Banking.—The peculiar convenience for saving found by experience in the use of each of these methods of settlement in exchange leads to a natural commingling of all. Coins serve some purposes best, and accounts have a limited range; notes of hand are often desirable, and paper money, if safe, is universally convenient. This natural combination has led to a more systematic arrangement for handling various kinds of currency, called banking. The most obvious addition to the machinery of exchange in the system of banking is the possibility of immediate transfer of property right [pg 138] in a bank deposit by check and account, or by a draft in account between banks, or by bills of exchange in more distant transactions. The bank deposit is made up of individual wealth, or titles to wealth, supposed to be immediately available for use in exchange. It may consist of all the kinds of currency described or conceivable. Checks are orders upon these individual accounts or deposits, and by their means exchanges are made with great ease and little risk between individuals in the same neighborhood or even in distant cities or distant countries. The cost of storing, handling or transferring any form of currency is reduced to a minimum. So far-reaching is this comparatively modern machine of exchange that it is properly assumed to be the means of settling 90 per cent of all exchanges, domestic and foreign, with almost no use of money in any of its numerous forms. Its importance as a machine of commerce entitles banking to a more distinct consideration, and chapter [XI] will be devoted to the subject.
Deferred settlement.—In certain stages of civilization exchanges involve, not simply present wealth, but prospective accumulation. A farmer may purchase his farm upon the assurance of crops and stock to be raised in a series of years. In this exchange final settlement is deferred by notes payable at definite future dates, the promise to pay being secured by a deed in trust, a mortgage deed or individual endorsement. If many individuals are united, a purchase may be made by means of issuing more formal notes called bonds, the property of the company being pledged for the payment of the bonds when due. Sometimes such purchases are [pg 139] made by the issue of stock, establishing the right of the seller to a certain undivided share in the wealth controlled by the company. In this case the time of final settlement is indefinitely postponed, to be fixed by limits of the charter or by a vote of the stock-holders. All these certificates of indebtedness serve to a limited extent in exchange of property. So far as they enter into commerce, after the first transaction, they are simply articles of purchase and sale, having a more or less established market value. Since they usually represent an accumulating interest or a provisional dividend, the market value is constantly fluctuating, and they can therefore serve almost no purpose of currency.
The ease with which such notes, bonds and stock can be made the basis of a single purchase in establishing some enterprise gives to them an indefinite influence in trade, sometimes immensely extending the apparent purchasing power of a community. The advantages and disadvantages of such deferred settlement are so varied and important as to make it worth while to treat the subject more extensively than is proper in this analysis, and such treatment will be found in Chapter [XII].
Chapter XI. Banks And Banking.
Origin of banks.—Attention has been called to the banks of the country as a most important part of the machinery of exchange. It is proper to describe more fully the nature of the machine and its operations. A clear understanding of the character and process of banking on the part of all the people both extends its influence and diminishes its dangers. Banking, like everything else in civilization, has had a natural growth. The different steps in its growth have been devised for the sake of meeting the needs of a growing commerce, and banking can exist only where commercial transactions are frequent and constant.
The word bank, distinctly related to the English word bench, is supposed to have been adopted from the fact that early Jewish dealers in money sat by a bench in the streets of Italian cities. The commercial city of Venice is supposed to have been the seat of the first organization distinctly named a bank. This was a corporation of money lenders who handled their capital in the form of coin by exchanging it for notes of individuals. This was as early as the twelfth century. Since that time in every civilized community there has been experiment upon methods for quickening exchanges [pg 141] through such organizations, some of which have been of great advantage and some have brought disaster. The modern system of banking is the result of all these centuries of experience, a history of which cannot be given here.
Bank described.—A brief description of the most modern form of banks under state or national restrictions will help to understand how these institutions serve the world of commerce.
In simplest terms, a bank is a company founded for the sole purpose of dealing in coin and current certificates of credit of every form, the prime object being the convenience of people in making exchanges of any kind. Sometimes a bank is called upon simply to make change, or, as we say, to break a valuable coin or a bill of large denomination into smaller pieces. On the border land between two countries the banker serves a traveler by exchanging the coins of the country he leaves for coins of the country he enters.