Banks make their loans chiefly in the form of discounts; that is, upon bills of exchange. Commodities in the wholesale market are generally sold on credit. The buyer promises to pay the amount at a certain date to the seller, and his promise is contained in a bill of exchange. The seller transfers it to a bank, which, on the faith of it, advances the amount in loan to him, less discount (q.v.), that is, interest of the money till the bill be due. This Is called discounting. But banks lend on other securities. A holder of gov ernment stork, for example, will obtain a loan on the security of his stock; the banker being entitled to sell it, and repay the loan from the price, if the borrower fail to make punctual payment. So also, the holder of stock or shares in any public company, as a railway company, or of a debenture or bond due by such, will. where the company is believed to be in a sound condition, or the security is salable, obtain a loan from a bank. The owners of commodities lying in a public warehouse, may obtain a loan on depositing with the bank the trarrants or certificates of ownership. loans, too, are occasionally made for short periods on the mere note of hand of the borrower. when the banker Is satisfied of the ability of the borrower to repay the money. It is seldom in Scot hind that banks lend on mortgages over land. Borrowers, in these cases, generally take loans to lie unpaid for a few years; but to have his money locked up in that way does not suit the trade of a banker. Where a banker finds the security which he has received to be Insuillelent, and repayment of the loan is not forthcoming, he will, of course, like any other trader, to avoid making a bad debt, take any other security the debtor can give him—such as a manufactory or a mine. Banks have in this way frequently become involved in manufacturing transactions, in their attempts to make more money of the securities than they would have done by an immediate sale of them; they have become manufacturers and miners, and suffered great losses in consequence. And it is not to be supposed that banks always abstain from making loans when the security is known to be doubtful; far from it; banks, like other commercial establishrher.ts, have been, on ninny recklessly managed. In trying to push busineSs, they have made loans on Insufficient security, and banks are under strong temptation, to which they frequently yield, when a trader largely indebted to them Is app_oaching bankruptcy, to sustain his credit by additional advances, in the hope that he may retrieve his affairs, and pay in full both the old and the new advances. The result is often the loss of both. Conduct of this kind has been the ruin of many banking establishments in England, of two or three in Ireland and Scotland, and elsewhere.
Bankers perform another very important function: they remit money from one place to another. One illustration will serve to explain how this is managed. A debtor in Edinburgh makes a payment to his creditor in London in this way: lie pays the money to a banker in Edinburgh, who, for a small charge, called the exckange, gives him a draft for the amount on a banker, his correspondent, in London. The debtor transmits the draft to his creditor, who presents it to the London banker, and receives the money from him. No actual transmission of the money, however, takes place, for there are debtors in London requiring to pay money to creditors in Edinburgh, and these debtors effect the payment by giving the money to the London banker, and obtaining his drafts on the Edinburgh banker. The one set of drafts are thus set off against the other. Not only may remittances between two places be thus made without the use of money, but the payments in both places may also be made without it. The debtors may pay for the drafts by checks on the banker %vim grants them, and the creditors may receive the money by drawing checks on the banker by whom the drafts are made payable. For another function of banks, see MARGEsZAL CREDITS.
The large amount of money transactions carried through without the intervention of coin or bank-notes, in a country like England, is inconceivable to trose not engaged in business pursuits. The manlier in which these transactions may be effected without money, would be at once apprehended, if all persons in the same locality dealt with the same bank, and if all the banks scattered throughout the kingdom were only branches of the same establishment. But in practice, matters are so managed as if this were the case.
The checks, bills, or other drafts which come into the hands of a banker, drawn on (that is, payable by) other bankers, are set off and liquidated by drafts, which they have received, drawn on him. The balance or difference only is pa'd in money. In London, the center of the money-world, there is an establishment ea.!ed the clearing house (q.v.), of which most of the London banks are members. There, at a fixed hour daily, attend ance is given by a clerk from each of these banks. who presents a:I the drafts immediately payable which his bank holds on the others: the balance or d fference, on the whole, for or against each bank is ascertained; and the bank which ho'ds a less amount of drafts on others than they hold on it, pays the difference by cheeks on the Bank of England. The lowest clearing for an entire week between the 4th of Oct., 1877, and 2d Oct , 1878, was £71,120.000, and the highest £13:3,921,000. The total c!earings him Oct.. 1877, to Oct., 1878, were .C5,066,533,000. There are similar clearing-houses in some provincial towns.
Bank of England.—This hank, the most important in the world, was projected by William Paterson (q.v.), and was incorporated .Tuly 27, 1694. It was constituted as a joint-stock association, with a capital of £1,200.000, which was lent at interest to the government of William and Mary, at the time in a state of embarrassment. At its very outset, therefore, the Bank of England was a servant of government; and in a lesser or greater degree, it has enjoyed this character through all the stages of its subsequent. his tory. At first. the charter of the bank was for 11 years only; but in consequence of the great services of the institution to government, its charter has been at various times renewed. The last renewal was in 1844, and the charter of that year still subsists, its terms being subject to modification or revocation by the legislature at pleasure. By the act or charter of 1844, the bank was divided into two departments—the issue and the banking. What led to the division was this: it was supposed that, when a foreign drain of gold from us set in, it would, if the currency or circulation in this country had been purely metallic, have produced a contraction of the circulation, and a consequent fall of prices, and, as an ultimate result, the cessation of the drain. It was further supposed that banks could issue their notes to any extent they pleased; that their excessive issues increased the currency, and therefore increased Prices, which in their turn led to foreign drains; and that., on the occasions of these drains, the con tinued issues prevented the natural and desirable contraction of the circulation, and aggravated the commercial convulsions occurring at such periods. The object of the act of 1844 was to prevent issues of notes beyond a certain amount, unless against an equal amount of gold held by the issuing bank, so that the mixed currency of notes and coin might thus expand and contract like a self-acting metallic currency. Experience, how ever, has shown, that when these foreign drains occur. the gold exported is taken chiefly from the reserves in the Bank of England, being withdrawals of deposits or loans by the hank; and that the amount of notes in the hands of the public has not been affected by the legislation of 1844. In practice, whenever there are signs of a foreign drain, and the reserve of the hank is diminishing, the bank counteracts the tendency to a drain by raising the rate of discount and restricting its loans; the purchasing power of the public is thereby limited, and prices kept down; and, at the same time, gold is attracted to this country for investment. The circulation is in reality not interfered with. It was also intended by the act of 1844 to add to the security of hank-notes by insuring a supply of gold to meet the payment of them at.all times. But the solvency of the Bank .of Eng land is undoubted; its notes would at any time be taken as gold; and this effect of the act of 18-14, and the supplementary act of 1845, has in the case of the notes of other banks been hitherto inappreciable.