PRINCIPLES OF NOTE ISSUE 137

change for which the bank notes were given. The goods are sufficient
 to redeem the notes issued upon them, and therefore sufficient
 to pay or redeem the bank notes substituted.” ! Thus the
very merchants through whom the notes are placed in circulation,
create a demand for them exactly equivalent to the whole
amount extant. One accepts the notes in exchange for what he
sells, not because of the specie into which they profess to be convertible,
 but because he knows that, by virtue of this demand,
the notes will be received for what he purchases. ‘It is not, then,
that bank notes may be useful, that they are payable on demand;
it is, that they may be subjected to a constant test of their soundness.”
 The British Restriction Period bears out the fact that,
“The process of adjustment by which men are enabled to apply
what others owe to them in satisfaction of what they owe to
others . . . is in no way dependent upon money.” 2
Colwell did not rest his case with denial that convertibility is
necessary to the proper functioning of bank currency, whether
notes or deposits. The manner in which the notes are issued
necessarily implies a demand for them, on the part of borrowers,
that is sufficient assurance that they will have value, and that
they will not be overissued; and insistence upon convertibility is
as disastrous as it is dispensable. In demanding that bank notes
be payable in specie on demand, as a test of their soundness, “we
impose a criterion which, when the time of application arrives,
forces the bank to admit failure, or to become a scourge to the
community by inflicting the hardships of a drastic contraction.”
The only alternative would be the keeping of a reserve of onehundred
 per cent against all demand liabilities.?
Banks whose notes and deposits are payable in specie on demand
 have no choice but to contract when specie is being witht

 Colwell, Ways and Means of Payment, p. 235. Cp. p. 195. Elsewhere he
recognizes that the banks’ borrowers may be unable to market the products at a
sufficient price to enable them to meet their obligations.
? Ibid.,p. 300. Cp. p. 400. Colwell held the view that the disparity between
bank notes and gold during the Restriction Period was the result of appreciation of
the gold, expressed in terms of money of account, and not of depreciation of the
notes.
3 Ibid., pp. 11, 12.