We have discussed the relation of banks to money in the previous chapter. We have seen how money is necessary to industrial and commercial progress, not because of its own intrinsic worth but because it makes exchange possible. We can next take up a consideration of the part that banks play in the development of industry and wealth. Of all the great institutions that serve the people, such as schools and colleges, churches, railroads, the postoffice, newspapers and banks, the public knows least about banks. To the average person, they are places fitted up with vaults where savings may be stored, where clerks keep records of the balances which the bank will pay back, plus the interest that in some mysterious way has accumulated. And too often the bank clerk is content to think of the bank only as an institution that requires him to report at a certain hour in the morning, post figures in books, the real nature of which he does not understand, and then go home at night after he has struck a balance. The bank clerk ought to know why banks are necessary and how important are their functions, not only because it will enable him to work more intelligently, and with greater interest in his work, but he will also be able to explain the nature of banking to other people, many of whom distrust banks because they do not understand them.

Banks owe their origin to the simple law of nature that everything that lives grows and expands.

Nature is very generous and has so arranged her scheme of production and increase that every one, in fact every living thing, has in him or it the power to produce more than is needed for immediate consumption to sustain life. The bee, the ant and the squirrel store up surplus summer food for the winter; the mountain uplands and valleys nourish the deer and other wild creatures with an abundance each season renews. And man, in a civilized state of industry, can through his labor in any direction, produce more than he needs for his own sustenance. Perhaps it is nature's plan that he shall produce in his youth what he must consume in his old age.

With the development of exchange and the use of money this power to create surplus wealth is harnessed. The surplus wealth, converted into money, is laid aside - deposited in banks - for future consumption and thus capital, the third factor of production, has its origin. Wealth instead of being allowed to lie idle, is set to work to produce more wealth, which is good, since wealth is anything that adds to human welfare. Let us see how the bank sets money - the result of work - to work in turn.

Without exchange, when man was in the savage or pastoral stage, he produced for himself everything he consumed. As soon as he began to confine his labor to one particular thing which he would sell or exchange when completed, he began to feel the need of credit, that is, the power to borrow from his neighbor for sustenance until he was able to use or sell his own product. Of course, he would borrow not the actual goods, but the money to purchase them. Under modern conditions, money is borrowed and loaned for hundreds of purposes and in many different ways, but the underlying principle is always the same.

For example, the farmer plants his crop in the spring; he must buy seeds, pay for labor and keep his family in food and clothing until the fall when his harvest ripens and can be sold. The store-keeper or merchant fills his shelves with endless variety of goods, part of which he has bought with his own capital and part with money he has borrowed to be paid back when his goods are sold. The builder erects a dwelling or larger edifice for which he must buy labor and material. He will need money until his contract is completed. Railroads are built, mines developed, crops must be moved, new enterprises financed and so on without limit, borrowed money making possible all these vast facilities that are indispensable to modern civilization.

These conditions would be as nearly impossible without banks as would be an efficient exchange system without money. If everyone who needed to borrow money was forced to search about for someone who had just the right amount to loan, there wouldn't be much business. Furthermore, those who had money to loan would need to be acquainted in each case with the borrower's ability to repay the debt else there would be loss and ultimate ruin.

Banks are storehouses where the equivalent of surplus wealth - money - may be accumulated and loaned for the purpose of creating more wealth. Thus it will be seen that still another virtue, thrift, which we are accustomed to urge upon men as bringing its own reward, is after all a cold business necessity. Men must work, produce surplus wealth, save a part of it or there will be no storehouse of money and credit which is so essential to the production of both the necessities and luxuries of life. The humble wage earner who puts aside even a small fraction of his income is doing more than fortify himself against the future. His accumulated savings added to those of all other classes, rich and poor, placed in banks and by them loaned out, make possible the industry that gives work and sustenance to all.

There are many ways in which money is deposited and loaned or invested. For this reason, there are several different kinds of banks. The same principles are involved in each case, however, and the young bank man who would become a banker is cautioned against the common error of thinking that each kind of bank is peculiar unto itself and so requiring a different course of study.