CORNELL UNIVERSITY LIBRARY BOUGHT WITH THE INCOME OF THE SAGE ENDOWMENT FUND GIVEN IN 1891 BY HENRY WILLIAMS SAGE Cornell University Library arV12627 Chapters on the theory and history of ba 3 1924 031 251 907 rtlin anv Cornell University Library The original of tliis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924031251907 CHAPTERS ON THE THEORY AND HISTORY OF BANKING BV CHARLES F. DUNBAR LATB PROFESSOR OF POLITICAL ECONOMY IN HARVARD UNIVERSITY SECOND EDITION, ENLARGED EDITED BY O. M. W. SPRAGUE, Ph.D. INSTRUCTOR IN ECONOMICS IN HARVARD UNIVERSITY G. P. PUTNAM'S SONS NEW YORK AND LONDON ZTbe ftniclserbockec ipress 1906 :3> COPYRIGHT, 189I, BY CHARLES F. DUNBAR Revised Edition COPYRIGHT, I901, BY G. p. PUTNAM'S SONS "Bbe ftniclietbocfiet press, Hew ffiorli PREFACE TO THE SECOND EDITION. For more than a year before his death on Janu- ary 29, 1900, Professor Dunbar was engaged in the preparation of a new edition of this book. He had revised and made changes in all but the last chapter, and had drawn up a list of specific points in those chapters for further consideration. This list has suggested most of the changes made by the editor. The revised text differs from that of the first edition in few instances, except in matters of detail. The author's plan of revision had included several new chapters, but unfortunately only that on Daily Re- demption was written out. Other additions made by the author will be found at the end of chapters VII. (pp. 91-93) and XI. (pp. 222-226), in three places in chapter X. (pp. 159-161, 169-173, and 184 -187), and, — a more considerable extension, — at the end of chapter IX. (pp. 143-157). The editor has made a general revision of the last chapter, which Professor Dunbar had not reached, and has added to the text of two chapters. The Currency Act of 1900 made necessary a few pages at the end of chapter X., and some account of the IV PREFACE TO THE SECOND EDITION. recent development of the German banking system was required if the last chapter was to be uniform in scope and treatment with the chapters immediately pteceding. These additions, which are separated from the author's text by spaces, begin at pages i88 and 236. The editor is indebted for information on difficult points to Herr Karl Helflerich, of Berlin, and to R. H. Inglis Palgrave, Esq., and for frequent aid and suggestion throughout to Professor F. W. Taussig, of Harvard University. O. M. W. Sprague. November, 1900. PREFACE TO THE FIRST EDITION. The preparation of the following chapters is the result of the need of some convenient statement oi ordinary banking operations, felt by the writer when lecturing upon banking to a large class of students in the elements of political economy. To the chapters devoted to such operations it was found useful to add a series of historical chapters on certain of the great banks .and banking systems, partly for the easy illus- tration of theory and partly to supply the want of any good manual of banking history. Eight of the chapters were printed in 1885 for the use of classes in Harvard University, but were not then given to the public. To these have now been added an introductory chapter, a chapter on com- bined reserves or the system of Clearing-House loan certiiicates, and one on the Bank of Amsterdam. The whole has been revised and the notices of cur- rent history brought down to the present date, and the book is now laid before students and readers with the hope that it may aid in the systematic study of a subject, the treatment of which by writers VI PREFACE TO THE FIRST EDITION. upon economics is generally either too summary or too diffuse for ordinary purposes. The writer has annotated his text with a freedom which perhaps demands some apology, desiring to make |iis notes answer the double purpose, of inform- ing the reader as to the sources from which state- ments are drawn, and of inviting him to explore the sources more deeply than was possible within the limits of the present publication. C. F. Dunbar. January, 1891. CONTENTS. CHAPTER 1. PAGE INTRODUCTORY I CHAPTER II. DISCOUNT, DEPOSIT, AND ISSUE . . • 9 CHAPTER III. BANKING OPERATIONS AND ACCOUNTS . . . 20 CHAPTER IV. THE CHECK SYSTEM 39 CHAPTER V. BANK NOTES 54 CHAPTER VI. REDEMPTION 6j vii Vlii CONTENTS PACE CHAPTER VII. COMBINED RESERVES 78 CHAPTER VIII. THE BANK OF AMSTERDAM 95 CHAPTER IX. THE BANK OF FRANCE II9, CHAPTER X. THE NATIONAL BANKS OF THE UNITED STATES . I58 CHAPTER XI. THE BANK OF ENGLAND I9I CHAPTER XII. THE REICHSBANK OF GERMANY .... 328 INDEX . . 247 CHAPTERS ON VHE THEORY AND HISTORY OF BANKING CHAPTERS ON BANKING. CHAPTER I. INTRODUCTORY. The operations of banking, as the system has been developed in the last two centuries, appear at first sight to be singularly complex and difficult of comprehension. This is not due, however, to any mystery in the operations themselves, but simplicity is the result of their multiplicity and of of banking the varied conditions under which they op"'**"""^- take place. The wants which banks satisfy are of a simple kind, sure to arise early in the history of any commercial or industrial community in which there is mutual confidence among men ; and the satisfaction of these wants is a business easily established, in what might well be regarded as an almost primitive con- dition of trade. The transactions by which these wants are satisfied are, moreover, as simple as the wants themselves, and are speedily reduced to such routine as to lead Adam Smith, in a well-known passage, to rate " the banking trade " as one of the few which, in his judgment, could be brought to 2 CHAPTERS ON BANKING. such uniformity of method as to be safely conducted by a joint-stock company. The leading wants to be provided for by banks are, first, loans upon a considerable scale, required by individuals embarking in enterprises beyond their own means ; and, second, the temporary employment of money which is not required by the owner for immediate use, or at least the means of safely keep- ing it. Some agency for lending and some place of deposit are called for as soon as commerce begins to move in a regular course. With these may be required some system for simplifying the currency of the community, or for giving it an ascertained value, but this is after all a secondary matter. The primary and indispensable functions to be provided for are those of lending and of receiving on deposit, and it is these which have given rise to modem banking. These functions, it is clear, imply no very complex operations. They require prudence, integrity, and patience, but they have no mystery. The banker who lends, or who engages to supply cash to his customer as it may be called for, needs to be sure of the solvency of his borrower and of the goodness of the security received, and must have the evidence of the transaction made indubitable, its terms clearly fixed, and the record of it complete and exact. When he receives cash on deposit, or collects for others cash which is due and holds it until it is wanted by the owners, he must in like manner be sure that the evidence of every transaction is regular and placed beyond doubt, and that its record is INTRODUCTORY. 3 precise and systematic. And when, as an extension of his system of holding deposits, he recognizes the right of a depositor to transfer his deposit or any part of it to another person, in order to make a payment to the latter, the operation of transfer must be closely followed and the resulting changes in the banker's accounts must be made with fidelity and minute accuracy. But in no one of these cases does the actual transaction present any more diffi- culty of comprehension than the simple payment or receipt of money. The questions of prudence, — how much and to whom it is advisable to lend, and upon what terms, how far it is safe to assume that deposits will be left undisturbed, and to what extent it is needful to be prepared for demands by depositors, — require all the light that trained sagacity and experi- ence can throw upon them, as do the questions relating to the conduct of business in other depart- ments ; but the essence of the transactions themselves, to which the judgment of the banker is applied, is simple. As a natural consequence of' the simplicity of the operations involved in lending and in receiving deposits, it is probable that they have been under- taken and carried on in every old country by indi- viduals long in advance of any public Banking first estabhshments, and long before the chroni- carried on by clers of history thought it worth while to notice phenomena of such a humble order. Private lenders established banking in Venice two centuries before the Senate opened its first public bank of deposit. Banking was in like manner practised by 4 CHAPTERS ON BANKING. individuals in Amsterdam long before a special class of evils led the city to establish the famous Bank of Amsterdam. And banking of a well-defined modern type was introduced by the London goldsmiths at least a generation before the opening of the Bank of England. Instances of the same sort could easily be multiplied, tending to show that in other coun- tries also banking has had its origin in the effort of individuals to supply certain rather primitive wants of an advancing community, and that the process of satisfaction was by means of a few thoroughly simple operations. Such as these leading operations were two or three centuries ago, they have continued to be in the midst of the changes and the enormous development of the present century. It is probable, however, that in most modern com- munities the individual wants which banking under- takes to supply have ceased to be the exclusive object of attention, and that the general influence and ulterior effects of a banking system, not originally foreseen and long 51 matter of dispute, have taken the leading place among the reasons for introducing such a system. The first bankers probably had little thought of affording encouragement or applying a stimulus to the industry of the community as a Ulterior whole. When they began, however, to effects of lend their money systematically to mer- ^° "'^' chants or the producers of goods, they began to give the command of capital in the enter- prises where, for the time being, it was most called for and presumably most needed. When they in- creased their loans of this sort, by means of the INTRODUCTORY. 5 funds left temporarily in their care by persons depositing with them, they began to give to in- dustry the benefit of capital which would otherwise have remained idle, or to secure the more speedy application of capital slowly seeking employment. The use of their own notes as the medium for making their loans, in a manner strictly analogous, gave to their borrowers the command of capital which the fluctuating body of noteholders might forbear to demand. And. their practice of discount- ing the bills received by dealers from their customers tended to a rapid organization of credit, and, by giving the dealer the immediate use of that which was due to him at some time in the future, shortened the period required for " turning his money " and undertaking some fresh enterprise. It is obvious that the bankers created no new wealth by their lending and deposit-holding, but it is equally plain that they directed the existing capital to the enter- prises and industries most in need of support, and that they quickened the succession of commer- cial and industrial operations. A given amount of capital was thus made more effective, so that the result of the introduction of banking in any com- munity was the equivalent of a considerable increase of capital, although not implying any real increase in the first instance. The stimulus thus applied by banking to the general commercial and industrial movement of any community, whether young or old, has long been clearly seen ; and it is this effect of operations, at first undertaken simply with reference to the de- 6 CHAPTERS ON BANKING. mands of individual convenience, that now chiefly claims attention and excites interest. This stimulus stimulated '^ "°* unattended by risk. Deposit-holding crsdit has its and the increase of notes are alike opera- angers. tjons of Credit. They imply, as conditions of their existence, a certain growth of mutual confi- dence in any community, and a certain degree of domestic peace ; and under conditions otherwise similar, nations will differ in their resort to such operations, as the national temperament is more. or less sanguine and as tradition and habit have prepared the way, or the reverse. But to whatever extent credit is thus used, it introduces not only the dangers of misplaced confidence, but the greater danger coming from the spirit of adventure. The tendency under the keen spur of a developed bank- ing system to carry enterprises based upon credit beyond the point of safety, the infection of an entire community by the fever of speculation, are too familiar for comment, and the errors of bankers in aiding and encouraging that which they should have striven to repress or control, have at times brought the utility of banking itself into question. The modern world, however, does not discard any great agency merely because its use is attended by danger. To secure a balance of gain by minimizing the risks, always recognizing their existence and their deplorable character, has been the aim of most com- mercial communities in deahng with banking during at least four generations. The ignorant hostility to the system itself, instead of its abuses, of which trace.? may still be found in the constitutions of one Introductory. 7 or two of the United States, has generally given way to a wiser appreciation of the services rendered by banks and bankers in the development of a country like this. The difificulty of properly weighing the advantages and the risks of banking has been greatly increased by the reckless imprudence with which „ ^ Hence, notes banks have so often managed their issues often viewed of notes, to which allusion has already "'"'' """"'*''• been made. Such issues, although not a necessary adjunct of the business of lending and of deposit- holding, are a natural and, in some conditions of society, a usual adjunct. Where they are made, the issuing banks or bankers at once become responsible for an important part of the visible circulating me- dium of the country. Their mistakes or wrong- doing may affect a multitude of persons having no intentional or conscious share in or relation to the concerns of any bank; and may easily throw the affairs of a community into confusion. It is true, as we shall see hereafter, that the steps by which a bank issues its notes do not differ from those by which it assumes other less observed liabilities, and that its obligations in the two cases are the same in essence. Still, the wide diffusion of an issue of notes and the more visible and notorious nature of the evils resulting from its mismanagement make such issues the object of extreme jealousy, and have often led to the indiscriminate condemnation of all banks. Although, therefore, the issue of notes is not one of what we have called " the primary and indispensable functions " of banking, it is a function which fills a 8 CHAPTERS ON BANKING. large space in most discussions of banking theory, as well as in the history of the great banking systems and in legislation. The starting-point in the present exposition of the subject then must be an examination of the transactions involved in lending, deposit-holding, and note issue or circulation. CHAPTER II. DISCOUNT, DEPOSIT, AND ISSUE. ' A BANK may be described, in general terms, as an establishment which makes to individuals such advances of money or other means of payment as may be required and safely made, and to which in- dividuals entrust money or the means of payment, when not required by them for use. In other words, the business of a bank is said to be to lend ^^^ j^^^^ or discount, and to hold deposits^. With banking functions. thesetwo^frmcnonsmay be combined a third, that of issuing bank-notes, or the bank's own promises to pay, for use in general circulation as a substitute for money^ ' - The object of the present chapter is to inquire into the real nature of the operations, thus roughly clas- sified and usually described by the terms Discoun t. Deposit, and Issue ; and for this purpose we shall analyze thetransactions attending the ordinary and simple case of a loan made by a bank to one of its customers. The borrower who procures a loan from a bank does so in order to provide himself with the means, either of making some purchase, or of paying some dtht. He seeks, therefore, to obtain, not necessarily 9 10 CHAPTERS ON BANKING. money, but a certain amount of purchasing power in available form, or of whatever may be the usual medium of payment, measured in terms of money. If we suppose him to be a merchant, buying and Discount selling goods upon credit in the regular analyzed, course of his business, he is likely at any given time to have in his hands a greater or less num- ber of notes, not yet- due, signed by the persons to whom he has heretofore made sales ; and it is in the form of a loan, made upon the security of one or more of these notes and giving him immediate com- mand of the amount which will become due upon them in the future, that he is likely to procure what he needs from the bank. This loan may be sup- posed to take the form of what is termed a discount ; in which case, in exchange for the note " discounted " the borrower is entitled to receive from the bank the amount promised in the note, less the interest on that amount computed at an agreed rate for the time which the note has still to run." The dis- counted note becomes the property of the bank, to which the promisor is henceforward bound to make ■ If, e. g., the note discounted promises to pay $2,500, has 87 days to run, and the agreed rate is 6 per cent. , then the interest to be deducted is $36.25, and the proceeds received by the borrower are $2,463.75. This process, which is commonly used and is known as "bank discount," gives a result somewhat different from that of dis- count in the strict sense of the term. Strictly speaking, discount consists in finding that sum which, if put at interest for 87 days at 6 per cent., will then amount to $2,500, or, in other words, in finding the present worth of $2,500 due under the conditions stated. As this present worth is $2,464.27, the established practice gives to the bank a slight profit in addition to that afforded by true discount. See oa tbis point Agricultural Bank vs. Bissell, 12 Pick. 585. m essence "g^sale to the banET" DISCOUNT, DEPOSIT, AND ISSUE. II payment at maturity ; and this payment when made obviously restores to the bank the amount advanced by it in exchange for the note, together with the interest which was the inducement for making the exchange. It is now clear, however, that the operation which we have described, although spoken of as a loan by the bank to a borrower, is in fact something more than a loan. The note when given was evidence that its holder owned the right to receive at a fixed date a certain sum of money, and this right the so-called borrower has ceded to the bank. Passing j^ over for the present all question as to what " "g-SSle he has received in exchange, his cession of property by sale is as distinct and complete as if he had sold a bale of cotton to another merchant, in- stead of selling to a bank his right to receive money in the future. It is true that in parting with the note he probably endorsed it, and thus bound him- self to make good its amount in case the promisor should fail to do so ; but he might equally bind him- self by some warranty given to the purchaser, when selling any other description of property. The note has ceased to be his, and now takes its place among the investments or securities of the bank, although custom may lead to its classification as a " loan or discount." ' . The operation which we have here presented in its simplest form may easily change its shape according -In an account of the Bank of England, the note supposed, if taken, would have to be classified under " other securities," together with bonds or stocks owned by the Bank. See post, chapter xi. 12 CHAPTERS ON BANKING. to circumstances. Thus, instead of offering for " dis. count " the notes of his customers, our merchant may offer his own note for the sum which he wishes to obtain, and attach to it, as security for its payment at maturity, one or more of the notes of his custohi- ers. In this case the principal note, his own, be- comes the property of the bank, the right to receive from him at its maturity the sum promised in it being the real object of sale ; and the attached notes, 'originally received by him for merchandise and now pledged to the bank as collateral security for the performance of his contract, continue to be his prop- erty, subject to the right of the bank to be indemni- fied therefrom in case of his failure. So, too, he may offer his own note, securing it by the pledge of bonds, stocks, or other valuable property, the owner- ship of which he does not part with, while at the same time he sells as effectually as in the first case the right to receive from him a certain sum at a fixed date. Or, instead of the note of hand which we have supposed to be used, some other kind of negotiable paper, as, for example, the bill of exchange, may be preferred by local usage, as the evidence of commer- cial obligation. Still, whatever the form of the trans- action by which a bank may make " advances " or " loans," it will be found that in every case a right to demand and receive a certain sum of money has been acquired by the bank for a consideration. We now have to consider what it is that the bank gives in exchange for the right to demand and receive money at a future time, acquired by it under these circumstances. To return to our first and DISC0UNT, DEP©SIT, AND ISSUE. 1 3 Simplest case of so-called discount ; the proceeds of the discounted note, or its nominal amount less the interest for the time for which it is to run, are in the first instance placed to the credit of the merchant, to be drawn out by him at once or at different times, as convenience or necessity may dictate. In j,^ ^^^j^ thus crediting him with the proceeds, the arising from bank plainly gives to him simply the right d'sc""*. to call upon it at pleasure for that sum of money. Whether this right is exercised at once by demand- ing and receiving the money, or whether the exercise of it is postponed as regards the whole or a part of the amount, in either case the right to demand, or to "draw," is the equivalent received by the merchant in exchange for the right, sold by him to the bank, of which the note ^discounted was the evidence. The sum which he is thus entitled to call for is said, so long as it stands to his credit, to be deposited in the bank, or, to be a deposit standing in his name; so that the transaction is seen to be, both in form aird in substance, an exchange of rights. The same thing is true also in other cases of so-called " loans " or " discounts " ; whatever form they take and whatever the collateral security held by the bank may be, the operation is after all essentially an. ex- change of rights, whereby the_bank_acguires__the fight t o recei ve money, pr ^ the legal tender, of th e count^^^^^QS3Jiie__tjmgpand t.he.indiddL!ial acquires the right to call for money or legal tender at"^' ieasurg^ The result is to give to him that imme- diate command of purchasing power or of the usual medium of payment which, as we have said, is the 14 CHAPTERS ON BANKING. real object sought by him; but at the outset this result is usually secured and the relations of the bank and the " borrower " are settled, by the sale of one right for another, and without the intervention of money or any of its tangible substitutes.' But a deposit may owe its origin to a different operation from that which has just been or from ^ i i_ t_ some other examined. It happens every day that the operations, j^erchant, having cash in hand, prefers not to hold it in his possession until it is required for use, but to " deposit " it with the bank where he usually transacts his business, until he needs to use it. In this case, when he makes his deposit, the property in the money or substitutes for money actually handed in by him passes to the bank, and he receives iri exchange the right to demand and receive at pleasure, not that which he paid in, but an equivalent amount." Here then, as in the former case, the transaction is in effect a sale, although the use of the word " deposit " seems at first to suggest an entirely different idea of its character. The other leading operations of banks, when ' The less usual case of a loan made in cash does not create a a deposit, but is a case of issue if the bank gives its own notes to the borrower. It is, however, the sale of a right for a right in every case except where the loan is made in actual money, when it becomes the sale of a right for coin. ' It is true that money may be left as a^"ySpecial deposit" with a bank, just as plate, jewels, or other valuables may be, in which case, the identical money deposited is to be returned, and the bank conse- quently does not acquire the property in the thing deposited, but is merely entrusted with its temporary custody. This, however, is not a banking operation, and the deposit in this case is made with the bank, not because it is a bank, but because it owns a strong vault. DISCOUNT, DEPOSIT, AND ISSUE. 15 analyzed, can also be resolved into cases of the exchange of rights against rights, or of rights against money. As, for example, when the bank, for the convenience of its customer or depositor, undertakes to collect a note due to him by some third party, in which case the amount paid to the bank in money by the promisor is passed to the credit of the promisee as a deposit. Here the bank has received money for, the account of the depositor, and has given to him in exchange a right to draw at pleasure for the amount or any part thereof, the property in the money actually paid having passed absolutely to the bank in exchange for the right to draw. And again,jwhen^e bank buys from a merchant a bill of exchange, or when it sells a bill of exchange drawn by itself on Some correspondent, it effects an ex- change of money against a right, or of a right against money, strongly resembling those already consid- ered. And so, too, if in any of these cases any substitute or equivalent for money is used, instead' of money itself, the transaction is still an exchange of a right on the one side and some means of payment on the other, the latter becoming the property of the bank. We have thus far, for the sake of simplicity, spoken only of the " rights to receive " money, bought by the bank in one class of cases, and sold by it in another. But where there is a right to receive on the part of a creditor, there is a corre- sponding duty to pay on the part of the debtor ; and these rights or credits, when viewed from the other side, are, therefore, debts or liabilities. The l6 CHAPTERS ON BANKING. deposit-wbt ch is credi i n^ly a liability to pay on demaiid ,.assumed by the bank in exchange for a security promis- means the *-* "* \ bank's liabiii- ing a payment to the bank in the future ; _ ty to pay. ^^^ ^^ d^Egsit Credited upon the receipV/ of cash from the depositor is a similar liability J ^ assumed in exchange for so much money or so \ much of its substitutes. In short, as any addition to the loans of a bank is an increase of its invest- ments or resources, so any addition to its deposits is an increase of its debts or liabilities. A little consideration of the manner in which notes are issued by banks will show that in the . ,^ bank-note we have only another form of Issue IS the ^ ^ same, in all liability, differing in appearance, but not but form. jj^ substance, from the liability for de-_ ■•The bank-note is the duly certified promise , of the bank to pay on demand, adapted for circular ' tion as a convenient substitute for the money which sit promiseg/^It is issued by the bank, and can be issued only to such persons as are willing to receive the engagement of the bank in this form instead of receiving money, or instead of being credited with a deposit. Thus the so-called borrower, who in the first instance has been credited with a deposit and to whom the bank is therefore to this extent liable, may prefer to draw the amount in notes of the bank and to uSe them in making his payments. But, in this case, it is- plain that the liability of the bank is changed only in form ; it is still a liability to pay a certain sum of money on demand. And SO if the depositor pays in money and receives DISCOUNT, DEPOSIT, AND ISSUE. 17 notes/ or receives notes in satisfaction of a demand of any kind against the bank, he, in fact, foregoes the use of the money itself and consents to receive in its stead a promise to pay upon demand, and to receive the evidence of that promise in the form of notes. The question, in which form he shall hold his right of demand against the bank, is one to be decided by the nature of his business or by his present conven- ience, but plainly the decision of this question in no way alters the relation between himself or any trans- feree of his right, on the one hand, and the bank on the other. The notes issued by a bank are thus a liability distinguishable in form only from its liabili- ty for deposits, and the functions of deposit and . issue, spoken of at the opening of this chapter, instead of being distinct, as is often assumed, are one in substance. In the operations which have now been consid- ered the subject-matter involved is in every case either money or contracts for the payment thereof. No form of dealing in merchandise or real property comes properly within the province of banking. And, inasmuch as a contract for the payment of money may be viewed either as a credit or as a debt, according as it is looked at from the one side or the other, banking is sometimes described as the business of dealing in credits and sometimes as that of dealing in debts. For the transaction of this business in the modern world both of the functions ' In early English banking this was a common practice and no doubt explains the phrase "take up money on their notes," used IB legislation. See Bagehot, Lombard Street, p. 98. 1 8 CHAPTERS ON BANKING. " discount " and " deposit " are indispensable. In order to be a bank, at the present day, an estab- Discountand Ushment must carry on the purchase of deposit esscn- rights to demand money in the future, or hai functions, gej-y^ities ; and it must also use in some, form or other its own engagements for the payment of money upon demand.' If it practises the former only, it is simply an investor of its own money, as any private individual may be ; if it practises'the latter only, it may indeed be said to be a bank of the obsolete type of the Bank of Amsterdam, but it then plainly ceases to answer one of the chief pur- poses of a modern bank, viz., that of enabling indi- viduals to convert into immediate purchasing power such debts as may be due to them in the future. The use of the third function, however, that of issuing ' Issue not notcs, is not indispensable to the exist- A essential, eucc of a bank, for, as has been shown, \ issue is but a modification of dfeposit, adopted for '^ convenience and not from necessity. There are^ conditions under which the liability of the bank in the form of notes is desired for use, and there are also conditions under which the liability in the form of deposits better serves the convenience of individ- ' See in Bagehot's Lombard Street, p. 212, a remark that the Rothschilds are great capitalists, but are not bankers. The defini- tion of a. bank by the internal-revenue act of the United States of 1866 includes "every person, firm, or company having a place of business where credits are opened by the deposit or collection of money or currency, subject to be paid or remitted upon draft, check, or order, or where money is advanced or loaned on stocks, bonds, bullion, bills of exchange, or promissory notes, or where stocks, bonds, bullion, bills of exchange, or promissory notes are received for discount or sale." — 14 Statutes at Large, p. 115. DEPOSIT, DISCOUNT, AND ISSUE. I9 uals or of the community. Many banks in every country, therefore, carry on their business success- fully without making any issue of nates whatever.' It must be added that incorporation by law is not a necessary condition of the existence of a bank. Discount and deposit, and if no legal nor incorpora- prohibition exists, issue also, may be car- *'°" ^y '^*- ried on by individuals and firms as well as by in- corporated companies. It is true that in discussions of banking it is usual to give almost exclusive attention to incorporated banks, partly because they are usually more important and conspicuous, and partly because their affairs are in some degree open to official inspection, so that the nature of their business is not easily concealed, whereas the trans- actions of private banks are usually known only to the persons concerned. It is none the less true, however, that in the economic effects of their transactions the two kinds of banks do not differ, and that neither can be neglected in an examination of the economic problems presented by any com- munity in which it is found to exist. ' The Comptroller of the Currency in 1899 received reports of the operations of incorporated banks in the United States, excluding savings-banks, as follows : Number. Ca-^ital and Surplus. State Banks and Trust Companies . 4,45 1 $494 millions. National Banks 3,595 854 Total 8,046 $1,348 Of these banks the national banks alone are authorized by lavir to issue notes. In November, 1882, the number of private bankers paying the tax then levied on deposits was 3,412. The term is applied loosely, and the present number of such bankers is not easily estimated. CHAPTER III. BANKING OPERATIONS AND ACCOUNTS. Having thus taken a general view of the nature of banking operations, it is now necessary that we should enter upon the consideration of some of their details. For a bank, as well as for any other considerable Capital • no establishment, it is requisite that a capital rule for its should be provided at the outset. There amoun . ^^^^ ^^ ^^ Constant proportion between the amount of this capital and the extent of the business which may be built up by its means. We can only lay down the very general rule, that the larger the business that can be carried on with safety with a given capital, the larger will be the field from which profits can.be earned, and the higher the pro- portion which the profits will bear to the original investment ; but the point at which the extension of the business passes the line of safety, must be determined by the circumstances of the particular bank, by the kind of business carried on by those dealing with it, and by the condition of the com- munity in which it is established. The attempt has sometimes been made to limit by law for incorporated banks the proportion of transactions for a given BANKING OPERATIONS AND ACCOUNTS. 21 amount of capital," but no such provision has any foundation except a conjectured average, too rough to be of service in any individual case. In this respect, as in so many others, the judgment of the persons most interested, acting under the law of self- preservation, is far more trustworthy than any legis- lative decision. The capital thus to be provided at the outset is, of course, in the case of a private bank, the contribution of the partners, as in any other undertak- shares and ing. In the case of an incorporated bank shareholders, the capital is divided by law into equal shares or units of fixed amount ; as e.g., under the law of the United States, a capital of $100,000 is divided into 1,000 shares of $100 each ; and these shares are con- tributed by the individual shareholders, in such pro- portion as they please. The law may as a matter of public policy Hmit the proportion of capital stock to be owned by any one individual or firm, and it may also limit the liability of shareholders for debts due by the bank, in case of its failure ; but in general, in the absence of special provisions to the contrary, the powers, rights, and liabilities of every shareholder are now usually determined by the number of shares of the stock contributed or owned by him. In the election of directors and of other officers, for the immediate management of the business, every share entitles its owner to cast one vote ; the dividend of profit is allotted in the ratio of shares owned, and ' E. g., the law in Massachusetts formerly limited loans to double the amount of the capital. See General Statutes of 1S60, c. 57. § 25. 22 CHAPTERS ON BANKING. contributions to meet losses, if required by law, are called for in the same ratio. The capital subscribed by the intending share- holders must necessarily be paid in in money or in the legal tender of the country. It is not necessary that the whole should be paid in at the outset, but the payment of the whole usually precedes the full establishment of the business ; and, in the case of incorporated banks, the law often requires that some definite proportion, as e. g., one half, shall be paid in before the opening of business, in order to in- sure good faith and a solid basis for the business undertaken.' If, now, we undertake to represent by a brief statement of account the condition of a bank having a capital of $100,000 paid in, in specie, on the morn- ing when it opens its doors for business, we shall have the following; Liabilities^ Resources, Capital . . . $100,000 Specie . . . $100,000 It may at first sight appear to be a contradiction Capital ^"^ terms, that the capital should be set viewed as a down as a liability and not as a resource. '^ " ''■ But we must here distinguish between the financial liability for what has been received from ' The English joint-stock banks present some remarkable cases of partially .paid capital. Thus the largest, the National Provincial, has less than one fifth paid up, and the London Joint-Stock Bank has ;^I5 in the £i. In these cases, the business having been fully established by means of a part only of the nominal capital the liability of the shareholders to contribute the remainder in case of need constitutes a s_pecies of guaranty fund of great amount. BANKING OPERATIONS AND ACCOUNTS. 23 the shareholders and the right of property in the thing received. The bank has become accountable to its shareholders for the amounts paid in by them respectively, but the money actually paid in has become the property of the bank; or, in the lan- guage of accountants, the bank has become liable for its capital, and the money in hand is for the present its resource for meeting this liability, or for explain- ing the disposition made of what has been received. As the bank requires banking-rooms and a certain supply of furniture and fixtures for the convenient transaction of its business, we may suppose it to expend $5,000 of its cash in providing this equipment. The property thus procured, with the remaining $9S,ooo in cash, will then be the aggregate resources by means of which the capital is to be accounted for, and the account will stand as follows : Liabilities, Resources, Capital . . . $100,000 Real estate, furniture, fixtures, etc. . . $5,000 Specie 95,000 $100,000 $100,000 The^ank, however, ca nnot answer the purposes of its existence, or ea rn a profit for its shareholders, until its idle _icash.Js._CQnverted_in±a. some kind of interest-bearing security. Nor is it enough that a permanent investment of the ordinary ^^^ ^^^^ kind should be made, as by the simple credit must , f it -If i. be used also. exchange of the cash for government bonds or railway securities. It is the chief business of the bank to afford to purchasers and dealers the 24 CHAPTERS ON BANKING. means of using, by anticipation, funds which are receivable by them in the future, and this implies both the purchase of private securities or " business paper " to a considerable extent, and also frequent change and renewal of purchases. Moreover, while the private capitalist finds it advantageous to make simple investments of a permanent sort, this would plainly be insufficient for the shareholders of a bank, who have to pay from its profits some serious ex- penses of management, and need, therefore, a larger field for earnings than the ordinary returns on their capital alone. The bank being objiged then to ex- tend its operations beyond the amount of its capital, is compelled for this purpose to make use of its credit. In fact, it is only by such^ause of its credit that the establishment becomes in reaHly a bank. Most of the conditions of the case are best answered by the •' discount " of cogimercial Commercial . . ^' rj- — '., rr-.. /T^ r paper. paper as above described. Ihe time for which such obligations have to run varies with the custom of the trade which gives-jdse to_ them, but is in most cases short enough to imply early repayment to the bank. .And even where custom gives the paper longer time, if the paper itself is used only as a collateral security, the note which is the actual object of negotiation with the bank is by preference usually made not to exceed four months. It is easy then to arrange the pur- chases of paper with reference to the times of maturity, so as to provide for a steady succession of payments to the bank, and thus facilitate the reduc- tion of the business, if necessary, or its direction BANKING OPERATIONS AND ACCOUNTS. 2$ into new channels, as prudence or good policy may require. The certainty of prompt payment at maturity, needed for this end, is presented in a high degree by the paper created in the ordinary course of business.' Independently of the collateral security which the bank may hold, the written promise of a merchant or manufacturer to pay on a fixed day is an engagement which involves the credit of the promisor so far that failure is an act both of legal in- solvency and of commercial dishonor. Selected with judgment, then, such paper is not only the invest- ment which most completely answers the purposes of ti;? bank's existence, but is probably as safe as any investment which could be found. It may easily happen, however, that the bank may find it desirable to invest a part of its re- other sources in some other form, either because investments, good commercial paper cannot be procured in suffi- cient amount, or as a matter of policy. In this case it will purchase such other securities as offer not only complete safety of investment, but the possibility of easy conversion into cash in case of need.^ . In this ■ The reports of a large commercial agency show that, for twenty years, 1879-99, the number of failures in the United States was a little over one per cent, of the whole number of houses reported as in business. The highest per cent, of failures recorded in any one year was 1.5 per cent, in 1893. See Bradstreets, Jan. 6, 1899. For x curious estimate showing that the liabilities of failed firms in 1874 amounted to less than one fourth of one per cent, of the total com- mercial liabilities of the country for the year, see Commercial and Financial Chronicle, February, 1875, p. 129. 'See in the reports of the Comptroller of the Currency, the " United States bonds on hand " and " stocks, securities, etc.," held by the national banks and amounting to nearly 320,500,000 in 26 CHAPTERS ON BANKING. country United States bonds, and many description^ of State, municipal, and corporation bonds might answer this purpose. Stocks would more rarely answer it, being more liable to the fluctuations in price caused by misfortune or the ordinary vicissi- tudes of business. Mortgages of real estate, how- ever, would not be admissible, except when held as a security, collateral to some other which is more easily convertible, for even when the mortgaged property is so ample and stable as to insure the goodness of the mortgage, the conversion of the mortgage into cash by sale is not always easy, and is especially difiScult at those times when the bank most needs to have all its resources at command. Indeed, the danger to be apprehended from the locking up of resources, in securities which may be solid but are not easily realized, is so great, that it has been said to be the first duty of the banker to learn to distinguish between a note and a mortgage, his business lying with the former. Real estate, of course, cannot be regarded as a banking security, however desirable it may be as an investment for in- dividuals, for it is not only subject to great fluctua- tions in value, but is at times unsalable ; and the law of the United States therefore wisely prohibits invest- ments in it, by the national banks, except so far as is necessary for the accommodation of their business.' The results of the process of investment in com- mercial paper and in other securities are best under- stood when we trace the effect in the account of the September, 1899. Compare also the " government securities" held by the banking department of the Bank of Englancl, ' See Revised SUftMtes, % 5137. BANKING ePERATIONS AND ACCOUNTS. 27 bank. Taking then the account as it stood on page 23, let us suppose that the bank buys paper or securi- ties from those dealing with it, or, in the common phrase, makes " loans to its cus- T^/ou^nt, tomers," to the amount of $90,000, the caused by paper being in many pieces and having various lengths of time to run, but averaging about three months. Supposing the interest to be com- puted at six per cent., we should have the account changed by the operation as follows : LiabiliiieiT ~^ Resources. Capital . . . $100,000 Loans .... -$90,000 Undivided profits T 1I350 ■ Real estate, furniture,. Deposits . . . 88,650 fixtures, etc. . . 5,000^ W. Specie . , . . . \ 95,000 M, $190,000 $190,000 J Here we have the securities which certify the right of the bank to demand and receive $90,000 at a fu- ture date placed among the resources ; the net pro- ceeds of the securities, or the aggregate of the sums which the bank holds itself liable to pay for them on demand, stand among the liabilities as deposits ; and the interest deducted in advance, or the profit on the operation, which the bank must at the proper time account for to the stockholders, also stands as a liability.' This, however, is the condition of the account at the moment of making the investment, ' As this profit is not realized until the discounted paper is finally paid, the interest deducted in advance is often carried to a separate account for the time being, to be transferred later to the undivided profits. This method is not universal, however, and in the present discussion the simpler statement appears to be sufficient. 28 CHAPTERS ON BANKING. ivhen the bank has made its purchase of securities by merely creating a liability. As this liability is real and must be met, so far as the de- and by the positors at any time see iit to press it, let withdrawal us suppose that depositors call for cash to ° *p°^'*^" the amount of $15,000, and we shall have a further change in the account as follows : Liabilities, Capital . . . $100,000 Undivided profits l|35o Deposits . . 73,650 Resources, Loans . . . $go,ooo Re^I estate, etc., £><3oo Specie . . . 80,000 $175,000 $175,000 It is clear that, unless the enforcement of the lia- bility for deposits and consequent withdrawal of specie goes much farther than this, the bank can safely increase its loans or its purchase of securities, although its method of doing so is by the increase of its liabilities. We will suppose it, therefore, to have expanded its affairs until it has reached something like the average condition of many of those banks in the United States, which, being incorporated under the laws of the several States, are not author- ized to issue notes. It will then stand thus: Liahitities Resources. Capital .... $100,000 Loans .... $305,000 Surplus .... 29,000 Bonds and stocks . 23 000 Undivided profits 10,000 Real estate . 15,000 Deposits . . . • 305,000 Other assets 20,000 Expenses . . . 1,000 Cash items . . . ) Specie .... \ 80,000 Legal-tender notes ) $444,000 $444,000 BANKING OPERATIONS AND ACCOUNTS. 2g Postponing for the present the consideration of some terms which here occur for the first time, it ap- pears from the above account that purchases of secu- rities have been made to more than three times the amount of the capital, and that this has been effected chiefly by the creation of liabilities in the increase form of deposits. What determines the of loans limit to which this process can be carried ? >™' e . If depositors seldom demanded the payment to which they are entitled, and were contented with the mere transfer of their rights among themselves as a conventional currency, the bank might dispense with holding any large amount of specie or cash in any form and keep most of its resources employed in its productive securities. The expansion of the depos- its would then resemble in its effects the expansion of any other currency and might go on until a check should be interposed by the consequent rise of prices and demand for specie for exportation. And it is true, as we shall see, that in communities where banking is largely practised, the use of deposits as currency by transfer between depositors is so exten- sive, that a bank in good credit can rely upon their being withdrawn so slowly, or rather to so small an extent, as to make it unnecessary to have cash in readiness for the payment of more than a small pro portion at any given moment, jjMlit in a period oi financial disorder or alarm, withdrawals may be made earlier or more frequently, and. a larger provision of cash may be needed for safety, than at other times ; the kind of business carried on by depositors may expose one bank, or the banks in one place, to heav- 30 CHAPTERS ON BANKING. ier occasional demands, or may on the other hand make demands steadier, than is the case elsewhere ; and a city bank may be more subject to heavy calls from depositors than a country bank. In general, then, for every bank, in. its place and under the cir- cumstances of the time, there is some line below which its provision of cash cannot safely fall. This provision of cash, which in the account last given in- cludes the cash items, specie, and legal-tender notes, is called the reserve, and the necessity of maintaining by need ''■ Certain minimum reserve fixes a limit to of cash the ability of the bank to increase its se- curities. For obviously any increase of securities, that is, of loans or bonds, must ordinarily be effected, either by an increase of deposits, or by an actual expenditure of cash. In the one case the proportion of reserve to demand liabilities would be weakened by the increase of liabilities ; in the other it would be weakened by the decrease of cash. If, then, the reserve were already as low as prudence would allow, or were threatened by approaching heavy demands from depositors, no increase of se- curities could be made without serious risk. What proportion the reserve should bear to the The ratio of liabilities which it is to protect is a ques- reserve to tiott which the law has sometimes at- ' " ' ' tempted to settle, by requiring a certain minimum,' leaving it to every individual bank to ' The law of the United States, under which the national banks are established, recognizes twenty-five per cent, as the minimum reserve for city banks, and fifteen per cent, as the minimum for couatty banks. Revised Statutes, § 519I. BANKING OPIiRATlONS AND ACCOUNTS. 