CHAPTER XI

THE NATURE OF BANK DEPOSITS

Early recognition that deposits constitute part of the currency. - Failure generally to realize that deposits may be created by the banks. A few instances in which this was understood. Conclusion.

IN reviewing the theories that prevailed before 1860 with respect to the nature and utility of banks, we have inquired merely whether it was believed that banks, in making loans with their notes, lent only what they had in turn received from shareholders and depositors; and whether it was thought that by the operations of banking any capital was created, prices disturbed, or specie driven from the country; but we have so far avoided raising the correlative question how far bank deposits were held to share these several characteristics with notes. We now turn to this other problem.1

Two questions arose here: are deposits to be regarded as a part of the currency? and are they ever created by the banks themselves? That demand deposits subject to withdrawal by check constitute a part of the currency on an equal footing with notes was apparently recognized by American writers somewhat in

1 The practice of drawing checks upon demand deposits came in with the beginnings of banking in this country. In 1786 Pelatiah Webster commented upon it as so convenient that "it is almost universally adopted by people who keep their cash in our present bank" (the Bank of North America). See Political Essays, p. 434.

The volume of notes exceeded that of deposits in the aggregative balance statements for all the banks of the country until 1855, although in Massachusetts the total amount of deposits passed that of notes (not, to be sure, permanently) as early as 1806. (See Report of the Comptroller of the Currency (1876), pp. 95, 98, 99 and passim.) The relative sparseness of population, and, no doubt, the less complete development of the banking habit, told against the use of checks, with its implication of frequent visits to the banks. The greater attention accorded to notes can hardly be accounted for on the ground that deposits were as yet little used; the explanation seems to lie rather in a misapprehension of the nature of deposits, discussed in the text, and in the fact that the more spectacular evils of banking were connected with the function of note issue.

advance of their English contemporaries. Of the latter, James Pennington, in 1829, seems to have been the first to insist that deposits be given a coördinate importance with notes as a part of the currency.1 The contrary view was still so widely accepted as late as 1844 as to be generally assumed in the arguments made in behalf of the Bank Charter Act of that year, which sought to eliminate fluctuations in the volume of the currency by rendering bank notes inelastic in quantity.2

In the United States, on the other hand, the doctrine that bank deposits must be reckoned a part of the currency appeared much earlier. We find it in Hamilton's Report of 1790 and in Hare's significant essay of 1810.3 A committee of the Pennsylvania legislature, headed by Condy Raguet, incorporated in its report of 1821 the principle that "The right to draw a check upon a bank, payable on demand, is as much a part of the currency as a bank note." In all his later works 5 Raguet insisted upon the inclusion of bank deposits in the currency. Gallatin, in his Considerations of 1831, wrote: "We can in no respect whatever perceive the slightest difference between the two: and we cannot,

1 Silberling, British Theories of Money and Credit, 1776-1848, pp. 124, 310. (Unpublished Harvard thesis.) See Tooke, Letter to Grenville (1829), pp. 117–127.

2 Peel's Act, and the currency principle upon which it is based, are often said to have been founded upon failure to appreciate the fact that bank deposits, no less than bank notes, function as currency. (Cp. Pierson, Principles of Economics, p. 457; Andreades, History of the Bank of England, p. 276; Palgrave's Dictionary of Political Economy, i, 473.) To a certain extent this is true. But the currency principle might logically have been advocated by one who recognized that bank deposits share equally with bank notes the functions of currency, but who believed, as did many American writers, that while bank notes may be created by the banks more or less at their own discretion, bank deposits represent sums of preëxisting media of payment placed in the bank by its patrons. In that case there would be no reason to regulate deposits so as to prevent their volume from fluctuating; while there would be reason to restrict note issues.

3 Hamilton, Report on a National Bank (1780), American State Papers, Finance, i, 68; Hare, Brief View of the Policy and Resources of the United States (1810), p. 63.

4 The report was printed in virtually all of Raguet's later publications, e. g., Examiner (1835), p. 340. It seems to have been little more than an expression of Raguet's own views.

