This section is from the "The Science Of Wealth" book, by Amasa Walker.
Lord Overstone, one of the best authorities, has maintained the negative; but most writers * in this country take the affirmative side of the question: indeed, there are, at the present time, few, if any, who doubt that deposits are currency. The New-York Board of Currency has given its verdict unequivocally as follows: " They constitute at this time five-sixths of the active currency of this city" See the official report of that association for November, 1858. No array of authorities, however, but an examination of facts, should determine the question.
* We do not know of any intelligent writer in this country who now denies that deposits are as truly currency as the circulation itself.
Deposits are an instrumentality by which by far the greatest amount of values are transferred in commercial centres. They discharge debts, purchase commodities, and perform all the functions of currency.
For example, A has a deposit in the Merchants' Bank. He purchases of B a bill of sugars, amounting to ten thousand dollars, and pays for the same with a check on that bank, with which B either draws the notes or specie of the bank, or has the check passed to his credit by the bank. This transaction has been equivalent to the transfer of ten thousand dollars in value from one party to the other.
If A owed B a note of ten thousand dollars, he might pay it in the same way.
Now, what difference did it make to A whether he had ten thousand dollars of bank-notes in his till, or an equal amount to his credit in the bank? Clearly, not the slightest. One was as truly currency as the other. If A was pondering the question whether he should purchase the sugar for cash (i.e., immediate payment), did not the consciousness that he had ten thousand dollars to his credit in bank operate on his decision precisely to the same extent as if he had ten thousand dollars of bank-notes in his pocket-book? Undoubtedly. Where, then, is the difference? And, if all this would be true in the case of A, then in the case of any one similarly situated; and therefore we must conclude, that deposits are, in their nature and influence, of the same character as bank-notes, and, of course, are currency.
All bankers and business men are well satisfied that deposits are even more active by far in transferring values than the bank circulation; that a much greater number of exchanges is made with deposits than with an equal amount of bank-notes.
A little reflection will satisfy any one that such is the fact. The sum of ten thousand dollars, for example, might easily pay in a single day, in ten different transfers by checks, a total of one hundred thousand dollars.
This would not be an extravagant supposition; but it would be quite improbable that bank-notes make ten payments in a single day.
The efficiency of money, or its substitutes, depends greatly upon the rapidity with which exchanges are made. John Stuart Mill recognizes this principle; and it is a very obvious one. It is on that principle that we see the propriety of admitting, that, although the active deposits in bank may be less than its notes, yet the greater rapidity with which they are used makes the whole amount equivalent in their effects to an equal amount of bank-notes.
The currency of any country is as its quantity multiplied by the rapidity of its circulation. This consideration will lead us to regard the whole amount of deposits as equal in effect to an equal amount of circulation.
Here it may be proper to explain why we have not placed the item of "stocks " held by the banks amongst their immediate resources. Many persons seem disposed to regard them as such. But, so far as the quality and character of the currency are concerned, the stocks held by the banks do not essentially differ from any other securities. Suppose a severe pressure for specie comes on, what can they do with them? Force the sale, and realize the money for them? This cannot be done, of course, at such a time, except at a great sacrifice; besides, if they do this, what will the banks receive for the stocks sold? Their own notes and deposits. There is nothing else in which the stocks can be paid for. But if, after having received their notes in this way, they refuse again to loan them, they contract the currency by so much, and increase the pecuniary distress by all that amount; if they do reloan the notes, they have gained no relief to themselves by the operation. The great object desired is to relieve the pressure for money: the sale of the stocks will have the opposite effect. Hence they cannot be regarded as the immediate resources.