THE BENEFITS 
 
 rW 
 
 BANK-NOTE CURRENCY 
 
 By CHARLES A. CONANT, 
 
 AUTHOR OF “MODERN BANKS OF ISSUE.” 
 
 Reprinted from The Bankers’ Magazine, February and March , 1900. 
 
 NEW YORK: 
 
 BRADFORD RHODES & CO., 
 
 78 William Street. 
 

<U a 
 
 THE BENEFITS OF A BANK-NOTE CURRENCY. 
 
 Having sketched the origin and development of bank notes and defined 
 their functions and qualities,* it is proper to consider their benefits to the 
 community. Some of these benefits are those which naturally arise from 
 the banking function in concentrating and distributing capital without the 
 power of note issue. This power, however, greatly quickens and promotes 
 the process of bringing capital into active use, especially in communities 
 where credit is not well developed, and where a sparse population renders 
 banks less accessible than in commercial centres. The bank note economizes 
 the use of metal, and to this extent diminishes the amount of real capital 
 required for the circulating medium. Bank notes issued under such conditions 
 constitute a loan from the public to the banker, but compensate the lenders 
 by affording a convenient medium of exchange. The benefits of the public 
 are not limited to the mere convenience of the paper in comparison with coin, 
 but include a share in the lower discount rates and greater facilities extended 
 to commerce by the capital saved for productive purposes by the economy of 
 tlfii metals. The note-issuing function, moreover, affords a method of intro¬ 
 ducing other forms of credit, and thus by degrees extends to an undeveloped 
 country all the benefits of the modern credit system. These advantages of 
 bank-note issues may be set forth with more precision and detail under the 
 following heads: 
 
 1. Economy of the precious metals. 
 
 2. The accumulation and distribution of capital. 
 
 3. The reduction of the rate for the rental of money. 
 
 4. The adjustment of the currency to business needs. 
 
 I.—Economy of the Precious Metals. 
 
 The issue of bank notes, even where they are protected by large metallic 
 reserves, results in a considerable economy in the use of the precious metals 
 and in the cost of handling money. In so far as a paper medium of circulation 
 will do the work of money, without involving any question as to its safety 
 and exchangeability, the community gains by the amounts of the metals thus 
 economized. A gold currency is a costly investment, which can be afforded 
 only by countries having saved capital beyond the amount required for 
 maintaining the machinery of production, the purchase of raw materials, and 
 the expense of distribution. The law of marginal utility will almost inevi¬ 
 tably reduce a poor country to the lowest minimum of metallic money 
 required'for exchanges and even below the minimum of convenience, because 
 its available capital will be required for the material and machinery of pro¬ 
 duction. 
 
 To reduce this argument to its simplest terms, it is obvious that a primi¬ 
 tive community, which was barely able by all the efforts of its members to 
 
 Vide “ The Principles of a Banking Currency,” Bankers’ Magazine for May and June, 
 
4 
 
 obtain their necessary food, could not employ any part of its energy or set 
 aside any part of its products for the purpose of obtaining clothing and shel¬ 
 ter. When there came to be a margin of producing capacity, which gave addi¬ 
 tional purchasing power, clothing and shelter would be the first objects for 
 which this power would be exerted. In a more advanced community, a medium 
 of exchange would be found highly desirable, but if such a medium required 
 the expenditure of labor, like the mining of gold or silver, the labor required 
 would be devoted to this purpose only after the necessary requirements for food 
 and the minimum requirements for clothing and shelter had been complied 
 with. In a community still further developed, where organized industry 
 existed, the necessity for a medium of exchange would be so pressing 
 that a small portion of its capital would probably be invested in this 
 direction, even while the machinery of production and distribution was 
 incomplete. There would be, however, a constant tendency to reduce 
 this medium of exchange to a minimum and to part with it to other commu¬ 
 nities in exchange for the tools of production and the comforts of life. By 
 the law of marginal utility the individuals of the community would exchange 
 the products of their labor, first, for the most necessary articles, and then by 
 a graded series of steps, for articles having successively lower degrees of 
 utility. 
 
 An alternative resource is open to communities whose producing power is 
 on the margin of the capacity for investing capital in a metallic currency. 
 This resource is the employment of paper credit. The tendency to devote 
 saved capital to the increase of the goods necessary for comfort and for effect¬ 
 ive competition with other communities, is so persistent that in a community 
 whose saved capital is close to the margip necessary for these purposes, there 
 is a constant substitution of paper credit for metallic money up to the mar¬ 
 gin of safety and even beyond this margin. This tendency is aided by the 
 demand for notes as a tool of exchange, which keeps them in circulation 
 even when the security for them is not of the best. This is the explanation 
 of the abuse of banking credit in comparatively poor communities. How 
 this condition was brought about in the early history of the United States is- 
 thus set forth by Prof. Newcomb: * 
 
 “ In new countries where the rate of interest is high and the .demand for loans great, 
 the temptation is much stronger than elsewhere. Thus arose the ‘ wildcat ’ banking which 
 was so prevalent in our new States during their early history. When a 1 wildcat ’ bank was 
 established, its practice was to loan its own notes on interest. The banker knew that there 
 was little immediate danger of these notes coming back in great numbers, because the 
 community was too much in want of them as money. He was, therefore, tempted to loan 
 them on insufficient security, especially as good security was difficult to obtain under the 
 circumstances. If he could induce his customer to carry the notes to a great distance, the 
 danger of their being returned for payment became still less. So long as people would 
 take his notes, he was thus enabled to draw a high rate of interest on a very small capital.” 
 
 The safeguard against such abuses is the adoption of a prudent banking 
 policy, either by union among bankers or by the mandate of law, which shall 
 not permit the metallic resources of the country to fall below the margin of 
 safety. There is no reason, when this margin is ascertained, with a proper 
 excess for emergencies, why the economy of paper credit should not be availed 
 of to the entire amount consistent with this condition. Such a policy has the 
 
 * “ Principles of Political Economy,” p. 171 . 
 
r 
 
 5 
 
 advantages of affording a country the most effective and economical use of its 
 saved capital. The bank note, although it has been the most useful form of 
 paper credit in poor communities, is the only form which has become a subject 
 of serious controversy, because it has not always been employed with moder¬ 
 ation and skill. In its essence, however, the hank note involves no greater 
 danger in use than checks and deposit accounts, and still less danger when 
 surrounded by the safeguards which have been provided in modern commer¬ 
 cial States in order to permit its circulation as a substitute for money. 
 
 Benefits of an Efficient Currency in Foreign Competition. 
 
 It is not merely a local advantage that a country should have an econom 
 leal circulation. It may directly affect the competition of one nation with 
 another. Assuming that this rivalry is reduced to the closest conditions, it 
 is obvious that the economy of the currency may play the same part in facil¬ 
 itating competition as economy in any part of the machinery of production. 
 A nation which used old and cumbersome woolen machinery could not suc¬ 
 cessfully compete in the world’s markets with one which used the most mod¬ 
 ern and efficient machinery. Other things being equal, a nation which un¬ 
 necessarily invested a large part of its capital in a costly and cumbersome 
 tool of exchange, could not compete upon favorable terms with one which 
 adopted the most economical means of exchange. Undoubtedly the most 
 economical means includes the safest means, but this safety need not be car¬ 
 ried to excess in respect to the currency any more than in the case of machin¬ 
 ery, which might be made unnecessarily cumbersome with the object of pre¬ 
 venting breakdowns. The disadvantage which might result from an exces¬ 
 sive investment of capital in currency becomes obvious if one considers how 
 much capital would be required if the United States or any other country 
 should decide to abolish all forms of banking credit as well as note issues. If 
 every transaction had thus to be settled in coin instead of by checks and com¬ 
 mercial bills, the entire savings of the country for several years would have 
 to be applied to the acquisition of a sufficient supply of metallic money to 
 the impoverishment of every other part of the machinery of competition. 
 It is obvious that the country adopting such a policy would soon cease to be 
 a serious competitor of the well organized industrial nations. 
 
 So far as note issues exceed the metallic reserves held for their protection, 
 they may be considered as an economy of capital. This economy is multi¬ 
 plied many times when the cost of the original investment in a gold currency 
 is supplemented by consideration of the annual interest charge upon it. The 
 cost of maintaining £95,000,000 in gold, silver and copper money in circula¬ 
 tion in Great Britain in 1876 was estimated by Mr. Jevonsat £2,972,000 ($14,- 
 500,000) annually, of which £2,850,000 was for interest upon the principal a 
 the rate of three per cent.* The annual average circulation of European bank 
 of issue in 1898 was 14,668,000,000 francs, which was protected by a gold re¬ 
 serve of 8,182,000,000 francs, leaving an uncovered circulation of about 6,500,- 
 000,000 francs ($1,200,000,000). The interest upon the latter amount at three 
 per cent, would amount to $36,000,000 a year. This is a material saving of 
 capital for application to productive industry. The excess of uncovered note 
 issues was much larger a score of years ago than at present, but the great 
 
 “ Investigations in Currency and Finance,” p. 296. 
 
surplus of saved capital in recent years, and the extension of other forms of 
 credit, by the growth of banks of discount and deposit, have permitted a 
 large investment in the gold supply from the mines without a corresponding 
 extension of credit in the form of notes. 
 
 A considerable saving is obtained from the use of a bank-note currency in 
 a more modest way, even where the volume of notes does not greatly exceed 
 the metallic reserve. This saving results from the fact that the use of paper 
 certificates in ordinary circulation avoids the wear of the metallic pieces. The 
 loss by wear upon a gold currency is very considerable where it is in actual 
 use as a medium of exchange. The coins surrendered by the Bank of Eng¬ 
 land to the British mint for a period of about four and a half years, from 
 March, 1893, to September 30, 1897, included coins under [the legal limit of 
 weight showing a loss of 134,294.8 ounces, or at the mint value a loss of 
 £522,910 ($2,500,000). This represents a loss of about $500,000 per year upon 
 the coins passing through the Bank alone.* A portion of this loss is parall¬ 
 eled by the cost of printing and handling a paper currency, but on the other 
 hand a small gain accrues to the issuers by the losses of such currency. 
 
