19. BANK NOTE ISSUES. In principle a true bank note does not differ from a bank check. The purpose of either is to transfer credit. The granting of credit on the boolcs of the bank precedes the issuing of notes by the bank or the drawing of checks by the depositor; or, at least, the bank pays out a note in discharge of an obligation of some kind, and this is the usual way in which a depositor employs a check. He may, of course, use it as a means of obtaining currency from the bank for his own needs; but here, again, there has been only a transfer of credit from the bank to the depositor in circulating form. If checks were certified, issued in convenient de nominations and so engraved and printed as not to be easily counterfeited or raised, they would be substantially the same as a bank note, for a certified check becomes an obligation of the certifying bank. But a bank note ought to be somewhat better secured than a checic, and for this reason: a check is accepted or not as the person receiving elects; but a bank note, though not a legal tender, must be taken in the ordinary course of trade by merchants and other business men, who cannot discrim inate between different kinds of money in cir culation. Therefore, the notes should be given some extra security, as a first lien on assets or by a guaranty fund.
Experience in the banking history of the United States and other countries has shown that by employing either of these expedients bank notes can be made safe beyond question. The best provision for current safety, and the best check against inflation, is the test of daily redemption, in the standard metal, applied through the clearings.
If banks in the issue of their notes are left unrestricted beyond the simple safeguards above mentioned, the amount of circulating medium in the shape of bank notes will be determined by the wants of trade — that is, by the requirements of those who deal with the banks. In the larger cities deposit credits to be chedced against will best serve; in the farming communities more currency will be called for. How much currency is needed in any one locality, or whether bank notes or checks are most serviceable, must be lef t, not to the bank nor to the government, for only the person desiring to use the credit can cor rectly gauge either its degree or kind.
The early banks in the United States were of diverse kinds, but there were two general sy-stems of note issues, one where the notes were based on bonds, the other where the notes were emitted on the general credit of the issuing banks. The latter—as in Indiana, Iowa, Missouri, Kentucicy, Louisiana, Virginia, and especially in New England—were good, the notes not only being of great service but proving sound. In other States where bonds and stocks were pledged as security, the notes proved unsatisfactory. Generally, in those days, the notes exceeded the deposits in volume. Where, as in New England, under the Suffolk system of redemption, which was a plan whereby the notes were redeemed at Boston through the Suffolk Bank, the notes showed a close correspondence in volume to the de mands of trade. It was found, also, in practice
that redemption was an effectual check against over-issue, and that the banks did not keep the volume of notes up to anywhere near the permissible limit. The experience in New England, as in other sections of the country, established the fact that only simple provisions were necessary to ensure the safety of the notes. Inflation of bank credit—that is, the of more credit than prudence sanc tions— is possible where the coin reserves are inadequate or the bank management reckless, but inflation of bank notes, under a proper system of redemption, is not easy. Banks can not keep their notes in circulation any longer than they are needed. Every issuing bank receiving the notes of another bank will want to have that note redeemed to make place in the circulation for one of its own notes on which it will make a profit; moreover, it will want to have the notes of other banks re deemed to replenish its own reserves upon which its credit structure is based. Private holders of the notes will deposit them as re ceived in the course of trade.
Bank notes save the abrasion incident to circulation of coin, and they are more econom ical than gold certificates, for while the latter are issued only against a like equivalent of the standard metal, bank notes may be issued with safety against a much smaller reserve. Credit bank notes also have one immense ad vantage over notes issued against United States bonds, for while the latter represent an in vestment of an equivalent amount of capital, and are therefore a source of expense even when lying idle in the bank's tills, a true bank note while in the possession of the issuing bank represents no more than the cost of the paper and the engraving. When it is paid out, in exchange for the obligation of others, or against checks of depositors, and a reserve set aside against it in the vaults of the issuing bank, it then becomes of value.
The Canadian and Scottish banking systems afford familiar examples of the issue of bank credit notes. From the imposition of the 10 oer cent tax on State bank notes in 1865 bank credit currency has been prohibited in the United States. Prior to the adoption of the Federal Reserve system (q.v.) notes of Na tional banks were issued against a deposit of a like amount of United States bonds. The Federal Reserve Act provides for the issue of notes to member banks against specified com mercial papers, the Federal Reserve banks emit ting the notes to hold a reserve of 40 per cent against them. These notes, however, are not true bank notes, issued by the banks themselves, but obligations of the government, issued only through special institutions under government control.