Thus the banks are enabled to provide safe keeping for money without charge, and even to pay a low rate of interest upon considerable deposits when times are good. In this way legitimate borrowers and legitimate lenders find a close connection in the bank. A legitimate lender is one who has property not needed at present for his own use. A legitimate borrower is one who can use capital to advantage in production. Any producer may at one part of a year be a lender and afterward a borrower to advantage of everybody. If the banks are thoroughly satisfactory the proceeds of the fall crops may serve the busy manufacturers as circulating capital during the winter. Again, the proceeds of the spring sales of goods and machinery may tide the farmers over the season of growth.
In this way labor of every kind is sustained by labor of every other kind. In all these ways the banking power of a country is extended to several times the coin money in circulation, and that with perfect safety. But it is possible for banks to be tempted through the very perfection of their own credit. The note of an individual has no established market value. A deposit in the bank is valued as cash. It is possible to secure the credit of having a bank deposit by discounting an individual note. If that note is a time note the bank has increased its immediate liabilities by the amount of a nominal deposit, with only a promise to pay in the future to rest upon. To lend to an individual is practically to enter into partnership with his fortune. The fortunes of the group of individuals representing the bank is less doubtful than that of any one person. The borrower in this instance pays in the discount of his note the difference in risk between his fortune and that of the combination. Such deposits purchased upon credit must be distinguished from deposits of cash, lest the bank should nominally increase its power to lend while in fact it has already lent up to its ability. Sometimes such nominal deposits are maintained by persons deeply in debt for the sake of paying a larger rate of interest than is allowed by law.
_Safety of banking._--In times of business prosperity a bank with usual business caution as to customers, is safe for all concerned. And yet, in the very nature of extended credit, it has promised to pay on any particular day, if demanded, far more than it has cash in hand. Its liabilities embrace the whole of its deposits except a small portion made for a definite time, and all its issues of currency subject to redemption. To meet these engagements its immediate resources are whatever currency in any form of coin or bills it may have at hand. This amount, since its profits are made from lending, not from holding, must be small in proportion to its liabilities. The bulk of its means of payment is in notes not yet due, and to be collected when due. Of other property it is likely to have bonds of municipalities or of great corporations, and these are supposed to be a more available form of resources than individual notes, because they usually have a definite market value and can be sold or used as security for loans in any money market. If real estate forms a part of the capital, it can never be made available for immediate use. Hence any bank dealing in mortgages on real estate invests its funds where they cannot be had when wanted. All banking schemes based upon security in land have necessarily failed, because land has no current use in trade.