Digitized by the Internet ArcWve in 2008 with funding from IVIicrosoft Corporation http://www.archive.org/details/bankingcreditsfiOOrussrich INTERNATIONAL BUSINESS LIBRARY BANKING, CREDITS AND FINANCE BY THOMAS HERBERT RUSSELL, A. M., LL. D. EDITOR-IN-CHIEF kuthor of "Business Principles and Methods," "Natural Resources and National Wealth," etc., etc.; former Editor-in-Chief Webster's Universal Dictionary ASSISTED BY A CORPS OF BUSINESS EXPERTS Wasb'''6*J^'''«tit ute Chicag< OCPYRIGHT 191» BT WHITMAN PUBLISHING Oa RACINE - CHICAGO 7?^ * 'Business men do not realize how closely their banks watch them — ^how much the bank is bound to know about their aflfairs— how much seemingly small things in their daily lives affect credit. And big things that they some- timee want to conceal, too." M712444 **It must be said, and said whatever men may think of it, that the finances touch everything, help everything, conclude everything. They are in the state what blood is in the veins of the human body; if it circulates, it carries along with it motion and life; if it stops, paralysis and death supervene. Good organization, good administration, a good condition of the finances, exert, therefore, imperi- ously, everywhere and always, a positive, healthful and vivifying action upon the government of a country and the prosperity of its people." ASSOCIATE EDITORS. RicHAED Canning, President Northwestern Finance Company, Minneapolis, Minn. H. M. Coombs, special lecturer on Credits and Collections, Inter- national Law and Business Institute. James J. Ceaig, LL.D., special lecturer on Insurance, International Law and Business Institute. C. A. EcKLUND, special lecturer on Accounting and Auditing and B^inancial Management, International Law and Business Institute. W. J. Jackman, former managing editor of the Chicago Journal ; Sunday editor of The Inter Ocean, etc. G. A. Obth, adjuster Travelers' Insurance Co. C. N. Smith, special lecturer on Business Systems, International Law and Business Institute. J. T. Thompson, formerly of the Ontario bar. A. C. Wilkinson, special lecturer on Salesmanship and Advertis- ing, International Law and Business Institute. Oeorge E. Young, of the Minnesota bar, special lecturer on Commer- cial Law and Corporations, International Law and Business Institute. C. E. Zimmerman, expert on Publicity and Sales Promotion, Chicago. AUTHORITIES CONSULTED. Otbus C. Adams, author of "A Text-Book of Commercial Geogra- pihy." Joseph A. Arnold, Editor and Chief of Division of Publications, U. S. Department of Agriculture. W. J. Ashley, M. A., professor of Economic History in Harvard University; author of "An Introduction to English Economic History and Theory." Harry C. Bentlet, C. P. A., author of "Corporate Finance and Accounting." Albert S. Bolles, Ph.D., LL.D., Author of "Money, Banking, and Finance." Right Honorable James Bbyce, British Ambassador to the United States; author of "The American Commonwealth." Andrew Carnegie, author of "The Empire of Business," "The Gospel of Wealth," "Triumphant Democracy," etc., etc. Charles U. Carpenter, author of "Profit-Making in Shop and Fac- tory Management." 4 AUTHORITIES CONSULTED. A. Hamilton Chubch, author of "the Proper Distribution of Ex- pense Burden." Thomas Conyngtois-, of the New York bar; author of "Corporate Organization," "Corporate Management" "The Modern Corporation, Its Mechanism, Methods, Formation and Management," etc. William Amelius Cobbion, author of "The Principles of Salesman- ship, Deportment and System." Db. Stuabt Daggett, University of California, author of "Railroad Reorganization." Lawbence R. Dicksee, F. C. A., professor of Accounting at the University of Birmingham; author of "OfiBce Organization and Man- agement." Hon. John F. Dbyden, former United States Senator; president of The Prudential Insurance Company of America; author of "Life In- surance as a Career," "Uniform Law and Legislation on Life Insur- ance," etc., etc. E. Dana Duband, Director of the Census Bureau, Washington, D. C. Seymoub Eaton, Director of the Department of Industry and Fi- nance, Drexel Institute, Philadelphia; author of "How To Do Business." James H. Eckels, former Comptroller of the Currency; author of "The Methods of Banking," etc. Harbington Emebson, author of "Efficiency as a Basis for Opera- tion and Wages." A. NoETON Fitch, of the Tacoma (Wash.) bar, formerly of the Rochester (New York) bar; author of "New Commercial Law." E. K. FoLTZ, author of "The Federal Civil Service as a Career." David R. Fobgan, president of the National City Bank of Chi- cago. H. L. Gantt, member of the American Society of Mechanical En- gineers; author of "Training Workmen in Habits of Industry and Co- operation," etc., etc. J. W. Gilbabt, F. R. S., formerly Director and General Manager of the London and Westminster Bank; author of "The History, Principles, and Practice of Banking." James C. Gipe, Secretary Joint Committee on Conservation, Wash- ington, D. C. Thomas H. Goddard, author of "History of Banking Institutions of Europe and the United States." John H. Gbay, Ph. D., professor of Economics and Political Sci- ence, University of Minnesota. W. C. HoLMAN, former editor of Salesmanship Magazine. Ebnest W. Huffcut, former Dean of the Cornell University Col- lege of Law; author of "The Elements of Business Law." Jbnkin Lloyd Jones, Abraham Lincoln Center, Chicago. AUTHORITIES CONSULTED. Hon. W. L. Mackenzie King, C. M. G., M. P., Minister of Labor, Dominion of Canada. M. G. LaRochelle, Joint Commissioner, Civil Service Commission of Canada, Ottawa, Canada. Pbof. J. Laubence Laughlin, head of the Department of Political Economy, University of Chicago. Patji, Mobton, president of The Equitable Life Assurance Company. Alexandeb Dana Notes, financial editor "New York Evening Post." Geobge W. Pebkins, 23 Wall Street, New York. Cabl Horton Piebce, lecturer on "Salesman-Making," New York Y. M. C. A.; author of "Scientific Salesmanship." Chas. F. Roland, Secretary of the Winnipeg Development and In- dustrial Bureau, Winnipeg, Manitoba. William A. Schonfeld, attorney and counselor-at-law ; author of "A Compendium of Laws." Wm. a. Scott, director of Course in Commerce, University of Wis- consin; author of "Money and Banking," etc., etc. Edwin R. A. Seligman, LL. D., author of "Essays in Taxation," "The Economic Interpretation of History," "Principles of Econom- ics," etc., etc. Abthub B. Shelton, Secretary of the National Monetary Commit- sion, Washington, D. C. Adam Smith, LL. D., author of "The Wealth of Nations." Goldwin Smith, D. C. L., LL. D., author of "The Relations Be- tween America and England," "Canada and the Canadian Question," "History of the United States," "Essays on Questions of the Day," etc., etc. Samuel E. Spabling, Ph. D., author of "Business Organization." Edward W. Spenceb, of the Milwaukee bar, author of "Manual of Commercial Law," and "The Elements of Commercial Law." F. W. Taussig, professor of Political Economy in Harvard Uni- versity; author of "Wages and Capital." Frederick Winslow Taylor, expert in Industrial Organization, Philadelphia, Pa.; author of "A Piece-Rate System," "Shop Manage- ment," etc., etc. R. Whately Cooke Taylob, author of "Introduction to a History of the Factory System." Henby W. Thurston, head of the Department of Social and Eco- nomic Science in the Chicago Normal School; author of "Economics and Industrial History." Bybon E. Walker, president of The Canadian Bank of Commerce, Toronto. Hon. John Wanamakeb, Philadelphia. Algebnon Wareen, author of "Commercial Traveling: Its Features, Past and Present." Banking AND Finance CONTENTS. Associate Editors and Authorities 4 Introduction 17 CHAPTER I. Origin and Use of Money. . i 25 True Origin and Function of Money — Man Lives by Exchange — Early Mediums of Exchange — Use of Metal as Money — ^Various Metals Used — Origin of Coinage — The First Stamped Metals — In- stitution of Coins — Pounds, Shill- ings, and Pence — Values Have Varied — The Universal Instrument of Commerce. CHAPTER II. The Function of Banks 35 What is a Banker — Private and Public Banks — The Business of Banking — The Disposable Means of a Bank — The Expenses of a Bank — The Profits of a Bank — Banks as Commercial Institutions — Classifica- tion of Banks — Public or Incorpor- ated Banks — National Banks — Banks of Discount and Deposit — Savings Banks — Trust Companies, CHAPTER III. The Origin of Banking. 43 The Jewish Money-Changers — The Banks of Ancient Greece — ^Methods of Athenian Bankers— Commerce Gave Rise to Bankers — The First Joint-Stock Bank — The Banks of Ancient Rome — Origin of the Word * ' Bank ' '—The Florentine Bankers— The Earliest National Banks — The Bank of Venice— The Bank of Barcelona — The Bank of Genoa — The First Bills of Exchange— The Bank of Amsterdam — ^Bank Money 9 10 CONTENTS. CHAPTER IV. CHAPTER CHAPTER VI. at a Premium — The Bank Capital — Managed by the Burgomasters — A Model for European Banks — The Bank of North America. Eaely Banking in England 65 1. Money-Changing — The OflSce of Royal Exchanger — Re-established by Charles I— The King's Pre- rogative. 2. Money-Lending — Early Rates of Interest — Expulsion of the Jews — The Lombards as Usurers — Interest Made Legal. 3. Money-Borrowing — The Banking Goldsmiths — Blamed for Money Scarcity — The First Run on a Bank. 4. Transmission of Money — The Bank of England — Opposition of Foreign Competitors — The Act of Parliament — Provisions of the Charter — Agents for the Govern- ment — Events in the Bank's His- tory. The Utility of Banking 93 The Safe-Keeping of Money— The Allowance of Interest — The Loaning of Money — The Transmission of Money — Exchange of Currency — An Economy of Time — Collection of Drafts — A Record of Expenditures — Safe Deposit for Valuables — Valuable Help in Business — A Moral Influence for Good. The Methods of Banking 105 Organization of Banks — The Officers of a Bank — Suggestions to Bank Clerks — The Bank's Cash — Counter- feit Notes — Bank Loans — Accurate Interest— Money *'0n Call"— Col- laterals — The Name "Bank"— Bor- rowing from Banks — Rates for Loans — ^When Interest Accrues — Forged Indorsements — Trust Com- CONTENTS. 11 CHAPTER VII. CHAPTER VIII. CHAPTER IX. panies — Safe Deposit Vaults — A De- positor's Credit — Giving Bonds for Faithful Service — Use of Instru- ments of Credit — Emergency Cur- rency — Usury and its Penalty — Bank Examinations — The Cheque Bank — Bank Statements — Bank Debits and Credits — Value of Paper Offered for Discount — ^Mercantile Agencies — Savings Banks — Defalca- tions and Embezzlements — ^Com- mercial Crises. The Cleabing-House System 135 Check Collections — The Wanderings of Checks — Clearing-House Manage- ment — Foreign Clearing-Houses. Deposits and Depositors •. .143 Opening a Bank Account — Hints for Depositors — Bank Checks — Identifi- cation — A Banker's Hints — Check Indorsements — Cashing Your Own Check — Checks for Special Purposes — * ' No Funds ' ' — Stopping Payment — Canceling Checks — Checks Pre- sented after Death — Checks Should Be Numbered— Certificates of De- posit — Certified Checks — Bank Drafts — "Kiting" Checks — Forged Checks — Signatures — Suggestions to Bank Depositors. Notes and Drafts 163 Promissory Notes — Date of a Note — Value Received — Accommodation — Interest Notes— Indorser of a Note — Presentation for Payment — Pro- test — Date of Maturity — Payment on a Note — A Joint Note — Signature to a Note — Commercial Drafts — ^CoUejj- tions by Draft — Draft Notices — When are Accounts Due — Collec- tions through Banks — Three-Party Drafts — "No Protest" — Discounting Drafts — The Advantages of Taking 12 CONTENTS. a Note — ^Discounting Paper — Drafts and Bills of Lading — Protest Notice — Overdue Paper — Who is a Bona- Fide Holder?— A Set-off— Notice of Non-Payment of a Note — A "Mark" Signature — An Important Provision — Power of Attorney — The Return of Vouchers — Due Bills — How Notes Differ from other Ck)ntracts — Legal Tender — Note Brokers — Single- Name Paper — Demand Collateral Note — Waiver of Demand and Notice — A Judgment Note — Collection Laws. CHAPTER X. Credit AND Exchange 185 Foreign and Domestic Commercial Credit — History of Financial Ex- change — Principles of Exchange — Changes in Exchange Rates — Ex- change Terms — Domestic Exchange —The Cost of Shipping Gold— The World's Financial Center — The World's Currencies — Value in Gold of the World's Coins — English Money — Canadian Money — Letters of Credit. CHAPTER XL Banking in Canada 209 Bank Charters — Liability of Share- holders — Term of the Charter — Banking Principles — Historical Sketch— The Condition at Confed- eration — Note Issues — Distinctive Features — The Basis of Elasticity — Currency and Trade Require- ments — ^Bond — Secured Currency — Convertibility and Security — The Borrower and the Branch System — Supplying Local Wants — The De- positor — Competitors for Deposits — Interest on Deposits — ^Bank Inspec- tion — Reserves — Chartered Banks of Canada. CONTENTS. 13 CHAPTER XII. CHAPTER XIII. CHAPTER XIV. CHAPTER XV. Bank Credits 245 The Laws Governing Credit — State- ments from Borrowers — The Credit Department — Analysis of Statements — Principles and Rules of Credit Science — Accuracy is Required- Value of the Accountant — ^Value of the Engineer — Inaccurate and Dishonest Statements — All Benefited by Examination — Practical Features of Bank Credits — Typical Balance Sheets — ^Net "Worth of Borrowers — Failure of Uniform Credit Tests — To Encourage Manufacturers — Im- portance of Credit Science. The Comptroller's Office 265 An Independent Office — The Organ- iation Department — National Bank Examiners — The Department of Re- ports — The Redemption Department — The Issuing Department — In- solvent Banks — Responsibility of the Office — Liquidation of Assets. Monetary System of the U. S 275 No. 1 — Gold and Silver Coinage — Provisions of the Act of 1873— The Silver Act of 1878— The Standard of Value — Coins and Paper Currency — Gold Coins — Silver Coins — Sub- sidiary Silver — Issue of Standard Silver Dollars and Subsidiary Silver Coin— The Silver Act of 1890— Meaning of 16 to 1— Standard Bull- ion — What is Seigniorage ? — Coinage of Gold — Coinage of Silver — Trade Dollars — Free and Unlimited Coin- age of Silver — Unlimited Coinage — Sales of Gold — Redemption — For- eign Coins Not Legal Tender — De- nominations, Weight, and Fineness of the Coins of the United States. Monetary System of the U. S 297 No. 2 — Paper Money — United States Notes — Gold Certificates — Silver 14 CONTENTS. CHAPTER XVI. Certificates — Treasury Notes, Act of July 14, 1890 — Fractional Currency — National-Bank Currency — Author- izing Acts — Amendatory Acts- Security — Profits on Circulation — Profits on Capital Invested — Reports and Examinations — Capital Based on Population — Amount of National- Bank Circulation. The Federal Reserve System 307 The Act of 1913— Establishment of Twelve Reserve Banks — Purposes and Provisions of the Act — A New Epoch in Banking — How Panics are Prevented — The Federal Reserve Board and Council, etc. — A Great Constructive Measure. CHAPTER XVII. Monetary Events Since 1786 321 CHAPTER XVIII. Foreign Exchange, Part 1 6'Sl Foreign Departments Supersede Brokers — An Opportunity for Stu- dents — What Foreign Exchange Is — Magnitude of Foreign Trade — Knowledge of Monetary Systems — The Only International Money — How Gold Shipments Are Handled — Commercial Bars of Gold — ' ' Money of Account ' * — European Moneys — The British System — "Sterling" Exchange— Two Kinds of Exchange — Rate of Exchange — Effect of Discount Rates — Par of Exchange — Quotations of Rates — Peculiarity of French Quotations — German and English Quotations — Meaning of Newspaper Quotations — Before and After Clearings. CHAPTER XIX. Foreign Exchange, Part 2 359 Commerce and Exchange — A Typ- ical Transaction — ^Foundation of Foreign Exchange — Buying Com- mercial Bills — ^Hypothecation Cer- tificates — Certificates of Insurance, CONTENTS. 15 CHAPTER XX. Etc. — Various Rates of Discount — The Bank of England Rate— Safe and Unsafe Bills— Clean Bills of Ex- change — Documentary Bills — Cost of Revenue Stamps — Miscellaneous Charges — Complicated Transactions — German Requirements — Conveni- ence of Sterling Exchange — Precau- tions Against Wrong Payment Investments 377 Bank Deposits are Largely Credits — Little Actual Cash Demanded — The Potency of Credit — Recent Expansion of Credit — Effect of Pub- lic Confidence — Funds Available for Investment — Increase of Investment Securities — What Constitutes De- sirability — 1. Public Securities — 11. Real-Estate Securities — III. Corporation Bonds — IV. Stocks — ^ A Safe General Rule. CHAPTER XXI. The Stock Exchange 403 Technical Terms of Stock Exchanges — Brokers — Stock ' Companies — Shares of Stock — Capital Stock In- creased — Preferred Stock — Divi- dends — Surplus Fund — Treasury Stock — Guaranteed Stock — ^Watered Stock — Limited Liability Com- panies — Sale of Stock. Questions fob Review 417 INTRODUCTION. At first sight it may seem that the study of principles and methods of Banking and Finance might be confined to those engaged in the business of banking or con- cerned with the actual problems of high finance; but a brief consideration of the matter will soon enable the student of modern business to decide for himself that the more he knows about banking and financial manage ment of concerns large and small, the better equipped he will be to seize the fleeting opportunities of twentieth- century business life. It is not only bankers and young men who aspire to become bankers or financiers, therefore, they may prof- itably study the theories, history and practice of banking and finance. Business men of all classes, and ambitious yomig men generally, may devote time and attention to these subjects with almost absolute certainty that the knowledge thus acquired will greatly profit them sooner or later. Every business man has more or less to do with banks and banking. It stands to reason, therefore, that he can- not obtain too much knowledge of banking methods. The greater his business, the more need he has of spe- cialized knowledge on the subject. It is an important part of a liberal education in Business Administration. It may be remarked in passing, that the opportunities offered to young men trained in matters of finance were 17 I.B.L. Vol. 4—2 18 INTRODUCTION. never so great or so numerous as they are at the present day. The general demand for specialized knowledge in business is fully exemplified by the strong demand for young men fitted by study to enter the employ of the great banks and financial houses that are a notable out- growth of modem business. It is reahzed by financiers generally that the young men thus partially equipped for their service afford splendid material for the practical training in banking and financial management which can be obtained only by actual experience in the bank, trust company, or other financial institution. It must never be forgotten that the bases of all success in the business world of today are Character and Knowl- edge. These may well be linked together side by side, since it takes a man of character to enter upon the con- scientious pursuit of knowledge. The young man who possesses this combination — character and knowledge — is the young man bankers and financiers are looking for. Economics. — ^As the groundwork for study of Bank- ing and Finance, some knowledge of economics is desir- able, especially that portion of the science which deals with the theory of money, the standards of value, and the relation of commerce and credit. The student should fully realize the importance of the subject of finance, and this can hardly be over-estimated ; for, as a French writ- er sagely remarks. "It must be said, and said what- ever men may think of it that the finances touch every- thing, help everything, conclude everything. They are in the state what blood is in the veins of the human body; if it circulates, it carries along with it motion and life; if it stops, paralysis and death supervene. Good organiza- INTRODUCTION. 19 tion, good administration, a good condition of the finan- ces, exert therefore imperiously, everywhere and always, a positive, healthful and vivifying action upon the gov- ernment of a country and the prosperity of its people." Realizing the importance of the finances in the public economy, the student will readily understand the utility of banking in all commercial communities. He will learn how the banker stands between the capitalist and the borrower, as the medium whereby arrangements are made for carrying on and expanding domestic trade and international commerce. He will see why the bank- er becomes a prominent and esteemed citizen of the com- munity, and how great is the banker's influence, indi- vidually and collectively, in keeping business on a safe basis; checking the over-enthusiastic and the purely speculative, but ever promoting enterprise on the part of worthy men. History of Banks and Banking. — A knowledge of the history of banks is desirable because it gives a clearer understanding of the essential principles on which mod- em banking systems are founded. The time spent in studying the historical sections of this volume will there- fore be well spent, and these sections will be found ex- tremely interesting in their presentation of the subject. Classes of Banks.^-The various classes of banking in- stitutions in all parts of the world are dealt with. Ui> der this heading, we note the distinction between public and private banks and deal with the national banks and state banks in the United States, and with the Cana- dian banking system. The subject of savings banks re- 20 INTRODUCTION. eeives due attention, and the modern development of loan and trust companies is fully treated. Deposits and Depositors. — In this branch of the gen- eral subject, the student will learn how bank accounts are opened; how checks are drawn, indorsed, certified, etc.; and how the deposits are handled by the bank; also the rights and duties of depositors. Laws of Banking. — It will be advisable to obtain some knowledge of the laws under which banks are or- ganized and operated, and these are presented in con- venient form for study and reference. Bank Organization. — The various steps attending the organization of a bank, particularly in the United States and Canada, are clearly shown, also the duties of direc- tors and officers ; the functions, rights and obligations 6f shareholders; requirements as to meetings, etc. Bank Circulation. — As part of the monetary system, bank circulation is treated at length. The principles and methods of making bank note issues in the United States and Canada receive particular attention. Negotiable Paper. — The manner in which a bank han- dles commercial paper and other negotiable instruments is not only an important but an interesting feature of the subject of banking, hence it should and does receive considerable attention. In this connection the subject of bank collections is also dealt v/ith. Loans. — One of the most responsible duties of a banker is the making of loans. The methods used in banks to judge of the reliability and credit of applicants for loans will well repay study, and all engaged in busi- ness should have considerable knowledge on the point. INTRODUCTION. 21 Bank Credits. — In recent years, bank credits have been reduced practically to a science. We shall see how this has been brought about, and incidentally study the whole question of commercial reports in connection with bank credits. Collections. — The methods by which a bank makes its collections on commercial and other negotiable paper are discussed. These too have been systematized within the past few years and the student of business can assimi- late with advantage all the information given on the sub- ject. Clearing Houses. — The study of banking would be in- complete without some knowledge of the system whereby the work of banks is facilitated by means of clearing houses. The clearing house is remarkable among mod- ern developments of business as an institution for the ex- change and settlement of checks drawn on a variety of banks. It greatly economizes time, money and labor. The methods, membership, authority, and organization of clearing houses are discussed, and the operations of clearing and payment of balances are fully described. Bank Reserves. — It is astonishing how many men of business, otherwise well informed, lack precise informa- tion upon such matters as the nature of bank reserves and government requirements regarding the reserve. Of late years, there has been a tendency on the part of banks to give the public a better understanding of their peri- odical reports, while the movement toward a central reserve bank has by its propaganda added to the general information on the subject, but the average business man and all students of business may well read up on this 22 INTEODUCTION. point, since it is an important feature of American bank- ing. No one can be said to understand the methods of banking unless he understands the question of the re- serve; hence the matter is discussed at length in these pages. Postal Savings Banks, — The postal savings bank sys- tems of Europe, particularly that of Great Britain, need to be understood in order that we may intelligently con- sider the mooted question of the establishment of a sim- ilar system in the United States. Canada follows the British system to a considerable extent. Domestic and Foreign Exchange. — The question of exchange in its relation to commerce, both domestic and foreign, and to international affairs generally, is of the utmost importance. All matters pertaining to foreign exchange are particularly interesting, and a complete dis- cussion of the question by an acknowledged authority will be found in the chapters devoted to the subject. Investments. — All business men are interested in the subject of investments, hence it is well to study the var- ious kinds of investments offered to capital, and to obtain an idea of the relative value of each. The chapter on this subject is from the pen of an investment expert of inter- national reputation, a Western banker held in universal esteem. Corporation Finance. — In modern business, banks, trust companies, and private bankers frequently under- take to finance commercial enterprises and public under- takings, hence the subject of corporation finance is close- ly interwoven with that of banking, and some time and INTRODUCTION. 23 attention may profitably be devoted by the student to this subject. Monetary Systems. — Every student of business should have a thorough understanding of the monetary system of his own country. We have fully described the mone- tary system of the United States in two parts, — first the coinage of gold and silver, and second, the paper money, — and have also given a historical review of the monetary events of the world since 1786, which will be found ex- tremely useful for reference. Government, State and Municipal Bonds. — The na- ture of government bonds and of other securities based on state and municipal obhgations affords a wide field for study. The bond business is a great and growing branch of modern affairs, and there is no branch in which close and constant study of the situation is more imperatively necessary than in this. We have sketched the broad prin- ciples underlying bond issues, and the safeguards that experience has thrown round about them. All that is said upon the subject in the following pages is worthy of study. BoomSy Panics and Depressions. — Some space is de- voted to an examination into the causes of panics and de- pressions, of which a close study has been made by many eminent writers on finance. The question of booms and their effect also receives attention. These conditions oc- cur and recur in Europe and in America. The English- speaking pubhc on both sides of the Atlantic seem par- ticularly susceptible to both booms and depressions, save perhaps in the case of Canada, where public sanity usu- ally prevails to a remarkable degree. 