A HISTORY OF 
 .MODERN BANKS OF ISSUE 
 
 WITH AN ACCOUNT OF THE ECONOMIC CRISES 
 OF THE PRESENT CENTURY 
 
 BY 
 CHARLES A. CONANT 
 
 FOURTH IMPRESSION 
 
 G. P. PUTNAM'S SONS 
 
 NEW YORK LONDON 
 
 *7 WEST TWENTY-THIRD STREET 24 BEDFORD STREET, STRAND 
 
 | fjumhcrbockrr $)rss 
 1902 
 
PREFACE TO THE SECOND EDITION. 
 
 THE exhaustion of the first edition of the " History of 
 Modern Banks of Issue," less than six months after 
 its publication, is one among many proofs of the inter- 
 est taken by the people of the United States in financial sub- 
 jects. The banking problem was not directly involved in the 
 contest, which has just closed, regarding the metallic basis 
 of the monetary circulation. The relations of the metallic 
 standard and the paper currency are, however, so linked 
 with each other that the consideration of the one almost 
 necessarily involves the other. The decision which has been 
 made by the majority of the voters in favor of the gold 
 standard is, in some senses, only a negative decision, and 
 merely clears the ground for the radical reforms which are 
 needed, in order to place our currency system upon a scien- 
 tific basis and make it responsive to the legitimate needs of 
 business. The financial ills from which the United States 
 have suffered in recent years cannot be permanently cured 
 by a political victory over the forces of discontent. A defec- 
 tive currency system has undoubtedly been one among 
 several causes which have contributed to recent agitation, 
 and the political party which has the judgment and the 
 courage to reform the system will do much to commend 
 itself to the intelligent support of the American people. 
 
 The changes made in the present edition of this book are 
 unimportant, because of the short time which has elapsed 
 since the appearance of the first edition. There have been 
 few changes in the banking laws of important states within 
 the past six months, and even statistics are not yet available 
 
VI PREFACE TO THE SECOND EDITION. 
 
 for a later year than 1895. The more serious criticisms of 
 the book made in leading newspapers and reviews have been 
 directed rather to the brevity of the discussion of banking 
 principles than to the actual contents of the work. These 
 criticisms would have force, if the author had proposed to 
 develop any new theories of banking. It was his more 
 modest purpose to record the simple facts regarding existing 
 banking systems, and in this record no serious errors have 
 thus far been pointed out. 
 
 CHARLES A. CONANT. 
 WASHINGTON, Nov. 12, 1896. 
 
PREFACE. 
 
 reason for being of this work is the growing inter- 
 : est in the United States in financial and economic 
 subjects and the fact that they promise to be the 
 paramount issues of American politics for many years to 
 come. My purpose has been to bring together, in compact 
 form, the leading facts regarding the banks of the world 
 authorized to issue circulating notes and the history of the 
 financial and economic crises through which they have 
 passed. There is no work in English covering exactly the 
 ground covered by the History of Modern Banks of Issue. 
 The materials for such a history are accessible in public 
 records as well as special works, but they have never before 
 been brought together in a form easily accessible to the 
 American and English reading public. 
 
 The functions and character of history have changed 
 with the changes in the character of national development. 
 The historical development of the human race has passed 
 through two essential stages and has entered upon a third. 
 The first was the struggle for the existence of civilization 
 and national life ; the second was the struggle for the legal 
 and political freedom of the individual within the state ; 
 the third is the struggle for the complete development, ac- 
 cording to sound economic laws, of the producing capacity of 
 the community. The Muse of History has followed no un- 
 reasoning whim in turning her pen to the story of each suc- 
 cessive stage of the world' s progress. In the first stage of her 
 work, her theme was the history of nations and the acts of 
 their sovereign powers. In the second stage, the history of 
 
Vlii PREFACE. 
 
 value to the community became the history of the people and 
 the contest for popular rights. The historians of each age 
 have been logical in looking to the dominant spirit of that age. 
 
 The issue of the present and of the immediate future, 
 and the subject with which the Historic Muse must most 
 concern herself, is the best means of developing the pos- 
 sibilities of individual and national life. This issue is 
 essentially an economic one and the history of economic 
 development must, in the very nature of events, be in future 
 the principal study of practical thinkers and workers. The 
 Massachusetts Senator who declared that of late years the 
 American people had given " too much attention, perhaps, 
 to economic questions, and too little attention to those great 
 and far-reaching questions on which the future of the repub- 
 lic depends," l spoke out of the education and out of the 
 political theories of the past and with his face to the past 
 rather than to the future. The pursuit of the best means 
 of increasing wealth, not for its own sake, but for the wider 
 opportunities of intellectual and moral development which 
 it places in the hands of the community, is the mission of 
 the student of public affairs for the future, and the public 
 man who seeks different political ends subjects himself to 
 the judgment pronounced upon himself by Lord Stanley a 
 generation ago, that he was brought up in the pre- scientific 
 period. 2 
 
 Political economy is still in a large measure an experi- 
 mental and a disputed field, but this is less true of financial 
 administration than of the questions of taxation and the dis- 
 tribution of wealth, which still perplex economic students. 
 .The modern banking community have already learned, dur- 
 ing the past hundred years of the history of banking, the 
 leading lessons of the failures and experiments of that period. 
 There is doubtless much yet to be learned, but the system 
 of a banking currency and of the management of banking 
 operations is now a practicable and workable system. The 
 
 1 Congressional Record, Fifty-third Congress, Third Session, March 
 2, 1895, p. 3108. 
 
 2 McCarthy, I., 31. 
 
PREFACE. IX 
 
 results of the experiments of the century can be summed up 
 and their lessons indicated in a clear and certain manner, 
 subject to little dispute by those who have given unpreju- 
 diced study to the subject. It is these experiments which I 
 have endeavored to describe in the following chapters, leaving 
 their lessons for the most part to be derived from a compari- 
 son of their results with the rules of sound banking policy. 
 
 The purpose of this work is historical rather than contro- 
 versial and I have even refrained from discussing the prob- 
 lem of the single or double standard, because the rules which 
 govern a banking currency apply with equal force, whatever 
 metal constitutes the standard money of redemption. I 
 have thought it proper to state, as simply and as clearly as 
 possible, the theory of a banking currency, but I have en- 
 deavored to avoid all digressions which were not essential to 
 an understanding of the history of banks of issue and of 
 recent events in the financial world. Systems of coinage, 
 the history of public loans and political events, the many 
 forms of mortgage, deposit and popular banks, and the new 
 problems relating to the uses of speculation and the part 
 played by negotiable securities in modern economic life, are 
 such important subjects of discussion that each is worthy of 
 separate treatment, and they are only referred to here where 
 they seem to form a necessary part of the history of one of 
 the great banks of the world. It has been necessary to 
 refer in several cases to the history of government paper 
 money, because it is related to the origin and growth of 
 banks of issue, but my plan excludes the systematic treat- 
 ment of paper money, which would of itself fill a volume. 
 My chief object, beyond that of a narrator, will be accom- 
 plished if the study of the dismal record of government 
 interference with monetary laws shall convince thinking 
 Americans of the axiomatic truth that 
 
 The currency of a commercial country should be regulated by 
 commercial conditions and not by the whims of politicians. 
 
 CHARLES A. CONANT. 
 WASHINGTON, D. C., April i, 1896. 
 
I beg to acknowledge my obligations to the Hon. William 
 K. Curtis, Assistant Secretary of the Treasury ; to the Hon. 
 James H. Eckels, the Comptroller of the Currency ; and to 
 the Hon. Robert E. Preston, the Director of the Mint, for 
 the use of many valuable public documents of foreign coun- 
 tries as well as of the United States ; to them, and many other 
 officers of the Treasury, to the Hon. Lewis Sperry of Hart- 
 ford, Conn., and to Mr. L,. Carroll Root of New York, for 
 many helpful suggestions ; and to my Secretary, Miss Flo- 
 rence Johnson, for her intelligent assistance. 
 
 Amounts expressed in foreign currency in the following 
 pages are reduced only to round sums in United States 
 money, with sufficient frequency to afford a general idea of 
 the sums dealt with, but the exact equivalent of the foreign 
 monetary unit is usually stated early in the chapter in which 
 it appears. 
 
 The full titles of the leading authorities cited will be found 
 at the back of the book. 
 
 C. A. C. 
 
CONTENTS. 
 
 CHAPTER I. 
 
 PAGE 
 
 THE THEORY OF A BANKING CURRENCY i 
 
 CHAPTER II. 
 ANCIENT AND MODERN BANKING IN ITALY . . . .21 
 
 CHAPTER III. 
 J BANKING IN FRANCE 38 
 
 CHAPTER IV. 
 FIRST CENTURY OF THE BANK OF ENGLAND .... 78 
 
 CHAPTER V. 
 SECOND CENTURY OF THE BANK OF ENGLAND . . . 100 
 
 CHAPTER VI. 
 THE SCOTCH BANKING SYSTEM 138 
 
 CHAPTER VII. 
 BANKING IN IRELAND 167 
 
 CHAPTER VIII. 
 -* THE BANKS OF GERMANY . 182 
 
XIV CONTENTS. 
 
 CHAPTER IX. 
 
 PAGE 
 
 THE AUSTRO-HUNGARIAN BANK ...... 209 
 
 CHAPTER X. 
 THE BANK OF RUSSIA ......... 235 
 
 CHAPTER XI. 
 THE BANKS OF NORTHERN EUROPE ...... 250 
 
 CHAPTER XII. 
 THE BANKS OF SOUTHERN EUROPE ...... 268 
 
 CHAPTER XIII. 
 THE BANK OF THE UNITED STATES ...... 286 
 
 CHAPTER XIV. 
 THE STATE BANKING SYSTEMS I 
 
 CHAPTER XV. 
 THE NATIONAL BANKING SYSTEM ...... 348 
 
 CHAPTER XVI. 
 THE CANADIAN BANKING SYSTEM ...... 386 
 
 CHAPTER XVII. 
 THE BANKS OF LATIN AMERICA ...... 4x3 
 
 . CHAPTER XVIII. 
 BANKING IN AFRICA AND THE EAST ..... 432 
 
 CHAPTER XIX. 
 CRISES AND THEIR CAUSES 453 
 
 ' 
 
CONTENTS. XV 
 CHAPTER XX. 
 
 S PAGE 
 
 THE EARLY CRISES OF THE CENTURY 467 
 
 CHAPTER XXI. 
 THK LATER CRISES OF THE CENTURY 492 
 
 CHAPTER XXII. 
 THE CRISIS OF 1893 524 ^ 
 
 CHAPTER XXIII. 
 THE ADVANTAGES OF A BANKING CURRENCY .... 554 
 
 LIST OF AUTHORITIES 577 
 
HISTORY O3&ERN BANKS 
 OF ISSUE. 
 
 CHAPTER I. 
 
 THE THEORY OF A BANKING CURRENCY. 
 
 The Distinction between Batik-notes and Money The Functions of 
 Currency as a Standard of Value and Medium of Exchange The 
 Mechanism of a Bank of Issue Do Note Issues Create Capital? 
 Importance of Redemption in Coin on Demand The Necessity 
 for Quick Assets The Operation of the Rate of Interest and the 
 Foreign Exchanges on the Volume of Circulation Difficulty of 
 " Cornering " Money under Free Banking. 
 
 IT is the purpose of this work to give the outlines of the 
 history of the leading banks of issue in the world and 
 their methods of doing business, and incidentally to set 
 forth the principles and uses of a banking currency. Bank- 
 ing can be done without the issue of bank-notes, but they 
 are an important factor in the development of the use of 
 capital and afford the best currency for general uses. In 
 their capacity as a circulating medium, bank-notes have 
 come to be confused with money and have attained in the 
 minds of many a special and official character different from 
 that of other commercial paper. The examination of the 
 history of banks of issue, as well as of the theory of a bank- 
 ing currency, will serve to show the gradual development of 
 the use of bank-notes as a means of transferring credit and the 
 part they play in commercial transactions alongside of other 
 
2 HISTORY OF MODERN BANKS OF ISSUE. 
 
 forms of credit which differ from them only in degree of 
 negotiability. 
 
 The creation and regulation of a banking currency are 
 based upon the theory that bank-notes are a convenient 
 means of giving mobility to capital. There are two impor- 
 tant truths which should be clearly understood at the outset 
 of the discussion of banking and paper currency. They are : 
 
 1. That bank-notes are not money. 
 
 2. That bank-notes are a form of credit and are of substan- 
 tially the same nature as bills of exchange, promissory notes, 
 and checks. 
 
 The distinction between bank-notes and money is of prime 
 importance for the purposes of economic study and from the 
 standpoint of legislation, if not always important in daily 
 transactions. It will be convenient, however, first to point 
 out what bank-notes are, before considering what they are 
 not. It will be convenient also to state broadly, in the 
 beginning, the theory of a banking currency and of free 
 banking, as a theory, before dealing with certain limitations, 
 for the purpose of promoting uniformity and security, which 
 experience and sound judgment may suggest in practice. 
 
 Bank-notes are the proper instruments of commercial 
 transactions because they are the creatures of commercial 
 needs and are adapted in volume and use to commercial 
 necessities. In this respect they differ from government 
 paper money, which is regulated wholly by the necessities 
 of governments and not by the convenience of trade. Bank- 
 notes are substantially similar to checks and bills of ex- 
 change, because they are simply the paper representatives 
 of credit. In the language of Prof. Bonamy Price : 
 
 A seller by taking the bank-note makes himself the creditor of the 
 government or bank, and is willing to part with his property, sub- 
 stantially, on credit to the state or bank. He finds in this debt, now 
 due to him, of the issuer of the bank-note a sufficient guarantee for 
 being able to buy with it other goods. . . . Every buyer with a 
 note virtually says, " I have no money ; give me the goods and I will 
 tell a good man who owes me money to pay you for me." ' 
 
 1 Currency and Banking, 42-43. The character of a bank-note is 
 clearly and simply defined by Prof. Charles F. Dunbar, professor of 
 
THE THEORY OF A BANKING CURRENCY. 3 
 
 Those who insist that gold and silver constitute the only 
 proper medium of financial transactions do not clearly distin- 
 guish the two essential functions of currency. These func- 
 tions are the creation of a standard of value and the provision 
 of a means of exchange. It is only in the fulfilment of the 
 first function that exchange value is required in the material 
 of which the currency is made. The fulfilment of the 
 second function requires only that the currency shall repre- 
 sent value, rather than that it shall contain value in itself. 1 
 A bank-note currency represents the value bound up in 
 commodities which are in process of production and ex- 
 change. The essential function of business operations is the 
 production and exchange of commodities for each other, 
 not the exchange of barren heaps of metal for each other nor 
 of commodities for metal. The intervention of gold and 
 silver in such exchanges adds nothing to the sum of produc- 
 tion and is not necessary to carry them on, except as the 
 metals afford, with paper, a convenient tool of exchange 
 
 political economy in Harvard University, as follows : " The bank-note 
 is the duly certified promise of the bank to pay on demand, adapted 
 for circulation as a convenient substitute for the money which it 
 promises. It is issued by the bank, and can be issued only to such 
 persons as are willing to receive the engagement of the bank in this 
 form instead of receiving money, or instead of being credited with a 
 deposit." Theory and History of Banking, 16. 
 
 1 It is difficult to get away from the term " intrinsic value," in the 
 terms of ordinary discussion, in spite of the well-reasoned demonstra- 
 tion of Prof. Macl,eod that value is a relation based upon exchange 
 rather than an inherent quality. Elements of Banking, 12. Gold 
 and silver, strictly speaking, are not only limited to an exchange 
 value, but they perform to a large extent, by the convention of civil- 
 ized nations, the same functions in monetary uses, as representatives 
 of value, as bank-notes and other commercial instruments. Roscher 
 illustrates the fact that even the currency of gold as money rests in a 
 measure upon credit. "The person who takes money as such must 
 always harbor the hope of being able to dispose of it again as money. 
 . . . The savage Goahiros, between Rio de la Hacha and Mara- 
 caibo, are too ' distrustful ' to take anything in trade but commodities 
 fit for the most immediate use." Political Economy, I., 351. The 
 refinement in the use of credit is a pretty accurate measure of na- 
 tional economic progress. 
 
4 HISTORY OF MODERN BANKS OF ISSUE. 
 
 and, by themselves, a standard and common denominator 
 by which exchanges are measured. Bank-notes are not, as 
 government paper money usually is, pieces of paper created 
 out of nothing to represent value. They are simply the 
 paper representatives of a great mass of mercantile trans- 
 actions. They are the convenient counters by which men 
 carry on exchanges. The presence of gold and silver is a 
 necessary element in these exchanges only for the purpose 
 of applying the test of a common and fixed standard, and 
 this is secured for bank-notes by the condition that they 
 shall be redeemable in standard coin on demand. 
 
 The entire fabric of a bank of issue constitutes a harmoni- 
 ous whole. The capital subscribed by the stock-holders at 
 once becomes a liability and provides the bank with cash 
 for making loans and keeping a coin reserve. The issue of 
 notes enables the bank to furnish accommodation to the 
 holders of good commercial paper by covering the paper 
 Into its assets and treating the notes as demand liabilities. 
 A bank of issue, therefore, has on one side its liability to its 
 stock-holders for their invested capital and its liability to 
 its note-holders to pay coin on demand. It has on the other 
 side, as its resources, the cash derived from subscriptions to 
 the capital and the commercial paper payable in cash by its 
 makers at maturity. When deposits are received in cash or 
 paper convertible into cash, the proceeds can be employed to 
 enlarge the scope of the discounts. The obligation to pay 
 the deposit becomes a liability, but the cash deposited fur- 
 nishes assets of equal volume as an offset. Most of the 
 great banking institutions of the world have begun busi- 
 ness, and many of them continue it to-day, upon their capi- 
 tal and their loans and with but a small proportion of cash 
 deposits. 
 
 The volume of notes which a bank may issue, when not 
 directly limited by law, is determined by a prudent relation 
 between the issues and the coin reserve. The greater part 
 of the cash received in capital and deposits, over and above 
 the coin reserve, is available for loans and discounts. Loans 
 as distinguished from discounts are actual advances of money 
 
THE THEORY OF A BANKING CURRENCY. 5 
 
 upon negotiable securities. They usually constitute a smaller 
 proportion of the transactions of a bank in a commercial 
 city than the commercial discounts. These are simply pur- 
 chases by the bank of commercial paper, carrying the right 
 to collect money at some future time. The wholesale mer- 
 chant, for instance, receives from his retail customer a pro- 
 missory note or bill of exchange, covering the cost of goods 
 he has sold, payable sixty or ninety days from date. By 
 taking this note or bill to the bank the wholesaler obtains 
 currency at once for the amount contracted to be paid, less 
 an interest charge which is known as discount. The busi- 
 ness of a bank of issue is simply to transform the bill of 
 exchange, which is itself a negotiable security, into another 
 sort of negotiable security. For this purpose it issues bank- 
 notes. In the concise language of an eminent French finan- 
 cial writer : 
 
 The bank bill is a promise to pay a fixed sum at sight or to bearer. 
 In promising to pay at sight, the difficulty is avoided of maturity at a 
 fixed term and the bearer is relieved of the limitations which result 
 from it. By the promise to pay to bearer, one gets rid of the embar- 
 rassment of endorsements, protests, recourse, etc. One obtains by 
 this means a security always negotiable, to which suffices a signature 
 generally known and in some degree public to make it equally 
 accepted and demanded, even in preference to metallic money. 1 
 
 The bank by the issue of notes gives mobility to capital in 
 several ways. It enables the holder of a bill of exchange 
 to put it to active use instead of locking it up against the 
 time of its maturity. The wholesaler or manufacturer, by 
 paying a small commission to the bank upon such a bill, is 
 able to obtain in advance the use of capital in negotiable form 
 to which he would otherwise not become entitled for several 
 months. He is enabled to obtain it not only in advance of 
 the time it would otherwise be due, but in such form that he 
 can split it into small amounts and pay a part for his raw 
 materials, a part for his labor, and a part for his personal 
 expenditures. The issue of bank-notes also enables small 
 depositors to combine their capital in the hands of the bank, 
 
 1 Courcelle-Seneuil, 102. 
 
6 HISTORY OF MODERN BANKS OF ISSUE. 
 
 so that it becomes available for constant use. This is one of 
 the great advantages of modern banking, that it brings out 
 into the light and into the current of the processes of pro- 
 duction the capital which would otherwise be locked up in 
 idle hoards. The bank-note is a loan from the holder, but 
 a loan which costs him nothing and, on the contrary, affords 
 him the benefit of security, convenience, and negotiability 
 for his capital. In the sense in which government paper 
 money, made by law a legal tender for the payment of debt, 
 is a forced loan, for non-commercial uses, upon the produc- 
 tive forces of the community, the bank-note, which is not 
 forced legal tender, is a voluntary loan, for commercial uses, 
 which tends to bring into play, for the mutual benefit of 
 borrowers and lenders, the full efficiency of those productive 
 forces. l 
 
 The simple statement of the theory of a banking currency 
 shows how absurd it is to imprison the volume of circulating 
 notes within fixed limits, or to condition their issue, when 
 they are kept in circulation at par with coin, upon any other 
 specific thing than the amount of loanable capital."^ The 
 Bank of England is limited in its note issues, beyond a fixed 
 amount, by the Bank Act of 1844, to deposits of gold coin 
 or bullion, with the result that there is an annual autumnal 
 stringency in the money market. 2 There have been repeated 
 periods of business paralysis when every possible substitute 
 has been employed to make up for the deficiency of circu- 
 lating notes, and the limitation itself has been finally sus- 
 pended in every acute crisis as the only means of averting 
 universal bankruptcy. The banks of issue of the United 
 States are required to purchase evidences of the national 
 debt and are allowed in circulation only ninety per cent, of 
 
 1 Exactly the opposite view was urged by some of the early oppo- 
 nents of the Bank of England. Davenant declared that the effort to 
 attract deposits by the offer of four per-cent. interest was a hindrance 
 to energy and enterprise. Rogers, 18. This view overlooked the fact 
 that the money would be loaned by the bank for active use. 
 
 2 V. Jevons, Investigations in Currency and Finance, Ch. v., 160-93, 
 " The Frequent Autumnal Pressure in the Money Market." 
 
THE THEORY OF A BANKING CURRENCY. 7 
 
 the face value of these securities, with the result that as the 
 debt has been reduced, the bank-note circulation has de- 
 clined. The securities have reached an enormous premium 
 as they have become scarce, and the bank-note circulation 
 has fallen from $354,408,008 on June 30, 1875, to $211,600,- 
 698 on June 30, 1895, while loans and discounts, which indi- 
 cate the volume of business, have more than doubled. The 
 public, under these circumstances, have looked to other 
 sources than the banks for a circulating medium and found 
 it, until the repeal of the purchasing clause of the Sherman 
 law, in purchases of silver bullion, by the Treasury, and the 
 issue of government paper money in payment for the bullion. 
 This circulation proved absolutely irresponsive to the de- 
 mands of business and resulted, after periods of great strin- 
 gency in the autumn of 1890 and the summer of 1893, i n 
 a long period of redundancy and gold exports during 1894 
 and 1895. The experience of both England and the United 
 States in this respect justifies the judgment of those who 
 believe that the circulating medium should be based upon the 
 general assets of the banks and governed by business condi- 
 tions rather than based upon extraneous securities and 
 governed by their fluctuations in quantity or value. 
 
 The theory of a banking currency, as here defined, is in 
 accordance with the " banking principle," which is approved 
 by most bankers and writers upon political economy. There 
 is another theory of bank-note issues, described in Eng- 
 land under the name of " the currency principle," upon 
 which the law governing the circulation of the Bank of 
 England is based. The essential difference between the two 
 theories is, that " the banking principle " regards bank-notes 
 as similar to other commercial paper and their volume as prop- 
 erly subject to business requirements, while " the currency 
 principle" regards bank-notes as performing the functions 
 and possessing substantially the character of actual money 
 and their volume as properly subject to regulations which 
 will cause it to change in the same manner as a circulation 
 entirely of coin. The failure of this principle to operate as 
 expected by its supporters in the case of the Bank of Eng- 
 
8 HISTORY OF MODERN BANKS OF ISSUE. 
 
 land will be set forth in the chapter relating to the later 
 history of that bank. The theory is not applicable where 
 credit exists in any form, and its advocates have never suc- 
 ceeded in advancing any substantial reason for assimilating 
 bank-notes to coined money, except the fact that they enter, 
 like money, into general circulation. This fact justifies 
 certain regulations to secure uniformity and safety, but the 
 regulations should be the same in kind as those which gov- 
 ern other commercial paper and evidences of indebtedness. 
 
 There is no reason why the number of bank-notes should 
 be limited any more than other commercial paper, except by 
 the requirement of redemption in coin on demand which 
 serves as a test of their value and the solvency of their 
 issuers. A bank authorized to issue circulating notes occu- 
 pies, substantially, the position of a corporation or business 
 firm, the circulation of its notes depends upon its reputa- 
 tion for solvency and honesty. Government regulations 
 requiring a mutual guarantee or the formation of a common 
 safety fund may enable the notes to pass from hand to hand 
 without inspection as to the particular institution putting 
 them in circulation, but, even in such a case, the validity 
 of the notes depends upon the solvency and resources of 
 the united body of issuers, if not upon that of the indi- 
 vidual issuer. 
 
 Prof. H. Dunning MacL,eod, an acute and brilliant writer 
 upon the laws of banking, undertakes to show that the 
 issue of instruments of credit is in itself the creation of 
 capital. He brings many arguments to the support of his 
 position, but his strongest argument is a legal rather than 
 an economic one. He shows plainly enough that there is an 
 essential distinction in law between the personal deposit 
 (depositum) secured by a warehouse receipt, entitling the 
 holder to the return of the specific goods deposited, and the 
 creation of a debt (muiuum}, by which the lender is simply 
 entitled to the return of some equivalent, but not the specific 
 thing entrusted to the borrower. The claim in the first 
 case is specific, and possession of the article may be recovered 
 by a writ of replevin, but it constitutes in the other case only 
 
THE THEORY OF A BANKING CURRENCY. 9 
 
 a general claim against the entire assets of the borrower. 
 Professor MacLeod is doubtless right, as a proposition of 
 mathematics or of law, in his demonstration that the new 
 obligations created by evidences of debt are not properly 
 set off against specific property in the hands of the debtor. 
 The holder of a bank-note for ten dollars has no claim 
 against any specific ten dollars in the cash drawer of the 
 bank ; he simply has a legal claim for an equivalent for 
 the amount. 1 
 
 But Professor MacLeod, in his subtle argument upon this 
 subject, confuses the domains of law and mathematics with 
 the domain of economics. Political economy looks deeper 
 than legal distinctions and looks to the substance behind 
 algebraic formulae. The creation of paper credit from this 
 point of view is not an addition to existing capital. It 
 greatly assists in the movement of capital and, in individual 
 cases, the creator of paper credit may obtain the use of more 
 capital than he possesses, but in every such case he simply 
 obtains the use of the capital of some other person or body 
 of persons. Barring the question of the incorporeal wealth 
 arising from mental culture, economics deal with tangible 
 property. Negotiable securities represent tangible property, 
 either in the possession of the issuers or in the possession of 
 the holders of the securities who are willing to advance their 
 capital for the promotion of some enterprise. The individ- 
 ual who borrows beyond the limits of his tangible capital 
 simply obtains the use of some other person's capital. In 
 the words of Professor Emile de Laveleye : 
 
 1 The legal distinction is important enough to a correct compre- 
 hension of the laws of banking to justify giving it in Prof. MacLeod's 
 own words : "The essential feature of a ' Banker' is, that when his 
 customers pay in money to their accounts, they cede the property in the 
 money to the Banker. The money placed with him is not a Deposi- 
 tum, or Bailment ; but it is a Mutuum : it is a Loan, or Sale, directly 
 to himself. The ' Banker ' buys the money from his customer ; and 
 in exchange for it, he gives his customer a Credit, or Right of action 
 to demand back an equivalent amount of money at any time he 
 pleases ; which Right of action he is also at liberty to transfer to 
 any one else he pleases." Theory and Practice of Banking, I., 319. 
 
IO HISTORY OF MODERN BANKS OF ISSUE. 
 
 Credit seems to multiply capital because by the side of the thing 
 due appears the promise which gives a right to its possession ; but in 
 fact there are not two things, one is only the shadow of the other. 
 Burn every evidence of credit ; nothing real would cease to exist. 
 Juridicial relations only are changed. The creditors lose exactly 
 what the debtors gain. 1 
 
 A bank of issue, therefore, creates no new capital when it 
 issues its notes to the amount of its assets available beyond 
 its coin reserve. It simply takes the titles to capital which 
 have been transferred to its custody and loans them to its 
 customers in the form of negotiable paper. This paper, 
 under a system of free banking, differs in no respect, except 
 its greater degree of transferability, from personal promissory 
 notes and bills of exchange. The bank, whether by its 
 intrinsic reputation or by the requirements of certain uniform 
 laws, simply affords a definite and well-known security and a 
 uniform style of note paper which add to the convenience 
 of the business community. 
 
 Banking can be done without the issue of circulating notes, 
 and is done to a large extent in the greatest commercial 
 centres, simply by the use of checks. Checks came into 
 extensive use in England as a means of transferring credit 
 when the Bank of England was given by law the substantial 
 monopoly of the issue of circulating notes. The use of checks 
 of other instruments of credit than bank-notes usually 
 obtains the widest development where the modern commer- 
 cial system of credit and of business has attained if highest 
 form. As Professor Dunbar forcibly says of this medium of 
 exchange : 
 
 1 Elements & Economic Politique, 221. If Prof. MacLeod's theory 
 is correct, the estimates of aggregate national wealth should be 
 obtained by adding to the ascertained value of corporate property the 
 face or market value of the securities which represent it, and in this 
 way the country in which " stock watering" prevailed to the greatest 
 extent would be that possessing the most wealth. Prof. MacLeod 
 himself says, "that a nation can spend its money in destroying its 
 enemies and have it too as bank-notes, or currency, is a wild and mis- 
 chievous delusion." Theory and Practice of Banking, II. , 267. 
 
THE THEORY OF A BANKING CURRENCY. II 
 
 Of the entire circulating medium of this country it forms incom- 
 parably the greatest, although the least considered, part. Depending 
 for its efficiency solely upon convention and issued as well by private 
 firms as by incorporated banks, it for the most part eludes the regu- 
 lations which legislatures so industriously enforce upon the' other 
 constituents of the currency. Indeed, beyond the requirement of a 
 minimum reserve to be held by incorporated banks, made by the law 
 of the United States, we may say that the subject is not touched by 
 legislation, in this country or elsewhere. The necessity for payment 
 in specie upon demand, which is the most important safeguard of 
 value, is the result of the general provision for the payment of debts 
 of any kind. 1 
 
 The essential question for every one who believes in 
 developing the productive powers of the community to their 
 utmost limit is the best method of giving mobility to capital 
 in that community. Checks and book credits are valuable 
 and essential instruments of modern commerce, but they 
 cannot always be so readily introduced into general use as 
 bank-notes may be. The difference is wholly one of the 
 business habits of a community, of its business necessities 
 and of the development of banking. The governing prin- 
 ciple of banking is that mobility should be given to capital 
 by the best means which will be accepted by the community. 
 Bank-notes afford this means in new countries and those in 
 which banking is undeveloped. 
 
 There is no more risk in the issue of bank-notes within 
 fixed legal proportions to capital or assets, when they are 
 redeemable in coin on demand, than in drawing checks or 
 bills of exchange. There is no more danger of the inflation 
 of values or of the volume of money, for the two transactions 
 are essentially the same. The question of the solvency or 
 soundness of the bank and its paper issues is in both cases 
 chiefly one of good banking. Inflation by bank-note issues, 
 when banks are required by law and by commercial custom 
 to redeem their notes in coin on demand, is not conceivable 
 in any such sense as inflation by means of government 
 paper money, issued without regard to the demands of busi- 
 ness and incapable of contraction with the diminution of 
 those demands. 
 
 1 Theory and History of Banking, 44-45. 
 
12 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The inflation of paper credit is one of the evils of the 
 structure of modern industry and banking which forms a 
 drawback to its manifold benefits, but bank-notes as such 
 have never played more than a subsidiary part in such in- 
 flation. The evil arises from the abuse of credit, from the 
 sinking of capital in unproductive enterprises, from specula- 
 tive risks, and from over-sanguine calculations which some- 
 times result in unsound banking. But unsound banking 
 is not especially connected with the issue of bank-notes 
 and has occurred again and again with banks of mere 
 discount and deposit and with banks like that of Ham- 
 burg, which held coin to the full value of their circulat- 
 ing notes. The crisis of 1893 in the United States is 
 the most recent illustration that such incidents are rarely 
 due to the abuse of bank-note issues. The bank-note 
 currency was then restricted to the trifling proportion 
 of about one-eighth of the entire monetary circulation 
 of the country and was less than for many years before. 
 Nearly every decade of the past century has witnessed a 
 commercial crisis, but in no case could it be traced to the 
 over-issue of bank-notes convertible into coin on demand. 
 The speculative mania has ebbed and flowed, but bank- 
 notes have not been the cause of either ebb or flood unless 
 where coin redemption was suspended in fact or by the in- 
 tervention of law. So complete is the evidence that bank- 
 note issues have not been an essential factor in causing 
 fluctuations in prices and collapses of credit that Mr. Tooke, 
 the eminent English economic student, after painstaking in- 
 vestigation declared : 
 
 In point of fact and historically, as far as my researches ha TT e gone, 
 in every signal instance of a rise or fall in prices, the rise or fall has 
 preceded, and therefore could not be the effect of, an enlargement or 
 contraction of the bank circulation. 1 
 
 The touchstone of a sound banking currency is redemp- 
 tion in standard coin on demand. A bank with authority 
 to suspend coin redemption and with no limit upon its issues 
 is in the position of an individual authorized to write notes 
 "^Quoted by Mill, B. III., Ch. xxiv., Sec. I. 
 
THE THEORY OF A BANKING CURRENCY. 13 
 
 and contract debts without any obligation to keep them 
 related to his purse and property. Redemption in coin on 
 demand constitutes the essential soundness of a banking 
 currency and keeps a bank tied strictly, even if there is no 
 limit of law upon its note issues, to its available assets. A 
 bank should, therefore, keep a coin reserve constantly in its 
 vaults to pay depositors who desire coin and to redeem its 
 circulating notes. This proportion is sometimes reckoned 
 at one-third of the demand liabilities, but is often permitted 
 by law to be less and is often required by prudent banking 
 to be more. "The intensity of the liability," in the lan- 
 guage of Mr. Bagehot, is to be considered as well as the 
 amount, and " the cardinal rule is, that errors of excess are 
 innocuous, but errors of defect are destructive." ' 
 
 But a bank must have other quick assets than its coin re- 
 serve, for if it keeps too large a proportion of its assets in 
 idle coin it will make no profit, and if it keeps too large a 
 proportion in investments which cannot be quickly turned 
 into cash it will have no means of replenishing its reserve 
 in case of necessity. The demands of a crisis or even a tem- 
 porary change in the financial situation often make it neces- 
 sary for a banking institution to redeem a large part of its 
 note issues in cash, to pay off depositors in cash, and to con- 
 tract at once the volume of its issues and its discounts. The 
 character of these obligations requires that banks of issue 
 should deal almost exclusively in commercial paper running 
 for short terms. So long as universal insolvency is averted, 
 the holding of such paper running in most banking sys- 
 tems no longer than three months affords the bank an 
 
 1 Lombard Street^ Works, V., 195, 208. It may prove advisable to 
 concentrate the actual coin holdings in the hands of a few strong 
 banks, whose notes are substituted for coin in redemptions by the 
 smaller banks, but that is a question of detail which need not be con- 
 sidered here. The essential point is that there shall be an ultimate 
 coin reserve somewhere, upon which the circulation of all the banks 
 actually rests. In the English system the Bank of England holds the 
 ultimate gold reserve of the entire country, and Bank of England 
 notes are a legal tender everywhere but at the bank, where they must 
 be redeemed in gold. 
 
14 HISTORY OF MODERN BANKS OF ISSUE. 
 
 easy control over its resources and liabilities. If danger 
 threatens by the diminution of the cash reserve, liabilities 
 can be reduced by the restriction of new discounts until the 
 reserve accumulates by the payment of maturing paper. If 
 the terms of maturity are scanned with sufficient care to 
 secure something like an even distribution day by day and 
 week by week, the command of the bank over its resources 
 is practically complete. The restriction of new discounts 
 for a few days and the collection of maturing debt will 
 change the relations between liabilities and assets at the 
 same time that this policy acts in a broader way to reduce 
 the outstanding circulation and influence the rates of foreign 
 exchange. 
 
 The only safe rule for a bank of issue, which is compelled 
 to redeem its notes in coin on demand, is to keep a large 
 proportion of its assets in a form in which they can be 
 quickly turned into cash. It is when this rule is violated 
 by loans on doubtful paper, which have to be continued in- 
 stead of being paid at maturity, or by loans on real estate 
 and in industrial enterprises, which tie money up for long 
 terms, that banks of issue find their cash exhausted and are 
 driven into insolvency. Next in value to coin and com- 
 mercial paper as quick assets, therefore, are good negotiable 
 securities. These securities in ordinary times can be quickly 
 sold without loss in the stock markets and turned into cash 
 to swell the reserve. It is true that crises have occurred so 
 acute that even the public stocks found for a moment no 
 ready market, but these occasions have been the result of a 
 temporary blind terror, against which the most perfect sys- 
 tem of banking yet devised has not been sufficient to guard, 
 and they have never lasted beyond a few days or weeks. 1 
 
 1 It was found in New York City in the panic of 1873 that loans on 
 commercial paper for short terms were more available than loans on 
 call or collateral. The call loans could not be paid by the brokers 
 and the value of the stocks deposited as collateral shrunk so rapidly 
 that they could not be sold for enough to cover the loans. The credit 
 of the makers of commercial paper stood the strain better and their 
 obligations were found more valuable for the moment than those of 
 the brokers. Bolles, III., 349-50. 
 
THE THEORY OF A BANKING CURRENCY. I 5 
 
 The necessity of redeeming notes on demand is the reason 
 why no currency based upon land or property has ever been 
 kept permanently at par with coin. Mortgage banks and 
 finance companies are legitimate forms of business enter- 
 prise, but they are not capable of doing the business of a 
 bank of issue. The assets are available only at long inter- 
 vals and cannot be quickly converted into cash in an emer- 
 gency. Several of the leading banks of issue in Europe and 
 many such banks in the United States do a certain amount 
 of mortgage business, but it is usually limited to a small 
 proportion of their aggregate transactions and in many cases 
 is restricted by law to a fixed percentage of the capital. The 
 two leading banking institutions of Belgium early in the 
 present century and the banks of Italy and Australia more 
 recently violated this rule of separating their note issue busi- 
 ness from their long term loans and were forced to the sus- 
 pension of specie payments as the result. 1 
 
 The necessity of redemption of bank-notes in coin on de- 
 mand is closely related to the regulation of the volume of 
 the currency and a stable system of values. A surplus of 
 redeemable bank currency instantly corrects itself. Deposi- 
 tors who found themselves burdened with surplus bank-notes 
 would take them to the bank for transfer to their deposit 
 accounts. Those issued by the depositor's bank would be 
 covered into its own vaults and could not be issued again in 
 any case until there was a demand for loans and discounts. 
 Those of other banks would be returned to them, under any 
 proper law, for redemption. This would be done by clearing- 
 house arrangements, which might not in every case call for 
 
 1 M. Courcelle-Seneuil (211) very properly suggests that "when a bank 
 of circulation is well established, it may consider its minimum of cir- 
 culation as a permanent deposit and make investments for long terms 
 with the capital of this deposit." Where reasonable confidence ex- 
 ists in the banking system, the coin reserve is much more likely to be 
 drawn upon by the withdrawal of deposits than by the direct presenta- 
 tion of notes for redemption, and this has to be reckoned with by the 
 banker. What is stated in the text is, of course, only the outline of 
 the theory of a banking currency and is subject to many modifica- 
 tions consonant with sound banking. 
 
1 6 HISTORY OF MODERN BANKS OF ISSUE. 
 
 transfers of coin, but would in every case involve the return 
 of the notes to the issuing bank and their withdrawal from 
 circulation. The currency would be promptly contracted, 
 without the expression of any distrust by the business com- 
 munity and without even the knowledge by an individual 
 depositor of bank-notes that others as well as himself found 
 their supply of bank-notes in hand larger than usual. The 
 operation would, indeed, be so completely automatic that 
 the redundancy could never reach any considerable propor- 
 tion of the outstanding issues and an unusual issue of cur- 
 rency in response to a special demand would be promptly 
 followed by contraction, when the demand ceased, without 
 intentional concert of action or any change in the usual 
 practices of the business community. If a crisis were con- 
 ceivable which made the currency so redundant as to arouse 
 distrust, the banks themselves would become the most pow- 
 erful agencies in bringing it again within the proper limits. 
 If they found their notes coming in not only for deposit, but 
 for redemption in coin, they would take immediate measures 
 to restrict issues and husband their coin. If they had been 
 slow in forwarding the notes of other banks for redemption, 
 they would forward them promptly when the accumulation 
 became rapid, and if they had been indifferent about de- 
 manding settlement of balances in standard coin, they would 
 insist upon that right. 
 
 The requirement of a sound banking currency, that the 
 notes issued shall be redeemable in standard coin on demand, 
 has another purpose than the mere test of the solvency of 
 the banks. It goes to the foundation of the economic and 
 financial system of the country and regulates its commercial 
 relations with other countries. This result is reached through 
 the medium of foreign exchange, which operates to main- 
 tain an equality of distribution of money among different 
 communities and to keep their merchandise markets in touch 
 with each other. Metallic money is the money of the world 
 and of international exchange. A redundancy in one coun- 
 try brings about changes in the condition of the loan market 
 which correct the redundancy and have an influence upon 
 
THE THEORY OF A BANKING CURRENCY. I/ 
 
 interest and prices. It is not necessary to maintain the old 
 theory that prices are governed by the volume of metallic 
 money or credit paper in order to show that a redundancy of 
 the circulating medium corrects itself through the foreign 
 exchanges. As John Stuart Mill acutely remarked a gene- 
 ration ago, when this subject was less clearly understood 
 than at present : " It is a fact now beginning to be recog- 
 nized, that the passage of the precious metals from country 
 to country is determined much more than was formerly sup- 
 posed, by the state of the loan market in different countries, 
 and much less by the state of prices." 
 
 It is only within the last half-century that the manner of 
 controlling the exchanges has come to be thoroughly under- 
 stood. It is necessary, to a proper understanding of the sub- 
 ject, to treat metallic money as a commodity and to apply 
 to it the laws of supply and demand which govern other 
 commodities. In the words of Professor MacLeod : 
 
 "Discounting a bill for a merchant is not lending him money but 
 buying a debt due to him : and the price of such debt must follow ex- 
 actly the same laws as the price of corn, or any other article. If 
 money is very scarce, and wheat very abundant, the price of wheat 
 must fall ; if money is very abundant, the price of wheat will rise. 
 The price of debts obeys the same rules. If money becomes very 
 scarce, the price of debts must fall, i.e., the discount must rise. If 
 specie becomes abundant, the price of debts will rise, i.e., the dis- 
 count will fall. The price of debts, then, must follow the same great 
 laws of nature that the price of wheat does." 2 
 
 This proposition, simple enough to the modern banking 
 community, was only imperfectly understood and tardily 
 acted upon down to 1860. The Bank of England then for 
 the first time, at the suggestion of Mr. Goschen, adopted 
 the principle of sharply raising the rate of discount one per 
 cent, at a time when gold began to leave the country. The 
 effect was marvellous and the method then adopted has since 
 been followed, with more or less halting steps, by every 
 banking institution in the world when it has been threatened 
 
 1 Political Economy, B. III., Ch. viii., Sec. 4. 
 * Theory and Practice of Banking, II., 278. 
 
1 8 HISTORY OF MODERN BANKS OF ISSUE. 
 
 by a drain of bullion. The effect of offering a higher price 
 for money is to attract money while compelling the sale of 
 commodities. It is not so much that commodities fall 
 because the mere volume of the circulating medium has 
 been reduced, according to the theory of the classical school 
 of political economy. It is rather because the price of money 
 having been raised by those who have it to sell in the form 
 of loans, the manufacturer or owner of merchandise prefers 
 to sell his goods at a reduced price rather than pay the 
 higher rate of discount for continued accommodation at the 
 bank. 
 
 The folly of attempting to maintain a uniform rate of 
 interest or discount is on a par with maintaining a uniform 
 price of wheat. At times the price would be too high and 
 the wheat of the world would glut the markets of the coun- 
 try enforcing such a law, diverting the capital which might 
 have been expended for other commodities and resulting in 
 artificial relations between wheat and all other articles. At 
 other times the price would be too low and wheat would flow 
 steadily to the countries paying the market price, while 
 starvation would stalk through the country which maintained 
 a fixed legal price. Money is governed by exactly the same 
 laws. The attempt to maintain a uniform rate of interest 
 or discount would result in some cases in a glut of bullion, 
 when the ruling rate of the world was lower, which would 
 be as real an inflation and as unhealthy an expansion of credit 
 as any form of paper inflation ; it would result in other 
 cases, when the ruling rate of the world was higher, in the 
 withdrawal of all the bullion which a country possessed. 
 
 A banking currency, regulated by sound laws and the 
 enlightened experience of modern banking, affords as perfect 
 a regulator of the monetary circulation as the automatic 
 governor of a steam engine. When capital is redundant, it 
 flows into the banks in the form of deposits of bank-notes 
 and of coin. The bank-notes are cancelled and retired and 
 if the redundancy of capital continues the rate of discount 
 falls and the surplus is available for domestic or foreign 
 investments. Domestic industry is thus able to revive after 
 
 

 THE THEORY OF A BANKING CURRENCY. 19 
 
 a commercial crisis as the result of the low rates for idle 
 capital. The surplus of currency which is not thus absorbed 
 goes abroad in the form of bullion. The moment such 
 losses of bullion go too far and put a strain upon the coin 
 reserves of the banks, their rate of discount is raised. This 
 has the triple effect of retaining capital at home which would 
 otherwise be exported, attracting capital from abroad, and 
 putting a check upon speculative enterprises upon small 
 margins. Money becomes harder to get and it is not gotten 
 for so many doubtful enterprises or for those promising small 
 and distant returns. 
 
 Money and capital are regulated by the law of supply and 
 demand, like other commodities. They pay smaller percent- 
 ages of profit, as a rule, than other commodities and there is 
 no danger that they can be cornered or monopolized. Capi- 
 tal is a generic thing which can be acquired by any one who 
 saves. In this it differs from specific commodities, which 
 may require special methods of production and which can be 
 made the subjects of monopoly. The conception which has 
 sometimes taken possession of the opponents of a banking 
 currency, that capital and money can be "cornered," is an 
 absolute chimera under a system of free banking. Banking 
 systems have been in force which have had a tendency to 
 restrict the supply of money because of the conditions they 
 imposed upon the quick conversion of capital into negotiable 
 form ; but just so far as a banking system is free it escapes 
 the possibility of such an evil, whatever others it may bring 
 in its train. The theory that all bankers and persons capable 
 of becoming bankers could or would form a combination to 
 raise the value of money when it was plentiful is the same 
 in substance, and is as reasonable, as the theory that all 
 holders of capital would cease to make promissory notes, 
 draw checks, and grant credits on their books. The form 
 which this theory usually takes, that a banking currency 
 would encourage the " cornering " of money more than a gov- 
 ernment paper currency, is peculiarly ill-considered, because 
 the amount of the latter is fixed and cannot be increased 
 without awaiting the slow process of legislative action, which 
 
20 HISTORY OF MODERN BANKS OF ISSUE. 
 
 usually involves also the suspension of specie payments and 
 the upsetting of the standards of value. The only way of 
 "cornering" money is by raising the interest rate. The 
 moment this rate was raised above that fixed by free compe- 
 tition in the markets of the world, foreign capital would 
 pour into the country where this condition existed in a 
 golden stream of coin and bullion, interest rates would 
 begin to fall again, and the "corner" would more quickly 
 collapse than has ever been the case in the wheat or cotton 
 market. 
 
 It is not to be inferred from what has preceded that no 
 regulation of banks of issue by law is justified or required. 
 The theory of free banking simply assumes that equal privi- 
 leges shall be granted to all banks which comply with uni- 
 form and reasonable conditions. The contest which has 
 been waged in France and some other European countries 
 on behalf of free banking has not been waged against 
 proper government supervision of banks of issue, but against 
 the grant of the privilege of monopoly of issues to a single 
 institution or a limited number of institutions. Government 
 regulation of institutions owned entirely by private individ- 
 uals is a very different thing from government ownership, 
 and the exercise of such supervision under a banking system 
 open to all comers who comply with reasonable requirements 
 is very different from its exercise over a single institution, 
 holding special privileges by grant of the sovereign power. 
 The essential limitation upon government supervision of 
 banking is that it shall restrict as little as possible, consonant 
 with the safety of the business public, the full operation of 
 the functions of the bank. It may be justifiable to impose 
 fixed proportions between capital and note issues and between 
 liabilities and the normal cash reserve ; to provide specific 
 methods of keeping accounts and to authorize full govern- 
 ment inspection of such accounts ; but legal regulation 
 should allow as much elasticity as possible in the full use of 
 the powers of the bank in times of emergency for the 
 accommodation of solvent business men and the protection 
 of the community from needless panics. 
 
CHAPTER II. 
 
 ANCIENT AND MODERN BANKING IN ITAI<Y. 
 
 Character of the Ancient Banks Origin of the Word " Bank "The 
 Banks of the Italian States The Unification of the Banking 
 System The Paper Money Mania and the Present Economic 
 Condition of Italy Flight of Subsidiary Silver to Other Coun- 
 tries. 
 
 ITAL,Y is in a sense the mother of modern banking, as she 
 is also the inspiration of much that is best in modern 
 literature, art, and religious faith. The oldest bank is 
 generally considered to have been that of Venice, founded 
 during the wars which the island republic was waging with 
 the Roman Empire of the East and its successor and rival, 
 the Holy Roman 'Empire of the West. The Bank of Venice, 
 however, was at the outset simply a transfer office for the 
 national debt. Several forced loans had been contracted, 
 the first apparently in 1156, which were converted into per- 
 petual annuities, paying an annual interest. The govern- 
 ment appointed commissioners to consolidate these loans 
 and to issue stock certificates or credits. This constituted 
 the evidences of the debt into registered negotiable secu- 
 rities, which were transferred from time to time on the 
 books of the bank and thus served certain purposes of 
 exchange in the same manner that such securities serve at 
 the present time. The actual business of deposit banking 
 by the issue of circulating notes was not undertaken by 
 public authority in Venice until four centuries later, in 
 1587, when foreign coins were received at their bullion value 
 and certificates were issued promising a return of bullion of 
 
 21 
 
22 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the same value of standard weight and fineness. 1 The Bank 
 of Venice proper (Banco del Giro} was established by decree 
 of the senate in 1619. 2 The origin of the word " Bank," is 
 traceable, however, to the form of business done by the 
 Venetian loan office, and for this reason it deserves some 
 attention as the origin of modern banking. 
 
 One of the names of a public loan in Italy was Monte, or 
 joint-stock fund, and the first Venetian loan was called the 
 Jlfonte Vecchio, or old loan, in contrast with the later ones, 
 called Monte Nuovo, and Monte Nuovissimo (new and new- 
 est). The Germans were influential in Italy at this time and 
 their word for Monte was Banck, which the Italians con- 
 verted into Banco. The word bank, was frequently used in 
 Knglish as well as Italian to signify a mass of money or a 
 joint stock fund. The definition given in an Italian dic- 
 tionary in 1659 is, "Monte, a standing bank or mount of 
 money, as they have in divers cities of Italy." * The issue 
 of paper money directly by the state was spoken of as " rais- 
 ing a Banke " in colonial days in Massachusetts, the word, 
 "bank," standing for the money rather than the institution 
 which put it in circulation. 4 Blackstone also says that at 
 Florence in 1344, "government then owed about ,60,000, 
 and being unable to pay it, formed the principal into an 
 aggregate sum, called, metaphorically a Mount or Bank, the 
 shares whereof were transferable, like our stocks." The 
 use of the word, therefore, if not the methods of modern 
 banking, comes from the institutions of Venice, Florence 
 and Genoa, which were at the outset the registry offices of 
 the public debt. 
 
 The Bank of Genoa grew out of the pledge of the public 
 revenues for the loans contracted to carry on the wars of the 
 fourteenth century. The lenders were permitted to receive 
 the produce of the taxes by their own collectors, paying into 
 
 1 Gilbert, I., n, note. 
 2 Palgrave, 103. 
 
 3 MacLeod, Theory and Practice of Banking, L, 315. 
 
 4 Weeden, 318. 
 
 6 Commentaries, I., 327. 
 
ANCIENT AND MODERN BANKING IN ITALY. 23 
 
 the Treasury the excess above their claims. The multi- 
 plicity of these claims led to the formation in 1407 of the 
 Bank of St. George, which became from that time the sole 
 intermediary between the State and its creditors. Every 
 senator on taking office swore to maintain the privileges of the 
 bank, which were confirmed by the Pope and the German Em- 
 peror. "The bank," says Hallam, "interposed its advice 
 in every measure of government and generally, it is ad- 
 mitted, to the public advantage. It equipped armaments at 
 its own expense, one of which subdued the island of Cor- 
 sica ; and this acquisition, like those of our great Indian 
 corporation, was long subject to a company of merchants, 
 without any interference of the mother country." ' This 
 territory was taken by way of security for the loan, in the 
 same manner that revenues from specific sources are still 
 pledged by second-rate powers in Europe and Asia for the 
 fulfilment of their pledges. 
 
 The forerunners of modern loan and deposit banks were 
 the private bankers of the Italian cities who lent money to 
 traders, merchants, and kings. The Jews were the money 
 lenders of the dark ages and their monopoly of the business 
 was confirmed among the Christians by an absurd prejudice 
 against lending money at interest, upon the ground that it 
 constituted usury. 2 The Jews were several times expelled 
 from the leading countries of Western Europe, and as early 
 as the thirteenth century the Christian merchants of L,om- 
 
 1 Europe during the Middle Ages, II., 530. 
 
 2 Prof. Jannet points out that the prejudice against loans at interest 
 was not without its justification before money came to be borrowed 
 for the purposes of production, because the proceeds of the loan were 
 usually consumed instead of multiplied, and if loans at interest had 
 been universally approved they would soon have resulted in rural 
 localities in the practical enslavement of the peasants who were un- 
 able to pay. The distinction between loans for production and for 
 consumption was early recognized by the Church, and the fifth Lateran 
 Council (1512-17) decreed: " Ea est propria usurarum interpretatio, 
 quando videlicet ex usu rei quae non germinat nullo labore, nullo 
 sumptu, nullove periculo lucrum foetusque conquiri studetur." Le 
 Capital, la Speculation, et la Finance, 81. 
 
24 HISTORY OF MODERN BANKS OF ISSUE. 
 
 bardy and the South of France took up the business of 
 remitting money by bills of exchange and of lending at in- 
 terest. Bills of exchange proved peculiarly useful to the 
 Church of Rome by facilitating the remission to Italy of the 
 immense sums subscribed by the faithful beyond the Alps, 
 and Italian bankers penetrated to England and were allowed 
 to farm the customs as security for their loans. 1 Edward 
 III. defaulted in his payments, owing the Bardi at Florence 
 900,000 gold florins, and the Peruzzi 600,000 florins. These 
 two great banking houses, who were described by Villani as 
 the pillars which sustained a great part of the commerce of 
 Christendom, were obliged to suspend, and their failure 
 carried down a great number of Florentine citizens and 
 caused great distress in the city. 
 
 The essential feature of modern banks of issue the cir- 
 culation of notes payable to bearer and redeemable in coin, 
 but only partly covered by the coin reserve, was not 
 worked out until the seventeenth century. The famous 
 Bank of Amsterdam, founded in 1609, was like the Bank of 
 Venice,. after it really became a bank at all, a mere issuer 
 of warehouse receipts for coin. The foundations of the 
 great structure of modern credit were already being laid 
 among private citizens and money lenders, but had not at- 
 tained their present form. That property might be trans- 
 ferred by paper representatives was demonstrated by the 
 immemorial use of bills of exchange, and the perception of 
 this truth led to the many crude schemes of banking upon 
 landed security which formed the basis of Law's bubble 
 under the French monarchy, led the American colonies 
 through every form of monetary folly, and deceived for a 
 moment even the sane, clear mind of Hamilton. William 
 Potter, in his Key to Wealth? groped towards the modern 
 theory of bank issues in the suggestion that greater mobility 
 should be given to trade by some firm and known security 
 
 1 Hallam, II., 529. The Bardi are said to have farmed all the cus- 
 toms in England in 1329 for ^20 per day. 
 
 2 Published in London in 1650. 
 
ANCIENT AND MODERN BANKING IN ITALY. 2$ 
 
 and that, failing a new supply of gold and silver, a flag or 
 sign of specie might be instituted. He grasped the concep- 
 tion of some of the best modern thinkers in the statement 
 that ' ' Money is given to men for their commodities, upon 
 no other accompt than as an Evidence or Testimony (That is 
 as it were a Token or Ticket) to signifie how far forth other 
 men are indebted for, and ingaged to recompence the fruits 
 of their labors, or possessions by commodities of some other 
 kind, instead of those that for such money they parted 
 with." China had paper money as early as the seventh 
 century, but the transport notes of the Stockholm bank, 
 issued in 1661 to avoid the transportation of copper coin, 
 are considered the earliest type of modern bank-notes. 1 
 With the progress of the arts of peace, the private bankers, 
 the great banks of Italy, and the Bank of Amsterdam thus 
 gradually perfected the methods of clearing by credits on 
 their books, while the great incorporated banks provided 
 credit with its potent modern instrument the bank-note 
 payable in coin on demand. 
 
 But it is the purpose of this work to deal with modern 
 banks of issue and not with the antiquities of mediaeval 
 commerce. The disorders which came on the heels of the 
 French Revolution, wiping out the boundaries of states and 
 destroying the freedom of the Italian cities, put an end also 
 to most of the ancient banks. The only one which survived 
 was a land and ' mortgage bank called Monte dei Paschi, at 
 Sienna, which was believed to date back to the seventeenth 
 century. The first effort to found a modern bank was made 
 at Genoa upon the foundations of the old Bank of St. George. 
 The effort was not successful, and, in the opinion of M. 
 Courcelle-Seneuil, this is not to be regretted, " for the Bank 
 of St. George was adapted to customs and commercial usages 
 which have ceased to exist." The next attempt to establish 
 a banking system in Piedmont was made by letters patent 
 of King Charles Albert, under date of March 16, 1844. The 
 new bank was to be known as the Bank of Genoa, to have a 
 
 1 Roscher, I., 443. 
 
26 HISTORY OF MODERN BANKS OF ISSUE. 
 
 capital of 4,000,000 lires ($800,000), and to be under the 
 supervision of a royal commissioner and sub-commissioner. 
 The bank received a subvention of 4,000,000 lires from the 
 government during 1846 and the following years, upon 
 which it paid interest at two per cent. A bank was founded 
 at Turin on October 16, 1847, with a capital of 4,000,000 
 lires, but the political and economic crisis of 1848 checked 
 its development. A royal ordinance of December 14, 1849, 
 authorized it to unite with the older bank under the denom- 
 ination of the National Bank of Sardinia, with head offices at 
 both Genoa and Turin. The duration of the new establish- 
 ment was fixed at thirty years, beginning on January i, 
 1850, and its capital at 8,000,000 lires, which was afterwards 
 increased to 32,000,000 lires ($6,200,000). 
 
