I THE VARIOUS FORMS AND SERVICES OF BANKING Introductory It is impossible to give a precise definition of banking, for the reason that at one time or another the most widely differing economic functions or services have been designated by the term. Even now it includes various forms of financial operations based on substantially different principles. Numerous writers, however, ignoring the popular or business connotations of the word, have attempted to limit the discussion of banking to a particular type of operation, namely, the creation of notes or checks, which are payable on demand, and which thereby furnish media of exchange to supplement the work of money proper in the economic process. While this type of operation is unquestionably of great importance, it is nevertheless only one form of banking, and to treat of it exclusively is to narrow the field to an extent that affords an entirely inadequate understanding of the subject. It is the purpose of the readings in this chapter, first, to set forth in a very general way the two fundamental types of banking operations-the commercial and the investment; second, to enumerate the various forms of banking institutions that have been developed in the carrying out of these fundamental operations; and third, to indicate the great variety of services that are in fact performed by the typical commercial banking institution. All of this is but introductory, however-designed to afford a sort of bird's-eye view of the problem of banking as a whole, and to serve as a point of departure for the detailed study to follow. It should perhaps be added here that banking (using the term loosely) is one of the oldest of institutions, dating back to a remote antiquity. Archaeologists have discovered, for instance, that Assyria, as early as eight centuries before the Christian era, appears to have had a well-developed system of bills of exchange, promissory notes, and transfer checks, very similar to those of our own day. Among the Greeks and Romans, also, most of the operations typical of modern banking were common. The Middle Ages, however, was a period of stagnation in banking affairs, as in practically everything else, and it was not until the twelfth century that modern banking history began. In the great commercial cities of Italy and Spain banking developed rapidly between the twelfth and the sixteenth centuries and appears to have been characterized by many of the problems that confront us today. A little later the famous bank of Amsterdam, though of a simple type, was largely responsible for the commercial pre-eminence enjoyed by Holland in the sixteenth and seventeenth centuries. The way in which modern banking originated in England and the general character of the services performed are indicated by the selection on "Goldsmith Bankers in England." A noteworthy feature of banking in mediaeval Europe was the rise, along with commercial institutions, of numerous great investment bankers or financiers who, through their control of enormous capital resources, were at times almost able to sway the destinies of nations. The Money Trust appears to have been quite as menacing then as now! I. COMMERCIAL VERSUS INVESTMENT BANKING' BY WILLIAM A. SCOTT In order to draw the line between commercial and investment banks, attention must be riveted upon the functions which each performs in the economy of the nation. Commercial banks are essential parts of the machinery by which goods and services are exchanged in the everyday conduct of business. Investment banks are essential parts of the machinery by which the savings of the people are collected and applied to the production and transportation of goods and to the service of such public bodies as the federal, state, county, township, and municipal governments. In order to comprehend the precise rôle which commercial banks play in the daily exchange of goods and services, we must note certain features of our credit system. To sell and to buy on time are very common practices in modern business. The manufacturer frequently buys raw materials and agrees to pay for them after their transforma Adapted from "Investment vs. Commercial Banking," Proceedings of the Second Annual Convention of the Investment Bankers Association of America, 1913, pp. 76-80. tion into completed products. The jobber frequently buys goods to be paid for after he has sold them. The farmer frequently buys seed, fertilizer, cattle for fattening, etc., to be paid for when the crop has been harvested or the animals sold to the butcher. The explanation of these practices is to be found in the growing separation of producers and consumers and in the lengthening of the period of production caused by the constant extension of the areas within which goods are marketed and of the use of machinery in manufacturing. Before paying for them consumers like to receive the goods purchased, and middlemen not only to receive them but to sell them again. Manufacturers find advantage in being able to pay for labor and raw products after they have been transformed into completed goods and sold to middlemen or consumers. Hence an interval must elapse between purchase and payment measured by the length of time required for the transportation, selling, and manufacturing processes. The practice of buying and selling on time results in making practically every business man both a debtor and a creditor, and renders it necessary for each one to meet his debts as they mature by means of the amounts paid by others in settlement of their obligations to him. It is rarely possible, however, for a business man to make the maturities of the debts due him and the debts due by him to others exactly correspond, and he therefore finds himself under the necessity of transforming into means of payment the obligations of other people due in the future. This service the commercial bank performs for him, and in this consists its unique function in the national economy. The means by which this service is performed is the discount of the evidences of indebtedness of others to him, or of his own personal notes, and this in the vast majority of cases is accomplished in this country by exchanging these credit documents for balances on a checking account, which balances can be transferred at will to other people at home, in other cities, or in other countries or transformed into hand-to-hand money. The service rendered by the investment bank differs greatly from that of the commercial. It acts as an intermediary between the person who has accumulated capital and those who are in a position to invest it in fixed forms. Two processes are here involved: the accumulation of the savings of the community on the one hand, the development of natural resources and the construction and management of |