24 INTRODUCTION. The method followed throughout this work has been to deal chiefly with principles and methods of more or less general application rather than with individual or local methods. This is for the advantage of the great majority of students of business, — for the greatest good of the greatest number, who will be enabled by a knowl- edge of the general principles and methods of banking and finance to comprehend individual or local variations in method where these may occur. CHAPTER I. ORIGIN AND USE OF MONEY. The true origin and function of money were ex- pounded at least as early as the second century, when the great Roman Paullus wrote: "The origin of buying and selling is in exchange. Formerly there were no coins, and merchandise was in no way distinguished from money. Every man, according to the necessity of the time and of things, exchanged what was useless to him for what was useful, and it was generally the case that what one had abundance of, another was deficient in. But as it did not always easily happen that when one per- son had what another desired, that other had also what the first desired, a substance was chosen whose general and durable value obviated the difficulties of exchange by being a common measure. This substance, having re- ceived a public stamp, has use and value less as a material than as a quantity, and is no longer called merchandise, but money" Jilan Lives by Exchange. When the division of labor has been once thoroughly established in a community, says Adam Smith, it is but a very small part of a man's wants which the produce of his own labor can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other 25 26 OBIOIN AND USE OF MONEY. men's labor as he has occasion for. Every man thus lives by exchanging or becomes in some measure a merchant, and the society itself grows to be what is properly a com- mercial society. But when the division of labor first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its opera- tions. One man, we may suppose, has more of a certain commodity than he himself has occasion for, while an- other has less. The former consequently would be glad to dispose of, and the latter to purchase, a part of this superfluity. But if this latter should happen to have nothing that the former stands in need of, no exchange can be made between them. The butcher has more meat in his shop that he himself can consume, and the dairy- man and the baker would each of them be willing to pur- chase a part of it. But they have nothing to offer in ex- change, except the different productions of their re- spective trades, and the butcher is already provided with all the bread and milk which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his custo- mers ; and they are all of them thus mutually less service- able to one another. In order to avoid the inconvenience of such situations every prudent man in every period of society, after the first establishment of the division of labor, must naturally have endeavored to manage his af- fairs in such a manner as to have at all times by him, besides the peculiar produce of his own industry, a cer- tain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in ex- change for the produce of their industry. OEIGIN AND USE OF MONEY. 27 Early Mediums af Exchange. Many different commodities, it is probable, were suc- cessively both thought of and employed for this purpose. In the rude ages of society, cattle are said to have been the common instrument of commerce; and, though they must have been a most inconvenient one, yet in old time we find things were frequenty valued according to the number of cattle which had been given in exchange for them. The armor of Diomede, says Homer, cost only nine oxen ; but that of Glaucus cost a hundred oxen. Salt was formerly the common instrument of commerce and exchanges in Abyssinia ; a species of shells in some parts of the coast of India; dried cod in Newfoundland; to- bacco in Virginia; sugar in some of the West Indies; hides or dressed leather in other countries ; and as late as Adam Smith's day there was a village in Scotland where it was not uncommon for a workman to carry nails in- stead of money to the baker's shop or the ale-house. Use of Metal as Money. "In all countries, however, men seem at last to have been determined by irresistible reasons to give the pref- erence, for this employment, to metals above every other commodity. Metals cannot only be kept with as Httle loss as any other commodity, scarce anything being less per- ishable than they are ; but they can likewise, without any loss, be divided into any number of parts, as by fusion those parts can easily be reunited again ; a quality which no other equally durable commodities possess, and which more than any other quality renders them fit to be the instruments of commerce and circulation. 28 ORIGIN AND USE OF MONEY. "The man who wanted to buy salt, for example, and had nothing but cattle to give in exchange for it, must have been obliged to buy salt to the value of a whole ox, or a whole sheep, at a time. He could seldom buy less than this, because what he was to give for it could seldom be divided without loss ; and if he had a mind to buy more, he must, for the same reasons, have been obliged to buy double or triple the quantity, the value, to wit, of two or three oxen, or of two or three sheep. If, on the contrary, instead of sheep or oxen, he had metals to give in ex- change for it, he could easily proportion the quantity of the metal to the precise quantity of the commodity which he had immediate occasion for." Various Metals Used. Different metals have been made use of by different nations for this purpose. Iron was the common instru- ment of commerce among the ancient Spartans ; copper among the ancient Romans ; and gold and silver among all rich and commercial nations. Those metals seem originally to have been made use of for this purpose in rude bars, without any stamp or coinage. Thus we are told by Pliny, upon the authority of Timaeus, an ancient historian, that, till the time of Servius Tullius, the Romans had no coined money, but made use of unstamped bars of copper, to purchase what- ever they had occasion for. These rude bars, therefore, performed at this time the function of money. The use of metals in this rude state was attended with two very considerable inconveniences; first, with the trouble of weighing; and, secondly, with that of assaying them. In the precious metals, where a small difference ORIGIN AND USE OF MONEY. 29 in the quantity makes a great difference in the value, even the business of weighing, with proper exactness, re- quires at least very accurate weights and scales. The weighing of gold in particular is an operation of some nicety. In the coarser metals, indeed, where a small er- ror would be of little consequence, less accuracy wouldy no doubt, be necessary. Yet we should find it excessively troublesome, if every time a poor man had occasion either to buy or sell a copper's worth of goods, he was obliged to weigh the copper coin. The operation of assaying is still more difficult, still more tedious, and, unless a part of the metal is fairly melted in the crucible, with proper dissolvents, any con- clusion that can be drawn from it is extremely uncertain. Before the institution of coined money, however, un- less they went through this tedious and difficult opera- tion, people must always have been liable to the grossest frauds and impositions, and instead of a poimd weight of pure silver, or pure copper, might receive in exchange for their goods an adulterated composition of the coarsest and cheapest materials, which had, however, in their out- ward appearance, been made to resemble those metals. Origin of Coinage. To prevent such abuses, to facilitate exchanges, and thereby to encourage all sorts of industry and commerce, it has been found necessary, in all countries that have made any considerable advances toward improvement, to affix a public stamp upon certain quantities of such par- ticular metals as were in those countries commonly made use of to purchase goods. Hence the origin of coined 30 ORIGIN AND USE OF MONEY. money, and of those public offices called mints; institu- tions exactly of the same nature with those of the ancient alnagers (inspectors) and stampmasters of woolen and linen cloth. All of them are equally meant to establish, by means of a public stamp, the quantity and uniform goodness of those different commodities when brought to market. The First Stamped Metals. . The first public stamps of this kind that were affixeH to the current metals seem in many cases to have been in- tended to ascertain, what it was both most difficult and most important to ascertain, the goodness or fineness of the metal, and to have resembled the sterling mark which is at present affixed to plate and bars of silver, or the Spanish mark which is sometimes affixed to ingots of gold, and which being struck only upon one side of the piece, and not covering the whole surface, establishes the fineness, but not the weight of the metal. Abraham weighed to Ephron the four hundred shekels of silver which he had agreed to pay for the field of Machpelah. They were said, however, to be the current money of the merchant, and yet were received by weight and not by count, in the same manner as ingots of gold and bars of silver are at present. The revenues of the ancient Saxon kings of England are said to have been paid, not in money but in kind, that is, in victuals and provisions of all sorts. William the Conqueror introduced the custom of paying them in money. This money, however, was, for a long time, re- ceived at the exchequer by weight and not by count. ORIGIN AND USE OF MONEY. 81 Institution of Coins. The inconvenience and difficulty of weighing those metals with exactness gave occasion to the institution of coins, of which the stamp, covering entirely both sides of the piece and sometimes the edges, too, was supposed to certify not only the fineness, but the weight, of the metal. Such coins, therefore, were received by count, as at present, without the trouble of weighing. The denominations of those coins seem originally to have expressed the weight or quantity of metal contained iu them. In the time of Servius Tullius, who first coined money at Rome, the Roman as or pondo contained a Ro- man pound of good copper. It was divided in the same manner as the English Troy (from Troyes, France) pound, into twelve ounces, each of which contained a real ounce of good copper. Pounds, Shillings, and Pence. The English pound sterhng, in the time of Edward I, contained a pound. Tower weight, of silver of a known fineness. The Tower pound seems to have been some- thing more than the Roman pound, and something less than the Troy pound. This last was not introduced into the mint of England till the 18th year of Henry VIII. The French livre contained in the time of Charle- magne a pound, Troy weight, of silver of a known fine- ness. The fair of Troyes in Champaign was at that time frequented by all the nations of Europe, and the weights and measures of so famous a market were gen- erally known and esteemed. 82 ORIGIN AND USE OF MONEY. The Scots money pound contained, from the time of Alexander the First to that of Robert Bruce, a pound of silver of the same weight and fineness with the English pound sterling. English, French, and Scots pennies also contained all of them originally a real pennyweight of silver, the twentieth part of an ounce, and the two hun- dred and fortieth part of a pound. The shilling, too, seems originally to have been the denomination of a weight. When wheat is at twelve shillings the quarter , says an ancient statute of Henry III, then wastel bread of a farthing shall weigh eleven shillings and fourpence. The proportion, however, between the shilling and either the pennj'^ on the one hand, or the pound on the other, seems not to have been so constant and uniform as that between the penny and the pound. Among the an- cient Saxons a shilling appears at one time to have con- tained only five pennies, and it is not improbable that it may have been as variable among them as among their neighbors, the ancient Franks. Values Have Varied. From the time of Charlemagne among the French, and from that of William the Conqueror among the En- ghsh, the proportion between the pound, the shilling, and the penny, seems to have been uniformly the same as at present, though the value of each has been very dif- ferent. For in every country of the world, says the au- thor of "The Wealth of Nations," the avarice and in- justice of princes and sovereign states, abusing the confi- dence of their subjects, have by degrees diminished the real quantity of metal which had been originally con- ORIGIN AND USE OF MONEY. 33 tained in their coins. The Roman as, in the latter ages of the RepubHc, was reduced to the twenty-fourth part of its original value, and, instead of weighing a pound, came to weigh only half an ounce. The English pound and penny contain at present about a third only, and the French pound and penny about a sixty-sixth part of their originkl value. By means of those operations the princes and sovereign states which performed them were en- abled, in appearance, to pay their debts and fulfill their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in ap- pearance only ; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favorable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons than could have been occasioned by a very great public calamity. The Universal Instrument of Commerce. It is in this manner that money has become in all civil- ized nations the universal instrument of commerce, by the intervention of which goods of all kinds are bought and sold, or exchanged for one another. The rules .vhich men naturally observe in exchanging them either for money or for one another determine what may be called the relative or exchangeable value of goods. I.B.L. Vol. 4—3 34) OEIGIN AND USE OF MONEY. The word valuer it is to be observed, has two different meanings, and sometimes expresses the utihty of some particular object, and sometimes the power of purchas- ing other goods which the possession of that object con- veys. The one may be called "value in use," the other, "value in exchange." The things which have the great- est value in use have frequently little or no value in ex- change ; and, on the contrary, those which have the great- est value in exchange have frequently little or no value in use. Nothing is more useful than water ; but, generally speaking, it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any value in use; but a very great quantity of other goods may frequently be had in exchange for it. CHAPTER II. THE FUNCTION OF BANKS. As late in history as the year 1746, a British statesman^ speaking in the House of Commons, inquired: "What is it that we call a Banker? There is in this city of London a company or corporation, called Goldsmiths, and most of those called bankers are of that corporation ; but so far as I know, there is not a company or corporation in Eng- land called Bankers, nor has the business any definition or description either by common law or by statute. By custom we call a man a banker who has an open shop, with proper counters, servants, and books, for receiving other people's money, in order to keep it safe, and return it upon demand; and when any man has opened such a shop we call him a banker, without inquiring whether any man has given him any money to keep or no ; for this is a trade where no apprenticeship is required, it having never yet been supposed that a man who sets up the trade of banking could be sued upon the statute of Queen Elizabeth which enacts, that none shall use any art or mystery then used, but such as have served an appren- ticeship in the same." In the present day, the functions of banks are better understood. A broad view of them, from an interna- tional standpoint, is as follows: A banker is a dealer in capital, or more properly a dealer in money. He is an intermediate party between 35 36 THE FUNCTION OF BANES. the borrower and the lender. He borrows of one party, and lends to another; and the difference between the terms at which he borrows and those at which he lends, forms the source of his profit. By this means he draws into active operation those small sums of money which were previously unproductive in the hands of private individuals ; and at the same time furnishes accommoda- tion to those who have need of additional capital to carry on their commercial transactions. Private and Public Banks. Banks have been broadly divided into private and pub- lic. A private bank is that in which there are but few partners, and these attend personally to its management. A public bank is that in which there are numerous part- ners or shareholders, and they elect from their own body a certain number, who are intrusted with its management. The business of banking consists chiefly in receiving deposits of money, upon which interest may or may not be allowed ; in making advances of money, principally in the way of discounting bills; and in affecting the trans- mission of money from one place to another. Banks in metropolitan cities are usually the agents of the banks in smaller communities and charge a commission on their transactions. The disposable means of a bank consist of — First, the capital paid in by the partners, or shareholders. Second, the amount of money deposited by their customers. Third, the amount of notes they are able to keep out in circulation. Fourth, the amount of money in the course of transmission — that is, money they have received, and are to repay, in some distant place, at a future time. THE FUNCTION OF BANKS. 37 These disposable means are employed — First, in dis- counting bills. Second, in advances of money in the form of cash credits, loans, or overdrawn accounts. Third, in the purchase of government or other securities. Fourth, a part is kept in the banker's till, to meet the cur- rent demands. Of these four ways of employing the cap- ital of a bank, three are productive, and one is unproduc- tive. The discounting of bills yields interest ; the loans, and the cash credits, and the overdrawn accounts, yield interest; the government securities yield interest; the money in the till yields no interest. , The expenses of a hank may be classified thus: Rent, taxes, and repairs of the building or premises in which the business is carried on ; salaries of the officers ; stationers' bills for books, paper, notes, stamps, etc.; incidental ex- penses, as postage, light, heat, etc. The profits of a hank are that portion of its total re- ceipts — including discount, interest, dividends, and com- mission — which exceeds the amount of the expenses. Banks as Commercial Institutions. In commercial language a bank is a repository, or an establishment, for the purpose of receiving the money of individuals ; either to keep it in security, or to improve it by trafficking in goods, bullion, or bills of exchange ; and, as stated above, it may be either of a public or of a pri- vate nature. A public bank is generally regulated by certain laws, enacted by the government of the nation or state, which constitute its charter, Hmit its capital, and es- tablish the rules by which it is to conduct business. A pri- vate bank, on the other hand, is merely a contract among individuals, for carrying on a trade in money and bills ; 38 THE FUNCTION OF BANKS. and the responsibility of the partners is usually the only security of those who transact business with it. Banks then are properly commercial institutions which by affording credits, or issuing notes, as the representa- tive of money, enable merchants, with greater facility, to buy and sell commodities, at home or abroad. The pro- duce of one country is thus exchanged with that of an- other, by means of a. medium to which an ideal value is attached; hence the great utility of banking establish- ments in all commercial countries. Classification of Banks. Private banking is the oldest form of the banking business and, as is well known, the antiquity of banks is very great. Records exist of ^ banking transactions among the Assyrians and in the Metropolitan Museum in New York there are Babylonian tablets bearing dis- tinct records of transactions in banking that took place in the reign of Nebuchadnezzar. Public or Incorporated Banks. Public or incorporated banks may be broadly classi- fied as national and state banks. National banks exist by virtue of national laws. State banks are governed by the acts of state legislatures. State banks may be further divided into banks of dis- count and deposit, savings banks, and trust companies. It may also be noted that state banks may exist (a) by virtue of special acts or charters, or, (b) by virtue of general laws under which all such banks acquire the same rights and liabilities. The establishment of state banks under special legis- lative charters was the original method employed, but THE FUNCTION OF BANKS. 39 the disadvantages of the charter system are obvious. The charters w.ere costly to the promoters, they could be granted only when the legislature was in session, and they opened the door to corruption on the one hand and to the granting of special privileges on the other. The enactment of general laws to govern the estab- lishment of banking institutions was made necessary by the evils attending the special charter system. Every state now has a general banking law, providing an in- expensive and ready means of obtaining authority to establish a bank under state regulations. Charters, how- ever, are still granted by some state legislatures, and there are a number of state banks still running under old charters. National Banks. National banks of the United States are established under the National Banking Act and are subject to fed- eral regulation. [See Chapter XIII.] National banks in other countries have certain relations with their respec- tive governments, and a bank of this character has beeu twice established in the history of the United States. In each case, the national government founded and con- ducted such a bank with branches. This bank, with its two periods of existence, was known as the Bank of the United States. The idea of it was conceived immedi- ately after the adoption of the Constitution, by Alexan- der Hamilton, then Secretary of the Treasury, and the act of Congress incorporating the first bank became law on February 25, 1791. The duration of the bank was limited to the 4th of March, 1811. The second Bank of the United States, located at 40 THE FUNCTION OF BANKS. Philadelphia with branches in the several states, was cre- ated by an Act of Congress March 3, 1816, and was con- ducted until 1836, when a renewal of its charter was de- nied. In consequence of this, reorganization was ef- fected by means of authority 'of the legislature of the State of Pennsylvania. The bank assigned in 1841, its affairs being finally liquidated in 1856 and resulting in the payment in full of interest and principal of liabihties to depositors and note holders; the shareholders, how- ever, received nothing on their investment in stock of the bank. During President Tyler's administration, efforts were made to establish another national bank to be conducted by the United States government, but the president ve- toed the bill and no similar bank was ever re-estabhshed. The first bank in the United States was the Bank of North America, elsewhere referred to, by which exclu- sive privileges of a monopolistic character were sought, and these were soon proven to be inconsistent with the general character of an American institution. It was opened for business on January 1, 1782. [See Chapter XVI— "The Federal Reserve Sys- tem."] Banks of Discaunt and Deposit. A bank of discount is owned by the shareholders who contribute the capital. It receives commercial and other deposits, usually payable on demand. It discounts com- mercial paper, makes short loans for conmiercial purposes, and is managed by a board of directors chosen by the shareholders, who hold annual meetings to receive reports and elect directors. THE FUNCTION OF BANKS. 41 Savings Banks. Savings banks are organized by trustees and operate usually without a capital stock, having no shareholders. The deposits are received chiefly in small sums, and are payable only after notification by the depositors that they wish to withdraw part or all of their money. In the case of small withdrawals, the notification is usually waived, except in periods of financial stringency or de- pression. Loans of the deposit funds are made for longer periods as a rule than in the case of banks of dis- count, and are made to investors, for building purposes, etc. The trustees elect some of their number as directors and these directors manage the business. If a trustee re- signs or dies, a successor is elected by the other trustees. The depositors have no voice in the election of ofiicers or in the management of the business. Trust Companies. Trust companies are a modern development of the banking business. They combine many of the functions of the older banks of discount with the execution of trusts. Deposits are received by them and interest paid. The making of loans forms an important part of the business. The funds are lent in all cases on collateral security, stocks, bonds, etc., and not, as in the case of commercial banks, on the credit of business men and firms. Trust companies act as administrators and executors of estates, guardians to minors, trustees for beneficiaries of wills, etc. They are often called upon also to act as trustees of bondholders in large operations, such as the building or reorganizing of railroads. 42 THE FUNCTION OF BANKS. One of their principal functions is the management of real estate, especially where the ownership is vested in es- tates of deceased individuals or in corporations. They act as fiduciary agents in business operations of a greatly varied character, and in recent years have largely re- placed individual trustees in the management of estates, etc., for the very good reasons that they possess capital, responsibility, experience, disinterestedness and conser- vatism, and besides have fixed charges of a reasonable character for the services they render. They have proved a valuable addition to the modern machinery of business. CHAPTER III. THE ORIGIN OF BANKING. There is but little information available as to the kind of banks that existed in the earlier ages, or on what sys- tem they conducted their business. As most of the na- tions of antiquity subsisted chiefly on agriculture, they probably had little occasion for banks; for it is only in commercial countries that these institutions have at- tained to any high degree of prosperity. And as even the commercial nations of antiquity were unacquainted with joint-stock companies or conmiercial corporations, and had not discovered the use of paper-money or bills of ex- change, the business of a banker, even among them, must have been somewhat different from that of a banker of the present day. The merchants of those early times employed as money, gold and silver bullion ; and received it and paid it away by weight. It is probable that the merchants would require that the precious metals they received should be of a certain degree of fineness. Thus when we read of a father in Israel weighing out as a payment 400 shekels of silver, current money with the merchant ( Gen- esis XXIII, 16) — the phrase implies that the money current with the merchant was different from that in or- dinary use. Afler bullion was superseded by coin, and each nation had a coin of its owti, the merchants would necessarily in 43 44 THE OEIGIN OF BANKING. the course of their business receive coins belonging to dif- ferent nations, and hence would be applied to by stran- gers who wished to exchange their own money for the money of the country in which they sojourned. This would take place more particularly in those oriental countries whose inhabitants were accusk)med in certain seasons to meet together for the celebration of public festivals. The Jewish Money-Ohangers. We read in the New Testament of money-changers who had tables in the temple of Jerusalem. It is prob- able they attended for the purpose of giving Jewish money in exchange for those various coins which per- sons coming from the neighboring countries might have brought with them. Whether the business of money-changing was carried on as a separate employment, or united with the general business of a merchant, we are not informed; but it is stated that the exchangers allowed interest for money lodged in their hands. "Thou wicked and slothful serv- ant, thou oughtest to have put my money to the ex- changers, and then at my coming I should have received mine own with usury." (Matthew XXV, 27.) From the circumstance of their allowing interest on money, we may infer that they also lent money on interest; other- wise they would have had no use for the money they bor- rowed. This scanty information forms the whole of our knowledge respecting the mode of banking practised by the ancient Babylonian, Egyptian and Jewish nations. THE ORIGIN OF BANKING. ~^ 45 The Banks of Ancient Greece. With respect to the bankers of Greece we have more ample details, some of these being interestingly re- counted by J. W. Gilbart, F. R. S., in his "History, Principles and Practice of Banking." In Greece the first banks were the temples. We read that "the wealth and growing estimation of Delphi had also another source, of which information remains only so far as to assure us of the fact with far less explanation of circumstances than for its importance might be de- sired. In the general insecurity of property in the early ages, and especially in Greece, it was highly desirable to convert all that could be spared from immediate use into that which might more easily be removed from approach- ing danger. With this view, by a compact understood among men, the precious metals appear to have obtained their early estimation. Gold, then, and silver, having ac- quired their certain value as signs of wealth, a deposit secure against the dangers continually threatening, not individuals only, but every town and state in Greece, would be a great object of the wealthy. Such security offered nowhere in equal amount as in those temples, which belong not to any single state, but were respected by the common religion of the nation. The priesthood, not likely to refuse the charge, would have a large inter- est in acquiring the reputation of fidelity to it. Thus Delphi appears to have become the great bank of Greece, perhaps before Homer, in whose time its riches seem to have been already proverbial. Such then was found the value of this institution, that when the Dorian conquerors drove so large a part of the Greek nation into exile, the 46 THE ORIGIN OF BANKING. fugitives who acquired new settlements in Asia estab- lished there their own national bank in the manner of th^t of their former country, recommending it to the protec- tion of the same divinity. The Temple of Apollo, at Branchidse, became the great depository of the wealth of Ionia." (Mitford's History of Greece.) Afterward the temple of Olympia, like that of Delphi, became an advantageous repository for treasure. But although the temples discharged one of the offices of banks, by being places of security, yet as they did not grant interest on the money deposited, they did not su- persede banks of deposit established by private individ- uals. At Athens, especially, banking was a flourishing trade, which is thus described by the Abbe Barthelemy in "Travels of Anacharsis in Greece": Methods of Athenian Bankers. "The greater part of the Athenians employ their money in trade, but they are not permitted to lend it for any place but Athens. They receive an interest for the use of it which is not fixed by the laws, but stipulated in a contract, deposited either in the hands of a banker or some friend to both parties. If, for instance, a voyage is tt) be made to the Cymmerian Bosphorus, the instrument specifies the time of the departure of the vessel, the kind of commodities with which she is to be freighted, the sale which is to be made of them in the Bosphorus, and the merchandise which she is to bring back to Athens; and as the duration of the voyage is uncertain, some agree that their money shall not be payable till the return of the vessel, while others, more timid, and contented with a THE ORIGIN OF BANKING. 