 Bank notes do not cease to have a high degree of usefulness, even in com¬ 
 munities which have an ample supply of saved capital for investment in a 
 metallic currency. The extent of the use of notes under such circumstances 
 depends to some extent upon the customs of the community, but the notes 
 are more readily transferable than coin, and when exchanged in large amounts 
 between banks and their correspondents cost much less for carriage.! The 
 practical benefits of handling notes instead of coin were set forth in a forci¬ 
 ble manner in a letter written in 1841 by Roger Aytoun, Esq., manager of 
 the Renfrewshire Bank at Greenock, at the time of the proposals to abolish 
 notes for £1 in Scotland. Mr. Avtoun said upon this point : J 
 
 “ At present the business of the Highlands is transacted by means of bank notes of £1, 
 with some larger notes on occasions, and that with the greatest facility. Cattle dealers, and all 
 others having to pay away money to any amount in small sums to a number of people, as in 
 the instances mentioned, prepare themselves by a mixture of notes, some large and some 
 small, accompanied by a few pounds of silver, and everything goes on well. These notes 
 are preferred by the country people before gold, both because they are unable to distin¬ 
 guish between the genuine and base metal, and because coins are more liable to be lost 
 from their pockets than notes; and they have no reason to repent their confidence in the 
 stability of those banks whose notes they have been accustomed to receive for so many 
 years in their transactions. But if small notes are superseded, and gold substituted, it is 
 not easy to see how the supply of gold is to be kept up to carry on the business and trans¬ 
 actions of this country. Should a quantity of it be received into the circulation, it would 
 not remain long, but find its way into the banks, who will not give it out again in bills as 
 
 ♦London “Economist” (July 15, 1899), LVII, p. 1012. The British Government, by the 
 coinage act of 1891, established a coinage fund of £400,000 to cover the cost of the restoration 
 of the gold currency. This fund, with the accumulated interest, was nearly exhausted by 
 the operation of 1898, but was increased by a further charge upon the public revenues under 
 an act of 1893. 
 
 + It is a regular practice of the interior banks of the United States to direct the deposit 
 of gold by their New York reserve agents with the sub-Treasury of the United States in New 
 York, in exchange for the shipment of notes from Washington to the interior point where 
 they are desired. This method is always preferred to the shipment of gold from New York, 
 because the express rates upon gold are nearly double the rate upon notes. The bankers’ 
 express rate, for instance, from Washington to St. Louis in 1893 was $1 per $1,000 on gold, 
 while the rate on currency was only sixty cents per $1,000. Such shipments of currency 
 against deposits of gold in New York were $19,718,000 in the fiscal year 1898. 
 
 $ Gilbart, “The History, Principles, and Practice of Banking,” Ii, p. 222. 
 
7 
 
 they do their notes, and it will immediately become a scarce article in the country. A per¬ 
 son, then, having to pay in small sums, will on every such occasion be obliged to send his 
 large notes to the bank that issued them, perhaps a hundred miles off, to receive gold and 
 silver in their place, to answer his purpose.” 
 
 II. —The Accumulation and Diffusion of Capital. 
 
 One of the great benefits of a banking currency is its service in the 
 accumulation and distribution of capital. This benefit is in some degree the 
 consequence of all banking operations, which attract into the custody of the 
 banks the scattered savings of the community. The progress in this con¬ 
 centration of saved capital in hands which render it productive has been 
 marked within the past century. The savings of capital themselves have 
 greatly increased, partly as the result of the increased productive power 
 derived from the use of machinery, but largely also from the stimulus to sav¬ 
 ing afforded by modern banking methods. The Savings banks and stock 
 exchange securities have become to a large extent the reservoirs of these 
 savings. These institutions are not closely related to the functions of note¬ 
 issuing banks, but the preliminary education in the use of banking credit 
 which led to savings deposits and investments in securities was afforded by 
 these issuing banks. The bank note is the form of credit which under certain 
 conditions is most convenient and performs most efficiently the work of 
 saving the use of metallic money. To quote from the exposition of the 
 Monetary Commission (p. 16) : 
 
 “ A borrower at a bank will usually ask for that means of payment which his situation 
 and the business habits of his community demand. If he cannot get it in that form, his 
 loan is ineffective. Hence the habits of the community determine which form of liability 
 the bank will make use of; it is not determined by the will of the bank. If the latter is not 
 able to conform to the business habits of its customers it cannot loan in that district. In 
 the interest of borrowers, therefore, a proper banking system should be so ordered that it 
 can adjust itself to the needs of its constituency. If banks are given perfect freedom in 
 conducting their business, whether they issue notes or not is a question merely of con¬ 
 venience to their customers ; to a large city bank the privilege of issuing notes is of almost 
 no advantage.” 
 
 Banks having the power of note issue have been, therefore, the pioneers 
 of credit in their respective localities. They have made the owners of capital 
 familiar with the note-issuing system, which required only passive action, and 
 have paved the way for other systems of credit which appealed to the direct 
 initiative of the small capitalist. The operation of this tendency is thus 
 described by Prof. Leroy-Beaulieu: * 
 
 “ It has been demonstrated by experience that the issue of bills, when they have been 
 made under regular conditions, has served in a notable manner to render a banking system 
 popular and to spread banking operations among the public, not so much by the advantage 
 resulting to the banks by the absence of interest on the sums which they procure with their 
 issues, as by the general notoriety given to their establishments, the confidence which the 
 public place in them when they hold their obligations, and the habit which they acquire of 
 recurring more and more to their aid for the various operations of payment and collection.” 
 
 The issue of notes which pass into general circulation permits an exten¬ 
 sion of credit in a community which might not be possible if there was only 
 a metallic currency. The manufacturer who is able to borrow notes from a 
 bank in the course of his commercial business, which are accepted by his 
 
 * “ Traite d'JEconomie Politique III, p. 474. 
 
employees and pass into general circulation, thereby aids the bank in borrow¬ 
 ing the capital of the community without obtaining it by direct deposit. The 
 holder of a bank note under such conditions has in a sense lent his capital to 
 the bank in return for a printed promise to pay money, but he is not a loser 
 by the transaction, since the promise serves all his purposes as a medium of 
 exchange with the same efficiency as metallic money. If he considers the 
 substitute less efficient, it is within his power to demand the fulfillment of 
 the promise by presenting the note for redemption in standard coin. The 
 holder of the note, indeed, so far from suffering by lending his credit to the 
 bank, is a partner with the whole community in the benefits derived from a 
 larger medium of exchange than would be available if bank notes were not 
 permitted and in the increased activity of business transactions which such a 
 medium of exchange allows.* 
 
 This increased activity of business transactions is one of the natural results 
 of the transferability of capital which is promoted by the banking system. 
 The power to issue notes increases the ability of the banker to aid new indus¬ 
 tries and to keep production in useful channels. It is the banker largely who 
 determines the direction of industry by his willingness to make loans to 
 industries which are profitable because they are meeting a demand and by his 
 withdrawal of loans from industries which are ceasing to be profitable because 
 of overproduction and diminished demand. How this process operates is 
 thus set forth by Mr. Bagehot: t 
 
 “It is the money-lender in a primitive community whose capital is first transferred 
 readily from occupation to occupation. Suppose a new crop, say cotton, becomes suddenly 
 lucrative; immediately the little proprietors throng to the money-lender to obtain funds to 
 buy cotton ; a new trade is begun by his help, which could not have been begun without 
 him. If cotton ceases to be a good crop, he ceases to lend to grow it.” 
 
 Advantages of a Banking Currency to the Wage-Earner. 
 
 The freedom of bank-note issues is of more direct advantage in some 
 respects to the wage-earner and small trader than to the manufacturer and 
 capitalist. The latter classes are able to conduct most of their operations by 
 means of other forms of credit and with only a limited use of bank notes. 
 Their individual credit is of such a character that their checks and promis¬ 
 sory notes serve the purposes of a medium of exchange in their larger 
 transactions. To this extent these instruments take the place of credit in 
 the form of notes, because their credit is well known and commands suffi¬ 
 cient confidence among those to whom these instruments are tendered. The 
 bank note, as Leon Say declared in a debate in the French Senate in 1884 on 
 the renewal of the charter of the Bank of France, ‘ ‘ is the deposit account of 
 humble citizens and small merchants. The rich obviate the use of money by 
 taking a check book; the humbler citizen deals in a sort of deposit account 
 on the bank by taking its bills.” J 
 
 The essential benefit of a bank note to the wage-earner or farmer over 
 other forms of credit lies in the fact that he can exchange it almost anywhere 
 for what he wishes without discount. A wage-earner who is paid weekly or 
 
 * “ The entire community is enabled to profit by that which tends to facilitate exchanges 
 and circulation. If the founders of a bank are the first, perhaps,[to benefit hy their creation, 
 the durable success of such an establishment is possible only so far as the public finds an 
 advantage in it, as the bank responds to a real need and well fulfils its office.”—Horn, p. 440. 
 
 + “ The Transferability of Capital,” Works, V, p. 297. $ Arnaune, p. 324. 
 
monthly earnings in a single check often has difficulty in converting it into 
 money in a community where currency is scarce, even though the maker of 
 the check is well known and of unquestioned credit. A small commission 
 is likely to be charged by any storekeeper to whom the check is tendered in 
 payment for the necessaries of life. The situation is still worse for the wage- 
 earner if he obtains only an open credit at the store, whether in return for a 
 check or whether the store is kept by his employers. He is by this mechan¬ 
 ism deprived of freedom in the expenditure of his earnings, and has to pay 
 whatever prices are charged him for goods. By this process country stores 
 and company stores are likely to collect what is really a banking charge, where 
 regular banking facilities are deficient, but which is much larger than would 
 be collected by an organized bank. The absence of proper credit facilities, 
 including especially the issue of bank notes, has imposed heavy charges upon 
 the farmers in the southern parts of the United States and in other coun¬ 
 tries. The lack of credit facilities has even changed the direction of agri¬ 
 culture in many of the Southern States and has depressed the price of cot¬ 
 ton. Cotton is the most negotiable commodity of the Southern farmer, be¬ 
 cause it is the most certain crop and can always be sold at a price, even when 
 prices are depressed by the excessive supply. When the Southern farmers 
 at the close of the Civil War found themselves without money to buy seed 
 and tools for resuming production, they obtained advances from the store¬ 
 keepers and merchants in the market towns upon their growing crops, but 
 these advances were made only upon cotton crops. The farmer thus bound 
 himself to the storekeeper, to buy everything at one place without regard to 
 the price and bound himself to raise cotton, however excessive the supply 
 and however much the price might be depressed. The process is thus de¬ 
 scribed by a writer who has investigated the subject: * 
 
 “ The merchant consented to advance to the farmer, be he owner or tenant, the provis¬ 
 ions, implements, seed, farm animals and other requisites for making a crop, provided the 
 farmer would consent to plant his cultivated land in cotton, to give to the merchant amort- 
 gage or lien on his crop to the extent of his purchases, and pay for these supplies in cotton 
 when the crop was harvested. The cotton prices of the merchandise thus advanced were 
 usually from twenty to sixty per cent, higher than the cash prices of the same articles. But 
 for the farmer there was no alternative. He was glad to accept credit upon even such un¬ 
 favorable terms, trusting that a high price of cotton would enable him to repay his indebt¬ 
 edness and free himself from the necessity of securing loans in the future.” 
 
 The Emancipation op the Farmer. 
 
