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 currency,
 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 maintained
 that convertibility precludes the possibility of a bank-note
currency becoming excessive. This view, adopted by the Bullionists
 of England, received rather little support in America. Convertibility,
 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 accepted.
 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.