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not only demands the supervision of legislative authority, but it has proved one of the most difficult problems which has in modern times engaged the attention of that authority, to regulate, restrain, and reconcile the different functions of modern banks. These banks receive on deposit coin, bank notes, (their own and those of other banks,) checks on their own and other banks; they receive and give credit in deposit account for commercial paper having yet several months to run, and for all this mingled deposit, a very small part of which, perhaps not one per cent, is gold or silver, they become responsible to pay coin on demand. This responsibility is only supposed to be good when compliance is not required; but compliance is known to be impossible.
These various functions, if not inconsistent with each other, are not susceptible of barmonious operation; wbilst no one can dispute that the issue of bank notes for circulation should be held under strict public regulation, and subject to constant restraint, and that the issuing banks should, under the present system, be bound to redeem their notes on demand with coin, it is questionable how far the credit given by banks on their books for unmatured paper discounted should, in like manner, be payable on demand in coin. If men of business find it to their advantage to adjust and pay their debts in that way, the public has no more interest in preventing them than it has it prohibiting the use of bills of exchange and promissory notes. If we suppose a thousand men of business to have severally issued their notes in various sums, amounting on tlie average to $10,000 each, and payable at two, three, or four months, these thousand individuals may be supposed, without any great depart. ure from wbat is frequently the case, to be among them the holders of the whole $10,000,000 which they owe. This large sum may be all maturing in the progress of 120 days. If the whole thousand were met together it would be impossible to effect the payment of this vast debt, although the assembly would consist of all the debtors and all the creditors, and although they would have in their hands the proper evidences of all this debt and credit, without some special device for this purpose. It could be done in the mode pursued in the Fairs at Lyons, as set forth in the chapter on these Fairs, and it might be done in other modes; but in no way could it be done more promptly and safely than by the process now pursued by our banks. This vast amount, secured by commercial paper, being discounted by banks, and the proceeds placed to the credit of the parties obtaining the discount on the books of the banks, becomes divisible and transferable to any extent, and fully competent to payment of all the securities held by the banks, and upon which they granted the credits. The banks give nothing for these securities but credits upon their books, and they can afford to give them up upon the surrender of the credits. The commission charged by the banks for this facility is merely the interest. No coin is required for this operation upon any consideration, public or private, beyond what the parties to it may for convenience choose to employ.
The individuals in the case supposed have merely converted the securities they held upon others into a fund to pay the securities which others held upon them. The operation resolves itself into bookkeeping; the parties to it have been charged and credited according to the evidences of debt and credit; the accounts arising thereon between them have been accurately stated and adjusted, and the debts have been discharged in the VOL. XLII.—NO. VI.
same medium of which they were at first constituted. That is, the men who were creditors upon commercial paper were paid by the proceeds of commercial paper; or the men who were creditors upon the books of the banks were paid witb the same sort of credits, and the credits tbey were willing to receive in payment were for the same reason readily received by others from them in payment.
In principle this process of adjustment by the agency of bank deposits is the same as that which occurs between individuals who transact business together, and for the respective debts incurred debit each other in their books of account; when these accounts are compared and balanced, the debts on both sides are paid-debts are set off against debts and extinguished. By the process of the discount and deposit system carried on by our banks, the customers of the banks apply the debts which are owing to them to pay what they owe others; the whole process is one of exchanging debts for debts, and thus discharging them as effectually and finally as it paid in gold. This operation being a business of a purely private nature, and deserving of all encouragement as being the most economical method of exchange ever devised, should be regarded with the utmost favor both by people and governments. In this country at least two-thirds in amount of the current payments are thus effected.
There is no more necessity of public restraints or supervision in this business than there is in the transactions out of which these debts and credits arise. So long as a man's own debts are to be regarded as a good currency to pay him witb, and be is willing to receive such payment, the public can have no interest in the matter but to encourage it as the greatest possible facility to trade, and one of the strongest supports of industry.
