The operations of banking, as the system has been developed in the last three centuries, appear at first sight to be singularly complex and difficult of comprehension. This is not due, however, to any mystery in the operations themselves, but is the result of their multiplicity and of the varied conditions under which they take place. The wants which banks satisfy are of a simple kind, sure to arise early in the history of any commercial or industrial community in which there is mutual confidence among men; and the satisfaction of these wants is a business easily established, in what might well be regarded as an almost primitive condition of trade. The transactions by which these wants are satisfied are, moreover, as simple as the wants themselves, and are speedily reduced to such routine as to lead Adam Smith, in a wellknown passage, to rate "the banking trade" as one of the few which, in his judgment, could be brought to such uniformity of method as to be safely conducted by a joint-stock company.

The leading wants to be provided for by banks are, first, loans upon a considerable scale, required by individuals embarking in enterprises beyond their own means; and, second, the temporary employment of money which is not required by the owner for immediate use, or at least the means of safely keeping it. Some agency for lending and some place of deposit are called for as soon as commerce begins to move in a regular course. In some countries the task of simplifying the currency of the community, and of giving it an ascertained value, was formerly entrusted to banking institutions, but this is a service which can manifestly be more satisfactorily performed by government and has now everywhere become one of its regular functions. Transfers of. funds and arrangements for making settlements between persons in different places in the same or in different countries, i. e., domestic and foreign exchange, have always been and will remain an important field of banking activities. The primary and indispensable functions to be provided for, however, are those of lending and of receiving on deposit, and it is these which have given rise to modern banking.

These functions, it is clear, imply no very complex operations. They require prudence, integrity, and patience, but they have no mystery. The banker who lends, or who engages to supply cash to his customer as it may be called for, needs to be sure of the solvency of his borrower and of the goodness of the security received, and must have the evidence of the transaction made indubitable, its terms clearly fixed, and the record of it complete and exact. When he receives cash on deposit, or collects for others cash which is due and holds it until it is wanted by the owners, he must in like manner be sure that the evidence of every transaction is regular and placed beyond doubt, and that its record is precise and systematic. And when, as an extension of his system of holding deposits, he recognizes the right of a depositor to transfer his deposit or any part of it to another person, in order to make a payment to the latter, the operation of transfer must be closely followed and the resulting changes in the banker's accounts must be made with fidelity and minute accuracy. But in no one of these cases does the actual transaction present any more difficulty of comprehension than the simple payment or receipt of money. The questions of prudence - how much and to whom it is advisable to lend, and upon what terms, how far it is safe to assume that deposits will be left undisturbed, and to what extent it is needful to be prepared for demands by depositors - require all the light that trained sagacity and experience can throw upon them, as do the questions relating to the conduct of business in other departments; but the essence of the transactions themselves, to which the judgment of the banker is applied, is simple.

As a natural consequence of the simplicity of the operations involved in lending and in receiving deposits, it is probable that they have been undertaken and carried on in every old country by individuals long in advance of any public establishments, and long before the chroniclers of history thought it worth while to notice phenomena of such a humble order. Private lenders established banking in Venice two centuries before the Senate opened its first public bank of deposit in 1587. Banking was in like manner practised by individuals in Amsterdam long before a special class of evils led the city to establish the famous Bank of Amsterdam. And banking of a well-defined modern type was introduced by the London goldsmiths at least a generation before the opening of the Bank of England. Instances of the same sort could easily be multiplied, tending to show that in other countries also banking has had its origin in the effort of individuals to supply certain rather primitive wants of an advancing community, and that the process of satisfaction was by means of a few thoroughly simple operations. Such as these leading operations were two or three centuries ago, they have continued to be in the midst of the changes and the enormous development of modern times.

