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BANK.-BANKING. Banks are establishments intended to serve for the safe custody of money; to facilitate its payment by one individual to another; and, sometimes, for the accommodation of the public with loans.

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Banks are commonly divided into two great classes; banks of deposit, and banks of circulation. This division is not, however, a very distinct one; for there is no bank of deposit that is not, at the same time, a bank of circulation, and few or no banks of circulation that are not also banks of deposit. But the term banks of deposit is meant to designate those which keep the money of individuals and circulate it only; while the term banks of circulation is applied to those which do not thus confine their circulation, but issue notes of their own payable on demand. The Bank of England is the principal bank of circulation in the empire; but it, as well as the private banks of England and Scotland that issue notes, is also a bank of deposit. The private banking establishments in London do not issue notes, and there are many similar establishments in Lancashire, and other parts of the country.

(1.) Utility of Banks. Private Banking Companies of London. The establishment of banks has contributed, in no ordinary degree, to give security and facility to all sorts of commercial transactions. They afford safe and convenient places of deposit for the money that would otherwise have to be kept, at a considerable risk, in private houses. They also prevent, in a great measure, the necessity of carrying money from place to place to make payments, and enable them to be made in the most convenient and least expensive manner. A merchant or tradesman in London, for example, who employs a banker, keeps but very little money in his own hands, making all his considerable payments by drafts or checks on his banker; and he also sends the various checks, bills, or drafts payable to himself in London, to his bankers before they become due. By this means he saves the trouble and inconvenience of counting sums of money, and avoids the losses he would otherwise be liable to, and would no doubt occasionally incur, from receiving coins or notes not genuine. Perhaps, however, the great advantage derived by the merchant or tradesman from the employment of a banker, consists in its relieving him from all trouble with respect to the presentation for payment of due bills and drafts. The moment these are transferred to the banker, they are at his risk. And if he either neglect to present them when due, or to have them properly noted in the event of their not being paid, he has to answer for the consequences.

"This circumstance alone must cause an immense saving of expense to a mercantile house in the course of a year. Let us suppose that a merchant has only two bills due each day. These bills may be payable in distant parts of the town, so that it may take a clerk half a day to present them; and in large mercantile establishments it would take up the whole time of one or two clerks to present the due bills and the drafts. The salary of these clerks is, therefore, saved by keeping an account at a banker's: besides the saving of expense, it is also reasonable to suppose that losses upon bills would sometimes occur from mistakes, or oversights, from miscalculation as to the time the bill would become due-from errors in marking it up from forgetfulness to present it, or from presenting it at the wrong place. In these cases the indorsers and drawees are exonerated; and if the acceptor do not pay the bill, the amount is lost. In a banking house such mistakes occur sometimes, though more rarely; but when they do occur, the loss falls upon the banker, and not upon his customer." -(Gilbart's Practical Observations on Banking.)

It is on other grounds particularly desirable for a merchant or tradesman to have an account with a banking house. He can refer to his bankers as vouchers for his respectability: and in the event of his wishing to acquire any information with respect to the circumstances, or credit, of any one with whom he is not acquainted, his bankers will render him all the assistance in their power. In this respect they have great facilities, it being the common practice amongst the bankers in London, and most other trading towns, to communicate information to each other as to the credit and solvency of their customers.

To provide for the public security, the statute 7 & 8 Geo. 4. c. 29. 2 49. "for the punishment of embezzlement committed by agents intrusted with property," enacts, "That if any money, or security for the payment of money, shall be intrusted to any banker, merchant, broker, attorney, or other agent, with any direction in writing to apply such money, or any part thereof, or the proceeds, or any part of the proceeds of such security, for any purpose specified in such direction, and he shall, in violation of good faith, and contrary to the purpose so specified, in any wise convert to his own use or benefit such money, security, or proceeds, or any part thereof respectively, every such offender shall be guilty of a misdemeanor, and being convicted thereof, shall be liable, at the discretion of the court, to be transported beyond seas, for any term not exceeding fourteen years, nor less than seven years, or to suffer such punishment by fine or imprisonment, or by both, as the court shall award; and if any chattel or valuable security, or any power of attorney for the sale or transfer of any share or interest in any public stock or fund, whether of this kingdom, or of Great Britain, or of Ireland, or of any foreign state, or in any fund of any body corporate, company or society, shall be intrusted to any banker, merchant, broker, attorney, or other agent, for safe custody, or for any special purpose, without any authority to sell, negotiate, transfer, or pledge, and he shall, in violation of good faith, and contrary to the object or purpose which such chattel or security, or power of attorney, shall have been intrusted to him, sell, negotiate, transfer, pledge, or in any manner convert to his own use or benefit such chattel or security, or the proceeds of the same, or any part thereof, or the share or interest in stock or fund to which such power of attorney shall relate, or any part thereof, every such offender shall be guilty of a misdemeanor, and being convicted thereof, shall be liable, at the discretion of the court, to any of the punishments which the court may award as hereinbefore last mentioned."