 This serfdom to the storekeeper would have been remedied to a large ex¬ 
 tent if the first loan had been made with bank notes, which gave their holder 
 the power to make purchases wherever the notes might be accepted. A 
 sufficient supply of circulating notes in a community means that the man of 
 small means, whose transactions are mostly for cash, escapes the payment 
 of high commissions to storekeepers, because he receives, compensation for 
 his goods or services in a form of credit which is readily exchangeable. If 
 the use of capital is obtained in any form by the individual, it is desira¬ 
 ble that it should be in the form most useful to him. For the rich man, as 
 pointed out by M. Say, the check book constitutes such a medium; for the 
 
 *M. B. Hammond, “The Southern Parmer and Banking Reform,” “Sound Currency” 
 (December 1,1898), Y, p. 379. 
 
10 
 
 wage-earner and man of small means the bank note is more convenient, use¬ 
 ful and beneficial. The same distinction lies to a large extent between the 
 city man and the country man. As stated by Mr. Hammond: * 
 
 “The city dweller is content to have his loan in the shape of a transfer of credits on 
 the bank’s books, in such a way as to permit him to check against the account. He has no 
 use for currency except to make minor payments. But the average farmer does not use 
 checks to any considerable extent. He desires cash in exchange for his produce and he ex¬ 
 pects to pay cash when making his purchases. ’ ’ 
 
 The fact that the bank note constitutes a loan from the public to the bank 
 is sometimes made the basis of the argument that the profit derived from this 
 loan should go to the government, representing all the people, rather than to 
 an individual banker or corporation. This argument ignores the utility of 
 the banks in affording reservoirs of credit and channels for its distribution 
 and in meeting the costs of providing the medium of exchange, t The gov¬ 
 ernment cannot distribute credit except through the instrumentality of a 
 bank, and most governments have failed disastrously when they have under¬ 
 taken to do a banking business. 
 
 III.— Reducing the Rate for the Rental of Capital. 
 
 The economy in the use of precious metals, and the concentration of small 
 private capitals which result from a liberal system of bank-note issues, yield 
 an important profit to the community. This profit would inure in the first 
 instance to the banker, who by the note-issuing system obtains the use of 
 private savings at small cost, if he was not compelled to share it with the en¬ 
 tire producing community under the law of competition, which tends to 
 bring to a level the profits in all enterprises. Under the operation of this 
 law the profit resulting from the economy of the metals and an adequate 
 medium of exchange is distributed in such a manner that hardly any mem¬ 
 ber of a producing community fails to receive some share. This is the case 
 with any mechanism which saves labor and capital, even where the device is 
 a patented monopoly. Such an article cannot be disposed of for profit unless 
 the price affords a saving to the users of it. Much more is this the case when 
 competition is open to all comers having circulating capital, as under the 
 operation of a liberal banking law. 
 
 It is worth while to examine somewhat more minutely the process by 
 which a bank-note currency benefits the banker and reduces the cost of man¬ 
 agement of all industries. The banker who keeeps afloat a given volume of 
 notes borrows the amount without interest from the public. He can grant 
 applications for loans only by the possession of capital or the control over it. 
 If he receives large deposits, they provide sufficient capital for making all the 
 loans which are asked of him. If deposits are not received in any consider¬ 
 able amount, either because of the lack of surplus capital in the community 
 or the lack of education in the use of banking facilities, the banker is with¬ 
 out any resources for making loans beyond the amount of his original capi¬ 
 tal. If, however, he has the power to issue notes which are accepted by the 
 
 * “ Sound Currency ” (December 1,1898), V, p. 378. 
 
 t Prof. Nitti says of the note-issuing banks, “not only do they carry on gratuitously 
 great part of their operations, not only are they exposed to the risks and losses of ordinary 
 banks of discount, but, if their organization is not perfect, they run much more considerable 
 risks, considering their large scale of operations.”— Revue d' Economic Politique. ( 1898), XII, 
 p. 393. 
 
11 
 
 public, he can extend his loans to the limit of his power of note issue under the 
 law or under the rules of prudent banking. Such notes only represent another 
 form of credit from that brought to the bank by the producer or trader in the 
 form of commercial paper. It is when the trader is able to pay out these notes 
 for capital or services that they are converted, in a sense, into a loan of capital 
 from the public to the bank. 
 
 The community by the process of bank-note issues obtains the use of a 
 sufficient supply of the tools of exchange without sending abroad capital to 
 the full amount of these tools. It is able by this means to exchange its pro¬ 
 ducts for others which are more beneficial than coined money. The amount 
 which might originally have been invested in a metallic currency remains 
 permanently available for increasing the machinery of production, acquiring 
 a larger supply of raw materials, and producing a larger quantity of finished 
 goods. The paper medium of exchange thus affords a sufficient currency, 
 where one could not be obtained in the form of metallic money, or could be 
 obtained only by serious sacrifices. The tool of exchange is the vital repre¬ 
 sentative of circulating capital. The circulating capital of the community is 
 enlarged by the issue of bank notes—not because bank notes are the creation 
 of capital, but because they give mobility to capital which would otherwise 
 remain in fixed form, or be in such minute subdivisions in the hands of 
 individuals as not to be available for the processes of production. Thus, at 
 low cost, the bank appropriates to its use the scattered capital of small 
 holders and places it at the disposal of the community. How essential it is 
 that this should be done under the fewest possible restrictions is thus pointed 
 out by Prof. Mtti: * 
 
 “If the credit circulation partially replaces the metallic circulation, it is because it 
 -costs less. If the cost of production is artificially enhanced, the advantage which might 
 result from it is reduced or suppressed. It is so much the more harmful, since it is the mass 
 of the users of credit—that is, the mass of the public—who benefit by every reduction.” 
 
 If an adequate mechanism of exchange is obtained for one-quarter or one- 
 half the investment of capital which would be required for a metallic cur¬ 
 rency, it is obvious that a material saving has been made. This saving is 
 likely to prove in practice, even if the proposition cannot be demonstrated 
 mathematically, much more important than an equal saving in any other 
 form of capital. The tool of exchange is so important to the successful work¬ 
 ings of the other parts of the industrial mechanism that a deficiency of it is 
 likely to hamper all branches of industry and a sufficiency to stimulate them 
 into increased producing capacity. When, therefore, a bank-note currency 
 permits an increased offer of the tools of exchange to those who desire to 
 obtain them, the effect upon the rental value of money is plainly felt. This 
 value is determined by the comparison of the supply of the medium of 
 exchange with the effective demand. The effective demand consists of the 
 commercial paper whose owners can afford to pay the rental prices of money, 
 as expressed by the discount rate. This demand must necessarily be shut 
 within narrow limits where the discount rate is so high as to detract mate¬ 
 rially from the profits of commercial operations. The holder of commercial 
 paper may prefer to go without the quantity of the tool of exchange which 
 would be useful to him rather than pay the rental price fixed by the supply. 
 
 * “Revue d'Economie Politique" (1898), XII, p. 821. 
 
12 
 
 His rates of commercial profit may not enable him to pay for a sufficient sup¬ 
 ply of the medium of exchange when the amount is small and the price is high. 
 
 The rental price of money responds, like the price of other goods and ser¬ 
 vices, to the law which Ricardo applied only to the products of agriculture, 
 but which has been found to be an almost universal law of economics—that 
 the price of the entire product or service is fixed by the price at which the last 
 increment of the goods can be produced, or the last increment of service 
 rendered at a profit. Competition among the owners of the supply of money 
 attracts borrowers to those offering money at the lowest rate, in just the same 
 manner as competition among dealers in wheat attracts purchasers to those 
 offering wheat at the lowest price. The effort to maintain a higher price in 
 either case than that fixed by the average profits upon invested capital, other 
 elements in the problem being given due weight, would attract many com¬ 
 petitors, but would in the case of money tend to dry up the sources of bank¬ 
 ing business.* Competition leads each banker who controls a part of the 
 supply to underbid his competitor in order to earn a profit by putting his 
 commodity to use. The fact that this competition is closer and more acute 
 in the case of circulating capital, as represented by the tool of exchange and 
 the command over credits, than in the case of most other commodities, is 
 indicated by the rapid changes in the rates charged for money in organized 
 money markets. These rates sometimes rise in periods of stringency to thirty 
 or forty per cent, a year, but fall within a few days to four or five per cent, 
 when the demand is relaxed and the supply increases. Each owner of circu¬ 
 lating capital or each banker who controls it begins to lower his rental price 
 when he finds that his supply is not absorbed by the effective demand at 
 prevailing rates. 
 
 It is obvious, therefore, that with a given demand in the form of com¬ 
 mercial paper and other legitimate appeals from borrowers, an increase in 
 the supply of circulating capital by a device which converts into such capital 
 the scattered resources of individuals must produce a marked decline in its 
 rental price. If this increased supply brings down the rental price to a point 
 which greatly increases the demand, one of two classes of benefits, and prob¬ 
 ably both, must result for the community. If producers and traders are able 
 to borrow who were not able to do so before, their productive capacity will 
 be materially increased and their benefits will be distributed over the whole 
 community through the payment of wages, increased purchases of materials, 
 and the exchange of their products for increased quantities of foreign pro¬ 
 ducts. If, on the other hand, it be assumed that no new class of borrowers 
 comes into the field, and that the increased supply of the tools of exchange 
 is available only for the use of the original number of borrowers, they will 
 obtain the use of the medium at a greatly reduced cost. Their productive 
 power and profits will be so increased that a portion can be spared for invest¬ 
 ment in a metallic currency, if it is needed. The more probable result, rep¬ 
 resenting the leveling effects of several causes, is that industry will be stimu¬ 
 lated, that the reduced rental for circulating capital will afford the means of 
 
 * “ If the money obtained by discounts was obtained at a price superior to the mean of 
 the profits of all transactions, there would logically be no more commercial transactions, or 
 rather there would cease to be recourse to the bank. Hence, in an ideal regime of the 
 economy of credit, the maximum limit of the rate of discount is determined by the average of 
 profits."—Nitti, “Revue d'Economie Politique ” (1898), XII, p. 377. 
 
13 
 
 production upon a larger scale to an increased number of borrowers, and that 
 the enlarged profits of the community will afford a surplus for obtaining suffi¬ 
 cient metallic currency to form the security of additional note issues to meet 
 the expanding needs of business, without the sacrifice which would be involved 
 in the attempt to maintain a currency consisting purely of metallic money. 
 
 Circulating capital is the most mobile form of wealth. According to the 
 maxims of political economy, it should flow so freely from the point where its 
 rental is low to the point where its rental is high that only trifling differences 
 should exist in any part of the world. This absolute fluidity is not realized in 
 fact because of the friction which attends the movement. There are different 
 degrees of safety in making loans in different communities which affect the 
 rental price of money, there are costs of transportation, and there are differ¬ 
 ences in the notoriety of credit even where the credit itself is equally good. 
 Perfect freedom of movement on the part of circulating capital is hampered 
 also by customs laws, by commissions and profits charged by brokers and 
 bankers, and many other influences. Between two organized markets the 
 difference in the rental price of money should vary only by the cost of trans¬ 
 ferring gold, but even this difference is subject to modification by losses of 
 interest in transportation, the alarm or confidence caused by political events, 
 the hopefulness or doubts of lenders, and by the facility for converting fixed 
 into circulating capital. 
 
