100 BANKING THEORIES IN UNITED STATES monetary standard prevents the enlarged circulation from doing any additional work.! That banks furnish an inexpensive substitute for metallic cur- rency, as explained by Smith, was, however, one of the major advantages most frequently ascribed to them after 1825. But Smith’s doctrine was based on the belief that any tendency of bank notes to become excessive in quantity would immediately bring about a readjusting specie outflow. Not all were ready to concede this. Many thought that serious price disturbances took place before the redundant currency was drained off. Banks thus provided an inexpensive currency, but one that fluctuated in value. Smith had dealt with this contention himself, and had main- tained that convertibility precludes the possibility of a bank-note currency becoming excessive. This view, adopted by the Bullion- ists of England, received rather little support in America. Con- vertibility, it was commonly thought, does indeed prevent a permanent excess of bank notes, but not a temporary one. And this excess, even though short-lived, may be very considerable. A number of writers observed that, when the corrective export of specie occurs, the banks, in order to sustain their reserve ratio, must contract their note issue by several times the amount of the loss of specie, thus multiplying the depressing effect of a gold outflow. Another theory, likewise transplanted from England, was that bank notes cannot be overissued because they are emitted only in response to the demands of trade. So sweeping a thesis had little support; but the more modest claim that bank notes do not admit of overissue if emitted only against real commercial paper (as distinguished from accommodation bills) was rather widely ac- cepted. A few writers recognized, however, that the needs of trade, as indicated by the volume of bills of exchange offered for discount, may themselves become unhealthily inflated as the result of a rising price level. The votaries of the theory that the quantity of bank notes is 1 This reasoning involved the fallacy of overlooking the fact that the interest itself is paid in the depreciated currency.