Imagens da página
PDF
ePub

connected therewith, all to the profit of big business and to the injury of small banks.

4. The large profits of reserve banks in contrast to the small dividends allowed by law to the member banks, who are also required to maintain all of their reserves in the reserve banks without any interest upon them. 5. The failure to check speculation.

Some of the above criticism is now groundless since the reserve banks have modified their par-clearance plan for the collection of checks (see 75). Hereafter no check of a non-member bank that does not wish to remit at par will be accepted for deposit or collection. To that extent the protesting non-member banks have won their fight; but the dissatisfied member banks are in the same position as before.

In regard to the par-clearance controversy the Bankers' Magazine says: "The banks that are fighting to maintain the privilege of making an exchange charge may find in time more than ample compensation for what they have lost, and thus disarm themselves of the opposition they have shown in the matter." 7

Many people are greatly concerned over the danger in which the system is, due to the possibility of political control, class domination, and legislative meddling. They cite recent amendments to the reserve act and the way in which a change was brought about in the personnel of the management of the system as indications of a trend that forebodes evil.

247. The results of the system. 1. It has broadened the powers of the national banks and enabled them to compete on more nearly equal terms with their rivals organized under state law.

2. It has unified the national banks of the country. The reserves are mobilized in each district and the authority 7 Bankers' Magazine, May, 1920, p. 701,

THE RESULTS OF THE SYSTEM

329

of the Board to require one reserve bank to rediscount for another, practically mobilizes the banking reserves of the member banks in one pool. If nearly all state banks were to become members the banks of the United States would be unified in one system. About 40% of the banking reserves of the nation belong to national banks. The largest state banks are members of the Federal reserve system. Again the state banks are closely related in a business way with the national banks. They deposit with them as reserve agents, they borrow from them. The unity is far greater than the figures indicate.

3. Reserves are not only mobilized but they may be used. The Federal Reserve Board can in emergency suspend the requirements of reserves against deposits.

4. Supervision has been made more effective. The Federal Reserve Board regulates closely the Federal reserve banks. These regulations as to deposits, reserves, and loans, necessitate uniform compliance by member banks all over the country. The supervision has affected even the borrowers of the member banks, because rules of eligibility for commercial paper must be carried out. State member banks are examined by examiners of the Federal reserve banks approved by the Federal Reserve Board. National member banks are examined under the direction of the Comptroller of the Currency. They are also subject to examination by the Federal Reserve Board.

5. It has transferred the control of banking operations to a Board appointed to represent the interests of the nation at large.

6. It has given the United States a fiscal agency that reaches to every nook of the United States and to every important financial center of the world.

7. It has provided for great sectional centers of finance each capable of supplying the peculiar needs of the district around it.

8. It has created an economical system of transferring funds from one center to another and for collecting checks. 9. It has standardized commercial paper and drawn a sharp line between liquid and permanent loans.

10. It has created a rediscount market and stimulated the development of a private discount market.

11. It has furnished an elastic currency responsive to the demands of the country. So far the power to contract is not automatic like the power to expand.

12. It has inspired confidence in the financial mechanism of the United States. It has eliminated undue fear. No sound business need fail from lack of loans. The Federal reserve system is here to stay. It will be criticised but even the bitter opponent of some feature prefaces his attack by a statement of loyalty to the system. A banker who but once has borrowed from a Federal reserve bank says he does not know what his bank would have done during the Great War but for the system. Some banks complain at the small return on the investment, but they have set aside only 3% of their capital and surplus. That means that by making an investment of approximately 3/5% of their deposits upon which they get a 6% return they have insured themselves against a panic of their depositors during a business depression.

CHAPTER XXI

THE WORK OF THE INVESTMENT BANKER

248. Need of more permanent capital. There is no doubt but that too many bank loans are of a permanent character. In numerous places the commercial banks have been pulled into a silent partnership with their customers. Loans are made which are not liquid. They may be demand loans, but the months, even years, go by; interest is paid monthly, quarterly, or semi-annually, but the principal is not paid. The loan is safe for a long-term loan; the borrower's assets far exceed his liabilities, but as it is not liquid, it constitutes an element of danger. In many cases the bank knows such a loan is beyond "call," and that if payment were demanded, a shortage of working capital would lead to the embarrassment of the borrower. It is better for a business to get permanent capital by offering for sale its long-term bonds, or its preferred stock, and reserve its bank credit for seasonal or self-liquidating loans. Such capital makes a business more certain of its position. There is no trouble as to renewals and a saving results in some cases due to paying the interest, or its equivalent, at the end of a year, instead of oftener, or perhaps in advance. The ownership of stock or mortgages in concerns which are solid enough to get practically permanent capital from banks, would give the thrifty saver an income in excess of that which he is now receiving. If he scatters his risks, he can even afford some losses. The selling of the securities of safe corporations to the investor, whether he does it on a merchant or commission basis, and the giving of advice to both the business which seeks

capital and the investor who seeks income, is the peculiar work of a financial expert, a banker. Advice as to investments and the dealing in high-grade securities is within the province of any bank. Besides there have grown up companies that specialize in the sale of investments. The investor must pick his investment banker as carefully as he would pick his jeweler. Let him select one that has gathered together the best offerings of the world. The corporation must pick a seller of its securities, who will add confidence and prestige to their worth (see 86).

249. Kinds of securities. There are two main classes of securities: (1) those which represent ownership of a business, and (2) those which represent the indebtedness of a business. A share of stock is a certificate of ownership of a portion of the corporation which legally owns the property of a business. These certificates are called "stock." The holders of stock are entitled to share in any distribution of profits which may be made, and in the distribution of assets whenever the affairs of the business are wound up. If a corporation secures funds for which it does not give stock, it gives in return therefor evidences of indebtedness, and obligates itself to return the principal at the end of a given period and to pay a certain rate of interest throughout the duration of the loan. These certificates of indebtedness vary in form. They are usually bonds or notes. The holders of these obligations are creditors of the business. They have a claim upon all the assets which is superior to an owner's claim.

250. Ownership securities. — (1) Common stock. Many corporations have only this class of stock. It has no special or peculiar rights. After all the claims of the floating debt, the bonds, and the preferred stock, have been met, this stock is entitled to receive the profits, if any. Entire control of the business is often vested in this stock.

« AnteriorContinuar »