BANK, primarily an establishment for the deposit, custody and repayment on demand, of money; and obtaining the bulk of its profits from the investment of sums thus derived and not in immediate demand. The term is a derivative of the banco or bench of the early Italian money dealers.
Divisions.—In respect of constitution there is a broad division of banks into public and private; public banks including such establishments as are under any special state or municipal control or patronage, or whose capital is in the form of stock or shares which are bought and sold in the open market; private banks embracing those which are carried on by one or more individuals without special authority or charter and under the laws regulating ordinary trading companies. In respect of function three kinds of banks may be discriminated: (1) banks of deposit merely, receiving and returning money at the convenience of depositors; (2) banks of discount or loan, borrowing money on deposit and lending it in the discount of promissory notes, bills of exchange, and negotiable securities; (3) banks of circulation or issue, which give currency to promissory notes of their own, payable to bearer and serving as a medium of exchange within the sphere of their banking operations. The more highly organized banks discharge all three functions, but all modern banks unite the two first. For the successful working of a banking establishment certain resources other than the deposits are, of course, necessary, and the subscribed capital, that is, the money paid up by shareholders on their shares and forming the substantial portion of their claim to public credit, is held upon a different footing to the sums received from depositors. It is usually considered that for sound banking this capital should not be traded for the purpose of making gain in the same way as the moneys deposited in the bank; and that is, for the most part, invested in government or other securities subject to little fluctuation in value and readily convertible into money. But, in any case, prudence demands that a reserve be kept sufficient to meet all probable requirements of customers in event of commercial crises or minor panics.
Methods.—Of the methods of making profit upon the money of depositors, one of the most common is to advance it in the discounting of bills of exchange not having long periods (seldom more than three months with the Bank of England) to run; the banker receiving the amounts of the bills from the acceptors when the bills arrive at maturity. Loans or advances are also often made by bankers upon exchequer bills or other government securities, on railway debenture or the stock of public companies of various kinds, as well as upon goods lying in public warehouses, the dock-warrant or certificate of ownership being transferred to the banker in security. To banks of issue a further source of profit is open in their note circulation, inasmuch as the bank is enabled to lend these notes, or promises to pay, as if they were so much money and to receive interest on the loan accordingly, as well as to make a profitable use of the money or property that may be received in exchange for its notes, so long as the latter remain in circulation. A considerable number of the notes issued will, however, be retained in circulation at the convenience of the public as a medium of exchange; and on this circulating portion a clear profit accrues. This rapid return of notes through other banks, etc., in exchange for portions of the reserve of the issuing bank, is one of the restraints upon an issue of notes in excess of the ability of the bank to meet them. In England a more obvious restraint upon an unlimited note issue, originating partly in a desire for greater security, partly in the belief that the note augmentation of the currency might lead to harmful economic results in its influence upon prices, is to be found in the bank acts of 1844 and 1845, which impose upon banks of issue the necessity of keeping an equivalent in gold for all notes issued beyond a certain fixed amount.
In specific relation to his customer the banker occupies the position of debtor to creditor, holding money which the customer may demand at any time in whole or in part by means of a check payable at sight on presentation during banking hours. For the refusal to cash a check from the erroneous supposition that he has no funds of his customer's in his hands, or for misleading statements respecting the position in which the bank stands, the banker is legally responsible. Moreover, the law regards him as bound to know his customer's signature, and the loss falls upon him in event of his cashing a forged check. In their relations to the community, the chief services rendered by banks are the following: By receiving deposits of money, and massing in sums efficient for extensive enterprises the smaller savings of individuals, they are the means of keeping fully and constantly employed a large portion of the capital of the community which, but for their agency, would be unproductive; they are the means by which the surplus capital of one part of a country is transferred to another, where it may be advantageously employed in stimulating industry; they enable vast and numerous money transactions to be carried on without the intervention of coin or notes at all, thus obviating trouble, risk, and expense. The mechanism by which the last of these benefits is secured is to be found in perfection in the clearing-house system.
History.—In the 12th century almost the whole trade of Europe was in the hands of the Italian cities, and it was in these that the need of bankers was first felt. The earliest possible bank, that of Venice, established in 1171, and existing down to the dissolution of the republic in 1797, was, for some time, a bank of deposit only, the government being responsible for the deposits, and the whole capital being in effect a public loan. The important Bank of Amsterdam, taken by Adam Smith as a type of the older banks, was established in 1609, and owed its origin to the fluctuation and uncertainty induced by the clipped and worn currency. The object of the institution (established under guarantee of the city) was to give a certain and unquestionable value to a bill on Amsterdam; and for this purpose the various coins were received in deposit at the bank at their real value in standard coin, less a small charge for recoinage and expense of management. For the amount deposited a credit was opened on the books of the bank, by the transfer of which payments could be made, this so-called bank money being of uniform value as representing money at the mint standard. Banks of similar character were established at Nuremberg and other towns, the most important being the Bank of Hamburg, founded in 1619. In England there was no corresponding institution, the London merchants being in the habit of lodging their money at the Mint in the Tower, until Charles I. appropriated the whole of it (£200,000) in 1640. Thenceforth they lodged it with the goldsmiths, who began to do banking business in a small way, encouraging deposits by allowing interest (4d. a day) for their use, lending money for short periods, discounting bills, etc. The bank-note was first invented and issued in 1690 by the Bank of Sweden, founded by Palmstruck in 1688.