The efficacy of the circulation of deposits as a mode of payment is strongly evinced by the operations of the banks in New York and other large cities. In New York, for a year past, the deposits bave averaged over eighty millions of dollars, whilst the specie bas averaged only twentyfive millions. The activity of these deposits, as a medium of payment, is shown by the movements of the Clearing-house. The daily average clearing has been over twenty millions, whilst the daily balances scarcely exceeded a million of dollars. The circulation of the deposits shown at the Clearing-house is only that which is produced by checks paid into different banks from those on which they are drawn, and the bank notes drawn upon such checks for the purpose of payment into other banks. Besides this circulation as between the banks arising from the payment of debts in one bank by checks upon or notes of another bank, there is a large circulation of deposits in each bank confined to its own books and customers. Whether this circulation is more or less than that exhibited at the Clearing-house, we have no means of knowing. If oply one-third as much, it would carry the daily payments by circulation of the deposits to thirty millions in the single city of New York. This vast amount, however, is far from exbibiting the whole daily movement of the deposits in that city; the diversity of transactions, and the uses made of deposits and checks, must attain an immense aggregate in modes not reached by any form of statistics. The actual movement of specie in New York seldom reaches two millions per day, leaving out the payments of government and the occasional movements for export, so that the pay.
ments of New York are mainly, if not nearly altogether, effected by a movement of the deposits.
The efficacy of this form of currency in large payments is shown by the fact that the balances of the Clearing-house which are discharged in specie, are paid by a check on a deposit of the precious metals maintained by the banks for that purpose. The coin and bullion deposited for this purpose are so much less convenient and suitable as a medium of payment, that they too are deposited and transferred by check, employed in the same manner as the great commercial fund created by the proceeds of discounted paper. This transfer of the ownership of gold or silver can only be done upon the confidence that the deposit is intact; it is therefore founded upon confidence among the banks or individuals concerned, and is thus indebted to the principle of credit for its efficacy.
It was the advantage gained in this way which made the great deposit Bank of Amsterdam, and others founded on that plan, so efficient. The debt due by the bank to the depositor became in fact the thing transferred. And so it proved when the deposits of the Bank of Amsterdam continued to be transferred a long time after the precious metals had been abstracted. The actual constitution and mode of operation of these banks is minutely set forth in the work before us, and their practical uses more fully shown than in any previous work in the English language. Their history and practice afford many lessons for the present day on the subject of money and banking. They were established to avoid the intolerable nuisance of a multiform and much deteriorated coinage, and were unexpectedly found to afford a facility for payments far beyond any previous experience, even with the best of coins. It was discovered that a hundred thousand ducats could be paid over in as little time as one hundred, and without loss of time in counting, or risk of counterfeits or expense of assaying. The great economy and rapidity of this mode of payment led the way to many of our modern financial facilities.
For the purpose of further explaining the object of the work before us, we add the following extracts from the introduction, which indicate other topics largely treated in it. Speaking of the large use made of the Public Fairs, some three or four centuries ago, to facilitate the process of payments among merchants and others, he says :
“The Credit System was, in fact, a growth of necessity. It was indispensable to the advance of civilization and industry; it grew with the progress of commercial punctuality and integrity; it now fourishes only in this soil, and cannot be destroyed where it finds this aliment of its growth. It sent forth many vigorous shoots, in various countries, long before it attained its present magnitude and wide extension. The payments at the fairs so prevalent in Europe during the middle ages, some of which continue even down to our time, were, to a large extent, made by setting off debts against debts. Men learned to pay their debts with their credits; and this mode of payment only disappeared as the progress of the credit system, and the growth of cities, absorbed both the business and the payments of the fairs. These payments at the fairs revealed that the best fund with which to pay debts is debts. Every debt implying a credit, no one could better employ his credits than in paying his debts. This required no money, and was, therefore, not only economical, but free from innumerable risks and troubles inseparably connected with payments in money.” (p. 6.)
THE BANKS OF VENICE AND GENOA. “ The Banks of Venice and Genoa were both remarkable forerunners of the credit system, and beautiful examples of its economy and power. The political and commercial importance of these two great republics were, in a great measure, owing to their respective banks, the oldest and mnost important of which we have any account. The lessons taught by these institutions have no doubt entered largely into the progress of the credit system, as now developed ; but we strongly insist that the study of the system of these two banks is yet necessary to any thorough comprehension of the power of credit, and of what is necessary to an enlarged and efficient financial system.
