Besides thusperforming the function of cashiers to their depositors, in consideration of the profit made on their deposits, many banks allow their depositors interest on their deposits. The rate allowed is, of course, always less than that received by the banker. Frequently a depositor bargains with the banker not to draw out his deposit without previous notice, longer or shorter as may be agreed on; and in this case the banker will allow a higher rate of interest than when the deposit is repayable on ecdi—that is, at any time, without previous notice. The practice of allowing interest on deposits has pre vailed in Scotland since 1729, but in England is of later growth, and not invariable; the rule there being rather to allow interest on fixed deposits only, and to allow no interest on money at call or on current accounts. It has led, of late years, to a great increase in the amount of deposits. Many persons prefer the low rate of interest which banks give, to the higher rate which may be obtained from individual borrowers, or to the greater return which may be received if they traded on their money.
Occasions are always occurring for withdrawing deposits, as well as making them. Traders and commercial men, for example, day by day, deposit with their bankers the drawings or sums of money which they receive in the course of their business; and, on the other hand, day by day, draw out such sums as they require to pay away in pur chases of goods, in wages, rent, and other expenditure. A bank, therefore, while con tinually receiving deposits, is continually repaying deposits; and the amount uncalled for is subject to a daily fluctuation. At one period of the year, or in a certain condition of trade, the amount of deposits may be high; at another, low. As it is a principle, at the very root of banking, that money deposited shall be returned, either on demand, or punctually at the expiry of is stipulated notice, it follows that banks must always have in their coffers as much of the money deposited with them as there is the least likeli hood of being called for by depositors. When business is in its ordinary condition, a bank can, after some experience, approximate pretty nearly to the amount of the greatest demand for a return of deposits throughout the year, and provide accordingly. But sometimes the credit of a bank becomes Ioubted, either from causes peculiar to itself, or on occasions of a panic or general distrust, when all who own money wish to have it in their own possession. In these cases, there is a run on the bank for repayment of its deposits, and the amount called for may be far beyond the maximum demanded in ordi nary times. If the bank has not retained as much of the deposits in its coffers as meet it is said to suspend payment, and, as a general rule, it must wind-up its business; the confidence of the public that it will in future restore its deposits on demand being now destroyed. There are two prime rides in safe banking: the one is, that the bank shall lend its deposits only on undoubted and readily reliable securities, however low the profit; and the other is, that the bank shall retain a sufficient amount of its resources—and this is called the reserre—to meet the possible demands of the depositors, even in cases of a run, although there may be no reason to expect one: for when a run comes. it seldom casts its shadow before. But it is evident that the greater the rescrre of a bank, the less the amount of deposits which it can lend out and draw interest for; hence the temptation which banks lie under of imprudently lending out a too great proportion of their deposits; and it is their yielding to this temptation which almost always precipitates the failures of banks.
The reserve of the banking department of the Bank of England is always in coin, or, what is the same thing, in notes against which there is coin lying in what is called the issue department of the bank. In the case of all other banks in this country, the reserve is only partly in coin; sometimes the proportion of coin is very small. A great portion of the reserve is generally in Bank of England notes, equivalent, of course, to coin. These other lianas also hold a portion of their reserve, in the shape of government stock, in which they have invested it. In this way, the banks obtain a return on this last portion of their reserve, in the dividends or interest paid by government on the stock —this return being less, indeed, In the usual case, than if the bank bad lent out the money in the ordinary course of business, but better than no return at all, as must be when the coin or notes are lying idle. The reason why government stock, in Great Britain, is a safe reserve is, that it is sure to command aipurchaser at all times. If there be a run, on a bank, it immediately finds a purchaser for the stock, and with the price, whether paid in gold, or in Bank of England notes, the only other legal tender, it meets the demands of its depositors. Sometimes, a bank liar its reserve in the form of a deposit at the 1 3ank of., England; or, if a provincial bank, with some London bank which has its own reserve there. From the Bank of England being the channel through which, directly or indirectly, payments are made, and moneys received, by other banks, it is more convenient for them- to have their reserve lying as a deposit in it than lying as gold within their own walls. In the ease of a demand on their reserve, the banks will draw out their deposits, in notes, or, if gold be in* demand, in gold, from the Batik of England. Whether, therefore, the reserve of a bank is invested in government securi ties, or is deposited in the Bank of England, or is in Bank of England notes. it k from the coin in that bank that the gold comes in the case of a rum It is apparent from this that it is essential to the stability of all banks in this country, so longas they themselves do not keep a Sufficient reserve of coin in their coffers. that the Bank of England shall always be possessed of coin, and never be unable, on demand, to 'Jay its depositors in gold, or to give gold in exchange for all its notes that may be presented to it. It may be addecl, that while banks gain, through the annual dividends, in keeping their reserve in gov ernment stock, they run the risk of a loss in the event of their requiring to sell it in the time of a panic. For at such a time, when many securities and stocks become unsalable. and all of them suffer depreciation in value, government stock itself falls in price, although less so than the others. Banks often invest portions of their reserve in other stocks than government stock. The higher return obtained on these other is, however. outweighed by the greater risk of depreciation in their value, whether continued unsold or thrown into the market for sale in Hines of panic.