The old definition of a banker as a man who took care of other people's money and let them have some of it when required, is a very incomplete one. A banker's function is not to take care of other people's money; he buys other people's debts and collects them; he is, in short, a dealer in money and credit.

If a man pays into his banking account a cheque drawn upon the X. Bank, he thereby sells to his banker a right to demand money from the X. Bank, and he acquires in return a right to demand the money from his own banker; the transaction has been an exchange of rights.

Before we can get a clear idea of the duties which a banker owes to the community and of the steps which he should take to make his position a secure one, it is necessary to grasp thoroughly the fact that the main function of a banker is to buy and sell rights to the possession of money. It must always be borne in mind that every right implies necessarily an obligation. If a customer gains the right to obtain coin of the realm from a banker on demand, the banker necessarily incurs an obligation or liability to pay this money whenever it is demanded of him. Let us see what are the principal functions of a banker and what is the nature of the obligations he incurs.

These functions can be conveniently divided into four groups:

(1) The issue of notes.

(2) The receipt of deposits.

(3) The discounting of bills and promissory notes.

(4) The granting of loans.

(1) The issue of notes was the function of a banker which was at one time deemed of paramount importance, but which, except in the case of the Bank of England, is now in England of small significance.

Every note issued by a banker increases his liabilities to pay money on demand. If a note is issued in exchange for gold, the banker buys the gold and gives in return to the seller a right to demand gold at his will - not the same gold, but gold of an equal amount. The banker gains the use of this gold for an uncertain period, for the note costs him practically nothing. If the note is issued in the form of a loan to a customer, there is an exchange of rights to gold on demand, but the customer has to pay interest on the amount of the rights he buys; the banker does not.

(2) The receipt of deposits on "current account" by a banker is an almost identical function with that of the issue of notes. In each case the customer acquires a right to money on demand, and a banker incurs a similar obligation. In the one case this right is evidenced by a piece of paper by which the holder can transfer the right by mere delivery; in the other case, the customer's right rests upon the implied contract made with the banker at the time the account is opened, and the customer can transfer his rights by drawing and negotiating cheques.

But in opening what is called a "deposit account" - that is, an account upon which interest is allowed, and the right of drawing cheques is not usually conferred - there is a slight difference in the nature of the banker's obligations. Such accounts are repayable only upon certain stipulated notice being given, usually seven days, though in some cases as much as two or three years. Therefore the banker's obligations are not to pay gold on demand as in the two preceding instances, and, as we shall see, this difference is a most important one from a banker's point of view.

(3) In discounting bills and promissory notes, a banker buys a right due at a certain fixed future time, and he gives in return to the customer an immediate right to demand money; he charges interest, called bankers' discount, on the transaction in return for which the customer gets the immediate use of the money.

A. has a bill, accepted by B., payable in three months for £100. He wishes to realise the amount at once, and therefore takes the bill to his banker, who credits his account with £100 less £1 for interest. A. acquires an immediate right against the banker, who obtains a right against B. payable in three months time.

It will be seen that in this case, as in two of the three preceding instances, the banker incurs obligations to pay gold on demand.

(4) The function of granting loans is similar to that of discounting bills; in each case the banker gives to the customer an immediate right in return for a future one.

A. applies for a loan of £1,000 to his banker. The latter opens a "loan account" in A.'s name, and debits this with £1,000 which he credits to A.'s current account. The customer therefore acquires an immediate right to £1,000 as against the banker, while the latter obtains, by means of the loan account, the right to demand the repayment of the sum at some future time, either at a fixed period agreed beforehand, or, as is more usual, at such future time as shall be convenient to the banker, due and reasonable notice being given to A.

These are the four principal functions of a banker, and it will be noticed that in every instance, except in the case of "deposit accounts" repayable with notice, the obligation incurred by the banker is to pay on demand gold or Bank of England notes, the latter being legal tender except by the Bank of England and its branches.

It may be thought that this insistence upon the nature of the rights and obligations in which a banker deals is pedantic and useless, but the key to the proper appreciation of the position of a banker towards the public lies in the proper understanding of this fact, that the majority of his obligations are payable on demand. The fact is hardly realised in many quarters that a banker's deposits may be an actual source of weakness to him instead of strength, and that in cases of panic or of temporary lapse of confidence, his danger may be commensurate with the amount of such obligations.

Our modern banking system rests upon the assumption, based upon experience, that the whole of these demands, or even a majority of them, will not be made at the same time. Should a general distrust of credit ever take place, our banking system would collapse, for it would be quite impossible to find the gold to pay even the majority of our banking obligations. Fortunately we are justified in assuming that such a demand for gold is outside the range of probabilities, except in very abnormal political circumstances.