CIHM
Microfiche
Series
(Monographs)
ICMH
Collection de
microfiches
(monographies)
Canadliin In-^tituto for Historical Microreproductions / Instltut catitTdie ^e nucromproductionj historiquos
1QQQ
I
Technica' and Bibliographic Notes / Notes techniques et bibliographiques
The Institute has atte-nptea io obtain the best original
copy available for fi'
may be bibliography.
the images in tht^
ignificantly chan; -
checked below.
rp^!!jres of this copy which
., unique, '.vhich may alter any of
iP iductii.-n, or which may
:',e u':i al method of filming are
n
n
n
Coloured covers /
Couverture de couleur
Covers damaged /
Couverture endommagee
Covers restored and/or laminated /
Couverture restauree et/ou pelliculee
Cover title missing / Le titre de couverture manq,j?
Coloured maps / Cartes geographiques en couleur
Coloured ink (i.e. other than blue or black) /
Encre de couleur (i.e. autre que bieue ou noire)
Coloured plates and'or illustrations /
Planches et/ou illustrations en couleur
Bound with other material /
Relie avec d'autres documents
Only edition available /
Seule edition disponib'e
Tight binding may cause shadows or distortion along
interior margin / La reliure serree peut causer de
I'ombre ou ce la distorsion le long de la marge
interieure.
Blank leaves added during restorations may appear
within the text. Whenever possible, these have been
omitted from filming / II se peut que certaines pages
blanches ajoufees lors d'une restauration
apparaissent dans le texte, mais, lorsque cela etait
possible, ces pages n'ont pas ete filmees.
L'Institut a microfilma le meilleur exemplaire qu'il lui a
ete possible de se procurer. Les details de cet exem-
plaire qui sont peut-etre uniques du pc nt de vue bibli-
ographique, qui peuvent modifier une image reproduite,
ou qui peuvent exiger une modification dans la metho-
de normale de filmage sont indiques ci-dessous.
Coloured pages / Pages de couleur
j I Pages damaged/ Pages endommagees
□
Pages restored and/or laminated /
Pages restaurees et/ou pelliculees
Pages discoloured, stained or foxed /
Pages decolorees, tachetees ou piquees
Pages detached / Pages detachees
|y I Showthrough / Transparence
□ C"ality of print varies /
Qua
D
D
Quaiite megale de I'impression
Includes supplementary material /
Comprend du materiel supplementaire
Pages wholly or partially obscured by errata slips,
'issues, etc., have been refilmed to ensure the best
possible image / Les pages totalement ou
partiellement obscurcies par un feuillet d'errata, une
pelure, etc., ont ete filmees a nouveau de fagon a
obtenir la meilleure irnage possible.
Opposing pages wiih varying colouration or
discolourations are filmed twice to ensure the best
possible im.age / Les pages s'opposant ayant des
colorations variables ou des decolorations sont
filmees deux fois afin d'obtemr la meilleure image
possible.
Additional comments /
Commentaires supplementaires:
Vcirious pdgings.
This Item is filmed at the ri.'duction ratio checked below /
Cp document est tilme au lam dp reduction indique ci-detsous.
lOx
14x
18x
22x
26x
30x
12x
16x
20x
?4x
28x
32x
The COPY filmed here has been reproduced thanks
to the generosity of:
L'exemplaire film6 'it reproduit grace i la
gdn^rosit^ de:
National Library of Canada
Bibliotheque nationale du Canada
The images appearing here are the best quality
possible considering the condition and legibility
of the original copy and in keeping with the
filming contract specifications.
Les images suivantes ont 6t* reproduites avec le
plus grand soin. compte tenu de la condition et
de la nertet6 de rexemplaire film6, et en
conformity avec les conditions du contrat de
filmage
Original copies in printed paper covers are filmed
beginning with the front cover and ending on
the last page with a printed or illustrated impres-
sion, or the back cover when appropriate. All
other original copies are filmed beginning on the
first page with a printed or illustrated impres-
sion, and ending on the last page with a printed
or illustrated impression.
Les oxemplaires originaux dont la couverture en
papier est I.TiprimAe sont film^s er commencant
par le premier plat et en terminant soit par la
derniir ' page qu' comaorte une empreinte
d'impr'jssion ou d'ilL ' .ration, soit par le second
plat, semn le cas. Tous les autres exemplaires
originaux sont filmAs on commencant par la
premiere page qui comporte une empremte
a'impression ou d'illustration et en terminant par
la derni^re page qui comporte uie teile
empreinte.
The last recorded frame on each microfiche
shall contain the symbol * (meaning "CON-
TINUED"), or the symbol V (meaning "END"),
whichever applies.
Un des symboles suivants apparaitra sur la
derniAre image de cheque microfiche, selon le
cas: le symbole — ♦• signifie "A SUIVRE , le
symbole V signifie "FIN".
Maps, plates, charts, etc., may be filmed at
different reduction ratios. Those too large to be
entirely included in one exposure are filmed
beginning in the upper left hand corner, left to
right and top to bottom, as many frames as
required. The following diagrams illustrate the
method.
Les cartes, planches, tableaux, etc , peuvent etre
film*s i des taux de reduction diff^rents.
Lorsque le document est trop grand pour etre
reproduit en un seul clich6, il est film6 ^ pariir
de Tangle sup^rieur gauche, de gauche i droite.
et de haul en bas. en prenant le nomb^e
d'images n^cessaire. Les diagrammes suivants
illustrent la mithode.
1
2
3
MICROCOPY RESOLUTION TEST CHART
ANSI and ISO TEST CHART No 2
1.0
I.I
Hi |2.8
II 2.5
12.2
2.0
1.8
1.25
1.4
1.6
^ A PPLIED irvHGE Ir
_ _^ .nestef. NcN Tork U609 uSA
' 6) +82 - 0300 - Pnon«
=!^= 61 288 ~ %9aa - Ft$'
Modern Business
CANADIAN EDITION
A SERIES OF EIGHTEEN TEXTS, ESPECIALLY PREPARED
FOR THE ALEXANDER HAMILTON INSTITUTE COURSE IN
ACCOUNTS, FINANCE AND MANAGEMENT
KDITHD 15 Y
JOSEPH FRENCH JOHNSON
PFAN. sr.w voHK r,Mvi:,iMrY s, ii u.,, ,,r , ,,„mkfue, accoi'sts and finaste
WVIAKD KCoNdMH S
"I{(;amzati!).\ amj .\l\na(.i:.mi:x
SKLLIXC
cui'Dns
IliAFIIC
! \i)\ i:h'iisin<;
HI SIM;sS (()Iil!];si'( ixdiate
T Lkk ( iM.i.dWAr
H. S. BlTLKIt
LkK CiAI.LOWAT
S. .1. M( Lean-
Lkk (i allow at
<i. iV IIoniiKiss
Lko ( iltl:i:M)LI.\(,F,R
vK. W. Wmi.HT
n\n,i,iAM H T>(ir(;n
1 rni;i) W. FiKi.i)
f Kahl Df.an HowAno
I \\ W Sw AVSOS
K. L. Stf-.waht Pattkrsun
f FUANKl.IN I':S( UKR
I I. I. StKW AKT i'ATTKKSON
'I"Hil\I \^ ( 'ONW VV
l.W Ksr.MKN T AM) SI'KC rLAllOX \i iu.ht AT«n.,i)
A<(orxTiX(; pii vcTKi-:
coiu'diiAriox riN \x(i;
MOXKV AX I) HANKlXd
HANKIXC, 1M{ \( IK i: .
roiuiKix i;x< iiAX(;i; .
.1 iithor
Jamks .Ma\or
IXSLRAXCE . . . .
UK.W. I>TATK . . .
AFDnixc;
COST FIVDINC . . .
rOMMi;i!( I \I, ].\W
l FiiKh W. 1 iKi.i)
ri:i)\vAKi> H. JlAnnr
I Fhki) W , I"ir,i.i)
i'Wai.tiu Li\i>\F,re
■ ■ ■ \ K W WiuMir
SllYMorii \\ ALTON
. . DkNTI Ii S KlMHALL
\\'\LTi:n S, ,'on\.^o\
I f
s «4^
Money and
Banking
A DISCUSSION OF THE PRINCIPLES OF
MONEY AND CREDIT. WITH DESCRIPTIONS OF
THE WORLD'S LEADING BANKING SYSTEMS
BY
EARL DEAN HOWARD
PROFESSOR OF FINANCE IN NORTHWESTERN UNIVERSITY
SCHOOL OF COMMERCE; AUTHOR OF "INDUSTRIAL PROG-
RESS OF GERMANY"
IN COLLABORATION WITH
JOSEPH FRENCH JOHNSON
DEAN OF NEW YORK UNIVERSITY SCHOOL OF COMMERCE
ACCOUNTS AND FINANCE: AUTHOR OF "MONEY AND
CURRENCY." "THE CANADIAN BANKING SYSTEM." ETC.
REVISED BY
W. W. SWANSON
ASSOCIATE PROFESSOR OF POLITICAL SCIENCE IN QUEENS
UNIVERSIT^-
Modern Business
Canadian Edition
Volume VII
ALEXANDER HAMILTON INSTITLTE
NEW YORK
C'OPTRICHT, 191 I. BY
ALKXAXDKU HAMILTON IXSTITITE
('0PVliIi:HT, lOl:;, BY
ALKXAXUKK HAMILTON- INSTITfTE
CopyiiiiaiT, lUi:i, BV
ALKXANDKU HAMILTON INSTITUTE
CripVliMIlT, 1911, BV
ALEXANDKI; HAMILTON IN.STITL'TE
COPYKIGIIT IN GkE^T HriTaIN, 1 •) 14 BT
ALKXANUEH HAMILTON INSTITUTE
EDITOR'S PREFACE
This volume (liscusses questions in which the iVmerican
peo])le have heen I'oreed hy events to take a deep and
personal interest. The rise cf prices and resultant in-
crease in the cost of living since 181)7 have ])rovoked uni-
versal discussion and even called forth proclamations of
disapproval from mayors, governors and other j)ublic
men. Canada lias succeeded in avoiding many of the
monetary evils common to other countries. The panic of
1907, while it affected Canada, was due to causes prevail-
ing in the Ignited States. Similarly the tight money
situation in 191.3 was caused hy conditions south of the
border. The discussion of both Canadian and United
States money ])roblems will, therefore, be of special in-
terest to business men in Canada.
It goes without saying that no man is fit to plan the
digghig of a tunnel or the construction of a railroad, to
mend a clock or repair an automobile, unless he has had
a certain amount of scientific trainiiig. In mechanics
the world recognizes the need and ])ractical value of
science. l!i finance the same need exists, but it is not
yet generally acknowledged. E\erybody thinks he un-
derstands the money (juestion, or that it is not worth
understanding, and the average man is inclined to think
that the business of banking is so simple that if our
banks have in any way fallen short of their duty, the men
M'ho manage them must either be very ignorant of their
business or very selfish and sjieculative in their methods.
As a matter of fact, the science of monev and credit.
KDITolfS I'KKFACK
wl.ilc almost as exact in its nature as niathematiis is
one ,>| the most difJicult in the AvhoJe fieUl of economies,
and the h.isiness or profession of hanking-, wliich is
founded ujx.n llmt science and should be conducted in
aceonhmce with its principles, is one demanding the
keenest and clearest hrain. Industry furnishes the red
blood of the economic organism. Trade and commerce
are its cn-culatory system. Finance is its nervo.is sys-
tem. If the banker is incompetent and fails in the p'.r-
formance of his task, the entire business world is pai-a-
lyzed.
In the present volume the effort has been made to
.yivethe reader in the clearest possible lan<,niage a scien-
tiHc knowledge of money and cre(!it and an accurate
description and analysis of the various banking systems
with which the world is now having experience. Tlie
subject is difficult and no reader can expect to get en-
lightenment from this book unless he is willin." to think
as he reads. If he will d(. that, I feel certain that he
wdl quickly grasp all the principles expounded and in
the end discover that many business prol)lems whieii
have perplexed him have been made easy of solution.
The editor cannot too strongly advise" that this volume
be read carefully by the general business man. The
hanker, of course, should understand the subject. If
lie does not, he is conducting his business by rule of
thumb, and is courting disaster. But the business man
should not think that Money and Banking are matters
with which he is not concerned. On the contrary, they
treat of matters which immediately concern him! The
relation of money to the upward and downward swings
of prices is something which the average Inisiness man
does not percei^•e, yet it is something which he ought to
understand, for his prosperity often depends on causes
EDITOR'S I'HKFACE
affecting' merely the (kniaiid lor and supply of money.
The j)riee.s of commodities are merely an expression of
the value of money and tliey change whenever money
ehan^es. The business man who Unows on* i-e con-
ditions which govern the value of the commoiiiiv which
he handles is only half protected against loss. 1 1' h.
would he safe he must know also the conditions which
determine the value of money.
Joseph Frexch Johnsons
New York University.
TABLE OF CONTENTS
PART I: .AIOXEY.
SECTION
1.
O
3.
4.
').
6.
r*
I •
8.
9.
10.
11.
rilAI'TFH I.
FUXDAMHNIAI. EC OVUM iC" CONCEPTS.
PACE
Reasons for tlic Study of Moiuy ,iii(i Hmkiiig ... l
Warnings of the l.aU; Panic 3
Sciiiicf 3
linance g
'I'l clinology and HuNimss 4
BiisiiKss tlif Hisult of .S|)((iili/,,iii,,ii ,if L:il),)r . , 5
I'rodiu'tion 5
Production by C'ii.ingc ot Dwm rslii]) (j
'I'ardy Id cognition ot' \'aluc of Exchange .... 7
Pri\atc Property g
Property and WValtli g
Integration of Industry 10
(HAPriH (I.
EXt 11 ANUE.
1.'^. Beginning of l!\cliaiigc
1 1. Barter
l."i. .Money
1(1. .Money l{ej)resents Ini'oniplete Kxcliangi s
17. Credit
IS. ( redits as Media of I".\cli.inge .
I!>. .Money and Credit Hepresentatives of \\( a
'JO. Classification of Wi dtli
-1. l'.ntrepren( ur .System
■J-J. Capital
'23. Capitalization
11
12
12
\3
I I
\r,
17
18
1!)
•JO
21
VII
Vlll
MUXKV AND BA.NKJNG
'-H. D.inaiid for Capital CnniU
-."'. .Mumy IiK'omts ....
■-'()'. .Mithods ot' Iin,stii),iit
-7. Rtal Invfstiiiciit .
CIIAI'TKH 111.
N'.vi.ri:.
'■is. Valii,' a R,.<rist,-r of Kr..n,unir Vorcrs
'-'!). .Mtaiiiiiir ()(■ •• \-,.,|,|,. "...
•it). Dcrinitioii (if till Diill.ir
•n. Kxchann-.abilitv ti„. Si.lr [-tilitv of M.ii
■'*■-'. (iol'l not ai! Iiloal Standard
.'i.'l Dctrrniiiiation oC \aluc
.'it. rtility Tlirory of \'aliu'
<i.'>. .Maruiiial I'tijity ....
•i<). .MarMi„,.,I l-uUiy („ i|„. hulixid:
ti7. H.conciliatioii of tin- two Tlirori, s
PAGK
•■it
28
29
'■-'.')
'-'!»
.•il
til
32
3:i
3t
CHAl'TI.H l\-.
KVOI.ITIOV OF Till-; MKDIL-.M iH- EXCII A NCR
•is. I'riniili\f Ideas of \'alsi.-
■i!». ()rnani.„lai .^ton,-. Karly IMd as Mi,,;,',.
t". 'I'lirrr I'linctions of j'rnintn.' M,i„ry
H. W aiiipiiiii
12. H.avr:- Skins
t;i. A|,n-ii idtural i'rodiicts as Mon.y
a. 'I'oliacco ....
i'>- Summary of I'rinciplrs
Id. Divisiliility
17. I nifiirmity
l-'^- ( oj^iii/aliility
Mi. .>^t.diilit\ of \-altir
. fir>
■ . at)
. . 'Mi
. . 36
. . .'i7
. . 38
. . 38
. 40
. 41
n
42
42
'■ 11 \ I' it I; \ .
KVOIt Tiov ,„ ,■,,,.. sTWDMd, OF VAFl F
r>0. M.lal Slandard-, thr I iii,.( i,, .w,,,,;,,.
:'>\ (iooij (^11 diti, s , . .
I I
C'ON'l'KN'JS
IX
PAGE
45
46
46"
. 48
. 49
. .^0
. 51
. 52
SFXTION
.'>2. Platinum I'liMicrrssfiil ,is Mdiuv
.'5;). Oiijictioiis to (iold ,111(1 Sil\(r
:"> K Coiii/ifTi'
.").■). Nanus of ('dins
.■)(). Hrtiuircnu nts df (khhI Coinage 4-
57. Standard of \'alnr
T'S. Donl,],. Stan. lard I'ossil.lc l-ntil Last (cntiiry
.'lU. ( in sliani s Law
(il>. .Mi.stak< s of I'.arly I.rgislalors
()1. K\j)( rirnr,. of Knjrj.ipd uiH, I),mi!iI( Stand.inl
<)''^'. Adoption of Singlr (,old Standard I innt, ntional . . 53
6:i. .Mintage ,,
Cn. I.tgal T. iid. r 52
6r>. Historv ot' ( fiinagc in tlic Cnitrd States .... 5()
(i(i. First Ratio ot' Sil\<r to (iojd | ,", ; | 5,j
()7. Inaeiairacy of tin- Ratio ,ind its I'llf, cts 5-
68. Disappear.aiic.' of tli.' Sii\er Dollars 5)^
6.0. Cliailge of Ratio to !(i:I g^
70. I.( gal ■{', nd, r Acts Created a Paper Standard . . . 6O
71. Single (iold Standard alter l,S7;) (jj
7:J. -Vet of I poo ' g„
7^. Suniinarv . . r,-,
• • ()J
( HAPi'l'li \ I.
STAND Mil) Ol' Di.j KlfUKl) l> \ VM (-.NTS.
7L n.'f'.cts of (,,,],]
75. I)' linition of Drfrrnd Pavnieiils
76. I'fl'eet of legal i'l nder I aus ......
77. Coristitulion alily of I ecr.ij 'i'mdc r \ets
78. Delitor ( l.iss Injiind l>\ .111 .\ppreeiatiMg St.uidird
()t
6.-.
(it)
(if)
(18
CIIAPTIR \If.
srrn.v wr) di.mwm i\ lii.i, \ iiov to movky.
so. Prires D. p. nd Cpnii ||i, ^tone\ Matk.t
XL I't!!!!' of \!f.!:: I
8'.'. Distinction IMudu 1), Mn .iiid D.niand
fif)
711
7i
71
MONEY AM) BANKING
S.^. Tiirrr \';)rj( ties rif Money
'"^K I'iat \. Cr.'dit Momv
>^'>- Di'iiiaiKl (or .Muiicv Aiialvzcd
Sf). Hapiifity of ( irciil.itioii
X7. Krt'rct of I'opiil.ltioii
■■^N. V.tl'ivi of DiMsioil of l.;il,o|-
S.M. Sjiccial Dciiiaiul for (,,il,l
!"l. I'ayiiiiiit of ('ontracts
<M. Store of \-;,iiie
!»'-'. [riMriirity of Property and Coiitraets
.'):i. Spirial Demand for Money as a Store of \-al„e .
iH. Hoardinii"
!)a. Dei'liiie of Hoardinjx
06". Jiink Hes( r\(s not Hoards
,'>7. (io\ernni(nt Iloardino'
.'»N. Diseriininatioii in Demand for Money
!»<>. Seasonal Demand for Money
HID. Demand tor M.m.y in International Trade
nil. I'remiinn on Crold
ll'-;. Lneertainty of tlie Demand for Money
ill.'!. Snpply of Moi:ev
I'U. X'arielies of Tnitid States Mn?iev
11'.". Siipply of (,,,l,i " _
l"(i. I'.ietors in tl,e Snpply of C.old g.j
i"7. I'ecnliarity of tiie Snpply of i.old
!"''<■ Ul^torrell Illustrations
I"!'. ■|''iiip..rary Hesnits of ( jianp ,.f Mom y Supply .
ll'». ''I" i of Increased Supply of (, old Traerd Out .
'"• ' il"'l '" 111' I'fice-Haisinf; Klfeet of (,o!d
I I'-'. .\lt, rnali\e [Ms ,,( .\ , w (iold
I I.!. Widespread l.lleel of' \, w (,old
1 I I. ( nn.p.irison of Kileet of Incr. is, of Supply ol (.old and
I' a])' r Mom y
II.-.. ilo« Mueli Momy is Needed m a loiintry.*
Ilti. I'nee ( hantr>s not Sviielironons
117. Stiiiml.itin^- Kdret of Hisini: I'ru-i s
I I H. He.ielioii
I l<>. .Svvlnirv ,,«' I>>;
TACt.
7'-:'
7:i
I .''
71
7."i
7.''
7.">
7t)
7fi
. 7S
. 7S
• 7.<>
. 80
. 80
. 81
. 81
. 82
8'J
8,'{
8i
81.
8j
86
87
87
88
I'-'O. C'linuilativ, Ktle.t of i:(()noinie Torres
8.0
91
!)1
V^
CONTENTS
XI
cHArri.i} \iii.
'1 II KOI! V OF I'HICES.
1-21.
\2-2.
12; J.
12 K
1-2').
126.
127.
128.
1 29.
l.SO.
ISl.
132.
! -.i'.h
LSI.
135.
" Slinrt " Sales of Moiiry .
" Squcezi!if; tlic Shorts "...
Forced Selling
Peo|;le Heeoniing Better I'xliicatcd
Ciriier;il Price Level ....
Price 'r.iMes
M'lny ( oniiTioditie.s
Kxampie of I'riee T.ililc .
" W'eiglitiiig " of Price Tables .
Advaiit.ifies of Weiglitiiig .
Falkiier Price j'ahli' ....
High Prices During the Cnil War
I'oreigii Price Tallies ....
Kcmiomic I'orces to he Observed .
Saving and In\csting ....
CHAPTER IX.
DOMESTIC AM) rOKF.IC.N KXCH ANC.R.
136. Relation 15et\M(ti i'ori ign .-iiid Doniestic I'xch ing
I.S7. Paniients 1)\- Means of Credit Balances .
138. rnnction of the liatik in Making Paymciils
1.3f). Payments at a Distance
IK). Exch.'nge on New ^ Ork
IH. How the H.inks Handle New York I'xchangi
1 PJ. Setthinenl of .\ccoiints J^etween H.-nks .
1 t-.T. Cost of Ciirreiicy Shipments ....
IH-. Settlements 'I'hrongh the .*^ul)-tre isnries .
1 I,'). Rate ot' Ni \v ^ Ork Kxchange ....
1 16. .'^ignificanee of Rates o'' Domestic ]-,\eh,ingi
147. The ( ieiring House Principle
118. Settlmu; llilanees hv Cse of ( r.dit .
1 If), (iold the Internal Min.'il Medium
!,")(). |-'iinction of tlx' Dealer in F'onign I'.xclianui
\!t\, }■' \ ■ininlc of I''<irii<r.i ]' vi-jiMiiirc
1.VJ. Why Minker* ari^ \\'illirtg to Pur<'hise I nm^
iriii. l»rogress of Draft '
TAr.r
!)■'
!)()
!)7
97
97
98
99
100
100
lot
10()
107
109
Drifl
12
12
i;{
13
1 1
1:.
U)
18
19
21
2^
23
24
Xll
MONEY AM) BANKING
177.
178.
179.
180.
8i65
Xn LStockholdrr
PECTION
lai. Quotations for Forcifjii Exchange
1,)5. Tlir Pound Strrling
1^)6. Cost of Sliipping Gold
157- The Minimum Gohl Point for Sterling Exchange
158. Maximum Gold Point for Sterling Exeh,i
159- Wliv Sterling Exchange May Fall Below
160. The Gold Market . . . .
Ifil. Bank of France ....
162. Gold Shipments ....
16.3. Our Foreign Commerce
16 i. Invisible Items of Foreign Trade
16.5. Movements of Capital .
166. Interest and Dividend Payments to
167. Freight
168. Tourists
169. Foreign Exchange Market .
1 70. Explanation of Articles
171. Cables
17"-3. Varieties of Foreign Exchange .
17.S. Demand Sterling ....
171'. English Banking Customs .
175. Finance Bills
176. Profit on Finance Bills .
Foreign Department of a Bank
Traveler's Letters of Credit .
Ccinmereial Letters of Credit .
Buy'ng I-'oreign Exchange for In\
181. German and French Exchange .
182. Arbitrage
CHAPTER X
niMF.T.\LLISM
18;!.
isr..
186.
187.
ISS.
World's .'Jtock of (Jold .
History of the Precious Metal
Tlic I'riid.il Period .
Discovery of America .
t', tiect of Sdvor from America
Piiiti tallism Defined
estmen
t
PAOE
125
125
126
127
127
128
129
1 .'30
131
l.'U
I, 12
133
131.
131.
131.
135
13fi
136
138
138
1.3.9
110
141
113
I 15
Uf)
I 17
119
152
\5^
153
151
155 ^
155 '
156
CONTENTS xiii
BECTION p^^.j,
189. Difficulties of Bimct.-illism 157
19U. Adv.uit.igts of Biiiutallism 1 j8
191. The SiiifrJe Staiid;ird :58
192. E.irly Atltiiipts .'it Inriation I60
\i)'-i. Tile L.itin Uiiion KJO
191. IJtiiioiittization of Silver by the United States . . . nil
1!)5. Acts of 187S and 1S9() l(,o
196. British Indi.a aiid the Coinafre of Silver 1()3
197. Final Tailure of Bimetallism Itjl
CHAPTER XI.
HISTORY OF CANADIAN MONETARY SY.STEM.
198. Economic Situ ition in Canada After the Conquest . . I66
199. New England Traders \(](]
200. Financial Situation After the Conquest 1(J7
201. Early Exi)erinunts in .M.dia of Exchange .... 1(J8
202. Standard Currency of the Colony KJc)
203. Clianirrs in the Currency After 1783 170
201. Ditfieidty of Changing Practice 171
205. Act of 1808 I70
20C. Dual I'uiutions of the Early Canadian Merchant . . 173
207. Early Pealings in Foreign Exchange 173
208. War of 1S12 in Its Relation to Canadian Finance . .171
209. Attitude Toward Pa)'er Currency 17.5
210. Origin of the (in at Chartered Hanks I76
211. Alex.inder Hamilton's Principles .Adopted .... I76
212. Articles of .Assoeiatieiii I77
213. First 15aiiks of I'ppt r Canada 178
211. Atlinq)ts at Currency Reform 178
215. Result of Currency Reform 1 70
216. Exchange with the l'nit( d Kingdom 180
217. Canidian Curnriey in the Second Quarter of the Nine-
teenth Centurv 181
218. Variety of Coins Circulated 182
219. Can.idian Currency .\fter tlie Cnion of Cpper and Lower
Can.ida in ISH . let
220. Issue of Short Time (hu eminent Oehenture in 1 8 18 . 18 1
221. Crisis of 1857 185
I;
XIV
SECTION
2-23.
-2-25.
-2-21).
-2-27.
-22S.
PAOki !
169 .
. . 186
.
. . 186
.
. . 187
. . 189 ,
Notes
• ■ 190 \
.
. . 191
• •
. . 192
MONEY AND IJANKING
Early Attinipt at Government Note Issues
Mr. Gait's Plan
J'roviiK'ial Noti- Issues
Dominion Notts for Banking' Reserves
Later Legislation Concerning Dominion
R( suit of Sir Francis Hincks' Legislation.
Uniform Currency in Canada .
PAIIT II: BANKING.
CHAPTER XII.
NATURE OF CREDIT.
229. Origin and Kinds of Credits 193
2,J(). I'se of Credit in Industry igi'
2^1. Function of Conunercial Banking 195
-2'.'>2. Mortgages and Bonds 196
-2:>:i. Example of Timber Industry 196
-231. Advantages of Timber Bonds 198
23'). Interest Rates on Bonds 198
236. Long-tinu; Borrowing 199
237. Credit Economizes the Use of Gold 199
2.'i>S. Li(iuidation of Credit 200
239. Conunercial Paper Houses and the Credit Situation . . 201
2K). Use of Credit as a Medium of Exchange 202
2H. Bank Credit 202
ti2. 1)( posit Credit 203
'J 13. I'.lastieity of Dejiosit Credit 20t
2 11. (Jold Jie Basis for all Credit 205
'JLV Reserve 207
2 Ki. Eff- ct of Reserve Requirements 207
2 17. Danger of Use of Credit in Panics 208
218. Importance of Credit 209
CHAPTER XIII.
EFFF:( T OF (UFOIT ON' PRICES.
Q.tO rn/.r.-iKinrr Vi./I .-,( \fiir.. FitiiMciit \fnlifv , . , .211
250. EfTect of N
on-i ireu
lat
inff
dit
2T1
I
251. C:
•11. •
if Credit 21;
I
{ ONTKNIS
x\
How I.rss.ii(<] |)riii,ni(l tor Moiiry Caiisrs IJjm' m I'rir. s 'J 1 ;5
KtfVc't of Nilioiial IJ.iuk Xolcs -'■'
tlji IJalik Not
ts .■111(1 C'liccks
Dili'triiitiatrd
■Jl !•
l-'.ti'cct of (io\ rn
it ' rciiit Moiuv
ii,")(). CniiiL 111(1 S|)iciil.it
lOIl
II
ow Spcculatioii
Mav 15.- Both Cause and I'.lfcct ol a
Ri
sf in
i'rioi
!58. Dt'ffct of our (urritu-y Sysuin
^17
c HA I'll, u xi\'.
C.OVKUNMKM' Cli I'.DI f (THUKXCV.
2.")0. Cl.issiticatioii of (io\iriniun
t ( r.
( tii-rrli.-v
•2()0. I'iat M.
Drflllrd
i()l. r'actors Dtterniiniiifi
the N'.iliic of Crrdit Monry
'iti'J. Risk in Tree I'sc of Credit Money
t:6[i. Rcmil.ition of Credit Money ,
;l. DcNii
to M.aliit.aiii X'.ilue of Credit Money
•Jt;.).
(ioverniiH lit
C ridit not "Ideal Mo-v
2(ry. Diffieiiltie.s of Adjusting Siii>])ly
l67. Prejudices Ag.iinst Cio'x
1861
2()8. l"inanein<
rnmeii
t Cr((lit Monev R
tlie Civil
W;
t2()!). Disadv.ant.ige of (io\ ( riiinent Diht
270. {ioverillliellt Delit
271. Demand Debts a
W'eaknes.s
l~2. Provisions
for Rdirini
Debt
2 '20
220
221
!2 1.
22()
226
22 S
229
( HAPTKU XV.
ECONOMIC 1 INCHON OF Till: HAN
27.'1. Produeti - Industries Clissili
d
271. IJee.iiii
tul.itiou of I'und.iiiient.il Priiieiples
Cr< (lit
27(i. H
Dealer in Credits
Ranks ."^iijiply a Medinni of I'.x
eli.antie
278. R.ankiiiii is ;i (Juasi-l'ublie I'unetion
27!). Tlie Hank .a Distributor of C-iiit.al
280. Bankin-i Prineii'lc
231
232
2.S3
2.S3
23:>
23.^
230
237
XVI
.M()M:V AM) r.ANKING
SECTION
'281. Ddiililc I'liiicticiri ol' ( nimnt rci.il li.iiik.s
'28-2. P.ciili.ir I'rivih lie of ISuikt rs .
28a. H.iiiks Do Not Crcitr Capital .
'281. Source of Capital and Credit of Hank
'■28'). Opirations of ;i Hank
i28(). Hesponsiliility of the Hanker for i'ropi r I )i>>tril)ution of
'287
'2 1-2
2 i;i
2H.
Capital -2l\
CHAI'TKH XVI.
ni:r()SiT cckkkncv.
of Credit 21S
287. Anal_
'288. How Credit Promotes Iridiislry ....
■28f). Hanks Create Credits
"290. Hank Credit {'referable to Cash ....
2<)1. Sliiftinii of JJank Credit \\'ithoiit I.itjuidatioii
'2<)2. Similarity of Checks and J5ank Nott s .
2f).S. Limits of Karninj.; 1N)\V( r of the Hank .
291'. Ditference Hetween a Casii atul Cn dit Loan .
29;"). Cash a Precious Commodity at Times .
2!K). Prohlem of the Reser\ e of (ireatcst Importance
297- Lack of Co()|)( ration Causes Hanks to Lose Ilcserv
298. .Methods of Incr<asiiisr Reserves .
299- Secondary Reserve
.'5()(). L'nrcliahility of Hoiids as Reserves
301. Government Deposits ....
2t9
2 H)
2.-) 1
2r)l
2."). '5
25, -5
2.^i
2:) t
2.->()
2.-. 7
257
258
259
259
CH.VPTF.R XVIL
BANK ST A ri-.M FAT -- R ESOURCES
Coiiiliined Stall iiient
.'5(12. Comliined Stati iiient 2()()
,'!().'). Proof' of the D( posit Currency Theory 2()1
'MM. Douhle-Kntry System 21)2
.'i()5. .Mteralions in \' due of Resources 21).'l
;i()(i. Concealed Assets 2(i t
.'i07. Loans .and Discounts 2f) t
:i(i8. Overdrafts 2^5
.i(>9- I nited States Bonds to Secure Circulation .... 2()()
31U. rnitrd States Honds to Secure I'mtfd Stil,s Dt i)osits 2f)6
CUNTKN'rS
Wll
SECTION
till. L'liilid M.iti > Hdiuis (III H.iml .
yi'2. I'n iiiiiim^ oil L iiittd Sl.itis lioiitls .
,'11 ;i. 15(iii(l.s, Sii'iiritit .s. ttf
M k Hanking ilimsc I'uniiturf and I'ixtiiri-s
;;:,'). OtlkT lU:i\ Kstatc lldUiiiigs .
;il(). Due I'roni National Hanks ....
;il7. Due I'roiu .Vpiirovrd Hcsirvi' .\j;;'nts
;il8. (lucks and Olhrr Cash I Uiiis ~ - Kxcli
C'ltarint;- Houst-
:'<][). Hills of OtliLi- Nalional Banks .
.S'.iO. Lfgal '!'( lidir Notes
;i'21. Ucd; inptioii I'lind
'3'i:i. Due From the rniliil States Treasury
mg
tor
fA8E
'^liO
'itjtj
-Z61
^2(J7
^ti7
iitJS
■269
^269
269
!i70
( IIAI'TKK XVIII.
HANK S1AT1::.MENT — I.IABII.IT
323. C'a])ital .Stock Paid In .
321. Doiihle I.ialiiiity of Stoekliolders .
3-'.-). Surplus ImuuI
326. L'ndivid.d I'roHts
327. National Hank Notes «. mdiiig .
328. St ite Hank Notes Oiii aiding .
32!K lndi\itlual Deposits ....
330. I'nited States I)e))osits and Deposits
Dislnirsing Ottieers ....
331. Honds Horrowiil
.332. Notes and Hills Ketliseountt d .
333. Hills I'ayaln.'
331. Certitied Cheek
335. C'asiiit r's Cheeks Or.lstaniling .
lES.
of Li
ted S
271
272
273
itcS
275
276
276
177
278
278
278
( HAPTKR XIX.
OltC. AM/. XTION AND lUSlN KS.S OF THE HANK.
336 National Hanks
337. .Slate Hanks .
,33H. Private Hanks
339. I'lidi rw riting
. 280
. 280
. 280
. 281
XVUl
MONEY -vM) UANKINC.
SECTION
340. 'I'rust C ouip.iiiit s
311. li.iiikiii'i- Dcpartiiiriit ....
.'i t'2. Deposits (if Trust (iiinpaiiifs .
.'U;i. 'rnist 1)( pirliiit lit
'Ml. I"iii\iiliial Trusts
y !-,">. Corpdrati' Trusts
;i Ki. Sa\ iiij^s IJaiiks
;i t7- I'Ik' Orjiaiiizatioii (»!' a IJaiik .
.'i 18. Kvolutioii of tlie Bank ....
3\[). .Stocklioldrrs
3:'>0. Directors
351. C'oiisidtr.atioiis (io\ friiinjr C'hoii'f of
3.VJ. Brl;;<rs y. Spiuldiiiij ....
35.'^. Ignorance No I'.xrusc ....
,'i,") t. Supplt innitary I'.xaiiiiiiatioiis Ncctssa
;{,"),"). Opinion of Coil ;itroIl< r Uicitftly .
3,')(). The I'rtsidfiit
3.")7. 'I'Ik' Cashier
3,")8. Payiiio- Teller
3,-)!). Kecei\ing Teller
3()0. Note Teller
3()1. Diseouiil Clerk
S(r2. 15ookkee])iii<i; Department .
3()3. Laws Helatiiiji to ( ollietions .
3b"l-. I.iahility of Colhet iii};- 15ank .
ti6'). Colli etioli of Out of Town Clucks
366. KMn-lish Method ')f Country Colltcti.-
)ire
PAGE
etor
•J 8 3
'J 8 3
-J8 1-
'J8f
-28")
-2H6
'JH()
28(j
'.i87
'288
290
'2!)1
2 in
i2!)-2
•293
-2[r.i
'2JH
'2!)")
•2!»;->
29()
29(J
297
-299
300
301
CII.M'TKK XX.
nr.po.siis AND DKi'osirous
S()7. General Deposits
3f)8. Sjieeial Dejjosits
36'9. Safety Deposit \ lults
370. IiidiieeiiK iits to Depositors ....
371. Dittieulties in Kstaiilisliiiiii- a New Hank
."i (' c. > .iiu< oi .1 ij.tiiiviii:^ V .iriiiei'ii.Mi
37.'". Kiteiiit; Cheeks and Drafts .
37t- .Method of " Kiteiii;:; "
SOS
303
301-
3()t
3()()
3 Ob
307
307
CONTENTS
MX
J I s,
379.
380.
381.
383.
38t.
385.
38(i.
387.
388.
389.
3yo.
Ucasoiiabk
Title to Dt-pusittd Clit'cks, etc
Case of lJi>[)iited Owiursliip to Deposited Check .
Accepting Deposits when Insolvent is Criminal .
Drawer Released from Responsibility After
Time
I.oeal Hanks
Holder of a Check Cannot Sue Bank .
Revocation
Insuthcient Funds
Forgeries
l',)st-Dating
391.
39'-'.
393.
391.
393.
39tJ.
3!)7.
398.
399.
400.
401.
40^2.
40.S.
404.
40r).
-l!!!".
407.
408.
Set-Ot»"
Wlun a Deiuteitor Fails, His Note Not Being Secured
Advantage to Depositor . . . •
Sel-Olf Makes Failures Appear Worse
Illustration
Form of Note
( HAFTER XXI.
LOANS Ol' THK BANK.
Two Qualities :>ecessary to the Making of ii Banker . .
In.estmeiit Loans
Conditions Cnder Which They Are Good Banking Loans
Industri.il Loans
Capital Loans
Capital Should Come From Stock and Bond
Mortgage Loans
Loans Reported to the Comptroller
Demand Lo.ins Have Increased .
Double-Name Paper ....
Single-Name and Brokers' Paper .
Judgment Note
Collateral Note
Risk in Collateral Loans .
L'sury Laws
('.•ill I.O.'VilS F.X'UOlt' d ....
Loans on Open Book .Vci'ounts .
i'roN iding Tt niporary Capital
308
308
309
309
310
310
310
311
311
311
312
312
312
313
, 813
. 313
ssues
315
315
316
316
318
318
319
320
321
321
321
323
323
324
325
826
327
327
XX
MO\i:V AM) HANKING
SECTIu
till).
I 111.
111.
II -J.
11,'{.
n I.
iir,.
U().
H7.
118.
1 •>' 1 .
( il.Vl' 1 i.u XXIf.
LOASS .\C.\lSSi COl.I. \ ri.K \I,.
I
('oll.it. r,;l ('(,r H-tiik I.o.nis
.Mtrc!i;iii!Jis, .-IS Coll-itir.-.l
A(l\;int,ii;( ^ (if (ioixl W;irrlu>u-,inir l.,,\vs
l.o-iiis nil M, r.-|],in(liM- a I.ciiitiinat, riuuln.ii (,t' Hank
.'■^tatciiK lit (if a Hank i'n si(i( nt
i.;i\v ul' Wari'liousc Hi ci ipts
I'liiroriii I. aw
Iii>k !n\ol\((i ill l.o.'iii-, nil WarrlHuiNf Ut-cti])t^)
(ndrr til,- I'r, s, nt Law
I^MK- lit 1{( ,', ;pts SaiVgiianlcd
Proltctioii ti) H.)1(1(TS of !{rc.i|)ts
(iarnislimciil iidt Allciu, d
I'.nalfy for l!l.n-,-iI I'm- of Hr(Ti|i!s
Transirr of Tijlc to [.nuliT ....
PAGH
329
330
;;;)()
33 1
332
332
333
333
33 i
331.
335
335
336
'HAITI. H Will.
CHKD.'T 1)1 1' AH r.xilAl ol \ UWK.
lAolutiiiii of till' ( rrdit i Jcp.irtliiriit
Sources of Crulit information .
(in (lit .Vgfiifit'.s
Dtitii s of Ol (iit Mm
1 lif t oiijiiuii lal .Noll -Hroki 1- .
C'lian^f in the Hii>sintss ....
Dtinaiul 111(1 Supply ol' (. oiinncrtial
Arc.i.s of Hifili and Low li.itts .
IJisi'ounl OliVr by Dtahr .
Crtdits
Size of Nottb
cii.M'r. u x.\i\ .
Hisroiiv Ol iswmm; i\ iiii.; rxiTF.n states.
••.'51. ( li.iraitt listii's of Karly Haiikinjr
••35. Rcl.itior's witli Govtrnnitnt
i36. Historical IN rjuds
437. Some Ivirlv Banks .
1,';!.
I'J r.
IJ."-.
i2C,.
■128.
^29.
rjo.
13 1 .
4.'3ii.
•1.33.
337
337
339
340
341
311
312
343
343
.•J4 •
Sir,
347
347
3iS
348
CONTENTS
-\.\i
kSS. I.mni.ip; nn B.ink Stock .
4,'jy. First U.'iiik of the I'mUd Stntrs
■1- K). Success of the !■ irst H.iiii\ .
111. ()|)))ositioii to Uicliartrr
ItJ. Second Hank of tile United Slat
}-l.'l. li((li niplion of Notes in Specie
ill. Misniana^eiiicnt of the Hank .
It."). .Jackson Opposed to tlii- Hank .
IK). State H.mkinp;
11-7. Siirtolk Bank System . .
•IIS. \<\v York .*^ysleins ....
ll-.O. Safety I'und System ...
450. Hond Deposit System ...
451. M istakes of tlie System ...
4.")2. I'"ree HankiTijj; .Systriu ...
4.5.S. Kxperienee in Otiier . States .
454. Indiana and ()liio ....
(ilAl'IIR \\
XATIOXAI. HANKlMi
455. The Xational Hank A<l . . .
4,")f). Alaikrt for rn.trd Stat.s Honds
457. Early History ot tlic Act .
458. ('om|)tr(dler ol the ('nrrenc\' .
45i). Sumiiiary ol Nation d Hank A't
4(j(). Circniatini; Notis ....
Itil. Jleserve Id ciuin ments of Nationa
W
.S^STK.M.
H ink Act
PA'.E
34!)
.•550
;551
352
•M,:i
:',r, 1-
.'i5()
.■^57
359
359
359
3fiO
.i()l
3().S
363
365
3f)()
366
367
;!o7
3(19
370
(ilAI'llH X.Wl.
I'RKSKXT ( (»X|)| IKiNS (M l!.\XKIX(; IX Till: rMTF.I) STATKS.
Ki'2. Tlu' l)(M !n|)!iieiit of H.ink Deposit ('nrniie\ .'>7I
Hi3. I.iinitalioii of Di posit Ctirrciicy .■i7'..'
[•■K Srasunal Demands ... .37.3
4t!5. Drplelioti of Rc*crvcii .37 !■
4tit>. Aldricli-Vrcdand .\ct 175
407. hi" lasticitv ^7 '<
4»!8. Expansion of Hank Circulation S78
XXII
.MOM.Y .\M) BANKINC
SECTMN
l-fi!*. Lack of L'nity in Our Svstmi
•J-Tll. Sa\iiii,r.s Hanks ....
•1-71. I'ostal Savings H;uiks .
•i7ii. Gliar.'iittc of IJaiik Deposits
PAGF
.'^77
377
378
:^78
( IIAI'II.H X.WII.
RELATION- OF HANKS TO WALL STULET.
i7.'i. \Iark<t for S. ciiritiis in tlic Liiitrd States .
47L V\ orkiny: ( a|>ital of Dralirs in S'c'uritifs .
i7.-|. Di tails of Ihr Coll.it.ral Loin
47(». ( rrliticatioii
477. Ii( striclions on Collateral ...
47S. C-ill Loan ILite
l-7i). Hespoiisiljijities of tile Loin ( lerk
180, Un(Jig)ste(l Seeiirili.s
tSl. (lose Helaliun Hetween Hi serves ami I'riees
iS-i. I'iaii f,.r IteniedyiniT the Dangir ;ii Hidejiosit iiig l{i
scrvts
48;?. (dnmiercial Hanks
48i. L'inaiifial B.iiiks
381
382
383
383
38i
381.
38.>
385
386
387
387
388
1
( li Al'Il'li XWfFL
nVNKS \NI) llli; t NlfKI) SI Nil's TULXSIHY.
!Sa. fiesponsiliilily ol t lie S( creta r_\ of I lie 'rreasiirv
f-'li. 'I'reasiiry ( aiisi s St riiii^iaicirs
187. I>eteeliM ( iiiTi ne\ Laws ....
INS. I .\p( (ill Ills of tlie .^lerefirv
3!)l
393
303
( lL\i'll,|{ XXIX.
I.I KOIM, \N UANKIVO SY.STKMS.
IN'). Hink of Lnpl/in.l
I!»''. !)e\elopmi lit of l|„ I s, of CliK-ks
1!)!. B.-uik All ot isi 1
l!l'2. (h.-ir/icter of Hank ol i.nul.in.l Vote . .
ViA. Tlii H.iiik .if i'.Mnrtn.} I>ri\,iie
IfU I'AMking in France
3<).-.
3!)fi
3!)8
3f)n
400
40 J
CONTENTS
xxm
BECTION
■Hj't. Bank of France
49(i. Deposit Currency Little Used .
■l[}~. Asset Currency
H)8. Braiielics
4!)f>. Imperial Bank of Germany
:aH). Intluenee of (ioverniiient
501. Mod. led on Bank of England .
5U:J. Reserves
rAOB
402
403
4U3
401
406
406
407
407
•OOS.
r,oi.
505.
r>oC).
.lOT.
.'508.
:)()!!.
r,\u.
r. 11 .
:.i'2.
r.i.i.
:^ii i.
516.
517.
r.is.
51!).
520.
CHAPTER XXX.
CANAUI.W BANKING SYSTEM.
Origin of Banking in Canad.i .
The Substruction of tlie Canadian Baiikin
Revision of tiie (ieneral Banking Mcasur
Incorporation of Banks
Tlu- Branch Bank System ....
Conditions of Note Issue ....
Canadian Bank Notes Based on Counnerci
Tiu' Ct nlral (iold Riserves ....
Security of Note Issues ....
Reserves I'ixed liy Eacii Bank .
Reserves Conipostd of I'our Elements
Call l.oa.is
Investiii''nt Securities
Loans to Manufacturi rs. Wli.ilesalers aiu
Internal Bank Inspection .
Bank I'.iilures in Canad.i .
Shareiiohiers' .\udil ....
Canadian Bankers' Association .
. •
.
. 409
ig System .
. 410
c of 1871 .
. 416
. 416
■ • •
. 417
• • »
. 41!>
Mai Assc
ts
. 419
. 420
. 42. ■<
^ ,
. 424
•
. 426
. . 427
^ ,
. . 428
d l"arin(
rs
. . 428
. . 4";
. . 4;i:!
. . 4:t6
. . 4 .'58
521.
522.
523.
524.
5 2. I.
CIIA^TIK XXXI.
CANADIAN nVNKlNf; I'KOIU.KMS.
Brnnch Banks and tti«- local ( oiniiiunity .
Concentr.ition i>f Hcs.tvi s in Br, inch Banks
Numher of Banks to Population .
!'>.-■;•.:■.•-;■! C'.!rr".'!!£ V >!• C.'ltl.'ld.! ....
* *' i ' "~ -
Criticism "f Bank Not. Issu.s .
439
441
442
443
VV6
MOXEY AND liASKlSG
SECTIO!*
5'.>(i. Profits on T?a,.k-\ot,- Issurs
5'J7. ExcTssiv Surplus ,„• Rr.t Tunds . Jm
■V-'8. Profits of tl..- (■.•u,,-uiia„ Banks ...'■"■■ [r^
^-^9. Hank .M.rp rs an.l Anial;ra„,ations ..'.'.'"" .^^^^■
•^■i". Hranclirs in ]nni-n Countries ...."' 4^^
•■'■'l- (ail Loans in \( w '^'ork !
•'•'-• '. all Loans in ( anad a ...
•'•'■■'• '■"'"•" '•"i"^' ""i I'roniotion of Corpojations ' ' 'tJ,
.'■».'M-. Loans t,, Dirrctors " ' " '.
5.'ia. Hanks an.! tlu Trust Con.i)ani,s . ^^^
r>:Hi. Intrr.sl Cliar-rs in tiio W.st .'
r>:'7. Hanks ,,f .Suiall C.ipital !!,
.'■>.•!«. Intrr.st on D.posits . . . ,' * L'^
.''•'i.O. FinanciriiT tli.' Crops ....*.' ^i!
r-M. .Mo\in« til,' Western Wheat Crop . • ' ! ' ' ' 4-1,
r>il. (^^'ommereial L.tters of Credit in Canada . .' * ' '.jl-
.'"'I-'. Cinadian Clearin^r 11,, rises . . ••••/(
480
CFLM'TLH X. '
TFIK n.WKS AM) THK .,/Vi' "{NMK.nt.
.'iLS. flovennnrnt Ndt.- Issu<'s
r>n. T.-ixinir tlie Hanks * '
M.-,. Montldy Statements to ti.e Government . . " \i)„
."•K.. flovernnient Postal and Savin-s Hanks ..." * ' ^qr,
.'ii:. C|„aper Affrieiilfnral Credit ' tqs
r>i>i. Co-operative Cndit SoeieH.s .... " " /'
MONEY AND BANKING
PART I: MONEY
CllAPTKR I
FUNDAMKNTAL ECONOMIC CONCEPTS
1. Reasons for Uic stiul// of inonri/ and Ixiiikiu^. —
The study i»t' iiioiua'. I'unriu'y and hankiiio' is iieccssary
to every person who desires a thorou^h<^'oing knowledn-e
oi' business. Kvery one who has to deal with prices,
w hetlier he be a prochieer or a eonsuiner. a working- man
seHin<i' his ser\ iees or a capitahst neeivinj^' interest on
his investnient'^, in order to oonthiet liis atVaii's intelh-
yently must understand llic forees alfeelinu- |)i-iees of
tlie commoihties or the services in whieli he is inter-
este(k Kvery Ihietuation of price allVcts the welfare
oC everv person who buys or sells, and the ability to
I'oresee these thietiialions enables the business man to
avoid loss and ^ain profits.
The s('<n('e ol' money and l)ankin,n- deals v\i'h jjriees.
and attempts to explain thiir tluetuations so I'ar as the
cause of tin sc tluetuations is due to ehauHes in the con-
ditions of currency and hanking-. TIk inlhienee of eur-
rciK-y and bankin<4' upon prices is much moi-e unporlaMl
than is gciKM'ally supposed.
Kverv brsincss man miderstands tiic Ihieiuaiinns of
tli.ii .ii-j. !.!',,!!"ht ;!b'-i!!! !.'\' alt( ratiiu's in the siiiiiijv"
price t!
of or the demand for commodities or services.
VII— I 1
II<
a MO.NKV AM) l$A.\JvlN(;
knou s when five nun arc hi,l(li„o- f,„. „Me article that the
price will o,, up, and that wlien five sellers arc ()frerin<r
their goods to one man the price is hkclv to o„ do^^n
He is not hkely to u-iderstand. however/ how prices in
general nuiy g,. up in conse(]uence of a new (hscovery
"f gold m the Klondike or an increase in the amount oV
I'ank crc.ht outstanding, ^'et these hitter forces are
.inst as pofrnt. and even more enduring, than the former
in affecting jxiccs.
To offset the enormous (himage chargeahle against
the panic of 1!)()7. mc must place on the cre.h't side of
the account an item whose importance is hecomin-.' more
and more apparent. This item is the education")!' the
Anuncan business man in the science of currencv and
l>anku,g. at least to the extent that he appreciates as
never hefore the relation between a defective currency
system and his own prosperity. lU feels that much of
the loss and suffering of that .lisastcr was unnecessarv,
'••"! that m tlu^ luture the severitv of panics mav be
consi(leral)|y mitigated.
U an architect should plan the construction of a
l>nd(hng which collapsed in the first severe storm he
would probably be lu Id for criminal neglect in .jisre-
.uanhng the ja,vs and principles <d' sc, ntific cnstnic-
f'<".. Shouhl not the architects of our currencv a,.d
''■Hiking systems be held e.,ually responsible for (he i„l-
lapse ..f their structures when they have .lisregarded
scieiitdic i)riri(iplc.s clearly established:'
The study of the science of eurrencv and bankin- is
"<'l o,dy obligatory upon the archit.rts ,,r ,,nr rnnu..t"rv
system, but it is also profitable tr, those who must adap't
their business to existing sysleTus. I f the system is de-
'.'"'■ "'''■• ■■'''"'' '^fiow ]),,n iu escape Uu' eoiise(|uences
ol such defect.s; they must know enough to move out (.f
1 r\i).\.Mi:N'r.\L i'conomic c()N( i:i"rs
the huildiiii^' when the iirst cracks appeal" in the walls,
or when evidences of a storm are manifest.
2. ]\'(inihti::s of Ihc IHu; jxinic. — During- the winter
of 1I)()() and tlie snmmer ol' liU)7 the economists and
stndents of finance had sent out hulh ins of warnini>'
and displaye(' storm signals of the ap])roachirii4' lroul)lc.
'I'he intelhu'ent na\ iyator of husiness craft who could
undci'stand the siwiiifieance of these si^iials sailed close
to the shoi'c or kc|)t in poi't. while the iieedless and igno-
rant put np full sail to take adxanta^e of the hi'ceze of
prospi'rily. and found themselves cau<4ht iiiun\ares iu
the s(]uall of Octoher.
'.i. SciciiCL'. — Science is the stud\- of tlie I'elation of
cause and efl'ect. Man has an inhorn curiosity to know
(he reason foi- thin<4s. in oi'dei- that he may he master of
his cnxironment and that lie may know how to produce
desired effects through his jjowir o\ei" the causes pro-
(hicini>' those effects. 'I'henl'ore. our ultimate aim in
Situdyin^- the sciince to which \sc \vd\v addi'csscd our-
selves is to he ahli' to make use ol' such knowledn'c in
increasing' our husiness efhciency. and a\()idin<.i' waste
of' elfoi't in materials thiou.uh iynorance.
Money and Hanking' is a pai't of the scitrice of finance,
which in tui-n is one o\' the hranches of the more ^^cni'i'al
suhjeet of I'A'onomics or political economy.
1-. Finniicc. Political Kcon<tmy is the science of
husiness: that is to say. the science of the relations of
men with each other in the jjroduction. consumj)tion.
distrihution and exchanu'c of uoods. l*'inaiu'e. one of
llie sididiv isions of llie lieid of economics, deals with
conlrol of property, (sp(ci;dly with that form of |)rop-
ei'ly which economists c.dl the production aoods. '. c.
land, natural resources, factories, ra.ilroads, machinery,
etc. Control of property is attained tin"ou<ih chan^'es
!
i
MOWS AMI llANKix,;
."' ""',"■"'' '"• i'"-«-M.,„ „r II,, i,ij,,|,„t ..moi,,K-v
'", '''■'"''"■'"■" « I»- l'"'»"cr. thc,vr„rc, is a s,.!,,,,',
"Im-I, t,-,.ls „r II,.. .«c„,l,li„«- a,„I ,„„„aKc.,„.nt „f c,-,,,-
' "I. .-."Htl,,. I, ,■,,,;,, ,1,, |,,.,,,,,|,,t ,,,,,^, it„|,„jj^^
"' !■<■ "rH,.., Is ,„„| ,„.s„,,„„.„,s „s..,| „„.c,ssan- t„ tl,is
;■'"'; '""7 ""■''"'"'"■ ■""■'<>■ '" m,ki„K. M ■„,,. ,„„,
';"''^"'«-''" "lilii'iMsIr .■nts,„„l,„..fh„,ls.tl,;,„„,|,
'"■ ..«v,„-.v „r ulnH, II,.- ..x,.l,a„,„,, ,„• ,„,,,,,,,,, ,„. ;;„
l-.Hls ,s a,v,„„,,I,sl,..,|. Tl,..„m,„„|,.„|,i,,,„|.;,|||,„,..
"" ''■ '"" l""''"<'f '■■ ll'^' .■"„s,„„..,.s. Wealth i,
"';■. f'"'™ *;■'■ I"'-'' -'-I'"!-- ^.n ,„at,,-ial tl,i„„s
tl - tl„„«.s „|„..|, „„,,„, H,c. .,„alilv ,,,ll.,| „tililv
» "c . ,s .,,,,lv ,1,.. p„^^^^^^^
' < > .;.■ „„l„-,,-lly. In .ml.T In ,.,.,,,tr Ihis .|„ali,v „f
;;'''''>,;■' '''^''7';'''|"''«-fisM,.,.ssa,,v -i,,,! „,.,;,
t V U „.s: lal,.„. „at,„,.l ,.., -.vs. a,.! ..a„rial :.„„|,
1 l"s la t,,. t.™, ,„..i„,U, all tl,.. a,-tili..iai i„sl „„ic;ts „f
;"■"''"'"■;";-■- l."il.li..«.. ,-ailn,a,l.s-„hie|, l,a
.-.. Ta-I,„„hg,i ,„„J 7.„.v;„,-.v,v.~ I„ ,,.,;,.,- <.nlcrp,-ise
'-:•■ -\t"" ''-'"-t -1.- ti-t is. a t,,.i,,,ical ,U
-- -k. Tl... ,„a„„ra,„„.,,. ,„„.| ,„„ „„,, ,,„,,
; '' 'f^- "'^ •'"■ ''-^t ""'l-ls ".1.1 l"-.K.c.ss,..s r,,;. tun,.
-K "..t h.s ,n„l„.,, I,„M,, „,„s| k„„„. l„„v t ,,,,
'"•■' .na s |,„... |„s ,al..„, ,,,,„, „„, ■ „,,^, , .^
ilJI.I sell |„s |in„|ii,.|. >^.i|MUH
"■■•■"""""'■■. has ,„,tl,i,,o. I., .,,,,;,,,, I,, |,.,.|,,,,_.^,,
.' '"•'"'«■ I"' -il,„aon..„i|,„,, ■„,ll,,h,.<.„„stmo-
";.i"l...a..h,n.. i„,„a„,„a,.„„i„„.. ft ,.„„fi,„.s ils"
■|"c,.v t„ u,, si,„iv ,„ II,, ,„.„,„„.ali„„ „„,| ,,|ali„„;„r
"'^' ""'"■ '''^''o'-^ "'■ l""'l"<'<i"M. Ia,i.h nal,„„| ,.,s,„„.J,
(
FrNDAMKNTAL i:(()N\).MI( (ONC Kl'TS r>
and capital o()()(ls. If cxcrybody {)ro\i(lc(l I'or his own
wants first, hy ])r()(luciii^' what he coiisuincd, there
would l)e no such tiling as husiness and eeononiies.
IkisiiRss he<^ins the moment one peivson prodnees some-
thing- for another hut de|)ends upon another to supply
him hy exchange with the things he needs. Since i)rac-
tlcallv nohodv is economicallv self-sutlicient in these
days, cveryhody is concerntd w ith husiness jji-ohlems.
0. liitsi>i('ss iJic rcsidf of spccudrjiiUni of labor. —
This fact of the uni\ crsal division of lahor or specializa-
tion of lahor is the vei'v foundation of our eeononiic sys-
tem. The ])rocedure of a modern man in supplying- ifis
wants is \ery indirect. If he hasn't some already, his
first move is to supi)ly himself with money which he ex-
chanyes for the ^fjods ^ith the merciiant. The mer-
chant has previously ac<|uired the ^oods in a roundahout
May tln-ouoh the channels of trade from the ])i-()ducei's.
The producers ai'c organizations of men who take the
material.-, fi'om their natural state and work them up
into finished ^'oods capahle of satisfying- human wants.
The work of the world, in which we ohscrve nearly
e\ cryhody so I)usily cn<>'a,i;ed. is ])i'0(hiction. Sometimes
it re(iuires very close anal\sis to discowi- how some
occupations assist in ])repariny noods foi- eonsumj)ti<)n
and use. At fii'st siyiit such occupations as l)aid-:in_u'.
hrokera^c, accountiiif^-, etc.. st'cm to haxc little to do
Avith the production of <^()ods. and yet as we shall see
Curthei- on, they arc as neccssai'v and elfective to this
end as aoriculture and inanufacturin<i-.
7. Product hill. — To create the greatest utility in
;4oods that Is. to <x.'vv them tlu- maximum powci- to sat-
isfv liuman wants, thcx- nmst he oixcn th.e nroiirr fonn:
they must he ready foi' consumption at the ])i-oper time
and in the pi'oj)er ])lacc; and lastly they must he in
6
the
M()M;v AM) B.WKlSa
:.^::^::;;;;:;::;:;:::;t:;';:,tr''-'''' "-
;;■'-■ ^-K' to „,,.,H,..,.,,,,,i,,,,,,-;,;;:;;-;;;>""^;^-.n
P^'-sons maU. utility just -is in.lv n '"""• "'^■^^'
>;''^"'^ '■""'^■••<'>-tIuM,uniuradMrer.
"i.y-. Cnd
money and hank-
'" *''^' amount <./• utihfv -f i' r ""'"'^
<IIMII\ at IIS ( isiKwi TI '
tHH, c,l- exc-han-.e is reh,fiv< K- ' , '"^;*''- ' '"^ "P^'ni-
"-Ha ,'.,,17: ^'.';: :'■■','';";'.''- '"'■''-■"•'■"■"piish-
vicvs. ' ■"■'""""■"■• iiii.i ii,j.viij,,,,s iIl-
I
FUNHAMKNT.VL ECONOMIC CONCEPTS 7
All our modem material civilization is practically due
to the extension of the principle oi" the division of labor.
It is only Mithin the last century or two that the whole
])opulation is ennaurd in producin<r things which they
do not intend to consume. The enormous increase in
elHcieney of this method over the methotl of each ])r()-
duciiio- for himself is instantly a])parent when we reflect
on what portion of the wealth which we consume daily
woukl he ours if we were ohliued to produce it hy our
own unaided eiforts. Now this whole system of divi-
sion of labor depends upon the exchange of uoods.
The products must find the consumers, and this involves
from one to one hundred chani>'t's of ownershij). There-
fore we see that our modern civilization has been de-
pendent upon the growth of commerce, and future
developments in the division of labor will depend upon
tiie facility with which its various classes of conmiodities
can be exchanged.
9. Tardji recognition of value of iwchnngc. — It is a
curious fact that this most vital ])art of civilization and
commerce, money and banking, has not been understood
and ai)preciated until recent times. A few centuries
ago, the merchant was regarded with susjjicion and
})laced not far above the thief in the social scale. Tiie
luerchant who bought an article for $1 and sold it for
$E.)0 was thought to have robbed the purchaser of .)()
cents. The banker who loaned money at interest vio-
lated one of the laws of the church which forbade taking
of usury, as interest was called at that time. Tt is
oidy in very recent times that the ])ersons who perform
this most vital economic function of exchange -the
bankers, financiers, brokers and merchants — have been
understood and a])])reciated, and even yet we find the
medieval idea still j)revalent among a large class of peo-
-Hon :.:::: rr^-:;:::;: ••:,['";:'-■■■-" '-^-
"■Iv. ir uc t-.k-,. ., ' ''"'''"' Pn>atu |,ro,.
an,l „tili.„ti, !• ' , ■ •" ^"•'"■'' *!«■ I>"«rv.li.,„
'■'"'•i'"" ..(■ llUM,-m ,.,,.'',•' "I"'i""-"t'>l-tl..- lull
I>er.s,>„ Is „c.,ltl,v. „e nn.,,, tl,-,t I "" "">■ "
--.''■™ii';;:;;i;,:';f:^ rT"'"-^- ""^^'""' - "-»>■
"r'- -■-'"; ::^:"..:n::'':: ;::::;;:::■-
'" "■"""""'■ s.rvice of the uier-
1
f
FUNDAMEXTAr lUOXO.MIC {()N( r.I'TS
I
sliarc of c()r[)()rati()n stock is a claim to a certain portion
of tlic cariiiii<^'s ol' a coi-poration set aside by the direc-
tors as a\ailal)le for dividends, and in case ol' llie dis-
solution of the corj)oration, to a portion of the assets.
A I'nited States note or <^reenhack is sini|)ly an evi-
(K ice of a claim against the (io\ernment for payment
ot' a certain number of dollars on demand. The fact
that it is readily accepted by evciybody in exch'ui^e for
wealth does not make it real wealth.
A ^'old coin is ..al wealth to the extent to which the
meta. it contains has utility. In the case of all the
other forms of money we are con {'routed with a prob-
kin whether to classify them as real or rej)resentative
wealth. Money undoubtedly has an indirect uHlity in
so far as it assists in ])i-oduction, and would seem to ^o
alon^- in the same cate<.>;oi'v as railroad cars, wiiich in-
crease the utility of noods by niovino- them from place
to })lace — money increases the utility of goods by mov-
ing them from owner to owner.
\\'e have seen how the division of labor, where nearly
everything is the subject of pi'ivate property, recjuires
continual excjianging of wealth in order that it mav
.'ome under cr-itrol of the ])erson.s wlio can best utilize
it. There is another conseciuence of tbe division of
labor: It re(juires that the factors of ])roduction l.e
organized in great groups, in order to be most effec-
tively utilized.
As the result of this tendency, we have tbe United
States Steel Corporation, with its 1.50.000 men working
with a billion dollars' worth of natural resources and
ca|)ital goods, and with the ])roduction of iron and
steel. This grouping together of a large number of
industries. (M-iginally indej)endent and sepai'ate, has
eliminated a vast num))er of e:" i anges. From the ii"on
'^.\\
10
-MONEV AM) ISA.VK.^.
ore at the n.inc to the finislicl steel rail there i, „„
ohnnffe„f „„Mer.hi|,„(li,e,„„t.™ls
1^. l„lc^-c,ti„„ of /„,/«.„,/.. .\, :, e«„seq„ence of
tl'; ' l>d„,e. I he ee,„„„„y „r ,|,is i,ileK,ate,l te.ulenev
-I '"'■ ""..e a,,,,a,e„t ,vh.„ „e have learned h.,« i , ^
la,l, „ ,„ I e „„,.|,a„,s,„ .„■ exehanse t„ w,„-k ,„■.,,,-
ulu As >ve .l.erease !h. ,„„„he,- „r exehanifes in lie
'"■■'"■'I l;™ ..H,o„. we .educe hy s„ ,„„eh Ihe ., lo
tiiiiitas l„i- hreakd.ivviis. ™
These |-,mda,„e„tal ee„„„,„ic faets a„d |„i„el,,les are
n.ent„aK.d I..,,. , „,„,,e, he anient a, ,,■.,,,',. i.lea,,r the
!'"l-lnal syste,,,. Voney is an h.str ent an.i hank-
Ik -ehy n,e,.ease the n,a.e,iai n.llare of ,!,. ,„,, ij
'■!;■;'""'■"«"- -l'en.sal,l,. .,., s ,„■ ,
;;""■" " "•'■ ••'" ""-■ vr .live e,r,„, no. ;;j
H al,ae,..n,d'i,se,liea. ,. V, hieh « e sh, .
stdl he ,„ the state ,W indnstna! harharisn,.
'';."'"' "*"l"-iv.'de,. rn,,e,-tvi.n..t. as a sreat n.anv
"','"'' ""•'-'■':• ""-'^-m the hnn ,ni„d: I? is a ,„, i
neral *", li""' '"■""'""" '""'''''^ -.nnnnnsn: is
"' ■"■™'l""" ^M-"liarly personak The «,.,
''•'"«"' "-'^ '"'"" I'vidnals, hn, heU.,,,,
^tr:jr\''"T'''''"''" l«i'-'--liH.lhana„v
coiitiMC't of ,fi//(f pro qiu).
CIIAl^rKR II
KX( IIAXGE
1.*}. Ec^;lnnin^ uf cvchuiigc. — lU'^iilar cxcliaiige did
iiot t xist until oiu' tribe had a .surplus ct' j-articulaf com-
inoditii's wliicli were desired by the tribes lia\in^' no
facilities for produeiny- tiieni. These artieles, which
W'-re sui)erHuous in the tribe j)i'0(iuein^- them, had a j)e-
euliar vahie to olliei- tribes whieh ])erha])S eould not
produce them at all. If Ihese commodities happen to
be of an imperishable nature, as pottery, weapons or
furs, they mi^iihl easily come to have a ux' as a medium
of exchange i'or home products. 'I'he necessity of ob-
tainiu;^- such commodities from otlu r ti'ibcs gave IIk lu
;i kind of lixcd \alue, and thus llicy became the most
convenient standard by which the xalue of all other
thiniis could be compared.
In the c\olulion of nionex a \ast numbi r of thin;..?s
have been used foi- tlu |)urpose of tixin*;' \alues. but
practically all of them represent sinplus products which
could be exchanged with foreigti tribes or nations for
imported wares.
Ivxchanging of goods within the tribes was a \('ry
slow development, and when it did dcNcIop it was most
natural ior these articles ot' foreign origin, with a fairly
<!( finite exchange \atue already fixid, to become the
common mt dimn of exchange and standard of \ahic.
r>\ >>Miii authorities economic history has been di-
vided into thi'ii' stages, aci'ording to the method by
which exchanges were made: liartcr, money and cicdit.
11
r T7
^
IS
^"IM.V .\M, liANKix,;
III llii^^ tirst or ■■|,:„.|,.,." ,,
.«""il^- III tl,.. sc-c,„„l , :f *"";- "'■'■'■ '■«'l'»'i«"l l',,,.
■■.".■-•ii.,,«x.a,,iii; ".:«r ;:::'■' f '^ ''•"'- i-.!
■iianwii.iiiiv ,, ;V '''"'^''''''''■"'■'I'ltiiitv .f„.
^'---l^;™^, ■':,;';::■''*"'',';'■ "*'«-..,„„•
'"•Ills. t„l,a«-c,, etc ,■.,„„, t„ I '■'■ "''"'"■
<"iii<' f" the stn.lv „| ■,,|,„.- ,1 , ■'" "'■'■ "''"I "<■
'■^"■'■"■■^"IlK'l, C.„,|-,.sv ■ "'■ ll„. |„.i„,i,,,i
extra exd,„„„e , ^ " "" f .""'^ '^ '"i'".- This
14 liar I '1^1 r
"'■ ^'i'p'"V"..ii> . :; ':;:r^^■ t;^'''«"' -^
''•■"^i..V,va,-h.,r, ',"'"'''' '"''■l""^'l''»cc
'<■ iiiiliilus k "^^
'-nH,st,h,,i.„n., ''::''' ^'" '■■•■'•''■ '"'■<■ I.
''"Ki.'i«M"i.i,Hi..d ,,!,';:.';;'■'■■ ~ "'"''''''■''« '-i-
""• I'"". !■> .1 UK , , .1 ;','"'■ ''"■■""">■ "'■ '"'"I ^1'
'-■i--^i«v, ;r ,:';■''■ '' '"""""■■'• '■•"ic
'■-■'"ill iimi ii , ,■■ T "■"' '" '•'""'^^ -"I '"I-
--..■ .'.::: an-: :';'■'"'! ■■ '■ "■ ■-
t.. Ml ,■ ,1 „,,„„,,, , .■ " ."•'■■ il-«.ll.l".IS |-,„- „„„
-■-■-iti., ;;: -''"rv ■■";■''••'''«'■ * '^"'■"•^'
np„„. ■ """•' "'-""''I ""I I- .l.:.,n,k.,I
15. Moucif.-^ M,„,. .. :
(
EX('IIAN(ii:
i;3
])nt wlicn it is cxdmn.ucd for other coinnuxlilics we do
not call the operation hai-ti'r, although it is an exehan^-e
of ,ii<>otls for <4()0(ls. 'Llie I'aet that one of the ex-
niaed articles is accei)te(l solely beeanse it can so
easily be exchanged for something; else whieh the hohler
reallv wants for nse or consun!i)tion, introduces an en-
tirely new principle.
Trachnu'. whieh was so limited, clumsy and iniccrtain
ill the stat^^e of barter, now beconu s easy and irnular.
If 1 have somethinu' of vahie I do not havi to look
ai)out to search out the person who not only wislies to
])ossess it but who has somethin<^- whieh I need. I have
simply to tind a persor. who has money, because I know
tiiat by accepting- n..)iiey I can «jet whatever 1 wish with
it. Kxi-han<rcs, therefore, become three-side<k I'irst,
the ti'a(lin<4- ol" g-oods for money, and tiien of UM.ney for
o(„y,is. The first part of ihc' operation, the exclian<iinn-
of uoods for money, is but the lirst half of the comi)lete
exchan,ur. Tiitil the money has beei; pent there is a
sus|)endi(l exehanuc. AvhiJi nmst lie t. mpleted sooner
or later by the exehan«4-e of the money for yoods.
'I'hercforc, all trade is finally barter, and the use of
one commodity in this peculia ■ way as money compli-
cates, but also o-reatly facilitates, exchanging- ol" goods
for <>oods.
1<). Minu'n represents incomplete crehau^es. — All
money existing at this moment rc]u-escnts incomplete
exehanu'es. Hvery ijosscssor of it will soont i- oi' later
otfer it for goods, because money has no use ixeepl to
be spent. 'I'herc is no utdity to be had from it until
it is |)art('d with. i'he miser perhaps realizes a i-ertain
satisfaction fiom the mere jjossession of monew but
with, the r:ition;il iierson the possession of money repre-
sents a posti)on((l satisfaction. Quite naturally the an-
I't
M()m:v anf) banking
ticipatioii nl' future satisfaction to he obtained is (j-iite
pleasurable, but to say that thr money rather than the
aiiticipation is the source of the satisfat '-On is to fall
into confusion of thMonht. 'fhe boy with the circus
ticket in his hand is d with joyous sensations when-
e\er he gazes upon n, A railroad ticket to California
conjures uj) the sniell of orano-e o-roves and other de-
lightful things, lint neither of these thinos is the real
source of the gratification. The miser is the l)oy who
prefers to miss the circus rather than to give ilp the
ticket.
17. Credit, a postponed /xiz/meitt of m one //.There
is a third stage of economic evolution bcyniid barter and
money— the credit stage. .Tiist as exchanges were lim-
ited and chimsy in the barter stage, necessitating the in-
vention of money before men eouM s])ecian/e in |)roduc-
tion to any grewt extent, so the time arrixcd. in the
Middle Ages jjeriinps (although Hie use of eredit was
not unknown in the ancient world), when iiKMiey. e\ en
the most !•( tilled forms and systdus df money, liecame
too cumbersome.
In this last stage exchanges can l)e made NviHiout the
use of money at all. A man uv.y be ;ii)le to buy and sell
without |)ossessing an_\ money, or even ;'.ii\- [uoperty.
The consideration he gives may be merely a promise to
pay money or its e(|uivalent value at a future time. In
this last stage exchange frees itself entirely from former
limitations and under speeiali/ation of industry can ex-
t< lid liiitil scarcely any man |)roduces the thing he liim-
s( If consumes. Kverything is i.rodueed for the market,
■•ind the market does not fail so |..ng as the maeliin-
er\ of credit is working sniootlil\. I 'nfortunately,
ci'cdit Is lil.i' fli-/. .iilI ;♦ :.. ..li ..11 -ii • 1 I .
■ ■■■-"; :'~ "..-■. :'. .; I ; ; ; ii ii',' i "i">iiri i'iSK, i>ur
iiolx ly w,.nl,| think of foregoing the use of tire j)e-
i:x( iiANcii:
15
cause liouses sometimes burn down, nor would auyl)ody
advocate the abolition oi" credit because .soinetinies its
abuse brin<4s on coniniercial ilisasters and panics.
Throughout tliis book the word •Y're(Ut" will l)e used
in a strictly technical sense, that is to say, with the fol-
lowiiio- niJaniuir: Cmlit is a fiostponcd pajimcni of
mniu'ii. The word is employed in ordinary nsa^e
to mean the ability to borrow. Thus, a person has
oood credit when his reputatio?i for financial inte;'^-
rity makes it easy for him to borrow the funds or i)rop-
(.rty of others. Much of the ditliculty and confusion i.:-
herent in the discussions of credit j^row out of this
va^-ue usa<re of the word. If it is kept in mind that a
cre^lit is a perfectly definite th.inw-. i. c. a i)ostponed
l)ayment of money, clear thinkin«>- will l)e possible.
bur definition imi)lies an ineomilete exchantrc. One
side of the exchange has been comi)leted, but so far no
c(iuivalent has been rendered. The payment has been
postponed. It is convenient, however, to re«rard the
credit as itself an tMiuivalent and a thiiio- having' value.
If a merchant sells a bill of ^oods to a customer and
agrees to po-ipone the payment for three month.s. he
has received foi" the ^cxxls a jjromise, which is valued by
liim as the full ((luixaleiit ol the ;^(„)ds. If this j)rom-
ise is put ill the form of a promissory note (which is
simplv a documentarv evidence of the promise) this
])romissorv iiote is a concrete object ol value and can
be itself exchanged for other things of value.
IH. Cirdits as media "f twch a iifrc— The fact that a
promise to pa\ moiuy i< a xaluabjc thing in itself sug-
gests immediately the possibility of using such promises
as a medium of exchange if they can be put into such
I • • 1 1 ■ I i :i t I , i I
form iiiai iiie o\\nei>iiij» iil Tiuui .;;" ;;;;■ ;; ::• ;;.■ ;::-:::
can be trans iVrred from hand to hand. .lust as tlie
16
MONEY AND HANKINCJ
value of nionty is an aiiifit-ial (jiiality, created by its
ready exeliaitoeal)ility, so credit may come to have a
value for l!ie same reason. People accept money read-
dy in exchanoe i'or anythino- else because they know-
that it n-ives them cf)nimand o\er any j)iece of |)ropertv
that is for sale. In other words, because it i.s converti-
ble into ])roperty practically at all times, in all places
and under all circumstances. Likewise, credit has value
as a iiudium of exchange only to the extent to which it
is convertible into money or directly into pro})erty. C'wii-
vertibility is iherefore the very essence of the value
oi' money and credit.
Money we saw was simply an indirect barter, the op-
eration beino- len<«thened by the use of an intermediate
tiling- called money. AVith the use of credit the o})era-
tion is stili fuither lenotlimed. and the steps in the com-
plete transaction may run as follows: (ioods are traded
tor credit: credit is traded for money: money is ex-
channt'd foi- yoods.
Sui)pose a mc'cliant buys a bill of dry-<rood,s fiom a
wholesale establisiimti't and ^ives his three-months note
therefor. The w holesale house may take this note to the
bjuik for discount, reeeix in^- a credit on its deposit ac-
count. \Vhe?i the note is due tlie bank may receive a
check from the retail merchant who made it. This
cheek may be cashed at another bank and mav be i)aid
out auain to a manufacturer, who has received a check
from the wholesaler drawn aoainst his deposit at tjie
l>ank. Tile manufacturer may use this cash to buv
cotton from the eustdtuer of Hie niei-ehan! wIk. consumt's
the dry-o'oods first bouohi. Kedueed to its simplest
terms, the cotton urow. r has bartered his cotton for
clr.th, i)ui liie iransaetion lias in\()j\ed a very compli-
cated series of exehauMCs in ordei to accom|)lish it.
I
EXCHANGE
17
i
i
This c'onipk'xity iiitroducca hy the use of money and
( i-eail ^v.)ul(l seen'i to inercase the ditlL-ully of exehan^-
i in- goods for o(„)ds, hut in reahty it facihtates the proc-
ess hnniensely. While seeniin-ly the most expensive
mode of making exchanges, in reafity it is the most eco-
nomical. The profits and salaries paid to the merchants
and l)ankers are added to the cost of the linished clolh,
and the planter must give so much more raw cotton for
it. hut if these middle men did not exist it is likely that
the i)lanter would have to manufacture the cotton and
the cloth himself at a hundred times the real final cost.
This is a case where the most indirect route is in reality
the shortest and chea])est.
10. Mducji (111(1 credit rcpresrufdihrs' of xccalth.—
Monev and credit are representatives of wealth rather
than real wealth, l^iis statement seems to inxolve a
])aradox because of the hahit which lias been ac(iuired
of regarding as wealthy a person who has control over
a large sum of money or credit. The ])o|)ular concep-
tion i)f a Mcalthy man is very likely to approximate the
caitoonist's idea of a rotund individual wearing a sdk
hat and a costumi" witli a dollar-mark pattern and sur-
rounded hy bags of specie.
The wealthy person in reality is one who has control
over a large amount of goods or real weallh. How-
ever, in est: ' .ding- wealth we find it convenient to reduce
it to a sum of dollars' worth rather tlian to enu-
merate all the items of goods contained in it. A mil-
lionaire is not a person who owns a million d(illars in
UKMiey. but whose properly rights are estimated in lerjus
of dollars. The millionaire may rarel> have in his per-
sonal possession more than a thousand dollars in money.
j)iil because his proi)erty rigliis are more or less iwii
vertil)lc ifto money we fall into the error of carelessly
VII ,>
IS
MONKV AM) n.WKIXG
consideriiio- I'm as possessed ol" a miilioii dollars. Un-
less we think elearlv on this point and rid ourselves of
this error, we are likely to find ourselves hlocked in
dealinn- witji problems in money and hankino-.
Tile value of money. e\eej)t in the case of metal coins,
which have a commodity utility, is dependent ujk)!! its
convertihility from property int , ooods. If ever,\!)o(iv
attemi)ted to convert the money and credit in the world
into ooods simidtaneously, money and credit would lose
its value entirely. It is oidy hecause there is a real need
for this ))aitieniar kind of utility in makino- exehan^res
that the value of money and credit is maintained. The
value oj' money and credit, then, is dependent entirely
uj)on a habit which })eople have of accepting- them in
exchange. When there is any reason to doubt that
money and ci-edit will be accej)ted. we find its value
shrinkino- away and are confronted with the phenom-
enon of a dej)reciated currency.
20. Classification of tccal tit. -There are two kinds of
economic <roods: 'C'onsumjjtion nj-oods," which have
direct utility and satisfy a iunnan want, and "production
^■oods," which have indirect utility and assist in pro-
ducino- consumption <j;-oods. The vahic of production
li'oods is entirely dependent upon the c()nsumj)tion broods
uhich they help to produce, /pist as the value of labor is
d( rixcd from its product. If production .^oods or lalfor
IS so limited that it can produce only ^^uods which have
no market value, they are themselves valueless. Work-
men may be e\er so skilled in certain lines of work, but
if the product is unmarketable they will look in vain for
employment. The maeliine luay have cost $1().()()(), but
ne' crtlKless may be thrown upon the scrap Jieaj) to-mor-
row ii tile product eeases to ()e purchased In consumers,
I
I
KXCIIANtil".
li)
or if aiiotlur iiiacliiiR' is itivcnlcd for doing the work
more fhcaply.
21. Kntrcprcuvur ■'■■//stcin.- rroductioii reiiuires tlic
cinployniciit togvtlifr of land, labor and capital «;oods.
rndcr tlie cor)])c'rative systen) tlie owners of the cai)ital
ooods and of th.e hnul unite with the hil)orers in the
pnxhietion of a certain conmiochty and divide among
themselves the pnuhict or the i)roceeds of its sale on
the market. 'Fhis system of industry has been found
kss satisfactory as a ride than the cntrcprenenr system,
so called. l)y which one man. the entrepreneur, under-
takes the responsibility foi- the industry. lie contracts
at a fixed rate of comi)ensati()n for the use of capital
and land, and hires his labor at fixed wages. He en-
deavors to reali/e from the enterprise a larger net sum
than the payments he must make to the workingmen,
the capitalists and the landlonls. The difference he
keeps for himself as his ])roiit. If there is a deiicit
h- suffers the loss. As a rule the entre])reneur, before he
can make contracts, must have a certain amount of cap-
ital of his own as a margin against loss. Otherwise, the
cai)italists. workingmen and landlords must have an ex-
tra remuneration for the risk they take. In dealing
with a capitalist the entrepreneur does not borrow ma-
chines or other forms of capital goods, but he borrows
a certain sum ol' money or purchasing power which he
c;in convert at will into jn'oduetion goods. The cap-
italist has funds or pin-chasing power to loan to the
entrei)reneur. This purchasing jjower rej)resents a
c'laim on goods in general which are for sale on the
market. When the entrejjreneur borrows these funds
he immediately uses them to claim whatever he needs
in his business. It was not the money he wanted, but
34
"(I
MUNKV AM) IJAMvING
the buildiii, % Ihc niacliincry, niw materials, etc. Money
is not necrssary in production: it is siiuj)iy the most con-
venient way of oettino' control of the tliin«4S needed.
22. Capital. — The conception of capital is one of
tlie most (h"(Hcult and confusing- in the whole science of
economics. Just as in the case of wealth, most peofjle's
idea of capital is a sum of money. Tntil recently most
economic writers used the word "cajjitar' to include not
oidy money, ])nt everytiiinn- wc have called jjrodnction
^■oods. 'Vhv lundamental idea in the word 'cajjital," if
it be analyzed closely, seems to be this: a source of in-
come. The Kskimo would call his canoe a part of
his capital because he could attribute to its use in fishing
a certain proportion of the day's catch. This pro})or-
tion might be measured by the amouiu .>' fish he could
have obtained without the use of the canoe. If he could
catch five 1'1'sh without the canoe and ten fish with it,
the canoe might be regarded as the source of the income
of five fish. Capital, therefore, has economic im])or-
tanee only as a soinve of income, and its value is en«
tii'cly proportioiiate to that income.
When men reached the stage of calculating income
in dollars' woiih instead of in specific commodities, then
caj)ital. the source of the income in dollars' worth, be-
gan to be regarded as a sum of value rather than as a
machine or building, etc. 'J'herefore. we might say that
cai)ital is an abstract conce])t of the value or dollars'
Morth appertaining to the source of an income, whether
.such source is tangil)lr or intan<>ible.
The merchanl itgards as his ca|)ital his stock of <roods,
his store building, and fixtuns. I)ecause they are tlie
souH'e of his money income. If he ^' ere asked to niake
a stattnient as to his capital, be would sum uj) the
\alues of bis business in terms of <lollars.
I
EXCHANGE
01
(V 1
I
23. Capifa1hatiou.—T\w word "cai)itali7.ation" pre-
sents a (litlieult e()neei)ti()n unless we hold in mind the
root meaning- of the word "eapital": Capitalization
represents the relation hetween ineonie and eajjital.
whieh may ])e made elear hy an illustration. Sui)pose
a manut'aeturer has a ])lant whieh yields him a net m-
eome beside his own salary and a reasona' "r profit for
undertakino- the business of say >^1(),()00. Sui)i)ose this
SI (),()()() is the average for a number of years, whieli ean
])e made a safe basis for future ealeulation. If this
manufaeturer were asked to tix a i)riee on his establish-
ment, how would he '^o about it f Perhaps the whole
plant, maehinery, buildino-. cte., did not eost more than
><1 ().()()() originally. Init tiiat its hi<>li earnini>- power is
(hie to the ])ossession of a ])atent on eertain of the ma-
chinery. ()i)viously he wotdd not l)e willin<i- to sell the
business for Si ().()()(), or even $-2().()(M). What lie is
really selling is tiie ri^ht to an ineome of $1().()()() i)er
year! Tiie priee whieh he would demand for his busi-
ness would not be mueh less tlian lie would have to pay
to obtain the .^10.000 ineome from anotlu-r souree. If
the oidy ineome he eould buy with the i)roeee<ls of the
sale of his business were bonds yielding- .5 jnr cent per
annum, he must needs reeeive at least S-_>()(),()()() in order
not to be a loser in the transaetion. He eould not de-
mand more than Ji<-2()().()()() beeause no purchaser would
\)v willinu- to buy a -^lO.OOO ineome at a priee whieh
would purchase a $11,000 or $l-.>,0()() ineome iu the se-
curity market.
If the owner of the plant thouo-ht of incorporating a
company and issuing shares oi' stock, he would be con-
i'ronted by the same i)roblem oi' placing a valuation on
the business in order to projjcrly eapiiaiize the cm poia-
tion. In this case if the income were practically tixed
^ -f
sa
^inVF.v AM) i{\\K[\(;
at $(MK)() juul there was a wide MKu-lut lor the shares,
't IS ikely that at a eapitahzali.,,, of x-Joomo the shares
wou hi sell at scM.ewhere near par. That is to sav, the
^rtal sn.n of their market vah.e wouhl he about !J<20(V
Oipitah/atlon, therefore, is ^he process of plaeino- a
vahmfonuponthesoureeofanineo.ne. T f a eorp.M-a-
t'<'" -s <nereapitah.e,l. the vah.ation whieh has heen
Plaml upon ,ts assets or the s<,uree of its earning power
Ijas l.een too hi^h : in sueh c.ses the shares sell be^.w par
11..S n.ay happen not only beeause the net earn in <,s
■•'•c- too snum as eompa,e,l wi-h the capitalization, but
'-crause ol the uueertain future, or beeause the de-
;"••'""/'>•■ ^»'^"' is very hmite<l. Corporations whieh
jave been overcapitalize*! a( the be^innin^ n.av tin,l
f'M theovercap.tahzation has disappeared in the course
.. line because the earnings have increasecl in amount
|"'.l staluhty. Inth. lan.uao.e of finance, "the wat^-r
lias heen s(|ueezed out of the stock."
This subject .,f eapital and capitalfzation belongs to
t e b,oajler scence of finance, but so intnnute i.^ the
idat.on between capital and eurrency that it is best to
get a clear ulea of capital at the outset. Capital in its
vanous forms like consumption .-oo.ls mnst chancre
f|.'nds u. order to realize the o..,,atest economies in .;,-
< -H- .on and the n.ost efhcient use of all forn.s of pro-
line .on ^oods. To be most efi^ectivelv utilized, the
and. n,achnu ry. buildings, n.aterials, etc., nmst f^nd
the.r way into eontrol of those er.trepreneurs who
can most efliciently organize and n.u.^i them! T,!;:
very ,,, ru-.f, ,,,,,,,, ^j^.^,^ ^^^ ^.^^^^^^^,^ .^^ mysterious
aiHl <hi!innt character, so tlf't .....nv .f / "'"""^
u .1 • "•' "V" •' •" '''' oiiiser. i he movement of can-
ital .s so mt.mately related to n,one> and bankinu. tJ^
IXlHANGE
23
one cannot l)e nndcrstool without mastering tlic other.
'2i. Demand for capital ^foods. — C'a[)ital i^oods arc
|)i()(hicc'(l hy iiulnstry for tlie market, just as are eon-
siunption «;'oo(l.s. They are ])ro(luee(l either to till a
(leinand already existiufj^. as when the nianul'aeturei-s
work on contracts, or tiiey are made in anticipation of
a market when they are ready for sale. The demand i'ov
capital goods comes from enti-epreneurs who wish to use
tht'u in industry foi- the production of more ooods.
Ik-fore the entrepreneur can take ea])ital <>-oods off tiie
nia''ket or <>ive orders for their manufacture, he must
havit ])in"chasing power. This jjurchasing power he
mav ac(iuire in a variety of ways. First, lie may pos-
sess the purchasing' power or caj)ital as his own prop-
erty; second, lie may he entrusted ^v!th the purchasing
power or capital of other men on various terms, either
for a tixeci compensation per annum or for a definite
share in the |)rofits of the husiness.
Tliis })urchasing power exists in the form of money
or credit; in most cases it is hank credit in the form of a
deposit, against which checks can he (h'awn to lU-.ke
j)ayments. It has its origin in income which has not
heen spent for consumption goods hut which has l)een
saveiL Incomes are deri\ ed originally solely from pro-
duction. Those who gain a personal income without
producing or assisting in the productive pi-ocess appro-
priate the incomes ol' others; hut originally every income
'vas the product oi' someone's productive industry.
25. Money incomes. — Under modern conditions very
few of the producers take a share of the })roduct as
their income. They prefer to convert the product into
])urchasing ])ower, that is. money or credit, and dis-
ti'ihute the proceeds as money income. This money in-
come, however, is simi)ly re])resentative of the products,
Hi
MDNIOV AM) RANKIXC
n 1 ,s o„,„,.,.t,l,k. „,„ .,„, ,, i, ,,„. ^..,i^, ,„, j|_^ _^^^_^._
K . iKivl,,,,.. ,!■ IIkm i,„.„„K..,,,,i,,,, |,,„|.„, ,„
v»c I „s |,u,vl,.-,s,„f; |,„u,.r ,-„ll,,,- lha„ ,ss,-ri tli.ir
'■''■'." ;' "■'■'"'" """'">>i of f.N,s„„ii,ti,„i j,,„„|s. t||,.v
liiNujjv tile furul <iC cqiit.il. •
■'''"■"""!"■ I"'- tl'is ..l«tinc„,. (•,.„„, c-onMn„|,ti„„ i,
:''''''^''>;/'"''"'nKp,,,-,K,.,colal,st,,i,,inKiV,,,,.s,,c.,,,
-« _,n,K.„n„.ly, l,„t r... ,l,c p,„,,„.sc of%e..-li„'„ -
--'■'«■ ".i...c,,,uc.. Tl,is conv>.,-.si„„ ,„•,„„,,,,,„ ,.
' .""" I'™'"'""" «■ ^ -tl.«- thai, .,:„s.„„,.ti„n
«...l..s,.al,„v«t,„c.nt. I (• it „..,,. „„1,„,. , his savin..-
f,;;:;'V' ^ " - p,-..!,,,,.,!. .sa,.,M,„,L.,
"■ """"," '--I'"-I ■-■l™.n...l.a,„l'a,va;vait-
n,« :< M,arl„.| s„„„«Ik-,v i„ ti,, w„rl,l. T!,,- „n,sp,,..
,i.T:,nl''""'' "'' ''"'"""">"- .\ ".,y s,„all p,-
"••'>"" ;'l'."l"ll,isi,„,,„„l„i,„,vas,.|„ss !<.„,, I„.
.-;. yU,. «,,.,,.,. pa,,, ,,■ ansa., api,a, is ,;„.„
'»" I. ..Il,.a-.„l,vp,v„,,„.. |.„-i,„,,|,„,„| .n,,,,,,, ,,,
;'.,;:,:;"■"'■ : r '•"'"'■ ■'■•■'I'i'^.'.^i-.siv,;,,,
.''"^■■'V '■'"''''' '-i"ni„.,.„„vp,.,.„,,„. „,„,
« s i„.,,.|..,.,,„.p,,„|„.,,„„„,,„„|^^ r„si.,l„. a-
::.: -!"-:'^'"> l'"-li„ir„,.sl„„a,l„,-,|„.,„„, .|.,,^
•- i'.,i,„|,s i,„y i„„„K „| ,, ,.,,|,„.„,_
I
EXCHAXGi:
25
s\liic'li llms obtains the (•a])ital and expends it in rails
and eciuipnunt. Secondly, the saver may de])()sit his
savinj4's in a eoinniereial hank, in whieli ease the eapita!
finds its way into the liands of eoniniereial borrowers of
liie hai\k and is nsed as workin<>- capital to l)ny raw ma-
terials, to pay wa^es and to carry cnstomers' aceonnts
for short periods. Thirdly, the saver may himself hny
stocks and bonds from a bond house or a trust company,
and thus make these institutions his a<i'ent for invest-
ment. Fourthly, the saver may hoard actual cash,
which simply means that investment is postponed for
the time bein^'.
•J7. /^v// invcshnciiL An Ihe ordinary use of the
ti'rm the purchase of slocks and i.onds in the market
would be called investment, but it is not, however, true
investment. In this case the saver has simply shifted
to the seller of the bonds the responsibilty for the real
investment of the capital, i. e.. the responsibility for
convertinu' it into pr-o(hicti<>n uoods. It is only wlun
till' capital is in the hands ol tlii' cntirprcncin- that an
in\istmenl can take ])laee. Kntnpreneurs are con-
stantly bidding- i"or the use and conlrd <»f tliis new
capital which is as »'onstantly aci'umu!atint>-. 'I'hc en-
triprtiKur who can offer the best raU' of interest or
the lii-lusl di\i(Unds with the lust secinity has the ad-
\anta,<4(.' in this competitive biddinii'.
I'ndei- our modern coi;ditions of industry the lai\ui'
corporations ari' liktly to lu- able to use this capital to
the best advantauc and hence are in a jiositinn to make
tlic must attractive ofl'ers to savers. 'I lieit fore, we
find an e\er inereasiiiL; jii iceiitaue <*!' the sax in^s ol the
communit\ flow Inn' in that direeli'in. 'I'his is to the
ixiblie .idvantaiic, in so far as the corporation is able to
ti.
unh/e
nro<
luct
ion
woods to which the capital ^i\r.
2(i
.M()NJ:\ AM) HANKING
tliem claim, and the final irsult is an increased amount
ol' product. J'or this reason, any syst'in whicii facili-
tates the tlo,v of capital from the savers into the hands
of the most elHeient entrejjreneurs is a distinct economic
gain. All thr highly specialized financial institnlions
perform this economic service, and their productivity,
indirect tluninh it he. is to he r>easured hy the increased
elficiency oT th.- eaj)iial which they have diverted into
the most produc'ci\c field. The stock exchanges, the
financial aiid commercial hanks, trust companies, under-
writiiin; syndicates and all the machinery of jii^h finance
are ccoik niically hcneficial to the country in the degree
that they perform this function.
Furthermore, this high development and delicate ad-
justment of tinancial institutions is only possible when
the currency of the country is of the soundest and most
sell lit itic ch;iracter. Kvcry defect in the currency sys-
tem makes it more .iiUicult or hazardous for such' insti-
tutions to do !)tisiness and is a handica|), the etrect of
which can he measured hy Ihe diminished eHiciency of
all the industries of the country. The man who says
that cnrreiiey and hanking (juestions arc no concern of
his would prohahly he surpriNcd to learn that iiis wages
are miimIK r«.r tlu prices ol' the no.xis h<' buys .•,ie higher
(»n accomit of some weakness i- defect in Ihe system
uhici. tin currency ref.u-m<rs are strixing to menii, yel;
such is the c;'se. Causes which ;M-e tli( most potent" in
pr..diiein- effects are fre((uenlly the most obscure and
unappic.iated.
X
I
CIIArTER III
VALUE
28. Value a rcfii.stcr of economic forces.— ^'mve in
our mocitM-n civili/atiou every man satisfies his v.ants
tlir()u<ih exehaii<^e of what lie pro(hices or helps to pro-
duce, for wliit he consumes, every man is perforce a
(kakr in values. Specific commodities are reduced to
terms of ahstract value, and are dealt in as such. The
workman sells his lahor, say. at ^\0() a month, and re-
ceives an income of .$100 worth of <roods and services
ol" liis own choosinji' from th' market. His economic
welfare is entirely a matter of the relation hetween the
effort rcijuired to earn the wane, and the amount of
utilities whi'h can he ohtained with that wa^^c. Either
a fall in the rate of wa<ies or an increase in the prices
ol' goods has the same effect in aUerin<r the relation to
the disadvantage of the wage earner. Kconomic
changes therefore always appear as changes in values.
\'alue is simplv a register or index of economic I'orces.
Tile reward of the entrepreneur for liis productive
( IVorls comes in the shape of profits. I'rolit is simply
the diirereiiee hetween the cost of the proihict and the
selling price. Any change of values which alters the
cost or the selling prices has its eU'ect on profits, either
diminishing or increasing them. We may call profits
the mains])ring of industry, hecause they are the mo-
ti\e which induces Hie entrepn iieur to organi/c industry
h\ horrow ing capi'al. em|)loyiug lahor aiul renting land.
\ N lien I ill" LX p'l'lil t II M I III |(i < >in -, i-> ^iiiti 1 1. 1 1 IV V 1 11 1 < |.. »
>»7
2H
MONKV AM) BANKING
neur J.as little indnccncnt to encourao,- any new enter
=:9^stt;;l,j:~':;;:;r:;
;;; ,;;;;:i:;rsss,;;;;2;»-::i
• .s likely t„ he „ ,,,„„„ „, .^.,,, ,,,;, ^^.,. ;.,
> "son,-... ,,t,,,„.,l t., tiK. ,,,,,,,«t, ,,,:.: 1.,,,. in ,
''• '■'■■'.'"I ^" ' - l"Kl.-l " a,..s. .Altcnu,!. |K.n„,l. „7'
^.•iiii conditions of \alne.
The tact tl.at enr.vney and l.ankhur have -i most
?™''''''-'"-"™t. Ik. ,•,,,,,,.. ',,„,.» .r,, .
'"' '""'■'■ "';:-^- I"' !-"■ I'""-I1- /•,„■ <.ha„„.c, i„ J., e . i
ImMrii-ssn.Mililii.iis. W<"ii.il
'>!'- ''V ■■''"•■ ""1'- l«."l<. IV.r ™„„p|,, ,„, |,e
'.'","""■'' "'''■^' '■> • l''-™"i(l,s.„„H|,i,V,,,' ,'
'*;/''"'■■ 7 '"'■' .".•alm.sl,,l„r,vl„,,l. "l'l„.v ..
'■' ' • "■•"'- »"^l't 1- .x,..-,,.,.,! |,v ,,vi„.. It;
""'•" "•>' '^ "'■ «i...<. This- >,,-,„„„,:
::":^":7", >■ v-l.ik ,,, ,,;''.
11 IS ncccssaiv. to liavc n ,.()nnn<.,. ,.,... < " •
j^ • ■■•'>'".>.<., nu-as,nvnrd<„on,Mia-
-- -wn.i.nis ai U-ashin.tnn are k,.p, ..,,,ain vard-
VALUE
o(
sticks, wei^iits and vessels wliieli are the standard units
of length, wt ight and capaeity.
W. Definition of the dolUir, — Jnst as Congress has
declared that a certain length shall he a yard, so it has
also declared that the unit of ^■ahle shall he a tlollar, of
'I'^.'l'l grains of pure gold. The only definition for a
dollar is that it is '>'.\:1'1 grains ol' gold. All other so-
called dollars are such hecause they are convertihle into
standard gold dollars. In this convertihility lies their
value. 'I'hey are not standard dollars, hut representa-
tive dollars. l*rice is sinii)ly value ex])ressed in terms
of dollars. If T say this hook is Morth <$.5, I mean that it
is exchangeahle for live times 2.3.22 grains of gold, or
its e(iuivalent.
If we speak of a ])i rson as heing worth $.")(). 000,
therd'ore, we mean that he has a legal title to
|)roi)ei'ty consisting of various forms ol' wealth luuing
a total exchange value of fifty thousand times the ex-
change value of our unit of gold, oi- its e(]uivalent. In
order to I'cali/e this exchangeahility. howcvei-. it is first
necessary to con\ei't th.e wealth into money, which is
oi-dinaril\- very dillieult to do at the market price, and
then (Mitnerl the money into goods desired, which is \v\
easy to do.
.'U. I'jiVchan^cahUitii the sole iitiliti/ of nioiiei/. The
d( sirahility of money as a form of properly is due solely
to its ready exchangeahility: for any ollu c pin'pose it
is inferior, producing no income, as do factories,
stocks, honds, etc., and rc<|uiring extra |)i"eca(itions
against theft. Its iiianal>ilit\- is simpK another form of
its e\( Iiangcahility. The honowcr purchases the in-
eoinc-yielding wealth and promises to divide the income
">> i 1 11 1 in ii i n n I
'V2. (told flat (III ideal staiidurd. Gold is verv far
,'30
-MOMIV AM) H.WKINCJ
from bc.n^r an ideal stan.lanl of value. Suppose the
yankst.ek had the ohjeetior.al.le habit of shrirlkin'^ an,!
expa.Hhn .- hein.- thirty inches one year and fortv h.ehes
the next ll,e merchant contracting to take one thou-
sand yards of cloth a year hence wouhl run the risk of
losing, on tlie deal merely on the Huctuations of the
yard-st.ck The <loIlar is just such a n.easure. I'l
value IS chano-n,. constantly. This fact is conceals
rom the ..nhnary ohserver. who attributes all fluct-i-
tHHjs m prices to commodities rather than to the dollar
Price states the ratio between the xalue of '>;j .>o
gran.s of ^chi a.id the value of the thin«- to be measural"
Ihc -atu, C.U1 be altered by the chanoes in the value of
«ohl as well as by changes ,n the value <.f o-oods ]f
wheat falls t(, .-,0 eents per bushel it mav be because of
an alteration in the relation of demand to supplv in ref-
erence to wheat, or it may be because of a dian^e in
the value o money. If the price of wheat alone has
H.an^r,d. while the prices of all other commodities re-
"'ain stable, the conclusion must be that the changes
were due to causes affectin^r wheat alone. Ifowerer
It all prices have shown a tendency to move in the same
« n-ecfon, especially when it is reasonablv certain that
there have been no changes affeetin^r the relation of sup-
ply and demand of these ^.oods. the explanation of the
'••'" '" j)nces must be sou^d.t i„ „,onev itself
tnbute,! the general fall of pnees to an increase in the
value o« o-„ld, the sole .slandar<l of value. Their
'•^■"K-dy. b.metallism. or a double standard of both .-oM
^»"d s.ver. woul.l have raised prices, but it wouhl have
caused such a rb^tni-Ii..,./.-. ..<• .,..:. .
-.!i^^ ... [/..v^i ,11111 rji(iii. t»oiJi
ose the
11?^ and
inches
- thou-
risk of
of the
-'. Its
icealed
iiet':a-
I
VALUE
31
temporarily and ])ernianently, that many tliink the cure
would have heen ten times worse than the disease. A
diseussion of this principle, however, belongs to a later
eha])ter on the Standard of Deferred Payments.
The idea that the value of the dollar is a constantly
fluctuating thing is so novel to most peo])le that it is
worth while making it very clear. In order to do so it
is |)erhaps advisable first to consider the general prin-
cii)les which govern the value of anything, whether it
be commodities or money.
'.y.i. DctcrwiiKition of value. -How are \alues de-
termined and what forces govern the fluctuations
thereof:' The statement of the older economists is:
Value is deternuned I)y Cost of Production. A thing is
worth the cost to ])ro(luee it. The insufficiency of this
explanation is ap])arent when we consider the great
number of things whose value is widely different from
or has no coimection with the cost of production; land,
for example, which has no cost of jjroduction, or build-
in<)s of unsuccessful enter])rises which may sell for one-
tenth of their cost.
.'U. Viil'itfi tJiior// of V(tluc. — A modern theory holds
that value is determined by "utility." rsefuluess or
desirability rather than cost is the (]uality which gives
a thing power to exchangi' for other things, rseful-
uess. however, is a matter of personal estimate and varies
infinitelv with different individuals. Since "value" is
expressid l)y the market i)rice. and there cm l)e but
one market ])rice for the same thing in ofie community
under the same cireumst an.'-'i"", the utility uicorists were
forced to lind a utility which was usefulness to the
whole eouiinimity or a sort of social utility. This they
named "marguiai ulihlv, and gave the world an ex-
32
MOM-.V AM) HANKINd
pression uhidi has Ikvi. r„,ni,l cxtrenidv useful. The
tern, is r..i,iin- int.. e nnniou u«e and is therefore worth
UM(lerstan(Hn«>-.
:J.5. Maroi>,a/ utilitn.-^h, a small eitx- then' niioht he
one i,ers<.,i uh„ u-oul,I be willino- and ahle to -ive anv
amount up to Sio.cm for an automobile: the.x^ n.ioht
1.0 another whose linu-t is .^!)..-,0(): and another at .^1) 000
and soon. As ue o,, ,l,.wn. the number of j,ossible
p.irehasers mereases so that there nnohl be several lum-
<lre<l at a j.nee between .^r,00 and .^Kooo. 'phis jH.ten
t'al demand for automobiles niioht be represented by
the lollowmo' diam-ani: *^
<:iO,000— r — ■
]
S.OOO —
6,000 —
4,000 —
A
« 1
C i
D
3,000 —
2.000 —
1,000 —
—
■E
The
hei
-ht
of
the (
'ojnnm
G
H
o.hnnns represents the monev
<|.nvalent ot the denuunl for automobiles, an.l th'e
I'rea< th of the eol.nnns represents the number of auto-
n.obdes wh.eh wouM be bouoht at the (lifferent priees
Suppc^e un.k.- these eonditions three ears were bmu^ht
;> that e.ty lor sale. The n.an A would pav .^10 000
'•:;'''^f'-'-''<'-'-tlK.l..ows there ar^lnj He
sol.l. so he ret uses to pay as mueh as he would if there
-re only one for sale. To dispose of the three auto-
'• oJ-. tlH. de.der nurst not .lenwmd n.ore than -l^lMmo ■
;'•••'' i-- ;• H. and (- will supply tlK^^^^^^^^^^^
tin s estabhsh the ,narket priee in that eitv. The auto-
JH.'f.. OS may not have eost n.ore than .^1.000 t,, produee
!;r'"''':^\-'-''''--'--.l.tiuHxin.te,, '
1 lie xuM'i' IV ,l,.f. ........... II.. '^ I'liL*..
is bv^l ' .;;--=;; = =;=^- 'v ''-^ '"ar^mai utihtv." that
is.l.> ll-eutd,t;,.| the.automobih.pM,,|iasedbv"c'.wh.
lio
i
\ALri: iw
is callcil the iiiai-<^inal piii'cliasrr. Mar,uit) means "cd^c"'
and C" is the piu'ehaser who is on the <'(lu,-e of the market,
ir there had l)i'en oidy t\\() antomohiles. he wonhl not
ha\e heen sn])i)hed: il' there had heen t'onr instead of
three for sale, the priee wonhl liave had to he reduced
lo .ss. .)()() and tlien 1) wonhl have heen the purchaser on
the margin. 'I'his example is of course hii^hly the-
oretical and would prohahly ne\er liai)])eii in this way
in I'cal life, yet the pi'inci|)le is true and \\orks out \\ itli
^■I•eater precision, as there are a yrcatei- nnmhci- of
huyci-s and sellei's. and as the know Icdyc of each othei's"
rial desires increases.
.'J(!. Miiri^iiud iitilil// to I lie iiuliiidiial. — In the illus-
tration we ha\e assumed that each l)nyer desires hut one
unit of the article foi- sale. With many classes
of u'oods, each huyer may desire niorc tlian one unit,
{•ii>ars for instance. Some wealthy men miiiht <4i\c a
dollar if they had to for one ci^ar a day l)ut they would
not yive so much for a second. l-"rom this t'act we
de!M\e the ""law of satiety," tiiat v\L'vy unit of a com-
modity consumed yields successively less satisfaction
and has less utility to the consumer than its predeces-
soi'. 'I'he demand of any one consun\ei' for units of
a ^ixon commodity w ithin a i>iven period may i/c I'cpre-
sented hv the follow inj'- diauram:
I ;^
.*l.nn_
.•)0
H-^
.(XI 1 1— 1
1,
-'. ;}, 4, 5, 6th
•ifTiir
To make a chart showinn" the demand t'or cii^ars, it
^V()!!!d he ! !', ('('SS.! rV !•> CO.'Mh!!!'.' ! h.' • ■■h:!!'!'- !''-'n!"'.'Se!!t !!! "'
the demand of each coiisumei". Snpj)ose for the sake
of sinij)le illustration tilers were one huiuhed consumers
01
.M()M;v AM) i;\\Ki\(;
"'' ^''-'""^ '" '■'"• '"•"•l^<t- ^''^'li ^vit!. a pntnitial .Icn.and
npivscnlc.I l.y llir tnn.ncino- diaura.n, a chart slu.u ,„.r
the «4'ciitral (kniaiid would \k- Ihiis:
$1.00 '
.75 — i
.50 —
.25 —
.00 —
1--
Ist. -Jnd. :!>(l. Ill,, .Hti, -111 .MIC liun.liv.l.
Supimsc ilu. , Makers ,.r ll.is particular (|ual,lv ..r n..ar
'•""'<l 'I'-'l^c' a fair profit l,v scllino then, at "j:,
"■n!s. They ^^uuUl pnnhicc live hmi(hcd hccaiisc thcv
<-oul.l find purchasers for that .luah'tv at -J.', cents cacll
llKy could ,H,t Mvt nioiv hcrause there can he l.nt „ue
Pnce in the market, and the huvers ass.nnini.' that thev
nnderstand the situation, will pay no more than neces-
sary. It the niannra.-turers make more then five hun-
'''■;'<1 c-.i^ars and attempt lo sell sav fiv.. hundred an.l
''<ty. tiny u.Mild foive the pricr I.el.m iV, rents and de-
stroy their profit.
.'{7. ILnnidlinliini of Ihc ha, t/unrhs. It is easy to
'".derstand nou nhv the value of anvlhinu- that "can
"■easily pn.juced coincides with the cost of production.
If the value is much ahove the cost there will he an ah-
;"'''"'•■'' I"'"''* '■" ''f- l"'Hlucers will hv attracted f. the
"isiness. the supply will 1,,. increascl, an,l the price
iM-ono-ht <lown hy the coinp(titi<m of [W~ sellers until
't ;-""u-i<les with thece,st. Converselv. if the valu,' is
''"''7 ^•"^*- "'^' ^"'PPIV will he rc.luccl on account of
i;'-"<l"«vrs kavino- the husiii, s and the price will rise to
'I'ecost. I r file supply of the lhnn,,sfi.x.d. the market
I"'";<' .'"'.1 cost of produc-tion mav June no relation to
each otiiei"
V
I
I
ClIAl'TKli IV
lAOIATION Ol mi: Ml.DIlM OI" KXCIIAN(iK
:W. Pnwlihc ideas of value— 1\\ the pm-ediii^r
chapter \vc liave (lesfril)r(l liow llie iircessity lor llic cx-
clmiiyv ()!' <i«)<)ils was tii'sl felt. \Am<x Ix-'I'ore the ri^-hts
of iJiivate property were ree()<^iiize(l within the tribe,
theri was exelianoino' of articles, usually luxuries, or
ornanieuts oi' u,()0(ls of an oriuuneiital character between
the tribes: first in the nature of gifts, later oTowin<r into
Hie regular systematic exchan<ie. This trade was direct
h.ii-ier. no niediuni of exehanii'e being used.
Later when ])ri\ate property rights became more
(Ictinitely recogni/ed within the tribe, intra-tribal ex-
change sprang up. The first articles of this tratbc were
the injported goods, to which a more definite value was
;iserit)eil. inlliienced by the limitations in the supply.
It was most natm-al that these articles with their dcti-
iiile value should become the measm-e of the exchange
value for the goods domestically exchanged, and thus wc
have the bi-glnnings of the idea of a standard of value,
still very crude and ill-dctined but serving the pur-
pose.
l'"iu-therniore these Im|)ortcd goods were as a I'ide
highlv desired by everyone, and were, theiefore. much
- asirr \() d;sl)()-^e of in exchange for other things than
(loimslic commodities. This gave to them an additional
utilitv ([uitc aside from their usefulness or then- ability
to satisfy the wants of their jjossessors. We call this
utilitv. 'exchange utility."
fjn
MONKV ANf) 15.\NKI\(;
^ '{i». OrnaiiKnhil .sin, Its carl// Nsrd a.s /none//. Article's
'ii'st iisid ;,s .n.UKv in .Mny (|..fii,i(( way of vvliicli u c
Ikivc kiiowlednc \\tr<. oi'iiniiicntal stniics. An ex-
Iravaoant love L.t (.ni;ini( nt is one of tlir ni..st nnivcrsal
diaractrristics of savnovs. Tiuy arc lik, |v to cstin.ate
•"■'laufnls at a nmcli Iiiulier value tlian tlic more neces-
sary coniinoditlcs. Tlic ntility nf these ornanienia!
stones or slujls was so constant and nnivcrsai that tiie
'''■■'"'•"(i ''"i- them uas likely to he hiohiv stahk. Th.c
savane was nnick to realize that if he" conid possess
linnsclr n\- a supply of these articks he had at his co.n-
llKUid the power to ^rct anythino- else of which h.- nii-dit
'"■ "i need. JIcn<-c these stones took on an additional
'""^■ti"" ri' a store of value, easily exchano'eahle for
other \;dues.
U). Three fiiiiclions of prirn'ilhc ,n one if. —Thus in
the earliest for;,i oi" n.on. y we have the three functions
well (Icvclope.k the function of Kxchano-eahilitv. of a
.Measnrr of Y-Uv,, a: 1 .,r a Sfuv „(' Value. In" all the
more primitive nations this function of store of value
was moie imp..rtant than in modern tiuics. Jewish
M-omen of ih. Oid 'IVstament carrie<l al»oui their per-
son tiieir dowries m the foni) of ornaments and jewels.
'Die East In.lians of to-day eoi.vert their surplus'wealtii
'iito sdver and carry it ahout with them, not so much
f '-om an cxtrava-ant hn e of ornament as from the more
practical motive of havino- always at han.l the means of
"i.tamin- the necessary articles of livelihood. As we
shall see latri this -ustom is a vcr.N- forniidahle obstacle
"• th" p.atl. of (conojnic development.
H. U'a.»'pnm. TIa Am-rican I-idiaiis uere in this
stanv of ciiltunii devek)pment when the American set-
tlers tiisl .•a,ue hi contact with them. 'I'hcv had elimi-
nated all fornix of ornamenlal money except uampnm,
;vni,r'ri()N or Tin: mkdux! ok I'xcii wci: :?T
4
7
9
-4
I
vliidi n.iiMsUM ni' stnii.us of !H■a(l^ rut fn.m slirlls.
Tlicsr lu'iiilN wire ol' t^\() colors, wliih and l)lack, tlu"
l.lark Leiii-- worth douhlc thr white. In trade with the
lii,li;.iis tlie sittli-rs I'outid it i-.)ii\ eiiiiiit to use waiiipuiii.
;iii(l it therefore aecjuired a \ery dcliiiite vahie in the
,.n!onies. The colonies hickin.u' a supply of ^iohl an;l
silver coins were c()mi)elled to make payments amon.i--
tluuiselves in wampum, and it was at one time receiv-
ahlr iis leual tender for payment of dehts to the amount
,,f ten pounds sterlin.u'. or ahout ^rA). The disad-
\anta<^es of this form of money were manifest when
Miuie clever hut more nnscrupidous Kuroptans invented
a method (.f dyeinn' the white l)cads hlack and douhlino-
their value hy the operation. So difficult ^vas it to de-
t(et this primitive counterfeitinu" that wampum sooi\
•ame into discredit. :md at len<;th was discarded.
V2. lic'ivcr .^l/nis.' Tlu- next form of mechum of ex-
ehann'e to he adopted foi- tra(hni>- with the Indians had
tjie nie'-it of hein^ imix-ssihle to counterfeit. 'I'he steady
demand foi' lieaver skins for manufai urinu' into iiats
in l-jiuland ua\ e them a n ery stahle value amono' the col-
onists, and they earl\' aeiiuii'cd the .(uality (d" exchan^^e-
ahility in addition to their ordinary utih'y. When a
ti'ihe' passed from the hunting' to the pastoral sta,u'e
of cultural development, it was natural ll.at they sliould
adopt a coiumodity for money v hich existed in ureater
and more constani sup])!y th.an the products iA' the chase.
Thus we lind amo'i^' the ancii'nt Ilehnws and Ai'al»s
that cattle were used tor the jiurpo-f. However, it is
d(.uniful whethe'- tl.ey attained any ,ureat circulation as
a mediiun of exchanm': it is iiiorc lik- ly that they i)cr-
irii.ed the function (>[' a measure of value. In tlie
on
hook of Cenesis we constantly read staie-uctit'^ of tiie
v.-ealtli of indi\iduals as measured in the si/e of tlieir
'.iy,
-^"'m:v AM) irwK.x,;
. , '■ '""* •■""' lis |'<nslial)ilitv
,• -'^ '"^ i;iic(r(;!!iifv (.}• tlic siiDi.N- r
' '"' lie More t n- f .1 .* •• 11
41 . '■'"'Ud w .Is also a<!'iMis! f 1/..., <k
iiiakc list ,,/•
'/'""■'' ""'■«' pnuiitiN,.
.'I I hi
.'I I III
ila<-
'■'■'■•' '" "liix.rt sue!, ,,i, r-
ni( tallic
■ ini|)(ii!s
1
« ^- '«■^'>':'^;;:::;:•:;;•^::;:r■^^
i:\()i.r'i'i()N OF I'Hi: mkdum uf fxciia.n(.k 'm
l((l)acc-() {•iii'iciK y ill \"ir<4iiiia reveals a <^reat many of"
i the priMeii)le.s iiiidei-lyiiio- the seienee oi' money. The
J story is very well told l)y Mr. Iloraee White ii, his i)ook.
'i "Moiuy and lianking":
In Hity at) act was passed forhiildiii^- tlic iiiakiii;;- of loiitracts
|)ay'il)le in inomy. tlnis vlrtnallv niaklnii,' ti)i)acc() the soir cur
iiiicy.
'i he Act of KJl'i wa^ repealed in 1().")(). Init nearlv all the trad
In;;' in tile j)i'()\ince conlii. i.d Id hi- done with tnhacco a-- the
nil ilinin of exchange.
In \()':iS the price of tohacco in silver had hei ii H-. (id per
pDUnil in \'ir;;'inia. Tlie cidtixation !n< i-( a-((i sn rapidiv that
in 1():>1 the price had t'alli ii Id (id. In lirdrr t.. rai-e the price.
>ti p^ Were taken to r'^lrict tiie ainonni i;rn\\n and In inij)i'<)\('
the (luality. The rl;;'ht to cidlivate tohacco \\a> riNti'icted to
] M)() jilaid- pi r poll. Carpentir- and oHnr niech.inic- uere not
J aiio\\ed to plant toh.icco "or do ;in\' (itiier «oik in the ^ronnd."
; 'I'hesi' iiiea-llle-- Ucre i neti'i <'t i \ ( . 'I'hc jiric; continued to t'.tll.
In l(i;5!) it was oid\ ;>d. It uas nou en.icled tiiat halt' of the
H'ood ;uid all of th( had should !)•■ de>trc\ed. .and Ih.al there-
(tt.r II creditor^ -hould accept M' Hi. f(U- 100; Ih.it the crop
of KiKi -hoidd not he ^oiii for ir-.> th.in I'^d.. nor that in Kill
lor le>s til
an !,J>. per pound, under jun.dty of fortViiine of tl
uholeci'op. 'I'hi> la\v w.i> inetitctiial, a-- the pri \ iou^ om ^ had
heeii, hut it cau^((l much injustice Iti'tueen i!''hlor^ .and ci'((iil(U'>
hy ImpauMii^' the ohhi^ation of i\i~tuiij;- coiit i-.act^. In Hi!.") to-
hacco was worth oiil\ 1 ' .d ,ind in l<i").") (jnl\ Id. per pound.
Tlie^e 1 vents tea( h U-- t h.il a coninnidit \ w hicli is liahle to ore.tf
and iiddiii ch.in;j,i> ot ~uppi\ !■> not ,a <livn-ahle <uh Io he u--cd
a-. ii!one\ .
in l!ie year !()()(! ;i I I'r.lt » u ■ ,eo;,tiated and ralili^d hitueeli
the coloiues of Mai \ Land. \ u'' ua. .and i '.irohn.i, to ^Inp iilart-
ni^' toii.icco for oin vc.ir ui oi-d. r to rai>e the prici . 'i'hi> tein-
pDi'jiry susjH'Hsion of pi.anlui;^ in.idi necossarv some other mode
,..._, ,,,^
• t(V«'lttl)t'^lt «
n;uti (I
( I lit I I M f I I I j f I t I f t li
40
M'lM.v AM) 15.\.\Ki.\(,
''"'^ ■""' i"'i^'i'' 'M- c.ii;,,., ,i,„. ••;„ .1, , .
^T;^r' '-- ^-:M..:^:';;::::■ ;::,::-
'II U)S:i ,ui ( \tr:i(>r,|,narv .,,;,*•
'II'' inu pn.-,. ,,f inlruv,, M , ""
,.^, ,. ' . ' ""■'""• -^'■"i> I"'.,, I,. .,„,„,! ,,,,,„„„ ,.„.
;;:;:;:;:.'" rirr'"''' '■■""- -■ '-'■ ■■■--
scKr. to--, III, ,• ,,||,i „,
pl.iiiK uli, r, v,.j- c, I
"M"-l u... ,i.,t or.int,..,. tli.v I,
ImikIwI tlifiii
;' *'"""^l''l'"-»n.;rv.l,.>,n.vin;;.t.,|,,..,vo
^: A,.,. H.M.H:r, ::,!,: :;'T';'^'';'\''''''''''''
::;; ■:';■;■'"•;' :■■""> "I'" I -^.in,„, „:,:::;
-'I--'"- Ml,,.. I, ,
■■;■'"'■';":•' ■■•■■■-.I ■ -...i 1,1 „,
;;■;"«,' ■•''' ■■ >■ in.t,.i.-,,^„
>'irt I r (leal ),_ "
•T- .111(1
H' ii.a-
t:..:i!:r'- ""■ >•'- '>- ■-
'"■''■'"'^ li"l'-. .mil Ii.,. Tl„. t„lMr,.,
Hie IVai III
i( re
i"- i'( liic (IIn-
' ".^ """""- l'.nHl..uu|., nu- ,1, ,„„,^,
"■'■" ill III'' U.Uv||,,|,.r, ua,
,, ", " '''— li'iiiU''. Til,. ,„|,a,v„ nn,,. .,,,. ,„,,.;
III'"!' .1 i'< l.iii_\. In
||' i!"t' -."" ".!> Illlro-
'■> I .iiMilli, 1- \arii t \ ,,|' ,
I' II l"-\ . (all, ,1 ••,■,,
" -' "' IV l>MI,(l
cask li, inn In 111(1, , I ami
'"■ I'"-'" Hi."' 'n-k^ ni- f„|.a.,„. .a.
'" '"■"•'^^ ^p.(i(„.| n„ 111,, ,„,!,,_
Ml! Us, iiiilst I
"■ '"•"'' "I f'''"ll III st;,(|n..- f|„
::;„;:;",'■'• \ '■'-■:■■'• '-■>. ■„:■;
'^^'"''•'' "M"'!-. liKi,!. r,„- MH-n. V
....i:
•»'J«tiiii ill X. \'
K
r.\()i.r'ri()N or 'iiii: mi.dicm oi' i:x( iia\(.i: ii
V (Hit ()(■
iiN for a
( Ti asiii^-
'l tlifiii
tiiliacco
nil- III, if
■|( (luM-
l.lt fliiii-
ImI Ilia!
II a I Mil 1 1
<'!■- and
tile iia-
i--ii( il
nt aiiij
« Ik re
lir (li>-
IKltcS,
I- \\,-(s
iililc I•^
■ ^^c|■(
n aii\
. Ill
ml ID
. (acli
■ <lic
li;is
\r/.t\
tlir
IKisI
< \-
"3
I
iliaiiy'L' is i^c'iK'i'al accc i)tal)ilit\ . It is this i,iialiiy wiiicli
(listini^niishc's tlic iiioiicy commodity I'l-oin all otlicis.
As a rule a coiiiinodity ln-t-omcs iiioi-t* ac'cr|)ta!»lc' in
( \('}iaii<^e, tlic Ifss its otlu-i' utilities arc cousidt-nd. ainl
Ilk' \\i(K'!- its use as a nu-diuiu of cxcliati^f. This tiiial-
ity (if acc't-ptahility dcpruds ritlicr u|)()[i a ufil-tstah-
lishfd tradition or upon an ultimate inarixet uhei'e it is
estei'iued for its \\.int-satisfyin<^' |)o\ver. Oi'nauieiits
possessed this (juality to a lii^h de-^i-ee heeause this hu-
man desire nas almost unixci'sal amoni;' primiti\e peo-
jiles. In the eas( of luavci- skins and \\ami)uni. the
insatialde demand maintained their aeeeptahilitv of e\-
ehan^e.
Uk Divisihilil//. ][ is liiuhly desiral)le tliat the
money eommodity should i)e eaj)al)le of division into
small units in oi'der to ser\c as a medium in small trans-
actions. This (juality of di\ isihility was absent in
liea\(i- skins and cattle. C'ommoditiis which contain
small vahu' in hu\uc !)ulk. which with the amouu* of them
JK'fVssai'y to make e\tn a \(i-y ordinai'y transaction i'e|)-
lesents so ^rtat a Milume as to he difficult of tiansporta-
tion, are unsuited for th.e pui'posc of monc\-. When the
value of tohacco fell, the dilliculty of transportiny' it
added to its othei' disadx aiitaut's as money. 'I'lie C'lii-
nese i)roir/,e coins of the present day. called ■'eisii." oc-
casion ^I'cat inconvenience to ti'avclcrs who must caiiv
a mo<lcratc sum with tin in. Their hulk is so jjreat that
s( parat( conveyances must Ik ustd. and it is oulv a (|uis-
lion of time when they will he eliminated on accounl
ol t heir cuillhelsomi liess.
17. I iiij nniiit It. I niformilv is another hii^hiv nec-
essary (nialify in money. Win n the estimates of value
were only appioNimalc it was no! so necessarv that the
units of' the cnrreticv shoidd 'k umtorm. hi-t when the
4«
-M()M;\ AM) HANKIXd
cxdia.i<^i,,^ InraMR- ,nn,v ^rnrral. th. hu-k of u,,ir,,m,-
'ty n, the units hcranic a serious ohstade to their ..,„-
eral acceptahility. The laek of this verv neeessarv <mal-
<y nuulethenMalues very in.letenninate and unm-tain.
Heaver skms uere unsuited for th.. purpose hu^^elv on
this account. 1 ohaeeo was liss so.
.ty ot un.lornnty is that <.f c<.o.ni.ahih-tv: that is the
possession of certain ..uaHties uhieh are distinctive' and
^■as.ly reco^,n.ed. either on a.rount of color, texture or
H'.^ht. ^^;^npu,n^vhich possesses so M.anv of tlu- other
<l"a<t.es desu-ahle in money failed in this important pa-
-Uhu- .t e,add IH. easNyc terfeited. ' '..cl'of
t"squahtyotc-o..n,xahih'tycanheovc.reon.e., the use
" some mark uhich is either diflicult to counterteit or
;:'"•'' ;•'"' '-^^ i';'"»--t-i ''.V severe penalties. The oM
a.s ulnch made counterfeitin.- a capital crime, pun-
^sI.ah ehy death, u.re.iustitied when then, .ssitv for
•'''''''tM.nn.u- the quality of c-oo,,i.ahilitv in the curi-enev
-.pprcnaed. Most of the early cun-encies ..„. „;•
"t-1 lor that use hecause of their hahihtv to detenora-
"•"• '^-'''''''''i'ty which has this defect is unsuitc.l as
• s '.vol .alue. an<l the UHMMcnt the deterioration hc-
.u to akeph.. ,Mosesthe,uaIi.yofacceptal>ilitv.
4.>. sMn „i ,,/,,. „„^^ „,. ,,_^.^^ ^1^^, ^_^^ . _
''''•'Y'-- i..vn elin.inatcd hy tlH. use of H.etallic coins.
'"' '••"•■'• '•>. '"■ "- •"• --«lit. Tlu.re is one <,ualitv
'■-•--Oneh n.,dlic currencies fail to possei. tha
-;t.-''"l v'.ivahic. 'Ihewhoh cs.ion of M.e stand-
"':'^'"""' ""■ "'"''■ -'.Iroversy ov< r sih,,- and ..oM
ansos ..ut ol this charactenstic lack of stahditv of . due
;''''7''''<' -''-'' 7 siull disc,. sat len.,h-p..,,,K.;
""■'"'•■'In-.lto! tins process of, . vol,. tioni,
.,...,..
I ,. , Hi iiioncv. the
'' ^-"'^"■'•''' "i i'.e unlit an.i the extension of the
i,\()i.i'i'i()\ ()!' 'iin: Mi'.DiiM ()!' I'.xcn.wci: ni
iiilorni-
■ir <ivn-
■>■ <|iial-
I't'i'tiiiii.
^vly oil
(-* (|iial-
is, the
\t* and
turr ()!•
V oilier
it par-
ic'k of
lie list'
IVit or
\c old
|iiiri-
y for
■fciicy
■(■ ini-
riora-
trd as
II l)(-
lility.
ts in
■<»iiis.
ality.
tli;it
aiid-
H'old
;duc.
iilly.
. tl"..'
• the
ii.; i)[' foiiiiiiodilies ,)o.ss(.'ssiii!4' more of IIksc (Usirahle
ijiialities, was llir iiiii\crsal use of the metals as moiuy.
i!( uinniii^" witli the eommoiier \arieties of nutals like
lii<iii/.e and iron in Ijie form of the utensils whieji serve
I useful |)iir|)ose otinr than exehaiiii'e. we may t I'aee
iliiwu the (le\elo|)ment to the coin whieh has no other
|iur|)os(.- than to he used as a medium of exehani^e.
Adam Smith s])eaks of a \ illa<4'' in Scotland in his <hiy
where nails were used as moiu y. The ii'eneral use of
hnllets amoii;^' the American pioneers in the cliase and
III warfare against the Indians made them i^iiod
^ '"chaii'^e"" ill the early days of \ew Kn^land. In the
liistoiies of (ireece, w f reail of the \n\;j;c and hea\y iron
-; (oius of S|)arta, whii-h snr\i\-ed he\i»nd their timt on ac-
■ eoimi of till' hostility • \' the Spartans to ti'jule. 'I'hey
s((iiied purposely to ha\e retained a most nnsuitahle
form of money for the ])iirpose of hinderiiiLt- exi-han^^c.
The (It elopments of hettei- methods ill minin<4' and
: smelting the commoiu'r metals such as hron/e. iron
■ and tin made them nnsiiitaiile for the currencies in any
form. 'I'heir defect was in their ciimltersomeness and
ill the dilliciilly of carryiiiLf thi'iii about. 'Idle jn'ocess of
i ( limiiiation lie^'an with the eheapi r and tht hea\ mi- uiet-
■ aK. until at last the sole sur\i\ois were sil\( r and i^uld,
' cept for the \»'rv smalkst of c.iins.
i^vou-rroxo, ,,n:sTAN,)un,c,rvu.rK
l'f<„ tnV.i ■n„i Ion, I • ''''<^*''"^' HiaptcT |,a,l
Hu-ir scarcity and (he
tlu. carli,.,. funns v ' ^^^ ''^ "••'''^'''A^- ''m most of
'- ;-.«••::" ;.Jn::;:l,;;^;;'':!;:!::::,'':': -•:
•'1. C/oo^/ r///^///7/V.v.~HntIi i,.,f..l r • I ■
"' '«i-../ K.i, s„ :'''v:'.- ';■''.'>■ ''"-'■!'■.
'"''I .-ukI silver-
''•'\' '••"•«•(■ value in sinal! I.nll. ..in , .. . "" •'
H
^■licapriiss (.r siK..,.
'"^''^ '•""- ^''"'""'A^l' tlu. inm.asin:.
I I ,
" '" '^^ ;i"aii.i()iinnMl a
41
s a
i:\Ul. ITION OF Till: STANDAKl) OF \.\l,li: K
'lie liis-
law of
nil the
tr liad
settled
;ils /'()!•
I ^reat
laimiit
lul the
lleni ;i
lost of
' statr
) that
icil ill
llie ;| ,
nietid
to its
■ah!e,
j»ar-
soine
.il\cr
aerl-
se ill
I'hev
siljM
IS a
inoiiev metal within I'eeent yeai's. 'I'hise metals are
peeiiliai'ly adajjted to the |)roeess of eoinaye. arid eaj)a-
hk ol' l)eii!Li' eliaiit>ed in t'onii. si/e and sliapi' without a
^|)eeially ditlieiilt prot-ess of nianul'acturinu'.
To a\ oid the di\ ision of sil\ er and <4old into (juantitics
so siiiall as to he inipi'at-tieaitle in handling', the baser
metals aic ^^cnei'ally used for eoiiis of niiiior \alne where
till' defect of small \ahie in lariic hulk does not a{)j)ly.
.")■_'. I'Idlitiii III niisiu-ci ssfiil as iiniiu//. Of the moi'e
e\pensi\e metals |)latiiuim is tln' only one . liieh has
lirri! tried as money. In 18'JS the Hnssian (Government,
which owned the principal platiimn. mines. I)e<ian to
coin this metal into pieces of three, six and twelve ru-
lil( s. a riihle then heinu' worth ahont 7.") cents. I^latinum
has s(\(ral (piahties which lit it for use as money, par-
ticularly its (hirahility and its oreat density, which
iiiakc> it easily (list iii'^iiishahje on account of its weight.
I "urthennore it oxidizes \ cry slowly. 'I'he experi-
iiKiit. howe\ ci'. I'cxcaled si'\fral fatal ohjictions to its
use as com. 'I'lu re is no ureat amount of it in use in
commerce, so that the \alue of it is lilvcly to he \ cry
unstahle. Heeause of its extremely lii<>li melting ])oint.
Ihe cost of maiiii i'aeturiii!' the coins was wvy oTcat, and
it coidd not he ea^dx con\trted from hullion to coin and
from coin to hullion, a feature which reiidi'ivs i>'('ld
and siUer \ei-y siiitahk' for money. Thcsi.' objections in-
duced the Russian (ioNcinment to abandon the cx[)eri-
II Mil I in IHl.").
.").'{. (Ut'jiciidiis f( <^()U1 (t>i(l silx'cr. - (\n\{\ and sihi'r
III hullion form arc b\ no nuans the ideal monev. Thev
are dillicult to identify at sinht without the use of tcst.s,
\\hieli ;ii( too ( laliorate for oi'dinar\' use. so that it is
ras\ lo eoumei'l en liieiii.
1 iic\ aiso are an cetcu i)\
w
ear and the (|uestion of loss of weii^ht in handling has
46
^"'M:^ AM) I{.\\KI\(;
;'^'i'nc.slHvn.s.nousn,K.. Inn.:
"t finics rsjKvfallv,
])rnhh,n. or ., sen. "' "■^■■■'^^■'' "">"c'tarv
^ .MMnnsnahnv. asuasilinst,.alc.,lhvth;
'" •^"^<' ayifalion ( Hr in.' tlic r.vf *
.>». ro/,/.,.;<, ',>,,^. ,i,,^j tuo.Ic.f,,.
^"^'••I'ln'ilitv to u(.,r .,n,l -^ -';'•""*". I.e.. f|„
;•"■'■'■"""■ I" " ''■■•i.,„ ,„,,„ I,, , ,,„;".,,,'■': "'','
•' 'l'"iililv ,.r „iil-,l will ., ' ■•tanip„,„ „|
■rni-i:..„i„„, ,., ,,i- ,,■' ''■''"'"' ""«•'"■''«■■
^'-'i-' '-,„,„ 1 J;;:, ,:::';: ';','"'-;:
^IVUiiia. in nr.l.T t„ r-.cil.>.,h. ' '"'"' "'
"■■■?:'■':! ^' -I-' ■H.,,H,,,i'-;;:::;:::; '™'''"''
•'■I- -'K'ncv (./■ ,■(./■);«- 'I'l :.
'■'"";-■■ ■'!'"■ "•■'■"<■ "!• till' K„„ii,h ,„
l''-('ncli con. liviv dl,,. i.',.,,. i , "'' "'''
I
'"'• "'-''"•■•'ted ll.at tluv uVrc
'";;- ^'-H..!:;s.':.,::,i;::::i'::;:x.'"""'"'''-^
'« ^^.is pn.I.ni.lv un[ In,,,,. |,,.,np<. H •'
^•l"il<' lil>-lv that l|„ |,.s , ''>"'"'ses. it
"—.I l"i.';::/"'::r;;r:;:;:;':;-'"™'
' Hie iiKlal or sul).
"■••!<•(■( tni, 11 III,, v).,, I ■- "i»-i.u or suD-
cn'ciiiiiv. n( II,;. I . ' • ""'t"'i'>i<-'. I ()
,,,,,,.,, , ■,; I'i'^H, .(•(.. rile .stamp in,.,,, t|,.
cir
eoiii \
%<
n. we
unit
lent
H
K'Cfl
Ul).
U'C.
To
i:\()i.ri'i()N oi riir. standaih) or ^.\LI i: t:
so as to make dilHcult the iihstractiou of any ^)ortion ol'
it, and besides to inserihe on \hv eoin the name ol" the
person eertiCyin^' the wein'ht. 'I'o |)revi'nt the wearing-
away of tlie inetah it heeanie enstoinary to mix in the
coin some liarder metal, ea'ded alloy. Auain this eon-
venient (k'\ iee was ahnsed. and it was fonnd prolitahle
to inli-odnee into the coin a i>Teatei- amonnl of alloy than
was enstomai-y. 'rheren|)on it heeanie neeessai'y to in-
dicate in some way the fineness of the metal.
.■)»;. Jii'qiiiri'iiicnls of ^ood ci)iu(i;i^c. — At this stage of
coinage several considerations had to he observed: It
was necessary that the stamp njjon the coin shonld cer-
tir\- that there was a certain amonnt of metal of a cer-
tain fineness in tiu' coin, that none of the metal had been
abstracted after the stajn|)ing of the piece, that the
(K\ ice co\ ci' the whole face of the coin, that it be ;^'nar-
antced b\ some reliable j)erson. and that it shonld be
diflicnlt to connteifcit. The i^reat a(lvanta<rc to com-
merce in ha\ ing <4ood coinage led to the gi'adnal restric-
tion of the I'ight to coin money to a W'w i-cliable ])crs()ns,
and finally to tlu' so\ereign himself.
This restriction of coinage, howc\er. did not elim-
inate the abnses which we have mentioned, for the royal
antliorities foi' man\- centniies made large profits by
debasing the coinage, both by I'cdncing the size of the
coins and In incicasing the amonnt of the alloy in them.
'I'his fact can !»(.■ easily demonstrated ])y reference to the
coins of to-day. The English ponnd sterling. whi( h
originally rcpriscnted a ponnd of sil\( i-. finally came lo
represent abont half that amonnt. 'i'he people became
so accustomed to receiving coins according to theii- face
and without reference to their weight that the debased
coin of similar wei
4A
#1
as ever.
ght had the same pun-basing power
The needy monarch conld melt up the old coins
■w
mcim;\ ,\m) dankim-
' '''■'M.--S I,,, „.„,„. Uk- sa„KM,aHK^ ..,,Kl Ih.s „„.",:.
':''•''- ■IP.-C-.I "ili,,,,,, p,,,,st. If,,,,,- VMI
' I 1-MKla .1 ,l,st„,j,„isl,,,| hi„„,|r l,v m,oatal i.-
'lNlKOlKv m ll„s |„„lilai,l<- prarti,,. • ' '"
,.,'■'/';"'''''"' "'"'": ""I '-'il'l-'S "I- coi„s wc-c ,,
:''"'■'■■'••■■".;•; -■ -^^ ti,™- iK.t .!,„ ,>.,. ' ' :
""■",' '" ''"I"-'- "■.■.>!„ „, H„,,„,^,- ll„.v 1 , I
"""■'."-I""' ■■•'■ ^y --,i„« and , ,i : :' T
'--"■'■"'"■s«"v..,,,,.la,,,ly,a,lk..l.,,,tt„nak:r,.,,
-;<'Kli ..I,. |„„«, „,|,„|, „.,„_,.,,^,_| j.„.'',,„|„„. .■
«i■<■" l,«hU.,. an,l lio.,,,,,, nntil. in ia-,2. tlu.pl™ ,
.-.7. A/,,,,,/,,,,, /■ ;.„/„,...„,■,, ,„ ,|,i, „i
.^1"H,,.,I,I,. M,l,,,.,, ,,r„K.|aMi..„,n,,..vr,,,n,|.c. s, ;r
I'",'"',"' ''^''""•'i""-^anK.di„n,nr ,,,!,„ :,'.''
••■-;'^«.-Mnn„.s,a.vnn»,v. .,.„,,,,,,,;,,,,,
"'"■ "" 'I""'""' "I H,c Innrtiun nf „„.|..ii:,
"".""■:\^'^ •■' ^'^ -■•l"|-valM. invn|v,.s,,nd..d"!V:
|)niici|)lfs. * <''ircKiu
15y a slan.iani or vahuMv. nu-an tlu- ,:sr of a met-,1 .s
a (iic.'ism-.. f',.,. )iw 1.. ,. .. .. 'I liituu as
.. , ' '" '"' 'i'!<-T coniniodities Tfw.
i;\()Lrri(!" oi jiii .^^.\^l)Al{l) of \aui;
r.)
Ill-
i
I
stiiiitlifd is stal)ility <»!' xaliic. Since Naluf is tlic result
of a(l_justii ''lit iR'twcTii supply and (kiiiaiKJ. it is ()l)\i()us
tliat our slaiuiai'd nit'tal must not l>t' suh'ix-t to excessive
tlnctuatiiins in eitlici- of tiiest' jjai'ticulars. Tlie prin-
cipal nion( tai'v ))ii'l»i( ins !)!' the past centui'v lia\ e arisen
out ol' conti'o\ eisies rcyardinu' IIk' standard.
In ancient times Itotli i^old and siher were used as a
standard, and no dillicully rose tlieicl'roi'i. pi'incipally
because there were no t^ri'at clian^fs in the supply ol'
!'i(se II ':iis a, id I)ecause trade was so pom-ly de\t'loped
that di\. r^cncies in values were not impnrtant enoUi;h
to create serious inconveniences. It is only in communi-
'it> where industry ami commerce arc hi<^hly organi/A-d
t!i:it small chan;i,-es in the measure of \alue are iiotii'c-
ahle. The case is similar to that of en<iineerinu': I'or
' xample, in e;n-li( r times id" cruder cons! i-uction there
was [)ractically no need of very ai'curate mcasui'iny- a|)-
paratus. Diirercnces of a fraction of m inch oi- milli-
inet( ! could he disii<;ar(l( <!. A\'ith improved teclmiciue
a d finer pi-whlems, it is nec-essary ' have th<' utmost
accuracv in UKUisuremeiit. 'i"he standard of value is a
iiieasuriir'4 appai';itus i'or values and it is only under
hi<ih.iv deveIoi)ed commercial coiuutions that minute ac-
curacy is essentia).
.')S. Ddiihlc .slfimJard pussiJAc iniliJ hist rcntiir/i. — ■
Uuritii'- the Middle A<>es. <>'old l»ecame so scarce that sil-
\vv was })rac-ticall\' the only coinage, and so the Vai-
ropean nations v\( : on a silver standard. The i'all in
the value ol' silver ai)out the time of the discovery of
America created a demand foi' coins oi' "^I'cater value in
small hulk, and as there v\ s ;i uiciitir production of
_U<)1d at this time, the use of u'ol I'oins to.u-ether with the
silver hecaine more common.
Tt is impossihlc to understand tile intricacies of the
\ II I
50
M(>\i^ \\i) i{\\Kr\(i
.sf-'iiidard .|iKstin!, iiitil ^u k,i,.u jiisl |,n-.\ III, vainrs r.f
tlir coifis nvc (l.t'/n.ii.K.I. n,,t|, silv.r jmh) -,.|.1 ;,,-,. n^,!
to .s;idi ;,.; rxtrnt in the .iris lli;.t tluir .nine is (Ktcr-
iiiiiK-<i in lai-of nuasurc hy the dvuv.i'.ul r<v tlicm tli-ir
in reliifion So the supply. Tlu- iinnt. .-nr al\va-,s ohi.i-v.i
to (Iran tlicir '-npplx of imiiion from the (,p,n i::arkct.
and unless thry <.fier the market priee they are uuahlJ
to obtain any.
Sui)|)(.si'. for example, that the s.ipply .,l' ^ih er -rad-
u.dly diminishes while the demand I'or il in he m-irket
is maintained. Xatnra.lly. the prodneers of silver u ill
he ahle to oiitain heiUr terms for it th;>n before. .Jew-
elers and other i)ersons wishing to use silver in their
business will melt up silver eoms instead of purciiasin.,^
the bullion at the hi-lu r ))riee in the eoina.ue. l^jide"-
these conditions, peojjle wr„i|d hemn to disenminate he-
tueen silver and .uold eoins. selling- the silver coins to the
jewelers at the premium whieh would i),-oI)abK- be of-
fered for them. The (Government would be unable to
H'ct silver for coina-e purposes unless it ,yave a much
larger sum in <.(,|,| |',„. jt. ;,,i(l if the C Government simplv
^ave hack the silver in the form of coins, these coijis
would (piickly retire from circulation.
oO. Grrsha Ill's Latc.^Thls principle is called (Gres-
ham's Law. named from an ollicial in the reiou „f
Queen Kli/aheth, who first observed this tendeircy of
people to discriminate between two coins of the same
nominal value. The simplest statement of this law is
that the cheaper money tends t.) drive out the dearer,
that is to say. when the peo|)!e for any reas<.n beoin lo
discriminate between two coina;«-es. they will invaHably
l)ay out the inferior and will hoard the better, thus re-
iuo\in<4- it from circulation.
The only remedy for this eonditioii w(iul(l be for the
i:\()i r'iit.N ()V Till; s'iandakd oi" \.\i,n-:
[Viui-
I
mints to cnnslaiillv niter tlic aiiioiirit of nittal in tlir
I'oius t(i coriTspdiitl to tlnir coiiiiiMMjity \altic in the mar-
ket. (Jold ar.d sil\er are so easily transuofted I'rom one
(■(UMitry ♦<> anotlier that ehan^'es in theli- \alu',' at an\'
['.iiticnlar jilaee will (jniekly spixad thron^hont Ihi coni-
intreial world. I'or ixai . iC ;i new sihc-r mine is
diseoiei'cd in Son''! Ameriea, the inereased .supply oC
>il\er at tl'.at place will hiwei- its \alne: tlic producers
will oirer it on easier an easiei- tei'ins in ex(iiap.<''c I'or
i^old or anytliinf.^' else oj' valne. Silver w ill ayain l;egin
to he exported, for it will eommaiid a hi/^her 'j)riec
ahroad than at home, hot the I'esnit of thns increasin<f
the sujjply in other countries will lower its value there
until a new e(|nililH!nm is estal)lishe(l.
li is of course impossihie I'oi- the mints to contiuuallv
alter the ([uantity of metal in the coins to cori'ispond [-,
tiieii- ni;ii'ket values, l'',ven il' they did so, the old coins
!ii circulation woidd lia\e a \alue either o-re-iter or iess
than their face, which w;)ul(l cause one or the ovhjr of
I Ik in to I'cHi-c fj'oni circulation.
tiO. Mi.sl(tl,(s of idrlji l(\^isl/il(irs.-—'Vh\s tendeney of
UK t.ds to ihu'tiiat*' in value was no! ur;derst(!od unli! re-
cent Iw and the i2'()\ ci'nmcnts were constantlv tr\ ina' va-
lii us expedients io force the circidation (,f ),ioth metals
111 till' face of natural laws to the contrary. As is usual
\\ith Icii'islators and otHcials who ai'c ;lealini>' with a mat-
li V which they do not uniler.itand, they souuht io deal
with Ihc symptcMus rather than the cause of tlie trouhle.
To this 'lid they passed hr.\s foi-hiddin^- irade in llic
liiccious metals. 'I'luy placed ohstaeles in the wav of
export ,".nd import, 'i'hey made )neltin<4' th.e eoms a
Ci'innn.'ll ofVcll'a- \ >.: iv ii>-.iiMi \>Itl) mwrii'iit ifir> l-i.^c l^i'
\h
this character, they wire im])o^sihle of exeeut
Acre constantK' (\aded.
lOtl, 111
id
1
^I()^]:^ wd hankinc;
<il. J-Jjjicricnic of En^;l<niii :Jl/i timihic slaiuhird. —
The ti-iK soliilioii (,f tlu'sf tlillic'iiltits was first rcaclicd
in J'Ji^laiui. This comitry had had h(.r share ol' the
loss and vexation (hie to ehaii/^ts of the ratio. Slie had ^
also \ isiled erncl puiiishineiits on iii(h\ ichials I'oi- niejtiiin-
and expoi-tino- tlie |)reeions metals. All attein{)t.s to eii-
i'oree thest' t'oolish laws wer" e\entually ahandoncd, and
it ( aine to pass in the rei<;n of Charles I I that the ouinca
of ^old. althon;^h proclaimed hy loya! authoritv to he
the e(|n!\alent of :i()s. in siKcr. passid in trade for 'Jls.,
and no attempt was made 1)\- the noxernment to inter-
fere. Tile Huinea I'emained as a trade coin till tlie third
year of (Jeoroc \ (1717). when anotiier proclamation
\' ;;s issued inakino^ it legally e(|iia' to "Jls., at which fig-
ure the I'alio to sihir \\as ahoti* i.") 1-.") to 1.
As i4()Id was sliuhlly oxcri'atid at the I'atio of I.') 1 .■),
tlki'e was a tendency to ( xpoi't sihtr: and for this pnr-
|)ose the full-W(iulit coins were scleclrd. So it came
iihoiit in the course ,,f li;,!f a cenlury that 'he onl\
sihcr coins i-emaiiiino- in circulation w<!'e those which
had heen \\\\\v\\ I'educid in wii^hl h\- ahrasion or h\-
tVauihdcnl clippino-. 'I'll,, (vil In came so intoK'rahk'
that ParliauHnl. in 177 K passed a law pro\ idin-; that
-iher c'Mii should not !»r le<_;al t( ndcr- for more than !.'•_'.")
in one |)ayiii(nt. e\ce|)t hy weight at the I'atc of ,)s. 2d.
pel- ounce. It was enacted at he same time that H(,!d
coins deficit tit iti W( iyht should he called in and rec lined,
.uid Ilia! tlure a fter such coins, i I' under a certain weiulit.
should not he leo-al tetidci at all. The restriction of the
\v\X'\\ tendt I' M' silver w;is |o (onlinuc two \eai's. The
c.\|)( I'lalion of l*ailiam<nl was that some rfl't'ctual and
J)criiian(nt steps would hi taken lo Ava] with the e\ II
of liuht coins in th;d iulei\al. hut since n<.lhinu' ^^-'^
done, the a<'l ipf I 77 I- w as n riew < d in I 77<'' lor two \ .'ars
I
I
r.\()M 'ii()\ OF Tin: s'l.wDAiti) of \ .\i.ri:
■1
/y/.—
u'lic'd
I" the
L' had
() C'll-
, itii(i
iiiiica
t.) he
•J Is.,
iittr-
thinl
at ion i
-p.\
'- 1
|)iir-
fainc
only
\ hich
r hy
rahlV
that
iin(i.
i-hl.
r thr
The
ami
evil
was
.-••ars
llinii-,
In ITTH it
A\as iHiK \\ «,(l lor .s(\(ii \fars. aiia
Ih^ii hy i'c|)(.att(l rc-iRuals it was cai'ried forward to
17'.>H. iViiothci' clause was now added that no more
il\er should he coined at the mint for prixate ])ersons.
CiL'. Adoplioii uf siii^lt' :^<}l(l slduddid iniiiitciilioiKil.
—The si^nificauct' ot' this ici^islatioii was not j)t'i'cei\('d
at the time. It had not ])vv\\ the intention of Parlia-
iiiciit to estahlisli the sinolc nojd standard. The (jues-
fion of statidard was not undci' consideration at all.
