The London private bankers usually grant no interest for money placed in their hands, nor charge any commission upon the amount of the transactions.1 Their customers pay them for the trouble of conducting their accounts by keeping a certain balance to their credit. The amount of the balance is never definitely fixed, but is regulated very much by the good sense and proper feeling of the parties. The number of cheques a party draws - the degree of accommodation he receives by discount or otherwise, these and other circumstances are taken into consideration; and though the amount of the balance is not expressly stipulated, yet few people of business habits are at a loss to judge whether the average balance of their account throughout the year is sufficient to remunerate the banker.
By the Scotch banks,2 deposit accounts are divided into two classes - "accounts current," and "deposit receipts;" the "accounts current" are similar to the "current accounts" kept with English banks. The deposit receipts are similar to what the English bankers call "dead accounts." The depositor pays his money into the bank, and there it lies "dead" until he has occasion for it, and then he produces his receipt and withdraws the whole amount, or takes a new receipt for any part he wishes to leave. The deposit receipts are chiefly for the use of those who lodge their money in the bank merely for the purpose of security and interest. The accounts current are for those who, in addition to security and interest, wish to make use of the bank as a means of facilitating their pecuniary transactions. As far as regards the circulation of the bankers' notes, each kind of account has the same effect; but as the operations on the current accounts are more frequent, they put into circulation a larger amount.
When a banker's own notes are lodged on a deposit account, they do not diminish the amount of his banking capital. The banking capital raised by his notes is diminished, but that raised by his deposits is in the same proportion increased. If, however, the interest he allows upon the deposits is greater than the expense of the wear and tear of his notes, then will his banking capital be diminished in the more profitable, and increased in a less profitable direction. But when a deposit consists of notes of other banks, his banking capital is increased by that amount. Hence, if a banker could know that the money deposited in his hands would consist chiefly of his own notes, it might not be for his advantage to allow any interest on deposits. It would be better for him that his notes should remain in circulation.
1 Provided the balance to the credit of the account is deemed satisfactory.
2 This is now the general practice in England also.
It will be observed that the amount of notes issued on deposit accounts, depends not on the banker but upon the depositors. They lodge money in his bank, and draw it out when they please. The deposit system, therefore, cannot place in circulation any additional amount of money. The depositors cannot draw out of the bank more money than they had deposited. After the deposits are made, the amount of money in existence is precisely the same as before. The only difference is, that what was previously in the hands of many individuals, is now in the hands of the banker - and until he has made use of this money in the way of discounts or loans, or in some other mode, no effect whatever can be produced upon the trade and commerce of the district. All the advantage the people of the neighbourhood obtain by the deposit system, considered by itself, consists in having a place of security in which they may lodge their money - in receiving interest for the sums thus deposited - and in the saving of time and trouble in effecting their pecuniary transactions. But although the deposit system does not affect the amount of the currency, it changes its character. As the lodgments will be made in the previously existing currency - whether gold, or silver, or notes of other banks - and all the issues will be in the banker's own notes - the effect will be, that in course of time all the previous currency will have passed into the bank, and all the existing currency will consist exclusively of the banker's own notes - and the more frequent and heavy are the operations on the deposit accounts, the more rapidly will this effect be produced.
Banks of deposit serve to economize the use of the circulating medium. This is done upon the principle of transfer. The principle of transfer was one of the first which was brought into operation in modern banking. The bank of Amsterdam was founded upon this principle. Any person who chose, might lodge money in the bank, and might then transfer it from his own name to that of another person. All foreign bills of exchange were required, by law, to be paid by such transfers. Although the money might at any time be drawn out, either by the original depositor or by the party into whose name it had been transferred, yet, in fact, this was seldom done, because the bank money was more valuable than the money in common use, and consequently bore a premium in the market. The transfer of lodgments is extensively practised in our own times. If two persons, who have an account in the same bank, have business transactions with each other, the debtor will pay the creditor by a cheque upon the bank. The creditor will have this cheque placed to his credit. The amount of money in the bank remains the same, but a certain portion is transferred into a different name in the banker's books. The cheque given by the debtor is an authority from the debtor to the banker to make this transfer.
Here the payment between the creditor and debtor is made without any employment of money. No money passes from one to the other: no money is paid out or received by the banker. Thus it is that banks of deposit economize the use of the circulating medium, and enable a large amount of transactions to be settled with a small amount of money. The money thus liberated is employed by the banker in making advances, by discount or otherwise, to his customers. Hence the principle of transfer gives additional efficiency to the deposit system, and increases the productive capital of the country. It matters not whether the two parties who have dealings with each other keep their accounts with the same banker or with different bankers; for, as the bankers exchange their cheques with each other at the clearing-house, the effect, as regards the public, is the same. The deposit system might thus, by means of transfers, be carried to such an extent as wholly to supersede the use of a metallic currency. Were every man to keep a deposit account at a bank, and make all his payments by cheques, money might be superseded, and cheques become the sole circulating medium. In England deposit banking has made much more rapid strides than in any country on the Continent. This is due to several causes. First of all, owing to her less troubled political history, property has been more secure and confidence more general, and this has led to an early spread of the habit of banking, and the abandonment of the old stocking or oak chest as the depository of the savings of the people. Secondly the fact that the joint-stock banks founded under the Act of 1833 were forbidden to issue their own notes, induced these banks to offer every inducement to the public to keep banking accounts, and led to a rapid extension of branch banking. But further than this, the fact that the country is thickly populated and that the whole of it is within easy access of some town possessing a bank or branch bank, has helped the bank cheque to supersede the bank note. For country districts where banks are separated by long distances, and a large part of the population is outside the reach of banking facilities, bank notes are a necessity. To a population such as the peasant population of rural France, bank notes are a much more convenient form of currency than bank cheques, and to this we must attribute the slow growth of deposit banking in France.