BANKS AND THE GOVERNMENT 1. Degree of the first chapter of this book, it was explained that banking was once a com mon law right which could be exercised by any indi vidual or group of individuals as they chose, and it was explained how people gradually came to realize the public nature of the business and to regulate it by law. The degree of regulation or control imposed by a particular government will be determined by the general policy of banking which is adopted. It may be said that there should be no more interference than is necessary to insure the soundness and harmony of the general policy.
The adoption of one principle will often necessi tate a long train of regulations. The governments of the United States and of the several states have decided against branch banking and in favor of great freedom in the establishment of small banks. It was necessary at the outset to decide between these two plans. Branch banks and small independent banks cannot exist at the same time. The former will drive the latter out of business. If branch banks are not permitted, small independent banks must be author ized or the little towns and villages will have no bank ing facilities.
Now, a system of small independent banks needs more regulation than a system of large banks, since small bankers, no matter how good their intentions, will not be as thoroly, trained nor will they have as broad a vision or as wide sources of information as bigger bankers. This is no reflection on small bank ers, nor is it intended as an argument for or against a branch banking system. It is something to be ex pected in the nature of the case. It explains why the business of banking has been hedged about with more legal restrictions in the United States than in most other parts of the world. The government may have gone too far in some directions and not far enough in others, but a considerable amount of legal restriction is necessary to insure good banking among our twenty-seven thousand independent banks.
Canada adopted the opposite plan. She has only twenty-two banks with over three thousand branches scattered thruout the country and even in other coun tries. Each of the banks is powerful and is able to
command the services of highly trained executives. The average head of a bank in Canada compares favorably with the best in the United States. Canada can leave details to the judgment of the bankers in stead of regulating them by law.
The principal banking systems of the world will be described briefly in the following chapters. It will be seen that the degree of governmental control varies widely between the different countries. Some permit almost absolute freedom, some regulate, some oper ate a part of the banking machinery, while others even go so far as to own a share in certain of the banks.
It must be borne constantly in mind that the degree of control necessary or advisable will depend largely upon the size and number of banks in the system. When a particular bank or group of banks within a system is singled out for special regulation, the kind of control to be exercised will be determined by the objects which are to be accomplished, whether regu lation of the credit supply, conservation of the gold reserves, aid to the government, or what.
2. Capital and surplus requirements.—The rea sons for establishing by law a minimum capital re quirement have been stated in a previous chapter. It may be well to summarize them here. First, the requirement makes sure that the organizers of a bank are staking a part of their own resources upon the success of the institution. If a part or all of the capi tal must be paid in cash before a bank opens for busi ness, there will be some actual money on hand from the very beginning to meet the demands of creditors. Furthermore, capital acts as a guarantee to creditors that the bank will be able to pay its debts even if some of the assets acquired in the course of business should depreciate or become worthless thru misman agement or some other unfortunate circumstance. This is especially true when double liability is im posed upon stockholders.