THE ‘CREATION’ OF BANK MONEY

We have seen in the preceding chapter how the transference of claims to money may be just as serviceable for the settlement of transactions as the transference of money itself. It follows that members of the public, when they have assured themselves that this is so, will often be content with the ownership of transferable claims without seeking to turn them into cash. Moreover there are many conveniences and incidental advantages in handling bank money over handling cash.

A modern bank is an institution which is made possible by the establishment of habits of this kind. Historically a bank may have been evolved from a business which dealt in the precious metals or in the remittance of money from one country to another, or which offered its services as an intermediary to arrange loans or for the safe custody of valuables, or which borrowed the savings of the public on the security of its reputation and then invested them at its own discretion and at its own risk. But we shall be concerned in what follows with banks of the fully developed modern type existing as going concerns.

Such a bank creates claims against itself for the delivery of money, i.e. what, hereafter, we shall call deposits, in two ways. In the first place it creates them in favour of individual depositors against value received in the shape either of cash or of an order (i.e. a cheque) authorising the transfer of a deposit in some bank (either another bank or itself).