INVESTMENT BANKING
In the economy of nations the encouragement and promotion of saving
and the accumulation, distribution, and investment of capital are as
essential as the conduct of exchanges, but the performance of these
functions has not been segregated and institutionalized to the same
extent as has commercial banking. Vast amounts of capital are invested
directly by the people to whom it belongs without the aid of middlemen
and large amounts are also invested through brokers of one kind and
another who can hardly be classed as bankers. The most important types
of institutions which have been developed in connection with these
functions are savings banks, trust companies, bond houses and
investment companies, land banks, and stock exchanges.
_1. Saving and Savings Institutions_
Saving is an individual matter for which the essential conditions are
the development of the instinct to make provision against
uncertainties of future income and to better the material condition of
one's self and family, and a surplus of income above necessary daily
expenditures. In order to secure the realization of these conditions
to as great an extent as possible, many agencies cooperate in all
modern nations, among them savings institutions. Included among these
are various forms of provident associations, sometimes independently
organized and sometimes connected with other organizations, insurance
associations of many kinds, building and loan societies, and savings
banks.
The need for savings institutions varies greatly among the different
nations and among different classes of people in the same nation.
Among people of great wealth the surplus of income above expenditures
is so great that large savings can hardly be avoided, and among all
the well-to-do classes the margin from which savings are possible is
sufficiently large and the desire to save sufficiently great to insure
large accumulations of capital. Among these classes there is little or
no need for institutions designed primarily for the development of the
saving instinct. What they need are institutions for the safe keeping,
accumulation, and investment of the savings which they are constantly
making. The principal work of savings institutions, therefore,
pertains to the classes of people who are not well-to-do and who need
encouragement and help in their efforts to improve their material
condition, if they are so inclined, and stimulus to make such efforts,
if they are not so inclined.
The means available to savings institutions for the accomplishment of
these ends are the urging of the importance of saving upon the
attention of people who do not adequately appreciate it, the placing
at their easy disposal of facilities for making savings when they have
the ability and inclination to save, and the application of pressure
of various kinds to compel or induce saving.
In the application of these means the methods employed by the various
groups of institutions mentioned differ widely and they are efficient
in different degrees, partly because they have other objects in view
besides the promotion of saving and partly because they deal with
different classes of people. Savings banks constitute the only group
to which the term bank can properly be applied and consequently the
only one to which attention will here be given.
In a book entitled, _Savings and Savings Institutions_, written by
Professor Hamilton of Syracuse University, the following definition is
given:[Pages 161 and 162.]
Savings banks are institutions established by public
authority, or by private persons, in order to encourage
habits of saving by affording special security to owners of
deposits, and by the payment of interest to the full extent
of the net earnings, less whatever reserve the management may
deem expedient for a safety fund; and in furtherance of this
purpose bank offices are located at places where they are
calculated to encourage savings among those persons who most
need such encouragement.
Professor Hamilton classifies these institutions as trustee,
cooperative, municipal, and postal savings banks. In the first group
he places institutions managed by boards of philanthropically inclined
persons who serve without pay; in the second, those managed
cooperatively by the people who make use of them; in the third, those
established and administered by municipalities; and in the fourth,
those connected with the post-office departments of governments. The
strength of trustee savings banks lies in the comparatively low costs
of their administration and in the fact that in their investments
they are likely to enjoy the advantages of the judgment and enthusiasm
of people skilled in the investment business; that of cooperative
savings banks, in their adaptability to the special needs of their
constituents and in the education which cooperative administration
involves; and that of municipal, and especially of postal savings
banks, in their capacity to place their services within the easy reach
of all who need them and in the confidence which their public
character inspires.
In the investment of the funds intrusted to savings banks, safety and
as large returns as are consistent with it, rather than ease of
liquidation, are the prime considerations, and hence they usually take
the form of high grade investment securities rather than of commercial
paper. Their deposits are usually subject to withdrawal only after due
notice, and, being savings deposits, their withdrawal usually follows
only after the lapse of a considerable period of time.
The purpose of their withdrawal is frequently investment and this is
sometimes made through the agency of the bank which held the deposit
and may involve merely a transfer of securities.
Outside of the New England and middle states, savings banks were rare
in this country previous to the inauguration of our postal savings
bank system in 1911. The explanation of this condition is doubtless to
be found chiefly in the wide extension of private, state, and national
banks, and trust companies, practically all of which conduct savings
departments and solicit the patronage of savers. These institutions
have coveted this field and have not encouraged the establishment of
savings banks. There is reason to believe, however, that they have not
worked the field as thoroughly as savings banks would have done and
that, on account of the dominance of their other interests, they are
not as well fitted as savings banks to work the field thoroughly.
Moreover it is probable that they are not able to pay as high a rate
on deposits as well conducted savings banks would be able to pay.
There seems, therefore, to be room, and probably need, here for the
development of savings banks of some at least, if not all, of the
types above described.
_2. Trust Companies_
Within a comparatively short period of time the trust company has
developed into an institution of prime importance in the United
States. In the beginning of its history it was, as its name implies,
simply an institution for the administration of trusts of various
kinds, such as the execution of wills, the guardianship of minors and
other dependent persons, the administration of the estates of persons
either unable or unwilling to administer them for themselves, and
trusteeship under corporate mortgages, especially those of railroads.
In the latter capacity they became mortgagees in trust for
bondholders, registering the bonds, collecting the interest as it
became due, paying the bonds at maturity, and in case of default
taking the legal steps which were necessary for the protection of the
bondholders.
