The chief criticism of national bank notes, however, is their inelasticity - the quantity of notes does not bear a direct ratio to the volume of business done. Bank notes should expand and contract in amount automatically with the flow and ebb of business, otherwise there will be a plethora of money in dull times and a dearth of it in good times, fostering high prices and speculation in dull seasons and depressing the periods of business activity. The full profit from the note issue privilege can be earned only if the notes are constantly in circulation; a bank therefore takes out only such circulation as it finds by experience it can keep circulating nearly all the time. The profit on the circulation is so small that it has been difficult to get banks to take out enough to provide for periods of great business activity. On the other hand, the expense incident to the retirement of bank notes has discouraged banks from retiring them whenever business slackens.
The law allows the bank to pay out over its counter the notes of other banks, and in most states to consider national bank notes as legal reserve money. The law also compels every national bank to accept at par the notes of every other bank. The results of these facts are:
1. The volume of national bank notes changes relatively little from season to season and from year to year.
2. In dull times the notes drift into the cash of the national and state banks and are paid out over the counter of non-issuing banks, and also drift into the reserves of state banks, and remain out of circulation permanently.
3. The motive for presenting the notes for redemption is minimized, so that most of them are presented only when they become unfit for redemption.
4. When business becomes more active, the volume of cash transactions increases as well as the volume of credit transactions, but, since the bank notes are not increased, the extra money required is drawn from the bank reserves or till money by the public withdrawing from the banks more money than is deposited; this results in "tight money," high interest rates, and contracted accommodation at a time when just the opposites are needed; the inelasticity of the bank notes therefore not only throws upon deposit currency the burden of providing elasticity of credit, but also tends to defeat the natural elasticity of that deposit currency.
5. The want of a bank note issue which can be expanded and contracted locally, with the seasonal needs for variation in the currency, makes necessary the transportation of coin, greenbacks, or certificates from one geographical area to another - an expensive, cumbersome, speculative, and unsatisfactory operation. Accordingly the relief of currency deficiencies is always likely to be tardy; and as soon as the business activity that occasioned the shipment subsides, the currency flows back to money centers, causing low money rates and fostering speculation on the stock and produce exchanges.
After 1900 and up to 1913 the volume of bank notes expanded almost as fast as did business transactions and deposit currency, but, as shown above, this expansion was due to the extension of national banks in new areas which either had been without banks or had depended upon deposit currency. In the old business areas the supply of bank notes did not expand with business needs. The relative growth and elasticity of bank notes and individual deposits in recent years are indicated in the table on page 347 made from the Comptroller's calls: