QO BANKING THEORIES IN UNITED STATES

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The view that banks are limited in their operations to the lending
 of money received from stockholders and depositors, is by no
means one of mere antiquarian interest. We read in a leading
dictionary of political economy:
The business of banking, generally speaking, consists in taking money on
deposit, and also, in issuing notes and drafts, by which the transfer of loanable
 capital is facilitated. The funds thus obtained, together with those
supplied by the capitals of the banks themselves, are employed in making
advances. [Thus capital is] transferred from those persons by whom, and
from those places where it is not required for active use, to those requiring it.!
And in a more recent book ? we read:

In a progressive community the steadily growing demands for capital
must be met by a continued saving. Fresh savings are placed daily at the
disposal of those having fresh capital requirements. In this the banks only
act as intermediaries. They can increase their loans only in proportion to the
amount of fresh savings that are available. Lending on the part of the banks,
however, is done in bank currency, to the creation of which there are no
absolutely definite limits.

The criterion for a sound bank policy, the author adds, is that
the quantity of bank currency should increase only as the needs
of the country for such currency increase.
The banks, however, must constantly see to it that the quantity of bank
currency is never unduly increased — i. e., that bank currency is not arbitrarily
 created merely to meet capital requirements which cannot be met
with available savings. . . . A complete daily adjustment between demands
for capital and fresh savings is scarcely possible. It is therefore of advantage

even when the state of collapse has arrived, the whole of the benefits have not been
lost to the public; but it is probably no exaggeration to say, that in all cases, twice
as much has been lost as has been gained; in addition to the evil and injustice of its
being a previous tax upon the community, for the benefit of a few. In this sense,
then, the banks encourage trade. They issue paper promises, and circulate them as
money, and by so doing increase prices, and therefore the assumed amount of capital
which they lend to the grasping or enterprising, is taken out of the pockets of the
prudent and honest for the benefit of the lender [borrower ?]; and becomes real
capital to him, beyond the loss that may accrue from the revulsion that takes place;
and under ordinary circumstances was certain to follow.” Richard Sulley, ‘ Currency
 and Banking,” Hunt's M erchants’ Magazine (1854), Xxxi, 193.
1 Palgrave, Dictionary of Political Economy, i, 91, 92. Cp. Labor’s Cyclopedia of
Political Science, i, 229, 238, and Cannan, “The Meaning of Bank Deposits,”
Economica (Jan., 1921), No. I, pp. 28-36.
2 Gustav Cassel, Money and Foreign Exchange after 1014 (New York, 1022). The
quotations are all from pp. 102-104.