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will be necessary for them to keep in their coffers to meet the ordinary demands of their customers, and employ the balance in discounting mercantile bills, in the purchase of securities, or in some other sort of profitable adventure; so that their protits consist of the sum they realize from such part of the monies lodged in their hands as they can venture to employ in an advantageous way, after deducting the various expenses attendant on the management of their establishments. A bank of deposit would never be established if it had to depend on its own capital; it makes no profit, in its capacity of bank, till it begins to employ the capital of others.
The directors of the Bank of England do not allow any individual to overdraw his account. They answer drafts to the full extent of the funds deposited in their hands; but they will not pay a draft if it exceed their amount. Private bankers are not generally so scrupulous; most of them allow respectable individuals in whom they have confidence to overdraw their accounts, those who do so paying interest at the rate of 5 per cent. on whatever sums they overdraw. The possession of this power of overdrawing is often a great convenience to merchants, while it is rarely productive of loss to the banker. The money which is overdrawn is usually replaced within a short period ; sometimes, indeed, in a day or two. The directors of the Bank of England decline granting this facility, from a disinclination on their part to come into competition in a matter of this sort with private bankers, who transact this kind of business better, probably, than it could be done by a great establishment like the Bank.
Banks afford great facilities to the public in the negotiation of bills of exchange, or in the making of payments at distant places. Many of the banking companies established in different districts have a direct intercourse with each other, and they have all correspondents in London. Hence an individual residing in any part of the country, who may wish to make a payment in any other part, however distant, may effect his object by applying to the bank nearest to him. Thus, suppose A. of Penzance has a payment to make to B. of Inverness : to transmit the money by letter would be hazardous; and if there were fractional parts of a pound in the sum, it would hardly be practicable: how then will A. manage? He will pay the sum to a banker in Penzance, and his debtor in Inverness will receive it from a banker there. The transaction is extremely simple: the Penzance banker orders his correspondent in London to pay to the correspondent of the Inverness banker the sum in question on account of B., and the Inverness banker, being advised in course of post of what has been done,
A small commission charged by the Penzance banker, and the postages, constitute the whole expense. There is no risk whaterer, and the whole affair is transacted in the most cominodious and cheapest manner.
Recently, however, the facilities given to the transmission of money by means of post-office orders have materially interfered with this branch of banking business, especially in the transmission of small sums, and are a great convenience to the publie. (See Post OFFICE.)
By far the largest proportion both of the inland bills in circulation in the country, and also of the foreign bills drawn upon Great Britain, are made payable in London, the grand focus to which all the pecuniary transactions of the empire are ultimately brought to be adjusted. And in order still further to economise the use of money, the principal bankers of the metropolis are in the habit of sending a clerk each day to the clearing house in Lombard-street, who carries with him the various bills in the pos. session of his house that are drawn upon other bankers; and having exchanged them for the bills in the possession of those others that are drawn upon his constituents, the balance on the one side or the other is paid in cash or Bank of England notes. this contrivance the bankers of London are able to settle transactions to the extent of several millions a day, by the employment of not more, at an average. than from 200,0001. to 300,0001. of cash or bank notes. — (See CLEARING House.)
In consequence of these and other facilities afforded by the intervention of bankers for the settlement of pecuniary transactions, the money required to conduct the business of an extensive country is reduced to a trifle only, compared with what it would otherwise be. It is not, indeed, possible to form any very accurate estimate of the total saving that is thus effected; but, supposing that 50 or 60 millions of gold and silver and bank notes are at present required, notwithstanding all the devices that have been resorted to for economising money, for the circulation of Great Britain, it may, one should think, be fairly concluded that 200 millions would, at the very least, be required to transact an equal extent of business but for those devices. If this statement be nearly accurate, and there are good grounds for thinking that it is rather under than over rated, it strikingly exhibits the vast importance of banking in a public point of view. By its means 50 or 60 millions are rendered capable of performing the same functions, and in an infinitely more commodious manner, that would otherwise have required four times that sum; and supposing that 20 or 30 millions are employed by the bankers as a capital in their establishments, no less than 120 or 130 millions will be
altogether disengaged, or cease to be employed as an instrument of circulation, and made available for employment in agriculture, manufactures, and commerce.
