3 ° THOMAS BOUCHIER MOXON ON large a unit for ordinary business transactions. To remove this difficulty, the Chancellor of the Exchequer, in 1697, issued Exchequer Bills to the amount of ^2,000,000, bearing interest, in sums of ^5 and ;£io, which proved rapidly effective, and in a few months bank notes were again at par. In 1759, notes of ^15 and £10 were first issued, and in 1781 the London bankers, though not prohibited from issuing notes till 1844, ceased to issue them, and for the first time supplied their customers with cheque books. In 1763 commenced a great industrial development which de manded a large increase in the currency, but as the Bank Charter prohibited the issue of notes by any firm of more than six partners, although the Bank had no branches in the provinces, no powerful banks could be created to supply the wants of the country. The demand for small change was supplied by irresponsible issuers, who gave notes for very small amounts, until in 1775 an Act prohibited the issue of notes under ^1, and in 1777 the minimum was raised to ^5, but again reduced in 1797 to^i. In 1782, owing to an enormous and sudden increase in our foreign trade, the exchanges turned against England and necessitated the export of gold. The Bank promptly refused to make further advances to the Government, and shortly the exchanges turned in our favour and the Bank lent freely. As we shall have occasion to refer to the “favourable” or “ unfavourable ” state of the money exchange with foreign countries, it may be observed that the terms “ favourable ” and “ un¬ favourable ” appear to be survivals of the “mercantile theory,” which held that the advantage of foreign trade was to be measured by the amount of actual money it brought into the country. This theory is exploded, but in exchange operations the terms are still used, and with propriety, as a favourable exchange is one which secures to us a larger amount of foreign money for a sovereign than it intrinsically is worth, whilst an unfavourable one gives us ^ less than its par value. OUR BANK NOTE SYSTEM, ETC. 31 In 1793 j &5 notes were first issued by the Bank of England. In 1794 a great panic broke out, and out of 400 country banks 100 absolutely stopped payment, reducing the country circulation by one half. As the Bank of England did not issue £1 and £2 notes until 1797,- there were no means of supplying the deficiency in the currency. The dread of being unable to obtain money intensi¬ fied the panic, and the directors of the Bank, losing nerve, added to the terror by a severe curtailment of their discounts, although the foreign exchanges were in favour of England receiving gold from abroad. Universal failure seemed imminent. It was not a question of having property; the grave anxiety was whether the richest could obtain sufficient currency to pay their debts with. Luckily, Sir John Sinclair remembered the Exchequer Bills of 1697. An Act was passed authorising the issue of ^5,000,000 Exchequer Bills in sums of ;£ioo, ^50, and £ 20. They were promptly issued, and operated like magic in restoring confidence. In 1795, owing to the War, bills drawn on the Treasury, and vast compulsory advances to the State, the exchanges became unfavourable; and in 1797 another panic broke out. The banks in Newcastle-upon-Tyne succumbed to a run on them, and stopped payment. The terror spread. The Bank protected itself by con¬ tracting its circulation, although again the exchanges were in favour of the importation of gold, and in the scramble for cash the Three per Cents fell to 51. Thereupon the Cabinet required the Bank to suspend cash payments, against its wish. It issued a notice of the suspension, adding that there could be no doubt as to the security of its notes, and forthwith increased its accommodation by ^2,000,000. Instant relief was felt, and 4,000 merchants passed a resolution to support the credit of the notes. An Act was also passed enabling the English banks to issue notes under ^5, and Scotch banks to issue notes under Cash payments were not completely resumed by the Bank until May, 1821, although it gave notice in 1817 that it was ready to resume them. 32 THOMAS BOUCHIER MOXON ON BANK RETURNS WHILE CASH PAYMENTS WERE SUSPENDED 31st August. Circulation. Depreciation of Bank Notes Deposits. Bullion. 1797 . £11,114,000 .. Per Cent. ... £7,765,000 ... ... £4,089,000 1798 . 12,180,000 .. — ... 8,300,000 ... 6,546,000 1799 . 13,389,000 .. — ... 7,642,000 ... 7,700,000 1800 . 15,047,000 .. _ nil 8,335,000 ... 5,150,000 1801 . 14,556,000 .. 8 ... 8,133,000 ... 4,835,000 1802 . 17,097,000 .. 7 ... 9,739,000 ... 3,891,000 1803 . 15,983,000 .. 3 ... 9,817,000... 3,592,000 1804 . 17,154,000 .. 3 ... 9,715,000 ... 5,879,000 1805 . 16,338,000 .. 3 ... ... 14,048,000 ... 7,624,000 1806 . 21,027,000 .. 3 ... 9,636,000 ... 6,215,000 1807 . 19,678,000 .. 3 ... ... 11,789,000 ... 6,484,000 1808 . ... 17,111,000 .. 3 ... ... 15,012,000 ... 6,015,000 1809 . 19,574,000 3 ... ... 12,257,000 ... 3,652,000 1810 . 24,794,000 .. 13 ... ... 13,617,000 ... 3,191,000 1811 . 23,286,000 . 8 ... ... 11,075,000 ... 3,243,000 1812 . 23,026,000 . 21 ... ... 11,848,000 ... 3,099,000 1813 . 24,828,000 . 23 ... ... 11,159,000 ... 2,712,000 1814 . 28,368,000 . 25 ... ... 14,849,000 ... 2,097,000 1815 . 27,248,000 . . 17 ... ... 12,696,000 ... 3,409,000 1816 . 26,758,000 . . 17 ... ... 11,856,000 ... 7,562,000 1817 . 29,543,000 . 3 ... 9,084,000 ... ... 11,668,000 1818 . 26,202,000 . 3 ... 7,927,000 ... 6,363,000 1819 . 25,252,000 . 4 ... 6,304,0*0 ... 3,595,000 1820 . 24,299,000 . 3 ... 4,420.000 ... 8 ,211,000 1821 . 20,295,000 . . nil 5,818,000 ... ... 11,233,000 1822 . 17,464,000 . — ... 6,399,000 ... ... 