Social aspect of commercial banking theory

Interest has been focussed on sound banking principles as a result of the large number of bank fallures in recent years. Sound banking from the banking stand- t may not be in the social interest. Orthodox commereial banking theory advocated the self-liquidating commercial loan chiefly because of its short maturlty. The develop ent of security markets led commercial banks to invest in bonds and extend security loans, which was not objectionable from the banking viewpoint. Banks create deposit carrency through bond purchases and the expansion of security loans not based on capital funds or savings deposits. Deposit currency expansion of this sort is undesir able because (a) it gives rise to investment inflation, (b) investment inflation cannet be readily controlled, and (c) the existence of investment inflation interferes with the proper control of commercial credit expansion. Assuming central banking control to have been ineffective and inflation to exist, deflation becomes necessary. A defla tion of commercial bank credit, however, has fewer social ill effects than a deflation of investment credit. Practical reform to insure the prevention of investment infla tion involves (a) a more complete legal and actual differentintion between demand and time deposits than now exists, (b) segregation of assets of savings departments in commercial banks, and (c) a restriction of assets of the commercial departments to self-liquidating, working-capital loans and reserves. Some alteration of central bank ing credit policy is also indicated.