What Parliament did in 1774 was: (1) to put "old
coin in a state of perfection hy recoinin^' the defective
pieces and making" liiiht coins una\ailahlc in paynunts
!h( I'caftei': ( '_' ) lo limit the Kiial-tendta- faculty of the
siUer money theti in circuiation. The mint \\as still
iipt'n, and anyhody could ha\e siher hullion I'oincd into
money of full wciyjit and full Ici^a! iendri'. jiut since
siKcr was uiidcr\aluc(l at the I'atio "A' 1 .") 1 ."i. nohodv
would take it to the mint. Thus all the conditions of
the sini^lc uold standard were in pi'actical opeiation
without any fixed intention of I'ailiamt nt to hring it
ahout. or any know Icd^^c that it had heen doni'.
it was noticed. l)owc\(i\ that 'he inconMiiic ncc s of a
^hiftiiii^' i';iti(t ha<l disappeared. Tjicrc was pl(ni\' of
Li'old money foi' laruc transactions and of siKcr monev
\'i>v small ones. AithcMiuh tii' siKci" coins were dc-
lici( lit in weight, thcv answered tin purpose s of small
ilianLtc. After the experience of a (|uai'tcr of a cen-
liiry. I'ai'iiamt nt and |)eoplt v.'.yr com inccil that the .\ct
of 177 ^. although adopted as a temporary ?ucasure,
oiil;Ii1 to he made pi I'manetil. .\ccordin;4ly it was
iikmIc so ii\ I7!M>.
^ ( t it was not until ISlti ih;d the true | liIlos()ph\' id'
the sfip w;is w<il enough iiiidirstood to Mcnit its en-
actment into a settled law. In thai \;ai- it wasenacteil
".+
M(»\l;^ A\l) 1{A\KI\(;
<|>--'l t H. o,,|.| c-oiM ..(• tiK. renin., whc, of r„ll .vci.-ht
.^HouM he i nil K,,.alU.n.ln- and should Ik. .oincdn^^^^
Pnvac p.-rsons tn any an.onnt. and thai s|h,,. ,,,in
■si'"uhi not Ih. !.,uJ undn- lor n.on- than lOs. in one
l'-\vnK nt. ..nd shonld h,- .oin.d onlv on oonnnnrnt -u-
;•''''''^•^,.KhonldlK■^•dncvd,..^v,.i.ht.;,H■rcv.nt. This
i-v. wind, .stahhshnl th. sinok. .old standard, rcn.ains
in toi'ci' to thc' present day.
J^--''''^tohMlK.sino.;daro.oodror!nnrorK,,o.h,nd
o hinnd.r upon or have, thrnst npon h.r , institu-
^">ns uhu.h oth.r n,untri..s an,UMv oulv' after nuu-h
->"sn<>us Hlor, „„, ,,,,,,aps revolution." l^.side. the
Kold standard a ureal many ,.xcvlk,,t iV.atuns of ...ov-
enmu.nt the. dual houses or IVuhauKn.. .h. nspon-
-l>.l.ty.dthe.(;ah,n,.tlothe.ConMnons.r..puhhe-an'ov-
";'7"' ;'"''•■•''-'•'''•'-' •"'•''nionare-hy.e.t...u.i,hMK.
(■it'.d on this poiiil.
•'•iyl/////,v,v. Tlu. key to !h.. nnderstandin... of the
com|.le.x pn,hK,,s o, ,h,. ..and irds i. . He.ar ..one-e.ption
"" "iin',n.orn.i„auv ,.u.d oflh.. Inllu-ne,. of the
"""ts upon values of, he pr-e.-onsnutals. .V unni is a
'' , , ^^■'"■'■•' *•*■'•'•••'" '•' 'i"i<*' -in.nlilies of th-. previous
"'y'^'l^ ;;••<• stamped with a deviee or inscTiption. indi-
<'^"'"i,- the ..xaet,,uantily of metal in them. .\ , hefor..
"'•"""•"■''• "- •■••"•li'-t inse-ription^ .ere literal stat,-
';"'";';''""■"'■'-''*"'■""• ""■'••'I ••""laiiud d.ivm-the
'■'■'-'''' '""""' ^^'-'^ ••' l"""id of silver, the Famhsh
I-""v.n pennyuei^h, ..r.,K,r. "I he sole runel,.:;, ..f
""■."""';^-''^'"i'" "" "letal In.oa ,orm mor,. eon-
^";","' ';"• '•"■'•"'•"-". II .(r.el.d the v.lne of the
''"'''^""'> ^'■'■^"•^'•^"'--'"npinu.inereasedlh.irnlii,.
'■ "^ V'"'''"''""-*^""' '•'■•^^'••1^'-' add, ll.nal
dm, and for tli(.m.
'''''"1""""'^ ""•••''^ ''■•i^'M Miarkel v-dueexaelK the
AOLI'I'ION Ol' IMir. STANDAUl) OF VAI.I 1. r,r,
line as aiiv otlic- coiruuHimts
itii
aiut
11
ns mar
ket
value
llia-tuates iccoi-dinu' to ti.c laws ol" sup])!)' and dcniand.
\\'luii tlicre is oidv one nutal in use as money
the 11
uc-
!l I
ts market value can
)th
hv measured only by
Th
Illation^
IIk' rise and fall of priees oT other tlini<>s. | |r; name
•■dollar;' 'iMunid sterling/" ■'i'rane/' -mark." ete., are
simplv terms in(lieatin<4' weight, not value. The name
•dollar" tor example is merely another name I'or a eer-
tain definite weight of o(,ld. i. c. -J.'i.-J-J orains of pure
nold. A eonfusion of thought arises heeause the values
(d' everythinj^- else ai'e indieated by eomi)aiison with the
dollar ol' gold, r.eeausc tlu- amount of -^old i.i the dol-
lai' nevei- .halves ixeept In le.uislatix <• enaetment. peo-
ple fome U) tnink of the \alue ol' ,!^'old as heino' iixrd
and unehangino'. In a later chapter on the relation he-
twicn oold and priees. we shall work out this idea more
(.xhaustixily.
(i-l-. Liual tciKhr. In the Middle .\gcs. wlun there
Wire a ;;r<al \arittv of coinages in concurrent cireida-
tion. it was ni'cessary that there shonld hi' some under-
-.tanding as to the relative \alues of this heterogenous
coinage. .\eco!'(lingly thi' duty was imposed upon the
uoxirnnunt (d' preserihing the \alue of all < Iher coins
111 t( rms of some one partieulai- donu'slic coin. These
roval proclamations ol' tlu value of coins really had a
lorce of legal tender enactmeids. heeause a creditor was
'•■.iiipelled l)V courts to !-ecti\f any of these coins at ds
l„,>trd \alue. Legal tender means any medium of ex-
change which m:iy he ten !( red in paxinent of deht. and
\Uiieli must lie rec<i\c.l oy the creditor whether he is
willing or not.
It was ol)v'r\cd early that there was a tendei.cy
lor certain -'asses of coins at certain limes to disappear
ir,.ni eii dation. Thev sure t itlur hoarded or melted
r>(i
-MoM;^ AM) |{.\\KI\(;
;'P f'"'"^^'"'ilH'.Kn.ur..u.t,nvor;,..vdrvnr|>latror
I'^'y^^ •■■•;• -^i-H.<l. In nnkM- to p,vu„t this the mints
*;yM''^>'tivrr.huvdth<.anH.n,tornH.talin th.c.^^^
^'tt^;".l.tc<l tn rhcrk thc^ Icn.k-.Ky hy hnvs prohibiti,,.. ev-
P'"-tnii4' or MKitinu. or the- c-oins. Onlv the fonmror
tlHse nic.^„ivs was rllieacinus in cheeking these tend-
^-nnes. liHore. h<.^^e^e,•. the .•o„.tant alterin- of the
n.inaoe ui(hiee<l n.vat e(.nriisiM,i i,, trade.
<;.->. ///>/o/7/ o/ roina::r In the Cnihd Sfatfs.-Thv
l).stnryo|MheeniMa.enr.ohlaM.l.,!ve,.inthel',nte,I
^•^'tes.soneorth.. Minst mst n.et ive ilh.st rat ions of the I
Jaws wh.eh uovern the tinetnations „. .ah,e oC th. pre- I
-.ns nntals. The (ir.t se<.,H.tary of the treasnrv 'va^ I
- '■■^••""I<T Ilannlto,,. an.i he was the statesman" upon '
"'"""''V^'' "''■'''"> •''■^•'•-f'Hoaplanlnran.on.
.tary an<l ha., km- svsi,.,, for th,. new eo„ntrv 'i le
"'^:<l""" "f rx.han-e i„ e.renlatl,.,, at that ti'n.e wa^
• "■'•'^•M'.''!!,v Spanish an.l Kn^hsh ..K er eoins. ,„■ paper
;'"";;■> "'"'-•"''"■i.s. The p„u..r.iK.n toC-on.,!ess
"'. "" ^""-^'''"l-n of reuuh.finn thr rah.e of Coreion
«""is uas most nnpoHant at that time h-eause of the
Ai-reat variety I„ .-irenkation. It nas nee.ssarv to have
-;nie anthonlall^.. vahiation In onh.- that pavments
""-''' '-•"■"I' ^^itlHHit n-imrinoth. partus to eomr to
.•li^rcenu nt as lo the preeisr nirans of pavmc nt
'•"i/wrv/..//o„/.sv7.v//o,.o/r/. /.--../. 'it was part of
tlic- pkn, of 1 1;nniIlon to .stahhsh an ( •ml, ,1 Stat, s mint
■so that th, . .m.i.vmi.hl he snpph. ,1 u 1th an a.h .mat."
'"""""' '"■ ''"""1 States eoiMs in the shortest possible
'"'"■• ••""! I!'"^ -• .■|^^.■.y uith the eonCnsioM of th,. mis.rl-
''";-'<s eon,;,,,.. II,. thought it n-nssarv!oeoir, hoth
,U"l.i.UMlsih,.rinor.krthat this pnrpos<. ,niokt he eo.,-
^"""'■'•""' '-'^ '•■'P""^- •- I — 'M<'. If.' fiv..l upon the
ratio o(' i:» to I as
ii'I"'"'^i"iatin,M most e|,K, K d,,. „,,,,..
i:\()i.T"rioN or Tin: s'iandahd op valfk r
■?*•■
3
k(. t \ allies of tlic metals at thai time. The unit of vahie,
the dollar, was () vitd upon heeaiise of the familiarity
of the j)e()|)le witli the Spanish dollar, and tiieir custom
of <|Uotin'>' prices in that standard. The opening;' of tiie
mints to the coinau^e of silver and Li'old at the ratio 1.')
to 1 .iieant the free coinage ot' hotli metals. T'iie mint
stood ready to accept <ra\(l and silver, to convert them
into coins, and return tiie:,e coins to the person i)rin<>ino-
the metal, char^in^' him a \ei'} small fee for tl>e alloys
used to hardrii the coins.
(•T 1 11(1 Hide// of the ratio (iiid ils cflUls. — The plan
(lid not work ■ iit as Hamilton had intended. In the
Mrst placi' the ratio of 1.) to 1 had ceased to re|)i'esent
ihe market ratio, when the mint was finally I'cady for
coina<,e al out two oi- three years later. According' to
'he u'reat Kuropean authority on the market values of
the ,irecious metals. Soethecr. the actual market I'atios
were as follows: l.)..'J7 to 1 in 17!>1-, 1 ')..">•') to 1 in 17i>.').
l.).*;.") to 1 in 17'»<;. l.").4.| to 1 in 17!>7, I.").")lt to 1 in
17!>H. 1.").74 to I in 17i>'.>, l.).tlK to 1 in IHOO. and l.).4()
to 1 in IHOl. Till se chan;.ies in the market ratio indi-
cated that the tciKlcncy of siher with. I'cspi'ct toxoid was
downward.
I'nder these circumstances noliody would he so fool-
ish as to take j.'')l(i to the mint to he coined. It was
!iiu(! more pi'o.i ,d)li' to take that <4'old and pin-i'hasc
siUer \'.ith it in the market, and tlu'n to take the
silvir to the mint and have it coined into uiore dollars
than the !4i>ld would jia\e made, and each eajiahh of
purchasino- the same amount of conimodities as a ^old
dollar. To make this ])roposition as cleai- as possihlc,
li I us tidxc a concrete examjilc.
Suppose a dcalir in hrdlion has one pound of ^'old.
it he wishes to convert it into a means of |)aymcnt. he
.')S
•MONKV VM) IJANKINc;
till
may do one ol' two tl.inus; first, 1r. may take it to tiic
mint ami liavc it coiiitd into approxiiiiattly -JM) dollars:
second, he may vwhiuv^v the o(,|,l hulli,,,, for silver bul-
lion in the Kuropean market. I f the market ratio hap-
pens to he ir,l . at this time, he will ^et i,, exehan-e 1.51 ..
pounds of silver. This silver he may take to the mint
and have it eoined into approximately •_>(;() dollars, eaeh
or whieh is just as u,„„l as any no|,l a,,!!;,,. f„i. tl,e j„„..
pose of trade. ( 'nder these eireumstanees, whv should
anybody take ,<.„1,1 to the mint when there were always
dealers ^^hn ^^vvc eaoe,- to make the profit whieh eould
Ik- had by purehasino- his u,,l,l h„||ioM for silver dollars,
t'xportino- the o,.],! t„ i,,,,. c,,,,,-^,, ^:|^.^.,._ .,,j^, ^j^^^^^ j^.^^._
in- the imported silver eoined in order to buv more <.(,hl
'"'Ihon^ Here we have an endless ehain, automaticvdiv
causinu- an exj^ort of n,,l,l and an import of silver. I 'n*-
der these eireumstanees no ^,,1,1 „as eoined, „f t,„„.se.
<iH. Disappcarainr o/' the .sihrr ^/o//a/-.v.- ^Hamilton's
idea of supplying this new eountrv with eoins of its own
i.iintaoe was further frustrated by another peeuliar con-
dition. It was very s<.<.n notieed that in spite of the coin-
age o( siher dollars at the mint thev did not seem to re-
ii'aiM m c-ireulation for Ion-. Instead the old Spanish
<;oinane eontinued to be the eurrent monev. Of these
.Spanish and other foreio-,, (,,ins, ,,nlv those whieh were
H1PIH<1 and mutilate.l Mere eurrenl. Perfeet eoins
were either mm.,, ,-edueed to this same eonditio,, or disap-
''^"7;"''""'""'^-"''''i""- 'I'lu' Spanish silver eoms were
a' this ti,„e full K..,,l lender alo„o ^,,11. the Tnited
Myites ...„,s. I„ ,|.,i, ,„,,,,,,, ,,„dition Ihev we.'e
^'';4-htlv heavier than Ihe An,e,-iean eoni. Hnth" in this
'•'"7*7— •'""- W.S.Indies, uilh.hnm at thai ti,„e
;:•■'">•'•' ve,-y extensive t,-a,h.. both eoins pasMul at their
'^•'•^-alue without anvd,MTi„„„ation SIhwv.I t,ade,-s
i.\()!.i rio.N OF rm. siandaud oi- \Ai.ri:
m-
I
Inuntl, however, tliat they could make a |)rotil: exportiiin-
the new Ignited Stales silver dollai's. e\ehani^iii<^- tlieiii
ill the West Indies i'or tlie hea\ ier Spanish dollars, nielt-
iiio- these liea\ier dollars into hullioii. itnn^in^' the liUi-
lioii to the Ciiited Stales and ha\ iii^' it eoined into more
than the oi'i^inal niimher ol' dollars.
When It was discovered that the eoinaoe of silver
dollars was simi)ly adding- to the profit ol' hiillion
(k-ders instead of sni)plyin,u- the country w ith currency.
President JeHVrson suspended the coina«ie of the siher
ilollar in IHO*!. 'I'his unsatisfactory state of the metallic
ciirreney of the country was not serious heeause of the
almost imixersal use of j)aper money at that time.
I'l III IMMiSS (ir M \I1KIT Ii\Tl(l HriUIKN del I) AM) Slivill.'
^,,ll■. Uatiii. Year. Italio. Viar. Ratio.
i.).n
15.7!)
1.>..>J
'^ I -111.
l-ii.)
* iMMi
iMiT lj.l;{
4 1-(W Ki.OS
I ISO!) !.>.!)(!
i I- 1 (I l.VTT
l-ll 1")..".;!
i-i." Hi. II
|sl;{ iti..',-,
jxU Ij.ol
l-l.> l."...'()
l>lti 1.5. -'8
i-«i7 i.vn
isiH l.j.:ij
isii) i:,.:«
|s.>() lj.(i.'
Is.>l l.-,.!)j
IS.'.' i.vso
|H.':{ i.-,.sv
Kn ij.s.'
!».'.•) I,V*(»
is.'i; i,-,.7(i
ls.'7 l.>.7l
is.'rt
to
ix.'<). . . . rv7s
I C'lmipil.'il li\ tlu Dm
is;$(i.
isil .
iKi.'.
is:t;{.
IKU.
1.V8-3
1.>.7.'
l,"..7:i
1 ■, !i;i
l.-..T.{
1S:{.; I.).N)
is;{() i"..7.'
IHU7 I "..Si
isss i,-,.s,,
|s;i!)
to
I-' ID I. ■..(!.'
Isu 1 "..7il
lsl.> 1 VS7
isi:} I ■..!•;!
ISU li.K'.
IHIJ IV!!.'
ISKI I.!»ll
isn l.i.hO
ISIH l.).H,>
ISl!) 15.78
ls.',() l.i.70
iH,-.i \r,.i(>
IH.).' 1.5.j<»
lH.-.:{ iv!;i
1S.U... iv.i:!
lH.'.j... . \;.:\H
la-io. . . . i,',.:w
is;,7 . . l.V.'7
lH,Jrt l.'i.nfi
]>•:)<) i:..i'i
ISliO 1 '>..".)
Isijl IV.'ii
ls(i.' i.».;!.<
iMi;{ 1.J.S7
isill 1.VH7
ih(i.; ivn
is(it> i;, i,i
lb<>7 l.»..i7
lS(iS 1 v.")!!
iHiiSj 1 ■, i;(i
1S70 l.)..W
\>:\ i"...'.7
IsTJ l."i.(i,i
|s7:{ 1,>.!».'
ls7t 1().17
l!-T.> Ki.fiJ
ls7<i 17 77
1H77 17..'.'
187H 17.!).'
1879 18.H9
IHHO.... Is (It
1881 l-> .'1
ISS.' IS.iJ
lss:i 18.(i5
1H8^... lM.(i3
188,'. 1!).3!)
188(i .'0.7;{
til. lititecl .'■■ittte.s Mint.
i
60
•M('M;\- AM) JJANKiXc
1 .SSM .
lh!):{.
it.iii
I eji r.
-M.l.i ls;i|.
-'l.!)U I >!).-,.
l!).i;
1W)7
-':{.7J I
-'(j.l9 1
^:>i
h!»S
:{ 1 .
;{.-..(
h!)i»
lii.:
!)00
3.5.:
Katio. ^car
• '.i.'.-'ii'i i)i(i|.
-'0 \nin.
I't i'M>:>.
III.
Kalii
. . 3+.()H
. :i:>.7o
. :io.,u
\\;is, thertf
("///.L'
< "f ratio to /6\-/.— The
.11 th
ore. oil ;i stiift silver I
(i I
monetai-v svsttu
)a.si.s diiriiio' I his nerio,!.
'^\i^nld iK.v.no- l,,,n ,.x-,.ort.,!. hoanK.I or ,l,\ertcd
into the- arts. In is.'U. C
L'(
Ivtl
I*-' e'cnditioM. irdiict'd tli
•"•^■IVSS. Ml ;,,| attfiiipt I,
) rtiii-
1 roiii 24.7.) grains to 'J,'}. 22
e wc'iulit ,,[■ ti
If m
.1(1
(to!
rt'j)resciiti(I a ratio of api
,S-'''";llllS (.r piHT n(,i,|. 'I'l
II'
nieicia
1 rat
niijit rat
ncaily conrcl. j
could I)a\c
'o m \W.n was 1.3.T.'i to ],
)f<'\iniat(ly K; to 1. Ti
R' coni-
'o iMitiJ I'ortv vcai-s lat
(T,
io\\ ex CIV
•ttl
"oi- did it nacli iln
^1 was pi'ohahK- af
;is aii\- ari)iti
It
w
Hfii settled ii|ioii
^^('11. ill fact, ii
aiy ratio wjiicl,
■liiiiietallivnr' li„xv iii,.fr<ctii;d
' a ^ul)S!(jiiciit chapter on
estahlisli li
y enaetiiKiit in
;>n\- attempt must \)v \i
value hetuccn t\\() sue!
a siiinif coimtrv a rat
lo o
\\liieh ha\(' uni\-i-rsal titilit
I (•on!m..ditiVs as o-,,|d and sil
\'er,
as o()l,| ^vas d
i'i\eii out ol' ('
too low, so after IH.'U sih
•■""' a world market. Just
"I'latioii wJKi, the rat
lo was
was too hii'Ii.
^\as drum out l)cfanM' It
"t was at the mint, and tl
'ilvrr was worth n
IO!-r ;|.
nil
llioii tl
lan
a i>'o
Id iiasis. In IH.'M the rat
If eoiiiitry soon JMiind its.lf
on
1. hut the diil
lo was eli;in^<(| to l.").!tS t
()
tVct.
'■••<"ee was so sJiM-|,t that it |,a,l little. .-f-
70. Lc^ol t( //(/(/• ,,rl
(.old
•v ('rtiit(\'J
j la per .s/,7;/^/^/,v/___
'":'"'""" •""'"•'li-l.'n.dard,iiitllth,.|ro:.,| tender
»<-ts of IHO-J is<;;j. The (jrst of ll
I'el
lese
icls.
"'iary. iSd-j. .mt)
liun-iiitei
est
passed in
"'ii/<(l tile issue ,,f .S|.-,o.o()(),,)(M) of
anno- ( 'nited .Slat
es Hole
pity
i:\()U rioN or I'lii: siandaud of vai.i'i:
liciiri. T. These iidIcs were to he rteei' al)'e I'or all dues lo
the (.overnnient and to he leyal tender I'or all dehls.
|)iil)Iie and i)rivate, within the Tnited States. They
were, Inrthei'niore, ixehan<^eahle I'or the (> ))er eent twen-
ty-vear honds of the Tnited States at the option of the
holder.
The first hill was followed six months later by a second
measure authori/.in<^- si.j().()()().()()0 more notes, and in
,)aiiuar\. ISC.:}, the total was inereased to .i<4()0.()()(),()00.
'I'hus there was injected into the circulating- medium of
the country s tOO.OOO.OOO of promissory notes, the early
i'Klemi)tion of w Iiieh at least dei)en(led on the success of
the Federal army in the field and the reestahlishment of
]n'ace and ordei'. In accordance with (ireshani's Law,
i^old entirelv disapi)eared from circulation after the first
hill was passed, and pi'ices were soon expi-essed entirely
ill t'^rms of the pai)er standard. The situation was
liirther complicated in July, IHC.'J, hy the repeal of the
|M(>\ision for Ihe exchann'c of the notes into United
Stall's Itonds. and hefore the end of lH(i4 ^'old was
(juoted at 280 in the \ew ^'ork market. In otlier
\^o!-(ls. the "urccnhacks"" were \\<)rth hut .'}.) cents on the
ddllar. It is ohvious that tlu' country was no lon^'cr on
a u'old hasis. The unit of value was now the Ciovern-
iM( nl's promise to ])ay Si in nold, a unit which fluctn-
ated with the fortunes of war.
71. Single i^oUJ sldudard after 1S7!). — This condition
lasted louij- after the conclusion of the war, l)ut naturallx'
as it hecame i\ ideiit that the nation was to endure and
the ( io\crnment linancts impro\ed, the di\c'r<4-ence he-
l\\((n u'old and tlu' ])a])ei' standard u'l-adually decreased
nnlil it was completely destroyed when in .Ianuai-y. 1H7-K
tlu treasury idlVrcd to redeem its le^al temler notes
I!! !H7;j nn act \\:is piisscd wliich made oold the sole Ic-
et
•MiiM;V AM) ll.WKiv,:
„;„::,1 :;!:;.:;,: -'^ "«-' ^'y ^"'-'--i <'>■ «i.c. .■,.,<.„.,»
Iri IK7K ll„. f,v,,s,„-y ,v„s m,ll,„ri,,.l I., ,,„rd,.sc. sil-
■^ Mi.r,„.-,„ Wt .„ll,„™..,l ,iK, ,„„,|,„, „, ,iK,, I,
" II' <>'„,,,.,,,„.,. Hl.,rt„r the. Silvc,. I>,„.tv(„c.rt
.•■ I o.„ ,„„,..,.,,,, ,,,,„„, ,,,,.,„,,;,,
-■ l:l'''l""".,«"Nll.asa.M..in..nUK-si,,,,k.|cJ
tli'^ iTM,„,|,t,„„ „f ,|,,eic ,,aynu„ts ,„ ,ht.>.
n •• , • 'M i.mm; ,1(1 act was nnssf-r] on
?'■"" ''V''''':'>' '-'•'■''•■'■ "-■•■■n.v tiK- r„i, si '
"-S t„ I,.. ,1, ,„,, |„,„,,,,,. ,1,^, ^,,., _|^_| >" t -
-nM„.i, as .1,,. I.„„ls ,1,.. (:„v,,,M,H.nt ,„',,.„ t' ,„ ,
V,... a„.l «,.,.n,l,a,.|<. a. pa,- „iH, ,«„,,, „, |,av ,e,
1 ■ .yiM.|i.,,H„ii,v..Uyp„,vi,i„r.,Mi„.i,.!..,i„,; ;^^^^
"--■"■I "»l"- ^ "P"., the. S«.vctarv ,,,■ ,|K. |,,av
;,;•■ l-«^;i ^l-.l.-.nl «a, a ,1„„,„, ,.,„, „„,,, „,',«;'
i:\oi.i rioN OF 'I'm: standaud or \ \i,n: (j;
silver: Irom lH.*}t until 1H()2 it was o()|(|. Tlifn came
the Icyal tender ;!ets, and yreenhacks heeanie the actual
standard, to eontiniic until I87!>. In IST.'J ^old was
made the siuf^le le,ual standard: and iVdin the resump-
tion of specie payment in 1871) it has l)ccii the actual
standard as well.
MICROCOPY RESOLUTION TEST CHART
ANSI and ISO TEST CHART No 2
1.0
If us
*^ 4
1 ^'^
22
I.I
2.0
1.8
1.25
1.4
1.6
A APPLIED IM/1GE he
CIIAPTKU VI
STANDAUl) Ol' DF.I r.HRF.l) PAYMENTS
7i. Defects of onld. The next function of money
to he considcrrd is its use as a statidard of (IcftTird pay-
ments. Obviously this dilfers from its futietion as'a
standard of value only because it introduces tiie time
I lement.
For this |)ur])ose, also. <rold is a defective standard.
l>ut it is hy far the best that is krunvn. c;,,!,! is ,hirable.
Once mined, it is added to the pnxhictions of the |)ast.
to remain always a part of the world's supi)ly. For
tins reason the amount mined in any one \-ear cannot
l>ear ]ar<.'e eiiouol, proportion to the total amount in
'■xistcjice to cause <>reat changes in its \alue. K\en with
tiie j)resent annual production of over .$4.)().()()(),()(H)
the amount in existence is so iai-oc that its \alue is much
more stable than anything- v]sv which could be used i'oi
th(.' j)ur))ose.
Although the same was formerly true of sii\er. it-
pi'oducfion has sn nreatly increased during the last
tlnrty years that a sinol,. sJUcr standai-d ol' deterred
payments woidd be xcry unsatisfactory. lUtwccn IH7(i
and IH'.tl- its ydld pne.' fell .*)() per edit. C'hanncs as
xiohiit as this wduld nnt ha\« tak( n ;lare had not silver
bet II dciiKuicli/cd in tli( I'nited Slati s and hail not the
natmns ol' Kuiopc aKd diseardt.l it <Iuiiiih th,. l;,st h.-df
crnlury. Tins ^nat chaniic in Ihf value (>{' si|\(r with
res|)(c| to n(,|,| s( r\((l to discredit il as a standanl.
i:....i.: :•.
■•]'■-'• : .'
• t w i i C
STANDARD OF DKFKHRED PAYMENTS
65
double standard, but shall reserve that subjeet lor more
{•arel'ul eoiisideratiou in a subse(juent chaj)ter. In the
absenee of a better, we are therei'ore forced to the eon-
elusion tliat gold is the best standard for deferred pay-
?iients.
7.5. Definition of deferred paijmoits. — Deferred pay-
ments are usually the result of eontraets. When we
stop to consider that contracts play a part in nearly all
business transactions, the inij)ortance of the subject is
a|)[)reciated. Our investments, bank deposits, notes,
currency, in fact, a lar^e proportion oC our wealth con-
sists oi' conti'acts. If economic prosj)erity is to con-
titiue. these contracts must i)e enforced. To this end
the Constitution of the Tnited States declares that "no
state shall ])ass any law impairing the oblination of con-
tracts."
Althougli the ])rovision ])revents the direct impair-
ment of contracts, the same end may be accomplished
indirectly by unwise moiutary laws. Anything, in fact,
that causes great changes in prices will alter the elfect
of conti-acts. Practically all contracts are payable in
tci'tns of dollar-, and some of them I'un for long pei'iods.
In order to securt' jxrfect justice between debtors and
creditoi's it is lucessary that the dollar should mean the
s.iiue at the maturity as at the begininng of the con-
tract.
Speaking accurately, this is impossible, for even wlicn
tile contract is specifically made payable in gold, the
purchasing powi r of that gold ;il'tei- ;i jxriod of Mars
liiav liMxe ejiaiiged eo]\sider;d>lv. ('oiitra<'ts ])avable in
gold, howcxcr. ba\e always Ixtm tln' most highlv re-
g.'U'ded. beeauve no matter how distant the dale ol' ma-
turity it is gen( raiiy Teil tiial tiie \alue ol golii will
ap|)ro\intate its present \alu»'. 'l"he risk that it will be
VII —
f)()
MONEY AM) HANKING
III!
greater or kss is only the ordinary business risk which
every husiiiess man must take and for which he must
make allowance in his calculations.
A nrtat many contracts, however, are payable in terms
of '•dollars," without s])ecifyino- the kind of doHar that
is meant. While the statutes define a dollar as '2li.'2'>
•grains of |)ure ^old. yet debts may be le<rally paid by
other forms of dollars. The law makes certain forms
of currency lenal tender in payment of debts. The sil-
ver dollar and the treasury notes are lull le^al tender,
(ireenbacks are full le^al tender. National bank notes
are IcM-aJ tende:- in payment of any debt to a iiational
batdv and are recei\ able by the (Government for all dues
I xcept duties on imports. Subsidiary siher is le<4al ten-
di']\ but for c(inv( iiicnce sake onlv for -Sjo in a siimle
))ayment.
7<i. K//'cct of h-o-al tender lnrcs.~So lon^ as all the
forms of currency are interchan<rcable and of the same
value, leo-al tender laws have no particular si<rniHcance,
but if some form ol" currency is depreciated it is obvious
that no creditor will care to receive it and i very debtor
will want to i)ay in that form of currency. For in-
stance, wlnri the -rreenbacks depreciated to ;{.) cents on
the dollar in ISC.l, they were still le^^al tender utdess
oliierwise sjxcitied in the contract. Xo, dclitor would
think of |)ayin^' his debt in o(,ld dollars because with
.'{.') |)cr cent of that amount of ^old he could buy dc-
prcciahd t>rcerd)acks that would I'ully satisfy the debt.
77. ('(nisliiiilitiiKilif// of Lc^nl Tinder Aetn. -TIk
rio-ht of the (ioxcrnment to pass the Le^al 'I'ctider Acts
Mas in fact declared uriconstituti(;nal by the Supreme
{'•Mirt because it violated the clause of the Constitution
■-..iirii i;;rri,i.a Tii< iiii ji.i i iriiciii oj u\v vaJiditv ol con-
tracts. 'I'his decision was reversed, however, bv a sub-
S'lANDARI) OF DEFKRUKI) PAYMKNTS
67
sequent Siij)iriHe Court wliicli (kclarcd the statute con-
stitutional under tlie autliorit
I)rovi(le means for earrvino- on \\
y o-ivrn to Congress to
ar.
\V
•uvjn<4' the question of eonstitutionahtv of lefj-al ten-
ler acts, it niay he well to consider Avheth
er under anv
he gained
( ireunistanees tliere is any advantage to
;i(l(hng the legal tender i'eature to the various forms of
circulating media. Does the medium hecome more val-
lia'nje l)ecause of the legal tender stamp ^ Ohviously,
if a country adojjts the gold standard, making gold
Irgal tender, it increases the value of gold somewhat
iKcausc it increases the demand for it. J?ut this is hc-
■•;!usc gold is iRcded as a medium of exchange. The
legal tender feature adds nothing hecause it will circu-
late at its actual metal value. AMicn a country attaches
tlir legal tender stamj) to two metals we have already
seen that the chea])er will drive out the dearer and that
liie chtaper metal will also circulate at its metal value.
In the case of the greenhacks the legal tender feature
.i('led nothing to their circulating ])owc'r, as is shown l)y
the fact that they iluctuated in value as the time of
tli«'ir re(lemi)tion seemed early or remote. The legal
tdider featuie, is, therei'ore, of value solely to the
i!(l)tors, who can take advantage of laxity of their con-
tracts to |)ay their dehts in (lei)reciated currency wlicn
Miry should pay in the standard iik tal. It adds little,
tlieret'ore. to the circulating power of the medium to
which it is attached, and what little it does add reacts
tn the a(l\antag<' of a single class.
The whole jVn- silver agitation was an attempt to
(liange the standard hecause it w.is helieved that in re-
ganl to its use as a standard of dilVrred na.vments u-old
was deCertivc. It is a|)parent that it is to the advantage
of the dehtor class to have a standard which is coii-
^f
68
MONF.Y AM) BANKING
iiii
I
stantly (lci)irciatiiin- in comparison with fr-oods; in other
Words, that ^oods should be apparently rising in value.
78. Debtor claa.s injured by an appreciating standard.
—From IHOO to 18!)(> there was a large debtor class in
the country composed of farmers who had gone AVest
and purchased land on mortgage. These farmers
l)ought the land agreeing to j)ay a certain price in the
future and a certain rate of interest each year. This
])rice and interest rate were based ujx)!! the value of
crops, i)articularly wheat, which in the early 70's was
worth as high as ^'1 per bushel. The i)rice of wheat
gradually declined until in 1H1)4 it was worth less than
.)() cents per l)ushel. The farmers found themselves
unable to meet the interest payments, much less to pro-
vide for tiie I)aying off of the principal. Tlvy were
told that this condition was due to the appreciation in
the value of gold following the demonetization of silver
in IHT.'J. They were also told that if silver could be rc-
nionetized, that is. made the standard of value alon<T with
gold, that the (piantity of standartl money would l)e
doubled, that the value of standard money wcndd be
reduced one-half and the value of evervthinLr else
doulded. This debtor class composed the backi)one of
the Silver j)arty in \Wi\. Fortunatily before another
election was held the (|uestiou h.id been settled to the
satisfaction of everybody by the unexpected increase in
the production of gold.
k
CIIxVPTER VII
SUPPLY AND DEMAND FN RELATION TO MONEY
79. Price. — Tlure is a ilistinctioti between the use of
the words "vahie" and "price" wliich it is well to under-
stand clearly. A'alue is the expression of a ratio of
importance between two commodities. If, for example,
one wishes to express his estimate of the worth of a pair
of shoes it is necessary tr) make a comparison with some
other commodity. Thus the value of a pair of shoes
may be expressed as e(iual to two hats, or the ratio ex-
j)ressed is one to two.
Price is a ratio expressing a comparison of value, but
one of the terms of the ratio is money. The use of a
standard of value which is familiar to everybody
< iiormously simplifies the expression of values. In order
that price may have a clear and definite meaning it is
necessary that the money standard fluctuate as little as
possible. If, however, there is a change in the value of
the standard, it alters the real meaning of ( vcrv (pioted
price.
Tliut the prices of goods depend quite as imicli iijuiii tin- value
lit' money as upon the value of ilie j^oods tlieinsolves, is a truth
that the reader must fully ^ra>}). It may he a little pu/zlin^' at
(Ir-t. for it is natural to think of monev as a Hxfd and stal)le
lliirii!-. "ith respect to which o*l'er thin<Ts fhietuatc. To iii.inv
men tiie idia that money ehan^is iu \alue is as novel when tir^t
presented a-; the notion that the ocean chanj^es its level, '['he
ison 1
<<l i:ii^ Hi!--.! |ij)l I lieu>JlMI «HII ir^aio 111 lllr \alUe <ll
noiiev lies in the fact that men th' '. of priir us hein^- identical
sy
',»«
ro
:\I()NEY AM) B \XKL\G
«itli \aiiu'. and miicc Hit ■priru"" of <^o\d ( aiid of silver in a
ciiuiifrv win re it is irecly cuinnl into iin)iK\- ) ncwr ciiani'cs, it
i> asMinicd that tlu value nf ^old i> uiichaii>4ini;'. 'I'iie eoiiinioii
l)elief in tlie stability of nioiiev i^ anali)0()u> to the illii>i()ii e\i>t-
in<^- anion..' primitive people uith ivnard to the Milar sv>teni.
Tliev think the earth is >tationar\'. It is their view point, and
all I'hann-o (n, the >ereen of the tiriiiaineiit m.ih to th. m to reflect
ehaiiu'cs in the heavens, not in the petition of the earth. 'J'he
analo^'V, like all analogies, i> imperfect, hut it is su<<-gestive.
'I'lie fact that chan<^es in ])rice reflect chan<res in the value of
nioiiev as well as chan<4is in the values of uoods is very ini-
jjortant.'
Every mail of business who l)uys imd sells property
lias a deep interest in the iluetuation of prices. M(;,t
of them arc thorouohly familiar ivith the causes wliich
produce fluctuations so far as they are caused by in-
fluences atfectino- commodities. Only those who have
made a special study of the subject comprehend the
influence of the fluctuations (.f prices on the conditions
affecting' the momy side of Ihi' ratio.
80. Prices ihpiinl iijnni tJic inoiicii inarl-ci. A lon<
continued and steady rise of prices may take |)lace in
the face of conditions of su|)[)ly and demand for com-
modities which would seem to warrant (|uite the opi)osit(>
tendency. ( )n the other hand there mav be a very oivat
fall of pru'cs notwillistandiui.' the fact tliat conditions
of supply and demand for commodities iustilV hi«dier
pricis. The explanation of this must be soiioht for in
the money market.
The \ :due of mnn.y as o^ everythiiio- vhc is the result
of an e(|uilil)riuui between su!)i)Iy and demand. How
these forces j)roduce the result so far as ^dods are eon-
r
cerncd we haxc ali-ia(l\-
seen III
eiia|)t(r on \;ilue.
.Im!>
Mi.iicv ,inil (
SUrrLY AND DEMAND
71
The value of iiionev is determined in tiie same way, but
the eonditions of supply and demand are so complex as
to re(|uire a special study of tiiem.
HI. VtUltii of moncij. — Money is utility in the form
ol' immediate universal acceptal)ility. Its utihty lies in
its exchan<4eabiHty in the same manner that nutrition is
tlie basis of the utility of food. Money is demanded
hecause of the need felt by men for this particular kind
of utihty. Tlie name ^vllieh Me fj^ive to this conscious
need of men for anythin<r is "desire." The failure to
(hstinguisli between desire and demand has been a fer-
tile source of error in economic thouti,ht. Some of the
most eminent of earlier economists, observing that the
desire for money was universal among men, concluded
that therefore the demand for money was unlimited.
If that were the case it would be a])S(^lutely impossible
to analyze the forces determining the value of money.
It would be the same as the attem])t to find tiie point of
equilibrium which would be the result of several phys-
ical forces if one of these forces was intinite.
82. Distinction J)ft:ccrn desire (u>'J demand. — De-
mand as used in an economic sense is "'desire" backed
u]) by the willingness to sacriticc or give up something
in exchange. The oidy method we have oi' measuring
demand is by thi' amount of \ahie which will be sacri-
ficed in order to obtain the object oi' the demand. The
demand for money can be measured oidy by the amount
of other valuable j)roperty which will ])e given in ex-
change for it.
l/ndcr the foregoing definition the demand for
moncv is limited, detinite. and lial)lc to fluctuate from
f,. \\
If .. mill i.n'.i-c SJ'IOM i',,1. .. l,,>v
m
('\ ident that bis desii'c for the horse is greater than his
desire for $.*J()(). The seller of the horse would desire
la
MOSV.y AND nAXKINCJ
ilii
tlic in..,RT more than the horse. The ,,.ie.stio„ of the
(leiiiaiKl |„r money !iiay he reduced to this: Why do
people desire moneys
^ 8.'J. Thnr varulirs „f mi,„c,i.~ \n the first phice it
IS necessary to (h-stinnuish heturen .h'tferent varieties
"<■ money. There are three kinds of ,nonev: stan.hird
money, fiat money, and crecht money. T|,e demand for
these (hfferent varieiies is not uniform and under
various cn-cumstances shifts from one to the other.
Staiuhu-d money or commodity monev is some ma-
terial which because of its proprietary (lualifications has
heen a.lopte.l hy any particular oroup of people as a
common medium of exchanoe, as explained in the ],re-
(vdmo- ciiapter on the Evolution of .Money. Its supply
IS reoiilated automatically, heinu- dependent on the cost
I'l |)roduction.
Fiat money is the medium „f exchanoe. tlie value of
>vhich has IK. relation to the w(,rth of the material com-
P"sm- it. Its value is derived from its utility as -i
medium of exchanoe. Its supply is reouhited artifi-
cially hy leoislative enactment.
Credit money is simply a promise to pay the money
which is m such form that it can he used as a medium
nl exchanoe. \ promise to pay money hy some re-
si.ons.hh- party m .y he just as valuable or'even more
valuable than the money itself if it serves the purpose
of money.
_ «^. I'lat V. credit //,o//r//._Tlie distinction between
<'^'t and credit money is an excee.iino-ly difficult one to
make u. practice. In practically every <-ase of Mat
""•"(■y. there is a promise eitlur expressed or implied
to- pay the amount in standard monev at son.e Ir.d^.finlt^.
tin.c: If not a promise- at least an "expectation or'ac-
ecptanee o| th<- money in payment of taxes and other
SUPPLY AM) DKMAND
78
I
Slims due the ^overnnieiit issuing it. It would he (htH-
ciiit indeed to imagine tint money whieli the government
itself wouhl not aeeept in payment or whieh it never
i.\l)ec
ted t
o redeem
■I
S5. Demand for moiic// anali/rxd. — Tlie demand
ir monev nuiv he studied hv analvzlntr the various
torms ()
f d
esire for monev.
1. People desire money for the purpose of exchang-
ing it for other commodities within a short time.
'2. l^eople desire money that they may have a store
iif \alue which for the time heing is preferahle to goods
which have a (1; (lini't utility, '. e., those affording
satisfaction hy tlieir use, or ('2) indirect utility, i. e., the
use of which jjroduces more value, as in the case of all
cnpital gootls. In some I'are instances the money is
esteemed for itself alone without reference to its ex-
changeahility, as in the case of a misers hoard.
a. People desire money as a reserve liasis for credit.
These three classifications cover all the desires for
money and changes in the intensity of these desires have
a their effect on the Aalue of money.
HO. liapiditji of circniation.- — The extent of the de-
sire for mon'n' for the ])urpose of exchanging it for
goods within a short time determines the rapidity of
circulation. The measure of the rapidity of circula-
tion of money is the form of exchanges, which is de-
Ijcndent upon four factors; 1. The numher of popu-
lation. 2. The production and distrihution of wealtli
uw capita, 'i. The extent to which division of lahor
nr speciali/ation of employment prevails. -4. The ex-
tent of the integration of industry
wr //' //',
./ /./'
,/.,/;
rui,
\]
1111 fl'L." il<'lf1/l* <>i1t1>ll
louhling the poj)ulation would douhle the demand for a
I'lrcuiatina' medium
Thei'c woidd he t
wice as ma
»y
, '^!*
nil
'^^ MOM.V AM) HANKING
producers and twice as many consumers. Tlicrel'ore it
would re(iuire just twice as niucJi money to circulate
the goods re(iuired for their consumi)tion. ' In a country
of increasinu' l)o|)iilati.)n. thererorc. there must he an in'-
crease in the (piantity u\' mone_\ . Otherwise the in-
creased demand upon the supply will t,.|„j to raise the
value or money. I)rinniiiu> witji it fallino' prices.
Kven with a stationary population, advancing- civiliza-
tion inevitahly hrings an increase in the production and
consumption of Mcaith. the circulation of which i)uts a
greatei- demand upon monev.
88. Kll'cct of (Vnis'ion of /a/;or.— Alono- ^vith the in-
creased production of oo,„]s per capita comes the in-
creasino- division of lahor. In fact, the greater special-
ization of employment is one of the most potent causes
of increase of wealth. In primitive communities wliere
the producer consumes a large ])art of his pn,(luct there
is little demand for money, not at all in projxM-tion to
the productivity of each man. Whenever men hegin to
conHne themselves to fewer occupations, especiaUy if
at the same time the variety (.f their wants increases,
they are under the necessity of ohtaining their supplies
hy means of exchange, and this exchange re(iuires a
medium. Hence it is that division of lahor reciuires
an increase in the supply of money out of projKH-tion to
the increase ol" ])r<)(luct per ca[)ita.
()pi)osed to this tendency and lessening somewhat the
(k-mand for money is the integration of industry.
AN'hen a numher of individuals or corjKJrations engaged
in the various i)rocesses of the manufacture of Ti line
oi" goods comhine so that the several i)r()cesses are con-
ducted imder one ownershij). the neeessity for a larue
numher of exchanges is eliminated. It may even go
so far that no exchange takes place after the r.iw nm-
SUri'LV AND I)i:.MANi)
76
■.3
I
ttiials :UT i)urchasc(l until tlic tinislKcl i)ro(liict is sold
to the c'onsuincr.
H9. Special (hinand for i^old. — Uiuler prcst-it condi-
lidiis in this coiiiitrv all tlu' f'oi'nis of money in ciivuia-
tinn |)(.'rr<)i-in llu- rnnction of cxcluin^in^ ^^oods (-'(luaily
\\(li. with possibly a slight ad\anta<4V on the j)art
ol' j)aj)cr credit money on the score of convenience.
Ill our trade with forei<>'n countries, however, if there
is a balance of imports over ex[)orts one way or the
other wliieh must he settled with money, there is only one
i'nrm which will serve the ])nrp()se, i. e., ^old. Increase
of demand from this sonree, may under some circum-
stances tend to enhance the value of ^old, inde{)endently
of the value of the other forms. This phenomenon ap-
])ears in the form of a preUiium on gold, of which we
shall speak later.
!)(). Pai/mcnt of contracts. — Anotlier demand for
money is in the ])ayment of contracts. T/nless there
is a dis})arity in the value of the different forms of
money the demand for money to liciuidatc contracts is
likely to fall on all etiually. Sometimes the demand
for mone}' for this purpose is artificially interfered witii
by the (iovernment, as in the case of le^al tender laws
which force the creditor against his interest and inclina-
tion to acce])t certain forms of money such as the green-
backs. The tendency in such a case as this is to shii't
the demand from gold to credit money, and thus to
eliminate the disparity.
91. Store of value. — The demand for money as a
st(<re of value without the intention of exchanging it
for goods within a short time de])ends largely ujxjn the
habits; of the ueoijle and the stabilitv of the (rovern-
iiient. Money as a store of \alue is at a disadvantage
when compared with produelixe pro[)erty. and under
Ml
76
MONEY AND BANKING
■ <'■
iK.riJial conditions priuknt people will regard stores of
money as very unproiitahle investments.
92. ItiMcirilfi of propcr'/f and contrach:—Umkr \
certain conditions. Jiouever, it may he advantageous to
I'old property m the form of money. In countries such
as Turkey, where tlie governme.it is unalile to protect
property and where it is hahle to heas v taxes or even
to confiscation, the j.rotit derived from the investment
of money m pro.hictive enterprises, althougl, very great,
niav he so risky and uncertain as to he unattractiVc. In
such a country those citizens who a-e least protected hy
the government are inclined to safeguard their future
welfare hy hiding away their wealth in the form of
nioney. The satisfaction thex derive from the con-
sciousness of heing protected in their old age and hein.
ivhevcl from the fear of Ims. .f pn,p.,rtv More than
compensates them for the loss u, even a large income.
According to the extent to which property is protected
and contracts are enforced, as well as the amount of in-
come that can he derived fn,m Investments, will the
people of any country he disinclined to hoard accumula-
tions ()( nioruv.
J>.*i. -V/^< ,7V// (fnnanil for m,>tuf/ as a sloir of value—
In every country, however. „<. mailer how stahle the
^•""<l't""is. there aiv limes when iii,.„ev is m„re hi-dilv
esteemed than any ..Iher Inrm of pn.pcrtv. \Vheli
«l'<''e is a prosp.el of falling prices of comm.ulitics it is
.•idvanfageous t„ ex,.hange property for m..nev hecausc
'''•■;•''"'•' '"' "lon-y rises in exact proportion as com-
"••><l'«"^ I'.'-ll. At the end. .f periods of prosprritvwh.n
("•"•'■^••l .-'11 property Ium<. he,„ iuHatc.l and tju're is a
'"'"''"■•;* *'''•'• <l"<'>ilm, nation of Ij,. j.oom is approaeh-
-■■ = ■• -■-■■• .i.;.ii;s i> i,K, i\ (o he |)er('ei\ cd siid-
''"• ''>•■' '•"■.^' ">iniher(,f peopi,, ns ho at onee heeome
in I
SUPPLY AM) DKMAND
< (
eager to cxflumge their propcrtv into cash; the desire
dt' a hirge lunnber to sell id the same time of course
hiiiigs a siulcleii fall in prices whieji we call a [)aiiic.
'{'he converse of this takes place at the Iieginning of
;i lioom period, when people realize that pi'ices are too
Inw and that purchases Avill yield large speculative
|)i()Hts. There is a rush to i)uy, that is to say, a desire
to convert money which is about to i'all in value into
I'orms oi' i)roj)erty which will increase in value.
'I'lie desire to convert proj)erty into money is only one
111' the causes and symi)toms of a panic. In a later
iha|)ter on credits a fuller discussion of this will he
uiven. The liciuidation of credits, either forced or vol-
imtai'v. at the beginning of a ])anic accounts for a large
pii't of the sudden demand for money and is the prox-
imate cause for the liciuidation of j)ropfc,'rt\'.
!>t. IltHirdhii^. — When the storing away of money
liecomes excessive we call it hoarding. It would be ex-
(ccdingly ditTicult to attempt to draw the line Mhere
hoarding begins. 'I'he amount of money which prudent
people will have ready for necessary purchases and the
payment of debts will vary widely under different cir-
cumstances. In the panic of 1!)()7 the country l)anl\s
.ill over the country withdrew their deposits from the
New ^'orl< banks in order to be amply protected in case
iif large sudden demands from theii- dejxisitors, A
ureat many banks cairied this practice to an urueasof-
ablc extent and filUd their \aults with money for whii'h
Miey jiad no use and for which thei'e was likeK' to l)e no
lisi- cxci'pt in the case of most e\t raordinai'v disaster.
S"icli storing awav of money might propei-ly be called
lioardiniL!'.
0.). i'hci'i
l!(
(if i/diiniitijf. Steady jtrogress lu tiie
liree
tiiiii of improving the linaneial atid lianking sys-
78
tf|i
MONKV AM) HANKIXG
terns and the widespread e.lneation nl' the people in the
advantages of deahn^ with banks lias chniinished hoanl-
in«- m this ecnuitry nntil iwider nonnal con(htions in the
prese,^ era it is praetieally hnntecl to persor.s in rural
(I'striets and to a tew eeeentrie in,lividuals wh.. are will-
H.J( to rnn the risk of rohhery in order to enjov the
•snt.siaet.on of an oeeasional view of a pile of' v'elhnv
coins or ol u;yfL'u paper.
li is extremely easy, however, to frighten people out
«>1 then- hanku.o- |,ah,ts and eause them to revert to the
more primitive methods, 'i'he f-iihir.' ..f .. . . •
I , ,, ^ "^ i.uiuie ot a prominent
;ank or the exposure of improper methods in hiVh
^jnanee u ,11 u.duc.e a o,,,at many timid persons to wit^i-
«t'-aw their deposits fn.m l)anks and stow awav the
|H<uuy m safety deposit vaults or in s,,me hidin^'plac-c
ill their lioiiKs. ^ '■
00. liauh ,r.sr,rr.v m>f hoards.^^Thv enormous sums
"' money stoivd in the vaults of hanking institutions are
;;;' '"•*"';'"^, "■ ^'"' -"- *" -'•■■*•'' -<■ a,., usi,... the term,
llicse dollars are really supporting- the .-mlit of the
'-"..try wln.h as a suhstitute is <loino- the real money
->rL In laet. a dollar ma hank reserve haekiuK up
c-ml.t .s really d,,in^ four or five tiiues as n.ueh work ;/s
its brother meireulation. The full explanation of this
point IS deferred to the diapt.rs on e,vdit.
07. anrn-nnuni hoan/iu^: While the oreat sums r,f
;•""->•'" '••••"k .•-.rves are not hoanls unless thev should
•;■ .x^vssive. their aiv at times hu^v amount,; in the
...vm.n.rni treasury and suh-treasuries whieh are reallv
,'"';',• "'•' '^'" '"I'.i.'s that $i:,(M)()(,.,„„) i„ .,,,1,1
^l.'.il hr maintaine.l {„ ,|,, ,,,,,,„,^. ^.^ reserve a-, dnst
the
^reenhaeks outstandiiin-.
■serve and not a| all a ho;.-!
sil
ver, both coin and i
I'his sum is a true r(>-
, ...1 1. . . . .
iKM , , liic yoi(i and
•""'"". "liiHi are held in ti,
SUriMA AM) DK.MAND
1)
¥^
[1 the
)ar(l-
) the
'lira I
will-
tlie
Hon-
out
the
lent
ith-
the
lace
I ins
are
rm.
the
ley
lip
as
his
of
lid
he
Iv
hi
st
e-
i(i
le
I
I
treasuries and af^aiiist which ^ohl and silver certiticatcs
are circulatiu<>- are not hoards, Tlie pa[)er money which
represents them is doing the work hy proxy. Unhke
the hank reserve, however, which through its suhstitutes
does four or five times the amount of money work, the
uohl and silver certificates do no more than gold and
silver itself could have done. The only advantage de-
rived from the system is the greater convenience and
llie saving of the wtar and tear on the metal.
Another part of the money held hy the (iovernment
represents a store of cash ready for future expenditures.
This is the sum necessary to he kept on hand in order
to provide for ])urchases within a short time, just as
individuals find it necessary to keep a certain amount of
(■;ish on hand for the same purpose.
.Vnv amount of money held in the treasury heyond tlie
sums mentioned ahove is a hoard, ir'i)resenting jnirchas-
iiig power which is withheld from cii'culation and for
the time hcing ahsolutely useless.
1)8. Disiriinitidfioii in demand for tnaiici/. — The dif-
tVrent forms of demand for money which we have out-
lined ahove do not apply at all times eijually to all the
ililferent varieties of money. There arc sometimes cir-
cumstances when llu' (kiiiand falls ui)on one kind alone.
So long as all the different forms are kept at parity the
ilemaiid for a circulating medium to exchange goods or
to li(piidate debts is satisfied with either form. 'I'heti
soiiulimes the <piestion of convenience j)lays a jiart, as in
tl'.' case of the siUer dollai" after the sihii- ])urchases in
the HOs. 'I'hr^e silvrr {lolhirs did not circulate in
the (piaiitities desirid hecause the ptcple had learned
to prefer paper on the score of eon\ ( iiienee. 'I'hcy
would n fust to tak( tin ni iroin tjie iianivs and would
.2i2^1i
.'pu:
,il Ihem I'reeK ; the h.iiik-- would turn them hack
80
MONKV AND BANKING
.r
* TtFT rt
into tlie CiovciiiiDcnt tRasury ii) cxdianoc for paper
which their (Icpositors (Iciuaiuled. The (ioreriinient
even went so far as to pay express charges to dis-
tant points in order to keep the silver dollars in circula-
tion. Finally the ingenious i)lan was hit upon of stor-
uio- away the silver dollars and issuinn- ;„ their stead
silver certificates of out- and two dollar denominations,
which were circulated in their place.
0!). f^cm^nnal dcmaud for fnoiin/.-Y or 00 i)er cent or
more oi' the d(Miiestic exchanges no money is recjuired at
all, hank credit in the form of checks and' drafts serving
the purpose. This relieves the money of the country
or most of the demand hut there are circumstances wheii
this hank credit fails to do its work. During the crop
moving season in the South and West there is a demand
lor a medium of exchange which cannot he supplied hy
hank credit. Kvery autumn there is likely to he a de-
mand for ahout S1.-,().()(M).()()() „f extra moiley to finance
the crop moving. This sum must ordinarily come out
of the reserves of the hanks, causing a contraction of
crc.ht. after <redit has heen exi.ande.l, and giving rise
to dangerous stringency in tlu financial centers. This
special seasonal demand for cash and the monetary proh-
IfiHs which it occasions will he the suhject of special dis-
cussion later in this \olnmc.
100. Demand fnr monc// in infrrnnfinnal trade. -
'ri'c exchanging of ,n-,,n,l,s hefw<rn this cMnifry and
•••'"•"•"I iv.|uires the use „f |,„t a minimum of u'loney
only th. differences hetween the exoorls and imports
•"■'■ n-.|uired to !„■ settl<d in ,.asl,. The „nlv possihle
'■'"■'n "I' uion,y uhiel, can he ns, ,| in making 'this inter-
national settlement ,.f I mde halanees is gold. Some-
times t;u- ilinirrnr, iKlucti ilie imports ;iii,i exports
IS so ureal, or th. re has heen so much international hor-
SUITLY AND DEMAND
81
!
lowin'i' that the resultiiio- nioveiiK'nt of gold in or out of
the eountrv is a (juestiod of extreme iinportanee because
of the effect it lias u])ou hatik or (Government reserves
;iii(l the maintenance of credit. Jt is this demand for
i;<)ld to he used in makin^^ f()rei<4'n settlements that ac-
counts for the appearance of a premium on ^old under
tcrtain circumstances. Whenever foreign hanks tind
that they cannot exchange other forms of money for
uojd they are driven to procure it wherever they can by
olfti-ino- a j)remium for it.
101. Premium on ^'o/^Z.— Kx|)erience lias shown that
ihe appearance of a small j)remiuni on n()]d is attended
hy such serious disturbances in the credit situation of the
country that such an event is to be avoided if possible.
The seriousness of this matter led President Cleveland
ill ]S!)1- to |)iit out issues of bonds and later to deal
with a syndicate of \t\v ^'ork banks in order to jire-
\cnt a premium on gold, or in other words to maintain
;i i)arily among all forms of money in the Cnited States.
'I'he l*resi(Kiit did this in the lace of |)opiilar disap-
pro\al by the mass el' citi/.i'iis who did not j)ercei\e the
necessity for these actions.
All rorm>« of money (except national bank notes ,n
national banks tbciiisth cs i ser\c the purpose of bank
reserxcs e(|ually well, although gold is |>rcfci'ab|c be-
cause it assists the (Jo\ermiient ii: siippoi-tiug tlu' cir-
culating credit. It has been j)ro[)osed in recent currency
hills to compel the banks to m;iintaii; their reserves in
-old in order that tlu re shall always be a satisfactory
hasi*^ for the ci'cdit of the country.
102. Viiviilii'nili, of IIk (l('m(iii(! for moucij. 'I'iic
'!( iiiand for luomv is a xcry uncertain (piantitw The
iiiict rtaint les o
lit
s suhstitutc. credit, mav cause \erv sud
lien and \(.ry great changes in the diniand for nioi
uv,
\ II-
\/^^'
82
.MONEY AND BANKINi
\ '
Tlie growth of population iiiLTcascs spt'cialization of em-
ployment and tile increasing volume of industry per
caj)ita causes an increasing demand for a medium of
excliange. On the other hand, however, the perfection
of the credit machinery and the extension of hanking
facilities economize the use of money and lessen the de-
mand. The suddemiess with which any derangement of
the financial machinery will cause a shift of dcrnand
from one form of money to another is one of the com-
l)lexities of the subject.
1 ().'{. SuppJii of moucij. — In contrast with the insta-
bility of the demand for money the supply of money is
so stable as to give rise to the problem of "clastic cur-
rency." 'I'hc only ^ariable clement in the supply is
found in cridit, which is a substitute for mojiey and
does the same kind of service.
10 k Vfiriftiis of Ignited iSidfcs rtwiic//. — In the
TJnited States at the preseiit time there is in circulation,
first, the Knited States notes or greenl)acks. The suj)-
ply of this form of money is absolutely unchanging,
amounting to .$3 MJ.OOO.OOO.
Second, the gold and silver certificates, representing
actual metal de|)osited in the trcasin'ics. The sup{)ly of
these certificates varies with the amount of gold and
silver dej)osited in Washington and the increase or de-
crease in theii- amount is offset by a corresi)ondiniflv
opposite change in the supj)ly of metal money.
Thii'd, National bank notes are somewhat elastic, but
are so limited by the amount of bonds which banks can
ac'.iuire to deposit as security i'or Iheni that the supplv
does not (•li;uigc in rcsponsi- to the demand.
I'oiirtli. The supply of silver eoinag.' in the couiitry
is rcgiilalrd I'v arliitrai-y action of Ijie Government.
SUPPLY AM) DM.MAND
83
a
Outside the siihsidiarv coinaf^c its use is so limited that
it cannot he re^nirded as an ehistic elejii'.nt.
L'ifth, (iold is tlie (Jiily n^ally thistie elenieut in our
country at the present time. Tlie amount in the country
for monetary purposes at any time is influenced hy ouV
financial and trade relations with forei^^-n countries. In
tlie chapter on foreiii'ii exchanges the causes of increase
)r decrease in the (luantity of o^old in the country is
, \l)lained in all its details.
10.). Stipplji of ^'•o/</.--The (|uantity of oold actually
(•roduced in the country has very little effect upon the
Mipply in that country, (lold is so easily transjjorted
that it eiiually distrihiites itself throu^Iionl the world,
^cckinn' those countries where its value is i^i't atest. The
listrihution of oold may well he illustrated hy comjjar-
'ii<>' it with water |)oured into one of a series of vessels
•oimected hy pipes. U^ater jjoured ii:to one vessel dis-
irihutes itself throuiih all the connected series so that
.)ne level is maintained throu^diout the whole. If the
pipes ar'' small or cloi^'^red up tliere may he considerahle
delay in the (listrihution of the water. In the case of
H'old there may he for short i)erio<ls of time inecjualities
in the (listrihution of u<)I,i which are to he accounted for
iiy distnrhances in the machimry of exchange; ulti-
mately, however, "^old will find its level throughout the
woi'ld.
I()(). Factors In the snp/iIi/ of <r()J<J.--Thv snj)i)ly of
uuld is determined hy tlie same factors which determine
llie price of any other commodity. There is ahvavs a
tendency for the supply to he incr(.ased so j()n«^ as there
IS a profit in its production. If the cost of {jrodueitiL,"-
iioUl is considcrahly helow its v;due there will he ;i strn»!.<«'
inducement to enlarge the operation of mines and to
84
MONEY A\D RANKING
till
Mil
prospect ior new mines. However, as the quantity of
gold in circulation increases, the effect will be to raise
prices, as shall presently he explained. This rise of
prices, affecting as it does all the implements and ma-
terials used in mining as well as the wages of the miners,
increases the cost of production and thus diminishes the
margin of profit made in the production and the value
of gold until all the profit of mining may disappear in
the mines wjiich have the highest cost of production,
causing them to shut down and cease contributing to the
su];ply. In this way the production of gold is auto-
matically regulated.
107. PccuUariiii of the .siippi// of ^oW.— There is a
peculiarity in connection with the sui)ply of gold which
distinguishes it from any other commoility. The sup-
ply of a commodity may be considered as a sum of util-
ities Avhich satisfy human want. The suj)ply of wheat
Avhen analyzed means the number of units, each of which
has a certain ])ower to satisfy hunger. Two bushels
of wheat have twice as much power in this respect as
one.
In the case of gold, however, the utility consists of
its poMcr to exchange other commodities.' Now there
is no reason at all why <mv grain of nutal might not do
.just as much w()ri< of exchanging commodities as one
o'lnce. If the (juantity of o„ld i„ the world is doubled
at the same time that the prices of goods in general are
doubled. th(> increased (piantity of gold will do no more
money work than the original amount, and the money
supj)ly of the world has n..t been increased at all when
measured by its c Ifectix eness.
lOH. Ilisfurical /////.s//7///V,./,',v. -Then bav<- I,. ...i three
periods in history whid, illustrate this nv.ural j»roposi-
tion very clearly. The -r. at increase in the amount of
SUPrLY AM) DEMAND
85
I
sihtr ill the world ut'tcr tlie iliscovery of xViiicricu and
the opening up of South iVnuricaa and Mexican silver
mines by the Spaniards in the sixteenth century caused
;i tremendous change of prices for e\ ery commodity.
The discovery of gold in California and i\ustralia in
the middle of the nineteenth century was followed by a
similar rise in general prices. At the present time we
are undergoing a ])eriod of increased gold production,
(Specially in South ^Vfrica, and accompanying hi/I'll
prices.
In each ol' these periods the great enlargement of the
stock of standard money in the world produced a pro-
found social effect and radically altered the relations
Iittween dei)tors and creditors. The small (piantity of
money metal in existence before these discoveries were
made would to-day do just as much work if there had
lieen no increase, but the le\el of prices would be very
low indtfd. The value of the dollar might easilv have
Invn ten times what it is to-day and 'J.i cents might have
been a fair (' 'v's wage for the unskilled workingman.
This ridiculously low level of prices, however, would
ti(»t mean anything at all if all \ alius were in the same
proportion. If the necessities of life cost one-tenth of
(he price which \\e are paying to-day, 2.") cents per day
u ages would be as satisfactory to the laborer as $2.50 is
under present conditions.
109. Ti'tnporari/ n'siilts of cliatiiic of monci/ sitppl//.
While it makes little difference whether the absolute
[)rice level is high or low so long as relative values are
iinchanged, yet changes in the price level are likely to
have great economic results because the ])rice of every
( oiiinioclitv that is boUi2ht and sold, docs rwtt chanue
' (lually or sinniltaneously. Therel'ore a change in the
general price level is likely to cause a general change in
hi
m
m
■>i;^3»^
8G
MONEY WO HANKING
III
the relative values. Kspeeially is this true of credits.
Jf a (Irhtor lla^ i)r()iiiise(l to pay a creditor ,$100 in ten
years, and il' within that i)eriod prices have chan<red so
that the SI 00 at maturity rej)resents the eciuivalent of
oidy liaif the (juantity of ^oods, the creditor has in real-
ity received only half as nnich in value as he loaned.
The fact that he received the same numher of dollars
does not mean anythino- lu-cause the dollars to him are
valuable oidy as he can cxchanL-e them for things that
he wants.
^ ^ 110. Effcvl of increased sup pi// of ^oJd traced oiit.--
The ])riiiciples which have heen stated above will be
better understood if we examine the eft'ect of the addi-
tion of a certain (juantity of ..„1,1 to the stock already
oil hand. Let us follow the output of a mine and trace
out the ultimate effects of the new gold.
When the gold has been refined and made into bricks
it is sent to a (iovernnient assay ofKce, where it is tested
to determine its purity, and "then turned over to the
mint. Theoretically, under a system based on the free
coinage of gold anybody can take the metal to the mint
with the projyer amount of alloy needed to harden it for
purposes of circulation and can have it transformed into
coins. Practically, however, the gold bricks are taken
to the mint, but instead of waiting until the gold has
been made into coins the owner receives at once tlie
money e(juivalent for its value. The person who
brought the gold to the mint now has the coins or their
e(|uivalent in some other form. lie will either spend
this money or deposit it in a bank. If he goes into the
market to luirchase goods o|' any sort his buying will
have the effect of bidding iij) pi-icfs proportionately
and the gold which was mined will be responsible for
wliate\er ef}. ct has bem jjrodnced on prices. The mcr-
SUPPLY AND DEMAND
87
(liant who received the money uses it to replenish his
>t()ek and his huyin<r will tend to raise the prices of his
j)iirchases.
As tile money eircuhites from hand to hand, at every
(•\('hanu,e it will tend to raise ])rices. This continuous
})n)cess of piiee raisin<4,-, s))readin^ thr()u<;h all the dif-
lerent markets, would seem to have no end. It would
seem that if we took one dollar and ^ave it time and
rapidity of circulation enough it might raise the general
price level to any height.
111. Limit to tlic price-raising effect of gold. — This
rediictio ad ahsurdum is answered hy another pro|)osi-
tion which counteracts it. Every rise of price reduces
the ])urchasing value of the dollar, so that as the dollar
continues to circulate it lose its power to exchange goods
ill the 2xact proportion as they have risen, so that if we
conceive prices to have exactly 'ed it will recjuire
S'J.OO to exchang'' them where it ( y required one be-
fore. The result will be that there will be an ecpiilib-
rium of prices established at a higher level than before
tile inci-ease in the (juantity of money.
If the quantity of money should be diminished in
.iinount, or if the (piantitv of goods to be exchanged
should be doubled, there would be a lowering of prices
to correspond on account of the increase in the offei-ing
of goods for sale without the corresponding amount of
bidding from the owners of cash to jiay for them. The
result would be the formation of a new level of ])rices
at a point where the offerings of goods and the bidding
of the holders of cash would balance.
112. Alternative nfies of nexc gohJ. W the miner
who has increased the moiuy supply of the country with
the product of his mine should choose to hold the gold
coins or the pa})er money ecjuivalent for the gold, there
^^
88
MON'KV AND BANKING
w-.iil.l he no cllVct wlmtcN.r ..n prices, jind it woiihl l,e
as tlioiinh In. |,;i,| s|,„V(l away \\w n(,hl WwU or had
ntxcr piodiicvd the yohl at all.
However, if he deposits it in the hank its effect there
will l)e to increase the loaniiv power of the l)ank and
thereby to i.'icrease the piirchasiiii.- power of the bor-
rowers of the l)anh and thus afi'ect prices even more.
11.*}. Widcspraul cll'cct of ncxc ^o/r/.- An increase
oi' prices on account vA' any laroe addition to the money
supply would have more than local effect. AVe have
seen how purchases from the retail dealers would
tend to increase wholesale prices in the central markets
on acco.nit of the a(l.,itional purchases of the retailer
to replenish his stock. In the same way the iniluence
would extend from the central markets io the producing'
centers in this country and abroad. The demand for
imported no„d.s \vould be increased and mdess our ex-
I)()rts happened to increase at the same time the result
would be an export of u„ld to foreinn countries. If
the .general price level was raised in this country there
would be an increased profit in im|)ortinu. ooods', and a
correspondino- decrease of profit in expoH.i„n- them, un-
til, if the oohl production or other increase in the supply
(if money was ^-reat enouoh, there mi<.ht be no exports
at all and we minht be forced to settle for all our im-
ports with ^(jld.
Followin<^- out this principle we may conclude that the
only advantage which a country derives from a lar^'e
production of o>„l,l is simply that it is the fh'st to f^el
the effect on pr-'ces: it camiot ixi)ect to retain perma-
nently any more than its proper share of the new v.-ol(I so
lon^- as trade is free between it and foreign countries.
it would be uiipossil)le to increase permanentlv the sup-
ply of o-old ill tr
us country without
I'lvmo- the other
SUPPLY AM) I)F..MAND
89
■
(Miiiitrics llicir pi-optr pi'opoftioiialc share of it unless
we used il as a suhstitute for other tonus of money
which were letired from cireuhition to make a place
I'or it.
114. Comparkoii of effect of iitrrrasc of .sitpjili/ of
^(ihl and paper iiioiie//. — l''ollo\\iu_o- out this |)rineij)Ie
liMthir in eonneetion \\ith eredit money it will a])])ear
that it is im])ossihle I'or a eountry to increase its su])j)lv
nf this foi'm of money and kecj) it at a pai'its- with yold
unless thei'c has heen an increase in the demand I'or
money due to enlarged \«»lume of husiness, increased
|)o|.M!lati()n, etc.
Suppose the (iovernnient were to issue $.'500,000,000
new United States notes in addition to the $.'U().000,000
already outstanding in cireuhition. Suppose these notes
were ])aid out hy the (iovernnient for extraordinary
< xpenditures occasioned l)y some <»'reat puhlic enterprise,
Mich as the Iniildin^v of a canal or for materials to carry
on a war. These notes Mould go into circulation and
cause the same rise in jjrices as an ecpial output of gold.
The higher piices would attract imports and discourage
(\|)()rts and there would he credited against us a dehit
halance which would have to ])e settled in "old sooner
(ir later. In this way the issue of n.)tes would continue
to drive gold out of the country hy attracting into the
country an ecjuivalent amount of goods from foreign
countries until a new etiuilihrium of prices throughout
the world were estahlished. When so much o()ld has
heen driven out that it becomes difRcult for the hankers
til find gold for export, the (Government would prohahly
he unable to maintain the new notes on a par with gold,
and there would apj)ear all the j)henomena which accom-
pany a depreciated currency, about which we shall have
much to say in a later chapter.
III
90
MONFV AM) HANKINTr
III!
iNNt
nil
11.). IIoxc mucJi moucji is needed in a eoiinfn/^—ln
the campaign, of ISiM! we heard a n-nat deal in this coun-
try ahout tlie scarcity ol' money, and onr of tlie strongest
aro-.nnents of the Silver Party was that tlie country
needed more money io do business properly. They said
that o,„h1s w<re unsalahle because there" was not the
loney to ])urchase them, li the principles whicji we
.lave worked out above are true, it would be of no use
\vii.!t( vcr to increase the (juantity of money in the coun-
try iKcause if we increased tlie amount we should dimin-
ish its exchan<.ino- p,nver proportionatelv and the net re-
sult would be that our. $2.00 would do no" more work than
tiie .<<1.0() di.l before. \\\ might 'vcn u„ so far as to
say that a coimtvy always has enough money to take care
of Its business needs; however, such a statement would
be misleading if we did not take into cons:deration the
ejTecl of fluctuating prices upon industry.
The real diflieully of which the siher reformers com-
plained was not the insulJicient (luantity of money, but
the low level of eouiiiiodity prices. Tluy pointed'to the
western farmer, who was compelled to acet>pt less than
fifty cents a bushel for bis wheat. 'I'here was plenty of
mon<T in the country to pay for the wh.at and' the
fanner was really complaining because of tlu low price
• alher than because of the lack of a market for the
wlicat. If everything 'he farmer had to iiurchasc with
the proceeds of bjs crops— sujiplies for the family,
wages of bis liirv.l labor, taxes, intenst and principal
«•" borr-.we.l money, wen diminished jiroportionatcly.
be would have had no reason to comi)lain. The trouble
was that tin- prices of these things did not diminish pro-
porti<.nately will, the price of wheat. In the course of
time values woidd adjust tliemsclves In ib- -.-..- .,,,,
portions as before.
SUPPLY AND DEMAND
91
IK!. Price changes not s/jnchionoiis. — In the long
mil (lie <iuantiiy of money has little effect in altering
relative values; for a short period of time, however, it
lias a very great effect. The reason of this is that some
voiiimodities are very susceptible to money inthiences
and ies})()n(l (juickly to changes in the money suj)ply,
\sliile others respond very slowly. Stocks and the spec-
iilati\e eommoditits. such as wheat, cotton, copper, iron,
1 ti-.. are \eiv easily and 'luicklv inlluenced; wholesale
prices ))r()hahly I'eel the elfect much sooiK.r than retail
prices, in which the inlhience of custom ])lays a greater
part. Wages feel the change consider:d)ly later, jO
that during a general rise of ])rices the workingman is
al a disadvantage in ha\in<j to pay moi'e for the food
and other necessities before his wages are increased cor-
respondingly. Contracts for the ])ayment of money in-
crease not at ail.
'The (juestion of the sujj-ply of money is an extremelv
\ ital one because ol' its bearing upon our business rela-
tions due to the variation in the i-esponse of various
\ahus to the change in the (iiiai\tity of money, t'lianges
in the supply of money alter the I'elation of one class
to their advantage and to t!ie (hsadxantage of another
class. An increase in \\\r sujiply of niontv j)uts cred-
itc's at a disadvantage and favors debtois; it increases
the ])rofits of Ihe producers of raw materials at the ex-
pense of the wage earners. iiioi( i speeially to the disad-
vantage ol' the recii>ients of fixed incomes.
1 17. Stimiildtiiiz effect of risin:^- prices. — There is
one effect ol" increased money s!i|)j)Iy. the benefit (d'
\>hich has no corrcsjjonditig disa<l\ anta^v for tjie time
being. Hising p<riccs of commodities stimulate industry
.....I
iT5crcusc
n... .1...
,1 (■
I..1..
»i.
..I .
\V
hich enter into capital goods. This increase in indus-
.; ^; B » l l jfl
()<->
:^ro^EY and bankixg
trial activity leads to IJic nnatc r production of wealth
in the form oi' coiisunijjtion i-oods and means a greater
i)er cai)ita distri' ition. Therefore, economists have
coneluded that a condition oi' oradnally increasing- prices
is the ideal one for any community and since it is within
the }K)wei of a community through the aoeney of (iov-
ernment to regulate the rise and fall of prices throuo-h
the mani|)uIatioii of the supi)ly of money, it is possihle
to make oreat economic in;|)i-ovements hy this means, as
we shall diseox cr in a more detailed examination later.
lis. 7/<Y/(7/o//.— There is as much to fear fron> rising
as from falling ,„-iees if the tendency toward higher
pr - levels is allowed to run into speculation, t! over-
expansioi. (,f eredit and the inevitahie collapse which fol-
lows. Whether it is j)ossihle for a Government to so
regulate the rise of prices through Ihe manipulation of
the supj.ly ol' money that the evil conseciuenccs can he
avoided is a matter which may one day hecome of great
iniportanee. especially if the unregulated production of
gold should go on increasing at too onat a rate.
In the present diaphr we have seen that the value
of gold and conversely the general kvel of priees is de-
termmed hy thr supply of and d( niand tor money. The
value of money at any j)artieular moment rejjresents the
eciuilihrimn hetween these two forces. Kach of the
forces, however, is eom|)ose,l ,.(' ;, u,vat numher of tend-
encies. SouHtinies lliere may he ;, particularly large
''•"i;uid Inr n,,|,| j,, ,,,.,!,.,. I,, ^.xcliaiim. a large volurne
••I' prndn.v. while at the siiuu- time lli.' demand for goM
as a store of value may decline: the force of denwind
"'"■••f'Te is iiie tinai nsuit of a numher (.f ten.leneirs
and countertindencies.
Ill>. Sxcifliis (if lU-irrs. .Vn !■-!!•>>!!•;..>- .--.f 4!...
strength of Ihe <lemand for m-mey at any parlicidar
SUPPLY AM) DEMAND
93
time or a prediction as to a i'utiirc dfiiiaiul is facilitated
In- the fact that the dian^es occur, not ahni])tlv, hut in
U-real swinos. These orcat swing's in the vahie of irohl
are .sinij)ly manifestations of tliat oreat hiw of nature
\>y which all |)ro^ress occurs rhythniically and not stead-
ily in any oiven direction. The course of prices on the
stock exchange, the recurring- periods of (lei)ressi()n and
prosperity, the ,iireat cycles of rainfall, are examples of
tiiis o-reat natural law which is found to prevail ^roncr-
ally throughout the universe.
120. Cmnulativc effect of caniomk' forces.- ~'Y\\ii ex-
planation of these (rreat economic swiiii^s of jjriccs and
values is to j)e found in the cumulative effect of the
economic forces. We are all familiar with the oeneral
pessimism that han^ys like a cloud over the eommuiuty
during an economic depression. The ohvious fact that
die existin^r sujjply of m(„„1s is steadily diminishing^,
diat tile savings deposits of the j)eoj)le are increasiriir
in amount in conseciuence of the hard lesson of thrift
which the jxople have learned in the hard times, in
^pile of the steady deterioi'ation in the industrial e(|uip-
ment of tlie country, the wearing- out of the rails and
rollin;^' stock of the railroads all lliese factors instead
"f inspirinn- confiiUricc I'or llic future amonn- husiness
men are even used as an ari^ument for continued hard
1 .rues.
When the inevitahle demand for ^roods uhich has tem-
I'orarily heen delayed finally heoins to assert ilsi'lf. at
tiist slow ly. the husiness community ^raduallv heoins to
liope that prosp( rity is returninu'. As the prosperitv
continues the ( lunulativc effect of n turnintr confidence
makes itself felt in ri^inu prices, and since an ad\ancc
::; j/iur--, r;i(,iFis iai;:;er jMi>iii> io .inximiix owuiiio an\'
kind (»r pio|,erly t \e( pt ukmkv itscll'. tliire arises an
,-, ^^.W
11
tiff £
U-t
MONEY AM) HANKIN(i
enormous; (Icmand for income yielding property of all
sorts, even that whieh i)roniises to return only a specu-
lative profit.
When industry is at its heioht and prices have l)een
l)ut to record hreakin^r levels everyhody is optimistic and
hopeful of si ill l)ett>er conditions. It is at a time like
this that the careful ohserver will note that the produc-
tion of hoth consumption and production ^yoods has in-
creased tremendously and will likely soon surj)ass the
needs of the conmiunity. lie will note that the hiu'.er ^
prices ^o the smaller is the i)rospect of still further ad-
vance and the nirater the prospect of a recession to
lower levels. He will note that the rate of interest is
very hi«4h. indicating- a scarcity in th«' -uiJijly of loanahle
funds. His conclusion from this ? of affairs will he
that in the near future there must inevitahlv he a "-reater
demand for money and a coiise(]uent increase in its
value. He also will remcmher from previous experi-
ence that the cumulative e+lVct of human cujjidity and
optimism which has carried |)rices to ahnormally hiyh
levels will have exactly the reverse effect when it is
turned in the opposite direction. When the turn comes
and the downward tendency l)e^ins a corrcspondiu";
scranil)k' to dis])ose of ooods and to ^et money in order
to realize the increase in value will set in.
These ^reat swings in prices offer an exj)lanation
of the fact that for hn\'^ periods of time an increased
demand for money has se( ined to he accompanied hv
a fall in value of money instead of a rise. The natuial
etlVct of dema?id in this case is simply sus|)endc(l for
the time Ixino. }„,t whci it a^ain asserts itself if will do
so with far more than the ordinary conse(iuences and
v.ihh> mil i.L eariied mucli lower tiian liiey otherwise
would he.
fc^\
CHAP IKR VIII
THEORY OF PRICES
V ■ . *l
121. "Short" sales of moncjj. — Every buyer and
srller whatsoever is a speeulator in niniiey. though he
may not realize it. Kvery debtor and erefhtor is not only
;i s|)ecnlator i?i money but lie is a sjxenlalor in "I'n-
tiH'es." Kveiy debtor has sold money short in exaetly
the same way as a sj)eeuIator on the board ( I' trade has
Mild wheat short when he has eonti-aeted to deliver a eer-
l.iiii number ol' bushels at a ^ixcn \)v'\vv at a future time.
lie gains or loses as the price at that time of delivery
lias fallen or risen.
It is an axiom in the speeulati\e markets that there
1^ no better guaranty for the maintenance of ])rices
than the existence of a large sh.ort intertst. the reason
lieing that those ])ersons are ])otential j)iircliasers who
iiiust buy within a gi\en time whether they wish to do
^o or not. 'I'hus in times of ere<lit exi)ansion when [ho-
|)le are going inti debt in order to extend their business
(ir for the purpose of buying something which they hoj)e
to sell at a higher price later, a large short interest in
money is being created and as the time of maturity aj)-
proaehes it is ine\ital)le that there must occur a scram-
i)le for money with which to satisfy the credit contracts.
Vl'l. "S<iinc\'niii- the shorts." — When the credit ex-
pansion has extended to an cxtraoi'chnary degree there
.ire not lacklig shrewd bankers and cxix'rts in finance
who reah/.e thj^' au'.u'oac!'.!!!" r!( in;!!!:! Inr !!«m!!(\ !!!•*!!••*»
the ordinary Inisiness community; these men (|uictlv ac-
96
M0M:Y AM) 1}.\NKING
If
ciiinulate a stoiv of funds. Tluy may do tills to such
an rxtcut that there suihlenly (k'\cIo|)s a coiuhtion which
ini^dit ahuost he called a corner in money and a scjucez-
in^' of shorts follows. This j)r()cess of •\s(iuet/in^>-"' the
money shorts is more familiar under the name of a
money j)anic.
A man who finds hirr.self ol)liged to make a payment
at a certain time has a choice of one of two courses; he
may either l.orrow or he may sell something he possesses
ill order to provide himself with funds. In a severe
money panic it is practically imjxjssihle to horrow
money, even upon the most select collateral, and there
have lieen days on tlie stock exchange when call money
ran as hi<4li as ISC |)er cent per annum.
12;}. Forced selling.— Vudvv such conditions the only
recourse of the dehtor is to sell whatever property he
possesses, at the hest price olitainahle. This sudden
pressure of sellino- ,i])on a market which is disinclined to
i)ny will iH'rmit pi'ices io descend to a level which would
have seemed alisnhitely ridiculous a few months previ-
ous. There are not wanting- at such times shrewd peo-
l)le who reaii/e that there are extraordinary i,.ar<rains
to he found, hut it is only a \'vw of these shrewd people
M-ho lia\e the means to huv at such times. The <>Teat
majniily of jjfople. however, do not recooiiizf these iiar-
gains. even if they have the I'unds; and instead of huy-
ing in a market which offers them a practical eertaintv
of an increase of -J.-) to 100 percent on their investment,
they prefer to kecj) it stored away until the strinoency as
well as the hargains have become a thitiir of the ])ast.
124. I*t()/)lc hccnniiif/ better educated There was
evidence, howexcr. in the panic of IOO7 that the peoiih
ii. gLiiCiui .in u, 111111114 10 iaixe a(i\antaye oj tjie oec'a-
sional opportunities which these great swings of prices
TiiEoKv or rincKs
97
nlVc r tliein. The ixxiks of the ^reat corjxjrations siicli
,is llif riiited States Stfcl Corporation, tlie I'tniisyl-
\;iiiia l{ailroa<i and liundrrds of otliei-s. ^liow a urtat in-
crease in the nninlier of stoekliolders after Oetoher, 11)07.
'I'liis is a most hopeful si-^ri that in the future, as the
prople i)eeoine hetter e(hieated in finaneial atl'airs. thi'
lliictuallons in \alues will I)eeonie le^s and less pi-o-
piHineed. It would i)e iinpossihlc to o\ erestiniale the
uieat eff'eet in this dii-eetion wjiich the I'eeent hn\ue out-
put of literature on financial subjects has hroun-ht aliout.
12.5. General price level. — Whenever we have spoken
of the effect of ciianoes in the value of money on prices
we have always sj)()ken of it as a clianoe jn the "^'•eneral
price level/' The risino- or falling- of prices due to a
iliange in the money sup])ly or demand is slow and
Ui-adual, while the changes in prices due to causes af-
fretiufT the sujjply and demand for goods may he sharp
iiid sudden. Fui'thermore, the prices of some floods
may he rising while the prices of others are falling.
ri(). Price iahle.s.-'lw the first place, therefore, it is
necessary in estimating the effect of money to ( liminate
all those causes which account for changes in the prices
of goods. In order to observe the changes iti the gen-
; ral price level price tables have l)een constructed. The
ideal price table would of' eomsi' repiesent the average
]»rice changes of all the commodities, the exchange of
which creates a demand foi- money. Since this is im-
possible the most practical method is to take a certain
iiumbei' of repri'sentative commodities.
127. Mail// coiiinuxliiies. — Such a table must not be
ronlined to a few commodities nor io one class, because
there might !h' special eausts for an adx.mcc of ni-jces
i'\' that |(;u'licular class. .\n iiislaiicc of Ihls wduld be
i!i com?nodities re|)res('nt mil; naiin'al resoui'ces and raw
98 MOM.V AM) HANKING
materials. A price table composed of wheat, corn, lum-
ber, coal, cotton, would show a rise in price in the last
ten years much greater than could be attributed to anv
chano'c in the value of money. The reason tor such a
change would be the increase of pojnilation relative to
tiie suj)ply of natural resources or the area of land
producing- them.
On the other hand, if we made a price table composed
of solely such articles as silk cloth, watches, articles man-
ufactured from tine metals, etc., we should find that the
average price had [)robably fallen within the last ten
years, the reason beinn- that with the improvement in
labor-saving machinery and the greater skill of modern
workmen the cost of production was considerably dimin-
ished, so that tile fall in jji-ice would more than oft'set
any diminution in the value of mojiey.
128. ExdDipJc of price ttthle. — It is therefore clear
that a price table should be composed of such a variety
of commodities that the influences affectino- the value of
the })articular classes will counterbalance each other.
The j)roposition has been stated above that a general
rise of values is absolutely impossible in the nature of
things, since value is a ratio, and it is im])ossil)le to alter
the relation of things by e(iual changes on each side.
We give below a samjde in outline of a price table con-
structed to show the price changes over a ])eriod of two
years:
1890 % 1892 %
Wheat ^ 1.00 100 I 1.10 110
Caftlp .^O.OO 100 (in.dd 1 .>()
Knives 20.00 100 1,>.(M» 75
Silk clolh l.iO.OO 100 K'0.00 80
4) 400 :J85
100 9fi-i.4
In this table we have made a hypothetical list of the
TIIKOHV OF I'HICKS 99
prices in 1890 and another for the year 1892. These
[)i-iees should i)ieferah|y re])reseiit an averafrc for a pe-
loid of time in ordei- to avoid any accidental lluetua-
tions due to the season or otlier tenmorary causes. The
piiees for 1890 have l)een made the hasis at 100 per cent
and the increase or decrease calculated witji reference to
this hase. This table will show that while some prices
lii\e advanced othei's have fallen so that the «feneral
k\el is dinn'nished .'J-"' ; per cent.
129. "Wcii^lilin^" of price tables.— U may l)e ob-
Mcted that in this table we have giren exactly as much
importance to knives as we have to wheat, whereas we
know that a chaufjre of a cent a bushel in wheat would
have vastly greater etrect on the demand for money than
a change of 100 per cent in the value of knives. To cor-
rect this difficulty a system has l)een devised for "weiglit-
iiiy"' the xarious items in a ])rice table. The principle
of ■'weif^hting" is to find some basis of estimatiuij;' the
amount of the particular items and exchauoe either on
the basis of total j);-')(luction or consumption.
To wei<>ht our jjrice table above it would be necessary
ill arrange the four items so that wheat would have an
inliuence on the result let us say one hundred times as
-reat as km'ves: thai cattle would have an importance
lifty times as great as knives: that silk cloth has an im-
portance say ten times as great as kr)ives. The table
modified to conform *^o this weighting ari-angement is
given below:
18!)f) ISO J
v.'iicit 100 X sp 1.00=10(1(10 .-« i.io— noooo
'■ittlc .40 X .jO.OO^r ,)(I00 ()().00=r (jOOO
Knives Ix JO.OO = 100 l.").()0= 7,5
Silk cloth 10 X l.>0.00= 1(100 l.'(M)0=; 800
I'll 16100 17875
1007o 111 i 161%
While the weighting of IJie price table seems to pro-
III
100
-MO.NKV .\M) HANKING
m
(luce a very oreat eflVct upon our .sample tal)le, yet in
inakirijU,- actual tables where the numher of coniinodities
is much greater the (litfereuees shown by simple and
wei<Thte(l price tables are very slioht, and since the total
result of any price table is but an approximation, it is
doid)t('ul whether the weighted ])rice tables are much
more accurate than the simj)le i)rice tables.
130. Advduid^is of i^-ci<^litinii: — The principle of
weighting is important when changes in the price level
for certain purj)()ses are desii'ed. For instance, if we
desire to know whether the average cost of living for
the workingman's family has increased or decreased, the
])rice table should not oidy show the items which enter
i?it() the consumjjtion of tlie family but tliey should be
weighted to show their inijiortance in the family budget.
Tables constructed upon this })rinciple were prepared
by Professor Falkner in the most elaborate investigation
of prices that has ever been undertaken in this country.
The report was })repared for a Committee of the Sen-
ate.'
131. Falkner price table.— Yor this table lists of
j)rices of 00 commodities were covered from 1840 to
ISDl; and 223 commodities were covered for the ])eriod
from 1H()0 to 1801. The investigation was conducted
with great care and expense, the prices being ascertained
from an examination of merchants' accounts. Several
tables were i)repared from this data which are repro-
duced herewith. In the first table the average per-
centage of ])rices for various groups ol' commodities is
given separately, the year 18(;o being taken as a liasis.
or 100 \)vv cent. The average ])rices of all the com-
' Ifcpnrt 1)V SciKitor Aldricli for tlii' Coniiiiitlce nn Fin.inrr, Mnn-h 'A, 1>;0i,
Senate Oocutiicnt. 5 :nil Cdiijfress, seeoiul Session, No. 1394, "Wholesale
Prices, Wages and 'rriaisjinrtation."
THKOHV OF PHK r.S
101
niodities taken had decreased to '.).:.-' per cent in 1891,
an avera^-e of 7.8 per cent.
FAI.KXKU PRICK lAIU.I':
c
be
c
J2
"is
u
■«,i
fi 2 1
■^ fa u
l-K» 96.() 110.7
I'^H in. I 11:5.1
i'^y- h-'.!) 10(1.!)
1-^1:5 79.3 <W.!I
l'"^^ SI. 6 lOJ.O
I"!'' 87.3 97.1
|''^»i ,')|..(i 9,).:?
I'-V7 9t-.7 97.fi
I>1S M5.5 K7.,i
I>^t9 79.0 8.'..'
l^.iO 85.5 91.3
IS51 9().(j 91..7
185.' 88.7 88.7
l^^fU 101. ,> 98.()
l^5t 10,-,.9 1)7.}.
1S55 111.8 9U
1^5G 110.). Kio.ii
1857 117.5 lOfi.O
1 ^^58 9 IM iis.O
1>'59 'Ji^.S 101.1
iMiO lOO.O 100.0
1>'<>1 95.8 !)1..9
!•'((-' ll.).! IJt.I
i^(i3 i:5:i.o loi.i;
IMil 1G5.8 .'(io.7
l>f>5 .>1().5 J99..'
i^'iifi 17;i.s .).'(i.ti
1^^1)7 l(l,{.9 179.9
iS(i8 Kii..' IKi.s
!''li9 l(i.>.9 U7.5
l'-70 153.8 l;!H.t
!^71 1(J9.3 l:i:i.3
i-'7i 133.3 113.0
l'^73 l.Hj.H 13ii.9
l''7V 131.5 l.'7,9
!>^75 130.5 l.'O.l
:-:7 I.>o.;{ 101. M
1-T8 107.0 |i;i.,>
1^79 97.tj 91.1
o
w "-"
— -Z
L-
C w
~^
&<
133.5
110.0
Q
1 15.8
1^
1UI.1
117.1
<
395.8
llfi.S
-'08.9
l.'3.7
111.8
111.3
ll(..l
117.1
115.8
-'o.'.o
11S.7
10S.8
131.(1
1 Iti.l
170. (i
107.8
1S7.5
1 1 1.7
105.1
1 .' 1 . 1
100.3
1 .'A.:,
.01.5
119.7
1,13.3
103.0
lift. 7
lo.'.3
l.'9.5
101.9
.'39.fi
110.8
lOfi.7
l.'l.o
I(i.'.3
1 11.8
10.'.8
1 i:!.s
11(1.9
lod..'
I. '3. 9
lll.i*
II 1.0
lOfi.l
110.7
l.'o.d
Ids..'
1 1 J.:>
1J0.3
l.'l. 7
10(i.5
lOfi.l
119.7
105.3
113.0
1-'1.7
l-'5.(i
101. -V
loo.u
l.'1.9
97. (i
II 1.0
1 .'0.5
109.8
9h.7
1 ().'.()
lU.S
10.'..'
1 J.i.ti
I .'5.(i
lf)7.7
10. '.3
97.3
119.-'
97..'
1J5.S
1 .'0.0
10.'.7
105.9
93.5
117.7
100.1-
111.;-
111.9
100.5
10.'.7
lOl.fi
l-'-\8
103..'
107.0
118.7
109..'
lf)9.1
10(i.8
l.'5.(i
111.1
110.7
l.'l..'
10-. 1
1 1 .'.9
l.'l.l
117.8
1(J3.1.
1.'9..'
I.'l..'
115..'
113.1
l.'fi.t
115.3
10-'.8
135.5
115.5
l.'l.fi
113.;
113.3
no,!
105.0
l.'fi.S
llfi.S
110.0
1 1 -'.5
lll.t.
101.3
103.8
llfi.O
los.7
97.1
I0I.8
98.8
100.1
9>H.7
101..'
103..'
loo.s
100. J
100.0
100.0
100.0
100.0
100.0
KJO.O
100.0
103.5
10.'.5
108.9
101.3
9(i.8
100.7
IflO.fi
97..'
117..'
1 19..'
IKi.l
89.5
103.7
117.8
107.1
110.0
177.1
1 If). 5
l.'3.1
l.'9.1
lls.(i
180.J
179.8
J .'1.3
170.3
Ifil.fi
151.1.
190.5
.'37.8
191.1
H.'.l
-'71.(i
1M.1
■.'o.'.s
.'l(i.8
.'80.5
171.1
lM(i.9
-'30..'
1S5.3
171.0
191.0
19(i.3
If) 1.3
178.8
-'11..'
159.1
ll.l.l
1 7-'..'
-'18.7
150.5
17)-.3
177.9
131.9
Itit.l
1fi0.5
JOfi.S
111.3
lf)5.9
UiO.9
l.'0.7
l<i.».3
1.53.5
i9i;.5
l.>7.8
118.3
119.fi
l.'l.fi
118.7
1 l-'.3
lU.l
1. '.'..'
151.1.
139.4
l->8.5
U8.8
13().0
1 1!)..'
i.'s.o
l(i(i.9
131.0
ir.u
13.'.7
138.8
131.fi
l.'O.S
171.9
in. 5
loil.I
131.1.
137.5
1 19.«)
l.'l.l
151.9
14-fi.8
109.5
l.'9.8
133.0
15().5
117.5
1 13.7
lU.-'
95.0
I. '.'.9
l-'7.6
1 Hi'.
] '. 1^ 1
:'?7.3
K'l.H
H7.--
; ; \ J
i i'p.i
los.o 100.0 l.',-,.8 1TJ.3
93.0
79.0
118.
9.'.1 llii.s HI..'
M.3 111.
95.3 88.t 115.1 110.9 68.(! lO.'.l
110.9
101.3
96.6
IH
i02
:\ro\i:v and it wkixc;
o
y o ^ 3 %^ ■=.- - --z ' ~
_^ ^ ^ ^ P. ^ c ~ 5 <
[!;:;'' !';'■;' '"^-^ h)o.~9«;3"i:{o.9~Yi31~85.71o9.h i,.,;.,
^'- '^.^ "'-^ I"- ^-.' 'ii:i !)s.I 77.,-, ii7.:i i.m.d
^^;^ ';:-l ^l-': ^"•" '--l l^'i" ^'if 7<U yr.i y;^:.,
'^''1; ""•■' ^•'•l Wi-' TVh l.'S.-, s.\.\) (jsi. ul;i (,!.,
^;;' '"^-f ^^•' *'«•"■ 'I-!' l-''i-5 K{.(i (iti.t h^.o y.Mi
r^^,*^ '""^ >'^■' i'l.i) 7l.y l.'t.H Wi.d ,,,;.y sy;{ yi-
^^ '"••' ^■<-'* !•'■;< '^.i' 1^1.0 J'S.s r.i.o sh.s y+'}
^'" '"^■•* ^-'-^ !'•'■' -i.-' i-':5.: ^r.y .ly,^ hy.7 y.';}
^"^"^ i'>->-» ^l -l yi.U 7t. D 1J.>.3 H(i.:{ 70.1 95.1 9.'. J
Til the second taMe we Imve a taljulation of the .same
data in Mei<ilited i'orni. In the eoliiiun headed II!
pereentaoe uiven represents the averane I'o,- all artieics
aeeordino' to their imj)ortanee in the hudoets of the
averao-e family. In the eohimn headed I \' the author
attempts to reach a s^J!' 'v^dier |.')!nt of aecuraey hy
assumin^r that the articles covered in the data represent
over (;8.(; per cent of the total e.xpenditnres of each fjuii-
ily. The difference in resnits |)rodnced hy these dif-
ferent methods seems to I)e rather small.
l-AI.KNKK l-iUCK TAIil.F, WKRiHTKD
— i "pit* -nib i
.i_ a '" •= 'i. y--= — ••
i< t^rf 'i c'^-~
i' « <a: -i I = = t .i ^ = ' -=
^ < '""''' = = ---.
»S^^ loi j; 89.3 Si
THEORY OF PRTCES
108
n
Illli.!)
lO.i.T
lOli.O
99. t
9:{.o
91.!l
a.'.ti
91..'
9i.J
9->.l}
92.2
TI
Simple arithmetical
averages. All ar
tides.
\^n
101.9
Isl.j
. lo' 8
Istfi
KKi.l.
i-^t;
10 ;.5
IHIS
lOi.t
^^V^
98.7
IVH)
ii)-'.;{
is.H
IOJ.9
IKVJ
. 1(» ' 7
ls-,:5
109 1
l^.U
ll-'.9
I'^j.j ..
ii:i 1
lS.i(J
li;5-'
ls,-,7
1 1J.5
ls.-,S
101 8
is.">y
100. J
IXiO
loo.o
isiil
. 100.6
'^(L'
117.8
Vi
118.6
■ii
190.5
1 Sli,")
. . . . .'16.8
IMilJ
191.0
1S()7
17-'.3
!S():4
ICO 5
1H()9
iJJ.a
ISTO
1 t.'.a
ISTI
136.0
IS-.'
1:58.8
IHT3
137.5
1H?4.
13,5.0
1s7j
U'7.6
IsTO
118.3
1>77
110.9
1S78
101.3
1S79
96.6
ISSO
106.9
1S«1
105.7
ISH3
108.5
1 *>-:5
106.0
i^'sl. .
99.4
1 SS,')
93.0
1 SS()
91.9
ISS7
95.6
! --SS
91.3
1 SS9
94.3
1S90
9:3.3
li>91
93.2
it.;
M)
89.8
9.'.1
96.7
96.7
9-'.0
88.9
9.'.6
99.1
98.5
103.4
103.4
106.3
108.5
109.6
109.1
lO.'.O
100.0
95.9
103.8
133.1
149.4
190.7
160.3
145.3
150.7
135.9
130.4
134.8
133.3
119.9
1 30.5
119.8
115.5
109.1
103.1
96.6
103.4
105.8
106.3
101.5
101.8
95.4
95.5
96.2
97.4
99.0
95.7
90J
^ E J; g
K _
■ v: ti . - {i
~ ^ c ^ —
'Z. ^ ^ . —
!: -S "^ c =
- C c fc 5-
85.0
88.3
95.3
95.3
88.3
83.5
89.3
98.6
97.9
105.0
105.0
109.3
113.3
114.0
113.3
103.9
100.0
9J.1
lOl.l
133.3
173.1
333.3
187.7
165.8
1 73.9
153.3
144.4
136.1
133.4
139.0
139.9
138.9
133.6
113.6
104.6
95.0
104.9
108.4
109.1
106.6
103.6
93.3
93.4
M.5
98.5
98.7
94.4
ymmM
104
MOXrv AND BANKING
V.i'2. II ',()}, prirc.s (hirhi,/ Ihc Civil ff'ar. It will
''^^' n..ti(r<l tliat t!ir pri.T-, ,|,,ri,,o. [U,. c'lvil War
I'(Ti(.(l an- extremely iiiuj,. the pereeiita^e lor llie vear
18(;:,bcin:4 i>l(;.8 per cent. This extraurdinarv rise is
due to tlic faet that the prices were ^aleulaied in (lci)r(-
eiated i)ai)er money. AVe liave inserted 'rai)le Xo. 4
shouino- tlie a\erane prices rechiced to a <rold basis duv-
in,U' the period when <^-reenhacks Mere depreciated. This
table will show t„ what extent the extraordinarily hioh
prices of the Civil War were ,hie to the inflated' pap'^er
currency. As we have explained elsewliere, most of the
people at that time did ]iot re<rar(. (he paper currency
as depreciated. b„t thou^'.t gohl was appreciated.''
The fact th it then was nolhino- connected with tiie sup-
ply and demand of commodities in General which could
account f(.r the more than douhlinn- (,f the prices in the
year 180.5 is evidence that the cxtrt ine In. tualion of
Jtrices w.is to doe I,, iii<.n'\ ratlu )■ r m to ooods.
The figures ^yv have .pnk. n ..j .,s perrenta-es are
usually calle.l nulcx nnmi.ers Th- v priee tables pre-
pared by Professor Falkncr were continued in the -l^il-
leun of tlie Department of Labor," ^ and the index
numhers for the simj)le table for the pc riod from 18!>1
to the year 11)10 are ^rjveu on tlie follovvin.r pane:
1 The .l,-iii.iti(l for (• ^mnl.ark as moncv in IS.i.' must <r.t.iinK- Invo
Keen ...u.h ..s ll,..„ .( I,,.,,,, „,e ,|,.„.,,„.,- ,„r p.l.l i„ , re-- l\'ars
-Sr.- "llMil.tii. for tix- IVi.artiM.rit' ..f l",J,„r" for MHrcli of ,,,.1, v....
iiie IJ. urinient of I.«|,or Ims nmintaiiird a price fahi.- in its i,i,ll,.tin
«rranj:r,l on a basis .lifT.-rcnt from that of t.u- Falkncr tHi.k'r.
ifi i
THEORY OF PRICES
105
COMPAHISOV Ol' VARIOIS lltlCK TABLES
2
o
o
1 .
ll
I:
mis
u
s
^
11^
ml
I--
f9:
C So
c ao
1-^
u
^
U'
tc
■M
(American)
(English)
(Gcrnian)
-liO
100.
99
123
131.0
Mil
100.6
98
1.'4
118.1
4>-
ISfii
M1.9
117.8
101
131
122.6
.M_
|S(i3
10:.' 1
148 6
103
10,--
1(11
102
159
172
ir.2
162
12J.,>
120,3
122.6
125.8
)^»,' ^
Isiit
.. . 122 r>
100 5
^pta
1 H(i, ■)
100 3
■^1(> 8
jp..zi
mm
13C.;J
191.0
+ ;
1 S(i7
1J7 9
IT ' '
100
137
1 '1 4
;
IsiiH
11.5.9
Kid.,)
99
122
1 22.0
-I ■,
lS(i<)
ii:j.-»
i,;3..>
98
121
123.t
' f
IhTO
117.3
142.3
96
122
122.9
i^ii
\22.9
1 36.0
100
118
127.0
ISi.'
] 27.2
1.38.8
137.5
i;tj.o
109
III
102
129
134
131
135.6
138.3
13(i.2
is7;j
122.0
•"'
I**74
119.1
l!S-,>
113.1
127.6
118.2
90
95
126
1;^
129.8
129.3
ISTfi
lOt.S
-1 ;-
I>T"
KU.t
110.9
94
193
127.7
1S78
99.9
101.3
87
116
120,6
IHT9
9(i.6
96.6
83
100
117,1
|s»0
106.9
88
115
121.9
IHHI
lOJ 7
85
108
121.0
]HH-3
lOfl.5
76
111
106
101
122.1
122,2
111,2
lhS3
106.0
HH4
99.4
1^8j
93.0
79
95
KIM.T
IhHIi
91.9
69
99
104,0
I«H7
92.0
68
70
94
101
102,0
102,0
isrtrt. ...
n.2
1^H!)
9*.i
12
99
106.1
1 «!)()
92.3
11 -.9
72
102
108.1
H91
92.2
111.7
106.1
10,5.6
96,1
93.0
7i
68
68
63
62
101
97
96
9.5
87
109.9
isni
H7.6
is'iu
87.2
I««!U
79.3
isit.i. .
77.:2
IH(»(i.
74.0
90.4
61
91
iy»-
74.0
8!;.7
62
88 S<hll
)itz
i
ISOH
77.1
93.4
64
8fi (liMh
.• 1900)
1H)»9.
83.9
101.7
68
87 ((
iprinan)
ii
UhH).
91.2
110.5
75
97
100
m
1!»()1
m.s
108.,S
70
97
94
St^
1 !»().».
93;?
112,9
69
89
93
i!>o;j.
9:J.7
113.6
60
91
94
-
mot,.
93.3
11.3.0
70
1(H)
94
r-
It
ni(»i
1U.9
lii.5
li9.A
122.8
72
76
79
74
97
106
!!4
10.i
97
106
11.1
107
fr,i
■&-
I!t06.. ,.
iiH j
H>ft7
mm 1
1 'Km
■„':
■P^
126.5
131.6
74
78
100
109
105
lOG
MOXF.Y AND HANKING
l.'W. Forcio)! price ta})lcf;. —The index minibcrs given
in the last three eohnnns of the tal)le are reprodueed
from the most imjxjrtant lorei^n investi<>-ation.s. The
Sauerheek and Economist tables are Kn<4!ish, the Soet-
beer tables are (iernian. Tiie table of Mr. Augustus
Sanerl)eek was pnblisiied in the Journal of the Hoi/nl
Statistical Socicf//. His indexes are eonijjuted by a
sim])le iinweifrjited arithmetieal average, lie lias en-
deavored to arrajige a limited number of eommodities,
all of whieh rejjresent raw jjroduets, in classes in such
a way as to be e({uivalent to wtighting.
The Ecomniiist *ables have the distinction of being
the first to be coi.., led. Twenty-two articles oidy are
emi)loyed in this table and the (juotations are those of a
given date, either the first of .January or the first of
.Julv on the averages for the year. The commodities
arc chosen disproportioiKitely. tjicre })eing out of the
twenty-two, four in which cotton is tlie })rincipal ele-
ment.
The German tablf of Soetbeer was fre(|uently re-
ferred l() in the Silver Controversy in this country in
IH!M;. The iiumb( r of coinmodities was over three hun-
dred and the result represents the simple unweighted
arithmetical average on the basis of the vears lSt7 to
1S.)«).
As we have indicjited b( fore, the value of the study
of the science of money and currency is the understaud-
nig it gi\es ns ..f the significance of price changes and
the d.ita I rom uiiieh j)rc(lictions as to tlie course of prices
^'•"' '"■ '";"I<- it is therefore important t(. get clenrly
111 mind the m;iin points of the two j)reeeding chapters.
In the first j)l;iee a g,ii,.ral , ise in tli. prices of all
' "" '*•••' -"i^'» • iC't'N iiiiiir.iirs Tit.il iln rcMsiin is to
be found ina eh:tnM-ein the \alueof money as comiiared
THEORY OF PRICES
107
uith other things, since we know that a general rise of
\ahies is c. impossibility. The rise and fall of general
prices is best indicated by means of price tai)les which
cnrrect the errors which a limited observation would be
likely to incur. The most convenient and acceptable
j)i-i('e table for the average business man i< that |)ub-
lished in the bulletins of the Department of Labor. A
study of j)rice tables will give the student an idea as to
l!if stage of the swing at which the observed ])rices are.
l.'U. Economic forces to he observed. — Observing the
present tendericy of prices he will endeavor to find the
reason for the tendency. lie will find almost any time
;i iiuml)er of reasons to account for a I'ise and also a
number of reasons t(> account for a fall. This makes it
lut'cssary for him to estimate (luantitatively ibc ))olency
nf each one of these foi'ccs and to balance one against
the other, in order to discover in wl ich direction \)\g re-
sult of these forces tends. The most iinpoi'tant oi ihese
permanent forces are as follows:
1. ProiJuctiou of ffohl. — At the ])res('nt lime it will
Ik found that the annual production of ^old is increas-
ing. This in itself means a lowci- value for gold inas-
iiiuch as only a very small (|uantily of gold that is once
lirought into existence disa])pears. Xearly all of it is
idded to the stock already on hand. It is estimated that
It ss than MO per cent of the gold amiually produced is
!is((l in tli< arts. \\\v\\ this amount is not prrmanenlly
v\iihdrawn I't'om iiionctary uses, siiuc it is so »asy to re-
ihice old jewelry and plate to I'oin.
2. I'sr (if siih.stiliih s Inr uioin//. An increase in the
Mii)ply ot' lint <ir credit money has the same elVeet on
|)rices as an ineicase in tlit supply ol' gold. The ui-
rrease ui C io\ (I'liUKiii issues is |)in(i\ an iii iiii i ai \ inai-
t( r aiid it' it occurs in oiiU one cdiintrx at .'inv gi\t'n
1
108
-MOM.V AM) BANKING
tunc It is likciy to (lisi>l;tcc tilt- pn.portioiiate u. )ount of
ynlil uliicli will l.c- export '1 from the country as a re-
sult oi' the ( flVcts produ. upon the forei<,ni'exchan^re
market hy a rise ..I' prices. The first result of an in-
crease of (;overnnient paper money is lii<ely to he a rise
of prices, hut after the ecinllihrium is estahlished in the
course of a feu- years, other thinos l,ein<r equal, the
])rices are likely to return to their former level.
The increase in the amount of credit which serves the
purpose of a medium of exchan.ye is highly important.
This medium depends upm, the deuree of perfection to
which the hanking machinery of a community has heen
developed. Ati increase in the numher of hanks and
trust companies and in the capitali/alion of old institu-
tions indicate increased credit facilities which are ccjuiva-
h'lit to an increase in the supply of the medimn of ex-
chanov. l-",„- sho, t periods of time the periodical infla-
tion and deflation of credit, producing the alternate
l)'H)ms and panics, must he taken into account. In the
year 1!>0S there was a considerahle reduction in the
••nnount of credit ..ver the year 1!»()( . uhil- the numher
of hanks and the amount of cajjitali/ation a-iually in-
creased. The total hank clearings ,,f the principal
cities of the I 'nited .States are a much hetter index of the
v()lume of credit doing money work than the numher
of hanks or their capitalization.
ii. roliniic of pnxlui'tioii. It is ohvious that the
greater the amoimt o\' goods produced the greater will
he the numher u\' hiddcrs for money, offering goods in
exchange. [ 'ndrr modern eniuiitions j)ractiraily all the
goods produced represent a deman.l for money," as they
'nust eh.i ige hands hcfore they are eonsimied. 'I'he
jn.Min.rr nowa(iays very rarelv consumes his own prod-
uct. ■ '
■.^^
THEORY OF PRICES
109
All increase ot" [jopulatioii means simply an increase
n the amonnt of ^rjods prodnced and consumed and
iiuans a greater competition for the cxistin^^ supply cf
money.
I. E.vtrava^ant expenditures of the people. — During
the tinancial difHculties following the panic of 1<>()7 a
ureat deal was said ahout the efJ'ect of the i>rowini>- ex-
ii'avagance in personal expenditure on the ])art of the
lK'o))le of this country during the preceding lour or live
years. This was held l)y some to be the cause of the
stringency of the nioney market.
Of course the moie extensive purchasing- by the peo-
l)le represents an addition to the bidding for goods and
tlie offering of money, so that we might ('(,nclu(le that a
lise of prices would be the result. On the other hand
( xtravagant expenditure could not have ai)peared uidess
incomes had been considerably increased. Increased in-
comes are due to a greater productivity. People pro-
luce more goods and hence have a larger amount to sell
'irfore tbi'\ can realize their income. This enlarged
production of goods causes a l)idding for money, whieh
I Dimtei-balauces the eidarged bidding foi- goods, that
Inllows immediately upon it. Thus the intluence upon
pi'lces is diminished.
1.'J.5. Saving aiuJ investing. — If instead of si)ending
Mieir incomes in living expenses tjiese people had em-
i)lovcd them in ativ other wav excei)t hoardiu''- cither
' • • • I r>
lepositing them in banks or in\('sting them in securities
'lie |)rodueing power woidd sim|)ly have changed its
•nvm and !!!st.;!i! (it' causing a bidding u}) of pricci^ of
<•on'^umpl ion goods would ha\e iiad :\ sitnilai' cfVeet in
itinneetion with production goods. Mone\' deposited
I! hanks or invested in seciuities is sim|»ly turned o\cr to
industrial and business enti-rprises. when it is spent for
(');»
110
.M()M:Y AM) HANKINC;
IIH«
^^oods, thus having the same effect on t!ie general level of
prices.
The effect of the expenditure of incomes for con-
sumption ooods instead of for production goods has no
immediate effect on general prices, hut it has an in;-
j)ortant effect upon the future production of goods.
KxjKTided upon consumption goods, the effect is to di-
minish the supply on the market and encourage indus-
trial activity to rcj 'ace them. 1 f incomes are generally
saved and invested they lead to a considerahle enlargJ-
ment of the productive capacity of industries and even-
tually lead to an increase in the quantity of consumahlc
goods to he marketed when the factories and machines
and equipment hegin to run a product.
The deductions from this are that extravagant per-
sonal expenditures tend to raise prices of consumption
goods and to retard future over-])ro(luction. .Saving
and investment are lar more likely to he the immediate
cause of a j)anie and depression on account of the larger
(luantity of goods upon the market after the production
goods have l)een installed and before the consuming ca-
pa<' ty of the country has caught up with the productive
canacily.
A much more reasonable cause for a panic than ex-
travagant expenditure is to hv found in the unreas-na-
i)ie expansion ol' credit, which is likrlv to he hn.uglii
about by rising prices and larger profits which in.lmv
men to undertake productive enterprises far in excess of
the present consuming poutr of the people. The in-
creased bidding for money which such nvrr-jiroduction
Inings about gives the imjjulsc to a cumulative .leniand
t'"i- money and a rai)id rise in its value compared with
..It,, .. ii •., '
-.■■;!ivi liiiiigij.
THKOHV OF i'H!( KS
ni
The rule therefore, ui)()n wliich prechetions as to the
t'uture course of prices can he made is this:
Do (\iititinff and future cotnlitioiis, tahcit as a rcholc,
•.ttrraiit Ihc conclusion that the hiddinii; for )iioiu\// or
Ihc offering of goods' xcill t>c stronger than the offering
iif nunicy and tJie bidding for goods?
CITAPTKR TX
DOMESTIC AND lORElUN EXCHANGE
13(5. liclation hiixcccii foreign a/ul domestic ex-
cJuni^c— in a precedino^ cliai)ter mention has been made
of the proeess hy wliieh the o(,I,l jjnxhieed in any })art
of the world is (hstrihuted thronnhont the worhl. In
the present ehapter it is proposed to study a little more
closely the details of the proeess of the distribution of
money and the methods of makiny- payments between
distant points.
The subject of foreJnn exchanoc is usually re/:.-ar(led
as excecdino-ly eomplex and teehnieal. The'reason for
this is tjiat some of the fundamental prineii)les are but
little understood. The prineiples of forei^-n exchan^re
ai-e exactly the same ;is those of domestic exchani>e. the
oidy diirerence beino- that there is in foreion exchanoe
the added element of translation from one coinage basis
to atiother.
137. Painncuts J>// dikuis uf fmlii Imlunct's.—'Vhc
liandlino- ,,f actual currency in transactions of any size.
even Ihounh the currency be in i)ai)er notes of " larije
det.ominations and the transaction takes |)lace loeally.
is incotivenit-r,t. It is one of the functions of bauks to
obviate the necessity of makini;- payments in currency,
by means of a cIk ckin,..- system. 'tIic whole i(ra of
makino- |)ayi.ienls and settlino- accounts without !l <■ u'> ■
of cash deixiiijs unon the f.';! ! I';;! !!!•..-!. v .-•=.:•»::;=■. ..:.
.stances a creditor is just as willing-
ilii
lo leceive m pay men 1
UOMKSTK AM) FOKKKiN I.Xc i i.\N(;i: ]i;)
llic ri^lit to (kiiiniid itioiuy as lii' is to rttfu c the cash
ilM If. Ill cases of lar^e Iraiisaclioiis il wouhl he coii-
sulei-ed a tcreal hardship on thi' part of the rccij)iciit of
the payment to he re(|iiire(l to accept the eun-ency.
i;JM. Funclidii of I lie Ixnil,' iu ind]yiii<j; jxniiiuitt.s. —
.\ hank Is an institution which permits persons to create
( recHts eitlier })y the deposit of cash or hv horrowino' at
M)e market rate of interest. l''urthermore it permits
iiese creditors to (h'aw onk'rs ii])on it for anv amount
lip to tlie hmit of their erecht. These oriKrs or checks
nive th.c holder the ri«4lit to demand the cash or to create
I ic<ht for himself hy a deposit of the checks. These
credits on the hooks of the hanks in favor of their pa-
lions furnish a mi-uis of j)ayment Mliich has almost
sii])crsede(l tlie use of cash in transactions of anv size.
If there were only one hank in a town all the checks
drawTi against it would return to it. either for payment
or (lejKisit. If there are several hanks in the city some
M)rt of clearing system is retjuired for settlinir the dei)it
and credit halances among- the different institutions.
l.'J9. Pa//iiiciit.s at (I disiducc. — When j)aynients arc
to he made hetween distant localities the matter of dis-
i'"ce iiicreases the comi)lexity iA' making the si'ttlc-
iiiv.its, l)ut the prinei|)les remain the same. If a husi-
ness man in Chicago wishes to pay a hill in Cincinnati
he will prohahly draw a check on his local hank exactly
IS though his creditoi' did husiness in the same citv.
The Cincinnati man will (lej)osit the check in his local
hank and i)ut ui)on it the hurden of making the col-
''(lion. \\'lu n till' hanking system of the country was
not so well organi/ed as at present the charge for making
eollcctions of local checks was so heavy that the creditors
iVcfiucntly refused to take local checks. Tiider tlii'se
circumstances the dchtor was ohliged to apj)lv to his
Vll y
#f3
K^
» llKjlj<
Bpila
' ^^B^^^9
^^^M^
114)
.M(A1',\ AM) 1{ \\KIN(;
h;inl< I'or a dial't wliifli would lie acccptulthj in the city
\\1r re liic amount was |)ayal)l(.'.
The ('act that New V'oiU is the coninK-rcial and finan-
cial ccntci- i)f' the I'nitcd States and that hnsincss men in
evei'v city and town are likely to liave tinancial relations
uith that city, citlier purchasing- ^-oods from it or sellin<r
^•oods to it. has made it a(hisahle i'or hanks throughout
the country to maintain deposits in hanks of that city.
'J'hus it happens that there are always ])ayments to he
made in New \'ork hy merchants huyin^ there and pay-
.uents to he made IVom that city hy merchants selling-
there.
IK). Exchange ())i Xnc Yorlc. — "Without '' ^ use of
exchani^e it wouhl he necessary t(^ pay for every shiji-
nient of froods l)y forwarding cash and to receive pay-
ment for every c()rKsi<4nment hy transporting cash in the
()j)l)osite direction. With the use of credit the ship})er
in the inland town receives ])aynient for his eonsio-nment
hv either drawing- a draft uj)on the consi^-nee or uwait-
ini'- the receipt of a draft upon a New ^'ork hank.
Kither of these instruments lie (le])osits in his local
hank which forwards it to New Voi'k and receives a
credit there u])on the hooks of the hank against which
it ^vas drawn. The bank has then the ri^ht to receive
a certain sum of money in New Tork and can realize
upon this ri^ht either hy recjuesting the shipment of cash
or hy drawing a draft against it.
Merchants who have made purchases from New York
must pro\ ide a means of payment in New Vork when
the l)ills are Ciwc. The local hanks having deposits in
New Vork are (julte willing to sell orders upon the New
York hank. Thus hv means of buying and selling the
right tf) sums of money in New Vork the payments
Do.Mi^ric ANP lOKi'.KJN !:x( n.\\(,!; iir,
wliicli arc iicccssitatid l)\- tiif iiion I'lmnt n|' ooods in ami
Dill arr made.
I U. Ilo'a' llif hdiiLs htdidlc A'( Ti.' }''//•/.■ i\r( lifin^^r. —
.\(\v ^'()^k cxcliaiiLiC or ordir.s ii|)()ii deposits in New
^ iii-k hanks arc accri)tal)lr ex cryw lici't : in the first 'acv,
lircTuise tlierc ai"e so nsany persons \\ ishiii<4' to make pay-
iiK iits in that city, and in the second ])Iace hecausc every
h;inkin<if institntion in the conntry deals either directly
r indirectlv witli some New Vork hank.
()
How tlic local hank^ oil fliiir powir to ■-fll drafts on \cw
^ mk can hc^t l)f shown l)y a (■(incntf illu^t raf Ion. We will
Mi[i|)n>L' that a hank in Auroi'a. Illinois, has on ({(.'posit ^1(),()()()
\ufh till' l-'irst National of Chica^i). Let ns su|)[)()se that an
Aurora niannfactun r has sold stoves to an (a--ti'rn dealer and
ia^ reiH'Ivi'd in payment a check for ."^l,!)!!!) on the Corn K\-
< hange hank of New Vork. He will deposit this clieck in his
.Vuroni hank, uhlch will send it to its Chicairo c'orre-.pondent,
iiid therehy increase its credit halance to S] l.OOO. Thv ('hica<^-()
i'liik will send tlu- check to its correspoiid( nt in Ne« Vork, and
n increase its ciedit halance in New Wnk hv ^1.000. Bv an
inanu'enient with the l-'ir.' t National Hank of Chic/i^'o the
Auroi-a l);ink i> ahK' to sell drafts on the Coi'n I'Achanere of
\i\\ Vork. u-in^- for the purpose hiank draft^ furnished hv the
r!i--t National. It is (|uite possihie that on the same dav a
;iierchant in .\nrora, who has hou^ht oi)i)(Js from New Vork,
'ill call upon the .\urora hank for a draft on \cw Vork. Ho
ly not want a draft for exai'tly ."^l.OOO. hnt that does not mat-
' r. The Aurora hank is ahle to sell hini a draft to anv amount
up to .*i<l 1.000. for its credit halance in the f"hicajj,'o hank i^lxis
it a rlf^'ht to "draw"" upon Ni w \'ork for that anioiuit. Thus,
• n account of New York"> trade relations with all })arts of the
■■"iiilrv. hank> e\ er_\ \\ here are u-ually ahle to sell drafts on that:
I ;tv without helna' comi)elled to ^hip currencv.
New Vork exchan^'e is u--ed not only for payments hetween
lU)
MOM'N- W!) B.WKING
New ^ Mik :r.\i\ ()tli( r p.irt- ot' tlir couiilrv hut aNo for pavimiiK
lictwirii point- in the ruilid Stales outsi(!c of N.u NOrk. A
iiiJUi livinj^- in Hiill'alo who owes .<1. ()()() to a man in New Or-
li'jins can hot pav t hr dc ht hv remittin>>- ;i (h'aft on New York
Citv. 'I'his mrthoil is t!ic one usualiv cniploved, for Buffalo
hunks inaintiin no liakuu'cs in New Orleans, and so cannot sell
(liMfts on that citv. 'J'hey can, however, si'll a (h'aft on New
\'ork, anil that will Usuallv he accepted hy New Orleans hanks
at par. Wluii the n.aler takes into account that New \'oik
diecks and drafts are e\ery day l)eln<f used in this way for the
cj.ncellation ot' (Mils in all parts of the United States, Ik will
iiiuK Island why N,'w \'ork exchange is deservedly called the
'"husiness nirufs inonev."' '
14-2. Stilli incut (if (iccoinits ])cfzccni hauh-s.-AVhWc
ill tlie lono- iMHi \]iv iiK.vtineiit of ooods from New York
and to \( \\ Vnvk iiiiist ])i-;icti('ally halancr, yet it would
!)(.' a rare cnim-idctift' if l!ic foiimiodities sent from any
given locality to X-w \()rk txactly balance the goods
reeei\c(l froni that cit}'. Any ))avtieiila-,- hank, there-
fore, lias occasion tr< purchase iiio'-c Xc\v \'oi'k exchange
than it needs to sell, or it has a demand for more than
it has occasion to buy or receive on depcwit from its cus-
tomers. CnlesK the country haid-c wishes to shift its
deposit account i'rom a \e\v York ])ank to some c>lier
1/ank it will be ncctssuiy to make a shipment of
currency.
In case a country ])ank has a dej)osit with its Xew
York corresjiondcnt mIucIi it considers lar<>'e enouoJ! it
will accept dejxjsits of checks on New ^'()T•k only uitli
the intention of makino- slii]>merds oi' cash to reimliurse
itself for the sums jiaid out. The shijjmerit of currencv
involves expense and it i^ (pn'te likely that it Mill not
acce]n suj)LJ!un)us TNtw "I'ork exclian^e uiiiess it re-
1 Ji
Ml
and ('uiTi'iUA'," pp. 7;»-bO.
DO.MKS'riC AM) FOUr.KiN KXCIIANdi!
117
c.ivcs a i'vv which will cover the cost of coUcctiiio- the
same in cash. 'I his cost ,lej)e[uls upon three items: first
il;< ( xpress charge, second insurance, and third the loss
if intefcst. The chai-^^'c for trans])()i'tation is usually
(Minliiii((l with the chai\u'e I'or insurance hy the expi'css
(iiiiipany. 'I'he moment the \c\v 'S'oi'k hank delivei-s
ll:i' cash to the express company for shi|)ment to the
(Mimtry hank upon its order it ceases to pay interest
iilMiii that sum. The counti-y ])ank therel'ore loses the
interest upon the same until it receives it and uses it as
a hasis for interest })aying loans.
II.'}. Cosl of ciirrrnc// slii/Jnwiit.s. — The cost of cur-
i' iiry shipments l)etween New \'ork and Chicago is in
the neighborhood of .50 cents |)er thousand dollars; be-
i\\een St. Louis and Xew York it is (>() cents; between
New- Orleans and New York it is 75 cents, and between
San l-'i-ancisco and Xew York it is .$1..50.
\H. St'ftUmcnts through the stih-trcasurics. — The
r »st of shipping currency from one city to the other is
tVe(]uently saved to the banks by the Treasury Depart-
I'lc ul of the Government. For a good many years pay-
ments to be made between the Treasury at \Vashington
and the sub-treasuries in the various large cities were
all conducted by casb shipments. It happened \ ei-y fre-
quently that at the same time that the treasury was for-
warding consideral)le sums of cash between two cities,
the banks would be shipping currency in the ()p])()site
direction. An ingenious cashier in Xew Orleans early
in the seventies suggested to the Secretary of the Treas-
ury, McCullough, that a saving both to the Government
:iMil the banks might be effected if the banks when they
WKjlcil to tr.'U!S!l!!t !>>.f!!l!'\' to ;• clfv !!! \vl>.!''!! !! mib-
treasury was located would asct-rtain whether the Gov-
ernment at tlic same time did not w ish to send monev in
Mi
-'Wf-
118
-MONKV AM) TANKINd
the opposite directioi!. IT this pro\t(l to he the case it
wo'ild he j)rofitahl(' to the hanks and to thi' (ioverninent
to allow the hanks to deposit tlif inohty in the Treasurv
and reeei\e an onkr iii)on the 'J'reasniy in the other eitw
The Treasury otliee in the first city would receive the
currency it iv(|uire(l iVoni the de])()sitin^' hank and th"
hank in the otlici' city would recei\i' tlu' eurrencv tVoni
the 'I'l-casury instead of tVoin its cori'cspondcnt and ^ll
cost of transjjortinn' the money would he eliuiinated.
14"). Utile t)f A'ci.' l'n/7.' cxv)iiin^c, — Suppose tliere
was a <4rr:it deinan^' for Xew ^'ork exchange in any
city on account of the hea\y hills of iiierchan(hse faliiiiu'
(hie at some pai'tieidar season of the yiar. 'I'hc hanks
will diseo\er that the demand for Xew ^'ol•k exehanm'
far cM'ceds the supply of checks and draffs deposited
hy customers. 'I'heir di posits with their Xew N'ork cor-
respondents are reduced and in order to continue sell-
in,t4' Xew ^'ork exchanu'e thty must ship currency to
that city. In that ease Ihey will he justilied in cliar^-
in^' at least .')() e( nts pi-emium for every $1, ()()()
ol Xew N oik exehanue sold in ordei' to i-eimhni'sc
themseKc'- for the actual cost. Competitiou hetwcen
the local hanks will not permit a much liinher chai'^e
than this.
On the otiiei- hand if tlu rtciipis <d' Xew ^'ork ex-
chaniic cxeicd the deii and for it, on account of hca\\'
shipments of ^i.-iin or produce to the chief exportiiiu
city ol' the country, the hanks will find their deposits in
Xe\s ^'oi'k la rijtr than they cai-e to mainl.iin. 'I'lic\
will he I'orced to oi(l( r shipnit nts of currrnc\ to them.
To reiudMu-sc lhems( i\(s foi' 'he expense !|i( \- will suh-
lr;ict fiom the f.icc \;ilue of the exchange hou^ht tif
i ;-;•;-;■.;; i ;:;; ;;; j ;; ;si ; . Tiii (lisi tiT (iOiiij^ liic iitoiiicSS.
'I'lius it IS po>>ih|e i'nr (Avli.uiac on X( w ^'ol•k in San
DOMESTIC AM) FORKIGN KXt'IIANGK
119
I'ratu'isco to he sold at a preniiuni of $1.50 or to be
(.■H'eied at a (liscoiint of the same amount.
14(;. S'ifj;nijic(im'c of ndcs of domestic twchdugc. —
'i'hc premium or diseount on domestic exehan^e is ])uh-
lished ill the pririeii)al dailies and is nseful to the husi-
iii'ss nuui as indicating- the volnme and dii-ection of trade
;it any ])articular time. An unusually hi^h premium on
New York exchan<^e or an unusually j)i'()lon^e(l ])re-
inium will indicate that the purchases of local merchants
lias hcxti unusually heavy in that year if tlure are no
unusual transactions to affect the; prit-e of exchange.
Why does it not happen that under certain circum-
stances a communitv mav huv moiv aoods than it sells
during' any ])articular period and thus he forced to j)art
with all of its currency in settling the halance:' Since
* ach trader is simply looking out i'or his own private
jM-ofit and does not concern iiimself with tl;e (piestion
of the amount of currency there seems to he no reason
uliy a comnumity might ji(»t he drained of its currency.
This hrings uj) the cjuestion of the halance of trade, the
jMineijjles of which arc the same whether thi' exchange
of goods is l)etween two sej)arate nations or hetween two
localities within the same nation.
Su])pose foi" any reason that there should he an un-
usuallx hea\ y puichasing of goods hy the merchants of
;i western State in any ])ai'ticidar year. The merchants
would huy from the hanks N'lw N'ork exchange with
which to j)ay their hills. The lianks. ai'lei' lia'.ing ex-
liausted their credits in \ew ^'oI■k would hi oI)ligcd to
hip currency in oi'der to co\er the drafts on New
^ lu k sold [,, tin merchants.
■nil
:'%:i
I rii'i'i' I*, till t* 'iii\ iriitii-«ii' (li!i) •! «w till) 1 1 1 1 II it I' It ill ill >.. t 1*1 1 \i It •! I
A \\^ nuMu V or 'm--Ii a^ m rcNiiH of Its |Mir<'lwi''(N nl' intods f'roiM
JII W
1J>()
MUM:V AM) HANKING
otiicr rommnnitli-. No matin- li,,u fnrlv Cliit'Ho-,, aiul llio
coniilrv tnl:iit;u-\ to it iiia;, puirliaM' o(wi,is from lli<-' K.i^l.
thoM J)^ll•(•|l,■|s(^ can iir\t-r mak<' aiiv xTJous drain upon the ca^!
supply of Chicago. N,, matter hou rxtravaoant the jicople of
the Wot may he, tlirii' puivhiisis of ca4rn, ^ood-, can nc\(>r
In ^ivatlv in cxccvs of tlicir salo to eastern customers. Sliould
I 111' people of Chicago for ( \l raordinarv reaM)ns at anv time in
• TcaM' their ))ureha-.es from N. w York and other eastern cities,
the Iir4 etfVct in Chica^io uonid he an increase in tl:e demand for
Neu York exchange and in l»aiik sliiprneiits of currency fro
m
Chiea-o to Neu York. Tlie loss of currency in Cliican-o, Miice
it N^ouid rrduc, the len.lin- pouir of Chica-o hanks. «o„ld tend
to eausc a ri^e in the rate of inter, st and a ri~i in the \ahie ,d'
money. 'I'he pi-uvs of certain co ditie. uculd he-in to de-
•■''"•■- ""' "'■■■'I' i'<Mnmo.hli.-. l,u| „f those wlieh are suh.ieels of
sp.rulition. such as s|,,cks. uh,,,l. •■orii and pm'k. .M,,st of the
-peeidatnrs in tliesc .articles are horrouers. and the int.'resf tliev
pa\ Is an impurtant item in the expenses of their l)Usiness. so
'''•■'' "I"" 'I''' llll'>esi rate ris. s the\ are uhli;;ed lo ..mtra.'t
""''■ ••[•"•■'''■"I-- Chi.'a-o uonld ihws lieconie a o(„.d place to
I' 11(1 ui .■■lid als,, I nnod place in vJiich lo luiy stocks .ami i)onds,
uheat. ,11.1 nth, r spcculativ,' coimiiodit i, >. In ,,th,'r vv(,rds. li,,.
valu, of m,,ii, \ uould lis,, in Chi.,,-.,, an. I p...p|,. m ..th.r p .rts
"*' "" <'"iiiitry «,m!d iiier.asi' th, ir |.urcliasc.s in Chic.ao., |,,,ar-
k.ts. r.milliT'n' Neu ^■.,|■k .\.'han,-v in p.iMii.nl. Th.' r.ader
must 11,1 suppose th.ii Ih.is,. chane.s in pn.v ,m- in the rate ,d'
intuLst 1 ,.l h,. so -r, ;d ..s lo.diract ;;cn. rai attent i.ni. N. \.r-
Ihek'ss it cum.. I h. .i..uht,.| Ih.d such chaiio-. s d,, i,,k, |,|ace. and
that as a r.sult the sales ,,f ( hica-o to other parts ,,f I h. nnui
''■.^ •"' ~" ••"i.liisl,.! that in III,. loiiM rt.n t|i,_\ furnish .i supply of
New York fxchaii^i' e(|U.i| to tl . .1, muid.
'I'hus ;i |,;,pp,ns throuuhoul fho country lliat in the .-..urs.
ot .a \, ar the d. hts nf Iv. ry coniiuuuify .tr.' always practicajh
lialaiiced l)_v its cndits .ni a. count of sal.s. .,. tint l.irM.. ship
III. ?its nf -Tri'iicv are iieyer neressnry. In.i, . .k it' .,,,.• M,,,..,f. ■!.•..
•uid li inkiii;^ svst..nis w. r. p. i f. .1. m, shipm, nt .,t cm.t, iicy from
DO.MKSTIC AND FOKI'.KIX KXCHANGi:
121
mil- part (if the louiitiy to anotlur would Lver occur a> a ucccs-
•arv result of trade transactions. .Money or currency would
(iiily he .shipped to a connnunity as a result of an increasino- netd
\'iU- it as a medium of exchange or as a hasis for the expansion
1 ! hank credits. In Canada, for examj)le. on account of the
elasticity ol' its hank note circulation, >easonal variations in the
(It iiiand for currency are easily proxided for by the local hanks
I ^
.1 tl
U'U' Uranches.
. 1
I'T. 2'Iic clctiri;'^- liousc prinriph'. — Doiin.'stic ex-
change as we luive seen, is simply a hanking deviee to
avoid the iinneeessarv sliipnient of nionev 1)V settlinijr hal-
.ihces only. The |)rinei;)le is e.xaetly the same as that
DM whieh elearing houses are based. The hanks in any
diK' eity find at the end of the ihiy that they have re-
(•(ixed from their depositors a great numhir of eheeks
rawn on neighhor'ng l)anks. Hefore the days of the
'raring house eaeh hank sent a messenger to all the
.iiers with the items against tliem and reeeived the easli
ill |)ayment. At the same time that each of the banks
\\(i'e seiKhng out messengers to make eolLetions tlu'V
wvvv |)aying eash ovei' tlu' eountcr to the messengers
ol other i)anks in settii'ment of the checks aiiainst them.
l>y ha\ing a common place of mtcting tlu' mi'ssengers
"Mild deliver the items to the debtor banks and could
irii\c the checks lepresenting tlii' credits i,\\\v them all
il OIK' time and could easily figure up the diircrcnce be-
lu( ( II the (kbits and the credits. .Settlement could then
'- made by payments representing the dill'iicnces which
"ere likely to be less than 10 per I'cnl of the total trans-
:!■ lion, tliiis '^.-ning the IsMMdling of '.»() per Cent ■)(' the
cash represented by the checks handled.
The dealing house |»iiiieiple li.is no! yel been appli«'d
Mi
i
IS lullcs. ,\tt nf in th( setlliiju- of aci'ount'
•tw
ecu
,Im|
iliMiii. " .Mi(ii(\ Mihi ( iirriiuN,
s i sv.
lati
MUNKV AM) HANKINC;
banks in different localities. The forwarding of the
cheeks to a central point, together with other difficulties
which will he discussed later, has up to this time made
the establishment of a clearing institution for out of
town collections an impossibility. The same result,
however, is accomplished by the custom of country
banks keeping balances in the city banks and drawing
against such accounts instead of shipping currency.
148. Si'tflin<^- hdUiucts h/j usf of (77yZ/7. Methods
have been found for eliminating tiie shipment of cur-
rency, even in order to pay balances. IJanks whicii be-
come debtors to others through the settlement ol'
accounts may I)orrow the balance due from tjie creditor
bank and i)ay interest thereon. 'I^iis of course is : )t a
final settlement of (he balance, but simj)ly postpones the
.settlement, yet if in the near future the balance happens
to iim in the op|)osite direction the loan may be li(|ui-
dated by a credit balance instead of by the p.iyment of
cash.
1 !■!). (iohJ the infrnidfidna! medium. In the case of
domestic exchange ultimate payments may be made iti
any form of cm rency but in tiie settlement of balances
between dilferent nations gold is the only acceptable
mediiun. .Since m,)|,j is tlu- ultimate basis of credit in
all civilized eiiiintries, and since a \olumi' of cin'renev
from SIX to t(n times its amount is erecttd u|)on it. the
niovmients of noj,! fnmi mw pl;iee to another are of
\astly more impoitance than mo.rnienis of any other
form of cash. Ivxports and imports o| o,)|,l in and out
of a country are likely to disturb the money situation ;in(i
to P(C(ssitate lVe(|uent readjustments of eredi! eondi-
tions at new rates of interest. The movements of gold
i<'it i^^ii ixeiiaiiL'e opv laiioiis. and il is
«i I \_ lilt t t -^ 1 1 I t t f r
DOMKS'riC AM) VOHKKIN KXCHANdE 123
this fact which causes hiisiness men to scrutinize so
carefully daily ijuotations for foreign exchange.
1.50. Finiction of ihc dealer in foreign exehange. —
'I'he service to the business coniinunity of the interna-
tional hanker who deals in foreign exchange is not only
that he does away with over 90 per cent of the shipments
of gold which would otherwise he necessary, and thus
causes a great saving of expense and risk in settling
commercial transactions, hut of far greater imi)ortance
is the service that h( renders in steadying the credit con-
ditions the world over. His function is more than to
eliminate the shipment- of money l)ack and forth to
make payments -he still further decreases such shi})-
mcnts hy borrowing and lending in foreign markets,
so that the final and a])solutely necessary shipments of
gold are retluced to a very low minimum as com})ared
to the total amouJit of Inisiness transacted.
l.")l. KA'dinple of foreifxn e.vehan^e. — Let us take a
tvj)ical case in foi'cign commerce and show how the in-
ternational banker facilitates the transaction. Armour
vV Company receive an order frun; a liritish dealer in
Cleats for a shipment of beef. After the beef has been
loaded on the cars Armour \ Company draw a draft on
!he Knglish consignee which in effect reciuests him to
pay to the Chicago National Hank or anybody else
disiunaled bv them, the sum (d" 1: 1.000 sterling.
Armour \ Comi)any might have waited until the
l''.nglish customi-r had received the meat and remitted
to them a ciicck which .\rmo>ir \ Company could have
collected Ihrough theii' bank. If this u ( rt Ihc I'Ustom
Armour \; Com|)any would be iiciuiicd to tie uj) an
rnormous amount of capital in this export business. It
IS the aliiiosi universal itruclice of British business men.
^^^^^gmm
■:sf
vn
MONEY AM) IJAMvING
lunvevcr, to draw upon tiicir customers for the amount
of o(,n,ls sold as soon as tlicy are shipped and the
American exporters find this very advantageous because
they can reahze the proceeds of a sale of goods very
i|uickly and it reheves them from the necessity of b(/r-
rowing so mucli working capital.
The Chicago National Hank is wiUing to purcliase
or give crefht to Armour .^ Comj)any for the (h-aft im-
me(h"ately. aUhough it cannot reimh'urse itself for sev-
eral weeks uidess it sells the draft outright to another
hank, in which case it simj)ly shifts the hurden to the
other !)ank. It is the business of a hank to provide com-
merce with working capital for a consideration; in tiiis
ease the consideration comes to them in the form of a
discount which they deduct from the face of the (h-aft
in jjurchasing from Armour.^ Company.
l.VJ. nini haiihir.s arc tf//////- /o purchase foreign
(Jrafts.~Thv hankers arc willing to purchase the draft,
even though they have never lu^ard of the Knglish firm
on whom it is drawn, for the following reasons: (1)
The reputation of Armour \ Compai.v assures them
tiiat the (Ira It would not he drawn utd"ess a shipment
of merchandise had been made. (•_>) Armour .V c"om-
pany as drawers of the dralt under the universal law
"I" negotiable instruments, endorse the payment of the
s:ime and may be held for payment if" the Knglish
drawe( fails to accept it. (.'}) "in most cases there is
attached to the draft a negotiable bill „f lading which
vests the right to receive the goods in the jxissessor of
""' '"II <•'■ lading. 'I'hr Knglish bank to whom thev
l)avc assigned the draft will n,,t deliver th- bill of
huhng until the consignee has accepted or paid the
til ai t.
( f )
lo still lurfher guarantee the !)ank.s
•.igani->t loss there is attached to the draft beside the bill
'«^
DOMESTIC AM) FORKKJN KXCHANC.E I5i5
(»r ladiiio- an insurance policy which entitles the banker
o receive reimbursement if the consionment should be
damaged or lost in transit. There
may also be attached
to the draft certificates of Government inspection certi-
lyino- the (juality of the meat and also an inxoice of the
shipment,
hy,i. Progress of draft.— These safeguards arc so
-ifective in ouaranteeino- ])aynicnt of tiie draft that it
is extremely rare that even a (hspute occurs in trans-
actions of this kind. The Chicao-o National Hank, if
it has no corres})ondent in Enoland. may sell the draft
in Xew Yiu-k. The Xcw Ynvk bank w ill send the (h-aft
to England for collection and credit the same to its ac-
count. New Vork banks are always willing to j)urchasc
these foreign drafts and to create credits abroad in
Older to be in a jjosition to sell foreign exchange to
importers and oth.ers who are re(im'red to make pay-
ments abroad. The foreign trade of this country "is
so huge that there is always a demand as well as a suj)-
ply (d" foreign exchange. The international l)atiker who
(le;ds in it is exactly like a merchant who buys and sells
any commodity.
1.54. Quotations for foreign ear h a nge. —The (juota-
lions for sterling exchange are the prices at which the
light to receive certain sums in England is bought and
^nid in Xfw ^'„,•k and varies like everything else ac-
"ifding to demand and supply.
1.).'). The pound sterling.- The monetary und of
I'.ngland is the pound sterling, which cont;iins IJ.'J
-lains of pun gold. Sincr dui' monetary luiii is the
•i"llar. com|)OM'(l of •_'.'{.•_'•_> grains of gold, it is easv to
'■alculate that the English soxcrdgn. uhich is the name
if the coin containing a pound stei ling, is exactly e<|uiv-
ilcnt to $f.S<;(i.*). In otjk-r worus an Knglish sov<'reign
.>^^
:i ' mv.nm t
\im
l^() M()M:V AM) ILWKlNCi
c'Uii he iaUcii to a rnited Stales mint and rccointd into
1.8«Wi.) AiiRiican <4'ol(l dollai.s.
Tlicrc is a «ri-eat difrcrcncc. however, between the
li^dit to receive gold sovereigiis in Knghind and the
})()ss( ssion of gold sovereigns in the L'njted States.
A gold sovereign in England will not pay a debt in
America unless it is first imported into this country and
coined into legal tender. Therel'ore it is worth to its
American owner .$4.8(;(>.), less the cost oC bringing it to
this countrv, mdess he c-an re.ijize n|)on it ])v sellinu' the
right to receive it in Kngland to some one who wishes
to use it there.
l.'if). Cost of Shipjlimr <roI(}. The cost of sllipjjilirr nohl
across the Atlantic varies sli^rlitly from time to time, 'i'hc fol-
lowing; fin-uits. showintr the cost of -hippinn- .>;1, {)()().()()() 1,, u-,,l,|
from New York to London weie furnished hv the repriseiitat ive
of one of the largest New York bankiiio' houses:
ln\(>tcd in fine I)ars, L':5.;2f^O,OflO pfr $1,()()(),0()0
A.s.->ay office premiinn on l)ar-- 1 c(iit> per SKIO. . . . }■()()
Freiojit rj '.i^> per c. nt l.r)()2.50
Insuranci' 1 Hi p, r cent (J^o
Packing an<l cartage 70
$l,()()!i.().-)T.")')
The Hank of I'',n<rlan(rs price of n-,,|d variis TTs. !)' il. to
77s. lOljd. p, r ounce, I-liiglish standard. DHi-':; (inc. The
mint coins an ounce of ^old. Ilngli^h standard, into 77s. 10 1 .,d. ;
but the H;nik (d' laiyland, with ulileh il is the cu'-toni of the
l)ullion l)rokrr> to dtal, usuallv pav> a fraction less than this
sum, thus savin;;- its( If from lo^- of int. rc^t while the huilion is
being cointd. It i- assumed b.low that tiie H.mk pays 77s. lOd.
i :■-•-' -^ ,
4H,;J7r) oz. fine eipial .■)L',77^.7 o/. 91 (i U •^ fine.
r.-")')
DOMESTIC AM) FOKEKIX EXCHANCi: liiT
n2,772.T oz. at 77s. lOd t;,'2().')J57 i
Deduct Muidrv rxpoiises 4,
Not receipts in I,oiuloii £^205,370
Cost of soverei-rn ( 1 .()()J2,()7r)..') -;- «();),;J7()) $4.88^2
-Mint j)ar in the I'liited States 4.8665
Cost of sliipineiit jk r sovi reifrn .45 .0157
No loss of interest is included in the fore<^oin<^. 'I'he New
\nrk l)anker uho furnished the finiires In Id thai no sucli item
«as iiiv<)ivi(i, for he >old sterhn^- e\chan;4e as soon as he made
-hipment and so was never out his money in consecjuence. If wo
nil hide interest, we raise the cost of shipnuiit to .'i^.()li)7 per sov-
t reign. ^
157. The minimum ^old point for sterling exchange.
— Calculating*- the total cost of shipping (rold between
America and Kurope at the lowest fionre oi" two cents
pd- pound sterlino-, it is easy to understand why .$4.8405
is called the niininnnn gold j)oint for foreign exchano-e.
If there should he an extraordinary supply of foreign
Inlls I'or sale their price under normal conditions could
never go far below this figure because there would al-
ways be some international banker who would be wilHng
til pay for them the moment there was a?iy profit in
Inlying them, for the purjwse of importing the gold,
iiit.r they had l)een cashed in England. This mini-
mum price does not mean that the value of forciirn bills
is an exception to the law of supply and demand, but
that when the price falls below a certain minimur 1 there
arises automatically an u?ilimited demand.
i.>o. x^i <i.t <• /7i ,<• ;7f" ,i;i7i(7 jj'iiiii /()/ fiiiriin^ CiVc/iange, —
' Johnson, " Moiicv anil Currencv."
\ilH
M()M:V AM) i{.\NKI\(;
i!
On tlic olluT IkukI the price of sterlino- bills may not
rise iiliove Sl-.HSC),; nndcr normal conditions 'cause at
that ti<y\irv there is always an unlimited supply, so that
no one who wishes to buy need pay any more. The
reason for tiiis unlimited supply is this: The interna-
tional hanivers, seeing- a chance for profit, will sell
forei^i) exchange above the maximum n()ld point
whether or not they iiave a credit balance ahroad.
Lackino- such a balance, they buy ^'old with the proceeds
of the bills. As soon as they have been issued they ex-
})ort o-old to Kuroj)e so that it will arrive at the same
tim the bills are presented for j)ayment, thus closin<f
the transaction as far as the issuer of the bills is con-
cerned.
1.5!). irii// sfcrliiiii- i\ir}ian<^c fiuii/ fall hclozc ^i.HiCyr^.
— We have seen that theoretically the price of demand
sterlin^r cannot fall much below !i<i.84t;.3 because of the
great demand on the j)art of the haid<ers when it tends
to fall l)elow. There are conditions, however, under
which the price may fall considerahly lower without call-
ing- into existence this demand. In March, 1907, the
price fell to $4.8.3 for a time, and in the autumn it fell
still lower. There were several reasons for this.
( 1 ) The rate for call loans in New York was very
high and the bankers who would otherwise have pur-
chased the exchange did not do so because it was more
l)rotitahle to loan the money than to invest it in the
exchange which would have tied it up for at least two
weeks, the time recpiired to send tlie bills to London,
exchange them for gold, and ship the gold to this
country,
(•2) The reluctance of the American bankers to with-
draw gold from Kngland at a time when it was needed
Uiere and when there was danger of a rise in the dis-
i)().M!>r!( AM) roui.K-'^ !:\(!!.\\(;i: vv.)
Miml rate il' tlic rf.sLive in iUv H:ink ol' Eiiglaiul were
■ iidaiiyci't'd.
(.•{) The (linieiilty in uetliiiL;' ^old for exi)()rl. Tlie
ImIIs eould l)e j)aid in notes and altliouLiii the Hank id'
r ii'dand must redeem all notes when asked to do so,
'i\ las the I'i.ii'ht to ])a\- out coins of ks-, than lull wtinlii
and make a (hffereneL- of a itiiI in the I' in t!ie protit of
the exporter.
(1) The hi^^h |)rie<.' of n'old hiihion in London. To
,,\oid the loss incidental to shipping' coins, the at)i'asioii
;ind the li;L;'lit weiuht, bars of ocjld must he pui'chased
ill the market, (iold bullion is marketid in London as
;i commodity hut with (ixed limits to lliictuation of price.
(.)) The premium on currency in New ^'()rk in Xo-
\ I'liiher. 1 1)07. (hie to the susj)ensioii ot" cash j)a\nients l)y
'he hanks.
!<;{). The gold iiKirhct.^-'Vhc hulk of the <y()\d \)Vi)-
iliiced in the worhl conies IVom South Africa direct to
London to the aiii'imit of ahout i^2..")()().()l)() per week,
file hullion brokers meet on Mondays to liade. Some
'if them lia\'(.' cei'tain amounts of bullion to dispose of"
iithers lia\i' buying' orders. They beL>in by comparing-
iMites and (juitt' a xai'iety of interestin<4' situations may
f'e (hsclosed. Thei'e may be a big' amount to offer and
a few small buyers, or vice versa. Sometimes the com-
petition for the gold is \ ^ry keen.
'i'lie Bank of iMigland is recjuired to pay on notes
!or uold (to buy gold) at the rate of 77s \h\ |)er ounce
'lid this fixes tlu minimum price. On the other hand,
I'lc Hank Is under Kiiai obiii^atiiin to irdit-m its nolrs
lor gold at the rate- of 77s 10' ._.d [)er ounce. This ap-
iH-ars at first si^ht to hmit the srliinu' price, but on
;i('coimt of the right of the Hank to pay out light w tight
coins for the notes the maximum is raised to practically
■■^m^
130
M()M,^■ \\l> HANKIVc;
7Hs per ounce. Tiicrf is a tiu-it iiiKlcrstamliii^- that tlu
]5aiik is lo liavc |)ixtV rcncc wluii il is willing- to pa\- the
best i)ricv ollV red hy any other l)i(l(ler.
