Banking system

“ That crises still degenerate on occasion into panics in America, but not in England, France, or Germany, arises primarily from differences in banking organization and practice. In each of the three European countries, the banking system as a whole is so organized by the prevalence of branch banking and the existence of a central bank that reserves which bear a small proportion to the aggregate demand liabilities of all the offices can be applied when and where they are most needed. ”

“ The unique powers of commercial banks to accept demand deposits, provide checking account services, and lend against fractional reserves permit the banking system as a whole to create a supply of 'money,' a function which is indispensable to the maintenance of the structure of our national economy. ”

“ The national banking system established by Congress, in the year 1863, at the suggestion of Secretary Chase, of the Treasury Department, is the initiatory step toward a highly desirable reform in the paper currency of the country. Already over seventy national banks have been organized, under the act of Congress, with a combined capital of ten millions of dollars, whose circulation will have not only a uniform appearance, but a uniform value throughout the whole country. Numerous others are in process of organization. ”

“ Every practical business man, as well as every student of the subject, knows it. The American people, even of this generation, have in this respect, gone through a lively variety of experience, from the wildcat State banks, which existed before the war, to the National banking system of to-day.
What qualities must a bank possess so that you may call it a good one? If it be a bank of issue, its notes must be well secured and surrounded with such guarantees of convertibility that they may pass throughout the land without discount and without danger of loss to anybody. ”

“ In a word, I can not but believe that, with the full understanding of the operations of our banking system which experience has produced, public sentiment is not less opposed to the creation of a national bank for purposes connected with currency and commerce than for those connected with the fiscal operations of the Government. ”

“ By its means their reserves can be replenished and their lending power made responsive to the needs of their communities. A bankers' bank makes it possible for the money of the individual banks to do many times the work it would do if left in the separate institutions, and to do it far more effectively. It is the only ultimate safeguard, the only scientific deposit guarantee, the only sound basis of flexibility in any banking system. ”

“ Through close contact with borrowers and detailed supervision of their operations the bank endeavors to forestall delinquencies and the attendant losses to the economy. In December 1972 the Council of Ministers adopted a decision to enhance [Pg 219] the role of the banking system in administering the economy by intensifying its participation in the formulation of economic plans and by expanding its authority in monitoring plan fulfillment. ”

“ But we have in our banking system an unacknowledged governmental organ, perhaps the more potent because it is developing spontaneously to meet the public need. In recent years there have been occasions when banking associations, believing that crops were being held off the market unwisely, have forced more rapid movement through limitations upon credit. ”

“ Evidently the banking system must be changed. The government bowed to necessity. They issued a revised code of banking regulations which substituted treasury notes in the place of specie. Each bank was thenceforth required to invest Change of the Banking System. 80% of its capital in 6% state bonds, and these being lodged with the treasury, the bank became competent to issue an equal quantity of its own notes, forming with the remainder of its capital a reserve of treasury notes for purposes of redemption. ”

“ Our people have a right to a banking system in which their deposits shall be safeguarded and the flow of credit less subject to storms. The need of a sounder system is plainly shown by the extent of bank failures. I recommend the prompt improvement of the banking laws. Changed financial conditions and commercial practices must be met. The Congress should investigate the need for separation between different kinds of banking ”

“ The occasional desertion of national banks to the ranks of state institutions, and the contemplated separation of others, as well as the prospect of enforced relinquishment of circulation by all, indicate, plainly enough, that it is none too soon to consider some modification of the national banking system, if it is to be maintained, and it has worked too well to be needlessly abandoned. ”

“ Every district has its local bank, of a size to suit its wants, the stock of which is owned by the small capitalists of the neighbourhood, and managed by themselves; the consequence of which is, that in no part of the world is the system of banking so perfect—so little liable to vibration in the amount of loans—the necessary effect of which is, that in none is the value of property so little affected by changes in the amount or value of the currency resulting from the movements of their own banking institutions. ”

“ Probably the reason why the feeling against our present banking system has not yet taken shape in legislation is because no sound constructive measures have been proposed. Faulty as the system is, what is there better that can take its place? is asked, and to this no satisfactory reply has been given. Even though the notes of the national banks should be retired, and currency issued directly from the national treasury should take their place, we must have banking facilities of some kind. ”

“ As some philosopher once said of God—if such an institution did not already exist, people would certainly have to invent one, and, as we have no such institution permanently and legally established in America to-day, the prime essential of any sufficient banking plan is the equipment of our system in some way or other with the facilities of a bankers' bank. ”

“ They also greatly economize in the use of money by saving cost of counting and of transfer, and by securing against losses. If the system offered no more advantages than this safe and ready use of good money, the banks would be practically indispensable. But they have a still greater use in a safe extension of credit. The perfection of system in banking makes it possible for one who habitually fulfils his promises to purchase anywhere in the world on the shortest notice with the simple guaranty of credit in the bank where he does business. ”

