1 In order to increase the amount of money available for use, and at the same time produce what is known as an " elastic currency, " that is, a form of money which can be increased or diminished within certain limitations, as the exigencies demand, national banks are authorized to take out " circulation; " to issue what are known as "national bank notes," being one of the most common types of paper money in use in the United States. There must, however, be certain security behind these notes, other than the promises of the banks to pay, in order to protect the holder of such money, and thus make him willing to accept it at its face value without hesitation. The law requires that a bank, for instance, wishing to issue $100,000 in bank bills, must first secure $100,000 United States bonds. (No bank can issue "circulation" greater than its fully paid up capital stock.) Any unmatured interest-bearing United States bonds may be used, provided they are in registered form,. " Circulation "may be taken out against these bonds to the extent of their full face value, and, in the case cited, $100,000 in national bank notes may be issued by the bank.2 Should the market value of the deposited bonds fall below par, the Comptroller may demand legal tenders, or enough more bonds, to fully protect the notes issued. The United States' " promise to pay," therefore, is back of the bank notes, in addition to the assets of the bank issuing the same; strengthened by the lawful money reserve (see " Reserve") and the 5% redemption fund. (See "Five Per Cent. Redemption Fund.")
1 Cleveland defines a " National Bank Note "as: "A promise of a national bank to pay to the holder, or bearer, on presentation, the amount named in the bill in legal-tender money of the United States - i.e. in gold, silver coins, or greenbacks. This makes the bank-note indirectly convertible into gold at the option of the one owning or holding it."
2 In October, 1906, the Secretary of the Treasury announced that he would accept approved securities - meaning in general thereby, railroad bonds which are legal investments for savings banks in Massachusetts of New York - other than Government Bonds, for United States deposits, to the amount of $18,000,000 with the understanding that the United States Bonds thus relieved should be used as a basis for increased circulation. Any bank taking out such circulation was required to retire the same between March loth and August 10th, 1907.
This has provided us with a safe and sound currency, circulating throughout the country without discount or distrust. It is immaterial in what part of the country the issuing bank is located, whether it is solvent or has gone into the hands of a receiver, the United States is virtually behind the notes, and pledged to redeem them.
The Government does not allow a greater reduction in the total amount of "national bank notes" outstanding than $9,000,000 in any one month. This does not apply in the case of bonds called for redemption, for notes secured by such bonds may be retired. This provides against too great a contraction in the currency. It further provides that every bank must deposit with the Treasurer of the United States a certain amount of bonds, but not less than $50,000, according to the amount of its capital stock. It is optional with the bank as to the issuing of circulation against them, however. That occasionally a bank has not thought it advantageous to take out circulation is demonstrated in the case of the Chemical National Bank, of New York City, which took out no circulation until the year 1907. This is a noteworthy example, because of the prominence of this old institution.
"National bank notes" shall be received at par in all parts of the United States in payment of taxes, excises, public lands, and all other dues to the United States, except duties on imports; and also for all salaries and other debts and demands owing by the United States to individuals, corporations, and associations within the United States except interest on the public debt, and in redemption of the national currency. They are not "legal tender," and must not be counted in the "reserve" of a national bank. All national banks must receive notes of other national banks at par. These notes are redeemable in lawful money of the United States by the Treasurer, but not by the Assistant Treasurers.
"In calculating the profit the interest on the bonds is added to the interest received on the circulation loaned at 6 per cent., giving the total receipts on an investment in $100,000 worth of bonds as $8,000. From the gross receipts are deducted the taxes on circulation, average expenses incident to cost of plates, redemption charges, etc., and the amount set aside as a sinking fund to provide for the premium paid for the bonds, the difference being the net receipts. Assuming that the amount invested - $100,000 worth of bonds - was loaned at 6 per cent., the profit on the issue of circulating notes will represent the difference between the interest on the amount invested in bonds and the net receipts from the interest on bonds purchased and the amount received by loaning the circulating notes."