 The government in 1848 resolved upon a loan of 20,000,000 
 lires, which the Bank of Genoa was required to furnish at 
 two per cent. , upon the pledge of the goods of the Order of 
 Saints Maurice and Lazarus. Forced legal tender character 
 was given to the bank-notes and an increase in issues per- 
 mitted of 20,000,000 lires. The smallest notes were reduced 
 from 250 lires ($50) to 100 lires ($20) with the condition that 
 the notes of 100 lires should not be issued to the amount of 
 more than one-fifth of the total circulation. The loan was 
 reimbursed to the bank and specie payments were resumed 
 at the end of I849. 1 The bank from that time followed the 
 fortunes of the Royal House of Sardinia, and extended its 
 branches and operations with the success of the Sardinian 
 arms and the consolidation of the Italian States. It was 
 necessary in 1856 to authorize the bank to exceed the 
 maximum note circulation allowed by its statutes, which was 
 three times the cash reserve. The bills of the bank were 
 again made legal tender, with suspension of cash payments 
 on April 27, 1859, on the occasion of the war with Austria, 
 and the bank was authorized to issue 6,000,000 lires in notes 
 of twenty lires ($4) and to open a credit for the government 
 to the amount of 30,000,000 lires at two per cent. The bank 
 
 Courcelle-Seneuil, 354. 
 
ANCIENT AND MODERN BANKING IN ITALY. 2 7 
 
 was prudently conducted, the government did not draw its 
 full credit, and the notes fell but little below par. Their 
 circulation was extended on June n, 1859, to the entire 
 territory occupied by the Sardinian troops. 
 
 The bank was reorganized at this time as the National 
 Bank of the Kingdom of Italy, in pursuance of the plans of 
 King Victor Emmanuel for the unification of Italy. Its 
 capital was increased to 40,000,000 lires ($8,000,000) and 
 three head offices of equal rank were established at Turin, 
 Genoa, and Milan, the latter being a new office within the 
 territory added to the new Kingdom of Italy. The bank 
 resumed specie payments and opened a credit of 18,000,000 
 lires in favor of the government. Branches were established 
 in 1860 at Bergama, Brescia, Como, Modena, and afterwards 
 at Ancona and Perusia. The bank absorbed the leading 
 banks of Bologna and Parma and established branches at 
 Ferrara, at Forli, and at Ravenna. The annexation of 
 Naples to the Kingdom of Italy did not result in the de- 
 struction of the Banks of Naples and Sicily, but the National 
 Bank was authorized to establish a principal branch at 
 Naples and branches at Catana, Messina, Reggio, and other 
 places in Southern Italy. Branches were also authorized at 
 this time at Pavia, Cremona, and Piacentia. 
 
 The character of the National Bank of the Kingdom of 
 Italy was not essentially changed until the Act of August 
 10, 1893, k ut i ts relations to the government constantly grew 
 closer and it was compelled to accept forced legal tender for 
 its notes in order to comply with demands for advances to 
 the State. Suspension of specie payments was decreed at 
 the outbreak of the war in 1866, although the capital of the 
 Bank had been increased by the decree of June 29, 1865, to 
 100,000,000 lires ($20,000,000). The provision for the .sus- 
 pension of specie payments, with legal tender quality for the 
 bank-notes, applied only to the National Bank, but the latter 
 was required to furnish circulating notes without charge to 
 other banks of circulation. The depreciation of the bank-notes 
 drove the subsidiary coins out of circulation, and many small 
 banks of deposit, commercial houses, and even retailers, issued 
 
28 HISTORY OF MODERN BANKS OF ISSUE. 
 
 certificates of one lire and 50 centimes to take their place. 
 The government in 1868 sought to drive these notes out of 
 circulation by authorizing the issue of notes for one lire by 
 the regular banks of circulation, which were made legal 
 tender for a limited sum throughout the Kingdom. The 
 bank made handsome profits, as usual when specie payments 
 are suspended, made large advances to the government and 
 again increased its capital to 200,000,000 lires under author- 
 ity of a law of April 9, 1872.' 
 
 The policy of the Italian government to introduce unity 
 into every branch of Italian affairs was pursued cautiously 
 in the case of the bank-note circulation and without the 
 hasty abrogation of the rights of the banks. No new bank 
 could be constituted without the authority of a special law, 
 but five banks of circulation conducted business without 
 interference by the side of the National Bank of Italy. 
 The Roman Bank, founded in 1851 with a privilege secured 
 until December 31, 1889, had a capital of 15,000,000 lires- 
 and while Rome was independent of the Kingdom of Italy was 
 under the protection in a measure of the Papal power. The 
 National Bank of Tuscany was established in July, 1857, 
 with a capital of 30,000,000 lires and the Tuscan Bank of 
 Credit was established for thirty years in March, 1860, with 
 a capital of 10,000,000 lires, of which only half was paid in. 
 Both these banks were located at Florence. The Bank of 
 Naples was founded as early as 1794 and the capital was 
 contributed in part by the State. It had a head office at 
 Rome and about a dozen branches. The Bank of Sicily was 
 also an old establishment, with its headquarters at Palermo, 
 four principal offices in other parts of Sicily and branches at 
 Rome and elsewhere in Italy. The capital of the Bank of 
 Naples was originally 32,500,000 lires and that of the Bank 
 of Sicily was 8,000,000 lires. The authorized circulation of 
 these banks under the law of 1874 was 450,000,000 lires for 
 the National Bank of Italy ; 45,000,000 lires for the Roman 
 Bank ; 63,000,000 lires for the National Bank of Tuscany ; 
 
 Juglar, Article " Banques," in Dictionnaire des Finances, I., 344. 
 
ANCIENT AND MODERN BANKING IN ITALY. 29 
 
 15,000,000 lires for the Tuscan Bank of Credit ; 146,250,000 
 lires for the Bank of Naples, and 36,000,000 for the Bank of 
 Sicily, making a total of 755,250,000 lires ($i5O,ooo,ooo). 1 
 
 The necessity of maintaining public credit, and some com- 
 plaints by the other banks that they suffered by the special 
 favors granted to the National Bank, led to legislation in 
 1874 which established the Consorzio. This arrangement 
 formed the banks into a syndicate for the withdrawal of the 
 notes issued directly on behalf of the government and the 
 substitution of a like sum (840,000,000 lires) in bank bills 
 of the National Bank, which were made legal tender through- 
 out the Kingdom. The notes issued by the provincial banks 
 on their own account were to be legal tender only within the 
 province in which the bank was established. The govern- 
 ment voted itself the authority to increase its loans from the 
 associated banks to 1,000,000,000 lires ($200,000,000) and to 
 demand a certain proportion of the amount in gold. The 
 -government pledged itself to deposit five per cent, securities 
 as the guarantee of the loan and to pay a low rate of inter- 
 est. The advances actually made to the government under 
 this arrangement reached 940,000,000 lires, of which 600,- 
 000,000 was reimbursed from the product of a specie loan 
 authorized by the law of April 7, 1881, and the remainder 
 was transformed into government bills. The Consorzio 
 came to an end with the abolition of forced legal tender in 
 1884. The circulation of the banks was slightly increased 
 by the law of June 30, 1891, which admitted a maximum 
 limit equal to the mean circulation of 1890. 
 
 The suspension of specie payments, the failure of the 
 Roman Bank, and the almost complete collapse of the bank- 
 ing system of Italy came about in the latter part of 1892 and 
 the beginning of 1893 as the result of wilful violations of 
 law by the banks and the guilty connivance of public offi- 
 cials. The Roman Bank was accused of exceeding its circu- 
 lation at almost the same moment that the director of the 
 Roman branch of the Bank of Naples, Signer Cucciniello, 
 
 1 Alfred Neymarck, Article " Banque," in Dictionnaire 
 Politique, L, 141-42. 
 
3O HISTORY OF MODERN BANKS OF ISSUE. 
 
 fled with, his secretary, leaving obligations of 2,000,000 lires 
 ($400,000) and compelling the branch to close. It was found 
 that the excess of note issues had been distributed among 
 the politicians by the thousands and hundreds of thousands. 
 A Roman deputy had received 4,000,000 lires ; a former 
 minister, 2,000,000 lires ; a well-known financier, 1,500,000 ; 
 a newly elected deputy, 1,000,000 ; a former editor, 150,000 ; 
 and others, various sums from 1,000 to 500,000 lires. 1 Some 
 of these sums were put in the form of loans and advances, 
 but the security was nominal, many of the loans were long 
 over-due, and Signor Tanglongo of the bank management 
 declared that he had been compelled to retain these people 
 by the orders of several ministers and of a president of the 
 council. 
 
 An official investigation was ordered and the report by 
 Senator Finali showed that three of the banks had exceeded 
 the legal limit of their circulation and that all had tied up 
 their assets to an alarming extent in securities which could 
 not be readily negotiated. The excess of circulation in the 
 case of the Roman Bank was 64,543,230 lires ; the Bank of 
 Sicily, 14,917,203 lires; and the Bank of Naples, 2,041,501 
 lires. It was found that the National Bank also had issued 
 53, 700,000 lires illegally by order of the administration. 
 The funds not readily negotiable at sight were reported as 
 628,620,686 lires, or nearly twice the capital and reserves of 
 the banks, the Tuscan Bank of Credit alone being in a sound 
 condition. 2 The loans upon mortgages and other securities 
 slow to realize were 199,756,000 lires, and what were called 
 the " Direct Employments" of the funds, in Treasury bonds 
 and other paper below par or of doubtful value, were 172,- 
 343,000 lires. The deputies who had paper over-due were 
 found to number sixteen, and the amount of the paper was 
 5,922,410 lires, some of it going back to 1878. There were 
 nine more deputies who had obtained renewals to the amount 
 of 641,670 lires. Among the latter was Premier Crispi, with 
 loans of 244,000 lires which had been renewed since 1887. 
 
 1 Revue des Banques, March, 1893, XII., 335. 
 
 2 Revue des Banques, May, 1893, XII., 378. 
 
ANCIENT AND MODERN BANKING IN ITALY. 31 
 
 It was stated that a report of August 30, 1889, na d shown a 
 clandestine circulation of 9,000,000 lires by the Roman Bank, 
 and that it was known to Signor Crispi, then President of 
 the Council of Ministers, as well as to Signor Giolitti. 1 
 
 These discoveries were a death-blow to the Italian bank- 
 ing system as it then existed. The Roman Bank was com- 
 pelled to liquidate, and its affairs were taken in charge by 
 the National Bank. The privilege of the banks expired in 
 1889 and 1890, but had been renewed for brief periods until 
 the close of 1892. A law was then pending, proposed by 
 Signor Grimaldi, which provided for a renewal for six years, 
 and that every bank should accept the notes of the others. 
 But this project went by the board when the rottenness of 
 the existing banking system was discovered, and the gov- 
 ernment seized the opportunity to push a step further the 
 policy of unity and consolidation. The National Bank of 
 the Kingdom was badly compromised, and the redemption 
 of its notes in specie was indefinitely suspended, but it was 
 made the basis of the new institution founded by the law of 
 August 10, 1893. 
 
 The new law provided for the fusion of the National Bank 
 of the Kingdom of Italy with the National Bank of Tus- 
 cany and the Tuscan Bank of Credit. The name of the 
 new institution is simply the Bank of Italy, and it is required 
 to establish offices or branches wherever they have been 
 established by the National Bank of Tuscany. The capital 
 of the new bank was fixed at 300,000,000 lires ($60,000,000) 
 and its privileges were confirmed for twenty years. The 
 Roman Bank was already in process of liquidation when this 
 act was passed, so that the only remaining banks of issue 
 are those of Naples and Sicily. The maximum limit of cir- 
 culation during the continuance of the forced legal tender 
 policy, was fixed at 800,000,000 lires for the Bank of Italy, 
 242,000,000 lires for the Bank of Naples, and 55, 000,000 lires 
 for the Bank of Sicily. This circulation is to be reduced 
 every two years after 1897, and until in 1907 it shall stand 
 
 Le Marche Financier en 1893-94, 131. 
 
 
32 HISTORY OF MODERN BANKS OF ISSUE. 
 
 at 630,000,000 lires for the Bank of Italy, 190,000,000 for the 
 Bank of Naples, and 44,000,000 lires for the Bank of Sicily, 
 making a total of 864,000,000 lires. If either bank at the 
 end of fourteen years, from the date of the law, lacks a 
 reserve corresponding to one-third of its circulation, the 
 circulation must be reduced within three months, and the 
 amount of the reduction transferred to the banks which pos- 
 sess or pay in the necessary reserve. 1 The banks are author- 
 ized to increase their circulation beyond the legal limits 
 when their notes are entirely covered by legal coin or by gold 
 bullion, and notes may be issued beyond the limit for the 
 purpose of advances to the government. 
 
 The reserves of the banks, when on a specie basis, are fixed 
 at forty per cent, of the circulation, including thirty-three 
 per cent, in coin or bullion and the remainder in foreign 
 bills of exchange approved by the Minister of the Treasury. 
 The metallic reserve is required to consist of gold in the 
 proportion of at least three-quarters. The law provides that 
 bills now in circulation shall cease to be a legal tender after 
 December 31, 1897, an d shall no longer be redeemable after 
 December 31, 1902. A permanent supervision over banks 
 of issue is established through a board consisting of the Min- 
 ister of Agriculture, Industry and Commerce, and the Minis- 
 ter of the Treasury. A special inspection is to be made 
 under the authority of these ministers every two years, and 
 the results reported to Parliament within three months. The 
 nomination of the director general of the Bank of Italy 
 must be approved by the government. One of the provisions 
 of the law provided that if the deposits exceeded a certain 
 figure, the bank must reduce its circulation by three-quarters 
 of the deposits bearing interest in excess of the limit ; but 
 this provision was suspended by decree of January 23, 1894. 2 
 
 The new banking law did not rescue Italy from the regime 
 of depreciated currency and was probably not expected to 
 do so. The government was reduced to subterfuges to in- 
 
 1 Section 2, Law of August 10, 1893, Bulletin de Statistique, XXXIV., 
 
 254- 
 
 * Bulletin de Statistique, February, 1894, XXXV., 207. 
 
ANCIENT AND MODERN BANKING IN ITALY. 33 
 
 crease the volume of paper money and provide itself with 
 funds to meet pressing obligations. The decree of January 
 23, 1894, permitted a supplementary issue of bank-notes to 
 the amount of 90,000,000 lires for the Bank of Italy, 28,000,- 
 ooo for the Bank of Naples, and 7,000,000 for the Bank of 
 Sicily. These new issues were not directly authorized, but 
 the penal tax imposed by the banking law was reduced to 
 two-thirds of the rate of discount up to the limit of the pro- 
 posed new issue. A decree a month later, February 21, 
 1894, purported to put a limit of 600,000,000 lires on the 
 circulation of State notes, and Article 5 of the same decree 
 provided that the banks might redeem their notes on pre- 
 sentation at the market rate of depreciation. This favor 
 was only to be accorded, however, to the banks which com- 
 plied with the requirement of Article 2, that they transfer to 
 the credit of the government 200,000,000 lires in gold and 
 accept a new issue of government notes as a substitute. 1 The 
 new notes, of which 145,000,000 lires were apportioned to 
 the Bank of Italy, 45,000,000 lires to the Bank of Naples, 
 and 10,000,000 lires to the Bank of Sicily, were thus nomi- 
 nally covered by gold, but no provision was made for reduc- 
 ing the volume of outstanding bank-notes or for replacing 
 the gold withdrawn from the bank reserves. 
 
 The result of measures like these was to drag Italy deeper 
 and deeper into the mire, make the rates of foreign exchange 
 more and more unfavorable and the receipts of the Treasury 
 of constantly diminishing value in gold. The additional 
 issue of bank-notes authorized by the decree of January 23, 
 1894, was avowedly for the purpose of meeting the demands 
 of the depositors in the savings banks, who upon demanding 
 the restoration of the deposits they had made in good money 
 were reduced to the choice of leaving their deposits in the 
 hands of a discredited government or accepting the paper 
 promises of the suspended banks. One of the expedients 
 adopted to protect the Treasury was the levy of a tax of 
 twenty per cent, on the interest of the public debt, which was 
 
 1 Bulletin de Statistique, March, 1894, XXXV., 335. 
 
 3 
 
34 HISTORY OF MODERN BANKS OF ISSUE. 
 
 only an indirect way of scaling the interest on the consoli- 
 dated five per cents, to four per cent. 1 The depreciation of 
 the paper money has become so great as to drive all subsi- 
 diary coins out of the country and make it difficult to get 
 change for a note of a few lires. Twenty million lires was 
 issued during 1894 in nickel pieces of twenty centimes, and 
 the government congratulated themselves on a profit of 
 17,500,000 lires by means of the seignorage. 
 
 The flight of subsidiary money from Italy carried it to 
 France, Switzerland, and, to some extent, to Belgium, where 
 it passed in ordinary transactions upon the same terms as. 
 the money of those countries. So much Italian silver drifted 
 into Southern France that the French government made an 
 investigation of the amount received on a given day at some 
 of the leading banks and found that Italian pieces consti- 
 tuted 28.78 per cent, of the entire subsidiary circulation. 
 Belgian, Swiss, and Greek pieces constituted 12.30 per cent., 
 so that the proportion of French coins was only 58.92 per 
 cent. Italian subsidiary coin constituted more than seventy 
 per cent, of the circulation in Savoie and the Maritime Alps 
 and from 45 to 60 per cent, in eight other departments be- 
 tween the Rhone and the Alps. 2 A conference of the states 
 of the L,atin Union, held at Paris, reached an agreement on 
 November 15, 1893, by which the Italian subsidiary coins 
 were to cease in four months to be received by public deposi- 
 taries in France. Those in the Bank of France were, upon 
 presentation to the Italian government, to be redeemed half 
 in gold and half by bills of exchange. The amount thus- 
 presented up to the close of 1894 was 57,222,279 lires. 3 The 
 policy adopted by the Italian government for preventing the 
 continued exportation of the silver, of locking it up in the 
 Treasury and issuing small notes against it, was sanctioned 
 by the conference upon the condition that the subsidiary 
 
 1 Le Marche Financier en 1893-94, I 3^- 
 
 2 Le Marche Financier en 1893-94, 348-68. 
 
 3 Assemblee Generate des Actionnaires de la Banque de France du 
 31 Janvier, 1895, p. 9. 
 
ANCIENT AND MODERN BANKING IN ITALY. 35 
 
 silver of Italy should never exceed the limit of six lires per 
 head originally fixed by the Latin Union. 
 
 The report of the Minister of the Treasury, Sidney Son- 
 nino, to the Chamber of Deputies, on December 10, 1894, 
 offered only a distant hope of the restoration of sound finan- 
 cial conditions in Italy. The result of the special examina- 
 tion of the banks in February was, in his own words, " not 
 very favorable. ' ' The Minister proposed a somewhat elabo- 
 rate scheme of law to put in effect a convention between the 
 bank and the Treasury. The period of liquidating the un- 
 available assets of all the banks was extended to fifteen 
 years. The Bank of Italy assumed the liquidation of the 
 affairs of the Roman Bank and received in return the cus- 
 tody of the public funds in the provinces, paying interest at 
 one and a half per cent, on sums above 40,000,000 lires. 
 The bank was required to deposit with the Treasury a guar- 
 antee fund of 50,000,000 lires in national securities and to 
 increase the amount within six years to 90,000,000 lires ; to 
 increase the limit of advances to the Treasury from 90,000,- 
 ooo to 100,000,000 lires ; to call upon shareholders for an 
 assessment of 100 lires per share, amounting to 30,000,000 
 lires, and to reduce the capital by an equal amount. The 
 bank was required to set aside 4,000,000 lires in 1894, 5,000,- 
 ooo lires in 1895, and thereafter 6,000,000 lires annually, to 
 be invested in national securities to form a reserve fund to 
 cover the losses by the Roman Bank, and any profit which 
 might remain was allowed to be divided among the share- 
 holders, to a maximum limit of 40 lires per share. 1 This 
 remarkable method of liquidation, by converting locked-up 
 assets into a new form of such assets, instead of paying off 
 liabilities, was approved by the shareholders of the Bank 
 of Italy on February 25, 1895, for they practically had no 
 option but to accept the proposals of the government. 2 
 
 The following table shows the condition of the three 
 Italian banks of circulation on September 30, 1895 : 
 
 1 Bulletin de Statistique, December, 1894, XXXVI., 587-89. 
 5 Raffalovich, Le Marche Financier en 1894-95, 177. 
 
HISTORY OF MODERN BANKS OF ISSUE. 
 
 BANK. 
 
 METALLIC 
 RESERVE. 
 
 CIRCULATION. 
 
 CURRENT 
 ACCOUNTS. 
 
 DISCOUNTS. 
 
 Bank of Italy 
 
 349-7 
 116.1 
 36.7 
 
 (In million 
 766.9 
 
 238.7 
 49.2 
 
 s of lires.) 
 
 229.8 
 
 78.6 
 36.4 
 
 208.6 
 
 53-8 
 
 22.0 
 
 Bank of Naples. .. 
 Bank of Sicily 
 
 One of the beneficent features of the banking system of 
 Southern Italy is the support which it lends to the popular 
 banks, which afford a means of raising money to small culti- 
 vators, shopkeepers, and even to laborers. The government 
 was empowered, by Article 38 of the law of January 23, 
 1887, relating to people's banks, to authorize loans for agri- 
 cultural purposes by banks of issue. The necessity of using 
 this power sparingly was appreciated, but the management 
 of the Bank of Naples voted on May 4, 1889, to set aside 
 8,000,000 lires ($1,600,000) for this purpose and their action 
 was approved by the government. 1 But perhaps the more 
 important service rendered to popular credit is in the redis- 
 counting of the paper of the people's banks. The large 
 bank thus escapes the difficult work of discriminating among 
 individuals of small means by directly discounting their paper 
 and obtains at the same time the guarantee of the local bank 
 as well as of the borrower and his security. The Bank of 
 Naples voluntarily discounts for those who appear most 
 worthy of it at one per cent, below the ordinary commercial 
 rate. Thirty-four people's banks in 1883 had obtained this 
 reduced rate on sums of 4,249,348 lires ($820,000) and thirty- 
 six banks had obtained discount at the regular rates on 
 9,971,726 lires ($1,924,000). 
 
 The Bank of Sicily has endeavored even more generously 
 to promote the system of the people's banks. Signer Notar- 
 bartolo, the director general, proposed in 1882 the establish- 
 ment of independent agencies, sharing in the profits of the 
 Bank and supported by its credit ; but the Minister of Ag- 
 riculture and Commerce decided that a bank of issue could 
 
 1 Durand, 481-82. 
 
ANCIENT AND MODERN BANKING IN ITALY. 37 
 
 not receive additions in this manner to its capital without 
 authority of law. Signer Notarbartolo then formulated a 
 plan for making the people's banks correspondents of the 
 Bank of Sicily with the benefit of discount one per cent, 
 below the ordinary rate and this was put into actual opera- 
 tion. 1 The result has been the creation of popular banks all 
 over Sicily and Southern Italy. The popular banks of 
 Northern Italy had an older foundation and were either 
 capable of standing alone or were sustained by other institu- 
 tions which were not banks of issue. 
 
 1 Durand, 509. 
 
CHAPTER III. 
 
 BANKING IN FRANCE. 
 
 The Events Out of Which the Bank of France has Grown The Mis- 
 sissippi Bubble of John Law and its Collapse The Banks of 
 Paris before the Revolution Failure of the Assignats and the 
 Revival of Commercial Banking Birth of the Bank of France 
 and its Absorption of the Departmental Banks The Latin Union 
 and the Embarrassments Caused by the Fall in the Price of Silver 
 The Proposed Renewal of the Bank Charter. 
 
 THE Bank of France is the greatest and in many respects 
 the strongest of the banks of the world, and its devel- 
 opment exhibits many of the most interesting phases 
 of banking history outside of Great Britain. French bank- 
 ing is done pre-eminently through the issue. of circulating 
 notes, and the aggregate monetary circulation of France is 
 greater than that of any other country. The origins of 
 banking in France go back to the " Mississippi plan " of 
 John L,aw, but its history during the present century has 
 been essentially one of prudence and moderation, if not al- 
 ways of the most enlightened financial policy. Monopoly 
 of the power of note issue now belongs to the Bank of France, 
 but is far from having been its immemorial right. The 
 regime of the independent departmental banks, which were 
 absorbed by the central institution in 1848, is still recalled 
 with pride by many French economists, and the approaching 
 expiration of the charter of the Bank of France may tempt 
 them to a renewal of the contest then so warmly waged 
 between "monopoly" and ''liberty." 
 
 The first French bank of issue was created by John Law 
 under the regency of the Duke of Orleans, at the beginning 
 
 38 
 
BANKING IN FRANCE. 39 
 
 of the eighteenth century. Scotland, which gave to the 
 world the founder of the classical school of political economy 
 in Adam Smith, was also the birthplace of Law, the author 
 of ' ' The System ' ' which introduced the use of negotiable 
 securities on a broad scale into France. The name of Law 
 has been synonymous with the most reckless speculation and 
 brazen fraud, but the bank which he founded was at the out- 
 set conducted upon conservative principles, and even the sys- 
 tem of the " Company of the West" (Compagnie cT Occident], 
 more generally known as the Mississippi Company, was 
 conceived upon broad and not impossible lines before the 
 stock was made the plaything of speculation. Law desired 
 to establish a royal bank of state, but the government was 
 only willing to grant a charter for an institution managed by 
 private citizens. The bank thus founded by letters patent 
 May 2, 1716, was authorized to issue bills in crowns of 
 specie under the name of "bank crowns," redeemable in 
 money of the weight and denomination of the day of issue. 1 
 This was intended to guard the bank-notes against the possi- 
 ble fluctuations and changes in the metallic standard and 
 give them some such preference as that given to the " bank 
 money" of the Bank of Amsterdam. The feature which 
 rapidly attracted subscriptions to the stock was Law's offer 
 to accept payment at the rate of twenty-five per cent, in 
 specie and seventy-five per cent, in bills of state, which 
 were at a discount of about seventy-five per cent. 
 
 Discount was granted by the bank at the rate of five per 
 cent., and officers of the finances received orders in October, 
 1716, to make their remittances upon Paris in bank-bills, 
 and to redeem these bills at sight when presented to them. 
 Another official decree of April 10, 1717, authorized the 
 receipt of the bills as money for the payment of public 
 revenues. If the bank had continued upon the sound 
 basis of a bank discounting commercial paper and acting 
 as the fiscal agent of the Treasury, France would have 
 been under a great debt of gratitude to Law for introducing 
 into her commercial relations the methods of the modern 
 
 1 Courtois, 10. 
 
4O HISTORY OF MODERN BANKS OF ISSUE. 
 
 business world. Prof. H. Dunning MacLeod, as keen a 
 thinker and acute a critic as has written upon monetary sub- 
 jects, says : 
 
 Nothing could be more extraordinary than the restoration of pros- 
 perity caused by the foundation of Law's Bank in 1716. It is proba- 
 bly one of the most marvellous transitions from the depths of 
 misery to the height of prosperity in so short a space of time in the 
 annals of any nation. And, if Law had confined himself to that, he 
 would have been one of the greatest benefactors any nation ever had. 1 
 
 But I^aw had much more comprehensive schemes than the 
 creation of a bank of discount. He determined to unite 
 into a single great monopoly the various commercial compa- 
 nies which had been incorporated since the discovery of 
 America, for the purpose of trade and the extension of 
 French influence. Courtois enumerates no less than thirty 
 of these corporations which had been authorized during the 
 previous century, but many of them had languished, run in 
 debt, and been consolidated with others. L,aw proposed a 
 stock company with a capital of 100,000,000 livres, divided 
 into 200,000 shares of 500 livres each, payable in bills of 
 state which were still at a discount of about sixty-six per 
 cent. 3 The State was to pay the company an annual interest 
 of four per cent, on the principal of the bills withdrawn by 
 this means from circulation. 
 
 The Compagnie d' Occident was incorporated by a decree 
 of August 28, 1717, registered by the Parliament on Sep- 
 tember 6th, for a duration of twenty-five years. Four compa- 
 nies were consolidated at the outset, which controlled the 
 commerce of Louisiana, Canada, and the Western Coast of 
 Africa, and the new company was to enjoy all the rights of 
 sovereignty over the lands which it possessed. The shares, 
 which were made out in certificates of one share or ten, 
 
 1 Theory and Practice of Banking, II., 254. 
 
 a The variations in the coinage at this time were such as to make a 
 statement of the value of coins an almost impossible task, but the 
 livre may be taken in a general way as about the equivalent of the 
 later franc 19.3 cents in United States gold coin. For a full account 
 of the changes in the coinage system, see Shaw, 396-423. 
 
BANKING IN FRANCE. 41 
 
 were transferable by bearer, a system for the first time intro- 
 duced into France, so far as known ; for even the shares of 
 bank were made out to the owners. Law proceeded to 
 make negotiations with the government through his friend, 
 the Regent, for farming the taxes, for coining money, for 
 managing the tobacco monopoly, which had been under the 
 control of the State, and for assuming the entire public debt. 
 He introduced a number of reforms into the collection of the 
 taxes by discontinuing the collection of those which were 
 disproportionately costly and vexatious in proportion to the 
 amount obtained, and he proposed more sweeping changes 
 which would have abolished needless offices, consolidated 
 various imposts into one, and removed some of the fetters 
 from French commerce. 
 
 The attribution of all these public functions to a single 
 company, as well as the management of the commerce of 
 two continents, would in themselves probably, as Law's 
 great opponent, Paris-Duverney, pointed out, have caused 
 the organization to break down of its own weight, and have 
 attracted the jealousy of the government. But Law, and 
 those who were carried away with him by the grandeur of 
 the new scheme, did not wait for the slow operation of com- 
 mercial causes to sow the seeds of destruction of their enter- 
 prise. He succeeded in having the bank transformed into 
 a public institution (Banque Roy ale} by a decree of December 
 27, 1718, and had the stockholders reimbursed in specie 
 for their subscriptions. Redemption of the notes in bank 
 crowns was abandoned by the decree which made the bank a 
 public one, and redemption was required only in the official 
 money of the country. This move created a degree of dis- 
 trust which led to a new decree of April 22, 1719, that bills 
 payable in the existing standard should not be subject to the 
 diminutions which might affect specie. The tendency of such 
 a decree was to put the bank-bills at a premium over cur- 
 rent coins, which were being perpetually debased and altered 
 by the wretched administration of the finances. The total 
 circulation of bills in April, 1719, the date of the last decree, 
 was 110,000,000 livres ($22,000,000). 
 
42 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Meantime the shares of the Compagnie d' Occident were 
 undergoing a remarkable experience. They were sold 
 rather slowly at first and the principal subscription was by 
 the former stockholders of the bank, who subscribed their 
 receipts from the bank shares (1,125,000 livres in bills of 
 state and 375,000 livres in specie) for the stock of the new 
 company. Law found it necessary, in order to stimulate the 
 sale of the shares, to buy publicly some two hundred shares 
 at par, of which 200 livres per share was paid as a margin, 
 with the option of completing the transaction in six months. 
 Dealing in options (inarche a prime} was thus brought into 
 general practice for the first time in France. The making 
 of the contracts for the tobacco monopoly, the extension of the 
 commercial operations of the company and the wresting of 
 the farming of the revenues from the Paris brothers, who 
 had formerly controlled it, gave a great stimulus to the mar- 
 ket value of the stock, and Law was authorized to issue fifty 
 thousand new shares at a premium of one hundred per cent. , 
 to pay the government the sum guaranteed by the new con- 
 tracts. The value of the old shares was maintained by 
 requiring their presentation to obtain the new ones. The 
 original issue thus came to be known as the ' ' mothers ' ' 
 (meres) of the second, which were called the " daughters " 
 {filles), while the third issue was known as the "grand*-, 
 daughters" (petites-filles). The contract with the govern- 
 ment for assuming the entire public debt upon a pledge by 
 the state to pay annually three per cent, interest was author- 
 ized October 12, 1719, and the payment of the interest was 
 assured to the company by its contract for collecting the 
 revenues. Three successive issues of one hundred thousand 
 shares in the Compagnie des Indes 1 were thought necessary to 
 carry through this gigantic operation. The new shares were 
 of a par value of 500 livres each but were issued at a price of 
 
 1 The name of the Compagnie d" 1 Occident was changed to the 
 Compagnie des Indes in May, 1719, when the privileges of the two 
 companies of the West Indies and of China were absorbed by Law's 
 Company, and the new name was retained until the dissolution of 
 the company in 1769. Courtois, 20. 
 
BANKING IN FRANCE. 43 
 
 5000 livres, payable ten per cent, a month. The presentation 
 of the old shares was not required for the purchase of these 
 last issues and the price was rapidly forced upward until 
 10,000 livres per share was attained in November, 1719. 
 
 Whatever might have been the success of so comprehensive 
 a scheme under sound management, the fever of speculation 
 had forced the shares to a point where a reasonable dividend 
 was impossible. Law announced at a general meeting of 
 the shareholders on December 30, 1719, a total revenue of 
 91,000.000 livres, 48,000,000 from the interest on the pub- 
 lic debt, to be retained from the taxes ; 12,000,000 from 
 profit on the farming of the taxes ; 6,000,000 from tobacco ; 
 1,000,000 from general taxes not covered by the farming of 
 the revenues; 12,000,000 from profits of the coinage ; and 
 12,000,000 from the commercial operations of the company. 
 The actual par value of the outstanding shares was 312,000,- 
 ooo livres, which would have afforded a profit of nearly 
 thirty per cent., and a dividend of 200 livres per share 
 was actually declared on January i, 1720; but the shares 
 had been selling at 12,000 livres, or twenty-four times their* 
 par value, which afforded an actual dividend of only one 
 and two-thirds per cent. Notwithstanding the doubtful 
 character of some of the profits claimed and their palpable 
 insufficiency to pay large dividends upon such an inflated 
 investment, the phrenzy of speculation forced the shares by 
 January 6, to 18,000 livres thirty-six times their nominal 
 par value. The Rue Quincampoix, between the Rue Saint- 
 Denis and the Rue Saint-Martin, had been since the close 
 of the reign of Louis XIV. the meeting place of speculators 
 and dealers in the public stocks. Such operations attained 
 a new extension by the speculations in the shares of the 
 Compagnie des Indes. Fortunes were won and lost in a day 
 and feeling became so violent that the place was closed by 
 the government and the speculators were driven into obscure 
 corners in other parts of the city, where they were constantly 
 on the watch for the police. 1 
 
 1 The decree of October 25, 1720, forbidding speculative operations 
 in the public streets is of interest because it established the sixty 
 
44 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The New Year of 1720 and the declaration of the dividend 
 marked the apogee of Law's system. The craze had sub- 
 stantially run its course and the reaction was setting in. 
 Prices were rising under the impulse of the excessive issues 
 of bank-bills and the more prudent speculators were endeav- 
 oring to convert their gains into more solid property by the 
 purchase of real estate or by shipping gold abroad. The 
 bank had already been authorized to issue 1,000,000,000 
 livres and there had been issues without authority and 
 counterfeits, which were easily made because the genuine 
 bills were so rapidly and crudely turned out. Specie began 
 to disappear and the subsidence of speculation made the bills 
 redundant. L,aw adopted the now familiar argument in 
 favor of paper money, that it was to be preferred over coin 
 because it was non-exportable. A series of decrees during 
 the early months of 1720 sought to discredit coined money 
 and maintain the currency of the bank-bills. The nominal 
 value of coin was reduced ; the quantity of specie which an 
 individual was permitted to hold was limited ; the sale of 
 vessels of gold or silver was prohibited ; the carrying of 
 diamonds and precious stones was prohibited ; the circulation 
 of bills throughout the realm as legal tender was decreed ; 
 an advantage was accorded those who paid certain taxes in 
 bills rather than specie ; and special jurisdiction was given 
 the Council of State for causes concerning bank-bills. 1 All 
 these measures failed to maintain confidence in the super- 
 
 agents of exchange (agents de change} who still form the legal body 
 of the Paris Bourse. Their places are transmissible and hereditary. 
 The Bourse decides what stocks shall be admitted to its lists and only 
 those representing a large capital are ever listed. The corporation 
 which has been formed by the members inspires absolute confidence 
 in its operations by voluntarily assuming corporate responsibility for 
 the acts of its members in their legitimate capacity as brokers. This 
 corporation has instituted a clearing house and was strong enough in 
 the crisis of 1882 to borrow 80,000,000 francs ($16,000,000) from the 
 Bank of France, guaranteed by the Rothschilds to the amount of 
 40,000,000 francs and by the leading societies of credit for 40,000,000 
 more. Jannet, 347-48. 
 1 Courtois, 44. 
 
BANKING IN FRANCE. 45 
 
 abundant mass of paper and the control of the bank was 
 turned over to the Compagnie des hides. The company was 
 authorized to convert at the will of the holders shares in 
 the company into bank-bills or to redeem bills in shares, at 
 a fixed price of 9000 livres per share. The contest of paper 
 money against the metals was continued by a decree of 
 March nth, suppressing gold and silver as legal tender and 
 providing for the confiscation of gold or silver, whether coin, 
 bullion, or vessels, when found in the possession of subjects. 
 
 But the tide had turned and could no longer be stemmed. 
 The fall in the stock continued, the company suffered in its 
 commercial operations by the pest, which closed the free 
 port of Marseilles, and a decree of May i, 1720, scaled the 
 value of shares from month to month until they should be 
 reduced on December ist, to 5500 livres and bank-bills should 
 be reduced to fifty per cent, of their par value. Panic seized 
 upon every holder of either form of paper, as he saw the 
 values of his property shrinking under legal decree with 
 every passing day. A commission was appointed to exam- 
 ine the bank and found that against 3,000,000,000 livres of 
 circulation it held 21,000,000 livres in coin, 28,000,000 in 
 bullion and 240,000,000 in commercial bills, less than ten 
 per cent, of assets in all against its outstanding notes. A 
 run upon the bank began on the night of July i6th, and the 
 crowd was so dense that a dozen unfortunates were choked 
 or trampled under foot. The corpses were placed upon 
 litters and borne to the residence of the Regent. Law 
 escaped from the crowd into the palace, but his carriage was 
 broken in pieces and the coachman thrown from his seat 
 and dragged upon the ground. The bank was closed, the 
 forced legal tender of the bank-bills was suspended, the con- 
 tracts of the company with the government were cancelled, 
 and the stock was called in for readjustment. 
 
 A decree appeared on January 26, 1721, known under the 
 name of the visa, providing for the liquidation of the affairs 
 of the company and of the bank and the readjustment of the 
 public debt. The decree was attributed to Paris-Duverney, 
 from whom Law had taken the farming of the revenues, and 
 
46 HISTORY OF MODERN BANKS OF ISSUE. 
 
 was confided to him for execution. The attempt was made 
 to readjust private fortunes as well as public obligations 
 upon the basis which had prevailed before the period of 
 paper inflation which Law had inaugurated. Those who 
 had fled the country with their winnings transmuted into 
 gold, those who could command the royal favor, and those 
 who were able to keep their gains in hiding were the only 
 ones who escaped. The mere transfer of speculative gains 
 into real property did not prevent the exercise of arbitrary 
 power to transfer the property back to its original owners 
 and remit the new owner to his original poverty. A regular 
 scale of readjustment was prepared by which the public 
 debt was reduced to its original volume and the holders of 
 bills and the stock of the company were given new public 
 obligations ranging from one hundred per cent, of their 
 holdings in certain cases down to five per cent., according as 
 they were supposed to represent real values or the profits of 
 stock gambling. 
 
 The lesson of Law's disastrous schemes and the painful 
 readjustment which followed them prevented for half a cen- 
 tury the creation of any new bank of issue in France. The 
 success of the Bank of England, however, and the necessity 
 of some aid to commerce, led to a futile attempt to found a 
 bank under a decree of the Council of State of January i, 
 1767, 1 and the establishment, during the ministry of Turgot, 
 by a decree of March 24, 1776, of the Caisse d' Escompte du 
 Commerce (The Bank of Commercial Discount). The new 
 institution was limited to a strictly banking business, and 
 forbidden to borrow except by its notes payable at sight. 
 It was authorized to begin operations with a capital of 
 15,000,000 livres ($3,000,000), of which it was intended that 
 two-thirds should be loaned to the Treasury. The loan to 
 the Treasury not having been completed as proposed, the 
 capital of the bank was reduced to 12,000,000 livres, repre- 
 
 1 The proposed institution was to be known as the Caisse d ' Escompte 
 and to have a capital of 60,000,000 livres, but it never entered upon 
 active operations and was suppressed by a decree of March 21, 1769. 
 Courtois, 84. 
 
BANKING IN FRANCE. 47 
 
 sented by four thousand shares of 3000 livres each. Some 
 of the most eminent public men and financiers of Paris 
 served on the board of directors of the bank, and while 
 they were not directly responsible for its management, 1 its 
 note issues were kept within prudent limits and annual 
 dividends were declared for the first six years, ranging from 
 five to eight per cent. 
 
 The first blow to the bank's credit came from the demands 
 of the government. The growing social and economic diffi- 
 culties of France were brought to a climax by the bad crops 
 of 1783 and caused a great scarcity of metallic money. The 
 new bank, after having considerably expanded its commer- 
 cial discounts, made an advance to the government at the 
 demand of D'Ormesson, of 6,000,000 livres. It was brought 
 face to face with the crisis with a circulation of 45,000,000 
 livres and with a cash reserve of but little more than 4,000,- 
 ooo. There was a sudden rush for the redemption of the 
 notes and the bank appealed to the Treasury to reimburse 
 the 6,000,000 livres recently loaned. The government was 
 in no condition to comply with this demand, but it was 
 ready to employ its sovereign power to enable the bank to 
 suspend specie payments and to authorize the redemption of 
 bills in commercial paper or their non-payment until Jan- 
 uary i, 1784, (Decree of September 27, 1783). The bank 
 was solvent, however, and had the courageous support of 
 the private bankers of Paris, who held a large proportion 
 of its bills. A report presented by the lieutenant of police, 
 M. L,e Noir, showed that the bills in circulation, amounting 
 to 44,724,000 livres, were offset by 47,700,000 livres in good 
 commercial paper, 4,121,700 livres in gold and silver coin 
 and bullion, and 6,000,000 livres held by the Treasury, 
 
 1 The bank really constituted a partnership en commandite, for 
 which a few individuals were legally responsible, and the use of the 
 names of leading financiers as directors was somewhat akin to the 
 modern fraud of paying men of high station for the use of their names 
 to float irresponsible enterprises ; but the practice in this case appears 
 to have grown out of the lack of experience with stock companies 
 and to have involved no intentional deception. 
 
48 HISTORY OF MODERN BANKS OF ISSUE. 
 
 making total assets of 57,821,700 livres and affording a 
 favorable balance of 13,097,700 livres. 1 
 
 The loan to the government was soon repaid, specie pay- 
 ments were resumed under a decree of November 23, 1783, 
 and the bank was authorized to increase its capital to 15,000,- 
 ooo livres, and for four years it continued to operate free from 
 government interference and with advantage to the business 
 community. Its growing prosperity attracted the attention 
 of Calonne, then Controller General, and he determined to 
 turn it to account for the benefit of the State by requiring 
 the deposit of a guarantee fund with the Treasury. The 
 capital was raised from 15,000,000 to 100,000,000 livres and 
 the net receipts in cash, amounting to 80,000,000 livres, were 
 deposited to the amount of 70,000,000 with the Treasury and 
 10,000,000 were carried to the reserve. A new run set in in 
 August, 1787, but the directors refused to accept a decree for 
 the suspension of specie payments, which Lomenie de Brienne, 
 Chief of the Royal Council of Finance, was preparing, de- 
 manded help from the guarantee fund in the possession of 
 the government, and promptly met every obligation. 
 
 But the government was sinking into the sloughs of bank- 
 ruptcy and determined to drag the bank with it, so that there 
 should be no stronger credit than its own to put it to shame. 
 August 1 8, 1788, appeared a decree authorizing the bank to 
 redeem its bills in part in commercial paper. The decree 
 was unsought and its existence was unknown until it was 
 affixed to the doors of the bank, and the permission to sus- 
 pend was not embraced by the directors. But Necker, who 
 became Finance Minister on May 25, 1789, continued to insist 
 upon secret loans to the Treasury, and the government and 
 the bank soon became so involved with each other that 
 Necker proposed to transform it into a national bank. The 
 Constituent Assembly had already assumed the power to 
 regulate the bank, as it regulated all the established institu- 
 tions of France, and ordered it to pay into the Treasury 80,- 
 000,000 livres of its bills against a deposit of interest-bearing 
 assignats. The bank lost its credit with the business commu- 
 
 1 Noel, I.. 90. 
 
BANKING IN FRANCE. 
 
 49 
 
 nity, the redemption of its notes in assignats was de- 
 creed in 1790, bank-note issues were forbidden by the 
 law of August 17, 1792, and the institution was sup- 
 pressed by a decree of the National Convention on August 
 
 24. J 793- 
 
 The next three years were those of the consummation of 
 the Reign of Terror, the execution of the King and Queen, 
 the fall of Danton and Robespierre, and the restoration of 
 order under the Directory. "What institution of credit," 
 asks M. Horn, "could have braved the tempest which agi- 
 tated the end of the eighteenth century ? What instru- 
 ment of credit could have maintained itself against the 
 assignats, which destroyed alike the notions of value and of 
 money ? " 1 But the Saturnalia of fiat money lasted but lit- 
 tle longer than in the time of L,aw. The same sort of enact- 
 ments, making the paper money legal tender for debts at 
 its nominal value, fixing maximum prices, punishing those 
 who discredited the assignats in conversation, 2 and inflicting 
 the penalty of death upon those who kept their produce from 
 the market, quickly ran their course. The assignats in 
 circulation amounted on January i, 1796, to 27,565,237,396 
 francs, and had increased on September 7, to 45,578,810,040 
 francs, when they were worth one one-thousandth part of 
 their nominal value. The whole fabric disappeared at a 
 blow when the National Assembly decreed on July 16, 1796, 
 that every one might transact business in whatever money 
 he chose and that the mandates, which had superseded the 
 assignats, should be taken only at their current value. The 
 effect of this removal of the restrictions upon the natural laws 
 of money is thus strikingly portrayed by Professor MacLeod : 
 
 No sooner was this great blow struck at the paper currency, of mak- 
 ing it pass at its current value, than specie immediately reappeared in 
 circulation. Immense hoards came forth from their hiding places ; 
 goods and commodities of all sorts being very cheap from the anxiety 
 of their owners to possess money, caused immense sums to be im- 
 ported from foreign countries. The exchanges immediately turned 
 
 1 La Liberte des Banques, 317. 
 
 2 Courtois, 99. 
 
50 HISTORY OF MODERN BANKS OF ISSUE. 
 
 in favor of France, and in a short time a metallic currency was 
 permanently restored. And during all the terrific wars of Napoleon 
 the metallic standard was always maintained at its full value. 1 
 
 The end of the paper money phrensy saw credit again 
 raising her head and several new banking institutions under 
 way. The first one, founded in 1796, was known as the 
 Caisse des Comptes Courants (Bank of Current Accounts), and 
 had a capital of 5,000,000 francs ($1,000,000). The circula- 
 tion was 20,000,000 francs in bills of 500 and TOGO francs, 
 and bills of exchange running for ninety days were dis- 
 counted at six per cent. 3 The Caisse des Comptes Courants 
 was created largely by bankers for bankers, and a party of 
 business men, to escape what they regarded as a certain de- 
 gree of favoritism, determined to found a banking associa- 
 tion of their own. They established, November 24, 1797, fora 
 term of three years, the Caisse d 1 Escompte du Commerce (Bank 
 of Commercial Discounts), which proved so successful that it 
 was renewed for an unlimited term. There was no fixed 
 capital, but each new subscriber for a share of 10,000 francs 
 ($2000) increased the capital by so much until in less than 
 four years it had reached 12,000,000 francs. Five thousand 
 francs were paid on each share in cash and five thousand 
 francs in bank-bills were endorsed by the subscriber with his 
 own signature and afterwards countersigned by the bank. 3 
 The plan proved so successful that it was imitated by the 
 retailers, who organized the Comptoir Commercial (Commer- 
 cial Bank). The Caisse des Comptes Courants and the Caisse 
 d 1 Escompte accepted reciprocally each others bills and were 
 doing an active and safe banking business when a new turn 
 was given to the economic history of France by the coup 
 d'ttat of the Eighteenth Brumaire (November 9, 1799), which 
 made Napoleon Bonaparte First Consul and virtually the 
 supreme ruler of France. 
 
 Bonaparte had hardly grasped power before he turned to 
 his financial advisers for a plan for a national bank. They 
 
 1 Theory and Practice of Banking, II., 258. 
 
 2 Courtois, 109. 
 a Horn, 322. 
 
BANKING IN FRANCE. 51 
 
 had one ready for his immediate consideration, bearing a 
 striking resemblance to the plan of the Notary Rouen which 
 had been before the Council of Five Hundred under the 
 government of the Directory. Less than three months after 
 the Eighteenth Brumaire appeared the decree of January 18, 
 1800 (28 Nivose, An VIII), constituting the Bank of France, 
 with a capital of 30,000,000 francs in shares of 1000 francs 
 each. The decree provided that one-sixth of the capital 
 should be furnished by the Treasury by an investment of 
 half the funds given as bonds by the receivers general, and 
 Napoleon, members of his family, and personal friends lent 
 their support by subscribing for the shares. ' This support 
 was necessary to the success of the bank, and it was not 
 until 1802 that all the shares were taken. Vitality was 
 given the institution by the decision of the general assembly 
 of the Caisse des Comptes Courants to consolidate with it and 
 the transfer of their offices in the Place des Victoires. Febru- 
 ary 20, 1800, the bank began its operations as a bank of 
 issue and of discount. It was at the outset a private insti- 
 tution, free from government interference and its right to 
 issue notes was far from exclusive. 
 
 But Bonaparte did not view with patience this situation. 
 " One bank is easier to watch than several," was his com- 
 ment, and after the Caisse d^ E scorn pie du Commerce had 
 refused to loan money to the government, he took vigorous 
 measures to drive it to the wall. The law of April 14, 1803 
 (24. Germinal, An XI), gave the Bank of France the exclu- 
 sive privilege of issuing bank-bills at Paris, raised the capital 
 from 30,000,000 to 45,000,000 francs and decreed that no 
 bank should be established in the departments without the 
 authority of the government. The stockholders of the 
 Caisse d* Escomple du Commerce filed an emphatic protest 
 against the abrogation of their right to issue notes. Their 
 complaints did not prevent the passage of the law, but the 
 
 1 Napoleon took thirty shares, Joseph Bonaparte took one share, 
 Murat two, Hortense Beauharnais ten, Duroc five, General Clark, who 
 married Napoleon's sister and died in San Domingo, one, and Bouri- 
 enne, five. Noel, I., 97, note. 
 
52 HISTORY OF MODERN BANKS OF ISSUE. 
 
 management of the Bank of France did what they could to 
 prevent a crisis by fusion with existing banks of issue. A 
 consolidation was arranged with the Caisse d' Escompte dii 
 Commerce, which turned over its assets and received bills of 
 the Bank of France in exchange. The shareholders had the 
 option of becoming shareholders of the Bank of France with 
 all the privileges of the original shareholders. 
 
 The financial crisis which broke out upon the formation of 
 the third coalition against France, after the rupture of the 
 Peace of Amiens, resulted in radical changes in the constitu- 
 tion of the Bank of France. The preparations for the cam- 
 paign of Austerlitz required large expenditures by the 
 government and the syndicate of contractors for supplies for 
 the armies obtained large loans from the bank in the form of 
 bills. The bills began to be presented for redemption at the 
 rate of two or three million francs a week. The coin reserve 
 of the bank was reduced, specie was demanded by the bank 
 in the settlement of its balances with bankers in the depart- 
 ments, and accommodation bills of exchange were largely 
 drawn by the contractors to obtain new loans, with the result 
 of new note issues and new demands for redemption. The 
 circulation, which before 1803 had never exceeded 30,000,000 
 francs, surpassed 80,000,000 and the bills began to fall below 
 par. The council of the regency limited redemptions to a 
 fixed sum per day, and in course of time the contraction of 
 discounts and the settlement of balances due the bank re- 
 established equilibrium. The victory of Austerlitz (Decem- 
 ber 2, 1805) assisted in restoring confidence, and Napoleon, 
 the morning after his return to Paris, summoned a council to 
 discuss the crisis which had absorbed his thoughts even upon 
 the field of battle. 1 
 
 The Emperor was convinced that bad management had 
 much to do with the crisis, and within twenty-four hours of 
 the council M. Mollien succeeded M. de Barbe-Marbois as 
 Minister of the Treasury and was charged with the prepara- 
 tion of a new plan of organization for the bank. He recom- 
 mended that the bank be linked with the State and that it 
 
 1 Noel, I., 104. 
 
BANKING IN FRANCE. 53 
 
 be the only institution in the country authorized to issue 
 credit paper. " The bank," he declared, " does not belong 
 only to its stockholders ; it belongs also to the State, since 
 the latter has given it the privilege of creating money." 
 This policy was very pleasing to the Emperor and was 
 promptly put in practice. The law of April 22, 1806, in- 
 creased the capital of the bank from 45,000,000 to 90,000,000 
 francs and confided its direction to a governor and two sub- 
 governors named by the head of the State, but paid by the 
 bank. The duration of the privileges of the bank was 
 extended fifteen years beyond the date fixed by the Act of 
 1803, until September 24, 1843. It was the purpose of Napo- 
 leon to make the bank national in its operations as well as 
 in name, and a decree of May 18, 1808, gave the exclusive 
 privilege of note issues to the bank in every town in which 
 it established branches. 
 
 The fall of Napoleon caused a temporary suspension of the 
 operations of the bank. The council ordered the burning of 
 the bills which were in the vaults ready for issue and the 
 withdrawal of current accounts by depositors. The reserves 
 fell to 5,000,000 francs ($1,000,000) the circulation to 10,- 
 000,000 francs and current accounts to 1,300,000 francs. The 
 prompt return of peace restored confidence, the circulation 
 was increased to 70,000,000 francs and the reserves rose to 
 93,000,000 francs. The government of the restoration, how- 
 ever, was not especially friendly to the financial creation of 
 the Napoleonic dynasty. The management of the bank 
 themselves were ready to renounce exclusive privileges in 
 the departments, provided the stockholders were allowed to 
 resume the selection of the governor and his assistants. This 
 project was not accepted by the Chambers, but the branches 
 at Rouen and Lyon were abandoned and were succeeded by 
 departmental banks of a type which soon spread to the lead- 
 ing cities of France. 
 
 These departmental banks were entirely independent of 
 the Bank of France, and were authorized to issue their own 
 notes. They accommodated themselves to local necessities, 
 their officers were acquainted with local credits, their profits 
 
54 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 augmented, and their operation contributed greatly to the 
 development of the industrial activity of the nineteenth cen- 
 tury in France. Institutions of this sort were founded in 
 nine principal cities, and some idea of the extent of their 
 operations and of their success may be formed from the fol- 
 lowing table of the principal items of their balance sheets 
 for 1847 : l 
 
 BANK. 
 
 MEAN COIN 
 RESERVE. 
 
 MEAN 
 DISCOUNTS. 
 
 MEAN 
 CIRCULATION. 
 
 DIVIDENDS. 
 
 
 Francs. 
 
 Francs. 
 
 Francs. 
 
 Per Cent. 
 
 Rouen, 
 
 4,500,000 
 
 10,100,000 
 
 I2,OOO,OOO 
 
 14.4 
 
 Nantes, 
 
 I,7OO,OOO 
 
 6,4OO,OOO 
 
 4,300,000 
 
 9-7 
 
 Bordeaux, 
 
 I2,6OO,OOO 
 
 I3,9OO,OOO 
 
 2O,9OO,OOO 
 
 I6. 3 
 
 Lyon, 
 
 10,400,000 
 
 23,100,000 
 
 I9,7OO,OOO 
 
 28.8 
 
 Marseilles, 
 
 6,400,000 
 
 14,000,000 
 
 l6,5OO,OOO 
 
 12.9 
 
 Havre, 
 
 I,OOO,OOO 
 
 7,OOO,OOO 
 
 4,400,000 
 
 6.8 
 
 Lille, 
 
 I,8OO,OOO 
 
 5,400,000 
 
 4,5OO,OOO 
 
 9.6 
 
 Toulouse, 
 
 1,600,000 
 
 2,400,000 
 
 4,8OO,OOO 
 
 11.7 
 
 Orleans, 
 
 1,100,000 
 
 2,600,000 
 
 3,000,000 
 
 II-3 
 
 Total, 
 
 41,700,000 
 
 84,900,000 
 
 90,100,000 
 
 
 This exhibit shows a circulation for these nine banks in 
 1847 of about $17,500,000 secured by a coin reserve of 
 $8,000,000, by means of which loans had been made to the 
 amount of $18,000,000. The large profits obtained by these 
 departmental banks (indicated in the table of dividends) 
 were reflected in the high prices of their capital stock. The 
 shares all had a par value of 1000 francs ($200), and the 
 quotations in 1847 were : Bank of Rouen, 2650 francs ; 
 Nantes, 1750 fr. ; Bordeaux, 2200 fr. ; I/yon, 3770 fr. ; Mar- 
 seilles, 1970 fr. ; Havre, 1330 fr. ; Lille, 1700 fr. ; Toulouse, 
 1200 fr. ; Orleans, 1 8 10 fr. The deposits were comparatively 
 small, amounting at their maximum in 1847 to 16,800,000 
 francs ($3,250,000). Deposit banking was almost unknown 
 in the smaller cities of France and these departmental banks 
 
 1 This table is compiled from the appendix to Courtois's Histoire 
 des Banques en France, 338-41, and is given in round figures because 
 the tables appear there in millions of francs, instead of being fully 
 carried out. The same figures appear in Horn's La Liberti des 
 ques, 361-64. 
 
BANKING IN FRANCE. 55 
 
 could never have made substantial dividends or acquired any 
 considerable volume of business without the power to trans- 
 mute their assets into circulating notes. 
 
 The majority of the departmental banks were founded 
 between 1835 and 1840, the period when the failure of 
 the Bank of France to meet expanding commercial needs 
 began to be most keenly felt. The Bank of France was 
 generally regarded as an institution for bankers rather than 
 for merchants and the latter obtained their discounts at the 
 bank through the intervention of private discount houses. 
 Many of these houses suspended during the political dis- 
 turbances of 1830, and it became necessary to appoint a royal 
 commission to report upon the commercial and industrial 
 situation and "to propose measures suitable to restore to 
 business transactions and the circulation their usual regular- 
 ity." The proposition which became law on October 17, 
 1830, proposed to make loans directly from the Treasury 
 and fixed the amount at 30,000,000 francs ($6,000,000). A 
 discount office (Comptoir d' Escompte) was established at Paris 
 with a capital of 1,300,000 francs, which it was authorized 
 to lend at four per cent, on bills upon Paris and at five 
 per cent, on those upon the provinces. Various amounts 
 were afterwards added to the capital and the comptoirwas 
 continued with the guarantee of the City of Paris until 
 September 30, 1832. The total discounts from December 
 31, 1830, covered 59,928 pieces of commercial paper amount- 
 ing to 33,191,433 francs. Similar offices were established 
 in many of the departments and contributed with the di- 
 rect government loans towards the accommodation of in- 
 dustry. The government commission made loans in Paris 
 for periods of twelve, eighteen, and twenty- four months, dis- 
 tributing them with some reference to the number of laborers 
 employed, and assisted nearly 450 establishments in fifty-three 
 departments outside of Paris, employing more than eighty 
 thousand men. 1 The amount of these loans reported still 
 bad or doubtful in 1870 was 905,312 francs ($180,000). 
 