The execution of these trusts involved in most cases the custody and
investment of funds, so that investment banking became a part of their
business almost from the beginning, and, in time, in states in which
the laws passed for their regulation did not prevent, they added
commercial banking to their other functions. In some cases they have
also become promoters of enterprises, taking the initiative in the
organization of corporations for various industrial and commercial
purposes. In New York City, and in individual cases in some other
large cities, the commercial end of the business has become the
dominant one; in the former case on account of the ability of these
companies, unrestricted by certain laws applying to state and national
banks, to offer to commercial customers better terms than their
competitors. In most states, however, especially in the large cities
in which they chiefly flourish, trust companies have become primarily
investment banking institutions, their other functions being carried
on as side lines and assuming, of course, in some cases greater
importance than in others.
Since they are still in the early stages of their development, the
status of trust companies in the banking system of the United States
is not yet definitely determined. Legislation concerning them varies
considerably in different states, as do also their relations with
other banking institutions. The competitive character of these
relations has resulted in some cases in legislation which has aimed to
differentiate and define the various functions which all these
institutions perform, and to prescribe the conditions under which each
one or each group must be performed, regardless of the way in which
they are combined, and in others, in their practical consolidation
with national or state banks, or both, through community of stock
ownership, interlocking directorates, etc.
From the point of view of the convenience of the public there are
advantages in the combination of all the banking functions in a single
institution, and the success of trust companies to some extent has
been due to this cause, but they have also profited from the unequal
competition which exemption from certain limitations imposed on state
and national banks has enabled them to enjoy. The removal of the
conditions which result in this unequal competition, a process already
in progress and likely to continue to completion, will reveal the
strength of the advantages of combination versus specialization of
functions. Previous to such a revelation it will be impossible to
determine whether or not the trust company form of organization is
destined to become the dominant one.
_3. Bond Houses and Investment Companies_
A large part of the business of investment banking in the United
States is conducted by corporations and firms organized for the
purpose of buying and selling investment securities, especially bonds
and mortgages. Rarely, if ever, do these concerns conduct savings
accounts. Ordinarily they confine their attention exclusively to the
investment end of the business and act in the capacity of jobbers, or
brokers, or both.
Within the investment field some of them specialize closely and others
deal in a wide range of securities. The specialties most frequently
followed are government, state, and municipal bonds, railroad bonds,
public service securities, timber bonds, irrigation bonds, and real
estate mortgages. Specialization involves the development of expert
knowledge of the class of securities dealt in and thus of special
serviceableness to both investors and the promoters of the enterprises
or the public bodies which issue the securities. These specialists
sometimes serve as middlemen between the issuers of securities and
other investment banks, as well as between them and the real owners of
the capital invested, their expert knowledge being of service to the
former as well as the latter.
Until recently there have been few attempts to regulate the operation
of these institutions by law, but the fraudulent practices of some of
them, and the ignorance and weakness of perhaps the majority of
investors, have recently created in some quarters a strong public
sentiment in favor of such regulation. In several states legislation
has resulted, of which the most noteworthy is the so-called "blue sky
laws" of Kansas and some other states.
In details these laws differ widely from one another, but they are
alike in that they impose upon some branch of the state government the
obligation of supervising both companies which issue securities and
those which offer securities for sale. The Kansas law, the first of
this kind passed in the United States, has been considered too drastic
by most of the companies that have attempted to operate under it, but
the Wisconsin law, which went into effect October 1, 1913, is looked
upon with more favor.
In formulating these and other laws for the proper regulation of these
concerns, it has been found difficult to provide adequate protection
to the investing public without unduly hampering the issue and
negotiation of securities, but this difficulty should, and in time
doubtless will, be overcome. A free and open market for bonds, stocks,
and other evidences of indebtedness is essential to freedom of
enterprise and mobility of capital, which are in turn essential to the
economic prosperity of any country. On the other hand, investors
undoubtedly need and deserve the protection of the state against
misrepresentation and fraud. It is practically impossible for them in
many, perhaps in most, cases to obtain the information necessary for
self-protection. The matters and conditions to be dealt with in such
legislation are so complex and subject to such frequent change that
laws are apt to be imperfect, inefficient, or obstructive. It seems
probable that those which do not attempt to be specific and detailed,
but give wide powers and discretion to administrative boards or
commissions, are most likely to be successful.
_4. Land Banks_
In Europe an important group of institutions has developed for the
supplying of agriculture and the building industries with the capital
needed in their operations. The greatest number and variety of these
are in Germany, in which their development has been continuous since
the days of Frederick the Great.
In order to assist in the recuperation of his kingdom from the
devastation caused by the Seven Years' War, Frederick caused the land
owners of certain provinces to be organized into associations called
Landschaften, which were authorized to issue mortgage bonds on the
joint security of the lands of all the members of the association in
exchange for mortgages on the lands of individual members who needed
funds for the improvement of their estates. These mortgages were made
payable to the association in the form of small annuities, to which
were added the interest paid on the bonds and an increment for the
payment of the expenses of the association.
These associations were governed by the members through a general
assembly, representative boards, and elected officers, and were
supervised by the state and carefully regulated by law. Regulations
were carefully worked out pertaining to the ratio that the loan should
bear to the value of the estate mortgaged, methods of valuation, ways
and means of maintaining an equilibrium between the bonds issued and
the mortgages held, the treatment of defaulting members, etc., etc.
Machinery for the sale of the mortgage bonds delivered to members was
also created, and in some cases later on these sales were made
directly by the associations themselves, and cash paid to the maker of
the mortgages.
