han one hundred per cent of the demand
obligations thereby created are unsafe, since a less amount is likely
to force liquidation on the banks' customers, with the results above
indicated.
The most elaborate regulations for the prevention of inflation have
been developed in connection with legislation concerning note issues.
The reason for this is the fact that commercial banking was at its
origin and for a long time thereafter carried on almost exclusively
through note issues, the conduct of checking accounts being a
comparatively recent development. The phenomenon of inflation was,
therefore, first observed in connection with note issues and
associated with them. Even now the essential similarity of note issues
and checking accounts as banking instrumentalities is not universally
recognized.
The means of safeguarding note issues which have been incorporated
into legislative enactments are the prior lien on assets, the safety
fund, the requirement and sometimes the mortgaging of special assets,
and the limitation of the total issues. By the prior lien is meant the
provision that in case of failure the note holders shall be paid in
full before any of the assets are distributed among other creditors.
By the safety fund is meant a required contribution from each bank,
usually a percentage of the amount of notes issued, placed in the
hands of some public official and kept for the redemption, in case of
failure, of such of the notes of failed banks as cannot be redeemed
out of the assets of the banks themselves. Additional contributions
from the solvent banks are required for the replenishment of the fund
when it has been depleted.
The practice of different countries regarding the requirement of
special assets to be held against note issues, as well as regarding
the mortgaging of such assets, is not the same. Germany and France,
for example, require their banks to cover their note issues by
designated proportions of commercial paper and coin, while the United
States requires its banks of issue to cover their notes by government
bonds and to contribute a five per cent redemption fund in addition,
and England requires the Bank of England to cover a designated amount
of its issues by government and other securities and the remainder by
coin. Unlike the others, the United States mortgages to the note
holders the securities, that is, the government bonds, required to be
held against the notes, by providing that in case of
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