10. Need for a discount it is not always possible for such a bank to find the com munity which has the greatest need for the surplus funds. The cash may be wanted again within a few weeks or even within a few days. Many of these funds find their way to the big cities, especially New York, where they can be loaned on call. The cities get the funds at a low rate of interest, usually two per cent, altho there may be many smaller towns where business men would be glad to pay a much higher rate. Under our banking system, it is almost impossible to learn about the small town demands. At any rate, the cost of looking up the matter is too great to warrant the business.
This condition could be improved in two ways. If our banks had branches thruout the country, it would be easy to shift funds to the points where they are needed most. Apparently, we are definitely com mitted against a branch banking system. Even with out branch banks, the question would be simpler if we had a large, steady market for commercial paper. Paper from all parts of the country would then get into the market and banks everywhere could buy it, knowing that it could be sold quickly if cash should be needed. A Massachusetts banker might hold the note of a manufacturer in Oklahoma, and so the sur plus funds of the East would be made available for use in the West.
At present, we have only a few banks that really deserve to be called national banks—banks that do a nation-wide lending business, or have information about credit conditions thruout the country. Our bankers for the most part are local money-lenders. They cannot be anything else when there are 27,000 of them thruout the whole country, working inde pendently and competing with one another. A good market for discounting commercial paper would do much toward bringing them together. The Federal Reserve system may do something by means of its re discount function.
11. Guaranteeing movement has long been on foot in the United States for the guarantee of bank deposits by the Federal government or by the states. The plan has been tried in Oklahoma, Kan sas, Nebraska, South Dakota and Texas, and has been urged elsewhere. Bank failures and conse quent losses to depositors have been so small in the past that it is estimated that the levying of a small assessment on each bank would create a fund large enough to pay the depositors of all insolvent banks. If such a fund were created, the banks would com mand implicit confidence, and they would not be lia ble to "runs."
The plan has been vigorously attacked, however, by the banks. Their theory is that the system would place a premium upon incompetent and dishonest banking. Under present conditions there is little doubt as to the correctness of the contention. The strong bank would be taxed to pay the depositors of the bank that failed, and it would also lose the pres tige that ordinarily results from its strength. Under such a system depositors would pay little attention to the stability of a bank, because their deposit would seem as secure in one bank as in another. They would be governed largely by the inducements offered by the various banks, and in spite of strict regulations it would be very difficult to keep unwise inducements from being made without the knowledge of the au thorities. The inevitable result would be the estab lishment of many new banks, expansion of credit, speculation and, finally, collapse.
The advocates of the plan claim that these condi tions can be prevented by frequent and searching examinations. This would be possible only if such examinations were possible, and it has been the ex perience of the country that they are not. Many banks have failed only to have the receivers discover that they have been insolvent for a long time without the knowledge of the authorities who have examined them. This would be particularly true if a na tional system of guarantees were adopted to cover 27,000 banks operating under different conditions. Whether or not effective examination is possible in a single state where banking conditions are uniform is an unsettled question. The experience of those states which are experimenting with deposit guaranty will be watched with interest because, if the experi ment proves successful, it may be generally adopted as a great advance in the science of banking.
12. Deposits used as currency.—The deposit, in the form of checks, acts as a medium of exchange and a substitute for money. So far as a bank is con cerned, it constitutes a liability which is in every way like a bank note, except that it circulates less widely and for a shorter time. A check passes thru corn paratively few hands before it gets into the bank upon which it is drawn. Consequently, bankers find it necessary to carry a larger reserve against deposits than against notes. This is particularly true in the United States, where bank notes are not returned to the issuing bank for redemption but are paid out again over the counter by the banks that receive them.