Besides being able to transform their notes and bills of exchange into funds immediately available for purposes of commerce, business men derive great advantage from the superior convenience, safety, and elasticity of bank currency. This is due, in the first place, to the fact that this currency exists in a variety of forms, each adapted to definite commercial needs. The check, for example, is a very convenient and safe means of making large payments. It takes less time to write into the printed forms, now furnished by all banks, the name of your creditor, the amount to be paid him, the date, and your own signature, than to count out a large number of notes or coins, and in this way the danger of loss from mistakes in counting is also avoided. Your creditor finds the check more convenient and safe than coin or notes, because it is less bulky, and, if he chances to lose it, he can procure a duplicate and direct the bank not to honour the original if it is ever presented for payment. Furthermore the stub of a check-book constitutes a convenient record of expenditures. For payments at a distance, as in another town or country, banks furnish a convenient currency in the form of drafts, that is, orders of one bank upon another to pay to the person named or to his order a specified sum. These can be conveniently and cheaply sent by mail, and, if lost, like checks, can be duplicated. For travellers in foreign countries banks furnish so-called letters of credit for any amount needed. These enable the holder to obtain at any place of commercial importance any sum he may desire in the money of the country in which he is travelling. These, too, can be duplicated if lost. Bank-notes, which may be issued in any and all denominations, can be used in all ordinary commercial transactions; they are more convenient than coin for all purposes except small change, and are quite as convenient as government notes, being in all external respects identical with them.
By the elasticity of bank currency is meant its capacity to adapt itself, as it were automatically, to the varying needs of commerce. We have just learned that banks are able to supply the various forms of currency needed, and it only remains to show that they can also supply these in the amounts, at the times, and in the places required. The amount of bank currency depends primarily upon the needs and desires of the customers of banks, among whom nowadays are to be found all business men and large numbers of people otherwise engaged or living without labour. As we have already shown, it is created by the processes of discount and deposit, and enters into circulation when the customers of banks pay out the notes received or make use of their credit balances by transferring them to others by means of checks. So long, therefore, as banks are able to continue discounting the paper of their customers the amount of bank currency can be increased, and, assuming that banks exist in sufficient numbers in all places where business is carried on, this currency will come into circulation in the places where it is in demand and at times when it is needed. Any business man can get the amount of money he needs, at the times and in the exact form that he needs it, provided his banker will discount his notes. The only limit to the increase of bank cur-currency, therefore, is the capacity of banks to discount mercantile securities, and within that limit its increase is in direct response to business needs.
Besides the capacity to increase at the right time and place, an elastic currency must possess the capacity to decrease when the need for it has passed away. This quality also bank money possesses in a high degree. Credit balances, which by means of checks are made to serve the purposes of a medium of exchange, diminish in magnitude when discounted notes fall due and are not renewed, customers meeting their obligations to the bank by checking against their accounts or by transferring to it the ownership of cash which has been on deposit elsewhere. Suppose, for example, that a merchant has for three months been using a credit balance obtained by the discount of his own notes. The date of their maturity having arrived, he must pay them. In case he no longer needs the use of the bank's credit, he will do this by drawing a check against his account in favour of the bank, having previously made preparation for this by allowing a sufficiently large balance to accumulate. In case, however, he still needs more money than he possesses, he will probably meet the matured note by discounting a new one or by securing the renewal of the old one. It would, of course, be possible for him to accumulate cash in his own tills to an amount sufficient to pay his notes, but in that case the money would probably have been taken from banks by checks drawn against the accounts of his customers. The almost universal custom of depositing each day the money received, however, prevents the general adoption of this method of payment. It is thus evident that a decrease in the need for money in any community will result in the decrease of bank balances by the payment of matured discounts, no business man being willing to continue the payment of interest to a bank for the use of funds which he no longer needs.
The process by which bank-notes are withdrawn from circulation, when they are no longer needed, is similar to the one just indicated. Like other forms of money, they are deposited in the banks, and cannot again be circulated until some one of the bank's customers is willing to take them in satisfaction of the whole or a part of his credit balance, or as a loan against a discounted note. In the former case they are substituted for another form of bank money, and in the latter they constitute a real addition to the currency. When, therefore, they are transferred to the bank in final payment of discounted notes, they effect as real a diminution of the volume of the currency as the final extinguishment of an equivalent amount of credit balances, and when they accumulate in the tills of the banks they are ultimately redeemed and destroyed.
In view of the great advantages of bank currency, it is not surprising that its circulation has increased with the growth of commerce and industry. But why are banks willing to furnish it? What is the inducement? Like other commercial institutions, they are working for profit, and under ordinary circumstances will pursue that line of policy which will swell this to the greatest extent. The public benefits which flow from this line of business are, as a rule, purely incidental, so far as the proprietors of banks are concerned. While banks have occasionally been founded by States almost entirely on account of their public utility, as a rule they are the outcome of commercial motives pure and simple, and can only be understood when they are viewed in the light of this fact. It follows, therefore, that bank proprietors, as well as their customers, must derive benefit from the business if it is to be continued. In their case this benefit comes chiefly in the form of the interest derived from their securities, which, as we have seen, represent in part money left with them on deposit and in part the loan of their own credit. Fees are charged in the case of certain services, but these are often little, if any, in excess of the expenses involved. It must be expected, therefore, that banks will aim to expand their loans to the greatest extent that sound business methods will permit, and that they will charge as high a rate of interest as possible under the existing conditions of the market. This fact has several important consequences which must be considered in succeeding chapters. One is the necessity of safeguards to prevent unscrupulous bankers or those of unsound judgment from expanding their credit beyond the limits of safety, and another is that the rate of discount becomes the result and at the same time an index of commercial conditions.
Most of the topics discussed in this and the four following chapters are treated in the following standard works on banking: Macleod's Theory and Practice of Banking; Gilbart's History and Principles of Banking; Hankey's Principles of Banking; Dunbar's History and Theory of Banking; Wagner's Beitrdge zur Lehre von den Banken, and Der Kredit und das Bankwesen; Scharling's Bankpolitik; Courcelle-Seneuil's Traite Thdoretique et Pratique des Operations de Banque; and Wolowski's La Question des Banques.
On the origin and development of banking institutions see especially Macleod, v. I, ch. iv, sec. 1; Bagehot's Lombard Street, ch. iii; Gilbart, v. I, chs. i and ii; and Jager's Die alteste Banken und der Ursprung des Wechsels. On the details of the various banking operations see Macleod, v. I, chs. vi and vii, and v. II, ch. xvii, secs. 12-19; Gilbart, v. I, chs. xv and xx; Wagner's Lehre, chs. ii and iii, and his Kredit, ch. ii; Scharling, ch. i, sec. 1, and ch. ii, sec. 2; Courcelle-Seneuil, bks. II and III.
On the advantages of bank currency see Steiglitz's Das Wesen und die Vorzuge des Despositen- und Checkverkehrs.