CHAPTER X

SUMMARY OF THE VIEWS ON THE NATURE AND
UTILITY OF BANKS

The dual réle of commercial banking. — The utility of banks as source of a form
of currency. — The utility of banks as distributors of loanable funds.

WHETHER consciously or otherwise, banks were regarded in their
dual role: first, as the institutions that provide the community
with a large part of its media of payment; secondly, as establishments
 for the lending of purchasing power. When it was asserted
that banks provide an inexpensive currency, that they increase
capital in the guise of circulating media, or that they lend elasticity,
 be it pernicious or desirable, to the media of payment, it
was their role as a source of currency that was being primarily
referred to. But when they were being considered as intermediaries
 between borrowers and lenders, or as lenders, in addition,
of a peculiarly significant credit of their own, it was their function
in directing the resources of the country that was being contemplated.
 Not, of course, that these two aspects of banking permit
of separation, except in the abstract and with due consciousness
of the limitations of such treatment. It isin placing purchasing
power in the hands of this or that entrepreneur that banking
brings media of payment into existence. Unfortunately, many
(I think we may say the great majority) of the writers of the early
nineteenth century, did, to a large degree, regard these two functions
 of banking separately; and in this mode of treatment lay the
source of a number of their errors.
The first notable experience of Western civilization with paper
money began in 1690, with the emission of bills of credit by the
colony of Massachusetts Bay. The problem at once arose of determining
 the economic significance of an increase in the quantity
of media of payment, whether through the issue of government
paper, or of bank notes. Not a few believed that a net addition