A serious question is involved here

Banks largely control the disposition of society's liquid capital

Too much of this may be put into fixed forms

Perhaps even more important, considering the nature of the ordinary bank's business, is the risk that is assumed in tying up funds in forms the liquidation of which depends upon the hazards of the market. The rise of a sudden emergency, such as an unexpected loss, a panic, etc., may require a bank to realize rapidly on its assets. Such a necessity, however, is not infrequently an outcome of conditions which at the same time tend to depress the price of stocks and bonds. Selling securities on a falling market may jeopardize the bank's ability to meet promptly and fully its demand liabilities, and inability to meet such liabilities means, of course, failure.

Nevertheless, it is generally agreed that a proportion of the bank's resources can safely and profitably be invested in that way. Just what that proportion should be is a relative matter. It would depend, among other things, upon the general standing of the bank itself. A bank of long and distinguished history could feel relatively certain that even in times of general distrust, only a small proportion of its outstanding deposits would be withdrawn. A bank not yet enjoying the confidence of the community might on the other hand have to count, in similar emergencies, on having a very large proportion of its deposits withdrawn. Another important factor would be the character of the people in the community in which the bank operates as well as that of the bank's individual clientele. If people are ignorant, or if they are unsettled and distrustful, they are likely, in times of pressure, to withdraw their funds more heavily than when they are enlightened, settled, and not easily thrown into a state of panic. Finally, another factor which has to be taken into account is that of the facilities offered to the bank for marketing such investments. A bank in a community with an established stock exchange might be perfectly safe in investing considerable sums in securities regularly dealt in on such an exchange, because of the facility with which the securities could, if necessary, be sold. A bank far removed from such a community, however, might find it hazardous to tie up anything like the same proportion of its funds in securities. What in any particular case the safe proportion may be is something that the banker himself is probably the best person to determine, just as, in the long run, where a high sense of responsibility is enforced, the selection of the particular items concerned can also be most safely intrusted to his discretion.

In the absence of restriction competition would take care of this

Fixed investments are subject to the hazards of the market

Several factors determine the proportion of fixed investments that a bank can make

Ordinarily, conservative practice seems to justify the investment of most of a bank's capital and surplus in interest-bearing securities. This, in all probability, grows out of the peculiar function of the bank's capital and surplus. A bank, as has been seen, is an institution that deals in credit. What it lends is not actual money, but credit. In its statement the capital and surplus appear as a lia-bility, but that is because the bank is looked upon as a business organization that is under certain obligations to its owners as well as to its clients. But to the creditors, i.e., the depositors and noteholders, the capital and surplus represent simply a guarantee fund that can be drawn on if necessary to pay their claims. If the bank officials make no errors of judgment in discounting and lending, there ought to be, for every dollar represented by deposits and notes on the liability side, hard cash or a safe investment on the asset side. If this were always the case capital, except for banking house and fixtures, etc., would be unnecessary. But since infallible judgment is beyond human attainment, a guarantee fund is necessary to reassure the creditor and thus to create and to maintain the confidence without which banking would be impossible. Since then capital and surplus are simply guarantee funds, drawn on only in case of loss, and not depended upon for the ordinary activities of the bank, there seems to be no reason why they should not be invested in any way that the bank managers see fit, as long as they are in forms that can without loss be drawn upon to fulfil the mission for which they are ordained.1

Capital and surplus are in practice commonly so invested

Confidence, it has been said, is the corner stone of the business of banking. In addition to what has already been said concerning the creation and maintenance of confidence, attention may be called to another very important factor, namely, publicity. The degree of publicity that may be necessary in a particular community depends upon a good many circumstances lying outside of the field of banking. English country banks may retain the confidence of their clients without publishing very elaborate or illuminating reports, because of the trust reposed in the family in control or simply because of respected tradition and of stolid adherence to the conventional. But in the United States where there is more or less contempt for tradition, where there are few if any long-standing family businesses, and where the individual is taught to regard himself with lofty concern, there is an insistent demand for full publicity in almost everything. Moreover, this is held to be specially necessary in the field of banking, where, despite notable achievements, there have been all too many cases of inexcusable recklessness and of the most conscienceless fraud.

Correlated with publicity as a factor in maintaining confidence in banks is governmental supervision. People always have confidence in the integrity of the government, and the assurance that the government is keeping a watchful eye on the affairs of banks engenders a confidence in thèse institutions that nothing else could stimulate. The word "national" in the names of the banks in the national banking system of the United States is distinctly an asset to the banks. Hartley Withers says that the knowledge that the "government" is behind the Bank of England is responsible for the unlimited confidence that that great institution has always enjoyed. So successful has governmental supervision of banks in general been in thus creating and preserving confidence that Professor Seager considers this result alone as an absolutely conclusive argument in favor of such supervision.