116 BANKING THEORIES IN UNITED STATES

the need of legal regulation. Gallatin, for example, maintained
that the business of deposit and discount calls for no more restriction
 than any other species of commerce! It was frequently
pointed out that bank notes circulate among individuals who
accept them without being in the position to use much discretion
in the matter; whereas the holders of bank deposits become such
voluntarily and with the opportunity of informing themselves
about the bank involved.2 Accordingly, such safeguards as legal
reserve minima, and regulation of the proportion of capital to
liabilities, were usually proposed for bank notes only? Now, it is
true that protection of note-holders (whether by safety fund,
prior lien, bond security, or what not), while depositors receive no
such protection, has an entirely valid justification. It is, however,
with respect to particular banks only that there is force in the
arguments that bank notes meet the test of presentation for payment
 less frequently, and that their acceptance is far less voluntary.
 There is no reason for distinguishing between notes and
deposits when machinery is being set up for the control of expansion
 on the part of the banking community as a whole. In urging
that it is with reference to note issue only that charters should be
required of banks, or minimum ratios of reserves and capital to
demand liabilities insisted upon, the part that deposits play in
causing fluctuations in the volume of media of payment was overlooked.
 And in general this was because of the failure to understand
 that deposits are created by the banks themselves in the
process of making loans.
Tt is not improbable that the tendency to miss the true nature
of bank deposits is in part to be explained by the relatively large
volume of deposits of a more or less permanent sort that were
held by commercial banks in the absence of any considerable development
 of savings banks. Before savings banks became preva-1

 Gallatin, “Suggestions” (1841), Writings, iii, 428. Cp. iii, 374; and Letter to
Maison (1836), ii, 516. This letter contains both the same view as that in the text
and another apparently inconsistent with it.
2 Gallatin, Letter to Maison, Writings, ii, 516; Hildreth, Banks, Banking, and
Paper Currencies (1840), p. 155; Bissell, “Banking in Massachusetts,” Bankers’
Magazine (March, 1853), vii, 677.
3 See Chaddock. Safety Fund System, p. 379.