1. Nature Of Bank Finance

Many banks, and especially private bankers, engage in finance operations which are quite distinct from those described in the foregoing pages. These pertain to the raising of money for individuals, corporations, and states, as well as the organizing and reorganizing of companies.

2. Limited Operations

These things, however, are not done by every bank. The national banks can not exceed their authority, which is confined strictly to the business of banking. They can sell national bonds, but at this line their authority stops. They can not "act as a broker or agent in the purchase of bonds and stocks." Many of the state banks are limited in the same manner.

3. Growth Of Trust Companies

Their sharply defined limitation is one of the reasons for organizing trust companies and kindred institutions possessing larger powers, which in many places supplement the work of banks. It is not an unusual thing for several men to organize both a national bank and a trust company, expecting to catch in both nets all kinds of business. Private bankers possess still larger powers, and are limited only by the general laws that govern men in conducting business.

4. Sale Of Bonds

The simplest finance operations in which banks engage is in selling bonds and other obligations for states, cities, and other corporations. A bank with a good reputation is a kind of guaranty that the obligations offered by them for sale are safe investments.

In conducting this business they act in several ways. One way is as agents or brokers, when they receive a commission on their sales. This is the safest, when no advances are made previous to sales.

5. Purchase Of Bonds For Resale

Another way is to purchase the bonds outright and offer them for sale to the general public. When this is done, their profits are the margin between the price they paid for them and the higher price at which they sold them. On several occasions the national banks have purchased large quantities of the government bonds with the expectation of selling them at a slight advance. The First National Rank of New York during 1879 bought $460,000,000 of the government and other parties. The amount was so large that had there been a very small decline in their value, the loss would have been serious. Happily, the bank sold them at an advance, and the profits realized were added to the bank's surplus, and thus was created the largest surplus fund within the shortest period in banking history.

The Rothschilds are the best-known house in conducting such operations. For many years they have made loans to the governments of Europe and of other continents, taking their bonds at an agreed price, selling them at an advance, and retaining the profit. As the bonds are not guaranteed, the only risk in buying them is to find purchasers. As soon as they are all sold, their profit is assured.

6. Risks

Banks, however, sometimes run too great risks in purchasing bonds and other securities for sale. One of the most familiar illustrations is the purchase a few years since by the Barings of the obligations of the Buenos Ayres republic and of the railway and other corporations chartered by it. This was one of the oldest and most respectable banking houses in England; and as the people had great confidence in their wisdom and integrity, they bought many millions of the securities offered by them. After a few years the government failed to pay interest on those it had issued, the railroads and other corporations defaulted also, and the prices of all the obligations, amounting to many millions, declined heavily. The Barings were the owners still of millions of them, their house was ruined, and many purchasers suffered severely. The house was not charged with fraud in selling these securities, but simply with overconfidence in the ability of the borrowers to fulfill their obligations, and with too strong a desire on their own part to increase their gains.