5. The Significance of the Exclusive Employment of Bills as Cover for Fiduciary Media

The German Bank Act of March 14, 1875, required that the notes issued in excess of the gold cover should be covered by bills of exchange; but in practice this provision has been understood to refer only to commodity bills. The significance of this prescription differs from that popularly attributed to it. It does not make the note issue elastic; it does not even bring it, as is erroneously believed, into an organic connection with the conditions of demand for money; these are all illusions, which should long ago have been destroyed. Neither has it the significance for maintaining the possibility of conversion of the notes that is ascribed to it; this will have to be referred to in greater detail later.

The limitation of the note issue not covered by metal, that is of fiduciary media in the form of banknotes, is the fundamental principle of the German act, which is based upon Peel’s Act. And among the numerous and multiform obstacles that have been set up with this aim, the strict provision concerning the investment of the assets backing the note issue takes a not altogether unimportant place. That these must consist not merely in claims, but in claims in the form of bills; that the bills must have at the most three months to run; that they should bear the names, preferably of three, but at least of two, parties known to be solvent—all these conditions limit the note issue. At the very beginning, a considerable part of the national credit is kept away from the banks. A similar effect results from the further limitation of the note cover merely to commodity bills, as was undoubtedly intended by the legislature even though express provision for it was omitted from the Bank Act, probably because of the impossibility of giving a legal definition of the concept of a commodity bill. That this limitation did in fact amount to a restriction of the issue of fiduciary media is best shown by the fact that when the Bank Act was passed the number of commodity bills was already limited, and that since then, in spite of a considerable increase in the demand for credit, their number has decreased to such an extent that the Reichsbank meets with difficulties when it attempts to select such bills only for purposes of investing without decreasing the amount of credit granted.14

• 14See Prion, Das deutsche Wechseldiskontgeschäft (Leipzig, 1907), pp. 120 ff., 291 ff.