 A similar device was resorted to again after the revolution 
 
 1 Courtois, 137-45. 
 
56 HISTORY OF MODERN BANKS OF ISSUE. 
 
 of 1848^ The country was then emerging from the effects 
 of a financial crisis and the discount houses had again lost 
 public confidence. The government on this occasion sought 
 the co-operation of the business community in establishing 
 discount offices. They required that a third of the capital 
 be furnished by individuals or municipalities, the other two 
 thirds being represented by Treasury bonds and municipal 
 obligations. Some of the offices received in addition a loan 
 in specie, upon which they were required to pay four per 
 cent, interest to the Treasury. Most of these loans were 
 reimbursed at the end of two years and several of the dis- 
 count offices afterwards repaid the capital advanced by the 
 State and became private banks. The Paris office became 
 the Comptoir d^ Escompte , which established branches in 
 India, Japan, and the Antilles, 1 and carried on some large 
 operations in finance. It was wrecked by advances of 130,- 
 000,000 francs to the great copper syndicate in 1888, and its 
 ruin was proclaimed by the suicide of the director, M. 
 Denfert-Rochereau, on March 5, 1889. a The Bank of France 
 was compelled from 1848 to 1852 to make many renewals 
 of its discounts, but the amount thus outstanding was re- 
 duced on December 31, 1856, to 772,500 francs ($i 50,000). 3 
 
 The success of the departmental banks was already so 
 great before 1840 that the Bank of France was stimulated to 
 avail itself again of the right to establish branches in the 
 leading cities of the country and a contest which has not yet 
 ended arose among bankers and economists as to the relative 
 wisdom of granting a monopoly of note issues to a single 
 institution or permitting such issues by local banks. The 
 advocates of monopoly won a partial triumph by the Act of 
 June 30, 1840, which prolonged the privileges of the Bank 
 of France until December 31, 1867, and declared that no 
 departmental bank should thenceforth be established, nor 
 the privileges of existing banks prolonged, except by virtue 
 of a special law. The ordinance of March 25, 1841, which 
 
 1 Courcelle-Senueil, 194. 
 
 2 Jannet, 325-26. 
 
 3 Courtois, 178-187. 
 
BANKING IN FRANCE. 57 
 
 fixed the status of the branches, is the law still in force, and 
 gave to the branches the exclusive privilege of issuing notes 
 in the cities where they were established. Even the increase 
 in the number of the departmental banks and in the branches 
 of the Bank of France had not been adequate to supply the 
 growing demand for discounts, and in 1837 Jacques lyaffitte 
 founded the Caisse Generate du Commerce et de V Industrie 
 (General Bank of Commerce and Industry), 1 with a capital 
 of 15,000,000 francs. The absence of authority to issue 
 circulating notes was evaded by the issue of bills payable to 
 order after five, fifteen, and thirty days, with interest, and 
 for three months without interest. The bills payable after 
 five days were the most sought for and were circulated 
 with an indorsement in blank which permitted them to pass 
 from hand to hand. 
 
 The overthrow of the government of Louis Philippe in 
 February, 1848, came on the heels of the financial crisis of 
 1847, and the combination of the two events caused a long 
 list of failures and the general suspension of specie pay- 
 ments by authority of the provisional government. The 
 suspension of specie payments was accompanied by decrees 
 giving forced legal tender character to bank-notes, both those 
 issued by the Bank of France and those issued by depart- 
 mental banks, 8 but legal tender circulation was given the 
 notes of the departmental banks only within the departments 
 
 1 The Bank of France was unwilling that the name Banque should 
 be assumed by any other institutions than itself and the departmental 
 banks. There was no law on the subject, as in England and the 
 United States, but the object was attained by the suggestion that 
 cordial relations would not be established with the new institution if 
 it called itself a bank. Courtois, 155, note. 
 
 2 The opponents of monopoly lay stress upon the fact that the Bank 
 of France was forced first to seek the suspension of specie payments, 
 and it was not until ten days later (March 25, 1848) that the same 
 privilege was extended to the departmental banks, which had thus 
 far steadily met all demands. The circulation of the Bank of France 
 was fixed by legal decree at a maximum of 350,000,000 francs ($70,000,- 
 ooo) and limits were fixed for each of the departmental banks, amount- 
 ing to an aggregrate of 102,000,000 francs (520,400,000). Horn, 368-70. 
 
58 HISTORY OF MODERN BANKS OF ISSUE. 
 
 in which they were established. This policy, whether inten- 
 tionally or not, paralyzed the action of the independent 
 banks and gave a color of justification for the decrees of 
 April 27 and May 2, 1848, providing for the fusion of the 
 departmental banks with the Bank of France and limiting 
 the issue of bills to the central institution and its branches. 
 The language of the decree based the consolidation upon the 
 ground "that the bills of the departmental banks form in 
 certain localities special monetary signs, whose existence 
 injects a deplorable perturbation into all transactions ; and 
 that the essential interests of the country imperiously demand 
 that every bank-bill declared to be legal money shall be able 
 to circulate equally in all parts of the land." ' The govern- 
 ment thus touched upon the weakest feature of the depart- 
 mental system the lack of interchangeability of the various 
 note issues. This was in part the result of the government's 
 own action in limiting the legal tender quality of the notes, 
 but it was also true that there was no association among the 
 banks which might have kept their notes in circulation 
 without the legal tender quality. * The Bank of France was 
 given the aggregate circulation of the pre-existing banks 
 and the maximum was raised by decree of December 22, 
 1849, to 525,000,000 francs. 
 
 The fusion of the departmental banks with the Bank of 
 France resulted in an increase of the capital of the central 
 institution by the exact amount of the capital of the nine 
 departmental banks. The capital of the central bank had 
 been reduced in 1823 by the purchase of outstanding shares 
 to 67,900,000 francs and was increased by the absorption of 
 the departmental banks to 91,250,000 francs ($18,000,000). 
 So strongly did the current of centralization run that it was 
 proposed to unite the bank to the public domain under the 
 name of the National Bank of France, but the Assembly was 
 unwilling to increase the distrust already felt in business 
 circles by so radical a departure and rejected the proposals. 3 
 
 1 Lois et Statuts, 67-68. 
 2 Courtois, 175-6. 
 3 Noel, I., 114. 
 
BANKING IN FRANCE. 59 
 
 The forced legal tender of the bills came to an end by the 
 law of August 6, 1850. A new increase of capital was made 
 by the law of the Empire of June 9, 1857, and the charter of 
 the bank was extended to December 31, 1897. * ts existing 
 privileges were confirmed and a concession was made to the 
 recent growth of economic opinion, in favor of controlling 
 the foreign exchanges through the discount rate, by exempt- 
 ing the bank from the usury laws. 1 The new charter re- 
 quired that branches be established within ten years in all 
 the departments, but it was not until fifteen years after the 
 time set that this requirement was fully complied with. The 
 increase of capital was justified by the immense expansion 
 of industry by machinery and the building of railroads, and 
 the requirement of a branch in every department made it the 
 more imperative. The capital was therefore doubled and 
 the 91,250 new shares were issued at noo francs, of which 
 the premium of 100 francs was destined to strengthen the 
 reserve. The government borrowed 100,000,000 francs of 
 the money subscribed for the increase of capital upon a 
 pledge of three per cent, securities. 
 
 The strength of the bank proved a powerful support for 
 the railway enterprises which were now being floated in 
 nearly every department. The quotation of the stock of the 
 new companies, which had not yet had time to complete 
 their lines, had fallen very low when ten of the leading com- 
 panies formed a syndicate and appealed to the bank for 
 assistance. A contract was signed by which the bank 
 opened a credit in favor of the companies on the deposit of 
 their obligations and agreed to market them under favorable 
 conditions. Two hundred and forty million of francs ($46,- 
 300,000) of obligations were disposed of, 150,000,000 by 
 private sales and 90,000,000 by public subscription, during 
 1858, and the quotations were carried upward from 260 francs 
 to 290 francs within the year. The only benefit derived by 
 the bank from this operation was the interest on the advances 
 
 1 Lois et Statuts, 81. The earnings above six per cent, were required 
 to be carried to a permanent surplus fund, which has stood for more 
 than twenty years at 8,002,313 francs. 
 
60 HIS TOR Y OF MODERN BANKS OF ISSUE. 
 
 to the companies, which amounted to 449,600 francs, but 
 the operation was so successful that sales through the 
 agency of the bank were continued in 1859 and the bank 
 charged a commission of 50 centimes for each obligation 
 sold, deriving a premium of 440,000 francs from the transac- 
 tion. Similar operations were continued for several years, 
 with handsome profits to the bank and great benefit to the 
 railways in placing their obligations and obtaining the neces- 
 sary capital for construction. 
 
 The history of the Bank of France since 1870 is deeply 
 colored by the national struggle with Germany. The bank 
 lent its support to the government at the outset ; it received 
 the privilege of legal tender for its notes and the suspension 
 of specie payments ; it suffered from the ravages of the 
 Commune, and it played a large part in the settlement of 
 the great war indemnity. The management of the bank 
 was prudent, and its credit suffered but slight impairment 
 under the strain of national disaster and civil discord. The 
 bank advanced 50,000,000 francs to the government on July 
 1 8, 1870, four days after hostilities were voted, secured by 
 Treasury bonds running for three months. Other advances 
 up to the close of the war carried the total to 1,470,000,000 
 francs ($280,000,000). The suspension of specie payments 
 was authorized on August i2th, with only one dissenting vote 
 in the Chamber of Deputies. This step was not taken at 
 the request of the bank, or because of any severe pressure 
 upon it for gold, but with the view of tying up the gold 
 reserve for the benefit of the government in case of military 
 necessity. 1 
 
 The restoration of specie payments in 1850 had been ac- 
 companied by the removal of any limitation upon note 
 issues, which had gradually expanded with increasing com- 
 mercial development to 1,439,000,000 francs ($275,000,000) 
 in 1869. A limit of 1,800,000,000 francs was imposed by 
 the law of August 12, 1870, which was raised two days 
 latter to 2,400,000,000 francs. Gold jumped to a premium 
 of fifteen per cent., but the premium fell in a few days ta 
 
 1 Courtois, 258. 
 
BANKING IN FRANCE. 6 1 
 
 one per cent, or even less and did not rise materially, in 
 spite of the disasters of the army, until the great demand for 
 foreign exchange in paying the war indemnity. The pre- 
 mium then rose as high as twenty-five per cent., representing 
 apparently one of the few cases where the price of gold has 
 risen as the result of a special demand without affecting the 
 prices of commodities or the credit of the paper circulation. 
 The necessity of a large circulating medium led to a further 
 extension of the limit of issue on December 29, 1871, to 
 2,800,000,000 francs, and the great loan of three milliards 
 was the occasion for another extension, July 15, 1872, to 
 3,200,000,000 francs. The law of December 29, 1871, author- 
 ized the issue of notes for five francs and ten francs. The 
 limit of circulation was not again raised until after the re- 
 sumption of specie payments. Resumption was set by the 
 law of August 3, 1875, for the time when the debt of the 
 government to the bank should be reduced to 300,000,000 
 francs. This condition was formally complied with by a 
 payment to the bank of 10,000,000 francs on December 31, 
 1877, but the bank had already been paying five-franc pieces 
 in silver since November 7, 1873, and twenty-franc gold 
 pieces since November, I874. 1 
 
 The Bank of France was saved from complete destruction 
 during the reign of the Commune in Paris, in the spring of 
 1871, by appeasing with small sums the appetites of the 
 hungry Communist leaders. The latter first drew out in 
 instalments the sum of 9,401,819 francs, which was on de- 
 posit to the credit of the City of Paris, and when this was 
 exhausted demanded several millions more. The bank 
 yielded grudgingly under the compulsion of force and with 
 the approval of the Ministry of Finance at Versailles. The 
 Communists, after the capture of one of the gates of Paris 
 by the regular army on May 22d, set fire to the Tuileries and 
 sent one of their officers to the bank to demand the imme- 
 diate payment of 700,000 francs for the wages of the National 
 Guard. The Marquis de Ploeuc, the Assistant Governor, 
 temporized as far as possible by advancing 200,000 francs 
 
 1 Arnaune, 349. 
 
62 HISTORY OF MODERN BANKS OF ISSUE. 
 
 and refusing the remainder upon the ground that so large an 
 advance required the consent of the Council of Regents of 
 the bank. The refusal exasperated the Communist leaders, 
 who threatened to bring the bank to terms by two battalions 
 and two pieces of cannon. The bank yielded, upon the 
 written demand of the Committee of Public Safety, endorsed 
 by M. Jourde, the financial delegate of the Commune, that 
 " If this sum is not delivered, the bank will be immediately 
 invaded by the Communal Guard." 1 M. Jourde was obliging 
 enough, when a new demand was made for 500,000 francs 
 on May 23d, to deliver a receipt endorsed with the declaration 
 that ' ' The refusal of this sum would involve the seizure of 
 the bank." The next day the regular army of Versailles 
 was in the heart of Paris and the bank was safe from further 
 robbery. The advances on behalf of the City of Paris were 
 recognized as a debt of the city and counted into the loan 
 for 210,000,000 francs contracted with the bank on August 
 30, 1871. The bank was less successful with the general 
 government and, after a long course of negotiations, was 
 obliged to charge 7,293,383 francs to the account of profit 
 and loss. 2 
 
 The Bank of France played an important part in the most 
 remarkable transaction in the history of foreign exchange 
 the payment of the great war indemnity levied upon France 
 by Germany. A detailed account of the process of payment 
 was submitted to the National Assembly in 1875 by M. Leon 
 Say, and forms one of the most instructive chapters of mod- 
 ern financial history. The definitive treaty of peace, signed 
 at Frankfort on May 10, 1871, called for the payment by 
 France to Germany of five milliards of francs ($1,000,000,- 
 ooo). Five hundred millions were to be paid thirty days 
 after the restoration of order in Paris, one thousand millions 
 during the year 1871, five hundred millions on May i, 1872, 
 and three thousand millions on March 2, 1874, with five per 
 cent, interest on the last payment. The framers of the 
 treaty appreciated the difficulty of making such an immense 
 
 1 Noel, I., 122. 
 
 2 Noel, I., 200. 
 
BANKING IN FRANCE. 63 
 
 transfer of credit without upsetting the financial fabric of 
 Europe and provision was made that payment might be 
 made in gold or silver, in notes of the banks of England, 
 Prussia, Holland, or Belgium, or in first class bills of ex- 
 change. Bills not payable in Germany were to be valued at 
 their net proceeds after deducting the cost of collection. It 
 was afterwards agreed that the portion of the Eastern Rail- 
 way of France which was situated in the ceded province of 
 Alsace, and was the property of the French government, 
 should be accepted for 325,000,000 francs of the indemnity, 
 and that 125,000,000 francs should be received in notes of 
 the Bank of France. 
 
 Three things had to be accomplished in order to pay the 
 indemnity within the time set. The credits had to be trans- 
 ferred to the French government by taxation or the sale of 
 securities ; the proceeds had to be converted into obligations 
 acceptable to the German government ; and these obligations 
 had to be paid or transferred to the credit of Germany. The 
 first step was taken by means of an advance from the Bank 
 of France and the placing of public loans. The bank 
 advanced 1,530,000,000 francs ($300,000,000) to enable the 
 government to meet promptly the two payments required 
 during 1871. One of the conditions of the payment of the 
 indemnity was that German troops should occupy French 
 soil until the payments were completed. M. Thiers, the 
 president of the new republic, determined to free the coun- 
 try from foreign occupation at the earliest possible moment 
 by anticipating the payments. Two loans were authorized, 
 one for 2,225,994,045 francs ($430,000,000) in the summer 
 of 1871, and one of 3,498,744,639 francs ($675,000,000) in 
 the summer of 1872. They were subscribed many times 
 over and the government thereby obtained the funds for 
 completing the payments and liberating French soil in the 
 summer of 1873. 
 
 One of the striking results of this loan was to bring from 
 the hoards of the French peasants and small shop-keepers 
 the gold and silver which had been accumulating for genera- 
 tions. It was the initiation of whole classes of the French 
 
64 HISTORY OF MODERN BANKS OF ISSUE. 
 
 people into dealing with negotiable securities. The time 
 was nearly ripe in the progress of modern financiering for 
 this change in the habits of the people, but it required a loan 
 which appealed to their patriotism and carried a high guaran- 
 tee of safety to definitely break down the old habit of 
 hoarding and establish the new habit of investment. 1 The 
 subscriptions to the second loan were 934,276, and the 
 amount subscribed was 13,252,455,930 francs at Paris, 4,513,- 
 445,566 francs in the provinces, and 26,050,195,054 francs in 
 foreign countries. The foreign subscriptions, numbering 
 107,612, were largely speculative and the majority were made 
 by the great financial houses as a means of supporting their 
 correspondents in Paris. The bulk of the loan tended 
 eventually into the hands of Frenchmen. The hoards of 
 gold and silver brought into the market from the provincial 
 subscribers went to swell the monetary circulation and 
 enabled the Bank of France within a few years to accumu- 
 late a coin reserve nearly twice as large as it had ever 
 before held. While 375,000,000 francs (73,000,000) in gold 
 left the country in the three years 1871-73 and the reserve of 
 the Bank of France declined as low in 1871 as 399,000,000 
 francs, the j^ellow metal came pouring back in the next few 
 3 r ears, and in 1876 the reserve of gold alone in the bank stood 
 at 1,530,400,000 francs ($300,000,000). 
 
 Another striking feature of the payment of the war in- 
 demnity was the development of the use of commercial 
 credit for transferring funds from one country to another. 
 
 1 M. L,eroy-Beaulieu computes an increase in French fund-holders 
 from 550,000 in 1870 to 1,000,000 in 1876, counting only permanent 
 investors and excluding speculative holdings. This would represent 
 about one in eight of the heads of families in France. The sales of 
 public securities in the departments increased from 4,299,425 in 1869 
 to 24,272,094 in 1873. La Science des Finances, II., 220-25. The ef- 
 fect of the popular subscriptions may be traced also in the reduction 
 of the balances in the Caisse d'Epargne (Savings Bank) of Paris, 
 which fell from 54,180,747 francs (f 10,500,000) on January i, 1870, to 
 35,454,124 francs ($7, ooo,ooo)on January i, 1873, the latter being the 
 lowest point reached since 1850. Vide Bulletin de Statistique, Oct., 
 1895, XXXVIII., 374-77- 
 
BANKING IN FRANCE. 65 
 
 The aggregate payments consisted of only 742,334,079 francs 
 ($ 143,000,000) in all forms of currency, including bank-notes, 
 and 4,248,326,374 francs ($820,000,000) in bills of exchange. 
 The loss in the monetary circulation of France was less than 
 the sum of coin and bank-notes, because some of the bank- 
 notes were purchased by exchange in foreign countries and 
 others were German notes which had drifted into France 
 with the German army. The real specie payments were 
 273,003,058 francs ($52,600,000) in French gold and 239,- 
 291,875 francs ($46,000,000) in French silver. The essential 
 work of completing the payments was done by the purchase 
 by the government of bills of exchange drawn by French- 
 men upon their credits in every quarter of the world. Brit- 
 ish bills were the most plentiful upon the Paris market and 
 the heavy purchases of the French government threw much 
 of the monetary stress upon England and compelled the 
 Bank of England to maintain high discount rates all through 
 1872 and I873. 1 The purchase by the government of a bill 
 drawn by a French merchant upon an English customer 
 permitted the transmission of the bill to the German gov- 
 ernment, which could then draw upon London for the gold 
 or simply direct the deposit of the proceeds to their credit in 
 the London Joint Stock Bank, which was their London 
 agent. If the Frenchman who sold his bill of exchange to 
 the government was a purchaser of the new public loan, the 
 result of the process was the transformation of his claim 
 against his English customer into a claim against his own 
 government. 
 
 One of the incidents of this great operation in exchange 
 was the fall in the price of foreign securities on the Paris 
 market and their flight to other countries, where their quo- 
 tations remained comparatively undisturbed. These influ- 
 ences operated most directly upon what are known on the 
 European exchanges as " international securities," because 
 they are known and quoted in the leading markets of the 
 world. The cause of their decline on the Paris market in 
 1871 was the eagerness of Frenchmen to transfer their capi- 
 
 1 Gilbart, II., 384. 
 
 5 
 
66 HISTORY OF MODERN BANKS OF ISSUE. 
 
 tal into the obligations of their own country. The result 
 of the decline was not only the sale of the securities offered 
 to brokers, but a flood of foreign money and foreign credits 
 to Paris to take advantage of the reduced prices of "the 
 internationals." M. Say, in his report, attributed to these 
 arbitrage transactions in international stocks and their cou- 
 pons much of the facility with which the indemnity was 
 paid. The sales of Italian five per cent, securities alone on 
 the Paris Bourse from July i, 1871, to December 31, 1873, 
 were 46,115,000 francs ($9,000,000), not including sales by 
 private brokers. The proof that these sales were largely on 
 foreign account was furnished by the decline in the interest 
 payments made at Paris on Italian securities from 40,150,- 
 ooo francs on July 1,1871, to 25,604,000 francs on January 
 
 The Bank of France was embarrassed as early as 1860 by 
 the fluctuations in the relative value of gold and silver and 
 their departure from the ratio of fifteen and a half to one 
 fixed by the French coinage law of 1803. Silver had be- 
 come the more valuable metal, because of the immense addi- 
 tion to the gold stock by the discoveries in California and 
 Australia. The value of silver, in other words, was greater 
 in proportion to gold than the price paid for bullion at the 
 mint. It was obvious that if the bank continued the policy 
 of redemption of its notes in gold or silver at the option of 
 the holder, silver coin would always be preferred, and would 
 be withdrawn for speculative purposes as long as it could be 
 obtained, because it could be sold as bullion at a profit above 
 its face value in gold. The situation became so serious that 
 the bank asserted the option to pay only in gold and was 
 obliged to borrow that metal from the Bank of England in 
 order to be well supplied. Gold had been flowing into 
 France since the opening of the California mines and silver 
 
 1 Leroy-Beaulieu, II., 236. M. Leroy-Beaulieu admits that sales for 
 report are included in the first item, but the decline in interest pay- 
 ments at Paris seems to sustain his argument that Italian securities 
 left France in order that their proceeds might be invested in the in- 
 demnity loan. 
 
BANKING IN FRANCE. 67 
 
 flowing out in an uninterrupted stream, 1 but the Bank of 
 France had held on to the dearer metal, silver, and redeemed 
 in the cheaper until its gold reserve was reduced in 1860 to 
 about 100,000,000 francs, while its silver stood at about 325,- 
 000,000 francs. About ,2, 000,000 in gold was obtained from 
 the Bank of England, which was not averse to exchanging 
 the less valuable metal for the dearer, even though the latter 
 was not a money metal in England. 
 
 The departure of the market ratio of gold and silver from 
 the mint ratio by the depreciation of gold was the occasion 
 of the formation of the Latin Union. Belgium, Italy, and 
 Switzerland had already adopted the French decimal system 
 of coinage before the formation of the Union, and the coins 
 of each country circulated freely in the others. The proposi- 
 tion for a conference came from Belgium, but was cordially 
 accepted by the French government and the meeting called 
 at Paris. The most pressing problem to be confronted was 
 the disappearance of the subsidiary silver coins because of 
 the premium upon silver. Switzerland had already reduced 
 her silver coins, except the five-franc piece, by the law of 
 January 31, 1860, from nine-tenths fine to eight-tenths; 
 Italy, by the law of August 24, 1862, had lowered to 0.835 
 fine the franc and smaller pieces ; and France had adopted 
 the standard of 0.835 for her pieces of 20 and 50 centimes. 
 The change of all but the five- franc piece was recommended 
 by a commission appointed by the French government in 
 1 86 1, but the Corps L,egislatif in passing the law of May 25, 
 1864, refused to reduce the one- and two-franc pieces. 2 Bel- 
 gium was on the point of taking legislative action when the 
 advantages of an international conference suggested them- 
 selves. 
 
 The refusal of the French legislative body to reduce the 
 fineness of the larger silver pieces, so as to bring their bullion 
 
 1 The net imports of gold into France from 1848 to 1870 were 5,153,- 
 000,000 francs ($1,000,000,000) and only one year (1861) showed net 
 exports. The years 1852 to 1864 showed uninterrupted net exports of 
 silver amounting to 1,726,000,000 francs ($340,000,000). Shaw, 184-86. 
 
 * Arnaune", 191. 
 
68 HISTORY OF MODERN BANKS OF ISSUE. 
 
 value down to their face value, was rapidly driving them out 
 of circulation and silver had long ceased to be offered in any 
 considerable quantities for coinage at the mints. 1 The con- 
 ference decided that all silver coins below the five-franc piece 
 should be reduced to 0.835 fine, that their coinage should be 
 limited in each country to six francs per capita, that the sub- 
 sidiary silver should be received in the public depositaries of 
 each country in amounts not exceeding one hundred francs 
 ($19.30) and should be a legal tender in the country where 
 coined in amounts of not more than fifty francs ($9.65). The 
 Belgian, Swiss, and Italian delegates strongly urged the adop- 
 tion of the single gold standard, but the proposition was re- 
 sisted by the French delegates and was not acted upon. The 
 convention putting in effect the decisions reached in the con- 
 ference was adopted on December 23, 1865, and Greece soon 
 after became a party to it. A monetary conference was held at 
 Paris in connection with the international exposition, which 
 recommended the adoption of the gold standard by the coun- 
 tries taking part, and it was in pursuance of this action that 
 the French government concluded the preliminary conven- 
 tion of July 31, 1867, with Austria, establishing a fixed rela- 
 tion between the franc and the gold florin. 2 
 
 The formation of the I,atin Union, so generally treated to- 
 day as a plan to maintain bimetallism, was, in the language 
 of a high authority, " a measure of defence against the ac- 
 tion of the bimetallic system in those countries which had 
 adopted the monetary system of France, and lay exposed to 
 all its disastrous fluctuations." 3 The effect of the action of 
 the countries forming the Union, in the language of the 
 French monetary commission of 1867, " places in the front 
 rank gold money, and reduces the pieces of silver of two 
 francs and less to the r61e of token money. It therefore 
 
 1 The total coinage of silver at the French mint in 1863 was 329,610 
 francs ($65,000), while the gold coinage was 210,230,640 francs ($41,- 
 000,000). The largest silver coinage since 1856 had been 8,663,568 
 francs in 1858, and the largest gold coinage 702,697,790 francs in 1859. 
 
 2 Vide Ch. viii. and ix. 
 
 3 Shaw, 190 
 
BANKING IN FRANCE. 69 
 
 definitely determines the ascendency of the gold franc and 
 solves practical difficulties arising from the double stand- 
 ard." The Latin Union, so far from establishing bimetal- A 
 lism, adopted the gold franc as the standard because gold 
 was then the money of general circulation within the coun- 
 tries of the Union. The mints continued open to the free 
 coinage of both metals, but silver was not offered on private 
 account for coinage into five-franc pieces at the legal ratio, 
 any more than gold would be offered at the present day in a 
 country where silver at the old ratio was the common medium 
 of circulation. 
 
 It was because the ratio tilted backwards to a higher bul- 
 lion value for gold and a declining value for silver that the 
 aspect of the monetary problem was reversed and that the 
 purpose of the Latin Union has come to be misunderstood. 
 The members of the union from the outset, however, have 
 done no more than seek to maintain the circulation of silver 
 by limiting its coinage. Silver first dropped below par in 
 1867, when the commercial ratio of gold to silver was i to 
 15.57, but it was not until 1873, when the quotation was 
 i to 1 5.92, 1 that it began to be noticed that an excessive quan- 
 tity of silver was being minted and that gold was disappear- 
 ing from circulation. The problem was complicated by the 
 fact that France, Italy, and Greece were under the regime 
 of paper money, leaving only Belgium and Switzerland in 
 full enjoyment of the bimetallic coinage system. The latter 
 
 1 The statement of these differences in the terras of the ratio makes 
 them look much more trifling than is really the case. Stated in terms 
 of percentage, the depreciation of silver in 1867 was a little less than 
 one-half of one per cent. (0.45) and in 1873 was 2.7 per cent, of the par 
 Talue. The depreciation in 1872 was 0.97 per cent. It is interesting 
 to note that the changes prior to 1873 took place, and that their effect 
 was visible in the bullion offerings at the mints, before the adoption 
 of the gold standard in Germany or the United States or the limitation 
 of coinage by the Latin Union. The depreciation of nearly one per 
 cent, in 1872 was sufficient to afford a large profit on bullion operations, 
 in view of the fact that the usual element in such computations 
 the time consumed in earning interest did not need to be considered. 
 
7O HISTORY OF MODERN BANKS OF ISSUE. 
 
 country, with a keen appreciation of actual conditions, 
 almost entirely suspended silver coinage and received her 
 circulation from the other countries of the union. 1 The 
 presentation of gold for coinage at the French mints ceased 
 during 1872 and 1873, and the silver coinage was 26,838,369 
 francs in the former and 156, 270,160 francs in the latter year. 
 The mint of Belgium was besieged by the owners of silver 
 bullion and 111,000,000 francs in five-franc pieces were 
 coined in 1873, while even Italy, though on a paper basis, 
 coined 42,000,000 lires, which were refused acceptance by 
 the Bank of France. 3 
 
 The limitation of the coinage was resorted to for the four 
 years ending with 1877 as the only means of averting the 
 single silver standard. Conferences were held annually and 
 the maximum coinage of five-franc pieces was fixed for each 
 country. The aggregate of these allowances for the four 
 years was 45,200,000 francs for Belgium, 216,000,000 francs 
 for France, 18,000,000 francs for Greece, 164,000,000 francs 
 for Italy, and 28,800,000 francs for Switzerland. Italy was 
 allowed to coin 29,000,000 francs in 1878 and 1879, on condi- 
 tion that the sum should be retained in the Bank of Italy as 
 a metallic reserve against the circulating paper money. 
 Silver continued to fall in price and the policy of limitation 
 was succeeded in 1878 by the policy of absolute suspension 
 of the coinage of five-franc pieces. The monetary union 
 was renewed from 1878 to January i, 1886, and was ex- 
 tended in 1885 to January i, 1891, since when it has 
 been prolonged annually by mutual agreement. The con- 
 vention of 1885 not only bound each of the contracting 
 parties not to resume the coinage of five-franc pieces without 
 the consent of the union, but provided that if such coinage 
 should be resumed the coins should be redeemable by the 
 nation coining them in gold on demand, and that if such 
 
 1 Her entire coinage of five-franc pieces, from the first limitation 
 to the final suspension of silver coinage, was only 7,978,000 francs 
 ($i, 500,000). Haupt, 85-86. 
 
 * Arnaune, 197. 
 
BANKING JN FRANCE. J\ 
 
 redemption should be refused the coins might be refused by 
 the public depositaries of the other parties to the union. 1 
 
 It was such conditions which confronted the Bank of 
 France when it prepared to resume specie payments in 1877 
 with a gold reserve of 1,202,400,000 francs ($232,000,000) and 
 a silver reserve of 860,900,000 francs ($165,000,000). The 
 situation was exactly the same as in 1860, except that the 
 position of the two metals was reversed. The bank found 
 itself well stocked with the more valuable metal, but re- 
 strained from using it for redemption purposes because of 
 the certainty that it would soon be drawn away and sold as 
 bullion. The policy was adopted, and has been steadily 
 adhered to, of redeeming in gold or silver at the discretion 
 of the bank and charging a premium for gold. It is impos- 
 sible to obtain gold at the bank in the quantity desired for 
 exportation and it has to be taken from the domestic circu- 
 lation. This means of protecting its gold reserve has been 
 treated by the bank in some measure as a substitute for rais- 
 ing the rate of discount in a monetary pressure and while it 
 protects the gold of the bank it has none of the advantages 
 upon the money market which follow the different policy of the 
 Bank of England . The bullion shippers were shrewd enough 
 when discount was low and gold at a premium in 1857, * 
 draw gold by discounting accommodation bills at the bank 
 rate of four per cent, and selling the gold for the premium 
 for exportation. The bank prevents this under its present 
 practice by paying for discounted paper in silver, which is 
 not exportable for monetary purposes. The result, "to 
 defend the reserve of the bank to the detriment of the reserve 
 of the country," in the language of M. Arnaune "is an 
 error which may have melancholy consequences." 2 
 
 The excessive quantity of silver in the reserve of the bank 
 has contributed in a measure to its large note circulation. 
 The bank has tried to force silver five-franc pieces into cir- 
 
 1 For the arrangements regarding the liquidation in gold of the 
 excess of foreign silver coins in France, see Chapter xi., under the 
 Bank of Belgium. 
 
 La Monnaie, le Credit, etle Change, 397. 
 
72 HISTORY OF MODERN BANKS OF ISSUE. 
 
 culation, but they have drifted as steadily back upon its 
 hands as standard silver dollars, in spite of the efforts of 
 Treasurer Jordan, drifted back into the Treasury of the 
 United States in 1885 and 1886. People have preferred to 
 take notes resting upon the security of both the gold and 
 silver in the bank reserves. The bank, in the language of 
 an eminent Scotch financier, has had to ' ' relieve the public 
 of ,50,000,000 of silver, which was coined, and was in ex- 
 cess of the silver required for the purposes of the people." 1 
 The government proposed the removal of the limit on circu- 
 lation in 1884 and while this was refused, the maximum was 
 carried up by the law of January 30, 1884, from 3, 200, 000,000 
 francs to 3,500,000,000 francs. The actual circulation at 
 this time was 3,162,000,000 francs, but it continued to rise 
 in response to the demand of the public for notes. The ex- 
 cess of notes in circulation over gold and silver was 1,210,- 
 ooo francs in 1884 and was reduced in 1893 to 695,000,000 
 francs, while the circulation had climbed upwards on Jan- 
 uary 12, 1893, to 3,473,000,000 francs. Another extension 
 of the legal limit was demanded for the accommodation of 
 commerce and it was carried upward by the law of January 
 25, 1893, to 4,000,000,000 francs. 3 
 
 The fluctuations in the gold and silver holdings of the 
 Bank of France are in some degree an epitome of its history. 
 Gold was scarcely a factor during the years before the dis- 
 covery of the Californian and Australian mines, but after 
 1852 it rapidly expelled silver from the vaults until the bank 
 took measures to reserve what was then the more valuable 
 metal. The swing of the ratio backward in favor of gold in 
 1867 was followed by accumulations of silver which have not 
 driven out the gold because of the option which the bank 
 has exercised to pay in either metal. The figures for repre- 
 sentative years, in francs, are as follows : 
 
 1 Mr. Charles Gairdner, manager of the Union Bank of Scotland, 
 before the Indian Currency Committee. Sen. Misc. Doc. 23, 53d 
 Cong., ist Sess., 150. 
 
 2 Arnaune", 326-27. 
 
BANKING IN FRANCE. 
 
 YEAR. 
 
 GO 
 
 LD. 
 
 SIL 
 
 ITER. 
 
 1811 
 
 Maximum 
 21,714,000 
 
 Minimum 
 l8,3OI,OOO 
 
 Maximum 
 105,231,000 
 
 Minimum 
 9I,228,OOO 
 
 1820 
 
 5I,8l7,OOO 
 
 22,488,000 
 
 167,372,000 
 
 136,925,000 
 
 1830 
 
 1,700,000 
 
 
 I7I,8oo,OOO 
 
 IO2,5OO,OOO 
 
 1840 
 
 26,700,000 
 
 IO,OOO,OOO 
 
 235,000,000 
 
 185,600,000 
 
 1850 
 
 29,2OO,OOO 
 
 5,500,000 
 
 339,100,000 
 
 290,700,000 
 
 1852 
 
 86,800,000 
 
 63,900,000 
 
 447,000,000 
 
 349,7OO,OOO 
 
 1855 
 
 I7I,OOO,OOO 
 
 28,3OO,OOO 
 
 92,400,000 
 
 25,000,000 
 
 1857 
 
 95,900,000 
 
 36,500,000 
 
 35,400,000 
 
 25,300,000 
 
 1860 
 
 238,300,000 
 
 97,4OO,OOO 
 
 325,100,000 
 
 269,000,000 
 
 1865 
 
 39I,20O,OOO 
 
 215,900,000 
 
 142,800,000 
 
 93,900,000 
 
 1868 
 
 877,100,000 
 
 662,400,000 
 
 477,300,000 
 
 308,800,000 
 
 1870 
 
 739,300,000 
 
 433,700,000 
 
 579,600,000 
 
 70,900,000 
 
 1875 
 
 I,I76,IOO,OOO 
 
 ,OO4,3OO,OOO 
 
 508,700,000 
 
 309,200,000 
 
 1877 
 
 1,556,500,000 
 
 ,204,100,000 
 
 866,700,000 
 
 637,IOO,OOO 
 
 1880 
 
 826,900,000 
 
 536,400,000 
 
 ,282,500,000 
 
 ,212,000,000 
 
 1885 
 
 I,I75,8oo,OOO 
 
 995,300,000 
 
 ,106,100,000 
 
 ,024,400,000 
 
 1890 
 
 I,32O,9OO,OOO 
 
 ,114,200,000 
 
 ,276,900,000 
 
 ,239,IOO,OOO 
 
 1892 
 
 1,708,300,000 
 
 ,336,2OO,OOO 
 
 ,299,000,000 
 
 ,248,5OO,OOO 
 
 1893 
 
 I,72O,9OO,OOO 
 
 ,537,2OO,OOO 
 
 ,285,500,000 
 
 ,247,900,000 
 
 1894 
 
 2,061,500,000 
 
 ,695,500,000 
 
 ,283,100,000 
 
 ,237,4OO,OOO 
 
 The most important functions of the Bank of France relate 
 to the monetary circulation. The volume of commercial dis- 
 counts has, however, grown to considerable proportions of 
 late years and has included the rediscounting of very mi- 
 nute pieces of commercial paper presented by the discount 
 banks of Paris. The number of pieces discounted by the 
 central bank in 1894 was 5,805,774, and of these 2,188,957 
 pieces were for 100 francs ($20) or less, and more than half 
 of these were below 50 francs. The number of pieces of 100 
 francs or less in 1881 was 1,160,495, and in 1885 1,590,839. 
 The bank has suffered in the volume of its discounts from 
 the competition of banking companies of more compact or- 
 ganization and with fewer public responsibilities, which have 
 kept their discount rates more closely in harmony with those 
 of the money market. The rate of discount at the bank 1 
 
 1 M. Neymarck suggests that the bank should, upon the renewal of 
 its charter, be authorized to lend at less than the official rate on the 
 best paper, as is done by the Bank of England. By adhering uni- 
 formly to the official rate, he argues, the bank drives the first-class 
 paper (papier de choix] to other lenders and gets only that of inferior 
 quality. Du Renouvellement du Privilege, 10-11. 
 
74 HISTORY OF MODERN BANKS OF ISSUE. 
 
 was for many 3^ears kept at four per cent., in defiance of the 
 rates in other countries and outside the bank, and even at 
 present is less often changed than in other large banks. 
 The rate fixed on May 19, 1892, two and a half per cent, 
 for commercial discounts and three and a half per cent, 
 for advances on securities remained for nearly three years 
 unchanged, and was only reduced to two and three per cent, 
 on March 14, 1895. This was still the rate at the beginning 
 of 1896. 
 
 The fact that the bank's most important functions relate 
 to the circulation may be deduced from the figures of its 
 transactions. The circulation exceeds by more than three 
 times the discounts and advances, and the metallic reserve is 
 many times the entire liability on account of deposits. The 
 circulation on January 2, 1896, was 3,647,097,410 francs. 
 The commercial discounts at Paris were 346,394,931 francs 
 and at the branches 503,356,005 francs. The advances on 
 securities at Paris were 182,603,486 francs and at the branches 
 201,936,317 francs. Discounts have fallen off somewhat 
 during the past two years, because the bank rate has been 
 higher than that of London and of other money lenders, 
 but the commercial discounts at the central bank and 
 branches were only 681,000,000 francs on January 4, 1894, 
 and reached the temporary elevation of 983,000,000 francs 
 on April 26th, only because of the negotiation of an important 
 loan by the City of Paris. 1 If discounts are relatively small, 
 deposits are still smaller, and if they are of minor import- 
 ance at Paris, they are insignificant at the branches. The 
 deposits at Paris on January 2, 1896, were 562,259,304 
 francs ($107,000,000) and at all the branches 90,041,157 
 francs ($17,000,000). The discounts given in the following 
 table of the principal items of the bank's accounts, from the 
 official reports to the government, represent the aggregate 
 of the bills discounted during the year rather than the 
 amount outstanding on any given date : 
 
 1 Raffalovich, Le Marche Financier en iSw-gs, 23. 
 
BANKING IN FRANCE. 
 
 75 
 
 YEAR. 
 
 MEAN 
 CIRCULATION. 
 
 MEAN METALLIC 
 RESERVE. 
 
 TOTAL 
 DISCOUNTS. 
 
 MEAN DISCOUNT 
 RATE. 
 
 (In millions of francs) 
 
 1845 
 
 268.8 
 
 271.2 
 
 1,399-3 
 
 4.00 
 
 1848 
 
 347-8 
 
 176.2 
 
 1,537-4 
 
 4.OO 
 
 1850 
 
 495-5 
 
 457-8 
 
 1,171.0 
 
 4.OO 
 
 1855 
 
 644.4 
 
 340.5 
 
 3,765.2 
 
 4-44 
 
 1860 
 
 736.4 
 
 513.5 
 
 9,964.7 
 
 3.63 
 
 1865 
 
 843-8 
 
 439. 6 
 
 6,030.2 
 
 3.72 
 
 1870 
 
 1,566.4 
 
 1,130-7 
 
 6,627.3 
 
 3-99 
 
 i875 
 
 2,464.9 
 
 i,54i.i 
 
 6,826.7 
 
 4.00 
 
 1880 
 
 2,311-4 
 
 1,974-4 
 
 8,696.8 
 
 2.81 
 
 1885 
 
 2,891.6 
 
 2,150.7 
 
 9,250.1 
 
 3-00 
 
 1890 
 
 3,076.6 
 
 2,476.7 
 
 9,549-7 
 
 3.00 
 
 1892 
 
 3,186.3 
 
 2,785.3 
 
 8,415.7 
 
 2.50 
 
 1893 
 
 3,423.0 
 
 2,895.3 
 
 8,922.2 
 
 2.50 
 
 1894 
 
 3,495-0 
 
 3,127.7 
 
 8,725.6 
 
 2.50 
 
 1895 ' 
 
 3.484.9 
 
 3,202.9 
 
 8,621.9 
 
 2.00 
 
 The Bank of France enjoys the advantage of an owner- 
 ship and credit independent of that of the government, in 
 spite of the close official supervision which is exercised over 
 it. This financial independence proved as useful to the 
 country midst national disasters and changes of government 
 in 1870-71 as dependence upon the government proved 
 dangerous during the similar changes of 1814-15. The bank 
 was able to assist the government by advances when its own 
 arms were paralyzed. 3 None of the 182,500,000 francs of 
 the bank capital are owned by the State, but the government 
 since 1806 has had a share in the management through the 
 appointment of the governor and two deputy governors, 
 removable at the will of the Minister of Finance. The bank 
 receives the public monies on deposit and performs other 
 public services free of charge, but does not act as an agent 
 of the State to the same extent as many other European 
 banks. The Treasury is entitled to an advance of 140,000,- 
 ooo francs ($28,000,000) and receives the proceeds of a stamp 
 duty on the notes and a tax of four per cent, on dividends. 
 The proceeds of these taxes in 1894 were about 2,500,000 
 
 1 Actual condition, December 26th. 
 
 2 Noel, I., 240. M. Thiers summed up one of the lessons of sound 
 banking in a sentence : "The bank saved us because it was not a 
 bank of state." 
 
76 HISTORY OF MODERN BANKS OF ISSUE. 
 
 francs ($500,0x30). There is no division of profits with the 
 government, but this has been repeatedly proposed in connec- 
 tion with re-charter. The requirement that the bank shall 
 maintain a branch in each department has now been com- 
 plied with, and ninety-four branches, thirty-eight auxiliary 
 bureaus, and 116 other banking offices are in operation. 
 Each branch is under the charge of a director appointed by 
 the government upon the nomination of the governor of the 
 bank. 
 
 The governing board of the bank is a general council, 
 which consists of fifteen regents and three inspectors or 
 auditors (censeurs). The members are elected at a general 
 meeting of the stockholders, but three of the regents must 
 be selected from the treasury disbursing agents, and three 
 inspectors and five regents must be chosen from among the 
 business portion of the shareholders. 1 The only share- 
 holders entitled to participate in the annual meetings in 
 January are the two hundred who hold the largest number 
 of shares, and at the present value of the shares no share- 
 holder worth much less than 500,000 francs (100,000) is able 
 to participate. 2 A full statement of operations is furnished by 
 the bank to the government every six months and a balance 
 sheet is published in the official journal every Friday. The 
 expenses of the central bank for 1894 were 7,464,600 francs 
 and of the branches 6,521,100 francs. Transportation and 
 other general expenses of 2,447,822 francs raised the total 
 to 16,433,522 francs (3,200,000). Fifteen branches showed 
 an excess of cost over net earnings in 1894 amounting to 
 156,831 francs ($31,000). The number of employees of the 
 
 1 Lois et Statuts, Art. 9, loi du 22 Avril, 1806. 
 
 2 Neymarck, 15. This provision has been the subject of much 
 criticism in connection with the renewal of the charter and it has been 
 pointed out that the bank is the only one of the great European 
 institutions where the number entitled to vote in the general meet- 
 ings of the shareholders is thus definitely limited. A minimum num- 
 ber of shares is the usual qualification, being only one in the Imperial 
 Bank of Germany, five in Holland and Servia, ten in Belgium, fifteen 
 in Italy, twenty in Austria-Hungary, and fifty in Spain. Noel, I., 222. 
 
BANKING IN FRANCE. 77 
 
 central bank in 1894 was IO 74 an( ^ f the branches 1258. 
 The dividends distributed in 1894 were 117.7 francs per 
 share, including the impost of 4.7 francs. The highest 
 dividend paid was 350 francs in 1873. This was 35 percent. 
 of the par value of the shares, but only 8.09 per cent, on the 
 market value, which was about 4370 francs. The value of 
 the shares on December 31, 1894, was 3600 francs. 
 
 The Bank of France may be confronted in the immediate 
 future with a struggle for existence. The renewal of the 
 charter was proposed in 1891, but the opposition was so 
 strong in the Chambers that the bill for the purpose was 
 withdrawn by the ministry for fear of defeat. Two potent 
 influences are arrayed against the renewal of the monopoly 
 of note issues by the bank under the terms of the existing 
 charter. On one side stand the classical political economists, 
 who believe in the theory of free banking and point to the 
 success of the departmental banks before 1848 and the develop- 
 ment of the Scotch and American systems, in support of the 
 policy of diffusing agencies of credit and of note issue 
 throughout the country. On the other side stand the social- 
 ists, who believe that the bank should be turned into a 
 great machine for scattering paper riches among the people 
 in the form of pensions and insurance, in payment for public 
 works, and in the purchase of the instruments of transporta- 
 tion and communication by the State. The close of the year 
 1897 will witness the expiration of the charter, unless legisla- 
 tion is enacted in the meantime to extend it. It is possible 
 that the government will exercise the executive power of 
 prolonging the charter for a year or two, as has already been 
 done in the case of some of the colonial banks whose char- 
 ters expired in 1894. 
 
CHAPTER IV. 
 
 FIRST CENTURY OF THE BANK OF ENGLAND. 
 
 The Economic and Financial Conditions Out of Which the Bank 
 Grew Early Difficulties and the First Suspension of Specie Pay- 
 ments The Loans of the Napoleonic Wars and the Restriction 
 of 1797 Pitt's Enormous Drafts upon the Bank. 
 
 Bank of England, like many of the Continental 
 banks, had its origin in the needs of the State. The 
 institution which resulted has been several times the 
 victim of the monetary necessities of the government, but 
 has not been dragged quite so persistently as the banks 
 of Italy, Austria, and Russia through the mire of depreciated 
 money and forced legal tender. The Bank of England has 
 come to enjoy, by a series of changes in the law, the substan- 
 tial monopoly of note issue in England and Wales, and has 
 proved one of the strongest banking institutions of the world. 
 The note circulation, since the Act of 1844, is based wholly 
 upon securities and deposits of coin and bullion. The rigidity 
 of the English system, by which expansion is prevented to 
 meet changing conditions of business, has received the con- 
 demnation of most students of political economy, but this has 
 not kept it from becoming to some extent the model of 
 national banks of later foundation on the Continent of 
 Europe. The defects of the English system of note issues 
 are those which are most apparent in a country where deposit 
 banking is in its infancy. They are less obvious and oppres- 
 sive in England than they would otherwise be because of 
 her small area, the wide use of credit instruments and the 
 closely-knit commercial relations of her people. 
 
 73 
 
FIRST CENTURY OF THE BANK OF ENGLAND. 79 
 
 The creation of the Bank of England is involved with 
 both the political and fiscal history of the close of the seven- 
 teenth century. England was behind Italy and Holland in 
 the development of the mechanism of modern commerce, and 
 the proposition to establish a banking system was sharply 
 resisted by Gerard Malynes, who published in 1601 a 
 Treatise of the Canker of England J s Commonwealth. Malynes 
 described the Continental method of banking with a fairness 
 and precision which enable its leading features to be readily 
 understood, in spite of his opinion that payments by the 
 banks by transfers upon their books were ' * almost or rather 
 altogether imaginative or figurative." ' English merchants 
 deposited their cash for a time in London Tower, but .120,- 
 ooo was seized by Charles I., in 1640, and only repaid after 
 violent protests and long delay. 2 The goldsmiths then be- 
 came the bankers for the community and paid interest for 
 the money left in their custody. There was much opposition 1 
 to the new system at first and, strange to say, one of the, 
 last to adhere to the old method of keeping his cash in a 
 strong box at home was Sir Dudley North, one of the most 
 progressive thinkers on political economy of his time. As 
 Macaulay graphically recounts North's experience, " He 
 found that he could not go on Change without being fol- 
 lowed around the piazza by goldsmiths, who, with low bows, 
 begged to have the honor of serving him. He lost his 
 temper when his friends asked where he kept his cash. 
 'Where should I keep it,' he asked, 'but in my own 
 house?' " 3 
 
 While commerce was coming to feel more and more the 
 need of a banking institution, the government was also feel- 
 ing the necessity of 'some method of raising money beyond 
 the precarious plan of sending agents to individual mer- 
 chants to see what they would lend. The historic legend 
 that King James I. attempted out of a spirit of pure wanton- 
 ness to levy excessive and unusual taxes upon the people of 
 
 1 Cunningham, II., 98. 
 
 2 MacLeod, Theory and Practice of Banking, I., 435. 
 
 3 History of England, Chap. xx. 
 
80 HISTORY OF MODERN BANKS OF ISSUE. 
 
 England is not fully borne out by the facts. The method 
 of taxation which he sought to introduce was simply a phase 
 of the transition from feudal to modern methods of carrying 
 on public affairs. As a careful student of the economic his- 
 tory of Hngland puts it : 
 
 According to ancient usage the King had been able to live of his 
 own, and had recourse to Parliament in emergencies. The chief 
 problem of the seventeenth century was to find a source of revenue 
 which would supply a regular income, that might adequately corre- 
 spond to the increased responsibilities of government in these more 
 modern times. The first attempt to do this was in the Great Con- 
 tract, proposed to the Parliament in 1610 ; by this James proposed to 
 relinquish all the occasional payments from feudal tenures, in return 
 for a regular income of ,"200,000 to be derived from parliamentary 
 supplies. 
 
 As this bargain broke down, James was a considerable sufferer ; 
 Charles I., to whom Tunnage and Poundage were not voted for life, 
 was left in a position of direct dependence on parliamentary grants, 
 and he did not conceal his resentment. During both of these reigns 
 every effort was made to secure supplies from extra-parliamentary 
 sources ; while the Commons, who were eagerly anxious to assert 
 their position and exercise a real control over the foreign as well as 
 the domestic policy of the realm, were always on the alert to thwart 
 these attempts. l 
 
 The parliamentary party succeeded in organizing a system 
 of taxation by means of customs duties, monthly levies upon 
 real estate and excises on internal trade, which continued in 
 full force after the restoration of the Stuarts. These taxes 
 laid the foundation of the modern method of defraying the 
 expenses of government, but they were inadequate for many 
 extra expenses and for carrying on the wars in which 
 Charles II. and William III. found themselves involved. 
 Charles II. turned for assistance to the goldsmiths. But his 
 rapacity soon outran his borrowing capacity, and he gave a 
 violent shock to credit by a proclamation of January 2, 1672, 
 refusing payment out of the Exchequer of money advanced 
 and sequestrating ,1,328,526 to his own use. The money, 
 although lent by the goldsmiths to the King, was the prop- 
 
 1 Cunningham, II., 215. 
 

 FIRST CENTURY OF THE BANK OF ENGLAND. 8 1 
 
 erty of some 10,000 depositors and its loss spread ruin and 
 suffering throughout London. A long course of litigation 
 ensued, which finally ended in the reign of William by the 
 consolidation of the^indebtedness with other portions of the 
 permanent national debt. 1 This conduct on the part of the 
 Stuart King made the people and the bankers cautious 
 about loaning to the government, and William III. was 
 driven to desperate expedients to obtain revenue to carry 
 on the war with France. A poll tax was imposed, stamp 
 duties were levied which have never been entirely repealed, 
 and enormous prizes, in the form of annuities on the ton- 
 tine plan, were offered to those who would lend to the State. 
 
 A plan was presented to the Committee of the House of 
 Commons, while they were considering the claims of the 
 goldsmiths in the autumn of 1691, which contained the 
 germs of the organization of the Bank of England. William 
 Paterson, himself an obscure Scotchman, but supported by 
 several wealthy London merchants, offered to advance 
 ;i, 000,000 to the government on condition of receiving 
 ,65,000 a year as interest and the costs of management and 
 authority to issue bills which should be legal tender. The 
 government refused to give forced currency to the bills and 
 the matter fell through until 1694. Montague, the ingenious 
 and enterprising minister of William, then sent for Paterson 
 and requested him to organize a plan. The new project 
 contemplated a loan of ,2,000,000 to the government at 
 seven per cent., but the ministry, w r ho were accustomed to 
 discounts and commissions of forty per cent, on short loans, 
 could not be made to believe that a loan with no fixed date 
 of maturity could be floated at such a low rate. The gov- 
 ernment turned to other plans, but Paterson persevered and 
 presently obtained the help of Mr. Michael Godfrey, who 
 carried the scheme to a successful conclusion. It w r as put 
 in definite shape by Montague and was saddled upon the 
 Ways and Means bill (Statutes 1694, cn - 2 )> in a form 
 which would be characterized in modern legislation as 
 "a rider." 
 
 1 MacLeod, Theory and Practice of Banking, I., 441-44. 
 
 6 
 
82 HISTORY OF MODERN BANKS OF ISSUE. 
 
 " The Governor and Company of the Bank of England " 
 was the official designation of the new bank, but it was 
 called by its enemies the Tonnage Bank, because the bill 
 levied certain tonnage dues as well as customs and other 
 taxes. The necessity of money was so great that the bill 
 passed without a division in the Commons, and in a very 
 thin house. There was some opposition in the House of 
 Ivords, and much criticism of the action of the Commons in 
 attaching the provisions for the bank to a tax bill. It was 
 already May, according to the new style, when the final 
 struggle occurred, and the debate of the last day continued 
 from nine in the morning till six in the evening. It was 
 proposed to strike out all the clauses relating to the bank, 
 but its defenders suggested that this would be to invite a con- 
 test with the Commons over the old political issue, whether 
 the I,ords had the right to amend a money bill. This 
 argument prevailed, the amendment was rejected, thirty- 
 one votes in its favor to forty-three in the negative, and a 
 few hours later the bill ' received the royal assent and Parlia- 
 ment was prorogued. 
 
 The new bank was to be organized upon the loan by the 
 stockholders of ,1,200,000 ($6,000,000) a to the government, 
 and was authorized to issue notes, to deal in bullion and 
 commercial bills and to make advances on merchandise. Sub- 
 scriptions were opened on Thursday, June 2ist, in the Mer- 
 cer's Chapel, and one-quarter of the capital was subscribed 
 the first day. Half was subscribed within three days, and 
 by Monday noon, July 2d, the entire subscription was com- 
 pleted. Among the subscribers were Sir John Houblon, the 
 first Governor, who was descended from a Flemish refugee ; 
 
 1 The date was April 24, 1794, old style ; May 4, new style. The 
 dates here given are from the contemporary records and are old style. 
 
 2 The value of the English pound sterling is so generally known 
 that I have not thought it necessary in this and the following chapter 
 to give the equivalents in United States money for the sums named. 
 The value of the pound sterling as reported by the Director of the 
 Mint of the United States is $ 4. 8665, but for the purpose of computing 
 round figures is usually taken at $5.00. 
 
FIRST CENTURY OF THE BANK OF ENGLAND. 83 
 
 Michael Godfrey, one of the most active organizers of the 
 bank and the first Deputy Governor ; Queen Mary ; the 
 Duke of Leeds, the Duke of Devonshire, the Earl of Port- 
 land, the Countess of Carlisle, Lord Godolphin, Lady Ann 
 Mason, Sir Stephen Fox, and Sir John Trenchard. The 
 new bank began the discharge of its pledges to the govern- 
 ment by paying into the Exchequer ; 112,000 in bank-bills, 
 sealed with the seal of their corporation, which bore the 
 figure of Britannia sitting on a bank of money. 1 The busi- 
 ness of the bank was described by Godfrey, who wrote a 
 tract in its support, as follows : 
 
 They lend money on mortgages and real securities at five per cent, 
 per annum. If the titles of land were made more secure, money 
 -would be lent on land at four per cent, per annum, and in time of 
 peace at three per cent. Foreign bills of exchange are discounted 
 at four and a-half per cent. ; inland bills and notes for debts at six 
 per cent. They who keep their cash in the bank have the first of 
 these discounted at three per cent., and the other at four and a-half. 
 Money is lent on pawns of such commodities- as are not perishable at 
 five per cent, and on the Fund of the City of London Orphans at five 
 per cent. 2 
 
 The stock of the bank was at par on December 13, 1695, 
 little more than a year after it began actual operation, but 
 within the next two years it had to deal with a combination 
 of difficulties which caused the suspension of specie pay- 
 ments, and required all the courage and ability of the 
 directors to surmount. The bank was essentially a Whig 
 institution and a representative of the commercial interests 
 of London ; and it encountered the same sort of jealous 
 hostility from the landed interest which has prevailed in 
 more recent times against the moneyed interests of ' ' Wall 
 Street " and " Lombard Street." The fate of the bank was 
 so closely bound up with that of the Revolutionary govern- 
 ment that it was compelled to lend its support on all occa- 
 sions of emergency, or run the risk of seeing the entire debt 
 due by the government repudiated by the restoration of the 
 
 1 Rogers, The First Nine Years of the Bank of England, 3. 
 
 2 Rogers, 20. 
 
84 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Stuarts. The Bank, in the forcible language of Macaulay, 
 " Was Whig not accidentally, but necessarily. It must have 
 instantly stopped payment if it had ceased to receive the 
 interest on the sum which it had advanced to the govern- 
 ment ; and of that interest James would not have paid one 
 farthing." Mr. Bagehot declares that without the aid of the 
 bank : 
 
 Our national debt could not have been borrowed ; and if we had 
 not been able to raise that money we should have been conquered by 
 France and compelled to 'take back James II. And for many years 
 afterwards, the existence of that debt was a main reason why the 
 industrial classes never would think of recalling the Pretender or 
 of upsetting the Revolution settlement : the " fundholder" is always 
 considered in the books of that time as opposed to his " legitimate " 
 sovereign. 1 
 
 The political enemies of the bank were supported by the 
 goldsmiths and other financial men whose monopoly of 
 money lending was assailed by the new institution. The 
 managers of the bank enjoyed from the outset three privi- 
 leges which gave them an immense superiority over all 
 competitors and enabled them to reduce the charges for bank- 
 ing. They received the government balances ; they enjoyed 
 alone the privilege of limited liability, by which the share- 
 holders were liable for the debts of the bank only to the 
 amount of their investment and not for its entire liability ; 
 and they were able to loan money in excess of their deposits 
 by reason of the circulating notes they were allowed to issue 
 against the government debt. The goldsmiths were able to 
 do only the business of deposit banking, and were supposed 
 to lend only coin, or credit for which they held coin in their 
 vaults. 2 The goldsmiths, therefore, undoubtedly felt justi- 
 fied by reasons of self-preservation in lending their support 
 to any plan which would break down their powerful rival. 
 Such a plan was presented in the scheme of a Land Bank 
 which was brought before Parliament by Hugh Chamberlain 
 in 1695. 
 
