2. The Economic Functions of Banks
Viewed from the standpoint of the nation rather than from that of individuals, the functions of banks may be described as those of intermediaries in exchanges and in the investment of capital. In the former capacity they supply the world with the major part of its medium of exchange and serve as distributing agents for that portion of the supply which comes from other sources. They create a medium of exchange through a process of bookkeeping which is world-wide in extent, and through which the mutual indebtedness of individuals, cities, and other subdivisions of countries and nations, brought about by purchases and sales on credit, are offset without the use of money.
The practice of depositing surplus funds with banks for safekeeping and consequently of using them as paymasters has resulted in the reliance of everybody upon banks for currency in any form, and has thus thrown upon them the responsibility of directly utilizing all the sources of money supply. Thus while the mints of the United States and most other countries coin gold bullion, and supply subsidiary silver and copper and nickel coins to private persons on the same terms as to banks, as a matter of fact few private persons take advantage of this privilege, finding it more convenient and profitable to get the coin they want from banks. The same is true of government notes in countries in which such notes constitute a portion of the currency.
The accumulation of a nation's capital and its investment require the cooperation of numerous agencies of which banks are the chief. They collect the savings of the people, combine them into amounts of sufficient size for investment purposes, and invest them temporarily and sometimes permanently. Cooperating agencies in this work are insurance companies, societies of various kinds for the promotion of saving, stock exchanges, promoters, etc. Some of these take the place of banks in the performance of these services, while others supplement and aid them.
3. Classification of Banking Institutions
Banks differ from one another chiefly in the nature and degree of their specialization, in legal status, and in the place they occupy in the system to which they belong. Some banks devote the major portion of their effort to the conduct of exchanges and are called commercial banks, others to investment banking and are called investment banks. The most common subclasses under the latter head are savings banks, land or mortgage banks, and bond houses. Savings banks specialize in the collection and investment of small savings; land banks are primarily intermediaries between capitalists and people who wish to invest capital in land, building operations, and agriculture; and bond houses are intermediaries between capitalists and those who wish to invest capital in industrial, commercial, and transportation enterprises, or loan it to states, cities, or other public corporations.
Commercial banks rarely confine themselves exclusively to the conduct of exchanges. Most of them also conduct savings departments and invest the funds intrusted to them through such departments in agricultural, industrial, or commercial enterprises or loan them to public corporations. Commercial banking, however, is their main concern, their other departments being side issues of greater or less importance according to circumstances. Investment banks also frequently carry on commercial banking as a side issue. These two lines of business are sometimes mixed in such proportions as to render classification difficult.
From a legal point of view the banks of nearly all countries may be classified as private or unincorporated, and incorporated, sometimes also called joint-stock banks. Private banks are started by individuals or firms, like any other private enterprise, without the formality of application for permission to some public officer, and without compliance with a set of legally prescribed regulations. They are subject to the laws of the country governing all kinds of private business enterprises and sometimes to special laws applying specifically to them. In some of the states of the United States such banks are prohibited by law.
Incorporated banks are usually started by private initiative but owe their actual legal existence and status to a special law, to the requirements of which they must conform before they are permitted to do business. Their right to do business is usually evidenced by a document known as a charter, executed and delivered by a public officer legally endowed with the requisite authority, or passed in the form of a law by the legislative organs of the state. Charters of the latter kind are known as special charters and are rarely used nowadays, except in the case of institutions of a peculiar character, endowed with special functions. The central banks of Europe owe their existence to such charters, as did also the first and second United States banks. In the early history of the United States special charters were uniformly employed by the states, but for many years general incorporation laws have been the rule, on compliance with the requirements of which persons who desire to incorporate banks can secure charters.