The fact that the hank of Falkland must buy and sell
all the ^old oilVred at the jjriees fixed hy hiw. makes it
very ditlieult for Knnjand to hold her supply of ^old
when other nations are hiddinu' hiuh for it \.< maintaiii-
in^- hi^h interest rates. Kn-^iand for this reason is
called a "fnc"" oold maikit. The Hank of Kim-land
exercises control over the u'old su|)ply hy nianiijulatin^r
the rate of discount: a rise in the I'ate dise()ura<res both
foi-eiu'n and doiiustic borro\\in,L; not onl\ at the Hank
but i I'om all othei- banks, which are I'oi-ced to follow the
had of the Hank in the rate. 'I'his means of control
is ef}'ecti\e. but it \y expcrsixc to tlii' business interests
of the country, to whom the difference of 1 per cent
in inteivst pa^inints mea)"s a ^ixat deal.
ini. y^r////.' of France. Din'in^- l<)()7, the svstein of
I'rance seems to have lurii s.ipei'ior: while there were
strinoeiicics in all otlu r markets, while the rate of the
liank of Kn<>land .\as held for a lonu- time at (» per cent,
customers of the F,ank of France could always get i unds
at W i)er cent. The Hank of France has a monopoly of
note issue, but it is not compelled to redeem its notes in
gold. \V'hen it desires to j)r()tect its gold reserve, the
liank of France refuses to ])ay out gold in (juantities
for export except at a premium. This ])rcmium is never
so high that would-be exi)orters are induced to gather up
th" outside gold at considerable ex])cnse. but it is liiLdi
enough to discourage knding in foreign markets l)v
l''rench capitalists without interfering with foreign
trade.
Proximity of the <|uotatlons for demand sterling to
le minimun. or maximum gold [joints indicates an ap-
tl
i)r)Mi:s'rir and iojir.K.x i-.xt iiANc.i; in
iii(»;tfliiii^ r\|)(irt or iiii|)()ft (if ^old. Hjol! (luotations
iiMlicalc exports, whik' low (|iioiations itidicutc iin])orts.
!(■.•_'. (i(,l(l •v////>//'r/;/.v. SliijMiitnts of ^^old intn-f'ere
with the basis of cirdit aii<l arc tlierct'orc can-fiilly
watclicd I)y cvrryhody wliosf interest c'lii he afFected
!'\- clian.i^ed coiuhtioris in the crecht market. The rate
III' interest and especially the rate on eall loans is sonic-
' lines ehanued (piite suddenly on this account. A stid-
il<ii weakening- of the call loan rates is very likely to lead
to a eallinu' of loans hased on secuiities as collateral
■ ilii the result that stocks arc likely to j)e thrown on
hi' market for sale, thus depressino- prices, ''"his ex-
phiins the close relation hetween the foreijiifn exchange
iiiai'ket and the st<ick CAchann-c.
1<!.'}. Oiir forcif/n roiii !>icrci'.-~\\: is n well-known fact
that aecordin,u- to the ollieial Hniires i>iven out at the
C ustom House our ex])orts considerahly exceed our im-
p'lts. The fi<rures for the fourteen years fading with
l'.»i;{ appear as follows:
>r\risTi(s oi' i()i!i;ic;x tkadk oi- imti;!) stapes.'
■|"|'l^'' niniitli-. Total T.,*;.! i'.mvss of
' iiilinjr.luiif.id. Import-,. l'',\|)(>rts. I^lxports.
'"" S sio.nn.isi .Si.iiOi.isn.os? i?,u),.)H.s!)8
i'"'l S.':i.l7,M(i:> l.l>7.7(il.!)!)l (idl- :,!) ' S 'li
'''•'-' !)(t;i.;i.'(i,!us i.;i«^i.7i<\i(ii V7s.:i')s,k->;5
''"'•5 l.O-'.').'. I!'.-';'.T l.i.'O.l 1 1.(i7!) S'U.l-'J.U.'
I'""- !>itl.():.r.;',71 1,M1().8.'7.J7I .Kiil.T;{!1.<>i)()
''"•■"' I.117.)l:i.iiTI l.jl8..j(il.(i(i() 4(II.()IS„jli.>
"""• 1. -'.'(;.:,():!.-' I J i.Ti:{.s(ii..,)()() .ooi.^dj.o.u
I'"'' l.CH.lJl.i ?:> l.sso.s;, 1.078 U(i.iJi>,(i.->;j
""'"' i.i!)i.:ui.7iij i,S(i(i.77:{.:iKi (iii(i.i;ii. .•.:!.
!'"»!> i.::ii/).>i)..'n i.(i(i:}.()i 1,1(11. :v>i.()!)(i.sHo
'''"' 1..),>7.HI!).<)SS 1.7U.i)Si.7.'() IS7.1(il.7:i.'
'''II l..').'7.Jjr,, ]■!.-, :.'.()1!).:{J(I.10>) ,),'\()<n.il!lt
'"I- l.ii.V{..'(it.!i:U :,:oi,3.'.',in<) .r,l.(i,-.7.l7,-,
'"l'5 l.si:i,()(is,.':u J.lCj.sst.Uf) (i,i.\s7:i!(M.j
These figures indicate that we are .selling a great deal
!oie ihan w are i)uying from foreign countries and
'III natural infeieiiee would he that we receive the hal-
• mce due us from this trade in gold. This is far from
1.12 iMOM-:'^' AM) RANKING
l)tiii<4- the casf. Ill tlif vfjir 1!)()S onv cxfcss of i-xports
Mas $(»«»<>.()()().()()(). \\ liilc our 'xccss iiiipdi'ts of Liold wwr
$70,000, 000. In thcytar 100.) our fxct ss of ( \{>oit.> was
S< I-OO.OOO.OOO while we aciually (Apnit.d S.'JU.Ooo.oud
worth of uo!(L 'I'hc liuurrs for tlic ( -■ poi! and mip'oil
of ^<i|(| \\iv cjnht I'cccii! ycai's ari' uixui hi'lM\\. '|"!;I>
ciniil ycai' a\c'r;i,m' nl' iinp.iils is souk^'. hal hiulis r than
in prc\ ions years.
M(>\i',\ii:\ r oi (■.(»! I) ro wn i kom tiii'. r\"i!i:n -;r\ri:s
I'v\ clvi' iM'inlli^ 'I'lital Tot.i! I''.\i( >^ i>t' (■'.m'css iif
( nditij: .Iiiiii- J<i. Iin|)iirts. l'.\|ioil-.. liiiiiDrt--. l-'xports.
I'lil.-) ,< .Vi.iiis.iiiii s !».V.!)|.(I.>1 .*;tS,!M,>.0(),i
I'lKi <)(i,.'ji,ri« :is,;,7:!.;.!n i«,)7,'ii^.i.i'>
I'lor m.Mo..M!> .".I.:!!)'!.! ;<( (i:{,i i i.o; s
Ml IS ; .. I is.:!:t;.:i.'i 7.'.l;{.'.'t.'l 7.>.!in|. iu;
l!li<) I l,<i(l{.!»sll !M..",:{l.sls U..).';.S.'()
l!)lii j:t.:!:!'>.!> '•. I !s..-,(i:{..M ;, :.•).. '.';i.:il(i
"111 ;:!.!. nt.iiit .'.'.i(»!).<i.>:{ .>l.()!>;,:i(io
111!.' |s.;i,{ii..>(iii )T.:i>' .s s.;J<)l,s|s
Kil. I ii\isihlt' iliiiis (if I'oriiiiii !i'(i(lf. ]\\vi\ thon^'h
we do not n'ct paid lor our ( \ct ^^ of txpoiis in Ljiild,
n< \ c!'!!)! less wi ai'c ])ai(l Im' tli< ui in sonic lorni oi-
oilier. The tim.res ot' inip.H'ts .■tnd exports include only
the noods wliicli p.'.ss throu'di the ( iistoni I louse.
'riiei'c are many kinds of tr:i l^actiolls re*|iiirini4 |'ay-
ni' Ills ol' iiione\ which are ne\ er it ported ;it the C'us-
toiii House at all and \ii Ihtir eil'cct upon tli.' trad(
halanei' is the same ;is nu rcli;indisc. In tli( last d; cadi
tile capital of the worhl h,is hccome more ;ui<l iiioi'c
niohilc ;is the I'acilitKs for lojininy and iiucslin^- in
foil i^ii coiinlrics n.nlicd ;i lusher pti lection through
tilt hank-, and stock ( \eli;inu(s. Knt;lainl has .always
'lulled ;i \{'v\ hiri^'c amount of Aiiieric;in stocks ;nid
ll{tll{lk._ l*«'l)l'«'k^;ilt^itlJl' llll^j'L^ll>li>tW 111 jtlll* lllill;i.jl*j«><.J 11 Ik.
l)().Mi:sri( AM) lOKKicN i:\( ii.\N(.i: i;5;i
s;ii(l lli;ii tlif l;ii-i4(.r |).ii't of llic (';ij>ii;il iisrd to i iislrucl.
(lur railroads IkToiv ISSo Ik1oii<^(.(1 to Kii«4laiul.
Aimrii-aii stciiritirs arr so fxttiisivfly dealt in on the
London cNclian^uv that the closinu' (juotatioiis on the
London |)ti((s I'or them at Ihe end of the day. uhieli
coiiK'. dne to the difl'creiiee in lime, at the opening' of
nwr own e\ehan;^es in tlii-^ e(inntry. Ii;!\e a!i itiij)ortant
( tl'eet ni)on (|iiolations lieii..
1»;.*). M(i:'t. lilt Ills of cdjjildl. — In I'ceent years the well-
known thrift of the l-"reneh people has induced our
linaneiei's to make nnnsiial eH'orts to estahlisli a mai'ket
for eel-tain American seeniitics in Paris. 'I'lie Pennsyl-
\ania Hailroad Company sold a very larue is^ne of
!:onds in that eonnti'\- and other lai'<.ti- coiuni'n^. notai)ly
tile Lniied States SI til C'oi'poiation. ha\ c from time to
,iiii(. heen eaii( il\- se-kinu Ih pri\ ije^c of listm<^' their
,( cin'it it s on the I'aris l!our^e.
'11; I 'nit((l .Staus 's jusl cominu' t . he a market for
r(,r( ion si'cnrities. 'I'ne eliii f foreign secni'ity which is
it |)rest lit (jiioted on our t xchanu'c is the Japanese war
honds. I*oi-tions of bond issues of .South .\merican
st.ites. .v.ueli as I'ciii and Chili, are occasionally rdlotted
lo American hankers to he disposed of in this eounti'y.
The moxcment of these securities to and fro is the
inosl potent cause of Uuetuation in the for<i,nn exchaiiiie
niarktt. .Stocks arc |)rohal>ly the first lliiuL, in the
eountrv to feel the eireet of the tendiiiey to higher
price-., cau^iil li\ an inei' .id amount of money or
iredil. .\ \(i\ small rise .., die ipiotations of stfinities
is ■.uilicit nl to cause i-onsideral)!< m lliuL; of thtni in this
niarkcL which has a t( ndency to create a d( niand foi-
foirigll e: 'iiiUi^^'e to |»a\ for them. Ih nee ;i ris( \\\ Ihe
<• I . ■ 1 . .• ! 1 ■ 1 I
j»l !(•(■ Of C Xiiliiii ^;i iiii i i i < \ j >< n i > > >i ^ m i .i i i 1 1 n u i ' ■ i.
This expl.'iins wli\ an issm id' p.ipti' money can drive
Mo.M'.V AN!) H.\.\KIN(i
;in r(|ii;i] ;iiii(Hiiit of yold out of the couiilry s.) (|iiit'kly,
fxc'ii hel'ori-' tlu' prices of coniinodilics li;i\c f'llt tlic
(.•luiiii^T. Tlif iiioir highly (Kv(I(»|km1 tlif tiiiaiicial iii-
stitiilioiis of tile world iln- uioi'c sciisitne will cvri'v
country l)cc-onic to pricc-c iiaiiwiny inliucncfs.
1 ;>«I. Interest (tnd (iividiutl j)(iifi)U'iit'{ to fdnl^ii .stoci,'
hdidirs. — Auotlur item of trade uliicli atl'ccts the
balance without appi'ariii^' in tlic Custom House figures
is tlie iiitei'cst and di\ ideud payments made to the
holders of American securities. 'I'hese payments are
madi' in foreign exchr.nj^'c and ci'cale a dtiuand I'oi- it.
hence tlicv ha\e a tendenc\- to lil't the i)riee of foreii'-n
exchange away from the n()j(l import point.
KI7. Freight. — Most of the merchandise which is
moved to or tVom the I'nited States is cai-i'ied n. foreign
ships. Since !H4<> the Americans ha\e found them-
sehes at a disadx anlanc compared with Hnu'land and
(Germany in the cariyiny- trade of the world and the
result is that wt' must i)ay freight chai-i;es to foi'ei^n
companies. These paymints ai'c made in forei<;M ex-
I'hann-c and lu Ip to create a demand to oU'set the exces-
si\f su|)ply of hills on the mar-Uet.
IC.H. Tdiiri.st.s-. 'riui'e is still another ittin which does
not appear in the olllcial tiyures. .Since I'anopenn
travel has heeome so popidar there has aristn a lar^e
(Kmaiid for letlii's of credit on tlu' |)art of tourists.
The elfeel of tjiise Irtti rs of credit is to create a de-
mand for liills.
'I'hese four itrins. namely, secui'ities owned ahroad.
iiit<i(st ;uid di\,(irnd |)aymiiits to the hohh rs llniiof.
fi'i lyht I'lnri^cs to fore i,i4n ship owners, and iouiists' ex-
penses in l*'ui'o|)( ill excels of |''urope;ni tra\(l in
\ tiw.i.i/-;! 1.. ......._.... t !!,., ; ; i::!; ;: L.:,! ..»' •! ^ .,«'
^ - 1 ii"- ; !*•- ct : \ j ,* ; "^ rjv : ; : ; : :; v : j i ; .' ". .1 ii i : i : ; i ; i i." ' i \\\ SS w i
i)(jMi:s'ri(' AM) !'()Ui:i(..N kxciianc.k \So
-i)()(ls we export ovci those wo receive fioiu foreign
eDuntries,
1G9. Foreign i\Vi'liaiiij,i' ntdrhtt. — IJelow are repro-
(iiietions ol' a daily article on the foreign excliauge mar-
ket from the ITdll Sircii Journal:
[fVljiiiiiiv ^IL 1 !)()!). J
'I'lic f'oreifTii fXciiHii^c iii.irkit opfind >irnn^', with (liiiiaiul
-trrlinj^' l-.HlHiOQi 4.H7()">, up ♦en points from Saturday 's c'lo->i'.
I'liiTc «us a o()()(l iiKiuirx for riinittancc, attnliiitcd to fonioii
^1 lliiiir of stoi'ks luri'. and on account of the London sittknuiit.
'I'hc market n maiiicd ^tron^" for tlic tir>t liourV tradiu"', in
uiiich demand ^tcrlin<;- went to 4.S7().")(f^ i.S'iTO. Init it hccanio
ividciit tiu'M tliat till re \\a^ not ^ulficient l)uyin<.'' })()\vcr .uid the
market t llefeaf ter ^okl oil'. 'I'lie openitii;' >tren;4tli was iar^'iiv
iiiHuencM'd l»v the weak opening" of the >tock markit and I.on-
lion's salts of »toek> here uere eNulentlv o\ere>t nnatc d. Tiierc
»vas soi'ic l)inino- ot" st( i-hnt;; calik > toi" the settlemiiit.
Iv the aft( rnoon liiddlnii \\as nicatlv withdrawn and the mar-
ket showt'd fui'thi r ea>e, cKi^in;^' ulth demand ^terhn;^- i'H~[.')(a]
IHUTA), oil fifteen points i'roni the o])eniii^ and ott" (i\i^' ])oints
iiM tlie day.
[May ;k 1 !)();). I
The foreifrn i\ehan^i' market open* d >leadv. witli demand
-ti rhn^ kS* M)((' KM !■•'). unehan^iid t'rom I'rida vV t lo>e.
I'he k'ir;4e ~hoil inlcrist which !■> said lo iai^I in ( Achano^c
v>.i- t'iirth«r in i \ idi nee loda\. 'I"!ie coveiin^' moveiiMiit that
s| irled in on Thiir-dax \\a-^ c<iiitimied uilh \iL4or diiriiiij; tin'
-liort da\'^ >e^>ion <!■ iimikI -terlini^' ad\aneid (iflien points. U
:ipp<ar> that a con^ideralik part ot the pii -.i nt iiio\ i im iit is ihie
'" tiio iniinipid'it inn ot one in->tilntion. "hieh i^ thoiiolit to hi'
"rij^j^in;^'" the market.
The maikit clo>ed stroiiL!,- with deiii.ind sti-rlili;^ 4'.87.')5(«J
t S7o<'i lip iiiieeii poiiii> on iiie iia\.
^n>^l.^ and uankinc;
|l iii:i|iilr<l l.\ I!( .l.ii'ir.ii \ ( ,.. I
('mI)Ii-,. Drm.iiid.
(>() (lav-
, ., ,. . ■• ..,.1 ill,. ,)i, imys,.
SIcThn- o|,,.n 1 >7i„.,a hT(i,i i s;i,i,,i >,;,, , >,,; „„a n, 'i
''" '■'"^'•" I ^::o;a s:7.-i i s; ,,,,,i ^;„i, t s(i;!.i;.i sia,
170. r:.fjilninili<ni of (oiirlcs. One purposr in n-
l)rillti!|M thrsr ;:itic|c, is to ;ir. 1 1 1;| ! 1 1 1 llic s dticit with Hir
iiH;iiiiti;4 dl" [\\v .l.nly Mioiuy ai'ticlcs.
'•Tlif Inicion fxclKiii-v iiKirkd opoic-l iij) ivn points
IVoMi S;itiii-(l;iy's close.""
^ -^ i>"iiit iti foiri-n e\('li;iimr is I loo ,,1' one ccni.
'I'lic ■Loiidoii scttlciiicnf iTlcis lo tl)c iMio'lish pi-;n-
lic of sdtlino' stock cxcliaii^v i raiisiiclions fort. ■\a\y.
'I'li.-it is to say. if a customer uix' s an onkr to a -aiikcr
'" '"•>■ '"• "^'11 l'^' i> ii"i r.<|uiiv.l io ,kli\,,- or receive
"'^' ^<'''"iii<^ unlil (lie next s.tilin- ,late. Because a
L'l-cal many specnlators (iesir,- to close up their com-
'"''"""•-^ '"I'-'l' 'lie s( tt|,,M,!,t ,|a!e there is like iv to l,v
n.Msi.leral.le fo!vi-n I ra-hn^ jnst hefoiv set t k nien't tiiu.',
11 ' i< foreiMiKix j|,.,\t. 1,^,,.,, |„|yi||„. our seciirilies f..r
tenipoiaiy sp.cn'al ion tluy ai likely to close up the
track' hy sellinn. If t|„y l,;,^,, h.m "selling.' short they
arc likely to pure liase s<cuiilies just hefore the settle-
liu nt.
Tiic oiKiiino sin n-lh was largely inlhienced hv the
we; k op.niiiM of th. call iiiaiket aiid Li.ndoii sales ol
>toek here were i \ id. nll_\ o\ crest iiii;i I ed.""
'''"■ '^•"' ^ "I" Allien VII stocks hy L,)nd.in traders
v.ould iialni.lly <rivcris. to a demand for e\eli;n,-e with
^^'"'■'i '" '^" "!'• '.o\\.i piices in the .\( u N'.irk mark. I
""'"''' iiidu.v for.iun s( llino' mid thus stiviiytlKn Mir
fort i^n ( xchaiii^'- mark' I.
"''"'■• ""^ '^"""' I'll} iii,u of sierliiiM cahles for the
sett l( iiu lit."
!- 1 / ■.,/./. .
\ ...11
credits l>_\ iiiiaiis of c.ihlc |
• ii> .Ki.i liu I I iiils I ( I ( iK-e ()|
iifs.sa^fs. Dealiis in
-sc-
i)()Mi.>'ric AM) roKi.Kiv i:x( n.\\(.i: i.;:
ii:iiti(s wild liiid tli.'il llicy li.i\c a lialaricc aii'aiiisl tin m
lust Iid'orc scttlciuciit tiiii'' in 1 don |ia\c not sullicicnl
lime to hny otlui- Torrns of stcrlin^^' c\c'liani>c and send
iliiiii l)y mail. In oi'der to meet tlieir ohli-^-utions in
London they arc ol)linrd to provide Imids in the market
at onee.
■'A lai'oe short intei'est wliieh is said to exist In ex-
( liani^e was further in evidence to-day."
I'oiciwn exehanue is hoiiL-lii and sold s])ccuhiti\el>
ill much the same way as stocks. If llic dealer hclicves
Miat the ;)i-ice is uoino down in the near future because
of the prosjx'cts of an unusual supply of hills or because
"I' ai! unusually liyht demand he mav "sell short."
That is he will contract to provide exehantic at a ^'iven
price at a futin-e time. A short interest cxistijiy in
lerlino- ix( hanue will have the same effect u|)on pi'iecs
"f cxchanyc as the same (ondiMon existing- in stocks.
.\ person who has sold slioit must ultimalely Iniy the
i!iin!4 li^' has aL'i'cd to delixcr and this buxirm- or "cov-
' riuii' by shorts is likeiy to sustain prices e\ en in the
I ace of ad\ crse conditions.
■"'riie coMiiiiM movement that started In 'I'hursday
w as continued with \ i;>()r.""
I'or some reason on this particular dale the shorts
I'oneluded that prices wen nolno- hiulier and made all
l^istc to purchase in onk i- to make dilivcri-s bcd'oif the
limitations Went hii^liei- yet.
It appears that a considerable |)art of the present
■mveuient is due to t h« manipulation of one institution
^^hieh IS thounhl to be i m^in^" the jjiarket.
Here a^ain w < lind anothrr similarity Ixfween the
market for fort iyu exchange and tjie stock market.
r,\ehanu. is manipin ited hy ai'lilicialjy interferiiiL;- with
HI
biddi
ii<y and on'ei'iijn'. 'I'lie manipulator who de
1;5S
MONKV AM) HANKING
sii'ts to buy or st'll t'itlicr (Impresses or raises the inai'kt,t
(luotalioiis by jjinrhascs and sales, tlic ohjccl hciii^i;' to
inspire similar l)uyin^' or sclliny- on tlie part ol' peopji'
who see priees ^'oin<4 up or down and wish to partiei-
|)ate in the advance or decline, as the case may he.
'I'he mani])ulalor is able to advance i)rices by pur-
cliascs hut if he is unable to sell out het'ore the price
has declined to its previous le\ el he makes nothing by
the ti'ansaclion. 'I'he manipulator always expects that
his selling w ill ha\"c a less effect on j)riccs than the buy-
ing. Othei'wise he gains nothing in the transaction.
17-. I'drhhis of fofi'i::,!! iwcIkui^c. — There are four
diffeicnt varieties of stei'ling exchange ([uoted above.
Cables we have already described as transfci's of credit
which taki' plact' within an liour or two.
Dtalci's who lia\e sold time drafts on London without
ha\ing (h'posited ci'cdits there sometimes postpone the
foi-warding of funds until the drafts ha\c reached
maturity. They do this hojjing perhaps that the market
V. ''1 decline befoic the maturity date and thus enable
them to purchase exchangi' at a greater pi'otit. IIa\ ing
waited so long without pui'chasing demand sterling they
are obliged to go into the market for cables at the last
moment. It will l)i' noticed that the price of cablis is
twenty points abo\c the price i){' demand stei'ling. This
dilfereiicc represents the cost ol' cable me^sagis and
also the inteitsl for six or se\en days. Tf" (Kalei* who
sells a demand draft knows that the funds cannot be
called for in London until the draft has reached that
city b\- mail, wjiieh at th<' very i»cst must r(i|iiirc at Icjist
six days. Li the UKantime his London account is draw-
ing interest.
17'{. hchunid stcriiui!;. I)emand sterling repre-
sents a draft which is payable on |)risentation and dc-
■13^ ,
DO.MKSTK AM) l-()in'.I(,\ 1 .X( I F AN(,i:
llJi)
niiiid. It \\ill be noted tliat there is a difrereiiee ol'
!i\( |)()ints between tbe (juotations at <)|)eniiijLi' 'i'i<l elos-
ml;. This (hirereiiee is aeecMinted for by [\\c (hfferenee
I, ijiiahty oi' the (h'al'ts in the mattei- ol' sienrity.
Drafts (h"a\\n l)y the best known and most rchable in-
- Iiitions eoniniand a sh-^htly hiyher pi'iet' than those
^^:n■d by weaker fii'Mis. Hank (h'al'ts eonmiand hinhcr
|iii(e than coniinereial (h'al'ts ueeonijjanied by bi'ls oi'
lading- and other doennients. 'I'lie })riee of the nini ty
(lay (h'at'ts is nearly 2 cents j)er ))onnd sterhn^n' kss
tlian I'or demand drafts. This (hU'erenee is aeeounted
Ini- by the fact that the jjurehaser of the (h'aft ninst wail
ninety (hiys before lie can demand ])a\nient. 'I'he 2
1 riits represents the interest j'or the ninety days.
A j)oint mnst be noted here that is ot' ^reat import-
anee in undei'standino' the nse of finance bills. The rate
if interest which is to be subtracted from the (luotation
luf demand sterlinn^- in order to oet the ecjnivaleiit foi-
iMiiety days dral'ts is reckoned at the Kni^lish cnrnnt
I lie of interest, e\ en if the ({notations are ^ivcn out in
\< ' \'()rk. The reason for this is that the purchasers
III the bills may send them at once to London and redis-
I lint them tiiei-e at current rates of interest and if they
liiiosr to realizi' on the funds may sell drmand sh rbnn'
i: thi- market ])ricc. e\en before Ihey forward the nimt\
i..\ l)ills.
ITk l'!itnlis]i hdiili'niL: r//,s7o///,v.- There exists in
lji<.iian(l a class of bankers called bill brokers whose
letion it is to discount time drafts for pirsnns who
i -ire to realize funds immediati 'y and who arc wiUiny
I ' pay a consideration to a\()i(l waiting' until tlu' ma-
in litv of drafts. So uni\ ersal is the iiistum in Isnuland
't drawing' di-nfts for accounts payable thai the rate
i I discount is more important than tlu' late of liianinii
..,j ^i j pi pi
1 ii»
\i()\r.\ \\i) irwKiNi;
lllinls. Must l-'jl^lisli IjIIMIHns IIKII i|i|\C IK) (lilL'l't |(-
l.'ilioii^ Willi h.iiiks liiit (Ic.'il tlnoiioli i|k's,c' hiil hrokd.
in imu'li Ihr saiiii- way llial in Icojil iiiatlcrs Kiinlj,!,
jKopIc (leal directly with a sdlicii,,)-. who .•(.|),.^.scl|t^ a
harnsttr. who is the otie who appears in eonit and
aeliially handles the ease. Th.- rate at whieh the l(,iiu
hills ean he discounted in London dei)ends vei-y eloseh
iiixin theotliciai rate at the Hank oi' Hnnlaiuh
Wry few- of the hill hrokers ixpect to hold the hills
until maturity, hut they expect to rediscount thi'in at
one ol' the lnr;j;v hanks: their profit liis in the dill'erenc
hi'tween the diseonnt which they -et from the eiistoitn-
and that they Jia\c to pa\- the i)ank. The laro'c sfocL
hanks of London are under normal c:i-emiistanees will-
in<4' to discount hills at about i ._, per cent less than the
15:nik of Knoland. Tiierefore the ojlieial hank rate i^
neai-ly always hi,i;iier than the actual I'ate.
'I'he otlicial I'ate of the Hank of Lnolaiid |,as sueli an
important ell'ict upon ci'edit conditions in this countn
that it is \\orth while to understand the mechanism iiy
which the relation is kv\)[ so close,
17."). FiiKinc- hills. Interest rates in tjie two coun-
tries are e(|uali/ed hy means of linance hills. A tinaiur
hill is a draft drawn hy a hanker in this country ii|)oii a
foreio-n hank for tlie i)ur|)ose of ivalizino' funds jieiv
for the time heino' and with the inttntioii of tiiectin^;
the draft .'t maturity hy the purchase of demand stcr-
li'ii^' *>!■ cahies. It is simply a iiieihnd hy which a hanker
liorrows moil, y in a cheap market and Joans it in a dear
one. A concrete case will make the suhjirt clear.
Suppose th( actual rate of (liseoniit in London is J
per cent and that tin rate in this eoiiiitry i.s fl per ecnt
nker is .ihit to i»oi-row funds in Knyjand and re-
I I a na
loan Ihrm in this country lie will lie ah|c to ni.ake a proti
DO.Mr.STK WD lOKl-.K.N i;X( HANC.l
IH
I per eciit |)t r aiiiiuin. K ss the expnisi' ol' ■loiiin;' hiisi-
'■. ,\ iKtiik'.r (ksiriiiL;' to ciiua^f in this t raiisaelion
t oljhu'cd to actually hoiTow the i'mids in lMi<.',ian(l
s1p|) the Ljold to this conntry. He ean aeeoniphsh
■ ■-anu' j)ni'|)osc with less expense and loss ol' lime hy
Jiawin^y- a ninity day di'at't a^^ainst a London hank and
M Ihny- it in the loi-eiLiii exelianye maiket and loaning-
:!i' pi'oeeitis at the jtrex ailing' rale. The pi'iee he will
!i :ih/e for the ninety day draft will he the price of (le-
liiand drafts less a disconnt e(|nivalent to the London
! it ■. as we ha\e explained aliove in connection with the
ij.iMtations on ninety day di'afts.
li is not necessary that the hanker have a deposit
i!((lit ahroa(h nn<Kr the coiuhtions mentioned it wonid
!' \xi-y nnpi-olit;.hle for him to haxc a deposit \\ hen he
luiojit loan funds to such advantage in his own conntry.
fhis lack of deposil credit does not deter him from
liiwiiiy- di'afU npon the London l)ank if he can make
-'iiie arrangements with the hank for acceptinn- the
ii;aft so pi'esented- in order to ,L:i\e it ne^otiahility with
the hill hrokei-s. Al the expiiation of the ninety davs,
liiiwcxcr. he is ol)li<^ed to have Hie fnnds in the London
I'iiik to meet the draft. These fnnds he |)rovides hy
;':iiehasin;4' demand st( rlinu a week oi- so hefore matur-
ity in order to yive the drai't plenty of time to reach
Knu-hiiul bet'ore the draft is ])resentrd; or. if he has
\\aitcd too joiio-. he must huy a cable.
17(5. rm/it on /litaiicc />///.v.— The .'uiiount of his i)i-otit
• Irpeiuls entirely upon the ditrerence between the ])ro-
ireds realized Iroiii the sale of tiie m'nety day dratt
wWwh are near the face of the draft, as the discount
rite in Knii'j.aiid is low- 1 . iilns the irit'T^s! !'.•■ Iijik (!;!!r!f'd
K loaning the proeeeds. and tlii' pi ice which he must
pay for the means of c(i\( linu IIk draft at maturitv.
if
; i
1 J-2
Mn.\i:v AM) HA\KI\(;
Ml
■CI I
plus the coiiiinissiDii Tor ;icTfi)taiur payahir ro li^
Ejioiish Hank, and [\\v liritisli (iovrrniucnt lax oi. hiiK,
Tlic hanker who issnes Hnancr hills is i'owvi] t(> \h-
coiiie a spec ilator in sterling- fxdian^ijc hccansc his i)r(,(ii
(lejKuds upon the price at which he can hiiy demand st. ; -
lin^'- or cables eighty to ninety days after the date ..t
issue of the finance hills. If he wishes to make sure
a profit and shift the risk to others who are more N|)e
latively incline( or who are hetter ahle to forecast
conditions of the suj)ply and demand in the forei^-n ex
change market in the future he may make a contract at
the time of issuino' the finance hills for demand sterlinir
ei^yhty days after at a certain fixed price. The issuing
of finance hills has the same effect upon the markH
value of foreign exchange as l)ills risin<«- out of commer-
cial transactions. If Ihey are issued in laroe amounts at
any one time they depress the market, hut when the time
of maturity of these hills ai)i)roaches. the purchases of
(hniand sterlino- to cover stimulate the market artifi-
cially.
I f the condition of the market is such that <ro\d im-
I'orts are imminent the issue and sale of finance hills is
hkely to reduce the price of hills just enough to hrin<:
ahout the import of i.ol(h In this ease the final resuft
is exactly the same as horrowino money ahroad and
shi))|)in,<.- it to this country for loanin<r |)urj)oses.
In spite of this very cffecHve method of e(|ua]iziii«,^
interest rales helween dinVrent countries there are timi^
when the discrepancy hetween the rates is verv oTcat.
This is accounted for hy the fact that unusual mn.ii-
tions exist in one country or the otlu r. The defects in
our currency system, of which much is to he said later,
are responsihie for nivat variations in the interest rate in
Xew Vork. Jt has heen said hy financiers of authoritv
no.Ml.STK AM) lOHKKi.N i;X( IIAN(.E 1 i;i
dial \c\v ^ >rk can never liope to iRronic the fiiiaiicia!
ruihT of the world or c'oni])clc with L(;n(loii in thai
rcspec-t as lon<>- as it is |)ossiI)lc Cor the rate on eall loans
!n exceed 100 per cent, or so lono' ;,s it is i)ossil)lc for a
'iiidilion to arise wlicre a preininni is |)ai(l for ciu'-
i Mcy. TIk profits from Hie issue of finance hills and
ii'iiii otlier intirnationai financial transactions are so
Mi;all when .cl oned in i)er cent that the variations of
"HI Dion market destroy the delicate ad.lustmcnt hy
iiKikino- such operatioris too specidative and risky.
The «rrcat adxantaoe which J.ondon possesses over
< \ cy other fii ancial center is stahility. Hankers can
: u.-ys depend u\Hm hciiio' ahle to realize funds upon
Nitisfactory collateral in London and take no risk of
liavin- their transactions absolutely l^locked hy a sud-
den money j)am'c.
177. Foreign dcpartmcut of a Ijanh-.~ln recent years
there has been a nreat increase in the foreign business
nf hanks and many foreign departments have In en cs-
tahlished. This has l)een due t. tl • rajjjd extension of
"iir foreign commerce and the lar;. numl)er of Amer-
iiis traveling abroad, giving rise t a demand for
I'anking facilities to expedite the forwarding of funds
Hid the collection of drafts. C'omi)etition between the
''.inks has raised the price paid for commercial drafts
'iiawn by exporters, at the same time it has lowered the
piice of drafts and banker's checks sold to importers.
The advantages to a hank arising from the niainte-
ince of fo! ign department arc, according to Mar-
ma ff: '
1. The foreign de|)artment affords facilities to the
general clientele of the bank to trans;ict all its li.'uiklrv.r
''ii'^iness with the bank, thereby avoiding the possibility
Iilloniati.m.il l',\rli;in;:r: p. It,
if.
MOM.^ AM) l{\Mxl\(;
of liisiii;;' a prolilahk- ai'coiiiil that is djxm to siifccssl'i;!
.solicitat ion Iiy a coiiipclitor.
•J. S{i\(s as a vaiiial)lc aii\iliai-y tludnuh {\iv medium
ol' a(l\(.rtisriiRiils and prrsoiial iii\ita(ioii to alt"ac't dt -
])()silors.
.'J. C'oiiiiiiands proiniiK'Uce of llir name of the l»;'nk
ainon^' .New ^'ol•k hankei-s. by whom its forrio-n ^x-
chan^c is |)niThase(l. and amono- hanUiTs throtiyhoiit thu
entire woi-id. with \\hom aeeonnts are kept, and hv
mIiohi (h'afts a<>aiiisl its kttrrs of ereiht are nef^otiated.
1. r.'aetically eoincrts the hank into an inlei'iiational
liankinii institution, thereby \astly ine!'easiii<»- its Held
of o])ei'ation. by phiein<jf it in elose touch w ith the lon^r-
estal)lished monetai-y centers of the world.
.■3, Affords the l)ank an opj)oi-tunity of placin<r loans.
at i'emunerati\e rates ol' intei'est. in jMn-o|)eaii mone\-
mai'kets when faxorable conditions j»i'e\ ail. by the pur-
chase ol' bills of exchange as an investment.
»i. Ad'oi-ds tile bank an o])portunity of borrowing''
funds l»y means of finance bills in any monetary centei
of the world.
The foreign departuient of a baid< usually transacts
the follow in<4' business:
1. Sells letters of credit to travelers and commer-
cial houses.
•J. .Sells drafts to [)ersons desiring' to send money
alii'oad.
'J. Hu\s drafts di'awii bv (XDoi'tei's on forei<>-n cm-
sig'uees.
]}] addition to these transactions, the possession of a
foreiuii department gives the large international banker
a chance to boi-row money abroad to loan at a higiier rate
ol interest at iiome by means of finance bills, or to
invest funds in sterling bills of exchange and thus
DOMESTIC A\D l'()Ki;i(;.\ KXCilANi.i:
1 i.)
realize a lii^rlur rate of interest than lie eoulil ^et l.y
Inaiiinnr at lioiiic, or to en-aye in prolitable arbitra<-"e
tiansaetions.
178. Ti-dvclcr's Ic tiers of credit. — So many Ameri-
cans travel abroad in tlitse i.ays that there is a larye
(hniand for letters of credit. It is so nineh more con-
Ncnient for peoplr to obtain these letters from banks
uith whom they have an aeeount that if they are eom-
pelled to nrtt them from other banks they are likely to
transfer their aeeonnts to those banks.
Letters of credit may be issued in three ways:
1. The |)nrehaser buys the letter outright and pays
cash for it at onee. The banker sells it to him at the
selling'- price oC demand exchange for that day phis 1
per cent commission. Tims a letter for £l,000 with
demand ster'inn- sdlino- at .$1.8.5.30, would cost $iS53
jilus $48.55 or $41»().'}.55.
2. If the ap})lieant is a depositor enjoyino- hi<,di
credit, the bank is Millino- to issue to him a letter with-
out payment until the customer has drawn money upon
the letter and the drafts ha\e been received by the sell-
h\fr bank.
a. If the applicant is not a depositor or one liaving
sufHcient credit, the bank will issue a letter upon the
deposit of collateral security to secure the amount.
lender the last two methods, the customers are not
.lebited with the amounts until the drafts which they
have sinrned to draw out the money abroad have been
returned to the bank. These drafts are ch;iryed at the
ciu-rcnt sellin<r rate of sterlino- exchan,<re jllus 1 per
cent commission ])lus interest on the amount lor thirty
I lays while the draft is comin.o- i'rom Kn.Ldan.fl and while
the remittance to cover same is li'oin"-
A bank can place itself in position to sell letters of
(■--\ll IK
in
MO.NKV AM) HANK INC.
r
credit by iiiakii);^' jUTiiiiu'cuRiits with a LuimIoi! hanker
wlio lias a larni' iniiiii)ir ol' cnrrcspoinkiits over tlir
M()i-kl to vjs\\ (li'at'ls (li-awii by \.\\v Iiokki's of letters.
A s[)eciinen eopy of the letttr with the signatures of tht
i.iaiia^yer of the department 's sent to e\'ery eorres[)()nd-
ent of the London hanker.
When a person presents a lellir of credit olftained
from a Phikidciphia l)ank aikh'esscd I,) tht London City
and Midland Hank and its corrcsponck nts to thc
Dentsche Hank in Herhn. i'oi insta'ice. they will com-
pare the letter with the specimen on tile, then they will
w.i'ic out a draft on the Londoi City and Midland
Jiaiik which tluy will ask the p'.sson pi-escntin^' to si^n.
If the person has asked lor I'lO, they will .u'ixc him for
the draft the amount in mai'ks \vliich they are [)ayinL;
for sterlin^f dral'ts on that day. If the ])iMce of sterl-
ing drafts is M '1().V.\ \n v I', the pei'son is intitled to
M •1{)\:M) for the !.10 draft which he si^^iiid and which
was endorsed on the letter of credit.
The reason why hanks arc always so willing to cash
letti'rs of (.'redit is hccansc of the yi-eat demand for
sterlin^n" exchan;4'e eviryuhere. \\'hen the hank has
hoiioht a draft foi' llO. it sends it to London for cri'dil
and can inmu (liat<ly sell a dra t for 110 a^^ains' this
er( (lit.
The London City and Midland, when it recri\rs flu'
draft fi'om the Di'utsche Haid'.. credils it to tlieii- ac-
count and charucs it against the I'hiladelphia isank
, 'I'he IMiiladc Ipliia haid< must |)ro\ide fmtd- i London
hy huyinti' slerlmi^ ( xchan^e at honir.
17'.>. Coni/llt /-('iftl lillils (if iiidil. Thes( are usi d
i>y imporlc rs to purchase ^oods ahro.id. \\\ means o!
them merchandise c;m Ik purchased in any part of flu
glolii' on a c;in1i hasis. although act,i;il |)ayinciil ol' tin
^\
x_Ji
^
tlu
i)().Mi;sTi( AM) loiji.K.N i;\( ii.\,\(.i: rn
■ ^1 <>r llic n-,...,|s iin|)(.rtf.| uill not I,c .Icnuuided of the
i'portcrs. I,y \hc hanker fi-niislnno- t|ir credit, until
'.'Innly ..f rcs,Krtivc .Irafts drawn l.y the exporters.
\dvanee onkrs may he -iv,,, hy iniporters with expor-
t'ls lor the inanuraetiire of ooods, aeeonh'i.o- to the
s[KrdieMtion.s and reciuirenients of the iinporters'u ithoi.t
IMvpayinent of tlie vahie of the -oods onlered. or a eash
'!' pnsit. the eo.nin.'reial letter nf ere.ht hein- snllident
■ liinty in thr hands of the exporters.
I i'c (xpork !s are henelited heean.,' thev receive cash
'"'• -''ll iHereh;in(hse ordered nndrr Ihe letter of creiht
' "h' date of th<' shipment : tl,al is to say. .h'afts covcr-
!'-; the cost of iiierchan(hse. even if issued for a spec-
'"' li'ne after siyht can he conv. rt( ! into cash hv dis-
'■'-"iitiri- such (h-afts with their joc.d l,ank<>rs. " The
l'My( r of the letter of cre.lit sio„s an agreement to reim-
'•i>iM' the hank lor the drafts drawn under the letter at
-'" '•""•'•<"t ••.■'!<• of exchan-c an<l to pav a commission
"I 1 |H !• (vnt ..n drafts at sixiv days .-> si-ht. The fact
"'■■' "'>■ 'I'-'fts arc drawn at sixty days ohviatev; the
n'ccss!ty.,i'rhar,o,n,-intuest. fnrthe London hank does
-'! I'.-iy the drafts nu'd sixty days after the -...ds have
i-"' shipped and the h.ank n..ti(i,d that the draft has
'"<n made.
When the f.nvioner has f',.. uno.ls ready for shipment
'' •''■•'^'^ ""■ '''••'t ••"id discounts it with the local
'mker. Ih. l(tt<rof eredit n,akin,o it .ecure and worth
'""■'■ "'■"1 •■'" "nlinaiy coniUK ici.d .ImCt. 'I'he dis-
""*'"^ ''-'"1^ 'i"'<'- Ii"l<^ !l nnid matinitv or sends it
'" ''"'"'"" l"i-<l,s,.amt. IMnrr i| is due IIm. .\merican
'ik pro\ id( s lunds m London to cover it.
ISO. /////////,;-• f„mo>, rnhnu^r f,,r invisi mnit .—
""I'l">^" til-' ral. r\- interest at hom.' is serv low at
" '•'"'" '""■ '' '^ l''i^'' ahroad. 'I'he u.t. mat ,o,,al
M()N!,\ AM) HANKlNCi
h;iiik(.i- fiiuls that ho could make piotil by loaiiiii'^f in tlie
lallrr niarktt. IK' ran do this wvy easily hy pmvhas-
iii'>- ■'loll!''" hills and holdinu' tlicni hiinstlf insli/ad of
Miidin^- thrni ahroad I'or discount. This he could easily
do hy dctachin<4' the /irsl of exchan^i' ( I'orei^ii hills
are always made out in tiii)licate ) and instead ol" indo's-
in<»' it for discount, would write aci-oss the lace: "Vor
acceptance only."" The correspo'.d<nt I)ank receiving
sann- would secure Mceeptance and hold it.
At the ind of tin- perio-l for which the hill ran. or
at anv time iKJ'ore. if the holder found that lie needed
the fiiiuls, the holder could take the scvuml of e\-
chaii^i'. endorse it for collection and send it. The //V.v/
containing'' the acceptance and the .sccoud containin<4' the
endorsement would to^'cther constitsilc a complete hill.
The I'orrespondcnt would collect (or discount them if
the\ were not yet duel and place the proceeds to the
credit of tlie si'iidin^' hank.
Suppose' demand stcrlinu- win- selling' at .^^kH,). the
l?aiik i)f Kn.yland rate was <; jur cent and the avera;;-
iiank rale in this country was t- per cent. In this case
the price of hills woiild Ik': '
«>|i(ri (lixdiint liitc in ImijiImihI .>e/;.
•t(l il;i\s' iiilcrrsl lit ■»' , nil .i!l.K»=:.0(ir'.
\\v\M\ Mill .SI.Miii's " — .(lO.'o
(•..wmii .iuii 1-H)',f =.001.>
.(MiOS
Therit'oK' the priei' of niiuty-dav hills would h.
Suppose the hanker piirehasid ':i(».»M)0 of iiiiietv-day
hills at SI..7S; the <'ost would Ik St7,H(U». At tiie did
of the nine'v d;i\s In would he ahit lo sell 'JIO.OOO ot'
(1( iiiand sttrhnu. say at i^J^.S.") (if the price had not llne-
1 Miir'Tiitl. " liiltiiiMtioiuil I'.Ncliimtfc." |i. \'X\.
^A'A
Do.Mr.s'ric AM) roKi'.Kix i:xriiAN(;E no
til
iKil'.d). or a total of ><|.<S, .)()(). His i)rolit would \)c
IS..-)()()- S4T.«()(J or ifTOO. li' lif had loaned the i^A7,-
MIO at .*{ j)er cent, he could ha\ c gained in interest oidy
>^.'{.)H..3(). The net j)rofit on the exchange would tlure-
Inre he S'.'Mi ..">().
ISl. (ii'nudu (uid French exchange. — The mone-
tary unit of (k'rniany is the mark whieli contains one
!iiMidred j)l'ennin^s. Measured in o()|d, ii is c(|ui\a-
imt to s. •_':{«;{();> in Tnited States money. The (juota-
liiuis f'oi- exehanuc in marks. ho\\e\ei-, aie (juoted, not
:i^ till' ])ii( (, one mark, hut as the priee of four marks.
l"o|- example, demand stei'liny- was recently <|uot(.'d at
~^.".>i- 7-1 •"> k'ss l-M-2. meaninii- tjiat di-afts on (iei'man
lianks W( i-e sold at S.<>1. 7- it; hss 1 -.'{'J for eveiv four
marks. "Le^s l-.'}-J*" nuans that ]-.'}•_' pt r e( iit of
>^.'.>t 7-1*'. must he deducted from S.tt I- 7-Ki to ^et the
trui' (luotation. Kxpressed decimally the (juotation
would he .i»t .()()i:{ less .()()().'} or ><.•.» UO.
In foi-ei^ii txelian<4es the expression "\kv mille" is
iil'ten used. One-half ptr mille (written ]-•_> ()-()()) K,
1" !• thousand or !-•_'() per cent. It is a more convenient
!( rm than fractional jierceiita^es.
The I'rench monetary unit is the franc, divided into
one hundred centimes. Mcasiued in ^^old. it is ((luiv-
aliiit to S.l<fJ!»,") iu our money. The (piotations for
I'rench exchange are yivcn exactly opposite the 1mi^-
I'di or (ierman tliat is, they (piote the numher of
:iancs which one dollar will purch.ase. A recent (piota-
'ioM for d( inand exchannc oii Paris was .kIC. 7-H less
I -.■{•-*. This nuans that .").!»; 7-H less 1 -:{•_' |h rcetit francs
' il •><• sold ,or SI. II \v;i! |„. ,,()t((| that the lan.er
!'■ li^MM-'-, the lower tiie «|uotations and
\ ice MTsa;
>. I .) IS
liiiil
'■|- I
Tl
piotation th ui ."). h"'
^1
!<• (piotations vai'\ I -H per ceut ,,;■ in intervals of .'j-8
M()M:\ AM) H.WKINC;
'•ciitiiiK' (l)ecausi' .5-S (viitiiiir is api)n)ximatcly 1-8 j^i
(viit of.-,.!.-, fraiK-s. the hasis of roinijutation ) .* Tlic in
tcrvals hcnin „i;|| .-,.|-, .„„| „.,, ,|,,.^^| ^^^^^^, .^. .^
3.1(; 1-4. .).!(; 7-H, .5.17 1-2. .).!S 1-8. .1.18 ;j-t. etc.. 'I'l,,.
reason for tliis is \hv fact tli;.t roriiKMlv 1-8 ikt criit ua^
dose cnouol, r,,,- tlic hrokrrs and was a coiivriiirnt fioi,n
in nrhitrao-r transactions, licccntly pricrs aiv (|not((l
clo^^tr and the ijnotations air rais(,| and louvivd hv dc-
<l>K-tin,<.- or addin-' l-lt; per crnt, l-.TJ per cvnt or" l-(il
[)(-'!• cent.
In onUr to deal witli such awkward . (notations it is
iKvessary to convtrt tluni into dcrinials. lor it is iiii-
possihlc to find. r(«r instaiKT. .> per cent on .-,.]<; 7-8 1. s^
I -•{•2. To (NMiNcrt .>.1(; 7-8 k'ss 1 -.•{!> into a (kvimak n
wonkl first fin(i tlic decimal cinivaknt of .007-8
.0087.): then wc woidd find I -;}•_> prr cent of .l.n; 7-8
- .()Oi:,(i - .-,.!(; . .o,)H7.-, ^. .-,.1,187.-,. To tins ^^r
""'^' ■' •<'<"•'•■• •>.lT<>;n. it is a.hk'd hrcaust " ks.
I-.'}-.' per cent ■• means a k.u er (piotation : smkv Ife liiu|,er
tli«' fi.ymes are the iou(T the actual .inot;ition mnsrh,.
Ilie reason for ad(hnn the .krima! instead of snhtraet-
ili<4' it is ekar.
Toconvei't a (juotation expressed declnially to the ren-
idar fractional lorm is more ditlicnil. I ,. t Us take, for
example. .-).l!i'J.").
The ne\t ,i(arest (|nota!ion fVae'.ionalK- is .-,.1!) ;{-8
(see list al)o\t) or .5. l;»;{7-,. which is too laru,. l,y .oopj;,.
.OOlL*.") is ((juixalenl approximah ly to !-;{•_> p,.,"- ,.,.,,1 ,,f
.■).1!». so we would compkle !he (|notati.m hs redncm-
the .-,,I<i.'{7.-. I.\ I -;{•_' |„r e.tit. makinu it .-..IK ;{-8 phi^
l-;{-J. plu^ n pr. srnli:iL; a low.rlnn. of the aetn.d .piola-
tion.
To find the vahie of a 00 ,ja\ hill ,.ti Paris for .52.',
i tallies if dem.and exeliMiiMv v^,,*' ;it VK; 7 8 k s'^-
DO.MKSTK \M) lOUKICN i:X('HAN(iK 151
l-.'}2 (."i.lTO.'JI as al)()\'cj \\c would calculate the discount
and ex})eiises: '
I'r.iiu's.
C, iimisM.m 1 10': or W':: (';=rF.!i MH.l.F.) 1:5
liduli Kill Sl.iiiip !-,'()'; or I-i?i)-00 .'(i
j)i^c()uiit (III (Li_\ ■, ,it .'■,'; ;j.6u
I'lMiu-. :i. !)!>()
I'rirf i)f ilciil.'iiul .•\cli;illf;'i' jlT.fCil
Pri.. r !li)Ml;iy .-.chaiVL'c 5-M.031
(^UotilllOIl |ll T Sl.lMI Ulirlll m' CNcilimLif ."j.-l
.'{.".)!> IVaiK's are added to the pi'iee of demand hecause
:•() da\' exehany'e is \v(iftli less than demand and the
Idwc!' he uotatioiN Hie i^reater the numher of iVancs
:i\r!i i'or SI.
\>1. ArhilraiiC.^ 'V\w ai'hitra^e transaction consists
ill 1mi\ iiiLi' or selling- i'\ehan<4'e on a cei'tain center indi-
ixetly Ihrouyh a third eit\-. For example, a hanker
wishini'' to increase his London halanet would huv Her-
iiii exehaii^f and instruct his (ierman coiM-espondent to
use the proceeds ot' the hill in purchasing" sterlin<i' in
I'm I'iin. thus iiici-easin<4' his London halance l)y the tri-
aii<;nlar opiiation.
Suppose' a ha' Uei* had an opi)ortunity to sell a draft
nil r I'is hut ha(. no funds tluiT. It would he very
' as\- foi him to sell the di'aft. purchase with the j)ro-
(■( rds ^t( rlinn' exchan^^e. I'cmit it to London with in-
truetions to purchase Lai'is « \chaniit in London v th
llic ]>roeeeds and forward fm' eredil to the Paris cori'c-
piMMkiit to co\ (. r tin draft sold ;d lir^t.
Supjjose tli<' (juotatioiis Inr IIk' day were as follov.s:
Sliiliii^: cMJiMMpr in N(\\ >'ii?k s (>|
I'jirls ('\clianfrr in \>\\ ^ nrk j.l7'_.
I'riincs it) I.iiiiilnii Jj..'5 per t'
' M.ir;.MMlV, " Iiiii nrili-'Tij 1-' v.. h-mL'"-.'" p. 11.'.
T
I"'--' .M(t^!:^ and i5.\\kin(;
If Ik' sold ;i (li'al'l Cor •_'.").•_'.■)() (Vaiics. lie would rccc'i\c
thn-dVotii SKH7i>.'_';} (•_'.-).•_',>() duidcd l,y .).17.-)). To
cover this draff in Paris hy l-'rcm-li excliau.yv piirdmstd
in London, it would he ncccssai'v for liini to hnv sterling'
cxclianuv at XLHL If •_'.-,.•_>:, francs in London sold
I'or f he would he i'e(|uired to huy £' I. ()()() in ordei
to oet -i.-j/J.^O francs. This would cost him in New
^'ork at s;.Hk st.siO. His profit would he:
Prncifils ^1,^7!) _);{
t'"-l 1,^1(1
His London hanker would ])rohahly ehar^'e him 1-40
per cent foi' doiii^ the husiness. which woidd cut down
his profit hy S].-J]. lea\ in;^' it net at ahout s.'W.OO.
The (|uotations in \ew VovU foi' continental cx-
clian^i' arc' inlhuneed lai'^cly hy the price of sterlin«4'
exchange, hotli in \ew ^'ork and iti Hi'rlin or I'aris.
If from anv cause the prici' of I'onlineiital exciiaiii'e in
X(\\ ^'ork should tend to fall to a point where tliei'c
would he a profit in the arhit i-aye transaction, the de-
inand for it on the part of the hankers who wish to
"I'li^c a profit from arhit ra^in,t>' would immcdialclv
force up the j)riee a^ain. Therefoi'e. there is a certain
relation existing' hetween all the iiuotations of foreio'ii
exe!ian<4c. When tin re is iKithei profit noi- loss from
aihitrauinu-. they are said to In at |)ar.
l'"or instance, if d( niaiid st'ihn^' in Xew York were
at s J,.S(i!;.">. the ////// pnr. and in Hei'lin a! -JOA'A. also the
////// /nir. the comiiieicial |)ar of marks in Xew ^'ork
could he found ]>y dl\ idin-.^' 4. HOC..') hy '20.V.i, c(iuals
.'-'.'{iSl', the \,ilue (if (iii( maik ( xchanL;e in Xew \'oik;
midtiply it h\ four ( .•_';{,S-i\ i .l).j;}2) and we hive flic
commei'cial par of excliari«ie for mai-j. < \eh;uii,c which
is also the iuint par.
CITAT^TKK X
HLMHTALLISM
1H;{. World's stock of (/ol(L—Thc total amount of
;:'(il(l estimated to have been ])ro(luce(l in the world up
til the year 1911 was !f^U,()0(),()()(),()()(). The amount of
;^(i|(l ill use in 1910 tlirouohout the world as money was
si;.."i()(),()()().()0(): thus leaving- over .$T,()t)(),()0(),0()() to he
:i(counted for. Of this amount it is ealeulated that over
three hillions have been consumed In the arts, and Jit'tv
iiiilhons have been lost through the abrasion of coins;
and that $2,00(M)()().()00 has been exjiorted to the Asiatic
(nuntries, where it has been hoarded and j)asse(l out
mI monetary use. This leaves unaccounted for over
S'-'.OOO.OOO.OOO, which probably rei)resents the -old that
las been Inst in transporting- it across the sea. or has
ti( ( n hidden away in the earth, or is at present in hoards
(if which no record is kept.
IH^. Ilistor// ()*' till' pit clous mctah. — Accorditio- to
t!ir fiu'ui-es of the production of sil\er throughout his-
! ric times it is estimated that up to li)l() there had been
liroduced $1.*{.77."),<)<M).()()(). which was accounted for in
|iirt as follows: Consumed in the arts, .*i<i.7.-,().0()(),()(M);
iliAotcd to monetary uses, over $4., ()()(),()()(). ()()(): e\-
|| .rtid to I?ulia and China, ov.'r J^'i.OOO. ()()(),()()(). This
l'a\cs unaccounted for the sum of the nillions.
In ancier.t times tiier'' was considerable pi-oduction of
Mil pi-ecious metals, mostly trom 'he mines of sdutiuin
l.uropc. These sources uerc worked by sla\( lalxtr al-
' Hist exclusively, and the j)?'<»durtl ns found their uay
15LJ
\\'
i
154
MONKS AM) HANKlNi.
into L>r( at lioanls wliicli strxcd no xalualilc piii'jxisc' otln
than to |)i'o\ i(K' a \ isihlc (,'\ idincf of tlic wtaltli and
powci- oi' till i)\\ iit'i". ( )nly a small |)aii of tlir cxistini;
stock (d' precious uk tals \\ as used as a circulating' iiu-
(liuiii. and of course at that time its use as a liasis dt
ci'cdit was entirely unknown.
(iolil and ^lUir wtvv rrti'iirdtd a-^ an cud. not a- a means; a^
t I'ca^n ic, not iiinm \. 'rii('\- wri'c di^t rilait id, not l(\ Iradc, l)ul
l)\ war. It wa.s tlK hand nC the (■(iiuiuiini' tliat stri|)i)cd tin'
iVoni [lalaecs and tiiii|ilr>. If \\v\ \Mif takni t'l'cnn tlu -.toi'c
dt' nHinarclis, il wa> imt to tVrip^lit tlir ca a\an> nt' ronnnirci.
Ijiit ti) till the cliarii't- and nnilr earl--, t(i load tlir sinn})tt r lior-r-
()i- the cainfl trains of a \irt(iri(iu- army.'
At'ti'i- thi' fall (d' the Honian l\mpiic the mines fell
into the hands of the harharians in their southern mi<i'i'a-
tions and ceased to he worked. 1" rom that time on
urdil the disco\cry of America the (|uantity of precious
metals in l-iUrope (lecreased ratiic!' than increased.
Lai\y'c (|uantities wcic used in dccoi-atin^' the chui'clies.
There was prohahly e\-en less used for nion(dary pui-
|)oses than the limited an id wiiii-h had heen so used
in the ancient times.
IH.). Tin- Feudal I'lriod. I'nder the feudal systiiii
society \\as ornaid/ed on a hasis which re(|inre(l V(r\
litth' ^■\cllan^e >d' products, ami most id' such (.'xchan^i
as ixisttd was doni' on a li.irtc r hasis. Taxes and i)ay-
ments to the lord ol' the manoi- wx'rc madi' in ])ro(lucc.
The i'o\al eourl was niaudain(d rmt I'rom monev taxes
collected, hut from tlu pi-oduce of th( ci'ow n huKK
wliicli the kini;' rec-ei\cd as the- lord of the manor. W'ai's
were condu(dcd withmd the use of mout _\ ; the sol-
di* were e(|uipp((l from iheir own resources antl svcrc
' y A. W'.lki r, •• M(.ii.\," p. las.
HiMr;i".\i.!.is.M
■)i>
ii^t;iiiK(l Ciom tli( I'oraoL' ol' the counli'x- ti';i\ crsrd in
( ailll);lli•ll^.
IH(). Discover! I of A iturica. One ol' liic most iiiipoi'-
! iit flfects 'if liic (lisco\ri'y of Aiiirrica on I^'iii-opcaii
idiioinic coiuJitions aro.st- IVoiii tin- (juantitiis ol' .sihir
which hrniui to Mow in an incrt'asino- stirain IVoni the
Spanish colonics to S|)ain and (Voni Ihcncc to he dis-
liiiiscd throuii'hont Kni'()])c. TIic ca^cr (picst of tlic
lai'ly explorers for the precious metals can he hettei-
understood when we know that the value of silver was
Many tinu's its value to-day. and that the precious metals
\u re al)out the only pi-opeity which could he jjrofitahly
transported dui-inii' these limes when transportation
".as so dillicnlt and e\])ensi\e.
I. ST. ElJ'irl of silver from A in cried.- The effect of
'lie .\mei-ican siher upon the economic conditions of
l'",uro])e was revolutionai'y. Payments fi-om the tenants
I" the landlords for the use of the soil had heen made
I ither in |)roduce oi- in lahoi-. a sxstem which I'educed
llie tenant to a condition not far remo\ cd fi'om that of
the slaxf. (Ommerce was so limited that eveiv com-
''I'liiily had to he practically sell'-suppoi'tin<^\ and its
rnnsumj)tion wa.s limited lo t!ie articles which could he
produced in tiie immediate vicinity. The lack of com-
nicrct' made it |)ossil)le for famine to exist in one county
AJiile wrcat plenty existed in the iieiu-hhorinL)- eountv.
The transmission from payment in kind to money
pavinent. which soon |)i'ofoundly altered the relatiotrs
"(iwfcn the loi'ds and tenants, makinti' the latter much
"lore indep( iid( 111. was not so much due to the greater
'Mindanceof money as it was to the effect produced l)y
'h new silver on prices of ail C!»mmodit ies. The Span-
nils to whom this new siher tirst came, appeared in
ihe mai-kets of Kuropr . ^ jMirchasers of -ouds, thus
1 ■ : ■
}r,c,
^I()^■!:^• and h.\\ki\(;
\l
»'i(;ilitin- a steady (Iciiiand lor export. TIic rise of
prices and tlic skady market uavc a stinmliis to indus-
try. Orinii.ally money had I.een nse<l eliiellv as a store
"f yahu- and iiad heen hoarded u,, as a proteetioti
anainst inisrorliuie. This was justified from the eon-
•litionsor llie ti.Mie uhieh made it (htlieidt to" aeeumuhite
any other form oC property. The huid A\as not houyht
and sohl as to-day. hut was n.nsidered permanent^!,,
the possession of famihes who held it under various
i"rms of hmited title from tl:e isini-- or lord.
There was very little opportunity to ae,|uire im.due-
tive eapital. What little invested eapital there was
'" ""■ *'•"'•" "'■ '''»"• mills, etc.. was held l.v the lords
under the same eonditions as the land praetieallv
Money was therefore ahouf the only form .,f propertv
m whieh saviiu^s eonld he invested. TJu.re was
ineentive to eireulate money e.xeept when misfm-t..,.
(oreed the possessor to release it for the neeessities o
Jilt, or when it was extorted hy foree.
1S8. //////r/.////.v//u/,////r<7.^ Himetallism is a monetarv
system un.Ier whieh the Government permits anvhodv t"o
l>rm- uoh! or silver to the mints and have it eoined into
money winch shall he le-al tender for all purposes. Hy
thus perniittino- the eoirta-e „f m.-tals without restrie-
tion, the relation hetween the values of , oins an.I hnllion
IS automatieally re-ulat..,!. A demand for monev will
tdi.I to M.erease its value eonipand to h.dlion; ov, as it
Jil'P<ars to the puhlie. the priee of hullion falls sh-ditly.
Kven a very small <Ieeline uouhl he sutlieient to hidu'v
someone to eonvert hullion into eoins throu^l, the mint
and thus re-estal.lisi, the e.|mlil)rimn. Prior to IHK;
ni.-t eivilized nations were <.n a himetallie hasis. admif-
tii!- to their mints both metals. !„ the Tnlled States
tl.e lirst coinanc hiws esla])lishe(l a douhle standard; the
lo
une
IUMi;iAI,I.IS.M
1.57
dollar w.is In lir t'(>i!i|)n:-,cil of either JJTl.-.J ^vain.s ol'
s;l\cr Ol' "J l-.7'> ^^fair.s of pure n'old. the I'alio as to weight
li( iiiL^' lirtc'fii to oil''. Ill l!s;U llic ratio was made six-
tr( II to oiR', tin- aiijuiint ol' pure "^old in the eagle Ijeiiig
!V(hieed to '2''i.'2 grains.
1S'.>, l)i/fiinliii.s ,'//' hiincldlii.sm. — In tlie study ol' the
standards in a pre\ ions eha])tci' it has been seen how
llic (htVereiK'e in mint ratios between the diU'erent 'i'o\ -
(inments created a (■on(htion which mack' it ini))ossible
to keep gold and .siher coins in cii'cnlalion eoiu'urrenlly.
Ill I'act there has been no lime since :lie founding of the
;:o\trnmenl ol" the I'nited Stales that il could ha\c been
said that the counti'v \\as actually u|)on a double stand-
ard. The ti'uth is tjiat the I'nited States was lirst upon
a siher standard; then from IS.'U to 1H(>'.? it was upon
a gold standard: then from ISd'J to the ixsumplion of
specie payments in 1S7'.> it was u])()n a |)aper money
standard; from 1H73 to 1S7'.» it \\as nominally upon a
single gold standard, and after the latter date actiially
upon a gold standaivl.
In ISK) the I'liitid Kinmlom a(loi)ted a siuii'le <>(>ld
standard. It was the fii'st country to do so. The other
countries of Kui'o])e and the ( 'nitt;! .Statt's continued
nominally upon a gold standard until the seventies.
Hefore the beginning of the nineteenth century bimet-
allism in lMir()])e was practieal)le because trade at that
time had not been dexclopcd to a jx^int where the dif-
I'l I'ent ratios in the diffd'cnt connti'ies produced any
a.jipreciable llow of metals. 1 1 is not initil \alnes and
prices i'esi)ond r(adil\ to conditions of supply and i\v-
maiid and until Ibci'c is sullicicnt commercial intcrcojirse
I'( twceii h)calities to c(|uali/.c \alues that dilliculties con-
icrning tbe standard arise. Prior to the ninctt'cntb
(■( ntiu'v there \Mre so man\- intei'ferenct's with tjie i.at-
V
I;
1:
1!fff
I i il
W
II
7/i
MICROCOPY RESOLUTION TEST CHART
,ANSI end ISO TEST CHART No 2
1.0
lii 128 II 2.5
j^ ■» 11 =
t^ lail 2.2
::i^ -
I: . 2.0
li
k. ^
nil 1.8
I.I
1.25
1.4
;
llll
1.6
^ /APPLIED IIVMGE Inc
K 1 4609
Phon»
IjS
-M('M;V .\\I) H.WKINf;
iiral play of supply and (lo.md llial the values were
mostly c'()ii\(.iiti()iial lather tiiau coiiipft:; : ;e.
I!>0. Advuutn^^i.s of hinula.'li.sm. Xotwithstaiulin--
the fact that practically all nations except the I'nitcd
Kino(l,,„, were on a hinictallic basis hcl'oix.- 1870, the
system could not he called international hinietallisn'i he-
cause of the different ratios of the various countries.
Those authorities who adv.K'ate hiuietallisin do so on the
^n-ound that ii assures a more stahle standard than either
metal il used eNelusi\ily. It is ar-ued that if the pro-
ductI(Mi of eidier nietal should diminish co.npare.l with
the other, its iK.tural rise of value wo.dd prevent its
bemn- taken lo the mint for coinaoe: the monetary
dc/nand of the country would therefore fall upon the
other iuetal accordin- i,, Cvshanrs law (which states
that cheaper money tends to drive. .nt the dearer). The
mcreased .lemand for the more abundant metal, trans-
'*■'■'■'■'' '" it '■'■'>m the scarcer nu tab would tend to restore
tiu' e(|uilibrium be tween tlu- two.
I-'m- in^iance. if under the conditions just mentioned
It had b.vn o,,|,| i!,;,t |,.„| ^.,,,,,,„ scarcr and more valu-
'•'''*■• ""<l<'- I'imetallism tlu money demand would have
'"•'■" tnuislern.l t<. silver until its bullion value a-ain
^^■■is restored I,, ;u. .•.,ualily with ^nld. If there liad
'"<" ;• Mt.ule unid standanl und. r the same circum-
stanc(s tl,<. increased valu.' of o,,j,| ,voul.l have resulted
'" •■'" ••'I'|n<rl.-,!in- sl,-u,<laid an.l a consr.pu ii! f;dl in
pnces. Tudrr lb, dnubl. sl.ui.lar.l 'here c.uild b, no
rise ,.f Mvneral prices until the ,|iianlilv nf b,,tli moU
;"id silv.r ha<l allrred sullicientlv b. pmd.Hv IbisivsuH.
I'.'l. 77/, sni^/r shnn/ar,/. Thr .bllicult irs inherent
" "'- 'l"-'l'l<' sfMudanl have |,,1 to lh<. use nf bnth metals
<'"'""' I'-'ly '^u^\ i^iven n.mpletc le-al Icn.ier mialitv!
"" >'• * n iiu jiiorie IS
BI.MKI'ALl.lS.M
1.5')
Silver is coined in limited anionnts only, and used solely
\'nr the minor coins. This was tirst systematically put
III practice hy the I'nited Kingdom which, as has heen
said, adopted the single yold standai'd in ISKl. All the
(isili/.ed nations have since adopted this mode ol' usin^
the two metals together, to the accompaniment of a
sinyle ^'('Id standard.
in the Tnitcd States the smallest u'old coin that can
lir com eniiiitly used is the (inai'ter ea<^!e ( •'^•_'. .")()) . which
(■(irres])oniis with the British half soxerei^n. the (xer-
man ten-mai'k piece and the French ti\e-rranc piece.
Sihei" is therel'orr used for the smaller transactions, and
i;Mi<i'es in si/r from the ten-cent ])iece to the dollai- piece.
I'oi- the smaller transactions siher has not l)ulk enough,
so resoi't is had to coins of nickel and coj)|)er.
If silver is undervalued, undi'r the douhle standard,
it will tend to disappiar from circulation. 'I'his hap-
pi ned in the I'nited .States undei- the system adopted
in IS.'U and IH.'JT. Sihir was (h'ixrn out of circulation
ii\- n'old. \\\A aft: r the discoxc^'y nt' n'old in lSl-'.> in
(alifoi'nia. the yellow mrtal was poured upon the mar-
ket in lai^e amounts: unld eoinat^c increast'd while the
\ahie of the metal fell, and siher disajipeared from cii'-
eu!ati(in. 'I'his led to the act of 1 S.").'{ whii'h created the
suhsidiary system in the I'nited State.. Half dollars,
i|uarters arid dimes were coined of such short weio-jit in
lint' sil\( r that no one \v;is lemptid to ( \port them or
to nielt them for commercial pufposes. The half dollar
was made to conl'iin 17-. H trains of line sihei'. The
-■il\cr dollar, tin iVee eoiuiiiic of w hieli ;it tli;it lime was
authorized, contained, as it doi's to-day. '{71.-"> urains of
pure siher. The suhsidiarv silvei* was not, of eonrse,
!i"eci\ eoini(i; ;in(i iiieicjore i^ojtj coiuii iioi in- liioiii
out of I'irculat ion. The yi)\ermnent alone hou^ht the
!iil
lli
Ml
Kit)
-MOM'.V AM) nA\KI\(;
Sliver bullion in the market, and arrannrcd for its coin-
an-f. To uuard against possible abuse, the sul)sidiarv
silver eoin has been made a lr<ral tender only up to .$10.
The prolit arisino- jn eonneetion with this eoina^re is
merely an incident in providin<r the country with a
medium of exehanm'.
1!>2. Earhi attempts at /////^///o//.-^After 1870 the
annual world output of ..•old fell ofl': and as a result
^•old tended to appreciate in value and j)riees I'eil. This
process was hastened in the Tnited States by the con-
traction of the pai)er money issu j during- the Civil War.
HuMiKss biM.an to suH'er as prices continued to fall. It
Avas thouoht to improve business conditions and to put
an end to i'allino- prices by issuing- an additional amount
of pajur money. This led to the formation of the ^rrcen-
l>ack party in the TOs. It was stron^- enou<rh to push
Ihrounh Cono-rcss a bill which i)reveiited the further
retirement of -.Teenbacks and provided for an additional
issue. Tresident (Jrant xctoed the bill; but the fiu-ther
retirement of the lirei nbai'ks ne\ertheless was brou^dit
to an end. and the (piantity in circulation fixed at the
amount at which it now stands, namely $.'M.().()()().(H)0.
This attempt to raise prices by further pa|)er money
issues was unsuccessful in itself: but it inau^nirated a
moxement to accomplish the same purpose with silver as
the means. Olher (nunlries. lio\V( \er. wei'c abandoning-
tli«' d'Miblr standard. The decrease in the i)ro(luction o7
/^'"'•I ••'lid the increase in the oiit|Mit of silver. to<retJier
villi the example of Kn<.-|;,nd which \\;is on a y-old basis.
were no doubt the causes which in(bi<-i(| the bimetallic
countries to demoneti/c silver at this time.
!!».'{. The Liitiii ('iiidii. Prior to ISTJ. l-'iancc was
i'i- ^lM.^t iritporiani iiimeiaijic country in tlie world.
Att.r ISdt I''iancc was in uai^ue with several of the
BI.MKTALIJS.M
1(51
smaller countries in Europe: Italy, Greece, Rpigiuni,
and Switzerland. This lea<rue was the Latin Vn'um,
which was so inii)ortant an element in the silver dis-
cussion of the do's. France furnished these countries
with coins of n-old and silver, so that for monetary pm--
poses the Union might he coiisidered as one country.
The Latin Union, tooetlicr with (Germany, created a
demand for silver which maintained its value for some
years in the face of increased production.
In 1871 the German Empire was founded and the
monetary system of various countries composing the
emi)ire was entirely reconstructed. The free coinage of
silver was suspended, and supplies of gold were accumu-
lated to maintain the vahie of all the credit money of
the empire.
France, which had acted as an e(iualizer of the values
of gold and silver in Europe u]) to this time, in 187i
superseded the free coinage of silver in resjjonse to the
tendency of the times.
U'4. DcmoNcH-alioii of silver h// I In- r nit aJ Staffs.^
A series of compromises had hrought about the same
result in the United States. The coinage of silver dol-
lars— full tender, freely coined silver dollars was
dropped in ]H7'.i. Paper mon<y alone was then in eli-
eulation: <lepreeiated i)aper. fiat currency. If specie
had l)een in circidation it would have I.een gold. After
1H.)(), with the inllux of new gold, gold hccanic the real
i>asis of the monetary systt'in. The existence of ;i nom-
inal douhle standard was forgotten. In 187,'} it wis
expected 'li.il ilie p.ipt r money would he soon gi\en up
■111(1 a specii- systdn re-estai)Iishe(l. Sp< cie pavnieiits
were, in fad. n'suincd in IK7!>. Hut when the silx* r
'loilar was dropped in 1H7.'J from the list of coins that
could l)e struck. hi?uel;dlisn). |onn- olvsojcte in nraetice
^ vii-n
I , j»|
i
I
'I I
'
It
IG^^
MONHY AM) nANKIXc;
was finally ended by law. This lias been often called
"the crime ol' 1873." The dollar was supposed to have
been (ir()pi)e(l from the list by stealth, by persons inter-
ested in the gold standard. It was done (juietly, to be
sure, probably because no one at the time thought it of
any moment.
10.). Act.s (jf 1.S7S and /s.'id,— The greenback ])arty,
having failed in its attempts to issue more pa{)er cur-
rency, sought to secure the free coinage of silver. This
it could not effect; but by way of comj)romise the
acts of 187H and 1890. already referred to in a previous
clia|)ter. were passed. These measures provided I'or the
purchase of silver bullion by an issue of new Treasury
notes, the total issue amounting to $1. '5.), ()()().()()().
In 1878 the HIand-Allison Act i)rovided that th- gov-
ernment should purchase not less than -S'i.OOO.OOO worth
of sihcr bullion nor more than $4.0()().()()() worth each
month, the bullion to be coined into dollars of the old
.standard of iineness. namely .*J71.'-'.5 grains of j)ure sil-
ver. Oidy the minimum amount was purchased each
month. During the ])eriod 1878-181)0 about 2..)00.00()
silver dollars were coined each month. 80,000.000 a year.
These dollars were overvalued, limited in (|uantity. of
full legal tinder, and in every respect a,s valid for |)ay-
ment as gold.
In 18'.»0 the .Sherman Act was |)assed. oidy to be
repealed three years later. It marked another comi)ro-
mise between tin friends of free silver and its opponents.
During the threi' years of the life of this act. silver was
])urchase(l jjy the government to the e\!eiil of adding
•21 8.000,000 dollars to the country's monev supply.
Tnder the act of 1878. a.')'_>.000.000 dollars had been
coined: so that when these operations came to an end
570.000.000 dollars of overvalued silver had been coined
lU.MF/IAM.ISM
163
;m(l put in cirrulation. At one time hctwccii 1890 and
IS'.t.'J Ihc silver dollars were coined to sneh an extent that
they seemed a!)ont to drive ^old ont of eireidation. This
was the eliief cause of the panic of 18!>;i, whicii led to
the repeal of tlie act. Ouinu- to the increase in tlie
(•oinitry"s ])opulati()n and c<»ininerce since IH'J.'J tlie de-
iiiaiid for money has enormously increased; hetice, <jfold
has remained in Die conntry side hy side with silver. In
other words, the o\er\alued silver has hce?i as o(K)(1 as
.U'old.
Il»(i. liritisJi Iiidirt and flic roiiui^^r of ,sili-rr. In 1893
Hritish India j)ut an end to the free coina^ro of silver.
Hritish India is the most important connti'v of the East
and had always ahsoi'hed immense (luantities of silver,
it had freely coined the siher into rupees, whose hullion
content is ahont two-iifths that of the I/nited States
dollar. The continued fall in the value of silver, how-
e\(r, had forced the l^ritish n()vernment to close the
mints of India to its free coinage. Thus in 189.'} the
last twooreat mai-kets for silver the Tnited States and
India- were closed. Since ISD.'J silver has remained at
practically the same level in resi)ect to its yearly pro-
<luction and price. The price has heen in the neij^dihor-
iK.od of so.tio ,„.,. ,„,,uv: and that has made the market
ratio ahout :} !• to 1. It follows that the silver dollar is
worth, as metal, less than fifty cents in ..-old. Silver no
lonocr has .a \'rvc openinu- j,, nionetary use. As suh-
sidiary coin the amount that shall he added to the circn-
latiny- medimu d. |»ends on the |)urcjiases which uovcrn-
m( nts choos* to make, Th-' act of 1900. dcscril)ed in
a previous chapter, where i.v the treasnry is empowered
• ■":■-"■•■-■•"'•"•■.".•"■"•■ ii; L;.'];; ro lii.ijiiTiiiri
the money of the I'nited States nu a .u'old hasis. ensures
that the silver dollars shall circulate at par.
1 1
!
\\
16 i
MONEY AM) BANKING
107. Final failure of bimetallism. — Bimetallism might
have l)een possible if Europe had joined with the United
States to bring it about. But there never was a chance
for concluding such a compact. Crreat Britain at no
time was friendly to such a proposal, except in the case
of British India; and it is doubtful whether even such
a great silver-consu.ming country as India would have
brouglit any great strength to a bimetallic league.
W^ithout (ireat BrUain, (iermany woidd not come in;
and M-itluHit these coimtries the United States would
not. So, wliatever the abstract possibilities of bimetal-
lism, it ne\er had a working chance of success.
For the mass of tlie people, however, the problem of
general prices is the most important. How far would
international bimetallism have steadied prices? It would
depend upon the extent to which tiie total supply of gold
and silver would be affected. In 1H90 there was some
reason for hesitation. The world ])roduction of gold was
virtually stationary; while that of silver was steadily
growing even in the face of a fall in its price. If the price
of silver were raised to $1..'}.'J an ounce (the price in the
United .States, gold correspor.;ling to the ratio of 1.5lo
t(} 1 ) Hoods of silver woidd make th-ir appearance.
Free coinage of silver at this ratio would have doubled
prices, it was said, in ten years. The bimctallists, on
the other hand, maintained that the increase in the out-
put of silver would not l)e great, and that with a sta-
tionary output of gold the demand for silver would be
so great that changes in pi'ice would be moderate and
would be spread over a considerable period. They fur-
ther stated that any upward trend in prices would be
beneficial to fbc debtor class.
However, al'ti r IHKO tlie danger of a stationary or
declining yearly output of gold disa])peared. If silver
BI.AIKIWLLISM
16.5
liad been freely coinable as well as gold the totai money
supply would have inereased at an enormous rate. Even
witJi the low priee of silver in IHD.'J the i)roduetion did
not diminish. ^\t increased prices it would have been
/greatly stinmlated. In a word, bimetallism would have
unsettled prices to a much greater extent tjian even the
increase in the world's stock of gold has done. The ex-
traordinary increase in the ])roduction oi' gold has put
an end to the propaganda for bimetallism. The rise in
l)rices has been phenomenal, and has prevented any fur-
ther agitation for the rehabilitation of silver.
I
1!
CIIAPTKU XI
HIS'l'ORY OF CANADIAN' MONKTAin' SYSTEM
1!)8, Kcoiioiiiic .sitiKilioii ill ('(HKida (iftcr the Con-
quest. — A brifl' sm\iv of the iiiiancial and monetary
system of Canada is essentia! to i)ut the student in toueh
with present day ])rot)lenis in that country. Jt is scarcely
necessai'v to enter into the niot)eta.rv situation (hn-in<)'
the I^'reneh reoime. however ititerestinn' that miyht he.
C'aiuuhi iWd not hecome a Hi'itish possession until the
Treaty of Paris was si^iu'd in 1T<'>.'}. although Quehec
capitulated in 1T.")!>. Voi- some time ])recedin^' the
capitulation of (-^uehec. the ti'ade of Canada had heen
almost alto^ethei- in the hands of ^oxernment oilieials,
who manipulated it for their own henetit. As a result
there were no open markets I'or the produce of the
couTitiy. The rapacious agents of the <.foveriiment de-
manded it all. They paid for the ])roduee in which they
dealt with depreciated and ultimately, ahnost worth-
less — pa|)er money issued hy the colonial <4()vernment.
After the fall of (^neluc these ollicials returned to
France, leaving- Canada practically destitute of a mer-
cantile class.
10!). .V( r.' Kiii^]tiii(J fniiJcrs.- The victorious l^ritish
ai'iiiy was followed hy a force of shnwd traders from
New ^'ork and Massachusetts. Tluy came to C anada
to seeui'e a share of the eontrai'ls for furnishing- the
troops with supplies, and also io particiijate in the fur
trade which had reached enormous ])ropoi-tions. They
dealt e\tensi\ely in u'oods of l-'n^lish manufa<'tui'e. and
liifi
.■'^■■:
HISTORY OF CANADIAN MONETARY SVSTKM l(i7
l)()iinlit from the colonists their farm produce which tliey
exported to (ireat Britain and the West Indies. Thus
the wholesale trade of Canada fell into the hands of Xew
iMi^laiid traders, under whose control it remained during-
succeeding- years. ( )nly the retail and the domestic trade
continued in the hands of tlie French, The racial
differences and ])rejudices, together with these facts,
explain in larfjfc measure the discord which subsecjuently
arose between the two races in Canada.
The New England traders distanced with ease their
French competitors. The vi^or and enterprise of these
dealers almost at once ^ave them a commanding- posi-
tion in Canada. To them, more than to any other cause,
was due the recovery of the colony from economic paral-
ysis. It is true they received very little support from
the p^ii^lish military administration. The army officers
who held the country and administered it under military
law affected to despise these merchants. They looked
with more favor n[)on the Canadian noblesse who had
remained in the colony, and preferred their aristocratic
society to that of the democratic and resourceful trades-
men of their own nationality.
200. Financial situation after the Conquest. — The
military occupation of Canada lasted, strictly speaking-,
from 17.39 to 17().'}. During- that time trade i)y the com-
missariat dei)artment, the IJritish troo])s ancl the Xew
Fin<>'land traders, was carried on in British currency.
'I'he paper money issued during the French regime
fluctuated in value with every rumor of its |)ossible re-
demption. It had become, in fact, an article of wildcat
speculation. A larye (juajitity of French coina^re had
disai)])eared from circulation durin<2- the naner delntre
of the French ascendai
lev
It
a})peared very s
lowlv
iii
I-
ui)on the establishment of Hritish rule. Such French
■.\ t\
IGS
M()M;V AM) HANKI,\(i
ill
ifi. ■
(•(•ins as found tlRir way into circiilatioti did y.o inostlv
tlh'oiioli ictiiil tradr. and wcix' accepted on a .slii-litly
o\crratcd hnllion hasis.
When the trade of (Quebec and Montreal be^*'an to re-
vive tliron.irh the activities of British merchants from the
New Knuland colonies, the currency standards of these
colonies l)e<,mn to prevail in commercial transactions.
'I'he merchants of Quebec we.e most closely associated
in their transactions with \ova Scotia and especially
with Massachusetts, while the Montreal traders and tli<'
inr dealers were most intimately connected with the
colony of \ew York, by the Lake Champlaiii route.
Now, the Xew lMi,nlan(l colonies were closely asso-
ciated with tile West Indian trade; and so the Spanish
dollar, or piece of eiyht (S reals), had come to be the
prevailing- coinage in circulation. Through it exchan<«es
were made with (n-eat Britain. Nevertheless, the nom-
inal standard was the Eritisli shillino-. TJie Spanish
dollar was eiiuivalcnt to 4s. Od. sterlinir; but owiii"- to
tlie scarcity ot money in these new colonics, there was a
constant tendency to overvalue it. In Massachusetts
and Nova Scotia the customary ratinn- was .5s., while in
Xew York colony it was 7s. (id., and at times 8s. IJoth
of these ratin^-s were introduced by the merchants com-
ing- to Canada. The former was })reval(.nt at (Quebec,
where it was known as Halifax currency, and the latter
at .^^ontreal, where it was known as \'ork currency. It
was not. however, untd some time later that the Halifax
currency standard was aiioj)te(l for o-overnment purpo„es.
I'Ol. Kar!// i\v peri in tills in media of e.vchaiiffc.^ln
18(M. the year after the establishment of civil mnern-
ment in Canada. (Governor Murray passc(1 an ordinance
'■for re^ndatinn- and establishing- tJie currency of the
provhice." By this ordinance the chief gold and silver
IllS'l'OliV UF CANADIAN .MONi/IAin' ^VS'ri.M |(!>
I
ciiiiis fjunlliiir to Aiiu'ricaii coloni;!! iradi' wvw .st'j);i-
ratcly i-altd. Of tlic sihcr coins, the S[)aiii.sli dollar was
rated at (is., tlic l-'rciifii crow ii at ()S. Sd., and tlit Hriti^h
sliillino- at Is. U\., the Spnnish pislarccn at Is. "Jd., and
the French iiinepeiiiiy piece at Is. currency.
To meet the need of IVactional currency it had heen
custoniai-y to cut ui) small coins into hahes and (juar-
ters, and to pass tlie sections as change. 'I'his facilitated
fraud, so the ordinance of ITCt ijroliihited the circula-
tion of cut money. A more successful device to meet
the scarcity of fracti(-nal currency was the issue l)y the
merchants of small due hills, which were good at their
face value for merchandise of an e(iuivalent amount.
In cases wliere the merchanls who issued tJiese l)ills
were well known, and where die paper was honored at
once on demand, these notes gained a more or less
general cii'culation, and in this way met a very real need
of the colony.
This ])aper currency originated in French Canada,
and the notes were generally introduced with the words
Hon pour. Tn this way, this paper came to he nni-
versally designated as lions, and the name followed
their introduction into Tpper Canada at a later date.
Without a douht these lions ])repared the way for the
suhseciuent issue of hank notes. An enterprising auc-
tioneer of Quehec. with no small degree of self-assur-
ance, petitioned the Council of Quehec in 17(>7 for a
monopoly of the privilege of issuing j)romIssory notes
for small sums as a suhstitute for fi actional currency.
Thi.^ ap])ears to he the first aj)plicatioti for hanking
privileges in Canada.
202. Shnuhinl o/rnin'ii of fjir cnjrtfiii — 'I''hf^ vatijifTo
given hy Ckneral Murray to a numher of the coins listed
were not consistent with each other. He purposely over-
i
i
u
!
lii ■
t t ; •
.£iil
iiil
170
.AIONKV AM) HANKINT;
rated tlie French coins in order to draw tlieni once again
into circulation, and retain tlieni in the country. Some
effort was made to secure unirormity thi-ou^hout the
colony: hut tliis was not ett'ected luitil after the out-
break of the American rexoiution. In 1777 an ordi-
nance was passed makin-^' the Halifax currency the
standard money for the coimtry. 'Die merchants of
Quehcc a?id Montreal had not l)een ahle to come to an
agreement on this rnatter: hut, a* the outbreak of the
American war. the (luestion had been decided in favor
ol" the merchants of (Quebec, the Montreal traders bein<r
suspected of sym])athizing with the revolutionists. ]Jy
an ordinance passed in 1777 the .SiJ- Mish dollar was rated
at 5s,, the Hiitish and l-'reneh crowns at .)> (>d. each,
tlic British shilling at Is. Id., and tlie Spanish ])istareen
at Is. It is intertsting to oi.Mi in this connection,
that as compared witii tlii' standard dollar the Hrilisli
crown was underrated to the extent of td.. with the rc-
.sult that it disap|)cared from eiiculation. On the other
hand, tlic I-'rench eiown was made by law to cii-culate
at more than if was worth, and hence was in ukh-c ••en-
eral u^(• than even the S|)anish dollar. Th'- pistareen.
too, was by this ordinance gi\en a \alue far more than
it wns worth, and as a result was attracted in large sums
to the colonw I'"oi- a time it was irseful in increasin<>'
the suppl\- of fractional currency: but lat( r it. with, the
French crown, became a source of much trouble and ex-
y)ense to the whohs.-.Ie merchants and tlie b.anks. The
^old coins, too. had been ni\,.n ;i |,.n;i| value: but from
them no h'oulilc was (■\peii<iice(l. The eliK !' of these
"ere till Hiiiisli tiuirMa. ral((| al LI ;{s. Id., and the
Portnuu* SI' .Inhannes comnioidy calhd ".Foe" -jit
•i- i is.
•Jn.'{. ('lutii-ifs ill I he I'll n; lie// nlhr / , .v,;. - -1 )iu'inu-
illSTOHV OF CANADIAN MONl/lWUY SVS'IK.M 171
the Hc'volutioiiarv War so iiiucli specie was sent to
Canada hv tlie Hrilisli Treasury, in support of the civil
and military administration of the country, that Cana-
dian merchants informed the home authorities that it
was unnecessary to ship fui'ther supplies of specie to the
colony, as they coidd secure all that was needed l)y send-
ini'- to Knulaiid the Treasurv l)ills which thev had
accepted as payment for sui)plies furnished the •govern-
ment in Canada.
When trade with the American colonies, now hecome
the Ignited States, was resumed, the Canadian merchants
who dealt in international exchan<4e found that the over-
ratiiiii- of certain coins involved them in considcral)le loss.
They, therefore, jjctitioned the imi)erial <40vernment to
rcmedv these evils: but no further change was made
until the division of the colony. ii\ IT'.M, into the prov-
inces of I'ppcr aud Lower Canada. 'IMiereujion an act
was ])assc<l in Lower Canada, and soon afterwards in
Lpper Canada also, pcrmittinu" slightly worn ^old
coins to ])ass at their full face value in order to encour-
a^'c their remaining' in circulation. The act also Icoal-
i/i(l the new American coins, the cayle and the dollar,
rating- them at €2 10s. and .5s. respectively.
•20i. Difficult// of clKHi^iiii^- jiractici'. As is very
often the case, custom did not altogether carry out the
Itlter of the law. It still was the current practici- for
Montreal and Lj)ptr Canada merchants to carry on
Ihcir business in ^'ork currency. althou<ih Halifax cui'-
rencv bad been made the standard. 'I'his is readily
undi'rstood when it is recalled llial the li.valist mIIK nu nfs
in I 'ppcr C'anada ( iicourayvd the merchants in this prac-
tice. 'I'liesc I<i\alists had come frotu New ^'(>I•k. New
.lersey and the adjoinin.u' districts (if IViinsyh ania. So
d( < py roote<l was the ^'^l|■k euri< ncy in tlii' lnwns ami
MONEY A\n R AXKTN'G
conntiy dislHcts of ['vpvr Caiiad;^ that oven to tlii.s (lav-
prices arc oftt'ii (jiiotcd among the I'arnier.s and local
dealers in ^'ork shilhims.
Tlie orioinal York shilling, as is well known, was tlie
:Me.\icai) real, hut in later times it Ijccanie known as the
British sixpence. The use of York currenev was so
wides|)read that it created a great deal of tronhle, espe-
cially in legal srttlements of business affairs; so that
finally in 1821, hy act of parliament, it was deprived of
legal recognition. In Lower Canada, among the peas-
antry, the French Hvre held much the same place as York
currency in the sister i)r()\ ince.
20.). Jet of /mv.— After the decimal currency system
liad hecome thoroughly estal)lishcd in the Fnited States,
much of the worn and dcfae, ,1 displaced coinage ^'ound
Its way across the border lo Canada. The comparative
scarcity of coins there, especially f„r fractional currency,
prevented the old American coins from being too closely
scrutim/ed. Those merchants who dealt in foreign trade
were cone. rned. for the most part, with the state of the
gold coins and their exchange values. Thus, an act
|)assed in ISOH dealt only with the exchange relations of
gold currency.
During the perio.l following the liritish occupation
of C'ana.la up to ISnS, the imperial government took
ycry little interest m the monetary system of the colony.
The British aulhoriliis n ,,uired the Canadian adminis-
I'-'ti"" to keep its acrount in the sterling standard of
Knglan.l. Neverthel. ss. ||,.. sjurie employed i,, the pay-
iiKiit of thr tro.»ps and m meeting oth,.,- expenses was
not as a rule Hrifish coinage but Spanish dollars, rated
|<l ^s. (Id. each. The S|,anish dollar passed in trade.
'™;' ■• ••' •'^- '^" ii'''' *•!•■ -'idler r.reived a premium
ol (5d. currency on each .loll,,r. In ihos the pninium
v^ ^^
HISTORY OF CANADIAN MONETARY SYSTEM 173
w;is reduced, the imperial government thei'eafter
j)ayiiig out tlic Spaiiisli dollar at the rate of -is. 8d..
Nterliiig.
•20iK Dnid funvlions of the carli/ Canadian mcr-
iJ'.ant.-' 'V\w. large merchants, especially in Western
Canada, not only carried on the import and export trade
of the colony but dealt in 1'orelgn exchange as well. As
a matter of fact, nearly all exchanges were made through
them. They extended credit to various persons in nearly
every line of business and honored drafts drawn on them
both for goods and money. They conducted the foreign
exchange bus-ness through their agents in Montreal,
who procured such foreign bills as they recjuired — most
of them from the civil and military administration. The
large import houses of Montreal in reality carried on a
banking business with the merchants of the ujjper prov-
ince. They received cash dejjosits, made payments as
ihey were directed, and extended credit to be met in the
future either by produce or cash. This combination of
functions gave them very extensive power over the dis-
tricts tributary to them, (governor Simcoe. of Tpjier
Canad'i. recognized this, and so sought to displace the
merchants by establishing grain and Hour stores — the
torerunners of the modern elevators. These stores were
to be under governmental control and super\ ision. The
Lords of Trade in (ireat JJritain. however, vetoed .Sini-
coe's plans.
•JOT. Karlji d((din^s in lOrii:^!! crcZ/rw^'-r.— Canadiai*
trade with the I'niled States had been greativ stimu-
I.ttcd after Jay's Trcaly of IT'.U. Mndi of tlie Ameri-
an produce I'lom the West found its \v:\y to the l\uro-
pcan market through Canadian merchants. The Hritish
uovernment was obliged to purchase large supplies, too,
for the garrisons, which they paid for with bills drawn
IIJI
ill
II
III
17i
.AIONHV AND RAMvIXG
mp.
upon the Treasury in Enf^iaiul. As a eonseqnence of
all this, at times niueh Canadian euneney was sent to
the neif^hhoring states. On tlie otlier hand, hills drawn
on IJiitain were often in exeess of the loeal demand
while they were at a i)reniium in the rei)uhlie. This led
to a profitahle e\elian<^e Ousiness. es{)eeially hetweeii
Montreal and Xew Vork. The eneouraninH' sueeess of
the liank of the United States, founded hy ^Vlexander
Hamilton, together with the extensi\e exehan^e liusiness
just deserihed, led to a demand in ISO? for a Canadian
hank. Jiut the rapidly inereasino- fi-iction hetwcen the
United Kin<^(lom and the United States prevented
the pi-oposition from l)eino- carried out, as war was de-
clared hy the repuhlic in 1812.
208. fl'ar (if isi j /// Us nUdion in Cdnad'uin finance.
— .Just hefore the War of 1812 the Canadian grain and
Hour trade was in none t 'o prosperous a condition. This
was ehielly owin^' to the fact that the British Corn Law
had j)rovided for a sliding- scale of duties, which had
meant for Canadian cx|)orters low prices and lon<i^
credits. Hut the outl)reak of war led to large expendi-
tures in Canada hy the imperial <;o\xrnment. In nor-
mal times, the pui'chasc of supphes in Canada would
h,i\e heen met hy hills of iwehange on the Hritish Treas-
ury: hut. there heing little specie iii Canada now with
Mhich to j)ui'chase them, and it heing too risky to im|)ort
large supphes of specie during the war, the Jiritish
goxcrmiunt arran^dl \\'v the issue of ai-mv hills. These
wvvv simply orders on the British '1' casury for con-
venient amounts of standard uioniy. 'I'hc v were not,
therefore, paper money in the ordinaiy sense of the term.
They wvw designed simply as a convetiicnt means of
supplying l{i-itish moni v to Canada with(!ut ninnlng
the risks incident to ^var.
■'■m^\:
iirsTORv or canadiw monetary system 175
209. ^Utitiidc toicard pajnr currciicif. — At first, the
l"'reiic'h Canadians were very suspieious of the new
|)a])er currcney. recalling' as th<y did their unhappy
e.\[)eiienee with the notes issued hy the French govern-
ment hefore 17."5!). They therefore hxst no time in con-
\ertinf>' the new notes into specie whenever they fell into
their hands. l?ut .soon they gained confidence in the
new i)aper money, which ])erformed its functions with
the greatest elhciency. These notes hore interest and
those of the larger denominations were convertihle into
liills of exchange drawn on the IJritish Treasury. Cer-
tain small denominations hore no interest and were
jiayahle on demand at the army hills otHce. Soon nionev
became plentiful throuj'hout the colony. The war, as
far as Canada and the i'e])ul)lic were concerned, was
really a tame affair. There were a few skirmishes
wiiicli Canadian and iVnicrican historians have glorified
until they have hccome great battles. It has often been
noted that, generally speaking. Ciirat Hritains wars
have always meant high prices and prosj)ei-ity for Can-
ada. It was ji'stingly said that the litiugy of Canada
contained a fei'vent |)rayei- "for a bountiful harvest and
a bloody war."'
The ariny bills. ]u)wcver, althongli tlicy did serve as a
medium of exchange, were not designed as such. In
i( ality. they were simj)ly bills of e\c-hange used to pay
Canadian merchants for sup|)lies furnished the military
administration. These bills w* -e sold throughout the
wai' in Xew l''nghmd cities, where tiny found ready
biiyei's; for. as is will known. New Kngiand was abso-
lutely oj)posed to this useless war. 'I'hese notes fatnil-
iari/ed the Canadians \\ith papei- currencv. and i)avc(l
the way for the successful launching of se\cral banks in
the tiear futmx'.
'^x
17G
MC)M:Y AM) BANKING
III
210. Origin of the ^rcat chartered hanks. — In 1815
and the following year an attempt was made to secure
a charter for a CanacHan bank. It was tlie general
opinion that a provincial bank whicli had the power to
issue paper money would greatly aid the trade and
commerce of the country. Its notes would take the place
of the retired army bills. In 181<> and again in 1817
attempts were made to secure })ank charters; but in
both tiiese years constitutional difliculties led to the pro-
rogation of the legislature before the bank bills were
reported.
All efforts to secure a charter from the legislature
having failed, several Montreal merchants and others
who were interested decided to estal)lish the bank as a
private corporation. On May 17, 1H17, the Articles of
Association of tlie Bank of Mor.treal were ado])ted;
and ten days later they were published in the Montreal
Herald in separate form. It is interesting to observe
that Americans subscribed a large portion of its early
caj)itnl. and several of its chief oflicers came from the
Cnited States.
211. Alexander II(imUt(fn's principles adopted.— In
its essential and most characterislic features the Bank
of Montreal paved the way for subse<juent banking
legislation and ])ractice. To this day the central facts
of Canadian banking are founded on tliis eaiiv ex])eri-
nient. It is of more than ordinary interest to note
that the Canadian banking system was founded )n the
j)rineij)les hiid down ir; fjie First l?ank of the Tnited
States a bank which was established along the liius
advocated by the great American statesman Alexander
llamiltoii. who was tlu' first Sicrctary of tji(> Treasury.
In I hi' following year t]n'e(> other ])rivate banks were
cstablislud in Canada. These were the (Quebec Bank
HISTORY OF CANADIAN- MONETARY SYSTK.M 177
at Qucl.cc; tiic Bank of Canada at Montreal, and the
Hank dC Upper Canada at Kiii'^rston. All of these fol-
lowed, with slioht nioditications, the articles of associa-
tion of the Bank of Montreal.
212. Articles of association.— The Icadinf? featnrcs of
these articles were as follows: The authorized capital
nf the hank was £;2.5(),()0() cin-rency, or -"i^l/JoO.OOO. TJie
shareholders were liahle only to the amount of their
suhscrihed shares, the douhle lial)ility clause l)ein^- intro-
duced much later. The bank was 'forl)i(lden to deal in
real estate or to lend money on mort,!jfaoes, althou^i^di
niortga<res mi«,dit he taken as collateral security. Jt
was i)ermitted to deal in promissory notes, to receive
dei)(),sits, and to huy and sell hills of exchan,i,''e and <,n)ld
and silver bullion. It was i'urther provided that the
total liabilities of the institution could not exceed three
times its paid-up capital. The directors were oblioed
to submit an amiual statement to the sharehoklers,
c.xhibitino- the total assets and liabilities of the bank, the
amount of the notes in circulation, bad or doubtful debts,
and the surplus or profit. The bank was permitted to
establish branches in other parts of Canada.
A numl)er of well-to-do French Canadians took
stock in the bank, and entrusted it with their deposits.
^'et the country people were somewhat dubious of the
soundness of the institution; and therefore (juickly
turned in its notes for cash. In this way the elasticity
of the notes of the liank of Montreal was retained.
In Tppcr Canada, on the other hand, the banks received
every encouraoement. and their notes t'ound wide cir-
culation. TTence they sidlVred more severely in time
"f crisis, as many notes which bad been, lon.'j- !>i elrcii-
lation were ])resented for payment. It was not until'
1822 that the three Lower Canadian banks— the Bank
C— VII— 12
liitf
.'«a'-j.t^<N
_^
17S
MONEY AND RANKING
of Montreal, tlif (:^iu'l)cc Hank and the Bank of Canada
— became regularly chartered institutions under the
government.
213. First hanhs of Upper Cdiiada. — In Upper
Canada the need of banking facilities was also felt.
Ini])atient at the delay of the government the promoters
decided to establish a bank on the model of the Bank
of Montreal. Accordingly, in 1818, the Bank of Upper
Canada was established. The capital stock of the new
bank was fixed at tfJo.OOO currency, or .$(;2.),()()(). Thus,
in .\pril, 181!), the private Bank of U])per Canada
opened its dooi's, and soon found wide circulation IV.r its
notes. As a matter of fact, following the army bill ex-
pei'ienee of the War of 1812, the British people were
much too ready to accej)t the notes of the new banks.
i\t the same time Upper Canada was being flooded by
^Vmerican bank notes. Soon after, in 1821, the Char-
tered Bank of Uj)per Canada received its charter from
the legislature and soon afterwards began business.
A'ery soon afterwards the Bank of Canada at Mon-
treal and the JJank of Upper Canada at Kingston were
<ib]iged to close their doors. The prosperity of the
colon v suffered a severe shock after the lontr and ex-
hausting Xapoleorn'c wars. The three Canadian banks
at Quebec. Montreal and ^'ork, however, became thor-
oughly established, and ad()j)ted a conservative ])olicy
in the discounting of notes and in the issuing of their
bills.
214. Allcmpts at currcncji /'(/or;;?.— Shortly after
1822 an imporlant expirimenl was attempted in cur-
rency I'eform. The Hiitisji government, owing to the
dillieulfies exjjerienced durinu' the suspension of specie
payments at the time of the Napoleonic wars, h. d de-
cided, in 181(>, to i)laee its curiency on a gold ijasis.
HISTORY OF t'ANADLvX .\I(>M;J.\UY SVSTll.M 179
Silver coinage was made a token currency by raising* its
face value soniewliat aho.e its bullion value and limiting-
its legal-tender properties to iOs. Tlius, silver was main-
tained as a simple t'raetionad currcnc}'. Tbe new regu-
lations operated so successfully that the Bank of Kng-
land resumed specie payments in 1821.
The IJritish government resolved to introduce the
gold standard into all parts of the emj)ire, beginning
u ith tile more important colonies. It was proposed, in
18*J.5, that for Canada the sterling standard should be-
eome universal; and, fui'tlier, that the British siher and
copper coinage should l)e employed I'or all moderate
payments; while larger payments should be made by
ineans of bills of exchange issued at the fixed rate of
.'J per cent per annum. In other words, £100 sterling
payaljle in Britain would be exchanged for £10.'J ster-
hiig payable in the colony. It was exi)ected tliat British
silver and co])])cr c(Mns would remain in the colony and
furnish a permanent medium of exchange. It was not
thoughi, ho^ ver, that the Spanish silver dollar could
be dispensed with at once; so it was provided that for the
future, it should be rated at 4s. 4(1., with other silver
corns in like projiortion.
•J1.5. Iicsiilt (if ciirroici/ reform. — As a result of all
this, an order-in-council was sent to the British Xorth
American colonies, among other;, virtually making
Hiitisli silver an unlimited legal tender and liritish
copjier coins legal tender to lOd. James Stephen (after-
^\ards Sir James), legal adviser to the colonial otlice.
gave it as his o])in!on that ITi*; Ma_)esty had no |)owfr
bv order-in-council to change the ratinjp of coins fixed
\)v the Iro'isilaturo of the colon.ies. TTis oninion. b.owever.
was overnded by the attorney-genend and solicitor-
general. ^Vhen Lord Dalhousie attemj)te(l to carry out
ISO
M()M:V AM) HANKIXG
liis instructions lie I'ound the lc<4islaturc of Lower Can-
ada unalterably oj)j)()se(l to it. They simply shelved
the whole matter \\ hen it was referred to them.
In Uj)j)er Canada, the people and the legislature de-
clined to ado])t the Hritisli monetary standard. Al-
though the otHcial standard was the pound currency,
the people had become accustomed to doing business
in dollars and cents. The bank notes in both provinces
were, as a matter of fact, printed in the American
standard. The F|)j)er Cana.dian legislature, in response
to the message of the lieutenant-governor with the ac-
com[)anying documents of the Treasury, simply raised
the rating of the British silver and copper coins. The
crown was rated at os. Dd. instead of .5s. 6d. ; the shilling
at Is. 2(1., instead of Is. id., and lOd. in British copper
was made the e(|uivalent of Is. currency.
•JK). Kxchdh^c i\:iih the United Kingdom. — The
British government was thus frustrated in its attempt to
alter the legal basis of the Canadian currency. In an-
other way, however, it had conunand of the situation
through the exchanges. The Treasury now sent out
t3(), ()()() sterling, in silver, and a consi(lcra})le sum in
copi)er coin. Instructions were sent to Canada that
henceforth supplies for the imperial officers were to be
stated in terms of sterling money. Payments for these
suj)plies and also ])ayments to the troops were to be made
on the same l)asis. Whenever the Spanisb dollar was
enjployed it was to be thereafter rated at only 4s. 4(1.
Payment for large sums might be made in specie on
this basis, or in bills of exchange drawn on the Treasury
in London at the rate of €100 sterling for £I03 of
the eniitract. l^it owing to the constant demand for
l)il!s of exchange l)y the Canadian meivhants, and be-
cause of the tleclaration of the government that these
HISTORY OF CANADIAN M0N1:TAHV SYSTEM ISl
•^^1
liills would he issiud tni' Hrilish sihcr ;il li per cent
|i!vmiuin, the IJritisli eoius were eonstiUitly witlulrawn
t'lODi circulation to purchase bills of exchange. As a
ic suit, the very machinery which was to ensiu'e the cir-
culation in Canada of liritish coina<;e resulted in vir-
liially dri\ing- it out of use; and the iield was left to
the i)aper issues of the- Canadian and American banks,
supplemented by French silvci* in Lower Canada and
American and Si)anish siher in Upper Canada. It
was sof)n discovered, too, that the premium of 3 per
(■(lit on IJi'itish bills was too high. It was cheaper to
( xport the IJi'itish silver directly, which was done. As
a result, the military authorities were forced to receive
,ind pay out little else than Spanish and ^Vmerican
dollars, and fractions thereof. In conse([uence, the Treas-
ury reduced the ])remium on excha.nge from 3 to ll o
])er cent, and bills of exchang( c'e more resumed
their place as the standard means ot laking payments in
Hritain.
-17. Canadian currnici/ in tJic second quarter of the
iiinefeenlJt ceuturi/. — The failure of the attem])t .f the
Hritish o()vermnent to establish the sterling standard in
Canada revealed ceitain peculiarities and anomalies of
the Canadian monetary situation. The Canadians had
adopted a ])urely tv.inentional standard, the Halifax
pound. There was no coinage corresponding to it; and,
therefore, it was necessary to utilize as a medium of ex-
change such foreign coins as were available in the course
'if trade. Thus, it was found necessary to admit to un-
iimited legal tender a variety of coins over the issue of
\\hich the Canadian Icgislatiuv had no control. It was
Mot iiossiblc to nlace all th.ese coins on ti uar ^^■!tll each,
other according to their real value: for that would have
involved various awkward fractions most inconvenient
i i
' J
'!'{•
183
M()\EV AND BAXKIXG
IH
m
i'or tiRir rapid circulation. M()rc()\cr, exact ratinfj^s
could lia\e a|)|)li(.(l only to coins of lull weight, and
unaliVctcd I y I'atcs of cxclian^'c. .\s a matter of fact,
British and Anicrican coins in ])articular (luctuatcd in
value with the I'ate of exclian^'e on their respective coun-
tries. And, moreover, except for the <4dld coins, the
ofl'icial I'atin^' applied to them was hy tale, not hy wei<4"ht.
As a result, it was made prolitaMe to import and retain
in circulation all manner of worn ;nul defaced coinaj^e
from every country with which Canada had coniniercial
dealings,
•Ji8. Varichi of coins '■ircnJ(iit(L--The most common
of the smaller coins in circulation was the Spanish
])istareen. the most worn and defaced, too, of all. It
had been discarded hy the Americans when they ado])ted
their national cui'reney. It ])assed current in Canada
for Is. or 20 cents, whereas in the adjoinin<i' states it
did not ])ass for more than 17 cents. In 1830 it was
reduced to lod. in Lower Canada and excluded from
the list of legal tender in l'|)i)er Canada. For lack of
small chanye. howe\er. it still contimied to circulate.
Durino- the second (juarter of the nineteenth century
the Canadian curi'ency broker cari'ied on an extensive
and j)aying business. His ollice was a veritable curios-
ity shop, exhibiting, as it did, the remnants of several
national currencies in the last stages of demoraliza-
tion. Only the chronic scarcity of coinage in times of
peace enabled this motley assemblage of coins to ])ass
current in the market-place. The copper currency was
worst of all. I)eing composed of discaided British half-
pence and farthings. Even at that, the suj)ply was de-
ficient to meet the needs of the counti'V. Private mer-
chants Ix'gan to imjjoi't su|)plies for themselves, and
these
'Pi
sununcs
assec
1 int(
o general circulation.
HISTORY OF CANADIAN M()N1:TAHV SYSTEM IS;;
Other attempts were made from time to time to induce
the colonies to adopt the sterUng standard, hut with no
success. The trend of mercantile and bankin<^ usa^e,
as well as that of popular sentiment, was distinctly in
favor of the decimal currency of dollars and cents. Dur-
ing the period from 1823 to 183,5 there were maiiy
rumors of proposals for improving the currency, and
especially of increasing its volume; but none of the i)ro-
j)osed measures could command the assent of l)otli
branches of the legislature in Lower or Upper Canada.
Thus matters drifted throughout the thirties, until the
political troubles after 183G paralyzed all proposed im-
portant legislation.
219. Canadian currcncij after the union of Upper and
Lo-u-er Canada in 1S4 L— -The political crisis of 1837-40
diverted attention from the reform of the monetary
system of the country, although there was evident need
of its being effecte(L There was great dearth of ca{)ital,
too, for banking purposes, as was made evident by the
extension of the term which had been given to certain
banks during which they were obliged to secure fimds
for various stock issues.
The British authorities in 1840 advised the leifisla-
turc of l"^p{)er Canada to prohibit the issue by the banks
of notes of less than £l each. This ad\ ice. however, w as
ignored by the legislature. The need of currency of
the smaller denominations was too apparent. As has
been explained the Halifax currency was purely an ar-
bitrary nionev of account. The Canadians, therefore,
had sound enough reasons for retaining bank notes as
low as one dollar. The only coins of nearly ecjual value
to these dollar notes were the Mexican, Spanish, and
South iVmerican dollars, and those coined in the United
States. In practice, Canada was dej)endent for her sup-
li.
'I
• 4
- i
I
III
>?!
1st
MONEY AND RANKING
])Iy of silver coin upon the Pliihuleli)liia Mint, and upon
iniijortations Ironi the I'nited Kingdom. Tlie pound
sterhny' was onhnarily rated at il 4s. 4.d. currency.
In Ipper C'aiuuhi the IJritisli shilhng had long passed
lor Is. ;>(]. currency, while in the lower province it was
rated at hut Is. Id. The very close trade relations be-
tween Canada and the United States, and the consider-
al)le note circulation the Canadian banks enjoyed along
the border, made it essential that the monetary media of
the two countries should be as much alike as posoible.
The familiarity of the jjcople with the decimal system,
and the rei)lenishing of their stores of specie with Ameri-
can coin, pointed to tlie eventual assimilation of the
Canadian currency system to that of the rnited States.
'J-JO. Ls.stic of .short lime fi-ovcriDniuf (Ichcnturcs in
7,9;,9.— The revival of trade alter the crisis o. 18^7 had
bc( n s' Av in bcoiunino-, hut by ISU there was a very
.«.;•( IK ral inipi'o\ mu iit. and a decided demand for new
capital. The movement t.)ok the usual form of economic
expansion, although in Canada the develoi)ment i\\ou<r
speculati\ t' lims was carried io no such extremes as in
the British railway mania. Shrewd observers, however,
tliought the imj)ortations )f 1SJ.7 excessive, and were
of the opinion that the great increase of staple exjxirts
would not likely endure. Their fon bodings ])rove(i to
be only too \V( II justified. The severe commercial re-
action in l'".iigl;ii!(| ill IS 1-7 made its cM'ccts evident at
once in Canada, especially ii. C;uiada Kast : for it was
the merchants of Montreal and (^u< Ixc. v.hosc connec-
tion with HritaMi was closest bv reason of their domi-
nance in the export trade, who first felt the blo,>-. There
were a great number of commercial failures; a great
r-Uing off in the export trade, csp^ -nilly ii: ^hipmcnt^
of timber, wheat and produce; a heavy reduction of dis-
HISTOKV OF CAXADIAX M()M:TA}{V SVRTF.M 1S5
nil lilts made by the banks, and a sharp contraction in
tlitir circnhition.
So <4reat was the f^overnnient's need in 181.8, and so
hopeless the prospect of borrowino- money in Kn<4land,
tliat resort was made to an issne of debentures. l)earinir
interest at ('» per cent. Tliey were of the form and ap-
|)(aranee of bank notes and were issued for sums as low
.IS $10, were payable in one year with interest, and made
leeeivable for jjublic dues. A ste}) not contemplated
hy the act was the re-issue of the j)ai)er after it had
\kv\] paid into the i)ublic eliest. A total issue of £12.).-
{100 was authorized. In the foilowinn- year the <iovern-
iiicnt obtained authority for a new issue, in debentures
for less than tlO each, payable on demand or after a
tixed date which the <4-overnment mi^ht set, with or
\\ithout interest. As it happened, the authority thus
f^ranted was not used, .and the debentures of 1848 soon
(iisap])eare(l from circulation.
•J"J1. Crisis of /SoT. — Trade revived a^»'ain in the early
lifties. until by 18.)7 there was a veritable boom in
tiade and commercial affairs. .Much of this meant
vtimd and lasting- progress, but there was also along
with it wild s|)eculation in l;ind. Hut in 1H.')7 the har-
\est was a virtual failiu'e: and added to this, urain ])rices
were low. Then, to make matters worse, came the finan-
(ial crisis in (ireat Hritain and also the I'nited .States,
riie Canadian banks had extetided loajis to Ijorrowcrs
piincipally ihiouuh note issues. 'I'hey w<re now cori-
Ironted with demands for note r((l( inplion: and. there-
!'>re. .'is a measure ol' safety .'ind nr<(>auti(in curtMiled
their discounts. Within the veur their circulation had
fallen to two-thirds its volume in 18.")r); juid discounts
nere cut down in corrcspondiiiM' decree. ,\l once there
.ircKse u demand from both the tradinj'- and the a<n-i-
ISO
MONEY AM) IJANKIVG
cultural classes that the ^rovernnieut should furnish a
circuiatino- niediuni of e.\chan<^e, since the banks refused
to meet the denia. ds made upon them. The banks
were simj)iy safe^iiarditi^j- their own interests in ado])t-
in<r tiiis eo"servative policy: l)ut there was no doubt that
the sudden and violent contraction of a <Treat part of
the circnlatino- medium of the })e(,j)le did seriously in-
jure the industries and trade of tlie colony. IJut it
was not until IHCO that a scheme |)ro\idin^' for govern-
ment note issue was seriously considered.
'2'2'2. Karl 11 al Ion pis at i^ovcniDwnl note issuer.— It
was in this year 'IH.jT) that legislation was prssed.
bec.<minw' effective January 1. 18.58, whereby I lifax
cunvncy ceased altogether to be the ofHcial or statutory
m'Miey of account. Thereafter Canadians reckoned in
dollars and cents, the decimal systi'in of ciu-rcncy l)ein<,'
adopted. This, of coiu'se. \vas simply takiny- formal ac-
count in law (.f what had \kvu done for years as a
fact. The Hritish .so\ creiyii was continued as le^'al teii-
dci- for S4.8(),-;. and the American ea^lc as coined after
18.'}! was made le^al tender for SIO.
'2'2:i. Mr. Cinlfs pJnu.- In 18t;o Mr. A. T. (ialt. the
(inanci- minister, devised a remedv wliich he thonjjht
uonI<l cure the monetary ills of the countrv. Ills plan
was "to separate ciiiri iiey IVom banking"; his purpose,
"to J)k' tli( i-nrreliey of the country on a perfecllv :,ui'c
and salV' fooijuM- |,y separaiing li IV:)m the banking
interests, and by removing' it from the possible sus|)icioii
of Ining all'icttd by political exigency." \\r pro])oscd.
therefi-re. that no paj)er money be issued except in the
credit of the |)rovince: and sicondly. thai such notes
of the provinc<- should be a legal lender and rede( niable
in s|)ccii . iii v\..ijio ii\ {lit* tnnximum Issue at >^n>,-
0(M),()0(». ;ind ha\e the notes jint into eirenlat ion by the
banks; the notes could be obtained bv lb< ni from llu
HISTORY OF fAXADIAX MONETARY SYSTEM 1«7
Treasury on deli very of one-fifth the amount of the
notes in speeie, one-tiftii in o()\;ernment securities, and
i)y ^ivin<jf a ])rivile<^ed hen upon their assets for the
other tliree-fifths. The banks would pay the govern-
ment for the privile'i'e of eireula^^^i'fif notes up to half
their paid-up eapital stock, at the rate of 8 per cent ])er
aiHiuni: and for notes in excess of half their eapital at
the rate of 4 i)er cent. S])ecie and securities so received
the Treasury was to jiold as a reserve ao-ainst the
notes. Needless to say, none of the chartered hanks
slunved any eagerness to exchange a franchise to issue
notes at no cost beyond that of ])rinting them, for a
right that would cost tluin 3 i)er cent on i)art: of the
notes taken out, as well as the current rates for the specie
de])osited and for the cash ])aid for debentures with
which they were to piotect two-fifths of their circulation.
So, iu the face of liostile criticism from all sides, the
govirnment withdrew the measure.
'2'2i. Pnniticial iiolt' issues.- In 18(')(). however, the
))lan was once more brought to the front. 'I"he floating
debt of the piovinct' alone amounted tt) ov( r .*^.").()()0.()()().
Of this. >>•_».•_'.")().()()() was owing to one bank, and that
bauk was pressing for payment. The legislature, in an
altemi)t to secure funds, finally pa^sed an act in this
vear. which authori/ed the issue of not more than
.^H.(M)().()(M) in ;'rovincial notes: tluy were made ])ayable
on demand in specie, cither at Toronto or Monti-e;d. as
the notes mitiht be dated. Tbev w.vc a fiill leg.il tender
except ;il tliese Iwoolliees. Tlie go\(rno|--in-couneil was
authorized to ni;ik( ari'angements with an\ ban!^. tliat so
wished, to surrendt r its right of noti' issue; such hank,
however, retaining the right to icsume its issue privi-
leg-es upon gi\ ing three months' notice.
N'arious inducements were oll'ered the l)anks to g( t
IIkui to vacate the lield, in tills particular, in favor of
fi
w
1 »
I .,,_4-
188
MONEY AM) BANKIXG
li-
the governnifiit. Ilowtvtr. only one institution— the
IJank of Montreal -pro\e(l willin--' evtn temporarily
to surreFider the rioht ol' note issue, and to undertake
the eirculation of piovincial notes. The provineial note
issue was. foi- the time bein^y". the liank of Montreal's
favorite seheme: for. so far as this particular bank was
eoneerned. the first ed'eet of the measure was to li(iuidate
Mliat had bcni a distinetly inactive asset. This was
done by convert in«r tlie loans which the bank had made
to the i)r()\ ince, and its investments in ^•overnment de-
bentures, into |)rovincial notes a\ailablc for use in any
kind of excliannc. It was provided in the act that to
such banks as suri'endcred tiieir riyht to issue notes, and
w ho withdrew their notes from circulate-' with.in a year,
compensation would be i)ai(h until tlu );ry of their
charters, at a rate not to exceed .■> ]ht cent per amuim
upon (lie nmoiint of tiieir eirculation on A])ril ;J0, 18GG.
A commission of one-(|nai-ter of 1 per cent was to be
paid every three months to each bank circulatinir
provhicial paper instead of its own. Hanks relincjuisli^
inu- issue ))ri\ iien-ts wxw fui'lher exempted from the
obliu-ation to hold one-tenth of their paid-up capital in
l)rovincial (h 1 . ntures. and were permitted to exchanu-e
such (hbeiiiuics at |)ar for pro\ incial notes.
Tile LfoNciiiment. on the other hand, was to hold a
reserve of -JO per emt in specie, against its leoal tenders,
for the aiiioiinl in circulation up to s.""».(M)().()()(); and
aoainsl amounts in excess of tiiat sum •_•.-> per ecnl in
specie until the whole ;!uthori/((l issue of SH.OOO.OOO was
i-cachtd. Co\er of piovineia! debentures to the full
amount was rc(|uired for the di.'lerence between .specie
reserves and notes ontstanchnu-.
It has .sei unci will wniiji wiiij, to (spjain t!iis system
somewhat in d( tail: for while no banlv, sa\e the one al-
ready niditioned, accepted the oHVi of the i^ovi rmiK nt.
HISTORY OF {'AXADLW MONETARY SYSTEM! ISO
yet the sclienie w".s an important one. In essence, it
involved the principles since ac'opted m issuing- Domin-
ion Government notes. These were issned alter the
confederation of ISC.T. Allhon^'h the terms of these is-
sues have been modiiied from time to time, yet tiie un<ler-
lyin^r principles have always been tlie same; tlierefore,
they may he very easily and l)rielly described.
•J2.). Dominion notes for IxinJyntii- reserves. — In 18(58
an act was ])asse(l declariri''- tlic ])n)vincial notes of IHCO
to be Domim'on notes for w hich the Dominion alone was
to be Jield responsit)le: and, further, continuing the i)ro-
visions first enacted in respect of this issue. Authority
Mas o'iven. also, for the estahlisliment of branches of the
iveeiver-^enerars department in Mont.eal, Toronto,
Halifax and St. John, for the issue and re(lem{)tion of
Dominion notes. Tntil the i.iiification of the curren-
cies of the vai-ious provinces, note^ ])ayable in Halifax
were to be issued at the rate of S.> the pound sterlin<,^
and were to be le^^^al tender only in \ova Scotia (.'U
\'ict., c. Kl).
In the revision of the bank act in 1S70 i:V^ Vict., c. 1 1 )
it was i)rovided that each bank shouhl hokl usually half,
and never less thai» one-Miird. of its cash reserxe in Do-
minion notes. In s<. far as such notes held by Ww banks
were not covered by specie, the pro\ ision nierelv meant
a foi-ced loan without int( rc^l to tlu' novcrtimcnt. Sir
I'rancis Ilinck.s. who was tluii linance minister, to all
objections merely replied lliat be was oblined "to con-
tend in the interests of the public at laru-e that they
were entitk'd to some share in the j)roiits of lireulation."
This j)oliey, sulijected to mudi criticism then as now,
has !)een maintained to the present day.
Sir i'rancis llincks, by ji finlher act (.'{.'{ \'i(t.. e. !»)
considerably enlar^i'd the yenend circidation of D(»min-
lon notes Iiy caneeliii'4' tin pnvik^^e of larger issues than
f
-\
190
MONKV AM) 15A\KIN(;
$t l)y tlic l)aiik.s. The ai-raiioenicnl iV,!- isMic and rc-
(lcn)])ti()ii l)y one of the chartered hanks, in f'(»ree since
18()(), was l)n)u<iht to an end; and the nianafifement of
the <rovcninient cii'cuhition tnnied (ner to otKcers of tlie
^oveninient. OfHces of issne and redemption branches
of the receiver-f'-enerars (lej)art?iient were oj.ened in the
provnieia! caj)itals. ^Vnthority was ^/wcn to increase the
wliole issue, hy not more tlian a miJHon at a time, at
intervals of not k'ss than three months, to the total of
.$(),0()0,(K)(). iV^ainst tlie circukition outstaiuhn^. the re-
cciver-fTcneral was ol)h<.ed to hold s|)eeie and Dominion
del)entui'es. The del)entnres were not to exceed 80 per
cent of the circulation: and ihe specie, as a rule, was to
cfjual •_>.) pel- cent of the debentures (20 per cent of the
circnlalion ). and was never to l)e less than 1.) per cent.
Issues in excess of so.ooo.ooo were to be covered bv
specie, dollar for d(.llar, and of notes so covered tlie
issue to any (juantity necessary mioht be undertaken.
•22G. Later h^ishilion mnrcniin;^- Dominion notes. —
This measure 'to regulate the issue of Dominion notes"
was intended to rejjroduce that |)art of Peel's act of
1S41. which established a?i issue department in the Hank
of KtiM-land. Sir Francis Ilincks believed that 'the
functions of the issue (le|)artment should be automati-
cally confined to the exchange of oold for notes and
vice versa: that an amount can be established that way.
with pciieet safety, to be issued upon public securities,
and all beyond that fixed amount, in u(,i,|;'
In 1H7-'. till' government beini; in need of funds, it M-as
provi.lrd (.-{.J \'ict.. (• 7! that excess of issue over
JfD.OOO.OOO miu-ht be permitted ai-ainst -rold holdin"-s n\'
hut 3.5 per cent, 'i'he Liberals, who came into power in
i:-^!"). chauired tjiis renuiation {HH \iet.. c. .5) to .)() per
•'•■"< i" ,U'»M l''>r the amounts outstandiny- between
5f<J>.0(M).()()() and sr.'.uoo.ouo .ni,| ,|ol!:,r for dollar a<.ainst
[ilSTORY OF CAXADIAN MOXETARV SYSTKM 1!»1
circulation in excess of .'^TJ.OOO.OOO. .\,s the Dominioii
(Xjijuuled, additional branch oflices of the vecei\er -i^en-
( lal's department were oj)ened in the other prox niees.
Ill 1 880 the limit of issue against specie and debentures
was extended to .$'J().0()().()0(). and the specie reserve re-
(|iiired a<^ainst anything- U-ss than that sum reduced to
].") per cent; wnile. in addition. 10 jjir cent of the
s-_'().000.000 was to be co\ ered by del.ientures of the Do-
minion guaranteed oy the government of the Fnited
Kingdom ( 4.'J \'ict., e. l.*}). Thirteen years later an
,i(t was |)asse(l (.'{ Kdw. ^'II. c. Ui) which raised the
amount which \vas to be but partly co\e!'ed in gold and
Dominion debentures to .'<:JO.O()0.0()0. In late years the
Dominion goveinment has held a very large amount of
Ui'ld as security for the circulation in excess of
s.SO.OOO.OOO. The circulation of the notes has expanded
\\ ith the demand for them bv the banks, thev having been
ii(|uired by law to hold 40 j)er cent of their reserves in
Dominion go\'ernment notes. The problems arising
from this will. howe\ei-. be fullv discussed in Chap-
ter XX XI.
227. lii'siill (,f Sir rrancis Ilinchs Ic-'.slatmn.— The
Kgislation which was cai-ried by Sir l-'raneis Tlincks
lias resulted in gi\ ing the Canadian Treasury some
small j)rofit in its note issues. Tluvse notes have been
issued in the I'nilowing denominations: 25 cents. $1, $2,
>^K $5, $.')0. J^IOO. s.)00. si.ooo and $.).000. The banks
are not jiermilled to issue notes for less than ><.'), but the
fi<l(l ai)ove thai sum has been \ irtuallv liTt to them, the
larger Dominion issnis Ik ing usid inalnK- as part of
Mie banks' reserves and i'or cleai'iiig-house settlements.
As a result, since confederal ion. Canada has affoivlcd
the rather uni(|ue i\amj)lc of eonilicting theories and
jM'inciples operating side by sidi — those, namely, of the
hanking and currencv schools.
..'il
192
:\ro\F,v AM) n.wKixG
if)
228. Uniform cum nc// in ('(tinidd.— ln 1871 tlie fed-
eral j)arliar)K'iit j)a.s.se(l an act (.*U \'ict.. c. -1) re.spectitin'
tlie eiirreiu-y, wliieli <>ave lo eaeli province of the Do-
minion a nniforni system. The sinn-le .rold standard
Mas then adopted, hein^'- that of the British sovereign of
the weight and fineness ])i-escrihed hy the laws of tlic
T/nited Kingdom. The sovereign consists of 12.'J.271.
grains of stanihird, or 1I,'3.()()1 grains of pure gold, the
slandai'd gold oi' (ireat Britain l)eing DKJ.OOH fine. It
was enacted also that the gold eagle of the United
States shonld he legal tender in Canada. The eagle
contains 2;J2.2 grains of pnre gold. Silver coins were
made a legal tender nj) to SIO, and co])per coins up to
2.} cents. Thus liritish sovereigns, American eagles, and
Dominion government notes formed at first tlie only full
legal-tender mone> . Bnt in 1!)12 Canadian $.5 and
•^10 gold pieces were added; the act of 1871 stipulating
that Canada shonld have a gold coinage of her own
when desired. The Canadian SK) piece is of the same
weight and fineness as the iVmerican eagle. It was not
until i;)()8 that a hranch of the ]{oyal Mint was estah-
lished at Ottawa, where Canadian copper, silver and
gold coins are now nn'nted.
There ne\er has JR-en any silver (jnestion in Canada.
The act of 1871 estahlished an niuiuestioned gold stand-
ard. As the Canadian hanks have furnished the country
with a safe and elastic medium of exdiange there has
hirn suflicient currency to meet the needs of the people.
A good deal of jealousy, however, has heen shown to-
ward the jx.wcr of the chartered hanks to furnish a paj)er
medium of exchange to the people. Many have in-
sisted that the issuing of paper money sjiould Ix.- the
govenitiienrs sole prerogativ<'. Tliis prolilem, iiowever,
^vill he dealt with in Chajjter XXXII.
PART II: HANKIXG
C II APT KU XII
XATL'HK Ol' (in: I) IT
•220. Griffin and Linds of crcdils. — A ci-edit is a de-
Icrrcd or jXJstpoiR'd jjayiiRrit of rii<iiKV. It always
itj)reseiits a pi-oniise, ex|)irss or implied, to pay a certain
imniber of dollars at some time, definite oi- iiidetinite.
IiiasniiK'h as it is a promise to j)ay money, certain
forms of it circulate in lieu of money, the ease and
extent of this cii-culation de])endin<>' dii-ectly upon the
intc^-rity and ability to pay (>f the maker of the credit,
and the date and conditions of ])aynient.
Credits come into existence always as the result of an
I'xchange, either the exchanne of credit for ^yoods,
v'iedit for money, or ux'dit for ci'edit. I f A pui-chases
ydods from li, ho Tuay tendi'r in payment either ^'old,
liis j)ersonal check, l)atik notes. I'nited States notes oi-
his own ])ronn'se to pay in sixty days. If the payment
is made in yold. no credit operation is imohcd. If
iiii'de by check or in l)ank notes, it repi'csents merelv a
ti'anslei' ' .'' credit already eicated by the bank. If
made m I'nited Statts 'otes it is likewise a tia.nsfer of
cicdit, this time of (io\ trnnienl credit. If ])a\-ment is
made by his own promissorv note. howfM-ri\ ■( new ci'edit,
pa}'able at a <lefinite time, is created.
Credit is of two kinds noii-cireiilatino' and circulat-
ing'. r\on-circuialin^' credit accompiishes one ex-
chano'e while circulatino- ere'dit accom])lishes man\ . In
VJi
.mum:v AM) i;a\kin(;
tlic case a'Dove iT A pays witli a promissory note, ;iM
c'Xfhan^'c has been made l)y nieaiis of the credit tluis
cieatcd. Al tlie end of sixty days, however, the crecht
must he H<|ui(hited. hy means of cash, if it has not Ihti;
• •iincelled hy an e\chan,m' of properly in the opposite
direction. The cre(ht which serxed as a me(hiim of e\-
ehany'( in the ih-st transaction must itself he ixchanired
for cash at matui-ity. and the whole transaction amounts
in the end to an exchange of n-oods for cash exten(hn'>-
over a period of sixty (hiys.
2.'J(). f'.sc (if crcdil in indiislr//. -l^udvr our capital-
istic systini of imhistiy e\ei-y enterprise i-ecpn'res cap-
ital The cutnprcuciir must ha\e hnil(hn<^s. land, ma-
chinery — a ^reat variety of capital <^-oo(l.s which make
up the plant and e(iuipment of the linsincss — and he
must ha\e the ser\ices of employes and raw matei'ials.
Jle must prej)are for the \ai'ious expenses of the busi-
ness — wanes, taxes, etc. If he is not a capitalist him-
self and cannot induce ca})italists to share with him the
risks and profits of his business, he must borrow this
property t'roTU otiiers, i\il these ()b]i<>-ations arc credits
and must sometime he li<iuidated by the payment of
cash.
The form whicli these credits will take will be deter-
mined lar^rcly by the nature of the business, the sa<racity
of the fiiircprciinir himself and the condition of the
credit market. We have seen that credits vary in re-
sjH'ct to time and conditions of ])aymcnt. Most nilrc-
pnnciirs arc capitalists to a certain extent, their demand
for credit arising' from the \'i[v\ that thev expect to
cnlarfT'e their business by supplementin.tr their ca))ital.
Let us suj)posc that a manufacturer owns outritjht his
la?i(ls. factory and machinery, and in addition has a
v.orkin<r capital sufTicicnt to meet his payrolls and ex-
'^iS
N.MTUi; ()!• ( KI.DIT
195
HI uses lor some liiiii' to coiir'. lie lias also a slock of
liiiisliKi ])i-o(lucl on hand, tiic market for which is sca-
-niial and which anioutits to only one-half the jjroduct
v\liich he e.\|)i'cts to market, or jxi-liaps has contracted
to deliver when the season comes. ()h\ ionsly he must
li;i\c more raw material, and if he cannot jjnrchasc it on
eiedit. he will i-o to his hanker, make a complete state-
ment of his condition, and if it is satisfactory, <rive to
the bank his {)romissory note maturin^r at a date when
he will have marketed his prodnct. In return for this
he will receive a credit on the hank's hooks, which will
enal)lc him to purchase the desired material.
•2:i\. Function of comincrcial baiih'ing.—Th\s is the
^ireat function of commercial hankin<r, to enable manu-
facturers and merchants to enlar^re their Jnisiness bv
e\tendin<r to them for short periods the use of credit
h\ which they can carry ooods from the time of pur-
• liase to that of sale. The readiness with which credit
will be o-ranted depends upon the reputation of the
iiKHiufacturer or merchant for sellin^r his product, the
■iniount ol' credit asked for and upon the nature of the
Inisiness. In dull times not every commodity will sell.
}et upon the proceeds of the sale depends the redemp-
tion of the credit. Therefore those who deal in articles
^y\m^h are always reasonably sure to sell, such as food
products, clothing- and in oeneral the necessities of life,
ne the most certain to obtain credit and in the larf^est
I mounts relative to their ca})ital investment. Heputa-
llon for sellin,ir. however, is a on-at factr)r, and credit
1^ often extended on this account even to those whose
product is. (Tcnerallv speakiny-. not apt to be quicklv
,,.,,, f:i,i,,. ' • ^ •
It may be. however, that the entrcjucncnr after reach-
r
I'
ui<T the limit of his own resnurces.
will i^refer to add
I'.Ki
\l()\l,^ AM) HAM\i\(.
pL'i'iiiaiKiitly lo his \' orkiii;^' capital instead of iiuTcasiiijr
and dccrcasiii;^- it as liis Imsiiifss dfinatids. It i lay lie
that tlu' nature of liis l)nsinrss is sufli that he linds it
(litHcult to ol)lain ci'i'tht in (hill tiuics. Kxtii in pros-
l)crons limes he may feel that a yiMieral contraction of
credits is due. and that he may lie unahle to market his
product to meet his ohli<^'ations. If such is the case, he
may add to his woi-kinn' ea|)ital hy hori'ow in<^' for a ion^^
peiiixl. placiny' a mort<4au'c upon his i-eal property.
23'2. Mort 1^(1 ill's (111(1 bonds. -^ A mortu'a^'c is a secured
credit, that is, seeuivd hy the |)led^e of specific pro|)-
ertv. The most common foi'in in which this kind of
credit is used, is that of l)onds. A liond is a portion or
fiaction of a mort^an'c. When mort^'a<4"es are so lar^e
in amount that in theii- entirety they cannot find a mar-
ket with any one indi\idual or institution, they •
di\ ided into parts, called honds. for distrihution. T;
credit must he redeemed, of course, at its maturity ,nist
like the shoi't-time civdit, hut the matui'ity is usually far
enou^di distant to ^'ive ':\'r u'rcjiri'rnr an opportunity
of mcctin<Ji' it out of his accumidated ])rotits. Moreover
if the pr(<perty which secures it has not dei)i'eciated in
the meantime, it can often he renewed at matui'ity.
This foi'ni of ci-edit is ordinai'ily used when the pro-
ceeds of the loan are to he used for some fixed or per-
manent investment. Tims it is the form commonly used
hy railroads, puhlic service corjjorations, lar<4"e industrial
corporations ownintj' xaluahle real ])ro|)ei'ty. and the
like. The interest on the honds is paid out of the sav-
inns of ijie coi'poraiion. and when ihey mature the
pi'ineipal is paid hy the sale of new secui'ities,
I'.V.i. Erdmnic of'iimhcr huhtsirii. There are cer-
tain industi'ies. howevei'. in which hoth these methods of
obtaining credit are used. A good example is the luni-
NA'I TKi: ()|^ Cin.DIT
197
I"!- liidiistiy. we havr seen that llic nurclianl and
iiiaiiiit'aiiiii-i'v of iiuickly coiixrrt ihic pi-odiicts will ordi-
iKiiily horrow coiniiKTcially and lliat railroads and sim-
ilar c'oi-por; ;ions will 1)oito\v on lono-tinK' ol)ii<>alions
I. cause tlic inorR-y so obtained is to Ik- usid in iHTiiianfiit
in\('stinciil. and the ohliyations cannot he redeemed e.\-
(v|)t hy reriindinu'. TIk. himherman is ol' eourse a
iiianuraetui-er hut his proihu-t is not always ([liiekiv eon-
'.'■rtihle. W'Ik n a ])anie eomes. i)eoi)le must still have
I'ood and elothinn- hut they ean ^et alony without huild-
in^' new jiouses. 'rherel'ore lumber is one of the first
commodities to feel the dei)rcssion throu<>li u fallinir
• AV in demand.
A complete linnhcrinn' industry will own a saw mill,
a supi)ly of timber sutlicient to last for a number of
years, and a (|uantity of manufactured lumbei- piled in
'he yards awaitino' sale. In tiiis country lumberineii
e always been lar<^e borrowers. 'I'he price of lum-
" r. and the Aalue of timber land ha\e adxanced steadilv
\\itli the decrease of tile availal)le supply. Luml)ermen
iia\e been quick to t;;!:-' 'dvanta^^e of this condition, and
have always been ea<i'er to borrow to add to their timber
holdings. \\'lien the noi-thern lumbermen beaan to <jo
south in tlie eiu'hties they fourid that timber land was
ejieap and that it couhl ])e bouyiit on credit, hence they
invested theii- capital in ecpiities. That is. they made a
first payment in cash, a.^reeinn' to i)ay an additional
amount eveiy year or as the timber was cut. Obvi-
ously they must manufacture and mai'ket lumber in
order to meet theii- objin-ations. As soon as the ])roduct
'.\as ready for sale it was a '■bankai)le asset" because in
boom times lumber finds a readv n kct, t'oiise-
(juently lumbermen became hir^'c commercial borrow-
ers, the amount of tlieir short-time credit outstandiny--
A
198
MOM.V \\l) |{A\KI\(;
often fxccediiio' the valiu' of the inaiiu factiind stock
oil hand.
'2liL Adidtiidiu^cs of ti)nl)cr bondfi. — Sintr the yeai'
r.tOO. lio\ve\tr, many dealers in hunher have taken ad
vauta<^e of the inerease in \aiue of thtir tiniher hinds to
retire their outstandinn' notes and the ohh->'ations thev
iiuMirred in the original purehase of this laiuK hy issiiinu'
bonds seemed hy all their real property. These bonds
are nsiiailv sei'ial. a eei'tain amount of them matin'ini)'
e\ery year as the timber is cut. The ad\ anta^^v of this
method of borrowing is obvious. '. /nl\- a fraerion ol'
their indebtedness nuist be met each yeai'. and thev know
lu-fori'hand just what tliat amount will be and can pre-
paid' for it. When thi'y borrow on short-time notes
and a panic occurs, they may tind it veiy ditlicult either
to sell theii- product or to renew their not* Almost
tbeii- entii-e indebtednvss is likely to Ix-omc due within
six months, and if conditions do (.,• ..nproxc. there i>
Urave daniici- of l)ankruj)ley. It is jjrobable that this
condition was lar<4ely responsible for the bi^' slump in
the price of .Southern pine followini^' the panic of 1<M»T.
'I'liere was such a yreal amount of" s]u .-t liine lumber
credits outstandinu'. that tl.^ competition between sellers
became acute and |(rices declined vcrv sharply. The
IuuiIh inien wliost liHalions were in tin form of bonds,
howcvci-, did !i.)t enter this (■ompciit ion. so did not sacri-
fice either their manufactured product o|- their timber.
2.'J."). Iiifitr.st rali.s nn /^o//f/.v,— The form which this
borrowing' will t;,k<', however, is further inlhienctd b\
the condition of the cndit market, as evidenced bv the
prevailin;^ ratt of inttusi. The rate of interest paid
upon the various kind 'oMM-time obliuations is f.iirly
wiii Tixe.i, .tiiiiwni;/! li t ■ sotii w iia i wiiii the d<nian(i
or supply of such iin i- 'I'lms railroad bonds
\ A'I'I'Ki: Oi' ( HKDir
199
Uvdv i'roiu .*{' o j)(.T cent to !•' ■_• \Kr triit interest: public
service corporation Konds tVoni •!•'•_. per cent to .')'.. per
cent and industrial and I'eal estate niort<4a^e bonds from
.") per ce!it to <! p"r cent. 'I'liese rates are fixed by tbe
1(54 a id in which the bonds are held by investors in in-
spect to security of |)rincipal and convertibility into cash.
The rate at which the commercial borrowei- must dis-
count his note, howevei. varies witlun much ,ureater
limits. It may i)e as low as ,'i per cent when the demand
t'oi' credit is small and the banks are ea<»er to loan.
'I'his condition is known as '"easy money." When l)usi-
ness imi)ro\ts and demand foi' credit inci'easrs, the rate
advances until in time of panic it may be as high as 10
or 12 |)er ctnt. The axera^c is IVom i t') 5 j)er cent.
•J.'J<>. L()ii;i-ti>nc horro'iciii;:-. — Naturally the < ntrc-
prcncur wishes to l)orrow monev at the lowest possible
rate. Dui-iui^- periods of easy money he is loath to re-
tire his short-lime iudcbtediicss on which he mav be
payin<4' 1 per cent i)y the issue of i)onds which will cost
iiim r> ])(■)• cent. .\s money hecomcs ti<4iit. howexei", he
lucomes anxious to make this change, but often the time
lias ])assed when the maiket will absorb his bonds.
Thus, in an endeaxor to obtain the lowi'st rate at all
liiiu's. thci'c is danger of his finding himself in a tii^ht
money juarket \y\\\\ all his obligations in short-t imk.'
lorni. 'I'he .idxaiitanc of |oni»'-timc borrow in j"' in ci'r-
lain lines of indiislrv is so ob\ ions, howcxci'. thai sai_jaci-
Miis business nun will often sell high-rab' bonds wbiii
the commercial ijh is much lowci'. knowing that in the
!'>ng nu! their interest account \\\\\ .iM'ragc lo'> er, .and
that in case of panii" Iheii- situation will be much more
secure.
'I'M. ('r<(/il I (■(iiioiiii.i s lilt iisf o/ i;o/</.— Credit is
like fire — u good ser\ant. but a bad master. So long
jS^P^"
y '<
■if-
200
MitM'.V \\l) 15 \\!<I\(;
as it is coiiti'ftrud aini |)rc\ cntcd \yi.\\\ siiddrii contracl-
tiiin it s(i\cs to icoiKiiiii/c the dm- oI' yold. doiiiu tli,
work of excliaiiii'iiig ^oods nion riUix eiiiciitly lliaii <4()l(i
itsc'li". \\\ lia\e stvn tliat ])ii('rs drpcnd iij)oii tlu
aiiiomit of the media ol' cxcliaii^ui'. 'I'lu iist' of credit,
tlu'ir'' 'ic. peniiits Inisiiiess to expand and trading' to lit
aecelei'ated witlioiit a rednetion of pi'ices. l)nt on tin
otii( r hand iU nse destroys the eheek which otherw isi
\\()nld ])ri\eni ])iiees from i-isin^' to an artitieial lieinht
tlnis hiin;4inu- on a panic. A discussion of the etfect
of credit on piic<>, ho\ve\ti-. h( lon,ys to a later eha|)ter.
•J.'iS. Lii/iii(l/ili(,ii of cr('<lil. We haxc seen that all
])ri\ate ei'i'dits must in the end he jitpiidated hy means
of casli. Dnrinu' a lime of prospi rity wlu'n prices arc
lisinu' and I'oitnnes are htiny' made simply hy hnyiny
at :. low pi'ice and sclliny- at a higher, many people pur-
chase property <tn ercdit. usually i>i\ in,u the pioperty
as seoui'ity fo!' tJK credit. The pi-olits of industry are
inert iuL;'. Ik nc( husiness men are stiainin;i' e^crx
ner\'e to increase their husiness, 'I'o (U) this tin \- must
oiitain cr<-dil. l-'inllnrmoi'e at such times hankers he-
come accustomed to seeing" yoods sold and credits
litjuidated. and they lo;in moi-e fi'cily, 'I'Ik ir portfolios
•AW full of lime credits, matnrinii in the future, aetpiired
in exchanye for (Uiiiand ciichts (hie whenever called
for.
At such a lime snpp(»se a political or linaneial dis-
turh.nice sh.ikcs puhlic conlidence in the ahility ot
dihlors- especially l>anl<s — to meet their ohliyations; a
demand for the payment of such crcihts as ai'c (hie is .s\ire
lo f illow. Since the ohjiyations of ;i hank arc always
du( and payahle. they ai'c apt losun'cra run." When
Ihis occurs tiicy must liiemselvcs re(|ucst paynn nl of nil
cicdits thai air (luc them and make praelieally no k
--1^
NA'iTiii' oi ( i{i:i)ri'
an
iK'wals. Otlici' huiiUs follow Miit. This forces the
iiK rcliam i. id niaiiuf'ac-tiirfi- as thrir notes hccoiiii' due to
sell their goods at a saeriiiee, and l)el'oie we know it we
are in the midst of a financial |)anie.
•J.'JJ). Cow nirrcidi iKi/nr houses mid I he en (Jit .sitiin-
tioii. — The (hinder of this condition has been soinewliat
augmented l)y the custom of large borrowers discount-
ing their notes through commei-cial paper houses.
While this is more necessary on account of the proi'iss
of consolidation which has gone on in industry in the
last decade, it ne\ irtheless injects info the situation a
lurther element of danger. l-'<M'merly the merchant
lioi'i'owed fi'om his own bank direct, oi* if his business
was large, from two or three banks in his own city.
lie knew the bankers pei-sonally, and kept an account
;it eai'h bank, 'i'hey were anxious to sei"\ e him. and
woidd do so it' possil)le. e\cn in ca^' of a panic ^lence
hi, chances cf renewing his maturing notes ai such
times were good.
With consolidation, however. a?id the growth of large
industries came the necessity of .'reased credit.
Many industries are now so laige that the l)anks ol' one
city cannot jxtssibly finance Iheii' boi-i'owing. Hence
the necessity ot' a noteljroker or commercial |)aper
house, whose function is to distril)ute the notes ol'
\aiMous eoncei'iis throughout the i)anks of the cjitire
eoiinti'y. Xo doubt it is a necessary de\ tloj)ement of
the era of consolidation but it destroys the jxrsonal
I lenient ol" banking. The b.mker in Kansas has no per-
sonal interest in the success or fallni'e of the \ew ^'ork
nicreliant whose note he holds, beyond the payment ot
that particular note, and in times of |)anic he is (piick
to re(|uest \aiuai)ie payment. i he aitiiity to i»orrow at
a large number of banks is an asset ihiring prosperous
^IWl
.M()M:V AM) H.WKlMi
W
times; luil if ()\ei--r\ei('isf<l. it can ncconie aliiu •: in ;i
niouient a most imijortimat ti)ility.
•J40. i'sc ;if credit <is a ilium u/' iwclianffc. — Tlu'
most important lunction ol cirdit is it^ |)o\vit to circu-
lalf as a mcdinm of rxrlian^i-. ()hvionsl\ . if cxt-liannr
can l)c consummated in lar^-e volume hy means of credit,
the necessity of iiuii'e national investment in the |)reci()Ms
metal is ohviatdl. The w lioie system rests upon thi'
assumption Ih.it not e\ei-yone is ^oinn' to |)i'csent de-
mand credits lor redcmjjtion at the same time. Ex-
cept in extreme instances, the assumption is a ^ood one.
and credit has hecome tlie chief meihnm of exclianiic of
this country.
In oi-dei- to eircuhite in lien of money, credit must
lie payahk' on demand, l-'urthermore. the issnei- naisl
he one in whose intt'ority and ahihty to j;av. the puhlie
has entire contidence. Xatin-aliy, then, the credit
which eiicnlates the most freely is (ioxernment credit.
Second to this is hank credit, and as this is the medium
m which a lar<^e proportion of our exchanne is made, it
is well t(» consider it separately.
'JJ-I. lidiili- credit. Hank credit has two forn.s. notes
and diposits. The true hank note is the simple {jromise
of till' hank to pay lii^al lendei- on demand: the de-
l)osit is prei-isely the same except in form. Thist
credits are creattd as the i-e-nlt (^\' an exchan<.;e, either
of money for credit, or credit for credit. If the cus-
tomer hrin^s mtaicy to the hank he recei\es for it eilhei
notes or a deposit acconnt, d( p( ndiny' u|)on which will
hest suit his neids. 1 1 he comes (o the hank as a !«or-
rowcr, he exchanyts his ouii time cicdit for the hank's
(hniand cr dit and a.L;aiii t;ik( s it in either lorm he de-
sires, it is liii- eredils thus created winch p( riorm so
NAT! Hi: oi' ( lii.nrr
^2();i
-nat ;i j)i'n|)()rt ioii dI' dim iiuiiuy woik. The notes
tii( iiisch IS passing' trdiii hand to han(L and the' clKcks
.iiawii auainst thr deposits eonsuniniate j)rohal)l)" '.>(»
]ii 1- cent of onr exchanges.
'The issue of ercchts intended t'oi' eircidation l)y pi'i-
'.;i.t< persons, corporations and hanks has ln( n attcnch'd
so nuii'h aliuse in \hv ])ast that n'oxcrnnicnts ha\e
me to re<^'ard it as a (piasi-puhhc i'unetion which inn>l
he i-(.\yiilatcd sti'ieily. Accordingly in this co;intiy the
iianks ha\(' lost the powci- to issue tiaie l)aid< notes, and
lan onlv issue notes secui"c(l h\- a deposit of ;4o\ nnnicnt
liMuds with the I'nitcd States 'I'reasury. Oui- l)ank
notes theret'ore arc really ( io\ eiaiinent honds con\t rtid
Mito cui'i'iaicy. Isach note is sini|)ly a IraiiURiit of i
l"ind stripped of its interest and payahle on demand.
•J+'J. Dc/xisil credit. — The other foi'in of circidalin<^"
ii'cdit. or ci'cdil i'urrene\ . consists of cheeks and di'afts
drawn against deposit ci'rdits. The enj-rcncy is not the
rlicv'k or draft Imt the deposit credit itself: the ijocu-
iiient is siniply a tcin|)()i'ai'y foiin which the deposit
takes foi' ciiculation. 'I'lie di'awiny and payin<i' ot
I'liccks do not expand or contiae-t the deposit curi'cncy
luit merely measure its rat( o| (ireulalion.
This form of credit has heen found to he much in tl( ;•
Miifcd to the needs of thickly ^tttl^■d communities than
lie hank note currtiic-y. wlna'cas in new rc<,ions with
poor iiankin;^' t'acilitics, notes arc still the favorite
iiicdimn. 'I'liis is Ixcause of the fai't that in new
lenjoiis. transactions are smaller; whereas in the I'itjes
transactions .in- lar^c ;u!<i it would \n uiosl hurdi'u-
somc to car/y ahout lar^c amoinits of hank notes with
^vhicli to settle oltliu'at ions. It is onl\' in this counti'V,
iio\\e\er. that tiu' diposit cinrency has ieaclnd its full-
m
inn
M<t\! N' AM) HANKINci
est <levc'l()|)iiieiit ;ii!<l it is noteworthy that cviii here it
(lid not iRoin to do so iintd rtst rict iocs \ww ulacrd li\
the (ioxcriinicnt upon the issue of hank n(»tes.
('[) to 18.>.> th( note issues oT the hanks exceeded
their (hposits. In that year deposits lolled ahta.l
somewhat, hut it was not until ihi- national hank act m
1H(>.) that till \ were yiven theii- I'eal ini|)ttiis. Since
that time the (l(po>its ha\f inci'eased out of ail ijid-
jjortion to the iiicn a of the capital invested in Iiank-
iii^\ while the notes have materially fallen oil' in
anionni.
