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on an equal amount of government securities and is provided with
inadequate facilities for redemption. It responds to varying de
mands only sluggishly if at all. . Before a bank can • increase its
circulation it must first purchase bonds.and pledge them for security.
Such an arrangement instead of being sensitive to alterations, in
the demand for money responds only to a change im th^ market
price for bonds. A, decline in the price of government securities
seldom accompanies an increase in the demand for currency. Since
there is no reliable connection between money need and the price
of bonds,' an overproduction as well as a scarcity, of bank-notes may
be the result. Our national bank system has provided no cure for
redundancy by creating adequate facilities for redemption: Bank
notes are not convertible in the sense that they are exchangeable
for coin., Redemption is usually demanded only in the case of old,
ragged and dirty bills which deserve to be put out of Use, for
sanitary rather than economic reasons. New notes are issued for
bank bills that are too delapidated for further wear and there is no
automatic, contraction, no reduction of the volume afloat. True a
bank may at any time deposit lawful money to retire all or a part
of its outstanding circulation but the initiative comes from the issuer
and not the holder of the note. Such action is generally prompted
by a rise in the , premium on bonds and a desire to secure their re
lease and their conversion into coin. Even here the . discretion of
the banks is limited by a statutory restriction zthat not more, than
$3,000,000 Of circulation can be retired each month.
Most of the recent plans and suggestions for currency reform in
the direction of greater elasticity have favored the retention of the
national bank system with the device of a bond secured circulation
and have merely sought to correct patent. defects an d , to supple
ment its, shortcomings. Of . this type were the proposals Of, the'
New York Chamber of Commerce and the plan of the currency
commission of the American Bankers , Association, made in the
autumn of 1906. Recogniziftg that “not, > a permanent increase iiv
the currency was needed but only the addition of a variable element”
banks were to be allowed to supplement their bond^secured circula
tion by an additional issue of credit currency, portions of which were
to be taxed at a rate high enough to secure their retirement under
normal conditions of the money market. In December, 1906, the
House Committee on Banking and Currency reported, favorably
on a bill em bodying the main features of the bankers’ plan, but the