empowered, if necessary, to sell them to obtain the funds required to pay off the noteholders. Such is the case with the bonds deposited with the United States government by the reserve and by the national banks to protect their several note issues. The special assets chosen are, of course, those which it is believed can be most easily and economically liquidated. cash reserves are Special cash reserve requirements are also not uncom- Special mon. In Germany the Reichsbank is required to keep against its outstanding circulation a cash reserve of 33-1/3% customary in gold, silver, and imperial notes. In England beyond the £18 million-odd "uncovered issue"-namely the issue based wholely on government bonds-the Bank of England is required to keep a sovereign for sovereign reserve. Hence beyond the £18 millions the notes are virtually gold certificates. In France there is no special cash reserve requirement, but in practice the Bank of France maintains an inordinately heavy reserve in gold and silver. In the United States the reserve banks are required to keep a gold reserve of 40% against the federal reserve notes which they have issued. A special specie redemption fund is provided for the notes of the reserve banks and of the national banks which are based on bonds. This fund is in “lawful money" to an amount equal to 5% of the outstanding notes. It is used by the government to redeem notes and, in case of failure of a bank to keep its quota up to the required amount, the government may sell the bonds deposited as security. This principle of a specie redemption fund was originally worked out in New York during the thirties and forties. It was known as the "Safety Fund" system. Each bank made an annual contribution to the fund until its total contribution equaled 3% of its authorized capital. In New York, however, the fund was used to repay depositors as well as noteholders and the double strain proved more than the fund could support. Had the fund been used only for note redemp1 Vide Federal Reserve Bank Notes, page 250. Government guarantee tion it would have more than sufficed.' The "safety fund" principle is a vital element in the existing Canadian banking system. Beyond a limitation of the total issue to an amount equal to the paid-in capital the only special protection afforded to noteholders in Canada is the preferred position given to them as creditors, coupled with a double liability of stockholders, and the maintenance of the mutual guarantee fund contributed by the banks up to 5% of their circulation. Canadian bank notes are acceptable, however, throughout the Dominion. Indeed, it may be said that where there are numerous banks of issue some form of mutual insurance of notes is almost essential to guarantee uniform acceptability. As a final assurance to the noteholder mention may be made of the possibility of a guarantee of the notes by the government itself. The United States government, for example, guarantees the immediate redeemability of the reserve bank and national bank notes. The new federal reserve notes are indeed direct obligations of the United States government. In view of the other measures of protection thrown about bank notes in the United States a government guarantee would seem almost to be a work of supererogation. But the guarantee is there, and it undoubtedly clinches absolutely the complete acceptability of the notes throughout the country. There is no such guarantee in France, Germany, or England; nevertheless, in these countries the notes are issued by the big central institutions whose relations with the government are so intimate that there has naturally grown up a feeling of comfortable assurance that if the worst should come the government is "behind the bank." 1 See Robert E. Chaddock, The Safety Fund System in New York, Report of the National Monetary Commission. SELECTED REFERENCES C. A. CONANT, Principles of Money and Banking (1905), Book IV, Chapters II, III, and IV; Book V, Chapters II and VII. Report of Monetary Commission of Indianapolis Convention, Part II, Sections 84-96 inclusive, and Sections 230-232 inclusive. H. PARKER WILLIS, American Banking (1916), Chapters V and VIII. Are banks producers? They safeguard savings CHAPTER III THE ECONOMIC SERVICES OF BANKS Having analyzed the main activities of the modern bank and having examined the two forms in which its credit manifests itself we can appropriately consider the question of the importance of such activities in modern business life. In short the question is now raised, what good are banks anyway? Do they help society in the process of wealth production? Are they themselves producers? Or are they parasites reaping where they have not sown? Banks were defined as institutions which receive deposits and which extend credit. In the simple process of receiving deposits apart from the further use that is made of them the banks render a distinct service to the community. In a society dependent upon exchange and upon the use of money, individuals, as has already been said, receive their income in the form of money. The proportion of this money income that is "saved," as we say, determines the amount of wealth that will be returned to society for further use in production. In the first instance then, for the purpose of adding to society's fund of capital it is important to facilitate in every possible way the accumulation of savings. Banks play a considerable rôle in this connection. They provide, usually free of charge, a safe depository for funds. That putting money in bank is a safer way of saving than by hiding it in an old stove or by burying it in the garden, is conclusively proven by experience in the past and by recurring experiences in the present. The chances of loss are less for money in the bank than for money kept at home. Special banks like savings banks regularly pay interest on sums deposited. Ordinarily, however, they are pro- They stimutected by law from withdrawal without previous notice. late saving Such banks can, therefore, tie up their resources in less liquid but more profitable forms of investment than the commercial bank, subject to heavy demand liabilities, could afford to consider for the investment of any large part of its funds. But commercial banks too pay interest on "special or time deposits" subject to withdrawal by the depositor only after an agreed notice has been given. Moreover, the custom of paying interest on average balances above a certain minimum is well-nigh universal throughout the United States. For years the payment of such interest was looked upon by conservative bankers as unsafe banking, and it is still so regarded by a large number, but the keen competition for deposits among the banks in the larger cities in time overcame these conservative scruples. But neglecting the possibility of interest on deposit balances the fact remains that through offering, usually free of charge, the opportunity safely to store a sum of wealth, subject to withdrawal on demand or after short notice, banks add to the security and convenience of saving. It may be said, therefore, that one of the services rendered by banks is to stimulate saving. Another important service rendered by banks is to be found in connection with their more active functions. Credit, as everyone knows, has come to play a tremendous part in modern exchange. Some estimate that as high as 90% of our total exchanges are transacted by means of credit in one form or another. Professor Kinley's estimate, however, is lower, namely from 60 to 75%. But these estimates do not include transactions settled by means of hand to hand money, most of which, in this country, is itself "credit money." Hence if the use of all credit media were for some reason or other completely abandoned, and the violent assumption were made that the same number of exchanges would be transacted, gold alone would have to be employed as the circulating medium, and the They permit society to econo mize in the use of capital |