Five of these original Landschaften have continued to the present day,
and others modeled after them were subsequently established. In 1909
in all Germany twenty-five were in operation, of which eighteen were
in Prussia. The newer ones have not in all respects followed their
models. Unlike the original five, membership in them is not limited to
the nobility and is not compulsory; the liability of the members for
the payment of the bonds issued has in some cases been limited to a
percentage of the total; the loans are usually paid in cash; and the
bonds are sold directly by the associations; but the principles of
mutual liability and mutual control which were basic in the old
organizations have not been violated in any case. Both old and new are
organized in the interests of borrowers on real estate mortgage
security, and aim to secure funds for these on the lowest possible
terms and for long periods of time, by making the security offered the
lenders greater than any single borrower could supply.
The degree of their success is indicated by the fact that in 1909 the
amount of their outstanding mortgage loans amounted to nearly a
billion dollars, and that their mortgage bonds rank on the exchanges
with Prussian state bonds and have at times outranked them.
Another type of land bank appeared in the early part of the
nineteenth century as a result of the movement for the freeing of the
serfs and their transformation into freehold peasants. The lands of
these cultivators were burdened with a variety of feudal dues and
charges which had to be commuted before they could become freeholds.
In order to facilitate this process banks were established which
assumed the obligations of a peasant towards his feudal superior in
return for a mortgage on his holding, repayable with interest in the
form of an annuity, and in amount equal to the sum to be paid to the
feudal superior for the total extinguishment of all feudal
obligations.
Some of these banks were established and administered by states,
provinces, and communes, and some by private parties. The public ones
obtained the funds they needed partly from subsidies and partly from
the sale of guaranteed mortgage bonds and the private ones wholly from
the sale of mortgage bonds.
The completion of the work for which these banks were originally
established put an end to their development about 1883, but similar
institutions have since been established in Prussia to assist
colonists in the purchase and equipment of their farms, and in central
and western Germany to promote general agricultural and urban real
estate operations. The colonists sent into Poland for the
Germanization of that province were in this way assisted by the
Prussian government, and in some parts of Germany the same means have
been employed for the purpose of aiding in the process of breaking up
large estates into small holdings, in the construction of dikes,
roads, and reservoirs, and in changing the courses of streams.
Next to the Landschaften the most important intermediaries between
capitalists and investors in real estate in Germany are the so-called
Hypothekenaktienbanken, or joint-stock mortgage banks. These are
private corporations, capitalized by the sale of stock shares to the
general public, and controlled by their stockholders through
directorates, like industrial corporations the world over. Their
business is the making of long-period loans on real estate security,
and the funds thus employed are obtained by the sale of mortgage bonds
secured by the real estate mortgages in which the proceeds are
invested and by their own capital, surplus, and other funds.
They differ from the Landschaften in that they are not cooperative or
mutual institutions, but strictly business enterprises run in the
interests of their stockholders. Their primary aim is to earn
dividends rather than to secure the lowest possible loan rates and
other favorable terms for borrowers. As a matter of fact they are
forced by competition and by the principles of good business to make
loans at reasonable rates and on favorable terms regarding repayment
and other matters, and they successfully compete with the Landschaften
and other cooperative credit institutions of Germany. Their mortgage
loans are usually made repayable on the annuity plan, one-half per
cent each year being the common rate of payment, and they loan about
the same percentage of the value of the lands mortgaged, as do the
Landschaften and other land banks, and the rate of interest charged is
the market rate, into the determination of which, of course, the
competition of all other institutions enter.
While these institutions loan in the aggregate enormous sums on farm
property, their chief field of operations is urban real estate, and
particularly the industry of residence, or as we would call it in this
country, apartment-house construction. It is on this account that the
period of their most rapid development coincides with that of the
recent rapid industrial and commercial development of Germany, which
dates back only to the establishment of the Empire in 1870. Most of
them began operations in the decade 1862-1872, but the most rapid
growth in the magnitude and scope of their business operations has
come in recent years.
In 1899 there were forty institutions of this kind in operation in the
German Empire. The number at the present time is probably considerably
greater, since for obvious reasons combinations among them are not
promoted by the same kind of economic pressure that in recent years
has operated so efficiently in Germany in the field of commercial
banking.
Two other groups of German institutions merit attention in this
connection, namely, the so-called Schulze-Delitzsch and the Raiffeisen
Credit Associations.
The Schulze-Delitzsch societies were the direct outcome of the period
of dearth and famine through which Germany passed in the years
immediately preceding the revolution of 1848. The first one was not a
credit association, but a cooperative buying society, organized by a
local judge named Schulze for the aid of his needy neighbors of the
small trading class in the town of Delitzsch. In 1850 a credit
association on the same plan was organized. Others followed, in rapid
succession in and after the seventies, until at the present time they
are numbered by the thousands and their members by millions, and they
are scattered throughout the entire empire.
The principle of their organization is the association of a
comparatively small group of neighbors, or of people who know one
another well, or who may easily come to know one another well, by each
making a contribution to a common fund to be loaned out to individuals
on personal security chiefly, and which, together with the credit of
the entire group, may be made the basis of security for larger funds
to be borrowed on the open market. They are carefully organized on the
cooperative principle, each member having an equal voice in a general
assembly which chooses a board of directors and a small administrative
board, to which is intrusted the actual management and administration
of the affairs of the society.
