1 8 W. G. Langworthy Taylor 



drawn by solvent persons, are preferable to a portfolio full of 

 stocks and bonds subject to the fluctuations of the stock exchange 

 and which could not be sold on a falling market in the case of a 

 crisis. Almost all banks invest temporarily in government bonds, 

 but the English banks have learned to their cost the disadvantage 

 of holding English consols for the last two years. Those banks 

 have been compelled to change their investment in order to stop 

 the effect of the depreciation of the 'best security in the world,' 

 which had fallen in a few years from 114 to 911" 1 While the 

 language of Raffalovich is that of business rather than that of 

 science, it shows plainly the evils of banking on bonds, and, inci- 

 dentally, of government interference in the banking business. 

 The same point has been made by Juglar. 



It may be noted in passing that the object of American legis- 

 lation with respect to banks has been different from that of Eng- 

 lish. In England it has sought to prevent crises by making 

 inflation impossible; in the United States the object has been 

 more democratic, namely, to provide absolute security for the 

 circulation. It has been supposed that notes were more used by 

 the common people, and hence more deserving of protection. 

 Protection of this sort, however, has been accompanied by ine- 

 lasticity. It would appear, at first sight, that the small circula- 

 tion in the United States, compared with the business done with 

 deposits, would make 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 the country has been 

 so behindhand in obtaining better legislation upon the circula- 

 tion. Nevertheless, as Dunbar aptly remarks, 2 we can not tell 

 how large the circulation might be if it were not restricted by 

 the requirements of bond deposit. This is only another way of 

 saying that legislative regulation confining its attention to notes, 

 like that contained in Peel's act and in the national bank act, has 

 stimulated unnaturally the growth of the deposit system. Are 

 we to infer that when legislators thoroughly interest themselves 



Arthur Raffalovich. Marche financier, 1901-2, p. 62. 

 2 Op. cit., p. 75, sqq. 



238 



