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C.D. Warner, et al., comp.  The Library of the World’s Best Literature.
An Anthology in Thirty Volumes.  1917.
Origin of Deposit Banking
By Walter Bagehot (1826–1877)
From ‘Lombard Street’

IN the last century, a favorite subject of literary ingenuity was “conjectural history,” as it was then called: upon grounds of probability, a fictitious sketch was made of the possible origin of things existing. If this kind of speculation were now applied to banking, the natural and first idea would be that large systems of deposit banking grew up in the early world just as they grow up now in any large English colony. As soon as any such community becomes rich enough to have much money, and compact enough to be able to lodge its money in single banks, it at once begins so to do. English colonists do not like the risk of keeping their money, and they wish to make an interest on it; they carry from home the idea and the habit of banking, and they take to it as soon as they can in their new world. Conjectural history would be inclined to say that all banking began thus; but such history is rarely of any value,—the basis of it is false. It assumes that what works most easily when established is that which it would be the most easy to establish, and that what seems simplest when familiar would be most easily appreciated by the mind though unfamiliar; but exactly the contrary is true,—many things which seem simple, and which work well when firmly established, are very hard to establish among new people and not very easy to explain to them. Deposit banking is of this sort. Its essence is, that a very large number of persons agree to trust a very few persons, or some one person: banking would not be a profitable trade if bankers were not a small number, and depositors in comparison an immense number. But to get a great number of persons to do exactly the same thing is always very difficult, and nothing but a very palpable necessity will make them on a sudden begin to do it; and there is no such palpable necessity in banking.  1
  If you take a country town in France, even now, you will not find any such system of banking as ours: check-books are unknown, and money kept on running account by bankers is rare; people store their money in a caisse at their houses. Steady savings, which are waiting for investment and which are sure not to be soon wanted, may be lodged with bankers; but the common floating cash of the community is kept by the community themselves at home,—they prefer to keep it so, and it would not answer a banker’s purpose to make expensive arrangements for keeping it otherwise. If a “branch,” such as the National Provincial Bank opens in an English country town, were opened in a corresponding French one, it would not pay its expenses: you could not get any sufficient number of Frenchmen to agree to put their money there.  2
  And so it is in all countries not of British descent, though in various degrees. Deposit banking is a very difficult thing to begin, because people do not like to let their money out of their sight; especially, do not like to let it out of sight without security; still more, cannot all at once agree on any single person to whom they are content to trust it unseen and unsecured. Hypothetical history, which explains the past by what is simplest and commonest in the present, is in banking, as in most things, quite untrue.  3
  The real history is very different. New wants are mostly supplied by adaptation, not by creation or foundation; something having been created to satisfy an extreme want, it is used to satisfy less pressing wants or to supply additional conveniences. On this account, political government, the oldest institution in the world, has been the hardest worked: at the beginning of history, we find it doing everything which society wants done and forbidding everything which society does not wish done. In trade, at present, the first commerce in a new place is a general shop, which, beginning with articles of real necessity, comes shortly to supply the oddest accumulation of petty comforts. And the history of banking has been the same: the first banks were not founded for our system of deposit banking, or for anything like it; they were founded for much more pressing reasons, and having been founded, they or copies from them were applied to our modern uses.  4
  [Gives a sketch of banks started as finance companies to make or float government loans, and to give good coin; and sketches their function of remitting money.]  5
  These are all uses other than those of deposit banking, which banks supplied that afterwards became in our English sense deposit banks: by supplying these uses, they gained the credit that afterwards enabled them to gain a living as deposit banks; being trusted for one purpose, they came to be trusted for a purpose quite different,—ultimately far more important, though at first less keenly pressing. But these wants only affect a few persons, and therefore bring the bank under the notice of a few only. The real introductory function which deposit banks at first perform is much more popular; and it is only when they can perform this most popular kind of business that deposit banking ever spreads quickly and extensively.  6
  This function is the supply of the paper circulation to the country; and it will be observed that I am not about to overstep my limits and discuss this as a question of currency. In what form the best paper currency can be supplied to a country is a question of economical theory with which I do not meddle here: I am only narrating unquestionable history, not dealing with an argument where every step is disputed; and part of this certain history is, that the best way to diffuse banking in a community is to allow the banker to issue bank notes of small amount that can supersede the metal currency. This amounts to a subsidy to each banker to enable him to keep open a bank till depositors choose to come to it….  7
  The reason why the use of bank paper commonly precedes the habit of making deposits in banks is very plain: it is a far easier habit to establish. In the issue of notes the banker, the person to be most benefited, can do something,—he can pay away his own “promises” in loans, in wages, or in payment of debts,—but in the getting of deposits he is passive; his issues depend on himself, his deposits on the favor of others. And to the public the change is far easier too: to collect a great mass of deposits with the same banker, a great number of persons must agree to do something; but to establish a note circulation, a large number of persons need only do nothing,—they receive the banker’s notes in the common course of their business, and they have only not to take those notes to the banker for payment. If the public refrain from taking trouble, a paper circulation is immediately in existence. A paper circulation is begun by the banker, and requires no effort on the part of the public,—on the contrary, it needs an effort of the public to be rid of notes once issued; but deposit banking cannot be begun by the banker, and requires a spontaneous and consistent effort in the community: and therefore paper issue is the natural prelude to deposit banking.  8

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