of as borrowers. If, as they sometimes do, they pay interest upon deposits, this offsets in part the profits arising from loans. But in many cases they pay no interest upon deposits, the clients of the bank being contented with the greater security in the custody of their funds which the bank offers, and other advantages which arise from the possession of bank accounts. At times these advantages have been so considerable that depositors have been willing to pay the bank for the safe-keeping of their funds. Thus, during the Seventeenth Century, the great Bank of Amsterdam simply received bullion and stored it, issuing receipts for it, which could be transferred from hand to hand, and entitled the holder to get back the gold or silver originally deposited, on the payment of a small premium for withdrawal. Such a bank was merely a warehouse for bullion. It performed a service similar to that of the United States Treasury in the issue of gold and silver certificates. The service was valuable because it substituted the notes of the bank for the extremely varied and uncertain metallic circulation of the period, consisting of the coins of many nations, often worn by use, and clipped by those who derived profit from mutilating the coinage. The bank received them at their bullion value, and thus fixing their real value once and for all, did away with the numberless vexations which arose from the use of such a currency. If we except the United States Treasury, which cannot strictly be called a bank, such banks of deposit only have ceased to exist. The reason for them has disappeared, and the lending of money is always associated in banking with the receiving of it.
Modern banks are banks of ‘deposit and discount,’ for though all loans made by banks are not in the form of discounts, the word is used in this connection to embrace all its loans. The advantage to society from banking operations consists in centralizing credits. The banker collects the money and wealth which would otherwise lie idle, and brings it into use. Through his agency, wealth which would lie idle and unproductive becomes useful and productive. His particular service is to mass together the small amounts of capital which in themselves are perhaps too trifling to become the basis of a business enterprise. He is the intermediary between those who possess capital and those who employ it. Thus he enlarges the field of business enterprises and intensifies its operations. The bank is the chief organ of credit which plays so large a role in the organization of modern industrial society. See Credit.
For the depositor the bank acts as paymaster. The depositor pays his debts by orders upon the bank in the form of checks. This not only relieves the depositor of the necessity of keeping in his own possession sums of money larger than he has an immediate use for, and whose safekeeping is a matter of anxiety and concern, but also furnishes him, through the indorsement of the check by payee, a receipt for the money paid out. The banks also act as collectors for their depositors. Only a small part of the deposits in banks consists of actual cash; by far the larger proportion, about nine-tenths, being in checks and other credit instruments. When a check is deposited to the credit of a person, the bank charges itself with the duty of collecting it. If it is drawn upon a distant point, a small charge is made for this service, but in general the cost is borne by the bank and not the depositor. If drawn upon the same bank, the collection consists merely of a transfer upon the books of the bank. If drawn upon another bank, collection may be made directly or through the clearing-house. (See Clearing-House.) In either case there is likely to be a set-off, and the collection effected without the transfer of cash. But in addition to collecting checks, the bank collects other debts, such as coupons and negotiable paper.
In addition to these advantages which the depositor obtains from his bank account, he sometimes receives interest upon his deposits. Among the commercial banks of the United States, the practice of paying interest upon deposits is not widespread. Persons who desire interest upon deposits must, as a rule, be content to surrender something of the absolute and immediate control over their funds, which is the characteristic of commercial banking. In such cases, they patronize the savings-banks or the loan and trust companies rather than the national banks. In these institutions, various plans are adopted to restrain the depositor from making sudden calls for any considerable amount of his deposit. Sometimes it is a requirement of previous notice of the intention to withdraw, or again it may be a provision that a certain part of the deposit is to remain untouched, and that interest be paid upon this only. It is clear that the various advantages of banks to the depositor, obvious as they are, cannot be a substitute for the investment of his capital or its employment in productive enterprise. It will therefore be, as a rule, a portion of what is designated as the circulating, rather than the fixed, capital of the nation which be placed in banks. When banks, however, offer interest upon deposits, under conditions which afford security, they will probably retard the process by which unused capital seeks a definite and profitable employment, and thus secure for the hanks a larger line of deposits.
Banks as Lenders. From the services which the bank renders those from whom it borrows, we may turn briefly to the more obvious services, rendered to those to whom it loans. Bank-loans are, in form, time-loans for a definite period of days or months, and call-loans, upon which instant payment may be demanded at will. Either form of loan may be made on the personal credit of the borrower, though this is not considered good banking, and can be safely done only in cases of persons of unexceptionable standing. Loans are made, as a rule, upon mercantile paper and upon collateral. The time of the loan is definitely fixed by the face of the instrument, and the amount loaned is that stated in the note or draft, less the interest upon the same for the unexpired time. Loans upon collateral are either for a definite period of time or on call. As in the latter case the amount of interest cannot be fixed in advance, it is customary to loan a definite sum, and at the expiration of the loan collect also the interest at a rate agreed upon for the duration of the loan. The collateral or