“ The capital of the Bank of Venice consisted of a debt due by the republic to its citizens. The government took the money, and gave in its place an inscription on the books of the bank for the amount, bearing interest. The government returned the money immediately into the channels of circulation among its citizens, whilst the lenders of the money circulated the debt as a deposit in the bank. All the large payments of this great commercial city were, for many centuries, paid in this fund, and the gold and silver coins were released for the purposes of the retail trade, the payment of foreign debts, and the foreign expenditures of the republic. The government of Venice deait faithfully with these bolders of stock in the bank, not only paying the interest punctually, but redeeming any amount wbich seemed surperfluous, or beyond the demand of the public. This policy not only kept the bank fund at par with specie, but more than twenty per cent above it. The bank was always open to further loans to the government, when such investment was in demand. The capital of the bank fluctuated in amount according to the wants of the people, and not according to the wants of the public treasury.
"The Bank of Venice performed its functions for over five hundred years, with an uniformity of success, and immunity from censure or complaint, which no other currency has enjoyed for a tithe of that period. During that time of vast commerce and immense public expenditure, the republic had incessant trouble with their own and foreign coinage, and •very many stringent regulations were made and enforced, to cure evils .and prevent abuses; but we have no record of abuses on the part of the bank, or of injuries inflicted by it upon the people.
"Believing that the commercial fairs of Europe, and the Banks of Venice and Genoa, were capable of imparting historical lessons not yet properly appreciated, we have brought them more prominenıly before the reader than has been done in any work upon money or currency. We have, in later times, achieved a method of clearing debts between banks; but a lesson may be learned from the payments at the fairs, of successful clearing between individuals. There is no reason, in theory or in practice, why clearing may not, to a considerable extent, be practiced between individuals mutually indebted. The history of these fairs furnishes abundant exemplification of this most economical and effective of all the modes of payment.” (p. 7.)
CLEARING OR PAYING DEBTS BY SET OFF. “The practice of paying or extinguishing debts by the process of clearing, now becoming so common among the banks, is not new. Three cen
turies ago, a very large proportion of the payments of central Europe were made in that way. Then it was effected, on a large scale, between individuals; now it is wholly confined to the banks. Then it was the chief mode of accomplishing the vast payments arising from the trade of the multitudinous fairs of that period; and it so continued, until other modes of commerce supplanted that of the fairs. The clearing at the fairs was simply a process of setting off debts against debts—the same, in effect, as balancing book accounts. A said to B, you owe me a thousand forins; pay that amount for me to C, to whom I am in debt. This being done, A is acquitted, and thus the process goes on. It is obvious that the final balances, among bundreds assembled for that purpose, may be reached by setting off mutual debts, and drawing verbally on each other at sight, where the process involves more than two persons, and thus continuing to pay until the result is reached of those who have more coming to tbem than they had to pay, and of those who had more to pay than they had due to them. The conclusion of the whole was, that the balances to pay were the exact amount of those to receive.
“ The mode of payment which had most prominence in large transactions, after clearing began to lose its importance with the decay of the fairs, was that of circulation. This was practiced not only at the great Banks of Venice and Genoa, but also at the deposit banks which succeeded them. The same money in a bank, or the same credits upon the books of a bank, was by this method kept circulating or passing from person to person, accomplishing a continued circle of payments. Its effectiveness did not come to an end, for it moved in a circle embracing nearly the same parties, gradually passing from the men of one generation to those of another. This circulation is still in full vigor in the Bank of Hamburg, and other survivors of the deposit banks of the seventeenth century; but it has no counterpart in our more modern institutions. The deposits in our banks are the proceeds of discounted commercial paper. The credits issued by the banks, of which these deposits are composed, are absorbed and wholly extinguished whenever they are paid to the banks. Their place is supplied continually by new discounts and new credits.
“ This mode of payment by circulation of the same money, or the same fund, as, for instance, national debt, differs from clearing. In the former, it passes from hand to hand, performing all the payments its successive owners can effect with it. If these owners were seated at one table, they could circulate a sum in coins from band to hand to the same effect, and see the money before them at the same time. But if seated at the same table, they could extinguish a large portion of their debts by simply exhibiting their claims, and balancing or clearing them, so far as mutual, and by verbal transfers, as in the fairs, until the final balances were reached, seldom over five per cent on the amount paid.
“ Clearing is, beyond all question, the simplest, the inost economical, and, when applicable, the most efficient of all modes of paying debts. It is precisely analogous to balancing accounts. Parties who are in business relations arrange to ascertain daily, or at convenient times, the state of their mutual claims; and having verified, extinguish them by set off. The banks of New York extinguished among themselves in that way, in 1857, upwards of $7,000,000,000, or upwards of $20,000,000 each day, upon which the daily balances did not exceed five per cent. This enor