The national bank-note when issued is the promise of the issuing bank, and must be punctually met by it, when payment is required, as any other liability must be. The note, however, also carries with it certain engagements binding upon the government of the United States. The provision for redemption at the Treasury binds the government to pay on demand all notes when presented in due form, and not merely notes to the extent of the reserve. And in case of the failure of a bank, the law provides for the immediate redemption of all its notes at the Treasury. The government has thus made itself fully liable in any event for the whole amount of the notes. On the other hand it has taken ample security for its reimbursement, by requiring the deposit of bonds as above stated, by requiring that this deposit shall be increased if the value of the bonds declines, by the provision for a reserve of cash to be held by the Treasury, and also by taking for itself a first lien upon all the assets of a bank and upon the personal liability of the stockholders, for the purpose of making good any possible deficiency in the security already provided. An ingenious provision in the act of 1882 also secures for the government any gain that may ultimately accrue from the destruction of notes while outstanding, or from the failure of holders to call for their redemption. And finally, although the expenses of printing the notes (but not of engraving the plates), of superintending the system, and of providing for the safe-keeping of the bonds deposited, are paid by the government, these charges are offset by a tax of one per cent. per annum on the average amount of notes in circulation, or since 1900 of one half of one per cent. on notes secured by government 2 per cent. bonds. On the whole, therefore, whatever may be gained by the banks from this system, it cannot be said that the liability of the government is onerous.

1 Such a prohibition was the basis on which the "Suffolk bank system" of New England rested, from 1819 to 1866, and maintained at par a note circulation which had otherwise but slender provision for convertibility.

Much controversy has been excited by the question as to the rate of profits which the national banks have obtained from their right of issuing notes secured by a deposit of bonds. It follows from what has been shown in the preceding chapters that their case is in no respect different as regards profits from that of banks which use their credit in the form of deposits, in order to make investments in interest-bearing securities. The notion often entertained that the national banks have some peculiar opportunity of making a double, profit, "by receiving both interest earned by their bonds, and interest earned by the loan of the notes issued upon the bonds," overlooks the fact that every bank uses, as its means for obtaining securities, its capital and whatever credit it can employ in addition. Every bank, then, as a consequence of its use of its credit in any form, must receive interest earned by the investment of its capital and also interest earned by what we may call the investment of its credit; and the fact that the national banks, like others, have the opportunity for making credit as well as capital yield a profit, neither springs from the system on which their notes are secured, nor depends upon it. Indeed, it must be manifest that their deposits yield them a profit in precisely the same way as their notes, and usually much greater in amount. The conclusive practical answer to the idea of a supposed extraordinary profit is to be found, however, in the conduct of the banks themselves, especially after the passage of the act of 1874, which, recognizing the desire of many banks to reduce their circulation and secure possession of their bonds, provided that any bank might deposit "lawful money" with the Treasurer of the United States to enable him to redeem its notes, and thereupon withdraw pro tanto the bonds deposited, provided the amount of its bonds left in deposit were not reduced below $50,000.1 Several important national banks had never chosen to issue notes, although required by the law to maintain a deposit of bonds; under this provision a considerable number of others reduced their notes to the $45,000 which the required minimum deposit of bonds would support. The withdrawals of notes continued for several years, and although new banks were formed and the note circulation increased in some sections, the total banking capital and note circulation alike declined, until the summer of 1878. Both increased after the resumption of specie payments, but the circulation of bank-notes did not reach the amount outstanding in 1873 of $341,000,000.2

1 Banks with a capital of less than $150,000 remained subject to the original requirement of a deposit of bonds equal to one third of their capital until 1882, when it was reduced to one fourth and became applicable to all banks with a capital of less than $200,000. All bond requirements were repealed by the act of June 21, 1917.

2 Although in its general theory the national banking system is one of "free banking," under which the business of banking in all its branches is open to all persons who comply with the formalities provided by the law, it was nevertheless felt to be dangerous to allow the issue of an unlimited circulation so long as the currency remained irredeemable. Without restricting the establishment of banks, the acts of 1863 and 1864 therefore limited the aggregate amount of notes to $300,000,000. In 1870 the limit was raised to $354,000,000,and finally by the act of January, 1875, for the resumption of specie payments, all restrictions upon the aggregate circulation of the national banks were removed.

The highest point reached by the circulation of the national banks during the twenty-one years following the resumption of specie payments in January, 1879, was at the end of 1881, when it stood above $325,000,000. From that point, its decline was rapid, with hardly a break in the continuous fall, until at the end of 1890 it was little over $123,000,000. The proximate cause of this remarkable disappearance of what was originally the chief feature of the system was the steady payment of the national debt and rise of the national credit, and the natural disinclination of banks to hold, on any considerable scale, investments which could no longer be relied upon to yield the holder so much as 2 1/3 per cent. The extraordinary financial conditions of 1891 and 1892, culminating in the crisis, both commercial and monetary, of 1893, increased the return to the holder of bonds to three per cent., and the bank circulation, for this reason and others, rose to nearly $183,000,000 in October, 1893. In the disturbed years which followed the issue fell slightly, then rose to nearly $211,000,000 at the end of 1896, with a further increase of the earning power of the investment in bonds, and during the three years following fluctuated between $191,000,000 and $215,000,000.