Loans are made to members only, usually for short periods of time, on
the personal security of the borrower and of others who are willing to
vouch for him, and on the unusually favorable terms which the credit
of the entire organization and very low costs of administration render
possible. The knowledge which each member has of the character and
business methods of his fellow members who borrow, and of the use to
which borrowed funds are put, and the stake which each one has in the
financial stability and success of the organization, bring the
percentage of losses to a very low figure, and make it possible for
these societies to grant their members maximum accommodations at
minimum prices.
To the funds accumulated from initiation fees, membership dues and the
sale of the associations' credit have been added, in constantly
increasing amounts in recent years, the savings of the members
themselves. Many societies have such an amount of funds intrusted to
them in this way that they are not only entirely freed from the
necessity of borrowing, but are obliged to seek opportunities for
investment outside their own group.
This condition of affairs, in addition to many other common interests,
led to the federation of the Schulze-Delitzsch societies into larger
groups, and these in turn into state and national associations,
through which surplus funds in one could be made to serve the needs of
others inadequately supplied, and through which all the societies
could be brought into efficient connection with the general money
market of the country. For a number of years these federated
societies conducted a large central institution, first in Frankfurt
and afterwards in Berlin, known as the Deutsche Genossenschaftsbank.
In 1904, however, this institution was absorbed by the Dresdener Bank,
one of the eight great private banking corporations of Germany, which
now serves as the central agency for all these societies.
The membership of these associations is not restricted to any class of
persons, and they actually include a very large number of small
farmers. An inquiry made in 1885 showed that in 545 of them, with a
total membership of 270,808, there were 72,994 farmers, and that
one-fifth of the total loans of these associations were made to this
class of their members. They must, therefore, be numbered among the
land banks of the Empire, or at least among the institutions which are
helping to solve the credit problem for the agricultural classes.
The Raiffeisen societies resemble the Schulze-Delitzsch in many
particulars and differ from them in others. Like them they are
strictly cooperative in character, and, when organized for credit
purposes, designed to supply members with loans on the most favorable
possible terms. Their development was also due to the hard economic
conditions of the period immediately succeeding the revolution in
1848.
They differ from the Schulze-Delitzsch societies chiefly in the
following particulars: They charge no initiation fees and do not rely
to the same extent on the proceeds of the sale of shares, the amount
of which they place at a very low figure, often the lowest permitted
by law; they make long-period as well as short-period loans, indeed
the former chiefly; they do not pay dividends on their share capital,
but instead put all profits into reserve funds or prevent their
accumulation by keeping the loan rates low; they exercise more care
than do the Schulze-Delitzsch associations to keep their societies
small, laying great emphasis upon the importance of personal
acquaintance between members and thus upon mutual watchfulness; and,
in their origin, they were peasant organizations pure and simple, and
hence more strictly land banks.
Their founder, F. W. Raiffeisen, Burgomeister of a small village in
Westphalia, Prussia, wanted to rescue the poor peasants of his and
other districts from the clutches of the usurers, into whose hands
they had fallen and by whom they were being exploited in a most
shameful manner. Since it was loans that these people needed and
since their cash resources were always very low and in many cases nil,
he felt that to require, as a condition of membership, entrance fees
and the purchase of one or more shares of stock, however small, would
be fatal to the success of his plans. He also firmly believed that in
the integrity, industry, frugality, and agricultural skill of these
people was the basis for sound credit and that cooperation was a means
by which these elements of sound credit could be made available and
attractive on the money market. At the beginning, therefore, no
entrance fees or share subscriptions were required. Later Prussian law
made share subscriptions compulsory and they were, of course,
introduced, but they were made so low, and the acquisition of the
money for their purchase so easy, that they have not been a serious
obstacle.
From the beginning Raiffeisen invited to membership in his societies
the well-to-do and substantial people as well as peasants. Of course
these people did not require the society for the satisfaction of their
own credit needs, but Raiffeisen saw that they would greatly
strengthen the credit of the societies and he was able to appeal to
them on philanthropic grounds. This class of people have a leading
part in the administration of the societies of which they are members
and have contributed greatly to their success.
At the outset the Raiffeisen societies had to rely chiefly on
borrowing for the acquisition of the capital needed, but with time and
success savings deposits, surplus funds accumulated out of profits,
and lastly the proceeds of the sale of shares have played an
increasing role. At the present time many societies are not obliged to
borrow at all, and not a few have surplus funds which are placed at
the disposition of other societies which are still obliged to borrow.
Like the Schulze-Delitzsch societies the Raiffeisen associations have
federated. At present there are thirteen so-called unions, and at the
head of all is a central bank with head office at Berlin and branches
at Koenigsberg, Danzig, Breslau, Cassel, Frankfurt, Coblenz, Brunzwick,
Strassburg, Nuremberg, Posen, and Ludwigshafen. The central bank is a
joint-stock company, organized on the principle of limited liability,
the stock of which is owned by the local societies. It formerly had
close relations with the Imperial Bank, but is now associated with the
so-called Centralgenossenschaftskassa, endowed by the state of
Prussia, in such a way that advances and discounts are extended to it
on favorable terms.
The Raiffeisen societies rival the Schulze-Delitzsch in the rapidity
of their growth and in the role they play in the economic life of
modern Germany. In 1908 they numbered 5,047, of which 4,340 were
credit associations. The collective balance sheets of these societies
in 1907 showed 490,734,834 marks assets, 489,234,357 marks
liabilities, and a membership of 405,819.
While Germany was the pioneer in the establishment of land credit
institutions, and while such institutions have attained a greater
variety of form and a higher degree of perfection in that country than
in any other, other countries have advanced along similar lines and
now have institutions and a fund of experience well worthy of study.
