Besides issuing its notes in loans, a bank may issue them in repayment of deposits. In this case, there is the same profit to the bank as in the other case. The hank gets the profit which it makes on the money which was originally de posited or lodged with it, without having to pay interest to the persons who made the deposit or lodgment ; the deposit, or money lodged, having now been repaid in its notes. But here, too, these notes are equally liable to he returned to the issuer as when they are issued on loans.
Of all the notes issued, in whatever way, by banks, a certain amount is not returned to them, but is kept in circulation, being what is required by the necessities of the public for use as money, passing from hand to hand. It is of course on this portion that the banks make their profit ; and, in consequence of this profit, they are able to afford banking facilities to the public more cheaply than they could otherwise do. The profit is just the interest on the notes in eireula tion—less the expense of manufacturing the notes, a ratable proportion of the expenses of conducting the banks, and the loss of interest or profit on an unemployed reserve kept from pru dence, or by the requirement of law, to meet a return of notes, The interest on the volume of bank-notes in circulation is paid by the per sons who originally borrowed these notes from the banks, and who have not repaid them; or if the banks have repaid deposits with the notes, the interest is paid by those to whom they lent what was originally these deposits.
In the foregoing discussion of the nature of bank-note issues, it has seemed hest to proceed upon the assumption that the issue of notes, and the conditions of the issue, such as the amount of the reserve, lay wholly in the discretion of the banker. This is the so-called 'free'-banking
system, in which the value of the bank-note depends upon its instant redemption in coin, where the whole organization of the system is such that the bank will, in fact, be called upon to redeem its notes frequently. But the issue of hank-notes in modern States is not thus left wholly to the discretion of the banker. In the first place, the issue of such notes is not uni versally permitted, lint is restricted, as a rule, to chartered institutions. In these again, the issue is frequently subject to legal restrictions, affecting, for instance, the amount of the reserve. Two general types of bank-notes may be said to exist: (1) those issued upon the general assets of the banks being those contemplated in the foregoing discussion, and (2) those issued upon the deposit of certain securities. In principle, the latter class, of which, perhaps, the most conspicuous instance is the issue of bank-notes under the National Bank Act of the United States, departs widely from the theoretical ideal I if a hank-note. lu the second ease, the value of the note depends upon the securities behind it, and not upon its frequent redemption. Indeed, it may be said that the object of the law is to • make the bank-note so safe that it will not be presented for redemption, but continue to cir culate as money, and this end is fully attained.