CLASSES OF BANKS 1. Primary functions of a bank.—The great metro politan bank of today presents an appearance of mys tery to the ordinary observer who examines it for the first time. It has so many interests, its influence is so far flung and the sums in which it deals are so large that usually the outsider despairs of ever understand ing it.
As a matter of fact, the essential operations of every bank, whether large or small, are extremely simple. All that any bank does is to deal in credit. Every bank exercises two primary functions, the ac cepting of deposits and the making of loans or dis counts. A third function performed by many banks is that of issuing notes for general circulation as a substitute for money. These are the most important ways in which a bank deals in credit. In each of them the bank is always exchanging money for credit, or credit for money or credit for credit.
A bank, then, is an institution which deals in credit thru the accepting of deposits, the making of loans and discounts and the carrying out of other related operations which are less essential, such as issuing notes, buying and selling foreign exchange, etc. De posits and discount (or loans) are the essential func tions. Note issue is important but not necessary to the business of all banks. About one-fourth of the banks in the United States issue notes, and of all the banks in the world even a lower proportion are banks of issue.
2. Secondary functions.—In addition to the three principal functions—discount, deposit and issue— banks perform various other services for the com munity. One important service is advising business men on questions of finance. A growing business needs more capital. Shall it be secured thru an issue of bonds? If thru bonds, what kind shall be issued? Or, would it be better to issue short-term notes or ad ditional stock? How can capital be obtained most advantageously? Under present conditions, is it ad visable to extend the business to any great extent? The banker, with his knowledge of the money market and of general conditions, should be in a position to.
give valuable advice on such points as these. Busi ness men in the United States do not take advantage of this service as thoroly as they might. In Canada the tie between business men and bankers is much stronger.
3. Development of banking.—The operations of re ceiving deposits and of lending are so simple that they were practised by individuals long before the estab lishment of regular banking institutions. The de mand for these simple services comes early in every growing community. There are people who have ac cumulated savings and want to leave them somewhere for safekeeping, and there are enterprising men who see golden opportunities in business if they can find the funds with which to finance them.
As the business life of a community develops and becomes more complex, the banks in it find new things to do. At first, the farmer borrows and leaves a lit tle on deposit; the merchant sends in his cash for safe keeping at the close of each day and borrows to dis count his bills; and the clerk stores his savings against a rainy day. Gradually the bank establishes itself in the confidence of the people until, after a while, it is called upon to act as trustee for estates, give credit information, finance new developments and exercise many of the secondary functions of banking. All the work of a miniature trust company, savings bank, financial bank, commercial bank or safe deposit com pany is done under one roof until finally the continued growth of the community brings specialization. Then separate institutions are organized to carry on the work of the savings bank, trust company, etc. In the larger cities a bank today is as highly specialized as any other organization in the business world.
An interesting development of more modern times is the growth of mammoth banks in the larger cities. Such banks as the National City Bank of New York and the Canadian Bank of Commerce do almost every thing in the banking field. The various special func tions are grouped together again as they were in the small banks at the beginning.