When would vastly increase. If the supply of government currency or bank notes were not correspondingly increased the value of money would rise and prices would fall. The use of credit money and credit in the form of checks and drafts reduces the amount of currency needed for pocket and till money, and legal tender money serves as well as money itself for bank reserves. Credit money, like every other form of credit, by economizing the use of money, lessens the demand for it and so lessens its value. people have perfect confidence in the ability of the government to redeem its notes and they are made legal tender and available for bank reserves, an increase in government credit money tends to raise prices in the same way as an increase in gold itself. Bank notes, too, serve as substitutes for money and by lessening the demand for money tend to raise prices. Credit does not increase the supply of money, but it does increase its efficiency, enabling a country to get on with a smaller supply of money than would otherwise be necessary. An expansion of credit, therefore, exerts the same upward tendency on prices as an increase of the money supply.1 In view of the fact that credit is so elastic and that its influence in raising prices is naturally cumulative, its use must be carefully guarded if over-expansion and speculation are to be avoided. As prices rise in response to the increased credit demand for goods, the owner of the goods finds that he can get larger credit at his bank, for the goods are worth more. With confidence and buoyancy in business, this process may be repeated until prices reach a dangerously high level. The total amount of credit based upon goods at these inflated prices may become so great that the uncancelled balance may be too large for the money reserve to sustain. If before this stage is reached credit is not contracted or reserves increased, a money stringency, possibly a crisis, will result, causing great loss to the business community by a rapid fall in the price level.2 The 1 Johnson: Money and Currency, p. 63. 2 Kinley: Money, p. 223. influence of credit upon prices, therefore, operates through its effect on the demand for money, and especially on the proportion between money in circulation and that required as a reserve for credit transactions. READING REFERENCES Cleveland: Funds and Their Uses, Chs. III, IV. Herrick: Rural Credits. Hobson: Gold, Prices and Wages, Ch. VII. Johnson: Money and Currency, Chs. III, XI. Kinley: Money, Ch. XI. Laughlin: Principles of Money, Ch. IV. Moulton: Principles of Money and Banking, Pt. II, Chs. II-III, IX. Phillips: Readings in Money and Banking, Ch. X. Scott: Money and Banking, Ch. VI. Taussig: Principles of Economics, Bk. I, Ch. 31. PART II. BANKING CHAPTER VIII ORIGIN AND DEVELOPMENT OF BANKING 63. Early banks.-The authorities are not agreed as to the origin of the term "bank." Some trace it to the "banc" or bench where the early money changers kept their coins and plied their trade. Others claim that it is derived from "banck," the German name for a joint stock fund, which was converted by the Italians into "banco," meaning a heap or accumulation of money or stock.1 In colonial days in Massachusetts the issue of paper money was referred to as "raising a Banke," the word bank meaning the money rather than the institution which put it in circulation. The modern banker, as has previously been shown, is primarily a dealer in credit. Originally he dealt in money, his business being to exchange one form of coin for another, both domestic and foreign. Early, however, the Athenian and Roman bankers began to receive deposits of money, to make loans, sometimes based on valuables, and even to transfer money and credits. "Traces of credit by compensation and by transfer orders are found in Assyria, Phoenicia, and Egypt before the system attained full deThe books of the old velopment in Greece and Rome. Sanskrit lawgiver, Manu, are full of regulations governing credit. He speaks of judicial proceedings in which credit instruments were called for, of interest on loans, of bankers, usurers, and even of the renewal of commercial 1 MacLeod: Theory of Credit, Bk. I, p. 315. paper."1 Clay tablets in the British Museum taken from the ruins of Babylon show that as far back as the days of Nebuchadnezzar loans of silver at interest were made and loans secured by mortgage on land. In Athens and Rome the banking business was brought under official regulation, and an expansion of its functions naturally resulted. As commerce developed the bankers were called upon to make remittances of money from place to place. Out of this grew the use of the foreign bill of exchange. Then in time as the convenience of this service appeared, merchants and others began to deposit money and bullion with the money changers for safekeeping. So the business of the Argentarii, as the early Roman bankers were called, slowly evolved from that of mere money changing to the receiving of deposits, lending at interest, both their own money and that intrusted to them, dealing in bills of exchange, and other banking operations. These private bankers of the medieval Italian cities were the forerunners of modern banking. Because of the prejudice of the Church at that time against lending money at interest on the ground that it was usury, the Jews had a monopoly of the business in the Dark Ages, and they have been prominent as bankers ever since. Several times they were expelled from the countries of Western Europe, and the business was taken up by merchants of Lombardy and others. These Lombards extended their operations to England, where they advanced large sums of money to the Plantagenet kings upon the security of the customs. When Edward III defaulted on his payments, owing vast sums to the Lombardy bankers, they became bankrupt, ruining many wealthy families of Florence and causing widespread distress in that city.2 64. Public banks. The Bank of Venice, founded in the twelfth century during the time that the island republic was at war with the Roman Empire, is spoken of as the first public bank. Originally it was not a bank in the 1Conant: Principles of Money and Banking, Bk. II, p. 168. 2 Conant: History of Modern Banks of Issue, p. 24. modern sense, however, being simply an office for the transfer of the public debt. The government secured funds by means of forced loans levied upon wealthy citizens. Instead of issuing bonds against these loans, as governments do to-day, the amount of specie loaned was credited to each subscriber. These credits could not be withdrawn, but could be transferred from one to another on the books of the bank. No notes were issued or checks used, the entries on the bank register being evidence of payment. The Venetian traders early saw the advantage of this transfer system over that of handling the coin, and voluntarily deposited their specie in the bank and obtained bank credits. Not until 1587, however, did Venice practice the actual business of deposit banking by receiving foreign coins at their bullion value and issuing certificates promising to return bullion of the same value of standard weight and fineness. The Bank of Amsterdam was established in 1609 to meet the needs of the merchants of that city, which had become the center of the international trade of Europe, and to correct the disorders of private banking, especially those growing out of the accumulation of promiscuous and lightweight coins received in the extensive foreign trade of the Dutch.1 The Bank of Amsterdam accepted all kinds of specie on deposit, crediting the depositors with its real value in standard coin. These deposits could be withdrawn at will or transferred on the bank's books from one person to another. The credits given for these deposits of coin or bullion came to be known as "bank money" and commanded a premium over the debased and mutilated coins in circulation. In the seventeenth century the bank adopted a plan by which a depositor of specie received an equivalent credit of bank money on the books and a "recepisse," a kind of certificate of deposit, which entitled him to withdraw it within six months upon returning the bank money with which he was credited and paying oneeighth of one per cent interest. The depositors had the 1 Dunbar: Theory and History of Banking, Ch. VII. |