influence of credit upon prices, therefore, operates through its effect on the demand for money, and especially on the proportion between money in circulation and that required as a reserve for credit transactions.

READING REFERENCES

Cleveland: Funds and Their Uses, Chs. III, IV.

Hagerty: Mercantile Credit, Chs. I-V.

Herrick: Rural Credits.

Hobson: Gold, Prices and Wages, Ch. VII.

Johnson: Money and Currency, Chs. III, XI.

Kinley: Money, Ch. XI.

Laughlin : Principles of Money, Ch. IV.

Moulton: Principles of Money and Banking, Pt. II, Chs.

II-III, IX.

Phillips: Readings in Money and Banking, Ch. X.

Prendergast: Credit and Its Uses, Chs. I–VII.

Scott: Money and Banking, Ch. VI.

Taussig: Principles of Economics, Bk. I, Ch. 31.

PART II. BANKING

CHAPTER VIII

ORIGIN AND DEVELOPMENT OF BANKING

63. Early banks.-The authorities are not agreed as to the origin of the term "bank." Some trace it to the "bane" or bench where the early money changers kept their coins and plied their trade. Others claim that it is derived from "banck," the German name for a joint stock fund, which was converted by the Italians into "banco, meaning a heap or accumulation of money or stock.1 In colonial days in Massachusetts the issue of paper money was referred to as "raising a Banke, "the word bank meaning the money rather than the institution which put it in circulation.

The modern banker, as has previously been shown, is primarily a dealer in credit. Originally he dealt in money, his business being to exchange one form of coin for another, both domestic and foreign. Early, however, the Athenian and Roman bankers began to receive deposits of money, to make loans, sometimes based on valuables, and even to transfer money and credits. "Traces of credit by compensation and by transfer orders are found in Assyria, Phoenicia, and Egypt before the system attained full development in Greece and Rome. The books of the old Sanskrit lawgiver, Manu, are full of regulations governing credit. He speaks of judicial proceedings in which credit instruments were called for, of interest on loans, of bankers, usurers, and even of the renewal of commercial 1 MacLeod: Theory of Credit, Bk. I, p. 315.

paper. Clay tablets in the British Museum taken from the ruins of Babylon show that as far back as the days of Nebuchadnezzar loans of silver at interest were made and loans secured by mortgage on land.

In Athens and Rome the banking business was brought under official regulation, and an expansion of its functions naturally resulted. As commerce developed the bankers were called upon to make remittances of money from place to place. Out of this grew the use of the foreign bill of exchange. Then in time as the convenience of this service appeared, merchants and others began to deposit money and bullion with the money changers for safekeeping. So the business of the Argentarii, as the early Roman bankers were called, slowly evolved from that of mere money changing to the receiving of deposits, lending at interest, both their own money and that intrusted to them, dealing in bills of exchange, and other banking operations.

These private bankers of the medieval Italian cities were the forerunners of modern banking. Because of the prejudice of the Church at that time against lending money at interest on the ground that it was usury, the Jews had a monopoly of the business in the Dark Ages, and they have been prominent as bankers ever since. Several times they were expelled from the countries of Western Europe, and the business was taken up by merchants of Lombardy and others. These Lombards extended their operations to England, where they advanced large sums of money to the Plantagenet kings upon the security of the customs. When Edward III defaulted on his payments, owing vast sums to the Lombardy bankers, they became bankrupt, ruining many wealthy families of Florence and causing widespread distress in that city.2

64. Public banks.-The Bank of Venice, founded in the twelfth century during the time that the island republic was at war with the Roman Empire, is spoken of as the first public bank. Originally it was not a bank in the

1Conant: Principles of Money and Banking, Bk. II, p. 168.

2 Conant: History of Modern Banks of Issue, p. 24.

modern sense, however, being simply an office for the transfer of the public debt. The government secured funds by means of forced loans levied upon wealthy citizens. Instead of issuing bonds against these loans, as governments do to-day, the amount of specie loaned was credited to each subscriber. These credits could not be withdrawn, but could be transferred from one to another on the books of the bank. No notes were issued or checks used, the entries on the bank register being evidence of payment. The Venetian traders early saw the advantage of this transfer system over that of handling the coin, and voluntarily deposited their specie in the bank and obtained bank credits. Not until 1587, however, did Venice practice the actual business of deposit banking by receiving foreign coins at their bullion value and issuing certificates promising to return bullion of the same value of standard weight and fineness.

The Bank of Amsterdam was established in 1609 to meet the needs of the merchants of that city, which had become the center of the international trade of Europe, and to correct the disorders of private banking, especially those growing out of the accumulation of promiscuous and lightweight coins received in the extensive foreign trade of the Dutch.1 The Bank of Amsterdam accepted all kinds of specie on deposit, crediting the depositors with its real value in standard coin. These deposits could be withdrawn at will or transferred on the bank's books from one person to another. The credits given for these deposits of coin or bullion came to be known as "bank money" and commanded a premium over the debased and mutilated coins in circulation. In the seventeenth century the bank adopted a plan by which a depositor of specie received an equivalent credit of bank money on the books and a "recepisse," a kind of certificate of deposit, which entitled him to withdraw it within six months upon returning the bank money with which he was credited and paying oneeighth of one per cent interest. The depositors had the

1 Dunbar: Theory and History of Banking, Ch. VII.

privilege of renewing the deposit indefinitely at the end of the six months' period, but failure to withdraw or renew forfeited the deposit to the bank. For generations this bank money constituted the basis of the large foreign exchange of Amsterdam. With the establishment of "giro" or transfer banks at Hamburg in 1619, and at Nuremberg in 1621, these written orders came to be used in much the same way as the modern check and were widely employed. These early transfer banks did not make loans or incur any liability beyond the coin and bullion deposits.

The Bank of Amsterdam was not subject to official examination, but its credit was never questioned. Toward the close of the eighteenth century it became known that the bank had not lived up to its obligations to keep in its vaults an amount of coin and bullion equal to the "bank money" outstanding. The small committee of city "fathers" responsible for its administration made no report of its affairs, but in 1790 it leaked out that for years favored depositors had been permitted to overdraw their accounts and that enormous loans of specie had been made to the city and to the Dutch East India Company. These disclosures destroyed confidence, the premium on bankmoney disappeared, and the bank became insolvent. It was finally closed by royal decree in 1819. The first bank of issue was the Bank of Sweden, founded as a private institution in 1656, but converted into a public bank in 1668.

65. Early banking in England. The Jews were probably the first bankers in England. They came to the country. with William the Conqueror. They knew the use of bills of exchange, and accumulated stocks of coins which they loaned at high rates of interest to the nobility and others upon the security of their estates. When the king and the nobles became so heavily in debt that they could not repay their loans, they repudiated the debts and expelled the Jews from the country.

After the expulsion of the Jews, the Lombards took up the banking business, lending at interest and remitting