Two additional forms of credit may be con sidered together, as their economic character is identical, whatever their legal and political differ ence. Bank-notes and government issues of paper, or of subsidiary coinage which is valued at more than the worth of the bullion, are alike representatives of credit. If convertible in stantly upon demand into standard money, they s are the equivalent of money, in the same way that checks are the equivalent of wealth deposited with the banker. They permit an economy of more expensive kinds of money and are there fore useful. For the same reasons that the banking system releases a portion of the capital of a community for productive purposes, repre sentatives of credit virtually increase the cur rency by whatever amount of money need not be kept constantly on hand for their redemption. If not legally convertible into standard money, they may still circulate side by side with it, pro vided the quantity is not excessive. Whenever the total quantity of money, including the rep resentatives of credit, exceeds the demands of business, the high prices which result will ne cessitate an exportation of money. Naturally it is the standard money that will be driven out of If the inflation continues after the diminution of the currency caused by the disap pearance of the money which can be used abroad, prices may continue to rise to any extent, as the international regulator of prices has been ren dered inoperative. There is no other remedy ex 1 See p. 228.
cept the calling in of a portion of the excessive issues until there is again an equilibrium be tween the volume of business and the volume of money.
Bank-notes resemble ordinary promissory notes, but are without interest and payable upon demand of the holder. Where there is no arbitrary restriction upon the issue of such notes, the amount which any particular bank can keep in circulation will depend chiefly upon the average time allowed to lapse between issue and presentation for payment. This in turn
depends in part upon the credit of the bank and the willingness of people in general to receive the bank-notes as money, and in part upon the requirements for business for a medium of ex change. If money is scarce, the bank-notes will remain longer in circulation, the credit of the bank remaining the same. This is equally true of government issues, if they are payable on demand, and there is ready access to the places where they may be presented.- This ele ment of the currency is a useful one as a means of assuring greater elasticity than is provided by the use of coin, and its *usefulness is greatest when the banks, which are entitled to issue notes, are most widely distributed and thus most directly in contact with actual business 1 The dangers from such an elastic currency should not be overlooked. Professor Hadley thus describes what may occur. "If it becomes easy to obtain the accommodation at the banks, a large number of transactions will be made on credit. The checks which result from the creation of such hank credit fur nish a medium of exchange almost as efficient as money. The over-abundance of a medium of exchange in this form will make it easier to get money than it was before. This will tend to raise prices.... This may continue until the liabilities of the banks become disproportionate to their reserves. When the public perceives this, there is a sudden shock to confidence and a withdrawal of accommodation which causes far greater distress than would have resulted had the facilities for pay ment by credit been less elastic at the outset."—Economics, PP. 246-247.