The institutions of Germany have in most cases served as models in
these other countries, the mortgage banks and the Schulze-Delitzsch
and Raiffeisen societies having been most frequently copied. These
models have been adapted to foreign conditions and modified in
interesting and instructive ways as well as copied without essential
change.
Among the mortgage banks developed outside of Germany the Credit
Foncier of France is especially noteworthy. In its organization it
was modeled after the Bank of France and is second only to that
institution in the magnitude of its operations and the scope of its
influence. Its head office is in Paris and it has at least one branch
in each department. Its capital stock owned by private parties amounts
to about $40,000,000, its surplus to over $4,000,000, its loans
secured by mortgage to over $400,000,000, and its total resources to
about $1,000,000,000.
Like the German mortgage banks, it secures the greater part of its
loan funds through the issue of mortgage bonds and a large percentage
of its loans are made on mortgage security for long periods of time
and are repayable on the annuity plan. However, it transacts a greater
variety of business than does the typical mortgage bank of Germany. It
loans on city and farm real estate and to communes, and it transacts a
large commercial banking business, though this is distinctly a side
issue, incorporated with its other business in order to give
profitable employment to funds, sometimes large in amount, which are
temporarily on hand awaiting investment.
At various times it has absorbed competing institutions and at times
it has established collateral institutions to transact lines of
business for which its own constitution and legal limitations did not
fit it. Among these the most important are the Credit Agricole and the
Foncier Algierienne. It was obliged ultimately to absorb and liquidate
the former, but the latter still flourishes in the colony of Algiers.
Mortgage banks have also gained a footing in most of the other
countries of continental Europe. In Italy they passed through a period
of storm and stress, owing to their connection with the issue banks of
that country and the consequent confusion between commercial and
investment banking which resulted, but they have recently been
established on an independent basis and are now developing along right
lines and with apparent success.
The Schulze-Delitzsch and Raiffeisen societies have been imitated in
Austria, Hungary, Belgium, Switzerland, and, to some extent, in France
and India. The so-called "Banche Populari" and "Casse Rurali" of Italy
are respectively modified forms of these two German types, and rank
among the most important means employed in that country for the
improvement of the condition of the peasants and small tradesmen.
State, provincial, and communal aid for these institutions has been
more frequently evoked and more extensively employed outside than
inside of Germany, and other important modifications of the German
prototypes have been made in Italy and elsewhere.
_5. Stock Exchanges_
An essential part of the machinery of investment banking is the stock
exchange. This is a place where the buyers and sellers of securities
or their agents regularly meet for the transaction of business. It may
be a portion of a street or a market place or a room in a building. A
fully equipped modern exchange contains a large room equipped with
telegraphic and telephonic communication with the most important parts
of the country in which it is located and of the world, with apparatus
for registering prices and easily communicating information to its
members, and with the offices needed for the accommodation of the
clerks and other employees required. Either by posts or in some other
manner the precise places in it in which each security or group of
securities is to be dealt in is also usually indicated.
The purpose of the stock exchange is to facilitate and to regulate
dealings in securities. It facilitates such dealings by providing as
nearly perfect means as is possible for putting buyers and sellers
into communication with each other, and for collecting and making
available to them the information they need. To this end they provide
for daily meetings at fixed hours; they make and publish lists of the
securities dealt in; they speedily record and, through the telegraph
and the telephone, communicate to all quarters of the globe the prices
at which securities change hands; and through the meeting room
equipped as before described they make it possible for buyers and
sellers, no matter where located, to communicate with each other in a
very short period to time. They regulate such dealings by establishing
and rigidly enforcing rules and regulations for listing, transferring,
clearing, and paying for securities and for other matters pertaining
to the conduct of their members.
These institutions serve investment banks as well as private
investors, constituting the machinery which connects them all. They
thus enlarge the area and scope of the markets for securities, and
greatly increase the mobility of capital. Without them the surplus
savings of one locality would only very slowly and with difficulty
find their way to other localities where they are needed, with the
result that capital would lie idle or be very inefficiently employed
in some places while in others natural and human resources would be
undeveloped or very inefficiently developed.
Existing stock exchanges differ considerably in the manner in which
they are organized and managed, in methods of doing business, and in
the scope of their operations. Some of them are incorporated and
others unincorporated; some restrict their membership to a prescribed
number, others admit as many as are able and willing to comply with
the conditions imposed; some are local in their scope, some national,
and others international. In this country all the exchanges deal in
local securities chiefly, except the one in New York City, which is
national in its scope. The London exchange does a larger business in
international securities than any other, but the Paris and Berlin
exchanges, as well as those located at the other important European
capitals, and the one at New York share in it to a greater or less
degree.
Stock exchanges have suffered in reputation, and their real functions
and merits have been obscured by the abuses to which they have been
subjected. Connected with their legitimate business of facilitating
the investment of capital, various forms of speculation have
developed which in some cases have degenerated into gambling pure and
simple. The better managed ones have striven to rid themselves of
these abuses, and in some countries, notably in Germany, legislative
bodies have taken a hand. The results, however, have proved only
partially successful.
Some forms of speculation are not only legitimate but necessary in
modern business life, and these shade into the illegitimate,
unnecessary, and positively harmful forms by such short and easy steps
as to render it difficult, and perhaps impossible, to draw a line
between the two which can serve as a guide for regulations of an
administrative or legislative kind.
