The nature of the liabilities assumed by the bank in the conduct of its business requires that the bank's investments be so arranged that they constitute a supplementary or secondary reserve. Most of the bank's liabilities are, as we know, demand liabilities, i.e., liabilities payable in cash on demand. We know, however, that, as a matter of fact, the bank has in actual cash only a percentage of its outstanding liabilities and that herein is to be found the possibility of its earning profits. An increased need for cash can then be met only through the sale of some of the bank's assets. These assets must, therefore, be of a kind to permit ready sale. They must, in other words, be of such a character that they will, in due season, naturally, easily, and without loss, liquidate themselves, or that with a minimum of trouble and of risk of loss they can be readily "marketed" by the banker himself.

Some of the bank's investments must be in the nature of a secondary reserve

It is in the selection of investments for the bank's loanable resources that the banker needs to call into service all his talents. Such a selection requires not only a knowledge of and an ability to analyze human nature, but also a broad acquaintance with economic conditions and an ability to foresee developments in the future. It is in this connection that the banker's work is most important for human society, and as he does that work wisely and with sound judgment or unwisely and recklessly, he advances or he impedes economic progress.

Years of experience seem, however, to have demonstrated the validity of certain general principles in the matter of assets or investments for the bank carrying a heavy burden of demand liabilities. It may be said, for example, that the most satisfactory investments are those embodying a promise or order to pay a specified sum of money itself. The great advantage of such investments is that they ultimately liquidate themselves. Their values can at any given moment be definitely calculated, and when they mature the exact sum specified must be paid, irrespective of the many possibilities of fluctuating prices in the market for other things. It is unnecessary for the banker to do anything but wait until the obligation matures. Then he collects the amount due and the transaction is closed.

These promises or orders to pay money are, of course, not all equally available. Some are more secure than others and some also are more easily convertible into cash. Other things being equal the banker will prefer the investments that carry the least risk and that offer the largest possibility of rapid conversion into cash.

From the point of view of security the order of availability may be indicated as follows: First, promises or orders growing out of mercantile transactions. These are acceptances, notes, bills of exchange, etc. They are in general spoken of as "commercial paper" which is accepted by the bank for discount. They originate in the buying and selling of goods which goes on as a regular part of the production of wealth. They carry comparatively little risk because they usually represent wealth in the process of transformation from lower forms to higher forms. Thus when the manufacturer provides bank acceptances in order to obtain raw material the ultimate basis of their value is one that is growing, and the manufacturer normally finds himself in a stronger position financially when the acceptances mature than that which he occupied when they were originally executed.

The selection of a bank's investments requires great sagacity

Experience has demonstrated certain general principles

Specific promises or orders to pay are most satis factory

Not all are equally good

Paper growing out of commercial transactions is most acceptable from viewpoint of security

Secondly, may be cited the promises or orders which are specifically secured by the deposit with the banker of easily marketed bonds, certificates of stock, etc. Here we are dealing with loans secured with what is ordinarily called "stock-exchange collateral." This is so called because the stock-exchange offers an always-open market for certain listed securities. The security of a loan so extended, entirely aside from the integrity of the borrower, grows out of the certain possibility of marketing the collateral, should that be necessary. The prices of the stocks and bonds dealt in on the exchange are regularly published, and it is easy for the banker to keep himself informed about them. Of course there is the danger of a drop in the price, but the banker protects himself against such an eventuality by allowing as a loan only a percentage of the selling value of the proffered securities.

Thirdly, may be mentioned the loans secured by the great staples - wheat, cotton, etc. These commodities are ordinarily offered as security for loans through warehouse or similar receipts. There are regularly organized markets for them where for a given supply the individual can count, with relative certainty, on finding, at some price, either a buyer or a seller. The security to the bank of a loan based on such collateral also grows out of the instantaneous marketability of the collateral, and the risk involved is simply a question of the range of possible price fluctuation. But here too the banker endeavors to protect himself by allowing as a loan only a percentage of the selling value of the security that he holds.

Loans secured with stock exchange collateral come next in order

Loans on the great staples follow

Lastly, may be mentioned the loans secured by other commodities or by real estate. In Germany so large an institution as the Reichsbank makes advances on almost every form of wealth except land. There is a humorous saying that if you are hard pressed you can take your shirt to the Reichsbank and get an advance on it. Where there are no legal restrictions the only question that the banker needs to put to himself is, Can I sell the collateral and what price can I get for it? Of course, the banker expects the borrower to repay the advance and he does not expect, except in a minimum number of cases, to have to sell out the security. That is to say, he counts on remaining a banker and not on establishing himself as a merchant. But as far as the safety of the loan is concerned, the question involved is one of the marketability of the security. Here the further away one gets from large organized markets of the kind provided for securities and for the staples, the more problematical does marketability of the collateral, and the larger, consequently, does the risk in making the loan become. Real estate is at the very bottom of the list as far as marketability is concerned, because each parcel has characteristics of its own and these are differently evaluated by different individuals. At best the market for real estate is narrowly circumscribed, and at times it is absolutely nonexistent. A banker must then of necessity be very careful about loans on ordinary commodity or on real estate security. Indeed the ordinary commercial bank eschews such chattel and real estate loans altogether, leaving to special lenders not carrying heavy demand liabilities the field thus unoccupied. Moreover, in some cases, as was formerly the case in our national banking system, banks are prohibited by law from engaging in this branch of lending.