BANKS. 



their deposits, in notes, or, if gold be in demand, 

 in gold, from the Bank of England. Whether, 

 therefore, the reserve of a bank is invested in 

 government securities, or is deposited in the Bank 

 of England, or is in Bank of England notes, it is 

 from the coin in that bank that the gold comes in 

 the case of a run. It is apparent from this that it 

 is essential to the stability of all banks, so long as 

 they themselves do not keep a sufficient reserve of 

 coin in their coffers, that the Bank of England 

 shall always be possessed of coin, and never be 

 unable, on demand, to pay its depositors in gold, 

 or to give gold in exchange for all its notes that 

 may be presented to it. It may be added, that 

 while banks gain, through the annual dividends, 

 in keeping their reserve in government stock, they 

 run the risk of a loss in the event of their requiring 

 to sell it in the time of a panic ; for at such a 

 time, when many securities and stocks become 

 unsaleable, and all of them suffer depreciation in 

 value, government stock itself falls in price, 

 although less so than the others. Banks often 

 invest portions of their reserve in other stocks 

 than government stock. The higher return ob- 

 tained on these other is, however, outweighed 

 by the greater risk of depreciation in their value, 

 whether continued unsold or thrown into the 

 market for sale in times of panic. 



A person may apply to a bank for a loan of a 

 sum of money, as when he discounts a bill ; for 

 that loan, he will pay so much interest. The 

 bank may give the loan in coin. That coin may 

 be money belonging to itself part of its capital. 

 In this case, the bank will have no greater profit 

 by the transaction than if it had laid out the 

 money in any other way, equally safe, and in- 

 volving the same amount of trouble to the bank. 

 Or the coin may be money deposited with the 

 bank. In that case, the interest paid by the 

 borrower, in so far as it exceeds the interest, if 

 any, paid by the bank to the depositor, and a 

 rateable proportion of the expense of carrying on 

 its business, will be pure profit to it. Or, if it be 

 a bank of issue, it may give the loan in its own 

 notes. A bank-note is simply a written promise 

 by the bank issuing it to pay to the bearer on 

 demand the sum of money therein mentioned 

 that is, in gold, or, what is the same thing, in 

 Bank of England notes, for which coin may be 

 immediately procured at its issue department. 

 Of course the borrower would not accept a loan 

 from a bank in its own notes, unless he believed 

 that it could redeem its promise of paying in gold, 

 and that the public were of the same opinion ; for 

 the moment that a suspicion arises that the prom- 

 ise will not be made good, the note will cease to 

 pass from hand to hand as coin, or to perform all 

 the functions which coin performs. But when the 

 loan is accepted in a bank's own notes, it is 

 evident that the interest which the bank draws 

 for the loan of its promises to pay is pure profit, 

 except the rateable proportion as in the other 

 cases of the expense of carrying on its business, | 

 and the expense of the paper and printing of the 

 notes with the government stamp-duty. The 

 motive which a bank has to extend its issues on 

 loans is therefore apparent, so long, of course, as 

 it is not compulsory on it to retain unemployed 

 in its coffers as much in gold as it issues in 

 notes. 



But it by no means follows that when a bank 



makes a loan in its own notes for a definite period, 

 it will really obtain the benefit of the interest on 

 it for that period ; for the borrower does not 

 apply for the. notes that he may keep them beside 

 him, but that he may pay them away in making a 

 purchase, or in liquidating a debt, and this, most 

 commonly, on the very day he receives them. If 

 the person to whom the notes are thus paid by 

 the borrower has himself no purchase to pay for, 

 or no payment to make, he may, the moment he 

 gets them, return them to the bank that issued 

 them, to lie there on deposit. If the bank pays 

 interest on deposits, as most banks do, then out 

 of the interest drawn by it on the original loan, it 

 will have to pay interest to the depositor of the 

 notes ; in other words, the loan is no longer a 

 loan of its notes, but a loan from its deposits. 

 Or, the person receiving the notes from the 

 borrower, may immediately present them to the 

 issuing bank for gold, instead of depositing 

 them. Here, too, therefore, the loan that was 

 made in notes is now converted into a loan of 

 gold, that was in reserve from previous deposits,, 

 or that was part of the bank's own capital ; in 

 which cases, the bank obtains no advantage what- 

 ever in having made the loan originally in its 

 notes. It might equally well, so far as profit is 

 concerned, have originally made it in gold from 

 its reserve of deposits or capital. So, also, the 

 bank makes no profit by a loan of its notes, if the 

 person to whom the borrower pays them is himself 

 a debtor of the bank, and returns the notes to it 

 to liquidate his debt. Notes generally find their 

 way back to the bank that issued them through 

 other banks, into which they have been paid as 

 deposits, or for the liquidation of debts due to 

 them. These banks suffer the loss of profit or 

 interest on the amount of the notes thus received 

 by them so long as they keep them ; they, there- 

 fore, immediately present them to the issuing 

 bank for gold, to replenish their own reserves, or 

 to lend out ; or, what is the same thing, they pre- 

 sent them to the issuing bank for government 

 stock, or other securities bearing interest, and 

 which that bank has had to provide from its 

 capital and deposits. 



It will now be apparent to the reader that there 

 are two checks which prevent a bank issuing 

 notes to any extent it pleases. In the first place, 

 there must be a demand for its notes by borrowers. 

 It is only to people in good credit, and likely to> 

 make a profitable use of them, that a bank will 

 lend its notes, and such people will not take an 

 increase of loans unless trade be increasing, and 

 new opportunities be presenting themselves for 

 profitably employing the notes borrowed. True,, 

 banks, when imprudently conducted, or when 

 deceived in the character of their customers, 

 frequently lend their notes to reckless persons,, 

 who overtrade with them, and become bankrupt. 

 But banks commit this en or, when they do com- 

 mit it, to a far greater extent by loans of their 

 deposits and capital, than by loans of their notes. 

 In the second place, the immediate return of the 

 notes, chiefly through other banks for gold, or for 

 other portions of the reserve of the issuing bank, 

 is a check to its issuing more notes than it has a 

 reserve to meet. This return of notes through 

 banks is called the exchange of notes the notes 

 issued by a bank being returned to it in exchange 

 for the notes held by it of another bank. The 



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