initial commit of ebook 32027HEADmain

1 files changed, 4737 insertions, 0 deletions

diff --git a/32027.txt b/32027.txt
new file mode 100644
index 0000000..689f77b
--- /dev/null
+++ b/32027.txt
@@ -0,0 +1,4737 @@
+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
+
+*** END OF THIS PROJECT GUTENBERG EBOOK BANKING ***
+
+***** This file should be named 32027.txt or 32027.zip *****
+This and all associated files of various formats will be found in:
+        https://www.gutenberg.org/3/2/0/2/32027/
+
+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.)
+
+
+Updated editions will replace the previous one--the old editions
+will be renamed.
+
+Creating the works from public domain print editions means that no
+one owns a United States copyright in these works, so the Foundation
+(and you!) can copy and distribute it in the United States without
+permission and without paying copyright royalties.  Special rules,
+set forth in the General Terms of Use part of this license, apply to
+copying and distributing Project Gutenberg-tm electronic works to
+protect the PROJECT GUTENBERG-tm concept and trademark.  Project
+Gutenberg is a registered trademark, and may not be used if you
+charge for the eBooks, unless you receive specific permission.  If you
+do not charge anything for copies of this eBook, complying with the
+rules is very easy.  You may use this eBook for nearly any purpose
+such as creation of derivative works, reports, performances and
+research.  They may be modified and printed and given away--you may do
+practically ANYTHING with public domain eBooks.  Redistribution is
+subject to the trademark license, especially commercial
+redistribution.
+
+
+
+*** START: FULL LICENSE ***
+
+THE FULL PROJECT GUTENBERG LICENSE
+PLEASE READ THIS BEFORE YOU DISTRIBUTE OR USE THIS WORK
+
+To protect the Project Gutenberg-tm mission of promoting the free
+distribution of electronic works, by using or distributing this work
+(or any other work associated in any way with the phrase "Project
+Gutenberg"), you agree to comply with all the terms of the Full Project
+Gutenberg-tm License (available with this file or online at
+https://gutenberg.org/license).
+
+
+Section 1.  General Terms of Use and Redistributing Project Gutenberg-tm
+electronic works
+
+1.A.  By reading or using any part of this Project Gutenberg-tm
+electronic work, you indicate that you have read, understand, agree to
+and accept all the terms of this license and intellectual property
+(trademark/copyright) agreement.  If you do not agree to abide by all
+the terms of this agreement, you must cease using and return or destroy
+all copies of Project Gutenberg-tm electronic works in your possession.
+If you paid a fee for obtaining a copy of or access to a Project
+Gutenberg-tm electronic work and you do not agree to be bound by the
+terms of this agreement, you may obtain a refund from the person or
+entity to whom you paid the fee as set forth in paragraph 1.E.8.
+
+1.B.  "Project Gutenberg" is a registered trademark.  It may only be
+used on or associated in any way with an electronic work by people who
+agree to be bound by the terms of this agreement.  There are a few
+things that you can do with most Project Gutenberg-tm electronic works
+even without complying with the full terms of this agreement.  See
+paragraph 1.C below.  There are a lot of things you can do with Project
+Gutenberg-tm electronic works if you follow the terms of this agreement
+and help preserve free future access to Project Gutenberg-tm electronic
+works.  See paragraph 1.E below.
+
+1.C.  The Project Gutenberg Literary Archive Foundation ("the Foundation"
+or PGLAF), owns a compilation copyright in the collection of Project
+Gutenberg-tm electronic works.  Nearly all the individual works in the
+collection are in the public domain in the United States.  If an
+individual work is in the public domain in the United States and you are
+located in the United States, we do not claim a right to prevent you from
+copying, distributing, performing, displaying or creating derivative
+works based on the work as long as all references to Project Gutenberg
+are removed.  Of course, we hope that you will support the Project
+Gutenberg-tm mission of promoting free access to electronic works by
+freely sharing Project Gutenberg-tm works in compliance with the terms of
+this agreement for keeping the Project Gutenberg-tm name associated with
+the work.  You can easily comply with the terms of this agreement by
+keeping this work in the same format with its attached full Project
+Gutenberg-tm License when you share it without charge with others.