3 1 determine for itself how much may be required in addition to this minimum. And this is no doubt as far as any general rule can go. As has already been suggested, the requirements for safety of different banks and in different places must vary, and so must the requirements of the same bank at different times.' In fact, the question as to the proper amount of reserve never depends simply on the absolute ratio of the reserve to the liabilities, but always involves further questions as to the probable receipts of cash by the bank and probable" demands upon it, in the near^future. It can only be said that the reserve should be large enough, not only to insure the im- C- ' mediate payment of any probable demand from depositors, but also to secure the bank from being brought down to the " danger line " by any such demand. If twenty-five per cent, is the minimum consistent with safety, the reserve should be far enough above this to be secure from reduction to a point where any further demand or accident may make the situation hazardous." In the management of its reserve the bank itself necessarily feels a strong conflict of interests. On the one hand, it is impelled to increase its securities as far as possible, for it is from them that it derives its profits, and the retention of a large amount of idle cash is felt as a loss. On the other hand, the ' The Bank of England may be content with a reserve amounting to 33 per cent, of its deposits, as in October, 1885, or it may be uneasy with a reserve exceeding 50 per cent., as in the autumn of i8g6, '^ For a discussion of this subject, see Bagehot's Lombard Street, chapter xii. 32 CHAPTERS ON BANKING. maintenance of a reserve sufficient, not only to en- able the bank to continue its payments but to inspire the public with confidence in its ability to continue them, is a necessity of its existence, even though a part of its resources do thus appear to be kept per- manently idle. As a natural consequence, the actual settlement of the question in favor of a large or of a small reserve in any particular case will depend in good measure on the temperament of the managers, not fixed in ^^ every banking community may be practice by found "conservative" banks, the caution of whose managers forbids them to take risks by extending their business at the expense of an ample reserve ; and by their side may be seen the more " active " banks, whose managers habitually spread all possible sail, and provide for the storm only when it comes. It is to be observed that the necessity^ of providing a cash reserve is not met-t)yH:he excel- Good secun- T . , , , , , , , ties no sub- Icncc of the secSuntips held by the bank. stitute for Although their certainty of payment at cash reserve. *^ j i. j maturity be absolute, still the demands upon the bank are demands for cash, and cannot be answered by the offer of even the best securities. If the depositor or creditor does not receive cash in full for his demand when ft is made, the bank has failed, and any satisfaction of his claim by the de- livery of a security is, as it were, only the beginning of a division of the property of the bank among its creditors. Specie, therefore, or 1;he paper which is a substitute jgr it as a legal tender' foFdebt, foiu'lH Lhe real banking res^veT*"'! Jie~reserve^ the bank may, BANKING OPERATIONS AND ACCOUNTS. 33 however, be greatly strengthen^ed by the judicious selection of securities. For example, if, in the ac- count above given, the " bon ds and sto cks " are, as they should be, of descrigticjns_jdiich_are readily salable, they afforgThg_jaaans__of_rg2lenishing ^the reserve in case_ofji££d, without fo regoi ng th£_£nj.oy- ment of an income from this amount qf_resources for the_greseTttr'~Irf' extreme cases of general ^financial panic, it is true, even the strongest government securities may^ird but few purch asers ' ; still such a provision is the best support which can be had in the absence of, or as an auxiliary to, a sufificient reserve of actual cash" TheTTafural method of securing the proper appor- tionment of resources between securities .... Reserve reg- and reserve, under ordinary circumstances, uiated by is by increasiiis-oj:-diminishing the loans, loaning / - — ■ '^ ■■ ° .' .jnore, or less. or, in other words,"the purchases of securi- ties made frx)m day to day in _the-regular course of business. That part of the securities which consists of the promises of individiLala-ar-fijxas to pay to the bank at fixed dates, is made up of many such pieces of commercial paper, maturing, if_j3roperly__mar- . shalled, in tolerably steady^^'sTrrdession. The pay- ment of one of these engagements when it becomes due may be made either in money, or byjthe sur- render to the bank of aa .equar"Siount of its own liabilities, as will be shown in the next chapter. In the former case, the payment of the maturing paper ' In the London market in the panic of May, 1866, there was a moment when even " consols were unsalable." Patterson, Science of Finance, p. 223. 3 34 CHAPTERS ON BANKING. to the bank is in fact the conversion of a security into cash, and increases the reserve without change in the liabilities ; in the latter, the redaietion of securities is balanced by^^Treduction of pliabilities which raises the proportion of reserve. If, then, the bank stops its " discounts " or~its^nvestinents in new securities, or if it-.- even slackens its usual activity in making such investments, the regular succession of maturing paper will gradually strengthen its reserve ; if it increases its activity^in invegfeeirtrfr''^Tff Tower ox i^^p^T^f jiits reserve ; and if it adjusts the anrOunt of its new investments to the regular stream of payments made by its debtors, it may keep the strength of its reserve^ unaltered, until some change in the condition of affairs brings cash to it or takes cash, away by some other process. This natural dependence of the reserve upon the more or less rapid re-inyestment of its resources by the bank is distinctly recognized by the law of the United States, which proyides that when recognized the r eserve of any n Fitinn^^ l-.ank- icUh by law and below theleaal— ffliwimum, suchlmnk practice. -"i--— w— ^^ _ > '"^ "shall not increase its^ liabilities by iQak- in^ any newTbans or discounts," until its jjsserve has been restored to its required proportion By a less harsh application of the same pnnciple, the Bank of England operates upon its reserve by low- ering or raising its rate of discount, and thus encour- aging or discouraging applications for loans. And it was with a view of facilitating the replenishment • Revised Statutes of the United States, § 5191, BANKING OPERATIONS AND ACCOUNTS. 35 oi the reserve by the^_ciirtailmeni _ of ^ loans, that the law of Louisiana formerly provided that the banks in New Orleans should hold what were called " short bills," or paper maturing within ninety days, to the amount of two thirds of their cash liabilities, so that the constant stream of payments of such paper might always insure to every bank the early command of a large part of its resources.' To return, in conclusion, to the account given on p. 28 ; we have there among the liabilities certain sums classified as " surplus-" and as " undivid-ed- profits." Taken together these sums represent the profits which have been made, but not divided attiOngThe stockholders, and which are certain usu- therefore to be accounted for by the bank, ai heads of The s urplu s is,that portion of these profits^--''''"*'^ which as a matter of policy it has been determined not to divide and pay over to the stockholders, but to retain in the business, as in fact, although not in name, an addition to the capital. The remaining portion, the undivided ..proiits, is the ,Jund from which, after payment of current expenses and of any losses which may occur, the next dividend to the stockholders will be made. The current expenses are for the present entered on the other side of "the account, as they represent a certain amount of cash which has disappeared ; but at the periodical settle- ' See some remarks on the excellent effects of the Louisiana system by Samuel Hooper, Theory and Effects of Laws Regulating Specie in Banks, i860. For the law itself. Acts 0/ i/ie Fifteenth Legislature of Louisiana, 1842, p. 34. 36 CHAPTERS ON BANKING. ment of accounts they must be deducted from the undivided profits, and will thus drop out from the statement. " Other assets," here set down as an investment, may be supposed to cover any form m property held by the bank and not otherwise classi- fied, but especially the doubtful securities, or such property, not .properly dealt in by a bank, as it may have been necessarylo take and to hold temporarily, for the^_purpose of^ecuring some debt not otherwise recoverable. For example, although the bank could not properly invest in a mortgage, it might be wise for it to accept a mortgage in settlement with an embarrassed debtor, and in this case the mortgage would stand among the " other assets." And, finally, " cash items " include such demands on individuals or other banks as are collectible in cash and can therefore fairly be deemed the equivalent of cash in hand. In the absence of any legal provision limit- ing the classification of such demands as reserve, they may be regarded as virtually a part of the reserve, which in the case before us may therefore be treated as made up of cash items, specie,~~and legal-tender notes. To illustrate what has been said in this chapter we will now suppose the bank, with its affairs standing as on page 28, to make the following operations : a. To add to its securities $20,000, by discount of three-months paper at six per ^c^nt.,, three Jpurths - being provided for by^a;easmg liabilities, and on^ -fourth by the expenditureoTlSaSlTr"' The accoiint would then stand as follows : BANKING OPERATIONS AND ACCOUNTS. 37 Liabilities. Resoy;t:ees, Capital . . . $ioo,cx)0 Loans . . . $325,000 Surplus—, , . . 29,000 Bonds and stocks • 23,000 Undivided profits— 10,300 Real estate. . 15,000 Deposits . . 319.775 Other assets . , 20,000, %■ ' Expenses ^. . . 1,000' Reserve . . 75,075 od $459>o75 $459,075 b. To retrace its steps, by diminishing its "dis- counts " or holding of securities to the. extent of $50,000, of which four fifths are paid to it by the surrender of demands for deposits to a like .amount and one fifth in ca|h ; to pay'$i,2So for current ex- penses ; and further to increase its reserve by the sale of bonds and stocks to the amount of $10,000. The following would then be the state of the account : Liabilities. Capital . . . $100,000-' ; %gf Surplus . . . 29,000'' ^-J~»* Undivided profits l^^oo J-^w Ueposits . . 279,775 Resources. Loans . . . $ 275,000 ^ Bonds and stocks 13,000 -^ Real estate . . 15,000'' Other assets 20,000 -^ ' * Expenses' . . '2,250.-' Reserve . . . 93.825,. /■#■ $419,075 . !> I419.075 c. To sell $2,000 of /its otfter assets for cash with a loss of $500 ; to make a semi-annual dividend of four per cent., of which one half is credited to stock- holders who happen to be depositors also, and one half is paid in cash;) to sell $4,000 of .bonds at a 'profit of fifteen ^er cent.; ^nd to carry $1,000 of its undivided profits to surplus. The account would 38 CHAPTERS ON BANKING. then stand at the beginning of the new half year, as follows : Liabilities. Resources. Capital . . . $100,000 ^ Loans . . . $275,000-^ Surplus . . . 30,000. .^ Bonds and stocks 9,000,^' Undivided profits 3,150 Real estate. . 15,000'^ Deposits. . . 281,775. . — Other assets . 18,000 ^ Reserve . . . 97,925. $414,925 1414,925 NOTE. It will be observed that in the present chapter and elsewhere in these pages the term ' ' reserve " is used strictly as denoting the pro- vision of cash which a bank keeps at command to meet its demand liabilities, — these being its liability for deposits in the case now under consideration, and for notes in cases to be taken up later. It is in this sense that the term is now generally used in the discussion 01 banking questions in this country and in England and in the national bank legislation of the United States.' The term is used, however, with a different application on the Continent of Europe, and occa- sionally even in English-speaking countries. In the French and German legislation it is used constantly in the sense of " surplus," as in the acts concerning the Bank of France and the Reichsbank, and so also in those concerning Italian and Austrian banks. It is also occasionally used, as in the phrase " reserve capital," to denote the unpaid capital which shareholders in many English joint-stock banks are bound to contribute in case of need, as explained at the beginning of this chapter. In the present discussion the term is used solely in the restricted sense noted above. ' See especially Revised Statutes of the United States, § 5191. CHAPTER IV. THE CHECK SYSTEM. In the preceding chapter reference has been made more than once to the transfer of deposits by one holder to another, and to their consequent _, use as currency. It is now necessary to used as examine more closely the simple machinery ^""^ncy- by which this transfer is effected. The depositor, or the creditor of a bank, who has to make a payment to some other person, has his choice between two methods of making it. He may demand money from the bank, in the exercise of his right as a creditor, and deliver this money ; or, with the assent of the person to whom he has to make „. , , ■^ Simplest case payment, he may give to this person an of payment order on the bank for the money, or what ^' check, is commonly called a check. If he adopts the latter method, a payment for goods or of a debt is effected by the simple transfer of a right to demand money from the bank ; and so too if the recipient of the check gives it in payment to some third person, and he to a fourth, and so on. To this extent the check is plainly made a substitute for the sum of money for which it calls. It represents no particular money or group of coins, for, as we have seen, the deposit 39 40 CHAPTERS ON BANKING. is likely to have been created by the bank in ex- change for some security bought by it, and is, there- fore, a naked right to demand, and not a claim to ' any particular cash ; and even if the deposit originated in the lodging of money by the depositor, it has in this case also become a naked right to demand and does not imply any claim to the money actually de- posited. But the transfer of this naked right, in the case supposed, is made by the agreement of the parties to serve the same purpose as the transfer of money, and the right thus becomes a substitute for money. The effectiveness of this substitution, however, is increased and the use of the deposit greatly pro- longed, where it is the practice for the transferee himself to deposit the check, instead of demanding its payment by the bank, or seeking his opportunity to use it in some payment of his own. If we suppose all the parties concerned to keep their accounts with a single bank, and suppose a check for $2,000 to have been drawn by A against his deposit in the bank and given by him to B in payment for goods, B may deposit this check to his own credit as he would money. The bank then makes the necessary chaijges in its accounts, cancels its liability for $2,000 to A and recognizes a liability for a like amount to B, and thus the transfer of the right by A to B is made complete. This novation, or change of creditors, to which the bank has made itself a party, has not_only secured B against the possibility of finding A's deposit in the bank ex- hausted by other checks drawn by A fraudulently or THE CHECK SYSTEM. 41 by mistake, but it has also made B's right of demand against the bank divisible at pleasure, since this, in- stead of a right to demand a determinate sum, has now become a right to draw his own check or checks to an amount not exceeding $2,000 in all. In this' way checks become the instruments by which rights to demand money may be transferred from one individual to another, in such amounts as the trans- actions between thetn may require ; and when we consider the great security and convenience of transfer by such means as compared with actual payment in money, there is little need of further explanation of the astonishing extent to which checks are now used, especially in English-speaking communities.' If, now, we suppose the parties concerned to keep their accounts with different banks in the„ ,.„ „„.. same city, we shall have results somewhat where banks , 1 . 1 frr ^ • 1 * 1 are numerous. more complex but not different in kind. In this case we may suppose the check drawn by A upon Bank No. i to be deposited by B in Bank No. 2. If the transaction stands alone, the latter bank col- lects the money called for by the check, and holds itself liable to make payment to B on demand in sums to suit his |)leasure. This makes a change, not only of creditors, but of debtors, and yet at the close, ' In July, 1899, the deposit accounts in the banks of the United States and United Kingdom, excluding those with private bankers, were nearly as follows : United States, national banks .... $2,599,000,000 " " State " (estimated) . . 1,999,000,000 United Kingdom, joint-stock banks . . . 3,600,000,000 «' " Bank of England . . . 265,000,000 42 CHAPTERS ON BANKING. after the payment by A to B has been completed, we have in existence a bank liability of the same amount as that with which we started. Probably, however, in a community where there were several banks, the transaction would not stand alone. At the end of a day's business every bank would be likely to have received in deposit checks upon several, and perhaps all, of the others ; each would then have checks to meet as well as checks to collect ; and each would naturally make its settlement with every other, not by making mutual demands and mutual pay- ments, but by the offsetting of demands and the payment only of such balance as might then remain due from one or the other. Thus, if at the end of the day Bank No. i had received in deposit checks upon Bank No. 2, to the amount of $25,000, and Bank No. 2, in like manner, checks upon Bank No. i amounting to $23,000, the account as between the banks would be settled easily by the payment of $2,000 by Bank No. 2 to Bank No. i. And the re- sult is the same if the operation here traced is multi- plied by the number of banks carrying on business with each other in a great city. The settlement of accounts by the banks with each other, however, still leaves the banks collectively under the same liability for payment on demand as before. The Hability rests upon the banks, it may be, in different proportions, and is differently distributed among the creditors : but so long as payments are made by checks. and checks deposited, the right to demand from a bank which is called a deposit continues to exist in some- body's possession, and is as well fitted to dis- THE CHECK SYSTEM. 43 charge the office of money as when it was first created.' This medium of payment acquires great perfec- tion wherever the Clearing-House system is adopted. Under this system there is a p'erfeJte'd daily meeting of clerks representing all by clearing the banks carrying on business at any ' common centre. Every bank there turns in at a central office all the checks and cash demands which it holds against others and is credited therewith, and is also charged with all checks and demands brought against it in like manner by others. The checks and , demands which have thus been credited to and charged against each bank are then summed up, and the balance found to be owed by or due to each bank, as the case may be, it then pays to or receives from the central office in money. By this means a great mass of transactions, which would otherwise re- quire a series of demands by each bank upon every other, are settled at once, and the transportation of large sums in cash from one bank to another is to a great extent dispensed with." ' A statement of the working of the check system, under circum- stances of difEerent degrees of complexity, is given by Jevons, Money and the Mechanism of Exchange, pp. 252-257. ^ For a further notice of the Clearing-House system, see note on p. 52. The transportation of cash referred to in the text is reduced to its minimum by the practice sometimes adopted of using ' ' Clearing- House certificates " instead of money or legal-tender notes. These certificates represent money or notes deposited with the Clearing House, or with some bank which is its representative for this purpose, and are payable on demand ; being made in convenient denomina- tions they are used in payments between the banks, and for the pur- poses of reserve are recognized by the law of the United States as the 44 CHAPTERS ON BANKING. Under this system the bank deposit, circulated by means of checks, becomes the most convenient medium of payment yet devised. A stroke of the pen transfers it in whatever amount is needed for the largest transaction, and this transfer instantly becomes the basis for fresh operations, with as complete security against accidental loss as can be imagined. In the strict economic sense this medium, no doubt, has rapidity of circulation in a high degree, while in the sense of actual activity of movement in a given time it far outstrips money or notes, and has been well said to be the most volatile of all the me- diums of exchange. Of the entire circu- and deposits made the latmg mcdmm of this country it forms of'^lTetit" incomparably the greatest, although the least considered, part. Depending for its efficiency solely upon convention and issued as well by private firms as by incorporated banks,' it for the most part eludes the regulations which legislatures so industriously enforce upon the other constituents of the currency. Indeed, beyond the requirement of a minimum reserve to be held by the national banks, made by the law of the United States, we may say that the subject is not touched by legisla- equivalent of the cash which they represent. Revised Statutes, § 5192. These certificates must be distinguished from "Clearing- House Loan Certificates," described below, ch. vii. In London the banks and bankers keep large cash balances at the Bank of England and settle with each other by transfers made there. ' Of the twenty-seven members of the London Clearing House, twelve are private banking houses. The joint-stock banks were no* admitted until 1854, nor the Bank of England until 1864. THE CHECK SYSTEM. 14^ tion, in this country or elsewhere. The necessity for payment in specie or legal tender paper upon de- mand, the chief safeguard of value, is the result of general provisions for the payment of debts of any kind. And the chief assurance against exce^ive expansion on the part of any single bank or banker is given by the certain demand for prompt and fre- quent settlement, occasioned by the voluntary estab- lishment of the Clearing House, or by the habits of the community, but not by law. What natural limit is to be found then to the continued circulation of a liability for deposit, when once it is created and set in motion by the process of " discount " ? Plainly, if at any stage the holder of a check, in- stead of depositing it, demands its payment in money by the bank on which it is drawn, the payment extinguishes the liability. It is, to be sure, quite possible that the money, after a brief circulation, may find its way back, in fresh deposits of cash made by one or more individuals, and so a new lia- bility similar to the old one may come into existence ; but, nevertheless, we may fairly say that the use of the original deposit as a substitute for money came to a natural close with the payment of the check. Except, however, in the cases where money is re- quired for some special purpose, as to be sent abroad or to some other part of the country, or for the increase of the stock in the hands of the public, this limit to the circulation of deposits is not of great importance. For, as the withdrawal of specie under ordinary' circumstances is merely the exchange of 46 CHAPTERS ON BANKING. one medium of payment for another, any withdrawal on a large scale would imply such a change in the habits and preferences of the public as is not often or easily made» A more important limit is found, however, in the use of deposits for the payment of debts due to the bank. That the depositor can, to the extent of his deposit, pay a debt due from himself to Mifc°euld by *h^ bank by the rehnquishment of the payments to bank's debt to him, needs no explanation. ^ ^° ■ In practice he draws his own check in favor of the bank and exchanges it for the obligation held against him by the bank, this mutual release being for each side as effectual a discharge of liability as a payment in money could have been. Such a payment of the debt due by the depositor, and pre- viously standing among the securities or loans of the bank, finally cancels a liability of the bank, equal in amount to that which was created when the loan was made.' It matters little by what process the de- posit, or right of demand, finally used by the de- positor in payment came into his possession. If he is a merchant, he has probably collected smaller sums which were due to him, for the purpose of his pay- ment to the bank, and these smaller sums are likely to have come to his hands to a great extent in the shape of checks, which, as we have seen, were the instruments for transferring to him the rights of demand which others held against the bank. If he borrowed the means of payment, he in all probability received the amount in a check. Nor is the case ' Compare the statement of account for operation b. on p. 37. THE CHECK SYSTEM. 47 different when there are several banks, and the de- positor has received his collections in checks drawn upon other banks than his own. As was seen when we were considering this method of payment on page 41, the deposit of these checks to his credit effects a transfer of the liability from the other banks to his own ; and here also this liability is iinally extinguished when he uses it in payment of his debt to the bank. It is possible, indeed, that the payment- should be made by the debtor to the_bank in money, or by • a check drawn against a fresh deposit of rsyemey, aiid in this case eitJier there 'ls~no~ gxtinguis bment of bank liability by the payment, or only the new lia- bility^rrreated by tlre-fresh-'aeposit is extinguished. But in a community where banking is firmly and widely established, the large payments of commerce and of general business are certain to be made, for the most part, ifPEHe^edium which is most acces- sible and most convenient for use in large sums, and this medium is undoubtedly that which is commonly termed bank deposits.' ' A series of investigations made by the Comptroller show that about ninety per cent, of the National Bank receipts, and an even higher per cent, of their deposits, consist of checks and similar instruments. The following table presents the relative per- centage of money and credit; substitutes for money in the receipts of the national banks on particular days in the years 1881, 1890, and 1892: yuneso, Sept. 17, July, /, Sept. 77, Sept. IS, 1881. 1881. 1890. i8go. 1892. Money . . 8.23 8.15 8.54 9.70 10.20 Checks, etc. . 91.77 91.85 91.46 go.30 89.80 —Comptroller's Report for 1896, pp. 57-97. 48 CHAPTERS ON BANKING. It appears then that deposits are created by the Hence a cor- act of the bank, when loans are increased, respondence ^^^ ^j^^^ they are cancelled when loans are of loans and •' deposits. paid.' There is, therefore, a rough corre- spondence between the movements of loans and of deposits. This correspondence may be weakened by the actual flow of money to or from the bank, but in the ordinary movements of business it is tol- erably close, and where it fails the apparent excep- tion will be found to be explained by some special condition of the case." It will be found in genera! that, at times when banks are increasing their opera- tions, their deposits swell, and that when they are contracting, their deposits fall. The true connec- tion between these movements is often forgotten, but its nature cannot be mistaken by anybody who will observe the steps by which an ordinary " dis- count " is placed at the command of the borrower. ' For some striking remarks on this subject, see Hamilton's report on a National Bank, JVoris (Lodge's edition), iii., 128. See also Quarterly youmal of Economics, i., 403. ' The weekly statements of the New York banks for November, 1890, are a good illustration of the movement of loans and deposits, at a period of great financial disturbance, when there was a heavy contraction of loans and some serious withdrawals of cash. The aggregates, stated in millions, are as follows : Specie and Loans. Deposits. Legal Tender. November i . . $399-8 . ■ $396-3 . . I99.8 8 . . . 398.9 • . 392.2 . . 95-5 " 15 . . ■ 393-3 ■ . 386.6 . . 95.8 " 22 • . 387.3 - . 381.7 . . 95.5 " 29 . . . 384-6 . . 378.6 . . 95. For the special conditions affecting the banks during these weeks, see the Commercial and Financial Chronicle, passim. THE CHECK SYSTEM. 49 It has already been suggested that the use of de- posits and checks is most highly developed among the English-speaking peoples. That the scat- use of de- tered branches of the English race should p?!'*^ ^'^"*- ^ ed by nation' in this respect have followed the example ai habit, of the mother country is not surprising ; but the rea- sons for the difference in practice between England and the Continent are not so clear.' The difference itself, however, is strongly marked. The American or Englishman who is in the habit of receiving and making frequent payments avoids the keeping of cash in hand, deposits his receipts, and pays all except the smallest sums by checks. As a conse- quence, the establishment of a bank is an early symptom of the growth of trade in a small com- munity of English blood. But even in large cities the French or German trader finds it most natural to keep his own strong box ; even large establish- ments adopt but slowly the practice of depositing. And in Italy, where banks of deposit flourished long before their introduction into England, they are sparingly used and make their way with some diffi- culty against the more recent national habit. In these cases the silent choice of custom, which leads one people to prefer coin and another notes and a ' Bagehot plausibly conjectured that the immunity of England from foreign invasion and domestic revolution has made the growth of confidence possible, to a degree not permitted by the disturbed condition of the Continent for generations past. Lombard Street, p. go. But this explanation appears unsatisfactory, in view of the frequently robust faith of Continental traders and speculators, and of the ease with which English-speaking peoples establish deposit banks under the most untoward circumstances. 4 50 CHAPTERS ON BANKING, third to prefer a mixed currency, also leads to the personal custody and direct delivery of cash. The effect is to be seen, not only in the distribution of banking institutions, as to which the difference be- tween the countries named - is extreme, but also in the proportion which the deposits of the great banks in those countries respectively bear to their loans or private securities.' Upon the Continent there is also a preference for holding the engagement of the bank in the form of a note, rather than in that of a de- posit, but in England or America, if the note is used for any thing beyond the small purchases of every-day life, it is usually from necessity rather than choice. Peculiarities of national character are not the only conditions, however, which affect the use of deposits and by local as Currency in a given country. The ex- conditions. tended use of a deposit and check system necessarily implies convenient access to banks and also a certain extended scale of operations. Ceteris paribus, then, the system will naturally be stronger where population is dense or communication easy, ' The published accounts of several great banks, at nearly the same time in October, 1899, afford the following comparative state- ment, the several currencies being reduced to dollars, at the rate of ;^I or 25 francs for $5, and the amounts given in millions and tenths of millions : Loans. Deposits. Notes Bank of England- . . . • $240.5 $258.5 $141. " " France . . . ■ 177.5 144. 776. " " Belgium . . . 21. 81.6 102.2 " " Netherlands . . 55. 2. 88.3 Reichsbank of Germany . 260. II8.9 293.8 Austro-Hungarian Bank . . 105.2 294.5 Banks of New York . . • 705.9 774-9 15.6 THE CHECK SYSTEM. 51 than in a sparsely settled country or where inter- course is difficult ; manufactures, commerce, and general trade will afford it a better field than agri- culture ; and, comparing one period with another, its development in a country with increasing population and capital and with diversified pursuits will be progressive and rapid. Accordingly we find that in the United States the city banks have extended the deposit system much farther than the country banks'; that in 1899 the .system is 'developed much farther than in 1875 ; and that, to compare the banking of seventy-five years ago with that of to-day. the United States Bank at the height of its prosperity was in this respect in as marked contrast with the national banks of to-day, as are the banks on the continent of Europe.' The full extent to which this development has now gone is seen, not in the mere 1 The reports of the national banks for July, 1875 and 1899^, show the comparative standing of the "reserve city " banks and of the country banks to have been approximately as follows, representing capital and surplus in each case by 100 : City. Country, 187s. iSgg. 187J. iSgg. Capital 100 100 100 100 Loans 187 410 130 214 Individual deposits . 144 356 77 241 Notes 34 12 60 29 'A comparison of the second United States Bank, at its greatest expansion in 1832, with the average condition of all the national banks in September, 1899, taking the proportions for an equal amount of capital for the former (which had no surplus) and capital and surplus for the latter, shows the following contrast : 1832. iSgg. Capital 35 millions. 35 millions. Loans 70 " 103 || Individual deposits . 9 *' 100 Notes 26 " 9 52 CHAPTERS ON BANKING. amount to which bank deposits have risen on the average, but in the vast aggregate of transactions effected by this rapidly circulating medium, as shown in the reports of the Clearing House. These reports contain the record of a mass of business, inconceiv- able in its amount and complexity, such as, it is cer- tain, could not have come. into existence without the aid of this powerful agent. NOTE. To illustrate the working of the Clearing-House system, we will suppose the case of six banks carrying on business in the same town. On a given morning we will suppose the messengers of these banks to meet at the Clearing House, each bringing the checks received by his banE in deposit on the previous day, as follows : No. I, checks on No. 2, $6,500 No. 4, checks on No. i, $8,750 f ( <( ** 3, ^,200 Capital . . $ioo,cx)o Loans . . . $217,000 Surplus . . . 30,000 Bonds and stocks . 105,000 Undivided profits 3,150 Real estate . . 15,000 Deposits . . . 187,850 Other assets . . 4,000 Notes .... 93,925 Reserve .... 73,925 $414,925 $414,925 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 credit- ors for deposits and notes. If the affairs of the bank were to be wound up, by reason of losses. Effect of or for any other reason, it is clear that, in losses ii- r , « . ,. . 1 lustrated. 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 va.lue, 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 6o CHAPTERS ON BANKING. 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.' 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 prop- erly be regarded as creditors, stand upon the same footing, no favored class among them having any preference unless by virtue of some special legisla- tive provision. We may now suppose that the legis- lature, 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 liquida- tion should fall short." 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 divi- dend 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 legisla- ' If we suppose the law to make the stockholders liable as individu- als for the debts of the bank, they would under these circumstances be subject to an assessment, in order to make full payment to the de- positors and note-holders. For the liability of stock-holders under the national-bank system of the United States, see Revised Statutes, §5151 ; also United States vs. Knox, 102 U. S. Rep., 422. ^ E. g., see New Hampshire Compiled Statutes of 18^3, ch. 148, § 30. For objections see Comptroller's Report, 1898, p. xili. et seqq. BANK-NOTES. 6l ture 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 ., , 1 , , ^ ,. , , How notes the bank, supposed to be of solid value are secured and sufficient to insure payment of the ^^ pi='ig= ■^ of property, notes m any case. Thus, to return to the account on page 59, 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, sub- ject to the provision that, in case of the failure of the bank, the proceeds of the securities should be ap- plied 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 oi a particular class of its liabilities in a given contin- gency. 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. 62 CHAPTERS ON BANKING. The method described in this supposed case, of protecting the issue of notes by a deposit of securities as in the na- in the hands of some public ofiScer, is^that ofThi United which was adopted by the State of New states, York in 1838, and was long known as the "free-banking" system. Many other States fol- lowed the example of New York, and finally in 1863 the New York plan was adopted by Congress as the basis for the national-banking system.' If, now, we vary the above supposition so far as to imagine the property pledged for the protection of and tiie ^^^ notcs to consist, not wholly of securi- Bank of ties, but of securities to a certain amount "^ ^° ■ and of specie for all notes issued in excess thereof, we shall have in substance the provision made by law in 1844 for the protection of the notes of the Bank of England. Besides other reasons, already adverted to, for seeking legislative protection for bank-notes, the be- lief has been common that banks are under a special and dangerous temptation to over-issue notes, thus ' causing their depreciation with loss to the public. The question whether really convertible notes can circulate in excess has been the subject of much wearisome and futile discussion,' tending to secure for the notes far more than their proper share of attention. It has already been shown, however, that the question whether notes shall be issued or not, is ' For an account of the New York system and its adoption by other States, see Comptroller's Report loi 1876, pp. 23-36. ' For convenient citations on this subject, see Walker on Money, ch. xix. BANK-NOTES. 63 one which in modern banking is not settled aiifirma- tively by the bank, but is settled by the creditor, who determines for himself and with an eye to his own convenience, whether to hold his right, as against the bank, in the form of a note or of a de- posit. If he and creditors generally prefer the latter, the bank cannot force its notes into circula- tion. The really serious question would be whether the bank can extend the use of its credit, by de- posits as well as by notes, in excess. This is as much as to ask whether the bank can go whether too far in the purchase of securities, or in extend cred^ other words, can unduly stimulate bor- in excess, rowers, the making of loans being the purpose for which the bank extends its credit. But this question cannot be answered without qualification. If we observe any period of ten years, we shall find some years in which banks have found the public de- pressed and spiritless, to such a degree that, with every motive for increasing their business, it has been impossible to find sound commercial paper in sufificient amount. So far from being able to extend their credit in excess, banks have at such times often reduced their capital because employment for it could not be found. Other years we shall find in which the public spirit was buoyant and adventurous, and in which the banks have fostered and increased the general tendency to speculation, by the facility with which they have given the use of their credit. It is true then that banks cannot extend their liabili- ties of either sort except in response to a demand from the public ; it is also true that in certain 64 CHAPTERS ON BANKING. states of business this demand may be unduly stimu- lated by their action, and that issues made in re- sponse to an unhealthy demand are in excess of the proper needs of the community. In any such ex- pansion of bank credit, however, bank-notes must generally play the least important part.' Far more important, at times, is the part played by what is known as the certified check. The check in its common form, under which it has been consid- ered in this discussion, is simply an order of pay- Certified mcnt addressed by a depositor to the bank, checks and and does not bear upon its face any en- t eir a use. gj^gej^j^jj^ \^y j-jjg latter to pay. The bank is necessarily under the liability to pay to the de- positor to the extent to which he has funds standing to his credit, but the check drawn by him is no part of the evidence of such liability. If, however, the proper oiKicer of . the bank certifies upon the check that it is good for the amount called for by it, the check then becomes an obligation of the bank, the certification is in effect the bank's promise to pay, and the whole transaction becomes indistinguishable in principle from the issue of a bank-note. The cer- tification of the check necessarily implies that the drawer has funds in the bank to the amount called ' The condition of the national banks in December, 1878, was one of great depression, and may be compared with their expanded state in October, 1890, and in December, 1898, the amounts being given in millions. December 6, 1878. October 2, i8go. Decetnber i, 1898, Capital and surplus . $581.3 $864. $867.2 Loans 826. 1,986. 2,214.4 Deposits 598.8 1,564.8 2,225.3 Notes 303.3 122.9 207.1 BANK-NOTES. 65 for and that they are appropriated for the payment of the check when it shall be presented ; and in this form the certified check is safe and convenient for many purposes. It is obviously easy, however, to certify the check as good, when the funds to meet it are deficient or are merely expected, or for the pur- pose of giving the check credit for some temporary use, looking to its ultimate cancellation without actual payment. In such cases the certified check is made the means of extending the use of its credit by the bank, in a manner peculiarly liable to abuse ; and it has often proved itself to be a much more efficient instrument for promoting hazardous specula- tion than any issue of bank-notes likely to take place under modern conditions.' Of other actual or possible forms which the evi- dence of the bank's liability may assume, it is enough to mention here what is known as the post-note. This is a bank-note payable not on demand but at some future time, probably not far distant. If much resorted to, the issuing of such notes would indicate that the bank was borrowing upon time, and was probably extending its business beyond safe limits. It is true that the Bank of England makes a small issue of post-notes, under the title of " seven-day " ' This subject is discussed among others in a valuable report drawn up by Mr, Geo. S. Coe and presented to the New York Clearing- House Association, November 11, 1873. Commercial and Financial Chronicle, November 15, 1873, p. 651. See the Comptroller's Report for 1884, p. 44, for the connection of certified checks with the crisis of that year in New York. The national banks are forbidden to certify cheeks unless the funds are actually in hand, 15 Statutes at Large, 335 ; 22 ibid., 166. S 66 CHAPTERS ON SANKING. bills, established as being safer for transmission by mail than the ordinary bank-notes.' In this country, however, the post-note has been found to present peculiar temptations for unsound banking, and its use by the national banks is therefore prohibited,' the law adopting the conservative policy of requiring that the liabilities of the bank, representing its use of credit for the extension of its investments, shall be cash liabilities, and not engagements to pay in the future. JVOTE. Of the writers on banking, McLeod, Theory and Practice of Banking, has made the most careful analysis of the exchange which underlies every banking operation. Notwithstanding eccentricities of method and style, his exposition of the real meaning of ' ' loans " and the ambiguities incident to our use of that term, the origin and purport of bank liabilities, and the substantial identity of the liabilities for deposits and notes, is clear and important, and might be cited in confirmation at many points in these pages. Reference may also be made with advantage to McLeod's smaller work. Elements of Banking. Among earlier discussions, attention is specially called to a strik- ing letter by James Pennington, in Tooke's History of Prices, ii. , p. 369, in which the strong analogy between the deposit accounts of the London private bankers and the notes of the country bankers is forcibly stated and explained. ' Gilbart, Principles and Practice of Banking, p. 30^ ' Revised Statutes, § 5183. CHAPTER VI. REDEMPTION. Reference has been made in a preceding chapter to the system by which, in most banking centres of any importance at the present time, banks holding checks drawn upon each other settle their accounts by means of a Clearing House, where checks are Exchanged and the resulting balances are paid in cash. It was pointed out that, by this simple but powerful agency, a complex mass of transactions, otherwise unmanageable, is easily and promptly adjusted. Probably the convenience of having the represen- tatives of several banks meet at a common centre first suggested this improvement upon the earlier practice under which every bank sent to every other to collect such checks or other demands for payment as might come into its hands.' A moment's con- sideration will show, however, that this method of systematic and early presentation of demands must ' See Gilbart, Principles and Practice 0/ jBaniing- (edition of 1873), p. 451. The primitive method of despatching messengers to make their daily rounds was followed in New York until 1853, and in Boston until 1S55. 67 68 CHAPTERS ON BANKING. act as a strong and salutary restraint upon the undue expansion of credits by any particular bank. Against a general imprudent expansion by the banks of a community, acting under the impulse of some wave of over-confidence or of speculation, there appears to be no safeguard except that which may be found in the relations of the community in question with others. But if a single bank, or a group of banks, imprudently expands its loans by the use of its credit it must soon begin to face the effect in the demands for settlement made upon it through the Clearing House. It may be able to reckon with some confidence on the omission of some depositors to draw promptly for the amounts due to them, but whatever checks are drawn it must be prepared to meet without delay, for few checks for any consider- able amount, when they have once left the hands of the drawer, will fail to make their way quickly into the deposits of some bank and to appear at the Clearing House on the following morning. It must be added that the operation by which de- mands are presented through the Clearing House is one in which the banks presenting the demands are scarcely voluntary agents. They are aware that they must meet checks drawn upon themselves, and are impelled in self-defense to present by way of offset all claims that they can bring forward against others. Demands which they might conceivably delay under a looser system, or press with less regu- larity, it is for their interest to bring forward at once as a part of their own provisions for the inevitable daily call to be made upon themselves. Even the REDEMPTION. 