The other class of financial establishments directly supervised by the State was the commercial bill and paper broker, the services of which, in connection with commercial banking were of great importance. They generally took care of the commercial paper business of the larger firms and distributed it among the banks throughout the country. They rendered an important service to the banks in the checking of such paper, and being in a position which familiarized them with the firms with which they came in contact, they were able to relieve, to some extent, the work of the bank in matters concerning credit. They also bought such commercial paper for their own account, and resold it to the banks when suitable opportunity presented itself to them.

Resume of the American Banking and Credit System as it Existed Before the Introduction of the Federal Reserve System

The above briefly describes the banking organization of the United States as it existed before the adoption of the Federal Reserve System. As to its advantages, it could be said that the business was made to be paying. It was conducted with reasonable safety. It was adapted particularly to the community in which it was located, and the system of checks and clearings which it developed was indeed in advance of any of those in foreign countries.

But there was no uniformity of action or of cooperation among- the banks. They acted altogether in an independent way. There was no centralized head. The credit system was far from elastic to any extent capable of keeping up with the growing manufacturing industries of the country. The nation's reserves were entirely scattered, the principle of the banks being more inclined to security than to liquidity. There was no system of mobility of such reserves. Neither was there any central head which could collect the reserves of the nation and hold them in readiness to be used to relieve financial strain which at times suddenly forced itself upon the nation. Nor did the then existing system enable the banks to use their reserve for most productive purposes.

Cooperation among the banks was lacking. They might have been bound socially by one or another organization, but not further than this. Individual banks were, in times of stress, helpless. There was no open discount market, nor standard form of commercial paper, which by its character might be discounted by the banks in times of need and so supply them with funds when necessary. There was no connection between the treasury system of the country and the banks. Government deposits were kept in various institutions which qualified for this privilege. Furthermore, there were no foreign branches of American banks, a fact which hindered our entry on a wider scale into foreign markets.

The panic of 1907 was the direct cause of much criticism of the banking system as it then existed. The National Monetary Commission was finally appointed to study the banking system of the country, and those of foreign nations, and to make recommendations for its improvement. In its report it brought out a number of defects, the most important of which are stated below.

Scattered Reserves.

(1) We have no provision for the concentration of the cash reserves of the banks and for their mobilization and use wherever needed in times of trouble. Experience has shown that the scattered cash reserves of our banks are inadequate for purposes of assistance or defense at such times.

Effect of State Laws Upon Reserves.

(2) Antiquated federal and state laws restrict the use of bank reserves and prohibit the lending power of banks at times when, in the presence of unusual demands, reserves should be freely used and crdit liberally extended to all deserving customers.

Immobility of Reserves.

(3) Our banks also lack adequate means available for use at any time to replenish their reserves or increase their loaning powers when necessary to meet normal or unusual demands.

Bank Note Only Means of Credit Expansion and Contraction.

(4) Of our various forms of currency the bank note issue is the only one which we might expect to respond to the changing needs of business by automatic expansion and contraction, but this issue is deprived of all such qualities by the fact that its volume is largely dependent upon the amount and price of the United States bonds.

Co-operation Among Banks Lacking.

(5) We lack means to insure such effective cooperations on the part of the banks as is necessary to protect their own and the public interests in times of stress or crisis. There is no cooperation of any kind among banks outside the clearing-house cities. While clearing-house organizations of banks have been able to render valuable services within a limited sphere for local communities, the lack of means to secure their cooperation or affiliation in broader fields makes it impossible to use these or similar local agencies to prevent panics or avert calamitous disturbances affecting the country at large. The organizations have, in fact, never been able to prevent the suspension of cash payments by financial institutions in their own localities in cases of emergency.

No System of Domestic Exchanges.

(6) We have no effective agency covering the entire country which affords necessary facilities for making domestic exchange between different localities and sections, or which can prevent disastrous disruption of all such exchanges in times of serious trouble.

No System of Foreign Banking Operation.

(7) We have no instrumentality that can deal effectively with the broad questions which, from an international standpoint, affect the credit status of the United States as one of the great financial powers of the world. In times of threatened trouble or of actual panic these questions, which involve the course of foreign exchange and the international movements of gold, are even more important to us from a national than from an international standpoint.

Commercial Paper Not of Standardized Character.

(8) The lack of commercial paper of an established standard, issued for agricultural, industrial, and commercial purposes, available for investments by banks, leads to an unhealthy congestion of loanable funds in great centers and hinders the development of the productive forces of the country.

Limited Means for Employment of Funds.

(9) The narrow character of our discount market, with its limited range of safe and profitable investments for banks, results in sending the surplus money of all sections, in excess of reserves and local demands, to New York, where it is usually loaned out on call or stock-exchange securities, tending to promote dangerous speculation and inevitably leading to injurious disturbances in reserves. The concentration of surplus money and available funds in New York imposes upon the managers of the banks of that city the vast responsibilities which are inherent in the control of a large proportion of the banking resources of the country.

Absence of a Broad Discount Market.

(10) The absence of a broad discount market in our system, taken together with the restrictive treatment of reserves, creates at times when serious financial disturbances are anticipated a condition of dependence on the part of individual banks throughout the country. and at the same time places the farmers and others engaged in productive industries at a great disadvantage in securing the credit they require for the growth, retention, and distribution of their product.

Lack of Equality in Credit Facilities.

(ii) There is a marked lack of equality in credit facilities between different sections of the country, reflected in less favored communities, in retarded development, and great disparity in rates of discount.

No Agency to Assist in Stability of Rates.

(12) Our system lacks an agency whose influence can be made effective in securing greater uniformity, steadiness, and reasonableness of rates of discount in all parts of the country.

System of Credit Expansion Poor.

(13) We have no effective agency that can surely provide adequate banking facilities for different regions promptly and on reasonable terms to meet the ordinary or unusual demands for credit or currency necessary for moving crops or for other legitimate purposes.

Uniform Publicity in Supervision Absent.

(14) We have no power to enforce the adoption of uniform standards with regard to capital, reserves, examinations, and the character and publicity of reports of all banks in the different sections of the country.

No Foreign Banking Facilities.

(15) We have no American banking institutions in foreign countries. The organization of such banks is necessary for the development of our foreign trade.

Defects in Loaning System.

(16) The provision that national banks shall not make loans upon real estate restricts their power to serve farmers and other borrowers in rural communities.

Defects in Treasury System.

(17) The provisions of law under which the government acts as custodian of its own funds results in irregular withdrawals of money from circulation and bank reserves in periods of excessive government revenues, and in the return of these funds into circulation only in periods of deficient revenues. Recent efforts to modify the Independent Treasury System by a partial distribution of the public moneys among national banks have resulted, it is charged, in discrimination and favoritism in the treatment of different banks.