Some Defects In Our Investment Banking Machinery

A comparison of our investment banking machinery with that of European

countries, especially Germany, reveals important differences. Among

these the most notable are the wide use there and the almost complete

absence here of the following: (a) the resort to cooperation as a

means of revealing and making available the basis for credit of large

numbers of people who lack capital but could use it to the advantage

of thems lves and of the nation; (b) the long-period mortgage loan

repayable on the annuity plan and the mortgage bond as a means of

accumulating capital for such loans; and (c) the cooperation of the

state and other public bodies and of capitalists and philanthropically

disposed persons in developing the credit possibilities of the masses

and in directing the flow of proper portions of the stream of capital

in their direction.



In the development of investment banking institutions in this country,

individual initiative prompted by self-interest has been the chief,

and except in the case of savings banks, the sole motive force. The

result is that most of them have been organized in the interests of

lenders rather than borrowers and serve best the purposes of big

business and of persons already possessed of large credit by virtue of

their wealth or their business reputations. Under these conditions,

while enormous amounts of capital in the aggregate have been invested

in agriculture and urban real estate, the former has suffered

relatively in comparison with transportation, manufacturing, and

speculation.



Contributory causes in the development of this situation have been the

great need for capital for the development of our transportation

system, the stimulation of manufactures by high protective duties, and

the enormous area of our public domain which was given or sold to

settlers on very easy terms. Inasmuch as our transportation system and

our manufacturing industries have now attained a high degree of

development, our public domain has been nearly exhausted, and land

values and the cost of living are rapidly rising, the needs of

agriculture are pushing themselves into the foreground, and we are

beginning to look to European experience for suggestions regarding the

best methods of diverting to that industry a larger part of our

rapidly accumulating capital resources.



There are obvious difficulties in the way of the application of

cooperation to the solution of the problem of agricultural credit in

this country. In spite of the fact that immigration is constantly

bringing to us people from the very foreign countries in which

cooperative credit associations flourish, our agricultural population

is still dominated by the spirit of individualism which has been and

is one of our dominant national traits. Our farmers are also more

widely scattered than is the case in Europe, and consequently less

closely knit together in social units. Their holdings are also

larger, their capital needs greater, and their business instincts more

highly developed.



There seems to be no good reason, however, why the joint-stock

mortgage bank should not flourish here as well as in Europe. It is a

purely private business enterprise of the kind with which we are

perfectly familiar. The mortgage bond ought to appeal to our

investors, many of whom have exhibited a strong predilection for

mortgage security and real estate investments, and long-period

mortgage loans, repayable on the annuity plan, would meet the needs of

many land purchasers and of people who need to invest considerable

sums in drainage, irrigation works, etc., better than our present

methods. In most, if not all, of our states, trust companies could

develop these new lines of finance without prejudice to the other

branches of their business.



The use of state, county, and municipal subsidies or credit in

enterprises of this kind is rendered difficult, if not impossible, in

this country, by strong prejudice against the use of public funds in

private enterprises, and in some states by constitutional

prohibitions. This prejudice is based upon unfortunate experiences,

and is at least partially justified by the laxness of our

administrative methods and the prevalence of graft, which expose us

to the danger of the improper use of public funds devoted to

enterprises of this kind. There is no reason, however, why our states

should not take the initiative in the improvement of our investment

banking machinery and why private capitalists and philanthropists

should not turn some of their energy into this channel.



Suggestion and leadership are needed in this field quite as much as

legislation tending to restrict and regulate the operations of

existing institutions.