1 E. g., see New Hampshire Compiled Statutes of 1853, ch. 148, § 30. For objections see Comptroller's Report, 1898, p. xiii. et seqq.

The method described in this supposed case, of protecting the issue of notes by a deposit of securities in the hands of some public officer is that which was adopted by the State of New York in 18381 and was long known as the "free-banking" system.2 Many other States followed the example of New York, and finally in 1863 the New York plan was adopted by Congress as the basis for the national-banking system.1

1 For an account of the New York system and its adoption by other States, see Dunbar, Economic Essays, pp. 317-329.

2 The term "free banking" was applied to this system because the law of 1838 was the first general banking law in New York. Previously a special charter was necessary in the case of each bank.

If, now, we vary the above supposition so far as to imagine the property pledged for the protection of the notes to consist, not wholly of securities, but of securities to a certain amount and of specie for all notes issued in excess thereof, we shall have in substance the provision made by law in 1844 for the protection of the notes of the Bank of England.

Besides other reasons, already adverted to, for seeking legislative protection for bank-notes, the belief has been common that banks are under a special and dangerous temptation to overissue notes, thus causing their depreciation with loss to the public. It has already been shown, however, that the question whether notes shall be issued or not is one which in modern banking is not settled affirmatively by the bank, but is settled by the creditor, who determines for himself and with an eye to his own convenience whether to hold his right, as against the bank, in the form of a note or of a deposit. The really serious question would be whether the bank can extend the use of its credit, by deposits as well as by notes in excess. This is as much as to ask whether the bank can go too far in the purchase of securities, or in other words, can unduly stimulate borrowers, the making of loans being the purpose for which the bank extends its credit. But this question cannot be answered without qualification. If we observe any period of ten years, we shall find some years in which banks have found the public depressed and spiritless, to such a degree that, with every motive for increasing their business, it has been impossible to find sound commercial paper in sufficient amount. So far from being able to extend their credit in excess, banks have at such times often reduced their capital because employment for it could not be found. Other years we shall find in which the public spirit was buoyant and adventurous, and in which the banks have fostered and increased the general tendency to speculation, by the facility with which they have given the use of their credit. It is true then that banks cannot extend their liabilities of either sort except in response to a demand from the public; it is also true that in certain states of business this demand may be unduly stimulated by their action, and that issues made in response to an unhealthy demand are in excess of the proper needs of the community. In any such period of general expansion of bank credit, however, banknotes play the least important part.

1 See Dunbar, Economic Essays, pp. 317-329.

In the absence of special restrictions there is greater danger of excessive credit expansion in the form of bank-notes than in the form of deposits by particular banks if the number of banks issuing notes is large. Reference has been made in a preceding chapter to the system by which, in most banking centers of any importance at the present time, banks holding checks drawn upon each other settle their accounts by means of a Clearing House, where checks are exchanged and the resulting balances are paid in cash. A moment's consideration will show that this method of systematic and early presentation of demands must act as a strong and salutary restraint upon the undue expansion of deposits by any particular bank. Against a general imprudent expansion by the banks of a community, acting under the impulse of some wave of overconfidence or of speculation, there appears to be no safeguard except that which may be found in the relations of the community in question with others. The larger volume of checks which a bank presents at the Clearing House will be offset by the larger volume of checks drawn upon it which other banks have received. Excessive credit expansion on the part of the banks generally can only be avoided by the adoption of a conservative loan policy. But if a single bank, or a group of banks, imprudently expands its loans by the use of its credit, it must soon begin to face the effect in the demands for settlement made upon it through the Clearing House. It may be able to reckon with some confidence on the omission of some depositors to draw promptly for the amounts due to them, but whatever checks are drawn it must be prepared to meet without delay, for few checks for any considerable amount, when they have once left the hands of the drawer, will fail to make their way quickly into the deposits of some bank and to appear at the Clearing House on the following morning.

It must be added that the operation by which demands are presented through the Clearing House is one in which the banks presenting the demands are scarcely voluntary agents. They are aware that they must meet checks drawn upon themselves, and are impelled in self-defense to present by way of offset all claims that they can bring forward against others. Demands which they might conceivably delay under a looser system, or press with less regularity, it is for their interest to bring forward at once as a part of their own provisions for the inevitable daily call to be made upon themselves. Even the possible disposition to forbearance, which a creditor bank may feel in a particular case, must be weakened by the consideration that others will not fail to require any payments that may be due to them, and that by forbearance the bank only consents to the preference of their claims over its own. The prompt presentation of checks for payment is therefore the established practice, implying no jealousy, hostility, or suspicion on the part of the creditor bank, - being in fact the natural disposition to be made of an instrument of credit intended to be but short-lived.