The safe-deposit business involves an interesting legal question of the exact relationship between the bank and the depositor. As explained at the beginning of the chapter, this relation in one of bailor and bailee. In view of this position, what is the extent of the bank's responsibility for property which it is holding for the depositor? The courts have held that the bank must exercise "due diligence." This expression has been interpreted to mean that it must provide at least the same protection as for its own property. The tendency of the courts has been to extend the liability of the banks even beyond this point, and to hold that it must give the same degree of protection which a prudent man would exercise in protecting his property. Hence an ordinary safeguarding is insufficient and special protection in the form of modern mechanical devices must be provided by the bank.

Obviously a bank cannot be held as an insurer of the contents of a safe-deposit box, since it has no knowledge of the contents. If this were the case, a box which brings a rental of $10 may involve a liability of possibly $100,000. The extent of the bank's liability and the exact relationship between the bank and the depositor is usually defined in a -safe-deposit receipt or contract. While a bank cannot legally waive its ordinary liability under common law, and ethically should not try to contract out its just responsibility, nevertheless unnecessary litigation and misunderstanding can be avoided by a properly drawn receipt. This may contain a non-liability clause such as the following: "the box is rented subiect to all risks against loss by fire, theft, embezzlement, and burglary and without any liability whatever against the bank for any loss or damage occasioned thereby. Thus a bank receiving safe deposits should follow a conservative policy in advertising its services and avoid misrepresentations such as claiming that its safes are burglar proof. Also, it is well to maintain a careful system of records, especially for filing the signatures of persons who have access to the boxes and for registering all visits to the vaults.

CHAPTER VIII

BANK NOTES

THE term "bank notes" is often loosely applied to any kind of paper currency, just as the term "paper money" is used without discrimination. Although we are not dealing here with the principles of money, except in so far as they are directly connected with banking, it is necessary to discuss briefly the use of paper as a circulating medium in order to give the bank note its proper perspective.

I. PAPER SUBSTITUTES FOR MONEY.

By money is properly meant so-called legal tender or standard money as embodied in a coin of recognized weight and fineness. Comparatively early in modern history, there arose a practice of substituting paper representatives for money. At first these paper representatives were simply warehouse receipts or pieces of paper certifying that a certain number of coins of a given kind had been deposited somewhere. They were useful and convenient so long as the confidence was generally entertained that the actual money was behind the paper certificates. After a time, however, holders of such money got into the habit of using it to pay for investments or titles to property, so that eventually they were in the position of having undertaken to hand a given amount of money to persons who were in possession of their receipts, although they possessed money in their vaults to only a fractional proportion of the total amount of certificates outstanding. The certificates had thus become claims upon the bank or issuer, while that issuer had used the money left with it for the purchase of other assets. Some money, held in relatively small amounts, had thus become a reserve for the payment of the paper, while the paper itself had assumed the position merely of

obligations which the issuer was bound to convert into coin when, as, and if presented. These paper obligations were bank notes in the sense in which that term is now used.

This brief historical survey enables us to recognize several kinds of substitutes for metallic money, as follows:

1. Paper representatives backed by metallic money, unit for unit, and used simply as a matter of convenience. To these the term certificates is properly assigned in current usage.

2. Paper representatives issued either as the result of the actual deposit of metallic money, or as the result of a loan made by the banks and backed only by a fractional amount of money but sustained or protected by other assets. To these the term bank notes is currently applied.

3. Paper representatives which by law have been given a legal tender quality rendering them available for use in settlement of debts. These may have been originally either certificates or bank notes, or they may at times be new paper issued by the government and without any backing either of property or coin. Such representatives are usually called legal-tender paper, or in some circumstances fiat money.

II. Bank Notes.

The kind of paper currency in which the business public is most interested and which has come to serve a really useful purpose is the bank note. Certificates have a certain usefulness but of a limited kind. Legal tender paper, especially when issued by the government, is injurious-tending to depreciate and drive out all other forms of circulating medium. The only kind of paper substitute that is permanently serviceable and helpful to business is the bank obligation, which is backed by an adequate amount of metallic money, thus enabling the issuer to redeem when necessary, and is supported by the bank's possession of other assets probably convertible on short notice into coin through sale to those who possess such coin.

In this respect bank notes are really nothing more than the obligations of the bank that issues them, and they are

spoken of as currency, or (incorrectly) as money, simply because they take the place of a circulating medium which would otherwise have to be provided. In fact they are not money, and although stated in terms of money denominations they are really nothing more than a claim to a pro rata share of the assets of banks which have issued and liable for them. This being the case, the question is often asked why bank notes should be needed and why the notes of large business houses might not circulate equally as well.

are

In short, why might not the business man who wants to borrow simply pay off his obligations in his own notes, trusting to the fact that the notes would probably not come in very freely for redemption, just as is the case with the banks. As a matter of fact, a good many large concerns have, in years past, done this, and have sometimes been very successful in thus furnishing a sound currency where their credit was high and enjoyed a universal acceptability. But such conditions are found chiefly in primitive communities or in disturbed currency periods such as 1923 when the Stinnes concern and other large German industrials issued their own paper. Such notes are not to be expected in countries or societies where financial operations are complex and where there is much necessity for clearing and offsetting the obligations of different banks.

So on the whole the strong drift during the second half of the nineteenth century was toward making notes of this kind into bank notes in the strict sense of the term. The tendency, moreover, went further than this and moved in the direction of government control or oversight. This was partly because of a fear that the effect of such note issues would not be good from the price standpoint, but it was also partly due to the feeling that the supplying of a currency was really a government function involving a public service policy. As a result of this growth of opinion, the past twenty-five years have seen bank notes assuming more and more the position of central-bank notes-that is to say, notes issued by a central bank. Other banks have been gradually prohibited from issuing notes or have, through

the use of the taxing power or otherwise, been induced to give them up.

III. THEORY OF BANK-NOTE ISSUES.

Perhaps there is no phase of banking that has been so carefully studied and analyzed during recent years as that of the issue of notes, so that today it is possible to lay down in general terms what may be described as an accepted or recognized theory of note issue. First of all, it is generally admitted that the notes are not called for and are not desirable except as a supplement to coin. There is no recognized system whereby notes can wholly displace coin and yet retain their value. The reasons for this fact will later be more fully discussed.

If the notes be taken as a supplement to coin, the question is naturally asked how far and to what extent this supplementary function should go. In general the accepted theory holds that it should go only to the extent that business transactions increase. Thus, if the volume of business exchanges be denoted by 100 at a time when the number of metallic money units in circulation is X, theory would dictate that an increase in the volume of business exchanges to 200 should result in the creation of 100 units in bank notes, so that the total circulation of money and notes together would be 2X. As will be observed this is based entirely upon the assumption that all business transactions are effected by using notes to carry them out, an assumption which in modern life is erroneous although it may be taken as a basis from which to start in theorizing about bank notes.

While it is not true that under modern conditions all transactions in business life are the result of an exchange which takes form either in money or in bank notes, it is undoubtedly true that all those transactions which are not brought about through the passing of actual money are effected through the granting of some kind of credit. That is to say, every modern business transaction which is not effected through the actual passage of money gives rise to