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The Elements Of Banking | by Henry Dunning Macleod



The purpose of the following work is to exhibit in the simplest language possible the mechanism of the great system of Credit, Banking, and the Foreign Exchanges, and to explain the reasoning upon which is founded the Principle of Currency, which I published in 1856 - That the true method of controlling credit and the paper Currency is by adjusting the Kate of Discount by the Bullion in the Bank and the State of the Foreign Exchanges - which is now universally acknowledged to be the true one, and which is now adopted by the Bank of England and by every bank in the world.

TitleThe Elements Of Banking
AuthorHenry Dunning Macleod
PublisherLongmans, Green, And Co.
Year1878
Copyright1878, Longmans, Green, And Co.
AmazonThe elements of banking

By Henry Dunning Macleod, M.A. Of Trinity College, Cambridge, And The Inner Temple, Barrister-At-Law :

Selected By The Royal Commissioners For The Digest Of The Law To Prepare The Digest Of The Law Of Bills Of Exchange, Bank Notes, Etc.

Fourth Edition.

-Chapter I
1. Banking is a department of the great Science of Economics, which is the Science of Exchanges, or of Commerce in its widest extent. The word Economics is derived from the Greek oTkoc, which is th...
-On The Definition Of Wealth, Or An Economic Quantity
2. Aristotle says: - We call Wealth everything whose value is measured by Money, or rather, we may say everything which is exchangeable, as Money itself is an Exchangeable Quantity. Aristotle's d...
-On The Three Species Of Wealth, Or Economic Quantities
3. Having, then, obtained a good general idea or fundamental conception of Wealth, or of an Economic Quantity, we have now to consider how many distinct orders of Quantities there are which satisfy th...
-On The Meaning Of The Word Property
5. Having thus found that there are three distinct species of Exchangeable or Economic Quantities, typified by Money, Labour, and Credit, our next object is to find a general term which will include t...
-Definition Of Value
9. If at any time any Economic Quantity, A, can be exchanged for any other Economic Quantity, B, then the Quantity A is termed the Value of B, and B is similarly termed the Value of A. Now as each ...
-On Money And Credit
10. In the primitive ages of the world we have abundant evidence that there was no such thing as Money. When persons traded, they exchanged the products directly with one another. Thus we have in Ilia...
-On Money And Credit. Part 2
It is a kind of a Bill of Exchange, or Order payable at the will of the bearer. Instead of taking his share in kind of all matters of subsistence, and all raw produce annually growing, the sovere...
-On Money And Credit. Part 3
14. Now when persons take a piece of money in exchange for services or products, they can neither eat it, nor drink it, nor clothe themselves with it. The only reason why they take it is, as we have s...
-On Sale Or Circulation
18. When commodities are interchanged directly for one another it is called Barter or Exchange. When commodities are interchanged for Money, that Money is only taken in order that it may be interchang...
-On The Terms Currency And Circulating Medium
19. The terms Currency and Circulating Medium are used as synonymous by all writers, and we must now explain their meaning. Circulating Medium is a term which came into use in the last decade of th...
-On Price, Discount And Interest
22. When one Economic Quantity is exchanged for another, each is termed the Value of the other. But when one of the Quantities exchanged is Money, or Credit, the sum of Money, or Credit, receives a pe...
-On Securities For Money And Convertible Securities
23. We must now explain the difference between Securities for Money and Convertible Securities. A Security for Money always means an Obligation, or Security, for the payment of a definite sum of Mo...
-Definition Of Capital
24. Economic Quantities are, as we have seen, of three distinct species, typified by Money, Labour, and Credit. Now any of these Quantities may be used in two different ways. The proprietor may use...
-Capital Is An Economic Quantity Used For The Purpose Of Profit
If a person has a sum of Money, he may expend it on his household requirements; or in gratifying his personal tastes by buying books, or statues, or pictures, etc. Money spent in this way is not Capit...
-Chapter II. On Value
1. It has been seen in the preceding chapter that there are three distinct species of Exchangeable, or Economic, Quantities, symbolised by the terms Money, Labour, and Credit, the various interchanges...
