That governments have so frequently felt it their duty to take measures for the protection of the holders of bank-notes against the insolvency of the bank, but have so seldom legislated for the protection of depositors, is due to several reasons. Legislators have generally failed to perceive the similarity of the two kinds of liability, and the claim for equal consideration which can be made, with some show of reason, on behalf of depositors. Moreover, the appropriate measures for the protection of the note-holders are more obvious and of easier application; and it is doubtless true also that depositors, as a class, are better informed

1 Compare the condition of the State banks from 1834 to 1863 with that of the National Banks in recent years. Comptroller's Report, 1876, p. 94. See especially the remarkable development of the New York banks during the former period. Ibid., p. 102, and can more easily protect themselves, and so have less claim upon the sympathy and guardianship of the legislature. At all events, provision for the safety of notes is not infrequently made by law, and when made is apt to consist either of the easily understood requirement of a certain reserve of cash for the payment of the notes, or of a preferred claim to some portion of the assets, allowed to the holders of notes in case a bank becomes insolvent.

The effect of provisions for giving holders of notes a preferred claim may be illustrated easily, if we take the statement of account last given, and, without any change of liabilities, suppose the bank to have been led to make a change of investments and to diminish its other assets and its reserve, until its affairs stand as follows:

The liabilities of the bank are plainly of two classes: the liability to stockholders for capital, surplus, and undivided profits, and the liability to general creditors for deposits and notes. If the affairs of the bank were to be wound up, by reason of losses, or for any other reason, it is clear that, in case of any deficiency of resources, the general creditors should be paid first in full, and that only the residue after such payment can be said to be the property of the stockholders and divisible among them. If, for example, it proved that, by reason of failures and losses, the loans, bonds, real estate, and other assets, instead of being worth $341,000, which was their original value, were worth only $225,000, we should then have a total of resources amounting to $298,925, leaving, after the payment of deposits and notes, only $17,150 to be divided among the stockholders, the disaster having swept away their supposed surplus and more than four fifths of their capital. We may go farther and suppose the depreciation to have reduced the value of the total resources to $250,000, in which case the creditors must be satisfied with a dividend of a fraction more than 92 per cent.1 and the stockholders are seen to have lost all that they had embarked in the business.

In these cases the depositors, holders of notes, and other outside creditors, all, in short, who can properly be regarded as creditors, stand upon the same footing, no favored class among them having any preference unless by virtue of some

1 If we suppose the law to make the stockholders liable as individuals for the debts of the bank, they would under these circumstances be subject to an assessment, in order to make full payment to the depositors and note-holders. For the liability of stockholders under the national-bank system of the United States, see Revised Statutes,§ 5151; also United States vs. Knox, 102 U. S. Rep., 422. 5 special legislative provision. We may now suppose that the legislature, for the protection of the holders of notes, has given them a right to be paid in full in preference to other creditors, if the assets of a bank in liquidation should fall short.1 Upon this supposition, from the total resources amounting to $250,000, we should first have the notes paid in full, amounting to $93,925; and then the remaining $156,075 would be divided among the depositors, giving them a dividend of a little more than 83 per cent.

A provision of law, then, giving the holders of notes a preferred claim to the assets of the bank would be a natural and easy method of insuring this class of creditors, except in case of a very large issue or a very bad failure. But we may suppose the legislature to wish to go farther than this and to give the note-holders, not a general claim in preference to others, but a claim to specific property of the bank supposed to be of solid value and sufficient to insure payment of the notes in any case. Thus, to return to the account on page 64, it appears that the bank holds bonds and stocks to the amount of $105,000 as a part of its securities. Suppose, then, that the law requires the bank to hold these bonds and stocks pledged to secure the ultimate payment of its $93,925 of notes. Under such an arrangement, the securities would not cease to be the property of the bank, and the earnings of the securities would remain, as before, a part of the profits of the bank. The pledged property would be enjoyed, however, subject to the provision that, in case of the failure of the bank, the proceeds of the securities should be applied first to the payment of the outstanding notes. If the law should go farther and provide that only certain approved classes of securities should be used For this purpose, and that the securities pledged should be lodged for safe-keeping in the hands of some public officer, the substance of the transaction would still be unchanged. It would still remain a simple case of the specific appropriation of a certain part of the property of the bank to the payment of a particular class of its liabilities in a given contingency. The essential structure of the bank would be unchanged and the sources of its profits would be neither more nor fewer than they were in the absence of this pledge of securities.