Reserves equally important here

Similarly the required reserve varies

Legal tender quality of notes is important here

Correlated with the question of the tender qualities of the notes is that of the availability of the notes of one bank for reserve purposes in other banks. Ordinarily using notes in this way would be reprehensible in that it would involve a dangerous pyramiding of credit. Where, however, note issue is virtually a monopoly privilege in the hands of a single bank acting as the head of the system and as the guardian of the national reserves, such a limited pyramiding of credit is justifiable because it is economical. But that throws a heavy burden of responsibility on the issuing bank. Its reserves must be considerably greater than would be necessary if its own obligations were not used as a foundation for a further extension of credit by other banks. It is because of a recognition of this responsibility that the big central banks abroad maintain cash reserves equal to from 40% to 80% of their outstanding demand liabilities.

Another, and perhaps the last, factor to which attention need be called in this connection is that of the circumstances under which the notes are issued. An increase of population carrying with it expanded production and a greater volume of exchanges would give rise to an increased need for money as a medium for transacting such exchanges. If the habits of the community were such as to make it necessary to have more hand to hand money a considerable part of the amount so needed might conceivably be bank notes. These notes might then tend to remain indefinitely as a part of the permanent money supply with little prospect of being ultimately retired through redemption. It is obvious that for such notes the reserve requirements would not be very heavy. On the other hand the issue of notes may be for the purpose of meeting only a temporary increase in the demand for money. Here ultimate redemption is certain and a larger reserve would in this case be necessary than in the case previously assumed. In general then it may be said that reserve requirements for a given issue would tend to vary according as the issue was intended to meet a temporary or a permanent increase in the demand for the circulating medium.

Connected with this question is that of the use of bank notes for reserve purposes

Another question involves the circumstances under which the notes are issued

The practical task of calculating the proper reserve for an issue of notes is a matter of as great delicacy and importance as it is in the case of deposits. Since, as was fully brought out above, there is little or no difference, from the bank's point of view between the two forms of credit, the same conflict of motives arises in the management of the reserves for notes as in the case of the reserves for deposits. Indeed unless there is imposed on the bank through legal enactment the responsibility of maintaining separate reserves against the two classes of liabilities, the bank makes no distinction in its reserves at all, and considers all the cash in its vaults as a joint reserve fund for both notes and deposits.1

Here also the question of "supplementary reserves" is one of great importance. The necessity of having investments as liquid as possible and of having them in forms that do not involve the tying up of funds for long periods was fully discussed above. All that was said there concerning such investments, publicity, etc., is equally apropos here. The preservation of confidence in the bank is just as essential for maintaining the acceptability of the notes as it is for preventing a wholesale withdrawal of deposits, because a loss of confidence results not only in a "run" by depositors but also in equally pressing demands for redemption by noteholders.

1 In the Reichsbank, for example, where there is special protection for the note issue but none for the deposits the cash reserve is an undivided fund. In the case of the Bank of England a division is made between the "banking department" and the "issue department" but the larger part of the reserves in the banking department is in the form of Bank of England notes.

The calculation of reserves for notes is also an important matter

The question of secondary reserves also arises

The noteholder, indeed, is today given special protection by most governments.

There are naturally some good reasons for this discrimination. The depositor chooses his bank. If he has accumulated a sufficient surplus, or if he carries on operations large enough to warrant his opening a bank account, he is supposed to have enough intelligence to inquire into the standing and character of the available banks, and to choose from among them the one which in his judgment seems safest. Acting purely as a voluntary agent it is believed that the responsibility of any choice that he makes should devolve solely upon him.

The position of the noteholder, however, is in most cases entirely different. The original recipient of the notes from the bank can, of course, like the depositor, exercise a choice. He is not required to accept the notes, but may demand instead gold or standard money. But after he receives them the notes tend to enter into general circulation. He as the original recipient dealing directly with the bank may be presumed to know something about the standing and the security of the issuing bank, but those who in turn accept the notes from him cannot be expected to be so well informed. It may be objected that there is ordinarily no compulsory acceptance of bank notes, and that, therefore, unless an individual feels assured as to the quality of a given bank's notes he need not accept them. But such objection assumes a knowledge of the general money situation in a country and a power to act according to the dictates of such knowledge that probably a great majority of the people does not possess. Most laborers, for example, even if they knew something about the regulation of the money system, would hardly be in a position to refuse bank notes if these were offered to them in payment of their wages. Even during the days of "wild cat" banking in this country, when almost everybody knew something about the difficulties of the paper currency situation, the heaviest losers, as a result of the numerous bank failures, were ignorant and helpless washwomen, day laborers, and others among the relatively poor who were least able to stand such wicked pilferings from meager savings. Hence every dictate of justice and humanity requires that the state throw its protecting arm around the noteholder to save him from consequences the probability and the intensity of which he cannot in most cases adequately determine.