"WTHAT is it that we call a Banker? There is in this city a company or corporation, called goldsmiths, and most of those called bankers are of that corporation; but so far as I know, there is not a company or corporation in England called bankers, nor has the business any definition or description either by common law or by statute. By custom we call a man a banker who has an open shop, with proper counters, servants, and books, for receiving other people's money, in order to keep it safe, and return it upon demand; and when any man has opened such a shop we call him a banker, without inquiring whether any man has given him any money to keep or no: for this is a trade where no apprenticeship is required, it having never yet been supposed that a man who sets up the trade of banking could be sued upon the statute of Queen Elizabeth, which enacts, that none shall use any art or mystery then used, but such as have served an apprenticeship in the same."
A banker is a dealer in capital, or more properly a dealer in money. He is an intermediate party between the borrower and the lender. He borrows of one party, and lends to another; and the difference between the terms at which he borrows and those at which he lends, forms the source of his profit. By this means he draws into active operation those small sums of money which were previously unproductive in the hands of private individuals; and at the same time furnishes accommodation to those who have need of additional capital to carry on their commercial transactions.
1 Speech, Delivered In The House Of Commons- In 1746. See the London Magazine for that year, page 120.
Banks have been divided into private and public. A private bank is that in which there are but few partners, and these attend personally to its management. A public bank is that in which there are numerous partners, and they elect from their own body a certain number, who are entrusted with its management. The latter are usually called Joint-stock banks.
The business of banking consists chiefly in receiving deposits of money, upon which interest may or may not be allowed; - in making advances of money, principally in the way of discounting bills;1 - and in effecting the transmission of money from one place to another. Banks in metropolitan cities are usually the agents of the banks in the provinces, and charge a commission on their transactions. In making payments a few country banks still issue their own notes.
The disposable means of a bank consist of - First, the capital paid down by the partners, or shareholders. Secondly, the amount of money lodged by their customers. Thirdly, the amount of notes they are able to keep out in circulation. Fourthly, the amount of money in the course of transmission - that is, money they have received, and are to repay, in some distant place, at a future time.
These disposable means are employed - First, in discounting bills. Secondly, in advances of money in the form of cash credits, loans, or overdrawn accounts. Thirdly, in the purchase of government or other securities. Fourthly, a part is kept in the banker's till, to meet the current demands.1 Of these four ways of employing the capital of a bank, three are productive, and one is unproductive. The discounting of bills yields interest - the loans, and the cash credits, and the overdrawn accounts, yield interest - the government securities yield interest - the money in the till yields no interest.
1 Advances, by means of loans or overdrafts upon current ac-counts, are with most banks now of more importance than advances by way of discount.
The expenses of a bank may be classified thus: rent, taxes, and repairs of the house in which the business is carried on; salaries of the officers; stationer's bill for books, paper, notes, stamps, etc.; incidental expenses, as postages, coal, etc.
The profits of a bank are that portion of its total receipts - including discount, interest, dividends, and commission - which exceeds the amount of the expenses.
1 To these should be added money lent at call or short notice to bill brokers and others, and the balance kept at the Bank of England, or London Agent.