102 BANKING THEORIES IN UNITED STATES 
power as they receive from stockholders and depositors. If they 
lend any more monetary units than they have thus taken in, they 
are returning into circulation more than they withdrew from it, 
and the sole result (if we neglect the confusion attending the 
transition) is a depreciation of each unit, which restores the pur- 
chasing power of the aggregate of media of payment to its former 
level. Time after time it was reiterated that the only important 
advantages which banking confers are those of providing a sub- 
stitute for costly gold and silver currency, and of gathering idle 
surpluses of cash and placing them at the disposal of those who 
can give them active employment. That the reasoning underly- 
ing each of these two views is inconsistent with that of the other 
has already been suggested.' 
In reasoning, on the basis of the quantity theory, that banks 
cannot lend more than they have received from depositors,” the 
early writers passed incautiously from the way in which banks 
make loans to individuals to the way in which they provide a 
general circulating medium. They failed to give adequate atten- 
tion to the mechanism through which media of payment are 
furnished. They assumed that the added media of payment 
brought into existence when the bank expands its loans are dif- 
fused throughout the channels of circulation, but virtually neg- 
1 See Chapter VIII. The alleged advantages and disadvantages of banking might 
conveniently be divided into two groups according to whether they deal with the 
influence of banks upon prices, or with their relation to the effective supply of 
capital in the country. The three major views on the effect of banks upon prices 
have already been given; namely, that bank currency causes price fluctuations; that 
either convertibility or the manner in which they are issued prevents bank notes 
from deviating from the norm of a metallic currency; and, thirdly, that bank notes 
improve upon a purely metallic medium of payment by introducing a desirable type 
of elasticity. The ways in which banks were said to increase the effective supply 
of capital in a country were also three in number. First came the naive notion that 
confuses an increase in the amount of media of payment with that of wealth itself. 
This was superseded by the doctrine that banks provide an inexpensive substitute 
for costly currency of gold and silver, thereby, to all intents and purposes, increasing 
the nation’s wealth to a like extent. And, finally, banks were said to gather sur- 
pluses of capital, temporarily idle in the hands of their owners, and place them at 
the disposition of those who can employ them productively. 
2 For simplicity in exposition we may here regard stockholders as permanent 
depositors.