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Functions of financial institutions and the different classes performing each function:

I. Lending.

1. Consumption loans-proceeds used to get things for personal use, e.g., food, clothes, doctor bills. These loans are handled by pawn shops, loan sharks, Morris plan banks, co-operative societies, ordinary banks (for the well-to-do), and merchants selling on credit.


Production loans-proceeds used in business.

(a) Commercial or short-time loans are handled by commercial banks, note brokers, companies that

buy accounts or lend upon them, and dealers selling on credit.

(b) Investment or long-time loans take various forms: (1) Stocks and bonds involve investment bankers, underwriters, stock exchanges, investment companies, and trust companies.

(2) Mortgages are made by savings banks, insurance companies, mortgage companies, building and loan associations, Federal farm loan banks, and joint-stock land banks.

(3) Notes in commercial banks and trust companies, renewed many times, are the basis of some investment loans.

II. Care and transfer of money.

1. Savings are handled by savings banks, savings departments of trust companies and commercial banks, building and loan associations, and postal savings banks.

Checking accounts are handled by commercial banks, trust companies, and private bankers.


Domestic and foreign exchange is handled by private

bankers, commercial banks, trust companies, and express companies.

III. Issue of notes.

In the United States, the issue of notes is restricted to the national banks and the Federal reserve banks.

IV. Keeping valuables.

Valuables are kept by safety deposit departments of commercial banks and trust companies, and by companies which specialize in the work.

V. Trustee functions.

These include such functions as acting as executor, administrator, trustee for mortgage, the care of real estate, registrar and transfer agent for stock, assignee, receiver, guardian, and curator. Such functions are undertaken by trust companies or trust departments of national banks.

Suggested Readings on Chapter I.

Moulton, H. G.-Financial Organization, Chapter X.
Willis, H. P., and Edwards, G. W.-Banking and Business,
Chapter IV.

Dewey, D. R., and Shugrue, M. J.-Banking and Credit,
Chapter VIII.

Questions and Problems on Chapter I.

1. Are financial institutions becoming more or less specialized?

2. What are the advantages and disadvantages of specialization?

3. Give an example of each of the financial institutions mentioned.

4. Write the names of the various financial institutions in a column at the left of a sheet of paper and also at the right, thus:

Commercial banks
Savings banks


Commercial banks
Savings banks


Draw lines connecting each institution in the left-hand column with the institutions in the right-hand column with which it. has dealings.

Which institution has the most lines?

Does the fact that this institution has the most lines indicate that it is the most important institution?

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