The Scotch system of banking seems well calculated for admitting the easy passage of individuals from the one to the other class.Its distinguishing characteristic is that the banker allows interest on all sums deposited, from the moment of deposit, and that, on sufficient security, he is always ready to grant the loan of as small, or as large an amount, as may be required.
When he lends to individuals, by discounting bills, or by what are termed bank credits, he becomes the real owner of a proportional amount of the stock of instruments they hold, and in this way may be said to be the owner of a part of the general stock of instruments of those dealing with him, equal to the amount of what he has lent.In reality, however, it is not altogether he who owns them, but rather they who have given him the larger part of his funds in the shape of deposits.These have all come to him with money in the their of coin, of paper money of other banks, or of his own money, or of an order for his own money, and in place of it have been content with a pledge that it shall be returned on demand, and that in the interim interest will be allowed on it.By this arrangement the banker, in effect, transfers to them a portion of his claims on the instruments held by those who are debtors to him, and part of his right to a portion of the returns made by them.Thus, while the merchant formerly trading to Canada, instead of employing the money he receives for sales of his existing stock of timber in purchasing other goods, and in freighting other ships for that market, pays it into the bank, the merchant trading to Prussia is drawing money out of the bank, for the purpose of extending his trade with Prussia.The effect produced is, in so far, similar to that which would have resulted from the Canadian trader lending part of his capital to the trader to the Baltic.It differs from such a transaction, however, in three respects: 1st.These two individuals might be unknown to each other, and might have no means of ascertaining their respective plans;2d.The merchant trading to Canada would probably have either less or more spare funds, than the merchant trading to Prussia required; 3d.He might, also, probably, have occasion to call for them, for his own purposes, at a time when it might be inconvenient, or impossible, for the other to replace them.The banker, on the contrary, is always ready to receive or to lend.
Throughout all the occupations carried on by the different members of the community, similar circumstances occur.One tradesman, or mechanic, is laying by funds for building a dwelling house, another is expending all the funds he has laid by, and, perhaps, borrowing a little more, for the purpose of finishing a dwelling house.While the farmer is depositing in the bank some part of the proceeds of his sales of grain and cattle, the corn merchant and the butcher are drawing funds from the bank, for the purpose of assisting them to purchase these commodities.
It will thus be found, that the person making the deposit, is one who has just transferred to others, who can employ them at the moment to more advantage than he, some instruments which he held, and that in return he receives a claim to that amount, on the funds of the bank, and of interest on it till paid.Those funds, however, consist chiefly of debts, owing to the bank by the community at large, and that interest is drawn from the profits arising from the stock of instruments effectively owned by the bank, and lent by it to the individuals with whom it deals.Hence the person making the deposit is one having transferred a part of his stock of instruments to an individual, and receiving m lieu of it a share of the claim of the bank, on the general stock of instruments owned by those indebted to it.In this way the bank may be considered as a broker negociating between those, the condition of whose business requires them to borrow, and those, the condition of whose business disposes them to lend, and generalizing the transactions of both.It is not by any means, however, merely a broker.
Besides the fluctuating deposits, it has a large capital of its own embarked in the business.This is chiefly owned by individuals whose circumstances place them permanently in the class of lenders, persons retired, or retiring from active business, or widows, etc., who, selling off their stock, employ their funds in this manner.
This system probably yields as many advantages as any hitherto discovered, and avoids, as well as may be, the chief evils to which the business of banking is subject.
1.By means of it all possible exchanges are made at the least expense;and with the greatest facility.Every person is prompted to sell because the money he receives yields an immediate return.Every person having it in his power to turn any commodity to good account, has the means afforded him of obtaining possession of it.
2.The capital which bankers own, or hold, is liable to be embarked and lost by them in imprudent speculations; or, through partiality, to be lent to a few individuals who may squander it in the same manner.This seems to be best guarded against by there being many stock holders, and a large capital.In the banks to which we refer, this is generally, though not always the case.