47 less profit, require that it shall be repaid at the Bosphorus immediately after the sale of the goods carried out; in which case they either themselves repair to the place where they are to receive it, or send thither some person in whom they can confide, and whom they empower to act for them. "The lender has his security, either on the merchandise or the goods of the borrower; but as the dangers of the sea are in part risked by the former, and the profit of the latter may be very considerable, the interest of money thus lent may rise as high as thirty per cent, more or less, according to the length and hazards of the voyage. "The usury here spoken of is known by the name of maritime; that called landed usury is more oppressive, and no less variable. "Those who, without risking the dangers of the sea, wish to derive profit from their money, lend it to bankers at the rate of twelve per cent per annum, or rather one per cent for every new moon. But as the laws of Solon do not prohibit those who have money from demanding the most extravagant interest for it, some persons receive more than sixteen per cent, and others, especially among the lower classes of people, exact every day the quarter of the principal. These extortions are not concealed, and cannot be punished, except by the public opinion, which condemns, but does not sufficiently despise those who are guilty of them. Commerce Gave Rise to Bankers. "Commerce increases the circulation of wealth, and this circulation has given birth to the occupation of bankers, which facilitates it still more. A person who is about to 48 THE ORIGIN OF BANKING. make a voyage, or who fears to keep by him too great a sum of money, lodges it in the hands of these bankers, sometimes only as a trust, and without requiring any in- terest, and sometimes on condition of sharing with them the profit it shall produce. They advance money to gen- erals who go to take on them the command of armies, or other individuals who stand in need of their assistance. "In the greater part of bargains made by them, no witness is required; they content themselves with enter- ing in a register that such a person has deposited in their hands such a sum, which they must repay to such an- other, if the former should happen to die. It would sometimes be very difficult to prove that they have re- ceived a sum of money, were they to deny it ; but if they should expose themselves to such a charge more than once, they would lose the confidence of the public, on which depends their success in the business in which they are engaged. "By employing the money deposited in their hands, and lending it at a greater interest than they are to pay for it, they amass riches which gain them friends, whose protection they purchase by assiduous services. But all is lost when, unable to call in their money, they are in- capable of fulfilling their engagements. They are then obliged to conceal themselves, and can only escape the severity of justice by surrendering all their remaining property to their creditors. "Those who wish to exchange foreign moneys apply to the bankers, who by different means, as the touchstone and the balance, examine whether they are not adulter- ated or deficient in weight." THE ORIGIN OF BANKING. 49 The Tirst Joint-Stock Bank. In a treatise published by Xenophon, upon the Athen- ian revenue, we meet with the first suggestion for the es- tabhshment of a joint-stock bank. Of this historic step Mitford says: "A very remarkable project, which seems to have been original with Xenophon, next occurs — the establishment of a bank by subscription, open to all the Athenian peo- ple. The interest of money, it appears, was enormous at Athens, an unavoidable consequence of the wretched insecurity of person and property. Throughout modern Europe, land is, of all property, esteemed the safest source of income ; but in Greece it was held that the surest return was from money lent at interest. For in the multiphed division of Greece into small republics with very narrow territories, the produce of land was continu- ally liable to be carried off or destroyed by an invading enemy, but a moneyed fortune, according to Xenophon's observation, was safe within the city walls. In propor- tion, then, to the interest of money, and the insecurity of aU things, the profits of trade will always be high, and thus numbers would be induced to borrow, even at a high interest. Xenophon therefore proposed, by lending from the public stock, and encouraging commercial ad- venture by just regulations, to raise a great revenue, and, by the same means, instead of oppressing to enrich indi- viduals. As corollary, then, to his project, when the amount of the subscription or its profits might allow, he proposed to improve the ports of Athens, to form wharves and docks, to erect halls, exchanges, warehouses, market-houses, and inns, for all which tolls and rents I.B.Iv. Vol. 4 — ♦ 50 THE OEIGIN OF BANKING. should be paid ; and to build ships to be let to merchants. Thus, while numbers of individuals were encouraged and enabled to employ themselves for their private benefits, the whole Athenian people would become one great bank- ing company, from whose profits every member, it was expected, would derive at least an easy livelihood." The Banks of Ancient Rome. At Rome, the bankers were called Argentarii, Men- sarii, Numularii, or Collybistce. The banking-houses or banks were called Tahernce Argentarice, or Mensce Numularice, Some of these bankers were appointed by the government to receive the taxes, others carried on business on their own account. Their mode of transact- ing business was somewhat similar to that which is in use in modern times. Into these houses the State, or men of wealth, caused their revenues to be paid, and they settled their accounts with their creditors by giving a draft or check on the bank. If the creditor also had an account at the same bank, the account was settled by an order to make the transfer of so much money from one name to another. To assign over money or to pay money by a draft, was called prcescribere, and rescribere; the assignment or draft was called attributio. These bankers, too, were money-changers. They also lent money on interest, and allowed a lower rate of in- terest on money deposited in their hands. In a country where commerce was looked upon with contempt, banking could not be deemed very respectable. Among most of the ancient agricultural nations there was a prejudice against the taking of interest for the THE OEIGIN OF BANKING. 51 loan of money. Hence the private bankers at Rome were sometimes held in disrepute, though those whom the gov- ernment had established as pubhc cashiers, or receivers- general, as we may term them, held so exalted a rank that some of them became consuls. The Romans had also loan banks, from which the poor citizens received loans without paying interest. We are told that the confiscated property of criminals was con- verted into a fund by Augustus Caesar, and that from this fund sums of money were lent without interest to those citizens who could pledge value to double the amount. The same system was pursued by Tiberius. He advanced a large capital, which was lent for a term of two or three years to those who could give landed security to double the value of the loan. Alexander Se- verus reduced the market-rate of interest by lending sums of money at a low rate, and by advancing money to poor citizens to purchase lands, and agreeing to receive pay- ment from the produce. Origin of the Word ''Bank.'* After commerce and the arts had revived in Italy, the business of banking was resumed. The word "bank" is commonly regarded as derived from the Italian word banco, a bench — the Jews in Lombardy having benches in the market-place for the exchange of money and bills. When a banker failed, his bench was broken by the pop- ulace; and from this circumstance we have our word bankrupt. But while this is the derivation generally accepted, some writers have asserted that a more accurate explana- tion of the use of the word "bank" is that which makes it 52 THE ORIGIN OF BANKING. synonjrmous with the Italian monte (Latin mons, mon- tis) , a mound, heap, or bank. Thus the Italian Monte di Pieta and the French Mont de Piete signify "a Char- ity Bank." Bacon and Evelyn use the word in the same sense. Bacon says : "Let it be no hank or common stock, but every man be master of his own money." Evelyn, re- ferring to the Monte di Pieta at Padua, writes : "There is a continual bank of money to assist the poor." Black- stone also says: "At Florence, in 1344, government owed £60,000, and being unable to pay it, formed the princi- pal into an aggregate sum called, metaphorically a Mount or Bank" The Florentine Bankers. Though the States of Venice and Genoa made the most rapid advances in commerce, and established pubHc banks, yet the department of banking appears to have fallen more particularly into the hands of the Floren- tines. "As the Florentines did not (like the Venetians and the Genoese) possess any commodious seaport, their ac- tive exertions were directed chiefly towards the improve- ment of their manufactures and domestic industry. About the beginning of the fourteenth century, the Florentine manufacturers of various kinds, particularly those of silk and woolen cloth, appear, from the enumer- ation of a well-informed historian, to have been very con- siderable. The connections which they formed in dif- ferent parts of Europe, by furnishing them with the productions of their own industry, led them to engage in another branch of trade, that of banking. In this they soon became so eminent, that the money transactions of THE OEIGIN OF BANKING. 53 almost every kingdom in Europe passed through their hands, and in many of them they were entrusted with the collection and administration of the public revenues. In consequence of the activity and success with which they conducted their manufactures and money transactions — the former always attended with certain though mode- rate profit, the latter lucrative in a high degree, at a pe- riod when neither the interest of money nor the premium on bills of exchange was settled with accuracy — Flor- ence became one of the first cities in Christendom, and some of its citizens extremely opulent." (Robertson's "Disquisition on India.") Cosmo di Medici of Florence was reckoned in his day the most wealthy merchant ever known in Europe, and in a treaty whereby Louis XI engaged to pay Edward IV fifty thousand crowns annually, it was expressly stipulated that the king of France should engage the partners of the Bank of Medici to become bound for the faithful and regular performance of this agreement on the part of himself and his heirs. The Earliest National Banks. Although the business of banking has probably always been carried on by private individuals before it has been carried on by a public company, yet most countries have found it useful to establish a public or national bank. Some of these banks have been founded for the purpose of facihtating commerce, others to serve the govern- ment. The most ancient of these was founded at Venice. The Bank of Venice. The first establishment of banking, in a regular and systematic form, took place at Veriice about the middle of 54 THE ORIGIN OF BANKING. the twelfth century (1157) ; and it arose from the neces- sities of the state. Duke Vitale, Mitchel II, being in- volved in expensive wars with the Empire of the West, and the Grecian Manuel, embarrassed the finances of the republic ; and to relieve it from the pressure of its difficul- ties, he had recourse to a forced loan, the contributors to which were made creditors, and received interest at the rate of four per cent per annum. The "Chamber of Loans" was established for the management of this fund, and regular payment of the interest; which, gradually improving its plan, at last formed itself into the more perfect institution of the Bank of Venice. This celebrated bank served as a model to almost ev- ery similar establishment in succeeding ages; its capital was 5,000,000 ducats, or $4,800,000, for which the repub- lic was security. It was, properly, a board of deposit, credit and interest. By an edict of the state, all payments of wholesale merchandise, and bills of exchange, were re- quired to be made in banco, or bank notes ; and all debt- ors were obliged to lodge their money in the bank, that their creditors might receive payment in banco; which was done by transferring the amount from the one to that of the other, or by writing off the sum from the ac- count of the debtor, and placing it to that of the creditor. Payments were made in this manner without the inter- vention of gold or silver; but there were exceptions to this rule in cases of retail trade, or when foreigners wished to carry off the precious metals. All the riches of the state thus flowed into the bank; and, through various channels, were again diffused among traders, to give activity to the extensive commerce of this once opulent and powerful city. THE ORIGIN OF BANKING. 55 From its good faith, and the regularity of its trans- actions, the Bank of Venice always maintained a high character in Europe, and on some occasions, its obliga- tions were more esteemed than the bonds of kings. This bank may well be deemed a wonder for the twelfth cen- tury, but required much alteration in methods to adapt it to the requirements of the nineteenth and twentieth cen- turies. During two centuries and a half the Bank of Venice was unrivaled. The progress of human knowledge was slow and improvements in banking methods were long in coming. The Bank of Barcelona. So early as the year 1349 the business of banking was carried on after a fashion by the drapers of Barcelona, who were probably the most wealthy class of merchants in that city. But by an ordinance of the king of Arra- gon, they were not allowed to commence this branch of trade until they had first given sufficient security. In the year 1401 a public bank was established by the mag- istrates. It was called the Table of Exchange, and was properly a bank of exchange and deposit. Foreign bills were negotiated with the same liberaHty as those of the citizens, and accommodations were extended to strangers as well as to natives. It was altogether calculated for the encouragement of both external and internal com- merce, and the funds of the city were pledged as security for the responsibility of the bank. The Bank of Genoa. In the year 1407, the bank of Genoa commenced, ow- ing its origin to the debts of the state. Previous to this 56 THE ORIGIN or BANKING. time, the republic borrowed large sums of money from the citizens, assigning certain branches of the revenue for the payment of the interest, and accounting to gov- ernment for the funds intrusted to its care. From this circumstance, the Genoese claim the merit of estabhshing a bank as early as the Venetians; but it is evident that the transactions of this board were only an approximation to banking. In process of time, however, the multiplicity and extent of these funds induced disorder and confu- sion, and it was deemed expedient to consolidate the whole into one capital stock, to be managed by a bank called the Chamber of St. George, to be governed by eight protectors, annually chosen, elected by the creditors and stockholders. Under this form of government, the affairs of the bank were prosperously conducted; but the further increase of the public debts, and the acquire- ment of towns and territories as security, among which were the port of Caff a and the little kingdom of Corsica, made the business of the bank much more complex ; and the inconvenience of annual successions of new protectors becoming apparent, determined the Genoese, in the year 1444, to elect eight new governors for the management of the bank, of which only two were to go out every year. The rirst Bills of Exchange. Before the discovery of the passage to the Indias, by the Cape of Good Hope, the Venetians enjoyed a mo- nopoly of the lucrative trade of the east, by means of the Mamelukes of Egypt, with whom they were leagued by poHcy and interest, which diffused opulence and wealth throughout Italy. This extensive commerce created THE ORIGIN OF BANKING. 57 and gave circulation to bills of exchange, the credit and currency of which were universally acknowledged when they bore the signature of the banks of Italy, and for several centuries there were no other establishments of the kind in Europe. The Bank of Amsterdam. The Bank of Amsterdam was established on the 31st of January, 1609. The magistrates of the city, under authority of the States, declared themselves the perpetual cashiers of the inhabitants, and that all payments above 600 gilders (afterwards reduced to 300) and bills of ex- change, should be made in the bank ; which obliged mer- chants to open accounts with it for the payment of their foreign bills. The extensive commerce of Amsterdam involved such a vfiriety of transactions that the expedi- ency of regulating them became evident, and no meas- ure could more effectually secure property, check law- suits, and prevent frauds, than the establishment of a bank office, in which all receipts and payments were reg- istered in books kept open for the purpose. Dr. Smith ascribes the origin of this bank to the de- based state of the current coin which the trade of Am- sterdam brought from all quarters of Europe, and which was sold at a reduction of nine per cent, below the money of the mint. Merchants, in such cases, could not always find standard money to pay bills of exchange, the value of which was always uncertain; and accordingly oper- ated against the United Provinces with foreign nations. But as the bank received the debased, light, or worn coin, at its mtrinsic value, in the good money of the country, 58 THE OEIOIN or BANKING. and gave credit for the amount in its books, an invari- able standard was thus estabUshed, that tended greatly to simplify and facilitate the operations of commerce. Bank Money at a Premium. The beneficial effects of this establishment in Holland were soon perceived, and bank money immediately bore a premium called the agio, which is a term to denote the difference of price between the money of the bank and the coin of the country. When we consider that coin is only a representative of commodities, and that its utility arises only from its being a generally acknowledged standard of value, by which mankind in the civilized state of society are enabled to calculate the price of articles of exchange, it was not surprising that bank receipts, which represent property also, and at the same time are not liable to risk, danger, or deterioration of any kind, should be held in higher es- timation than coin, which is exposed to robbery, and all sorts of casualties. In all countries where banks have been regular in their transactions and their responsibility undoubted, their paper has carried a premium, more or less, according to circumstances, and the agio of Amsterdam was generally about five per cent. The Bank Capital. The amount of capital of the Bank of Amsterdam was never exactly ascertained. It was originally constituted by deposits of coin, and there was full value in its coffers for all the credits and receipts it issued. The bank, how- ever, gave credit and receipts also upon deposits of gold and silver bullion, at the rate of five per cent less than the THE ORIGIN OF BANKING. 59 mint price of such bullion, which was restored to the owner if he called for it within six months, upon paying one- fourth per cent if the deposit was in silver, or one- half per cent if in gold. But if the term of six months was allowed to expire, the bank retained the bullion at the price stated in its books. The advantage of making deposits in this bank was two-fold: First, the credit enabled the merchant to pay his bills of exchange ; second, the receipt gave him an op- portunity of selling his bullion at an advance price, if the market should fluctuate in his favor. "Although none could draw out bullion without producing a receipt, and reassigning bank money equal to the price at which the bullion had been received, yet it was not absolutely nec- essary that both credit and receipt should always remain in the hands of the same person ; as he who had the receipt could find bank money to buy at the market price, to en- able him to relieve the bullion, and the owner of the credit could at all times find receipts in abundance ; but to prevent any extraordinary rise in the price of bank money, or receipts, which speculation or other causes might sometimes induce, the lank adopted the resolution of selling bank money for the current coin, at an agio of five per cent, and buying it at the rate of four. "The city of Amsterdam was guaranty that there should always be full value in the bank to answer all its demands; and as the directors, who were annually changed, compared the treasure with the books, under solemn oath,* * * there could be no probability of fraud." 60 THE OEIGESr OF BANKING. Managed by the Burgomasters. The four reigning burgomasters were invested with the direction of the bank, and the city of Amsterdam de- rived a considerable revenue from it, which arose from the following sources: "For all deposits, a fourth or half per cent had to be paid ; from every person who opened an account, a fee of ten gilders was exacted, and for ev- ery additional account, three gilders three stivers; for every transfer, two stivers, or six stivers if the transfer was less than three hundred gilders. If any person over- drew his account, he was fined three per cent on the amount, and his order was set aside. There was also a con- siderable profit on the sale of foreign coin, or bullion, which was always kept till it could be sold to advantage ; and Hkewise by selling bank money, at five per cent agio, and buying it at four. Through these various resources, the Bank of Amster- dam became rich and prosperous, and it was supposed to retain in its repositories more gold and silver than any other estabhshment of the kind in Europe, A Model for European Banks. The Bank of Amsterdam was the model on which were formed many of the older European banks, but they have varied very considerably from each other, according to the circumstances of the respective countries in which they have been estabUshed. The Bank of North America. The Bank of North America- owed its origin to the vigorous mind and enterprising genius of Robert Mor- ris, who conceived the idea of it when superintendent of THE OEIGIN OF BANKING. 61 the public finances, and submitted to Congress in the month of May, in the year 1781, the plan for establish- ing a national bank of North America. Agreeably to this plan, the capital was to consist of 1,000 shares, of $400 each, or $400,000, payable in gold and silver, to be increased by new subscriptions, from time to time, at the pleasure of the directors. The di- rectors, twelve in number, were to be chosen by the stock- holders, and were to be intrusted with the management of the institution. The notes of the bank payable on de- mand were to be made a legal tender in the discharge of duties, taxes, etc. On the 26th of May, in the same year. Congress approved of the plan, and passed several resolutions, by which it pledged itself to support the proposed institu- tion; to incorporate the subscribers, under the name of the president, directors, and company of the Bank of North America; to reconmiend to the several states the prevention of similar establishments within their respec- tive jurisdictions, during the war; to receive the notes of the institution in payment of taxes, duties, and debts due to the United States, and to use its influence with the sev- eral legislatures, to have laws passed, which should make it a felony to counterfeit the notes of the bank, etc. After this, subscriptions were immediately opened, during the summer and autumn of the same year. In November, directors were chosen. In December, Con- gress, conformably to its former resolutions, passed an ordinance which created the subscribers to the bank a corporation for ever, under the title of "The President, Directors, and Company of the Bank of North Amer- ica." The original features of the plan were preserved. 62 THE ORIGIN OF BANKING. but the bank was restricted from holding property ex- ceeding the amount of $10,000,000. The institution commenced its operations in the month of January following, and Robert Morris, who may be justly styled the father of the system of credit and paper circulation in the United States, succeeded in securing for it the good- will and confidence of the people at large, by various judicious measures, of which a circular letter, addressed to the governors of the several states, explain- ing the object of the institution, and the certain advan- tages to be derived from it, was not the least effectual. "Thus the first bank in the United States came into ex- istence, and such was its happy and immediate influence on the public finances, and on commercial concerns in general," says Gk)ddard in his History of Banking In- stitutions, "that it may be justly doubted whether, with- out its seasonable aid, the revolutionary struggle for in- dependence could have been brought to a satisfactory termination. "The United States, for several years, wa« constantly indebted to the bank, to a larger sum than the stock they owned ; nor could the various devices for creating a revenue have answered their end, or the army have been fed and clothed, or any degree of order and punctuality maintained in the dispatch of public affairs but for the great facility in the management of business, and the restoration of confidence, which were created by this institution. The sense of the great utility of the bank, was so universal, that Massachusetts and Pennsylvania corroborated the ordinances of Congress, by additional charters, and Rhode Island, Connecticut, and Delaware THE OEIOIN OF BANKING. 6S passed laws for the purpose of preventing the counter- feiting of its notes. "Yet when peace had been concluded, and the pressure of the times was over, there were not wanting those who viewed the prosperous state of the affairs of the bank with a jealous eye, and conjured up imaginary fears of an overbearing oppression, an alarming foreign influ- ence, and fictitious credit, from temporary punctuality; of a created scarcity of specie ; possible commercial con- vulsions, from the stopping of discounts ; partial favors, and comparative disadvantages, under which distant traders labored; as if, in a moral community, the bare possibility of abuse could ever furnish a good argument against the decided utility of a thing ; or as if a benefit were to be relinquished, because all cannot be benefited alike. And so effectually were those objections against the institution urged, that on the 13th of September, 1785, the legislature of Pennsylvania actually repealed their charter." The repeal was persevered in by the succeeding legis- lature, notwithstanding innumerable petitions to the con- trary, and vast efforts to enlighten their proceedings. The bank, however, continued its usual operations under the charter from Congress, and in the enjoyment of corporate rights, which, it was presumed, could not be arbitrarily wrested from them after having been once legally bestowed. The legislature which met in December, 1786, at last thought proper to renew the charter of the bank, and passed an act to that effect, on the 7th of March, 1787, by which, however, the term of the charter was limited to 64 THE ORIGIN OF BANKING. fourteen years, and the capacity of the corporate body of holding property was restricted to two millions of dollars. The same charter was extended for the term of fourteen years more, by an act passed on the 20th of March, 1799. CHAPTER IV. EARLY BANKING IN ENGLAND. There are four principal branches or functions of the business of modem banking, namely, ( 1 ) the exchanging of money; (2) the lending of money; (3) the borrowing of money; (4) the transmitting of money. It is in this order that the various functions seem to have originated in most countries. We trace below the rise of banking in Englandj as a leading and typical commercial nation. 