69 possible disposition to forbearance, which a creditor bank may feel in a particular case, must be weakened by the consideration that others will not fail to re- quire any payments that may be due to them, and that by forbearance the bank only consents to the preference of their claims over its own. The prompt presentation of checks for payment is therefore the established practice, implying no jealousy, hostility, or suspicion on the part of the creditor bank, — being in fact the natural disposition to be made of an in- strument of credit intended to be but short-lived. The differences of situation among banks are so great and convenience of intercourse varies so much even in any limited district, that the law would have found it difficult to create and enforce any such effective system of compulsory daily redemption of obligations as the banks of cities have developed and set in operation of their own accord. The observed tendency is, moreover, to enlarge the scope of the system, bringing outlying banks more and more with- in its reach and quickening the course of business between different banking centres. This volun- tray development of a system so searching and re- strictive is unquestionably due to two characteristics of the check, which hinder its continued circulation. In its ordinary form the check carries no guaranty or other recognition of obligation by the bank on "which it is drawn, so that prudence calls for its speedy collection, unless the holder is willing to depend upon the signature of the drawer and such endorsements as the check may bear. Moreover, as the amount for which the check is drawn is deter- 70 CHAPTERS ON BANKING. mined by the transaction in which it had its origin, it is little likely to be convenient for use in making any further payments, and its division or merger in any larger amount is not readily effected except by depositing it. The nature of the instrument then has led inevitably to the development of a practice which, once adopted, is recognized as one of the most important of existing safeguards against the abuse of bank credit. Bank-notes have no similar tendency to speedy return. Although the obligation expressed by them is, in origin, purpose, and most of its effects, substantially identical with that which exists be- tween the bank and its depositors, the evidence of the obligation is essentially different. Bank-notes express a direct promise by the bank, of payment to be made to the bearer ; they are also issued in con- venient denominations, and therefore adapted for continual circulation like coin. They may come back to the issuing bank in payments or may be de- posited, but their return by these channels is uncer- tain, especially where there are many banks of issue. Their return is seriously hindered, moreover, by the fact that it is generally easier to use them than to present them for payment. For the holder, whether an individual or a bank, this is certain to be a con- trolling consideration, and one that is quite inde- pendent of any question as to the comparative abundance of currency or the extent to which bank credit is expanded. If there is but a single issuing bank, or if a large part of the circulation is issued by a few banks which make a compact group, the REDEMPTION. J I demand for specie for export, which is the natural corrective for an excess of currency, may sometimes be satisfied most conveniently by presenting notes for redemption. But if the issuing banks are many, and especially if they are scattered geographically, the operation of "this corrective will obviously be slower by reason of the number and inconvenience of the demands for redemption needed for making up any considerable amount of coin. Under such circumstances a bank-note currency, once set afloat in excess or become excessive by a change in the condition of business, may be slow in coming to the mark to which, if really convertible, it must eventu- ally adjust itself. The systematic reduction of bank-notes, . as an insurance against their possible excess, is therefore developed with much less ease and certainty than the corresponding restraint upon the use of credit in the form of deposits. The end to be sought — a wholesome restraint of a kind of credit which is easily abused — is the same. Indeed, public opinion and the law generally proceed upon the assumption that the use of the right of note-issue is practically open to abuse, and that, for the protection of the public, special and sometimes elaborate precaution is necessary. Still the immediate convenience of the holder of bank-notes, for the reasons given above, is stronger than the more remote public interest, so that some form of pressure is usually needed for the development of an effective system of redemption among any large number of banks. The Suffolk bank system of New England, the 72 CHAPTERS ON BANKING. most effective which has existed in the United States, was forced upon the banks of that section by the concerted action of a few strong city banks, which found their natural field of circulation in Boston seriously invaded by country issues.' The pressure thus established was finally made decisive by a legislative act which, in Massachusetts, forbade any bank to pay out any notes except its own, and thus compelled every bank either to send in for re- demption any notes of other banks received in pay- ment or on deposit, or to hold them as dead cash. The agreement under which the few Scotch batiks have for more than a century returned each other's notes through a clearing house ' is a striking case of competition by few competitors in a limited field, and so, too, is the practice by which the larger number of banks in Canada send in for redemption the notes of their competitors. In each of these cases the struggle for a narrow field, intensified by the direct competition carried on by rival networks of branches, brings motives into play and creates a possibility of common action for mutual convenience which have no existence where the number of banks is large and their distribution greatly scattered. To take for illustration the 3600 national banks of the United States, — no single bank can feel that its own power of circulation would be appreciably affected if it were to present for payment such notes of its 3599 competitors as it might chance to receive. The infinitesimal gain in this respect could not be counted in comparison with the inconvenience and ' Whitney, History of the Suffolk Bank. ' Graham, The One Pound Note, chs. xv. and xvi. REDEMPTION. 73 delay to which it would have to submit. The natural course must be for each to extend its own circulation wherever the opportunity is found for doing so with profit, and to trouble itself as little as possible with respect to the circulation of others. It is easy to see that the conditions which prevent the spontaneous development of a system of note redemption where there are many banks of issue may also tend to create a positive opposition to any such system. Why do by agreement that which the banks separately do not care to do ? Why compel banks to send home for redemption a multitude of notes which can as well be used in payments and are sure to be re-issued at once ? Why impede the free use of its power of circulation by any enterprising bank, by requiring the early redemption of notes which the holder does not in fact care or need to have redeemed ? Why not allow to a bank the full advantage of the virtual loan made to it by a com- munity which forbears to press for the payment of notes ? Objections of this kind gain strength from the good credit which a note circulation may de- servedly enjoy. It is obvious, for example, that a secured circulation like that of the national banks of the United States could not have been made stronger by any system of mutual redemption. The holder has been protected against loss to such a de- gree that the ultimate soundness of the issue ceased long ago to have any bearing upon questions like the present. It is also clear that any system of con- stant and effective note redemption, comparable with the exchange of checks through the Clearing 74 CHAPTERS ON BANKING. House, must tend to confine the issue of each bank geographically, thus sacrificing in some degree the element of nationality, on which a high value has always been set. It may then be argued, with some show of reason, that an enforced exchange of notes would be an excess of regulation, useless and bur- densome to the issuing banks, and therefore to be resisted. Objections of the kind which have now come into view, however, proceed upon too narrow a view of the subject. As the exchange of checks through the Clearing House has had results far beyond the mere gain in convenience and safety to which the practice owes its origin, so the redemption of notes by some corresponding mode has important bearings of much greater scope than the convenience of banks in maintaining their issues, and quite inde- pendent of any question as to the security of the currency. No doubt the real and ultimate interest of banks in any well-ordered system is identical with that of the community which they serve, but this does not alter the fact that the every-day considera- tions upon which any particular bank acts must relate to the special transactions which it has imme- diately in hand and may have little to do with more remote and general questions of public policy. Especially is it true that, in all that relates to what is commonly called the elasticity of the currency, the immediate objects had in view by the particular bank have little to do with the general interest. Each bank acting for itself may have a strong motive for maintaining its circulation at the highest point REDEMPTION. 75 consistent with its own safety, but the community is interested in securing a quick correspondence be- tween the amount of its paper currency in actual use and the rapidly changing demands of business. To maintain this correspondence it is as necessary that the paper currency should shrink at some times as that it should expand at others, and this must be effected, not by any such slow process as that which - in the course of years raises or lowers the general level of paper, but by some movement as speedy and as natural as that by which metallic money ad- justs itself to current wants. For reasons already stated it is not enough for this purpose that there should be provision for redemption on presentation, even though it be as unquestionable as that made by the United States for the central redemption of national bank-notes at the Treasury. It must be for the direct interest of some holder or class of holders to require redemption, if there is to be a real contracting force, capable of immediately re- moving a redundancy of paper from circulation. In short, to give genuine elasticity to the note-issue of banks there must be the same play of opposing forces that can be seen at work now expanding and now contracting the volume of deposits used as currency. This conclusion appears to be inevitable whenever the number of banks is large and the use of their credit in the form of notes bears any considerable proportion to their loans. It may be argued, how- ever, that the conditions, and hence the conclusions, are materially altered if the note-issue is relatively ^6 CHAPTERS ON BANKING. small, and it is no doubt true that in this case the active redemption of notes loses a part of its practi- cal importance. Still, even in such a case, of which the banking system of the United States is an ex- ample, there are serious considerations favoring such redemption. Looking at the banking system as a whole, no doubt as regards the aggregate use of banking credit in effecting the daily exchanges of the country, the preponderant element, the bank deposits, are a flexible quantity, easily adjusting itself to the demands of trade, so that taken in the. mass the adjustment of our total currency to our needs is in large measure secured, and it might at first sight appear that if the inferior element, the note circulation, is tolerably constant or even in- flexible, the elasticity of the total is sufficiently provided for. This view of the case, however, overlooks the fact that it is only by giving the public its choice between the two forms of currency upon equal terms that it can be determined whether the most advantageous apportionment between them has been reached or not. If under similar condi- tions of choice a greater or less proportion of either would be used than at present, it is clear that the law or practice which prevents this adjustment runs counter to the natural current, and is so far a hin- drance to natural and, it may be presumed, healthy development of the circulating medium. But, after all, the effect of redemption upon the currency in the aggregate is not all that has to be considered. In any widely extended system of banking there must be serious differences of method REDEMPTION. yy and condition between the banks of different sec- tions and districts. As we have already seen, popu- lous sections will necessarily differ in their use of credits from those which are sparsely settled, manu- facturing districts from agricultural, and cities from the country. On the whole the proportionate use of note circulation may be small, but it may, and probably will, run higher in some parts of the country than in others. Moreover, there will be found the same difference between the banks carrying on busi- ness within the same considerable section, or even within the same city or large towns. In short, the general statement of condition made for any great system or group of banks affords an average which is made up from widely differing extremes, and cannot be taken as decisive in questions of legisla- tion. CHAPTER VII. COMBINED RESERVES. It has been pointed out in a preceding chapter, that in the management of its reserve a bank feels a strong conflict, of interests. It is impelled to increase its securities and to avoid the keeping of idle cash, by the desire for profit ; it must also maintain a re- serve strong enough to insure it from risk, in order to secure the confidence of the community. In a pe- riod of financial disturbance or crisis this conflict of interests is intensified, for the instinct of self-preser- vation may then demand the contraction of loans for the replenishment of the reserve, when a more far-see- ing judgment would advise its apparent sacrifice by a liberal increase of accommodation. In a community where there is only one bank, or where there is a sin- gle bank of great influence, this difficulty of choice between opposing counsels is felt, and the action taken has therefore often been vacillating, mistaken, or tardy, with plainly mischievous consequences.' ' See, for example, Bagehot's strictures on the conduct of the Bank of England, Lombard Street, pp. 178, 199 : " A more miserable cata- logue than that of the failures of the Bank of England to keep a good banking reserve in all the seasons of trouble between 1825 and 1857, is scarcely to be found in history." 78 COMfelNEt) RESERVES. 79 When, however, there are several banks side by side, without any recognized leader or strong combina- tion, the difficulties of the case are greatly ° ■' When banks increased, for then the opposing interests not united, of different banks also come into play. «<=""« ff'"* ^ ^ intensined. It is then possible, and in any sharp crisis is even probable, that some of the bank man- agers may decide to take care of themselves by re- ducing their loans and filling up their reserves, and leave it to others to take care of the general welfare by enlarging discounts and satisfying the public demands. The knowledge that some may pursue a selfish course weakens the disposition of others to take a more liberal course, and thus may practically lead the whole group of banks to pursue a policy of contraction, which is condemned by the judgment of the majority. It is this difficulty of managing many reserves upon a common plan during a period of financial crisis, that has led on several occasions to the adoption of an expedient for combining the reserves of the banks in New York, and to like action in other cities. The first occasion on which this was done was at the height of the alarming crisis of November, i860, when the sudden development of the secession movement had destroyed a great body of mercantile credit, and had for a time paralyzed the industries of the whole country. The fifty banks of New York panic of were at this moment endeavoring each to Nov., i860, in , , , I , -1 -i. New York. save itself, and the mercantile community, with the prospect of being called upon for the re- payment of loans at a time when goods could not be 8o CHAPTERS ON BANKING. sold, was in a condition of panic. Foreign exchange had become nearly unsalable,' and the efforts of a few banks to start the wheels of domestic commerce again, by buying bills drawn against shipments of produce, had resulted in failure.'' It was necessary in some way to satisfy the business community that every solvent debtor could rely upon having the usual facilities for paying or for renewing any liabili- ties maturing in the near future, and that he could safely shape his dealings upon that calculation. If this were not done, increased alarm, the withdrawal of deposits, hoarding of specie, and forced suspension of the banks themselves were certain to follow. And a could not be done, except by such an agreement among the banks as should insure the full co-opera- tion of all. The New York banks held in the aggregate, at this critical moment, an amount of specie which was equal to about twenty-three per cent, of their cash liabilities. This was a scanty reserve, but in the opinion of the more sagacious managers it was large enough to serve in the present crisis, if no further shock to credit occurred, and if the reserve were treated as a genuine reserve, to be used in pressing necessity, and not simply to be guarded. A liberal increase of loans and at the same time of liabilities would make it still more scanty, but nevertheless the ' Bankers' bills on London were quoted at the equivalent of $4.67 for the pound sterling, and commercial bills at $4.44, on November 19th, with few buyers. ' Besides the daily papers for November, see the review of the money market in the Banker's Magazine, 1860-61, pp. 499, 539. COMBINED RESERVES. 8 1 rfsk was not overwhelming. No export of specie was going on, and the solvency of the banks and of their circulation was under no suspicion. There was rea- son indeed to expect that additional loans, being used to a. great extent in making such payments as fell due at the banks, would be in substance a mere exchange of obligations and postponement of the time for actual liquidation. The chief difficulty of the case was to secure real concert of action. For accomplishing this, the Clearing-House Association, in which the banks were already united for impor- tant purposes, and from which no bank would willing- ly find itself excluded, was the natural agency. A plan of operation was therefore settled upon, which should become binding upon all the banks in the Association, when adopted by three fourths of them. By this plan ' the banks agreed •^ ^ ° Plan of that, for the purpose of enabling them to combined expand their loans, the specie reserves ll^o"^^ held by them should be treated as a com- mon fund and, if necessary, should be equalized among the banks by assessments laid upon the stronger for the benefit of the weaker ; and that, for the purpose of settling balances between the banks, a committee should be appointed with power to issue certificates of deposit to any bank placing with them adequate security in the shape of stocks, bonds, or bills receivable, and that these certificates should be received in payment by creditor banks. The effect ' The resolutions of the banks are given in full in the Banker's Magazine, 1860-61, p. 500, and also in the daily newspapers of No- vember 22, i860. 82 CHAPTERS ON SaNKING. of this arrangement was that any bank which expe. rienced an unusual demand for specie would be sup- ported by the whole of the common stock, and that the debt to the others, which it thus incurred, could be met by a pledge of its securities. Whatever course might be taken then, any bank was as strong in spe- cie as any other. A general increase of loans and lia- bilities might for the time weaken all, and if there were a further loss of confidence in the community might expose all to a common danger ; but no one bank, by holding back its loans, could strengthen it- self above the others, since the specie which it might thus collect must be held subject to assessments for the common benefit. This plan was adopted November 21, i860, and under it certificates were issued finally amounting to $io,cxDO,ooo, all to be redeemed by February i, t86i. It was also provided that after that date any bank whose specie fell below one fourth of its liabilities should cease discounting until that pro- portion was recovered, under penalty of expulsion from the Clearing House. Into this combination all the New York banks entered, except the Chemical Bank, an institution with remarkably large and steady deposits and small circulation, which pre- ferred to leave the Clearing House rather than throw its large reserve of specie into the common stock. The effect of this arrangement was instantaneous. The announcement that it had been made quieted the money-market and ended the panic. In the next week the banks increased their loans rapidly, COMBINED RESERVES. 83 and nearly the whole of the additional loans went to swell the mass of deposits, with only an incon- siderable loss of specie.' The expansion ns complete was continued at a more moderate rate success, for several weeks until, under the natural effect of the revulsion in business, the demands for loans fell off and specie began to accumulate. The great causes which had produced the crisis were still at work, and a general stagnation and liquidation were inevitable ; but the combination of their reserves had probably saved the banks for a time from the suspension of specie payments, which the civil war was destined to bring in its train thirteen months later.' Although, however, this combination was the turning-point of the panic and was favorably re- ceived by the general public, it was the object of much criticism. It was declared by many to be a disguised suspension of specie payment, since the debts of the banks to each other were no longer ' The reported condition of the New York banks for four weeks was as follows (stated in millions) : Loans. Circulation. Deposits. specie. Nov. 10 . . . $125.6 fe-5 $79- $21.1 17 • . . 123-3 9-3 76.2 19.5 24 . . . 122.5 9- 74- 18.8 Dec, I . . . 129.5 8.8 80.7 18.5 These figures being averages, the week ending November 24th shows a fall of loans, although there was a heavy expansion in the last three days. " For the revival of this arrangement in April, 1861, and for the issue of certificates and equalization of specie in the summer and fall of that year, see the report of the committee in the Banker's Maga- zine for 1862-63, p. 136. 84 CHAPTERS ON BANKING. settled by the payment of specie, but by a pledge of securities. But it was answered triumphantly by the bank managers, that the power of the public to obtain in specie the payment of deposits or the redemption of notes remained unimpaired. So long as the convertibility of the bank-note was main- tained, how could it be said that specie payments were even virtually suspended, although the banks should mutually forbear to demand specie from each other ? The arrangement was in fact a tem- porary fusion of the fifty banks of the city in their relations to each other, but without prejudice to any of the rights of the public. The general crisis of 1873 had its beginning in New York, with some important failures, on the 8th of September. It developed rapidly, and by the 1 8th a panic bad set in, which was heightened in the next two days by several serious failures of banks and banking houses, and by the rapid withdrawal of balances by country banks and other depositors. The pressure to realize upon stocks, and the conse- quent excitement in the market, became so intense that on the 20th the Stock Exchange was closed for ten days. The sale of foreign exchange drawn against exported merchandise was soon completely blocked, and the Treasury was at last urged by many, with little regard for its limited authority, to use its funds in the purchase of bills.' The banks, ' Some of the correspondence on this subject was given by the Secretary of the Treasury in the Finance Report for 1873, p. 13. Set also New York Times, September 26th. COMBINED RESERVES. 85 in this state of affairs, acted with little promptness. Whether they could have stayed the progress of a panic, which was, in fact, the awakening from an intoxicating speculation, may be doubted. At any rate, it was not until the evening of Saturday, Sep- tember 20th, that they determined upon an issue of Clearing-House loan certificates to the "^ The same amount of $10,000,000, and agreed to plan followed equalize their reserves by assessment, ;£"> Sept., 1873. necessary." The fact that specie payment had been suspended since the close of 1861 did not materially change the problem with which they had to deal ; and they accordingly adopted the same votes as in i860, with few changes, except the phrases needed to recognize the fact that their liabilities now im- ported the obligation to pay in " lawful money " only, and not in specie. This measure, however, proved to be unavailing. The shock which had been given to confidence was too severe and too general, the drain upon city banks by the demand of country corresponding banks strengthened, and legal-tender notes rapidly disappeared from the reserves. In the effort to withstand this movement, the banks, on Wednes- day, the 24th, increased the issue of loan certificates to $20,000,000. On the same day, however, it was ' The votes adopted by the banks are given by the Comptroller of the Currency, Finance Report for 1873, p. go ; and in the Commer- cial and Financial Chronicle, September 27, 1873, p. 410. For the amount of certificates issued in 1873, see Report of the Comptroller of the Currency for 1884, p. 38. That the legal tenders were equalized for the first time on the 25th, see New York Times, September 26th. 86 CHAPTERS ON BANKING. reported that in many cases the payment of checks calling for legal tender in large amounts was refused,' Suspension ^"d this provcd to be the beginning of nevertheless a suspension of payments, which, in a """^ ■ day or two, became general throughout the country, and lasted until November ist." The banks continued to meet at the Clearing House and to settle their demands against each other by means of certificates, and payments were made as usual by checks, in cases where these could be deposited by the payee and so could pass through the Clearing House. The necessities of depositors having large payments of wages to make were often met by payment in legal tender, and also many of the small checks required by the necessities of every-day life were so paid. This, however, was by favor, and it still remained true that for most purposes payment upon demand by the banks had stopped. The re- serves, which had shrunk rapidly down to the suspension, continued to decline until they reached their lowest point October 1 3th,° when, in the gen- eral stagnation of business, the banks began to regain their strength by a natural process. In May, 1 884, the banks of New York again found themselves confronted by a rapidly developing crisis. An uneasy feeling had prevailed from the ' New York Times, September 25, 1873. "^ See statement by the Comptroller of the Currency, Finance Re- fort for 1873, p. 91. ' The weekly publication of the returns made by the banks to the Clearing House was discontinued during the suspension of payments, but the Comptroller of the Currency, Finance Report for 1873, p. COMBINED RESERVES. 87 beginning of the year, and failures, loss of confidence, and decline of prices had strongly marked the spring months. Some apprehension that the United States Treasury might find it necessary to resort to pay- ment in silver had also disquieted the public, and led to a serious withdrawal of deposits, which left the banks but ill prepared for any severe strain." On May 6th the Marine National Bank failed, under cir- cumstances of extraordinary dishonor; on the 13th the Second National Bank of New York disclosed an immense defalcation by its president, and on the next day the Metropolitan National Bank and sev- eral important private firms suspended. This was the signal for action by the associated banks, and they accordingly on the same day. May 14th, adopted for the third time the plan of settling The plan their balances with each other by means succeeds in of certificates of deposit, and this time **^^' '*^^' without limiting the amount to be issued. They did not deem jt necessary to adopt the further provision of the plan of i860 and 1873, for equalizing reserves by assessments in case of need. That provision was 95. gives the following comparison for the national banks of New York (stated in millions) : Sept. 12. Oct. 13. Nov. I. Loans $199.2 $179.1 $i6g.2 100. 89.7 92.6 72.6 38.8 36.9 27.5 27.8 27.8 32.3 6.5 15.7 14.6 10. II. 5 See also Finance Report for 1874, p. 170, for weekly average lia- bilities and reserves of the same banks for September and October, 1870-74. ' Some instructive comments as to the course of affairs earlier in the year are made by the Commercial and Financial Chronicle, May 31, 1884, p. 632. See the table in the note on p. 88. Deposits Due to banks Circulation Legal tender Specie . . 88 CHAPTERS ON BANKING. framed, it is probable, to guard against that kind of discredit which finds its expression in a " run " upon particular banks, by depositors or noteholders, such as was seen in the panic of 1857 ; but although such a contingency is never impossible, it no doubt now appears far more remote than formerly, since the ability to meet the Clearing-House settlement is ac- cepted by the public, as well as by the banks them- selves, as the sufficient guaranty of solvency. And the simple resort to the issue of certificates proved in 1884 to be sufficient for the purpose, being resorted to before the situation had become too des- perate.' It quieted the apprehensions of the public and enabled the banks, although contracting their loans in general, to give assistance with confidence when it could be given legitimately. The process of liquidation, with diminishing loans and deposits, went on for some weeks, the reserves of the banks fell below the legal minimum, but the stress of the crisis was passed by the general public in ^afety. The severe crisis of November, 1890, compelled the New York banks for the fourth time to combine ' The average condition of banks of the New York Clearing House, for a series of weeks, was as follows (stated in millions) : Loans. Circulation. Deposits. Reserve. February 16 ■ $345.9 $14.5 $363-5 $110.9 April 26 . • 343-4 14-5 335-7 86.3 May 3 - 342- 14-4 333-2 84.1 " 10 . • 333-4 14.2 329.8 86.9 " 17 . 326.6 14-2 317-2 82.4 " 24 • - 313-2 14-3 296.6 67.5 The vote adopted by the hanks of New York is given by the daily newspapers of the date, and also by the Comptroller of the Currency in his Report for 1884, p. 33. On p. 37 is a statement as to the amount of certificates actually issued in 1884. COMBINED RESERVES. 89 their reserves for general defence, by the resort to loan certificates. A long-continued fall in prices at the stock exchange, the unexplained alarm shown in the London market, and the low state of reserves, had finally, at the beginning of the second week of November, resulted in a dangerous collapse of prices and in several failures and the notorious embarrass- ment of two or three banks. The banks voted the issue of certificates on thfe afternoon of . . Again Tuesday the nth, again without limit of succeeds in the amount, with the effect of a consider- °^" '^'°' able recovery in tone by the general public on the next day. The week was marked by a train of disas- ters, culminating on Saturday with the news that the old house of Baring Brothers had gone into liquidation. The crisis was safely passed, however, without the development of panic. Fresh loans were not to be had, in the general pressure, but renewals were made freely, and by the end of the year the business community found itself in comparative safe- ty, tided over a complication of financial misfortune which at times had appeared nearly hopeless.' ' The average condition of the New York banks, for a series of weeks, was as follows (stated in millions) : Oct. 18 Nov. I " 8 " 15 " 22 " 29 Dec. 13 Some particulars as to the amount and form of the certificates issued on this occasion are given by the Comptroller of the Currency, Report, iSgi, p. 12. Loans. Circulation, Deposits. Reserve. $406.1 $3-5 $403.5 $100.5 399-8 3-5 396-3 99-8 398.9 3-5 392-3 95-5 393-3 3-5 386.6 95-8 387.3 3.6 381.7 95-5 384.5 3-5 376-9 95. 386. 3-6 yib.n 94-8 90 ■ CHAPTERS ON BANKING. The banks of Boston have usually followed the example of those in New York, with such changes of method as their special needs seemed to advise. In November, i860, a proposition was made in the Boston Clearing House to adopt the New York plan without change, but after much debate this was rejected, and it was voted, on the 24th, that any bank owing a balance at the Clearing House might pay in its own notes to the extent of fifty per cent, of the balance due, provided the amount of notes did not exceed a certain proportion of the cap- ital of the bank, varying from one tenth for the smaller banks to one twentieth for the largest.' The expedient of making a common fund of specie was rejected, and on the whole the Boston banks failed to secure satisfactory unanimity of action. They passed through the crisis, however, without suspen- sion, with the aid, it was said, of some forbearance by creditor banks in New York. In 1873 the Boston banks voted, September 27th, to suspend currency payments in consequence of the suspension in New York, and also to issue loan certificates, for use at the Clearing House, to the amount of $io,ooo,cxx), " upon substantially the same basis as issued by the banks in New York City." In this case also they did not adopt the method of equalizing reserves by assessment." In 1890 the Boston banks, November 17th, determined upon the issue of loan certificates without limit as to amount, but bearing the high in- terest of 7^^per cent. The issue which followed was ^Boston Daily Advertiser, November 26, i860. '^ Ibid., September 29, 1873. COMBINED RESERVES. 9I at its maximum, $5,o65,cx)o, on December 6, and a month later was entirely withdrawn." The banks of Philadelphia followed the same course as those of New York and Boston in 1873 and again in 1890. Beyond these three cities, how- ever, the expedient was not adopted before the disastrous summer of 1893. In that memorable revulsion, the distress incident to a financial collapse of the ordinary type was intensifiedby the depletion of the gold reserve in the Treasury and the perils which threatened even the gold standard, and by the extraordinary disappearance of all tangible currency, caused by the withdrawal of country deposits from the banks in the financial centres." The banks in the three leading cities began their issues of certificates in the last half of June, and were followed in a few weeks by those in Baltimore, Buffalo, Detroit, Pitts- burgh, and New Orleans. Relief was slow in com- ing. The ability of the banks to make their settlements with each other did not remove the ap- prehensions caused by a disordered currency and by shaken public credit. The pressure upon the banks for cash continued to mark the unusual course of the panic, and produced, as a natural result, a partial and occasionally disguised, but still real, suspension of payments by a large number of banks in the prin- cipal cities. Of the causes which had combined to produce the revulsion, some, not active in former periods of crisis, were found to be too deep-seated ^Report of the Comptroller of the Currency, 1891, p. 14. "^ K clear and comprehensive review of the panic of 1893 is given by Noyes, Thirty Years of American Finance, ch. viii. 92 CHAPTERS ON BANKING. to be reached by what had become the customary remedy. The loan certificates outstanding in the five cities, New York, Philadelphia, Boston, Baltimore, and Pittsburgh, at the highest point for each, not far from the beginning of September, 1893, was $63,- I52,CKX), of which $38,280,000 were in New York alone. Of the aggregate all but $5,000,000 had been retired on the first of November.' The alarm caused by the Venezuela boundary controversy in December, I89S, and the consequent outflow of gold to Europe, for a time threatened the financial world and the banks with renewed disaster. As a precautionary measure the New York banks, on December 23d, and those of Boston and Philadel- phia on the next day, made their arrangements in the usual form for the issue of loan certificates in case of need. The temporary stringency passed by without any call for further action, but the machinery was kept in readiness, and there were moments of alarm and excitement, during the political crisis which ended with the election of 1896, when an issue was thought by some to be a necessary relief. No bank called for such assistance, however, and at the close of the canvass affairs resumed their normal ease of movement. ' Report of Comptroller of the Currency, 1893, p.15. The report made by the Loan Committee of the New York Clearing House is in the Commercial and Financial Chronicle, November 4, 1893, p. 749. Cases illustrating the use of certified checks as currency, and the issue of paper for circulation under the assumed title of Clearing-House Certificates, may be found in the Quarterly Journal of Economics, January, 1874, p. 145. COMBINED RESERVES. 93 It is clear that the dangers from which the banks of the United States have sought to escape by this repeated resort to temporary combination are inherent in a many-reserve system. High authority has pronounced such a system to be the natural one and presumably the best, in itself considered.' But it is clear that, in banking, " a republic with many competitors " means not merely a divided responsi- bility, but at times the probability that required action will be impossible, unless some means are found of securing uniformity at the expense of indi- vidual independence, — in other words, some means of practically converting many reserves into one reserve, under a common authority, for the time being. With many reserves, the banks of a community like New York, managing each for itself, traverse with ease and profit the period of rising confidence and general expansion. They combine their reserves in effect, by enabling each to convert its securities into the equivalent of cash at the Clearing House, when the critical moment of alarm and revulsion comes. At that moment, it appears, the confidence of the public is best secured by showing that the natural system is for a time superseded by something not unlike a vast consolidation. This combination is sometimes timely and suc- cessful, as in i860 and 1884, and sometimes tardy and unsuccessful, as in 1873. But inasmuch as its effects under proper conditions are well recognized, it is sometimes suggested that some such system should be made permanent. Why not have relief ' Bagehot, Lombard Street, page 67. 94 CHAPTERS ON BANKING. all the time, it is asked, instead of occasionally? The answer to this question must be, that what is effective by way of relief is not necessarily salutary as The system a regular system. The relief in this case pe^mlne^nJ"' comes from the fact that, under the arrange- use. ment for combined reserves, every bank is for a time completely discharged from any real sense of responsibility for cautious action. Slight as its share of responsibility may be under ordinary circumstances, under this arrangement it is free to expand, or to neglect ordinary precautions, at pleas- ure ; the arrangement is entered into for the precise object of thus setting it free, and it is in the public knowledge of this fact that the virtue of the arrange- ment consists. But, under ordinary circumstances, it is not in any diminished sense of responsibility that the way to sound banking and to the ultimate good of the whole community is to be found. On the contrary, the problem, both in legislation and in theoretical discussion, now is, how to bring the sense of public duty in the management of private inter- ests to the aid of the legal provisions by which bankers are hedged about. CHAPTER VIII. THE BANK OF AMSTERDAM. The sixteenth, seventeenth, and eighteenth cen- turies give many examples of a class of estabhsh- ments performing some of the functions of banks and playing a great part in the commercial history of their time, and yet answering imperfectly to the modern definition of a bank. Of these, the Bank of Venice and the Bank of Amsterdam were in their day the most celebrated, and the Bank of Hamburg was the last to disappear. As a type of the class the Bank of Amsterdam has perhaps a better claim upon our attention than any other. At the close of the sixteenth century the com- merce of Holland had already taken such a form as to make Amsterdam a leading city in international dealings. Foreigners found there the supplies of goods brought in by the Dutch from all Amsterdam parts of Europe and from the East a centre of Indies, and specie flowed in abundantly '^ "' in payment for goods and for the services of the Dutch shipping. This stream of payments often made it convenient to settle other transactions also through Amsterdam as a financial centre, and thus 95 96 CHAPTERS ON BANKING. both the variety and the amount of the bills of exchange, coming into the Amsterdam market for payment or for sale, rapidly increased. Such a concentration of dealings in money could not fail to develop some of the convenient practices of banking. Individuals began to deal in foreign exchange and to buy and sell coin and bullion ; and, sometimes in connection with the exchange business and some- times independently of it, began to receive money on deposit, and to effect payments, when ordered by customers, by transfer from one account to another. That with these dealings the business of lending was also carried on follows almost as a matter of course, so that it is probable that by the end of the sixteenth century the issue of notes was alone wanting to make the development of private banking in Am- sterdam complete. The currency used in these transactions was the multifarious coinage of the Dutch provinces and cities, and the great variety of coins brought in from all parts of the commercial world in the regular The currency '-°"''^^ of payments. The standard coin confused and in use was the Netherlands riksdaler, but epreciate . ^^ small part of the specie in actual cir- culation, even of the riksdalers, was below its legal weight, either from wear, ill usage, or irregularity in coinage." Coins of full weight tended to disappear, ' Adam Smith, Wealth of Nations, Book IV., ch. iii., " Digression Concerning Banks of Deposit," gives a brief account of the condition of the currency of Amsterdam at this time. Sir James Steuart, Principles of Political Economy, ii., p. 78, devotes a chapter to a minute but difficult account of the Dutch coinage. The Netherlands riksdaler, from 1606, contained 528^ azen of fine THE BANK OF AMSTERDAM. 97 except when a premium paid in the Hght coin ol every-day use brought them out. The confusion which resulted from this state of things extended to foreign exchange as well as to domestic trade, and some cure for it was felt to be necessary for the solid prosperity of the city. The cause of the dififi- culty was so little understood, however, that the city administration did not look to the restoration of the local coinage to sound condition, for a remedy. They formed the opinion that the bad condition of the current money was due to the practices of the dealers in specie, and that the heavier coins were driven out by the increasing use of bills of exchange as a sub- stitute for money. The first action taken then was directed against the deposit bankers and dealers in specie and exchange. More than one effort had been made to restrict and regulate the dealings of these persons, when in 1608 the rise of the premium on some kinds of heavy money to nine per cent, stimulated the administra- tion to extreme measures. By the statute of July 15, 1608, the business of deposit-holding was abso- lutely prohibited, and the receiving or paying out of money for another person, or its transfer by writing or by word of mouth, directly or indirectly, was for- bidden under a penalty of twenty-five per cent., one half to, be levied upon the banker, and the other silver, or nearly 392 grains Troy, being equal in contents to about $i.05j^ of American standard silver. The gulden was only a money of account previous to 168 1, the riksdaler being rated at 2f gulden from 1608 to 1622, and from this date at 2| gulden. The gulden con- tained 20 stuyvers. 98 CttAPTEtlS ON BANltlNG. upon the customer. The use of bills of exchange or assignments in making payment was forbidden, and every one was charged to make and receive payment of his own debts or credits, by himself or his agents. And finally all were admonished neither to give nor take any description- of money at a higher rate than that fixed by the States-General, and not to cull the heavy coin from the lighter in order to make a profit.' Upon the demand of merchants it was found neces- sary, a fortnight later, to moderate some of these provisions slightly, but even then the measure showed plainly the opinion of the administration, that private speculation and an extended use of credit were re- sponsible for the bad condition of the local currency. The substitution of direct payments for the con- venient mode of dealing through cash-keepers or bankers, however, was intended to be, and was in fact, only a temporary measure. The city adminis- tration had for two years been maturing a plan for a great establishment, which should con- The '' . , wisseibank ccntratc under public authority the whole r'thel^t"* business of keeping assignable deposits of cash and of dealing in specie, and this scheme was finally put into operation by the city ordinance of January 31, 1609, which created the Amsterdamsche Wisseibank, or Exchange bank, since known as the Bank of Amsterdam." ' The text of this remarkable act is given by Mees, in his excellent history of the Bank of Amsterdam, Proeve eener Geschiedenis van het Bankwesen in Nederland, gedurende den tijd der Republiek, dooi W. C. Mees [formerly President of the Bank of the Netherlands], Rotterdam, 1838 ; pp. 351. See p. 279. ' The ordinance is given by Mees, Bankwezen, p. 283, THE BANK OF AMSTERDAM. 99 The provisions of this ordinance were simple. It provided that any person might bring money or bullion for deposit and might withdraw at pleasure the money or the worth of the bullion, provided that deposits should not be made of less than 300 gulden in amount and should not include more than three per cent, of small silver. The bank was also required to sell any kind of specie demanded of it, at as low a premium as possible. Deposits payable upon de- mand having been provided for and made transfer- able, the ordinance then required that all bills of exchange of 600 gulden or upwards ' should be paid through the bank, or in other words, by the transfer of deposits or credits in bank. Deposits were ex- empted from seizure by process of law, and a commission of :^-^ of one per cent, on the amount deposited or paid out was prescribed to be paid to the bank. By a natural usage, the transferable de- posits or credits soon came to be known as " bank money," and were so called throughout the history of the bank. The purpose of this ordinance was advanced still further by a statute of November 30, 1609, provid- ing for the appointment of outside receivers for the bank, who should be authorized, for the convenience of the public, to receive deposits and payments af their offices, sums so received to be paid over to the owner or carried to his credit at the bank within three days. No assignments could be made on the books of the receivers, however ; they were forbid. ' In 1643 this limit was lowered to 300 gulden. Mees, Bank ■wezen, p. 114. lOO CflAPTERS ON BANKING. den to take or pay out any kind of specie at a different rate from that established by the States- General, or to deal in any kind of specie for proiit ; and provision was made for their compensation by a commission on deposits and payments. The receiv- ing or paying out of money for others by private cashiers, even within the narrow limits finally con- ceded in the summer of 1608, was strictly forbidden, and thus the greater part of the business of banking and dealing in money and exchange, so far as it was yet developed, was concentrated by law in the hands of the bank and of its receiving agents. The advantages offered by the bank as thus organized were those of a secure system of deposit and a fixed standard of payments. It used its credit in no way to displace the specie currency of the city, but only as a representative of so much of The deposits ^^^^ Currency as might be present in its become a vaults, by promising to pay deposits to currency. ^^^ owners or thcir assignees. As the bank received deposits only as valued in money of full weight and paid out such money only, the value of a credit upon its books was the same as that of good "coin, at times varying seriously from the average value of the degraded medium in common use, but after all representing only what the average value should have been. The value of the deposit was thus made certain, except in the case of a possible alteration of the mint standard by the government." Payments between individuals • Changes in the value of the gulden banco were thus made in 1622, 1645, and 1654, which progressively lowered the standard, THE BANK OF AMSTERDAM. lOI by the transfer from the deposit account of one person to the account of another, or in other words, payments in bank money, were a chief function of the bank from the start. These transfers appear to have been made at every period of the bank's history by means of an order, presented by the payer in person or by his usual authorized agent, and not effectual for the payee until the next day, and thus many of the conveniences secured by the modern use of the check were missed.' Still, in the more deliberate movement of the seventeenth and eigh- teenth centuries, the activity even of deposits trans- ferred in person made these a valuable part of the commercial machinery of the cities using them. The establishment of such a bank of deposit then, and the requirement that bills of exchange when negotiated or maturing should be settled for by transfers in bank, had the great advantage of freeing the important transactions of merchants, and espe- cially their foreign dealings, from all risk of confu- sion or uncertainty arising from the bad condition of the current money. Some of the consequences of an evil, with which the state was not ready to cope directly, were thus avoided with great success. Venice had had the same evil to deal with and had met it in 1587 by establishing the Banco di Rialto, the'forerunner of the more famous Banco del Giro," leaving the gulden banco at a premium, however, which represented the difference between the mint standard for the time being and the coin in actual use. ' As to the method of transfer see Ricard, Traiti Gfndral du Omimerce (edition of 1781), i., p. 77. ^Quarterly Journal of Economics, vi., p. 308 ; vii., p. 210. 