10,097,000 In 1824 the interest on a large portion of the National Debt was reduced. ^150,000,000 was sunk in Mexico and South America; mining shares “ boomed ” so that a £10 share valued at ^43 on 10th Dec., 1824, was at ^150 on nth January, 1825. Bullion was leaving the Bank, the exchanges were against us, and still the Bank increased its issues. Early in 1825 the Bank began to prepare for the storm, and contracted its issues. Other banks struggled to gather in their funds, and this pressure, aggravating the already overstrained and unsound position, culminated in a panic OUR BANK NOTE SYSTEM, ETC. 33 which brought down nearly half the banks in the country, at any rate temporarily. By the 12th December, 1825, affairs were at such a pass that it was impossible to convert the best Government stocks into money, and the bullion in the Bank ran down to ;£i,027,000. Government declined to intervene to save the Bank and the country, and the distress was frightful. Fortunately, the exchanges turned in favour of the country. The Bank reversed its policy and lent profusely, issuing upwards of ^5,000,000 in three days, and the panic was stayed almost immediately. This relief extended, however, only to London and to the larger houses; the failure of the local banks left the country without small change. The small notes of the Bank of England had previously been withdrawn, but, fortunately, a chest of £1 notes was discovered in the Bank, and with the permission of the Government they were sent into the country. ^500,000 in ^1 notes of the Bank were sent down, and there, too, the panic subsided. When Parliament met in 1826, and the circumstances of the commercial distress came to be inquired into, a strong opinion was expressed by Lord Liverpool, the Premier, that the excessive issue of small notes was the cause of much of the excessive speculation, and it was resolved that no further small notes should be sanctioned, and that all notes under ^5 should be withdrawn ,by the 5 th April, *1829. Since that time no small notes have been issued in England. It was intended to have extended the measure to Scotland and Ireland, but so strong was the opposition, led in Scotland by Sir Walter Scott, who wrote under name of Malachi Malagrowther, that the proposal was withdrawn. In 1826 an Act was passed which made it lawful for any number of persons to carry on the business of bankers in England, and to issue notes at any place or places exceeding 65 miles from London. In 1832 Mr. Horsley Palmer, the governor of the Bank, stated that under ordinary circumstances the Bank considered it desirable 34 THOMAS BOUCHIER MOXON ON to invest two-thirds of its liabilities in interest-bearing securities and one-third in bullion. At this time its return (May ist, 1832) read: Liabilities, circulation, £19,036,000; deposits, public, £3,391,000; private, £6,256,000; Assets, public securities, £20,541,000 ; private bonds, &c., ,£2,200,000 ; bills, £2,396,000, bullion, £5,899,000. In 1833 Bank of England notes were declared to be legal tender in England, so long as it paid its notes on demand in legal coin. In 1836 an extraordinary development of home enterprises took place, the nominal capital of the new projects amounting to nearly £200,000,000. The new banks, as well as the Bank of England, encouraged the speculation; difficulties among the Irish banks drew bullion from England; the Northern and Central Bank in Manchester suspended; other houses appealed to the Bank for assistance, and to tide over the difficulties the Bank increased its discounts from £3,500,000 in July, 1836, to £11,400,000 in January, 1837. Bullion slowly came forward and rose from £3,831,000 in February, 1837, to £10,520,000 in March, 1838. Later, in 1838, a financial crisis on the Continent drew gold from the Bank, and the directors, failing to raise their rate of discount to counteract the drain, found themselves getting into difficulties so that in May, 1839, they not only raised the rate of discount to 6 per cent, but in July, through the intervention of Messrs. Baring, borrowed £2,000,000 in gold from the Bank of France, which was not all repaid until April, 1840. On September 3rd, 1839, the Bank’s circulation was £17,896,000. Deposits, public, £2,069,000; private £4,056,000; total liabilities,£24,021,000; its assets were: public debt, £12,518,000; bonds, £4,215,000; bills, £7,938,000; bullion, £2,406,000. In 1840 a committee for inquiry into the system of note issues was appointed, and in 1844 Sir Robert Peel introduced the cele¬ brated Bank Acts of 1844-5, which have since been the basis of our note circulation. The leading idea of this measure was to suppress the unlimited issue of notes, and ultimately to merge all OUR BANK NOTE SYSTEM, ETC. 35 issues in that of the Bank of England, which itself was subjected to a like limitation of issue. The Bank of England was permitted to issue ^14,000,000 of notes against securities ; all notes in excess of that amount were to be covered by bullion, of which one-fifth might be silver. All existing country banks of issue in England might issue notes to the amount they respectively had in average circulation during the twelve weeks preceding the 27th April, 1844, but if any exceeded this amount they were to forfeit the amount of the excess issue, no 'additional issue being permitted, even if covered by bullion. If any issues lapsed, the Bank of England might be allowed to increase its issue by two-thirds of the amount so extinguished. The English and Welsh country circulation was fixed at ,£8,631,647, and no new banks of issue were allowed to be established. The Scotch and Irish banks issues were fixed at ^9,441,703, but they were allowed to exceed their limits if they held gold to cover any excess on the average of four weeks’ issue, and in those countries, too, no new issues were to be allowed. The new system was soon put to the test. A drain of bullion commenced in September, 1846. By April, 1847, the Bank’s banking reserve fell to ^2,558,000 ; the usual panic set in, and dis¬ count rates rose to 12 per cent. The Government were urged to suspend the Bank Act, but declined. Fortunately the