Bank notes

Definition

Likeness between deposits and notes

Bank credit in the shape of notes, unlike deposits, is practically never purchased for cash. An individual who possesses cash in the shape of greenbacks or gold certificates, for example, would have no inducement to take such currency to the bank merely for the sake of getting bank notes. The bank notes are no safer and no more convenient than are the gold certificates and the greenbacks. There may, of course, be an incentive to get a bill changed, or perhaps to get rid of heavy coins in exchange for the more convenient paper bills, but such incentives do not imply a demand for bank notes as such. Government bills would ordinarily be equally satisfactory. Hence the bank rarely gets an opportunity to make a direct exchange of its notes for cash.

It is often possible, however, for an issuing bank to substitute its credit in the form of notes for its credit in the form of deposits. A depositor, for example, transfers by means of a check the whole or a part of his right to demand cash from his bank. The payee may prefer to have currency, but the nature of the currency in which payment is made is a matter of indifference to him as long as it is generally acceptable. In cashing the check the bank may therefore simply pay out its own notes, and if that be done the bank's liabilities are not altered in the slightest degree. There is simply a change in the form of such liabilities, the disembodied right to demand represented by the "deposit" having become the embodied right to demand represented by the "notes." As long as the notes remain in circulation they are almost in all respects like the unused balances of depositors.

Notes not obtained for cash

Notes often substituted for deposits

Somewhat different in nature is the "cashing" with its own notes by a bank of a check drawn on another bank. This is in essence a substitution by the issuing bank of its own credit, in the form of notes, for the credit in the form of a deposit of the bank on which the check is drawn. From the viewpoint of the individual who cashed the check the process involves simply the exchange of a demand obligation in one form against ágiven bank for a demand obligation in a different form against another bank.

For the most part, however, an issuing bank gets its notes into circulation as a result of discounting or lending, although the same thing must be said of the bank's credit in the form of deposits. Before the rapid development of deposit banking bank notes were by far the most important form of bank credit. This is still true of Germany and France, although it is tending to become less so. But today, especially in England and in the United States, the use of checks has grown to such enormous proportions that most people desiring bank accommodations wish simply a checking account and do not desire cash or currency. Where, however, note issue is of importance, "loans and discounts," which in banks of deposit are responsible for the greater part of the deposits, are similarly responsible in banks of issue for most of the outstanding notes.

Lastly, it may be pointed out that just as there is no difference in the nature of the liability represented by the bank note as contrasted with the deposit, so there is no difference from the point of view of production of income. The profit that the bank earns is simply a question of the rate charged for loans and for discounts. At a given rate the return is the same whether a given amount of credit be extended in the form of a deposit or in that of an issue of notes. Practically the only cause of a possible preference by the bank for one form to another is to be found in connection with the relative duration of life of the two V

Cashing of checks with bank notes simply an exchange of rights

Discounts the chief source of issue

Notes and deposits correlated sources of profit to bank

Selected References

H. G. Brown, International Trade and Exchange (1914), Chapter II (Deposits Versus Notes).

Charles F. Dunbar, Chapters on the Theory and History of Banking (1906), Chapter I (The Bank'S Operations).

H. G. Moulton, Principles of Money and Banking (1916), Part II, Section IV.

C. A. Phillips, Readings in Money and Banking (1916), Chapter IX (The Protection Of The Reserves).

Report of Monetary Commission of Indianapolis Convention (1898), Part II, Sections 78-83 inclusive.

W. A. Scott, Money and Banking (1910), Chapter VII (International Clearing And Exchange).

Hartley Withers, The Meaning of Money (1909), Chapter V (Elasticity Of Bank Credit: Overexpansion And Contraction).