Banking, Money Markets, Loans, Mortgages, Finance FAQs

Section II

BANKING MACHINERY

Capital, then, is wealth invested in industry, finance is the machinery
by which this process of investment is carried out, and international
finance is the machinery by which the wealth of one country is invested
in another.

Let us consider the case of a doctor in a provincial town who is making
an annual income of about £800 a year, living on £600 of it and saving
£200. Instead of spending this quarter of his income on immediate
enjoyments, such as wine and cigars, and journeys to London, he invests
it in different parts of the world through the mechanism of
international finance, because he has been attracted by the advantages
of a system of investment which was fashionable some years ago, which
worked by what was called Geographical Distribution.[2] This meant to
say that the investors who practised it put their money into as many
different countries as possible, so that the risk of loss owing to
climatic or other disturbances might be spread as widely as possible. So
here we have this quiet country doctor spreading all over the world the
money that he gets for dosing and poulticing and dieting his patients,
stimulating industry in many climates and bringing some part of its
proceeds to be added to his store. Let us see how the process works.
First of all he has a bank, into which he pays day by day the fees that
he receives in coin or notes and the cheques that he gets, each half
year, from those of his patients who have an account with him. As long
as his money is in the bank, the bank has the use of it, and not much of
it is likely to go abroad. For the banks use most of the funds
entrusted to them in investments in home securities, or in loans and
advances to home customers. Part of them they use in buying bills of
exchange drawn on London houses by merchants and financiers all over the
world, so that even when he pays money into his bank it is possible that
our doctor is already forming part of the machinery of international
finance and involving us in the need for an explanation of one of its
mysteries.