can no longer be increased except by deposit of gold, the depositcurrency provided by the Banking Department has been expanded in times of over-trading quite as certainly as under the old form of note-issues. Without going into details, it is sufficient to point out the error of supposing that by controlling the issue of notes alone expansion of the currency can be prevented. So far, however, as notes are the necessary currency of certain parts of the country, they will, of course, be the form through which any expansion must necessarily take place.

DEPOSIT CURRENCY.

90. The process by which a highly efficient medium of exchange is created by means of bank deposits has already been described. But its influence on the problems under discussion is not so generally admitted as it should be. If properly understood, those persons who profess to regard with favor a medium of exchange which expands easily in time of need should heartily favor a sound banking system out of which an efficient and expanding currency arises. The characteristics of this currency were clearly understood by Hamilton in 1790:

"Every loan which a bank makes is, in its first shape, a credit given to the borrower in its books, the amount of which it stands ready to pay, either in its own notes, or in gold or silver, at his option. But, in a great number of cases, no actual payment is made in either. The borrower frequently, by a check or order, transfers his credit to some other person, to whom he has a payment to make; who, in his turn, is as often content with a similar credit, because he is satisfied that he can, whenever he pleases, either convert it into cash or pass it to some other hand, as an equivalent for it. And in this manner the credit keeps circulating, performing in every stage the office of money, till it is extinguished by a discount with some person who has a payment to make to the bank to an equal or greater amount."

The same understanding also appeared in the statement of the Bank Commissioners of Massachussetts:1

"By far the most operative of the causes which have diminished the circulation of bank bills has been the increased use of deposits, bills of exchange, and drafts. To keep a bank account was once the badge of a large mercantile business; it is now the habit of most shopkeepers, mechanics doing a considerable

I

1 Report of Massachusetts Bank Commissioners (J. F. Marsh, Wm. D. Forbes, and George Walker), October 15, 1860, Executive Document No. 77, pp. 47-8, XXXVI Congress, Second Session.

Bank deposits are, properly

business, and professional men. speaking, a part of the currency; and for that reason our law wisely places them on a footing with bank bills in providing a specie basis for their redemption. This is a truth not always recognized, and sometimes even denied; but a moment's reflection upon the characteristics and functions of both deposits and bank bills will show that while they differ in the manner in which their value is evidenced, and their transfer accomplished, they do not differ in intrinsic character. Considered as a whole, deposits grow out of the discounting of paper, precisely as does the issue of bills; like them, they are capable of performing every operation of payment, and may effect a countless number of payments without any redemption being made of them by the bank; the only difference being that the transfer of bills is by manual delivery, while that of deposits requires a registration by the bank to perfect it. . . . . By the use of deposits the bank derives a profit, precisely as by the issue and circulation of bills; like bills, they are payable by the bank on demand in specie, and any unusual withdrawal of them affects the bank precisely as an unusual demand for the redemption of its bills would do. The suspension of specie payments by the banks of the city of New York in October 1857, which led to a similar suspension throughout this State, was not caused by the presentation of bills for redemption, but by the withdrawal of deposits."

91. And yet during the early part of our history there was little consideration given to the deposit currency, largely because the country as a whole was, speaking generally, then in the state of our present rural districts where note-issues and not deposit currency are chiefly required. As a consequence, legislation directed against bank expansion was concentrated solely upon note-issues. This has been fully explained by Professor Dunbar,' as follows:

"Besides the apparent ease of legislating upon note-issues and the obvious difficulty of legislation upon deposits, the notes were, in the earlier decades of our history, the more important

**Deposits as Currency," Quarterly Journal of Economics, vol. i, July 1887. The subsequent extracts are also taken from the same admirable paper.

of the two. The comparative sparseness of population and the imperfect development of the banking habit, in a new and more slowly advancing country and in a less advanced age than the present, created an early preference for the currency which passes from hand to hand, and discouraged the use of that which implies a resort to the bank. Even in the abnormal years 1809 and 1811, when all business was stagnant as the result of the embargo and subsequent non-intercourse, the note-circulation of the Bank of the United States was little below its debt to individual depositors, as shown by the only statements of that institution ever given to Congress; and, in the accounts even of the best developed state banks of that date, the notes have clearly the first place. The figures collected by Gallatin for 1820 and 1829 show the same preponderance of note circulation. The returns collected by the Treasury for many years, under the resolution of July 1832, show that it was not until 1855 that the deposits of the banks, taken in the aggregate, rose above their circulation. Even under such special circumstances as those of Massachussetts, the notes continued to be the more important element until 1858, with the exception of an irregular period. from 1806 to 1823, and two or three scattered years of exceptional conditions."

"And not only were the notes practically the more important during these years, but events riveted the attention of the public upon them. The suspension of specie payments at the close of the second war with Great Britain, the history of the second bank of the United States and the struggle for its re-charter, and the hard-money movement which finally led to the independent treasury system, all tended to keep the notes in the foreground, and to give the impression that banking was synonymous with note issue, as the old acts of Parliament treated it. The long-continued suspension of 1861 and the later controversies, turning primarily on the questions raised by the greenbacks, but involving the bank notes, have easily and naturally followed the same line."

92. The rapid growth of the deposit currency, which was out of all proportion to the growth of banking capital, and to the

quantity of national bank notes issued, is to be seen in the reports of the Comptroller of the Currency. These reports show how admirably this species of currency seems to have served the interests of the community, since this expansion, at the expense of notes, could have taken place only by the voluntary choice of the business public, arising out of its own conception as to what was most convenient. The figures' are given since 1875.

93. This highly efficient currency is certainly present in very large amounts-much larger than any other medium of exchange. But the one quality which characterizes it in a preëminent degree is its elasticity. And on this point we cannot do better than quote again the words of Professor Dunbar :

The table supplied by Professor Dunbar to 1886, has been continued to the present time.

Comptroller's Report, 1897, pp. 571, 572, and Finance Report, 1893, p. 532. *Estimated.