The security afforded by a bank of deposit is a matter as to which there must always be more or less of doubt. When, indeed, a banking company confines itself to its proper business, and does not embark in speculations of unusual hazard, or from which its funds cannot be easily withdrawn, in the event of any sudden run or demand, it can hardly ever fail of being in a situation to meet its engagements; whilst the large private fortunes that most commonly belong to the partners afford those who deal with it an additional guarantee. Much, however, depends on the character of the parties, and on a variety of circumstances with respect to which the public can never be correctly informed; so that though there can be no doubt that the security afforded by many private banks of deposit is of the most unexceptionable description, this may not be the case with others.
All joint-stock banks, or banks having more than six partners, whether for deposit and issue, or for deposit merely, are ordered, by the act 3 & 4 Will. 4. cap. 83., to send quarterly returns of the number and names of their partners to the stamp office. But this act does not apply to private banks, or banks not having more than six partners, though we see no good reason wliy similar returns should not, and several why they should, be required from them as well as from others. At present few have any certain knowledge of the partners in private banks. Individuals often appear in the names of firms who have been dead for many years; and it has not unfrequently been found in cases of bankruptcy that parties of large fortune, who were supposed to have belonged to the concern, had withdrawn long previously. All uncertainty and obscurity of this kind might, however, be easily put an end to by making periodical declarations of the names of the partners; and provided this were done, and the names made sufficiently public, we doubt whether any other step should be taken for interfering in any way with banks of deposit. There is in this respect a wide difference between them and banks of issue. It is the duty of the government to take care that the value of the currency shall be as invariable as possible; but it has never been pretended that it is any part whatever of its duty to inquire into the security given by the borrowers to the lenders of money, any more than into the security given by the borrowers to the lenders of any thing else. Government very properly obliges a goldsmith to have his goods stamped, this being a security to the public that they shall not be imposed on in buying articles of the quality of which they are generally ignorant; but it does not require that the persons to whom the goldsmith sells or lends his goods should give him a guarantee for their payment. This is a matter as to which individuals are fully competent to judge for themselves; and there neither is nor can be any reason why a lender or depositor of bullion or notes should be more protected than a lender or depositor of timber, coal, or sugar. Gold being the standard or measure of value, government is bound to take effectual precautions that the currency shall truly correspond in the whole and in all its parts with that standard, – that every pound note shall be worth a sovereign, and that the amount and value of the aggregate notes in circulation shall vary exactly as a gold currency would do were it substituted in their stead. But this is all that government is called upon to do. If A. trust a sum of money in the hands of B., it is their affair, and concerns no one else. Provided the money afloat correspond with the standard, it is of no importance, in a public point of view, into whose hands it may come. The bankruptcy of a deposit bank, like that of a private gentleman who has borrowed largely, may be productive of much loss or inconvenience to its creditors. But if the paper in circulation be equivalent to gold, such bankruptcies cannot affect either the quantity or value of money, and are therefore injurious only to the parties concerned.
