Complex Bank System. - William Stanley Jevons, Money and the Mechanism of Exchange [1875]
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Money and the Mechanism of Exchange (New York: D. Appleton and Co. 1876).
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Complex Bank System.
A large commercial town usually possesses several or many banks, each with its distinct body of customers. The mutual transactions of each body will, as before, be balanced off in the books of their common bank, but the larger part of the transactions will now be cross ones, resulting in a claim by one banker upon another. The probability is very great, indeed, that each banker will have to receive, as well as to pay, each day; but it does not follow that he will pay to the same as those who are going to pay to him. The complexity of relations becomes considerable; thus among fourteen banks there are (14 × 13)/2 or 91 different pairs which may have mutual claims, and among fifty banks there would be no less than 1225 pairs. The result is, that P might happen to have a considerable balance to pay to Q, and yet might be going to receive about the same sum from R or S. The actual carrying about of coin under such circumstances would be absurd, because a manifest extension of the book-credit system at once meets the difficulty. The several banks need only agree to appoint, as it were, a bankers' bank, to hold a portion of the cash of each bank, and then the mutual indebtedness may be balanced off just as when a bank acts for individuals. In the figure we see four banks, P, Q, R, S, each with its own body of customers, but brought into connection with each other by the bankers' bank, X.
P need not now send a clerk to present bundles of cheques upon Q, R, and S, but can pay them into the central bank, X, where after being placed to the credit of P and sorted out, they will be joined to similar parcels of cheques received from Q, R, S, and finally presented at the banks upon which they are drawn. Thus all the payments made by cheques will be effected without the use of coin, just as if there were only a single bank in the town. What each bank has to pay each day will usually be balanced pretty closely by what it has to receive. Such balance as remains will be paid by a transfer in the books of X, the bankers' bank.
It is not precisely true that there is in any English town a bankers' bank, which thus arranges the payments between banks. The accountants' part of the work is carried out by an institution called the Clearing House, managed by a committee of bankers, and the Bank of England is employed to hold the deposits of the bankers, and make transfers which close the transactions of each day. The organization of the Clearing Douse will be described in the next chapter.
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