which would have remained unproductive in the hands of individuals are collected into large amounts in the hands of the bankers, who employ it in granting facilities to trade and commerce. Thus banking increases the productive capital of the nation.

Another advantage conferred upon society by bankers is that they make advances to persons who want to borrow money. These advances are made by discounting bills, upon personal security, upon the joint security of the borrower and two or three of his friends, and sometimes upon mortgage. Persons engaged in trade and commerce are thus enabled to augment their capital, and consequently their wealth. The increase of money in circulation stimulates production.

Another benefit derived from bankers is that they transmit money from one part of the country to another. There is scarcely a person in business who has not occasion sometimes to send money to a distant town. This can be most conveniently done by paying the money into a bank, which in turn arranges with a correspondent bank in or near the distant town to pay the designated party the amount specified. Periodical settlements between the two banks make such transactions comparatively inexpensive. At the same time there is not the least risk of loss.

Wherever a bank is established, the public is able to obtain that denomination of currency which is best adapted for carrying on the commercial operations of the place. In a town which has no bank a person may have occasion to use small notes, and have none but large ones; and at other times he may have need of large notes and not be able to obtain them. The banks issue that description of notes which the receivers may require, and are always ready to exchange them for others of a different denomination. Banks, too, usually supply their customers and the neighborhood with silver; and if, on the other hand, silver should be too abundant, the banks will receive it, either as a deposit or in exchange for their notes. Hence, where banks are established, it is easy to obtain change. This is very convenient to those who have to pay large sums in wages or who purchase in small amounts the commodities in which they trade.

By means of banking there is a great saving of time in making money transactions. How much longer time does it take to count out a sum of money in pounds, shillings, and pence than it does to write a draft? And how much less trouble is it to receive a draft in payment of a debt, and then to pay it into the banker's, than it is to receive a sum of money in currency? What inconveniences would

arise from the necessity of weighing sovereigns, what a loss of time from disputes as to the goodness or badness of particular pieces of money!

A merchant or tradesman who keeps a banker saves the trouble and expense of presenting promissory notes which he holds or drafts which he may draw against customers. He may turn these over to his banker for safe-keeping and collection at maturity. He pays these into the hands of his banker, and has no further trouble. He has now no care about the custody of his bills, no anxiety about their being stolen, no danger of forgetting them until they are overdue, and thus exonerating the endorsers, no trouble of sending to a distance in order to demand payment. He has nothing more to do than to see the amount entered to his credit in his banker's books. If a bill be not paid it is brought back to him on the day after it falls due, properly noted. The banker's clerk and the notary's clerk are witnesses ready to come forward to prove that the bill has been duly presented, and the notary's ticket attached to the bill assigns the reasons why it is not paid.

Another advantage of keeping a banker is that by this means you have a continual reference as to your respectability. If a mercantile house in the country writes to its agent to ascertain the respectability of a firm in London, the first inquiry is, "Who is the banker?" And when this is ascertained, the banker is applied to through the proper channel, and he gives his testimony as to the respectability of his customer. When a trader gives his bill, it circulates through the hands of many individuals to whom he is personally unknown; but if the bill is made payable at a banking-house, it bears on its face a reference to a party to whom the accepter is known, and who must have some knowledge of his character as a tradesman. This may be an immense advantage to a man in business as a means of increasing his credit; and credit, Dr. Franklin says, is money.

By means of banking, people are able to preserve an authentic record of their annual expenditures. If a person pays in to his banker all the money he receives in the course of a year, and makes all his payments by checques, then by looking over his bank-book at the end of the year he will readily see the total amount of his receipts and the various items of his expenditure. This is very useful to persons who have not habits of business, and who may therefore be in danger of living beyond their means. A bank account is useful also in case of disputed payments. People do not always take receipts for money

they pay to their tradesmen, and when they do the receipts may be lost or mislaid. In case of death, or omission to enter the amount in the creditor's books, the money may be demanded again. Should the payment have been made in bank notes or sovereigns, the payer can offer no legal proof of having settled the account; but if the account was discharged by a checque on a banker, the checque can be produced and the payment proved by the officers of the bank, who can be subpoenaed for that purpose.

By keeping a banker people have a ready channel of obtaining much information that will be useful to them in the way of their business. They will know the way in which bankers keep their accounts; they will learn many of the laws and customs relating to bills of exchange. By asking the banker, or any of the clerks, they may know which is the readiest way of remitting any money they have to send to the country or to the Continent. If they have to buy or sell stock in the public funds, the banker can give them the name of a respectable broker who can manage the business; or should they be about to travel, and wish to know the best way of receiving money abroad, or be appointed executors to a will, and have to settle some money matters, the banker will in these, and many other cases, be able to give them the necessary information.

