This section is from the "The Science Of Wealth" book, by Amasa Walker.
This is by far the most important matter in relation to a mixed currency. What is the proportion of specie held for its conversion? To ascertain this, we must know, on the one hand, the amount of notes in circulation, and the inscribed credits, that is, the deposits; and, on the other, the amount of specie in bank. We have naught to do with any other inquiry, so far as the quality of the currency is concorned. We have no occasion to make such an inquiry in regard to money, for that was value in itself, and needs no conversion; nor in relation to a purely credit currency, for that does not profess convertibility: but a mixed currency, to be reliable and beneficial to the public, must be what it proclaims itself to be; viz., convertible on demand into coin; and therefore a sufficiency of coin should be held to secure that object.
And here it is necessary to distinguish carefully between the convertibility and the redeemableness of a currency. The first may be uncertain or impossible, while the last may be sure. A bank may be perfectly solvent, while its currency is almost entirely inconvertible. By convertibility, then, we understand the power of the bank to exchange its promises for specie on demand; by redeemableness, its power to liquidate or discharge its obligations some time or other, by the resources it may possess for ultimate payment.
For example, a bank has promised to pay one hundred thousand dollars in specie, while it has only ten thousand dollars in specie to pay with. The same bank has demands against individuals, for their notes discounted, to the amount of two hundred thousand dollars. Now, it is certain that this bank can convert only ten thousand dollars of its bills; but it can, if sufficient time is allowed, redeem the whole amount, by taking in its own notes in exchange for those of its debtors. The power of the bank ultimately to redeem or cancel its notes is amply sufficient; though, for the conversion of them into specie, it has the ability only to the extent of one-tenth. This point needs to be well understood and remembered, because, as we shall have occasion to show, the difference between the redemption and conversion of a currency is a matter of the utmost importance to the business world, and the former cannot be made a sufficient substitute for the latter. This is evident from the following consideration.
A bank-note converted into coin, the money still exists in circulation: a bank-note, redeemed by receiving it for indebtedness to the bank, is taken out of circulation; that is, it ceases to be currency, and, for the time being, is practically annihilated. The circulating medium of the country is diminished to that extent.
To illustrate this point, and show how much depends upon the quality or convertibility of a mixed currency, we propose to take that of the United States as an example.
In doing this, it will be indispensable that we refer to the statistics of banking institutions, and use the terms commonly employed by them; and therefore we now proceed to define them.