Money and Credit are so closely interwoven with the commercial life of a nation that it is essential for every person engaged in business to have some knowledge of the part which they play in it.
The Part Played by Banks.-- As generally understood, bankers are merely middle men who borrow from one set of persons at a rate in order to lend to another set at a greater rate, the difference between the two rates being their margin of profit. But in reality they are much more than this. They are conservers of a nation's capital and promoters of its trade and industry.
The most common function of banks is the discount of commercial paper running for short periods of time and representing actual transfers of property in the business world. In this way the bank exchanges its well known credit for the less known credit of merchants and manufacturers.
How Banks Increase the Potency of Capital.-- By means of banking, a given amount of wealth acquires nearly the same potency when diffused among millions as when concentrated in the hands of a few. Banks take the place of large capitalists; they gather into one fund the small savings or reserve-wealth of the masses, and thus render these as available for the employment of labor as if they belonged to a single possessor. And also they supply the knowledge and enterprise requisite for the employment of that wealth, which is in great part wanting on the part of the actual owners of it. Hence the banking system accomplishes the same results as if the wealth of a country were concentrated in the hands of a few large capitalists, and yet allows of that wealth being actually diffused among tens of thousands of owners. The banking system, in short, immensely increases the potency of capital, which has quite as much to do with national progress as the actual amount of national wealth.
Banks, as before stated, take the place of large capitalists; so that the money expended by the wealthy and enterprising portion of the community in trade or industrial works, such as railways, etc., although dispersed in wage payments among the laboring classes, who do not themselves employ the money thus acquired in reproductive industry, is not thereby withdrawn from production, seeing that it immediately finds its way back into the banks, who employ it just as a large capitalist would.
If there were no banks, a large portion of the money employed in the construction of a railway would stagnate as small hoards in the hands of thousands of owners, and a very long period would elapse before it became again available for production by returning it into the hands of large capitalists; whereas, through the agency of banks, the small sums are quickly re-united, and become disposable anew for industrial investment. In this way capital is re-collected as soon as dispersed, and hence, by means of Banking, the reserve-wealth of a country, although ceaselessly dispersed in industrial expenditure, practically remains massed or concentrated in compartively few hands and therefore in the most effective condition for augmenting production. In this way a very large amount of capital which would otherwise become "fixed", in consequence of its being employed in industrial enterprise, immediately reappears as "floating" capital, available for similar investments by other parties.