A bank-note has already been defined as the promise of a bank to pay to bearer on demand a specified sum of money. It is usually printed, contains a statement of the amount both in letters and in figures, the signatures of the properly authorized officers of the bank, usually of the president and the secretary, the date of issue, and a number corresponding to the one on the stub. Frequently extracts from the law authorizing the issue and various devices intended to make the note attractive or to render difficult its counterfeiting are added. The following form shows all the essentials: -

25 25

N C 1000 N C 1000

The Bank of the Netherlands will pay to bearer

Twenty-Five Gulden.

Amsterdam, January 2, 1900. The Secretary, The President,

John Doe. Richard Roe.

In form bank-notes are distinguishable from checks by the fact that they are issued in fixed denominations, are payable to bearer, are a promise to pay instead of an order to pay, and are obligations of the banking institution itself instead of one of its depositors. The denominations are usually selected with a view to their convenience in exchange, and range from some low limit, frequently fixed by law, to the largest amounts needed in commercial transactions. Being payable to bearer and obligations of a bank, they are transferable without endorsement and are readily accepted wherever the bank's credit in this form is known to be good. If, as is usually the case nowadays, they are so well secured that loss from their acceptance is rendered practically impossible, they will circulate throughout the length and breadth of the country in which they are issued, and be accepted in the exchange-centres of foreign lands. Indeed, the peculiar form of bank-notes is designed to render them everywhere acceptable as money in ordinary commercial transactions. Like checks, however, they are payable on demand in legal-tender money, and may be deposited on account like any other form of currency. When once paid or redeemed they may be destroyed or reserved for future use in a new issue.

The fact that well-secured bank-notes are capable of circulating wherever money is used makes them exceedingly efficient instruments for the expansion of bank credit. Being fitted for all branches of trade and acceptable in small towns and country districts as well as in large cities, they permit the extension of banking operations to all parts of a country and among all classes of people, and, since their presentation at the bank for acceptance or payment is not necessary to the establishment or maintenance of the bank's obligation to pay them, they are apt to remain for a long time in circulation before being sent in for redemption. It is possible, therefore, for a very large quantity of them to be put into circulation and kept there for a long time without the bank's ability to redeem them once being tested. When it is remembered that they may be issued against interest-bearing securities, the benefits of which accrue to the bank, it becomes apparent that the unrestricted privilege of issue may tempt bank officials to make hazardous loans. In the expectation that they will not soon be called upon to meet their promises to pay, and in the hope of greatly increasing their profits, they are apt to take chances by investing in paper not of the first class, and to tie up the bank's funds in securities not readily transformable into cash in cases of emergency. The danger of this practice consists in the fact that, if the securities prove to be poor, the safety of the bank is jeopardized and the security of the notes weakened. If they are not readily transformable into cash, the shattering of commercial credit from any cause may suddenly send in large quantities of the notes for redemption, exhaust the bank's funds, and force it into bankruptcy.

Many illustrations of the disaster caused by the over-expansion of bank credit through note issues might be given, but one, and that the most notable certainly in our history, will suffice. During the administration of President Jackson, 1828-36, the charter of the Second United States Bank expired, and was not renewed. This fact, combined with a genuine need for increased banking facilities and some encouragement from the President and Congress, was responsible for the establishment of a large number of new banking institutions, especially in the West and in the South. In most of these the right of note issue was practically unrestricted, and the great undeveloped resources on every hand, the success that seemed certain to attend almost any well-conducted business enterprise, the lack of capital and the optimistic character of the people, made the demand for loans very large and presented great temptations to the new banks. The result was an unprecedented expansion of note issues based upon securities whose value depended upon the successful outcome of all kinds of new and untried enterprises. The ease with which notes were issued and maintained in circulation caused many institutions to be established without cash or financial backing of any kind, and the discovery of this fact together with the failure of many of the enterprises which the banks had helped to finance brought on the great commercial crisis of 1837. All the bank-notes being discredited by the known worthlessness of a few, they were presented for redemption in such large numbers as to exhaust the cash reserves of nearly all the banks and force them into liquidation. The loss occasioned by this disaster was widespread and enormous in magnitude, and it gave the people of the United States an object lesson on the subject of banks and especially of bank-notes which has not yet been forgotten.

This and similar experiences in this country and elsewhere, however, must not be regarded as adequate ground for the condemnation of this form of currency. They indicate simply the necessity of some sort of regulation of the issue of bank-notes by public authority. The undue expansion of deposits is attended with the same danger, though perhaps in less degree. The means which have been found appropriate and efficient for the safeguarding of the banking business in all its branches will be described in the following chapter. In the remaining sections of this one we will consider the natural limits of the issue of bank currency and certain theories connected therewith.