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
