PAPER
MONETARY SYSTEM

CHAPTER III
BANKS AND BANKING.

BANKING had its origin at an early period in the history of commerce, and a banker originally was simply a dealer in money.  In the New Testament mention is made of a bank in which money could be placed at interest, and only recently the tablets of an ancient banker, with their inscriptions uneffaced, were brought to light by the explorations now being made amongst the ruins of Italy.  In England, until as late as the beginning of the 18th century, the business of banking was carried on by goldsmiths.  Banking, however, as it is now conducted, is an institution of modern growth.  The check, certificate and bill of exchange have come to perform an important part in the work of exchange.  It is not the intention to enter into a consideration of the principles and details of banking further than is necessary to a proper understanding of the question of money, with which it is intimately connected.  Money, as has been explained, is an agency of trade, and, in an accumulated form as capital, an instrument of production.  The first thought of the possessor of money is safety and the next profit.  Money cannot accumulate value of itself, and consequently has to be put to use in order to bring its owner a return.  When hoarded it is not only useless to the owner, but society is deprived of the advantage of an important agency of exchange and of production.  It is, therefore, a matter of importance to society, as well as to the individual, that money should be afforded every opportunity to occupy the channels of trade and perform the uses for which it is designed.  The interests of society, as we have seen, are best promoted by a division of labor.  One class is devoted to agriculture, another to manufactures, trade, education, etc., etc., and each class is again subdivided into innumerable forms of industry.  In this way it happens that a class has grown up which is specially engaged in the collection, custody and investment of money, and in dealing in debts and credits based on money.  The banker offers reasonable safety and repayment on demand, or moderate interest, and in turn lends the money for the purposes of trade.  The offices of a bank are to receive money on deposit subject to order, to collect money, to invest money, to lend money, and to buy and sell securities and exchange.  The check and bill of exchange are invaluable aids to business and commerce, and for many purposes are preferable to money.  The great facilities which a bank affords for the transaction of business, as well as its ability to promote the circulation of money and foster enterprise, render it an agency of trade, second in importance and usefulness only to money itself.  Like all other human institutions, banking is of course liable to abuses, but when legitimately and properly conducted there is no other institution so closely connected with the well being of every individual, or one which is capable of rendering so much service to society.  It is, therefore, important that banking, like money, should be based upon sound principles.  Banking legitimately conducted is purely a matter of private enterprise, as much so as dealing in grain or lumber, and the relation, which the banker sustains to the community, differs in no respect from that of an individual, following any other pursuit or profession.  Banking should, therefore, be free, and subject only to general laws, such as the laws under which partnerships are conducted.  The generally recognized and acknowledged importance of banks, however, have led individuals to seek and governments to bestow upon them powers and privileges, such as are bestowed upon the vocation of no other class of society.  We refer more particularly to the power, with which banks are clothed by law, of issuing promissory notes, nominally payable on demand, to circulate as money.  There is no reason why bankers should be invested with this authority any more than any other class of society.  The temporary relief which, by reason of this privilege, they are enabled to afford to individuals, and from which the community derives a benefit, has blinded society to the far greater evils which flow from the custom.  A distinguished writer1 upon the subject of money and finance, in speaking of this feature of banking, says :  “ The bad practice which originated with the Bank of England was an agreement to pay gold on demand for its inscriptions of credit.  This was to undertake to do an impossibility.  The general debts of a bank are redeemed by its general resources, and these consist mostly of loans and discounts which mature in the future.  A more flagrant violation of sound banking was never conceived.  It has repeatedly involved the banks of the United States in fatal embarrassments, and brought ruin upon thousands of merchants who were otherwise able to pay their debts and retain a handsome surplus.”  It is not alone the excessive and unfair profits which this system (banks of issue) enables those engaged in it to reap from the public, but the periodical derangement of business and trade, so fruitful of disaster, which it leads to, that renders it so obnoxious.  Jefferson, who never failed to warn his countrymen against the evils of the system, in a letter upon the subject in 1813, said :  “ But it will be asked, ‘ Are we to have no banks ?  Are merchants and others to be deprived of the resource of short accommodations found so convenient ?’  I answer, let us have banks ;  but let them be such as are alone to be found in any country on earth, except Great Britain.  No one has a natural right to the trade of a money-lender but he who has the money to lend.  Let those, then, among us who have a moneyed capital, and who prefer employing it in loans rather than otherwise, set up banks, and give cash, or national bills (United States Treasury notes) for the notes they discount.  It is from Great Britain we copy the idea of giving paper in exchange for discounted bills ;  and while we have derived from that country some good principles of government and legislation, we unfortunately run into the most servile imitation of all her practices, ruinous as they are to her, and with the gulf yawning before us into which these practices are precipitating her.”

The dependence of the government upon a medium of exchange for its revenues has contributed largely to the abuses of the banking system, to which we refer, but since the Treasury note, made a legal tender, has been found to answer all the purposes of money, much better than gold, silver, or the bank note, there is no longer any reason for tolerating banks of issue.  That this theory in substance finds able advocates, even in England, is manifest from the following extract from an article in the Westminster Review of October,1873, entitled, “ The Mint and the Bank of England:”

“ In breaking this monopoly of the bank, we should be taking great strides toward the attainment of that ideal system of currency which Sir Robert Peel must have had in heart when he passed his currency laws ;  a system under Which the State shall be the sole fountain of issue ;  under which no money shall circulate on credit, or if it does, shall circulate on the credit of the State, all bank notes, as well as coins, bearing the image and superscription of the head of the State, and under which all profits upon the issue of money shall form part of the imperial revenue. * * The power of issue, now exercised by the Bank of England, and by the English, Irish and Scotch banks, [all private corporations,] is a relic of feudalism. * * The manufacture of coin has been suppressed long ago, but the manufacture of paper money still remains, and the profits of this manufacture are allowed to remain in private hands, the State taking upon itself the manufacture of the only part of the currency upon which there is, or can be, a loss.  It is high time this state of things ceased ;  that all rights of issue were gathered into the hands of the State ;  that the debt of the Bank of England was paid off ;  that all notes but those of the State were suppressed ;  that the powers of issue, now, exercised by the banks, were vested in the royal mint, * * and that the profits upon paper currency were claimed by the State, and appropriated * * to the reduction of taxation.”

Public banks in the United States are conducted solely for private gain, and are free from governmental connection or control.  They are, however, as we have already observed, invested with extraordinary privileges and franchises of a public nature, intended for the public good.  While they are eminently successful in enabling their corporators and stockholders to secure their own ends, they are far from being beneficial to the public.  The languishing condition of the country at the present time demands that the right to make a circulating medium of exchange shall no longer be suffered to remain in private hands, but shall be restored to the nation, to whom it belongs, and by whom alone it can be exercised in a spirit of equal and exact justice to all.

1 J.S. Gibbons, in Jobnson’s Universal Cyclopædia.