'2r.i. Kldslinlji (,f (h'pasit crtdll.-- 'V\\v reason for
this condition is to l)e found, of course, in the increase
of |)opidation and the conse(jueut oi'outh of the hank-
ing- hahit: l)ut even moi'c im|)ortant than these factors
in its oi,,\\th has hecn its innate ahility to provide a
inedium of cNchanu'c which expands and conti-acts w itli
the hiisiness needs of the country. There are certain
times of the year when exchanges increase n'reatlv in
volmiR-. this condilion hein^' partienlai'K- true of siu'de
comniuiiities where industries aic not ^reatlv varied.
^foreover. as husiness heconu's hrisk or slack, Iheie
aic (han.'ics in the volume fiom year to vear. This
necessitates a constant cliaiii;-e in the amount of the
medium of exchange. Cnhss it is a |>eriod of m'ncnd
speculation and ertdits rest uixiii an unstahle hasis. this
change in the demand foi' midium will he met auto-
maticallv hy an increase oi' deciease of checks and
drafts drawn aLtainst the dt |>osit curreiicv. W'c shall
see lairr on that this is the only eui'iiiiev in use in this
countrv that had this atfrihute of elasticity. It is oh-
vioiis that the issue of hank notes which must he fi/st
se(aired hy drpusil nl ( .ov ( rniiK nt honds with the
'l'iiasin'\- IS exeeediiii^iv iiulastic.
l^^ii
NATlKi: (JF C l{!.l/ri
il)o
Il;i\iii.u' ('v)nK' into cxistciicf ;is the i-csult ot' an cx-
(■lian<4C' transaction, tiicsc circulating' credits scr\c as a
medium ol' e.\clian,y(.' in a nuniher of transactions hel'ore
lli(\- are extinunislied. Tliey are usually li(iuidated by
cancellation of one against the othei" tatliei- than hy pay-
ment oC money: so that the exchantits which they ha\c
made ha\c not merely ])ost])one(l the actual transfer of
mone\' as in the case of the non-circulating credits,
'i'lie fact that they ser\ c tlu' |)ni'|)ose of money and are
Usually setilid hy ca.ncellation misleads jjcople into
supposing that they oln iat( the need foi- money. That
siich is not the ease tliey leai'u sometimes to their sor-
!ii\\ wjieii th(.i'e comes a u'c'i'ci'al demand for the re(lem[)-
tion of credits accordin;^' to their tenor.
The vohimc of credits contracts wliene\cr there is
liiiuidation or whenex^r the credits hecome de|)reeiatt'd
in \alue. As loni; as the dt I tor (.'ontuHRs to meet the
matured ohli^ation In mi»ney their \ahie is maintained
liut wlKiuvcr he )•( fuses to do this \alue hi-wins to de-
cline concuri'cntly with the chances oi' future |)ayment.
A credit depre<-iated to half its par \alue has lost halt'
its power to do money woik and is conti'acted half as
mucji as if it had heen liiiuidated.
Inasmuch as crtdc can serve the pui'jxises of money
^ \ en hettei' than mone\ ilsclf, no person wiiuld ever de-
mand mone\ unless lu thought ;t moi-e \aluaI>U' tha?i
the credit, thai is. unless, in his opiniori. the \alue of
'he ei'tdit had d( preeiated. Such a depreciation could
take place oidy when contidenee in the aliility of th(
debtor t(i pay was imj);!ii'i<l. 'I'hc only exceptions to
tins are cases whire ^old is riiiuircil l^ir use in the arts
iiid for forcjiifn payments. The run on the (io\-
I'limt nt in lS'J.'{-t' for u'old foi' tlu redemption (^\'
ureenhaeks was caused h\ IIk (hmand i'oi- liohl to he
HOG
yU)M.\ AM) I5.\M\I.N(,
exported in scttlciticiit of the iiih riiatioiial l)alaiK'(
\\liicli had oonr a<4ainst us. 'I'liis le,<«itiiiial( and
iTUidar demand fnr oold soon Kd to anotlur demand
which ai-ose lieeause people heoa.n to fear that tlie (iov-
eminent niiyht not he al)le to meet its ( Ijh-^ations.
'''" maintain the \aiue of outstanding' credits it is
necessary for the issuer to sustain the confidrnce of the
piifihc in his ahihty to pay on demaiuL 'I'his can h(
• lone only hy kifpino- within easv reach, monev enoui-h
to satisfy all hut the most extraordinary demands. It
IS not enou<>h that he have i)roi)erty which is onhnarily
eoinei'tihle into means of payment, for when the (U-
mand for licjuidation comes it is likely to fall on e\cry-
one at once and no one will care to |)art with money.
Safely foi- the issuer of demand creihts, therefore, lies
oidy in kei'pin..- ;,t all times a reserve of money sulli-
cient to maintain confidence in his ahilily to pay. Tiiis
reser\ e is the hasis of outstanding- credits.
•Jit. (;(,lil iJic Ini.si.s for (ill credit. The hasis for
hank credit is resei'\c money. All of this reser\ e
nKMuy exeejjt ^old coin is hased more or less on the
credit of the government. It is kept at par with <><)ld
lieeause the ,«io\ ci'nmiiit stands ready to i-edeem it dol-
liii- foi- dollar upon (kniand. In ordei' to meet |)ossil)le
demands for rede?iii)lio!i thi' o(,\ (rnnieiit is reiiuired to
k(rp a <iold reser\e of S1.)().()()().(M)0. The i)rincipie
hehind this law is the same as that hehind the reserve
section of the National Hank Act. TIk' cn<iit monev
of the u.ncrnment is hased uj'on oojd. '['he hank
'•'•'■'!i< "!' the coimtry is hased upon government credit
money, plus n-o|,j. 'rj„> ordin;!iy time and nxrcntile
'■'■•■''i' "'' •'"■ n.-itioii is hased upon hank cre.ht. o-ovf rn-
tu. lit credit, money and ^(,1,1. The f
iihivti-ates the idea:
ollowiim (liayraMi
«#i
NAiTKr, oi- ( i*i,i)ri
2(t;
M(i( .■mtilc ;in(l 'liiiit' Cr-iiit.
,, , ,. , , ( Hunk Votes.
1 Deposit Currency.
('■(ivirmiirnt ("rcdit Money.
L
Gold.
•Ji.j. lifscn'r. — The t'ssciitial Icatiirc of the hank is
its powtT to Ucx'[) oiitstaiuhn^' a mass of non-interest
liiafin^' demand erethts. either in the form of notes or
deposits, whieh it has issned in e.\elian<;'e t'or interest
liearin^- tinu' ei'echts. To keep these demand erechts
Milt, the hank must lia\e the eonfidenee of the pnhlie.
This it aetjuires hy its capital and reser\ e. 'Vhv re-
M i\c re))ri'sents to the depositor his ])roteetion, shoidd
in' choose *o re(iuest imme(hate reck'mption of his cre(ht;
the ca])ital and surphis, represents his idtimate pro-
Iretion.
The national hatd< act re(|uires that national hanks
111 central reser\ e cities ( Xew ^'ork. Chicago and St.
Louis) shall keej) a c.ish reser\-e of "J.") per cent of theii-
oi landin<^' demand credits. This rcser\e consists of
Hold, and (io\ernment ci'cdit. 'I'he <>eneral rese)'\e
cities, of V. Inch there are forty-nine, must keep 2.5 per
cent reser\e with the privile<>'e of de])ositin<4- jialf of it
n centi'al reser\ e cities. All other national hanks must
ivci'P a 1.") |)cr cent resi'r\(' with the j)rivileg'e of (lej)osit-
in^ .'J-.') of it in reserxc city hanks.
'2U\. Kfj'cct of rcsiTi-(' r('(/iiir('in('>i(s. ~'V\\c amount
of reserve which shoidd he kept hy a hank dei)erids npon
1 1.,
. 4- I' :»- i i
III. I V |V.i(ll.
I 1 • !!...,
1 i i i i V \
:ire due to other hanks they are more likely to he called
t'oi- than if till \ -AVI' ill th( h.-nids itt' lar<>e nnnil)ers of
•t|"'!;-
UUH
MC ;:\ AM) HANKINd
people seattered over tlie country. The aniomit of re-
serxe nceessavy eaiiiiot he (letennined \)\ any fixed rule.
'I'lie purpose of t'le reserve reiiuireiueiits ol" the national
hank act is to put a cheek on undue e\[)ansi()n of de-
mand credit hy the ha.nks, and forhids tiiein niakiny
further loans as lon^r as tlieii- reser\e is helow tlie le^al
rciiuirenients. hi |)rospei'ous times this operates verv
well, hut times of ciisis and strin<jfencv are prolcn^a'd
hy it.
At such times each hank strives to hold as lar^e a
reserve as possihlc. refusin^ti- t<> make new loans or to
renew old ones, and withdrawing- its deposits from the
city hanks. The effect of this is to inte: ''y the
strin^'cney. The proper i)olicy would he to loan freely
so that solvent firms may not he compelled to suspend
heeause they cannot <yct ready funds with which to meet
iheir current ohli<T-ations. The Hank of Knoland pur-
sues this policy and i)ermits its reserves to fall to a very
low point, hut it selects automatically the most uroent
cases for relief hy raising the rate of discount. In the
panic of 1907. the Secretary of the Treasury and J. V.
Mor<ian followed the correct hankinjj;- principle when
they put on the market large sums of money to he
loaned.
24.7. Ddi^cr of NSC of credit in panics.— It is during
panics that an elastic medium of exchange is most
needed, and unfortunately the (ie})osit currency, ordin-
arily elastic, not only refuses to stretcli at such limes,
hut contracts instead. Just as soon as there is a gen-
eral demand for rcflcmptioti of private credits even th(
hanks are compelled to redeem their cred.ts in legal
tender, whether their ahility to j)ay is thought to l)e
impaired or not. Fo do tins they must pay out their
reserve money. This in turn cripples then ahility to
AAll lii: Hi ( Kl.Dll"
JJ()9
i"'ii and f'uithcr (Icplili s llif deposit ciiririK'y.
Most of the so-r;dlL(I niiii iicy i)ills wliicli have hrcii in-
troduced in C'odoi'tss lia\c att(!ni)te(l to rcinrdv the
i\il liy aiiihoi-izinu- hanks to issue note credits in na\-
III' lit of the dej)osit ere(hts. In this way note e lits
■onid he used insl( ad of iTservc money for eircuhition,
,■111(1 unless the ei((ht of the haiih has Hiireir-d. reserve
:roiiey will i-ol he (h'awn out. I 'ndei- our incsent law
Mk issue </f notes is inii)raetieahie at such times bc-
iiiise it neetssilaiv-- tin purchase of ( 'nited States
!"tiids, whieji woid<l findher (le|jletc the amount of the
'Tsei-ve.
In spite of these fjirave dan^-ers wliieli attend the use
"l' ere(ht as a medium of exeliaiio-e, its use is a necessity
"f the era (»f modern industry: and as the puhlie is
gradually aionsed to a study of tlu' pi'olilrms. its de-
'rets Avill disappear in the wake of eompelenl. Icis-
l.it ion.
■J 1-8. IiiipoiidNCC of en7/;/.--C'redit is the life !)1()0(1
: the economie system, its amount and condition de-
'' rminin^- whetln'r hnsiness he healthy and vigorous, or
iiiihealliiy and sta.niiant. It determines whethei- the
[(opulation shall he hnsy and prosjjcrous or unemployed
and poverty stricken. Insomuch then as the science of
hankin,^- ;uid money is so intimately concerned with the
\ery fundamentals of iifc^-tlic procin-ement of food,
shelter and clothinn-, with h.ealth and witii the whole
-iandard of li\inu'. it assumes an importance cvjual to
my other. If all the distress which followed the panic
of 15)07 — the la.ilurc ol business men. the i-iduction of
incomes amon;^' all classes, the loss of employment and
\\;|<rCS hv thoUS.Mluls of WMl-L- in, ii In-ii . , i!>i , .- i ■..>,■....), ■ :..!,.
^ '.-^ i ■ ■.
iiinumerahle homes if all this tiemendous calamity
was nniicccssai-y and remedialilc. then the subject is one
\ II II '
i
LI.;;-
210
M()M:V ,\Ni) iS.\NKi.N(.
oi' tiic greatest Imiium interest, well worthy of the at-
tention ol' trained investigators and master minds.
We have progressed I'ar enon^h in onr stndy to
reahze that the sole eanse of some of onr panies is the
misnse of the eredit niedinm and that it is a leadini,'
faetor in all of tjiem. Abnormal and sndden eontrae-
tions and e\j)ansions of eredit disturb the eeonomie
e(iuilibriiim by eausin^ iluetnations of priees, manipu-
lating' profits, and (ksti'oyiiiH' the sj)irit of enterprise
among those who eontrol the industrial aetixity of tiie
nation.
r*
i' ^•'
CHAPTER XIII
EIIKCT OF C HIDIT OX PRICES
•J 10. ///r;vY/.s7 //.;'■ need of more efjie'ieiit inotiei/. — We
ii;i\u already scrii that the use ol' crccht afreets the gen-
ial level of j)riees by iiKTeasini,^ the etfieieiiey of money.
Were it not I'or eredit tiie price level unist always he
lixed by the rates hetween the amount of goods to be
( \ilianged and the amount of money in eireulatioii. ])ro-
\iikd of course that the rate ol' circulation remain con-
>^tant. As ])0])ulation increases, more goods are
produced and more exchanging must be done, hence
prices are certain to decline unless the supply of money
is increased or rendered niore efticient. Declining i)ric(,'s
Ksscn profits, the inccntixi' to iMiterjJrisc is deadened.
ilie factors of ])ro(iuction become idle and depression is
rlironic. A develo])ing counti'y. therefore, to be healthy
I (oiiomically must ha\ c a constantly increasing quantity
• I the medium of exchange.
This need has been met by credit, chiefly in the form
n\' bank credit. In the preceding chaj)ters the several
kinds of credit have been discussed and it may be well
til consider briefly the eff'ects of each.
-.)0. Effeet of unn-eireiddting credit. — The use of
Hiii-c'ii'culating credit (promissory notes) has very little
H'ect on ])rices through any economy of the use of
Hioney \\\m-\\ it brings about per sc. Such credits must
be settled at maturity in money. Hence the use of
;in.iicy ]S p05i()0iicu iatiiui iiiiiii win uiled. il musi he
i'emembered. however, that the use of non-circulating
.'-'11
;2i!
MiiMV AM) H. .\KI.\(,
!;•
tM
credit, while it raeilitnti s prodiu'linn and llius increases
tlie aniniiiit of transactions, at the same lime ureiitly in-
creases th" mcchnm l)y its i-reation of circulating^' ci'edit.
The manner in which non-circnlatiny' cr'cdits ni'c con-
\(i'te(l hy the hanks into cii'cnlat ini^' ci'cdits ha> ali'cadv
heen (lescnhed. Hnsiness men issue promissory notes,
(liscomit them at tiu' hank and recii\"e in exchan^'c I):miI<
ci'edit (.'it'ici' in ilie I'oriii ot' nott»s or de])osil accounts.
It is this (Kpi.isit cun-eiicy which has in tliis counti'v
remo\ ed a ^|•^•al^•l• nait of tlu' hui'den of e.\( lianijinu'
^oods fi'oiii 111' sjini.'di I's of aioney itself. I'fohahlv
7.') per cent of oni' excliaiims are ])erfoi'med hy the use
of cheeks and di'afts di'awn against these deposits.
Mo'ny must In h<l(l hy the hanl.s aL;ainst tlu ir crediN
as a rcscr\e to maintain conlidenec in their ridemptioii.
hut the amount neeikd is onle iVoni l.> to '_'.") per vci\[ ol
tlie oil I si and mil; en dits. 'riiesc checks and dia fts. w hilr
they are merely pmmises to pay mou' y and theoretic-
ally must he r'di ( iiied in mone\ ai'' so cancelled one
ai^aiiisl the other thai iitlle actual money is used.
2.")1. ('(nicilldlicn (>f ciidil. l-'or c\;imple, ht us
take an is ihited coniiiiiinity in which there art' twc
hanks, tlu deposits of each heiiio' Slno.OOO. ;iiid thi
nioiuy I'csci'xcs S-J .").()';(». A. 15 and t' are local hiisiiiess
men: .\ and 15 !i;i\e deposit accounts with one hank ;ui(l
(' with tlu nlher. If A ni\cs his check to \\ in pa\
iiKUl for ;4'oo(ls, the check will !»e d. posilid h-, \\ ;ii;'i
his accoimt will he crcditiil with the ,11 iiit of the
I'lieck. whili's As airount \\ill hi chari^i'd. Thus i^'oods
have I'cei! c.\chan,ue(l solely Iw credit. If .\ ^ives his
t'lieck t(i (', it will he dt posited in ("s hank, ;ind thcorcHc-
ally ("s hank m.iy expect A's hank to |i'i\ Ilie check in
iiHiiiey. il IS proii.ihic, ji(iw(\er. that i ;icli l»ank will
Hold
hecks di a w II on i h' nlher. in \
liicl
I i'\(iif ()nl\'
El'l IXT oi" cm DIi ON I'lxK !"S
;n:i
;ii (liU'cR'nce ill total anKtiints. or baLincc, will l)c set-
;i;il ill money, in this mainiri- tlu' clircks arc cantvUfd
■mr- a^y'aiiist the other without aii} use ol' money. It is
m')\ ions that In lari>'e eommunities. whi.iv ii is eiistoii!ar\-
':■ ii.akc s( tt l(.-iu( Ills hy cl'i ■: !<. tliis caii-'cl iat ioii hccoines
I ,'y i!ii]).)ffatit . IIow \( i'\ ii!i])0!'tan! t!; - eiisinm lias
lieconie \\i!l he sf.n when Ihi liin;'l;ons of the ehai'im^'
hdii^e iwv discussed.
•J.5*J. II(>ic Icx-scncd (Icindiid far itioudi causes rise hi
i/vVc.v.- Thus moiuy is nsed hy the hanks only as a
:t sirve a<4'ainst actual ',\ithdra\\ a!s ol" luoniv and I'oi' the
vcttlemeiil of l)alanccs. Tiie ellicieney of the dollar is
Ny this system mnlti])lied several times, hence the de-
. ;id for money is lessened, and prices l(, nd to rise.
The introduction of (h.is Nirni of cicdit must alwavs
' i' an im|>oi! uit inline net' u|)on |)ric( s. \\\ ])oorl\-
Mid communities \\liei-e iiafikin^ 'acihties are mcayre
tile nierchanl and the farmer must keep on iiand in
their cash drawers m- pocki ts sullicient mouc \' to ae-
eomphsh tiicii' i)urcli;:s' ^. il is in"ou\ ( iiieht to make
|t:'yM;ents hy clicck: in fact, if th(\ did so. the cheek
would prnfai"!', lie ro||ow((l h\- llie del!\er\ of jielua!
!'ioney. 'I'liere is uo way lu which (hev'k-> can he can-
celled against eaeli otlur. With the eslaltlishinent
"\ l)anks and the i^rowth of lh( ellecl^in'4■ hahil. Iiow-
tver. the necessity lor earr^inij- ahout larirc amoimts of
actual money is o\('rcome. 'I'lie demand foi- moiwv is
tliercoy lessened, am. prices ayain tend to rise.
2.").'?. Klf'cvt (if ii'ilioiKil haul,' notes. — In the chapter
"W the nature of credit th( dill'i leuct hetwicn tht true
hank note and the naiinual hank rx.tc was descrih(il.
Iiiasmncli as the national hank notts ai'e secured hy
i iCtYv iijiiii ill i . iiiis, "\\iiiCri tirc llH m i' jiiUl; iui'' (lOV-
■ riimcnt eicdits. tlu\- ciieulat( freely as nnau \ dsell'
I
i*
.1
ii
- *
J2l-i
-Mo.vi:'; AM) H.\\KiN(;
TIrIi- cfi'cct on prices, therefore, corresj)()iHls to tlic
efiVi't of otlier I'oi-ms of (ioveniment e'-edit. and will
be discussed under !liat lieadinu'.
•i.54. Jidiil.' nates and chcchs dilfcri n'iaUd. — It hds
been ah'eady staled that the (nffereru-f l)et\V(en the de-
j)osit and the true bank note is one of ,'nrin. It remains,
however, to describe the (HftVrenee in t'niiii before the
effect of true baiik notes 'ipon prices can I)e considered.
The chief (htfereiice is that the baidv note is payable to
bearer, whereas checks and (b-afts— the foi-nis in which
tlie dei)osit currency circulates— are usually di'awn in
favor ol" a dt'tinite pa>ce. Bet'oiv the check is valuable
it Miust be endorsed by the jjayce, whereas the note cir-
culates V. ithout endorsenient. I'urtlicrniore the value of
a check de|Hnds U|)on the si/( of the dej)osit account
l)ossessed by the maker oT the check. Thus checks do
not ci"culate as freely as notes l)ecause both ()ersonal
and bank cicdit .are inxohed. 'I'liey usualiv rctui'ii tn
the bank i)romptly for ndemption. whereas notes may
i'liiain Mitstandin^' for considerable periods.
Because notes arc nuant t'or wider circulation t! an
checks, they have Ik en licnerally iiido\»e(| with ci'rtain
preferences o\er deposits that eiialile tiiem to meet more
readily the demand for hand to hand nionev. 'i'lusi
banks I ay be eomiH IKd to keep a l.aru'er and speeilic
rescr\e for !h(ir i( demplion. or |)erliaps a unaranle-
fund with the (iovernmenl : or ;is in this country tin
notes may l)e a first li<'n on all the .assets (d' the bank and
be .secured by tli( pledge of (.oxcrnmeid bonds. 'I'hat
there is danger in endowing- \\u \\- securitv with too m-
Hexible provisions. S(> that once issued they become a
part of the actual money supply and ju'c never j)i-c-
senit'd ior redt nipt ion. \\ \\\ Ik se( n when our own bcini>
noti' syst( in is deei iIm d m a subscijiient ejiapt
KFFKC r OF ( KKDir ON PRICES
21:)
The true hank note, that is. one whieh is not secuicd.
hy the pled^ic of spccidc assets or a deposit of honds hut
\<y die (general cre(ht ol' the hani<, may have a very im-
port ant eft'eet on priees. Vnv exani])le let us suppose
that the holdir of deposit erechts needs money for hand
1(1 hand transactions. Pt-'haps he is ^'oing away where
]iv is not known and wliere his elieek wouhl not he hon-
iicvl. II' note issue were <4'reatly restrietech the hank
piiist lionor liis er"(ht hy the ])ayment ol' actual reserve
iiiDney. Fnder a system of free note issue on the other
hand, no money would i)L' needed; the haid< would issue
tlie noie which would he ucnti-ally acet j)tai)K' and would
itniain outstanding' oidy as iono' as thei'c was demand
I'lii- it as a medium of exchange. Once in the possession
n{' another hank it would he picscntcd foi- redemption
li(.cause money is u'ore valuahlc to ;! hank than errdit.
The use of the hank note tends to raise prices hy
' ss(n!n<4' the demand for money. Its chief henetit.
however, aiises i'rom the fact that it so often j)revents
prices from falling sharply wlun any extraordinary de-
iiiand for hand to h.uid monev (such as wv are aj)t to
lia\e at eei'taiii timis of the year and arc sure to ha\'e in
panics) causes a depletion of i)ank rest r\ es and a coii-
t paction of ei'cdit.
'2')'i. Klf'cct of <^(i:-fnnncnf credit wouvji. — The use
'I' (iovernmeiit eiedit money and. in the counliy. of
iiiitioiial hank notes, has praelicMJly the same effect on
priees as a similar inc-rease of actual money. When
taith in the redemption is entire, and when it is uiade
M i4'al tender .tnd is tjiert lore a\ailal)li for hank reserves.
m ificrease in (Joverrmieiit credit mon«y ten'ls to raise
piicis just as would an incnase in yold itself. A eon-
iiiviiii^ic iSMiie Ol iicW (iO\ ei iiiiieiit eicOit lii ;t Mii^ir
I on. dry will in ('net inciiase prievs ail o\ i r uk world.
)i
:i 1 ()
MONJ.V .\\i) 15\NKI\(;
Its lirst effect is ;i I'isc of prices in Ww issiiiiin' countrN,
'I'liis means tlial imporls will incrc.ise. and exports di-
miiiisli. I'inally uold nnis! he exporUd In setllemcnt of
tile iiitei-iiatioii.il halanee. and tlius u()ld will tend to
raise prices in the other countries.
"J,)«i. ('/-((lit (iiiil spccnlalioii. Tlte nsc of credits,
particularly hank credit, has a furthei- eJlVct on prices
in that it fosters speculation. Speculation is that sort
of huvinu' and selling' whicli does not lieli) to move troods
alono- the chaMnei^ oi' industry and cointnei-ce from the
pi-oductr !o the cousin, lei". The ohjeet of speculation is
yain fi'oin the a(l\ i ni ilioii-, Ihiclualion of price and not
from the natural inerenu lit in \aliie of Lioods arisin<'
fi'om increasi'd utility as they ap])roach coiisumpti'j?!.
Legitimate speculation tinds to e(]uali/.e suj)plv over
loni^- periods and ada|)t it to the d( iiiand. thii^ minlnii-
/\\\[X !hletllation>^ .if pi'ict ami di^t riliijt inu its i Ifeets in
the least harmful \\a\ ,
llle,U'itiiiiate '^p( ■iilai ion increases lluctuations of
price, either tli!'oi:i;h Iradiim in imiDi'an.H' ol' conditions
nf supply and d( iiiand uv i.y niaiiipiilat in^ the markc!
and causing t, inpniary ciianLi'es which arc iidl iustilicd
'•y ■^I'l'l*') and demand. It mak.- ]triccs ahiHtruiai.
iisiiallv aliii(irm;dl\ Iul:!! a! lirst. ri>Mnwcd hy a period
w hell llicy air afnoriii.',II\ low.
l»uck( t shijipiiiM and mei-e o'amhiiiio' im j)ricc (liic-
tiiJitiouN are not relVri^d 'o lure: thoiiuh rcj)relicnsil»le
in tli(iiisclves and iniuiidiis to puhlic morals, thev do
not ( \erl any elfi i I mi prici s. It is onl\- wluii |ti'o|>-
ert\ Is actually hoiiuht and sold, w Im-u the d< niand and
supply an' altc i'(d. tli.il cjiaiim s in price result.
-'u. llo'c sjx'ciilation nui// hi Imlh rfin\f dud (■//'ret of
a r.-.si ill jiiirrH. — 'iV* Imi\ propcriy. one i list h;i\c mean
of payment. Spccidalion rci|uires that tin speeidator
-#
I i'M:( T OF C'Hl.Di'l ON I'liK i:s
III
mist not only li;ive nicinis ol' payment hut tliat he must
ic aide to hold j>ro[:ei-ty out oi' the market for ii time.
Ill spei'ulation. tlien. eapi'al. instead of heiii^ invested
])ro(lueti\ e entcrpri'-es and addiiiu' to the supj)ly of
Is. is locked ii]i ill li'oods in the hopi' of profit not
!'\- ])ri)diiet i\ (■ increases hut h\' a ri>e ol' prices. Pro-
iliictive prolits arise i'rom an increase in the amount or
utility of ,n'oods; s])eeulali\ i' profits from aitilici'd
scarcity ol' ^oods. .Speculation is hotli llie cause and
t ircet of pi'ice l!iictii;itions; a natural increase of price
\'. ill start, often, a specuhitive hoom whicli soon makes
mices ahnormally hiy'h.
C'recht is the instrument of spei-idation. It furnishes
ilie medium of I'xchanuc which iileases prices tiinpor-
iiily t I'om tlieii' depiiHleiice on mone\'. and jxrmits
;li(m to soar. It enahles persons with small ea))ital to
|)iirchase and lio!il property. If credit were unknown
and e\ery e\cliaiii4\' of projx ily rei|uired money, spec-
ulation would siill exist on a small scah : iione hut cap-
italists. howe\ei\ could (linage in il and tlu money
which was di\eiied l(» the speciilali\e hiixiiii;' of one
rMiiinioditx would he withdr.awn I'rom otlKi" usi s. and
liie |)rices of otlu rs tliiiiLt's must fall. A 1^(111 :a\ spec-
lijativc mo\inieiit, therefore, would lie inipossihie.
So far we ha\e spoken ot' the ell'i ct of the various
lorms of credit only as com))ar((l to a s\slt m in which
iiiit IS iiol used. This was eipiivalent to coiisideriiiL!'
ei( ly the ell'eet of an increase or expansion of credit.
I' nniaiiis llierefdic to exaimiu' the ell'eet of prices of
I CI ml ract ion of eredii .
•J.')S. /),/'((•/ '//■ ')iir cnrmicii .si/slrni. — T'^iiforfun-
lely this is tile ureal defect of our credil s\stem. I 'n-
li^e e\|)ansi(iri. wincii is liia'iuai and aiw.i\s lakes piaee
II answ<i t<i a d' ipiiid f'>i' iiiouex. conlraction of ci'cdit
218
^rONKV AND H.WKINC;
is likely to be very sudden. Moreover, it is likely ti
oceiir after a long period of expanding credit and ris-
ing prices; therefore the contraction and consequent fall
of prices will he the more acute.
We have seen that credit dej)ends on confidence that
the debtor will be able and willing to meet his obliga-
tions. If anything occurs to destroy this confidence,
there will be a general demand for payment. More-
over, it does not always take some givat ])oliticaI up-
heaval to cause this disturbance, particularly if credits
are greatly e\])anded and prices high. Any decided
fall in prices in any great industry, due perhaps to con-
ditions entirely j)eculiar to that industry, may cause a
general slum]) of the stock market. This shrinkage
in values causes doubt to be cast on tlie ability of debtors
to pay, and such credits as are due are j)resented for
payment. To meet these obligations, debtors must sell
their goods and ])r()perty. Since no one cares to pur-
chase, prices decline sharply, to be followed by still
greater distrust, lower valu( s. further selling and so on,
with cumulative effect. This process continues until a
large portion of the credits have been li(juidated.
This condition is not attributable to credit itself, but
to our particular system. The great desideratum of a
credit curreiic-y is elasticity- tlie power to r\])and when
it is stretched and, what is more important, to contract
of itself when tin- |)ull is removed. The amount ol
nadily acceptable medium of e\ch;uige should, liow-
ever, exj)and (juickly and without restrictions when a
general demafld for liijuidatioti ajipears. Hence if the
banks could issue notes freely in times of panic, a vast
amount of credits might be li(|iii(laled without resort
u) a depiction of tsank reserves. i lie < !}■( ct of li(|uida-
tion on j)rices. therefore, would not be so eumidative.
Kii'r.c'i' OF cui:i)rr on phrks
^li)
!i should not remain outstandini;' l()n<4'ei- than there is
an actual demand for it as a medium. AVlien times are
prosperous and ])r()lits inereasin^' with rise in ])riees.
stoeks lend themselves readily to speculation anil I'or
that reason are a|)t to he ahnormally hi^uh.
All the money in existence, however cannot be said
to he in circulation, and hence is not oll'ered for goods
at anv one time, liesides the limitation.s on the num-
her of exchan<4es which the average dollar can niaUe
within a given time, it fre(|uently haj)i)(ns that dollars
aie hoarded for loi\ger or shorter periods; until they ai'c
again put into circulation they might _just as well he
iini\-existent so far as their effect on prices is i-onci rned.
\Ioreover, the amount of the crtdil mcdimn of exchange
wliieii is oll'ered I'or gooils constantlv \ aries.
i ta
I i
> (I
CHAPTKK \IV
(i()\"i:i;\.Mi,\-i' ( Ri.iJir < ii;i! i:\cy
2.')9. ( !,i.'-:,//if(ilii,ii i,f ;:;iivcni incut credit c/irrcnc//. —
A lar.yv niiUMinl nl' the moiuy .siii)|)ly (.f tlu' riiit-d
States coiisisls of CoMi'Miiuiii rrcdil. I 'luk )• thi:, luad
must he classed the i;ir<ii!.;icks. \\\v tiTasui'v notes, yold
and silver eertilieaks. sih'er dollars, and all siihsidia- v
coins. Tlitsc are ail foi'nis ot' citdit niofuv. hecausf
they derive their value as media (d' exehanue I'rom tin-
(invei'nuK nfs ahilily and reachness to redeem them in
.i^old on d( tnand.
It is oh\ions, h<iucNer. that liuy do not all di'pend
e(iually upon the ( .o\ crnnienrs o;i.||,.,-;d credit. Sii\er
dollars and the suhsidiary coins possess a certain \al
ame
in themsrhes hecause of IIk' nielal they contain, (iold
and sih. ti- certilicates ai'c uwvv warehouM' recei|)ts for
an e(ini\alent amount of metal held in tjie treasur',.
and d( p( nd only u])on tlu safe kivpin,^- of that metal.
The ^i4ree.nhacks and licasury notes only are true creiliL
money.
Credit money should not he confused with Hat monev.
We ha\( ah-eady notid that the -old dollar derives its
\alue hoth I'roni the metal it contains and I'rom the (K-
mand for' it as a. medium (d' e\chann('. Tndcr oui- sys-
tem of fnc coinaL;c the supi)ly is regulated auto-
maticaii\-. in ( conoiine spi celi. the n(,|d d,,||;,r is known
as c( ^muiodil \ uionew
hand, is any monev the suppiv of wjiich is rculated
cuM:iiN.Mr.N r c ki:!)it ( riiivF.Ncv
^:,!l
iiitilii'ially and the ilnnaiul for \\hicli is llie result oi'
jK scr\ii'(.' as a iiicdliini of cxc'!iaii<4C'. It may \)v cnni-
pKsrd of \ali!a!i!c metal, or it may nut: in any vvvi\\ it
i> not its contents oi' conx nlihility, hut its cxclian^e
utility that fixes ils \alne.
Ci'edit money is a piomise lo pay eillier fia.t or com-
iiUMhty moniy. i i' it is a diiect promise to pav. it is
■-"!'! to !)e I'edeemal*]' . ;-l Kasi as ion^' as the promise
!■> kept: if the rcdeiupl ion !-. sii-^peialed or if it does not
ih pi^nd upon a direct pnaiiisv to pay. hut upon its cus-
t"ni;iry redem])tio!i hy ilii- ( io\ eiaiment. it is said to i>e
ii redeemahle. The diii'ei ri;e;> hetweiii iriH deemahle
ei'edit and lial ii:oney is tliai '])'■ ;;()0(1 laiih o! Ilie (Jo\-
( rnment is pledu^il to the redemption of th.e former in
spite ot a ])eriod of suspension and its \alue ',\ill aluaxs
!■(• iiifhienei (1 liy the pros])eet of its actual redemi)tion.
■jrd. Factors (h'tcniiiiiiiiii tlic vdhic of cntlii nniiu'/i.
- Since commodity money deri\es its value hotli froni
the \alue of the metal it contains and fVoni the need foi'
ii as a me<iium of exchan<4<,', credit money hased on ^old.
w hethei- nominally redeemahle or not, d(.|)rn(ls for its
\aluc first, upon the pMospn-t of the rtdemption and
•econd, upon the supply of' laedit money relative to lie
e\cliaiiuin<4' that is to Ik done.
In an earlier chaj)lu' wf saw how the ^'rccnhacks
Miictuatcd in value rtlati'.ely to i^old dui'inL>- the C'i\il
W nv as their redemption sr;nn(l inuuediate or I'emote.
i his was not the soU' reason. Iiowivai', for their fluctu-
,;tion. Within narro\\er limits the relafi\e \alue of
ricnhaclss lo n-old and of i^nods to irre( nhacks fell
ilh each additional issue of notes. 'I'liis caii hardly he
1 1 ..:i.. . 1 .1 I . I 1 : (• ii. . 1 ii. : . i .. i .
ill
3 ii
ium more uncei'tain: if tlu' ( io\ ciaiment coulil redt cm at
■ill. it x'.oiild mai.L' little dillVi'ence whetlur th( re were
11 '< -
> i
ooo
MO.NKV AM) I{.\NKING
SIOO.OOO.OOO nu)iT or less. It can iiioiv rca.sfM-.!,iy |„
attni)iitt(I iiKTcIy to an iiuTcasc of tlic money supplv,
wliicli in itsi ir was snflififnt to raise prices. It is iin-
possihle to reach any definite conclusion as to how miikIi
of the liiK fualion was caused hy each ol' these in(hlenee^.
I'lit it isclt';;r that they were liolli at work.
In fact, wiien after 1S<;8 tlie (iovcrnnient siispen.iM!
entirely tlie retirement of the -^reenhacks. they ei.n-
tinned to circulate and even rose rapidly in value. Dnr-
ino- the year that followed they were practically Hat
mone; draw inn- their value solely from the demand (ui
them as a medium of exchano-e. In ISC.'.), jiowever.
Congress passtd what is known as the Public Credit
Act. j)ledo-inM- tlieir icdemptlon in coin, so that they re-
sumed their character of ertdit monev.
•iC.-i. h'isk in free ti.sc of credit //;o//e//.— The theory
hehind the issue of credit money is that it economi/es
the use of o-nld and i)revents price Ihictuations. Its
most ardent adxo. aUs claim that it can become tjie sole
medium of e.xehanoe in a nation witere confidence in
the n-.,vernm. lit and its ability to redeem in no|,| js
maintained. This confidence can be sustained l)y a re-
serve of noj,| upon which the country will draw only
for t!ie purpose of payino- f,,,- imports. Furthermore
its supply can be ren-ulated and adapted to the varyinir
need-, of industry: at least Mich is the claim. That' it is
a dan.i^erous device, howevei-. the hi-tory of ahnost cverv
nation shows.
•J').'J. h't\iiulati,,n of credit ///o//(V/.^That credit
money eeonomi/.s the use of nold is evident: lien.'c so
far as it can be issued without ill eflVets, it must be a
!)/ ii.fii o, •■ 1. .,(;,>., 'v\ .1 I • • -^
tion. The cU'cct of any issue of credit money on j)rices
and ..n the money supply has alrta-ly been "mentioned.
(.i)\ i:un.mi;ni' ( i{i:i)rr c ikki-nc v
i)o;J
I'liccs risf ht'cjMisc there is niovc c'ii'culatiii^j;' iiu'dinni;
tlii^ iiicreiiscs imports wliieh are always ciuiek to take
;i(i\aiita^e of a risi' in pi'iee: ^old Hows out of the coun-
try to pay for the imports. Prices tlieu fall somewhat
ill the issuin<4' country because of the loss of <^<)l(l, and
v\^c abroad: in the end, world prices are readjusted on a
liiLiher level.
This will take placi' \\h(iie\er there is an issue of
iirdit money, \vhether it is I'edecmabk' or irredeemaltl''.
As lon;^' us the issue is not excessive, tli;it is. as \ou;j; as
Uii' amount of credit money issued does not appi'oach
llie amount of ^old formei'ly in circulati<in, its effect is
not dan^'crous. When the issue of either becomes ex-
er^si\e, so that all the yold Hows out in payment for im-
poits or is hoarded in ex])ectation f)f such a condition,
the ciedit money becomes the standard of prices and the
sn\c medium of e\chan,Gce,
At such times it makes little difference whethei" the
iicdit money is nominally I'edeemable or not. M,\en if
it is redeemable and the ^'oxei-nment keeps a ^old re-
serve for the purpose, it will soon be depleted because
■ill ci'cdit money issued in excess of the monetary de-
mand will promj)tly i)e ])resented at the treasui-y for
rtilemption. When this leserve has been paid out,
credit money of either kind becomes irredeemable in
fact. The only difference between the two forms
M ( ins to bf that irredeemable credit will drive tin <rold
(lilt somewhat faster. A\'hen the ^'o\ (M-nment's ])roniise
In pay is express, and a resei've is kept, public confi-
'!( nee in the redemption will last lon^c r. so that hoard-
nn- will jiot start as soon. In other woi'ds. a o-icater
.... .....f . I' ... I ._ :....i..l.1 fl. ... i' :.... ! . .1 ! !l
be issiK'd with safety.
The iiionient that credit mont v fails to circulate at
MTM.N AM) i5.\\KI\(,
]);ir w itii l;i>1(!. IIk crfdit PDncy is said to !k' ilcprcciMti'd
ciincnc)-. 'I'I'.is will take |)lacc' U^ui^ hd'orc all tlu' <4o|d
lias lucii (lii\ni out of ci'-cnlatioii. 'I'jic standard oi'
j)ric(.s w id l)c a d(!!d)lc one; i^onds will \)v pi-iccd so nil id i
li)|- ,L;o!d. and a i^rcat-i' amount !'or tlir credit niotiex'.
■_'(;i.. .Orr/cr.v to iimniiaiii v/iliic of crcdil iiKiiicf/. It
has liccn Hie history oj' ci'edil nioiuy tliat cirorts arc
Usually made to kec]) llie credit circniatinu' at |)ar with
,yi)id hy making it lcL',al iendei'. This mean^ that il
must he accc|)ted in paynunt ol" all dehts. While tlii
l'catiii-c increases its elliciency as niotiey. and theoretic-
ally makes it a iiiore ])ci'('eet sul)sti[iite foi- ydld. it is a
mistake to cencliide that ii will ])r(\('nt d 'preeiation.
\Vi ha\c seen that Ihe \alue of ( reihl mont\- depends
ii)st upon the prosp. ct rA' its rcdcm|)tion and second
upi/ii its suj)piy relali\e to tlie money work which is to
he done. Tiic leija! '(iuh r stamp does not increase the
])rospect of redeiiiplion of icdecmahlc credit, hecaiisc
for that the ,l;o\ (.i-nmer.f "s faith is already delinitelv
pledged.
It is only when credit money is irredeemable that
niakin/;' it le.ual tei;der to i)i'e\ent depieciation is hene-
licial. In this ease, the ;^o\ernmtnt is not alread\- dcl-
initely plcd-^cil to redeem the credit, hein-e anythinii
attaclu'd to it which is an e\ idencc of the _ii'o\ ernments
,Uood faith inci'-'ases puhjic contidence in its re(Iem})tion.
The piomisi' to aeci pi it in payment of debts to itself is
(>b\ iously an e\ idencc of its purpose to redeem.
2<»."). f/'/T-; /•//'"( 7,7 rr((lit iin/ "idifil iii(,iu\//." It must
h' aduiitted i:. support of tiio^e theorist, \^■ho advocate
I'le nse of u-nvernincnt cr( dil as the "ideal moiiey"" that
i' has hi ell tri(d Usually under Ihe most inaiisijicious
c:reunislances its issue ncneraily ha\ inu been rcsortt'd
'.\ars or to maintain pros])eia't\- whi( ii
ti
> oiii\' to Ini; 'ic
(;()\ iiKN.Mi'A'i" ( iii;i)ii' ( ruiii.Nt ^
::i>
lias already <4;r()\vti im1i(.'altliy. If it (•(uild ln' issued
witli the sole aim of steadying prices under I'lm-
(litioiis wliieli woidd necessitate its rcdeaiption wlun
the nei'd tor it disappeared, it might Itecome a \ery
iffeetive instrument in the hands of a com])etent gov-
ernment.
Its issue on this theory is im})ractical)le, however, hc-
eause automatic redemption is impossihle. When eon-
tidence in the government is genei'al, all forms of credit
issued hy it find their way into the clKUinels of trade,
causing a rise of prices. As long as confidence is main-
tained, they will continue to he a part of the monev sup-
|)ly hecause there is no motive for their redemption.
'JG<>. Difficulties of adjuntintr suppltj. — Moreover, it
would he unsafe to give to Congress or to any associa-
tion of hankers the power to expand and contract the
money su])})ly artificially. Congress 's not always well
iid'ormed of the husiness needs of \he country; and
hankers must always have personal and selfish interests.
The effect of a sudden contraction of the money su[)ply
as seen in panics is well known. Moreover, the power
to regulate the money supj)ly would include the power
to inflate or de])ress the price level. We are forced to
the conclusion, therefore, that this credit has heen well
named "ideal money" 1 y the theorists; "ideal" because
it presu])p()ses a state of technical knowledge on the part
of legislative hodies and .d)sence of self-interest which
we may expect with the millennium.
Irredeemable credit money may circulate at par with
ii,()ld if the issue is not excessive and if there is general
confidence in the goverrmient. In this case the govern-
tiipjit line jidf niviiiiic<>f I fri r<i(I(ir>i>) tho mnnp^' Imf it fir>f>«
*'*' i .'*
SO in practice, receiving it itself at par with gold. This
is not fiat money hecause it derives its value not entirely
VII -15
%
226
MONKV AM) U.WKINd
from its exchange utility hut from tlic /rovcniment's
actual redemption. The silver dollar has heen a good
example.
Unfortunately, however, government credit money
has seldom heen issued in response to a demand for
money as a medium of exchange. It has heen issued
largely in resjjonse to the li: ca! needs of governments,
that is, to meet extraordinary increases in current ex-
})enditures-
'J()T. Prrji'diccs nffdinst government credit monetj
before 18()1. — This has heen especially true of the
Ignited States. The Constitution gave Congress the
power "to borrow money on the credit of the L'nited
States"; also "to coin money and regulate the value
thereof." In the Constitutional Convention a proposi-
tion to enable Congress "to emit bills of ciedit was de-
feati'd, it being the sense of the T'onvention that j)apcr
money was dangerous." The history of the Ciovern-
nient shows that the dislike (>f paper money, no dou!)t
a survival of the days of the Kevolutionary bills of
credit, must have continued until IHOl. Oti ordy three
occasions prior to diis time had t'casury notes becii is-
sued, namely, during the War >f IHTJ, the panic of
1S.*{7 and the Mexican AVar of ISiT. ^foreover. thr
aggregate of these issues amounted to otdy $1 I(),()()(),-
()()(). ;nid ill ewry ease the notes were interest-bearing,
and n( \ei- attained general circulation.
'JfiS. rinanciiif/ tin ('nil ii\ir. The opening of tiie
Ci\il War brought extraordinary con(hfioi\s. Money
had to bi iaiscd at once tor eonductiny the war, an<l in
laig( sums. Should tlic (government "borrow monev
on ilir credit of IIk Cniled States," or should it create
iiK'-tiiy i'V i-'Siiiiig its iiOH S ili'tii C . iOWiJlg TiU'lli Wllil liic
legal tender feature!' Tiie former it was empowered
(iOVKKNMl.Nr ( KKDir ( IHKKSC V
in do by the Constitution and could have done by tlie
sale of bonds. (io\ ei-nnient !)onds are a form of nov-
( rninent eredit. i)ut they are not credit money, as they
ale nv)t payable on demand. The market for bonds was
not o-ood. however, and Conufress chose the latter
method as less e\i)ensive. tliou<ih the constitutionality
was very doubtful. It may be objected that "the jmwer
lo borrow money" inehidi'd the liyht to issue notes.
In req'ard to this |)oint. tiie distinctions between cap-
ital and money must be kei)t in mind. I'lom the busi-
ness man's staii(Ii)oint what the (lONernment really
needed was working"- capital. No business man would
tliink of issuing demand oblij^ations in exchange for
eajjital ^'•oods, particularly when there was no prospect
of an immediate increase of rever- -e with which tci meet
'he obligations. The business man's obligations is-
M!«(| under such circumstatices would be lon^-time cred-
its in lh< iOi'in of bonds I'ui-thermoi-e. there was no
necessity for an increase in the money supply. Trices
were suthcicnlly hinh. What tlu- (iovernment wauled
was not money but purchasiiiii' power and this it could
Iiave l)orrowed wi'Iiout increasin;^- the supjjJv of money
itself.
•J(i!). risddvdiila^Y of ^oicnnncnl dthl. — (iovern-
nicnt credit always represents a ^ovenunent debt I'l
this coiuitry \\e l;a\f become so accustomed to havinn
a government debt that its e!cm< >» . of weakness ace sel-
dom analyzed. Our prospciit\ -ratois point with pride
to tlic fact that the I 'nitcd States is the oidy nation in
liie world wbicii can sell lionds that pay cnly 2 per
rent inl'ics'. This is applauded as an e\ idence of j)ros-
perilx, witl.oui .•ina.hsLS. wit!" no thoupb! lb;!! \\>.i- mvv
|>resetice of a (h l)t on the books of anvone. excn of a
nalioii, must always be a weakness. In what respect
( -I
I
OOV!
MOMA AM) HANKIN(;
m
11
!i
should a yoxminicnt's financial activities diifer from
tliosc f)t' a \\(ll-ic<4ulatc(l husiiicss' Do not the same
principles nriikrlie them hoth'
The husiness man will n-^t horrow until lie has already
devised a lime and method of jiaymcnt. As we have
already noled. the I'orin in which he will horrow depends
upon the disj)()sition he wishes to make of the credit,
ir he expects to add to his fixed capital, he will horrow
hv issuing lonn-time credits, expectin<^ either to pay
them Milt of his profits oi- to rene\r them at maturity.
II' he merely wants the use of funds for a short time,
he will issue sliort-time or demand ci'cdits. These he
w ill expect to meet out of tiie proceeds of his sales.
•J7('- (roirnnnriit drhf. — When a j^-overnni'iit bor-
rows it does so for current expendituiis. These may
he for permanent imj)rovement. such as federal build-
ings, harbors. caJials, which will benefit the public gen-
erally and flu cost of which should be spreajl over the
j)eriod of their usefulness rather than be met out of 'lie
re\c"iue of a sin^''le year at the time of ex{)enditure.
.V fa\()iite expression is "to let posterity ha\e its share
of till' burden." The ^o\ermnent bonded dei)t in 1870
•unounted to S-_\;{.'n,l()'. >,'.).)(; ; in l'.»()-J it had been re-
duced to .^^'.CJ.-i.Ol l.(;.'ii».
'i'h( income of a "^'overnmcnt is ;ncnerally s})oUen of
as re\(iiue and is deiixcd entirely from \ai"ions methods
of taxation. If wi' wish to cany out the analogy be-
tween the ^oxeiiiment and the Imsiness man. we may
say thai the di Its iciiccs bctwce?) the rcMiiue and ex-
penditmcs in any one year are profit, and that it is
with this profit that thi' bonds are retired. The issue
of bo!i(]s, tlii'ri'! <>re> \\b<,'!! the !>roceeds a.re n.ot souiui-
(icred, rests on a firm business basis.
gum:hn.mi:nt credit currency
oo
on
The issue of credit iiioney, however, pre.seiits diff'er-
riit j)rol)leins. When the husiiiess man issues demand
credits he purchases something sahihle with tlie j)ro-
eeeds, and expects to he in a })osition to retire the crecht
at any time. The oovernment on the otlier hand merely
spends the money, usually to meet some extraordinary
expenses, and then has nothing to show for it. If it is
a war that has heen financed, as in the case of our green-
I)acUs, it iiad a perfect right to horrow for the jjurpose
just as it would have to make permanent improvements
hecause, on the same theory, posterity should help hear
an exi)ense from which it will henetit. If it does that,
however, a provision for redemption on demand must
he made hy the estahlishment of a suflicient goKl re-
serve; hut to rest on a husiness hasis, more is necessary.
Posterity should not hear the !)urden hy keeping the re-
serve always intact hut hy actually retiring the demand
credits. l{e<le!ni)lion in gold on demand is not sutli-
cient. These credits should he canceled just as the
honds have heen canceled.
'271. Demand dcht.s a xccakiicss. — A deht is always a
weakness, hut especially so when j)ayahle on demand.
it may he well to examine the claim made hy the advo-
cates of the issue of greenhacks that their issue would
result in a saving to tlu' government. The argument
that turned the tide of hattlc in Congress was that in-
lerest-liearing honds could l)e sold only at a coiisiderahle
discount, whereas the non-interest-hearing notes could
he issued at j)ai-. in otlur woi'ds. a large saving was to
!»(■ eil'eetcd \]\ the intirtst account.
In an earher ehaptei- the pi-etci-iiice of husiness men,
who (Kid in aoods which air not nlwavs mar'.xctahle. for
II
frg
jtlll'^ (INll .sjliirl Tiiiif tifinS Was iMiiiiiru iiiir. i'iii'iiiv r
2.'}()
mo\t:v and i?amvI\(j
i!
If--
more, it was sJunvn that tluy will often pav a hiolier
rate of interest on 1„mo- time loans siniplv to inake
tlieir business more seeure. A o-,,,,,! example of the
prelerenee has been shown I.y the issue of .$.'J(),0()(),()()U
1" J'onds l,y Armour .V Company of C'hicaK,). Tliese
bonds bear 4i _, per eent interest and were issued when
the eommercial rate was less than t per eent in spite
of the faet that Armour cV Companv always had a
ready nKirket for their short time credits owino' to their
reputation an.l the (piiek convertibility of their })ro(luct.
The -■overnment does not deal in "noods at all. j
only method of meetmo. oi,lin,,tions is by doin^r so (.it
of its excess of revenue over expenditures or by re-
f inuhn- them. The h'rst must always be a slow process.
In .ts ability to refund only does the oovc-nment have
:"! advantau-e over the business man: and even uiis
"bdity may be cripple.l at critical times, so that in re-
hmdin- . loss greater by far than the interest ori-
Hinlly would result. It is obvious, therefore, that the
l>'"per business policy would be to avoid the issue of
demand cn.lits. in spite of the original savinir of ;„.
tei-est. "
•272. rrovislon. for rrfinn:^- dcht.- \u any event
iowcNc.- whether a d, bt .o incurred is in the ■form of
I'oiids or notes, provisinu for its can.-ellalion sluudd be
ma.le. The smalier the d.b'. the oreater the nation's
'""•".muin. pouc...,n.l tliereisnotcllin^when thisbor-
rouinupowermay beMe..ded. II is„..l a correct busi-
Mcss pohey to aHnu a debt Ineurn .1 durin- on<. period
"1 stnss t,, .villain o!itstan<lii,n |,. ,•<■, imv the ..-.wen!-
"Hiifs endit when anolinr p. rio.l of stress appe;7rs It
sl.ould be paid oir in prosperous years, so Ibal when an-
1 I
tin" S i ,■ i 7 1
ernment's cndit unimpaired.
'Mii iu- eic.'-.ii and the j-oy
CHAPTER XV
ECONOMIC FUNCTION OF THE BANK
273. Productive industries classified. — The economic
life of a coninuiiiity consists in the production and con-
sumption of goods. The production of goods becomes
more difficult and comphcated as the wants of men
grow and u great number of auxihary institutions be-
come necessary. Banking is one of these institutions,
developed to assist in the production of goods.
The institutions which carry on the process of pro-
duction may be classified in three groups.
1. Those \\hose purpose it is to extract raw materials
from the earth and to adapt those raw materials to
lunnan wants —therefore, the activities of agriculture,
mining, manufacturing, etc.
2. Those whose pvn-[)ose it is to transport materials and
finished goods to the place where they can be most ad-
vantageously used.
3. Those whose purpose it is to as.sist in transit rring
the ownership of materials and finished goods so that
they may come into the possession of those persons who
can use them most advantageously therefore, the ac-
tivities of retail and wholesale merchaudising, broker-
age, coining and issuing money, banking, etc. This
third group of economic actiMties is not absolutely
necessary to the economic ])roccss but is a conseiiuence
of the private ownership of materials and the means
oi' t>!'()(!!!ct!')!K u»>dcr a thoroutrb socialistic regiine these
institutions would be Mj[)ertluous.
S31
4
232
MONEY AND BANKING
274- lii'iutpihildt'uni of fundamental principles. —
rndtr our present system of private ownership of
weaKli and the division of hibor in {)ro(hiction, frecjuent
transfers of ownersliij) are i-eiinired. Kxclianne is an
absolute prerecjuisite to any hut the most primitive
form of i)ro(hietion. Only an insi<riiitieant portion of
tile ^j-oods pnxhiced are consumed hy tlie producer; they
were made to be exelian^anl for otlier goods. In the
process of manufacture most goods change liands many
times l)efore reaeliing the consumer.
These eleme?itary economic facts are recapituhited
for tlie i)urj)ose of em|)hasizing the importance of ex-
change in our economic hfe. lender an economic sys-
tem of private ])roperty tliere could be no civilization
without the means of exchanging one form of propertv
for another.
'''he exchange of one goods for anotlur, however,
involves considerable diHiculty. In any exchange there
must be two parties, each desiring the article wliieh the
other wishes to part with, at the same time and place.
These conditions must coincide in order to make an ex-
change possible. These obstacles in the way of l)arter
led early to the use of money, whieli was a commodity
enjoying so universal a demand that everybody was
willing to accept it in exchange for his goods.
Jii order tli;it production shall be most successfullv
carried on— that is. that goods of the liighesi (lualitv
shall be produced in the largest (juantity. it is necessarV
that each person shall be set to do the thing at whicii
lie is the most skillful and that he shall be aliir to make
use of the proper tools and materials. It is necessarv
that the i-apitai ri'sourees aiui the labor force of the
country should he l»n>uglil together and organized in
the most ellicient way. The number of persons who
KCONUMR 1 LNt riON OF THE BANK
^33
arc capable of heconiinf,'' organizers of industry — entre-
preneurs — is limited, and these are not usually the own-
vvs of capital. If the coniniunity is to utilize the expert
abilities of these ca})able but i)ropertyless entrei)reneurs,
a method must be pro\idc(l by which they may come
into possession of cajjital without bein<r recjuired to give
an equivalent value immediately. So we have the insti-
tution of credit, which is the third step in the dev. lop-
nient of exchange — barter, money, and credit.
27.5. Credit.— A credit is a deferred i)ayment. In
exchange for valuable })roperty, one of the parties to
the transaction gives his promise to pay a certain sum
of money in the future, or, in other words, lie gives his
creditor the right to demand a certain sum at u future
time. The value of this right dejjcnds of course upon
the certainty oi' payment at the future time. This de-
pends further upon the character and ability of the
debtor and upon the aid afforded bv the law in enforcin<>-
payment. A ci-edit, therefore, is a contract to pay
money, and is usually evidenced by a written instrument
for the further protection of the creditor and for the
purpose of making the contract negotiable. The fact
that credits in the form of negotiable instruments are
transferable add enormously to their utility as media
i>f exchange.
27(5. Jiaiih- a dealer in credits.— 'Vhv business of a
bank is to deal in credits; it is a market for the pinrhase
and sale of credits. It is an institution the fimction
I if which is to assist in the exchange of goods by facili-
tating the use of credit as a medium of exchange. It
is with credit as with any salable commodity — the exist-
...w..> ,>P .. ..... ..l-,.t^ ,..1 :i 1. Ill 1 I 1
■::v-. \ri ii ii;.;: r.-^ ■.. ;-. ;:-^:l ;; i;;;;", ;;v" Jiwiigiil iiiiii ."XJuI
increases its use because a demand for it is always
assured, lianks are an economic beneJit to liie commu-
Rl
ii'.ii
^iom:v and banking
Hi
1
1
'■R
ii
*p(
'
r
h
riity to the extent that they promote the exchange of
goods and services, to tlie end that the material resources
(capital) and the labor force shall be most advanta-
geously emjjloyed in the best possible organization and
that the finished products shall find their way, with the
minimum of delay and difficulty, to the best markets.
Every excliange. excejjting mere barter, involves the
use of a medium of exchange. Money and credit are
the two media of exchange. The term "money" is now
used by economists to mean simply the standard of value
which, in most countries to-day, is gold. Where the
gold standard prevails, all other forms of currency —
token coins, government notes and bank notes — are
credit currency. The government usually undertakes
to provide and regulate the metallic coinage of the coun-
try, but leaves to the banks the task of providing and
handling the credit currencv. 'I'he Tnited States imes
further than most European countries in concerning
itself with the credit currency of the country by issuing
"greenbacks," and Treasury notes, and by guaranteeing
the redemption of national bank notes.
In England, as well as in most of the larger Yaiyo-
pean countries, to the banks is delegated the function
of managing the credit cu"rency; of course, under re-
strictions more or less stringent. The point to be
observed in this, and one \\hieh has been urged by sev-
eral of our rec^'t writers on money, notably C'onant in
his "I'rinciples of Money and Hanking," is that the
iiandling of credit, evi-n of credit currency, is properlv
a banking funetio?i ratiier than a governmental oiic.
Credit jis a medium of < xchani. <■ varies in form all
the way from a national bank ooti , whicli na.sses from
hand to hand as freely as a gold coin, to a mere verbal
promise tr> pay (. \ idcnccd by a niemora!idum in a ledger
ECUNUMIC FLNCTIUN OF THE BANK
235
wliich, often as it has served in one excluingc, is but
rarely negotiated further. ^Vrranged in the onkr of
their negotiahihty (tlieir servieeabihty as nie(ha of ex-
cliange) between tliese two extremes, we liave the cer-
titied cheek, cheek, draft, l)ond. ])roniissory note, etc.
277. lianlcs supplij a medium of iwclian^c. — Hanks
perform the function of sup|)lying a me(hum of ex-
change in two ways: (1) by the issue of hank notes
intended I'or general circulation, as the national bank
notes, and (2) by granting, in exchange for a cash de-
])t)sit or an interest-bearing note, its own credit which
can be used by the customer as means of payment by
drawing a check against the bank.
The function of providing a medium of exchange
for a community is essentially a public one and is pecul-
iarly liable to abuse if left without restriction in the
hands of private parties. Before the Civil War this
country suffered severely from badly regulated issues
of bank money and, since the National Bank Act, the
right to issue paper money has been limited to national
banks under very strict regulations.
278. Hanking is a quasi-public function. — The right
to furnish a medium of exchange by the system of checks
and de]>osits still belongs to every bank, but in all cases
it is regulated cither i)y federal ov state statutes. In the
Ignited States minimum cash reserves are re(iuiri(l to be
kv\)[ and in many other ways the i)iiblic nature of the
business is recognized.
Besides the quasi-public function of jiroviding a me-
dium of exchange by the use of credit in one form or
nnother, banks liave anotht r function closely allied to
if- titlfl <.-<\«>tjitll^^i>(.' (.'/Id l>f 1/ ill' 4-(t l\it jIi
.^:., ,„..:. I. ...J I-
to supj)ly temporary capital to industry in the form of
short time loans.
'JIG
MONEY AM) RANKING
In th
'd>j;(-\ scarce any iiuhistrv can ht- carried
(Ul
without capital. It is very rare also that the best pn;
iiioters and managers of industry are tlie i)ossessors
of the large am unts of capital necessary to carry on
the business. On the other hand, a large })()rtion oi' the
country's capital is in the hands of those who have no
ability to emj)loy it successfully or it is scattered about
among tiie people. To get this cai)ital into the hands
of the entrei)reneun ..iio can employ it most profitably
is a function largely assumed by banks.
•271). Tin- hank a (li.stribiitor of capital.— Cainial is
employed in iiidustry in two ways. Some of it must be
invested in the plant and machinery; this is fixed cap-
ital. Another installment must be invested in materials,
labor, incidental exj)enses of production, etc., the neces-
sity for M-hich arises out of the length of time required
to manufacture and market the product. There is
naturally great variation in the length of the period
of production in the various industries. In some of
them this circ' ;ting capital must be tied up for Meeks,
in others i'or wars.
The distinction between circulating and fixed capital
IS that the former ai'ter a period reappears in the form
of a salable {)roduct from which is realized the value of
capital invested and something more in such shape that
it can be reinvested; in other words it is fluid, whereas
Jixed cai)ital remains in the form in which it is invested
and only l)eeomes fluid as a replacement or depreciation
fund is accumulated or the plant is sold.
This distinction has gre.it value in the science of
banking, for as we shall see later, the credit which a
bank loans has a very precarious existence and it may
become necessary to withdraw it at any moment from
the enterprise iti which it is invested. The restrictions
K( ONOAIIC 1 TNCl'lON UF THE HANK
j>;i'
wliicli leoislal n\ has placed njxm the nianiicr of loans
a l)ank may 'iiakc are vciilly hased upon this j)rinciple.
2S(). Ihuilcing priuciplc. — A lar^a- proportion of the
hank failures of the country is caused hy a violation of
this fundamental hanking- principle. The National
Hank Act forhids hanks to loan on real estate or mort-
oaacs. The idea hack of this i-, to ])revent the lockin<;
up of funds ii fi 1(1 capital. The faihu'e of the three
Walsh bai. s in Chic'^o in V.m\ occurred hecause the
funds of tlic hanks had been used to huild railroads
which some dav mav he \erv i)rofitahle, but which for
the present tie up capital where it cannot he easily
turned ijito a means of payment.
The reasons why hatdv funds should not he tied up in
the form of fixed ca[)ital are:
(1 ) The value of the investment may he unstable.
(2) The value of the investment may depend on the
completion of the whole plant, as in Hie case of the
Walsh railroads.
(3) The value of the investment may depend upon
a monopoly or upon the ability d' > ;ie man, so that if
the peculiar advantage ceases to exi^ the property
shrinks in value. New processes may nuike old plants
entirely obsolete and destroy their value.
281. Double function of commcrcinl hanhs. — The
function of a modern commercial bank is therefore two-
fold: (1) To provide a means of payment and (2)
to provide temporary capital for the use of industry.
It will perhaj s he well to show brietly how these func-
tions were developed.
One of the early banks, the liank of Amsterdam
was the conmn rcial center o\' Europe at that time, and
the currency in circulation was a heterogeneous mass
1 .;
I
I
L'.'JH
MOXKV AND RANKING
of the coma-c of all the mio-hhorin^v and .h'stant conn-
tnes, of murrtain \ahic a..,l f'miuentlv Mmtllated
S.K'h a currency seized the needs of connneree ^cvv
I'a.Ily, and the J^mk of Anistenh.n, uas oroani/.e,: to
reheve the diHicnHy. It received deposits of this niis-
c-elhmeous currency, calcuhited its vahie on the })asis of
a fixed stanchu-d and permitted the depositor to transfer
l'>s credit at the hank. The deposits were all kept in-
«act in the l)ank, or at least were supposed to he As
;i matter of fact, the si^rht of so much idle money seem-
I'l^ly doui^r no ^rood to auyhodv in time proved too
stron^r a temptation to the mana-enipnt and thev from
time to time ])ermitted lar-e sums to he used in 'financ-
ing,^ hazardous ventures, principallv the colonial enter-
prises of the Dutch Kast India Company. When these
tacts hecame notorious the depositors lost faith in the
hank and it was compelled to suspend. This hank per-
lormed a hankino- function in diat it provided a ^.ood
iriedium of exchanoe, h„t it did not deal in credit in
any other sense than a -rain warehouse man mIk) is sim-
])ly under ohii-ations to return the deposit on demand.
_ In the IJank of Knu-hmd {nm} we find the hunk-
in^r i unctions considerahly developed. In considera-
tion of a li)an to the ^nnernment, which at that time wis
m sore need of tunds, the suhscrihers were given the
exclusive right to organize a hank which should have
the privilege of issuing notes payahle to the hearer and
which were intended to circulate as currency.
Here we have the essential element in "hankino-— an
organization which is ahle in some way to create credit
at small expense and which it may loan'out to the puhlic,
deriving an income therefrom which leaves a nrh nrofif
above expenses. In other words, the bank is able to
1!^-
ECONU.Mh 1LN( IIUN Ul' IHI-; HANK
ii'.i\)
])ro(luce somcthir;^'- cheaply and to rent it out at a (rr-
taiii rate per cent. The f'ollouiu^tr features were a part
ni' the creation of the credit of the Hank of Kn<>'la(id:
(1) A siihseriptioii of funds nhieh sliould he loaned
to the ^oveniuient al 8 per cent.
(2) Notes must he jirinted, counterfeitintr guarded
a<,''ainst, an othce for doin<,r husiness and redeeming the
notes must he maintained.
(.'J) A demand for currency nrust exist so that the
notes will n^main oulstandiiiir.
282. Peculiar privilege of hankers. — There arc a
^reat many persons and firms who can create credit, hut
the hanker is the only one ahle to dei-ive an income from
loaning it out. The reason of this is that the hank-
credit is in such form that it can he used as a means of
payment and, therefore, will he received and held by
the puhlic so long as there is need for it to do the
necessary work of exchange.
Naturally a husiness in which the stock-in-trade can
he produced at very little expense and can be loaned
out at from 5 i)er cent to 2.5 per cent per annum is
peculiarly attractive and liable to abuse. Until the pas-
sage of the National ]Jank Act, the United States had
to suffer many and heavy losses through the insulficient
regulation of this important function. It took us all
those years to learn that the function of supplying the
I'urrency of the country is a pul)lic one and should he
delegated to private parties only under the most strin-
gent regulations.
lender our present laws the privilege of issuing bank-
credit to be used as currency (the national bank notes)
posts, the hank nearlv ss much, as th.e incojiu^ derivcf!
from loaning the notes and, furthermore, a Inrgc part
uw
MONEY AM) BANKING
of the con II try's need for credit currency is supplied
by the <4-overniiient itself hy issues of "greenbacks" and
Treasury notes.
liy far the largest portion of the payments in ])usiness
trnnsaetions are made by the use of credit in another
form than currency, that is, 1 means of the check or
draft. 'J'he service of the banks in providing currency
is really insignificant when compared to their service in
furnisliing a method of j)ayment by click.
The essi'iitial element in the e!.cck system is the same
as in the bank-note system, viz., bank credit. Instead
of selling, or more jjroperly, loaning its credit in the
form of baidv notes, at a certain rate pf-r cent, the bank
loans the right to draw checks against it, which checks
can be used as a means of payment, but to a much more
limited extent than bank notes and with a much more
restricted circulation. The principle underlying both
systems, however, is the same.
The |)eculiar cliaracteristic of a bank is the privilege
of using its credit as a medium of exchange. This
gives its credit a utdity enjoyed by the credit of no
other organization except the government. IJecause
its ci'edit has this uiiHty it can be kept outstaiiding witli-
out the i)ayment of interest. The principal business of
the bank is to exchange its own credit, in the I'orni of
baid< notes or a deposit credit oti its books against which
chicks may be drawn, for the i-redit of someone else in
the form of a promissory note bearing interest. ( 'nder
ordinary eircnmstanees neiiner the bank ?iotes nny the
deposit credits beai' interest, conse(iuentl'- Ihe banK "-ains
i)y the Iransaetion a gross jirofit e(]nal to tiie interest
on the pro;iiiss(«iv note. In order to make this j)rofit
it is necessary Ui.tl thr bnnk-"redit should be kept ouf-
standini^ and not be returne(i to the liank for payment.
ECONOMIC ruNcnox OF Tin-; hank
^n
Credit is simply a deferred payment and this hank-
i '. 'it represents a payment dne at any time the posses-
eliooses to call for it; if it is in the form of a hank
lie may present it for redem|)tion in eash; if it is
... the form of a dei)osit-ere(ht he may (h'aw a check
and casli it at the l)ank. Now, if hank notes were re-
deemed soon after their issne. or if deposit-erefhts were
elieeked a<rainst and the checks caslied soon after the
cre(ht was granted, tiie hank wonid not he ahle to keep
its credit, having no interest ontstaiuh'ng. It wonM
gain the interest on the promissory notes purchased hnl,
since it liad to pay cash for them ultimately hy redeem-
ing the outstaiuhng cretht given for them, the whole
transaction woidd he e(iuivalei:t to loaning money at
the current rate of interest, nothing mo: or less.
In actual practice, however, the hank is not compelled
to redeem its credit in cash immediately, hut is ahle to
keep it outstanding for some time. In case the hank
puts out its credit in the shape of hank notes, the puhlic
need for currency keeps them circulating from hand to
hand and serving the same j)urpose as money; as th-jre
IS no need to exchange them for money the haid< is not
<alled upon to redeem t; em. However, this no longer
applies to hanking in the Tnited States since the \nW\-
lege of issuing hank notes freely has heeti taken away
I'rom the hanks hy the National Hank /Vct.
I nder the jjreserd system of hanking in this country
the hanks can i.o longer put out their endit in the
form of hank noles. cxeepi ii< the case of national hank
notes where the restrictions u|)oi> their issue aic so many
that their .haraefer is (|uile ehang-d; they [io longer
rej)rescnt the credit of \hr issuing hank hut the ere.Iit
of the goxernmeni in the shape of a I 'nited Sl.ihs hond.
Having hern deprived of thi- one method of kee,)!n"
I i
III
HI
\!l Hi
O It)
MONEY AND BANKING
11!
their credit oiitstaiuliiig by the issue of bank notes, the
banks have made use ol' another nietliod, the cheek and
deposit system, which serves the same purpose but which
is more dilJicull to understand.
•JH.'J. liduJcs ill) not create cdpital. — Dunbar says in liis
little book, "The Theory and History of Banking":
It I? obvious thfit tlic hankers cn'dtc no luw cajiittil by their
letidin^ and deposit lioldiii^-, \n\\ it is e(iiial!y plain tliat the\'
direct tlie stream of (';;pital to the enterprises and industries re-
(juirinij; such support, and fliat tl \ quicken the succession of
{•onunercial and iii(lu>ti'ial opirat ions. A ^ivcn amount of caji-
ital is tiuis made more elt'ective, so tisat the re>ult of tlie introduc-
tion of liankiiif;- in anv conununitv is the e!iu!val< nt of a coiisid-
erahle increase of capital, althoujj;h not implying any real increase
in the tir>t instance.
Indrstry is impossible without two things: Capital
and ni iiaoement. \\'ry frecjuently the class of per-
sons owning the capital are not capable of employing
it in industry to the best advantage, and many |)ersons
of ability have no caj)ital. It is the function of the l)ank
to bring the two together for their mutual advantage
and thus promote industiy.
It is important to get the distinction between capital
and eapUal goods. Capital goods are those material
things which are employed in the further production
of goods, such as iiachincry. factoiy buildings, raw
materials, and goods in the hands of merchants. Cap-
ital is a certain sum of' vahr so many dollars worth
from uhi<h the person owning it expects to get an in-
come. Capital goods wear out and <lisappear. but i i])-
ital survives in tlii' form ol" rej>laccmcnt and sitiking
funds undir normal conditions.
EC'ONO.AIIC FrXC'I'lOX OF 'i'lIK HANK x>l;3
A fju'toiv iiKiy he turning- out sonic form of capital
uoods iiKu-liiuery, for example— and at the same time
there may l)e entrepreneurs desirin^r to make use of
!hat maelunery in ])ro(luction hut liavin^r no ready
linids. J'he inakers of the machinery cannot ])art with
the machinery mdess they ^et some form of medium
nf exdiano'c nitli which to pay the'r hills for waoes,
tnaterials, etc. The hank ste|)s in at this point and
< iiahles the two parties to ,<ret to<,a.ther to the advanta^re
"f hoth themselves and the community. The maclMnery
company cith-r takes a note from the entrepreneur anil
uets it discc ,it(. ' at the hank, thus chan<rin<r a non-
'■irculatin<v I'orm of credit into a medium of exchan^re
with which they can j)ay their hills, or they sell the ma-
chinery on time and horrow from the hank enou^dt to
pay running expenses until the account shall have hc-
t "me due.
rroduction requires a laj)se of time and the owners
iif the cai)ital employed must wait until the goods pro-
duced arc sold hcforc they can get hack their capital.
The hank takes the hurden of waiting from thos' who
liavc to emj)loy their capital more rapidly and places
li on those who are content to wait so long as thev get
in incorjie for it.
•J'<lk Soiinr of ('u/)iltil ami crcdif of hank. 'Vhc
sources nf the capital and ciedit which is the stock in
iiadc of the haid<: (1) C'ai)!tal stock suhscrihed hy
stockholdirs, and CM di|)o>it.s of cash. On the hasis
"f the funds thus i)rM\ided tin hank is ahle to create a
•n-^^v amount cd' credit which. '\hcn loaned to entrepre-
I'urs, serves the purpose of actual ca|)ital hecause with
' they can p";(liase the capiial goods thev re(|uire.
I redit is a si 'slitute for monev in makin<> e\rlian"es
\H
2^i
MONKY AM) BANKIN(i
and may be comijared to airships which in tlie near
future may reiuler superfluous raih'oad tracks and right-
of-way.
2H.5. Opirdliun.s of (i hanJc. — Tlie Dperations of a
l)aiik aie tiiree: Discount or loaning, deposit, and issue.
In diseoiMiting or loaning, the bank buys from the
customer a m ii-cireulating crc(ht in the form of a prom-
issory note and ])ays for it with cash or, what is much
more l're(iuently the case, with its own credit in the form
of bank notes or a (kjjosit crecht, either of whicli are
cii-eukiting and can be used as a me<lium of exchange.
In (kahii''- \\\[]\ the bank the customer niav either
sell (discount) notes of other peojjle which he has
taken in trade, or he may sell iiis own note with
these trade note^ as collateral security, or he ma\
sell his own note with or witliout some collateral.
Wv have now to consider what it is that the bank
gives in exciiange for the right to demand and
rec'cive monex' at a future time which is ae'[uircd by it
under tliesc circumstances. In the case of discount the
])!()ci'eds of the discounted note (face value less inter-
est ) are placed to the credit of the customer, to be drawn
out by him by means of checks to suit his convenienct
The customer has given the bank the right to demand
funds IVom him at a definite future time in exchange
for the light to dtinand I'unds from the bank at any
time.
The item "indi\i(hial de])osits" in a bank statement
does not inipl\' that per'^ons ]\nw deposited cash to that
amount in the bank; some of it of couise represents
cash de|)ONited. or checks, drafts, itc., deposited for col
lection which are e(iui\alenl to cash; but the greatest
proportin;! represinls credits \\hieh have \kv\\ sold by
ECONOMIC FUN( TION OF THE BANK
J24r>
the bank in exchan<>- or non-ciiviilatin^ forms of credit,
i. e., proinissoi-y notes, eoininereial paper, etc.
A bank note is a form of demand lial)ility sold i)v tbe
iiank. It is simply the evidence of tlie debt of the ]rdi\k
the same as an entry in a bank l)ook showing that
whoever possesses it can claim from the bank a certain
^ im. The system of checks and deposit is a snlistitnte
tor bank note issues and developed out of them. Kny-
md and the T'.iited States are the oidy countries mak-
ing extt -live ..>e of the system, the contine?ital countries
still ciingin<r to tlu hank note.
Ju the oj)erations we iiave been considering the sub-
(ct matter involved is in everv case t ither money or
contracts for the payment thereof, vi/., credit. \o
for I of dealing in mercl'.andise or real pro^jcrty comes
roperlx within the field of banking.
28(». Jicspon.sihiliti/ of ilic JxuiJ.cr for proper distrihu-
lion of nipitdl.- Mr. C'onant says in his "l*rinciples of
Money and l?aid<ing":
It is in (li^t^il)^lti^^ between dipositors, borrowers, ami his own
vaults tlie nioni'V intrusttd to him by depositor.^ in siidi a inan-
inT tliat hi' sliall !)(■ able to rcp.iy it aecordiiin' to bis promise,
that tlie most rjilieate and important fnmtiem of tlu- banker
arises. If ;s in the e\ 'iliini of thi> function that I be modein
banker ha become the arhitei- of the direction of investment, the
lU'^ani/ation if industry, and even of the fate of nations. Sim-
ple as the process i> by whii'h the banke r tran-lVrs to others the
-lored purchasing power «hich he has itluied up in small de-
posits from his customers who have aicpiired i^old or tbe right
'o command gold, it is bis selection among tliese borro-sei's wbicb
determines the cour-e of tbe industrial progress of the nation.
lit lu-e it comes tbat Ibe bank(r. in tbe t"nancing of important
enter})rises, can within certain limits dtterniine «hetb(r a given
project shall succeed or fail. In e\erv growing commuiuty
/.
u
uw
MONEY AM) IJAMvING
!;;»
flu
!•
ii
nuu'li of the rial hurdi ii of dccidiiig iij)()ri tlie course of its fuhire
di'vclopnioiit liis with the liankcr. It is for him to (letcrniiiie
the relative iiiar<rinal iitihtv of one enterprise as compared with
aiiotlier and to ^rant liis suj)port to the enterprise wh.ich promises
the hi<;hest utility and therefore the most certain })rofits. 'J'luis
there rests upon the hanker in a sense the vital function of trus-
tee for tlie couHTiiuiity in its dealings with itself. This trustee-
ship is especially sacred if he deals with the money of others, us is
usuully the case, and not purely w ith money of his owi .
The peculiar nature of a l)aiik and the close relation
existino- hctween It and the economic welfare of the
community is hrought out clearly when a i'ailure occurs.
In the case of an enterprise of a more private character
— a manufacturini^- or mercantile concern--a failure
does not ordinarily hiino- such disastrous results as the
I'ailure of a hank, hecause the ])arties injured expected
to take a lisk and usually have means of protecting
themselves.
A haidv failure, on the other hand, throws a direct
loss on a ^real many i)eopIe who have not calculated
on any risk, l-'urtheiinorc. tluie is an indirect loss of
confidence in hanks. This leads people to withdraw
their deposits and ^o hack to the more |)rimitive and
expensive melhods of t xclianoe, thus relanlino- the eco-
noiiiie (kvelopmenl oj' the <'oimtry.
Our i)rosperity is owino' to a laroe extent to the
devices which make exchange easier and cheaptr, just
as hetter railways aful steamships increa;ie our welfare
hy |)r(/molino' that form of exehanoe. Hankino^ de-
vices, the use of ejieeks against deposits, etc.. are jiist as
imi)()rtant as inventions which help to annihilate dis-
tance.
The hanks lia\c so impoitint a role io play in th.e
disjHisition of the eirenlatino^ capital o!' the ecimtry that
ECONOMIC FUNCTION OF THE BANK
247
they can cause a very serious complication when, by
departing from the true rule of banking and in hope
of gaining large profits, they invest these circulating
i'unds in enterprises of a speculative character and by
so doing convert circulating into fixed capital.
CHAPTER XVI
DEPO.SJT LLHUKNCY
287. Auahisls of credit. ~ A bank loans its c-redit, as
a ^reneral rule, rather than cash. Wv shall have to prove
tills statement, for the averane banker will insist that he
loans cash.
Credit IS the promise to pay money at a t'ntnre time
and arises out of an exehanoe in whieh proj)erty, serv-
ices, or some valuable thino- is exchanged against a
promise to pay an e(inivalent value in the future. The
transaction is not complete until the promise is dis-
charo-ed. A c^dit is created, therefore, by a transfer
of value which is ,till incomplete, one of the |)arties as
yet not havino- pcrCormed his part of the contract; \u
lieu of property, the second j)arty oives the right to
receive I'rom him value at some future tinie. Having
l)een once created, this credit ''."s right to receive value
— is regarded as piojierty and may be transferred as
any other form ol' property is transferred. Wiioever
posstssis the legal right to receive this value may de-
mand it of the debt* ■ when it is due.
As a medium of exchange, credit is su))erior to stand-
ard money in that it does not involve the transfer of
mtrinsically valuable commodities pi-oduccd at great
cost. 'I'hf function of the bank is to promote the use of
this incxpeiisive substitute for standard money credit,
it does so by atfording a marki-t wherein credits can be
bought .ind sold. A tyi)ical illustration of tiiis im-
L' IS
IV
DEPOSIT CURRENCY
249
])()rtiitit service to the business of the community is as
I'ollows:
'2HH. Ilutc credit promotes indnstri/. — The process of
|iro(luein^r from the raw material a cotton garment he-
lore it reaches i. i consumer re({uires months of time
and the i)artici))ation of many separate industries,
riie raw cotton must he grown from the seed, ginned,
lialed, transported, carded, s[)nn, woven into cloth, cut
and sewed into the form of the garment, transported,
and sold to the johher, then to the wholesaler, to the
retailer, and tinally to the consumer. Practically every
step involves an exchange in which a quid pro quo is
necessary. For example, u cotton-mill owner cannot
perform his part in the chain or })roduction unless he
can possess himself of the raw cotton and hold it long
enough to make it into cloth. If he has no equivalent
to exchange for the cotton, he is esto{)j)ed from business.
The owner of the raw cotton, ])erhaps, cannot wait
sixty or ninety days for his pay atid he cannot, therefore,
accept the credit of the mill-owner in exchange unless he
can sell that criMlit for casii. 'J'he credit of tiie mill-
owner, in the form of a promissory note, is not a
medium of exchange which the cotton dealer can use to
[)ay his obligations. The bank, however, stands ready
to buy that nole and give for it something which can be
used as a mearis of })ayment. The bank, a market for
negotiable commercial j)a])er, has made possible the ex-
change of cotton, and the industry of the country has
been aided, liecaiise a market for credit exists, ex-
changes can take place which w(;uld otherwise be im-
j)ossible.
2S0. liciks create credits. — besides furnisliing a
market lor ci'cdits already in existence, banks engage
!.n transactions in w hich ciedits are created by receiving
i
^r.o
MONKV AM) H.\NK1N(;
.1
(Itj)o.sits and niakiii^r loans. In exchange for cash de-
I)<)site(], the depositor receives the promise of the hank-
to repay the sum on demand. Tliis is evidenced hy
an entry in the pass hook of the depositor. The hank
redeems its ])romise, eitlier partially or entirely, when-
ever it accepts a check drawn npon it hy the depositor.
Jn loaning- money, the hank may exchan<^e cash for
the promise to })ay of the horrower, either on demand
(a call-loan) or at some stated futnre time (a time-
loan). This, however, is not the nsnal transaction.
Ordinarily, when the hank makes a loan it is to a
re<fular customer who has an account. In this case the
horrowin^r customer receives, in return for his i)romise
to pay, a credit on his deposit account against which
he may draw checks. In this transaction the hank ex-
exchan^rcs its own promise to pay money on demand for
the i)romioe of the horrower to j)ay a lar^rer sum at some
future time or. if it is a call-loan, on demand; the whole
matter is simply an exchange of credits. It is hecause
the horrower rarely takes cash from the hank hut prefers
to acce])t a deposit credit, that the loan and deposit
items of the hank statement correspond so closely in
amount. Alost of the deposits of a hank are created in
this way; the rest arc created hy the deposit of cash or
eash items.
Tlie deposit item of a hank is not, therefore, a record
of the sums of money hrou^iit into -the hank hy cus-
tomers, although it includes such sums; it represents,
rather, the (lemand liahiiities of the hank (excepting
its circulatiii''- notes outstanding)— that is, the sums
it may he called upon to ])ay at any time.
Is it not clear, therefore, that what a l)ank loans is
not cash hut its own credit:' It is a simple matter of
fact that the honowei' does not take monev when he
DKP'jSIT crUHKNC V
251
^"■c'ts a loan but takes instead a credit on tlic hooks against
w hic'li lie can draw cheeks, that is, he accepts the promise
of the l)ank to pay on demand, whicli is a deposit credit.
'I'he very fact that a deposit cre(ht is payable on demand
does not make it any the less a credit.
2i)(). lifinJi credit pnfcrnhlc to cash. — Why do jier-
sons bori-ow from the bank unless they need the money!'
Why are they willitig to pay interest on funds which
thev leave in the bank^ Whv are thev willinij to take
the credit of the l)ank instead of eash^ Answers to
these (|uesti()ns involve a study of the business habits
of the business community.
A business man borrows from a bank in order to get
something with which to make payments; not usually
immediate payments, but payments falling due from
time to time within a month or more. The most con-
venient method of making j^ayments is by means of a
check drawn against a dej)osit credit at the bank. The
chances are, however, that it will be some tiuK . perhaps
several weeks, before the business man who made the
loan at the bank will have ^iven out checks for the whole
amount of the loan and in the meantime he may be
receiving funds which ai'c de{)osite(l in the bank.
Furthermore, before the loan falls due. he begins to
accumulate a deposit so that when the loan matiu'es he
has simply to draw a check in favor of the bank in order
to cancel the debt. The bank has had the use of the
funds, for which the customer has been ])aying it in-
terest, for some days after the loan was made and for
some days before it is repaid.
*J'.)1. S}iiftin<^ of hanK' credit icitJiont liquidation. —
liut there is still a further advantage to the bank. l\i
the first ])lace, the checks given out by the depositor
are not presented at once for payment but may go to a
MICROCOPY RESOLUTION TEST CHART
-ANSI ond ISO TEST CHART No 2
1.0 ^
'•ii 112.8
I.I
m
■ 40
12.5
IP 2.2
2.0
.8
1.25
1.4
1.6
^ ^pn\ iFn ilVMGE Inc
05^
MONEY AM) BANKING
It
distant city and pass throii^di many hands before they
find their way to the ha?ik. ^)unno- all this time, per-
haps for a week or two, the l)ank has the use of the
funds. Kven when the check comes hack to the bank,
the bank does not ordinarily i'.ave to part with the funds
represented i)y the check, althou<rh the drawer has
ordered the baid< to pay to the presenter the amount.
If the check I'alls into the hands of a customer of tlie
l>.'H!k. he will take it to the bank and increase liis de-
posit account instead of askin^r for cash. As a rule
the check will come into the possession of a person who
is the customer of another bank and he will increase
the (lej)osits of that bank. This bank will present the
check to the bank, which is liable for its payment, for
payment through the clearing- house.
^'et even now the debt(»r bank need not part with the
cash, for on the preceding' day it has received o?i deposit
from its own customers checks on the bank holding- the
check against it. They simj)ly cancel off their mutual
ol)li^ations, |)erhaps i)ayino- a small balance the one to
the other. .Still the money remains in the bank. In
fact, the oidy time the l)ank is called upon to redeem
its demand obli-^ations is when a check is actually |)r<-
sented at the tclitrs w indow for cash payment or when
the balances at the clearing'' house are runnin;^- a<4ainst it.
The bank statement in the followinn- chapter shows
that demand liabilities (deposits) of the banks are usu-
ally foiu- limes as \:\y<yv a^ their cash on hand. Kxpe-
rienre has taught tlieni that a cash riserxc is amply
suHicient to meet all demands for I'ash pa\ nu iits which
an- likely t(i apjuai-. Tbicc-fourths of their demand
liabilities nprestnt the bank's own credit which it is
. ...... i: I
.;:;;; :;; ;.v ^ j; ;;;;; -.;;;; i; nri^ ;;;r,iii-.i I in i'i imi it ^^ n iiIMlIlM III \
prefers to use checks lallier than cash as ;i medium of
DEPOSIT CURRENCY
2o;j
exchange. This credit of the hank serves all the pur-
poses of money and the l)ank can get interest for the
use of it just the same as if it were cash.
29"2. SimUaritji of checks aiul hank notes. — It is pre-
cisely the same as if the hank loaned its credit in the
shape of hank notes. ]k"fore the Civil A\'ar, when there
was no restriction on the issuing j)ower of hanks, the
horrower received from the hank its notes, that is, its
i)romises to pay on demand; to-day the horrower receives
the promise of the hank to pay, hut in the sha})e of a
deposit credit which really amounts to exactly the same
thing. Checks, hased (tn these dej)osit credits, circulate
as a Hjcdium of exchange, although in a more resti-icted
way than the old hank notes. Xohody will deny that
a hank note is simj)ly the promissory note of the hank
and that the haid-c loaned its credit when it gave hank
notes to horrowcrs. ^Vhy should ariyhody deny that
a modern hank loans its credit when it gives to the hor-
rower a deposit credit:*
21>a. Limits of cdniiufr poxcer of the hank. — The main
source of the hank's profit is the interest received on
loans and discounts, and it follows that the profit varies
directly with the amount of loans made. What then
is the limit to the amount of loans a hank can make!'
The National Hank Act s Is no direct limit e\c(,|)t that
it forbids any jiational hank to loiui to ;my individual
or firm an amotuit greati'r than oiu-tiiith of the hank's
cajjital and surplus. Indirectly, it limits loans Itv pro-
viding that national hanks shall k(t|) a reserve whieh
shall not fall below a ecrtjiio jx'reciitagi' nf tin net de-
posits. When a bank gives a loan it must lithei- j)art
with that amount of cash, thus reducing its reserve, or
li must giv«' a (iep<l^lt endit. tjiiis inereasiug its net
deposits; in either easi' it has inereast d the ratio between
i
4
U'yt.
MONF.V AM) HANKING
ill:
irsrn-c and net deposits, and the limit to wliioh this
ratio may hv increased is one to four, whieli is the same
as savin nr that the reserves must be 2.5 per cent of the
deposits.
204. Difference hehceen a cash and credit loan.- -
When the liank loans aetual cash instead of cre(ht, it
increases the ratio between reserve and deposits four
times as mucli as Mheii crecUt is loaned. For exam|)le:
A bank with deposits of Ji<l, ()()().(>()() and a reserve of
•$.'}()().()()0 (the ratio between them beinn^ \ ,'.\ ]..'j), |o;,iis
>f<I ()(),()()(). I f the borrower takes the cash from the bank,
tlie deposits remain as l)ef<>ie but the reserve has fallen
from -t'JOO.OOO to S2()().0()(). thus chan^in^r the ratio of
reserve to deposits to 1 :.5. which means that the reserve
is (udy 20 per cent of the deposits, and this is below
the le^al minimum if the bank is a New ^'ork national
bank. Suppose, on the other hand, that the l)orrower
accepts a deposit credit instead of deinandin^r cash.
The deposits then increase to .$1.1()(),()()(), while the
reserve remains as before at $.'{()(>.()0(), the ratio in this
case risino- to 1:.'} 2-.'J. When thr borrower took cash,
the ratio changed from 1 ::i I-.'} [,, i:.5; „|u.,, the i)or-
rower took credit, the ratio clian^rcl Irom \ ;.\ \-'.\ to
1:.'J 2-;j. In the first case, the reserve was depleted
below the leual limit; m the second case, the l.ank could
still loan another ><1(M).()(M) before it reached the limit.
There can be no (|uestion as to whether the bank would
prefer to loan i's cash oi- its credit.
2i).). Cdsli (I preciotin eoniniodif// af liun.^ It be-
comes easier now to sec the reason why ,-;,s!) j^ such a
precious commodity in Wall Stred; not because cash is
a medium of exchange, for Wall .Street uses very little
'•'■' •' ••• ;:;iiis;iv iifiw^ iT> biiMiHss, iMit because cash is
the basis of ciidit uliich /'.v the medium of e.\eh;ui^e.
DEPOSIT CTRREXCY
Ilfiice the rivalry among the hanks to secure cash de-
posits, for cash deposits mean hirger reserves, hirger
reserves mean new cretht created to three times tliat
■iinount, new credit means hirger loans and conse(juently
increased dividends. Hence, also, the great disturhance
caused hy the withdrawal o'' a few millions of cash
deposits, such as wiien withdrawn hy the country banks
to "move the croj)s." Withdrawals of cash mean de-
pleted reserves, which condition creates a shrinkage of
bank credit and a re(hiction of ])rotit-making loans.
More than tiiat, the contraction of credit — the me-
ihum of exchange in 90 per cent of the important
transactions of the market — has the san e effect as the
retirement of a large portion of the cii'culating medium.
The effect of tiie movement of a t\-w million dollars
westward to move the crops would he an unimportant
matter if it involved the contraction to that amount
simply of the medium of exchange; under present con-
ditions it involves a contraction of three times or more
of the amount.
Those great accumulators of cash, the country hanks,
the savings hanks, trust companies, in\istment coni-
panios, and insurance comp-nies, ha\{ in their pox^cr
the control of the money market, for the cash, at Mieir
disposal forms the basis of a vast stiucture ot' credit
oil which the business of the tinancial center of the
country rests. The dangerous element in the situation
arises from the instability of this foundation, for the
withdrawal of cash from the i-eser'.es of the banks causes
the eo!laj)se of the superstructuii . credit.
In view o|' these facts the rate of interest which the
>.'ew York banks pay tor cash deposits. I ' ^, per cent
or •_' per cent, is a small matl( r. l"or i v( rv ddllar of
casli dej)osited they are enablcl to loan eiidil to Ihice
J2>G
MONEY AM) BANKING
times tlic amount at liom 2 [kv cent to 6 per cent, thus
rnakino- a ^ross j)roHl of from .) per cent to 15 per cent
on the deposit.
The word "deposit" is amhiguous and has a dual
nature. When u batiker asserts that he makes 5 per
cent ^rross profit on his deposits, he uses the term as
meanin<4- demand hahihties outstatuhng (excepting, of
course, circuUitin^r notes) . A deposit of cash in a bank,
however, rncans somethin^r more than an increase of that
amount of the demand hahihties of tlie bank; it means
an increase of reserve to tiiat amount, on the basis of
which the bank is justified in increasing its demand ha-
bilities by three times the amount dcposite(h and this it
usually does if there is a market for the loans. On
the receipt of a deposit of ^\{H)0 cash, the bank does
not put .$-J.'50 in the reserve and loan -$7.50; it puts .$1000
in the reserve (for the reserve is not a special fund, but
represents practically all the cash on hand at any par-
ticuli.r time) and increases its loans and demand lia-
bilities ((iei)()sits) .$.'}00(), if it is a reserve city national
bank, or more if it is not. (See Section 4()1.)
2{)r». Prohlcm of the reserve of greatest importnnee.—
The problem of what constitutes a sufJicient reserve is
one that en^ra^res the mind of bankers at all times. The
amount of credit which they can keep afloat and upon
which their profits depend is determined by the si/e of
the reserve which they can hold In tiieir vaults. It is
obvious that if a large proportion of the demand credits
are presented at atiy one time that the liank cannot meet
them. This hapj)ens oidy when some event occurs that
shakes flic conlidence which the dej)ositors have in the
bank. If tlu- bank cannot dispose of its assets by bor-
rowino- iiom the other banks, it must fail. In addition
to this danger there are certain times of year, varying
DKTOSIJ (I l{Hi;.N( V
2.v;
in (iiffcrcnt localities, when hanks ineiease their reserves.
It may he that more aetnai money is used in liand to
iiaiul transfers, oi- that the l)anks expect a demand for
local loans that eanses them to increase their reserves.
W'heii there is any general movement on the j)art of the
comitry hanks toward inereasino- their reserves, sneh as
lakes ))laee every year when the crops stai-t to move, the
withdrawal of aetnai money fiom the leserve cities
eanses hank reserves there to fail in voinme. C'on-
\ersely, when the demand for mon'y in the interior
>nhsides, the money Hows hack into the reserve eitv
lianks. and their reser\cs are tlins increased. Hence
a reserve which is sntlicient at one time of year may not
l)e at another: and reser\es which aie sntlicient durino
a i)erio(l when the orantino- of cre<lit is on a normal
l>asis may he lamentahly insnthcient when there is a
•ii'neral demand foi- iiijiiidation.
2!)7. LdcJ,' of CDOjuralion cdiiscs h(ut],s to lose ir-
serves- [ 'nfortimatcly. nnder onr present system, there
!s \(ry little cooperation hetween tin- hanks of dilfcrcnt
cities wlieii demand for licinidation hecoines o-eneral.
Kaeh hank docs c\ ciythiny in its power at sneh times
li) increase ils it^erve, and it mnst all he ;it tlu' e\|)ensc
• if some other hank. The ui'ite. knows personally of
se\ cral hanks, each of which in<-reased its r( sei-\c diuiiio-
""' P""i'' <''■ I"<'7 iMitil it amount. (I to ;.> per cent of the
de|)osits.
2!>H. MelJiods (.f 'nicrcash}^- rcscnra.- \[ sneh times
there are only two ways of increasin«,>- the total of the
conntry's hank i\ser\es miiii they heni,, |,, |„. increased
antomatically In the oia.hial li(|nidalion of credit. The
most coiiiiiion nuthod is to neoot iat. for ..,,ld ;.h.v..= = !
This is slow, however, and is apt to he e\|Kiisive. The
second nielhod is i.v (he dep,>sit ol' (iovernment funds
\ II- li
M()N':Y AM) I'.ANKING
J* — ,—
.-A-. -I
M itii tlic hanks. This was of ^yreat assistance during the
])anie of 11)07, hut it ecnild he taken advanta'^'e of hy
the holders of certain securities which the (iovernnient
oirered to aceejjt as colhiteral for the h)an. Since that
e\|)erience the law has httii clian^ed so tliat the list
of acceptahle securities has hvci\ ^ivatly enhir^'ed: and
tl(M-e is IK) douht hut that the new arran^-enu'ut would
prove of \alue if the expei-ienee should hi' rej)eated.
This |)resupposes. however, an a\ailahle surj)lus of
money in the Cnited States Treasury, on the presence
of w Iiicli it is not safe to rely.
2!)!). Svc(ni(l(irii reserve. — A ^rreat many haid<s. in ad-
(htion to their casji reserve, carry wliat is sometimes
known as a seconihuy i'eser\e. The cash I'cserve means
money on hand or on deposit in otlier hanks. The
secondary reserve consists of any secin-itics wliich are
readily marketahle. Itaiiroad and such municii)al honds
as are listed on tjie \ew \nvk Stock Kxchan^'c are the
most poi)ular. hec luse they are l)ou<4ht and sold daily,
and the hanker may always ascertain their mai'kct \alue
hy recourse to the daily |)a])er. Thei-e are certain issues
which are very active on the exchanoe. hence they hest
ser\ e the liankci's' |)ur])ose. Because of this, many l)ank-
ers fall into the error o{' thiid-ciny that any hond which
is listed is readily mai-kctahlc. Theie aic a oreat man\-
issues, jiowever, wliicii are listed hut for wjiich it mav
i»e far from easy to find :\ niarki't. It may he that
the issue is small and not widely known; or it may he
that the honds are closely held hy a few interests. In
either case the issue is ni»t active, and the honds will not
always sell readily.
The yreat fallacy of the theorv of investment in
listed honds on the assumption that thi\' are salahje,
however, is more fundamental. I"',\(n whin a hanlv se-
DEPOSIT I rui{i;.\( V
2ry9
Itcts as a sccntidarv reserve, hoiuls which arc active, it
iloes not follow that they can he sold when there is a
ut'iieral (leniaiid for licjuidation. The same issue of
\nun\s may !)e held hy a thousand hanks over the country
111 the same theory and it is needless to say that they
(iiiiiiot all convert them at the same time. If any of
flicm sell, it will he at a <4-reat sacrifice in price, and
\vith each sale the price declines still further.
.•}()(). l^uirliahilit// of Jxind.s as reserves.— li must not
he supposed from this that investment in listed honds
IS unwise. In practice they have many times proved
to l)e a very valuahle asset, hut <renerally for a somewhat
(litferent reason. First, they are readily marketahle
I .\ee|)t during i)anics, so that if a hank wishes to realize
<»n its honds for reasons peculiar to itself it may do so
without great loss. Furthermore, in the panic of li)()7
tile city hanks refused to redeem any credits in cash,
M) that even if honds had hcen sold on the exchange,
ihe sale would not have ohtair.ed for them any currency.
I'his action, however, enahled them to make more loans
than they otherwise could have made, and the honds of
their coimtry corrcsi)f)ndents were very aeccjjtahlc col-
lateral. When the countiy hanks saw the market price
'>f honds falling oft\ they preferred horrowing with
111* ir honds as collateral to selling. es|)ecially as neither
■ ilternative netted them any actual cin-rency.
.■}()1. G(n-crninciif Deposits. — Since 11K)7. Secretaries
"f the Treasury hnw accepted honds other than govern-
ment as seein-ity for government funds deposited in the
iiatif)nal hanks. The adoption of this poliev. which has
liecii recognized hy Congress as legal, renders various
' lass's ol' honds .-i \ Mlo.Mhlc a***-^'!^ i" t^inw. />f' n..i.;,.
.1
■ I
; I
CIIAPIKK XVII
HANK. S'I'A TK.Ml.N r Hl.SOl H( I,S
ifi
1 ' f
'M)2. ('otnhiuc'd sidtcnn lit. In passing- iVoiii the tlir-
oretic'cil to Aw ])i'a('ti('al (lisciission ol' hanking', it is will
i'or the student to heeonie t'aiuihar with tlie hank state-
ment. It is a siininiin^' np of all the transaetions oi' the
hank — a eondensed reeoi'd ol' all the hooks of account -
and every transaction, no matter how small. ])i-o(luees a
change in the statement. An understanding-, therefore,
of all the items of the l)ank statement will provide a
^•()()d introduction to the actual pi-aetice of tlie husiness.
The statement reproduced in section tiOli on pai^e 'Jdl
is the eomhined statement of all the national hanks in the
country. The federal law provides that each national
hank shall make a repoi't to the com))troller of the cur-
rency at least five times each year. The dates for niak-
iniT the reports are not fixed hut are announced hv the
eomptrollei- at intervals. It is a peculiai'ity of the hank-
in^' l)usiness that it may have a com|)lete re])()rt of its
financial condition at the end of each day. In a mei-can-
tile or manufacturinii' estahlishment it is ])ossil)le to ha\e
such a statement only aftei- an in\entory of the stock <mi
hand is taken. The assets oi' a hank are of such a nature
that tlic perpetual in\entory can he kept.
It was th()U<,dit hest to take tlie i-ejjoi't oi' all the
national hanks rather than a statenu-nt oi' any sinolf
liank; the items are exactly the same and th" relation
hetween the different amounts is more ty})ieal of the
avcratje hank than anv single statement could l)e.
N)()
HANK >r.\ 1 i.Mi.N r i{ix)ri{( i:s
;.'(i1
;{(>.'{. Proof of lilt' ticjiti.sif (■Nrniic// llicor//. I'lirtlicr-
iiioii'. the fiuiii'ts sliowiiiL'' tii(.' fclatioii lictwccii loans,
deposits and i-cscrvcs. arc the best proof thai can l>c
(■ffci-cd as to the vahchty of tlic (k'])osit-can'reiic\- theory
presented in the preeechnu' chapter. It will l)e observed
that tlie total voliiiiic of loans and (hscounls in the 7 ^■-<)
naliona! hanks in 11»]2 was hnt little in excess of six
iiillion of dollars. The in(li\ idual deposits, oi- the
.iinount due to depositoi's of all sorts exc-ept l)anks. was
a little less than six hillion dollars. The amount of rc-
■''■rxe. inchidin<4' the specie and le^al tender notes and .>
per c-ent rcdcnij)tion fund, amounted to nine hundred
million dollars, oi- 1.) per cent of the deposit liahility.
Since the total amount of money of all descriptions in
iliis country was then ahout S:}.4()0.()0().0()(). and since
'he (le])()sits in the state hanks and tiaist companies, com-
tiined w ith the figures iii\ (.'ii. would ha\e made a total of
M\t'i- Hfteeii hillion dollai's. it re(piires no argument to
>how that the item '■(lc|)()sits" does not represent cash
iKposited hut rathei' credit extended hy the hank.
I'herc is not enough actual cash in the whole world to
pay the de|)osit()rs of the l)anks of the United States if
they should suddenly desire to exercise their le<>al right
and all at once call for payment of their deposits.
o\ii!iNi:i) m.i'oKis i{i:(^iii;i:i) n\ riii-: ( oMrriuM.ii-.it of
I'nr: c riiifi'.Nc v i hom riir. \\rioN\i. hwks
the
15 \\K SI \ii-.Mi;\ r.
'iAJi> HANKS. SOMMIUH -'ti. 1 '-* 1 .'.
liF.SOrHCFS:
1. 1.11,111'- .'111(1 (lis(i)unt-- (III uliich iirticcr*. .iiid (lircctur-; Mr"
li.il>lc, cither as |i,iycr"i or indiirscr^.
Feins and di iDiints (in wliicli (itticci's and dirccturs an-
iiot lialilc as payers or iiidorsci-, .'S l),().)^*.;w.^().'9.KJ
J. Ovcniratts, sfciircd," ,$ — , imsccun-d. s— — ,'(i.K):i,(l()F.H
;i. r. S. lidiids to secure eireidatioii, jiar value T.N.IS.'.SHI.OO
k L'. S. boiiils to >eeurf L". S. liejxisits. pur value 4i),ll).j,lO(l.UU
2fi'~ Mn\]:\ AM) !{.\\Ki\(;
■"'• <'tliir ImiihK Id s(ciiiT I . S. .Ir|ii,^its <{:(:{()") 1') I '-,
<i. r, S. ImiikI. on ImihI ;..,. " ;,";:V;.'oii().on
«. I rciiliillils nil I. S, liniiiN ;,o:>!l.-i.-,|.S|
S. HoikIs, .s.ciiritics. etc l.(i:i(i!fM .'!l)(il.:t(i
H. IViiiking lioiisf. fiiriiitiiic ^iiul IIsIuits .'l,<,;!li>,SI)i)..>s
IC. Other real estate owned -'!)!()7rtj).")0. '1
II. Due froiii iiatinii.il liaiiks (mil rcMr%e .ip'iiN) 177 JHllvLMi",
I-. Due from stale hanks and iMiikcrs -'ls].>S!),;!:>S. V,
l:i. Due Iroin approved reserve aiiciils 7H(i.l!)i».si).i..'l.
II. Clueks and otiier cisli items.'. :il.'lllo!.">fi7!u
I). i;xeliaiij.'es for elearin^:- lioii^e J7S,(i7_>,(i|i).;,;{
III. Mills of other national h.aiiks KU |s[j:{Ml()
17. (-'raetional eiirreiuy. nickels and cents :{.;{0(),:{i)0.i)7
IS. Specie (IS.'.:iJo]7JI.71
li). I.egal-tender iio'es 17(i.7 7(S,01(i.O()
-'0. live per cent redemption fund S.>,|S(f,.'7:JX)
-'1. Due from Treasunr liiited States 7,.5H:U(i()!.H
'f "'"1 .1)10,9(i,i,788,()17.()8
MABII/riKS:
-'-'. ra|)ital stock paid in s l,i)t,-,.ll!).V-,s(l.()l)
-'•*• Surphis fund 'loi.'Kifl.s:},!.;,:!
-'4. Tnilivided |)rotits. less expense^ am! taxes -'fls.o<)7,.>,V,. | |,
-'."). N'ation.d h.iiik notes outsLindinj. I JI,.)(IJ,I S.",..j()
J(j. State hank notes oiitstaiidiiii: .'7,7(»l.(»()
.'7. Due to other national hanks 1.0.j(l,l!)!»,i):i,>.!n
J^. Due to state hanks and h.inkers U.MHS.Hd.SI
■-'!•. Due to trust companies and sa\in;:s hanks lli,».:ins,!i:i7,S|
'.iO. Due to approved reserve ajreiits l:{.7!l!),:i(lt,(i:{
SI. Dividends unpaid 1,0:{,>.7,'{S.(;;!
;i-'. Individual deitosits siihject to checks. |
M:(. Demand certificates of deposit. I
;U. 'lime ccrtilicates of deposit { J,9H..J()l.U(iiJ,91
S5. C'ertifieij checks. I
;?f>. Cashier's checks oiitstaiidiii;.'-. J
.'57. I'nited .States deposits S:},.)!)t,l 1:{..'J
.'is. I'ostal savinjrs (le|)osits l.j,()l:>,:n.").S7
:i!l. Deposits of I'nited States dishiirsin^f otlicers I -.(if)J.K'< -M
■UK HoikK l.orrovved .'!S.77 l,(iSS.7H
41. .Votes ,111(1 hills redisi'omited 10.77(i,J7. '.,)<)
4.'. Bills pa_\ ahle (iLKr).-.'!!.).,-,,-,
■i'.i. I{eserv<'(l for taxes 7.U7.!t7.j.Hl
44. I.iahilities oilier than those ahove stated l,71(>.;i<)7.s:{
Total .>>!10,9(J.i,7HS,iil7.t)^
.*J04. Ddiihlr-ciilr// .si/slo/i. - Tlic fi''st tliin^' to he
noted about the >,tati!iKiit on tliis panv is lliat ihv t^ o
coluniD.s of resources and liabilities exactly balance eacli
otiier to the cent. The reason of tliis is to be round in
the system of double-entry bookkeeping- by which everv
traiLsaction is recorded twice, so that it is iiii])ossible to
BAN K STATK.M ENT— RKsOl RC
mi
alter the cirdit or resource s'ul: without at the same tiine
(•lian'4'iii^ the hahihtx oi- dthit side, lender this system
the hank is considered as havin<^ ro projjcrty ol' its own,
liiit that all its resources ahove its liahuities belong'- to
tlif stockholders, and these resources are classified as
part ol' the liahilities under the items cajjital stock, sur-
plus funds, dividends, profits, aiul dividends un})aid.
Tlicse items are liahilities of the hank only in the event
of li(juidation.
The fact that the resources and liahilities of the hank
are ecjual has no hearin*)- whatever on its solvency. 'I'lie
last statement ^yiven out before a bank fails inrariably
shows the resouives to he ccjual to the liabilities. 'I'he
tliserepancy must be looked for in some of the Items:
either the resources have been put in at valuations above
their real worth, or some item of liability has been
omitted or reduced. ]t is almost always discovered in
the event of a failure that loans and discounts contain
items which are far less than the figures set down.
( nder resources are put down all the items of property
owned by the bank and all sums due to be paid to it
in tlie future. I 'nder liabilities are placed all the debts
owing by the bank and all items representing- the e(iuity
of the stockholders in the property of the bank. In
other words, the liability side of the statement simj)ly
indicates to whom the resoui'ces bel(jn<4' in case the bus-
iness of the i)ank were to be settled up instantly.
.30.5. AlfiTdfidiis in xtiliic of rc.s-oiirci's.—'Vht' items on
the resource side may increase or diminish without any
tiansactions ha\ini); taken })lace and therefore without
any chanues iiaving been made in the liability side.
■**^ome of the Jouu-S mu\' ni'o^c to be bad an.d n.on-col-
lectible, or some of the real estate or bonds may increase
in market value; profits may be made or losses may be
h
2()4
.MONKV AM) 1}.\\KI.\(;
W
^■'i
iiicui-rrd. It is iinpossihlc coiistaiitly to adjust tlic
valiifs «4i\fii ill the statciiiciit to cori-'spoiid lo tiie real
conditions. Ill sonic hanks the ad.jiistimnt is made
liiriodicaily : in otlkrs only when it is discovcifd that
th' ahcratioii of \ahif is jitrmantiit ; and in still others
it is n(\c r made.
.'}()(!. ("oiuralcd asscls.- It (V((|iienily liai)])ens that
where tlie ii( itis of proj.erty ha\e eiihaiieed in value the
fi«4-ures on tlu' slateuu nt ai-e allowed to reniain ahsurdiv
low. creatino- what i> ealled ■(•oneealed assets." It is
C'onsidirerl !)y a ureat many hankers an e\i(i(.nee of
conser\atism to '•ontinne to list :it a low fi<iui-( , projjerty
\\orth mueii moi( than its hook value. TIk fe ean he no
ohjeetioi, tr) ijiis piaeuee so |oni>' as e\-eryl)ody under-
stands the iT.d eondition and knows that t!ie statement
is a fictitious one TJie ohjeetidn '() the praetiee I'omes
I'rom the fact that ( wii the stockholders do not reali/.e
H'.e full \alue of lh< ir stock and may ht induced to part
>vi1li it at a prict' which thiy would not consider at all
if they kiirw Ilice(|uily repriscnted h\- it.
We shall iiosv tak( u|) (at-h ili m sepaiati I. wiih such
t'X])!aMation-> as r-n necessary to descrihe the transac-
tions hy w hi( !i it i^ creaied.
;i07. Ijxniy. mi/l ilisrninits. 'I'his item of assets is in
the tiiini of pioniiss()i\ nolf s nf iiidi\idua!s or corpora-
tions. 'I'll!' discount i(pi( stilts iiot(-, which ha\f hecn
|»urclias»<l or d!sc"UMt( d h\ i\\r liank at a certain p-ncc
ImIow tli( Ir face \aluc ai maturity. TIk diircj-cncc hc-
'^^'■•■n !h( •>, 'due ;it maiiiiily and tin price paid is called
discount, and i.-. at onct credited to the prolit account,
Mppearinu" under "lial)il!tics"" in llic item 'undixidcd
pistils. ■ Loans.' I( clinically spiakiiiL'. rtprcMnts the
sUlii jiiini wiii i(|ii.'ii ii ihc ia(( u; ijir iioie; ai maiuiiiv
the hank will receive that amniinl plus the inli n st. The
HANK >r.\'i'i:.\ii:.N r lii.soruc i:s
■:i{;r>
i\\{Yvrv\K'v hctwccn loans and discouiits, thfix't'orc. is that
ill tile case of loans the l)ank does not reahze its j)rolit
until tlie note is (hie: in the ease of (hseoiints the bank
lakes its profit when the transaction is made.
Diseoiintin^H" has always been considered the jieeidiar
iiiisiness of a liank. In I'eiinsyhania the trust coin-
jKinies are not einpouered to discount, but tliey ha\ e the
riyht to loan money and to purchase notes and other
iilili^ations. The prohibition of discount does not i)re-
\ent the trust com])anies from (l()in<4' a general banking'
liusiness; instead of discounting they simply purchase
the notes outi'ight or loan the funds on the security
of the notes, taking the interest at maturity.
On the back of the bank report are |)rinte(l certain
schedules which must be tilled out in order to show moie
ill detail fbi' meaning of the \ari()us items. The law
proxides tli.it "all debts due to an association, on which
interest is jiast due. and unpaid, for the jieriod of six
months, unless the same ai'e wi'll secured, and in proci'ss
of eoilcction. shall be considered Iiad debts within the
nieaning of this section."'
All such notes must be listed in the schedule, together
with all notes which ari' ovtrdue and all notes re|)re-
senting liability of directors as borrowers. While there
IS no law limiting the right of the bank to loan to its
directors on the same terms as to any oilier |)(rson. it is
rceogni/.ed that the prixilege is likely to be aliiisrd and
liciiee the banks ait- asked to make a s<parate state iiieiit
if such loans.
'M)H. Ovrrdrafls. — Where banking is not conducted
on the strictest business j)rineiples tlii' depositors arc
likclv to overdraw their accounts. I'nder certain loe.il
mditions of business overdrafts arc iinax <»i(lal)lc
ii.it
the good banker can usually arrange w itii the di posilor
add
MOM.V AM) BANKI\(i
!r¥^
'•X
to ^/\\v a note to tlie hank I'or the amount and h.us con-
vt-rt the ovenh-al't int.. a loan or (hseonnt. li' a certain
inaxiinuni teinporarv civcht is wanted to (h-a\v a^-ainst.
a demand note should he nivcn to the t,ank, the amount
pa.s-sed to the customer's emht. and when settleiuent is
made the customer shonhl he charged with 'die interest
on the amount cliecked out.
.'J0!». VnUid Stales Ixtiu/.s to srcinr circulation. — This
item rei)resents honds owned hy the hank hut deposited
in Wasliinoton. Prior to 1013 the law reciuircd the hank
to deposit or to own Tnited States honds up to 2.) per
cent of its capital whether circulation is taken (uit on
them or not. The value of the honds is given at par
and not at market value.
.'JIO. United States hoiu/.s to .secure I'nited Stales de-
//o.v/V.v.— The law provides that the fu.ids of the I'nited
States not re(|uired hy the Treasury may he deposited in
national hanks if I'nited States honds. or under certain
c-n-enmstances other honds approved hy the secretary of
the treasury, ari' dejxisitrd in Wasliinoton as collateral.
The secretary may use his discretion as to whether other
than (ioxcrnment honds shall he accepted at all and
what hondsmayheacccptcda.scollateral security. (Funds
may now lie deposited with federal reserve l»anks.)
.■ni. I'nited States bonds on hand. Sometimes tli.'
haidvs hold (;o\ernment honds in tluir (,wn \aiilts witli-
oiil usino tluni io s.rnre circulation. It is not likeK
that any hank would hold (iovcrnment ix.nds as an in-
\estmetit. and it is likely that this item icpivsrnts honds
which it is (Ap.cted will I,,, sold to eus!oni( Is of the hank
or will he !C(|iiir(il later for .secni'inn' circulation.
.'{!•_'. I'reniiunis on United States honds. 'I'hls item
>•,.! .I-... ..i.t . 1 1... .1 : If 1 I .1
""' '''" '•■' •:;::;:;;;;;■ ;;;;\\;(n rin jno- \aiuc and
HANK s'l'A ri:Mi:N r rksotkc i:s
y()i
markt'l \;iiiR' of tlif I'nitcd States hoiids owned by the
li.-iiik.
.'{l.'J. lioitds. securities, etc. — This item embraces be-
>mI(s bonds, also stocks. eIiattel-moi't<>'a<4es, jud^'-
iii( nis. ehiims, elc.. owned by the bank. 'I'be securities
which are deposited by l)orrowci's as coihitei'a! seciUMtv
iMi- loans do not appiar in the statement because thev
:irr not the |)roi)erty ol' the l)ank until del'aidt has been
iii:i(k' Oil the note. I'nder the law national banks are
iKit allowed to own coi'Doraticfii stocks unless it is neces-
•>a!y to take them in the collection of a debt. This item,
ilui'cl'oi'c, I'cprcscnts practically the bonds owned bv the
liaiiks. It has increasc'd ^-i-c-atly within the past Tew
\iars. because many of the banks ai'e dealers in bonds
iiid hold them pending' tlkir sale to customci-s. and fur-
tliermoi-e because the ready mai'ket which is at hand un-
il' r normal conditions for the bonds causes he bank to
i'^iard tlu'm as a form of secondary rescrxc which can
ahiiost immediately be conxcrtcd into money in ease of
I iiicr^'cncy.
.'Hi. li<i)ihiii<i- Jioiise furniture <(itd fLvtures. 'I'he
'omptroller has been rather strict in iutcrpi'ctin^' the
law with nferi-nce to the holdings of real estate bv
hanks. The lar^^i' otlicc building's which lia\e bein
I iccted to house the banks as well as to accommodate
hundicds of tenants lia\c b'.'cn (.rected by sej)ai'ate com-
jianics. usually composrd of the same stockholders as
!lii' bank.
.'{1"). Other real estate Iniidiniis. This item includes
.ot only leal estate but ,'!l mortifa^'es and as-.tis rt p-
i'srntin<^' real estate. The law is \ery strict in limitinj^
h( power of thf l>ank to hold I'eal cstutt, as indicated
;i the follow inu- pro\ ision :
.•>(i.s
MOM N \\l) i?\\KIN(.
r
J'
A IMtloiial l);inki!ii;' ;i -Miii.it Inn iii,i v [ill I'd i;i m-. hold, .•(iid coiix, \
ival ("-tatr for tin t'(illn\\ iii;^ |iiir|i(i-M -, ,iii(i i'uv no dtln i- :
I'liNt. Such a> >hall hr iuciN>ai'v Cor it- iiiiiin'(hair acroiiuiKjii.i-
ti(Mi :ii the ti'an-actio.'i of it- i)ii>iiu'>s.
Second. Such a- -.hall he inort^^ai^rd to It in i;()iid I'allli h\ u .\
of si'cuiit V f'oi' (Kill- [)i\\iou-l\- coidract((l.
Third. Such a> -hall he coii\. \ , c! to it in >at is fact ion (d" d. hi -
j)l'c\loU>lv coiltractrd in the course (d' iU di alili^-.
I'ourth. Sucii a> it NJiall |iurcha-r at -air, under iudi^iii'ii'-.
decrees, or inortoaM-s held h_v the association, or shall [lUrchaM-
to secure dehts due to It.
But no such association shall hold the possesion of aiiv real
estate under inort^aoi . or the title and possrs^lon ,if anv nal
estate pui'chased to sicun anv debts due lo it, for a longer period
t h.w! Ii\ e \ears.
'I'lir ohpi't of tills ])r()visi()?) is to ])rev('nt the baiik^
I'roiii inx tstiiio- tin ir resources in t'oi-iiis wliieli are iioi
feadily eoii\ crtihlf into current I'luids. In roi'inci'
years, before tliei'c was so iiiucli |)ro|)(.i'ly otliei- than real
estate which coiihl he iisid as security I'oi' loans, the
h.inks wert' ahtiost forced to take tiiort oam's oi- noth.iii"
at all. In times (d' si riiio( ncy wht ti (Kpositoi's were de-
inanchno' easli. Ilic h;inks were frecpicnlly eniharrassed
and foi'ced into insol\enc\ hecausc thc\ could not con-
\ t I't real t^late. which undir such eircunistanccs is
always \try urisalahh cxccp} at a IrenRiidous sat'rilic(.
into funds which would satisfy lluii' dcpositoi's.
liW). Dili' fnni: iKilidntil IxiiiL's. Tllis re])i( scnis de-
posits in other natiiiii.il hanks which niay iinl he counlid
as pari of the n sri\e.
.'JIT. liin frnin a/i/)r(f.((I lu srr: ( iKhiits. Prior lo
191.'}. the country nall(Uial hanks niioht d( posit in 111'
1 1 ~)i I \ t (iiu-<. iinii-Mi(iis oi I I.I iici rem (ii iinii
BANK SIAILMLNT- liKSUUlit KS
209
|( posits i-c(niirc(] as ix'stTxc. In \hc reserve cities iia-
lidiial l)aiiks lui^lit dejjosit oiie-iiall' of the 2.j \)ijr cent
nijiiired in ceiiti-ai resei'x e cities.
.'{18. ChccLs find other cash iUiiis — (WcJi/ai.i^cs far
li't cltariu;^- house. — I'luler these hea(hii<is are iiichuled
i\(rythiML;' which may he imnie(hately coinertihle into
<Msh. In cities wliere there is a cleai'inu' lionse the
(lucks on the cka,-in«i' honse l)anks are listed separately.
In the slalenieiil we see that the exi-lian^es for the
ilcarin*^' honse ai'c o\er se\en tinies as ^reat as the
iliicks and other cash items. Tliis shows the j)rop()r-
tion {)[' checks, etc.. whii-li can he coUected ine,\pensi\ely
ind also the j)i'oi)orti()n whicli mnst he collected by
mail.
.*}19. li'tlls of other ixitioiuil Jxnihs. The national
lianks are not allowi'd to connt other national hank notes
;is pai't of their riser\c. It is theiefore to their interest
I'* have as \'c\\ of them on hand as possihle. 'i'o ac-
tiiniplish this they pay them ont hefoir anv other form
III' cni'i'ency. or send them to W'ashinoton to replenish
Mie .") per cent I'l'demption fund or to make other pay-
iiicnts to tlu' 'i'i-e;!snry.
I 'ndei' the diirciiiit items i'( present in;j, specie it will
'le noted that the <;()ld and sihii- cei'titicates are in-
ijudcd.
.'{•JO. /w'i'v// tender notes. This re))resents the LTrccn-
liacks held Iiy tlie hanks and also the Treasurv notes of
IS',>(», which are no^^ \(rv rai'c.
.'{•_'!. lit dim jitioii fund. I'',\ery national hank is w-
'|iiir(d !o ki t p on dt posit \\ilh iiie Treasurv of the
I 'niti'd Slates ;i I und i (jiial to ."> per ei nt of its outstand-
MiU' circnlation. Prior to IIM.'J ties dejjosit could be
iinnt((l as part of the banks re(|un(il reserve against
270
II
yU)SV.\ AM) RANKIN(,
(Icpusits, and so worked no hard.sliip. The l-'cdcral I{(
MT\ f Act resdi.ded this pcnnission, hut tlic total vlsvvw
ix<|Mircd to he licld aoainst deposits was h.wcml hy
much more than the amount of the .> per cent fund.
.TJ2. Due from the Viiital States V'/vv/.s/zr//.— This
Item inchides any amounts (hie i'roni tlie Treasi'iry other
than the .-> per cent funch such as sums of leoal'tender
money <leposited with the Treasury for the retirement
oi hank notes or honds forwarded to it for redemption.
CIIAI'TKR XVIII
n.\SK S'JAIKMKNT LfAlUMTIKS
.'{•J.'J. Cupiidl sfoch jxiid in.- The capital stock of a
I '.ink rc])rcscnts the fimds paid in by the stockholders.
I lie National Hank i\ct i)rovides that no i)ank shall
lie^rin to do husiness nntil .)() ])er cent of the capital has
iieeii jniid m cash, and the balance must be paid iu
liistallnients of at least 10 per cent jier month.
The capital is the mar<rin paid uj) by the stockholders
\n protect the creditors in case of any shrinkage in the
resources. The law rc(|uires ?io stated percentage of
capital proportionate to the size of the bank, but aims
In pi'event un(ler-caj)itali/ation as follows:
Sec. .")l;5S MS ;iiiu!ul((l l)v ;i(( of Marcli 1 1-. 1 !)()()). Xo ;is-
-o. iitioii ^liall he ()C^r;mi/( (I witli a lr>s ia|iltal than SIOO.OOO.
ixri'pt iliat hank- with a capital of not li>s than S5().()()() niav.
"ith thf sanctioii of the Si'iTitary of tlio Trcasurv be orcrjinizcd
inv place the population of whicli dors not cNcccd six tliou-
nihaliitanl-. and except that hank- with a capital ot' not
'' >- than $','.■).()('() ntav. uith the sanction ot' the Secretai-v of the
Treasiirv. he or-^ani/ed In anv place the popidation of uhich
does not exceed three thousand inhabitants. No association >hall
he nrfraiii/t d in a citv the population of whicli rxcrrds (iftv
Ihousfiiid ])eisons «ith a c,ij)it,il (d' lev- than S'.'OO, ()()().'
M a I
ind n
By this rcipiiriinent of a certain niaMmnm capital
tor banks in towns of moi-e than a i'(-rtain population
the act prohibits tlie establishment of banks with insuf-
' \,iliiiii;il U.iiik \(l, p. T.
Hi
MONKV AM) MANKINCi
ficicnt capital in cities where the loans and deposits are
hkcly to he hiri^c. ('ntil l*)i)0 the niiniiiiuin capital for
a national hank was S.io.ooo; since that time it has l)cen
J^2.). ()()() to encourage the estahlislinicnt of nat
hanks in small towns.
lonal
Soc. r)!;}}). Tlie cajjital stock of cacli ;L-snriatIoii <iliall 1
)r (11
\m1('(I into ^liar(- of SICO
crtv. and t ran-f(ral)lr
each, and he dccnii'd personal proj
till' hooks of tl
ic association in ■>\i(li
niatmrr as niav hi- prc-cnlxd ni the hv-Iaw-. or arti
('lis of asso-
ciation. I'.vcrv [)( rxin l)cconiino; a sJiareiioicK r liv sucli traiistVr
sh;ill. in proportion to his shares, succeed to all the rin-hts and lia
hiiities of the prior holder of such shares.'
:i'2i. Double liahilif// of slochholdcrs. — The sliares of
sto(>k in a I)ank differ from stock in othei- corporations
in the douhle liahility feature. The piinciple of limited
liahility is an almost unixcrsal feature of corporation
laws in this country and the stockholders cannot I)e made
liahle foi' further payments for the stock if it has heen
i ully paid. The idea of limited liahility is of course to
make it j)ossil)le for pei'sons wjio are unwillino' to take
uidimited i-isk in l)ecomin<4' partners in an entei-prisc to
hecoine stockholders with a maximum risk of 1
wfdy what they have j)aid in. In the case of hank^
howc\(r. it has l)i('ome a tixed custom not oidv in th
osm^r
national hank act hut also in most of the state statutes
to jjlacc a doid)le liahility on the shareholders for the
hettcr protection of depositors; the j-eason hein^r that
the de|)ositoi's are creditors of an entirely difVerent sort
from the creditors of other corporations.
Sec. .51.")1. The sh
iar( liol(l( rs ot (Mry national hankm"- asso-
ciation shall he held individual' \ responsililc e(|uallv and ratably.
mil not t'or one another, (or
1 Nation. il li.uik Act.
intriK
(teht
s, .iriil enjja
gc-
liANiv M.\ii;\ii,Nr i,i.\iui.n"n:s
ilV6
s arc
1 f
or
hctn
ioiial
)r (li
iroi)-
^iicli
ii>tVr
ili
■s ot
;ioiis
litcd
itioii
ladc
bt'cii
ic- to
take
e to
nks.
ti
le
utcs
the
that
so
rt
IS>1>-
IDIV.
IgC-
its of ^ucli a>>()ciat ion lo tlic r\tcnl of t!
oiiiit of tlifir
■k tlnrriiu ;it the |i,'n- '. iliU' tlicridt . in .uidition to tlic amount
1 >har(>. (Xi-rpt that >liai-('liol(lri'- of anv hank-
ii\i>tr(l 111 -ucli >l
111^ association now (\i>lin<;- iindrr
-tat
V laws havinif not k'ss
th
111 !^r).()()().()()() of capital actuailv paid in and a sui-plii> of ^0
))( !■ cciituin on hand. l)otli to In dctci-niiiii (i hv the ( 'oinptrol!
cr
the (
iirrcncw s|i,i|| 1,,. hahir onlv t(
amount invested in
I III I r shares ; a
nd such siirphis of '10 per centum shall lie kept
leihmmished. aiui hi' in ad(h'ti()n to the surplus provided t'
lor ill
'ills title; and if at an\ time theri' is a deficieiicv in such surplus
if '>{) J.er
centum siich association shall not
pay any (lUKleiul
ciencv Is made i;ood ; and in i-a»
ti> its shareholders until the deti
i)f such deficiency the ( "omptrollei- of the Currency mav compel
sociation t
ition to close its
its hu-iiKss and wind up its aff
tie provisions of chajilcr four of this title.'
urs uiulor
.'J2.). SuvjiJus fiind. This itciii sioiiiHcs that a cci-'
ain ])()rti()n of the resoiii'ces in adchtiori to the capital
pa
id in l)eloiius to the stoekhohlers. 'I'lie siirjjhis is
■ reated eithei' l)y cash paid in at the or,oani/atioii of
ne hank in ad(h'tion to tlie capital |)ai(l. for which no
stock is issned. or it i-eprescnts profits which ha\e ac-
'iiMHihited and wiiich liave not hten paid out in (h\ i-
di'dds.
The idea of tlie surplus I'und is to provide an item
ill the liahik'rics which can he used to I'cprcsent chan<>es
111 the c(piity of the stoekhohlers in the rest fves without
altering the capital stock. If the I»ank should suil'er
a loss of resources in any inanner heyond the amount
■ A' undivided pi(dils. thr capital of the Iiank would lie
ipaired if it were not for the surplus.
A surplus is i'e(]uired hy law under the following
ction :
ill
\(itii>iial WiwU Act.
VII IS
.T. 1
MOM A AM) iJANKINd
lij
Sec. .")!!)!). Tlir (liiTclor^ of ,iii\ .o^oci.ition mav scini-aii-
iiuallv (Irclarc a ilisid.'iid rf so miicli of the lu t profits of tlic as
sociatioii as tliiy shall .juil.nc i'\|)<'(liciit : l)iit cacli association
sliall. Ixtorc the dccla rat ion of a dividiiid. can-v one tenth pail
of its net jirotits of the prcrcdinir half ycai- to its surplus fund
untd the same shall auuniiit to ^H) ]nv centum of its capital
stock.'
.A liluTJiI surplus ciiliancrs the credit of Ww hank
and for that reason new hanks l'rc'(inciitl\- start wi'h a
surphis of .50 or 100 per cent of the capital snhscrihed.
Tliis proves an advantaof in se\eral ways. The hanks
are re(inired to puri-hase fewer honds than they would
if the whole investment had heen put into the capital.
l\\ states where the shari's of the hank ai-e taxed on
their [lar vahie it reduces the personal property tux of
the liolders thereof.
On the other hand the smaller auiount of capitaliza-
tioiv reduces the i)o\\er (d' the hank to issue circulatinu-
notes and until the recent aniendiiient to the law I'or-
hiddino- the hanks to loan more than 10 per cent of their
c.'.pital and sur])!us to any one person, the' hanks were
jcslricted to 10 per cent e)f theii- capital alone.
The faed that the shares of stock represent the e'(piit\-
of the holders not only in the- ca])ital hut also in the
sur])lus oi\(.s the ])ar- value of hank stock nnieh less
meanino- than the "he)ok value." The l)()e)k value (d
the haid< stock re])resents the -$100 par \alue plus the
])ro]iortionate share of the surplus.
The whole ])urpose' of i"e(|uirino' a certain capital sum
to he eonlrihuted hy tlie' shareholdei's can !)e defeated
hy the' suhseiiue'nt w ithdi'aw al ed' its fimds as loans to
.shareholelers. It has fre'(juently happe'tied that hanks
have heen started \\ilh e-apital horrowed i)\- the inee)r-
XatioiKil ]\:n;'.. \<\. ]i. JH.
iJANK s'i'.\ri;.Mi;.\r MAHii.riii:s 07-,
porators, wlnCIi horrow inos liavc hecii repaid just as
sium as the hank was in position to make h)ans to the
sliareliolders.
Ill the statement (pa^^es 201 -2) tlu- eapital stock of
;ill the national hanks amounts to a httle more than one
I'ilhon (lolhirs. or to ahout one-sixth of the deposits.
This means tliat there niiyht he a slu'inkaiie oC at least
!'•' per cent in the assets of the l)anks het'ore the de-
!l||^ito!s wouhl l)e in (hmacr.
:i'2(\. riuJhidcd ym^//7.v. Tnh'ke tlie majority of
iManui'aeturino- l»usinesses the profits of a hank are ear-
111(1 to the profit and loss aeeount as they aeerue eaeh
'l.iy. From the on.ss profits must i)e dethjeted all the
' Ajx-nses of doin.y- the husiness. At the end of the fiscal
\«ar the directors nuet and declare dividends from this
item, the effect of which is to transfer a part of it to
the account of divide^ uijjaid and the halance t(» the
sui|)his. Sometimes I dividends when pavahle are
placed directly to the accounts of the shareholders when
they hapj)en to he depositors as well.
•'{27. XatioiKil hfiiil,' notes outsli, Unci. — This item
rrpresents the amount of notes for which the hank is
^iill liahle. All the notes which the comptroller has
! M-warded to the hank are charoed a^i-ainst it until he
lias received the notes hack a,««ain or has received lawful
money for their redemption. If the Dank has any of
'iicsi' notes o;i hand they will he deducted.
it will he noted that the amount of national hank
notes oulstandin,L>- almost eipials the amount of Cnited
Slates honds deposited in the Treasurv to secure circu-
■ I'lnn. At the particular time this report was made
lie l)anks were puttino; out as much eireulation as nos-
-ihle on their hond (le])osits on .aeeount of the very liio'h
nite of interest at which thev could loan the funds.
'^',6
.M()M:^ AM) I<.\NK1N(;
1^1;!
'I'lif ;mi()iini of Ixiiids to secure cifciilatiDn is cnnsid-
crahlv ox ci- oiu'-liall' the capital stock ol' tlie coiiihiiied
l)anks. sliowiiin' that the hanks were disposed to hold
iiiorc hoiids than they wvvv I'lMpiirid to under tlu' law .
'.V2H. Sidtc haiih' iK'tc.s oiitsldiidiiifi.- 'IMiis small item,
which amounts to only s;{().()00, is a M'stiyc of the ("i\ il
War period. Many oi' the state hanks of that time were
conxcrted into national hanks. 'I'he cii-culation which
they had outstandin^u' at that time could not he called in
and -S'JO.OOO of it has ne\ci- heen presented lor redemp-
tion.
The items due other national hanks, state hanks. \v\i^\
companies, and ai)pr()ved ixserve agents represent the
{lej)osits made hy othei' hanks.
.'J2!). Iudhldu(d deposits. — This item represents the
amount due to indix iiluals and corporations. Tin
amount si<rnifies the ohlioations of the bank x\hich may
he demanded at any time durin"^' hankino- hours. This
ohli^ration is created cither hy the deposit of money or
cash items wh'ch appear in the ojjposite column under
these headings, or hy the loans which the hank has
granted to customers, and corresponds to the item
"Loans and Discounts"' on the resource side. 'V\\v pe-
culiar nature of this item x\as explained in the preeedin;^
chapter.
On the hooks of the haid< the individual deposits
appear under several accounts. Hy far the largest
amount is recorded in the indi\ 'dual ledo-ers and is suh-
jeet to clici'k. For some of the deposits the hanks have
issued certificates of deposit either payahlc on demand
or at a certain date. These (le])OHts arc not sul).iect
I . *_ ;4l»; i^.lj- o 1 M 1 M !V 1 !K! !.*! ! I \' ! IM \''! !>!i ' ( M l! \' ! 1 ! >( Hi i ! If ' !'f 'f M !'! !
I • ; V : : •- •- r. ;•-::' ^ •'• - i " * / " * i
ot" the certificate which is ne^otiahle. These deposits
closely resemble savings dej)o^its except that they re})-
HANK >1 A ri.MlN 1" l.I AlUl.l 1 1 1 .r
KMiii a deposit in;i(ic at oiir tiiiu' instead of in install-
iiiciils. 'I'lif cri'tificate of the hank is soiiKliines ^iNeii
liy I he hank instead of a note, where fniids liave been
iMii'i'ow't'd.
;{.'}(). I'liilfd Slates (JfjKisits (iiid dcjuisits of Viiiti'd
Shitts (lishiirsin^ offivcrs. 'I'he (iovei'iinient deposits
^' cnred hy I)on(Is are (Hxided into two ehisses. Tlie first
:> more perinaiKiit in eharaetei- and eonsists of fluids
(iwned hy the (io\i'i-nineiit in excess of tlie (hshurse-
iiients re(iuiiv(l. 'I'lie second eiass sii^nifies deposits
uliieh ha\(' been made hy otHeei's of the (iovei'iinient
t( iiiporaiily hut which \\ill soon be rcMjuired to make
payments to (iovernment cre(Htors,
.'{.'{]. lioiids /;o/vorc'<7/. There is no re(iuirement in
!lie \alionai J?ank Act that the bonds deposited hy the
I'jinks to secui'c circulation oi" dej)osits shall be owned
Dutri^'ht by the bank. Some banks find it profitable
!m borrow from investors oi- other financial institutions
'\\v bonds recjuired t'or tlu' |)uri)oses mentioned. .So
InwiT as the bori'owin;^' bank is sohent and the interest
nil the bonds is paid I'c^ulai'ly to the real owners, the
l.itter suirci- no disadvanta^^- whatever from having the
Miids out of theii' ])ossession.
.■{;{'_*. Xoh'.s- (Utd hills rcdiscouutcd. — This item, so in-
^i^H'uificant in amoimt, su^'^'ests the <4'i'eat dilt'ei'ence
lictwcen Amei-ican and l''uropean bankini^'. In this
ioimti-y it is considei'cd a confession of financial weak-
ness if a bank seeks to rediscount any of the paper
Ik Id by it. In Kuro])e, on the contrary, a Jar^e i)i'o-
noi'tion of the paper ])urchased or discounted bv the
i';iiik is ac(|uired with the exi)ectati()n of rediscoutitin^'
I. This is a ureat advantaijc because it nlaees a!!V
'i.iiik in a position of bein^' able to loan to any amount,
now in<4' that it can always replace the funds bv redis-
^J7^i
AIUM:^ AM) HANKINi;
^'"
c-oiiiitliiu' the notes. In thr Tnitc-d States, prior l<, 1<>I.'{.
when any hank reaelied the hunt of its h)anni^' jjower.
it was ohh^u'ed to i-el'nse aeeoniniodation to its enstoniers.
no matter iiow |)ressinL>' their need oi' how (hsti'essin^
the eonse(inenees of denying them the I'nnds. The |)rae
tiee of i'e(hseonnti!i;.i' ])raetieally amonnts to makin^i
avaihdih' Tor thi' u hoh' eonimnnity the erecht of thr h)eal
bank in the hii-ner monty mai-kets. The tanh'ness of
Ameriean hankei-s to adoj)t llu ])i-aetiee ol' i-e(hseountinn
with all its advanta<<{ ^ hoth In themselves and the eoni-
mnnity. |)artienlaiiy to the eomnumity. is mneh more
inexplieahle heeansr the disadxantaucs of {he sys-
tem appear to he insi<.;niticant compared with its ad-
van' ages.
li'.iti. Hills jjfi//(ihlc.- This item, which is ahont six
times as hirnc a- tiic precedii,- one. sinnifjcs that flu
hanks June horrowcd oiitrii^ht tiie sum ii|)resenled in-
stead ol" selhn<4- some of their resonrees.
ii'.U. ('cr!i/!((I clitch.- 'I'his is an oivlinai'v check
drawn i)y a depositor which has he( n ei ilified I)y th<
cashier or othei- ap|)i'opi'iate oflicei' and which has not
yet heeii presented for payment. When tin hank eerti
fies a ehec 1- t^ r a mom it is t:ikiii from tin- aeeonnl of llu
dcpositoi- and placed in the certilied cluck account. H\
this act i( hceonies a dii-ecl ohlioaiion of (Ir' Imnk tlu
same as a |)roniissoiy note. If flu hank should fail
liefnre it is presented lor ])ayment the holder woidd ha\('
no i-ci'onrse iipo.i tlic original di-awci- of the check. Tht
fact that the holder chose to Iia\<' it certilied instead
(d' d( rnaiuiiiiL!. pavnicnt .-it the h.'iiik llu-ons the risk of
lion-paynient npon him. If ll,( maker of the check
himself had it certilied his liahility for payment is the
same as iii ijie case of an or(iinary check.
Xi.~). ('(i.sliiti's chtiL.s niihlituiVtii:^. This item i-eprc-
BANK STA'n.Ml'.M' LlAllILiTIES
M Ills the checks whicli the cashier lias signed on hehalf
(if the hank against (le|)()sits in other hanks or checks
ii[)(iii the hank itself. New Vork exchange is the name
i^iMii to cashiei's cheeks which are payahle at New
^ iirk hanks and which aii; sold hy hanks throughout the
(duiitry to persons wishing to make remittances.
f
: .
CHAl'TKH XIX
OH(.AM/ATI()\ WD U( SIM.SS OF Tin- R.WK
.•J'}*!. \<iti(,)i(il hniiLs.'-^ V'wx' (liilViriit kinds of insti-
tutions in the Fnittd Stjitcs nrv included in the o'eriei'al
t( rin hank: \atioiial hanks, statr hanks, trust coni-
panics, prixatr lianks. and sa\inus l)anks.
National hanks nw corporation; wliioh are char-
tcrrd hy the Federal ( ioxci'nnient to assist the rnittd
States Treasury in |)ro\idino' f ■ j)apei- eurrencx
of tile country. The strict limitations iniposrd upmi
these hanks hy law. (specially tin- law which prohihits
them from loaninu' on real estate seenrit\-. ai'c od'set li\
the pi\ stim w inch their national cliartei- and supers isioti
hy the examiners ^ives tlniii in tlu' community.
lili'i- 'Stale littuls. State hanks are chai-tei'cd hy tlir
several states. The h i^al restiictiotis thrown around
tliem \aiy widtly hut in general the state statutes ai'c
mo(|( l(d att( r ilu National liank .\ct. The ditrerenct s
l)(twe(ii natiMiial hanks and state hanks so fai' as tin'
lunetions IIkv ixildrm are coneeined. are so unimpor-
t;nd thai it is not worth w liile to discuss them separatelx ;
therefore what follows will refei' |)riniaril\- to national
hanks. Since iht ( i\il W'ai- state hanks ha\e heen al-
lowed to issue paper cui-rcncy only upon |)aymer>t ot a
10 pel- cent pel- aimum tax. which is so jiiwh as to he ahso-
lutely oro|iihiti\e and in conseniiencc the state hanks
issiK no paper cin-iency.
.'{.'{S, ri/\<it, hfiiihs. -Vr'wiili hanks -.[vc p.irlnerships
III wiiieli each of iiK- |)artners is iiaiiic for aii ii«e (jeiit->
S8()
UllGAMZAriON AM) HISIM'.SS L>.M
•if the firm to the extent of his private I'ortiine. The
Diilv ])rivate hanks oi' any eoiisiderahlt- si/e are those
ikaHn^- in foreign (.■xehan<i'e. in honds. or in real estate.
An important I'nnetion of private hankers is the pro-
motion of new eorjjorations and nnderwritiiio- lor new
issnes of seenrities. The firm of J. V. Morgan and
C nini)any is ty|)ieal oi' this ehiss.
:i:V.K riidcncritiii^-. — When a new issue of srenrities
is to he hrou^hl out an arran^'ement is usually made
with professional tinaneiers who understand how to
make a market for tlirm. >\s the otlieers of the i-or-
|)(iration issuin^' them aie usually not (lualitied to mar-
ls( t a vcrv lari>e issue, a speeialist in that line is in
demand, 'i'he underwriter agrees to sell the entire issue
at a certain fixed price: sometimes he uels a eoiuniission
liiit more often he relies for his proiil on sellin<4' the
s(cin'ities aho\e the agreed priei'. If an issue is larger
than his own firm can handle he may or,uaiii/e a syndi-
cate, with himself as syndicate mana<ier. lie then
;n\ lies other capitalists or lii'ms to sul)scril)e to the syndi-
cate. If the market conditions are uood the whole issue
can he disi)oscil of without callin«i' upon the suhscrihers
to furnish any funds. It is usual in the case of the
suhscrihers that they know nothing' almut the whole
transaction from thi' time of their agreement to pro\ ide
a certain sum if necessa!\\- until they recei\c a cluck
re|)re.senlin.u their share of the profile. if the issue
should fail to find a market it may he necissary to call
upon the suhscrihers to make up tlu loss, or at least
to uive them the privilci^c of takiuL', up their share ol
the unsold securities at the syndicate prict'. The \eiy
lar<.>'e pro])ortion <d' "undi^'csled securities" which so
trouhlcd the financial world in i;t(i;j ami eaiisid tin ncii
mans pame of that year, were securities which under-
Oj^O
li.
-MOM.V AM) HA.\KlN(i
i> .-»'■■
writiiin- syndic-iites had failed to sell to the public and
had to carry tlu'iiist'lvcs on uiarnin at their haidvers.
;34(). Tni.st companies. A tnist comnaiiv was ori«i-
III » • ^
iially not a l)aid< at all hut a company incorj)orated t(j
execute trusts in the le^al sense. TIr- lar^e powers
granted to these corporations were. sonieh"ines ■'inad-
vertently." found to include the powci's necessary to do
a hankiny- business without many of the limitations of
state i)anks. In the last twenty years there has been
an enormous n-routh of this type of instiUition, and it
has become a \ery serious competitor of both ?iatioiial
and state baid<s.
.'{11. li(uihiii>j; dc pari Die lit.- The trust company has
two distinct departments, the bank dei)artmeiit and the
trust department, with sets of oUict-rs. The bank-
ino- dej)artment is con(]i..ie<' almost the same as a com-
mei'cial bank, althou^yh the conditions and laws in the
diffei-ent localities have forced it to take on a (hft'erent
ioi'iu to suit the circumstances. In \e\v ^'ork C'itv.
for e.\ami)le. the trust companies ha\ e specialized lart^elv
in the collateral loan business.
Tntil recentiv the trust companies in .\(\\ \'()i'k C'it\
were not re(|uire(l to keep any rcscrxc. Instead of
l)lacin,ii' money in their own \aults. therefoi'e. thev either
(kposiled in nalion;il banks, receiving; thereon a small
I'ate of interest, oi- loaned if for .lock e\c!iani;c purposes
at call loan latis. These loans could i>e converted into
cash at such slioi t notice under ordinary circumstances
that the trust companies telt it unnecessary to keej) anv
other reserve. When the volume of this business
reached ( iiornious proportions the national and state
banks felt that they wen' jorced to have on hand readv
monev suiiiiieni io provide for auy su(i(jcn deman.,\
not only at then' own counters bu' at the counters of
{)!{(. AM/ATIOV AN!) HrsINKSh
»^ff-^i
i!I tile trust coinpaiiics as well. Tlicy IVarrd that in
I line of ^viu'i'al panic the small pt'i-ccntayc ol cash rchi-
li\i to the (Icniand (lc])<)sits of hoth hanks and trnst
1 iiiiipaniis wnnld ])rcci])itatc a disastci-. .\t this time
lli( trust c(impani;s wvvv mcmhci's ol' the clcai-in'^' h(»iisc
;i!iil in orcK'i' to t'oi'cc the ti'ust enm])anies to Ui'cp I'e-
Mi\is a I'ide was passed in May ol' UMl i'e(|nii'in!^' trnst
rMiiij)anies to keep a reser\ i' of ].') per cent in cash and
III |ier cent in deposits in meml)ei' hanks. .Manv trust
loiiipanies were at first unwilhnu' to comply witli this
|iid\ ision and withdrew from the eleai'ino- house. He-
liiic till' end of I'Jll, ho\\(.\ei'. the leadinu' tiMist com-
panies chan<ied their policy and rejoined the clcai'in<4'
liHiise. HeceritK the state of \e\\ \()i'k has passed a
i.iw r((|iiii'inL>' the trust companies to keej) a resei'xc of
i ") pel' cent.
."UU. I)( {losits (if Inist com pdv'ics. Tn a ureat many
iMcalities the trust (ompany has de\elo|)ed an en'.irely
Ml \\ field iiithei'to ne,t>leet(,(l hy thi' hanks. Hy advci'-
tiMMU and other nuans they ha\(.' attracted larn'e imm-
I" 1^ of personal accounts o! pi-oplc who had n< \ir
iNriiit thoiiuhl of ha\ iti<i' a hank account. Tlu sc de-
[ iMlors are j^ivcn the |)ri\ ilei4<' of draw mi '4 an unlimited
niiiii'M r ol clucks aj.ia:nst tluar accounts anil nvv usuallv
paid intei'cst on their dail\ halanees of '1 per c-etit.
While these personal accoimts do uit axera^c \ cry
lai'^'c. lhe\- ait so numerous Uial the total is considcr-
ahje. .Most of them arc fairly inacti\e. and the nnmher
if checks is not excessive. With the improved methods
1 li(ioU-,( (pinu aiul tin use of addinu machines, etc..
the ti-ust cctinpanics have found that it is |)rofital)lc to
'■.•iter to this class of customers.
r«f I . rill I 1 1 t < ii
•"> f'i. / / ^.^( lii ji'ii'i III ( li f . i iiC TiiiSi ir j ),i ii iiiCnt ()I
lilt tiiist conipaiiN has no hankinu function whatever,
If
, = tt
X4i
*.. . »
!
I
Ui
m
'2S |.
MOM.N' WD H.\\KI\(,
i"'<l niaiiy tnisl (•..nipauics .In not ])irlcn<l to maintain
;i trust <l( partnunt. TI,,. iuiportancr cf this hiisiiuss.
li'-uever. in uunkrn fiiiaiur uarmiitsa brirf (iiscripticn.
.-Uk Inclhidiial tnisls. \ tn.st (Icpartnicnt of ;„,v
si/<- Mil! !).■ .Iivl<lnl i„t,, lu,, ,,;,,is, an in.livi.lnal aiiil
•I ('orporatc trnst dcpartnunt . lacli in charu,. ..f a tnisl
omccr. 'i'lic fnnctinn of tin individnal Irnst drpnit-
nua.t Is to ad as tnist.v lor the property of i.uhvi.luaU.
•IS .uuanhan for minors and incompetents, as coiiserx at..r
"I (Stales, as exeent.»r of wills and adnnnlst rator of lli,'
estates of intestates. A -real deal of this hnsines.
'■'""^"^ *" "'^' f''"^^ company hy appointment of the
'•onrts. The <lnties of the trnst company re.jnire it tn
"lana-v larnv amonnts of property in the form of real
estate and seenrities. Hence it is necessarv for them
t" lia\e a. real estate and hon.l .lepai'tmeni. " The h.)n(i
•lepartment of many trnst companies I, as -rown heyond
ilie rniniremenls of trnsteeship int.. a reonhn- l.on.i
iinnse f..r the •.eneral purchase and sale of vrurities.
.'M-.-,. C.rpnmtc Irnsls. 'VW crj-orate d.'partment
acts as trustee mider c.irporate mort<.ao,s and trust
deeds. Wlitn a coiporalion wishc I., issu.' honds mider
a smul, m..rt,:.a,oc it is imj.ossil.le (or each one ..f tli-
sliareli..ld.rs to liave a separate mort^aov. The trust
comp;ui_\ Ik, Ms th.' mort.tja.M.' sui./iect t<»"the l.rn.s pn-
^'•'•;''cd in th. h.,n.l. an.l in case of .lefaidt of principal
•'.'' '"'••'•est on th.' l..,n.l it pr.Kvc.ls a-ainst tii.^ corpora-
tion in th.- int. rests of ail the [...nd holders. It also
acts as fiscal ay. lit for c..r|).iral i..ns. takin.n eharuc of
the pa\ I,, .tils ..(■ coupons wj,,,, fl^.y arc ^ur an.i r< c. jv -
In- and linldinL;' sinkini.' fun. Is to provid.' for the r. tir.-
"""' "'■ ""• "hlioati.ins at maturity. Wlim an i-suc
•■i" '"'M-is Is suhj.rt to n.i.inptM.n'lh.- triisl .•..nipanx
may tak.- char-,, of lh.. .Irauin- of ih,. nnmhers .an.l
OIICAM/AIION AM) lUSlM.SS
285
till |);iyiiu'iit ol' the call bonds. 'V\\v trust c'(>inj)aiiy
iiia\- act a^ rcyisti'ar I'or coi'porat ' )iis, aiitliciiticat iiiy
llic issues ol' stocks and lioiids in ordci" to prevent an
'!\ ci'-issui'. It tr((|ueutly acts as ti-aiisfer ayent i'oi"
; "i])()i-af ions it' it is located in a central city. In the
i->e of failures a trust c()ni]);uiy sonietiiiies acts as I'c-
ciiver under the direction of the court. All these fiuic-
linns arc of niod( rn ilc \ tlo])nient l)ut so nci'cssary have
tli( y ticvoiue tliat it would iie almost inipo.ssible to di.s-
|:i use w itii Iheni.
