BANK OPERATIONS AND FUNCTIONS Fundamental and Other Functions The activities described in the preceding chapter as discount, deposit, and note issue are traditionally called the fundamental functions of commercial banks. "Function" here means the course of action which peculiarly pertains to or is appropriate to the institution. The operations of discount, deposit, and issue have been shown to be reducible to a guaranty of private credit or to a substitution of bank credit for private credit. These operations are not, of course, ends in themselves, but activities toward accomplishing ends. Some recent writers on banking call these immediate activities banking " operations " and their ends, banking "functions." Although in the further analysis of causation these so-called " functions " will be but " operations " to even more remote ends, it may be well to consider the activities so distinguished as functions.
In the other volumes of this book many other banking opera tions than discount, deposit, and issue will be described. Some of them have become traditionally associated with banks and are peculiarly appropriate to them. Banks could not continue in business unless they performed a wide variety of operations which competition has forced them to assume. These operations are usually incidental to discount, deposit, and issue, and are per formed for borrowers or depositors and in consideration of their accounts. Other activities may be undertaken by a bank because it has an organization that can assume and execute the additional duties more economically than specialized organizations could do. Some of these activities may produce no small part of the bank's earnings and therefore seem quite essential; others are purely adventitious and occasion a large net expense, but are undertaken for the indirect benefits that accrue from general publicity.
Banks as Credit Markets Banking operations facilitate the production and distribution of goods. They do this by organizing the market for credit, by negotiating between lender and borrower, by rendering an ever larger volume of our collective wealth into " bankable " form and promoting, not only its transferability but also its actual transfer to the most effective uses. The lender repairs to the bank to
deposit (lend, invest) his surplus, the borrower goes there to find accommodation; the bank is the organized credit mart. As a basis of credit the banker increasingly accepts stocks, bonds, mortgages, bills of lading, warehouse receipts, and other property rights in wealth that is not itself available as a basis of credit; possession of such titles can in this way be made the means of procuring bank funds, purchasing power, and finally control over other wealth useful in production and distribution. The banker determines largely the personnel of the business world; he is a shrewd judge of ability to produce and distribute efficiently; he seeks as customers those who by their financial record and original ity, aggressiveness and opportunity, promise well, and he dis courages the opposite sort of applicant.
The American tradition holds that commercial banks should finance only short-term, self-liquidated transactions and should leave the provision of permanent capital to specialized invest ment institutions. The theory is that, since the liabilities of the bank are demand liabilities, the assets must largely consist of cash, and that short-term, self-liquidating paper is the most convertible and manageable earning asset. This traditional theory bears the approval of state and federal law, and the banking system con forms nominally to the theory; but an examination of the busi ness (banking and investment) situation reveals the following facts: i. No small part of commercial loans are provisions of per manent investment capital.
2. Industrial loans which finance the purchase of raw ma terials and labor to make a marketable product are quite as good bank assets as commercial loans to finance the marketing processes.