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Adequacy And Economy Of Service








From the point of view of adequacy and economy of service, two types
of banking systems require attention; namely, that characterized by a
large number of relatively small local independent banks, chartered
under general laws, and exemplified in this country; and that
characterized by a relatively small number of large banks endowed with
the privilege of establishing branches, and exemplified in the other
leading nations of the world.

Under our system each community is encouraged to look after its own
banking needs. Local initiative in the establishment of new
institutions is given free play and local capital and local talent is
attracted. Outside promoters and outside capital are not excluded,
but, if they come, they do so as colonists expecting to cast in their
lot with the community and to become identified with it. The managers
of our banks for the most part are local men who are the real heads of
the institutions they manage and whose careers and prosperity depend
on the success of these institutions.

The localism which characterizes this system contributes elements both
of strength and of weakness. It develops local talent, and promotes
mutual understanding and cooperation between the banks and the
business enterprises of the community, and conformity of organization
and methods to local needs. Its weakness consists in the financial
isolation and the narrowness of vision and training which are its
natural accompaniments. Under this system capital does not easily and
quickly move from place to place and readily distribute itself
according to the relative needs of different communities. In
consequence, rates of interest are apt to vary widely, some
communities to be under- and others over-capitalized, and the capital
of the nation as a whole to be inefficiently employed. Under this
system the opportunity of bankers for training is meager, since the
broader and more fundamental aspects of the business are rarely
brought to their attention, and in the smaller towns and country
districts they are apt to be recruited from people of mediocre ability
and often from those not well fitted by nature and education for this
branch of commercial enterprise.

The system of branch banking, almost universally employed elsewhere,
is strong where our system is weak, but it has weaknesses of its own.
It promotes distribution of capital according to relative needs, and
consequently efficiency in the application of a nation's capital as a
whole, and it offers a wide field of training for the people engaged
in the business, and draws its recruits from every quarter. It can
readily supply banking facilities to communities too small or too poor
to provide for an independent bank, and more readily than our system
can adjust itself to rapidly growing communities.

Its chief weakness consists in the lack of independence of the
managers of the branches and the consequent danger that local needs
may not be fully satisfied. The manager of a branch is usually granted
freedom of action only in routine matters. Any business out of the
usual order must be referred to higher authorities connected or
associated with the main office; and, even with the advice of the
manager, who alone is familiar with local conditions, the decision
cannot be made with that intimacy of knowledge of and sympathy with
the business and aspirations of the individual or firm under
consideration that full justice to him and his town may require. In
the matter of adequacy and character of service, therefore, the city
in which the main office is located has an advantage over those in
which the branches are located.

In this connection it should also be noted that, while the branch
banking system is able to adjust itself to the capital requirements of
towns of all sizes more readily than the independent banking system,
and thus to secure a better distribution of the banking capital of the
community, it does not follow that it will do so. On account of
ignorance of conditions, insufficiency of capital or inability readily
to increase it, or inertia on the part of the head office, a town may
have to wait for the establishment of a branch longer than it would
for the establishment of an independent bank.

Whether or not this will be the case, however, depends to a
considerable extent upon the keenness of the competition between the
big banks with branches. The big central banks of Europe, which have
no competition within their field, have been slow to establish
branches. The coercive force of the government has been necessary in
many cases to secure their proper expansion. In the case of the other
big banks, however, both of Europe and of Canada, competition has
resulted in very rapid expansion during the last half century,
probably as rapid as could be desired.

Regarding adequacy of service, the method of granting charters and the
attitude of the government towards private banking is important. If
banks are allowed to spring up spontaneously, like manufacturing and
commercial establishments and farms, they are likely to be plentiful
and to be located wherever needed. Experience, however, has shown that
private banks cannot be adequately regulated in the interest of the
public and that incorporation under public auspices should be
required.

Two methods of incorporation are employed, those of the special
charter and of the general law. Except in the case of special
institutions, like central banks, the former is objectionable, since
it opens the doors to political favoritism and is likely to result in
bad distribution, lack of uniformity in regulation, and lack of
steadiness and regularity in development. Incorporation under general
laws, or the free banking system, as it is sometimes called in this
country, is unquestionably the best from every standpoint. All the
necessary checks and balances can be incorporated in these laws, and
the supervision of public officers, together with the necessary
administrative machinery, provided for. This is the only practicable
method to employ in an independent system like ours.

The special charter method works best in connection with the branch
bank system, in which the question of chartering new institutions only
occasionally arises, and in which delay is not so serious.





Next: State Banks

Previous: Protection Against Unsound Practices



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