It is to be noted that the restrictions which defeat elasticity of bank notes may not defeat elasticity of the country's aggregate currency; elasticity may be secured through issue of government paper money or by deposit currency. England, for example, has a very inelastic bank note system, but its deposits expand and contract freely to conform with business needs. If the deposit check system is thoroughly understood throughout the country, there is relatively little need of an elastic note issue. In actual practice, however, large industrial classes, such as wage-earners, and large geographical areas, such as the agricultural South and Northwest of our own country, find checks inconvenient, and the seasonal demands for means of payment are best met by an elastic note issue. As deposit banking permeates the United States the evils of the inelastic national bank note are reduced.
Existing Systems of Protecting Bank Notes Differences of historical, political, and economic nature in the leading commercial countries of the world have resulted in various adaptations of the methods of protecting bank notes, as given in the foregoing section. These adaptations may be briefly sum marized as follows.
Bank Notes in France The Bank of France has a monopoly of the note issue privilege. The notes are a legal tender for all debts. They are secured by the general assets of the bank, but they are not given a prior lien on these assets. The law does not compel the bank to keep any specific reserve, but the bank has been conservative and has accumulated a large specie reserve of gold and silver. Besides its specie reserve the bank's assets normally contain large quantities of prime commercial paper. The issue of bank notes takes place ordinarily through the rediscounting of two-name paper, in large part of small denominations, to which the banking house that sells the paper adds a third name. The war had the effect of loading the assets with government securities. From time to time the government fixes a maximum figure for the circulation of these notes, but as the figure is usually raised in advance of needs, this is not a real restraint. While the bank may redeem in either gold or silver, a stubborn refusal to pay gold would create adverse public sentiment; the bank, accordingly, offers to make gold payments at a premium in currency when such con cession seems advisable, and in this way it controls the exporta tion of gold and protects its reserves. The deposit business in France is very small indeed, but elasticity of both notes and de posits is well attained.
Bank Notes in England The Bank of England, to which the note issue privilege sur rendered by other banks accrued under the Bank Act of 1844, the "Peel Act," has a practical monopoly of the bank note issue in England. The English bank note system is based on the currency
principle. To the amount of L18.45 million the issue is secured by government and other securities, this portion of the issue being called the "uncovered" issue. All in excess of that amount is secured pound for pound with gold.
The Bank of England is divided into two distinct parts—the Issue Department and the Banking Department. The Issue Department is charged with the sole and exclusive function of the issue and redemption of bank notes; the Banking Department handles discounts, loans, and deposits. The Banking Department procures notes from the Issue Department in the same way as does any holder of coin or bullion, that is, by the exchange of gold for notes. In making loans the Banking Department gen erally credits the borrower with deposits, but it may pay out notes or gold; the same is true of any payment by the Banking Department. A large part of the outstanding bank notes are found in the vaults of the Banking Department and constitute a portion of its reserves; they simply represent so much gold kept in the Issue Department.
Bank notes of the Bank of England may be used as reserve by the other banks whose reserves consist of "Cash and Due from the Bank of England." The "Cash" includes many notes of the Bank of England, and the portion described as "Due from the Bank of England" consists largely of balances carried with the Bank of England by the local bank.
The uncovered issue of the Bank of England is fixed in amount, but the covered issue, which consists really of certificates of deposit, can expand indefinitely. With every increase of the covered issue, the per cent reserve against the total issue is in creased. As a result the bank notes are absolutely safe but wholly inelastic; to increase the total volume of the country's currency by the method of note issue is impossible, since gold is simply exchanged for an equal amount of bank notes. In financial crises the system breaks down; five times it has been found nec essary to disregard the legal limitations on the uncovered issue. On such occasions Parliament suspends the Law of 1844 and so enables the Banking Department to carry to the Issue Depart ment more government securities in exchange for bank notes. These suspensions are temporary, and as soon as the crisis is passed the Banking Department recovers its securities by paying bank notes. Because of the limitations on bank note issue and because of the greater utility of deposits, deposit banking largely supplants note issue in England.