A bank, by the issue of notes, puts into circulation as money its own promises to pay.  The customer, in borrowing money or in withdrawing deposits or cashing checks and drafts from other banks, is paid with the bank’s notes instead of with standard money.  These notes may be returned to the issuing bank either to be redeemed in specie or to be paid in some other form of credit, such as deposits or exchange.  The limit of the issue of such notes is the need of the community for that form of money, and if they are promptly redeemed in standard money on demand, they never can exceed that amount.  A holder of a note (in the absence of special regulations) has the same claim on the bank that a depositor has.  As it is to the interest of the bank to keep in circulation as many notes as possible, there is a temptation to abuse the power of note issue, to which many banks in America yielded in the period of so-called “wild-cat” banking before the Civil War.

Sec. 10. #Divergent views of typical bank notes#.  Some persons seeing in bank notes but a form of ordinary commercial credit (like a promissory note or an individual’s check) have contended that their issue should be entirely unlimited and unregulated except by the ordinary law of contract which makes the bank liable to redeem the notes on demand.  Such bank notes would not be legal tender, and every one would be free to take or refuse them as he pleased.  Each bank would thus put into circulation as many notes as it could, and as they would constantly be returned for redemption when not needed as money their volume would expand and contract with the needs of business.

It may be conceded that there is much truth in this view, but not the whole truth.  For, in reality, when bank notes are in common use, every one is compelled to take the money that is current.  This offers a constant temptation to the reckless and unscrupulous promotion of banking enterprises, as has been repeatedly shown (notably in America in the days of “wild-cat” banking before 1860).  The average citizen cannot know the credit of distant banks, and thus has not the same power of judging wisely in taking bank notes that he has even in making deposits in the bank of his own neighborhood.  Between bank notes and ordinary promissory notes there are other differences.  Bank notes pass without endorsement and thus depend on the credit of the bank alone, not, like checks, on the credit of the person, from whom received.  Unlike ordinary promissory notes, they yield no interest to the holder.  They go into circulation and remain in circulation for considerable time by virtue of their monetary character in the hands of the holders.  Thus they approach political money in their nature, and the banks are near to exercising the sovereign right of the issue of money.