In a general way the problem of establishing a sound bank portfolio can be solved only through a careful study of general business conditions. The time has passed when a mere inquiry into the solvency of a given concern was enough to show that its paper was safe. If at the same time other concerns in the industry are being unduly promoted by the use of the bank's credit, the effect may be a sudden expansion in that line, with the concomitant effect of overproduction of goods and the bad results that have been referred to at an earlier point. These may be avoided only through knowledge on the part of the banker regarding the general condition of trade and industry, his purpose being always that of seeing to it that no act of his results in overfinancing firms which are engaged in a line that is already fully up to the level that is permitted or rendered profitable by the demand of the community. For instance, suppose that a banker has a client, a large automobile factory, which has always met its paper promptly. The manufacturer of automobiles having been successful in producing an output of, let us say, 1,000 cars per month, is planning to recapitalize his company and to double his output. He will, however, before taking such a step, probably consult with his banker. At such a time the question is properly raised whether demand for automobiles is such as to warrant the doubling of this particular factory. It may be that, although the total supply of cars in the country is excessive, the output of a particular kind of car is still insufficient, so that the banker may well be warranted in agreeing to increase his current credit in accordance with the enlarged investment of capital. On the other hand, the banker may have his own reasons for thinking that such a step will be unwise, and by making it plain to his customer that the financing of the new enterprise will be attended with much greater difficulty he may influence the concern either to provide enough capital to take care of its own current financing or to restrict its operations, or perhaps seek to transfer them to other banks, where they may meet with the same kind of discouragement that has been offered in the first place. The result of such financing of an institution is likely to be an increase in conservatism, the producers determining not to go ahead faster than they can get assurance of credit.

This kind of careful study of industrial conditions, coupled with an analysis of the position of various kinds of industry, is coming to be a more and more important element in practical banking, and its results are having a larger and larger influence upon the direction and volume of bankers' loans. It is clear that in so far as they operate to increase or reduce the amount of loans in any particular line, or to shift funds from one branch of industry into another, they have a very important effect upon bank portfolios. For example, after the armistice which closed the war with Germany, many American bankers were of the opinion that the disturbance of European currencies was such that they could not afford to assume commitments in foreign money. The result was a very general refusal to discount foreign bills in the United States, and hence a great reduction in the amount of such bills actually appearing in the portfolios of the banks. Analysis of the portfolios of specified groups of banks a year after the armistice seemed to show that these banks were keeping themselves almost entirely out of foreign-exchange commitments. As a matter of fact, in this particular instance, the outcome was not what had been intended, for the reason that the banks, at the same time that they failed to discount foreign bills, allowed themselves to lend heavily to export houses which carried their foreign customers on open account, so that the banks were really engaged in financing foreign trade, after all. A glance, however, at their portfolios indicated the important modification of the form of these portfolios which had been effected at the time referred to, and illustrates the extensive influence that may be exerted upon the classification and grouping of banking assets by such considerations as have just been referred to. It frequently happens that well-informed bankers reach the conclusion that a given industry is proceeding too fast, and that consequently the instruction is given to curtail the amount of investment in the paper of that industry. Such orders usually take effect first of all in the open or commercial-paper market, and the effect of them is to reduce the marketability of the paper of the industry in question. Such paper is thus excluded from bank portfolios in a greater or less degree, and the composition of these portfolios is gradually altered.

All this may be summed up in another form of language by saying that the loan policy or lending policy of the bank is one which must be determined in such a way as to maintain liquidity and at the same time to distribute credit fairly. Such a policy must be changed from time to time as the changing conditions demand.