AV. 
Remarks on Specie Reserves and Bank Deposits. 
By FRANCIS BOWEN, 
ALFORD PROFESSOR OF MORAL PHILOSOPHY AND POLITICAL ECONOMY IN HARVARD COLLEGE, 
[ Communicated to the Academy, November 81, 1861.] 
THE question is, whether any regulation of the amount of the specie reserves in 
banks will avert, postpone, or alleviate a commercial crisis, and the suspension of specie 
payments by the banks, which is a frequent consequence of such a crisis. 
The old theory upon this subject is, that a crisis is the result of an undue expansion 
of the bank circulation, leading first to a general enhancement of prices, and then to 
an export of specie; that this export diminishes the specie reserves, and thereby 
obliges the banks, for their own security, to contract the circulation, making it as 
much too small as it formerly was too large, and thus necessitating what is called “a 
scarcity of money," — that is, a fall of prices, a rise of interest, increasing difficulty in 
the payment of debts, and general distress and bankruptcy. The conclusion is, that 
legislation is necessary to compel the banks always to retain on hand a certain consid- 
erable amount of specie reserve, proportioned to their circulation alone, or to their 
circulation and deposits united; and that this restriction will prevent them from 
issuing too large an amount of bank-bills in prosperous times, and will better enable 
them to meet a drain of specie when it comes, without unduly or aps contracting 
the circulation. | 
But this theory, after prevailing in the commercial and legislative world for about 
half a century, and doing a vast amount of mischief, has at length been so far refuted, 
both by reasoning and experience, that it is now seldom mentioned except in docu- 
ments which have rather a political than a commercial or scientific character. To 
mention only a few of the decisive considerations against it: — 
l. The banks cannot expand their circulation, even if they would. Every bank 
cashier knows, that, if he issues an unusually large amount in bills one day, there will 
be a proportionally large reflux of them, both that day and the succeeding one, mostly 
