16. What measures were recommended with respect to minerals? 17. What is the importance of determining the legal status of con servation? 18. What did the Maine Supreme Court say as to the general powers of the state legislature? 19. What, in the opinion of the Court, are two reasons why the public may control and limit the use of private property? 20. What was the conclusion of the Court with respect to the power of the legislature to control the use of natural resources? 21. Outline some needed Federal legislation with respect to fire protection and forest renewal. 22. Outline some needed Federal legislation with respect to the extension and consolidation of Federal forest holdings. 23. What Federal legislation is needed with respect to the reforestation of denuded lands? 24. Outline the state legislation needed with respect to fire prevention and reforestation. 25. What recommendations are made by the United States Forest Service with respect to needed legislation on state and municipal forests? Importance of the commercial bank. The goldsmith who is becoming a banker notices that some of the deposits are not called for, and so decides to put these out on short-time loans. CHAPTER XXXI CREDIT AND BANKING 181. The function of the commercial bank 1 There are many types of financial agencies in any modern industrial community, but probably the most important of these is the commercial bank. During the last few decades, an increasingly large amount of the nation's business has been carried on with the help of this agency. Professor H. G. Moulton has tried to explain the rise of the commercial bank by the story of the goldsmith. In former times, people with surplus money began the practice of leaving their funds with the goldsmith, and drawing out sums, as they needed them, by means of checks. Professor Moulton continues: Every day people present orders or checks drawn by the different depositors against their respective accounts. To my surprise, [the goldsmith is speaking] I learn that about three times out of four the man who presents the order does not withdraw cash, but instead asks for a credit account with me against which he can draw checks when he wishes to make payments. Everybody remarks how much more convenient and how much less risky it is when one does not have to transfer the actual money. I ponder over the fact that only once in four times does anyone ask for cash. I have $100,000 with which to pay $100,000 in claims against me, but I am never called upon to pay more than $25,000 at one time. Why not, therefore, loan $75,000 at interest and increase my profits? I try this and find that my ability to pay $100,000 is not impaired so long as I make short-time loans of a kind that are sure to be paid promptly when they fall due. So long as only one dollar in four is called for in cash, a 25 per cent reserve of specie is all that is necessary. Finally I get a new idea. Instead of loaning $75,000 of my cash, 1 From the United States Department of the Interior, Bureau of Education. Lessons in Community and National Life. Washington, 1918. Series A; pp. 189–192. why not plan to keep the whole $100,000 as a reserve and . . . create The business claims against me equal to $400,000? I try out this idea. I loan is expanded. $300,000 to business men. I give them credit accounts against me, and for the sake of convenience they write checks against these accounts rather than withdraw the actual money when they wish to make payments. I find that the people who receive the checks are no more desirous of taking away cash than were the people with whom I dealt before. Now, as formerly, one-fourth of the checks are presented for cash and three-fourths are deposited with me as credit accounts. Thus I carry a total of $400,000 and need only $100,000 actual cash with which to pay. Since most people prefer a credit account I am able to meet all claims with my cash reserve of 25 per cent of my outstanding accounts. of the commercial The banker as a judge of business Commercial banks to-day make loans to business men amounting The function to billions of dollars annually. These loans are mainly for short periods, and business men use them largely for working capital bank. rather than for plants and equipment. The modern business manager . . . borrows funds on short time with which to buy raw materials for manufacture and stocks of merchandise for sale. It is the function of the commercial bank to furnish this working capital. In the loaning of funds the banker has to exercise a great deal of judgment. If he loans to business men who are inefficient, or dishonest, or engaged in lines of business which are speculative in their nature, he may find that his loans are not repaid at the date of maturity. There may be heavy losses involved, which reduce the banker's profits. Even slow payments are looked upon with disfavor by the banker because his ability to expand his own obligations as described above depends largely upon the certainty and promptness with which his debtors pay him. The banker therefore makes a careful study both of the borrower and of his business before a loan is granted. . 