102 CHAPTERS ON BANKING. seeking to concentrate all deposits and all dealings in exchange in a single bank controlled by the gov- ernment. It is not to be assumed, however, that Amsterdam, twenty-two years later, was in any true sense indebted to Venice for the idea upon which both acted. Each city adopted banking practices which private persons had long since evolved, and each took the obvious method of seeking to manage, by public authority, branches of business which it was believed were managed ill by individuals. It is obvious from what has been said above, that whatever difference of value between the deposit accounts of the bank and the money in ordinary „. . . ,„ circulation may have been observed in the The premium J upon the earlier days of the bank, could only have money. -^^^^ ^^ difference between the money of full weight received and paid out by the bank and the average coin in circulation. So long as the bank received deposits freely from all comers and paid depositors on demand, no convenience arising from the use of deposit accounts in payments, or sense of security on the part of depositors, or obligatory use of deposit accounts in settlement of bills of ex- change,' could cause any thing more than a transient fluctuation in the value of bank money above oi below the specie standard. But the specie used by the bank as its standard tended to become scarce, ' Serionne, Richesse de la Hollande, i., p. 154, declares that the provision as to bills of exchange was not observed (1778), being " in- executable. " ' ' Tons les jours on voit a Amsterdam nombre de lettres de change payees hors de la banque, I'agio etant regie suivant le cours." See also Mees, Bankwezen, p. 115. THE BANK OF AMSTERDAM. I03 " Bankable " money, or, as it came to be called, " bank specie," was at the beginning the heavy Netherlands riksdaler of silver, of which the value in receipts and payments at the bank was expressed in gulden, ac- cording to the legal standard of weight. From the start, therefore, the gulden of account at the bank, being a fixed part of the heavy riksdaler, stood at a premium as compared with the light coin in every- day use; and soon after the alteration of the nominal weight of the gulden in 1622, the premium on gulden banco rose above four per cent. Other changes in the mint weight followed in that century. The heavy riksdalers, the chief bank specie of the earlier days, became so scarce that from time to time notice had to be given that other coins, if of full weight, would be received as good bank specie at a fixed rate measured in gulden, and paid out at the same. Still the premium on bank money marked in the same way the difference between it and the deteriorated coin in common circulation. It is clear that the original theory of the bank as a bank of deposit did not contemplate lending as one of its functions. Established without a capital, it was understood, both by the ordinance which created it and by the public, to have actually in its vaults the whole amount of specie for which bank money was at any time outstanding. The original scheme did not provide for any further use of its credit, and the bank therefore failed to answer the definition of a bank in the modern sense. Having no means of holding securities as a source of income, and the specie deposited with it being idle, the I04 CHAPTERS ON BANKING.- establishment could meet its expenses only by the charges which it levied upon depositors, for the opening and management of their accounts and for making transfers. The great number of accounts opened, however, and the extended use of bank money as a circulating medium, made the bank a considerable source of revenue for the city'; and this income was naturally increased when the original deposit business of the bank was replaced by a new method of advancing upon coin. In January, 1683, the bank established a system of making advances upon deposits of coin, upon a The system P'^" whicli had already had a short trial in ofadvances 1656, and which finally determined the upon specie, (-jj^^^j-j-gj. ^f jjjg institution for the remain- der of its existence.' The advances were made by giving to any depositor of specie a credit on the books of the bank, for an amount of bank money not far from the actual value of the specie reckoned in heavy coin, the depositor receiving at the same time a "recepisse," certifying his right to withdraw the deposit within six months, upon returning the bank ' Adam Smith sets the number of accounts at 2,000, but Mees pre- fers the estimate of 5,000 given by Oudermeulen, Bankwezen, p. iii. The net return to the city in different years varied from a profit of 266,000 gulden in 1781, to 28,000 in 1784, and from 1609 to I7g6 averaged 65,500 gulden. Ibid., p. 149. ^ This system of advances occupies an important place in Adam Smith's account of the bank, and Smith says that he received ' ' the most distinct, as well as liberal information " concerning the bank from Mr. Henry Hope of Amsterdam, the well-known banker. See, in the Wealth of Nations, the advertisement to the fourth edition, page Ivii. of McCuUoch's edition. Mees discusses the system of ad vances thoroughly, Bankwezen, pp. 95, 135. THE BANK OF AMSTERDAM. IO5 money with which he had been credited and paying therefor one eighth of one per cent, interest. The depositor also had the privilege of renewing the deposit, upon the payment of the specified interest, for the further space of six months, and so on with- out limit ; but if the specie was not withdrawn noi the transaction renewed at the end of any period of six months, the deposit became the property of the bank and the recepisse given for it expired. The advances upon this system were at first made on a few descriptions of coin only ; but as time went on some other kinds of Dutch money, both gold and silver, were received, the commonly current foreign moneys were also accepted, and at times advances were made upon bullion. In an age when a varying demand for a particular coin, in such a market as Amsterdam, might cause frequent and considerable fluctuations in its current value, this system afforded the owner of specie an attractive method of obtain, ing the present use of his money and also saving the chances of its rise in the market. This class of transactions therefore rapidly increased, and although a large part of the specie deposited became the prop, erty of the bank, by the failure of the depositors either to redeem it or to renew their recepisses,' the business of advancing upon specie appears in the eighteenth century to have completely superseded the earlier practice of simple deposit. The adoption of the system of advances upon specie in 1683, however, not only changed the form ' The nature and purpose of the recepisse have been strangely mis- conceived by McCulloch and McLeod. Quarterly yournal of Eco- tt*mics, October, 1888, p. 107. For its form see p. n8, below. I06 CHAPTERS ON BANKING. of the transaction by which the bank money was created, but also had an important effect upon the real convertibility of the money. There is no question that in the earlier years of the bank the owner of bank money had the right to demand its redemption in specie, and that its convertibility at the will of the holder was relied upon to insure its steadiness of value. The language of the ordinance of 1609 shows this to have been a part of the original scheme, and the long succession of regulations made necessary by the fluctuating value of coin in the next seventy years constantly regulate the payments to be made by the bank in redemption. In 1672, in the alarm caused by the advance of the French to Utrecht, payments were made on a great scale, in the presence of what appears to have been a " run " upon the bank. But in the eighteenth century the redemption of bank money upon demand had ceased. No precise date can be assigned for its discontinu- ance ; no ordinance or other legal authority for such a vital change has been cited ; but the fact is estab- Bank money listed, that by the middle of the eighteenth becomes in- ccntury the right of demanding payment had been obsolete so long, that more than one writer of that time doubts whether it ever had existed. As a substitute for the regular redemption of bank money over the counter, the bank had adopted the method of selling through outside agents, either bank money for specie o.r specie for bank money,' at fixed rates and usually in such ' Sir James Steuart, Principles of Political Economy, ii. , p. 302. Smith, Wealth of Nations (McCuUoch's edition), p. 214. Savary, l^ Parfait N^^ociant [fd^Aon. of I753)> !•> PP- 483, 484. THE BANK OF AMSTERDAM. I07 amounts as the public might require. Thus, for many years the bank bought in bank money when the agio on it fell to 4^ per cent, and sold whenever the agio rose to 4^ per cent., and by this means limited the fluctuation of bank money within such narrow limits as seemed to bespeak remarkable fixity of value. But this was after all a substitute for convertibility, and not convertibility itself. Throughout the most flourishing period of the bank, certainly for the last century of its existence, the currency supplied by the Bank of Amsterdam was an inconvertible currency. This inconvertibility of the bank money was a natural, though perhaps not a necessary, result of the introduction of the system of advances upon other money than the strictly bankable coin in which the bank had previously made its payments. Under its earlier system the bank was expected to have in its vaults specie of the same kind as that which it was bound to pay and to the full amount of its debts. But its advances upon other descriptions of specie added to the mass of bank money calling for payment in bankable specie, without adding to the amount of such specie held' by it. It held specie no doubt for its bank money, but not exclusively specie that could be used in payment, — valuable assets, but not necessarily available assets. As the recepisses expired, this unavailable specie became the property of the bank, and although at the present day the maintenance of regular payments by means of such a resource would appear easy, even when the amount of actually available specie in I08 CHAPTERS ON BANKING. hand might not be large, it may well have appeared otherwise to the less experienced managers of two centuries ago. It may easily have seemed to them to be safer and equally advantageous for the public to provide for taking any excess of bank money out of the market, without continuing to give to every holder a right to demand payment in certain Hmited descriptions of coin. It has been pointed out also that this course, which met the supposed needs of the bank, also This change answered sufficiently the convenience of tooK place merchants. To sell bank money at the insensi y. (.yr^ent quotation for current money, was a simpler operation for the merchant who required specie, than to arrange with the bank officers for the terms upon which a particular description of coin should be taken, or than even the conversion of bankable coin received from them into ordinary current cash. It is not unlikely that in practice the purchase and sale of bank money for cash had be- come so well recognized as a substitute for direct demands upon the bank, that merchants only needed an assured opportunity for purchase or sale at the will of the individual, in order to discontinue alto- gether the earlier practice of redemption. This opportunity. was given by means of outside agents or cashiers, as has been stated above. A radical change of method was thus introduced by a natural process, without requiring the bank at any stage to announce the formal discontinuance of regular re- demption, and the mercantile community of Amster- dam lost the tradition of the old right of demand THE BANK OF AMSTERDAM. log upon the bank, with the facility with which such communities everywhere forget all that is not matter of actual record.' But the change, although easily made, imported a radical change in the character of the bank money and the grounds on which its credit rested. „ , ^ Isank money If the action of the outside agents of the then had no bank had been completely automatic and "* *° "*' recognized as such, if they had bought and sold bank money in answer to all demands and to whatever amount, even with such a range of rates as is stated above, the distinction between such an arrangement and ordinary convertibility would have been thin. But in so far as their action was not automatic, but depended upon the irregular will of the managers of the bank, the bank money was an inconvertible cur- rency, with its fluctuations moderated by the inter- ference of the issuing body. The occasions were not few in the eighteenth century on which the low agio ' The ordinance establishing the bank in 1609 provides that every one may bring to it such moneys or bullion as he may see fit, " and the same moneys or the worth of the said bullion draw out again at his pleasure." Marperger, Beschreibung der Banken, p. 120, appears to recognize the necessity of payment in some cases, writing in 1716. But the later commercial writers, as well as Smith and Steuart, treat payment on demand as non-existent. Oudermeulen, R^cherches sur le Commerce, ii., part i., p. 58, states the case thus: " Si la Banque n'achette pas pour elle meme de I'argent de Banque, son depot ne peut pas diminuer. Car qui peut obliger la Banque i faire sortir les deniers ou les Especes, si les rejus n'existent pas ? Du moins j'avoue que je n'en ai pas vu d'exemple de mon tems. " Bondt, in his Consideratien over 'i Bankgeld, argues that the right to demand the payment of bank money was never lost by non-user. Nieuwe Nederlandsche Jaarbocken, 1791, p. 2g6. no CHAPTERS ON BANKING. on bank money showed the insufficiency of the pur. chases made for the bank, and their failure to answer the purpose of regular redemption; and that the public retained its faith in the bank under these circumstances, and notwithstanding the profound secrecy which covered all its transactions, can only be ascribed to a blind belief in the wise management of the institution and a widespread notion that the bank money had a fixed value of its own, so that no change of agio could be significa.nt of any thing amiss in the affairs of the bank.' How completely the transactions and condition of the bank were kept secret is shown by the general Condition of ignorance which prevailed as to the real the bank extent of its business. The increase of kept secret. . , , . ,..,,. bank money bemg limited by its uses as a circulating medium and by the more or less steady withdrawal of any surplus, the actual amount of such money outstanding, and of coin and bullion repre- sented by it, was probably at no time so great as the public supposed. The important position of the bank in Amsterdam, and the place which Amsterdam held among the markets of Europe, seemed to make the bank a vast storehouse, in which the supplies of the precious metals received from all parts of the world, generation after generation, were buried in a constantly accumulating mass. Savary set the amount of specie at 300,000,000 gulden ; Melon set it at 400,000,000, and the Dutch editor of Melon at 800,000,000 or 900,000,000. Magens made the sober estimate of 60,000,000, and. finally Adam Smith 'See especially Steuart, ii., pp. 306, 307. THE BANK Of AMSTERbAM. Ill set the amount for 1775 at about 33,000,000 gulden.* There is reason, independently of the high authority from which Smith received his account of the bank, to beHeve that this figure represented very nearly the ordinary amount for which the bank was in- debted during that part of the eighteenth century when its business was most flourishing. This reality, however, fell far short of the fabulous sums which long-established tradition represented as lying in the mysterious vaults under the Stadthaus. The administrative organization of the bank was well contrived for the preservation of this secrecy. The city government appointed a board ^ .. . ^^, Its adminis- of commissioners, at first three m number tration or- and afterwards seven or eight, to take Ban>«dfor ° secrecy. charge of the bank and to make an annual report upon its affairs. The greater part of the com- missioners were taken from the city government ' A variety of conjectures are collected by Mees, Bankwezen, p. in. Sir William Temple, in his Observations upon the Nether- lands (1673), speaks of the bank as containing " the greatest treasure, real or imaginary, that is known anywhere in the world." But he seems to have had a shade of doubt as to its complete reality. For Melon's estimate see Essai s-ur le Commerce (edition of 1742), p. 241. Oudermeulen, ii., part l, p. 66, after saying that the treasure of the bank is large, adds: " J'ai e'te en etat d'en parler pertinemment et avec certitude, par le bonheur que j'ai eu de rencontrer quelques Bilans de notre Banque, entr'autres ceux des annees 1727, 1739 & 1740, & encore un plus recent. J'aurois done pu specifier i quelle somme se monte ordinairement le depot ; mais la discretion ne me I'a pas permis. D'ailleurs cet objet ne pourroit tout au plus servir qu'i satisfaire une curiosite, dont le public ne pourroit pastirer lamoindre utilite. Tout ce que je puis assurer, c'est que le depot est tres-con- siderable." The reasons for this discretion, it will be seen, became manifest a few years later. 112 CHAPTERS ON BANKING. itself, however, and all were sworn to obey its authority, so that no independent judgment or in. fluence could be looked for as a check upon the policy or determinations of the city councils ; and, as a further security against any possible influence of this kind, the ofificers of the bank, who were under the orders of the commissioners, were also strictly bound to obedience to the burgomasters. The bookkeepers and clerks, as well as the commis- sioners, were sworn to strict secrecy as to every thing which related to the condition of the bank, and the obligation was not relaxed if the individual ceased to be an officer. In this way all real power was kept in the hands of the city authorities, without danger of opposition or even of criticism, and all knowledge of the steps taken or of the real state of affairs at any given time was confined, almost as completely, to those vfho were responsible for any misguidance or error. In an age when the importance of publicity was not yet understood, this jealous exclusion of the light does not appear to have injured the credit of the bank. Secrecy appears to have been ac- cepted by all the world as the natural method in managing important interests, and it was enough that the city of Amsterdam had pledged its faith for the safekeeping and proper application of the treasure in its hands. At intervals^ for the last century of the existence of the bank, doubts were raised as to the actual presence of all the specie rep- resented by the bank money, but these appear to have been easily satisfied, or dismissed as unim- THE BANK OF AMSTERDAM. II3 portant, although it is now certain that in some cases at least they were well founded. In the absence of any published accounts it was always possible that the -city administration, for reasons of its own, might make ^oans to individuals or companies by crediting them, with bank money without receiving any deposit of specie therefor, or might by the same process borrow from the bank on behalf of the city, and at times the suspicion of some such operation was afloat, strengthened occasionally by the failure of the bank to sustain the premium on bank money by sufficient purchases, and then laid aside as the premium regained its cus- tomary level. On the whole, however, it is clear from the language of the contemporary writers that in the last half of the eighteenth century the position of the bank had become a matter of debate.' It does not appear, however, that serious alarm was felt as to the safety of the bank before the disclosures of 1790 and 1791. The public appears to have been ready to accept the explanation that a low premium on bank money was due to scarcity ■ There is a good deal of evidence to be collected showing rather more than a passing doubt on this subject, but it is enough to cite the following: Steuart, ii., p. 307, discusses the question whether the treasure has been used for put lie purposes, and concludes that there is coin, to the full extent of the bank credits, actually in the vaults. Adam Smith (McCuUoch's edition), p. 214, treats the question as to the actual presence of all the coin called for by the bank money in a somewhat guarded way, as if Mr. Hope, if the lan- gu^e used is his, felt himself to be on the defensive. Oudermeulen, ii., part 1., p. 69, noticing a remark in Pinto's Traiti de la Circulation ct du Credit, that the money in the bank could be made to circulate 114 CHAPTERS ON BANKING. and undue value of silver, and that large purchases of bank money under such circumstances would be fol. lowed by a heavy export of coin and bullion, to the injury of commerce. But in the winter of 1789 and The Bank 179° ^^^ premium fell below two- per discredited Cent.; in August, i/QO, it had disap- mi79o. peared, and in November bank money was at two per cent, discount ; and as the bank still did not protect its credit by purchasing bank money on any suflficient scale, the fear that for some reason it was unable to do so began to spread. On the I2th of November the city administration issued a notice, in which, after defending their inaction, on the ground that if they had bought bank money as usual in the falling market the specie would have been sent out of the country, they offered silver to all holders of bank money at a rate which was equivalent to a payment of 90 per cent., and proposed also to give credit at the same rate for silver bars -deposited.' The right of fixing different terms after the current month was reserved, but as the bank proposed to re- ceive silver as well as pay it out at the new rate, the without injury to credit or good faitli, says that this is practicable only in two cases: first, if the city or state is in pressing need second, if, e. g., the East India Company should need some millions, which could be credited to them in bank money, and perhaps finally paid off by them with 3 per cent interest. Suppose, he says, that to 25 millions existing, 5 millions of pure credit are thus added, as if 5 ounces of alloy were added to 25 ounces of silver in the coin, — this would be mischievous and unjustifiable. Oudermeulen published his book in 1779, and this supposed case can hardly have been a random shot. ' The notice is in Mees, Sankwezen, p. 189. THE BANK OF AMSTERDAM. II5 lingering hope that bank money could rise was de- stroyed, and the proposition was regarded as a plan for settling debts at a discount, by a debtor who could not pay in full. It was insisted, on behalf of the creditors, that the old right to demand the redemption of bank money had not been lost by disuse ; that the apprehension as to the export of specie was groundless, as the current had begun to flow towards Holland again, and that the city ad- ministration was bound in duty to use the treasure of the bank for the settlement of the debts and to provide by some means whatever might be needed in addition. The offer for settlement being gener- ally rejected, the bank began to issue specie to its agents for the purchase of bank money, but early in February, 1 791, this operation stopped, and the failure of the bank, after a career of one hundred and eighty-two years, was thus acknowledged. The general causes of this failure appear to have been understood, but few details were made public until the report made in February, 1795, by the committee of investigation, appointed by the pro- visional government of Amsterdam after the revo- lution in Holland.' From that report it appeared that the city was indebted to the bank The causes of for nearly 9,250,000 gulden, and that 'ts failure, as security for this debt the bank held the obliga- tions of the states of Holland and West Friesland for ' This report is printed in the Jaarboeken der Baiaafsche Repuhliek, for 1795, pp. 157-160. It is noticeable that no statement is made in it as to the amount of bank money outstanding, or the amount of specie on hand. Il6 CHAPTERS ON BANKING. 8,850,000 gulden. This substitution, of public obliga- tions for cash, it further appeared, was the result of a practice which had existed for not far from a century and a half. Even before 1657 the administration of the bank had suffered individuals at times to transfer more bank money than their deposits of specie war- ranted, which was a close approach to the method of making loans by giving permission to overdraw. In that year loans to individuals appear to have been dis- continued, and in their stead the practice of lending upon interest to the Dutch East India Company was introduced. For many years the sums thus lent were small, but the faith of the bank was nevertheless broken, and the way was opened for larger opera- tions. It appeared that, in 1760, of 30,000,000 gulden which should have been held by the bank in specie, it held barely 10,000,000, and the condi- tion of affairs probably continued to be as bad as this for most of the remainder of the bank's ex- istence.' For generations the peculiar constitution of the bank had enabled the administration to hide this guilty secret and to stifle suspicion, A system of banking of great utility, under which with a faithful management failure was impossible, thus ended in discredit and ruin, from a lack of any public knowledge of the real condition of affairs, and of any responsibility of the managers to public opinion. In 1790 the city government had for a moment hinted a doubt as to its obligation to redeem the ' A more particular account of these transactions, from 1 65 7 down is given by Mees, Bankwezen, pp. 195-198. THE BANK OF AMSTERDAM. II7 outstanding bank money,' but this untenable ground was quickly abandoned, and in February, 1791, a loan of six millions was authorized, the proceeds to be used in redeeming bank money. In 1795 and 1796, between seven and eight millions were raised by loan in order to reduce the debt of the y^.^ ^^^^^^ city to the bank, and an effort was made to revive to resume the old business, but with little *''='»^'"'- success. In 1802, under the influence of the Bata- vian government, it was announced that the debt of the city had been discharged and that there was no bank money outstanding beyond the metal actually in hand, and a decree was issued forbidding the com- missioners of the bank to give any credit on its books except upon a deposit of specie, absolving them from obedience to any order inconsistent with this, and making them personally responsible for any breach of the new regulation. But it was too late to revive the bank. The exchange business could not be recalled, the commercial position of the city had changed, and the war for many years prevented commerce from seeking again its old channels. But more than all, the time for deposit banks of the old type had nearly passed and the need of the community was for banking on the modern system, of which the Bank of England had become the leading example. The present Bank of the Netherlands was therefore established in 18 14, with authority to make loans by means of its credit upon commercial paper and pub- ' This question is argued at length on behalf of the creditors by N. Bondt, Consideratien over V Bankgeld, printed in the Nieuwe Neder' landsche yaarhoeken, 1791, pp. 285-319. Il8 CHAPTERS ON BANKING. lie securities. The Bank of Amsterdam still retained its nominal existence with the aid of some merchants who continued to hope for its revival, but was finally closed under a royal decree of December 19, 1819. The small amount of bank money still in existence was paid off, and in 1 820 the establishment which for generations had held the leading place in European commerce ceased to exist. NOTE. The form of the recepisse given by the bank, when making ad- vances on specie as described above on page 105, is preserved by Mees, Bankwegen, p. 135. Translated it runs as follows : Anno , the ■ N. N. has brought into Bank 1,000 ducatons at 60 stuyvers apiece, upon condition that he shall withdraw the same within the space of six months, paying to the bank \ per cent., or that otherwise, after the expiration of the aforesaid time, they shall be forfeited to the bank at the price aforesaid. M. M. 3>ooo/. In a note to p. 155, Mees works out in figures the result of this deposit of 1,000 ducatons, supposing the specie to rise as compared with current money, or not to rise, and supposing bank money to remain steady or to fall. CHAPTER IX. THE BANK OF FRANCE. In describing the leading modern systems of banking, it will be convenient to take the simplest case first. This is the case of a bank au- The Bank of thorized to practise discount, deposit, and France a , . . , . , bank of the the issue of notes, but without any special simplest provision for the safety of one class of *yp=- liabilities rather than another. This primitive sys- tem was adopted for the first Bank of the United States, founded by Hamilton in 1791 ; and the same model was followed in establishing the second Bank of the United States in 1817, and in the earlier State banks. The Bank of England also was organized on the same plan until 1844. In all these cases the law provided so far as it might for faithful and honest administration, but left all the liabilities of the bank upon the same footing and equally a charge upon its general assets. Among existing banks, the Bank of France is a remarkable instance of this free organiza- tion, surviving, prospering, and enjoying the merited confidence of the French people, long after the pub- lic opinion of other leading countries has required special and elaborate provision for the safety of all bank debts which take the form of notes. 119 120 CHAPTERS ON BANKING. From 1793 to the latter part of 1796, banking can hardly be said to have existed in France. The government tolerated no issue of paper except its own ; the Caisse d'Escompte, which for many years before had been the only public bank, had been sup- pressed, and the times were too disturbed for private banking to flourish. With the disappearance from circulation of the assignats, and of their successors, the mandats territoriaux, the issue of notes appears to have become a matter- of common right, to be undertaken by anybody who could gain the confi- dence of the public ; and accordingly a bank of issue called the Caisse des Comptes Courants, was organ- ized in Paris in the last half of 1796, and began its operations with fair success. Two others of some! importance were established by the year 1800, be- sides some smaller ones of which little is now known ; and in Rouen a bank of discount and issue was in active business as early as 1798. It is clear that, with the return of orderly government and the re- vival of credit, the need of banks began to press. Under these circumstances the Bank of France was also established in Paris in 1800, with the encouragement of the government and Established .° , „. ^ , in 1800, even with the First Consul as one of its but with no stockholders, but still upon a footing not monopoly. *■ " essentially different from that of its neigh- bors. Its capital of 30,00x3,000 francs was the largest yet proposed, and the difficulty of raising it led to a fusion with the Caisse des Comptes Courants, but no monopoly was created. One public bureau, holding a large amount of funds, was required to invest them THE BANK OF FRANCE. 121 in shares of the new bank, and large deposits were made in it by the government ; still, although favored, the Bank of France stood legally upon an equality with the rest and nothing more.' So far it might be said that the field was open in France for a wide and free diffusion of banking facilities, and that by the new establishment the government pointed out the way for its citizens. In 1803, however, Napoleon announced a com- plete change of policy, and the Bank of France was endowed with the exclusive privilege of is- j^^^^ ^^^ sue in Paris '' until September 24, 1 8 18, and sole bank of its capital was raised to 45,000,000 francs.' "*"'' ' °^' All other issues of notes were at once withdrawn, one of the rival banks in Paris was absorbed by the rising monopoly, and another assumed for a time the humble place of intermediary between the great bank and its less important customers. No provin- cial bank could thereafter be established except by authority of the government. Under this arrange- ■ment, and notwithstanding the provision that no notes should be issued in Paris for less than 500 francs, the circulation of the Bank rapidly increased with its expanding discounts. It is plain in fact ' Courtois, Hisioire des Banques en France, pp. 108— 112. The articles of association, containing the statutes of the Bank, adopted by the shareholders at the start, are in the Moniteur, 5 Pluv. VIII. (25 January, 1800). ^ Banks of issue could be formed outside Paris with the consent of the government, but none were established until after the Restoration. For evidence of the active hostility of Napoleon towards other banks of issue, see Courcelle-Seneuil, TraiU des Operations de Banque, p. 216. 2 The law of 24 Germinal XI. (14 April, 1803), is in the Bulletin 122 CHAPTERS ON BANKING. that the strong preference of the public for bank credit in the form of notes left but a narrow field for those banks which could only open deposit accounts, and justified the government in its opinion of the. importance then to be attached to the right of emission. And the fact that in the existing state of things, with the existing habits of business, the credit in the form of notes was so strongly preferred, gave to the monopoly of the Bank an influence on the future history of banking in France far beyond that which a similar monopoly could have exercised in the same years in England. Although the Bank of France still chose its own officers and enjoyed a nominal independence, it was now becoming involved in the bold operations of the French Treasury. Complications thus arising re- duced the cash in the Bank, in the latter part of 1805, so far that it was found necessary to limit the redemption of notes to 600,000 francs daily, until such time as specie could be collected in sufficient quantity for complete resumption. The result of this crisis, however, was not to separate the Bank from the government, but to connect them still more closely; and in the spring of 1806 a measure was Placed under therefore adopted which definitely settled state control thc character of the Bank as a public in- in 1806. ■ stjtyjjQn^ i^yt without any alteration in the essential principles of its organization as a bank.' By des Lois, and, with most of the subsequent legislation concerning the Bank down to 1857, is also given in Wolowski, La Question des Banques, p. 425. The statutes of the Bank of 1803 are in ihsMoni' teur, 15 Brumaire, XII. (7 November, 1803). ' Bulletin des Lois. THE BANK OF FRANCE. 1 23 the doubling of its capital and the extension of its privilege to 1843,' not only its pre-eminence in the financial affairs of France, but its absolute importance in the European world, was assured, so far as de- pended on legislation. At the same time the direc- tion of the Bank, hitherto confided to a board of regents chosen by the stockholders, was transferred to a governor and two sub-governors, to be nomi- nated by the chief of the state. Under a govern- ment not inclined to use power for its own ends, this species of control might easily have become a mere trusteeship on the part of the state ; under an emperor like Napoleon it made the bank an engine of the state, — a private corporation, indeed, as regards the legal ownership of its property, but a public office as regards the actual employment of the property. Successive governments in France have used this opportunity in different ways as the case has seemed to require ; but such as Napoleon made the Bank, in pursuance of the law of 1806, it has remained ever since, — an institution subject to the control, and often available for the needs, of the government of the day.' In the closing years of the Empire, this subjection of the Bank to the government caused a great irf. crease of transactions with the Treasury, which ' In 1840 the privilege was extended to 1867, in 1857 to 1897, and in 1897 to the end of 1920. See below, p. 145. ' The statutes of the Bank, under the law of April 22, 1806, were established by the Emperor, January 16, 1808. See Wolowski as above, Bulletin des Lois, and Moniteur, January 18, 1808. In Block's Dictionnaire de V Administration, is a detailed account of the organization of the Bank. See also Say, Dictionnaire des Finances, 124 CHAPTERS ON BANKING. became more and more compromising and finally far exceeded in amount the advances made to the commercial public. When, therefore, France was Brought to invaded by the allies in the winter of a low ebb 1813-14, a ruH by the noteholders began, '" ' '*■ caused, it is probable, chiefly by the fact that the Bank appeared to have no independent ex- istence of its own, and it again became necessary for three months to limit the amount of the daily re- demption of notes to 500,000 francs. Full payment was resumed in April, 18 14, but the settlement of the affairs of the Bank was pushed on both sides, until its loans were reduced to less than 3,000,000 francs, and its circulation had fallen from 95,000,000 francs to 15,700,000.' The enlarged capital of the Bank had been found, even in the latter years of , Napoleon's reign, to be greater than could be used with profit, and the Bank had therefore, as early as 18 12, made large purchases of its own stock. These were continued in 1816, until the capital was reduced to 67,900,000 francs, at which point it remained until 1848. Lafitte, who became governor of the Bank under the Restoration, desired to improve the oppor- tunity for general change, by freeing the institution froni the interference of the government, and bring- ing it back to the safe position of an independent bank of discount ; but, although his views appear to have been supported by the ministry, no measure ' The Moniteur for January 31, 1815, contains a report by Lafitte, then provisional governor of the Bank, giving in some detail the operations for the year 1814. For tables giving the leading figures of the accounts of the Bank from 1800 to 1879, see Courtois, Histoire, PP- 344, 360. THE BANK OF FRANCE. I25 for carrying them out could be passed, and the im- perial decree of 1808, strengthened as we shall see by the action of the Republic in 1848, has continued to be the working constitution of the Bank. The government of the Restoration appears, how- ever, to have adopted the policy of re- Bourbons stricting the monopoly of the Bank to the ^°'' ^°"'^ o r J Philippe es- capital. By the decree of 1808 the Bank tabUsh other had been authorized to establish branches banks. (comptoirs d'escompte), subject to approval by the government, plainly with the design of centralizing the banking interests of the Empire under the lead of the great Bank in Paris.' Under this decree the establishment of branches in Lyons and Lille was undertaken, although with little success, and one was set in operation at Rouen. The Bourbon govern- ment in 1 8 17 and 181 8 closed these branches and established independent banks at Rouen, Nantes, and Bordeaux, giving to, them the right of emission, and thus reversing the policy of Napoleon. The government of July, following a similar course for a time, established independent banks at Lyons, Mar- seilles, Lille, Havre, Toulouse, and Orleans, and also authorized the Bank of France to open branches in fifteen other provincial towns and cities, with the monopoly of issue for every place in which a branch was established. Vigorously pursued, this mixed j system of branches and of independent banks might easily have been made the means of introducing banking facilities throughout the kingdom, to the great advantage of the country, which has never ^ Moniteur, 28 May, 1808. and Bulletin des Lois, 126 CHAPTERS ON BANKING. ceased to suffer from the backwardness of its de- velopment in this respect. But no strong poHcy was adopted ; the government established new banks for a time with reluctance and under hard conditions, and after 1 838 withheld its encouragement altogether ; and the Bank of France, opening its branches fit- fully and with little regard for public needs, seemed to prefer that affairs should drift. The revolution of 1848 found in existence, then, the Bank of France, with its fifteen branches, and also nine independent banks of issue. No system of exchanges or of redemption at a common centre had been adopted by the latter; even the branches of the great Bank redeemed each other's notes only at pleasure ; so that France felt all the inconveniences of having many issues of notes with but local credit. The suspension of specie payment and the re-establishes lcg«il-tender power given to the notes of the monopoly the Bank of France, and to those of the in 1848. independent banks alike,' added to the confusion, and in the spring of 1848 the provisional government finally cut the knot, by making all the independent banks branches of the Bank of France. Their shareholders, in exchange for their old stock, received shares in the Bank, and the capital of the latter was thus raised to 91,250,000 francs." This practically re-established the monopoly in the form in which it had been projected by Napoleon, and although a vigorous discussion of the advantages of freedom in banking has been carried on in France, ^ Moniteur, March 16 and 26, 1848, or Bulletin des Lois. * Moniieur, April 29, 1848, or Bulletin des Lois. THE BANK OF FRANCE. 12/ all subsequent legislation has tended to strengthen the existing system. The government of Napoleon III. urged the extension of its branches by the Bank, and in 1857 even called for the establishment of one in every department within ten years. The Bank was reluctant, but before 1869 sixty-five branches had been authorized. The republican gov- ernment in 1873 again applied the spur, and in 1880 all the required branches had been authorized, although a few were not brought into operation until as late as 1882.' After all, however, it would seem that the branches thus established can fill but imperfectly the place of local banks. A branch of the Bank of France has a capital allotted to it by the Bank, and is g^^^^^^g^f then required to carry on its business the Bank m strictly under the supervision of the latter, ig^^f^^^t*" and without engaging in any operation with other branches, except by special leave, so that its business, even to the rate of discount, is directed by a policy settled at Paris and not with reference to local wants. It has a board of directors selected by the governor of the Bank, from a list of candidates in some cases made up at Paris and in some by local stockholders, where the latter represent half of the capital allotted to the new branch. 4^he real author- ity, however, is exercised by a manager appointed by the government, frequently a stranger, and assisted by subordinates sent froni the capital.") That under such circumstances more than one half of the dis- ' The Bank in 1900 had 1 26 branches and a great number of auxiliary offices, making in all 373 " places bancables." And see p. 156 ielow, 128 CHAPTERS ON BANKING. counts of commercial paper made by the Bank should be made at its branches, as has been the case ever since 1848, is better evidence of the great demand for banking facilities in the provincial towns, than of the success of the present organization in answering this demand. i That the country has felt seriously the want of such aid from independent banks as would have been- given under a freer system, appears clear from the i measures to which the French government has found ^ itself driven in two periods of political revolution. It has been remarked that from 1814 for many years" the Bank of France was the bank of the bankers rather than of the merchants.' The position of inter- mediary between the Bank and the great class of borrowers on a small scale, should have been held by a class of independent banks ; it appears, in fact, to have been held by private bankers, and discount during the revulsion which accompanied offices neces- jj^g revolution of July, 1830, this class of sary in 1830, J J ^ J ' establishments either disappeared or be- came inactive, so that a part of the usual machinery of commerce, never adequate, was for a time abso- lutely wanting, and it seemed impossible for the normal movement to begin again. The Chambers therefore voted that loans should be granted by the government for the relief of commerce to the extent \of sixty millions, one half to be lent directly by a public commission, and the other to be used in es- tablishing public discount offices in Paris, and in the departments. The loans were made at four per cent. * Courtois, Histoire, p. 156. THE BANK OF FRANCE. 1 29 and upon security, and the business would seem to have been managed with better success than could have been expected ; for of the thirty millions of direct loans, made to industrial establishments and divided between Paris and the departments with tol- erable equality, the amount still unpaid in 1870, and then set down as either bad or doubtful, was only about 900,000 francs. The discount ofifice in Paris discounted paper to the amount of 20,629,000 francs, the securities averaging a little less than 560 francs each, and of this not quite two per cent, was still unpaid in 1841. The operations of the ten or more discount offices opened in the departments are not carefully reported.' After the revolution of 1848, which carried down the greater part of the discount houses in and from Paris, France was again found to be prac- ^^^ *" '^^o- tically destitute of any banking system, which could reach the smaller commercial interests, and the gov- ernment again found itself compelled to establish in haste the machinery needed for such a crisis.' By a combination of private capital with public, discount offices were established, in Paris and in the depart- ments, with an organization and powers which made them strongly resemble independent banks, having the state as a shareholder. In sixty-seven cities of France, including Paris, the operations of these discount offices in 1848, 1849, ^^'^ ^^So were greater ' See Courtois, ffisioire, p. 138, for a valuable notice of these opera- tions. ' Moniteur, March 8, 1848, or Bulletin des Lois. Courtois, ffisioire p. 178; Dictionnaire deVEconomie Politique, articlei "Comptoiri d'Escompte." 130 CHAtTERS ON BANKING. in amount than those of the Bank of France for the -feame years. A considerable number of these offices were allowed to continue their business for several years after the revival of affairs under the Second Empire, and some of them were finally reorganized as banks of discount, repaying to the state its share of the original capital.' At the present day the state of things is so much changed that it is hardly probable that any crisis of affairs would find such a hiatus in the banking or- Thisneces- ganizatioH as existed in 1830 and 1848. aity not likely The number of independent banks of dis- to recur. count has finally been greatly increased, and this not merely in the great cities, and the Bank of France, as we have seen, now has branches in every department. Embarrassment might still be caused in some cases by the provision in the statutes of the Bank which requires three signatures upon all paper discounted by it, unless accompanied by certain specified collaterals, this provision tending to bring in some third party between the actual borrower and the Bank ; but the agencies for banking now exist throughout the country, and it would only remain to provide for the details of access to them. But for the monopoly of issue given to the Bank, these agencies would probably have existed long ago and would have reached a much higher development than ' One of these became the Comptoir d'Escorapte of Paris, with a capital of 80,000,000 francs, and prospered for many years. It failed disastrously in 1889, upon the collapse of the great copper syndicate, but was reorganized under its present name, the National Comptoir d'Escompte de Paris, Courcelle-Seneuil, Traiti, p. 187 ; Quarterly Journal of Economics, July, 1889, p. 508. THE BANK OF FRANCE. I3I they have as yet. Deprived of the use of that form ^ of credit which is chiefly in demand in the more re- mote districts, banking capital has spread itself but slowly, and the privileged institution has found little occasion to exert itself to supply the want, until stimulated by peremptory legislation. That the Bank of France itself now meets the pub- lic wants much more freely than formerly, is clear from the great diminution in the average importance of the securities discounted by it. Before 1830 these securities were on the average not far from 2,500 francs each in amount ; from that point they have fallen irregularly, but still with a marked general ten- dency, until the average now appears to have settled permanently at less than 900 francs.' As this change has taken place, notwithstanding an immense in- crease in the aggregate loans of the Bank and a great rise in the scale of financial operations at Paris as well as at other centres of business, we can only con- clude that the Bank now systematically admits to its portfolio, in larger proportion than formerly, the paper coming to it indirectly from traders of the smaller class. ' The policy of favoring the small trade of Paris was established by Napoleon in the statutes of the Bank in 1808, where it is provided that " il sera pris des mesures pour que les avantages resultant de I'etab- lissement de la banque se fassent sentir au petit commerce de Paris. ..." Some of the paper discounted by the Bank in masses for bankers and others is extraordinarily minute. In 1889, out of 5,667,119 pieces discounted in Paris, 19,100 were for 10 francs or less, 836,417 for from II to 50 francs, and 1,076,072 from 51 to 100 francs. The proportion of small paper discounted has risen steadily for several years. See, for comparison, a statement as to the size of loans in several parts of the United States, by the Comptrollel of the Currency, Report for i880p^p. 16^ 132 CHAPTERS ON BANKING. We have already referred to the suspension of specie payment by the Bank of France in March, The Bank 1848. The suspension was authorised, the March!'i848, "o^^^ ""'^^^ ^ ^^S^l tender, and the issue tojune, 1S50. of notes as low as icx3 francs permitted, on condition that the issues of the Bank, and of all the independent banks soon after consolidated with it, should not exceed 452,000,000 francs. Political and socialist agitation destroyed all commercial con- fidence and a rapid liquidation went on; the dis- counts of the Bank fell off, specie flowed in, and in June specie payment was practically resumed, and the legal-tender provision might perhaps have been abrogated with safety, had the Bank been left to itself. The Treasury, however, was embarrassed, the Bank saw few opportunities of using its resources profitably, and advances to a considerable amount were therefore made by it to the government. Partly as a consequence of these advances the limit of the note circulation was raised in December, 1849, to 525,000,000 francs ' ; and the suspension of specie payment was not ended and the legal-tender power of the notes destroyed, until August 6, 1850.' By these means, aided by its own great prudence, the Bank not only passed through the gloomy years from 1848 to 1852 without serious loss, but continued when affairs were at their worst to earn a modest profit for its stockholders.' ' Moniieur, December 23, 1849, or Bulletin des Lois. ' Moniteur, August 13, 1850 ; Bulletin des Lois, T. 166, p. 265. • At the end of 1848 the Bank of France held overdue paper amounting to 85,000,000 francs. Of this 76,000,000 francs were paid in 1849, and subsequent payments soon reduced the balance so that, it is conjectured, the real loss of the Bank from bad debts during the THE BANK OF FRANCE. 