foreign exchanges turned in favour of this country, and in about three weeks the tension relaxed. Speculation again became rampant. In August failures occurred with frightful rapidity, Consols which were above par in 1844, and at 94! in 1845, fell to 80. The ex¬ changes were in our favour, but internal troubles grew worse and worse, terror took hold of the commercial world, money could not be obtained on any terms, and general ruin seemed imminent. On 23rd of October, the Government authorised the Bank to issue notes in excess of the limits fixed by the Act of 1844. The Bank Act was “ suspended,” the panic vanished, as Mr. Macleod says, “ like a dream.” No sooner was it known that notes might be had than the want of them ceased, and the Bank did not issue one note 36 THOMAS BOUCHIER MOXON ON beyond those authorised by the panic-creating law. The Govern¬ ment placed no limit on the amount of uncovered notes to be issued, but fixed the rate of interest to be charged at 8 per cent. Notes in Bullion in Banking Minimum Rate 1847. Actual Circulation. Issue Dept. Reserve. of Discount. £ £ £ Oct. 16 ... 19,360,000 ... 7,990,000 ... 3,071,000 ... Aug. 5, 5 % „ 23... 20,714,000... 7,865,000 ... 1,994,000 ... Sept. 30, 6 „ 30 ... 20,832,000 ... 8,009,000 ... 1,606,000 ... Oct. 25,8 Nov. 6 ... 20,397,000 ... 8,437,000 ... 2,333,000 ... Nov. 22, 7 — — — — Dec. 2, 6 In 1857 came another panic. By nth September the reserve fell to 462,000, and again, “when universal ruin was impend¬ ing,” on 12th November, the Government again authorised the Bank to issue notes in excess of its limit, at a charge of not less than 10 per cent; and again public excitement was calmed, although the highest excess issue was only ^928,000 on 20th November, and 30th November it was reduced to ^15,000. Notes in Bullion in Banking Minimum Rate 1857. Actual Circulation. Issue Dept. Reserve. of Discount. £ £ £ Nov. 4 ... 20,267,000 ... 7,947,000 ... 2,706,000 ... July 16, 5J „ 11 ... 20,183,000 ... 6,666,000 ... 1,462,000 ... Oct. 8, 6 „ 18 ... 21,307,000 ... 6,080,000 ... 1,552,000 ... Oct. 15,7 „ 25 ... 21,340,000 ... 6,784,000 ... 2,398,000 ... Oct. 19,8 Dec. 2 ... 21,103,000 ... 6,896,000 ... 2,729,000 ... Nov. 5, 9 „ 9 ... 20,143,000... 7,568,000 ... 4,402,000 ... Nov. 9, 10 Dec. 24, 8 In 1866 came “ Overend’s panic,” on the 10th May—“Black Friday,” probably well in the memory of all of us. The Chancellor, “ amidst the loudest cheering from all parts of the House f announced that they had informed the Bank that if they thought proper to make advances beyond the limit, the Government would bring in a bill of indemnity; and everything calmed down, although no notes were issued in excess of the limit of the Act of 1844. OUR BANK NOTE SYSTEM, ETC. 37 1866. May 9 „ 16 „ 23 „ 30 June 6 Noteain Bullion in Banking Minimum Rate Actual Circulation. Issue Dept. Reserve. of Discount. £ £ £> 22,345,000 ... 12,295,000 ... 5,811,000 ... 15, Mar. 6 26,121,000 ... 11,852,000 ... 1,203,000 ... 3, May 7 25^469,000 ... 11,300,000 ... 1,388,000 ... 8, May 8 26*019*000 ... 11,434,000 ... 860,000 ... 11, May 9 25,453,000 ... 12,620,000 ... 2,826,000 ... 12, May 10 _ _ — 16, Aug. 8 No change has been made since 1844 in the regulations for the issue of notes in the United Kingdom, though in 1873 the Chan¬ cellor of the Exchequer, Lord Sherbrooke (then Mr. Lowe), brought in a bill to enable the Bank to extend its issues when the exchanges were favourable to the country, on condition that the minimum rate of interest charged should be not less than 12 per cent! Needless to say, the conditions were regarded so onerous and impracticable that the proposal fell through. Statement of the Note Issue in 1844 and 1890. Actual Circulation Authorised Issues. Actual Circulation. per'Head of Population. £ £ £ £ £ * Bank of England .14,000,000. .16,450,000. . 20 , 176,000. .25,315,000 English Country Banks .. 8,631,647.. 4,832,407.. 8,031,080.. 2,235,000 Total_£22,631,647 £21,282,407 £28,807,000 £27,560,000 £1 14 6 £0.19 8 ScotchBanks . 3,087,209.. 2,676,350.. 3,087,000.. 6,432,000..1 2 6..1 12 0 Irish Banks. 6,354,494.. 6,354,494.. 6,354,000.. 6,421,000..0 15 3..1 5 5 Scotland Ireland ., Percentage of Notes under Five Pounds to Total Circulation. 1846. 1890. . 69-7 .71-6 . 57 0 . 43-3 From this rapid survey of past crises, we find that they have generally originated in undue speculation, developing unsound business; failures have naturally followed, distrust has been aroused, and banks have been called upon to redeem thei note issues or * 3 » THOMAS BOUCHIER MOXON ON repay their deposits. When gold has been taken it has not been for export but because of its intrinsic value, and, as we have seen, its place has been supplied satisfactorily to the public by the issue of exchequer bills or of bank notes, based upon unquestionable security. The public have only required decisive proof of the safety of their money to calm their anxiety. Merchants and bankers have only needed an assurance that on producing good security the means to fulfil their engagements should be forth¬ coming, and panic has ceased. The discredit that fastened upon country bank notes was due to the want of confidence in their security; based solely upon credit, once that was shaken, the public would have none of them, though they were ready enough to accept the Bank of England notes, in which they had full confidence. The country issues did harm, because they were not secured. They produced exactly the same effect as may still be produced by a reckless granting of credit, only, as they were more distributed among the people when they were discredited, they produced more general alarm and distrust. After the City of Glasgow Bank failed, in 1878, its note issue in the Isle of Man was sought for, instead of being at a discount, because by a law of the island it was fully secured upon real estate,, and the notes, after its stoppage, carried interest at 4 per cent. The people did not want gold ; they required security, and that they knew these notes possessed. It will have been observed how almost every panic has been calmed by the Bank increasing its issue of notes, and a reference to foregoing tables will show that since the Act of 1844 at no time has there been any doubt as to the convertibility of the note. The stock of bullion has always been far in excess of any probable foreign drain, and yet we have been subjected to the strain of panic after panic to satisfy the requirements of a theory which wherever and whenever tried, breaks down. Annexed is a table of the returns of the Banks of England, France, and Germany, made up on similar bases :— OUR BANK NOTE SYSTEM, ETC. 39 October 22, 1890. October 23, 1890. October 23, 1890. Capital. .