Adapted from article by H. G. Moulton on "Commercial Banking and Capital Formation," in Journal of Political Economy, vol. xxvi, 1918, pp. 490-494.

(See text, pp. 21-23)

Gilbart: "Providing safety-deposit vaults; paying interest on deposits; making loans; exchanging funds between places; changing currency denominations; collecting notes and drafts, etc."; he also adds that in connection with the receipt of deposits and the making of loans bankers gather together money in small sums and transfer it in larger amounts to borrowers engaged in "trade and commerce."1

Dunbar: "The bankers created no new wealth by their lending and deposit holding, but . . . they directed the existing capital to the enterprises and industries most in need of support, and they quickened the succession of commercial and industrial operations. A given amount of capital was thus made more effective, so that the result of the introduction of banking in any community was the equivalent of a considerable increase in capital, although not implying any real increase in the first instance."2

White: A bank is termed "a manufactory of credit and a machine for facilitating exchanges"; discounting is "the swapping of well-known credit for less-knowncredit"; the banker "enables the most deserving persons in the community to get capital" and thus "performs a service to society by economizing tools and materials."1

1 Gilbart, The History, Principles, and Practice of Banking (Michie's revision), pp. 213-22.

2 Dunbar, Theory and History of Banking, chap. ii.

Holdsworth: Commercial banks "receive deposits of cash, checks, and drafts, and make loans to the business public by discounting or purchasing commercial paper. To these functions may be added a third, that of providing a medium of exchange through the issue of circulating notes." Various incidental services are also listed, and he adds that a bank is a manufactory of credit. "Business credit cannot be conveniently used for current business transactions, but bank credit in the form of checks and drafts is widely acceptable."2

Scott: "Customers of a commercial bank sell to it their surplus cash and credit instruments representing payments due them from other persons, and make loans from it secured by their personal notes due in the future. For the amounts due them as a result of these transactions they are credited on the books of the bank in a form known as deposits. . . . Making loans and discounts is a function correlative with that of conducting deposit accounts. It may be described as the process of advancing funds on the security of personal notes and bills of exchange . . . and on collateral."3

Laughlin: "The business of the bank consists of dealing in the commercial paper which grows out of current transactions. When a man desires funds for a long period, he should get them, not from the bank, but from those who have spare capital to invest for some considerable period of time. The bulk of banking business . . . consists of instruments evidencing claims upon individuals, stated in terms of money, and resulting from operations requiring a comparatively short period for their consummation."1

1 White, Money and Banking (3d ed.), p. 193.

2 Holdsworth, Money and Banking, pp. 148-49.

3 Scott, Money and Banking (revised edition), pp. 108, 109.

Johnson: "The principal functions of the bank are the collection of funds of loanable capital that are available for short periods only, and the employment of such funds in call and short-term loans."2

Ely: "Having converted his personal credit into a bank deposit, the business man can now use it as a means of payment. . . . Ordinary commercial banking consists, in large part, of this purchase of personal credit and sale of banking credit."3

Fisher: "Through banking he who possesses wealth difficult to exchange can create a circulating medium based upon that wealth. ... To put it crudely, deposit banking is a device for coining into dollars land, stores, and other wealth not otherwise generally exchangeable. Something of equivalent value is behind each loan, but not necessarily money. The note (or deposit) holder's promise (his promissory note) is secured by his assets; and the bank's promise (the bank note) is secured by the bank's assets. The noteholder has 'swapped' less-known credit for better-known credit."4

Fetter: "The essential feature of a bank is the lending of its credit. . . . The process of lending credit is called 'deposit and discount.' . . . The bank is a tool performing services similar to those of money. . . . The gathering of loanable funds by the banks, making them available at once, reduces hoarding, makes money move more rapidly, and creates a central market between borrowers and lenders for the sale of credit. While not creating more physical wealth directly, it adds to the efficiency of wealth; it oils the bearings of the industrial machine."1

1 Laughlin, Banking Reform, p. 76.

2 Johnson, Introduction to Economics, p. 286.

3 Ely, Outlines of Economics (revised and enlarged edition), p. 247.

4 Fisher, Elementary Principles of Economics, pp. 169, 171, 173.

Taussig: "Banks perform two functions, equally important, yet different. They act as agencies for the collection of savings and for investment; they create a part of the medium of exchange. ... A savings bank has to do with investment only. ... A strictly commercial bank is not concerned with the sort of investment to which the term is commonly limited, that which looks to the creation of permanent plant. But such a bank supplies, in English-speaking communities especially, a highly important part of the circulating medium."2

1 Fetter, Principles of Economics, pp. 462. 464, 465.

2 Taussig, Principles of Economics, i, 331.

Commercial And Investment Banking Adapted from W. H. Steiner, Some Aspects of Banking Theory.

(See text, pp. 26-27)