182. Our banking system before 19131 Since Civil War days the basis of our financial organization has been the national banking system. This system was highly defective 1 From the National Citizens' League for the Promotion of a Sound Banking System, Banking Reform. The National Citizens' League, etc., Chicago, 1912; pp. 7-9, 12. activities. Before 1913 system was highly defective. until amended by the Federal Reserve Act of 1913. Prior to 1913 our banking the great majority of national banks were national in name only. Except for the rather loose association of the banks in the clearing houses of our principal cities, most of these banks were independent units, each working for itself. There was little teamwork. The banks were sufficiently dependent upon one another to render one sensitive to the financial condition of other institutions, but there was no adequate method by which the strong banks in the system could extend aid to banks temporarily embarrassed. This important point was developed in the 1912 report of the National Citizens' League for the Promotion of a Sound Banking System, as follows: Under the terms of the National Banking Act, no bank is permitted to establish branches. [This was written in 1912, before the passage of the Federal Reserve Act.] Every bank is presumably an independent institution. . . Country banks are required to hold a reserve equal to 15 per cent of their outstanding liabilities, and may re-deposit nine per cent of it with reserve city banks. They thus retain in their own vaults, at the minimum, cash equal to only six per cent of their outstanding liabilities. The reserve city banks [in turn] . . . are required to hold a reserve equal to 25 per cent of their outstanding liabilities, [but] may re-deposit onehalf of this ... with banks in central reserve cities. Before 1913, their reserves Extent of this practice. Inter dependence of the banks. ... As a matter of fact the banks have availed themselves of this reserve provision very extensively, and much of the present socalled reserves consists not of cash in their vaults but of deposits in other banks in reserve cities. At a recent date of report to the Comptroller of the Currency, about 551 millions of dollars represented the total reserve held by country banks, while of this sum only 246 millions was actually in the possession of these banks in the form of lawful money. All the national banks of the country had reserves of 1,404 millions, of which only 862 millions was actual lawful money in hand. [Thus the smaller banks are profoundly interested in the condition of the banks in which they have deposited a large share of their reserves. To the latter] they look for the resources which will enable them to fill up their own reserves in times of sudden demand for payment. To them they look for accommodation through direct loans, or through the discounting of paper, or through some one of the various methods which are employed for granting relief to the smaller institutions when the stronger and larger banks are in position to afford such aid. for one bank may for all. Conversely, the city banks look with interest to the outside institutions as the source of deposits which they expect to use in times of financial ease and slack business in the country, for the purpose of facilitating transactions in the cities and general financial operations. [Thus the banks are intimately connected with one another, in fact, Distress they are inter-dependent, so that the distress of one bank may affect all of the banks with which it has business relations. The difficulty mean distress is that these banks, though inter-dependent, have no way of helping one another when the distress of one threatens to work a hardship on other institutions.] The larger banks have scanty means of knowing the details of one another's affairs and no means at all of enforcing their own ideas upon one another in any case. The smaller banks, while to an extent overseen and influenced by the larger, are not in touch with one another or able to judge of the movement of credit in the operations of the other institutions. The fundamental defect of the national banking system is [that it is] a series of banks artificially grouped. Because of the lack of coöperative or fundamental relationships between the institutions, it is not possible for them to exercise any general policy with reference to the control of reserves, the fixing of rates of discount, or the granting of loans. They can only act independently of one another, and the well-conducted institutions must, therefore, suffer from the mistakes of others whose conduct tends to arouse suspicion or alarm in the mind of the public. Because of this situation, it will be seen, the national banking system as at present conducted is in a sense a breeder of panics, while it fails entirely to grant any adequate relief from these commercial convulsions. 183. The panic of 19071 If we confine our attention to the defect brought out in the preceding selection, it will be seen that an important objection to our 1 From the National Monetary Commission, History of Crises under the National Banking System. Washington, 1910; pp. 253-256, 258-259. The fundamental defect in ou banking system prior to 1913. |