.'iltJ. Sd'iin^^s Ixnihs. - A sa\in,us hank is really not a
I'.ink at all. if the word is restricted in its use to institu-
iiuiis \\liicli pro\ ide a niediuin of exchan^^e. A saxin^s
j.iiik is more closely n lated to the iiivcstnient company.
Its pui'posc is sim|)ly to recci\e funds in small amounts
I'M- investment in sccui'itits or I'cal estate. The dei)osits
nt not suhjccl to I'heck and the hank may cxtii n'ciuirc
ihlity days' notice before niakini'- payment, t'onsi'-
'iiKiitly the savinn's bank is under no necessity for keep-
'iii; a rcsei'\e. ( )n tlie other hand, the sa\ii(,i>s bank
li.is no credit which it can loati and receixe an incoim-
•!|inii. The business ot' the savings bank is simi)licity
itself. It simply L>athei's together small sums which
"f themsehes are too small for inxestment and pur-
iliases witli them inl( rtst-yicldin^' secui'ities or mort-
Liay'cs. The} usually |)ay interest of 'i ])er cent or more
! > dcposiloi's. wh.ile the income iVom the in\ I'stmcnls is
iisnallx' below .") per c( nl. In some states, like Massa-
iliiiMtts and \ew N ork. w lit re the laws restrict wry
closely tlu' securitiis in which the saxin^s ma, be in-
vested, thus forciuL; the savinus \y.\\\\\ to buy onl\- first
cias^ sei'Unilcs, iiie in;iii;in in i i i(|tiiiiii_\ ii.ss iii;iii i pti
cent. The e\pi ns-.s of the business, however, are so
small that ev ( n a I pi r c( nt margin is prolitablc.
I
t!
2S6
MCM.V AM) B.\\KI\(,
Hcfikl
34.7. The <>r;u;(in'rjtth,,i of a J)anl,\~'V\w usual nutlio,]
of or<rnni/iiio' a l.aiik is first to <.(t a subscription ,,f
the iiiccssary capital. Kcccntly c()ni])aiiic.s have Ihtii
I'onncd for the purpose of opciiin"- new l)ank.s in coni-
mtinities uliere the i-ecent niowtli of husiness has justi-
fied their estahlishiiunt. 'I'iiese c-oinpanies. when tluv
ha\f found a locah'tx which promises to dt\elo|) siidi-
ciirit business lo he prolitahic, provide the capital and
the oflicers. Wdit n the iiank is once started and the
peo[)le of the conmiiuiity interested as de})ositors and
patrons, then the or,uani/in<>- company sells the stock to
local capitalists and emi)Ioys the cai)ilal in estahlishinn-
new hanks clsewhci'c.
.'U<S. I'Jvolnlion of Ihr haul,-. In cf)mmunities of
slower nrowth. however, the hank is usually an evolu-
tion. I'^irst the local merchant or wealthy farmer with
idle capital makes loans to his tiei«4'hi)ors and friends.
As the oi-i<.inal capital >j:vn\\s the nierchant or farmei'
may find that the loaning' business with all its details
is becoming- niorc ini|)oitant than his renular occupation.
People lia\e leai'ned to tiMist these men in their rc<,nilar
hues of busin(ss and intrust to them for safe kcc|)inn'
their sa\ in->s oi- \aluablcs. Tluy are also asked to take
charge of istafes and are consulted with I'cfercncc !o
iiiNestmcnts. etc. In the course of tini" these men find
it necessai'y to ha\c sej)nratt' ollicis arran.urd for the
convenient ti'aiisaetion of this financial !)usiness and jxr-
iiaps to ha\c assistance in tluir bookkee|)ino-. This ma\
gradually develop into the pr!\at'> bank, or the si/e o!
th( businiss max make it advisable to take other men
into tlu' business.
:u«t. \h.,ll>>.iJ- r. \ :,.,.,...,,,,,..,f. I I ,, ! ,1
stockholders are tlu ultimate authority. Their powci-.
ho\\( \ er. is all ilc lei4at( d to a numbei' of dii-cctoi's. Onee
()R(1.\M/.\'II()N AM) msiNKSS
!ST
i^in to
I year the sliarelioldcrs ol' tlic l)aiik have tlic r
•Imosr (lii'cctors, after wliieli they are entirely powerless.
t\eej)t ill cases of fraiui on the i)art f)f the directors,
until time for a new election arri\ es.
.'{,)(). Directors. — It is upon the directors that the
A\hn|e rrspoiisihility ot' the hank falls. The National
Hank Act makes certain re(|uiremeiits of directors which
;ii( set forth in the foUowiiitr st'ctions:
I
i
■1
^ic. •")] t."). 'J'lu. .iff'aiis of lacli a^xx'iat ion sliall 1)(> niaiia^rcl
In not I('-> than fi\f ilircchirN. who •>liall l)i' flcctrd l)v the sliaro-
linldns at a iiK'rtino- to lie licld at any time Ix't'orc tin- a>s()i'iatioii
I- aiithori/c'd liy the Conipl I'oilcr ot" t!ii' ('unxMU'v to coninuiu'e
tliu l)iisini->> ot" hanking-, and afterward at ni('itin<;s to he hold
(in >Ufh day in .January of each \vnv a> is >})vciHi'd tlur('t"or in
!lif artick'> of association, 'llw (hri'ctors sliall hold ottico for
one yiar. and until tliiir sUccT^sors arc L-kctcd and have (jualifiod.
S( c. .")! 4(). livery dircctoi- must, (hirin^' his whole term of ser\-
Ki. I)e ji eiti/en of iiu' I'nited States, and at least three-fourths
it' till' directors nnrst haxc resided in !he statt'. territm'v or
(li ti'ict in "hich the Jissociatiou is located for at least one vi'ar
nnniediately pn cedinej their t'lection. ami nuist he residents
therein duruij; tlieir continuance in office. l'.ver\' director must
nun. in his own ri^ht. at least ten -.hares of the c.ij)ital stock of
the a--sociati()n of which lie is a director, unlo- the capital of
the hank shall not exceed ^!^."),()()(). in which ca^e he must o«ii
in his own right at least five shares of such capital stock. An\'
director who ceases to he tlie owner of the refjulred lunnher of
shavis of ''>e -.tock, or who heconies in any other manner dis-
i|iiali(ii (1. -hall thereby vacate his place.
Sec. .)1 i-7. l".a<'h (hreclor. when appointid or elected. >hall
t.ake an oatii that he will, so far as the (iut\ devohcs on him.
diliirentiy and homslly administer the .atralr- of such assnciatimi.
1 iti(|. anv of the provisions ot" this title, and that he is the owner
m good t'aith. and in his own rijiht, ot" the numher of sh.ire- of
JSS
.M()M,\ an;) hankim.
i«i
w
slock •■((|iiir((l h_v \\\\> title, viil)>cril)((i In liim. or ^tamliiifr In
lii^ n;niir on tin hooks of this a»ociatloii. and that tin -aiiir i>
not li\ {lotlifcatid or 111 aiiv wav plcdj^-cd a^ >ccurltv for aiiv loan
or <l('l)f. Such oath. -nl)>crlhc(i h_v the director making- It. and
foi-tlficd l)v the oHicer het'ore whom It l> taken, sliall he liuniedi
atclv tran>inltted to the ( omptroller of tlie Currencv. and shall
be filed and pre^ei-vcd In h|^ otiice.
Sec. .■)f^;j!). And in ca-e> of Mich violation e\er_v <lirector who
partic-ipated in or a>^eiited to the sanie >hall he held iiahle in
ln> pei'-onal and Individual capacitv for all dania^o which the
association, it^ >harelioiders, or any other |)er.-on >iiall have mis-
taiiicd in con^((iuence of such violation.
Sec. .").'2;5!). If the directors of any national i)aiiklno- a->>ocia^
tion >hall know ln;;l\- violate, or knowinolv permit aiiv of the
officers, a^cnt-. or >ervants of the a-^ociat Ion to violate. an\
of the pro\i>ion< of thl> title. ;dl the ri<^'ht>. privileo-es. and
franchix > of the association >hall he tlierehv fort'eited. Such
violation >hall. however, he di teriuined and adjiid^cd l)v a proper
circuit, district, oi- territorial court of the I'nited States, in a
suit hroii^iit for that purpose hv the ('oiiij)troller of tiie Cur
rcncy. In his own name, Ijcfore tlic association >hal] be declared
(iis>olve(l.
Ill recent years the responsibility of the directors f)f'
l)finks lias heconie an iinpoi'tant (luestion. With the
increase in the si/.e and the complexity of the hnsiness
of a hank it has heconie more ditlienlt to o'ct business
men to ser\e on the directory who are willing to con-
sent to contribute enough of their time to ^ct fidh'
and thoi'ouohjy familiar with the business of the bank.
It has never \)vv\\ customary to ])ay salaries to directors
and llic smnii fee of '^') to -S-JO pei' meetino- js not sutJi-
cient ti) .justify busy men in Ki\ inn- up much of theii-
time.
.'}.)1. ('onsidtrdlioiis /,»7>r<7v////4' cJ/oicc of directors.
''he eicdit (if tlic bank and its atti-acti\ eness to depos-
()K(iAMZA riON AM) lU SINKSS
l)V(
S!)
ituvs (Iri)eii(l ill IK) siii;ill incasiirc upon the rc'])ntation
"I the iiR'ii on the hoard ol" directors, and hence it has
lieeonie the custom to select men for that position whose
names are hkely to [)rove a husiness asset, not only
aiiion^r the business men of their particular line I)ut with
the n-errcral public. Jn iiiost cases these men are not
familiar even with the rudiments of bankin-^- au'l in
many eases rarely attend the meetings of the board.
I'lider these circumstances it has been comparatively
.asy for dishonest otlicials to use the funds of the bank
in their cnvn private interests and this bas often resulted
ill the ruin of the bank. In an address before the Penn-
sylvania Bankers' Association in Philadelphia in IDOd,
Mr. William }i. Uidnely, at that time Comptroller of
the Currency, made the followitm- radical statement:
T~,
.MTjit from vc ry nu'c ami ixccptioiial causes, such as suddfii
|ianir> or lUiis (luc> to fal-L' niniors, tlicre is iiewr aiiv rua^oti-
mI)!c' excuse for the failure of a l>ank or \y\\^\: company. It is
almost always the result of iuexcusahle folly auil itieompc tciice
IT (lishoiiisty and fraud, and often ilw.' to all tlu-i eoiiihined.
ll'/(<7/ (I })(ink (Iocs fail, it is flic i'milt <if tJic hoard of directors.
Many others may he to blame, pcrletjjs more than the directors,
Ijiit the final r('s})()n>i!)ility of i)ank managenniit rests u])on the
(iirectoiN and they are to blame.
Jn many cases the federal courts liavc declared that
a director's duty is not !liscbar'''ed b\- merei\- electin<>'
iithcers of ^-ood rej)niation, ability and integrity to nian-
a<.>e a bank and then leavin^r its business in their hands,
'i'he board of directors, the courts have held, is bound
I'l maintain a su|)ervision of the affairs of its associa-
tion, and to have a ^>'eneral knowledge of the character
iu' its
M I .-) 1 I IV .'P.S <
iiiii liiC jri.UiiKi' iil V\"iiiCi"i it iS voiitiueleu.
M(l to know at least upon what security its larger lines
'i' c'redit ai'c given.
I,
190
.M()M;y AM) IJANKINC!
;j.VJ. //r/>^'-.s t'. Spauldin^. — The riiited States Sii-
pi-fiiie Court decision most in point is the case of Hri<4<,''s
V. Spauhhng, whicli was a suit hroufj'ht by the receiver
of the First National liank of Hufralo against the de-
fendants as directors for failure to perforin fai+h^'uily
and diiio-ently the duties of their ofhees. It was alleged
that they had failed to call and hold nieetinnns. to ap[)oint
any eoinniittee of examination, to reijuire bonds, or I)
make personal examination into the conduct and man-
agement of the affairs of the bank. l)ut that instead ijiey
allowed the executive officers to manage it without super-
vision. In rendering its decision the court said:
\\ ithout ruviiwiiiu- tliu various (iccisions on tliu siihjeot. we
liold that directors must exercise ordinary care and prudence in
the administration of tlie aH'air> of the hank, and that this in-
cludis Noniethin<i' more than officiating as fi(rp-"l)ca(ls. Thev are
entitled under the law to connnit the baiikiii^ uu-incss, as de-
fined, to their duly authorized officers, l)ut tliis docs absolve
them from tlii' ihity of reusonal)le su|)ervi.-,ioii. nor ougii: tlipv to
I)e ])ermitted to l)e shiehk-d from lial)ility because of want of
kn()wl((io(. ,,, wrongdoing, if thab ignorance i- the r" ult of
frross inaJtention.'
The law recjuires more of directors tiian a reasonable
care in selecting the officers of the bank. Although
there lias been great difficulty in charging the directors
M-ith civil liability for ignorance in cases where banks
have failed, yet the federal courts have laid down cer-
tain princii)les wuh which every director should be
familiar. Referring to the case of Briggs v. Spauld-
ing, the court in another case said:
In my opinion it flocs not meet tlie requirements of this state-
liivi'u ;;r ;iu i;iv> rii.u ntJ\if'*rs iii.i\ euuinic iiit' iiiuiii'ia't'iJicnt (m
1 Brijrgs v. Si)aiil(Iinfr. Ill V. .S. 13^.
OIUiAM/ATlON AM) MISIMISS
Su-
je9i
I
'1^' '-puMliun. of f|„. hanlv Im a tni>tr,i n|firia|. ,,,ul tlim ivpoM'
"i""i II"''- vnutuUuvr i„ 1,1, n-ht <'nn(l.u'( «,tl,„„t ni;.kii,u- ..x-
■niii-iati,,.!, tl„.|ii..|\r>. nr ivlvin- „|HUi lil> aiiMNrrs to <rnHvnl
M'i'-finn, put t., luVi ultl, iv^anl f- tlu' .faf,i> nf tlu. afn.lr, „f
'''■' ''■■'"''■■ ''"'"' i''''-' i- !i"l to !)>• t()lrr,-.|.,l that tl,, v s.rw as
I'l.T.lv -iMr.l nniaiMcriK (,f i|,r in>l it , if i,,;,. fo chiiancc its al-
l|-.u'tiv..Mr». ,„• tliaf fluir r, put;, linn. .|h,„1,| 1,.. „.,■,! ■,> a linv
'" ''"^^"""■'■'- • ■ • II i- i""MiiM.t,iit ritli III,. purp..M.> and
rliVv offli,. Ha.ikin- Art that iU vital i,,t,.n>t> .inaJ.I in- rcai-
!iiitl.d to one man. uithont ovn-siuht and coiitroj.-
:{.).'{. I^iioniucc IK, r,rr//.sr. J)irc(t(.rs iii;iy not cx-
ciisr tlicmst'lvrs iVom liability on tlic plra" of i^'no-
r;i!ic-e. Allliouu], it is a physical iinpossil)iJitv''ror
'nnctors to liavc iK'r.s..iial kiiowlcdoc „f tlic condition
"I' the hooks and funds of a very iaroc bank, yet it is
pKssihle and even imperative for them to emplov puhlie
■'••'•"iintants to make andits of the affairs of tjie hank
iixlependent of the federal or state examinations.
;{.U. Sii/)j)lc'nu)/tar// (WaniinafioNs //(rc.v,sY//7/.~-The
t;i'l that the National Hank Act re(|uires a fre(|uent ex-
animatiw,, ,,/ the hank hy re<.niarly ap[)ointed examiners
1^ not sntheient. These examinations art' neeess, rily
i'"'^nij)lete heeanse of the limitations ])laeed upon the
I vaniiner. l/nder the older methods of doinu- the hank-
iiii^' iuislncss no loan M-as o-ranted until the directors had
s|)criHcall>' authorized it. Applications for loans wore
'•""ided in an offerino' hook which was placed before
llic hoard at ev^ry meetinn-. and no loans were o-ranted
until the formal consent was ^'iven. This method is too
^l<m aiid cumbersome in these days and it is doubtful
"Iiether any number of directors would have sufficient
n-ctiii inroi-mation to intelli;^ ■ tly aulhorize every loan.
However, it is not too much to demand of a board of
-Gibbons V. AiidiT.'-'in, SO led. Uqi. 3tj.
ft
*t|$l
0(>t)
h
MONKV AM) HANKING
(lirci't())'s that tlu'v be I'amiliai- with every loan which
may Ix'coine (hui^erous to the haiik. I\\|)erience lias
shown that lar^e losses ha\e o'.eurred only where the
directors have allowed the law to he violated bv loaniu'''
iiior( than 10 pei' cent of the capital to one ])erson or
corpoi'ation. 1 'in'tlK rnioie, e\ery loan made to a direc-
tor or otlicei" ol' the hank should he carel'nlly considered
ill the hoaid meetings. I f e\ t-ry director wei'e familiar
with these two ty))es of loans and exercised his l)est
,judiiinent in passing' ii])oti them there would he feu-
lossi's from thestsou. -es. Moreovtr. it would he impos-
sihlr to deceive the directors reyai'din^' such loans he-
cauM an ir.dependent auditoi- instructed to report
s|)ecially upon this point could not fail to discover any
ii'rei4idarities.
.■{.")."). Ojiiii/Dii of Compl'-'^Ucr li'ul^chi. — On this
point Mr. Hidnely sp'-'iiks as follows:
Ali()\c ail. till' (lirc(l(..s of a l)aiik --lioiild ino-t closely scru-
tiiiizr tlir liiaii^ to iitliccrs and otfiir director^, and >t'i' tliat tin v
arc kcjil down lo not onlv lc;^al \\\\\ safe amounts.
l"ar tlic uii)>l I'rctjiunt cau-i- of haidv trouhlc^. in fact, tin-
alnio'^t iiivariahlc cause of janlx i'adnrcs. is tlic <;rantinj^ of
credits fai' hi sonil tlic lc;;al and |iiiidcnt limits to the officers in-
to one I'onci rii tir j;rou|) ot allied concci'ti'^. ^i lu iail\ owned
a; 'luiia^ed Iiv the officers or dii( ciors of" the hank, or in winch
tliey have diri'ctlv or indirectly, some li;r^c })i'Ciiniary interest.
Wlien a l)ank is in anvtliiii^ approaching this (•(iiiditioii, it is
in grave dangir, for its entire safctv di pi luls on the surccss of
oiit-idr t nil I'prises, and tin man who should |)rf)tect the bunk
has, perhajjs, a greater interest in protecting tlic other con-
cern. It is j)rohal)Iv the most coninion, serious dereliction of
duty on the part of" directois to allow such a condition as this to
gradud t' 'U in a i)anls. It may sometimes lir done honestly
ns the ! f of hau judgment only, l)ut in my i \pi rienco it \*
the most r iiei; ctiusc of dishonesty niiii tiiud amonjj ban!-.
I
ORGANIZATION AM) HISINl.SS
^9!J
I
officers. I (Id not n'lnciiibLr a case wIiltc a liank dtiiicr iiad the
moral courage to let loans of this kind lanv down his hank
«i'hoiit rooi'tiiig- to crliius of -onu' kind to conceal or ])i)->t pone
the catastrophe, in hopi ■- that ^dme t'ortiinde ciri'uni^tance nii^^iit
inter-'eiic to save hini and I'oni'eal hi^ fraud.
'Ihi- fimctioti ol' the honi'd of diivctors is lo assimu'
the responsibility t'i)r the safety ol' thr \nink and io (kdci--
miiif the o'eiicral policies which shall lie pni-sncd. With
the active conduct of the business it has nothino- to do.
This function is delc'^'atcd to tlie otlicii's, the cliirf of
whom is the |)resident.
.'{.)(). TJic j)rcsi(lii!l. The president is alwiys the |)re-
sidino- ofHcer ol' the hoai'd of directors, it devolve.s
ii|)(»ii him to see that the directions of liie hoai'd are
carried out. In some cases, espeeiall\ where there is a
this !uinii!\- hoard ol direetoi's. the president exercises the
whole power. In other cases he sim|)ly carries out the
' ill of the board in tlu' administrati\ e details without
iiav ino' even th(> authority to o-rmd a loan. I'sually the
powers and dutit's of the president lie somewhere be-
tween these two extremes. The boai'd as a rule deter-
mines the maximum limits to which credit may be
cxlcndi'd to |!articular (iiiiis, and leaves tlu |)r« sidcid
wide discretion in orantino- credits between these liimts.
Ill lai"o(' banks tliei'e are \ iee-pri'sidcrds who share
.^ dii the presideni the didy of ne^'otiatino- with
itonouers.
;{.')7. Tlir cdsliicr. The cashier of the baid< is its chi(d'
.'Xicutixc otlieei-. u|)ou whom falls the duty of opei'atin;^
the bauK, He has direct <'harL>f td' all the employes
and must of I'otn-se be familiar with the details of every
•Icpartmeid. He usually acts as si'ci( tary ot' the boanl
■if (hri'ciors. it is ins duty io prepare iiie reports and
'I'tmeuts. Ml is llw ullicer ( inpowei'cd to si^ii doeu-
■idi
MONEY AM) HANK IN (1
iiK'i'ts Oil heliair of tlie hank. His sif^iiature must
alnays a])])eai- 111)011 tlic eirciilatino notes issued or the
checks and (h'al'ts dcawii hy the hank u])( its corre-
spondents.
In most lianks which ha\c not yet developed a s|)eeial
crechl d'|);n'tnien! the cashier is the ehiel' credit ofheer.
\\ hilf th( president or \ice-presidenl usually ivtaiiis the
autlmrity to yiant loans, he usually depends upon the
cashiei' for inrormatioii as to the cre(ht responsihiiity
n\' tin a|)i)lieant. In those hanks where the list of hor-
rowci's has heconu' extended and where the adxantan'c
of a credit hiirea.u is recooni/ed. the cashici- iVcijuently
has an assistant who has sj)eciali/,e(l in this field and who
understands how to accumulate and systeinati/e informa-
tion aH'ectin>4' the financial status of the [)atrons of the
hank.
The ei( (lit departnieiit of a hank i)ioh;ih!y oi!'ers more
opportunil) for an employe to ac(|uaint himself with
the science of hanking in general than any other depart-
luent. The husiuess of a hank is of such a routine char-
ac-ler that the emj)loyes ha\e \ery little op|)ortunity to
learn tlie husiness from the inside, or to tiispla\ initiative.
or to perform duties re(|uirinjjf discretion. ! nlike most
husinesses tlii're is no line of jiositions which i-e(iuii(
successively more and inoi( husines.s sagacity on the part
of Ihe ocdijiant. The ^ulf hetween tin highest em-
ploye and tilt ollieer is a wide one and very dillicult to
cross; in most lar^e city hanks it is |)raetically inipossihle
to cross, and tin- oHieers are usually reciuittd from small
institutions where the emnlo\ e has had an oi>noitiunf\
to learn all departments of the hank.
.•J.>H. P(it/in(/ teller. — i\ii imj)ortant (mplo\e of IIk
hank is I he payin;.* Uiler. in ii.is charge of all iii( (lut-
g'oing I'lnuls o|' the li.inlv. The transaclions which
UKGAM/Al'loN AM) lUJSiNESS
295
a(iuire the paying out of cash are: (1) Cashing- of
clieeks presented at the bank; (2) payment of debit bal-
ances to the clearing- house; (3) shipment of euiicncy
to correspondent banks. It is the (hity of the jKiyinir
teller to see that all the cash of tlu- bank is ])roperly
accounted for. It is necessary that he be familiar with
flic siuiiatures of all the (ki)osilors so that he may make
iiu payments without havin<>- pro])er vouchers to show
!.ii them. Hanks are under legal rcspdn^ibility to de-
positors to pay out no funds on tluir account excei)t
t • the proper payees or their order. Kven if the signa-
ture on the check is genuine, still the jjcrson demanding
pavment may not have ])roper title to the check or he
may have altered it. It is. therefore, the duty of the
Idler to safeguard the bank by re(iuiring proi)er en-
dorsement before tlie cluck is paid, so that m case the
depositor attemjjts to repudiate 'in ■heck the bank can
;ill upon the payee for ih mibnrsemeid.
:$.•)«>. Jiecciviii;^- tclltr. — The employe second In im-
portance is the receiving teller. I'nless there is a note
cl.ik in the baid< it is tl. duty of the i(cei\ing teller
to lake in and account for all the funds which come
into the bank. His chief duty is to receive cash, checks,
(hafts, and other items, and to give credit to dei)ositors
tnr the same. His principal duty is to assure hiniM-lf
that everv item for which credit is given is collectible.
Funds comi' into the bank from { 1 ) depositors. (2)
credit balance s at the clearing house, {li} i)ayments on
maturing j)aper held by the bank either as an asset or
for collection, and ( t) currency shipiped by correspond-
ent banks or by the Treasury of the rniled .States.
;j«)(). Xolc Itllcr. Where the business of a l>ank is
extensive iitongh to re(|uirc it. there is a note teiier
whose function if is to make all the collections. Matur-
.'.'i)(i
-MONKV AM) HANKING
4-
ino- notes payable at the hank art 'w his chai-f^e. He
!-ecei\t s all eas mittaiices from lail-ol'-towii eiist oiners.
He lias (lirec liaroe of all the eojlectioiis of drafts,
etc., ill the city, except the checks on clearin<>- house
hanks, wlileh are usually attended to hy the clearing
house eJei'k.
;3()1. Di.scn/nil chrlc. — The discount clerk has charge
of all the loans and discounts of the hank after they
have been negotiated hy the ollieers. It is his duty to
keep the documents so systematically that there will he
proper presentation made of them when they matiu'e.
When due the interest is cali'ulated and the noti' turned
over lo the note teller foi- collection. He has charov
of all till' collateral held to secure loans unless the bus-
iness is so large as to r(i|nii'( a en||atei\d loan cierk. In
l»ard<s ha\ ing close I'dations -villi stock brokers the latter
|«'Mtioii may l»c a \vv\ icsponsihle one. The collaterals
held to seciii-e loans to stock hrokers are constantly hring
withdrawn, substituted and replaced. Furthermore, in
times of active speculation, the values of the collaterals
arc shifting so rapidly that the collateral loan clerk lias
great resj)onsil)ility in seeing that the margin of security
d' niandcd hy the hank is maintained and the call for
:iddili(.Mal collat.ral is propcrlx si nt out. so that the
borrower can lia\i' no grounds of c(.mplaint if the hank
liuds it necessary to sdl the collateral to |)rotect itself
in a ])anicky market.
;{<;■_'. JiixiLhicpiiiii' (Ii/xirtmcnt.—'Vhv Iransactlons of
all the tellers and other clerks are finally referred to the
bookkee|)ing depari ini nt . There is alwa\s a genera!
ledger u\' the \ku\1 containing the accounts summarized
Ml the hank siat(ni(iil. It is th<- duly of the ovnerai
bookkeeper to iiiak( iii) a dailx >lat( tneiit show in. > the
^•""•hiinii of III, hank and all statements re<|uin ,1 b_\ the
OlUiANIZATION AM) 1USIM:sS
297
, iiiii|)ti'nlk'r of the ciirreiicy. 'V\\v Imlk ol' thr book-
Lii [)iii^- work falls upon tlic iiulividiial ledo-ep keepers,
whose duty It is to chai'^c to the depositoi's' aeeouiits
e\erv cheek di'auii hy the hittei' and to credit their ac-
counts with all the deposits reported hy the receiving
teller. The bookkeeper must keep the paying teller
iiifoniud as to the lialances of depositors.
In many hanks there is a separate dej)ai'tme''t for
liandling eorrespondei\ce and the collection of out-of-
Imwii items. It has hecome the custom of late years for
II iiiittances to he made in checks on local ])anks rather
than in \e\v ^'ol•k exchange oi- tnoncy orders as for-
Dicrly. In some cities the hanks ai'c so anxious to secure
tilt (kposit accounts of lai'ge firms thai they make no
charge for the collection of local checks, although this
may re(|uii'e con'cspondenec with a multitude (d' banks
in all ])arts of the I 'nited States.
.'$•!.'{. Lii:cs rt'ldliii^' to collections. — Kvery (le|)osit in
a hank other than cash must be collected. If the item
N ;i chfcU on the bank itsell' oi- a matured note payable
:i! tlie hank, it is paid as soon as the baid< gi\es ci'cdit to
iiic depositor. Hut if the items ate payable hy another
paity the bank is usually c-onsidered, in the absence of
a special agreement and when the items are endorsed in
lilank Ol in full, to be the bailei' of the di j)ositor. The
deposit is in fact a special deposit until the proceeds
i' the I'ollection aic lodged in the bank and credited to
the <iepositor, whifeiipon the relation between bank and
dc])ositof changes to that of debtor atid creditor.
As bailee, tiic bank has all the righis to the pa|)er
1:! ill and may sue upon it. In ti'c evtni if its noti-col-
I'ction the bank ma\- rescind the credit alread\ liixtii the
depositor, thus pio\ ing that the bank had not purchased
the paper and taken title.
^98
MOXF.V AND n AXKIXG
1-"^*
r"
Insolvency of a hank revokes its power to collect and
It mnst l.ol.l nneolleeted paper as a special deposit of tlu
ouner. If :t receives proceeds of a collection and
in.no-ies then, u ith the general funds of the bank it is
^nilty of fraud.
A collecting- hank should accept nothin- hut nionev
-" pay.uent hut it has hee.. held iunocent (,f ne-liLrenc'e
whe.> ,t ha.l taken a certified or even an uncertif .d duck
winch .. presented to the drawee hank without delav
and the takn.o- ..f which cause.l no loss to the owner of
th, collcctH.n iten, hy reason of release of endorsers etc
;, I-"""''-payn.ent of the cheek taken in pavnient of
til.' eollcctiou iteni the hank should recover the item if
P-SH .c- the san.e day an<l protest it. J^avnient hv
worthless check is no payment aud the hank (V.uld pn,'-
test the Item even if the payer refused to ^Wv it up
If a colleetiou item is endorsed "For collection and
mn.ttance. the. proceeds becon.e a part of the <.eneral
nnds ol ti,e hauk as soon as a draft is rcn.itted, ami if
ihc draft proves worthless the owtier of the colleetio,,
cannot chum the funds as a special trust deposit
if the hank has collected a check heari.,^r a forLred
endorsen.ent. the proceeds heiong to the ri^d.tful ou.ur
•"Hi n.ay he collected hy him althouo-h the hnuk ha.
t.nned over the proceeds to the person dcpositluLr th.
item. "
A \ew ^•ork hauk reeeive.l a "tramp" collection (one
"■''""^■' '•> ••' ^^'••■'"^■^■•- ^^itl' whom it ha<l no account),
col lecte.l ,f. .ieducted its collection fee. an.l re.nitted
'^'';'''' '"'-"^'^ <'>'l that the cheek had heen lost in the
'"•"' alt<r Ik,,,,.. ,.udo,-sed in lull; the thief forord the
c,.do,-Mme>,t ami sold it loan iunoe.nt pa.'ty who sent
'- ■''- * ■- - --- \ ink i-..i,k for eoiieetinn-. i),^ {j.,,^. ,,.^.„^,,.
U 4.. »!... \-
^^
ORGANIZATION' AND BUSINESS
0(
)9
recovered from the hank, w hicli was uiiahle to locate the
])( i.soii to wlioin it had paid the j)rocee(ls.
Hut a (h-a\vec hank caiiiiot collect the proceeds of a
raised check i'roiii a collecting hank if they have heen
paid over hy it to the owiRr of the item.
.'}(U. Liahilit// of col lectin^- hanJx. — When a hank .in-
(Idiakes to collect, it makes itself liahle Tor all losses
caused by its neglitifenee, hut it is not res])onsihle for
\]\v iie<'l!''ence of a notary selected hv it with ordinary
care because the notary is a public (Mlicer.
The law varies in the different states as to the liability
of a collecting bank for banks to whom it sends the item
in course of collection. In the federal courts, and in
l'( imsylvania. \ew York, Xew Jersey, Ohio, Indiana,
Michigan, Montana, and Minnesota, it is held that a
collecting ]):uik is Jxiilcc and liable for the agents it se-
lects to make the collection. In the otiier states, the
l)aiik is held to be the (i^cnt and renders itself liable i'or
sub-agents aj)|)ointed by it only to the extent of using
(Ilk- care in selecting them; be\ ond this the sub-agents
;i!( responsible to the owner and may be sued by him.
It is held to be negligence for a collei'ting bank to remit
tlif item directly to the drawee bank, since that bank
may in ^'e an adverse interest.
Hanks do not succeed in avoiding resj)onsibility by
printing in the i)ass books notices that they will not be
liable for the acts of l)anks to whom they send items.
Such contracts have been held to 1)e void hy the courts
on the same j)rinclple that railroads cannot avoid lia-
bility for accidents to i)ersons riding on j)asses even
though the pass bears on Its face such a disclaimer.
1 '■ a note is payable at a bank and funds arc kept to
pay it, the bank is the agi'ut of the nuiker and if the
-Vi^
300
MONKV AM) UASKISG
I!
l.a,,k I'.il, l,,f„,r IIk. h„i,lc,- „r (1,0 „nt, J,,,,, ,,„„„,■„,
ajr»aiii.
cove,- t M • , "'' •■""' "'^ ''"""' '"'"k 'I-
emus l,.,l ,t has pa„l i,v n istak.. fiore hci,,^, „„ f,„„,,
tl.e colfcctu.K l-ank is safe :■., ,-ct„„,i„j, .i'. ,„, , i'
and recen-n.^. „„ck tl,e check. The c„d,„.se,/a
K-leasc cvc, „ ,„., „ , „.,.,^,, „^ ^,_^ ^.,^^_,,^ .^ . ^^ - •
The n kc- appcarc, ,„„I sai.l he ha.l ,„a,le an-a„Ke.
i"U,ts /,„■ ,ts ,,.„ewak The cashic,-, h.nvcvc,-, hisisLi
recenei „sln„.|,„„s to ret,,,-,, the „„te. lie se„( the
>roeee,ls M.stea.k Me >v„„l.l „„t have hce„ i„s ie,l
Z2z!:::i::;:r '''"''-' --'^"'^''-'^''^^'^
-M:, Clhrii,,,, of o„t-of-f„!,„ rf«V.-,,-The collec-
tion of o„t-of-to„.„ i,e„,s is pe,.l,aps „„e of the ,e n t
r:,-?,, ;""""■. '"-'-•■" ™i-ia.e,Mti!
eo.sl ol eolh.ct,„^. an ,tc,„ averages ahout ei„htee„ c-nts
; -:'" as ,„||o„.s: Exchange ,., cent, ^os e ,d
•I -Heefon «... Small l,„„k.s shift the txpe,,.
o the h„«e,. hanks hy keeping a-vounts with I, a„.l
'lq««,t,„«. all ,.„„,,,;„„ i|,,„s. ].a,..e .,„. ha,,,;;!'
;"!"■'■ ^"" '''I'"-'"- '" l<"P I'alances which th,.- :;,,.,,.
.a e a,e lar«e c„o„j,h to yid.I a piv.fit over anil ahove
the expense ol niakinf. the cilleclions
sv'!u",',;or""T,'''r "'"'■'' """''' '■""" "''"'-'>• >■•■""< »
■ ' ' '", '■"'""•'" ' ""■>• H,eeks i, „, sue anncr
as <ilx e,„,.„s air ,„>u collcct.,1 Ihn.ujfh the cic-,ri„„
;..;.-, ,i> w i i,^^.,, ;i(i,)j)ti.,i.
It was pru,,„.,..| „, H,„,,„ „,^„ ,„,^, ,^^^^^, ^j^^ ^^^^ ^^^^
ORGANIZATION AND IH'SINESS
301
I
{■(.llcctiii.t,^ for the city, tlius avoiditi^v a large omnimt
(if (liiplicatioii of work and hoUlin.u- the country l)aiiks
to stricter terms than conii)etiiig city banks could do
iii(livi(hials. This was the Suflolk hank system, applied
to check collections. The scheme failed mainly because
the banks were unwilling to give any one bank .the ad-
vantage which such a position would bring, nor to give
;my one bank the o[)portunity to learn so much about
its affairs as the collection of its items would give it.
To avoid these dilKculties it was projjosed to charter
a new natiotial bank for the ])urpose. Init the law forbids
national banks to hold stock in other }»anks.
Schemes for dividing the country uj) into districts
with a clearing house for each district are impracticable
because settlements could not be made on the same day
and it would be necessary for each member to keep
funds on deposit in the clearing city to pay balances
against them, rurthermore, the pro rata expense would
he considerable whereas now the country l)anks pay
nothing for getting their collections made while they get
fees for collecting items on other banks in their vicinity
or even on themselves.
;}(;(■>. l^iifflisJi iiiitJiod of couuinj coJIi'ctinns.—Vuach
i'aiik in London receives during the day a large numl)er
if ehecks upon country bankers. I'pnu these checks
the name of the London agent is printed. K\ try clear-
ing banker in London is the agent for one or more
countrv banks. So when the country clerks of each
bank get such checks from the cashiers, correspondence
department and other som-ces. they proceed to arrange
them lor clearing as they do town checks, sorting them
and ])utting them in j)ackages according to the London
ugencies at which they are payable. No cre(ht is given
iii the clearing house for these country checks on the day
2. 11
.'502
•AIONEV AND "BANKING
on wlnrh tl.ey are delivered. Tlie aniounts are sin.piv
.settle<l !,y the deliverino. clerks and the receivin^r dcrk;
an<l then the items are taken t., the respeetive hank,
whenee they are sent hy „,ai| the same eve..i„u- to the
conntry l,anks hy whom they are pavahlc. If these
cheeks, reaehu.^- their destination, are fo.n.d to he all
n^l.t, they are crechted to the account of the London
;-urnt who is advised: h.,t if any of then, are not all
n^ht, either fron: insufheient funds or irre-ular endorse-
ment or any other cause, sueli irreuuhir cheeks are re-
turned direct to the hanker whose crossing thev hear
All country checks not returned or advised hv thJ morn-
ing oi the third day are assumed f Se paid! and credit
is accordmn^ly «iven for them in the clearm- of that
day and the amount is settled for, alon.- with those
advised T,aid, in the final halance. All countrv checks
lield hy London hankers, returned unpaid, must he re-
turned mto the hands of the clerk representino- the deliv-
ering hank hy V>:liO on the third day, and thev are simply
( educted from the total of the countrv cl/ecks on the
day of settlement.
*L.«
;«#"■ ■ T
CIIAPTKU XX
Di.l'OSITS AM) Dl.l'OSriwRS
'.W7- General di po.siis. l)i'|)()sits are of tw^ kinds,
-( iicral and special. Cieneral deposits are always moiuv
(ir the ri^Iit to receive money. They ei-eate between
the bank and the customer the rehitioii of debtoi- and
creditor. The rclati(Mi is pecuhar in that tlie bank not
iiiily contracts to pay the debt on demand (unless the
deposit is a time deposit) but also agrees to pay to the
order of the depositor any sums within the total amount
dl' the deposit, and if it i'ails to do so it may l)e sued
in damaii'es bv the depositor. The baid< mav satisfy the
depositor by the payment of le<jial tender, no matter
liy what form of money the debt was created or how
iiiiieh the le^'al tender may have depreciated. Tho lethal
ttiider acts during the Civil War period were more im-
portant to l)anks than any other class in the community,
tliese acts ])ermittin<4' the banks to pay their depositors
(kj)reciated ])aper money, even though the depositor
ii;id deposited ^old. At that time it was the custom
;niion<;' the banks to oj)en special ^old accounts all the
payments on which should be made in fjold.
.'}(i8. Speeial depomts. — A special deposit may consist
of anythino- of value left with the bank for safe keej)in^.
The relation between the baid< and the de])ositor in such
a case is that of bailee and l)ailor. The title to the deposit
does not pass to the bank as in the case of a <>'eneral
iji riosit. but v(^sts. !!! ib.c <l'.'i)()sit(>r. 'i'he bank is ludd to
i' -■■- ----- -- ' ' I --- ---
use only ordinary care in protecting it and if it is stolen
303
304
MOSK\ AM) RANKING
li^f
Avitliout iicnlioviKT on [hv part of the l);ink, the owner
imist hear the loss. Tlie hanker must return to the de-
positor the ivleiitieal thino- deixisited. If the hank ac-
cepts a eousideratiou I'or keepiiio' tlie deposit, it is held
l)y law to exercise ^n-eater care.
.'J(ii). Safct// deposit rowZ/.v.— IJecausc the banker was
the oidy husiiiess man in the smaller j)laces, possessin<r
a sale, it was formerly the custom for him to receive tlu
valuables of customers for safe keeping'. Nowadays the
banks derive a profit from the function whieh was
formerly a source of ^reat aimoyance to them, and tlu y
liave estal)lished safety deposit vaults the l)oxes of which
are rented by the year. These a aults are not only profit-
able on account of the rentals they earn but also because
they act as a feeder to tlie bank. Many people who
will not trust the bank with their money will rent a box.
This hrin<,^s them into touch with the officials of the
bank, and as a rule whatever suspicion they had grad-
ually disai)j)ears, so that ultimatelv thev become regular
depositors either in the savincrs or commercial depart-
ment, especially if the bank pays interest on deposits.
:J70. Inducements to depositors. — We learned in the
I)recedin^- chapter that a cash deposit enables the bank
to loan credit from three to six times Its amount. It
is quite possible for a bank to make 1.5 to 20 per cent on
the (le|)osits left with it. Hence there is nrreat conijieti-
tion aiiion^r banks for tleposit accounts which are likely
to he fairly permanent. In return for the use of the
general dejxisit which is so protitalile, banks liave been
led by e()m})etition amon^ themselves to offer many
valuable services to the depositor. Among these are the
following:
(a) Checks. — It pays the checks of the depositor,
taking the risk of their being genuine and that the money
DEPOSITS AND DKl'OSnOUS
305
is paid to tlif i)frs()n dcsiniiatrd hy \\\v depositor or
Ills order. liis serxiee is ol nrcat \aliic to the dej)ositor
as it saves Iiiiii the iiiconvenieiiec ami the expense of
iiiai<iii^" eash payments.
(h) Collections. — The hank eolleets the cheeks and
;ill iitlier items of credit for the depositor, often at eon-
siderahle ex[)ense. It offers tlie depositor a cheap
and easy way to collect accounts due hy draw iiiii' si^^'ht
drafts on his dehtor and collectin<'' them throu<>!i his
hank. Since the ^'row th of the custom of sending- local
checks in making- small payments to city houses, such
for exami)le as the one dollar subscription to magazines,
the associated hanks in several of the larger cities have
hi en compelled to estahlish a unilorm fee ('or collecting
cwi-of-town checks, the rate usually heinif |'^- of 1
per cent, with a mininiuni diarize of 10 cents per cheek.
(c) Safctif.—'Vhe bank relieves the depositor of the
risk of caring for his money.
(d) Loans. — The bank usually feels under obliya-
til 111 to loan to a depositor on more advantaffcous
terms and usually on less rif^id requirements than to
non-depositors. It can do so because it is moie or less
a((]naintcd with the affairs of the depositor and can
accej)t personal credit when other parties would i-e(jiiire
collateral security. The greatest advantage, however,
(•->nies in times of panic when funds are needed most
and when all the banks are refusing to loan to others
than their dc])ositors.
(e) Interest on balances. — Sometimes the })anks
p.iy interest on the daily balances. This practice \sas
111 innovation of the trust companies and was due to the
fact that the (le])osits in the banking department of
the earlier trust com})anies were practically time de-
posits. \Vhen the character (d' the deposits gradually
Vii-jo
•\m
■AOC)
MCNKV AM) H.\M\l\(i
i
ii;'i
3", ?^
I).
c'li;m^c(l the CMstdin still prevailed, imich to the vexation
ol' the national hanks.
(f) lucrcdsi's credit.- 'Vlic hankin^r coni^eetion f'l-e-
(juently inereases the en (lit of the husiness man. A
^ood Imnkinn- reCerenee is Creijiiently ol' <^reat advantaii'c
in husiness. and the l.>anks must he eonstantly on tlieii-
^nanl against persons who use their eonnectiiin with the
hank to uain unmerited eredit.
.'J71. Dillicultic.s ill cstahli.sliing a ncx hank. — It is
very dilllenlt to estahlish a new liank in a communitv
already sujjplied. If the old hanks are not willin/jf to
aceoinmodate their eustomers freelv, and if thev chariie
for making- eolleetions or refuse to loan exeept on oner-
ous terms as to i-ate and security, a new institution nia\
attract many depositors hy superior inducements, pai-
tieularly hy paying interest on deposits. Too man\
concessions, on the other hand, may cause the new hank
to lose credit for soundness; it may he inclined to taki
great risks in loaning in order to reco\er the amounts
j)aid out as infei-est to depositois and in the expensi\e
sei'vices performed for them. There usually is no dilli-
culty in finding horrowtrs for tiie funds of the ru u
hank; in e\ery community thire aic always husiness nn ii
of unsound methods who ha\e hecii refused credit In
the old hanks and who wilcotne the a|)pearancc of ;i
new \nii\k. hoping to estal)lish relations with it. They
try to place the hank under ohligations hy opcnitig di-
posit accounts.
'A7'2. f'tiliic of (I hdiiJ.iii^' coiiiiiclioii. — Many well cs-
lahlished hanks ari' eiiahled to hold thi'ir depositors w itli
out paying interest on di])nsits against the competilioii
ot' the trust companies hecause they offer the (lcp()sit(n-
i)i;iM)si'i>^ AM) Di.i'osn ()i{s
;j()7
ii.iiiicly. credit in limr of need. When m panic comes
Mri'l (\eii str()n<i- business concerns .ire in (lan<Jer ol'
liankruptcy tlirou^lt ieiiij)ora!'y need of I'und.s. the op-
portunity of the liank to render svr\ ice is very ^reat.
A suiall loan at the |)rnper time may count i'or moi'c
than interest on (hposlts t'oi- many yeai-s. Depositoi-s
Kinain !o\al to ohl consei'x atiw hanks, knowint'' th.it
the hanks \\i!l i)r()hai)ly ha\e a chance, sometime, to
rendei' reciprocal sei'\ ice. Ilouexcr, ;is business (on-
ccriis ^rou richei- and less dependent upon hank credit
for existence this inducement will lose its force.
:}7-J. Kiliiif/ chi'clc.s (111(1 (Ivdfls. The ])raeticc of
"kiting" is ;i st.Mrce of urcat annoyance to hanks. It
^ practiced hy depositoi's who wish to s^ain the use of
liiiids for a siioi't time without payment of intensl. It
;■- |i!issilile to accomplisji this hi'cause of the custom of
Kinks of nix iiiu' credit imme(hat(l\- upon deposit I'oi'
cliicks and drafts. e\ in though the\- ai'e drawn on dis-
tant citii's. Kitinn' re<]uires tlu' collusion of two pai'tits
located some distance .apai't. It e.in he most easily done
hctwecii branches of the same concein.
ISIX. Miiliod (>l " hiliin/. ' To illustrati' the practice
I< I Us assinnc that a <lepositor in \ew ^'or|•. draws a
siiilit draft or deposits a chick reccixed from :i fon-
fcdcrale in San I'laneiseo. Tin- bank will permit the
Niw ^ oik d( j)(>sitor to check .-i^ainst the cr< dit even
IIm'U^Ji IIk b.'uik wdl not i'eali/.( die proceeds of the
check oi draft within nii'' or two weeks. It will riiiiiire
at least a wvrk lor the cheek or dr.ift fct reach San I'lan-
'•isco and be prcseiitid to the ennhderate lor pa\nient.
'irip.itino- the .irri\al of tin bMI auamst him the con-
Icdcrate will provide credit at his bank by dej)ositin^
tl 'I'C a (ir.'ift or ebick on .1 liilnl <'< m !'< / 1< rO. iwiliiii.^-
308
MONEY AM) H.\NKI\(;
h
in New Oilcans. Thus Iwo oi- three {X'l'sons ?niiy have
the use ol' eoiisiderahk sums ol' money lt)r some time
without payment ol' inteiist.
.'}7.). 7V//c /o (hjK)siU(l clicchs, etc. — Tlie title to paper
deposited in a hank '.'ten heeomes an imi)ortant (pies-
tion. It is a rule of law tliat it' the items de})osite(l in
a hank arc for colleetion and not for credit on the re<r-
ular account. tl;c title docs not pass to the hank hut
remains in the dcpositoi until the proceeds have arrived
at the hank. In tliis ease Mic l)ank is simj)ly the a^eiit
<)!' the oufier, and the [jt'occeds oi" the collection are
trust I'nnds whieh. ii' they can he traced, must be re-
turned t.» the ownei' in spite of insolvency of the parties
holdiu/^' thetn. I f the paper is endorsed 'for collection"
there is no douht as to the owmrship. hut when it is
endorsed in full or in hlank the owtici'shii) dei)ends en-
tirely upon the a^^rei'inent hetween the depositor and
the hank. I f no agreement has heen made the hv holds
that the deposit is for credit and that the hank actpiires
title. If the hank should fail the depositor must take
1ms chanc( s with tin otlnr dep(»sitoi-s. hut if the agree-
ment has heeti that the items diposiS.d arc for collec-
tion. Ol il' they ha\e iieeii endorsed plainK' "for col-
Kction. " liie (l( p(»it(ir is a j)ref( i-red creditor and is j)aid
hef(.re all ollk r depositois.
I iiless the item is endorsed *'|"or collection" or they
iia\e notice otherwise, innocent thii'd parties who enn-
sider the item llu propeiiy of tlii' hank and seize it to
pay any <le')ts of the haiik then ha\int,^ it. cannot hold
to lh( iiile longer. The law on this point was clearly
hud down in ilii' ease of I)o|)i)tlt \. National hank ot'
the Hepuhlic'
:i ../ .;. . .;.
' No. I, Niiliiiiiiil Hiiiik Cas«*s,
,;.,
DEPOSITS AND DKPOsriOHS
309
y have
le time
I paper
: (pus-
ited in
ik Init
irrivcd
a^X'iit
:)n are
lie ri-
[)art!cs
.'ction"
ii it is
ids cii-
)r ami
■ holds
'(|uiies
it talxL
collcc-
)]• col-
is [)ai<l
r thty I
I) con- "k
i
L' it to I
t hol<l I
•Icarly g,
jik I
..../.
ched
I
Dopj)cit deposited w ith his l)ank a check endorsed in
hiank for collection. The hank endorsed the cheek "for
(oll( ction to the credit of Hank," ( insei-tin^' its own
name ) , and sent it to the National Hank of the Uepublie.
Dnppelt's hank failed the next day owin^' a considerable
amount *;> the National Hank of the Repuhlic. The
lalttr sei/.ed the jjroceeds of the check after it had been
(•('liK'ted in order to satisfy the debt due it. Dojjpelt
surd il-c National Hank of tlie Kei)ublie lor the funds,
ilaimin;^ that his own l)ank had accjuired no title to
thi (luck. Heoardlcss of the agreement between hini-
M If and his l)ank. Doppelt could not recovei- because the
National Hank of the Uepublie had no notice, nor could
it have leaiMied IVorn the endorsement of l)opi)elt's bank,
that it was not the owner of the check. The law per-
mitted the National Hank of the He|)ublic to regard
IIh check as bein^v the j)roj)erty of Doppclt's bank.
Ml. Acccpihi^ deposits xchcu insolvent is criminal. — -
lie icceipt of deposits by an insolvent bank is clearly
a Iraud and the ollicers who take (iei)osits are guilty
nf eriininal oll'ense. ])unishable by inii)i'isonnient. In
iMti\ icling an otlicei- of a bank of this cjiarge it is neces-
^al y io j)rovi' thai he knew the bank to be insolvent when
lie rec( i\cd the d(|)osit. 'I'he InsoUtiicy of a bank is a
\ery diflicult inattci' to deti'rniine sonictinies, l)ecause it
li peiids upon tlu' \ahir ol' the loans and discounts in
its assets. While the olliceis may know that sonic of
'" lo.uis are not first class and !iia\ not be paid promptly
\<t they may beliexc them to l)c good ultimately.
•MTH. Dri.tx'vr niciscd fr>iii! r( sjio'isihiUt // aflrr riui-
sdiKihlc tinw. The drawei- of a i-Ji. ck is always liable
foi' tli<' ultimate payment in case tin liank should fail
iielore it IS cashed. Iloutver, in ordi r to pniiect tiie
drawer ol cheeks, tin
a\\ reiiiiiii
that
a clieelv imis
t be
:nu
.MOM'.V AM) IJANKINC;
i'
})rf.s«')ik-(l to tlif hank foi- j)iiymciit witliin a reasniialjlc
time, othcTuisr tlir lioMrr of the duck must assume tin-
lisk of the f'aihu-e of the hank.
.•J7!K Local hdiihs. \u the ease of a loeal l)ank the
courts liave held that a irasonahle time means until tin-
close of the husiness day t'ollowino- the ddiveiy of the
check. 11" the payee should endorse it to another party
on the second day and the endorsee should hold it still an-
other day hefore presenting- it. the hank iailino- in tlic
meantime, the ori<>inal drawer would he released and the
payee he eomixlled to reimhurse the jiolder or endorsee,
hecause the lattir had jjresented it for })ayment within a
reasonahle time after reeeivitin' it. In the ease of ehecks
drawn on hanks outside the city in . hic-h the drawer
resides, the cheek must he forwarded on its way hefore
the close (d' the next husiness day in order to hold die
drawei- responsihie.
.'{HO. Hohhr of a clitch c(ui iiol .sue haul-. Tn nearly
ever\ state a hank on which a check is di-awn is under
no le;4al ohlioalion lo tin- holder to pay or accept it.
win Ihei' the maker's funds ai-e sullicient for this. purpose
or not. Of ronrsc if the hank has ;iceepte(l the check
hy (■( ililicatioii. then I in holder has ;i claim against tin
''••'"'-• I I' ;i '•■■'Ilk should (hvlinc without a \aii.l rtasdn
to j)ay a check dr.iwii on a siitlicic nt fund helon^in..' Id
its de|)ositor the iiisl it iit ion would he liahle for wliate\tr
injury the d( positor sustaiiie.l. 1 'or example, should
a liaiik decliiK to |»ay ,i cluck sii|)])osiiio tli.it the makt'r's
depMsil was iiisiillicicnt when in truth it was ample, the
institution w<Mild he lialile for the eonsi .jnenees of thi^,
(hshononn.L;- his order. (\(ii thoii-h its condm't was
'"iinded on the mistaken c.ilciilat ion of a hookkicper.
.'ihl. ill , (icdiidii. i ii( iepositor iias tlie pri\ iltM.c ,,r
^t<'ppil!,:^ paNiiHiil on a check. ;uid the hank will he
.%-
i)i:iH)siTs AM) Di'.rosri'ou*
;}] 1
nk \hv
itil t!ic
of tllC
■ ])ai1y
till ati-
iii till'
nd tJK'
lorsce.
ithiii a
flu'cks
Irawfi
l)el't)ic
id the
lialil'' for the anioutit if it pays the clitrk in spite of the
stop order.
TIr' death of a dei)ositor works a rrvoeatioii of all
tile eheeks not yet paid just as soon as the bank receives
notice of liis death.
882. Insufficient funds.— If tlie credit account of tlie
(K[)ositnr is insuthcient to pay the full amount of the
cheek, the hank lias no ri^ht to pay a part of the sum
with the funds on hand. On one occasion when a l)ank
refused to pay a check where the funds to the credit
of the dejxisitor were insufhcient. the holder of the check,
r. arin^' that if there was delay he mi^ht not receive any-
thin;; on account of the emharrassment of the drawer,
(Kposited to the account of the drawer a sum suiHcient
t(. cover the amount of the check. Thereupon the hank
!iad no ri^'ht to refuse payment.
;{S:}. Forgeries. — The l)ank is presumed to know the
sitiiiatures of its depositors and it cannot pay a forced
cluck and charge the account of tlie depositor with the
aiuoimt of the check. The principal excejjtion to this
rule is in the case of a check so neoliocnlly dr-iwn that
an alteration is easily made. The hank that pays a
I'orii-ed check cannot recover the money from the iiino-
( . lit pavee. This seems a hard rule as both are imioeciit.
but as ^rreater vigilance on tlie i)art of the iiank nii.uht
have discovered the for^a-ry it must i)e held respousilile.
'Mi. Post-dating:- '^oun-Uuivs cheeks are post-date.!,
that is, bear a later date than the one on which tluy are
written. The object of this is to ..''tain ddav in mak-
ing- payment, tlie drawer simply desMin^i' time in uliieh
to have the money in the bank's possession on tlu' date
specified. The bank that pays an ;ilt(ic>l post-dated
(litik before its due date i-aiinoi elnck tlie amount
It
1,
a^-ainst the drawer. In no ease can a eliei'k ]
laiti
ore
-312
MONEY AND BANKING
f'T
11. tnn. spenhec he c.|,a,...l to tlu- d.aue.-'s account.
.iHo Srf-of.-^lhv rdation iHtuccM the har.k and
<n-s.o,.,s that of dehto.. and creditor: therefore either
Pa.ty has the r.o-ht to set off his ,leht to the other uith
;n.y e am, he n.ay have against him or it. For instance
.1 A has a deposit of $100 in a har.k. the hank is his
'l^-I'tor lor that sun,: hut if the hank holds an ur.sccurc,'
jnul matured note against A for ^.50 the deht of the
f'ar.k to A is only $oO-the diiferencc hetneen the credits
and debits.
.•iS<J. fncn a dcpoKifor fails, Hs uoW not hcin^ se-
cured.- 1 h,s point is of consi.lerahle conse(,uencc when
one or another of the parties have heeome insolvent. U
the depositor fails owing the hank on an unsecured note
whether n.atured or unn.atund, the hank can sei/e the
Jlqx's.t to satisfy the note unless somehodv has a prior
^en upon itfor instance, an attachment: ;.r in Ilhnois.
South Carohna. Kentucky. Nebraska, or Texas when
a cheek ..peratcs as an assignment of so much of the
<lci'"s.t a che<k holder, after he presented the check
won ,1 have a chum superior to that of the ha.ik. Simr
n.solven.y caused all unmature<l obligations of the in-
M.lvcnl p,.,.son In b,.,nnu. at onee ,lue au.l pavable. the
'^o.kc.uld apply a deposit on such a note. If the note
.as secunly the hank must (irst satisfy the note from
the securit\-.
;|.sr. Advantage In ././W.r.-If the bank should
:'-''''••'; I'--'';;'' n.ay s, loir his note to the bank with
Ins d.pos.t. Ih,. receiver cannot, of eourse. enforce
;""',^'"","" ""•""'*■ "'"'''" ".aturesbu! the depositor
I'.-'s Ins elaim against Ih.. bank u in never the note is
IMVsented to hi.n. The nveiver cumo, avo|<| this set-
;:;\;-,"V;7^'*'" ■'"'*■ '"aninnoeenl I hinl party, for th,.
I'act that the not
V \^as piiic|ias/(| I
I oil! a reeeixtr
"•oui<l
DEPOSITS AND DEPOSITORS
313
I
lit notice of irregularity. If a note after maturity was
iR<4()tiate(l by one bank to aiiotber and the first bank
t'aikd hol(lin<r a deposit of the maker of the note, tlie
maker eould use his deposit to off-set the note, because
tilt' second bank was not a bona fide holder and took the
note sul)ject to all equities between the maker and the
tiist bank.
:\HH. Set-off maki's failure'^ appear tcnrsc. — Since a
larne portion of the loans of a bank are made to de-
[iMsitors, whenever a bank fails a considerable part of
tlie assets are canceled l)y an equal amount of liabilities
in the shape of (!e])osits. Depositors who are also bor-
louirs are really in the position of ])referred creditors
for their (lej)osits and they oain at the ex])ense of de-
pnsitors who ai'e not also borrowers. Therefore, in a
1 ank faihu-e where a ;>() per cent dividend is paid to de-
[Misitors. the failure is not so bad as this fi<,nn-e indicates,
Inr a large number of depositors may also have been bor-
ii'\\(rs and lunc lost little or nothing,
:{H!>. Illustration.— A bank witii Sr^l, 000.000 loans and
si,()()(M)()0 deposit liabilities fails. 1 f half the loans are
iiffsft by deposits there remain .%')()0,000 of loans with
\\!iieli to pay .%")00,000 deposits. Supi)ose the loans
nali/.e M) pvv eeiit of their face value w hen licjuidated,
< n- would then be .$2.50,000 to be distributed to depos-
IC
le (!' positors who
itnis. or a ,•)() ptT ci.,,! di\ idcnd. I (
\^' If also borrowers had not been allowed to offset their
(I
Itligalions with their deposits, the assets collected would
iuive been !i<7.') 0,000. which would have l)een distributed
iitiiong all the depositors having claims of .$1,000,000;
lliat is. each depositor would have received a 7.'> per cent
ili\ i(l<-nil
,. 1.,
I....I
as
tl
le percentage of divide nds indicates.
•*''0. Form of note. — Some l)anks use a form of note
HU
-AIOM-.V AM) HANKINCJ
similar to the f'ollouin^- in which the horrowcr specificailv
agrees to permit the hank to transfer t(; itself in ease
of his insolvency any deposit credit or other form of
indehtedness:
I'l V A N STO S , III
.19.
""'■'■ '''''•■ ITDinist. to pay to fhf order of
STAIK HANK OF KVAXSTOX,
With interest at IHr';:,:;." ,,;; ani„;„. aft.r ;.•.■.■.•.• at tiTX
of sa„l H,..„k, X ,1m.. n....iv...l. I„ ....s,. of the insolvency of the
>m.le,s,p„..l any In.leMedne.s due fron, the lejral hol.ler hereof to
tl"' M.ulerMfrn,.<l n.ay he appropriated and applied hereon at anv time
as well hetore us after the maturity hereof.
\o
C'lIAPTEU XXI
LOANS OF THK BANK
3!n. Tico qualities iicccs.sar// to the ir iking of a
htinlicr. — The succcssl'ul l)ankc'r who lias llie entire le-
spoiisihiHty ol' his bank upon his own shouhlers must pos-
sess two <|uahHeati()ns ahiiost opposite in eluiraeter.
I'ikU'I- former eoiuhtions eonservatism was the distin-
«4uishin<4- (luahtyof a good hanker, hut with keen compe-
tition in the business he must add to eonservatism in
planting loans, ao^^'ressiveness in seeui-ing deposits. In
a lar<4e bank the two functions can be specialized in dif-
I't'ient men. The point of view of the ot!icial who makes
the loans should be, first, to avoid losses and, second, to
make money: in these good judgment is more to be de-
sired than enterprise.
Mr. William I^aw, vice-])resident of tlie Central Na-
tional Kank of Philadeli)hia, iti an un])ublishe(l address,
Ims made a fourfold classification of bank boi-rowers.
'■V.)2. luvcstiiioit /oc/;/. v.- First. inve>iment borrowers
pai-ties who borrow to invest the funds of the bank
in certain secvnities or property which they Mish to carry
with a view of reselling at a profit, or of holding until
I'liiids can be accumulated to i)ay for the purchase, or
iif enabling the holder to gain certain control or infiu-
I iKT. or of otherwise accomi)lishing some object external
to the transaction. Such are the loans ordinarily
granted brokers, investment bankers, and market opera-
tors, lliese loans can be readily irali/rd upon m piw-
[)ortion to the coincrtibility or salaltility of the collateral;
316
m
MONKV AM) liASKlSC.
It
it
utt
L*-*
tlKit ,.s to say. uudvv normal conditions such a borrower
^^ 'II pay ns loan at one hank by ..||in«- the seenrl^ies
pledged there or by borro\vin<.. t'rom another bank
-'m. Cuu'litinns under tchlch the,, arc fraud hnukin->-
/o...--Loans oi' this eharaeter, if they are obli^atio,;;
of aetive and capable n.en, and especially if pavabl. on
clenumd and secure.l by well-,hstribute<l and properly
n.av^uu.d collaterals possessing a broad market, are an
JNcellent nnestn.ent for a portio.i of the fun.ls of a
•mnk. Ilouever. when money is rednndant such loans
at tunes y.eld a lower rate of interest return than the
■•ate paid by banks in reserve and ce.itral reserve cities
"Pon tne daily balances of their out-of-t..wn correspond-
ents. In recent years the rates upon such loans have
rano-ed from ll . to 2 per cent for several consecutive
"lonths. In times of o-reat financial stringency reali-
^t,on upon such loans is often excee.lin^ly d'iffic.dt.
Ihe bank having loans secured by a large hnj of certain
securities may lu-sitate to force their sale, fearing to
break the market and thus reduce the market value of
similar securities on other loans or injure the market
price of securities belonging to their friends and business
associates: but we are compelled to recognize the fact
that under our system of a bond-secured, non-elastic
currency, with its Mell-known central reserve city and
reserve city features, call-loans upon stock exchange
collateral affonl a reasonably safe and exceedingly con-
venient method of util,/ing that portion of the loanable
funds of an aetive bank in a financial center which is not
employed m eanng for the rciuiiemenls of traders and
nianutaelurers.
.304. Industrial /w;/.9.— Second, automatic or seasonal
"orrowers. Hy these terms it is intended to deseril)e the
operations of manufaelnrers. meiehants. farmers, dro
LOANS OF IHK BANK
3r
virs. and otlicr like IjorrowtTs who r(.(iuire lt'in])orai-y
acroniinodatioii (liiriii<^ a ])eri()(l of product ion, transi)or-
tation. distribution, oi- collfction. To illustrate: A
(■i»ii\frter oi' cotton o'oods must jjay the coniinission iner-
rliant or manufacturer for his raw material, for instance,
i^iay ^oods, witliin ten days after purchase. The ])roc-
iss of l)leachin^\ dyeing-, and finishing- may consume
sixty (hiys; the p.-ocess of (hstrihution amon;^' and col-
kciion from the dry <4()0(ls wholesalers who purchase
the finished ])roduet will re(|uirc at least sixty days more.
l"i;n(ls loaned a borrower of this (lescrii)tion should be
automatically returned with the completion of the trans-
action. Or a company operatin<if grain elevators in
Minneapolis ships wheat in carload lots to a Philadel-
phia grain exporter, asking its local bank to discouii-t
tlie bill of lading draft created by the transaction. The
completion of this ])urchase by the sale of the sterling
yrain bill automatically returns to the bank the money
l)()rrowed. From the standpoint of a commercial banker
loans of this character constitute the ideal bank credit.
Hanks are to be en\ied when a large part of their funds
are utilized by local dealers engaged in })roducing,
marketing, and distributing the great staples that the
people consume, as food, clothing, heat, and light. A
liank so located will continue its usual business whether
or not the. _' is a ])anic on Wall Street, whether or not
tlic financial leaders are hurryiiig to Washington,
whether or not there are eager buyers for life's light
luxuries.
A favorite form of loans of this sort are the re-dis-
lounts of other banks, especially if the bornnving banks
■ire located in sections where seasonal borrowing is the
usual rule and are, therefore, themselves seasonal or
temporary borrowers. The risk involved is small and
ii/=
'»•%
;5l,s
M<»^|;^ AM) 1{.\\KI\(;
Hi:
I>';"nr,i.s of rr-.lis.-ont.ts .•..•<■ .•,,,! to .rn.ain on cmlit
"'fl' "'^' l»",l,no- hank in n.nd, lar.vr proportion than
arc the proc-nls of or.hnary loans. A hank usualiv
I'orrous to unrvnsv its rosc-r\es: a firm usualiv horrows
to pay out the proceeds.
rUv ahovc- mentioned two classes are considercl most
(ic'siraolc loans: the two f'ollouinu. k,ss dcsirahk'.
'•m. Capital /nans.-- -'I hinl, .-apital horroucrs. This
Pin-ase is inlendcl to <lescrihe the borrowing- of pc,-nn-
'H'.it capital for a business to be repaid from earnin-s
or profits as they accum.date. and the natural results
are continuous loans aiul over-tradin^r. j.^r instance:
Ihe president of a manuf acturin^r corporation, in con-
structing a new plant, fin.ls tfiat its cost exceeds the
<'a],ital subscribed by tl.e stockiiolders. He borrows the
necessary money by issuin- notes which are disouinted
by a friendly bank. This loan can be extinouished onlv
by borrowing' elsewhere, by continuous operation at ',
j)roht, or by the sale of the plant.
J|!)r,. Capita! ,houhl come from stock and hornJ mv/r.v
— Ihe Meakness of this position would (,uickK be made
manifest should manufacturing operitions cease All
eapably manaoed banks discoura-e such loans in a,n
substantial measure unless conditions are uiiusuallv i'l-
vorable for continue.l hioh earnino.s uhicli can I.; an-
pliul to reducing steadily such a loan within a reasonable
t.me. ( apita! for re.iuirements of this character shoul.l
be j)rovided by additional subscriptions .,f stockholders
nr by sales of bond issues. That is to sav, ^he funds
■slunild be held in the form of permanent or I- n.r Unu
I'ornnvmo- at the option of the borrower throui>iri>onds
secured b\- mortuaiic.
Thi:, idea is eoi.e.sely exprcsseti by the advertisement
ot ;i prominent Chicago bank: "C\.nservativ, bankln<^
Ujt
LOANS or liu: i?.\.\k
11!)
.oiisists ill caring' for many iiitciTsts, while (•a])itali/iii^f
iioiK'.' Till' statciiK'iit of a sti'on<^ly or^aiii/.rd inaim-
f;ictinMn<^' corporation or firm itidicatt's <|uicl<Iy cotivcrt-
ililc assets ahmidaiitly siitliciciit to j)rotec't all (|uic'k
li;il)ilitit'S. ()♦' c'oiirsf. from the staiulpoidt of the maii-
iir,i(tni-ei- enju"a<4'e(l in a highly profitable line of work,
till tciiiptatioii is allui'in<j' to endure for a pe;-iod the
saerifices, hnff'etin^s, and annoyances of earryin<4' wlmt
is termed a plant debt, knowing- that he w ill thereby ])e
enabled to maintain ])ermanently a low eapitali/ation
and tlnis render the task of dividend earning li^-hter for
all time to come wlien the plant debt shall once have been
extinguished out of earnin<;s.
;}!)7. Mort^ni^e loans. — l-'oui-th, lon<4- time or perma-
[icnt borrowei-s on mort<>'a<^e. To this class ])el(;n^ the
li.ildeis of improved and j)roducti\e central real estate
ill till' larger cities. Tiiou<4'h these loans command low
rates by reason of the stable vahn of the security, na-
ti i[ial banks are ])rohil)ited from takint*- them directly,
except to secure a ilebt pre\ iously e\istin<i', and are
ciiticised severely for taking' them •ndir*'ctly. These
Idaiis are gencally })laced with corporations controlling
trust or j)erniancnt fujids, scch as life and tire insurance
cMii,j)anies, savings banks, and trust companies. T'he
ih i4iee to w'licli these loans are encouraged by our laws
ami the case Mith which money can be borrowed in round
amounts u[)on improved central rea' estate in onr larg-i
cities, ])ossibly affect the advance in real estate \alues
as dii-ectly as the iticrease in population and wealth.
Uuildinu' and loan associations affoi'd the most eifective
]»lai» for handling small real estate loans. In this elassi-
ticatioii ma\' be included, for some reasons, the bomls
constituting preferred liens upon high class railroad
ami traction propci'ties. l?ut their ready coin ertibiiit
'320
MONKY AND BANKING
renders tlicni also
ilL'C
e{)tah|(
ptahle as a hank invcstnicrjt. and
K-y arc tavo.yd l,y the national hankino- svsten, in that
t"^' 'lile re^rardn.o- ,xcrss loans is not applied to then.
'm. Loans reported (u the comptroller. The f„|-
cnv.nn- elass.fication is nse.l hy the Comptroller of the
Currency n>. the reports re,,uired of national hanks
Comparison ,s ma.le with the statements eovev'
I)eiiod of tti, vears:
i-uii>- a
LOANS OF THE HANK
S21
.'JIM). Demand loans have i»ctrast(L— The first class
irpresents the demand loans of all the national banks.
It will he noted that these unsecured demand loans have
increased over 4. per cent in ten years.
The second class are demand loans secured by stocks
and bonds as collateral. There is an increase projxjr-
tionately in this form of loans between 1897 and ]!)()<;.
The year IJKXJ was one of great speculation in the stock
markets, and the increase in this item represents the
^n-owth of speculation on the margins. About one-
third of these loans a'-e reported by the New ^^)rk banks
aioiie. In 1897 these loans fell oH" proportionately to
others. prob{iJ)ly ,„i account of the hcjuidatinn of' the
stock markets which had taken place during the summer,
the margin traders having l)cen sold out and their stocks
going into the hands of holders who could purcliasc
then, outrigh
too. Donhlr-namc pa per. —The next item rei)resents
trade i)aper discounted at the banks. The decrease of
H per cent in ten years indicates the changing naturt' of
l);ink loans. The commercial jjaper |)laeed through
cninmercial pa|Kr houses, which are di scribed later, is
single-name paper. It is now the custom of the largest
Ik'iiscs not to take notes from their customers but to
l'"in.w on their own credit. This tendency is more ap-
I'li-e-if in the cities than in the coimtry as a whole.
I'linnighont the country there lias luen ;"ui ab-.olutt iti-
erease in two-name pap(>r of nearly 100 per cent, while
"i«' increase n this class of loans held t,y \cn- York
haiiks has !)• ^n not more than .'JO per <-eti».
••01. Single-name and brokers' paper.— 'Vhv amount
••'■ Mugh -name pap.r lu Id by tin banks almost <!..,,!, I,.]
li,
le commercial |)ap(!- houses.
1'-. iiHiK .iting UK gr(i\s (II (i|
L
VII— .M
ii
322
MONEY AND BANKINC
in
The last classification represents time loans on mort-
gages or other security. Since the law prohibits the
national banks from loaiiing on mortgages the colJateral
back of these loans is probably to a large extent personal
securities and warehouse receipts.
Jielow are rej)ro(luce(l two forms of notes in use geii-
crallv bv banks:
Jl'DGMENT NOTE
o
<
y.
N
<
8 EVANSTOX, Ti I IS!) I
nfter datr. for value nc.iviil proiiiiso to j),iv
to thr onirr of l!ic SIWIK HANK Ol' I':VA\.ST()\,
I
Doi IMI'^.
t
; Mt the STA'I-F-: IVWK OF I'A AXSTON, with interest nt the rale
of |)er cent [ler aiiniiiii from inilil paid.
And to secure the |)aytiien of said anioinit henliv
iiuthori,^e irrevo<'al)ly any attorney of any (.'oiirl of record to aii-
I'car for in --nch {'ourt, in term time or vacation, at any
time hercaftiT, anil lonfess a JMd^'ment without process in favor
of tlie liohler of this note, for such anionnt as mav appear 'o In'
Mliiiaid thereon, tom'lher \y\\\\ costs and '. dollar- altor-
ni'y's fees, and to waive ;uid releax- all errors uhich inav .nterveiw ;
in any such proeeedin^rs, and consent to iiinnediate execntion upon
(such judjrtnent ; hereby rat ifyinj? and confinuinp all that
said attorney mav do liy virtue h,i> tl.
No.
r)iip
(Ml. I. \ rhU \I. NOTE
% I'.V \ VSTOS, II I
ON DFM ANI"), i\^\fr lintr pr'imitv to pnj/ to thf order nf Ihi
STATI, HANK <)!• KNANSTON, nl >lt n/fire.
... Dot I *R',
for value rerrired, vith inlirml of Ihv rote of p,r iml fur
nnnum. nl'trr dotp. horynq dfjiofitnl irith noid fhink o> rnllnlrrol nrriinlii
for thf imymi-nl 'if thm orul nriu of/iT Ivilnhtu nr linhilitii'n t>f Ibf uuilfi
Bxyned to mid /{(ink hi'rituf'.rr or hrreoftfr ront lorl, il , thf folloiniKf pyoji-
trty, riz. :
thf markft ralu* of which m noir f If thf Honk or its attigni
m
:
LOANS OF '^'HE BANK
aa;3
■ I, I'l Ihiil thai niii<l I iilliihriil .iii-iiri/i/ i.i of liss value tlrni nborr ntntfd. rtr
'n>i if fit'id s(i-ur'ilii .iltall dirlinf i;i vnliir. nr the liobilitii of the uiider-
M /(((>/ /') siiiil ISdiikx III- itn <is.iliiii!< flidll be lit mil/ time merenKed, xaid Ihiuk
or i/." ii.isifiim null/ rail for additional .teriinti/ fatigfaetorq to the Imldir
luniif. and falhire to fnnii.ih the aanie fhiill make this note at once due and
jHiiiahle. Th( undi rsiani d hinbii ijires xaid Hank, its attorneu or its
afxiiins, full poirir to mil snul ndlalerat or aiii/ pari thirinf, vithnut notire
or drniand. at fuiblir or jirirate sale, in ease said riillateral shall be found
nf less value than idtore stall d. or in ense aiiii of said rullateral shall decline
ill value, or in easi ndditinnal secnrili/, sat isfartoni to Ihr holder hereof, shall
nut he funiishid upon call as above providid. or in case this note or am/
olhir liahilitii of the undersiiim d to said /lank shall not be paid at ma-
tiirili/, and if such sale shall be public or at Broker's Hoard, the holder
heriiif mail piircha.fe at such sale. In case of sm h sale the proceeds, after
puinnint of the costs and i.rpiiisis coiintctid with siud cnllateral, and the
sale and deliver;) thereof mail be ajiplied upon ami liabilitii of the tinder-
tiiliifd to the holder hen of. irhetlier due or not, and the surplus, if ami. shall
be paid to the iindersifiiii d . Iiis or their assiiins; but if the proceeds of such
title rhiill not paii in full tin liabihtiis of the iindrrsnined to the holder
hrriiif. the balance of such liabihtiis shall bimnie at once due and paij-
iible and biar inlinst ai the rale of si n n jii r ciiit pi r annum from the
lime of such sale. In case of ami i .nhaniir . or adililioii to the collaliral
iitiiive ninnid. the provisions hiriof shall i.rliiid to such niw or additional
ciilliiti lal. In case of the insolvinci/ nf Ihr iindi rsiijned, am/ indibti dm ss
due from till liiial holder hereof to the undi rsuini d mail he appropriated
iiiiil iipplii d liiriioi at ami time, as in II bi fore as after maturitii hereof.
No ' ".
Due
KC_'. J lid gillie It f note- In the jud/^ineiit note tiic
si^iiitr autliori/.t's the bank tliroiit^ji its attonu v to ap-
pear in any court and ^tt jiid^Micnt in the amount of
the noti' without the trouhjc and i'\j)ens(.' oC pro\in^
ilic ( xistencc of the drht or ^ivinix the si^'^nei- the i-i<,^ht
til (1< iVnd iiiiiis(ir a<>ainst the ,)ud^inent. This I'oriii of
iiiilc enahles the hank to hecoir'e a pid/^iiient ert^htor
in case the signer is threatined with insolvency and thus
t(i |)laee itscll' iji a jjrel'erred position in collecting' the
.M.t.
K>.'{. Colldtrnil iinlc. '|'h( coliatei'a! note is the ordi-
n.iiy noti rei|uiri(i of hoi rowers who pled/i^e collateral
to SI cure the debt. It will he noted that the collateral
deposited secures not oidy this deht hut an\' other (h ht
that the si^iu r owes to Ihr hank. Tlu' hank has the
n^ht
•till i
'11(11^ I tl I « tl I M I
fnihue to deposit such collaleial makes the note due at
:«+
MONKY AM) BANKINC;
i
m
once. Tlie bank does not liavc to wait until the matur-
ity of tlie note to proeeed a<rai»ist the debtor. Further-
more, if additional eollateral is not fortlicoming the
bank has the ri^lit to sell the collateral at public or
pri\ate sale and is evrn permitted to ])uy it in itself if
it cares to do so. It the sale of the collateral should
fail to cover the indebtedness the balance is still an obli-
gation against the delator. If the si^nier should become
insolvent the bank is a })referrcd creditor and may seize
the collateial.
These pn)\ isions, which seen so drastic, are necessarv
in order that the bank may )rotect itself in times of
falling values. The l)anks making collateral loans usii
allv depend almost entirely upon the collateral and very
little upon the /jjeneral credit of the borrower. There
have been numerous cases. j)"\\ l\ er. t(^ show that a bank
is not always safe in relyin;^' u|)on the value of liie
collateral. Forced securities have been used to secun
loans, the t'ori^ers de])en(lin<;' upon the carelessness of
the bank in not scr>itini/.in^' the secui'ities as carefully
as if they were purchasing" them.
M)i. A'/.s/.' /// colhitcrdl h. ins. — A few years a^o a new
stock ol' the Railway K(|uipuient Company apj)eare(!
on the cuib market in New ^'ork. Heiuf^ jn the hands
of the promoters of the company the stock was easily
l)id up to a very hi^di price by means of "wash sales"
that is, the promoters buying" and sellin<4' the stock
an\on^' themselves. After the public had become accus
tomed to seeing- the (luolations o!" f!ie stock in the daiK
ncws-papv'rs ilie j)rnmoters wci ! to other cities an :
opened deposit accounts with the banks. IIa\ in^ estaii
lished their credit tluy persuaded the banks to a'-cept tin-
stock as eollateral with a liberal margin. When the eon
federates had l)()rrowed as much as thev could the bank-
LOANS or Tin: uank
385
iiatiir-
irther-
ig the
)lic or
self if !
should
n ohli-
ICCOIIK'
V seize
• a new
j)eare(l
hands
easilv
lies" -
stock
aceus-
V daily
:s and
; estali-
■|)t tlll^ ;|
lie coii-
' bank^
S),
were one day surprised and chagrinetl to find that the
piiee of the stock on the curb market had fallen to
almost nothing and that the collateral, which was the
(iidy secui'ity i'or the loan, was almost worthless.
'l"he great bulk oi' collateral loans in Wall Street are
call or demand loans. Wiien the lender, usually a bank
(ir tiiist company, calls the loan the borrower must pay
it or his collateral is sold to satisfy the debt. The rates
for call money depend upon demand and suj)ply. The
yieatest market for it is the New ^'ork Stock Kxchange
where it is offered by brokers just like a stock. When
it is plentiful, call rates range from 1 to 3 })er cent,
and money is easy; from (J to 8 j)er cent is firm, and when
it soar beyond that rate money is stringent. In times
of ))anic the rate has gone above 100 per cent.
lO.) l\siiri/ lares. — Any rate of interest higher than
that fixed by law is usurious. I low then can New \'ork
hankers and money brokers charge 40 or 80 per cent
foi- call money?
Hefore explainijig how this is possible let us see just
uliat is meant by the legal and maximum rates of inter-
est as fixed by statute in most states. There is a very
wide misconception of what is meant l)y the legal rate.
Contrary to the usual impression it is not always the
highest rate that can be charged for borrowed money.
Instead, it is. for example, the rate that the court would
iii,])ose if a judgment to collect an account "with inter-
(st" wei'c entered. If the li gal rate in the state where
'lie judgiiirnt was entered hap|)ene(l to be <i per cent.
Uie drCcndani would lia\e to pay p< r i-enl. 'I'lie max-
!uinin legal late is the highest rate tlurt cui be charged
I'll money, a?id any rate above the maximum is usury.
In some states, as for example in \ew ^'ork and
I't nnsylvania, the legal and maxnnum rates are the same
*f'
ii2(i
-MONKY AM) 1JANKI.\(;
If J
~0 pw cent; in Alaluinui hotli rates are 8 per cent;
in liiinois the le^ral rate is .5 per cent and the niaximuin'
rate 7 per cent; in Kansas (> ptr cent and 10 j)er cent
^i| respectively; in Indiana (! per cent is the legal rate and
8 per cent the niaxiniuin rate.
400. Call loans (■.r<';///;/(y/.— Althongh the niaxiniuin
rate in \e\v \-(,rk State is per cent, the ^Vall Street
liankers can charge any rate of interest lor call loans
by reason ol' a sectir)n of the state hankino' law which
says: 'Tpon advances of* money repayable on demand
to an amount lu-t less than five thousand dollars made
ui)on warehouse rcceijits, hills of ladino-, certificates of
stock or dej)osit. bonds and other ne<>;otia')lc instruments
pledoed as collateral seciirit> for such repayment, and
any bank or individual banker may receive or contract
to receive and collect as compensation for making such
advance ann sum to he a^iral upon in writing
l>y the parties to such transactions." Thus the banke'i-
can charge any late for call money for sums of $.5,000
and moie that the borrower is willing to pay. With a
tmie loan a loan made for a spccitied period, as ninety
(lays— the rate cannot i)e higher than the maximum rate.
Most people beliexf that a call loan is for one or two
days only. Some call loans run forty days or even mori .
The interest on it changes with th tiuctuations in call
money rates; the interest on a time loan remains the
same during the life of the loan.
■KIT. Loans on ojmi 'oook accounts. Soiuv bankers
loan funds to business men on the security of open book
accounts of their custonu rs or on insiaiiment contracts.
This business is strongly discounten.tnced b\- the mon-
conservative banks. Th.sc classify bankers who cML^a^v
ni it with pawnhrokers. Hankers who do this business
claim that it is exactly the same as ilie old business ol
LOANS or THE BANK
327
discounting trade paper. Tliev argue tliat as trade
paper is now no longer given by customers to the same
ixtent as formerly, the merchants have none of it to dis-
count at their banks and therefore it is permissible for
tiiini to borrow on the funds due them from customers,
although these are not in the form of notes. Conserva-
tive bankers on the other hand say that utider present
conditions of banking c()mi)etilion any !)usiness man
can liorrow on his general en it all the bank funds he is
I iititlcd to and that those merchants who can get funds
(iiily by hypothecating and assigning tlieir book accounts
aic undeserving of any bank credit at all.
408. Providing tcmporarij capital. — The financial
manager of a business is concerned principally with
liiidging over the interval between the ])urchase of ma-
tt rials, etc., and the realization of the value of the out-
put ol" the industry. The value ol' all the materials
and stock represents capital wliich must be contributed
by someone. If materials can In- bought on credit, the
scllci- is the one who has provided that capital for a short
time, tliough he may shift tjiis burden on to a bank by
discounting a note taken in payment f( '• the materials.
The l)uyer of the materials may thus jiartially escape
Wiv burden of providing temporary capital. On the
other hand his own customers — the purchasers of liis
linished product — may put upon him the necessity of
finnishing caj)ital to them by demanding terms of from
thiily days to six months. In most cases the business
man will find he is able to shift less of a burden upon
concerns from whom he buys than that he is compelled
to bear on behalf of his own customers. When coUec-
tloiic ;ir!' s](!w tb.is e\t!'a burtieu i< corresi'on.ibnjrlv ui-
creased.
The task of the financial manager, therefore, is to
3i>8
MONEY AND BANKING
^^et Ihrouul, il,(. assisfancc of banks the use of capital
not nmk'd by its owners. Banks act as agents between
the owners and the nsers of capital. They are always
ready to furnish capital to any one, provided the bor-
rower can oive satisfactory security for repayment.
The secin-ity offered to a bank may be either the gen-
eral credit of the firm, l)ased ui)on its reputation for
prompt payment: the possession of property above its
liabihties: or the maintenance of a certain deposit balance
at the bank, Jn case these are not sufficient, cai)ital may
be granted on cohateral — some form of property hy-
pothecated to the bank.
Hni
IH
CHAPTER XXII
LOANS a(;ainst (c)[. lateral
400. Collateral for hank loans.~The form of collat-
eral most easily handled is no doubt stocks and bonds
extensively dealt in on the Stoek Exchange and which
are marketable on a moment's notice. Heal estate and
other forms of permanently invested cai)ital are bad
eollateral for a bank because of the difficulty of realizing
ui)()n them quickly. The third ^reat class of property
uhieli may be used for collateral is merchandise and ma-
terials representing the investment of that form of cap-
ital which it is the le^^-itimate function of banks to
])n)vi(le. If the calculations of the owner are not amiss,
tills pro])erty will be j)repared for the market and sold
u itliln the near future, so that it embodies the l)est (|ual-
ily in a collateral security in that it will be licjuidated
tiaturally and thus provide funds with which to repay
the debt.
HO. Merchandise as collateral. — The difficulties met
with in tlie use of this most natural form of collateral
lor bank loans have considerably hindered its emj)loy-
inent as such. Merchandise and materials cat mot be
deHvered to the l)ank as in the case of stocks and bonds,
if they are left in the possession of the borrower they
may disappear, or substitution may be made, or they
may deteriorate through ne<^iect. 'i'hese risks can be
u third i)arty, who acts as trustee for all concerned and
3Jiy
iiSO
MONKV ANJ) HANKING
wlio is re<,uiml by law to ccni'orni to certain rule
whidi make fraud and loss inipcssihle.
411. Advantages of good xairrh,,i<s},tg krus.—M „
to the interest of both tlie banks a.u^. tiie borrowers that
the warehousing^ system should be so re^mlated that
loans can be neootiated on warehoused merchandise as
easily and safely as possible. In a ^n-eat number o;
cases of financial difficulty on the i)art of merchants
or manufacturers, the source of the trouble lies in 'e
investment of too niuch capital in merchandise or n,a-
terials which cannot be sold (juickly without loss because
of adverse market conditions. The ^oods bu\e value
but time is lecjuired to realize upon it. T?ankruptcy
may be imminent unless the banks consent to pn>vi(le
the temporary capital to carry the merchandise, and
their doinu- so may depend upon the ri^k invohed in
loanin..- upon the security of the U'e-chandise. The
value of a warehousing system, regulated by law, is
measured by its service in eliminating the risi attend-
ant upon loans on merchandise.
412. Loans on merchandise a legitimate function of
banks.— The character of baid^ loans has changed
greatly in recent years. There has been a marked de-
cline in the amount of trade paper offered for discount
and competition among banks has compelled them to
develop new fields.
The collateral loan is one of these, but few banks
have been willing to acce])t anything e\cej)t stocks and
bonds as collateral -loaning on merchandise is still
regarded in many (juarters as a sj)tx^^ies of pawnbrokin-
and is classed with loaning o!i book accounts. Xever-
theless loans on niercjuuidise confor??! »ii.-.!v
.,.4-1,.
*t;
--. — ..., .>...»„»i, i,».
banking principles, and they promote the industrial
prosperity of the community more than any other class
LOANS ACiAINST CULLATKRAL
S6l
(if loans in that they give snhstantial aid to le<^itiniate
(dinintrfu in niari^etab' goods, which is the basis of
all l)iisiness. Anytlung which removes obstruction from
the free passage of goods through all tlie processes
tVoni raw material until they reach the consunier rep-
II sents an economic gain. All other business, of what-
t\er kind, is merely auxiliary to this fimdamental
i.idductive acti\itv. There is no doubt that the inmie-
(li.itc future will see a gradual elimination of the uncer-
tairitits and risks incident to loans on merchandise and
a (Irvtlopment of tiiis branch of banking.
41.'J. Statement iif a bank president.— On this subject
^i^. \;ish. former president of the Coi'ii Kxchange
i?;iiik of New \'ork. spoke as follows at it.^ liftieth an-
niversary baiujuet:
The hank 1ki>, however, made two iinportnnt contributions to
A' ■ ric:ui hankiiiii'. Prrsidont Dunham. Ijciny; familiar with the
^ram huslness, introdu'((K inmiediatilv on takini^- otficc, tlie un-
usual ])racti('e among ijanks of : sisting merchants to carry
larg(' stocks of grain and iuerchaniiise in this port, by making
I(ian^ on that i lass <)( collateral wlien represented hy the ware-
)iiiu>e reci'ipts or bills f latling. It subjected us at the start
ti) till' stigma of being a jiawnbroker's shop, and this stigma
" - fi'i'elv ap})lied. But eventually the principle of advances
I ■! Mil I'chandise «as adopted by other banks, luitii now it is well-
iilyh universal. It has always been a distinctive jjart of our
huMuess. Mr. Dun'.iam used to say that wheat and cotton, wool
.•uid pork, lard and coffee were as good as gold, and he was
rcadv to give gold to tlu man who was willing tn pledge these
( iiiiiiiiodities as security for its payment. He, howt . rr, con-
tiind his opcrati- ns to the great staples named, because the
'jiiihtv aiui the price were less subject to wide variations, and
UHS chary of general merchandise, where the differences are
much more marki'd, and to a non-dealer somewhat deceptive.
'J'his preferenie for the staples has not prevented us from going
;5:i;^
MONEY AM) IJANKINC;
%mi'^
■f<!"
iiiio liss (li'sira! ' llruN of l)usii]oss, wIk-iv tlu' soliditv of the
born.wcr has onf'. Awd the dNadvatitu^L's of his collatLral, and
varifcJ mid sonut:: ;niius;tij.r lists of iiicrchuiidise have been re-
porti'd to our (hrti'toi> i\,v their aj prova!
41 J.. J. ate of rcarrhouNf rtccipff.—Tht ^reat ]imit;i
tion to the use of nierclmndise as collateral is not so miu ii
in stability of \alues of the commodities as it is the diHi-
culty of maintaining- intacL and secure the collateral
itself. The -levelopment of wareliousino' and the use
of the v.arehouse receipt under such leoal reoulution as
to ^-uard a-^-ainst fraud is gradually diminishing the
risk of merchandise loans.
•il5. l\iif\,rm hnc. — A valuable contribution to this
end has been the drafting of an "Act to make uniform
the law of warehouse receipts" l>y Uie Commission on
Uniform State Laws in lOOO. 'J^he success of the Com-
mission in getting its uniform law ol" negotiable instru-
ments adopted in twenty-eight states and by the federal
government makes it more than likely that this ju-w
act will soon become a law in all the states. As in the
law of negotiable instruments, the wai-eliouse recei])t
law aims to codify existing laws as far as itossible.
Whenever anything new is projjosed, it will invariably
be found a step in the direction of promoting the busi-
ness of loaning on merchandise. The passage of such
a law in states which have not already a similar one is
of the most vital inie'cst to merchants and manufac-
turers as well as Itank'rs. It will jiasten the time when
loans will be made as readily on warehouse receij)ts for
stored goods as they are now made on stocks and bonds.
The advantage of the warehouse recei})t is that it
.. ....1.1. jLI - 1 . 1 ■' ' ■ • • • •
c::.i:;ir:- i;;;; ^UOliS liesci"! iii. i.i iTi il It' i>c isoiti or pie{ig'e(i
for u loan uf inoiiey by the mere delivery of the ware-
*
Loans a(,ai\m i ollaikhai,
333
I
Iioiisc rccci])t, tl)iis avoitliiio- the iiifoiiveiiiciR'c of an
ncliial innoval or delivery of the property itself. In
(itlier woids, the warehouse receipt is u sytnhol for the
pinptrty (k'scrihed, and the dehvcry of the receipt is in
l.iw a deli'' v of the j)ossess!on of the propei'ty.
11<> Hinli involved iit loans oh xitirclionsc rcfcipls. —
'fi.c danger of accepting a warehouse receipt as colhit-
I r;d may arise from an insutlicleut or false «lescription
if the ])roj)erty, tlie uufaithluhiess of the warehouse-
man, who may misapproj)iMate the property coiDmitted
to his keepinjL^; ne<i:H<,''enee in earing for it; or from
cai'clessness in allowing- recei])ts to cireulale 'wlun the
[iroperty hehind them may not exi.'.t oi- may f)e suh/ject
to liens, hi all these ca^es the Iioldcr of the receipt
iiii,L>ht lose his claim to the pi-oj)ei'ty ,'Uid would he forced
!'i rely upon the personal responsihility of the war.'-
Iiousema?! for re!ml)ursement of liis loss.
417. Under tJie present laxc. — I'ndcr the ju'cscnt law
ill most states rhe svarehouseman is responsihie as hailee
\'<n- the safekeeping' of the <foods. lie is houiid to use
oi'dinary diligence or sue!) care as ))rudent j)ersons usu-
ally take of their projierty. He is not hahle for losses
causel hy Hre, flood, insurrectioii, or ])uhlic c'cmies.
1 1' he is guilty of no neglect he is not resj)onsil)le for
U'oods stolen even hy liis own en)])loyes.
Persons dejxisiting me?-ehandise with a \\arehoiise-
inan ai'c o))li^ed to tnist to his fidelity and dili^-enc'^' in
takiu'X due care of th.eir property, and persons dealing
in warehouse receipts are in the same position, and must
also trust to the accuracy of the warehouseman in de-
scrihiti'T in the receijtt the ])roj)erty intrusted to him.
!f tlw> ti-'i r^>n) >i ! ^i -t I Ml II mien f»t^»-/^TM'i'i 4 II
tails to take due care of it or if he falsely or insurticicntly
•Mi
.MONEY AM) HANKING
I
fc
describes it in the receipt, the holder of the
receipt nu
lose his chiiiii to the property and mav have only
i\
an
action for (hima'j-es aiji'ainst tl
le w arehouseni
418. /.v,s'//r of receipts safi guarded ~
propose 1 1
act dn-ows definite restrictions aronnd issuin^r of
receijits, and makes the warehouseman cni,.inally hal)lc
HI many -.ases. It provides tliat all liens on the goods
must he set forth in tlic receipt, inchidinn- the rate of
storage charges. Tiie warehouseman may not insert
any clause absolving himself from his legal liability lor
due care. -i)uplicate and non-tiegotiable receipts must
be i)lainly markec' as such. 'J'he warehouseman shall
be obliged to del.ver the goods on the receipt if the
demand is acco?>;panied by an otfer to satisfy the ware-
liouseman's lien, a surrender of the receipt, and an
ackno.vledgment of delivery. The warehouseman shall
be justified in delivering the goods to any one tendering
the receipt iiroperly endorsed. If a thief presented a
negoti;ib|r receii)t properly endorsed the warehouseman
would be proU'cted if he delivered the goods innocently.
41!). ProUctian U, holders of rceeijds. If the ware-
houseman shall fail to take uf) and cancel a negotiabit
recei|)t when goods are delivered, he shall be liable lor
fadure lo deli\cr the goods to any one who j>urch;is(s
for value in good faith such receipt, whether such pur-
chaser ac(iuire(l title to the receij)t before or after the
delivery of the goods by Ibis warclioiisrman.
A warehouseman shall be liable to the boldrr of a
receipt for damages caused by (Ik non-exislcncf of flu
goods (V l)y till, failure of tlir g,,o.ls to correspond to
the description there.. f ;!i the rcc. ipl at the tune of its
issue. If, however, the goods aie descrilu'd in a reci.pt
merely by a statement that th(_\- are said to br goods of
a ccrluin kind, or that packages containing the gooJs
LOANS AGAINST C"OLI,ATERAL
33.^
;ire said to contain goods of a cei'tain kind, or by words
of like import, sucli statements, if trne. shall not make
]ial)le the warehouseman issuing the receipt, although
[lie goods are not of the kind whicii the marks or labels
ujxrn them indicate, or of the kind they were said to 1)0
hy the depositor. This makes the warehouseman liable
for what he asserts only.
4'J(). Gnnmhmcnt not allmccd. — (ioods delivered to
a warehouseman who issues a negotiable receipt there-
for cannot thereafter, while in prvssession of t!ie ware-
houseman, he attached l)y garnishment or otherwise, or
he levi( tl ui)on iindcr an execution, unless the receipt be
first surrendered to the warehouseman or its negotiation
iiijoined. In most states the })resen'i laws disallow any
!4a!tiishment ; it was thought best i!i this act not to taivc
s(i extreme a positi(..i but to cover the essential practical
point by making it a condition ol' the validity of sueh
MT/iu'c that th<- negotiation of the receijjt be enjoined
or the document impounded.
A |)e'-son to whom a negotial>le receipt lias been jiego-
tiated accjuires, accoi'ding to the act, such title to the
goods as the person negotiating it had. and also the
direct obligation of the warehouseman to hold |)ossession
of \iie goods for him according to the terms oj' the receipt
;is fidly as if the warehousiiuan had eontracted directly
with him.
t-L'l. rciiaUi/ for iUcf^nl use of rC(rij)ts.— l\ shall be
a cnmirtal offense for a warehouseman to issue a receipt
for goods not actually received, or to issue a receipt
knowing that it corrtains a false stateiudit. or to issu'-
iliiplicate receipts not so marked, or to issue a rcceij)t
for goods of which hi himsi !f is the ownir without stat ■
iiig that fact, or to dclivei- goods without canceling
the receipt. ^\ny pi rson who deposits g(H)ds to \shich
;5;j()
MONEY AND BANKING
he has no title, or upon which there is a lien or mort-
gage, and takes a negotiahle receipt therefor witli intent
to deceive without (Hsclosing want of title, shall be guUty
of a crime.
Loans may he made on receipts under such a law wi^h
little risk or incoinenience to the lender. If the goods
are insured his chances of loss are practically limited to
deterioration in the (juality or value of the goods. Sea-
sonai)le goods in old storage, such as fruit, butter, eggs,
poultry, etc., must l)e sold at certain seasons, lest they
shrink in value by having to compete in the market witli
fresh goods at cheaper prices.
422. T rails fcr of iitir to lender. — ^lany banks preier
not to accept recei])ts for warehoused goods as collateral
at all but retjuire the transfer on the books of the ware-
house to themselves, takhig a non-negotiable receipt
therefor.
lit'
CIIAPTKK XXIII
CREDIT DKPART.MKNT OF A BANK
!••-'*{. Evolution of the credit depart went. — Only
witliiii recent years have credit departnients appeared in
!lie banks. Formerly the cashier was snpposed to keep
[Hrsonally all the credit information. However, it has
ludi found [)referal)le l)y the banks to em|)loy a comi)e-
t' lit credit man, whose sole business is to accumulate
iiifiirmation on credits. In some of the lar^i^er city
I'.inks and es))ecially in the offices of a commercial paj)er
liniise, there are highly or^^anized systematic credit l>u-
rciiis. which have on file every bit of information rei-ard-
iii-i' the credit standin<r of their customers.
Vl\. Sources of credit information. — The cliief source
of information on credits is of course the statements of
the customers themselves. Tntil within the last ^<.w
\( ais it was not the custom of the banks to demand writ-
tdi statements from customers and there are still busiticss
JiKii who resent the re(|uest of l)anks for statements.
As a rule, howe^er, the borrowers have found it to their
;i(l\anta^e to vnake a full statement of their afairs to
tliiir banker, knowing- that failure to make .such a state-
lihnt will prejudice their credit.
A stan(;ard form of customers' statement in use l)y
i'links is rtproduci'd below for the |)urpose of showin^r
till items ( !' information which the banks believe to be
important m the n.initinn ,,f Joans. In some doubtful
cases tlu banks may riipiire the statement to be certified
l)y a professional ai'countaiif.
H:
if
\ 11 ii
887
;}3S
MONEY AM) BANKINC;
!<
If ■
rnrm A.
STANDARD FORM OF STATF.MFNT FOR FIRMS AS ADOPTED BY SF.W
YORK STATF. HANKKRS ASSOCIATION.
FROM
ADDRESS
TO
For the purpose of procuring credit from time to time with you for "iir n#un-
tiiible paper or otherwise, we furnish the folIowinR as a true and accu; ite statf
inent uf our tinamial condition on I'.IO, ,, which you are to consider
:m cnntinuin^ to lie full a' d accurate until we pive you written n'tticf of chafigf.
ASSETS.
I.IABIl.ITIES.
Tiisli on hand
Cash in the followinB hanks
Notes Payable Kiv.n f.ir iner
chandise
Notes Payable lo . *iatcd to
own banks
iNotes Payable othcrwis.' dis-
posed of
Acconnia Pay.ible
Deposits of Mr.ney with Fs
as follows
By $
•
. • 1 • : •
K'olos Rec-n-ahle of cnsto
mers (not transferred)
Aci'ouDtB Keceivable of c\islo
mers (not Iransferrnd)
Niites and Accounts Receiva-
..
■ ■
ble o' partners (not trans
ferred)
Merchandise finished (how
valued ^
Merchandise unfinished (how
valiicil )
Merrlianilise raw material
By t
By $
By sundry persons $
:::
( how valued )
Land owned liy firm, used
for this business
BuildiiicK owned by firm,
used for this business
Macliinerj owned by firm,
used for this business
Mortcage Debt
Chattel Mortgages
lotal Liabilities
Net Worth
—
—
-
---
—
TOTAL
"
TOTAL
i
CONTINGENT LIABILITY: Notes Kereivable of customers Disoounted
or Sold and not inrhided in assets enu-
merated above
Other conIini;ent liability
We Have Not Pledged or Assigned any .if the abov Accounts Receiva-
ble our .\^--i>,ned Accninls Receivable
nni'-iint \n
(llliiT assets nsid as collateral .
I.NSI'RANCF: on merchandise $ buildings . .1 machin
iTv $ Total Ihsiiranct
HISINKSS and RESULTS: Annual Sales (nr the year ended...
190. or from 190 to Hin .
(.r '=^s Prcitils on Sales For the same p.riod
K.x|ii use of Conducting Business
Nfi Profit " '[ '■ ][
Other Inc. .me. including investments
!«'. n.liined I'r.ifil
WITHDRAW .\1.S bv 1 '.HTNERS in.it included in expense of conduct
ing business) fr.m 1 !»0 . . to 190..
HAD DFKTS f..r the pern.d fr.im I'.XI to 190 .
SI'K'IAI. t'API'l'AI, contribuleil bv until 190.,
. 190. .
190. .
PEN ERA I, PARTNERS; name Ontside Net W irth
II)
( HKDIT DKI'Airr.MKNT OF A BANK
;3;jy
I
V ACCorNTS: nli.Tr kept oilur lliaii abcive
. iHTGAUKS; ou what as&ils a lion
Avcrnso TKKMS on whicli we SKMj
Arerage TKK.MS on wliic-li we ISUV
HATK of ORGANIZATION' and KXIMKATION cif I'AKTXKHSHIp '.'.'..['.
TIMK "f YKAR wlicn Notes ami Ai-roiinls Hcipival.I.- <>i i-iistoiiiers, ['iiroIN-rtpd,
are jjeiierally maxinnini iniiiiniiiin
TIME OF YEAK when Stocks of Morrlinndise on hand aro cpui'rally ir.aximuin
mininunn
TIME of YKAR when Liabilities are maximum luinimum
STATKMKNT: is it based on artual inventory.' if so, Date
VKKll'ITATlON: have the bonks been audited by a Certilied Public- Acer.untaiit ?
if so, Name and Date of Audit
lU'SINES.S: what kind of business do you ronduet !
BOOKS: wliat kind of books do you k. cp?
(Please si:.'n fiini name)
^Mte Signed. ... 1 !io , , Ry
Please Give PaMieuIars of Ivnh Parrel of Real Ksiale
I>esrription
Street and
number
City or town
and state
Title in
name of
Estimated
value
Mort-
gages
Equity
■
'I'lic l;i\v is .still !iiK'(.itai(i toward jxi'soiis wlio make
! iNc statoiiR'iits for the purpose of ^aiiiiii^ civdit. The
"tniioiis failure of A. Hootli and Company of C"liiea^»'o
ill I '••OH iiidiieed the legislature of Illinois to pass a law
!i \'M)\) making it a eriininal offense to obtain loans
M false or misleading- statements. TIh' jutialty for
i'Mntrsois tint ind impiisonmei.t.
I"_'.5. Credit <'/^'Y7/( /( v. 'I'he second .souire of informa-
m is the credit a<4-encies. The chief credit a^^'-eneies in
tliis country are Dun's and Hradstret fs. Concerning''
tli< function of 'hese a<4i'ncies one hanker has said:
' \n\ man is unwise to base a '^.'A) credit soklv on an
mo
.M()m:y and banking
I!
If
agency rating or ivport, ])nt any man, business house
or institutio;i is (loul)ly unwise who cannot get hack in
full all that he i)ays out to the conmiercial agency, pro-
vided lie knows lunv to use the information which he
receives. "
The fact that the agencies charge the same fee for
reporting upon a credit involving .$o{),()()0 as they do
upon a credit involving oidy $.5, makes it impossible for
them to do n)ore than superficial work. The reports
are obtained by reporters who are not expert credit men,
and wlu. are reijuired furthei-more tf) report upon ten to
fifty concerns in one day. The reporter will first try to
get a statement iVom tlie concern under investigation,
and then will go to the banker or local lawyer for infor-
mation. The n)a\iinmii salary of the bulk of such ro-
j)orters is not much abo\e '$20 per week. The business
is very [)rofitable, in the case of Hradstreet's paying a
])rofit of (i< ■_. per cent on its capital of if^l. .)()(),()()(). Tiic
charge for the service of an agency is ^MH) a year. This
sum entitles the subsei'ibcr to 100 special reports and a
book of j'atings semi-annually. The reports are valu-
able in suggesting points which might otherwise be over-
looked and in tabuhiting information obtained in other
ways.
4'2(!. Duties of credit num. — It is the business of the
credit man to cndtivate exery possible source td' inforin;i-
tion bearing on credits. He must consult court records
to find suits which ha\e been filed or judgments ren-
dered, lie must know when any of iiis cHents have
P'corded mortgages. lie should find out the business
alhhation of bis clients so :is to get clues as to the kind
of business done by them.
The credit dej):irtm(td of a I);uik affords the best op-
porMmiiy of any de|);n-tmt nt tor the young man who
m
CREDIT DKrAKT.MKNT OF A IJANK
541
I
wishes to learn tlic baiikinir business. The experienee
())' iiettin<»' information about the business men of the
cniiiiiiunity and abc^ut the peeuhar eonditions existing
iii the various hues of trade, will eultivate in him the
jMiwxr of ju(l<rment so that by actual })raetiee in the
sulinrdinate position he may (jualify himself for the desk
(>r an officer. This can scarcely be said of any other
Mil';.rdinate position in a bank.
{••-'T. Tltc commercial notc-hrohcr. — The note-broker
is a middle-man betwcn the lending bank and the bor-
iiiwing business man. His profession is to borrow
iiKitiey for other people, and the need for his services
;iii(l the amount ol' his remuneration will depend upon
his skill in i)lacing loans and in obtaining favorable
Iniiis from the lenders. To borrow money to the
best advantage is an art recpiiring exj)ert knowledge
;iii(l ability beyond that of the average business mana-
ger, and if his borrowings ai'e large enough to make
it worth while it is ])rotital)le for him to engage tiie
services of the note-l)roker in this business.
Tlic business of note-broking has changed radically
within the last decade and is still in the process of raj)id
lit \el(;pment. The old-fashioned broker was simply an
;ii4rnt who. for a certain commission, placed the promis-
soiy notes of Jiis principal at the lowest rate of discount
ht cituld obtain. lie incurred no liability, had no occa-
sion to employ capital of iiis own, and did not attempt
III place the jjaper far from the locality of its inception.
I-'JH. Clian^c in the business. — The note-bnjker on
iniiimission !;as givcji place to the dealer in comnjercial
paper who Iniys and sells outright the jjromissory notes
of his clients. The !)usiiRss is practically controlled
by seven or ei lit large lu'ms whose operatiorcs extend
over a large part of the w hole ctninlr} . The nature of
.'5 ki
:\I0M:V AM) HANKING
li-
pi':
tl
le business is sudi that the tejukiu/y toward central
tion in a few sti'on^- hand
disad
iza-
s is inevitable beeanse of tht
disadvantages under which the sni
dl operator must
)()
r. Larne caj)itaK the eonfidc-nee of lend
ers.
hd
thoroun-hnoinn- and elHcient credit department wjiicli
IS necessarily expensive, and a hir^e staff of salesmen.
are factors against which the small broker finds it im-
possible to conij)ete.
In order to buy and sell paper to the best advantage
le modern note-broker, oi- more properly the dealer in
commercial ])aper, must have a capital ai)|)roximatimr
5M.0()(),()()() His chents demand the money u|)()n their
notes at once and the notes must be held several days
before they can be lealized upon. With such a capital
our typical dealer in commercial paper can do an annual
business of $10().()()().0()() at an exj)ense of about 8l()0,-
000, or one-tenth of 1 per (vnt. He can make a '^ond
profit if he can net one-fourth of 1 per cent or even
less mari^in on the ])aper he handles.
4-Jl». Diiiuind and .siijjj/l// of commcrc'ud paper. — In
times when the demand for loanable funds is <,n'eat and
the ii.tercst rate liinh. the dealer has no difficulty in
purchasi , first-eiass paper. He does not need to seek
out new clients but on the contrary is kept busy market-
in^' the pajHr of his old clients. The energies of the
dealer are directed almost I'nlirelv to seiliiif. 'I'lu
house w ith a well-or,i>anize(l and efficient selliim- fonv
has a ^reat advantane over competitors. The firm here
in mind has twenty salesmen coverin<r nearly the whole
of the Cnited .States. Through tlicse anent< it is en-
abled to keep informed on the money situation of everv
section.
The r:<te of interest in any locality is determijied by
the demand i'or and the supply of loanable fimds. The
CHKDIT DEPARTMENT UF A BANK
343
r
()
forces vary from time to time with more or less reg-
ularity. While the cotton crop is being marketed in
the South, for instance, the demand for funds is very
w-rtat and beyond the available supply. I>ate in the
\ tar, when the money returns to the banks, the supply
loanable capital may far exceed the demand and very
low rates of interest may prevail. There is scarcely
any locality which is not subject to these seasonal
tluctuations as well as the accidental fluctuations which
may occur at any time.
\'M). Areas of high and loic rates. — The monetary
ronditions of the whole country might be represented
ill much the same way as the weather conditions on the
weather map — there are areas of high money and areas
of low money, and these "highs" and "lows" move across
the map with more or less regularity. lieing able to
predict the movement of the "lows," the expert dealer
in commercial paper is able to take advantage of low
interest rates wherever he finds them, while the borrower
himself is confined to his own inmiediate locality where
the rate most of the time may be higher than the "low"
in some other section.
Owing to his ability to sell paper at a lower rate of
discount than the borrower himself, the dealer may re-
alize a haiulsome profit v,hile discounting at the same
late as the local banks. As far as the rate is concerned,
the borrower may just as well patronize the dealer as
the banks. There are, however, four additional hiduce-
nients which the dealer may ofi'er.
r.n. Discount offer by dealer. — (1) It is an almost
universal rule of the banks to reijuire that the l)orrower
shall maintain a dej)osit balance e([ual to at least 20 per
cent of his loan. This means that the borrower can
actually use but $80 out of every $100 Ijorrowed froui
R
lit
lUi
MONEY AM) B.\NKIN(;
the bank. If he has ho
rrowed at the rate of .5 per cent
or everv avail-
ititcrest. lie aetiially pays over (5 per eeiit f
able $100. U Ik- sohj liis paper to a dealer hJ would
realize at once the full face value of the 1 .an.
(•i) liy selling his paper thr()u<.h a dealer he k
his credit at his hank nt^.^n -itwi iii.;.>i,v.,:..,„i „.. ^i.
ps
)ank open and urnnipan-ed, so mat iii
case of enierfrency he has this resource to fall hack upon.
(3) }W estahlishinfr relations witli a dealer he creates
a broader market for his paper and may reasonahlv
expect the dealer tt) favor him as an old eustomer when
otherwise he could not get accommodation, perhaps he-
cause of a stringent money market or because his credit
showing was not satisfactory to those with wiiom lie had
no previous dealings.
(4) Tlie dealer has facilities for floating a much
larger loan than any bank could handle, thus relievin^r
a large borrower of the necessity of negotiating with
several i)arties.
Dealers in commercial paper do not endorse the notes
they sell, nor do th«^y assume any liability except for
their genuineness. The notes are made payable to the
maker so that they may be negotiated without endorse-
ment. The success of a dealer is so closely dependent
uj)on his reputation for handling only good jjaper that
he will use every effort to i)rotect the holder against
loss; so there is practically little risk in buying his paper.
In ca.se of a failure the dealer will take charge of the
claims of hi.s cu.stomers, and as this usually makes him
the largest creditor he will Ik- able to jjrevent undue
loss by reason of unskillful handling ol' assets of the
failed firm.
4.'J2. Cmlits.— The ])est guarantee against loss fur-
nished by the dealer is the close attention given by the
credit department to every note sold. The most effi-
CHEUIT DKl'ARTMKM' OF A HANK
345
iKiit credit (k'partmt'iits in the eoiuitry are those main-
tained hy the dealers in coniniereial paper. \o cHent
is takt n until his tinaneial conthtion has \\ ithstood a most
search iii<:;" investi<4ation. A statement is always re-
([uired and must he revised at fretjuent intervals. Kach
salesman has copies of these statements to show to pros-
pect ive customers. Fnder orihnary circumstances no
[Kijxr will l)e l)ou<»ht l)y the dealer uidess the statement
of the maker shows (luick assets (cash, mcrchindise,
ami hills reeeivahle) of at least twice the value of the
liahilities. The credit department may he regarded as
tlif most vital part of the husiness of dealinii" in com-
niercial [)aper. Few hanks outside the largest cities
lia\e ci'cdit facilities and they are disposed to rely more
aiiii more on the information furnished hy th(3 note
dealer as experience proves its reliahility to them.
l-:i."{. Si:::(' of notes. — 'I'he notes sold are usually di-
vided into amounts of $5,000 each and rarely run longer
than six months, tiie average heing about ninety days.
I'lices are (juoted in per cent, the higher the rate of dis-
cmint tl:^' lower the price of the note. For example,
a note for .$.'5,000 due in six months without interest may
It' bought by the dealer for (J per cent, which means that
it would yield to the borrower $.5. 000 less the interest
nn Sj.OOO at per cent for six months ($1.)0) . The net
yidd would be, therefore, $.5,000 minus $1.50, or $4,8.50.
It' the dealer sold it immediately to a bank at .5' j per
c(nt for six months (or whate\er time remained until
tlic note was due in case the dealer had held it for a
while), this would amount to $4,802. ,30 ($.5,000 less
'*i;<7..50) . The profit to the dealer would be the differ-
ence between $4,8()2..50 and $4,8.50. or $T2..50.
The business of dealing in commercial paper and dis-
t'ihutinu- it tlirougliout the comitrv on a large scale
MICROCOPY RESOLUTION TEST CHART
ANSI and ISO TEST CHART No 2l
1.0
I.I
1.25
U^yB 12.5
2.2
3?
13.6
1.4
2.0
.8
1.6
^ /APPLIED IIVHGE Inc
'ft', ^ f>T.* Moir ''.t»M!t
■■!)!
3+6
I'
MONEY AND BANKING
is so recent and is developing so rapidly that the total
effect on the banking situation has not been fully worked
out. An irievitable tendency will be to equalize the
rate of inerest throu','Out the country; the smallest
country bank will have loaning facilities almost as good
as the largest city bank. There will be no inducement
for it to deposit its surplus funds in New York at 1 or
2 per cent interest when it can buy first class paper
at much higher rates. On the other hand, business
firms who are large borrowers will have a market for
their paper as wide as the whole Tnited States and will
thus be emancipated i'nmi l(K'al restrictions.
1
CHAPTER XXIV
inSTOKV Ol HANKINC; IN THF. I'MTED STATES
ft
I'M. CJiaractcrisfics of carl// bankhi;i(. -Tht early
111 loiv of l)aiikiiiir ill the I'nited States is for the most
part a history of tlie issue of eireulatintr notes. Prior
t(r the national hank aet of 1805 whieh greatly restricted
noti- issue, the deposit eiu'reney re])resented hut a small
jMiiportion of the eireulatin^ medium of the country
and hence occupied a relatively unimj)ortant place in
tlic business of hankin<4'. l^articular attention must he
^i\en. therefore, in a discussion of hanking prior to
I (St;,"), to the success and failure of the various plans for
issuing notes.
V.l'). licldtioiis •iciih govern mciit. — Another function
111' early hanking, however, was to facilitate fiscal op-
nations of hoth the federal and state governments.
Although this has continued to he a hanking func-
tiiiii to the |)resent day, its early history plairdy shows
that it is not a safe one, however eHicient it may
s(irn; and there is a marked t'-ndency toward the com-
pete dnort'cnient of hanking fVom financing govern-
III! nt expenditures. 'iMiis di\-orcement has already
taken ))lace in the opeiations of the stales, and remains
iti the operafiotis of the federal government oidy in
the requiiement that hank notes he secured hy a
(i( posit of govermuent honds with the Tn-asury. a re-
(luireincnt which creates a fictitious deman<l for lK)nds
and so lowers the interest rate that there is practicallv
11(1 demand for them except from the hanks. In this
347
348
:\roNi:v and bankin(;
I
way it is still a fiuiction of l)aiikiiig- to finance govt'ni-
iiunt loans.
-t.'JC. m.storical periods. — Tlie history of })anking in
the Tnited States may he divided into lour periods: (1)
First l)ank of the Tnited Slates; (2) Second Hank of
the rin"ted States: (.*}) state hankino-, and (4) national
l)ankifi<r. In j)oint of time these periods are not at
all distinct l»ecatise they overlap, hut there was a period
in which each was the most im])ortant development in
hanking'.
4.'}7. SoDic cavhi /;a//A.v.— Pi'ior to the estahlishment
of the First Hank of the Fnited States several hanks
existed which are worthy of iiote. The first one estah-
lished was t) - Hank of North America in Fhiladelphia,
chartered hy C'onnrtss in 17H1. It was capitalized at
.1<40(),()00; $2.5().()()() heinn- snhscrihed hy the ^rovernment.
C'onsiderahle donht existc<l as to the powers of Congress
in charterin^r a hank, hence in 17H2 a charter was oh-
tained from the State of Pennsylvania. During the
years of tinancial chaos that followed, the hank per-
formed an inestimahle service hy makino- large loans
to the government for the maintenance ol' the army.
In spite of this service the !)ank was severely attacked
after the close of the war. and for several years had
an extremdy j)recarious existence; it was finallv re-
chartered hy the State of I'ennsylvania. under which
charttr it i)ros|)ered until it hecame a national hank
in 1H(;.").
The Hank of .Massachusetts, with a ca|)ital of $.'J0().-
()(M), was chartered hy the State of .Massachusetts in
ITHI". In the samr year the Hank of New \'()rk was
estal>lish((l hy .Mcxandei- Ilamdton. lor several years
it ixisted as a prix.ilc l);n\k l>Mt \\ ;is fin.MHv rh.-ii-tfriM!
hy the Icgislatun in ITIM. In hoth states an attempt
IIISTOHV OF BANKING
SVJ
uas made to regulate banking in the interest of the
piihhe welfare, and as some of the problems wliich the
Kgislature attaeked are still with us their consideration
is interesting.
The most im})ortant restriction dealt with the issue
of notes. In Massachusetts it was provided that the
outstanding loans and notes or credits and debts (ex-
cept to depositors) should not amount to more than
twice the paid-in capital: in \ew ^'ork, the debts of
the bank, over and above the money then actually de-
posited in the bank, \\ei"e not to amount to more than
three times tile j)ai(l-in capital. Thus a distinction was
made i)etween the lial>ility of a l)ank to its note holders
;inil to its depositors: and there is no doubt of the ex-
istence of a reason for this distinction at that time.
The deposit cunency was not de\ eloped, and when bor-
rowtrs a|)])eare(l they wanted notes which they could
use as money. Deposits were not created, therefore, by
loaning as they ai'c to-day, but entirely by the actual
deposit of money, a process which did tiot in any way
ineiease the pro|)oi-tion between the bank's demand obli-
gations and its unmatinrd assets. The dej)osit account
was exchanged for moniy. whereas the bank note was ex-
<liMnged for unmatured credit.
Kiith hanks weie prohibited from dealing in merchan-
dise, and till- Hank ol New ^'(>lk from traiiitig in the
stocks of tile I'nitcd States oi- any of tin states. This
was ividently an attempt to sej)aiate banking and gov-
ernment and. as such, was a cori'eel prinei|)le.
4.'iH. lAunihis oil I'oiih' .v/ocA'. The liank of Massa-
chusetts was ))rohii)ited fiom dealing iti l>ank stocks,
.inother jjrovi^ion which was fimdamentally sound,
lilt piai'iicc oj dealing in. or lainer ioaning on. bank
stocks
ii.is many dangers, as was am[)ly proved in
11
le
m
i
i^
.inle^^H
,'}oO
:\:o\KY AND HA\KI\(i
m-
If.
pari.c of I nor. It enables unscrupulous financiers t..
Ihiv one hank, deposit their stock with it as colhite.al
for a loan, and with the proceeds of the loan to purchase
the controllino- stock in another hank. This operation
may he continued until a nuniher of hanks are under
the same ownership, the henetit to the Hnancier arisin^r
from the fact that he obtains control and conserjuently
increased credit from them all. Its dan^^er is (hie to
the fact that any calamity which affects one bank must
affect them all. The Hank of \ew \-ork was restricted
from loanin,ir on real estate, or holdinrr it except foi
l)ankino- purposes or when it came into its possession
m settlement for debts i)reviousIy contracted. This was
likewise a wise i)rovision and one which is found in
practically the same form in our i)resent national bank-
ing- law .
4.3!). First liauk of the Vmtcd States.— Tha First
Bank of the Tnited States was chartered by ConniTss
in 171)1. The charter was ^ranted in spite of strony
opposition on the i)art of those who inveif.hed against
the tendency toward centralization of ^^overnment, hold-
inn- also that ("on^nress was not em])owered by the Con-
stitution (o create banks. Alexander Hamilton, then
secretary u\' the treasury, took the <,n-ound that this
l)ower was an im|)lied one, and his opinion prevailed.
The bank was capitalized at 8 1 ().()()().()()(), divided into
2.>.()()() shares of .SMH) each. Of this total ca|)ital .t2,0()().-
000 was subscribed by the «o\ernment and paid for in
installments. The remainder was subscribed by the
I)ublic. one-fourth in specie and the balance in ^(nern-
ment securities | bearing- interest i. The bank was o(,v-
<'rned by a board of twenty-ti\ c .lireetors, not more than
t liree-fonrt hs <!!' wh'.!.! ii.!... :.!|..;!!..!;: ('..:• -.-.. ..I....!: v ,
stockhol.hr was entitled to more than thirtv votes, no
HISTORY OF HANKING
351
niattrr how larg'c his hohlings, and foreig'n stockliolders
(iiiild not \otc' by ])roxy. The bank could loan on real
t'statc but could not hold it except for bankintr purposes.
It could not trade in commodities, nor purchase addi-
tiiiiial government securities. The same distinction
lu tween notes and dej)Osits that appeared in the Massa-
chusetts law was reco<ifni/ed, and it was provided that
the l)ank could not become indebted, except for deposits,
to ail amount ^reat'-r than its capital stock. The char-
ter was to expire in twenty years.
440. Siiccrs.s of the first hank. — The bank enjoyed
success from its incej)tion. Hratiches were established
at Xew York, Boston. Baltimore, Washington, Norfolk.
Charleston, Savannah, and New Orleans. The central
iiank with a capital of $4,700,000 was in Philadelphia.
It ac(juired dcjHJsits of government money, receiving
prnhably two-thirds of all money deposited in banks
1)\ the Treasury. It paid dividends for twenty years
at an average rate of 8 per cent. It loaned commer-
cially, and became a jjowerful influence in establishing
a sound currency.
The bank's loans to the frovernment, however, the
installments on the original ])urchase of stock, and fur-
thir advances to be paid out of revenue, were not
promptly paid and in 170.) had increased to over $(>,-
(Mil). 000. There was no market for government bonds,
hence it became necessary for the government to sell
iK stock, which it did in 1H02. This sale had only a
iirtiellcial effect on the bank, and it is hard to justify
a! all the government's part ownership of it. When
Ihe bank was organi/eil the govenunetit did not netd
credit; it was given no control ovei" the bank except
the right to investigate its affairs, which it seldom ex-
t rcised. Hence the bank was not made anv more secure
^
44»
352
MONEY AM) BANKING
! !■
m
as a place of deposit for ,i.overnm(nt iinids; ami it had
no surplus ou hand to luvest. If the /rovernnient hc-
came a stockholder for the sake ol' profit, its jud^nnent
was correct, for the dividends of 8 per cent were paid
annually, and the stock it held was sold at a eonsiderahle
advance.
441. Opposition to rcchartcr.—ln 1800 the stock-
holders petitioned C\)n<.rcss for a renewal of the charter.
and their petition was ably indorsed hv a report from
Secretary of the Treasury Gallatin. lie reviewed the
successful history of the hank and recommended th.it
Its capital he raised to' .$;j(),0()0,()()(), three-fifths of whidi
It should he forced to lend to the ^n)vernment. Vn-
fortunately, however, C"on<.ress failed to act and the
question was tabled until the succeedino^ C'on^rrcss.
\\\\vn the question a^ain arose in 1811 opposition to
the charter was not only stron^^ hut or^ranized.
First, those who believed in a strict construction of
the Constitution Mere a^^ainst the bank. Second, the
Kepublicans. now in power, denounced the hank as an
aristocratic institution. They })ointcd out that three-
fifths of its slock was in foreion hands. A majority
of this was held m En<rlan(l, and a war with that countrv
was imminent. \ot pausin^r to analv/e the reoulation"s
which prevc.ted control of the bank bv foreign in-
terests, or more probably for^ettiuK this regulation for
their own p.)litical purposes, they uri-ed that in case
of war with England the liank of the Cnited States
woul.l lin.l itself in Kin<r (;eor^re's hands. Third, the
state banks and the political enemies of Secretary (ial-
latin had had time to combine a«-ainst the .^overnme it
bank and its chami)ion. T!ie result was a vote to post-
pone iWiiisiiun^xy iiu reneu;ti (.r iiie charter, and the
dissolution of the bank followed imiiiediaielv.
he
IHSTUUV Oi J5ANKI.\(; ;i.-,;l
U-J. Second lianh of the ('iiitcd Stutrs.—Thc Scr-
\)\\(\ Hank of the rnitcd States was llie result of the
tiiiaiieial ehaos that followed the (hssolution of its pred-
(c.ssoi-. The W'dv of ISVJ found the ^'overnuieiit
luiids de[M)sited in state hanks, a hir<^-e nuniher of whieli
IkhI spruno- u|i with the ])assino- of the First Hank.
Tlicse state hanks were poorly niana^ed. and in ISl i
s|i( cie i)aynit lit was snsjx-nded hy all hanks exeept those
in Xew Knoland. The <i-overninent defaidted on the
iiilerest oi' the pu})lie deht. I'ank notes eireulated only
ii! a eonsiderahle diseount. vai'yin"^- with the reputation
111 the issuing- hank. A o-o-, eminent hank was |)roposed
in ISIJ. to he^iiin l)usiness undei' a suspension of s|)eeie
|i,i\Mients. hut it was not until IHKI that the Second
l^ink was founded.
It was caj)itali/ed at -S'J,3.()()().0()(). one-fifth of wjiieh
\vas suhserihed hy the <4-overnnient. Prixati' suhserij)-
tiniis were ])ayah!e one-fourth in speeie and the halanee
in i4()\ennnent honds. Tjiiily per cent \\as <hie at onee
;Mid till' halanee in e(]ual installments at the end of six
anil twelve months. The n'overmnenfs suhscription
\^.is j)ai(l in notes, and it nceived si ,.)()0,()()() as a bonus
!'"r i>riintin<4' the charter.
'l'!ie chai-ter was modeled after that of ^hv First
Hank. It was to he the depository of pul)lic funds.
It was to he yoNerned hy t\\cnty-ti\e (hrectors. i\\c of
\^ horn wvvv to he named hy the Presideut of the [ 'nited
>l;itcs. Its notes were made i'ecei\al)le for ail (lel)ts
i" the federal .u'o\ ( rmiient. l-'oreinrn stockholders
"Mild not \()te. It was re(iuiri(i to j)ay (le])osits as
Will as notes in specie, and a forfeiture of 12 per cent
''.IS i)ro\ ided in i-ase it faded to do so,
W.i. liidcmpt'uiii of tiiiics i;i spicic. This was a
gicat step toward sound hanking. Although deposits
VII— ,'3
334
.AI()Ni:v AM) HAN KING
\l
[i -■
lit!
Mk
'!!i
Iiad ;il\vays horn iioiiiiiially payalilc in spo'cic, tlic cns-
toiii had ^row fi up ol' paying- them in Uw iiotcfc of dlli.r
sptrie i)ayino> hanks. If tlicsc hanks hapiH'ncd to hr
i-einote the nnlcs circ'iiialcd at their fair vahic less the <\-
prnsc of n'(icnipti(.n: the rcsnlt was a non-nniroi-ni vuv-
nncy. W'liilc tiir nrw i( ouhitidn did not cniirclv pre-
vent the eirenhition of si-wral kinds of eni'reney. il
lielped to do so. and was a I'eeonnition of the statns ami
possil)ilities of the de])osit system. The foi-feitiu'e ol'
12 iKT cent in ease of suspension of speeie jjaynients
was intended to prevent a profit hein^r made from sus-
pension. Many of the state hanks liad heen ahle to
pay (hvidends when they eoidd not redeem either their
own notes or deposits e.\cej)t in the tiotes of other non-
Sj)ecie i)ayment hanks.
444.. Mis)ii(in(tu:c)iuiit of llic h(niJ,\ — Vudvv this char-
ter twenty-fi\e hra.nehes were estahhshed and the hank
soon hrouo'ht al'out resum|)tion of s[)eeie payment.
This. howe\e!-. was the only henefit it conferred for
the first two years of its existence, as it was shamefully
mismanaged. Karly in its career it heoan to loan to
stockholders on stock which was not yet fully paid for.
Speculation in the stock foilovved. its pi'icr advancing
and the hank Ioani!ii> its pai- value freelv. The charter
l)ro\i(Jed that no (li\idends shoidd he |)aid on stock
wjiich was not fully paid for. hut tiiis reouiation was
violated. The Haltimoi-e hranch was in (lu- hands of
nnscru]»nlous ofIice<-s who detrauded il of laro-c sums.
Hence, up to ISin th" Seeon<l IJank ol' the Tnited
Sta.tes was managed in such a way that the dej)o^if
of i)uhlic funds, amountin,^' to more than -SH.OOO.UOO.
was yreatly endanneixd. and the hank itself was a dis-
grace to the nation.
Jn ISli) 31r. Lano'don Cheves of South C'aj'olina wa^
tt*
HlSi()H\ ()1- HANKINCi
3.-)5
I
i
5
I
cIctUd president of tlic hank, lie ininiediatcly set
;i!i(Mit correct iiiL> tlic \ai-ioiis abuses that had spniiio^ up.
r(di!ciii.<4' loans to stockhohlcrs. incrcasiiin- ivsci'\cs hy
iiiiportalioii of sil\ci\ and rc^;idatin<4' the issue of notes.
His administration was so husincss-Iike that tiie \nv.\k
soon regained popuhn- confidence and j)i'ospered ^n-catlv
the ' nsuin<4' decade.
The constitutionality of the ^overnnienl hank was
settled in 18U) when, tlie Su|)reiiie Court, hy C'ln( f
.fiistice .Marshall, handed down the decisio?i that the
istahlishnient of the hank to assist the fiscal oj)erations
of tlu' ^(nernnicnt was an iiiij)lied ])()wer of the Con-
stitution. It was further decided that the states had
i\n power to tax the circulatin^r notes of the federal
li.ink or of the other state hanks. ]?oth decisions were
( xtieniely iniportar.t because a different rulin<»' on either
would have made inii)ossil)lc not only tiie Bank of the
( nited States hut our })resent national bankin<r system.
1-4-,). Jackson opposed to tJic J)anJx. — When iVndrew
.laekson became President of the United States in 1821»
Xiiliolas Hiddle was at the head of the I)ank. The (|ues-
1 "M of the renewal of the charter, which was not to ex-
piit until 1S.'J(). immediately became prominent. .Jack-
al mi was inclined to object to the bank on constitutional
tii'ounds. and his antipathy was increased by charjies
''i(/iioht a^fjiinst various otHcers of the bank by his ow ji
political associates. Tlis niessa^'c to Congress in 1H2!>
plainly showed his antij)atliy, but in IS.'JI he spoke in
I niildiM' tone. lie \\as still kriown. how(,\ei-. as an
opponent of the bank. In IS.'il I lenry Clay, the candi-
date for President on the W'hi^ ticket, came out em-
uhatied.lv for .•■ rfp.fu;!! f^f tlif i'h!>rf.'>r '!'!•..-> l-.-sj-.l- -.•,■•:-
'■•■nerally populai- and Clay was rtiemptini;- to cap-
i.iii/.e that popularity. JJefore the election a hill pi-o-
'4
;5.-)()
.M()M:V AM) H.WKINC,
Itii
vidiiiir for the ixiic^val oT tin cli.'trtcr was |)assf(i 1)\
C'oiin'i'i'ss and \i't(H(l liy Prcsidi lit Jackson, so that tin
(luc'stioii lu'cainc the priiu-ipal issue ol" the ciisiiiiin- caiii-
l)aioii. TIic (11(1 of the Sccoiid Hank of the riiitdl
Stales was in \ iew when Jackson was elected.
Ill 1S.'{,'J the ^overnnient deposits were withdrawn
I'roiii the hank and c-uicellation of the <4<)\ i rniiient's
sto'-k was reciuested. To pay off this ohlii.-ation \u\\
stock was sold, and the hank ohtained a charter from
the State of Pennsyh ania. It was never auain siiccess-
t'ul. however. princi|)ally hecanse its ea])ital was too
lar-i^e for operation in Philadelphia. It was comjjclled
to loan lai'^e ainonnts on the stocks of \ arions companies
which Wfi-c hein^- formed in all parts of the country.
The panic of ] S.'JT madt many o'' these stocks worth-
less, and the hank was forced to suspend. In IStl it
ii<i'ain suspended, and went into li(|uidati()n. Its credits
were paid in full hut tlie stockholders receixcd nothing.
The history of these two hanks is interestinn-. not so
much hecaiise of the various restrictions on loans, note
issues, etc.. as on account of the effect of tluir intimate
I'elatioii with and dej)endence upon the ;4'o\ criiment.
In hoth c-ases the hanks j)erl'ormed n-reat ser\icc. The\
were hoth successful financially, 'i'heir failure was due
to the fact that they hecanie iinolved in politics, as
any hank so chartered must hicome in a countr\- where
parties and administrations arc constantlv chan<J'in<''.
This is tlie argument now iiru'ed ai^ainst the creation of
any kind oremtral hank in the rnited States.
MC. .S7^//e Ixiiihiii;^-. — liankmo- under charters ob-
tained from the \arious states wji - of two kinds: ( li
' ■ ■ i i •. I ■- - 1 :.-.v *. : tt -* *^ *. •* :; 4 : ; v" I Wiii j ivS, tl i i • t
CJ) hanks in which the states themselves had an interest.
The first class is of importance cliietly from a tecjinical
■ ' ?--
HISTOUV Ol- H\\M\(,
;l-)T
|iniiit ol' \ icw, j).trti<'iil;irly in I'cnard to \hv success ol'
liic sivci'al |»l;iiis adopted for iIk iss •'' lu les; tlic
<ic()ii(!. hicaiisc ol' IIk lael thai llie states were iiiti-
iii.ilcly connected with their niaiia<^'enieiit.
'l\\r early hanks oi' I'ennsy haiiia. Massachusetts, and
N(\\ ^'o|■k ha\e already heeli nient'')lied : and i-elVrence
has heiii made to othei' state hanks which wei'e in e\-
isteiici' (hu'in^- the hi'e ol' the hanks of tiie ( 'nited States.
'i lie most notahk- mo\'ement toward sound l)ankin<i' took
jilaee in \ew iMiylainh particuhwly Hoslon. and in New
\'.irk.
11-7. Siif/'olL' Ixtiil: siisUin.- \\\ \ew Knyland in the
1 ;!ily pai't oi' the centiu'y the same eonthtions prevailed
ill reyaiil to the circidatinn' mc(hum that existed in IMiil-
,1 hlphia ])i'ior to the estahlishment of the Second liank
III the I 'nited States. 'I'he notes of country l)anks eom-
jiri'-i'd a lar^e |)roj)ortion of the currency, even in the
iiMiimercial centei's. 'i'hey circulated at a discount I)e-
caiise ol' the expense ol" re(lem])tion. hence they (juickly
unne the nott's of the city hanks out of circulation, and as
they wei-e not recei\ahle at par at tli'- city l)anks while
tlie notes of the city hanks were, the latter uatui'ally
were presented for jjayment and the depreciated notes
(iiiilinued to cii'culate.
In ISIH the Suffolk Bank was incoi-jjorated in lios-
t'ln, and it immediately endeaxoix'd to work out a ])lan
h\ which it could make a pi-ofit I'l'om the redemption
<ii' countiy hank notes. It otl'eivd to make itsell" an
a.miit of redcmj)tion for the country hanks, at^reeiui^'
to ucce|)t their notes at par |)in\ ided a dej)osit was kept
with it to pay it foi- the trouhle. ^At first onlv a small
Miiiiiher of hanks axailed themselves ot' the privileyr.
I'lit the Suffolk Hank i-( taliated hy setidin;^' home for
ivdemption the notes of all hanks \\hicii did not adopt
If
lit ^ : '^
^1:
.'ioS
M()M:\ AM) HA.\K1\(;
tlic plan. Tlif fiii.'il rrsult \\;is tli;it ))i';u'ti(';illv all IIk
l>aiik,s ill New l\ii<4laii(l Ixcaiiif iiiciiihcrs of the Snn'nik
svstt'iii. wliifli c'oiitiniud until tlic national Itankinu law
of 18(;.->.
It soon l)fcanif a cIcarinLC Iiohse for hank nok's. ainl
jiisl as tlu' c'iiy ck'aiin^' houses oll'sct the I'i'cdits and
(Ichits of the xai'ii.us hanks against each otiu r in siicli
a way that only halancis ai'c j)ai(l in cash, si the Siitrojk
l)ank canceled the hank ohlinations of all Xew Imil;-
iand. In ISl-.l the Massachusetts law \',as ciian^'ed to
l)ro\ idc that no hank should pay out any notes excipl
its own, a |)i-)\ision which strengthened the Suil'iilk
systcDi l)ecaus(.' it made necessary (luick I'cdeniption.
All hank notes issut'd would circulati in the pockets and
tills of the pe;)])le as lony as thei'e was actual denia.iid
foi- them: when this demand suhsidtd th;\- would \>v
dcpositeii in a hank, and since the\- could not ayain hr
paid out tiny would Ik (|uickl\- I'cdeiincd at the SuHdHx
Hank.
Dufino' the yreatei- |)art of the existence of the .Suf-
folk Hank there was no piox ision in Massai'husttts fof
kccpiiio' a specified I'tsei'x i'. The system worked so
well, in fact, that specie was seldom demanded. I !i
1H.")H the leijisl.-itin'e passed a law pro\ idiiiLi' l<>ra rescr\c
of 1.") per e(iil against hotli notes .and di posits. 'I'liev
Were thus recoLini/.ed as liahililies of the haid<. eipial mi
evei'y I'espi ct ; nor was thei'c any reason I'oy tlivin^' tli<
notes ;i prefereiiee or lua I ul aiuHii^ a s|)ecial i'es( i\c I'm-
till in under the system of ijiiick ri deiiipt ion which i\
isti-d. The iiotis weiT not iiileiided for general einii-
lation hut foj- redemption w h' n tin nerd for iJu ni
dis.ippeared. in tin same maniiei- thai our checks ;md
drafts an- ri.de(iii(d to-da\. I ndi r this s\slem tin
IIIS'IOHV OF l{ANKI.\(i
;i.->y
i\
■Awni^c 'ilV <'!' tlu' l);iiik note was t'oiiiul to he altoiit
ti\ e weeks.
44S. Xi'xc Varli sf/.stcnis. — The hanks of New ^'ork
\\(i-e oj)erate(l alotiy- different lines. There were two
|ilans of note issue: ( 1 ) The safety fund system and
r2) Ihe hond deposit or tree hankin<4' system. The th'st
is espt'cially worthy of noie hecause of the reeent pi'o-
[I'lsal of the Demoeratie I'arty that i)ank deposits he
niiai'anteed hy tlie o()\ fniment. a |)roposal whii-h I'ests
nil the same hasis. 'IMie second plan is interestin<^' he-
cause il was adopted l)v the federal <4()vernment in lH(i.')
Ill sfcui'c the nolc issues of the national hanks.
tH*. Sdfi'lfi fund s//.st(i)i. — The safely fund system
was estahlishcd in 1H2'.>. Ivicii hank was rciiuired to
cniiti-ihutc annually one-half of 1 |)er cent of its capital
111 a s|)ec!al fund in the hands of the states until its
ciiiiirihutions should amount to '.i per cent (d' its capital.
( )iit (d' this fund all the dthts of failed hanks (cxc-ejjt
lliuse to stockholders on their stock) were to he paid
;iller the assfis of the hank had heen exhausted. In
is;{7 the law was amended so that the notes of failed
li.iiiks could he paid immediately. pro\ ided they did not
aiiioimt to more than two-thirds of the money in the
rmid. In that ycai- sc\t'ral hanks failed and their notes
siilfcred no dcpicciat ion. After IHtd, however, the
niiiiihcr of hanks wliicii failed was so lar<4'c that the
safi'ty fund was Ino small to meet all theii' oliliLjations,
li"lli notes and di posits. .Vccordiunly in 1 S l^.'{ the l.iw
was ai^ain ariK ndi d so that the fund was made applica-
hle otd\ to the paxiiiiiit of the nol( -, of the insoKeiil
!>anks.
t.">(>. Hi, 11(1 (liposil s//.slt!li. In IH.'JS. ||owe\ei\ the
IhiikI deposit systiin was t stahlished, and al tei" that dale
m
m .i\
m^ ■V M
* 9
.-I
SGO
MoMV .\\i) i].\\KI\G
iill i^-. hunks iiic'or[)()rat(.(l uikKt lliat plan. 'J'lus
Mrakcjicd tlic s;it(ty I'uikI hccaiise Ihci'c wlvc iki ikw
contrihiitions to it and Ww hur-l'Mi IVII iipoi i ronstaiitiv
<kcrrasin<i' miiiiln!- of l)aiiks. I r. ISir. tlir new consti-
tution of \c'\\ \ oris |)ro\ i(it(| tlial note holders wcir
to have a lii'st litn on all tlif assets <;t' a l>ank and that
ii) casi' of failnic slocklioldiTs wtTc to he liahk' for an
amount c(|ual to tlicir hnhh'n^^s of stork. It furth(r
j)r()\i{lcd tiiat no siucial t-hai-ieivs. such as those under
v.hicli the safety fund haid<s opeialeck were to he
^-ranted or i'.aie\\e(k Tluis the safety fund system
^•ra(hially dwd oui with the e\i)iration of the chartei's.
the Last (d' which (xpired in JHOO. ^\1| claims against
it were paid in fidl.
4.11. Mist(il,(.s i,f tin ,s//.v/. ///.— -The safety fmid s_\ s-
tun faihd Ik cause of mistakes in ditail rather than
tiu-ou.iih fundamental delects. The fund at tlie start
should have hun made appiicahle oidy to the payment
of notes. Its re.il function was to jji'ox ide a uniform
(au-rency which anyone mi;.iht accept without ([nestion.
While deposits ari' e.|ual liahilitics of a hank, no one
is ever forced to accept a di'posit in a particular hank,
wheri'as he may hi- ofit n compelled to accept its tK.tes
without any knowledge of tiic stahilit\ of the hank.
It was this i-cneral acceplancc which the safetv fund
aimed to accomplish, and it is oh\ ions that the <4u.araiitct
of notes would have Ikcii stitlicicnt. |{y ]SU> this and
otli(r defects had In n c(iir,(|,d hut the s\ stem had
already rcc<'i\r(| its dtath hl.iw. Had the dcd'ccts Ih.h
corrected carlitr it is jMohahlc that the hond deposit
plan wnnid ni\< !• iia'-c hct ii .•idMpIrd,
The chill' inthiences whi'/h i((l to tlu hond deposit
law of IH.'JH ware puliiical. Cliaitf rs iiiidi r the safetv
tund pian had hi( n Loaiited laily h\ spreial act of tlu
IllS'lOin Oi' HANKINC
nei
l('uisl;iture, and tlitre was a pronounced sciitiMicnt fur
lire hanUin'J'. The \\v\\ systiin, howcx ti'. ini^^lit lia\c
h((ii t'stahlished nndt'i- the sal'ety t'nnd plan had that
Ikcii workin**- smoothly.
i.'yJ. Free hdiih'iii^- ■s//.stcin.~-'l'\H' Vwv Hankin<4' Law
aiithoi'i/ed any })t.'i'S()n or association of persons to
rn'ci\c circnl.-itin^' notes to l)e signed and issued as
iiioiuy who wonhl deposit with the couijitroller the
stocks oC the Cnited States, of the State of New N'oi'k
III' othei' ip[)roved states, or inort<4'ages secnred hy real
estate worth twice the amount of the moi'toaox'. 'I'his
tl( posit of collatei-al was intended to insure the note
lioldei' against loss. \o pro\ision for actual i-edemp-
tioii in sj)ecie was ri'ipiired. Anyone wjio j)ossessed
the necessary securities uii^ht enter the ha.nkinn' husi-
iitss. and it is e\ident that many of them did. ()\cr \'M
Ml w haidcs w(i"e orn'ani/ed before IHM). I'ailures
i|iiickly resulted, and it was found that in many cases
tli( securities de]tosited weit not sutlicieut to meet the
ni)t( s. Heal estate iiiort^a^es. howe\( i \ aluahle. wi're
iMii (|uick assets, heuce the law was tiually chanyed so
that only the stocks of the I'nited .States and of' New
^ iii'k were a\ailal)le for deposit.
The notes cii-culated at first at considerahle discount
liiil this was o\(r(dnie to a certain extt nt in ISK) hv
.III amendmer.t to tin' law \' hich necessitated redenip-
tmii of the notes of' itderior hanks in New ^'(ll■k and
.\lli;ni\ at a discdimt not yreater than onedialf of i pi r
11 lit. This, howe\(i-. >4a\c an advanlaLif to the cdiui-
ti\ hanker hecause ol the profit he could make li\ loan-
\iiiX his uoles at j»ai' and I'edeemnii^ them at a discoinit.
Hence many persons iti the cities issued tlu ii' notes in
till- rw >iiiif r\' towns I'ne nllslnl'.v^s iit tiicv/' li-iiil.^ »\ mc
U Iv U) issue notes.
r
ley had no pirmaiiint hanking
;jfi^
M()M:V AM) HA\KI.\(.
f
I
i '
!i
houses, and irceivcd no deposits. In IHil lis condi-
tioii was soniculiat bettered hy a law re({uii-iiiM- hanks
of issue to become banks of deposit as well, but it was
never earefully enforced. Tiic edfeet of these varimis
ainendmenls. jiowever. and ol' the constitution of is.'ji;
was to improve yreatly the condition of the issuing'
banks, so that failures after 1 S.K) were infre(juent and
in almost all cases the notes were redeemed at \rd\\
After 18(iU there weix- no failures which resulted in
loss to note holdei's.
This system was co])ie(l by Illinois. Indiana, and \Vis-
consin but with disastrous I'esrdts. In none of tluse
states did the system siu'vive lon^- (.nou^h to becoiiu'
])erfecte(l. In Illinois particularly a lar<^e amount of
the securities deposited were those of the Southern
States, which l)e( ame valueless at the outbreak of llic
war. The bank currency circulated at ^r'^at disccuiits.
varyin^j!' \^idi the reputation of the issuin*^- bank, in
1H.")7 Iherc wire 112 banks in Illinois: in 18(11 ouly 7.
and tin nott' holders had realized less tiian 40 cents on
the dollar.
The oidy advaiita^^-e of this system over that of tin
safely fund is security, which was pi'owd b\- the e\-
|)erieMcc of New \ ovk after the list of acceptable stiu'ks
had bi'cn i-esti'ictcd to those of the ( 'nitcd States and nl
X( \\ \ ork. No cui'ieiicy could be nH)re secure, thai
is. more ccriain of ultimate red( ui|)t ion. This, how
ever, is rml tlu' only desideratum of a credit cuir-enev
(urrt (il redi nipliou is as Important as idlimale ?-edein|>
tion. and in Ibis the system is defective. Moreoxer, tin
system was rii^id when the binks deposited secui'itie>>
they were ^i\en the i i^ht |n issue so mauv notes, ami
thl'V could not Issue .'iddlt !ori;d. '! >!!e>U> >! -. >><> >!!.'>ne!' <.<.!>:!!
till' n( ((Is of busiuess mi^-ht be. hi oilier woi'ds. tin
iiisroin oi ir\\KiN(,
am
s\nI(Iii \v;is iiulastic, ;in nttrilmt'' wliicli aloiin' with that
lit Mcurily it Iiaiuled down to oiii' ])r(Sfnt ('urix'iicy
s\st(iii and against wliich most of tin attai-ks of to-day
aif dirt'ctcd.
[.y.i. I'!.r/)( rit iici' ill (ithcr slnh's. — Tlic liistoi-y ot'
i,;itil\S III which the xai'ioiis states wci'c jiart ownci's was.
ill the main, (hsastroiis. IvcntiicUx' tricil the ( xpci'iiiKiit
\\\ ISOC and a,L!'ain in 1S2(). Ahdiama in IS'JO snh-
Miihfd two-lii'lhs of th(- capital oi' the Hank oi'
Aiiliama. issuini.'; bonds in i)a\iiiciit. 'I'lic oriuinal
l^^t^i(•tions on loans \\('re ample hui tliiy wci'c con-
-tniitly \ iojatcd. Loans wxvv tVccly made to memhers
dl' tliL" le^islatiu'c and tlicii- fiieiids. and in ten years
tli( disconnts increased iVom S,)()(».()0() to S-jO.ooo.ooo.
fill panic of I H.'}7 found a la!\ne auiount o|' these loans
wMidiless. and coutidence in the notes disappeaivd. to
Ih follov'-ed hy a period of business sta!4'natioti. In
ist.*) the chai'ter expired and was not rencwecf Mis-
NisMppi. Ai'kansas, 1-dorida. and Louisiana had similar
( Apt |-ii'nces. The I iiion liank of Louisiana was estali-
li-iM (1 in IH.'}-J with a capital of S?. (»()().(»()() laised by a
■ i!' ot' state bonds. It failed ten yeais later, and was
!'i|!ii\\cd by the establishment of |)ri\ale banks undei-
M'Miid laws. Missouri's e\pcri(tice was not so calam-
ilmis. althou/^ii the Hank of Missouri w is ne\cr a n'l'eat
Mireess. The state's connection with it was sexcred
11 iSdti.
i."it-. Iiidiiiiifi (111(1 Ohio. '\'\\r Hank of hidiana was
til' most successful. It w as ineoi pnrnted m | ,s:{ | with a
.:ipital of SI.COO.OOO. one-lia!l' ol whii'li was siibsciibi d
i>\ die state. It \wis ;4i\ en a uioiiupdU of banking; in the
st.itc and the riLiiit to e^iabhsh iMancJies. |'',a<'li bi-ancli
II II I .1 . : : 1 I .111
%\
i.l
i' -
'*!.!
, I 1 M ' I « » 'I
I I » I t I • I I » i v" iSSi iC » i ' i ii M V 'I \"\ (i S
f( lrii'U'<l t<» :\\\ ;i!iiiMi!il \ -w-r as ^^Tcat as llic cMiMtil.
;}(i4
M()\i:^' AM) IJANKlXd
m
Kacli hi'aiK'h hauls was iT(|iiiix(j to ;icc('|it l!;c notes n|
other hraiich<s at pai- and to iTdccni its own notes in
specie. Dni'ino' the first years of its existence it at-
tenii)te(l to loan on ival estate seenrity. hut the (huinrrnl
this ensto/n \\as soon reah/ed and it was dlseont inind.
Siihse(iuently it loaned to farnier^ on tlieii- jx I'sonal notes
and on their ei-ops. hut the loans wvvv alwavs for shoit
])eriods. In this way it transacted husiness on souiui
i)ankino' pi-inciples and continued to ihrixc until ISC.-).
when the federal tax on stale hank note issues forced
it out of existence.
Tile State Hank of Ohio was likewise well uianaoed
and Jiiuhly successfid. It had a capital of s:{..'{()0.(i()(i
and thirty-six l)ranches. Note issue was restricted to
an ainoiHit not oreater than twice the cai)ital. and was
I'urther safe-^uai-ded hy a safety fund of 10 ])er cent
deposited with a hoard of eonti-ol. It passed out m
existence with tlic expiration of its cli;!rtei- in iStlC.