1 33 A great expansion of the business of the Bank began in 1852. The coup d'etat, which opened the way for a restoration of imperial govern- its great ment, at all events removed political un- expansion certainty. Commercial confidence there- f°"'52. upon revived, and the discounts and advances made by the Bank to individuals rapidly increased, and in 1853 touched a higher point than was ever before known. The Crimean war brought no interruption of this quick growth. The Bank felt its share of the burdens of that period, in the difificulties caused by general financial embarrassments, which forced it to import for its own safety specie to the amount of 800,000,000 francs, at a cost varying from i-^ to \\ per cent.' ; but it found its compensation in dividends rising in 1856 to 27 per cent. In view of the general expansion it is not surpris- ^^^ increase ing that in 1857 the government deter- of capital mined to double the capital of the Bank, '° ' *'' raising it to 182,500,000 francs at which it now stands. It is characteristic, however, of the shifty financial policy of that period, that this increase of capital was used as an opportunity for placing a government loan, to ' which the market happened to be unfavorable. The Bank upon raising its 91,- 250,000 francs of fresh capital was required to invest 100,000,000 francs in new three per cents., issued for the reduction of the floating debt, which had risen to revolution was not over 500,000 francs, although it charged at the time 4, 500,000 francs to profit and loss. Its dividends during 1848, the worst year, were 75 francs on the share of 1000. Courtois, Histoire, p. 186, note. ' Courtois, Histoire, p. 222 ; Tooke, History of Prices, vi., p. 85. 134 CHAPTERS ON BANKING, an awkward amount.' The charter was at the same time extended to 1 897, authdrity was given to issue notes as small as 50 francs, and the government was empowered after 1867 to require the opening of a branch of the Bank in every department. But per- haps the most important of the new features of the charter was the provision made as to the rate of dis- count. For the greater part of its existence the Bank had striven to maintain the uniform rate of four per cent. The statutes of 1808 had fixed at three months the maximum length of the paper to be admitted to discount, but in periods of difificulty the Bank had sometimes lowered this limit to sev- enty-five, sixty, and even forty-five days. In 1854, however, and for some years after, it tried a varia- Adoptionof ble rate of discount, but then found it- rate^oV^ ' ^^^^ hampered by a law passed in 1807, discount. which made six per cent, the limit of legally chargeable interest. The charter of 1857 freed the Bank by special exemption from this restric- tion, allowing it to charge such rate as it might find advisable, with the provision, however, that the profits earned by charging a rate above six per cent, should not be divided but carried to a permanent surplus." ' Moniteur, June ii, 1857, or Bulletin des Lois. Under this law a share of new stock was given to the holder of a share of old, upon payment of i ic» francs, the par being 1000, and this payment, col- lected upon 91,250 shares, supplied the 100,000,000 francs required by the government. The stockholders, whose shares were worth 4500 francs June 1st, had the satisfaction of seeing their stock after doubling quoted at 3050 on June 2gth. The three per cents, received by the Bank are not to be sold, and now appear among its resources as " Rentes immobilisees (Loi de 9 Juin, 1857) 100,000,000 francs.'' * This surplus, which is set down in the published accounts as THE BANK OF FRANCE. I3S The years from 1857 to 1870, although marked by great changes, both in the pohtical world and the financial, hardly witnessed any event in the history of the Bank of France which needs to be noticed here.' But with the opening of the Franco-German war in July, 1870, the Bank entered upon ^^^^ the most remarkable period of its exist- withcer- ence,— that in which its vicissitudes were "^"^ '° '*^°- most startling and critical, its services to the country most distinguished, and the success of its manage- ment most brillianL Three weeks before the breaking out of hostilities the Bank of France had in its vaults a reserve of cash almost equal to its notes, and amounting to nearly two thirds of all its cash liabilities." The approach of war caused a heavy pressure upon the Bank for loans, and both notes and specie were " Benefices en addition au capital (art. 7, Loi de 9 Juin, 1857) " has stood at 8,002,314 francs since 1874. ' Perhaps an exception should be made of the unexpected claim set up by the Bank of Savoy in 1864, which for a moment seemed to threaten the monopoly of the Bank of France. The Bank of Savoy had by its old statutes the right to issue notes and to establish branches ; the treaty of. annexation saved all existing rights of corporations in the annexed territory ; and on this reasoning it was proposed to raise the capital of the Bank of Savoy from 4,000,000 francs to 40,000,000 francs, to open branches and issue notes. The project was favored by many opponents of the monopoly of note issue, and was formidable enough to lead the Bank of France to pay the round sum of 4,000,000 francs for the surrender of the asserted rights. For notices of this episode see Courtois, Histoire, p. 245; Economist, January 16, 1864; D'Eichthal, Monnaie de Papier ei Banques d' Amission, p. 84. ' The chief movements in the account of the Bank of France, caused by the war, can be seen in the following table, give?, iv jaiUions ancl t?nth§ : 136 CHAPTERS ON BANKING. drawn from it in large amounts, and began to find their way either into private hoards or into foreign hands. Neither the government nor the public could see with patience this dispersion of a stock of specie which, it was felt, might be an important resource in the desperate struggle with Germany, and suspension of payment as a precautionary step thus became probable early in August. Shortly afterward the government resolved upon the adop- tion of a measure suspending the collection of com- mercial obligations, and this made the suspension of the Bank a necessity. (^On the 12th of August, then, Suspension ^°"'' weeks from the beginning of the war, authorized, a law was passcd, as a government meas- ug.i2,i 70. ^^^^ ^^j ^j^j^ ^^^ ^^g dissenting vote in each house,' authorizing the Bank to refuse payment of its notes in specie, and for the second time in its history making its notes a legal tender for debts public and private.") The issue was at the same time limited to i,8cxd,ooo;ooo francs, and authority was given for the emission of notes as small as 25 francs each. \Pn the next day, August 13th, was passed the first of the measures which postponed all com- Notes. Deposits. Cash. 1870, June 23 . . 1,374. 431.9 1,318.5 Aug. II . . 1,583.6 582.2 1,028.6 Sept. 8 . •. 1,745. 441-8 808. 1871, June 2g. . . 2,213. 524.1 549.8 , June 23d was the day when the cash was at its maximum for 1870 ; August nth was the day before the suspension ; no account was published between September 8, 1870, and June 29, 1871. ' In the Senate the solitary negative vote was given by Michel Chevalier. For the laws noticed in the text see jfournal Officiel, 1870, Aug. 13, 14, 15, ox Bulletin des Lois. Disc'd Public Paper. Lmns, 558.1 1,181.7 1,428.3 741.9 1.403 THE BANK OF FRANCE. 1 37 mercial debts for one month, and then, by successive extensions of time, until July, 1871, without other burden to the debtor than liability for interest until the final payment." And finally, on the 14th of August, the limit of issues by the Bank was raised to 2,400,000,000 francs, on the ground that for the Bank to continue its discounts it must have a wider margin than was allowed by the law of the 12th. This completed the series of measures under the authority of which the Bank was administered during the war. The state had at the outbreak of the war obtained a small advance from the Bank, and called for others soon after the suspension. During the siege of Paris the branch of the Bank at Tours became Loans made the agency by which considerable advances to the gov- were made to the provisional government at Tours, while the Bank itself was in like manner aiding the government in Paris. When the war with the Commune succeeded that with Germany, these advances had risen in all to 761,000,000 francs, besides a loan of 210,000,000 francs to the city of Paris. The Bank resisted with great difficulty the efforts of the Commune to use its resources in de- fence of the city, and for several weeks escape from open pillage, or from demands not to be distinguished from it, seemed hopeless. The prudence of the managers, the devotion of their subordinates, and > Under the operation of this law the Bank of France held sus- pended paper to the amount of nearly 870,000,000 francs. Of this more than two thirds was paid in before the expiration of the legal term of indulgence ; and of principal and interest less than one pel eent. was still unpaid at the end of 1874. Courtois, Histoire, p. 263, 138 CHAPTERS ON BANKING. the steady support of one or two members of the revolutionary body itself, carried the Bank safely through the most dangerous episode of its history, and enabled it, upon the suppression of the Com- mune, once more to give its aid freely to the govern- ment.' In July, 1871, the loans thus made to the state amounted in all to 1,425,000,000 francs, and the government now happily found itself in such a position that it could cease drawing from this source." The brief statement given on p. 136 shows dis- tinctly enough the change which a year of war had wrought in the affairs of the Bank. An enormous loan had been made to the state simultaneously with an increase of discounts for individuals, and this had been effected partly by the sacrifice of cash and partly by an increase of notes, the volume of which now stood nearly 800,000,000 francs above the highest point ever before reached, ^'his increase of notes had been managed with great caution, so that while it necessarily expelled from circulation a Little depre- Considerable amount of specie, it had ciationofthe nevertheless brought about but a slight depreciation of the paper'; and with the repayment by the government of the advances made to it by the Bank, the restoration of specie payment ' For minute details of the history of the Bank under the Com- mune, and of the means by which it was saved, see Du Camp, Les Convulsions de Paris, iii. , ch. ii. ' In the Bulletin de Siatisiique et de Legislation Comfarde for April and May, 1880, is a careful report upon these loans and upon theii subsequent payment. ' During the war quotations were made of exchange on London and W?a?i9nally of gold, indicating in one extraordinary case a premiuQ) THE BANK OF France. 139 promised to be easy. The government, however, was for the time in no condition to undertake the payment of a domestic debt. It had before it the problem of paying to Germany, in the next two or three years, the great indemnity of five thousand millions of francs, to which it was bound by the treaty of peace ; it had yet to learn how far its credit would enable it to make this payment by borrowing in the general market, and the most that could be hoped was that it should not have to call upon the Bank for further aid. The latter could not expect, therefore, for several years to come, to extricate the resources which it had lent to the state. But while the Bank thus saw its resources unavail- able for a movement towards specie payments, it was also called upon to increase at once the assistance given by it to commerce. It was of paramount necessity that productive industry should resume its activity without delay, for it was after all in the pro- duction of wealth and its proper use that France must find the means of escape from the economic misery caused by the war, and it was the thrift and prosperity of individuals that must support the credit, on which the country now relied in making its settlement with Germany. Special precaution was needed also to insure industry from being starved of of four per cent, on specie. After the restoration of order gold ceased to be quoted, and the price of exchange on London fell to a level of about i per cent, premium. See the Economist for quota- tions both in London and in Paris. Leon Say's Rapport sur le Payement de I' Indemnity de la Guerre gives a chart shovping the rates of exchange in Paris on London from June, 1871, to September, 1873. 140 CHAPTERS ON BANKING. its needed supplies of capital, while the government was borrowing the vast sum to be paid to Germany. Increase of The Bank therefore took the bold course iranttaftef^of rapidly enlarging its discounts and ad- peace, (^vances to individuals ; and to make this possible, in a country where deposit accounts and checks are but little used, it was authorized in De- cember, 1871, to increase its issue of notes to not more than 2,800,000,000 francs,' and in July, 1872, the limit was further extended to 3,200,ooo,ooo.N Such an increase of paper with a forced circulation/ required, as the condition of possible safety from serious depreciation, a further expulsion of specie from use. The smallest notes thus far issued by the Bank were notes for 20 francs authorized by a law of December, 1870; but the law of December, 1871, raising the limit of the total issue of notes, now authorized the issue of notes as low as S francs, and thus facilitated the introduction of the bank paper into all the channels of circulation, small as well as great. With the ground thus prepared, the great scheme for the simultaneous payment of Germany and revi- val of France was carried through. The government to facilitate borrowcd in all the markets of Europe, i'Te^Xlo including that of Germany, but called Germany. upon the Bank of France for nothing more than two or three temporary advances, not large in amount and soon repaid. The Bank doubled ' Journal Officiel, 1871, p. 5373 ; Bulletin des Lois, T. 253, p. 504. ' yournal Officiel, 1872, p. 4969 ; Bulletin des Lois, T. 257, p. 39. The provision is contained in article 4 of the law for a national loan o£ three milliards, and declares that ' ' le chiflfre des emissions des billets ... est eleve provisoirement a trois milliards deux cents millions." THE BANK OF FRANCE. I4I its discounts of commercial paper for the next three years, and for this purpose increased the note circu- lation until at its maximum at the end of October, 1873, it nearly reached 3,072,000,000 francs. V From the data subsequently published it appears that the whole of the increase was made by the issue of notes of not above 100 francs, and the greater part of it by means of notes of 50 francs and less.' The risks of the operation were amply compensated by its gains. Although the government, in view of the valuable privilege enjoyed by the Bank of making a great issue of notes without the obligation of pay- ment, reduced to one per cent, the interest on its own debt to the Bank, the profits from the immense increase of discounts were heavy. Dividends of 20 per cent, for the second half of 1 871, 32 per cent, for 1872, and 35 per cent, for 1873, amply justified the conduct of the management in the eyes of stockholders, and once more proved that in periods of specie suspension no trade flourishes like that of the dealers in credit. The government was able in 1872 to begin its pay- ment to the Bank at the rate of 200,000,000 francs per year ; the payment of the indemnity to Germany was completed in August, 1873, and in Preparations 1874 the Bank began its preparations 'ZnZZ'. for the resumption of specie payment. 1874. France, having a less expanded state of credit than most other commercial countries, had felt the revul- ' Economist lor 1872, p. 326 ; the same for 1874, p. 320. In the Bulletin de Statistique for May, 1887, p. 510, is a table of the annual maximum and minimum circulation of every denomination of notes, and of the annual aggregates, from 1866 to 1886. 142 CHAPTERS ON BANKING. sion of 1873 but little, and it was, therefore, possible to make a large reduction in the discounts of the Bank, and thus to carry on the double operation of accumulating specie and withdrawing notes. The withdrawal of small notes of 25 francs and less was carried on even faster than the general lowering of the circulation, in order to force the introduction of specie into general use and thus to insure the presence of a large mass of metal in the hands of the public, before the Bank should begin its payments. The specie in the Bank reached its highest point in June, 1877, when it stood at 2,281,000,000 francs, showing an accumulation by the Bank of over 1,500,000,000 francs in three years and a, half, inde- pendently of any made by the public. Of this specie, not far from sixty per cent, was gold, it being the policy of the Bank to hold much gold, partly because gold alone could answer demands for use in foreign trade, and partly because of the uncertainty which obscured the future value of silver." ' In the Bulletin de Statistique for January, 1887, p. 60, is a table showing the annual maximum and minimum of specie in the Bank of France, distinguishing gold and silver, from 1811 to 1886. It has often been said that for a few years before 1879 the great nations were "grasping for gold," in a species of panic caused by the introduction of the gold standard in Germany. A little examina- tion will show, however, that the great demands for gold by Ger- many, France, and the United States came in succession and not simultaneously, and were met without disturbance. While the French accumulation was going on in the years 1874 to 1877 inclu- sive, that sensitive barometer, the Bank of England rate, averaged 3^ per cent. During the four years it rose but once as high as 6, and then for only 38 days, and was above 4 for only 124 days alto- gether. These low rates are not observed when nations are " grasp ing " for specie. THE teANii Ot FRANCE. 14^ The precise period at which specie payments should be resumed was determined by the law of August 3, 187s, in which it was provided that when the advances made by the Bank to the State should have been reduced to 300,000,000 francs, payment of the notes in specie should begin.' By the end of 1876 only 338,000,000 francs remained unpaid, and it would not have been difficult at any time in 1877 to complete the operation. The year was permitted to pass, however, without taking the final step, the Bank in the meantime dealing upon the specie basis, A payment of 10,000,000 francs, which lowered the government debt to the required point, Resumption was at last m^Ae. pro forma December 31, "^J'y^jan",^ 1877,' and specie payment was resumed 1878. with the opening of the new year, without shock and without much thought on the part of the public. By the terms of the law the notes continued to be a legal tender for all debts, as they are to-day, but their forced circulation by non-payment was at an end. It is also to be observed that as the law for resumption did not disturb the previous legislation which had fixed the limit of note circulation for the Bank at 3,200,000,000 francs, the Bank of France, for the first time in its history, had the function, when paying in specie, of issuing a legal-tender paper of limited quantity. At the moment of resumption the outstanding I See article 28 of the Budget for 1876, in Journal Offidel, 1875, p. 6866 ; also Bulletin des Lois, « The final installment of the debt was paid March 14, 1879, See the Bulletin de Statistique May, 1880, p. 336. 144 CHAPTERS ON BANKING. notes of the Bank amounted to nearly 2,462,000,000 francs. This was a great reduction from the maxi- mum reached in 1873, but the amount was still nearly double that which had been usual before the war. It soon became clear that, with the free choice between specie and paper afforded by resumption, France had adopted a permanently larger paper cir- culation. In part this was no doubt due to the change of ratio produced by any protracted use of forced paper, — a change which makes it highly im- probable that any nation, after such an experience, will easily return to the use of paper and coin in proportions the same as were once found satisfac- tory. Perhaps in greater part the increase of paper circulation was the result of a progressive expansion of affairs, requiring an ample medium of exchange and one more convenient than coin. Unfavorable conditions in 1878, 1879, ^^'^ '^8° caused a moderate decline, which at one moment lowered the issue to 2, 107,000,000 francs. Deficient crops, especially in 1879 ^^^ 1880, caused large im- ports of wheat and heavy exports of gold, a large proportion of the latter finding its resting-place in the United States. The Bank of France relieved the situation by some increase of its loans, but parted with not less than 500,000,000 francs of its gold. With the return of good harvests the loss of specie was made up, and the increased demand of the public for notes soon began to show itself. Per- haps to some extent by the direct exchange of specie for notes, and in general by an increased pro- portional call for paper in payments received from THE BANK OF FRANCE. I45 the Bank as compared with the use of paper in pay- ments to it, the notes outstanding and the specie holdings of the Bank both began to increase, and the growth of that part of the circulation which simply represents specie in hand, and is not an extension of bank credits in profitable operations, became rapid. In 1884, the issue having risen to 3,162,000,- 000, the limit was raised to 3,500,000,000 francs. In 1893 it was found necessary to raise it to 4,000,- 000,000, and in the revision of the charter of 1897, although the issue had at no time gone beyond 3,840,000,000 francs, the probability of a still further advance was so great that the limit was raised to 5,000,000,000 francs. The importance of maintain- ing a limit of circulation which is certain to be raised before it can be reached is not clear, but it is prob- ably to be found, if at all, in the frequent opportu- nity thus afforded for legislative review of the use which the Bank makes of its extensive privileges.' During 1899 the circulation of the Bank varied from 3,632,282,000 to 4,043,708,700 francs, and its specie ranged from 2,811,000,000 to 3,137,000,000 francs, being usually not far from seventy-five per cent, of the issue. By the force of circumstances, then, rather than by positive legislation, the Bank of France has been made the storehouse for a vast mass of specie, con- ' The committee which, in 1897, reported to the Chamber of Dep- uties the bill extending the charter, frankly recognized the futility of the limit, but acceded to it as probably harmless, and agreed to the advance from 4000 to 5000 millions as affording an ample margin for some time to come. — Journal Officiel, 1897, Doc, Pari. Chambre, p. 176. 146 CHAPTERS ON BANKING. veniently represented in circulation by bank-notes, and thus holds in its charge a large part of the cur- rency of the country. As the specie thus held be- comes in fact a reserve protecting all the cash liabilities of the bank, it is clear that it is an effec- tive safeguard against the ordinary chances of an insufifiicient banking reserve, and that the Bank of France thus secures great steadiness of movement in its ordinary operations in compensation for the heavy responsibility thrown upon it. \ Demands which would otherwise be a serious drain upon its banking resources make no sensible impression upon a reserve so greatly disproportionate," and the Bank can often afford to wait for the tide to turn in its favor under circumstances which would compel its neighbors in England or Germany to use Every effort for immediate self-protection.^ The composition of this vast reser\^e is hardly less remarkable than its growth. The resumption of specie payments by France took place after the fall in the value of silver had compelled the countries of the Latin Union to suspend its free coinage at their mints. At that moment the Bank held approxi- mately 1,200,000,000 of gold and 867,000,000 of ' In November, i8go, the Bank of France, upon short notice, made a loan of 75,000,000 francs to the Bank of England, then making its preparations to meet the crisis caused by the failure of the Barings, — Economist, Nov. 15. The gold was at once transferred to London, and remained there until the following February. — Economist, Feb. 14, 1891. This may be compared with the exchange of ;^2, 000,000 sterling of gold for an equal amount of French silver made by the Bank of England to the Bank of France in November, i860. — Econo- mist, Nov. 24, i860. THE BANK OF FRANCE. I47 silver. During the years of specie export, referred to above, the Bank parted with gold until its stock in the winter of 1880-81 was reduced to less than 540,000,000, and accumulated silver to the amount of more than 1,200,000,000. With the return of favoring conditions the Bank was not slow to replen- ish its stock of gold, and soon showed that it had adopted a definite policy of restricting its holding of silver and strengthening its holding of gold. Its silver has never risen much higher than the point reached in 1 880, and for several years has ranged between 1,200,000,000 amd 1,300,000,000 francs. Its gold, on the other haM, with some important fluctuations, has tended upwards, and since 1890 has ranged from 1,114,000,000 to 2,152,000,000 francs, usually making about three fifths of the cash re- serve, often rising above that proportion and less frequently falling below it. ]\ The success of this coursed action has, of course, been due in great measure to the advantage enjoyed by the Bank of France, as a debtor, under the bi- metallic system of the Latin Union. Having the legal right to make in silver any payments which it does not care to make in gold, the Bank is able to protect itself against any dangerous demand for the latter. It is obliged to receive silver when tendered to it in payment, and at times gold is said to have disappeared from its receipts ; but with a change of the international current the inward flow has re- turned and the Bank has continued its accumulation. The harshness of this policy, which if strictly carried out would isolate the interests of the Bank to the 148 CHAPTERS ON BANKING. great inconvenience and disadvantage of the com- munity, has been softened, without impairing its success, by the practice of making gold payments at a premium, in cases where such concession appeared advisable. The line which separates such a practice from a depreciation of the local standard is narrow, but the Bank of France appears to have managed this delicate business with such caution as to be able to satisfy the occasional strong demand made upon it for gold, without disturbing in any serious degree that sensitive index, the rate of exchange upon J^ondon.' \ The abandonment, since 1889, of the vptriable rate of discount which the Bank had adopted, as has been seen, more than twenty years before," would hardly have been practicable without these strong defensive measures. Down to October, 1898, the Bank rate in more than nine years had changed but twice, seeming to be insensible to in- fluences which at times carried the rates in London and Berlin to five or- six per cent. iThat the French '"La Banque de France, grace k notre regime monetaire qui permet de payer en or ou en argent, a pu reduire les sorties d'or k ce qui etait reellement necessaire aux besions legitimes du commerce international. " La prime defensive sur Tor a montre une fois de plus son efficacite, elle nous a permis de maintenir le taux de I'escompte le plus stable et le plus modere du monde entier, sans gSner en aucune fa9on les affaires puisque le change sur Londres ... est toujours reste tr^s voisin du pair." — Compte Rendu au Nam du Conseil Gindral de la Banque, 1897, p. 12. For some account and criticism of this policy, see George Clare, Money Market Primer, pp. 110-115. "Page 134. THE BANK OF FRANCE. I49 tnoney market did not feel the pressure of such influences is not to be supposed, but the peculiar body of customers served by the Bank of France was in a well sheltered position. A large part of the loans made by the Bank of France upon commercial paper now take the form of a rediscount of paper, on which advances have already been made by the banking houses which are the immediate customers of the Bank. The endorsement by the banking house offering such paper gives the third signature long required by the statutes,' and the difference between the rate charged by the endorsing houses to the original borrowers and that charged by the Bank for rediscounting is the profit reaped by the intermediaries, who thus give the paper the added strength of their names. It is a natural, if not a necessary, result of this system of operation, that the Bank, both in Paris and in the country, is a lender on a large scale to the class of small traders, as is shown by the vast number of securities dis- counted by it, and by their small average amounts." /The rate charged by the Bank for advances made /upon collateral security is higher by one per cent. ( than its published rate of discount, but even of the advances a considerable fraction is made up of sums not exceeding 500 francs, the minimum being fixed at 250 francs. \ Experience has shown that the busi- ' In 1897 a motion to authorize the Bank to discount paper with two good signatures was rejected after debate in the Chamber by a vote of 295 to 255. — yournal Officiel, June 16, 1897, p. 1540. ^ The annual reports of the Bank show that the average of bills dis- counted are for sums under 700 francs, and their average time of maturity about twenty-seven days. Compare also note on page 131. 150 CHAPTERS ON BANKING ness thus carried on with the class of small dealers is singularly free from loss,' and generally steady in its movement, and it is for the interest of all concerned, as well as a matter of some moment to the general public, that the vast body of actual borrowers thus ultimately depending upon the Bank should be as little disturbed as possible by changes of rate and uncertainty of accommodation. That the small borrowers should be absolutely secured against a rising money market, eveh by such a system as this, is not to be expected. The inter- mediary who obtains his own loans from the Bank at a rate lower than that generally prevailing must still feel a strong inducement to raise the rate which he charges to his own customers. The tendency of such a network of established relation is, however, to moderate this temporary inducement and to secure for the small borrower a part at least of the relief afforded by the flow of loans at a steady rate from the great bank. And as regards the larger borrowers receiving advances from the Bank, the exaction of the premium upon advances in gold, already referred to, amounts in fact to a moderate advance in the rate of interest charged to them. The term for which the law of 1857 continued the exclusive privileges of the Bank of France, — or, to use the customary phrase, " extended the charter," — ended with the year 1897. A bill providing for a further extension was presented by the government 'In the debate of 1897 the Minister of Finance stated that in the last forty-eight years the Bank had charged off losses of but 42,000,- 000 francs in all. — Journal Officiel, June 3, 1897, p. 1377. THE BANK OF FRANCE. 151 in 1889 and reported by a committee in the Chamber of Deputies in 1891. The complete change which thirty years had wrought in the poHtical, social, and financial conditions of the question, caused the de- bate to take a wide range, and the project was still before the Chamber at its dissolution in 1893. The measure returned with some modification in 1896, and finally became a law, November 17, 1897,' ex- tending the charter to the close of 1920, but reserv- ing to the legislature the power to terminate it with the year 1912 by a law to that effect adopted in 191 1. No important alteration was made in the general structure of the Bank or in its administrative organization. It continues to be a bank of the primitive type, with no special provisions by law for the limitation of its liabilities, except the maxi- mum arranged for its issue of notes, and with no provision as to any reserve to be maintained or for the special protection of any particular class of lia- bilities. In its government it is still where Na- poleon placed it, under the immediate direction of a governor and two sub-governors, appointed and removable by the chief of the state, but aided by a board of fifteen regents, who are elected by the two hundred largest shareholders, and whose action is subject to a veto by the governor. The relations between the Bank and the govern- ment were the most serious subjects of discussion. Easily as the authority of the governor might seem to lead to the absorption of the Bank as a part of the political machinery of the state, the Bank has for a ' journal Oj^ciel, p. 7070. 1 52 CHAPTERS ON BANKING. large part of its life maintained a considerable de- gree of independence. Material changes in legis- lation and important financial operations for the benefit of the government have generally been the subject of treaty and agreement. Even at the crisis of the war of 1870-71, the aid given by the Bank was for the most part Wisely measured with careful re- ference to the maintenance of the credit of the Bank as an independent institution. The law has from the first recognized the importance of guarding the Bank in this respect, by requiring that the governor shall at all times hold at least one hundred shares of its stock,' and each sub-governor fifty shares. But the private interests of these officers, so far identified with the interests of the Bank, could not have protected it if the goveifiiment of the day had not generally used great discretion and forbearance in their relations with it. The governorship of the Bank appears ta have been treated but rarely as a political office, and has remained unchanged even by revolution." Whatever takes place in the politi- cal world, the Bank has been regarded and has acted as the supporter rather of government than of air administration, and has thus maintained an unques- tioned credit, which is among the most valuable of the national resources for a great emergency. ' The shares of the Bank of France have not been quoted below 3500 since 1890, and at the end of 1899 stood above 4200. * Since 1866 the governors of the Bank have been : Rouland 1866-1879 Denormandre 1879-1882 Magnin 1882-1897 G. Pallain 1898- THE BANK OF FRANCE. 153 In the repeated discussions which ended in the passage of the law of 1897, the plan of state owner- ship of the Bank was urged with great ability by a minority of the Chamber of Deputies." The argu- ments for and against the proposition turned for the most part upon the financial considerations bearing upon the absorption of functions by the state, and upon the expediency of altering arrangements found to work well in practice. It is interesting to observe that it was pointed out more than once by those who supported the bill as it was passed, that in case of invasion, a public bank, like any other public establishment, would be subject to seizure by a hostile army, and that a bank under private owner- ship would be exempted like other private property by the laws of war, and in support of this view the decision of the German government recognizing the immunity of the Strasburg branch of the Bank in the war of 1870 was cited with great confi- dence. The same arguments were used, mutatis mutandis, in the debates in the German Reichstag a year later, when the bill for extending the char- ter of the Reichsbank was on its passage and there also the question of absorption by the state had come up. Stronger support was given to the proposition, made in several forms, for enabling the government, in case of emergency, to use on some great scale the cash and the rights of issue belonging to the Bank of France. No limit, it was urged, can be set to the ■ The vote finally stood 114 for and 405 against ownership by the state. — Journal O^ciel, June 10, 1897, P- I45i. 154 CHAPTERS ON BANKING. absolute necessity for instant relief which public calamity may create. The national existence ought not to be imperilled by the possible refusal of a private corporation to do its utmost, and the prop- erty and rights of issue of the Bank ought to be as completely at the service of the nation as a railway or the property and life of the citizen. To arguments of this kind it was answered that no worse prepa- ration for possible disaster could be made than the announcement that in order to replenish the treas- ury in a certain contingency, the credit of the Bank of France might be submerged, and the public and private interests dependent upon it sacrificed. The credit which the Bank enjoys by reason of its inde- pendent existence and strength, it was contended, must inevitably be weakened by any provision for deliberately destroying it, and the most important financial defence of the government would thus be undermined. It was stated, however, by the minis- try that provision for the worst had been made, by an agreement between the government and the Bank defining the kind and amount of support to be given by the latter in a case of public extremity, and affording what was described as " pr^cieuses garan- ties." The terms and even the nature of this sup- port were declared to be a state secret, no more to be made public than the contents of the arsenals, but the arrangement was vouched for by the minis- try as sufficient.' It was protested by a part of the Chamber that if the arrangement meant anything less than the command of the entire power of issue, ' journal Off del, June 3, 1897, p. 1385, THE BANK OF FRANCE. 155 —the transfer, as it were, of the plates from which notes are printed, — it must be insufficient, and that in any case the Chamber or some important com- mittee of its members should pass judgment upon it ; but the government was immovable in its re- fusal to give any further information on the sub- ject. By a vote of 298 to 236 the Chamber refused to press for further information, and by nearly the same vote it rejected a .proposition for placing the cash of the Bank and its right of issue at the command of the government to be used in the national defence in the event of a general mobili- zation.' But although the general relations between the Bank of France and the government were left un- changed by the law of 1897, the opportunity was used, as it has been before, to require the Bank to make some serious concessions as the price of a further extension of its exclusive privilege. The law of 1878, under which a stamp duty is laid upon the notes, recognizes a distinction between what is called the productive circulation of the Bank, or that which is a profitable extension of its credit in the ordinary operations of banking, and the unproduc- tive which is simply a convenient substitute used by the public in place of the coin held by the Bank. By the law of 1897 the Bank is now required to pay on its productive circulation, as a- bonus for the extension of its privilege, a further tax, which is never to be less than 2,000,000 francs per annum, and may rise above that mark with an increase of ' Journal Officiel, June 10, 1897, p. 1446 ; July i, p. 1759. 156 CHAPTERS ON BANKING. the taxed circulation or of the rate of discount.' The Bank is also required to continue without inter- est some permanent advances made by it to the government in 1857 and 1878, amounting to 14O,- 000,000 francs, and to make a further advance of 40,000,000 francs, to remain without interest until the expiration of the privilege. \^he number of branches is to be increased from 94 to 112, and the auxiliary ofifices from 38 to 50, all before the year 1900, and further extensions are provided for which will give the Bank 362 "places bancables " in 1900, and ultimately 377, against 261 in 1897. The Bank is, moreover, to increase considerably the ser- vices which it renders to the government as an agency for receiving, transferring, and paying pub- lic monies. A strong effort was made in the Chamber to com- pel the Bank to aid in the creation of a bank of agricultural credit, to be established by some fu- ture law, propositions being made ranging from a contribution of 60,000,000 francs from the surplus, to serve as a capital for that purpose, to a loan of 500,000,000 francs at one and a half per cent. This effort was defeated, however, and it was finally pro- vided that the receipts from the new tax on the productive circulation and the new advance of 'The stamp duty is 1.50 per 1000 francs upon an issue equal to the annual average amount of discounts, loans, and advances, and . 20 per looo on all above that amount. — Law of June 13, 1878, Bulletin dh Lois, where will be found the agreement between the government and the Bank upon this subject. The tax of 1 897 is calculated by multiplying the average productive circulation by one eighth of the average rate of discount. THE BANK OF FRANCE. 1 5/ 40,000,000 francs to be made to the state should be retained by the Treasury for the use of one or more banks of agricultural credit whenever created by law. Motions requiring loans to be made to groups of workingmen and to the Monts de Pi^te were also rejected." The debates of 1897, therefore, left the Bank substantially a bank for commercial loans, although the signatures of agricultural syndicates can be received like any others known to be solvent. On the whole the Bank was not required to pay an excessive ransom,'' nor to accept conditions likely to weaken its credit or hamper its operations. The term, however, for which its exclusive privilege of issue is extended is the shortest in its history. This promises no long respite from discussions of a fun- damental sort, but the state of political affairs in France no doubt made this concession to the legis- lative minority unavoidable. ' Journal Officiel, June, 1897, pp. 1546, 1625, 1648, 1706. 'In a report made by M. Dubost for a committee of the Senate, the total increase of burden thrown upon the Bank by the law of 1897 was estimated at a little less than 6,400,000 francs per annum. — yournal Officiel, Documents Parlementaires Senate 1897, p. 566, CHAPTER X. THE NATIONAL BANKS OF THE UNITED STATES. Advancing from the simplest type of the modern bank of issue, represented by the Bank of France, we come to the case where the government seeks to protect the circulating notes of the bank, by requir- ing the pledge of property for their redemption. The best ^^ ^^^^ systcm, the National Banks of the type of se- United States are the best representatives. The legislation which establishes them prescribes many details of administration, and un- foreseen circumstances have checked the proper de- velopment of their circulation ; but they present the system of secured currency in its least complex form and under circumstances which have given it great historical importance. The national banking system owes its existence to the civil war. Although in the majority of the States the banks incorporated under State authority were badly organized and insecure, and although even such as were on a solid foundation could enjoy little more than local credit, the current of opinion before the war was by no means favorable to any consolidation of banking interests. Discontent with existing systems more frequently took the form of 158 NATIONAL BANKS OF THE UNITED STATES. 159 opposition to the existence of any banks of issue at all ; the party then apparently holding permanent control of the national administration cherished with pride the traditions of its victorious struggle with the United States Bank, and of its devotion to a gold currency ; and probably neither the friends nor the opponents of banks would have then thought the government of the United States able to reorga- nize upon a common plan the note issues of all the States. It is probable that in 1 860 a majority of the people would have thought the establishment of a third United States bank dangerous and of doubtful constitutionality. But in 1863 a system of national banks, indefinitely more powerful than the bank which waged an almost equal war with Jackson, was established with widespread, although not unani- mous, consent, and without solid opposition, except from some existing interests threatened or alarmed by the change. For effecting the revolution thus brought about in little more than three years, the favoring conditions were the unusual assumption of powers by the United States government then be- ; coming habitual under the pressure of a struggle for j existence, and the imperious necessity of finding a, market for United States bonds for the supply of a i Treasury drained by war. In the great borrowing ' operations of 1861 the Secretary of the Treasury had sold a large amount of securities to the banks of the Eastern and Middle States, but the banks had found themselves embarrassed by the impossibility of using their own notes or their credit in any form in transactions with the government, and both banks l60 CHAPTERS ON BANKING. and Treasury had been compelled to suspend specie payments at the end of the year. The Secretary had already laid before Congress his plan for the strength- ening of bank circulation by a national system of secured bank issues, urging its adoption chiefly as a reformatory measure which might give to the coun- try a solid currency, preferable, in his opinion, to an increase of government notes which must always involve " the risk of a depreciated, depreciating, and finally worthless paper money." ' Events moved rapidly, and the first resort to legal-tender govern- ment notes was authorized by Congress, with the acquiescence of the Secretary, in less than two months after the suspension. The bank proposition, which, considered simply as a reform, would then have had small prospect of success, began to gain ground as affording a possible escape from the final flood of legal-tender paper which seemed to threaten. When the Secretary again urged his plan upon the attention of Congress," it ha'd acquired new signifi- cance in its bearing upon the finances of the gov- ernment. Immediate relief to the Treasury by the sale of bonds to the banks to be used as security for their issues was not to be expected, for the organi- zation of banks under the proposed system could not be effected without much delay, and many of the strong banks which the Secretary hoped to see con- verted into national banks already owned bonds in large amounts. Indeed the Secretary contented himself with saying that " in a very few years " the '' Finance Report, Dec. 9, 1861, p. 18. ^Ibid., Dec, 4, 1862, p. 17. NATIONAL BANKS OF THE tNlTEt) STATES. l6l proposed national banks would require bonds to the amount of $250,000,000, and in fact the war was -jj)ver before their deposits of bonds had risen much * above $100,000,000.' But the banks were looked upon as important agencies for the government in placing new loans, and their circulation as a medium needed for^use in default of specie and likely to facilitate the return to specie payments. In short as the national bank system slowly passed through its successive stages of development from 1863 to 1865, its importance as affording in itself a market for United States bonds pretty well disappeared, and its importance as a valuable part of the com- mercial organization and as the source of a paper currency of remarkable credit and security came to be more and more fully recognized. The adoption of a system of national banks, hav- ing their notes secured by the deposit of United States bonds, was proposed by the Secre- ^^^ ^^^ ^^ tary of the Treasury in 1861, and strongly the system, urged by him in 1862. An act for the F"''- ^'s. '863. purpose was passed in February, 1863,'' but in many points of detail this proved to be so unsatisfactory and incomplete, that only 134 banks were organized under it in the next nine months and the number had risen to less than 450 in sixteen months. A revised act, making important changes, was therefore passed in June, 1864,^ and ample provision having been ' In November, 1863, the Massachusetts banks held United States secrurities amounting to $53,000,000, and the banks of New York, city and country, probably more than $100,000,000. ' 12 Statutes at Large, 665. ^ 13 Ibid., 99. l62 CHAPTERS ON BANKING. made, under which banks chartered by the States could be reorganized as national banks, the exten- sion of the new system went on rapidly. Its adop- tion was further stimulated by an act laying a tax of ten per cent, on all notes of State banks paid out by any bank after July i, 1866.