_6. Some Defects in Our Investment Banking Machinery_
A comparison of our investment banking machinery with that of European
countries, especially Germany, reveals important differences. Among
these the most notable are the wide use there and the almost complete
absence here of the following: (a) the resort to cooperation as a
means of revealing and making available the basis for credit of large
numbers of people who lack capital but could use it to the advantage
of themselves and of the nation; (b) the long-period mortgage loan
repayable on the annuity plan and the mortgage bond as a means of
accumulating capital for such loans; and (c) the cooperation of the
state and other public bodies and of capitalists and philanthropically
disposed persons in developing the credit possibilities of the masses
and in directing the flow of proper portions of the stream of capital
in their direction.
In the development of investment banking institutions in this country,
individual initiative prompted by self-interest has been the chief,
and except in the case of savings banks, the sole motive force. The
result is that most of them have been organized in the interests of
lenders rather than borrowers and serve best the purposes of big
business and of persons already possessed of large credit by virtue of
their wealth or their business reputations. Under these conditions,
while enormous amounts of capital in the aggregate have been invested
in agriculture and urban real estate, the former has suffered
relatively in comparison with transportation, manufacturing, and
speculation.
Contributory causes in the development of this situation have been the
great need for capital for the development of our transportation
system, the stimulation of manufactures by high protective duties, and
the enormous area of our public domain which was given or sold to
settlers on very easy terms. Inasmuch as our transportation system and
our manufacturing industries have now attained a high degree of
development, our public domain has been nearly exhausted, and land
values and the cost of living are rapidly rising, the needs of
agriculture are pushing themselves into the foreground, and we are
beginning to look to European experience for suggestions regarding the
best methods of diverting to that industry a larger part of our
rapidly accumulating capital resources.
There are obvious difficulties in the way of the application of
cooperation to the solution of the problem of agricultural credit in
this country. In spite of the fact that immigration is constantly
bringing to us people from the very foreign countries in which
cooperative credit associations flourish, our agricultural population
is still dominated by the spirit of individualism which has been and
is one of our dominant national traits. Our farmers are also more
widely scattered than is the case in Europe, and consequently less
closely knit together in social units. Their holdings are also
larger, their capital needs greater, and their business instincts more
highly developed.
There seems to be no good reason, however, why the joint-stock
mortgage bank should not flourish here as well as in Europe. It is a
purely private business enterprise of the kind with which we are
perfectly familiar. The mortgage bond ought to appeal to our
investors, many of whom have exhibited a strong predilection for
mortgage security and real estate investments, and long-period
mortgage loans, repayable on the annuity plan, would meet the needs of
many land purchasers and of people who need to invest considerable
sums in drainage, irrigation works, etc., better than our present
methods. In most, if not all, of our states, trust companies could
develop these new lines of finance without prejudice to the other
branches of their business.
The use of state, county, and municipal subsidies or credit in
enterprises of this kind is rendered difficult, if not impossible, in
this country, by strong prejudice against the use of public funds in
private enterprises, and in some states by constitutional
prohibitions. This prejudice is based upon unfortunate experiences,
and is at least partially justified by the laxness of our
administrative methods and the prevalence of graft, which expose us
to the danger of the improper use of public funds devoted to
enterprises of this kind. There is no reason, however, why our states
should not take the initiative in the improvement of our investment
banking machinery and why private capitalists and philanthropists
should not turn some of their energy into this channel.
Suggestion and leadership are needed in this field quite as much as
legislation tending to restrict and regulate the operations of
existing institutions.
REFERENCES
The following books are comprehensive in character, treating most of
the subjects covered in the foregoing chapters:
MACLEOD, H. D., Theory and Practice of Banking.
GILBART, J. W., History and Principles of Banking.
BAGEHOT, WALTER, Lombard Street.
DUNBAR, CHARLES F., History and Theory of Banking.
SCOTT, WM. A., Money and Banking. Rev. Ed.
WHITE, HORACE, Money and Banking.
FISK, A. K., The Modern Bank.
The subject of clearings and the exchanges are discussed in the
following books:
CANNON, J. G., Clearing Houses.
CLARE, GEORGE, The A, B, C of the Exchanges.
CLARE, GEORGE, A Money Market Primer and Key to the Foreign
Exchanges.
MARGRAFF, A. W., International Exchange.
ESCHER, F., Foreign Exchange.
The following cover the history and present condition of banking in
the leading countries:
CONANT, C. A., Modern Banks of Issue.
KNOX, J. J., A History of Banking in the United States.
SUMNER, WM. G., A History of Banking in the United States, being
Vol. I of a History of Banking in all the leading nations.
KIRKBRIDE & STERRETT, J. E., The Modern Trust Company, Its Functions
and Organization.
BRECKENRIDGE, R. M., The History of Banking in Canada.
LAUGHLIN, J. L., Editor, Banking Reform.
JOHNSON, J. F., The Canadian Banking System.
WITHERS, HARTLEY, PALGRAVE, R. H., and others, The English Banking
System.
LIESSE, A., Evolution of Credit and Banks in France.
NATIONAL MONETARY COMMISSION, The Reichsbank, 1876-1900.
RIESSER, J., The German Great Banks and Their Concentration.
On investment banking see:
WOLFF, H., People's Banks.
PETERS, E. E., Co-operative Credit Associations.
HAMILTON, J. H., Saving and Savings Institutions.
PRATT, S. S., The Work of Wall Street.
CONANT, C. A., Wall Street and the Country.