1. — Money-Changing. For several centuries the only coin current in England was made of silver, and the highest denomination was the silver penny. This coin contained about half as much silver as one of the modern sixpences. There were also silver half -pence and silver farthings, and fre- quently the silver pennies were cut into halves and quar- ters to serve the purpose of half -pence and farthings, until laws were made to prohibit the practice. Copper was not coined in England until the year 1609, and then the small leaden token previously issued by private indi- viduals was suppressed. Gold was first coined in England in 1257, but soon went out of circulation, and did not enter permanently into currency until 1344 when Edward III issued gold nobles, half nobles, and farthing nobles; the noble to pass for 6s. 8d., the half noble for 3s. 4d., and the farthing noble for Is. 8d. d5 .:B.L. Vol. 4—5 06 S4JELT BANSlirO IN ENGLAND. The Office of Royal Exchanger. This coinage seems to have given rise to the office of Royal Exchanger. We find the following in Henry's History of England: "It was not so easy a matter in the times we are now considering to exchange gold and silver coins for each other as it is at present, and therefore Edward III and several of his successors took this office into their own hands, to prevent private extortion as well as for their own advantage, and they performed it by appointing certain persons, furnished with a com- petent quantity of gold and silver coins, in London and other towns, to be the only exchangers of money, at the following rate : — When these royal exchangers gave sil- ver coins for a parcel of gold nobles, for example, they gave one silver penny less for each noble than its current value, and when they gave gold nobles, for example, they gave one silver penny less for each noble than its current value, and when they gave gold nobles for silver coins they took one penny more, or 6s. 9d. for each noble, by which, in every transaction, they made a profit of 1 1-5 per cent. These royal exchangers had also the exclusive privilege of giving the current coins of the kingdom in exchange for foreign coins, to accommodate merchant- strangers, and of purchasing light money for the use of the mint. As several laws were made against exporting English coin, the king's exchangers at the several sea- ports furnished merchants and others who were going beyond seas with the coins of the countries to which they were going, in exchange for English money, according to a table which hung up in their office for pubhc in- spection. By these various operations ihey made oc«i- EAELY BANKING IN ENQIiA3S». OT siderable profits, of which the king had a certain share. The house in which the royal exchanger of any town kept his office was called the Exchange, from which it is probable the public structures where merchants meet for transacting business derive their name." Re-established by Charles I. This institution continued until the middle of the reign of Henry VIII, when it fell into disuse. It was re- established in 1627, by Charles I, who then issued the following proclamation : — "Whereas the exchange of all manner of gold and sil- ver current in moneys or otherwise, as the buying, selling and exchanging of all manner of bullion, in species of foreign coins, billets, ingots, etc., fine, refined, or alloyed howsoever, being fit for our mint, hath ever been and ought to be our sole right, as part of our prerogative, royal and ancient revenue, wherein none of our subjects of whatever trade or quality soever, ought at all, without any special license, to intermeddle, the same being pro- hibited by divers Acts of Parliament and Proclamations, both ancient and modern. And whereas ourself and div- ers of our royal predecessors have, for some time past, tolerated a promiscuous kind of liberty to all, but especi- ally to some of the mystery and trade of goldsmiths in London and elsewhere, not only to make the said ex- changes, but to buy and sell all manner of buUion, and from thence some of them have grown to that licentioui- ness, that they have for divers years presumed, for their private gain, to sort and weigh all sorts of money current within our realm, to the end to cull out the old and new moneys, which, either by not wearing or by any other 68 EASLY BANKING IN ENGLAND. accident, are weightier than the rest, which weightiest moneys have not only been molten down for the making of plate, etc., but even traded in and sold to merchant- strangers, etc., who have exported the same, whereby the consumption of coins has been greatly occasioned, as also the raising of the silver even of our own moneys to a rate above what they are truly current for, by reason whereof no silver can be brought up to our mint but to the loss of the bringers, etc. For the reforming of all which abuses we have, by the advice of our Privy Council, determined to assume our said right, for our own profit and the good of the realm, and for this end we do now appoint Henry, Earl of Holland, and his deputies, to have the office of our changes, exchangers, and out- changes whatsoever, in England, Wales, and Ireland. And we do hereby strictly charge and command that no goldsmith nor other person whatsoever, other than the said Earl of Holland, do presume to change, etc." The King's Prerogative. As this measure occasioned some dissatisfaction, the king authorized, in the following year, the publication of a pamphlet, entitled "Cambium Regis, or the Office of his Majesty's Exchanger Royal." In this pamphlet it was attempted to be shown : — "That the prerogative of exchange of bullion for coin has always been a flower of the Crown, of which instances are quoted from the time of King Henry I downward. That King John farmed out that office for no smaller a sum than five thousand marks — that the place or office where the exchange was made in his reign was near St. Paul's Cathedral in London, and gave name to the street EAELY BANKING IN ENGLAND. 69 still called the Old 'Change — that in succeeding reigns there were several other places for those exchangers be- sides London — that this method continued to Henry the Eighth's times, who suffered his coin to be so far debased that no regular exchange could be made — that the same confusion made way for the London goldsmiths to leave off their proper trade of goldsmithrie, i. e., the working and selling of new gold and silver plate, and manu- facture, the sole intents of all their charters, and to turn exchangers of plate and foreign coins for our English coins, although they had no right to buy any gold or silver for any other purpose than for their manufacture aforesaid, neither had any other person but those substi- tuted by the Crown a right to buy the same. The king, therefore, has now resumed this office, not merely to keep up his right so to do, but likewise to prevent those traf- ficking goldsmiths from culling and sorting all the heavy coin, and selling the same to the mint of Holland, which gained greatly thereby, or else by melting those heavy coins down for making of plate, witness the pieces of thirteenpence-half penny, old shillings of Queen Eliza- beth, ninepenny and f ourpenny-halfpenny pieces, which, being weighty moneys, none of them were now to be met with, whereby they have raised the price of silver to two- pence per ounce above the value of the mint, which thereby has stood still ever since the eleventh of King James — that for above thirty years past it has been the usual practice of those exchanging goldsmiths to make their servants run every morning from shop to shop to buy up all weighty coins for the mints of Holland and the East countries, whereby the king's mint has stood stiU." TO EAELY BANKING IN ENGLAND. Not only the Goldsmiths' Company of London, but the lord mayor, court of aldennen, and common council, petitioned against the revival of the office of the Royal Exchanger, says J. W. Gilbart in his History of Bank- ing. They were not, however, successful ; and on a second application of the Goldsmiths' Company, the king told them "to trouble him no farther, since his right to the office was undoubtedly clear.'* After the death of Charles I, however, this office was not continued, and the business of money-changing fell again into the hands of the goldsmiths. Their shops were situated chiefly on the south row of Cheapside, and extended from the street called the Old 'Change unto Bucklersbury. 2.— Money-Lending. That part of the business of banking which consists in the lending of money was conducted during the Middle Ages under severe restraints. The taking of interest for the loan of money was deemed sinful, and stigmatized with the name of usury. This opinion appears to be wholly unwarranted, either by the principles of natural equity or the enactments of the Mosaic law. Michaelis says in his Commentaries on the Laws of Moses: "The taking of interest from Israelites was forbidden by Moses ; not, however, as if he absolutely and in all cases condemned the practice, for he expressly permitted interest to be taken from strangers, but out of favor to the poorer classes of the people. The farther we go back towards the origin of nations, the poorer do we commonly find them, and the more strangers to commerce; and where this is the case, people borrow, not EAELY BANKING IN ENGLAND. 71 with a view to profit, but from poverty, and in order to procure the necessaries of life; and there it must be, no doubt, a great hardship to give back more than has been gotten. The taking of interest from strangers, Moses has not only nowhere forbidden, but even expressly author- ized. Hence it is clear that he does by no means represent interest as in itself sinful and unjust. Any such prohi- bition of interest in our age and coimtry w^ould, without doubt, be unjust towards lenders, and destructive to trade of every description. Among all the remnants of ' ancient laws, it would be difficult to find one which, in the present state of society, it would be more fooHsh and hurtful to revive and enforce. It would only suit a state so constituted as was that of the Israehtes by Moses." Early Rates of Interest. ' The taking of interest for the loan of money was first prohibited in England by Edward the Confessor. This law, however, appears to have become obsolete; for, in a council held at Westminster, in the year 1126, usury was prohibited only to the clergy, who, in case they prac- tised it, were to be degraded ; and in another Council, held twelve years afterwards, it was decreed that, "such of the clergy as were usurers and hunters after sordid gain, and for the pubhc employments of the laity, ought to be de- graded." The earliest mention in English history of a certain yearly allowance for the usury or interest of money, is in the year 1199, the tenth and last year of Richard I. In this case the rate of interest was 10 per cent. This appears to have been the ordinary or market-rate of in- Itsegt from that period until the time of Henry VIII, 7* EAELY BANKING IN ENGLAND. but there are many instances on record of a much higher rate of interest being taken, especially by the Jews and the Lombards, who, in those times, were the principal money-lenders. The exorbitant interest taken by them is supposed by eminent writers to have been the effect of the prohibition of usury. The Jews, who were previously famous in foreign countries for their "egregious cunning in trade and in the practice of brokerage," arrived in England about the time of the Norman Conquest (1066) and soon became remarkable for wealth and usury. *'The prejudices of the age," says Hume, "had made the lending of money on interest pass by the invidious name of usury; yet the necessity of the practice had still continued it, and the greater part of that kind of dealing fell everywhere in- to the hands of the Jews. The industry and frugality of this people had put them in possession of all the ready money, which the idleness and profusion common to the English with the European nations enabled them to lend at exorbitant and unequal interest." Henry III prohibited the Jews taking more than twopence a week for every 20 shilUngs they lent to the scholars at Oxford. This is after the rate of £43 6s. 8d. per cent, per annum. Peter of Blois, Archdeacon of Bath, writes thus to his friend the Bishop of Ely: "I am dragged to Canterbury to be crucified by the per- fidious Jews amongst their other debtors, whom they ruin and torment with usury. The same sufferings await me also at London, if you do not mercifully interpose for my deliverance. I beseech you, therefore, O most Rev. Father and most loving friend, to become bound to Sam- EARLY BANKING IN ENGLAND. 78 son the Jew for £6 which I owe him, and thereby de- liver me from that cross." Expulsion of the Jews. The wealth and the rapacity of the Jews occasioned the most cruel proceedings against them on the part of both the /populace and the Government. These perse- cutions terminated by their expulsion from England in the year 1290. They were not readmitted until the time of Oliver Cromwell. On this occasion the Protector summoned an assembly to debate two questions: 1st, whether it were lawful to tolerate the Jews; 2nd, if it were, on what conditions? The assembly consisted of two judges, seven citizens of London, among whom were the lord mayor and the sher- iffs, and fourteen divines. The judges considered toler- ation merely as a point of law, and declared they knew of no law against it, and that if it were thought useful to the State, they would advise it. The citizens viewed it in a commercial light, and they were divided in their opinion about its utility. Both these, however, despatched the matter briefly; but the divines violently opposed it by text after text for four whole days. Cromwell was at length so weary that he told them he had hoped they would have thrown some light on the subject to direct his conscience, but, on the contrary, they had rendered it more obscure and doubtful than before ; that he desired, therefore, no more of their reasonings, but lest he should do anything rashly, he begged a share in their prayers. The Lombards as Usurers. Previous to the expulsion of the Jews, the Lombards had settled in England, and they soon became as great f4 EAELY BANKING IN ENGLAND. usurerf aa the Jews themselves. By Lombards ware gen- •rally understood Italian merchants from the four ro- publics of Genoa, Lucca, Florence, and Venice. The foreign commerce of those times was usually carried on by companies of merchants who, on payment of certain duties, were invested by the Government with a monopoly of the trade to those countries of which they were natives, and they also possessed peculiar privileges. "As the Lombards engrossed the trade of every king- dom in which they settled, they soon became masters of its cash. Money, of course, was in their hands not only a sign of the value of their commodities, but became an object of commerce itself.- They dealt largely as bank- ers. In an ordinance, A. D. 1295, we find them styled mercatores and campsores. They carried on this, as well as other branches of their commerce, with somewhat of that rapacious spirit which is natural to monopolizers who are not restrained by the competition of rivals. An opinion which prevailed in the Middle Ages was, how- ever, in some measure the cause of their exorbitant de- mands, and may be pleaded in apology for them. "Commerce cannot be carried on with advantage, un- less the persons who lend a sum are allowed a certain pre- mium for the use of their money, as a compensation for the risk which they run in permitting another to trafiic with their stock. This premium is fixed by law in all com- mercial countries, and is called the legal interest of money. But the Fathers of the Church absurdly applied the prohibitions of usury in Scripture to the payment of legal interest, and condemned it as a sin. The schoolmen adoled by Aristotle^ whose sentiments they foUowid^ ioi- EAELY BANKING IN ENGLAND. 75 plicitly and without examination adopted the same error and enforced it. Thus the Lombards found themselves engaged in a traffic which was deemed criminal and odious. They were liable to punishment if detected. They were not satisfied, therefore, with that moderate premium which they might have claimed, if their trade had been open and authorized by law. They exacted a sum proportional to the danger and infamy of a dis- covery. Accordingly we find it was usual for them to de- mand twenty per cent, for the use of money in the thir- teenth century. "About the beginning of that century the Countess of Flanders was obliged to borrow money in order to pay her husband's ransom. She procured the sum requisite, either from Italian merchants or from Jews. The lowest interest which she paid to them was above twenty per cent., and some of them exacted near thirty. In the fourteenth century, A. D. 1311, Phillip IV fixed "the interest which might be legally exacted in the fairs of Champagne at twenty per cent. The interest of money in Arragon was somewhat lower. James I in A. D. 1242, fixed it by law at eighteen per cent. As late as the year 1490, it appears that the interest of money in Pia- cenza was at the rate of forty pe.- cent. This is the more extraordinary, because at that time the conmierce of the Italian States was become considerable. "It appears from Lud. Guicciardini that Charles V had fixed the rate of interest in his dominions in the Low Countries at twelve per cent, and at the time when he wrote, about the year 1560, it was not uncommon to exfuct more than that sum. He complains of this bm 76 EARLY BANKING IN ENGLAND. exorbitant, and points out its bad effects both on agri- culture and commerce. This high interest on money is alone a proof that the profits on commerce were exorbit- ant. The Lombards were also established in England in the thirteenth century, and a considerable street in the city of London still bears their name. They enjoyed great privileges, and carried on an extensive commerce, particularly as bankers." [Robertson's History of Char- les v.] The English monarchs frequently borrowed money of the Lombards, as well as of other public bodies and of private individuals. The companies of foreign merchants made advances of money, which were repaid by the duties on their merchandise. The oldest and wealthiest of these companies, the Steel- Yard Company, was a kind of bank to the English kings, whenever they wanted money on any sudden emergency, but the company was sure to be well paid in the end for such assistance. Interest Made Legal. In the year 1546, the taking of interest for money was made legal in England, and the rate was fixed at ten per cent. This Act was repealed in the year 1552, but it was re-enacted in 1571. The legal rate of interest was reduced to eight per cent in 1624, and to six per cent in 1651. In the year 1714 it was reduced to five per cent. After the taking of interest was sanctioned by law, the term usury y which was previously applied to interest in general, became limited, to denote a rate of interest higher than that which the law allowed. EAKLY BANKING IN ENGLAND. 77 3. — Money-Borrowing. That part of the business of banking which consists in the borrowing of money, with a view of lending it again at a higher rate of interest, does not appear to have been carried on by bankers until the year 1645, when a new era occurred in the history of banking. The gold- smiths, who were previously only money-changers, now became also money-lenders. They became also money bort-owers, and allowed interest on the sums they bor- rowed. They were agents for receiving rents. They lent money to the king on the security of the taxes. The re- ceipts they issued for the money lodged at their houses circulated from hand to hand, and were known by the name of "goldsmiths' notes." These may be considered as the first kind of bank notes issued in England. The following account of these banking goldsmiths as given by Gilbart, is taken chiefly from Anderson's "History of Commerce." When the English merchants became enriched by com- merce, they wished for a place of security in which they might deposit their wealth. Hence they usually sent their money to the mint in the Tower of London, which -became a sort of bank. The merchants left their money there when they had no occasion for it, and drew it out as they wanted it. But in 1640, King Charles I took possession of £200,000 of the merchants' money that had been lodged in the mint and from that period the mer- chants kept their money in their own houses, under the care of their servants and apprentices. On the breaking out of the civil war between Charles I and the parlia- ment, it became very customary for the apprentices to 78 EAELT BANKING IN ENGLAND. rob their masters, and then run away and join the army. As the merchants could now place no confidence either in the public authorities or in their own servants, they were under the necessity of employing bankers. The Banking Goldsmiths. 'These bankers were the goldsmiths. Previous to this period, the business of the goldsmith was similar to what it is in our own time. They bought and sold plate and foreign coins; they procured gold to be coined at the mint, and suppUed refiners, plate-makers, and others with the precious metals. To deal in gold and silver bullion to any large extent implies the possession of con- siderable wealth ; and as all the money in the country then consisted of gold and silver coin, it was natural enough that the goldsmiths should become the bankers of those who had money for which they had no immediate use. An account of the bankers of those days is related in a curious pamphlet, published in the year 1676, and en- titled, ''The Mystery of the New-fashioned Goldsmiths; or Bankers Discovered." The author says: "This new banking business soon grew very considerable. It hap- pened in those times of civil commotion, that the Parlia- ment, out of plates and old coins brought into the mint, coined seven millions into half-crowns; and there being no mills then in use at the mint, this new money was of a very unequal weight, sometimes twopence and threepence difference in an ounce, and most of it was, it seems, heav- ier than it ought to have been in proportion to the value in foreign parts. Of this the goldsmiths made naturally the advantage usual in such cases, by picking out or cull- ing the heaviest, and melting them down and exporting them. "Moreover, such merchants' servants as still kept their masters' running cash, had fallen into a way of clandestinely lending the same to the goldsmiths at four- pence per cent per diem, who, by these and such-hke means, were enabled to lend out great quantities of cash to necessitous merchants and others, weekly or monthly, at high interest, and also began to discount the mer- chants' bills at the like or higher interest. "Much about the same time, the goldsmiths (or new- fashioned bankers) began to receive the rents of gentle- men's estates remitted to town, and to allow them and others who put cash in their hands some interest for it, if it remained but a single month in their hands, or even a lesser time. This was a great allurement for people to put money into their hands, which would bear interest till the day they wanted it; and they could also draw it out by one hundred pounds or fifty pounds, etc., at a time as they wanted it, with infinitely less trouble than if they had lent it out on either real or personal security. "The consequence was, that it quickly brought a great quantity of cash into their hands, so that the chief or greatest of them were now enabled to supply Cromwell with money in advance, on the revenues, as his occasion required, upon great advantages to themselves. "After the Restoration, King Charles II being in want of money, the bankers took ten per cent of him barefacedly and by private contracts; on many bills, or- ders, tallies, and debts of that king, they got twenty, •ometimei thirty per cent, to the great dishonor of the igovernment. "This great gain induced the goldsmiths more and more to beocMne lenders to the kin^ to anticipate aU the 80 EABLY BANKING IN ENGLAND. revenue, to take every grant of Parliament into pawn as soon ks it was given; also to outvie each other in bujdng and taking to pawn bills, orders, and tallies, so that in effect aU the revenue passed through their hands." Blamed for Money Scarcity. The "new-fashioned bankers" were also attacked by Sir Josiah Child, in his "New Discourse of Trade," in the following terms : "And principally this seeming scarcity of money pro- ceeds from the trade of hankering, which obstructs cir- culation, advanceth usury, and renders it so easy, that most men, as soon as they can make up a sum of from .£50 to £100, send it in to the goldsmith, which doth and will occasion, while it lasts, that fatal pressing necessity for money visible throughout the whole kingdom, both to prince and people. "A seventh accidental reason why land doth not sell at present at the rate it naturally should in proportion to the legal interest, is that innovated practice of bankers in London, which hath more effects attending it than most I have conversed with have yet observed; but I shall here take notice of that only which is to my present purpose, viz: — "The gentlemen that are bankers, having a large in- terest from his Majesty for what they advance upon his Majesty's revenue, can afford to give the full legal interest to all persons that put money into their hands, though for never so short or long a time, which makes the trade of usury so easy and hitherto safe, that few, after having found the sweetness of this lazy way of improvement (being by continuance and success grown EARLY BANKING IN ENGLAND. 81 to fancy themselves secure in it) , can be led (there being neither ease nor profit to invite them) to lay out their money in land, though at fifteen years' purchase; whereas before this way of private banking came up, men who had money were forced oftentimes to let it lie dead by them until they could meet with securities to their minds, and if the like necessity were now of money lying dead, the loss of use for the dead time being de- ducted from the profit of six per cent (communibus annis) would in effect take off <£l per cent per annum of the profit of usury, and consequently incline men more to purchase lands, because the difference between usury and purchasing would not, in point of profit, be so great as now it is, this new invention of cashiering having, in my opinion, clearly bettered the usurer's trade one or two per cent per annum. And that this way of leaving money with goldsmiths hath had the aforesaid effect, seems evident to me from the scarcity it makes of money in the country; for the trade of bankers being only in London, doth very much drain the ready money from all other parts of the kingdom." The First Run on a Bank. In the year 1667 occurred the first run of which we have any account in the history of banking. The busi- ness of the new-fashioned bankers had increased so fast, and they had become so numerous, that their trade was supposed to be at its height in this year; when, during the time that a treaty of peace was under consideration, the Dutch fleet sailed up the Thames, blew up the fort of Sheerness, set fire to Chatham, and burned four ships of the line. This disaster occasioned great alarm in I.B.L. Vol. 4—6 8i AAlSLT BAJSKIIXQ 117 S17QLANB. London, particularly among those who had money in their bankers' hands, as it was imagined that the king would not be able to repay the bankers the money they had lent him. To quiet the fears of the people, the king issued a proclamation, declaring that the payments to the bankers should be made at the Exchequer the same as usual. In 1672, five years afterwards, a much greater cala- mity befell the bankers; for King Charles II shut up the Exchequer, and would not pay the bankers either the principal or the interest of the money which he had bor- rowed. The amount then due by the king was £1,328,- 526, which he had borrowed of the bankers at eight per cent., and which he never repaid. The mode in which the bankers transacted their loans with the king was this: As soon as the parliament had voted to the king certain sums of money out of particular taxes, the bankers advanced at once the money voted by parliament, and were repaid in weekly payments at the Exchequer as the taxes were received. The mode of mak- ing the payments and the rate of interest were agreed upon at the time of making the loan. The shutting up of the Exchequer occasioned great distress among aU classes of the people. Persons not in trade had then no way of employing their money with advantage but by placing it out at interest in the hands of a banker. Hence, not merchants only, but widows, orphans, and others, became suddenly deprived of the whole of their property. They came in crowds to the bankers, but could obtain neither th^ principal nor the in- terest on the money they had deposited. The clamor be- EAELY BANKING IN ENGIANB. 