Banks and their Credit
The origin of banks lies in merchants and landowners who had sufficient wealth to attract thieves, but not sufficient to pay for a guarded vault on their own premises. Banks were in the nature of warehouses in which hundreds of patrons shared in the common expense of securing their gold and silver and giving them the convenience of trading in notes rather than carrying large sums in precious metal. Goldsmiths and silversmiths often afforded the same service to those whose reserves were more modest.
The notion of reserve banking is mentioned: as some customers would leave their metal in banks for a long period of time, and a banker could loan out their reserves - so long as he kept enough to fulfill requests to withdraw, they would be none the wiser. And later, legislation was enacted to legitimize the practice.
Cantillon also mentions the function of a banknote as currency: a note written by a depositor authorizing the withdrawal of silver would be reused in several exchanges before anyone would produce the note at the bank - and even then if the note was redeemed by another depositor, the money could remain in the vault and its ownership reassigned.
The risk to bankers in loaning out sums is that they detract from the amount available for withdrawals and to honor notes - and if they fail to do either, there is legal remedy against them. For this reason many bankers are conservative, and while they generally need no more than 10% of deposits to honor such demands, many choose to keep a reserve of 50% to ensure their solvency.
It's suggested that the level of confidence and trust people have in a bank corresponds to the length of time its notes remain in circulation. In the local market where the reputation of the bank is well known notes tend to remain in circulation much longer, reducing the amount of reserve that is theoretically necessary. The less familiar an individual is with a bank, the more quickly they will seek to obtain the metal.
A banker who deals with farmers and craftsman can develop a keen sense of the pattern of deposits and withdrawals, as withdrawals are made when a crop is sewn and deposits when it is reaped; and when the crop is reaped, the craftsmen for whom it provides the raw material will withdraw money to purchase it and return it as the merchandise is finished and sold.
The most fortunate banker is the one who has rich landowners for clients, and whose fortunes rest with them for very long periods of time, being withdrawn in small amounts to pay the expenses of their estate only when the productivity of their tenants is insufficient in a given season.
It's also noted that larger banks have greater stability and predictability in their reserves, as having a large number of clients, their patterns of withdrawals and deposits will tend to mitigate one another.
However, the author is wary of advocating the consolidation of all banks into a single national bank. While that would have considerable efficiencies, it also brings considerable risk. Fraud and incompetent management can ruin a bank of any size - the larger the bank, the more people may be ruined. When a small bank fail, the economy hardly notices; when one or more large banks fail, it damages many and chills economic activity; but if a single national bank were to collapse, it would be a crippling national crisis.