BANNS OF ISSUE. We have thus far discussed only banks of deposit and discount, and it is now time to consider the special characteristics of banks of issue. Banks of deposit, as has been mentioned, make loans from their capital and deposits. If from capital, the banker has no greater profit by the transaction than if he had lent out his money in any other way, equally safe, and involving the same amount of trouble. if from deposits. the interest he receives, so far as it exceeds the interest, if any, paid to the depositors, and a ratable proportion of the ex pense of carrying on the business of the hank, is pure gain to him. But a banker may give the loan from his own notes, and in that ease his gain is still greater. A bank-note is simply a written promise, by the bank issuing it, to pay to the hearer, on demand, a sum of money—that is, lawful money. The borrower would not accept a loan from a bank in its own notes, unless he believed that it could redeem its promise of pay ing in coin, and that the public were of the same opinion; for the moment that a suspicion arises that the promise will not be made good, the note cease to pass from hand to hand as coin, or to perform all the functions that coin per forms. But when the loan is accepted in a hank's own notes, it is evident that the interest which the bank draws for the loan of its promises to pay is pure profit, except the proportion—as in the other eases—of the expense of carrying on its business, and the expense of the paper and printing of the notes, and any special taxes rest ing upon such issues. In other words, a bank which can get people to pay to it interest for the loan of its promises to pay, draws the same income—barring the comparatively trilling ex pense of manufacturing the written promises— as a bank does which has to provide itself with gold for making its loans. The motive which a bank has to extend its issues on loans is therefore apparent, so long, of course, as it is not com pulsory on it to retain unemployed in its coffers as much in gold as it issues in notes.
But it does not follow that when a bank makes a loan in its own notes for a definite period, it will really obtain the benefit of the whole of the interest on it for that period: for the borrower does not apply for the notes that he may ki.cp them lying idle, b,ut that he may pay them out in making a purchase, or in liquidating a debt; and this, most commonly, on the very day he receives them. If the person to whom the notes are thus paid by the borrower has himself no purchase to pay for, or nn payment to make, he may, the moment he gets therm return them to the hank that issued them, to lie there on deposit. If the
hank pays interest on deposits, as banks often do, then out of the interest drawn by it on the original loan, it will have to pay interest to the depositor of the notes; in other words, the loan is no longer a loan of its notes, but a loan from its deposits. Or, the person receiving the notes from the borrower, may immediately present them to the issuing bank for coin, instead of de positing them. here, too, therefore, the loan that, was made in notes is now converted into a ken of coin that was in reserve from previous deposits, or that was part of the bank's own capital: in which cases, the bank obtains no advantage whatever in having made the loan originally in its notes. It might equally well, so far as profit is concerned, have originally made it in gold from its reserve of deposits or capital. Notes generally find their way back to the bank that issued them through other banks, into which they have been paid as deposits, or for the liquidation of debts due to them. These banks suffer the loss of profit or interest on the amount of the notes thus received by them so haw as they keep them; they therefore imme diately present them to the issuing bank for gold, to replenish their own reserves, or to lend out.
]t will now be apparent to the reader that there are two checks which, under such a sys tem, keep a bank from issuing notes to any ex tent it pleases. In the first place, there must be a demand for its notes by borrowers. It is only to people in good credit, and likely to make a profitable use of them, that a bank will lend its notes, and such people will not take an increase of loans unless trade is increasing, and new op portunities be presenting themselves for profit ably employing the notes borrowed. True, banks, when imprudently conducted, or when deceived in the character of their customers, frequently lend their notes to reckless persons, who over trade them, and become bankrupt. But banks commit this error, when they do commit it, to a far greater extent by loans of their deposits and capital than by loans of their notes. In the second place, the immediate return of the notes, chiefly through other banks for gold, or for other portions of the reserve of the issuing bank, is a cheek to its issuing more notes than it has a reserve to meet. This return of notes through banks is called the exchange of notes—the notes issued by a bank being returned to it in exchange for the notes held by it of another bank.