The discussion thus far has concerned itself with the nature and with the economic function of the media of exchange for which the banks are responsible. We may turn, therefore, to a consideration of the circumstances controlling the form and volume of these media.

It has been shown that bank credit is made available in two forms, namely, deposits and notes. Both of these forms are from the bank's point of view "demand liabilities." In the absence of any restriction, and if all other things besides form could be assumed to remain the same, it would probably be safe to say that it is a matter of indifference to the bank which form its credit takes.

It cannot, of course, be assumed that for the two kinds of bank credit the "other things" besides form are equal. The costs of administering them can hardly be the same. Just what these costs would be in a particular case would depend upon numerous conditions, which would probably not be the same for any two banks. The denominations of the notes, the frequency of redemption, wear and tear, the size and volume of deposit operations, the relative reserves necessary, the number of depositors and the general nature of their business - these and other things would determine the relative cost of issuing notes and of extending credit in the form of deposits. Considering simply costs the bank would, of course, prefer the less costly of the two forms.

There are, however, considerations which are more significant than cost of administration. Consider for example the effect on a bank's position of a widespread preference for notes rather than tor deposits. The very preference for the notes would in all probability indicate not only a less fully developed state of confidence, but also a relatively backward condition of trade. Hand to hand money could hardly be employed in a community where trade operations are transacted in large sums and in great volume. Furthermore, the preference for notes rather than for deposits and checks in exchange operations would also in all likelihood be indicative of a similar preference for storing up funds at home rather than for intrusting them to the banks. Such a preference would then tell heavily against the bank's deposits, and would consequently put serious limits on the bank's capacity to extend its operations. Where the deposit and check system prevail most of the money available for reserve purposes is actually found in reserves. Where the employment of checks is largely restricted by the use of hand to hand money a larger proportion of the available reserve money remains in general circulation or in private hoards. Considering, therefore, the ultimate as well as the immediate interests of the banks it seems safe to say that the deposit and the check system contribute more to banking prosperity than does the note system.

Circumstances controlling the form of bank credit

Other things equal form probably a matter of indifference to bank

Other things are not equal

Costs vary

General experience tends to confirm this conclusion. Banking thrives better in the manufacturing and commercial centers, where the check is the usual form of payment in almost all except retail transactions, than it does in the agricultural districts where dependence is more largely placed on hand to hand currency. It prospers more noticeably in England where the check system grew up than it does on the continent where notes still predominate. Moreover, ever since the establishment of the Reichsbank its officials have endeavored to build up the check and deposit system - not only for the sake of the banking fraternity, but also because it was believed that there would be a great saving of capital and a stimulus to industry for the community at large. Finally, it may be mentioned that since the middle of the nineteenth century the development of deposit banking has far outstripped that of note issue, and many huge banking establishments are flourishing which are deprived by law of the privilege of note issue.

Use of notes involves a great dependence on hand to hand money

This means a large proportion out of bank reserves

Ultimately banks prefer deposit business

Experience confirms this

But irrespective of the interest of the bank itself the fact remains that the determining circumstance in connection with the form which its credit shall take is the 'demand of the bank's clients. What the borrower who goes to the bank for funds really wants is a purchasing medium that will be accepted in carrying out the particular purpose that he has in view. Such a borrower can want funds conceivably only for two reasons; either he has a debt to pay or an obligation to meet or he wishes to buy something. Consequently, if he is to use bank credit to meet his obligation or to purchase goods, that credit must be supplied to him in a form adapted to his purpose. As a dispenser of credit the bank, like every other seller, must provide that which it sells in a form to suit its customers.

It must not be supposed, however, that the demand of the bank's clients is something which is itself simply the product of individual whim in each particular case. Borrowers who have obligations to meet or goods and services to buy must offer in payment a medium which is acceptable to those with whom they are dealing. In other words the demand of the borrower himself for a particular form of bank credit depends upon what other business men with whom he deals consider an acceptable medium. Moreover, these other business men will accept a given medium of exchange only becausse they in their turn expect to use it in paying obligations to or in making purchases from still others. And if we endeavor to pursue further the circumstances determining the demand for the several forms of bank credit, we find that they ramify through and spread out over the whole community in such bewildering complexity that individual preference seems to be ultimately of no concern whatever. These circumstances are really outgrowths of elements lying deep down in social life, and our conclusion must therefore be that they are not individual but social.