Or these institutions there are two kinds: banks of deposit, and banks of circulation. Of the first kind, there are but few examples. The most celebrated bank of this description, though not the earliest, was the Bank of Amsterdam, which, in consequence of the inconvenience of the various kinds of foreign money that found their way thither when Holland carried on commerce with all parts of the world, was established to receive these foreign coins on deposit at their fair value; and the receipts for these deposits, issued by the bank, passed from hand to hand as a currency of undoubted credit, and commanded an agio or premium, in lieu of the foreign coins deposited; and, as there was some small deduction or loss in drawing out the money from the bank, it was scarcely ever done. The gold and silver was consequently long steadily increasing, until at length it was found that, after these deposits had been faithfully kept for some centuries, the bank had been tempted to lend out much of this idle treasure to great corporations, to relieve them from pecuniary difficulty, which loans they never found it convenient to repay. The subsequent discovery of these facts destroyed the credit of the bank, and the bank itself. The example has been rarely imitated; and there is, perhaps, no case now existing of a bank of mere deposits.

Banks of circulation, which have been since adopted, are of very great commercial importance, both by their functions and their number.

They are commonly created by a charter from the government, for which they pay a fixed or an annual sum. Being possessed of a large capital, on the credit of this they are enabled to circulate their own promissory notes as a currency. Since their notes are redeemable in gold or silver on demand, they obtain a ready circulation, and are often preferred to specie, from their greater portability, the greater safety and care with which they can be transferred from place to place, and the saving of time in counting large sums.

It is in this substitution of their paper for gold and silver that the bank finds its profit, and the public its advantage; since the banks receive the same interest for their notes as for specie, and the public is a gainer by the substitution of so cheap an article as paper for the precious metals.

Banks of circulation are also banks of deposit - they being the safest depositories of money of all kinds, whether of paper or specie.

They are also banks of discount; that is, they advance the money on the promissory notes of merchants and others not yet due, on discounting the interest, and it is chiefly through these borrowers and depositors that their notes get into circulation.

Though their notes are liable to be returned to them to be exchanged for specie as soon as they are issued, yet it is found by experience that by reason of the superior convenience of bank paper over the precious metals in saving time and trouble, a certain proportion of their issues remains some time in circulation. To the extent then which experience justifies, they issue their paper - aiming always to keep as much specie in their vaults as will suffice to meet the ordinary and probable demands for gold and silver; and it is commonly considered that their issues are within the bounds of prudence, if they have not more than three dollars of paper in circulation for one dollar of specie in their vaults. This, however, does not mean three times the amount of their capital stock, even where that stock was altogether in specie, because as soon as the banks begin to lend, a certain portion of the amount lent is specie, in consequence of which they may reach the limit prescribed by prudence (three times as much circulation as specie,) when they had not lent to double the amount of their capital.

Whenever, by reason of a sudden panic of distrust with the public, or of heavy drafts of coin for export, the specie of the bank is exhausted, or has become very low, the bank must then go into the market to purchase specie; which, being a recourse likely to affect their credit, they never resort to but in cases of necessity.

When prudently conducted, these institutions are very useful in a commercial community. So far as they make paper supply the place of gold and silver, they enable the country to dispense with a large quantity of those metals; and the capital thus saved may be profitably employed in other branches of domestic industry. By means of cheques or drafts on them, their depositors - comprehending the whole mercantile class, and all men of business - are spared the expense of keeping, counting, and transferring their money; and they greatly diminish the amount of idle specie capital - the little rills of individual depositors swelling the stream in the banks - their means of making loans are thereby augmented. They are more likely than individuals to lend their money to borrowers, who can use what they borrow in a way that will be at once safe to the bank, profitable to themselves, and beneficial to the community - and lastly, they can, by their established credit, give seasonable aid to the government in times of sudden calls for large pecuniary disbursements.

But these benefits are sometimes attended with great drawbacks. Banks are occasionally tempted, with the view of increasing their gains, to enlarge their issues to a point which is consistent neither with their own safety nor the interests of the public. The consequence of these imprudent issues, whenever the course of trade causes a great export of specie, is probably the failure of the bank to redeem its notes; which immediately checks their circulation, and subjects the people to the evils of a depreciated currency, that embarrasses all the operations of commerce, and deprives creditors of a portion of their debts. Even where this serious result does not take place, the excess of paper is apt to engender a wild spirit of speculation, and to stimulate private extravagance; both of which are sure to be followed by a reaction that is severely felt by the community. Thus, in 1836, when the banks had received a large accession of specie from abroad, in consequence of special orders of the Government, for the purpose of lessening the circulation of bank paper, and increasing that of specie, those institutions, instead of increasing the specie currency, were tempted to distend their loans and issues to an unprecedented amount, so that the sales of the public lands, having then become a favorite object of speculation, were increased from three millions of dollars in a year to twenty millions. The effect of this redundancy of paper money was, in the following year, a general stoppage of the banks, and an extent of private bankruptcy and ruin which had never been witnessed before.