£14,553,000 £7,300,000 £6,000,000 Reserve . . 3,153,000 2,030,000 1,296,750 Public deposits . . 3,451,000 8,592,000) 17,379 450 Other deposits . 29,304,000 15,588,000 j Notes issued .... . 24,532,000 122,150,000 50,797,100 Bank bills . 211,000 1,932,000 - £75,204,000 £157,592,000 £75,473,300 Assets Bank of Bank of Imperial Bank England. France. of Germany. October 22, 1890. October 23, 1890. October 23, 1890. Government securities £27,213,000 £14,108,000 Secys., £7,456,750 Other securities . 28,390.000 45,400,000 Bills ...30,835,150 «... aM n S( gold 48,269,000 *Notes.. 1,342,350 C ° in ’ &C . 9) ° ,0 °° 1 silver49,815,000 +Gold...23,892,550 tSilver 11,946,500 £75,204.000 £157,592,000 £75,473,300 * Of other banks. t Estimated. Separating the departments, as the Act of 1844 requires, ff the Bank of England made the following return of its Banking Department Liabilities. Capital and reserve.£17,706,000 Deposits and bank bills . 32,966,000 £50,672,000 Assets. Government and other securities .. £39,153,000 Notes and gold. 11,519,000 £50,672,000 Thus concealing 42 per cent of the actual reserve of specie. 40 THOMAS BOUCHIER MOXON ON Whilst the Bank of France held 66 per cent of its liabilities in specie, the Bank of England only held 34 per cent. The Bank of England employed ^18,400,000 more of its funds in earning dividends for its shareholders than it would have done had it kept the reserve maintained by the Bank of France. Although we generally look upon the Bank of England as a public institution, still it is actually simply a joint-stock Bank, electing its own directors, and entirely free from State control, though, the State being its principal customer, any suggestions made by the Government receive full consideration. The large amount of Government securities it holds, exceeding the amount of its note issue, and its immense capital, are assurances of the security of its note issue, but the comparatively small store of coin and bullion naturally cause anxiety in times of panic to a nation whose foreign trade is so large as ours. Of course, it should be remembered that the Bank of England has had to work under the restriction of Peel’s Act. Had it been free to issue notes as occasion required, it is quite possible that its note circulation might have increased materially, and its reserve approximated more closely to that held by the Bank of France. On December 26th, 1839, the Bank of France had notes in circulation ^£8,164,000, and held coin ^8,539,000; whilst now its circulation is ^122,150,000, and its coin ^98,084,000. BANK OF ENGLAND. ; Average amount of Notes in circulation during 1889. £5 . . £11,278,000 . £10 . 4,036,000 . . 16-55 £20/100 . 6,380,000 . . 26-17 „ £200/500 ... . . 1,471,000 . .. 6-03 „ £1,000 . . 1,217,000 . . 5- £24,382,000 100- OUR BANK NOTE SYSTEM, ETC. 41 ENGLISH COUNTRY ISSUES. The issues are based solely on the credit of the issuers, who, if private banks, are not required to publish balance sheets, though one private bank, it may be noted, has taken the advanced step of publishing its accounts, duly audited. The advantage of the privilege to the issuers cannot be doubted, as, in addition to the use of the money they obtain for the notes in circulation, they have the advantage of supplying their tills with unissued notes, to a certain extent, where a non-issuing bank would have to provide Bank of England notes, and lose the interest upon the money they represent. The advantage to the public, so long as the notes are duly honoured on presentation, is not to be overlooked. Most of the issuing banks have in ordinary circulation a much less amount than their authorised issue, and when temporary local requirements call for an increase of currency they are enabled to supply it without in any degree affecting the central reserve of the Bank of England, whilst a non-issuing bank would have to bring down a supply of Bank of England notes. The public would further benefit by obtaining this accommodation at a less cost were the right of issue not a monopoly ; but it is clear that, where one bank issuing its own notes has in competition with it only banks who purchase their notes from the Bank of England, the issuing bank has no inducement to give the public the advantage of the extra profit it can make; the usual effects of monopoly or protection naturally are produced, and the public suffer for the economic error. Country bank notes are not a legal tender. In the Act of 1844 the English country banks of issue were, as compared with the Scotch and Irish banks, unjustly treated, as they were prohibited from exceeding their fixed limits, even although they held gold in the till against any excess issue. 