96 came so great that the king granted a patent to pay six per cent interest out of his hereditary excise ; but he never paid the principal. But, about forty years afterward, the parliament made arrangements by which the debt was as- sumed to be discharged ; that is, it became a part of the National Debt, but the creditors received nothing. The business of banking remained entirely in the hands of the "new-fashioned" bankers until the establishment of the Bank of England, in the year 1694. 4. — Transmission of Money. The transmission of money was in ancient times ef- fected by sending a messenger with the coin. During the Middle Ages, it was accomplished by means of bills of exchange, which were purchased by merchants. Ulti- mately, a special class of persons carried on this kind of traffic, and purchased or sold bills to suit the convenience of parties who wished to deal with them. The pe- cuniary transactions of independent nations are still adjusted in the same way. But the transmission of money from one part of the country to another part, is more frequently effected upon the principle of transfers, without the passing of any bill. This branch of banking is fully dealt with elsewhere. The Bank of England. Previous to the year 1694 there were only four banks of any great consequence in Europe, but on the 27th of July of that year a charter was granted by the reigning sovereigns, William and Mary, for estabhshing the Bank of England, which for opulence, importance, and extent of circulation became the greatest in the world. 84 EAELY BANKING IN ENGLAND. The object of the promoters was to raise money for the use of the government. When the scheme was brought before the parliament, it caused a long and vio- lent discussion. One party dwelt upon the national ad- vantages that would accrue from such a measure. They said it would rescue the nation out of the hands of ex- tortioners and usurers, lower the rates of interest, raise the value of land, revive and establish public credit, ex- tend the circulation, and consequently improve com- merce, facilitate the annual supphes for the national ex- penses, and connect the people more closely with the gov- ernment. The opposition party declared that such a bank would become a monopoly and engross the whole money of the kingdom; that it must infallibly become subservient to government views, and might be employed for the worst purposes of arbitrary power; that instead of assisting, it would weaken commerce, by tempting people to with- draw their money from trade and employ it in stock- jobbing; that it would produce a swarm of brokers and jobbers to prey upon their fellow-creatures, encourage fraud and gambling, and thus corrupt the morals of the nation. Notwithstanding these objections, the Act passed both houses of parliament, and received the royal assent. Opposition of Foreign. Competitors. It was noticed that foreign competitors for English trade strongly opposed the project, and not long after the bank had been estabhshed. Bishop Burnet wrote: "The advantages the king and all concerned in tallies had from the bank were soon so sensibly felt that all people EAELY BANKING IN ENGLAND. 85 saw into the secret reasons that made the enemies of the constitution set themselves with so much earnestness against it.' In the English Exchequer, the "tallies" referred to by- Bishop Burnet were long used in lieu of certificates of indebtedness to creditors of the state. These tallies were seasoned sticks of willow or hazel, notched on the edge to represent the amount. Small notches represented pence ; larger notches shillings; and still larger, pounds. Pro- portionately larger and wider notches represented £10, £100, or £1000. The stick being then split longi- tudinally, one piece was given to the creditor and the other was laid away as a record. When an account was presented for payment, the voucher was compared with the record. When paid, the tally and counter-tally were tied up together and laid away, accumulating for a long series of years. This system was in use until 1812. The tallies were received as evidence in courts of justice. The Act of Parliament. The act of Parliament by which the bank was estab- lished was entitled, "An Act for granting to their Ma- jesties several duties upon tonnage of ships and vessels, and upon beer, ale, and other liquors, for securing cer- tain recompenses and advantages in the said Act men- tioned, to such persons as shall voluntarily advance the sum of fiften hundred thousand pounds towards carry- ing on the war with France." After a variety of enact- ments relative to the "'duties upon tonnage of ships and vessels, and upon beer, ale, and other liquors," the Act authorizes the raising of £1,200,000 ($6,000,000) by voluntary subscription, the subscribers to be formed in- 86 EABJLY BANKING IN ENGLAND. to a corporation, and be styled "The Governor and Com- pany of the Bank of England." The sum of £300,000 was also to be raised by subscription, and the contribu- tors to receive instead annuities for one, two, or three lives. Towards the £1,200,000 no one person was to subscribe more than £10,000 before the first day of July next ensuing, nor at any time more than £20,000. The corporation were to lend their whole capital to govern- ment, for which they were to receive interest at the rate of eight per cent per annum, and £4,000 per annum for management; being £100,000 per annum in the whole. The corporation were not allowed to borrow or owe more than the amount of their capital, and if they did so the individual members became liable to the creditors in proportion to the amount of their stock. The corpor- ation were not to trade in any "goods, wares, or merchan- dise whatsoever;" but they were allowed to deal in bills of exchange, gold or silver bullion, and to sell any goods, wares, or merchandise upon which they had advanced money, and which had not been redeemed within three months after the time agreed upon. Provisions of the Charter. The whole subscription having been filled in ten days, a charter was issued on the 27th day of July, 1694. The charter declares: "That the management and government of the cor- poration be committed to the governor, deputy-governor, end twenty-four directors, who shall be elected between the 25th day of March and the 25th day of April each year, from amon^ the members of the company duly qualified. EAELY BANKING IN ENGLAND, 87 "That no dividend shall at any time be made by the said governor and company, save only out of the inter- est, profit, or produce arising out of the said capital, stock, or fund, or by such dealing as is allowed by Act of Parliament. "They must be natural bom subjects of England, or naturalized subjects; they shall have in their own name and for their own use, severally, viz., the governor at least £4,000, the deputy-governor <£3,000, and each director £2,000, of the capital stock of the said corpora- tion. "That thirteen or more of the said governors or direc- tors (of which the governor or deputy-governor shall be always one), shall constitute a court of directors for the management of the affairs of the company, and for the appointment of all agents and servants which may be necessary, paying them salaries as they may consider reasonable. "Every elector must have, in his own name and for his own use, £500 or more, capital stock, and can only give one vote ; he must, if required by any member pres- ent, take the oath of stock, or the declaration of stock if it be one of those people called Quakers. "Four general courts to be held in every year, in the months of September, December, April, and July. A general court may be summoned at any time, upon the requisition of nine proprietors duly qualified as electors. "The majority of electors in general courts have the power to make and constitute by-laws and ordinances for the government of the corporation, provided that such by-laws and ordinances be not repugnant to the laws of 88 EARLY BANKING IN ENGLAND. the kingdom, and be conformed and approved, accord- ing to the statutes in such case made and provided." The above charter, which was originally granted for ten years only, has been subject to many renewals. The capital of the bank has been vastly increased and its operations have been governed by numerous acts ofpar- liament. It enjoys a wonderful record for wise and con- servative management, and is an institution of which the entire British Empire is justly proud. Agents for the Government. In 1718, subscriptions for government loans were first received at the bank, and from this period the British government has found it more convenient to em- ploy the bank as its agents in all operations of this nature, than to transact them at the Treasury or the Ex- chequer. The bank became by degrees more closely connected with the government, and soon began to make advances of money in anticipation of the taxes, and upon Exchequer bills and other securities, by the es- tablishment of what is now called bank circulation; that is by the issuance of secured notes. By 1722, the bank capital had increased by new sub- scriptions to a total amount of approximately £9,000,- 000 or nearly $45,000,000. In 1734, June 5th, the direc- tors began to transact business in their new house in Threadneedle Street, in the heart of the city of London. The business of the bank had previously been carried on at Grocers' Hall, in the Poultry. Since that day "the Old Lady of Threadneedle Street" has led the financial institutions of the world. EAELY BANKING IN ENGLAND. 89 In 1737 there was considerable public discussion about the propriety of again renewing the bank charter. In the course of the public debate, the following opinion of the bank operations was expressed in the London Magazine: "There certainly never was a body of men that con- tributed more to the public safety than the Bank of Eng- land. This flourishing and opulent company have, upon every emergency, always cheerfully and readily sup- plied the necessities of the nation, so that there never have been any difficulties — any embarrassment — any de- lays in raising the money which has been granted by parliament for the service of the pubHc; and it may very truly be said that they have, in very many important conjunctures, relieved the nation outof the greatest diffi- culties, if not absolutely saved it from ruin." Events in the Bank's History. In 1745, there was a run upon the bank, occasioned by the rebellion in Scotland, and supposed to be for the purpose of supplying the adherents of the Stuarts with gold. A public meeting was held in London and one thousand one hundred and forty merchants signed a de- claration expressing their readiness to take the bank notes. The 3 per cent, consols were established by means of the bank in 1752 and have ever since been a famous government stock. The word "consols" is a contraction for "consolidated." Outstanding government annuities were consohdated in the 3 per cents. In 1758 occurred the first instance of a forgery of a bank note. The note was for £20, the smallest amount 90 KART.Y BANKING IN ENGLAND. then in circulation. The forger was promptly convicted and executed. In 1782, the total capital of the bank was increased to £11,642,400, or approximately $58,000,000. There was no further increase of capital until the year 1816, since which time it has been largely increased. In 1794, the bank commenced issuing its famous £5 notes. During various periods of financial depression, the government of England has rendered assistance to the bank by timely administrative action, enabling it to main- tain its high reputation and meet all its obligations ; and the bank on its side has made many advances to the gov- ernment, besides managing the public debt and otherwise aiding in the operation of the government finances. It enjoys certain exclusive privileges of banking in Eng- land, and fixes the bank rate of discount at regular meetings or "courts" of its board of governors, which are referred to elsewhere in connection with the subject of Foreign Exchange. The Bank of England building covers a whole block bounded on the south by the famous Threadneedle Street. Outside it presents the appearance of a blind outer wall of a great building without windows, and hav- ing here and there ornamental pillars and few entrances. The plan, as shown in our illustration, is a complex system of Hght-walls, offices, court yards, etc., the re- sult of growth and necessity. Among the curiosities in the bank library is a millioB pound bank note. Tradition says that there have been only four such notes issued. Samuel Rogers, the poet, had one framed and hung over his parlor mantelpiece. EARLY BANKING IN ENGLAND. 91 Another curiosity in the bank library is a note for £25, which had slumbered unobserved for 111 years, and was then presented and paid. If compound in- terest had been payable by the bank, the owner could have claimed over £60,000. About 50,000 notes of different values are paid into the bank every day. These are kept five years in the bank cellars and are then destroyed by burning. New notes are always given out in payment of bills and checks. Flan of the Bank of England. CHAPTER V. THE UTILITY OF BANKING. In a commercial community banks possess a large sphere of usefulness. Their utility has been well de- scribed as six-fold: First, they furnish a safe repository for money ; second, they encourage thrift by the payment of interest on deposits ; third, they render useful service to all engaged in production, transportation and ex- change of conmiodities ; fourth, they also render useful service to their customers by furnishing exchange and otherwise arranging for the transmission of money; fifth, the check system affords a useful record of indi- vidual expenditures; sixth, by collecting money in a large aggregate, they render it more effective for pur- poses of trade and enterprise. But this list does not include all of the particulars in which banks benefit the business community. As we shall presently see, they afford a convenient and valu- able means for the interchange of information affecting credit; they are useful to business men of probity as references ; they keep the community supplied with con- venient "change"; in many places they afford the only means of safe deposit for valuables ; and last, but by no means least, they exert a tremendous moral force in be- half of honesty, truthfulness, industry, perseverance, thrift, prudence and punctuahty. M THE UTILITY OF BANKING. The Safe-keeping of Money. In the first place, banks are useful as places of secur- ity for the deposit of money. The circumstances which gave rise to the business of banking in England was a desire on the part of the merchants of London to obtain a place where they might lodge their money in security. Every one who has had the care of large sums of money knows the anxiety which attends their custody. A per- son in this case must either take care of his money him- self, or trust it to his employees. If he takes care of it himself, he will often be put to inconvenience, and will have to deny himself holidays and comforts, of which a man who is possessed of much money would not like to be deprived. If he intrusts it to others, he must depend upon their honesty and their ability. And, although in many important cases an employer is compelled to do this, yet he does not feel the same satisfaction as if the money was actually under his own care. Some in- stances of neglect or of dishonesty will necessarily occur, and these will occasion suspicion in reference to other parties against whom no suspicion ought to be enter- tained. Besides, in both these cases, the money is lodged in insecure premises, and is subject to thieves, to fire and to other contingencies, against which it is not always easy to guard. All these evils are obviated by means of banking. The owner of money need neither take the charge of it him- self, nor trust to his dependents. He can place it in the hands of his bankers. They are responsible men or insti- tutions and are accountable to him for the amount. If they are robbed, it is no loss to him; they are pledged to THI UTILITY OF BANKING. 95 restore to him the amount of his deposit when he shall re- quire it. Whenever he wants money he has only to write an order, or check, upon his banker, and the person to whom he is indebted takes the check to the bank, and without any hesitation or delay receives the money. The Allowance of Interest. The bankers often allow interest for money placed in their hands on deposit. This is a direct incentive to thrift, especially in the case of depositors in savings banks. By means of banking, the various small sums of money which would have remained unproductive in the hands of individuals, are collected into large amounts in the hands of the bankers, who employ it in granting facilities to trade and commerce. Thus banking in- creases the productive capital of the nation. At the origin of banking, "the new-fashioned bankers," as they were called, allowed a certain rate of interest for money placed in their hands. The banks of Scotland carry this practice to the greatest extent, as they receive upon in- terest so low an amount as ten pounds, and also allow in- terest on the balance of a running account. Many of the country bankers in England allow interest on the balance of a running account, and charge commission on the amount of the money withdrawn. The London bankers generally do not allow interest on deposit, but neither do they charge commission. All their profits are derived from the use of their customers' money. The banks of Scotland do not charge commission, although they allow interest on deposits ; but then those banks have a profit by th« issu9 of their notss. The London bankers do not is* 9$ THE UTILITY OF BANKING. sue notes. The practice of paying interest on general deposits is becoming more common in America. The Loaning of Money. Another benefit derived from bankers is, that they make advances to persons who want to bor- row money. These advances are made — ^by discounting bills or notes — upon personal security — upon the joint security of the borrower and two or three of his friends — and sometimes upon mortgage. Persons engaged in trade and commerce are thus enabled to augment their capital, and consequently their wealth. The increase of money in circulation stimulates production. When bankers are compelled to withhold their usual accommodation, both the commercial and the agricul- tural interests are plunged into extreme distress. The great advantage arising to a neighborhood from the establishment of a bank, is derived mainly from the additional supplies of money advanced in the form of loans, or discounts, to the inhabitants of the place. The Transmission of Money. Another benefit derived from bankers is, that they transmit money from one part of the country to an- other. There is scarcely a person in business who has not oc- casion sometimes to send money to a distant town. But how is this to be done ? He cannot send a messenger with it on purpose — that would be too expensive. He cannot send it by mail — that would be too hazardous. How, then, is the money to be sent? In England, for example, every country banker opens an account with a London banker. If, then, a person lives in Bristol and wants to TKX VTULITY OT BANKING. 97 send a sum of money to Aberdeen, he will pay the money into the Bristol bank, and his friend will receive it of the Aberdeen bank. The whole transaction is this : the Bris- tol bank will direct its agent in London to pay the money to the London agent of the Aberdeen bank, who will be duly advised of the payment. A small commission charged by the Bristol bank, and the postages, constitute all the expenses incurred, and there is not the least risk of Commercial travelers, who collect money, derive great advantage from the banks. Instead of carrying with them, throughout the whole of their journey, all the money they have received, when perhaps it may be wanted at home, they pay it into a bank, by which it is remitted with the greatest security, and at little expense ; and they are thus delivered from an incumbrance which would have occasioned great care and anxiety. Exchange of Currency. Wherever a bank is established, the public is able to obtain that denomination of currency which is best adapted for carrying on the commercial operations of the place. In a town which has no bank, a person may have occasion to use small notes, and have none but large ones ; and at other times he may have need of large notes, and not be able to obtain them. But where a bank is es- tablished there can be no difficulty of this kind. The banks issue that description of notes which the receivers may require, and are always ready to exchange them for others of a different denomination. Banks, too, usually supply their customers and the neighborhood with gold and silver coinage as required; i.i.L. v«i.4— y ■» TiDI XTTILITT OF BANKINd. «nd If, on the other hand, silver or gold should be too abundant, the banks will receive it, either as a deposit, or in exchange for their notes. Hence, where banks are es- tablished, it is easy to obtain change. This is very con- venient to those who have to pay large sums in wages, or who purchase in small amounts the commodities in which they trade. An Economy of Time. By means of banking there is a great saving of time in making money transactions. How much longer time does it take to count out a sum of money, especially in various European currencies, than it does to write a check. And how much less trouble is it to receive a check in payment of a debt, and then to pay it into the banker*s, than it is to receive a sum of money in currency. What inconveniences would arise from the necessity of weighing gold coins 1 What a loss of time from disputes as to the goodness or badness of particular pieces of money I Besides the loss of time that must necessarily occur on every transaction, we must also reckon the loss which every merchant or tradesman, in an extensive line of bus- iness, would certainly sustain in the course of a year from receiving counterfeit or deficient coin, or it may be, spur- ious notes. From all this risk he is exempt by having a banker. If he receives payment of a debt, it is in the form of a check upon his customer's banker. He pays it into his own banker's, and no coin or bank notes pass through his hands. If he makes drafts, those drafts are presented by his banker: and if his banker takes bad money it is his own lo§6. THE UTILITY OF BANKUfO. 79 Collection of Drafts. A business man who has a banker saves the trouble and expense of presenting those bills or drafts which he may draw upon his customers, or which he may receive in ex- change for his goods. He pays these into the hands of his banker, and has no further trouble. He has no care about the custody of his bills receivable — no anxiety about their being stolen — no danger of forgetting them until they are over-due, and thus exonerating the in- dorsers — no trouble of sending to a distance in order to demand payment. He has nothing more to do than to see the amount entered to his credit in his banker's books. If a draft or note be not paid it is brought back to him on the day after it falls due, properly noted. The banker's clerk and the notary's clerk are witnesses ready to come forward to prove that it has been duly presented, and the notary's ticket attached to it assigns the reason why it is not paid. This circumstance alone may cause an immense saving of expense to a mercantile house in the course of a year. Doing business through a banker also prevents loss from various kinds of mistakes that may be made by the em- ployees of a business house. In a banking-house mis- takes are not so Hkely to occur, though they do occur sometimes; but the loss falls upon the banker, and not upon his customer. Still another advantage from having a banker is, that by this means the business man has a continual referee as to his respectability. If the banker is applied to through the proper channel, he gives his testimony as to the re- spectability of his customer. This may be an immense 100 THZ UTILITT OF BANKI2C0. advantage to a man in business, as a means of increasing his credit ; and credit, as Dr. Franklin says, is money. The keeping an account at a banking-house enables a merchant not only to give a constant reference as to his own respectability, but it also enables him to ascertain the respectability of other persons who deal with bankers. There are numerous cases in which a merchant may wish to know this, especially where such facilities as Dun's and Bradstreet's reports, with which every American busi- ness man is familiar, are lacking. Among nearly all the bankers in London, says Gil- bart, "the practice is established of giving information to each other as to the respectability of their customers. For as the bankers themselves are the greatest discoun- ters of bills, it is their interest to follow this practice; and indeed the interest of their customers also, of those at least who are respectable." A Record of Expenditures. By means of banking, people are able to preserve an authentic record of their annual expenditure. If a per- son pays in to his banker all the money he receives in the course of a year, and makes all his payments by checks — then by looking over his bank-book at the end of the year he will readily see the total amount of his receipts, and the various items of his expenditure. "This is very useful to those who have not acquired habits of business, and who may therefore be in danger of living beyond their means. It is useless to advise such persons to keep an account of their expenses — they will do no such thing ; but when short of money at Christmas to pay their bills, they may take the trouble of looking THE UTILITY OF BANKING. 101 over their bank-book, and noticing how many checks were drawn for the purchase of unnecessary articles." A bank account is useful also in case of disputed pay- ments. People do not always take receipts for money they pay, and when they do the receipts may be lost or mislaid. In case of death, or of omission to enter the amount in the creditor's books, the money may be de- manded again. Should the payment have been made in currency, the payer can oflPer no legal proof of having settled the account ; but if the account was discharged by a check on a banker, the check itself can be produced, and the payment proved by the officers of the bank, who can be subpcensed for that purpose. Safe Deposit for Valuables. Another advantage resulting from a banker in many places that lack safe deposit vaults is, that the customer has a secure place of deposit for any deeds, papers, or other property that may require peculiar care. If a party were going to the country he might send his plate or jewelry to his banker, who will lock it up in his strong room, and thus it will be preserved from fire and thieves imtil his return. European lawyers, stockbrokers, and others, who have deeds, securities or other documents of importance left in their custody, can send them to the bank during the night, and thus avoid the danger of fire. In America, safety deposit vaults are now found in every city of importance, often operated in connection with banks. In the smaller cities, towns and villages, the banker is a universal custodian of valuables for his de- positors. 