“ Local Banks are Multiplied to Replace the Bank of the United States. Their Issues are Stimulated by their Fiscal Functions, soon Intensified by War Financiering. Commercial Crisis is Produced with a Prolonged Liquidation, Attended by Various Experiments in Bank Issues and Stay Laws for Relief. A Banking System is Created Consisting of Local Banks Co-ordinated Around a Bank of the United States, as a Regulator of the Currency, and Fiscal Agent of the Government.
CHAPTER V.
Inflation on the Atlantic Coast. ”

“ Turning now to the vast system of banks throughout the country, if the separate reserves of all the banks were gathered into one mass, available to meet the demands of depositors for payment in money, whether made in Maine or Texas, New York or California, the banks of the whole system would be able to operate with the highest degree of safety by having a total sum of money equal to only a small percentage of the aggregate amount owing to depositors, and consequently would be able to lend for use in the commerce of the country the greater proportion of the funds deposited. ”

“ The desirability of some legal limitation on the extent of the liability to a banking institution which any one person, firm, or corporation may incur is largely due to the fact, that, since the American banking system is a system of independent banks, the resources of many of the banks are necessarily small in comparison with the needs of some of their customers for loans. ”

“ Designed for the purpose of encouraging a system of independent banks, the act has been responsible, directly and indirectly, for the creation of some twenty-five thousand banking institutions in this country, practically all of which [Pg 673] are independent of each other. Instead of a small banking class and an equally small group of banks, all under the domination of one or a very few interests, we have developed a system of banking which has sprung from the people, and which is closer to the people than that of any other country. ”

“ Undoubtedly our people pay by check much more commonly and much more largely than people of any other country. We settle smaller transactions by check; our banks are willing to carry smaller accounts. Indeed, the rapid industrial development of our country is probably due [Pg 154] in no small degree to our system of independent banks and the facility with which we have permitted banks to be established. ”

“ Deposit banking operations affect not only the volume of money and credit, but also the value of the dollar and the stability of the currency system. In this field, considerations other than simply the preservation of competition are relevant. ”

“ He is not dependent on the whims or fortunes of any other bank. He need not shiver at the prospect of abundant crops for fear he may not have available the funds with which to meet demands for moving them. He will know that if he needs money to accommodate the bank's customers he can, as a matter of right, call on his federal reserve bank.
Among other benefits the new currency law, by its direct system of clearances, will release and make available for purposes of trade and commerce hundreds of millions of dollars which under the old system have been tied up in tedious processes of collection. ”

“ If the present efficient and admirable system of banking is broken down, it will inevitably be followed by a recurrence to other and inferior methods of banking. Any measure looking to such a result will be a disturbing element in our financial system. ”

“ In such times depositors in banks, stricken with fear and sometimes pressed by need, draw out their deposits, in many cases to such an extent as to render it difficult or even impossible for the banks to contract their loans sufficiently to meet the demands thus made upon them. Under our present currency system no adequate method is provided for expanding the money volume as occasion demands, whereby the banks can continue their usual loans and discounts, and thus prevent a panic with all its evil consequences. ”

“ A few men have secured to themselves the monopoly of a few irredeemable notes; and not wishing to have any competition, either in the business of banking, or in any business depending upon bank loans, they cry out for specie payments; and declare that no solvent or redeemable notes must be put into circulation, in competition with their insolvent and irredeemable ones, lest the currency be inflated, and specie payments be postponed! ”

“ Under the Independent Treasury System, the Regulation of Banking and Currency is left entirely to the States. The Federal Government Handles only Coin. Banks Organized under General Joint Stock Laws gradually, and to a great extent supersede Chartered Banks. In the Ohio Valley and the Northwest, Banks of the new kind run to great extravagance and abuse. By the development of new Institutions of Finance, Commerce, Transportation, and General Industry, Banks lose Comparative Importance.
CHAPTER XVI.
The Local Bank System. ”

“ A man who is without capital, and who, by prohibitions upon banking, is practically forbidden to hire any, is in a condition elevated but one degree above that of a chattel slave. He may live; but he can live only as the servant of others; compelled to perform such labor, and to perform it at such prices, as they may see fit to dictate. ”

“ It is with government paper, and bank paper, as it is with the paper of private persons; that is, it is worth just what can be delivered in redemption of it, and no more. We all understand that the notes of the Astors, and Stewarts, and Vanderbilts, though issued by millions, and tens of millions, are really worth their nominal values. ”

“ Still more wonderful is this discovery; better than costless; it is said to enrich a nation, by enriching a paper interest. Oh happiness unlocked for! No longer remains then a motive for that mass of patronage and taxation, by which nations are enslaved. This beautiful system of banking enriches stockholders by dividends and the people by bank notes. Patronage is received and returned with mutual civility and profit. And avarice is at length converted into a blessing for industry. ”

“ A National Bank is forbidden to lend more than ten per cent. of its combined capital and surplus to any one firm or individual. "But the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed." Also no National Bank can lend on its own stock as security. ”

“ But apart from this obvious difficulty, can we contemplate with equanimity the prospect of the State monopoly of the ordinary banking facilities as they present themselves to the man in the street, namely, the provision of bank branches, the use of the cheque book, the custody of securities and any other articles that the customer wishes to leave with his bank? ”