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Bond Houses And Investment Companies

A large part of the business of investment banking in the United
States is conducted by corporations and firms organized for the
purpose of buying and selling investment securities, especially bonds
and mortgages. Rarely, if ever, do these concerns conduct savings
accounts. Ordinarily they confine their attention exclusively to the
investment end of the business and act in the capacity of jobbers, or
brokers, or both.

Within the investment field some of them specialize closely and others
deal in a wide range of securities. The specialties most frequently
followed are government, state, and municipal bonds, railroad bonds,
public service securities, timber bonds, irrigation bonds, and real
estate mortgages. Specialization involves the development of expert
knowledge of the class of securities dealt in and thus of special
serviceableness to both investors and the promoters of the enterprises
or the public bodies which issue the securities. These specialists
sometimes serve as middlemen between the issuers of securities and
other investment banks, as well as between them and the real owners of
the capital invested, their expert knowledge being of service to the
former as well as the latter.

Until recently there have been few attempts to regulate the operation
of these institutions by law, but the fraudulent practices of some of
them, and the ignorance and weakness of perhaps the majority of
investors, have recently created in some quarters a strong public
sentiment in favor of such regulation. In several states legislation
has resulted, of which the most noteworthy is the so-called "blue sky
laws" of Kansas and some other states.

In details these laws differ widely from one another, but they are
alike in that they impose upon some branch of the state government the
obligation of supervising both companies which issue securities and
those which offer securities for sale. The Kansas law, the first of
this kind passed in the United States, has been considered too drastic
by most of the companies that have attempted to operate under it, but
the Wisconsin law, which went into effect October 1, 1913, is looked
upon with more favor.

In formulating these and other laws for the proper regulation of these
concerns, it has been found difficult to provide adequate protection
to the investing public without unduly hampering the issue and
negotiation of securities, but this difficulty should, and in time
doubtless will, be overcome. A free and open market for bonds, stocks,
and other evidences of indebtedness is essential to freedom of
enterprise and mobility of capital, which are in turn essential to the
economic prosperity of any country. On the other hand, investors
undoubtedly need and deserve the protection of the state against
misrepresentation and fraud. It is practically impossible for them in
many, perhaps in most, cases to obtain the information necessary for
self-protection. The matters and conditions to be dealt with in such
legislation are so complex and subject to such frequent change that
laws are apt to be imperfect, inefficient, or obstructive. It seems
probable that those which do not attempt to be specific and detailed,
but give wide powers and discretion to administrative boards or
commissions, are most likely to be successful.

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