Financial Legislation and its Limitations. 



17 



have its organic guaranty, no matter what the politicians, or the 

 legislatures, or the statute books, think about the matter. 



It is claimed that government guaranty of deposits is calculated 

 to weaken free competition and hence responsibility in banking. 

 It affords the politician-banker an advantage over the tried, ex- 

 perienced banker, and discourages the latter. However, the 

 bankers will doubtless seek compensation in consolidation and a 

 common understanding — a result not popularly desired. They 

 will try to ostracise the politician-banker. 



The " Bullion Report " produced little more than an academic 

 effect, and Peel's Act was after all a beginning of legislative 

 reform. It is admitted to have had the good result of stimulating 

 the banking department of the Bank of England to keep a larger 

 reserve in time of crisis and thus, indirectly, it brought into 

 greater prominence the difference between the circulating and 

 guaranty functions. The Act also recognized that inflation comes 

 through credit, although it made the mistake of thinking that 

 undue commitment arises solely from expansion of notes; for it 

 attempted to prevent crises by restricting the issue of notes alone. 

 The banking department, consequently, was caught with an in- 

 sufficient reserve against deposits several times thereafter, until it 

 learned its lesson from experience. 



§ 14. The first two United States Bank acts, those of 1781 

 and of 1816, recognized the resemblance of notes to deposits to 

 this extent, that they did not mention the distinction between the 

 two in limiting the amount of obligations into which the bank 

 might enter to twice the capital together with the reserves ; but, 

 as already mentioned, deposits were, in those days, insignificant 

 in America as well as in Europe, and probably were not thought 

 of especially in the framing of that provision. The present 

 National Bank Act of 1863-64 made formally a backward step 

 by restricting the application of its guaranty fund to redemption 

 of the notes loaned. Of course, it could not have guaranteed 

 deposits by a dollar to dollar fund. The mention of notes at all 

 is a symptom that deposits were, by that time, 1864, becoming 

 more important. But the act made a step forward in only limit- 

 ing the amount of notes loaned to the capital, and in thus allow- 



Peel's Act 

 attempted too 

 much in the 

 way of dis- 

 courag^ing un- 

 due inflation, 

 and naively 

 ascribed infla- 

 tion to bank 

 notes alone. 



The first 

 and second 

 United States 

 Bank Acts 

 ignored the 

 deposit busi- 

 ness. 



131 