^ The certainty of the practical exclusion of all State banks from the field of circulation, caused the speedy reorgatiization of the greater part of them as national banks ; and thus the national system, numbering 1634 banks on July I, 1866, at once assumed the pre-eminence which it has easily maintained. There is no doubt that, in adopting the national Intended bank systcm. Congress understood that finally to jj ^^s establishing the agency by which supply the ^, , ^ r 4.U ^ sole paper the solc paper currency of the country currency. should be issued in the future. The legal- tender issues were still regarded as a temporary expe- dient,- resting upon the overwhelming exigency of the moment for their justification ; the bank act is entitled " An act to provide a national currency," emphasizing by its title the permanence of the sub- stitute which was to fill the place left vacant when the legal-tender notes should be paid ; and the text of the act plainly looks forward to the return of specie payment, which should leave specie the only tender for debt.' Establishing a permanent system ' 13 statutes at Large, 484. ' In 1870, when the return to specie payments finally seemed to have been postponed indefinitely, an act was passed authorizing the establishment of gold banks, issuing notes redeemable in gold coin, and secured by the deposit of " United States bonds bearing interest payable in gold " with the treasurer of the United States. The notes were not to exceed eighty per cent, of the value of the bonds, and NATIONAL BANKS OF THE UNITED STATES. 163 of banks, Congress undertook to surround them by the Qrdi nary safeguards needful to give them full credit, providing minutely for their organi- General zation and superintendence, and for the safeguards, publication of their accounts at rather short inter- vals," and laying down rules, wholesome so far as they go, restricting the kinds of business in which the banks should engage. It was provided also that the shareholders should be responsible ratably for the debts of the .banks, each to the amount of his stock in addition to the capital actually invested by him." A system of banks thus guarded and under the charge of the government itself could hardly be treated by Congress as unworthy of being entrusted with the public funds, as the State banks had been under the Independent Treasury Act of 1846, and provision was therefore made for designating were not to be subject to those provisions of law which then limited the aggregate circulation of bank-notes. Several gold banks were or- ganized, chiefly in the Pacific States ; but after the return to specie payments, the distinction between the gold banks and others ceasing to be of importance, provision was made by the act of j88o for their conversion into national banks of the visual type, and there are now no national gold banks in existence. 21 Statutes at Large, 66. Comptroller's Report, l8go, p. 53. ' A summary statement of the number and condition of the national banks, at five dates in every year, and for every year since the adop. tion of the system, is given annually in the Report of the Comptrolltr of the Currency. * From this liability to contribution beyond the amount invested, the law made an exception in favor of the stockholders of any existing State bank, having a capital of not less than five millions and a surplus of twenty per cent., in case of its reorganization as a national bank. This exception was made in order to secure the adhesion of the Bank of Commerce of New York City, — the only bank in the United States which could meet these conditions. 164 CHAPTERS ON BANKING. banks as depositories of public money when occa- sion should require, and for their employment as and ubiic financial agents of the government, up- functionsof on their giving satisfactory security, by the banks, ^j^^ deposit of United States bonds and otherwise, for the faithful discharge of these func- tions. The framers of the measure no doubt looked forward at one time to a more consolidated system of banks, and to a closer intimacy with the government than was in fact established ; but their action as it stands marks an extraordinary change of policy, made under the pressure of war, by a government which, hardly more than two years before, trusted no agency whatever with the custody of its funds, rec- ognized no medium of payment except specie, and carefully disclaimed all connection with, or responsi- bility for, any possible system of banks. The general provisions of the national banking system' have for their starting-point the restriction of the right of note-issue to national banks, the other functions of banking being left free for banks chartered by State authority, and for private banks. Any national bank, proposing to issue notes, is re- quired to secure them by a deposit of registered ' The legislation on this subject down to 1873 is embodied in §§ 5133-5243 of the Revised Statutes of 1878. The subsequent acts of importance are the Compromise act of 1874, 18 Statutes at Large, 123 ; the Resumption act of 1875, Ibid., 296 ; the act of 1880 con- cerning gold banks, 21 Id., 66 ; the act of 1882 extending the exist- ence of the banks, 22 Id., 162 ; the act of 1887 providing for a class of central reserve cities, 24 Id., 559 ; the silver-bullion act of 1890 making further provision as to the redemption of bank-notes, 26 Id.^ 289 ; and the currency act of 1900. NATIONAL BANKS OF THE UNITED STATES. 1 65 bonds of the United States, the bonds being trans- ferred to and held by the Treasurer at Washington, but the interest thereon collected by the ^^^ method bank, whose property the bonds con- ofsecuring tinue to be. The deposit of bonds under *''' °'""" these provisions entitled the bank making such de- posit to receive from the Comptroller of the Cur- rency, who has the general charge of the system, notes to the amount of ninety per cent, of the mar- ket value of the bonds deposited, but not exceeding ninety per cent, of their par value ; a restriction which continued from 1863 to 1900, when the limit on note issue was raised to one hundred per cent.' These notes when received are in blank, certifying only the fact that the security for them is in the hands of the government ; but when signed by the proper officers of the bank, they become its promises to pay upon demand, and can then be issued for circulation. The eflect of this arrangement, it will be seen, is simply that a sufficient amount of the property of the bank, required to be held in the form of bonds, is pledged with proper safeguards to insure the ulti- mate payment of all notes issued by the bank. The notes are also, of course, to be paid by the issuing bank whenever presented, are to be received in pay- ment by all other national banks, and can be paid to or be used in payments by the government in all cases where specie is not required by law ; but they have never been a legal tender as between individuals. These provisions have secured for the notes a uni- form value and give to those of every bank an un- impeded circulation in every part of the Union. If, ' For present provisions of the law as to note issue, see p. i8g below. . l66 CHAPTERS ON BANKING. indeed, the law, as in the act of 1 863, still made no further provision for redemptioh than to require every bank to redeem its own notes when presented at its own counter, the return of notes for payment would rarely take place and their substantial conver- tibility would be nearly destroyed. But the law of Provisions 1 864 made provision for redemption by for central all banks at agencies in the principal cities, and this arrangement continued in force until June, 1874,' when the present system was adopted, inaking the Treasury of the United States the sole redeeming agency for all of the national banks, and requiring every bank to maintain in the Treasury, to be used in redemption of its notes, a reserve equal to five per cent, of its circulation. Thus far, however, the chief effect of the present system of redemption, except in the case of insolvent banks or of banks reducing their issues, has been the easy removal from circulation of notes which are worn, soiled, or otherwise unfit for use. For the establishment of a system which should test effec- tively and continuously the power of every bank to convert its notes into specie on demand, it would probably be necessary to require that no national bank should pay out any notes except its own." For the general purpose of maintaining the convertibility of the aggregate note-issue of the banks and its ready >l8 Statutes at Large, 123. ° Such a. prohibition was the basis on which the " Suffolk bank systein" of New England rested, from i8ig to 1866, and maintained at par a note circulation which had otherwise but slender provision for convertibility. Massachusetts General Statutes of i860, ch. 57, § 55 ; but compare also § 124. And see D. R. Whitney, The Suffolk Bank. NATIONAL BANKS OF THE UNITED STATES. 167 diminution when required by the condition of busi- ness, the present arrangement is well devised. The national bank-note when issued is the promise of the issuing bank, and must be punctually met by/ it, when payment is required, as any other liability must be. The note, however, also carries with it certain engagements binding upon the government of the United States. The menfs°irabii- provision for redemption at the Treasury ityforthe 1-11 11 notes. binds the government to pay on demand all notes when presented in due form, and not merely notes to the extent of the reserve. And in case of the failure of a bank, the law providp for the imme- diate redemption of all its notes ^t the Treasury, The government has thus made itself fully liable in any event for the whole amount of the notes. On the other hand, it has taken ample security for its reimbursement, by requiring the deposit of bonds as above stated, by requiring that this deposit shall be increased if the value of the bonds declines, by the provision for a reserve of cash to be held by the Treasury, and also by taking for itself a first lien upon all the assets' of a bank and upon the personal liability of the stockholders, for the purpose of mak- ing good any possible deficiency in the security at- ready provided. An ingenious provision in the act of 1882 also secures for the government any gain that may ultimately accrue from the destruction of notes while outstanding, or from the failure of holders to call for their redemption. And finally, although the expenses of printing the notes, (but not of engraving the plates), of superintending the sys- l68 CHAPTERS ON BANKING. tern, and of providing for the safe-keeping of the bonds deposited, are paid by the government, these charges are offset by a tax of one per cent, per annum on the average amount of notes in circula- tion." On the whole, therefore, whatever may be gained by the banks from this system, it cannot be said that the Hability of the government is onerous. Although in its general theory the national bank- .ing system is one of "free banking," under which the business of banking in all its branches shall be open to all person* who comply with the formalities pro- vided by the law, it was nevertheless felt to be dan- gerous to allow the issue of an unlimited circulation so long as the currency remained irredeemable. The attempt to restrict what was in theory free led, there- fore, to a series of contradictory and in some respects remarkable provisions. Without restricting the establishment of banks, the acts of 1863 and 1864 limited the aggregate amount ori inai °^ notes to $300,000,000; and while no limitation of bank was allowed to issue notes exceed- no e-issues. .^^ j^ amount its capital stock, every bank was required to deposit bonds amounting to at least one third of its capital. Apprehending that the rapid reorganization of the numerous State banks in the Eastern and Middle States might fill up the prescribed aggregate of circulation, before the West should be able to organize a due proportion of bank- ing capital, the act of 1863 also required one half of the total circulation to be apportioned among the 'Since 1900 one half of one per cent, upon a part of the circula- tion. See below, p. i8g. NATIONAL BANKS OF THE UNITED STATES. 169 States according to their representative population, allowing the other half to be allotted " having due regard to the existing bank-capital and resources." The reluctance of the banks to reorganize as national banks, however, caused the omission of this provision in the amended act of 1864. The movement of reorganization soon became strong, and early in 1865 it was seen that, by the conversion en masse of the banks in States well provided with bank-capital, the limit of $300,000,000 was likely to be reached so soon as to leave little opportunity for banks which might be established in other States to enjoy the right of issue. By an error of administration, an effort made by Congress to prevent this mischance hastened the absorption of the right of circulation by States which could most easily make use of it at short notice, and thus caused an unequal distribution of bank-capital under the national system, the effects of which are still visible. By an act amending the bank act, and dated March 3, 1865, Congress revived the provision by which circulation was to be allotted to banks in the several States, one half according to population and one half according to existing banking capital, re- sources, and business, and also cut down the ratio of circulation to capital for banks of the larger class.' By a section of the internal revenue amendment act of the same date,' it was also provided that any State bank having a capital of not less than $75,000 applying before July i, 1865, for authority to be- come a national bank, and found to be in good ' 13 Statutes at Large, 498. ^lUd., 469. 170 CHAPTERS ON BANKING. credit, should " receive such authority in preference to new associations applying for the same." It was clearly possible to interpret the two provisions so as to give effect to both, by simply giving to banks already existing in any State the preference over newcomers in allotting the circulation apportioned to that State ; and the two acts being of even date, and neither provision purporting to limit or control the other, it was plainly the duty of the Treasury authorities to execute both.' The Comptroller of the Currency, however, with the approval of Mr. Mc- Culloch, then Secretary of the Treasury, assuming that the chief purpose of Congress was to effect the general conversion of State banks, proceeded to give to existing banks authority for the issue of notes under the national system as fast as they applied for it, without regard to the provision requiring an apportionment among the States. The fact that the preference allowed to existing banks was to ex- pire July 1st hastened the applications, and it was soon found that the apportionment contemplated by Congress was buried beyond possible resurrection. Banks applying late for conversion^ were asked to waive in part their right to ask for currency, in order that the aggregate of $300,000,000 might not be overrun, but the general result was that New England and the Middle States had a circulation allotted to them in enormous disproportion to their ' A few years later Mr. Sherman, in a debate in the Senate, declared that "this whole difficulty grew out of a disregard for the law ; it was not the defect of the law, but a violation of the law."—" (Jongrefsional Globe, Jan. 24, 1890, p. figg. NATIONAL BANKS OP THE UNITED STATES. 17I due quotas, and a few of the Western States received their full share ; but most of the Western States were left seriously deficient, and the Southern States were almost wholly unprovided.' It is probable that, in this remarkable disregard of the rule of apportionment laid down by Congress, the Treasury authorities were taken by surprise by the extent and the rapidity of the movement of State banks for conversion. It is also probable that the authorities believed that the resulting dispro- portion would finally be unimportant. The Comp- troller favored the establishment of an effective system of central redemption of national bank- notes, and believed that it would materially curtail the issue and destroy the interest of many banks in having a large circulation. A movement for setting such a system on foot by means of assorting-houses in New York, Boston, and Philadelphia was then in progress, with the approval of the Secretary, andits effect might very well have been counted on as likely to make the original allotment of the right ' The quota for every State, if $300,000,000 of circulation were ap- portioned according to the Act of Congress, is shown in Cong. Docs. , 1865-66, 7 House Exec, No. 33. The amount issued to banks up to October i, 1866, in the aggregate $292,672,000, is given for every State in the Comptroller's report for that year. Comparison shows : Quota. Issued. Six New England States $45-5 m'ns $103. sm'ns Five Middle States 94.9 124.2 Ohio, Indiana, Minnesota 28.3 30.7 Illinois, Michigan, Wisconsin, Iowa, ) „_ _ .0 „ Missouri, Kansas. i Kentucky, Tennessee, Arkansas 22. 3.6 Nine South Atlantic and Gulf States . 66.2 6.9 1/2 CHAPTERS ON BANKING. of issue, in part at least, merely provisional. More- over, the expectation of an early resumption of specie payments was general in the spring and summer of 1865, and was strongly encouraged by the Secretary, who was then well supported by public opinion, and it may easily have been supposed that the bank circulation would everywhere find its proper level when specie payments should have removed the necessity for any limit of the total amount of bank- notes. It may also have been thought that the agricultural states of the South and West would not be able to use their quota of the right of circulation without a good deal of delay, and that the relief of resumption would be early enough to meet their needs. Considerations of this kind were no doubt strengthened by the fact that to limit the circulation of banks in the Eastern and Middle States to the proportion required by Congress would cause a heavy reduction in the bank circulation enjoyed by those States for many years, and probably of their banking capital as well. As early as November, 1866, notes had been issued to nearly the amount of $300,CXX),C)00 allowed by law, and complaints began to be heard, especially in the West, of the difificulty of organizing national banks, without the right of issue, in sparsely settled States. The withdrawal of any part of the circula- tion already issued to banks in the Eastern and Middle States was strongly opposed ; any increase of the aggregate issue was also objected to, as mul- tiplying the difficulties of specie resumption, and for several sessions all attempts to cure the difficulty NATIONAL BANKS OF THE UNITED STATES. 1 73 proved fruitless. In 1868 banks opened in the West were paying a premium for the notes of banks failing or withdrawing circulation, as the surrender of the notes at the Treasury enabled them to secure the abandoned right of issue.' In 1870 a chance was of- fered for the increase of bank-notes without increase of the aggregate paper currency of the country, by the contemplated payment of certain obligations of the Treasury hitherto used by the banks as a part of their reserves, for which legal-tender notes would now have to be substituted and thus withdrawn from circulation. Congress therefore seized the opportu- nity of extending the aggregate limit of notes for circulation, and authorized $54,000,000 to Efforts to be apportioned among States having less apportion than their due proportion. It further re- **" "ssues, quired that, after this increase of note circulation should have been effected, a redistribution of the right of issue should be made, by the withdrawal, to the extent of $25,000,000, from States having more than their due proportion, and by the apportion- ment of the' same among States having less. The limit for each bank thereafter organized was reduced to half a million dollars, and provision was even made for allowing the removal of existing banks to States having less than their due proportion of note circulation. By the end of 1873 the new limit of $354,000,000 was nearly filled ; and finding itself impelled to legis- ' Globe, 1867-68, p. 3187. In 1872 the rate paid for notes of banks closing or insolvent was said to be " from four to six per cent." — Comptroller's Report, 1872, p. 74. 174 CHAPTERS ON BANKING. late upon the currency by the financial revulsion of that year, Congress after painful debate elaborated the Compromise Act of June, 1874, in which pro- vision was made for the immediate withdrawal of circulation from States having an excess and its dis- tribution among banks in States having a deficiency, as fast as application should be made by the latter, to the extent of $55,000,000, including the $25,000,000 already provided for. Arrangements for carrying this act into execution, however, had hardly been made, when this series of crude and futile measures ended by the ^^^ brought to an abrupt close, by the Resumption hasty passage of the act of January, 1875, ' 75,' £qj. ^Yie resumption of specie payments, This act fortunately swept away all the provisions limiting and apportioning the aggregate amount of bank-notes to be authorized, as well as those calling for the withdrawal and redistribution of issues al- ready authorized, and thus established the national banks for the first time on the basis of freedom, required by the theory of the original measure. N« further change was needed to adapt the system to specie payments, its details having been arranged at the outset so as to admit of easy translation into terms of specie. In its regulation of the discount and deposit busi- ness of the national banks, the law does not follow the example of some previous legislation, by fixing a limit to the amount of securities to be held by any bank,' ' See e. g. Massachusetts General Statutes of i860, c. 57, § 25 ; New York Revised Statutes of 1859, ii., 518 ; Maine Revised Statutes of 1857, ch. 47, § 19. NATIONAL BANKS OF THE UNITED STATES. 1 75 but simply prescribes a minimum reserve to be held for the protection of the liability for deposits. For banks in the " reserve cities," named in Provisions as the original act of Congress or provided to reserve, for by later legislation,' the reserve must be twenty-five per cent, of the deposits ; for all other banks, fifteen per cent. The provisions for deter- mining what shall be counted as reserve are, how- ever, less simple. The general requirement is that the reserve shall be " lawful money," or in other words specie or legal-tender notes of the United States, so long as a paper legal tender exists. But Clearing-House certificates, which represent lawful money specially deposited for the purposes of the Clearing-House association, of which the bank own- ing them may be a member, and the cash reserve of five per cent, of its circulation, which every bank is re- quired to keep in the Treasury, are also to be counted as a part of the reserve against deposits. And it is further provided that, for any bank in a reserve city one half of its reserve may consist of cash deposits in the city of New York, or in any other " central reserve city,"' and for any bank outside of 'The reserve cities are Boston, Albany, New York, Brooklyn, Philadelphia, Pittsburg, Baltimore, Washington, New Orleans, Louis- ville, Cincinnati, Cleveland, Detroit, Indianapolis, Chicago, Milwau- kee, St. Paul, Minneapolis, St. Louis, Kansas City, St. Joseph, Omaha, San Francisco, Savannah, Houston, Des Moines, Lincoln, and Portland. The list included Leavenworth, until the passage of the act of March 1 , 1872. Any city having 50,000 inhabitants can now be made a reserve city, upon application made by three fourths of the national banks established in it. 24 Statutes at Large, 559. "^ By an act of 1887, a city having 200,000 inhabitants can be made « central reserve city, upon application made by three fourths of the 176 CHAPTERS ON BANKING. the reserve cities three fifths of its reserve may in like manner consist of deposits with banks in those cities. The permission thus given, to count as cash these deposits, which are, in fact, only demands for cash, has a marked effect upon the composition of the reserve held by the banks as an aggregate, and there- fore upon the strength of the whole mass of banks at any given moment. If we take the returns of the national banks for September 7, 1899, we find their deposits amounting in the aggregate to 3,031.5 mil- lions of dollars, requiring a reserve of 630.8 millions. They are returned as holding 890.5 millions of reserve in all, and were, therefore, on the average, far above the legal minimum. But this great ap- parent reserve was composed as follows : Specie $338.6 millions. Other lawful money . . . 127.8 " Redemption fund . ... 10. i " Due from agents 414.1 " Total $890.6 Of actual cash, then, the banks of the country at this date held but 466.4 millions, much less than the amount of reserve required for their liabilities, — the remaining sum, which apparently made their con- dition remarkably strong, consisting chiefly of debts due from one bank to another. The ability of the mass of banks, therefore, to meet the pressure of a national banks established in it. 24 Statutes at Large, 559. In December, 1899, the central reserve cities were New York, Chicago, and St. Louis. NATIONAL BANKS OP THE UNITED STATES. 1 77 financial crisis was dependent on the ability of the debtor banks, to pay upon demand the sums depos- ited with them and relied upon by the ^ ^ Concentration others as a part of their reserve, or in other of risks at words, on the ability of the banks of New ^^ York City to meet their demand liabilities. The reserve of those banks, however, on which all the others rested, was but little above the legal mini- mum at the date named, and sometimes under similar conditions has been below that point, so that with an apparently high reserve for the country at large, there was such weakness at the central and ' most exposed point as to impair seriously the value of this precaution.' The relation of the New York banks to the other banks of the country, as the depository of their reserves," is plainly quite analogous to that of the Bank of England as the depository of the joint-stock ' The reserve September 7, 1899, was divided betvi^een city and country, and classified as follows, in millions : New York City . Classification of Reserve. • Reserve Reserve Legal Ten- 5 p^ r c^ t DuefrOTK required, held. Specie, der.^ etc. fund, agents. $176.9 $178.3 $140.7 $36.9 $ .8 $ — Other Res. cities . 263.3 307-2 113. 7 51.5 1.9 140.1 Country . . . 190.6 405. 84.2 39.3 7.5 274. Totals . . . $630.8 $890.5 $338.6 $127.7 $10.2 $414-1 The published reports make it probable, although not certain, that in the middle of October, 1873, when the reserves of the New York banks had fallen to less than eleven per cent, of their liabilities, and payments had been generally suspended, the reserves of the rest of the country were above the line required by law. ^ The central position of New York is not seriously affected by the converi biiof Chicago and St. Louis into central reserve cities, under the ac ^ ' /. 178 CHAPTERS ON BANKING. and private banks of London, and the effects seen in the weakening of reserves and the concentration of risks are the same in both cases.' As regards the national banks, the tendency to centralize the re- serves, favored by the law, is heightened by the practice, long established among the New York banks and also existing elsewhere, of inviting de- posits from country banks by the payment of interest. The opportunity of converting a barren reserve into an interest-bearing resource, and yet counting it as reserve, has always been attractive, and has caused an habitual transfer from the country banks to those of New York, sometimes estimated at not far from $80,000,000. The employment given to the funds thus held subject to call is a topic of serious interest on which it is impossible to enter here. For the enforcement of the provisions as to reserve, the law provides that whenever the reserve of any Enforcement ^ank falls bclow the prescribed limit, the of provisions bank shall neither "increase its liabilities or reserve. ^^ making any new loans or discounts," otherwise than by the purchase of sight bills of exchange, nor shall it make any dividend, until the reserve has been restored to its due proportion. The Comptroller of the Currency is also authorized to no- tify any bank whose reserve is insufficient that it must 'See Bagehot's Lombard Street, pp. 160-173; Dun's British Banking Statistics, p. 129. ^ This practice was condemned by resolution by the banks of the New York Clearing House in 1857, 1873, and 1884. See Banker's Magazine, April, 1858, p. 822; Commercial and Financial Chronicle, November, 1873, p. 651 ; Banker's Magazine, August, 1884, p. 129. Resolutions alone, however, have never proved to be a cure. NATIONAL BANKS OF THE UNITED STATES. 1 79 be made good, and in case of failure to comply within thirty days, he may, with the concurrence of the Secretary of the Treasury, appoint a receiver to wind up the business of the bank. Although the ample discretion thus given to the Comptroller has been used with moderation,' the prohibition of further discounts, when the reserve falls below a given point, makes a hard and fast line, the approach to which never fails to cause uneasiness, and in some condi- tions of affairs is viewed with great alarm. In any actual crisis, the declaration that, in a given contin- gency like this, the usual accommodation of the public must stop and liquidation must begin, is the surest means of increasing the pressure for loans and of thus converting a crisis into a panic. For ease in operation and greater safety, some more elastic pro- vision is needed, which shall insure a sufficiently high average of reserve and yet threaten no harsh break in operations at a given point. The Bank of Eng- land has in its hands a superior instrument for this purpose in a sliding scale of discount, by which it can encourage or discourage borrowers and thus deplete or replenish its reserve, without ceasing its operations altogether at any point yet reached. This expedient, however, is less applicable in the United States, partly because of a traditional prejudice against the adjustment of rates of discount by the demand in the market, widely prevalent among our pdople, and partly because Congress has been obliged by probable ' See the course pursued in September and October, 1873, when the reserve of the banks of New York were far below the line, and both city and country banks had suspended payment. l8o CHAPTERS ON BANKING. lack of authority to forego the establishment of a general law respecting interest, and to recognize in every State the rates there prescribed by the local legislature. A suggestion of an elastic limit is con- tained in certain provisions of the German bank law, taxing without prohibiting all issue of notes beyond a prescribed line ; ' but this expedient, devised long after the establishment of the national banking system by Congress, has not yet had such trial as to test its capabilities thoroughly. Much controversy has been excited by the ques- tion as to the rate of profits which the national banks have obtained from their right of issuing exuaordinary notcs sccurcd by 3. deposit of bonds. It profits from foUows from what has been shown in the circulation, , , , . . . precedmg chapters, that their case is in no respect different as regards profits from that of banks which use their credit in the form of deposits, in order to make investments in interest-bearing secu- rities. The notion often entertained, that the national banks have some peculiar opportunity of making a double profit, " by receiving both interest earned by their bonds, and interest earned by the loan of the notes issued upon the bonds," overlooks the fact that every bank uses, as its means for ob- taining securities, its capital and whatever credit it can employ in addition.' Every bank, then, as a ' See below, chapter xii. Also Jevons, Money and the Mechanism of Exchange, p. 226. ' As a great number of state banks of issue were converted into national banks, a comparison of the accounts of any such bank, before its conversion and after, is easily made, and will show that the deposit of a part of its property at Washington gave it no source of profit NATIONAL BANKS OF THE UNITED STATES. l8l consequence of its use of its credit in any form, must receive interest earned by the investment of its capi- tal and also interest earned by what we may call the investment of its credit ; and the fact that the national banks, like others, have the opportunity for making credit as well as capital yield a profit, neither springs from the system on which their notes are secured, nor depends upon it. Indeed, it must be manifest that their deposits yield them a profit in precisely the same way as their notes, and usually much greater in amount. The conclusive practical answer to the idea of a supposed extraordinary profit is to be found, however, in the conduct of the banks themselves, especially since the passage of ^^^^ the act of 1874, already referred to. That reconciled act, recognizing the desire of many banks ^'*'' *^*'^*^" to reduce their circulation and secure possession of their bonds, provided that any bank might deposit " lawful money " with the Treasurer of the United States to enable him to redeem its notes, and there- upon withdraw/r(? tanto the bonds deposited, provided the amount of its bonds left in deposit were not reduced below $50,000.' Several important national banks had never chosen to issue notes, although re- quired by the law to maintain a deposit of bonds ; which it did not enjoy before. The actual profit earned by the banks from their right of circulation was estimated by the Comptroller of the Currency in 1883 not to exceed $46 on $90,000 of notes. See Comp- troller's Report, 1883, p. 13. ' For an objection made at the Treasury to the working of this provision, &&& Finance Report, 1880, p. 331 ; 1881, p. 221. Forthe con- nection between this provision and the "bank panic" of March, 1881, see Comptroller's Report for 1881, p. 39 ; Atlantic Monthly, February, 1882, p. 195. 1 82 CHAPTERS ON BANKING. under this provision a considerable number of others reduced their notes to the $45,000 which the required minimum deposit of bonds would support.' The withdrawals of notes continued for several years, and although new banks were formed and the note circulation increased in some sections, under the authority for free banking given by the Resumption Act, the total banking capital and note circulation alike declined, until the summer of 1878. Both in- creased after the resumption of specie payments, but the circulation of bank-notes, although open to all banks, and to any amount, never reached its old point. This course of things was entirely inconsist- ent with the existence of large profits, arising from the issue of notes in the method prescribed by the national system. It is impossible to believe that, if such profits were reaped, existing banks would have neglected or renounced the opportunity of making them, or that the multitude of private bankers, and of State banks would have failed to seize uppn an opportunity which was free to all,' by organizing under the national system. That a good rate of profit has been made by the national banks upon their general busi- The business . t^ • «i » in general ness IS uo doubt true. Especially during '^"fit"bi'i'' ^^^ period of irredeemable paper and of fluctuating credit, their harvest was large. The law has from the first required of every bank ' See in Comptrollef' s Report, 1899, P- 3^5. a list of national banks without circulation. ° Until the spring of 1881, two thirds of the bonds held by the banks to secure their circulation bore interest at not less than five per cent, and a considerable amount at six per cent. NATIONAL BANKS OF THE UNITED STATES. 1 83 that a part of its profits should be reserved, until a surplus amounting to one fifth of the capital should be accumulated. A solid foundation was laid for this surplus in many cases, by the sale at a high premium of the gold held by State banks before their reorganization, and retained by them until the adoption of the paper system had plainly become definitive. The banks had thus on the average accumulated the surplus required by law before the end of 1869, since which time their accumulation has increased or diminished, as the times were prosper- ous or the reverse, the aggregate surplus varying from 26.6 per cent, of the capital in October, 1875, to 25 per cent, in December, 1878, and again to above 40 per cent, in March, 1899.' The annual dividends paid from earnings after the reservation for surplus, also stood at their highest point during the period of most rapid accumulation, and have varied from a maximum of 10.58 per cent, of the capital to a mini- mum of d."] per cent. Without doubt this rate of dividends shows a prosperous business, but how far the prosperity is due to privileges enjoyed under the national system, may be judged from the approach which State banks have made to national banks in their earning capacity." The highest point reached by the circulation of the ' For many years the largest surplus held has belonged to a bank which issues no notes, but has accumulated many times the amount of its capital. It is true in general that the banks of largest surplus have not owed it to their issue of notes. " In New York, where there are about 200 banks organized under the laws of the State, the percentage of surplus and undivided profits 1 84 CHAPTERS ON BANKING. national banks after the resumption of specie pay. ments was at the end of 1881, when it stood above $325,ooo,CXX). From that point, however, its decline was rapid, with hardly a break in the continuous fall, until at the end of 1890 it was little over $123,- 000,000. The proximate cause of this re- Continuous ,11,. r , . ■ decline of markable disappearance of what was origi- the bank nally the chief feature of the system, was of circulation. ^ "^ course the steady payment of the national debt and rise of the national credit, and the natural disinclination of banks to hold, on any considerable scale, investments which could no longer be -relied upon to yield the holder so much as 2^ per cent. The extraordinary financial conditions of 1891 and 1892, culminating in the crisis, both commercial and monetary, of 1893, increased the return to the holder of bonds to three per cent., and the bank circulation, for this reason and others, rose to nearly $183,000,000 in October, 1893. In the disturbed years which followed the issue fell slightly, then rose to nearly $211,000,000 at the end of 1896, with a further increase of the earning power of the investment in bonds, and during the three years following fluctuated between $191,000,000 and to capital under the two systems respectively was in September, 1879, 18S2, 1884, i88g, and 1899 as follows : National banks. State banks, September, 1879 ... .45 ... .37 1882 ... .58 ... .51 1884 ... .57 ... .53 " 1889 ... .86 ... .68 " 1899 . . . i.oi ... .94 See Reports of State Banking DepartvientsxA Comptroller^ s Report. NATIONAL BANKS OF THE UNITED STATES. iSg $215,000,000.' The experience . of these years proved that the expansion or diminution of national- bank currency was powerfully affected by an influ- ence quite distinct from the need of bank currency for use by the public. Mr. Chase, when advocating the adoption of the national system, had foreseen the possibility that payment of the public debt might compel " a future generation " to find for the bank-notes some security other than United States bonds,' but it probably did not occur to him or to the other founders of the system that -the rise of public credit by itself might cause the curtailment and even threaten the extinguishment of the note- issue. These unexpected results of the bond requirement were of course moderated by the wise provision of the act of 1874, referred to above, making $50,000 the maximum amount of bonds which a national bank is compelled to deposit. But even with this material modification the bond requirement has been a serious element in determining the geo- graphical distribution of the national banks. The causes which to a considerable extent excluded many States in the South and West from taking any im- portant share in the system down to the passage of the Resumption Act in 1875 have already been stated. In the years of depression which followed, ending with the actual resumption in 1879, these sections suffered serious losses in national-bank cap- ' See a table giving the investment value of United States bonds in the Report of the Comptroller of the Currency, 1899, p. 411. " Finance Report, 1862, p. 20. 1 86 CHAPTERS ON BANKING. ital and circulation, losing far more than their pro- portion of the total diminution in the United States. The great revival of business which began in 1879, and the improved political and industrial condition of the South, increased the need of banking facilities and made it easier to provide the necessary capital, but any considerable expansion of national banking in the South, and West, except in a few of the wealthy and rapidly growing States of the Middle West, was then checked by the rising value of gov- ernment securities and the consequent low return afforded by them. The distribution of the national banks therefore underwent little change. The sys- tem continued to thrive in the great belt of States north of the Potomac and Ohio rivers, finding in- creasing difficulty as it crossed the Mississippi. The sparsely settled States, having from the nature of the case the strongest need of banks of issue, still found themselves practically cut off from the ad- vantages of the national system. Some relief from this difficulty might have been obtained perhaps from the establishment of branches by banks in urban communities, but this practice is not now permitted by the statutes of the United States,' and, although it has always existed in this country to some extent, as in the cases of the first and second Banks of the United States and among State banks under the laws of some States, there ' For the purposes of the Columbian Exposition of 1893 a special act of Congress was passed authorizing for two years the existence of branch offices of Chicago banks on the Exhibition grounds. — gy Statutes at Large, 33. NATIONAL BANKS OF THE UNITED STATES. 1 87 has been a strong disinclination to introduce it in the national-banking system. In the meanwhile, the States and "sections which found the national-bank system ill adapted by its requirements to their condition sought relief in many cases by an extraordinary development of banking under State laws. Banks with as small a capital as $10,000, and in Kansas, Nebraska, and the Dakotas only $5000, have organized by the hundred, having no power of note issue, of course, but in many cases with singular looseness of control by the State authority. By these agencies the States in question have secured a rapid increase of bank facilities, with some neglect of provisions for security. Their needs of tangible currency for use are necessarily variable, and to satisfy them the movement of large masses of government or bank notes from the States farther east is annually re- quired. But the inelastic quality of issues whose volume depends in great degree upon the attractive- ness of an investment in bonds, makes this annual flow of currency a disturbing event, and not seldom the cause of serious disturbances in the money market. These defects in the national system were widely recognized, and at length, in the act of o ' => ' Changes in March, 13, 1900, some steps were taken the system with the design to remedy in some March 13, measure the evils complained of. The minimum capital required for the organization 1 88 CHAPTERS ON BANKING. of a national bank in places with a population of three thousand or less was reduced from $50,000 to $25,000, in the hope of bringing the system within the reach of the poorer and more sparsely settled parts of the country. This reduction in the required capital may be expected to increase somewhat the number of national banks, partly through the forma- tion of new banks, and partly from the entrance of State banks into the system.' The present minimum is not, however, low enough to answer the purpose in view, since a majority of the State banks in those Western communities which are small enough to come within this provision of the act, have an even smaller capital than $25,000,' and even if the reduc- tion of required capital does lead to an important extension of the national system, it is a serious question whether on other grounds this is not a move in the wrong direction. In the crisis of 1893 the failure of small State banks in the Central and Western States were strikingly numerous, and the danger of failure in the future is not very greatly reduced with their entrance into the national system. Few persons in very small places have the necessary experience to conduct a banking business, and the proper distribution of risks among a wide circle of customers can seldom be secured. It is also clear that the addition to the system of a large number of small banks renders much more difficult the task ' From March 14 to October 31, 1900, 249 national banks with less than $50,000 capital were organized. Of, these 132 had been State banks. ^ Quarterly yournal of Economics, xii., pp. 28-35. NATIONAL BANKS OF THE UNITED STATES. 1 89 of adequate examination and supervision, which has been performed in the past with results highly favorable to the general security and prestige of the national-banking system. The provisions of the law, regulating the issue of notes, were so changed as to remove in some meas- ure the difficulties arising from the high price of government bonds. By the act of 1900 banks were allowed to issue notes to the amount of the paid-in capital and to one hundred per cent, of the market value of the bonds deposited, but not exceeding one hundred per cent, of their par value. The act authorized the refunding of the greater part of the funded debt into two per cent, bonds, payable after thirty years, in exchange for several former issues paying higher rates of interest but all redeemable before 1909. Upon notes secured by the new bonds the tax on circulation was reduced from one to one half of one per cent. For at least another genera- tion, then, an ample basis of bonds to secure cir- culation has been provided, and for the time being at any rate the profit to be gained from the issue of notes has been slightly increased. Our system of note-issue was not essentially altered by the act of 1900. The aggregate circulation still depends proximately upon the current price of bonds and not upon the demand of the community for that form of bank currency. Within less than four months after the passage of the law the note-issue, which had remained almost stationary for more than a year, rose from $214,000,000 to $274,000,000. Real elasticity, whether for contraction or expan- igo CHAPTERS ON BANKING. sion, is still wanting. It follows therefore, that, while the national-banking system has created an issue of notes of undoubted solidity and of equal value in every part of the Union, as the founders of the system expected, it has not yet created a system of banking adapted to the wants of all sections or tending to unify their interests. The national sys- tem is, no doubt, the foundation on which any reorganization of the paper currency of the United States ought to rest, but as the end of the century draws near it is still only a foundation, with the superstructure scarcely more advanced than it was a generation ago. CHAPTER XL THE BANK OF ENGLAND. The national banks of the United States, it has been seen, rest upon the simple principle of securing the solvency of bank-notes by a pledge of salable property. The Bank of England, although originally a bank of the simplest type, like the Bank of France, issues notes which, since the adoption of the act of 1844, are secured by a mixture of securities and specie, upon a system which presents an Modified type interesting and important variation upon ofsecured that detailed in the last chapter. Dis- '""'■ regarding its chronological relation, therefore, to the cases already discussed, we take it up as coming in the third place in a natural order of classification. The Bank of England owes its origin to the finan- cial straits to which the government of William and Mary found itself reduced in carrying on origin of the the war with Louis the Fourteenth. The Bank of revenues of the kingdom were small, the "'^ *° " public credit weak, and the very title of the dynasty unsettled. The growing wealth and business of the country had caused private banking houses to spring up. The paper given by these houses to their credi- tors had acquired a circulation, limited indeed, but 191 192 CHAPTERS ON BANKING. sufficient to show its convenience, and projects for the estabHshment of a public institution on the scale, if not on the model, of the great continental banks, had been discussed for many years.' Under these circumstances, as an expedient for raising a million sterling, for which no other resource could be found, the government in 1694 adopted the scheme pro- posed by WiUiam Paterson, a Scotch adventurer, and proposed to Parliament that a loan should be offered for public subscription and made attractive by a grant of incorporation, with banking privileges to be enjoyed by the subscribers and their succes- sors. The measure seems to have been contested chiefly, although not wholly, on party grounds, and was passed after a severe struggle, and thus the Bank of England came into existence as a Whig corporation.' The act of 1694 provided for a loan to the govern- ment of ;^I,200,CXXD, bearing interest at eight per ' McLeod, Theory and Practice of Banking, i., p. 210, prints a ■'goldsmith's note" which is still preserved, dated 1684. And see Macaulay's History, vii., p. 134. A curious pamphlet of 1676(7) on the introduction of private banking in London is given in fac- simile by Martin in The Grasshopper (history of Martin & Co's bank), London, 1892, p. 285, and was also reprinted in the Quarterly Jour- nal of Economics, January, 1888. And see Ibid., July, 1888, p. 482, for notes of schemes for a national bank, broached at various dates in the seventeenth century. ' The fiscal character of the measure is well shown by its title : "An Act for granting to their Majesties several Rates and Duties , . . for securing certain Recompenses and Advantages in the said Act mentioned, to such Persons as shall voluntarily advance the sum of fifteen hundred thousand Pounds towards carrying on the War against France." 