+
+1.D.  The copyright laws of the place where you are located also govern
+what you can do with this work.  Copyright laws in most countries are in
+a constant state of change.  If you are outside the United States, check
+the laws of your country in addition to the terms of this agreement
+before downloading, copying, displaying, performing, distributing or
+creating derivative works based on this work or any other Project
+Gutenberg-tm work.  The Foundation makes no representations concerning
+the copyright status of any work in any country outside the United
+States.
+
+1.E.  Unless you have removed all references to Project Gutenberg:
+
+1.E.1.  The following sentence, with active links to, or other immediate
+access to, the full Project Gutenberg-tm License must appear prominently
+whenever any copy of a Project Gutenberg-tm work (any work on which the
+phrase "Project Gutenberg" appears, or with which the phrase "Project
+Gutenberg" is associated) is accessed, displayed, performed, viewed,
+copied or distributed:
+
+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
+
+1.E.2.  If an individual Project Gutenberg-tm electronic work is derived
+from the public domain (does not contain a notice indicating that it is
+posted with permission of the copyright holder), the work can be copied
+and distributed to anyone in the United States without paying any fees
+or charges.  If you are redistributing or providing access to a work
+with the phrase "Project Gutenberg" associated with or appearing on the
+work, you must comply either with the requirements of paragraphs 1.E.1
+through 1.E.7 or obtain permission for the use of the work and the
+Project Gutenberg-tm trademark as set forth in paragraphs 1.E.8 or
+1.E.9.
+
+1.E.3.  If an individual Project Gutenberg-tm electronic work is posted
+with the permission of the copyright holder, your use and distribution
+must comply with both paragraphs 1.E.1 through 1.E.7 and any additional
+terms imposed by the copyright holder.  Additional terms will be linked
+to the Project Gutenberg-tm License for all works posted with the
+permission of the copyright holder found at the beginning of this work.
+
+1.E.4.  Do not unlink or detach or remove the full Project Gutenberg-tm
+License terms from this work, or any files containing a part of this
+work or any other work associated with Project Gutenberg-tm.
+
+1.E.5.  Do not copy, display, perform, distribute or redistribute this
+electronic work, or any part of this electronic work, without
+prominently displaying the sentence set forth in paragraph 1.E.1 with
+active links or immediate access to the full terms of the Project
+Gutenberg-tm License.
+
+1.E.6.  You may convert to and distribute this work in any binary,
+compressed, marked up, nonproprietary or proprietary form, including any
+word processing or hypertext form.  However, if you provide access to or
+distribute copies of a Project Gutenberg-tm work in a format other than
+"Plain Vanilla ASCII" or other format used in the official version
+posted on the official Project Gutenberg-tm web site (www.gutenberg.org),
+you must, at no additional cost, fee or expense to the user, provide a
+copy, a means of exporting a copy, or a means of obtaining a copy upon
+request, of the work in its original "Plain Vanilla ASCII" or other
+form.  Any alternate format must include the full Project Gutenberg-tm
+License as specified in paragraph 1.E.1.
+
+1.E.7.  Do not charge a fee for access to, viewing, displaying,
+performing, copying or distributing any Project Gutenberg-tm works
+unless you comply with paragraph 1.E.8 or 1.E.9.
+
+1.E.8.  You may charge a reasonable fee for copies of or providing
+access to or distributing Project Gutenberg-tm electronic works provided
+that
+
+- You pay a royalty fee of 20% of the gross profits you derive from
+     the use of Project Gutenberg-tm works calculated using the method
+     you already use to calculate your applicable taxes.  The fee is
+     owed to the owner of the Project Gutenberg-tm trademark, but he
+     has agreed to donate royalties under this paragraph to the
+     Project Gutenberg Literary Archive Foundation.  Royalty payments
+     must be paid within 60 days following each date on which you
+     prepare (or are legally required to prepare) your periodic tax
+     returns.  Royalty payments should be clearly marked as such and
+     sent to the Project Gutenberg Literary Archive Foundation at the
+     address specified in Section 4, "Information about donations to
+     the Project Gutenberg Literary Archive Foundation."
+
+- You provide a full refund of any money paid by a user who notifies
+     you in writing (or by e-mail) within 30 days of receipt that s/he
+     does not agree to the terms of the full Project Gutenberg-tm
+     License.  You must require such a user to return or
+     destroy all copies of the works possessed in a physical medium
+     and discontinue all use of and all access to other copies of
+     Project Gutenberg-tm works.
+
+- You provide, in accordance with paragraph 1.F.3, a full refund of any
+     money paid for a work or a replacement copy, if a defect in the
+     electronic work is discovered and reported to you within 90 days
+     of receipt of the work.
