Here arises the question: In what form does the banker obtain payment of these pieces of paper for his customers? If his bank is in the City of London, he will not touch a single pound of money in the collection of these debts. They will all be sent to the Clearing House, where a list is drawn up several times a day of the cheques sent in against and those sent in in favour of each banker who is a member of the Clearing House. A balance is struck for each. Those who have to pay it give a cheque on the Bank of England to those who have to receive it, and the whole affair is settled. If, on the contrary, the banker has his bank in a locality where there is no Clearing House, as at the West End or at Liverpool, then no doubt he must be paid in cash over the counter, but, as we shall see presently, this makes him no more a dealer in money than his fellow banker in the City.
We see then what are a banker's receipts,- an insignificant quantity of cash, and all the rest debts, expressed on paper, which he undertakes to collect. These are his resources - the staple in which he deals,- debts. What does he do with them? which means, - How is it that at the Clearing House he may send in cheques for £100,000, and is paid with a cheque on the Bank of England for perhaps £50? Manifestly, he does not collect money and send it round to each of his customers for whom he undertook to collect it. That would not be banking, it would be a mere collecting agency. The real question is, How comes it to pass that he has a right to receive £100,000 from the Clearing House, and is paid only £ 50? What are these counter claims against him which have reduced his payment to such a trifle? They are claims of his own making. He knows that he would have a right to receive £100,000 at the Clearing House, but he does not want to receive this sum in money. The money would be useless to him, it would do him no good. Instead of that he finds borrowers, who seek means wherewith to make purchases. He bids them buy the goods they desire and pay for them with cheques drawn upon his bank. The purchases are made, the cheques are sent by the sellers of the goods to the Clearing House against him, they are placed against those he has to receive, and the end of the whole affair is that he carries off a cheque of £50 on the Bank of England.
The nature of banking now stands forth quite clear. A banker is a man who collects debts from one set of persons and employs the proceeds in granting loans to another set. He receives debts from his customers, he creates debts against his borrowers. Thus he deals in debts. Nominally he deals in money, because all these debts are stated in money; but practically and really he deals in money which is due, but not touched,- in claims, debts, transferred from one account to another. Hence in my " Lectures on the Principles of Currency," I defined a bank to be an institution for the transfer of debts, and the definition is true. But a still better one can be given, which brings out into clearer light the true nature of a bank, its essential function, and draws away attention from the movements of its machinery, its paper receipts and paper payments with the trifling accompaniment of gold, and fixes it on the realities which generate them. This definition will be derived from the cardinal question, How these debts, which are the receipts and resources of a bank, and those other debts which it creates, are born into the world? For a right apprehension of this vital matter, the exclusive talk about money in connection with banks is most mischievously misleading. People are ever saying of the banks that money is abundant or scarce, money is dear or cheap. This language is freely used by men who are accounted great authorities, yet it is most inaccurate and untrue. It is the unthinking abbreviation, the mere slang of the City. Banking transactions may be enormously increased or diminished without: any change in the quantity of money circulating. When banks have much to lend, it is not gold or cash, for that is not the thing lent, but something else which we must try to discover. Again, when money is called cheap or dear, the words express a falsehood, for money (sovereigns) is dear and cheap solely according as the gold of which it is made is cheaper or dearer as a commodity in the metal market. What the City really means is that the borrowing of money is cheap or dear; but a payment given for the loan of a commodity is something utterly different from the cost of the commodity itself. The hire of a hunter for a day's gallop is not the hunter himself.
How then do cheques and bills come into existence? They are the offspring of sales. There are, it is true, many cheques and bills drawn between bank and bank which are not the immediate progeny of sales of goods; but they do not come into consideration here. They are mere distributions among the several banks of a common stock. The origin of that common stock is what we are here concerned with in discovering. These paper documents - every one of them - at their origin denote property bought and paid for, either by the transfer of a debt or a promise to pay later. Every man who gives a cheque to a banker has previously sold something, charged his banker to collect the payment for him, and then he in turn buys and orders the banker to pay for the purchase with that previous cheque he deposited. People who receive their income in cheques or warrants - without sales effected by themselves - fall under the universal law. If their income is derived from a tenant's rent, or a railway dividend, or a dividend on consols - in every case alike, property has been sold to generate the cheques; corn and hay, or a seat in an expensive railway carriage, or goods wherewith to pay taxes, have been sold; there is no exception whatever. The conclusion then is clear; the resources of banks proceed from goods sold, of which they collect the payment. On the other side, the counter-cheques at the Clearing House denote goods bought at some time or other. Further, it is perfectly plain that the power to buy these second goods with the cheques which the banker has authorised his borrower to draw is the consequence of the sale of the first goods, whose seller has received a cheque and deposited it with his banker. Thus the cardinal and final truth comes out, that one set of goods has been exchanged for another - that goods have bought goods - that the banker has acted precisely like a sovereign, has been a tool, an instrument of exchange. He transfers purchasing power, which he received in the form of a debt to collect, and passes it on in the form of a debt he creates. That purchasing power resides in the goods sold, directly or indirectly, by the banker's depositor. It is because the depositor has sold corn that the banker is enabled to authorise the merchant to buy tea.