Commercial bank

“ The commercial banks of the United States may to a very considerable degree check dynamic tendencies, but in general, they do not lead and direct them. Bank-credit, directed by others than commercial bankers, does, however, enormously facilitate both the starting of new enterprises and social readjustment to them. ”

“ Some commercial banking products or services are so distinctive that they are entirely free of effective competition from products or services of other financial institutions; the checking account is in this category. Others enjoy such cost advantages as to be insulated within a broad range from substitutes furnished by other institutions. ”

“ 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. ”

“ These, as well as the other commercial banks, consisting for the most part of local institutions and those catering to special interests, use [Pg 125] 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. ”

“ But banks do need a substantial margin of liquidity, to protect the rest. They get it from stock exchange collateral loans, and from ownership of listed and easily marketable bonds, primarily. They get part of it from true commercial paper. Thus, the director of a country bank in Iowa told the writer that banks in his section—where banks owned in large measure by farmers, and dealing largely with farmers, are very numerous and important—make a regular practice of buying, through brokers, a considerable amount of notes of outside merchants. They do this to protect themselves. ”

“ Seasoned bonds have been bought in great volume by our commercial banks, but few stocks. Even the underwriters and investment bankers have been primarily intermediaries, expecting to pass on to private buyers the securities they hold temporarily. My point here is, merely, that there is nothing in the distinction between static and dynamic credit, when by that is meant the distinction between credit for new enterprises and credit for old enterprises, to mark off a peculiar or essential province for bank-credit. ”

“ That any national bank desiring to take out for issue and circulation an amount of national bank notes in excess of its paid-up and unimpaired capital, without depositing United States bonds or any other securities to secure the payment thereof, may do so to an amount not to exceed 100 per centum of its paid-up and unimpaired capital stock, provided the board of control of the commercial zone to which such bank belongs first gives its approval thereto. ”

“ In fact, every banking association is assumed to be a corporation of money lenders. Under ordinary circumstances this corporation is able to loan to individuals whose credit is good all of its capital not otherwise employed in the machinery of the bank, a considerable portion of deposits from its customers, and to a certain extent its own credit in the commercial world. In the case of a national bank a portion of capital is loaned to the government in the purchase of bonds, which are the basis of its circulating notes. ”

“ I said that the business of banking proper consisted in loaning money, discounting bills, facilitating exchanges of productions by the agency of commercial paper, and in receiving and disbursing the deposits of individuals. The issue of bank bills was an exclusive privilege conferred only on a few corporations. It was a privilege that an individual could not enjoy. No person could issue his bills in the form of paper money without a corporate franchise granted him and his associates, either by a general banking law, or by an act of incorporation. ”

“ 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 [Pg 7] 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. ”

“ The report of the Comptroller also shows this fact, that while all other banks than the National Banks, excluding the Mutual Savings Bank, hold only 7 per cent cash reserves of their individual deposits, or demand liabilities, they have 24 per cent of their assets invested in bonds and other securities, which must of necessity be slower than current commercial paper, while the National Banks, which hold 17 per cent in cash of their individual deposits, have invested only 17 per cent of their assets in bonds, or other securities. ”

“ 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. ”

“ Commercial banks can and do discourage certain types of enterprises by refusing loans with their securities as collateral, or by requiring very heavy margins with such loans, but even these may be developed, and are with us on a large scale developed, on banking credit, advanced by the speculators and private bankers who borrowed it from the commercial banks with other securities as collateral. ”

“ Agricultural loans, and other mortgage loans are made in considerable volume by our State banks and trust companies. All classes of commercial banks make many non-liquid loans, as we shall later see. But all of them get as high a proportion of liquid loans as they can. Bills of exchange, running ten, thirty, sixty or ninety days, growing out of commercial transactions which automatically terminate themselves in the payment of cash or the promises of other bankers, constitute admirable assets. ”

“ The reason for the competitive disadvantage of most lending institutions vis-a-vis banks is that only banks obtain the bulk of their working capital without having to pay interest or comparable charges thereon, by virtue of their unique power to accept demand deposits. The critical area of short-term commercial credit, see pp. ”

“ The banks in consequence have less to lend to the brokers, who are then bound to apply to the Bank of England, which compels them to discount their bills at its own terms, and the rate in the outside market, of course, advances. ”

