METALLIC MONEY Relation of Money and Banking Principles A bank is an institution for the custody, loan, exchange, or issue of money and credit, and for facilitating the transmission of funds by bills of exchange. Banks deal in money and in credit, which is the deferred payment of money. The principles of banking therefore are inextricably involved with the principles of money and of credit.
Money is of two kinds: metallic or commodity money, and paper or fiduciary money. Such metallic money as is not stand ard money is also fiduciary in character. This and the next chapter contain a discussion of metallic money, which is followed in Chapters III, IV, and V by a discussion of fiduciary money— a form of credit issued by governments and banks and character ized by general acceptability. Of the many forms of credit issued by banks only bank notes enjoy general acceptability. Such notes are fiduciary money in every essential, and in some coun tries they constitute the bulk of the circulating media. In other countries bank deposits are a more important medium of ex change, in spite of the fact that their acceptability is restricted. Letters of credit and acceptances are also other important forms of non-circulating bank credit.
The exposition of the nature and laws of money and credit contained in the chapters referred to is an especially proper and useful introduction to the discussion of bank operations and functions taken up in Chapter VI. There it is explained how bank deposits and note liabilities arise in a variety of ways, but chiefly through loans and discounts. By means of such loans and dis counts the business of the world is effectively carried on.
The last five chapters of this volume deal with the distinguish ing features of the modern bank as regards both organization and operation, the features being discussed from the point of view of the need in response to which they have arisen. A glance at the titles of these chapters will show that there is, first, a need of facilities for performing the functions of deposit, note issue and discount, and, second, a need of safeguarding the interests alike of the bank, of its patrons, and of the public.
The First Exchanges Inasmuch as the principles of money and banking are closely related, it seems logical in a study of banking to inquire first into the history of exchange and the functions of money. The first
exchanges were probably in kind. This method, known as "barter," is very primitive, restrictive, and wasteful. Few ex changes can take place, for several reasons: the coincidence of mutual wants in amounts, time, and place is unlikely; certain commodities which A may wish to exchange for articles belonging to B may not exist in such units as B may wish or be willing to take; A's surplus goods may exist at a time when B has no ex changeable commodities, although it may be a time when B de sires A's goods, and if A's goods are perishable, exchange by barter would result in great waste; similar waste and restriction would exist where the surplus products of a producer or com munity were in demand in another locality whose surplus pro ducts did not coincide with the demand in the former.
Primary Functions of Money The burden of the method of barter is reduced where some commodity is quite generally in demand in a society. The possessor of surplus commodities is willing to accept this article of general demand, knowing that it can be used later in exchange for particular goods he may then need or desire. Goods which he cannot get by direct exchange may thus be procured indirectly.
A commodity may be in general demand by reason of its power to satisfy directly man's desires and needs; objects of food, clothing, decoration, and the like do this. But when once adopted, always by an unconscious process, as a medium of exchange, the com modity is received and wanted primarily for its exchangeability, and a prime use or function of it is to facilitate exchanges. The commodity becomes the foundation upon which a new economy rests, the economy of division of labor, of separation of employments. Producers eventually produce articles to ex change, not for specific goods but for general purchasing power; they specialize their production and sell to a general market. The exchange values of their products in terms of the commonly acceptable mediums are spoken of as "price"; to receive the medium for goods is to "sell," to give the medium for goods is to "buy." The medium is money and may be any commodity having general acceptability.