CHAPTER XIV. BANKING. WE have now reached the great financial institution of modern times-banking. It is an agency for performing the all-important service on which civilisation depends -the exchange of commodities produced by different makers on the fundamental principle of division of employments. Thus it does the same work as money or currency; banking and currency are two different machines for performing the same function. They both transfer goods and property from the hands of one person to those of another. That is their one and only task. They do nothing else, and this is a truth sadly unperceived and yet one which cannot be too firmly grasped, if light is ever to penetrate into this region. They each employ two operations to complete one transaction. The farmer buys three sovereigns with a sheep, and then with those sovereigns he purchases guano; a sheep has been exchanged for guano through the intermediate agency of money. In precisely the same manner the farmer again sells a rick of wheat for a cheque or bill, and his banker with that cheque enables a merchant to buy tea. Wheat has been exchanged for tea by the help of certain writing within banks. There is no difference whatever in the essence of the process, though, of course, the mechanical machinery actually employed in each case varies in detail. Banking and money are purely tools of exchange, and nothing else. But banking is not money nor currency of any kind. Endless confusion is generated on every side by this fatal misconception. Money does its work by means of a valuable metal; banking employs for its tools words written on pieces of paper called bills and cheques, which give legal claim to the metal called coin, and for which the courts of law will, if need be, compel that coin to be given. Thus debts expressed on paper are the tools with which banking works. Some little money it touches, as every business must; but both for banking and for the collective trade of a highly commercial country, coin, money, is absolutely nothing but its small change. Many regard the cheque and the bill as money, equally so credits opened in banking accounts; but if they are money, then farewell to all possibility of understanding what money is. Upon such ideas, a letter must often be regarded as money; for many are the payments which a banker effects without a bill or cheque, in compliance with the instructions of a letter. To jumble up into one heap coin, notes, money, banking, currency, cheques and bills, is to refuse to understand what are their natures and manners of working. We have asked and answered the question, What is money? let us do the same for a bank. What is a bank? A banker is an intermediate agent between two principals; that is the very essence of his action. He is as truly a broker as a tea-broker in Mincing Lane or a cotton broker in Liverpool. Like them he brings. a seller and a buyer together, or rather, which is the same thing in substance, a lender and a borrower; and as the cotton broker transfers the cotton of the American merchant to the hands of a Manchester manufacturer, so the banking broker transfers the property of a lender to the disposal of a borrower. What the banker has to transfer, his power to act, comes from his depositor; he passes it on to his second principal, the borrower, to whom he decides to entrust it. The conduct of this operation constitutes a business, a trade; and the question immediately arises, What is the article in which a banker deals? what is it that is deposited at his bank? what is it that is lent by him and borrowed? A banker deals in money, all the world replies. People take money to a bank, and procure money from it; what can be plainer? Nothing can be more untrue. A bank does not deal in money. It touches per cent., ten shillings only in coin, in true money, of all that it handles. If notes are included in money, 3 per cent., Sir John Lubbock tells us, is all the cash that it receives. Every week in London alone, banking operations are accomplished at the Clearing House—that is, buying and selling of goods through banks-to the gigantic amount of one hundred millions sterling; and yet not one farthing of money has been passed or handled. If we take banks in places in which there is no Clearing Houses, a little more cash will be used; but all over the country the great buying and selling of the people is carried on by cheques. Debts of every kind are paid with cheques; these cheques are placed to the accounts of the receivers; they in turn draw upon these accounts; and so the transfer of commodities, the purchase of merchandise, as of domestic wants, is effected for all but trifling ready money payments, without setting a shilling in motion. This is banking; and the vital question remains-What are these ninety-seven things which a banker receives, and with which he does all his work? In direct words, What are deposits? Debts to receive ;) and this is an answer which goes down to the very root of banking. They are orders to receive money, which the debtor is bound by law to pay at the time specified. But they are not money; an order to pay money, a written request to pay coin, is not the coin itself. Το call it coin or cash is a pure absurdity. A man who deposits a cheque with his banker asks him to collect for him a debt due by another banker. A cheque on a bank implies that it owes money; and it is an instruction from its creditor to pay it to the holder of the order. We thus discern what the ninety-seven parts of a bank's receipts are composed of; they are debts to collect on behalf of its depositors. How, then, are these debts paid? In money-which the banker can demand? By no means. These debts are paid by reckonings in account. If the bank is in London, they are sent to the Clearing House, and figure as items to the credit of the sending banker. If in the country, the banker who is to receive them from the bank drawn upon probably has counter claims to pay, and the balance alone passes. Otherwise they are paid in notes -but these notes move about with marvellous rapidity, and at the end of the day, there are many changes in many accounts, but the cash in the town remains the same. The next question, and it is a most critical one, is— how came the depositor to have a debt to give to the banker to collect? In answering this question, it must be carefully observed that we are speaking of the first appearance of the deposit in the banking community. We must not introduce here mere movements between banker and banker, shiftings of deposits from one portion of the money-market to another. The deposit, then, at its origin, arises from the sale of property, from nothing else. The man who gives a cheque to a banker has previously sold something. If he be a receiver of rent or an owner of dividends or consols, the fact equally holds good. The farmer has sold for the owner of rent his share of the wheat and hay which comes to him as landlord, or the public has sold goods wherewith to pay the taxes imposed for the National Debt. There is no exception whatever; the resources of banks, at their origin, come from goods sold. On the other side the counter cheques at the Clearing House denote goods bought. The course which the operation takes is now clear. A manufacturer has sold 1000 tons of iron, and has been paid with a cheque, which he, by lodging it with his banker, requests him to collect and to place the amount to his credit. Now, if the iron-master draws out the sum due on this debt as soon as paid, the banker becomes a mere collecting clerk, and true banking, as it actually exists, would not come into being. But another fact makes its appearance. The manufacturer will not want for three months, say, the proceeds of 600 tons of the iron sold. He will draw for the present one cheque only on the bank for the purchase of coals up to the value of 400 tons, and this the banker knows. Now commences his specific action. He knows that he has |