This act is not to affect trustees and mortgagees, nor bankers receiving money due upon securities, nor securities upon which they have a lien, claim, or demand, entitling them by law to sell, transfer, or otherwise dispose of them, unless such sale, transfer, or other disposal shall extend to a greater number or part of such securities or effects than shall be requisite for satisfying such lien, claim, &c.- 50.

Nothing in this act is to prevent, impeach, or lessen any remedy at law or in equity, which any party aggrieved by any such offence might or would have had, had it not been passed. No banker. merchant, &c. shall be convicted as an offender against this act, in respect of any act done by him, if he shall at any time previously to his being indicted for such offence have disclosed such act on oath, in consequence of any compulsory process of any court of law or equity, in any action bona fide instituted by any party aggrieved, or if he shall have disclosed the same in any examination or deposition before any commissioner of bankrupt.- 52.

The Bank of England, and the private banking companies of London as well as some of the English provincial banks, charge no commission on the payments made and received on account of those who deal with them. But they allow no interest on the sums deposited in their hands; and it is either stipulated or distinctly understood that a person employing a banker should, besides furnishing him with sufficient funds to pay his drafts, keep an average balance in the banker's hands, varying, of course, according to the amount of business done on his account; that is, according to the number of his checks or drafts to be paid, and the number of drafts and bills to be received for him. The bankers then calculate, as well as they can, the probable amount of cash that it will be necessary for them to keep in their coffers to meet the ordinary demands of their customers, and employ the balance in discounting mercantile bills, in the purchase of government securities, or in some other sort of profitable adventure; so that their profits result, in the case of their not issuing notes, from the difference between the various expenses attendant on the management of their establishments, and the profits derived from such part of the sums lodged in their hands as they can venture to employ in an advantageous way.

The directors of the Bank of England do not allow any individual to overdraw his account. They answer drafts to the full extent of the funds deposited in their hands; but they will not pay a draft if it exceed their amount. Private bankers are not generally so scrupulous; most of them allow respectable individuals, in whom they have confidence, to overdraw their accounts; those who do so paying interest at the rate of 5 per cent, or whatever sums they overdraw. The possession of this power of overdrawing is often a great convenience to merchants, while it is rarely productive of loss to the banker. The money which is overdrawn is usually replaced within a short period; sometimes, indeed, in the course of a day or two. The directors of the Bank of England decline granting this facility from a disinclination on their part to come into competition in a matter of this sort with private bankers, who transact this kind of business better, probably, than it could be done by a great establishment like the Bank.

The facility which banks afford to the public in the negotiation of bills of exchange, or in the making of payment at distant places, is very great. Many of the banking companies established in different districts have a direct intercourse with each other, and they have all correspondents in London. Hence an individual residing in any part of the country, who may wish to make a payment in any other part, however distant, may effect his object by applying to the bank nearest to him. Thus, suppose A. of Penzance has a payment to make to B. of Inverness: to send the money by post would be hazardous; and if there were fractional parts of a pound in the sum, it would hardly be practicable to make use of the post: how then will A. manage? He will pay the sum to a banker in Penzance, and his debtor in Inverness will receive it from a banker there. The transaction is extremely simple: the Penzance banker orders his correspondent in London to pay to the correspondent of the Inverness banker the sum in question on account of B.; and the Inverness banker, being advised in course of post of what has been done, pays B. A small commission charged by the Penzance banker, and the postage, constitute the whole expense. There is no risk whatever, and the whole affair is transacted in the most commodious and cheapest

manner.