Wherever banking has reached an even moderate measure of development, the individual wants which it undertakes to supply have ceased to be the exclusive object of attention. The general influence and ulterior effects of banking operations, not originally foreseen and long a matter of dispute, have become potent factors in the diffusion of banking and in the determination of the character of the legislation to which it has been subjected. The first bankers probably had little thought of affording encouragement or applying a stimulus to the industry of the community as a whole. When they began, however, to lend their money systematically to merchants or the producers of goods, they began to give the command of capital in the enterprises where, for the time being it was most called for and presumably most needed. When they increased their loans of this sort, by means of the funds left temporarily in their care by persons depositing with them, they began to give to industry the benefit of capital which would otherwise have remained idle, or to secure the more speedy application of capital slowly seeking employment. The use of their own notes as the medium for making their loans, in a manner strictly analogous, gave to their borrowers the command of resources which the fluctuating body of noteholders might forbear to demand. Again the practice of discounting the bills received by dealers from their customers tended to a rapid organization of credit, and, by giving the dealer the immediate use of that which was due to him at some time in the future, shortened the period required for "turning his money" and undertaking some fresh enterprise. It is obvious that the bankers created no new wealth by their lending and deposit-holding, but it is equally plain that they directed the existing capital to the enterprises and industries most in need of support, and that they quickened the succession of commercial and industrial operations. A given amount of capital was thus made more effective, so that the resuft of "the introduction of banking in any community was the equivalent of a considerable increase of capital, although not implying any real increase in the first instance.

The stimulus thus applied by banking to the general commercial and industrial movement of any community, whether young or old, has long been clearly seen; and it is this effect of operations, at first undertaken simply with reference to the demands of individual convenience, that now chiefly claims attention and excites interest. This stimulus is not unattended by risk. Deposit-holding and the issue of notes are alike operations of credit. They imply, as conditions of their existence, a certain growth of mutual confidence in any community, and a certain degree of domestic peace; and under conditions otherwise similar, nations will differ in their resort to such operations, as the national temperament is more or less sanguine and as tradition and habit have prepared the way, or the reverse. But to whatever extent credit is thus used, it introduces not only the dangers of misplaced confidence, but the greater danger coming from the spirit of adventure. The tendency nuder the keen spur of a developed banking system to carry enterprises based upon credit beyond the point of safety, the infection of an entire community by the fever of speculation, are too familiar for comment, and the errors of bankers in aiding and encouraging that which they should have striven to repress or control, have at times brought the utility of banking itself into question.

The modern world, however, does not discard any great agency merely because its use is attended by danger. To secure a balance of gain by minimizing the risks, always recognizing their existence and their deplorable character, has been the aim of most commercial communities in dealing with banking during at least four generations. The ignorant hostility to the system itself, instead of its abuses, of which traces were formerly to be found in the constitutions of a few of the United States, has generally given way to a wiser appreciation of the services rendered by banks and bankers in the development of the country.

The difficulty of properly weighing these advantages and risks was greatly increased by the reckless imprudence with which banks in most countries, specially during the early stages in the development of the banking business, have managed their issues of notes. Such issues, although not a necessary adjunct of the business of lending and of deposit-holding, are a natural and, in some conditions of society, a usual adjunct. Where they are made, the issuing banks or bankers at once become responsible for an important part of the visible circulating medium of the country. Their mistakes or wrongdoing may affect a multitude of persons having no intentional or conscious share in or relation to the concerns of any bank; and may easily throw the affairs of a community into confusion. It is true, as we shall see hereafter, that the steps by which a bank issues its notes do not differ from those by which it assumes other less observed liabilities, and that its obligations in the two cases are the same in essence. Still, the wide diffusion of an issue of notes, the somewhat greater opportunities for mismanagement than of deposit credit, and the more visible and notorious nature of the resulting evils make such issues the object of extreme jealousy, and have often led to the indiscriminate condemnation of all banks. Although, therefore, the issue of notes is not one of what we have called "the primary and indispensable functions" of banking, it is a function which fills a large space in most discussions of banking theory, as well as in the history of the great banking systems and in legislation.

The starting-point in the present exposition of the subject then must be an examination of the transactions involved in lending, deposit-holding, and note issue or circulation.