Bank of England.—The Bank of England, the most important banking establishment in the world, was projected by William Paterson. It was the first public bank in the United Kingdom, and was chartered in 1694 by an act which, among other things, secured certain recompenses to such persons as should advance the sum of £1,500,000 toward carrying on the war against France. Subscribers to the loan became, under the act, stockholders, to the amount of their respective subscriptions, in the capital stock of a corporation, denominated the Governor and Company of the Bank of England. The company thus formed advanced to the government £1,200,000 at an interest of 8 per cent.—the government making an additional bonus or allowance to the bank of £4,000 annually for the management of this loan (which, in fact, constituted the capital of the bank), and for settling the interest and making transfers, etc., among the various stockholders. This bank, like that of Venice, was thus originally an engine of the government, and not a mere commercial establishment. Its capital had been added to from time to time, the original capital of £1,200,000 having increased to £14,553,000, in 1816, since which no further augmentation has taken place. There exists besides, however, a variable “rest” of over £3,000,000. The issue department of the bank was established as distinct from the general banking department, the sole business intrusted to the former being the issue of notes. The bank is now permitted to issue notes against securities to the amount of £18,450,000, but for every note that the issue department may issue beyond this total an equivalent amount of coin or bullion must be paid into the coffers of the bank. The Bank of England notes are, therefore, really equivalent to, and at any time convertible into, gold. At the end of 1919 the total of notes issued was £108,748,000. Notes once issued by the bank and returned to it are not reissued but are destroyed—a system adopted in order to facilitate the keeping of an account of the numbers of the notes in circulation, and so prevent forgery.
The total deposits and post bills of the banking department at the end of 1919 was £199,862,000.
The management of the bank is in the hands of a governor, deputy-governor and 24 directors, elected by stockholders who have held £500 of stock for six months previous to the election. A director is required to hold £2,000, a deputy-governor £3,000, and a governor £4,000 of the stock.
Other English Banks.—The other English banks consist of numerous joint stock and private banks in London and the provinces, many of the provincial establishments of both kinds having the right to issue notes. Private banks in London with not more than six partners have never been prevented from issuing notes, but they could not profitably compete with the Bank of England. The maximum issues of the provincial banks are limited to a certain amount against which they are not compelled to hold gold in reserve, and they have no power to issue against specie in excess of the fixed circulation. Their actual issues are considerably below this amount.
In Scotland there are no private banks, the only banks in that portion of the United Kingdom being the Bank of Scotland (1695), the Royal Bank of Scotland (1727), the British Linen Company (1746), and 10 other joint-stock banks of issue, with many branches. By the act of 1845 new banks of issue were prohibited, a monopoly being given to such establishments as existed in the year previous to May 1, 1845. At the same time the issue of each was limited to the amount of its average circulation during that year, together with the specie held at the head office. Any bank issuing notes in excess of this limit is supposed to hold an equivalent amount in gold.
The banks in Ireland consist of one public or National bank, the Bank of Ireland, 8 joint-stock and several private banks. The authorized note circulation is arranged on the same footing as that of the Scotch banks. If any bank discontinues its issue and issues notes of the Bank of Ireland, the circulation of the latter may be, to an equal amount, increased.
In Canada the banks are not allowed to issue notes of lower denominations than $5, notes for small amounts up to $4 being issued by the Dominion Government; and the banking laws are such that there is no possibility of holders of bank-notes being losers by them.
Bank of France.—Of all other banks, the Bank of France is second in importance only to the Bank of England. It was established in the beginning of the 19th century, at first with a capital of 45,000,000 francs, and with the exclusive privilege in Paris of issuing notes payable to bearer, a privilege which was extended in 1848 to cover the whole of France. It has numerous branches in the larger towns. The government appoints the governor and two deputy governors, who are all required to be stockholders. There is also a body of 15 directors and 3 censors, nominated by the shareholders. The capital of the Bank of France is fixed at 182,500,000 francs. The value of its note circulation in 1920 was 38,355,755,000 francs.
Detailed information regarding banks in other countries will be found in the separate articles on the respective countries. For banks in the United States see Banks, Federal Reserve; Banks in the United States.
Banks for Savings.—Savings banks are banks established for the reception of small sums so as to be taken advantage of by the poorer classes, and they are carried on entirely for behoof of the depositors. One of the earliest was an institution in which small sums were received and interest allowed on them, established by Mrs. Priscilla Wakefield, at Tottenham, near London, in 1803. The first savings bank in Scotland was formed in 1810 by the Rev. Henry Duncan, of Ruthwell, Dumfriesshire. In 1814 the Edinburgh Savings Bank was established on the same principles, and the system soon spread over the kingdom. The first act relating to savings banks was passed in 1817. By it all deposits in savings banks, as soon as they reached £50, were placed in the hands of the National Debt Commissioners, who allowed interest on them. In 1824 it was enacted that the deposits for the first year should not exceed £50, nor those in subsequent years £30, the total deposits being limited to £150; also, that no more interest should be paid when the deposits, with compound interest accruing on them, standing in the name of one individual, should amount to £200, This enactment is still in force. Postoffice savings banks were established in Great Britain in connection with the money order department of the postoffice, by an act of Parliament passed in 1861. Any sum not less than a shilling is received, so as not to exceed £30 in one year, or more than £150 in all; and when the principal amounts to £200, the payment of interest is to cease. Interest is paid on every complete pound at the rate of 2½ per cent. For the deposits the government is responsible, and they may be drawn from any postoffice savings bank in the kingdom. By an act that came into operation in 1880, any person desiring to invest in Government stock any sum of from £10 to £100, can do so through the postoffice banks at a trifling cost, and obtain the dividend free of charge. In the United States postal savings banks were established in 1911. Savings banks are now well known in all civilized countries, and the good they have done is incalculable. In the United States there is an enormous amount of money deposited in them. School savings banks are the most recent institutions of this kind, and have had a marked effect for good. See Savings Banks.
Source: Collier's New Encyclopedia 1. (1921) New York: P.F. Collier & Son Company. 404-407.