At

habits of the community. It, therefore, varies with the seasons and is greater at times when certain kinds of payments, like those for dividends, interest, rents, wages, etc., fall due than at others. In this and most other countries the spring and fall are seasons of large demand, the former because agricultural activities are then starting, and the latter on account of the movement of the crops. the beginnings of the quarters, especially of the first and the third, this demand is also great. Interest on enormous issues of government and corporation bonds then fall due and dividends are most apt to be paid at those times. In Scotland half-yearly payments, such as rent, interest on loans and mortgages, wages of farm servants, etc., customarily fall due in May and November, thus causing an unusual demand for cash at those times.

The extent to which people use hand-to-hand money instead of checks is also partly a matter of habit and of the enterprise of the banks. Until considerably after the first quarter of the nineteenth century the banks of England catered chiefly to the government and its employees, the nobility and the great merchants. The joint stock bank of discount which appeared in the thirties gradually changed this custom, however, and made banks popular among all classes, thus enormously increasing the proportion of bank currency to cash used in the ordinary transactions of the people. In this country banks have been popular almost from the beginning of their history, and bank currency, at first in the form of notes and later in the form of deposits, has constituted the larger part of our currency for nearly a century. With the multiplication of banking institutions, however, and their easier accessibility to people in small towns and country districts, the use of bank currency is constantly increasing. The people of the continent of Europe have been more backward in this particular than the Eng

lish and the American, but the use of the deposit account is yearly becoming more and more popular there and banknotes for many years have been widely used.

For the cash which it needs the ordinary bank depends upon the deposits of its customers and upon drafts on its correspondents. Any excess coming from the former source is usually shipped to correspondents and any deficit supplied by them. The task of supplying the entire country with hand-to-hand money is thus transferred to the great financial centers in which are located the institutions that act as final correspondents for all other banks,in this country to New York, in England to London, in France to Paris, in Germany to Berlin, etc. How this problem is solved in this and certain other countries will be discussed in a subsequent chapter. Here it is sufficient to say that the regulation of the reserves cannot be disassociated from the regulation of loans and discounts and noteissues. The volume of the former must be so arranged as to keep the deposits within such limits that the cash available will be adequate to meet the demands of depositors. To meet these demands, however, properly secured bank notes are nearly as efficient as coin or any other form of hand-to-hand money, and hence the method by which they are supplied and regulated is vital to this discussion.

In most countries no attempt is made directly to regulate the amount of the reserves by law. To this rule, however, the United States is a prominent exception. Our national banking act requires that banks in country towns shall keep a reserve of 15 per cent. of their deposits, of which at least two-fifths must be in cash in their own vaults and the remainder on deposit with approved national banks in certain specified cities known as reserve cities. Banks in these cities are required to keep a reserve of 25 per cent. of their deposits, of which at least one-half must be in cash in their

own vaults and the remainder on deposit with approved national banks in the so-called central reserve cities. Banks in these cities must keep 25 per cent. of their deposits in cash in their own vaults. Similar requirements are imposed upon other banks by the laws of the various states.

The efficiency and desirability of such laws are open to question. That they are not essential to sound banking is demonstrated by the experience of other countries. As an objection to them may be urged the impossibility of classifying banks according to their real needs for cash. Different localities make very different demands upon their banking institutions, much depending in this respect upon the nature of the business carried on and something upon the customs of the region. Hence, when all banks are placed in three classes, one of two results is quite certain to follow. Either the limit set by law will be so low as to afford no real protection, or it will be in some cases so high as to seriously interfere with the accommodation which the banks ought to be able to render to the business of the community. The weight of this objection becomes more apparent when we consider the effects of the clause requiring banks to stop discounting as soon as their cash. reserves fall below the legal limit. This regulation makes these reserves practically useless at the time when they are most needed. Cash reserves are most apt to be infringed upon in times of incipient or actual crisis, and it is precisely on such occasions that banks should be able to accommodate business men to the greatest extent possible, that they' should be able indeed to discount first-class securities in even greater amounts than in ordinary times. The provision in question, however, absolutely prevents this, and thus is apt to exaggerate the conditions which characterize such periods of industrial unrest.

6. Regulation of note issues.—In the legal regulation of

the banking business most states have distinguished between depositors and noteholders and have granted special protection to the latter. The chief reasons for this practice consist in the peculiarities of bank-notes to which reference has already been made and for present purposes may be summarized as follows:

(1) Notes circulate freely from hand to hand without endorsement, and, if issued in the proper denominations may answer nearly all the purposes of currency, even taking the place of coin. They are, therefore, less liable to be presented for redemption than other forms of bank currency, and in consequence make fewer demands upon the cash reserve. If unrestricted in their operations, bankers are thus tempted to neglect their reserves and unduly to extend their loans. Long and bitter experience has shown that bankers are unable to resist such temptation, and that unrestricted and unregulated note issues are a fruitful source of bad banking and commercial disaster.

(2) In order that bank-notes may perform their legitimate functions they must be rendered absolutely safe. They are the only form of bank currency which can serve as hand-to-hand money, but unless they are perfectly safe their circulation at par is sure to be restricted to the immediate locality in which they are issued, and consequently their general use as a medium of exchange obstructed.

Among the various means employed for the special protection of noteholders may be mentioned the prior lien upon assets, the safety fund, the mortgaging of special assets, the government guarantee, and the limitation of the total issues. By the prior lien is meant the requirement by law that in case of insolvency the claims of noteholders shall be satisfied out of the assets before those of any other creditors. The safety fund method is best illustrated at the present time in Canada. The banking laws of that country require

each bank of issue to contribute five per cent. of the amount of its issues to a fund kept and administered by a public official. In case of the failure of any bank its notes may be paid at once out of this fund, in which case the amount thus abstracted is replaced from the assets of the bank. If they are insufficient, the deficiency in the amount necessary to bring the fund to five per cent. of the remaining issues is made up by an assessment on the other banks. In this case the prior lien and the safety-fund systems are combined.

By the mortgaging of special assets is meant the requirement that banks of issue shall hold certain specified securities, the proceeds of the sale or of the collection of which, in case of insolvency, shall be used for the satisfaction of noteholders' claims. This is the method employed in this country. National banks, the only ones which issue notes, are required to deposit government bonds with the Comptroller of the Currency, who then prepares and sends to each bank notes to the par value but not to exceed the market value of the bonds deposited. The government guarantees the payment of the notes, and in case of the failure of the bank with inadequate resources uses the bonds as a means of indemnifying itself for the expense involved. This method was also employed by many of our states during the period in which state banks were issuing notes. Usually national bonds, the bonds of the state in question, and other specially designated bonds, and sometimes real estate mortgages, were accepted as security.

The guarantee of the ultimate payment of the notes by the state does not necessarily accompany the mortgaging of special assets, and it might easily be used independently or in connection with other methods. It cannot be recommended, however, in any case in which adequate provision