DEVELOPMENT OF THE BANKING SYSTEM.

Manawatu Herald, Volume XLII, Issue 2177, 16 September 1920, Page 4

DEVELOPMENT OF THE BANKING SYSTEM.

At the weekly meeting’ of the local branch of the W.K.A. on Thinsday of last week, Mr Ayrton’s subject was the rise of the system of banking. The lecturer pointed out (hat it is a natural development of the monetary system, and the bulk of the money transactions in modern society is not performed by cash, but by cheques and other bank instruments. Society outgrew the old method of bartering and exchange which was too slow and became inapplicable to the industrial system with subdivision of labour. In an agricultural and pastoral society the medium of exchange was the product of the soil. When the mechanical age developed, and (he use of metals, and particularly gold and silver, became recognised, the precious metals became the means of exchange.

During the civil wars, when life and property were unsafe, those Avho were in possession of large sums of money sought for some means of securing it. Hence traders began to entrust their gold lo the London goldsmiths, who usually had vaults for safe deposit, and armed men protecting them day and night. The goldsmiths charged a rent for the use of these vaults, and gave to each depositor a receipt certifying that a certain amount of money was held in the vault tor him. It was found that this receipt was accepted by others as a certiiicate that a certain man had a certain fund which could bo drawn upon at any time, and accordingly these receipts began to be put into circulation. Later the goldsmiths found that these receipts, after being in circulation, came back to them for redemption in a certain ratio. That is. at any lime only a certain proportion of them, say one tenth, came back for payment. Tims they found that for every 100 sovs. I hey held in safe custody the receipts fur only ten of them were handed back for payment, and the receipts for the other DO remained in circulation. Consequently they could safely carry on business by holding for payment lo their customers only a small proportion of the gold for which they gave receipts, and if they held ‘id per cent, it would be a perfectly safe margin. They then found that instead of charging a rent for the use of their vaults, it was belter to pay depositors interest on their deposits, in order lo tempt them to deliver their gold to them, and the depositors found that the longer the goldsmiths held their deposits the more valuable they became.

Thus the goldsmith heeamo a banker, and his receipts became baid< notes. If lie held £I,OOO he < ould issue £4,000 worth ol Hides, For (he additional £3,000 lie would receive securities from the customers to whom they were issued. Thus (he bankers made profits by adding to the total amount o! money in circulation. The bank, therefore, is a manufactory of credit, just as a mill is a manufactory of goods. The monev lender lends his own money for interest; the bank lends other people's money, and charges an interest for it. The Bank of Kurland was established in l(i!)4, and the Government invested it with the side right of issuing notes. At first they were usually of la rye denomination, £2O. Thirty years before the establishment of the bank, Samuel Pepys, in ids celebrated diary, mentions on a certain day that he had hired a hansome cab and taken about 40 sovs. into the country and buried them. At that time there was no other means of safe deposit. In 1797. when Win, Pill had issued a large amount of bank notes to pay the debts incurred by the Continental wars, the Bank of England had not: sufficient gold to meet them, and had to suspend payment. When provincial and private banks were established they were not given the right by law to issue hank notes, and (hey accordingly conceived the device of issuing to their customers books ot blank forms, which the customers filled up for the amounts they wished to pay, and these forms were put into circulation. Thus arose the first cheques. The Bank of England having sole right by law to issue notes, appealed to Parliament against this system, which it considered an infringement of its monopoly, but it was found that there'was no legal machinery to prevent the provincial and private banks from issuing these cheques. Since then the cheque method has become the chief, means of payment. Throughout Great Britain and America 95 [ter cent, of money transactions arc effected by cheques. The reason why the system of banking and cheques is not of direct advantage to the great mass of the people —that is, the wage earners — is that they are not familiar with it, and have not adopted it, and a suggestion has recently been made that instead of paying wags and salaries in cash they should be paid into a. bank account to the credit of the worker, which, it is alleged, would result in considerable economies, for a man will not hesitate to pay out various small sums unnecessarily when he has the money in Ids pocket, which would he saved to him if ho had to go to the trouble of writing cheques for them. By i>suing dotes for small amounts, 10s and ss. the banks are able to work on a still smaller reserve of cash, because only a certain small proportion of these notes come in at any one time for redemption, just as with the larger notes. In most countries there are a number of banks. Formerly each separate bank hud its reserve of 10 per cent, or 25 per cent, to meet the

note issue, but it was found that by nil the banks pooling their reserves they could safely give still more credit in proportion to the gold held, on the same principle that if a number of buildings have each a separate water supply for fire prevention, by till combining their supplies into one central reservoir, from which any one of the buildings can draw when necessary, a smaller total quantity will suffice for safety. So by centralising their reserves and enabling all the banks to draw on the central fund it was found that about £OS worth of notes could be safely issued on a reserve of only £lO of gold. Thus the whole banking system is an expression of confidence in the public. If (his confidence were lost, and the public presented all their notes at once for redemption in gold, even in normal times, when gold is the legal tender, the banks could not meet their obligations. But suppose in such a case the Government, assists the banks by the issue of treasury notes: the public would be satisfied, because they would have confidence in these notes, although it would he only exchanging one piece of paper for another. Hence an eminent financier refers to (he huge banking system in the wodern world as a great confidence trick. And since the whole system is thus based on public confidence, and would fail in a crisis when that confidence is lost, why should not the community which gives the confidence retain for itself (he function of note issue, with its attendant advantages? 'flu* whole system is like an inverted mountain, which, instead of standing on a broad basis, is balanced on its apex, the small gold reserve, and with the ever-widening credit and its piles of paper money above.

With the further extension of credit by the tremendous expenditure occasioned by the war, we have now got down lo a money basis of less than 1 per cent, of gold to the amount of notes in circulation. The huge government loans were largely effected by banking. On a deposit of £lO the bank would provide £9O of war stock, and this formed the basis of still further note issue by the banks. No doubt there are advantages from this. One Humid never complain about the form of the currency so long as then 1 is an honest basis to (he amount in circulation, and (he most reliable system would be the issuing of notes or coins in proportion to the actual wealth of the country in wheat, wool, coal, and other commodities, because these things constitute the real national wealth. Overseas traders work on this basis. The imperial Authorities issue credits to the amount of 75 per cent, of our product ions.

The national wealth is never a. stationary fund or accumulation. It has a How. It is all dependent on (he services of the transport wicker, the sailor, the farmer, the labourer, the tradesman, the artisan, and the professional man. IP you live in a place where these services are not performed you are miserably poor, no mailer what money you have. If the harvester fails, and services cease, there is general panic and inconvenience, and so these things should be the basis of any form of currency, and no money issue should be in excess of them. Crises arc usually of a financial nature. Hero you have the nervous system of the industrial life. There is immense power in the hands of I lie bankers. When the currency is inflated (he cost of living increases. This continues until the currency in circulation is in harmony with production. Henry VIM. thought he could increase the currency by debasing the coinage, but the result was indescribable misery and confusion. The Continent of Kurope would not accept his money, and the King lost his good name, if he e\ei had one.

This evening Mr Ayrton will dis-.-uss the lessons to be dravn from .he consequences of being unable to redeem on a gold basis the pledges embodied in a note issue.