William Amasa Scott

“ 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 [Pg 138] investment of the savings which they are constantly making. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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 [Pg 40] 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. ”

“ 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. ”

“ 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. ”

“ A common method of procedure, when [Pg 103] 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. ”

“ 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. ”

“ 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. ”

“ 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 [Pg 3] 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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 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 ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ In this popular usage these documents are called commercial paper because they are themselves objects of commerce. In our use of the term the adjective "commercial" applies to them only when they play the rôle of intermediary in a process of exchange through credit. In this sense it is a matter of indifference whether they pass through the hands of brokers or not, and the fact of their being objects of purchase and sale does not confer the quality of commercial paper upon documents having an origin and character other than that above described. ”

“ 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 ”

“ 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. ”

“ A person buys on time and sells on time and expects to pay for [Pg 18] 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. ”

“ 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. ”

“ Through its agency he secures capital at low rates for his business. In America the bank is too often regarded as a necessary evil, certainly not with affection. Yet it plays a most important rôle in the nation's economy. Our banking laws are obsolete, unsatisfactory, and actually in some instances detrimental to the best and widest use of the nation's resources. Europe has many lessons for us in the problem of how best to use our accumulations. With agriculture demanding and the railroads calling for more capital, the question of scientific banking assumes new proportions. ”

“ This 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. ”

“ 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. ”

“ 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. ”

“ 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. ”