Chapter I.—Of Banks of Deposite, of Banks of Discount, and of Banks of Circulation

OF banks there are three distinct kinds, wholly different from each other, in their constitution, their uses, their operations, and their influence upon the public prosperity, viz. banks of deposite, banks of discount, and banks of circulation, or, as some express it, banks of issue, of each of which I will speak in its turn.

A bank of deposite is an institution established solely for the safe keeping of the coin and bullion of individuals, which would otherwise have to be kept in iron chests or less secure receptacles, and for facilitating mercantile payments by the transfer upon its books by checks or drafts of the various amounts standing to the credit of the depositors, thus saving the labor of repeated countings, and the expense of repeated transportations of the precious metals from house to house, accompanied at the same time by a diminished risk from fire or pillage, and a diminished wear and tear of the coins by friction. Such a bank, it is manifest, is more appropriate for a community using a currency of coin alone, than for one employing a mixed currency; and accordingly, we find such a bank as having formerly existed at Amsterdam, and at the present day at Hamburgh, in which latter city, a deposite of standard silver of the weight of a marc, entitles the depositor to the credit of an amount denominated a marc banco, which is the unit of the currency of Hamburgh, in which all bills of exchange and mercantile debts are payable, and which the party who holds the credit may draw out at his pleasure in marcs weight, or transfer to others. As regards the operations of this particular species of banks, the reader will perceive that they add nothing to the existing amount of the currency, and that they take nothing from it. The credits on their books represent certain quantities of bullion ascertained by weight, placed there for safe keeping, without any authority on the part of the administrators of the bank to lend it, or to apply it to any purpose whatever, until called for by its owners, or transferred by them to other persons; and hence it is clear, that such banks exercise no influence whatever over the currency, by contracting or expanding its amount.

A bank of discount is an institution possessing a capital in money, which the proprietors, for there are usually several, associated in part for the sake of maintaining a survivorship, lend to merchants and others by discounting acceptances and promissory notes, originating in the sale of merchandise and other property, having short periods to run. It also receives on deposite, either by allowing interest or not, as the agreement may be, the money of other people, repayable at fixed periods or on demand, which it also lends with its own capital in discounting commercial securities. Of this description of banks, are all the establishments in London, (except the Bank of England,) and many of those of the principal cities on the continent of Europe known as private bankers. Several bankers of the same description, but better known as extensive brokers, have also at different periods in New York and Philadelphia, carried on the business of lending their own capitals and the capitals of others deposited with them, and it is probable that in every commercial community there are establishments of the kind upon a larger or a smaller scale. As such banks do nothing more than lend the money which actually exists in the community, it is evident, that they, like banks of deposite, exert no influence whatever over the currency, in expanding or contracting its amount, and that consequently they produce no effects different from those which would result if the same money had been loaned out by its individual proprietors, through the agency of brokers.

Some persons indeed suppose that where the money of depositors is repayable on demand, an expansion of the currency takes place to the whole extent of such deposited sums, in case they have been loaned to others, inasmuch as the depositor as well as the person to whom his money has been loaned, has each the power to make purchases in the market for the same amount, the right possessed by the former to draw money out of the bank, giving him the same command of funds as the actual possession of money by the latter confers upon him. But this is an error, for, if the depositor’s money has been loaned out, it can in no possible way be paid back to him, but by the bank’s requiring the borrower or some other of its debtors to refund an equal amount, by which process the aggregate mass of the currency is preserved the same as before. Banks well administered, do not, however, place themselves in the condition of being obliged in order to meet the sudden demands of depositors, to call unexpectedly on their debtors. They keep on hand an amount of money unemployed, sufficient to meet any probable calls that may be made upon them, before the bills receivable held by them fall due, and like the mill pond which is supplied with water from the stream above, just as fast as it is discharged through the mill race below, they preserve a uniform level in the currency. Nor is the matter at all changed by the fact that bank credits or deposites are transferable by means of checks, from the account of one person to that of another, for it is clear, that if by such transfers, one person becomes possessed of the command of funds, another parts with it to the same amount, and consequently, there is but one power of purchase in the market at any one time, with the same money.

A bank of circulation is an institution established solely for the purpose of lending credit, which is performed by exchanging its promissory notes payable to bearer on demand in coin, or giving transferable credits on its books, also payable on demand in coin, for the promissory notes of individuals, payable at a future fixed day, the latter paying a per centage per annum equal to the interest on a loan of capital, for the advantages they consider themselves as enjoying by dealing in the market with the credit of the bank instead of their own. The operations of such a bank, it will be perceived, are different from those of the two preceding ones, inasmuch as the currency by the introduction into it of paper money and paper credits, createable at will, in addition to the coin which before constituted the entire currency of the country, admits of expansion and contraction, and consesequently of fluctuations such as are unknown under a metallic currency.

In the nine hundred banks and branches which now exist in the United States,* all the operations of these three distinct institutions are combined; and it is owing to this combination, by which dissimilar things are confusedly mixed together, that the public mind has been led into so much error upon the subject of banking. An analytical examination can alone enable any one to understand the true merits of this important subject.

From the foregoing definitions it will be seen that banks of deposit and banks of discount are of positive advantage to every country in which they are established. The former protects the gold and silver of the community from the danger of robbery and fire, as well as from loss by abrasion, as has already been remarked, and at the same time greatly facilitates the operations of commerce by the convenience of payments in checks instead of payments in coin. The latter keeps the money of the community in constant employment by lending it to one borrower, as fast as it is paid back by another. But it will be readily seen, that such institutions do not hold out sufficient temptations for their frequent establishment, as corporations. To maintain a bank of deposite, a fund must be provided by government or individuals to defray its expenses, inasmuch as no number of persons would assume the responsibility of taking care of other people’s money, and of keeping their cash accounts, without compensation, and in regard to a bank of discount, it would scarcely be worth while for a company to become incorporated or to pay the rent of a banking house, and the salaries of a number of officers, to do that which the individuals could do themselves or by the employment of brokers at a much less expense, or, indeed, at no expense at all, as the brokerage is usually paid by the borrowers, unless a comparatively large amount of deposites could be relied on, at a low interest or at no interest at all. Banks of circulation have, therefore, been resorted to, as presenting the only certain, or apparently certain, prospects of emolument; and as the credit requisite to give confidence to the paper could not be established without having for its basis a capital, more or less extensive, they have in every case been consolidated with a bank of discount. To secure the popular favor too, as well as to derive a profit from the lending of the money of others, they have also taken upon themselves, without charge to the public, that part of the duties of banks of deposite which relates to the keeping of cash accounts with individuals, and transfers of credits on their books, but not that part which guarantees the safe keeping of the coin and bullion of depositors, except in the few cases where an agreement for special deposites is made.

But banks of circulation are themselves, when properly conducted, and when their operations are confined to the legitimate objects of banking, and when their liability to comply with their contracts is strictly enforced by the public, capable of conferring benefits upon a country. By the creation of paper money they enable the merchants to export a part of the metallic money which was previously required to circulate its commodities, and thereby convert it into active capital, yielding an annual income equal to the average profits of trade. The mode in which this is effected, I will endeavor to illustrate in detail in the succeeding chapter.