 1 Lombard Street, Works, V., 64. 
 
 2 Cunningham, II., 396. 
 
FIRST CENTURY OF THE BANK OF ENGLAND. 8$ 
 
 Chamberlain's scheme was to issue notes upon landed 
 property to one hundred times the annual rental, lend the 
 notes to the owner of the land, and in some unexplained 
 way furnish money to the government at the same time. 
 The absolute absurdity of calculating the money value of a 
 piece of real estate at one hundred times the rental, when 
 the fee simple was worth only twenty times the rental, or 
 one-fifth as much, was demonstrated over and over again, 
 but the opponents of the Land Bank were answered that 
 they were " usurers," and the enemies of the Bank of Eng- 
 land were ready to catch at any scheme which promised to 
 promote their projects. Notwithstanding its folly the scheme 
 was authorized by law and received the royal assent on April 
 27, 1^96 (7 and 8 William III., c. 31). The Land Bank pro- 
 posed to advance to the government ,2,564,000, on which 
 interest was to be paid at the rate of seven per cent, annu- 
 ally, secured by a special tax on salt. The King was au- 
 thorized to appoint a body of commissioners to receive 
 subscriptions, half of which were required to be subscribed 
 before August i, 1696, and the whole before January i, 1697. 
 Subscriptions did not materialize, however, with such rapidity 
 as expressions of sympathy for the enterprise. The Lords 
 of the Treasury subscribed ^5000 on behalf of the King, 
 but the other subscriptions never exceeded ^2100, and it is 
 recorded about three years later that Dr. Chamberlain, " sole 
 contriver and manager of the Land Bank, is retired to 
 Holland, on suspicion of debt." ' 
 
 The immediate effect of the new legislation was to depress 
 the price of bank shares, which fell from 107 on January 3ist, 
 to 83 on February I4th. 2 Capital was not so abundant then 
 as now and the mere offer of a new public stock was sufficient 
 to divert investment from the old and depress its value. It 
 was argued even by the friends of the bank that it must be 
 the sole institution of its kind, like the banks of Venice, 
 Amsterdam, and Hamburg, in order to retain strength and 
 usefulness. The experience that the stocks of an existing 
 
 1 Rogers, 56. 
 
 2 Rogers, 50. 
 
86 HISTORY OF MODERN BANKS OF ISSUE. 
 
 company declined under the influence of competition was 
 illustrated in a striking manner by the history of the East 
 India Company, whose stock stood at 158 in the beginning 
 of 1692, but sank to 38 after Montague brought forward his 
 plan for the new or English East India Company. The 
 close calculations which are now made regarding the earn- 
 ing capacity and value of stocks were little understood at 
 that time and the unreasonable declines as well as extrava- 
 gant advances which occurred are illustrated a little later by 
 the history of the Mississippi scheme in France and the 
 South Sea Bubble. 
 
 The bank had real financial difficulties to cope with as 
 well as thpse arising from political distrust and competition. 
 The recoinage which was ordered by the Act of 7 William 
 III., ch. i, to take full effect on February i, 1697, found 
 the bank with a large quantity of clipped coin on hand for 
 which they were bound to pay in new pieces of full weight. 
 The new coinage was progressing too slowly to meet de- 
 mands, the smallest denomination of bank-notes was ^20, 
 and the result was a run upon the bank for cash during the 
 week beginning May 4, 1696. The goldsmiths were charged 
 with gathering together ,30,000 in notes for the purpose of 
 breaking the bank. The directors, knowing the purpose of 
 the demand, refused to redeem these notes, but voted to con- 
 tinue their payments to their ordinary customers. Sir John 
 Houblon,,who was Lord Mayor as well as Governor of the 
 bank, succeeded in reassuring the applicants for cash for a 
 time, and the proprietors of the bank agreed to put off their 
 dividend. The government failed, however, to make an ex- 
 pected payment of ,80,000 and the bank was compelled to 
 accept an order of the Lords of the Treasury on July 13, 
 1696, that no public notary should enter a protest upon any 
 bill of the Bank of England for fourteen days. As a protest 
 could only be effective at that time when thus entered, the 
 effect of the order was a practical suspension of specie pay- 
 ments, which lasted until the autumn of 1697. 
 
 It is not surprising that the bank was unable to cope with 
 its difficulties and that many impracticable and speculative 
 
FIRST CENTURY OF THE BANK OF ENGLAND. 8/ 
 
 schemes were set on foot, for the time was essentially a period 
 of transition. The industrial and commercial world had 
 barely set foot upon the threshold of the wonderful develop- 
 ment of the eighteenth and ninteenth centuries. Great 
 Britain until the time of Elizabeth had been only a .second 
 or third rate power in Europe, overshadowed by the great 
 Kingdoms of France and Spain, by the ancient prestige of 
 the German Emperor, and by the power of the Pope. Her 
 influence was raised by the defeat of the Spanish Armada, 
 but the population of England and Wales at the Revolution 
 of 1688 was only five and a half millions, and the supremacy 
 in the money markets and trade of the world still belonged 
 to the bankers and merchants of Holland and Italy. The 
 use of bank-notes, except as mere certificates against which 
 coin and bullion was held to the full amount, had begun only 
 thirty years before the Revolution, and the proper manage- 
 ment of a banking currency was almost purely a problem of 
 abstract theory rather than of practical experience. If mer- 
 chant princes and the kings of finance stood upon the threshold 
 of an unknown world, the mass of the community but dimly 
 viewed it from afar. They were easily deluded by extrava- 
 gant hopes and easily misled by the fairy tales of the splendid 
 riches and possibilities of the Western Continent. Least of 
 all could the general public be expected to grasp instantly 
 the fact, which is not accepted by great masses of people 
 to-day, that a paper currency, in order to have a steady 
 purchasing power, must be redeemable on demand in coin. 
 As Mr. Cunningham acutely says, regarding the run upon 
 the Bank of England in 1696 : 
 
 This was a principle which men did not find it easy to recognize. 
 They saw that the man who had wealth in any shape had credit; 
 but they did not apparently understand that bills can only be cir- 
 culated, when there is a certainty that they can be met on presenta- 
 tion, and that wealth, in forms which cannot be readily realized, is 
 not a satisfactory basis for a credit circulation. 1 
 
 The suspension of specie payments was naturally followed 
 by a depreciation in the bank-notes. The discount on July 
 1 Growth of English Industry and Commerce, II., 397. 
 
88 HISTORY OF MODERN BANKS OF ISSUE. 
 
 28, 1696, was ten per cent, and October loth, twenty per cent. 
 The Bullion Report, discussing this subject in 1810, declared 
 that ' ' the quantity of the notes became excessive, their 
 relative value was depreciated, and they fell to a discount of 
 seventeen per cent." This opinion, that the note issues 
 were excessive, is supported also by the high authority of 
 Professor Rogers, 1 but is disproved by Professor MacLeod, 
 in so far as excess of issues is to be interpreted as implying a 
 larger supply of money than could be absorbed by the demands 
 of commerce. That the issues of the bank were excessive 
 in proportion to its coin reserve is hardly a subject for dis- 
 pute, in view of the account submitted to the House of 
 Commons on December 4, 1696, showing the amount due on 
 notes for running cash to be ,764,196, and the actual cash 
 held ,35,664, in addition to .9,636 in goldsmiths' notes. 
 That the issues were excessive in this sense is proved by the 
 suspension of specie payments, but that they were excessive 
 in the sense implied by the Bullion Report is shown to- 
 be untrue by the state of exchange on Hamburg, which 
 promptly became favorable to England upon the reform of 
 the coinage and while bank-notes were still at a discount. 
 The test whether issues were in excess of the necessities of 
 trade was the state of the foreign exchanges, which were at 
 par in coin, and the depreciation in the bank-notes was 
 plainly due to the fact that they had ceased to be redeem- 
 able in coin on demand. 3 
 
 , The collapse of the Land Bank and the necessity for new 
 government loans led to the legislation of February 3, 1697, 
 to increase the capital of the Bank of England and give it 
 wider privileges. The charter was renewed until the expi- 
 ration of twelve months notice after August i, 1710, and the 
 bank was authorized to issue notes to the amount of the sub- 
 scriptions for the new loan, provided the notes were made 
 payable to bearer on demand. It was declared that in 
 case of default in redemption, the notes might be paid at the 
 
 1 First Nine Years of the Bank of England, 88. 
 
 2 McLeod, Theory and Practice of Banking, I., 479-484. 
 
FIRST CENTURY OF THE BA&K OF ENGLAND. 89 
 
 Exchequer out of the annuity due the bank, and a trace of 
 the theory of the legislation of 1844 appears in the provision 
 that all notes above the sum of ,1,200,000 were to bear a 
 distinguishing mark. The new subscriptions for the capital 
 amounted to ,1,001,171; and ^200,000 in bank-notes and 
 ,800,000 iii Exchequer tallies, which were both below par, 
 were taken out of circulation. The notes previously issued 
 had borne interest, and now rose above par, while the bank 
 was able to issue non-interest bearing notes which circulated 
 at par. The subscriptions to the additional stock in 1697 
 seem to have been made by the original shareholders and 
 were repaid to them between 1697 anc ^ r 77 from the profits 
 of the bank. 
 
 The government was again in serious need of money when 
 the charter was renewed in 1708 until August i, 1732, and 
 the bank was authorized to double its capital of ,2,201,171, 
 and to circulate ,2,500,000 in Exchequer bills. The next 
 extension of the charter was made in 1713 (Statute I., c. n) 
 and continued the bank until twelve months notice to be 
 given after August i, 1742. The subscription lists for the 
 new stock were opened on February 22, 1709, and the whole 
 sum was subscribed before one o'clock. The bank under 
 this arrangement advanced ,400,000 to the government 
 without interest and surrendered ,1,500,000 in Exchequer 
 bills to be cancelled, upon condition of receiving an annuity 
 of ,106,501. The principal of both these items was added 
 to the permanent debt, which afterwards became the basis 
 of the note circulation of the bank. Calls for additional 
 capital were made upon the stockholders to the amount of 
 ,656,204 in 1709 and ,501,448 in 1710. Several of the 
 debts of the government to the bank were consolidated in 
 1716 and reduced from six to five per cent., and ,2,000,000 
 in Exchequer bills were cancelled in 1718 and added to the 
 permanent debt due the bank by the government. The 
 settlement of the affairs of the South Sea Company in 1721 
 resulted in the purchase of ,200,000 in annuities by the 
 bank at twenty years' purchase, making a new addition to 
 the permanent debt of ,4,000,000. These loans increased 
 
90 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the permanent debt to 9,375,027, exclusive of various ad- 
 vances of a different character which had been repaid. 
 
 The South Sea Company was essentially a Tory institution 
 and they proposed as early as 1717 to increase their capital 
 from "10,000,000 to "12,000,000 for the purpose of wiping 
 out the debt due the Bank of England and several minor 
 obligations. The bank made counter propositions, but the 
 real contest occurred in 1719 and 1720 over the proposition 
 of the South Sea directors to assume the entire national debt. 
 It was estimated at 30,981,712 and was to be consolidated 
 into one fund, to be added to the capital of the company at 
 five per cent, interest annually. The company proposed to 
 pay a bonus of ,3,500,000 to the government in four in- 
 stalments, beginning in 1721. The bank met this remark- 
 able proposition by an offer of its own to assume the entire 
 debt on terms which were calculated to be about ,2,000,000 
 more advantageous than those of their rivals. The South 
 Sea Company obtained three days to amend their offer and 
 increased the bonus to ,7,567,500. The bank rejoined with 
 another offer of ,1,700 in bank stock for every annuity of 
 ,100 for ninety-six and ninety-nine ) T ears and the reduction 
 of the interest on the consolidated debt after June 24, 1727, 
 to four per cent. 
 
 The South Sea bill passed the House of Commons April 2, 
 1720, by a vote of 172 to 55 and passed the Lords by a vote 
 of 83 to I7. 1 The South Sea stock was forced upward to a 
 preposterous figure under the influence of the same fever of 
 speculation which raged at about the same time in France 
 over the Mississippi scheme, but capital was soon sunk in 
 this and other unproductive enterprises and the reaction 
 wrecked the credit of the company and came near wrecking 
 that of the bank. The directors of the South Sea Company 
 appealed to the bank for help, goldsmiths and private bank- 
 ers began to fail, and a run upon the bank itself began, which 
 was only staved off by payments in light sixpences and 
 shillings and by engaging men to fill up the line, draw 
 
 MacLeod, Theory and Practice of Banking, I., 496-99. 
 
FIRST CENTURY OF THE BANK OF ENGLAND. 91 
 
 money and re-deposit it at another window. Fortunately 
 the festival of Michaelmas, during which the bank was 
 usually closed, intervened and when it was over the public 
 alarm had subsided. 
 
 The bank had weathered severe storms, had seen two 
 powerful rivals crushed and its own monopoly confirmed, and 
 justly felt that it had proved its capacity to endure. Thirty- 
 eight years after its foundation, on Thursday, August 3, 
 1732, the corner-stone of a new building was laid in the 
 presence of the Governor and other officials of the bank in 
 Threadneedle Street. The directors moved from their old 
 quarters in Grocers' Hall on June 5, 1734, and from that day 
 4 'The Old Lady of Threadneedle Street" occupied the 
 massive building which is still consecrated to her use. 1 A 
 statue of King William, under whom the first charter was 
 granted, stands in the hall, with a Latin inscription which 
 accords to him the honor of official founder of the bank. 
 
 When the time approached for a renewal of the charter in 
 1742, the bank advanced ,1,600,000 to the government 
 without interest by a call upon their proprietors for ,840,- 
 004, which raised their capital stock to ,9,800,000. The 
 advance without interest was substantially part of a pro- 
 cess of conversion by which the interest on the original 
 advance to the government at the foundation of the bank 
 and on ,400,000 advanced in 1708 was reduced from six to 
 three per cent. The bank simply continued to receive the 
 old interest payment, but doubled the principal of the loan. 
 The charter was extended at this time until twelve months 
 notice after August i, 1764. Another adjustment with the 
 government in 1746 led to the cancellation of ,986,000 of 
 Exchequer bills, upon which the bank was to receive an 
 
 1 The buildings have been much enlarged since and now cover the 
 whole area between Threadneedle Street, Princes Street, Lothbury 
 and Bartholomew Lane, a space of more than three acres. The 
 bank originally employed about fifty clerks, but the number is now 
 about fifteen hundred and the pay-roll amounts to about ^"300,000, 
 exclusive of ^50,000 paid annually in pensions. H. J. W. Dam, 
 The Bank of England, McClure's Magazine, IV. 460. 
 
92 HISTORY OF MODERN BANKS OF ISSUE. 
 
 annuity of four per cent. , and a call upon the proprietors for 
 ten per cent., which made the bank capital .10,780,000. 
 The rate of interest on portions of the debt amounting to 
 .8,486,000, which had not yet been reduced, was changed 
 to three and a half per cent, in 1749 for the seven years 
 beginning with Christmas, 1750, and thereafter to three per 
 cent. ' The charter was renewed in 1764 until twelve months 
 notice after August i, 1786, upon the conditions of a direct 
 payment to the Exchequer of .110,000 and a loan for two 
 years on Exchequer bills of .1 ,000,000 at three per cent. The 
 next renewal, in 1781, carried the charter along until twelve 
 months notice after August i, 1812, and provided for a loan 
 for three years of ,2,000,000 at three per cent. A call upon 
 the proprietors for ,862,400 in 1782 advanced the capital of 
 the bank to ,11,642,400, at which it remained until 1816, 
 when it was increased to .14,553,000 by adding twenty-five 
 per cent, to the stock of each proprietor from the reserved 
 profits or " rest." 
 
 The Bank of England at its institution enjoyed no monop- 
 oly of note issues, so that Chamberlain's plan for a Land 
 Bank was not a violation of the privileges of the older estab- 
 lishment. The managers of the Bank of England endeavored 
 to protect themselves in the legislation of 1697 an< ^ secured 
 a provision that during the continuance of the corporation 
 no other institution in the nature of a bank should be erected 
 or countenanced within the Kingdom by act of Parliament 
 by bodies exceeding six persons. This provision was calcu- 
 lated to prevent the formation of strong joint stock banks,, 
 and dangerous rivalry was not feared from private firms of 
 six persons with unlimited liability. An effort to narrow 
 the limits still more closely was made in the Act of 1709 by 
 making it unlawful " for any body politic or corporate what- 
 soever, created or to be created (other than the said Gover- 
 nor and Company of the Bank of England), or for any other 
 
 1 The operation of 1752, by which the balance of annuities granted 
 in 1721 were consolidated with other three per cent, stocks, gave rise 
 to the familiar designation, " Three per cent, consols," the latter word 
 being a contraction of "consolidated. "Gilbart, I, 43. 
 
FIRST CENTURY OF THE BANK OF ENGLAND. 93 
 
 persons whatsoever, united or to be united in covenants or 
 partnership, exceeding the number of six persons, in that 
 part of Great Britain called England, to borrow, owe, or 
 take up any sum or sums of money on their bills or notes, 
 payable at demand, or at any less time than six months from 
 the borrowing thereof." This clause was repeated in 1716, 
 when the usury laws were suspended as to the Bank of 
 England and the directors were authorized, "at their own 
 good liking" to borrow or take up money at any rate of 
 interest they pleased. The conception of banking at this 
 time involved necessarily the privilege of issuing circulating 
 notes, and it was determined to close all loop-holes in this 
 matter upon the renewal of the charter in 1742. It was 
 accordingly provided (15 George II., c. 13, s. 5) : 
 
 And to prevent any doubts that may arise concerning the privi- 
 lege or power given by former Acts of Parliament, to the said Governor 
 and Company of exclusive banking, and also in regard to the erecting 
 of any other bank or banks by Parliament, or restraining other per- 
 sons from banking during the continuance of the said privilege 
 granted to the Governor and Company of the Bank of England, as 
 before recited, it is hereby further enacted and declared, by the 
 authority aforesaid, that it is the true intent and meaning of the Act 
 that no other bank shall be erected, established or allowed by Parlia- 
 ment, and that it shall not be lawful for any body politic or corporate 
 whatsoever, erected or to be erected, or for any other persons what- 
 soever, united or to be united, in covenants or partnership, exceeding 
 the number of six persons, in that part of Great Britain called England, 
 to borrow, owe, or take up any sum or sums of money, on their bills 
 or notes, payable at demand, or at any less time than six months 
 from the borrowing thereof during the continuance of such said privi- 
 lege of the said Governor and Company, who are hereby declared 
 to be and remain a corporation with the privilege of exclusive bank- 
 ing, as before recited. 
 
 This limitation upon the power of other corporations did 
 not prevent the issue of promissory notes and checks ; nor 
 did it prevent the issue of bank-notes by individuals and 
 firms of not exceeding six persons. The opportunity which 
 this afforded for the creation of joint stock banks of dis- 
 count and deposit was not understood and availed of till 
 
94 HISTORY OF MODERN BANKS OF ISSUE. 
 
 much later, but the opportunity for the issue of circulating 
 notes by individuals and small firms was availed of. The 
 notes of the Bank of Kngland had little circulation outside 
 of London and the rapid development of canal building and 
 other enterprises during the last half of the eighteenth cen- 
 tury created a demand for a larger credit currency. Professor 
 MacLeod declares, in speaking of the principle of monopoly 
 embodied in the charter of 1697, that ''The frightful con- 
 vulsions and collapses of public credit which have taken 
 place during the last three-quarters of a century are chiefly 
 due to this great wrong." 1 The effect was not felt until 
 nearly a century later, when England began to take her 
 place at the head of the commercial nations, but after the 
 crisis of 1782 " multitudes of miserable shopkeepers in the 
 country, grocers, tailors, drapers, started up like mushrooms 
 and turned bankers, and issued their notes, inundating the 
 country with their miserable rags." Burke said that when 
 he came to Kngland in 1750 there were not twelve bankers 
 out of London ; in 1793 there were nearly four hundred. 
 The Bank of Kngland began to issue notes for ^10 and ^"15 
 as early as 1759, but the private bankers issued them for 
 smaller amounts, and in 1775 an act was passed to prohibit 
 notes of less than twenty shillings, and two years afterwards 
 the limit was raised to ^5. 
 
 The prohibition upon note issues was probably one of the 
 causes which contributed to the use of checks. The notes 
 issued by private bankers were at first written on paper for 
 any odd sum, like promissory notes. The practice was in- 
 troduced by Child and Co., in 1729, of having the notes 
 partly printed and partly written, like a modern check. 
 These notes continued to be issued till about 1793, when the 
 existing system was introduced, of giving the depositor a 
 credit for the full amount of his deposit and authorizing him 
 to draw checks at his convenience against it. 2 The issue of 
 
 1 Theory and Practice of Banking, I., 479. 
 
 2 MacLeod, Theory and Practice of Banking, I., 331, 515. M. 
 Juglar (343) says that the use of checks replaced the use of bills in 
 1772. 
 
FIRST CENTURY OF THE BANK OF ENGLAND. 95 
 
 notes by private bankers was not forbidden until the Bank 
 Act of 1844, but their use gradually diminished as the 
 greater convenience of checks came to be understood. The 
 Act of 1742 would probably have prohibited joint stock banks 
 of discount and deposit, if it had been supposed that they 
 could be carried on without the issue of notes, but note 
 issues were then regarded as a necessary part of successful 
 banking. 
 
 The Bank of England had to face serious financial crises 
 in 1772, 1782, and 1792. Their policy in 1772 and 1782 was 
 to support credit and to make advances to solvent merchants, 
 with the result that the foreign exchanges turned in their 
 favor and general bankruptcy was avoided. Mr. Bosanquet 
 was Governor of the bank and he adopted the policy of con- 
 tracting issues while the drain of specie was going on and 
 expanding them when the tide turned. The crisis of 1793 
 was precipitated by the breaking out of war with France, 
 and was quickly followed by the stoppage of about one hun- 
 dred country banks and the serious embarrassment of many 
 others. The directors of the bank became alarmed, refused 
 credit to strong houses and created a great scarcity in the 
 circulating medium by the discredit cast on the notes of the 
 country banks. The policy of contracting issues was not 
 justified by the state of the exchanges, for gold and silver 
 were pouring into England from France in consequence of 
 the issue of the assignats, which rapidly drove coin out of 
 circulation, and exchange was favorable with both Amster- 
 dam and Hamburg. The absolute refusal of the bank to 
 lend its support to credit compelled the issue of Exchequer 
 bills by the government, which quickly improved the situa- 
 tion. 
 
 The long suspension of specie payments during the wars 
 with France was brought about by the reckless and un- 
 scrupulous course of Mr. Pitt, who dictated the entire 
 policy of the government. The relations of the bank with 
 the government had grown closer from year to year since 
 1718, when subscriptions to public loans were first received 
 there, as affording greater convenience than the Treasury- 
 
g6 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The bank soon after began to make advances of money in 
 anticipation of the land and malt taxes, and upon Exchequer 
 bills and other securities. 1 They did this in the face of the 
 provision of the charter of 1694, that if they should advance 
 any money to the Crown whatever, except by the special 
 permission of Parliament, they should forfeit treble the value 
 of all such advances. The usual limit of these temporary 
 advances was ,20,000 or ,30,000 and it became a subject 
 of complaint if the amount was increased to ,50,000. The 
 limit was stretched in the American war to , 150,000 and 
 Mr. Bosanquet in 1793 became uneasy as to the legality of 
 such advances without authority of Parliament. The direc- 
 tors, therefore, applied for an act of indemnity for past 
 advances and permission to make them in the future to a 
 limited amount, not to exceed .100,000. Mr. Pitt readily 
 agreed to bring in a bill for this purpose, but he quietly 
 dropped the limitation and passed the measure in this form 
 through Parliament. He was now armed with absolute 
 power to draw upon the bank, unless the directors should 
 refuse to honor his bills, and he was neither conservative nor 
 scrupulous in the use of the power. 
 
 Mr. Pitt availed himself of the new law to scatter gold 
 broadcast over Kurope to promote the combination against 
 France, with the result of draining the country of specie and 
 creating unfavorable foreign exchanges. He drew heavily 
 upon the bank and drove them into such close quarters that 
 they passed a resolution on January 15, 1795, that the Chan- 
 cellor of the Exchequer must make his financial arrange- 
 ments for the year without expecting further assistance from 
 them than advances on Treasury bills not exceeding ,500,- 
 ooo at any one time. Mr. Pitt promised to reduce the exist- 
 ing advances to that amount by payments out of the first 
 loan which was in process of subscription, but he paid little 
 attention to such promises. The bank was compelled by the 
 demands of the government to expand its issues in the 
 face of unfavorable exchanges until in February, 1795, they 
 
 1 Gilbart, I., 36. 
 
FIKST CENT 'UR Y OF THE BANK OF ENGLAND. 97 
 
 reached ^14,000,000. The drain of gold set in strongly in 
 September, the price of gold in bank-notes rose to ^4 2s. per 
 ounce (about five shillings above parity, which was ^3 ijs. 
 io^^/.), and the directors of the bank were compelled to 
 sharply restrict their discounts. They gave -notice on De- 
 cember 31, 1795, that if the applications for discounts on any 
 day exceeded the sum to be advanced, & pro rata proportion 
 of each applicant's bills should be returned, "without regard 
 to the respectability of the party sending in the bills or the 
 solidity of the bills themselves." Matters went from bad 
 to worse until February u, 1796, when the court of directors 
 adopted the resolution : 
 
 That it is the opinion of the Court, founded upon its experience of 
 the effects of the late Imperial loan, that if any further loan or ad- 
 vance of money to the Emperor, or other foreign state, should in the 
 present state of affairs, take place, it will in all probability prove fatal 
 to the Bank of England. 
 
 The Court of Directors do therefore most earnestly deprecate the 
 adoption of any such measure, and they solemnly protest against any 
 responsibility for the calamitous consequences that may follow there- 
 upon. 
 
 Mr. Pitt replied that after the repeated promises he had 
 made he saw no occasion for the resolutions and should re- 
 gard them as having been adopted in a moment of needless 
 alarm. This did not prevent him from continuing secret re- 
 mittances to the Continent, but suspension of specie pay- 
 ments was staved off until the next year by the restriction 
 of accommodation to merchants and the favorable crops of 
 1796. The advances upon Treasury bills amounted on June 
 14, 1796, to /i, 232, 649 and Mr. Pitt demanded ^"800,000 
 more in July and a like sum in August. The bank re- 
 fused the second demand but granted a request by Mr. Pitt 
 in November for ,2, 750,000, on condition that the advances 
 on Treasury bills should be paid out of this loan. "Mr. 
 Pitt," in the terse language of Professor MacLeod, "took 
 the money but never paid off the bills." 2 
 
 1 Gilbart, I., 45. 
 
 * Theory and Practice of Banking, I., 524. 
 
98 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The landing of a French frigate in one of the Welsh har- 
 bors and orders from the government to the farmers to drive 
 their stock into the interior, caused a run upon the Bank of 
 England which finally brought the long dreaded catastrophe 
 of suspension of payment in coin. The bank had been mak- 
 ing frantic efforts for several weeks to contract -their issues and 
 had reduced them from ^10,550,830 on January 21, 1797, to 
 ,8,640,250 on February 25th, but their cash was reduced on 
 the latter date to 1,27 2,000. The cabinet met the next day, 
 which was Sunday, and issued an Order in Council, ' ' That 
 the directors of the Bank of England should forbear issuing 
 any cash in payment until the sense of Parliament can be 
 taken." ' A meeting of merchants was held on Monday, 
 with the Lord Mayor in the chair, which adopted a resolu- 
 tion similar to that adopted on the successes of the Pretender 
 in Scotland in 1745, that " we will not refuse to receive bank- 
 notes in payment of any sum of money to be paid us, and 
 we will use our utmost endeavors to make all our payments 
 in the same manner." A select committee was appointed 
 by Parliament to inquire into the bank's affairs, and found 
 them in a prosperous condition except for the scarcity of coin 
 and bullion. Their assets were ,17,597,280, representing a 
 surplus of ,3,826,890, exclusive of the government debt of 
 ^"11,686,800, which paid three per cent. Suspension of pay- 
 ments was enacted until June 24th and the bank was au- 
 thorized to issue notes under ,5. The bank-notes were 
 made legal tender and were to be received at par in the 
 payment of taxes. The bank was authorized to receive 
 special deposits in coin in exchange for notes and to repay 
 three-fourths of the amount in coin if demanded. The re- 
 striction was prolonged on June 22d to one month after the 
 meeting of the next session of Parliament and was again 
 prolonged on November 3Oth, at the next session, until six 
 months after the conclusion of a definitive treaty of peace. 
 
 The policy of the bank in restricting commercial discounts, 
 though forced upon it in a measure by the demands of the 
 
 1 Levi, 74. 
 
FIRST CENTURY OF THE BANK OF ENGLAND. 99 
 
 government, was the cause of serious complaint in the mer- 
 cantile community and led to much discussion of other 
 methods of meeting the demand for credit. The bank re- 
 fused to establish branches in the country and their charter 
 prohibited any other strong company from doing so. The 
 very policy of restricting their issues in the autumn of 1796, 
 which the directors regarded as a measure of extreme pre- 
 caution, intensified the demand for gold by creating a scarcity 
 of currency which led to the withdrawal of gold by deposi- 
 tors. The irritation among the merchants was such that a 
 meeting was held in L,ondon Tavern on April 2, 1796, which 
 appointed a committee to devise a plan to restore the circulat- 
 ing medium, if practicable without infringing the monopoly 
 of the bank. Mr. Walter Boyd, an eminent merchant, drew 
 up a report on behalf of the committee, authorizing a board 
 of twenty-five members to be named by Parliament to issue 
 circulating promissory notes upon deposits of coin, bank- 
 bills, and commercial paper. l The committee were persuaded 
 by the Chancellor of the Exchequer to delay action and noth- 
 ing ever came of their plan, but it was the opinion of Mr. 
 Boyd that the public stocks suffered as well as commercial 
 paper by the scarcity of currency and the necessity of forced 
 sales of securities to obtain it. Sir William Pulteney, during 
 the debate on the bill authorizing the suspension of cash 
 payments, asked leave to bring in a bill for another bank if 
 the Bank of England did not resume on June 24, 1797, as 
 was then proposed. The proposition was defeated at the 
 time but gained such strength within the next two years 
 that public meetings were held and pamphlets written in its 
 support. The bank directors became alarmed, and as gov- 
 ernment was still pressing for money, they offered .3,000,- 
 ooo without interest for six years as the price of a renewal 
 of the charter. Mr. Pitt accepted the terms and passed a 
 bill in 1800 extending the monopoly of the bank for twenty- 
 one years after 1812, or until 1833. 
 
 1 MacLeod, Theory and Practice of Banking, I., 523. 
 
CHAPTER V. 
 
 SECOND CENTURY OF THE BANK OF ENGLAND. 
 
 The Continued Suspension of Specie Payments The Bullion Report 
 and the Act of 1819 The Contest against the Monopoly of the 
 Bank of England and the Rise of the Joint Stock Banks The 
 Bank Act of 1844 Theory of its Operation and its Failure to 
 Carry Out the Theory The Recent Accumulation of Gold in 
 the Bank. 
 
 THE great events of the second century of the history of 
 the Bank of England have been the resumption of 
 cash payments, the restriction of circulation by the 
 Bank Act of 1844, and the recent accumulation of gold in 
 the custody of the bank. The Act of 1844 has been the 
 turning point of almost infinite discussion of the theory and 
 practice of banking in England, but, whatever its merits or 
 defects, it has not destroyed the character of the Bank of 
 England as the guardian of the cash reserve of the country, 
 nor prevented London from becoming the centre of the 
 exchanges of the world. Freedom from danger of invasion, 
 the development of banking and credit beyond any point 
 attained elsewhere, a market free to the world's commerce, 
 and a single fixed standard of value have raised England to 
 supremacy among commercial countries and linked the his- 
 tory of her financial progress in some degree with that of all 
 other nations. 
 
 The British nation was far from her present position at 
 the close of the Napoleonic wars. Political and military 
 triumphs had come to her, but they had been at the expense 
 of the crippling of her merchant marine, the increase of her 
 
SECOND CENTURY OF THE BANKOFENlAND. oi 
 
 debt to $4,000,000,000, and the suspension of payments in 
 specie. The Bank of England by prudent management 
 kept its notes for several years at par with coin and the 
 depreciation was at first so gradual as hardly to be noticed. 
 One of the elements of confusion in the discussion of the 
 effect of the restriction of specie payments was the fact that 
 bank-notes became the sole medium of ordinary transactions. 
 The issue of ^i notes by the bank drove the gold from cir- 
 culation even before the depreciation of the paper and made 
 metal only a subsidiary money. If an effort had been made 
 to keep the circulation saturated with coin by continuing 
 the prohibition upon notes below ^5, the depreciation of 
 the paper would have been quickly felt by the disappearance 
 of gold and accurately measured by the premium upon gold. 
 The fact that the paper was maintained at a substantial 
 parity with gold for nearly ten years while gold disappeared 
 from circulation, misled those who did not look to the simple 
 and indisputable facts regarding the foreign exchanges which 
 were stated in the celebrated Bullion Report of 1810. Silver 
 had been rapidly disappearing from circulation for some 
 years, because the English mint ratio gave it a less value 
 in relation to gold than the market price. The country 
 bankers were authorized by the restriction laws to redeem 
 their notes in Bank of England notes in exactly the same 
 manner as they had formerly done in specie, so that the ex- 
 pansion and contraction of the country note issues was in a 
 measure placed in the hands of the central bank as well as 
 the control of its own circulation. 
 
 Bullion rapidly accumulated in the bank after the suspension 
 of specie payments and the bank announced their willingness 
 on January 3, 1799, to redeem sums under ^5 and to pay in 
 full after February ist, notes for i and 2, dated prior to 
 July i, I798. 1 The bank then held ,7,000,000 in coin and 
 bullion and had increased its note issues to ,16,000,000. The 
 government were not willing to take the risk of resumption 
 and continued the restriction even after the peace of Amiens, 
 
 Gilbart I., 49. 
 
"l(52 * * *tflSTOR Y 'OF MO'DERN BANKS OF ISSUE. 
 
 when the bank again declared that it was well supplied with 
 cash and was ready to resume. A bill was brought in on 
 April 9, 1802, only thirteen days after the signature of the 
 definitive treaty, to continue the restriction until March i, 
 1803, and the restriction was continued again on February 28, 
 1803, until six weeks after the beginning of the next session 
 of Parliament. War broke out before this date arrived and 
 the restriction was continued until six months after the 
 ratification of a definitive treaty of peace. No such treaty 
 was ratified until after the abdication of Napoleon in the 
 spring of 1814, when the problem of restriction was again 
 taken up. 
 
 The price of gold began to rise in September, 1799, and 
 in June, 1800, had reached ^4 55. per ounce, which was about 
 seven shillings above the mint price. 1 Kxchange with Ham- 
 burg fell and the unfavorable state of the exchanges was 
 made an excuse for postponing the resumption of specie 
 payments after the peace of Amiens. The fact that the un- 
 favorable exchange was due to the depreciation of the cur- 
 rency was denied or evaded by the Parliamentary leaders 
 and Mr. Addington, the Chancellor of the Exchequer, urged 
 that the restriction be continued because, ' ' for several months 
 past, there has been a trade carried on for purchase of guineas 
 with a view to exportation." 
 
 1 The mint price of gold was ^3 175. io}4d., which was four and a 
 half pence above the market price, in order to cover the cost of coin- 
 age and the loss of interest while the bullion was detained in the 
 mint. The value of gold coins was fixed as they exist to-day in 1717, 
 when it became necessary, upon the recommendation of Sir Isaac 
 Newton, to reduce the coining value of the gold in the guinea to arrest 
 the exportation of silver. The reduction made the ratio of gold to 
 silver about fifteen and a quarter to one, but as the ratio in France 
 and Holland was about fourteen and a half, it continued to be profit- 
 able to export silver from England to those countries and to import 
 gold into England. Silver disappeared from circulation, gold became 
 the sole metallic medium of exchange, because it was the cheaper 
 metal at the legal ratio, and the law of 1816, which gave England the 
 gold standard, simply recognized in law what had been the fact prior 
 to the suspension of cash payments. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 103 
 
 An object lesson in the effects of a depreciated currency 
 was afforded the English people by the condition of affairs 
 in Ireland, which had a currency of her own. The Irish 
 shilling contained thirteen pence, and as the pound, both 
 English and Irish, contained two hundred and forty pence, 
 English money was more valuable than Irish in the propor- 
 tion of ^100 to ;io8 6s. $>d. The par of exchange between 
 England and Ireland was therefore called eight and one third. 
 The Bank of Ireland was directed to suspend specie pay- 
 ments at the same time as the Bank of England, and exchange 
 was maintained at a point favorable to Ireland until the 
 autumn after the passage of the restriction act in England. 
 Exchange then began to fall, which made it unfavorable to 
 Ireland, until in January, 1804, it had reached a depression 
 of;i8 in the hundred. The bank had been increasing its 
 issues until they were more than four times the amount at 
 the time of the restriction. A committee of Parliament was 
 appointed in 1804 to consider the subject and they found 
 that the exchanges were nominally unfavorable because of 
 the depreciation of the Irish paper. The directors of the 
 Bank of Ireland who appeared before the committee would 
 not admit that this was the case and maintained that the 
 large issues of paper money were to supply the place of 
 gold which had been taken out of the country to pay remit- 
 tances. One of them advanced the same extraordinary 
 doctrine advanced a few years later in England, that "the 
 mere buying of gold at an advanced price beyond that of the 
 mint, is the effect, and not the cause of the exchange, and, 
 therefore, no proof of the depreciation of the paper itself." 
 
 The committee refused to be misled by this sort of argu- 
 ment and found that the real exchange, when allowance was 
 made for the depreciation in the paper, was favorable to 
 Ireland. A convincing proof that it was so, if there were no 
 others, was found in the fact that the exchanges between 
 England and Belfast were favorable to Belfast, because pay- 
 ments at Belfast were made in specie, at the very moment 
 that they were unfavorable at Dublin, where paper was the 
 standard. Still further demonstration of the simple mathe- 
 
104 HISTORY OF MODERN BANKS OF ISSUE. 
 
 matical proposition, that the fall in the exchange was 
 measured by the depreciation in the paper money, and not by 
 any cause common to Irish industry or banking, was afforded 
 by the fact that there was a local difference of exchange be- 
 tween Dublin and Belfast, which put specie at a premium of 
 ten or twelve per cent, in Dublin, while it passed at par in 
 Belfast as the only medium of exchange. 1 The committee 
 recommended that the relations between the currencies of 
 the two countries be simplified by making the notes of the 
 Bank of Ireland payable in Bank of England paper and that 
 the Bank of Ireland establish a fund in London for that pur- 
 pose. Little attention seems to have been paid to this report 
 and the recommendation that the currencies be assimilated, 
 which was made by Mr. Parnell in Parliament in 1809, was 
 rejected without a division. 
 
 The depreciation of the Bank of England notes did not 
 advance rapidly until the period of commercial speculation 
 which caused the panic of 1810. The price of gold in bank 
 paper, which had risen to ^4 55. per ounce in 1800, fell back 
 to about ^4, representing a depreciation of two and a half 
 shillings or about three and two-tenths per cent., and re- 
 mained at substantially this figure until 1809. The price of 
 gold rapidly advanced during the following year until the 
 mint price of gold was ^4 us. or a depreciation of 17.4 per 
 cent. Exchange with Hamburg had been falling with the 
 depreciation of the 'currency and on February i, 1810, Mr. 
 Horner moved for several accounts relating to the currency 
 and exchanges. The committee was then appointed whose 
 work has become so famous in the literature of finance as 
 the Bullion Report. The committee, in an endeavor to ascer- 
 tain the true cause of the unfavorable exchanges, examined 
 a large number of witnesses, including directors of the Bank 
 of England, private bankers, business men, and students of 
 finance. The conclusions of the committee, however, were 
 directly adverse to the opinions of the bankers and in accor- 
 dance with those of the most enlightened students of the 
 abstract problems of finance and political economy. 
 
 'MacLeod, Theory and Practice of Banking, II., 14. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 1 05 
 
 The report which the committee presented to the House 
 of Commons took its place at once among the classics of 
 finance and has been one of the guides of sound banking 
 from that time to this. It is a remarkable fact that Mr. 
 Horner was a young man of thirty-two who had never given 
 more than a general attention to financial subjects. He 
 simply listened attentively to the testimony of the best ex- 
 perts who appeared before the committee and with singular 
 clearness of vision grasped the correct principles of regulating 
 a banking currency and discarded the shallow sophistries 
 and ' ' practical rules ' ' which were presented to him by the 
 great bankers of London. ' The Bullion Report is remarkable 
 not only for the clearness and precision with which it lays 
 down the fundamental rules for regulating the volume of a 
 paper currency, but for the discriminating judgment with 
 which it discusses limitations of the then existing theories 
 of prices and currency which only came to be generally 
 accepted by political economists a generation later and have 
 not been accepted by all of them to-day. a 
 
 The undisputed facts upon which the bullion committee 
 based their report are summed up by Professor MacLeod as 
 follows 3 : 
 
 1 M. Juglar remarks that, " There is always something which blinds 
 those the best placed to see, and it is not the persons engaged in 
 affairs who are the best judges of the mechanism they direct or which, 
 rather, sweeps them along." DCS Crises Commerciales, 341. For 
 similar views see Price, Currency and Banking, 3-4 ; Bagehot, Lom- 
 bard Street, Works, V., 112-15. 
 
 2 Mr. Horner himself expressed a modest opinion of the literary 
 merits of the report, but declared that it possessed one great merit, 
 " That it declares in very plain and pointed terms both the true doc- 
 trine, and the existence of a great evil growing out of the neglect of 
 that doctrine." Portions of the report were written by Mr. Hus- 
 kisson and Mr. Thornton, but the inspiring spirit was largely Mr. 
 Homer's. The views set forth were not new and had been so clearly 
 stated by Mr. Ricardo in his pamphlet on "The High Price of 
 Bullion," that some of Mr. Ricardo's friends accused Mr. Horner 
 of borrowing the ideas without proper credit. 
 
 3 Theory and Practice of Banking, II., 29. 
 
106 HISTORY OF MODERN BANKS OF ISSUE. 
 
 1. That the mint price of gold bullion, or the legal stand- 
 ard of the coin was, ^3 175. io)4d. per ounce. 
 
 2. That the market price of gold bullion was then ^4 los. 
 per ounce. 
 
 3. That the foreign exchanges had fallen to an enormous 
 extent : that with Hamburg, nine per cent., that with Paris 
 14 per cent. 
 
 4. That the increase of bank-notes had been very great 
 during the last few years, and was rapidly augmenting. 
 
 5. That specie had disappeared from circulation. 
 
 The report made by the committee was divided into four 
 parts, the first dealing with the causes of the high price of 
 gold ; the second, with the state of the foreign exchanges 
 and the reason why they were adverse to England ; the third, 
 with the conduct of the Bank of England in the regulation 
 of its note issues ; and the fourth, the increase in circulation 
 of the Bank of England and of the country banks and the 
 increase of their discounts. 
 
 The demonstration was easy to intelligent and unprejudiced 
 observers that the high price of gold was the measure of the 
 depreciation of the bank paper. The contention of some of 
 those who declared that bank paper had not depreciated, but 
 that gold had risen in value because of its scarcity, grew out 
 of a muddy confusion of ideas regarding the relations of 
 prices to the two standards of gold and paper. The com- 
 mittee showed that the question of prices had no relation to 
 the difference between the mint price and the market price 
 of gold. The paragraph in which they made this clear is 
 as follows : 
 
 An ounce of standard gold bullion will not fetch more in our 
 market than ^3 175. lo^d., unless ^"3 ijs. ioj4d-, in our actual cur- 
 rency is equivalent to less than an ounce of gold. An increase or 
 diminution in the demand for gold, or what comes to the same thing, 
 a diminution or increase in the general supply of gold, will, no doubt, 
 have a material effect upon the money prices of all other articles. 
 An increased demand for gold, and a consequent scarcity of that 
 article, will make it more valuable in proportion to all other articles ; 
 the same quantity of gold will purchase a greater quantity of any 
 
SECOND CENTURY OF THE BANK OF ENGLAND. IO/ 
 
 other article than it did before ; in other words, the real price of gold, 
 or the quantity of commodities given in exchange for it, will rise, and 
 the money prices of all commodities will fall ; the money price of 
 gold itself will remain unaltered, but the prices of all other commodi- 
 ties will fall. That this is not the present state of things is abun- 
 dantly manifest ; the prices of all commodities have risen and gold 
 appears to have risen in its price only in common with them. 
 
 Another proof that it was not the scarcity of gold, but the 
 depreciation of paper, which increased the market price of 
 gold in paper was the fact ' ' that both at IJamburg and 
 Amsterdam, where the measure of value is not gold as in 
 this country, but silver, an unusual demand for gold would 
 affect its money price, that is, its price in silver ; and that 
 as it does not appear that there has been any considerable rise 
 in the price of gold, as valued in silver, at those places in 
 the last year, the inference is, that there was not any consid- 
 erable increase in the demand for gold." The committee 
 also called attention to the fact that on previous occasions 
 4 ' the excess of the market price of gold above its mint price 
 was found to be owing to the bad state of the currency ; 
 and in both instances, the reformation of the currency effectu- 
 ally lowered the market price of gold to the level of the mint 
 price." By parity of reasoning, the reformation of the ex- 
 isting paper currency would lower the price of gold to the 
 level of the mint price, without regard to the quantity of 
 commodities which either form of currency might purchase. 
 
 The high rate of exchange against England, as expressed 
 in paper currency, was explained by some of the witnesses 
 as being due to a large balance of payment due from Eng- 
 land to other countries, either on account of imports of 
 merchandise or expenditures abroad on account of military 
 supplies and subsidies. The committee, however, pointed 
 out that it had ' ' been long settled and understood as a prin- 
 ciple, that the difference of exchange resulting from the 
 state of trade and payments between two countries is limited 
 by the expense of conveying and insuring the precious 
 metals from one country to the other ; at least, that it 
 cannot for any considerable length of time exceed that limit. 
 
108 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The real difference of exchange, resulting from the state of 
 trade and payments, never can fall lower than the amount 
 of such expense of carriage, including the insurance." If 
 proof were needed of this simple proposition, it was fur- 
 nished by the answers given to the searching questions of 
 the committee by Mr. Greffulhe, regarding the actual rate 
 of exchange in coin. " From these answers of Mr. Greffulhe, 
 it appears, ' ' said the committee, ' ' that when the computed 
 exchange with Hamburg was 29, that is, from 16 to 17 per 
 cent, below par, the real difference of exchange, resulting 
 from the state of trade and balance of payments, was no 
 more than five and a half per cent, against this country." 
 The committee concluded, therefore, that after making the 
 necessary allowances for the balance of trade and payments, 
 there still remained a fall of n per cent, in the exchange with 
 Hamburg " to be explained in some other manner." 
 
 Mr. Harman, one of the directors of the bank, declared 
 before the committee, ' ' I must very materially alter my 
 opinions before I can suppose that the exchanges will be 
 influenced by any modification of our paper currency." The 
 committee furnished him in their report the evidence of 
 the depreciation of the Scotch currency, when the optional 
 clause of payment was inserted after the Seven Years' War ; 
 the depreciation of Irish currency six }^ears before ; and the 
 depreciation of the notes of the Bank of England itself three 
 years after its foundation. The committee then declared : 
 
 Under the former system, when the bank was bound to answer its 
 notes in specie upon demand, the state of the foreign exchanges and 
 the price of gold did most materially influence its conduct in the issue 
 of those notes, though it was not the practice of the directors syste- 
 matically to watch either the one or the other. So long as gold was 
 demandable for their paper, they were speedily apprised of a depres- 
 sion of the exchange, and a rise in the price of gold, by a run upon 
 them for that article. If at any time they incautious!}' exceeded the 
 proper limit of their advances and issues, the paper was quickly 
 brought back to them, by those who were tempted to profit by the 
 market price of gold or by the rate of exchange. In this manner the 
 evil soon cured itself. 
 
 The committee, in taking up the question of excessive 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 109 
 
 issues, made the discriminating admission, "that the mere 
 numerical return of the amount of bank-notes out in circula- 
 tion cannot be considered as at all deciding the question 
 whether such paper is or is not excessive. It is necessary 
 to have recourse to other tests. ' ' The economy of money 
 was referred to which had taken place in late years, by " the 
 increased use of bankers' drafts in the common payments of 
 London ; the contrivance of bringing all such drafts daily to 
 a common receptacle, where they are balanced against each 
 other ; the intermediate agency of bill-brokers ; and several 
 other changes in the practice of London bankers." Not- 
 withstanding this, the committee found an approximate 
 increase between 1808 and 1809 of ^3, 095, 340 in country 
 bank-notes, and about ; 1,500,000 in Bank of England notes. 
 The suspension of cash payments imposed no other expense 
 upon the issuers of this paper than the printing of the notes 
 and some ,100,000 in stamp taxes. The committee, there- 
 fore, asserted their conclusions, ' ' That there is at present 
 an excess in the paper circulation of this country, of which the 
 most unequivocal symptom is the very high price of bullion, 
 and next to that, the low state of the Continental exchanges ; 
 that this excess is to be ascribed to the want of a sufficient 
 check and control in the issues of paper from the Bank of 
 England ; and originally to the suspension of cash payments, . 
 which removed the natural and true control." 
 
 The Bullion Report was presented by Mr. Horner to the 
 House on June 9, 1810, but was not taken up for considera- 
 tion until May 6, 1811. The debate was opened by Mr. 
 Horner, who spoke for three hours and closed by moving a 
 series of sixteen resolutions. These resolutions declared that 
 when Parliament passed the restriction act, it had no inten- 
 tion that the value of the bank-notes should be altered, but 
 that they had for a considerable time been below their legal 
 value, and that the extraordinary depression of the foreign 
 exchanges was in great part due to the depreciation of the 
 currency of England relative to that of other countries. The 
 final resolutions declared that the only method of preserving 
 the paper currency at its proper value was to make it paya- 
 
HO HISTORY OF MODERN BANKS OF ISSUE. 
 
 ble on demand in the legal coin of the realm, and that cash 
 payments ought to be resumed at the end of two years. The 
 report was ably supported by Mr. Henry Thornton, but 
 was assailed by Mr. Rose, Mr. Vansittart, and others. Mr. 
 Vansittart maintained that ' ' a standard in the sense used by 
 these gentlemen, namely, a fixed and invariable weight of 
 the precious metals as a measure of value, never existed in 
 this country." His idea was that the pound sterling was a 
 sort of intangible thing, and that the paper pound was not 
 to be considered as depreciated so long as it formed the cur- 
 rent medium of exchange, and was accepted in the discharge 
 of obligations. The effort was made by the defenders of 
 paper money to deny any difference between gold prices and 
 paper prices, but it was disclosed in the course of the debate 
 that the government themselves were making a distinction 
 by paying guineas to the soldiers in Guernsey at the value 
 of 23 shillings, although their legal value was only 21 
 shillings. 
 
 The country was not ready to return to a specie basis, and 
 Mr. Horner's first resolution was defeated by a vote of 75 
 in the affirmative to 151 in the negative, and his final reso- 
 lution by a vote of 45 to 180. Mr. Vansittart followed up 
 his victory by a series of resolutions, to the effect " That the 
 promissory notes of the Bank of Kngland have hitherto 
 been, and are at this time held to be, equivalent to the legal 
 coin of the realm," and that the price of bullion and the 
 state of the foreign exchanges were in no way due to exces- 
 sive issues of bank paper. Notwithstanding the protests of 
 the better informed members of the House, an amendment 
 by Mr. Canning was rejected, 42 to 82, and Mr. 'Vansittart's 
 astounding resolutions were carried. 
 
 The opponents of the Bullion Report laid stress upon the 
 fact that gold was not sold openly at a premium. The rea- 
 son was the belief that it was a penal offence to part with a 
 bank-note for less than its face value in bullion, and at the 
 very moment of the debate on Mr. Horner's report three 
 men were lying in prison for selling guineas for more than 
 twenty-one shillings under an old statute of Edward VI. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. Ill 
 
 The issue soon after came before the Court of Common Pleas 
 and they unanimously quashed a conviction under the law 
 and declared that it was no crime to sell guineas at a pre- 
 mium. Lord King in March, 1811, issued a circular to sev- 
 eral of his tenants, reminding them that their contract was 
 to pay a certain quantity of the legal coin of the country, and 
 that, as the paper currency was considerably depreciated, he 
 should in future require his rents to be paid in the legal coin 
 of the realm, in Portugese coin of equal weight, or by a suffi- 
 cient amount of bank-notes to purchase the necessary weight 
 of standard gold. This attempt to establish a gold price 
 distinct from the paper price of commodities caused a tem- 
 pest of rage among the advocates of a paper currency and 
 led to the charge againt Lord King, so much bandied about 
 in France, of incivism. A bill was promptly introduced into 
 Parliament by Lord Stanhope, making it a misdemeanor to 
 make any difference in payments between guineas and bank- 
 notes. The measure passed the House of Lords by a vote 
 of 43 to 1 6, and the House of Commons by a vote of 95 to 20. 
 The disasters to the country banks during 1815 and 1816 
 greatly reduced the volume of paper afloat and made way 
 for additional issues by the Bank of England. The reduc- 
 tion in country bank paper in circulation is estimated by 
 Professor MacLeod l at three times the amount of the issue 
 of the Bank of England, and the effect was immediate!)' felt 
 in the rise in value of Bank of England notes. The market 
 price of gold in paper fell from ^5 6.?., in May, 1815, to ^3 
 iSs. 6^., or within three per cent, of par, in October, 1816. 
 Foreign exchange rose in a corresponding degree, and these 
 rates prevailed until the mid-summer of 1817. The bank 
 had been preparing during the peace in 1815 to resume 
 specie payments and were able after the final overthrow of 
 Napoleon to announce, in November, 1816, that they would 
 pay all notes dated previous to January i, 1812, and that in 
 the following April they would pay all notes dated before 
 January i, 1816. Resumption was thus almost accomplished 
 
 1 Theory and Practice of Banking, II., 62. 
 
112 HISTORY OF MODERN BANKS OF ISSUE. 
 
 and the people were found to be so accustomed to a paper 
 currency that little demand was made for gold and many 
 persons who had hoarded gold presented it for exchange in 
 bank-notes. 
 
 Cash payments were not yet established by law, however, 
 and the restriction had been continued, after Napoleon's 
 return from Elba, until July, 1818. The return of peace 
 brought a great many foreign borrowers to England. 
 Prussia, Austria, and other states were endeavoring to ob- 
 tain gold to reform their currencies. The result was a 
 heavy drain upon the gold reserve, which had reached 
 ^11,914,000 in October, 1817, and the reappearance of a 
 premium upon coin and bullion. 1 Advances to the govern- 
 ment were increased from ^20,000,000 to ^28,000,000 and 
 the bank made no effort to restrict their issues, in the face 
 of the foreign drain and a new increase in the circulation of 
 the country banks. It was perfectly evident that specie 
 payments could not long be maintained with the paper price 
 of gold at ^4 35., or about seven per cent, premium, and 
 committees were appointed on February 3, 1819, by both 
 houses of Parliament to inquire into the state of the bank. 
 They reported in favor of a further suspension of specie 
 payments and a bill for the purpose became law on April 
 
 1 The question was much discussed by t _e oithodox believers of 
 the classical school of political economy, wliy prices of commodities 
 did not fall with the export of gold and invite foreign purchasers of 
 English merchandise. As Prof. Sumner puts it (History of American 
 Currency, 264), " If all nations used specie, or even paper and specie, 
 in only due proportion it would be as impossible for one nation to be 
 drained of specie as for New York harbor to be drained of water by 
 the tide." But all nations do not use specie only, but credit, and 
 modern experience has demonstrated that prices do not move up and 
 down with gold exports and imports, but under the operation of 
 much wider causes in the credit market. The Bank- of England did 
 not employ at this time the method of protecting its cash by raising 
 the rate of discount, and the orthodox theory of price movements was 
 of no practical avail against the operation of special causes which 
 drew off gold. See an outline of the discussion in Money, by Francis 
 A. Walker, 356-58. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 113 
 
 5th. The bill forbade the bank to make payments in gold 
 either for fractional sums or for any of their notes during the 
 session of Parliament. The committees then addressed 
 themselves to a full hearing regarding the bank manage- 
 ment and the best means of resuming specie payments upon 
 a secure basis. 
 
 The testimony taken by the committees indicated a 
 marked advance in sound opinion among bankers and busi- 
 ness men since the adoption of the comic resolutions of Mr. 
 Vansittart. Nearly all the witnesses admitted the influence 
 of the irredeemable circulation upon the foreign exchanges 
 and the necessity of curtailing the circulation when the ex- 
 changes became unfavorable and the automatic regulation 
 of redemption in coin on demand was lacking. The majority 
 of the bank directors were not convinced of the wisdom of 
 these views until several years later, but Sir Robert Peel 
 changed his opinion completely and found a powerful sup- 
 porter in Lord Grenville, who was a member of -the Cabinet 
 which originally proposed the restriction act. Lord Gren- 
 ville went so far as to declare that he considered the restric- 
 tion one of the greatest calamities under which the country 
 labored and to deplore the part which he had himself taken 
 when it was proposed. While the bank was enabled by the 
 act to lend money with one hand, he declared, it was with 
 the other shaking the foundation of contracts, affecting 
 prices, and involving the country in distress and individuals 
 in ruin ten times greater than any benefits they could derive 
 from liberal issues. 
 
 Both houses concurred in the passage of a bill for the 
 gradual resumption of specie payments by the reduction of 
 the mint price of gold. It was provided that after February 
 i, 1820, the bank should be required to deliver gold of stand- 
 ard fineness in quantities of not less than sixty ounces at ^4 
 is. per ounce ; that after October i, 1820, the rate should be 
 reduced to ^3 195. 6d., and after May i, 1821, to the mint 
 price of ,3 175. io%d. per ounce. The provision for pay- 
 ment in bullion was adopted so as to prevent a run upon the 
 bank for coin by small note-holders, while it established 
 
114 HISTORY OF MODERN BANKS OF ISSUE. 
 
 substantial coin redemption when the bullion came to be 
 delivered at the mint price. 1 This liability to pay in bullion 
 was to continue until May i, 1823, after which full redemp- 
 tion in coin on demand was to be required. The statutes 
 restricting the trade in gold coin and bullion were repealed 
 and Mr. Pitt's practice of free borrowing from the bank was 
 cut off by an act forbidding advances of any description 
 without the express authority of Parliament. It is probable 
 that the bank would have been able to resume cash payments 
 without authority of legislation, within the time which the 
 act required, but its passage by Parliament did much to 
 educate and crystallize public opinion and to protect the 
 bank during the attacks upon the resumption act which were 
 made within the next few years. 
 
 The accumulation of gold in the Bank of England was so 
 rapid that it became possible to pass an act in 1821 permit- 
 ting full resumption on May i, 1821. The government 
 repaid ^"10,000,000 of its obligations to the bank and specie 
 payments were resumed in coin at the date fixed by law. 
 The bad harvests and commercial collapse led to several 
 attacks upon the resumption act in Parliament in 1822 and 
 1823, but they were rejected by large majorities. It was 
 pointed out in the course of the debate that the low price 
 of wheat, which was a great cause of discontent among the 
 agricultural class, could not well be due to the alleged con- 
 traction of the currency, for a greater decline had taken 
 place in France, which had been steadily upon a metallic 
 basis, and a like decline in other Continental countries where 
 depreciated paper was still the medium of circulation. The 
 price of wheat at Vienna, in spite of the large volume of the 
 Austrian paper currency, had dropped from 1145. in March 
 1817, to 195. 6d., in September, 1819. It was shown also 
 that the amount of currency in England had increased rather 
 than diminished, for the paper issues had not been materially 
 reduced and a large mass of coin had been infused into the 
 circulation. The only concession obtained by the opponents 
 
 1 Levi, 137. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 11$ 
 
 of resumption was the statute of 1822 (Chapter 70), author- 
 izing country bankers to continue the issue of notes for i 
 until the expiration of the charter of the Bank of England 
 in 1833. The permission to issue i notes, which had been 
 given to the Bank of England in 1797 and continued during 
 the entire period of restriction, was withdrawn by the 
 resumption acts. 
 