INDEX
"Acceptance" credit and lines, 103
Accommodation loans, 12, 13
Accounts overdrawn, 16
Agriculture, capital for, 168;
individualism in, 168
Assets, prior lien on, 56;
special, 57
Balances, 16, 17, 23, 28
Banche Populari, 162
Bank of England, 104-111
Bank reserves, 35-40
Bank of France, 111-119
Banker's banks, 9;
bills, 33, 34;
most valuable assets, 61;
making loans, 86
Banking, act, 54, 78;
adequacy and economy of service, 62, 66;
branch, 64, 65;
business, 9;
commercial, nature and operation of, 11-67;
commercial in the United States, 68-100;
commercial in other countries, 101-135;
Canadian, 126-135;
defects and reforms in banking systems, 97-100;
English, 104-111;
French, 111-119;
functions in single institutions, 144;
German, 119-126;
incorporation, 66;
investment, 136-170;
Kansas "blue sky laws," 146;
problems of commercial, 35;
reserve, 78;
services rendered by, 1-3;
Wisconsin regulations, 146;
local, 62, 63
Bank notes, see _notes_
Banks, bond houses, 6;
Canadian, 126-135;
central of Europe, 101;
central reserve, 78;
classified, 6;
classification of national, 54;
collections, 22;
commercial, 6, 7;
cooperative, 139;
correspondent, 24, 25;
England, bank of, 104-111;
European land banks, 147-163;
European central, 9;
federal, 8;
federal reserve, 98-100;
France, bank of, 111-119;
French land, 160-163;
functions of, 4;
German Imperial, 119-123;
German land, 147-163;
incorporated, 7;
inspection of, 59;
interest charges, 14;
investment, 6, 7;
Italian land, 160-163;
joint stock, 7;
land, 6;
loan-making, 86;
municipal, 139;
national, 8, 70-75;
note issue privileges, 37, 38;
of issue, 20, 21;
postal saving, 139;
private, 7;
protection against unsound practices of, 46-62;
real estate, 6, 52;
savings, 6, 136-141;
services rendered by, 1-3;
state, 9, 68-70;
supply currency, 22;
trustee, 139
Berlin stock exchange, 165
Bills of exchange, 12, 17;
documented, 42
"Blue sky laws" of Kansas, 146
Bond houses, 144-147
Bonds, government, 96, 97;
mortgage, 148, 150, 169
Bonds and stocks, not liquid securities, 53
Book accounts, 12
Branch banking, 62, 64, 65
Bullion, 81, 82;
in Canada, 132;
in England, 105;
in France, 113;
in Germany, 122
Buying and selling on time, 11, 12
Cables in foreign exchange, 33
Canadian banking system, 126-135
Capital and surplus requirements for banks, 46-48;
stock, 47, 48
Cash, supply of, 35-40;
demands on banks, 55;
resources, 29
Casse Rurali, 162
Central banks of Europe, 8, 9, 65, 101;
England, 104-111;
France, 111-119;
German, 119-123
Charters, 8;
special, 66, 67
Checking accounts, 15, 20, 21, 24, 35
Checks, 15, 16, 21-24;
abroad, 36
Chicago, clearing center, 24;
central reserve banks, 78
Clearing house, 22-24;
center in New York, 80
Coin, 21;
and bank reserves, 38;
in England, 109;
in France, 117;
in Germany, 121, 122;
standard and subsidiary, 21;
supply, 40
Collections, 22, 25
Commercial banking, collections, 22;
currency, 21, 22;
domestic exchange, 25;
nature and operations of, 11-67;
other countries, 101-135;
problems of, 35;
promissory notes, 19;
protection against unsound practices of, 46-62;
savings accounts, 44;
in the United States, 68-100
Commercial paper, 11-14;
discount of, 14, 15, 17;
and investment paper, 41, 42;
liquid security, 53;
market for, 100
Competition in banking, 83
Comptoir d'Escompte de Paris, 115, 116
Conflict of functions and laws, 82
Cooperative banks, 139
Correspondent banks, 24, 25
Credit "acceptance" line, 103;
balance, 16, 18-20, 23, 25;
cooperation in, 166-168;
department in banks, 43, 86;
inflation of, 87;
"line" of, 16, 85, 86;
subsidies, state, county, and municipal, 169;
system, 11-13
Credits, forced liquidation of, 49
Credit Agricole, 162;
Foncier, 113;
Industrielle et Commercial, 115, 116;
Lyonnais, 115, 116
Crisis, commercial, 19, 31, 88
Currency, 21, 22;
lack of elasticity, 95-97
Debt paying, 13, 14
Debits, 15-18
Demand in foreign exchange, 33, 34
Deposits, 2-4
Depositors, mutual insurance of, 60-62
Discount, defined, 14;
loans and discounts, selection of, 40-43;
loans and rates, 44;
operation of, 13;
rate, Canadian, 128, 129;
bank of England, 108;
bank of France, 113;
reserve system, 95, 97;
stopped, 30
Discounted paper, 14, 15, 17-19, 55
Documented bill of exchange, 42
Domestic exchange, 25
Drafts, 16, 27, 28;
foreign payments, 31
England, bank of, 9, 104-111;
banking system, 104-111;
foreign and colonial, 108;
joint stock banks, 106;
metropolitan, 107;
private, 108;
provincial, 107;
reserve system, 108
Europe, commercial banking in, 101-126;
central banks of, 101-126;
land banks, 147-163
European investment banking machinery, 166
Exchange operations, 11-13;
checks, 22-24;
domestic, 25-31;
foreign, 31-34
Federal Reserve Banks, 98-100;
Federal Reserve Board, 99, 100
Foncier Algierienne, 162
