'Cbe Conservative. 7 I
which are most used , and most charac
teristic of banking operations. Then ,
whether the customer chooses * to use
checks and transfer his deposit to
another person without taking the
funds from the bank ; or , whether he
finds his needs best served by talcing
notes of the bank away in his pocket
is settled merely by the wishes of the
borrower , and not by the will of the
bank. The amount of the loan being
fixed it then makes no difference what
ever to the bank , so far as its profit is
concerned , whether this credit to the
borrower takes the form of a deposit , or
of a withdrawal of its notes. Both are
equivalent demand-liabilities of the
bank. A note is a promise to pay on
demand ; so is a deposit. Either one
means that its holder refrains from de
manding actual money from the bank ,
the deposit or note answering all his
purposes. Large city banks have cus
tomers who scarcely ever xise anything
but deposits and checks , who never call
for notes ; and yet , without issuing
notes , these banks make a profit quite
as well as any note-issuing bank. It
imist be evident , at once , that the
privilege of issuing notes is not in itself
the means of profit ; but that the profit
arises out of the process of discounting ,
or lending.
On the other hand , in some parts of
the country checks are little used. To
make payment one needs a form of
money that will be taken irrespective of
any knowledge of the signature on the
check , or of whether or not the signer
has a deposit in the bank. And if the
transactions are for small sums , for re
tail trade , or payment of wages , checks
are not always convenient , especially if ,
as in rural districts , a bank is not close
by. Under these conditions , a borrower
at a bank will usually ask for that
means of payment which his situation
and the business habits of his commun
ity demand. If he cannot get it in that
form , his loan is ineffective. Hence the
habits of the community determine
which form of liability the bank will
make use of ; it is not determined by the
will of the bank. If the latter is not
able to conform to the business habits of
its customers it cannot loan in that dis
trict. In the interest of borrowers ,
therefore , a proper banking system
should be so ordered that it can adjust
itself to the needs of its constituency.
If banks are given perfect freedom in
conducting their business , whether
they issue notes or not is a question
merely of convenience to their custom
ers ; to a large city bank the privilege ol
issuing notes is of almost no advantage.
The government does no more in the
matter of supervising the issues of a
bank than it does
GOVERNMENT SU-
comi
PEIIVISIONOP
BANKS > the latter case.it
certifies to the fineness and weight of
the metal 'in a given coin ; it does this
not for the bullion owner , but to save
the public the inconvenience and delay
of weighing and testing the metal at
each exchange of goods and money. In
the same way it provides a banking
system , decides how the notes should
bo secured , redeemed , and the like , not
in the interest of the banks , not oven to
protect note-holders against loss ; but to
save the public the inconvenience and
delay involved in examining into the se
curity of each note ; for it is only when
bank notes are issued under such a sys
tem that it is unnecessary to examine
into the circumstances of each individ
ual bank that they can attain their
greatest usefulness. If , also , there is
tree banking , so that any body 01 reput
able men can form a bank under the
general law , banking is not a monopoly ;
and the bank which is unwilling to
issue its notes under a system that is
safe and wise for all , thereby indicates
that , if permitted , it might issue its
notes under methods little likely to boar
inspection and with the evident result
of loss or inconvenience to the public.
How truly the properly regulated
issue of bank notes is really in the in
terest and for the convenience of the
public may bo seen by taking a simple
illustration of those needs of a commun
ity which lead to the organization of a
bank.
Suppose the case of a farmer who desires -
sires to market his crop. His prospec
tive purchaser has not the immediate
funds in hand with which to purchase
the farmer's products. Ho offers to
give his note for some amount ( say
$1,000) ) . The farmer , however , wishes
to use the proceeds of the sale of his
crop in paying , the expenses which he
has incurred in raising it. The credit
of his purchaser is undoubted , so that
the farmer's creditors would unques
tionably accept the note of the pur
chaser in payment. In order that the
claims may bo all satisfied , the farmer
proposes to accept instead of one note
for § 1,000 , ono hundred notes for $10
each , and for the privilege of having
them payable on demand , he proposes
to forego the interest upon them. In
such a case the purchaser of the pro
duce might take the goods upon these
terms , and if his total property , upon
which the notes would become a lien ,
was formerly $10,000 , he would then
have $11,000 as security for the notes
that is to say , his original $10,000 and
$1,000 in property additional.
The illustration may be earned fur
ther : Suppose the merchant who pur
chased the farmer's crop were to extend
his operations and to purchase the pro
ducts offered for sale by nine others
giving on each occasion ono hundrec
notes of $10 each. The merchant has
now outstanding ono thousand promis
sory notes of his own of $10 each , male
ing $10,000 in all. These notes are al
payable on demand , and have been
given by the farmers who received theme
; o their creditors in payment of debts.
The notes being payable at the wish
of the holder , arc likely to bo presented
it any time. To enable him to meet the
notes as they are presented , the mer
chant has the original $10,000 of pro
perty with which ho started , and in ad
dition ten different lots of produce worth
$1,000 each or $10,000 in all. We may
assume that on a certain day , a month
after the notes were given , fifty of the
holders of the notes , finding it desirable
to obtain money , for the purpose perhaps
of paying taxespresent the notes for pay
ment. The merchant , foreseeing the
probability of this event has , in the
meantime , converted either a part of
his capital , or of the goods purchased ,
into coin ( as a reserve to meet demands ) .
He is thus prepared to meet the fifty
notes , and when presented ho pays for
them $500 in cash and destroys them.
In such a way as this , a community
otherwise devoid of a medium of ex
change , might derive great help from
the creation of such a currency , which
converts property into means of pay
ment. The farmers have been able to
market their crops and obtain the
means with which to satisfy their cred
itors without sacrifice. Had they not
been able to obtain from the merchant
the titles to immediate means of pay
ment , it might have been necessary to
sell their products at a heavy loss.
So far it has been assumed that the
deposits of a bank come into existence
when other per-
BANK DEPOSITS.
thdr
funds with the bank ; and that the
banks can lend the portion over and
above the sums needed for reserves.
But this is by no means the origin of
the principal sums which swell the deposits -
posits to very considerable , or even sur
prising , figures. It seems , at first , para
doxical to say that in the main deposits
do not result from the bringing of
money to a bank. And yet it is liter
ally true. This is indeed one of the
things most necessary to understand
about a bank , because it is thus only
that we can comprehend how a bank
creates a most effective currency with
out issuing any notes. No progress can
bo made in getting correct views of
banking and currency until we grasp
the fact that banks are not confined to
issuing notes when they wish to create
a medium for the exchange of goods.
Indeed , in no other way , can one clearly
see how largo city banks , without is
suing a single note , can supply their
customers with a perfectly satisfactory
medium of exchange. Such a currency
is readily supplied through the deposits
of a bank , 011 which checks are drawn.
A manufacturer may have a stock of
hardware , and yet ho needs a means of
payment at the present moment. If he
has sold goods on ninety days' time ,
and needs means to pay a note matur
ing tomorrow for materials used in his