-On The Definition Of Value
2. Value in its original sense is a quality or desire of the mind: it means esteem or estimation: as we speak of a highly valued friend: but such Value is not an Economic phenomenon. To bring Value in...
-On The Error Of The Expression Intrinsic Value
6. We must now say something about an expression which has been the source of enormous confusion in Economics, and has especially obscured the Theory of Credit. All ancient writers kept their minds...
-On The Distinction Between Depreciation And Diminution In Value
7. We must now observe the difference between two expressions, which, though often used indiscriminately, are essentially distinct, viz. Diminution in Value and Depreciation. An Alteration in Value of...
-On The Origin, Source, Or Cause Of Value
8. We have seen that there are three species of Economic Quantities, each containing many varieties, which have Value. We have seen that the Value of any Quantity is any other Quantity for which it ca...
-On The General Law Of Value : Or The General Equation Of Economics
9. Having in the preceding sections given the Definition of Value, and found that its Form or Cause resides exclusively in the Human Mind, the last branch of our inquiry is to determine the General La...
-Chapter III. On The Coinage
1. In the first chapter we explained the circumstances which gave rise to the use of Money, and showed that many substances have been used to fulfil that function. But a metal of some sort has been fo...
-On The Meaning Of The Mint Price And Market Price Of Gold And Silver
2. As the very purpose of coining is to certify that the pieces of Bullion are of a certain definite weight and fineness, it is evident that a fixed quantity of bullion, as a pound weight, must be div...
-What Is A Pound ?
4. We must now explain how a certain weight of Gold Bullion has come in modern times to be called a Pound. The original measure of value in France, England, and Scotland, was the pound weight of si...
-Chapter IV. The Theory Of Credit
1, A long series of illustrious Lawyers whose doctrines were declared to be Law by the legislation of Justinian, had brought the Theory of Credit to a state of perfection at the beginning of the sixth...
-Investigation Of The Nature Of Credit, On The Definition Of Credit
3. We have seen that all modern Economists admit that human Abilities, Energy, Skill, and Character are Wealth, because men can make a Profit by their employment. These Moral Qualities and Character m...
-Investigation Of The Nature Of Credit, On The Definition Of Credit. Continued
That is to say, that no particular money in the Debtor's possession belongs to the Creditor, which he can seize upon: none is pledged to him: the Money continues the absolute Property of the Debtor, w...
-On The Ambiguity In The Meaning Of The Word Loan: Or The Distinction Between Mutuum And Commodatum
6. We now come to the next ambiguity which has been the cause of great confusion in the Theory of Credit in recent times. All the older writers, who were chiefly men having a practical knowledge of...
-Lent
Thus without giving any particular thought to the subject, every one would instinctively feel that there is an essential distinction between the cases of lending a Book or a Horse, and lending £5. Or ...
-On The Distinction Between A Debt And A Bailment: Or The Distinction Between A Mutuum And A Depositum
7. We have now to trace the consequences of this distinction between the Mutuum and the Depositum, because they each give rise to a class of Paper Documents of a totally distinct nature. And it has be...
-The Distinction Between A Debt And A Bailment: Or The Distinction Between A Mutuum And A Depositum. Continued
So also if a man takes a bag of money to his banker, and asks him to take care of that specific money, and give it back to him, or to any one else he may name, on demand, no Property in the money woul...
-On Some Erroneous Ideas As To The Nature Of Credit
8. We have still another erroneous view of the nature of Credit to clear away. We have seen that the preceding errors arose from not observing the distinction between Mutuum and Commodatum and Deposit...
-On The Meaning Of The Positive And Negative Signs In Economics
9. We have now to explain the meaning of the Negative Sign in the Theory of Credit, or Debt. Two Algebraists of the highest eminence have attempted to explain the application of the Negative Sign t...
-On The Meaning Of The Positive And Negative Signs In Economics. Part 2
They are then called Signs of Affection or Position. The instances of this which might be quoted from the various branches of Natural Philosophy are innumerable, and we will only quote a few to ill...
-On The Meaning Of The Positive And Negative Signs In Economics. Part 3
14. But moreover Inverse or Opposite Operations may be performed on these Quantities which are already affected with these opposite signs. And these Inverse or Opposite Operations are also denoted by ...