By far the largest proportion both of the inland bills in circulation in the country, and also of the foreign bills drawn upon Great Britain, are made payable in London, the grand focus to which all the pecuniary transactions of the empire are ultimately brought to be adjusted. And in order still further to economise the use of money, the principal bankers of the metropolis are in the habit of sending a clerk each day to the clearing house in Lombard-street, who carries with him the various bills in the possession of his house that are drawn upon other bankers; and having exchanged them for the bills in possession of those others that are drawn upon his constituents, the balance on the one side or the other is paid in cash or Bank of England notes. By this contrivance the bankers of London are enabled to settle transactions to the extent of several millions a day, by the employment of not more, at an average, than from 200,000l. to 300,000l. of cash or Bank notes. - (See CLEARING HOUSE.)

In consequence of these and other facilities afforded by the intervention of bankers for the settlement of pecuniary transactions, the money required to conduct the business of an extensive country is reduced to a trifle only, compared with what it would otherwise be. It is not, indeed, possible to form any very accurate estimate of the total saving that is thus effected; but, supposing that 50 or 60 millions of gold and silver and bank notes are at present required, notwithstanding all the devices that have been resorted to for economising money, for the circulation of Great Britain, it may, one should think, be fairly concluded, that 200 millions would, at the very least, have been required to transact an equal extent of business but for those devices. If this statement be nearly accurate, and there are good grounds for thinking that it is rather under than over rated, it strikingly exhibits the vast importance of banking in a public point of view. By its means 50 or 60 millions are rendered capable of performing the same functions, and in an infinitely more commodious manner, that would otherwise have required four times that sum; and supposing that 20 or 30 millions are employed by the bankers as a capital in their establishments, no less than 120 or 130 millions will be altogether disengaged, or cease to be employed as an instrument of circulation, and made available for employment in agriculture, manufactures, and com

merce.

(2.) Substitution of Bank Notes for Coins. Means by which the value of Bank Notes may be sustained. Not only, however, does the formation of banking establishments enable the business of a country to be conducted with a far less amount of money, but it also enables a large portion of that less amount to be fabricated of the least valuable materials, or of paper instead of gold. It would, however, alike exceed the limits and be inconsistent with the objects of this article, to enter into lengthened details with respect to the mode in which this substitution originally took place. It is sufficient to observe, that it naturally grew out of the progress of society. When governments became sufficiently powerful and intelligent to enforce the observance of contracts, individuals possessed of written promises from others that they would pay certain sums at specified periods, began to assign them to those to whom they were indebted; and when those by whom such obligations are subscribed are persons of whose solvency no doubt can be entertained, they are readily accepted in payment of the debts due by one individual to another. But when the circulation of obligations or bills in this way has continued for a while, individuals begin to perceive that they may derive a profit by issuing them in such a form as to fit them for being readily used as a substitute for money in the ordinary transactions of life. Hence the origin of bank notes. An individual in whose wealth and discretion the public have confidence being applied to for a loan, say of 5,000/., grants the applicant his bill or note payable on demand for that sum. Now, as this note passes, in consequence of the confidence placed in the issuer, currently from hand to hand as cash, it is quite as useful to the borrower as if he had obtained an equivalent amount of gold; and supposing that the rate of interest is 5 per cent., it will yield, so long as it continues to circulate, a revenue of 250l. a year to the issuer. A banker who issues notes, coins as it were his credit. He derives the same revenue from the loan of his written promise to pay a certain sum, that he would derive from the loan of the sum itself; and while he thus increases his own income, he at the same time contributes to increase the wealth of the society. Besides being incomparably cheaper, bank notes are also incompar- | ably more commodious than a metal currency. A bank note for 1,000%. or 100,000/. may be carried about with as much facility as a single sovereign. It is of importance, too, to observe, that its loss or destruction, whether by fire, shipwreck, or otherwise, would be of no greater importance in a public point of view, than the loss or destruction of as much paper. No doubt it might be a serious calamity to the holder; but whatever the extent it injured him, it would proportionally benefit the issuer, whereas the loss of coin is an injury to the holder without being of service to any one else; it is, in fact, so much abstracted from the wealth of the community.