Foreign exchange, 31-34;
_par of_, 31, 32;
classes of bills used, 33
France, bank of, 9, 111-115
French banking system, 111-119
German banking system, 119-126;
hypothekenaktienbanken, 151, 152;
investment banking machinery, 166;
land and mortgage banks, 147-161;
landschaften, 147-149;
Schulze-Delitzsch, 153-162;
Raiffeisen, 156-162
Germany, bank of, 9, 119-123
Gold element of currency, 5, 96;
points, 32, 33;
and silver coin in England, 105, 106;
in France, 113;
Canada, 133
Incorporation, 7;
should be required, 66
Independent treasury system, 75-78
Inflation, 49-53, 56-59;
of credit, 87
Inspection of banks, 59, 60
Insurance, mutual of depositors, 60, 62
Investment, banking, 136-170;
commercial paper, 41, 42;
confined to liquid securities, 52;
defects in machinery, 166;
improvement of machinery, 170;
paper, 18, 35, 41, 55;
of surplus funds, 3
Italy, land banks, 162, 163
Joint-stock mortgage banks, 169;
English joint-stock banks, 106;
German, 151-159
Kansas "blue sky laws," 146
Land banks, 147-163
Letters of credit, 21
"Line" of credit, 16, 85, 86
Liquidation, forced, 19, 88;
of credits, 49, 50;
protection against, 52
Liquid securities, 53
Loan operations, 85-88
Loans, 2, 3, 15, 86;
and discounts, selection of, 40-43;
Canadian system, 128, 129;
fluctuations, 97;
German land bank, 147-162;
in the interest of big business, 167;
limits to, 52, 55;
long-term, 2;
pernicious practice of national banks, 83;
and reserve system, 95;
short term, 2
Local banking, 62, 63
London stock exchange, 165
Mints, 5
Monetary commission, 97, 98
Money of the United States, 95
Mortgage banks, 169;
France, 160-162;
Germany, 148-163;
Italy, 162;
mortgage bonds, 169;
mortgage loans, long period, 167
Municipal banks, 139
National banks, 8, 9, 54, 70-75, 80, 82;
federal reserve, 98, 99;
money in vaults, 91;
notes, 96;
pernicious loan practices, 83;
subscribed to federal reserve banks, 98
National Reserve Association, 98
New York City, assay office, 81;
central reserve bank, 78;
clearing center, 24, 80, 81;
stock exchange, 81, 82, 92, 165
Notes, bank, 19-21;
central banks of Europe and supply of, 102;
Canadian, 126-133;
bank of England, 105;
of France, 117, 118;
of Germany, 121;
issue of, 19-21;
issue privileges, 37, 38;
government, 39;
limitation of issue, 58;
promissory notes, 43;
regulations regarding, 52;
safeguarding issue, 56;
volume of United States, 96
Oklahoma, mutual insurance plan, 60
Overdrafts, 16
"Panicky" conditions and feeling, 94, 95, 97
Par of exchange, 31, 32
Paris stock exchange, 165
Passbook, 15, 16
Postal savings banks, 139, 141
Promissory notes, 12, 14, 19-22, 43
Prior lien, on assets, 56, 58
Protection against unsound practices of banks, 46-52; 59-61
Publicity, a safeguard, 59
Rate of discount, law in France, 118;
of exchange, 26, 27
Rates, 44-46;
raising on loans and discounts, 29
Real estate and banks, 52
Reserve banks, Federal, 98-100;
central reserve, 78;
cities, 24, 78
Reserves, administration of funds, 100;
bank, 35;
English system, 108-110;
in national banks, 73;
operations of system, 91-94;
regulations regarding, 52, 54;
secondary, 35-40;
in state banks, 69;
in country banks, 73
Safety, in savings banks, 140;
fund, 56, 57
Savings banks, 6, 9;
defined, 139
Saving and saving institutions, 136-141
Secretary of the Treasury and surplus funds, 88-90
Securities, dealings in the stock exchange, 163, 164
Security, liquid, 53
Silver dollars, 96
Sixty-day bills in foreign exchange, 33, 34
Societe Algerienne, 114
Societe Generale, 115, 116
State banks, 9, 68-70, 79, 82;
and Federal reserve, 99
St. Louis, central reserve bank, 78;
clearing center, 24
Stock exchanges, 163-166
Stockholders, liability of, 46-48
Surplus, 17, 47
Trade or mercantile bills, 34
Treasury of the United States, 75-78;
operations, 88-90
Trust companies, 9, 141-144
Trustee banks, 139
United States, notes, volume of, 96;
subtreasury, 80, 81;
treasury, 75-78
Units of value and foreign exchange, 31
Vouchers, 23
Wisconsin, regulation laws, 146
The National Social Science Series
_Edited by Frank L. McVey, Ph.D., LL.D.,_
_President of the_
_University of North Dakota_
Now Ready
MONEY. WILLIAM A. SCOTT, Director of the Course in Commerce,
and Professor of Political Economy, University of Wisconsin
TAXATION. C. B. FILLEBROWN, President Massachusetts Single
Tax League, Author of _A B C of Taxation_
THE FAMILY AND SOCIETY. JOHN M. GILLETTE, Professor of
Sociology, University of North Dakota
BANKING. WILLIAM A. SCOTT
In Preparation
THE CITY. HENRY C. WRIGHT
TRUSTS AND COMPETITION. JOHN F. CROWELL
THE COST OF LIVING. WALTER E. CLARK
STATISTICS. W. B. BAILEY
BASIS OF COMMERCE. E. V. ROBINSON
PUBLIC FINANCE. CARL C. PLEHN
Each, Fifty Cents Net
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