CHAPTER V.

ANALYSIS OF DEPOSITS.

OUR analysis of mixed currency will be far from complete, if we do not give a full description of the origin and character of deposits, as forming an element most dangerous to such a currency, and generally very mysterious in the popular understanding.

In the currency of the United States, deposits constitute the largest item, considerably exceeding the circulation.

The nature of these deposits has, until within a very few years, been a matter of serious disagreement amongst those who ought to be well acquainted with their nature and effects. To present the subject in such a light that it shall be clearly understood, we must carefully examine it in all its details.

First, What are deposits? We have already defined them as credits given to individuals in the books of the banks, for which they are authorized by law to demand. the specie.

Secondly, How do they arise? In various ways.

1. A customer may deposit coin, and have the amount passed to his credit. The proportion thus deposited is infinitesimally small, compared with the aggregate deposits.

2. He may deposit checks, drawn by himself or others, on other banks.

3. He may deposit the notes of the same or other banks. 4. He may deposit the notes of individuals, or bills of exchange running to maturity; and, when they are collected, the amount will be passed to his credit.

5. The customer may get his own notes, or the notes of others, discounted at the bank, and the amount is passed to his credit; and this last is the origin of the greater part of all deposits.

Of these different kinds of deposits, it will be observed that only one, and that a small one, was in specie; and yet the bank has promised to pay specie on demand alike for all. But it must be observed, that, while all these stand legally on the same basis, as a matter of fact they are practically held by the banks upon different conditions, expressed or implied. They may be divided into three kinds :

First, Permanent or compulsory deposits, made by business men wishing for bank accommodations, in order to secure larger loans.

Second, Fiduciary or trust deposits, made wholly for temporary safe keeping, by executors, guardians, treasurers of corporations, &c., who are receiving funds to be paid out, or invested at a future period.

Third, Active deposits, made by business men, to be withdrawn to meet their current payments.

It will be necessary to explain these different deposits. The permanent or compulsory deposits are not used at all by those who make them. They are made with the tacit. understanding that they are to remain in the bank, and not be drawn upon. They are made to secure favors from the bank, and in order to show a "good account." No bank, perhaps, compels its customers, by any law or rule, to do this; but custom in such a case is as imperative as law. Banks are conducted wholly with reference to profit, and the most profitable accounts will secure the most liberal discounts.

These deposits constitute a permanent loan to the banks, without interest; and the banks can loan the same to their customers upon interest. It is one of the forms in which a bank may secure extra interest in a legal way; but it is done at the expense of those who make the deposits.

This kind of deposits forms a very dangerous element in the mixed-currency system, for the reason, that, when the merchants of any great city are driven to desperation, they

may demand these deposits in specie, and then the banks must suspend. This was done in New York in October, 1857, as before stated. The merchants saw clearly, that, unless the banks would make discounts, they could not meet their engagements. The banks refused to do this, because they could not, and continue to pay specie. The merchants then, by concerted action, called for their deposits; and the banks themselves succumbed.

This will always be re-enacted in a time of great pressure, if the mixed-currency system is continued. It is the only remedy which the mercantile interest has within its power. It is properly used, because the banks have no right to make promises which they know perfectly well they cannot keep.

Another objectionable consideration is, that these deposits greatly and unnecessarily enlarge the immediate liabilities of the banks, and give them a frightful preponderance over the immediate means of payment. This injures the credit of the banks in times of pressure. All sagacious financiers look with suspicion on institutions owing ten or fifteen dollars on demand for every dollar they have in their possession. On the 29th of August, 1857, the banks of the city of New York owed for eighty-four millions for deposits and nine millions for circulation, in all, ninety-three millions, and had but nine millions of specie.

Here, perhaps, it is proper to remark, that this kind of deposits is probably unknown in any other country than the United States. In England, for example, the rate of interest is not arbitrarily fixed by government, but fluctuates from time to time, according to the laws of currency and the demands of trade. Consequently, there is no occasion for this indirect mode of obtaining extra interest, so common in some, if not all, the commercial cities of the American Union.

Compulsory deposits mean, simply, extra interest; but that interest is paid in a manner most burdensome to the depositors, and most dangerous to the banks. The former

must lie out of a considerable part of capital which they need in their business; the latter must enlarge their deposits to a most unreasonable extent, and place themselves at the mercy of the depositors in any time of severe pressure or panic.

Of the second class of deposits, viz. those on trust or for safe keeping merely, it may be said, that they are perfectly legitimate, and may, to a certain extent, be loaned by the banks with safety. They should be so loaned for the advantage of the public, and thus no capital be left unemployed. An obvious benefit arises to all parties: the depositor has his money securely kept, the borrower has the use of it, and the bank rightfully gets interest upon so much of the sum as it has loaned.

The third class of deposits may be described as follows:

(a) A business man, who is making sales each day, will receive, in payment, notes of all the different kinds in circulation. He will also receive checks on different banks. All these he will deposit in bank; and the amount is passed to his credit, and becomes a bank deposit.

(b) He will also receive notes of hand, drafts, and bills of exchange, in payment. All these, when nearly due, he will deposit in bank; and, when paid, they are passed to his credit.

(c) Or, if he desires to anticipate the payment of such notes, he may ask the bank to deduct the interest (and exchange, if there be any), and place the amount to his credit; and this the bank will, in ordinary circumstances, be ready to do; and the amount so passed to the credit of the customer will constitute a part of the deposits of the bank.

ARE BANK DEPOSITS CURRENCY?

Lord Overstone, one of the best authorities, has maintained the negative; but most writers in this country take

* We do not know of any intelligent writer in this country who now denies that deposits are as truly currency as the circulation itself.

the affirmative side of the question: indeed, there are, at the present time, few, if any, who doubt that deposits are currency. The New-York Board of Currency has given its verdict unequivocally as follows: "They constitute at this time five-sixths of the active currency of this city." See the official report of that association for November, 1858. No array of authorities, however, but an examination of facts, should determine the question.

Deposits are an instrumentality by which by far the greatest amount of values are transferred in commercial centres. They discharge debts, purchase commodities, and perform all the functions of currency.

For example, A has a deposit in the Merchants' Bank. He purchases of B a bill of sugars, amounting to ten thousand dollars, and pays for the same with a check on that bank, with which B either draws the notes or specie of the bank, or has the check passed to his credit by the bank. This transaction has been equivalent to the transfer of ten thousand dollars in value from one party to the other.

If A owed B a note of ten thousand dollars, he might pay it in the same way.

Now, what difference did it make to A whether he had ten thousand dollars of bank-notes in his till, or an equal amount to his credit in the bank? Clearly, not the slightest. One was as truly currency as the other. If A was pondering the question whether he should purchase the sugar for cash (i.e., immediate payment), did not the consciousness that he had ten thousand dollars to his credit in bank operate on his decision precisely to the same. extent as if he had ten thousand dollars of bank-notes in his pocket-book? Undoubtedly. Where, then, is the dif ference? And, if all this would be true in the case of A, then in the case of any one similarly situated; and therefore we must conclude, that deposits are, in their nature and influence, of the same character as bank-notes, and, of course, are currency.