Foreign banking methods differ from American not only in the matter of technic and in the relationship which exists between the individual and his bank, but also from the standpoint of internal banking management, as well as from that of general credit extension. On the latter point the differences of practice and method are rather important. In a general way there are, as the reader is aware, two important methods by which banks extend credits - the one the issue of notes, the other the creation of credit deposits which are drawn upon at the pleasure of the borrower. In the United States the latter method of extending credit has become almost preponderant. There are large issues of bank notes, of course, and in some parts of the country they have a function of extreme importance to perform. But it may fairly be said that the banking development of the past fifty years in the United States has been almost wholly along the line of the deposit, and that the note has played a more and more subordinate part as time has gone on. Very much the same is true of Great Britain, and for somewhat the same reasons. When we turn to continental banking, however, it is observable that the main line of development has been in a somewhat different direction. In France, for example, the central bank, while carrying large lines of deposits, has granted the preponderating part of its accommodation in the form of notes. Other banks have then taken these notes and held them in their vaults as reserves, while business men, instead of checking as freely upon banking accounts as do American business men, have been more in the habit of keeping the notes in a safe or strong box out of which they would be paid as occasion required. The distinction between the two types of banking may be strongly emphasized by contrasting a statement of the Second Bank of the United States, which terminated its career in 1837, with the statement of, say, one of the large New York banks for the year 1920.

From such comparison it is obvious that the bulk of the loans made by the Second Bank of the United States must have been made in the form of notes, while the New York bank could not have done much business had it been limited to its note liability. A similar comparison might be drawn between one of the London joint-stock banks to-day and the same institution fifty or sixty years ago. This distinction is of a good deal more than merely technical importance. It is founded upon the different business habits or practices which grow out of the fact that in some countries actual money or a substitute for it is wanted in business, while elsewhere the check-and-deposit system is more acceptable. Under the two systems very considerable differences in practice naturally arise.

It is not necessary to go into these differences at this point, and it need only be said that in the main the check-and-deposit system, as exemplified in American banking, is one which minimizes the use of cash and results in the clearing of a very large amount of obligations without any employment either of money or of money substitutes, but that this system has a tendency to instability, due to the fact that its basis may be rapidly weakened by the export of coin or by the withdrawal of it from banks. Conversely, inflation is more easily produced through the sudden growth of bank deposits. In the countries which have developed along the note or circulation line of growth large quantities of currency are held in circulation. A given amount of them is practically necessary at all times in order to do the business of the country. The central note-issuing bank is thus performing a quasi-public function in supplying notes, and the stability of the system is greater because the needs of the community for the notes and currency are such that they tend to keep a given volume of them in circulation constantly. This is true even where the redemption is quite rapid - that is to say, where the whole volume of notes is redeemed by the issuing bank within a very short time.

Such rapidity of contraction is called elasticity when it is accompanied by correspondingly easy expansion. It has little to do with the amount of notes held in the circulation at any given time. This difference of practice as between continental countries, on the one hand, and England and the United States, on the other, also implies great difference of practice in remittances and collections and tends to produce a quite different ideal of the banking situation. A credit deposit plan is practically necessary to business as it is organized in the United States. Across the Canadian border, where industry is organized on a rather more primitive basis and under the branch-bank system already described in this volume, there is a much greater reliance upon notes and relatively smaller use of checks, notwithstanding that the number of banking offices in Canada is very large. In general the note finds its best function in the community which is not much accustomed to checking and is not encouraged to resort to banks, while those countries which have made banking simple and easy of access usually find that customers promptly give up the use of notes and substitute credit instruments in lieu thereof.