5 William and Mary, ch. 20. For its political bearing, see Macaulay's History, vii., p. 147, THE BANK OF ENGLAND. I93 cent., and incorporated the subscribers, with this amount of nominal capital, as the Governor and Com- pany of the Bank of England, — a title which has never been changed. The corporation was empow ered to deal in coin, bullion, and exchange, and to lend upon security, but was forbidden to deal in merchandise in any form. It could not borrow nor give security by bill, bond, or agreement, for an amount exceeding its capital ; no provision was made for the transfer of its bills, " obligatory or of credit," except by Indopssment ; nor was any mo- nopoly created in its favor. In this form the char- ter of the Bank gave little promise of its future importance. Three years later, however, the neces- sities of the government and the embarrassments of the Bank, which had been obliged to suspend pay- ment in 1696, led to a revision of the charter, in which the outlines of the great structure begin to appear.' The issue of notes payable to bearer on demand was authorized, thus laying the foundation for a true bank-note circulation' ; the ^^^^ ^^ monopoly of corporate organization was established granted by providing that, during the >ni697. continuance of the charter, no other bank or corpora- tion in the nature of a bank should be allowed in the kingdom; and, on the other hand, the capital was doubled by a fresh advance from the stock- ' 8 and 9 William III. , ch. 20. ^ The notes issued under the act of 1694 appear to have borne interest, and being made to order, could have had but a limited circulation. No notes of less than ;^20 were issued until in 1759 the Bank began the issue of notes for £15 and ;^io. Anderson's Origin *f Commerce, ii., p. 413. 194 CHAPTERS ON BANKING. holders to the government, and the interest payable by the latter was reduced to six per cent. From this point the growth of the Bank and the increase of its influence were rapid. The corporation became the chief depository of the public money, and the agent of the Treasury in many financial operations. In 1720 it carried on a mad struggle with the South Sea Company for the control of the business of refunding the national debt, and man- aged, although with difificulty, to save its own credit in the crisis which destroyed its rival. Further loans to the government and additions to the capital of the Bank were made in quick succession. In 1722 its capital stood at nearly nine millions, and it was also able to establish from its profits the surplus fund now called " the Rest," and thus to save its dividends from serious fluctuation. In 1782 the capi- tal had risen to more than eleven millions and a half, and in 18 16 it had risen to ;£^I4,553,CXX3, at which figure it has stood ever since. Of the loans to the government, which had risen in nearly the same proportion as the capital, one fourth was repaid in 1834, reducing the total to ;£'ii,oiS,ioo, which is its present amount. By the year 1750 the government had succeeded in reducing the interest on most of its debt to the Bank to three per cent., and it has since used the opportunity afforded by the periodical necessity for a renewal of the charter, to lessen still more the burden of its interest, by requiring from the Bank an annual bonus and other pecuniary con- cessions, in consideration of the extension of its monopoly. THE BANK OF ENGLAND. ig5 This monopoly, dating, as has just been said, from the act of 1697, and confirmed by the act of 1707, was further defined by the act of 1742 ' as the right of " exclusive banking," the true intent being, as is declared in the latter year, that " no other Bank shall be erected, established or allowed by Parliament, and that it shall not be lawful for any Body Politick or Corporate whatsoever, erected or to be erected, or for any other Persons whatsoever, united or to be united, in Covenants or Partnership, exceeding the number of six Persons, in that Part of Great Britain called England, to borrow, owe, or take up, any Sum or Sums of Money on their Bills or Notes, payable at Demand, or at any less Time than six Months from the borrowing thereof, during the Continuance of such said Privilege to the said Governor and. Company." It is clear from this language that Par- liament understood by " banking " only 1 - e 111 1 ^^. Meaning the issue of notes, and that the exclusive of the mo- privilege of the Bank did not prevent the nppoiyof f ° \ "banking." issue of such notes by partnerships having only six partners or less, nor the performance of the other banking functions by companies or partner- ships of a greater number of partners. Notes con- tinued to be issued by the London private banking houses, some of which were of longer standing than the Bank of England itself, and by country bankers, of whom the number increased rapidly in the second half of the eighteenth century. The London bankers, it is true, began not far from the year 1772 to discontinue the issue of ' 6 Anne, ch. 22 ; 15 George II., ch. 13. 196 CHAPTERS ON BANKING. notes,' finding the check system identical in its ad- vantages and more convenient in practice ; but their right of issue was merely in abeyance, until it was formally taken away in 1844. The country bankers, however, with many vicissitudes of fortune, have continued the issue of notes to this day, subject to the restrictions contained in the Bank Charter Act of 1844, presently to be described. That the Bank monopoly in its strict interpretation also permitted the exercise of all banking functions, except issue, by joint-stock banks and companies of more than six persons, had indeed been noticed, but seems to have been little considered, until the dis- cussions of 1826, which were renewed upon the revision of the charter in 1833. The growing de- mands of the country for banking facilities, and the slowness with which the Bank of England responded to these demands by the establishment of branches, caused much unsound banking by private firms, while a lingering doubt as to the meaning of the monopoly prevented the foundation of joint-stock banks with large capital. Lord Liverpool is reported as declaring in 1826, that the efiFect of the law " is to permit every description of banking, except that joint-stock which is solid and secure." The result banking made of this statc of things was that, notwith- °^* ' ' ' ■ standing the resistance of the Bank of England, an act was passed in 1 826, giving to com- panies of more than six persons the right of issuing ■ McLeod's Dictionary of Political Economy, p. 88. In his Theory and Practice of Banking, i., p. 211, Mr. McLeod says that the latest London banker's note preserved is dated 1793. THE BANK OF ENGLAND. I97 notes, when established at a greater distance than sixty-five miles from London, thus creating an im- portant exception to the monopoly hitherto enjoyed by the Bank. The act of 1833, for renewing the charter, also expressly declared that companies and partnerships, although composed of more than six persons, might carry on the business of banking in London, or within the radius, of sixty-five miles, provided they should issue no circulating notes.' This legislation was followed by a great extension of joint-stock banking. The London and West- minster Joint-Stock Bank, still one of the leading banks of deposit in England, was established the next year," and many banks of issue began business outside of the geographical limit. The extension, however, was too rapid to be sound ; the disturbed condition of business affairs for a large part of the next decade stimulated agitation ; and public opin- ion was disposed to find in a vicious note circulation the cause of the repeated commercial crises. The terms of the act renewing the charter of the Bank of England gave to the governiiient of Sir Robert Peel in 1844 an opportunity, both for re- The Bank vising the organization of the Bank, and Charter Act for putting an end to the increase of the ° ' *' issues of the joint-stock banks, and the result was the passage of the measure known as the " Bank ' 7 George IV., ch. 46 ; 3 and 4 William IV., ch. 98. ^ The London and Westminster was for many years under tha management of James W. Gilbart, author of several works on bank- ing, and owes its existence largely to his sagacity. For a shon account of its early struggles, see Gilbart, Principles and Practice oj Banking (ed. of 1873), p. 462. 198 CHAPTERS ON BANKING. Charter Act of 1844," or " Peel's Act," in which are embodied the leading provisions by which the bank- note circulation of England and Wales is now regulated." By this act, Parliament undertook to make the notes of the Bank of England secure, and to limit the issue of bank-notes of all other kinds in England and Wales. To accomplish the first of these objects the act provided for the division of the Bank into two de- separation partmcnts, the Issue Department and the of Issue and Banking Department. The former was " '°^' charged exclusively with the issue and re- demption of notes ; the latter was charged with the other functions of banking, including the ordinary business of discount and deposit ; and in all dealings with each other the two departments were made as independent as if they belonged to distinct corpora- tions. iT"or all notes issued by it the Issue Depart- ment was required to hold either government securities, or coin or bullion ; and the amount of securities which it could hold being limited by the original provision to ;£' 14,000,000, it followed that for all notes outstanding in excess of that amount it must have an equivalent in the precious metals." As ' 7 and 8 Victoria, ch. 32. For abstracts of this important act, see McCulloch, Commercial ZHciiofiary (edition of 1856), p. 84; Gilbart, Principles and Practice of Banking, p. 428 ; Fenn, Compendium of the Funds (ed. 1883), p. 77. ' The act provides that of the coin and bullion held by the Issue Department one fifth may be silver. For the reason for this provision see Hansard's Debates, May, 20, 1844, p. 1334. The Bank ceased to hold silver for this purpose in September, 1853, but temporarily exchanged $2,000,000 of gold for silver with the Bank of France in i860. Economist, Nov. 24, i860. The conditions on which silver THE BANK OF ENGLAND. 1 99 experience had shown that the ordinary uses of the country never failed to require an amount of notes higher than ;^l4,ooo,ocx5, this provision insured the presence of coin or bulHon for the redemption of all notes whose presentation for payment could be deemed morally possible, and made it unnecessary to fix any limit to the issue. The ordinary business of the Issue Department was then reduced to the auto- matic function of giving out notes for coin, or coin for notes,' to whatever extent and from whatever quarter such exchange might be required. Under this arrangement the Banking Department carries on its business of buying securities and using its credit in the form of deposit accounts, on the same general principles on which any bank of de- posit and discount is conducted. It is bound to meet all its demand liabilities in cash, and for this purpose it habitually maintains a reserve, consisting either of specie or of notes issued by the Issue De- partment, which are convertible into specie. It is bound to make its payments in gold, if so required, like other banks ; but it may make payment in notes with the consent of the payee ; and if, for the con- venience of its customers, it finds occasion to pay out a greater amount of notes than it receives in might again be held were stated by the Bank in 1881. Confirence Mondtaire Internationale, ii., p. 139. ' The Issue Department is also made an intermediary between the public and the Mint, being required to buy all gold bullion offered at 77s. gd. per standard ounce. The ounce is coined into 77s. lo^d., the difference being the estimated equivalent for a loss of interest, caused by the delay incident to the actual coining at the Mint Hankey, On Banking, p. 98. 200 CHAPTERS ON BANKING. payments made to it, or in deposits, it must procure such notes, as any other bank or any private person must, by taking an equivalent amount of gold to the Issue Department and procuring notes therefor. Indeed, so completely is the Banking Department deprived of all special facilities or privileges in deal- ing with the Issue Department, that it has often been said that, for all practical purposes, the notes might as well be issued by a public office at West- minster as by a department of the Bank itself." The second purpose of Peel's Act is accomplished by a series of provisions which prevent any increase Regulation °^ ^^^ "°*^ issues of joint-stock and pri- of country vate banks, beyond the average at which issues, ^jjgy stood for the twelve weeks preceding April 27, 1844. No bank not then engaged in the issue of notes is allowed to issue them, and no bank then existing can carry its issue beyond the limit thus fixed for it. It is provided, however, that if any bank issuing notes at the time when the act was passed shall close its business, or become bankrupt, or discontinue its issues by agreement with the Bank of England or otherwise, then the latter may add to the amount of securities held in its Issue Departr ment, or in other words to the amount of notes for ' In Ricardo's pamphlet, A Plan for a National Bank, ( Works, p. 499), it is proposed that notes should be issued to the Bank by public commissioners, holding securities and gold substantially as at present. This pamphlet, left in MS. at Ricardo's death and first published in 1824, is the first distinct proposition which we now recollect for the separation of the issue and banking departments. Public discussion of the subject seems to have begun as early as 1837. The suggestion that the separation was suggested by the New York free banking sys- tem is certainly without foundation. Old and New, viii. , 590. THE BANK OF ENGLAND. 201 which it holds securities and not coin, to the extent of two thirds of the amount of the joint-stock or private bank-notes thus withdrawn from circulation. The act thus plainly looks forward to the ultimate withdrawal of all other notes than those of the Bank of England, and to the filling of the vacant place by the latter, in a certain measure.' No new issues being permitted, every change, however brought about, diminishes the amount of country bank-notes left in use. The progress towards extinction is probably slower than was expected. Still, since 1844 the authorized country bank issue has been re- duced, by the winding up of banks or by the surren- der of the right, from ;^8,648,853 to ;^2,958,900 in March, 1900," and the Bank of England has added, under the authority of the act, to its own issues covered by securities only, until the limit has risen to ;^ 1 7,775,000. But it is plainly not the policy of this legislation that there should ever be a large circulation of bank-notes. The smallest note issued by the Bank, indeed the smallest lawfully issued by any authority since 1829, is for ;^5, a denomination too large to make its way far from cities and large towns, and of but limited use even in those places." ' For some comments on the intention of the act of 1844 in this respect, see Economist, i88g, pp. 505, 697. Some intimations of measures for ending the issue by country banks were given by Mr. Goschen in his budget speech, April 15, 1889. Hansard's Debates, p. 535. ^ The average vf eekly circulation for four weeks ending Jan. 20, igoo, of the country banks which still keep the right of issue was ^1,274,676. "The Bank issued no notes so small as £^ until 1795. Francis, History of the Bank 0/ England {Am.sr. ed.), p. no. In 1797, after 202 CHAPTERS ON BANKING. A large circulation of sovereigns, affording a solid basis of specie in the hands of the people, with a small amount of convertible notes for convenient use in the larger cash transactions, is the ideal condition tovi/ards which the uniform current of English law has been directed for nearly fifty years. In this matter Scotland with its convenient one-pound note, which has so long been safely issued, presents a striking contrast, and Scotch example has been fre- quently appealed to by those who have urged the issue of such notes by the Bank of England. But the substitution of one-pound notes for sovereigns on any large scale would change materially the practical conditions under which the Bank of England has long issued its circulation. Legislation for that purpose seems less probable than it has sometimes appeared in the past, for the current of public opinion has undergone no great change as to the point at which the lowest denomination of notes should be fixed.' To illustrate more clearly the operation of the act we will take the account of the Bank as it stood September 7, 1844, being the account on which the the suspension, it was authorized to issue notes of £1, but withdrew them after the return to specie. It made a temporary issue of them during the crisis at the end of 1825 and in 1826, but these also were withdrawn before 1829, in conformity with an act passed in 1826. The issue of £1 notes by country bankers was forbidden as early as 1777, but was permitted from 1797 to 1829. ' See A. S. Cobb, Threadneedle Street, and the Economist, Decemr ber 7, 1889. Also Journal of the Institute of Bankers, January, 1890, for a paper, by R. H. Inglis Palgrave, on the Note Circulation. Mr. Palgrave favors giving the right of issue to local banks, with proper provisions for securing notes and insuring convertibility. THE BANK OF ENGLAND. 203 act first took effect. The situation of the Bank at that date ' was as follows : Liabilitii ?J, Resources. Capital . . . ;iCi4.6 m'ns Government Debt . . /ll. m'ns Rest .... 3.6 " * ' Securities 17.6 * Public Deposits 3.6 " Other Securities . . . 7.8 " Other 8.6 " Coin and Bullion . . 15.3 " Seven-day Bills I. • Notes . . . 20.2 51.6 51.6 As no attempt was made by law to protect by preference any special class of liabilities, before the passage of Peel's Act, it follows that the resources set down in this statement were held equally for notes and deposits ; and it is at least conceivable that there might be so strong a demand for coin by depositors or noteholders, or both, as to exhaust the reserve, while a large issue of notes was still out- standing, in which case payment of the notes must be suspended. Thus in the extreme panic of De- cember, 1825, the coin and bullion of the Bank was reduced to ^1,027,000 and suspension was imminent, while notes were still outstanding to the amount of ^23,359,840. Such a possibility became still more , serious after the act of 1833 declared that the notes of the Bank, so long as they continued to be re- deemed on presentation, should be a legal tender in ' In the Bank of England statements, Rest {i. e. the balance of the account) means the net profits on hand ; Other Deposits comprise individual deposits and deposits by banks ; Seven-day Bills are post- notes, still issued to a small amount ; Government Debt is the loan made by the Bank to the government, in order to secure its charter ; and Other Securities include loans and advances to customers upon security. 204 CHAPTERS ON BANKING. England and Wales in all payments except those at the Bank itself. It was, therefore, an important object, in separating the departments, to security of insure the payment of the notes in any issues under event by pledging for that purpose a sufifi- cient amount of securities and of specie.' How this result was accomplished is easily seen in the form of statement of the Bank account, adopted upon the passage of the act, and ever since adhered to : Issue Department. Xotes ... ;^20.2 m'ns Government debt . . . ^il. m'ns Other government securities 3. " Coin and bullion . . . 6.2 " Capital . . . ;^I4.6 Rest .... 3-6 Public deposits • 3-6 Other 8.6 Seven-day bills . I. jC20.2 * jC^O.S" Banking Department. i Government securities ;^l4.6m'n3 Other securities ... 7.8 " Notes « Coin and bullion . . g. " 31.4 " 31.4 " ' Whether in case of the insolvency of the Bank the securities and specie in the Issue Department would be held for the preferred claim of the notes, or would become a part of the general assets, to be divided among all the creditors, is not explicitly declared by the act and has been doubted. But it has no doubt, been the common under- standing, from the first, that the devotion of the resources of the Issue Department to' the payment of its notes is indefeasible. See Parlia- mentary Documents, 1857-58, v., p. 427. " The above shows the effect of the separation of accounts taken by Itself. For convenience the Banking Department also transferred 8.2 millions of coin and bullion to the Issue Department and received notes therefor, so that in the published accounts the banking reserve was 8.2 millions of notes and .8 million of coin, and both the notes and the coin and bullion in the account of the Issue Department were raised by 8.2 millions. THE BANK OF ENGLAND. 205 The thoroughness of the provision here made fof the security of the bank-note is attested by the fact, that since the passage of the act there has never been a moment when the convertibility of the note has been open to doubt. The lowest point to which the notes in actual circulation outside of the Bank have ever been reduced was a little below ;£" 17,000,0x30 in December, 1848, and this left in the vaults of the Issue Department nearly ;^ 14,000,000 in specie, with no demand for it on the part of the public. Indeed, the Bank of England note, under the act of 1844, has become little more than a warrant entitling the holder to so much gold actually lying in the Bank vaults, and thus the whole question as to the sol- vency of the paper currency has been removed from the field of debate, where it had been agitated for so many years. The Issue Department gains nothing from an increase of the circulation, and can lose nothing by its diminution. The whole problem as to the bank-note is reduced to a mere inquiry as to the preference of the public for coin or for a certifi- cate calling for coin. It is evident also that to the Banking Department it is of no consequence, except as regards conven- ience, whether it uses notes or gold in its separation of business. If it prefers gold it has only to departments send in for redemption such notes as it *^ """'' holds or receives in the course of its business ; if it prefers notes it has only to send in its gold for exchange. Its reserve is in fact composed like that of any other bank, of gold or of notes which are good for gold, or of both ; and this reserve it must 206 CHAPTERS ON BANKING. procure, must maintain, and in case of need must replenish, as any other bank must, by properly ad- justing its purchases of securities. Its profits would obviously be the same as now if it discontinued the use of notes altogether, except so far as its business might be affected by the mere difference of conven- ience to its customers. Indeed, nearly the whole income of the Bank of England, beyond the simple return on the investment of its capital, is derived from the use of its credit in the form of deposits in the Banking Department. So far as concerns the Issue Department, the only possible source of in- come open to it under the act of 1844 is limited to the interest received on the government debt and securities held by it, now amounting, as has been said to ;£'i 7,775,000. This interest is offset, how- ever, by payments to the government and by other charges, to such an extent that the question has been raised seriously, whether it would not be for the advantage of the stockholders if the Bank were relieved from all connection with the issue of notes.' Complete as is the separation between the de- partments in theory, and generally even Suspension . , . , 111 of the limit m fact, it has nevertheless happened ofuncov- several times, under the exceptional ered issue. c <• conditions of a financial crisis, that the embarrassments of the Banking Department have ' The annual profit from the Issue Department is estimated by Mr. Hankey at about ;£'ioo,ooo. Hankey On Banking (3d ed.), p. 63. In the Economist, April 17, 1875, is a careful calculation by Mr. R. H. Inglis Palgrave, showing that the government would probably be a loser, if it were to substitute its own notes for the issue now carried on by the Bank of England and the country banks. THE BANK OF ENGLAND. 20/ affected the issue of notes, in a manner not originally contemplated by the framers of the act. On three occasions it has been found necessary to disregard that provision which hmits the securities held by the Issue Department, and more than once besides this extreme measure has been escaped with difKculty.' In order to understand the real significance of these occurrences, it is necessary to take into consideration'' the circumstances under which the Bank of England holds its banking reserve. The most striking fact in the situation of the Bank of England is that the Bank is the centre of a great system of joint-stock and private banks, whose aggregate business and liabilities are many times greater than its own, and that to this system of banks are confided the financial affairs of the city which may almost be said to be the Bank as the Clearing House of the world. It is at «'<="« of all events true that many of the largest trades in the world make their settlement in London, and that especially the world's supply of gold there finds its natural point of distribution. From this it would follow, even if England were not herself a great lender of capital, that many of the operations of lending and paying undertaken in other countries must be carried on through London. The banks through which a cosmopolitan business of this kind ' The limiting clause of the act of 1844 was disregarded, or, as is commonly said, " suspended," October 25, 1847, November 12, 1857, and May 12, 1866. In February, 1861, and in May and Sep- tember, 1864, the condition of things was critical ; and in November, 1873, the suspension of the act appeared for some days not improbable. 208 CHAPTERS ON BANKING. passes must at times find themselves subject to great and sudden demands. The nature of their liabilities is not constant ; it varies with every change in the condition of any foreign country of importance, and is at one time steady, and at another time uncertain. The reserves, therefore, which are at one time ade- quate for the protection of these liabilities, are at another time too small. These reserves, however, which belong to the individual members of the great system of banks, are in practice not held by the banks themselves. The London banks, from long habit, keep their chief reserves as private persons might, deposited in the Bank of England, retaining in their own hands only such small amounts as are needed for the demands of the moment, and draw- ing upon the Bank for more important sums. Of the " other deposits " of the Bank of England a large part represents the liability of the Bank to its neighbors incurred in this manner." The position of the Bank of England, then, is not simply that of a bank whose deposits are liable to sudden fluctuations of a peculiar nature ; it is also a position of great responsibility. Whether by its own ' Dun, British Banking Statistics, p. 124 ; Bagehot, Lombard Street, p. 307. In 1877, when the bankers' deposits in the Bank of England were reported on, their maximum and minimunj points were in Janu- ary and May respectively, the deposit accounts standing as follows : yanuary 10. May 10. Exchequer deposits . . £ 1..2 millions. ;^ 4.4 millions. Bankers' " . . 13.3 " 8. " All other " . . 18.3 " 15.9 " Total .... 32.8 " 28.3 " For this report see Parliamentary Documents, 187?, xlvi. THE BANK OF ENGLAND. 209 action or by the force of circumstances, the Bank holds in its charge that on which the solvency of the banks in general, the safety of the commer- cial public, and the credit- of England alike ^ "iutyTn depend. Its managers have sometimes managing r 1 1 • .11-1**^ reserve. professed to regard it as simply a bank carried on for the profit of its own stockholders ; but so long as it holds the banking deposits it has in its hands the financial safety of the whole community and the real leadership of the money-market, and cannot escape its accountability for the manner in which it performs the duties of its position. As rega-ds the issue of notes its duties are too plain and even mechanical to throw upon it any serious burden of this kind, but as the depository of the other banks it is in effect charged with the duty of providing in some measure for the safety of all. In this respect, as holding a reserve wherewith to repay the borrowed reserves of others,- the Bank of England, as has been said, holds a position remark- ably similar to that of the banks of New York City, with the difference, however, that its responsibility for prudent management is undivided and, therefore, inevitable. Of course, the position would be one of perfect safety if the Banking Department regularly held cash for all its banking liabilities, — that is, either coin or notes redeemable in coin by the Issue Department. Its sources of profit being the same, however, as those of other banks, the Banking Department finds its interest as they do, in the con- version of idle cash into interest-bearing securities, so far as possible, and in holding, therefore, no larger 2IO CHAPTERS ON BANKING. cash reserve than is required for safety. Acting on this reserve by raising or lowering its rate of dis- count, ' it is under great temptation to defer as ]png as possible the diminution of its business by the rais- ing of its rate, and may thus be led to keep itself weak, down to the moment when it needs to be strong. And it may happen, moreover, that the reserve, being suddenly reduced by causes not to be fore- seen, cannot be raised by the slow action of the rate of discount, in time to escape all the consequences of such misfortune. ' In every case of remarkable pres- sure which has occurred since the separation of the two departments, and in most of. those which hap- pened before, the real difficulty presented will be found to have been that of meeting liabilities for deposits with a reserve which had become insuffi- cient, either from continued negligence in the past, or from the sudden possibility of demands on a great scale. Of these cases we will take as an illustration of the present topic, the critical situation of the Bank in the great commercial panic of November, 1857, ^ case which may fairly be regarded as typical. There is no doubt that in England the materials for a crisis had been long in preparation. Rapid commercial expansion and a great extension of credit had brought the usual results in the form of unsound ' Until 1833 the usury laws had led the Bank to adhere to a uniform rate of discount. The present system of a sliding scale was not fairly adopted before 1839, nor very effectively used until after 1857. Conant, Modern Banks of Issue, p. 129. ' That the Bank may lead, but cannot control the market, by changes of rate, see Bagehot's Lombard Street, p. 114. THE BANK OF ENGLAND. 211 business, of speculative prices^ and of extreme sensi- tiveness to any threatening influence. If no unusual pressure had occurred all might have course of the passed off in a mere subsidence of activity crisis of no- and in general depression ; but the sudden '"" "' ' ^^' occurrence of a disastrous revulsion in the United States, bringing ruin to some and carrying apprehen- sion to all, developed a crisis which took the whole community of Great Britain by surprise. In August the state of things was reported to"'be " not unsatis- factory," and no fear seems to have been felt until the middle of September, when heavy failures in New York, beginning with that of the Ohio Life Insurance and Trust Company on the 24th of August, became known in London. Still, although gold began to leave England for the continent, and the pressure in New York had caused the cessation of specie exports to England, the directors of the Bank of England seem not to have thought the difificulty serious. It was not until October 8th, when the news of the general suspension of payments in Philadelphia and Baltimore proved that something more than an ordinary embarrassment existed, that they determined to raise their rate of discount, from the point at which it had stood since July i6th, tosix per cent. At this point the condition of the Bank was disquieting. In the course of three weeks it had materially increased its loans, but was losing serious- ly from its reserve, so that the proportion of reserve to liabihties had changed much for the worse, at a time when general uneasiness was beginning to make the commercial public more than ever anxious to 212 CHAPTERS ON BANKING. borrow, as a prudent provision for the uncertainties of the immediate future. It may fairly be said then, we believe, that a singular tardiness of action on the part of the Bank was the immediate cause of much that ensued. Without following the steps by which the crisis from this point was converted into panic, we will take the state of things existing in the early days of November, when the Bank rate stood at eight per cent. At this juncture, the alarm caused by the failure of several large firms and of one or two Extraordi- provincial banks of some importance had nary pressure intensified the demand for loans, both upon the Bank of England and the other banks in the city. The increasing disposition of the latter to strengthen their own position, in view of the possible heavy demands to which their great liabilities exposed them, not only threw much of the increased pressure for loans upon the Bank of England, but also led to a marked increase in the bankers' balances — that is, in the deposits of reserve by other banks. At the same time with this serious change in the amount and character of the liabilities, the cash resources of the Bank were falling. An active export of specie to the United States had taken a considerable amount from the reserve, the rise of rates on the continent of Europe had made it impossible to draw specie from that quarter, and the apprehension of banks in the interior led to a serious absorption of cash by them. In short, at a time when it was called upon to extend its use of its own credit, the Bank found itself acted upon by THE BANK OF ENGLAND. 213 what has been called an internal drain as well as an external one. The Bank met this dilemma by raising its rate of discount on the 5th to nine per cent., in the hope of repelling the least necessitous borrowers, and by making in the course of the next week an increase of loans to the amount of three millions and a half. Before the end of the week, however, the state of affairs had become desperate. The general alarm had deepened with the rapid succession of failures in the commercial world and the suspension of the great Western Bank of Scotland,' and the moderate increase of loans by the Bank of England had done nothing toward quieting the public. Some sales of securities had been effected by the Bank, but the drain upon its reserve as well as the increasing liability for bankers' deposits continued. The rate of discount was raised on the 9th to ten per cent, but without avail. The joint-stock banks and private bankers, had finally ceased discounting, so that from Monday, the 9th, the, whole demand for loans was t,hrown upon the Bank of England, whose reserve by the lith had fallen to little more than one tenth of its " other deposits." On that day came the suspen- sion of the City of Glasgow Bank,' caused by the general alarm created by the failure of the Western Bank ; other banks called for assistance ; and a great ' The ruin of this bank, which in 1857 discounted to the amount of ;^20,ooo,ooo and had deposits of ;^6, 500,000, was precipitated by losses in America, although not strictly caused by them. ' The final and disastrous failure of this bank in October, 1878, will long be remembered. 214 CHAPTERS ON BANKING. discounting firm in the city failed on the same day. In four days, beginning with the 9th, the Bank advanced to the public over five millions sterling, but without the effect of subduing the The reserve _ _ ° is nearly panic 6r stopping the drain of its reserve, expended. q^ ^^^ evening of the 12th it found itself with a liability for deposits amounting to thirteen millions, and a reserve of cash in its Bank- ing Department of only iJ 5 8 1,000,' an amount which more than one depositor could exhaust by his single check. This feeble reserve might be expected to disappear before the close of the next day. In all this there had been nothing resembling a run upon the Issue Department.' Gold required for export or for the interior was indeed drawn ulti- mately from that department, for it was provided by those who were directly or indirectly creditors of the Banking Department, who drew therefore from the banking reserve and thus caused notes held in that reserve to be presented to the Issue Department for redemption. But the gold was not obtained by the presentation of notes hitherto in circulation or held outside of the Bank, for from the loth of October to the nth of November, the amount of notes thus in the hands of the public is shown by the account to have been almost without change. What had occurred was that the Banking Department had been caught, at the beginning of a severe pres- sure, with an insufficient banking reserve and had ' Of this only ;,f384,ooo was in London, the remainder being held by the branches of the Bank. See Parliamentary Documents, 1857-58, v., p. 55. . THE BANK OF ENGLAND. 21 5 been slow in taking measures for escape. The posi- tion of the Bank was such as that of the London and Westminster Bank might have been, had its reserve of cash run down while its liability was large, except that the latter had no chain of dependent banks. It was a case of near approach of failure, as simple in its essentials as that of any private banker who is unable to meet his depositors, or any incorporated bank which is not a bank of issue and meets with similar misfortune. Under ordinary circumstances a ready means of replenishing the reserve might be found in impossible to the sale of securities for cash, and such a restore it by course, it has beeri suggested, should be "^"^ m=ans. taken by the Bank of England in a case like the present. This resource can be used, however, at the height of a crisis, only to a moderate extent. Buyers, even of the soundest securities, are at such a time few and reluctant, partly because of the universal disposition to keep a firm hold upon cash as the safest provision for an unknown future, and partly because of the prospect that low prices may be succeeded by still lower. Moreover, it is to be remembered that purchases to any considerable extent would have to be made by those holders of capital who have their funds deposited either with the joint-stock or private banks, or with the Bank of England itself ; and in either case the check given in payment for securities would finally be a demand upon the Bank of England made by one of its depositors. The sale of securities would then serve to extinguish a part of the liabilities, and to that extent would improve the condition of 2l6 CHAPTERS ON BANKING. . the Bank, but it would bring in no cash to meet the steady drain upon the reserve.' Thus the Bank, on the 1 2th of November, reached the end of its tether. Following the precedent of the year 1847, therefore, the management informed Suspension of t'^^ government of the critical condition the act, and in which they stood, and received in re- meaning. ^^^^ ^ virtual authority for the issue by the Issue Department of a further amount of notes secured by government securities." Thus empowered, the Banking Department transferred to the Issue Department securities to the amount of two millions, and in exchange therefor received notes which were placed in the reserve. The operation was in effect a sale of securities to the Issue Department, in default of other purchasers, and the receipt of payment in notes, redeemable on presentation. The effect on the Issue Department was to increase the absolute amount as well as the proportion of notes issued by it upon securities instead of coin or bullion, but the notes did not cease to be redeemed in the regular course of business. Carried to a great extent the ' On the possibility of a sale of securities on a large scale during a panic, see Bagehot's Lombard Street, p. igo. ^ This practical setting aside of an act of Parliament was in the form of an assurance that, if the Bank found it necessary to take the step proposed, the ministry would ask Parliament to indemnify the Governor and Company for any consequences of such illegal action. Besides the publication of the entire correspondence in the Parlia- mentary documents, which has been made on every occasion of the suspension of the Bank Act, the ' ' government letter " is given by the Economist of November 14, 1857, and all the correspondence for 1866 in the Annual Register of that year, p. 305. See also Levi's History of British Commerce (2nd edition), pp. 311, 403, 468. THE BANK OF ENGLAND. 217 operation might plainly have weakened the notes by endangering their convertibility. Restricted as it was, however, it cannot be said to have had any real influence on the credit of the note issue. It gave to the Banking Department an immediate accession of means to the amount of two millions, with the as- surance that more could be had if needed, the only discernible limit to the relief being the conceivable inability of the Issue Department to continue the redemption of an indeiinitely enlarged issue of notes — a theoretical limit too distant to have any prac- tical bearing." The real assistance given to the Banking Depart- ment, however, did not consist so much in the actual addition of cash to its resources, as in the Effect of the quieting effect of the measure on the suspension on public mind. In every such state of "''" affairs it is a factor of prime consequence that much of the public excitement is pure panic, — an unreason- ing terror, which multiplies danger by destroying presence of mind. For the easy movement of busi- ness under the credit system, confidence in each other and in the future is necessary. The producer or merchant, using borrowed capital, relies upon the sale of goods and upon fresh loans for the means of repaying former advances, and if the current is in- terrupted, if doubt on the part of buyers prevents sales, or embarrassment of lenders prevents or diminishes loans, the fears of debtors to whom the failure to make their payments punctually means ' This whole subject was reported upon, with evidence, by a select committee, in Parliamentary Documents, 1857-58, vol. v. 2l8 CHAPTERS ON BANKING. bankruptcy and ruin, become at times ungovernable. No man is any longer sure of any thing except his own indebtedness and its near maturity ; there is a universal pressure to borrow, even beyond the real needs of the moment, lest borrowing should presently become impossible ; and there is a universal tighten- ing of the grasp on all ready means by such as are so fortunate as to have them. The sauve qui pent of merchants, who are desperate as to their means of payment, is as mutually destructive and as fatal to their hopes of escape, as is the crush of a panic- stricken audience, blocking the exit from a burning building. To a community thus dominated by universal terror, the Bank of England was able to say, that its potential reserve was now so enlarged as to fix no limit to its ability to extend its loans and meet all consequent liabilities. The effect of this assurance in allaying the panic was instantaneous. Men ceased to press for what might not be needed after all, and the other banks in the city, no longer dreading demands from their own depositors, re- sumed their operations. Confidence had indeed suffered too severe a shock to recover without that process of liquidation which is called a revulsion of business; but the liquidation, instead of being immediate, could now be gradual enough to enable- debtors to collect and realize upon their resources with some deliberation.^^'"'^ It was not then so 'much the four millions which the Bank felt safe in adding to its securities in a week after the suspension of the act of 1844, as the moral relief given to the public, which constituted the reail THE BANK OF ENGLAND. 219 remedy by which the crisis was ended. As for the change in the amount of the note issues of the Bank, we may fairly deny that in itself it had any influence whatever, so trifling was its amount. The notes issued in excess of the statutory limit, and actually in the hands of the public, stood at their highest point on the 20th of November, when they amounted to ;^928,ooo, and by the end of the month the Issue Department had returned to its normal condition.' Indeed the difference between the minimum and maximum of the outstanding notes for the month was only ;£■ 1,300,000. The conditions on which this singular abandon- ment of the terms of the Bank charter has been allowed are jealously guarded. The Bank has been required to pay over to the government all profits made by it from any increase of issues above the statutory limit,' and both in 1857 ^^^ 1866 it was required to maintain its rate' of discount at ten per cent., so long as it should use the permission given to it. As this rate would drive away business from the Bank as soon as the rate in the general market should fall, this condition insures as speedy a return to the legal limit of the issue as is practicable. ' This opinion, that the relief given by the suspension of the limit fixed by the act is a moral relief and is not to be found in the actual issue of notes, is confirmed by the fact that neither in October, 1847, nor in May, 1866, was the issue of notes upon securities increased at all, — the mere announcement that such issue would be made, if needed for the reserve, being sufiicient to quell the panic. ' The profit on the increase of issues above the limit in 1857 was calculated on ;^2,ooo,ooo, for 41 days at the rate of two per cent Parliamentary Documents, 1857-58, xxxiii., 271, 275. 220 CHAPTERS ON BANKING, Whatever the conditions, however, the repeated " resort to this extra-legal measure is a remarkable departure from an elaborate scheme of legislation in favor of a crude expedient, and does not easily find its parallel, even in English administration. And Question as *^^ question has been raised, with good to real value rcason, as to the real value of a legal ega imit. jjj^j^.^ which evcrybody believes will be set aside when it begins to press. Why not, it is said, allow the Issue Department to keep such amount of securities as is found advisable, always holding it to the duty and the test of instant redemption ? No doubt if the provisions of the act of 1 844 were to be defended solely on the grounds on which they were originally urged by Sir Robert Peel, they would have to be condemned. He expected the act to prove a remedy for financial crises ; whereas, not only have such crises recurred with the same rough periodicity since the passage of the act as before it, but they are probably sharper in the London market by reason of the existence of the very law which was to cure them. The act has, however, served the purpose of making the legal-tender paper of England safe and converti- ble, in every contingency which is even remotely possible. It has rendered an even greater service, while thus eliminating the question of convertibility, by setting in its true light, as the kernel of all banking problems, the question as to the proper management of the banking reserve. No such mis- takes of management could now occur as marked the whole course of the history of the Bank in the first half of this century. The Bank was not quick THE BANK OF ENGLAND. 221 to learn the real risks of its position and its responsi- bilities ; but still it has learned them, and now guards its reserve with vigilance, by appropriate means, and with general success. It takes the alarm sooner than formerly, it sets its customary line of supposed safety higher, and thus, in the great crisis of 1873, it escaped the disaster, which befell it in 1857 in a con- dition of affairs not more dangerous. But the per- fection of the provisions of law, even with these improvements in practice, is doubtful.' Probably an elastic provision like that contained in the German legislation would be easier in operation and equally effectual. Some provision other than the present reliance upon the sound policy or interest of the Bank itself the law will finally make, in a system of banking and currency so highly concentrated as that which England has long maintained.'' From what has been said, it will be seen that the Bank of England, although a highly privi- ^ leged establishment, is not a government organization institution. It has a partial monopoly of °^ '*"* ^^"^' the right of issuing notes, which in theory is destined to become complete ; it has the distinction of having its notes the only paper legal tender in the United Kingdom ; it is the chief depository of a government which maintains no public treasury; it is charged with the duty of keeping the registry of the public debt, and of paying the interest thereon ; still it is a ' For Mr. Lowe's bill to authorize the suspension of the' limit of 1844, under fixed regulations, see Economist for 1873, pp. 741, 748. '^ Some of the leading joint-stock banks have recently adopted the policy of keeping at least a part of their reserves in their ovi^n vaults. fournal of the Institute of Bankers, 1899, p. 539. 222 CHAPTERS ON BANKING. private corporation of the familiar type, managed by its own officers, in whose selection the govern- ment has no share, and whose responsibility is to their own stockholders alone. The Bank has duties thrown upon it, partly by law and partly by force of circumstances, which make it a highly important member of the body politic, and yet it is in form a corporation intended to earn dividends for the owners of its stock. For many years after its foundation it was even forbidden by law to lend to the government, beyond a certain narrow limit, without the express sanction of Parliament,' and although it has now for a long time been a trusted agent, and has at times com- promised its own safety by its financial support of the Exchequer, it has never failed in its dealings with the authorities to assert its own essential inde- pendence. The peculiarities of this position, which sometimes lead to an erroneous classification of the Bank of England as a government bank, have been much emphasized by the manner in which the other con- stituents of the English banking system have de- veloped in recent years. The private banking"houses have steadily declined in number. The advantages of joint-stock organization and Hmited Hability have led in many cases to their absorption or conversion into companies of larger capital, and have hindered the opening of new private banks, even if establish- ments of such a decaying type could any longer com- mand the credit once given to them in the English financial world. On the other hand, the joint-stock * This prohibition continued until the year 1793. THE BANK OF ENGLAND. 