By the evolution of this system by which the banks can grant credits, which being transferred by cheque from one to another, increase the total of the deposits which they handle, a magical and unlimited power of creating purchasing power is often attrib uted to them. But in practical fact this power is limited in many countries by law—as in the United States, where the banks are obliged to maintain a certain proportion between cash and liabil ities ; and even in England where the law leaves the banks free to conduct their business as their prudence and experience directs them, they are always careful to maintain a proportion between cash and liabilities such as is required by safety and by banking conventions. Since the amount of cash at the central bank that is available for them can be varied by the central bank, thanks to its power to contract and expand credit, the policy of the commercial banks is thus closely affected by that of the central bank, though at times when a country's financial position is abundantly strong, the commercial banks, with a comfortable margin between them and the possibility of stringency, have a good deal of latitude in the conduct of their business. The theory, that the banks exercise a despotic tyranny over industry, and by their distribution of credit, decide what is, and what is not, to be produced, is largely a delusion. In spite of amalgamations, competition among them is still so keen that they cannot afford to refuse any solvent customer the accommodation to which his position entitles him; and their dependence on public confidence is so complete and so vital, that they dare not make advances unless they have reasonable confi dence that they will be repaid. In granting credits the only ques tion that they can consider is whether the customer's obligation is likely to be met—in other words whether he is going to use the money in some enterprise which will pay, by satisfying some public demand; and so it is public demand, well or ill exercised, which finally decides who is to get credit, and not the banker, who merely interprets it.
sources, because though nominally recoverable on demand or at short notice, they cannot be called in at times of stringency with out inflicting serious inconvenience on customers whose solvency the banks would be most reluctant to endanger. It is thus on the other items in their assets that the banks have to rely, in order to secure that liquid position which is the ideal of prudent banking. Their holding of legal tender cash and cash at the central bank is their first line of defence and after that come the loans at call and short notice which they make to the discount houses, for financing the stock of bills of exchange carried by the latter, and to the Stock Exchange for financing securities that have not yet found a home or are being carried by speculators for the rise. Stock Exchange loans are usually arranged from one settlement to another and so run (in England) for about a fortnight and are less liquid than the loans to discount houses which run from day to day or for a week. It is on these last that the banks, as has been shown, rely at times of seasonal pressure to reinforce, their cash holding, calling them in and so obliging the discount houses to pro duce fresh credit by borrowing from the central bank. The banks' holding of bills of exchange is another highly liquid item they can arrange so as always to have a certain proportion falling due day by day or any date they may anticipate pressure. Bills of exchange drawn against commodities of general consumption and accepted by banks and firms (see MERCHANT BANKERS) of first-rate standing are the most liquid of investments because they do not have to be sold but are paid when due ; and the Treas ury bills which, since the war caused a huge increase in the floating debt, now form so large a part of the stock in trade of the discount market, have the same advantages with Government security added. The banks' investments—generally a comparatively small item in their assets—are usually confined to Government stocks and other "gilt-edged" securities.
See also the articles BANKING AND CREDIT ; MONEY ; BANKS; CHEQUE; BILL OF EXCHANGE ; MERCHANT BANKERS ; and the bibis.
attached thereto. (H. WIT.)