The slate l)anks. as a rule, did not fail for the sanic
reason that caused the downfall of the two I'nitnl
States hanks. Whih in some instances, notahly in
Kentucky and Alal)ania. the lianks hit-anie in\(>l\cd in
polities, their failure was u-enerally due to defects d
or^ani/ation and niaiiayeiiient.
ft
V\
i.,
If
CIIArTEll XXV
NATIONAL BANKING SYSTEM*
I.")."). '/'//(• XdtioiKtl Bank Act. 'l\\v cstaljlislinieiit :)t'
;iic iiniioii.tl haiikiiin- system was the result of the un-
siitist';{ct()i'\ liiianeial coiKh'tioiis which ohtained (liii-iii<)
tl'' ('i\ I! War. The enri'eiiev ni' the eouiitry was eoiii-
j)ovc(i hir<^X'ly of the notes of over 1, .'>()() state hanks.
.-! lai'yc amount of whieli was worthless and almost all
I \Uiieh eireulated oidy at a (hseonnt wIumi it was at a
ii^lanee from its place of redemption. In addition to
(Ills ein-rencv troul)le the fiscal situation oi' the o-overn-
i.'itiit was unsatisfactory. It had heen forced hecause
cf tile ahseiiee of a market for its iionds to raisi.' moiiev
ii\ ilie issue of leu'al tendei' notes. These notes, not
Ik iii<i' redeemed. im])aired the credit of the ^•overnment.
t'iiMsc(jiiently it was anxious if j)o.vsihle to strengthen
tlir market for honds. Secretai'y Chase's plan foi- the
c^talilishment of the national hanking' system com-
iiK iidi'd itself hecause it would correct in a nuasiu'c hoth
"f llicse ills, in Secretary Chase's words the pi'iiicipai
fr;i(ui'es of the \Ai\]\ wei'c:
I'ir^t. ,'i rifciilution of imtc^ li' ariii^ a coniiiioii i!nprr".v|<>n. iiiul
tUlHiciif irati ( i !)v ;i I'oiiiiiKiii aiil linni \ ; ^i('(ui(l, tlir rrdrnijif inn of
tli('s(> ii(itr> 1)\ the a^-(U'iation> aiui m^titutioii^ In \vlilch llicv niav
ill' (Irin I rid for i>>ur. and, iliiiil. the .-ccuntx of lliat n (Icmnt ion
liv till' pli'd^'c of 1 nitrd Statr^ stocks, and an adniuali pro-
' ■ Mn of - MCI'K .
In tlii- pl.m the pi oplr in llicir ordinary iiu^inc^^ uonld tind
til'' id\anta;;(^ ol" unil'inniil \ in cnrri nc\ ; of iitnt'oi'init \ in se-
i > . oi ciiriinai --a i ' :,;iia i i i. li riinii!:! >al fj,;ilar(i i> no>».it)ii_',
■ lii'.v Ft"l lal i{i'-.(r\.' All in ApiKUilix.
365
ii!*
h'
III!
'i(]{i
•l!4'.lili^t lit
AfOMV AM) 1{.\\KI\(;
lipnriati,,,,. ,.,|m1 uC prot.rf I,.ii fnnii Iu.>r, ii, dixT.nnts
ami , Ncl,;,,!-,--: ulnl,. l,, fl,,. ,,,HrMt I,mi^ of flic (iovmnrn'rit. tlio
I'"..,, I,. u,,„!,l fiiul tl,r nirllHT ;„lvanta-.vs ..j' ,-i laiir,. ,K„,an.l for
;4n\rin,,iMit Mvunlic,,. and of incivas-.l facilities for ohtainin-
IJk loan- n i|nirv(l liv the \^nr.
^ t.)<;. MarLcl /.,/■ ri/ilcd ShiUs Ixnids. 'Ihv rind
I'eahirc of fl,, piaii uas the rc(iuir(HK'nt tliat all hanks
\vhich <l< sired t.) iiiforporate under the national name
should huy o<,verniiient honds. (lei)osit them with the
'i'reasury and j-eeei\ e eireulatino- notes to the amount of
'■»<> IKT cent of their hon.l deposit. Thus these notes
"ould l)e unirorm heeause they were all to he printed
hy the government: and they would always he seeurc
heeause the deposited honds wvvv pledo-ed" to tlieir re-
•Icmi-iion. l-'urthermore. a new demand Tor n;nyvvu-
ment honds would result whieli would greatly I'aeilitatc
the nation s hori'owino- power,
(•.";7. J'Jarffi liisinru ,,f I he r/e/.~This i)]an was reeoiii-
nundid hy See-etary Chase as early as IHCI l)ut it wa ,
nut until l.S(;;j that it heeame a law. It did not. how-
t.\cr. result in as or.al a henetit to the national finanecs
i:s had heen expected. 'I'here was a decided i)rejudiee
.(.^ainst the issue of notes secured hy the deposit of
honds. the result (.C the laHiu-e of Ihe several state svs-
tems uhich o.H rated on that plan. Furthermore, the
original act was del\cti\f m many respects. 'Die state
l)anks. a majority ot which had heen e.\i)ected to incor-
l)orate under the new law. did not do so in any lar.oc
iiumhers: l!,<,rlore there was no great demand for gov-
ernment !"i!|(|s.
In IS(H the law was amended making the conditions
of iruori)orati.,n somewhat more attractive, hut it was
not unid ISO.-,, wlun a law was passed providinu' for a
tax ol 1(1 per cent on ;d| notes issued hv slate hank-,
\i\
NA'iioNAL B.\xi\i\(; s^s■l■I,^r
rccdiii-
it \\;i ,
. how-
judicc
)sit of
te svs-
T. the
■ state
inciir-
!;ii-l;c
iitidiis
i \\;!s
for ;i
tit.it (•(tdvcrsioii of state into national hanks bccanie
-1 IK lal. IJy tliis jM-oN ision all slate hanks which wished
1(1 list' notes wei-e I'oi-ced into the new system. Thus the
(itiiiand for honds did not eonie until the war was over
ami tlu' neeessily of their innncdiate sale had disap-
iKai'ed.
Tliis national hank law. its o|)erations i)erl'ected hy
\aii<iiis anieiidments in IST-t, 1H7"). and 1H82. hecanic
till haekhoiie of the American hankin^- system. Its
])ni\isions. therefore, in their final form, arc worthy of
caicl'ul attention.
I.")H. Comptroller of tl/c ciirrciic//. — Control of the
national ha?ikino- system was vested in a hureau of
IIm I'nited States Treasury under the direction of the
cniiiptroHer of the currency. It was the function of this
(l( partment to supci'vise the issue and redemption of
iH'trs. the orantin^' of charters, etc.. and to enforce all
till various provisions of the law. To accom])lish this
(11(1. examiners wire api)ointed hy the comptroller,
uliose duty it was to examine from time to time the
affairs of each hank in the system. These examina-
tions were made at any time the comptroller selected,
aii'l '.vithout i)revious notice to the hank. The examiner
had access to all the hof)ks and accounts of the hank,
and was rc(]uired to make a thorou^^h itnesti^ation of
ill the loans outstanding. This examination was re-
t'(ati(| in detail to the c()m])trollcr who called the hank
to account for any illegal |;iactices or situations which
might exist. Once a year the comjjtroller made a report
(o ('f)ngrcss showing tho condition of the I'anks in detail.
In case of the failure of a hank the comptroller ap-
pointed a receiver.
l.){). S It w warn of 7\(itioii(tl Bunk ./C/.— Charters
Were granted for periods not longer than twenty vears.
i:
4
in-n
368
M<'M:Y AM) 15ANKl.\(i
k
U
Si '
[i I '
?','
Ai)])licatinii iiiust he made by not I'cwcr tlian five ))cr-
soiis, i\itli uliosc >^()(h\ character tlu' coiiiplroUcr must
!»(,• satisfied. T'if'ty |)er eetit of the eai)ital must Ik- j)ai(l
ill hel'ore the hank ecuhl open. aii<l the remainder within
six months. Tlie niinimum eapital for eities ol' .'i.ddo
po|)uhition or hss was S'J.). ()()(»: for eities hitween .'{.Odo
and (;.()(){). S.IO.OOO: for those hetwee.i (),()()(> and
.-)().()()(). sioo.OOO: and for th(»se greater tlian -lO.OOO,
IvK'h hank must ha\e a hoard oi' directors of not less
than five memhers, eaeh of w Iioni must own ten shares
of stock. The stockhohlers were in(h\i(hially hahle for
all ohl'o'atioiis of the l»ank up to an amount ef]ual to
their holding's of stock. In case of failure they could
i»e assessed to pay de])osits.
'I'he technical powers of national iiaiiks ha\e already
heen considered. Hrietly they wei-e: (1) To receive
de])osIts. (2) issue notes. ( .'} ) loan credit on personal
security, and ( ti discount notes and other evidences of
debt. A hank mij^ht own only such n A estate as was
necessary for conducting its business and as came into
its possession in settlement of ]>i'e\'iously contracted
debts. In the latter ease it must lu- sold withiji li\'i
years. The bank ecuhl not loan more than one-tenth of
its ca])ital and suri)lus to one individual or cor])oration.
Hefore a national bank could open it must deposit
with till- Fnited States 'l'reasu>-y a cei'tain amount of
U'overnmeiit bonds. This amount Aaricd with the ca])i-
tall/ation of the bank, l-'oi- banks with a capital of
$•200. ()()() or less, the j'eijuii-ement was one-!'ourth of its
capital: for those over S-JOO.OOO it was S.io.OOO. This
amount must be deposited re<4ardiess of whether the
liank expected to issue notes. It was entitled, however.
if it so desired, to receive froivi the comptroller circulat-
XATIUNAL ]1ANK1.\G SVSTKM
369
= ii\
iim notes ccjual in ainotiiil to the pai- value of tlic df-
|iM>ik(l l)oii(ls. These notes weie "reeeixahle at par in
;ill parts ol' the I'nited States in payment of all taxes
and exeises, and all other dues to the I'nited States
( \cei)t duties on imports; and also tor all salai'ies and
ntliir debts and demands owiny hy the I'nited States
In individuals. e()r})orati()ns and assoeiations within the
I iiilcd States exeept interest on tlie puhlie deht. " Tlii'y
wn'e also le^al tender in payment ol' any debts to
national hanks.
ft'>(). Circiildtiii;/ notes.- — The notes nnist he redeemed
(in demand in lawful nioney at the eounter of the issu-
ini; i)aid<: and to fui'thei- faeilitate re(lemj)tion each hank
\\a>> re(|uire(l to deposit witli the 'I'leasui'y an amount
( i|iial to .) per eent of its outstanding' eireulation. When
ndtcs were presented to the <i'oveinment they wei'e re-
(ircined out of this fund. Ciix-ulation mi<^ht he retired
liv i'e(leemin<i,' the notes over the hank's eountei- and
sn:(lin<4' them to Wn'-' Miy'ton for eaneellation, or hy de-
pDMfin^ money to . ecjual amount in the Treasury.
Til deposited bonds were then I'edeemed. The law
Kstiieted redem})tion. howe\ er. by pi-()vi(lin,i>- that not
tiinie than $0.0()().()()() ol' national bank notes must be
rt tired in any one month. The notes were subject to
ta\afion by the ^oveiiiment. When they were secured
liy the 2 per cent bonds, the banks nnist pay one-half of
I per cent annually on the average circulation: when
stciired by higher rate bonds the tax was 1 per cent
iinnMally. 'I'jie expense of redem))t!on was also l)ornc
lie banks. It is estimated that it amounted to about
"'''•■{ for each $1 ()().()()() of ciiculation.
There were in 1!M)'.). ('»,«<*:{ national banks, with a
ti'i.il note circulation of •S<;4H. ()!)(•. 2 10. To secure this
*; (Illation the baid<s had purchased and deposited with
VII -il
370
MoM;^ AM) I5ANKIN(;
I
1^
tlif Treasury .S(;4l>..'{H!).r)l() of <>()veriiiiicnt bonds. A
majority of tlitsr bonds ijorc only 2 ])tr cent inttr(st,
the lowest rate paid by any nation in the worhl. Tims
the predietion tliat the hiw wouhl ereate a market for
government bonds has been fulfilled. The sreond reasdn
for its adoption — that it would provide a uini'orm cur-
reney — has likewise been aeeom|)lishe(l. for national
bank notes have always eireulated freely and withoiil
diseount. The note of the Maine bank was e<|ually
aeeej)table in California as that of the San Franei^co
bank.
The danger of the system lay in the priee that was
])aid for these benefits. In making the eurrcncy stable
and uniform it was made inflexible: and in re(|uiriii^
a <ie|)( it of government bonds a system was founded
whieh neeessitated a eontinuanee of the national debt.
4()1, licscrvc rcf/iiircmnit.s of ihc Xatioitnl Hank
.tct. — i\ll banks were rerjuired to keep a certain amount
(.'f lawful money on hand as reserve. l?i Xew York.
Chicago, and St. Louis — designated central reserve
cities— this amount was 2.5 per cent of the deposits. In
certain other cities, called reserve cities, the amouiit w;is
2.5 per cent, but one-hal f of this migjit consist of demand
deposits in Xew ^'ork. Chicago, or St. Louis. All other
banks must kec]) a reserve of 1.5 per cent, three-fifths
of which nnght be de])osited in the reserve cities. The
.5 i)er cent redem])tion fund might be counted as a part
of the reser\c. 'I'he enfoi'cement of this i-i'serve ])ro\i-
sion was a duty of the bank examiner and the comp-
troller.
m
C IIAPTKH XXVI
I'Hl.SI.NT { ONDCl'IONS OK M.WklVd IV THK rVI'i'ED
STATi:S
li'.'J. The (Urt'lopnioii of bditk dcixisit ciirrnir//. —
llir history ()(' l);uikiiiu' in the Cnited States siiiee
tlir ( stahhshmenl of the national haiikiii<r system and
tlu att''ii(huit restrictions upon note issue hv the state
I'.iiiks. deals ehietly with the (leveloj)iiient r)f' tile deposit
liinction. The Coliowin^r table shows the inerease of
(|i posits relative to capital and note issues in Idl'.i coni-
\<;tvvi\ with IHG,"):
lH(i5. lid:?.
D-llars. Dollar.-,.
< .i|.il.il, ~u^|liu^ ;in.| iiiidix idc il prnlit-. . . At.'! l.!)(ll 1.(1(11 1 si.(lt,j,()(i'( ,.5 Ifi
l''-l'">it> j I!). 100.(1(1(1 ,;,!).);5.t(>l..V.l
Niitcs 171,()()(),o()o 7ii.\i:,,u-Zi
W liile national hanks had inncased four aii<l one-
li.ill' times in nuiiihtr, the capital and surplus nearlv tive
iiiiKs. and the noh s over four times, the deposits had
iiivicased over tenfold. In addition to this, moreover.
liiiist he counted the ><.S. 000. ()()().()()() of dci)osits in state
''.inks which issued no nous whatever,
W'v have seen that this deposit system <4a\e rise to the
most perfect cui'reney known, a eurrincy which ])er-
tiiinis a vast amount of money work at a minimum cost
.111(1 which exi)aii(ls and contracts duriiiu ordinarv times
Hilh the \ai'yino' needs of l)usiness. To this function
tli( naiional hanking law eomplctdy suIk .dinated the
i^siR' of notes.
It j>iin- >w. ..--.n 4-,.
, J ,,.... i,
;{7i
I '
-fi 1 I I I Kt I II V
KV 'f .
'''- .AIOMA AM) H.WKINC;
and (lifffrciicc between notes and (iej/osits. Hotli are
(leiiiand ohiioations of the hank. The (hirerenee is
ehiefiy one of form whieh oiv,s to the note oRattr
aeeeptahihly hteanse (.f its nni rorniity. Tlie person
who aeeepts the hank note rehes entirely npon the sta-
hdity of the hank, whereas one who aeeei>ts a cheek
rehVs npon the personal ercdit of the maker. The
eonrts jiave held that the tender of a cheek does not
eonstitnl.' payinetit nntil the cheek Itself is redeemed at
the hank. pro\ ich'd redemption i^ re(|nestea within a
reasonahle time. It is ol)\ ions, therefore, that the ru.te
l)erforms a fmietion which the deposit eamiot i>erforni.
namely, eircniation heyond the repntation of tlu' oriuinal
holder oi' thi' hank cre.lii.
U\:i. Liniil'ilinii nf ,lt i,n.sil r//m'//r//.--Tliere are
])arts (,f the conntry. particniarly the nn-al districts iA
th. Sonth an. I West, where hankinw^ facilities are poor
and where they ninsf nse -ither notes or actnal money.
Furthermore, at certain times o!' the year their demaiid
for enrreney of ,,ne form or another incixases. It is
ohvionsjy p.,.)r economy to force these districts to nse
,U«>ld in their hand-to-hand transactions wluri tliat ,ii.ild
ean perform three tinus the mone \ w.,ik if h<ld in hank
reserves as a hasis for tht deposit enrreney. Whereas
lli«' depe.sit eairreticy will expanei te. meet the' s.asnna!
inearases .f l.nsir.ess in the tinaneial centers, it ejoes not
■•""I 1" any way the' rural eoiiimnnitv which iieieis men-,
actual money. I-',,,- (his, if \ny ,,<, ..tiier reas.ui. (1.
suhor.linatie.n ..f !h<' nol.^ issne' fnne-C.n has pr.x,ntM|
flu .urcate.st eeeineimy in liaiikiri^-.
The ^n-cal danger nf sne'h a sy^t, m. however. lay in
liie reserve reeiuireiiie nls anel e-nste)ms. All l)anks were
permitted to keep a pe.rli.m e.f llicir reserve ..n elepe.sil
ui reserve eiiy hanks. Tins permissie.n was ine-,.ipe.raf e el
I'HKSKXT (OXDITfoX,. ,»F l^WKIXd 37;]
'-''; 'I'Hau- with the i.l.a c,l\.n..,I,linn. ti,, .oMMlrv hanker
'" kcq. w.lhout exiK-nsr a city acru.n.t as a hasis for
-H-a.i^iV. A luMher .vason uas t„ .ncrcase the ,„„-
"'">■ "' l-anahh. IuihIs hy enahhn- the eitv hanker to
1"^"' I" tl'" larne ecnters the .leposit. of the eountrv
"ank. Ihese needs eontinncl to exist Iron, vear t'o
><■<•"•. hnt the h,anit!u hy thr city hanker of th.' eonntrv
I'anker s ,|,j,os,ts was s.. oreatly ahusc.l that its (hm-vr's
fHeanir as oi^al as its hrtietits. "
UH. SrasoNa/ <icmu„ds. This ahusr ha.l its orh-in
"I th.- enston, nf thr n.n.itry hanks of deposit in-.",,,
''"•"'^•'■'I ecnters n..t only ., portion of their reserve, lu--
in^- eertain seasons o| the vear hut a h.r.v a.no.u.t of
•■"''''♦""i--'l eash. Sin(v eon.iu tit i.,n hetwee.i the eitv
"ajiks r,snite<l in the payment of i,;terest on eonntrv
''••'l;nie(s. fh.'se deposits must h, h,aned o,it. And since
lliry were .hiiian<l dep,,sits th. v must he loaned on de-
'"•■""'<>'■ '•■•'II- As the only liehl lor this sort of loan is
"' "'•■ ^*'"'^ '"•"■l^"^- »•'*■ |""n.olH.n of sp<enlation was
""■ '■'"•' '"'iction of these e.MHitry halanees.
^^''"" "" ■'•■'"and \\n- h.atis a's well as for aetnal
'••i'"i'y inereased in the country, as ,t invanahlv does in
•I'; l.dc siniiMMr. thes,. deposits w,-re withdrawn a.,d
'l"l""<iilsn| ciirnney re.(ues|rd. Loans must he sharply
''""''■'"•'*'' '" ♦'"• 'i".-'neial .vnters. Thr <lep,,sit cur-
rency enuld not mr.l Ih. n.rd heeause Ih,. ,h ni.nd was
'"'•;> eirculatinnnir,|iiininfn,.nrral aeeeptahiht v. If, r,.
^^■•'sa .l,„,and. th,r, loiv. that iin.ler a svst, ni .d' elastic
'i<»te issu, ,,.u|,| hr linan,',,| w,tli,.ut shipni,„t ,.f i,n,ld,
a conscciu, lit ,1, phlM.n of r, s, r\ , s an.l ,'allin.j ,.f |,Tans.
Perhaps it is u.|| t|,,,t ,,nd, r th,- svst, 111 ,,f r,s,,v,i
'I'P'.Mts th.iv was lhis,-h,,k up,.n speculation, hut the
1 1 1 1 1 I ^
) I I V I I , \ t \
•y (•naiiiuiL; iii, eountrv
I'ank, r to increase his ,,un ,-urr, ii,-y supply, uijl hsseii
Mi
'4
.'571
MONEY AXn BAXKIXC
''J
the necessity of kcepin- easi, l.alanees in the cities. Tliiv
\^<'"l<i increase his purchases „r con.rncrcial paper with
iunds diverted Crom the stock market.
4<5.-,. Drp/rlion of /e.srnr.v.— This danuer „(■ deple-
'""'"' '•^■^^■'■^^•^ ^^''-'""-t acute i„(i„K.s„r panic. There
ua.s tlien a -eneral .lernand lor h(|uidati()n of all credits
"■cl.Hlin.L; these .lepoMt crc.lits. liank -runs" are de-
I7''^'l '•> '•'" '•••".kers. yet ,t is the countrv hanks then.-
•sdves uhich ucre the first to uithdraw deposits. Kach
''ank was anxious to increase the cash reserve in its own
vanlts. and tins could he done onlv at the expense oi'
v-n.e other hank. As reserves were depicted, loans n.ust
'KM-a le<l. and the ioaninu' power <,(' the hanks was sadiv
mpplcd at a time when it was .;reatlv needed. Wit),
the call, no of loans can.e lallinL-' „ ices, and if horrowers
cannot horrow they must sell .heir property at ..,,,,,
-aerdu-e. It would not he the function ..f hank notes
t'- prevent laihuvs of concerns which were ovca-
♦^"•'^■•' ^""1 "nheaithy. hut the issue of true hank note.
•;" ^'leh lime s woulel save many solvent firms temporarilv
I" need of finiels,
Tl.is with.lra-.al -'f <!< posits h.ra.ne. so ..neral holh
"" f'c part <.f the iu.lix , dual an.l the. ..ountrv hank that
''"'■'"-••' P''"'"'tli<city hanks loun.l th.nise'lus fe.nr.l
'" '■*'"^"' "" payment of .hp,,sits in eM.rr.ncv This
^vas don.. Illegally, of ,„urse.. hut in times lik,. that
<^Npe<hen,.N -ath.r t han legality is t h.. paran.e.unt issue'
«■• this way only l.ne. hani. n.vrv.s h,.,n maintain, .1
■\ ^'•••.ve.rtainm.th.ulofohtaimni. n.nnev t.Mne.re-.s,
••'^^ms ,s tl,.. purchase, of u.old ahn.a,!. (n.ld ma;
al-avsh,. ohtairud provideel a sutlie i,.,,! Iv hivh p,.i,c is
I';-' (.'III. The. Ia.-c hanks, particularl v t hos. ui New
^-iK. ean exehanoe. their intercst-eanunt, res, hi, -res. .
'•■"-•• ••'""""" "' •'^i"'h are. well secure, I sfoe-ks ami
iM{i;sF.\T coXDrrioxs uv baxkixc
;5T5
lioiids, for <>ol(l ill the markets of the worhl. ()l)vioii.sly,
however, this metliod is extremely slow and very likely
to l)e expensive, as it may involve the sale oi' ^ood eol-
lateral at saei'iHee pi'iees.
4»;»;. Alilrich-rrcilaiid Aci.'V\w Aldrieh-\'reeland
Ael of I <»()«, ad<i|)ted as a irsult ol' the panie of lltOT,
provided lor the issue of an emer^eney eireulation by
national hank I'nder this law national hanks in anv
conimunity mi-iht or<iani/.e a national hanking- assoeia-
tion, any member of whieh. with the ai)proval of the
assoeiation. eonld issue eireulatin^- notes based upon
(•( itain s|)eeiHetl elasses of !)onds or eommereia! jjajjer.
riic total issue of a hank, however, eould not exceed its
capital and surplus. 'V\\c emeroeney eireulation thus
|)ro\id(.d for was subject to a tax of .j per cent i)er
annum durin;^' the first month and to an increasing' tax
in sueccedinn' months. These notes could be retii'ed
without limit by the deposit of l(<>al tender money with
I hi' Treasurer of the I'nited States.
KIT. Iinldsticitji. Although the a^'<ire<'ate amount
"f notes outstanding increased fully four times in
amount ^incc IHti.'). the increase had notliin<^' to do with
the exj)ansion and contraction of business. A perfect
'•lU'ruicN must lia\e tix' attribute of elaslicitv, that is,
not only the abiht> to ixpand wjieti nec-essary but the
pouci- to contract automatically when the necissit\ for
ixpansion is removed. In neither respect did the na-
tional bank no' s meet this need. 'I'hc re(|uirement that
bonds must be purchased, and deposited in ;idvanci',
made the procediue s(» slow tjiat oftentimes the notes
• niiid not be issued until the deinand for them had dis-
appiar-ed. Confi'action was excn si .wer because of the
restriction tb;it oni\ .so oiui itiwi ii. tli ■■,.. .•,. , i.i
be retired in an\- oni' month.
O ■» />
^H'^■|:^ and haxkixo
1'.^^
\\.i
¥-
[VV ol
4<>H. !-lvp,u,si(>,i of haul: circn/alioN. As a matt,
fiict the auH,u„t ..r iH.tcs cutstandmn varic.l not at" al.
w.thtiK- husmess lurds of tl.r cuntrv luit cnti.rlv with
tl'*' Pncv ..r -ovrrnnirnt h.,n.ls. Cpon this hitter and
"P"" tlir nn-rcni c-on.URrcial rate „r intnrst drpc-nded
thr pro/It to hr w.ulv out ..f rimihition. W'lu'ii honds
^vvn■ln^v thnr uas a trn.hncy toward janvhasin- then,
;'"<! incrcasMiu- cimdation: when thcv swiv hi-di the
U-ndeney wa. in the ..pposde direetion. The National
e .ty {,nk ol Xcw York, in one of its n.onthlv eirewhus
stated:
0.i„j,,oM,,ra<Ml.attlu.|K„n<n,..tp..-tui,hnuu-on,on,v
f l;an ,t . ,11 nruv.. l.ark in nmilafino. ,,,,,. , i,,,,,„,, ,,j. ^1, ,_,^.
'"».■„ on o.n.n,„„.„t ho.uls) a> pn.fiK ;„ nm,latH,M iMc.va.. ■.,
<l- .'N.n.ov rat. of int.n .t i„ the ,„„„,,, ,„,,,k..t d,,.|,n..s • and
as uvcraj... n.on.y n,a--- ' rates a.ivance, the pmtits on nr.ula
;*'" •'*"•'"•"• ''''''^ '^ -i •■•• "'■■ r:u, that it .onl.i 1,,.,.
*''^' ;■'""■" ^""' ^^'"'1' 't nu.>t> in hun.is at the av..,-ao. ,„o„,,
"-'■l^'t .-at.., l.nt ,flt takes out nn.ulat„.,< it .an onlv loan an
•'"""'"■'' "inal to the par value of the hun(l> an.l io.es the interest
Ol, the pre,mu,n.
'''•'<■ I'i^Iht the tnark.t rate of interest the ..reater
"••IS th,. loss on tins pren.inni. hence a smaller protit
"" ^•"•^••''••'ti"M. Inasnineh as the rale ,d' interest in-
'■nases w,tl, inereasrd dmiand lor n,o,H v. the proljt on
*■'""''■""""'"''"'"' "''^"••""Mcnase or notes was most
":"'';■''•. ''''"■ 'I' l'< 'iden.-e or fh, a.«Teu.al. .n>o„nt of
*■"•'•"';"'"" "I-i th.s, hvo induenees was n. ver more
••'""l'''l<l,v pn.vedlh;,ndi,rin.w \\H)H. liotl, theprireol
|...v,.rnn,ent l.onds and Ihe r.,1. of interest were vrrv
'"":'''"<|"' ■■'-I'""- llHf. to eirenhdion increased manv
nnllion dollars.
it isoi,\ i.nis that eompreliensix c nf
••rm was n( eessarv
PHKSKXT COXDITIoXS ()F BAXKIX(
(ii
if the nation was to lia\ e a cni'i'tncy which woiihl tinance
(.rononncally its husintss needs and enable it to pass
from j)eriods of <4reat aetivity to (piietude without eom-
|)lete paralysis of its eeononiie inaehinei",-. The chief
defects of the system ueir deeentiali/ation and inelas-
ticity.
K;!>. Ldcl. of unit// in flic .sf/stcni.— lw addition to the
T.OOO national hanks tlure were a -^reat many more state
hanks and trust eom|)anies. which weri not onlv direct
(•om|)etitors of the national lianks hut which were <>ov-
■viwil hy diUVreiit laws and i-eoujations. 'I'he result was
ili\iously a nKchanism with I."), 000 managers, each in-
terested in the welfare of his own institution. A system
was needed wjiieh would enable the banks to work in
unison instead of at cross purj)oses with each other and
which would render possible the issue and redemption of
notes as the need i\>y them mi,uht appear and |)ass.
iTO. S'(>-in</.s hdiiliS.— A diseussiiin of baiikin<4' con-
<litions in the I'nited States would not be complete
without a ref« rence to saxin^s banks. The reuulatiori
of these institutions has, for the m(»st part. \kv\\ left
to the slates, and in most cases the states have faihd
to pass efrective le«4islation. The savings bank is the
bank of the wa<4e earner whose accumulations are worthy
of the most careful protection, in thi' auHi-eoate the\-
already amount to a fabulous sum. and the system is
only in its infancy. The mutual sa\ inus bank law^ of
\ew Kni^land and New ^■ork are the niost perfect.
In thes< !)anks there are no stockholders, the profits
Ik inti distributeil cMtirel\- anionu the d( poMtors. Their
Investments are restricted to the very hinhesl class of
bonds an. I morti>anfs. and their atl'airs are adminisleicd
1 i- 1 •! ■ I 1 11' •••__• • •
■ ■\ iiifFi wi aoiiiiV rtFiii jiiiiiiiC S]>n"il \Vilo stTXC Wltjiout
compensation. Tn the West practically all tin savinus
i
.',8
r-i*<T'"
;}:s
4T
f
-MONKV AM) n.WKIvr;
^M.
I.anks are nv^auhn] f,,,- p-ofit and no c-ard'ul rcul ,-
tion ol invtstinents is attempted.
471. Am/.,/ savi,u^.s hauhs.-^-U was this situation
wlnd.^ave risv to the .len.and lor postal savings hank,
--banks inanaovd hy the Government thron-h the me-
<l"nn ol the po,t olliee department. In 1!»|() C'onoress
passed the aet providino- r,,,- postal savin-s hanks? It
created a lioard of Trustees, eonsistino of the Post-
master (ieneral, the Secretary of the Treasury ar.d the
Attorney (General, to designate and eoi.tn.l the jx.stal
sayujos depositories throuohout the eountry.
The Aet provides that any person over "ten vears of
aoy n.ay open an aeeount in his or her own nam'e. One
;'""•"•'•>• ^i "Kiltiple thereof is the smallest sum that mav
'H' deposite.l witl, the post oUiee. hut postal savin.."s
stamps at t.„ eents may he pmrhase.l. Interest at the
rat., ol -J p,.,. c.,,„t per annum is paid on these .ieposits
•Vxleposdor is aUowed to have more than five hundred
'l'»llars. e\elusi\ e of interest, to his eredit.
7''^' '■""'''^ rceeived are directed t.. he deposited in
sohent hanks, statr or national. Xo one hank mav have
"""■^■"'''" '!'<• amount of its capital stock and one-half
'tynrplus. Inteivst of at least 214 p^''- cent per anmim
IS to lie paid.
The trustees may piiirliase .uovernnieiit iionds with
part ..f thes,. p,,slai savin-s lunds. hut n..t more than
•^" !"■'• ^''''t may he used in this wav. for ,| ,s inten<le,l
t'» keep a workin- halance of (;:> per eent on deposit
^;'»l' <l'ch.':iiks. Anv<.xcess of interest or pn.Hts fn.m
tl"' investment ..f these funds is part of the postal rcv-
'"""■• 'I'!h' Aet further pnn i.hs fur the purchase of
.^••vernment ho„,js ,^1' denomination ..f S-jo-.^m) 1,^ the
'Icposilors. these hnnds to hear interest at L>I.. vvr vm^
per- annum. " '
PHi:si:\'l' (ONDI'l'IoNS Oi' HANKINd ;ST!)
'I'lii- jjostal saviii^ys t'niids aiv to he ke|)t ^rparatr
lioni the other postal rcrcii)t.s and arr ijrottrtcci hy all
llir laws already dealili.u' with piihlit- inonrys. The faith
ol the Fiiitc'd States is pledged for their safety.
It is j)rohal)le that the est.ihlishmeiit of postal sa\ -
iti,y:s hanks will hriiio- out of hi(liii,<i' J' eoiisiderahle
ainoiint of ^old whieh is heiiio^ hoai'ded hy ignorant per-
sons, and that money withdrawn fi'oni other hanUs dur-
ing' i)an:es hy :ndi\ iduals w ill he deixisited with the <xo\-
ernnient hanks and thns find its way haek into eireiihi-
tion. The postal hank will not eonipete directly with
carefidly re^'ulated savin;^s hanks heeaiise of the low
rate of intei'est that is paid and heeanse it does not oUVr
the same hankin^' faeilities. It will, houtxcr. eatci- to a
class whieh. in the ))ast. has not deposited its mv)Me\ at
all and to persons in isolated communities where there
are no oankin^' facilities.
i7'2. (TiKiraiifcc of IxniL' dcjiosils. Then' is anothei-
movement on foot in re^'ard to the regulation of hank-
in^' which is worthy of note, namely, the guarantee of
hank deposits hy the ^'ovei'nmeiit or hy the states. The
plan is now in operation in Oklahoma. Kansas. Xehras-
ka and Texas, and is hein^' ur<4C(l elsewhere. Hank
failures and losses to the depositors i-esidtin^ thii-efrom
have heen so small in the past that it is estimated that
•I small assessment on each hank woidd create a fund
lai>>f enough to pay the depositors of all insoUcnt
hanks. In this way confidence in the hanks would Ite
implicit and tluy would not hecome suhject to "i-inis."
The j)lan has heen viudi-oiisly attackid. howcxer. h\-
llic hanks. 'I'heir position is siihsiant iall\- that the sys-
tem would place a j)remium upon incompetent and dis-
iionesl o.-tnkini;. and uikici- presi tii conditions ijiri'e is
little doiilit of the coi'reclness of the contention. 'I'lio
m
m
".t
■i
i
^HO
MONKV AM) |{ANKI\,
stroiio- l.anlv niust be taxed td
■'''1<^'I ''aiik. and at the same I
t
I ye
that
pay httle attent
I't^'siilts rrom its stn ii-^th. I)
I'uy the (lepositc, , ,if' the
inie it would lose the |)r(s-
epositors would
<»l a hail
tl
k. h
'"" "iider sueh a system to the stahili!
Dan!
leeaiise their deposit
Hy minht select. Tj
'•^■^■Hy l)y the iiidueements ottered hv tl
s would he secure in ai
H'V W,)ul(l I)
i\-
and
it
won
'" ^pite of strict
Id
i)c ver
y ditfieult to kfep tl
without the knowledoc of the auth
rc'^Milation of these iifd
.y'n-ci'ne<|
le various hanks.
iieenients
icm from hein^f uukK
"ic i-esu
It
orities.
w
""'<! ''^- the estahlishment
Tl
K' me\ ita-
"iiiiks. e.\j)ansion of credit,
fol lapse.
'11
can he prevented hv t
iiian\- new
sjjecidation, and linall
:ions.
'■ '"l\"^"iles of the i,lan claim that tl
i'c<iuent and scarel
Tl
"IS position is correct onl
icse conditions
>i".H' t'xamina-
are |)oss!hle. And it has I
y it such examinat
ions
eoimtry that tli
'"ily to lia\c the
insoh ent I'or vear
"■cii [hv experience of tli
iti
cs w ho ha\
•"■'.V true it a national svst
<^y ii'v not. Many hanks have failed
receivers discover that tliev have I
s uithout the knowlcdoe of the autl
lis Would l)c pai't
e examined
th
)een
lor
em.
Tl
leu-
<-"l'»pled tocoNir l.j.ooo hank
em ot u-iiarantce wen
eonditioi
IS.
Whell
i<s(>|)eratino- under different
itr or not elfectiv
JK'ssihle III a sinnle state where hank
t' examination i«
uniform will I
and upon the effect
>c seen in the experiei
"t,U' eonditioi
IS are
ice ol
Ol
lat
K'M depends tl
iveness of the examinat
<iahom;
le success of th
K'li and reo'u-
rcat interest hecaiise. if it p
watched with
CMhIe. it uill he ucnerally adopted a
in the science of hankinii'.
• \steni.
It
wil
ro\('
s practi-
s a nreat advai
ice
th
rts-
uld
II \
Uiy
lC(i
ril-,
L'W
a-
lls
\
( HAPTEK XXVTI
RKI.ATfOX Ol- HANKS TO WALL SriUT.T
IT.'}. M(ir/,(l /(ir sci'iiritirs in I Ik Suited States. —
<\\ ^■()l•k C'it\- is iiir central iiiarktt of the Tiiited
Uates for st'ciii-ities just a Lomion
IS ()
f tl
le \v
holt
t tl
le
\\«)i-|(j. The term Wall Street, hy whieli is mean
(iiiatieial center in New \'()rk. is synonymous with mar-
kets I'or stocks and hoiids. Whenever the capital re-
• |uirements of an cnterpi-ise ai'c too 1;
irm- for the local
aj)italists to handle it is the custoni for ]>i-omoters to
inance tiieii- proposition in New \'ork. Capitalists
w !
th funds for investment and an enterjirise needin'
those funds are l)rou^ht together hv the financial insti
lutions of Wall Street. The husin
less of hrin^'in^-
tl
le
apitaJists and the enter])rise toj^'cther is wi-v compli-
ated and may re(iuire a lon^- time. In fact, a lar
xv
p|-0])01'tlOIl o
f tl
le seem-ities Hoated in Wall Street n
main there in the hands of the promotei's.
When a coi-poiation wishes to raise capital it may
issue either stocks oi- uonds. In oi-dei- to dispose of its
^tock^
s and t)on(is
d 1
to tl
le capitalists it is necessarv
that
market he made for iiiem. When the rnited States
Steel Corporation was or<4ani/.ed in r.»()l the prohlem
of disposin;^' of the \ast amount of stocks of that cor-
poration \\as an e\c'eedin,ul\- I'ormidaMc one. The task
>f i, ttin
iR' slirewi
the
lest
piililie intercNti-
as ( ntrusle
d t
(i lo one ol
siocK markit mam|)ulators on tlie ^'x-
clian,i<e. .So successfully did Mr. Keene mani|)ulate the
market foi- hoth common and preferred sliares that the
:}S1
■ *•-•'■'
%
iw
.MoM.'i AM) H.\\KI.N(,
l)iil)lic. si)((ul;it(.i-s and iincvst
Iny^v hiicks of tl
Ti
ket I
•'I's wrir induced to h
ii'sc securities.
ii'iv is a i-ivat (leal of similarity l.ctwcrn tl
n\-
ic inai-
or srcuntics and the market i
niodity
and tli(
'11
or any rjtlici- com
!'• interval I.etueen the issue ..f the securities
>""nient when they reach the ultimate investor
"lio puis them au
the income w jiich tl
\e oi
ly III his strono- hox f,,,- the sal'
K'>- eain. ie(|nires the use of circulat-
ing' capital, just as a merchant handliiii.- d
,11(1
ry «4-oods must
pnn i,lc suttieieiif capital to carry liis stock of o„od
an averanc of fn.m three t
.s on
47 i. Jt'orh
o six months
niidd
// ■sffiiritics. — Tl
10
emen w
///,;'■ cd/'itfil of (/((ilcr.s i
I'" <'arry the securities in Wall Street he-
("iv they reach the ultimate investor need in their Inisi-
11' ss enormous sums of temporary capital. These mid-
<'l^"ieu are the hon<| houses and the speculators. The
^•aj)ital re,|uired is laroely furnished hv hanks, nearly all
'.'*' '^ '" »'"• !■'"■•" -r hank .-rclit. The corporations which
issue
le secui-ities are paid for them
|)ass into the hands of the middl
as soon as the\'
emeu.
Tl
le middleman
le cor
will prohahly pay (or them with a check which tl
l""-*'t'"" <-"i deposit au.l a|.'ainst which it can draw its
own checks in niakiiin- payments: these checks drawn hy
the corporation are prohahly deposited airaiu, and so on
"Klcfimtely^ This hankcrecht whici
cii\es for its issues of
1 the corj)oration re-
tl
Heeds
Tl
IC middlemen. (>itlier hond 1
louses or speculators.
who purchase the securities, horrow the hulk of th.i' haul
credit tluy re.)uire from the hanks. The hanks makin^r
■I ^Pyi'iHy.f loanino. credit for this purpose arc known
I'iie credit loaned
l\'.,!l
'I iiii.tfKiai iianivs.
o the speculators or hond I
louses IS I),
:ised
on coll.itei
securities serves the purjKJse of I
'^' forporation in producing' whatever capital n,,„ds it
HI
I.ATION OF n.WKS 'I'O WAI.I. STUKKT
;5S:
)li\-
M'c.inty. Tliis collateral scrunty is the .same slocks and
IioikIs wliieli the credit paid ('op.
47.3. Dclail.s (,f the collalcr/il loan. Wv have (hs-
eiissed, in tiie chapter on loans, the natnre of the collat-
eral or call loan. The vohinie or amount of this partien-
lar husincss is so enormous that it is worth while to ex-
amine more closely its details. Sni)i)ose. Tor example,
that a si)ecnlator hnys 100 shares of Cnion lacific com-
mon stock at 11>.). This ((notation means that the 100
shares of I'nion Tacitic stock are worth lO.") |)er cent of
par. which is nearly always .<<100. Therefore the 100
shares will cost the speculator .Sr.>..>0(). The stock will
he purchased thron<.h the hroker. and if the jjurchaser is
a speculator and not an investor it is (juite likely it will
he purchased "on mar<^i?i.'" The customer deposits with
the hroker from 10 per cent to 20 per cent of the value
of the stock in order to j)rotect the hroker a-^ainst any
loss should the value decline.
The rules of tiie New \'ork Stock Kxchanne re(|uire
tliat every jjurchase and sale must he hona tide and that
actual delivery of the stock must he made. The hroker
IS not in possession of enonoh eai)ital to })ay for the
stocks i)urchase(l on mar^-in hy his customers and must
i-o to the hank for accommodation. The hroker pays
for the shares hy drawin^r a check on the hank with
w hich he is in the hahit of doino- husiness, and hy having-
it certified. The hank Mill loan on collateral like i 'nion
Pacific prohahly HO per cent of its market value, which
wives the hank a mar^'in of 20 pcv cent in ease there is
.1 hreak in the j)rice. The halanee of the purchase price
IS made uj) hy the marnii, ,,f the customer and the capital
of the hroker.
1T<'>. ('irti/iratian. ]{ is (juite likely that at the time
tile hroker asks for the certification of th( cheek he has
:584
.M()M:V AM) n.\NKIN(i
1V~
not siilliciciit CiMids in till' hank td vinvw nor can lir
liypotlKcatf the stock until hv lias paid for it. The
l)ank. Iiow.vcr, readily (rrtifR's the cluck. diiHaidin^r
npon the receipt of the collateral and the oiantin<i- <'f a
demand loan w ithin a few lion is.
This is o\er-certitication and is I'orhidden hy the \a
tional liank Act. which says that no national hank may
certify a check unless the drawer has on deposit a sum of
money e(|iial to the amount (d' the check. Jn Wall
Street this law is ^-enerally disreoarded. I'suallv the
i)anks protect themselves a.yainst technical violation hy
^•ivino- the hrokers credit for certain sums for tiie day.
accepting- a note in the mornino- for it. 'riiese notes are
called "day notes." \o interest is cjiaroed on the credit
cxtcTuled, i)ecause the hrokers are constantly depositing-
checks as well as draw in^- them. The extent of this hus-
iness of certifying' j)rokers' checks is api)ai-ent from the
H<'-ures for the year ciidiim' Oct-'her 1. li)()(;. whicli
amomited to the enormous sum of '•'>(). OOO.OOO.
477. Restrictions on colhitcral.—Mos 'he l)aiiks
are veluctant to take too much of any one setunty as col-
lateral, and it may he necessary for the broker'to have
several . ..nk conneciions so that he (•.•!•) (hM;ihrle the
shares amono- them. Csually the hanks will not take
uuhistrial shares alone hut reijuire an admixture of rail-
road shares. I-'urthcrmore. only those securities which
have a ready market will hf used as collateral on demand
loans.
trs. Call loan /Y//r.— The rate of interest char^-ed on
these demand 1; •nis is excecdinu-ly variaf.le, running- all
the way from 1 per cent to IHC per cent per annum. I f
durin<>- the course oi' the loan there should he a sharp
advaner m iiiuiiey rates tiie i»orro\\er is notified that the
rate charged will he advanced. If the broker oi)jects
RKI.ATIOX OF UAXKS '1
O WALL srUKF/r
;585
I
tt. the advance lie is at liheity to pay the loan and seek
.urornniodatioii elsewhere. Conversely, if the rate ^oes
down he may elaiin a rcduetion from the hank.
470. UcsponsihUUics of the Inau clcrh.^ All eollateral
loans are in eharne „f' a loan elerk. In the ^reat Wall
Street hanks this is a most responsihle i;osition rerinirin^r
keen and constant vin-ijanee. The loan elerk must keep
a sharj) watch of the market and he HiUst kru)w what the
money market is doin^r. Uc must keep an eye con-
stantly ,,M the ticker (as the instrument for reportin^r
(|Uotations of securities is called), in order to see tha't
tlie margin of all the collateral loans of which he has
("har^x-e, is properly kept. \\^ there is a sud.K-n slump
m the market, if the value of a collateral ^roes down
and the mar^nn is not maintained, he sends immediate
notice to the horrower for more collateral.
There are certain i)eriods when the investors ha\e
A^nne out in the market and paid for a laro-e pro-
portion of the securities. Such was the case ?n ]H!)7
hefore the hoom ])e<ran under the McKiidey Adminis-
tration. The hanks were carryinn- a \ cry small amount
of collateral and th.e rates were very low.
'«^. VmUffcstcd sccurith's.—lu li few vears the con-
dition chan-ed entirely. The notations',,^ hundreds
of industrial comhinations in the period from 18i)8 to
HXm hrouoht into the market an enormous (juantity
of new securities. In fact the issues were so last that
the l)anks were soon filled up to their limit with, collat.ral
loans. The Wall Street hanks were furnishin^r the cir-
culatmo- capital on which the new corporations were do-
mcr husiness. The stocks and honds thus held hy the
hanks were mllfvl "iiiwllo-nt+^'l - ri.-- _ ■" mi _",
IS a happy one expressin^r as it does the stoppa^re in
the re^nilar i)rocess c jassing the securities alon.r to
VII— .v, "
v-M^.
.386
-MONFA A.,L JANKINT,
the ultimate investor. Tiie securities wliicii thus failed
to move naturally were the cause of a serious disturb-
ance ill the financial mechanism. The banks found that
they had extended their credit to the utmost and were
unable to jirovide sufficient funds for industrial pur-
])oses.
The condition was remedied by the crisis of 1 !)().'i which
is called the "ricl, man's" panic. Prices beoau to de-
cline uhei, the banks be<ran to sell out the collateral of
weak holders who were unable to furnish additional mar-
gin. The cumulative efTect of these forced sales caused
a very sharp break in prices, which tempted the investor
to enter the market and take away the securities, thus
restorin/r the nu./ket to its normal condition and ^et-
tin-,-- it ready for the <iTeat l)oom which culminated in
1907.
481. Close relation hetzccni reserves and ;>r/Ve.v.— The
credit which tlie financial l)ankers of Wall Street extend
to the dealers and speeul. 'm's iu securities is based upon
cash reserves. Tb" National Hank Act. bv permittin^r
the interior hw,^ .,, deposit half or tbree-tiftiis of their
cash in the res»-rve c;\v banks and still count it as re-
serve, cncoura<rcs the pilin^r np of cash in these central
markets. 'I'his prru'css is known as "jjyramidinir" the
reserve. The dan-rt,- of ihis nuthod lies in the insta-
bihty of this cash reserve, which sustains the cri'dif
structure of AVnil Street. Whenever from any cause
he interior banks withdraw tlicir cash deposit the New
N oik banks are forced to contract their credit, whicb
means that they nmst call some of their demand loans.
SoMic of tlif speculators will be unabh to eai-rv their
stock an<i must sell at wliatever price thev can ^r^-t.
So close is the relation between all kinds of business
ill this coMiiry tliat a iireak in the st(.eiv market from the
KELATION OF BANKS 1
O WALL STULKT
;387
c-auscs menti(„„.,l al.ovr is likdv to l.avc ;, v.-v .icp.rss
in- cfrect thr..no.j,nut tlic ul.olc c-.untrv. Ml „r the
|.eri,.,ls <.i' (kprcssio,, wliid, this c.untrv has experi-
'■•H'e<l Iiavc h,rn initiate,! hv a panic in \Vall Street
-yter th. panle of VJ07 a «reat u.any people ehar^r^
tl.e tron'.le to the law pennittinM' the- pvra.ni.lin^. of re-
serves. The ^^ itluirau.l of these reserves was ..hviouslv
''^^ "".ne.hate eause of th,. panie. The a.lvantao-.;
fn-eu.r. of the n-.h.positin-,' of reserves In eeonomi/-
l";^' the nse ol eash are so many thai it vvo„M prohahlv
hv wiser to regulate than to abolish the system
iH'J. Plan for rcwali,},uj th, dan<nr in rale position
>rscrvcs.~i)n. of the authors has elsewhere made the
sn,.xest,on that the danuer of pynnrnMing u.ight he
■•"•«vly el.nunated hy dividino (he hanks in \ew York
^ ily into lu<. elasses, eommereiaj and tinaneial
(■"n.mereial hanks furnish eredit to merchants and
"lanulaeturers to he us.. i in tne production and M.ove-
""''* '•' -'""'^^ "'<■ '■'"^'"^•i^'l '•••"iks furnish credit to
'"•nkers and dealers to h^. us.,! i„ purehasino. ,nd hold-
-ig scurdies uhich ar,. dcp.,s,t,,l as collateral for the
'"""s. "■^■•I'sfin.i-ulslnnn. feature of the tinaneial hank
- I.e collateral loan. This fa.-t su...vsts a plan lor
-Ntnctu.u. th, resources of the speculator without at
"le san., time placing- any hurdcn upon inu'.,strv an.l
loniuicrcc.
^H.^ Cnnnncrckl hanks.- Let Ih,. national hanks in
the t M-ee central rescr^ e .•ities-\cw V..,k. Chicago, and
>'.;nu,s«eduided into the tuo class, ..commercial
"Id fuiancial. Leav t., th,- c,,uirn, n-ial n-dio-rd '>-u'
'M ti.e pnvik.ues they ,mw enjoy un.lcr the Xa^'n'^I
'i.ijik Act i.xcept such as h.Tcinafl.r state.h. an,l in
^•wditmn pcnuir ih,,u io ,vcrcise hust cunpanv func-
loiis, such as acting as trustee, a.luiinistrator, r(-gislrar.
388
MONEY AND BANKING
1
etc.; also <y\\v tliciii autliority to have savings depart-
ments uiuler strict saviii<j^s hank laws. This concession
should he granted to hetter enahle them to comiKte
with the state i)anks and trust companies. Xo eomii.
eial ha!ik should he allowed to make ly loan, or to
discount any eoinmercial paper for an\ hroker or any
loan secured hy the deposit of stocks or honds, unless
such collateral is taken to secure a loan already made,
or one the proceeds of whii'h are not to hi' used in trad-
in>4' upon an e\chan<4e. \'iolations of this i)rohihition
will cause the hank to he classified as a financial hank.
^Hl. Fiiianria! hanhs-.- A financial hank should have
the ri^ht to make loans to hrokers ui)on collateral se-
curity of stocks and honds or warehouse receipts. How-
ever, they should not hi' permitted to receive deposits
from any other hank oi- hanker or from any tnist com-
])any. They should not he permitted to issue circula-
tion, hut should have the riylit to deal m honds and
underwrite issues of honds. Kvery loan made shoidd
he posted in a puhlic place and ^Wc the name of the
horrower, the amount, the rate of discount, and the
name of the security.
Xo national hank should deposit any of its funds in
any other institution exce|)t a commercial nali(.nal hank
in a central reserve city or in a national hank in another
city.
The forcgoin^r provisions are an attempt to deal with
specidation on the hasis of present ha?ikin^r laws. It
is to he hoped that in the ruar future all the hanks nt
the country may he incorporated and reirulated under
one system. l''inancial conditions can ne\ci' he thor-
oughly conti'ollt('
nor can
I i;...:
le speculati\e exj)ansion
1.1 i:i »i..
, i .. I .
. -. I
i i i K ."
and trust companies are made to conform to the re-
RELATION OF BANKS lO WALL STREET 38i)
(luirements laid down for iiationnl hanks. It is a great
anomaly to put strict limitations upon the national hanks
and expect them to compete with uiu-epdated trust
companies; hence, in the provisions ahove, we have
yranted to the commercial national hanks the functions
uf trust companies. It were much hetter, though, to
ill l)rive the trust companies of hanking functions, which
IIrv have accjuired, hy usurpation, until the states
recognize them hy statute.'
' Baiiktr'a Mayaziiie, Aug., 1909, |). 19J.
15 AN
t'lIAPTKH XXVIII
\' I) THK rXITFI) STATKS THF.ASrRY
•i8.}. licspousihUitji of llif Scnrfur// of the Trcasurn
— Few people have any a(l((|uate idea of the power and
responsibility attaeliin^- to the j)osition ol' Seeretary of
the Tnited States Tivasnry, This jjouer and respon-
sihility uas not eonseioiisly oi\rii io the head of the
deparlnient hut exists hy reason of the failure of Con-
gress to assume a Iturden and resj)onsihih'ty whieh })rop-
erly hilotjus to it. C'on,yress. or<hnarily so eaoer to ha\ e
a hand in e\c'i-y (jui'stion of ini])ortMnee and so jealous
of its jtrerooatixc. has in lliis ease liaeked away timidly
frou! tile piohUiii. Icax in,u the Seeretary to orappk-
'vith it as i)est he ean. handii'ai)iH<l as he is all the wlule
Iiy notoriously iiiade(|uate legislation and compelled to
take advantage of every little teehm'eality and am-
l)i^niity of the statutes in ordci- to sa\c the eouniry I'roni
eiMistantly thi-eatenin^' panics.
'I'he a\ira^-e Congressman mav know soniethinir
about the silxir tjuestion (!.• jiad to learn that when
the matter was the paramount |)oli!ical issue in ISlXi),
liiil ha\in;4 ^one so far lu would he oidv too willinir,
)f it w( re ])ossihle, to regard ;,s settled the whole iutri-
eate and per|)le\in<,^ siihjeet of currency and finance.
He realizes that it is a. ••li\e'" wire and that when it
sj)utter.s the a{)j)ropriate thing- for him to do is to run.
Somchody. Iiowever. must take charge of the situation
and face the dajinrr of a shock. In tiie ease of the
BANKS AND UNITED SI ATKS THKASl'HV
391
funvncy problem tliat man is tlic Secretary of the
Treasury.
The situation which confronts the Secretary is this:
Tlie (iovernnv^nt is the hirgest financial instituticju in
the country, it.' receipts and (Hshursements together
amounting to four or live millions of dollars daily. A
large })art of these transactions is made in cash, and
the daily balance (hie from or to the New York Clear-
ing House must be settled in cash. It may readily be
seen that when the I'cceipts happen to be greatlv in ex-
cess of the disbursements, the Treasury ai-w Sul)-Treas-
uries will have on hand a large surj)lus of idle currency
which has been withdrawn from circulation and from
ti'c reserves of the banks.
iH(>. Trciisuvji vdiiscs slrin/'ciidcs. — There is a cer-
tain (juantity of currency in the country, consisting of
the various govermnent issues and national bank notes.
Its amomit can be increased or diminished but slowly.
The larger percentage of it lies in the Treasury; part
is in the bank vaults serving as the l)asis for credit;
the remainder is in the pockets of the people. Should
aii\thing ha|)pen to increase the amount in use by the
peo|)le, it must come either from the bank reserves or
from the Treasur\-: ii' an unusually la'ge amount lions
to the Treasury and is not disbursed then tlie amount
in the ba!d<s or in circulation is re<luctd bv that much.
During the past few years it has fi'eijumlly ha|)j)ened
in the autunm season that both the amount dema?' led
for circulation and the amount lodged in th'- Treasury
have increased suddenly at the expense of the bank re-
serves, especially those of New York City, causing an
acute monetarv stiingcncv.
The gieai buik oi^ ijic exchanges of tile country is
.'?92
^roXEY AM) BANKING
made hy means of rirdit ratlRT than currency. How-
ever, the aiiioiml of credit available for this use is rig-
idly limited hy the amount of currency >vliicli may be
employed in bank reserves. If the l)ankino- credit of
the country is e.\i)an(led to the limit permitted by law
and a ])ortion of the reserve funds is suddenly taken
away, the banks must contract credit accordinoly. hence
the immense importance of the weekly statement of
the New York C'learinn- House banks showing the con-
dition of their reserve. A contraction of credit means
a diminution of |)urcliasing power and a weakening
demand for everything that is bought and sold, stock's
and bonds being especially sensitive to this inHuence.
A sudden withdrawal of cash funds from the Xew
York })anks and the immediate contraction of credit
which follows when credit is expanded, is likely at any
time to l)ecome the initial cause of a panic which might
spread outward from Wall Street until it involves 'the
whole country.
The Secretary of the Treasury is re(iuired to keep
in the Treasury or Sub-Treasuries all tlie cash received
by the goveriumnt, except the receipts from internal
revenue, amounting to about $1.()()0,00() a day, which,
beiore the\ arc "covered" into the Treasury," may be
deposited in certain banks designated as I'nited States
depositories. As security for these the baid<s must de-
posit with the Secretary of tlu Treasury Tnited States
bonds to the full value oi the deposit," or other bonds
at the discretion of the Secretary.
This, tlien, is the situation. The j)rospcrity of the
country depends to a large extent on the conditions in
the financial center. Healthy financial conditions dc-
•'•••""■■••'• '••"■ '^le;;;; ;i '< I'ii i<i Tiit i()i ijse
in the markets; an inciease leads to speculation, while
15ANKS AND UNITED STATES TREASURY 39:}
a (Itcrtase may lead to dangerous })anic's. In a word,
thr uliok' of our iiidustri >\ and linatit-ial lil'e rests upon
the t'ouudatioii of easii in the Xew York bank reserves.
'I'iiere are two ways by which this cash reserve nsay be
interfered with — by withdrawals and shipments West
and South during the autumn season when those sec-
tions need an unusual quantity of cash monev; and by
the pilino- up of surplus funds in the Treasury, liy
whichever manner the funds are withdrawn the effect
is the sanie.'
4H7. Defective currcncn larcs. — The condition above
outhned is not inevitable but is the unavoidable conse-
(|uence of our currency and the treasury laws. We
know that the system gives rise to grave dangers which
threaten the happiness atid Avell being of every jjcrson
in the country. Congress rel'uses to change the law
and the law is incapal)le of meeting the conditions as
they arise. The bankers of the country, jjarticularly
of Xew York, are often loudly blamed because they
allow such conditions to arise and exist, but amouL'- so
many, who is there to take the responsibilty or with
sulficient power to remedy the matter:' The banker is
conducting a private business for private gain and there
is no reason why he should be expected to assume a pub-
lic function of such, magnitude.
^KH. L\r pal it'll Is of tlic .sccirtari/. — The rcsj)onsil)il-
ity falls, therefore, upon the Secretary of the Treasury.
rie is given specific discretionary powei-s in enforcing
the laws and out of these certain exi)edients have been
devised which may be used mider certain conditions:
1. The secretary has induced national banks in one
way or another to take out notes in advance of their
actual needs.
2. lie has anticipated the payment of interest on
'Si-c .\|)iHii,|,\ in •■ iva.r.il |{( scrvp Act." I'li^--. ,)t(! ,/ .v,r/.
394
MONKV AM) HANKING
\W^'
Tuited States l.onds in order to put casli into cirou-
Ja' on.
3. He has made purchases of (^nited States bonds
lor the same purpose.
■1. He has made a rulin^r that tlie banks need not
keep a reserve a<?ainst ^rovcrnment deposits. Tlie Xew
York Clearing/- House Association, however, continues
to enforce its reserve reciuirements against members, s„
that tlie effect of tlie ruhn-, so far as it concerns the
Xew ^ ork banks, is (Hilhtied.
o. He has allowed the H()vernment depository banks
to substitute county, city, state, and other bo'nds, in-
c'iudu'g, it is understood, some railway bonds, in tlie
place of Ignited States bonds as security for i)ublic de-
posits. This privileoe was extended only to such banks
as would au-ree to use the I'nited States bonds thus
released for takin;^' out additional circulation.
(i. He has warned the depository banks to abstain
troni using their I'unds in Wall Street as a basis for call
loans to speculators through brokers.
7. He has entered into the foreigti exchange market
to assist the gold importing movement by givin.r the
banks temporary deposits of gold e,,ual to the anmunt
tiiey engage for import from abroad. This removes
the disadvantage under which our im|)ortinL.- bankers
labor that of losing interest during the time le gold
is in transit and to a considerable extent stimulates
^old imports.
^^
i\
CHAPTER XXIX
EUROPEAN BANKING SYSTEMS
iVAf. Bank of K upland. —Tht; Hank of England
owes its orio-iii to conditions similar to those whidi ob-
tained in the United States wlien the Hank of Xortli
America was founded. It was estahhshed in 1(504 for the
purpose chieily of assistino- the fiscal operations of
the ^fjvernment. On account of the war with France
the ^-overnmcnt was })adly in need of money. Taxes
of all sorts had been levied but it was very difKcult for
the government to borrow i)ecause of the confiscation
in 1(572 of funds borrowed in like maimer by Charles II.
Althouo'li this sum, amountin<r to tl..'i()().()()(), had
linally been j)aid. bankers and individuals of wealth
were still very cautious about making advances to the
uovernment.
The original charter of the Hank of Enu'land pro-
vided that it should ])e given the power to issue notes,
to deal in coin, bullion, and commercial bills, and to
make advances on goods and merchandise; these powers
biing contingent upon a loan to the government of
I' 1,200,000 for which the bank was paid 8 per cent in-
terest. From its ability to issue notes the bank found
itself in possession of an ecjual anunmt of currency
which it was at liberty to loan. These notes were not
payable to bearer, hence passed oidy by endorsement.
They were ])ayable at specified <latcs and bore interest.
In 1(597 the capital of the bank was increased, a further
loan made to the govcrmneiit, and the bank was
395
390
:vro\i:v and hankixg
given tiir iiul,t to issue (K'niaiid notes witlioiit interest.
^ In 17()!t an attempt was made to nivf to the liank of
England a monopoly of the bankino- business by pro-
yuhuu; that no eorporation or partnership com])osed of
more than six persons should be given the power to
issue eireulating n(jtes. 'Vhv issue of notes at that time
M-as supposed to eover the entire field of banking, hence
this provision was understood as prohibiting any or-
ganization of more than six persons from engaging
in banking in any form. It is obvious that this did ntPt
prohibit the issue of notes by in(hvi(hiais or corporations
of less than six i)ei-sons; nor did it prohibit the operu-
tjons of l)anks of deposit by large organizations. This
fact Mas not understood for many years, however, and
with the exception of small "nstitutions the liank of
England enjoyed a monop<,jy of the entire field of
banking. The effect of this monojxjly was not felt at
first, but with the general development of commerce
M-hich took ])laee in the latter part of the eighteenth
century a demand for credit instruments appeared
which the Jiank of Kngland could jiot meet. There
sprang up accordingly a vast amount of small but weak
banks, whose notes soon flooded the country. Thev
were issued for the most j)art in small amounts, and iii
1777 a sueeessi'ul attem[)t was made to drive them out
of circulation by prohibiting the issue of notes in de-
nominations smalLr than £.5.
4!M>. Dnrlopmcnt of the use of chccks.—Mr. C'onant
in his "History of .Modern Hanks of Issue" says:
Till' j)r.)lii!iit;r.n upon note issiius was prohnljly one of the
causes wliieli i<.iitril)uted to the use of cheeks. Tlic notes issued
hv private bankers wnv at fir>t written on paper for auv odd
ouiu, like proinibbory note>. I'lie practice was introduced hy
EUUOrEAN BANKIN(i SYSTEMS
397
C liild & Co. in 17^9 of liaving tlic notes partly printed :ui(l
[>,irt!_v written, like a modern check. These notes continued
to he issued till ahout 179.'5, when the existing system was intro-
iluci'd. of giving the depositor a credit for the full amount of his
ill posit- and authorizing him to ih-aw checks at his convenience
a<,rain>t it. 'I'he issue of notes by private bankers was not
forbidden until the Hank Act of 1844. but, their use grad'ially
diminished as the greater convenience i checks came to be under-
stood.
The intimate relation between the Bank of England
and the government, wliieh had been estabhshed at the
outset, continued as time ])assed. The charter was re-
newed from time to time, usually on the condition of
.idditional loans to the government. The war against
Xapoleon was financed largely })y the Bank of Eng-
land. Mr. Pitt drawing heavily upon the bank for money
which was sent to the Continent to promote the war.
These drains of s[)ecie continued unabated until the
bank was forced by Parliament to suspend specie ])ay-
ment in 1797. The suspension, or restriction as it was
railed, continued until IH21.
During the earlier })art of this period the Bank of
England was able to keep its notes circuLating at par
with coin. The act of 1797 had made them legal tender.
I'inally. however, depreciation began, and during the
h(K)m which followed the panic of 1810 assumed con-
siderable proportions. In that year a committee was
ap})ointed by Parliament to investigate the fii\ancial
and monetary situation, and a report known as the
Bullion Re})ort was the result. In this re])ort the real
evils of the situation were ably expounded, and recom-
mendations made wbieb. if ad.ontcd Dronintlv wonjd jinve
restored the currency to a stable value. It served, how-
? {
398
MONEY AND HA\KIN(i
^..
pc,.to.,lu(.atcthcn.in,lsnn.Mnker.snr,cl public- nun
^" :'" -"..kTstar.di,,^. of the prnhlcn.s i„volvc.l, an oIm-
oat.oM winch l,„re fVnit a ieu- vcars later.
,,,,'',,;';;:,;''f'7'f;i'^->^'--'A^'^'^'>l.lstan,Ianh
■'^-a.nonnt nl ...M. ,vsnn.,>t,onhc.,.anK. a fact A
Hvsan.e tnn. the o-ovcnuncnts pnu.Mo hnn-ou "r^.n,
-'-•'< -as n.stnc.te,l so th.t nn nn-ther l,.ans eonl.
lH.^.nh^., h.nt special an.hon.y ,Von. I'aH.an.ent.
m 1823 .t was (hscovcred that the Hank of En.rl,,,,]
haci not been .iver, a monopoly of hankin^r excq,t in
Its note issne fnnction. There followe.l aeeonlinolv a
movement to establish joint stock banks of deposit
.,;;'^' ;fi^fr^^'-^'--'-^swereinm.e:;!:
My estabhshcd, bnt it resnlted in certain c-oncessions
^"'-/- I^ankofEn,dand. In 182(> the bank con-
sented to the establishment of joint stock banks of issnc.
A ';'"; . :; ""'" ""'^^ authorized in London
an lucnnty but they were not ,nven the ri^ht of issue.
In lH,i,i an act Mas passed by Parliament which made
the notes ot the Rank of Kn^huul le^al tender as Ion.
as they w-ere hem- redeemed in ^old at the bank. The
notes had been le^^al tender prior to this act bnt ordv
dnrinn- the restriction period.
491. Bank Act of m4.-Buvir,<r the vears which
followed the establishment of joint stock banks of issue
seventy- wo such banks were or^rani.ed and note issues
.Mcreased. In 1830 and a^ain in 1830 panics occurred
and It was popularly thoncrht that thev were caused bv
an excessive issue of notes. The result" was ar, a^^itation
; ;, ^^;minated in the T?ank Act of 184-1.. The charter
of the ]iank of Enu-jan.i was liefore Parlianient f()r re-
newal. The new charter provided for the entire sepa-
'JROPi: N HANKl.\(i SVriTKMS
•>99
Tl
le
ration of the banking and issue dcpartnicnts.
Iiank was ordered to deposit with the issue dej)artmeiit
L 1 !•. ()()(),()()() of ^'•oveniment seeurities, wliich rej)re-
M!)tc> the average amount of eireulation then ontstand-
inn-. This deposit inehided the ^'•overninent's del)t to
the hank, which amounted to €11, 01.), 1 00. In return
the I)ank received an eciuivalent anuMint of notes.
I'lU'tlier notes couhl he issned only after a dejjosit of
L;(ihl coin or hidhon with the issue dei)artmcnt, the riiiht
Ml' deposit hein^' ojjcn to anyone. Joint stock hanks
.>f issue were allowed to contiinie issuin<r notes, hut if
they retired their circulation it could not a^ain he issued.
In order that this nn"^ht not cause a contraction of the
currency the IJank of Kn^dand was <riven the ri<4ht to
increase its de])osit of bonds and the notes which it
would obtain for them to the amount of two-thirds of
the circulation retired by the .joint stock banks.
Hy this act the character of the bank note was
changed entirely. Formerly it had been a credit in-
strument, dependin<r for its current redemption upon
the reserve of the bank and for its ultimale redemption
upon the hank's ^eueral assets, the bonds, notes, etc.,
for which it had been exchano'ed. Its volume ex-
panded and contracted with the demand for medium of
exchan<;c. That its excessive issue could have caused
the j)anics of IH.'iC. and 18.'J!> is inconceivable. The
hank act converted it into a <rol(i certificate — a mere
warehouse receij)t for <jold — destrovintj- entirely its
(•redit character. Its volume can expand now only after
i dei)osit of an equivalent amount of ^old, hence the
only economy the system attains is in the greater con-
\('Tiie!ice of !)a!)er monev.
1.02. Chamclir of Hank of England natc.—Thi: Iiank
act was followed by a considerable increase of deposit
400
MONEY AM) BANKING
■'I
j(.S
rip
)i
banking-. Ilnur its inelasticity was not felt until the
panic of IH^T- In that year, and a<rain in the panics
of IH.)7 a.nl 1H(!(;, tlic (leniand on the hank for notes
was so ^vc-di tliat the y-overnineiit susjjended the hank
act and allowed the hatik to issue notes hased on its
genera! assets. The -ate of interest at which the hank
could loan its notes was rixed in 18.57 at 8 per cent, and
in 18f)(» at 10 per cent, and the interest was to he credited
to the government's account, so that the hank would not
increase its loans nnnecessai'ily with the idea of niakin^r
lar^e ])rofits for itself. In this suspension system, lies
the ojdy elasticity of the Kn<4lish plan of note issue.
It has iiad the desired effect in the i)anics iii wliich it
has l)een used, hut hecause it dejjcnds upon the consent
of Parliament it is a dangerous device to rt;y u})on.
4!):J. The Ihtuk of Eiiirlaud private— The Hank of
Kn^land has always remained a private corporation,
hent n])on earnin<^- ])rofits for its stockholders. It is
managed, iiowever, in the interests of tiie whole country,
and its management has always l)een so etKcient and
unselfish ii..it many ])eople are under the impression
that it is a ^n)\ti'nment institution. It still n-pcafly as-
sists the fiscal operations of the government hy man-
a^riiicr the puhlic debt, receivin^r ^ovt rtiment revenues,
and making- \arious payments, hut over these lunctioi's
the ^n)vei-nm( nt has no diicet control except when it^'
contracts with the iiaiik expire.
With the growth of deposit hatlkin^^ the resultant
iricrease of .joint stock hanks of deposit and restrictioji
upon note issue tin Hatik of Kn^land has hec«)me
chiefly a hankers' l)ank. It is not ^om iiud h\ hankers
hut hankers are its cnstomers. in fact the charter |)ro-
directors, and the iioard is composed largely of mer-
EUROPEAN BANKING SYSTEMS 401
cliants. Its diief usefulness to bankers is as a depos-
itory of their cash reserves and as a hank of re-dis-
count.
There are no laws in England compellinrr banks to
keep cash reserves, their size bein«- kft entirelv to the
.lud^rment of the managers. The banks throughout
Kngland find it much more convenient to deposit their
cash in the l>ank of England. Xo interest is i)aid on
these deposits but the banks continue to make them be-
cause of the right it gives them to draw on the city
I'anks. The result of this system of concentrating th<«
cash ui one bank is to place upon the IJank of Englan.l
the responsibility of holding the cash funds of the entire
country not in active circulation, ^^'hcn there is an
extraordinary demand for any reason, such as with-
drawal of deposits by individuals and firms in time of
panic, that demand is transmitted from one bank to
another until it finally reaches the Bank of England.
For this reason the IJank of England must i<eep'"itself
m a position to linance such occurrences, and it does so
by keeping a large cash reserve. It has learned from
experience that a 40 i)er cent reserve is necessarv, and
this it aims to kee{) at all times. Its de^ ice for keeping
Its reserve intact is the d.eount rate. It selects the
most urgent cases for relief automatically bv raising
the rate at which it will discount paper. This imme.ir-
ately restricts loans. When the reserve piles up in ex-
<vss of what is needed the bank encourages loans by
Imvering the -ate. This is the principle ,ipon whi,.),
l"nis are made (.. the world ov( r, btil because of the
■ mporlancc of the Hank of Ktigland its discount rate
IS watched carefully, even i.i this country, as a barom-
< ter of financial cnrwlitinnu
VM. Ihnihing in France— '\:\\<i earliest attempt to
t — \ II ji; *
m
./*/?
402
MONEY AM) BANKING
i''
fc»
'•5
tiH
:M
estaulish a central bank of issue in France was made
l>y John Law in 171(5. Tiie bank was well conceived
and tor a time was ably mana^rcd, bnt it finally became
involved witii Law's specnk.tive schemes and went into
li(inidation in 17'21. The panic which marked the end
of Law's career was so severe that for lifty years there
was no further att'Mnpt to establish a "^real national
l)ank In 1770 the Bank of Commercia! Discount was
organized only to receive its death blow at the hands
of the government in 1789. During- its i)rief existence
;fr was well managed and gave excellent service. Tiie
gnvtrnment, however, found that its own creciit was
unstable, and in an effort to repair it dragged the bank
down with it. The climax occurred when the gov ,'rn-
nient ordered tlu' bank to pay into the Treasury a large
sum in notes in return for worthless assignats. In 1703
the bank went into licjuidation.
4".).>. liiuih- of France. — The Bank of France was
foutided by Xapoleon in 1800 with a capital of .30,000,-
000 francs. At the outset it had no special nrivileges
in regard to the issue of notes, nor was it a government
institution in any sense. In 180;j the capital was raised
to 45,000,000 francs, and it was given the exclusive
right of issue in Paris. In 1H()(; the capital was furtiier
incieased 1o !K),000,tOO francs and the present system of
government was ado[)ted.
I'nder this .system a governor and two deputy gov-
ernors an api)ointed by the state. These othcials must
l)e stockholders. 'I'liere is also a board of fifteen re-
gents chosen by the stockholders, but the governor pre-
sides ov(r this board and has general supervision of
loans and all bank affaii's.
.. »l...
■•:r!-.» -•.*'
•i-i'
issue in all towns in which it had branches. During
'f '^
El'KOl'KAN BANKING SYSTEMS
403
the years following the fall of Napoleon its influeiiee
waned somewhat in favor of the establishment of de-
partmental l)ank«,. A laroe nnml)er of these were es-
tahhshed between 1830 and 1840 as the resnlt of the
!>ehef that the liank of France was not properly or-
■iani'/ed to administer the banking affairs of the average
citizen. It was popnlarly beheved to be a bankers'
hank. The nnnvtii of the (lei)artmentai banks soon re-
sulted in a spirited contest with the IJank of France,
the main [joint at issue bein^' whether the privilege
oi' note issne should be confined to tlie one bank
<ir bestowed ni)on all. The final resnlt was the Act
ul' 1848 which nave to the JJank of l-'rance a monop-
oly of th.e note issne function. It was re(]uired, how-
ever, that the i)ank should buy out the dej)artmcnt;d
l)anks of issue, which it promptly did by increasi.Mn- its
own capital stock.
VM\. Dcposi! nirrcucii little ii.st'd.—'Vhv monopoly of
till' note issue function did not result in buildino- uj)
ureat banks of deposit in France as it did in Kri'dand.
One of the most intcrestin^r features of the French
system is the undeveloped condition of the deposit cur-
rency. \otes are used almost cntncly in lar^e trans-
actior.s as well as in the channels of small trade. The
confinement of the privilenrf of uoh- issue to the one
•ii-eat institution has <«iviji to France a uniform, stable
I urrency against which tinn is little com|)laint and be-
cause of which there seems to be no nccessitv for the
_;ro\\ th of deposit b;uikin^'.
41t7. ./.v.v</ (iintiif/i. The notes of the Hank of
Trance are issued on what is known as the bjuikin^'' or
"asset currency" plan. In other words, there is no spe-
'liic iutid set aside for their rciCmption. such as is pro-
\Kled l»y the Fn>^r|isli law ;uid by the National Hank Act
V;
M
lU
404?
M0M:V AM) BANKINC;
of the I/nited States. The vohnne of notes outstanding
is fixed solely by the needs of business and by tlie eash
reserves whieh the bank thinks it neeessary to keep to
redeem the notes. Under this plan bank notes are
treated just as deposits are treated in national banking
law — as demand obliuations of the bank against the re-
demption of whieh a reasonable eash reserve should be
kei)t.
In })ractice tiie amount of notes against whieli ati
e(iui\alent amount of eash is not held is relatively small.
iVIthough the Hank of Franee is not re((uired to {)ro-
vide any speeitie reserve it has found it advisable to
kee[) a very large one, mueh larger than Me eonsider
neeessai-y in this eountry. The reserve of the IJank of
Franee will average about 60 per cent of its circulation
and consists of gold and silver eo'
408. linniclii'.s.- 'i'he bank is recjuired to maintain
one branc'ii in every department in Franee. Each
branch is allotted a certain aniount of the capital, and
the law re(iuires that half the ca{)ital shall be held
locally. The total cai)it:d is at present 1H(),()()(),(K)()
francs, or a|)pro\imately S.'}(>, ()()(),()()(). Loans are made
by till' branches as well as at the central institution,
and at the same I'atc of interest. It is worthy of note
that the l)ank oftin loans in very small sums, running
down to a few francs. The bank also does a large
amomit of re-discounting, the small institutions
tlu-oughiiut l-'iancc accc pting paper with the intention
ot' passing it on ai a small piolit to the central bank.
The liank (y\' I'liglatid issues notes onlv agamst the
deposit of gold with the issue deparinu lit ; ilie Hank
of I''rance issues them without any restriction whatever
except iiiose iiiij)osed i»\ its o\\ n couseix atism. it is
evident that tiie latti r nu thod, although it may not ap-
F.UHOl'KAN HANKING SYSTEMS 405
pear on its face to be as safe, o-ives to the currency the
iinieh needed attribute of elasticity. The Kuulisli sys-
tem is notably inelastic. The volume of out^standin^r
notes can be increased only by the purchase and deposit
<»r <4old, a method both slow and expensive. As we
have seen, the rigidity of the system has caused the
MTowth of the deposit currency, the l)ank note losing
entu-ely its true function as a credit instrument. Eng-
l.ind's only resource in time of acute strin«rency is the
suspension of the bank act, which in itself is an" admis-
sion that the system is incorrect in principle. Jn France
unrestricted issue has allowed the bank note to retain
its true character and its im])ortance as a medium of
exchano-e. The system is elastic, the vohnne of the
(iieulat.on ex])andinu- juid contractin^r as the demand
for it changes. Although there are no reserve recpiire-
nients the same result has been accomplished by con-
^eI•vative numagement, so that the note of the Hank of
I'lanee has Ijcconie as readily acceptabk- as the liank
«•!' Kngland's gold certificate. The law fixes a maxi-
mum limit to the circulation of the Hank of France, liut
this is changed from time to time so that it always ex-
ceeds any j)ossible need.
The (|uestion as to which is the betfir system, Imw-
cver, camiof be considered here because it goes far
Ixyond the merits of the two j)Ians of note issue. In
Imal analysis it would be foimd to de|)end uj)on which
s\stem that of perfornniig exclangis with bank notes
i'V with the deposit currency -would be most economical
.■mil best suited to the needs of a given country. Even
lliin final (hrision of the question must be largelv of
aradenu'c value, for the century-h)ng habits of nations
^ cl« I I I > \ I l€l I I J; t 1 I ,
\ KrioV\ iftim- oj ijic uruier
in
si
lying principles, however, setting forth the t
\\t» li
reat
4()()
MONEY AND BANKING
r-'. f?
schools of hankiIl^^ is extremely valuable to anyone who
is interested in the unsettled hanking- problems of the
I.^nited States. France and Kn^land have each ^iven
to the world s})len(li(l examples of conservative, upright
banking which stand as monuments to the ability of
their citizens to conduct private enterprises in the inter-
ests of the pu])lic welfare.
4f)i). Imperial Hank of (rcnnaiii/.—Thv Imperial
liankof Ciermany, or Heichsbank, was founded in 187.5.
Its organizatio)! was one of the measures adoj)te(I by
liismarek to bring order out of the monetary chaos that
had existed in the (German states prior to the unification
of the empire. Together with other monetary and
banking reforms it was made possible largely by the
huge war indenuiity of 5*^1, OOO.OOO. ()()() which (iermany
collected from France. In IHT.'i the gold standard was
adopted, and the mark made the unit of value in place
of the thaler.
The Imperial liank Mas organized upon the founda-
tions of the Hank of Prussia, established a century
earlier. This bank was owned j)rivately but was con-
trolled by the Prussian (iovernmetit. The Imperial
(io\ernmeii', purchased the Prussian interest, raised tht
cai)ital from i>0,()()0.(»()0 t balers lo 1 •_'(),()()(),()()() marks,
and sold the stock to private interests.
')()(). lufhicucc of ij;ovcntmcuL Although the gov-
ernment is not a stockholder it exercises direct control
over the l»ank"s iiffairs, so that it is much more essen-
tially a govtrnuKiit institution than arc the banks of
Kngland and France. Tlse Chancellor of the Empin
is the gtnerning olHcer. Associated with him are four
directors, ofic named l)y the Kmperor, and the others
lt\ till- l''cd(ral Council. 'I'he stockholders elect annu-
ally a commission of fiftcdi members which act> in an
EUROPEAN BANKING SYSTEMS
407
advisory capacity but has no real control of the bank's
affairs.
The bank acts as fiscal agent for the government
without pay; and furthermore, the stockliolders share
tlie profits with the government. First, a dividend of
31/2 per cent is paid to the stockholders; second, one-
fifth of the balance goes into the bank's surplus; tliird,
tlie stockliolders and the government then share e(iually
until the stockholders have received 8 per cent, after
wliich the government receives the remainder.
.501. Modeled on Bank of England.— The regula-
tions in regard to the issue of notes were modeled upon
the laws of Enghuul witli certain modifications which
liave been very useful. Tlie Ueichsbank was given a
circulation of 2.50,000,000 marks, with the further pro-
vision that M-hen other note-issuing banks (of which
there were then thirty-two) gave up the privilege, the
Reichsbank might increase its issue in like amount. At
present only six banks still issue notes, so that the circu-
lation of the Reichsbank has been considerably increased,
its capital was increased in 1905 to 180,000,000 marks,
and it now has .320 branches.
;502. 7i*r.srnY'.s'.— The Reichsbank is recjuired to keep
a cash rcsei've of one-third of its circulation, two-thirds
being secured by first-class commercial paper maturing
within ninety days. It is evident that this provision
renders the currency much more elastic than that of
Kngland where the cash reserve must be 100 per cent.
Furthermore, the Reichsbank is entitled to exceed the
limit set for the amount of no..^ it can issue iiy l)aying
a tax of .5 per cent per aruium upon all circulation
above the maximum limit. This creates :i circulation
th.'it can be used in emergencies without the necessitv
of suspending the limit l)y special enactment, as Kng-
iil
408
MONEY AM) H AX KING
■il^
»: 'J
J,
land is compc-UtHl to do. Tliis plan has been incor-
I)oi-atcd into a number of the systems whieh have been
su^iroested lor adoi)tion in the Cnited States.
It is worthy of note that no speeial fund is set aside
for bank note redemption. In case of dissolution the
depositors and note holders would be in the same posi-
tion. The deposit currency, however, has not grown
greatly in (iermany, so that the note holders would
always be the chief creditors. The system has worked
out very well in practice. The notes have always cir-
culated freely and without discount. The bailk has
followed the |)rece(lent of the Bank of Enoland and
the Bank of France, and conducts its affairs on a very
conservative basis, maintaining, like the Bank of
France, an average reserve of <)() per cent of its circu-
lation. In its conservatism it is very like both its pred-
ecessors; in its plan of note issue it seems to have taken
a middle ground between the two older schools, adoj)t-
ing many of the good points of each; but in its manage-
ment it has de|)arted entirely froni the other institutions
in that its control is entirely in the hands of the Imperial
Cioxcrnment.'
' Much v.iliial)!,- iiit'orinati,.ii cnnccrniiig I'.uni|..-;m l.,inkinL' svst.-ms is
<-;'iilMin,-<l iM thf tnoncijrr.-.plis puhlish,,! I,y th.. Xation.-il Monrt.irv' C'o.iiinis-
Mon I icsc „i,-.y l)f (.l)taiiR-ii from th.' SMiHTinl.'ihl.Mit ..f niHumi'iits,
W ashinjitiiii, I), e'.
CHAPTER XXX
£i
CANADIAN ILVNKINC; SYSTEM
50.3. Origin of banking in Canada. — Wherever a sys-
Irm of banking has been cstaljh.shed history of some sort
lii's behind it. Tlie aphorism: "Ilappx are the people
wbo have no liistory" may well be doubted; and espe-
;ially is this true in the held of commeree and finanee.
Tbe experiences, even the failures of the past, prepare
the way for the foundation of the nrcsent. xVlthou<di
Canada is as yet merely a new country, a country in
the makiiifT, it has had a lon<»- historv not onlv in the
|)olitical but also in the financial field. The history of
her currency, whicli beoan in 1()8.5 with the issue of
fiat money during the French regime, has already been
considered, as well as the early IJritish experiments.
The need of better financial facihties was early felt in
Canada. This was especially true after the Army Bills
issued in 181 2-1 81 4 had been withdrawn from circula-
tion. Therefore in 1817 and in the following year, 1818,
private banking corporations were established in Lower
Canada, now the Province of Quehec. These institu-
tions obtained provincial charters in 1821. to which the
loyal assent, then necessary, was given in 1822. Upper
Canada, now the l^rovince of Ontario, was asked in
!S17 to grant a charter to a banking comj)any. This
was done, but the lieutenant-governor reserved the bill
lor royal assent, which was given in 1821. A fierce dis-
pute arose l)etween the ])olitica! factions of the j)rovii,ee
over this measure, which e\entually led to the govern-
409
410
MONEY AND BANKING
i'l'r
K ;
ment itself taking about one-fourth of the stock of the
institution, with tlie rioiit to name four out of fifteen
directors. Tliis is the only instance, fortunately, of state
ownership in Canadian ba..".jig history.
In the maritime provinces, which became part of the
Dominion of Canada in 18G7, tlie first efforts to estal)-
lish banks was made in Xova Scotia in 1801 and again
in 1811. In 1812 the provincial governme it of that
colony brouojit out an issue of treasuiy notes, bearin<;
interest and not subject to re-issue, liut this was fol-
lowed by notes which bore no interest and were re-issu-
able. From this time on until confederation, the prov-
ince continued to issue treasury notes. Sometimes they
were made redeemable in gold and sometimes not. In
1807 there were in circulation notes to the value of
c£()0.5.859 (Halifax currency) . They, together with the
issue of 1800 of the Province of Canada, formed the
basis of the present legal-tender issues of the Dominion.
Xo bank was started in Xova Scotia until 182.3, doubt-
less because of the existence of the government treasury
notes. This was a i)rivate bank and remained so until
1872. The first joint-stock bank was not created until
1872; although in the sister Province of Xew Brunswick
royal assent was given to a charter for a bank in 1820.
o04. TJw mhslnictnrc of the Canadian hanking sys-
tem.— \\. is maintained by Dr. Adam Shortt, the fore-
most authority in Canada, that the three charters granted
in Lower Canada—all practically alike— are the sub-
structure on which the present system has l)een built.
This is now generally acknowledged ; for during the past
century no very radical changes have been made. In-
deed, there are many provisions in these charters which
remain, almost unchanged, in the ])resent general Bank-
mg Act. Among these i)rovisions, which are essen-
f'AXADlAX BAN KIN (; SYS'IK^I
411
tially the same in principle, aitliough diH'ering in de-
tail, are the following:
1. The charter was to continue in force for ten years.
2. Tlie directors were to be liritisii snbjects. Tiie
qnalification in stockholding was small, namely, four
shares of £50 currency each, or -$1,000 jjar \alue. The
directors were to he remunerated by compensation voted
by shareliolders at an annual meeting only.
li. The directors were to appoint officers of the bank
and to take surety bonds for faithful i)erf()rmance of
duties. They were to declare dividends half-yearly, if
sufficient pi-oHts were earned. They were enjoined, in
paying dividends, from encroaching uj)on the capital.
They had the right to inspect all ))ooks, correspondence
and funds of the l)ank. They were obliged to submit
a clear annual statement of the bank's position to the
shareholders at the annual meeting.
4. The bank might receive deposits, deal in bills of
exchange, discount notes, buy gold and silver coin and
bullion, etc., but miglit not engage in any other business
than tlijit of banking.
5. The bank could not lend money directly upon real
property. It could, however, take such ])i-operty as ad-
ditional security for loans already made. It was not
j^ermitted to lend money to a foi-eign countrv.
C. The bank could issue notes to circulate as nionev.
but with, no limit of amount other than the general limit
for cdl obligations. The limitations at the present time,
as will be seen, are (jnite different.
7. The government might require, at any time, for
the ])rotection of the public, a statement, under oath,
of th.e i)Osit!(^n. of the bHn.k.
8. Transfers of shares in the bank were not valid \in-
less registered in the stock-book of the bank. Moreover,
Mil
If
y
41^
MONEY AND BANKING
P
the btuik had a prior lien on the stock, for ordinary debts
d;ie hy tiie holder to the com})any.
There were, however, reowlations diflerinfr in prin-
ciple from those in the ^nneral act now in force. These
may be briefly siimmarized as follows:
1. The total liabilities were not to exceed three times
the capital stock actnally paid in. Directors were made
personally liable if they })ermitted any excess above the
stipulated amount. Any di:oetor, however, mi<rht es-
cape liability by publicly protesting, within eight days,
after the transactions causing the excess took place.
2. Shareholders were responsible only for the amount
of the stock for which they had subscribed, althouuh they
were subject to a j)enalty of five per cent for non-pay-
ment of instalments at maturity.
a. The voting power of shareholders M-as not, as now,
in exact proT)orti()ii to the shares held, but the number of
votes diminished relatively to the shares held. Vor
example, one share gave one vote, ten shares gave five
votes, and thirty shares ten votes. No lu)iding gave
more than twenty votes.
The banks soon established branches and agencies, and
Canadian banking began its career. Tluy issued notes
unsecured by any special pledge and exercised the widest
functions of banking without ])i-ecise reference to the
pow(rs conferred upon them by t.heir several charters.
They possessed capital (piite r.s huge, relativeiv to popu-
lation, as they now have: and as a result they assmned
a commanding position as ;i clearing-house for the ex-
change of the country's j)rodiicts.
Of these banks— three ir; Lower Canada, one in.
Tapper Canada, two in Nova Scotia .ind one in Vpwr
Hninswick— all but one in Quebec l)ecame leadmg in-
stitutions. They are, moreover, all in high standing to-
CANADIAN BANKING SYSTEM
413
(lay or have been honorably absorbed by existing banks,
exeept tlie institution in l/pper Canada nhidi, unbap-
l)i!y, became involved in {lolities. It failed in I8GG and
wrought untold misery- to the whole province.
The extent of the country served by the banks was
very great, but the trade and i)opulation were small,
almost insignificant. 'J'lie i)opulation was settled along
the shores of the sea, the lakes and the rivers; and means
of communication was almost entirely by water. Farm-
ing was in a backward state; as exports, furs and timber
were more important than those of agi-ieulture. As a
natural result the development of banking lacks interest
until a much later period.
In Lower Canada the volume of business more than
doubled between 1820 and 1^30. The liabilities were
made up as follows: Capital, .£3()4,()00; notes in circu-
lation, £217,000; deposits, £lG.*3,000. Other items made
the aggregate a little more than £700,000 currency.
The assets were as follows: Loans, £()02.000; cash on
hand, £103.000. In the same jear the one bank in
Upper Canada showed liabilities as follows: Cubital,
£77,000; notes in circulation, £150,000; deposits and
other bank debts, £38.000. The assets were: Loans,
£214,000; cash, £23,000; other assets, £30,000.
There were several new features added to ])anking in
this peiiod, which have survived in a more or less modi-
t\td form to the present. These were:
1. The principle establi.shed in Upper Canada that
a bank coul;l buy real estate only for its own use. Tn
Lower Canada there was a provision in the charttis
niaking it compulsory to state the animal value of the
real estate held.
2. Inal)illty to pay notes in specie on demand, forced
a bank into liquidation.
41t
MOxXEY AND RAXKLVG
it .. -
Vx. \i
I
V
m
\ 1
3. In Xova Scotia the double liability of shareholders
was introduced; althou^rh this did not as yet exist in the
provinces of Canada.
4. In New Brunswick the folloM-ing leatures were
added :
(a) Xo bank notes to be issued until one-half the
authorized capital was paid in.
(b) Loans on pledge of the bank's own stock were
forbidden.
During the ten years preceding the union of Upper
and Lower Canada more than a score of bills were in-
troduced deahng with novel ideas in banking, mostly
based on experiments in the United States. FortunatJ-
ly, as these measures had to be referred to the Colonial
Office for royal assent, they were vetoed. Xotwithstand-
ing the severe criticism of the imperial authorities at the
time, it is now recognized that they were right in re-
fusing to give their consent to 'these hare-braine(i
schemes.
Thus far, .,o joint-stock bank had failed, although
when the country was distracted by the Re})e]li()n of
1837, it was found necessary by the government to per-
nut the banks to suspend specie payments. This was
'liie not only to political disturbances, but to the great
I'Mi.ic in the same year in New York. Previous to
tiiat time the b. nkers had never failed to pay their notes
on demand. Soon after, however, the banks again re-
sumed specie payments.
^ The union of the tw„ provinces of Tapper and Lower
Canada in IHIl cmphasi/cd tlu- importanrr nf uniform-
ity in b.-mking. A committee on banking and currency
was app(,int(d, which reported upon crtiiin banking'
];: riK-ipk.s. Tiitr uiuy niw and important departure was
CANADIAN BANKING SYSTEM
4L
the restriction of note issues to an amount not greater
than the paid-up r.ipital.
There were no new important 'lepartiu'es up to Con-
federation in 1S(»7. exce[)t the issue oC govennnent })aj)er
money in ISGO, ah'eady deserihed, and the Free IJank-
iii^- Act passed nearly a generation before, in 1850. The
C anadian provinces were tlien. as now, carrying on hank-
ing through a few institutions with hu-ge capital, with
luiHiches and a hank-note currency based on general as-
sets. In tlie State of New \'()rk, just across the border,
I lie opposite policy was in effect. There were established
l);uiks with small cajjital, no branclu s, and a s})ecially
secured note circulation based on i)OTi(ls of various kinds.
The Canadian banks had done well, and come through
many trying times without failure; but their pace was too
slow for the public. And so "An Act to Establish Free-
dom of Banking" in Tpper Canada was passed. It was
intended to create small banks without branches and
\\ith bank note, based on the securities of the province,
lint the ])lan did not work. The largest amount of notes
takeii o:it under the act was, as re})orted late in 18,').5,
L."{()i),.)40; after that there was a steady diminution in
the note issues. The law, however, was not rejjealed
until 18<>r).
The reasons for the failure of the free l)anks are not
l.ir to seek. The banks could make more money under
the old system. The capital gathered togetlu r in .-uiy
eommi iiity to start a bank was forthwith sent away
tn buy the bonds as an initial deposit against tiotcs. The
proprietors, to I)e sure, secured the ru>tis: l)ut. except
for the small iterest yield on the bonds, they were ex-
actly in the stmc position with respect ir the amount of
loanable funds as they Mere iK-fore.
Moreover, they were obliged thenceforth to keep an
m
\.'
i$'.,
li
uo
MONEY AM) BAMvIXG
i^^mt
office I'or (liscoiiiit and dcijosit, and to he ready at all
times to pay specie whenever tl.e notes were presented
tor i)aynient. On ihe other hand, the cliartered hanks
issued notes against tiieir _yeneral cre(ht, and so had
control of their ori^ri^al capital and oi' the resources
arisino- from wiiatever {)ortion of their authorized note
issue they could keep In circulation. I'pon this general
loan fund they could earn the current discount rate,
and whatever additional yains were incidental to hank-
in.y operations in their territory. It can thus he readily
seen that the (iiartered hank was the more etJicient iii-
striiment hoth for the advantage of the stockholders
and for the community as a whole. And l)ein<r such,
it sur\i\cd.
.>().). Hnision of the ffcncrnl hnnlhi^ measure of JS7!.
— Enough has now Ikxh said, perjiaps, to make it clear
that the present Canadian l.anking system owes its origin
to the early l)aidsing c\j)erin.ents of the several prov-
inces. Limits of space will not permit of a detailed ex-
position of hatddng legislation from coid'ederatior. to
the i)resent time: nor, indeed, is it necessary. The act
now in force is merely a revision of the general hankitig
measure of 1H71, (he first hai.K act of the Dominion
under which the hanks actually worked (;U \"w[., c. .')).
Tlie first decennial revision of the act look place in 1880.
A decade later, in 1H!>0, the act was suhjected to im-
portant amendments which placed it snhsfantially in the
form with which wc arc now familiar. Again in 11)00
several imi)ortant changes were made. All these modi-
fications, however, in so far as they hear ujion the system
as it rxisfs fo-day. may he in s| d( sciJIh.I Ji, ;,r. analysis
of the act as it was last rr\ iscd in !1)i;{.
.'}()(). luvnrporali,,,, (,f hanks. - The p?-ovisions of the
bunk act witli respect (o the incorporation of wvw hanks
CANADIAN BANKINCi SVSTK.M
ir
are iiitciuled to ^nard aQains*^ the entry of unfit or iiie.x-
j)erienee(l persons into tlie bankin^r business. With this
end in view it is provided that the niininiuni re(|uired
eapital shall be .%}()().()()(), ol' whi.-li ofie-huU' must be
hdiia fide paid in and all subseribed btt'oiv a eertifieate
( an bf seeui'ed I Voni the Treasury IJoard pei-niittin^- the
institution to be<4in business. Xo eertifieate can be
f^ranted by the I'l'iasury Hoard uidess it has been shown
that all the re(iuirenients of the act as to the subscription
(»f capital stock, fhe ])ayinents of money by subserilK'rs
on account of theii- sul)scriptions. the i)ayments reciuired
to be nuuK' to tlie minister ol' finance, the eleciion of di-
rectors, deposit for security of note issue, and all other
j)reliminaries have been compiird with. It also must be
made cleai- to the board that tiir e\])('nses of incorpora-
tion and oruanizatioii aic i-( ason;'ble. 'I'his board con-
sists of the nn'nistcr of finance and five other members
nominated fi'om time to time by the •^'overnor-in-coun-
lil. The minister of financt.' is clu-irman of tin board,
and the deputy ministci' is. cx-ollicio. the secretary.
The prcliminai'y re(]uiremcnt riiakc it impossible to
(u-<^ani/,e a b;nik in Canada w itii any d( yicc of secrecy.
The aj)phcation for a new chartir is soon known toevcrv
liaidxcr in the Dominion. The scei'elarv of the Cana-
dian Hankers" Association, although not re(|uii"ed to do
so by law, at once ^'ets toL>«tlier all pos^ibK" information
ill connection with the new entei'prise. He mav cvet\
(liter into u?io(licial eommiinieation with the yo\crnmcnt.
and in various ways h( Ip to ni ike it certain that the new
^(M)turc is conducted as a hmic fide bu^.iness. It is thus
readily seen flial. as a rule, only b.niks which lia\c allied
proper financial backing- ha\t' a chance to enter the Held
I. I '.■
,)..
."iOT- The l)r(i!iiJi Jtinifi s/i.sl( in. As Dean .lo.seph
e-vii— ,>7
US
M()\i:V AND IJANKIMJ
r'rt'iich .loIiMsoii lias so fittingly said, a chartered bank
in Canada is a hank of liraneiies. not a bank a\ ith
branches. Tlie jiarent bank, wliieh is known as the
"bead olTiee." neither takes deposits nor makes loans.
It is merely an a(hninisli-ati\ e center. All the bank-
in^' business is (hmc by the branches, each of which en-
joys considerable inde|.en(lenee. Tliey are all. however,
subject to the control of the bead office. The law jjlaces
no restriction ujion the number or location of branches.
Canadian baidxS. therefore. 1ki\c b'-anchrs and agencies
in man\ I'orcinii countries as well as in Canada. That
this IS of \(ry ureat advantage to the commerce and
ti'ade of Canada (an be easily se- v Tiicre are at the
present time ( I'.MM) almost .'{.(MM) .anches of the Cana-
dian banks at home and abroad.
The inducement to the establishment of branches by
banks is. of comse. the possibility of j)rolit. Hut piotits
can be made only by making- 1,,; i^. 'll^v^^- |,,;,,,.s nnist
i)e made litlu r by issuin-.- circulating- nolcs or bv oprnin<r
an account uilh the bank. It is clear that were the
possibilities of |o:uiin,u- beyond the amount of the capital
wholly or ebiclly »-outincd to one of three forms of liabil-
ity, and w( re the other form distasteful or imjmssible of
introduction amon<>- th,. eonimumty ubere the branch
uas to be ( stablished. the m..ti\r for the creation of the
l)raneh would be absent. \ow, in anrieultural commu-
nities in Canada, win re popidntion is coniparativch-
sparse, the use of diposit-cuiicncy has not bc'n devcj-
oped. in Iced, the eon.btioiis aiv such t|,;,t tin \- would
scarcely admit of its use. \Vv liaNe. indetd. "a g'reat
number of small communities which -.ould be (nfirdv
iinabh- to support independent banks >f small capital,
communities \vhieb <!e!>!:!n!! •!!:■!■• :-t--i-:.z,f,^ :-.. n.
II till 1 1 1 1 1 1
oi' notes, not in that of deposits. The tHcd for note
CANADIAN HANKlN(i S'i S'lKM
419
iiirrcTicy, nioirovei-, in tlu'st- localities is not constant.
Iiiit is manifest only at certain seasons of the year.
WJKii the (leiiiand becomes intense, at the period of
iiiovino- the eiops. cnrreney mnst he su])plie(l (piicklv
,111(1 at reasonable I'ates. It is jnst here that the llexihil-
it\ and the elasticity of the branch bankino' system of
( aiiada are most in e\ idence. In every ])ioneer com-
iiiiiiiity and in the farthest frcMitier the bank is almost
I he lii'^t instrununt of ei\ ili/ation to ser\e the commn-
iiity.
oOH. Conditidns' of nnfc issue. — Tender ordinary cir-
cumstances the total amount of notes in circulation at
any time may not exceed the amount of the nnim])aired
paid-u]) capital of the bank to^xther with the amount «)f
ciin-ent yold coin and of Dominion notes held for the
hank in the central ^(Ad reserves, hereafter to be (K -
scribed. 'J'his lattei ])i'o\ ision was added in the revision
• if the act in 1!>1.'}. An amendment to the act passed in
]'M)H ])i-ovi<!es for the issue of what may be termed an
emcr^-ency circulation. This issue is restricted to the
(•rop-mo\ inn- pei-iod ( Sc})tember 1st to end of February
loljowinn). I)u!'in^' that time a bank may issue, in
addition to its ordinary circulation, an amount ecjnal to
1") jier cent of it> combined paid-up capital and sur])lus
<ir rest fund. This issue consists of notes which in all
respects resemble the ordinary ciieulation of the bank.
It is subject to a tax, not to exceed .1 per cent of the
iiiiount outstanding", until the notes are retii-ed.
.")()'.». (^nifididii lifivk nolis hascd oil com incrclal itsscfs.
Tile notes of Canadian banks, with tju' exception of
those that arc issued dollar for dollar on i^old or le^al
irnders deposited in the central reserves, arc based n|)on
ihc <^eneral a<s< ts oi i!ie iiafiivs. "iiiis forms a wonder-
lully clastic tnedinm of exchati^c. expanding and con-
r
'If
^,'0
MONKV AND B.\.\KI\(J
(rac'tiiio- ahiiost auloiiKitifally. TIk'sc notes, hciii.^- Imscd
simply on the general assets of the banks. Irvoiiu'. midfr
tlk'sc circunistanccs. similar to deposits. Tlicy arc issncd
on demand from li'<^itimate l)()rrouers and they automat-
ically conti-act I'y l.cin<4' rctnrncd when the need for IIk
enrrency is past. Cnder sneh a system any increase in
the demand for money, with higher (hsconnt rates, adds
to the indncemeiit to issne notes. There is no delav or
inconvenience sneh as exists where-- as in the Cniled
.States— honds mnst he i)nrchase(l and dei)osited with
the n(,\crnnient het'ore ilic notes can he issned. The as-
sets on which the notes are i)ased are the ordinary com-
mei'ciai i)aper ac(|nn-ed hy the hank in the coin'se of its
re-nlar hnsiness. The l)ank is tlins always ready to
inci-ease its circniation If the puhlic need more notes;
and all considerations oT |)i()lit lead it to do so. as its
power to lend money will he increased in projxjrtion as
it is able to snpply notes when that is the kind of ac-
conimodation re«|nired. 'I'he motive of profit, too. brings
the banks into active competition with one another, cans-
in,o- them to redeem promj)tly all notes of other institn-
tions which are |)aiil into tluin. and in liiu of these
to place their own enrrency in circniation. And a
sonnder or more li(|nid secnrity. as ;i basis foi- note issues,
than o(),)d, short-time commercial paper can hardly l)e
desired.
."ilO. 77/(' cciifnd ■^(,l(f /T.vcnr.v.— The provision for the
(stablishiiK nt of central <4o|d reser\cs was the most
iniportant new fealnrc ad(' d to Canada's bankin^' sys-
tem by the legislation of l!»l.*{. These reservi-s will mi-
doubtedly exert a potent inllnence not oidv in times of
stres.s bnt the whole y, ar jnound. As already indicated,
::;-. :;.:;;;,-, ;i;i.:; i ir;r oiii ,;•; T Vm j ( ai)i^' io issue iiieir notes
to th<- ext<i!t of their iinim])aired paiil-up capital stock
CANADIAX r.ANKiN(; s^■s'^l:M
421
.ind
(1 Itcyoiul that ( Sfptiinbcr 1 to l-'thniarv 'iS i to tlic
liiiouiit ol" 1.") j)C'r cent of tlicir capital and surplus or
list funds. According- to the (luarti'i-jy statement of
April .'{<), 1!>1.'J. the paid-uj) capital of tlic hanks was
-^1 I.j.7t>'.>.217, and the rest {()>• sur|)lus) ainountt'd to
si(lS.41 k.'i.'JT, a total of Ji^-22t.-21.'i,.).)4, The emoro-ency
ciiTuIation dui'inn' the autumn and uintc'i- of I!) 12-1;) I. 'J
!iii,i>lit, thci'eforc. if necessary, haw reached somewhat
(»\er .'}•') million dollars. In Xoveniher. l'.H*_*. the emer-
yency cii'culation actually approached SIO.OOO.OOO. and
the margin of such circulation .> mailable at that time was
ahout -S-JO.OOO.OOO. At ordinarx times that mar«rin
v\()id(l he am|)le-. hut it is easily seen that cii-cumstances
may ai'isc where such a mar/^in would he w i|)e(| out. .Vt
^ueh a time of (huiuer a comi)arati\ely insiy'uiticant
ution may stai't a panic, or a run on a hank. ^Vt the
I nd of April. IDl.'J, the (ie])osits ])ayahle on (Kiiiand in
Canada were S.'i(!.).34().()()2. and after notice. !^(i.'Jl.l(>(),-
I'SO a total of Sl)tM;..)()().2S'J. In Xoveniher. 1!H2. a
month when the ))ressure is usually <4i'eatest. the dej)osits
were -$1 (».(»()(),()()(> higher. To nuct a run on such a lar<^e
jiiiiount a good deal more than S2(),0()(),()()() might be
needed.
The new provision does much to econoi i/e time and
liring j)rompt I'elief. T'irst of ;dl. a goxti'imicnt depait-
iiient is eliminated. ()f necissity. there would need to
lie a laj)se of time to plact' go\ci'nmental maehiiirrv in
motion, as is e\ ideiil now in the time needed to secure
l)ominion legal tcndci's. Again, if recourse is had to
uojd imports, there is delay in secuiiiig then), and incon-
\eiiience in rel( asing the gold \\lien oner the jiced is
o\-er. Hut by pooling theii- gold res(!urces in a eeiiti'al
ieser\(' the hanks can imme<hately rtccixe additional
'iiodation in the form of notes, and still retain control
'1
H:t
■Is
40^2
MOM'.V AXn HANKTNc;
:ia:,-.
oT their rcser\cs. It .should hi' lirfc (.■\i)hiiiRd th;tt.
Mhilc the C';ma<]i;iii l)aiik note is not a le^al teiidrr. it is
c'oiisidemi ahsohitcly .safe hy the puhhc heeause of the
safen-uards [)roteetiiio' the holder from imnieihate or
ultimate loss. These j)ro\ isions will he enumerated di-
rectly hi'low.
However, apart from crisis, the central ,n(,ld re-
serves are expected to serve an important i)nrj)ose in
normal times. During- recent years hank-note issues
have fre(]uently ai)i)roached very near to the limit author-
ized hetween Septemher 1st and the end of the following'
Fehniarv. For instance, in .June, 1!»12. the circulation
was within «•_'.()()().()()() ,,f the circulation in Septemher,
when the emer<4ency clause comes into operation. .\t
such times a «i-reat deal of anxiety was caused the hankers
lest tile authorized limit should he reached: for tlun the
only recourse was to issue Dominion notes either !)y tak-
ing- them from their reserves or hy securin<r new sujjplies
from the ^rovernment— the latter expedient takino- some
time, while the former was a dangerous policy to j)ursue.
Under the new system any amount of hank notes may he
held in reserve to he released instantaneously hy the de-
])osit of ^'old or Dominion ^jovernment notes in the cen-
tral reserves. It is ex|)ected that the I)anks will keep
])ermanently a considerahle part of their ^(,1,1 imd leoal
tenders in the central reserves, so that in eflVct the eii-
culation will he permanently extended. The ^rold and
notes so deposited, which !nay l)e in excess of the amount
needed to cover the tiote issues of a hank, may he with-
drawn at any tinu after ii proper statement has been
rendered hv the hank in (|uestion.
The Canadian li.-mkers' Association, witli the ap-
proval of tlie ruiiiistci ttf i'iiiaiKv. appoints three trustees,
and the minister a fourth, to liave charge of the central
C'AXADIAX nANKIXG SYSTEM
423
icscrves. The association, too, uiider tlie power given
lliein in tlie act, makes the hy-laws, rules and re<riihitioi s
respecting tlie custody and management of the reserve;;,
\'. Iiich are under the charge of the trustees in Montreal,
Canada's financial center.
oil. Siriirit// of note issiu's. — With the exception of
such notes as may l)e issued ui)on gold and legal tenders
deposited in the central reserves, the law does not retjuire
the pledge of any security for the protection of the
note-holder. It does not re([uire a cash reserve against
( ither notes or deposits. Xo hank is ohhged to accept
the notes of another l)ank. The government does not
guarantee the re(kmi)ti()n of the notes, nor does it bind
itself to receive them in payment of dues t(^ itself. All
these are features that make it a])])ear sti-ange, at first
sight, that Canadians should unhesitatingly accept these
notes at j)ar, and nevei* (juestion their soundness as cur-
rency. And this confidence has been well justified, for
no one since lh!>() had lost a dollar through the failure
of a bank to i-edeem its notes. This has been due to the
following legal reciuirements:
1. Every bank must redeem its notes at its head office,
and in such commercial centers as are designated by the
treasury board. These redemption cities are: Toronto,
Montreal. Halifax, St. .Johti. Winnipeg, Victoria. Char-
lot tetown, liegina and Calgai'y.
•_'. Each hank must keep on deposit with the minister
of finance a sum of lawful money (gold oi* Dominion
notes) e(|ual to .'> \ni' cent of its axerage annual circula-
tion; the total so dei)osite(l is called the "^-irculation re-
demption fund." It is an insurance fund for use, if need
be, in the redemption of notes of failed banks. The cir-
culation fund bears interest at tiie rate of a per cent per
annum.
fjl
ill
m
4-24
.M<)\l;^ AM) n.\\Ki.\(;
''i. IJ;inl< iioUs possess :i first lien upon tlic assets of ,i
iiank.
4. Hank stockholders aie lial)i( . in the even! of u
l)arik'.s iaihn-e. to an assessment e(|i.al to tlie par vahie of
then- stoek. 'I'liis. ol' eonrse. proteeN the general cred-
itor as well as the note-holder.
'). Kach hank ninst oive a detailed monthly statement
of its^airairs. accordin-' to a schedule provided in the
Jict, These statements must he signed hy responsihle
officers of the institution.
5. Provision is made in the rexision iA' IDl.'J for
s.iareholdcrs' audit of the hank's affairs: and also for a
sj)ccial rei)()rt from the auditors, wiien ivqnired hy the
mim'ster of finance.
7. The Canadian Hankers' Association, an in^'orpo-
rated hody of uhifj, rach hank is a mem!)er, is ^-iwn
supervision hy the act of the issue and cancellation of
notes, and of the affairs of a failed hank.
8. The notes of a failed hank draw irtvnst at .5 per
cent from the date fixed for their redemption hv the
minister of finance, who may redeem then) out if the
assets of the i)ank or out of the ^circulation redemntion
fund." ^
These reciuircmciits make the Canadian hank note ab-
solutely safe, althou-li the first feature is the most im-
portant one. In that respect tlic Caria.ilan system for
retirino- notes resemhlcs the famous .Suffolk plan of note
rcdemi»ti()n. the most successful experiment in early
American hanking- history.
.512. h't serves ftard /;// etch hank.—Tho snhjeet of
cash reserves docs not receixc much attention in the act.
It is almost iiicredii)le to the Ameiican hanker that, aj)-
paj-ciJiiV, so ill lie rn.Mi-iii Is ^^'\\\-u to this vital feature
in sound hankino-. The law merely provides that the
CANADIAN HANKINC; S\sri:.\l
4i>5
hank sliall hold not less than K) per nut of its cash i-c-
scrvcs, which it has in Canaihi, in Dominion notes. The
ininistcr of finance must make all necessary arrange-
ments to deli\er Domin on notes to the hanks, in ex-
change for gold coin, at the se\eral hfanch otiices of the
department of tinanee at which Dominion notes are
ifdeemahle.
It is, of course, necessary that a hank sliould he ahle
at all times ;o meet its demand ohligations. and to that
end should have always ^ome |)ortion of its assets ready
ill tlie form of legal-ttnder money. lint what that
amount of cash reser\-es shoidd he will depend ui)on niany
I irenmstanees — tiie husiness hahits of its customers, the
extent and character of its demand and shoi't-time lia-
t»ilities, and especially upon the degree of caution and
conservatism employed in its management. In well-es-
taldished hanks, managed ly conservati\e and experi-
enced hankers, the ])i'ol)lem always settles itself without
dilHeuIty. That is why, among other reasons. Canadian
hankers ohjeet to fixed reserves heing made .*i re(iuire-
ment. The hankers nemselves ire hetter al)le than any
government to decide what pioportion of tlie dejxjsit or
note liuhility the '>ank recjuires iti the foi'm of cash, to
meet any calls which may be made. \\'hen that is de-
termined, Canadian t)ajikers endeaxor at all times to
hold an amount which is safely ahove the re(|iiii'ed limit.
Without entering into any expended theoretical dis-
cussion of the matter, it may further he said that Cana-
dian hankers maintain that a I'cserve, if it is to he of any
service, must l)c read}- for instant use. Xow a fixed
legal resei-\e may deieat its own ends if the law is
strictly enfoived. This is sufficiently well recognized
in the United .'- ates where the hanks have, in periods
of stress, on more than one occasion depleted their legal
^2(i
.M()\i;^' AM) H.\\K(\(,
fsf-
reserves. One of the most iiotaMe iiistaiiees oecnired
in the first weeU of August, 1K!»;{, when the aogicuate
reserves oC the \''\\ York C'itv ha?)ks uere $1 i,()()(>.000
helow tlie 2.") ]hv eeiit Hmit. Caiuidian bankers aHirni,
tliereforc, that in hist analy is th'- fixed leoal reserve is
usifnl only as a sort of \iarnin ;■ hell — a notiee to the
i)anh that if its reserves fall Ih-1o\v a eertain limit, its
cash and liabilities are not in the i>roj)ortioi\ that eon-
ser\ati\e bankers would ai)i)rove. They maintain,
moreover, that a jaw re(|iiirii.o- Icual reserves may he
(|uite applieable to a system v.l' thousands of e()mj)ar;'-
tively small indejiendent banks, but that sueli is not
needed in the Canadian system, wiiieji is made up of a
limited number of very powerful banks under the con-
ti'ol of eonserv.ttive and experieneed managers.
A Canadian bank manager keeps before liim the
amount of time dei)osits and demand deposits, and the
notes outstanding. The time deposits form mueh the
largest of these items. They bear interest at :i per eent.
and while not legally jjayable on demand they are always
l)i'omj)tly paid on reciuest. no banker wishing to have it
rumored that all obligations are not pr()m])tlv met. A
l)aiik's credit would suffer if it took advantaiie of its
legal privilege to delay payment for even ten days.
With these faets before him. experience and intimate
knowledge of the bank's afi'airs ))ermit the manaiicr to
ad just the reserves very near to the ideal limit.
.jI.'J. Ji'cscncs composed of four dements. — In prac-
tice the bankei- considers his reser\cs as conn)iisin<'' four
different kinds of assets: (1) Cash on hand, (2) cash
balances in other banks. {'.\\ call loans, and (4) securi-
ties. Strictly sjjcaking "cash reserves"' mean only the
Mrst, t)ut a banker usually has In mind tlic first and sec-
ond when s|)eaking of his cash reserve. There is a gen-
( A.\.\i)iA\ ii.\\i(iN(; s^■s^^,.M
421
I lal'iN" imdiTstood ;i;41"((1ikii! ;iiii<)||m ||i, |),iii]<s tli.U in
■irdiiKiry tillK■^ the cash rcs(,r\ts ol' a hank du^IiI to
.(|iial !.■> j)c'r cent of its lial)iliti(.'.s. Ol' tli\ H jici- wwt
^lM)lll(^ !)(.' casli Mil hand, the rfiiaiiiiinu T |'<i' cnil hcm^'
lalaticcs diiv IVdid othfi' l)aid-v-<.
l''r.')Tii thr American point of x'hw Canadian hanks
'Id a \cry ..all amount of cash in pi-oporlion to their
(li-nosiK and note issues. Acco!-(iinLi' to the I'elurn of
May .'il. li)\ti. tile cash on hanii amounted to ■'^l.'J.'J.-i^}.),-
.'{TJ. and je net liahihties. notes and al! dejiosits in-
ehided, amounted to ^'. 1. 1!*."), HIS. .■}!•?. ihe ratio heiu'i only
a little moi'c tluui *.» per cent. Hi:l for manv years the
(■a^h-on-I;and I'cstr'.e has .•u'cra^cd hetwecu 10 and 12
pi r ce?it of the net liahihties.
.J14. Call loans.- At the end of Ma v. lOl.'J, tlie (\i-
nadian harks had S(;i>/.)S'J..") K) of (••lil loans outstandiiu^'
In Canada, and «'M;.1.-,1.-J0*> elsewheic. Most of the lat-
(i !■ wci'c out in New ^'ork ("itv. the fa\i)r:te call-loan
market lor Canadian hanks. '!'h<' hankers do not re-
L'.ar.j call h.uns in the country as iti .uiy I'cspeet e(]uiva-
leiit t») cash. Tiie eollateraJ securities i-annot he (piickly
niarkotul without a sacritic<'. the stock market not heinu;
on a sutHciently lii-oad hasis in Canada. Moi'eoNci-. the
payment of domestic call loans would result sii;ii)ly '" •■•
i'educti(!U of hank dei)osits. as has often Wvn illustiated
hy a ])arallel situai:i(;i! in \ew 'S'oi'k C ity.
It is (juiie otherwise with a call loan payal)lc in Xew
N'ork City, and scured hy hitih-elass collateral. In
noimal times such loans can he convei'ted into mon>. y
within tweidv-fo'.;r hours. 'IMiis adds to the h;!nk's cash
reserve in Canada cither hy the sale of Xew 'S'ork ex-
change or hy an im|)ortation of ^old. If the market is
|)anicky ni .New \ Ork, and ^'old camioi he secau'cd. as in
11)07. the Canadian hanks may use tlicir Xew \ovk
m
i'-'s
MOMIN AM) |{.\\KI\(;
1:1
U'l:
hjilanccs to l)iiy ^hi'ljim I. ills of (•\cli;m^(.. TIk y vaw
tlicn iiuporl rrcin LoikIom w Imtcxcr u(,!,| |||..y m,,!.
."jI,"). 1 iivisliinni scciiril/c.s. Haiikrrs (■aiiiiot, and as a
nilr do not, ])\iivv iiiiicli i-cliaiicr upon stcuriHis as nai!
of tlifir iTsfi'\ CVS. Tlicsr foi'in a srcond li dcfciKv
to wliich tlif liafd<s do not cxixcl vwv to : ivcii. It
Mould taUe sonic lime, of conrsc. to rcaii/v ^lon the ;■
sernntics. 'n tlicii- cjioicc of iiu cstnicnt the hanks ai'c
not liariipcml hy law. Tiny may purc'Jiasr iVdcral and
|)i-o\incial honds. and a.'so tli" bonds of Canadian and
foreign cities, and tlir stocks and honds of domestic
a?id foi-cioi! railways and indnstrial corporations. On
.May ;n. I'JIM. the h.-.nks held scuirities as loMous: I)o-
tninion and pi-o\ incinl -4()\ei'nm(nt secm-ities. S'.>. ()()!>.-
H<!1 ; Canadian mniicipal secnrit ies and Mntishand foi-
ei->n puhlie se.";rities. s-_>;{.s-J7.t;i;{ ; railway and otiur
honds. dehentiircs and stocks. Sf;7.(»-Ji .;, tl. As a luh .
the securities held hy the hanks do ii,,t llu-'tuatc ui-(atl\
iii anionnt; tlic\- ]>vvi\y, as a rule, to rednce their cajl
loans in \eu 'S'ork to Ixiild up their casji riser\cs.
")1<;. J,<>(iii.s In iiKiniil'achircrs. :Ji<il(.sa!(r>: ,1111/ fann-
ers. Ill addition to the power ^ranttd to Ca?iadian
hanks to cn^au,. {,, ordinary hankinu l>iisiiicss. they arc
permitted to assume \(r\ important functions in aidinu
the manufacturino- and wliolcsak trad<- of the eouiitrv.
The haidar is empowered to lend mom y en the sc.an'ilx
of wan house re'ci|)ts and hills of ladiuL',. Loan- are
^;|-atil((j to wholesale dealt rs and d'lppt in of produce of
all kinds. The hanks ha\c a lien, not only upon tln'
^oods oriwinally acee|)ted as sccui-ity. hut also upon the
^■oods which ill the c.airsc of hiisi;,ess aiv >.iihsiitut( d
therefor. The same jiolicy is *' llowcj in |,,;i|p, ,,,..,,1,, |,,
inaniifacturt rs. Thus. ili. hanks hecomc \ irfiialU silent
partiurs in hii>iness. As far as pi.ssihle. the hank act
«-s-^
rANADIAN IJ.WKINC; SVSTK.M
V2{)
i II I
iii.ikcs iiicirliandisf of all kinds a sort of collateral siru-
niy for l)aiik arlxaiicvs. A lar<ic part of the so-ealled
(iiiiiiiRrc-ial paper in Canada is secured praetieally 1»\-
e to o-oods ill Wiiirlioiises. faetoi'ie? and wholesale
les. In this way, to a niiieh ^nater extent than is
uciK rally reeo,niii/ed. the banks are heliind tlie trade and
industry of the country.
Ill the last i-e\ision of the act (IDI.'J) additional bnsi-
ii( ss of this nature was made possible for the baid<s. It
was at first proposed that a bank nii^ht lend nionev to
;t lai-nier upon the security of threshed ^niiii of everv
kiiid and to a rr.neher iijion his cattle. This was inodi-
li< d to permit loans on orain in the farmer's possession.
'I'hese niodilicafioiis of tlu' act were advocaied by mem-
h( IS of parliament from rural eonstii.u ncit's. especiallv
from constituencies in the West. (Generally sj)eakin^.
tlu country <lisfricts .lave found most fault with the act.
It was said that the cities were bcino- I)i;i|t ii|, ;,( {j,,. (.^.
p' iKc of the i-iiral districts: and that the merchant, the
w hol( >al(r. and the manufacturer w t re recei\ing bene-
lils in which the farmer could nr*t participate.
That the I'.irnicrs could not secure ad\ances u|M)n
urain and cattle still in their |)os<;ession was (juite true:
I'll! (hat they were not furnished with sullicicnt bankin<>-
ncomiiiodaiion ofhei-wivc dots not seem to have been
I lair eliaiL;c against I he banks, '{'he banks ha\c natii-
I lily rrfiis((l to advance tlu in mon<y to be iincsted in
'i\<d capital form land and buildinos but tluv lia\ e
ilway- pro\ ided nioiiev for working capital— tnachinery.
lools. scrd. etc. on nasonablc security. In the Ka.st
tli<' lariiieis are. as a class. d( positoi's, \\{^\ borrowei'
In
Al the investioation be-
Me th< ( ommiltee on Hanking and Comnierce. in
W'esl the re\ el-
se IS lru>
* ii
■'ii
it;
111
KJO
.M()M:V AM) I{.\M\IN(;
tn
*¥il
.April. 1!»1.'}. Sir l^diiiiind \Valkcr, l^-(\si<lcnt of the
Canadian Hank of (."oiimieive. stated that at TJ-J
hi-aiu'lics of this hank in the middle or |)rairie prov-
inces, farniers" deposits amounted to .S2.H(>!>.'.>2»>. and
loans to si.'J.().'{.).7Sk Moreover, wjiilc in former davs
in the oldt r provinces the hald^s waited until a eom-
mimity had a population of two or three thousand hefoiv
oi)eninu a hraneh. at the |)resent time hanks o(, j,, with
each railway division in the \\'( st. and are ready to do
husiness with the lii'st stoi'ekeeper. In tlx' Peace ]{\\vr
disti-ict h;!nl>s are to-d.iy many miles in advance of the
railways. It i'^. on tin avcra^i'. two or three vcars he-
fore these hanks can l>e exiK'cted to pay.
The new terms of the act. under which the I)anks ma\
make advances to farmers on tlu'ir ,yi'aiii. w ill hr of urcat
henefit to the West, '['he farmer has heen (om|)ellcd
hitherto to close his (jnancial year :d)out the tirst of \o-
vemhei-. This is heeause the Wist is a hiu' })Oi'i-o\\ iu"
count IV ;uid is. to ;t |;,ro(. rxlciit. dependent upon the
an-ricultural impleriK nt makers for credit. These coin-
l)anies. in s( llin<.- (,, H,,. farmer, have made notes of the
latter f.ill due Xovcmhcr 1st, c'lch year. The result is
that the farmers have Ixvri compdied to throw tlicii-
produce on the m.irket in the months of .Sepiemher and
Octoher. as soon a- the ur;,i,, js threshed, to secure the
necessarv nmney to mci t ih.lr payments. Oiu- i-csult
of thi' unfoitnnate state of alfairs has h. rn that Can-
•'"'•' 'i''"^ 'I'K' '" lace ;i Mr.ain hlockade each vear. The
f'ln.K IN li.ix, had to throw IIk ir ^rain on. the market at
•■' '"'"■ ^^'i<" i' would hrin.u' fli'' smallest pric<'s. Th<'
new Icuisi.atiori v\ii| make it possihje to h,.rrow. on
thr(sii(d uram in their possession for two. three and
f"iir months, 'n,, m;,iri uill ||,ns lie shipped out or;id-
CANADIAN HANK!N(; SYSTEM
4;u
iijilly ,'1(1(1 al).sorl)c 1, as rc(niirc(l ii (lie world's markets.
At the ;,ame time the farmers will he in a hetter position
tn ])ay their maehiiie and store hills as these heeome
line. They will he [)Iace(l on terms inore nearly ap-
I'lnaehinn- .(inalify with the wholesakT and the manu-
facturer than they lia\e heen in the past.
.")17. Inlcnial hmik inspcvtiou. — At the last revision
of the act the ^rt^neral puhlie were more eoneer?ied in the
indhlem of an a(ie(|uate system of inspeetion tluui in
anythm^r v\sl\ 'V\w immediate rea.son therefor was the
disastrous failure of the Farmers" liank Mhieh oamhled
it-; resources o?i the Keeley i.tine. I-'or several years
pieviously. however, there was a strong- demand for
sniiK" system of external inspection of tiie hanks, the
prineipal advocate of this iiuiovation hein«r Mr. II. ('.
McLeod. late general manager of (he Hank of \(/^a
Scotia. In response to the <4'eneral demand several
hanks of their )\\ii accord estahlished a shareholders'
■ludit in addition to the ordinary internal examination of
'he hank.
In the act as revised the hanks still retain their fornu r
system of insjx'ction, which is now sii|)pUiiiented l)v a
shareholdeis" audit. The hanl.s will continue to place
rliief reliance upon their own ins|)e;'tors, the mineral
niana/r(-r, and the hoard of directors. Thev expect verv
little in the wa\ of results from the shareholder^' audit,
riic ki'ynoti' o ■ the ornani/.ation of Canadian hanks has
iluays hern the centralizatinu (»f rcspo.isihilitv. The
general manager is jiractically supreme. He lia-> an
irmy of employees, jdl of whom hut two or three ha\c
l"<n placed in their positions hy him. Althou-^h the
'"•ard of (jn'eci(.rs are leualls aho\c him in autiw.ritv.
" I>r<sent:n^r ;is tlity d.. tli< shareholders, yet his power
- >i
m
I
•fill
m
■• H
\'f.
tm
m
432
M()M:V AM) HANKING
h
is practically unlimited. Tlic <4ciieral manager of a Ca-
nadian hauU knows so niiicli more about actual business
conditions tliat Aviicrc there is a contlict of o})inion l)c-
twciii liiin and the directors the latter usually bow to
his judf^ment. lie is. as a I'ule. assisted by two or three
officers a))])ointe(l i)y the directors. mIiosc business it is
to aid the general manager and su|)j)lement whatever
information may In re(|uired of him. The chief ac-
countant is expected to know (piite as niui h about the
banks affairs as the general mana<ifer himself, and is
ol'ien prt'sent at the board meeting's.
'I'he chief appointments made I)y the freneral maiiager
are Ihoseof the mana^^trs of the branch banks. A lar^e
branch is i?i daily couunimication with tin h id office.
either by uii-e oi' liy letter. They are ol ;i<^ d to conduct
their business in coid'ormity with ■ rtain reyidations;
but aside from that the branches ai'( manatred as ijide-
pendent batdss. They mu-t fuinisb \\eekl\ accounts to
the head oflice if all loans and disc iints. and at the end
of caeli month a detaili'd statement of '-esources and lia-
bilities, with a description of all cn!lat( lal security iield.
The branches are ins|)i'cfed at irrej^^ular intervals l)y offi-
cials ap|)(iinted by the ^enei'al manaj^er. These men are
tliorou^hh c()m|)etent. have had years of baid'vin^ expe-
rience, and are in i-eceipt of larj^c salaries. They are
cxpii'ts '\ hn pi ri'orni their work with a deep sen ' of
the i-espniisiiiilitie^- iuxoived. AN'hcn their reports aic
s(nt in tlii\ are dealt vvitli b\ the administration of the
rtank.
iV I'onen te example of the cost and nature of the
wnrk in\(il\(d is found in the msjxctioii of the .'{?<•
branehrs of the Canadian Haid< of Commerce in \\)\'2.
That bank em|)loyed i't)y this work I !■ officers of the
A
CANADIAN 1{\NK1N(; S\STi:.M
433
lii^licst ;»ra(le whose salaries amounted to $4().()()() and
,1 lar^c iHimhcr of ordinary audit olliccrs and assistants
.lose salaries amounted to sm.hoo. In addition there
were many elerixs. steno^raj)hers and messen<i;ers em-
ployed at a total eost of $8.{)()(); travellini,' expenses
\uie .$2.'}.()0() ; and eliar<4es for rent, lif^lit. ])osta«r(.', sta-
tionery, ete., eame to ^i:j. ()()(). makin,(r a total eost of
^M)'2J(\'2 in one year for one insjx'etion of this hank.
Tlie head ofHce as well as every hraneh hank is in-
speeted.
As far as the puhlie is coneerned it has no means of
i'ld^'in^r the standing' of a hank except hy the monthly
returns puhlished hy the hanks according- to the require-
ments of the law. These returns are fairly eomj)rehen-
sivc. and have heen made more so !)v the revision of
ini.'J. They will l)e deserihed in Chapter XXXII,
The minister of Hnanee may call for sui)|)lementary in-
formation from any hank. \\!ienever, in his jucl^nient,
"^iieh is neeessary to afford a complete knowledne of its
■ ilfairs. Of course, these returns can !>e taken only for
"hat they are worth. In the case of several of the
failed hanks they have heen made with evei-y decree of
falsification, heeause no independent eheekin^r of figures
^vas possihle.
.■)1H. Hank failures in (\ina(Ja. Thwc have heen a
I mher of disastrous haids failures in C anada since Con-
lederation. the most imjinrtant heino- tho>e of the ]']\-
■lian^rc, Ontario. Soxerei^^n and 1 armers" IJanks. In
•lie ease of the Ontario and the l"a' n< rs' IJanks there
\< re no losses to citln r note holders or depositors. The
Ontario was tnk.ti over hy the Hank of Montreal and
liquidated hy that insiiliit mn. The Soxcreinn was ah-
-'•rhed hy ;t .<4r< -ip ol hanks which (ii\id((| its otlices
(•-VII— js
tit
'€
i;u
MONEY AM) n.WKIXG
aiiinii^ tlicm. accoulin^ to districts. This was done
partly in st'lt'-dfrciicc. to jireveiit a <j^eiK'ral ])aiiic. Tlic
mere siii)ersc'rii)tioii ol' tlie words "Bank of Montreal"
on the bankin^v; house of the definiet Otitario Bank
stopped a run on that institution almost immediately.
The Farmers" liaid<, however, was left to its fate.
l'"rom the start several ])rominent finaneiers liad oh-
jeeted to the "rantiny,- of a eharter to this hank: and
the sudden eollaj)seof its reekless career in hi<2;h finance
aj)p.irently occasioned little or no surprise to the l)ank-
ers of the country.
Mr.ny unfair com])arisons have been drawn ])etwepn
hank failures in Canada and in other countries, partic-
ularly the Cnited States. Since Confederation eleven
hanks have failed in Canada: hut it must l)e borne in
mind that not all of these could iiave been chartered
under the present act. Even so, the true perspective is
not secured by reference to mere numbers. This is
secured only by comparing' the total assets of the failed
batd<s since C'otd'ederation with the total assets of the
banks as they exist at the prcKiit time. This is obvi-
ously the oidy correct method to follr)w. since Canada
possessivs few banks-only twenty-toin- in r.)i;i and
tlurefoic a reference to mei-e numbers ixives a uro-
tes(|ue view of the situation.
Sir Edmund Walker, in a statement snbinittcd to the
Banking' and Commerce Committee, has admirablv snm-
mari/ed the situation as follows:
I. Total ass(l^ of Canadian banks which
have t'aikd simn Conftdc I'alidii . $77.780, Hi*
*J. 'I'otal assets of Canadian banks as on
December .'{l, 1!)12 1,.VJ().()H1.1.-,S
.'}. Total liabilitie-s to the publie of Cana-
dian banks a^ on December .'{l. IHl'J. 1 .•_>!»•_*,}. *>! .1. ST
( ANADI.W HANKIN:; SVSTKM 435
4. Total losses l)v cirditors ( c\clii(linir
shareholders) from hank failures
since Confederation G. 000.3.57
.'). Total losses hy creditors throu<)h fail-
ures of hanks which coidd have !)een
organized under the present Hank
Act iMTO.'XIf)
And these consist of -t hanks;
losses hy:
Exchann-e liank •$.574. .)87
Central liank 7.08.'J
St. Jean Bank 200.088
Farmers" Hank 1.208.:U)8
3. Percenta<^e of total assets of faik'd
hanks since Cotifederation to the
t(»tal assets of all hanks on Decemher
•^1- li»l-' 5.09
7. Percentage of totnl losses hy creditors
to total assets of all failed hanks. . . 7. 830
H. Pei-ceiita^'e of total losses hy creditors
of failed hanks to total assets of all
!)anks oi l)eceml)er 31. 1012 .3001
0. Percentage of total josses !)y creditors
throu<ih failures of hanks \\hieh
could ha\(' hcc!) or<iani/c(l under tJie
l)resent Hank Act to total assets as
on Decemher 31. 1012 A VJC>
These comparisons, of course, do not take into ac-
count the \ei-y laroc- losses hy shareholders. Hut from
that point of \ lew it may he said that in Canada there
iiave heen less failures in hanking' than sn any other field
of cnter|)rise. Moreo\tr. it should hi- notid that it is
scarcely worth wiiile to make comparisons he'.ueen fail-
ures in hanking in Canada and in otiiei- countries. In
i-i
m
m
un>
yH)Sl.\ AM) HAMvlNCi
i:
tlic case of the I'liitcd Slates, lor exaiupk', \vc would
h-dve to take into eonsideration the State IJanks and
Trust Cornpauies as well as the National Hanks, where-
as in Canada there is hut the one systeni of hankin^.
However that may he. the ])eo])lc of Canada wrrr
thorou<ih!y aroused over the rec-ent l)aid< failuirs, and
particularly over the C()llaj)se of the I'arniers' Hank.
It WHS due more to the failure of that institution than
to any other cause that a demand was made for some
sort of independent examination. K\eii thou,uh in tin
ease of the L'armers" Hank the dej)ositors' losses were
assumed hy the ^ovei'iiment. tiu re is r' > disiiuisin^' the
fact that such losses eventually must he sustained l)\- the
country. They merely ])lace the ^ox ei-niiieni in ilie
place of the depositois. and that mainly foi- |)olitieal
reasons, \e\ertheless. when all the tacts are consid-
ered, it seems (|uite evident that the Treasury Hoai'd
never should have ui-anted a certificate to the Faiiners"
Bank permitting' it to heyin huslncss.
.■)11). Slnirf/ifjhlrrs' (iiidif. — As a result of the demand
for inde])end(.'nt examination of the l)atd<s. it was pro-
vided in the rexision of the act in 191.*} that the share-
holders should ap])oint auditors, at each ^enei'al meet-
ing, from a ''st of not less than forty names selected by
the whole i(.,(.y of ^'cneral mana<4'ers. suhject to the
apj)ro\al of the minisUr of finance: with the furthei-
resei'vation that one-third of the ^lockholdei-v. if dis-
• ttisfied with the auditor appointed l)\- the ma joritv,
nsay ap])eal to the jm'nistcr for anotlu'r. This mdliod
\\as largely based on the i-ecoinmendations of .Mr. II. ('.
^rcLeod. The auditors must thoroughly examine the
books and accounts, cash, securities, docnmenis and
\()uchers of the l)a?d<. In addition the\' are empowered
to !'C(|uire from the <lirecfors arivi olliccrs of the bark
CANADIAN J{ANK1N(, S\ h Tl'.M
V,
X
Slid) inroriiiiitioii and explanation as inav Ix.- lU'cessarv
\'ny tlu j)i-()iRr ])(, i-lorinancT of Hkmi- (IiiIkn. Tlirv are
allowed access, too, to the returns of the i)i'anch hanks
s( III to the chief oflice; and they may. at tlieii- discretion,
\ isit any hi-anch or a^^-ency for the pnrjjose of e\aininini4-
its l)ooks arid accoiuits. It is theii- (hity, also, to check
the easji and verify Hie secnrities of the hank at its chief
(illiee; and. if they deem it advisal)le. to do the same at
,iiiy hraiieh or agency. The auditors must rej)ort to the
sliai'eholders their tindinn- at the annual meeting, or on
any othei" special occasion th()u<>ht necessai-y. In addi-
tion, the minister of finance may direct any auditor
;;])pointe(l accordino- to the ])r()visions of the act to make
a special return to him. the service so performed to lie
remiiiKraied hy the ^'oN'crnment.
This external examination of the head office of a hank
and its chief hi-anches is sim])ly an attempt to do for
the l)ank what has been done foi- years foi- the lar^^e
iiK-rcantile houses and manufactui-eivs. A thorough ex-
amination of the <ie,K'i'al ledner at the head oflice will
cover the special re|)orts and statements from the
hranches. It \v(ni'd also test the accuraev of the tiuures
.L;i\cn in the monthly statement to the go\ernment. and
I he statements presented to the shareholders. The |)res-
ident of a Canadian hank must si<in these statements; hut
the president, as is well known, is not in a jjosition to
slate tliat the tigui'cs are e\ en appi'oximately coi'rect.
<)f coni'sc the signature of the .ueiieral manaj^'cr is at-
tached to these slatements: he oiinht to know, and is
paid for knowin;^', wluthtr tlu'se statement> ai'c correct.
Hut the added sionatiii'c (.f expert accountants will make
assui'anci' doiihly sui-e. Xe\ eitheless. too much must not
he ex])ecte(l IVom this system of audit. .\firr all. it
cannot do more than \erifv the fi'^ui'es ami statements of
m
^l^s
MOM.V AM) HANKING
ii !>iiiik. It caiiiiol jiidoe „f tlie (itiality of fhc assets
lield a fact of paranioiint iniixirtaiUT luillur c-aii it
ptvvciit loans IHJM-- approved of by the directors. In
t\ 1 1 y larnc- iiridrrtakinn. resjxMisihility rimst finally rest
upon the directors and cliie!" e\ccnti\ c oHiccrs.
.VJO. ('(inadid,, IhniJccrs' J.ssorialioii. - TI. • Canadian
Iiaid<ers' Association is an incorporated Ixxly with \n)\v-
vvs and dnties prescribed in an amendment to the bank
act passed in 1 !)()(). Kach of the chartered banks is
represented in the meml)ership and has one vote. The
principal dnties of the association are to apjx.int certain
trustees for the central o(,ld reserves, to snpervise the
issue of bank notes, to look after the deduction of worn
and mutilated notes, and to take charge of snspended
banks. The head(|narters of the association are in the
IJank of Montreal Huildinu-. and its executive olHcer is
the secretary-treasnrer. The expenses are apportione.l
amonu- the bard<s, and do not constitute a very heavy
l)in-den. All expenses inenrred on account of a sus-
))cnded baid< are a charoe aoainst thai bank. The
clcarini-' houses in the I /onunion are :.lso snbject to
reonlation by the association. It has ureal power and
prestioe thron-h the conntry, representing- as it does
the opinion of the banks as a whole.
CHArTKH XXXI
CANADI.W 1!ANKI\{; I'KOHl IMS
')21. Branch Ixiiih.s aiul the local coinnuniitti.— The
hiaiich l)ank systtMii lias hccii snhjec-tc-d to severe eriti-
v\<\u. es])eeially in tiie West, where it lias l)eeM eharoed
that the hanks have not suHieiently met loeal needs. Re-
cently, in an attempt, apparently, to meet tliis situation,
two l)anks have heen started -the Rank of Vaneouver
and the Weyhnrn ,'^eenrity Hank. No doul)t the heavy
iinmiiiration of Ameriean settlers has had something- lo
do with the a-^itation for the loeal haidv as distinet from
the hraneh l)ard<. Nevertheless, speakinj.^- for Canada
otdy, the hraneh hank system has more than justified its
existence.
In the East, certain agitators have attacked the branch
l)anks on the <>ronnd that in the country towns and rural
districts, they do not make loans to ar.y great extent.
Much of this discussion is apparently based u])on the
assumption that the banks have to do only with direct
customers, or at least with those who apply for loans.
This is obviously not the case. Every economii- institu-
tion lias its direct relationshii) to the well-bein<r of every
class in the community. This is conspicuouslv true of
the l)anking system, which su])plies to so large an extent
the machinery of exchange and production. A good
banking system is of as great importance to the con-
sumer and the reei])ient of wages as it is to the men en-
gaged in the distributive business or in mai\ufacturing.
W'lien the baiiking system surt'ers. the injury passes on
439
i
MICROCOPY RESOLUTION TEST CHART
.ANSI ond ISO TEST CHART No 2
1.0 !?™^ IB
I.I
1.25
136
1.4
Z5
|| Z2
j 2.0
1.8
1.6
^ ^pp, ipn irvviGE inc
-fcOJ 'jS.*
U()
MOXIA AM) 1{\\K[\(;
m
^\itll (•uiiinlat!\c I'orcL' tlnoiiwh \ai-i()us ('0(jii()iiiic' <^rou]:N
until its limit is rcacli'-d in the ua^c-caniing and con-
suiiiiii^' I'lassrs in tin fDinniunitw
'I'lie small local hank cannot he estahlislied in Can-
a(ia ()\\in.u' to the I'act that a hank must have a snh-
scrihed capital o!' at ha>t S,5()().()()(). oT which S2.)(), ()()()
must i)e i)aid up hcfocf it can hcwin hnsiness. Should
the Hard< Act rwv ^^]\v authority Tor the or-^-anization
'»!' small hanks, tlu proliahl ■ i-csult woidd he the ruin ol'
the uiitoi-lnnate stockholder and hea\y losses to the de-
positors. J-'.ven a liank of sjoo.ooo could not |)r()titahly
comi)ete with the lar^e hanks unless it were estahlislied
in a place of '-onsiderahle size. Without hranches it
could not <^() into a small place at all: it woukl lia\e to
confine' itself to a town \\liei-e there v.onKl I)e a com-
parati\ely \:\r<xv amount of imsiness. Hut in all such
towns there are three or foin- hranches of laroe haidxs
competing for the hii^iness. Deposits would undouht-
edly \k' secured in the smaller placis, hut it ue^nld he hard
to |)lace loajis. espiciaJIv in the smaller towns and rural
districts of the Ivist. and of Ontario in jiarticular. The
defunct I'armers" Hank, for c\ample. securi'd S] i;j.()00
deposits in a iittk hamlet called Dashwood, 10 im'Ics
l''"i" IIk' h)wn (if Clinton; hnt it could not negotiate
many safe loans. TIk I'c are scores of such small places
i" Ontario in the same position. A local Itnuk with a
capital of S|o(!.()()() or (v.ri s-J.l.OOO (..uld not slay in
hnsiness in such places, for Ihi' e'apital could not he used
unless it wt re s. nt out of Ihc coinitinnitv. 'I'he people
ill these places are wcll-|o-d... and aic d< posilors, not
horrowers. Hnl. iir\ ,|| hek-s. i| is (uilv thi'oii-^h the
'*t»^ltltlll IMMM MI>mMt*
I,,.,..,.!, !:•!!;!. ^ • h:! I. \., '.'..:: \.
loans a" fair rates. Otheruisc. thev are ohli^cd to turn
CANADIAN BANKING P1{0HL1:MS
111
'-HP
to ])rivatc hankers and money lenders ulio eliarge liigli,
almost exorbitant, rates.
Mr. J. B. Forgan, president of the First National
Hank of C'hieago. gave some very illuminating evi-
('(iice on this jjoint before the Committee on Hanking
and C'ommeree at Ottawa, in ^\i)rii. l'.)l.'{. He ex-
plained that, as a rule, the loeal Iniwk was organi/ed. in
tiie I 'nited States, by loeal bori'owers, who wanteil to
utilize its funds: and that it was ecjntrolled by those
borrowers. Loeal bankers, a? a I'ule. wish to elitig to
tlieir authority over loeal financial matters. Sir Va\-
iiimuf Walker, testifying before the sub-committee of the
Hanking and ("urrcney Committee at Washington as
to the alleged supei'iority of the local o\ ci- the branch
bank, said: "It is one of thosi- popular \ iews that is
repeated o\er and o\er again, but ! am (juite positixc
that under the branch system we ser\-e the customer bct-
lir than the local baid< can do." 'I'he local bank is too
a|)f to get into a iMit : to serve the interests of a i)articu-
lar set or clifiuc. The big chartered banks of Canada
can afl'oi'd to take an impci'sonal point of view. Mr.
Meeker, of l*rinceton Fniversitv. follow inu' Sir Kd-
iiiiind Walker befoi'c the same committee, said: "The
local baid\cr is not so well able to furnish the necessary
ci-cdits in his loeal community as is the managci' of the
liranch of a larger bank. The loctd banker, moicoxcr.
■- likely to fa\()r ceitain infci'csts."
.")•_'*_*. ('(nicitilrntion of rcscn'ts in liranih Ixiiihs. One
o\' the chief i-caso?)s w by the branch banks lia\ r bccu able
to a\i)id a uidc-spread linaneial panic lia.> Imii because
"I tbcii- control n\' rcscr\ I's. Canadians ri'gard as waste-
I 111, dang (roils and unscientific tin maimer in w bicb each
"I more than I'T.OOO banks in the I 'iiif< d Slates iindei-
iiiok lo control its own legal reserves. I'Ik \ !ecoi,;ni/(.-
ni
til
i 11
Ui
MoNKV .KM) BA.XKLWi
iff
fliat whenever aiiythinn- oeeurs to shake pnbhc Ponfi
(leiiee the hanks nnist he the first to take ahinn wheii
these are h)eal. and independent of one another. At
sneh a time, in tlie ( 'nitid -States, eaeh hank jjroeeeded
to sti-ennthen its own casli reserves, hy enrtaihn^' ere(h'ls
an(i eonvei'tino its h)ans into cash. The result was that
the ;^()hl snp])ly of the eountry was (hstrihnted anionu
27,000 !)anks. instead of i)ein<i' niohih/.ed and controlled
at strate<iie points. IIai-dly a hank in the lot could
meet all demands upon it: so cash payments were sus-
pended or seriously restricted. In Canada the hanks
havf not suspended ea>-' payments since the C'ord'edera-
tion. This has heen due in larye measure to the fact
that the cash re(|uirements of each district are cared for
hy the head oHice.
.)•_>;{. XiiHihcr (if hfiiih.s l(, iKipiildtioN. It has somi-
timcs hctn said that the Canadian chartered hanks do
not providf sulHcienl hranclies to meet the needs of tlu
people. This is not horne out !>y the facts. Aecoi'dini;
to a \ciy careful statement |)re|)ared hy Sir Kdmund
Walker and sul)mittt(l to the ("oiiimittee on Hankinu
and Commerce in .\piil. I'.d.'J. there is one haid; to each
2. HtT of the population, in the ('nited Kingdom there
is (»ne liank to each .kIK". persons. In iMi^land. alone,
there is one hank to each ,").l.-J!t of tlie population. In
Scotland, where the luaneh-hank sysli ni exists in the
most com|)|(te form. thei-e is .mt hank to each L'.ior,
P<"1*'<'- ' " !''<■ ' iiited Stales there is one hank to eacii
•'ktM) of the population. Scotland is the onlv countr\
w hieh exceeds Canada, .ind it d<ies xi heeaiise ot' il . mor(
hi^^hly de\( lo|)((l i»raiieh-lianlsin<4',
.\nolh(r useful comparison, althouuh too much must
not he nd'erred from it. may he made h\ comparing' cer-
tain cities. Hiisloi. in l''nuland. has a p<)|)uIalion much
CANADIAN l{ANKIN(i I'UOnLl'.MS
u:)
tlic same size as Toi'.Jiito, .'{oT. <>()(>. It lias one haiilv to
.").(!7+ persons. Toronto lias one hank to •J..'}.j4' of its
|)o|)iilation. C'ineinnati, in the Tnited States, lias one
fMiik to 9,125. On the other ha'.d. Detroit has one
lank to 1.100. Takinj^' Canada as a whole, there is in
the cities one hank to e\ ery .'}.000 of its population: in
tile I'nited States there is one hank to every 9,000 per-
sons.
A point that should not he overlooked is that some
.inters of ])opulation are \ei'y liea\y jjorrowcrs of capi-
tal, while oidy small deposits ai'e reeei\ id. These jjlaces
consist of the husy mannfaeturin;^' centers as distinct
tVom the haekward or rin-al distiict. Such place-: con-
sist of Herlin. in Ontario, with a hundred manufacturinu'
I ^tahlishments. (,f which ei^ht are \cry lar^e: Hrant-
iiii-d. with si'xcnty: Peterhoro. with thirty-ti\ c: (Juelpli.
\Mtli sexcnty: Sarnia, London, and so on. It is \(rv
(ionl'fful whether local capital could ha\e taken care of
these places; certainly local deposits could not ha\e done
•><). 'i'h.eir prosperity and "growth are due in lar^i' meas-
ure to the ahility of the ^rcat chai'tered haid<s to furnish
the re(iuisite capital hy oatliei-in<4' the funds of savinn' dis-
ti-icts and pourin<4 " sti-eam of capital into the cities and
ttiuns where men of foresiohi and irilerprise are ahle to
f'liild up (loui'i>>hin^' industriis.
.")•_' !■. l)(/i()sll iiirrincii in ('(iiniihi. There has hcen a
la r«>'t' and steady growth of d( posits in C'an.-idian hanks
\\iHiin the last decade. The de|)osits stood on May .'{I,
r.ti:}. at the urand total of $1 .09-_'.H.50, Mil- a sj)len(lid
Niiowin<.i' for a new country whose resources are onlv hc-
uinnin^' to he de\i!o|ied. These deposits wcic niade u|)
of $.'J(>4.1.)9.<ill'. paxahk- on demand in Canad;!: !^<'>.'<0_-
7 ■»,"). CO,'}. IcchnicalU- pa\ahk' after a lixid dale hut <>( ri-
illy paifl on diiuanil: and ><'.>7.9.'{.').2iri, j)ayal)le else-
tu
MOM.V AM) H.WKINd
ii '
t^^
IL'
where than in (";uia(hi. On the same (hite there weiv
.$l()lM)!>7.!>;i(; or notes in eimilation.
In Cana(hi. anion^' Icoishitors. far less attention ha.^
l;<-en oivrn to (lf])osits than to note issnes. This has
hicn (hie. pei-haps. to the east- of ie,nislatin,u' npon nole
ivsnes as eonii)are(l uitli dcijosits. and heeanse of the
e()nij)arative sparseness of popnlation. taking- tlie eoun-
try as a wlioju. In \hc rnrai (hstriets and amon- {1,,.
w()rkin<i' ehisscs. tlie hank note and the Dominion note
are the ehiit'f tnech'nm of exehanuc. Hnt there has hccn
a very ratud <4ro\\th ol' deposit enrreney amono- t!ie
cominereial and hnsiness ehisses in the towns and eities.
