Banks are institutions with a threefold relation to money; they receive money on deposit, they loan money and they issue money. There are two additional functions closely related to the others, if not identical with them; banks borrow money and invest money. It may be added that banks also transfer money, but this applies to credit rather than to money. In the popular mind and in actual practice banks are identified with the use of money to such an extent that it is impossible to get a clear conception of banking functions without some knowledge of money. This involves study of economic laws which, as we have intimated, are the forces that control banking just as natural laws govern engineering, medicine, navigation or other sciences.

All our modern complicated systems of commerce, trade and business in general grow out of the simple fact that man has certain wants which must be satisfied. He must be fed, clothed and housed. These are the primary wants. After them come education, religion and social needs and so on from the sheer necessities of life, to the luxuries. The predominant characteristic of human wants is that they are unlimited; each want satisfied leads to another and in the effort to secure what we need, habits are formed which, in turn, fix standards of living for men and nations.

The term used to define things that satisfy wants is wealth, which consists of anything that ministers to our pleasure or happiness and serves to keep away pain or discomfort. Three factors enter into the creation of wealth: land, labor and capital. The first includes the surface of the earth and all that is above or below it, in short, land is natural resources. The second factor is man himself, who by the application of his strength and skill converts the raw material of the field, the forest or the mine into such form that he can make use of the wealth thus created. This is labor. The third factor is capital.

Of all economic terms in common use, the three most generally confused are capital, wealth and money. They are not by any means synonymous. We have seen, first, what wealth is, and we have learned that there are three factors that go to produce it. The first two produce directly, while capital produces indirectly through the other two. Capital is wealth that works in the production of more wealth. For example, the miner applies his labor to the vein of coal and produces wealth in the form of fuel. He uses a pick and other implements; a track is built into the mine over which cars are hauled by a small compressed-air motor; at the mouth of the shaft is an elevator operated by an engine and other machinery. These implements, tools, machinery, etc., are capital. If the capital of the mine is $100,000, it means that this machinery cost that amount of money. The money itself is gone into other hands in the process of circulation. In the banking business, money is the raw material so to speak, so that the terms capital and money are nearly synonymous as applied to banks. How capital arises will be discussed later.

An object is said to have utility when it satisfies a want. Value exists, however, only when an effort or sacrifice of some sort is required to secure the object having utility. The value, therefore, depends largely on the extent or degree of the sacrifice necessary to obtain use of the thing desired. Let us suppose a man owns a farm in one corner of which he finds a hard, black stony deposit not useful for anything so far as he can discover. A neighbor, upon experiment, learns that the black stones will burn and so possess utility. Thereupon he gives the man who owns the coal some of his wheat in exchange for the fuel and thus the coal becomes valuable. It is power of exchange that bestows value.

Thus a thing may be very useful, as for example, water, but of no value unless it can be exchanged for something else.

Exchange is the process of giving and taking one thing for another. It is not necessary for each of us to produce for ourselves all the things that we need. The farmer raises potatoes, but he does not need to make his own shoes. He may exchange his potatoes with a shoemaker for a pair of boots. But this would be a clumsy process since each one who had anything to trade would need to find someone who was willing to exchange for something else that was wanted. Therefore, a medium of exchange becomes necessary and this medium of exchange we call money. Money may be anything that the producer will accept in exchange for his product, but it must have value in itself or else we will not be able to exchange our money for other goods. It must be something that does not exist in too abundant quantity else it will require no sacrifice to secure it and it will, therefore, lose its value. It must be easily recognized or else it may be counterfeited and so there will be no confidence in it. It must contain large value in small bulk, or it will not be convenient for use. It must be durable, so that it can be stored up for future use. Finally, it must be of a material that will not be destroyed, by being divided and redivided, which is necessary since the same quantity or values will not always be offered in exchange. There is but one material that possesses all these qualities and that is gold. Hence, by a long process of experiments and eliminations, all large nations have come to the conviction that gold is the ideal medium of exchange. In order to prevent any controversy that might arise between the buyer and seller as to the purity or weight of the gold offered in exchange, the government coins it in metal discs and then by a stamp, certifies as to the quantity and quality of the bullion contents. This is called coinage.

Not all money is gold, however. There are three kinds in all, standard money, which is usually gold; credit money, generally made of paper; and token money, which is the small change, the bullion contents of which are less than the coin value. In the United States there are more varieties of these three kinds of money in circulation than in any other country. We have gold coins; gold certificates, which are practically the same thing; standard silver dollars and silver certificates; fractional silver; nickels and cents; Treasury notes, which were issued to purchase silver bullion and are then redeemed when presented, the bullion having been coined; U. S. notes, or "greenbacks," which are called "fiat" money because the government forces their circulation; and bank notes. For some years to come, we will have three kinds of bank notes in circulation; the national bank notes, Federal reserve notes, and the notes issued by the Federal reserve banks, secured by U. S. bonds which, beginning Dec. 23, 1915, they may buy from national banks.

In addition to being used as a medium of exchange, money has two other uses. It is used as a standard of value and as a basis of deferred payments or credit. The value of every form of wealth is quoted in terms of money and in this sense money is used as a standard of value. This use of money causes many people to confuse money with wealth. The third use of money, as a basis of credit, or payments to be made at a later date, is an important one from a banking viewpoint because it is this use of money that is involved in bank deposits. Bank deposits, for example, may be set down for the entire country at about 18 billions of dollars (1915), whereas there are less than 4 billions of money, the medium of exchange in the United States.

It is not necessary that there should be as much money as is represented by other forms of wealth. Using money as a standard of value, we may say a certain building is worth $10,000, an automobile, $1,000, your watch, $20, your hat, $2, and so on. But since these things are not purchased by each of us every day, the nation as a whole will need only as much money as is required to make exchanges. And so with bank deposits. If every depositor wished to withdraw his balance in cash daily, there could not be a larger amount of bank deposits represented by a money value, than there was actual money in the country. Panics are due to the fact that people confuse values with money and when everyone tries to "sell" or convert his standard-of-value money and basis-of-credit money into medium-of-exchange money, there isn't enough to go around. Banking comes to the rescue in such a situation with the note-issuing function which will be explained later.

Through the use of checks and banking mechanism, bank deposits are also a form of credit money. If A wishes to pay B ten dollars, both having bank accounts, A writes his check or order upon his bank for that amount and gives it to B, who deposits the check to his credit. No actual money changes hands, the entire transaction consisting of debit and credit book entries. Here again we see why it is not necessary to have as much medium of exchange money as we have bank deposits.