 Needless Restrictions on Banks are Taxes on the People. 
 
 These differences in the rental price of money are greatly increased when 
 that freedom which is often assumed for the operation of economic laws is 
 hampered by legal restrictions upon the issue of credit. If the use of checks 
 was taxed ten per cent, in the commercial centers, and no other forms for 
 transferring the titles to money were equally convenient, the rental price of 
 circulating capital would be increased and its movements would be greatly 
 hampered. Prohibitions upon note issues destroy in the same manner the 
 most convenient mechanism of credit in country districts, where the deposit 
 system has not obtained a footing or where banking offices are not conveni¬ 
 ently at hand. 
 
 That the absence or the severe restriction of the note-issuing function has 
 increased the rental price of money is plain from comparison of the banking 
 history of different countries. In England, where the restrictive policy was 
 adopted in 1844, the discount rate was changed 330 times from 1844 to 1890, 
 while at the Bank of France it was changed only 110 times.* The autumn 
 months called almost invariably for an advance in the rate of the Bank of 
 England because of ‘ ‘ the dispersion of money in wages during the summer, 
 and the absorption of money and capital in buying up the produce of the 
 harvest.” t No provision for relieving this demand by note issues is made by 
 the English banking law and every unusual demand for currency has to be 
 met by an increased investment in metallic money, often at heavy cost to the 
 producers of the country. In Germany high discount rates became the rule 
 at the Imperial Bank as soon as the business of the country grew up to the 
 limit of note Issue fixed by the law of 1875. The average rate was under three 
 and a half per cent, from 1891 to 1895, but rose to 3.66 in 1896, 3.806 in 1897, 
 
 * Nitti, Revue d'Economie Politique (1898), XII, p. 383. 
 
 t Jevons, “ Investigations in Currency and Finance,” p. 172. 
 
14 
 
 4.267 in 1898, and 4.98 in 1899. Much worse is the situation in the United 
 States, where the rates in the rural districts have often stood at ten or 
 twelve per cent. That this is not a necessary condition of new countries is 
 shown by the conditions in Canada, which possesses an economical banking 
 currency. 
 
 The fact that the returns upon circulating capital differ so widely in differ¬ 
 ent communities seriously impairs the efficiency of the whole economic sys¬ 
 tem. A high rate for money in a given locality indicates that not all of the 
 circulating capital which could be profitably employed is obtainable. The 
 community is not able to invest the capital required in a costly tool of ex¬ 
 change and is not able to pay the rental price for borrowing an adequate sup¬ 
 ply. Industry is therefore hampered, because its tools are abnormally costly. 
 The differences between the compensation earned by different industries and 
 between different communities indicates a lack of efficiency in the distribu¬ 
 tion of industry, a deficiency in the maximum product which might be ob¬ 
 tained under a proper organization, and a disadvantage in competition with 
 better organized communities. As the proposition is reasoned out by Prof. 
 Yon Wieser: * 
 
 “ Uniformity in the percentages of increment, and a uniform rate of interest, are, 
 where they exist, proofs, economically speaking, of a well-balanced distribution and dis¬ 
 posal of capital. They are proofs that the economically indicated limits of the employment 
 of capital are everywhere equally respected ; that nowhere is there any falling short, and 
 nowhere any overstepping of them. In the principle which demands that the employment 
 of capital shall be guided by the rate of interest, and that all employments which fail to re¬ 
 turn the customary interest be left alone, we find the marginal law brought into one com¬ 
 mon expression as regards all the different forms of capital.” 
 
 IV.—The Adjustment of the Currency to Business Needs. 
 
 The greatest benefit of a banking currency, derived in some measure from 
 the functions already ascribed to it, in the economy of the precious metals 
 and the accumulation of credit, is in keeping the volume of currency con¬ 
 stantly adjusted to the requirements of production and trade. This adjust¬ 
 ment to business needs, coupled with the necessary condition of security, 
 should be the object of every sound monetary system. A bank-note cur¬ 
 rency is especially fitted to fulfill this object, because it is based upon busi¬ 
 ness transactions. A bank note, when issued in pursuance of legitimate 
 banking business, is the offspring of a credit operation. The issue and 
 retirement of notes is the consequence of business transactions and not the 
 cause, t 
 
 Let it be assumed, for the sake of simplicity, that there are no other 
 forms of credit than the discount of commercial paper by the banks and the 
 issue of bank notes, and that all business is done by means of discounts, 
 bank notes and coin. If a loan is made to a trader, which is issued to him 
 entirely in bank notes, he is compelled upon its maturity to find a sufficient 
 amount in bank notes to pay back into the bank the sum borrowed. If 
 there were but few transactions the fluctuations in the volume of notes in 
 circulation would respond visibly to the loans and the payments as they 
 
 * “ Natural "Value,” p. 143. 
 
 f “ The issue of bills in connection with loans for short terms and made rigorously con¬ 
 vertible is only the effect of transactions and not the cause of these transactions.”—Juglar, 
 
 p. 211. 
 
15 
 
 occurred. Wlien a bank is making loans daily to a great number of persons, 
 the effect of a single loan may not be obvious and striking upon the number 
 of notes in circulation. The notes pass into many hands, but if notes and 
 standard coin constitute the sole medium of making payments, a merchant 
 having a loan to repay must surrender to the bank as many notes as he origi¬ 
 nally obtained or an equal amount in coin. In the one case, the outstanding 
 debts of the bank are reduced by the withdrawal of the notes, which are the 
 printed promises of the bank to pay coin on demand. In the other case— 
 payment in coin—the outstanding debts in excess of the reserve are reduced 
 by the deposit of a quantity of coin fully covering the amount of the loan 
 and capable of redeeming in full the notes which may be still outstanding. 
 
 The operation of a banking currency under such conditions results in the 
 automatic adjustment of the amount to the needs of the business. If the 
 number of business transactions is large, many bills of exchange are brought 
 to the bank and many notes are issued. A large volume of business transac¬ 
 tions usually implies increased employment for labor and larger payments for 
 wages and in retail purchases, requiring an increased supply of the circulating 
 medium. A larger volume of notes is absorbed at such times than in times of 
 dull trade. If business transactions become less numerous, the paper presented 
 to the bank for discount becomes less, fewer notes are issued, and the retire¬ 
 ment of the outstanding notes takes place as traders having commercial 
 bills to meet from day to day pay notes for them into the bank. With many 
 transactions consummated daily, the volume of a banking currency is thus 
 kept in close relations with the needs of business. If the number of notes 
 in the hands of the public becomes excessive, they may prefer to exchange 
 them for standard coin by presenting them for this purpose to the bank. 
 They will be led naturally to make such exchanges if the excess of the circu¬ 
 lating medium operates to increase the supply of loanable capital, to depress 
 interest rates, and thereby to attract money to other countries. Metallic 
 money is the only money acceptable for export, and it would be necessary to 
 present notes for redemption in coin in order to meet the demand for export¬ 
 able currency. 
 
 When the deposit system is introduced, another element enters into the reg¬ 
 ulation of the volume of bank notes. If the supply of currency in the hands of 
 the people becomes large, they begin depositing both notes and coin to their 
 credit in the banks. Notes thus received on deposit are retired and are not 
 reissued unless there is a demand for discounts. An excess of currency in cir¬ 
 culation is thus rectified by the reduction of the notes in the hands of the pub¬ 
 lic. The deposit constitutes an obligation of the bank, the same as the notes, 
 and requires a sufficient cash reserve to provide for its payment on demand. 
 The conversion of the note liability into a deposit liability prevents further 
 issues of notes, if the reserve has been reduced nearly to the minimum limits 
 required by law or by sound banking policy. This is usually the case when 
 note issues tend to become excessive. Thus, in any given community, a 
 combination of causes operates to keep a redeemable bank-note currency 
 within the limits set by the requirements of business at any particular 
 moment. An expanding volume of trade results in an expansion of note 
 issues, in the form of loans, while a contracting volume of trade brings notes 
 daily into the bank in payment of obligations which are not renewed. A 
 contracting volume of trade also relaxes the demand for currency and 
 
16 
 
 increases the accumulation in individual hands, from which it is promptly 
 carried to the banks to be deposited. 
 
 The automatic operation of a banking currency not only keeps the circu¬ 
 lation within a country within limits adapted to business needs, but affords 
 the means of keeping its commercial operations in harmonious relations with 
 those of the world. The operation of the foreign exchanges comes into play 
 when there is a greater accumulation of circulating capital in one community 
 than another. The market for such capital is governed by the discount 
 rate. If there is, for instance, an excess of capital upon the London market, 
 the offerings exceed the effective demand, and under the law of supply and 
 demand the rental price of circulating capital falls. Such conditions create 
 an inducement to transfer capital to other markets, where a higher price is 
 paid for its use. This transfer (under the supposed conditions of the absence 
 of other banking credits) would have to be made in metallic money. The 
 banks are the reservoirs of metallic pioney and, if other means of transfer¬ 
 ring capital had been exhausted, their notes would be presented for redemp¬ 
 tion in gold, until the point was reached where there ceased to be any excess 
 in the supply of capital at home over that in foreign markets, and discount 
 rates again tended to become uniform. The volume of the notes in circula¬ 
 tion in the exporting country would thus be reduced by the amount returned 
 to the bank to obtain metallic money for export. 
 
 The conception which has occasionally prevailed, that bank notes maybe 
 issued in excess of the requirements of the community and may expel coin 
 from circulation, is based upon the losses which have been suffered where 
 bank notes have not conformed to the essential conditions that they shall be 
 redeemed in coin on demand and be secured by commercial assets. The issue 
 of notes upon any other basis than commercial assets tends to separate them 
 from commercial business and to deprive the bank-note currency of the elas¬ 
 ticity which it derives from such a connection. Prof. Price, in answer to the 
 question, “In what numbers will convertible bank notes circulate ?” makes 
 this answer: * 
 
 “ The answer is the same as that which has already been given to the parallel question 
 respecting coin. So many bank notes as the public has a distinct want for will circulate, 
 and no more. It is the universal law of all commodities in use, the law of demand and sup¬ 
 ply. Neither bankers, nor Parliament, nor suspensions of the Bank Act, nor the need of 
 borrowers, but the wants and convenience of the public, its willingness to hold bank notes, 
 the number and amount of the specific payments which bank notes accomplish, with a cer¬ 
 tain spare stock as for all articles in use, can determine how many convertible bank notes 
 will remain in circulation, and not be returned upon the bankers for payment. This is the 
 truth of truths for a convertible paper currency. This is so obvious a consequence of the 
 fact that bank notes are tools, and that their quantity will be regulated by the specific work 
 which there is for them to do, that it almost seems a platitude to proclaim it.” 
 