The o-rowtli of deposits has heen ont of ail projjortioii
to the oro\\th of hankino' eajiitai and to thr (Uianlilv
of notes issnt'.k This highly ellieient enrreney. repir-
sented l)y depositors' elieeks ayainst (h posits, is present
in hiro'e amonnts - inneh hn-yci- than any other nu-
dinm of exehanue. Tiie (inahly which eharaeteri/.es
it in a pi( -eminent dv^^nr is its elasl icily. It athipts
itself* to the (hinand of (he momeiil witlioiit \ isihir
effort, either hy ex|)ansion orcontiaction.as the ease mav
lie. And it does this (jnite irrespective of ki>ishiti\e
pin-pose or unidance. In view of the extraordinarv
•growth of this kind of cre.jit eiirreiu y. the (jiiestion of
the amount of hank notes in eirciikition <iiiks ahiiost to
insionilJe.Miice. Of course, there remains the .yraver
• piestion as to whether tlie .u'ox erimieiit slioiild interfere
in th<' amount and kind of currency iiicded hv liie peo-
!''<• -^t tlie revision of the act in IIMM a nivat (kal >>(
eritielMn ua^ (hrected at tii<' i>^slle of ;. eircidat inu
medium of (Achaiiuc liy tlie lianks. instead of li\- tli^
.government. It seems cl.ar. liowcvei-. th.il Ihe nHdJin.!
of exchange should he made up of the kinds of monev
I KJst convenient for the use of the commiinitv, ami
(ANA 1)1 AN HANKIXC. rUOHI.I.MS
41.>
ilividcd hctwcfii tliese kinds in Ww proportions niost cou-
wwk'vA. uIu'tlRT tlu'sc 1)0 (k'])o.sits oi- hunk notes. \o
i(<>islalurc. and no conclave of hankers, i-an determine
llic amount i<\' notes needed IVom yeai- to year in the
' \(han,iies of tlie country. The oidy rational process
- to pei'inil the liaidss to extend acconunodat ion either
li\ a deposit account or in hank notes, as the customer
disires.
While the deposit currency is almost an ideal medium
i! ( xchanu'c in the urhan ceiders. \'et the cost to the
Ii.iiik is larmier than is ordinarily su])posed. In fi^urin<j:
!li" cost it is necessary to include, in addition to the cost
"I the clerical \">()rk in\<)l\ed. the cost ol' supcr\ision of
liii' mana^ii' and accountant, as well as an apportion-
fiK i:t ot' the I'cnt, stationery, liyht. heat, \ault and safe
i(( omniodation. and also ef the head ollice expenses.
I'.ven if oul\" the salaries of the men actually en^a^'cd in
iinndlin;^,' checks and dejjosits ari' considered — the teller
tiid ledu'er keeper the cost per cheek amounts to no
Micon-idirahle sum. It is also seldom reali/ed that a
cluck form on safety paper costs the hank i)et\\een $-
;iiid S'_'.,")() pel' thousand, or practieall> one-cpiai'ter of
.1 cent each.
( )f course, in i\ cry hraneh. no niatter hoAV small, there
;u'e certain lixed charucs to maintain, irrespective of the
'iii^iness done. A new hi-anch for several years aftt'r
lis opening', has men and machinery to spare, and can
li.indle small at'counts withoid any additional expense.
I ! is only w hen the husine^s has increased, and mori men
Mid acconimod;ii ion are i'e(juired. thai many small ac-
■lunts ma\ lie liindt i(som<'. This explains \\\\\ some
!\inks enconrau.c" small checkiuij: accoimls. 'i'lie opcninu
if these accoimts enal»le> the manaifcr of lh<' haul to
!ii I'oine ■ic(|uaititcd with his neiulihor'-, ;tnd frccpiciilly
m
IS;,:
iW
MO\i;v AM) HANKING
a small acroiint may turn out profitable or hriiifr desir-
al)!f conti-ctioiis. It may he said, however, that'^in last
analysis, no aeeount is protitahle or valnahle unless tin
ineome exceeds the expense of keepin-' it. In revieuiiii.
;iii aeeonnt the minimum weekly halanee is the on,
that determines the loanino' value of the deposit to ;i
liank.
.'yj.'i. Cnticisiii (if htiiih--i/()tc m/zcv. The note eiren-
lation of Canadian hanks on May .'Jl, l!»i:{. was Sio-j.-
JM)7.9;}»i. This circulation has been denounced hy certain
Henients throughout the country as heino^ "a prac-
tical uin from the oovernment to the hanks (7|' over one
'"""'•■<■'' I'lillion dollars. This criticism has found ex-
pressi()n hi such organs as The Farmrr.s' Advocaic and
The (intiu drowcrs' (in'idc. It is complained ,nat tlii^
c'lirrency is not subject to a tax of any kind, as is the
case in some other countries : and that, moreover, instead
<»r l)ein,M' secured by i.-,,!,! ,„• u(,vrrmuent bonds, it is sim-
ply made a i)referred lien a-ainst the oeneral assets of
the baid-.. 'i'his. ace-i-dino- to the critics, makes the
money of the depositors the securiiy for the note circula-
tion ot' the countrv.
A more hopeless confusion of mind tlian this i)oint of
view indicates, can hardly be imagined. To beoi,, ^vitli.
the cirndation of the baidxs cannot exceed the^})aid-up
capital. ' \c( |)t dui-inii tin' mo\ in,<4' of the crojts. or whei;
notes arc issued anaiust IIk central .yold reserves. In
the second place, it is of (-onrse absurd to sav that tli<
deposits are the srcurit_\- for the notes. A on'at |»ai't o(
Ihc de|)<;si[s arise in Ihe lir>t instance throunh previ,)Us
l"ans made by the banks, in which the chief risk is run
b\- the baidxsand not by the depositors. Hut that is not
all. II i-^eharocd that the Canadian ba>d<s make unwar-
r nU (I |)rolits from the no|r issues: and so -icneral i^. this
( ANADIAN r.ANKlN(i lM{()ni,l,M>
417
npinioii that it is worth while to hriclly look into the
(|iic'.stioii.
.)2(). Profits (til })((iiL--ii()ic issues.- -As a rule, these
( lities do not stoj) to consider that both deoosit aceoiiiits
,111(1 note issues cost the bank a eoiisidei'ahle sum. Es-
[Kcially is this ti'ue of the lattei-. The returns from the
( .Miadian Iiaid<ers' Association show that the notes rc-
i< i\e(l from the ennra\crs and tlie notes desti'oyed in
I;M2 were as follows:
I!'1'2 INcriMii from r,ii;:Ta\ t r.s
.linu;iry $'2.7 Ui.O 1 'i
I I liru-iry .'!.775,()()l)
Miri'h l'j.-j;i;!.()(i()
Vpi-il ;j.l-27,.s;i:!
M ly K.')()().()()()
.'unr 7.()l(t.()00
. I Illy ,").8()t.0()."i
AiiuMist ,->.!) I- 1- .01 10
>' pt' Mihcr r).()7().l)0()
<*(lcil)tr 7.f)f)<).oon
\o\fml)t'r ().."):;o.iiO'J
Dn'tinber (),K{.'i,()()7
•f71.'-!0.'!.;!:>7
Drstroy. (1
•'t'.>.;577.()U'
().(U.'5.i.'!,'{
4.8r)().87.')
;!.9:).s.<)8'2
(i.8r):)..'j:)i
;M7i.'.29o
1..">.'!!).().V2
.■">.87-2.S<)l
.").ISO.SJ|)
."'..iO'J.O.U
:).8i7.8()fi
K818.^JH)
.f ■'Jp. 1-7 K086
'••if
ft
■:il
III
The ItanU-noie companies charge the Itatiks ^\M) per
I. ()((() sheets for en^ravin^- notes. Also, the hank must
pay for the cost of plates in the first instance. There
.ire four notes to a sheet, so tiie i-ate of -SOO per 1. ()()()
•sheets amounts to 2'^ '\ cents ])cr note. The cost of en-
,ura\in<4' the notes for l'.n2 Mould amount to about •S'.il-).-
<l(U). 'I'akiny- the a\ei-a,ye life of a |)late to be H yeai-s.
Mif I'c would bi about s;{(). ()()() to add. rt |>r( ^eniinj^ tlie
Marly dei)recialion of the plates. That would make, in
lound numbers. S24.j.()0() a year foi- j)rintinti- the notes.
I'lie average amount of tiotes in circulation in I'.M'J was
^1()(K()0().()()(). Therefore, the cost ol' print. n^ the notes
W
MS
MOM'.V AM) HANKING
s
If'-"
W
lb
r
aiiioniitcd to alioiit '4 of one per cent on tlie average
cii'ciilation.
\ 'nder the system prevailing before the re\ ision of the
act in 11»1.'}, eacli note was count(M-si<rnc(l in pen and ink.
This wonid invohc a consideral)le expense, which \\as
added to the general acconnt. To this must lie added the
items of express and insurance on shipmentsof tlie hanks"
own notes to the branches, and the cost of the shippiritjtof
otiier banks' n(H.\s to the redemption centers. Then there
is the work of the tellers at redemption centers in sort-
in<i- up other banks" notes for the elearin"' house. These
expenses must all be char<ie(l to note circulation. What
the total of the expenses atti'ibutable to the note circula-
tion alone would be cannot be accurately estimated, but
they are \ ei'v considerable.
Then a^ain. the batiks cannot consider wholly as reve-
nue the funds derived from note circulation. ^Vith each
SI ()().()()() ol' note issues. ])ro!)abIy 20 i)er cent is carried
in cash and bank balances yieldinn- n()thin<r. iVnother
•JO per cent would be in Xew ^"ork call loans netting-
less than -Jl ■_. per cent. Even if the remainintr 00 per
cent earned per cent, the <^ross revemie from .$100,000
of circulation would not be much more than ^-l-.lOO or
i pel' cent. The exj)enses enumerated would amount
to 1 I ;j i)er cent: so the coiiclusi(Mi is reached that the net
profit on tl ^ note issues would not be much more than
■J' 1 per cent. Of course, the banks in the East could
exist vww if Miey were deprived of the ri^ht of issuinn^
noti's. but thi'y would have to close up most of their
l"ranche< in the West, rnder pirsent business condi-
tions it would be mere folly to inij)ose conditions on ihv
banks such as would increase the cxpensi' of issnin^
notes, lor the lnu'den would be merely transferred to the
people in higher interest rates.
I A.NADIA.N IJANKINC; ril()15I,i;.MS
[W
Tlif <^i-aiii ti'adc. and notably the Western ,<;rain trade,
iicnetits most uiider the present system of note issne.
Tlie hanks make al)out .50 per eent of their advanees to
tlie ^rain trade in the foi'm of their own notes. Hv
( xpandin^' their note eirenhition SIO.OOO. ()()(). and other
(•ie(hts to a hke sum. tliey can a(l\anee S-J(). ()()(), ()()()
t(i the ^'rain trade. The demand foi- ad\ anecs from the
hanks to mo\X' the erops i^ inereasin<^' year l)y year in
the West. Any eui'taihuent of ereiht faeihties wotdd
Nim])ly mean hi^^her inlei'est rates, (irain havers would
he ohli^ed to operate at fewer points, and their power
to huy would he lessened. Ilenee, in the end, as has been
said, any ohstnele i)lace(l in the way of the haid<s in is-
suin<>' notes at this critical period, oi- of raisin<i' the cost
of note issue to then) in any way. would result merely
in throwin<if a heavy burden upon the farmer. The ex-
perience of the baid<ers in the Tnited States, Mith their
;()stly bond-secured bank-note currency, furnishes con-
clusive evidence on this |H)int.
.")27. I'J.rccs.sii-c .siirphifi or rest fniids. — The Canadian
hanks have I'ormed the hal)it of putting- profits back into
the })usiness, in tile sha[)e of sur[)Ius or rest funds, to a
dei^rce that has come to ])e thou^lit l)y many to be exces-
sive. The act itself s))ecilies that no division of profits
either l)y way of dixidends oi- bonus, or both coml)ined.
i;r in any other way. exceedin*^' the rate of 8 per cent
pel- annum. sliaH be made by a bank unless, after making
the same, the bank has a surj>lus or rest fund ecpial to
at least .*}() per cent of its iiaid-uj) capital, after deduct-
iiiiT all liad and doubtful drbts. On Mav .'H. li)l.'}. the
paid-up capital of the banks amounted to i^l l.),l)(ii).l..'{;j
and the rest to SlOS.CSl .2:}().
The ])racticr of buildino- up larne reserve funds mav
have been well enouuh iu its time, but it is liardh- in the
e— \"II"^:iO
i.
[JO
MONEY AND 13 AX KING
Hi
i£t-
best interests of either the hjuiks or the eountry to-{hi\ .
In earher (htys tlie earning power of the hanks was much
in excess of that of orchnary and reasonably secure in-
vestments. Stoekliohhrs. therefore, asirh- from the pro-
vision of the act. were content uitli the distribution of
a \ cry moderate share of the profits. They were content
to put the rest back into tlieir pn pcrty. for ihcir ultimate
welfare. Hut to-day every form of investment expects a
hioher return. The earninos of the banks, calculated
upon the real amount of the shareholders' investments,
are no lontrer exceptionally laroe. Moi-cover. in the
early days there were \ery few forms of investment
which compared with banking' in attractix eness: par-
ticularly to well-informed invesloi's who feit that tiny
could .iudoe of the calibre and (•har.iet( r (d' the meii
in charge of the banks. To-day. ^\'\\]^ the enormous in-
crease and di\crsi(ieation of corjioi-ate finaneinn-. there
are scores of opportunities e(|ually attractive as bink-
in^-. If an investor m ants as hi^t^h a rate of earninus with
about the same deo-ree of security, hundn ds of kinds of
preferred stocks are otiered for his approval. If he
wishes sound security with a chance to jiarticipate in
future o-alns. he may select any one of maiiv dilt'erent
bonds, each carry ino- •, h(Muis of common stock. Ca-
nadian municijjal bonds are risin.u' to a ooint where their
yield compares favorably with that of bank stocks, and
investment in them involves hardly any risk at all. It
is hardly possible for banks to continue their past policy
and expect to secure cap'ital subject to double liability,
at tlie old divid'^nd rate.
The banks are, as a niatti'r of fact, earning more than
they ever were. These earninos may be further in-
creased by economies resuitm»- from amalgamation, and
agreements regarding extensions into new territory; and
CANADIAN I{.\NKIN(i IMtOHI.l.MS
\oi
i.i
ly irdiK-iny tlic 'uiionnt of ca]:;ital iti tlie form r-i sur-
)lns cm }) loved in unproductive ways — palatial office
Innldino's and tlic like. '1 Ik carnin<,''.s arc not excessive
iiy any means; hut they are large enou<. h to make i)ank-
ing investment look attractive aloni>side of other tmn-
<;pecidati\e entei'prises in the Dominion, if only the
directoi-s would make a distrihutinn of a projjcr pro-
pi'iiion o|' those earnin()'s. But instead of this, so small
.1 proportion is allowed {o reac-h the shareholder in the
I'nin of dixidends that the stock exchanores — which
value a stock very lar<j:ely hy the yield- actually value
nearly all of these hank stocks at less than tlie halance
^lit-et show illy- of the shareholders' ])roperty — that is. the
t.ipital. sui-plus. ami undi\id((i profits.
Nor is this low return made .u'ood to anv extent hv
riielon-cullin^y."" IJecent issues of new stoi k in the Ca-
nadian hanks have heen made at prices so near to the
market value of the stock that the "rights" were incon-
-iderahle. The ohject of this ])oIicy. of course, was to
I outmue t!ie huildin<>- up of enormous reserve funds by
means of the liio-h premiums. The stronger and hetter-
estahjishcvl hanks actually made their shareholders pay
a price for new stock which jjrovided the l;aidv with
money at less than jier cent. This, too, was on an
i;i\ estment that made tiie purchaser liable to a loss ( nom-
inal, it is true, but still a factor to be considered) ecpial
'• the face value of the stock purchased. This double
iia])ility feature cannot be ignored.
Canada urgently needs more banking capital. The
hanks themselves urgently need more capital. Tliey
need it in order to increase their circulation, which is
limited by the paid-up capital, if for no other purpose.
I hat cn-culation is free, untaxed ai.d based upon the
general assets of the bank. The banks now regularly
4
.M().\i;V AN!) n.\NKI\(r
If--
excad tln' iMitaxcd cii'ciilat ion in rvvvy iiioiiili of tln^
yea.- ( Scptuiiiljcr to I-'ehriiary i iti wliicli tlicv arc \)vr-
iiiittud to do so. Tliey are ])rat'ti('ally t'orced to do so;
and tlity pay a tax of .) per cent for the pri\ il( yc.
There is hardly a hank in Caiuuhi which eould not k( i r-
oiiistaiuhn^' i'ii'cnlation {'(jnal to the I'nll amount of it-,
eaj)itai foi' niru' months in tlie year and moi'e.
liidei" these eii'enmstaiiecs. why shonhl a hank seek
to maintain a I'est fund <'(|nal to its eapitah hy issuin.u'
new stoeU at ^'JOO. anii nort' \\v issninu" twice the
amonnt at •**'1()() it eould increase its circulation facilities
twice as nincli. ui\ c \aluahlc ' i-i;^hts"" to its stockholders
tliat w'ouid make them feel an int(.'i-est in the expansion
of the haid-; s husiness. and 'ivc the ci'editoi's of the hank
not only cMpial secui'ity hut a n'reat-r security hecause
of the donhU' lialiility extendiui^' to twice as lar^e an
amount of ca])ital. I'eri : ps such a di\ision of pi'ofjts
would he extreme: hut at any rate new stock should
l)e put out a y-ood deal under the s-joo mai'^^in.
In the formative days of Canadian haiikin;^' fear ol
the (loiiMe lialiility was undouhtedly a stroii;^' diterrenl
a<4ainst the |)olicy of lar^i- ca.nital and a -mall surplus,
'riierel'ore. the liuiiU ^f the sharcholdcrvs wei-e put into
tlu' I'est and not the capital tol' the plU'pose of keepiuLl
the douhle liahility (lov\n. Uut the well-estahlished
hanks are now on m» lii-ni a hasis that the douhle liahil-
ity is hardly a factoi- in i^ovcrninu' the clioict of inxe-t-
nient. It is hardly to he supposed, foi' example, thai
I lu luarket p(is!ti(»n of the Ho\al Ha(d\ would hr iui-
])an'. d if the entii'e «•_' 1. 000. ()()() of comhined capita! and
rest w(i'e entered as capital, uistead of heiny'. as now.
SI l..")()0.(MM» (ajiital and srj. .-)()(>. OOO yrs\ . 'I'lic douhle
lial>dil\ o| the s|iai< liol{|( 1 > wouki iie nicreascd h\- spj.-
oOO.OOO 1)\ the chau'ic; '» it the clianc<- of tla extra
4^^^
CANADIAN HANKIN(, ni()HLi:.MS
K).'?
Ii,il)ilily vwv \k'\\]}X ciirorct'd i< so I'tinotc^ as lo Ik almost
III nli!4il)k'. The stocklioMn- would rcccixc the saiiu' I'c-
tiii'ii. althoiio'li the rate per cent would he lait in two.
( >ii the othei- hand, the hank would he ahle to is^ue notes
lip to $24..()()(),()()() it it so w ished : m li.reas. at the present
iiiiie, it must i)av a tax for excess issue dui-inu the mo\-
iiiu ol' tlie crops. oi- (k'posit {k)llar I'oi- dollar in uold or
Dominion notes in the eenti'al i'eser\es. 'l'lii> example,
mT eoui-se. is ustd merely hy way of illusti-at ion. While
llie hanks will hai'dly turn Hieir sui'plus into ea|)ital hv
(leelarin;;- a stock dividend, it is time that the hnildint^-
!ip of excessive i-esei'x tvs reeei\ed a check.
.VJS. Profits (if tin ('(iiKulidii hdiihs. — It is a conunon
( liai'^'c auainst the hanks that they ai-e making exei'ssi\c
prolits. as their juinual statements appear to sjiow. and
that til' ])uhlic is paxinu' hio niueli to lia\r its liankiiiu'
husiness doni'. To a eei'tain extent tin- hanks ai'e them-
M |\(s to hiame for the sjiread of this opinion. They
iK |)i'one to hoast of their prosjxi'ity. especially when
iluy sick to attract new <"i])ital. .\n exam|)le will make
Irar the situation. The ru t prolitsof the Canadian liank
"I Commerc'.' for I'.M-J wci'e S'J.KOO. (»()() on a capital of
>^ ;.").()()(». ()()(», which is somewhat mori' than IS per cent,
itiit d' the sm'plus or I'est is included the pi'ofit would
ii.i\( to he computed on S-_>7, .-)()( ).()()(» and would he tlien
'|ual to o!ily a little more than 10 pir ciiit. It seems
elea!' that the only fan- way to estimate the prolils is to
luliide tlit total m\ estnlent^ of the sliari holders. \\ hether
iiat in\estmeiit apjiearsas capital or rest fund.
In an attempt \<> di<»\\ to the Committee (iii Hankiui^-
lid ConiMierce that the hanks are not making < \cessi\e
|'io( its. as compared with other enter pi'i si s. .Sir I'jlmund
"\'\ aii^( r iiad prepared one liunch-ed liaianci sliiels of as
iiiaiiy typical cstahlishmciits excluding real (^tat'
'♦:•
t;!
~/ ■.-.if •
"I
[31
M()M:\ AM) BANKING
iSi'
\ i ■ 1
? t!
i
rancliiun- and )':irmiii^ wliicli wt^vv funiislic'd h\ 'us-
toiiiei-s of the C'aiiaditui Hank of C"onniit!-cc. 'I'iu-se
.statements eovered the eariiiii<^' of estahhshments in 4'.>
different Hne# of industry ■ranoinu' from eraeker fac-
tories to eoal mines'": and repirsented an investment nl'
^TO.OOO.UOO. Thev \\ei-e. moreover, eoneerns of axerasi-e
normal prospt'ril; . chosen merciv with the v\n\ in view
of disc()verin<i' the average proiits of an average husiness.
In each lase it was foimd the avd'aye ijrolit was hiu'her
than that of the haidss. althou-^h in some eases it was
ajiproximately the same.
Sir K(hnnnd Walker further presented a statement to
the Committee analy/in^ the ])i-ofits made hy the k-ad-
ing hanks. He found that the eai'ninns ,,t' the hanks on
their ca|)ital and surphis eomhincd was somewliat in
excess of '.» per cent. The profit.'; (not (hvidcnd-, i in
rehition to the mai'ket price of the stock ratiL'c from
• i' ■_. |)er cent to I'J |)er •cnt. The percentage of the (h\ i-
dends to the maiket price of the stock is. in geiierak
Itetween .') and .'>' ■• pei- cent.
'I'hc (jucstion may also Ik re-^aidi-d from another point
of view. 'I'he pr.itits made hy Canadian l)aid<> on the
cntiix' assets which they control aitioiuit to l.i'O per
criil. and ran.ue. in the case of IJie itidividmd h.-inks.
fiom .!t:i to !..-)<>. If it iv c(.n>i(lercd that a hank could
make on its capital and siirphis i\ per cent in ;in\ otlu r
inve.stmeiit Imsincvs. then th-- pidfits ni.ade on their otli( r
assets, v^hicli th.y control in virtue o|' Ijie peculiar fea-
tures of llie haidxin^i liiisiiie-,s. wiiiild .averaue sonHuhen
I'clw.rn .-J,-) .iiid :Ut per cru\ 'I'ha! iv to s;n . tin \ make
•' I't'l"" niore tha,i one-(|uai-ter of (uie per c( nt profit on
tJKir total .ismIs. if it is considered tli.it (i pei- cent m;iv
'" aiiowed (III ih( capitai and sin-pliis e(pntril)uted hy
the shanlioldt IS llu uiselv cs. This is summari/.:d in tin
nm
CANADIAN i};\NKING I'UOBLK.MS
15'
t'.illouing table, iji which "capital"' includes capital rest
aiui undivided i)rotits:
l^rotit on
B:uik Total
As.^ets
Conimcrct' ... 1.1!
Doii.inion ... 1.1 t
!1 iiiiilton ... 1.01
I li I'llilaga . . 1 ,,;7
liiipcri/il . , . \.:i6
Metropolitan. 1.23
Montreal . . . 1.0(3
M. rcliaiits ... I.j9
\!nlsons .... 1.-29
N.itionale . . . 1.35
Nova Scotia . . \ .36
Ott.iwa I.'JG
t^R-bcc 1.33
Hoy, si 93
.-I inilard .... 1 . 1 ,'
I'lronto 1. U
I nion I .(I-,'
Profit, After
■vllowingO'lj
on Capital
E;irniniis
on Capital
Plarning.s on
.Market Price
(.r Stock
1912.
Dividend.-
01! -Market
Price of
Stock
.1")
10. l.j
8.()1
5.07
.-25
7. SI
1 . 1 1
5.03
.18
7.11
8.10
5.39
.10
7.98
9.61
1.19
..■JU
7.83
7.37
5.29
.18
7.07
8.18
5.03
O;
7.11
6.35
1.81
.61
lO.l.'i
lO.O'i
5.05
.;io
7.7U
8.-27
5.31
.39
8.53
1 1.81
5.65
.22
7.18
7.10
5.05
.26
7.74
8.01
5.62
.30
7.8'2
8.93
5.3
.10
(i.lO
6.11
5.33
.-'!•
0.7-2
8.06
5.51
■27
7.56
8.00
5.71
.'29
8.11
9.26
5.3
In view of all tlii< it is (■\i(lent that Canadian hanks
•lie far from niMkinti cxcessixc profits. What ett'eet the
present rate of dixidends and piofits \\ill haw in at-
lraetin<2' "cw capital into the hankinii' field can onlv
he surmised. New hanUs will nndoiihtedly he started;
hnt they \\ill he sttnied hy people who will he willinu;
t 1 wait for a rrtnrn on the capital in\ested. Xew
I tatd\s ^cannot immediately earn and pay a dividetid.
That is praetieallx impossihlc in Ihe.-i' days. Many
hanks lia\e heen starhd in the I 'niled States within the
last twenty years: hul lh<y hast heen started on tluir
career hy men who km \\ that their moiux could n<it
earn a dividind. with safet\'. for three or four vears.
The |irolits ha\e hct n put into IIk hjink'-. .Manv of the
concerns, when earefnIK manaued. Iia\e heen notahlv
I '
Ail
»5(i M()m:v and R.\\Krv(^,
successful: and for the I'litmr. luw Canadian hanks must
I'ollow the sanii' c(»nsci'\ at i\ f hues.
.32!). liaiih' nicr^irs aud (ii/iiil^^di/iiilKtN.s.- -The opin-
ion lias heen in(histriously spread hy t!ie i-adieal element
in ('ana(hi that the hanks form a liu«>c ■"moiu y trust"
and are wockino tooethei- foi- the exploitation of the
country. It is niaiiuaincd that the process has heen fur-
thered hy recent hank amai^aniat ions. This |)rohlem
occupied a <xi)in] dial of attention during the last revision
of the act. and is ther<t'()i-c worth considci'ino".
It is perftctly true, of course, that the Canadian
hardxino' system is made up of institutions of relatively
larov capital. That is seen hy a ,uiance at the following
tahle which shows the am(!iint of capital and surplus of
the kadiu'i' hanks:
'^•■'"'^ (',i|ii(il H<st or .Surplus
^'""''■ral .-fKi.diKl.ODO .^1 ().()()().( )()()
( omiiK rcr l,"),0(l().(l()l) I'-'.riOO.OOO
Htiya] 1 l.:)()0.n()o !■.;., ">()(). ()()()
'"'I'Tial (I.soy.i.u T.ooo.ooo
No\,i .*^(()li;i .").<),")7.;5'20 l().8.'{().2i8
Doiniilidii J. .'!.')(). 'J'iT ()..'!,")(). •J'iT
ruronto ;■■>.(>{)().()()() (i.OOO.OOO
That the tcndcncx in i-cccnl years has heco to riduce
the numher of hank< and to inci'ease tin n- si/e cannot he
disputed. In se\(i-al easts the si/e of the liank Iris hecn
increased hy amaluamat im; with it weaker institutions.
Most hatdscrs at;ree that it is a n'ood tliiuLf to remoxc a
weak hank hy mei';4inL;' it with a ^IronLiCi' one. 'I'liev
lia\(' not hesitated to pid their tliccM'ics into practice.
'I'lu' n.Mid< of Montreal hasahsorhed tlu'ce: the Canadian
Hank of Commerce, t'our: the liank of \o\a Scotia. two;
and the Ho\al Hank. two. 'I'hesc consolidations ha\c
heen fornud. Iiowi'vcr. witii the oh jet I of seciu'inL>' a
sfron<4' chain of hranchi s throughout die whole country.
CANADIAN HANKINC Pl{()l',l,l ..MS
4r>T
I 'nr example, in llie rccriit iiuM-<4er of \\\c 'ri-adti'- liaiik
and the Royal Hank the t'ornui' liad liranclus i-ontimd
tor the most part to Ontario and the middle West, while
the Royal was stioiif^iy represented in the maritime
I)ro\inees and on the Paeitie Coast. The union of these
lianks formed an institution with hi'ani'hes widely seat-
tci'ed througliont the len<4th and hreadth of Canada.
The hranehes were (]u{)lieated at fifteen points onl> :
liiit as many of these points ai'c eommn-eial eenters
already well supi)lie(l with hank-, it is hardly possihle
that eompetition will he lessened hy the union ol' these
two institutions.
Now, in s|jite of the eritieism aroused l)y these merg-
ers, it is noteworthy that the Canadian hanks have ex-
panded in all direetions in recent yeai's. Thi> a])|)!i(.'s
not only to their increase in capital hut also in the facil-
ities for haid\in;4' <'tfered to the people. This has hecn
due to the i'ai)i(l di \clopment of the country, and to the
lai-<4e capital in\i'stn)ents that h.ive hecn made. The
iiumher of new hi'anehes that ha\e hecn estahlished in
all dii-ections is certaitdy remarkahle; and the ma |oi-ity
of these hranehes l!a\e (piickly justitied their estahlish-
iiietit.
Hut. .so far from hein^- tnie thai the h, iiks ha\e
foiMned any sort of ti'ust. many parts of the Dominion
-eciii to ha\e evi'ii excessive hankin^' accommodation,
riie hanks themsehcs have f( It the prcssuri' of this com-
[jetition. and aiv not rushin;^ into new tt ri'Itoi'\- as thev
did a year oi- two at>(). 1 1 is desirahle th;it hanks, heforc
!'! ancliiii<4 'lul. .should iiioicMiyliK- salisfv llieiii>el\e< of
the need of additional hanking' f;iciliti(s in the new dis-
tricts; otherwise, as has hecn said, undue com|)et it ion is
the result, 'I'hi^ i-aiscs discount rates in the end and
causes the hanks to undertake undesirahlc hiisiness. The
1 ■
MONEY AND HANKING
V-Pi
danger at tlie present time is in the undue niultlplicatiun
ot'braneh hanks, rather than the reverse. If the hanks,
especially in the West, wijuld uork more in harmuny
with one another, it would result in more reasonable
banking rates and I'aeilities for their customers.
In order that the pnhlie interests may be safeguarded,
however, the Act of 1!>1.'J provides that ikj agreement
t)y a bank to sell the wIk^Ic or any porti(jn of its assets
to another bank can be made luitil the minister of tinance
tirst gives liis consent. Mr. McLeod. late general man-
ager of the liank of Xova Scotia, and others as well,
maintained that the assent of parliament to a |)roposed
merger should also be secured: but the precautions taken
\vould seem to be suthcient. If the matter became pub-
lie and were discussed in parliament it would manifestlv
prejudice the jjosition of the bank that was selling out
its interests. An attempt would be made at (Mice l)v the
ftther banks to get part of its business: and, as a result,
it is extremely douotfnl whether the agreement could
be put through. And there may be gXHxi reasons why
it should be put throngh. If a bank gets into a bad
eoiidition. it is sometimes necessary that it should be
absorbed by some other baid<. thus sa\ ing the ])ublic
from the shock to business that would arise from a bank
failui-e. That j)oint should not be (»\erlooked, for it is
important in considering the (|uestion (if consolidation.
o'-U). lirtuicJns in foreign cotintriis.- The Canadian
banks ha\f taken achantage to a c-onsiderable extent cU'
that pro\ision of the law which p< rmits them to open
branches \\\ foreign countries. A\ tin ( ikl (if WWl they
had I.'{ branches in Xewfoundland and Wl branches else-
whcie principally in the I'nited .States. Mexico, Cuba
and tli( Mntisli West Indus. On the whole, this has
resulteil in alfording fail' facilities for the extension of
CANADIAN HA.NKINC; l'R()l?T.F..MS
450
( iiiada's trade. Some o|)])()siti(»n has develoj^ed against
'his i)()licy, and pi'oposals lia\e arisen to tax capital
loaned by Canadian banks in t'oreij^'n countries. For-
tiiiiatei\-. at the hite revision of the act, this sno-o'estion
was not carried into eH'eet. Xolhin^ conhi be jjained by
la\in^' the funds ol" banks employed abroad. i\)v the
i'lisines'^ that the banks carry on is to the direct advan-
taue of Canada, as ueii as to the banks. Vov example.
the Koyal Haidv went into Cuba in 1H'.>1) and now has
I'.t branclKs there. In IHOI Canada's imports from
( uba amounted to .$.'J4.*J..'}74 and exports to ^.578.013.
Ill r.>l'2 the correspondin<i' fioui-fs were ii^l.TTO.HT^ for
imports and ^'2AV.){},77^ for exports. While, of course,
tilt banks cannot be credited \y'\[\] this very large gain,
\r! thev ha\e undoubtcdiv tireatlv aided exchanu'c of
[Moducts between the two countries.
The lianks in Cuba and the W'esI Indies are not de-
pindent upon Canadian mon>y, On the c-ontrarv, de-
|ii).sits thei'e are in excess oi the loans made. 1 1 would,
tlierefore. for this reason among man\ others, be un-
\nse to discouia<_!,e Cana('ian banks froui opening up
liranclus in these islands. The \ation;il Hanks of the
( nited States are now permitted to establish bi-anehes in
loieign countiies. I lad tluy always bei n al>li ti. do >,(»,
llie foi-eign trade of that country would bi' greater than
it is to-day. It is estimated that -S'JOO.OOO. ()(>() of Anu r-
lan ca])ital i^ inxfsted in Cuba alone: but it is the
Canadian lianks that baxc lakt n greatest ad\antage
"f the opportimities of1'ere<l in the baid<ing field. The
hanks pay interest at the rate- ol '4 per cent on de|)(jsits
:ii Cuba, and charge an a\erage of 7'- per cent on
f'»ans. .Vbout 'J.') percent of sui'plus deposits is retained
III these islands: the rest is loaned on call in New N'oi'k.
Ill no wav does this t'oreign business weaken the po^i-
'I
%M
m
m
im
.MOXr.V .\\i) UANKINd
I HP
!!i-i^:
(ion of tlic hanks in C aimda. il need lie. tlic loans in
\t\v ^ ork could he nia(k' a\ aihil)lc in a iKricd of [lanic
in this countrx'.
y.il. ('((II loans in A'.tl' )'(irh\ On Mav .'51. lUi:}.
tlic call and shorr loans of Canadian hanks, ciscuhciv
than in Canada, ainoinitid to ■•^1m;.1.)1. •_>()<). 'IMicsc loan>
arc \'i)v the most part made in tlu' City of Xcw Yovk.
'J'licy ha\c often hccn severely critici/cd: hut. on tin
wliolc. this ])olicy can he jiistilied. It is necessarv to
keep a coiisiderahle part of a hank's k)ans in such licjuid
ioi'ni that they may he rcali/ed n|)i)n in anv emi r^cncv
that may aiise. Dni'inu' the tronhle of IDOT tlie foreion
loans saxed the situation in Caiiada. \\\ [hv (.iid of I'.lOT
the Canadian hanks had exhausted all the moiiev l)e-
lonoitio- to them ahroad. and had imported out of tli(
(lc|)osits in othei- coimtries s-j.sn .(»()(). 'i'lie hanks dn
not lend at call in \e\\ ^'ol•k to secure exceptional pi-oj-
its: hut chielly to pi'cnrx e a cei-tain poi'tioii of tlitii'
loans ill a hio|,|y Ii(|iiid fomi. A< a laile. the l)anks lend
money in Xeu York at a much lower avcraiic rate than
in Canada, 'i'he jiioh lates of interest, so often r<t'errcd
to. occair at rare oi'casioiis only, at a time of excessiw
monetary striii<^eiicy or of panic, and do not matcriallv
att'ect the avera«i-e rate of int<i( st ea.rned. Morcoxer.
at times of hioli interest rates tin hanks air almost
always withdraw in,n' money from New ^'o|•k. instead of
scn(hii<4' it thei'c.
It is the pow( )• to withdraw monex at siicji tinus
which enahles the Canadian hanks to support their ( iis-
tomers. !t is. also, lai-ucly Ixc.nisr of llij-, power that
no pa!iic has taken place in Canada in^ ivcent tiim -,.
If New 'V'ork itself caniiol furnish u'old. as in I'.Mi;.
the same results are secured in sellino stcrlinu' hills of
exchaiioe furnished i)y New ^ Ork. '1 c no],) j^ then
( ANADI.W HANKIMr ri{( )HLi:.MS
4(Jl
MCiirt'd ill London. The (ilijcct of these eali loans in
\( \\ ^'o!■k, tliercforc, is not so inneh to enlarge the {)rol'-
iis ol' (anachaii h;;nk-. 'S to enal)le them to support
llnir enstoniers in time ol' stress, hy Iia\ in<4' a eonsid-
I rahle pai't of their assets in a h(|ui(l t'oi'in. The eall
io.nis thus t'orni an im|ioiiant i)art of the Canachan
ii.inks reser\'es. In the hist analysis it is mei'i'lv makinii"
Use of neeessary rese!'\ es that would otherwise he lying
u-cless in Canada.
.y.i-2. Call loans in Canada.— ih) May .'H. 191.'}. the
(all and short loans on stocks and honds in Canada
amounted to !^(;t». •»«•_'. .UO. A o'ood deal of niisunder-
slandin^' has arisen over this item, heeause ol' the dit!i-
inlly in aeenrately detininn what is meant hy the term
"short. ' The oilicials of some hanks consider that only
(hose loans payahle within ten days can j)roperly he
iiiehided under this heading: \\liile in other cases loans
of .'}() days Ol- e\en iwo months are included. It all
dt peiids on the di gree of conservatism of the dilVerent
liankers. Some ixw of the opinion that only loans to
stoekhrokers should, strictly speaking, he termed "call"
loans.
In the more eoiiser\ati\e lianks. it is true, it is the
custom to di\i(k' the call or demand loans into two
chisses. The tii'st class is styled "strictly call loans" and
it inchides only the loans made strictly on call to stock-
lirokers on honds and stocks. Ail other demand loans
should go into the second class. v\v\i when tlie\- are
secured hy honds. stocks and dehentures. When ih;'t
i'raclite is foll(»\\ed ii makes foi- a clear, true statement
ofall'airs. In studying the position of a jjarticular iiank
the- d( positors or the general piihlic are accustomed to
eonsidering the call and sh(trt loans as an im])ortaiit part
if the restrxe of (|uick assets. When the hank |»reseiits
rti
Mi
Tm
i»
^^)\
M0M;\ AM) J{.\NKl.\(i
its statenit'iit. hy inttiviKr it (Ifclares that tlie amonn^
shruMi in the call-loiiii (•oliuiiii can he taken as quid
assets: and wlien this lunount is made u|) of strictly
call loans to stockhrokers that is undonhtedly the case.
If it wished to do so a haidv ininrlit put in consider-
ahle loans, uhich ai'e really s|o\v. in the call-loan col-
umn. In the l.io- city hranches there are always a
consideralile numher of loans oraiited to jjrominctit
(hrectors of indnsti'ial and f)ther corporations on the
stocks of their own companies. These horrowers have
no intention ot sellin.ir the stocks: in fact, they could not
retani control o!' the eoi-poration it their collateral were
sold. So. as a matter of fact, in actual practice, the
loans sometiniis run alon.o- from y(>ar to year, althoutrl)
tlie\- may lu payahle on demand. Now. such loans
should not he considered (piick assets: they are not
meant to he .such hy the horrower. and should not l)e
considered so by the hanks.
Then, aoain. the hanks have nearly always a num-
her of loans on stocks and bonds cai-ried by "princi-
pals." That is to say. the <lea]er, instiad of carrying-
his stocks by means of a broki-r's loan, carries them
ill his bank liability account, 'i'lic l)anks prefer to deal
with a broker instead of with a princij)al. as it is always
nmre diflienlt to .sell out the collateral pledoed Ijy'a
principal than thai plcdoe<I by a broker; forthe bor-
rower may be an intluential customer, and if the bank
sold out his collateral against his wishes it would run
the risk of losinn' a valuable commercial or industrial
account. These loans, no doubt, are payaltle on de-
mand; but they are not to be compared with the strictly
call loans in point of view of fluidity. Yet. in mnst
cases, all these so-called demand loans appear under the
heading of "call and sb.oit loans on stocks and bonds in
CANADIAN I{ANKI.\(i PROnLEMS
U).'}
('anacla."" Clearly, the practice should he chanoer] so
that only genuine call loans woulfj he counted as such.
o.'J.'i. l^ndcrxcniins and promotion of corporations. --
It ".as charged hei'ore the C^^immittee on Bankintr and
( i^tiinierce. during' its sessions in 191."}, that the hanks
iiave heen closely allied \\ith many n(\v enterprises: and
tli;!l liu<ie new industrial conihinations ha\e heen |)!'ac-
tically financed hy their funds. It was said, too, that
the (Teneral nianaoc rs and directoi-s of some ])anks have
profited 1)} these promotions. This was notliinf; more
than a vaoue. n;eneral charge. concernin<T the proof of
\^hich no e\i(lence A\as snhniitted. Xevertlieless. the act
\*as amended in such a vay as to make it a penal offence
till- anv l)ank official t<t accept honiises or <nfts for iii\in<r
iccommodation to patron^ of the institution.
The hanks, however, have ne\er denied that tluv have
furnished capital to grouj)? of capitalists -^^ilo were start-
ing- new industries, and v'- needed temporary accom-
modation durino- the under itin<^' of the securities, he-
lore these could he (lis])ose(l of to the investing ])uhlic.
Such large enterprises could not he started in Canada
unless hankijig facilities were ])rovidei' during that
[•'■riod in which capitalists have underv^ ritten large
hlocks of securities of the new corporation and have not
as yet disposed of them — that is, pending tile period
in which tiie stocks and ])onds can he sold on the mar-
kets of the world. Of course, everything in such a case
depends upon the character of the underwriters; whether
they are men who are financially responsihle, whether the
hanks hclieve these men can market their securities, and
\\hethcr they understand the nature of the underwrit-
ing contract. During the interAal hefore the securities
are marketed the hanks consider not only the nature of
ihe collateral j)ledge(l. bnt the financial Standing and
m
H
:'- Si
Mil
.M()M:^ AM) |{.\\KI.\(i
iiiU'^iity of tlu" capitalists coiiccnicd. Otlicrwisc, as-
sistance luiju'lit l)c L>i\cri to men of sti'aw : and, as a re-
sult, the l)aiiks ini<4lit find llieniselves owning the enter-
])rise.
1 )urinn' I'ccent years Canadian institutions ha.\e aete(|
as hankers for laru'c in(hrsti'ial undertakings in Mexieo
and in South American countries. They have heen
named as such in the ])ros])ectuses of tliese corporations;
hut. strictly s])eaking. this has meant nothing more tlian
that they have lield the I'unds ol' these eom])anics. Of
course, the hanks have also advanced capital on undei-
writings oj' fliese cor])orations. l)ut not in the sense that
they ha\(' pro\ idt'd the initial eapitak l-'or example, the
Canadian Hank ol' Commerce niade loans on two very
important underw ritiiigs made in P'.ngland of the Hio
and Sao Paulo enterprises. 'IMie loans \\ei-e niade on
Canadian nndci'u i-itings in connection \vith these com-
])am'es: under\\ritings of a class that were actually
])lace(l on the market. The lai'ge Canadian lianks arc
always willing to lend money on good underwritings
when funds ai'c plentiful: .just as they make loans, on
securities alone, to financial houses in London and else-
where wlio aie ahle to covenant that when the payments
due on the undci-w I'itings are made they will re))av the
l)anks. That is considered ordinary banking husiness
which the larger hanks like to get. lU'garding the South
American enter])rises as a whole. Sir Edmund Walker
has stated that Canada its<'lf has little of its own capital
in them. 'I'he money to huild the entei-])rises at Rio
and Sail l\uil(> was found ii' Kngland. Helgiuni, Switz-
erland and thi'oughout the contineni of Europe. The
Canadian haid<s have lent moiiev on the securities wliicli
wei'c sold in Europe; hut they have not directly sup-
})orted these enterprises. Of course, the hanks have also
CANADIAN HANKIN(, rilOlU.K.MS
H).:
directly particiijatal in tlu- iiiidcrwriti!!^ of pnhlic securi-
ties "nu!iiici|)al. provincial and Dominion. Most of the
l,ir;^'c Canadian banks associate tlieniselves with the un-
(lertakino- wliencver the Dominion o()vernment 1)()ito\vs
ill the London money market.
The <r()vernment returns of May 81. 1!)1.'}. show that
the Canadian hanks held on that date: Dotninion and
provincial <4overmnent seein-ities. >^!».()()l».H(;r. Canadian
imim'cipal securities and Hi-itisli and foreiuii public se-
ciwities. J^-J.'J.H-JTJil.'J: railway and other bonds, deben-
tures and stocks. •S(;7.()21..-)41. The l)anks have, there-
lore, a considerable and direct interest in many inchistrial
enterprises.
.y.ii. Loans to dircctors.— Vudvv the act the share-
holders may make by-laws linutin<^- the amount of a loan
to any individual or corporation. As a matter of j)rac-
tice tliis is left to the directors to decide. In the Tnited
States national baid<s are not permitted, under the act.
to lend more than 10 per cent of their paid-up eai)ital
to any person or eori)()ration. An attempt was made
to introduce some sucii restriction in the revised Ca-
iKidian act; but it was stron<>-ly opposed by the banks
and failed to carry. An effort was made, too, to place
a limit on loans made to the directors of banks; but this
amendment was also defeated.
It is true that several small banks have failed be-
'•ause the chief executive ollicers either misai)j)ropriated
iir speculated with their funds. Hut that has hai)penc 1
generally wiiere the institution was a "'one man" bank.
In the case of the failure of the Ontario Baid< the «'en-
' ral mana<4er speculated with the banks funds in Wall
Strri'f- mihI flic /lii-<.<.f<ir>.' It ,.!..> .,\\...v..A ^.. 1 1.^,
- ■ . : ^ • : . ..,..;. ; ,,^ L 1 i • i -^ ^
liM'ent in safeouardiiio- the bank's interests. The Sov-
ereinjn and the Farmers" Hanks were forced into liciui-
460
MO\F,V AND RANKIXC;
(lation tlirounli exces-iive and speculative investments
made npnn tlu- authority of the directors. However, all
these I'aihires occurred i-atlier tlir()u<xli t!ie malpi'acticc
ot the batd<s" chief officers or thrrai^h an error of judji-
ineiit on the part of the directors — as in the case of the
Sovercij^n Bank — rather than because of loans to the
directf)rs.
The hanks seek to tret men to act as directors wlio
are ])rominent in the husiness community. The accounts
which these meii brinfi; to the banks are anion<x the nio^t
\ahiable the hanks ]iossess. The imsiness of the directors
is a \ ital asset in building up a baid<. Now. if a director
could not ffet a loan from his own bank it is just possi-
ble that he would lose interest in its operations, and
refuse to act. ;nid thus the services of the most desirable
men in the eoinmtuiilN would be |e t to the institution.
It has bei n charj^cd that directors who act for other
corporations also in that capacity (li\ ert the baid<'s funds
to the enterprises in w Inch 'hey ai"c interested. It comes,
in the last analysis, to a (|U( stion of the advisability of
interlocking directorates. 'I'his is a situation that must
inevitably arise under modern business conditions. Men
of l;n'<i'e cajiltal are interested in many enterjirises: and
there seems to In no uood re.'ison wbv a director of ;i
bond house, a trust company or .in iftsurance com|>an\
should not also ha\e a seat on the board of a bank.
Xor should they Ix.' discriminated afjainst in s-curinu a
lf):m I'oi' th-.'mselves or the eorpor.-itions in which tluy
ha\e an inleitst, provided, always, they rccei\c no
favors and tliat the loans are leuaily made.
As nas been said, ro limit is pliucd in the act upon
the amount of a loan to any person or cor|ioratioii. |!
appears to be the ^encr.'il consensus of opijiion ;uni>nL;
bankers and business men in Canada th it nothinu' of am
CANADIAN IJANKING rilOBLKMS
i07
■••tu
\;ilue is p'ained by .such restriction. Mr. TI. C. McLcod
qiajTested to tlu> C'otiimittce on Hanking and ("oinnicrcc.
(Ill the occasion of the last rc\ ision of \hv act. that a
limit of 2.5 per cent of the haids.'s caj)ital should he im-
! (vsed. The sufjofcstion met ^^■ith some aj^proxal: hut.
the \\lioh'. it was felt that any hmitation upon loans
\MiMld not he in the hest interests of the hanks oi- the
{ountry: and that, in any c.,sc. it would he dilticult of
(iiforcement. In a word, it is i'elt that fluidity and secu-
I'ily are more imi)oi-tant than tlu- mere a-nount loaned.
.Y'i.'i. Haul's ami the trust ct iiipanicft. — Some of the
Canadian hard<s. following American precedent, have
istahlisiied trust companies to take care of husiness
vli!(h cannot iic leoally undei'taken hy them. Sir Kd-
iHiiiul Walker ha>; <^i\en reasons why this policv ap])eals
t the hanks. Tjie Canadian Hank nf Commerce has
not estahlished a ti'usf conipany. hut it ha > at times hecn
inclined to do so. This hatd< has nearly !^"J. ()(»(». ()(»() in
pension funds helonoinn- to it- otfii'crs. which is larj^cly
iii\est(<l in mort<.,M<>-es in wcsfci-n farm lands. It oh\i-
(Uisly iinohcs much labor in looking- after such lai-^e
investments. Such a fund nnnlit well sfr\(> as a foun-
(Lition for a small trust company, in l-aiM-land. espe-
ciidly. many investors come to the Canadian Hank of
Commerce v, ho \vould like to \( ]\(\ funds on ucstei-n faifus
ill Canada, and in other ways. These tr.ansactions ean-
.lot be undei-t.aken under the bank act: and therefore a
cdnsiderablc amount of profitable business is lost. Other
Canadian banks found themselves in the same condition.
iUKJ or«ianized trust companies to take care of this class
iif l)usiness. Of couise. it is another <iuestion altooctber
if the tiiisl eiimpany dipcnds on the banks for funds to
iiivc.st in ways not enntemplalid \>\ tli< l»ank act. Aside
from tliat Ihei-c dors not a|)pear to be an\ it asnn why
m
ili
^
468
M()^l:^ and haxkint.
th'J hanks should not or^aiii/c ti-ust coinpaiiirs and IkiM
stock in tlicin. Tlicix' is no reason why shareholders f>\'
a hank siioiild not permit the formation of sueh a com-
pany, and ^u in<4' to it the husiness that cannot l)e legally
undertaken hy a hank.
It has hei'ii c'harj^fd that the direetoi's of some of tin
^. anadian hanks are also directors of tlu'se suhsidiaiy
companies, and that they exei't an undue inlluence in ><-
cuiin<i' loans from the hanks for them. Hut the conten-
tion is hardly hoiMie out l)y the facts. As a rule directois
are not favoi'cd aho\-e othei' horroweivs. Hut they ouiilit
not to he discriminated ayainst merely iKcnise they arc
directors. In tlu' case of the l''arniers" lank it is trm
that it was ruined l»y an excessive loai. )f S7(((t.()()() In
the Keele\- mine: hut althouLih mistakes haxc heeii niadc
it does not follow that thousands of other lei^itimate ami
j)rofitahle transactions should he foi'liidden to the hanks.
.').'{(>. I nil rest ch/ira.'i-'^ in tlic Wist. The act permits
haid<s to chai'^^c 7 per cent on loans; hut no hiuiiei- raic
is reeo\ei'ahle at law. This is a matter o| more oi- |^s^
academic importance in the I'^ast : hut in the West it
has h((ii an impoiiaut i-sue amon<^' the ranchers aiiil
;rain-i4i'ow(rs.
Mr. (I
iipman. edi
tor
the (
I rath
(ini:\.(rs'(^i/i(l(. produced ex idcncc hiloi-c thr ('iMiiiiiit-
ti'i'on Haidsin^ and Commerce ;it ( )ttawa in April. I'.M.'f.
that the hanlo had heen charjL'in''- intciTst in the \\'( si
di th
wa\- froni S to !•_' iter een
t. I
n sonic cases it wa^
much hi;4her. especially on small loans. Some hanks
have chargt <l one dollar a tuonth on a loan of ><■_',"). I'lii
axera^c r
lie. Iio
>m M to I •_' j)( 1' (■( nt accord-
in;^ to t lie (list r lets w Iieic tlu hank is located and the p< r-
.son who receives the loan.
The people of tin West feel that they have a griev-
aiue in t!iis, and lia\( souaht to h;u( the late fixed .it
f^
( ANADIAN HA.\KI\(J I'ROlU.ll.MS
4G9
7 jK r cciit ill all {'ascs. It lias liccn c'niisc-i-\ ati\ rlv t-sti-
iiiatid. li()\\c'\rr. that it costs on an a\(.Ta<>c 2 per cnit
iiioi'f to can-v on liankiii<^- in the \\\'?t tlian in tiu' Ivist.
On tiu' IVontiir and in the rciiiotcr districts tlu- ditl'er-
Micc in cost is niiich liinlicr than that. At oiu- time the
li.iiiks were chai'^inji' - !><■ I'f^'nt a nioiith in Dawson
( il\ : ;uid cvtn at that, money was. i'elatl\ eiy, the chea])-
I ^t coiiimoihty there. Ol" coiirsi- this is an extrt-me case;
il the ^'ciieral pl'iliciple holds true. The cost of sei'\ -
is ninch liiLi'lier in the West, and thi' risk is <>'reater.
l,(adin,n hankers ha\i' insisted that if the statutory rate
<<\' 7 p<'i' ct'nt wvvv enforced many of the hraiich hanks
udiiM ha\'.' to he closed.
Mort<^-a^c and loan companies recei\e 8 oi- per cent
"II thiir fiiiKJs; and the cost ol' cxecntiim' the inort"'a<''e
''! iiius the loan up to 1 1 - or 2 per ctiil hinher. .\!4'i-ee-
iiK nts for sal( yield as hiuli as If. per cent and moi'c
>ii the money iiixcsted. Impliiiient dealer^ ehai'yc 1 •_'
|ii r cent on tlii'ir customers" notes, and these ai'e made
III at credit p'-ici's. .Moreo\ ci'. there are not onl\- vearl\-
i'lil s( asonal !hietuations of interest i-ates in the W'e^l.
W li< n thesi' facts ai'c considci-ed it does not appear that
'lu haiik^ are charuin^i (,\eissi\c I'ates. The crux of
'!• (iiieslioii. therefore, is this: |^ it to the ad\aii!aLi'e
I I Ihe West to lia\e money at ])re\ ailing' I'ates rathei-
II 111 run the risk of decrea^inu' the sn|)pl\ of capital h\-
.'ihitrarily lixiny- the rate of interest' It would not In-
praeticahle or just to impose a fixed ?-ate nf 7 per cent
II till' hanks without rcslrictiiiLt also the rate charwfd
hy otiur tinaJicial institutions. An i normous amoimt ol"
'ipital has come into Canada m recent viars from (ii'cat
Mritain. Holland. I'ranee and oIIki- l-'nrnpi.'in enuii-
trii's. A tixi'd 7 p'l' ceiil inlii(^l lali- would neccssaiaU'
■ iU'ect this flow of ea|>ital. and I'cdiicc its \oliime. The
470
Mo^■l;^■ and banking
legislation would (k'l'eat its own (.'nds; foiiipctition woiiM
be (limiiiislied. and as a natui'al rrsult interest i'at< -
would rise liiglier than ever. Tlie situation will gvml-
iially riulit itself as the c<junti'y is develo])etl. and local
savings heeoine a\ ailal)le.
5li7. Haul's of siiuiU aipitdl. — It has been ad\-oeate(l
in some (inai'ters in Canada that l)aid<s of small capital.
relati\el\' local in their (i])<.-rati()ns, would reduce the in-
terest rate and |)ro\ ide sutHcient accommodation t'l r
local purposes. 'I'he W'eyhui'n Security liaiik. of \\\v-
burn. Sask.. has been cited as an example. This b'aiik
Avas started in January. IDll : has an authorized eai)ital
ot'$l.()()0.t)()(), of which S(j;{i. ()(»(» is subseribeil and s;ji.-,.-
(500 paid u|). There are seven dii'cctors. fi\e living in
Canada and t\\o in the I'l ' States, 'i'he institution
Mas started by six wealth; .1. icricans who held larqc
business holdings in the W'eybui'n district, and who iVlt
ihe lack of bardsing capital. Mr. llarxey Powell, tlu-
general managei". has h: d wide expi'rieiiee in l)anking in
Wisconsin and Dakota. The baid< has paid .5 ])er cent
on its stock and ear'i'ied ><t!,).()0() l(; sui'plus. There are
ten branches of the baidv at various small towns in tiic
j)ro\ ince.
'I'he bank di\ id(s its business, .so far as interest rates
ai'c coneii'ni-d. accordnig to the class of customers: tint
is, not aceordnig to the business he is in. but according
to his relation^ willi the bank. Some loans are granted
at 7 |)er eiiit. but the ma|ority are made at 8 per cent.
The borrow! i- who gets his money at 8 per cent must be
a depositor, and he must, moreoxer, give evidence of
being a fiisl-ilass customer in tin- future. A boiiowcr
\vh(i iji 11 -. riiit ilf-twisit ill ;!!!\' ''xteut !s ebarjjt'd !(.' !!•!'
cent. 'Ihe man who eami(>i pay his aceomil when din'
is charged fJ per c( iit for i'iiu\\al. 'I'he baid\ "ttempt^
S.S ^-*
( ANADIAN BAN KING PROBLEMS
471
to keep its loans liciuid: it does not want to go into ])art-
iRTsliip '«'. itii the borrower in a rural distriet.
The evidenee given hy the general manager ot this
hank has gone to show that the rates are in general less,
under similar eoiiditi()ns. than they are in the Tnited
States. He agreed witii Mr. Forgan. president ot the
1 irsl National Uank ot Chicago, that the hranch hank-
iim system can o])eratc more eeijiiomieally and turnijli
hanking facilities more cheaply, as a general rule, than
the independent, local bank. The small bank ot limited
lajiitalization could not compete with the large bianch
hanks. Mr. Powell, from his American experience, saw
iiiit one adxantage in I'avor of th« local bank. The
<lirectors of a local bank may be more dee|)l\ interested
in thf community than a branch bank manager. Aside
from that, whether with reference to interest ratis or
u<ti<ral banking fa( .lities. the large branch banks aie
in a much better position to si'rve the public. A small
Ideal bank must deptiid for its success upon the pros-
perilv (if the locality in which il is situated. If for any
reason local industry shoidd iei-ei\'' a setback, the bank,
too. is bound to suffer. This occurred when the wooden
shipbuilding industry of Nova Si'otia declined at the
advent <-i' steel ships. The small local baid<s suffered
liea\il\-. .tiid \Mre obht^ed to i lose ♦heir doors. On tlie
other hand, a branch bank may be closetl. if necessary,
v. ithout check t" the institution as a whole. This has
been illustrated time and time again in Cana<Iian bank-
ing, especially in the West.
,").iH. Iiili,i.si oil (hpunits. — Cansidera!>!e dissatisfac-
ti(.n has arisen among Canadian depositors because the
banks do not pay greater interest on deposits. The
ordinar\ rate on deposits is :} per cent, although the
W. vburn Stcuritv liank pays t per cent. This rate
47-2
MOXKY An I) H.WKIN'C,
ill
'U?
c'onipiircs t'a\()r;il)ly v.itli that of hanks .similarly situalid
in the I'nitcd States. The C'hiea^o hanks, for exani])li,
pay '2 per eent on daily halanees of eonnti'v hanks left
with them. They do not |)ay interest, as a rnle. to a cns-
tomer who makes arrangements to he a horrowinn
customer: hnt if they ha\e a lar^e account where the cus-
tomer does not want to l)oi'ro\\'. and wheiv he is essen-
tially a depositoi', they de(hiet a sum which must he in-
terest-free and which w ill meet the expenses ol' carryinu
the account. j)ayini4' - pt'r cent on the halance. Of course
in active centers as much as 1- ])er cent is paid on deposits,
principally iiy trust companies. A national hank undei-
normal conditions cannot pay more than .'J ])er eent.
although in some oi' the Western States 4 ))er cent is
|)aid.
()wiii<r to keen com])etition hi Canada, hanks ])ermit
checks to he drawn against sa\ iu<4s accounts. Moreover,
very small sums ai'c cai-ricd as curivnt accounts, for the
sar.ie reason. On these accounts the hanks actually lose
money: hut they ai'c not disciiminatcd a<>ainst, so ^reat
is the comjKtition to sei-urt' additional i)usiness. There
is no olliei' coimtry in tin world wlier< service of this
kind is pro\ ided to such a deni'ce foi- noihin^". Persons
kce|)in;^' an account of lifty or sixty dollars arc j)ro-
\ ided with a check hook and complete hankin*:!,' I'acilities.
The cost of tliis s( r\ ice is ahont .'{ cents ])er check in
the castci'n ollices and .'{' o cents to .1 cents in the West.
according as tlu cheek is drawn uixtn a citv or countrv
ollice.
It is iiue tlial in Ih' Ivisl. es|)eeially in ilu' maritime
pi'o\ inces. tin deposits exceed the loans, .-iiid the surplu<«
is sent to other pai'ts of the Dominion where there is
an active demand for capital. It has e\cn hten suj^-
gcsted that the deposits of a |ii<i\iiice should he em-
( ANADIAN HANKINC; TKOHLKMS
ployed there in l)iiil(lin<i' up local iiidiisti-ies. To this
the hanks reply that they ha\e always met every de-
iiiaiid made upon them. They eannot take the initia-
tive: tlie j)eo])le must (h) that for themselves. From
\\liat has been said. too. it aj)pears that .*J ])er eent is a
fair retin-n upon deposits in the Kast. There loans are
made at .> or (i j)er eent. which affords the bank merely
;i fair retui'ii u])on the cost ol' the sei-\ ice rendered.
y.iU. FiiKiiiciiii:; tJic crops.- The obvious i)eculiarity
of agriculture is that, o\vin<>- to tlie charactci- of the
Canadian chmate. but one crop per annum of a ^iven
kind is harvested. The si<i'niticant rehition of the farmer,
tiierefore. to the bankin<i' system ai'ises out of the fact
that the hainestin^ of the rei>idar staple crops of the
(ountry such as wheat, oats. flax, barley and others, is a
siasonal operation. 'I'his is the one im|)ortant fact wliieh
distinj^uishes the tinancino- of ajj,iicultui'al operations
iVom that of manut'aeturini^- and commerce. In regions
which are mainly agricidtural. the seasons of the year
\\hcn the products of the soil arc bein<4' marketed, are
the seasons when large calls are made upon the banks
for loans.
'i'here are few lines of industry where anythin<i; like
the same seasonal ebb and How of trade is found. Some
classes of manufactures, to be sure, are to some extent
dependent upon climatic conditions ujxtn the s})rinj4
■iv the fall trade, l''or example, the gcneial retail trade
ex])eriences sharj) upward moxcments in demand when
the seasons are changin<.j, and a correspondinjj,' de|)res-
Mon at the height of the season, iiut bi'ueatii all these
lluctuations thci'c is a steady current of e\clianges wl ieh
ni.iiv' 1)0 counteil iiiK)!! f hroiiirhout the \'ear.
As has already been explained, tlie Canadian farmer.
especially in the West, needs money not only to pay his
474
MONEY AND BANKING
?■••;
harvest hands, the expenses of thi'esliing, etc., but \
pay accounts due to tlie merchant and the iniplenienl
ilealer. These accounts are generally small in the indi-
vidual case, but in the aggregate they amount to an
enormous sum. The farmer, too. has often secured an
advance from the bank to meet his temporary needs,
merely on the strength of his pei'sonal character and
credit. 'I'o discharge these obligations lie must depend
upon the salt' of his crops. It is thi'ough tlie banks that
money is fui-nislied to the ])r()ilucers and the niiddlo
men. while the j)roducts of the farm are on their way
to the customer. A heavy burden rests upon the char-
tered banks during this j:)eriod. and their note issues are
stretched to the utmost limit.
During this time, when linancial facilities are strained
to the utmost, lielj) from any good (juarter is acceptable.
During itcent years financial arrangements have been
entered into bttween Canadian and British banks, to
assist in the movement of grain. London bankers have
found it such a satisfactory luid remunerative business
that they are ordy too glad to guararitec advances, if
necessary, to a larger measure than before. The secu-
rity is iMideniably sound; and London bankers have been
enabled in many cases to earn substantial connnissions
merely by a guarantee, without the actual emission of
cash.
540. Moling- the tccsfcru xclifat crop.— The new pro-
visions of the act. whieh permit the baid<s to issue addi-
tional notes on legal-tender money held in the central
gold reserves, will materially atfeet th.e methods of the
banks in providing curiency for moving tlie crops. It
II Iw.
-wl f!,..t +1,.,
.1,1
,1 T».,
deposited with the trustees in Montreal, upon which
additional note issues are based, will not be available as
( ANADIAN BANKING l'UOlU.i:.MS
ir.5
;i |);irt of a l)ank"s reserves. Altli()u<iii tliis is'^ue is not
Mil»j('et to a tax. some hanks will undoubtedly preter to
issue additional eurreney on tiieir eajiital and surplus,
upon wliieli they must pay a tax not to exeeed .3 ])er
cent. It will he recalled tliat the tcjtal amount of this
einergencv issue is fixed at 1.) per cent of a hank's eom-
hined paid-uj) capital ami surjjlus. The hanks tliat are
.inxious ahout their reserves will undoubtedly i)rcfer to
j)ay tlie 4 per cent tax rather than deplete their lujld-
inus of u'old and Dominion notes. The amount of addi-
tional currency needed at the crop-moving period is
about >i<'J(). 000.000. Part of this has been furnished in
Dominion $4 and «.3 notes: l)ut it is altogether likely
that, for the future, the banks ^vill pirfer to issue (july
their own notes, as these can now. through the gold
i(ser\es. be |)rocure(l as easily as Dominion notes.
Fresh supplies of notes are prepared by the banks
Hi the summer, and an estimate made of the amount
reciuired at the different branch oltices. (H-ain-buying
firms arrange a line of credit at the banks, and at the
time of del'xcry of the giain at their elevators, secure
notes from the bank to make the re(iuired payments
to the farmers.
x\s the grain is bought it is j)ut tlirougli the eleva-
tors and loaded on cars for Koi t William. I'ort Arthur
oi' Duluth. the terminal points on Lake Superi(jr, When
tjie grain is loaded on the cars the grain-buyer receives
from the station agent a l)ill of lading for a number of
busiiels the ca|)acity of the cai'. 'I'he gi-ain-ljuyer turns
these bills over to the hank as security for loans made
to him. The bank loan grows steadily; each (hiy luw
re receivcvi :d
.. lv...,,,,.l. ),
.wl
^iippiics oi iii''ier> ;
issued to the grain-buyers. During this time the grain
is on its way to the lake pints. From time to time the
'4i!i
4;
470
MOM ^ AM) H.\\KI\(,
1 >
hi- ■
,1"-
\niyvy .^rlls to Winiiiprn- exporters, or lo tlie hiu' „,illi„n
companies. He draws a .IraTt upon tlie exporter or tlie
luillino- eoin|)any, to wliieli hills of ladiiiu' -'ire attaelied
I'V Ins hank. 'Die hank applies the ai nt of the draft
f" the loan made to the ,uraind)nyer: and instrncts its
'"■-•I'lch at W'innipe.u'. to which the draft is forwarded,
to (icHver the hills of ladin.u and insnranee receipts to
the e\|)orter or miller, as the ease m.ay he. onlv on pay-
ment iA' the draft. As deliveries .if urain "from the
farmers cease, the (k-mand tor the haid^'s notes slackens:
and t!ie -rain dealer's indehtalness falls. 1 f a firm does
not ncl out its oiviin htt'oiv navigation closes on the lakes.
It may stori' it in its elevators, prelerrino to keep it until
the sprino- rather than ship it to Portland or St. John
l»y the all-rail route. In that case the hanks may carry
iiic dealer all throunh the winter. In addition" to th"e
'•ountry huyers the aueuts of the Winm-pe-- exporters
antl of the hio' millers will he huyino' from the farmers.
This husiness is financed in the same way as that of the
small oTaiu firms, hut at \\'innij)eo' hanks.
Jn W'innipeo' and other cities the l)io' exi)ortino. firms
send out lar-e amounts of cash to the centers at'^whieh
they havi' elevators. They also acce|)t the drafts drawn
iipoM them hy country deak'r>: so that their indehtediiess
to the hanks is constantly increasino-. 'rh^ security for
these haidv loans consists largely of wjieat in store at lake
ports. Jiy sales and shipments fiom lliese points their
accounis at the hanks are li(|uidated. W'iien a hoat-
l'>.i<l ')f ,urain sails fiom an upper lake port for HulValo
and New N'ork. or ilirou-li the Weiiand Canal for
-Montreal, the haul, hnys the sterlin-' hill of exchanoe
with the hills of ladinu' attached Iherrto.. '\'\u> I.,!..,, hTu
of ladinn- is. of course, ixclianovd for an ocean hill of
•'"•'"f^' ''^ *li^' l'<'i"t <••' ^Iiipment. When the sterlin-
(•A\.\1)I.\N HANKINC; 1'H()15M;.MS
477
liill i)[' I'xcliaiiu'c is drawn, with in ocean l)ill of lading
,111(1 insnraiift' receipt attaclied. the l>ill is iisually sold
ill .W'w ^'(M■k. Thus the hank and the exporter hoth
lia\e theii' money.
The hank notes u'radually i-etnrn to the hanks as
the farnieivs and the merchants settle tlieii' acconnts. ^Vn
(Mormons credit hnsiiuss is cairied on in Canada. esj)e-
eially in the West. When these accounts are settled the
notes, as has heen said, gradually return to the ))anks
eitliei- to he deposited or to pay ofli' loans to the hanks.
'I'lie notes thus I'orm an elastic medium of exchanu'e.
expanding' and contractiiif^ as the need re(]uires. They
cMst tlu' hanks \ei'y little, aside from the expense of
piintin,!^' them, exeipt in the cast' of the tax on the
u!ieo\ fi'ed enR'r<4enev circulation. That tax is not paid
until the notes are actually placed in cii-culation : hence,
they may he held as till money at a trivial expense.
'I'his is an ad\anta^e not generally recofrnized: hut it
results in \ery lar^e savings to the l)ank.
.")41. C'onninrcidI letters of credit in CaiimJn. — \\Miile
the })anks ])lay a \ery imj)ortant pai't in the way just
descrihed in the export trade, they play an ecpially im-
|)oi'tant I'ole in aiding manufactureivs and wholesalers to
lii'ing goods into Canada. Indeed, one of the most im-
poi'tant functions of the hanks is to facilitate the impor-
tation of merehan<lise into the country.
When a Canadian merchant or manufacturer wishes
to import goods from ahroad, he may settle for his pur-
chase hv any one of the three following methods:
( I ) He may s(,nd the expoi'ter a draft on a Loudon
I)ank, in payment for the goods, along with the order.
This in\(il\cs risk in regard to the (juality of the goods,
as well as loss of interest on the amount !)ai(l for them,
lience. tlii< method is seldom followed.
'if
-I
HI
m
478
M0\1■.^ AM) H ASKING
(2) Wlieo sfrHiiii^' liis onler lie may instruct the ex-
porter to draw on liim in payment, eitlier at sight oi
alicr notice. accoivHtiu to whatever teiins have hecn
agreed upon. 'I'o such a rli-alt (ioeuments ( hill oi' l-idinu-.
insurance i-tciipt. etc.) u ill W- attached to he (kli\tred
to the Canadian importi r upon acce|>tanee of the draft.
As the first iiK-thod might iinolve loss to the C'a-
nadian importei-. so iniujit the secoifd to the Knglish
exportir. It' the Canadian customer wvvi- unknown to
the exporter the ordei' would, no (h)uht. he deelinefj: be-
cause, if his (haft were rtfused. he would he compelled
to .NKM-ifiet- his goods at foiv id sale in a strange country.
Credit relations of this sort are usually arranged in ad-
\ance.
But even if the Canadian .should he a highly trusftd
customer, the exj)orter in Spain. Italy, (ireece or (.er-
many would have to i>ay an exceptionally hi ' rate if
he wished to discount his draft on a Canadian I,
same holds true to a less extent for the Knglish expoi ,
This would, of course, all'c-et the ])riee the exporter could
<|Uote. to the dis.uh ntagc (>f the CanadiaTi merchant.
(3) The most .satisfactory method to all concerned,
as Avell as the one most usually employed, is the use of
the commercial letter of credit. When a merchant or
nianufacturei' wishes to impoi-t any considerable quan-
tity of goods he applies to his bank for a commercial
letter of eredit.
In the ;ii)plication to the bank, he gives full j)articu~
lars with regard to the name and address of the exyiorter.
the terms of the draft to l»e drasv ti in pavment. date be-
fore which the goods must be shipped and their destina-
tion, total amount which may be drawn, also whether
the goods are insured liy the exporter, or in Canada bv
the importer. Then, when the ai)]ilication is granted bv
CANADIAN l{ANKIN(i l'R01H.r.M>
Hi)
to
ill.- liMiik. \\\v customer receives a letter of eredil wliuli
I, t'oi-wanled with his order.
'I'liis letter of credit iiiithorizes tlie exporter to d'-aw
.,11 the London aoviits of the hank or its an;eiits in any
othv'r eitv. np to. hut not exceeding, a certain amount of
pounds sterling. Such a draft must he aceompani((i
hv a certified invoice and hill of lading made ou^ to the
Older of the hank, for goods siiipped to the Canadian
ciistonier, according to the terms of the letter of credit.
\V1 en the e\i)orter ships the goods he draws on the
London bank: and j)resents the draft with the relative
tcunients attached, together Mith his letter of credit,
his own l)ank. The hank will at once discount the
hill, and the exjjorter thus receives his money even before
the goods mav have left the coimtrv.
As London is the clearing center for Kuro])e, docu-
iiientary bills of exchange are discounted at a very low
rate of interest. IJoth the exjiorter and the importer
gain by this ])rocedure: the former receiving his money
without risk of loss, and the latter getting a better price
ijuoted on the goods lie buys.
i'h.e Cannd'i-n bank has. in the meantime, forwarded
to its London branch an exact copy of the letter of
(ledit; so that when the branch bank has presented i •
it the draft, with the necessary documents attached, it
at once accepts it. The documents are then forwarded
to the Canadian branch which granted the credit, to-
ffetlicr with advice of the date and amount of the draft
which has been drawn against tlie credit. The Ca-
nadian customer is then notified that the bank liold^
the bill of lading, etc.. and that he may receive these
bv meetiniT the amount due upon the draft. If the
draft drawn by the exporter i- t sight, the equivalent
('\' the amount will be charged .n once against the cus-
'J
ISO
MOMA AM) I5.\NKIN{;
tomci-'s ac't'oiiiit. The (locuiiiciits .U'iving title to tlio
goods will tl'en he turned over to him. But if the
draft should not mature for some time, the customer must
execute a trust receipt hefore he can gain possession of
the merchandise. In tliis receipt he ])le(lgcs himself to
hold the goods in trust, as the j)roperty of the bank, until
the (h-aft is ])aid. In this way the letter of credit })lays
a veiy inii)ortant jiart in the carrying on of the country's
ini|)oi't trade.
.■>l'-'. ('(iit<i(li(ui clearing houses. — The Canadian clear-
ing methods arc carrit'd on partly hy means of credit and
partly hy cash si'ttlemcnts. Three systems are followed:
( I ) At the lai-ger centers are clearing houses of the
ordinary t\ pc. wluic the balances arc settk'd in cash.
As a matter of con\cnience tlie banks use for this pur-
pose Doininioii Icgal-ttiidcr notes of lar'ge denomina-
timi. which ••irc issui'd e\|)rcs,sly for .'is j)urpose.
(2) At some cities of the -• ond lank tiu'i-c arc clear-
ing houses of the ordinary j,c: but the resulting bal-
ances ai'c settled by checks di'awri ori central i-ities.
(.*{) At the i'cmainin}4' ofliees which, of course, cover
the bulk of the branch ofliees. exchanges are made di-
rectly bitwccn the baid<s. aiu. the resulting balances
settled by draft on the nearest local tinanc-ial center.
Tliroughoiil Ontario and '^ucIm c x I tlcnient checks are
dr.iwn ( . Toronto or Montreal; in the maritime pi'o\ -
inccs on Halifax or .St. .John; in the |»rairie provinces
upon Winnipeg: and in liritish Coliiiubia on \'ictoria
and \ aneoin ( I'.
It should 1h obxrvcd that llic Canadian clearing
houses have di'.elopcd no special functions such as the
.\merican clearing houses ha\c done. In the I 'nited
States, jis is ' known, the functions ( t' the i-karing
lu)iises lia\e .n.lcd 'ar bcvond ilu ir orininal \\u\\\-:
CANADIAN iJANKlNC 1M{()HI,1;MS
4S1
until tlu; clearing' houses to-day arc ccntcis tor united ae'-
tion anion<^ the hanks. 'I'liey re<4ulate all (juestions
atf'ccting their mutual welfare, sucli as unii'orni rates of
interest and exchange, as well as otjier (|uestii)ns mT
gi-eater iin})<)rtance to then.. It is hy united action that
the hanks have, in the past, heeii ahle to succcssl'ullv meet
a crisis hy the issue of clearing-house certificates. In
C'an.ida, on the other hand, all matters of imjjortance are
settled eithei- hy the e\ecuti\es of the different hanks or
liy tlie Hankers' iVssociation. the clearing house ])laying
no part whatever in such matters.
In London tlu' clearing-house system is very much
the same as in Canada. ( \ce])t that no cash is lieared
owing to the fact that tlie Bank of Kngland has a mo-
nopoly of tiote circulation withiti the city. Balances are
|)aid hy check on ilie Bank of Kngland. with whom all
tlie other hanks keep accounts. In the l''i:ghVh |)ro\-
inces. as well as in Scotland and Ireland, the clearing
house.', are conducted along almost the same hue as in
Canada.
I*
\ i
C_VII— 31
it
CirAPTKK XXXII
THE RANKS AND THE GOVERNMENT
5i.'J. (rovrrninciit note i.ssiics. — The ])a|KT money of
Canada eoiisists ol' government notes and hank notes.
The t'oi-mer are a full legal tender; hnt the hank
notes are iinested with no legal (|uality whatever, nn-
less the ohiigation resting npon the hanks to accept
their own notes on presentation may Ik' considered such.
The amount of Dominion notes outstanding has in-
creased rapidly in recent years. In 1!M)() the total was
only !i<2(;.:).-)().4(;.'}: in lOia (April .'{Oth) the amount
Avas $1 K}.T4(),7.'{.'{. These notes are of the following de-
nominations (exclusive of $"J7.7S.5 of former provincial
issues not ledeemed, and fractional notes at .'25 cents
each. $7<!.'J..j3«) :
Hi
$1 ^l^.-Sp^.S^f)
2 <>,i;i7,i.'8<)
4 ns.uf)
5 .I.TO.^.'.'.'i'J
.'50 1 5. .'{()()
H)() 7/200
■"'(>() . 2,07 i.OdO
i.<»(i() 5,sn,ooo
.'500 IrfT.iM' lult r iiotrs fnr li.iiiks .'fHri.OOO
1.000 lcjr,il-t( lulcr nods fur Ivitiks '2,08i,l)()l)
5,000 lrgal-t( ndiT i\oUs for limits 7.5,7 ^.5,000
It will f)e recalled that upon the lirst !i<;}(),(M)().(M)()
issued the g(>\(rnin(rit is ohligcd ti) rnaititain a 2.") |)cr
_ I _ _ : ,,_, i' !,! ,,_,,! „!i: _, , i . !
i-'i-iii It .Svr\'t" liiiitie 'ip i-i giHii <iri(i St'i'i i i il i(~S gi in 1 ilTlTl ( »' i
by the United Kingdom; hut at least 15 [kv cent must
48%
THE BANKS AND illl. (i()\ KKNMKNT
4S[3
lie ill «T)1(1. As a iiiattir of fact, the governineiit iiiaiii-
..Mis tlic whole of this reserve, .$7. •>()(). ()()(). in o()l(l.
Notes ;ih()ve «.'J().()()().()()() are issued only on a ^old hasis.
The specie held on Ai)ril .'}(), i;n;3, to fnlHU this ohliga-
tion anionnted to .$«;j,74(),7.'j:j. It will he seen, there-
fore, that the Dominion notes are, in reality, gold cer-
tificates. The act is jjlainly inodell'd upon Peel's Act
(if 1814, which perniitted the Haiik of En-^'land to issue
notes up to a certain amount on securities, and heyond
that ])ound foi- jxiund on uold.
The hanks are ri(|uire(l hy the government, under the
Urms of their chart rs. to kiep 4() ])er cent of such re-
serves as they determine to hold, in Dominion notes.
'I'he hanks i)uy these Dominion notes with gold. From
the goverinnent statement it may he seen that on April
.'{(), im;}. the hanks held ahout .S7S.()()().()()() in large legal-
!i ikUi- notes, which are used in jiai't U^^ reserves and in
p.irt for cl(;ning-house purposes. Ai.. .', >< I. "),()()().()()()
of the rest of the Dominion notes i- used hy the hanks
as till money, Iea\ ing oidy .S-J(),()()(),0(K) in the hands of
tlie pe()j)le.
As has Ikcu shown, against uie paper moncv of the
Dominion the vaults at Ottawa contain somewhat more
than $!»1.(M)(».(K)() in gold. Many linancial critics have
iiiiiintaincd that this is an excessive reserve, and an utter
\\;istc of a great amount of capital that oug'it to he out
the world doing husincss. It is said that conditions
II n( \(r ai-isc in Canada, sjiort of its con(|ucst hy a
i.ireign foe, in whicii government notes to the extent
nf over SI(M>,()(M»,(M)0 vvouhl l)c presented at the receiver-
U( neral's oMicc with a demand for gold. The critics of
■ :,v pit"".; I'il j;;:iii y ili.'i liitiiiii liiiir iiii iiSt V\i i.,u K ui iiic
Dominion notes might he placed at .50 per cent of the
i^-sue, instead uf practically dollar fur dollaj- in gold.
Ill
1.1
m
J
i
<3
i
Jl
la
484
MONEY AND RANKING
This would reduce the amount of idle /'old l)y $-il, ()()().-
000, uiulei' present fotulitions. It' the \a\v recjuirin^ the
banks to keep M) eeiit of their reserves in that case
remained as it is, ihe gold lield against tiie large legal
tenders in possession of the bunks would l)e redneed fiom
$7H.()()0,0()() to .^.*{9.()()0,00(;. The further suggestion is
that the ."^.'{D.OOO.OOO in gold ^hould he used to reduce
the national debt or s])ent by the government on na-
tional works. In this way the national ))urse would gain
j;t least i^l .'JoO.OOO a year in interest, and the banks
A\()uld still be amply secured against any eoneeivable
(!< maud foi' gold.
Xow, the chai-tered baidxs held on May '.M. 101.*), in
round numbers, .S-1.(),()()0.00() in spirie and $J):},0<)(),()()0
in Dominion notes. If they held inci'ely !■(> \)vr ci-nt of
their cash reseini's in Dominion notes, it would amount
to .$.5;},0(»0.(I0() only. As a matter of fact, however,
they keep siune SK». 000.000 of Dominion notes in tin ii-
reser\es more than the law re(|m'res. 'I'his they do be-
cause of the ease with wliicb legal tend<'rs can be .sent
to the dill' I'eiit bi'anch b;inks foi- use in their reserves.
That tluy would contimie tn d'> so i!' the law were
changed in the maimer descrilxd is more than doubtfuL
If Ihey reduced theii' holdings of legal tenders to the
amount that the law prescribes, that is, to !t^.")."{.000.-
000. the government would gain in intei'cst only on ;iii
i.s.sue of about •'^•JT. 000. 000. ;ts far as the large legal ten-
ders ai-e eonc( rued. That would be a paltry gain in
icinrn for tluenh ninn the gold reserves of Ibis eoimlry.
already tno srn;dl. .\nd despite what has been said by
those in f;i\ or of the plan, the n( w order of things would
I i.i«^ .. . .... —
MOl HiUKt. iiii i/Oniiiiiuii iioits ;in ^^(loii ;|s i4oi(i. f\ 1 1
doubt in normal times llu \ would continue to ciriulati'
at ])ar. as long as tlity were payable on demand in gold.
TIIK HANKS AM) Till" (iON l.HNMr.N'l"
1^
and as 1imi,!4 as tlit jjeopk' deinaiKkd lliciii as a im-diuiii
1)1' (.-xchangt* and Hie hunks conliniK-d to use theni in •
tlnii- ivsLTves. Hut if the <i,o\ criimmt sci/ed the oppor-
iiitiity to make further jjrofits l»y extending- the issue of
I he sniaUer cK-noniinations. the time rnij^iit easily come
whiii a iiation-\vi(k' (hsaster would depress their value.
Aside from the (|uestion as to whether the govern-
ment should eompete with the hanks in issuin;^' a credit
iiiireney to the people, there is the serious prohiem of
niaintainiii<i; an a(le(|uate '^nld reseI■^•e 'u the eountrs.
The pro\ ision of the law eompelliu^- the hanks to keip
to per eeiit of their reserves in <^()vernment notes was
enaeted at a time when the Dominion needed money,
and souuiit to find room for the eireidaticn of iis notes.
i"he hanks would strenuously ohjeet to eh;mo-ino- the
essential eharaeter of the notes at the i)resent time; and
would prefer to keep thc'ir ow n j^old rather than have the
4(»\trnment deplete its j^old reserves. It may t ven he
.|uestioned whether there is suHieieiil ^old in the eoun-
li\- for the husiness done. The total lial)ilities of the
•ji ehartered hanks on May li\, I'.M.'k were J<1.--'77,'.>41,-
.V.>7. .\f^a!nst this the haidss held in k^j^al-tender money
■^ I ;{.■{, l.'}.*)..'}!"-*. This sum was eomposi'd of nol,! and
1( oal tender notes piaetieaily «^'o!d. Now. if the u'ov-
ernment should hold in ^old a reserve of only .")() per
(■ml a^-ainst these notes, it is plain that the position of
llie haidxs. as well as of lh<' eountr\ . would l)e wi'aki'iied.
I )niiiinion notes arcworthless for intrrnational exehan^e.
althouiih they are a full le^ai tender in ( ;ma<la. It
would seriously weaken Canada's inlernatittnal posi-
tion if her present sm.-dl stoek of ^old were seriously
'i!:ninisln(l. It is (juite eoneeivahle that in certain peri-
ods foreif^n inxcstments in Canada will fail off: and
Canadian seeurities might he sold in large (plant it us hy
.-}?
ISO
MOxNKV AM) IJANKIXG
K ■:
iorc'i^ii holders. Tliis. addi'd to heavy imports, vrould
seriously allVet the rale of exchange: and a small stoek
of gold would not re<4ulate thi' situation. It is jjerfeetiv
clear, therefore, that the ,^•overnnlen^ would he ill-advised
to threaten the supply of oold l,y e.\iK'rimentin<^- with
the Dominion note issues.
.")44. Td.vini:; llu Jxaih's. — Some Canadians have eom-
])lain(d that the hanks are given special favors hv the
government, for which they |)ay nothing hy way of uix-
ation to th country. One man. for example, who
appeared hefore the C'ouimittee on Haid<ing and C'om-
meree in April. 1;>1.'{. said: "'rhe hanks have been given
a monopoly oi' the haidsing husines- of the country. In
addition they aiv j)ermitti(l to issue currene\ to the
extent of their paid-up capital at no greater cost than
that of the engraving and ])rinting. This amounts to a
virtual gift from the government of ^100. ()()().()()(). 'I'his
currency is not suhject to a tax of any kind, and instead
of iieitig secured hy gold nr goxernnicnt bonds il^ is se-
cured hy heing made the preferred creditor against tlu'
assets of the })ank."" This statenuiil is txpical of many
similar criticisms. It is hardly neees^^ary to draw atten-
tion to the fallacy that tin- government conlrihutes -SlOO,-
OOO.OOO to the hanks, hy permitting them to increase
their lialiihties to that amount, lint the (luestioti of tax-
ation, which comes up again and again in (':!nada. de-
serves some considci'ation.
It is true that the lederal goNcrnment dot's not tax
the hanks: iml llicy paid in the se\ti-al provinces in
li»]'_' ahiMit .SnT.ii'H) h\ \Ka\ of taxation. This takes
no account of local ta\(s on red tstatc and special
licenses and fees in certain citiis. I"or ( \ample. Halifax
charges each l>ank $1.(100 yearly and I If. of 1 |)er cent
U[)on i!i<' axerage \iilimie of husincs> done . including ;dl
4-' r
THE BANKS AND TIIK GOVERNMENT
487
loans or investments and current and savin(?s deposits.
The niininiuni so jiayable is $7.'}(); but a bank may eom-
nuite for its I'ees and taxes by paying $;J.()()0 yearly. In
St. John. X. IJ., a munieipal tax of 1/12 of 1 i)er cent
is imposed upon the average vohime of business done.
as in Ilahfax, X. S. In .Montreal a s])eeial license of
S(i()() is exacted from each head oflice and if^lOO from
each branch. In Quebec C'i^v the mumcipal license is
SI, ()()() with $2()() for each branch. Montreal also im-
poses a tax of 7' 2 ])er cent on the rental value of the
hank premises, aiid Quebec a similar tax of fJl- per
(■(lit. These taxes are in addition to the real-estate taxes.
Ill Ontario the law ])rovides that banks shall be assessed
lor a sum etjual to 7-) i)er cent of the assessed value of
the real estate occupied. On this sum the local rate of
taxation is levied. This is. of course, in addition to the
local tax on real estate. This tax does not amount to
as much as might appear; for the assessment of real
(State in Ontario municipalities is much below the mar-
ket value. The banks in Toronto, therefore, do not i)ay
nearly as heavy a tax for local purposes as those in
Montreal.
Talking the i)oi)ulation as given in the 1011 census, the
number of inhabitants i)er bank for these five cities is as
i'ollows:
' fi
I'opul.ition
Toronto .'i7(i.'2K)
Montreal l()(l,l!)7
(^i.'Ih'c TH.'XiT
Halifax «■(;.(;() 1
.St. John i'.'.i!);)
NmiilitT (if I'tr-
Bank Offices suns to 15 ink
U.-i 2,.)!>t
!)7 4,806
'.H\ .'<,()() -2
!',> 3,88-2
IH 2,656
Tt
IS ;tvo
!)• Die that the lieaiv taxc
in ^Montreal have
ha<l somethi ig
to do in bringing about this result. It is
488
MO\i:v AM) HANKING
L « .
char thai when a miiiiicipahty levies heavy taxes it is not
l)r<)\ ided with the same haiikiiin- faeihties whieh it other-
wise would .secure. The hanks naturally, whenever jjos-
sihle. transfer tliese taxes to horrowers, especially upon
customers not of the first class. In some form or other
they endeavor to earn these ta vcs; and it is only fair
to j)ut these on the locality where they are levied."
The proj)osal which lias found most favor in the tax-
ation of the chartered hanks i)y the federal government,
is to levy a tax on circulation. At one time the hanks
did j)ay a tax on circulation; hut in 1870. when the aov-
ernment restricted their note issues to $.5 and multiples
thereof, to make room for Dominion le<)'al tenders, the
tax was repealed. It was felt that in a new and unde-
veloped coimlry. such as Canada, the hanks sliouhl not
he hurdened in furnishiiio' accommodation to the ))eople
hy a tax on note issues, since in tiie country districts
notes fiii'in the principal medium of exchan<4'e. That
reason holds ,o(),),l to-day. .\ny considerai)le tax on cir-
('ulation. as has already heen pointed out, would un-
douhtedly ohlioe the hanks to close their hranches in
the small country districts, especially in the AVest. It
is scarcely realized to Avhat extent the hanks have pro-
vided hanking- accommodation to the towns and villages
of the West. This is seen hy a glance at the following
tahles, which show the numher of hanks in the cities,
towns and villages in the four western provinces — Mani-
toha. Saskatchewan. i\ll)erta and liritish Columhia.
(In this c'omiection it should he noted that IJritish C"o-
lumhia's jjopulalion i^ all contained in the cities and
large electoral districts.)
it-.
Tin: IJANKS AND '11 li- C.OXKUNMENT
489
I
'r()\ met'
No. of
Citits
Allurt;i <i
ISritisli ( ()liiiiil)i;i .... I'l
M iiiitob.i t
2 S i''k;\tclic\v.iii 1
li.WK oil i( I..-; i\ 11 11. ( nil s
;;!)
H.iiik
l'ii{iiil'it ion
Popiilitioii
Oll'u'cs
to Hank
!)().'2.")'i
(il
l.!Si»
',>();i.()81.
1 I'J
l.l:it
lO.S.'il!)
().")
'J.jl 1
C^.',•29^
t-j
l.lS.'i
■-lii.tT!)
.-no
l.liTtl
BANK OFFTCE.S IX I N( OHPORATKD TOWNS
i'ro\ iiu'O
Mli.rt.'i
Nl.niitoha . . . .
."^ isk.iti'liewan
Xo. of Hink l'o])iilitioii
Towns l'o|iulition OHiecs to Hank
'27 'J,-).S,S1 r>r) \-~\
■2t 'i().!)'2G 47 r,i:i
51) .'57..")01 97 '587
<)<).;! I 1
!!»!»
1,V1.
15ANK OIFICKS IN INt OUPORATKl) VIM ACiKS
No. of
Trovince Villafri s
Allurta 8-2
Manitob.a '21
."^ iskatc'liewaii .... 1!);'
I'o])ulation
2(5,779
10,190
;5l.,")9()
298
6a, .')().'
Bank
Ortic.-s
70
20
l.-.l
'2 11
Po))nlation
to Hank
.'iS.'i
509
209
28i
Tlicse fipfures sliow tliat a tax on note ciirulatioii
vvdiild foiTi' the banks to do.se many of tlu'lr olFicos in
ll:c ^Vest. While, no doubt, tlie ])anks have a valuable
iianeliise in tlie power to issue notes, tliey a|)])ear to
be giving' a suttieient return in serviee. Xo other l)ank-
iiio- system in the world ean show a better record in
briniriiijr banking- faeilitie.s close to the people, especially
' . il- „ i. ] '. I ..! ^.t .. \ fii-v- i\i\ /■! l*r •! l1 ') f w U I H'Mlll/l
J i i i I iv." Vwl • I i I ; '» ; ; : ~ ; : ;^ "^ ~; . - - ■--.-- • -: !
result merely in im])airinj2: the s<'rviee ol' the banks to
!lie people: ;uid in the last analysis it would be j)Mssed on.
490
MONKV AM) NANKING
fe
ill })art at least, to the eustoniers ol" the I)aiiks. Vvn-
posals to tax the eii-eiihitioii of the hanks, therefore, are
ill-timed. W'liat is wanted is not only inoix- hank
offices as the eonnti'v <^i'o\vs, hnt more money a\ailahle
for loans in the West. .More eapital is needed for C'a-
nadian hanks; and that is not likely to he seenred if it
is tliou<.>ht that the i4r)\crnment intends to restrict hank-
ing- o])erations thronf^hout the country.
.54.>. Mont/il// stdtfuicnts to ilic i<;()vcnimcnt. — Under
the act chartered l)aid<s are ohli^^cd to make a monthly
statement of their assets and liahilities to the govern-
ment. In tlic revision of 1 !>!.'} the schedule was modi-
tied somewhat. {)ro\ iding foi' a moi'e detailed statement
of a hank's affairs. A well-known ' .k manager has
expres.sed the o])inion that these returns "are not \vorth
the paper they ai'c written oit": the reason hcing tliat
fi'audulent i-eturns from !)anks that ha\e gone into
li(luidation have heen included in the general statement.
AN'hile it is true that statements hy such defunct insti-
tutions as the Ontario Hank, the Sovereign Hank, and
the Farmers' Hank have heen necessarily included, and
have thus vitiated the results I'oi- the ])uri)oses of com-
parison, it yet remains true that, on the whole, the state-
ments have heen honestly made. At any rate, they
furnish the only figures, concerning the condition oi' the
banks, available to the ])uhlic.
It is not neces.sary to make a detailed analysis of th''
resources and liabilities of the chartered banks; but the
chief items which bear upon the standing of the banks
may be briefly set fV.rth. In order to make clearer the
growth of the banking ])ower of Canada, a comi)arisoii
1907 — a memorable year in Canada as well as in the
United States— and their jjosition in recent years.
rili: BANKS AM) Tin: (iOVKRN.MF.N'l'
M)l
I'ii'st. tlif extent of the loans and deposits and their
n lation to one another may l)e eonsidered. ""Current
Iduns in Canachi"" rei)re.sent the money loaned within
theeounlry for eommereial pin'poses, and do not inehide
the i-all loans whieli are hased on stoeks and lionds. 'I'iie
il( posits inelude tin dejjosits in Canada (- y. and eon-
sist of those payahle on demand as well as those pay-
;i!ile al'ter a fixed date. The sum total of these i'et".rns
at certain speeitied times was as follows:
C'lirniit l.o.iiis l)t posits
May .'31. liH.I $8!)H,II."<S.(H)0 $99 K!) 1 "'.DUO
l).("tnib<r .'il. 191'^. 881 ..'!.il .001) 1 .01 'J, H 8,000
Jiii'f ;!(). I9l'j ,si-s.9K).oo() i.ooi-.siT.noo
June ,')(), 1907 ;")8(),!);i0.000 .TSj), I- jO.OOO
Ratio
90%
877o
8 1-%
This statement illustrates the remarkahle (growth of
Canadian hanking in reeent years. It indicates, too.
that the hanks are not so heavily committed in the way
of loans as they were in li)()7. Perhai)s it would he fair
to say that the hanks lia\e heen more careful and con-
s(r\ ative in making their loans, excluding as far as j)os-
sihle those of a speculative nature.
A better survey, liowever, of the recent position of
the hanks may be obtained by finding the ratio which the
assets that may be (juickly reali/.ed upon l)ear to cur-
it'iit liabilities. Cash resources consist of specie and
Dominion notes. For ])urpose.s of comparison the cash
reserves of the banks on certain selected dates may i)e
shown as follows:
1 )(iiMini/in
\(?tcs .
Total .
.May. 191 ;i Die. 191-2 June, 1 91 'i .June. I907
.tK),;?'2.').()7f) $.S.5.780.3fJ.S ^:i7.\'-2-2.76r) $'2i,H)I.()(l,S
9;5.io9.(),'i() !)i-..'J8i.i8i- !);i,()i.s.o.'i9 t:..5j t.i8-2
$13.S,i35,81'2 .$1.'50..S()1.,817 $130.170,80i .t()9.(i.').'i,78r)
'at;- '-
492
MONF.V AND HANKIXG
In tlic six years siiifc 11»()7. it will be uutcd that tin-
cash reserves have almost dtxihkd.
Another inipoftant item in the lianks' (juiek assets is
the excess of halanees <lue to hanks from as^eneies or
othei- hanks ontside of Canada above tlie amounts due to
outside a^a-neies or other hanks. Tliese amounts (000
omitted) aiv:
May. 'l.-i
Balances due fr<ini
L'liiti'd Kiii^dciiii. . ."fjl ,S.'{5
lialaiiiTs dill' from
(■Iscwliirr 27,8'2G
Total $J.9,66l
B.ilaiiCfs due I'liilt'd
Kingdom ■fP.^O,")
BalaiK'ts due tlsc-
wliere 9-<)7.'5
Total $18,880
Excess balance .... ^0.781
D.e., l-,'
June, 12
June, 'U7
$1(1.1 1!)
$28.0()i
$10..'!00
2.'5.t.'ij
31,887
1 ..771
l-'^a.-^jl.
$62,891
.$25,071
$S.,'!I-2
$6,129
$12,210
7.082
7.5f)7
5,891
$15..'?9t
$l.'?.99(i
$18,101
18.1()0
i8,895
6,970
Canachan hanks, as lias l)een explained, maintain at
all times lar<)e amounts abroad at eall. largely in New
York. On May .'Jl, 191.'}, this amount .somewhat ex-
ceeded Sixi.ooo.OOO. These loans are (juick assets, and
ai'e available in Canada when needed. Call loans on
Canadian stocks and bonds, as already explained, can
hardly be included in tlie category of assets that may
be (juickly realized upon, except in normal times when
they are considered with more justice as call loans. In
])eriods of stress, however, call loans on Canadian secu-
rities are regarded bv the banks rather as fixed loans.
'VU(, Ilov,].' i^f A[.'t!ltv.-.il li'!-;
,;i 1,
r\.. ..,,!..
whatever. So-eallcfl call loans in Canada ^v•ere fairly
steady in 101.*] around -'i^TO.OOO.OOO.
THE BANKS AM) THK (lOVKUNMENT M».'{
Along' with the foreign call loans should he c-()n>i(lcir(l
current loans mIji-ojuI. These latter are distrihuted
through the I .lited States. Mexico. C'uha, the ^Vest
ludies and elsewhere. On the liahilities side must he
considered the deposits received hy Caiiadian hanks
ahroad. These several accounts ahroad conipaic as fol-
lows :
M,iv, 191 ."^
D.ccmkT, lpl'2
.hiiH". 1<)1'2 . . . .
.lunc, iy07
C1II Loans
.$96.1 -.1, '20!)
10,5,0.52.101
l'i0.5()9.812
55/298,873
Currrnl Loans
$3 7. 6<) 1.7 8(5
i0.n90,!'2()
.'U.'251,()58
'2;5,;i88,,'2.59
Deposits
?:97.9;i,"),'21(i
87,050.132
82.0()7.093
59.17<).'iO(j
It will be seen from this statement that the funds for
current loans abroad are jirovided from deposits re-
ceived abroad. On ^Fay .31, lOl.'J, dei)osits received by
Canadian banks abroad exceeded by .^C.O.OOO.OOO the cur-
rent loans ahroad. As the foreign call loans aggregated
over $9(),()00.0()0. it is manifest that some !^;j().()()().()()()
of the amount loaned abroad on call is Canadian funds.
But. as has been explained, these call loans form ii
secondary line of reserves for Canadian banks.
A fourth item in the list of assets, which may be
quickly realized upon, is the holdings of railway and
other bonds and stocks. In so far as these are held
abroad, they may rightly be considered a cpiic-k asset,
although when held in Canada their right to he consid-
ered as such may be open to ({uestion. The holdings of
Canadian municipal .securities can hai dly be regarded as
quick assets, under certain conditions, as in 1913.
Coming to current liabilities of the banks, it is fournl
that they consist of three items; namely, circulation, de-
nosiiS and hal'incos du.f- povcrnmcnts. The latter are
divided into accounts due to the federal and provincial
governments, respectively. Deposits consist of those
494 MONKV AM) BANKIMJ
payable on dcnuin;! -L'posits j).'iyal)le after notice on a
fixed (lay, and deposits received elsewhere than in Can-
ada. These various items for the dates considered were
as follows (000 omitted) :
Drposits May. 'l.'i I)(t.,'I,> June, '12 Jtinr, •():
Oil (irniaiid .. . . !f.S() k 1 ,-.!) $.(7!). 777 .*:i7;!..')00 $170,012
<'" '|'»ti''' ();i().7:.,-, ():i-j.(in ().'!1..{17 4.0,H7
'^'"■"■hI J)7.!).i.") S7.n.-,n S'2.0(i7 59,171}
'•'"'■'J .$1,01)2,81!) .$I,0yf),t()8 *1,08().88 ). ,t6l8,(i.-f.-,
Amonpr the assets of the Canadian haidvs is carried
an item made up of "notes of and checks on other
hanks." which is merely an inter-hank item On tnis
account it may he deducted from the current liahilities
of the i)ard<s as a whole. The relation of current assets
to liahilities may then he compared as follows (000
omitted) ;
Qn!</,- .t.ssrl.<! ray. 'l:{ n.T..':2 ,Iunr. M: Jnn.. '07
( a^^l: r.s.. lines .$1 .'<.'{, t.1.-. ,< 1 JS..;!) |. .i^l.iO.lTO ,'f(i<).«i.-,.-,
I'accss for. i^r,| halaiicf. .•i(1.7H0 17.'-!(il H).7!):! (I.'CO
( il! loans aliroail . . . <)(), I "i 1 m.KJCrJ 120. .")()•) .'>.'),2!>8
Railway bonds vV stoiks (17.021 ()8,8K» ()2,2!)2 H.-SSI
'■'"••'• if!.'i27..''S7 •*.{20. n 7 .t;?()2,H2 !■ ^'I 7.'f,;io \.
Ciirrnif f.iiihllitirs: May. ||l|.l D.r., |<)|J .luiif. I!H2 .Iiitic, 'o7
< iri'iil-itiori •■T'n)2.!l|)7 .*ll(i,(US .-^^102.011 .*7:i.:i 1 1)
'*'l"'^i'^ I.O!)2.8,-)0 1.0!)<j,Ki8 1.08(i.H8|. (il-S.fi;i(i
J{ai inrr iliii ■^(i\ -
"■""""t^ .•<!),7.'50 .'JD.rtl'i .S7.288 l.-J.fjH
'l""t'>l .i'l,aH5..5;)7 $I.2I!).IJ,S ■*l.22(i.l8.i •+7.if).787
Less iiolcs of and
rlirrl<s nti otiicp
'""'^•^ 6l,.'SRfi 81.68^ ,'57.7,5,'? Q()'\[G
'lot il .*l.l7i.2ll ij«!.lfJ7.iU >l.l(;s.^.■^o $710,271
itilin ( [irr (imI ) . 27.8 27. !• ;<1.0 2 1 . ."J
Tin: HANKS AM) THK r.OVKHNMFAT
v.)r,
h
ill
'riifsc statements cover the eliief returns of the hanks.
,111(1 showtliat tliev have steadily improved their |)osition
ii! reeent years, although their husiness has greatly ex-
])anded.
:U6. Government jiostal and i^nrina^fi hnnJxS.-- The
un\ ernment comes into direct e()mi)etition with the char-
ti red hanks through the ])ostal and government savings
anks. The jiostal hanks were estal)lished in 18(')7, al-
oiigh they did not hegin oj)crati()ns until i\])ril, ISfJH.
There is also a system of savings hanks under the eon-
tiol of the minister of finance. Prior to C'oid'ederation,
■A svstem of savings hanks was in existence in the mari-
time provinces, under the control of the ])rovincial gov-
( itiments. These hanks wei-e taken o\er hy the Domin-
ion in 1H()7; hut the system is gradually heing ahsorhed
hy the postal savings haid<s.
rntil IHD'J the amount deposited l)v one person in one
year was limited to $.'}()() and the total deposit could not
exceed $1,000; hut in 180'J these amounts were changed
to $1,000 and $;j.000 rcsi)eetivcly. The average deposit
is hetween $200 and $.'{()0. which indicates a patronage
hy others than those l)i'longing to the working-cIas>.
In (ireat Britain the average deposit in the postal sav-
ings hanks is $7.^, and in Helgium ahout $<>.!.
It was originally provided that the deposits should he
in\csted in Dominion securities, hut in 1H7.") this law was
I (pealed. The deposits are now handed over to the
i( ceix er-geiieral to he used hy him on currctit account.
W'ifhdrawiils are paid hy him. 'I'his creates a floating
iiidchtedness of ahout $.")7.000.000. payahle on demand.
I-'or more than twtnlv yeais the rate of interest was
I p<, I cent, hut it was reduced in IHHO to .'J' '._> per cent,
'^^iM in i oW I TO ii p* ' i"i"iit. '»»ii("ii' ii ri»''."» SitifWi^. i TiiJ
I hart ml hanks ha\f had to fnllow dose'y the late pai<l
ail
:to
m
H!
4
49(i .AIONKV AND BANKING
ill the postal saving.s banks, and this has led to much
criticism of the n()vernnu iit's ])olicy Indeed, it is about
the only complaint made by tiie hanks as a whole. The
receiver-jifeneral maintains a reserve of 10 jier cent of
the total deposits in j^'old ; and a balance of about $o()0.-
()()() w ith the chartered banks to meet withdrawals, these
being paid by check on the banks.
As has been said, the chartered banks object to the
comj)etiti()n of the postal baid<s maiidy upon the ground
that the ii ])er cent interest rate on deposits is exces-
sive: and that thev are foi-ced by the action of the aov-
crnment to niaintain the same rates. They |)oint out.
further, that this money costs the govenunent a good
deal niiii-c tha?i .'{ j)rr c( tit. wjien the ex{)enses of man-
agement are also considered. Although a considerable
sum is placed at the disposal of flii' govermiient by the
depositois. that money must be always subject to pay-
ment j)ractl("dly on demand. The bankers argue thit
the government could secure the same amount of fun(! ,
])ayable only at a fixed time, at about the same interest
rate. !)y the sale of its bonds. All this, of course, is re-
ganling the (jucstii-n nurdy from one point ol' view.
The (|uestion of interest paynu nts. thtii, is the one
that specially interests the iliart<re(l banks. Thev in-
sist that •'{ per cent is loo much lo pay when the cost of
manageuicnt is .-dso considt rrd. Just wjiat is the cost
of management is indicated by a statenuiit fuiriished
on .\i)ril 21', r.»i;{. by .Mr. .1. K. Hourke, Controller
of the ( ii'Tcni-y :
( ii.st jti r ('(///, n'lr lilies hfin!. dcjxisil.s.
Cost of managinicni and interest paid:
( Jo\ (1 luiicnl sa\ inns banks .'J.i j' ;
I'osf-otliff' sa\ ings b.ntks ',i.]'2' ,
A\( rage rate .'J.I.'J.T .
Tin-: RANKS AND THE GOVKRNMKNT M)7
To which niiist he add'd intcivsl oji ^old reserves
(10 per cent of hahmce) and interest on l)ank hahmee
iKjiiired to f)e held to meet withth-awals (say J^oOO.OOO) .
l''Ji'eetive rate allowing interest on o^old reserves and
liaiik balances at 3 per cent, .'}.t51 per cent.
/'or fixca] !ic,ir l()l 1 12.
Average balance (tleposits) $57,()()(),()()()
Expcuxcs:
Salaries. printin<r. etc 12().0(M)
Interest piiid depositors l.()H(). •'$(>.'{
Interest at .'{ per cent on ^old riservc of
>i<5,7(i(),()()0 172,800
Interest at >\ j)er cent on bank balance of
$500,000 1,3.000
Tocal $l.t)HH,10.'J
Under the ren;nlations, deposits bear interest from the
first day of the tnonlli sncceediiig that in wliieh the de-
posit is made, and interest is charged on withdrawals
from the first day of the month on which the w ithdrawal
is made. The gain in interest which is thns made (S.'jc,-
.'!!>S) offsets the charges for rent, fnel and liglit. A
more detailed statement of the cost of management and
interest paid follows:
(lo-icniincnt fidxiiiffs Ixnik.
Ax crage balance dm ing !!ni-r„' *U.000.000
Salaries, etc S'iO.OOO
Interest paid 421; ,800
Total *t.V-'.H00 a.U^o
(,— \ 11 .;:
4f)S MONKY AM) HANKINCi
Post -office .sa'citi^.s hanks.
Avera«re balance dvivm^ 1911-12 $43,200,000
Interest i)ai(l $1,257,503
Estimated cost of nianagenient
(salai'ies. eonmiissions. print-
ing, etc. ) 90,000
Total $1,347,503 3.12^'r
i ■
It Mill l)e seen from this statement that the govern-
ment pays virtually 3l [, per cent for the use of these
(lei)osits. when interest and cost of administration are
included. On the other hand, the Dominion can borrow
in the London market at about 4 i)er cent. It will be
si'cn. therefore, that little gain accrues U Mie Domin-
ion througli these banks. On the other liand, they have
not greatly stimulated savings; for the deposits have
remained almost stationary during recent years. When
it is recalled that the chartered banks have branches in
almost every town and village in Canada it can be seen
that the need for |)ostal savings banks is not very acute.
They draw money away fiom the commercial banks of
the country, that might otherwise Ik- ctnj)loyed in the
business of the nation. i\^ long as the chartered banks
ai-c willing to receive deposits of $1 and u])v.ards, and
aie willing to furnish banking faciliti(^ to every section
of the country, it cannot be said that there is any great
need for government banks. Perhaps the oidy justifi-
< at inn of postal savings b;mks is that they regulate more
or less ttic interest rate i>aid on dej)osits by t!ie rhartercii
banks.
547. dit'fipcr niiricnitiiral credit. — Heci-ntly a stn.ng
fi(>man(i has t)eeri made, especiaHy m xhv \\ Csi. ior
cheaper credit facilities for tl farmers. It is hoped th''
THE BANKS AND Till: GOVKllNMKNT
tno
■: ' H :
oovernment will eiu'()ura<?e the formation of co-opera-
tive credit societies, or else will make loii^-timc loans
to the farmer somewhat after the Australian plan. The
government of Saskatchewan lias displayed the greatest
interest in this movement. It sent a commission to Eu-
rope in 1013 to study the question, and to make sugges-
tions for some measiu'e that would result in furnishing
credit to the farmers at a low interest rate. This is a
l)rol)lem that has excited also the deepest interest in the
Iriited States.
Could rur.'l co-operative, credit societies be safely
formed, the farmer would undoubtedly benefit. The
farmers in the West are, as a rn\c, of the debtor class;
although many are in a \ery j)rosperous condition.
These latter have comfortable homes, own automobiles
and may evcji ])ossess a bank account. They prefer to
conduct their business on the principle of keeping out
of debt.
But many of the more prosperous element are not
independent of the banks. In a sense, all farmers are
interested in banking, whether they have a siu-jjIus at
the bank or not; whether the ruling ])rices are high or
low; whether their business is j)rosperous or depressed.
.Mniost all farmers can make use of c/edit to improve
tlieir condition, to make a good farm better. Moreover,
it is not at all certain that the farmer who makes it a
rule to keep out of debt really does so. 11' he has no
•surplus he recpiircs credit for domestic ])urposes, arid to
larry on his business. 11 is i?i(lebl(Miness to tjie store-
keeper is as real a^ if !»' wcrt^ iiul' hted to the banker.
II has the ad(]e<l disadvantage that the system of bny-
'4 on credit from the store-keeper is likely to cause a
iiueh greater consumption of his means than would b*.-
< titailed liy any interest rate he would pay his banker.
rll
.500
MONEY AND BANKING
For, in the first place, tlic store-keeper who sells on
credit must buy on "ion^^ time"; he thus starts in hy
payin<4' 'long time" prices, and he nmst, therefore,
char'^e "lono- time" profits. Tlie farmer may, indeed,
be surrounded by credit stores, and may pay up to 100
per cent for tlie use of money; although all the time lie
is under the impression that he is living up to the prin-
ciple of "keeping out of debt." The fact is that he will
be really out of debt o?dy when he can keep an open
bank account Avhich will enable him to place his busi-
ness on a cash basis.
548. Co-operative credit s()ciefieft.-~\y\\] the co-opera-
tive credit society permit him to do so in Canada? To
a certain extent that has been answered by the establish-
ment of co-opcM-ative people's l)anks in Quebec. M.
Desjardins was the originator of this movement in
Canada, and, in fact, upon this continent. He organized
the co-o])erative bank of Levis in 1900, of which he has
ever since been the i)resident and manager. The suc-
cess of this institution was so striking that many similar
societies have been established in the Province of
Quebec.
Knowing the prejudice of the French Canadians for
anything resembling uidimited liability, M. Desjardins
adojjted a princi])le similar to that prevailing anions
the mutual savings baid<s of the New England States.
In these there is no capital stock, the depositors alone
])rovi(lingthe fimds, and enjoying the right to withdraw
their money almost at will, a mere notice being required
if the necessity of so doing arises.
The working capital of these credit banks is com-
posed of shares and deposits. The distinction between
a share and a deposit is that the former is made up oC
savings with a view to providing for needs more or less
THE BANKS AND THE GOVERNMENT
501
Rinote. The sliares are similar to tinK' deposits. The
deposit consists of money put aside for daily use like
the checking accounts at a hank.
Tlie main idea of this system is very largely that of
tiic uncai)italized savings hanks of the United States.
There is this difference, however, that the savings of the
working classes are loaned to such working people,
^\hetiler in tlie towns or tlie country, as happen to he
in need of funds. This has eliminated the professional
money lenders and the usurers who have taken advan-
tage of the necessities of the ])oor.
Tliere is hut one rule which guides the policy of
making loans — the sums advanced nuist he put to some
leally useful and productive purpose. Experience of
more than a century in Europe, and of thirteen years
in Quehcc. proves that institutes of savings and credit,
in tlie form of co-operative credit societies, are prac-
ticahle among the huuihler classes.
It should not he forgotten, however, that the co-oper-
ative people's hanks are associations deaUng only with
their memhers. The j)ersonal factor, therefore, is em-
phasized, (iood habits and j)ersonal integrity count for
much in these associations. Moreover, the societies must
he restricted to narrow circles in the community; for the
whole scheme rests upon i)ersonal contact and per-
sonal knowledge. Tlie basic idea is not the building
up of huge societies; hut rather of societies that
will he able to look after the wants of their borrowing
members.
Eoans may he made for long peri^xls, even for ten or
lifteen years, once the guaranty fund, made up of sur-
])lus ])rofits. has reached a certain proportion of the
g( neral assets. Intenst rales are made as low as the
average rate in the louiniiniily : but they must be matie
III'
f\
III
■!i
'f
502
moni:y and baxkixg
sufficiently liii-h to i.^Anwi hiiuls to the society. While
these co-operative credit societies have proved of ^reat
service in the Province of QMel)ec. in their limited
si)here, it is douhtiul whether they would prove an e(iual
success in the Kn^lish-speakinn' provinces, and especi-
ally in the i)rovinces of the West, it is the opinion of
many mIio are entitled to he heard on such a matter that
they would not. The humbler classes would prefer the
])ostal savings hanks as depositaries for their savinos
to any co-()i)erative society. In the West the diffi-
culties in the way of estahlishino' such societies are
even greater. For one thing, the population is in a fluid
state. The peoi)le are not intimately acciuainted with
each other. They would hesitate to make a full state-
ment of their affairs to a conmiittee of their neighbors,
as IS necessary in granting a loan by a credit society.
JMoreover. their business operations are conducted on a
comjjaratively large scale. Those who have money find
that the chartered baid^s can take care of their Inisiness,
Those who are borrowers can get accommodation from
the banks, which have an office in almost every settle-
ment. It is true the interest rates are high in compari-
son with those obtaining in the East; but when the
risk and the cost of administration are considered it does
not appear that the chartered banks are charging exces-
sive rates. Kew shareholders could be found for co-
operative baidxs if interest rates were below current
(|uotations. It is com])aratively easy to find ready bor-
rowers in the West at prevading rates. When all these
facts are considered it must be coid'esscd that tlie n.-
oju-rative credit .society will hardly become a serious
factor in banking in the West. Hut undoubtedly pres-
sure will i)e hiougiit to licar upon cillierthe federal gov-
i'rnmcnt or upon tlir |)ro\ im-ial administrations, or u])on
I
THE BANKS AM) THH GONKRNMENT
503
both, to find ways and means for providing, if [)ossible,
I lieaper credit to the farmers of the AVest.'
'Thf Royal Commission, appointeii by tin; govcnimciil of Sasivat< hewan,
li,i~ np(jrte(l (N'ovenibiT, 19l;ij in favor of a system iif rural iriMlit liaM'd iipcm
liic l.andschaften of (icrniany. The outline of Iho schenic is as follows: There
si;, ell lie an executive committee of three members, appointed by the government,
and nil advisory committee of fifteen, nonunate<l l)y the local societies. Local
Mil icties shall consist of not less than ten members, with control ov<t land sufficient
III raise loans aggregating at least $.3,000. Loans will be made on ap|)roved lands
up to 40 per cent of their value. Funds will be raised by selling bonds guaranteed
liy the province, anil .secured by the lands held by members. Members will be
jiiiiitly aiid .severally liable for any loss that may occur; but the liability of lach
sli.ill be limited to one ami one-half times the amount of his loan.
It is proposed, aLso, to estiiblish a central bank for the .six'ieties, with the help
of the government. Loans will be made on the liasis of personal .security. If these
soiieties are establishi'd n(j injury will be tloiic to the business of the chartered
banks; if anything, their business will be increased, as the local societies will act
as feeders to the present banking institution-i.
^1
,#■
QUIZ QUESTIONS
(The numbers refer to the numbered sections in the
text.)
CHAPTER I
1. Name the chief reason why the study of money
and banking is of advantage to the business man. Is
it fair to })hice as much bhune u{)()n Icgishitors for a
bad currency system as upon architects for a bad build-
ing?
2. Were warnings given of the panic of 1907?
3. What is the relation between the sciences of money,
finance and economics?
4. What is the science of finance?
5. Show how every business has a technical and a
business side.
6. AVhy is business the result of the specialization of
labor?
7. Name the phases of production.
8. How is the changing of ownership productive?
9. Wlien did the value of exchange begin to be recog-
nized?
10. In what countries are tlie rights of private prop-
erty most strictly enforced?
11. Distinguish between property and wealth. Is
money wealth ?
12. What is the effect of the integration of industry?
.504
QUIZ QUESTIONS
505
CHAPTER II
13. Describe three stages of economic history based
on the method of excliange.
14. What are the obvious hmitations of exchange by
barter?
15. Show how the introduction of a medium of ex-
change simphties trade. Exphiin why "all trade is
iiiially barter."
IG. Show that money represents incomplete ex-
changes. How does the miser differ from other people
in his attitude towards money? Show the similarity be-
tween money and a railroad ticket.
17. Define credit. AVhat other meaning of the word
sometimes leads to confusion?
18. Why is credit a good medium of exchange? Do
you think that merchants and bankers earn their incomes
as truly as farmers or laborers?
19. Are money and credit real wealth? Would you
expect a millionaire to have much money in his posses-
sion?
20. Distinguish between production and consumption
t>oo(ls.
21. Describe tlie entrepreneur system of production.
22. What is cajjitaH From what source does it de-
rive its ecoiiiomio importance?
23. Define "capitalization." How is it possible to
know when a corporation is over-capitah/.ed?
24. From whom comes the demand for capital goods
and for what purpose? How may the entrepreneur ac-
quire purchasing power?
25. On what human xuouncs dues the atvumuiatioii i>i
capital depend?
••i •
1'
JOG
MONKV AND HANKING
'2(». Name four methods l)y wliidi the saver of tlie
income may invest.
27. Show liow a f^ooj currency system increases the
incomes of all producers.
CHAPTER III
28. Explain how value is a register of economic
forces. Explain the meariing of the phrase, "prolit is
the mainspring of industry."
29. (iive a definition of the word "value." What is
meant })y the expression "common measure <>t' value":'
30. (iive the legal definition of the dollar.
31. What is the sole utility of money? Why is it
loanable?
32. What object'ons are there to gold as a standard
of value?
C3. Show why the cost of production theory of value
is unsatisfactor}'.
34. State lirielly the utility theory of value.
35. Define "marginal utility." Show how it is illus-
trated in tliC demand for automobiles.
3(5. \\'h,it is tjie "law of satiety"? Wh;it is its relation
to tlie theory of marginal utility?
37. Hov mav the two theories of value be reconciled?
»-t
CHAPTER IV
38. Define "exchange utility."
3'.). What commodities were first used as standards of
value?
■10. A\'hat three functions of iiiotu-v were dcxeloned
in primitive money?
41. What was wampum? ^^'hat gave it its value?
QllZ QlESTIONS
507
42. Why were beaver skins used as money by the
t'aily settlers of the rnited Stalest
13. What were the cUsadvuntages of agrieultural
|)r()(hicts as money?
44. Wliat Uiws were passed in A'irginia to maintain
l!ir vahje of tobacco? Did they succeed? Compare the
(Instruction of growing tobacco phuits in early Virgmui
i.) the same acts committed by the "night riders" in
Kentuekv in 1900. To what modern form of currency
in the Ignited States may the "tobacco notes" be com-
pared ?
45. Name the ([ualities which must be possessed by a
good currency.
40. Why is the (juality of divisibility lecessary?
47. Whv were beaver skins unsuitable for use as
monev on account of their lack of uniformity?
48.' Why slioukl a substance used as money possess
the quality of cogni/ability ?
49. Wliy have civili/ed countries generally adopted
<rold and 'silver as iiioney? Do tiiese metals possess
stability of value?
^1
CHAPTER V
30. Why were silver and gold the fittest standard- to
survive?
51. Name the good qualities of silver ami gold as
money.
52.' When and where was platinum used as money.
Why was the experiment a failure?
53. Name the defects of gold and silver as money.
54. How have two of the defects of gold and silver
been overcome?
55. How did the earlier coins get their names?
i
/>,'
508
MOXKY AND BANKING
50. Xame three requirenients of good coinage.
Wliut nu)tives led to the debasement of the coinage?
AVho was injured by the debasement of the coinage?
57. Wliat is the essential (juality of the standard of
value?
58. Why ■would silver disappear from circulation if
the demand for its use in manufactures increased;"
59. What is dresham's I^awf
GO. How did the earlier legislators atiemi)t to deal
with the eifects of (iresham's Law!' What result?
fil. Give a brief sketch of Kngland's experiena' with
the double standard.
G2. How did England come to adoj)t the single gold
standard?
(>.'}. What effect has minting upon the value of
metals?
04. Define "legal tender."
05. What were y* 'exander Hamilton's ])roi)o. ^.s
respecting coinage in the Tnited States in 17i>l !"
OC). Why was the ratio of 15:1 unsatisfactory?
(57. ^^'hy was there no gold coined in the I'nited
.States before IH.*}!?
«">H. \\ jiy did Hie newly-coined silver dollars disaj)])ear
fit)m circuiation?
i't\K What chimge did Congress make in the ratio in
IH.'U? What was Lhe ( llVct ?
70. What change occurred in the standard in IHO.'Ji'
71. How was the single gold standard adopted in the
rnifcd States?
7'_'. !"'or wb;il did the Act '.f 1<M)() provide?
78. liricfly sum up the evolutioti of tho standard in
tiie Tnited .States?
QllZ QIESTIONS
50!)
CHAPTER VI
74. Show why gold is defective as a standard of de-
ferred payments.
75. Find ilhistrations to prove the economic ad-
\ antage of the enforcement of contracts.
70. How may contracts be impaired by legal tender
laws?
77. On what gronnds were the Legal Tender Acts
declared constitutional '
78. Why were the defects of gold as a standard of
(Ifferred i)'ayments the cause of the free silver agitation
in 1896?
CHAPTER VII
70. Distingulsli clearly between value and price and
show that tlie ])rices oi ;oods depend as much upon the
\alue of money as upon the value of the goods.
80. How is it possible for prices to rise when the con-
ditions of supply and demand seem to warrant a de-
cline?
81. What is the utility of money?
82. Distinguish between "desire" for moiuy and the
(conomic "deniand" for it.
8;{. Name and deline three varieties of moniy.
8i. (iive illustrations of tiat and credit money.
8.'). Analyze the demand for money.
8('.. What determines the rajtidily of cii'ulalion of
money?
87." \\'b.at effect las population on the d( tiiatwl for
money ?
88. What is the relation between division of labor and
If • cireulatioii ot moru'y : What viirri ii;i> the niie^ra'
lion of industry on the circulation of money?
• M
i!
h.
m
:,io
MONKV AM) llANKlNr.
f^A
80. ShoH- how foreign trade may result in a special
demand i'or gold.
90. Sliow hou- eontractr, sometimes affect the demand
for money.
91. Does the nse of money as a store of value affect
the demand?
92. What effect upon the <iemand I'or money arises
from insecurity of contracts and property?
93. Under what circumstances may it he advisahle for
jiersons to lioard money?
94'. Is hoarding a cause or an effect of a panic?
95. Define "hoarchng." ^^'hat is its effect on the
value of moneys \Vhat are some of the injurious in-
direct effects of a hank I'ailure connected with money'
9(5. What is the essefitial differencv- hntween a private
and a hank store of money?
97. Is the money in the (Jovernment Treasury a
hoard?
98. Docs the demand for money always fall ecjually
upon different varieties of money?
99. (iive illustrations of seas()nal)le A mands for
money.
100. How far does international trade create a de-
mand for money?
101. What are the ')ad effects of a j)remium on gold?
10"J. Name some reasons why the demand for money
is \iry irregular.
lO.'J. What is the uncertain element in the sup|)ly of
money ?
lot. Why is gold practically the only elastic eleinmt
in our ein'rency ?
10,*). Does the (|uantity of gold actually produced in
a country determine the sup|»l\ in that eoinitry?
100. What factors determine the supply of gold?
QllZ (^IKSTIONS
511
a
107. Explain how the utiUty of gold has little connec-
tion with its quantity.
108. What are the advantages of an increased supply
of money?
lOU. Why are the temporary results of a change in
the money supply likely to he serious even though
ultimately the effect may he /////
110. Trace the history of a hrick of new gold and
its effects.
111. Why does not the circulation of new gold con-
tinue to raise prices indefinitely f
112. What would he the effect on prices if the minor
should choose to hold the gold coins or paper money
(•(luivalent for the gold which has increased tiie money
supply of the country?
li;j. What is tlie effect if the miner deposits the new
gold [n a hank? Show how the effect of new gold
spreads throughout the world. \Viiat advuitage has
tiie country producirig gold over other countries?
114. wiiat would he the effect of an =ssue of paper
money; com])ared with gold?
ll.'i. IIow is it possihle to determine how much money
is needed hy a country?
IIG. What difficulties arise from the facts that jmce
changes are not synehron<»us?
117. Show how rising prices stimulate itidustry.
118. Why is not an increase in the supply of moTiey
always an unciualified lu'tiefit '
1 l"u. (iive some illustrations of the universal law of
rlivthm.
Vjo. What is the conseiiucnce of the cumulative effect
of economic forces?
#-r--
512 MONKV AM) BANKING
CIIxVPTKU VIII
121. Explain how every debtor has sold money
"short."
122. How are the sliorts "sqiu ezed" in the money
market?
123. Explain why priees of stocks may deehne so
suddenly?
124. \vhat effect will the hetter education of the
people in financial affairs have upon the fluctuations in
values?
12.}. What is meant by the general p jc. level?
12r). What is a price table?
127. Why should a price table not be confined to a
few commodities?
128. II<nv are price tables cDnstruetef'i?
121). For what purpose is "weighting" of price tables
used? ,
130. V/hat are the advantages of "weighting ?
131. Why does tiie Faulkner Frice table show prices
to be so higli during tb.e Civil War?
132. What are Index Numbers? i^repare a chart
illustrating the rhythmic swings of prices. Account for
the greater swings.
133. Describe some of the important index numbers
prepared by Kuropenii statisticians.
134. \\'liat are the most imj.ortant forces to be reck-
oned witii in forecasting changes of llie general i)riee
leveP
la:,. What is ihe elfec ' of exeessive savu.LT on pros-
perity? State the rule for predicting general price
changes.
QlIZ (ilKSTIOM
il.T
W
CUxVPTER IX
136. What is the diifercncc between domestic and
foreign exchange ^
137. How may payments be made without tiie use
of cash?
138. How do banks faeilitate payments without the
use of cash?
139. Wliy is New York Exchange so universally
acceptable ?
UO. How do ])anks all over the country get their
power to sell New ^'()rk exchange?
Ul. Tell how the banks handle New York exchange.
U2. How do banks settle balances between them-
selves ?
1+3. What are the items of expense in shipping
nu-rency?
U4. How do the United States subtreasuries assist
the banks in the settlements of balances ^
U.3. How is tiie price of New York exchange de-
termined'
Ud. What is tlie signilicance of rates of domestic
exchange? Explain why it is imi)ossible for a com-
munity to lose all its cash in the sittlemeiit of balances?
Ut! How does the clearing house principle api)ly to
domestic and foreign t\<'hange?
Its. Htm may tlie use of cash be eliminated even in
the settlement of balances f
UO. Why are th' movements of gold so important?
1 .")(). \\'hat is the ecoiiomic function of the dealer ui
foreign (\ehange'
. .1 ,■ • ...I J....l..fc r. llv
i.jl. iiovv »i<> 1 iU loiiij^Ii ■ »v:..:..,_ ,: -.: ■
an working cupi
tal to their customers
C-\II :i:i
.Hi
MONEY AM) 15A\KING
,f:
■ :- I ' :
1^
1.52. W'liy are bankers williiig^ to purchase drafts oi
exporters^
l.).'J. \Miy are New York banks always willing to pur-
chase foreign drafts?
\.')4: Define stei'ling excliange.
I.'}'). II' the I'Jighsh jjouud sterling contains 113
grj'.iiis, how is it possible to determine its vahie in I'nitcd
States money?
!.)(). I low is the cost of shipping gold across the
Athuitic calculated?
l.)7. What is the minimum price of demand sterling
exchange?
l.")H. Why is it impossible under normal conditions
for sterling exchange to sell higher than ''*^ t. 88(5.5 ?
1.59. P'.xplain the conditions whieh made it possible
for the price of demand sterling to fall to ^i.S'.i in
:Mareli. T.>()7.
1()(). Describe the Knglish gold bullion market.
Kil. How was il possible for llie Hank of l''rance to
maintain a '.i percent, discount rate in l'.»0(>, while funds
could ])e loaned in London at <» per cent.?
1 ('.'_*. A\'b;it is the significance of shijjments of gold
to foi'cign countries?
1 (!.'}. Mention certain j)eculiarilies of our foreign
romnieree.
Kit. What are the "itnisible" items of foreign trade?
ir»,5. Show how capital mo\es from one country to
another.
ICiCi. Show tliat interest and dividend payments to
foreigners aU'eet tin SD-ealled foreign trnde balance.
Hw. What elfeet u|)on tbe demand for foreign ex-
change is exerted by the iV.et that American merebiiiidic
IS carried in foreign sliips?
QW/. (^IKS'llONS
.51.>
1(>8. IIow do American tourists in Europe affect tlie
(Kniaiul lor i'orci«,ni exchange?
1 (>•.». What ])oints are worth mentioning in a daily
newspaper article on forei^ni exchange?
170. Kxj)lain the "London Settlement."
171. What is meant by "cables"? By speculation in
tnrcign exchange? By "covering movement"? By
iiiaiiipidation?
172. Explain tlie several varieties -^f exchange.
How are their values determined?
17:}. What is demand sterling and Mhy do diftVrent
(Itniand bills sell at dilFerent prices? At what rate of
iiiteiest are long bills discounted?
17k \Vhat is the business of London bill brokers?
17.'). What is the eff'ect on tiie i)rice of exchange of
an issue of GO-day finance bills? The effect (>0 days
later?
17(5. Upon what does profit on finance bills depend?
Slio'v that their issue is cfiuivaknt to borrowing money
aliroad. What efl'ect does their isstie have upon rates
of interest? What advantage does London possess
over other financial centers?
177. What are the advantages to a bank from hav g
a foreign dei)artment?
178. Why is a man who wishes to travel abroad likely
!o transfir his deposit account to a bank which can sell
iiiin a letter of credit? Sui)pose you have a letter of
credit issued on a dejKisit account. If you asked for
' 10 at the Deutsche Bank in lierlin on a day when
Mcriing was (pioted at M. '20.4.3, how jiiueli would you
nali/.c in marks? For how much would your deposit
K count be del)ited when the draft reached home, if ster-
iiig exchange \\.is selling ai
MM()
170. What are the advantages of using a comme
rcial
%
m
I!
m
h^
516 MONFA AM) HANKING
letter of credit? \\'hy are banks all over the world
ea<rcr to cash letters of credit (
180. Suppose I want to borrow £10,000 for 00 days.
Demand sterling sells at $4.88 and the Bank of
England rate is 5 per cent. At the end of 00 days de-
mand sterling sells at -$4.84. I can loan funds at hoiii
for per cent., what profit can 1 make by selling finance
bills?
181. A Philadelphia banker sells a draft for 210,17.3
Kronen on Vienna. By cabling to Vieiuia he learns
that sterling exchange is worth 'J-t Kronen IT^- heller
(100 heller = 1 Kronen). The current price for de-
mand, sterling in rhiladelpiiia is $4.8(>.5. What i)n)lit
can be made by l)uying sterling to cover if he sold the
draft on \'ijnna for $.'2030 per Kronen f
182. Would there ])e any ])rolit in an arbitrage trans-
action at the following ([notations?
Sterling in New York $4.88.3
Francs in London 2.). 10
Francs in New York .3.10 "s less 1-.32
Show the ])rotit on $1,000 invested in the arbitrage
transaction.
CHAPTER X
183. What is the world's stock of gold and silver?
ISt. IIow much silver is it estinn-itcd that the world
has ]>!oducedf Why did mining decline after the fall
of the Roman Empire?
18.3. IIow were wars financed dining the Feudal
180. What was the effect produced by the new stock
of silver from America^ •
QUIZ QUKSTIONr
jl /
1S7. Show the effect of American silver upcMi eeo-
iioinic eoiuhtions in Europe.
188. What is binietalHsni?
18!). What are some of the difficulties of maintrinlng
a bimetallic standard? Why did the difficulties arise
i ,,iilv in the nineteenth century?
1«U). Wliat are the advantages of bimetallism?
1<>1. What is meant by the single standard? What
i the place occupied, under the single stanilard, by sub-
sidiary coins?
VJ'2. Give an account of the early attempts at inflation.
VXi. What was the reason for the formation of the
Latin Union?
19-t. What were the effects of the demonetization of
silver by the Tnited States?
lit.'). Explain the significance of the acts of 1878 and
18<t().
\W. What effect had tlu closing of the Indian mints
to the coinage of silver. ui)on the problem of bimetallism?
1«>7. What were the reasons for the final failure of
bimetallism?
1?1
I"
CTT.APTER XT
108. ^Vhat was the economic condition of Canada
after the Contiuest?
101). Who controlled the wholesale trade of Canada
after the Conquest ? IIow di.l tlu y aflVet the monetary
svstem?
L»00. Describe the monetary system of tlu' c-ouiitry.
• .«l. Give an account of early experiments in media
i ( xchange.
o\S
MONEY AND 1} AX KING
*i
202. "Why Mas Halifax (.•unriicy aclopled as tlic
staiulardf (jii\e an account of the \aiioiis vdiiis in cir-
culation and tiicir ratinijs.
20.'J. Describe the changes in Canadian iiiou'v after
the American Revolution.
204. AVhen was the York siiilling depriveii of k-ual
recognition? Why?
205. AN'ith wliat did the act nf 1808 dealf
20(5. De^'-rihe the dual function of the early nu •-
chants.
207. Outline the early exchange business carried on
between Montreal, Xew York, and London.
208. Describe the paper money issues during tiie war
of 1812-1 8U.
209. AVhat M'as tlie etl'ect of the army bills on Ca-
nadian business?
210. What were the causes which led to the foundii _r
of the ]Jank of ^lontreal ?
211. ^^'hose ])rinciples Mere ad()])ted In founding the
first Baid^ of Montreal^ ^^'hat other cities established
ba. , shortly after:"
212. Describe the chief features of its articles of
association. A\'liat Mere the ditfercjices in the attitude
of the i)e()i)le of Tpper and Lower Canada to bank
notes? AVhat Mere the results of this attitude?
21.'}. \A'liat is the liistory of the first l)anks in Ipper
Canada? AVhat Mas the effect on the other Canadian
baid<s?
214. AVhy did Cireat Britain go on a gold l)asis in
IHKl? Describe the attempted currency reform in Can
ada resulting from this change.
21."», W'juit ^^Hs the l•,.s!!!^ ;.•' (Ivf-'A Vi-Hxl^^'^ :iifii=..:.f
to enforce a monetary standard in C anada:*
21G. Describe the attcm]){ made to regulate Can:idian
Ql IZ (QUESTIONS
ill)
•al
currency by bills of exchange drawn on the British
Treabury.
'_'17. What were the cliief characteristics of Cana-
dian currency in the second (juarter of the nineteenth
iciitury?
•_MH. What sort of coins circulated in Canada in the
second (jtiartcr of the nineteenth century '. Why '. What
sort of a currency did the mercantile and bankhig in-
tcest-s f;i or at tiiis time?
- 19. Describe tiie state of the currency after the union
of l/pper md Lower Canada.
L'20. (iive an account of the sliort-time debentures
of 184h, and their resemblance to government paper
money.
221. What bearing had the crisis of 1857 on the cur-
I'ency question in Canada!"
222. When did Halifax currency cease to be statu-
tory money:' AVhat currency system took its ])lace:'
223. (ii\e an account of tl first attempt of A. T.
Gait to issue government notes.
224. Describe the conditions oi' the provincial note
issues. Why were they aut orized? What was the atti-
tude of the banks toward these lotes?
22.5. What was the nature of the legislation ])assed
in 18(J8 and 1870 concerning Domhiion notes? Is there
any profit to the government in issuing tluin?
22G. AVhat later legislation was there concerning Do-
minion notes?
227. What was the result of Sir Francis Ilincks'
legi
ation
t fi
228. What is legal lei ler money in Canada?
.3iJ0
MOXKV AXh 15A\K1.\(,
CIIAI»TKU Xll
S*f
•J20. What is a credits How do credits ori'Tinatc?
'J'M). Sliow how credit i:, oj o.-ait importance in in-
dustry.
•j;n. What is the function of comnierciai l:inki:i«»r
•Ja-J, Describe the hond and inoitnaof.
•2:i:i. Show how the use of cre(ht facilitates the hiniher
inchistry.
'2:U. Describe the characteristics o» tiin'her })onds.
•211'). Why is there sueli a ditlVrence in tht interest
rates of (hfrerent classes of bonds.'
2.'J(). Wliat are the advantaocs of lonn-tinie borrow-
"i«"
2.*J7. Sliow liow credit econo?ni/es thi' use of nohl.
2.'J8. What dan<4er h"es in the h"(|ui(iation of credits^
•J.'M). Wiiat efrect have the conunercial jjaper houses
on the credit system:'
240. ''.N'hat (juahties nnist cre(h"t have in order to eir-
cuhite as a medium of exchanne:'
•241. C'ompare the two forms oi' ban!; circulating
credit.
242. How Is a deposit credit utih'/ed ' What kind of
bank cre(h"t do thickly settled communities usef
243. What is meant by the elasticity of thposit credit ^
When will deposit credits depreciated \\'hat causes
credits to be licpiidated'
244. Show how (.■o|,J fs the basis of ail credit.
^ 24.1. Wjiat are the reserve re(|ulremcnts of the Xa-
tional IJank Act:"
24r,. TTow much reserve sliould a Iiank keep?
247. llow IS credit an element of great danger hi
panics!'
I
q( [/: ni i;.--i"in.\',> 521
•JtS. ^Vhy is credit ;i siii»jt('t mil uuitliy of iiivcsti-
CllAPTKH XIII
249. What is the tieral etlVet of the use of eredit
on J t rices f
•J.);). Descnl)e the various eti'ects oi the (hllVreut
kiiids of cre(nt on iM-icesf
•J.Jl. Show how tiansactlons may l>e setth'd without
the use of niotiey at aiL
•J.")2. Show how a lessened (kniand for money causes
a rise iii prices.
2.5.'}. \Vliat effect does an issue of national hank notes
liave upon piices^
2."j4. Explain the ditt'erence in circulation of I'uiik
notes and checks,
•2.">.>. Has government cre(ht money a greater or hss
(fleet on prices than hank notes ^
2.j(). What is the relati(,n l)etween cre(ht and specu-
lation^ Dilferentiate hetween legitimate and illeniti-
inate specuhition.
2.57. How may specuhition l)e hoth the cause and
effect of a rise of prices!"
2.*)S. Descrihe tlie conditions which cause a contrac-
tion of credit.
CIIAPTKH XIV
2.59. Name the varieties of government cre(ht cur-
rency.
2t;0. What is the essential element in liat money?
2G1. What are the factors determining- the value of
credit money ^
202. What is tlie danger in the use of credit mone> ?
Hh
^•3
11
i I
I'll
MOM^V AND BANKINC
1 1 *■
What devices are used to inaiiilaiii tlic value ol' ercdit
iiioiay'
'2('}li. W ail issue of eredit nioiicy is (.xeessive, v
will l)f the eU'eet on its value f
•JCi. Does iiiakiiiH' ereiiit money le^al tender prevt
its depi'eeialionf
•J«i.). Why is H(,vernnient credit ij^oney not ideal
money (
•_'<;<;. What are some of the dit^ieulties of adjusting
tlu- supply of oovernn.ent ertnit money f
lm;7. What was the feelino of the people re.yardin^
od\crnment issues hefove IKClf
■jr.H. Why are o(,\ crnnK-it honds not credit money?
What prohiem was I'aised !)y the tinancinj^ of th«- Civil
XS'arr
•_>•;<). What are some of tlie di' advantages of <i()vern-
inenl deht (
•_'70. Why are notes a /greater element of weakness iii
government tinanee than honds'
•J71. Contrast ^oTrnnient l)orrowinj4 with that ol
])i'i\ate eoncenis.
•_'7-i. If an issue of eredit money is excessive, what
will he tiie effect on its value?
( IIAPTKH W
'J7.'{. Classify the j>ro<hi(ti\ c industries into thrct
^idiips.
•J74. Keeapii:-.'ate the fundamenlal piineiples ol
exchan^ic.
•.'7:). Show that a cndit is a contract to pay monc\ .
•_'7(;. Whiit is the husincss of a hank'
•_'77. In wh.Ml two ways do hanks supply a medium of
exchaniic ?
I
Qiiz Qri:sTioxs
52:j
■
•27H. Kxplain why l)anki!i,u' is a iiuasi-puljlie ruiu'lKiii^
■J71>. How (Iocs the l)aiik act as a^xiit hrtwicii the
capitalist and ciitrepreiicur ^ Kxphiin how the hank is
a (hstrihiiter of c'a])ital.
•J«(). Wluit haiikiii<>- priMcii)le is it the viohition of
which causes a hirj^e proportion of Isank faihu'esf Name
Ihiee reasons wliy hanks shonhl not h)an funds to l»e
(diixeitcd into fixed eai)ital.
•J81. Trace the ev(.hition of the two main functions
(if hanking. Contrast the IJank of An»stcr(hini Avitii
ilie Hank of Kni-land.
282. What are some of the peculiar privileges of
liankers'
2Ha. l)isi)r()vc the statement that "l)aiiks create ca])i-
284'. From what souros doe : a hank ohiain its cai)ital
and credits
28."). What are the three essential hankinu' oj)erations^
280. How is the i»anker the '"arhiter of in\ estmenf f
( HAPTKH XVI
287. Does a hatik lend credit or money? Show that
rredit as a medium of exchanue is supirior to mon* \ .
288. Show how credit promotes the pioduiiion ol
.'I II >ds.
28<». How d(t hanks create credits'
2'.M). \N'h\ is l)ank en dil prefi'rahle to cash'
2!M. Show how hank credit passes from hand to hand
' ithout l»einu litpiidated.
2'.>2. Show the similarity helween elircks and tiaiik
notes.
2'.>M. On wlial does the larnlnu' power of a Itank dc-
ill
!24
MOXF.Y AND iSAXKIXf
1 ^ AS.-:
i I m
fr
|)cn(l:' Docs llic National liaiik Ac'i limit \]\v ainoiiiit
of loans a hank may makcf
•J'.»k Docs it maki' any diirci-ciicc to a bank wlictlu i
it loans ca>li or credit:" Illustrate the point hy an ex-
ample.
•J!>.). Why is the control of i;i-cat stores of casji so
^rcat a prize in Wall Street.' A national hank in
Kalama/oo. Michi/^an, i-ecei\is ;i cash deposit ol' SI. 000
which is left foi- one year intact, no checks hcin<.i' di'aw ii
a<^-ainst it. The hank has no dillicnlty in loaning- to lt^
own customers at ') i)er cent. These customers make
all their |)ayments hy check and de|)osit all their receipts
in the hank. Calculate tlu' yross profit \\\\\vh the hank
can make on tiie -"^LOOO deposit. lea\in<i' out of account
all c.\|)enses of doin^' husiness.
•JIM). What factors dctci'mine the amount of deposit
currency axailahlc in this counti-y at any ^i\<ii time'
liy what means minht the maximum limit to the amount
ht raised^
•JOT. .Show how the lack of coopeiation hetwcen tin
hanks causes them to lose |)art of their rest r\ es
•JOH. liy what methods may a l)ank replenish it>
reserve:*
•JOO. What Is a seoiidary reserve? Ts there an\
danger in this |)olicy '
.'{00. Do honds constitute a reliahle ri ser\('
.'{01. (.'an the .Secretary of the Ti-easury aece|)t ofliri
than ( Jovernnient honds as security for deposits of (io\-
ernuii nt funds'
CTTArTKlt XVII
'M)'2. How does a hank statement difT'er from n mer-
cantile form ^
•Mli. How d.K s the staliriient <tf tlie national ()anks
I
m
(HI/, ^^i r:sr loN^
Oi.)
,,n,vr llic validity of tlic (k'jx.Mt cunx-iicy tlicovy ? How
iiiucli (Kposit ciinciu-y is tlRft in llic I'liitcd States f
.•{Ok Why d" 111*' ixsoiuxcs and liabilities exactly
I ;a 1.1 nee'
■ ;}().■). What do tlie iteius on Use liability side sio-iufyf
llnsv (j.. ehan^es in the values of resources atrect the
st.ileiuent '
;{()<;. What are "eoneeaied assets""^ Are they good
]Hilicyf
;5(»7. l)istiii«^uish between discountin<4 and loaning.
.'{OS. What is an ov.r-dral't '.
•")<• Where do the securities held as collateral on
Imiiiis ai)|)iai''
;{10. IIow are the (hposits of the Tnited States
( ,(i\i'innient seeuied .'
:{11. \\'hy do banks soiiietinies carry governnient
i.diids in theii- o\\ n \aults^
:?rj. What is meant by the preniiuin on I "nited States
;{|:{. What is inehnhd under bonds, securities, etc..
;iiid why has this item inenasrd greatly in recent
\ t ars'
:{] ^. .\re banks iisnally the owners of the large biiild-
iiins in whieh their otliers ari' situated'
;{1,-). What is th( la-v regarding the hohbng of real
( stale by a bank .'
.•{1»;. What is mcarit by the item "dui' from. national
banks'-^
.'{IT. What is Ml ";il»|tlo\({| reser\e agent"
.'{IH. What are easli Items'
:{|1». Wh\ d<. national b:inks seek to have on hand as
lew '\tnk not( s Ms jxissibb '
\-2i). What ar( bgal tt iider notes'
.TJl. What Is th. Htdemptioii I'nnd'
526
-M*)M.\ AM) J!A.\K1.\(,
.'{22. ^NN'hat is inrliKlf,! undci- -(luc lumi (he I
State;* Treasiirv"".^
iiit(,(i
CIIAPTKH XVIIl
.*i2.-{. Wl.v is tl
ic miniiimm capital of a hank prnpo,.
;;;;"^'l '" tli^' m/c ..r thr rity i„ which it is h.catcl'
lliioictically h.nv h.r.uc ,|,onhl the capital of a a.iL
i
DC
lilt'.
Stocks r
•J2^M\hat IS the (I.H.hk- hahility rcaturc of hank
\N liy IS the ahovc distinction made h. tue(
".••Ilk a, Id other stocksf Ilnu is ,t p„ssihle for the ap-
if.'il of a hank to i)e really (ietitioiisr
••{2.-,. What is the purpose of the sMrj)]tis.' What i
"'*• •■^■'I'lirenient of the National H;,nk .Net .v-ar. ,„.
sm-l'i.is^ Why do son.e hanks start uith a C,rpln^
>N hal ,s meant hy the -hook-valne- of har.k str.cks.'
'{2i;. ^^ hat disposition is nltimateh- made ol lu' item
'■midi\id((| |)rotits""r
.'{27. What inducement is there for the hanks to take
out cMcuIation !
.•{2S. Kxplain (he item "State Hank \ntes Outstand-
.•{2'.». I-Xplain the item -mdix idual depnsils.- What
is a ct itificate i?f d( posil '
, •'•^" ''"•*'■'• ^^''■^' .-iHlitinns do.s the <.-over.,m<nt
d»'I)«isit in national l.,iiiksf
•■{■n. IXplain Ih, i|,i,i ■hoi.ds horruu<(|.-
•5-{2. What is 11,.. diH-eniHv ImIu,.,,, Anieri.'Mn ..uul
'''"••"I'*''"' '•••"•kin^ in Ih, niatterof rcliscountin-.^
'■i'i'i. \\ ha! are \hr hills pa^ahle-'nfa hank' ^
••{••U. What is (h. rll'ret of eert ifyitin a check?
:i'.r>. What is a ■•cashi, i\ eJKck"''
QUIZ l^rilSTloN:
5Z1
ClIAPTKH XIX
.'J30. What five institutions art- calkd •hanks'"?
.'J.'JT. What is Ihc (hircrciicc htturen national and
staU' hanks?
iV.iH. What is the jji-incipal husiness of hirjjc i)rivatc
lianks?
.•{.'{^». Descrihf "niukrwritin^f."'
(). What is thf (hff'ciriuT hrlwttii the trn>>t com-
pany anil a hank? How did the trust company get its
name?
."Ul. Afc trust comi)anies r((iiiired to kee|) reser\es?
:iV2. What is the nature of the dejjosits in trust com-
panies ?
lii'.i. What departments are re(|uired in a trust com-
jiany ?
.'U4-. What are the functions of a trust company as
individual trustee?
.'U.). I)es( rihc the coii)orate trusts of a trust company.
'.iU\. Whv is a sa\in<4s liank really not a hank at all?
.'{ tT Dcscrihe the oigani/at ion of a hank.
'MH. Desciihe the exolution ol' a l)ank in a small town.
.*U'.>. Whei-e is ultimate authctrity loeated in an iii-
ciuporat ." hank ?
;{.")(). \Vhat are the re(|uircments for directors named
in the .National Hank .\ct ' What is tin penalty on
directors if they allow the law to he violated f
;{.")l. What considi : tions govern the choice of di-
iT'ctors?
;{.VJ. .Vccording to the courN. what Is the responsi-
hility <if hank directors' How may the directors
ascertain tlu' true condition of (he liank?
M.")."}. Of what value is the plea of ign. ranee?
^1
il
528
MONEY ANb BANKING
! H
.'J,5t. Can directors ixly iiiij)licitly on the reports of
national examiners^ W'iiat two types of loans should
directors he
I'aniil
lar witli
'•i.').'). What should he the attitude oi' hank directors
toward loans to otlicers and other directors^
.'}.)(). What are tiie duties of the president?
.*}.;7. Who is the chief executive otHcer of a hank?
What is tht importance of the credit department of a
Imnk?
.'}.>H. \\'hat are tiie duties of the paying teller? Dis-
count ch-rk?
li.y.). What are the duties of the receiving teller?
I'lom what foui' sources do funds come into a hank?
:j«)0. What are the (hities of the note teller?
.'J(»l. l)esci'il)e the work of the discount clerk and show
wjiy he is husy (hu'ing a j)eriod of acti\-e speculation.
.'}()2. Mention the important hooks kept hy a hank.
M<!.*J. What is the law with regard to collections?
What risk is connected with a tram]) collection?
.'{(i4. What is the i-esponsihility of a collecting hank?
.'it;.'). What is the expense of collecting out-of-town
checks? What schemes ha\e heen proj)osed for lessen-
ing the expense of collecting country checks?
'.HU\. What is the Knglish method of collecting
count rv checks?
CIIAPTKU XX
'M>7. Distinguish hetween general and special de-
posits.
:U)H. How did the Legal 'I'ender Acts work a hard-
shi]» to the dcjxisitors during the War' How far is a
liank rcsponsihle ff>r s])ecial .Itposits?
QUIZ (iUESTlONS
i^2«J
.*{(»!). What advjuita^xs do the salcty deposit vaults
hriii^' to ;i hank:"
;}70. What arc the inducements offered to depositors
liy tlie hanks'
,'{71. Dcscrihe the iHHicullies in tlie way of cstal)lish-
iiio- a new hank.
