the United States, 95
+
+  Mortgage banks, 169;
+    France, 160-162;
+    Germany, 148-163;
+    Italy, 162;
+    mortgage bonds, 169;
+    mortgage loans, long period, 167
+
+  Municipal banks, 139
+
+
+  National banks, 8, 9, 54, 70-75, 80, 82;
+    federal reserve, 98, 99;
+    money in vaults, 91;
+    notes, 96;
+    pernicious loan practices, 83;
+    subscribed to federal reserve banks, 98
+
+  National Reserve Association, 98
+
+  New York City, assay office, 81;
+    central reserve bank, 78;
+    clearing center, 24, 80, 81;
+    stock exchange, 81, 82, 92, 165
+
+  Notes, bank, 19-21;
+    central banks of Europe and supply of, 102;
+    Canadian, 126-133;
+    bank of England, 105;
+    of France, 117, 118;
+    of Germany, 121;
+    issue of, 19-21;
+    issue privileges, 37, 38;
+    government, 39;
+    limitation of issue, 58;
+    promissory notes, 43;
+    regulations regarding, 52;
+    safeguarding issue, 56;
+    volume of United States, 96
+
+
+  Oklahoma, mutual insurance plan, 60
+
+  Overdrafts, 16
+
+
+  "Panicky" conditions and feeling, 94, 95, 97
+
+  Par of exchange, 31, 32
+
+  Paris stock exchange, 165
+
+  Passbook, 15, 16
+
+  Postal savings banks, 139, 141
+
+  Promissory notes, 12, 14, 19-22, 43
+
+  Prior lien, on assets, 56, 58
+
+  Protection against unsound practices of banks, 46-52; 59-61
+
+  Publicity, a safeguard, 59
+
+
+  Rate of discount, law in France, 118;
+    of exchange, 26, 27
+
+  Rates, 44-46;
+    raising on loans and discounts, 29
+
+  Real estate and banks, 52
+
+  Reserve banks, Federal, 98-100;
+    central reserve, 78;
+    cities, 24, 78
+
+  Reserves, administration of funds, 100;
+    bank, 35;
+    English system, 108-110;
+    in national banks, 73;
+    operations of system, 91-94;
+    regulations regarding, 52, 54;
+    secondary, 35-40;
+    in state banks, 69;
+    in country banks, 73
+
+
+  Safety, in savings banks, 140;
+    fund, 56, 57
+
+  Savings banks, 6, 9;
+    defined, 139
+
+  Saving and saving institutions, 136-141
+
+  Secretary of the Treasury and surplus funds, 88-90
+
+  Securities, dealings in the stock exchange, 163, 164
+
+  Security, liquid, 53
+
+  Silver dollars, 96
+
+  Sixty-day bills in foreign exchange, 33, 34
+
+  Societe Algerienne, 114
+
+  Societe Generale, 115, 116
+
+  State banks, 9, 68-70, 79, 82;
+    and Federal reserve, 99
+
+  St. Louis, central reserve bank, 78;
+    clearing center, 24
+
+  Stock exchanges, 163-166
+
+  Stockholders, liability of, 46-48
+
+  Surplus, 17, 47
+
+
+  Trade or mercantile bills, 34
+
+  Treasury of the United States, 75-78;
+    operations, 88-90
+
+  Trust companies, 9, 141-144
+
+  Trustee banks, 139
+
+
+  United States, notes, volume of, 96;
+    subtreasury, 80, 81;
+    treasury, 75-78
+
+  Units of value and foreign exchange, 31
+
+
+  Vouchers, 23
+
+
+  Wisconsin, regulation laws, 146
+
+
+
+
+                  The National Social Science Series
+
+               _Edited by Frank L. McVey, Ph.D., LL.D.,_
+                          _President of the_
+                     _University of North Dakota_
+
+
+                              Now Ready
+
+    MONEY. WILLIAM A. SCOTT, Director of the Course in Commerce,
+    and Professor of Political Economy, University of Wisconsin
+
+    TAXATION. C. B. FILLEBROWN, President Massachusetts Single
+    Tax League, Author of _A B C of Taxation_
+
+    THE FAMILY AND SOCIETY. JOHN M. GILLETTE, Professor of
+    Sociology, University of North Dakota
+
+    BANKING. WILLIAM A. SCOTT
+
+
+                            In Preparation
+
+    THE CITY. HENRY C. WRIGHT
+
+    TRUSTS AND COMPETITION. JOHN F. CROWELL
+
+    THE COST OF LIVING. WALTER E. CLARK
+
+    STATISTICS. W. B. BAILEY
+
+    BASIS OF COMMERCE. E. V. ROBINSON
+
+    PUBLIC FINANCE. CARL C. PLEHN
+
+
+                        Each, Fifty Cents Net
+
+
+               A. C. McCLURG & CO., PUBLISHERS, CHICAGO
+
+
+
+
+
+End of the Project Gutenberg EBook of Banking, by William A. Scott
+
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