Promissory notes issued by private individuals or associations circulate only because those who accept them have full confidence in the credit and solvency of the issuers, or because they feel assured that they will be paid when they become due. If any circumstances transpired to excite suspicions as to their credit, it would be impossible for them to circulate any additional notes, and those that they had issued would be immediately returned for payment. Such, however, is not the case with paper money properly so called, or with notes that are declared legal tender. It is not necessary, in order to sustain the value of such notes, that

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they should be payable at all; the only thing that is required for that purpose is, that they should be issued in limited quantities. Every country has a certain number of exchanges to make; and whether these are effected by the employment of a given number of coins of a particular denomination, or by the employment of the same number of notes of the same denomination, is, in this respect, of no importance whatever. Notes which have been made legal tender, and are not payable on demand, do not circulate because of any confidence placed in the capacity of the issuers to retire them; neither do they circulate because they are of the same real value as the commodities for which they are exchanged; but they circulate because, having been selected to perform the functions of money, they are, as such, readily received by all individuals in payment of their debts. Notes of this description may be regarded as a sort of tickets or counters to be used in computing the value of property, and in transferring it from one individual to another. And as they are no wise affected by fluctuations of credit, their value, it is obvious, must depend entirely on the quantity of them in circulation as compared with the payments to be made through their instrumentality, or the business they have to perform. By reducing the supply of notes below the supply of coins that would circulate in their place were they withdrawn, their value is raised above the value of gold; while, by increasing them to a greater extent, it is proportionally lowered.

Hence, supposing it were possible to obtain any security other than immediate convertibility into the precious metals, that notes declared to be legal tender would not be issued in excess, but that their number afloat would be so adjusted as to preserve their value as compared with gold nearly uniform, the obligation to pay them on demand might be done away. But it is needless to say that no such security can be obtained. Wherever the power to issue paper, not immediately convertible, has been conceded to any set of persons, it has been abused, or, which is the same thing, such paper has uniformly been over-issued, or its value depreciated from excess. It is now admitted on all hands to be indispensable, in order to prevent injurious fluctuations in the value of money, that all notes be made payable, at the pleasure of the holder, in an unvarying quantity of gold and silver. This renders it impossible for the issuers of paper to depreciate its value below that of the precious metals. They may, indeed, by over-issuing paper, depress the value of the whole currency, gold as well as paper, in the country in which the over-issue is made; but the moment that they do this, gold begins to be sent abroad; and paper being returned upon the issuers for payment, they are, in order to prevent the exhaustion of their coffers, compelled to lessen their issues; and thus, by raising the value of the currency, stop the drain for bullion.

It does, however, appear to us, that it is not only necessary, in order to prevent the overissue of paper, to enact that all notes should be payable on demand, but that it is further necessary, in order to insure compliance with this enactment, to prohibit any one from issuing notes until he has satisfied the government of his ability to pay them. The circumstances that excite public confidence in the issuers of paper are often of the most deceitful description; and innumerable instances have occurred, of the population of extensive districts having suffered severely from the insolvency of bankers in whom they placed the utmost confidence. In 1793, in 1814, 1815, and 1816, and again in 1825, a very large proportion of the country banks were destroyed, and produced by their fall an extent of ruin that has hardly been equalled in any other country. And when such disasters have already happened, it is surely the bounden duty of government to hinder, by every means in its power, their recurrence. It is no exaggeration to affirm, that we have sustained ten times more injury from the circulation of worthless paper, or paper issued by persons without the means of retiring it, than from the issue of spurious coin. It is said, indeed, by those who are hostile to interference, that coins are legal tenders, whereas, notes being destitute of that privilege, those who suspect them are at liberty to refuse them; but, whatever notes may be in law, they are, in very many districts, practically and in fact, legal tenders, and could not be rejected without exposing the parties to much inconvenience. It should also be observed, that labourers, women, minors, and every sort of persons, however incapable of judging of the stability of banking establishments, are dealers in money, and consequently liable to be imposed upon. This, then, is clearly a case in which it is absolutely imperative upon government to interfere, to protect the interests of those who cannot protect themselves, either by compelling all individuals applying for stamps for notes, to give security for their payment, or by making sure, in some other way, that they have the means of paying them, and that the circulation of the notes will be a benefit and not an injury to the public.

A security of this sort has been exacted in the case of the Bank of England; and the whole 14,686,000l. lent by the Bank to government, must be sacrificed before the holders of her notes can sustain the smallest loss. Her stability has, therefore, been truly said, by Dr. Smith, to be equal to that of the British government. The system of taking securities having been found to answer so well in the case of the Bank of England, is a powerful argument in favour of its extension. Were securities taken from the country banks, their ultimate failure, in the capacity of banks of issue, would be rendered impossible; and a degree of solidity would be given to our money system, which it is idle to expect it can ever attain, so long as it continues on its present footing.

