to obtain the money from banker C in exchange for the promise of A guaranteed by himself. It is obvious that should D or banker C pay to B the full amount of money specified in the promise of A, he would be dispossessed thereof from the time it was given to B until it was repaid by B—that is, he would have rendered a service without compensation. It is equally obvious that compensation would be obtained if a portion of the sum specified in the promise were withheld by C. This sum is the discount. Banker C, by making a practice of thus advancing money on such promises, may obtain a considerable revenue. Hence banks of discount.
There are banks which not only make money by discounting from the amount of deposits over and above what they estimate will be required for daily needs, but which issue promises to pay in the form of bank notes, the funds available for use in discounting being, therefore, increased. Hence banks of circulation.
he development of banks, therefore, has been from simple repositories of the commodity used as a medium of exchange into purveyors of the currency that is superseding coin, the providers of funds for commercial transactions, and the centers through which instruments of exchange are balanced.
Besides the checks and promissory notes issued by individuals, which have a limited circulation, and the notes issued by banks, which have a more extended circulation, many governments issue notes directly that circulate generally among their peoples. As, however, the precious metals are the only commodities generally accepted as money throughout the world, all promises to pay are based upon one or another of them, but the aggregate of value represented by these promises to pay is so great that their fulfillment at any one time in coin or bullion would be impossible, the ratio between the volume of exchanges effected by the use of paper representatives of money to the volume effected by coin or bullion itself being, as has been said, greater than nine to one.
This fact, that the total value called for by the paper representatives of value at any time in existence, although expressed in terms of the units of value originally designating coins, vastly exceeds the value of the metals as coined or held in bullion by the sources whence coins are issued, together with the fact that no man willingly and knowingly exchanges commodities for paper representatives of value without believing that he can obtain the worth called for by these representatives, leads to the perception that, after all, it is not the metals, however precious, but property of all kinds that is their basis, and that these paper representatives of value are succeeding coins in designating and
