stock exchange. The fluctuations of these particular rates are typical of the others in each class.

It will be observed that in all their principal and in most of their minor fluctuations these three rates move together. In degree of change the call-loan rate was decidedly the champion, the 60-day time rate, as a rule, occupying second, and the commercial-paper rate third place. The cases in which these statements do not hold true are decidedly exceptional. These facts point clearly to influences common to all the rates as the chief causes of their fluctuations. These causes are to be found in the influences which affect the relations between the supply of and demand for loanable funds in the New York market.

V

RELATIONS BETWEEN BANKS

Introduction

In the foregoing chapter the bank has been studied as a type of business institution, and as such treated by itself alone, that is, independently of other banks. In actual practice, however, a bank is never isolated in this way. In the ordinary conduct of its business every bank is in many ways brought into contact with other banks-with those in the same city or community, with those in other cities, and even with the institutions of other countries. The development of the present interrelations of banking institutions has been partly due to a desire to effect certain economies in the conduct of the banking business; but it has also been due to a very considerable degreemuch more than has been generally realized-to the driving force of competition under conditions that were proving mutually disadvantageous, if not disastrous, just as the combination movement in industry was originally due in no small degree to the disastrous results of various practices inherent in competition.

Within a given city, for instance, the banks are constantly brought into relations through the daily granting of loans. The extent to which any bank may loan is dependent in part upon the extent to which other banks are loaning. And when the reserves of any particular bank are low there are numerous means by which it may increase its loaning power at the expense of, or through permission of, its competitors. One of the most important reasons for the establishment of clearing-houses appears to have been the common practice among banks of making use of each other's funds between settlement days. The clearing-house, once organized, has, moreover, come to serve the banks of a given community in a great variety of ways. Among these the clearing of checks has attracted the most attention; in fact, the clearing-house in this regard is one of the wonders of the modern world. There is something about this daily settlement of many millions of obligations in the space of a few minutes that makes a tremendous appeal to the imagination. Yet, after all, the "clearing" is merely an interesting, and relatively simple, labor-saving device,

and at the present time cannot be regarded as the most important function performed by the clearing-house.

By the "system as a whole" is meant not only the banks of a given community but those of the entire country, for though independently organized they are all inextricably bound together by mutual interests. These interrelations are discussed under two headings: first, the general relations that exist in the conduct of daily business, and, secondly, the peculiar relations that develop periodically with the ebb and flow of business activity. This periodical tension and ease in the system as a whole is, moreover, of two sorts, seasonal and cyclical, each of which has its own peculiar problems. It is in connection with these seasonal and cyclical variations, in fact, that the hardest problems of banking organization and control arise.

The banks through their clearing-house associations have endeavored to control certain competitive practices that work havoc in the system as a whole in every period of stress in the money market. To some extent they have been successful in this voluntary regulation of the machinery of banking; but in certain respects the immediate selfinterest of the independent members of the system has always proved too powerful to be controlled by voluntary association. Even though many, or even the great majority, of the banks of the system be willing and anxious to sacrifice immediate gains for the sake of saving the entire structure from crumbling, they are powerless to resist the minority. When some strike out to save themselves, leaving the system as a whole to its fate, the rest must follow suit, for the system is then already crumbling, and self-preservation becomes the first law of banking.

When the strain on the system is great at one point, some relief has often been gained by calling upon banks in some other part of the country; but there are limits to this in consequence of the independent basis of organization of our banks, and for the reasons suggested above. When the strain on the entire system becomes severe, relief has frequently been sought from the federal treasury; but this, too, is a limited source of aid. Finally, gold may be imported from other countries when the supply of loanable funds is inadequate to meet the requirements of business. At times some assistance has been procured from this source, but one of the striking weaknesses of our independent banking system has been the lack of effective machinery for controlling the international flow of specie; gold has often flowed out of the country at the very time when it was needed as a basis for domestic loans.

When all means of procuring elsewhere the additional funds needed in time of monetary stringency have failed or been exhausted, there still remains the alternative of manufacturing more currency that can serve as the basis of credit expansion. But under our national banking system our currency always proved inelastic; it could not readily be increased in quantity to meet the requirements of the situation in time of stringency, nor could the quantity be easily reduced during periods of monetary ease. This inelasticity, however, was due not so much to the system of independent banking as to the nature of the security required by law for the notes issued by the national banks. Through the use of clearing-house loan certificates and the equalization of reserves the banks have at times been able to save the financial system from breaking under the strain, but generally the inability of a voluntary association to control the policy of all its members has resulted in disaster for all. Government regu lation and government provision for an elastic currency appear, therefore, to be a necessity.

A. Within a Given City

(1) LOANING RELATIONS

42. RESERVES OF CLEARING-HOUSE BANKS AND TRUST COMPANIES IN NEW YORK'