Credit operations may be interfered with

Rapid redemption must be facilitated

The nature of the check leads to speedy redemption

There is a strong incentive to the payee to deposit it

There is also a strong incentive to the bank to present checks for collection

When there is a regular clearing house, with frequent clearings, the process of collecting is greatly expedited. Each bank sends to the regular clearings as many items against all the other banks as it can possibly gather together. Such items are recorded as credits on the clearing-sheet. But to the banks from whom payment is due such items constitute debits. Hence in a particular case a bank will have a series of credits made up of the items collectible from the other banks and a series of debits made up of the items payable to the other banks. Payment in cash or its equivalent is made only for the difference between credits and debits. The result is that the process of collection is not only expedited but it is also stimulated.

Here may be indicated the important fact that speedy redemption at the clearing house exerts a very wholesome restraining influence on the individual bank that manifests a tendency to expand its credit beyond that deemed wise by the other banks in the system. This influence arises from the fact that an expansion of loans in the shape of deposits is normally followed by an increase in the absolute number and total amount of checks drawn by a bank's depositors. As these checks largely get into the hands of other banks, an increase in their number and total amount means for the bank concerned an increase on the debit side at the clearing house. If for any extended period a bank has considerable debit balances to meet, its reserves will eventually be depleted to the point where the only alternative to disaster will be contraction. Hence the necessity of regularly meeting clearing house debit balances acts as an automatic check on individual banks against over-expansion.

Organized clearing expedites redemption

Rapid redemption exerts a restraining influence on expansion by an individual bank

But what happens if all the members of a clearing house overexpand their credit in the shape of deposits? In such a case of general expansion there is no check as far as the individual community is concerned. The expansion of a given bank results, it is true, in a larger volume of debit items at the clearing house, but, if the expansion is general, a particular bank will in all probability receive as deposits a larger volume of checks on the other clearing house banks, and these checks act as an offset to its own debits. While expansion for a single bank tends to increase debits at the clearing house, general expansion increases credits as well. Under general expansion the "balance may remain practically undisturbed and the net result may be simply an enlarged business on a smaller margin of reserve.

In so far, however, as the banks of one community have a considerable volume of dealings with banks in other communities inter-community clearings have a restraining influence on a whole community in much the same way that intra-community clearings influence the individual bank. The more thoroughly organized the domestic system of clearings is the less likely is there to be any purely local overexpansion, because local overexpansion is bound to result for the community concerned in an increase in debits in inter-community relations. The outcome of this is sure to be in turn depletion of reserves and a consequent necessity for contraction.

But, proceeding further, suppose that there be national overexpansion - as there has been several times in the United States - what restraints are provided? International clearings undoubtedly provide a final cheek, but the greater friction involved in the exchanges between nations as compared with the exchanges between domestic communities renders the operation of this check uncertain and precarious. The flow of funds is not easy enough or in sufficient volume to check national overexpansion until a point is reached where, through loss of gold, the whole national credit superstructure is threatened with collapse In order to check national overexpansion before credit is strained to the breaking point some reliance other than that of international clearings must be sought.

It exercises a similar effect on the banks of a community

In international credit relations some control is necessary

Turning now to a consideration of the bank note from the point of view of redemption it will be found that the nature of the bank note is such as to retard rather than to stimulate redemption. As already explained there are three ways in which the credit represented by the bank note may be liquidated. The holder of the note may pre sent it to the issuing bank or to its responsible agent for redemption in standard or other "lawful" money. Or secondly, if the holder of the note be himself a debtor of the issuing or of another bank he may use the note in liqui dating his own indebtedness. Thirdly, the holder of the note may be a bank depositor and may utilize the note in increasing his deposit. These may now be separately con sidered.

What inducement is there for the holder of a bank note not himself a bank debtor or depositor, to present the not for redemption in standard or lawful money? Unlike the check resting on a bank deposit the bank note is the em bodied promise of the bank itself to pay, and to the exten that the bank is more widely and more favorably known than are the individual depositors the note is more secure than the check, and it enjoys in consequence a more gen eral acceptability. Hence there is little incentive from the point of view of security for the noteholder to redeem the note. Furthermore bank notes are usually issued in convenient denominations of regular multiples of the standard unit, and they become therefore just as con venient for exchange purposes as standard money itself Where paper money is preferred to coins they may be even more convenient. There would be, in consequence, little reason from the point of view of convenience to insist upon redemption. Consequently, it may be said that, since for the purpose of transacting exchanges or for storing value bank notes are generally as satisfactory as standard or lawful money, there seems to be little reason to suppose that noteholders not bank debtors or depositors will present their notes for redemption.