In the last century, a favorite subject of literary ingenuity was
"conjectural history," as it was then called: upon grounds of
probability, a fictitious sketch was made of the possible origin of
things existing. If this kind of speculation were now applied to
banking, the natural and first idea would be that large systems of
deposit banking grew up in the early world just as they grow up now in
any large English colony. As soon as any such community becomes rich
enough to have much money, and compact enough to be able to lodge its
money in single banks, it at once begins so to do. English colonists do
not like the risk of keeping their money, and they wish to make an
interest on it; they carry from home the idea and the habit of banking,
and they take to it as soon as they can in their new world. Conjectural
history would be inclined to say that all banking began thus; but such
history is rarely of any value,--the basis of it is false. It assumes
that what works most easily when established is that which it would be
the most easy to establish, and that what seems simplest when familiar
would be most easily appreciated by the mind though unfamiliar; but
exactly the contrary is true,--many things which seem simple, and which
work well when firmly established, are very hard to establish among new
people and not very easy to explain to them. Deposit banking is of this
sort. Its essence is, that a very large number of persons agree to trust
a very few persons, or some one person: banking would not be a
profitable trade if bankers were not a small number, and depositors in
comparison an immense number. But to get a great number of persons to do
exactly the same thing is always very difficult, and nothing but a very
palpable necessity will make them on a sudden begin to do it; and there
is no such palpable necessity in banking.
If you take a country town in France, even now, you will not find any
such system of banking as ours: check-books are unknown, and money kept
on running account by bankers is rare: people store their money in a
_caisse_ at their houses. Steady savings, which are waiting for
investment and which are sure not to be soon wanted, may be lodged with
bankers; but the common floating cash of the community is kept by the
community themselves at home,--they prefer to keep it so, and it would
not answer a banker's purpose to make expensive arrangements for keeping
it otherwise. If a "branch," such as the National Provincial Bank opens
in an English country town, were opened in a corresponding French one,
it would not pay its expenses: you could not get any sufficient number
of Frenchmen to agree to put their money there.
And so it is in all countries not of British descent, though in various
degrees. Deposit banking is a very difficult thing to begin, because
people do not like to let their money out of their sight; especially, do
not like to let it out of sight without security; still more, cannot all
at once agree on any single person to whom they are content to trust it
unseen and unsecured. Hypothetical history, which explains the past by
what is simplest and commonest in the present, is in banking, as in most
things, quite untrue.
The real history is very different. New wants are mostly supplied by
adaptation, not by creation or foundation; something having been created
to satisfy an extreme want, it is used to satisfy less pressing wants or
to supply additional conveniences. On this account, political
government, the oldest institution in the world, has been the hardest
worked: at the beginning of history, we find it doing everything which
society wants done and forbidding everything which society does _not_
wish done. In trade, at present, the first commerce in a new place is a
general shop, which, beginning with articles of real necessity, comes
shortly to supply the oddest accumulation of petty comforts. And the
history of banking has been the same: the first banks were not founded
for our system of deposit banking, or for anything like it; they were
founded for much more pressing reasons, and having been founded, they or
copies from them were applied to our modern uses.
[Gives a sketch of banks started as finance companies to make or float
government loans, and to give good coin; and sketches their function of
remitting money.]
These are all uses other than those of deposit banking, which banks
supplied that afterwards became in our English sense deposit banks: by
supplying these uses, they gained the credit that afterwards enabled
them to gain a living as deposit banks; being trusted for one purpose,
they came to be trusted for a purpose quite different,--ultimately far
more important, though at first less keenly pressing. But these wants
only affect a few persons, and therefore bring the bank under the notice
of a few only. The real introductory function which deposit banks at
first perform is much more popular; and it is only when they can perform
this most popular kind of business that deposit banking ever spreads
quickly and extensively.
This function is the supply of the paper circulation to the country; and
it will be observed that I am not about to overstep my limits and
discuss this as a question of currency. In what form the best paper
currency can be supplied to a country is a question of economical theory
with which I do not meddle here: I am only narrating unquestionable
history, not dealing with an argument where every step is disputed; and
part of this certain history is, that the best way to diffuse banking in
a community is to allow the banker to issue bank notes of small amount
that can supersede the metal currency. This amounts to a subsidy to each
banker to enable him to keep open a bank till depositors choose to
come to it....
The reason why the use of bank paper commonly precedes the habit of
making deposits in banks is very plain: it is a far easier habit to
establish. In the issue of notes the banker, the person to be most
benefited, can do something,--he can pay away his own "promises" in
loans, in wages, or in payment of debts,--but in the getting of deposits
he is passive; his issues depend on himself, his deposits on the favor
of others. And to the public the change is far easier too: to collect a
great mass of deposits with the same banker, a great number of persons
must agree to do something; but to establish a note circulation, a large
number of persons need only _do nothing_,--they receive the banker's
notes in the common course of their business, and they have only _not_
to take those notes to the banker for payment. If the public refrain
from taking trouble, a paper circulation is immediately in existence. A
paper circulation is begun by the banker, and requires no effort on the
part of the public,--on the contrary, it needs an effort of the public
to be rid of notes once issued; but deposit banking cannot be begun by
the banker, and requires a spontaneous and consistent effort in the
community: and therefore paper issue is the natural prelude to
deposit banking.