+
+- You comply with all other terms of this agreement for free
+     distribution of Project Gutenberg-tm works.
+
+1.E.9.  If you wish to charge a fee or distribute a Project Gutenberg-tm
+electronic work or group of works on different terms than are set
+forth in this agreement, you must obtain permission in writing from
+both the Project Gutenberg Literary Archive Foundation and Michael
+Hart, the owner of the Project Gutenberg-tm trademark.  Contact the
+Foundation as set forth in Section 3 below.
+
+1.F.
+
+1.F.1.  Project Gutenberg volunteers and employees expend considerable
+effort to identify, do copyright research on, transcribe and proofread
+public domain works in creating the Project Gutenberg-tm
+collection.  Despite these efforts, Project Gutenberg-tm electronic
+works, and the medium on which they may be stored, may contain
+"Defects," such as, but not limited to, incomplete, inaccurate or
+corrupt data, transcription errors, a copyright or other intellectual
+property infringement, a defective or damaged disk or other medium, a
+computer virus, or computer codes that damage or cannot be read by
+your equipment.
+
+1.F.2.  LIMITED WARRANTY, DISCLAIMER OF DAMAGES - Except for the "Right
+of Replacement or Refund" described in paragraph 1.F.3, the Project
+Gutenberg Literary Archive Foundation, the owner of the Project
+Gutenberg-tm trademark, and any other party distributing a Project
+Gutenberg-tm electronic work under this agreement, disclaim all
+liability to you for damages, costs and expenses, including legal
+fees.  YOU AGREE THAT YOU HAVE NO REMEDIES FOR NEGLIGENCE, STRICT
+LIABILITY, BREACH OF WARRANTY OR BREACH OF CONTRACT EXCEPT THOSE
+PROVIDED IN PARAGRAPH F3.  YOU AGREE THAT THE FOUNDATION, THE
+TRADEMARK OWNER, AND ANY DISTRIBUTOR UNDER THIS AGREEMENT WILL NOT BE
+LIABLE TO YOU FOR ACTUAL, DIRECT, INDIRECT, CONSEQUENTIAL, PUNITIVE OR
+INCIDENTAL DAMAGES EVEN IF YOU GIVE NOTICE OF THE POSSIBILITY OF SUCH
+DAMAGE.
+
+1.F.3.  LIMITED RIGHT OF REPLACEMENT OR REFUND - If you discover a
+defect in this electronic work within 90 days of receiving it, you can
+receive a refund of the money (if any) you paid for it by sending a
+written explanation to the person you received the work from.  If you
+received the work on a physical medium, you must return the medium with
+your written explanation.  The person or entity that provided you with
+the defective work may elect to provide a replacement copy in lieu of a
+refund.  If you received the work electronically, the person or entity
+providing it to you may choose to give you a second opportunity to
+receive the work electronically in lieu of a refund.  If the second copy
+is also defective, you may demand a refund in writing without further
+opportunities to fix the problem.
+
+1.F.4.  Except for the limited right of replacement or refund set forth
+in paragraph 1.F.3, this work is provided to you 'AS-IS' WITH NO OTHER
+WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO
+WARRANTIES OF MERCHANTIBILITY OR FITNESS FOR ANY PURPOSE.
+
+1.F.5.  Some states do not allow disclaimers of certain implied
+warranties or the exclusion or limitation of certain types of damages.
+If any disclaimer or limitation set forth in this agreement violates the
+law of the state applicable to this agreement, the agreement shall be
+interpreted to make the maximum disclaimer or limitation permitted by
+the applicable state law.  The invalidity or unenforceability of any
+provision of this agreement shall not void the remaining provisions.
+
+1.F.6.  INDEMNITY - You agree to indemnify and hold the Foundation, the
+trademark owner, any agent or employee of the Foundation, anyone
+providing copies of Project Gutenberg-tm electronic works in accordance
+with this agreement, and any volunteers associated with the production,
+promotion and distribution of Project Gutenberg-tm electronic works,
+harmless from all liability, costs and expenses, including legal fees,
+that arise directly or indirectly from any of the following which you do
+or cause to occur: (a) distribution of this or any Project Gutenberg-tm
+work, (b) alteration, modification, or additions or deletions to any
+Project Gutenberg-tm work, and (c) any Defect you cause.
