A further refinement of conditions such as those which have been sketched in the case of institutions which grow up with their functions differentiated as the result of law or custom is found in those countries where a definite effort has been made to relate institutions to one another - that is to say, to build up a definitely organized system of banking. This is the third of the "types" of banking systems already referred to on page 361 of this chapter, and differs from the others, as there suggested, only in that there is a very much more clear-cut notion of organization or effort to establish a systematic relationship among different kinds of banks. We may see how this type of banking system is developed by casting a glance at recent American history. When the Federal Reserve Act was first under consideration the intention was to confine it entirely to national banks. Political pressure forced the admission of state banks and trust companies as members of the system, so that there was thus estab-lished a distinct classification as between banks (national) which were obliged to accept membership and those which were only voluntary members. When the trust companies came into the system in considerable numbers there was in effect a third grouping of membership, national and state banks being generally active rediscounters, while many trust companies came in as insurance against panic or for the sake of the prestige and advertising which they derived therefrom. In the Federal Reserve Act, provision was made for discounting nonmember bank paper under specified conditions, so that a fourth fine of relationship to the inner banking organization was established - that of nonmember banks permitted to obtain accommodation indirectly from Federal Reserve banks and later allowed also to use the collection facilities of the Federal Reserve system.

Further organization was provided by the adoption of the Federal Farm Loan Act, whose purpose it was to furnish agricultural loans to the farming community and which gave to farm-loan institutions certain rights in the use of the facilities of the Federal Reserve system for the holding or transferring of funds. Under the old national banking system and in some of the state-bank systems, provision had been made for recognizing different groups of banks as central reserve city, reserve city, and country banks, with provisions governing the kind of deposits permitted to be made by one with the other. Altogether, therefore, there has been introduced in the United States a very substantially developed organization in which the discount relationships of banks to one another are carefully defined and in which a rather strict control is established by all over the types of business that may be undertaken by any of them.

Contrasting this situation with the specialized banking system of England, in which the lines of distinction between different types of institution are even more carefully drawn than in the United States, but in which the amount of law relating to the subject is vastly less than here, the distinction drawn between the organized type of banking system and what we have called the specialized type is obvious, while in both cases a clear line of distinction exists as against the heterogeneous banking system in which institutions come into existence with the privilege of doing practically anything that they choose. It remains true that in many parts of the United States, and in many of the less developed countries of the world, the exercise of various unrelated functions by banks is still the rule. The country bank in the western part of the United States will discount local commercial paper, lend on long term to farmers with mortgage security, accept savings deposits and pay interest on them, discount the notes of local merchants, furnish domestic remittances, make collections, hold for safe-keeping the valuables of customers, and perform a variety of other duties. The process of differentiation goes hand in hand with the progress of the community in the division of labor. One after another the various functions of the primitive bank are sloughed off or transferred to other institutions, until at length the specialized type of banking emerges either with or without definite organization of the kind already described.

From what has been said in this chapter it will be seen that the expression "banking system" or "type of banking system" is one which must be used with caution and which can be understood only in connection with the grade of industrial situation to which it applies; while still more caution must be used in approving or disapproving this or that plan of organization until there is exact knowledge as to the conditions under which it is to be put into effect. Banking is in one aspect a branch of business and goes hand in hand with business. It cannot be developed very much faster than general business develops, and its principles and methods must always be those which render it efficient in its aid to and support of general business.