"Notes are issued in denominations of five dollars, or one pound, and upwards. They are exchanged daily at the Edinburgh Clearing House, and settlements are made between banks by drafts on London. The notes remain in circulation on the average eighteen days after issue, the whole circulation being redeemed twenty times each year. Noteholders have a prior lien on the assets."
That is, if a bank should fail, the noteholders are paid first, and before anyone else gets anything.
Mr. Merchant: What is that? Did you say that the noteholder had a first lien on the assets of the Scotch Bank: that is, that the noteholders are paid in full before anyone else gets anything?
Mr. Banker: Yes, sir, and for the very best reasons in the world.
Mr. Lawyer: Certainly, the noteholders should have a first lien upon the assets of the bank issuing them, because bank notes are a public convenience. Bank deposits, on the other hand, primarily are a private convenience. It is a matter of public importance that bank notes should flow through the channels of trade, pass from person to person and hand to hand unquestioned by any member of the public, and have ready as well as general acceptance. The man who selects his bank for the purpose of making deposits has time to investigate and decide deliberately which one he will choose. While a man in a transaction must accept the currency of the country offhand. At all events, it is a matter of the greatest public importance that he should do so without hesitation, and yet be protected, be absolutely safe in doing so.
Mr. Merchant: Come to think it over, I believe you are absolutely right. Our present bank notes are made a first lien upon the assets of the bank issuing them. We were talking about that the other day over at the bank, and while I had never thought of it before, the cashier of the bank explained the matter fully to me, and gave the same reason for making bank notes a first lien that Mr. Lawyer has. When I told him that I did not quite understand the thing as he did, he satisfied me completely by using his own bank as an illustration.
He said, you will remember that we were a State Bank until about a year ago, when we became a National Bank. Our capital of $100,000 is all invested in this bank building which we occupy. Our deposits were $500,000. We took $100,000 of our deposits and purchased $100,000 of Government Bonds, which we deposited with the United States Government, and received in return $100,000 bank notes which we have put out, or, as we say, put into circulation. Now, since we actually took $100,000 of our deposits to buy the bonds with, and then placed the bonds up as collateral, to guarantee the payment of $100,000 of notes, it is perfectly clear that the noteholders will get their money, in case of our failure whether anybody else gets anything or not.
I then asked him this question: Suppose, for the sake of the argument, that the $100,000 of the United States Government Bonds should not sell for $100,000? Say they sold for only $75,000, would the noteholders lose the other $25,000, and he replied as follows:
"No, if the bonds should sell for only $75,000, the remaining $25,000 due the noteholders would be taken out of our assets, before any depositor got a cent."
You see, therefore, gentlemen, that our National Bank Notes are a first lien upon the assets of the banks that issue them, and that they will always be paid in full, before the depositors get anything.