Banking

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 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 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.