223 and limited companies have grown rapidly in the last two generations, both in relative and in absolute im- ' portance.' They have felt the strong tendency to concentration which marks the closing years of the century, and by consolidations have even diminished their number, but with a vast increase, not only of individual, but of aggregate importance. At the same time, by the establishment of branches they have everywhere brought themselves into close con- tact with the general commercial life of the country, so that most of the banking of English trade and commerce is now carried on by their agency. More than 3,800 banking oliEices in England and Wales alone, and nearly 1,700 in Scotlahd and Ireland, repre- sent this part of a vast system which, like so many other English institutions, is a chance result, worked out by certain economic and social forces, with little aid or even consideration by legislation. The Bank of England, on the other hand, having established eleven branches before the year 1830, has gone no further, in that direction.' It enters into lit- tle competition with its younger neighbors for the business which is offered by the growing industry and wealth of the nation, but is satisfied with the scope which its position as the head of the banking hierarchy affords for employing its capital and the ' In May, l8go, there were 104 joint-stock banks in England and Wales, with 1929 branches. In May, igoo, there were only 84 joint-stock banks, but with 3837 branches. During the decade deposits increased from ;^386,ooo,ooo to ;^6i4,ooo,ooo. For Eng- lish banking statistics generally, see the Banking Supplement pub- lished by the Economist in May and October. ' The location of its branches has undergone some changes. 224 CHAPTERS ON BANKING. energies of its managers.' Its long-existing prestige and prescriptive leadership have enabled it to maintain relations and acquire an influence whose importance is not measured by the magnitude of its banking operations. This influence, it must be added, is due only indirectly and in a small degree to any connection between the Bank and the govern- ment. The fact that the Bank is the depository of the public moneys and performs for a consideration some other public functions, does not give it in any special way the protection or support of the govern- ment, nor place it in any way under the control or direction of any public officer. Its present position and power over the metropolitan money market is a development from a long train of causes which have finally imposed upon the Bank some of the responsi- bilities of a public institution. It is only by degrees and reluctantly that its management have been led to recognize the fact that the Bank is under obliga- tions essentially different in kind and in range from those resting upon any of its neighbors." ' The following table illustrates the comparative growth of the loans and deposits of the three largest joint-stock banks and of the Bank of England (stated in millions of pounds) : Loans^ Deposits, 1890 1899 1890 1899 Bank of England £,i(>.-i &l,l.'j- £n-3 £i3-l Lloyds 11.3 15.3 17.3 40.9 London and City 21.6 28.4 33.8 45.3 National Provincial 22.4 29.6 39.3 51.3 * Mr. Hankey, who had been Governor of the Bank, writing in 1S67, says: " The more the conduct of the affairs of the Bank is made to assimilate to the conduct of every other well-managed bank in the United Kingdom, the better for the Bank and the better for the community at large." Principles of Banking, p. 26. THE BANK OF ENGLAND. 225 Perhaps the most striking illustration of an extra- legal obligation recognized and acted upon by the Bank is the action taken by it in the emergency created by the suspension of the great firm of Baring Brothers & Co. in November, 1890. The Bank then undertook, with great judgment and energy, to save the public from a possibly disastrous panic. To do this, it not only strengthened its reserve by borrow- ing ;^3,CX)o,ooo from the Bank of France and ;^i,6cx>,- 000 from the Russian government, but it undertook, with the aid of other banks and bankers, to guarantee the payment at maturity of all obligations of the fail- ing house, and to look for repayment to the gradual collection of its assets. To this guarantee the Bank was the largest subscriber, the directors agreeing to risk ;^i,ooo,ooo in the liquidation of an indebted- ness of ;^2 1,000,000, and the marketing of a corres- ponding mass of assets, a considerable part of which were supposed to be of uncertain value.' It is true that this risk, assumed by the Bank in order to quiet public apprehension, was to be weighed against the loss which might fall upon it if a general panic were to break out and run its course of ruin. Still, it was the general opinion at the time that the directors delib- erately set at risk a substantial part of the property of their stockholders in a manner required neither by any legal obligation nor by a calculation of probable advantage, and their right to deal in this manner with the interests entrusted to their care was questioned by some writers. By a natural although illogical process, ' Two or three of the large joint-stock banks subscribed ;^ 750,000 each. The total guarantee was ;^I7, 250,000. 226 CHAPTERS ON BANKING. the success of the operation disarmed criticism,' ob- jection died away, and thus a precedent was estab- lished which in any future case of the same kind the Bank would find it hard to set aside. The organization of the Bank is as anomalous as its position. It is governed by twenty-four directors, who, by long established custom, must not be bankers, and by a governor and deputy governor. The di- rectors are elected annually, and by usage a part of the board is changed every year; but the changes take place among the younger members, so that after some years of possibly intermittent service, the director's tenure of his position is practically for life. After many years he usually becomes deputy gov- ernor for two years, in due rotation, and then governor for the like term, after which and for the remainder of his official life he is a member of an executive council of directors known as the committee of treasury. The director enters upon office, there- fore, at an early age, and reaches the positions of most active responsibility only after a long training in the Bank itself. Such an organization would hardly be proposed if the case were new, but it is, no doubt, well fitted, perhaps too well fitted, to preserve the traditions of policy and of management which secure the Bank from rapid change.' Under a direction thus organized, the Bank has now enjoyed a long course of prosperity, seldom ' The liquidation was finally closed in January, 1895, with a bal- ance of more than half a million pounds in securities to be returned to the firm. ' Oil the government of the Bank, see Bagehot, Lombard Street, ch, viii. THE BANK OF ENGLAND. 227 interrupted for any length of tinae. Its imprudent loans to the government early in the wars of the French Revolution caused its long suspension of specie payment, from February, 1797, to May, 1821, but the Bank reaped a rich harvest from its issue of irredeemable paper.' In the crisis of December, 1825, it was on the point of failure, and in 1839 it was forced to obtain material aid from the Bank of France.' Still, since 1852, its dividends have never been at a less rate than 8 per cent, for any one year, and have averaged above 9 per cent, since 1880. The stock has not been lower in price than 156 per cent, since 1840, has for forty-five years steadily kept above 200, and for much of the time since the early part of 1883 has stood well above 300. ' For a statement of the dividends and bonuses received by the stockholders from 1797 to 1816, together with a searching inquiry into the profits made by the Bank from its relations with the govern- ment, see Ricardo's pamphlet, Proposals for an Economical and Secure Currency, especially the table, Works, p. 427. ' For a brief statement of this see Annual Register, 1839, p. 289 ; and Tooke, History of Prices, iii., p. 88. The aid which the Bank secured from the Bank of France in No- vember, i8go, was rather for the security of the public under the presstire of a great calamity than for the protection of the Bank itself. CHAPTER XII. THE REICHSBANK OF GERMANY. In the system upon which Qgrman banking has been reorganized since 1875, of which the Reichsbank is the leading example, we have a further development dcvelonment of the coijception of a note from these- circulatiOTl resting upon a mixed basis cured system. . . t - . , • i j_i • of securities and specie, but with the im- portant change that the law contents itself with requiring the maintenance of this basis, without specially pledging it for the payment of the notes. The German system is then one of securing the notes by salutary regulation, rather than by the actual de- votion of specific property, either in the hands of the government, as under the national bankf^ system of the United States, or left in the charge of^ the bank itself, as in the case of the Bank of-England^^ When the present German Empire was established in 1871, the reform of the legislation upon currency Origin of the ^"'^ banking was felt to be a pressing ne- German sys- ccssity. In their coinage stoie German emo I 75. gj-^j-gg jj^jj ranged themselves under the thaler system and others under the gulden, but in all there was a mass of old coin in circulation of obso- lete denominations. The silver standard had been 228 THE REICHSBANK OF GERMANY. 229 adhered to by all. Every member of the North German confederation, except the cities Hamburg, Lubec, and Bremen, and the principality of Lippe, was issuing paper currency for the supply of its own wants. And finally thirty-three banks of issue, with capitals ranging from 1,200,000 marks to 35,000,000, had been established, each upon such basis as the state or city establishing it found good, some hold- ing perpetual charters, some incorporated for terms of^ears, and |ome holding only rights revocable at pleasure. These banks differed materially as to the limit of their authorized iss^^s, and were under different obligations as to the holding of reserve. To reduce this mass oj confusion to order and to es- tablish unity of system in currency and banking, was a problem which constantly taxed the German mind for the first four or five years of the new Empire. The law of December, 1871, provided for unity oi coinage and prepared the way for the subsequent in- x-froduction of the gold standard by the act of July, 1873.' Another law of April, 1874, provided for the extinction of the paper currency issued by the several ' The coinage laws of 1871 and 1873 are to be found, with copious annotations by Soetbeer, in Bezold's Gesetzgebung des Deutschen. Reichs, Th. II. Band i., this part of the volume being also issued separately as Soetbeer's Deutsche Miinzverfassung. See pp. 35, 67. For a translation see Laughlin, Bimetallism in the Uniied States, *p. 237. The German law of July, 1873, is often spoken of as a law " de- monetizing " silver. In fact it provided for coining gold money and substituting this for silver, but it did not demonetize the silver remain- ing in circulation. A part of this silver was sold in London between 1873 and 1879, and the remainder is being gradually absorbed by its conversion into subsidiary coin. 230 CHAPTERS ON BANKING. German States, by creating a currency of imperial treasury notes (reichs-kassenscheine), convertible into gold upon demand at the Treasury, but not a legal tender, and authorizing the distribution of the notes to the several States, to be used by them in taking up their local issues.' Of the imperial paper I20,- 000,000 marks were distributed to the states in the ratio of population, and 55,000,000 more were ad- vanced in amounts as required, and with this aid twenty local issues, amounting in the aggregate to rather more than 180,000,000 marks, were extin- guished. And finally by a law of March, 1875, the banks of issue were brought under a common system, and the reform may be said to have been completed." The new system required the establishment of a Establish- Central bank to be under the immediate mentofthe supervision and direction of the imperial government, and the subjection of a:ll other banks of issue to a uniform set of regulations and also to imperial supervision. To secure the first of these two objects, advantage was taken of the peculiar position of the Bank of Prussia. Originally established as a government bank, with a capital of 2,000,000 thalers supplied by the state, this bank had been enlarged by the admission of private stock- holders until its capital had risen to 20,000,000 ' See Bezold, as above, p. 181. ' The bank law of 1875 is to be found with Soetbeer's annotations in Bezold, Gesetzgebung, Th. II. Band i. , p. 255. A translation is to be found in the Statistical yournal for 1875, p. 267. THE REICHSBANK OF GERMANY. 23 1 thalers, but without the surrender by the State of its power of control or of its disproportionate share of the profits. As a part of the new system the .Bank of Prussia now became the Bank of the Empire (Reichsbank). The Prussian government was paid for its share of the capital and surplus, and also received 15,000,000 marks for its interest in the goodwill of the establishment ; and the capital was then raised by subscription to 120,000,000 marks, the whole of which was thus placed in private hands.' The imperial government reserved to itself a direct power of control through the imperial chancellor and also by the appointment oi the board of direction, giving to the shareholders the election of a commit- tee charged with certain duties of consultation. The Bank was required to receive and make payments, and to conduct other financial operations for the im- perial treasury, without compensation, and also to manage free of cost the receipts and payments of the several states of the Empire. It was thus made in every thing except its ownership a national bank on a large scale, although not the largest, and had its privileges secured to it for fifteen years. Certain general regulations adapted the thirty-two existing independent ° banks of issue to the new sys- ' For some account of the Bank of Prussia and its successor, see Bulletin de Statistique et de Legislation Comparie, November, 1886, p. 556. For the distribution of the 40,000 shares in the bank among 7,784 shareholders, see ibid., p. 573. ' The banks which are here called " independent " are often desig- nated as ' ' private banks, " to distinguish them from the Reichsbank. But as they are incorporated, the term ' ' independent " appears less likely to be equivocal for American rea,ders, 232 CHAPTERS ON BANKING, tem. The exclusive right of issuing bank-notes was then given to them and to the Reichsbank, with a provision for transferring to the latter any right of issue which may be surrendered by any of the others/ No limit was fixed for the aggregate circu- lation, but the possible aggregate of notes which could be issued without being covered by cash in hand was fixed at 385,000,000 marks, mentlnd"' This total was then apportioned among regulation tjjg banks, having due regard to the of all issues. , ' ° . , . , , amount of the notes previously issued by each and to their probable needs in the future " ; and by this apportionment the limit for the allowed un- covered issue of every bank taken by itself is now determined. For all notes issued by any bank be- yond this limit of uncovered issue, the law requires that cash shall be held, the bank being allowed to count as cash for this purpose German coin, gold bullion, and foreign gold, imperial-treasury notes, and the notes of other banks ; and if any notes are issued beyond the limit, and not thus covered by cash, a tax must be paid on them at the rate of five per cent, per annum. To insure the prompt applica- tion of this rule, every bank is required to report its condition at four fixed dates in every month ; and any excess of notes, shown by any such report, above ' By the refusal of some banks to accept the right of issue under this law, and by the surrender of the right by others, the number of independent banks of issue was reduced at the close of 1893 to seven. See Siatistiches Jahrhuch fiir das Deutsche Reich, where tolerably full statements as to the German banks may be found. "As to this apportionment see Soetbeer's Bankverfassung, in Bezold, as above, p. 273. THE REICHSBANK OF GERMANY. 233 the allowed, limit and not covered by cash, is then taxed ^ of one per cent. It is also required that the cash held, exclusive of the notes of other banks, shall in any case be equal to at least o'ne third of the total circulation, and that the remainder shall be protected by discounted paper, having not more than three months to run. The notes issued under this system thus rest upon a solid basis of specie ; but in addition, the presence of an ample specie cir- culation in the country is secured by a provision prohibiting the issue of any notes of lower denomi- nation than one hundred marks. The application of these provisions is best seen by reference to the accounts of the Reichsbank. The limit of uncovered issue allowed to the Reichs- bank by the original apportionment was 250,000,000 out of the total 385,000,000 marks. Fifteen other banks, however, declined to issue notes under the conditions required by the law and ten more with- drew their issue before 1894 ; so that by the transfer of these abandoned rights of issue, the uncovered limit of the Reichsbank was raised to 293,400,000 marks. The significance of the limit may be under- stood easily by taking any account of the Reichs- bank, as for example that of March 23, 1900. As the notes then outstanding were 1034.4 millions, and the cash reserve 895, the notes exceeded the cash by 139.4; but as the allowed Hmit of uncovered notes was then 293.4, the Bank could still increase its issue by 154 million marks, without being required to add to its cash. In other words, the Bank had a disposable margin of 154 millions, which could be paid out in specie, or in notes calling for specie. 234 CHAPTERS ON BANKING, It is obvious that the important provision in this system, by which any excess of notes above the The elastic uncovered limit, not offset by cash in limit. hand, is taxed, is intended to produce the general effect of a prohibition under mild penalty, which admits some relaxation in case of urgent need. The law makes clear the general design of the law- making power, to secure the protection of all issues beyond a certain point by cash, and the tax of five per cent, is sufficient under ordinary circumstances to effect this object, by taking away the induce- ment for carrying the issues beyond the line at which taxation begins. But the law has at the same time left open the possibility of an extension of circulation beyond the line thus indicated, whenever the reasons for such extension are- strong enough to outweigh the tax. In the familiar case then of a commercial pressure, when the demand for loans is imperative and the market rate is high, it is possible for a bank, under this regulation, to meet the neces- sities of borrowers and thus to relieve the public apprehension, although it is practically forbidden to reap any important profit from this action. In the absence of any such pressure it is tolerably certain that the issues will be kept within the line, and that the business of issuing notes as gold accumulates, and of paying out gold as notes come in for redemp- tion, will go on naturally and automatically. In this system are easily traceable the general out- lines of the English Bank Charter Act of 1844. The suggested absorption of the entire right of issue by the Reichsbank, emphasized as it is by a provision THE REICHSBANK OF GERMANY. 235 that the government upon giving due notice may withdraw the right from any bank in 1891, or at the end of any decade thereafter ; the fixed limit of notes to be issued without specie ; with the and the automatic arrangement for the English r - 1 1 system. issue of notes agamst cash above that hmit ; all are closely copied from the English model. The requirement that the cash shall amount in any case to one third of the notes is unusual, although the ratio thus insisted upon has long been familiar in discussions of banking. The distinguishing novelty of the German law, however, is the power given to increase the uncovered issue beyond the limit, sub- ject to payment of the tax of five per cent., in order to secure a certain degree of elasticity at the point where, under the English law, the rigidity of the line drawn by Peel's Act has sometimes presented a frightful dilemma. . The notes issued upon this plan are not a legal tender, nor are they received at public offices ex- cept by virtue of regulations which the governnient reserves the right of abandoning. They Regulation are not secured by any special pledge of of the use the specie or discounted paper which the law requires to be held for their protection. Not only does this paper as well as the specie remain in the possession of the issuing bank, but the law gives to the noteholders no special lien upon the paper or specie, or right of payment in preference to other creditors. The law in short has simply provided by suitable measures that the affairs of the bank, including its issue of notes and the money and securi- 236 CHAPTERS ON BANKING. ties held by it, shall meet certain tests of soundness, believing that both the ultimate solvency of the bank and the prompt payment of its circulation are thus made secure. The credit of the notes is main- tained by their strict convertibility and by the law which makes them everywhere current in payments to any bank of issue. Every bank is required to pay its own notes on presentation ; the Reichsbank also, under ordinary circumstances, pays its notes at its branches ; and every independent bank is required to redeem its notes at an agency in Berlin or in Frankfort, as the government may determine, in addition to redeeming at its own counter. Every bank of issue is also required to receive at par in payment the notes of every other bank, with the pro- vision that all notes thus received, except those of the Reichsbank, must be either presented for redemp- tion, or used in payments made to the issuing bank or in the city where it is established. This provision, which imposes a safe restraint upon the smaller banks, is also significant from its tendency to allow the Reichsbank alone to obtain anything resembling a national circulation. The notcjissue of the Reichsbank, though subject to considerable fluctuation over short periods, has The note- shown a strong upward tendency, the issue of the average yearly circulation ranging from Reichsbank. z- , „ f . 000,000,000 to 800,000,000 marks be- tween 1876 and 1886, and from 1,000,000,000 to 1,400,000,000 marks between 1890 and igoo. At THE REICHSBANK OF GERMANY. 237 the same time the Bank has increased its stock of coin in almost the same ratio. Its original holdings were but little more than 500,000,000 marks, while in recent years they have averaged nearly 900,000,- 000 marks. A part of this specie, as in the Bank of France, is silver, a heritage from the years of silver coinage befoi:e 1873. The amount of this silver, first disclosed in 1894, has formed since that time not far from one third of the entire stock of specie held by the Bank. The proportion of coin and its equivalents ' to the note-issue has never fallen below 55 per cent., and has been usually in the neighborhood of 70 per cent. It follows, then, that the one-third rule has never been of any im- portance in the operations of the Reichsbank, since the notes have always been less by many hundred million marks than three times its cash reserve. From 1876 to 1895 the note-issue not covered by cash seldom exceeded the limit at which taxation begins. During that time the device of the elastic limit was resorted to on ten the use of occasions : five times for one week, \he elastic four times for two weeks, and once '""'*• for three weeks. The excess of issue varied from 19 to 109 million marks, but was never as much as ten per cent, of the total circulation. The effective- ness of the elastic limit in time of crisis has never been severely tested, but it has been found to meet with much success exceptional temporary demands ' The legal equivalents for coin, imperial treasury notes and notes of other banks, have not been subject to marked variation, seldom going above 35,000,000 or below 25,000,000 marks. 238 CHAPTERS ON BANKING. for currency which under a rigid system of issue like that of England could only have been satisfied by the withdrawal of specie or notes from the reserve of the Bank of Englaftd. It is noteworthy that with one exception ' the limit has been only exceeded at the end of September and the beginning of October or at the end of December and the beginning of January, at the opening of the autumn or winter quarters of the year, when for various reasons there is regularly an increased demand for currency. In England similar demands can be met only by the withdrawal of notes or coin from the reserve of the Bank of England, and, though the temporary na- ture of such demands is well understood and in itself causes no alarm, the difficulties of the situation are thereby enhanced when the Bank is trying to strengthen its reserve against more serious drains in other directions. Such demands the Reichsbank is enabled to meet without difficulty through the de- vice of the elastic limit. If, however, the rate of discount at these periods is under five per cent., the Bank suffers a distinct loss, since it must then pay more in taxes than it receives for the accommodation which it has given its customers. A five per cent, rate is so far above the normal rate that not infrequently the Bank has paid the five per cent, tax when the return it has received upon advances has been but four per cent., and on some occasions as low as three per cent. For this reason an increase of the uncovered issue not subject to tax was urged in 1899, when ' October 31, 1890. THE REICHSBANK OF GERMANY. 239 the regular decennial renewal of the charter of the Bank afforded an opportunity to change the law under which its operations are carried on. It was further urged that, in consequence of the growth of population and the rapid economic development of the country, its normal currency requirements were greater than in the early seventies, and that they were neither readily nor economically satisfied under a system of issue which permitted no per- manent increase except in proportion to the inilow of specie to the Bank. In support of this contention, attention was called to the frequent resort to the elastic limit in the four preceding years.' During these years the tax was paid for thirty-four weeks, the excess on fourteen occasions being above 100,- 000,000 marks, and more than once rising to nearly 300,000,000 marks. The law of June 6, 1899, re- newing the charter, authorized an increase of the uncovered issue not subject to tax to 450,000,000 marks, a limit which had been exceeded but seven times in the history of the Bank. It was expected when the system was established in 1875 that the Reichsbank would ultimately ab- sorb the issues of all the other banks, either through the relinquishment of bank and the these rights by the banks or in conse- other banks ... . ... . , of issue. quence of the intervention of the imperial government, but the seven independent banks which still possess that privilege do not appear likely to give up their issues, and it is not now probable ' In 1895 the tax was paid for three weeks, in i8g6 for six weeks, in 1897 for nine weeks, and in 1898 for sixteen weeks. 240 CHAPTERS ON BANKING. that they will be disturbed in its exercise. The Bank of Frankfort alone excepted, they are all out- side Prussia,each in one of the other states of the Em- pire.' They have a sort of territorial position, and are sustained by the same influences which in so many other directions oppose the complete unification of the Empire. Their aggregate note-issue is small in comparison with that of the Reichsbank, amounting to less than 200,000,000 marks, and their operations do not affect seriously its leading position among German banks. That position is indeed well assured by its 310 branches of all grades, which carry on its operations in all parts of the Empire, and far out- number all the independent banks of issue and their branches. Unlike the case in France, the spur of legislation has not been necessary to bring about the diffusion of banking facilities by the central bank, while in many ways, as in the development of an efificient Clearlng-House system, its managers have been on the alert to improve and modernize German banking methods. The use of notes is still far more important in Germany than in English-speaking countries, though deposit banking has been increasing rapidly in re- cent years. Of such accounts the Reichs- Reichsbank bank has a large share, in acquiring which a bankers' j^-g extcnsive network of branches is no bank. doubt of great service. At the same ' They are the banks of Saxony, Bavaria, Baden, South Germany (Hesse), Wurtemberg, and Brunswick. The notes of the latter can only circulate in Brunswick, since the bank refused to subject itself to the general restriction of the law of 1875, THE REICHSBANK OF GERMANY. 241 time a considerable number of joint-stock banks, many of which were originally established primarily to facilitate the organization of large corporate enterprises and the sale of their shares to the public, have also developed the business of deposit banking upon a great scale. The relations of these banks to the Reichsbank are not unlike those of the London joint-stock banks to the Bank of England, and therein seems to lie the chief importance of the growth of deposit banking in its effect upon the operations of the Reichsbank. It holds in large measure the reserves of these banks, and in consequence it possesses the only available store of specie in the country upon which the German banking world can rely to meet any extraordinary demand.' The policy of the Bank is therefore primarily determined by the necessity of guarding its reserve, not because it issues notes, but because the credit system of the country is built upon the foundation of specie in its vaults. The right of issue has given the Bank prestige, and has been an important factor in the accumulation of the large store of specie in its possession ; but the dangers of its depletion, against which the Bank must be ever on its guard, do not come from the note holders, but are due to its central position in the German money market. Like the Bank of England, the Reichsbank resorts to the variable rate of discount to protect its reserve, raising its rate in times of danger in order to restrain the ex- ■ The other note-issuing banks must, to be sure, keep their own reserve against their notes, but their aggregate holdings of specie do not commonly rise much above 8o,CXX>,ooo marks. ^42 CHAPTERS ON BANKING. tension of credit and check the outflow of specie. The importance of the action of the Bank in this matter is clearly recognized in Germany, and it seems to have experienced less difiSculty than the Bank of England in bringing the oufeside rates of the general money market up to a close approxima- tion of its own rate. The specie held by the Bank is not looked upon solely as the banking reserve of the country, but is also regarded as a most impor- tant resource for the Empire in time of war. Any loss of its gold is accordingly a matter of general concern, quite apart from the particular degree of importance which it may have at a given time in purely banking aspects. The French method of the premium on gold, though strongly urged upon the Bank, has never been adopted, its managers point- ing out that the present policy has been successful in the past for the accumulation and protection of its stock of specie.' At the renewal of the charter in 1899, an entirely navel step in banking legislation was taken with the design to assist the Bank in some measure in its efforts to protect its reserve. The other banks of issue were forbidden to discount at a rate lower than that of the Reichsbank when its rate is as high as four per cent., and were allowed to discount but one fourth of one percent." below its rate when ' The well-known disapproval with which the withdrawal of gold for export is regarded at the Bank, is said by English writers to be a potent factor in the protection of its reserve. * The Reichsbank must not cut its official rate when it is as high as four per cent., and when below four per cent, must publish its actual as well as its official rate, and then the other banks may discount one eighth of one per cent, below its actual rate. THE REICHSBANK OF GERMANY. 243 it is under four per cent. For an understanding of the purpose of these restrictions, it must be remem- bered that an increase of the rate of discount by a reserve bank will not accomplish the end in view unless the general rate for money in the outside market goes up as well. If the market rate remains very much below that rate, business leaves the re- serve bank and its own immediate obligations may be quickly reduced, but the obligations of the other banks, which in the end must rely upon the central bank, are rather increased than diminished, and the general situation is in no way improved. Moreover, if the efforts of the reserve bank are directed to- wards checking a foreign drain, they will prove equally unsuccessful. The rate of discount of the banks which issue notes has ranged somewhat below that of the Reichsbank, and their operations have no doubt rendered somewhat less effective its con- trol of the market. But whether the restriction upon their action will greatly help the Reichsbank may be questioned, for the general market rate for money is now chiefly influenced by the action of those banks which do not issue notes, and whose operations have not been regulated in this matter by law.' These restrictions seem to illustrate the exaggerated importance which is still ascribed to the issue of notes on the continent of Europe. Notes are still regarded as the one important factor in the phenomena which result from the operations of banks, and the essential similarity in most re- spects of notes and deposits is overlooked. • It should be noted that the deposit banks seem to have been more disposed to follow the lead of the Reichsbank than the banks of issue. 244 CHAPTERS ON BANKING. Of the net profits of every bank of issue, the law originally required that from so much as was earned Division of 1" excess of a dividend of four and a half the profits, pgj. cent., at least one fifth should be added annually to the surplus, until this should amount to one fourth of the capital. But of the profits of the Reichsbank remaining after this allot- ment for surplus, it was also provided that an equal division should be made between the stockholders and the government, with the further cautious pro- vision, that when the annual dividend of the stock- holders reached eight per cent, the share of the government in any remainder of profit should be three quarters instead of one half. But as the law provided that in 1891 and every ten years thereafter the government should have the option of discon- tinuing the Reichsbank or of taking it at a valuation, opportunity was given for making still better terms; and accordingly by the act of 1889 the ordinary dividend before the allotment to surplus was limited to three and a half per cent., and six per cent, became the point at which shareholders began to receive only one fourth of any further profit. Under this" arrangement the government received between 1891 and 1898 an average annual revenue of nearly 6,600,- 000 marks, or more than forty-four per cent, of the earnings of the Bank, while at the same time the shareholders were paid average dividends of seven per cent. Still further concessions were exacted as the price of the second renewal of the charter in 1899. The capital of the Bank was increased to 180,000,- 000 marks, and the gradual increase of the surplus from 30,000,000 to 60,000,000 marks was authorized; THE REICHSBANK OF GERMANY. 245 twenty per cent, of all profits in excess of three and one half per cent, going to that account, sixty per cent, to the State, and but twenty per cent, to share- holders. When the required surplus has been ac- cumulated, three fourths of all profits, after the ordinary dividend of three and one half per cent, are to be paid to the State and one fourth to the shareholders. INDEX Accounts, explanation of bank- ing, 22-38 Agricultural credit, banks of, in France, 157 Amsterdam, commerce and cur- rency of, in seventeenth cen- tury, 95 ; see Bank of Amster- dam Bagehot, 18 n., 49 n., 78 n., 216 n. Baltimore, banks of, combine re- serves in 1893, 91 Banco del Giro, loi Banco di Rialto, loi Banking, simplicity of, i ; be- ginnings of, 3 ; effects of, 4 ; dangers of, 6 ; essentials of, 9, i8, 23 ; issue not essential, 18 ; defined, 18 n. Bank of Amsterdam, purpose of, 97 ; foundation of, 98 ; deposits of, 100 ; success of, lor ; not a bank of dis- count, 103 ; advances on spe- cie by, 104 ; results of, 106 ; fluctuation in bank money, 109; aifairs of, kept secret, no; specie held by, in n. ; administration of, in, 112 ; solvency questioned, 113; se- cret loans of, 115 ; failure of, 114; its causes, 115, 116; efforts to revive, fail, 117 ; form of recepisse, 118 n. Bank of Commerce, 163 n. Bank of England, 11 n., 31 n., 44n.,62 ; management of its reserve, 34, 78, 179 ; mode of securing note-issue of, 62 ; accommodation to Bank of France, 146 n. ; origin of, 191-193 ; history of, to 1844, 193-195 ; capital of, 194 ; gov- ernment loan of, 194 ; nature of its monopoly, 195 ; the Bank Act of 1844, 197 ; separa- tion of issue and banking, 198, 205 ; notes issued against sil- ver, ig8 n. ; the purchase of gold by, 199 n. ; in crisis of 1825, 203 ; position of notes in case of insolvency, 204 n. ; profit from issue, 206 n. ; and suspension of Act of 1844, 206- 216 ; relation of, to other Eng- lish banks, 207 ; reserve of, 208-216 ; and the rate of dis- count, 210, 213, 221 ; and crisis of 1857, 211-217 ; branches of, 223 ; and the Baring fail- ure, 225 ; organization of, 226 ; dividends of, 227 Bank of France, of the simplest type, 119 ; establishment of, 120 ; relations with Napoleon, 121—124 ! monopoly of right of issue, 121, 125, 126 ; and its effects, 126-130 ; branches of, 125, 127, 156; capital of, 120, 123, 124, 133 ; government of, 122-152; partial suspension of , in 1805, 122 ; in 1814, 124 ; in 1848, 132 ; after the Restora- tion, 124-126 ; organization of its branches, 127 ; ill adapted to local wants, 127 ; discounts small notes, 130 ; expansion 247 248 INDEX. Bank of France — Continued. of, after 1850, 133 ; and note, 149 ; policy of, as to rate of discount, 134, 149 ; opera- tions of, in 1870-71, 135-142; fluctuations of its circulation, 144 ; limit of note-issue, 145 ; loan of, to Bank of England, 146 n. ; reserve of, 146 ; use of silver by, 147 ; gold premium policy of, 148 ; charter of 1897, 151 ; extent of government control, 152 ; relations of, to the State in time of war, 154 ; governors of, 154 n. ; pay- ments of, to the State, 155 Bank of Hamburg, 95 Bank of Netherlands, 117 Bank of Prussia, 230 Bank of Savoy, 135 n. Bank of Venice, 95 Bank money, of the Bank of Amsterdam, 99 ; premium on, 102 ; becomes inconvertible, 106 ; and ceases to have fixed value, 109 Bank-notes, similar in nature to deposits, 7, 16 ; see Notes and Note-issue Banks in Germany before 1873, 229 ; see Reichsbank Banks in the United States, see National Banks Banks of Louisiana, 35 Banks, number of, in the United States, 19 n. ; relation of capi- tal to size, 20 n. ; investments of, 24-26 ; money and checks in the receipts of, 47 n. Baring failure, the. Si, 225 Bonds required to be held by national banks, 181, 185 Bordeaux, bank of issue at, 125 Boston, use of combined reserves in, go Bradstreet's, 25 n. Branch banks, in France, 125, 127, 156 ; in United States, 186 ; in England, 223 ; in Ger- many, 240 Buffalo, banks of, combine re- serves in 1893, 9t Caisse d'Escompte, 120 Canadian banking system, re- demption of notes in, 72 Capital, of banks in the United States, 19 n. ; relation of, to size of banks, 20 ; of English joint-stock banks, 22 n. ; of Bank of France, 120, 123, 133 ; of state banks, 187 ; of na- tional banks, 188 ; of the Bank of England, 194 ; of Reichs- bank, 244 Cash items, explanation of, 36 Central reserve cities, 175 and n. 2 Certified checks, abuse of, 64 ; as currency, 92 n. Chase, Salmon P., 159-161, 185 Checks, as currency, 39-42 ; in- struments for the transfer of deposits, 40, 41 ; chief item of bank receipts, 47 n. ; safer than notes, 56 and n. 2 ; re- demption of, through Clearing House a safeguard against abuse of credit, 69, 70 Chemical Bank, 82 Circulation, see Note-issue City of Glasgow Bank, 213 Clearing House, operation of, 43 and n., 52 n. ; in London, 44 n. ; in New York, 53 ; es- tablishment of, in New York and in Boston, 67 n. ; restrains the expansion of credit of a particular bank, 68 ; but not of all banks, 68 Clearing-House certificates, 43 n. ; part of reserve of national banks, 175 Clearing-House loan certificates, 81, 85 Columbian Exposition, i86 n. Combined reserves, purpose of, 79 ; history of, in i860, 79- 84 ; in 1873, 84-86 ; in 1884, 86-88 ; in 1890, 88-91 ; in INDEX. 249 Combined reserves — Cont'd. 1893, 91, 92; objections to, 83 ; not a suspension of specie payments, 83, 84 ; success of, 93 ; nature of the relief af- forded, 94 Commercial paper, 24, 25, and n. Commune, the, and the Bank of France, 137 Comptoir d'Escompte, 130 n. Comptroller of the Currency, 163 n., 165, 170, 178 Credit, excessive, effects of, 5 ; use of, essential in banking, 23 ; excessive extension of, by banks, 63 Crises, sale of securities in time of, 33 and n., 215 ; in United States, of i860, 79 ; of 1873, 84 ; of 1884, 87 ; of l8go, 88 ; of 1893, 91 ; in England, of 1857, 211-217 Currency Act of 1900, 187-189 Deposits, from discount, 13 ; from other operations, 14 ; nature of the liability of the bank for, 16, 27 ; as currency, 39 ; how transferred, 39-42 ; in United States and United Kingdom, 41 n. ; limits upon circulation of, 45 ; cancella- tion of, 46 ; correspondence between, and loans, 47 ; little use of, in sparsely settled re- gions, 50 ; and checks chief- ly used in English-speaking countries, 51 ; and notes, prac- tical identity of, 54 ; not always recognized by law, 55 ; more convenient than notes in cities, 56 ; the nature of those of Bank of Amsterdam, 100 ; of the Bank of England, 208 ; of English banks, 223 ; use of, in Germany, 240 Detroit, banks of, combine re- serves in 1893, 9 1 Discount, analyzed, 10-12 ; rate of, and protection of reserve, 34 ; not a function of the Bank of Amsterdam, 103 Dividends, of national banks, 183 ; of the Bank of England, 227 ; of the Reichsbank, 244 Dutch East India Co., 116 Elasticity, of note-issue secured by redemption, 74 ; absence of, in United States, 189 English joint - stock banks, growth of, 197, 223 ; relation of, to the Bank of England, 208, 223 Expenses, place of, in bank ac- counts, 35 Failures, in the United States, 25 n. France, slow development of banking agencies in, 128, 130 ; see Bank of France Franco-German war, operations of the Bank of France during, 135-141 Free banking, 62, 168 French banks of issue other than the Bank of France, 121, 125; become its branches in 1848, 127 Germany, coinage law of 1873, 229 n. ; independent banks of issue in, 232, 239 Gold, premium on, in Paris, in 1871, 139 n. ; accumulation of, after 1873, 142 n. Gold banks, 162 n. Hankey, Thomas, 224 n. Havre, bank of issue at, 125 Interest, payment of, on bankers' deposits, 178 Issue, see Note-issue Liabilities, ratio of reserve to, 30,31 2SO INDEX. Lille, bank of issue at, 125 Limitation of note -issue, in France, 145 ; in the United States, 165, i8g ; in England, 198 ; in Germany, 232, 239 Liverpool, Lord, 196 Lloyd's Bank, 224 n. Loans, nature of bank, 10-12 ; limits on increase of, 29 ; cor- respondence between, and de- posits, 48 ; of Bank of Am- sterdam to the city, 115 ; of small amounts by the Bank of France, 131, 149 ; of Bank of France to the State, 156 London and County Bank, 224 n. London and Westminster Bank, 197. Louisiana, regulation of the banks of, 35 Lyons, bank of issue at, 125 McCuUoch, Hugh, 170 McLeod, analysis of banking operations by, 66 n. Marseilles, bank of issue at, Mortgages as banking invest- ments, 26 Nantes, bank of issue at, 125 Napoleon, control of the Bank of France by, 122-124 National banks, of the United States, foundation of, 158— 163 ; gold banks, 162 n. ; gen- eral safeguards, 163 ; public functions of, 164 ; conditions of note-issue, 165, 189; system of note redemption, 166 ; lia- bility of government for notes of, 167 ; original limits on note-issue, 168; apportionment of, 169-174, 186 ; distribution of circulation before 1873, 169-174 ; regulation of re- serve, 34, 175, 178 ; composi- tion of reserve, 176 ; profits from issue, 180 ; bond deposits of, 181 ; surplus of, 183 ; divi- dend of, 183 ; amount of notes issued, 184, 189 ; relation of issue of, to the price of bonds, 184 ; branches of, illegal, i86 and n. ; and State banks, 187, 188 ; capital, 188 National Provincial Bank, 22 n., 224 n. New Orleans, banks of, combine reserves in 1893, 91 New York banks, position of, 177 ; generally ch. VII. on, see Combined Reserves Notes, danger of overissue, 7, 62 ; more important than checks in Europe and in sparsely settled regions, 50, 51 ; greater regulation of, than deposits, 58 ; modes of secur- ing, 61, 62 ; overissue of, but one form of excessive credit, 62 ; not the most serious, 64 ; period of circulation longer than checks, 70 ; regular re- demption difficult, 71 Note-issue, of city and country banks, 66 and n. ; of national banks inelastic, 76, 189 ; in France not specially secured, 119 ; stages in growth of the monopoly of the Bank of France, 121, 125, 126 ; of French banks outside Paris before 1848, 126 ; importance of, in France, 130; limit on, by the Bank of France, 145 ; of London private bankers, 195 ; of Bank of England be- fore 1844, 195 ; of country bankers in England before 1844, 195 ; of English joint- stock banks before 1844, 196 ; of Bank of England after 1 844, 188, 204 ; of country banks in England since 1844, 200-202 ; decreasing, of English country banks, 201 ; of Germany, ap- portionment of, 232 ; of Reichsbank, 232 ; of indepen- INDEX, 251 Note issue — Continued. dent German banks, 232, 239 ; of Reichsbank, increase of, 237 ; see National Banks, Bank of France, etc. One-pound notes, issue of, by Bank of England, 201 n. ; by Scotch banks, 202 Orleans, bank of issue at, 125 Other assets, explanation of, 36 Pacific States, gold banks in, 165 n. 2 Paterson, Wm., 192 Peel's Act, 198 ; suspension of, 206-220 Philadelphia, use of combined reserve in, 91 Pittsburgh, banks of, combine reserves in 1893, 91 Post-notes, explanation of, 65, 203 n. Profit, from note-issue, in United States, 180 ; of the Bank of England, 206 n. Public discount offices in France, in 183O, 128, I2g ; in 1848, 129, 130 Rate of discount, and protection of reserve, 34, 221, 243 ; of the Bank of France, 134, 148 ; in the United States, 179 ; of the Bank of England, 210, 213 ; of the Reichsbank 241 ; of other German banks of issue, 242 Recepisse, 104, Ii8 n. Redemption of checks through Clearing House, 67 ; a restraint on abuse of credit, 68 Redemption of notes, 70 ; under Suffolk bank system and in Scotland and Canada, 72 ; diffi- cult under a system with many banks, 73 ; objections to, 73, 74 ; advantages of, 74, 75 ; in national banking system, 166 Reichsbank, the, origin of, 228 ; organization of, 231 ; regula- tion of note-issue, 232 ; elastic limit on issue, 234, 237 ; policy of, as to its reserve, 241 ; rate of discount of, 241 ; relation of, to other banks, 242 ; division of profits, 244 ; capital and surplus of, 244 Reichs-kassenscheine, 230 Reserve, proportion of, to lia- bilities, 30 ; in the United States, 30 n. ; in the Bank of England, 31 n. ; management of, 31, 32 ; securities no sub- stitute for, 32 ; regulations con- cerning, in the United States, 33> 175. 178 ; in Louisiana, 35 ; various meanings of, 38 n. ; protection of, under central- ized system, 78 ; under decen- tralized system, 79 ; dangers of a many-reserve system, 93 ; of Bank of France, 145 ; com- position of, 146 ; of national banks, composition of, 176 ; of New York banks, 177 ; management in a crisis in England, 220 ; of Bank of England, 207-209 ; of other English banks, 208, 221 ; of Reichsbank, 241 ; see Com- bined Reserves Reserve cities, 175 Rest, 203 n. Ricardo, plan of, for a national bank, 200 n, Rothschilds, 18 n. Rouen, bank of issue at, 125 Scotch banks, 72, 202 Securities an auxiliary to the reserve, 33 Seven-day bills, 203 n. Shareholders, liability of, 21 ; in the United States, 163 Silver, in reserve of Bank of France, 147 ; held against Bank of England notes, 198 11. ; effect on, of German law of 1873, 229 n. 252 INDEX; South Sea Company, 194 Southern States and the appor- tionment of national banks, 169-174 State banks tax on note-issue of, 162 ; in Western States, 186 Stocks and bonds as a banking investment, 25 Suffolk bank system, 71, 166 n. Surplus, of banks in the United States, 19 n., 183 ; defined, 35 ; of the Reichsbank, 244 Toulouse, bank of issue at, 125 Tours branch of Bank of France, 137 Treasury of United States and national banks, 163, 165 Undivided profits, explanation of, 35 United States, first Bank of, 118 ; second Bank of, 51, 118 Venice, banking in, 3, 98, loi Wealth not created by banks, 5 Western Bank of Scotland, 213 Western States and the appor- tionment of national banks, 168-174 ; small state banks of, 187, 188 By CHARLES A. CONANT A History of Modern Banks of Issue With an Account of the Economic Crises of the Present Century. Fifth Impression. 8°. $3.00. " No better volume can be recommended to the general reader who wishes to familiarize himself not only with the theory of bank- ing, but with the history and actual experience of this great agency of industrial progress." — Chicago Evening Post. "We can only express our hearty appreciation of the book as a whole. It is extremely interesting. 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