Bank Notes

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Related to Bank Notes: bank draft, fiat money, Promissory notes

Bank Notes


credit tokens of money which are put out by banks of issue and which substitute for metallic currency as a medium of circulation and payment. The necessity of issuing bank notes grew out of the development of capitalist industry, trade, and credit. With the growth of production and goods turnover, metallic currency began to be replaced, to some extent, by commercial promissory notes (promissory notes of individual capitalists). However, circulation of private commercial promissory notes was gradually replaced by the use of bank notes—the promissory notes of bankers. The latter issued them in the course of discounting commercial promissory notes, and the bank notes began to circulate as credit money. These bank notes were subject to payment on presentation, so bankers had to have metal, as well as promissory notes, to guarantee their own bank notes. Initially, all banks were free to issue bank notes. However, the multiplicity of bank notes in circulation and their total or partial devaluation because of insufficient security and the frequent bankruptcies of various bankers acted as a brake on the development of capitalist production. This situation required the introduction of state regulation in matters of emission. State-regulated issue of bank notes was instituted with the establishment of the Bank of England (1694). In 1833 these notes acquired the force of legal means of payment, that is, they were turned into national currency. In France bank notes became a type of national monetary token during 1800–03, in Germany (Prussia) in 1846, and in Holland between 1814 and 1830. However, in many states issue of bank notes was decentralized, and only large bonds were issued as bank notes. Up to the second half of the 19th century, bank note circulation was not highly developed: it served primarily for accounts among capitalists.

Starting in the middle and continuing during the second half of the 19th century, a system of regulating the emission of bank notes took shape which met the requirements of capitalist production. Bank notes began to be used not only in the sphere of wholesale circulation but also as a means of paying wages and as a medium of circulation in the retail turnover of goods. If more bank notes than were required for circulation were issued in the process of discounting promissory notes, then the excess bank notes were returned to the bank, which was obliged to exchange them for gold. In 1844, England adopted the Bank Charter Act (in Russian, the Robert Peel Act), by which every bank note above the limit of £14 million sterling was to be guaranteed 100 percent by gold. In Germany up to World War I (1914–18), the gold guarantee of bank notes was set at one-third of the total issue; after the war notes were guaranteed by gold and foreign currency to the sum of 40 percent of the issue. In Russia the law of Aug. 29, 1897, established that for issues to the sum of 600 million rubles the security in gold had to be 50 percent, while over 600 million rubles it was to be 100 percent. In the USA, bank notes were guaranteed by gold at 40 percent in 1913.

The transformation of bank notes into a legal medium of payment allowed the state to use issues of the notes, in case of need, to cover its expenditures. Banks of issue obtained the permission to issue notes guaranteed not by gold and commodity notes but by bonds for state loans, and they were freed from the obligation to exchange bank notes for gold. In effect, bank notes were thereby turned into state paper money with a compulsory rate of exchange. This change generally took place during wartime, especially during World Wars I and II. After World War I, bank note circulation appropriate to the conditions of peaceful development was restored, but the issue of bank notes not covered by gold was considerably increased (in England, up to£260 million; in France unlimited output of bank notes was introduced) and bank notes began to be exchanged not for gold coin but for gold in ingots or for foreign currency which in turn was exchanged for gold.

With the start of the world economic crisis of 1929–33, the exchange of bank notes for gold was once again discontinued in all capitalist countries—a specific manifestation of the general crisis of capitalism in the monetary sphere. Unexchangeable bank notes are faulty bank notes; they either occupy an intermediate position between genuine bank notes and paper money (when they are issued for the crediting of goods turnover), or else they in effect degenerate into paper money, when their issue is carried out to finance nonproductive expenditures of bourgeois states, to cover budget deficits, or to finance capital investment.

After World War II (1939–45), laws determining the compulsory amount of gold backing of bank notes continued to operate only in a few states (Belgium, Holland, Pakistan, the Republic of South Africa). In the majority of capitalist countries, standards for the guarantee of bank notes in gold were either not established at all or else were purely formal. Essentially the guarantees of bank notes are foreign currency and other devisen, as well as state securities and, to an insignificant degree, commercial promissory notes (for example, in France and the Federal Republic of Germany, instruments such as devisen, promissory notes, and state securities are used, along with gold; in Italy, state securities and devisen; in Holland, gold and devisen). In a number of countries (for example, Mexico and Indonesia), the country’s assets in the International Monetary Fund also serve to guarantee the emission of bank notes. There is no country where bank notes are exchanged for gold for private parties; only central banks (and then only in the USA) can obtain gold in exchange for dollar-based bank and other notes. In a number of countries convertibility has been introduced between the national bank notes and the currency of other countries; however, in many capitalist countries bank notes are either unconvertible or else their convertibility is limited.

In the USA the standard for the gold guarantee of bank notes was set at 25 percent by the law of 1945; the remainder of the emission was guaranteed by state securities and, to a small degree, promissory notes. In 1968, as a result of the currency crisis and the threat of the devaluation of the dollar, the guarantee of bank notes by gold was completely abolished in the USA. In England, the issue of bank notes was essentially connected to the adjustment of the state debt. In 1954 a law established the maximum for issues of bank notes at £ 1,575 million. This sum can be exceeded by agreement with the Exchequer; however the action must be confirmed by law every two years. In India the law of 1957 fixed the gold and currency guarantee of bank notes at 200 crores (of which 115 are in gold and the remainder of the bank notes are covered by devisen, state securities, and promissory notes). Under contemporary conditions, inflation is carried out in all capitalist countries, as a rule, in the form of the emission of unexchangeable bank notes.

In socialist countries bank notes are state credit money; their emission is carried out in a planned manner in the procedure of short-term crediting of the national economy and in accordance with the requirements of commodity circulation for ready money, based on credit and cash plans. The basic guarantee of bank notes is the mass of commodities belonging to the state; this serves as the material cover for all monetary tokens put into circulation. Furthermore, bank notes of socialist countries also have gold and currency guarantees (for example, the bank notes in the USSR are guaranteed to 25 percent by gold and precious metals). In some socialist countries (the USSR, Rumania) treasury notes circulate along with bank notes; however, they do not serve as a source for covering state expenditures and are issued in the same manner as bank notes.


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