English Public Finance from the Revolution of 1688: With Chapters on the Bank of England

By Harvey E. Fisk | Go to book overview

CHAPTER V
How the Banks Helped Finance the War
(1914-1920)

FOR the benefit of those who are not familiar with banking operations in England and the United States it may be explained that, as a usual thing, every loan made by a bank results in an increase in the deposits of the bank or of some other bank. If a merchant or manufacturer or other business man borrows at his bank he usually has the amount of the loan credited to his account. The result is that an increase in bank loans is nearly always accompanied by an increase in bank deposits. Therefore, an increase in the deposits of a bank is not necessarily, as is often thought, an index of the increasing wealth of a community but often merely of increasing business activity, or simply of credit expansion. If the increase in loans and consequent increase in deposits is brought about by unproductive borrowing, this gain in deposits may be a sign of financial weakness rather than an indication of growing wealth.

The war financing in England and in America was effected by the use on a large scale of this familiar process of everyday banking. Each loan issued by the nation increased the loans as well as the deposits of the banks. This was due in large part to the fact that in many instances the purchasers of government obligations borrowed from their banks in order to obtain the funds with which to pay the Government. These loans created deposits against which cheques were drawn to the order of the Government--that is, in England, to the order of the Bank of England. The actual payment

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