5. Banks of the nature of those of Venice, Amsterdam, and Hamburg, never existed in this country; and we must now explain the mechanism of that great system of commerce in Debts, Credits, or Rights of action, called "Banking" as it has been carried on in this country.

It was during the civil war, as we have shewn elsewhere, that the Goldsmiths of London began to receive the cash of the merchants in deposit. They not only agreed to repay it on demand, but to pay 6 per cent, per annum for the use of it. Consequently in order to enable them to do that, it necessarily became their Property to trade with as they thought best. They were not the Trustees of the money, but its Proprietors; and it was not placed with them as a Depositum to be restored in specie; but it became theirs as a Mutuum to be restored in genere: and therefore they received it as "bankers."

When therefore these Goldsmith-Bankers received this money in deposit, they gave in exchange for it, or "issued" to their customers, a Credit, or Right of action, to have an equal amount of money back on demand. And it must be observed that it is this banker's Credit, or Right of action, which in banking language is termed a Deposit. The Money itself is called an Asset,

6. Let us for the present leave out of consideration any private property the goldsmiths may have had, and for the sake of convenience let us deal with small figures. Suppose the goldsmith has £10,000 deposited with him by his customers; then as he has created an equal amount of Credit, Debt, or Rights of action against himself, which in banking language are called Deposits, in exchange for this money his accounts would stand thus -

Now experience would soon shew him that if some of his customers demanded payment of their Deposits, or Credits, from day to day, others would probably pay in about an equal sum, so that at the end of the day there would probably not be much difference in his cash. In practice it will be found that in ordinary times, a banker's balance in cash will seldom differ by more than one 36th part from day to day. So that if he retains one tenth part of his cash to meet any demands for payment that may be made, that is ample and sufficient in ordinary times.

The goldsmith, then, in the above case, if he kept £1000 in cash might trade with the remainder so as to produce profits to pay interest upon the whole.

They found that the most eligible mode of trading was to buy, or discount Commercial Debts, in the form of Bills of Exchange.

Now we have observed above that "bankers" invariably buy, or discount, Commercial Bills, with their own Credit in the first instance. The banker, therefore, would see that if an amount of cash was sufficient to support the Credit of ten times that amount of liabilities, he might safely buy Debts to several times the amount of cash in his hands. With such an amount of cash as £9000, he might safely buy £40,000 of Commercial Bills. Now supposing the Rate of Discount was 8 per cent, per ann., and the bills at three months, the discount on this sum would be £800. Consequently in exchange for Commercial Debts to the amount of £40,000, he would create Credit against himself to the amount of £39,200. But the Credit he places to the accounts of his customers, or the Liabilities he creates against himself, is called a Deposit, equally as the Credit created in exchange for cash.

Hence just after purchasing these Bills his accounts would stand thus -

Now by this process the "banker" has added £39,200 of Credit to the previously existing Cash; and his Profit is clear, he gains 8 per cent, on the £40,000 and he pays 6 per cent, on the Deposits, or Credit left unclaimed.

Now this is what the business of "banking" consists in; and hence the correctness of the definition of a "banker" given above is manifest:-

A Banker is a Trader whose business consists in buying Money and Debts, by creating other Debts.

Thus it is seen that the essential and distinctive feature of a "bank" and a "banker" is to issue Credit payable on demand, and this Credit may be put into circulation, as we shall see presently, and serve as Money.

The banker, then, having created these Credits or Rights of action, or Deposits, his customers might utilise them in three ways -

1. They might demand payment in cash: if they did so the banker's liability was extinguished.

2. The banker, if his customers wished it, gave them his Promissory Note to pay them, or the bearer, such sum as they might wish, on demand: this neither created nor extinguished a liability, it merely recorded it on paper, for the convenience of transferring it to some one else. This Promise to pay was at first called a Goldsmith's note, and is now called a Bank Note.

3dly. If the customer wished to make a payment he might write a note to his banker desiring him to pay the money to some particular person, or to his order, or to bearer. These notes were formerly called Cash Notes, but are now called Cheques.

Like a Bank Note, a Cheque does not create any new Right, it merely records on paper a Right which already exists, and it is used for the purpose of transferring that Right to someone else.

It is to be observed that all Banks whatever are Banks of "Issue." The very meaning of the word to "Bank" is to "issue" a Right of action or Credit, in exchange for Money or other Debts; and when once the banker has "issued" this Right of action to his customer by writing it down to his Credit, it makes not the slightest difference in his liability whether he delivers his own Promissory Notes to his customer, or whether he merely creates the Credit, and gives him the Right to transfer it to some one else by means of a Cheque.

7. The preceding considerations shew what a complete mistake it is of the nature of "banking," to say that bankers are merely agents between persons who want to lend and persons who wish to borrow. This is entirely untrue in the ordinary sense of the words lending and borrowing: because in the ordinary case of "lending," the lender deprives himself of the use of the capital he lends. But when a person pays in money to his banker's, it is not his intention to deprive himself of the use of it: on the contrary he means to have as free use of it as if it were in his own purse. The customer, therefore, lends his money to his banker, but yet at the same time has the free use of it - the banker employs that money in promoting trade; upon the strength of its being deposited with him, he buys debts with his Promises to pay, several times exceeding the amount of the cash placed with him, and the persons who sell him their debts have the free use of the very same coin which the lender has the same right to demand. Thus the lender and the borrower have the same right at the same time to the free use of the same money : and all banking depends on the calculation that only a certain small portion of each set of customers will demand the actual cash, but that the majority will be satisfied with the mere "promise," or the Credit.