CHAPTER XXXI

ECONOMIC SIGNIFICANCE OF BANKING

I. PERMANENCE OF PRESENT FORM OF BANKING.

A REVIEW of the present practice of banking and the elements of financial theory upon which it is founded suggests to the student of the subject certain broader considerations which must be taken into account in forming a general conception of the subject and in giving it its proper place both as an important, not to say fundamental, phase of modern economic organization, and as a highly developed department of business life. The business man is inclined to accept existing institutions for what they are, and to use and deal with them in their present form and without a very critical estimate of their significance. This is unavoidable. Business activity is immediate and practical and is concerned with the attainment of results rather than with the alteration or reform of methods.

Nevertheless, it is true that business life is progressive and that all economic institutions are undergoing a process of steady evolution and change. The broad-minded student of business, and equally as much so the broad-minded participant in business, will therefore make a far more intelligent and effective use of the institutions with which he comes into contact if he accustoms himself to recognize their general social significance and their place in the economic organization of society.

In the opening chapter of the present volume it was explained that the banking and credit organization of modern business is practically essential to the maintenance of the principle of the division of labor and to the more complete and full development of such division. This may perhaps be taken as unquestionable; as nothing more than

the statement of a more or less obvious economic fact. From it, however, certain inferences must be drawn and upon it certain conclusions must rest.

II. CONTINUATION OF DIVISION OF LABOR.

The first question which suggests itself with respect to banking in its present form is probably the recurrent question which is always asked as to all economic forms-how far is it permanent, and how far is it merely a transitional stage of activity which will sooner or later pass into another? The preliminary answer to this question is afforded when we inquire how permanent the principle of division of labor is likely to be. If it be assumed that large-scale production is a desirable feature of economic organization and that the development of skill in special lines is to be encouraged, the conclusion seems almost inevitable that a régimé of continuously greater division of labor may be expected to go on indefinitely developing. This is stated with full consciousness that some theorists believe that such division of labor has been carried too far and that in the future there may be a tendency toward greater individualization of production with a less highly interdependent relationship of the different classes of society. A more difficult phase of the question is raised when it is inquired whether division of labor on the present basis is to be regarded as largely an outgrowth of what is called capitalistic enterprise, and whether, as it advances in the scope and efficiency of its undertakings, it may not be possible gradually to do away with what we now call individual ownership or capitalist production, and to substitute community effort or production. Such a discussion in its broad terms would be out of place here; and it is desired only to draw attention to the relation of banking to this phase of economic inquiry. There have been some theorists, especially within recent years, who have not hesitated to express the view that the use of money and credit in their present form is injurious, and to say that as industry is socialized, not only money, but also probably banking as we now know it, will become obsolete. Apparently the

basis of such views is found in the thought that an omnipotent state, with the entire resources of the community in its control and with unlimited means of information open to it, will be able to assign duties artificially to given classes or individuals, and thereby to determine what shall and what shall not be produced, and the proportions in which goods shall exchange.

III. FUTURE POSITION OF BANKING.

Supposing that such a development were possible, what would be the effect of it upon the situation of banking? It would presumably render unnecessary the present arrangements between individuals and industrial groups which are undertaken for the purpose of carrying on production by the use of credit, and of distributing the output of industry to the various consumers who may or may not be willing to absorb it in the proportion in which it has been created. The view that banking in the abstract is not a necessary occupation, but is one of those "middleman enterprises" which may theoretically be dispensed with, is probably as tenable as any other of the elements of the theory of government activity or interposition in industry. It should be observed, however, that the gradual elimination of banking as an element in economic organization depends upon the substitution of something else which will take its place and will perform a similar servicealways assuming, as already stated, the existence and probable increase of division of labor. That something which must thus be supplied is clearly an ability to adjust production to consumption, and to distribute the productive forces of society among the objects to which they are to be assigned in such a way as to bring about an even balance. Reduction of the importance of banking will be deferred, therefore, until such time as absolute knowledge of consumers' tastes, preferences, and disposition to purchase can be obtained, and until some overruling authority is able to force industry into the channels which are necessary to produce commodities in these relative proportions and to keep industrial activity out of all others. That this is a

state of things which is likely to be so long deferred that it may be expected from the human standpoint never to take place, would seem to be an accurate conclusion, and accordingly the inference must be drawn that banking is, in the ordinary sense of the term, a permanent element or factor in economic life as we know it. It is not likely that an increase of state activity or the growth of socialistic practices will in any considerable degree dispense with banking as a means to the proper conduct of economic activities of society. Rather is it true that a continued evolution of the state and an increase of its functions will be successful about in the proportion in which an active and effective credit and banking system is employed for the purpose of guiding, directing, and determining the lines along which such state activity can well be directed. The probability would seem to be that banking, far from declining in importance or being discarded, will become a more and more important industrial agency.

IV. PUBLIC SERVICE NATURE OF FUTURE BANKING.

The direction of its development is not toward atrophy, but is rather toward expansion along new lines and with new purposes. These purposes are essentially those of public service. As industrial organization becomes more complex and as the effect of banking upon industry and prices is better and better recognized, it becomes more and more necessary to provide regular access to credit and not to leave such access open to chance or casual bargaining. In all institutions which have been developed as the result of modern specialization of industry, the gradual evolution has been in the direction of a recognition of public-service qualities. Two hundred years ago even ordinary roads were regarded as private property and tolls were charged for passage over them. The same was true of bridges, and when railroads came into existence it was a long time before their position as common carriers was recognized and rates and fares reduced to a standard basis, while the duty of maintaining regular service was insisted upon. In the same way banking, which began as money lending and

whose service as well as the charge for it has for many years been the subject of negotiation and bargaining, is tending more and more to assume a standardized form. This standardization is seen to best advantage in the increasing unity and similarity of commercial banking requirements, in the practical identity of different types of paper, and in many other ways. It appears also in the constant demand that provision shall be made for credit for the moving of crops and for all sorts of necessary operations which shall not be dependent upon private enterprise or activity, but shall be the result of community action. It is the perception of the public-service nature of banking, no doubt, that has led some nations and states to enter the business. The belief that access to credit has been cut off or unduly restricted by combinations of capital in order to drive individuals out of business or to promote the prosperity of others, is difficult to prove in any particular instance. It is probably seldom attempted in the crude forms that are sometimes referred to in current prints. Knowledge of economic history, however, shows how transportation was used for competitive purposes, and there is no reason to doubt that a similar misuse could be made of banking and credit. A recognition, therefore, of credit facilities as practically an essential necessity of business leads further to a recognition of full public-service character, and hence to the safeguarding of conditions under which banks operate and under which loans may be granted.

No success has thus far been had either in regulating rates of interest or in controlling the conditions under which loans are made or the amount of accommodation to be extended on specified security. Public-owned banks when organized have been unsuccessful in the majority of cases. Better success has been had with co-operative banking enterprises, best exemplified in various rural credit undertakings, but even these have found their success greatest when their operations were simplest and most closely standardized, while their success has been least in those cases in which they ventured into complex transactions