102 THE UTILITY OF BANKING. Valuable Help in Business. By having a banker, people have a ready channel of obtaining much information that will be useful to them in the way of their business. They will learn the way in which bankers keep thfir accounts ; and may learn many of the laws and customs relating to negotiable paper. They may obtain assistance in remitting money to dis- tant places and so save themselves trouble and possible loss. If they have to buy or sell bonds, stocks, or shares the banker can send them to a respectable broker, who can manage the business; or should they be about to travel, and wish to know the best way of receiving money abroad ; or be appointed executors to a will, and have to settle money matters — the banker will in these and many other cases, be able to give them the necessary in- formation. A Moral Influence for Good. Banking also exercises a powerful influence upon the morals of society. It tends to produce honesty and punctuality in pecuniary engagements. Bankers, for their own interest, always have a regard to the moral character of the party with whom they deal ; they inquire whether he be honest or tricky, industrious or idle, pru- dent or speculative, thrifty or extravagant, and they will more readily make advances to a man of moderate prop- erty and good morals than to a man of large property but of inferior reputation. Thus the establishment of a bank in any place imme- diately advances the pecuniary value of a good moral character. There are numerous instances of persons having risen from obscurity to wealth only by means of THE UTILITY OF BANKING. lOd their moral character, and the confidence which that char- acter produced in the mind of their banker. It is not merely by way of loan or discount that a banker serves such a person. He also speaks well of him to those per- sons who may make inquiries respecting him and the banker's good opinion will be the means of procuring him a higher degree of credit with the parties with whom he trades. These effects are easily perceivable in country towns ; and even in great cities, if a house be known to have en- gaged in speculative transactions, or in any other way to have acted questionably, their paper will be taken by the bankers less readily than that of a strictly reputable house of inferior property. It is thus that bankers perform the functions of pub- lic conservators of the commercial virtues. From mo- tives of private interest they encourage the industrious, the prudent, the punctual, and the honest — while they discountenance the spendthrift and the gambler, the liar and the knave. They hold out inducements to upright- ness, which are not disregarded by even the most aban- doned. There is many a man, says Gilbart, truly, who would be deterred from dishonesty by the frown of a banker, though he might care but little for the admoni- tions of a bishop. "Whether it is your form of organization and total of bills receivable, or the time you arrive at the office and the church you attend — every fact counts with the bank. The answer to what it wants to know is — everjrthing.** CHAPTER VI. THE METHODS OF BANKING. BY SEYMOUR EATON. Banks are absolutely necessary to the success of mod- ern commercial enterprises. They provide a place for the safe-keeping of money and securities, and they make the payment of bills much more convenient than if cur- rency instead of checks were the more largely used. But the great advantage of a banking institution to a business man is the opportunity it affords him of bor- rowing money, of securing the cash for the carrying on of his business, while his own capital is locked up in merchandise or in the hands of his debtors. Another and important advantage is to be found in the facilities afforded by banks for the collection of checks, notes, and drafts. Currency. The legal medium of exchange of a country is called its currency, that which passes current, or circulates as money, such as coin and bills. Bullion is uncoined gold or silver. More than ninety per cent of the cash circu- lation of the country is represented by checks, etc., and not by actual money. Organization of Banks. The national banks are organized under national laws while state banks, savings banks, etc., are organized imder the laws of the State in which they are located. 10« 106 THE METHODS OF BANKING. Any person who has money and credit can start a private bank. Some of the largest banking institutions of the world are owned by private individuals, and are not subject to law any more than is any other kind of business concern. The act of Congress of 1864 fixes the corporate life of a national banking association at twenty years. Un- der date of July 12, 1882, an act was passed authoriz- ing extensions for an additional period of twenty years, and second extensions were authorized by the act of April 12, 1902. From 1882 to October 31, 1909, first extensions of charters were granted to 2,795 banks and under the act of 1902 to 969 banks. Section 5133 of the Revised Statutes, formerly section 5 of the act of June 3, 1864, provides for the organi- zation of national banking associations by any number of natural persons not less than five. The law con- fers authority upon the Comptroller of the Currency to approve the corporate title of an association and also to withhold his certificate authorizing an association to begin business when, as the result of special examina- tion or otherwise, it is ascertained that the association has been organized for purposes other than those con- templated by the act. It is further provided that no banks shall be organized with capital less than $100,000 unless sanctioned by the Secretary of the Treasury. This was reduced to $25,000 in certain cases, in 1900. To avoid formation of associations for ulterior pur- poses or by those lacking the qualifications necessary to successful conduct of the banking business, or in a place the population and business of which are insufficient to THE METHODS OF BANKING. 107 warrant the establishment of a national bank, the Comp- troller, upon receipt of an application to organize, causes a special investigation to be made, the results of which determine the favorable or unfavorable action. The expansion of the national banking system along normal, safe, and conservative lines is unquestionably de- sirable, but the Comptroller of the Currency takes the view that the organization of a bank is not warranted in a, community where there is no reason for its existence; that is, where sufficient business would not naturally come to warrant success, or where the board of directors will not be composed of men of business ability equal to the best to be found in the community, or where the organization is attempted by promoters who, by public and private means, create a false impression that a bank is needed and that success is assured by merely obtain- ing subscriptions to the capital stock. Comparatively few applications for authority to organize national banks are rejected, however. From the date of the establishment of the national banking system in 1864 to October 31, 1909, charters were granted to 9,572 national banking associations, of which 2,063 have been placed in voluntary liquidation and 484 failed. The number of banks in operation at the close of the year 1909 was 7,025. Included in the 9,572 associations chartered are 1,503 banks, with orig- inal capital of $320,755,928, which were conversions of state banks. Since March 14, 1900, the date of the act of Congress authorizing the organization of banks with capital of $25,000, charters have been granted to 4,308 associations. 108 ' THE METHODS OF BANKING. with capital of $261,083,300, a number greater by 691 than the number of banks in existence on the date of the passage of the act in question. The number of banks organized during this period (1900 to 1909) in- cludes 2,768, with capital of $72,105,500, which were or- ganized under the act of March 14, 1900, and 1,540, with capital of $188,977,800, organized under the act of 1864 with yidividual capital of $50,000 or over. The Officers of a Bank. The directors of a bank meet regularly to consider the character of the paper offered for discount, and to consult regarding the general business of the bank. Sometimes the directors give the president or cashier authority to pass upon paper offered for discount. The ordinary officers of a bank are the President, who is the chief executive officer; the Cashier, who is the manager of the internal workings of the bank ; the Pay- ing Teller, who pays out all moneys and has charge of the working cash of the bank; he is familiar with the signature of each depositor and with his daily balance, and is really one of the most important officers of the bank. The Paying Teller should be a man of good ability, a man who can read motives from appearances, a man of quick and accurate judgment, and withal, a man of patience and unwavering good nature. The Receiv- ing Teller receives all moneys coming into the bank, and makes the entries in the depositors' pass books. The Note Clerk has charge of the commercial paper handled. The Bookkeeper and his assistants have charge of the ledgers and other account books. METHODS or BANKJNa. 109 Suggestions to Bank Clerks. Ability, enthusiasm, tact and determination are as nec- cessary in banking as in any other commercial situations. Many of the most successful bankers in the country commenced as messengers and passed from one office to another until they became presidents. It should be the constant endeavor of officers of a bank who hold superior positions to cultivate and develop the self-re- spect of their subordinates. Faithful service and manly character in a janitor are entitled to just as much honor and to as full recognition as that rendered by a cashier. The man makes the place, not the place the man. It is the general opinion of bankers that the demand for the right sort of bank-clerk is much in excess of the supply. No young man, however, should think of en- tering upon banking as a profession, unless he has a real love for the business. The best position for a young man, and the one affording the largest opportunity for promotion will be that of general assistant. It is considered better to en- ter upon a clerkship in a small bank than in a very large one, for the reason that the steps in the ladder of suc- cess are fewer and closer. The successful clerk must have a true appreciation of the value of time. Every minute should be strictly given to the work of the bank. In the matter of prompt- ness the higher officers should set a good example for those in subordinate positions. There are exceptions, but as a rule promotions are not the result of chance. The man in any calling who has the abiUty and the desire to do greater things will sooner or later be called upon to do them. 119 IflK ACZTMCnM OF BANKJLNG. The Bank's Cash. The actual usable cash of a bank is represented by the silver, gold and bills on deposit. It is estimated that the gold in use in the world amounts to $7,000,000,000, and that an equal amount has been lost through wear and other causes since the earliest times. A million dollars in gold could be put into a box two feet square and a foot deep. All the gold in the world could-be put into a room 64 feet by 50 feet with a height of 20 feet. It is estimated that a million dollars worth of gold is each year buried in the ceme- teries of the United States in the mouths of the dead. The gold in our banks lies piled in bags containing $5,000 each. Each bag weighs twenty-two pounds. Standard gold is worth $18.96 an ounce, and a $20 gold piece weighs 21% pennyweights. In shipping gold from New York to London it is estimated that a million dollars in gold may be reduced in value, by the coins rubbing against each other, about $175. If a standard gold coin falls short one-half of one per cent, of its original standard weight, it is marked "light weight" the moment it reaches the United States Treasurer. It then ceases to travel as money. The United States bills which are considered cash are of a variety of kinds. There are in circulation over $300,000,000 of treasury notes of the following denom- inations: $1, $2, $5, $10, $50, $100, $500, $1000. These arc payable in coin, either gold or silver. The national bank notes are really promissory notes, issued by the banks, and payable on demand. They are secured by, and issued upon. United States bonds. THS METHODS OV BANKINO. Ill Every national bank must redeem its notes in full in lawful money at the treasury in Washington or over its own counter whenever a demand for payment is made. The denominations of the national bank notes are the same as those of the Treasury notes, except that there are no bills smaller than $5. The silver certificates are notes issued by the United States government and payable on demand in silver dollars. Some hunHreds of millions of dollars of this form of money are now in circulation. Notwithstanding the fact that the paper used is of the very best quality, paper money, the world over, is con- stantly becoming ragged and mutilated. It may be well to quote here the law which regulates the redemption of mutilated bills. If the whole face of a note is in a condition which will permit its being recognized as a genuine bill it will be paid in full. If not more than two-fifths of the paper of a national bank note is gone and the note shows the name of the bank and the signature of one of its officers, it will be paid in full. United States notes, Treasury notes of 1890, fractional-currency notes, gold certificates, silver certificates, and national-bank notes, when mutilated so that less than three-fifths, but clearly more than two-fifths, of the original proportions remains, are redeemable by the Treasurer only, at one-half the face value of the whole note or certificate. Fragments not clearly more than two-fifths are not re- deemed, unless accompanied by a satisfactory affidavit. Fragments less than three-fifths are redeemed at the face value of the whole note when accompanied by an affidavit of the owner or other person having knowledge of the f«at« tlu.t the miMing portiona have been totally destroyed. 118 THS METHODS OF BANSI2f«. Counterfeit Notes. All United States notes are printed in sheets of four notes of one denomination on each sheet. Each note is lettered and numbered twice. All notes of which the number when divided by 4, shows remainder of one, have the check letter A; a remainder of 2, the check letter B; a remainder of 3, the check letter C ; those numbers which divided by 4 /show no remainder, have the check letter D. Any United States note the number of which can- not be divided by 4 and show one of the foregoing re- sults is a counterfeit. There are no secrets in the art of detecting counter- feits. Careful study, long experience, and a thorough familiarity with all kinds of genuine bills, will make any person an expert. Banks are required by law to stamp as "Counterfeit" all had hills coming into their posses- sion. Bank Loans. A portion of the loans of many banks consists of in- vestments in solid bonds, but the bulk of the loans of banks are made on commercial paper ; time and demand loans are made upon collaterals of many descriptions. The larger banks loan, on an average, from fifty to one hundred thousand dollars a day. A very large propor- tion of the commercial paper discounted is first handled by note brokers. Banks discount paper for their depositors — and simp- ly term the operation discounting; but when they go outside of their line of depositors, in making investments in time paper, they call it buying paper. They gener- ally buy from private bankers and note brokers. Torn lorrsBODt of ban kins. 118 National banks are prohibited from loaning over ten per cent, of their capital to any one individual or cor- poration, except upon paper representing actually ex- isting merchandise. Accurate Interest. The Treasury Department at Washington pays ac- curate interest, founded on a basis of 365 days to the year. The great majority of banks pay and charge in- terest on a basis of 360 days to the year. Money "On CaU." National banks located in clearing-house centers, find it a very convenient thing to put out quite a percentage of their loans on call. In some cities banks have a habit of borrowing on call from each other at clearing-house icttlements. Call loans are payable on demand and are •ccured by demand notes. , Collaterals. If a business man borrow $1,000 from a bank on his note and give ten shares of stock to the bank to be held by it simply as security, the stock thus given would be termed collateral. These collaterals are not the bank's property, and the bank is responsible for their safe-keep- ing. If coupons mature while bonds are being held as collateral, the owners are usually allowed to collect the amount for which they sell. Sometimes one note is given as collateral security for another which is discounted. The Name "Bank." In some of the states the title Bank can be lawfully used by anyone ; in other states, for instance, New York and Massaehus^tts, th« titl« Bunk can be used only by 114 THE METHODS OF BANKING. duly incorporated banks which are organized and con- ducted under the provisions and restrictions of the state banking laws. Borrowing from Banks. It is the business of a bank to loan money to re- sponsible persons, within reasonable limits. The regu- lar customer of the bank is entitled to and will receive the first consideration if the demand is larger than the bank can safely meet. A business man should not hesitate, when occasion re- quires, to offer his bank any paper he may want dis- counted, if in his opinion it is good, nor should he be offended if his banker refuses to take it, even with- out giving reasons. Make your own notes and acceptances payable at your bank. Keep a careful record of the dates of maturity of all paper which you make or indorse. It is usually better, that is, more convenient to the holder, to pay your note early on the day it falls due, rather than a day or two before. Rates for Loans. In loaning money on demand, when it is strictly un- derstood between bank and borrower that the money so advanced is positively minute money — ^money return- able at any minute, when the bank calls for it — banks usually charge low rates of interest. When interest rates are high, bankers prefer to deal in long-time paper. This general rule is reversed when the situation is re- versed Bankers aim also to scatter and locate their maturi- ties so that as the seasons roll around, they will not have THE METHODS OF BANKING. 115 very large amounts maturing at one time and very small amounts at another. They plan also to be "in funds" at those seasons when there is always a large and profitable demand for money. For instance in the centers of the cotton manufacturing interest the banks count on a large demand for money between October and January when the bulk of the purchases to supply the mills are made: again, among those who operate and deal in wool there is an active demand for money in the wool clip in the spring months. The wheat and corn crops are autumn consumers of money. Midwinter and midsummer in the north are usually periods of comparative stagnation in the money market. All these things affect rates, and the successful banker is he who from observation and large experience shows the most skill in timing his money supply. When Interest Accrues. There are certain well-defined principles which make clear when interest is accruing and when it is not. Money voluntarily left by any one in the hands of an- other will not, of course, draw interest unless a specific mutual agreement to that effect is made. In most cases, a demand note bears interest even though there be no statement to this effect on the face of the note. Money on deposit in a bank without an agreement to pay interest will not accumulate interest even though it remain fifty years. Forged Indorsements. A bank is supposed to know the signatures of its de- positors. It is one of its first and most important duties lltf THX ifttCETHODI OF BANKING. to have them on file and immediately accessible by the use of a well-kept signature book. Holders of checks, in very many cases, know nothing about these drawer-signatures. They have taken them, supposing, of course, that they are genuine. When they have collected the checks at the banks upon which they are drawn they are to a very great extent reheved of all further responsibiUty as to the signatures of the signers, for the bank by paying them has guaranteed their genuineness. But the bank which cashes for a good holder a much- indorsed check, the signature of which is all right, gen- erally knows nothing about its many indorsements be- yond the fact that they seem to be all right and stand there in regular order, apparently correctly made. For the honesty and genuineness of these many or few pre- ceding indorsements the last holder, for whom the check is cashed, whether he indorse the check or not, is fully and legally held, and no reasonable lapse of time before a discovery of the forgery is mad6 will reheve him of this hability. Trust Companies. The ordinary trust company with which city people are familiar is very similar in its management to a na- tional bank. They invest their deposits and capital in the same class of securities, and they are equally careful and conservative in the matter of their loans. They re- ceive money on deposit subject to checks and allow in- terest on deposits which exceed a nominal sum — ^usually from $300 to $1,000. They are organized under and ax« subject te stata laws. Tk«y hav« ooiuiaction with Tta KITHODI 07 BiiNKINCI. 117 the clearing-houses either direct or through some con- venient national bank. Trust companies are in form of organization very similiar to the great joint-stock banks of England. They are usually authorized to receive and hold moneys and property in trust and on deposit from courts of law or equity, executors, administrators, assignees, guardians, trustees, corporations, and individuals, and may be ap- pointed by probate courts trustees under any will, upon such terms and conditions as may be agreed upon. They act as trustees for widows or children, take charge of and manage property, and collect interest and rent. They act as transfer agents for railroad and other stock, and as agents for the purpose of issuing, registering, or countersigning the certificates of stock, bonds, or other evidences of debt, and for the payment of dividends. They act as agents or attorneys for the care and manage- ment of invested property. Safe Deposit Vaults. Many of the banks, trust companies, and insurance companies make a special feature of renting small safe deposit boxes or drawers in their vaults to any and every person who chooses to pay the rent asked, which depends largely on the amount of space needed and is usually from $3 to $10 for the smallest sized box. It is very convenient for one who has not a safe of his own to have a secure place in which to keep valuable papers. In many of the larger safe deposit vaults there are desks and stationery for customers, so that one may at any time and very conveniently and privately examine one's papers and make entries or indorsements, or add new vouchers, or make chang^es, as the occasion may re- quire. 118 THE METHODS OF BANKING. A Depositor's Credit. As a rule, banks do not make known even to a single individual the extent of a customer's business or the size of his bank account. However, any shareholder in a bank has a right, as one of the proprietors, to examine the books, so long as such examination is not an unreason- able interference with the regular routine of work, and it is pretty generally known that a large depositor can either directly or through some other bank get at the condition of a small depositor's account. Giving Bonds for Faithful Service. Bank clerks and officers are usually required to give bonds, that is, they must get some person to go their surety, thus guaranteeing faithful service, and agreeing to make good any losses caused by defalcation or careless- ness. There are now several surety companies that give bonds for everyone and anyone whom they consider a "good risk" upon the payment of certain premiums as in insurance. If a young man is an applicant, say, for a cashier's position in a mercantile house and the house requires that some one give a bond, that is, go his surety for $10,000, and the young man has no rich father or uncle to guar- antee the house against loss, he applies to a bond insur- ance company and if his record and habits are good he has no difficulty in securing the necessary papers. The amount of the bond required depends upon the importance of the position applied for. Presidents of banks do not usually give bonds. The bonds of personal friends have always a good deal of moral weight and force and for this reason are THE METHODS OF BANKING. 119 Enow all Men by these B:e9eiit^ That vT^f...^i2ir'en4.y 9^-M»*»,„.je princip^L and i*."J2»«*W^'«Og *'^SJ*— ^ riRST NATIONAL BANK. SBn^i^KlTIZtNS BANK 41 TRUST CO^ TNIRD NATIONAL BANK. ^ ^BLWlMj^ tllttiL, PWOBASCO -4 COw CHATTANOOOA NATIONAL BMKjmfggjf^ CHATTANOOOA SAVINGS BANK. ————— SOUTH CHATTANOOOA SAVINGS SANK. VkM« OcanrtMTa i« ac^wato a« *m( aiMaiT er waaavia aiavaitita la ?■» auaaa •» T O. MONTASUC. • at^ ifgn fm* W a w aaa* Saw. a» a» a taeua to »ia»»a» * ana inoaa* au. aucw^ytirwTta. ^^ eiMTT4Maoa« Cicaaiaa Heuaf Aa>os>*f laa. ♦ A Clearing House Certificate. emergency clearing-house certificates, their object being to extend indefinitely the brief term of mutual credit involved in all clearing-house settlements. They were in reahty not used as currency, but their effect was to add their face value to the volume of currency in circulation, by releasing for use outside that which would otherwise have been reserved for clearing-house settlements. In each instance the use of the certificates was limited THE METHODS OF BANKING. 128 strictly to settlement of mutual accounts between mem- bers of the particular clearing-house association issuing the certificate. The certificates were issued to banks upon securities which they furnished. Such certificates were also used during the financial depression of 1907-08. , Other devices of similar character were clearing-house due bills. These stated that a certain sum was due by a particular bank to some other bank or to the order of some individual and usually had the following additional wording : This due bill is only good when signed by one and countersigned by another authorized person and is payable only in the exchanges through the clearing-house the day after issue. Another expedient favored in all parts of the country, was the sale by banks of certified checks against them- selves for currency denominations, which when signed by the purchaser, were used by him as currency. Most generally used of all, however, were pay checks in currency denominations, which in scores of manufac- turing towns, were the only currency that was available for weekly payments and cash purchases by ,wage- earners. In addition to these well-defined classes, there were others so varied that but a suggestion of them can be made — negotiable certificates of deposit ; ninety-day and other short time paper in currency denominations; bond certificates ; grain purchase notes ; credit and corporation store orders; improvement fund orders; teachers' war- rants; shingle scrip, etc. In every case where the as- sociated banks of a section failed to supply the needed currency, individuals and corporations were compelled 124 THE METHODS OT BANKINa. to resort to extraordinary devices. This illegal banknote currency was accepted by the community, the financial conditions became normal again, and every credit in- strument was made good in actual money. Usury and Its Penalty. The laws of some of the states for collecting more than the legal rate of interest are quite severe. National banks , which collect more than the legal rate can only be pro- ceeded against under the U. S. Interest Penalty Act, which provides that usury shall be punished by a for- feiture of twice the amount of interest paid, if action is commenced within two years of the time of such usurious practice, and that recovery can be had for the entire amount of interest paid at any time. / Bank Examinations. National banks are examined once or twice a year by a United States Bank Examiner, who has authority from the Comptroller of the Currency, to whom his reports are made. These reports are seldom if ever seen by bank officers, and unless the examiner chooses to inform them that everything is right they are none the wiser. When a national bank becomes embarrassed it is the business of the Bank Examiner to look thoroughly into its affairs and if necessary to close its doors. The Cheque Bank. This is an English institution with a branch in New York city and agencies in other cities. This bank sells to its customers a book of checks, each of which can be filled up only to a limited amount, as shown by printed and perforated notices appearing on the blank. For im- THE METHODS OF BANKING. 125 stance for £100 one can buy a check-book containing fifty blank checks each good, when properly filled up, for £2. Each of these checks is really a certified check, only it is certified in advance of issue. Its payment is guaranteed by the bank rather than by the maker. Any of the thousand or more foreign banks which are agents for the Cheque Bank, sell these check-books and cash the checks when presented. The Bank of England is a bankers' bank in the sense that it holds reserves of other banks, and makes those final payments of cash which close the general balance of transactions. The Cheque Bank is a bankers' bank in the opposite sense of making deposits in all other banks and employing them as agents. Although the checks are issued for limited amounts they may be drawn for any amount within the maximum value. The amounts that may be short drawn, go toward the cost of a new check-book, or may be returned in cash. A form of claim for the short-drawn balances is pro- vided on the cover of each check-book. Check-books are made up to suit the customers' convenience, and may be had either with checks all of the same denomination or of assorted values. Paid checks are returned when re- quest for them is made. All checks are issued crossed and payable to order. This requires the indorsement of the persons to whom the checks are paid, and the further security that checks can only be cleared by passing through the hands of a banker. ' A peculiar feature of the Cheque Bank is that it en- lirtly abstains from using, or tven holding, the money IfC THE METHODS OF BANKING. deposited in payment of check-books. This money is left to draw interest and to meet demands, in the hands of the bankers through whom the check-books are issued. These checks are being used largely by travelers in- stead of letters of credit. The American and other ex- press companies have a form of check which is very simi- lar and which is used largely by Americans travehng in Europe. Some banks also issue "travelers' checks.'