(2.) Substitution of Notes for Coins -- Banks of Issue — Means by which the Value of Notes may be kept on a Level with the Value of the Precious Metals. --- Notwithstanding the precious metals are in many respects admirably fitted to serve as media of exchange (see art. MONEY), they have two very serious drawbacks--their cost, and the difficulty and expense of carrying them from place to place. If the currency of Great Britain consisted only of gold, it would amount to at least sixty millions of sovereigns; and the expense attending such a currency, allowing only £ per cent. for wear and tear and loss of coins, could not be reckoned at less than 3,250,0001. a year. The weight of 1000 sovereigns exceeds 21 lbs. troy; so that were there nothing but coins in circulation, the conveyance of large sums from place to place to discharge accounts would be a very laborious process, and even small sums could not be conveyed without considerable difficulty. Hence it is that most commercial and civilised nations have fabricated a portion of their money of less costly and heavy materials, and resorted to various devices for economising the use of coin. Of the substitutes for the latter hitherto suggested, paper is in all respects the most eligible. When governments are sufficiently powerful and intelligent to enforce the observance of contracts, individuals
possessed of written promises from others that they will pay certain sums at specified periods begin to assign them to those to whom they are indebted ; and when those by whom such obligations are subscribed are persons of whose solvency no doubt can be entertained, they are readily accepted in payment of the debts due by one individual to another. But when the circulation of obligations or bills in this way has continued for a while, individuals begin to perceive that they may derive a profit by issuing them in such a form as to fit them for being readily used as a substitute for money in the ordinary transactions of life. Hence the origin of bank notes or paper money. An individual in whose wealth and discretion the public have confidence being applied to for a loan, say of 5,0001., grants the applicant his bill or note payable on demand for that sum on his receiving adequate security for its repayment with interest. Now, as this note passes, in consequence of the confidence placed in the issuer, currently from hand to hand as cash, it is quite as useful to the borrower as if he had obtained an equivalent amount of gold; and supposing that the rate of interest is 4 per cent., it will yield. so long as it continues to circulate, a revenue of 2001. a year to the issuer. A sense of the advantages that might, in this way, be derived from the circulation of bills or notes led to the formation of banks for their regular issue. Those who issue such notes, coin as it were their credit. They derive the same revenue from the loan of their written promises to pay certain sums that they would derive from the loan of the sums themselves; and while they thus increase their own income, they at the same time contribute to increase the wealth of the society. Besides being incomparably cheaper, bank notes are also incomparably more commodious than a metallic currency. A bank note for 1,0001, or 100,000). may be carried about with as much facility as a single sovereign. It is of importance, too, to observe, that its loss or destruction, whether by fire, shipwreck, or otherwise, would be of no greater importance, in a public point of view, than the loss or destruction of as much paper. No doubt it might be a serious calamity to the bolder; but to whatever extent it injured him, it would proportionally benefit the issuer, whereas the loss of coin is an injury to the holder without being of service to any one else; it is, in fact, so much abstracted from the wealth of the community.
To obviate the endless inconveniences that would arise from the circulation of coins of every weight and degree of purity, were there no restrictions on their issue, all governinents have forbidden the circulation of coins except they be of a certain specified or standard weight and fineness. And the recurrence of similar inconveniences from the issue of notes for varying sums, and payable under varying conditions, has led, in all countries in which paper money is made use of, to the enacting of regulations forbidding the issue of notes below a certain amount, and laying down rules for their payment. In England at this moment no note payable to bearer on demand can be issued for less than five pounds, and they must all be paid the moment they are presented. In Scotland and Ireland the minimum value of bank notes is fixed at one pound, the regulations as to payment being the same as in England. In order to preserve the monopoly of the London circulation to the Bank of England, no notes payable to bearer on demand are allowed to be issued by individuals or associations, other than the Bank of England, within sixty-five miles of St. Paul's. But beyond these limits every one who complies with the above regulations as to the minimum amount of notes, and who promises to pay them on demand, may, on paying the stamp-duty, and making returns of the issues to the stamp office, circulate any amount of notes he can succeed in getting the public to take oft:
But though the condition that they shall be paid on demand, and the belief that this condition will be complied with, be necessary to sustain the value of notes issued by private parties or associations, it is not necessary to sustain the value of paper money, properly so ealled, or of notes which have been made legal tender. The only thing required to sustain the value of the latter description of currency is, that it should be issued in limited quantities. Every country has a certain number of exchanges to make; and whether these are effected by the employment of a given number of coins of a particular denomination, or by the employment of the same number of notes of the same denomination, is, in this respect, of no importance whatever. Notes which have beer made legal tender, and are not payable on demand, do not circulate because of any confidence placed in the capacity of the issuers to retire them; neither do they circulate because they are of the same real value as the commodities for which they are exchanged; but they circulate because, having been selected to perform the functions of money, they are, as such, readily received by all individuals in payment of their debts. Notes of this description may be regarded as a sort of tickets or counters to be used in computing the value of property, and in transferring it from one individual to another. And as they are nowise affected by fluctuations of credit, their value, it is obvious, must depend entirely on the quantity of them in circulation as compared with the payments to be made through their instrumentality, or the business they have to perform. By reducing the supply of notes below the supply of coins that would circulate in their
place were they withdrawn, their value may be raised above the value of gold; while, by increasing them to a greater extent, it is proportionally lowered.
