1 The failure of the First-Second National Bank of Pittsburgh a few years ago illustrates the danger involved in tying up too large a sum in relatively illiquid investments. While the bank had a capital of a little under three and a half millions it had invested in bonds, stocks, etc., more than eight millions.

Publicity is also an important factor in maintaining confidence

Correlated with this is governmental supervision

In practice this supervision has varied in nature and scope. For the moment we are concerned only with deposit banking, and here not so much needs to be said as in the case of note issue. In few countries is the depositor given the special protection that is accorded to him in the United States. In our country it is customary to require the banks to maintain minimum cash reserves of a prescribed percentage of the deposit liabilities. Furthermore, the banks are often restricted in the choice of their investments. Real estate, for example, is only partially acceptable as a basis of bank operations, and other lines of business that the bank might engage in are either specifically, or, through lack of positive legal sanction, impliedly forbidden. Occasionally also special guarantee funds directly or indirectly in the control of the government itself have been required. Reports to the government and the publication of more or less detailed statements in the daily press are perhaps the most common requirements, but in the United States there is in addition regular governmental examination of books, checking of reserves, passing upon investments, etc. As a matter of fact, however, the depositor, as will be seen shortly, is much less in need of special protection than is the noteholder.

The bank note has already been described as the formally executed and definitely embodied promise of the bank itself to pay. It thus differs from the check which, as was seen, is simply an order to pay drawn on the bank by an individual. This difference accounts for the fact that the bank note enters generally into circulation, passing freely from hand to hand and enjoying wide acceptability, while the acceptability of the check is narrowly restricted to the immediate circle of the maker and his associates.

This has varied in practice

The nature of the bank note gives it wide acceptability

The bank is, of course, in most cases more widely known than is the individual depositor. Its operations naturally throw it into direct contact with large numbers of individuals in all lines of business enterprise, whereas the private business, even though its scale of operations be large, finds its points of contact limited to those engaged in the same or kindred lines. Furthermore, the credit of the bank is usually more securely established than is that of the individual. It has a definite and known amount of capital and usually also a considerable surplus invested as a special guarantee to its creditors. This is particularly true of a bank organized as a corporation. In some countries also there is special supervision of banks by the government. Law, public opinion, and even competition often enforce considerable publicity of a bank's affairs, and more is, therefore, apt to be known about the standing of a bank than about that of a private individual. In most cases also the issue of bank notes is supervised or even minutely regulated by the government, and not infrequently the notes themselves are vested with a certain degree of legal-tender power. The general result of all these circumstances is to place the bank note as a medium of exchange on a much higher plane of acceptability than that on which the check finds itself.

The confidence involved in the general acceptability of the bank note - as was seen to be the case in the confidence involved in the limited acceptability of the check is confidence in immediate redeemability. The promise to pay lawful money is acceptable as a substitute for such money only when it is believed that the money can be immediately had if desired. The case here is on all fours with that of the check except that there is felt to be evec a greater certainty in the redeemability of the bank note than in that of the check. The confidence underlying the acceptability of the check covered, as we saw, the integrity of the maker as well as of the bank, but in the case of the note the bank alone is concerned. Moreover, long years of sad experience have demonstrated that ultimate solvency of the issuing bank will not suffice to make bank notes freely acceptable if immediate redeemability be denied. There must be a belief in the certainty of immediate availability in cash or the notes will drop into instant disfavor.

The bank is known

Confidence in notes a question of redeem-ability

The persistence of this belief also requires the maintenance of a cash reserve. Noteholders may recognize that there would be no point in issuing notes if an exact equivalent in cash were maintained against the notes, and they may also recognize that very few noteholders will want to substitute cash for their notes, but each individual noteholder wants to feel that should he actually desire the cash no obstacle will be put into the way of his getting it. Such a belief requires for notes, as for deposits, that at least some cash be always kept on hand and available for purposes of redemption.

As with deposits the amount of reserves required for this purpose tends to vary under different conditions. One factor of great importance is the general standing of the bank itself. The more securely a bank is established in the confidence of the community the smaller the necessary reserve. In the case of notes also, just as with deposits, another factor is the habits and traditions of the community. A third factor of importance is the legal character of the notes. In Prance, Germany, and England the notes of the big central banks are full legal tender. Redemption there is purely incidental to the repayment of loans or for the sake of obtaining gold for export. The average noteholder never thinks of demanding cash. In Canada where the notes are freely issued by all the chartered banks, of which there are about twenty, the notes are not legal tender. They are freely acceptable because of confidence in the banks, and there too redemption goes on automatically through repayment to the banks of loans extended, and through depositing and clearing. The ordinary noteholder in Canada probably never thinks of presenting a note for redemption, and yet it can hardly be questioned that the absence of the legal-tender quality in the notes acts as a constraining force on the issuing banks to insure the constant acceptability of their notes through the maintenance of really more than adequate cash reserves. Of course, it must be admitted that where the state enforces the acceptance of bank notes by making them legal tender, it assumes a corresponding obligation to insure redeemability.