“ An institution might have been established with large capital, and a monopoly of the right of note issue, authorized to act as government fiscal agent, and to deal with the general public. Such an institution would presumably in the course of time have become a central bank, the main reliance of other banks in emergencies. In order to avoid competition with existing banks, the act provides that the receipt of deposits by the Federal Reserve Banks, and their normal lending operations shall be confined to those banks which subscribe to the capital and maintain balances with them. ”

“ The banks put up their capital as an insurance fund, to protect their customers, and should handle their resources, and should keep such an amount of reserves on hand or at their command as to guarantee the payment of all depositors upon demand, or in accordance with their contracts. Since the banks, commerce and the people are all bound up together, the contracts of the banks with the people should take one common form, and each bank, from one end of the country to the other, should be compelled to assume its proper share of the burden, both as to paid-up capital and as to reserves. ”

“ It collects money from institutions and localities when and where they do not need it, and lends it to others when and where they do. In like manner the active deposits of the various banks, as they are not all wanted simultaneously, furnish the bankers' banks with a large surplus reserve of lending power, which in turn is an invaluable source of flexibility to the individual banks. By its means they can, if need be, rediscount their commercial paper, exchange their unmatured assets for actual cash, and secure its still better known credit in place of their own. ”

“ 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. ”

“ If, on the other hand, his business is unexpectedly large, giving opportunity to make bigger profits and creating the need for more capital, he will find the bank ready to increase his line of credit, provided the manager is satisfied that business conditions and prospects warrant expansion. Under no circumstances, however, must the customer of a bank seek to raise funds elsewhere unless he first gets the consent of his bank. If he sells his notes in the open market, he must do it with the [Pg 429] full knowledge of his bank or run the risk of being placed upon the "black list." ”

“ And it is furthermore evident, that the Bank, which is met at every turn as an agent in all transactions, which governs credit, regulates the currency, animates or checks at will the activity of commerce by narrowing or widening the channels of circulation, the Bank, which by its numerous branches is, like the fabled polypus, everywhere present, the Bank with its funds, its centralisation, its trusty creatures, is certainly an anomaly, which may become big with danger. ”

“ Goods are sold in one locality and paid for in the goods of another locality by means of drafts, bills of exchange, etc., meeting and canceling one another, so that very little money is transferred from point to point.
The function of discount and loan, as has been intimated, is in modern banking usually combined with that of deposit, as also that of circulation or issue. When the capital of a bank is paid in by the stockholders, and the officers elected, it is then ready for business under regulations imposed by its charter. There are two ways in which the public is accommodated. ”

“ It is at bottom a mutual buying and selling of debts. There is of course a daily balance on one side or the other between every two of these banks, which must be settled in money, because it would never happen in practice that each should owe the other precisely the same sum on any one day; but substantially and almost exclusively the exchange at the Clearing-House is a simple trade in credit-claims. Each bank pays its debts by credits. A merchant is a dealer in commodities, a laborer is a dealer in services, and a banker is a dealer in credits. ”

“ In the ultimate analysis, and outside of its function of insuring credit, a bank is really an intermediary between borrowers and lenders. It is by virtue of bringing borrowers and ultimate lenders together and providing the former with a supply of loans which would not otherwise exist, that a bank simultaneously tends to lower the rate of interest and increase the supply of credit currency. ”

“ 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. ”

“ If a country merchant accumulates more currency than he desires to keep on hand, he deposits it, together with his checks and drafts, in the local branch of his bank. This branch immediately sorts out the notes of other banks and treats them as it does checks and drafts upon other banks, either sending them to the nearest redemption agency or using them as an offset in the local clearing house if the issuing banks have branches in the locality. The branches of a bank are not obliged to redeem the notes of the parent bank, but must accept them at par in the payment of all dues. ”

“ No matter how a merchant's stock may change in character, it all belongs to his bank in case he fails to take up his paper or meet his engagements. In the same way a manufacturer's stock of goods, the raw material and the finished products, no matter how they change from day to day and month to month, will become the property of his bank if he fails to pay his note. The law practically makes every bank a silent partner in many wholesale and manufacturing businesses and gives it many rights which no ordinary silent partner can acquire. ”