Hence, supposing it were possible to obtain any security other than immediate convertibility into the precious metals, that notes declared to be legal tender would not be issued in excess, but that their number aboat would be so adjusted as to preserve their value as compared with gold nearly uniform, the obligation to pay them on demand might be dispensed with. But it is needless to say that no such security can be obtained. Wherever the power to issue paper, not immediately convertible, has been conceded to any set of persons, it has been abused; or, which is the same thing, such paper has unifurmly been over-issued, and its value depreciated from excess. And it is now admitted on all hands to be quite indispensable, for the prevention of injurious fluctuations in the value of money, that all notes be made payable, at the pleasure of the bolder, in an unvarying quantity of gold or silver.
But though such be the law in this and most other countries, it is, we are sorry to say, operative only on the richest, most cautious, and respectable bankers; and is found to afford no real security against the roguery and misconduct of others. This security is, however, the more indispensable, seeing that the issue of notes is, of all businesses, that which seems to hold out the greatest prospect of success to the schemes of those who attempt to get rich by preying on the public. The circumstances that excite the public confidence in the first instance, and that afterwards keep it up, are often of the most treacherous description. The cost of engraving and issuing notes is also but an inconsiderable item, compared with the sums for which they are issued, and provided they be got into anything like extensive circulation, they become at once considerably productive. They are seldom issued, except on the deposit of bills or other securities yielding a considerable rate of interest ; so that if an individual
, or set of individuals, with little or no capital, contrive, by fair appearances, promises, and similar devices, to insinuate himself or themselves into the public confidence, and can maintain 20,0001., 50,005., or 100,0001. in circulation, he or they secure a good income in the mean time; and when the bubble bursts, and the imposture is detected, they are no worse off than when they set up their bank. On the contrary, the presumption is that they are a great deal better off; and that they have taken care to provide, at the cust of the credulous and deceived public, a reserve stock for their future maintenance. Hence, seeing the facilities for committing fraud are so very great, the propriety, or raiher necessity, of providing against them.
Ii must not be imagined that this is mere hypothetical reasoning. On the contrary, as every body knows, innumerable instances have occurred of the population of extensive districts liaving suffered severely from the insolvency of bankers in whom they placed the utmost confidence. In 1793, 1814-16, and 1825-26, a very large proportion of the provincial banks stopped payments, and produced by their fall an extent of bankruptcy and ruin that lias seldom been equalled in any other country. But when such gigantic disasters had already happened, and were on the eve of again happening in 1837-38, it became the bounden duty of government to hinder, by every means in its power, their recurrence. It is no exaggeration to affirm that we have sustained a thousand times more injury from the circulation of worthless paper, or paper issued by persons without the means of retiring it, than from the issue of spurious coin.
It has been supposed that the objections to the issue of notes because of the risk of non-payment might be obviated, were they issued only by associations or joint stock companies. But there is no real foundation for any such supposition. There cannot, in fact, be a greater error than to suppose that because a bank has a considerable number of partners it will necessarily be either rich or well managed. It may be neither the one nor the other. A single individual may possess more wealth than a number of individuals assuciated together; and the chances are, that if he engage in banking or any other business it will be better managed than by a company. Under our present system, (and it cannot be prevented under any system,) the partners in joint stock banks, as in others, may be men of straw, or persons without property, and unable to fulfil their engagements. It is of the essence of a secure and well established paper currency that the notes of which it consists should be of the exact value of the gold or silver they profess to represent, and that, consequently, they should be paid the moment they are presented. But it is not enough to order that this condition shall be uniformly complied with. Such order is obeyed only by the opulent, prudent, and conscientious banker, and forms little or no check on the proceedings of those of a contrary character, It is the latter class, however, that it is especially necessary to look after; and it is needless to say that any system that permits notes to be issued without let or hindrance by speculative, ignorant, or unprincipled adventurers, must be essentially vicious.
