AUTHOR'S PREFACE

Increasing interest in the systematic study of financial problems is everywhere manifest since the war. Not only are the classes in finance in our colleges, universities, and schools of commerce literally flooded with students; the high schools are also seeking to incorporate the subject in their rapidly developing commercial curricula; Y.M.C.A. and institute study courses in finance are being formed throughout the country; and, more significant still, many business houses, recognizing the dependence of successful business management upon a thorough knowledge of financial principles, are now organizing special courses for their employees and officials. Even the business manager who has already "arrived" is reading and studying financial literature as never before. The present volume is designed to serve as the basis of a general survey course in finance and to enable the general reader to obtain a clear understanding of the nature of the modern financial system, and of the economic functions performed by each of the numerous financial institutions-investment banks, stock exchanges, commercial banks, trust companies, savings institutions, commercial paper houses, discount companies, Federal Reserve and Federal Farm Loan institutions, etc.-which together comprise this system.

Perhaps the most striking feature of the modern economic organization is the dependence of practically all business enterprise upon borrowed funds-that is, upon credit. As the charts on pages 134, 136, and 650 indicate, the funds used by business concerns-whether organized on an individual, a partnership, or a corporate basis-must largely be borrowed from the rank and file of individuals, who purchase securities or make deposits in savings or commercial banking institutions. Now the modern financial structure has evolved to meet the needs of this credit system-the origin and development of all the financial institutions of the present time being largely

attributable to the necessity of raising fixed and working capital for the uses of modern capitalistic enterprise.

The teacher will wish to know precisely where a course organized on the basis of this volume would fit into the economics or school of commerce curriculum, and wherein it differs from the traditional course in money and banking. The answer to the first question may best be given by means of a diagram:

The survey course in Financial Organization is designed as a one quarter, or semester, course, and is a prerequisite to each of the advanced specialized courses in the field. Following this series of advanced or graduate courses would come research or seminar courses in each of the various special fields of inquiry.

The primary purpose of a survey course in financial organization as a prerequisite to more advanced study is of course to give the student a view of the entire financial system before undertaking a highly critical study of any single part of it; each financial institution can obviously be fully understood and critically appraised only when it is envisaged as a part of a larger financial structure. All teachers will doubtless concur with this doctrine and all, I fancy, will agree that for one reason or another it has seldom been practiced, largely because of historical accident. All of our so-called "applied" economics

courses have been developed, one at a time, either to meet the need for an elaboration of the theoretical material outlined in the general introductory course in economics, or the demand for more practical instruction as a training for business. Accordingly, we have witnessed in the financial field the development of a whole series of specialized courses: money; banking (or money and banking)—meaning by banking, as a rule, only commercial banking; investments; corporation finance; speculation; foreign exchange; bank management, etc.

inevitable that there should be much duplication of material in these specialized courses; and at the same time the want of a common background of training on the part of the students in any one course necessarily militated against a highly critical analysis. The present treatise constitutes an attempt to bring together within a single volume, and in a single course, the material that is necessary as a background to advanced study in any of the special fields of financial inquiry suggested in the outline of courses above. It is believed that much economy of teaching effort may thus be achieved and that at the same time the advanced courses may be lifted to a substantially higher plane than obtains in most institutions at present. The treatise therefore differs from the traditional volume in money and banking, in that it is more inclusive in scope.

The attempt to organize a general survey course in the field of finance has, however, not only resulted in combining in a single volume certain material that is common to all financial courses; it has also, inevitably, led to a substantial shift in emphasis and in the point of view from which the material is presented. As is indicated above, and as is more clearly revealed in the charts to which reference has been made, the numerous financial institutions which make up the modern financial system are united in a common task of furnishing fixed and working capital for business enterprises, the various types of institutions being very closely interrelated as parts of a general financial structure. I may frankly say that I did not fully appreciate this fact until I undertook to describe the practical operations of each of the numerous types of financial

institutions that exist today, and to point out the economic significance of each. The very attempt to explain the economic function of each financial institution inevitably carried one into a discussion of its relation to other financial institutions, and thus to a consideration of the relation of the financial system in general to the economic system in general. A more complete statement of the relationship here suggested, as well as an explanation of the use of the term Financial Organization of Society, will be found in the introductory chapter.

Another reason for making the introductory course in finance a general survey rather than a discussion merely of money and of commercial banking is found in the fact that. almost every financial institution in the United States now conducts under a single roof and under the direction of a single management, nearly every variety of financial operation. As is indicated in the chapter on "Financial Integration," the department-store financial institution has become the prevailing type. In consequence, it is difficult to justify a survey course designed to acquaint the student with the principles of finance, which selects for discussion only a single function performed by any banking organization-such as commercial banking-to the exclusion of all the others. This is particularly the case if the needs of the business student be held in mind. The modern business has its setting in the midst of a financial system upon which it is at all times dependent in many ways; and the business man needs to know not merely the relation of his business to the commercial banking department of, say, the First National Bank of New York, but to all of the other departments of that bank as well. Moreover, because of the close interrelations that exist between the departments of an integrated financial institution, the student of banking organization and theory will gain a very inadequate view of modern finance if he studies the commercial banking department as though it were an isolated institution.

In colleges where but a single course can be devoted to the study of finance, it would seem that a course which presents a general view of the system as a whole, would prove both

of more practical and of more cultural value to the student than one which considers merely certain special features of the financial system.

The author anticipates no little criticism for having failed to include in a volume on finance a thorough discussion of so important and vital a subject as the relation of money and credit to prices. A word of explanation is therefore in point. In chapter ii there is presented a very brief statement of the relation of money and prices. The emphasis is, however, not placed upon the causes of price changes; it is merely pointed out that the values of goods are expressed in terms of money and that these money prices fluctuate widely and more or less continuously. Now the reason for not entering into a discussion of the causes of price changes at that place is merely that the price question cannot be intelligently discussed until an analysis of the commercial banking system has been made; and by the time the analysis of the commercial banking system, including its relation to other financial institutions and to the general business organization as conditioned by the phenomena of the business cycle, was completed, limitations of space did not well permit an adequate discussion of this most vital aspect of the modern financial system. The controversial issues with reference to the relation of money to prices are therefore necessarily left for consideration in advanced courses. It is believed that enough data bearing on the price question are presented in the treatise for the purposes in hand. If, in the view of any teacher, such is not the case, the text material may be readily supplemented by lectures and by collateral reading.

In the preparation of the volume I am indebted to Mr. Walter Buckingham Smith, of the Department of Political Economy of the University of Chicago, for assistance in construction of the various charts; and to Messrs. Hardy, Keister, Marshall, Meech, Thompson, Smith, and Viner, of the same department, for many helpful criticisms, as well as for assistance in reading the manuscript. I am also indebted to Professor E. G. Nourse, of Iowa State College, for criticisms of the