-On The Meaning Of The Positive And Negative Signs In Economics. Part 4
Now the Right to receive any, or any number, of these future profits is an Estate in land: and as the entirety of these Estates may belong to a number of different persons, we have the whole legal doc...
-On The Meaning Of The Positive And Negative Signs In Economics. Part 5
Hence the true definition of Credit as an Economic Quantity, or an article of commerce, is the Present Rigid to a Future Payment. We shall now see the importance of the error we have just noticed. ...
-Receipts
In Bankers' Drafts and Mercantile Bills of Exchange payable after date ... £ £ 533,596 In Cheques on Bankers, etc, payab...
-Payments
By Bills of Exchange payable after date 302,674 By Cheques on London Bankers ............. 663,672 ...
-On The Transfer Of Credit Or Debts
21. Many persons when they see that a Bank note is transferred from hand to hand like a piece of money, might think that any other Debt might be sold or transferred with equal facility. Nevertheless t...
-Upon Instruments Of Credit
22. Credit, or Debt, then being an Exchangeable Right, or an Economic Quantity, a Commodity or Merchandise, which may be bought and sold, cannot of course, in that form, be the subject of manual deliv...
-On Bills Of Exchange And Promissory Notes
23. In its most general form a Bill of Exchange is a letter from a Creditor to his Debtor, ordering him to pay (1st) a certain sum of money: (2nd) to a certain person: (3rd) at a certain event. The...
-On The Limits And Extinction Of Credit
25. In the preceding sections we have clearly shewn that Credit is the name of a certain species of Incorporeal Property, which is of the same nature as, but inferior in degree to, Money: and that it ...
-On The Extinction Of Credit Or Debts
26. We have now to consider the various methods by which Credit, or Debt, is extinguished. Credit being the Eight to something to be paid or done, of course the Payment or the Performance of the thing...
-On Release Or Acceptilation
27. Euler, as have seen above, says that if a man has nothing in the world and even owes 50 crowns it is certain that he has 50 crowns less than nothing. He also says that if any one makes the Debtor ...
-On Payment In Money
28. The preceding considerations will easily explain how a Debt is extinguished by a Payment in Money: which very few persons have ever thought of. Suppose a person possesses £100, but owes £50: th...
-On Renewal Or Transfer, Or Novation
29. The term Novation, in Roman Law was applied to substituting a new Obligation for the former one. But this took place in two ways - 1. When the Debtor himself gave a new Obligation, which the Cr...
-On Set-Off, Or Compensation
30. If two persons are mutually indebted, each may claim that the Debt he has against the other shall be taken in payment of the Debt he has to pay. If the mutual Debts are equal, each is payment of t...
-Chapter V. On Commercial Credit
1. Goods or commodities in the ordinary course of business pass through the following hands - 1st the foreign importer: 2dly the wholesale dealer: 3dly the retail dealer: 4thly the customer or consume...
-On Commercial Credit. Part 2
Credit so far even as this would be of great assistance to Production, and the vast amount of it generated in this manner would be valuable Property to its owners. But it is manifest that it would be ...
-On Commercial Credit. Part 3
6. We must refer to the next chapter for an exposition of the mechanism of banking, shewing how the creation and exchange of Debts is made in modern commerce to perform the part of money. We will only...
-On Commercial Credit. Part 4
Almost all men in commerce are under Obligations: that is they accept Bills of Exchange which must be paid at a fixed time, under the penalty of commercial ruin. To meet these Obligations due by them,...
-On Commercial Credit. Part 5
It is therefore not the scarcity of money, but the extinction of confidence, which produces a pressure on the money market; and an examination of all the great commercial crises in this country, will ...
-On Credit Employed For The Purpose Of Forming A New Product
12. The operations on Credit, which we have hitherto been considering, were all based on an anterior operation, or one in which an exchange of commodities was effected by the creation and sale of the ...
-On Credit Employed For The Purpose Of Forming A New Product. Part 2
The advantage of the second method is that it makes Capital more abundant, and sometimes might provide it when not otherwise obtainable. If it were scarce, or otherwise occupied, it might not always b...