 The effect of the monopoly of the Bank of England, 
 which deprived any corporation or large firm of the power to 
 issue notes, but left the power to firms of six persons or less, 
 was the subject of severe criticism every time that the small 
 country banks were swept away in a period of industrial 
 depression. The success of the Scotch banking system was 
 attracting attention and English financiers were desirous of 
 adopting it in England. It was supposed, however, down 
 to 1823, that no joint stock bank cpuld be lawfully established 
 in England because of the exclusive privileges conferred 
 upon the Bank of England by the Act of 1742. It was 
 found, upon careful inspection of the act, and having in 
 view the rule of law that a penal statute must be construed 
 strictly, that the restrictions were limited in their application 
 to banks of issue. The failure to make any distinction up 
 to this time between the power to establish joint stock banks 
 for the purpose of issuing notes and the power to establish 
 them for other purposes was due to the early impression that 
 banking could not be carried on without the issue of notes. 
 The London private bankers had for thirty years suspended 
 the use of circulating promissory notes, but the tradition 
 lingered that joint stock banks could not be established with- 
 out infringing the legal monopoly of the Bank of England. 
 Mr. Joplin in a pamphlet issued in 1823 announced his dis- 
 covery that the charter of the bank " does not prevent pub- 
 lic banks for the deposit of capital from being established." * 
 
 There was natural hesitation, even after this discovery, to 
 embark in joint stock banks of deposit without specific 
 authority of law, but the discovery probably had something 
 
 1 MacLeod, Theory and Practice of Banking, II., 381. 
 
Il6 HISTORY OF MODERN BANKS OF ISSUE. 
 
 to do with wringing concessions from the Bank of England 
 and improving the existing system. The government pro- 
 posed to the bank in 1823 that it consent to the creation of 
 joint stock banks of issue at a distance of sixty-five miles 
 from London, upon condition of the extension of the bank 
 charter for ten years. This proposition was rejected, but 
 the subject was revived after the dreadful panic of 1825. 
 The time for the renewal of the charter w r as drawing nearer 
 and the bank consented to the Act of 1826, establishing 
 joint stock banks of issue beyond the radius of sixty-five 
 miles from London and requiring the bank to establish 
 branches. These joint stock banks were authorized to issue 
 notes, but they were not to issue them within the prescribed 
 distance nor to draw upon their London agents any bill of 
 exchange payable on demand or for any less sum than ^50. 
 A sworn list of the shareholders and places for carrying on 
 business was required of the new banking companies, but 
 few restrictions were imposed as to their management, capital, 
 or cash reserve. 
 
 Few joint stock banks were formed for the first few years 
 after the Act of 1826, as the leading country bankers already 
 had private banks and had no wish to set up powerful rivals. 
 The Bank of England managers clung to the monopoly of 
 banking in London, even after they had conceded freedom 
 beyond the sixty-five mile radius, and begged Lord Althorp, 
 when the charter was renewed in 1833, to insert a clause 
 clearly preventing the formation of joint stock banks in the 
 City. Lord Althorp, having obtained the opinion of the 
 law officers of the Crown, in favor of the right to set up de- 
 posit banks, refused to impose new restrictions and tartly 
 reminded the directors of the bank that the bargain was that 
 their privileges should remain as they were, not that they 
 should be extended. 1 A clause was inserted in the Act of 
 1833, specifically declaring that any body politic or corporate 
 or partnership might carry on the business of banking in 
 London or within sixty-five miles thereof, provided they did 
 
 1 MacLeod, Theory and Practice of Banking, II., 384. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. II? 
 
 not issue notes payable on demand. It was not until after 
 this act that it was seriously attempted to set up a joint 
 stock bank in London. The history of these banks is not a 
 part of the history of banks of issue, but it is an interesting 
 fact that the first was the London and Westminster Bank, 
 which was originally formed as a private partnership and 
 whose manager was Mr. James W. Gilbart, the author of 
 one of the most complete and intelligent works on English 
 banking. Joint stock banks of issue were formed in con- 
 siderable numbers in the prosperous years preceding the 
 panic of 1836, and more than forty were established in the 
 spring of the latter year. The number issuing notes when 
 the restrictive Act of 1844 took effect was 72, of which only 
 35 still retain the privilege. 
 
 The Bank of England opened its first branches at Glou- 
 cester, Manchester, and Swansea. The branches were able to 
 compete on favorable terms w T ith the country banks and to > 
 discount bills at four per cent., where the old banks charged 
 five per cent, and sometimes an additional commission. 
 The principal advantage which the country bankers re- 
 tained was the payment of interest on deposits, but they 
 felt keenly the competition of the branch banks and held 
 a meeting as early as December 7, 1826, to consider it. 
 They adopted resolutions that the establishment of branch 
 banks ' ' have the evident tendency to subvert the general 
 banking system that has long existed throughout the coun- 
 try, and which has grown up with, and been adapted to, the 
 wants and conveniences of the public. ' ' A deputation was 
 sent to the Chancellor of the Exchequer, who promised to 
 give serious consideration to their views. Further cause of 
 complaint was found in the stamp duties, which were levied 
 upon the country bank-notes according to value, while a 
 fixed sum was accepted from the Bank of England for their 
 entire issues. The result, according to the country bankers, 
 was to subject them to a tax of ^650 on ; 10,000 where the 
 bank paid only ^35. This protest resulted in an act ex- 
 tending the privileges of the Bank of England to the coun- 
 try banks, but the general protests against the branches were 
 
Il8 HISTORY OF MODERN BANKS OF ISSUE. 
 
 answered by the assurance that " the interest of the country 
 bankers should not be neglected in any negotiation between 
 the government and the Bank of England for the renewal of 
 the bank charter. ' ' 1 
 
 The extension of the country banks, without any legal 
 regulation, was popularly regarded as one of the causes of 
 the panic of 1825 as well as of some of the earlier panics. 
 The issue of small notes by the country banks was treated 
 by eminent statesmen as an especially dangerous feature of 
 country banking and as having a tendency to expel coin 
 from the circulation. Many of these notes were retired by 
 the insolvency of the issuers in the panic of 1825 and the 
 ministry seized the opportunity to propose their prohibition 
 for the future. They took steps, without waiting for Parlia- 
 ment to act, to prohibit the issue of the required stamps for 
 i and 2 notes and the Chancellor of the Exchequer made 
 an early motion in Parliament that no notes be issued in the 
 future under ^5. The proposition became law and after a 
 sharp contest was extended in 1828 to Scotch notes circula- 
 ting in England. 2 
 
 The approach of the date fixed for the expiration of the 
 bank charter, at the end of one year's notice after August 
 i, 1833, ^d to the appointment of a committee of the House 
 of Commons May 22, 1832, to consider the privileges to be 
 granted in the extended charter. The witnesses examined 
 discussed the propriety of establishing joint stock banks in 
 Condon (which most of them opposed), the publications of 
 the accounts of the bank, the regulation of the circulation, 
 and the rate of discount. The subject of making the bank- 
 notes legal tender except at the bank was also considered 
 and the change was urged upon the ground that the notes 
 could then be used by the country banks in the redemption 
 of their own notes in times of panic and the demand for 
 gold diminished. Lord Althorp moved the resolutions for 
 
 1 Gilbart, I., 70-73. 
 
 2 The history of Scotch and Irish banking will show that the effort 
 made at this time, to deprive those countries of the use of small 
 notes, was defeated. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 119 
 
 the renewal of the charter on May 31, 1833, and it was de- 
 cided by a vote of 316 to 83 to proceed with their considera- 
 tion. The proposition to make the notes legal tender except 
 at the bank prevailed by a vote of 214 to 156. 
 
 The new charter continued the exclusive privilege of note 
 issue within sixty-five miles of London, but authorized 
 country banks to have agencies in London for the purpose 
 of paying such of their notes as might be presented. The 
 bank was authorized to reduce its capital by one-fourth of 
 the amount of the debt of the public to the bank and in 
 consideration of its privileges surrendered ,120,000 of the 
 amount allowed annually by the government for the man- 
 agement of the debt. 1 The charter of the bank was ex- 
 tended to one years' notice, to be given within six months 
 after the expiration of ten years from August i, 1834, and 
 until repayment of all debts due by Parliament to the bank. 
 The renewal of the charter in 1844 extended the life of the 
 bank until twelve months' notice after August i, 1855, and 
 the repayment of the public debt. No such notice was 
 given and the bank continued to operate under this author- 
 ity until 1870. A revision was made at that time of* the 
 statutes relating to the public debt, and it was enacted that 
 the Bank of England shall continue a corporation until all 
 the public funds are duly redeemed by Parliament. 2 
 
 The period following the crisis of 1839 developed a pecul-\ 
 iar doctrine of finance in England, which obtained a strong 
 footing among public men with only a rudimentary know- 
 ledge of political economy and has spread to some extent 
 on the Continent of Europe and in the United States. This 
 
 1 The government repaid one-fourth of the permanent debt, amount- 
 ing to ^3,671,000, and reducing the principal to ^11,015,100 ; but 
 the bank never availed itself of the permission to deduct the amount 
 from its capital, which remains at ^"14,553,000, where it was fixed in 
 1816. The interest on the debt to the bank was reduced in 1892 from 
 three to two and three-fourths per cent., and changes were made in the 
 allowances for managing the debt which made the total saving to the 
 government ^"45,700. London Bankers' Magazine ', July, 1892, UV., 
 50. 
 
 2 Clause 72, Act 33 and 34 Victoria, c. 71. 
 
120 HISTORY OF MODERN BANKS OF ISSUE. 
 
 doctrine embodies the ideas that bank-notes are a form of 
 currency entirely distinct from other commercial paper and 
 forms of credit ; that an expansion of bank-note issues, even 
 when redeemable in coin on demand, is a potent cause of 
 commercial crises ; and that the way to prevent crises is to 
 place fixed limits upon bank-note issues. Few advocates of 
 this theory have undertaken to place definite limits upon the 
 volume of bills of exchange or of other forms of commercial 
 paper issued by solvent borrowers, but they have maintained 
 that bank-notes were money for all practical purposes of 
 daily use ; that an undue expansion in the volume of money 
 has stimulated speculation and expelled gold under the opera- 
 tion of Gresham's law; and that the curtailment of note 
 issues would maintain sobriety in the mercantile world and 
 restore the equilibrium of the foreign exchanges. 
 
 The advocates of this view, of whom the most conspicu- 
 ous were Sir Robert Peel, Lord Overstone, and Colonel Tor- 
 rens, named their new discovery " The currency principle," 
 and immediately set out to rescue the commercial world of 
 Great Britain from future disturbance by enforcing their 
 policy in a modified form upon the Bank of England. Sir 
 Robert Peel declared, in advocating the resumption act of 
 1819, that it was impossible to prescribe any specific limita- 
 tion of issue for the bank and that the quantity of circula- 
 tion which was demanded in a time of confidence varied 
 materially from the amount required in a period of despon- 
 dency. He became a complete convert to the currency 
 principle in 1844 and introduced the bill which became the 
 basis of the present charter of the Bank of England. The 
 theory of the currency principle was so generally accepted 
 as a means of putting an end to panics that amendment was 
 refused by the House of Commons by a vote of 185 to 30, 
 and the bill passed the House of Lords without a division, 
 and received the royal assent on July 19, 1844. The bill 
 absolutely cut off the creation of banks of issue, except by 
 the union of existing banks, and made the future elasticity of 
 English currency dependent upon deposits of coin or bullion 
 with the Bank of England. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 121 
 
 The new charter provided for the separation of the issue 
 department from the banking department of the Bank of 
 England and placed the issue department under the charge 
 of a committee of the directors appointed by the entire body. 
 The Governor was directed to transfer to the issue depart- 
 ment on August 31, 1844, securities to the value of ,14,- 
 000,000, of which the debt due by the government to the 
 bank was to be a part. The bank was also to deliver to the 
 issue department such of the gold coin and bullion as was 
 not required for the banking department and was to receive 
 back a quantity of notes which should make the circulation 
 of the bank exactly equal to the coin and bullion on deposit, 
 plus the sum of ^14,000,000 represented by securities. 1 
 Thenceforth the issue department was to pay coin and 
 bullion for notes and issue notes for coin and bullion, and 
 no department of the bank was authorized or permitted to 
 issue notes in excess of the limits thus established. The 
 price of gold at the bank was fixed for the future at ^3 17.?. 
 gd. per ounce. Weekly accounts of the circulation were to 
 be transmitted to the government and published in the Lon- 
 don Gazette. The bank was required to pay ,180,000 annu- 
 ally for its privileges instead of the rate of ^120,000 fixed in 
 1833. This payment was modified in 1861 and now amounts 
 to about ,200,000. 
 
 The purpose of fixing the amount of notes covered by se- 
 curities at ^14,000,000 was to economize that amount of 
 gold without impairing the convertibility of the note. The 
 amount was arrived at, not with any special regard to the 
 capital of the bank or the government debt already held, but 
 with regard to the smallest amount of Bank of Kngland 
 
 1 Whether the notes constitute a prior lien on the securities and 
 bullion in the issue department is a point which is not clearly set 
 forth and has never been judicially decided. The act directs that 
 " there shall be transferred, appropriated, and set apart by the said 
 governor and company to the issue department securities to the value 
 of ^14,000,000" ; but "it shall be lawful for them to diminish the 
 amount of such securities," which seems to preclude the idea that 
 they are not part of the general assets of the bank. Price, 65. 
 
122 HISTORY OF MODERN BANKS OF ISSUE. 
 
 notes which could be counted upon to remain always in cir- 
 culation. It was found that the net circulation in Decem- 
 ber, 1839, was ^14,732,000, and it was argued that at least 
 ;2, 000,000 more must be kept in the banking reserve of the 
 bank. It was considered safe, therefore, to fix the uncov- 
 ered circulation at ^14,000,000 and it was left to the play of 
 the foreign exchanges to control the fluctuations above that 
 amount. 1 Gold imported under the attraction of low prices 
 and high interest rates would be brought to the bank and 
 exchanged for notes, under the theory of the framers of the 
 act, and gold withdrawn from the country by the attraction 
 of low prices and high interest rates elsewhere would be 
 taken from the bank by the presentation of notes, which 
 would thus be withdrawn from circulation. 
 
 The principle of issuing notes covered by other securities 
 than coin, within the safe maximum limit of the amount 
 which can be kept permanently in circulation, is a simple 
 and intelligible banking principle, and indeed the principle 
 upon which modern banking is founded. The declared pur- 
 pose of the act " to cause our mixed circulation of coin 
 and bank-notes to expand and contract, as it would have 
 expanded and contracted under similar circumstances had it 
 consisted exclusively of coin," also seemed simple and in- 
 telligible to those who ignored the existence of credit and 
 the domestic causes which made a larger circulation desira- 
 ble at some periods than at others. The Act of 1844 pro- 
 posed substantially to destroy the bank-note as an instrument 
 of credit and make it a mere certificate of coin, leaving to 
 other forms of commercial paper the functions which the 
 bank-note had in part performed. It is obvious, however, 
 that the framers of the act, in fixing a maximum limit of 
 authorized circulation, meant to deal only with the condi- 
 tions then existing and that, if their theory had proved op- 
 erative, they could not have objected to a much higher limit 
 to meet the expanded volume of modern trade. 
 
 Existing private and joint stock banks of issue were per- 
 mitted, with the usual respect of English law for vested 
 
 1 Mr. Torrens, quoted by Hankey, 5-8. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 123 
 
 rights, to continue their outstanding circulation. It was the 
 purpose and expectation that these banks would gradually 
 be led to retire their circulation and remit the power to the 
 central bank of issue. Provision for this contingency was 
 made by the authority given the bank to increase the 
 amount of securities in the issue department to an amount 
 not exceeding two-thirds of the country bank-notes with- 
 drawn and to issue circulation against the new securities. 1 
 The new issues did not fall to the bank automatically, but 
 required an order from the Crown in Council. The amount 
 of circulation allowed the country banks was determined by 
 the average circulation during the twelve weeks preceding 
 April 27, 1844, and the amount was found to be ,5,153,417 
 for the 207 private banks and ,3,478,230 for the 72 joint 
 stock banks. It was not until December 13, 1855, that any 
 increase was made in the secured circulation of the Bank of 
 England. Forty-seven banks with aggregate issues of 
 ,712,623 had ceased to issue their notes since the Act of 
 1844 and an order was made authorizing the increase of the 
 Bank of England issue by ,475,000. The next increase was 
 ,175,000 in 1861, and the next "350,000 in 1866, increasing 
 the issues upon securities to "15,000,000. An increase of 
 "750,000 was made April i, 1881 ; "450,000 September 15, 
 J 887 ; ,250,000 February 8, 1889 ; an ^ 35. January 
 29, 1894. The secured circulation since the latter date, 
 therefore, has been ,16,800,000 ($84,000,000). The lapsed 
 issues since 1844 have been ,2,902,997 on the part of 143 
 private banks, and ,1,504,028 on the part of 37 joint stock 
 banks, making a total of "4,407,025. 
 
 No provision was made for strengthening the security of 
 the issues of private banks, except the absolute limit put 
 
 1 The limitation to two-thirds of the cancelled issues was based 
 upon the theory that these issues had been protected by one-third 
 their amount in bullion, which would be released for circulation, 
 thus keeping the amount of circulation intact. The utter disregard 
 of banking principles embodied in the law is indicated by this as- 
 sumption, which completely ignores the necessity for a reserve 
 against general liabilities. Gilbart, II., 121. 
 
124 HISTORY OF MODERN BANKS OF ISSUE. 
 
 upon the amount, for it was not intended to foster their 
 development. A banker who ceased to issue his own notes 
 was not permitted to resume the issue, and if two or 
 more banks became united and the number of partners of 
 the united bank exceeded six their power of note issue was 
 to cease. The country bankers were required to permit 
 their books to be inspected by a government officer, but this 
 was apparently to prevent an excess of issue rather than to 
 afford any other sort of security to the public. The country 
 banks have been slow to leave the field, as the figures of 
 their circulation demonstrate. Fifty-six private banks were 
 still issuing ,2, 220,048 and 35 joint stock banks were still 
 issuing ,1,974,202 in notes at the beginning of 1896, more 
 than half a century after the beginning of the operation of 
 the Act of 1844. The notes of the country banks were not 
 made legal tender and the banks were not required to pub- 
 lish their accounts. 
 
 The operation of the Bank Act of 1844 w r as put to an early 
 test by the crisis of 1847 and the result was a complete fail- 
 ure upon two essential points. The operation of the act 
 neither prevented the speculation which is the cause of pan- 
 ics, nor reduced the issue of notes to correspond with the 
 export of gold. Inquiries were made by both the House of 
 Commons and the House of Lords, at the meeting of Parlia- 
 ment after the panic and the friends of the Act of 1844 made 
 an earnest effort to rescue it from the discredit which the 
 panic had cast upon it. The committee of the House of 
 Commons reported in favor of continuing the act in effect, 
 but the House of Lords' committee spoke in severe terms of 
 its operation. The failure of the act in the important re- 
 spect of preventing commercial convulsions was frankly 
 admitted in the debate in the Commons by Sir Robert Peel. 
 It had neither " put a check on improvident speculation," 
 in the language of the Lords' committee, nor afforded ' ' se- 
 curity against violent fluctuations in the value of money." 
 The law was framed to arrest commercial expansion by limit- 
 ing the means for carrying on commercial transactions. It 
 failed absolutely in this object, because such operations can 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 125 
 
 be carried on, and usually are carried on, by other means 
 than bank-notes. It succeeded in checking the expansion 
 only when other forms of credit had been swept away by 
 distrust and expansion of note issues to fill their place was 
 absolutely needed to prevent overwhelming commercial dis- 
 aster. It did not prevent expansion, in simple terms, when 
 expansion might do harm ; it prevented it absolutely when 
 it might have done good. 
 
 It was the theory of the supporters of the act, that the 
 currency would fluctuate in exact accordance with the fluctu- 
 ations of a metallic currency by the self-acting provision for 
 the issue of notes only in exchange for gold and the issue of 
 gold in exchange for notes. Both sides in the discussion 
 of the bill, when it was pending in Parliament, seem to have 
 made the incredible blunder of overlooking the fact that 
 gold could be obtained by the presentation of checks. This 
 was exactly what happened in 1847 an< ^ the effect upon the 
 outstanding note issues and the bullion in the bank at 
 different dates during the April pressure is indicated in the 
 following table : 
 
 
 NOTES HELD BY THE 
 PUBLIC. 
 
 NOTES IN THE BANK- 
 ING RESERVE. 
 
 BULLION IN THE 
 BANK. 
 
 Aug. 29, 1846 
 
 Dec. 19, 1846 
 Jan. 9, 1847 
 Feb. 20, 1847 
 Mar. 20, 1847 
 Apr. 10, 1847 
 
 ^20,426,000 
 19,549,000 
 2O,837,OOO 
 I9,482,OOO 
 I9,O69,OOO 
 20,243,000 
 
 ^9,450,000 
 8,864,000 
 6,715,000 
 5,917,000 
 5,419,000 
 2,558,000 
 
 ^"16,366,000 
 15,163,000 
 14,308,000 
 I2,2I5,OOO 
 II,232,OOO 
 9,867,000 
 
 The bank, therefore, saw its bullion decreasing on the one 
 hand and its banking reserve decreasing on the other hand, 
 while gold and notes poured out of the banking department 
 in the discharge of its obligations. The banking reserve 
 was chiefly in notes which had been obtained by the sur- 
 render to the issue department of such gold as was received 
 on deposit, but the payment of these notes to customers 
 either swelled the note circulation or reduced the gold in the 
 bank, by just the amount of the payment. The effect, as 
 Mr. John Stuart Mill pointed out in his testimony before 
 
126 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the Committee of the House of Commons, was a double 
 action, which required each department of the bank to take 
 measures for self-protection and made the bank's action on 
 the money market ' ' as violent on a drain of three millions, 
 as would have been required on the old system for one of 
 six." The banking department might be completely 
 wrecked by the exhaustion of its note reserve, without the 
 power it formerly possessed to draw upon the whole re- 
 sources of the bank for help. 
 
 It was fortunate in many respects that the Act of 1844 
 failed to operate to contract the domestic circulation as was 
 expected. Such an event would only have added to the in- 
 tensity of the panic and made the suspension of the act and 
 the issue of additional notes more imperative. Such con- 
 traction and such absence of expansion as actually occurred 
 invited a run upon the bank for gold and notes which would 
 not have occurred under former conditions. Bank of Eng- 
 land notes were a legal tender except at the bank and were 
 largely employed in the reserves of the country banks. The 
 absolute limit on the supply had the double effect of frighten- 
 ing the public into withdrawing their deposits from the 
 banks for hoarding before the supply was exhausted and of 
 driving the banks to withdraw their deposits from the Bank 
 of England for hoarding against this demand by the public. 
 If they could not get notes under such circumstances, they 
 would take gold, and the reduction of the note circulation in 
 the meantime would only have increased the pressure. The 
 demand for notes, so long as their convertibility was unques- 
 tioned, was, of course, immensely increased by the destruc- 
 tion of credit. Hoarding operated to reduce the visible 
 quantity of notes at the very moment that the disappearance 
 of commercial paper as a medium of circulation increased 
 the necessity for them. The terrible pressure thus applied 
 by the Act of 1844 to the commercial community compelled 
 the sale of goods and securities in foreign markets at any 
 sacrifice which would bring the ready currency withheld by 
 
 Political Economy, B. III., Ch. xxiv., Sec. 4. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. \2J 
 
 the operation of the Bank Act. The operation of the law, 
 therefore, meant an absolute loss, not merely in the nominal 
 sense of money denominations, but in the real sense of sur- 
 rendering more English commodities for a given quantity 
 of foreign commodities than would otherwise have been 
 required. 1 
 
 The chief contention which was left to the friends of the 
 Act of 1844, after the rude disillusionment of the panic of 
 1847, was that the act had maintained beyond doubt " the 
 convertibility of the note." They argued that under former 
 conditions and in previous panics, the bank had been drained 
 of gold as well as of its banking reserve, the two not being 
 then separated, and that the ultimate redemption of the notes 
 in gold had been threatened. From a practical point of view, 
 there was perhaps some force in this claim in behalf of the 
 act. a The claim is subject to the two conditions, however, 
 that a better knowledge of the rules of banking had come 
 into operation since the earlier panics and that theoretically 
 the " convertibility of the note" was not perfectly assured. 
 It is doubtful, indeed, if convertibility could have been 
 maintained if there had never been, either in 1847, l8 57> or 
 1866, any suspension of the Bank Act. Loss of convertibility 
 would not have come primarily from distrust of the notes or 
 of the credit of the bank, but from the pressure for money 
 by depositors upon the private banks and joint stock banks 
 which kept their reserve with the Bank of England. They 
 would have come upon the bank with a rush for the pay- 
 ment of their deposits and the point might very soon have 
 been reached where the bank had only public securities as 
 
 1 Gilbart,!., 345-46. 
 
 ' 2 Mr. Mill insists that the convertibility of the note " would have 
 continued to be maintained, at whatever cost, under the old system," 
 and remarks that the suspension of the banking department, "in- 
 volving, as it would, the probable stoppage of every private banking 
 establishment in London, and perhaps also the non-payment of the 
 dividends to the national creditor, would be a far greater immediate 
 calamity than a brief interruption of the convertibility of the note." 
 Political Economy, B. III., Ch. xxiv., Sec. 3, note. 
 
128 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the guarantee of its circulation. The effort, in other words, 
 to keep the bank standing a solitary monument of unimpaired 
 credit when every other part of the credit system of the 
 country had fallen a mass of ruins around it could not 
 have succeeded. This was the logical meaning of the 
 propositions of those who insisted that the Act of 1844 main- 
 tained "the convertibility of the note," so far as they had 
 any definite meaning, and it was a proposition which was 
 utterly chimerical. 
 
 If the limitations of the Act of 1844 have been of any value 
 to the English people, it has probably been in driving them 
 to the adoption of substitutes for circulating notes and to the 
 extension of deposit banking. England was sufficiently far 
 advanced in 1844 in the use of instruments of credit to make 
 the restrictions of the Bank Act of much less importance than 
 such restrictions would have proved in a new and undevel- 
 oped country. One of the devices adopted in London for 
 promoting the movement of capital was the Cheque Bank. 
 Money was received by this bank on deposit, and books of 
 checks were issued for even denominations, which might be 
 filled in for less than the denomination but not for more. 
 The face value of the checks issued did not exceed the 
 depositor's credit, so that the receiver of such a check had 
 the assurance of the bank that the depositor's account was 
 not overdrawn. Such checks were made payable by the 
 Cheque Bank only through some other banker and not at 
 the counter of the bank, thereby escaping the prohibition of 
 the law against promissory notes payable to bearer on de- 
 mand. The checks passed between individuals for cash and 
 the Cheque Bank established relations with some 1500 
 domestic and foreign banks which agreed to receive and 
 cash its checks. Several railways and other companies re- 
 ceived these checks as cash and they proved convenient for 
 transmission through the mails. 1 The Cheque Bank, there- 
 fore, put in operation a sort of emergency currency, outside 
 the law, if not in violation of law, which has been resorted 
 
 1 MacLeod, Theory and Practice of Banking, II, 374-75. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 12g 
 
 to in other countries only under the pressure of commercial 
 distress. 1 
 
 A much more important and scientific step than cast-iron 
 rules of circulation was adopted by the Bank of England for 
 the protection of its gold reserve after the crisis of 1857. 
 This step consisted in raising the rate of interest rapidly by 
 degrees of one per cent, at a time, instead of fractions of one 
 per cent. , in order to arrest the export of gold. The increas- 
 ing ease and cheapness of communication had destroyed the 
 value of differences of a fraction of one per cent., when this 
 fraction was divided into fractions of a year, in attracting 
 gold from foreign countries or arresting its departure. The 
 theory of statesmen and students of political economy had 
 generally recognized up to this time only two causes of the 
 export of gold payments for merchandise and the pressure 
 of a depreciated currency. The bullion brokers, without 
 spending time over theories, had long since learned by obser- 
 vation that it became profitable to export gold when interest 
 rates abroad were higher than at home. They fabricated 
 bills of exchange, had them discounted by bankers, took the 
 proceeds in gold and shipped the gold to the point where it 
 would earn the highest interest. The bills fabricated for 
 this purpose had the character of accommodation bills, in 
 that they represented no merchandise transaction and were 
 drawn for the single purpose of transferring money from the 
 place where it was cheap to the place where it was dear, in 
 order to earn the higher rate of interest. 
 
 The fact and possibility of such shipments of gold do not 
 seem to have been known, or at least fully understood, up 
 to this time, by the staid old merchants who formed a ma- 
 jority of the board of directors of the Bank of England. 
 The necessity of meeting the drain by rapid advances in the 
 rate of discount was first set forth in the literature of political 
 economy by Prof. H. D. MacLeod, 2 was quickly adopted as 
 the true theory by Mr. Goschen, and put in force by the bank 
 
 1 For a similar device in Austria, see the closing portion of Chapter 
 ix. 
 
 2 Theory of Credit, II., 813-18. 
 
 9 
 
130 HISTORY OF MODERN BANKS OF ISSUE. 
 
 which, on this occasion, according to Mr. Bagehot, " and as 
 far as I know, on this occasion alone," made " an excellent 
 alteration of their policy which was not exacted by contem- 
 porary opinion, and which was in advance of it." l The 
 results were even more striking than were anticipated by 
 the advocates of the new theory, and are thus summed up 
 for the next few years by Mr. Bagehot : 
 
 The beneficial results of the improved policy of the bank were pal 
 pable and speedy : we were enabled by it to sustain the great drain 
 of silver from Burope to India to pay for Indian cotton in the years 
 between 1862 and 1865. In the autumn of 1864 there was especial 
 danger ; but by a rapid and able use of their new policy, the Bank of 
 England maintained an adequate reserve, and preserved the country 
 from calamities which, if we had looked only to precedent, would 
 have seemed inevitable. All the causes which produced the panic of 
 1857 were in action in 1864 ; the drain of silver in 1864 and the preceding 
 year was beyond comparison greater than in 1857 and the years before 
 it ; and yet in 1864 there was no panic. The Bank of England was 
 almost immediately rewarded for its adoption of right principles by 
 finding that those principles, at a severe crisis, preserved public credit. 2 
 
 The great expansion of English banking after the middle 
 of the century led to serious doubts as to the capacity 
 of the Bank of Bngland to maintain commercial credit in 
 every conceivable emergency. Mr. Bagehot pointed out in 
 his celebrated work, Lombard Street, more than twenty 
 years ago, that the entire fabric of English credit rested 
 upon the gold reserve of the Bank of England. The reserve 
 had then increased somewhat above its level in earlier times, 
 but was still considered by many as affording an insufficient 
 protection for the great volume of the banking business of 
 the country. The private and joint stock banks made no 
 effort to maintain a coin reserve of their own, for such a 
 policy would have locked up their capital and driven them 
 to the wall in the fierce competition for fractional profits. 
 They carried only such cash as was needed from day to day 
 for ordinary transactions, and relied upon their deposits with 
 
 1 Lombard Street, Works, V., 118. 
 
 2 For a temporary failure of the new rule to act, and the reason for it, 
 see account of the crisis of 1866, in Ch. xxi. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 131 
 
 the Bank of England for cash to meet emergencies. The 
 system thus created was graphically called "the one reserve 
 system," and under it the credit of the entire business com- 
 munity depends upon the solvency of the Bank of England. 1 
 
 Private deposits with the bank were ^9, 000,000 in 1844 ; 
 they were ^18, 000,000 in 1872 ; they were ^50,295,171 for 
 the week ending October 6, 1895. The growth in the de- 
 posits of the joint stock banks and private bankers has also 
 been rapid. They were ^120,000,000 in 1872 ; they are 
 probably ^200, 000,000 in 1896. These deposits include 
 such of the funds of the country banks as are deposited with 
 the private and joint stock banks, but they do not include 
 the additional obligations of the country banks to their 
 depositors. 
 
 The experience of three crises since the Bank Act of 1844 
 has given serious warning of the shock which would come to 
 every British interest if the Bank of England should prove 
 inadequate to support the fabric of British credit and to sup- 
 ply all foreign demands for gold. Mr. Bagehot fixed ' ' the 
 apprehension minimum," below which the bank reserve 
 could not go without exciting alarm, at 10,000,000, and 
 he maintained that measures to protect the reserve should 
 begin to betaken when it dropped below ^"15,000,000. The 
 reserve was gradually strengthened by the accumulation of 
 gold and by the financial blunders of other countries until it 
 stood in 1891 at ^22,295,403 ; but this expansion no more 
 than kept pace with the expansion of credit and did not 
 diminish apprehension for the future. Mr. Goschen, the dis- 
 tinguished financier who has several times acted as Chan- 
 cellor of the Exchequer, proposed a plan in 1891 for issuing 
 i notes upon a reserve consisting of four-fifths gold and one- 
 fifth securities. The purpose of the plan was to substitute 
 the notes for gold in the hands of the public, and to draw 
 
 1 The Irish and Scotch banks of issue hold gold funds, which 
 amounted on October 5, 1895, to ^"8,810,739, t> ut this gold is more or 
 less tied up by the laws governing their circulation, and calls are 
 almost invariably made for gold upon the Bank of England in times 
 of stringency. 
 
132 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the gold into the bullion reserve of the bank. Mr. Goschen 
 proposed, if the bullion in the bank was raised by this means 
 to ^30,000,000, to "give certain additional powers of issue in 
 times of emergency ," by authorizing the bank to strengthen 
 the reserve in the banking department by the issue of addi- 
 tional notes against securities, on paying to the government 
 a high rate of interest, to be fixed by law. 1 Mr. Goschen 's 
 proposals were much discussed, but did not result in defi- 
 nite action. 
 
 Recent events have changed the entire face of the problem 
 by strengthening the reserve beyond all past precedent and 
 removing any fear that it will not be adequate for all de- 
 mands. The chief of these events has been the enormous 
 production of gold in South Africa, which has been flowing 
 into the Bank of England for the past two years at a rate 
 never equalled in its history. The bullion in the bank rose 
 at the end of December, 1894, to ^32,547,000, and had in- 
 creased on January i, 1896, to ,44,960,056. The bullion 
 now exceeds the note issues by fifty per cent. , is equal to 
 nearly 75 per cent, of the deposits and post-bills in the bank- 
 ing department, and is equal to about fifty per cent, of the 
 combined liability for note issues and deposits. The influx 
 of gold has been so rapid that the question is already being 
 discussed, whether the effect will not be to stimulate spec- 
 ulation and to burden the country with a mass of dead 
 stock w r hich is not really needed for monetary purposes. The 
 necessity of suspending the free coinage of gold, in order to 
 limit the circulation, has already been suggested by Mr. 
 W. R. Lawson, who discusses the effect of the recent addi- 
 tions to the bullion fund in the following terms : * 
 
 A forty-three million gold reserve has become the dominant factor 
 in a financial situation altogether abnormal, the peculiar characteristics 
 of which decline to be judged by the rules or traditions of the past. 
 Revolving round this huge gold reserve, and reflecting all its fluctua- 
 tions, we have a growing plethora of loanable capital, unwieldy masses 
 
 1 Letter to the governor of the bank, Dec. 3, 1891. London Bank- 
 ers' Magazine, LIU., 2-3. 
 
 8 London Bankers' Magazine, October, 1895, LX., 492-93. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 133 
 
 of deposits in banks and other financial institutions, where they have 
 next to no productive value ; an insatiable demand for high-class 
 investments, which has driven prices up to a dangerous level ; a great 
 wave of speculation spreading from one market to another till the 
 entire business of the country seems likely to be infected soon with 
 the morals of the Kaffir circus ; a prolonged depression in all the 
 legitimate industries of the country, agricultural and manufacturing ; 
 our foreign markets nearly all upset by currency agitations and 
 experiments, which reduce international exchange to a daily and 
 hourly gamble ; our domestic industries transferred from private 
 hands to joint stock companies, which have revolutionised all the old 
 methods and ideas of business. Facility of financing has been the 
 principal factor in these transformations, and anything which helps or 
 encourages facility of financing, must accelerate the economic crisis 
 we are passing through. Nothing could act so powerfully in that 
 direction as loading up the Bank of England with gold, which it is 
 obliged to turn at once into loanable capital, thereby diminishing the 
 loanable value of all pre-existing capital of the same class. 
 
 The measure of the changes in the bullion in the bank in 
 recent years, as well as the state of the other leading items 
 of the bank's accounts, for the average of the last quarter in 
 each year, is given in the following table : 
 
 YEA 
 
 NOTES IN 
 CIRCULATION. 
 
 DEPOSITS. 
 
 SECURITIES. 
 
 BULLION. 
 
 l880 
 
 ^26,829,000 
 
 /31, 350,000 
 
 ^34,839,000 
 
 ^"26,406,000 
 
 1881 
 
 26,237,OOO 
 
 28,633,000 
 
 37,096,000 
 
 20,876,000 
 
 1882 
 
 26,351,000 
 
 27,410,000 
 
 36,147,000 
 
 2O,75I,OOO 
 
 1883 
 
 25,683,OOO 
 
 29,205,000 
 
 35,669,000 
 
 22,355,000 
 
 1884 
 
 25,222,999 
 
 29,346,720 
 
 36,336,69! 
 
 20,360,721 
 
 1885 
 
 24,621,423 
 
 29,344,372 
 
 34,643,349 
 
 20,826,856 
 
 1886 
 
 24,691,913 
 
 27,038,698 
 
 33,895,673 
 
 19,929,836 
 
 1887 
 
 24,209,867 
 
 26,930,149 
 
 32,508,224 
 
 20,238,539 
 
 1888 
 
 24,405,030 
 
 29,281,524 
 
 35,977,745 
 
 19,455,412 
 
 1889 
 
 24,460.836 
 
 29,837,081 
 
 36,301,144 
 
 19,712,368 
 
 1890 
 
 24,732,153 
 
 35,414,155 
 
 39,168,647 
 
 21,820,279 
 
 1891 
 
 25,510,059 
 
 34,830,397 
 
 38,607,719 
 
 23,159,668 
 
 1892 
 
 26,039,500 
 
 34,367,453 
 
 36,809,048 
 
 24,991,060 
 
 1893 
 
 25,778,436 
 
 34,204,021 
 
 35,543,o67 
 
 25,865,721 
 
 1894 
 
 25,528,878 
 
 41,614,576 
 
 32,937,638 
 
 35,262,470 
 
 1895 l 
 
 26,458,425 
 
 56,526,619 
 
 48,922,039 
 
 44,960,056 
 
 The Bank of England is governed by a court of twenty- 
 four directors, and a governor and deputy governor who 
 serve for a term of one year. The senior director who has 
 
 1 Average for week ending January i, 1896. 
 
134 HISTORY OF MODERN BANKS OF ISSUE. 
 
 not already served is usually made governor and the next in 
 seniority deputy governor. A part of the directors retire every 
 year, but these are usually the younger ones, so that the older 
 always remain. It is customary to choose young men for va- 
 cancies in the board, so that they will be still in the possession 
 of physical vigor when their turn comes to be governor. 1 
 Bankers in the strictly English sense, lenders of money for 
 short terms on commercial paper, are not allowed to serve on 
 the board of directors, but this rule does not exclude the leaders 
 of finance who are engaged in other branches of the banking 
 business. It is usually about twenty years from the time of 
 a man's entry upon the board of directors until he is reached 
 in his turn as governor, and it is rarely that a director is 
 made governor out of his turn or serves more than one year. 
 The board meets with the governor and deputy every Thurs- 
 day in what has become historic as " the bank parlor," to 
 pass upon the report for the week. The branches of the 
 bank are limited to a few leading cities, and a large share of 
 the business of the bank is derived from the deposits of the 
 private banks and joint stock banks. 
 
 The Bank of England has been comparatively free from 
 government interference since the time of Pitt. It receives 
 the public deposits and performs many financial operations 
 for the government, but it differs from many Continental 
 banks in the sense that "it is purely the banker of the 
 state, and not its cashier, and as such maintains with it 
 the same relations as with the individuals and companies 
 which constitute its clientage." 2 There is no division of 
 profits with the state and only moderate taxes are paid. 
 The private and joint stock banks which issue notes are so 
 similar in character to those without circulation that the 
 statistics are rarely separated. The number of banking 
 offices open in Great Britain at the close of 1894 was 5612, 
 of which 477 were in London and the suburbs, 3538 in other 
 parts of England and Wales, 15 in the Isle of Man, ion in 
 Scotland, and 571 in Ireland. 
 
 1 Bagehot, Works, V., 136. 
 
 2 Noel, I., 232. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 135 
 
 The total resources of all the banks of the United King- 
 dom of Great Britain and Ireland, including banks of de- 
 posit merely as well as banks of issue, are over i ,000,000,000. 
 The banks of deposit have of late years become more and 
 more in the habit of making public their accounts, until all 
 but an insignificant proportion now do so. These returns 
 have been compiled for the close of 1894 an d earl) r part of 
 1895 by Mr. R. H. Inglis Palgrave, 1 and show an aggregate 
 capital of ^85, 629,366 ; reserve fund, ,37,896,899; deposit 
 and note liability, 721,371,206 ; cash in hand and on short 
 notice, 185,146,719; and discounts and advances, ,446,- 
 269,821. The aggregates include the Isle of Man, with 
 banking resources of 1,992,856. The figures for the greater 
 divisions of the United Kingdom are given below, those for 
 Scotland representing entirely banks of issue : 
 
 LIABILITIES. 
 
 
 ENGLAND AND 
 WALES. 
 
 SCOTLAND. 
 
 IRELAND. 
 
 Capital paid 
 
 /"6o 121 115 
 
 /"o, 302,000 
 
 f-i ioi 251 
 
 Reserve fund 
 
 2Q.O37, 525 
 
 5,694,879 
 
 3,064 605 
 
 Acceptances, endorsements . 
 etc. 
 
 16 QIQ 018 
 
 7 105 4.77 
 
 166 492 
 
 Deposits, current accounts. . 
 and note circulation 
 
 570,138,250 
 
 100 538 870 
 
 48 921 672 
 
 Miscellaneous 
 
 3,961,744 
 
 057,880 
 
 471,508 
 
 
 
 
 
 Total 
 
 689,177,661 
 
 119,599,111 
 
 59,728,708 
 
 ASSETS. 
 
 Cash in hand and on short . . 
 notice, 
 
 ,158,833,302 
 
 17,343,954 
 
 ,8,756,180 
 
 Brit. Gov. investments 
 Other investments 
 
 83,497,584 
 66 787 ^4.0 
 
 14,281,452 
 2O 68^ 7Q5 
 
 6,899,170 
 97IO 780 
 
 Discounts and advances 
 
 oe I Q44 O75 
 
 60 826 034 
 
 q-j -126 566 
 
 Acceptances, etc 
 
 16 919 018 
 
 3 IO5 473 
 
 1 66 492 
 
 Buildings etc 
 
 12 096 342 
 
 3058 401 
 
 869 520 
 
 
 
 
 
 Total 
 
 689,177,661 
 
 119,599,111 
 
 59,728,708 
 
 1 L/ondon Bankers' Magazine, April, 1895, LJX., 529. 
 
I3 6 HISTORY OF MODERN BANKS OF ISSUE. 
 
 One of the criticisms which has been made upon the opera- 
 tion of the Act of 1844 is the great number of changes in 
 the discount rate which have taken place at the Bank of 
 England since that time. The criticism is not directed 
 against the propriety of the changes when they have been 
 made, but against the underlying causes which have made 
 them necessary. The fact that England is the centre of the 
 exchanges of the world and feels the pressure of the demand 
 for gold and silver from every quarter has undoubtedly had 
 much to do with these changes, but it has been pointed out 
 that they have not diminished in frequency since Paris has 
 regained some of the exchange business she lost during 
 specie suspension and Berlin has become an important money 
 market. 1 Changes in the rate of discount are preferable to 
 a dangerous reduction of coin reserves and are the modern 
 method of checking such reductions, but a uniform rate has 
 the advantage of offering steady conditions to legitimate in- 
 dustry. The " one reserve system," as well as the peculiar 
 pressure put upon the Bank of England by the Act of 1844, 
 have been charged with a part of the responsibility for the 
 frequent changes in the discount rate, and this view is sup- 
 ported by the few changes since the increase of the bullion 
 in the bank. The present official rate is two per cent, and 
 loans are made below the official rate to customers of the 
 bank, according to long established practice. This rate was 
 adopted on February 22, 1894, anc ^ f r niore than two years 
 remained unchanged, an interval without precedent in the 
 history of the bank since the effect of changes in the rate 
 came to be fully understood. 2 The great number of changes 
 between 1845, after the Bank Act took effect, and the close 
 of 1891, in comparison with those in other countries, is 
 shown in the following table 3 : 
 
 1 R. H. Inglis Palgrave, before Institute of Bankers, March 2, 1892. 
 London Bankers' Magazine, April, 1892, LIU., 551. 
 
 2 The rate was advanced on September 10, 1896, to two and a half 
 per cent ; on September 24th to three per cent ; and on October 22d 
 to four per cent, on account of the large withdrawals of gold for the 
 United States. 
 
 3 London Bankers' Magazine, May, 1892, LI II., 723. 
 
SECOND CENTURY OF THE BANK OF ENGLAND. 137 
 
 
 TOTAL 
 
 
 
 
 
 
 NUMBER OF 
 
 RISES. 
 
 PER CENT. 
 
 FALLS. 
 
 PER CENT. 
 
 
 CHANGES. 
 
 
 OF TOTAL. 
 
 
 OF TOTAL. 
 
 Bank of England 
 
 354 
 
 166 
 
 47 
 
 188 
 
 53 
 
 Bank of France 
 
 IOI 
 
 43 
 
 43 
 
 58 
 
 57 
 
 Bank of Germany 
 Bank of Holland 
 
 130 
 153 
 
 62 
 76 
 
 48 
 50 
 
 68 
 77 
 
 52 
 50 
 
 Bank of Belgium 
 
 161 
 
 71 
 
 44 
 
 90 
 
 56 
 
CHAPTER VI. 
 
 THE SCOTCH BANKING SYSTEM. 
 
 Its General Scope and Results The Bank of Scotland and the Royal 
 Bank The Failures of the Ayr Bank, the Western Bank and the 
 City of Glasgow Bank Advantages of Scotch Banking and its 
 Effect upon the Habits of the People and the Prosperity of the 
 Country Branch Banks in London and Limited Liability. 
 
 THE Scotch system of banks of issue comes nearer to 
 the ideal of successful free banking than that of any 
 other country. Absolute freedom in note issues 
 reigned for over one hundred years in Scotland, and during 
 eighty years of that period general distrust of the banking 
 system never occurred, small notes became the favorite 
 medium of exchange among the people, and the deposits in 
 the banks absorbed almost the entire savings of rich and 
 poor and brought within the circle of active producing 
 capital the entire accumulations of the country. Such de- 
 fects as were disclosed in the early years of Scotch banking 
 were corrected with experience, and the few departures 
 which have taken place from sound principles have been 
 such as to suggest no change in the established practice of 
 the majority of Scotch banks, but, at the most, some official 
 regulation which should hold all to the rules voluntarily 
 adopted by the oldest banks and the soundest bankers. The 
 mania for restricting note issues which swept over the 
 British Parliament in 1844 shut the circulation of the Scotch 
 banks within fixed legal limits, and limited the banks of 
 issue to those already in existence, but left untouched their 
 power to issue small notes and their means of accommodat- 
 ing the people of Scotland by receiving deposits. 
 
 138 
 
THE SCOTCH BANKING SYSTEM. 139 
 
 Banking in Scotland was inaugurated by the system of 
 monopoly, but differed from all earlier banking systems en- 
 joying monopoly of note issues in the fact that the first 
 joint stock bank was formed by private persons for the ex- 
 press purpose of promoting trade and not for supporting the 
 credit of the government. The charter of the Bank of Scot- 
 land, which was organized under authority of an act of the 
 Scotch Parliament of July 17, 1695, was framed to some ex- 
 tent on the model of the charter of the Bank of England and 
 made it illegal for any other company to set up the business 
 of banking for twenty-one years. The joint stock was to be 
 1,200,000 Scotch pounds, the equivalent of 100,000 English 
 pounds sterling, and was to be subscribed in amounts of not 
 less than ^1000 Scotch nor more than ,20,000 Scotch 
 (equivalent to ^83 6s. Sd. and ^1666 135. 4^. English). 1 The 
 bank was allowed to lend on real or personal security at not 
 more than six per cent., but was prohibited from employing 
 its stock or profits in any other trade or commerce, except 
 that of lending and borrowing money upon interest and the 
 negotiation of bills of exchange. The company was pro- 
 hibited from purchasing land or from advancing money to 
 the government, upon the anticipation of any sums to be 
 granted by Parliament, except those upon which a loan 
 should be authorized by a specific act. 
 
 The Bank of Scotland soon encountered the opposition of 
 the African Company, otherwise known as the Darien Com- 
 pany, which was organized by William Paterson, the founder 
 of the Bank of England. The Bank of Scotland had so 
 little confidence in its ability to protect its monopoly, that it 
 made no serious effort to contest the legal rights of its rival, 
 but endeavored to strengthen its position by calling in two- 
 tenths of its capital, of which one-tenth had been originally 
 paid in. The African company issued notes with great im- 
 prudence, lent to its own shareholders, and was obliged to 
 
 1 The coinage of Scotland was assimilated with that of England by 
 the act of Union in 1707, and the Bank of Scotland assisted in the 
 operation by receiving the old money and giving new money or their 
 own notes in return. 
 
140 HISTORY OF MODERN BANKS OF ISSUE. 
 
 abandon the field in May, 1698. The Bank of Scotland 
 repaid to their shareholders the two-tenths of the capital 
 called in and continued for several years without a rival. No 
 deposits were received at first from the public, but notes were 
 issued against the capital of the denominations of ^5, ^10, 
 ^20, ^50, and ;ioo. Notes for^i were first issued between 
 1699 and 1704. A run was begun in December of the latter 
 year, which compelled the bank to suspend specie payments. 
 A meeting of the proprietors was held and a device adopted 
 which is still of interest because it is similar to the existing 
 laws of Canada and Germany in the case of failed banks. 
 This device consisted in making the notes bear interest until 
 they were paid and resulted in keeping the notes at par. 
 Payment was made with interest in less than five months, 
 by means of a new call upon the proprietors for one-tenth 
 of the nominal capital. Another run upon the bank was 
 made in September, 1715, when the rebellion on behalf of 
 the Stuarts broke out, and the withdrawal of coin by the 
 presentation of the notes was encouraged by the bank direc- 
 tors in order to prevent the seizure of the coin reserve by the 
 insurgents. The bank suspended payment after most of the 
 cash had been withdrawn and gave notice again that the 
 notes would bear interest until paid. The monopoly of 
 banking for twenty-one years expired in 1716 and no steps 
 were taken to renew it. 
 
 The second successful bank in Scotland was formed, as in 
 the case of the Bank of Venice and Bank of England, by 
 the proprietors of the public debt, which they assumed 011 
 the union with England. An act which was passed in 1719 
 empowered the King to incorporate the proprietors of the 
 debt into a body corporate, which was organized in 1724. 
 The new corporation endeavored to secure admission to the 
 Bank of Scotland, upon the terms of increasing the capital 
 of the united bank by the sum of ^"250,000, the principal 
 of the debt, and the division of the annual interest of ^10,- 
 ooo in the proportion of two-sevenths to the shareholders of 
 the bank and five-sevenths to the holders of the debt. The 
 bank was making dividends which were declared b}' rivals to 
 
THE SCOTCH BANKING SYSTEM. 141 
 
 run as high as fifty per cent., and they replied that they had 
 no legal authority to increase their capital, that their stock 
 was large enough for the banking business of the country, 
 and that they would not in any case unite with the holders 
 of the debt at par while their stock was worth at least ten 
 per cent, and the debt only paid four per cent. The holders 
 of the debt, or the Equivalent Fund, as it was called, then 
 petitioned the King for banking powers, which were granted 
 on May 31, 1727. These powers were not granted without 
 powerful opposition from the old bank, whose defenders 
 declared that their capital, which they had called in to the 
 amount of three-tenths, making an aggregate of ,30,000, 
 was sufficient to circulate all the credit that could be re- 
 quired in Scotland. The last call made for the payment of 
 capital was partly paid in the notes of the bank. This raised 
 a great outcry from unthinking persons, who maintained 
 that the payments should be made in specie, but they were 
 answered by the scientific statement that ' ' bank-notes are 
 j ustly reckoned the same as specie when paid in on a call of 
 stock, because, when paid in, it lessens the demand on the 
 bank." ' 
 
 The new bank was known as the Royal Bank of Scotland 
 and began business on December 8, 1727, with a capital 
 stock of ^151,000. They received support from the govern- 
 ment by the deposit of ,20,000 of public monies and their 
 business rapidly extended. The Royal Bank is entitled to 
 the credit of the invention of cash credits, the unique feature 
 of Scotch banking which has done so much to promote the 
 prosperity of Scotland and to place business success and 
 wealth within the reach of the humblest of her people. 
 There was a deal of friction between the two banks during 
 these early years and the Bank of Scotland introduced a 
 clause into their notes making them payable at the discre- 
 tion of the directors at the end of six months, with the 
 interest from the time of presentation until the time of pay- 
 ment, instead of payable in coin on demand. This practical 
 suspension of redemption on demand resulted in excessive 
 
 1 MacLeod, Theory and Practice of Banking \ II., 203. 
 
142 HISTORY OF MODERN BANKS OF ISSUE. 
 
 issues of notes, not only by the two leading banks, but by 
 private banking and manufacturing companies, and the fall 
 of the notes below par. The attempt to maintain coin re- 
 demption was carried out by a process, which is described in 
 detail by Adam Smith, 1 of collecting coin through London 
 agents and sending it down in wagons to Scotland. Bills 
 of exchange were constantly drawn upon London to cover 
 coin obligations and their payment was often provided for 
 only by drawing fresh bills. The fact that the bank paper 
 was below par led to the constant presentation of notes for 
 redemption and justified Smith's declaration that " bringing 
 gold into the country was like pouring water into a sieve, or 
 like the toil of Danaides." The two principal banks soon 
 saw the folly of this method of doing business and agreed to 
 combine their influence to obtain an act of Parliament, which 
 was passed in 1765, prohibiting the issue of notes with the 
 optional clause, making all such notes payable to bearer on 
 demand, and prohibiting notes under twenty shillings ($5). 
 
 The Bank of Scotland and the Royal Bank were the only 
 chartered banks until the incorporation of the British Linen 
 Company at Edinburgh in 1746. This company was organ- 
 ized for the purpose of promoting the linen industry by 
 lending money to the manufacturers and as the Company 
 was thus led into the banking business it soon found it ex- 
 pedient to continue as a banking company only, under the 
 original name. 3 The next important institution founded was 
 the Ayr Bank, which distinguished itself by a radical depart- 
 ure from the methods of the older Scotch banks. The 
 wonderful expansion of Scotch agriculture and industry 
 after the failure of the Jacobite rebellion, under the stimulus 
 of conservative free banking and the system of cash credits, 
 was not rapid enough for certain restless spirits who wished 
 to borrow far beyond their capital or credit. The Ayr Bank 
 was formed with the avowed purpose of adopting a more 
 liberal policy, and the course of the older banks in gradually 
 
 1 Wealth of Nations, Book II., Ch. ii., i, 302. 
 
 2 Cunningham, II., 350. 
 
THE SCOTCH BANKING SYSTEM. 143 
 
 curtailing the discounts of a group of speculators who were 
 dealing in accommodation paper drove all this class of busi- 
 ness to the new bank. The result was the over-issue of 
 notes, which came back so rapidly upon the bank for re- 
 demption in coin that it was necessary to draw constantly 
 upon London and to incur heavy expenses for commissions 
 and interest. As Adam Smith describes the operations of 
 the bank : 
 
 When it was obliged to stop, it had in the circulation about ^200,000 
 in bank-notes. In order to support the circulation of those notes, 
 which were continually returning upon it as fast as they were issued 
 it had been constantly in the practice of drawing bills of exchange 
 upon London, of which the number and value were continually in- 
 creasing, and, when it stopped, amounted to upwards of ^600,000. 
 This bank, therefore, had in little more than the course of two years 
 advanced to different people upwards of ^800,000 at five per cent. 
 Upon the ,200,000, which it circulated in bank-notes, this five per 
 cent, might perhaps be considered as clear gain, without any other 
 deduction besides the expense of management. But upon upwards 
 of ^600,000 for which it was continually drawing bills of exchange 
 upon London, it was paying, in the way of interest and commission, 
 upwards of eight per cent., and was, consequently, losing more than 
 three per cent, upon more than three-fourths of all its dealings. 
 
 The Ayr Bank was founded by a company which com- 
 prised the Duke of Hamilton and many other wealthy landed 
 proprietors and it was supposed that their estates, which 
 were pledged by the unlimited liability of the stockholders, 
 would suffice to maintain the notes of the bank at par and 
 supply it with coin. The failure of the experiment proved 
 two of the essential principles of a banking currency that 
 no greater volume of notes can be maintained in circulation 
 than the convenience of business requires, and that landed 
 security is not the equivalent of coin in maintaining the re- 
 demption of notes on demand or the credit of a bank. The 
 period of the operation of the Ayr Bank was one of exten- 
 sive speculation and large Scotch exports, but the apparent 
 prosperity was brought to a sudden halt by the crisis of 1772, 
 which began in London on June loth, and caused a run upon 
 
144 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the Edinburgh branch of the Ayr Bank just one week later. 
 The bank continued its payments until June 25th, when it 
 was compelled to suspend and its great mass of obligations 
 was discredited. 
 
 The Bank of Scotland was authorized in 1774 to double 
 its capital stock, and began in this year the policy of estab- 
 lising branches which has become so striking a feature of 
 Scotch banking. Efforts had been made in 1696 and again 
 in 1731 to establish branches in Glasgow, Aberdeen, Dundee, 
 and one or two other places, but in both instances proved 
 unprofitable and were abandoned after a year or two. The 
 capital of the Bank of Scotland was increased in 1784 to 
 ,300,000, in 1792 to ,600,000, in 1794 to ,1,000,000, and 
 in 1804 to ,1,500,000, of which ; 1,000,000, was paid in. 
 The present paid up capital is ,1,250,000 and the nominal 
 capital ;i,875,ooo. The capital of the Royal Bank has been 
 raised to ,2,000,000, all of which has been paid in. The 
 capital of the British Linen Company is ,1,000,000, all paid 
 in. The Commercial Bank was founded in 1810 as the bank- 
 ing institution of the Liberal party, with a paid-up capital 
 of , i, ooo, ooo, which was strengthened later by a reserve 
 fund of ^"400,000. The nominal capital is now .5, ooo, ooo. 
 These four banks the Bank of Scotland, the Royal Bank, 
 the British Linen Company, and the Commercial Bank 
 are the oldest institutions now in existence. The other 
 banks of issue which w r ere in operation when the Act of 
 1845 forbade the extension of the system were for the most 
 part founded as late as 1825, the date of the foundation of 
 the existing National Bank of Scotland and the Abderdeen 
 Town and County Bank. There were a few older institu- 
 tions w T hich have since ceased to exist, among them being 
 the Perth Banking Company, founded in 1766 and united 
 with the Union Bank in 1857, and the Dundee Banking 
 Company, founded in 1763 and united with the Royal Bank 
 of Scotland in 1864. 
 
 The strength of the Scotch banking system was illustrated 
 by the events which followed the suspension of specie pay- 
 ments in England. The news reached Edinburgh on March 
 
THE SCOTCH BANKING SYSTEM. 145 
 
 i, 1797, and a meeting of the bank officers decided that it 
 would be necessary for the Scotch banks to follow the example 
 of the Bank of England. There were symptoms of a run 
 for a few days, and the disappearance of specie led to the cut- 
 ting of i notes into quarters to afford a currency for small 
 transactions. 1 The Lord Provost called a meeting of the 
 principal inhabitants, who resolved to support the credit of 
 the banks and to receive their notes as specie. Banks which 
 had been in the habit of issuing notes were allowed to issue 
 notes for five shillings for a limited period and confidence 
 quickly returned. No action was ever brought against the 
 banks for their failure to pay specie, the notes were received 
 as confidently as ever, and in a short time business activity 
 was resumed and continued throughout the long Napoleonic 
 wars. The banks, in the language of the report to the 
 Lords in 1826, "supported themselves from 1797 to 1812 
 without any protection from the restriction by which the 
 Bank of Kngland, and that of Ireland, were relieved from 
 cash payments. ' ' 
 
 The policy of the English Bank Act of 1844, to suppress 
 the evils of speculation by restricting bank-note circulation, 
 was extended to Scotland in 1845," but several of the provi- 
 sions regarding the Scotch banks differ from those affecting 
 the English banks. The banks of issue existing in Scot- 
 land at the time of the passing of the act were allowed to 
 retain an authorized circulation equal to the average during 
 the year ending on the ist of May, 1845. They were also 
 authorized to issue additional notes when fully covered by 
 deposits of coin at the head office or principal place of issue. 
 Not more than one -fifth of this coin deposit was to be in 
 silver. The Scotch banks, therefore, stood upon an equality 
 in issuing notes upon deposits of coin beyond the authorized 
 limit, while the English banks except the Bank of England 
 were absolutely limited. No new bank of issue could be 
 founded, however, in Scotland. The authorized circulation 
 of the Scotch banks, as ascertained under the new law, 
 
 1 MacLeod, Theory of Credit, II., 601. 
 
 2 8 and 9 Victoria, c. 38. 
 
