PRINCIPLES OF NOTE ISSUE

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securities.! We have now to deal with the discussion of government
 stocks as the security for a convertible note issue.
The first proposal for such a plan seems to have been that which
Professor John McVickar advanced in 1827. Banks should lend,
not their capital, but their credit; the capital should properly
serve simply to give creditors assurance. This purpose can best
be accomplished by investing the capital in permanent securities
of undoubted soundness. Moreover, bank notes circulate among
those who are incapable of determining the financial circumstances
of the issuer, and whose interest should justly be safeguarded by
the pledge of acceptable stocks. Let banking, then, be made free
to all, under a general statute, upon the condition that ninetenths
 of the capital be invested in government stock, and that
these securities be pledged for the redemption of the bank’s promissory
 notes, which shall not be issued in excess of the amount of
stock held for this purpose.?
Eleazar Lord, in his Principles of Currency and Banking, published
 two years later, adopted McVickar’s suggestion as alternative
 to the issue of paper money in limited quantities by the government
 itself. Note-holders would be secured by the fact that
capital to the full amount of the outstanding circulation was being
withheld from the hazards of commercial banking;?® and the
banks, because of the interest borne by the securities, would be
able to refrain from the mischief of returning more money into
circulation than had been withdrawn from it in the payment of
capital.* Also, the undesirable elasticity of bank notes would be
eliminated.’ To prevent violation of the law, let the government,
 upon the deposit of the securities, turn over the proper

! A. M. Davis, Origin of the National Banking System, p. 9, regards the proposition
 as the first one suggestive of the National Banking System.
? McVickar, Hints on Banking (1827), reprinted in the Financial Register (1838),
ii, 325-327. The first and second Bank of the United States, three-quarters of the
capital of which was payable in government stock, and the Bank of England, whose
entire capital was invested in government securities, were cited as precedents by
McVickar and others.
3 Principles of Currency and Banking (1829), p. 84.
4 Ibid., pp. 65-67. Cp. pp. 55-65. In reality the original capital is also returned
into circulation when government stocks are bought with it.
5 Ibid.,p. 54.