16 MAY 1840, Page 13


Union Bill, Drumm., Gtb May 1840.

have read with satisfaction the art irk a in your two last numbers on

deposits in banks of issue. Your main conclusion is certainly correct : but it appears to me, thin in consequence of neglecting- to separate the truth con- tained in the arguments of your opponents from the errors combined with it, thus to lay bare the good as well as the bad side of their case, you have rejected that which constitutes one of the most powerful means for producing convic- tion that can be employed. I don't know whether or no you will think any thing that I may write worthy of insertion in your valuable paper, but 1 have resolved to commit myself so fiir as to send you the following brief review of the chief points connected with the question at issue, for the purpose of ascertaining if possible the source of the puzzle and confusion which prevails.

(2.) By ft/posits I understand (to use your own words) coins or bank-notes lodged with a banker or any other party ; the depositor always retaining a full legal right to draw for it of delllaDd. (3.) The rummy/ of a country at any time comprises all the coin and bank- notes in circulation, that is, which having been issued,bave not been called in or cancelled, (lest coyol, or lost, at that particular period. Whether any thing else may lie Mehl:led in it, I do not inquire at present. I follow in your footsteps, ill 1.1,1,r to avoid ent:rtaining irrelevant questions. These coins and bank-notes are 1:01 imagieary but tangible things, which have a real identity. They can be diminished solely by loss or destruction. They can be increased solely by the issue of others of a similar kind. If a particular set of them, however, should he removed from the circulation, and their place supplied by an issue of (villas of the same kind, value, and amount, no essential change would be pro- duced in the currency. (4.) Every distinct part or particle of the currency is either in use, i. e. is in a state of action, or it is ldid by fur a longer or shorter time, i. e. it is in a state of stagnation. Each individual coin or banknote for the most part passes continually from a slate of action into one of repose, or back again into a state of action. Some of 1111011 remain for a longer some for a shorter time quiescent, whilst others for a considerable interval circulate so rapidly that they 612011 to enjoy in the mean time scarcely any rest. By far the greater part of them are at least occasionally brought into circulation, but they have all a ten- dency to remain at rest unless impelled by some cause capable of' setting them in motion. They air: seldom parted with without MI equivalent. (5.) Since money is nothing, so for as the purpose for which it is employed is concerned, moles it be in use, whatever tends to give it motion and make It cir- culate niore rapidly, increases its power, or in other words facilitates exchanges and influences prices. Such a diminution of its via inertia. may therefore. be Nut-

valent to an increase of its mass ; so that the efficiency of the currency must be estimated by the rapidity of its circulation as well as by its amount. (6.) The peculiar effect of deposit-banking is to set in motion a quantity of money or portion of the currency, which would otherwise, for some time at least, have been locked up in private coffers. Instead of keeping at home the money for which there is no immediate demand upon hint, or even that which may be necessary for present use, the merchant sends it to his banker's, on whom he draws for it as he requires it. The bank reserves out of the whole amount of deposits, as much as is found or considered to be sufficient to answer such temporary demands, and lends or invests a certain portion of the remainder, thus sending it afloat. In this way, what would have been otherwise lying idle is rendered of some account.

(7.) Neither the credit of the bank nor that of' the public incurs any extra- ordinary risk in consequence of the deposit system, if legitimately carried out. The former has investments or other securities, and a reserve equal to the in- creased liabilities. The greater part of the deposits constitute a new and additional capital employed in the operations of banking. That part of them reserved for being reissued to depositors, supplies the place of the whole, and the remainder is in a manner created in behalf of the banker and the public. If a sufficient reserve were retained, therefore, to supply the depositors, and the proportion of specie to both the circulation and deposits remained the same as it no deposits existed, no greater risk would ensue than in ordinary banking— vie. the probability of a run for specie, or of an analogous one upon the de- posits, both of which would be equally provided for. (8.) But if, on the contrary, a bank of issue or deposit, in establishing a rest and adjusting the proportion between its circulation and cash on band, considers all its specie, or what will at any time procure specie, in the same light as if it were merely a batik of issue, there will then be a double risk incurred, arising from the liability to a run upon the deposits and specie. hence may be traced the origin of the salutary rule of banking, to treat the liabilities iu deposits as if they were a part of the circulation or issues. From which some persons have been induced to believe that they arc in reality one and the same, and consequently that the former are a part of the currency. (9.) Deposits area part of the currency. The latter includes all the coin and bank-notes in circulation. Deposits, or the money deposited, consists of coin and bank-notes which previously formed part of the circulation, and are not by being deposited removed out of it. Passing from hand to hand does not pre- vent them from being, it renders them part and parcel of the currency. (10.) Deposits arc a component not a distinct part of the currency. Since the currency includes all the coin and hank-notes in circulation, to add to it, in estimating its amount, those portions which are circulated more freely through the agency of the banks, would be to add a part and perhaps the same part over and over again to the whole, in order to make up the whole. (11.) The aggregate sum designated as the bank's liabilities and deposits, or more briefly, deposits, is merely nominal as regards the circulation. It indicates impalpable rights, not substantial things. It shows that so much money has been lent to the bank and employed by the latter as capital in banking opera- tions, and thereby in facilitating exchanges. It is equivalent to an equal amount of the original capital of the bank, except inasmuch as being borrowed and liable to be at any time called for, the bank thinks it necessary to prepare for such a run in the same way as for one directed against its issues. Every, part of each originally represented money in the coffers of the bank. The same identical coin may have successively represented different sums of each. Both are employed in the same way in loans, investments, and reserves—with this difference, that in the one case the reserve is proportioned to the circula-

tion of' the bank, and in the other case to the deposits or capital itself: It' it is absurd to call the original capital a part of the currency, it is equally so to call the deposits a part of it.

(12.) It appears, therefore, 1. That in estimating the amount of the currency, the deposits, that is, the bank's liabilities in deposits, are not to be added to the

circulation; and 2. That in estimating the effect of banking operations in facilitating exchanges and influencing prices, they should be taken into ac- count, since on the one hand they operate as bank capital, and on the other expose the currency to the same kind of derangements as are brought on by issues of paper or bank-notes.