 The basis for the argument of Prof. Price lies in the fact that notes are 
 issued in exchange for commercial paper which is the result of actual business 
 transactions. It is the volume of these transactions which constitutes the 
 primary demand for bank notes, not the bank notes which create transac¬ 
 tions, t The notes constitute the supply of circulating capital which responds 
 
 * “ Currency and Banking,” p. 54. 
 
 + Every market, having to provide for a certain quanity of exchanges, has need only of a 
 certain quantity of instruments of payment.”—Leroy-Beaulieu, “ Traite d ’Economic Pol¬ 
 itique ,” III, p. 567. An increased equipment of the tools of exchange will eventually stimulate 
 the volume of exchanges, but the notes can only be issued as demand for them arises. 
 
17 
 
 to the demand. The note is rarely created without demand and thrust upon 
 the market to find an investment. The note, therefore, does not constitute 
 the demand for loans; it is the loans which constitute the demand for the 
 note. The most speculative demands for currency and credit are horn on the 
 stock exchanges, and they are satisfied by loans from deposits rather than 
 from the power to create notes. The fault lies in the creation of fictitious and 
 speculative loans rather than in the creation of bank notes. The correct reason¬ 
 ing upon the subject is well expressed by Prof. Coureelle-Seneuil: * 
 
 “When attentive study is given to the principles of the monetary circulation which 
 have been set forth, the conviction remains that one or several banks of circulation, opera¬ 
 ting upon a market and committing no faults in their discounts, are never able to issue too 
 many bills, whatever may be their efforts towards this end, because their issues have a nat¬ 
 ural and necessary limit. It may be concluded directly and absolutely that, if banks com¬ 
 mit faults, it is always in their investments and never in their borrowings by notes or other- 
 
 The greatest danger of excessive speculation is found in a rigid currency 
 Issued by the Government rather than in redeemable notes issued by banks. 
 A Government paper currency is non-exportable and does not respond, either 
 by expansion or contraction, to the requirements of trade. When the demand 
 for currency is great, such money is often inadequate; when the demand re¬ 
 laxes, such money is excessive in volume and is either employed by its holders 
 in speculation or presses heavily upon the whole volume of the money of the 
 country, with Ihe result of expelling the surplus by the export of gold. The 
 same lack of responsiveness to the needs of trade is the characteristic de¬ 
 fect of a bank-note currency secured by Government bonds or other securities 
 which are not commercial in their character and of short terms of maturity. 
 Such a form of security has only an indirect relation to the essential character 
 of the notes as contracts to deliver money. To fulfill such contracts, as Prof. 
 J. B. Say well says, “ It is necessary that the bank have in its possession not 
 merely securities of thorough soundness, but those always available and con¬ 
 vertible instantly into money; for a holder of bills who thinks himself likely 
 to be paid in lands or houses will not consent to receive the bills as cash.”f 
 
 The issue of bank notes upon convertible commercial assets affords, there¬ 
 fore, the best means of giving elasticity to the currency and keeping it ad¬ 
 justed to the requirements of trade. What is meant by this elasticity is 
 well set forth by Prof. Dunbar: j 
 
 “It means responsiveness to present increase or diminution of demand—the power of 
 adaptation to the needs of the month, the week, or the day, whether rising or falling. * * * 
 Elasticity implies the the operation of counter forces, in a currency as well as in a steel 
 spring. That a currency may be responsive to demand, it is necessary that the forces, tend¬ 
 ing respectively to expand or to restrict, should be forces at work in the daily business of the 
 bank, where it is brought into contact with the community by the stream of loans, deposits 
 and payments.” 
 
 The Benefits of Elasticity. 
 
 Elasticity is one of the most important qualities of a good currency. This 
 elasticity must be derived, either from such a movement from place to place 
 of a fixed volume of currency as provides the amount required at every given 
 
 * “ Traite des Operations de Banque," p. 224. 
 
 + “ Traite d'Economie Politique,'’’ p. 306. 
 
 $ “Quarterly Journal of Economics ” (October, 1897), xii, p. 14. 
 
18 
 
 point, or from such a capacity for increase or decrease in volume as meets 
 the changing needs of trade. Experience has shown that a fixed volume of 
 currency is not always equal to the demands put upon it and causes unnec¬ 
 essary advances in the rate for the rental of money. In every country there 
 is usually a much greater demand for currency at certain periods than at 
 others, and this enlarged demand happens to be almost simultaneous in 
 several of the chief civilized countries which deal with each other as recipro¬ 
 cal producers and consumers of food products and finished goods. This spe¬ 
 cial demand is most intense in the autumn, when the cereal crops and the 
 cotton crop are harvested and taken to market. At such times there is not 
 only unusual activity in the money centers, but a pressure for currency 
 in the producing sections, which requires an enlarged supply of the circulat¬ 
 ing medium if reasonable wants are to be fully supplied. There are other 
 periodical demands for currency which affect banking accounts in a consider¬ 
 able degree, but the movement of the autumn is the most widespread and 
 prolonged. Mr. Jevons, although an opponent of a true banking currency, 
 admitted the periodical character of this pressure in England in an article on 
 “The Frequent Autumnal Pressure in the Money Market and the Action of 
 the Bank of England.”* A largely increased volume of exchanges requires 
 an increase in some manner in the medium of exchange. This increase may 
 be obtained either by the mechanism of the deposit and check system, by the 
 borrowing of money by one bank from another, or by the issue of bank notes. 
 In the case of a demand for an increased medium of exchange upon the occa¬ 
 sion of special financial operations in the cities, like the issue of a new loan, 
 or the payment of dividends, the medium of exchange furnished by deposits 
 and loans is usually sufficient. How this system operates is thus set forth by 
 the Monetary Commission :f 
 
 “The deposit currency by means of which the largest part of our commercial transac¬ 
 tions is effected is particularly elastic. It expands and contracts automatically with every 
 change in demand. If additional currency is wanted in a strictly commercial community 
 for any of these extraordinary demands—by a railroad, for example, to provide for the pay¬ 
 ment of interest on its bonds—it is secured from an existing deposit, or by means of a loan 
 granted in the form of deposit currency against which checks for the interest are drawn ; 
 and to the extent to which those to whom the interest is paid likewise make use of the check 
 and deposit system, the whole transaction is carried through without the least trouble or 
 friction.” 
 
 While the deposit currency thus serves the purposes of the commercial 
 centers, experience has shown that it is not acceptable and sufficient for the 
 needs of the rural districts and especially the producing and laboring classes. 
 In most countries the bank-note circulation expands automatically to meet 
 the demand for a larger means of conducting exchanges. This is not the case 
 in the United States, because of the restrictive character of the note-issuing 
 system. The country banks borrow regularly from the banks of New York 
 and other reserve cities, and are thereby compelled to divide with these cen¬ 
 tral banks the profits of the autumn business and to charge higher rates than 
 
 * “Investigations in Currency and Finance,’’ p. 160. 
 
 t Report, p. 311. Statistics of payments of interest and dividends on railroad bonds and 
 stocks in the United States in 1897, furnished to the Monetary Commission by “ The Commer- 
 mercial and Financial Chronicle” showed such wide variations as $67,000,000 in January and 
 $14,500,000 in February. 
 
19 
 
 would be the case if they could from their own resources provide the medium 
 of local exchanges. The accounts of the country banks show a regular in¬ 
 crease in the autumn in their loans from other banks, which almost disap¬ 
 pears in the spring.* During January and February, the country is usually 
 emptying its idle money into New York; in March there is a slight reaction, 
 lasting only a few weeks, and from May till August, the tide again flows 
 strongly toward New York. With August the turn comes, and the movement 
 to the interior is again strong and continues until December.t The effect of 
 the withdrawal of capital from the reserve cities is often disastrous to finan¬ 
 cial operations in these cities. This demand has to be met mainly in cur¬ 
 rency, which the New York banks are required to hold as a reserve to the 
 amount of twenty-five per cent, of their deposits. Their losses of currency 
 reduce their reserves and at periods of the greatest strain have often reduced 
 them below the legal limit. J This need not have occurred if greater freedom 
 of note issue had been given to the National banks. They would then be 
 able to meet demands for currency as they are met in Scotland and Canada, 
 without the impairment of their reserves or the undue increase of their dis¬ 
 count rates. The manner in which the note issues of the Scotch banks re¬ 
 spond to the necessity for a larger medium of exchange is thus set forth by 
 Mr. Gilbart: || 
 
 “ In Scotland the lowest point of circulation is in March, and the highest in November. 
 The advance, however, between these two points is not uniform—for the highest of the in¬ 
 tervening months is May, after which there is a slight reaction ; but it increases again until 
 November, and falls off in December. The reason of the great increase in May and Novem¬ 
 ber is, that these are the seasons for making payments. The interest due on mortgages is 
 then settled, annuities are then paid, the country people usually take the interest on their 
 deposit receipts, and the servants receive their wages. There are frequently large sums 
 transferred by way of mortgage. It is the custom of Scotland to settle all transactions, 
 large as well as small, by bank notes—not by checks on bankers as in London. It is re¬ 
 markable that these monthly variations occur uniformly every year, while the amount of 
 the circulation in the corresponding months of different years undergoes comparatively lit¬ 
 tle change. 
 
 The circulation of Scotland is at its lowest point in the month of March, is higher in 
 July, and reaches its highest point in November. In the corresponding months of different 
 years there is but little deviation in the amount of the circulation. These facts prove that the 
 circulation of Scotland does not produce any effect upon prices, nor, consequently, upon 
 the foreign exchanges. It is hardly necessary to adduce evidence in proof of the fact that 
 the prices of commodities do not go on increasing from March to November in every year; 
 and if they do not they cannot be regulated by the currency.” 
 
 * “The National banks located in the Southern States have an aggregate capital of $68,- 
 680 000 On October 6,1896, they had borrowed largely from banks in the East, to assist in 
 handling the cotton crop, $13,548,000. On March 9, following, these loans had been reduced to 
 $2 516 200 They succeeded in borrowing for a part of their needs, but commercial necessi¬ 
 ties required more. With proper banking facilities the necessity for such borrowing now 
 existing would be reduced to a minimum.”-" Annual Report of the Secretary of the Treas¬ 
 ury (Lyman J. Gage), on the State of the Finances, 1897,” p. LXXVIII. 
 
 + Report of the Monetary Commission, p. 320. 
 
