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 natio
s 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


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.