In preceding chapters reference has often been made to money, with only a passing explanation of its functions and uses. The most extensive reference that has been made to it in its relation to banking is found in the section dealing with reserves, where the thought was developed that one problem in connection with the reserves of the bank is that of providing always a sufficient amount of specie with which to meet current obligations that may be presented. Nothing has been said with regard to the theory of money or prices, because of the belief that this phase of the subject can best be dealt with after the reader has attained a working knowledge of the methods of banking. It is now time, however, to set forth some of the main problems of money in its relation to bank credit.

As has been seen incidentally at an earlier point, money is by many regarded as having been a development in the process of exchange which preceded credit and which certainly preceded even the most fundamental forms of banking. Without stopping to inquire further into the historical accuracy of this view of the situation, it may be admitted that the exchange of goods largely by the use of money is a step in the process of working out the modern exchange system which preceded any considerable development of banking as we know it to-day. Looking back, for example, for about a century, it will be found that most civilized nations had accepted the view that it was the duty of governments to establish the standard of value, coin money and issue it, while it was also true that the larger part of exchanges was consummated either immediately or eventually by the actual transfer of money or its paper representatives. The concept of a banking system in which transfers of credit on the books of banks took the place of credit individually extended by traders, and in which, therefore, the liability for the soundness of credit was shifted to the bank, has been the product of the last three-quarters of a century or less. This being so, it was natural that in the earlier days of modern banking the bank should be regarded as an institution for lending money or furnishing money, and that its function should be conceived of very largely in terms of the money standard. It was equally natural that the reserves of the bank should be considered as consisting of actual money, and that solvency and liquidity on the part of the bank should be regarded as measured by the ability to command money when customers sought it. The foregoing chapters have shown the erroneous character of this idea. Still it remains true that, with conditions in the world as they are at the present time, money retains, and, so far as one can foresee, will continue to retain for an indefinite period, an important function as the means of liquidating obligations. Banks will continue to be tested by their ability to command money, and it is probable that economists will continue to theorize about bank credit as a substitute for money or as a means of avoiding the use of money.

It is at the latter point that the student who enters the field of scientific banking needs most to clarify his ideas. As the modern economic world has developed, most of its business transactions are in one way or another connected actually or nominally with money. The value of goods is stated in terms of money even when the goods themselves are sold without the actual acquirement of any cash whatever by the seller. The level of prices is measured in terms of money and the problem of the value of money is thus fundamental in the whole theory of exchange, and hence has a vital relationship to banking both in theory and in practice.