It has sometimes been contended, in vindication of the plan of allowing any individual, or set of individuals, how bankrupt soerer in furtune and character, to issue notes
without check or limitation of any kind other than the promise to pay them on demand, that they are essentially private paper ; that their acceptance in payment is optional; and that as they may be rejected by every one who either suspects or dislikes them, there is no room or ground for interfering with their issue ! But every body knows that, whatever notes may be in law, they are in most parts of the country practically and in fact legal tender. The bulk of the people are totally without power to refuse them. The currency of many extensive districts consists in great part of country potes, and such small farmers or tradesmen as should decline taking them would be exposed to the greatest inconveniences. Every one makes use of or is a dealer in money. It is not employed by men of business only, but by persons living on fixed incomes ; by women, labourers, minors; in short, by every class of individuals, very many of whom are necessarily, from their situation in life, quite unable to form any estimate of the solidity of the different banks whose paper is in circulation. Such parties are uniformly severe sufferers by the failure of banks. The paper that comes into their hands is a part of the currency or money of the country; and it is quite as much the duty of Government to take measures that this paper shall be truly and substantially what it professes to be, as that it should take measures to prevent the issue of spurious coins or the use of false or deficient weights and measures.
The fact is, that the paper currency of the country cannot be on a perfectly sound footing until the issue of notes, whether by joint stock banks or private individuals, be suppressed. It has been proposed to obviate any recurrence of the wide-spread ruin that has so frequently resulted from the bankruptcy of banks of issue, to compel them to give security for the payment of their notes; and the adoption of such a regulation would, no doubt, have been a vast improvement on the late system.* But though the exacting of security would have materially mitigated, it would not have eradicated the rices of a system which allowed banks to be established at the pleasure of individuals. A paper currency is not in a sound or wholesome state, unless, 1st, means be taken to insure that each particular note or parcel of such currency be paid immediately on demand; and unless, 2nd, the whole currency vary in amount and value exactly as a metallic currency would do were the paper currency withdrawn and coins substituted in its stead. The last condition is quite as indispensable to the existence of a well-established currency as the former; and it is one that cannot be fully realised otherwise than by confining the issue of paper to a single source.
It is easy to see that were paper issued only by the Bank of England, or some one source in London, and then only in exchange for bullion, the currency would be in its most perfect state, and would fluctuate exactly as it would do were it wholly metallic. But at present, the currency is supplied by hundreds of individuals and associations, all actuated by different and frequently conflicting views and interests. The issues of the Bank of England, previously to the late changes, were generally, though not always, governed by the state of the exchange, or rather by the influx and efflux of bullion, increasing when it flowed into, and decreasing when it flowed out of the country. But it was quite otherwise with the provincial bankers. Their issues were not regulated by any such standard, but by the state of credit and prices in the districts in which they happened to be situated. If their managers supposed that these were good or improving, they rarely hesitated about making additional issues. Hence, when the state of the exchange and the demand on the Bank of England for bullion showed that the currency was redundant, and ought to be contracted, the efforts of the Bank to effect its diminution were often impeded, and met by a contrary action on the part of the country banks.
This was not owing to the ignorance of the latter. Under the supposed circumstances, the country bankers saw, speaking generally, that they ought also to contract; but being a very numerous body, comprising several hundred establishments scattered over all parts of the country, each was impressed with the well founded conviction that all that he could do in the way of contraction would be next to imperceptible; and no one ever thought of attempting it, so long as he felt satisfied of the stability of those with whom he dealt. On the contrary, every banker knew, were he to withdraw a portion of his notes, that some of his competitors would most likely have embraced the opportunity of filling up the vacuum so created ; and that consequently he should have lost a portion of his business, without in any degree lessening the amount of paper afloat. Ilence, in nineteen out of twenty instances, the country banks went on increasing their aggregate issues long after the exchange had been notoriously against the country, and the Bank of England had been striving to pull up. But the moment the pressure extended to them they ran headlong into the opposite extreme, and unreasonable suspicion took the place of blind unthinking confidence. The cry of sauve qui peut then became all but universal. A recoil seldom took place without destroying more or fewer of the provincial banks, involving those who held their notes or had deposits in
We stated at length the grounds on which such security might be demanded in the previous edition of this dictionary.