1 Whitney, History of the Suffolk Bank.

1 Graham, The One Pound Note, chs. xv. and xvi.

2 In Scotland there are only ten banks which are authorized to issue notes; in Canada there are twenty-two, but, unlike Scotland, new banks enjoying the privilege of note issue may be established.

Systems of regular redemption cannot prevent the overissue of notes by banks generally or loss to note-holders through the failure of particular banks. They do limit these evils to such manageable proportions that they can be almost entirely eliminated by means of legislative safeguards which do not take away the right of issue from the banks in general and do not deprive the note of its value as an instrument of credit. In Canada, for example, note-holders are adequately protected and excessive issuing has been avoided under laws which limit the circulation of each bank to its capital and a proportion of its surplus, 'give the note holder a prior lien on the assets of failed banks, and provide for a guaranty fund to which each bank contributes an amount equal to five per cent. of its outstanding notes. On the other hand, in countries where there has been no system of regular redemption the evils of excessive issues of notes and frequent loss to note-holders have required drastic remedies which have fundamentally changed the character and utility of the bank-note.

Two distinct and radically unlike policies have found expression in the legislation designed to provide a satisfactory bank-note currency. In the various States of the United States before the Civil War, banks generally were permitted to issue notes but subject to increasingly stringent conditions. The limitation of issue to the capital of each bank and a prior lien onall assets were found to be inadequate to safeguard note holders. In one State after another during the years immediately preceding the Civil War the requirement was imposed of the pledge of particular securities, commonly the bonds of the various States. This method of safeguarding bank-notes was subsequently adopted in the National Banking Law of 1863 with the further restriction that only United States bonds could serve as security of the notes of the National Banks.1

Under this method of note issue a perfectly safe medium of payment is secured, but notes secured by bonds are fundamentally unlike notes issued generally by the banks without restriction, or those issued under restrictions such as are found in the Canadian Banking Law. In the

1 The unsatisfactory condition of the bank-note currency in the United States before the Civil War could not have been wholly corrected under redemption arrangements. The business of the country, mainly in the pioneer stage of agricultural development, did not provide the banks with loans having a high degree of liquidness and security. Means of communication were imperfect and consequently even the notes of the strongest banks were at a discount when at a distance from the locality of the issuing bank. Finally, owing to the lack of uniformity in design, numerous counterfeit notes were a source of universal irritation, as well as of frequent loss to unfortunate individuals, case of bond-secured notes all other considerations are sacrificed in order to gain absolute safety. Such notes are not a credit instrument, expand-ing and contracting with the variations of activity of trade and in response to changes in the volume of bank loans. The amount of notes in circulation is primarily determined by the price of the bonds required as security. At the best, such notes are little more than a safe and economical substitute for coined money. They have little direct influence upon the other operations of the banks by which they are issued. In fact, such notes are more analogous to convertible government paper money than to bank-notes which are issued as a form of credit.

In England and in some of the other European countries, unsatisfactory experience with unrestricted issues of notes by numerous banks in the absence of arrangements for regular redemption led to the adoption of the drastic remedy of the grant of a more or less complete monopoly of issue to a single bank. By this means a safe currency was secured without depriving the banknote of its character as an instrument of credit. This method of controlling the issue of notes had, however, entirely unforeseen consequences of a most far-reaching nature. Wherever, and this is everywhere in the early stages of the development of banking, the bank-note was the principal instrument of bank credit, all other banks were placed in a position of constant dependence upon the institution to which the monopoly of issue was granted. At the same time these banks became inevitably responsible for the satisfactory working of the entire credit structure of the countries in which they were established. This responsibility was not clearly recognized at first by the management of these banks, but after much often unsatisfactory experience the special function and duties of these central institutions were clearly perceived. It became generally recognized that a banking system is greatly strengthened by the presence of a central institution which accepts responsibility for safeguarding the credit structure and consequently maintains itself in a condition of great strength at all times.

Bank-notes issued by a single bank are in many ways unlike bank-notes issued by a large number of institutions. When numerous banks enjoy the right of issue, the notes never acquire that prestige which the note of a single institution possesses in its own country. The bank-note in such countries as France and Germany occupies a position midway between gold and the ordinary bank-note. It will be accepted for practically every purpose except for foreign payments. The power to issue an instrument which has this special sort of prestige is of very great value in emergencies. It enables the central institution to supply an almost indefinitely large demand for currency for domestic purposes without involving itself in any appreciable danger of loss of gold through the presentation of the notes for redemption. On the other hand, if notes are issued by many banks, in a serious emergency it may happen that the public loses confidence in the notes and manifests a preference for gold. Bank-notes issued by a single institution have, then, a very great practical advantage, they have a quality which the ordinary bank-note does not possess, at least in a country in which thousands of banks are permitted to issue notes. This consideration has been an important factor in shaping legislation regarding bank-notes in many countries. Central banks have been established, as in the case of the Federal Reserve banks in the United States, in order to secure the improvements in banking machinery and practice which they make possible. These institutions have then been granted a more or less complete monopoly of issue, not because it was impossible to secure a satisfactory currency issued by the banks generally but in order to enable the central banks to perform their special functions more effectively.