BANKS AND BANKING. The word “bank,” in the economic sense, covers various meanings which all express one object, a contribution of money for a common purpose. Thus Bacon, in his essay on Usury, while explaining “how the discommodities of it may be best avoided and the commodities retained,” refers to a “bank or common stock” as an expression with which his readers would be familiar. Originally connected with the idea of a mound or bank of earth—hence with that of a monte, an Italian word describing a heap—the term has been gradually applied to several classes of institutions established for the general purpose of dealing with money.
The manner in which a bank prospers is explained by David Ricardo, in his Proposals for an Economical and Secure Currency, in a passage where he tells us that a bank would never be established if it obtained no other profits but those derived from the employment of its own capital. The real Banking as
a business.advantage of a bank to the community it serves commences only when it employs the capital of others. The money which a bank controls in the form of the deposits which it receives and sometimes of the notes which it issues, is loaned out by it again to those who desire to borrow and can show that they may be trusted. A bank, in order to carry on business successfully, must possess a sufficient capital of its own to give it the standing which will enable it to collect capital belonging to others. But this it does not hoard. It only holds the funds with which it is entrusted till it can use them, and the use is found in the advances that it makes. Some of the deposits merely lie with the bank till the customer draws what he requires for his ordinary everyday wants. Some, the greater part by far, of the deposits enable the bank to make advances to men who employ the funds with which they are entrusted in reproductive industry, that is to say, in a manner which not only brings back a greater value than the amount originally lent to them, but assists the business development of the country by setting on foot and maintaining enterprises of a profitable description. It is possible that some part may be employed in loans required through extravagance on the part of the borrower, but these can only be a small proportion of the whole, as it is only through reproductive industry that the capital advanced by a banker can really be replaced. A loan sometimes, it is true, is repaid from the proceeds of the sale of a security, but this only means a transfer of capital from one hand to another; money that is not transferred in this way must be made by its owner. Granted that the security is complete, there is only one absolute rule as to loans if a bank desires to conduct its business on safe lines, that the advance should not be of fixed but of floating capital. Nothing seems simpler than such a business, but no business requires closer attention or more strong sense and prudence in its conduct. In other ways also, besides making loans, a well-conducted bank is of much service to the business prosperity of a country, as for example by providing facilities for the ready transmission of money from those who owe money to those to whom it is due. This is particularly obvious when the debtor lives in one town or district and the creditor in another at a considerable distance, but the convenience is very great under any circumstances. Where an easy method of transmission of cash does not exist, we become aware that a “rate of exchange” exists as truly between one place and another in the same country as between two places in different countries. The assistance that banking gives to the industries of a community, apart from these facilities, is constant and most valuable.
With these preliminary remarks on some main features of the business, we may pass on to a sketch of the history of modern banking. Banks in Europe from the 16th century onwards may be divided into two classes, the one described as “exchange banks,” the other as “banks of deposits.” These Historical development.last are banks which, besides receiving deposits, make loans, and thus associate themselves with the trade and general industries of a country. The exchange banks included in former years institutions like the Bank of Hamburg and the Bank of Amsterdam. These were established to deal with foreign exchange and to facilitate trade with other countries. The others—founded at very different dates—were established as, or early became, banks of deposit, like the Bank of England, the Bank of Venice, the Bank of Sweden, the Bank of France, the Bank of Germany and others. Some reference to these will be made later. The exchange banks claim the first attention. Important as they were in their day, the period of their activity is now generally past, and the interest in their operations has become mainly historical.
In one respect, and that a very important one, the business carried on by the exchange banks differed from banking as generally understood at the present time. No exchange bank had a capital of its own nor did it require any for the performance of the business. The object for which exchange banks were established was to turn the values with which they were entrusted into “current money,” “bank money” as it was called, that is to say, into a currency which was accepted immediately by merchants without the necessity of testing the value of the coin or the bullion brought to them. The “value” they provided was equal to the “value” they received, the only difference being the amount of the small charge they made to their customers, who gained by dealing with them more than equivalent advantages.
Short notices of the Bank of Amsterdam, which was one of the most important, and of the Bank of Hamburg, which survived the longest, its existence not terminating till 1873, will suffice to explain the working of these institutions.
The Amsterdamsche Wisselbank, or exchange bank, known later as the Bank of Amsterdam, was established by the ordinance of the city of Amsterdam of 31st January 1609. The increased commerce of Holland, which made Amsterdam a leading city in international dealings, led to the establishment of this bank, to which any person might bring money or bullion for deposit, and might withdraw at pleasure the money or the worth of the bullion. The ordinance which established the bank further required that all bills of 600 gulden (£50), or upwards—this limit was, in 1643, lowered to 300 gulden (£25)—should be paid through the bank, or in other words, by the transfer of deposits or credits at the bank. These transfers came afterwards to be known as “bank money.” The charge for making the transfers was the sole source of income to the bank. The bank was established without any capital of its own, being understood to have actually in its vaults the whole amount of specie for which “bank money” was outstanding. This regulation was not, however, strictly observed. Loans were made at various dates to the Dutch East India Company. In 1795 a report was issued showing that the city of Amsterdam was largely indebted to the bank, which held as security the obligations of the states of Holland and West Friesland. The debt was paid, but it was too late to revive the bank, and in 1820 “the establishment which for generations had held the leading place in European commerce ceased to exist.” (See Chapters on the Theory and History of Banking, by Charles F. Dunbar, p. 105.)
Similar banks had been established in Middelburg, (March 28th, 1616), in Hamburg (1619) and in Rotterdam (February 9th, 1635). Of these the Bank of Hamburg carried on much the largest business and survived the longest. It was not till the 15th of February 1873 that its existence was closed by the act of the German parliament which decreed that Germany should possess a gold standard, and thus removed those conditions of the local medium of exchange—silver coins of very different intrinsic values—whose circulation had provided an ample field for the operations of the bank. The business of the Bank of Hamburg had been conducted in absolute accordance with the regulations under which it was founded.
The exchange banks were established to remedy the inconvenience to which merchants were subject through the uncertain value of the currency of other countries in reference to that of the city where the exchange bank carried on its business. The following quotation from Notes on Banking, written in 1873, explains the method of operation in Hamburg. “In this city, the most vigorous offshoot of the once powerful Hansa, the latest representative of the free commercial cities of medieval Europe,