 % Thus Mr. A. D. Noyes says in regard to the pressure of 1893: “ On the New York banks 
 the strain was particularly violent. During the month of June, the cash reserves of banks 
 in that city decreased nearly twenty millions; during July they fell off twenty-one millions 
 more. The deposits entrusted to them had been loaned, according to the banking practice, 
 in the Eastern market; their sudden recall in quantity forced the Eastern banks to contract 
 their loans immediately.”-" Thirty Years of American Finance,” p. 191. 
 
 II “ Principles and Practice of Banking,” II, p. 216. 
 
20 
 
 The Canadian bank-note system is also directly responsive to the demands 
 of production and exchange. Its fluctuations are thus set forth by Mr. 
 Root: * 
 
 “As surely and as regularly as the autumn months come around and the inevitable 
 accompanying demand for additional currency begins to manifest itself, does the circula¬ 
 tion of the banks automatically respond; the expansion ordinarily continues until about 
 November, when a maximum, some twenty per cent, in excess of the normal circulation 
 during the summer months, is reached. In consequence of this prompt and adequate 
 response to every legitimate demand of commerce for more of the media of exchange, the 
 conditions in Canada are quite different from those to which we, in this country, are 
 accustomed. As a prominent banker has recently stated it, ‘ Panics for fear of stringency 
 are thus unknown. The Canadians never know what it is to go through an American 
 money squeeze in the autumn.’ ” 
 
 The proof of this responsiveness of the Canadian currency to the needs 
 of business is afforded by the figures of the circulation. While the Canadian 
 banks are permitted to issue circulation to the amount of their capital, 
 which was $63,241,533 on December 31, 1898, their note issues rise during the 
 period of special demand for a circulating medium and are promptly reduced 
 again under the operation of the redemption system when this 'demand 
 declines. The circulation varies by twenty per cent, in the course of the 
 year. This was the case in 1892, when the minimum circulation of May was 
 $31,383,000 and the maximum circulation of October was $38,688,000, only to 
 fall in the following May to $31,927,000. The circulation touched even 
 lower points under the influence of the dull business of 1894 and 1895, but 
 rose on October 31, 1898, to $42,543,446 to fall again on March 31, 1899, to 
 $38,409,227. 
 
 The “Currency” and “Banking” Principles. 
 
 The question has been raised by a number of economists whether the 
 saving of capital due to the employment of a bank-note currency is not 
 obtained at the sacrifice of safety and the real economic interests of the 
 country where such a currency is employed. The fact that systems of bank¬ 
 note issues have in many cases proved defective has led to the conclusion 
 that the theory of a banking currency was itself unsound. The subject was 
 discussed with great warmth in England during the first half of the present 
 century and the lines of battle were then drawn between the advocates of 
 what was called the “currency principle ” on the one hand and the “banking 
 principle” on the other. The advocates of the currency principle laid 
 down the proposition that bank notes should not be issued beyond the amount 
 at which they would fluctuate exactly as a metallic currency would fluctu¬ 
 ate. This limit they found in the issue of notes simply as certificates, fully 
 covered by coin, or only in such amounts without a metallic cover as would 
 constitute the minimum amount below which the circulation was never 
 likely to descend. It was contended that credit is unduly stimulated by the 
 issue of paper notes as a substitute for metallic money, and that in such 
 cases “the whole money of the country, paper and gold, undistinguishably, 
 is depreciated in comparison with the money of other countries.” f 
 
 It is necessary in order to sustain an indictment against the value of 
 a bank-note currency in promoting the convenience and the real economic 
 
 *“Canadian Bank-Note Currency,” “Sound Currency ”(December 15, 1894), II, p. 322. 
 
 + F. A. Walker, “Money,” p. 430. 
 
21 
 
 interest of a community either to show that all credit is in itself injuri¬ 
 ous to the community or that hank notes so far differ from other forms 
 of credit that they threaten a peculiar and excessive danger. The first point 
 hardly calls for serious discussion. The abolition of all forms of credit in 
 business transactions would mean the arrest of the mechanism of modern 
 exchange and the restriction of production within very narrow limits. 
 The consummation of every transaction for cash without contracts for 
 future delivery would require an immense volume of money and would 
 mean also that the prices of all commodities and services would be gov¬ 
 erned by the demand and supply of the moment instead of by sound judg¬ 
 ment as to future supplies. Contracts to pay money for future production 
 would become impossible, and prices and wages would fluctuate violently 
 under the influence of temporary causes, without the steadying effects which 
 would be given by the ability to make contracts for future performance. 
 Nearly all forms of credit are in the nature of contracts to deliver money 
 at some future time. This is the nature of a bank note, a deposit account 
 with a bank, a bill of exchange, and a promissory note. The first two forms 
 differ from the others in the fact that the holder of the contract has the 
 power to demand performance at any time, at his pleasure, instead of on a 
 date fixed by the maker of the contract. 
 
 That there are certain risks involved in modern credit transactions cannot 
 be denied. Production, where it is carried on in anticipation of future 
 demand, may be carried farther in certain cases than if it were carried on 
 only in response to immediate orders; but all such risks are controlled and 
 reduced to a minimum by the regulating force of prices throughout the 
 world and the existence of organized markets, especially on the produce and 
 stock exchanges. Gren. Francis A. Walker, one of the most intelligent and 
 candid of the opponents of a banking currency, dismisses the possibility 
 of risk where paper is reasonably secured by the following comparisons: * 
 
 “Yet though the issue of bank notes on a partial basis of specie under the doctrine 
 of chances, is always, in the nature of the case, at a certain risk, this does not con¬ 
 stitute a fatal objection to paper-money banking, if it be otherwise desirable. Men and 
 communities rightly take the necessary risk of collisions and boiler explosions for the 
 sake of the saving in time and the gain in power which they derive from the use of steam 
 cars and steamboats. So it might be with disasters to which, from the fault of managers or 
 through causes that could neither be controlled nor anticipated, paper-money banking 
 should be found subject.” 
 
 Dismissing, then, the proposition that all forms of credit should be abol¬ 
 ished in a modern industrial community, it becomes necessary to examine 
 the proposition that bank notes constitute a form of credit involving peculiar 
 dangers. The question was disputed in the discussion over the English Bank 
 Act during the first half of the century, whether a bank-note currency fluctu¬ 
 ated in exactly the same manner as a metallic currency. Some of the 
 advocates of such a currency contended that its fluctuations were regulated 
 by precisely the same laws and in precisely the same manner as a metallic 
 currency—that an excess in the volume of currency would correct itself 
 by the presentation of bank notes for redemption and the exportation of 
 the surplus in the precious inetals. Other advocates of a banking cur¬ 
 rency contend that it acts as a cushion for the violent fluctuations in the 
 
 * "Money,” p. 411. 
 
22 
 
 supply of money caused by abnormal demands for the precious metals— 
 that, in fact, a bank-note currency need not and ought not to fluctuate, 
 as expressed by Mr. Nicholson, “exactly as a currency composed of coin 
 only would have fluctuated under similar conditions.” The contention of 
 the opponents of a banking currency has been that it would not fluctuate 
 in response to the movements of the precious metals and that such fluctua¬ 
 tions were necessary in order to apply the corrective influence of the foreign 
 exchanges to excessive issues of paper. 
 
 There are elements of truth in the position taken by each side in this con¬ 
 troversy. It is highly desirable that a bank note currency should be respon¬ 
 sive in some degree to the play of the foreign exchanges and to the volume of 
 metallic money. Entire absence of such responsiveness would result in the 
 same dangers as issues of inconvertible paper money. It does not follow, how¬ 
 ever, that a bank-note currency should be governed absolutely by the move¬ 
 ment of the precious metals in the same degree as if the paper notes were 
 themselves coined money. The law of marginal utility sends the notes where 
 metallic money might not go, thereby equipping a country more efficiently with 
 the tools of exchange, and the demands for metallic money are so peculiar and 
 specific in their nature that they are often influenced by causes which ought 
 not to be permitted to operate at once and with full effect upon the domestic 
 circulation of a country and in fact do not thus operate upon a properly reg- 
 lated bank-note currency. 
 
 Nearly all the various forms of banking credit are contracts to deliver 
 metallic money. They are promises to pay money at some future time. Prof. 
 Jevons, an able advocate of the currency principle, says: * 
 
 “ Every one who promises to pay gold on a future day thereby increases the anticipated 
 supply of gold, and there is no limit to the amount of gold which can thus be thrown 
 upon the market. Every one who draws a bill or issues a note, unconsciously acts as a 
 ‘bear’ upon the gold market. Everything goes well, and apparently prosperity falls upon 
 the whole community, so long as these promises to pay gold can be redeemed or replaced 
 by new promises. * * * 
 
 But foreigners will not hold such promises on the same footing ; and, if the exchanges 
 are against us, the metallic, not the paper, part of the currency will go abroad. It is at this 
 moment that bankers will find no difficulty in expanding their issues, because many persons 
 have claims to meet in gold, and the notes are regarded as gold. The notes will thus con¬ 
 veniently fill up the void occasioned by the exportation of specie ; prices will be kept up, 
 prosperity will continue, the balance of foreign trade will be still against us, and the game 
 of replacing gold by promises will go on to an unlimited extent, until it becomes actually 
 impossible to find more gold to make necessary payments abroad.” 
 
 These propositions contain some truth. The difficulty is that if they con¬ 
 stitute fatal objections to bank-note issues, they also constitute objections to 
 all other contracts for the delivery of metallic money. The condition assumed 
 by Mr. Jevons, in which notes would continue to replace gold until no more 
 gold remained for export, would occur only if reasonable reserves were not 
 kept against bank-note issues. The situation would simply be that more con¬ 
 tracts for the future delivery of money had been made than could be fulfilled. 
 The money market would be in the same condition as the wheat market, when 
 demands for the performance of contracts for future delivery exceeded the 
 capacity of brokers to make delivery. In the case of money, however, the 
 difficulty of creating a corner would be infinitely greater than in the case of 
 
 * “ Money and the Mechanism of Exchange,” pp. 315-316. 
 
23 
 
 wheat or any other single commodity, because the supply of money in the 
 world is subject to narrow fluctuations and is distributed among many com¬ 
 mercial centers, where it is held subject to rental at a price. Sound banking 
 and sound methods of credit undoubtedly require that reasonable regard 
 should be had in the issue of instruments of credit to the ability to fulfill the 
 contracts which are made. This is equally true of other commodities as well as 
 instruments of credit. There are special reasons why the State is justified in 
 requiring guarantees of solvency from those who deal in money, but it is not 
 necessary that these conditions should go so far as to forbid contracts in the 
 form of bank notes for the future delivery of money. 
 
 Mr. Jevons criticized those who advocated the adoption of a true banking 
 currency in England, upon the ground that if they wanted currency, they 
 might obtain gold by giving up capital for it. He declared: * 
 
 “ This metal, again, is only to be had, in the absence of gold mines, by that state of 
 foreign trade which brings it, and does not drain it away again. The principal currency, in 
 short, must be regarded as a commodity, the supply of which is to be left to the natural ac¬ 
 tion of the laws of supply and demand. The unrestricted issue of paper representative 
 notes produces an artificial interference with these natural conditions.” 
 