146 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 was ,3,087,209. The limit of authorized circulation was 
 reduced by the suspension of the Western Bank in 1857, 
 which had an authorized limit of .337,938, and the similar 
 suspension of the City of Glasgow Bank in 1878, which had 
 an authorized limit of .72,921. These reductions fixed the 
 authorized circulation at ,2,676,350, where it now stands. 
 The union of two Scotch banks is permitted by the Act of 
 1845, and the retention of the aggregate circulation of both. 
 Several unions of this kind have taken place without chan- 
 ging the limit of the authorized circulation for the Kingdom. 
 The average circulation of the Scotch banks for the four 
 weeks ending November 30, 1895, including that covered 
 by coin, is shown in the following table : 
 
 BANK. 
 
 AUTHORIZED 
 CIRCULATION. 
 
 AVERAGE CIR- 
 CULATION FOR 
 FOUR WEEKS. 
 
 AVERAGE GOLD 
 AND SILVER 
 HELD FOR FOUR 
 WEEKS. 
 
 Bank of Scotland 
 
 flAI Al8 
 
 
 
 Royal Bank of Scotland.. . . 
 
 216,451 
 
 Xj 1 , 1 ^/, J9 
 1,000,968 
 
 950,441 
 
 British Linen Company. . . . 
 
 438,024 
 
 922,221 
 
 630,989 
 
 Com'l Bank of Scotland. .. . 
 
 374,880 
 
 998,986 
 
 768,312 
 
 Nat. Bank of Scotland 
 
 297,024 
 
 899,120 
 
 756,8/1 
 
 Union Bank of Scotland. . . 
 
 454,346 
 
 1,039,304 
 
 777,853 
 
 Aberdeen Town and Co. Bk. 
 
 70,133 
 
 336,625 
 
 307,902 
 
 N. of Scotland Banking Co . 
 
 154,319 
 
 484,739 
 
 3/ 2 ,944 
 
 Clydesdale Banking Co. . . . 
 
 274,321 
 
 783,969 
 
 625,474 
 
 Caledonian Banking Co. . . . 
 
 53,434 
 
 141,260 
 
 99,806 
 
 Total 
 
 2 676 35O 
 
 
 
 
 
 
 
 The average circulation shown consisted of ,5, 170, 831 in 
 notes of denominations under ,5 and ,2,593,730 in notes 
 for ;5 and more. 
 
 The history of Scotch banking was comparatively unevent- 
 ful after the restrictive legislation of 1845, except for the two 
 great failures of the Western Bank in 1857 an d tne City of 
 Glasgow Bank in 1878. As these failures have sometimes 
 been treated by the opponents of Scotch banking as an 
 impeachment of its safety and success, they are worthy of 
 some attention in detail. Both occurred in years when 
 
THE SCOTCH BANKING SYSTEM. 147 
 
 other banking institutions and business houses in England 
 and other parts of the world were collapsing, but both were 
 the result of methods of banking so reckless and unsound 
 that they had repeatedly received, before the failures, the 
 condemnation of other Scotch bankers. The Western Bank 
 was founded in 1832 and in the twenty-four years of its 
 operation lost its entire capital of ;i, 500,000, and nearly 
 as much more from its other assets. The Western Bank 
 from the outset kept in I^ondon a reserve which was much 
 inferior to that of other Scotch banks and was so small that 
 its drafts were dishonored in 1834 by its L,ondon agents. 
 The other Scotch banks thereupon refused its notes and 
 remonstrated with it for its mismanagement. The directors 
 notified the other banks on October 30, 1834, that they had 
 resolved to invest in marketable securities a sum sufficient 
 to secure themselves in the future, to lessen their discounts, 
 and to keep sufficient funds to meet their obligations. The 
 chartered banks, upon this pledge, advanced ,100,000 to the 
 Western Bank to enable them to purchase the proposed 
 securities. But the management of the Western Bank soon 
 forgot their promises and returned to their former method 
 of business. These methods were so objectionable that 
 when they applied to the Board of Trade in 1838 for a grant 
 of letters patent, the other banks presented a joint memorial 
 against the grant. This memorial declared that Scotland, 
 during the periodical convulsions among the banks of Eng- 
 land, which had led to the failure of several hundreds, had 
 for the most part maintained a state of general tranquillity. 
 The memorial continued : 
 
 The cause of this is notoriously owing, first, to the large capital 
 employed in the Scotch banks, and, second, to the system of admin- 
 istration adopted. Capital alone, as has been recently experienced 
 in England, by extending the scale of operations, may only increase 
 the mischief. In the like manner a numerous proprietary, consti- 
 tuting a protection to the public against eventual loss, may, by adding 
 to the credit, add to the power of such an institution for evil. The 
 safeguard of the Scotch system has been the uniform practice adopted 
 of retaining a large portion of the capital and deposits invested in 
 government securities, capable cf being converted into money, at all 
 
148 HISTORY OF MODERN BANKS OF ISSUE. 
 
 times and uuder all circumstances. This requires a sacrifice, because 
 the rate of interest is small, and, in times of difficulty, the sale in- 
 volves a loss, but it has given the Scotch banks absolute security, and 
 enabled them to pass unhurt through periods of great discredit. . . . 
 
 The Western Bank was established in the year 1832, and the prin- 
 ciple on which it has avowedly acted has been to employ as much as 
 possible of its capital and assets in discounts and loans, retaining 
 only the cash necessary to meet its current engagements. . . . 
 
 It will be quite apparent that a bank that can employ its whole 
 funds in this manner is enabled either to divide a larger share of 
 profits than its competitors, or to do business on more favorable terms ; 
 and we repeat, that if the only consequence of this was to increase or 
 dimmish the dividends of the rival establishments, it would be of 
 comparatively small importance, but in its results it endangers the 
 existence of every bank in the country and the fortunes of a large 
 portion of the community. We feel that, if letters patent shall be 
 granted to this bank, after what has passed, it will be a public sanc- 
 tion and countenance of a new and mischievous principle, opposed 
 to the banking system of Scotland. 
 
 The charter was not granted and as the result of keeping 
 such small reserves in L,ondon the Western Bank was again 
 in trouble in 1847. The bank was then compelled to bor- 
 row .300,000 of the Bank of England in November and 
 December, which it repaid in March, 1848. A somewhat 
 more cautious policy was pursued until 1852, when the dis- 
 counts of the bank were .13,525,332 and the re-discounts 
 were ,407, 143. The bank even at this time had ,356,000 
 in overdue bills and held a number of life insurance policies 
 as security for dead loans, on which it was paying the 
 premiums. A reckless policy of re-discounting was begun 
 in 1852 which expanded the re-discounts in 1856 to .5,407,- 
 363 with ordinary discounts of ,20,410,884. The most 
 alarming feature of the bank's affairs, however, was loans to 
 four firms which reached an aggregate of ,1,603,725. The 
 character of the bills discounted for these firms is shown by 
 the fact that of ,402, 716 in bills of Macdonald ,398,349 
 were dishonored at maturity, and the results for the other 
 three firms were only a little better. The books of the bank 
 were examined, soon after the general meeting in June, 
 l8 57> by request of the directors and it was found that bad 
 
THE SCOTCH BANKING SYSTEM. 149 
 
 debts to the amount of ,573,000 were carried as good assets 
 and that the advances to shareholders amounted to ,988,487. 
 It was found that the four firms to which such immense ad- 
 vances had been made had been dealing in accommodation 
 paper and that the Macdonalds drew upon 124 acceptors, of 
 whom only 37 had been inquired about and 21 were reported 
 as extremely bad. The banks stopped the accounts of these 
 firms, which immediately failed, and a panic resulted on 
 the Stock Exchange on October loth. Depositors began to 
 withdraw their accounts, the bank was unable to settle its 
 balances through the clearing house and on Monday, No- 
 vember gth, closed its doors. 
 
 The collapse of the City of Glasgow Bank in 1878 was 
 similar in its character to that of the Western Bank twenty- 
 one years earlier and was due to similar causes. The City 
 of Glasgow Bank was compelled to stop temporarily in 1857 
 and continued to be suspected of reckless management from 
 that time until its failure. The institution had fallen into 
 such discredit early in 1878 that the bill brokers generally 
 asked and received an extra quarter or half of one per cent, 
 over the market rate charged other banks in discounting its 
 acceptances. 1 Distrust finally came to a head in September, 
 1878, when the Condon banks found increasing difficulty in 
 getting rid of acceptances sent them by their correspondents 
 in India and ordered their agents in the Hast to buy no more 
 such paper. The directors of the City of Glasgow Bank 
 appealed to the other Scotch banks for help towards the close 
 of the month and an expert accountant was set to work 
 upon their books. A slight examination showed that nearly 
 ,6,000,000 had been lent to four firms and that the books 
 had been deliberately falsified for not less than three years. 
 The other banks declined to give any assistance and the 
 City of Glasgow Bank stopped payments on Wednesday, 
 October 2d. The news was received very quietly in Scot- 
 land and the other Scotch banks announced that the notes of 
 the failed bank would continue to be accepted as usual. 
 They also made an arrangement by which relief was given 
 
 1 Gilbart, II., 400. 
 
150 HISTORY OF MODERN BANKS OF ISSUE. 
 
 to depositors who were hampered by the locking up of their 
 money pending the settlement of the bank's affairs. 
 . The heaviest burden of loss fell upon the shareholders, 
 whose liability was unlimited under the law then in force. 
 The liquidators were compelled to institute a number of suits 
 to fasten the liability fully upon the shareholders and to 
 defeat attempts to transfer stock. Having adjusted the list, 
 they made a call for ,500 for every ,100 of stock held, and 
 subsequently made another call for ,2250 per share of ,100. 
 The result of the first call, of which the nominal amount 
 was ,4,200,000, resulted in receipts of ,2,409,066 at the 
 end of the second year of the liquidation, October 22, 1880. 
 The nominal amount of the second call was ,7, 8 14,000, upon 
 shareholders who were still solvent, and the amount realized 
 was 3,405,452. The result of these two calls, with a sum 
 of ,5,851,657 realized from the assets, enabled the payment 
 of seventeen shillings in the pound within less than two 
 years and payment in full was made within little more than 
 a year, with the help of an advance from the other Scotch 
 banks, to creditors willing to forego interest on their claims. 
 While the creditors thus lost almost nothing, the great 
 majority of the shareholders were absolutely ruined. The 
 majority expressed their purpose at the first meeting on 
 October 22, 1878, to keep faith with their creditors, and they 
 kept the pledge so well that when the two calls had been 
 made the holders of only ,88,722 out of the capital of 
 ;i,ooo, ooo remained solvent. Criminal proceedings for the 
 falsification of the books w r ere begun against the directors 
 and they were given short terms of imprisonment. 
 
 The narrative of the transformation of the unlimited 
 banks of Great Britain into limited companies relates to 
 English banking so far as it affects some of the great English 
 joint stock banks, but it belongs more properly to the history 
 of Scotch banking in its origin and in its relations with im- 
 portant banks of issue. The agitation of the subject was 
 the direct result of the terrible losses suffered by the stock- 
 holders of the City of Glasgow Bank because of their unlim- 
 ited liability for the obligations of the bank. The law of 
 
THE SCOTCH BANKING SYSTEM. I$I 
 
 England, which prevailed in Scotland after the union, pre- 
 sumed and enforced unlimited liability upon corporations 
 except in the cases where special charters had been granted. 
 There was much opposition to extending the principle of 
 limited liability to private partnerships, but a statute of 
 1855 (Chapter 133) finally authorized the formation of joint 
 stock companies under such conditions. Joint stock banks 
 were excluded from the operation of this law and the exclu- 
 sion was continued in the joint stock banking act of 1857. 
 The failures of that year led to an enactment of 1858,' which 
 admitted banks to the privileges of limited liability so far as 
 concerned their general obligations. Banks issuing promis- 
 sory notes, however, were liable for the amount of the notes, 
 without limitation, in addition to the sum for which they 
 might be liable to general creditors. This act was merely 
 permissive and required banking companies which took 
 advantage of it to give thirty days' notice to each customer 
 and after registering under the act to post conspicuously at 
 their offices, on February ist and August ist of each year, a 
 statement of their liabilities and assets. 
 
 The Act of 1858 would have averted the hardships of the 
 stockholders in the City of Glasgow Bank if they had taken 
 advantage of its provisions before the failure. The three 
 older Scotch banks, however, held special charters which 
 limited their liability and the others, aside from the natural 
 indisposition to revise their constitutions, feared that the 
 effect would be injurious to their credit. Thus matters 
 remained until the collapse of the City of Glasgow Bank. 
 Investments in bank shares were recognized by the law 
 courts in Scotland as a legitimate investment of trust funds, 
 but the trustees were personally liable for the calls made by 
 the banks as well as to their clients, and many were ruined 
 by the failure. A steady selling of shares began all over 
 England and Scotland, by the prudent as well as those who 
 were carried away by the flurry of the moment. 2 The shares 
 of the three senior Scotch banks declined about ^55 on an 
 
 1 Statute 1858, c. 91. 
 
 2 Gilbart, II., 433. 
 
I$2 HISTORY OF MODERN BANKS OF ISSUE. 
 
 average, while the shares of the unlimited banks fell about 
 
 99. 
 
 The subject of permitting banking with limited liability 
 
 under different conditions from those imposed by the Act cf 
 1858 w r as brought up in Parliament and the government on 
 April 21 , 1879, introduced a bill for the purpose. The act be- 
 came law ' after a good deal of controversy and authorized the 
 increase of capital stock by an amount equal to existing shares 
 or some multiple of their value, and liable to be called up 
 only in case the company was wound up. This constituted a 
 reserve liability, which placed a definite fund within the 
 reach of a failed bank without requiring assessments upon 
 the shareholders to the full amount of the liabilities. The 
 principal of unlimited liability was retained in regard to 
 note issues by corporations whose original charters were 
 unlimited. Most of the leading English banks and the 
 unlimited Scotch banks soon registered under the new law. 
 It was feared that the adoption of limited liability would 
 result in a reduction of deposits, but this fear was discovered 
 to be unfounded and deposits materially increased in the 
 limited banks within the next few years. The banks gener- 
 ally adopted the policy of increasing their reserve funds by 
 setting aside a part of the profits, but the reserve funds 
 themselves are a source of profit in the revenue derived from 
 the securities in which they are invested. It was found, 
 moreover, by some of the English joint stock banks that a 
 better class of shareholders, of undoubted responsibility, were 
 attracted by the limited principle where men of straw with- 
 out other visible assets had begun to acquire title to the 
 stock when the liability was unlimited. 2 
 
 The three senior Scotch banks possessed the privilege of 
 limited liability in respect to both note issues and general 
 liabilities. They desired in 1881 to increase their capital and 
 to issue additional stock under the conditions of the limited 
 companies. 3 The bills which they proposed were at first 
 
 1 42 and 43 Victoria, c., 76. 
 
 2 London Bankers' Magazine, June, 1892, LIU., 897. 
 
 3 The chartered banks had occasion to point out, in the course of 
 
THE SCOTCH BANKING SYSTEM. 153 
 
 favorably received in Parliament, but after passing a second 
 reading in the House of I/ords were opposed by the govern- 
 ment. Conferences and correspondence ensued which 
 brought out some rather startling statements as to the policy 
 of the government towards the Scotch note issues. Several 
 of the objections made to the proposed bills were completely 
 demolished by the representatives of the banks, and the 
 government several times shifted their position. The gov- 
 ernment at first objected to legislation by private bill and 
 suggested that the grant of new privileges in recent years to 
 corporations had been accompanied by a review of those 
 already possessed. They declared they were determined to 
 oppose the grant of new powers if the three banks continued 
 to ask for them accompanied by limited liability for notes. 
 The banks promptly offered to cover their note issue by 
 government securities to the amount of the circulation 
 authorized by the Act of 1845 an d by coin to the amount of 
 the excess. The government then suddenly forgot their 
 solicitude for the security of the circulation and intimated 
 that they would give the banks a lease of the right of note 
 issue for a fixed term, subject to a moderate royalty. 
 
 This was an important indication of public policy, for it 
 grew out of the theory that the right of note issue was 
 peculiarly an attribute of the state. It was based upon a 
 measure dealing with English banks of issue which had 
 been brought before Parliament by Lord Palmerston in 1865, 
 but never became law. The government emphasized their 
 leaning towards state note issues by an alternative proposi- 
 tion which they submitted, that the banks join them in 
 considering the terms upon which a state issue of notes, 
 conducted through the agency of all the banks, and main- 
 taining the ;i circulation, might be introduced into Scot- 
 land in place of the existing circulation. The banks replied 
 
 the discussion which followed, that there were legal difficulties which 
 were almost insuperable against extending unlimited liability for ex- 
 isting note issues to their shareholders, but they expressed their will- 
 ingness to adopt other safeguards for the ultimate redemption of the 
 notes. Gilbart, II., 448. 
 
154 HISTORY OF MODERN BANKS OF ISSUE. 
 
 at length, declining these propositions. They did not care 
 to take a lease of rights which they declared were already 
 theirs and had been exercised under express grants from the 
 Crown or from Parliament for from 135 years, in the case of 
 the youngest, to 186 years in the case of the oldest of the 
 three banks. A state issue of notes, they declared, would 
 not be acceptable to the people of Scotland, who would 
 suffer more than the banks from the closing of many of the 
 branches and the diminution of banking facilities which 
 would be the necessary consequence. 
 
 The right of the Scotch banks to maintain their branches 
 in Kngland became a subject of active controversy in 1875, 
 when Mr. Goschen introduced a bill in the House of Com- 
 mons prohibiting such branches. The National Bank of 
 Scotland had established a L,ondon branch in 1865 and the 
 Bank of Scotland in 1872, and Mr. Goschen himself had 
 carried through a bill permitting the Royal Bank to do so in 
 1 873. It was the opening by the Clydesdale Bank of branches 
 in Northern England which aroused the hostility of the Eng- 
 lish banks. 1 Mr. Goschen's bill resulted in a commission, 
 which made no recommendations, and the matter was dropped. 
 A new attempt was made to drag the limitation upon Scotch 
 banking into the limited liability act of 1879. It was em- 
 bodied in the eighth section of the original government bill 
 and prohibited limited companies from establishing branches 
 outside that part of the Kingdom in which they had their 
 head offices. The Scotch banks were immediately up in 
 arms against this provision and the government were finally 
 persuaded to abandon it. They attempted a flank move- 
 ment, by cutting down the operations of the bill to the joint 
 stock banks of England, entirely excluding Scotland and 
 Ireland. This was to defeat one of the most important pur- 
 poses of the bill and the friends of the Scotch banks declared 
 that they would not permit it to pass in such a form. The 
 government were finally compelled to give way and permit 
 its passage in a form applicable to the entire United King- 
 
 1 Maclveod, Theory and Practice of Banking, II, 397. 
 
THE SCOTCH BANKING SYSTEM. 155 
 
 dom and without any limitations upon the power of the 
 Scotch banks to establish their branches in London. 
 
 The essential features of the Scotch system of banking 
 have been freedom of note issues, the use of small notes, and 
 cash credits. The great achievements of the system with 
 these elements may be summed up thus : 
 
 1. It has provided Scotland with an elastic currency, 
 adapted to the condition of her industries and adequate in 
 volume to their changing needs. 
 
 2. It has enabled the people to carry on numerous com- 
 mercial and agricultural transactions for which they could 
 not have found the necessary quantity of coin and has econo- 
 mized the locking up of capital in the precious metals. 
 
 3. It has made the use of notes of small denominations 
 familiar and popular and has taught the people the distinc- 
 tion between bank-notes as the representatives of credit and 
 the precious metals as the measures of value. 
 
 4. It has brought into active use the available savings and 
 capital of the country. 
 
 5. It has afforded an opportunity for entering upon busi- 
 ness to thousands of poor but honest men and enabled them 
 to lay the foundation of a comfortable home and in many 
 cases of a fortune. 
 
 6. It has convinced the people so conclusively of the value 
 and safety of the banking currency system that no serious 
 panic has ever lasted beyond a few days or has ever affected 
 any of the banks except those which were justly the subject 
 of distrust. 
 
 I. The first proposition, that the Scotch banking system 
 has provided the country with an elastic and adequate cur- 
 rency, is strictly applicable only to the period between 1765, 
 when payment of notes on demand was made obligatory by 
 law, and 1845, when the volume of authorized circulation 
 was arbitrarily limited. The limitation imposed in 1845 
 could not be seriously objected to at that time, because it left 
 the authorized circulation at the amount then existing. The 
 moderate demands of changing seasons for an increased vol- 
 ume of circulation could easily be met by issues of notes 
 
156 HISTORY OF MODERN BANKS OF ISSUE. 
 
 against coin, since it would be highly improbable and impru- 
 dent that any bank should be without a small supply of coin 
 which might be made available for such a purpose. This 
 view of the matter is based, however, upon the theory that 
 the population and trade of Scotland were to remain station- 
 ary or to decline, as actually happened to the population of 
 Ireland. An advancing population and volume of trade 
 must gradually feel the fetters cramping the flesh of com- 
 merce and this has been to some extent the experience of 
 Scotland. ' ' The only effect of this law, ' ' upon the banks, 
 according to M. Courcelle-Seneuil, "has been to limit their 
 productive power, in condemning them to keep in reserve a 
 considerable sum without necessity." ' Protests against the 
 operation of the Act of 1845 have been frequently made by 
 the Scotch chambers of commerce and experience has seemed 
 to justify the early criticism of Mr. Gilbart, "that restric- 
 tions upon banks are taxes upon the public. ' ' a But Scot- 
 land had already passed the point in 1845 where free banking 
 was of supreme importance to her industrial development. 
 Limitations upon her circulation might hamper the opera- 
 tions and reduce the profits of the banks, but they could not 
 unlearn the lessons in saving and in the use of banking 
 facilities which had been taught by a century of free banking. 
 The Scotch circulation has continued to fluctuate in some 
 degree according to the seasons, the lowest point being 
 reached in March and the highest in November. The ad- 
 vance, however, is not steady from March to November, but 
 rises to a high point in May and then falls slightly until the 
 advance sets in which culminates in the autumn. May and 
 November are the months when the interest on mortgages is 
 usually settled, annuities are paid, the country people take 
 the interest on their deposits, and servants receive their 
 wages. It was the custom during the first half of the pres- 
 ent century to settle all such transactions by bank-notes. 
 This made it easier for the banks to keep their accounts than 
 under the system of drawing odd amounts in checks ; for a 
 
 1 Traite des Operations de Banque, 298. 
 
 3 History, Principles, and Practice of Banking, II., 217. 
 
THE SCO TCH BA NKING S YS TEM. I 5 7 
 
 depositor having payments to make would draw out the en- 
 tire sum in notes, would receive his payments during the day 
 in the same form, and would deposit the net proceeds again 
 in one sum in notes at the close of the day. The use of 
 checks has now become more general, but does not prevent 
 the rise and fall of the circulation in the autumn and spring 
 as formerly. 1 
 
 The elasticity and security of the Scotch circulation are 
 assured by the daily exchange of notes through the Edin- 
 burgh clearing house. The settlements for notes were un- 
 dertaken at an early date by the Bank of Scotland and 
 the Royal Bank, on each alternate month and are made by 
 exchange drafts on L,ondon. A bank which cannot meet 
 the test of these settlements is driven to suspension, as 
 happened to the Western Bank in 1857. The daily ex- 
 changes by notes are the great regulator of the paper cur- 
 rency and by their means, according to the admission of 
 one of the most radical opponents of free banking, " the 
 average circulation of Scotch bank-notes is reduced to a term 
 of a few days. ' ' a Notes which are not demanded by the con- 
 venience of trade quickly come back to the banks as deposits 
 on current account and are returned through the exchanges 
 to the issuing bank to be retired and cancelled. 
 
 II. The proposition that the banking currency of Scotland 
 has enabled her people to carry on numerous transactions 
 for which they could not well have found the necessary 
 quantity of coin, was abundantly demonstrated by the testi- 
 mony before the committees of Parliament which made re- 
 ports upon the subject in 1826. The Act of 1845 was not 
 successful, according to Mr. Gilbart, "in imparting to the 
 people of Scotland a taste for gold." The circulation of 
 notes, with the profit which the banks derived from circula- 
 tion, was necessary to maintain the existing banking system 
 and afford accommodation to the Scotch people. The banks 
 have never issued the gold except upon demand or for spe- 
 cial purposes. When it has become necessary to increase 
 
 1 Gilbart, IT., 207, 216. 
 
 3 Wolowski, La Banque d'Angleterre, etc., 515. 
 
158 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the circulation beyond the limit imposed by the gold in 
 hand, they have quietly brought the gold from London to 
 Edinburgh and kept it locked up in the vaults of the bank 
 until the necessity for it was at an end. The amount of 
 gold kept in the Scotch banks prior to the legislation of 
 1845 was but a small percentage of their obligations, but 
 was large enough to maintain their solvency and supply the 
 yellow metal when demanded for export or other special 
 uses. The specie holdings for the four weeks ending Janu- 
 ary 3, 1846, just after the act took effect, were only ,1,180,. 
 406, or less than half a pound sterling per capita, against a 
 circulation of ,3,336,409. The specie had increased for the 
 four weeks ending March 5, 1864, to ,2,337,459 against a 
 circulation of ,3,996,743 ; and for the four weeks ending 
 October 5, 1895, to ,5,521,437 against a circulation of 
 ,7,054, 197. 
 
 III. The use of small notes has also -been of enormous 
 advantage to the people of Scotland, and has produced none 
 of the dangerous results to the stability of the currency 
 which have sometimes been predicted in other countries 
 when small notes have been proposed. The benefits of 
 issuing notes for ,1 were fully set forth in the testimony 
 before the committees of the two houses of Parliament in 
 1826. Mr. Robert Paul, the Secretary to the Commercial 
 Bank, summed up some of the evils of abolishing small notes 
 by declaring that it would require the reduction of the num- 
 ber of branches, because of the increased expense in the 
 transmission of gold ; the withdrawal of cash accounts, be- 
 cause they would no longer accomplish the end for which 
 they were granted, the maintenance of the small note cir- 
 culation and the profits derived from it by the banks ; and 
 the reduction of the rate of interest paid on deposits, because 
 it would be necessary to keep a very large stock of gold and 
 to keep it wholly unproductive. 
 
 A letter written by an agent of the Renfrewshire Bank at 
 Greenock to the manager, Mr. Roger Aytoun, set forth in 
 an even more striking manner the absolute paralysis which 
 would fall upon many transactions by the adoption of a gold 
 
THE SCOTCH BANKING SYSTEM. 159 
 
 currency and the abolition of notes under $. Cattle dealers 
 in the country markets, he pointed out, often purchased two 
 or three hundred beasts, reaching an aggregate value of 
 several hundred pounds, but they purchased them by the 
 single animal, at a price ranging from 2 to ^4, from the 
 farmers who brought them to market. It would be neces- 
 sary, if i notes were abolished, for them to come to market 
 loaded with gold and silver, and the difficulty of obtaining it 
 from the banks would be increased by the fact that the 
 banks derived no profit from its circulation. Grain was 
 bought up, it was pointed out, in much the same manner 
 and the herring fisheries, which often amounted at L,ochfine 
 alone to the value of ^"40,000 in a single season, were 
 brought in by a thousand boats, whose catch for a night was 
 generally under ^5. " If small notes are superseded, and 
 gold substituted," continued the letter, "it is not easy to 
 see how the supply of gold is to be kept up to carry on the 
 business and transactions of this country. Should a quan- 
 tity of it be received into the circulation, it would not re- 
 main long, but find its way into the banks, who will not 
 again give it out in bills as they do their notes, and it will 
 immediately become a scarce article in the country. A per- 
 son, then, having to pay in small sums, will on every such 
 occasion be obliged to send his large notes to the bank that 
 issued them, perhaps a hundred miles off, to receive gold 
 and silver in their place, to answer his purpose." The evi- 
 dence was so overwhelming of the value of the small note 
 system that even Sir Robert Peel and the extreme advocates 
 of the currency principle were convinced of the serious in- 
 jury which its abolition would do in Scotland and both the 
 committees of the L,ords and the Commons recommended 
 the postponement of the measure. 
 
 IV. The fourth advantage of the Scotch currency system, 
 that it has brought into active use the available savings and 
 capital of the country, is due to the system of allowing inter- 
 est on deposits. This is hardly practicable except under 
 freedom of note issues, because no other system would afford 
 the banks sufficient profit to pay a rate of interest attractive 
 
l6o HISTORY OF MODERN BANKS OF ISSUE. 
 
 to capital. The early regulations permitted deposits for any 
 amount above ^10, subject to withdrawal at the will of the 
 depositor and bearing interest from the day of deposit until 
 the day of withdrawal. This system was supplemented by 
 the provident banks, which received deposits of small sums 
 until they amounted to ^10. It was the ambition of the 
 Scotch domestic, fisherman, and agricultural laborer to ac- 
 cumulate enough for a bank deposit during a half year or a 
 year and add it to the principal and interest which he had 
 already earned. When this sum accumulated sufficiently to 
 enable the depositor to buy or build a house, or to set up 
 as a master in the trade in which he had been a servant, it 
 would be drawn in bank-notes, which would continue to afford 
 profit to the bank until returned by some other depositor. 
 The system thus stimulated greatly the frugality and savings 
 of the poor, and did much to accumulate in Scotland a capi- 
 tal capable of developing her agriculture and manufactures. 1 
 It has not been merely as savings banks, however, that 
 the Scotch banks have contributed to bring into the circle 
 of active industry the entire capital of the country. The 
 wide diffusion of branches under the Scotch banking system 
 places a bank account within the reach of every small trader. 
 The result, in connection with the interest allowed on de- 
 posits, has been to create a much greater number of deposit 
 accounts from small tradesmen than in any other country. 
 The facility of banking and the advantage of earning inter- 
 est have tempted the Scotch tradesman to keep his spare cash 
 in hand at the lowest minimum and to deposit his entire sur- 
 plus in the bank. The payment of interest thus acts as a 
 direct check upon excessive issues by bringing the notes 
 back to the bank for deposit. The advocates of the Scotch 
 
 1 The proof of the large savings of the Scotch people and their gen- 
 eral use of banking facilities may be found in the bank returns for the 
 United Kingdom for 1894 published near the close of Chapter V. 
 These returns show that, in spite of the enormous wealth and bank- 
 ing business concentrated in the City of London, the deposit liabilities 
 of the Scotch banks, divided by the population of Scotland, show a 
 per capita average of about ^27, while those of England subjected to 
 a like process show an average of about 22. 
 
THE SCOTCH BANKING SYSTEM. l6l 
 
 banking system blame the English banks for their failure to 
 invite the available capital of the country into their coffers 
 by the payment of interest. 1 If a Scotch banker issues a 
 quantity of notes, he feels assured that nearly all of them 
 will be paid into some bank in the course of the day. There 
 was a competition among issuers, before the Act of 1845, 
 but it was under the restraint of the theoretical rule of free 
 banking, that the notes come back to the bank whenever 
 they are issued in excess. Many of the Knglish banks, 
 however, have discouraged deposits and active accounts by 
 charging a commission when the accounts were operated 
 upon. 
 
 Deposit accounts and the payment of interest have thus 
 operated at once to bring within the circle of productive in- 
 dustry every possible fraction of available capital, but they 
 have operated also to apply constantly to the banks the 
 touchstone of a sound and scientific currency, the redemp- 
 tion and cancellation of their notes. These results could not 
 be accomplished by a great state institution or without the 
 wide diffusion of banks or their branches. The ten Scotch 
 banks of issue have now over 900 offices or branches, or an 
 office for every 4500 people, men, women, and children. The 
 methods by which they have accomplished such results, 
 moreover, are not, in the language of M. Courcelle-Seneuil, 
 " the exercise of a blind routine, the setting in motion of a 
 sort of mechanism ; they have been the employment of an 
 enlightened judgment in their loans, the exercise of a high 
 intelligence applied to business." The Scotch system of 
 branches results in an even distribution of capital by with- 
 drawing it from points where it is not needed and concentrat- 
 ing it where it is needed. The branches in the agricultural 
 districts usually accumulate more capital than is needed 
 within their own circuits and transfer it to the manufactur- 
 ing districts, which are able to employ nearly all the capital 
 they can obtain. This system kept capital within the coun- 
 try and the payment of interest on deposits contributed to 
 deter the Scotch people from the reckless investments which 
 
 1 Gilbart, II., 211. 
 
 XI 
 
1 62 HISTORY OF MODERN BANKS OF ISSUE. 
 
 have absorbed so many millions of English, French, and 
 American money. 
 
 It was predicted, when the regulation of note issues was 
 applied to the Scotch banks in 1845, that the result would be 
 the reduction of the interest paid on deposits, and this pre- 
 diction has been verified by events. A part of this reduction 
 has undoubtedly been due to the accumulation of capital 
 and the fall in its price in the money markets of the world, 
 but a part is due to the increased cost of banking under the 
 Act of 1845. A radical departure was taken from the old 
 methods of Scotch banking, when the banks by a circular of 
 October i, 1892, gave notice that after that date the allowance 
 of interest on creditor balances of current accounts would be 
 discontinued. 1 No distinction was made in regard to the 
 rate of interest, at the time of the Act of 1845 and for some 
 years after, between deposit accounts and credit balances of 
 current accounts. The rate allowed was the same on the two 
 classes of accounts and seldom fell so low as two per cent. 
 The rate in force on deposits for several years was one and a 
 half per cent, and this w r as reduced in January, 1895, to one 
 per cent. These low rates have destroyed much of the 
 motive for depositing idle capital in the banks, and have 
 driven the Scotch people to send their money to Australia 
 and seek other and less secure investments than those which 
 they formerly obtained at home by simply depositing their 
 surplus in their current accounts with the banks. 
 
 V. The fifth great advantage of the Scotch banking sys- 
 tem, that it has afforded an opportunity for entering upon 
 business to thousands of poor but honest young men, is due 
 chiefly to the system of cash credits. The Royal Bank 
 found, soon after its organization, that it had more capital 
 than it could employ in ordinary commercial operations on 
 bills of exchange within the narrow circle of Scotch com- 
 merce. The result was the adoption of the system of cash 
 credits for the promotion of agriculture and industry. The 
 system consists in giving an open credit, or drawing account, 
 to a customer who is vouched for by two or more trustworthy 
 
 1 London Bankers' Magazine, April, 1893, LV., 577. 
 
THE SCOTCH BANKING SYSTEM. 163 
 
 persons. A cash credit of ^100 authorizes the person in 
 whose favor it is granted to draw upon the bank for that 
 amount, but he is not usually expected to draw the entire 
 sum at once and is charged with interest only on the amount 
 actually drawn and not repaid at any given time. The sys- 
 tem differs, therefore, from the discounting of a bill of ex- 
 change in the fact that the money can be drawn piece-meal 
 instead of in bulk and interest is charged only upon the por- 
 tion of the loan actually outstanding. If payments are made 
 from time to time into the bank, they are credited and the 
 interest charged is reduced. The persons who vouch for the 
 holder of the cash credit are called cautioners or sureties. 
 
 A cash credit, therefore, is in the nature of permission to 
 overdraw an account up to a fixed limit. Cash credits are 
 rarely given for sums below ^100 and generally range from 
 ^200 to ^500. The banks prefer these small sums, but 
 sometimes grant such credits for ^icoo or even larger sums. 
 Payments upon these credits are made in the notes of the 
 bank, which are thus kept in active circulation. Such a 
 credit is not allowed to lapse into a dead loan of the aggre- 
 gate amount, but it is expected that payments will inter- 
 mingle with drafts upon it. It is intended as a working 
 capital for men of good character engaged in trade or agri- 
 culture. It has the advantage over the ordinary method of 
 loans by discount, not only that it is more economical to the 
 borrower, but that it keeps within the control of the bank 
 all sums not in active business use. The holder of a cash 
 credit is not only benefitted by paying into his account all the 
 cash which he may receive from day to day, but he reduces 
 the bank's outstanding loans by that amount and enables it 
 to increase them in other directions. 
 
 The advantage of this system to Scotch industry has been 
 incalculable, measured not only in shillings and pounds to 
 the borrower, but in the stimulus which it has given to the 
 thrift, frugality, honesty, and morality of the people. The 
 two cautioners keep an eye upon the young man for whom 
 they have vouched, have a right to know the state of his ac- 
 counts, and if they find that his business is badly conducted, 
 
1 64 HISTORY OF MODERN BANKS OF ISSUE. 
 
 they can withdraw their security and authorize the bank to 
 call in the loan. The losses on cash credits have been tri- 
 fling throughout the entire history of Scotch banking. Cash 
 credits have been granted to manufacturers and large employ- 
 ers and to the trustees of great public works, as well as to 
 young men setting up in business and to farmers desiring 
 money in anticipation of the sale of their crops. Many dis- 
 tinguished Scotch manufacturers have testified that the sys- 
 tem of cash credits was the foundation of their success in 
 life. Mr. Monteith, a member of Parliament who testified 
 before the Committee of the House of Commons in 1826, de- 
 clared that he was then a manufacturer employing 4000 
 hands and that, except for the merest trifle of capital which 
 was lent to him, and which he soon paid off, he began the 
 world with nothing but a cash credit. The testimony before 
 the same committee showed that upon one cash credit of 
 ^500 there were operations to the amount of ,70,000 in a 
 single year, and one witness stated that during twenty-one 
 years in a country bank of moderate size operations took 
 place to the amount of ^90, 000,000 and that there had been 
 but one loss of .200 on a single account and that the whole 
 loss of the bank during the entire period did not exceed 
 
 ^1200.' 
 
 VI. The confidence which has been produced among 
 the Scotch people in the system of a banking currency as 
 maintained by their banks was illustrated in a remarkable 
 manner at the time of the failures of the Western Bank in 
 1857 and the City of Glasgow Bank in 1878. The run upon 
 the Western Bank began on Tuesday, October 13, 1857, and 
 continued for three days, but during that entire period the 
 bank paid away only about ^"36,000, in coin, and for the 
 entire month from October loth to November 7th only 
 ^44,000. Deposits were drawn out to the amount of 
 ;i, 280,000, but in nearly every case the depositors were 
 willing to accept the notes of the bank and when it 
 suspended operations the notes in circulation were still 
 ,720,000. The heaviest pressure upon the bank came after 
 
 1 MacLeod, Theory and Pratice of Banking, I., 347. 
 
THE SCOTCH BANKING SYSTEM. 165 
 
 the announcement that it would receive support from the 
 other Edinburgh banks on condition of winding up. This 
 pressure came, not from any demand for gold, but from 
 large tradesmen who transferred their accounts to other 
 banks in order to establish banking relations for the future. 1 
 The bank was unable to settle the heavy exchanges which 
 were thus created against it in the settlement with the 
 associated banks. 
 
 It was not until Sunday, November 8th, that the other 
 banks resolved to refuse the notes of the Western Bank in 
 consequence of its inability to settle its exchanges, and the de- 
 mand for gold became more marked on Monday and Tuesday. 
 The Western Bank closed on Monday and a genuine panic 
 was directed for a day and a half against the City of Glasgow 
 Bank, because it had been guilty of the same negligence as 
 the Western Bank regarding the keeping of its reserve in 
 London. The bank was obliged to close on Wednesday, 
 but the demand for gold was almost entirely confined to 
 depositors and very few note-holders came forward to 
 demand payment of their notes. Large remittances of gold 
 arrived from London on Wednesday and Thursday, the run 
 on the banks ended on Wednesday afternoon, and the people 
 seemed to retain the same confidence as ever in the other 
 banks and received the notes even of the Western Bank when 
 the other banks agreed to again receive them. When the 
 City of Glasgow Bank failed in 1878, it was only necessary 
 for the other banks to announce that they would continue 
 to receive its notes, as usual, to put an end to all uneasiness 
 on the score of the notes. If the banks on these occasions 
 had not been allowed to issue notes, the entire demand for 
 
 1 The same tendency to substitute the note obligations of the bank 
 for a deposit account was shown in British North America after the 
 failure of the Commercial Bank of Manitoba on July 3, 1893. The 
 reason in this case for preferring notes was the fact that they were 
 made by the Canadian banking act of 1890 a perfectly secured first 
 lien upon the assets. The banks receiving these notes were willing 
 to hold them for a time, at the request of the liquidator, because they 
 bore six per cent interest until paid. Breckenridge, 394-95. 
 
1 66 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the withdrawal of deposits must have been met in coin and 
 would have put a heavy pressure upon the coin reserves. 
 But the small notes were readily received, the deposit ac- 
 counts of the solvent banks were not assailed and the Scotch 
 banking system retained as completely as ever the confidence 
 of the people. l 
 
 1 M. Horn declares that the three elements which have especially 
 promoted the solidity of the Scotch banks and inspired the public 
 confidence have been their large capital ; loyal adherence to com- 
 mercial banking, without complications with the government ; and 
 the system of exchange of notes, which established a sort of mutual 
 supervision. La Liberte des Banques, 424. 
 
CHAPTER VII. 
 
 BANKING IN IRELAND. 
 
 The Effect of Political and Economic Misfortunes The Early Bankers 
 and the Foundation of the Bank of Ireland The Provincial Bank 
 and Other Banks of Issue The Collapse of the Agricultural and 
 Tipperary Banks The Act of 1845 and Present Conditions. 
 
 T REL,AND has had almost as varied an experience in 
 banking as in the political fortunes of her people and 
 her banking history has been affected more or less 
 unfavorably by the agitated condition of the country. The 
 policy of England towards Ireland was distinctly selfish 
 during the seventeenth and eighteenth centuries. Irish 
 agriculture was crushed by the importation of bounty-paid 
 wheat from England and Irish manufactures were stifled by 
 countervailing duties intended to prevent their competition 
 with English goods. 1 The linen trade was almost the only 
 one which was allowed some degree of prosperity, upon 
 the theory that it was better for England to draw her 
 linen supply from a dependency than to pay foreign coun- 
 tries for it. This policy was changed from 1782 to 1800, 
 while Ireland had an independent parliament, for the policy 
 of large bounties and protective duties, and for a brief period 
 Irish industry started forward by leaps and bounds under 
 this artificial stimulus. But the country soon felt the heavy 
 cost of the bounty system and prosperity began to decline 
 before the union with Great Britain. The economic history 
 of Ireland then became a part of that of England, and a 
 reasonable degree of progress was made up to the time of 
 
 1 Cunningham, II., 298, 523. 
 
 167 
 
1 68 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the potato famine in 1846. That event caused a loss of pop- 
 ulation by starvation and immigration which has never been 
 recovered. Absentee landlordism also has been a permanent 
 source of loss to the country by the large amount of produce 
 and money annually sent abroad in payment for rents. The 
 fact that bank deposits have increased and that Ireland has 
 retained within her limits a large fund of gold and silver, 
 in spite of these obstacles to her progress, is high evidence 
 of the productive and thrifty character of the Irish people 
 and the sound judgment of their bankers. 
 
 The earliest banking in Ireland seems to have been done 
 by brokers or intermediaries, who brought borrowers and 
 lenders together for a consideration. The business of issuing 
 promissory notes against deposits of coin gradually grew up 
 among the goldsmiths and tradesmen, who carried it on in 
 addition to their regular callings. These notes were given 
 a legal status as negotiable instruments by an Act of 1709, 
 which made them assignable and transferable by endorsement. 
 There were no banking laws to prevent fraud and failure, 
 and the losses by the failure of banks or exchangers was 
 estimated as early as 1682 at having been ^50,000 within a 
 few years. 1 The Act of 1709 gave the power to protest in- 
 land as well as foreign bills and promissory notes for non- 
 acceptance or non-payment. The Irish House of Commons 
 acted as a court of bankruptcy and a special act of Parlia- 
 ment was necessary for the liquidation of the affairs of an 
 insolvent institution. The first act of the kind on record is 
 in 1721, which was passed for the relief of the creditors of 
 Mead and Curtis, a Dublin firm which had suspended on 
 June 14, 1727. A bill for the relief of Burton and Falkiner 
 of Dublin was passed in 1733 but the final legislation re- 
 garding the affairs of this firm was not passed until 1757. 
 The firm had acted as bankers for the government and their 
 failure seems to have been due to their large holdings of 
 landed property, which could not be turned into cash when 
 needed. 
 
 A series of failures took place in 1755 and 1756, which led 
 17. 
 
BANKING IN IRELAND. 169 
 
 to the appointment of a select committee of the House of 
 Commons to make an inquiry. They reported that credit 
 had suffered by the setting up of persons as bankers with- 
 out sufficient capital, and recommended that bankers be 
 required to register the real and personal estate which they 
 proposed to hold as security for the payment of their liabili- 
 ties, that the names of the issuing bankers be stated on bank- 
 notes, that bankers should not be permitted to trade as 
 merchants, and that it should be made a felony without 
 benefit of clergy for cashiers or clerks to embezzle money 
 in excess of ^50. The committee also recommended the 
 cancellation of notes at the time of payment. These recom- 
 mendations, except that regarding the registration of security, 
 were embodied into law in 1755 (29 George II., c. 16). This 
 act did not entirely revive credit and four important banking 
 failures took place in 1758 and in 1760. The first was that of 
 Clements, Malone, and Gore, a firm established on July 3, 
 1758, which closed its doors on November ist, of the same 
 year. This firm issued deposit notes payable to bearer on 
 seven days' notice with interest at the rate of ten pence per 
 week for every ^100 (two and one-sixth per cent, per annum). 
 The deposits obtained were larger than were expected and 
 were invested largely in land, but the depositors soon began 
 to demand repayment of their notes and as cash could not 
 be obtained the firm was obliged to suspend. 1 
 
 Three of the six large banking firms in Dublin suspended 
 in 1760 and the others refused to discount bills and practi- 
 cally suspended business. Among the firms which remained 
 solvent was that of Messrs. I,a Touche and Co. , which began 
 business in 1725 and survived as a banking house until its 
 fusion with the Munster Bank in 1878. The financial con- 
 dition of the country and the state of credit were in such a 
 situation that a meeting of the merchants of Dublin was 
 held in April, 1760, which made an appeal to Parliament for 
 relief. A committee of inquiry was named by the House 
 which reported on April 23, 1760, that the quantity of paper 
 in circulation was insufficient to carry on trade and manufac- 
 
 1 Dillon, 23. 
 
I/O HISTORY OF MODERN BANKS OF ISSUE. 
 
 tures, and recommended support for the three surviving 
 banks to the amount of ,50,000 each. This recommenda- 
 tion was adopted and the notes of these bankers were 
 received as cash in the subscription for a loan which was 
 then being raised. The failure of Sir George Colebrook, 
 Bart., and Company, London bankers who had opened a 
 branch in Dublin, in 1764, was the cause of another panic 
 in 1770 which led the Lord Lieutenant and some of the 
 gentry to issue a notice pledging themselves to receive the 
 notes of the existing Dublin bankers without question. 
 
 The effort to found a strong joint stock bank began the 
 year after the foundation of the Bank of England. A number 
 of the principal merchants of Dublin held a meeting in 1695 
 and presented a memorial to the Irish House of Commons 
 on September i7th, recommending the establishment " of a 
 public bank or a fund of credit, for the encouragement of 
 trade, and supply of the present want of money." The 
 petition was referred to the committee on trade, but was 
 never reported upon. The matter was revived in 1720 by 
 Lord Abercorn, Lord Boyne, and others, who petitioned the 
 King for authority to found a public bank with a capital of 
 ,500,000. The Lords Justices reported in favor of the 
 scheme and the King authorized the Lord Lieutenant to 
 grant a commission and charter. The consent of the House 
 of Commons was required for a proper bill and the early 
 stages were favorably passed. Charges of jobbery began 
 to be made against the promoters of the bank, a rival scheme 
 was started with a capital of ,1,000,000, whose promoters 
 were charged with paying ,50,000 to members of the House 
 as bribes, and the outcome was the passage of a resolution 
 on December 9, 1721, " That the erecting or establishing a 
 public bank in this Kingdom will be of the most dangerous 
 and fatal consequence to his Majesty's service and the trade 
 and liberties of this nation. ' ' Religious, political, and finan- 
 cial reasons influenced the action of the House, but a stronger 
 reason was probably found in the infringement of the privilege 
 of originating legislation, which they jealously guarded. 
 
 The plan of a public bank remained in abeyance until 
 
BANKING IN IRELAND. I /I 
 
 1782, when Ireland obtained a new constitution, was freed 
 from humiliating tariff restrictions and believed herself upon 
 the threshold of a new era of prosperity. Mr. Eden, the 
 Secretary to the Lord Lieutenant, presented the heads of a 
 bill for a bank on February 27, 1782. Some opposition 
 developed among the existing bankers and their friends in the 
 House and when Mr. Eden called the bill up on March 5th, 
 the opponents of the bank endeavored to secure an adjourn- 
 ment, but the motion was lost and the report of the com- 
 mittee was agreed to. The capital of the bank was fixed at 
 600,000 Irish pounds, 1 of which no person was to subscribe 
 more than ,10,000, and which was to be lent to the govern- 
 ment at four per cent. The charter was to run until January 
 T , 1 794, and until twelve months' notice of withdrawal and 
 the re-payment of all sums due the bank by the government. 
 The bank began business June 23, 1783, and as early as 
 October 3ist, of the same year Mr. David La Touche, Jr., 
 was able to inform the House of Commons that great advan- 
 tages had resulted, particularly to the traders in linen. The 
 first offices of the bank were in some old houses in Mary's 
 Abbey, but after the union of Great Britain and Ireland in 
 1802, the directors of the bank purchased the Parliament 
 house for ,40,000. They remodelled it to meet their require- 
 '-ments and established the bank there in 1808. The meet- 
 ings of the directors and shareholders are held in the old 
 chamber of the Lords and the general office occupies the 
 old House of Commons. 
 
 The new institution was known, in similar language to 
 that establishing the Bank of England, as "The Governor 
 and Company of the Bank of Ireland," and was not allowed 
 
 1 The coinage of Ireland, although bearing the same names, differed 
 from that of Great Britain. The English shilling was passed in Ire- 
 land for thirteen pence, although twelve Irish pence were equal to a 
 shilling and twenty shillings to a pound. This made English coins 
 worth about eight per cent, more than Irish coins of the same names 
 and led to much confusion until the currencies were assimilated by 
 the Ac^of 6 George IV., c. 79, making the currency of Great Britain 
 that of the United Kingdom and providing for the interpretation of 
 contracts in its terms. 
 
172 HISTORY OF MODERN BANKS OF ISSUE. 
 
 to charge more than five per cent, interest on loans and dis- 
 counts. If the bank incurred debts to a greater amount 
 than its capital, the subscribers were answerable in their 
 private capacity to the creditors in proportion to their sub- 
 scriptions. The stock was to be transferable and to be 
 deemed personal estate, and as such to go to the executors 
 of the holders rather than their heirs. Fifteen directors were 
 to be chosen annually, not more than two-thirds of the direc- 
 tors of the preceding 3*ear were to be re-elected, and the 
 corporation was to have a governor and a deputy governor. 
 The charter of the bank was renewed in 1791 and the capital 
 increased to ,1,000,000. Another increase of ,500,000 was 
 made in 1791, and still another increase of ,1,000,000 was 
 made in 1808 by 48 George III., c. 103. The charter was 
 extended at this time until the expiration of twelve months' 
 notice after January, 1837. The last increase of capital 
 was made in 1820, when the total was fixed at ,3,000,000 
 in Irish currency (equivalent to ,2,769,231 in English cur- 
 rency). This last increase was taken from the surplus fund 
 of the bank and lent to the government, making the aggre- 
 gate loans to this date ,2,630,769 in English currency. The 
 total annuity paid the bank by the government was fixed at 
 ,115,384, which was reduced in 1845 to ,92,076, or at the 
 rate of three and a half per cent, on the English equivalent 
 of the amount of the loan, and was further slightly reduced 
 in 1892. 
 
 The suspension of cash payments in England in 1797 was 
 extended to Ireland, without any apparent necessity, " for 
 the sake of uniformity." Exchange was then in favor of 
 Ireland, there was no special demand upon the Bank of 
 Ireland and no drain of gold was feared. The effect of sus- 
 pension, however, was to enormously stimulate the issue of 
 notes, which increased from ,621,917 in 1797 to ,2,482,162 
 in 1800, ,3,068,100 in 1809, ,4,212,600 in 1813, and finally 
 reached ,5,182,600 in 1821 and ,6,309,300 in 1825. Ex- 
 change turned against Ireland as early as 1804 and led to 
 the special inquiry by the British Parliament which resulted 
 in the formulation of the principles afterwards repeated with 
 
BANKING IN IRELAND. 173 
 
 greater elaboration in the Bullion Report. The evidence 
 showed that silver had disappeared from circulation, even 
 for subsidiary purposes, and been replaced by silver notes. 
 Mr. Colville, a director of the Bank of Ireland, testified that 
 there were in Ireland seven bankers issuing notes ; 28 issuers 
 of gold and silver notes, 62 issuers of silver notes ; and 128 
 issuers of I. O. U's. 1 The Bank of Ireland made large 
 profits upon its forced circulation, and paid dividends never 
 less than six and a half per cent, and rising in 1803 and 
 1805, including a bonus, to twelve and a half per cent. Ex- 
 change on lyondon became favorable after a time, not because 
 the value of Irish currency was raised, but because that of 
 Bngland had fallen to its level. 
 
 The substantial monopoly of joint stock banking by means 
 of note issues was conferred upon the Bank of Ireland by 
 the act of incorporation, which declared that it should " not 
 be lawful for any body politic or corporate, erected or to be 
 erected, other than the corporation thereby intended to be 
 created and erected into a national bank, or for any other 
 persons whatsoever united or to be united in covenant or 
 partnership exceeding the number of six persons, to borrow, 
 owe, or take up any sum or sums of money on their bills or 
 notes payable at demand, or at any less time than six months 
 from the borrowing thereof. ' ' This provision left it in the 
 power of individuals and firms of small numbers to issue 
 notes, and this privilege was availed of to a great extent 
 after the suspension of cash payments. Nothwithstanding 
 the worthless character of many of these institutions, the 
 demand for currency was so imperative that large quantities 
 of notes were easily floated and great distress occurred, after 
 1820, when the number of institutions outside the Bank of 
 Ireland had been reduced to six. The Bank of Ireland was 
 permitted by an Act of 1821 (chapter 27) to resume cash 
 payments on June ist of that year. 
 
 The absence of a proper circulating medium, in spite of 
 the monopoly enjoyed by the Bank of Ireland, led to a pro- 
 
 MacLeod, Theory of Credit, II., 609. 
 
174 HISTORY OF MODERN BANKS OF ISSUE. 
 
 vision in the act which increased the capital of the bank, * 
 that the bank should surrender its monopoly outside the 
 circuit of fifty Irish miles from Dublin. Companies of more 
 than six partners were henceforth authorized to do a bank- 
 ing business and to issue circulating notes outside the pro- 
 posed limit. A party of Knglish capitalists determined to 
 take advantage of this provision and at a meeting in London 
 on June n, 1824, resolved to found a bank with a capital 
 of ,2,000,000 in shares of ,100 each, of which one-fourth 
 was to be paid up. Subscriptions we.re received far beyond 
 the amount needed before the end of the year and the capital 
 of the Provincial Bank of Ireland, which was thus estab- 
 lished, has never been increased except in 1836, when .40,- 
 ooo was transferred to the capital from the ' ' rest ' ' or reserve 
 fund. The monopoly enjoyed by the Bank of Ireland in 
 Dublin made it necessary to keep the head office of the new 
 bank in London, but an agency was established in Dublin 
 and Messrs. La Touche and Company acted as agents until 
 1838, when the bank opened its own office. 
 
 The Provincial Bank rapidly extended its branches 
 throughout Ireland, establishing them at Cork, Limerick, 
 Clonmel, and Londonderry in 1825 ; at Sligo, Wexford, Bel- 
 fast, Waterford, and Gal way in 1826, and at other towns in 
 successive years. The Bank of Ireland, which had been 
 content with its head office until it found competitors in the 
 field, began a policy of opening branches and established 
 them at Cork, Waterford, Clonmel, Londonderry, Newry, 
 Belfast, and Westport almost as soon as the prospectus of the 
 Provincial Bank had appeared. They began an action of 
 law against the Provincial Bank in December, 1828, because 
 of the payment of the latter' s notes in Dublin. The jury 
 found in favor of the Bank of Ireland upon the law and the 
 evidence, but awarded damages at sixpence, with costs of a 
 like amount, as evidence of the feeling in the business com- 
 munity of Dublin against the narrow policy of the bank. 
 The restiveness of the merchants was further indicated in a 
 petition to the Lords of the Treasury for the establishment 
 
 '2 George IV., c. 72. 
 
BANKING IN IRELAND. 175 
 
 of joint stock banks in Dublin, which led to a compromise. 
 An Act was passed in 1830, making lawful the payment of 
 notes in Dublin by the issuing bank for the purpose of with- 
 drawing them from circulation. The Provincial Bank ob- 
 tained the privilege in 1827 of receiving the revenues of the 
 excise, stamps, and postal service outside the Dublin district 
 reserved to the Bank of Ireland. Collectors of revenue were 
 authorized in the same year to receive the notes of the bank 
 in the same manner as those of the Bank of Ireland. 
 
 The Acts of 1820 and 1825 made it possible to establish 
 joint stock banks in different parts of Ireland and several of 
 these were soon incorporated. The first was the Northern 
 Banking Company, founded by the partners of a private bank 
 of the same name in Belfast. An attempt was made to convert 
 this bank into a joint stock bank in 1820, but it was found 
 necessary to await a change of the law requiring the residence 
 of all the partners in Ireland. The bank began business in its 
 new character in January, 1825, with a capital of ,500,000. 
 The capital was increased in 1867 to ,1,000,000 and has 
 since been increased to 2,000,000, of which ,400,000 has 
 been paid in. The Northern Banking Company purchased 
 the business of Messrs. Ball and Co., of Dublin in 1888 at a 
 cost of ,22,500 and opened an office at the capital. The 
 Belfast Banking Company was another institution which 
 was founded upon a private company. It began business as 
 a joint stock bank of issue on August i, 1827, with a capital 
 of ,500,000, of which ,125,000 was paid in. The capital 
 was increased in 1866 to "1,000,000 and in 1883 to ,2,000,- 
 ooo with ,400,000 paid in. 
 
 The National Bank of Ireland was founded in 1835 as the 
 result of the Nationalist feeling in the country. It began 
 business at the Carrick-on-Suir with a subscribed capital of 
 ,1,000,000 and consisted at first of separate bodies of share- 
 holders, English and Irish. When a branch was opened, 
 the local share-holders subscribed a portion of the capital 
 and the English proprietors contributed a like amount. 
 The profits were divided evenly between the two interests, 
 but the system proved inconvenient and the stocks were 
 
i; HISTORY OF MODERN BANKS OF ISSUE. 
 
 consolidated in 1837 except in two branches, where the 
 consolidation was delayed until 1856. Daniel O'Connell 
 was the first governor of the bank and his name caused 
 the institution to be dubbed "The Liberator's Bank" 
 and made way for its notes all over Ireland. The only 
 other bank of issue which is still doing business is the 
 Ulster Bank, founded in 1836, at Belfast. The capital was 
 originally ,1,000,000, which has since been increased to 
 ,2,400,000, with ,400,000 paid up. The profits paid in 
 dividends to the shareholders were twenty per cent, annu- 
 ally from 1866 to 1885 and have been only a little less in 
 subsequent years. The Royal Bank of Ireland was estab- 
 lished at Dublin in 1836, but was restrained by the monopoly 
 of the Bank of Ireland from issuing notes, and was found in 
 this condition in 1845 by the legislation confirming the 
 power of issue to the banks which then possessed it. The 
 Royal Bank, although a powerful and profitable institution, 
 was, therefore, never enrolled among Irish banks of issue. 
 