It is exceedingly difficult to prevent the issue of forged notes. Various schemes have been suggested for this purpose; and though it is hardly possible to suppose that an inimitable note will ever be produced, it is contended, that by judiciously combining different sorts of engraving, forgery may be rendered so difficult, as to be but rarely attempted. But however this may be, during the period from 1797 to 1819, when the Bank of England issued 11. notes, their forgery was carried on to a great extent. And the desire to check this practice and to lessen the frequency of capital punishments, appears to have been amongst the most prominent circumstances which led to the return to specie payments in 1821, and the suppression of 11. notes-(See Table I.)

(3.) Bank of England Notes legal tender. According to the law as it stood previously to the present year (1834), all descriptions of notes were payable at the pleasure of the holder, in coin of the standard weight and purity. But the policy of such a regulation was very questionable; and we regard the enactment of the late stat. 3 & 4 Will. 4. c. 98., which makes Bank of England notes legal tender, every where except at the Bank and its branches, for all sums above 5l., as a very great improvement. So long as the notes of the Bank are themselves convertible, at the pleasure of the holder, into coin, an arrangement of this sort will, it is obvious, effectually prevent any over-issue of country paper, at the same time that it is free from many very serious disadvantages that attached to the former plan. The unjust liabilities imposed upon the Bank of England by the old system, placed her in a situation of great difficulty and hazard. They obliged her to provide a supply of coin and bullion, not for her own exigencies only, but for those of all the country banks; and, what is harder still, they exposed her to be deeply injured by any misconduct on the part of the latter, as well as by the distress in which they might accidentally be involved. In consequence her free action has been at all times in some degree impeded; and her power to render assistance to the banking and mercantile interests in periods of discredit materially diminished. The country banks kept but a small supply of coin in their coffers. They were all, however, holders, to a greater or less extent, of government securities; and whenever any circumstance occurred, to occasion a demand upon them for coin, they immediately sold or pledged the whole or a portion of their stock, carried the notes to the Bank to be exchanged, and then carried the specie to the country. Hence, when any suspicions were entertained of the credit of the country banks, or when a panic originated amongst the holders of their notes, as was the case in 1793 and 1825, the whole of them retreated upon the Bank of England, and 700 or 800 conduits were opened, to draw off the specie of that establishment, which was thus, it is evident, exposed to the risk of stoppage without having done any thing wrong. It was not the drain for gold from abroad, but the drain for gold from the country, that nearly exhausted the Bank's coffers in 1825, and forced her to issue about a million of 11. and 21. notes. The currency could not possibly be in a sound healthy state, while the Bank of England, and, through her, public credit, were placed in so perilous a situation. But the making of Bank of England notes legal tender at all places except the Bank, will tend materially to protect her from the injurious consequences of panics or runs among the holders of country bank paper; and while it does this, it will not, as it appears to us, in any wise impair the securities against over-issue or depreciation.

It was, no doubt, contended during the discussions on the late act, that the measure now referred to would lead to the depreciation of provincial paper; inasmuch as the expense of sending notes from a distance to London, to be exchanged for gold, would prevent any one from demanding Bank of England notes from country banks in good credit, till the value of the notes issued by them was so much depreciated below the value of gold, that the difference would more than pay the expense of sending men to London, and bringing gold back. But this notion proceeds on a radical misconception of the nature of the old as well as of the new system of currency. There cannot, in point of fact, be the least difference, as repects value, in the provinces, between Bank of England paper, now that it is legal tender, and gold. London being the place where the exchanges are adjusted, the value of money in every part of the empire must depend on its value in it; and this, it is plain, cannot be in any degree affected by the late measure. Formerly the provincial currency, gold as well as paper, might be, and, indeed, frequently was, depreciated. This was brought about either by an over-issue on the part of the country banks, generally in the first instance, the effect, but always, in the end, the cause of a rise of prices; or by the issues of the Bank of England, being, in consequence of an adverse exchange, narrowed sooner or more rapidly than those of the country banks. In either case the provincial currency being redundant as compared with that of the metropolis, there was a demand on its issuers for bills on London; but it is material to observe, that, unless their credit was suspected, there was not in such cases, any demand upon them for gold. It is, indeed, obvious that a redundancy of the currency is a defect that cannot be obviated by getting gold from the country banks, unless (as hoarding is out of the question) it be intended to send it abroad; and that may always be done better and cheaper by getting from them Bank of England notes, or bills on London. A local redundancy of the currency may take place in future as it has done formerly, and its occurrence cannot be prevented, even though paper were wholly banished from circulation, so VOL. L-G

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