* Bank Statements. A bank statement is a balance-sheet of the bank's main ledger, and is sworn to by the cashier and attested by several of the directors. It is pubhshed at the time of its making in the local newspaper. The resources in such a statement usually consist of items due from other financial institutions, bank bills, and specie on hand, bonds deposited with the United States treasurer; loans and discounts, consisting of dis- counted notes, drafts, etc., owned and held by the bank and which are maturing and being paid from day to day; real estate, etc. The liabilities consist of the accounts due depositors and other banks; outstanding circulation of bank notes; undivided profits; surplus fund; original capital stock, etc. Bank Debits and Credits. The bank's debits for any day may consist of. 1. Deposits — the gross amount of money received on deposit. 2. Matured Loans — notes discounted that have been paid. THE METHODS OF BANKING. 127 8. Interest — money received for interest from all sources. 4. Exchange — ^money received as exchange on col- lections. 5. Discount — ^the discounts on notes and other com- mercial paper. 6. U. S. Treasury — remittances received in payment for notes sent for redemption. 7. Circulation — new bank notes of the bank's own issue received from Comptroller of the Currency. The bank's credits may consist of. 1. Checks — paid during the day. 2. Loans — gross amount of net proceeds of paper discounted. 3. Expense — ^running expenses of the bank 4. Interest — on deposits and rebates on prepaid discount paper. 5. Exchange — cost of collections made, charges on foreign paper, etc. 6. Dividends — paid stockholders. 7. U. S. Treasury — cash sent for new small legal tenders, etc. 8. Circulation — ^notes of the bank's own issue retired in any way. Value of Paper Offered for Discount. One of the most valuable parts of a banker's education is to learn whom to trust. Every bank should have a well-organized and thoroughly equipped credit depart- ment, in charge of some one who can be relied upon to investigate carefully all names referred to him by the officers. 198 TBX jLETm/w OP mkXfKmm. A man who desires to borrow money from a bank should offer the same confidence that he would offer if he were going to a wholesale dealer to buy goods. The merchant has a commodity to sell and he looks for facts which will aid him in determining the line of credit to be granted. The banker has money to sell and he should be doubly sure of the responsibility of the party to whom he is selling it because the money does not belong to him. A banker has a right to expect the fullest confidence on the part of the borrower, and the borrower should furnish him with a complete and detailed statement of the condi- tion of his affairs. It is safe to conclude that when a borrower refuses absolutely to give any information as to his financial condition, his credit is not in the most fa- vorable condition. Many of the banks have blank forms which they from time to time ask borrowers to fill out. These statements show in detail the assets and liabilities of the firm in question; they show the notes which are outstanding, the mortgages on real estate, and many other particulars including the personal or individual credit of members of the firm, if a partnership. The total net worth of the borrower should be first considered; then the character of his business, whether it is speculative or staple; then his record and standing in the conmaunity ; then his busi- ness habits; then a consideration of whether he is in en- terprise abreast with modern ideas and methods. The paper offered for discount is of a variety of kinds. The larger proportion of it is from customers of the bor- rower who have extended their credit by paying their accounts in notes instead of in cash. Such paper is real- ly, though having two namss, rery littl* better than THE METHODS OF BANKING. 129 Single-name paper, for it is not the maker's credit, but the payee's, which the bank usually considers. Many very small notes offered for discount usually indicate a very needy condition. There are times when the character of the merchandise owned by the borrower should be considered. What would it bring under the hammer? Groceries and raw materials can usually be turned into cash at a forced sale at very small discount from current prices. Not so with hardware, glass, dry goods, boots and shoes, books, etc. Machinery and fixtures are not a bankable asset upon which to base credit. The banker should also note his borrower's bills pay- able. Why did he give notes? Are they met promptly? Many houses prefer to sell their own paper in the open market and keep their banks open for accommodations when they are unable to secure outside credit. The insurance carried should be considered, also the volume of business done. A large business on moderate capital, with long credits, will naturally have large ha- bilities, while a small business, with liberal capital, and short credits, should have small liabilities. There are many firms which carry two or more bank accounts and others who sell their paper to out-of-town banks. In buying paper it is important to ascertain whether the firm is in the habit of taking up paper at one bank by floating a note at another. A prominent banker classifies paper as to its discount value as follows: 1. Bankers' paper including bills of exchange. 2. Remittance paper — ^bills drawn by houses abroad on banks or correspondents in Europe. I.B.L. Vol. 4—9 180 THE METHODS OF BANKING. 3. Inland drawn paper — bills drawn by shippers of goods on the houses to whom the goods are shipped. 4. Brokers' paper — bills drawn by importers against commodities placed in brokers' hands for sale. 5. Trade paper — bills arising out of our manifold trades and industries. 6. Drafts with bills of lading attached. 7. Paper having personal indorsements. 8. Paper secured by collateral. 9. Individual — or one name paper. Mercantile Agencies. In large cities and towns, bankers and other business men should avail themselves of the advantages offered by mercantile agencies. These concerns report to their subscribers upon the credit of men in various lines of business. They gather their information from a variety of sources. This service has been very much improved of late years, and after making all due allowance for the inherent defects of the system, it is stiU a useful ad- junct to the man who is giving credit. Bradstreefs and Dun (| Co. are the two largest mercantile agencies in this country. Savings Banks. Savings banks have no special capital owned by stock- holders. Their capital is the money received on deposit, which, of course, is the property of a great many people. Every depositor is an owner in the bank, and the profit is paid to depositors in interest. This capital is invested in choice securities. The corporation is simply the agent or trustee of the whole body of depositors, and works for their account and benefit and not for its own. THE METHODS OF BANKING. 131 In most of the states, the savings banks are organized under State laws and are in a limited way under State supervision. Their chief purpose is to encourage the saving of money by the common people. In some countries government savings banks have been established. In Canada almost every post office is a branch of the government post office savings bank. Defalcations and Embezzlements. An experienced banker offers the following sugges- tions to prevent defalcations and embezzlements through the manipulating of the bank's record books: Secure clerks of high character and integrity and have a proper system of accounts with a perfect system of checking everything. If possible keep accounts in duplicate. The balance ledger can be proved to a cent every day, and this should certainly be done. When practicable, it is better to have all differences investigated, and reported upon by some one who is not directly responsible. A number of banks in the large cities have created the position of auditor of accounts, and it is one of his duties to report to the cashier direct upon all differences. This auditor reconciles accounts-current with out-of-town correspondents, balances and dehvers all pass-books, and furnishes information to all depositors respecting their accounts. A great benefit is secured to a bank by the ex- amination of one man's work by another. Pass-books of active accounts should be written up once a month, and no pass-book should run longer than two months before being balanced. It should be a rule in every bank that no charge entry should be put through the books,. except from a proper voucher, that is, a check 132 THE METHODS OF BANKING. signed by a depositor, or a charge ticket made out and signed by an officer of the bank. The discount clerk and the collection clerk should not be the same person and neither of them should be the corresponding clerk. The monthly accounts-current rendered by a city cor- respondent should be reported upon promptly, and any disposition on the part of the bookkeeper to delay or neglect this matter should be corrected. A very important requisite in modern banking is a system of thorough examination at irregular intervals. No teller, bookkeeper, or other clerk can suffer the slight- est harm from having his cash and books examined and found correct. All notes held for collection should be accounted for, and balances due from other banks for collections should be verified. Special deposits of se- curities held for safe-keeping should be examined oc- casionally. The more complex the bookkeeping the easier it is to "cook" the accounts. CJommercial Crises. Disturbances of the course of trade arise largely from the necessity of readjusting its conditions to the common standard and measure of value. The common standard of value is money, and the conditions of trade which require to be adjusted to it are the price of commodities, and contracts and obHgations of all kinds. Contracts and obligations, agreements to pay money at a future time for something presently received, form the credit system of modern commerce. Inability to meet these obligations constitutes bankruptcy, and a great multipli- city of bankruptcies occurring simultaneously constitutes a commercial crisis. THE METHODS OF BANKING. 133 If all persons were in the habit of paying immediately for everything received, there could be no debts, and consequently no failures nor panics. Those nations where the credit system has received its widest devel- opment, and where consequently the spirit of commer- cial adventure and speculation is most rife, are most ex- posed to the ravages of recurring periods of bank- ruptcy. Money panics are usually preceded by years of active trade, high wages, multiphcation of new enterprises, and general prosperity. Each period of abnormal and ex- citing prosperity is followed by a violent collapse, re- sulting in increased rates of interest, closing of factories, failures of banks and mercantile houses, and enforced idleness of large numbers of people, often resulting in extreme social disturbances. There is no remedy except in the concurrence of mankind to keep out of debt and to avoid all temptation to make gain without equiva- lent labor. This is impossible, however. Civihzation is so interlaced with the credit system that it is idle to talk of abolishing it. The interests of mankind require that it should continue, even at the cost of its abuses. There is, too, a desire for gain without labor which is legitimate. Nine-tenths of all the inventions and dis- coveries which have advanced mankind from the stone age to the age of electricity have had their origin in this desire. It may be, too, that an occasional crisis is a good thing, inasmuch as it shows commercial leaders by an object lesson the influences which tend to make trade successful or disastrous. ,^^- M^ 'Pax' TO THE ORDER OF .'DOLLAPS Form of Check. .^^ Check Stub. CHAPTER VII. THE CLEARING-HOUSE SYSTEM. In large cities checks representing millions of dollars are deposited in the banks every day. The separate col- lection of these would be almost impossible, were it not for the clearing-house system. Each large city has its clearing-house. It is an estab- lishment formed by the banks themselves, and for their own convenience. The leading banks of a city connect themselves with the clearing-house of that city, and through other banks with the clearing-houses of other cities, particularly New York. Country banks connect themselves with one or more clearing-houses through city banks which do their business for them. The New York banks, largely through private bankers, branches of for- eign banking houses, connect themselves with London. So that each bank in the world is connected indirectly with every other bank in the world, and in London is the final clearing-house of the world. The daily clearings in New York in 1909 averaged $326,505,468 (for 51 banks) and the average daily balances paid in money amounted to $13,797,644. Usually once a week the banks of a city make to their clearing-house a report based on daily balances, of their condition. Check Collections. Each bank in a city receives on deposit, daily, checks on other banks. Instead of sending these by messenger 135 136 THE CLEARING-HOUSE SYSTEM. to the other banks they are sent to the clearing-house at a fixed hour each day — in some cities twice a day. The banks of a clearing-house city are numbered. These numbers are seen stamped upon checks which the bank handles in the process of collection. Bank A may for instance carry checks amounting to $200,000 to the clearing-house for collection. Banks C, D, E and F may have checks on A amounting to $189,240, which they send to the clearing-house for collection. This would show a balance of $10,760 in A's favor, which is paid to bank A by the clearing-house in clearing-house certificates or due bills. If the balance were against A, the amount due would have to be made up within the hour limit fixed by the clearing-house regulations. Suppose, for illustration, that Brown of Lynn owes Smith of Media $25, and pays the amount by a check on a Lynn bank. This check will go by mail from Lynn to Media. Smith will deposit it in a Media bank. The Media bank will send it with other checks to its Phila- delphia correspondent, say the Penn National. The Penn National will send it with other checks to its New York correspondent, say the Chemical National. The Chemical will forward it with other checks to its Boston correspondent, say the First National. Now the First National of Boston may not be the Boston correspondent of the Lynn bank. It therefore sends the check for col- lection through the Boston clearing-house to the bank which does the Boston business for the particular Lynn bank upon which the check is drawn, say the Second Na- tional. The Second National sends the check to Lynn, where it is charged up against Brown's account. This THE CLEAEING-HOUSE SYSTEM. 137 system of collections is almost as perfect as is the post- office system of carrying registered mail. The Wanderings of Checks. Under old-fashioned methods, each bank was in the habit of selecting its collection agents, sending them by mail their collection paper, charging their customers very substantial collection rates and passing the same to their credit when collected. Nowadays the country trader, no matter where he is located, sends his check on a T '" ^^^«r«.r "^V're,^ "a^ M0»4t local bank to pay his account in a distant city, and the re- ceiver of the check expects his bank to collect the amount of the check free of expense, and to give him full credit for it the day it is deposited. Suppose for instance that a merchant of Selma, Ala., sends his check on a Selma bank by mail to pay a bill in Alpena, Mich. The Alpena merchant deposits it in his local bank, and this local bank sends it to its Detroit cor- 138 THE CLEAEING-HOUSE SYSTEM. respondent; that is, deposits it in the Detroit bank where its account is kept. The Detroit bank sends the check to its Chicago correspondent. The Chicago bank may have no connection with a Southern city. It sends the check to its New York correspondent. The New York bank forwards the check to New Orleans, where it may pass through the clearing-house to some other New Orleans bank which forwards it to its correspondent in Mobile. The Mobile bank sends the check to Selma, and has it charged up to the account of the man who issued it. Now all these banks and clearing-houses through which the check passes, stamp their indorsement and other information on the back of the check, so that the check itself bears a complete record of its travels. Millions of dollars are collected by banks daily in this way, and generally without expense to their customers. It is estimated that these collections cost the New York city banks more than two million dollars a year in loss of interest while the checks are en route. Fifteen thousand collection letters are sent out every day by the banks of New York City alone. There have been spasmodic at- tempts in some cities to make a charge for the collection of out-of-town checks, but such attempts are unpopular among business men. Clearing-house Management. The bank clerks who attend to the clearing-house busi- ness must be experts in their special work. The shghtest error on the part of one clerk may prolong indefinitely the entire settlement. As a check against error very se- vere rules are estabhshed. The following are samples from the by-laws of a large clearing-house : THE CIJ:ARING- HOUSE SYSTEM. 139 "1. For disorderly conduct of any clerk, or other of- ficer, at the clearing-house, or disregard of the manager's rules and instructions, for each offense, $4.00. "2. For any officer failing to attend punctually at the hour for making the exchanges, $4.00. *'3. Debtor banks, failing to appear to pay their bal- ances before a quarter past 12 o'clock, $3.00. "4. Any error in the credit ticket (that is the amount brought), $2.00. "5. Errors in making the balance ticket (that is, the amount received) entries, $2.00. "6. Failing to deUver check tickets before half -past ten o'clock, $1.00. "7. All other errors, $2.00. "Any clerk, or other officer, who shall repeatedly and perseveringly disobey the orders or instructions of the manager, shall, with the approbation of the clearing- house committee, be expelled, and not readmitted without the written consent of the committee. Thirty minutes will be allowed for the morning business settlement, and for each additional fifteen minutes' detention, $2 will be added to the fine under No. 3." The following selections from the general rules of the same clearing-house will give the reader some idea of the exacting character of clearing-house regulations : "Errors in the exchanges and claims arising from the return of checks or other cause are to be adjusted directly between the banks which are parties therein, and not through the clearing-house. "Whenever checks which are not good are sent through the clearing-house they shall be returned by the banks receiving the same to the banks from which they 140 THE CLEAEING-HOUSE SYSTEM. were received as soon as it shall be found that said checks are not good; and in no case shall they be retained after one o'clock. "The manager shall immediately report to the clears ing-house committee any apparent irregularity in the deahngs of any bank belonging to the association that comes to his notice, and receive the instructions of the committee in regard thereto. "The committee shall have power to remove the mana- ger or any of the clerks, whenever, in their opinion, the interests of the association shall require it. "The hour for making the exchanges at the clearing- house shall be ten o'clock A. M. each day. At a quarter past twelve o'clock, noon, the debtor banks shall pay to the manager, at the clearing-house, the balances due from them respectively either in coin or in such other currency as the laws of the United States shall require, or in such certificates as shall be authorized by the clear- ing-house association, excepting sums less than one thou- sand dollars, which may be paid in bills of the debtor bank. "At half -past one o'clock P. M. the creditor banks shall receive from the manager, at the same place the balances due to them respectively ; provided all the bal- ances due from the debtor banks shall then have been paid to him. "Should any bank fail to pay the balance due from it at the proper hour the amount of such balance shall be immediately furnished to the clearing-house by the sev- eral other banks in proportion to their respective balances against the defaulting bank resulting from the ex- changes of that day." THE CLEARING-HOUSE SYSTEM. 141 Foreign Clearing-houses. England has three bank clearing-houses and France one. The clearing principle is used in England to ad- just the complicated accounts of the through traffic of connecting railroads, and to simplify the fortnightly deliveries of stock on the London Stock Exchange. Ev- ery clearing-house bank in London, and the clearing- house itself, keep accounts with the Bank of England, and differences are settled by transfers from one account to another. London originated the clearing-house. It was formed spontaneously by the clerks of the London private bankers, who, to save themselves the trouble of going about to each bank, got into the habit of meeting in a central room to settle their mutual claims. A similar practice arose among French merchants, in old times, of making their bills payable at the great annual fair in Lyons, where they met to balance their debts, and pay the differences. If gold were to be used instead of the clearing-house machinery in either New York or London, the weight to be moved every day over long distances would exceed 200 tons. The clearing-house establishes a fellowship among banks that has already proved in times of money panics of the greatest service to themselves and the com- munity. CHECKS ON OTHER CHICAGO BANKS DCPOSITCD WITH First National Bank, POKH U-« Rrst National Bank OF CHICA GO. DepoMadL far acecwni tf Deposit Slip. CHAPTER VIII. DEPOSITS ANB DEPOSITORS. When you enter a bank to open an account, inquire for the cashier, and, if convenient, take with you some one who can introduce you and identify you as the per- son you profess to be. If you go alone, do not feel hurt if a number of ques- tions are asked you. While you may be perfectly honest, a large number of people make their living by being sharp, and, besides, it is necessary to establish those con- fidential relations which ought to exist in all financial transactions, so that' the cashier may know something more about you than he could ascertain by merely looking at you, and taking your name in a book. The cashier will have you place your signature in a book. Your name as written in this book should be the same in style as you intend to place on your checks. If necessary, the cashier or some officer of the bank, will show you how to make out a deposit sHp. He will give you also a small bank book, in which you will be credited with the amount of money which you deposit. East time you deposit money you will be required to make out a deposit slip. The banks furnish the printed blanks free. Under the word checks on the blank you write the names of the banks upon which the checks, if any, which you are depositing, are drawn. If a check is on a distant city, the name of the city should be given. 143 144 DEPOSITS AND DEPOSITORS. Your bank book is in reality your only receipt from the bank for the money you deposit. When you deposit money hand it to the receiving teller, and when you wish to draw money present your check to the paying teller. DBPOSITBD IN The Union Trust Company, 71$. 717 & 719 Chestnut St„ Ptiiladelphu "y QWo/ttAifl^;!^- "RyMrJJL.;^ Bank Note*. DOLLAU CI» XJ+0 - Small NotM. !•» ana Sr», 37 — ' , Coin, d' . Cback, (znnniisLT) £.'°4.~2itfS5iSiS;Ji,'?i? fil/MM.A-^//^///,> — A\aK .'. ////r/f/Af. '^*«^^y ■"^Ui^ Certificate of Deposit. is usually called a certificate of deposit. See illustration. It often occurs that such certificate is used instead of a bank draft, in the payment of distant bills. Interest is allowed under certain conditions. It is practically a bank's check on itself. In issuing certificates of deposits to strangers the bank should take their signatures upon the margin of the certificate book, so that, when the cer- tificates come home for redemption, the indorsement may be compared with this original signature, if it seems 156 DEPOSITS AND DEPOSITORS. necessary. Of course every properly managed bank has a ledger account of certificates of deposits issued, which is a full record of the amounts and names of all certifi- cates issued, together with their dates and numbers. Re- turning certificates can be compared with this record as they are presented for payment through clearing-houses and over the counter. Certified Checks. If you wish to use your check to pay a note due at some other bank, or in buying real estate, or stocks, or bonds, you may find it necessary to get the check certi- fied. This is done by an officer of the bank who writes or stamps across the face of the check the words '^Certified" or ''Good when properly indorsed f and signs his name. (See illustration.) The amount will immediately be de- ^^^2e^lHI$ i I J %^^«" ^b^£.J£-^\W LincomII^^ Pay to the order oLOi :f.p. »Jt."Vt^ ANK OF THg gEPUBUC^ A Protested Note. NOTES AND DRAFTS. 175 nillKM BRIGG3. Nounr PMh. (^ommomveaUh of QSIIassacHtuEefis. Jm^m^mm*^^^*^^, L VeRNON BrIGGS, |totar]! f nbIit,-s^5'/*'A*yw,«^ /^ ^ (^Uw*«»^«^(%^>'^..iSft Demand Collateral Note. Waiver of Demand and Notice. All indorsed demand notes held by a bank should start with a waiver of demand and notice by the indorser, since in time (in some states in 60 days) indorsers are lost — unless a demand for payment is made upon pro- misors — if this precaution has not been attended to. A Judgment Note. Some of the states, noticeably Pennsylvania, have a form of promissory note called a judgment note. In this form of note the maker confesses judgment if the note is not paid and authorizes the court to take possess- sion of sufficient of his property immediately to satisfy the amount of the claim. It is really a very severe form of contract and should be given only under the most ex- treme conditions. Collection Laws. An edtachment is a writ issued at the commencement of, or during a suit at law in court, commanding the NOTES AND DRAFTS. 183 sheriff, or other proper officer, to attach the property of the defendant, to satisfy the demands of the plaintiff. The property of corporations may be attached as well as that of individuals. By this prppess the plaintiff gains a lien on the attached property, which lien will await the judgment of the court in the suit. In many of the states the defendant may dissolve the attachment by giving a bond, with sureties, that he will pay such judgment as the plaintiff may obtain in the suit. 9 titCoflV:;^^. fi*^...