ABSTRACT
The immediate and most general effect of their power to issue bank notes is that it enables the Scottish banks to hold a greater quantity of assets than they would hold were they restricted to deposit banking alone. This extra quantity of assets cannot be smaller in amount than the volume of the note circulation at that time. When a note is passed into circulation it is given either in exchange for an asset (e.g. as part of an advance to a customer), or for an equal reduction of the bank’s deposit liabilities (i.e. when a customer encashes a credit balance). In the second case assets do not increase, but the composition of liabilities changes and there is, as it were, a transference of an asset from ‘matching’ a deposit balance to ‘matching’ a note. Thus, in their note-issuing activities, the banks will always acquire an amount of assets at least equal to their circulations. The proviso ‘at least’ is entered here because, as we shall see later in this chapter, the Scottish note issues—or at any rate the reserve practices associated with them —have a small expansive influence on the level of the deposit liabilities, and hence on the assets, of the whole banking system. But here we may disregard this deposit effect and treat the assets held on account of the note issues as equal in amount to the volume of notes in circulation. The question that now immediately poses itself is: which particular bank assets are affected by the existence of Scottish bank notes in circulation?
