The ideal in domestic clearings is of course collection and remittance at par between any two points in the same country without additional charge. The more nearly all the collections and remittances of the different communities in a country are brought together under one agency the more extensively can that ideal be realized, because in the long run income must balance outgo. Some costs of administration must always be borne, but with a unified system these can be made a general charge, as in local clearing associations where uniform dues paid by the members cover all expenses, or a slight charge may be levied on the particular individuals concerned. With the relatively simple possibilities under a system of centralized reserves the total costs can be made much lower than under the cumbersome arrangements made necessary by scattered reserves. As any cost must in the end be borne by the public it is to the public interest to have a system which will reduce costs to the lowest levels.

Domestic clearing must be carefully organized

In the interest of adequate reserve protection at home a good banking system will also provide for the control of the national gold reserve in its relation to international transactions. In the chapter dealing with this subject it was pointed out that practically essential to this control is thoroughgoing centralization of reserves and final and effective control of the discount market. This assures not only the possibility of controlling credit development at home, with the object of properly safeguarding it, but also the possibility of influencing gold movements in international transactions where these are seen to have an important bearing on the domestic situation.

But as changes in the domestic discount rates are themselves of great importance to the home market, the agency in final control of centralized reserves ought to have wide latitude in the utilization of other expedients less drastic in nature but possibly adequately effective within easily determined limits. As gold movements proceed from immediate possibilities of profit in the foreign exchange market, however complex be the economic forces focused in that market, through simple buying and selling operations the agency in control of the reserves may materially influence gold movements. It must therefore be liberally empowered to carry on foreign exchange dealings, to maintain balances abroad, to buy and sell, borrow and lend foreign exchange and gold itself with the view of getting the utmost out of the international possibilities before serious pressure is exerted at home.

Reserves at home must be protected

Agency in control of centralized reserves must have wide latitude in international exchange matters

Coupled with this question is that of the organization of the domestic banking system with a view to the proper financing of a country's foreign trade. The main factors in this go down deeper than the organization of the banking system, but in the discussion of this topic it was shown that questions of banking organization are involved in it. In so far as intelligent planning can bring it about the effort ought to be made, therefore, so to frame the home system that wide participation in international banking is made possible.

Finally, a good banking system will guarantee security. The success of banking depends upon the maintenance of general confidence, and the organization and operation of the system ought to be such as to stimulate and to preserve such confidence. Owing to public faith in the government a considerable supervision of banking by the government is desirable. Indeed, as already stated, the effect of governmental supervision of banking on the confidence of the public is believed by some authorities, to be a conclusive argument in favor of such supervision. The nature and scope of governmental control is, however, a political rather than an economic question. In general, however, it may be said that a country's banking system must harmonize with the general social and political organization of the country. A system that works well in one country will not necessarily work well elsewhere. Furthermore, owing to the shifting nature of confidence and to the rapid changes in the practical world of business, governmental supervision ought to emphasize and enforce individual honesty and responsibility, rather than to prescribe methods, reserves, investments, etc. Attempts to lay down rules of procedure for every possible contingency are often seriously embarrassing. The banking system must be kept as flexible as possible.

Relation of banking to international trade must not be overlooked

Security will be guaranteed

This is largely a question of proper governmental supervision

Selected References

P. M. Warburg, Essays on Banking Reform in the United States (1914): "Principles that Must Underlie Monetary Reform in the United States," "American and European Banking Methods and Legislation Compared."

Victor Morawetz, The Banking and Currency Problem in the United States (1909).