 The words “natural” and “artificial” have no place in such a discussion. 
 The issue of paper instruments of credit is just as “ natural ” an element of 
 modern commerce as the evolution of stamped disks of gold as the sole stand¬ 
 ard of value. It is true that the use of paper credit modifies to some extent 
 the movement of the precious metals which might take place if no such in¬ 
 struments existed, but the one influence is no more “natural” or “artificial” 
 than the other. It is because the use of such instruments permits economies 
 in the use of gold, and therefore interferes with ‘ ‘ the natural action of the 
 laws of supply and demand ” for gold, that these instruments are of value to 
 the community. The opening of railways interfered with ‘ ‘ the natural ac¬ 
 tion of the laws of supply and demand ” for seats in post coaches, but that 
 constitutes no argument for the retention of the “natural conditions” of the 
 old mode of conveyance. Mr. Jevons appears to share the opinion of General 
 Walker, that the power to borrow notes from a bank is an encouragement to 
 speculation. They reason, more or less unconsciously, as though the entire 
 profit derived from the economy of note issues went to the borrower of the 
 notes, instead of being spread over the whole volume of banking operations. 
 The borrower of notes has to pay for them in the form of discount. If the 
 public, in a period of speculation, is willing to pay for the use of currency by 
 high discount rates, they will be able to obtain it in the form of gold. There 
 is nothing in the possession of a gold currency which prevents the wildest 
 speculation. Gold can be obtained at a price, if it is required, in any country 
 where the speculative spirit runs high, and experience has shown that other 
 forms of credit are quite as useful in promoting speculation as the issue of 
 bank notes. The rental price of gold might be slightly higher than the price 
 of bank notes, so far as either was required in speculative transactions, but 
 the difference would hardly be such as to check the demand for money during 
 a period of speculation. 
 
 Bank notes may facilitate speculation just as other forms of credit may. 
 The proposition that credit should for this reason be suppressed has already 
 
 * “Money and the Mechanism of Exchange,” p. 313. 
 
24 
 
 been dismissed with the consent of Gen. Walker. As a matter of fact, it is 
 generally admitted, even by critics of a bank-note currency, that notes are 
 not the primary cause of speculation. It is simply contended that they pro¬ 
 vide it with a convenient tool. But deposit accounts, the check system, and 
 certified checks also provide such a tool of a much more efficient character 
 and in much greater volume than bank notes.* These other instruments of 
 credit constitute the mechanism of modern wholesale transactions and specu¬ 
 lation upon the produce and stock exchanges. Money, even where bank 
 notes are included under the definition of money, forms but a trifling per¬ 
 centage in the settlement of these transactions. The issue of bank notes, 
 therefore, cannot contribute in any material degree to promoting specula¬ 
 tion in the great commercial centers as credit is at present organized. 
 
 What, then, is the true law of the operation of bank notes upon credit 
 and the movement of the precious metals ? If bank notes do not contribute 
 materially to sustaining speculation, what aid do they give to the business 
 community ? The answer to these questions is derived largely from the law 
 of marginal utility which, under the clear reasoning of the Austrian and Ger¬ 
 man economists, has solved with precision so many economic problems. Bank 
 notes do not respond directly and precisely to the movements of the precious 
 metals, because they find their employment to a large extent upon the mar¬ 
 gin and beyond the margin of the utility of metallic money. If, for illustra¬ 
 tion, notes may be issued upon a reserve of fifty per cent, in coin, the com¬ 
 munity gets the use of twice the amount of currency which it would other¬ 
 wise obtain at the same cost. A community capable of investing its capital 
 in money to the extent of say $50,000,000 would thus be able to command 
 the use of $100,000,000 in well secured circulating notes. If the law required 
 a reserve of fifty per cent, against note issues and the notes outstanding were 
 constantly at the maximum allowed by law, a demand for gold from abroad 
 might lead the paper currency to fluctuate exactly as the metallic currency 
 over its whole volume. 
 
 The usual conditions of banking and credit, however, even where fixed 
 metallic reserves are required, do not involve the issue of notes to the utmost 
 limit allowed by law. Such issues occur only in the poorer portions of the 
 community, where the demand for a tool of exchange exceeds the amount of 
 capital available for investment in such a tool. In the great commercial cen¬ 
 ters there is usually a surplus of metallic money, whose movements back¬ 
 wards and forwards from country to country do not necessarily involve a cor¬ 
 responding reduction of the domestic circulation. The domestic circulation, 
 especially in the districts removed from the commercial centers, remains un¬ 
 impaired, while the portions of the community which are engaged in great 
 speculative movements surrender gold or borrow it back, according to the de¬ 
 cisive question whether the price they get in the one case corresponds to the 
 disadvantage of being without it, or the price they pay in the other corre¬ 
 sponds to the advantage of having it. In these transactions a fraction of 
 
 * The practice of certifying checks where the maker of the check had not even a suffi¬ 
 cient banking credit to cover it attained considerable development in New York during the 
 decade from 1860 to 1870, and became an efficient aid in stock speculation. The Legislature 
 of New York passed a law to govern the subject in 1869 and the Federal Congress in 1882 im¬ 
 posed penalties for 4 over-certification,’ but neither of these laws sought in any way to re¬ 
 strict certification where the maker of the check had a legitimate credit for the amount.— 
 Vide Bolles, “ Financial History of the United States,” III, pp. 365-67. 
 
25 
 
 one per cent, may decide the question whether gold shall move from one 
 commercial center to another. There may be a sudden call in one of these 
 centers for the execution of contracts to deliver gold. There is no reason 
 why these conditions should affect the domestic circulation of the country, 
 except so far as they indicate that the entire structure of credit has been 
 unduly expanded. In that case the pressure will be felt upon all the issuing 
 banks and a contraction of note issues will follow. 
 
 It has to be borne in mind that the transfer of the precious metals is not 
 governed purely by the state of trade. The problem of international ex¬ 
 changes is no longer the simple shipment of gold to cover an excess of impor- 
 > tations of merchandise. Securities often take the place of gold as payment, 
 
 bills of exchange are sent to the country where they mature or are held in the 
 creditor country pending maturity, according to the rate of interest in either 
 country, and gold itself is loaned on credit where its rental is highest. This 
 being the case, a special demand for gold is created on the one hand, which 
 is not dependent upon the domestic transactions of any one country, and a ne¬ 
 cessity is created on the other hand for a domestic medium of exchange which 
 is not controlled absolutely by these temporary and almost arbitrary move¬ 
 ments of the precious metals. Every community ought to take measures to 
 maintain its solvency by retaining a certain minimum supply of the precious 
 metals. This is a matter of sound banking policy or of government regula¬ 
 tion, but it is very far from involving the requirement that the bank note 
 shall be destroyed as an instrument of credit and that the surface of the 
 4 domestic circulation shall be swept by every tempest upon the stock ex¬ 
 
 changes which affects the rental price of gold. The steadying and beneficial 
 operation of a bank-note currency in these respects is thus set forth by Prof. 
 Cauwes :* 
 
 “ The entire community profits by issue, at first because the circulation of bills relieves 
 it from the purchase of a great quantity of metallic money, and then because a mixed cir¬ 
 culation (of bullion, coin and paper) is better regulated, according to the movements of 
 foreign commerce, than a circulation exclusively metallic. If gold and silver were the only 
 money, it would result that every time the importations of foreign goods were in excess of 
 the exportations, money going out of the country would subject the domestic market to a 
 crisis having the consequence of a sudden rise of prices. Paper money acting as an auxil¬ 
 iary to metallic money in quantities varying according to the needs of business, averts the 
 monetary crisis which the operation of the foreign exchanges might otherwise occasion and 
 thus gives more stability to commerce.” 
 
 The movements of a bank-note currency, therefore, do not and need not 
 correspond precisely to the movements of the precious metals in order to in¬ 
 sure healthy financial conditions. The advantage of such a currency will 
 often be found in this very divergence from mathematical relations to the 
 supply of metallic money. In one community the demand for tools of ex¬ 
 change, perhaps for only a temporary purpose, may strain the note-issuing 
 power to the maximum limit of safety. In such a community the power to 
 issue notes will be of the highest value, because the desired service to trade 
 can be rendered for a fraction of the cost of bringing coin or bullion into the 
 community for the full amount of currency required. In another community 
 the lethargy of transactions, or the preference for other forms of credit, may 
 reduce the volume of outstanding notes to nearly the level of metallic re- 
 
 “ Cours d'Economie Politique ,” II, p. 309. 
 
26 
 
 serves or even below that level. Such a condition may permit the surrender 
 of coin or bullion to a community where the supply is insufficient, but 
 without destroying the power to expand the note issue within reasonable lim¬ 
 its when there is an increased demand for the medium of exchange. The 
 greatest use and highest value of the note-issuing function will be found on 
 the margin where coin cannot go because it is too costly. If the blanket of 
 a metallic currency will spread over only those portions of the community 
 well equipped with surplus capital, the use of the note-issuing function will 
 spread a useful fringe of benefits over a wider area and protect the entire 
 community against the inconveniences of a sudden contraction of the 
 metallic cover. 
 
 Value of Note Issues in New Countries. 
 
 There are two classes of conditions under which the privilege of issuing 
 bank notes under the minimum of restrictions is of great service. The first 
 class of conditions are those prevailing in comparatively undeveloped coun¬ 
 tries-, where the supply of capital is not equal to the demand for it for creat¬ 
 ing the machinery of production and means of transportation and where 
 banking offices are widely separated. So pressing is the need for an economi¬ 
 cal paper currency under such conditions, that it has sprung into being 
 beyond the law and outside the law where no legal provision has been made 
 for it. One of the most interesting cases of a successful currency of this sort, 
 which was maintained for several years in the face of hostile legal enact¬ 
 ments, was what was known as “ George Smith’s money,” an episode in the 
 early history of Wisconsin. Wisconsin in 1838, like most of the newer Terri¬ 
 tories of the United States, was without a sufficient metallic currency and 
 without an organized system of banks of issue. The creators of the new 
 money were two Scotchmen, George Smith and Alexander Mitchell, who had 
 been educated in the efficiency of bank-note issues in their native country. 
 George Smith obtained from the Territorial Legislature of Wisconsin a char¬ 
 ter for the Wisconsin Marine and Fire Insurance Company. The bill became 
 a law on February 28, 1839, and authorized the company to ‘ ‘ make insurance 
 upon life or lives and employ such capital as may belong or accrue to said 
 company in the purchase of public or other stock, or in any other moneyed 
 transaction or operations for the sole benefit of the said company.” There 
 was a general clause, usually incorporated in charters, that ‘ ‘ nothing herein 
 contained shall give the said company banking privileges.” This clause was 
 practically ignored and the banking feature of the business done by the com¬ 
 pany soon overshadowed the insurance feature. 
 
