The peculiarly public nature of banking was soon recognized, however, and numerous restrictions were put upon banking operations at an early date. In deed, public opinion swung far in the opposite di rection and banks were restricted unnecessarily and unwisely in some instances. Many of the early char tered banks were required to perform certain services for the government. Some were required to make loans to the state, some to carry on certain fiscal op erations for the government, some to perform various other public services which are not necessarily con nected with a bank's real business.
In most of the older states it was necessary, at one time, for banks to obtain a special charter from the legislature before opening business. As every new bank charter had to run the gauntlet of legislative ac tion, it was quite possible to set political influence at work either for or against a proposed charter, to the detriment of sound banking. Many a legislator was found who would set a price on his vote.
Finally, the states passed general banking laws.
The law now states certain conditions which must be complied with before a new charter is granted. Any group of reputable men who will comply with these general provisions, which apply to all alike, may en gage in the business of banking. This plan is evi dently much better. In addition to taking the banks out of politics, it provides for a uniform system of banks thruout a particular state. Some of the opera tions of banking may still be carried on without a special grant of authority from a state, some states being more strict than others.
13. National banks.—The National Banking Act, passed in 1863, provides for the incorporation of banks by the Federal government. On November 17, 1916, there were 7,584 national banks in the United States with total resources of over $15,000,000,000. As compared with this, on June 30 of the same year, there were 19,934 banking institutions of all kinds operating under state charters and having combined resources of over $18,000,000,000.
14. Federal reserve banks.—Under the Federal Reserve Act of 1913, twelve Federal reserve banks were established in the United States under the super vision of the Federal Reserve Board at Washington. The stock in these banks is subscribed by the national banks of the country and by a few state banks which have entered the reserve system.
15. Individual and private ban kers.—Individual and private bankers receive the funds of individuals or corporations and invest them for their account.
They also underwrite or purchase outright new issues of bonds or stock and dispose of them to their clients. Frequently they permit depositors to check against funds left with them. This is seldom an important part of their business, however, for the money in trusted to their care is usually left for investment.
There is a legal distinction between an individual and a private banker in the United States which has been clearly established by the courts. An individual banker is one who has received authority from the banking department of his state to engage in business subject to state inspection. A private banker is one who carries on a banking business without having se cured any special privileges or authority from the state.
Two types of private bankers should be dis tinguished. The one is the large financial house, such as J. P. Morgan & Company, which promotes and finances enterprises, underwrites securities, sells bonds and stocks, makes loans to national, state and city gov ernments, etc. These houses receive deposits and sometimes discount commercial paper.
The other type is the little private banker who so licits deposits, usually from the poorer classes, and conducts a general banking business. The banking business is often combined with some other business, such as real estate, department store or insurance. Depositors' funds are sometimes loaned by the bank to the mercantile or real estate end of the joint busi ness. If the store or other allied business fails, the bank fails also. Immigrants are often persuaded to deposit with small private bankers of their own na tionality, who sometimes abscond as soon as their pockets are well lined..
The private banking business is now regulated in some states. It should be watched carefully every where, for frequent failures injure the very ones who are least able to lose.
16. Choosing your bank.—The value of a good banking connection cannot be overestimated. If the wrong choice is made, the time may come when the needs of the depositor cannot be met by his bank.
A case in point may be given: A small but grow ing corporation engaged in the manufacture of em broidery kept its account with a trust company which did not compete with the banks of discount for com mercial deposits, and which did not make commercial loans. The account was not large, but the owners of the business did their best to handle their corpora tion well. The time came when they needed a loan. The trust company did not care to make an exception in this case, and the corporation in question found it difficult for a time to finance its business properly.
Another instance was presented about the same time. A young and successful manufacturer of an article in great demand had started his business with a small capital and had been borrowing for a number of years from those who might be called "loan sharks." He was compelled to pay very high rates of interest. Finally, he sought the advice of a trust company as to a method of financing his business which would re lieve him of these exorbitant rates. The trust com pany advised him to open an account with a commer cial bank in the vicinity of his business and to keep on with his present discounting relations until he had es tablished himself with the new depository. He did so, and in less than six months had established satis factory credit relations and was able to release himself from the clutches of the "loan sharks." The commer cial bank was able to give his business the support which the trust company could not give.
If a business man will carefully analyze his busi ness as well as the banking facilities within his reach, or confer with a reliable banker, he can determine which institution is best fitted to serve his needs.