Let us suppose that all the Banks in the country were destroyed and that our circulating medium consisted exclusively of gold and silver coin. In such a state of affairs, every merchant would keep about his person, or in his house, his whole stock of money. Let us next suppose an Office of Deposit, established in any one of our large towns.
For the sake of security against fire and robbers, the wealthy would here deposit whatever money they did not require for immediate uses. All the money employed in the wholesale trade would thus become the deposit of the Bank. It might be drawn out a few times, but as every large dealer would keep an account at the Bank, the absurdity would soon become evident, of drawing out the money by one man, that it might be deposited in the same place by his neighbor. The amount would, therefore, be transferred from the credit of one merchant to that of another, and the Bank would become an Office of Transfer as well as of Deposit.
The only money that would circulate, would be that employed in retail trade. All wholesale transactions would be adjusted by checks on the Bank, and transfers on its books. The Bank has issued no paper, the only demand on it would be for specie to send abroad. This demand would be limited, for every merchant would make it a rule to retain enough money in Bank for his domestic trade. It would be only as the trade of the town fluctuated, that the amount of money in the vaults of the Bank would fluctuate.
We may suppose that it rose as high, sometimes, as six millions, and sunk as low, sometimes, as four millions. In a little time, the Bank would discover the lowest amount to which its permanent deposits would be liable to be reduced and it might lend nearly the whole of this amount without much risk of discovery. The money might, indeed, be sent abroad by him to whom it was lent, but he by whom it had been deposited would still have a credit at the Bank, and as all the wholesale transactions of the town would be carried on by checks on the Bank, his credit on the books of that institution would serve him the same purposes as money. Retaining the Sinn of 500,000 dollars to meet contingencies, the Bank might safely grant discounts to the amount of 3,500,000, and thus realize a profit of more than 200,000 dollars per annum, without lending a cent of its own capital, and without issuing any paper. It is worthy of note, that the Bank of Amsterdam acted on this principle.
Millions of money, which the merchants had deposited in its vaults, and for the safe-keeping of which, and the transferring of which from one account to another, they paid a premium, were lent by the Bank to the India Company, and to the Provinces of Holland and West Friesland. The fact was long kept secret but was discovered when the French entered Amsterdam in 1794. What was regarded as a shameful breach of confidence in the Bank of Amsterdam, is, with our American Banks, an avowed principle of action? They all lend the money deposited with them for safekeeping, and it is in this way that the Banks in the large cities make a great part of their profits.
All the money required for wholesale transactions is their permanent deposit. It may go out one day, but it returns the next, and it may be transferred from one bank to another, but it is never long out of some of the Banks, and for the same sum of money there are frequently two creditors-one in favor of him by whom the money has been deposited, and another in favor of him to whom it has been lent.
These Bank credits have a very different effect from the Leger entries of private traders. Whoever sells on trust, puts on his goods an additional price, equivalent to the interest for the time to which payment is deferred. Sellers may persuade purchasers to the contrary, and, in some cases, the capital inlay is so plentiful that the amount of interest on a small sum, for a short period, maybe scarcely appreciable. In other cases, the increase of price is greater than the amount of interest; as with fashionable tailors and shoemakers, who are forced to charge insurance on each item, and make the honest pay for themselves and the dishonest also. Their business would not otherwise yield the common profits of stock and the common wages of labor But Bank credits are in all cases equal to cash.
The Bank check goes as far as Banknotes, for Banknotes can be obtained for it on demand. The increase of Bank credits has the same effect on prices as an increase in Banknotes. lie who has deposited money ill the Bank, and he to whom it has been loaned, appear as competitors in the market, and raise prices by bidding against one another. It is the same sum of money with which they are contending, and the seller of goods can get it from one only. But there are two credits for this money in the Bank, and the credit is equivalent to cash, both to him who has deposited the money, and him to whom it has been lent. Our American Banks of Discount must be distinguished from Loan Offices, or institutions which lend no more than the amount of their own capital.
As some express it, the business of the American Banks is “to lend credit.” These Banks must also be distinguished from the Bank of Amsterdam, as it once was, and the Bank of Hamburg, as it now is. Into those cities, there was a great influx of foreign coin, of various denominations, and much of it clipped or worn. To save the trouble of ascertaining the exact value of each parcel, by sorting it on every transaction, it was deposited in Bank, and credit granted to each merchant for the amount he deposited, according to mint valuation, a small sum is deducted for warehouse rent, and a small fee charged on each transfer.
These Banks were mere offices of deposit and transfer-not of discount. They were very different from our American Banks.
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