The natural limits of bank currency must be sought in the magnitude of the sums of money and of the credit against which it is issued. As we have previously stated, at one time or another practically all the money of a country finds its way into the banks, but at any particular time only a portion is deposited, the remainder being in active circulation among the people and hoarded in one form or another. Of the amount deposited, a percentage must be kept as a reserve to enable the banks to meet the cash demands made upon them.^ In order statistically to determine the amount of money which is available for investment in securities, therefore, it would be necessary to know the total sum in existence, the percentage of it which remains normally in active circulation and in hoards, and the aggregate of the reserves kept by banks. The first two of these amounts cannot be accurately determined, and under existing arrangements only a portion of the banks regularly report the amounts of their reserves. We must be content, therefore, with the mere statement of the fact that at any particular time a portion of the legal-tender money of a country, no matter what the source or manner of its issue, is employed by banks in the purchase of securities of various sorts against which notes and other forms of bank currency are issued.

It is less easy to establish the limits of bank credit. By nature it is very elastic and conceivably may be stretched to almost any extent. There is, however, a natural limit to its expansion in the demand for loans made necessary by the normal development of the credit system and by the magnitude of commerce. As explained in the preceding chapter, the granting of a certain amount of credit, and with it the creation of mercantile securities, is necessary in the prosecution of commerce according to present methods. These securities, as a rule, are offered to the banks for discount, and constitute the normal demand for loans, and, to the extent that their discounted value is in excess of the cash deposits available for investment in this form, they constitute a demand for the expansion of bank credit. Since the amount of these securities depends upon the degree of the development of the credit system and the magnitude of commerce, its statistical measurement is quite impossible. Of more importance for our purposes, however, is the fact that this amount, however great or small, constitutes the natural limit to the expansion of bank credit.

In order to make this clear we must note first of all that such securities rest upon a very solid basis, since their payment is assured by the completion of the commercial processes to the inception of which they owe their existence. All commerce at bottom is barter, money serving simply as a medium of exchange. Its processes, however, require time, partly because many goods are bought and sold in an unfinished state, and must, therefore, pass through various processes before they are ready for consumption, partly because completed commodities must often be sent long distances and pass through the hands of numerous middlemen before they reach the people destined finally to consume them, and partly because some consumers do not possess the wherewithal to pay at the time they purchase goods. The mercantile securities of which we are speaking come into existence when the first transfer is made, serve to bridge over the period of time which must elapse before the counter-transfer, and are paid when the process of barter is completed. These facts may be illustrated as follows: -

A merchant sells goods during the winter to a farmer, taking in payment his notes due at the next harvest. When the farmer's grain and vegetables are gathered he sells them to this or some other merchant and with the proceeds pays the note. The process has really consisted in an exchange of the merchant's goods for the farmer's products, the interval of time between the transfers having been bridged over by the farmer's note. A New York merchant sells a thousand dollars' worth of cotton goods to a tea-merchant in China, receiving his pay in the form of a four months' bill of exchange which he sells to his banker. The China merchant meanwhile ships various chests of tea to New York dealers, with the proceeds of which he pays the bill when it falls due. In reality the cotton cloth and the tea have been bartered, the necessary interval between the arrival and sale of the cloth in China and the arrival and sale of the tea in New York having been bridged over by a bill of exchange. A manufacturer of woollens buys on time, from commission merchants or producers, wool and other raw materials needed in his business. The notes which he gives in payment he ultimately satisfies with the proceeds of the sale of the cloth into which he has transformed the goods purchased. Here we have an example of the barter of completed products for raw materials, the interval of production being bridged over by notes.

So long as the processes of commerce are in the hands of men of integrity and good judgment and uninterrupted by crises or other unforseeable events, mercantile securities thus come into and pass out of existence in a perfectly normal way. Banks, however, are a necessary part of the machinery by which their work is accomplished, and these securities, therefore, may be said to constitute the normal demand for the exercise of bank functions.

At this point the query arises whether banks may safely expand their credit to the extent that is necessary to absorb all the securities of this class presented to them for discount. This depends upon their ability to supply forms of currency suitable to the needs of commerce, and upon the willingness of business men to use such currency. These two requisites being granted, the safety of such an extension of credit must be conceded. The presentation of securities for discount guarantees the existence of a demand for currency equal at least to their discounted value, and, if commerce readily absorbs the forms of currency issued by the banks on the basis of their credit, no harm can come from the discount of such securities in the amounts presented. The preceding sections of this chapter have established the ability of banks to furnish convenient and economical forms of currency for nearly all business needs. The answer to the above query, therefore, depends chiefly upon the power of commerce to absorb these forms of currency.