Financial Legislation and its Limitations. 



19 



§ 16. It may be noted, in passing, that the object of American 

 legislation with respect to banks has been different from that of 

 English. In the latter country it has been sought to prevent 

 crises by making inflation impossible; in the former, the intention 

 has been more democratic, namely, to provide absolute security 

 for the circulation. It has been supposed that notes are more 

 used by the common people, and hence more deserving of pro- 

 tection. Security of this sort, however, has been accompanied 

 by inelasticity. It would appear, at first sight, that the small 

 circulation in the United States, compared with the business done 

 with deposits, would render the question of elasticity of the 

 circulation of comparatively little importance:^^ There is much 

 truth in this view, and perhaps that is one reason why that 

 country has been so behindhand in obtaining better legislation 

 upon the circulation. Nevertheless, as Dunbar aptly remarked,'" 

 one cannot tell how large the circulation might be if it were not 

 restricted by the requirements of bond guaranty. This is only 

 another way of saying that legislative regulation dabbling in notes 

 alone, like that contained in Peel's Act and in the National 

 Bank Act, has stimulated unnaturally the growth of the deposit 

 system. Is it to be inferred that when legislators thoroughly 

 interest themselves in deposits also, the banking business will be 

 finally destroyed? However, everything points to the view that 

 the deposit system must increasingly preponderate over the 

 circulation. So long as the latter is wanted, however, it should 

 be properly regulated, if regulated at all, and not in such a 

 manner as to derange the level of prices and the rate of interest, 

 or to stimulate stock speculation. 



The law of June 3. 1864, under which the existing national 

 banks of the United States were organized, constituting really 

 the third national bank of that country, abolished the limit of 

 bank indebtedness that had been set for the first and second 

 banks. This change may be looked upon as a distinct advance 

 in the line of elasticity of bank obligations and, in view of the 



"An elastic currency is not a cure-all for crises. O. M. W. Sprague, 

 Crises under National Banking System, 213. 

 '« Op. cit., p. 75, sqq. 



A bond- 

 secured circu- 

 lation neces- 

 sarily inelastic. 



Compara- 

 tively small 

 importance of 

 circulation ia 

 the United 

 States. 



The Na- 

 tional Bank 

 Act of the 

 United States 

 favored elastic- 

 ity of deposits 

 but rigidity of 

 circulation. 



