Banking operations facilitate the production and distribution of goods. They do this by organizing the market for credit, by negotiating between lender and borrower, by rendering an ever larger volume of our collective wealth into "bankable" form and promoting, not only its transferability but also its actual transfer to the most effective uses. The lender repairs to the bank to deposit (lend, invest) his surplus, the borrower goes there to find accommodation; the bank is the organized credit mart. As a basis of credit the banker increasingly accepts stocks, bonds, mortgages, bills of lading, warehouse receipts, and other property rights in wealth that is not itself available as a basis of credit; possession of such titles can in this way be made the means of procuring bank funds, purchasing power, and finally control over other wealth useful in production and distribution. The banker determines largely the personnel of the business world; he is a shrewd judge of ability to produce and distribute efficiently; he seeks as customers those who by their financial record and originality, aggressiveness and opportunity, promise well, and he discourages the opposite sort of applicant.
The American tradition holds that commercial banks should finance only short-term, self-liquidated transactions and should leave the provision of permanent capital to specialized investment institutions. The theory is that, since the liabilities of the bank are demand liabilities, the assets must largely consist of cash, and that short-term, self-liquidating paper is the most convertible and manageable earning asset. This traditional theory bears the approval of state and federal law, and the banking system conforms nominally to the theory; but an examination of the business (banking and investment) situation reveals the following facts:
1. No small part of commercial loans are provisions of permanent investment capital.
2. Industrial loans which finance the purchase of raw materials and labor to make a marketable product are quite as good bank assets as commercial loans to finance the marketing processes.
3. The so-called self-liquidating loans are largely liquid only with respect to individual banks and not to the banking system as a whole.
4. Liquidity is mainly a matter of high organization of the market for credits and of the markets for the various forms of collateral.