The Theory of Money and Credit - Ludwig von Mises [181]
Nevertheless, something was overlooked in the calculations of the currency theorists. They did not realize that unbacked deposits were substantially the same as unbacked notes, and so they omitted to legislate for them in the same way as for the notes. So far as the development of fiduciary media depended on the issue of notes, Peel's Act completely restricted it; so far as it depended on the opening of deposit accounts, it was not interfered with at all. This forced the technique of the English banking system in a direction in which it had already been urged in some degree by the circumstance that the right of note issue in London and its environs was an exclusive privilege of the Bank of England. The deposit system developed at the expense of the note system. From the point of view of the community this was a matter of indifference because notes and deposits both fulfill the same functions. Thus Peel's Act did not achieve its aim, or at least not in the degree and manner that its authors had intended; fiduciary media, suppressed as banknotes, developed in the form of deposits.
It is true that German writers on banking held that it was possible to discover a fundamental difference between notes and deposits. But they did not succeed in demonstrating their contention; in fact they did not really attempt to do so. Nowhere is the inherent weakness of German banking theory more obvious than in connection with this particular question of the note versus the check, which for years has been the central issue of all discussion. Anybody who, like them, had learned from the English Banking School that there is no fundamental difference between notes and checks, and was in the constant habit of stressing this,[5] should at least be prepared to supply a detailed proof in support of an assertion that the banknote system represents "an earlier and lower stage of development of the credit economy" than the deposit bank and the check, with the connected system of the account current, book credit, and clearinghouse. [6] Certainly reference to England and the United States cannot be accepted as proof of the correctness of this assertion, least of all in the mouth of a decided opponent of Peel's Act and of the restriction of the note issue in general; for it is undeniable that the great importance of the deposit system and the decreasing relative importance of the banknote in Anglo-Saxon countries are the result of that act. The consequence is that the German literature on banking theory is full of almost unbelievable contradictions. [7]
The repression of the banknote, as it has occurred in England and in the United States—in different ways and for different reasons, but as a result of the same fundamental ideas—and the corresponding growth in importance of the deposit, and the additional circumstance that the organization of the deposit banks has not attained that soundness that would have enabled it to retain the public confidence during dangerous crises, have led to serious disturbances. In England, as also in the United States, it has repeatedly happened in times of crisis that confidence has been destroyed in those banks that circulate fiduciary media in the form of deposits, while confidence in banknotes has been maintained. The measures by which the consequences which such a collapse of a part of the national business organization would infallibly have involved were avoided are well known. In England an attempt was made to fill the gap in the circulation which was due to the lack of large quantities of fiduciary media by the Bank of England being ready to increase the issue of its own notes. In the United States, where the law made this solution impossible, the clearinghouse certificates served the same purpose. [8] In both countries, attempts to give this device a legislative basis were made. But Lowe's bill was not passed, and even the Aldrich-Vreeland Act in the United States had only a partial success. [9]
None of the many systems of limiting the note circulation has proved ultimately capable of interposing an insurmountable