Under the operation of the national banking act, New York, Chicago, and St. Louis have been designated as central reserve, and forty-seven other cities as reserve cities. The national banks in these reserve cities act as reserve agents for national banks in the cities and towns not so designated and ordinarily receive on deposit the major part of their reserves plus surplus funds not needed for local purposes. Banks in the central reserve cities act as reserve agents for the banks in the reserve cities as well as for country banks, and on account of their importance as commercial and investment centers receive and hold in the form of bankers' balances a large part of the reserve funds as well as the surplus investment funds of the national banks of the entire country.
State banks and trust companies manage their reserve and surplus investment funds in substantially the same manner as national banks, using national banks in the reserve and central reserve cities as their reserve agents. State laws usually allow approved state banks and trust companies also to act as reserve agents for the banks and trust companies under their jurisdiction, but these approved banks are generally located in the reserve and central reserve cities, and themselves employ the national banks there located as their reserve agents, thus forming simply an additional conduit through which the reserve and surplus investment funds of state banks and trust companies reach the central money reservoirs administered by national banks in the central reserve cities.
National banks in the reserve and central reserve cities are also clearing centers for the enormous volume of checks and drafts which the administration of the checking accounts of the banks and trust companies of the country bring into existence. They act as correspondents as well as reserve agents for these other banks and trust companies, and in this capacity collect out-of-town checks and drafts and conduct checking accounts for them. Within these cities, as well as in hundreds of others, clearing house associations conduct the local clearings and also act as agencies through which national and state banks and trust companies cooperate in the promotion of common interests.
The center of the entire system is in New York City. The clearing house association of that city, consisting of over fifty national and state banks and trust companies, includes the banks the vaults of which constitute the central money reservoir of the country and which constitute the center of the country's clearing system. Through the New York subtreasury pass the greater part of the receipts and disbursements of the government, and the chief assay office in the country is located there. The New York stock exchange is our only stock and bond market of national scope, and consequently the investment center of the country.
The Associated Banks of New York City, as the members of the clearing house association are called, hold the greater part of the reserves of the banks and trust companies not required by law to be kept in the local vaults, as well as the greater part of the surplus investment funds of the entire country. It is through the operation of the New York subtreasury on the reserves of the Associated Banks that the chief influence of the independent treasury system on the banking business of the country is exerted, the greater part of the government's receipts coming directly out of those reserves, and a large part of the expenditures going into them, and the greater part of the money deposited in national banks by the Secretary of the Treasury going directly or indirectly into New York institutions. Most of the exports and imports of coin and bullion pass through New York, and the major portion of the foreign exchanges of the entire country are there effected. The New York Assay Office receives and distributes the greater part of the new supplies of gold and silver bullion which come from our mines and transforms into bullion the major part of these metals that come to us from abroad and do not find employment as foreign coin. The New York Stock Exchange is the medium through which a large part of the surplus savings of the country are invested in our industries or loaned for the use of our national, state, municipal, and other local governmental agencies.
5. Operation of the System
The most noteworthy features of the working of this machinery may be discussed under the heads: conflict of functions and laws; loan operations; treasury operations; reserve system; absence of elasticity in the currency.
(a) Conflict of Functions and Laws.—The two classes of banking institutions which have been described (state banks and national banks) and trust companies, described in a subsequent chapter, exist side by side in many communities, and in the performance of certain services compete for the patronage of the public. As has already been pointed out, state and national banks differ little in their functions except in their relation to real estate loans, and in some states trust companies perform all the functions of these institutions and many others besides. In the performance of these common services, however, they are rarely regulated by the same laws or subjected to the same kind or degree of public supervision. The competition between them, therefore, is not always on a fair basis and the temptation to violate restraining laws and administrative regulations is strong. The supervising officers recognize the situation as a rule and go to the extreme limit of leniency in administering laws and regulations which operate to the manifest disadvantage of the institutions over which they have jurisdiction, but even then it is often impossible to render the basis of competition fair and equitable.
This condition of affairs has resulted in the devising of ways and means of circumventing obnoxious laws and in some cases in practices which are pernicious in themselves. As examples may be mentioned the widespread practice of national banks, which are prohibited by law from making loans on real estate security, of making loans to customers who can offer no other collateral, on the security of their personal notes only, or of making loans secured by real estate by a three cornered operation utilizing a director or officer or some other third party as intermediary. All three classes of institutions compete in soliciting the savings deposits of the community, with the result that the trust companies and savings banks, which often have the advantage here, sometimes force upon their state and national bank competitors a higher rate of interest on such deposits than they ought to pay. The differing regulations in some places in force regarding the amount that may be loaned to a single individual or firm has also resulted in some cases in devious and uncommendable practices.
For the remedy of these conditions the first desideratum is the careful differentiation of the various functions performed by all these institutions, and the devising of appropriate legal and administrative regulations for each one. These regulations should then be incorporated into the legislation and the administrative practices of the federal government and of each state, and any institution which performs any of these functions should be obliged to submit to the regulations pertaining thereto. The difficulties in the way of securing such a differentiation of functions and such community of action between the federal government and our states are too obvious to require statement, but they should not prevent the formulation of ideal conditions, and a conscious and persistent effort to attain them.