The Chautauquan, Vol. 04, December 1883

by Chautauqua Literary and Scientific Circle; Chautauqua Institution

This instrument in order to meet the want, it is generally believed, must have the following characteristics: 1. Value in the material of which it is made. 2. Uniformity of value throughout the world. 3. Much value in small bulk. 4. Approximate constancy of value. 5. Not readily destructible. 6. Divisibility into small portions which are capable of being reunited. 7. Of universal use. 8. Capable of receiving stamps and marks. Most of these properties are found in gold and silver, if not to such an extent as has been claimed for them, at least so far that they have been the basis of the money of the civilized world.

6. But supplementing in a certain way, and representing these, the instrument of exchange comprises also the large element of credit. This consists chiefly of book accounts, promissory notes, bank notes, government notes, bank deposits, checks, drafts, bills of exchange, stocks and bonds. One of the great agencies in modern commerce by which credit is made effectual as a part of the mechanism of exchange is that of banks. Banks are institutions which serve to abbreviate and facilitate the business of exchange and to extend and render available the credit of the community.

There are four kinds of banks, namely: savings banks, banks of deposit, banks of circulation and issue, and banks of discount. In our modern banking system the last three are generally found in combination, that is, each bank exercises all the functions implied.

A savings bank is an institution in which small sums of money are deposited from time to time as they accumulate in the hands of persons of moderate incomes. The depositors are credited with these amounts, and receive a certain, usually not very large, rate of interest in any case, and an additional amount contingently. The bank loans the money thus deposited in large sums to trustworthy persons who can furnish good security, the rate of interest being somewhat higher than that paid to the depositor.

The benefit of such an institution is two fold. In the first place there are many persons who have small sums of money which they desire to be earning something in some safe place. The amount is too small to be loaned to advantage. Such persons are not likely to know how, even if the sums at their disposal were sufficient, to find the best investment, or to determine concerning the security offered. But put into the hands of men who make this their business, under rules devised by the best financial talent of the community, and who can combine these small sums and invest them to the best advantage, it is made both safe and profitable for the small capitalists.

In the second place there are many persons who wish to unite their labor and skill with capital in some productive enterprise, and having no capital of their own, desire to borrow. They do not know the persons who have money to loan. The savings bank affords them an opportunity and gives them an advantage which they would not otherwise have. It is a benefit first to those who have some surplus, but are unable to loan it to advantage; secondly to those who are in want of capital, but do not know where to find it.

A bank of deposit grows out of the necessities of commerce in a community where much business is transacted. All persons engaged in trade will find from time to time large or smaller accumulations of money in their hands which it is not safe without considerable expense, to keep by them. Hence the custom of depositing these for safe keeping in the bank. Usually no interest is paid as the money may be withdrawn any time at the will of the depositor. It was early found that only a small proportion of these deposits were likely to be withdrawn at any one time; hence a considerable proportion of them could be loaned on short time, and thus the bank would in this way receive compensation for its care, without expense to the depositors. In this way, too, the capital of the community could be kept more fully employed.

But the credit factor in the deposit system soon came to have a much wider scope than is here indicated. Instead of each depositor going to the bank and drawing his money as he needs it, he now gives an order or check on the bank to any man to whom he may have occasion to make a payment. In many cases the receiver of such a check also has deposits at the same bank. In such a case he sends in the check to be deposited with his cash for the day. The amount is debited to the drawer of the check, and credited to the depositor of it, and thus by a simple transfer of credit much business is done without the intervention of any money. This expands into a great and complicated system of exchange between individuals doing business at different banks, by banks in different cities, and by traders in remote nations. Goods are sold in one locality and paid for in the goods of another locality by means of drafts, bills of exchange, etc., meeting and canceling one another, so that very little money is transferred from point to point.

The function of discount and loan, as has been intimated, is in modern banking usually combined with that of deposit, as also that of circulation or issue. When the capital of a bank is paid in by the stockholders, and the officers elected, it is then ready for business under regulations imposed by its charter. There are two ways in which the public is accommodated. First, when a wholesale city merchant sells a bill of goods to a country retail merchant, it is frequently the case that the former makes out his bill, which the latter accepts, promising to pay in thirty, sixty or ninety days. This accepted bill the wholesale merchant carries to his bank, where it is received with his endorsement, and the cash, less the interest for the given time, is paid him or placed to his credit. This is discounting a bill. A loan is sometimes made by a borrower’s giving his own note endorsed by some reliable person, and payable in some brief time as above. Sometimes the note is discounted; at other times the interest is paid when the note is taken up.

The function of circulation is exercised by the issuing of bank-notes to be circulated as money. When a bank is instituted the stockholders are required to pay in their respective shares in metallic or lawful money. But as the borrower would find coin most inconvenient to carry about, the device arose of substituting notes of the bank, payable on demand, thus leaving the specie in the bank. It was further soon observed that only a very small proportion of these notes were likely to be called for at any one time. Hence a large part of the specie could be used for other purposes instead of being kept idle in the vaults. Under the national bank system now in operation the capital of the bank may be largely invested in United States bonds which are retained in the government treasury, but on which the bank draws the usual interest. The bills of the bank are then guaranteed by the government, so that there is never any loss to the holder of the bills, even if the bank fails.