Evening bulletin. [volume] (Honolulu [Oahu, Hawaii]) 1895-1912, 1901-08-21
L0AN|NG ON STOCKS
TIMELY REVIEW OF
BANKING TENDENCIES
Dangers in Policv Of Dealing in
StOcks---Eventual Result is to Grip
pie Legitimate Mercantile Inter-
ests---Sound Finance

ciers.
The influential feature which to our
mind. indicates that banking In the
United States is drifting away from
safe moorings is the modern doctrine
that banks exist more for the purpose
of furthering large stock market deals,
than for the purpose OF primarily ef-
fecting mercantile transactions. The
old idea Of bank was that of finan-
cial institution which stood ready to
discount the notes OF Its customers,
issued for the purpose of transacting
the commerce Of the world. That is
still largely the function Of American
banks, but there is nevertheless a man.
lfest tendency In certain quarters to
regard this as a more or less archaic
form OF banking. A very large part of
the business Of the banks In the great
financial centers now consists OF loans
on stock market collateral: and many
banks frankly declare that that is the
kind Of business they most like to
transact; to be too solicitous for the
comfort OF mercantile borrowers is re-
garded as a bit OF old fogyism; and
there are some banks that are not over
anxious to have mercantile accounts
Especially II they are not more than
moderate in size) kept with them.
II is to this tendency that we may trace
in very large measure the enormous
increase In the volume of stock mar
ket speculation in recent years. Now
the dangerous feature OF this policy
IL, that the banks in making and look
ing after their stock market loans are
good deal more Influenced by the
mere stock market quotations on the
securities which constitute the col
lateral for the loans. than they are by
the real facts in connection with the
Industries against which these securi-
ties are issued. One reason why they
are so much inclined to make loans OF
this sort. in preference to purely mer.
camille loans. is that they can realize
on their assets so much more quickly.
Their principal care is to keep their
stock market loans properly margined
Now 1t is well known by the commun-
ity at large, and II Is probably equally
clear to the banks, that very large
part OF the stock market securities
against which they lend their money
so freely represents water" pure and
simple; that Is, there are no tangible
assets back Of them In the shape Of
plant and supplies. and very little of
intangible assets in the way of earning
capacity. But that is a matter which
the banks who do this business do not
feel called upon to take very much
into account. as these securities have
n ready market, and all that's neces-
sary for the banks to do Is to margin
them sufficiently to admit Of their get
ting out without loss in the event of
drop In the stock market. The theory
Is beautiful; In actual operation II does
not always work as well as might he
desired. The objection to too great q
prevalence of this kind OF banking Is
twofold. In the first place, 1t incites
overspeculation In the stock market,
and Is therefore the mother of financial
panics; and In the second place, Il Ia
likely at any moment to cripple the
legitimate mercantile interests OF the
country by the withdrawal OF loanable
funds necessary to lis proper conduct.
No one who has kept an eye on the
financial situation In recent years can
question the fact that the policy We
have been describing inevitably works
In the direction of overspeculation In
the stock market. This point could be
amply illustrated by the case OF the
National City bank Of New York.
1--WE may parenthetically say that we
allude to this institution so frequently
because II Is the largest bank in the
United States, and because 1t is one OF
the leading opponents of the dangerous
tendencies In American banking which
II Is our aim to point OUT This bank,
as we have before pointed out, had a
great boom in copper shares a few
years ago, and the part which II Is uni
versally credited with playing In con-
nection with the panic OF May of this
year Is another instance Of the thing
we have In mind. As regards the like
lihood of hardship from this policy
wiz, of loanlng whenever possible on
stock market collateraD 10 the real
mercantile business of the country,
there Is no occasion for us to say any
thing at this time; the danger Is too
Obvious to escape any ones notice.
This tendency to make banking a
mere adjunct of the stock market Is
bound to impose a very severe strain
on the morals of those who have the
banks in charge. The new policy
brings the managers OF the banks into
too close intercourse with Wall street,
and makes them too susceptible to the
influence of the "get-rich-quick"
theory. The managers Of an old com.
mercial bank were hardly likely to be
carried off their feet by any tempta.
ton to misuse the banks funds in car
rying out private commercial ventures.
They were not in a position to carry
through such ventures, requiring much
time and special knowledge for their
contamination. But It Is altogether
different with stock market schemes.
AS regards these, the managers OF
bank can sit In the back parlor, and,
by using the banks funds for their
private purposes, make vast sums OF
money without any effort at all. That
Is, they very readily think they can,
and thpv vpry franupntlv try thair