manufacturing and transportation agencies on the other. The transfer of capital to public bodies, such as central governments, states, municipalities, and other political divisions, for unproductive consumption is a process also carried on by investment banks similar to the other in its nature, but having peculiarities which place it in a class by itself.

It is the business of the investment banking institutions of a country to see that this work of directing the savings of the country into its various enterprises is economically and efficiently done. It is their business to stimulate saving and to provide facilities by which every person who saves can readily put his accumulated funds to productive use. It is their business to search out opportunities for investment, to see to it that the natural and human resources of the nation are used to the best possible advantage in the promotion of its economic interests. This is a great work, as important and essential to the well-being of the nation as that which commercial banks or institutions of any other kind perform.

2.

A CLASSIFICATION OF BANKS AND TYPES OF BANKING OPERATIONS

Banks are commonly classified either according to the type of business in which they specialize, or according to the legal authority under which they conduct their business. Under the first classification we find the following: commercial banks, investment banks or bond houses, savings institutions, and trust companies. However, there is often a far from complete specialization in the work performed by these various institutions; indeed, "commercial" banks and trust companies as a general rule now perform nearly every kind of banking operation.

Under the second classification we have: national and state banks and private banks-the classification indicating the source of, or the absence of, specific authority to conduct a banking business. The term "state bank," however, has numerous connotations. Most commonly the term is used in connection with state institutions which engage in commercial operations. From this standpoint-the character of business carried on-savings banks and trust companies cannot be called state banks, even though incorporated under state law. Again, private unincorporated banks have also been classified as state banks where they are subject to regulation by the state. For our present purpose, however, the distinguishing feature is the chartering

by state governments. Trust companies, savings banks, bond houses where incorporated, and commercial institutions are all state banks in this classification.

Private banks are of various kinds: (1) small concerns which engage in a general banking business (largely savings), without any specific grant of authority; they may or may not be under the supervision of the state banking department; (2) various co-operativecredit or loaning associations; (3) unincorporated investment banks, or bond houses.

But while banks may be classified into several different kinds of institutions, and while, from the standpoint of services performed, they offer a wide variety of advantages in the way of affording a place for the safe-keeping of money, transferring funds at small expense for the benefit of customers, providing a convenient and uniform system of currency, etc., there are nevertheless but two fundamental types of banking operations. In the last analysis all banking may be classified as either commercial or investment business.

3. THE VARIOUS SERVICES OF BANKS1

BY JAMES W. GILBART

Banks are useful as places of security for the deposit of money. The circumstance which gave rise to the business of banking in this country was a desire on the part of the merchants in London to obtain a place where they might lodge their money in security. Everyone who has had the care of large sums of money knows the anxiety which attends their custody. A person in this case must either take care of his money himself or trust it to his servants. If he takes care of it himself he will often be put to inconvenience, and will have to deny himself holidays and comforts, of which a man who is possessed of much money would not like to be deprived. If he entrusts it to others, he must depend upon their honesty and ability. Besides, in both these cases the money is lodged under the owner's own roof and is subject to thieves, to fire, and to other contingencies, against which it is not always easy to guard. All these evils are obviated by means of banking.

The bankers allow interest for money placed in their hands on deposit. By means of banking the various small sums of money

'Adapted from The History, Principles, and Practice of Banking, 1837. Michie's revision (1882), pp. 213-22. (G. Bell & Sons.)

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.)