The nature of the bank note is not such as to stimulate redemption

There is little inducement to the holder to present the note for redemption

It may next be supposed, however, that the noteholder is himself a debtor of the bank and the question can then be asked what likelihood is there of the credit represented by the note being redeemed? Here, of course, the chances of redemption are greater. But here too it must be recognized that not all noteholders are bank debtors and that there is no special inducement to the noteholder to use the bank notes rather than other forms of money or credit in liquidating indebtedness. If he be not a bank depositor he will in all likelihood simply count out the necessary sum from whatever funds first come under his hand. The average individual, especially if there be government notes as well as bank notes, does not discriminate between the different kinds of money. The redemption of the bank note in this case is then a matter of chance. It will all depend upon what proportion of the total general currency supply the bank note issue constitutes.

The third possibility concerned the use of the bank note in making a deposit. If the noteholder be a bank depositor the probability of redemption is greater than in the previous case. But here too it must be recalled that bank notes do not only get into the hands of depositors, and, further, that even bank depositors need a certain amount of hand to hand currency. According to the ratio of bank currency to total currency supply, therefore, the bank note is just as likely to be retained for pocket or till money purposes as is other money. Moreover, as a corollary it may be said that, according to the ratio referred to above, other forms of money are just as likely to be used in making cash deposits as are bank notes. Complications must be taken into account in connection with the second and third possibilities here discussed. The noteholder who is a debtor of or a depositor in a bank is not necessarily - and in most cases is not usually - a debtor of or a depositor in the bank issuing the notes he holds. In other words even where bank notes are paid into banks they are not necessarily paid directly into the issuing banks. Whether the credit represented by the notes will be redeemed or not when the notes are paid into banks other than the issuing bank depends upon the legal position of the notes. If the receiving banks may again pay out the notes, or if the notes may be considered a part of the lawful reserves, there is no incentive to the banks to collect or "clear" notes as they do checks.

Or to select it to pay a debt to the bank

Or to select it to make a deposit

Taking notes as a whole, therefore, it will probably be conceded that their nature is not such as to warrant the hope of speedy redemption. Pressure of some kind must be brought to bear on them if their overexpansion is to be guarded against. As here too overexpansion is a question of the relation between reserves and liabilities this pressure may be exerted in several ways, namely by expediting redemption, by limiting issue or by regulating reserves. As the best means to be employed in this connection depends upon a variety of considerations affecting the organization of the banking system as a whole the further discussion of the matter may profitably be deferred.

Selected References

C. A. Conant, Principles of Money and Banking (1905), Book VI, Chapter VI (Domestic Clearings And Exchange).

C. F. Dunbar, Chapters on the Theory and History of Banking (1906), Chapter VI (Domestic Clearings And Exchange).

Report of Monetary Commission of Indianapolis Convention (1898), Sections 97-102 inclusive, and Sections 217-219 inclusive.

F. M. Taylor, Some Chapters on Money (1906), Chapter VIII (Reserve Organization And Utilization).

The inducement to the banks to offer each other's notes for redemption depends upon the legal position of the notes

Pressure of some kind must be brought to bear on the notes