National organization of banking desirable World organization con ceivable but improbable National and of CHAPTER X REQUIREMENTS OF A GOOD BANKING SYSTEM The peculiar function and the great importance of commercial banking render highly desirable if not absolutely essential its organization on a national scale. In its operation this form of banking constitutes a part of the national money system. Checks drawn on banks in Maine are used to pay bills in California. Bank notes circulate side by side with the standard money issued by the government. The unsettling of confidence in any given locality reacts upon the whole credit structure, and through credit on the entire system of production. The organization of a country's banking system as a whole is, therefore, a subject that transcends in importance that of the unrelated activities of individual banks. Writers with imagination have referred at times to a world organization of credit. Where one's outlook is sufficiently cosmopolitan the possible benefits of a worldwide system are obvious. But the heterogeneity of the world's peoples, the differences in their economic activities, and the diversity in their points of view, render useless any consideration of a world banking system. The economic life of today and the system of exchange involved in it are based almost exclusively on ultra-nationalistic conceptions. A brief consideration of the opposing interests and ideals which underlie the Great War suffices to disclose the truth of this proposition. While much may be said concerning the need of national organization of commercial or credit banking, the need of such organization in the fields of investment and savings banking is not equally pressing. Bank credit in its normal manifestations appears as a medium of national use, but the major portion of the locally collected investment funds in the hands of savings and of purely investment banks are locally utilized. That portion which is not locally applied tends to be mobilized in the great security markets. The existence of such markets assures a satisfactory apportionment of the available investment 'funds. Rates charged for purely local investment purposes, as, for example, for real estate mortgages, may vary considerably from section to section; and in special fields, like farm-loan mortgages, it may also be necessary to organize investment banking on a national scale in order to mobilize funds over an adequately wide area, and to provide the standardized securities essential to such mobilization. But in the wider markets the securities dealt in may represent properties scattered over the whole country, while the funds appearing for investment are sent in from every quarter. The only questions that are raised concern safety and earnings. Hence the competition of seekers after funds, on the one hand, and of buyers of good and profitable investments, on the other, leads, other things equal, to substantial uniformity in rates, and, in consequence, to an apportionment of the available funds which promises maximum social advantage. The earlier chapters of this book aimed to set forth the What conunderlying principles of commercial banking as a possible clusions may be basis for intelligent conclusions concerning the organiza- drawn tion of this branch of banking over the country as a whole. from previous Assuming in general the validity of the analysis there discussion? made, attention may be directed to the conclusions to be drawn. of bank The general object of a good banking system will be to Maximum provide for all the advantages and to guard against all advantages the dangers inherent in bank credit. Owing to the funda- credit the mental importance of reserves to such instruments, this objective in a good implies the availability for reserve purposes of a max- system Maximum Diffusion of credit facilities necessary imum proportion of reserve funds. Individuals with money available for deposit should be encouraged to "bank" such money, and in like manner the general dependence on banking instruments in carrying on exchange should be systematically encouraged. Such dependence on the banking facilities of the country is desirable for the government as well as for private individuals. The fiscal operations of the government should be carried on through the ordinary channels of trade. In most countries the government is the largest single business man, and "hoarding" by the government is as indefensible as is hoarding by private individuals. It would hardly seem necessary to make this special reference to governments were it not that for more than seventy years the United States government has maintained an independent treasury in which its current funds have been kept. The rule was relaxed somewhat in later years, but as will be seen in the chapter dealing with the Federal Reserve System, the utilization of the banking system by the Treasury Department is still permissive rather than mandatory. The widest possible dependence of the trade of the country on banking facilities implies corresponding diffusion of such facilities. Banks must be sufficiently numerous to enable the mass of people to have access to them, and the peculiar limitations of different classes of economic endeavor must be taken into account in arranging a basis on which the banking facilities will be extended. Under a system of branch-banking, for example, means are provided for the rapid provision of banking facilities as the need for them arises. But if for political reasons the system of branch-banking is condemned, then in providing the regulations for governing the local independent banks care must be taken to offer every inducement consistent with safety for the early establishment of banks in small communities. Similarly, where the nature of the economic occupation, as in agriculture, is such as to provide only inadequate forms of security for the extension of bank credit, the effort must be made through the formation of coöperative societies or other agencies to buttress this security or so to transform it that it can be employed in adequate amounts to meet the needs of those concerned. The great desideratum, after a general use of bank Elasticity the great credit is assumed, is, of course, elasticity. Elasticity of desideratum bank credit implies in first instance the development of the two forms of such credit when and where each may be needed. The failure to permit this free development means a disparity in rates from place to place and unfortunate fluctuations from time to time in the same place. The result is a high average rate that unduly taxes the country's industry and commerce. first upon the adaptation of the banking system to the economic life Broadly speaking, the fulfilment of this requirement It depends of elasticity depends first of all upon the original adaptation of the banking system to the economic life of the community. All the economic and social factors which have been alluded to in connection with the absolute importance of bank credit, its embodiment in the several forms, the reserves necessary to establish it, etc., must be carefully considered in the conscious ordering or reordering of a banking system. In other words, the banking superstructure must be adapted to the foundation on which it is to rest. of the nation tuations in Taking this for granted, however, the question resolves Assuming itself into one concerning the provisions to be made for this, flucmeeting fluctuations in demand. Fluctuations in the abso- demand lute demand for bank credit from place to place require require mobility of such credit, but as the extension of credit is reserves a question primarily of underlying reserves, mobility of credit means mobility of reserves. mobility of reserves It has already been demonstrated that mobility of re- Mobilizaserves can best be obtained through mobilization of tion of reserves. It is, of course, possible under a system of scat- essential to tered reserves finally to equalize "pressure" on reserves mobility as a whole through voluntary interrelationships established by banks, or through dealings in the market, but Mobilized reserves must be made accessible the more completely all the reserves are brought under one general management the more rapidly will readjustments be made, and the more uniform will be the rate. A dozen communities served by independent reservoirs may through a piping system connecting the reservoirs finally obtain uniform water pressure, notwithstanding differences between the communities in the consumption of water. But if the water in all the reservoirs were brought into one great reservoir there would never arise the necessity for equalizing the pressure between the communities. It would always be the same for all. The flow of credit as based on reserves constitutes an analogous case. Changes in the demand for bank credit from time to time in any given place may, when the country as a whole is taken into account, be regarded as a situation involving constant readjustments of place demand. Providing an elastic system to meet the variation in place demand is therefore essentially the same as providing for the variations in demand from time to time in the same place. From whatever angle the question is approached, the higher the degree of reserve centralization the greater is the possibility of delicate adjustment of credit facilities to need. Mobilization of reserves would appear to be, therefore, one of the first requirements of a good banking system. It has been seen, however, that mobilized reserves to be effective must be accessible. Such accessibility involves for the individual bank the possibility on the one hand of obtaining, or on the other of transferring or liquidating, investments in adequate amounts to meet its changing needs. The several ways in which this might be done were set forth in a previous chapter. Here it may be said that the wider the possibilities in this respect the more efficiently will the banking system function. The outstanding advantages of an open discount market lead, of course, to an emphasis on this expedient, but it must be remembered that the creation of an open discount market depends upon the availability of the proper kinds of discounts, |