-On Credit Employed For The Purpose Of Forming A New Product. Part 3
A great deal has been said and written about the difference between Real and Accommodation Bills, and while no terms of admiration are too strong for the first, no terms of vituperation are too severe...
-Chapter VI. The Theory Of Banking. On The Meaning Of The Word Bank
1. The word Bank originated in this way. In the year 1171 the City of Venice was at war with both the eastern and western Empires. The finances were in a state of great disorder; and the Great Council...
-On The Definition Of A Banker
3. The Nature of a Bank therefore being to receive Money and issue Credit in exchange for it, the business of a Banker is exactly the same. The Romans invented the business of banking. Roman bank...
-On The Currency Principle
4. The express function of a Bank then being to create Credit, we must now explain a phrase which has been frequently used in recent times, and which must be fully understood before we come to the exp...
-On The Mechanism Of Banking
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...
-On The Mechanism Of Banking. Part 2
Banking is a species of insurance: it is theoretically possible that a banker may be called upon to pay all his liabilities at once: just as it is theoretically possible that all the lives insured in ...
-On The Mechanism Of Banking. Part 3
10. A banker then having purchased either money or Securities from his customers by creating or issuing Eights of action, or Deposits, we have now to consider how the customer may operate upon these...
-On Cash Credits
12. The Credit created by the Bankers in the operations just described was employed to buy Commercial Bills, which arose out of the transfer of Commodities, and we have seen that they create Credit to...
-On Cash Credits. Continued
It was in this manner that the prodigious progress in agriculture was made in Scotland. There were immense quantities of reclaimable land, and abundance of unemployed people, but no Capital, or Money,...
-On Accommodation Bills
16. We now come to a species of Credit, which will demand great attention, because it is the curse and plague spot of Commerce, and it has been the great cause of those frightful commercial crises, wh...
-On Accommodation Bills. Part 2
In the case of Accommodation Paper there are very material differences. To the eye of the banker there is no visible difference between Real and Accommodation Bills. They are nevertheless very differe...
-On Accommodation Bills. Part 3
This is the rationale of Accommodation Paper; and here we see how entirely it differs from Real Paper. Because with Real Paper, and bona fide customers, though losses may come, still directly the loss...
-On The Transformation Of Temporary Credit Into Permanent Capital
19. We have now to give an example of the use of Credit which may surprise our readers, and of which we have not seen the slightest notice any where else. Sixteen hundred years ago Diophantus said ...
-How Joint-Stock Banks Increase Their Capital
This however is a complete delusion. These banks never had anything like these sums paid up in money. Of course it is utterly impossible for any one to tell how much was ever paid up in money: but we ...
-Chapter VII. The Theory Of The Exchanges
1 . An Exchange in commerce is where a person pays his Creditor by transferring to him a Debt due to himself from someone else. Thus the ordinary case of a person paying a debt by means of a Bank...
-On The Nature Of An Exchange
3. We will now show how the example of the nature of an Exchange we began with is exemplified in practice. Suppose two cities, London and Edinburgh. Suppose a trader A in London is debtor to a trade...
-On Foreign Exchange
4. The principle of Foreign Exchange is exactly the same as that of Inland Exchange. But there is somewhat more complication in the detail, on account of the different moneys of different countries. ...
-On The Limits Of The Variations Of The Exchange
5. Supposing that while the Exchange between any two places - say London and Paris - is in a state of equilibrium, that is, when the demand and supply of bills in each city is exactly equal, so that t...
-On The Effects Of An Inconvertible Paper Currency On The Foreign Exchanges
6. We must now consider the effect of Paper Money, or an Inconvertible Paper Currency, on the Foreign Exchanges and the Market Price of bullion. So long as Paper is convertible, that is, so long as th...
-On Exchange Operations
7. Exchange operations consist in buying, selling, importing and exporting bullion, called Bullion Operations, and buying and selling Bills, called Banking Operations. The calculations necessar...
-On The Real Or Commercial Exchange
8. We must now consider the Real or Commercial Exchange, which arises out of the transactions between this and other countries. As the British Islands do not produce the precious metals to any extent ...
