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 advantage
 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 alleged
 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 individuals
 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 consider
 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