The differences of situation among banks are so great and convenience of intercourse varies so much even in any limited district, that the law would have found it difficult to create and enforce any such effective system of compulsory daily redemption of obligations as the banks of cities have developed and set in operation of their own accord. The observed tendency is, moreover, to enlarge the scope of the system, bringing outlying banks more and more within its reach and quickening the course of business between different banking centers. This voluntary development of a system so searching and restrictive is unquestionably due to two characteristics of the check, which hinder its continued circulation. In its ordinary form the check carries no guaranty or other recognition of obligation by the bank on which it is drawn, so that prudence calls for its speedy collection, unless the holder is willing to depend upon the signature of the drawer and such endorsements as the check may bear. Moreover, as the amount for which the check is drawn is determined by the transaction in which it had its origin, it is little likely to be convenient for use in making any further payments, and its division or merger in any larger amount is not readily effected except by depositing it. The nature of the instrument then has led inevitably to the development of a practice which once adopted, is recognized as one of the most important of existing safeguards against the abuse of bank credit by a single bank or a small number of banks. Bank-notes have no similar tendency to speedy return. Although the obligation expressed by them is, in origin, purpose, and most of its effects substantially identical with that which exists be-tween the bank and its depositors, the evidence of the obligation is essentially different. Bank-notes express a direct promise by the bank, of payment to be made to the bearer; they are also issued in convenient denominations, and therefore adapted for continual circulation like coin. They may come back to the issuing bank in payments or may be deposited, but their return by these channels is uncertain, especially where there are many banks of issue. Their return is seriously hindered, moreover, by the fact that it is generally easier to use them than to present them for payment. For the holder, whether an individual or a bank, this is certain to be a controlling consideration, and one that is quite independent of any question as to the comparative abundance of currency or the extent to which bank credit is expanded. If there is but a single issuing bank, or if a large part of the circulation is issued by a few banks which make a compact group, the demand for specie for export, which is the natural corrective for an excess of currency, may sometimes be satisfied most conveniently by presenting notes for redemption. But if the issuing banks are many, and especially if they are scattered geographically, the operation of this corrective will obviously be slower by reason of the number and inconvenience of the demands for redemption needed for making up any considerable amount of coin. Under such circumstances a bank-note currency, once set afloat in excess or become excessive by a change in the condition of business, may be slow in coming to the mark to which, if really convertible, it must eventually adjust itself.
The systematic reduction of bank-notes, as an insurance against their possible excess, is therefore developed with much less ease and certainty than the corresponding restraint upon the use of credit in the form of deposits. The end to be sought - a wholesome restraint of a kind of credit which is easily abused - is the same. Indeed, public opinion and the law generally proceed upon the assumption that the use of the right of note issue is practically open to abuse, and that, for the protection of the public, special and sometimes elaborate precaution is necessary. Still the immediate convenience of the holder of bank-notes, for the reasons given above, is stronger than the more remote public interest, so that some form of pressure is usually needed for the development of an effective system of redemption among any large number of banks.
The Suffolk bank system of New England, the most effective note-redemption system which has existed in the United States, was forced upon the banks of that section by the concerted action of a few strong city banks, which found their natural field of circulation in Boston seriously invaded by country issues.1 The pressure thus established was finally made decisive by a legislative act which, in Massachusetts, forbade any bank to pay out any notes except its own, and thus compelled every bank either to send in for redemption any notes of other banks received in payment or on deposit, or to hold them as dead cash. The agreement under which the few Scotch banks have for more than a century returned each other's notes through a clearing house1 is a striking case of competition by few competitors in a limited field, and so, too, is the practice by which the somewhat larger number of banks in Canada2 send in for redemption the notes of their competitors. In each of these cases the struggle for a narrow field, intensified by the direct competition carried on by rival networks of branches, brings motives into play and creates a possibility of common action for mutual convenience which have no existence where the number of banks is large and their distribution greatly scattered. To take for illustration the 7600 national banks of the United States - no single bank can feel that its own power of circulation would be appreciably affected if it were to present for payment such notes of its 7699 competitors as it might chance to receive. The infinitesimal gain in this respect could not be counted in comparison with the inconvenience and delay to which it would have to submit. The natural course must be for each to extend its own circulation wherever the opportunity is found for doing so with profit, and to trouble itself as little as possible with respect to the circulation of others."