holder-supplies the fluctuating additional amount. Speculation here performs its second function-namely, that of directing the flow of capital into investment. Turning to the last form of investment, direct loans to the individual enterprise, in order to involve the time element, are practically made for employment as fixed capital. There is, however, a shading in time, both of loan and of operation to which the same is applied, between such loans and commercial loans, and a large twilight zone exists.

IV

LIMITATIONS ON LOANS BY NATIONAL BANKS

From the National Bank Act as amended, the Federal Reserve Act, and other laws relating to national banks. Section 5200 (as amended 1919).

(See text, pp. 150-153)

"The total liabilities to any association of any person or of any company, corporation, or firm for money borrowed, including in the liabilities of a company or firm the liabilities of the several members thereof, shall at no time exceed 10 per centum of the amount of the capital stock of such association, actually paid in and unimpaired, and 10 per centum of its unimpaired surplus fund: Provided, however, That (1) the discount of bills of exchange drawn in good faith against actually existing values, including drafts and bills of exchange secured by shipping documents conveying or securing title to goods shipped, and including demand obligations when secured by documents covering commodities in actual process of shipment, and also including bankers' acceptances of the kinds described in Section 13 of the Federal Reserve Act, (2) the discount of commercial or business paper actually owned by the person, company, corporation, or firm negotiating the same, (3) the discount of notes secured by shipping documents, warehouse receipts, or other such documents conveying or securing title covering readily marketable non-perishable staples, including live stock, when the actual market value of the property securing the obligations is not at any time. less than 115 per centum of the face amount of the notes secured by such documents and when such property is fully covered by insurance, and (4) the discount of any note or notes secured by not less than a like face amount of

bonds, or notes of the United States issued since April 24, 1917, or certificates of indebtedness of the United States, shall not be considered as money borrowed within the meaning of this section. The total liabilities to any association, of any person or of any corporation, or firms, or company, or the several members thereof upon any note or notes purchased or discounted by such association and secured by bonds, notes, or certificates of indebtedness as described in (4) hereof shall not exceed (except to the extent permitted by rules and regulations prescribed by the Comptroller of the Currency, with the approval of the Secretary of the Treasury) 10 per centum of such capital stock and surplus fund of such association and the total liabilities to any association of any person or of any corporation, or firm, or company, or the several members thereof for money borrowed, including the liabilities upon notes secured in the manner described under (3) hereof, except transactions (1), (2), and (4), shall not at any time exceed 25 per centum of the amount of the association's paid-in and unimpaired capital stock and surplus. The exception made under (3) hereof shall not apply to the notes of any one person, corporation or firm or company, or the several members thereof for more than six months in any consecutive twelve months."

V

INTERBANK LOANS

Adapted from articles by W. H. Steiner, in Federal Reserve Bulletin, June, 1920; January, May, 1921.

(See text, pp. 240-241)

The methods which are followed in extending accommodation to banks differ in important particulars from those followed in extending accommodation to mercantile houses. With the latter, borrowing is assumed to be a natural and recurring operation. The general situation of the enterprise is considered, and on this basis a line of credit is extended. Borrowing by a bank, however, is usually not so regarded. Instead of viewing its transaction as a whole, and on this basis determining the line of accommodation, it is desired rather to go back to the general operations and to consider the specific transactions which occur. This is the case to the extent at least of having the paper representing these transactions as collateral, and analyzing these bills receivable to some extent. In consequence, no line of credit is generally fixed, but each individual case is considered on its merits, specific amounts being granted as needed. The line of credit is therefore employed only in a somewhat restricted sense. The position which is taken with respect to bank borrowing is well stated by one institution as follows: "We avoid as far as possible suggesting lines or limits as to the extent we would serve the borrower, simply indicating our disposition to fully meet their reasonable requirements in liberal proportion to balances maintained and with due regard to the amount of their capital investment and borrowing elsewhere, but frequently the borrowers suggest lines themselves which

are agreed to if circumstances warrant, conditioned on everything continuing satisfactorily." Some institutions, however, make it a regular practice to fix lines for their bank as well as for their mercantile accounts, while some institutions fix lines only for those banks which are regularly in need of funds each year. The amount loaned is also limited in the case of national banks by Section 5202 of the revised statutes, covering indebtedness for loans or rediscounts, other than with the Federal Reserve banks, to the amount of unimpaired capital, and in many states there are provisions covering this matter.

The practice of institutions with respect to credit files on their bank accounts differs greatly. Some institutions keep a very elaborate file, whereas others rely much more largely upon the general acquaintance which the individual officers in charge have with the account. In a broad way the information which is considered is composed of the following: (1) statements of the institution; (2) experience of other institutions with the subject; (3) agency reports, which are, however, frequently not obtained; (4) reports of representatives; and (5) miscellaneous data such as newspaper clippings, special memoranda concerning the handling of the account, etc. New York banks in particular pay much attention to the experience which other institutions bave had with the subject, and inquiry is usually made from a number of the latter's correspondents concerning the general standing of the bank in the community, its prospects, etc., the character, ability, and conservatism of its management, and the relations which the bank has had with the subject Some of the Western and Southwestern institutions, which are in much closer contact with their borrowing accounts, do not make it a practice to communicate extensively with their correspondents, nor do they regularly employ representatives as in the case, for example, of New York banks.

Borrowing, in general, is of two classes-(1) for seasonal needs and (2) for extraordinary needs and special purposes. Banks generally insist that the borrower clean up its loans for a reasonable part of each year. The seasonal clean-up