Right against the banker that his original creditor had. If the transferee is also a customer of the same banker, he may either demand the money; or he may direct the banker to transfer the credit from the transferor's account to his own and this transfer of the Credit is in all respects equivalent to a payment in money It must be carefully observed that in such a case the banker is not in any way the Trustee of his customer's money. He has absolutely bought the money, and may apply it exclusively to his own private benefit or purposes, in any way he pleases: and his customer has no legal ground of complaint against him. If, therefore, the banker loses the money in unfortunate speculations, the customer is only entitled to receive a portion of the banker's property, rateably with other creditors It is not unusual for persons to say that they have so much "money" at their banker's. This expression, however, is entirely erroneous. A customer has no " money at his banker's: he has nothing but a Right of action to demand so much money But a Credit in a banker's book is so universally considered as "money," that if a person makes his will bequeathing "all his ready money," "all his debts," "all his moneys," the sum standing at his credit in his banker's books has been held by numerous decisions in equity to pass under these designations The relation between banker and customer being strictly that of Debtor and Creditor, if a customer were to leave a balance in his banker's hands for more than six years, without operating on it, the Statute of Limitations would take effect, and the banker might, if he chose, refuse to pay it Formerly there were three ways in which the creditor of a banker might transfer his Debt, or Right of action to another person 1. He might give a verbal direction to the banker to pay or transfer the credit to some one else. This, as far as we can ascertain was the usual practice with the Greeks: it was also sometimes done at Rome and it appears also to have been sometimes done in the days of early English banking But in modern English practice these Credits, or Debts, are always transferred by means of written documents 2. Either the banker gave the customer his own promisssory notes, payable to bearer, which he might transfer to any one else 3. Or, the customer might write a Note to his banker directing him to pay the money to some one else. Such a Note was formerly termed a Cash Note; in modern commerce it is termed a Cheque It is obvious that these paper documents do not create any new liability: the liability was created when the banker first wrote down the Credit in his books: the paper documents are only made for the purpose of transferring a liability which has been previously created For various reasons which need not be stated here, the Legislature has deemed it against the public interest that bankers should be allowed to issue their own Notes. By the Bank Charter Act of 1844, bankers who were then issuing their own notes were allowed to continue doing so to a certain limited amount. But no banker was allowed to begin to issue notes after the 6th of May, 1844 consequently, at the present day, except the small amount of bankers' notes which still survive, Banking Credits can only be transferred by means of Cheques The case we have been considering is the simplest between a banker and a customer, and is called a Drawing or a Current Account Some celebrated banks in Europe, such as those of Venice, Amsterdam, Hamburgh, Rotterdam, &c., never went any further than this. They simply bought specie from their customers, and, in exchange, gave them Credits for the amount in money of full weight. Thus they only exchanged Credit for Specie, and Specie for Credit. The Credit they created was exactly equal to the Specie they bought. It is evident that such banks could make no profits. These Credits were called Bank Money The Post Office acts as a Bank in two ways 1. It receives deposits as a Savings' Bank, and pays an interest for their use 2. In exchange for money it grants Post Office Orders, payable at a particular Office, or Postal Orders, payable at any Office. This is genuine banking When "banking" was first introduced into England the usual rate of interest was 10 per cent., and bankers allowed their cus tomers 6 per cent. on their balances. But with the reduction of the usual rate of interest, chiefly produced by the increase of banking and the institution of the Bank of England, these halcyon days for customers soon passed away. And when the usual rate of interest was reduced to 3 per cent., it became impossible for bankers to allow interest on current accounts. Some Joint Stock Banks allow a small interest on the condition that the customer's balance does not fall below a fixed limit for a certain period It had always been a fixed principle of the Banks in Scotland to allow interest on daily balances but this has just been abolished But bankers receive money placed with them for fixed periods, or only repayable after a certain notice, upon which they allow interest, and grant receipts. These documents are termed Deposit Receipts : It is part of the fundamental contract between banker and customer that a customer can transfer his Right of action on a current account to any one else he pleases: but Deposit Receipts are only given payable to the customer himself and so by the common law these Deposit Receipts