Owing to this character of the savings-bank deposit a high percentage of savings-banks funds are normally not drawn upon. In a progressive community, with trusted savings banks, current withdrawals are usually more than offset by new deposits. This is so generally the case that in ordinary times the banks need not avail themselves of the privilege usually accorded to them by law of demanding preliminary notice of the intention to withdraw funds.

Three types of banking are distinguishable

The savings bank

The character of its business

The character of the savings bank deposit is also of importance from the viewpoint of the utilization of its funds. The savings bank can definitely "invest" a large proportion of the funds intrusted to its care. Its investments must be made with an eye to the possible and probable withdrawals, but safety and security are of greater importance in this field than are immediate re-deemability. Consequently, even where savings banks are carefully regulated by law they are usually permitted to invest their funds in such forms as acceptable corporation securities and real estate mortgages.

On the other hand the borrower from the savings bank is one who needs capital for definite investment purposes. He is usually a landholder, who wishes to improve his property and who gives as security a mortgage on the property, a corporation that supplies security in the form of bonds, or an individual who wishes a fairly long-time loan and can offer a mortgage or satisfactory bonds or stocks as independent security. At any rate, the funds obtained are usually "tied up" for a considerable period of time and while the savings bank making the loan may through possible sale or transfer get back the funds originally invested, this possibility is predicated upon the existence and availability of new investment funds. Ultimate liquidation comes, in the main, only from the contributions of the investment itself.

Hence the character of the savings bank is that of the middleman, but not that of the middleman whose work is finished when he has brought principals together. There is always the obligation resting on the savings bank of repaying the savings intrusted to it at least after due notice. It must therefore assume responsibility to the depositor for the manner in which its funds are employed.

Its deposits

Its loans

The investment banker on the other hand is a middleman pure and simple. Those having new enterprises to finance come to him for aid. He studies the situation and decides on what basis the financing can best be done. He may make some advances of his own to meet immediate needs, but, in the main, he expects to raise the necessary-capital by interesting his clients. When the organization of the new enterprise is complete and when the issue of securities, etc., has been arranged, the effort is made directly or indirectly to interest those with funds to invest. The banker may appeal to his own clients or he may through listing of securities on stock-exchanges endeavor to attract the general, investing public. Whatever the method of procedure, however, his activities are limited by the amounts that he can so gather together.

The investor himself is one whose main object is to increase future income through a profitable investment of his savings. While he ordinarily prefers to have his investment in a readily saleable form the return of his principal in cash is not of primary importance. Certainly the investment banker, after once having sold securities to his client, or having obtained them for him, accepts no responsibility for the return of the sums involved. If the investor wants his money back he has to take his chances in the market, while the making of the investment in first instance comes under the general rule of caveat emptor.

Hence it may be said that the function of the investment banker is to mobilize investment funds, and to assist in the apportionment of these funds to productive uses. The projects that he takes up, and the recommendations that he makes, are, of course, of far-reaching importance to economic development, but he is limited in his activities by the amount of actual investment funds of which he can obtain control.

The economic function of the commercial or credit bank is more fully discussed in a subsequent chapter. It is this type of banking with which this book is concerned. Here it may be said that the commercial or credit bank is an institution sui generis. It is not merely a middleman, but is a highly creative, dynamic agency that goes farther in its control of capital than the money actually intrusted to it would indicate. On the money actually in its possession it builds a structure of credit, and this credit as a claim to value is even more important than money itself in the process of exchange. Without anticipating the analysis in the subsequent chapters it may be said that the credit extended by the commercial bank takes the form of deposits and of notes. In so far as these forms of credit serve to obtain control of a part of the community's saved wealth, the bank extending the credit virtually controls the use of such wealth. As the notes and deposits constitute liabilities payable on demand, from the depositors' and from the noteholders' point of view they represent temporary surpluses instantly available in liquid form. To preserve the liquid character of its credit the commercial bank cannot, of course, consent to the utilization of its funds for long-time investment purpose. This credit can be employed only in short-time productive operations where the original investment is quickly followed by sale and return of principal. Hence through the creation of credit payable on demand the commercial or "credit" bank may be said to mobilize and to apply to productive use that portion of the wealth of the community which is in a relatively liquid form, and which must be preserved in that form.

The investment banker

The character of his business

The commercial bank

It is the purpose of this book to explain how the commercial bank carries out this function, and to set forth what principles must be borne in mind in the organization of such banks into a nation-wide system, if they are to be permitted to render the maximum economic service of which they are capable.

Selected References

Charles F. Dunbar, Chapters on the Theory and History of Banking (1906), Chapter I (The Bank'S Operations).

H. G. Moulton, Principles of Money and Banking (1916), Part II, Sections I and II.