Economic Planning and the Tariff: An Essay on Social Philosophy

By James Gerald Smith | Go to book overview

CHAPTER VI
THE FINANCIAL COST OF ECONOMIC NATIONALISM

IN THE field of banking, the particular form taken by the fetish for economic planning is the worship at the altar of branch banking as the solution to the bank failure problem. Born in the sins of our "new era" philosophy there has been the attempt to explain the rising tide of bank failures in this country as an inevitable tendency due to the existence of "too many banks," as a manifestation of uncontrollable forces. It was due to the enlarging of economic areas on account of the automobile and new roads, to the development of automobile transportation and chain stores, so that the larger banks in nearby towns or cities were able to take away the cream of the small "country bank's" business. The new era doctrinaires are continually picturing in pompous conclusiveness such "inevitable tendencies," to the abiding discredit of their intellectual acumen.

A good way to stop the thinking processes is to explain things in this manner. Whenever a development cannot be clearly analyzed and explained, or whenever the true explanation is prejudicial to a coveted claim, we have the comfortable alternative that it is an "inevitable tendency."


CAUSES OF BANK FAILURES

Such an evolution of the banking system, whether it is inevitable or not, need not necessarily cause bank failures; but rather would be manifested by mergers or gradual dissolution of the smaller country banks. Banks can dissolve and go out of business without "failing." The primary and immediate cause of a bank failure is sudden realization of the lack of liquidity of the bank's assets, not a declining business or falling off of profits. The liquidity or lack of liquidity of the bank's assets has nothing whatever to do with the size of the bank; and the relationship between bank liquidity and profits is an inverse one. A bank increases its profit making opportunities by decreasing its liquidity. That is the essence of the business of banking. The question the banker has always to decide is how far can he depart from an absolute degree of liquidity (being a mere depository

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