were not transferable so as to allow the transferee to sue the bank in his own name. But the transferee might always sue the banker in equity. By the Supreme Court of Judicature Act it is declared that wherever the rules of Equity conflict with those of the Common Law the rules of Equity shall prevail: consequently, a Deposit Receipt is now as transferable as a Bank Note or a Cheque just as a Bill of Exchange no longer now requires the words "or order" to make it transferable A most important branch of banking consists in giving customers bills or drafts on distant towns in the same country, or on foreign towns, called Bills of Exchange. This, as we have already said, was originated by the Roman bankers. A "foreign banker" is a banker who, in exchange for money, gives his customer bills upon foreign towns, payable at the exchange of the day 3. Bankers who merely receive money on current accounts can, of course, make no profits by such customers. To make profits they require a different set of customers It is the custom in trade to allow three months' credit on all transactions. In fact, a three months' bill is often designated in trade as "ready money," and for payment in real ready money a discount is allowed. But a three months' bill is inconvenient for many purposes in trade: traders want real ready money. They accordingly go their banker and offer him this three months' bill for sale. If the banker thinks the bill a good one he buys it from his customer: that is, he buys the customer's debt or right of action against another person But when he buys this debt he does not do so with "money" as is so often supposed. He buys this debt exactly in the same way as he bought money from his former set of customers-with his own Credit. He writes down to the credit of his customer the full amount of the bill; and at the same time he charges to his debit the amount of profit agreed upon. And exactly as in the former case the Credit he creates in his customer's favour is termed a Deposit The profit agreed upon and subtracted from the amount of the bill is termed Discount: and to Discount a Bill means to buy a Right of action which one person has against another When a banker discounts a Bill it is a complete Sale of the Debt. He buys all the Rights which his customer had against all the parties to it. He makes his customer indorse it. The effect of this is, that his customer becomes security for the payment of the bill. The banker first demands payment from the acceptor, or principal debtor, and if he does not pay it at maturity, he must within twenty-four hours give notice of the dishonour of the Bill to all the other parties to it. If he fails to do this, they are all discharged but the acceptor still continues liable Having thus bought the absolute Property in this Right of action, the banker may, of course, sell it again to any one he pleases this is termed re-discounting the bill: and if he becomes bankrupt the bill becomes the property of his assignees : In the loose language in which Economic subjects are usually treated, it is commonly said that when a banker discounts a bill for a customer, he makes him a loan on the security of the bill. This, however, is a complete misconception of the nature of the transaction. If the banker merely made a loan to his customer on the security of the bill, it would be the customer's duty to repay the money at the time fixed just as in all other loans it is the duty of the person receiving the money to repay it. But a banker who discounts a bill never, in the first instance, demands payment from his own customer: he demands payment from the acceptor and if the acceptor pays it duly, the customer never hears of, or sees, the bill again. It is only in the event of nonpayment by the acceptor that the banker comes upon his own customer as security The transaction is in reality an exchange, or Sale of Debts: the banker buys a Debt, payable at a future time, by creating a Debt in his customer's favour, payable on demand. This Debt is termed a Deposit: hence a banker does not make an advance out of his Deposits, as is so often alleged; but he makes an advance by creating a Deposit But a banker does, also, often make a Loan to his customer. If a customer wants an advance, the banker discounts his customer's Promissory Note; either with or without other parties as joint securities. He does this in exactly the same way as he discounted a Bill. He buys the Promissory Note from his customer, and in exchange for it he creates a Credit in his favour in his books, which is termed a Deposit. In this case the customer is the principal debtor; and is bound to repay the Loan, and the other parties are only called upon in the event of the customer failing to do so In creating, however, these Credits, or Deposits, the banker must always have strict regard to the quantity of specie he possesses: so as to meet all demands for payment at once: if his specie gets too low, from an unusual demand, he must sell, or re-discount, some of his securities, and so provide a fresh supply of cash All "banking" profits are made exclusively by means of creating these Credits, or Deposits: and, of course, the more Deposits he can create, the greater will be the amount of his profits. We have already, in chapter vi., § 9, explained the different methods by which these Credits can be utilised without demanding payment in money |