Exactly as in the case of any commodities or manufactured articles, money has to be put into circulation through some medium or other. The medium by which money is sent out by the government to the public and received from the public by the government, is the bank. When society was not as developed as it is to-day, and even under some types of government, the government itself performed the function of banking. So long as the people were self-contained and had no commercial or other intercourse with their neighbours money had very little to do; and what little it did was usually done through the Government. But when commerce expanded and when there was an interchange of commodities between two or three places, money had to do much more; even then one place usually exchanged the commodities it produced with those produced in a neighbouring place; only when the limit of exchangeable commodities was reached and when one place desired more of the commodities for which it had no goods to give in return, the use of money became necessary. When this process was repeated several times and when the volume or business expanded then the number of merchants in one place liked to have a guarantor or a man who had no direct interest in the business of any one of the different individuals. Each place had its own guarantor; and instead of the individual traders then settling accounts with each other they settled it through the guarantor. By this process not only was business simplified, but scope was available for the widening of each individual business.
The function of the guarantor was not only that of bringing about economy in the use of money and saving time and trouble, but also or enabling persons who were guaranteed to purchase goods although they had nothing in their possession; thus the use of capital was obtained without the person having to pay money for it or to transfer any article of value in exchange for it beforehand. A further step was that all persons left their balances in the hands of the guarantor and saved themselves the trouble of paying out or receiving cash, on the condition that the guarantor undertook to repay on demand to each person any balance that might have been standing to his credit. When such a stage was reached a guarantor became for all practical purposes a bank, which facilitated trade by an expansion of a system of credit.
Apart from the original functions of the guarantor the advantages of banking to trade are many. When a bank is sufficiently well established, so that many customers leave their money in its custody, the bank uses the money, by making loans and advances; but is not limited again to the amount of capital with which it commenced business and the total of its deposits. As a matter of fact it makes loans and advances to any extent, only subject to the condition that it shall be able to meet all claims against it at the appointed periods. Some capital is concentrated in the hands of the banks; the banks wish to utilize it and those who wish to take advantage of capital pay for it. Further, the banks, in addition to their other functions, serve as clearing houses for their customers, whose accounts are set off against each other without money having to pass from hand to hand with each transaction.
This is, of course, an ideal statement of the functions of the bank. But local or political conditions may affect the position in such manner as to make the bank err by either guaranteeing too much credit or restricting it too much. During the years between 1900 and 1910 we have had examples in China, before the revolution, of banks guaranteeing credit recklessly; after the establishment of the Republic and even up to date the banks have been over-cautious in the guaranteeing of credit.
But there is also another function of the banks which is taken for granted in countries where there is a stable and well-regulated currency. The banks are the sole mediums, in almost every part of the civilized world, through which the currency passes from any government to the people. When the banks have reached the stage of being public guarantors or institutions where people deposit their savings and whence they draw money from, it is but natural that they should form the link between the administrations and the public in every transaction involving money. When a government issues notes or when a government issues coins, the public could certainly directly obtain whatever it wants from the treasury; but the circulation is made easy by the government dealing through the banks, or the public dealing through banks. There is naturally a very close connection between the currency and banking systems of a country. The decision to reform currency must inevitably involve the adoption of regulations controlling banking. It is hard to say which should precede the other, for the best system of currency, with unregulated banking, would be of no use to the country; similarly the best banking methods would prove of no practical use if the currency is what it is in China to-day. Therefore, the only conclusion that one could arrive at is that reformation of currency and banking should go hand in hand, or be simultaneously attended to.