CHAPTER XXIII TYPES OF BANKING SYSTEMS I. BANKING SYSTEMS GROUPED ACCORDING TO ORGANIZATION. FROM what has been said in the foregoing chapters it will have been seen that banking experience in the different countries of the world has evolved several types of banking systems. Writers on banking sometimes speak as if there were one kind or character of banking system which is more "scientific" than another, or as if the evolution of banking had pointed definitely to some single type of organization which was regarded as the most desirable or perfect. Much of this kind of suggestion has often been given to the public in the course of banking "reform" or monetary "education" movements. There is no foundation for the supposition that one kind of banking organization is necessarily better than another. Banking, like other phases of business organization, is closely related to the business community in which it exists, and depends much for its efficiency and success upon its adaptation to local customs. It is not even true that the so-called banking principles relating to liquidity, short-term loans, reserves, etc., have any universal force. They depend entirely upon the general conditions under which banks operate, the demands of the community in which they are situated, and other factors. So, in developing a system of banking the essential test of its satisfactoriness is found in adaptation to conditions. It is, therefore, true that banking systems throughout the world differ very widely from one another, and they must be judged by their adaptability and success in practice. From a broad general standpoint, however, it is possible to recognize several types of banking systems. Looked at from the point of view of the legal basis or status in the matter of organization, the three following chief groups may be recognized: (1) The central banking systems, of which the banks of England, France, and others of similar kind are the best examples; (2) The independent-charter banking systems, of which the Canadian is probably the best known; and (3) The free banking systems, best represented by the national banking system of the United States. II. CENTRAL BANKING SYSTEM OF GREAT BRITAIN. In the case of the central banking systems there has been developed a nucleus which represents practically the combined banking strength or the pooling of bank reserves of the community. Other banks are then offshoots from such an institution, such as the Bank of England, not in the sense that they are owned or directed by it, but simply in that they look to it for guidance and direction, shape their policies in accordance with its doings more or less, and count upon its aid under certain given conditions. Before the opening of the European War it was believed that the British banking system was perhaps the best type of organization. That banking system included a number of large, strong institutions organized for the performance of regular commercial banking operations in England. These banks had themselves in many cases been developed out of a considerable number of other banks, so that each of them represented a pooling of interests. Each such bank had a considerable number of branches scattered throughout the United Kingdom, while the main office was usually in London. The Bank of England was thus surrounded by a group of strong commercial institutions. At other points in the United Kingdom were situated the headquarters of other banking systems. Thus in Scotland and Ireland independently organized institutions existed, each with its set of branches, and such banks usually had a branch in London for the purpose of transacting business with the Bank of England or of participating in the general financial market at that place. In all, there were in the United Kingdom probably about ninety banks with interlacing systems of branches; but the whole banking structure was practically dominated by a few strong banks with headquarters in London, to which reference has already been made. The Bank of England, as the result of long practice and custom, was the holder of the bulk of the reserves of these banks. At times before the war the bulk of the cash held by the banks fell as low as 3 or 4 per cent of outstanding liabilities, and various banking authorities were inclined. to view this with some alarm. The Bank of England, however, by maintaining a strong reserve and a liquid portfolio, kept itself in position constantly to meet the demands of the other banks, and consequently no British bank which was in possession of paper eligible for discount or salable in the open market was ever without the means of providing cash with which to meet the demands of its depositors. During the war, as elsewhere observed, there was a change in this state of affairs, the British banks amalgamating into a still smaller number of institutions. Confining attention, however, to the pre-war situation, we may say that the British banking system was practically a pure central bank organization. III. INDEPENDENT-CHARTER SYSTEM OF BRITISH COLONIES. As contrasted with this highly centralized, highly organized banking system of Great Britain, attention may be given to the colonial systems of banking, of which those of Canada and Australia are good examples. In each of these countries there has been organized a relatively small number of banking establishments. In some instances colonial banks have been created under a general incorporation law like our National Bank Act, but subject to restrictions which kept the number of such banks very small. In others the banks were created through special charter which authorized the establishment of a banking institution vested with specified duties and powers. Whichever plan was followed, the result was practically the same in that the outcome was the creation of a comparatively small number |