^^ r, v»i»h Ih»» :>s. A Judgment Note. A suit is ended by the court's giving a final judgment, either for the plaintiff or for the defendant, at the same time fixing the amount in dispute, if judgment is for the plaintiff. Execution is the act of carrying into effect the final judgment of a court. If property of any kind is sold under execution, the proceeds go to satisfy the judg- ment and any costs or charges ; and then, if there is any surplus, it belongs to the defendant. By the homestead and exemption laws of many states, certain kinds and amounts of property are exempted from attachment and 184 NOTES AND DRAFTS. sale on execution. By garnishment or trustee process is meant the attaching of money or goods, due a defendant, in the hands of a third person. By exemption is meant the right given by law to a debtor to retain a portion of his property free from a sale on execution at the suit of a creditor. CHAPTER X. CREDIT AND EXCHANaE. It is to credit alone that we are indebted for that inter- mediate agent which plays so important a part in the transaction of business, whether it be in causing supply and demand to meet, or in applying to the industry of exchange the principle of the division of labor which is so favorable to production. Without credit this intermediary is impossible in most instances. It gives birth to both industry and trade. It multiplies the producing and consuming power of society; by facilitating exchange it accelerates and in- creases it. In reality the largest share of the business of the world is done on a credit basis. In many instances the instruments of payment which we call cash are in reahty only promises to pay. During the Middle Ages credit transactions of great importance and on long time were effected without leav- ing the slightest trace in writing; and even to this day the Russian producers and merchants who frequent the great annual fair at Nijni Novgorod, contract credit obligations for twelve months' time, without giving the least evidence of the debt, and that for a very good rea- son : very frequently they can neither read nor write. When we give credit we give value and wait for the value we are to receive in return; but we often cannot 185 186 CREDIT AND EXCHANGE. afford to do this, so we get some other person to wait for us by giving him an instrument of credit which we take when we deliver our goods. This person to whom we give the instrument of credit may not be able to wait either, so he takes the paper to the bank and discounts it. It is the business of the bank to wait, not the busi- ness of the merchant. The latter should keep his full capital active every day and every dollar he is waiting for is inactive and is earning nothing. On the other hand the bank increases its capital by waiting, for the simple reason that it charges for wait- ing just as a lawyer charges for giving his time to his client. But does this increased circulation increase capital? The machine runs faster and turns out more work, but doesn't increase its size or its intrinsic value; it is the work that counts, not the machine. History of Financial Exchange. In early times foreign trade consisted in the direct exchange of commodities. A caravan set out with a variety of manufactured articles, across the deserts of Arabia or Sahara, and came back with the ivory, spices, and other valuable raw products obtained by barter. In later times the merchant loaded his own ship and sent her forth on an adventure, trusting that his shipmaster would sell the cargo to advantage, and, with the pro- ceeds, bring back another cargo to be sold to great profit at home. Trade was thus reciprocal, and what was sent out paid for what was brought back. Wherever this direct reciprocal exchange did not exist it was necessary to devise some mode of trans- CREDIT AND EXCHANGE. 187 ferring debts. To the early Italian and Jewish mer- chants we owe the development of the use of the credit instruments which have since developed into bills of ex- change. As early as the fourteenth century bills were used under similar customs and of about the same form as those of the present day. Principles of Exchange. In commerce the term exchange is generally used to designate that species of mercantile transactions by which the debts of individuals residing at a distance from their creditors are canceled without the transmission of money. Among cities or countries having any consider- able intercourse together, the debts mutually due by each other approach, for the most part, near to an equal- ity. There are at all times, for example, a number of per- sons in New York indebted to London, and perhaps, as many persons in London indebted to New York. Hence when A of New York wishes to make a paj^ment to B of London, he does not send the actual money, but he goes into the market and buys a hill of exchange on London; that is, he goes to a New York bank, doing a foreign business, such as Brown Bros, or J. Pierpont Morgan & Co. and buys a draft, called a bill of ex- change, which is in reality the New York banker's order on his London correspondent, asking the latter to pay the money to the person named. It may be that about the same time some London mer- chant who owes money in New York goes to the very same London banker and buys a draft on the New York bank. In this way the one draft cancels the other, and 188 CREDIT AND EXCHANGE. when there is a difference at the end of a week or month the actual gold is sent across to balance the account. Inland or domestic bills are commonly called drafts. Foreign bills, that is bills on foreign countries, are called exchange. The par of the currency of any two countries means, among merchants, the equivalency of a certain amount of the currency of the one in the currency of the other, supposing the currencies of both to be of the precise weight and purity fixed by their respective mints. Thus, according to the mint regulations of Great Britain and France, <£l sterling is equal to 25.2 francs, which is said to be the par between London and Paris. And the ex- change between the two countries is said to be at par when bills are bought and sold at this rate; that, is for example, when a bill for £100 drawn in London is worth 2520 francs in Paris, and conversely. When £l in London buys more than 25.2 fr., exchange is said to be in favor of London. The par of exchange between Great Britain and the United States is 4.86 2-3, that is, £l sterling is worth $4.86 2-3. Exchange is quoted daily in New York and other city papers at 4.87, or 4.87%, etc., for sight bills and at a slightly lower rate for sixty-day bills. These are the two common kinds of bills usually bought. The sixty-day bills bought in New York are as good as cash when they reach London, but they are cashed at a discount from their face value, unless they are held until the date of ma- turity. The foregoing statements explain in a general way the meaning of the par of exchange, but its exact determina- CKEDIT AND EXCHANGE. 189 tion, or the ascertaining of the precise equivalency of a certain amount of the currency of one country in the cur- rency of another, is exceedingly difficult. If the stand- ard of one be gold and that of another silver, the par must necessarily vary with every variation in the relative values of these metals. The value of the precious metals even in contiguous countries, is always exposed to fluctu- ations from the over-issue or withdrawal of paper, from circumstances affecting the balance of payments. Gold is usually high when there is a demand for gold or a scar- city of it, just as it is in the case of potatoes or wheat. It is obvious, therefore, that it is all but impossible to say, by merely looking at the mint regulations of any two or more countries, and the prices of bullion in each, what is the par of exchange between them. The imports and exports of bulhon are the real test of exchange. If bullion is stationary, neither flowing into nor out of a country, its exchanges may be truly said to be at par ; and, on the other hand, if the bullion is being exported from a country, it is proof that the ex^ change is against it, and conversely if there be large im- portations. Variations in the actual course of exchange, or in the price of bills, arising from circumstances affecting the currency of two countries trading together, are nominal only: such as are real grow out of circumstances affecting their trade. When each buys of the other commodities of precisely the same value, their debits and credits will be equal, and the real exchange will be at par. This con- dition of affairs very rarely happens. The cost of conveying bullion from one country to an- other forms the limit within which the rise and fall of the 190 CREDIT AND EXCHANGE. real exchange between them must be confined. If a "New York merchant owes a debt in London and ex- change costs him, say 2 per cent, and the cost of shipping the gold is only 1 per cent, it will be to his advantage to pay the debt by sending the actual coin across, so that the limit within which trade fluctuations may range corres- ponds to the actual cost of making remittances in cash. Fluctuations in the nominal exchange, that is, in the value of currencies of countries trading together, have no real effect on foreign trade. When the currency is depreciated, the premium which the exporter of com- modities derives from the sale of the bill drawn on his correspondent abroad is only equivalent to the increase in the price of the goods exported, occasioned by this de- preciation. A favorable real exchange operates as a duty on ex- portation, and as a bounty on importation. It is to the interest of merchants or bankers who deal in foreign bills to buy them where they can get them the cheapest, and to sell them where they are the dearest. For this reason it might often be an advantage for a 'New York merchant to buy a bill on London to pay a debt in Paris, or to buy a bill on Paris to pay a debt in Berlin. For instance, in the trade between England and Italy the bills drawn on England amount almost invariably to a greater sum than those drawn on Italy. The bill-merchants, however, by buying up the excess of the Italian bills on Lon- don, and selling them in France and other countries in- debted to England, prevent the real exchange from ever becoming very much depressed. ^ CREDIT AND EXCHANGE. 191 Changes in Exchange Rates. Exchange is not affected so much by the balance of trade as by the balance of indebtedness. Europe can contract debts in America by the purchase of stocks, bonds, or other securities as readily as by the purchase of wheat, cotton, or oil, the rate of foreign exchange be- ing similarly affected no matter what is bought. Euro- pean owners of American securities when sending them to America obtain the right to draw against the Ameri- can receivers of those securities. One hundred shares of stock sent by a London firm to a New York firm will make as much exchange against New York as the same value in wheat shipped by a New York firm to a Liverpool account ; so that the balance of trade, so far as imports and exports are concerned, may appear favorable and yet no balance of indebtedness ap- pear. The movement of merchandise is recorded while the movement of securities is not recorded. The sum total of our securities in European hands is unknown, but it probably exceeds our national debt. The rate of foreign exchange, affected by trade move- ments and by the movements of securities, is also affected by interest and dividend payments and by remittances for freight on importations of merchandise, the owners of vessels usually being foreigners. Our large cities send annually to Europe drafts for hundreds of thou- sands of dollars to cover interest on city bonds. Foreign exchange is affected too, by the difference which exists at any time between the American and Euro- pean market rate of interest. If money can be loaned 192 CBJEDIT AND EXCHANGE. at 10 per cent in New York while only 3 per cent can be obtained in London, there is an advantage in keeping or sending money there, the difference in interest being greater than the cost of transportation. The fact of the United States being a gold producing country is also im- portant, for it indicates that a small annual export of gold is to be expected. There is another factor which has a noticeable effect, namely that of travel. Thousands of wealthy Americans travel abroad every summer and the letters of credit which they carry, if not counterbalanced by some other cause, require gold shipments to meet them. Ordinarily when the market rate of demand exceeds 4.867 it is evi- dent that foreign goods have \ been imported too freely, or American goods are not wanted abroad, or American securities find a better market here than in Europe, or rates of interest here are too low to attract or keep foreign money, or foreigners are short of money, or there are a great number of Americans abroad, or we have produced a surplus of gold, or freight remittances are large, or interest payments on securities owned abroad are heavy. And when the market rate is below 4.867, the reverse is true. Of course there are other causes, and important ones too, but those named are the principal causes of changes in rates under normal trade conditions. Eastern capital is extensively used in the West, because the people of the West can make a profit by its use in excess of the interest and dividends sent to its owners. For the very same rea- son, European capital is extensively used in the United States. CBEDIT AND EXCHANGE. 193 Exchange TermB. There are several terms used in connection with ex- change which should be understood. Bankers' bills of exchange are bills drawn by bankers on bankers. Com- mercial bills are those based upon movements of mer- chandise, and drawn by merchants. Documentary bills are those which are accompanied by bills of lading. Normal exchange rates are those quoted in newspapers; there are lower or inside rates which are made to brokers, through whom most of the buying and selling is done. Domestic Exchange. The principle of domestic or local exchange is pre- cisely the same as that described as underlying the for- eign exchange business. In foreign exchange we have to do with a mixture of dollars with sovereigns or other foreign money. In domestic exchange we have dollars at both ends of the line. Suppose A of New York owes B of Chicago $12,000. He buys a draft (check) on Chicago for this sum and mails it to B. Now this draft will cost him something in addition to its face, but it should not cost more than $12 exchange, for the reason that A can take his $12,000 in bills or gold and express it to Chicago for $12. If $12 were charged the rate of exchange would be 1/10 of one per cent. But suppose that at the same time C of Chicago has $8,000 to send to D of New York and is trying to buy a draft in Chicago. If C keeps his money or turns it over to B, or to B's bank, or for that matter to any bank, A need not ship more than $4,000, for the balance can be turned over to D in New York, or to D's bank, or to I.B.L. Vol. 4—13 194 CREDIT AND EXCHANGE. any bank. Now $4,000 can be shipped for $4, so that the rate of exchange on a draft for $12,000, only $4,000 of which need be shipped, should not be more than one- thirtieth of one per cent. Under normal conditions exchange should be based upon the cost of shipping the balances due rather than the gross amounts due. If Chicago is buying more through New York than New York is buying through Chicago, it will be necessary at regular intervals to ship gold or bills from Chicago to New York to meet the dif- ferences, and when this is the trade condition, drafts on New York if purchased in Chicago will be at a premium. Drafts bought in New York on Chicago should be at a discount, but as a matter of fact, they will be at par. There are, of course, many other things which affect exchanges. Our banking system is such that the condi- tion of the money market is uniform in each banking cen- ter, but these centers may differ very largely from each other, and while in Boston the banks might have more money than they could use, the banks of St. Louis or St. Paul might be unable to meet the demand upon them. The Cost of Shipping Gold. There are times when it is to the advantage of the banker or merchant to ship gold to meet foreign debts. Usually if sight bills on England cost more than 4.90 it is cheaper to ship gold. The following figures give some particulars of the cost of such shipments: Freight — % of one per cent. Insurance — % of one per ceilt. Ahra- sion — From nothing to % of one per cent on $20-pieces ; % per cent to % P^r cent on $10-pieces, and % P^^ cent, to 1/^ per cent on $5-pieces. CREDIT AND EXCHANGE. 195 The cost of bringing gold from London to New York is the same as the cost from New York to London. The actual demand for gold in either city will affect its value slightly, and this temporary value must be ascertained before making close figures on a large transaction. The World's Financial Center. There is no doubt of the fact that London is the finan- cial center of the world. This tendency to the centraliza- tion of financial business in London is much promoted by the fact that the largest mass of cheap loanable capi- tal exists there. The general rate of interest in New York is at least 3 per cent higher than in London, so that a trader who has credit enough to obtain loans in London will make a profit by borrowing there rather than in New York city. The great banks of the world each of which is a center for its own section of country must have a gen- eral center for clearings and London has grown to be this center. The great foreign trade of England, her thousands of carrying ships, her merchants and invest- ments in every country on the globe, the age and strength of her great financial institutions, and the many distant colonies and dependencies which naturally have financial relations with the capital of the empire, tend to give London the unique position which is rightfully hers. Lombard and Threadneedle streets are the great money streets of London, as Wall street is of New York. The World's Currencies. , In addition to the gold and silver coins, the United States has in circulation about $350,000,000 in "green- backs" — the remnant of the forced paper currency of the civil war ; about $155,000,000 in Treasury notes issued in 196 CBEDIT AND EXCHANGE. payment for silver bullion ; gold certificates in denomina- tions of not less than $10, issued upon deposits of gold; silver certificates issued against standard silver dollars deposited in the Treasury ; currency certificates issued in denominations of not less than $5,000 upon the deposit with the Treasury, by national banks, of United States legal tender notes ; national bank notes of denominations of $5 and upward, issued by banks upon the deposit with the Treasury of United States bonds which are held as security for the ultimate redemption of the notes. The currency of Great Britain in actual circulation in- cludes the gold sovereign (value $4.8665) and half-sov- ereign; the silver crown (value $1.087) , half-crown, shil- ling (value $0,217), sixpence, four-pence, and three- pence. The paper money includes the notes of the Bank of England, the smallest denomination of which is £5, the notes of the Scotch and Irish banks, the smallest de- nomination of which is £l, and the notes of the joint- stock and private banks. The currency of Canada is in form, at least, similar to that of the United States. Canada has no gold coinage of her own, but is considering (1910) the establishment of a gold coinage of $5 pieces on the same standard as the American coinage. The gold coins of the United States and Great Britain pass current and are legal ten- der. The silver coins are similar to those of the United States, except that there is no silver dollar, and a silver five-cent piece. The notes issued under the authority of the Dominion are of the denominations $1, 2 and $4, and are redeemable on demand in gold. Bank notes are is- sued by the chartered banks in denominations not smaller CREDIT AND EXCHANGE. 197 than $5. No special security in the way of deposit of bonds is required, but the notes in case of insolvency are a preferred claim against all the assets of the bank, in- cluding the double liability of the stockholders. The ag- gregate issue rarely exceeds sixty per cent of the paid-up capital of the bank and must not exceed one hundred per cent. The monetary system of Australia is the same as that of Great Britain. British India has a silver standard unit, the rupee (value $0,444). There are gold coins in value equal to five, ten, fifteen and twenty rupees respectively. The government issues notes ranging in value from five to ten thousand rupees secured by deposits of gold and sil- ver. The money in circulation in India exceeds one bil- lion dollars. Germany has a gold standard with the mark (value $0,208) as the monetary unit. The smallest gold coin is the 5-mark piece. The silver coins are the 5-mark, 2- mark, 1-mark, %-mark, and 1/5-mark pieces. The paper money includes the imperial treasury notes payable in gold, and the bank notes of the Reichsbank, an institu- tion with individual shareholders, but largely under the control of the government. The issue of notes of less denomination than 100 marks is prohibited. The government of Austria-Hungary has recently estabhshed a monetary system with the gold crown (value $0,203) as the unit. The gold coins consist of a 10-crown and a 20-crown piece, and the silver coins of a crown and a half-crown piece. As a matter of fact there is very little metalhc money in circulation. The money 198 CREDIT AND EXCHANGE. most in use consists of an irredeemable paper currency issued by the Austro-Hungarian Bank in denominations of 10, 100, and 1,000 florins (two-crowns), and by the treasury in smaller denominations. The Latin Union, which includes France, Belgium, Italy, Switzerland, and Greece, has now a single gold standard with the franc (value $0.1929) as the monetary unit. The smallest gold coin is the 5-f ranc piece ; "the silver coins are the franc, the 2-franc, the half- franc and the 20-centimes (one-fifth of a franc) . The coins of one country are received at par in the others. France issues bank notes through the bank of France. Belgium issues bank notes through the bank of Belgium, payable to the bearer at sight, and the individuals and associations are free to issue bank notes on their own responsibihty. Italy has no state bank, but there are in the country six banks which are authorized to issue notes payable on demand. The smallest denomination is 50-lire. Switzerland has now a state bank with central offices at Berne and branches throughout the country. Greece has three banks authorized to issue notes on such a very low gold and silver reserve that for many years gold has been at a premium. Spain has the silver peseta, equivalent to the franc, as a monetary unit. It has the same gold and silver coins as the other countries of the Latin Union. The only bank of issue in the country is the bank of Spain, a pri- vate institution, with certain government restrictions. Its smallest note of issue has the value of 25-pesetas. The Scandinavian Monetary Union embraces Sweden, Norway and Denmark. The krone or crown (value $0.- CREDIT AND EXCHANGE. 199 268) is the monetary unit. The gold coins are 10-kronen and 20-kronen, and the silver coins are the 2-kronen, the krone, and the fractional currency. Sweden has a bank of issue entirely under the control of the state. Joint- stock banks are also permitted to issue notes under re- strictions favorable to the monetary system. Norway has one bank of issue — a joint-stock bank with the state as principal shareholder. Denmark issues notes through a state bank. The monetary unit of The Netherlands is the guilder or florin (value $0,402) of 100 cents. The gold coins are the 10-florin and 5-florin pieces. The bank of the Netherlands, situated in Amsterdam, has the exclusive right to issue notes. The monetary unit of Russia is the gold ruble (value $0.52) of 100 kopecks. Other gold coins are the imperial equal to 10 rubles and the half -imperial. The National Bank of Russia is the only bank of issue in the empire. This bank issues paper money denominations of 1, 3, 5, 10, 25, and 100 rubles. The gold milreis (value $1.08) is the monetary unit of Portugal. The only bank of issue in Turkey is the Imperial Otto- man the notes of which are payable exclusively in gold. The currency of China is made from an alloy of cop- per, iron, and tin. In all large transactions, silver by weight is the medium of exchange, the Mexican doUar being used in the South and ingots called shoes, in the North. There are large numbers of private banks which issue notes upon their own authority for local circulation. The legal money of Japan is the yen of 100 sen. The yen is almost equal in value to our silver dollar. Trade 200 CREDIT AND EXCHANGE. among Japanese is carried on to a large extent by paper money issued under the authority of the government. Meocico had a silver standard until 1905, when it adopt- ed the gold standard. The Mexican dollar (el peso) is the unit, and under the name of piaster, is the current coin of several countries in America, Asia, and Africa. Thel-e are also gold coins in circulation, the smallest (1 peso) being almost equal in value to our gold dollar. The Central American States have bank notes, but the metallic currency of these repubhcs is largely JNIexican. Chile is on a silver basis, so far as specie is concerned. The real medium of exchange is a depreciated paper cur- rency. The unit i^ the peso equal to the 5-franc piece of France. The unit of the Argentine Republic is the same, but of gold. The actual currency is depreciated paper fluc- tuating greatly in value. English Money. Any person may take bar gold to the extent of £20,- 000 to the English mint and have it returned to him in sovereigns and half-sovereigns. The Bank of England receives bar gold at £S 17s. 9d. per ounce and pays in gold coin. The English sovereign weighs 123.274 grains, and is a legal tender so long as it does not weigh less than 122.5. English silver and bronze coins are fiat money, that is, their intrinsic value is materially less than their face value. The difference between the token value and the real or intrinsic value is called seigniorage and this is a large source of revenue. English gold coins are a legal tender for any amount; silver coins are a legal tender for only forty shillings or CREDIT AND EXCHANGE. 201 less, and bronze coins for one shilling or less. The gold is largely handled by bulhon brokers. The Bank of England notes are very ordinary looking pieces of white paper with plain black printing, some- what larger in size than those of the United States. The paper is especially made, is very strong, and is not easily burned. No note is paid out a second time. Every check or draft is paid in new bills. In sending bank notes by mail the Englishman gener- ally cuts them in halves, takes a careful record of their marks and numbers, and sends one of the halves by registered mail, and the other by ordinary post. The Scotch and Irish banks have a paper issue of their own, and there are joint-stock banks and private banks that issue bank notes. These bank notes, although they pass current, are not legal tenders. ** Crossed" Checks. The crossed check so common in Britain is unknown in the United States. It is simply an ordinary check that has upon its face marks which signify that it must be presented through some other bank or banker; and checks of this description will not be cashed if they reach the bank upon which they are drawn by any other way. They are absolutely worthless for presentation in the hands of the wrong persons. The banks are forbidden by law to cash such a check over the counter. The receiver of such a check must necessarily deposit it. Our stamped words "Payable only through the clearing house when properly indorsed" have nearly the same effect. Some houses say on their bill-heads how checks are to 202 CREDIT AND EXCHANGE. be crossed. When the cheek is crossed simply by two lines it may reach the bank upon which it is drawn, through any bank ; when it is crossed with a bank's name, it must reach the bank upon which it is drawn through the banker whose name appears between the crossed lines. When the drawer knows the name of the payee's banker he usually inserts it; otherwise he simply draws the Hues. Na A-o.ai+u- '^JSmxJbim.cJ^ EA^ w^ -=0=^^ PAY.__..MiwLfirOAiuJ:COKl ^. ife^^ % XIIBURY ^YYVaA\^o. iq0^ ) tj Mu^ l«/Ctiu, cu«.cL w«. tAA.Qa.ciJo "MioX liiji .aa/wot o^aXt a^uuX tJLtu. 'Mxn'UJv XtoaoXtvt/v- AUAi/tu uJo txjt. vv**^ tmJEt ^iImu<. WLdxmx iluti, 1 (A»aa. *r>«« SICWATXR A Letter of Credit, First Page. pendent upon its local banks, it is a common thing to see mutual ruin of banks and business in numerous widely CREDIT AND EXCHANGE. 205 scattered localities, while the business of the country as a whole is sound. Such results are impossible in Canada. The widely ex- tended system of each of the great banks, with its branches in every part of the country, constitutes a sort of financial insurance, by which each helps to guarantee the soundness of all ; while the Canadian branch systems, interlocking at every town, leave it simply impossible that any local point of the least importance should for a moment be lacking in the most complete discount, cur- rency, and other banking facilities, so long as the whole business of the Dominion is not involved in common ruin. The currency system is elastic and always meets the de- mands. Panics for fear of stringency are unknown. A run on a bank, as it is understood in the United States, is practically impossible. Letters of Credit. The ordinary letter of credit is the leading and usual instrument for the use of travelers in Europe and has now become such a common feature of banking that every one should be familiar with its form and purpose. We reproduce a facsimile of the first and second pages of a circular letter for £500. The first is the credit proper, authorizing the various correspondents of the bank issuing it, who are named on the third and fourth pages, or any other banker to whom the letter may be presented, to pay the holder, whose signature is given on its face, money to the extent of £500. The second page shows how the holder availed himself of the ad- vantages of the letter. It gives the names of the banks to which he presented his letter and the amounts paid by 206 CREDIT AND EXCHANGE. each. With such a letter a traveler could make a trip around the world and not carry in his pocket at any one time more gold or silver or bills than would be necessary to meet immediate local expenses. When a banker is- sues a letter of credit, the party purchasing it, and who is to use it abroad, places his signature upon a lower Bjf WHOM PAID «AME of TowM AnX-