4: Commercial Banking in the United States
(EN: Recall that this book was written in the early twentieth century, prior to the establishment of the Federal Reserve system, so there have been a number of significant changes to the banking industry - though I expect that much of the material here is still applicable.)
State Banks
Given that the US was until the Civil War a federation of independent and sovereign states, and it was for many years left to the separate states to manage their own industry and economy, including the establishment and regulation of banking. There were only brief periods in history (1791-1811 and 1816-1836) that there was a national bank - The First and Second Bank of the United States - which managed the banking business of the federal government and, by so doing, became a de facto national bank.
So even in the (author's) present day, state banks remain the most prevalent form of banking organization - far exceeding national banks in the number of customers they serve, but not in the gross amount of assets they manage.
Since each state has a free hand in regulating its banks, there are no uniform standards to the regulation of state banks. Generally speaking, states allow banks to maintain lower capital reserves, to be more liberal in underwriting loans, and are subject to less scrutiny and interference from their government.
Because they are less restricted, state banks have been able to flourish where national banks cannot.
National Banks
The national banking system exists largely as a consequence of the debt incurred during the Civil War. Banks were granted national charters in exchange for agreeing to purchase shares of the national debt in the form of government bonds. Banks were also given incentive to open in economically depressed towns and counties.
Banking regulations were document in an act that was originally passed in 1863, but has been amended several times since. At the time the book was written, national banks had rather broad privileges and could engage in commercial and investment banking. There were some limitations and exclusion (they could not invest in real estate, could not issue mortgages, etc.). The general intent was to make national banks support commerce and industry without interfering with the state banks support of retail banking operations.
The Treasury System
At the time this book was written, the United States Treasury managed the savings and debt of the US government. Prior to 1840 it had been kept in a either a single national bank or spread out among multiple institutions, but friction between the banks and the government led to the passage of the Treasury Act in 1840, which created the treasury department to manage government funds.
Even when there is no formal central bank, the US Treasury has de facto control over the money supply, the government commanding the majority of the nation's wealth. Its ability to demand large extensions of credit or to make large loans skews supply and demand of money and credit to a degree that outweighs the activities of any large institution or any number of smaller ones.
Hence the ebb and flow of funds between the coffers of the treasury and general circulation influences the availability of funds to any other borrower - and as the sole issue of legal tender (dollar bills and dollar-denominated coins, whether backed by specie or government credit) - it effectively dominates the money supply and, as a consequence, the inflation and interest rates of the banking industry.
Institutional Interrelations
The citizens of any city, town, or province may be served by any of a number of banks that choose to offer services in their area - choosing among a local bank or the branch office of a state or national bank. But the banks themselves are customers of one another - depositing and borrowing funds as necessary to maintain the capital they require to serve the borrowers and depositors in the areas they serve.
In general, a small bank maintains its daily working capital, but maintains a reservoir (or reserve) of money in the vaults of a larger bank. Local banks reserve with state banks, state with national, and national in a few major cities, with the largest banks located in New York, the hub of the US financial system.
As to international banking, most of the foreign exchange is handled in New York city, including the exchange of domestic and foreign notes and the import and export of coin and bullion. Most of the domestic production of gold and silver mines eventually passes through New York to be assayed and smelted. It's also mentioned the New York stock exchange is the major investment market through which the majority of the savings of the country are loaned or invested in industries.
Operations of the System
Various kinds of banking institution exist - local, state, and national banks along with credit unions, trust companies, and other oddments - largely because the functions of certain kinds of institution are defined by law. If an organization sees a need that cannot legally be served by one kind of institution, it will form a different kind to serve the needs of the market that demands a specific kind of services. This flexibility provides " a means of circumventing obnoxious laws" to engage in whatever means of business is needed and profitable to provide.
This of course results in some complicated arrangements. A bank that is forbidden to underwrite a mortgage loan may refer its customer to a mortgage bank to get one. In the background, the bank may extend a loan to the mortgage bank (which it is permitted to do), who provides a mortgage to the customer (that the original bank cannot). Clearly, the original bank has funded the mortgage through another institution to appear to comply with the law - both lender and borrower are served, though at slightly higher cost for the inefficiency of this arrangement.
A bit more is said about lending: because a single business may borrow various amounts from a bank over time, some efficiency is gained by giving as business a "line of credit" that allows these loans to be made with greater efficiency: the business may borrow up to the line and repay on a single schedule. By extending a line, the bank must trust in the dependability of the business to generate income, and will investigate that. The business owner may also provide collateral for the loan to increase his line or decrease the interest rate he will be charged.
It's also noted that banks are in communication about their clients, both commercial and residential, to ensure that a given individual isn't presenting the same collateral to multiple banks to obtain far more credit than that to which he is entitled. An examination of the books of any business will often reveal its income and payments, enabling a banker to detect the amount that has already been lent by other institutions. (EN: IN a roundabout way the author is describing the need for credit reporting agencies, such as exist today, to coordinate information about the creditworthiness of borrowers.)
While it has been said that the government is the most influential borrower and lender due to the vast sums it has at its command from taxpayer revenues, it is also observed that banks as a while maintain a far greater reserve: each bank has on deposit the funds of all its customers, and maintains some reserve to meet the demand for withdrawals. But each bank has great leeway in the amount it maintains in reserve. Most have more than required by their charter and, at their discretion, can lend that money and put it into circulation. If demand for capital causes many banks to loan more of their reserves, the banks (rather than the treasury) would have the ability to significantly increase the money supply of the nation.
In that sense, while certain banks manage the vast treasury of the national government, all banks manage the far vaster treasury of the people of the nation. But because the people are not of one mind and do not act in unison, the "power" of the banks to intentionally and purposefully influence the money supply are limited.
There is a bit of nit-picking of the system and speculation of what might happen if there were a sudden and widespread demand of capital. The reserve system has been put into place to bolster the security of the nation's banking system - but it is by no means ironclad protection against any possible event. If an unusual number of borrowers default while an unusual number of depositors demand the return of their funds, any bank can be broken.
There is some consideration of the "money" of the author's time (EN: which is a historical account to the present day). Some part of the national money is backed by gold and silver reserves and some of it is backed by the goodwill of government - which is to say revenue that will be collected in taxes in the future. The government may issue notes of credit in unlimited number, voluntarily restrained by the knowledge that abusing this privilege will cause the value of money to diminish. In times of peace and prosperity, it is easy enough to behave - but when there is crisis or deprivation, the temptation is there for brinksmanship.
Plans for Reform
The author mentions the Panic of 1907 (EN: which is around the time this book was written), in which a loss of confidence caused a run on banks and a fire-sale of investments, resulting in a 50% drop in stock exchange. A few wealthy individuals and banks pledged large sums of money to shore up the banking system, and managed to avoid a collapse and restore consumer confidence within about three weeks. At the time the book was written, Congress was debating the creation of a Federal Reserve System and the author details some of the proposals under debate.
(EN: the Federal Reserve System would be established in 1913. I have not assessed the accuracy of the author's speculation, nor is it particularly useful. I suggest consulting a more recent source for accurate information about the Federal Reserve.)