 The foundation of the National Bank was intended to 
 offset in a measure the collapse of the Agricultural and 
 Commercial Bank of Ireland, which was established in 1834 
 by the appeals of a Dublin baker, Mr. Thomas Mooney, to 
 the patriotism of the Irish people. Mr. Mooney bore the 
 same name as a Dublin capitalist of wealth and standing and 
 he secured as one of the directors a stationer named James 
 Chambers, which was also the name of a distinguished 
 Dublin financier who was a director of the Bank of Ireland. 
 The impression generally prevailed that these two eminent 
 gentlemen were interested in the new bank and Mr. T. M. 
 Gresham, who was brought into the bank just before its 
 collapse, testified before a committee of the House of Com- 
 mons that " there is no manner of doubt that we were all 
 deceived in two names in that bank." The capital of the 
 Agricultural Bank was gathered up from all sorts of humble 
 people by appeals to their Irish patriotism and parts of it 
 were obtained by liberal discounts to those who presented 
 commercial bills. A meeting of the shareholders after the 
 collapse of the bank was attended by two steamboat-loads 
 
BANKING IN IRELAND. 1 77 
 
 from Belfast, most of whom had their expenses paid by the 
 directors, and another contingent came from the south of 
 Ireland in canal boats. The branch managers of the bank 
 were selected according to their holdings of stock and acted 
 in reckless disregard of orders from the head office, even to 
 the extent of raising their own salaries and dating the 
 increase back to the time of their appointment. 1 The nom- 
 inal capital of the Agricultural Bank was ^1,000,000, but it 
 was admitted that at the time of beginning business it did 
 not actually exceed .3,000. The first branch was opened 
 at Nenagh, Tipperary County, in November, 1834, and the 
 bank was compelled to close its doors on November 14, 1836. 
 A special act of Parliament was required to wind up the 
 affairs of the bank and an attempt to put it on its feet under 
 a new organization failed in 1841. 
 
 The Tipperary joint stock bank, which succeeded Scully's 
 private bank in 1838, did not issue its own notes, but had an 
 arrangement with the Bank of Ireland by which its paper 
 was discounted. The power was reserved to the Tipperary 
 bank by the Act of 1845 to take the same amount of issue 
 as it would have been entitled to in case of the termination 
 of the agreement with the Bank of Ireland, so that it was 
 recognized as connected with the system of banks of issue. 
 The directors of the institution when it became a joint stock 
 bank were John Sadlier, his brother James, and Mr. James 
 Scully. The capital of the bank was ,100,000, a portion 
 of which was held in England, and favorable reports were 
 regularly made and large dividends declared for some seven- 
 teen years. Prosperity seemed to reign in the affairs of the 
 bank until February, 1856, when the doors were closed, less 
 than a month after the issue of a favorable report and the 
 declaration of a dividend. It was found that John Sadlier 
 had systematically robbed the bank and falsified the accounts. 
 Sadlier was one of the brilliant swindlers who so often take 
 the world by storm and persuade shrewd men of business to 
 embark with them in great enterprises. He had piloted 
 through Parliament several important railway bills, obtained 
 
 1 Dillon, 71-77. 
 
178 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the reputation of immense wealth, been elected member of 
 Parliament for Carlow, and was offered and accepted the 
 position of a Junior Lord of the Treasury. He became 
 chairman of the London and County Bank in 1848, chair- 
 man of the Royal Swedish Railway and a director in num- 
 erous stock companies. Towards the close of his career he 
 indiscriminately used all the funds of either corporation he 
 could lay his hands on, issued duplicate shares in the rail- 
 way company and forged documents which he deposited as 
 security for advances from other bankers. His forgeries 
 began to be suspected, the Tipperary Bank collapsed, and on 
 February 17, 1856, Sadlier's body was found by a laborer 
 crossing Hampstead Heath, lying on the ground with a 
 bottle labelled " poison " beside it. 1 
 
 The Banking Act of 1845, following the similar legisla- 
 tion for England and Scotland, repealed the acts of Parlia- 
 ment which prohibited the formation of stock companies for 
 banking with more than six partners. This threw down the 
 bars to all comers, so far as the organization of banks of 
 discount and deposit was concerned, but circulation was put 
 in a straight jacket, as in the case of the English banks. 
 The authorized issue of circulating notes after December 6, 
 1845, was not to be permitted to exceed, upon an average 
 of four weeks, the average amount of the circulation for the 
 year ending on the first day of May, i845. 2 If any two 
 banks united, they were allowed to maintain the aggregate 
 authorized circulation of both the old banks, and if any bank 
 surrendered its issue or agreed to issue Bank of Ireland notes, 
 the Bank of Ireland was allowed to increase its issues to the 
 full amount of the notes withdrawn. The law differed in 
 this respect from the English act, which limited the increase 
 in Bank of England issues in such cases to two- thirds of the 
 issues withdrawn. 
 
 The Irish law differed in an important respect from the 
 English banking act in regard to the additional circulation 
 which the banks were authorized to issue against deposits 
 
 1 Dillon, 81-86. 
 
 3 8 and 9 Victoria, c. 37, sec. 19. 
 
BANKING IN IRELAND. 179 
 
 of coin and bullion. This privilege was accorded to all the 
 Irish banks of issue, instead of but one, as in the case of 
 England, and they were thus put upon an equal footing 
 with no apparent purpose of concentrating issues finally in a 
 single institution. The Irish banks are required, however, 
 to keep the coin held against additional circulation wholly 
 at their head offices, while all their notes are required to be 
 redeemed on demand at the place or places where issued. 
 These requirements compel them to keep a supply of coin at 
 every branch, in order to redeem notes issued from that 
 branch, and it is the practice for a bank to redeem any of its 
 notes at any of its branches where they may be presented. 
 The fact that the privilege of additional issues has been 
 availed of to only a limited extent, while the coin holdings 
 of the banks have been large, would seem to indicate that 
 the fixed limit of authorized issues has not operated greatly 
 to restrain the business development of Ireland. One reason 
 for this is doubtless found in the fact that the population and 
 the volume of business were so greatly decreased in the 
 famine years, while the authorized circulation remained 
 untouched. The limit has proved in practice so generous 
 that Ireland has enjoyed a currency fluctuating with the 
 seasons and with the varying demand for money, in much 
 the same manner as an untrammelled banking currency. 
 
 The circulation was nearly ,1,000,000 above the limit in 
 1846, standing at ,7, 266,000, but declined as low as ,4,310- 
 ooo in 1849. The average returned in 1854 to ;6, 296,000 
 and increased pretty steadily until 1860, when it stood at 
 ,6,840,000. A decline then set in, which reached its lowest 
 ebb in 1863 at ,5,405,000. Another period of increase 
 carried the average circulation for 1872 as high as ,7, 674,000, 
 after which it fell to ,6, 065,000 in 1879, rose to ,7, 297,000 
 in 1882 and fell to ,5, 885,000 in 1887, the lowest average 
 for twenty years. The authorized circulation of each bank, 
 with the circulation and specie holdings for the four weeks 
 ending November 30, 1895, are shown in the following 
 table : 
 
i8o 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 BANK. 
 
 AUTHORIZED 
 CIRCULATION. 
 
 AVERAGE CIRCU- 
 LATION FOR 
 FOUR WEEKS. 
 
 AVERAGE GOLD 
 AND SILVER 
 HELD FOR FOUR 
 WEEKS. 
 
 Bank of Ireland . . ... 
 
 /T 7^8 428 
 
 7~2 670 47^ 
 
 /~648 823 
 
 Provincial Bank of Ireland. . 
 Belfast Bank 
 
 927,667 
 28l,6ll 
 
 801,786 
 
 610,087 
 
 353,299 
 
 470 ^S 1 } 
 
 Northern Bank. . .... 
 
 24 ^ 4.4O 
 
 eqi 026 
 
 46 1 2 I O 
 
 Ulster Bank 
 
 ^11 O7Q 
 
 807 Q74 
 
 708 ^n 
 
 The National Bank 
 
 852 269 
 
 1,7^6,717 
 
 8^4 ^4Q 
 
 
 
 
 
 Total 
 
 6 ^4 4Q4 
 
 6,028 06^ 
 
 34Q7 Oo8 
 
 
 
 
 
 The average circulation shown consisted of ^2,896, 841 in 
 notes of denominations under ^5 and ,4,032,124 in notes 
 for ^5 and more. 
 
 The elastic character of the Irish currency, in spite of the 
 restrictions of law, gives an interest to the fluctuations dur- 
 ing the year which result from the varying demand for 
 money. Beginning with January, the amount of the circula- 
 tion usually declines, slowly at first, but more rapidly in 
 May, June, and July, until it reaches its lowest point at the 
 end of August. Then begins the process described by Mr. 
 Gilbart, as a consequence of the law that ' ' the monthly cir- 
 culation must depend upon the quantity of produce brought 
 to market within the month ' ' : 
 
 Now, it lias been the custom in Ireland to commence bringing the 
 produce to market immediately after the harvest. Hence arises the 
 increase of the notes in September, and their further increase in the fol- 
 lowing month. But in the beginning of the year the landlords collect 
 their rents, and receive from their tenants the notes for which this 
 produce has been sold ; this brings the notes back to the bank, either 
 to be placed to his credit (if he have an account there), or, otherwise, 
 in exchange for a letter of credit on Dublin, or a bill on London. 
 The circuit of a note, then, is this : It is obtained from the bank by 
 a corn -merchant, who pays it to a farmer for his corn, which he ships 
 to England. The farmer afterwards pays the note for rent to his 
 landlord, who brings it back to the bank. 1 
 
 One of the peculiar features of the Irish circulation, like 
 the Scottish, is the large proportion of small notes. The 
 Select Committee of the House of Commons in 1826 recom- 
 mended fixing a limit of time in the future beyond which 
 
 1 The History, Principles, and Practice of Banking, II., 286. 
 
BANKING IN IRELAND. 
 
 181 
 
 the circulation of notes below ^5 should cease, but the testi- 
 mony given before the committee was against such a restric- 
 tion and it was not adopted. The arguments made against 
 the restriction were that it would check the growth of 
 manufactures, make difficult the sale of small lots of agri- 
 cultural produce, and curtail the accommodation which the 
 banks are able to give their customers and especially their 
 cash credits. The transfer of gold, it was pointed out, would 
 be inconvenient and costly, and once sent out of the country 
 it would rarely come back. The Act of 1845 prohibited notes 
 of fractions of i and required the banks in their reports to 
 state separately the notes in circulation under ^5. These 
 returns have shown a large proportion of small notes in cir- 
 culation and a marked increase from September to January 
 over the spring and summer months. This circulation of 
 small notes has contributed, with the widely diffused system 
 of branches, 1 and the existence of several strong joint stock 
 banks without the power of issue, to afford reasonably ade- 
 quate facilities for the development of banking in Ireland. 
 The proof of the growing use of banking facilities is afforded 
 by the steady expansion of deposits, shown in the following 
 table, in the face of a decreasing population : 
 
 YEAR. 
 
 POPULATION. 
 
 TOTAL DEPOSITS AND 
 CASH BALANCES. 
 
 DEPOSITS PER 
 CAPITA. 
 
 
 
 
 J. d. 
 
 1840 
 
 8,155,521 
 
 5,567,851 
 
 o 13 8 
 
 1847 
 
 8,025,274 
 
 6,493,124 
 
 l6 2 
 
 1850 
 
 6,877,549 
 
 8,268,838 
 
 i 4 i 
 
 1855 
 
 6,014,665 
 
 12,285,822 
 
 2 10 
 
 1860 
 
 5,82O,96O 
 
 15,609,237 
 
 2 13 7 
 
 1865 
 
 5,594,589 
 
 18,619,000 
 
 3 6 7 
 
 1870 
 
 5,418,512 
 
 24,366,OOO 
 
 4 9 ii 
 
 1875 
 
 5,278,629 
 
 33,519,000 
 
 670 
 
 1880 
 
 5,202,648 
 
 29,746,000 
 
 5 14 4 
 
 1885 
 
 4,924,342 
 
 29,370,000 
 
 5 19 4 
 
 1890 
 
 4,716,996 
 
 33,061,000 
 
 702 
 
 1893 
 
 4,606,527 
 
 34,637,000 
 
 7 10 4 
 
 1 The number of branches of the issuing banks in 1887 was 353, 
 affording an average of one to 13,000 inhabitants and to 200 square 
 kilometers. Counting the joint stock banks which do not issue notes, 
 the average was one branch to 10,500 inhabitants and to 180 kilo- 
 meters. Noel, I. 75. The number of offices of all Irish banks at the 
 beginning of 1895 was 571. 
 
CHAPTER VIII. 
 
 THK BANKS OF GERMANY. 
 
 The Bank of Prussia and the Share of the State in its Profits Other 
 Banks of Issue in Prussia and the Smaller States of Germany 
 The Reform of Currency and Banking under the Empire The 
 Sales of Silver and the Withdrawal of Paper Money Absence of 
 Legal Tender Character in the Bank-Notes. 
 
 THE existing banking system of the German Empire is 
 a part of the fabric of imperialism which was so in- 
 dustriously built up by Prince Bismarck from the be- 
 ginning of his premiership in 1862 until his retirement from 
 office. The Imperial Bank of German) 7 is in a measure an 
 expansion and development of the Bank of Prussia, which 
 was founded in the time of Frederick the Great, but it has 
 already absorbed the circulation belonging to the banks of 
 most of the other German states and is authorized to absorb 
 the entire paper circulation of the Empire as it is surrendered 
 by the local banks, in much the same manner as the Bank 
 of England is authorized by the Act of 1844 to absorb the 
 circulation of the country banks of England and Wales. 
 The circulation of the Imperial German Bank, while mod- 
 elled in many respects on that of the Bank of England, is 
 capable of a somewhat greater degree of elasticity, by virtue 
 of a legal provision for an emergency circulation above the 
 usual limit, and the notes are not a legal tender. 
 
 The Bank of Prussia was created by virtue of an edict of 
 June 17, 1765, under the name of the Royal Bank of I^oans 
 and Current Accounts at Berlin (Konigliche Giro- und Lehn- 
 bank zu Berlin} with a capital of 1,000,000 thalers ($750,000) 
 
 182 
 
THE BANKS OF GERMANY. 183 
 
 and was at first exclusively an institution of state. It con- 
 tinued to be a state institution until 1846, when the new de- 
 mands for capital for railways and for the extension of 
 commercial relations led to an extension of the scope of the 
 bank and an appeal to private capital to carry it on. Two 
 ordinances of April 14 and July 18, 1846, authorized the 
 increase of the capital by a sum of 10,000,000 thalers ($7,500,- 
 ooo) and admitted the shareholders to a part in the adminis- 
 tration by means of a central commission composed of fifteen 
 members, who were authorized to appoint a commitee of three 
 to exercise a regular supervision over the acts of the direc- 
 tors. * The capital owned by the State had been increased by 
 the setting aside of profits until it had reached in 1846 1,197,- 
 553 thalers ($900,000), and the portion furnished by the pub- 
 lic was increased in May, 1856, to 15,000,000 thalers and 
 again by the law of September 24, 1866, to 20,000,000 thalers, 
 ($15,000,000), divided into shares of a par value of one 
 thousand thalers each. The capital credited to the state had 
 been increasing in the meantime until it attained in Decem- 
 ber, 1867, a total of 1,897,800 thalers ($1,425,000). 
 
 The government took care to keep its hands firmly on the 
 direction of the bank, in spite of the new privileges given 
 the shareholders, and limited the right to participate in the 
 general assembly of shareholders to the two hundred hold- 
 ing the largest amount of stock domiciled in Prussia. Su- 
 preme control was reserved directly and exclusively to a 
 privy council (Bank Kuratorium), composed of the Presi- 
 dent of the Council of Ministers, the Ministers of Finance, 
 of Justice, and of Commerce, and a fifth member named by 
 the King. The direct management also was confided to a 
 director and a committee of direction appointed upon the 
 King's nomination. This official control was compensated 
 in a measure by exemptions from imposts and from certain 
 taxes which were imposed upon other similar establishments. 
 The bank was compelled, however, to pay interest on the 
 deposit of the public funds and to pay three and a half per 
 
 Noel, I., 246. 
 
1 84 HISTORY OF MODERN BANKS OF ISSUE. 
 
 cent, upon the capital contributed by the State and half the 
 net profits remaining after the payment of a dividend of a 
 like amount to the shareholders. The receipts of the gov- 
 ernment from these sources, including interest on its own 
 stock, attained a very considerable figure during the eight 
 years prior to its transformation into the new Imperial Bank, 
 amounting to 3,166,436 thalers in 1873 ; 1,711,920 thalers in 
 1874 ; and 2,284,875 thalers in 1875. 
 
 The accounts of the Bank of Prussia afford a good illus- 
 tration of the principle that banks of issue usually precede 
 mere banks of discount and deposit as a means of familiar- 
 izing the public with banking methods. There were scarcely 
 any deposits in the early history of the bank, except those 
 made by the government and upon which interest was paid 
 by the bank. These government deposits came from the 
 trust funds of the courts, including those of guardianship, 
 and the administration of churches, schools, hospitals, and 
 other charitable foundations and public institutions. Their 
 magnitude constantly grew and their use by the bank gave 
 it loanable funds which it could not otherwise have obtained 
 except by an issue of notes upon commercial paper dispro- 
 portionate to its original capital. This money entrusted to 
 the bank enabled it to do a discount business which steadily 
 grew with the expansion of commerce in Prussia and among 
 her neighbors. The aggregate of the discount business of 
 the year rose from 1,581,956,399 marks ($395,000,000) in 
 1867 to 2,630,469,468 marks in 1871, 3,958,299,756 marks in 
 1872, and 5,350,216,312 marks in 1873. The business depres- 
 sion which began in the latter year forced the discounts down 
 to 4,136,089,162 marks in 1874 and to 4,099,613,175 marks 
 ($1,025,000,000) in 1875. 
 
 One of the peculiarities of the Bank of Prussia, which ex- 
 tended to many other German banks, was the practice of 
 making loans upon merchandise as well as upon bullion 
 and the pledge of securities. Business of this kind was al- 
 ways kept within conservative limits and the statutes of the 
 Bank of Prussia admitted the precious metals at a valuation 
 of only 95 per cent, of their real value and merchandise at 
 
THE BANKS OF GERMANY. 185 
 
 from 50 to 60 per cent. The valuation of negotiable securi- 
 ties was determined by the officers of the bank. All these 
 operations were limited in amount and were required to run 
 for terms no longer than bills of exchange, for which the 
 maximum was three months. The number of loans of this 
 sort steadily declined during the latter years of the history 
 of the bank, while the amount increased, reaching a maxi- 
 mum in 1872 of 824,840,690 marks ($206,000,000), including 
 securities. 
 
 The issue of circulating notes was the chief means by 
 which the Bank of Prussia was able to utilize its assets and 
 there was no limit of law after 1856 upon the volume of the 
 issues. The law of 1846 forbade the issue of bills for a 
 greater sum than 21,000,000 thalers ($15,750,000), but the 
 repeal of this provision in 1856 left the bank untrammelled, 
 except as the opinion of the banking community imposed a 
 relation of one to three between the metallic reserve and the 
 circulation. The bills were not a legal tender and were re- 
 deemable in coin on demand, but they were accepted in pub- 
 lic depositories by virtue of a royal ordinance of June 9, 
 1847. The denominations were limited to ten, twenty-five, 
 fifty, one hundred, and five hundred thalers, equivalent to a 
 minimum of $7.50 and a maximum of $375. A further 
 limitation was imposed that bills of the smallest denomina- 
 tion should not exceed a total of 10,000,000 thalers ($7,500,- 
 ooo), and in fact their number never surpassed 957,000 in 
 the ten years preceding consolidation with the Bank of the 
 Empire and had descended in 1875 to 520,000 ($3,900,000). 
 The maximum note circulation in 1860 was 93,029,000 tha- 
 lers ($70,000,000) ; in 1865, 136,148,000 thalers, and 1870 
 202,488,000 thalers. The increase was more rapid in the 
 next few years and carried the maximum in 1871 to 242,242,- 
 ooo thalers ; in 1872, to 311,531,000 thalers ; in 1873 to 342,- 
 290,000 thalers ; and in 1874 to 297,412,000 thalers. 
 
 The reserve of the Bank of Prussia consisted of gold and 
 silver coin and bullion, public securities, bills of Prussian 
 private banks, and securities payable at sight or otherwise 
 and until 1869 of accepted drafts (Giro-Anweisungen). The 
 
1 86 HISTORY OF MODERN BANKS OF ISSUE. 
 
 total of this reserve reached in 1875 about 1,900,000,000 
 marks ($475,000,000). The proportion of coin and bullion 
 seldom exceeded one-third of this aggregate. The maximum 
 in 1860 was 77,457,000 thalers ($58,000,000) and had only 
 reached 99,427,000 thalers in 1870. The rapid increase of 
 the number of branches of the bank scattered over Prussia 
 and the growth of commercial operations led to an increase 
 in the reserve during the last four years of the operations of 
 the bank commensurate with the increase in its circulation 
 and discounts, so that the maximum in 1874 was 239,860,- 
 ooo thalers ($180,000,000) and the minimum was 203,511,000 
 thalers ($152,000,000). The Bank of Prussia, in spite of 
 the share which the government enjoyed in its profits, had 
 no monopoly of the right of note issue in the Kingdom. By 
 its side and in competition with its numerous branches ex- 
 isted eight local banks, including one at Berlin, whose united 
 capital was 8,899,000 thalers ($6,675,000) and which had the 
 right to issue bills to the amount of 7,000,000 thalers, but in 
 no case of a smaller denomination than ten thalers ($7.50).' 
 The branches of the Bank of Prussia increased from 143 in 
 1867 to 158 in 1870 and 167 in 1875. 2 
 
 The other German states were not without flourishing 
 banks of issue, which conformed in the general features of 
 their organization to the Bank of Prussia. There were 
 thirty-three German banks in existence, including those of 
 Prussia, when the Imperial Bank was established in 1875. 
 Two of these were commercial banks and one was a terri- 
 torial bank, the capital in each of these cases being furnished 
 by the municipality or the State and the liabilities constituting 
 a general claim against the government and the community. 
 The others were organized as stock companies. Three of 
 the German banks the Bank of Bremen, founded in 1856 ; 
 the Bank of Thuringia, founded in 1856 ; and the Bank of 
 Anhalt-Dessau, founded in 1847 ne ^ charters without 
 limit of time, which were regarded as perpetual. The char- 
 
 1 Courcelle-Seneuil, 365. 
 8 Noel, L, 250. 
 
THE BANKS OF GERMANY. l8/ 
 
 t.ers of the other banks ran for various periods from one year 
 to eighty-one years. The charters of the Bank of Gera, 
 which expired in 1953, and of the Banks of Central Germany 
 and Lower Saxony, which expired in 1956, had been granted 
 originally for one hundred years. 
 
 The oldest of the banks with limited charters was that of 
 Pomerania, established at Stettin in 1821, with a capital of 
 6,000,000 marks. The others were : The Bavarian Bank of 
 Mortgage and Exchange at Munich, founded in 1834 ; the 
 Bank of Leipzig, in 1839 ; the Communal Bank of Breslau, 
 in 1848 ; the Communal Bank of Chemnitz, in 1848 ; the 
 Bank of United Deposits of Berlin, in 1850 ; the Bank of 
 Rostock, in 1850; the Bank of Weimar, in 1853 ; the Bank 
 of Gera, in 1854 ; the Bank of Frankfort, in 1854 ; the Bank 
 of Southern Germany, at Darmstadt, in 1855 ; the Bank of 
 Cologne, in 1856 ; the Bank of Magdeburg, in 1856 ; the Pri- 
 vate Bank of Lubeck, in 1856 ; the Territorial Bank of Hesse, 
 at Homburg, in 1856 ; the Bank of Hanover, at Hanover, 
 in 1856 ; the Private Bank of Gotha, in 1856 ; the Bank of 
 Central Germany, at Meiningen, in 1856 ; the Bank of Lower 
 Saxony, at Buckebourg, in 1856 ; the Bank of Dantzig, in 
 1857 > the Bank of Pozen, in 1857 J tne Bank of Brunswick, 
 in 1857 ; the Commercial Bank of Lubeck, in 1865 ; the 
 Bank of Saxony, at Dresden, in 1865 ; the Territorial Bank 
 of Gorlitz, in 1866 ; the Bank of United Deposits, at Leipzig, 
 in 1867 ; the Territorial Bank of Oldenburg, in 1868 ; the 
 Bank of Baden, at Mannheim, in 1870 ; and the Bank of 
 Wurtemburg at Stuttgard, in 1871. The Prussian banks in 
 this list are those at Stettin, Breslau, Cologne, Gorlitz, 
 Magdeburg, Dantzig, and Pozen, and the Bank of United 
 Deposits at Berlin. 
 
 Many of these banks were born of the financial necessities 
 of the governments by which they were chartered and were 
 under obligations to aid the public Treasury. The Bank of 
 Homburg was required to loan to the government up to a 
 maximum of 100,000 florins ($42,000) at three per cent. ; the 
 Bank of Gotha was required to advance to the Treasury 
 a maximum sum of 200,000 thalers ($150,000) at four per 
 
1 88 HISTORY OF MODERN BANKS OF ISSUE. 
 
 cent. ; the Bank of Bremen was required to loan a maximum 
 of 200,000 thalers, and the Bank of Buckebourg was under 
 obligations to make advances to the amount of 400,000 
 thalers without interest, on the condition that the government 
 deposit public securities paying an interest of four per cent. 1 
 The State exercised a more or less complete control over all 
 these local banks, in some cases appointing the officials and 
 in others limiting its action to inspection and suggestion. 
 The Banks of Bremen and Frankfort were among those en- 
 joying comparative freedom, being subject only to public 
 control when it was judged desirable. 
 
 The operations of these banks before 1875 consisted, like 
 the operations of the Bank of Prussia, in the discount of 
 commercial paper, the negotiations of foreign and domestic 
 bills of exchange, advances upon public stocks and the pre- 
 cious metals and in some cases upon mortgages, and the 
 pledge of securities and property. The building of railways, 
 the increased productive power of the community, and the 
 consequent increase in capital, brought a rapid extension of 
 business to the German banks during the ten years before 
 they become subordinate to the German Imperial Bank. 
 The aggregate commercial discounts of all except the Bank 
 of Prussia increased from 126,629 in number and 693,420,- 
 537 marks ($167,000,000) in amount in 1867 to 535,302 in 
 number and 2,797,759,142 marks ($675,000,000) in amount 
 in 1874. The management of the local state banks was for 
 the most part prudent and conservative and they were doing 
 a safe and profitable business when they were arrested in 
 their growth by the policy of consolidation. Most of them 
 had branches in the neighboring towns and cities, reaching 
 a total of nearly fifty establishments besides the parent banks. 
 They were required by the laws of most of the states to set 
 aside a portion of their profits as a reserve fund and this fund 
 increased from 12,270,712 marks ($3,000,000) in 1867 to 34,- 
 332,457 marks ($8,200,000) in 1875. 
 
 The aggregate circulation of the banks outside the Bank 
 
 1 Noel, I., 263. 
 
THE BANKS OF GERMANY. 189 
 
 of Prussia was 181,635,305 marks ($45,000,000) in 1867, 242,- 
 502,653 marks in 1869, 432,799,730 marks in 1872 and 487,- 
 020,519 marks in 1874. The circulation of the Bank of 
 Prussia on the latter date was 838,422,000 marks, making 
 a total bank-note circulation for all the states of Germany 
 of 1,325,442,519 marks ($320,000,000). The banks showing 
 the largest circulation in 1874 were those at Dresden, 99,727,- 
 440 marks ; at Mannheim, 51,901,428 marks ; at Darmstadt, 
 46,327,015 marks ; at Frankfort, 45,208,833 marks ; at Leip- 
 zig, 28,464,069 marks; at Stuttgard, 25,477,028 marks ; and 
 at Meiningen, 24,000,000 marks. 
 
 The narrow limits of many of the German states and their 
 commerce with each other led to the mutual circulation of 
 their bills in spite of the absence of any legal tender quality 
 even within the limits of the state where they were issued. 1 
 The banks of some of the smaller states took advantage of 
 the wide circulation of their bills, and the lack of require- 
 ments for prompt redemption, by swelling their issues and 
 by various artifices for getting the notes into circulation at 
 distant points. Though legally redeemable in coin on de- 
 mand, the small denominations of the notes and the diffi- 
 culty of getting them to the counters of the issuing banks 
 threatened to create- a practically irredeemable and redundant 
 currency, which would expel coin and bring the country to 
 a paper basis. " They might without difficulty have reme- 
 died this abuse," says M. Courcelle-Seneuil, "by means of 
 a system of mutual exchange and liquidation among the 
 banks themselves, such as is practised in Scotland, and the 
 principal banks had in their hands every power to enforce 
 this exchange upon the banks of the small states." a But 
 other means of reaching the difficulty were adopted, and the 
 initiative was taken by Prussia, which passed an act on May 
 14, 1855, forbidding the circulation within her limits of for- 
 
 1 The legal tender quality was not given by law to the notes of any 
 of the German banks and was expressly disclaimed by the laws in- 
 corporating the banks of Pomerania, of Frankfort, of Homburg, of 
 Meiningen, and of the United Deposits at Berlin. Noel, I., 284. 
 
 2 Traite des Operations de Banque, 366. 
 
190 HISTORY OF MODERN BANKS OF ISSUE. 
 
 eign bills payable to bearer, without interest, of a value 
 below ten thalers. Saxony took similar action on July 8, 
 1855, and the small states of Thuringia concluded a conven- 
 tion January 21, 1856, by which they forbade the circulation 
 of foreign bills to bearer without interest and below ten 
 thalers in denomination, with the exception of the bank 
 drafts of Prussia and Saxony. The Grand Duchy of Baden 
 forbade the circulation of any foreign bills on December 24, 
 1855, except those issued in Prussia, Bavaria, and Nassau 
 and at Frankfort. Prussia extended the scope of her pro- 
 hibition on May 25, 1857, to all foreign bills except those 
 below ten thalers issued by the governments of Saxony, 
 Thuringia, and Anhalt. A Saxon ordinance of May 18, 
 1857, imposed a fine of fifty thalers upon the holders of for- 
 eign bills below the denomination of ten thalers except 
 upon banks of issue which carried on a special service of 
 exchange. 1 
 
 The history of the circulation of these state bills outside 
 of the limits of the issuing state suggests an interesting 
 comparison with the circulation of the notes of the depart- 
 mental banks of France and of the State banks of the United 
 States. The banks were not in any of these cases closely 
 linked together by clearing arrangements and the means of 
 communication and the promptness of commercial transac- 
 tions were not such as to result in the prompt return of the 
 notes to the issuing banks for redemption. It does not 
 appear that this resulted in a great inflation of the note 
 issues, even in the United States, 2 but it naturally aroused 
 fears that the banks might not be able to redeem their notes 
 promptly on presentation and that they might fall below par 
 
 1 Noel, I., 288. 
 
 2 M. Wolowski, who is one of the warmest champions of monopoly 
 of note issues, speaking of the situation in 1863, says: "Twenty 
 banks issuing 45,000,000 thalers ($33,000,000) for thirty-two states 
 whose population exceeded thirteen millions, is not too much as to 
 quantity ; it is too much because of the embarrassment which is 
 caused by this diversity of monetary signs." La Question des 
 Banques, 404. 
 
THE BANKS OF GERMANY. 191 
 
 in coin. The situation in France differed from that in Ger- 
 many and the United States in the respect that the notes of 
 the departmental banks were made legal tender after the 
 revolution of 1848 within the department where they were 
 issued, but were forced into an inferior position by the notes 
 of the Bank of France, which were legal tender throughout 
 the republic. The circulation of the bank-notes of Germany 
 and the United States without the legal tender quality might 
 have been maintained at par with coin (from which they do 
 not seem to have departed in Germany) under a system of 
 closer union among the banks and prompter means of com- 
 munication. 
 
 The government of Prussia took action as early as 1846 
 towards the centralization of the banking system, by the 
 ordinance of October 5th, which provided that the provin- 
 cial banks of the Kingdom should cease their operations 
 when the Bank of Prussia should lose its special privileges. 
 Another act, which indicated the purpose of the government 
 to keep matters in its own hands, was the law of May 7, 
 1856, renewing the privileges of the Bank of Prussia, but 
 reserving to the executive power the right at the end of 1871 
 and every ten years thereafter to dissolve the bank and re- 
 turn the capital to the shareholders. This provision neces- 
 sarily exposed the other banks, under the ordinance of 1846, 
 to dissolution as banks of issue at the end of the same period. 
 The law remained in this condition until the reorganization 
 of the North German Confederation under the headship of 
 Prussia in 1867. A provision was then incorporated in the 
 constitution of North Germany confiding to the Federal As- 
 sembly exclusively the regulation of banks of issue. The 
 power remained in abeyance for a few years, when the law 
 of March 27, 1870, reserved to the Confederation the right 
 of granting the power of issue or of increasing the monetary 
 circulation. The law stipulated that the renewal of the 
 privilege of issue should not henceforth be granted except 
 upon the condition that it might be revoked at any time 
 upon preliminary notice of one year. It was also provided 
 that where a bank possessed the right of issue for a definite 
 
I9 2 HISTORY OF MODERN BANKS OF ISSUE. 
 
 term, subject to preliminary notice of withdrawal, this notice 
 should be regarded as having been given. 
 
 The monetary system of Germany called for radical re- 
 form, without regard to the banking policy adopted, in order 
 to facilitate exchanges among the German states and with 
 foreign countries. The coins were of such different denomi- 
 nations and degrees of abrasion that heavy exchange charges 
 were levied on the borders of every little state and possible 
 profits on merchandise were almost neutralized by this loss. 
 Several conventions to simplify the monetary system were 
 held before the unification of the Empire, one of the latest at 
 Vienna on January 24, 1857. The basis of an agreement 
 was then prepared abrogating the old systems and adopting 
 one based upon the new pound of five hundred grams which 
 was in use in several continental countries. Germany was 
 divided by this convention into three zones. Silver was 
 treated as the single standard of value and was to be coined 
 into two forms, the thaler, equivalent to a florin and three- 
 quarters, and the florin, worth four-sevenths of a thaler. 
 It was proposed to coin thirty thalers out of a pound of five 
 hundred grams of fine silver for use in the Northern States 
 and fifty-two and a half florins out of a pound for use in the 
 South. Other silver pieces of one and two thalers were to 
 be coined with special devices, under the name of the union 
 thaler ( Vereinthaler), for trade between North and South 
 Germany, and were to be received by public depositories as 
 lawful money. 
 
 Silver constituted the principal metallic stock of Germany 
 and of the cash resources of the local banks up to the time 
 of the monetary reform. Gold figured somewhat in the cir- 
 culation, but it was not a legal tender. 1 The gold pieces, 
 coined under the convention of 1857 according to mint re- 
 
 1 Mr. Shaw declares that the convention in 1857 had a part of its 
 motive in the wish by the German States " to protect that part of 
 their currency system which was threatened by bimetalic law," and 
 that France drew gold from Germany as well as from California and 
 Australia as the result of the change in the ratio. History of Cur- 
 rency, 205-11. 
 
THE BANKS OF GERMANY. 193 
 
 gulations, were to be received at a valuation in standard sil- 
 ver money known as " the bank rate," which was fixed in 
 advance for six months and was never to be higher than the 
 mean quotations in the market. The character of the circu- 
 lating medium was further complicated by a circulation of 
 government paper money, which was issued by every Ger- 
 man state except the principality of L,ippe and the three free 
 cities of Hamburg, Bremen, and lyubeck. The adoption of 
 the gold standard was first formally recommended by a com- 
 mercial convention of one hundred and nineteen German 
 cities which sat at Berlin between October 20, and October 
 23, 1868. 1 A resolution was presented by Dr. Adolph Soet- 
 beer, who was the official reporter on the subject of the 
 standard at an earlier session held in September, 1865, de- 
 claring that "a monetary unity, and at the same time such a 
 general monetary reform as befits the age, can be brought 
 about by the adoption simultaneously by all the German 
 States of the single standard with full application of the 
 decimal system, in pursuance of the principles recommended 
 by the International Monetary Conference of Paris in its re- 
 port of July 6, 1867." This resolution was adopted, includ- 
 ing the recommendation of a unit of value equivalent to the 
 gold five-franc piece, and the public authorities were recom- 
 mended to put it in force not later than January i, 1872, when 
 the new system of weights and measures already adopted by 
 the North German Confederation took effect. 2 
 
 The payment of the great war indemnity by France gave 
 Germany the opportunity to carry out the recommendations 
 of her leading economists, that she adopt the gold standard. 
 The direct payments in French gold were only 273,003,058 
 francs ($52,600,000), but the power given the German gov- 
 ernment to draw the proceeds of bills of exchange upon 
 L,ondon and Paris gave them access in a large measure to the 
 
 1 Appendix to American Report on International Monetary Confer- 
 ence of 1878, Sen. Ex. Doc. 58, 45th Congress, Third Ses., 727. 
 
 2 M. Allard, the honorary director of the Belgian mint, declares that 
 silver was " academically demonetized " by the vote of the Paris Con- 
 ference. La Crise Agricole et Monetaire, 41. 
 
194 HISTORY OF MODERN BANKS OF ISSUE. 
 
 gold of the world. The German government kept an ac- 
 count with the London Joint-Stock Bank which was believed 
 to run as high as ^4,000,000 ($20,000,000)' and by watching 
 the market were able to rapidly carry gold into Germany. 
 The law establishing a uniform coinage (Act of December 
 4, 1871) did not adopt the five-franc piece as the unit, as 
 recommended by the convention of 1868, but adopted a unit 
 called the mark, equivalent to one-third of a Prussian thaler, 
 and established the ratio of fifteen and a half to one between 
 gold and silver. The provision of the treaty of Vienna, 
 providing for the coinage of the union thaler of silver, was 
 repealed. Gold legal tender coins were provided for, but the 
 Imperial gold standard was not fully established until the 
 coinage act of July 9, 1873, when it superseded all local 
 standards and made the monetary unit the mark of gold. 2 
 The Imperial silver coinage was to be carried on on govern- 
 ment account, and limited to ten marks per capita, and was to 
 be a legal tender for only twenty marks between individuals, 
 but payable in any sum to the government. The new sil- 
 ver coins were made mere token coins, by reducing the weight 
 of the fine silver eleven and one-ninth per cent, below the 
 full weight at the ratio of fifteen and a half to one and coin- 
 ing a pound of fine silver into one hundred marks and a 
 pound of fine gold into 1395 marks. 
 
 One of the interesting incidental results of the new coinage 
 laws was the termination of the career of the old Bank of 
 Hamburg, which had for more than two and a half centuries 
 been carried on on the principles of the Bank of Venice and 
 the Bank of Amsterdam. The accounts of the bank were 
 kept in marks banco, representing a bank credit of the uni- 
 form value of half a thaler (37^ cents), and its notes were 
 redeemable in silver. The Bank of Hamburg, founded in 
 1619, was the last survivor of the medieval banks, created 
 
 1 Bagehot, Lombard Street, Works, V., 199-202. 
 
 * The exact equivalent of the mark in American gold coin is twenty- 
 three and eight-tenths cents, but for convenience of computation in 
 dealing with large figures it is treated in this work as substantially 
 equal to a quarter of a dollar. 
 
THE BANKS OF GERMANY. 195 
 
 for the purposes of foreign commerce. Accounts could be 
 opened only by a Hamburg citizen or corporation and were 
 transferred only upon his appearance in person or by attor- 
 ney with a transfer order. The principle upon which the 
 bank was conducted was the granting of a credit on the 
 books for the silver or gold deposited. No loans were made 
 and no notes or other liabilities were created beyond the 
 amount of coin and bullion on deposit. So faithfully was 
 this rule adhered to that when the French on November 5, 
 1813, took possession of the bank they found 7,506,956 
 marks in silver held against liabilities of 7,489,343 marks. 
 They removed a large part of the treasure before the free- 
 dom of Hamburg was re-established on June i, 1814, but the 
 bank resumed business with unimpaired credit and the 
 thefts of Napoleon's forces were made good in 1816 by a 
 transfer of French securities. Modern banking methods 
 were gradually introduced into the Bank of Hamburg and a 
 capital was accumulated of about 1,000,000 marks ($250,000) 
 in addition to the buildings. The bank survived the storm 
 of the crisis of 1857, only to fall under the decrees establish- 
 ing the new German monetary system, which ordered the 
 bank to liquidate its accounts in fine silver by February 15, 
 1873. The latest reference to its existence is found in the 
 proceedings of the Hamburg Senate on October 13, 1875, 
 declaring their purpose to sell to the Bank of Germany for 
 900,000 marks the buildings of " the venerable institution 
 which had performed such great services to German trade." 1 
 The accumulation of a stock of gold was begun by the Im- 
 perial Bank and the government, and the purchases of gold 
 by the bank, from January i, 1876, to the end of 1893, 
 amounted in American money to $434,890,067. The coin- 
 age of Imperial gold coins from 1872 to the close of 1893 
 reached 2,737,790,915 marks and the aggregate coinage of 
 silver 484,048,609 marks. The sales of silver by the govern- 
 ment up to March 31, 1893, represented a coining value of 
 672,862,729 marks, but the amount actually received was 
 
 1 Palgrave, Dictionary of Political Economy, I., 105. 
 
196 HISTORY OF MODERN BANKS OF ISSUE. 
 
 574>55,53 2 marks, showing a loss of 98,807,197 marks. 1 
 The bulk of the sales were made before May 16, 1878, before 
 the great decline in the price of silver, and the highest price 
 per kilogram was obtained in the period of the largest sales, 
 between September 30, 1876, and September 30, i877. a The 
 profit on the gold, silver, and subsidiary coinage, taking 
 these coins at their face value, was 96,380,330 marks, and 
 the cost of recoinage added to the loss on silver was 127,894,- 
 218 marks, showing a net loss of 31,513,888 marks. 
 
 The banking system of the Empire was unified in a meas- 
 ure by the provisions of the law of July 9, 1873, that bank 
 bills should be withdrawn from circulation before January i, 
 1876, if their value was not declared in Imperial marks, and 
 that the smallest notes should be for 100 marks ($23.80). 
 The work of unification was completed, so far as it was 
 possible to complete it, by the Imperial law of March 14, 
 1875, which was supplemented by the Prussian law of 
 March 27th and a convention between Prussia and the Em- 
 pire on May i7th and i8th following. The Royal Bank of 
 Prussia was directed to cease its operations on December 31, 
 1875, and to transfer its rights and privileges to a new bank, 
 known as the Bank of the Empire (Reichsbanfc). The gov- 
 ernment of Prussia was allowed to withdraw its capital of 
 1,906,800 thalers in the old institution and the half of the 
 reserve fund belonging to it. The Prussian government was 
 further compensated for the surrender of its rights in the 
 bank by an indemnity of 15,000,000 marks ($3,750,000), 
 paid from the Treasury of the Empire, and a pledge that 
 
 1 The equivalent for these sums in American money, as given in 
 the American translation of the Report of the Berlin Silver Commis- 
 sion of 1894, are : Gold coinage, $651,594,221 ; silver coinage, $115,- 
 203,549 ; face value of silver coins sold, $160,141,329 ; price received, 
 $136,625,216; loss on sales, $23,516,113; net loss after deducting 
 profits, $7,500,308. Sen. Mis. Doc. 274, pt. I., Fifty-third Congress, 
 Second Session, 33-36. 
 
 2 The sales during this period were not far short of half of the 
 whole, being 1680.4 kilograms and representing a face value of 302,- 
 500,000 marks. The average price of silver in 1876 was $1.156 per 
 ounce and in 1877, $1.201 per ounce. 
 
THE BANKS OF GERMANY. 197 
 
 the new bank should continue the annual payment of 621,- 
 910 thalers ($465,000) from 1876 to 1925 which had been 
 agreed upon by the Bank of Prussia in I856. 1 The Imperial 
 government agreed to be responsible for this annuity in case 
 the privileges of the bank were not continued. The share- 
 holders of the Bank of Prussia were given the option of 
 receiving back their capital in cash, in accordance with the 
 pledge of the Prussian law of October 5, 1846, or receiving 
 shares of equal face value with their existing holdings in the 
 new Imperial Bank. The new bank on these conditions 
 succeeded to all the rights and obligations of the Bank of 
 Prussia. The Chancellor of the Empire was authorized to 
 acquire the bank shares which should be exchanged for the 
 shares of the Bank of Prussia and to issue interest-bearing 
 Treasury bonds maturing not later than May i, 1876, to the 
 amount of the shares not issued, in order to complete the 
 capital of the new institution. The capital was fixed by law 
 at 120,000,000 marks and was divided into 40,000 shares of 
 3000 marks ($750) each, of which 19,919 shares replaced the 
 shares of the Bank of Prussia which the holders had chosen 
 to convert ; 20,000 shares were placed by public subscrip- 
 tion, and 8 1 by means of sales on the Bourse. 
 
 The organization of the Imperial Bank made it entirely a 
 private institution as to ownership, but essentially a public 
 one in its management. " In fact," says M. Octave Noel, 
 " the establishment is closely bound to the state and is only 
 able to move, think or act when the state manifests in some 
 manner its presence and affirms its control." The official 
 control over the bank is confided to a council of curators, 
 composed of the Chancellor of the Empire, who is President, 
 and four other members, one named by the Emperor and the 
 other three by the Federal Council. The- direction of the 
 policy of the bank is so completely under the orders of the 
 Chancellor that in case of his absence or impeachment the 
 presidency of the Council is vested temporarily in an official 
 named by the Emperor. The Chancellor or his substitute 
 
 Noel, I., 248. 
 
198 HISTORY OF MODERN BANKS OF ISSUE. 
 
 directs the entire administration and issues the instructions 
 to the council of direction, to the branches and to the em- 
 ployees of the bank. The committee of curators meet every 
 three months and examine reports regarding the bank's 
 condition and the operations which are being carried on. 
 The administrative authority is vested in a directorate com- 
 posed of a president and a number of members named for 
 life by the Imperial government upon the nomination of the 
 Federal Council. The official force of the bank, although 
 paid from the funds of the institution, are subject to the 
 same obligations and enjoy the same privileges as the public 
 employees of the Kmpire. Honors and pensions are ac- 
 corded them, benefits are voted to the families of deceased 
 employees, the number of posts and the salaries are included 
 in the Imperial budget, and the accounts are subject to the 
 control of the accounting officers of the Empire. The em- 
 ployees of the bank, moreover, are forbidden by law to hold 
 stock in the institution. 
 
 The influence of the private owners is exerted through a 
 central commission of fifteen members and fifteen alternates, 
 elected by the general assembly of the shareholders from 
 their own numbers. These commissioners are required to 
 possess in their own right not less than three shares, to have 
 their domicile within the Empire, and nine members and nine 
 alternates are required to be residents of Berlin. A third 
 of the board is elected every year and the members are 
 eligible for re-election. Many of the business details of the 
 management of the bank are remitted to this central com- 
 mission, so long as their course does not meet the disap- 
 proval of the Imperial authorities. They are required to 
 examine at least each month the weekly reports, to inspect 
 the deposit accounts, and to determine what proportion of 
 the bank funds shall be used in advances and in the purchase 
 of paper, what the rate of discount shall be, and what ar- 
 rangements shall be made with other German banks. A 
 still smaller body of three members of the central commis- 
 sion is charged with the daily supervision of the bank's af- 
 
THE BANKS OF GERMANY, 199 
 
 fairs and they are authorized to sit at all meetings of the 
 directorate with consulting powers. 
 
 The note circulation of the Imperial Bank is based largely 
 upon the English banking act of 1844, but with an impor- 
 tant modification which adds greatly to the ability of the 
 bank to provide accommodation in times of stringency. 
 There is a fixed limit of authorized circulation, against which 
 cash or its equivalent must be held in the proportion of one- 
 third, and issues beyond this limit must be covered in cash 
 for the full amount. The cash reserve of one-third in the 
 one case and one hundred per cent, in the other may consist 
 of money having currency in Germany, Imperial Treasury 
 bonds, gold bullion, or foreign gold coin. The notes, there- 
 fore, are issued against the general assets of the bank, which 
 remain wholly within its own control and are not set aside 
 by specific designation or prior lien for the security of the 
 note holders. The law, says Prof. Dunbar, "has simply 
 provided by suitable measures that the affairs of the bank, 
 including its issue of notes and the money and securities 
 held by it, shall meet certain tests of soundness, believing 
 that both the ultimate solvency of the bank and the prompt 
 payment of its circulation are thus made secure." 1 The 
 limit of authorized circulation was fixed by the law of March 
 14, 1875, at 250,000,000 marks ($60,000,000) but the same 
 law provided that when any existing bank of circulation 
 should surrender its right, either by liquidation or by refusal 
 to accept the conditions imposed by the new law, the amount 
 of the circulation might be assumed by the Imperial Bank. 
 Seventeen banks surrendered their right to issue notes soon 
 after the adoption of the new system and their action added 
 26,085,000 marks to the authorized circulation of the Im- 
 perial Bank. This has since been increased to 42,117,000 
 marks. 2 The two- thirds of the authorized circulation not 
 covered by the cash reserve are required to be covered by 
 
 1 Theory and History of Banking, 195. 
 
 2 Raffalovich, Marche Financier en 1893-4, 67. 
 
200 HISTORY OF MODERN BANKS OF ISSUE. 
 
 bills of exchange maturing in not more than three months 
 and bearing not less than two solvent names. 
 
 The novel feature of the German system of circulation is 
 the authority given to the Imperial Bank to exceed the statu- 
 tory limit of note issue without metallic security, upon the 
 payment of a tax at the rate of five per cent, per year upon 
 the excess of circulation. Weekly reports are required by 
 the government and upon the excess of circulation shown 
 above the limit a tax of T 5 -g- per cent, is at once assessed, rep- 
 resenting approximately the tax for a single week at the rate 
 of five per cent, a year. This provision permits increased 
 issues when there is stringency enough in the money market 
 to carry current discount rates above five per cent, but drives 
 the new notes promptly out of circulation when the discount 
 rate falls. The operation of the rule, which has been several 
 times availed of by the Imperial Bank and by other German 
 banks, has proved salutary in averting such stringency as 
 has been felt in Kngland under the Act of 1844, while it has 
 kept the circulation within the limits set by the needs of 
 business. 
 
 The first issues of the Imperial Bank subject to the five 
 per cent, tax occurred in December, 1881, and were repeated 
 in September and October, 1882; in December, 1886; and 
 three times in the latter part of 1889, when the excess above 
 the limit ran as high as 109,473,000 marks ($26,000,000). 
 The limit was exceeded in 1890 by 26,250,000 marks ($6,500,- 
 ooo), but at the end of 1891 the reserve had been so increased 
 that the note issues were 101,407,000 marks below the limit. 
 This margin was reduced to 16,764,000 marks ($4,000,000) 
 at the end of 1892, and the bank was compelled in February, 
 1893, to P ass tne limit, to maintain an excess of circulation 
 until March 3oth, and to avail itself again of the privilege of 
 passing the limit on May 23d. The bank was 8,000,000 
 marks within the limit at the end of the year and 123,000,- 
 ooo marks within it at the end of 1894. The occasion of the 
 high interest rates and the demand for money in 1893 was 
 the withdrawal of deposits from Berlin by the Russian gov- 
 ernment, the effort of Austria-Hungary to restore specie 
 
THE BANKS OF GERMANY. 2OI 
 
 payments, the heavy offerings of Italian bonds and the im- 
 portant financial events in India, Australia, and the United 
 States. 1 The years 1894 and 1895 passed with slight excess 
 of the circulation above the limit. 
 
 The rate of discount charged by the Imperial Bank has 
 averaged 4.04 per cent, since its organization on January i, 
 1876. The variations have not exceeded seven in any one 
 year and have usually been fewer. The mean from 1876 to 
 1 88 1 was 4.42 per cent. ; from 1882 to 1887, 4.57 per cent. ; 
 and from 1889 to 1893, 3- 82 P er cent - The mean rates for 
 the past six years have been 4.51 in 1890 ; 3.78 in 1891 ; 3.20 
 in 1892 ; 4.06 in 1893 J 3- rl in l8 94 5 and 3-H in l8 95- The 
 rate in 1893 was permanently higher than for a long period. 
 It began at four per cent., and was reduced on January i7th 
 to three per cent., but was advanced on May i2th to four per 
 cent, and on August nth to five per cent., where it remained 
 until January 9, 1894. It was then reduced to four per cent. , 
 and on February 5th to three per cent., 8 where it remained 
 until November, 1895, when it was advanced to four per 
 cent. 
 
 The local banks of Germany were brought by the law of 
 1875 under the same rules as the Imperial Bank and drastic 
 regulations were enforced to compel them to comply with the 
 new law or abandon the issue of circulating notes. The 
 purpose of the new legislation, to bring the control of the 
 bank-note circulation as soon as practicable into the hands 
 of the Imperial Bank, was indicated by the declaration that 
 the power to issue bank-notes or to increase circulation be- 
 yond the limit already authorized by the various states should 
 be granted only by a law of the Empire. Prussia was almost 
 supreme in the Federal Council and there was little likelihood 
 that she would consent to any law increasing the circulation 
 of the local banks. The long duration of the privilege ac- 
 corded to some of them was cut off by a provision that their 
 privileges should be subject to revocation on January I, 1891, 
 
 1 Raffalovich, Marchk Financier en 1893-4, 62-63. 
 5 Raffalovich, Marche Financier en 1894-5, 112. 
 
202 HISTORY OF MODERN BANKS OF ISSUE. 
 
 and every tenth year thereafter, upon one year's notice and 
 without indemnit}^ if they accepted the power of note issue 
 involved in the new law. Those banks which were not dis- 
 posed to accept the new conditions were dealt with in a man- 
 ner similar to the departmental banks of France after the 
 revolution of 1848. They were not deprived of the privilege 
 of issuing notes, but they were forbidden by Article 42 of the 
 law to carry on banking operations, outside the limits of the 
 state which had given them the privilege, by means of 
 branches or agents or to hold shares in other banks. An- 
 other provision (Article 43) declared that "The notes of 
 banks having the privilege of note issue at the time of the 
 promulgation of this law, shall not be employed in payments 
 outside the state which may have granted them the privilege. 
 The exchange of these notes, however, for other bank-notes, 
 paper money, or specie is not subject to this prohibition." 
 
 Banks which saw fit to submit to the new conditions were 
 treated somewhat more favorably, pending the extension of 
 the branches of the Imperial Bank throughout the Kmpire. 
 They were governed by Article 44 of the law and were sub- 
 ject to the same conditions, as to the classes of securities 
 dealt in, the character of the commercial paper held, the 
 proportion of cash reserve to circulation and the payment of 
 benefits to the state, as the Imperial Bank. They were re- 
 quired to hold security for their circulation to the amount of 
 one-third in money having currency in Germany, in Imperial 
 Treasury bonds, in gold bullion or foreign gold coin. The 
 remaining two-thirds of the circulation was required to be 
 protected by bills of exchange running for not more than 
 three months and bearing three endorsements or not less than 
 two names of well-known solvency. They were required to 
 exchange their notes for German money having currency at 
 Berlin, or Frankfort, and redemption must not be delayed 
 beyond the morrow of the presentation of the note. 1 Banks 
 accepting these conditions obligated themselves to receive at 
 their face value, in branches established in cities of more 
 
 1 Noel, I., 320-23. 
 
THE BANKS OF GERMANY. 2O$ 
 
 than eighty thousand inhabitants and at the parent bank 
 the notes of German banks whose circulation was authorized 
 throughout the Empire and which were redeemable in coin 
 on demand. Bills on one bank thus received by another 
 could be used only in the settlement of balances with the 
 bank of issue, employed in payments within the territory of 
 the issuing bank or presented for redemption. Banks de- 
 siring to conform to the requirements of Article 44 were re- 
 quired to present to the Chancellor of the Kmpire the evidence 
 that their statutes conformed to the law and that the locality 
 chosen for the exchange of bills (Berlin or Frankfort) pos- 
 essed a branch ready for actual operation. 
 
 Much feeling was aroused among the German banks upon 
 the passage of this law and fifteen of the thirty-two outside 
 the Bank of Prussia promptly abandoned their right to cir- 
 culation, and became mere private banks of discount and 
 deposit, rather than conform to all the requirements of the 
 new law. The Bank of Brunswick took the bolder course, 
 which it was believed no bank would be able to maintain, 
 of refusing to comply with Article 44 and continuing its cir- 
 culation under the limitations of Articles 42 and 43. The 
 Bank of Brunswick, therefore, continued to issue bills which 
 circulated within the limits of the duchy and braved the ef- 
 forts of the Bank of Prussia to force it into submission. The 
 Prussian Bank refused to receive the paper of the Bank of 
 Brunswick and upon the failure of this device had orders 
 issued to the postal savings banks not to receive the notes 
 of the bank on deposit. The latter measure threatened to 
 arouse so much of the old separatist feeling in Germany that 
 it was abandoned by direction of the Chancellor. Frederick 
 William of Brunswick died during the latter part of 1884, 
 and Prince Albert of Prussia, the nephew of the German 
 Emperor, was elected Duke of Brunswick by the Diet on 
 October 21, 1885. The close relations thus established be- 
 tween Brunswick and the Imperial government soon led to 
 the compliance of the Bank of Brunswick with the provi- 
 sions of Article 44. 
 
 The purpose to clear the field for the circulation of the Im- 
 
204 HISTORY OF MODERN BANKS OF ISSUE. 
 
 perial Bank was indicated by a law of April 30, 1874, which 
 required the retirement of the paper money issued by the 
 various states not later than July i, 1875. The Imperial 
 government, in order to promote this policy, was authorized 
 to issue Treasury bonds to the amount of 120,000,000 marks 
 ($30,000,000) and to apportion them among the states ac- 
 cording to population. The paper money in circulation was 
 61,374,599 thalers ($45,000,000), and it was not distributed in 
 any such even ratio as the new bonds. The law, in contem- 
 plation of this situation, authorized the Imperial Treasury to 
 advance to states which needed an additional allowance 
 to retire their paper money a sum in Treasury bonds equal 
 to two-thirds of the excess of notes above the original ap- 
 portionment of bonds. These bonds were to be receivable 
 by the Imperial Treasury and were to be convertible on 
 demand into metallic money. The advances of bonds in 
 addition to the apportionment of 120,000,000 marks, were 
 54,919,941 marks, of which Saxony received 19,013,441 
 marks ; Bavaria, 14,534,975 marks ; Baden, 4,577,449 
 marks; Wurtemberg, 3,309,651 marks; Hesse, 3,250,- 
 514 marks ; and the other states less than 2,000,000 marks 
 each. Prussia received no additional advance, but her share 
 of the original allotment was 72, 145,494 marks. Oldenburg, 
 Ivippe, L,ubeck, Bremen, Hamburg, and Alsace- L,orraine 
 received no extra advance. 
 
 The sixteen banks which decided in 1875 to accept the 
 federal regulation of their circulation and to continue to 
 issue notes were, besides the Imperial Bank and the Bank 
 of Brunswick, the Municipal Bank of Breslau, and the 
 banks of Magdeburg, Dantzig, the Grand Duchy of Posen, 
 Hanover, Frankfort, Bavaria, Saxony, United Deposits at 
 lyeipzig, Chemnitz, Wurtemberg, Baden, Southern Ger- 
 many, and Bremen. Provision was made in the new law 
 for a new bank in Bavaria, with which two existing banks 
 were consolidated, and which was given special permission 
 to issue circulating notes to the amount of 70,000,000 marks. 
 The authorized uncovered circulation of these sixteen banks 
 was 111,125,000 marks, of which the Bank of Bavaria was 
 
THE BANKS OF GERMANY. 
 
 205 
 
 originally entitled to 32,000,000 marks, the Bank of Saxony 
 at Dresden to 16,771,000 marks, the banks of Frankfort, 
 Baden, Wurtemberg, and of Southern Germany to 10,000,- 
 ooo marks each, and the others to smaller amounts. The 
 absorption of the issues of these banks by the Imperial Bank 
 has proceeded rapidly in recent years. Only eight banks of 
 circulation remained in existence in Germany at the close of 
 1891, outside the Imperial Bank. They included the larger 
 of the banks named above, and their aggregate capital was 
 130,000,000 marks ($32,000,000). The circulation of the 
 local banks fell from 200,300,000 marks ($50,000,000) in 
 1883 to 192,400,000 marks in 1890, but their metallic reserve 
 increased from 111,200,000 marks to 112,600,000 marks. 1 
 The number of banks continuing to issue circulation at the 
 beginning of 1896, outside the Imperial Bank, was seven, 
 and the circulation in January reached a total of 180,880,000 
 marks, distributed as follows : Frankfort Bank 14,085,000 
 marks; Bavarian Bank, 67,793,000 marks; Saxon Bank, 
 50,438,000 marks; Wurtemberg Bank, 20,911,000 marks; 
 Baden Bank, 16,037,000 marks ; Bank of Southern Ger- 
 many, 13,646,000 marks ; Bank of Brunswick, 2,970,000 
 marks. 
 