42 THOMAS BOUCHIER MOXON ON SCOTCH BANKS OF ISSUE. The Bank of Scotland, founded in 1695, at first received no deposits properly so called, but made advances by the issue of its own notes in sums of ^5, ;£io, ^20, and ^50 until 1704, when it first issued £1 notes. Later, in 1729, the Royal Bank introduced the system of “cash credits.” Com¬ petition grew fierce, notes were issued for 10s., 5s., and even, in Perthshire, for is., and actually for id. In 1830, the Bank of Scotland, to protect themselves from sudden runs, made their notes payable six months after demand, with legal interest added. Such uncontrolled issues soon brought the notes to a discount, but in 1765 the two leading banks made common cause and obtained an Act suppressing all notes under £1, and declaring that all notes should be payable to bearer on demand. It will be seen from the table on page 37 that these banks, under the more favourable conditions granted to them by the Act of 1844, have in circulation an amount of notes far in excess of their fixed limits. The figures in the table do not fully represent the advantage they derive from their note issue. Competent authorities have estimated that, owing to the method of averaging their monthly circulation, they have in actual circulation ^2,000,000 more than their returns show, and Mr. J. S. Fleming, of the Royal Bank of Scotland, estimates that, in addition, they use as till money nearly ^10,000,000 more notes, so that the note system of Scotland economises no less than ^18,000,000. This, of course, includes the advantage of the £ 1 note issue. The saving to the country will be readily seen. It is often argued that so many economies of money have been introduced by means of cheques and the development of the clear¬ ing system that no larger issue of notes is required. It does not concern us here to advocate an enlargement of issue, but reference to the same table will show that in Scotland, where the banking offices are as numerous as blackberries, where a clearing system is OUR BANK NOTE SYSTEM, ETC. 43 in full operation, and among a people who look keenly after their “ siller,” the circulation of notes per head is considerably more in 1890 than in 1844, and that this cannot be entirely accounted for by the increased circulation of small notes is evident from the subsidiary table, showing that practically they form no larger proportion of the total circulation now than in 1844. The right of issue in Scotland also is a monopoly, and the notes have no special security, but rank with the ordinary liabilities of the banks. By “ Peel’s Act,” the Scotch banks were required to hold gold for all notes in circulation, estimated on the monthly average, above the limits fixed by the Act, and under this regulation they hold in their strong rooms between ^3,000,000 and ^4,000,000 in gold; and at the time of the “ term ” payments twice a year make a further demand upon the Bank of England for about ^500,000 more. All this gold is withdrawn from use. It is not required in Scot¬ land, and is not available to meet foreign payments, which, if they had to be made by Scotland, would actually be made through London. It cannot be made available except by a reduction of the amount of notes in circulation, and yet it is not hypothecated to cover the notes issued. This absolute waste of gold is due to the regulations of the Act of 1844. All the issuing banks there hold Government securities equal to, or in excess of, their total circulation, as shown in the returns; and if a like amount of these were appropriated against the notes and the gold released, the banks would benefit by the interest they could obtain on funds now lying unproductive in specie, and the United Kingdom would benefit by the addition of so much gold to its ultimate reserve. To provide against the demand arising during “ runs,” either Bank of England notes (with a £1 issue) might be declared a legal tender in Scotland, or exchequer bills for small amounts might be created. 44 THOMAS BOUCHIER MOXON ON IRISH BANKS OF ISSUE. The Irish banks have identically the same rights of issue as the Scotch banks j but whilst the Scotch notes are convertible only at the head office of the issuing bank, the Irish notes are payable at the place of issue by law and wherever presented in practice. This compels the Irish banks to keep a larger amount of specie; and whilst the Scotch banks only hold about £500,000 in gold for their ordinary till money—excluding the provision for their excess note issue—the Irish banks hold about ,£2,750,000 gold for ordinary requirements. A study of the history of banking in Ireland does not warrant one in thinking this coin reserve could safely be dispensed with, unless some means could be devised, agreeable to the national sehtiment, for absolutely securing the issue. At the same time, it is much to be regretted that a country where capital is so valuable should lock up at least £2,000,000 of gold for no practical purpose. UNITED STATES OF AMERICA. The present note system of the United States dates from 1863. The scheme proposed by the Hon, S. P. Chase, in 1861, aimed at providing:— (1) A circulation of notes bearing a common impression, and authenticated by a common authority. (2) The redemption of these notes by the associations and institutions to which they may be delivered for issue. (3) The security of that redemption by the pledge of United States stocks, and by an adequate provision of specie. To provide this currency National Banks were authorised under the following conditions :— The shareholders’ liability is equal to the par value of their shares in addition to their shares. That is to say, all national banks, after their working capital is called up, are “ limited ” banks, 50 per cent of their subscribed capital being paid up. OUR BANK NOTE SYSTEM, ETC. 45 The directors, of whom there must be five, are personally liable for all losses to shareholders or to the public through any violation of law occurring with their knowledge. The minimum capital is fixed at 50,000 dols. for places of a population of not over 6,000; 100,000 dols. for those with between 6,000 and 50,000 inhabitants ; and 200,000 for larger cities. Half the capital must be paid in before business is commenced, and the other half within five months after. If any of the capital is lost a call must be made to make good the