-On The Real Or Commercial Exchange. Continued
It must be observed however that the example of the product which we have taken, wine, is not a very good one to illustrate the principle, because wine is an article which may be kept for several year...
-On The Rate Of Discount As Affecting The Exchanges
9. We have now to treat of a cause of the movement of bullion which, has acquired an importance in modern times far exceeding what it ever did before: in fact it is more important than any other, exce...
-On Foreign Loans, Securities, And Remittances As Affecting The Exchanges
10. Besides the state of national indebtedness, arising out of commercial operations, there are other causes which seriously affect the Exchanges. Formerly England, being more abundant in money and ma...
-On Monetary And Political Convulsions As Influencing The Exchanges
11. As an immediate consequence of the preceding principles it follows that a political or monetary convulsion in any country will immediately turn the Exchanges in favour of that country, if such an ...
-On The Means Of Correcting An Adverse Exchange
12. The preceding paragraphs shew upon what complicated causes those great movements of bullion depend which produce such important consequences. There are three great Economic Quantities, Products, B...
-Chapter VIII. On The Bank Charter Act Of 1844
1. We shall now endeavour to explain as clearly as our limits allow us - 1st. The Causes which led to the enactment of the Bank Charter Act of 1844; 2ndly. The Objects intended to be effected by that ...
-On The Bank Charter Act Of 1844. Part 2
5. In 1824 a rapid drain began from the Bank, which took no measures to stop it; this went on all through 1824 and 1825, when the bullion which was above 13 millions in January 1824 was reduced to lit...
-On The Bank Charter Act Of 1844. Part 3
But this does not show the full extent of the error of those who think that the Bank Act enforces the Currency Principle. The Banking Department does business like any other bank. It purchases or di...
-On The Bank Charter Act Of 1844. Part 4
The fact is that there are two leaks to the ship. The framers of the Act could only perceive one: and they only provided against one: and they were utterly astonished to find the ship rapidly sinking ...
-On The Bank Charter Act Of 1844. Part 5
Now the weak point in the Act of 1844 is that it takes no notice of this grand principle: it takes no precaution that the Directors of the Bank of England shall recognise it, and counteract it. On the...
-On The Causes Which Compelled The Suspension Of The Bank Act In 1847, 1857, And 1866
12. The monetary pressure which we mentioned above passed away at the time, but another much more severe came on in the Autumn, which ended in a monetary panic; and on the 25th November 1847, the Gove...
-The Causes Which Compelled The Suspension Of The Bank Act. Part 2
No sooner was the Act passed than the Committee set to work. A large sum, £70,000, was at once set down to Manchester and Glasgow on the strength of the Exchequer bills, which were not yet issued. Thi...
-The Causes Which Compelled The Suspension Of The Bank Act. Part 3
And now we see the practical results of the two policies: when all commercial and banking Credit was on the verge of universal ruin it was saved and restored by the Expansive Theory in 1793: in 1797 t...
-The Causes Which Compelled The Suspension Of The Bank Act. Part 4
Thus on this occasion again, the Restrictive Theory wholly failed: and the Expansive Theory saved the country and was the only means of saving the Bank itself from stopping payment. The next great ...
-Examination Of The Arguments Alleged For Maintaining The Bank Act
14. It has now been clearly shewn that the Bank Act has completely failed both in Theory and Practice. It has been shewn that it is based on a Definition of the word Currency which any Mercantile La...
-Examination Of The Arguments Alleged For Maintaining The Bank Act. Continued
The very same principle was decisively proved in 1847, 1857, and 1866 : the Restrictive Theory was in those years enforced by Law. But no Government could maintain the Act and the Restrictive Theory t...
-Chapter IX. On The Business Of Banking
1. We have seen in a former chapter that from the time the word Banker was first used it meant a person who bought Money by means of his Credit, or Promise to pay an equal sum either on demand, or a...
-On The Relation Of A Banker To His Customer As The Purchaser From Him Of Money Or Debts
2. The first of these cases is the ordinary one where a customer opens an account with a banker by means of paying in money to his account. In this case, the customer cedes the Property in the Money t...