 The company advertised to “ receive money on deposit and transact other 
 moneyed operations, in which, by their charter, they are allowed to engage.” 
 Certificates of deposit were issued in sums of $1, $3, $5 and $10, in the form 
 of bank bills. These certificates met a popular want and they were soon found 
 in people’s pockets all over Wisconsin, Illinois, Iowa, Missouri and Michigan. 
 They were redeemed in specie at the central office in Milwaukee, and in New 
 York exchange at the current rate through agencies in Chicago, Detroit, Buf¬ 
 falo, Galena, Cincinnati and St. Louis. The success of “George Smith’s 
 money ” was so great that the jealousy of other bankers was incurred and re¬ 
 peated efforts were made to break down the bank. There was a fight running 
 over several sessions of the Wisconsin Legislature to have the charter forfeited 
 
27 
 
 or repealed, but in these debates no question was raised in regard to the 
 solvency of the institution, and it was asserted without contradiction that 
 its notes were as “good as gold.” When the other banks, the day after 
 Thanksgiving in 1849, attempted to force the bank to suspend specie payments 
 by gathering and presenting for redemption all the notes they could find, Mr. 
 Mitchell directed that the bank be kept open until a late hour of the evening 
 and that depositors and note holders be paid as rapidly as they presented 
 themselves. Every note presented was redeemed even before the reserve sup¬ 
 ply of cash arrived which was ordered from Chicago. The issues of certificates 
 at this time had reached about $1,000,000, having steadily grown in amount 
 from the organization of the bank. The people of Wisconsin voted down a con¬ 
 stitution which prohibited bank-note issues in the State, largely because of their 
 sympathy with the Mitchell bank. When finally Wisconsin was admitted to 
 the Union in 1848, a general banking law was passed, under which the Wis¬ 
 consin Marine and Fire Insurance Company reorganized. The advantages of 
 this currency, the spontaneous outgrowth of business needs, have been graph¬ 
 ically set forth by Mr. Root: * 
 
 “It is obvious that ‘ George Smith’s money,’ which played so large a part in the early 
 settlement of the Northwest, took the place of other kinds of money, and especially of specie, 
 for which the products of the country would have otherwise been sold. On condition that 
 the currency should always be redeemed in specie, this was a good thing for the holders of 
 Smith’s money as well as for Smith ; that is, it was an advantage to the public. It was an 
 advantage because it was more convenient to handle and carry and count, while it performed 
 all the local exchanges equally well. It introduced the principle of barter on a large 
 scale. Whatever work bank checks would do in the city of Milwaukee, George Smith’s 
 money would do over the greater part of Wisconsin, Illinois, Missouri and Iowa. It enabled 
 the local exchanges to be carried on without specie. * * * 
 
 In the fall, when the crops began to move, there was no lack of money for legitimate 
 trade, because it was as easy to put out these certificates at one time as at another. In the 
 winter, when lake navigation was closed, the certificates answered all the purposes of a local 
 circulating medium. In the spring, when the steamboats began to move, bringing new set¬ 
 tlers and cargoes of goods, the certificates came back to headquarters mainly for the pur¬ 
 chase of New York drafts, after which they took their usual round again.” 
 
 A like device for escaping the restrictions imposed by a too narrow note¬ 
 issuing system is that of the Cheque Bank in England, which was instituted 
 after the Bank Act of 1844. Money was received by this bank on deposit, 
 and books of checks were issued for even denominations, which might be 
 filled in for less than the denomination, but not for more. The face value of 
 the checks issued did not exceed the depositor’s credit, so that the receiver of 
 such a check had the assurance of the bank that the depositor’s account was 
 not overdrawn. Such checks were made payable by the Cheque Bank only 
 through some other banker and not at the counter of the bank, thereby 
 escaping the prohibition of the law against promissory notes payable to 
 bearer on demand. The checks passed between individuals for cash, and 
 the Cheque Bank established relations with some 1,500 domestic and foreign 
 banks which agreed to receive and cash its checks. Prof. MacLeod expressed 
 the opinion that these checks, if not a violation of the letter of the law, were 
 at least a violation of its spirit, and, if not interfered with, would open the 
 door wide for any amount of issues of checks capable of circulating as money, 
 
 * “ Sound Currency ” (April 15, 1898), V, p. 120. All the facts given are from Mr. Root’s 
 paper. 
 
by any bank in the Kingdom.* In this view he is correct, and such a device 
 would undoubtedly have been widely adopted if the education of the Eng¬ 
 lish people in the use of other forms of credit had not made it comparatively 
 unnecessary. The success of the Cheque Bank well illustrates the principle 
 that the real needs of a community will usually And spontaneous relief along 
 the lines of least resistance and will often circumvent repressive laws. 
 
 The issue of bank notes under the minimum of restrictions is of peculiar 
 value in periods of panic, even in countries otherwise well equipped with the 
 mechanism of credit. The demand on such occasions is for some article 
 which is readily exchangeable and which will be accepted in the fulfillment 
 of contracts to deliver money. Such contracts under normal business condi¬ 
 tions are so generally cleared against each other that their fulfillment is not 
 often demanded. These conditions change when confidence is impaired, 
 because a great void is then caused in the usual mechanism of credit, which 
 bank notes are called upon to fill. The issues of bank notes which then occur 
 are abnormal in their character, are not required beyond the period of acute 
 pressure for currency, and may be issued by a sound institution without 
 much regard to the exact proportion of notes to the metallic reserve, so long 
 as the reserve is sufficient to meet all demands and inspire confidence in the 
 solidity of the institution. It is the recognition of the peculiar character 
 of this demand for currency in periods of panic which led to the provisions 
 of the charters of the Imperial Bank of Germany, the Austro-Hungarian 
 Bank, and the Bank of Japan, that notes might be issued without the 
 increase of the metallic reserves when they paid a tax to the Government at 
 the rate of about five per cent, a year. The undue restriction of the normal 
 note-issuing function in these countries has compelled resort to this power 
 on many other occasions than those of actual panic, t but upon all these 
 occasions the power to issue notes, even under a heavy penalty, has proved 
 useful to the business community. 
 
 The utility of the power to issue bank notes without fixed limits in meet¬ 
 ing the abnormal demand of a panic has been clearly shown on all of the 
 occasions of crisis which have swept the London money market within the 
 present century. The Bank of England was strong enough, only a short 
 time after its resumption of cash payments, to stay the panic of 1825 by the 
 free issue of its own notes. The display of stacks of £1 notes upon the coun¬ 
 ters of the Gurneys at Norwich was sufficient to arrest the run upon their 
 bank 4 The Bank came to the rescue of the money market in a similar man¬ 
 ner in the crisis of 1847, again in 1857, and again in 1866. There never was 
 a question on any of these occasions of the value of the notes of the Bank 
 as the equivalent of money. The only question which arose, under the 
 charter of the Bank, after the restrictive act of 1844, was the authority to 
 
 * “ There can be no possible doubt that these instruments, these crossed bank notes, are an 
 utter and complete violation of the manifest purpose and intention, not only of the Bank 
 Charter Act, but of all our monetary legislation for the last century. For what is easier 
 than for the bank and its customers to agree to make these checks for £1, and put them 
 into circulation? Then we have at once£l banknotes. So also the checks for 10s. and 5s. 
 are the old silver notes back again. If the Cheque Bank may do this with impunity, why 
 may not every other bank in the Kingdom do the same?”—“Theory and Practice of Bank¬ 
 ing,” II, p. 376. 
 
 + In Germany notes were issued subject to the tax during sixteen weeks of 1898, and such 
 issues stood on December 31 at 282,955,280 marks ($70,000,000). 
 
 $ MacLeod, “ Theory and Practice of Banking,” II, p. 118. 
 
29 
 
 issue a sufficient amount of notes to meet the demands of the commercial 
 community. The Bank Act greatly hampered the issue of notes, but author¬ 
 ity was given to the Bank by the Government on each of these occasions to 
 disregard the limits of the law and issue as many notes as might be required. 
 The mere fact that the authority to issue notes was given, and that currency 
 could be had by solvent borrowers, was sufficient to stay the tide of panic in 
 1847. Notes which had been hoarded, under the impression that the limit of 
 issues fixed by the law would soon be reached, came pouring from their 
 hiding places, gold which had been stored in deposit vaults was returned to 
 the banks for deposit, and both the metallic and banking reserves of the 
 Bank of England rapidly rose to safe proportions. A similar experience 
 accompanied the crisis of 1857, when £2,000,000 in notes were actually issued 
 above the legal limit. The crisis of 1866 was met in a similar manner. The 
 Bank of England could hardly have continued to meet its liabilities for 
 another day if the Chancellor of the Exchequer had not announced in the 
 House of Commons on the evening of May 11—“ Black Friday ”—that the 
 Government had addressed a letter to the Bank authorizing the suspension of 
 the note limit.* The panic was again checked by the knowledge that a 
 medium of exchange could be obtained by solvent borrowers. 
 
 The power to issue notes without a rigid limit, even if they are restricted 
 to a fixed relation to the metallic reserve, is of value in periods of panic. 
 It usually inspires confidence at such times for the great note-issuing banks 
 to borrow gold from abroad. This was done by the Bank of England on the 
 occasion of the Baring failure in 1890, when £3,000,000 was obtained from 
 the Bank of France upon the security of exchequer bonds and £1,500,000 
 was obtained from St. Petersburg. The crisis of 1890 was prevented from 
 degenerating into a panic by a combination among the leading banks,t so 
 that there was not much special call for currency to fulfill money con¬ 
 tracts, and there was no tendency to withdraw deposits from the banks because 
 of distrust. If such a panic had occurred, accompanied by a demand for 
 deposits'from the banks, the importations of gold would have proved a defec¬ 
 tive as well as insufficient resource for meeting the demand. It would have 
 been otherwise if the gold had been availed of under such circumstances 
 as a reserve against note issues to the amount of twice or three times its 
 value. The potency of the gold would then have been doubled or trebled in 
 amount and its real efficiency would have been increased in a much greater 
 ratio by reason of the general preference for notes over coin. 
 
 Charles A. Con ant. 
 
 * Gilbart, II, p. 354. One of the representatives of the joint-stock banks is reported to 
 have said to the representative of the Bank of England, at a meeting of the leading bankers 
 just before midnight, before the limit of note issue was removed, “ I can draw a couple of 
 checks to-morrow morning which will shut you up at once.” 
 
 t Mr. Lidderdale, the Governor of the Bank of England, secured an agreement among 
 the joint-stock banks of London, the leading provincial banks, and the joint-stock banks of 
 Scotland to guarantee the liquidation of the Baring indebtedness to the amount of £15,000,000. 
 Vide MacLeod, “ Theory of Credit,” II, p. 836.