loss. The banks may do a general banking business, and may be depositories of the public moneys, on condition of furnishing security to the Government. From 30,000 dols. to 50,000 dols. of registered bonds of the United States must be purchased out of their capital funds, and these bonds must be deposited with the Treasurer of the United States. Against these bonds the banks may receive from the Comptroller of the Currency bank notes to the extent of 90 per cent of the par value of the bonds in the case of the smaller banks, and so on in inverse proportion to the capital of the banks, those with a capital of 3,000,000 dols. and upwards being only granted 60 per cent of their capital in notes, whatever amount of bonds they deposit. These notes express on their face that they are secured by United States bonds, and if the bonds lodged against them are depreciated below the value of the notes, the Comptroller is required to collect the deficit from the respective banks. Payment of the notes is guaranteed by the United States, and practically, except for customs duties, they are legal tender. If any bank fails to redeem its notes at par, in lawful money on demand, its bonds are forfeited, and the proceeds applied in pay¬ ment of the notes. Every issuing National Bank is required to keep up with the Treasurer of the United States a special fund, at all times equal to 5 per cent of its circulation, for the purpose of the current re¬ demption of its notes. 46 THOMAS BOUCHIER MOXON ON So satisfactory has the system proved, that not a dollar has been lost by the public upon National Bank notes during the 27 years they have been in circulation. One-tenth of the profits every half-year are required to be carried to a surplus fund until it equals 20 per cent of the capital, and all debts on which interest is overdue six months are to be considered bad in estimating the profits. No one customer is to be trusted more than one-tenth part of the paid-up capital of the bank, except in ordinary discounts. The country National Banks are required to keep 15 per cent of their deposits in cash, or at call with approved agents in the larger cities. The banks in larger cities are required to keep a cash reserve of 25 per cenf of their deposits (the note redemption fund forms part of this reserve), but one half of their reserve may be at call at New York, Chicago, or St. Louis. The banks in these three cities are required to keep their full reserve of 25 per cent in lawful money of the United States. When the reserves thus provided for fall below the fixed amount in the case of any bank, it shall not increase its liabilities by making any new loans or discounts until the required proportion has been restored, and the Comptroller may notify any such association to make good such reserve, and if it fail for thirty days thereafter, so as to make good^ its reserve, the Comptroller may , with the concurrence of the Secretary of the Treasury, appoint a receiver to wind up the business of the association. Here, again, by a new adaptation, we arrive at the panic line. Time after time the Treasurer of the United States has stepped in to alleviate the distress, but if he cannot give relief, no help remains, and often before, as we have seen lately also, the utter impossibility of obtaining currency has brought good houses down It might have been supposed that the large issue of silver certificates would have added materially to the currency, but the high price the Treasurer has bid for United States bonds to reduce the surplus in his hands, the calling in of bonds, and the OUR BANK NOTE SYSTEM, ETC. 47 heavy taxation of National Bank issues has had the effect of causing many banks to withdraw their circulation, so that the Silver certificates have added but little to the amount of notes in circulation. Amount of Notes of Various Denominations Outstanding (30th June, 1889, and 31st October, 1889). Dollars National Bank. United States. Gold Certificates. Silver Certificates. Total. Per cent. 1 375,000 3,714,000 _ 27,908,000 31,897,000 3*48 2 188,000 3,351,000 - . 20,237,000 23,776,000 2-58 ' 5 56,631,000 58,334,000 — 85,580,000 200,545,000 21-80 10 65,140,000 86,584,000 — 87,437,000 239,161,000 2600 20 49,117,000 93,413,000 10,978,000 35,109,000 188,617,000 20-50 50 11,246,000 24,242,000 8,443,000 3,459,000 47,390,000 515 100 18,782,000 34,808,000 11,626,000 2,326,000 67,542,000 7-33 500 209,000 14,499,000 11,058,000 346,000 26,112,000 2-82 1,000 52,000 28,687,000 21,153,000 227,000 50,119,000 5-44 5,000 — 35,000 20,230,000 — 20,265,000 2 20 10,000 — 10,000 24,860,000 — 24,870,000 2-70 $201,740,000 347,677,000 1 108,348,000 262,629,000 920,394,000 10000 The National Banks now issue no notes for less than 5 dols. The 1 dol. and 2 dol. notes included in above table are survivals of withdrawn issues. The United States notes, tabulated above, are notes issued by the Government to provide a circulating medium, and, as an issue, have no elasticity, being paid out by the Treasurer as often as they are received by him for taxes, &c. They are an absolute legal tender. Although we have a general idea of the importance of the trade of New York, it is almost a surprise to find that the Clearing House returns of the two cities, New York and London, both expressed in pounds sterling, are— 4 8 THOMAS BOUCHIER MOXON ON 1889. 1890. Whole year. First eight months. New York . £7,179,021,000 . £7,791,224,000 London . £7,618,766,000 . £5,266,063,000 Even if allowance were made for Stock Exchange items included m the Clearing Return, the New York totals would hold a very important place. The following table shows the relative importance of the National Banks throughout the States as compared with the State Banks Loan and Trust Companies and private banks so far as the latter have responded to Comptroller’s invitation to make returns. 30TH September, 1890.—Liabilities. National Banks. Capital . $612,600,000 .. Reserve, & P. & L. ... 