.'}7'J. Why are (lei)ositors h)yal to ohl and conserva-
ti\e hanks;'
:i7'.i. When do (lei)ositors practice the "kiting" of
ilucksf
;J74. Ilhistrate the method of "kiting."
.•}7.'). Siiov.- how the title to deposit checks often l)e-
(I lines an important {juestion.
87(5. Give an illustration of a case of disi)uted owner-
^llip.
:}77. \Vhat is the law regarding the acceptance of
deposits hy insolvent hanks ^
;J78. What risk does a holder run l)y retaining a check
too long!'
.•J79. \Vhat is meant hy "reasonahle time" in the case
(if a local hank'
.'{HO. What recourse has the holder if a l)ank refuses
to j)ay a check?
.*{81. Can a depositor stoj) payment on a chc k?
What elfcct has the death of a depositor upon checks
not yet paid!'
:iH2. Can a hank pay a check if funds to th.e credit
of till' depositor aic insullicient f
.'iS.'}. What is a hank's liahility in the case of a forged
.heck :
;{S4. May a hank pay a post-dated check hefore it is
(h.e?
;{H.j. \Vhat is the cfrc( i of tlie fact that the relation
5;;o
MnM;^ AM) I'.ANKIX,
hi'twt'cii tlic liiiiik iiiul till' (lipositor is thai of (lcl)t(ir
and creditor.'' What is meant hy ■"set-off'"^
'Mi'}. 1 f a hank holds a depositoi-'s unsecured note and
the depositor fails, what ri^ht has the hank to his
deposit '
'{87. If a hank fails may a dej)ositor pay his note to
the l)ank hy a cheek on his dejxisit f
."{SH. Show that till' "set-of!"' may make failures ap-
|>ear worse than they ixally are.
.*W.>. Illusti'ate the fore^oin^- hy a concrete case.
.'}'.»(). Sjiow liow i)anks sometimes protect ti.emsclvcs
against loss throu/i'h a horrower's insolvency.
CHAPTER XXI
.'101. What two qualities arc essential to the making
of tl,.' banker?
•'{'.>2. W'liat is meant hy inxcstnit iit loans ^
.'ii'.'J. Fnder what conditions are inxcstnicnt loans
gond haid<ing loans^
.'{'.> k What are " • lustria! loans ^ Show jiow they are
secu'-ed. What are rediscounts!'
.'}!),}. Wjiat is meant hy "Capital" loans?
*}0(). Should a hank loan a concern money t'or the
consti-n.tioii of a plant ?
.'{f>7. ^\'hat Ciii-porations lend mf»ney on mortgages!'
.'{!)S. How are the loans classified in the reports to
the ('(iinptroller:'
.'}{)!). What changes liave taken ])la«'e in ten years in
the ])roj)ortion of the demand loans!'
M)0. \^'llat docs "douhlf name ])ai)er" represent!' Is
this paper mucli used in largi' cities?
(^riz (^riisiioNs
331
lor
11(1
Ills
to
ip-
'C'S
4-01. Distiii^iiish hctwccii ■tradt"" and "hrokcrs" "
paper.
K)2. What provisions distin^^iiish the /pid^Muiit note'
K).'{. Name the |)i()\ isions of the eolhiteral note In
\Jiieh 'he hank pi'oteets itself against h)ss.
K)l. \/hat risk is in\<)l\ed in eolhiteral loans f
J-O.j. lv\[)lain what is meant hy le^al rate of interest.
K)»i. IIow are call loan rates of o\ei' 100 per eent
consistent with the usury lawsC
1-07. Why do eonsei'x ati\ e hankers ohjeet to loaning'
nil hook aeeounts '
WH. What is the task of the linaneial manager of
an enterprise f
"M
IIS
I'e
iC
to
in
CIIAPTKK XXII
K)!). What classes of property may serve as collateral
for loans'
110. What are some ol' the dillieiilties of using mer-
( liaiulise as collateral 1
HI. What art' the advantages of good warehousing
lausr
H"jf. Show that loans on merchandise are a legiti-
iiiate functi<in of hanks.
H.'}. \\'liat was the early practice ol' the Corn J'>x-
cliange Hank of New ^'o|■k!'
HI-. Why is merchandise hetter collateral now than
tormcrly '
H.'). lIow docs (he new uniform law safi'guard ware-
house ri'ceipts ^
i]>'>. What are the risks Iinolved in loaning on ware-
house receipts f
f n
I
i
:l '^
53ii
M()M;\ AM) liANKlMl
417. What JUT tlif rc'sp()ii^il)ilili(.^ of a warclioiiscniaii
under the i)reseiit hiw '
418. I low is the issue of i-eeeipt^ sate<i,uar(le(l .'
41t>. What protection is aironied to holders ol' re-
ceipts.'
420. Is garnishment alh)\ved'
4-Jl. What is the [)enalty for the illegal issue oi
receipts'
42'J. Wliat do some hanks suhstitute for warehouse
recei{)tsf
CHAPTKU XXII I
111
i'2',i. Wlien (hd ere(ht departments appear in l)anksr
424. Name the soiu-ees of crecht information.
42.3. How far are the credit a,i;'encies to l)e depended
upon:'
42(i. What are the (hities of the cre(ht man:
427. What is the husiness of the conunerciai note
broker:'
42H. What ehann-e^ have taken phiee in the conuner-
ciai pa|)er business i-ecently'
42i). Tpon what do the demand and supply of com-
mei-eial paper depend '
4.'J(). .Show how a country possesses areas of hi^^h and
low interest I'ates.
t..*il. What four inducements may a dealer in com-
mei'cial j)api'r otrer to a borrower'
i:i2. What is the best guaranty against loss furnislK<l
by a dealer in commei'cial pa])er^
4.'}.'}. What is the usual si/.e of ?iotes handled by
dealers in commercial jjaper^ I low art' they (pioted'
(^l IZ (H 1->1'1<»N>
5'M
C IIAPTKK XXIV
ilU. What were the characttri sties of early hanking-
111 the Tiiittd States^
i;{.}. W'liat was tlie rehltioii of e;irl> \ni\\ks with the
u(i\ enmient '
t;j(). l)i\ i<U' the liistory of United States liaiikiii^' into
foiii' periods.
4.;}7. Deserihe some of the hunks prior to the First
Hank of the United Stati .
VM. What are the dangers of pennittin«>' hanks to
loan on hank stoek (
V.i\). What were some of the featnres of the First
Hank of the United States^
410. Was the Hank sneeessful? How mneh (hd it
I'lid to the •government:'
4tl. On wiiat uronnds was the First Hank of tlie
United States ohjeeted to ^
H'2. Wliy was the Seei)nd Bank of the United States
()i'<i,ani/ed:'
4V.i. Compare the Seeond with the First United
States Hank.
444. How was the ru-eond Bank misniana/^ed :■
44."). Wliy was President Jackson o])])osed to the
Hank^
44(). AVhat ar<,niment does the liistory of the two
Hanks of the United States furnish agai!\st a central
federal hank?
447. Deserihe the Snffolk Bankinpf System.
448. What two plans of note issue were tried in N'ew
York State?
449. Deserihe the New York Safety Fund System.
i
MICROCOPY RESOLUTION TEST CHART
ANSI and ISO TEST CHART No 2
1.0
I.I
i"2 8 12.5
-. \l\M m 2.2
IT 1^
2.0
1.8
1.25
1.4
1.6
A /)PP1_IED IM/)GE Inc
,14
MONF.Y AND BAXKIX(
i! -ii
4.)(). Dcscrihe Hu- bond dtjjosit or free baiikin
iX svs-
teiii.
4.)1. Why (lid tli' Safety Fur I System i'ail^
4.J2. What weir the eauses oi ihe i'aihire ol' the Free
Hankitio' System:' Was it adopted in other States!*
What was its only advantage over the Safety Fund
System:"
i.y.i. What was the experience of other states with
their l)anks^
4.U. Describe the Hank of Indiana. Why was it
successful^ Describe the State Hank of Ohio.
(II.VPTKH XXV
m
4.>,>. What conditions led to the Xational Hank Act?
4.")(>. What etrect did the Act ha\e on the market for
Fm'ted States bonds:'
4.')7. (iive the early history of the Act.
4.)H. What are the duties of the C'ompt rollei" ol' tl
le
ui'icncN
4.V.>. Xame the chief provisions of the Act.
!■<;(). Describe the issue and redem|)tion of National
l)ank notes.
4(11. WJiat are the r
tional bankinu s\ stem '
eser\c i-ecjuiicmc nts of the na-
4(;-.>. X
CirAPTKlJ XXVI
inie sonic of the di trerenccs belwci, ;i bank
note and a drpusit ciniinc\.
Ki-}. What are the liniitatiMis of the d( pc.sit
renc\?
cur
Ij: I I,' I.
ire^rnt sysl
eii! iniensMics
stringencies ;ind panics at ceil;
on scnson.s.
QUIZ (^l l^TloXS
5;}^
K;.). Show tliat tlie (luii<4er of depleted reserves is
acute ill times oi' j)aiiie.
iCAi. How may an emer<^eiiev circulation lie issued
under the Aldrich-\'reelaiid Act:*
k;?. \\'h\- is the cii'culatioii ol' t)ank notes inelastic^
WtH. I'nde!' what circumstances docs the hank-note
CI
III
•culation increase
,). What are the disadvantages of the lack of unity
k;
oin' svstem
l-TO. What i^ the importance of savin<is hanks?
1.71. Whence comes the need for tile ])ostal savings
l.aiiks? Descrihc the Act of 1910.
^72. What are the aru\iments for and a^s^ainst the
L'.uaranty of Isank (le[)osits?
CIIAPTKU XXVIl
473. What is the economic function of Wall Street^
J-74. Wlieie do the dealers in securities yet their
working' cai)ital '
1-7.'). Descrihc the method of makinj^' a collateral loan.
i7(;. How (Id the hanks ;i\(»id technical over-eertiti-
■ Mtion ?
1.77. What restrictions do the hanks make on collat-
eral?
1.7H. What is the peeuliarlt\ of the call lo;in rale of
interest i
|.7'.». Show- win the respoiisihilities of the lonn clerk
,ii-e ureat in Wall Strict Itanks.
iH{}. What are ^mdiucsled securities!'
I.HI. IIou does the stale of the hank reserves affect
the prices of securities?
!•«•_'. What advantage wouid eoiiie iVoiri .iiM.iHi^
hanks into two classes commercial and (inancial;'
iV.m
iM(>Xi:V AND HA.NKIXcj
•J-H.'}. What additional j)nvilcnc,s .sli„„I,l be -iven t<.
national hanks '
■1H4. Why is it ,)n.,Hr to forhid tinaiicial l)anks aetin-r
as reserve agents.'' *
CIIAPTKU XXVIII
■48.5. In what way is the Secretary of the Treasury
compelled to assume ,no,e responsihihtv than helonu's
tohisofheer "
48(1. How does the I'nited States Treasury intensifv
monetary strinoencies:'
187. Are these eon(.,(ions the result of our currency
or ot the Treasury laws!'
_48H. \Vhat expedients have heen used l,v Secretaries
of the Treasury to miti<^ate stringencies^
It?-
C'irAl'TFJJ XXIX
48!). Tnder what circumstances was the Bai'k of
Kn-land founded r I)(serihe the husiness of the orio-
mal liank of Knoland. ^
41M). What c.nditions caused the development of the
use oC cheeks:'
4!>I. What were thi' provisions of the Hank Act of
1814^
^ M)-J. Wh;it is the present character of the Hank of
Kn^land note:'
ion. What is the rclati<.n of the Hank of Kn<rlan(I to
the r.ovcrnmcni ^ ITou is the Hank ..f Knohmd the
center <.f the hankino- system of Creat Hritain^
40 L I )rscrll)e the history of early hankin.u' In France.
If\ - H ' I
'"" •"< »•'*• uisun«4uisnmy- lealuics of the
Hank of I'rancc?
QUIZ QUF.STIOXS
537
i'.IG. To what extent is deposit eurreney used in
1 ranee i'
41)7. What security is behind tlie notes of the Bank
of J'" ranee!'
4!)8. Contrast the Hank of l'],n<;hind and Franee with
re t'erenee to the funchunental prineiple upon uhieli they
are based.
4!t!). Compare the Keielisbank of (Jerniany witli the
Hank of Knghuid.
.)()(). How does the government iiiHueiiee the Keichs-
liank^
"iOl. Sliow tliat the Bank of (iermany is modeled
after tlie Bank of Knghui(k
.")02. What reserves is the Baid< of (iermany reijuired
to kee])!'
CIIAPTKH XXX
.)(KJ. When were the tirst Caiuuhan banks established?
.)()4. Knumerale the various provisions f)f the early
liai'.k aets tluit are similar to those in foree to-day.
.)().). When was the banking- system as it exists to-
day founded^
.')()»■>. State the genei'al eonditions under wliieji a bank
iiiav be ineoi'porated in Canada.
.)()7. Describe the essential I'talures of the branch
liank system.
,')0H. Kxjjlain carefully the eonditions of note issue
in Canada. What pro\ isi(tn has bcm made foi' the issue
ill' circulation during- the annual ei()p-m.)\ in.u jx lind^
.')()!). In what respects are Canadiaji l>ank tuitcs an
asset currency !'
.510. What is meant l)y "tlu' central gold res<'rves'V
How far will they aid the lianks in meetuig an emer-
ycncv?
.11;
538
MONEY AM) P.AXKING
oil. What are the methods a(l()])ted in Canada to
insiire the (juality of hank notes ^
.■)12. What are the re(inirenients of the Hank Act
uitlt i-e^ai'd to reserves;' Is it safe or desiral)h' to per-
mit the hanks to determine the amonnt of the i-eserves
they will hohl?
')Mi. (iivo an estimate of the vahie of eaeh element in
a ("anachan liank's ix'serves.
.51 k Disenss the ,justitication of the practice of the
hanks in makin<4' <"ill loans in \cw \'ork.
.)1.>. Of wliat \alue aie hioh-elass stocks and honds
as a means of maintaininu- tlu' resei-ves of a hank?
.")1(;. What relation do the hanks hear to tlie whole-
sale and mannfactni-ino' husiness of the Dominion:'
AMiat is the new provision of the act with respect to
loans to farmers!'
.517. How are Canadian hanks inspected? What
were the new provisions with regard to inspection added
in 191.'i?
.518. (Jive an acconnt of hank failnres in Canada since
Confederation.
.51'.). What value may he attaejied to the shareholders'
audit'
.5-_'(). What is the Canadian Hankers' Associa-
tion '
CIIArTKJ{ XXXI
.521. AVhat are the main criticisms made of the hranch
hanks in Canada' What arr the ditHcnlties in the way
of estahlishing local hanks?
■:.).> |.' ... . . I.. :.. il. ... f! I ! i 1. I • ! ■! J 11 !
■-■ ;..". j .";,;;: ; ;;;;■ ;;;;;;;;;;;'. r;"\ 'iiiii;;; TiK i>t'aTi("ii iuiJiKS
can eoncentrale their le^al tender money reserves at
lhre;ilened Jioinis.
Qiiz ()rr.s'ri<>xs
r>o
.")■_'.'}. To what f.xtrnt do the hanks furnish hankini*'
facilities to the popuhitioii as a w hoU' f W'ouhl K)eal
liaiiks meet tlie situation Ix'tter:'
VJi. To wliat extent are (h'))osits used as eurrenev:'
\\ hy have the le^'islators in Canada paid more atten-
iaiii to iiott' issues :" Is a ehiTkiuy aeeouiit as expeiisi\e
[n ;i hank as the issuinu' of its notes:'
.VJ,'). Discuss the justitieation of <4ivin<>" the riiji'ht of
imte issue to the hanks.
,Vi(). i\re the protits on C'anachan hank notes exces-
sive^
.V27. Is tlie sui'])lus fund e\cessi\e? If so. in what
w.iv should it he reduced;'
.VJK. ^\re tlie haid<s making' eNcessi\e pi'otits^ Should
thcif note issues he taxed, in order that the ^^'ovei'ument
may shafe in the hanks' i)rolit>^
.Vi;>. iVre the recent nier<Jers of Canadian hanks de-
slral)lei?
.VM). Should Canadian hanks estahlish hranelies in for-
eiuii countries;'
.■j.'Jl. (ii\c an estimate of the value ot' the call loan
market in Xew ^'ork to Canada and its hanks.
.y.i'2. What is the natiu'c of the call loan husiness In
Canada' Contrast with call loans in Xcw \'ork.
'uV.i. 'I'o what extent do the hardvs part i'-ij)ate in "un-
(Ici'w !-itiiii4's"" ^ Can their aeti\ it y alonj^' this line he justi-
tied^
■')'i\. Discuss the Canadian policy of making' loans to
'ill cctoi's.
.").'{."). What is the iclation of the !)aid<s to the trust
I impanies '
■>.'?(). .Vre in.terest cha.rues \\\ the W'cvt e\<'<'ssivc?
.').'{7. Is there I'oom in Canada for hraiich hanks with
iiall caj)ital '
!!
r>\{)
M()\]'\ WD i'.ANKIXC,
."538. Do the Canadian Itaiiks pay a f'aii- rate of inter-
est on {lej)()sits:'
y.ii). What arc tht special problems t'acin<4' the hanks
during the croi)-inovin<>' ])eriod''
5i0. IIow do the hanks finance the fanners and deal-
ers during the niovin*^' of the ci'opsf
541. Desci'ihe the ])rocess l)y which Canadian inij)i)i't-
ers settle their debts abroad.
5i'2. Describe the Canadian clearing- honse system.
CIIAPTEU XXXII
iiiti. Is the fj^old reser\e behind the Dominion notes
too large? If so. how should it be rivhiced'
.544f. Should Canadian banks be more hea\ ilv taxed'
.'j^.j. What are the pi'inci|)al retui-ns made I)y the
banks to the government ! I low may one determine the
position of a bank by these retui'ns?
')M). Are the postal savings banks, everything consid-
ered, beneficial to Canada!'
5^7- Can cooperative credit societies be expected t.)
do much to reduce the rate of interest in tiie West (
APrEXDIX 1
GOLD STANDAHl) ACT OF MAIUU 1 i, 1900
LrLuuc— No. ;m).j
\n \ct To drfinc niifl fix the ^taIu^lra of value, to maintain the ?■■"•'*>■ "^
,„ ,11 fonn. of .n.m.y isMunl .,r eoined by the Lnited States, to refund the
public (l.bt, and l'.>r othei- purposes.
He if enacted hi/ the Senate and Ilonsc uf licprcsentathrs of
the United States of America in Con^resn as.send)led, Tliut the
.Inllar consist inn- of twcntv-(ive and dght-tcntlis grains of gold
iiino-tcntlis fine, as cstal.lislRcl by section thirty-five hundred and
eleven of the llevised Statutes of tlie United States, shall he the
standard unit -d' value, and all forms of money is.ued or corned
hy the United States shall be maintained at a parity of value
^^■ith this standard, and it shall be the duty of the Secretary of
the 'rrea.>urv to maintain sucli parity.
Si... . i2. That United States notes, and Treasury notes is-
sued tnider the Act of July fourteentli, eigliteen hundred and
ninety, ^vhen presented to the Treasury for redemption, shall be
redeemed in -ol.l com of the standa-d fixed in the first section
„f this Act, and in order to secure the ])rompt and certain re-
.iemption of such notes as herein provided it shall be the <luty of
the Secretarv of the Treasury to set aj.art in the Treasury a
V, .erve fund" of one hund.v.l and fifty million dollars m -old
,„i„ ,„a Inillion, ^vhich fund shall be used for such re.lemption
..urnoM.s onlv. ami whenever an.l as often as any of said notes
shall be re.l.'emed from sai.i fun.l it shall be tlie duty of the
Secretarv of the Treasurv to um. said n..tes so re.leeme.l to
restore and maintain such reserve fund in the manner followm-,
to wif. First, bv exchanKino- the n<.tes so re.leemed tor any
„ol.l cin in the general fund .d" the Treasury; second, t.y ac-
^pting deposits of gold coin at the TreaM.ry or d any sub-
541
,f L
u\
m
w
1^2
APrKNDIX
ii-L'asury in exrhan-,n. for the l-nilcd States notes so rcdccmcrl;
thin/. l,_v pnxMirino- ^r,,!,! ,„i„ l,_v the use of said noto. ,„
•■tcTordancT uith the provisions of Mctlon thirtv-.eveii huiuhvd
of the Revised Statute^ of the Tnited States. If the Seeretary
of tiie TreaMii-v is unable to re>tor.. and n,/unt,ain the -old coin
■n the reserve fund l.v the for. <.,,i„o- methods, and the" amount
cf surh -old eoin and l)ulH<ni in >aid fund shall at anv tune fall
'"■l.in one hun.lre.l nullinn dollars, then it hall i)e li'is duty t„
restore the >anie to the niaxiniuiu sum of one hundred and fifty
""' ' ''""'"■^ ''.^ 'u.rrounin- money on the eredit of the Tnit/d
States, and for flu. deht thus ineurivd to issue and sell o.uj.on
...• reKistend hnnds „f fhe Tnited States, in such lorn, as h. „,,,v
presenhr. n. deuonunalions of fifty ,loIlars or anv multi,,le
thereof. I,..arin- interest at the rate of not exceedin^r three per
centum per annum, paval.l.. ,,uartrrly, sueh honds to l„. pavahle
at tlic pleasure of the Cnit.,! States after one year fron, the
<iate of then- issue, and to l... payable, prineipal and interest. i„
Kohl eon, of the pres.mt stan<lar<l value, and to be exempt fro,,,
the payment of all taxes or duti.s of the United States, as well
as from taxation in any forn, by or under State, nnn.ieipal, or
''"■■■'I aulh<n-,ty: and the ;;old eoin ree.aved from th.. sale of said
l)on(ls shall first !„• .•ov, red info the nv„.ral fund of the Treasury
an.l fher, exchan-.d, in lhe ,„,.,„„er hereinbefore providai. for
■•"1 'qnal am.amt of the notes redeemed an<i held for cxehan<To
an.l the S.rret.ry of the Tnasury n,ay, in his discretion, use
viul notes ,n exchanuv f„, „,,1,1. „, u> pnrchase or redeem any
bonds of the Tnitul States, or for any other lawf.d purpose th"e
public interests may re.iulre, except that they shall not lie used
to meet defici. iieies in the curivnt revenues. That Tnlfed States
■infes when ivd,r„„.l in aceon lance with the pr.n Islo„s „f this
Metion shall be reissned, but shall be held In the r, m.-vc fund
unfil exenano-.d for ^rold. as hnvln provided; and the onjd ,,„„
'""J i'ulhon in the reserve fund, together with the r.deemcl
notes held for use as provided in this section, shall at no lime
exceed tlic maximum s,i,n of ,„,.. hnndivd and fiftv .«,ni;=.M .1.]];...
Sec. ;}. '1-hat not!,!,,,- ..mtainrd in this Act shall 1... construed
to affect the legal tend, r -,„allty as „„u provide.l by law of the
APrENDIX
A:\
,,i\ir dollar, or of any other money comcd or in.Micd h\ the
Initod States,
Si;c. 4. That there be estabhshet} in tlio TnaMiry Drpart-
! . lit. as a part of the oftice of tlie Treasurer of the I'nitcd
>t ites, divisions to be designated and known as the <h vision of
-lie and the division of redemption, to which shall l)e assirriutl,
1. -jjeetively, under such re<^ulations as the Secretary of the
'i'reasury may apjirove, all /eeords and accounts relating \r the
-MIC and ri(lini{)tion of I'liiied Stat(s notes, irold irrtificatcs,
vixcr certificates, and curn iicy certificates. There shall he
tiansferred from the accounts of the <reneral fund of the
Treasurv of the United States, and taken up on the books of
-;ud divisions, respectively, accounts relating; to the reserve
fund for the redemption of United States notes and Treasury
iintcs, the <^oId coiti held afraiiist outstanding <j;old certificates.
tlic United States notes held against outstandin^jf currency
1 1 rtitic'ites, and tiu> silver dollars held a<jfainst out'taiulinrf silver
1 rtificates. and eacli of the fun.ds represented by these accounts
-liall be used for the redemption of the notes and certificates
i'nr which they arc respectively pledfjfed, and shall be used for
no other purpose, the same hiing held as trust funds.
Si:r. 5. That it shall be the duty of the Secretary of the
Treasurv. as fast as standai'd silver dollars are coined under
t',r provisions of the Acts of July fourteentli. ei<^liteen Innulred
iiid ninety, and June thirteenth. eip;hteen hundred and ninety-
< iu;ht, from bullion purcliased under the Act of .July fourteenth,
eiffhteeri hundred and lu'nety, to retire and cancel an equal
amount of Treasurv notes wlicncver received into the Treasury,
cither bv cxchanfrc in accordance with the provisions of this
Act or in the ordinarv course of business, and upon the caru-ella-
tion of Treasury notes .silver certificates shall be issued against
the silver dollars so coined.
Skc. fi. 'I'hat the Secretary of the Treasurv is hereby
authorized and directed to receive deposits of fjold coin with the
'I'rrasnrer or anv assistant treasurer of the T^nitefl St.ates in stuns
i)f not less tlian twenty dollars, and to issue <rold ci rtificati s
therefor in denominations of not less than twentv dollars, and
i
5H
APPENDIX
tlic coin so flcpositcd sliall be ntaiiR'ti in tlic Treasury and hrlt
for tliL> payment of such certificates on lieniand, and used foi
no otiier purjiose. Such certificates shall be receivable for cus
tonis, taxes, and all public dues, and when so received may !)(
reissued, and when held by any national banking associatioi
may be counted as a {)art of its lawful reserve: Prozidcd, Thai
wheneyer and so long as the gold coin held in the reserve fuiu
ill the Treasury for the redemption of United States notes aiK
Treasury notes shall fall and remain below one hundred millior
dollars the authority to issue certificates as herein provided shal
be >u-i)ended: And provided further. That whenever and s(
long as the aggregate amount of United States notes and silver
certificates in the general fund of the Treasury shall .xcced sixty
million dollars the Secixtary of the Treasury may, in his dis-
cn tion. suspend the issue of the certificates herein provided for:
J)i(l jinnidid further. That of the amount of such outstanding
certificates one -fourth at least shall be in denominations of fiftv
dollars or less: And provided further. That the Secretary of
tile Treasury may, in his discretion, issue such certificates in
denominations of ten thousand dollars, payable to order. And
section fifty-one hundred and ninety-three of the Revised
Statutes of the United States is hereby repealed.
Si-:c. 7. That hereafter silver certificates shall be issued only
of denominations of ten dollars and under, except that not ex-
ceeding in the aggregate ten per centum of the total volume of
said certificates, in the discretion of the Secretary of the
'J'reasury, may be issued In denominations of twenty dollars,
fifty dollars, and one hundred dollars; and silver certificates of
higher denomination than ten dollars, except as herein provided.
shall, whenever received at the Treasury or redeemed, I)e retired
and canceled, and certificates of denominations of ten dollars or
less shall be substituted therefor, and after such substitution,
in whole or in ])art, a like volume of United States notes of
less denomination th;ui ten dollars shall from time to time be
retired ;uid canceled, and notes of deiiominafinn«: of f.jn dnllnrs
and upward shall be reissued in siib4ituti(ni therefor, with like
qualities and restrictions as tlio^e retired and canceled.
APPENDIX
545
y and hrlri
1 used for
lo for cu>-
.'d may I)r
issoc'iatioii
id 1(1, Til, it
■-erve fund
notes aiiil
'ed million
kided shall
cr and x)
and silver
cced sixty
n liis dis-
vidod for:
itstandinrj
IS of fifty
'rotary of
ificatcs in
icr. And
! Revised
sued only
it not cx-
rolninc of
y of the
V dollars,
ificatcs of
provided,
be retired
dollars or
)stitution.
notes of
) time he
■ n floll.ir^
with like
Skc. 8. That the Secretary of the Treasury is •.:y
authorized to use. at his discretion, any silver bullion :ii tiie
Treasury of the United States purchased under the Act of Ju'y
fourteenth, ein;liteen hundred and ninety, for coinage into such
drnominations of subsidiary silver coin as mav be necessary to
nut t the })ublic reciuircments for such coin : Proxahd, That
the amount of subsidiary silver coin outstanding shall not at any
time exceed in tl;e aggregate one hundred miliions of dollars.
Whenever any silver bullion purchased under the Act of duly
fourteenth eighteen hundred anil ninety, shall be used in the
coinaiie of subsidiary silver c(;in. an .unouiit of Treasury notes
issued under said Act equal to the cost of the bullion contained
in such coin shall be canceled and not reissued.
Set. 9. 'I'hat the Secretary of the Treasury is hereby author-
i/,'d and directed to cause all worn and uncurrent subsidiary
Mlver coin of the T'nited States now in the Treasury, and here-
ifter received, to be recoined, and to reimburse the Treasurer
of the United States for the difference lietween the nominal or
face yalue of such coin and the amount the same will produce
in new coin from any moneys in the Treasury not otherwise
appropriated.
Skc. 10. That section fifty-ono hundred and thirty eight of
tlie Revised Statutes is liereby amended so as to read as fol-
lows:
"Section 51138. No association shall be organized with a less
(Mj)ital than one Inmdred thousand dollars, except that banks
with a capital of not less than tir'ty thousatid dollars may, with
the approval of the Secretary of the Treasury, be organized in
any place the population of which does not exceed six thousand
inhabitants, and except that banks with a capital of not less
than twenty-five thousand dollars may. with the sanction of the
Secretary of the Treasury, be organiz-d in any place the
population of which does not exceed thn'e thousand inhabitants.
No association shall be organize.l in a city the i)o})iilati()n of
;ti.
..If.J ,,f less ill!
, . , 1 <■ .'1 1 1 .1
^llilli cXCCCuS 111.. .!..•..
two hundred thousand doUa'-s."
Sec:. 11. That the Secretary of the Treasury is liercby
C— VII— ;)4
546
APPENDIX
h ■.
I* :,--•
authorized to receive at the Treasury any of the outstanding
l^onds of the United States bearin^r interest at five per centur,
I.cr annun., payable February first, nineteen hundred and four
■■UHl any l)„nds of tlic United States hearincr interest at fuu,
].er centum per annum, payable July first, nineteen hundred arR
seven, and any bon.ls of the United States bearin^r interest al
three per eentun, per annum, i.ayable August Hrst, nineteen
hundred and ei^ht, and to issue in exchange therefor an e,,ual
amount of coupon or registere.i bonds of the United States ,n
•such form as he may prescribe, in denonnnations of fiftv .lollars
or any multiple thereof, bearin- interest at the rate' of two
per centum per annun., payable (p.arterly, such bon.ls to ho
payable at the pleasure of the United States after thirty vears
from the date of their issue, an.i sai.l bonds to be pavablr
principal and interest, i„ gohj coin of the present standard 'value,'
and to be exempt from the p; um.i of all taxes or (hities of the
United States, as well as from taxatior in any form by or
under State, inunicij)a], or local authority: Pnnidrd, That
such outstanding bonds r ay ' r received in exchange at a' valuii-
tion not greater tiian their present worth to yield an income oC
two and one-,,uarter per centum ])er annum: and in considera-
tion of the reduction of interest .tfccted, the Secretary of tlir
Treasury is authorize.l t., pay to the holders of the out'standin.-
honds surrendered for exchange, out of any monrv in the
Tr.'asury not otherwise appropriated, a sum not greater than
the .l.tf.rence between their present worth, computed as afore-
said, and th. ir j.ar value, and tlie paynu .,ts to be made here-
un.l. r shall be laid to be payments on account of the sinking
fund create.! by section fhirty-s.x hundred ami nlnetv four of
the K. vised Statutes: ./,-„/ prmhlrd f„rfh,r. That" the two
per centum bonds to be issmH ,nu|e, fbc provisions of this Act
sliall he issued at not l.-ss than par. an.J thev si,,!! be numbere.l
consecutiv.lv i„ tl,e or.ler .,f their iss,,.. ,,,,1 „ ),,„ ,,,v„,ent is
made the last numbers i.^ied shall be first paid, an,) thi, or.fer
shall be follnveed uniil all the b.m.k are paid, and uhe„ever
'" ■ '' ■■■■••"••-="""^^ r,.-,,,n.> ai.- (aii((i for payment interest
tlureon shall cea^e thrc m.-ntli- after such call": and there Is
ArrENDix
5«
utstanding
XT centum
and four,
^>t at i'owr
iiulrcd atid
interest at
, nineteen
' an e(jual
States in
'ty dollars
te of two
nds to he
irty years
payable,
ard value,
ies of the
in by or
>d. That
a valua-
nconie of
oiisidera-
■y of the
standini^
r in the
ter than
ts al'on -
de }i(Te
sinking
four of
the f«()
this Ac\
UtTihered
rnent i^
IS order
heiicver
mterisl
lliere is
lureln' apjjropriated out of any money in the Treasury nut
dtlierwis" appropriated, to etfeet tiie exchanges of bonds pro-
Miliil for in this Act, a sum not e\eeedin<r (jne-fiftcenth of one
per centum of the face value of said bonds, to pay the expense
dt prej)ari!i^ and issuin<j;- the same and other expenses incident
thi rt'to.
Skc. ly. 'I'hat upon the deposit with the Treasurer of tlie
I'lilted States, l)y any national banking' association, of anv
Imnds of the I'nitid States in the manner prinided by existiiifr
l.m, such association sh.ail be entitled to nctive from the C'omp-
iinjlei of the C'urnncy circulating- notes in blank, registered
and countersitrned as provided by law, ecjual in amount to the
ir \alue of the bonds so deposited ; and any national liankin^ as-
ciation now ha\ ni^ bond> on deposit foi- the security of circu
latiiifj; notes, anil upon which an amount of circulating notes has
hreii issued less than the ])ar value of the bonds, shall be entitled,
upon due apjilication to the Comptroller of the Currency, to
nceivc additional circulatinj^f notes in blank to an amount which
\u]\ increase the circulating notes held b\ such association to
the [)ar value of the bonds deposited, such additional notes to
he held and treated in the same way as circulat Ini^ notes of
national banking;' associations Ik relof'r)re i-sued, and subject to
ill the ])ro\isi(Uis of law aff'ectin;^' such notes: /'/or/f/ci/, 'I'hat
iiothinfX lurein lontaimd shall be construed to modi("\ or I'epeal
ihe provisions of section tift\-one hundred and si\tv sexcn of
the Uevisid statutes of the I'nited states, auth.iri/iii;^- the
(Omptroller of the ('iirrencv to nijulre ailditional dejiosits of
bunds or of lawful money in case the market \alu( of tlu Ixiiids
h( Id to sicure tli( ciiculatmj; notes shall fall below the par
\ahii' (d' the cir( lilat iii^ notes outstanding- for which soi'h lion<ls
may be deposited as securitv : .ind proiiilii/ fiirllur. 'I'hat the
circulating notes furnishi,} !'■ national banking associations
unik r the pio\isions of this Act shall be of the denominations
prescribed by law. excej)t that no naticm.il liankliifr association
^halL •ift''r tlie P'lssnnc (if tjiw .\et^ lie intitli'i! to receive fron.'
the Comptroller of the Currency, m" to issue or reissue or place
in circulation, more than one-third in amount (d" its circulating
III
548
ArPENDIX
.%
"ot.s of the cknominati,,,! of Hve .loUars : A„d provide -^ fu
tlur, That the total amount of such notes issue,) to any su
association may equal at ..ny time hut shall not exceed t
■•'■"ount at such t,.Me of its capital stock acfially paid i
And provided further. That u,)d..r regulations to l,e' prescrih.
In the Secretary of the Treasury any national hanking a.soci
t'«.n „,ay substitute the two p..,- eentum hon.ls issued under tl
I.n.v,s,ons of this Act for a,.y of the hon.ls deposited with tl
ireasurer to secure circ'ulation or to secure ,l,.posit5 of p„|,I
money; and so ,nuch of an Act entitK.I "A,, Act to enal)
national hanking associations to extend their corporate cxistenn
and for other purposes," approved duly t«,.|fth, ei-rhtee
''^"•''■•'■•l ••hhI eighty-fwo. as prohihits anv national hank whic
makes any deposit of lawful nmncv in order to withdraw it
c.rc,datu,g notes from re niving any increase of its circulatiu
for the prnod of six months from the tin>e it ,na<l,. such .ieposi
nt lawful m.Micy for the purj.ose aforesaid, is herehv roneale.l
••"'<l ■•'II other Acts or ,,arts of Acts inconsistent with the pro
Visions nf this section are h. rehy ivpealrd.
Si:<-. v.). 'I-hat every nati.u.ai hanking association having,,,
deposit, as provided hy law, ho„,|s of the T'nit..d States hearinn
."teres! at the rate of two per o„fum per annum, issue,! und.^
fl'<' [.roMsHms of this A,'t, to se.ure its cir,-ulating notes, shall
pay to the Treasurer of the I'mted Stat.^s, i„ the im.nths ot
•'■■'"uary and duly, a tax of on..-f„„rth of one per c.ntum v.u-h
I'aH year upon the average amount of such .d' its notes i,,
;•■'•<•"'■■''"'-. as an. has.d upon the .ieposit of sai.l two p..- ....ntum
l-n-l^: and such taxes shall he in li.u of existing faxes ,m its
nn.es ,n eirculatinu i„,,,os.,i 1,,. ,,.ction fifty-two hun.Ire,! and
foiM-teen of till I{e\is, ,} Statutes.
Skc. 1 k That the provisions of this A.^t are not inten,led to
I're,-h,.le the a.vomplishment of inl,r„,.,tinnal hmutalhsm when-
ever conditions shall make it .xpe.lient and pra..fical.le to s,aM.re
Mu>s«„,ohv n.ncurnnt action of the lea.hng comnuTcial nations
of the «orld an. I at a r/dN. uhlel, shall insure
relali\e xalue I.etue.n oold and siKcr.
Appro\.d. .Aiareh I V. VMM).
'•omW/'/ fur-
any sudi
exccet! the
y paid in:
; prL'scribod
ing a...-,oci,i-
1 under the
t'd with tiir
' "f" l)ul)li<'
; to onahiu
c cxisti'iicc.
I, ciffhtcrll
Jaiik wliich
itlidraw its
(circulation
K'll <ll■pt)^it
V r.^ncaKd.
Ii the pro-
lia\ ing on
IS hearing
lied under
"tes, shall
nonths oi
ituin each
notes in
L>r cenhni!
tcs on its
idred and
tended to
>u\ when-
to securr
d nations
Ti t III jxt .t r
APPKNDIX II
FEDERAL RESERVE ACT
An Act to provide for the cstablislimeiit of Federal reserve banks, to
li.riii^li an elastic currency, to att'ord means of rediscountin^ coniiiier<ial
|M| ( r. to establish a more etTective sui)crvision of banking in the United
Mitts, and for other ])ur])oses.
Br it enacted hif the Senate and House of Representatives of
the I'nited States of Amerien in Congress assembled. That the
^hort tith: of this Act shall l)e the " Federal Reserve Act."
Wherever tlie word " hank " is used in this Act, the word
-liill he held to include State hank, hanking association, and
trust conipanv, except where national hanks or Federal reserve
hanks are specifically refi'rred to.
The terms " national hank " and " national banking associa-
tion"' used in this Act shall he held to he synonymous and
intcrchangeahle. The term " meml)cr hank " shall he held to
mean any national hank. State hank or trust compaii wliich
h IS hecome a memher of one of the reserve !)anks created hy this
Alt. The term "hoard" shall he held to nie.m Federal Ue-
>! rve Hoard; the term " district " shall he held to mean Federal
II serve district; the term '* rescne bank" shall he liekl to
HP an Federal reserve hank.
Kl'.DKK \I. KKSKRV!'. DISTIUCTS.
Skc. 2. As soon as practicable, the St cretary of tlio 'I'reas-
'V, the Secretary of Agriiulture and the ('omplroliir of the
• iirrencv, Jicting as "The l{estM-ve Hank Organl/ation ("om-
niittec," shall designate not hss than eight nor more than twihe
cities to be known as T'ederal reserve cities, and shall dixlde the
eontinrntal I'nited States, excluding .Alaska, into districts, each
• hstrict to contain btdy one of such I'ediral reserve cities. The
determination of s.ild orgatii/at ion conmiiHee shall not be suli-
■ ct to review except by the I'ederal Ueserve Hoard when or-
£49
§1
!l
w-
.5)0
APPENDIX
ffan.zcl: rrovulcch Tl.ut the districts shall l.e apportioned wifch
due rc^^ird to tlie coi.veiii.ncc and customary course of business
and sliall not necessarily be coterminous with any State or
States. The districts thus created may be readjusted and new
districts may from time to time be created by the Federal Re-
serve Board, not to exceed twelve in all. Such districts shall
be known as Federal reserve <listricts and may be designated by
number. A majority ,,f the organization committee shall con'-
stitute a quorum with authority to act.
Said organization committee shall be authorized to employ
eoun.el and expert aul, to take testimony, to send for person's
■t.id j)apers, to administer oaths, and to make such investhra-
tion as may be deemed necessary by the said committee in de-
termining the reserve .ll.irlcts and in designating the cities
withm such districts when- such Federal reserve banks shall be
severally loc.'.ted. The said cnunlttee shall supervise the or-
gan, /at ion in each of the cities designated of a Federal reserve
I'ank, uhich shall Inclu.le In Its title the name of the city I„
Avh.ch it is situate,!, as " Fe.leral Heseive Hank of Chlca'-ro "'
Tnder regulation, t,, be prescribed by the organizati.ni c"om-
I'iittee, every national banking association in the Fnlt^d States
1^ licreby requlre.l, an.i every eligible bank In the United States
and every trust conij.any within the District of Columbia, Is
iHMvby authorized to signify in writing, within sixiv davs after
the passage of this Act. Its acceptance of the terms and pn-
MMons heivnf. When the organization cmmittee shall have
(l.Mgnate,! the eiths in uhlch Federal res,.rve banks an to be
organ, /,d. an.i tix, d the geographical limits of the Federal
reserve .l,^t^I<•ts, vx.yy national banking association uithln that
.l->lr,rt .hall be required uifhln thirty .lav. after noil.... fr.,m
♦li" organization committee, to subscribe to the capital stock
of .such Federal res,.rve ba.ik in a sum e.,ual t., six per centum
of the paid-up .apltal .to. k and sur,,Ins of such bank, one-sixth
<-f the subscription to be payabl,. on call of th. organization
'•;"""""'" "•• "'■ '1'^' I-'*'"-''! H'— -v.. Hoard, .n..-slxth within
-H.,,. „„,nii,s an.i one-sixtl, ,,,thln six months thereaft-r, and
tlie remain.ler of the subscription, or any [..it thercf, shall be
APPENDIX
Miliiict to call when deemed necessary by tlie Federal Reserve
liuiird, said paymeiils to be in ^old or <^old certificates.
The shareholders of every Federal reserve hank shall he hild
iiuiividually responsihle, equally and ratably, and not one for
aiiotlier. for all contracts, debts, and ensas^^nients of such bank
t,i the extent of the amount of their subscriptions to such stock
;it the par value thereof in addition to the amount subscribed,
wliether such subscriptions have been paid up in whole or in
part, inider the provisions of this Act.
Any national bank failing to si<,niify its acceptance of the
terms of this Act within the sixty days aforesaid, shall cease to
ait as a reserve a<?ent, ujjon thirty days' notice, to be <riven
within the discretion of the said organization committee or of
the Federal Reserve Board.
Should any national banking association in the United States
liow organized fail within one year after the passage of this Act
to become a member bank or fail to comply with any of the
iirovisions of this Act applicable thereto, all of the rights,
privileges, and franchises of such association grant.'d to it
under the national-bank Act, or under the provisions of this
Act, shall be thereby forfeited. Any noncompliance with or
violation of this Act shall, howe\er, be determined and adjudged
l)V anv ccnirt of the I'nited States of competent jurisdiction in
a suit brought for tliat purpose in the district or territory In
which such bank Is located, under direction of the Federal Re-
serve Board, by tlie Comptroller of the Currency ii. his own
name before the association shall be declared dissolved. In
cases of such noncompliance or violation, other than the failure
to become a member bank under the provisions of this Act,
rvcrv director who participated in or assented to the same shall
he held liable In his personal or individual capacity for all
<lani.'icrt.s whi<'h said bank, it- shareholdiTs. or any other })erson
shall have sustained In consequence of such violation.
Such dissr)lution shall not take away or impair any remedy
. -„:.,-i =.;..!.. ............... I ;-....• •f'-: Kt/^.i-Lliotil'Ts (>r offi'^crs^ for nnv
,;^;;::;-; ■:■.:: ■■■: j ■••: r ■■•••■- .
liability or penalt\ which shall Iiave been previously inc-irred.
Should the subscriptions by banks to the stock of said Fi.leral
552
APPENDIX
m\
reserve banks or any one or more of them be, in the ju,Ig,„ent
oi the or^ran.zation co.n.nittee, insufticic.nt to provide tlie amount
of capital rc.i„ire,l therefor, then and in Ihat event the sai.l
organization committee may, under conditions and regulations to
he prescribed by it, offer to public subscription at par such an
.m>ount of stock in said Federal reserve banks, or any one or
^■H.re of them, as sai.l committee shall determine, subje'ct to the
same conditions as to payment and stock liability as provided
lor member banks.
No individual, copartnership, or corporation other than a
"'-"'';••• >;""1^ of it. .hstrict shall be permitte.l to subscribe for
or to hold at any tim.. more than $i>r,.()()() p^u- value of the stock
'" any F,,|eral reserve bank. Such stock shall be known as
pubhc stock and may be transferred on the books of the Federd
reserve bank by the chairman of the board of directors of such
bank.
Shoul.l the total subscriptions by banks and the public to the
stock o said r-ederal reserve banks, or any one or more of thenK
-e, m the judgment of the organization committee, insufficient
o provule the amount of capital required therefor, then and in
hat event the said organizati.,n committee shall allot to the
n, .d States such an amount of said stock as said committee
shall .letenmne. Said rnifcl States stock shall be paid for at
par out of any ,„„„,, ,•„ ,„, Treasury not otherwise appropri-
aU., and sail be held by the Secretary of tl.TreasurvLl
d sposed of for the benefit of the T'nited States i„ ..ch „,;„„..•,
at such nnes and at su.h price, not less than par. as the Secre-
tary of the Fivasury shall determine.
St.ck not held by member banks shall not be entitle.] to votiW
power. "
The Federal Reserve Roard is hereby en,p,n ered to adopt
and promulgate rules an.l regulations governing the transfers
or said stock.
No Federal reserve bank shall commence business with a sub-
scribed capital l.ss than .« KOOO.OOO '|-| :,...:_.. ,
serve districts and Fc.leral reserve cities shall not'l^^in^tnu'cl
as changing the pres..nt status ,.f reserve cities ami central
APPENDIX
r).y.]
r, ~,rve cities, except in so fur iis this Act cliiuist'^ tlie amount
of reservfs tiiat may be carried with approved reserve a<rents
located therein. The organization cosnmittee sliall have power
to appoint sucli assistants and incur such expenses in carrying
out the provisions of this Act as it sliall deem necessary, and
maIi expenses shall be payable by tiie Treasurer of the I'nited
States upon voucher approved by the Secretary of the Treas-
mv, and the sum of $100,()()(), or so much thereof as may be
luicssarv, is herei)y appropriated, out of any moneys in the
Treasury not otherwise appropriated, for tiie payment of such
expenses.
t
BRAKCH OFFICES.
Si;c. 3. Each Federal reserve bank shall establish branch
hanks within the Feder.al reserve district in which it is located
and may do so in the district of any FecUral reserve bank which
may have been suspended. Such branches shall be operated by
a board of directors under rules and re<vulations apj)roved by
the Federal Reserve Board. Directors of branch banks shall
j)ossess the same qualifications as directors of the Federal '-e-
scrve banks. Four of said directors shall be selected by the
r(-^erve bank and three i)y tlu' Federal Reserve Hoard, and they
.-iiall hold office during the pleasure, respectively, of the parent
bank and the Fed>ral Reserve Hoard. The reserve bunk shall
designate one of the directors as manager.
FKDKKAl, UlSKKVl'. HWKS.
Sf.c. 4. \Vhei> the organization committee shall have estab-
lish' li Federal resirve districts as jjrovided in section two of this
Act. a certificate shaH be tiled with the ("omptroller of the
Currencv showing the geographical limits of such districts
and the Fedi ral reserve city designateil in each of such di-tricts.
The Comptroller of the Currency shall fhennipon cause to be
.i: 1 1.
,>i I,
..i..,l
1. .];.)•-;,') .■•..)
to such other banks (Kclared to be eligii)le by the organization
connnittee which may apply therefor, an application blank in
554
APPFA'DIX
:^'4
Fr
^.^heii Hie minimum amount of caxAi'i] ^frwl- ^ -i , ,
"'.■» A- f„. .„„ „,.,.,„„„„„ „, ,,„;f"!i:' tr I'* , ;,',
;"-'7° '■'■ -"-'l "". <l.o cit,. a„,i S„a,. i„ ,„,;,,, ,,,;:; t to
res m ,,.„ ,,, ,„ ,. ,„, ,|,,„,«..|vo, „f ,|,, „dva„t„sos of tl,|. Act
"...ph-oll,.,. „n,„. ,•„,..„„,, ,vl,„ »|,„„ «,e, „co,.d „„d J
•" Mu-h or^.unxafion certificate., sl,all l.ave noue.- '^"'^""^'^'^
i i«>i. lo a(l„,,t and use a corporate seal
Second. To lu.ve .ucce.sion for . period ,r t.entv ^ea^.
APPENDIX
.).).>
■Inch hlaiik
1 of diroc-
lorlziiig a
«-^i've bank
provisions
cribcd hy
Junk shall
committee
ions liave
tion, and
'uls, make
state the
■lit of the
'I've bank
unk is to
nnber of
phice of
-', and of
of such
ribed by
)le those
ribed or
Federal
Iiis Act.
I^fed be-
lie ; and
uthenti-
I to the
d care-
r of the
mil be-
i^nated
Vears
from its organization unless It "is sooner dissolved by an Act of
Congress, or unless its franchise becomes forfeited by some
violation of law.
Third. To make contracts.
Fourth. To sue and be sued, complain and defend, In any
court of law or equity.
Fifth. To appoint by its board of directors, such officers and
•uij)loyees as are not otherwise provided for in this Act, to
(liHne their duties, requiie bonds of them and fix the penalty
tliereof, and to dismiss at pleasure such officers or em})Ioyees.
Sixth. To prescribe by its board of directors, by-laws not in-
consistent with law, rcgulatin<:f the manner in which its general
business may be conducted, and the privileges granted to it by
law may be exercised and enjoyed.
Seventh. To exercise by its board of directors, or duly au-
thorized officers or agents, all powers sjxclfically granted by
the provisions of this Act and such inci<)ental powers as shall
l)e necessary to carry on the business of banking within the
limitations prescril)ed by this Act.
Eighth. Upon deposit with the Treasurer of the United
States of any bonds of the United States in the manner pro-
vided by existing law relating to national banks, to receive
from 'he Comptroller of the Currency circulating notes in blank,
registere<l and countersigned as provided by law, equal in
amount to the par value of the bonds so deposited, such notes
to be issued under the same conditions and provisions of law as
relate to the Issue of circulating iu)tes of national i)anks secured
by bonds of the United States bearing the circuhiting })rivllege,
except that the i. sue of such notes shall not be limited to the
capital stock of such Federal reserve bank.
But no Federal reserve bank shall transact any business ex-
cept .such as is incidental and necessarily preliminary to Its
organization until it has been authorized by the Comptroller of
the Currency to commence business under the provisions of
J.I.:,. A _i
t
Every Federal reserve bank shall be conducted under the
supervision and control of a board of directors.
r>.;6
APPENDIX
r,
I:
Tlio hoard of directors shall perform the duties usually up-
pertaiiiiii<^r to the office of directors of hanking associations and
all such duties as are prescrihed hy law.
Said board shall administer the affairs of said bank fairly and
impartialiv and without discrimination in favor of or against
any member l)aiik or banks and shall, subject to the provisions
of law and the orders of the Federal Reserve Board, extend to
each member bank such discounts, advancements and acconuno-
dations as may he safely and reasonably made with due regard
for the claims and demands of other member banks.
Such hoard of directors shall be selected as hereinafter speci-
fied and shall consist of nine members, holding office for three
y»ars, and divided into tliree classes, designated as classes
A, 1} and C.
Class A shall consist of three members, who shall be chosen
by and be representative of the stock-holding banks.
Class H shall consist of three members, who at the time of
their election shall be actively engaged in their district in com-
merce, agriculture or some other industrial pursuit.
Class C shall consist of three members who shall be designated
by the Federal Reserve Roard. When the necessary subscrip-
tions to the capital stock have been obtained for the organiza-
tion of any Federal reserve bank, the Federal Reserve Board
shall appoint the class C directors and shall designate one of
sucli directors as cliairman of tlie board to be selected. Pond-
ing the designation of siich cliairman, the organization com-
mittee shall exercise the powers and duties appertaining to the
office of chainnan in the organization of such Federal reserve
bank.
No Senator or Representative in Congress shall be a member
of the Federal Reseine Hoard or an officer or a director of a
Federal reserve bank.
No director of class B shall be an officer, director or employee
of any bank.
No director of class C shall be an officer, director, employee
or stockholder of any bank.
APPENDIX
557
Directors of class A iind class B fliall be chosen in tlic follow-
iii(r manner:
Tlic chairman of the hoard of directors of the F dcral reserve
li.uik of the district in which the hank is situated or, pending;
the appointment of such chairman, the organization conmiittec
shall classify' the member banks of the district into three <riner,il
;4roiips or divisions. Each group shall contain as nearly as
mav be one-third of the aggregate number of the member banks
of the district and shall consist, as nearly as may be. of banks
(•f similar capitalization. The groups shall be designated by-
number by the chairman.
At a regularly called meeting of tlio board of directors of
each member bank in the district it shall elect by ballot a district
reserve elector and shall certify his name to the chairman of
the board of directors of the Federal reserve bank of the district.
The chairman shall make hsts of the district reserve electors
thus named by banks in e^ach of the aforesaid three groups and
shall transmit one list to each elector in each group.
Each member bank shall be -Permitted to nominate to the
chairman one candidate for d. )r of class A and one candi-
date for dirtctor of class B. Tl. candidates so nominated shall
be listed by the chairman, indicating by whom nominated, and
a copy of said list shall, within fifteen days after its completion,
be furnished by the chairman to each elector.
Every elector shall, with fifteen days after the receipt of the
said list, certify to the chairman his first, second, and other
choices of a director of class A and class B, respectively, upon
a preferential ballot, on a form furnished by the chairman of
the board of directors of the Federal reserve bank -if the district.
Each elector shall make a cross opposite the name of the first,
second, and other choices for a director of class A and for a
director of class B, but shall not vote more than one choice for
any one candidate.
Any candidate having a majority of all votes cast in the
,,1 „i.
Tf
.,A;A.,^r
have a majority of n\\ the votes in the first cohnnti, then tin re
shall be added together the votes cast by the electors for such
II
5.58
APPENDIX
i:w«:-»-.^'.
candidates in the .second colunui and tl.e votes cast for tlx
several candidates in the first eohnnn. If any candidate then
Imve a majority of tl.e electors voting, hy addin^r together the
first and second choices, he shall I.e declar.'d elected If „„
can.hdate have a majority of electr,rs votin- ^vhen the first an,|
second choices shall have been added, then the votes cast in the
third column for other choices shall he added together in like
'".mner, and the candidate then havin- the hi^d.est number of
votes shall he declared elected. An immediate report of elec-
tion shall he declared.
Class C directors shall be appointed by the Federal Reserve
Board. They shall have been for at least two years residents
"f the district for which they are appointed, one of whom shall
be designated by said board as chairman of the board of direc-
tors of the Federal reserve bank an<l as "Federal resene
affont." He shall be a person of tested banking experience-
and in addition to his duties as chairman of the board of direc-
tors of the Federal reserve bank he shall be required to maintain
under regulations to be established by the Federal Reserve
Board a local office of said board on the premises of the Federal
reserve bank. He shall make regular reports to the Federal
Reserve Board, and shall act as its official representative for
the performance of the functions conferred upon it by this Act.
He shall receive an annual compensation to be fixe.l by the
Federal Reserve Board an.l paid monthlv by the Federal reserve
i)ank to which he is designated. One of the directors of class C
who shall be a person of teste,! banking experience, shall be
appointed by the Federal Reserve Board as deputy chairman
and deputy Frderal reserve agent to exercise the powers of the
chairman of the board and Federal reserve agent in case of
absence or disability of his principal.
Directors of Federal reserve banks sliall receive, l„ addition
to any compensation otherwise ,,rovid. ,1. a reasonable allowance
for necessary expenses in attending meetings of their respective
boards, which amount shall be paid bv tl-e rpspppfjve Federal
restive banks. Any compensation tlmt may be provide.! hy
boards of directors of Federal reserve banksfor directors, offi-
APrKNDIX
55!)
-t for tho
idato tlun
Sotlirr the
ci. If no
3 first and
•nst in the
ler in like
iuinl)er of
t of clec-
1 Reserve
residents
lioni shall
of dircc-
I reserve
pcrience;
of direc-
inaiiitain
Kescr\e
? Federal
Federal
ativc for
this Act.
I hv tlie
I reserve
■ class C,
shall 1)0
hairman
•s of the
case of
iiddition
'lowanco
spcctivo
■p.- J.-.-.-..1
Ided I)v
)rs, offi-
(• IS or employees sliall he subject to the approval of the Fed-
tr il Reserve Board.
The Reserve Bank Orrranization romniittce may, in orrraniz-
iii;; Federal reserve banks, call such meetin<Ts of bank directors
i.'i the several districts as may i)e necessary to carry out the
purposes of this Act, and may exercise the functions herein
conferred upon tlic chjiirman of the l)f)ard of directors of each
I'rderal reserve bank pending the complete organization of
>ueh bank.
At the first meeting of the full board of directors of each
Federal reserve bank, it shall ho the duty of the directors of
classes A, B and C", respectively, to designate one of the mem-
bers of each class whose term of office shall expire in one year
from the first of January nearest to date of such meeting, one
uhosc term, of office shall expire at the end of two years from
said date, and one whoso term of office shall expire at tlic end
of three years from said date. Thereafter every director of a
Federal reserve bank chosen as licreinbefore provided shall hold
office for a term of three years. Vacancies that may occur in
the several classes of directors of Federal reserve banks may be
filled in the manner provided for the original selection of such
directors, such appointees to hold office for the unexpired terms
of their predecessors.
STOCK ISSl'KS; IXCRKASK AND nKCRKASE OF rAPITAL.
Sf.c. .'5. The capital stock of each Federal reserve bank shall
he divided into shares of i^lOO each The outstanding capital
stock shall be increased from 'ime to time as member ])anks
increase their capital stock and surplus or as additional banks
become members, a. id may be decreased as member banks reduce
their capital stock or surplus or cease to be members. Shares
of the capital stock of Federal reserve banks owned by member
banks shall not be transferred or hypothecated. When a mem-
:;r: ;;.;::r. :::\ i \.:\~'^ ~ ■■ ' .:.••••• ; -
upon subscril)e for an additional amount of capital stock of tlio
Federal reserve bank of its district efjual to six per centum of
i
■:|1.
15
.560
ArPEXDIX
the said Increase, one-half of said subscription to be paid in the
manner hereinbefore provided for orij^jnal subscription, and
one-half subject to call of the Federal Reserve Board. A bank
a{)plyin<; for stock in a Federal reserve bank at any time after
the organization thereof nnist subscribe for an amount of the
capital stock of the Federal reserve bank cfjual to six pn-
centum of the paid-up capital stock nnd .surj)lus of said appli-
cant bank, pavinf,^ therefor its par value plus one-half of nr.9.
per centum a month from the period of the last dividend. Whdi
the capital .stock of any Federal resen-e bank shall have be. n
increased either on account of the increase of capit.al stock of
member banks or on account of the increase in the number of
member banks, the board of directors shall cuise to be executed
a certificate to the ("omptroller of the Currency showing the
increase in capital stock, the a, Mount p.iid in, and by whom
I)ai(l. When ;i member bank reiluces its capital stock it shall
surrender a ]irnj)ort ionate amount of its holding in the capital
of said l''((ler,il res. rve bank, and «hen a i ,!inber bank voluntar-
ily licpiidates it shall surreiuler all of ils holdings of the capital
stock of said Fed.ral reserve bank ;uid be ndeased from its
stock subscription no^ f)reviously called. In either case th.>
shares surrendered shall be citiceled and the member bank shall
receive in payment th.refor. under regulations to b." pr.'scrib. .1
by the I'.deral Reserve Hoard, a sum e(|iial to its cash-p.uid sub-
scriptions on the shares suncndered and one-half of on.^ j)cr
centum a month rn.ni the period of the last dividend, not f.i
exce.'d the book vain.' theriof, I. ss any liability of such member
bank to the 1'. .1. ral reserv.' bank.
Si.-. G. If any mi niber bank shall be declared insolvent and
a receiver appoint..! th. n f.u-. Ww stock held |,v it in sai.l
I'Vdcral reserve bank shall be canciled. without impairmi'nt of
its liabilit\. and all cash-paid Mib-cription^ on said stock, with
one-half of one [>. r .■entuin p. r month from the period of last
(livid, nd. not to I'xce.'d ti,,. l,ook \ahi.' t''er.'.)f. sliall be fir-'
•ipph. .1 to all debts .if tln' insiilvciit in. .n.!,.. r !..!.;l I,, tl... I.'.-L,^,.!
reserve b.ank. .and the bai.ance, if Miiy. shall be paid to tli.'
receiver of the insolvent bank. Whenever the capita! stock of a
APPENDIX
561
IVdcral rcscn-e hank is reduced, either on ;iee<)iiiit of a rtdiu-
tioii in capital stock of any inei.ilier l)ank or of tlie liquidalioii
or insolvency of such i)ank, the hoard of chrectors sliall eaii-i
to he executed a certificate to the ("onif)trolh'r of tlie Curreriev
showing such reduction of capital stock and the amount repaid
to such hank.
niVISIOX OF KARNIXr.S.
f'
Si:r. 7. After all necessary i \f)enses of a I'ederal reserve
hank have i)een j)aiil o.- provid<d for, tlie stockiiolders >hall he
(iititled to receive an animal divid. nd of >i\ per ceiituin on the
paid-in capital stock, whicii dividend -liall i)e cuniiilatlve. After
the aforesaid dividend claims have heeii fully imt, a . the m f
earnings shall he paid to the Fnited States as a franchlx' tax,
( Acept that one-half of sucli net earnings shall he paid into a
surplus fluid until it >hall amount to forty j)er centum of tiie
paid-in capital stock of such hank.
The net earniners derived l)y the T^nitiMl States from Federal
reserve hanks shall, in the discretion of the Secretary, he used to
supplement the gold reserve held against outstanding United
States notes, or shall he applied to the reduction of the out-
stmding honded indi'htedness of the rin'ted Statis under regu-
lations to he prescrihed hy the Secretary of the Treasurv.
Should a Federal reserve hank he dissolved or go into liipilda-
tion, any surplus remaining, after the payment of all ddiU,
ili\ldend reciuirements as lieriinhefore |)r()vided, and the par
\alu{> of the stock, shall he paid to and liecome the j)riii)rrt\
of the I'nited States and shall he similarly aj)plied.
Federal reserve hanks, inchwiing the capital stock and sur-
jilus therein, and the income derived therefrom shall he oxem[)t
from Federal, State, and local taxation, except taxes upon real
'state.
Si:c. M. Section fifty-one hundrid and flft\ ''our, rnitfd
States Itcvised Statutes, is herehv am. ndrd to r< a<l as follow.s:
Any hank incorporated hy special Ian of anv State or of llie
rnitcd States or organized under the general laws of anv Statr
(«
:-fr
5GiJ
APPENDIX
19' ■
m
u -
or of the United States and liavin<^ an unimpaired capital suffi-
cient to entitle it to become a national hanking association
under the provisions of the existin<r laws may, by the vote of
the shareholder owninrr not less than fiftv-one per centum of
the capital ,->t(){ K of such bank or banking association, with the
approval of the Comptroller of the Currency l)e converted into
a nai onal banking association, with any name approved by the
Comptroller of the Currency:
Provided, hozccvir. That said conversion shall not be in con-
travention of the State law. In .such case the articles of asso-
ciation and organization certificate may be executed by a major-
ity of the din ctors of the bank or banking institution, and the
certificate shall declare that the owners of fifty-o"e per centum
of the capital stock have authorized the directors h) make such
certificate and to change or convert the bank or anking insti-
tution into a national association. A majority of the directors,
after executing the articles of association and the organization
certificate, sh dl have power to execute all other papers and to
do whatever may be re(juired to make its organization perfect
and I'ompli'te as a national association. The shares ot any such
bank may continue to be for the same amount each as they were
before the con\ersion, and the directors may continue to be di-
rectors of the association until others ar(> elected or aj)pointed
in accordance with the provisions of the statutes of the United
States. When the Comptroller has given to such bank or bank-
ing association a certificate that the j)rovisions of this Act
have been complied with, such bank or banking association, and
all its stockhcldfi's, offi('( rs, and emj)loyces, shall have the same
powers and privileges, and shall be subject to the same duties,
liabilities, and regulations, in all respects, as shall have been
prescribed by the Federal Reserve Act and by thi- national bank-
ing Act for associations originally organized as national bank-
ing associations.
STATK HA.NKH .\S MKMIIKRS.
Skp. 9. Any bank incorjiorafed by special law of any State,
or organizi'd undi r the /general laws of any State or of the
ArrENDix
56;]
Iiiitcd States, may tn.ikc application to the reserve bank organi-
zation committee, pending organization, and thereafter to the
I'lderal Reserve Board for the right to subscribe to the stock of
!ir Federal reserve I;ank organized or to be organized within
the Federal reserve district where the applicant is located. The
organization committee or the Federal Iteservc Board, under
Mich rules and regulations as it -nay prescribe, subject to the
provisions of this section, may permit the applying bank to be-
come a stockholder in the Federal reserve bank of the district
in which the applying bank is located. Whenever the organiza-
tinii committee or the Federal Reserve Board shall permit the
.ipi)lying bank to become a stockholder in the Fi>deral reserve
li.itik of the district, stock shall be issued arid paid for under
the rules and regulations in this Act provided for national banks
uhich become stockholders in Federal reserve banks.
The organization committee or the Federal Reserve Board
shall establish by-laws for the general government of its conduct
ill acting upon ap[)lications made by the State banks and bank-
ing associations and trust companies for stock ownership in
l"((leral reserve banks. Such by-laws shall require applying
liiiiks not organized under Federal law to comply with the re-
M rve and capital recjuirements jmd to sui)mit to the examination
and regtdations prescribed by the organization committee or by
the I'sderal Reserve Board. No applying bank sh/dl be ad-
mitted to membership in a Federal reserve bank unless it pos-
V' ss( s a paid-uf) unimpaired capital sufficient to entitle it to
lireome a national banking association in the place where it is
Mtiiated, under the provisions of the national banking Act.
Any bank becoming .i menil r of ,i Federal reserve l)ank
under Ihe provisions of this section shall, in addition to the
regulations and restrictions hereinbefore f)rovide(l, be required
'o conform to the provisions of law im|)osod on the national
Iriiiks respecting the limitation of ii.'ibiiiiy which mav be in-
■ urred by any person, firm, or corporation to sucli b.mks, the
ii'ihibition against making |)urchase of or loans on stock of
leh banks, and the withdrawal or impairment of capital, or the
payment of unearned dividends, and to such rules and regula-
l!
o6i
APPENDIX
tions as the Fctlcral Hcscr\c Hoard may, in pursuance thcrt'of,
pn scribe.
siieli l)anks, and the officers, agents and employees tlicrcof.
shall also he subject to tlie provisions of and to the penalties
prescribed l)y sections fifty-one hundred and ninety-eight, fiftv-
two hundred, fifty-two hundred and one. and fifty-two hundred
and eight, and fifty-two hundred and nine of the Revised Stat-
utes. The member banks shall also be required to make reports
of the conditions and of the payments of dividends to t!ie comp-
troller, as provided in sections fifty-two hundred and eleven and
fifty-two hundred and twelve of the Revised Statutes, and shall
l)e subject to the j)enalties prescribed by section fift- -two hun-
dred and thirteen for the failure to make such report.
If at any time it shall appear to the Federal Reserve Rn.ird
that a member bank lias failed to comply with the provisions
of this section or the regulations of the Federal Reserve Board,
it shall be within the power of f id board, after hearing, to
require such bank to surrender .. siock in the Feileral reserve
hank; upon such surrender the Federal reserve bank shall pav
the cash-paid subscriptions to the said stock with interest at the
rate of one-half of one per centum per month, computed frnni
the last (ll\i(lend, if earned, not to exceed the book value thereof,
less any liability to said I'Vderai reNcrve bank, except the suii-
scription liability not previously called, which shall be caiu-ided.
and said Federal reserve bank shall, upon notice from the
Federal Reserve Hoard, be requind to suspend said bank from
further [)rivileges of meinlx isliip, aiid shall within thirtv davs
of such notice canc(d and retire its stock and make pavmeiit
therefor in tlie manner herein pro\ ided. The l-'ederal Reserve
Hoard may restore meMibership u[)on due proof of compliance
with the conditions imposed by this section.
K*
FrnriiM. iitsmvi. iioahi).
Srr. 10. A FicHM-al Heservp Rna.rd !s lierehv rre.itod »r!>!:l'.
shall <-onsist of seven members. Including the Secretarv of the
Trcusury and the ('omi»l roller of the Currency, who dmll !'>
c— Vll— :«)
ArrENDix
ofi5
nidiihcrs ex officio, and five iiieinl)ers appointed by the President
of the United States, by and with the advice and consent of
Ihc Senate. In selecting the five appointive members of the
I'.dcral Reserve Board, not more than one of whom shall be
.selected from any one Federal reserve district, the President
s.liall have due regard to a fair representation of the different
commercial, industrial and geographical divisions of the coun-
t'v. The five members of the Federal Reserve Hoard appointed
l)V tlie President and confirmed as aforesaid shall devote their
entire time to the business of the Federal Reserve Board and
shall ciich receive an annual salary of $Ui,()0(), payable monthly
fi.nvther with actual necessary traveling expenses, and the
( ninj)troll( r of the Currency, as ex officio member of the Federal
li.M'rve Board, shall, in addition to the salary now paid him
lis Comptroller of the Currency, receive the sum of $7,000 an-
niiailv for his services as a member of said Board.
The members of said board, the Secretary of the Treasury,
the Assistant Secretaries o" the Treasury, :ind the Comptroller
iif the Currency sh.ill be ineligible during the time they are in
otHce and for two years tlurealter to hold any office, position,
or employment in any member i)ank. Of the five members tlu's
:i|)|)ointed by the President at least two shall be perscms ex-
perienced in banking or finance. One shdl be desigiiated by
Mie President to serve for two, one for four, one for six, one for
eight, and one for ten vears, and thereafter each member so
.ippointed sh !1 serM- for a term of ten yiars uidess sooner re-
moved for t'ause by the President. Of the five persons thus
.•i|)i)ointed, one shall be designated liy the President as governor
iiid one as vice iroveinnr of the T'edeivd Reserve Board. The
L;nvernor of the Federal Reserve Board, subject to it-, super-
\l>ion, shall be ilie active executive officer. The Secretary of
the Treasury may assign offices in the Department of the Treas-
nrv for the use of the Fe<leral Reserve Board. F.ach member
of the Federal Reserve Board shall within fifteen days after
.. . !• •t..l It^/T*
ilinuiii iii.ii\c and >Ui>MTiin- Tu THr «<.tTn or oniCP.
M'
'I'lie I'ederal Re.ervc Board shall liave power to levy
!|l
seMU
Iv upon the i'edi r.il resi'rve banks, in [iroportion to their
.,../
566
ArPFADIX
■ ■■■
[ i ' H
!»:
capital stock and surplus, an assessment sufficient to pay its
estimated expenses and the -^jilaries of its meml)ers and employees
for the half year >uccee(iiiirp the levyin<^ of such assessment,
ton-ether with any deficit carried forward from the preceding
lialf year.
The first meeting of the Federal Reserve Board shall be held in
Washington, District of C"oluml)ia, as soon as may be after the
passage of this Ac^ at a date to l)e fixed by tlie Kesene Bunk
Organization I'onnnittee. The Secretary of the Treasury shall
be ex of'icio chairman of the Federal Reserve Board. No mem-
ber of the Federal Reserve Board shall be an officer or director
of any bank, banking institution, trust company, or Federal
reserve bank nor hold .stock in any bank, banking institution, or
trust company: and before entering ujjon his duties as a mem-
ber of the Federal Res( rve Board he shall certifv under oath to
the Secretary of the 'J'reasury that he has complied with this
requirement. Whenever ;i vacaiuy shall occur, other than bv
expiration of term, among the five members of the Federal
Reserve Board appointed i)y the Fresident, as above provided,
a successor shall be a})pointr(l liy the President, with tlie .idviee
and consent of the Senate, to fill such vacancy, and when ap-
[)oiided he shall hold oflice for the unexpired term of the mem-
ber whose l)lace he is sdicted to fill.
The Fres'd.nt shall !i;ive powtr to fill all v ancies (hat may
li.ipixii on the I'.drral Rcs.rvi Hoard during the recess of tlu-
Stnate, by grarding connnissions which shall expire fhirtv days
after the next session of the Senate convenes.
Nothing in this A, I contained shall be construed as takiii<j
aw;i\ any powi rs heretofore vested by law in tli(> Secretary of
the 'I'reasnry which relate to the supc rvlsior!, management and
control of the 'I'reasury Departm.'rit and Iiureaus niider sucli
department, and wh.erever any power v.stdl by this Act in llie
V'ederal l{(serv> Hoard or the I'ederal reserve .agent appears tn
conflict with the powers of the Secretary of the Treasury, such
powers .siiaii be exercised sub ject to tiie supervision and (a)ntrol
irv.
)f the Seeivl
The I'ederal Reserve Board shall
innuallv make a
full
renoit
APPENDIX
567
of its operations to the Speaker of the House of Represent<a-
tives, who shall cause the same to be printed for the information
of the Congress.
Section three hundred and twenty-four of t' ■ Revised Stat-
utes of the United States shall be amended so as to read as
follows: There shall be in the Department of the Treasury a
liureau charged with the execution of all laws passed by Con-
trress relating to the issue and regulation of national currency
secured by I'nited States bonds and, under the general super-
vision of the Federal Reserve Board, of all Federal reserve
notes, the chief officer of which bureau shall be called the I'omp-
i roller of the Currency and shall perform his duties under the
uiiieral directions of the Secretary of the Treasury.
Skc. 11. The Federal Reserve Board shall be authorized and
< mpowercd:
(a) To examine at its discretion the accounts, books and
affairs of each Federal reserve bank and of each niem!)er bank
and to require such statements and reports as it may deem
necessary. The said board shall publish once each week a
>tatement showing the condition of each Federal reserve bank
and a consolidated statement for all Federal reserve banks.
Such statements shall show in detail the assets and liabilities of
the Federal reserve banks, single and combined, and shall fur-
nish full information regarding the character of the money
liild as reserve and the amount, nature and maturities of the
I)aper and other investments owned or held by Federal reserve
banks.
(b) To permit, or, on tlie aHirmat!\e vote of at least five
members of the Reserve Board, to re<|iiire I'ld-ral reserve banks
to rediscount the discounted ])a|)(r of other Federal reserve
banks at rates of interest to be fixed by the Federal Reserve
lioard.
(c) To suspend for a period not exceeding thirty days, and
from time to time to renew such suspension for periods aot
:n .1
Act : Prov'uJid. That it shall establish a graduated tax ujxm
the amounts bv which the reserve requin inents of this Act may
rA\H
APPENDIX
r^
be porr.,ttod to fall below the level hereinafter specified: ./,./
pror.Jal furt,,rr. That «he„ the ^old reserve held against Fe.l-
-al reserve notes falls hehnv forty per centu.n, the Federal
ii-erve Board shall establish a .raduat. d tax of not „,ore than
<"'e per eent.un per annum upo.i such deficiency until th.
"".'■"'^ ''•'"/;; \'"'-^>-*"" -"> --)>alf per centun;, and when
s.K reserve falls belo. thirty-two and one-half per centun,, a tax
at he rate uu.reasu.o.ly of not less than one and one-half per
-ntun, per annun. upon each two and one-half per centun, or
-• ";; """- t'-t such reserve falls below thirty-two and
;-;''^P--un, TlH. tax shall be paid by the reJerve bank,
't «lK. reserve bank shall a.hl an a„u>unt ec,ual to said tax to
H. rates of interest and discount fixed In' the Federal Reserve
iJoard.
(.1) To supervise and regulate through the bureau under
Ih. .harge of tlu. (-on.ptroller of the Currencv the issue and re-
-nnent nf Federal reserve notes, and to p,-escribe rules and
y^adat.ons under which such not,. „,.y be deliven.! by the
Comptroller to tlu. l.^.deral reserve agents applying theref^n-.
(e) lo ad<l to the number of cities classified as .vserve and
-"f'-al .--..ru. ..iti... un.ler existing law in which national bank-
...g assoc.at,ons are subject to th. .vserve requiren.ents set
^'"'""" 7""" '"•-".^•o'' "'is Act; o.. to reclassify ..istin-.
-serve and central reserve cities or to tern.inate their desbnu;^
tion as such. °
in To suspeud or remove any officer or director of any
'-'"•■■'1 reserv. bank, the cause of su<h ren.oval to be forth-
- I. .onmnnncated in writing hy the Federal Uescrve Board
'" <'"• n ni.,v<,l ofMcer or director and to sai.l bank
(M-) To re.,,n-re the writing off of doubtful or worthless assets
"P"" tJ'- books anrl balance sheets of Federal reserve I,anks
(') To suspend, for the violation of :,„y of the provisions
"i "- Act, he operations nf any Federal reserve bank, to take
I-— n thereof, adn,inister the san,e during the perio.l of
susDi'Msion. iiiii nil I,,p,„„,i „J„; i i
. ' , , "■ ; -enRU aa\i.Nar.i., u, i,(jui(iaie or reoriran-
i/e such bank. ^
<') ''■" ••'-l"in. bond, nf Federal reserve agents, to n.ake
Vk
APPENDIX
,>Ci)
riM.-ulations for the safeguarding of all collateral, bonds, Federal
nscrve notes, money or property of any kind deposited in the
liaiids of such agents, and said board shall perform the duties,
functions or services specified in this Act, and make all rules
and regulations necessary to enable said board ctl'ectively to
[iirform the same.
( j) To exerci.ie general supervision over said Federal reserve
hanks.
(k) To grant by special permit to national banks applying
tiiirefor, when not in contravention of State or local law, the
right to act as trustt'c, executor, administrator or registrar of
stocks and bonds under such rules and regulations as the said
imard may prescribe.
(1) To iniploy such attorneys, experts, assistants, clerks, or
otliir employees as may be deemed necessary to conduct the
liiisiness of tlie board. All salaries and fees shall be fixed in
advance by said board and shall be paid In tli(' same manner
a- the salai'ies of the members of said board. All such attor-
iM vs, ex{)erts, assistants, clerks and other employees shall be
a[)pointed without regard to the provisions of the Act of Janu-
arv sixteenth, eiglitecn hundred and eighty-three (volume twen-
l\ two United States Statutes at Large, page four hundred
and three), and unendmeuts thereto, ur any rule or regulation
made in pursuance thereof: I'mT'idiil. 'J'hat nothing herein shall
prevent the President from placing said employees in the classi-
iied sen ice.
FKni-.RAI, ADVISORY COVXCIL.
Dr.r. IS. There is h(>reby created a Federal Advisory Council,
which shall consis. of as many meml)ers as there are Federal
reserve districts. Each Federal reserve bank by its board of
directors shall annually select from its own Federal reserve
district one member of said council, who shall receive such com-
.1 ..f i:.
|niisiii mil .tini .liii'Wancc.-, as iii.;y ;>< :;\;;; :;; :;:~ -
tors subject to the approval of the Federal Reserve Board.
The meetiiiiTs of said advisi.rv cmuiicII shall be held at Washing-
570
APPENDIX
I:r5-
ton. District of Columbia, at least four times each year, und
oftener if called by the Federal Reserve Board. The council
may in addition to the meetin^rs above provided for hold such
other meetin<rs i„ Washinn-ton, District of ("olumbia, or else-
where, as it may deem necessary, may select its own officers and
adopt its own methods of procedure, and a majority of its mem-
bers shall constitute a quorum for the transaction of business.
\'acancies in the council shall be filled by the respective reserve
biuiks. and members selected to fill vacancies shall serve for the
unexpired tenn.
Tlie I'ederal Advisory Council shall have power, by itself or
through its officers, (1) to confer directly with the Federal
Reserve Board on general business conditions; (2) to make
oral or written representations concerning matters within tlie
jurisdiction of said board; (;3) to call for information and to
make reconnnendations in regard to discount rates, rediscount
busmess, note issues, reserve conditions in the various districts,
the purchase and sale of gold or securities bv reserve banks,'
open-market operations by said banks, and the general affairs
of the reserve ban kin <; system.
POWKRS OF KKDKUAT, RKSKRVE BAXKS.
Sf.c. 13. Any Federal reserve bank may receive from any
of Its member banks, and from the United States, deposits of
currvnt funds in lawful money, national-bank notes. Federal
reserve notes, or check, and drafts upon solvent member bunks,
payable upon presentation; «r, solely for exchange purpose^,
may receive from other Federal reserve banks deposits of cur-
rent funds in lauful money, national-bank notes, or checks a,ul
drafts u})on solvent Tuember or other Federal reserve banks, pay-
able upon presentation.
Upon the indorsement of any of its member banks, with a
waiver oMemand, notice and protest by su.l, bank, any Federal
rf-^crve i^anK may wi-count .i-.i,,, (irnns an(i i)iijs of exchange
arising o,it of actual cmnnercial transactions; that is, .u.trs,
drafts, and bills of exchange issu..l or drawn for agricultural^
APPENDIX
.->7l
industrial or commercial purposes, or the proceeds of which
have been used, or are to be used, for such purposes, the Federal
Reserve Board to have the ri<.ht to detcmiine or define the char-
acter of the paper thus eligible for discount, within the mean-
in<r of this Act. Nothing in this Act contained shall be con-
stnied to prohibit such notes, drafts and bills of exchange, se-
cured by staple agricultural products, or other goods, wares or
merchandise from l)eing eligible for such discount; but such
definition shall not include notes, drafts or bills covering merely
investments or issued or drawn for the purpose of carrying or
trading in stocks, bonds or other investment securities, except
bunds and notes of the (Joveriunent of tlie United States. Notes,
drafts and bills admitted to discount under the terms of this
paragraph must have a maturity at the time of discount of not
more"than ninety days: ProvhUd, That notes, drafts and l)ills
drawn or issued for agricultural purposes or based on live stock
and having a maturity not exceeding six months may be dis-
counted in an amount to be limited to a percentage of the capi-
tal of the Feder/d reserve bank, to be ascertained and fixed by
the Federal Resene Board.
Any Federal reserve bank may discount acceptances which
are based on the importation or exportation of goods and which
have a maturity at time of discount of not more than three
months, and indorsed by at least one meml)er bank. The amount
of acceptances so discounted shall at no time exceed one-half
the ppid-up capital stock and surplus of the bank for which the
rediscoiuits are made.
The aggregate of such notes and bills bearing the signature
or indorsement of any one person, company, firm or corporation
rediscounted for any one bank shall at no time exceed ten per
centum of the unimpaired capital and surplus of said bank ; but
this restriction shall not apply to the discount of bills of ex-
clmnge drawn in good faith against actually existing values.
Any member bank may accept drafts or bills of exchange
drawn upon it and growing out of transactions invouing the
importation or exportation of goo.ls having not more than six
months sight to run : l)ut no bank shall accept such bills to an
Hi^Z
APPENDIX
amount equal at any time in the aggregate to more than one-
'lalt its paid-up capital stock and surplus.
Section fiitj-tuo hundred and two of the Revised Statutes of
the United States is herein- amended so as to read as follows-
-No national banking association shall at any time he indebted
"■• ". any nay hable, to an amount exceeding the amount of its
'•'P'tal stock at such time actually paid in and remaining un-
dmunished by losses or otherwise, except on account of demands
of tlie nature followind--
First. Notes of circulation.
Second. .Moneys dei)osited will, or collected by the assocla-
tion.
'I'lunl. Hills of exchange or drafts drawn against money
aetually on deposit to the credit of the association, or due
thereto.
Fourth. Liabilities to the stockholders of the association for
dividends and reserve profits.
Fifth. Liabilities incurred under the provisions of th. 'Vderal
Reserve Act.
The rediscount by any Federal reserve bank of any bii,
receivable and of domestic and foreign bills of exchange, and of
acceptanc.s authorize,! by this Act, shall be subject to .such
.-tn.'tions, l.mit.t: i . 1 reguLtlons as may be imposed by
the Federal Reserve Hoard.
Ori'X-MAI{KF.T OPKRATIOXS.
Skc. 14. Any Federal reserve bank may, under rule.s and
regulations prescribed by the Federal Reserve Hoard, purchase
■•u.d sell in the open market, at home or abroad, either from or
to domestic or foreign banks,, firm, corporations or individuals,
cable transfers and bankers' arcoptancos and bills of exchange
of the kinds and maturities by this Act made eligible for redis-
ccmnt, with or without the indorsement of a member bank.
'p,,^,... 1?...} 1 I , , ,, ■
:_i i vv!t_:.;i .L.iCi'.e ./.'iiiiv >.i,iii iiavc powcr :
fa) To deal In gold coin and l.ulllon at home or abroad, to
make loans thereon, exchange Federal reserve notes for gold,
' 5»»*!*»«W«»»'r?
ArPEXDlX
:,i.i
^old coin, or gold certificates, and to contract for loans of
rrold coin or bullion, givinrr tlicrcfor, Mhen necessary, acccpt.ihlo
security, including tlie liypothccation of T'nitcd States bonds
(ir otlicr securities wliich Federal reserve banks are authorized
toi Id;
(b) To buy and sell, at lionie or abroad, bonds and notes
of the United States, and bills, notes, revenue bonds ar.d war-
rants witli a maturity from date of purchase of not exceeding
six months, issued in ;• ;ticipation of the collection of taxes or in
anticip ition of tlio receipt of as-urcd revenues by any State,
county, district, political subdivision or municipality In the
continental United States, including irrigation, drainage and
reclamation districts, such parchases to be made in accordance
with rules and regulations prescribed by the Federal Reserve
Board ;
(c) To purchase from member banks and to sell, with or
without its indorsement, bills of exchange arising out of com-
mercial transactions, as hereinbefore defined;
(d) To establish from time to time, sul)ject to review and
determination of the Federal Reserve Board, rates of discount
to be charjicd bv the Federal reserve bank for each class of
paper, whiel) sh.nU be fixed with a view of accommodating com-
merce and business ;
(e) To estaljlish accounts witli other Federal reserve ban. s
for exchange purposes and, with the consent of the Federal
Reserve Board, to open and maintain banking accounts In
foreign countries, appoint correspondents, and estabhsh agencies
in such countries wheresoever it may deem best for the purpose
of purchasing, selling and collecting bills of exchange, and to
buy and sell with or without its indorsement, through such
correspondents or agencies, bills of excLinge arising out of
actual conmiercial transactions which have not more than ninety
days to run and which bear the si-^- ature of two or more re-
sponsible parties.
.^^^^^..
.574
AITENDIX
GOVKRyMKNT DKrOSlTS.
Sec. 15. The moneys he'd in tlic -general fund of tlic Trcas-
nrv, except the five per eentuni fuiul for tlic redemption of
outstanding national-lii-nk notes and the fund., provided in this
Aet for the redemption of Federal reserve notes may, upon the
direction of the Secretary of the Treasury, be deposited in
Federal reserve banks, which banks, when required by the Sec-
retarv of th.e Treasury, sliall act as fiscal agents of tlie T"nit< d
States; and the revemies of tlie (iovermuent or any part thereof
may be deposited in such banks, and disbursements m.ay be made
by checks drawn af^ainst such deposits.
No public funds of the I'liilip' Mie Islands, or of the postal
•savings, or any government fluids, shall be deposited in th:^ con-
tinental United States mi .'i-iy bank not Ijilongin^ to the system
established by this Act : I'rov'uhd, Jimc-ci'rr, That nothin^r in
this Act shall be construed to deny the ri^ht of the Secretary
of the Treasury to use member banks as depositories.
XOTK iss
Sec. 1(). Federal reserve notes, to bo issued at the discretion
of the Federal Reserve Board for the purpose of makinj^ a<l-
vances to I'ederal reserve lianks throu<rh the Federal reser'-c
agents as luTeinafter sit forth and *" )r no other j)iii'pos(,, are
henliv authorized. The said notes shall be oblij^r.itions of tiir
I'nit'.d States and shall be receivable 'v all national and nieni-
ber banks a ' Federrl reserve banks and for all taxes, customs
ami o'.iier j)ul)lic dues. They shall bi' redeemed in <rold on de-
mand at the Treasury Depariment of the T'^nited States, m
the cit\ of ^Vasbinffton, District of Coluinlila, or in fjoid or
lawful money at any Icdcral re>erve bank.
Any Federal reserve bank may make n])plication to the Inrnl
Federal reserve afrcnt for sucli amoimt of the I'ederal reserve
notes hereinbefore prov'd-d for as it may re(|uire. Sik li appli-
cation sliaii lie i pnnied with a tender to i f i- local i.iii rai
reserve .ayenl oi ,-■ Uicral m amount e<iual to the sum of the
APPENDIX
OiO
KiiKral reserve n
surh application.
Acs tlui> ajjplied for and i>.su(({ pursuant to
The collateral security tluis otFered shall
cepteil for rediscount undi r the provisions
'„f section thirteen of this Act, and the Federal reserve agent
>h,ill each day notify the Federal Reserve Board of all issues
;.:ui withdrawals of Federal reserve notes to and hy the Inderal
n.,erve hank to which he is accredited. Tlu- said Federal Re-
serve Board niav at any time call upon a Fcl.ral reserve bank
for ad.'itional security to protect the Federal reserve notes
issuetl to it.
Fvery Federal reserve hank shall maintain reserves ni gold
or lawful money of not less than thirty-fivr p.r cm, turn against
it> deposits and reserves in gold of not K >> Wv.n forty per
or.tum against its Federal reserve notes in actual circulation,
;m,l not offset hv gold or lawful money deposited with th. Fed-
.ral reserve agent. Notrs so paid out shall hear ui)on their
faces a distinctive letter and srrial nu.nl)er. which sliall he as-
signed hv the Federal Reserve Hoanl t., ...•h ]■ , (hral ivMrvc
hfuik. Whenever Federal rrserve notes issued through one Fed-
eral reserve hank shall l)e r.cix.d l.y another Federal reserve
hank the, shall he promptly refurm.l f.)r credit or redemption
to the I'edend resir\r hank through which they were originally
issued. No Federal r.s.rve hank shall pay ovit notes issuea
fhrough another under penalty of a tax of ten per centum Uj.on
\\h' face xalue of notes so pai.l out. Notes presented for re-
,i,M„ption at the Trra ury of th-.- Fnited States shall he paid
out of the redemption fund and returne.l to the Federal reserve
h.mks thr.nigh which they wen' originally issued, and thereupon
such Fedeial reserve hank shall, upon demand of the Secretary
of the Trea.sury. rcimhursc such r(<irniplIon f nd in lawful
money or, if such F.-Lral r.s.rve not.s have h-m re.l.rna.l hy
the Treasunr in gold or gol.l certificates, then such funds shall
l.r reimimrsid to the extent deemed nocrssary hy the Secretary
of the Treasury in gold or gohl certificates, and such Federal
nsorve hank shall, so loTig as anv of its Federal reserve notes
_ _ • 11....
rein.nn (>ut>tan(hng. mamiam »iiii ii'e i re, -.,;;,, . ;t; ^-:;-.: .-.::
■unount sufHcient in tiie .judgment of the Secretary to provide
J 7 (5
APPEXDIX
4
:J1
for all rcdtniptions to he made hy tlie Treasurer. Federal re-
serve notes received by tlie Treasury, otherwise than for re-
demption, may he exchanged for gold out of the redemption
fund lieniiiafter provided and r.tunird to the re.ser - hank
througli which they were originally issued, or they ma he re-
turned to such hank for the credit of the Ignited States. F(.i-
eral reserve notes unfit for circulation shall he returned hy the
I'Vdcral reserve agetits to the Comptroller of tiie Currency for
cancellation and destruction.
The Federal Reserve Board shall require each Federal reserve
l)ank to maintain on deposit in the Treasury of the I'nlt.d
States a sum in gold suflicient in the judgment of the Secretary
of the Treasury for the redemption of the Federal reserve tiotes
issued to such hank, hut In no event less than five per centum;
but such deposit of gnjd shall he count, .1 and Included as part
of the forty per centum reserve hereIni)efore recjulred. 'I'he
hoard shall have the right, acting through the Fechral reserve
agent, to grant in whole or in part or to reject entirelv the
aj)plication of any Federal reserve hank for Federal reserve
notes; !)ut to the extent that such application may he granted
*!h' F((I,ral Ii,s,.n,. Hoard sjiall, (hrongh its local I'ederal re-
serve agent, suppiv l-'ed.'ral reserve not.s to the hank so applv-
ing, and such l)ank shall he charged with the amount of su. h
notes and shall i)ay such rate of interest on sal.l amount as
may he established hv the Federal Reserve Ro/ird, and the
amount of such I'.deml reserve notes so issued to anv .such
I-ank shall, upon d. liv. ry, together with such notes of such
F((leral reserve bank as may be issued uiirl. r s,.,fi,,n eighteen
of this Act upon security of Fnited Stales f«„ p.r centum (lov
'^rnmcnt bonds, become a first ami paramount lien on all the
assets of such hank.
Any Fcfieral reserve bank may at any time reduce Its lia-
bility for outstanding Federal reserve notes by depositing, with
the Federal reserve agent, its Federal reserve notes, gold, g.)ld
certificates, or lawful money of the Fnited States. F.d.r.d
rcscrvp notc-s no deposited shall not he r.issucd, excejjt upon
complian.e with the conditions of un original issue.
ArPENDIX
^( I
The Federal reserve agent shall hold such ffold. gold cer-
tificates, or lawful nionoy iivailable exclusively for excliaii<i;e for
t, outstanding; I'edcral reserve notes when offered by the re-
MTve bani; of which he is a director. Upon the request of the
Secretary of the Treasury the Federal Ilcserve Board shall
require the Federal reserve agent to transmit so nuich of said
gold to the Treasury of tlie United States as may be reiiuircd
for the exclusive purpose of the redemption of such notes.
Anv Federal reserve hank may at its discretion withdraw
collateral deposit. d will, the local FetKral reserve agent for the
protection of its Federal reserve notes deposited with it and
>hall at the same time substitute therefor otiier like collateral of
.,,ual amount with the approval of the Federal reserve agent
under regulations to Lj prescribed by the Federal Resei-\e
Hoard.
In order to furnish suital)le note^ for circulation as Federal
rescr^-e notes, the Coniptn.lK r oi the Currency shall, under
the direction of the Secretary of (lie Treasury, cause plaies and
(lies to be engraved in the best manmr to guard against counter-
feits and fraudulent alteration , and shall 'oavo printed there-
from an.l numbered such (inantities of sucli note, of the drnom-
inations of .f.',, ^10, ^^li\ $')0, $100, as m ly be re.|uired to sup-
ply the Federal reserve banks. Such notes shall be in form
and tenor as directed bv the Secret y of the Treasury under
the provisions of this Act and shall b.ar the distinctive num-
bers of the several Federal reserve banks through -vliieh they
are issued.
When such notes have been prepared, they shall be deposited
n tlu' Treasurv, or in (he subtreasury or mint of the I'nited
States nearest the place of business of each Federal reserve bank
and shall be held for tlie use of such bank subje.-t to the order
of the Comptroll.r of the Currency for tlieir delivery, a> pn.-
Mded bv this Act.
The plates and dies to be prnmred by the Comptrnller of the
Currency for tlie printing of sudi circulating notes shall remain
nnd.T his control and direction, and the expenses necessarily
incurred in executing the laws relating to the procuring of
hJ^'" *
APPENDIX
such notes, and .ill other expenses incidental to their issue and
retirement, shall i)e paid hy the i'ederal reser\ ■ lianks, and the
Federal Reserve Board '■ U include in its cstlmale of expenses
levied against the I'ed reserve banks a sufficient amount to
cover the expenses hcrem provided for.
'i'he examination of plates, dies, hed pieces and sn foi Ih. and
re.f^ulations relatintj to such examination of plate>, dii-' and so
forth, of national-hank notes provided for in section fifty-one
liuiuiixl and .>iventy-four llc.vix'd Statutes, is hereijy extended
to include notes In nin provided for.
Any appropriation heretofore made nut of the fjeneral funds
of the Treasury for engravinjj; plates and dii s, the purchase
of distinctive paper, or to cover any other expense in connection
"ith the printing; of national-hank notes or notes provided for
liv the Act (>f Alav tlilrlicth, nlintcrn hmidnd and ci;:^]!!. .iiid
aii\ distinctive jiaper that may he on hand at the time of the
])assa^c (if this \(t may he u^cd in the discretion of the Secre-
tarv for t!ic |)iir|)oses of this Act. and slioidd the appropriation-
heretofore m nic he insufficient to met t the retjuirements of tin-
Act in addilinn to clrculat in;j; noli s provided for hy exlstinfi
law. the Secretarv is lu'rehy authorized to use so much of an\
funds in the Treasury not otherwise appropi i.ited for the j)nr
pose of furnishinir the notes aforesaid: I'nn'i(Ui'i. Iimcircr. Tli.i
nothin^j,- in this section contamed shall he construed as ex( nipt
In^ national hanks or Federal reserve hanks from tlieir liabilit;
to reimburse the I'niled States for any expenses incurred ii
printiufif and issuing circula! inu,- notes.
I'verv Federal reserve hank shall receive on deposit at pa
from member banks or from Federal reserve banks checks am
drafts drawn upon any of its depositors, ami when remitted h
a Federal reserve l)ank, checks and drafts drawn hy any deposi
t(u- in anv (>ther I'ederal reserve hank or member bank upo
funds lo the credit of said depositor in said reserve bank o
member bank. Nothinfr herein contain- d shall be construe
ft.: nrolnbiti'ifr fi me'iiber bank from diaruinff its actual expens
incurred in collecting and remittin<; funds, or for exclmnere sol
to its patrons. The Federal Idscrvc Board shall, i)y rule, fi
ATTKAniX
579
issue .ii'.il
, Jiiul the
cxptiiM ^
mount to
oilli. and
liftv-Dllr
oxtcndtil
M'al funds
purclia 1'
•otinection
)vi(lccl for
lUC of till'
the Sccrc-
opriatioii>
its of tlii>
y cxlstlni;
icli of an V
r tlic ))ur-
cirr. That
IS exi'nipt
ir liiihility
iicurrcd in
isit at par
checks and
oniitfrd I)y
iny doposi-
liank iijion
e liank or
const nicd
ml oxponsr
luin<fo sold
)V ruK', (i\
thr charirrcs to 1)C collccti'd liy thr ni'jnil)cr hanks from its j)a-
tnin> whose checks arc cleared through tiie Federal reserve l)ank
,111(1 the char<;e which may he imposed ior tlie service of clearing
or collection rendereil hy the Federal reserve l)ank.
Tiie Federal Jlescrvc Board shall make and promulgate from
time to time re<;ulations jroverning the transfer of funds and
cliarfTcs therefor among Federal reserve hanks and tiicir
I, ranches, and may at its discretion exercise the functions of a
charing house for such Federal reserve hanks, or may desig-
nate a Federal reserve haiJv to exercise >uch functions, and may
,.!>o re(iuire eacli such hank to exercise the functions of a clear-
ing house for it- memher hanks.
Sec. 17. So n.uch of the j)rovisions of section fifty-one hun-
dred and fifty-nine of tlie Revised Statutes of the United States,
and section four of the Act of dune tucntieth. eighteen liundred
and .seventy-four, and section ciglit of tile Act of July twelflh,
(ightcen hundred an<l eighty-two. and of any other j)rovisions
of existing statutes as reciuire that hrfore any national hank-
ing associations shall he authorized to conmience hanking husi-
n.'ss it shall transfrr and deliver to llu' 'I'reasun r .if the Fnitrd
Ni ,to. a stat.d amount of United States registered bonds is
hereby repealed.
RKFUMUNi- ilONUS.
Sec. is. Aftor \\\<< \>:i\- from the jiassagr of this Act. .^nd at
aiiv time during i jn riod of twmty \ <'.irs thereafter, any niem-
lur bunk desiring to retire the whole or any part of its circu-
Ming notes, may file with the Treasurer of the United Stales mi
application to s. 11 for its accoimt. at par and accrued interest,
Fnited States iiMud- securing circulation to he r. tired.
Thr Treasur. r shall, at tho em! of each (piartorly period,
furnish the F.d.r.d H(-erve Board with .i h>t of such applica-
tions, and the Federal Reserve Board may, in its discretion.
!(!uirc the Federnl reserve hanks to i)urchas.> such honds from
• .■ banks whose applications have been filed \Nith thr 'I'rr.isunr
; least ten d.iys hefurr the end of any tpia'-terly prriod at
:>so
AJ'PENDTX
wliirli the Ferlcral Reserve Roiinl may direct the purchase to t
iiiadr: Proridcd That Federal reserve hanks sliall not he pei
niittid to purcliasc an amount to exceed ^!.'.").()0(),()()() of sue
hoiids in ;iny one year, and '.vliich amount, shall include i)oncl
actjuired under section four of this Act liy the Federal reserv
bank.
Providr,] f/irtlicr. That the Federal Reserve Roard sliall alle
to eacli IVdcral res. rve hank sUi'h proportion of such hond
as the capital and ^urphis of such hank shall hcai- to the aii-<.T(.
^ate capital and siiri)Ius of all the I'l'deral reserve hanks.
I pon noti( fi-oni the Treasurer of the aiununt of hone's s
sold for its account, eacli memlur hank shall dulv assio-n aii
transfer, in wi-itinif. such bonds to tlic Federal reserve ban
purchasliio- flu. same, and such I'ederal reserve bank shall, there
upon, di pdsit liwful money with the Treasurer of flie Fnitei
States f(ir III,, pui-ehase j)rice of such bonds, and the Treasure
shall pay (o the member hank selling- .sUch bonds anv balaiu'
due after (Kchu'tinLj a sufficient sum to redeem its outstanding
notes-- secm-ed by Mich I'luids. uiiich notes shall be canceled am
jH-rnianently retired when redeiined.
'I he Inderal r serve banks purchasinf^' ^neh bonds sliall h
permitted to take out ail amount of cireulat inj^f notes equal ti
the jiar \ahie of such bdiid-.
Fpoii the dej)osit with thi' Treasurer of the T'nited Stat(\s o
bonds so jmrchased. or any bonds \v]t\\ \]\n circulat in;^- jiriviletri
aetMiii-rd under s,,'!,,,,, f,,ur of this Act. anv Fefleral reservi
I ank making; such deposit in the manner j)rovi(led by existinr
l.'iu. sh.ill be entitled tr) reccive from the {'oinptioHer of tin
Currency i n-ciilai in^r- notes in blank, re^^-istered and counter
sifjned as prn\ idrd by law. «(|ud in amount to the par value ol
the )>onds so deposited. Such notes shall be the oblij^^it ion-
of the Federal reserve bank procuriiio- the same, and siiail l)c ir
form prescribed by the Secnt.iiy of the Treasurv. and to th(
same tenor and effect as national-bank notes now provided 1)\
lau. rh.ey shall be issudi and redee-n,.(| under the same lerni>
and conditions as national-bunk ii!){e.s except that they i.h
Iial
APPENDIX
581
chase to he
lot he piT-
)() of such
iudc I)(iii(is
ral resLTvi;
sliall allot
lU'h hoiiiis
the aii-n-rc-
nks.
f h()ii('s so
issiu'ii ami
uTve hank
hall, then -
tho T'nitrd
'l'r('a>iir( ]•
i_v i>alaiici'
1 1 1 s t a n ( 1 1 M l;-
iitek'd ami
Is shall h."
s (.'(jiial to
I States of
;■ prlvilcov
•al icscrsi'
y (.'xistin^;'
Irr of tli-
I Colilltcl'-
r \alii(' (if
il)li<;'at ions
sIkiII he Hi
mil to thr
oviilcd hv
lino tl•I■!n^
thev .-hall
I
: I \h- limited to the amount uf tho capitai stock of the I'ldcral
ri>ciVL' hank issuing tlnin.
I'pon application of any Federal reserve l)aiik, approved
I)y the Federal Reserve Hoard, the Seeretary of the Treasury
may issue, in exelianpfc for I'nited States two per centum <i'old
bonds bearing the circulation privilege, hut against which no
ciieulation is outstanding, one-year gold notes of the I nited
States without tlie I'irculatiou i)!-|vllegc, to an amount not to
exceed one-half of the *^wo per cei.lum Ijonds so lendend for
exchange, and thirty-year three ])er centum gold homls without
the circulation privilege for the remainder of the two per centum
lionds so temlered: I'rorhlal. 'I"liat at the time of such CAchange
llie Federal reserve hank ohtaining such one-year gold notes
-!i:ill enter into an ohligation with the Secrt'tary of the Treas-
i!'v hinding itself to })urchase froui the United States for gold
at the maturity of such one-year notes, an amount ((jual to
those delivered in exchange for such ixmds, if so re(iuested hy
I'nr Secretarv. and at eai'h maturity of one-year notes so pur-
. hased hv -uch I'ederal reserve hank, to pnrchaM' from the
I nited States such an amount of one-year notes as the Secre-
i irv may tiiuh r to such hank, not to exceed the amount issued
to such hank in the first instance, in exchange for the two per
centum I'nited States gold hdncU : said ohlin'ation to ))urchase
al maturity such m)te> shall continue in force for a period not
to excel (1 thirty years.
For the i)urpose of making the exchange herein provided for,
Ihe Si'cretai-. of the Treasury is authorized to issue at j)ar
'i'reasurv notes in couj)oii or registered form as he may pre-
-erlhe in denomination-.^ of one hundred dollars, or any imilti[)lo
thereof, heariui;- interest at the rate of thne pn- e. ntuin per
tinum. payahle (juarterly, such Treastn-y notes to he ])ayalile
not more than os.- y^'ar from tlie date of their issue in gold
coin of the i)resent standard value, ami to be exempt n.s to
principal and interest from the payment of all taxes and duties
• 111 I 1 ■ 4 I , -, II
lUeii liV Tlii:- .\i":, -i- **. vi;
U tlie « mied rMale
»roviti
f
IS I rom
tax.
{•
IS m anv lorm tiv or under
le. nninicipal or local
lulhorities. And for the same purpose, the Secretary is aii-
r,Hi
APPENDIX
thorizcd and empowered to issue T'luted States gold bonds a
par, lKariii<r three per centum interest pavahk' tliirty year
from (late of issue, such boiuls to be of the same (General teno
and effect and to be i^suid under the same oi.nera! terms am
conditions as the Tnited State-, three per centum lionds withuu
the circuhition privile<ro now isMied ,! id .)ut^tan(lin>4•.
Upon apph'cation of any Ftihral .eserve bank, approved h\
the Federal Keserve Hoai'd, the Secretary may issue at par sucl
three per centum bond* in exchange for the one-year gold note:
herein provided for.
BANK RESERVES.
Sec. 19. Demand dep(j>its witliiti the nuaninrr of this Ad
shall com]»rise all deposits payal)le within thirty dav>. and tinii
deposits shall comprise all depoMts payaide after tliirtv davs,
and all savings accounts and c( rtificato (,i' deposit which an
subject to not less than thirty days' notice before ])avmeiit.
When the Secretary of the Treasury shall have otticially an-
nounced, in such manner as h,' may i lect, the establishment of ;i
Federal reserve bank in any district, every subscribing nienibei
bank shall establish and maintain nservis as follows:
(a) A bank not in a reserve or central reserve city as now
or hereafter defined shall hold and maintain reserves etpial to
twelve per centum of the aggregate amount of its demand de-
posits and five per centum of its f ime deposits, as follows:
In its vaults for ;i period of thirty-six months after said date
five-twelfths thereof and permanently thereafter four-twelfths.
In the Federal reserve bank of its district, for a j)eriod of
twelve mo:dhs .after said date, two-twelfths, and for each suc-
ceeding six inoidhs an additional one-twelfth, until five-twelfths
have been so defjosited, which shall l)e the amount permaneiitiv
reipiired.
I-or a perl()(' of thirty-six months after said date the balance
of flio ..,,. 1 111 • •. ,. . . . .j_. . .
•'"" "•••."• '■■" •■-'••• •'' '•■' ■"■";; ■ auus, ui' m li.- rederai
reserve l)nnk, or in national banks ;a reserve or central .serve
cities as now defined l)v law.
APPENDIX
58.*^
I bonds ut
irty jL'iirs
icral tuiior
terms hirI
l!s without
proved l)v
t p;ir such
gold notes
' tliis Art
. ;uid tiiin'
irtv (i:i\-,
whicli ai'i'
.Muent.
ieially an-
iiiient of a
g member
y as now
efjual til
■mand de-
)ws :
said date
•-twrlftlis.
})eri()d of
eacli siic-
L'-twelfths
•marientlv
e balance
' i''i'(i( rai
ui . • serve
After said thirty-six months perioci said reserves, other tlian
tliuse liereinljefori' recjuired to be held in the vavdts of the meni-
liir bank and in tiie Federal re;,erve bank, shall l)e held in the
\aults of the member bank or in the Federal reserve bank, or in
liith, at the option of the member l)ank.
(b) A bank in a reserve city, as now or hereafter denned,
vhail hold and maintain reserves equal to fifteen per centum of
(lie. a'-^'fre'-'-ate amount of its demand deposits and ti'e per centum
(if its time deposits, as follows:
In its vaults for a period of thirty-six months after said date
six-fifteenths thereof, and permanently thereafter five-fifteenths.
In the Federal reserve bank of its district for a period of
twelve months after the date aforesaid at least three-fifteenths,
and for each succeedinn; six months an additional one-fifteenth,
until six-fifteenths have b.en so deposited, which shall be the
amount permanently required.
For a period of thi^ty-^i\ months after said date tlie balance
of the reserves may be held in its own vaults, or in the Fetleral
reserve bank, or in national banks in reserve or central reserve
cit'es as now defined by law.
After said thirty-six months' period all of said reserves, ex-
cept those hereinbefore required to be luld pennancntly in tiie
vaults of the member bank and in the Federal reserve bank, shall
i>e lield in its vaults or in the Federal reserve bank, or In both,
at the option of the member bank,
(c) A bank in a central reserve city, as now or hereafter
defined, shall hold and maintain a reserve eciual to eighteen per
centum of Die agj^^re^ate amount of its demand deposits and five
per centum of its time deposits, as follows:
In its vaults six-eighteenths thereof.
In the Federal reserve bank scven-cio-htcentlis.
The balance of said reserves shall be luld in its own vaults
or in the Federal reserve bank, at its option.
Any Federal resei-ve bank may receive from the member
. ' ■ ,. i;., _ ^I...lf ,,f «.i/^l. iiwf ulllllcnf .
hanks as i i -ni v"i .-,, noi crxicei::::^ •,•::-. ::•.:: --t
eligible paper as described in section fourteen properly In-
dorsed and acceptable to the said reserve bank.
584
APPENDIX
If a State .)ahk or trust coinpaMv Is required hv tlic law of
Its Statr t,. keep its reserves eitlar in its own vaults or with
anotl.er State bank or trust ro,„pany, such reserve deposits so
kept HI such State Link or trust eoinpany shall be eoustrued,
«itiiiu the Hieaninn. uf this section, as if they were reserve de-
posits in a national bank in a reserve or central reserve city
for a penod of three years after the Secretary of the Treasury
shall have officially announced the establishment of a Federil
reserve bank in the district in which such State bank or tru>f
company is situated. Kxcept as thus provi.led, no member bank
sliail keep on deposit with any nonmember bank a sum in excess
of ten per centum of its own paid-up capital and surplus. No
"u.mber bank shall act as the medium or a-ent of a nonmember
hank m ap})ly,ns for or receiving discounts from the Federal
reserve bank under fl,e provisions of this Act .:cpt by permis-
sion of the Federal IN serve Poard.
The reserve carried by a m..nil)or liank with a Federal re-
serve bank m.-.y, under the re,<,ndations aiul subject to such
penalties as may b," prescri!,ed by the Federal Reserve Poard, be
checked a-ainst arul withdrawn by such member bank for the
purpose of meetin- existing? liabilities: Provided, horvevcr. That
no bank shall at any time make new le)ans or shall pay any
dividends unless and until tlie total reserve required by Liw is
fully restored.
In estimatincn the reserves required by tliis Act, the net
I)alance of amounts du.. to and from other'banks sliall be taken
as the basis for ascertaininir the deposits against wliich rcser^-es
shall be determined. Pa lances In reserve banks due to member
I'.u.ks sliall, to the extent lierein providod, be counted as re-
serves.
^ National banks located In Alaska or outside the continental
United States may remain nonmember banks, and shall in that
event maintain reserves an<l comply with all the conditions now
provided by Ia^v reerulatln^- tliem: or said banks. oxa^Y-k '■" the
Pliilippinc Islands, may, witli the consent of the Reserve Board,
1 eeome member banks of any one of the reserve districts, and
V
APPFA'DIX
585
>liall, in that event, take stock, uiaintain reserves, and bo sul)j(Tt
tt) all the other provisions of this Act.
Sec. 20. So much of sections two and three of tlie Act of
.Tune twentieth, eighteen hundred and seventy-four, entitled
•• An Act fixing the anieunt of United States notes, providing
for a redistribution of tlie national-bank currency, and for
other purposes," as provides that the fund dep> ted by any
national banking association with the Treasurer of the United
States for the redemption of its notes shall l)e counted a^ a
part, of its lawful reserve as provided In the Act aforesaid. Is
hereby repealed. And from and after the passage of tlils .\ct
^uch fund of five per centmu slr.ill in no case be counted by
any national banking association as a part of its lawful reserve.
BAKK F.XAMINATIOXS.
Sec. 21. Section fifty-two hundred and forty, United States
Revised Statutes, Is amended to read as follows :
The Comptroller of the Currency, with the approval of tlic
Secretary of the Treasury, shall appoint examiners who shall
exan.ine every member bank at least twice in each calendar
year and oftcner If considered necessary: Pruvidcil horci-irr,
'Fhat the Federal Reserve Board may authorize examination by
tlie State authorities to be accepted In the case of State banks
and trust companies and may at any time direct the holding of
a special examination of State banks or trust companies that
are stockholders in any Federal reserve bank. The examiner
making the examination of any national bank, or of any other
inemhcT bank, shall have power to make a thorough examination
of all the affairs of the bank and In doing so he shall have jiow.r
to administer oaths and to examine any of the officers and agents
thereof under oath and shall make a full ;ui.] detailed report
of the condition of said bank to the Comptroller of the Currency.
The Federal Reserve Board, upon the recommendation of
• . . ^. _ 1 1! n.. tl... ...1.. i-Ii^c (if .ill
tile Coinpi roiiei ui tiie v rrrrcnrv, :■;;;;;; .:■'
bank examiners and make report thereof to Congress. The ex-
pense of the examinations iiereln provided for shall be assessed
?■
-)S(;
Al'ri'.NDTX
])\ the Comptroller of tiio Ciirroncy upon the hanks examined In
proportion to assets or resources held hy the banks upon the
dates of examination of the various banks.
In addition to the examinations njade and conducted bv tli."
Comjitroller of the Currency, every Federal reserve bank ma\,
with the approval of the Federal reserve agent or the Federal
Reserve Hoard, provide for special examination of member
banks within its district. The expense of such examinations
sliall be borne by the bank examined. Such examiiuitions shall
he so conducted as to inform the Federal reserve bank of the
condition of its member banks and of the lines of credit which
are being extended by them. F.very I'ederal reserve bank shall
at all times furnish to the Federal Reserve Board such infon-vi-
tion as may be demanded concerning the condition of any mem-
ber bank within the district of the said Federal reserve bank.
No bank shall be subject to any visitatorial powers other
than such as are authorized by law, or vested in the courts of
justice or such as shall be or shall liave been exercised or di-
rected by Congress, or by either House thereof or by any com-
mittee of Congress or of either House duly authorized.
The I'ederal Reserve Board shall, at least once each year,
order an examination of each Federal reserve bank, and upon
joint application of ten member banks the Federal Reserve
Board shall order a special examination and report, of the con-
d'tion of any F'ederal reserve bank.
Sec. 22. No member bank or any ofSccr, director or employee
thereof shall hereafter make any loan or grant any gratuity to
any bank examiner. Any bank officer, director or employee
violating this provision sludl be deemed guilty of a nusdemeanor
and sliall be imprisoned not exceeding one year or fined not
more thru $5,000, or both; and may be fined a further sum
equal to the money so loaned or gratuity given. Any examiner
accepting a loan or gratuity from any bank examined by him
or from an officer, director or employee thereof slmll be deemed
,;ifT
^T n micrifi
m£ioTir\i» r» T-»
,j ..1...11 i„
^T- = n^..A T.nf
i, v.-vcecciing
one year or fined not more than $5,000, or both; and may be
fined a further sum equal to the money so loaned or gratuity
V
APPFADIX
587
:,ivcn : and slmll forever Hicrcafter he disqualiflid from lioldinf?
(.tiice as a natioiial-haiik examiner. No nalioiial-baiik examiner
.hall perform any • 'ur service for com})ensation wliile holding?
-.lull office for any l-ank or otliei r, tlireetor, or tiniiluyve thereof.
Other than tlir uMial salary or director's fre paid to any
oHicer, director or einphiyie of a memlier hank and other than
.1 reasonahle f( e paid by said bank to sncli officer, director or
.inployce for services rendered to such bank, no officer, director,
nnployee or attorney of a member bank shall be a beneficiary or
receive directly or indirectly, any fee, commission, ■j.-ift or otiur
consideration for or in coimectioii with any transaction or busi-
ness of tlie bank. No examiner, public or private, shall disclose
the names of borrowers or the collateral for loans of a member
bank to other than the proper officers of such bank witliout
first having obtained the express permission in writ in-- from the
Comptroller of the Currency, or from the board of directors of
such bank, except uhen ordered to do so by a court of compe-
tent jurisdiction, or by direction of the Congress of the United
States, or of either House thereof, or any committee of Congress
or of either House duly authorized. Any person violating any
provision of this section shall be punished by a fine of not ex-
ceeding $.5,000 or by Imprisonment not exceeding one yea--, or
both.
Except as provided in existing laws, this provision sliall not
take effect until sixty days after the passage of this Act.
Sec. 23. The stockholders of every national banking associa-
tion shall be held individually re>p(msii)le For all contracts,
debts and engagements of such association, each to the amount
of his stock therein, at the par value thereof in addition to th.-
amount invented in sucli stock. The stockl>olders In any ^na-
tional banking association who shall liave transferred tlu ir
shares or registered the transfer tliereof within sixty days next
before the date of tlie failure of such association to meet its
obligations, or witli knowledge of such impending failure, shall
, Til. .1. !.„..*.... ;r fl,o^- liwl innrle no such transfer,
ne IKluie lo ua: ^:lIl:!-■ v.-wtv:;-. ;•-
to the extent that the sul)se(iuent trruisferee fails to meet such
liability; but this i.rovlslon shall not be construed to affe.i in.
I
;s8
AIM'KXDIX
■^u^y wav any recourse wlm.I, >uc-h .han.l.ol.I.Ts nu-^Iil ..llarui.
i.ave a^au.st tl.o.o in uhu.e num.. .ucl. .hare, are reyi.tercd .t
tiie time of sucJi failure.
an
T.OAXS OX FARM I.AXDS.
.^Kr. 21. Any national hanklnn. association not slt^iated '"n
antral n-serve eity n.av n,ake ioans MHaired hv improved an.
>i'Kneun,l.ered farn. land, situat.-d uithin its ^Federal nserv.
'I'.^tneU hut no suel, loan ^hall !„■ „,ad. for a lon^a-r tin,e tha.
hve years nor for an amount cxeeedin^r fifty ,,.,- „„tun. of tl,,-
-•tUHl value of the property oflVnd as seeuntv. Any suei,
;ank n.ay n,ake s. ■], loans in an a^^.-e^ate su.n ..,ual In t^wentv-
"ve per eentnn> of it> capital and surplus or to one-tl.ird of i^
"-ne deposds an.I m,..!, hanks ,nay continue h.uvafter as hereto-
'"•;;■ t*' >-<<'^'>ve tinu. d. po>Its and to pay Inl.rest on tl... same
11k. Federal Ucsc-vc J{oa,-d s!,all have powc,- f.-on, ^in,.. to
nnetoaddtothe h\t -I' .itics In u Inch national hank, shall m.t
'"' P"n.nttcd to n>akc loan, secured upon real estate in the
n.anner dc^crihed in this >eetion.
FOIUIC.X Ill!A\THi:S.
S|.:r 05. Any national hankinn- a»ociafion possossmn- a can-
;'''';:'V'"r^"'"^^-'"»"''"»<>-- — v 01.. application. iU.
""■,'■"■'■;."""■'■"' "••"■''• "' ^"''' '-"litions and nnd,,-
M.eh n.n.„latH,ns as n.ay he p.v.c.lhed hv the saal hoard, for
""' P'"T'"- of securing- authority to csfahlisl, hranclu. in for-
n-n conr.fru.s or .lep.ndencies of the Fnit,,! St ,t.s for the
l.Ttherance „f fl,, forein,, connnerce of the I-nited States and
to .xt. „ re.pnred to do so. as fi.cal a^n nts of the Fnited States
Sneh application shall .pcclfv. In adddion lo ,|„. „an,e and
•■■■;'"'"' '" ""• I'ankin^. association (ilin. it. the pi,,,, o,- pl,ce,
where the hanking, operations propo..! are ,o I .,r,i,d on
;""'»»'-"'>'o"nt of capital >ct asale for the conduct of it. for,.l.,n
husinoss. The Fed.r.d !{...,.rve !» = -.,= =■.{ .]...!! !,,.... .. . . "^
I"-"V" ..r fo reject s„ch application if. in lts".iud!^„!.„t! tl^
ArriADix
)8!)
amount of capital proposed to be .sot aside for tlie conduct of
loreio-n business is inadeciuate, or if for other reasons the grant-
inc of such apphcation is deemed iiiexf)ecHent.
Kverv national l)aiiking a-MJciation which shall receive au-
horitv to establish foreiy;n hranclus shall he required at all
tiiiio to furnish information concerning the; conditiori of such
hranches to the ('om|)troi!er of the Currency upon demand, and
the I'eder.il Reserve IJoard may order --pecial exiuninations of
the said foreign branches at sucii time or tlmcN a- it may deem
h'st. I'.verv --uch national banking association shall conduct
the accounts of each foreign branch independently of llu' ac-
counts of other for( ign branches established by it and of its
home office, and shall at the end of each fiscal period transfer
to its general ledger the profit or loss accruing at each branch
as a sejiarate item.
Sic. 'id All provisions of law inconsistent with or super-
seded by any of the provisions of this Act are to that extent and
to that exteid oidy hereby repealed: rror'tdid. Nothing in this
Act contained shall be construed to repeal \\w parity provi-lon
or provisions ccntaln((l In an \et approved March fourt(enlh.
nineteen hundred, ( ntitled " An Acl to define and (i\ the -tandard
of value, to maintain the parity of all form> of Money issued
or coined !)y the I'nlted Stal-, to refund il,e public debt, and
for other pur{)OMS." and the Secretary of the TreaMiry may f.u-
the purpose of nialnlalning such parity ..nd to siniigthen the
gold reserve, borrow gold on I he security of I 'nlteii States bonds
authorized i)v seillon two of the Act last referrtd to or for one-
\ear "-old notes bearing,- interest at a rale of not to e\<'eed three
per ceiiMnn j/er aiuunn, or sell Ihe same if necissary to obtaui
<'oIil. When til.' funds of h. Treasurv on h uid .justify, he may
purdiase and retire such outst nullng bonds mk! imfes,
Si;c. ;^7. 'I'h.' provisions of th.e Act of M iv thlrlutli, nineteen
hundred and <lglil, authorizing national . urreiicy associations,
the issue of ailditional national-bank .inulation, and creating a
National Monetary Commission. «l>i.h esplns liy limitation
under tlie lenns of sneli Act on the Ihlrtleth (biv of dune, inne-
teen h mdivd and f.airtien. ar( hereby txt-nled to .luiu- thir-
i
590
ArriADix
tictl
1, run
ctccn lu'iidrcd aiui iittccn, ami sections
Ircil a I
1(1 Hftv-tluTi.', filtv-otu' llUIH
Ircd
and seven
fift
ty-t
v-or.c liuii-
wo.
<ift-
one hundred and ninety-one, anil fifty-two hundred and fourteen
of the Revised Statutes of tlie I.'nited States, which nere
amended hy the Act of May thirtieth, nineteen huiuhed and
eight, aicj hereliy remaeted to read . > such sections read prior
to May tiiirtieth, iiiii.teen hundred ami ei<;ht. vui),ject to sucli
amendments or modifications as are j)rescrii)ed in tliis Act: Pro-
:;'(/( y/, iKKiCxi't; That section nine of the Act first referred to
in this section is hereby amended so a- to cliange the tax rates
fixed in said Act by making the portion applicable thereto read
as follows :
National bankinij a'<socIal!ons liavin<]^ circulating notes se-
cured (.therwis' than by bon<is of the I'nited States, shall pay
for liie (i)st three monflis a tax at the rate of three p^r centum
per annum upon the averarro amount of such of their notes in
circulation as are based upon the deposit of such securities, and
aflerwards an additional tax rate of one-half of one per centum
I'er annum for each month until a tax of six per centum pi-r an-
num is reaeli-.d. an 1 thereafter such tax of six per ceiitum per
annum upon tiie a\erage amount of such notes.
Skc. .'2S. Section fifty-one hundred and forty-three of tli(> lie-
\i^((I Statute^ i> her(l)e aimiidid and rei iiaeted to r^ id as lol-
lows: Any association f(nii.( d uiuKr this title may, !> tin vote
of shareholders ouuin^ fwot birds f its capital stock, reduce
its (;i,Mtal to aiiv sum not below the .•iinount re(piir<'d by il-is
title to aiithcn/e the f()rmatl<iii of associations; but no sucli
rcmutioii shall be allowable which v ill reduce the cajiit il of the
a-sociatioii belou the aiiiouiit riMjuirid for it> oiiKtandm^ circii
lalioii. nor shill aiiv reduction be made until the aniouii' of the
proposed reduclion has been n ported In the Compt roller of the
Currencv and such reciuction has In i n approved by the said
Comptroller of the Currency and by tht I'ediral Reserve Hoard,
or by till' ory;anvation coniinittcc pending the organization of
the I'ederal liesi'rve Hoard. .
r>£C. !^'9. If anv ( iause, s(-ntrncr, pfiragrapli or part of tiii-
Act shall for anv rea-on be adjudMid by anv enurt of <i(mi)e-
APPENDIX
591
trnt iurisdiction to be invalid, such judgment shall not affect,
nnpa'ir or invalidate tlic remainder of this Act, but shall be con-
fined in its operation to the clause, sentence, paragraph or part
thereof directly involved in the controversy in which such judg-
inciit shall have been rendered.
Skc. .'JO. The right !o amend, alter or repeal thi^ Act Is
liereby expressly reserved.
Approved, December 23, 1913.
INDEX
Acceptability, a rcqni.>ilo of inonc.v. 11.
Act,
Aldrioh-Vrocland. '$7.). 473.
BIan<l-AlliM)n, 187S. iOi.
Free Banking. i>f 1S.")I). U.V
General Baiikiiij;, 110.
Lcfjai tender, (iO.
N.itional Bank (see Natinnal Bank
Act). :<(!.">.
Of IHOH (Canada;. \7i.
Of liXIO, V<i.
Of ISH (Hn^ilandV 308.
Slicrinaii. Hii.
.\pcncics. <rcdit, 331).
.V^'ricultural creilit, cheaper, tOS.
Apriciillural [>roducts as money, 38.
Aldricii-Vrccland Ail. i.">f).
Arl.ilrat;.-. l.-,l \:,i.
Army BilU, 171 I7.V
.\sset ciirren<y, U!>
.\sset'i, ciincealcd, i(\\
Audit, -.harelididiT.'. i:!I. t3fi.
B
Bank (or Banks),
Articlps of .\.ssoeial mn df lir^t char-
tered. 177.
Audits. 131.
Capital, 4.-.I.
Capital anrl credit. 2*3.
Capital stiM k of, '271.
Cashier. •<!».t
Conlral nold reserves, liO.
Claxsifi.'d. ^SO iHi.
Cleariti^j houses. ISO.
C. tfliitii'T' ifii, T/iiV.
Credit, department of, ,337-316.
Difficulties of establishing, .306.
l)ire<-t<)rs of, i87-i93.
Discount clerk, i96.
Early, 348-3t!).
Early Canadian, 4H.
Earning power of, i')3.
Economic functions of, iSl-iH.
Employes (.f, i94-i97.
Evolution of, 280.
Failures in Canada, 433.
Financial, 3HH, 427.
First in I'pper Cfln-da, 178,
First I'nited State>, 3.">0,
Foreign Di'partment of, 1 i3.
Free Banking Act of 18.>0, 41, V
Functions m making jtayment, 113
lU.
(ioverninent, the, 482 -.")i')2.
Incorporation of, 410.
Inspe( tion. Internal, 431.
Liability of, in <<>llecting, 2!)0.
Liai)ilily of stockholders, 272.
Loans (see Loans).
Loans to directors, 40,5.
Mergers and amalgatnalions, 4,56.
Note feller. 2!».i.
Number of, to population, 4t2.
Officers of. 2!>3-2!)t.
Of small capital, 470.
Operation of. 241.
Organi7.atini\ of. 280
Organi^.alion nf n ('.uMdian, 43L
Origin of great chartered, 176.
Paying teller, 294.
I'rivrtte. 280.
I'rofits of ('anaiiiaii, t.53.
Provisions of the early bank charter!
410.
592
INDEX
!):j
}7-3t6.
?, 306.
31-247.
113-
178.
n:!.
■)0, n,v
yment,
H.
, i7i.
ions, 456.
n. Hi.
lifin, 431.
1, 17G.
ank chartors.
Hank (or Bark!f) — (rnnlinue(1)
Reserves composed of (our elements,
4i6.
Reserves fixed liv each bank, 424.
Savings (see Savings Banks).
Second I'nited States, 353.
Settlement of accounts between, 116.
Shareholders' audit, 431, 436.
State ownership of, 409.
Stockholders of, 286.
Surplus, 449.
Taxing the. 486.
Trust companies, 467.
Underwriting and promotion of cor-
porations, 463.
V. S. Treasury in relation to, 390-394.
Wall Street's relation to. 381-389.
Rank .^ct of 1844, 308.
Bank circulation, expansion of, 376.
Bank Credit,
.Advantages of, 251-253.
Deposit. 203-208.
Bankers,
Privileges of, 239-241.
Requisite qualities, 315.
Responsibility of, 245 2 17.
Banking,
Branch I)ank system, 417.
Branch banks and the local commu-
nity, 439.
Call loans, 427.
rommercial, 195 (see Commercial
banking).
Commercial letters of creclit in C.in-
ada, 477.
Concentration of reserves in liramh
banks. Ul.
Conilitiiins of note issue. 41*^.
Karly characteristics, 317.
KtTccI of union of I'pper and I.mver
Canada, 414.
Knclisli customs. 139.
I'inancing the crops, 473.
I'r.tnce, 401-402.
Historical peri(Mls, 318.
10.
Interest chari.'es in the West, 468.
Inti rnal bank inspection, 431.
Money trust of Canadian banks, 456.
New features added to, 1820-1830,
113.
Origin in Canada, 409.
Security of note issues, 423.
Shareholders' audit, 431, 436.
State, .35(i.
Substructure of Canadian banking
system, 410.
Banking Systems,
European, 395—408.
National, 365-370.
State experiments with, 362-364.
Bank mergers and amalgamations, 456.
Bank-note Issms,
Benefits of, 448.
Criticism of, 446.
Profits on. 447.
Bank of Kngland,
.\ct of 1S44, 398.
Character of note, 390.
Control over gold supply, 129.
History. 395-399.
Management of, 400.
Origin, 395.
Relation to Government. 397.
Bank of France, 130
Branches of, Kll 406.
( iirrciicy of. 40,1.
System of. lOt- Kl6.
Bank of Cicrniai .-,
fiovcrnment relation to, 106.
Svslem of, 107.
.ifTcctcd 1
>y.
Bank notes, prici
215.
Bank reserve. 207.
Bank reserves, 78.
Dominion notes as, 189.
Bank Sfatiinent,
( 'ombint il. 260.
Double entry system in, 262-405.
Liabilities in, 271-279.
Resourci'S in, 2(!0- 270.
s.;....,!...j ?!:?-..•! •:•. J?.''. '?7.'
Iniled States bonds in, 206,
,-.ni
INDEX
!?,ink System,
l$(m.l Deposit, 359.
Free, :i(ll-.S(U.
New York. ;!,)!).
Safely fliuil, 3.")!).
SiilTolk, 357-358.
Barter,
Excliange by, li.
Influenro im industry, 12.
Reaver skins as money, 37.
Bimetallism, 153-l(>5.
A<lvantag<'s of. 15S.
Bland-Allison Act of 187«, 16£.
Defined, l.K).
Diftieulties of, 157.
Final failure of. 164-165.
Latin I'nion, 160.
Sherman Act, 1H90, 162.
Single standard, 158-160.
Bliind-Allison Act of 1878, 162.
Bonds.
Defined, 1!)6.
Interest rate.s on, 108.
TimhiT, 198.
Boris, KiO.
Borrowing;, long time, 199.
Branch Banks,
.Vdvantages of, 4V0.
Concentration of reserves in. 441
Functions in local community, 439.
Functions of, 418.
In foreign countries, 458.
OKjections to, 439.
l?ranch l)ank system, 417.
Mn^rgs vs. Spalding, 290.
Bu-iness,
Beginning of, 5.
I'rar-tice of. 1.
Result of division of labor, 5.
Tecluiology of. V.
('
Cables. Foreign Exchange, 136.
( ;dl Loan Rat.-s, 3HV.
'"idl Loans. 3^(1. l<7.
In < ana.l.i. tCl,
In New York, 100.
Canada,
Bank failures in, 4.33.
Deposit currency in, 443.
Economic situation after conquest,
16G.
Financial situation after conquest.
167.
Foreign coins in, lHl-182.
New England trailers in, 166.
Canadian Bankers' .\ssociation, 438.
Canadian b.inknig problims, 439- »S1
Canadian Banking System. 409-438.
Substru( ture of, 410.
Canadian bank notes, based on com-
mercial assets, 419.
Canadian clearing-houses. 480.
Canadian monetary system, history of,
100-192.
Capital,
Bank, 243 (see Bank).
Bank a distributor of. 236.
Defined. -^0.
Economic importance of, 20.
Movements of, 133.
Need of banking, 45L
Ri'lation to currency, 22.
Temporary providing of, 327.
Value proporti(mate to income, 20.
Working (of dealers in securities),
.382.
Capital g(HKls. demand for, 23.
Capitalization define.i. 21.
Cash, value of. 254-250.
Central gold reserves, 420.
Certification, Wall Street, .383.
Che( ks. title to deposited, 308.
Circulation, rapidity of, 73.
Civil War,
Financing, 226-227.
Prices. 10 1.
Clearing houses, Canadi.in. 480.
Clearing liousr jjrinciplc. 12!
Cleveland. President, ii, panic of 1893,
178-182.
CoKuizability. a requisite of money, 42.
Couiage,
Earliest. 40.
INDEX
505
Coinage — (continued)
History in United Slates. of.-O;?.
Kcquircmont.s of frooil. V7.
Coins,
Fraudulent depreciation of, 17-48.
Oriuin of names, Ki.
( i.llateral, rrstrielions on, 384.
Collateral loans.
Details of, .'?8:?,
For Banks. .^iO.
Merehandise, ;5i9-;i36.
Risk in, ;5i4.
( ()lle<'tions,
Knglish method of, 301-302.
Laws of, i07.
Out of town. 300.
Commerce, foreign, 131,
( (innnercial Ranking, function of, 19.5.
Commercial Banks, plan for, 387.
Commercial letters of credit in Canada,
477.
Commercial paper.
Dealer in. 3V3-344.
Demand and supply of, 342.
Double-name, 3il.
Houses. iOl.
I Single-name, 3il.
Size of notes, 34.5.
I < ninmodity, acceptahility for exchange,
41.
Concealed assets, iM.
Contracts, [laymrnt of, 7.5.
( nnvertihilily, inllueuce on value of
moniy and credit. 1<>.
( ci-operative iredit soci<Mies, .'lOO.
( n-t of production, determination of
value, 31.
Cr-dit,
Analysis of, il8.
Bank, ^Oi-im (see B.-ink Credit).
Bank a dealer in. <33.
Cancellation of, i\i.
Cheaper agricultural. tttS.
Convertibility the essence of value
of. U!.
('.._. ..,.._.,.;vp j-redit siK-ieties. 500.
I rcaticu l.v Imnk, it!)-i.51.
Dangers in panics, 308.
Defined, 15, 193.
Deposit. i03-i00.
Kxcliangc by, 14.
Gold the basis of, 206.
Importance of, 209.
Indirect barter. 1<>.
Kinds of. 19.3.
Letters of. 14.5-146.
Liquidation of. 200.
Necessity of. 426.
Non-circulating, 211.
Operation of. 16.
Prices afTected by. i 1 1-219.
Settlement of balances by use of. 122.
Sources of information, 337-3.39.
Speculation and. 216-217.
I'se in industry. 194.
I'scfulncss in I'xchange, 14.
Credit .\gencies, 339.
Cre<lit money,
.Vrgument for. 224.
Cla.ssified. 220.
Defined. 221.
Devices to maintain value of. 224.
Difficulty of adjusting supply of, 22.5.
Factors determining value, 221.
Prejudices against before 1861, 226.
Prices affected by. 21.5.
Regulation of. iii-iii.
Risk in free use of, 222.
Crisis of 18.57, 18.5.
Crop, moving the western wheat. 17*.
Crops, financing the, 17:!.
Current y,
,\fter union of I pper and Lower
Canada, 18:i.
.\ttempfs at reform of Canadi.in. 178.
Based on commerci.ci assets. tl!>
British Government and Canaiiian.
178.
Canadian in second quarter of 19th
century, ISi.
Cause of de])reciate<l, 18.
Changes after 178.3. 170.
( 'iimplroller of. 367.
Decimal .'vstera in Canada. 186.
)9n
INDEX
CurrrtiCN — (rnntinunl)
Dff.'cts of rnitcil States 217-^19.
Ucpiisit, -ili {>i-i- Doi)()sit Curri'iicy).
Deposit rurrtiicy in Canada, H3.
Fractional. I(i9.
Halifax, His.
Mc(lia of i'\<liaii>,'o. 15.
Hi'lalion to raiiila!, ii.
Rosnlts of roform. 170.
Soa onal (icmaiuN for, .'i73.
Shipments of. 1 17.
Standard, of Colony. 100.
Iniforni. in Canada, \'.H.
York, KiS.
Cut eoins as fractional rurr- iicy, 160.
Debt,
Demand. iiO.
Government. ii7-iiO.
Provisions for reliriiif,', 230.
Deferre<l Payments,
Defme<l. G.j.
Ciold as standard of, 04.
Demand, delinc-d. 71.
Demand for money.
Discrimination in. 70.
Factors infhiencm};. 7:5-77.
International trade, SO.
Seascmal. SO.
Tncertainty of, SI.
D.-mand sterling. l:iS-l;?9.
Deposit, natiin- of, i'lG.
Deposit Curn'n<y,
Cost of, U.V
Development of, 371.
In Canada. 11.3.
Inelasticity of. 37,5.
Limitation, .37i.
Ohjeclions to, U5.
Depositors,
Inducements of hank to. .301 3()t).
Protection of, 30!» 312.
Deposits,
Cost in (iovcrmncnl savin^js hanks
40(i.
C.eneral, 30.3.
e_\|l— 3S
Government. 250.
Guaranteeof, .37S-3S0.
Interest on, 471.
Special, :>03.
I)e|)reciation of currency, IS.
Desire, defined, 71.
Directors, loans to hank, 105.
Discounts. 201.
Divisihilily. .-i re(|ui-iti' of money, 41.
I)i\isi.in of Lal)or,
business the rcs\ill of, .">,
FfTect on demand for money, 7t.
Dollar, defined, 20.
Domestic Exchanp\ 112-122.
Dominion Notes,
.\s hank reserves, ISO.
Legislation coneerninR, 100.
E
Economic Fore<"s,
(-umulalive effect of, 03.
Prices governed hy. 107-109.
Value a register of, 27.
Economic goods, kinds of, IS,
Economic situation in Canada afte
Con(|Uesl. KiO.
Economics, <ietinition of, 4.
F^ngland.
Adoplion of gold standard. 53.
Bank of (s.c llauk of Fngl.uidK
Experienie with douhle standard c
value, 52-53.
English TreaMiry Hills, 174.
Entrepreneur,
Kffect on <-redil, 101.
System of production. 10.
E\iropean Hanking Systems, 305-408.
Evchaeige,
,\rmy hills a medium of, 174-175,
Barter stale of, 12.
Heirinning of. 1 1.
Hy iTcdil, 11.
Hy money, 12.
Dom.'stie, 112-122.
i i.ii i \ « ,iu«uliciti ii.i 1 c" :;;;:;: - :;::::, : ■
Karly r\prriin«"nt-i in luMni of. ir>H
INDEX
o97
8.
iiiiiicv, 41.
inry, 7t.
ii.
!)0.
lOD.
IS,
"aiiaila aftiT
ni. .-.3.
.standard of
ii>, 3!).)-in8.
r, 17;-17J.
_ . 1 l-^O
i.dia (.f, UiH
K\(lianj,'«- — ironl! lined)
I'.aily iiifdiiiiiis of, 11.
l''iirrit.Mi. I'ii-lji IM''' Foreign Kx-
(■li.int:r,).
(itrmaii and I'nncli, 119-151.
(iovcrnminl dilji-nturc.-, as a mtxlium
uf, IHl.
M,ll.od> of. 11.
Money a fm tor in, 1.'?.
New York, lUllJ.
Value of. 7.
Uiili Cnited Kingdom, ISO.
lAehanp'aliility, utility of money de-
pendent on, i\i.
Exchan^'e utility, tij.
Falkner price tahl.s lOO-lO-l.
Feudal I'eriod, metals in, lJ-1.
Fiat money, defined, iiO.
Finance I'ill-i,
Dclineil, 110.
I'njlit on, U1-U.3.
I'iuan'ial hanks, plan for, .'5S8.
I'liiancial situation after Conque-jl. 1G7.
riuancinj; the crops, 47:5.
Fnreiun hranch l)anks, IJS.
Foreign coins in ("anada, lSl-182.
Foreign commerce, 131-13i.
Foreign Kxchangc,
Dealer in. Hi.
I',nuli-li Treasury l)ill>, 174.
(iold point, U7-US.
Investment hnying of, 147.
Market articles, Ki.V 13G.
(^uotalions, li:>.
.■^peciil.ilion in, l;i7.
Varieties. l:iS.
Fractional currency, U>1>.
Hons as, 109.
Cut coins as, ICi).
France.
Hanking in, 401.
Iliuk of, 40^ (see Hank of France).
l fee hanks, 41.">.
Free Silver Party, 30.
Gait, \. T., 18G.
(ialt's plan, ISO.
fiarni>hment, 3;io.
Cicneral Hanking .\ct.
Basis uf, 410.
Points of difference from early thiii-
ters, Mi.
Provisions of, 410.
Similarity to cliarlers of three original
hanks, 410.
Germany, Imperial Hank of, 400-408.
Gold,
Credit an inlluence on use of,
li)i).
Defects as .standard of deferred pay-
ment, 04.
Demand for, ~.'>.
Good (lualities a- money, 44.
Market for, IM.
New, S7-SS.
Objections to u>e as money, 15.
Premium on, 81.
Price-raising effect of, 87.
Shipments, 131.
Standard of value, 29.
Supply of, 83-85, 80.
^Vorlil's stock of, \o3.
Gold certiticates, iiO.
Gold (joint,
Maximuni, li7.
Minimum, H7.
Gold standard, I'ni! 1 States adoption
of, 01.
Government credit money (st-e Credit
Money 1
Government <lehentures of 1848, 184.
Government dehl, idi'-WO.
Government note issues, 48i.
Government postal hanks, 4!t,'>.
Government savings hanks, 4"Jj.
Goods,
Consumption, 18.
Prcxluction, 18.
Cireenijacks, iiii.
Greshum's Law, ,10 r>l.
598
INDEX
p
I
If
n
Hiilifax currency, 1(!S, 170, ISG.
ILimilloii, Ali'\;ui(i<'r, '>C>, J7, JH, 17G.
HiiK'ks, Sir FrancLs, IS'J.
KcMilt of legislation, 191.
Hoarding',
Decline of, 77.
Go\erniuent, 7S.
I
Imperial Bank (.M-e Hank of Germany).
Income, sjiveil, it.
Income.s,
Money, iii.
Sources of, i'i.
Indu.strial .system, relation of money
and banking,' to, 10.
Industries, j)roductive, i'M.
Industry,
Credit influences on, i\9.
Integration, 10.
Inelasticity, present currency, 375.
Inflation, early attempts, 100.
Inspection, Internal bank, 4;il.
Interest charfjcs in the West, 108.
Interest on deposits, 471.
Investing, 100.
Investment,
Detinetl, H.
Methods of, i-l.
Real, ^5.
Jackson, bank opposed by, 3j5.
Johnson, J. v., -US.
Kiting. 307.
Labor,
Division of, ,■;, i).
Ideal lin i^ion of, 5,
La'iii I'nion, UiO.
Legal tender, .Vi-.'jt).
Hasis of legal tender issues iu the
Diimini'ii, Sio.
InCanad . .)-2.
Legal-tender .\cts, of 180^-1803, 00.
Legal-lender Laws,
Constitutionality of, (JO.
EfTect of, (i(i.
Legislators, mistakes of early, 51.
Letters of Crciia, travelers, 145-146.
Loan clerk, responsibilities of, 385.
Loans,
Call, 'M6.
Capital, 318.
Cash, ^54.
Classified, 315-320.
Collateral, 324 (see Collateral Loans).
Credit, 254.
Demand, 321.
In bank sla'. nient, 264.
Industrial, 31U 318.
Investment, 315.
Mortgage, 319.
To directors, 405.
To farmers, 429.
London settlement, 136.
M
Margin, defined, 33.
Marginal utility, .32, 33.
Market, gold, 129.
Medium of Exchange, requirements of,
40-43.
Merchandi.se, collat<ral for loans, 329-
33().
Metal, standard of value, 48-49.
Meluls, as money, 44.
Mintage, 54.
Monc.\ ,
.\nioi:nt necessary, 90.
.\^ agent of production, 9.
Convertibility the essence of value
of, 10.
Credit, 72.
Dcniunci lor, 73 (see Demand for
Money).
.V
INDEX
50!)
\I inrj — (continued)
liat, 7i.
I uriuM i)f, 1 1-
linliri'(t barter, i;i.
In^lrumi-ut in production of wealth,
10.
Metals as, 44.
I'Litiuum used as, 45.
rriinitive forms of, 30-40.
l{iu.sons for the study of, 1.
Represents incomplete exchange, 13.
Heiiui.^ites of commodities used as,
40-43.
Short sales of, 95.
Standard, li.
>>:ppl.V of. Si, 85.
1 nited Slates varieties of, 82.
I'tilily of, 13,71.
\'arielies of, 7i-73.
Muuey and Banking, relation to indus-
trial system, 10.
Moiu-y and ("redit,
I'uiilitate exchange, 17.
Rrpresentatives of wealth, IC.
Muncy trust, Canadian banks in, 450.
Mortgages, 196.
N
N.i.h, W. .\., quoted, 331.
Nilional Bank Act, 305.
I'.arly history of, 300.
Sununary of, 307-309.
\ ilional bank notes, il3.
National banking system.
Lack uf unity in, 377.
I'resent condition-- of, 371-380.
N itional Banks,
I lasses necessary, 4i7.
Dclined, iSO.
Technical powers of, 308.
\-,\ York Exchange, 1 U, 118.
\ w York Sttxk Exchange, 383.
\ole,
( ullateral, ^^i'^.
•ludgnicnt, 3i3.
\..!,- broker, 341.
Note Issues,
Conditions of, 419.
Dominion, 189.
Government, 180, iSi.
Provincial, 187-189.
Reserve for (iuvernment, 48i.
Security of, ii'-i-
Notes, circulating, 3()9-370.
o
Organization of a Canadian bank, 431.
Overcapitalization, ■i'i.
Overdrafts, H\3.
Over-rating of coins, 170-171.
Panic,
Rich man's, 380.
Warnings of 1907, 3.
Paper standard, 00-01.
Placer mining, 100.
Platinum as money, 45.
Political Economy, defined, 3.
Population, effect on demand for money,
73.
Postal savings banks, 378, 490.
Pound sterling, Ho-
Premium, gold, 81.
Price,
Changes, 91-94.
Detined, 09.
Prices,
Civil War, 104.
Credit an influence on, 211-219.
Uepentici't upon money market, 70.
Economic forces governing, 107-109.
Reserves in rci ' ion to, 3S(i.
Speculation an influence on, 210-217.
Theory of, 95-111.
Price tables, 97-107.
Comparison, 105.
Falkner, 100.
Foreign, 100.
Weigiiting of, a9.
Private banks, 280
V
(inn
INDEX
I'licidiiu. coiiwiuc uttrihutciJ In, Hi.
I'dslal liaiiks V.)J.
I'mducliiiii,
Hy iliaiif,'!' of o\vnersliip, C.
{'o-()|)irativc sy>t(M!i, IS).
D.fiiud, -,.
Miitrcpn-ucur sy^li'iu, 19.
I'nxliiilivi' industries, i.'il.
IV.ifit, .Iffiiied, i7.
Profits of C.iiuidian banks, 453.
FroptTty,
D.'fined, 8.
Iiisi'curity of, 7C.
PvramidiiiL', 380.
R
Ratio, silver to >,'old, ."lO (iO.
Receipts, \vareliuiJ.ie (see Warehouse
Reeeiplsj.
Reiilishank, 4(>'j (see P luk of (ier-
inaiiy).
He.-e.ve.
.Aiiioiint ner sary, t-V.
Rank, -207.
Melh.:)ils itf inereasiiij,', iiJ7.
National liank, ;!7().
Secondary, i5S.
I nrelialjility of bonds as, xa9.
Reserves,
Call loans, Vi7.
Central avM, 4-20.
Coneentralinii in branch hanks, 4H.
Depletion of, ;!T4.
Fixed by each bank, 4ii4.
Four elements of, l-2(i.
Gold, for (lovernnient note i»ues,
4S-^.
Investment securities, 4:^8.
Loans to manufacturers, wholesalers,
and farmers. 4i28.
I'rids in relation to, 386.
RedeposilinK. 380-387.
Resourct s, alterations in value of, iGS.
Ridirely, opinion of ( oiuptroiler, i'.H.
Rourke, J. !■: , too.
s
.Safety deposit vaults, 304.
Saving, IOi>.
Suvinjis bank, iH3.
Savings Ijanks, 49j.
Postal, 378.
Present conditiotis of, ;'>77.
Secretary of Treasury,
K\ped!cn,s of, 393.
Re>p., liability of, 390.
Requir'/mcnts of, 'Mi.
Securities,
Dealers in, 3Si,
Market in Cnited States, 381.
Indigested, Ma.
Selling,
Forced, 9fi.
Set-otf, 31^. 313.
SettleuKnt, London, 130.
Shareiiohlcrs' audit. 431, 43C.
Shern\an .\ct of !Si)(), 'Oi.
Shipment ~. f,-o]d, 131.
Silver,
Bland-.\!!ison .\, ( of 1S78, \(ri.
Rriiisii iiiiiia and c oinage of, 103.
Uemonetization by Iniled States,
161.
E(Te( t of .\ineriean, 1.^5.
(iiiod (pialitii s as money, 44.
Latin I iiioi:, 100.
Objeitions to. 4.5.
Sherman .\(l, 1890, IGi.
Silver [,'art\ , 1(0.
Short sale,, '.>.;.
Shorts, si|Uci./ing, 9.».
Shortt. Dr. Adam. 410.
Single stand.inl, l.iS iOO.
Spcculalioii, credit an influenee on, i\i''
Slaliilil\. |-e(|U!site of money, 4i.
Standard of value,
.\l)preciating. 08.
Double, 49, .5^-53.
Gold in Lnited States, 6L
Melailic money as. 48.
Paper. 00-01.
State Hanks, d<'iiu( d, -^80.
V
iM)i:x
tiOl
Stiitrmont. R;ink, '2(;0-iJ70 (sec Ikii'k
J^'Htomcnt).
Stiitciiu'iiK III till' Ciovrriiiiii'iil, H'l'
State (i\vtirr~lii|) of liaiik--. 10I>.
StiH-k K.\( Ikiiij,'!-, New York, .'583.
St<K-ks, i;!:!.
Siih-Treasiirifs, srlllnnriit i>r l),niks
throiigli. 1 IT.
SiiiTdlk Hank S.v.strni. ;i.i7-:i.>S.
Supply, money, Hi, s:>.
Surplus, bank, 27;i-27.'5.
>iirplM> or rest fiitu!-. oxcrssivo, -M9.
T
Taxing li.-ink-. ISCi.
Taxipf; circiilaliori, iSH.
Toliacfo as mmicy, iiH.
Td'irists, ('(Tfil 1111 fdi-ci^ii lAilMiip',
l:U.
Trailc, infliu'iii-c <if motu'y on. i:>
Treasury. Secrel.iry ft (»•>• Scenl.i ry nf
TreaMiry) I'liitci ^lalrs (><■.■ [ . S.
Treasury).
Tr:i~t, Canadian l)anks in lanuey, i'Ai.
Trust Companies,
\n(l hank.s 407.
Defineil, iHi.
D.'po its of, iS.'i.
Trust De])artuionl of, iJ83.
Trulls,
< Orporate. iSl.
!iidivi(iual, 284.
u
rmlerwrii mu, 281.
.Vnd promoliou of corpnvalions, 40.1.
I'tiiformity, .'i requisile of money, 11.
I'nited States,
I'irsI Hank of, r!.50-:!.-)2.
Ilisiory of eoinajje, .)(i-(iI5.
Second !lank of, ,'{,53.
Tnited Stales ')on<I--, in Hank State-
ment. 26C.
I nited States money, varieties of. Si.
1 lilted Slates Steel Corporation, !).
I iiiied States T'reastli s .
Hank in relation to, :!!K)-.')1)1.
Strin^e'icy eail.sed hy, .'591.
I'siiry laws. 'M3.
nility.
KxehanK'', .'J.J.
Kxtra exchange, 12.
Marginal, .H. ;t;i.
T'lieorv of value, 31.
Value.
.\ttendeil li\ r!i,iiit;e^ in price of gold,
:!0.
( 'o~l of proihiilion theory, .'il.
Define.l, r,\
Dcleriuinalion of, :!I.
(iold ni>t an ideal standard of, -2!).
IViee distingnislie(l from, is.
I'riiiiilive ideas of. :>S
Sta!)ilit\ of, ■ requisite of money,
1.' t.i.
Store of, 7.').
rtllily theory of. .11.
Voliuf; power of shareholders, 412.
W
\\ aiiipnm.
Dl'fects.. i~2.
I se as niipiie.v. .'ifl.
Wall Street, banks in n lation to, .S81-
;!S!».
Warehouse receipts,
Law of, ;i.'i'>.
Loans on, 3.'5;j.
Penalty for illeu'.'il u^i'. :!:!.").
IVoteelioli lo holders of, AM.
."-afefXiLirdini; of, :i:!l.
Wealth.
Hanking' .:n iu-litution in prodnrtinn
of. 10.
Classid.'d, 18.
Definition of. 1. 8.
Money an instrument in production
of. !(».
Wevhurn Seeiirilv H.ank. '70.
York cTirrenrv, 1(!8. 171.