• Financial Register (1838), i, 406, ii, 208, 209; Currency and Banking (1839), pp. 183 ff.

therefore, but consider the aggregate amount of credits payable on demand, standing on the books of the several banks, as being part of the currency of the United States." 1

H. C. Carey contended, with wearisome repetition, that bank deposits are, indeed, the troublesome part of the currency that banks issue. The quantity of bank notes in circulation, being dependent upon the wishes of the public, is relatively stable; it is the book credits of banks that work mischief with their wide variations in quantity.2 And Carey criticized Peel's Act of 1844 for overlooking the major cause of price disturbances.3

There were many, on the other hand, who discussed fluctuations in prices, the necessity of keeping large reserves, regulation of banking, and like problems, with reference to bank notes only. In part this marked a failure to perceive that deposits are an element of the currency; in larger degree, it seems to have arisen from a misconception of the nature of bank deposits (whether they be included in the currency or not) — namely, from the tendency to regard them in all cases as credits for money actually brought to the bank.

In England the inclusion of such items as bills of exchange in the currency had been urged by some writers, and the merits of the contention received some consideration in this country. Usually the wide circulation of bills of exchange in Lancashire was cited, and the whole discussion was but a frank echo of the English one. Professor Dew thought that it was an error, in discussing the currency, to "lose sight of those other items, bills of exchange, private promissory notes, bonds, stock, etc., which do, in fact, perform, though sluggishly, the functions of a circulating medium." Their great volume more than offsets their sluggish

1 Gallatin, Considerations, etc. (1831), p. 31. Gallatin had reached the same conclusion in 1809. See Report to the Senate (March 3, 1809), American State Papers, Finance, ii, 351.

2 H. C. Carey, Past, Present, and Future (1848), pp. 187-204; Principles of Social Science (1858), ii, 392, 421; etc. Cp. Bank Notes and Specie (Anon., 1856), pp.

5, 10.

'H. C. Carey, Past, Present, and Future, p. 180; Principles of Social Science, ii, 393.

circulation.1 Vethake thought similarly.2 Gallatin, on the other hand, preferred to regard bills of exchange and promissory notes as substitutes for currency. In his opinion,

the essential distinction is, that the bills of exchange are only a promise to pay in currency, and that the failure of the drawers, drawees, and indorsers, does not, in the slightest degree, affect the value of the currency itself, or impair that permanent standard of value by which the performance of all contracts is regulated."

Gouge, after endorsing this view with respect to ledger accounts, bills of exchange, and promissory notes, added:

An increase of these three kinds of commercial medium may have the same effect on prices as an increase of money. Where the spirit of speculation is excited, men, after having exhausted their cash means, strain their credit. Cash and credit are then competitors in the market, and raise prices on one another."

Raguet, Tucker, and Carroll followed Gallatin.5

No less significant than the problem whether bank deposits should be classed as currency was that of determining whether they were in any measure created by the banks themselves. We have seen that the overwhelming majority of the writers conceived of the lending operations of banks as confined in essence to the advance of capital left with them by stockholders and depositors. That such a view would tend to be more readily accepted by those who regarded all deposits as representing money brought to the bank by its patrons is evident, but the two points are by no means the same. The one involved the problem of the ability of banks to create bank notes and deposits; the other involved the problem of the significance of such a creation, if its possibility be granted. Some of those who assigned to banks only an intermediary function believed also that international gold move

1 Thomas R. Dew, Great Question of the Day (1840), p. 6; and Essay on the Interest of Money (1834), p. 16.

2 Vethake, Principles of Political Economy (1838), pp. 148, 149. See also, Middleton, The Government and the Currency (1850), pp. 88-91.

3 Gallatin, Considerations, etc. (1831), p. 29.

4 Gouge, Short History of Paper Money, etc. (1833), pp. 19, 20.

5 Raguet, Currency and Banking (1839), pp. 173-177; Tucker, Theory of Money and Banks (1839), p. 142; Carroll, "The Banking and Credit Systems," Hunt's Merchants' Magazine (September, 1858), xxxix, 311.