§ 9. Issues of notes. The issue of bank-notes as a mode of lending a bank's credit calls for consideration here. Yet it must be observed at once that comparatively few banks in the world have now the legal right to issue their own notes. The function of bank-note issue has come to be looked upon as so closely connected with that of the coinage and regulation of the standard money that it has been increasingly limited in each country to a central national bank, or group of banks, which is in many respects practically an organ of the government. To such banks the right of note issue is granted as a monopoly in return for specified payments and services. In normal times the issues of bank-notes are regulated by the banks themselves; but in times such as those following the outbreak of the World "War the bank-note issues become essentially political money (irredeemable) issued by command, and to meet the urgent financial needs, of the sovereign state.

No two countries have quite the same kind and system of bank-notes. Typical bank money( or "credit currency") consists of notes issued by banks on the credit of their general assets, without special regulation by law. Many of the bank-notes issued by the banks chartered by either the federal or the state governments before the Civil War were of this kind; but after 1837 the notes of the Second Bank of the United States, which had been prudently controlled, were retired. The experience with many (not all) of the state bank-notes issues thereafter, until the Civil War, was less fortunate. As it was to the interest of the banks to keep in circulation as many notes as possible, many banks yielded to the temptation to abuse the power of note issue. The period is known as that of "wild-cat" banking. In 1866 a federal tax of 10 per cent on state bank-notes made their issue unprofitable.

Since the passage of the Federal Reserve Act we have temporarily two kinds of bank-notes, the old bond-secured notes, in use since 1863 (very different from the typical form), 9 and the new kind of Federal Reserve notes very nearly typical in character but issued only by the Federal Reserve banks, not by individual banks.

A bank, by the issue of notes, puts into circulation as money its own promises to pay. The customer, in borrowing money or in withdrawing deposits or cashing checks and drafts from other banks, is paid with the bank's notes instead of with standard money. These notes may be returned to the issuing bank, either to be redeemed in specie or to be paid in some other form of credit, such as deposits or exchange. The limit of the issue of such notes is the need of the community for that form of money, and if they are promptly redeemed in standard money on demand, they never can exceed that amount. A holder of a note (in the absence of special regulations) has the same claim on the bank that a depositor has.

§ 10. Divergent views of typical bank-notes. Some persons, seeing in bank-notes but a form of ordinary commercial credit (like the promissory note or an individual's check), have contended that their issue should be entirely unlimited and unregulated except by the ordinary law of contract which makes the bank liable to redeem the notes on demand. Such bank-notes would not be legal tender, and every one would be free to take or refuse them as he pleased. Each bank would thus put into circulation as many notes as it could; and, as they would constantly be returned for redemption when not needed as money, their volume would expand and contract with the needs of business.

9 Including, now, two varieties: the "national bank-notes," issued, as before, through local banks, and some "Federal Reserve bank-notes," which are national bank-notes that have been taken over by the Federal Reserve banks,

It may be conceded that there is much truth in this view, but not the whole truth. For, in reality, when bank-notes are in common use, every one is compelled to take the money that is current. This offers a constant temptation to the reckless and unscrupulous promotion of banking enterprises, as has been repeatedly shown, notably in America in the days of "wild-cat" banking. The average citizen cannot know the credit of distant banks, and thus has not the same power of judging wisely in taking bank-notes that he has even in making deposits in the bank of his own neighborhood. Between bank-notes and ordinary promissory notes there are other differences. Bank-notes pass without endorsement, and thus depend on the credit of the bank alone, not, like checks, on the credit of the person from whom received. Unlike ordinary promissory notes, they yield no interest to the holder. They go into circulation and remain in circulation for considerable time by virtue of their monetary character in the hands of the holders. Thus they approach political money in their nature, and the banks are near to exercising the sovereign right of the issue of money.

At the other extreme of view have been those who consider bank-notes to be essentially of the nature of political money. If they are so, it is argued, the power of issue should not be exercised by any but the sovereign state. In this view it is overlooked that bank-notes, unlike inconvertable paper money, depend for their value on the credit of the bank, not on their legal-tender quality and on political power.10 They must be redeemed on penalty of insolvency; government notes need not be, and yet will circulate at par if properly limited. Adequate provisions for the prompt return and redemption of bank-notes makes them "elastic" in their adaption to monetary needs, which fluctuate with changes in commerce and industry from season to season and even from day to day.

10 In some cases, as during the bank restriction in England, 1797-1821, and after 1914 in all the European countries, bank-notes become inconvertable - practically political money. 11 See above, § 3.

The predominent opinion to-day is that in their economic nature bank-notes share to some extent the character both of private promissory notes and of political paper money. In ordinary times they stand midway between the two, though in war financing they may virtually become merely fiat notes. Everywhere it has come to be held that the issue of paper money of any kind is in its nature a public monopoly, and yet everywhere the bank-note policy has come to be that of permitting the issue only to certain institutions, under strict public legislation and regulation, and of requiring in return for this privilege some substantial services of payments to the government.