CHAPTER XI 
THE NATURE OF BANK DEPOSITS 
Early recognition that deposits constitute part of the currency. — Failure generally 
to realize that deposits may be created by the banks. — A few instances in which 
this was understood. — Conclusion. 
IN reviewing the theories that prevailed before 1860 with respect 
to the nature and utility of banks, we have inquired merely 
whether it was believed that banks, in making loans with their 
notes, lent only what they had in turn received from shareholders 
and depositors; and whether it was thought that by the opera- 
tions of banking any capital was created, prices disturbed, or 
specie driven from the country; but we have so far avoided raising 
the correlative question how far bank deposits were held to share 
these several characteristics with notes. We now turn to this 
other problem.! 
Two questions arose here: are deposits to be regarded as a part 
of the currency? and are they ever created by the banks them- 
selves? That demand deposits subject to withdrawal by check 
constitute a part of the currency on an equal footing with notes 
was apparently recognized by American writers somewhat in 
! The practice of drawing checks upon demand deposits came in with the begin- 
nings of banking in this country. In 1786 Pelatiah Webster commented upon it as 
so convenient that “it is almost universally adopted by people who keep their cash 
in our present bank” (the Bank of North America). See Political Essays, P- 434. 
The volume of notes exceeded that of deposits in the aggregative balance state- 
ments for all the banks of the country until 18 55, although in Massachusetts the 
total amount of deposits passed that of notes (not, to be sure, permanently) as early 
as 1806. (See Report of the Comptroller of the Currency (1876), pp. 95, 98, 99 and 
passim.) The relative sparseness of population, and, no doubt, the less complete 
development of the banking habit, told against the use of checks, with its implica- 
tion of frequent visits to the banks. The greater attention accorded to notes can 
hardly be accounted for on the ground that deposits were as yet little used; the 
explanation seems to lie rather in a misapprehension of the nature of deposits, dis- 
cussed in the text, and in the fact that the more spectacular evils of banking were 
connected with the function of note issue.