CHAPTER XIII

PRINCIPLES OF NOTE ISSUE (Continued)

The currency principle. — The question of small notes, — Bond-secured issue. —
I'he safety-fund system.

1. THE CURRENCY PRINCIPLE

THE weightiest as well as the commonest criticism of bank notes
was that they fluctuate in quantity, causing great variations in
prices. An obvious method of preventing such disastrous changes
in the volume of the currency was to require that notes be issued
only against an equal amount of gold and silver, thus withdrawing
one type of money from circulation just as rapidly as the other
type was put into it. This principle was stated at the very outset
of the discussion of commercial banking, but rather, it is probable,
from a naive prejudice against allowing banks to lend more money
than they had in their actual possession than from an intelligent
understanding of the difficulties of banking upon a partial reserve.
A bank, in the opinion of an anonymous writer of 1787, “should
not emit a single note beyond the sum of specie in its possession.’’!
James Sullivan, in his Pat’ to Riches, roused by the desire of those
who wanted to establish banks “to spring a mine of wealth without
 labor,” urged the same view? and as much was implied by
many of the early writers who opposed lending upon the basis
of a fractional reserve largely because they were mystified by it.
Proposals for an inelastic currency began to be made in the
eighteen-twenties. In 1823, the year in which Joplin first clearly
stated the currency principle in England, Raymond wrote that
the government should never delegate to private individuals and
corporate bodies its prerogative of furnishing the circulating

! Nestor, “Thoughts on Paper Currency,” American Museum (1787), ii, so.
The article was a reprint, and may have been written a year or two earlier.
* Sullivan, Path to Riches (1 792), Pp. 71-73, passim.
Silberling, British Theories of Money and Credit, 1776-1848 (unpublished
Harvard thesis), pp. 234-236.