+
+
+Section  2.  Information about the Mission of Project Gutenberg-tm
+
+Project Gutenberg-tm is synonymous with the free distribution of
+electronic works in formats readable by the widest variety of computers
+including obsolete, old, middle-aged and new computers.  It exists
+because of the efforts of hundreds of volunteers and donations from
+people in all walks of life.
+
+Volunteers and financial support to provide volunteers with the
+assistance they need are critical to reaching Project Gutenberg-tm's
+goals and ensuring that the Project Gutenberg-tm collection will
+remain freely available for generations to come.  In 2001, the Project
+Gutenberg Literary Archive Foundation was created to provide a secure
+and permanent future for Project Gutenberg-tm and future generations.
+To learn more about the Project Gutenberg Literary Archive Foundation
+and how your efforts and donations can help, see Sections 3 and 4
+and the Foundation web page at https://www.pglaf.org.
+
+
+Section 3.  Information about the Project Gutenberg Literary Archive
+Foundation
+
+The Project Gutenberg Literary Archive Foundation is a non profit
+501(c)(3) educational corporation organized under the laws of the
+state of Mississippi and granted tax exempt status by the Internal
+Revenue Service.  The Foundation's EIN or federal tax identification
+number is 64-6221541.  Its 501(c)(3) letter is posted at
+https://pglaf.org/fundraising.  Contributions to the Project Gutenberg
+Literary Archive Foundation are tax deductible to the full extent
+permitted by U.S. federal laws and your state's laws.
+
+The Foundation's principal office is located at 4557 Melan Dr. S.
+Fairbanks, AK, 99712., but its volunteers and employees are scattered
+throughout numerous locations.  Its business office is located at
+809 North 1500 West, Salt Lake City, UT 84116, (801) 596-1887, email
+business@pglaf.org.  Email contact links and up to date contact
+information can be found at the Foundation's web site and official
+page at https://pglaf.org
+
+For additional contact information:
+     Dr. Gregory B. Newby
+     Chief Executive and Director
+     gbnewby@pglaf.org
+
+
+Section 4.  Information about Donations to the Project Gutenberg
+Literary Archive Foundation
+
+Project Gutenberg-tm depends upon and cannot survive without wide
+spread public support and donations to carry out its mission of
+increasing the number of public domain and licensed works that can be
+freely distributed in machine readable form accessible by the widest
+array of equipment including outdated equipment.  Many small donations
+($1 to $5,000) are particularly important to maintaining tax exempt
+status with the IRS.
+
+The Foundation is committed to complying with the laws regulating
+charities and charitable donations in all 50 states of the United
+States.  Compliance requirements are not uniform and it takes a
+considerable effort, much paperwork and many fees to meet and keep up
+with these requirements.  We do not solicit donations in locations
+where we have not received written confirmation of compliance.  To
+SEND DONATIONS or determine the status of compliance for any
+particular state visit https://pglaf.org
+
+While we cannot and do not solicit contributions from states where we
+have not met the solicitation requirements, we know of no prohibition
+against accepting unsolicited donations from donors in such states who
+approach us with offers to donate.
+
+International donations are gratefully accepted, but we cannot make
+any statements concerning tax treatment of donations received from
+outside the United States.  U.S. laws alone swamp our small staff.
+
+Please check the Project Gutenberg Web pages for current donation
+methods and addresses.  Donations are accepted in a number of other
+ways including including checks, online payments and credit card
+donations.  To donate, please visit: https://pglaf.org/donate
+
+
+Section 5.  General Information About Project Gutenberg-tm electronic
+works.
+
+Professor Michael S. Hart was the originator of the Project Gutenberg-tm
+concept of a library of electronic works that could be freely shared
+with anyone.  For thirty years, he produced and distributed Project
+Gutenberg-tm eBooks with only a loose network of volunteer support.
+
+
+Project Gutenberg-tm eBooks are often created from several printed
+editions, all of which are confirmed as Public Domain in the U.S.
+unless a copyright notice is included.  Thus, we do not necessarily
+keep eBooks in compliance with any particular paper edition.
+
+
+Most people start at our Web site which has the main PG search facility:
+
+     https://www.gutenberg.org
+
+This Web site includes information about Project Gutenberg-tm,
+including how to make donations to the Project Gutenberg Literary
+Archive Foundation, how to help produce our new eBooks, and how to
+subscribe to our email newsletter to hear about new eBooks.