282,300,000 . Notes in circulation... 128,500,000 . Deposits .1,522,000,000 . Due to other banks ... 425,300,000 ., Other liabilities. 27,600,000 .. State Banks, Trust Companies, and Private Banks. . $264,100,000 . 116,600,000 909,600,000 48,900,000 40,600,000 2,998,300,000 1,379,800,000 say—£599,660,000 £275,960,000 The last supplement to the Economist (18 Oct., 1890) reports the total liabilities of the English, Scotch, and Irish Joint-stock Banks at ^692,954,000, so that it will be seen that the National Bank system is no mere local development, but one of the most important financial systems in existence, embracing 4,148 banks. In the whole 26 years it has been in operation only 130 of these Banks have failed, and of these 30 paid in full, with interest, 6 paid in full, with part interest, 13 paid principal in full, without interest, 45 paid a composition, and the accounts of 36 are not yet closed. The average loss has been only one shilling and one penny- OUR BANK NOTE SYSTEM, ETC. 49 farthing per hundred pounds of the annual average amount on deposit. The National Banks are required five times a year, at such times as the Comptroller shall appoint, to make statements of their position, and these statements are published in the districts where the Banks do business. THE BANK OF FRANCE. This Bank was founded in 1803, and is essentially a State Bank. Its governor is appointed by the Government for life, and is usually a man who has held high office in the State. The deputy-governor is also appointed by the Government. The General Council, consisting of 15 regents and three censors, are elected by the General Assembly, which is composed of the 200 largest share¬ holders in the Bank. Five of the regents must be manufacturers, traders, or merchants; three are elected from departmental Govern¬ ment Treasury agents. The regents are elected for five years, the censors for three years. Both are eligible for re-election. The censors form a standing committee of audit, and appoint a discount committee of twelve shareholders, who must be in business in Paris. The governor’s duty is to watch that the Bank performs its duty * to the State and towards the commerce and industry of the country. The offices of the Bank are in all the important towns throughout the country. No limit is placed upon its issue of notes under ordinary circum¬ stances, but, when specie payments have been suspended, a limit has always been fixed. In 1870 this limit was ^72,000,000; in 1872, ;£i28,000,000. At the present time there is no restriction on its issue. As will be seen from the comparative table (page 39), it holds an enormous reserve in bullion, gold and silver; and, as either f coined gold or silver is still a legal tender in France to an unlimited 5 ° THOMAS BOUCHIER MOXON ON amount, the notes are readily convertible, but at present the Bank reserves to itself the right to pay in silver, and where large amounts are asked for in gold it charges a premium, so that practically in the international money market its notes are at a discount. To explain more fully, if I get a cheque for ^5,000 on the Bank of England, I may be paid in notes, but for the notes I can immedi¬ ately demand gold, and I shall get 5,000 sovereigns, the weight of gold in them being actually worth ,£5,000 wherever I may send them. If, on the other hand, I get a cheque for 125,000 francs on the Bank of France, and am paid in notes, which are a legal tender, I cannot compel the Bank of France to pay me in gold, but may be required to accept silver coin of the nominal value of 125,000 francs, but worth as bullion only about 93,750 francs. If it agrees to pay me in gold, it charges a premium of from 2| to 4 per thousand, so that I shall only receive in gold 124,500 francs for notes of the face value of 125,000 francs. For internal circu¬ lation, then, the notes of the Bank of France may circulate at par with the current coins, but for payment of foreign debts they are, as I said, practically at a discount. If the Bank of France paid gold for its notes on demand, when the cheque rate of exchange stood at 25*32-!, it would pay to remit gold to England in payment of debts due from France to England; but in consequence of the premium charged by the Bank of France, I believe during the panic, four weeks ago, it cost one French house between 25*38 and 25*40 to procure gold and place it in England, and all French houses, who at that time had to remit to England, would have to pay similar rates, solely because the Bank of France notes are not payable in gold. Although it may not be generally recognised that its notes are at a discount, the fact is there, and the French, in their dealings with foreign countries, have to pay more francs accordingly, the discount being concealed in the rate of exchange. At 30th anuary 1890, the Bank of France notes outstanding were : OUR BANK NOTE SYSTEM, ETC Si £ £ Per cent of total issue. 1,292,800 5 notes of 200 ... „ 40 ... ... value— 1,000 ... „ ... 51,712,000 .... .. 40-4 470,314 „ 20 ... ... „ ... 9,406,280 .... .. 73 2,485 „ 8 ... . 19,880 .... _ 15,054,742 „ 4 . . ... „ ... 60,218,968 .... .. 47-0 3,227,661 „ 2 ... ... „ ... 6,455,322 .... .. 50 Old issues outstanding . 