Banking also exercises a powerful influence upon the morals of society. It tends to produce honesty and punctuality in pecuniary engagements. Bankers, for their own interest, always have a rigid regard to the moral character of the party with whom they deal; they inquire whether he be honest or tricky, industrious or idle, prudent or speculative, thrifty or prodigal, and they will more readily make advances to a man of moderate property and good morals than to a man of large property but of inferior reputation. Thus the establishment of a bank in any place immediately advances the pecuniary value of good moral character.

4. THE GOLDSMITH BANKERS IN ENGLAND'

The development of banking in England was a mere outgrowth of the business of the goldsmith, and was entirely unaccompanied by legislation of any sort. The date at which the English goldsmiths extended their operations from mere trading in money and the precious metals to a regular system of private banking can be approximately

Adapted from Palgrave, Dictionary of Political Economy, II, 227. (London: Macmillan & Co., 1910.)

set at 1645. A pamphlet written in 1676 entitled The Mystery of the Newfashioned Goldsmiths or Bankers Discovered informs us that the goldsmiths had extended their previous business to lending money and to most of the operations of modern banking, their largest advances being made to the king upon the security of the taxes. The goldsmiths allowed interest to those who placed money with them, and the receipts which they gave for these deposits passed from hand to hand as currency in much the same manner as Bank of England notes do now. That this business soon grew considerably is evident from the testimony of Sir Dudley North in 1680, who, on returning from abroad after many years, was greatly astonished at the new practice of merchants and others making payments by drawing bills on bankers, i.e., goldsmiths. Hence it will be seen that the goldsmiths, from the middle of the seventeenth century onward, assisted greatly to accustom people to the use of a paper currency.

The English goldsmiths of the seventeenth century in issuing their notes acted on quite a different principle from the continental banks of that date. Most of the continental banks professed to be merely banks of deposit of coin or bullion, and to hold in this form the full value of the bills issued against these deposits. Our goldsmiths and the Bank of England, following them, purported to give in their bills the equivalent of what they had received, but never pretended to take the deposit for any other purpose than that of trading with it. They did not make their issues square exactly with the deposits of coin and bullion entrusted to them, "but coined their own credit into money." In other words, they kept a comparatively small reserve as a basis for extensive deposit accounts in precisely the same manner as do modern commercial banks. This resulted occasionally in difficulties. The first recorded run on the private banks, or goldsmiths, was in 1667 after the disastrous defeat suffered by the English fleet at the hands of the Dutch at Chatham. Then the stoppage of the exchequer in 1672 seriously affected their credit; even their honesty was impugned; and in course of time it was found that paper money issued on the security of a small number of individuals could not circulate profitably in competition with that of a powerful joint-stock corporation, such as the Bank of England became in spite of the goldsmiths' opposition.

II

THE NATURE AND FUNCTIONS OF CREDIT

Introduction

An analysis of the principles underlying the institution of credit is fundamental to an understanding of banking. Indeed, it is often stated that banks are credit institutions, that banks deal in credit, or, in a word, that credit and banking are virtually synonymous. Again, it is often stated that modern industrial society is a credit society, the implication being that credit is the most significant factor in the present-day organization of industry and commerce. "Credit is the life-blood of commerce," "Credit is the heart and core of the modern business structure," are other common statements emphasizing the tremendous importance of this phenomenon that is called credit.

While credit may be readily enough defined, an understanding of its real nature and significance is not so easily gained. It is a concept rather than a visible something; or perhaps one might better say that it is incorporeal rather than tangible. It is therefore an elusive phenomenon: "Now you see it and now you don't see it." At any rate, the student usually has at first no little difficulty in grasping its essential nature. In particular, credit is very often confused with the instruments of credit. One can see a check or a promissory note, and such instruments are therefore likely to appear as the very essence of credit. They are, however, merely evidences of the antecedent credit process or transaction and as such are quite irrelevant to credit itself. It should be observed in this connection that in the treatment below the "Instruments of Commercial Credit" are discussed in a separate division following the general analysis of credit itself.

The subject may best be understood through a study of the reasons for giving and receiving credit and an analysis of the many ways in which it manifests itself in our everyday business activities. It will be found that, whatever the particular classification, all credit operations involve at bottom a common principle; though there has been much discussion as to just what this basis of credit is—a discussion, however, which appears to have been largely due to a loose or differing use of words. The selection below on "The Basis of Credit"