10. Limit of note issue has been the subject of much legislation. Bank notes, because of their service as a medium of exchange, have a pe culiar interest to all the people, and they should be issued only under such conditions as make for the greatest public good. This does not mean that their issue should be hampered by much legislation. It has often been well said that every restriction on good banking is a tax upon the public. A community that needlessly restricts the use of credit in any form vol untarily puts fetters upon its industries and places them at a disadvantage in competition with those of other communities, where credit is allowed to develop in a natural way. Only such regulations should be imposed as are absolutely necessary to insure sound banking. In general, it may be said that restriction of note issue should be designed to secure good qual ity, and not to regulate quantity. The quantity of notes should never be arbitrarily regulated, except when necessary for the guaranteeing of good quality. With these principles in mind, let us examine some of the various regulations which are imposed by law on note issue.
The quantity of notes is limited in various ways. A bank may be allowed to issue a certain quantity of uncovered notes with the provision that all issues above that relatively small amount shall be covered dollar for dollar with gold. This is the case with the Bank of England. Notes issued under this, require ment are nothing more than gold certificates, similar in character to our gold certificates, which the Federal Treasury exchanges for gold. While these notes are more convenient than gold and are undoubtedly safe, they are not a good form of bank note, because their supply cannot be increased except upon the deposit of gold. The supply bears slight relation to the needs of business.
An elastic limit may be placed on note issue, the law requiring that a tax be paid on all issues in ex cess of the ordinary amount. The German law im poses a tax of five per cent on the surplus issue. This element of elasticity is intended as a provision for an emergency issue, which will be retired as soon as pos sible because of the heavy tax. If a tax is to be levied for regulative purposes, it would be more sci entific to base the tax on deficiency of reserve, instead of on excessive circulation. Such a tax would tend to regulate quality directly and it would, of course, indirectly regulate quantity. The Federal Reserve Act imposes a tax on deficiency of reserve.
An arbitrary limit may be placed on circulation. The issue of the Bank of France in 1913 was limited to about 6,000,000,000 francs ($1,200,000,000).
This restriction, however, is more apparent than real, as the legislative body has always raised the limit whenever there was any prospect of its becoming ef fective. An arbitrary limit of this kind, placed upon ordinary circulation, would be absurd if effective.
The issue of national banks is limited to an amount equal to their paid-in capital. There is a good reason for this limitation when notes are issued by a large number of independent banks with no central con trol. The justification of this limit is to be sought in the other defects of the banking system, however, rather than in any inherent virtues of its own. In the case of small banks, it is proper that some definite ratio should be established between banking capital and note issues. The capital, especially when double liability is imposed on stockholders, is a kind of guarantee of the obligations of a bank in addition to the ordinary assets acquired in the course of business, and it should therefore bear some reasonable propor tion to all the liabilities of the bank.
11. Other forms of addition to limitation of issue, two other kinds of regulation are ordinarily imposed. The first of these is the require ment of redemption. A good system of redemption serves various purposes. In the first place, it is a means of insuring the parity of bank notes with stand ard coin. It is a test of solvency. Another impor tant service is the retirement of notes as soon as they have performed the work for which they were issued. Every bank should pay out only its own notes, and should return all other notes to the issuing banks for redemption as soon as they are received. Such a sys tem may be voluntary, as in Canada, or compulsory, as in the case of our Federal Reserve banks. Most of the national banks have seldom taken the trouble to return the notes of other banks. A good redemption system is practically impossible where so many inde pendent banks of issue are scattered over as wide a territory as they are in the United States. The an nual redemption of national bank notes has averaged about 50 per cent of the circulation. Under the Canadian system, with a territory almost as scattered, but with fewer banks of issue, the entire circulation is redeemed about twelve times in the course of a year. Under the Scotch system, the circulation is redeemed about twenty times during each year. Swift and easy redemption gives to the notes of the Canadian banks an enviable reputation for soundness. The de tails of the system will be explained in Chapter XIII.