-On The Relation Of A Banker To His Customer As Pawnee Of Banking Securities
4. In the first of the relations between the banker and his customer above described, the banker was the absolute purchaser of the Money and Securities of his customer, so that he might do what he ple...
-On A Banker's Lien On His Customer's Securities
6. A banker's general Lien is part of the Law Merchant, and is judicially noticed as such. A banker has a general Lien over all securities deposited with him by his customer as a banker, for debts ...
-The Bankruptcy Of A Customer
7. Directly a customer becomes bankrupt, he is commercially dead: and he has lost all power to deal with his property, which is gone to his Creditors. Consequently a banker may receive money on a b...
-On Banking Instruments Of Credit
9. A banker buys Money and Securities from his customers, and gives them in exchange for it his own Credit. This Credit or Debt is expressed either in the form of an entry in his books called a Deposi...
-On Cheques
10. A banker invariably buys Money and Securities from his customer by creating a Credit in his favour. This Credit is termed a Deposit. By the custom of bankers the contract between a banker and h...
-On Crossed Cheques
By the Act 39 & 40 Vict. c. 81 it is enacted - Cheque means a draft or order on a banker payable to bearer or to order on demand, and includes a warrant for payment of dividend on stock sent by post...
-On Banking Investments
11. Though a banker is bound theoretically to repay every one of his customers instantly on demand, yet as no man whatever would spend all his money if it were in his own possession, but would keep a ...
-On Discounting Bills Of Exchange
12. We have already fully explained the nature and meaning of discounting bills of exchange: here, therefore, we have only to make some practical observations on the subject. If an abundant supply ...
-On Discounting Bills Of Exchange. Part 2
A banker is primā facie influenced by the respectability of his own customer, who is the drawer or indorser of the bill. He ought however to acquire specific information regarding the persons upon who...
-On Discounting Bills Of Exchange. Part 3
The objection to such transactions in a banking point of view is that the promissory notes of these persons and their securities are not available to the banker in case he is pressed for money. Mor...
-On The Clearing System
13. Suppose that any number of the customers of the same bank have transactions amongst themselves, and give each other cheques on their accounts. Then, if the receivers of the cheques do not actually...
-On The Clearing System. Part 2
Beesly's Gracchi, Marius, and Sulla. 2s. Gd. Capes's Age of the Antonines, 2s. 6d. - Early Roman Empire, 2s. 6d. Cox's Athenian Empire, 2s. 6d. - Greeks and Persians, 2s. 6d. Curteis's Rise o...
-On The Clearing System. Part 3
Vol. I. General View of Positivism and its Introductory Principles. 8vo. 21s. Vol. II. Social Statics, or the Abstract Laws of Human Order. 14d. Vol. . Social Dynamics, or General La...
-On The Clearing System. Part 4
Keith Johnston's Dictionary of Geography, or General Gazetteer. 8vo. 42s. Nelson's Work on the Moon. Medium 8vo. 31s. 6d. Proctor's Essays on Astronomy. 8vo. 12s. - Larger Star Atlas. Folio, ...
-On The Clearing System. Part 5
Ingelow's Poems. Illustrated Edition. Fcp. 4to. Woodcuts, 21s. Jameson's Sacred and Legendary Art. 6 vols, square crown 8vo. Legends of the Madonna. 1 vol. 21s. - - - Monastic Orders. 1 vol. 21s...
-On The Clearing System. Part 6
Travels, Voyages Etc Baker's Rifle and the Hound in Ceylon. Crown 8vo. 7s. 6d. - Eight Years in Ceylon. Crown 8vo. 7s. 6d. Ball's Alpine Guide. 3 vols, post 8vo. with Maps and Illustrations :...
-The Theory And Practice Of Banking
By The Same Author. Great alterations have been made in this Edition. Since the last was published Mr. Macleod was selected by the Royal Commissioners for the Digest of the Law to prepare the Diges...
-Works By The Same Author
A Dictionary Of Political Economy: Biographical, Bibliographical, Historical, and Practical. Vol. I. Second Edition. [Preparing]. Vol. II. Completing the Work. [In progress]. ii. The Theor...









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