Seventeen Talks on the Banking Question / Between Uncle Sam and Mr. Farmer, Mr. Banker, Mr. Lawyer, Mr. Laboringman, Mr. Merchant, Mr. Manufacturer

by Charles N. Fowler

MacLeod, the highest authority upon banking credit, and the theory of banking, used this language: "The first business of a banker is not to lend money to others, but to collect money from others."

Bagehot used this language, in describing the business of the bank: "Thus, a banker's business—his proper business—does not begin while he is using his own money; it commences when he begins to use the capital of others."

Many writers have maintained that a bank should only be allowed to create exactly as much credit as the specie paid in, and that its sole function should be to exchange its credit for coin, and coin for credit; and that the quantity of the bank's credit should always be exactly the same as the coin it displaces. This principle is called the currency principle.

Many banks in the world's history have been constructed on this principle, especially those famous banks at Venice, Hamburg, Amsterdam and several others.

These cities, small in themselves, were the centers of great foreign commerce; and as a natural consequence, an immense quantity of coin and denominations of all sorts of different countries was brought by the foreigner who resorted to them. These coins were, moreover, greatly clipped, worn and diminished. The degraded state of the current coin produced intolerable inconvenience, disorder and confusion among merchants, who, when they had to make or receive payment of their bills, had to offer or receive a bag full of all sorts of different coins. The settlement of these bills, therefore, involved perpetual dispute—which coins were to be received, and which were not, and how much each was to count for. In order to remedy this, it finally became absolutely necessary that some fixed uniform standard of payment should be devised, to insure regularity and a just discharge of debts. In order to do this, the magistrates of those cities instituted a Bank of Deposit, in which every merchant placed all his coins of different kinds and nations. These were all weighed, and the bank gave him credit, either in the form of notes, or a credit on their books, exactly corresponding to the real amount of the bullion deposited. The owner of this credit was entitled to have it paid in full weighted coin on demand. These capital credits, therefore, always insured a uniform standard of payment; and it was enacted that all bills upon these respective cities, above a certain amount, should be paid in these Bank Credits, which were called Bank Money. The consequence was evident, as this Bank Credit, or Bank Money, was always exchangeable for money of full weight on demand; it was always at a premium.

These banks professed to keep all the coin and bullion deposited with them in their vaults. They made no use of it in the way of business, as by discounting bills. Thus the credit created was exactly equal to the specie deposited and their sole function was to exchange specie for credit and credit for specie.

These banks were examples of the currency principle; they were of no further use to commerce than this, that they served as a safe place to keep money in—and they insured a uniform standard of payment for debts. They made no profit by their business, but those who kept their accounts with them paid certain fees to defray the expenses of the establishment.

Later and during the civil war in Great Britain the goldsmiths of London began to receive the cash of the merchants on deposit. They not only agreed to repay it on demand, but to pay 6 per cent per annum for the use of it. Consequently, in order to enable them to do that, the deposits necessarily became their property to trade with as they thought best.

When, therefore, these goldsmiths received this money on deposit, they gave in exchange for it, or issued to their customers a credit, or right to demand back an equal amount of money at will. And it must be noted that it is this banker's credit which in banking language is termed a deposit. The money itself is called an asset, or resource.

MacLeod says that in practice it will be found that in ordinary times a banker's balance in cash will seldom differ by more than one thirty-sixth part from day to day. So that if he retains one-tenth part of his cash to meet any demands for payment that may be made, that is ample and sufficient in ordinary times.