144,118.... £127,957,568 IMPERIAL BANK OF GERMANY. This is also a State Bank. It is governed by a council of ad¬ ministration, consisting of the Chancellor of the Empire, as president, and four paid colleagues, one appointed by the Emperor, the other three by the Federal Council, but the President is the controlling hand. The business of the Bank is carried on by a board of directors, subject to the instructions of the Chancellor of the Empire. All the directors are appointed for life by the Emperor, according to the recommendation of the Federal Council. The shareholders elect a central committee of 15 members, and as many substitutes ; nine of the committee and nine of the sub¬ stitutes being residents in Berlin. This committee receives the weekly reports of the Bank, and expresses its opinion upon the profit and loss account, after it has been made out by the directors and approved by the Chancellor, upon changes in salaries and pensions, upon the amount of the funds to be employed in loans, upon the rate of charges, and upon changes in the principles on on which the business of the Bank is to be conducted. Branches of the Bank are established in all the important towns, and a local committee is appointed from the resident shareholders wherever possible. The note issues in Germany are ^6,000,000—“ Reichskassen- scheine,” which are Government notes, in amounts of 50s., 20s., and 5s., and bank notes issued under the German Bank Act of 1875, which we will proceed to describe. 52 THOMAS BOUCHIER MOXON ON By this Act the State claims control of the issue of bank notes, and limits the present right to issue to certain specified banks. It prohibits the circulation of local issues out of the States for which they are sanctioned. It fixes the amounts of bank notes at ^5, ^£io, ^£25, ^50, and multiples of ^50. It requires all issuing banks to redeem their notes on demand at their full nominal value, and prohibits the calling in of the notes of any banks without authorisation of the Federal Council. It prohibits all banks of issue from accepting bills, and requires them to publish a statement of their assets and liabilities four times a month, and an exact balance sheet and profit and loss account once a year, in a form prescribed by the Act. It fixes a limit for each issuing bank of the amount of notes it may issue against securities, authorises it to further issue notes to the amount of cash in its till, and permits every authorised bank to issue additional notes, on payment of a fine of 5 per cent per annum on all notes in circulation exceeding the amount of its statutory limit and its cash on hand. No limit is placed upon this taxed issue. It requires the Imperial Bank to hold cash to the amount of one- third of its notes in circulation, and bills of exchange of not over three months’ currency for the balance. The “ cash ” is defined as coin, bullion, and legal tender notes of the empire. The Imperial Bank has the same permission as the other issuing banks to exceed its statutory limit of note issue on payment of the same tax. Originally the limit for the issue of notes against securities was fixed at M.250,000,000 for the Imperial Bank, and M. 135,000,000 for the provincial banks, but the Act permitted the Imperial Bank to increase its limit to the full extent of any issues which lapsed, and accordingly its present issue is M.288,025,000. In this permission for excess issue—granted, it will be noticed, to all issuing banks alike—is embodied the chief characteristic of the German Bank Act: a principle so simple, that one wonders why it OUR BANK NOTE SYSTEM, ETC. 53 was not devised sooner • so enlightened, that one feels almost jealous that it should have first been adopted by our cousins instead of by ourselves. When first the law was promulgated many critics distrusted it. The late Professor Jevons, however, recognised its ingenuity, and anticipated the favourable results which now, after an experience of 15 years, we see have arisen from it. Through the courtesy of the directors of the Reichsbank, I am enabled to submit the following table, giving full particulars of the working of the Act in respect of the issue of notes under the taxed issue clause. REICHSBANK. Date. Notes in Circulation. Amount of Cash as cover for Notes. Amount of statutory issue against bills' Amount of Notes sub¬ ject to duty. Amount of tax. Bank rate. M M M M M 31 December, 1881 869,385,000 559,418,000 273,875,000 26,092,000 27,000 5 X 30 September, 1882 841,532,000 548,433,000 273,875,000 19,224,000 20,000 5% T October, 1882.. 824,342,000 538,281,000 273,875,000 12,185,000 12,000 5% 31 December, 1884 864,133,000 547,579,000 273,875,000 32,678,000 34,000 4% 7 January, 1885.. 826,618,000 560,128,000 273,875,000 2,615,000 2,000 4% 31 December, 1886 1009,521,000 700,526,000 274,834,000 34,161,000 36,000 5% 30 September, 1889 1150,528,000 796,619,000 282,085,000 71,824,000 74,000 4% 7 October, 1889.. 1113,098,000 781,287,000 286,585,000 45,225,000 47,000 5% 31 December, 1889 1160,540,000 764,477,000 286,585,000 109,477,000 114,000 5% 7 January, 1890.. 1108,055,000 771,071,000 286,585,000 50,399,000 52,000 5% 30 September, 1890 1131,733,000 752,258,000 288,025,000 91,450,000 95,000 5% ■ 7 October, 1890 .. 1097,499,000 705,269,000 288,025,000 104,204,000 108,000 15 October, 1890 .. 1048,324,000 726^449,000 288,025,000 33,849,000 35,000 31 October, 1890 .. 1052,832,000 745,876.000 288,025,000 18,930,000 19,000 The foregoing table will afford ample food for reflection to English business men, who have any remembrance of the distress and panic, loss and disorder, which have attended the suspension of the Bank Act in our country. 54 THOMAS BOUCH1ER MOXON ON That the Bank should exceed its authorised issue by .£3,500,000 without raising its discount rate above 4; that it should issue £^5,000,000 “uncovered” notes, and leave its rate at 5, strikes us as a most unheard of proceeding. We should have been in the throes of a panic with a 9 per cent rate at least before such a thing would have been contemplated. This table only refers to the Imperial Bank, but all the other issuing banks have the same privilege, and no doubt use it. Think of our 8 per cent, 10 per cent, and Mr. Lowe’s permissory 12 per cent, and then read Mr. R. H. Inglis Palgrave’s remarks : “ I understand, from a communication with which Herr von Dechend, the President of the Directory of the Reichsbank, has favoured me on the subject, that the Reichsbank feels that the advantage which the shareholders might gain from raising the rate of discount would be overbalanced on these occasions (/.