CHAPTER VIII 
BANKS SERVE AS INTERMEDIARIES BETWEEN 
BORROWERS AND LENDERS 
The thesis that banks are mere intermediaries in their lending operations was the 
prevailing one. — Their alleged benefits as such. — Basis of the dogma that banks 
cannot lend more than they receive from depositors and shareholders. — The error 
into which the quantity theorists fell here. — Some inklings of a deeper insight. — 
The persistence of this issue even to the present day. 
WE turn now from those considerations concerning the nature 
and utility of banks which regarded them in their role as creators 
of an important form of media of payment, to the analysis that 
dealt with them as special agencies in the distribution of loanable 
funds. 
From the point of view of the currency they provide, the ad- 
vantage most commonly claimed in behalf of banks was that of 
substituting a less expensive form of media of payment for the 
precious metals. Coupled with this benefit that banks were al- 
leged to confer upon the community was generally the further 
one of gathering the surplus funds lying idle in the hands of their 
owners and distributing them among men who were in a position 
to give them productive employment. In other words, banks 
were thought to act as intermediaries between borrowers and 
lenders, thus making possible a more efficient utilization of the 
nation’s capital. 
It was inevitable that some should go further and assert that 
banking operations are not confined to lending to one set of indi- 
viduals merely what is borrowed from another, but include, in 
addition and with equal advantage to the community, the loan 
by the banks of their credit in the form of notes. But let us con- 
sider first those who made the lending operations of banks purely 
intermediary. Banks, said George Tucker, who held the chair 
of moral philosophy and political economy at the University of 
Virginia, “put the money of the female or the minor into the