 The principal items in the accounts of the Imperial Bank 
 since its creation are shown in the following table : 
 
 YEAR. 
 
 MEAN 
 CIRCULATION. 
 
 MEAN 
 METALLIC 
 RESERVE. 
 
 MEAN 
 DISCOUNTS. 
 
 MEAN 
 ADVANCES. 
 
 MEAN 
 CURRENT 
 ACCOUNTS. 
 
 1876 
 
 684.8 
 
 (In 
 510.5 
 
 millions of marks 
 
 ). 
 50-9 
 
 70.5 
 
 1878 
 
 622.6 
 
 494.0 
 
 340.8 
 
 52.4 
 
 109.9 
 
 1880 
 
 735-0 
 
 562.0 
 
 345-7 
 
 5L3 
 
 124.9 
 
 1882 
 
 747-0 
 
 548.9 
 
 372.1 
 
 54-4 
 
 III.Q 
 
 1884 
 
 732.9 
 
 5QI-7 
 
 377-7 
 
 49.1 
 
 155-2 
 
 1885 
 
 727.4 
 
 586.1 
 
 372.7 
 
 52.4 
 
 162.4 
 
 1888 
 
 933-0 
 
 904.0 
 
 430.0 
 
 52.0 
 
 247.0 
 
 iSgO 
 
 942.0 
 
 Soi.o 
 
 543-0 
 
 98.0 
 
 248.0 
 
 iSgl 
 
 971.0 
 
 890.0 
 
 546.0 
 
 98.0 
 
 360.0 
 
 1892 
 
 984.0 
 
 962.0 
 
 54i.o 
 
 95-0 
 
 463.0 
 
 1893 
 
 984.0 
 
 824.0 
 
 581.0 
 
 85.0 
 
 513.0 
 
 1894 
 
 1,000.0 
 
 934.0 
 
 548.0 
 
 81.0 
 
 491.0 
 
 1895 
 
 1,095.0 
 
 1,011.0 
 
 574-0 
 
 83.2 
 
 439-5 
 
 1 Bulletin de Statistique, Nov., 1891, xxx., 542. 
 
206 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The proportion of the metallic reserve which is in gold is 
 not regularly reported, but was stated in a government re- 
 port of May 10, 1892, at 624,977,000 marks ($150,000,000). 
 The amount at the end of 1894 was 714,448,000 marks ($170,- 
 000,000), and is now estimated at 750,000,000 marks ($180,- 
 000,000). The circulation of specie in all small transactions 
 in Germany is ensured by the limitation of the minimum 
 value of the bank-note to one hundred marks ($23.80). The 
 act of July 9, 1873, required all the German banks to with- 
 draw from circulation bills below this value as well as those 
 which were not expressed in Imperial marks. Redemption 
 in coin on demand is required at the Imperial Bank in Ber- 
 lin, but may be refused at the branches when the funds on 
 hand do not justify it. The bank is obliged to receive the 
 bills of other banks of issue which have conformed to the 
 law of March 24, 1875, and where they are established in 
 cities of more than 80,000 inhabitants. Bank bills are not a 
 legal tender, however, between individuals, and the law pre- 
 scribes that ' ' there exists no obligation to accept bank bills 
 for payments which are legally due in specie, and no such 
 obligation c&n be established by the legislation of any state 
 with regard to the banks of the state." 
 
 The government took advantage of the extension of the 
 charter of the Imperial Bank in 1889 to secure a larger share 
 in the dividends than it had before demanded. The statute 
 of December 18, 1889, reduced from four and a half to three 
 and a half per cent, the dividend allotted to the shareholders 
 before any other allotment. Twenty per cent, of the remain- 
 ing profits was to be carried to a reserve fund, so long as this 
 fund was less than a quarter of the capital, and the remainder 
 was to be shared equally between the shareholders and the 
 Imperial Treasury until the portion of the shareholders 
 reached six per cent. Of the profits in excess of six per 
 cent, the shareholders obtain only a quarter and the Im- 
 perial Treasury the other three-quarters. The minimum 
 dividend of three and a half per cent, was to be made up to 
 the shareholders from the reserve funds when it was not 
 provided by the annual profits of the bank. The reserve 
 
THE BANKS OF GERMANY. 2O/ 
 
 fund reached the legal limit of one-fourth of the capital in 
 1891. The old law divided the dividends above four and a 
 half per cent, equally between the shareholders and the gov- 
 ernment up to eight per cent. The actual profits under the 
 old law from 1876 to 1888 were 131,900,000 marks, amount- 
 ing to 8.46 per cent, annually on the capital. The share- 
 holders received 94,900,000 marks, amounting to 6.08 per 
 cent, of the capital and the state received 24,700,000 marks. 
 The bank had at the beginning of 1895 26 7 banking offices 
 and 1745 employees, and the cost of administration during 
 1894 was 9,069,380 marks ($2,250,000). The dividend de- 
 clared for 1894 was 6.26 per cent, to the 7877 shareholders 
 and more than half as much to the government. 
 
 The Imperial Bank has done much of late years to assist 
 the cultivators and small tradesmen, but not all that the 
 German socialists desire. The president recently had occa- 
 sion to remind them that the bank was not in a position to 
 accord long credits and that this condition was expressed in 
 the fundamental law, forbidding the discount of paper for 
 more than four months. "Within the limits of its stat- 
 utes," said he " the bank accords to small but sound cus- 
 tomers a suitable credit, when and so far as their conduct 
 and fortune offer guarantees of the punctual fulfilment of 
 their engagements. Artisans and merchants less fortunate 
 are always able to unite with advantage in a credit associa- 
 tion." 1 This suggestion has long since been acted on in 
 Germany through the Schulze-Delitzsch associations. These 
 are co-operative popular banks whose members comprise the 
 smallest artisans, domestics, and shop-keepers. They form, 
 says Professor Jannet, " a hierarchy of banks which by the suc- 
 cessive rediscount of their paper cause the bills of exchange 
 of the most modest artisans to reach the Imperial Bank." 2 
 
 1 Raffalovich, Marchk Financier en 1894-3, IT 6. 
 
 2 Le Capital, la Speculation et la Finance, 563. Mr. Henry F. 
 Merritt, the efficient United States Consul at Barmen, indicates that 
 the Imperial Bank even makes loans to associations not doing a 
 strictly short term business, but states that at the general meeting 
 of the Neuwieder Centralskasse at Mainzon on June 20, 1894, com- 
 
208 HISTORY OF MODERN BANKS OF ISSUE. 
 
 President Koch stated at the annual meeting in 1895 that 
 54,641 persons or firms were admitted to discount at the bank 
 during 1894, of whom 6414 were agriculturalists. From 
 April i, 1893, to April i, 1894, the bank had purchased 216,- 
 000,000 marks of bills bearing agricultural signatures, be- 
 sides discounting directly 24,000,000 marks more. The 
 associations having connections with the bank, he declared, 
 contained 502,451 members, of whom 127,229 belonged to 
 the rural associations, and they had at their disposal 60,000,- 
 ooo marks of the funds of the bank. 
 
 plaints were made that the Imperial Bank would only advance them 
 money at five and a half per cent. U. S. Consular Reports, Decem- 
 ber, 1895, 18. 
 
CHAPTER IX. 
 
 THE AUSTRO-HUNGARIAN BANK. 
 
 The Evils of a Century of Paper Money The First Issues of Notes 
 and the Efforts to Restore Coin Redemption The Creation of 
 the Imperial Bank and the Successive Changes in its Charter 
 Establishment and Growth of the Hungarian Branch The Mone- 
 tary Reform of 1892 and the New Rate of Exchange Use of 
 Certificates of Deposit. 
 
 THE Austrian Empire has been for a century under the 
 dominion of paper money, but her monetary history 
 has differed from that of France with the assignats 
 and the United States with the Continental money of the 
 Revolution. The Austrian paper money has been a serious 
 detriment to the commercial development of the country and 
 the solidity of business enterprises, but the volume has 
 never reached the point of absolute worthlessness and re- 
 pudiation. The effect of the system has been, in the lan- 
 guage of Professor Sumner, 1 "not like an acute disease ; it 
 is like an invalid state with occasional fever." The first 
 issues of paper money seem to have had the same beneficial 
 effects as the issues of Law's bank in France and the issues 
 of i bank-notes in Scotland, in stimulating business en- 
 terprises and affording a convenient circulating medium 
 where none existed, but the limit was soon over-passed and 
 the Austrian paper money began its downward course. This 
 course has been several times arrested by earnest efforts on 
 the part of the government, only to be resumed when the 
 necessities of war compelled new issues of paper. The fi- 
 
 1 History of American Currency, p. 323. 
 14 209 
 
210 HISTORY OF MODERN BANKS OF ISSUE. 
 
 nancial history of the Austrian Empire has been a succes- 
 sion of acts for refunding, for new issues of interest-bearing 
 and non-interest bearing securities, and new regulations for 
 the Austrian National Bank until the recital becomes almost 
 tedious. The government and the bank have been able in 
 recent years to accumulate a large stock of gold, the paper 
 money has risen much above the value of standard silver 
 coins, and unless the country is dragged into some new war 
 she will soon accomplish the resumption of specie payments 
 upon a gold basis. 
 
 The first important banking institution in Austria seems 
 to have been created at Vienna by a decree of June 16, 1703, 
 with a capital of 7,000,000 florins ($3,500,000). It was 
 created for the purpose of rescuing the government from the 
 evils of a debased currency which even then existed, but 
 was authorized to receive the deposits of individuals, like 
 the similar establishments of Venice, Hamburg, and Amster- 
 dam. It was essentially a governmental institution and was 
 formed, like the Bank of Venice, for the funding of the pub- 
 lic debt, which was to be accomplished by an annual levy 
 upon the receipts of the Treasury for the security and retire- 
 ment of the mandates or assegni which the new establish- 
 ment was authorized to issue. 1 The experiment was not 
 successful. The government was unable in the involved 
 state of the finances to make the annual payments to which 
 it was pledged and the mandates issued by the bank were 
 received very reluctantly into the monetary circulation. The 
 government finally turned the institution over to the City of 
 Vienna and it took the name of the Bank of the City of 
 Vienna. The transformation did not save it. The bank 
 suspended operations in drafts on private account in order to 
 devote its entire resources to refunding, but the expected 
 means for this work failed and the bank went into liquida- 
 tion at the expense of its depositors and shareholders. No 
 further attempt was made to establish a national bank for 
 over a century. 
 
 1 Noel, I., 344. 
 
THE AUSTIN-HUNGARIAN BANK. 211 
 
 The Austrian Kmpire found itself in 1761 in one of the 
 most critical stages of its history. The headship of Ger- 
 many, which descended to the Hapsburgs from Charle- 
 magne, was escaping from Austrian control under the potent 
 influence of Frederick the Great of Prussia, and Austrian 
 finances were involved in an inextricable confusion in which 
 the one patent fact of a deficit was all that was not obscure. 
 The Count of SinzendorfF, one of the leading ministers of the 
 Empire, noticed that the condition under which loans were 
 contracted afforded no opportunity to small capitalists to in- 
 vest. He presented, therefore, a project by which bills of 
 from 20 to 100 florins were issued, with coupons attached 
 indicating the value from day to day, with interest added at 
 six per cent. Public depositories were authorized to receive 
 these bills in payment of taxes and to disburse them to the 
 creditors of the State at their value at the date of payment, 
 including accrued interest. M. Noel says regarding the 
 effects of this issue : 
 
 The public were not slow to receive these bills with favor and the 
 circulation attained immediately such proportions that the govern- 
 ment felt able to dispense with the provision for interest, which 
 created a heavy charge upon the Treasury. It decided to substitute, 
 by a system of exchanges from day to day, paper money without in- 
 terest for the original interest-bearing bills, which represented a par- 
 ticular kind of Treasury bonds ; and in redeeming the last, in order 
 to avoid confusion, it issued notes of five, ten, twenty-five, fifty, and 
 one hundred florins. Public opinion showed itself as favorable to the 
 employment of the new money as to the circulation of the first, and 
 the numerous facilities which it gave to daily transactions gave it a 
 preference even over metallic money. 1 
 
 The government could not content themselves with tbe 
 moderate use of the power in their hands. A second issue 
 of notes was decreed in 1769 and a third in 1771. Commerce 
 was expanding, aided to some extent by the convenience of 
 the new note issues, and the government seized the oppor- 
 tunity for injecting fresh masses of paper into the circulation. 
 These excessive issues provoked a panic in 1797, which 
 
 1 Banques d' Emission en Europe, I., 340. 
 
212 HISTORY OF MODERN BANKS OF ISSUE. 
 
 obliged the government to give forced legal tender character 
 to the paper and even to refuse its conversion into securities 
 of the consolidated debt. Specie rose to a premium of thir- 
 teen per cent, in December, 1799, and began to disappear 
 from circulation, and in 1800 the Treasury attempted to fill 
 its place by the creation of notes of one and two florins (fifty 
 cents and one dollar). Austria lost several Italian provinces 
 as the result of the brilliant campaigns of Napoleon, and the 
 inhabitants of those provinces who held Treasury bills over- 
 ran the public depositories with the demand for payment in 
 specie. The separation between coin and paper constantly 
 grew wider, until in 1806 paper circulated for only half its 
 value in silver, which was then the metallic standard. The 
 Treasury made repeated promises, which could not be kept, 
 that a part of the annual tax levy should be consecrated to 
 the reduction of the paper circulation. The need for funds 
 was so urgent that decrees were issued ordering the trans- 
 mission to the Treasury of silver vessels, jewelry, the deco- 
 rations of the churches and the consecrated fonts throughout 
 the empire, which were paid for in paper money at three 
 times their specie value. 
 
 The peace which followed the French victory at Wagram 
 in 1809 and the marriage of the Archduchess Maria Louisa 
 with Napoleon afforded an opportunity, which the govern- 
 ment embraced, to attempt the restoration of order in the 
 public finances. Delegates from all the provinces were 
 assembled, but they found almost insuperable difficulties in 
 the inefficiency and corruption of public officials and the ab- 
 solute lack of confidence by the business community and the 
 people in the oft-broken pledges of the government. The 
 issues of government paper money had steadily increased 
 from 74,200,000 florins ($37,000,000) in 1797 to 1,064,000,000 
 florins ($530,000,000) in 1811. The value of the paper had 
 declined almost in proportion to the increase in the issues. 
 The price of silver expressed in paper was 118 in December, 
 1800. It steadily rose to 203 in 1807, leaped to 500 in De- 
 cember, 1 8 10, with the enormously increased issues of the 
 three intervening years, and touched 1200 for a time in 1811. 
 
THE AUSTRO-HUNGAKIAN BANK. 
 
 The method adopted in France, when the territorial man- 
 dates were substituted for the assignats, was followed by 
 Austria, which declared the reduction of existing issues to 
 one-fifth of their original value and substituted redemption 
 notes (EinloSungsscheine), which were called Viennese 
 money. The decree of February 20, 1811, which put this 
 reduction in force, w r as issued with the avowed purpose of 
 arresting the fluctuations in the paper money, which were 
 declared to be "so extremely pernicious, because they 
 shatter private fortunes, fetter industry, derange all social 
 relations, and give birth to distrust and jealousy." ' The 
 decree was despatched under seal to the officials in different 
 parts of the Empire, to be opened at five o'clock in the morn- 
 ing on March 15, 1811, and the announcement was awaited 
 by eager crowds who looked to the action of the Emperor to 
 relieve the public distress. The majority, who held quan- 
 tities of the paper, w r ent away cursing the government for 
 the decree. A few, who were believed to have had previous 
 notice of its contents, had put their affairs in a shape which 
 left them rich, as some of the purchasers of stock in the 
 Mississippi Company of John Law had transformed it into 
 real estate or exported the proceeds in coin while the stock 
 was still selling at high figures. The government promised 
 to limit the new issues of redemption paper to just enough 
 to redeem the outstanding notes in the proposed ratio of one 
 to five, which would be about 212,000,000 florins. The new 
 notes were depreciated, however, from the first day of their 
 issue and fell to fifty per cent, during the year, but rose to 
 eighty-seven per cent, when the public began to believe that 
 the quantity would not be increased. The suspension of 
 new issues was only for a brief period and the necessities of 
 the last Napoleonic wars forced the issues up to 638,900,000 
 florins ($319,000,000) in 1816. 
 
 The distrust and business paratysis caused by these re- 
 peated paper issues and the necessity of raising money to 
 carry on the government led to the creation of the National 
 
 Leroy-Beaulieu, II., 644. 
 
214 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Bank of Austria. The Btnperor, in issuing the imperial 
 patent for the establishment of the bank, invoked the public 
 confidence b)' declaring that he had from the first desired 
 to re-establish order in the standard of value, but that the 
 violent shocks which had rent Europe asunder had involved 
 Austria in a series of difficult wars, in which the preservation 
 and the independence of the monarchy became dearer than 
 mere questions of finance. He pledged himself to the people 
 that no new paper money should be put in circulation and that 
 the withdrawal of that already out should be confided to a 
 national privileged establishment. 1 
 
 A party of capitalists was formed after some delay and the 
 statutes of the National Bank of Austria received the Impe- 
 rial approval on July 15, 1817. The bank was accorded for 
 twenty-five years the exclusive privilege of note issues, was 
 exempted from the stamp taxes, and was authorized to accept 
 deposits and discount commercial paper. The entire capital 
 was to be 110,000,000 florins ($55,000,000) in shares of noo 
 florins each, payable 100 florins in silver and 1000 florins in 
 paper. The bank was able to dispose of only 50,621 shares, 
 from which the proceeds were $2,600,000 in silver coin and 
 $29,000,000 in paper. The government took up and de- 
 stroyed the paper and issued an equal amount of securities 
 bearing interest at the rate of two and a half per cent. As 
 the notes were depreciated to one-third of their nominal 
 value, this amounted to seven and a half per cent, upon the 
 real capital realized, which was about $12,300,000 ($2,600,- 
 ooo in coin and $9,700,000 in the coin value of the paper). 
 The services of the bank in restoring confidence and busi- 
 ness activity were further compensated by permission to 
 issue a quantity of notes which the government pledged 
 itself to accept as cash without the privilege, which was 
 accorded to individuals, of demanding redemption in coin. 
 The government showed its good faith by devoting to the 
 retirement of the paper money a part of the war contribution 
 paid by France, and 131,829,887 florins were soon withdrawn 
 
 1 Noel, I., 345-46. 
 
THE A USTRO-HUNGARIAN BANK. 21$ 
 
 from circulation, reducing the amount outstanding to 546,- 
 886.38 florins ($273,000,000). The bank continued the 
 process of converting the government money into bank-notes 
 until on December 31, 1847, the amount outstanding was 
 reduced to 9,712,838 florins ($4,850,000). 
 
 The uprising in Hungary in 1848, the Crimean War, and 
 the Italian struggle which resulted in Austrian defeat at 
 Magenta and Solferino, imposed new charges upon the Aus- 
 trian government and did much to upset the work of the 
 bank during the thirty years of peace from 1816 to 1846. 
 The bank had proceeded so rapidly with the conversion of 
 the government paper money as to endanger its own security 
 and alarming runs were threatened in 1831, and again in 
 1840, which were only averted by the help of the government 
 and in the latter case by a loan of coin from the private 
 banks of Vienna. The charter of the bank expired in 1842, 
 but the Emperor signed a patent renewing its privileges, 
 with some modifications, until December 31, 1866. The 
 bank had enjoyed until this time the exclusive privilege of 
 discount as well as the monopoly of note issues, but the 
 former privilege was now thrown open to others and the 
 power to make loans upon real estate mortgages was with- 
 drawn. The bank had contributed somewhat to the expan- 
 sion of commerce by its discounts, but its immense advances 
 to the government prevented its applying so much capital as 
 was needed for the development of new private enterprises. 
 Financial societies and private banks of discount had sprung 
 up in the important centres and their success and legality 
 depended upon sharing with the National Bank the power to 
 make discounts and advances. 
 
 The bank at the end of the year 1847 possessed a metallic 
 reserve of 70,240,000 florins ($35,000,000) and maintained a 
 circulation of 213,000,000 florins. The outbreak of the revo- 
 lution in Hungary brought the bill-holders in crowds to the 
 bank for the redemption of the notes and the coin reserve 
 shrunk in a few days to 35,023,030 florins. The directors 
 were seized with panic and secured from the government the 
 decree of June 20, 1848, authorizing the bank to suspend 
 
2l6 HISTORY OF MODERN BANKS OF ISSUE. 
 
 specie payments and giving forced legal tender character to 
 its notes. The government hesitated to take this desperate 
 step and accompanied it with decrees intended to prevent 
 the export of gold and silver, even to the amount of more 
 than 100 florins ($50) in the pockets of tourists. The gov- 
 ernment at the same time resumed the issue of its own paper 
 promises in the form of interest-bearing mandates, redeem- 
 able in four, eight, and twelve months. The fifth of these 
 issues, in 1849, was given forced legal tender character and 
 the notes were no longer to be redeemed in coin. Gold and 
 silver began to disappear from circulation, pieces of six and 
 ten kreutzers (one to two cents) were coined only to disap- 
 pear, and bank bills of one florin and Treasury bills of six 
 and ten kreutzers were issued to take the place of the small- 
 est coins. The credit of the bank began to sink with that 
 of the government and the depreciation of the bills in the 
 middle of 1849 to about half their nominal value alarmed 
 the administration and led to a solemn declaration that no 
 more loans should be demanded from the bank and that the 
 existing debt should be adjusted and consolidated. 
 
 The history of the thirteen years from 1848 to 1861 is the 
 history of the disregard of this pledge and of repeated loans 
 negotiated through the bank in spite of continual efforts to 
 refund the debt and reduce its proportions. The aggregate 
 of funded and floating debts due the bank by the govern- 
 ment was 178,500,000 florins on January i, 1849, and 205,- 
 300,000 florins on January i, 1850. Considerable reductions 
 were made during the next four years and the figures were 
 carried down to 121,700.000 florins on January i, 1854. The 
 provisions for the Crimean War forced the figures up again 
 with a bound to 294,200,000 florins ($147,000,000) on Janu- 
 ary i, 1855. The reduction of the debt began again the 
 next year and continued until it was reduced on January i, 
 1859, to 145,700,000 florins, but the war with the Italian 
 States and France carried the 'amount up again to 285,800,- 
 ooo florins. 1 M. Paul lyeroy-Beaulieu, after reviewing the 
 
 Leroy-Beaulieu, II., 646. 
 
THE AUSTRO-HUNGAR1AN BANK. 2 I/ 
 
 long series of negotiations between the government and the 
 bank, sums up the lesson of these years as follows : 
 
 It is apparent how political events hurled the state farther and far- 
 ther down the path of forced legal tender at the moment when the 
 resumption of specie payments seemed at hand. It is apparent also 
 of what little use were pledges, whether of realty or securities, to 
 hasten the liberation of the state and to permit the bank to terminate 
 the suspension of specie payments. It is because all such pledges are 
 incapable of negotiation at short notice without great loss. It is ap- 
 parent also what singularly advantageous conditions the bank ob- 
 tained from the state for its advances. It enjoyed an interest of two 
 or three per cent, on sums in paper which cost it nothing. 1 This 
 situation was too favorable for the bank for it to show itself rigorous 
 towards the state. Every exhibition of complaisance which it made 
 was the source of abundant revenue. This rate of two or three per 
 cent, was extravagant. In France one per cent, was adopted and in 
 Italy six-tenths of one per cent. The transformation, for such a long 
 period of time, of a great establishment of credit into the official 
 lender of the state had the disastrous consequence that this establish- 
 ment could with difficulty fulfil its natural mission of lending to com- 
 merce. One cannot serve two masters, and a bank which always has 
 its hand in its coffers to make advances to the state is compelled to 
 show itself more stringent towards manufacturers and merchants. 
 
 The attempt to resume specie payments seemed upon the 
 eve of success in 1859. A monetary convention was con- 
 cluded January 24, 1857, with the view to securing a uniform 
 currency throughout Germany, by which the contracting 
 parties, of which Austria was one, were to issue no more 
 legal tender paper after January i, 1859, which was not re- 
 deemable in coin on demand. An Imperial ordinance of 
 April 30, 1858, prepared the way for resumptiofi by provid- 
 ing that after November ist of the same year one- third of 
 
 1 M. Noel seems to ignore this element of the bank loans and says : 
 " The bank, during the entire period which elapsed from its origin to 
 1861, had risen to the level of its heavy task. It had contributed en- 
 ergetically to sustain the government in the difficult situations which 
 it had traversed and its support, often disinterested, had merited gen- 
 eral confidence. Far from abusing the opportunity of the multiplied 
 crises which had obliged the Imperial Treasuty to appeal to it, it had 
 endeavored to lighten the burden of the sacrifices imposed by events 
 upon the country." Banques d 1 Emission en Europe, I., 364. 
 
218 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the new bills should be covered by coin or bullion and that 
 the other two-thirds should be represented in the assets of 
 the bank by securities or commercial paper. An arrange- 
 ment was also concluded between the government and the 
 bank for the retirement of 100,000,000 florins in small notes 
 by the pledge of the domains of the State. War with Italy 
 upset these carefully laid plans and on April 29, 1859, the 
 bank was again released from the obligation of coin redemp- 
 tion, and the government appealed to it for a loan of 200,- 
 000,000 florins. This was met, to two-thirds of its face 
 value, by the issue of bank-notes entirely in denominations 
 of five florins ($2.50). The public had no use for so many 
 small bills and they rapidly returned to the bank. The loan 
 with which it was sought to pay this advance by the bank 
 proved a failure and the government was compelled to deliver 
 a variety of securities in addition to the unplaced obligations 
 of the loan, with a condition that they should not be marketed 
 before November i, 1861.* 
 
 The management of the bank decided on May 9, 1853, to 
 issue the 49,379 shares which had remained undisposed of 
 since 1820 and they gave the preference to the holders of the 
 original shares, at the rate of 800 florins payable in bank 
 bills, which were then below par. The bank was again au- 
 thorized by a decree of October 21, 1855, to loan money on 
 mortgages and issue mortgage bonds. This branch of busi- 
 ness rapidly developed and on December 31, 1858, already 
 employed about 37,000,000 florins ($18,500,000). The capi- 
 tal of the bank was again doubled and immediately after- 
 wards increased by 50,000 new shares issued at the rate of 
 about 725 florins, which made the total capital on December 
 31, 1855, about 110,250,000 florins ($55,000,000). A law of 
 November 13, 1868, reduced the capital again to 90,000,000 
 florins ($45,000,000). 
 
 The approach of the termination of the privileges of the 
 bank led to an earnest discussion, which resulted in the law 
 of December 27, 1862, remodelling the charter of the insti- 
 
 Leroy-Beaulieu, II., 650. 
 
THE AUSTRO-HUNGARIAN BANK. 
 
 2I 9 
 
 tion and its relations with the government. The govern- 
 ment proposed the renewal of the charter until 1890 ; the 
 finance committee of the elective chamber proposed 1880. 
 The subject was referred to a mixed committee of both cham- 
 bers, which finally fixed the limit at December 31, 1876. 
 The privileges of the bank were broadened from time to 
 time until 1877, when the law of December 2oth, terminating 
 the commercial treaties, provided also that the ministry 
 should conclude an arrangement with the bank extending its 
 privileges until March 29, 1878. A subsequent act made 
 the limit May 31, 1878, and one month later the National 
 Bank of Austria was fused with the Austro-Hungarian 
 Bank. 
 
 The National Bank, during its later years, in spite of the 
 manner in which it was fettered by its relations to the gov- 
 ernment and the suspension of specie payments, conducted 
 its relations with the business community in such a way as 
 to contribute in a considerable measure to the expansion of 
 industry. The business paper carried increased from about 
 32,000,000 florins ($16,000,000) in 1848 to 75.000,000 florins 
 in 1854 and 90,000,000 florins ($45,000,000) in 1855. The 
 advances on public securities increased from about 15,000,- 
 ooo florins in 1848 to 50,000,000 florins in 1854 and 82,000,- 
 ooo florins in 1855. The discounts increased nearly forty per 
 cent, from 1865 to 1877 and would probably have reached a 
 larger figure but for the liquidations following the crisis of 
 1873. The following table shows, in florins, the aggregate 
 amount of the commercial paper discounted every alternate 
 year from 1865 to 1877 : 
 
 YEAR. 
 
 AT VIENNA. 
 
 AT AUSTRIAN 
 BRANCHES. 
 
 AT HUNGARIAN 
 BRANCHES. 
 
 TOTAL. 
 
 1865 
 1867 
 1869 
 1871 
 
 1873 
 1875 
 1877 
 
 383,648,611 
 
 183,330,404 
 232,424,629 
 331,436,438 
 468,286,132 
 310,430,552 
 298,706,477 
 
 63,924,852 
 76,028,931 
 125,830,418 
 
 173,573,951 
 24O,OO7,674 
 221,522,518 
 212,324,840 
 
 23,563,202 
 37,340,086 
 103,590,858 
 134,386,521 
 168,973,050 
 147,671,119 
 135,296,195 
 
 471,136,665 
 296,699,422 
 461,845,906 
 
 639.39MU 
 877,266,856 
 679,624,190 
 646 327,512 
 
220 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The provisions for regulating the note issues which were 
 adopted in 1863 bear the traces of the English legislation of 
 1844. They provided for an "uncovered" circulation of 
 200,000,000 florins ($ 100,000,000) and that all notes issued 
 beyond that sum should be covered by gold or silver coin or 
 bullion. The uncovered circulation was required to be pro- 
 tected by commercial paper, by securities deposited for 
 advances, by the coupons of mortgages matured and payable 
 or by mortgage bonds of the bank. This last form of secu- 
 rities was not allowed to exceed 20,000,000 florins and they 
 were accepted for only two-thirds of their nominal value. 
 Gold coin or bullion was at that time allowed to take the 
 place of silver to the extent of only a quarter of the metallic 
 reserve. A decree of October 30, 1868, authorized the bank 
 to count as security for the uncovered circulation bills of 
 exchange drawn upon foreign places, and a law of March 
 1 8, 1872, gave the bank discretion as to the proportion of 
 gold and silver to be kept in its reserves. 
 
 The attempt to tie the note circulation rigidly to deposits 
 of specie broke down as completely in Austria as it has 
 broken down in England every time that a crisis has oc- 
 curred. The first suspension of the limit was authorized by 
 the government for a brief period in 1866. The bank was 
 compelled again in 1869 to suspend advances upon private 
 deposits of bullion and did not resume this branch of its 
 business for two years, in spite of the protests of manufac- 
 turers and brokers. The bank pursued a very conservative 
 course while the fever of speculation was upon the country, 
 but was unable to come to the rescue of mercantile credit 
 when the crisis of 1873 broke out, because of the limitations 
 upon its circulation. The condition of credit became so 
 critical that the government was obliged to intervene in 
 almost precisely the same manner as in England. A letter 
 was addressed to the bank by the Minister of Finance on May 
 J 3> I ^73, revoking the provisions of Article 14 of the statutes 
 of the bank, relative to the metallic security for bank-notes, 
 and an ordinance to the same effect was approved by the 
 Diet. The ordinance gave the bank authority to issue notes 
 
THE AUSTRO-HUNGARIAN BANK. 221 
 
 by discounting bills of exchange and making advances on 
 public securities without any other limitation than its own 
 good judgment. Under this authority the bank granted 
 extraordinary credits to the amount of 64,451,000 florins in 
 Austria, and 30,119,000 florins in Hungary. The circula- 
 tion exceeded the legal limit several times in May and July 
 and was almost continuously above the limit during October, 
 November, and December, 1873. The effect of the action 
 of the bank was almost instantaneous in restoring credit. 
 " The first moment of panic passed," says M. Clement Jug- 
 lar, " it was seen that commerce and industry continued to 
 make good head and that the vital forces of the country 
 were not exhausted, the crisis having been specially severe 
 in everything affecting the bank." 1 
 
 Payment in coin on demand was nominally the condition 
 upon which the bank held its privileges, but the situation 
 of the government and its relations with the bank were such 
 that it was thought necessary to maintain forced legal tender 
 for an indefinite period. A convention was signed between 
 the bank and the government on January 3, 1863, providing 
 for the resumption of specie payments by the bank during 
 1867, but the war with Prussia postponed the event and the 
 country continued to stagger through the mire of irredeem- 
 able paper. An act of May 5, 1866, authorized the gov- 
 ernment to issue 150,000,000 florins in government bills, 
 including notes of one and five florins which had already 
 been issued by the bank and which were now declared to be 
 bills of state. The disasters of Sadowa and the other events 
 of the war drove the government to the old device of John 
 Law and the French revolutionists, to guarantee a part of 
 its paper issues by the salt mines of Gmund, Hallein, and 
 Aussee, at the same time that the pledge was given that the 
 maximum of the two forms of the floating debt the paper 
 money and the salt notes (Salinenscheine) should not ex- 
 ceed 400,000,000 florins. This pledge was not kept to the 
 letter, but the actual circulation was never greatly above the 
 
 1 Des Crises Commerciales, 496. 
 
222 HISTORY OF MODERN BANKS OF ISSUE. 
 
 legal maximum. The mean circulation of the old paper 
 money in 1876 was 343,029,232 florins and of the salt notes 
 68 >97>395 florins. 
 
 An effort was made in 1867 to bring Austria within the 
 circle of the Latin Union and to harmonize her monetary 
 system with that of France, Italy, Belgium, and Switzer- 
 land. The government consented to the coinage of pieces 
 of eight and four florins in gold, equivalent to pieces of 
 twenty and ten francs ($4 and $2). The Franco-German war 
 arrested the negotiations before they had been ratified, but 
 the Imperial government immediately began the coinage of 
 the proposed pieces, and they were accepted in France in 
 public depositories by virtue of a decree of June 14, 1874. 
 Their coinage averaged about 3,000,000 florins ($1,500,000) 
 per year, until it was suspended by the laws which reorgan- 
 ized the monetary system in 1892. 
 
 The domestic troubles which broke out in Austria before 
 the defeat of Sadowa led to the reorganization of the Empire 
 according to the system of dualism which now prevails. The 
 Hungarian Diet was convoked at Pesth on November 19, 
 1866, and a basis of union with Austria upon the conditions 
 of local independence was prepared by a committee of sixty- 
 seven headed by Francis Deak. The Hungarian budget 
 was to be entirely independent of that of Austria in all in- 
 ternal affairs except those affecting the army. The officials 
 of the bank regarded their interest as fully protected in both 
 Austria and Hungary by the law of 1862, but the bank soon 
 found its rights in Hungary called in question and sought a 
 new arrangement which would place them beyond attack. 
 The Hungarian Diet passed a vote early in 1870, promising 
 recognition to the bank until the expiration of its privileges 
 in 1876, if the bank would consent to a payment to Hungary 
 in the same proportion as that made to Austria, and if it 
 would establish at Buda-Pesth an independent directorate 
 for Hungary. The bank was willing to make a payment of 
 4,500,000 florins, but this was not acceptable to the Hun- 
 garian cabinet and the privileges of the bank approached 
 expiration without an agreement. The Imperial government 
 
THE AUSTRO-HUNGARIAN BANK. 22$ 
 
 then brought forward a plan for terminating the existence 
 of the National Bank of Austria and substituting in its 
 place a new institution to be known as the Austro- Hungarian 
 Bank. The proposition became law and the new institution 
 was established for a term beginning July i, 1878, and end- 
 ing December 31, 1887. The charter was afterwards re- 
 newed for a period of ten years ending on December 31, 1897. 
 
 The new bank succeeded to all the transactions of the old 
 and a directorate was established at Buda-Pesth and a sum 
 of 50,000,000 florins ($25,000,000) set aside for discounts 
 and advances in Hungary. The bank-notes of the institu- 
 tion are required to be printed in both the German and 
 Hungarian tongues and to bear the arms of the monarchy. 
 The governor of the bank is named by the Emperor, upon 
 the joint nomination of the finance ministers of Austria and 
 Hungary, and the two deputy governors are chosen from the 
 two parts of the Bmpire. The changes made in the pro- 
 visions for the note circulation had in view the new charac- 
 ter of the bank as a representative of the two monarchies and 
 the purpose of the government to resume specie payments. 
 The certificates and matured coupons of the Austrian and 
 Hungarian debt were included among the legal securities 
 for the covered circulation and it was provided that the two 
 principal establishments at Vienna and Buda-Pesth might 
 issue bills on deposits of silver coin and bullion at the rate 
 of forty-five florins to the pound of fine silver. This pro- 
 vision became inoperative when the government in 1879 
 suspended the coinage of silver on private account. 
 
 The amount of 200,000,000 florins has been steadily ad- 
 hered to as the limit of the uncovered circulation, but the 
 rule is now followed of keeping coin and foreign gold bills 
 to the amount of forty per cent, of the entire volume of 
 bank-notes in the hands of the public. The difficulties 
 caused by a rigid limit of circulation in 1873 were guarded 
 against, upon the extension of the bank charter in 1887, by 
 the adoption of the German system of the five per cent, tax 
 on the circulation. The method of determination is sub- 
 stantially the same as in the case of the German Imperial 
 
224 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Bank. Weekly reports are required, and upon the amount 
 by which the aggregate circulation exceeds the sum of the 
 metallic reserve and the uncovered circulation of 200,000,000 
 florins, a tax is levied of -$ of one per cent, for the weekly 
 excess. The notes of the Austro- Hungarian Bank are a 
 legal tender throughout the Empire for their full nominal 
 value in all payments to be made in Austrian money, in the 
 absence of a specific contract or a judicial decision requiring 
 payment in specie. 1 
 
 The authorized limit of circulation has been exceeded on 
 several occasions since the law levying the five per cent, tax 
 on the excess and the tax has been levied for fifteen different 
 weeks. The first occasion was in the autumn of 1890, when 
 the limit was exceeded 656,440 florins in the week of Octo- 
 ber 7th, and the excess of circulation rose to 23,257,080 
 florins during the week of October 3ist. The excess of cir- 
 culation declined to 17,093,710 florins in the following week 
 and disappeared in the week of November i4th. The au- 
 tumn of the next year again required an excess of circula- 
 tion, which began in the week of September 3oth and 
 reached 7,186,560 florins in the next week. This excess 
 was reduced to 223,780 florins in the week of October i5th, 
 and then disappeared, only to reappear in the last week in 
 October and to rise to 13,267,040 florins in the week of 
 November 7th. The amount was reduced in the next week 
 to 3,463,370 florins and disappeared in the week of Novem- 
 ber 22d. There was a small excess during the closing 
 week of 1891, but none appeared again until October, 1893, 
 when the maximum was 6,767,120 florins for the week of 
 October 3 1 st. This was reduced to 218,120 florins for the 
 week of November 7th and disappeared in the week follow- 
 ing. There was no excess of circulation subject to the five 
 per cent, tax during 1894 and 1895. 
 
 The essential steps towards the resumption of specie pay- 
 ments in Austria- Hungary were taken by the monetary laws 
 of 1892. The ministers of finance of the two parts of the 
 
 , I., 458. 
 
THE AUSTRO-HUNGARIAN BANK. 22$ 
 
 Kmpire on February 26, 1892, invited a number of eminent 
 financiers and political economists to meet and consider the 
 following questions : 
 
 1 . What standard ought to be adopted when the currency 
 is reformed ? 
 
 2. In case of the adoption of the gold standard, should a 
 limited circulation of silver money be admitted and to what 
 amount ? 
 
 3. Is the circulation of government notes advisable, bear- 
 ing no interest, redeemable in legal money and not made a 
 forced legal tender, and under what conditions ? 
 
 4. According to what principles should the conversion into 
 gold of the existing florin be regulated ? 
 
 5. What monetary unit is it advisable to choose ? 
 
 The inquiry in Austria was entrusted to a commission of 
 thirty-six persons, under the presidency of Herr Steinbach, 
 the Minister of Finance, and . the sittings continued from 
 March 8th to March iyth. The inquiry in Hungary was 
 made by a commission of twenty-one under the presidency 
 of Herr Wekerle. The first question was answered by a 
 large majority in favor of the gold standard. The second 
 question led to a greater division of opinion, but the majority 
 seemed disposed to favor as large a use of silver as was com- 
 patible with the absolute maintenance of the gold standard. 
 The majority also favored the continuance of a circulation 
 of 50,000,000 to 100,000,000 florins in government notes not 
 fully covered by coin. A few believers in a strictly metallic 
 currency opposed any such use of paper money, and argued 
 that its continuance would shake confidence in the monetary 
 system. The fifth question was answered in favor of the 
 maintenance of the florin or its division into two parts, if 
 a smaller unit were desired. The answer to the fourth 
 involved the old controversy regarding the effects of the 
 restoration of a metallic standard after business had been 
 conducted and contracts made for many years on a depre- 
 ciated paper basis. The definite answer to this and the other 
 questions was finally given by the government, without fol- 
 lowing in all respects the recommendations of the commission. 
 
226 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The proposals of the ministry were submitted to the Par- 
 liament of both countries on May 14, 1892, and were made 
 law throughout the Empire on August i ith. The crown 
 (kronen} was made the monetary unit upon the basis of 
 cutting a kilogram of fine gold into 3280 crowns, and a 
 kilogram nine-tenths fine into 2952 crowns. The value of 
 the new coin in United States money is 20.3 cents or about 
 one-twentieth more than the French franc. The crown was 
 divided into 100 heller, and gold pieces of ten and twenty 
 crowns were ordered to be coined. Austrian ducats were 
 still authorized to be coined as money of commerce, but the 
 coinage of pieces of four and eight florins under the terms 
 of the treaty with France was discontinued. Silver pieces 
 were provided for of one crown ($0.203) an d of fifty heller 
 (Jo. 1015) and nickel and bronze pieces of smaller denomina- 
 tions. The silver pieces were to contain only 835 parts 
 silver in 1000 parts, making them substantially token coins, 
 and their legal tender quality was limited to fifty crowns 
 ($10). ' 
 
 The government decided to convert the paper money at 
 the rate of one florin for two crowns. This was the rate 
 which was under discussion by the commission, and while 
 it adhered pretty closely to the current rate of exchange it 
 involved a reduction of the nominal value of the paper in 
 gold about sixteen per cent. 2 It had been urged by several 
 members of the commission that it was desirable to convert 
 foreign obligations upon the basis of parity in gold, in order 
 to maintain the public credit, even if it were more just to 
 convert the money of domestic circulation at the rates which 
 had ruled for a dozen years. 3 The problem of conversion 
 was complicated by the fact that the Austrian metallic 
 standard, so far as there had been any, had been silver rather 
 
 1 Ordinance of August 8, 1892, Bulletin de Statistique, Sept., 1892, 
 XXXII., 318-22. 
 
 2 Two crowns being worth 40.6 cents, their even exchange for one 
 florin, nominally worth 48.2 cents, left a reduction of 7.6 cents in the 
 value of the florin, which is about i6per cent. 
 
 3 Raffalovich, Le MarchZ Financier en 1892, 96. 
 
THE AUSTRO-HUNGARIAN BANK. 22/ 
 
 than gold and many obligations were specifically payable in 
 silver. The suspension of silver coinage on private account 
 in 1879 gave a fictitious value to Austrian silver coins, just 
 as it was attempted by the British government to give such 
 a value to Indian rupees in 1893, and the florin ceased to 
 fluctuate with the silver bullion market while remaining 
 below both gold and paper. The government did not in 
 1879, however, abandon the silver standard and from 1879 
 to 1891 coined not less than 125,500,000 silver florins at the 
 mints of Vienna and Kremnitz. The rate of conversion 
 adopted for the paper currency, therefore, was not exactly 
 the scaling of a gold obligation, for gold only became the 
 standard 011 the date that the rate of conversion was fixed. 
 The rate represented about the average exchange from 1879 
 to 1891. 1 
 
 The bank was required to establish gold payments upon 
 the basis of the new rate of exchange. The result was a 
 considerable benefit to the bank, for it had in its vaults on 
 August 7, 1892, 59,757,000 florins in gold and 20,428,000 
 florins in foreign bills payable in gold, which at the new 
 rate acquired a higher nominal value. The bank carried 
 1 3, 50) ooo florins in foreign bills to its special reserve fund, 
 and was still able on August i5th to report a cash reserve of 
 70,666,000 florins, including 619,876 florins received during 
 the preceding week, and foreign bills in hand payable in 
 gold, to the amount of 10,404,000 florins. 2 The addition was 
 made to the special reserve fund in order to avoid increas- 
 ing the limit of covered note issues, which was not thought 
 advisable without consultation with the government. The 
 entire operation was simply a matter of bookkeeping and 
 added nothing to the real resources of the bank or to the 
 value of its gold. The gold had formerly been counted at 
 its face value, while its real value, expressed in terms of 
 depreciated paper, was much greater. The change simply 
 recognized this fact and in bringing the gold and paper 
 
 1 Haupt, 58-64. 
 
 2 Le Marche Financier en 1892, 102. 
 
228 HISTORY OF MODERN BANKS OF ISSUE. 
 
 together gave a nominal value to the former corresponding- 
 to the reduced standard. The purchasing power of a given 
 weight of gold remained the same under either method of 
 bookkeeping, but the gold was intended to become tinder the 
 new system a money of actual circulation instead of a bullion 
 reserve expressed in a standard above the real one. 
 
 The importation of gold followed quickly on the estab- 
 lishment of the standard and was promoted by the policy 
 of the bank, which raised the discount rate and made 
 advances to facilitate arbitrage transactions when exchange 
 seemed to be unfavorable. The receipts of gold by the 
 bank from April nth to October 10, 1892, were 38,759,000 
 florins ($19,000,000), of which a large part was in pieces of 
 American origin. Receipts from India became heavy in 
 November and raised the total receipts from August nth, 
 the date of the promulgation of the new laws, to December 
 31, 1892, to 39,447,000 florins. The state also availed itself 
 of foreign bills in its possession to accumulate gold and at 
 the close of 1892 had about 40,000,000 florins in the hands 
 of the Austrian ministry and 50,000,000 florins in the hands 
 of the Hungarian ministry. A new project was adopted 
 in 1894 for retiring the government paper money and sub- 
 stituting bank-notes and subsidiary silver. An arrangement 
 was made with the Austro-Hungarian Bank to sell 40,000,- 
 ooo florins in silver for coinage into pieces of one crown and 
 to issue 160,000,000 florins in bank-notes as the government 
 notes were received and cancelled. The Treasury agreed to 
 pay over to the bank 200,000,000 florins in gold ($100,000,- 
 ooo), which was to be used only as the coin guarantee of the 
 new notes, florin for florin. The first notes retired were 
 those of one and five florins and considerable opposition 
 developed among the people at surrendering the convenient 
 paper notes for the more cumbersome silver. An economist 
 of note, Max Wirth, urged that the retirement of paper 
 should begin with notes of 50 florins ($25) instead of the 
 small notes, but the government adhered to its original plan. 1 
 
 1 Raffalovich, Marche Financier en 1893-4, 113. 
 
THE AUSTRO-HUNGARIAN BANK. 22g 
 
 The crisis of 1893 i n the United States and the rather 
 unfavorable condition of the money market in Germany 
 had a reflex influence upon Austria which arrested her steps 
 towards a gold basis and prevented any considerable increase 
 in her gold fund during that year. The reappearance of a 
 premium on gold, running from three to seven per cent., in 
 paper money and bank notes, caused a deal of disappoint- 
 ment and much inquiry as to the reason. The critics of the 
 government ascribed it to the attempt to convert the old five 
 percent, obligations into four per cents., which resulted in 
 bringing back into Austria a large quantity of securities 
 held abroad. It was calculated that the importations of 
 securities during 1893 exceeded the exports by 114,690,000 
 florins ($57,000,000).' The Minister of Finance pointed out 
 that this inward current was almost wholly in securities 
 payable in silver and that it was necessary to cut the bond 
 which nominally bound the two metals together in the 
 Austrian currency system. A reason was found for the 
 change in some quarters in the state of the money market 
 at Berlin, which was swamped with South American and 
 other securities of little value, which had absorbed the 
 ready money of German capitalists. The Austrian securi- 
 ties were among the few of real value which were held in 
 Germany, and money could be recovered at the smallest loss 
 by returning them to Austria, whose people were buying 
 their own securities at good prices. This tendency, though 
 doubtless heightened in the case of Austria by the convei- 
 sions and by the fear of payment in silver, only confirmed a 
 principle which has become marked in recent years that 
 the securities issued by a solvent power tend, after their 
 original placement, to return into the hands of its own 
 people. This was observed in the United States in 1878, 
 when it was estimated that five-sixth of the public debt had 
 returned into the hands of Americans ; in France, after the 
 great loans to pay the German war indemnity ; and even 
 in Italy, who originally paid two-thirds of her interest 
 
 1 Neue Freie Presse, January i, 1894. 
 
230 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 charges abroad, but now pa} r s hardly a fifth outside the 
 Kingdom. 1 
 
 The action of the government in buying silver for sub- 
 sidiary coinage from the bank is proving a great aid to the 
 latter in solving the problem what to do with its large 
 stocks of silver accumulated when that metal was near the 
 old parity with gold. The cash reserve of the National 
 Bank of Austria and of the Austro-Hungarian Bank con- 
 sisted almost exclusively of silver while that metal was at 
 a premium over gold, but gold began to flow into the bank 
 in 1871, to constitute about half the reserve. The gold then 
 remained nearly stationary for ten years, while the silver 
 rapidly increased. The efforts to resume specie payments 
 have strengthened the gold resources of the bank, but they 
 are still threatened by the accumulation of silver. The 
 proportion of gold and silver held and other general statis- 
 tics of the National Bank of Austria and of the Austro- 
 Hungarian Bank appear in the following table : 
 
 YEAR. 
 
 SPECIE RESERVE. 
 DEC. 3IST. 
 GOLD. SILVER. 
 
 MEAN CIRCU- 
 LATION. 
 
 MEAN CURRENT 
 ACCOUNTS. 
 
 MEAN DIS- 
 COUNTS. 
 
 1865 
 
 i-5 
 
 (In millions 
 I2O.O 
 
 of florins.) 
 350.0 
 
 i-3 
 
 
 1870 
 
 1.4 
 
 II2.9 
 
 296.8 
 
 
 
 
 1875 
 
 67.8 
 
 66.5 
 
 286.2 
 
 1-5 
 
 
 
 1880 
 
 65.0 
 
 108.3 
 
 316.6 
 
 1-4 
 
 II3-4 
 
 I88 3 
 
 77-7 
 
 121. 7 
 
 457-7 
 
 1.9 
 
 144.2 
 
 1884 
 
 78.8 
 
 126.6 
 
 358.4 
 
 2.1 
 
 136.4 
 
 1885 
 
 69.1 
 
 129.7 
 
 347-4 
 
 2.7 
 
 H7.5 
 
 1887 
 
 71.0 
 
 145.1 
 
 366.0 
 
 2.2 
 
 I29.I 
 
 1888 
 
 59- 
 
 154.0 
 
 384.6 
 
 5.6 
 
 ML? 
 
 ISSQ 
 
 54-3 
 
 162.2 
 
 399-3 
 
 7.2 
 
 149.2 
 
 iSgO 
 
 54-0 
 
 165.5 
 
 415.6 
 
 7-3 
 
 156.7 
 
 1892 
 
 103.2 
 
 168.9 
 
 425-9 
 
 8.3 
 
 I5L2 
 
 1893 
 
 IOT.8 
 
 161.9 
 
 464.0 
 
 ii. i 
 
 168.3 
 
 1894 
 
 155.3 
 
 139.2 
 
 458.9 
 
 10.7 
 
 I5I.6 
 
 1895 
 
 244.0 
 
 126.6 
 
 6i9.S 2 
 
 
 246.3 2 
 
 The circulation and the discounts of the bank fluctuate 
 with the seasons. The maximum circulation in 1894 was 
 517,742,000 florins, for the week ending October 3ist, and 
 
 1 Leroy-Beaulieu, II. 228-29. 
 
 2 Actual conditions December 3ist. 
 
THE AUSTRO-HUNGARIAN BANK. 231 
 
 the minimum circulation was 409,349,000 florins, for the 
 week ending February 23d. The maximum discounts were 
 190,023,000 florins, for the week of November yth, and the 
 minimum discounts were 106,841,000, for the week of Feb- 
 ruary 1 5th. The note circulation on June 7, 1895, was 
 501,692,640 florins, and the discounts were 150,280,783 
 florins. The gold reserve on that date had increased to 
 192,262,330 florins, and the silver had been reduced to 
 135,093,317 florins. The reserve fund of the bank consists 
 of 32,520,824 florins. The circulation at the close of 1894 
 consisted of 206, 425, 360 florins in lo-florin notes, 179,578,800 
 florins in loo-florin notes, and 121,804,000 florins in 1000- 
 florin notes. The gross product of the operations of the 
 bank in 1894 was IO >44>566 florins, and the cost of admin- 
 istration was 3,801,041 florins,, leaving 6,639,524 florins to 
 be divided between the shareholders and the government. 
 A dividend of five per cent. (4,500,000 florins) is first dis- 
 tributed by law among the shareholders, four per cent, of 
 the remainder goes to the reserve fund, the dividend of the 
 shareholders is raised to seven per cent, if the balance per- 
 mits, and the remainder is divided, half to the shareholders 
 and half to the public Treasury, Austria taking seventy per 
 cent, and Hungary thirty per cent. The government has 
 not realized much from this arrangement, the entire amount 
 in 1894 being only 129,101 florins ($65,000). The amount, 
 moreover, is not paid into the public Treasury, but is set off 
 against a loan of 80,000,000 florins, made to the government 
 in 1863, which was reduced on December 31, 1894, to 
 76,986,975 florins. 
 
 The rate of discount of the National Bank varied between 
 1817 and 1862 from five to eight per cent., and from 1863 to 
 the fusion with the Austro-Hungarian Bank in 1878 never 
 went higher than six and a half per cent. The changes in 
 the rate of discount during these fifteen years were twelve, 
 while those of the Bank of England were one hundred and 
 fifty-two, of the Bank of France forty-six, and of the Bank 
 of Prussia forty-five. The mean rate of the National Bank 
 of Austria was not more than eight-tenths of a cent above 
 
232 HISTORY OF MODERN BANKS OF ISSUE. 
 
 that of the Bank of England nor more than seven-tenths 
 above that of the Bank of France, in spite of the much more 
 complete industrial development of the latter countries. 1 
 The rate has varied even less during the seventeen years of 
 the history of the consolidated bank. Fixed at four per 
 cent, on May 9, 1879, it was raised to five per cent. October 
 20, 1882, reduced to four and a half on February 3, 1883, 
 and to four per cent, on February 23, 1883. The rate was 
 raised again to four and a half on October 7, 1887, and re- 
 duced to four percent, on January n, 1888. The rate of 
 four per cent, has been pretty uniformly maintained during 
 the early part of the j^ear for the past seven years, but the 
 autumn rate has usually been higher, reaching in 1890 five 
 and a half per cent. An increase from four to five per cent, 
 was made on October 7, 1893, but was followed by a reduc- 
 tion to four and a half in the second half of January, 1894, 
 and to four per cent, on February 9th, where it remained 
 throughout the year and until the autumn of 1895, when it 
 was put at five per cent. 
 
 The number of branches of the Austro-Hungarian Bank 
 had risen in 1895 to 34 in Austria and 21 in Hungary, out- 
 side the principal establishments at Vienna and Buda-Pesth. 
 The bank at Buda-Pesth has been rapidly gaining in recent 
 years in volume of business over the bank of Vienna, and 
 the development of Hungary from a purely agricultural to 
 an industrial country has created a jealousy which threat- 
 ens the perpetuation of the bank in its dual form. The dis- 
 counts at Buda-Pesth, which were 16,853,181 florins at 
 the close of 1875 against discounts at Vienna of 51,109,319 
 florins, advanced at the close of 1890 to 35,688,570 florins at 
 Buda-Pesth against 53,253,903 florins at Vienna, and at the 
 close of 1894 to 43,410,814 florins at Buda-Pesth against 
 41,649,846 florins at Vienna. 2 
 
 1 Noel, I., 382, 434. 
 
 2 Regelmassige Jahressikung der Generalversammlung der Oester- 
 reichisch-ungarischen Bank, am 4 Februar, 1895, 31-2. The author 
 is indebted to the courtesy of the officials of the bank for their stat- 
 utes and full official reports for several years past. 
 
THE AUSTRO-HUNGARIAN BANK. 233 
 
 The tendency towards separate local institutions in Hun- 
 gary has led to considerable discussion of the project of 
 separate banks of issue for the two sections of the Empire 
 and this was one of the reasons why the project for the re- 
 newal of the charter proposed by the Imperial Bank in the 
 spring of 1894 was not accepted by the two governments. 
 The bank proposed that the Austrian government reimburse 
 at once the debt of 77,000,000 florins, which is in process of 
 slow reduction by the application of the government share in 
 the dividends. The bank maintained that this reimburse- 
 ment was required in order to strengthen its position in 
 resuming cash payments. The proposals offered some com- 
 pensating advantages to the government by giving it a share 
 in the dividends when the net profits exceeded six per cent., 
 instead of seven per cent. , as under existing law. The bank 
 asked, on its side, to have the Treasury funds confided to 
 its keeping and to have its capital reduced from QO,OOO,OOO 
 florins to 75,000,000 florins. The bank expressed its willing- 
 ness to submit at the same time to the supervision of an 
 official board of curators like that of the Bank of Germany, 
 which should control its general policy. The issue of bills, 
 the administration and the policy of the two divisions of the 
 bank were to continue under one head. The issue of bills 
 below fifty crowns ($10) was to be suspended or the subject 
 left open for conference between the bank and the two gov- 
 ernments of Austria and Hungary. The charter of the bank 
 was to be continued under these conditions until 191 2. l 
 
 Complaint is already being made in Austria that the with- 
 drawal of the government paper money will produce a con- 
 traction of the currency which will prove a detriment to 
 industry and trade. Gold has not yet appeared to any 
 considerable extent in the circulation and the silver pieces 
 of one florin are less popular than the paper money which 
 has heretofore been used for daily transactions. The circu- 
 lation is about 800,000,000 florins ($400,000,000), which 
 affords an average of less than $10 per capita. The Imperial 
 
 1 Raffalovich, Le Marche Financier en 1894-95, 152-154. 
 
234 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Bank is restricted, like the Bank of England, to a fixed cir- 
 culation of 200,000,000 florins in excess of its coin reserve, 
 and the necessity for a larger use of credit instruments has 
 been so keenly felt that the issue of certificates of deposit in 
 even sums has become a subject of serious discussion. The 
 use of checks is not widety diffused in Austria outside of 
 Vienna, Buda-Pesth, and a few other commercial centres, 
 and the proposition to issue certificates of deposit is a part 
 of the general policy of making the public familiar with the 
 use of credit instruments. The Hungarian Bank of Com- 
 merce and Industry has taken the initiative and proposes to 
 issue, in place of the savings deposit bonds heretofore lim- 
 ited to a minimum of 100 florins ($50), small coupons run- 
 ning as low as twenty crowns ($4). One of the propositions 
 discussed was to issue certificates bearing interest, but it 
 was evident that these would be inconvenient as a medium 
 of circulation, because of the necessity of computing the 
 interest, and would tend to deprive the depositor of his inter- 
 est for the benefit of the last holder of the certificate. The 
 plan proposed by the Bank of Commerce and Industry is to 
 compute the interest on sums remaining on deposit and pay 
 only the face of the certificates, making them substantially 
 similar to checks except that they are issued by the bank for 
 even amounts. The coupons in this respect assimilate closely 
 to bank-notes, and afford a good illustration of the narrow 
 line of separation between checks and notes. 
 
CHAPTER X. 
 
 THK BANK OF RUSSIA. 
 
 Its Essential Character as an Organ of the Government The Paper 
 Money System of Russia and the Efforts to Return to a Metallic 
 Basis The Reorganization of the Bank in 1894 and the Effort to 
 Assist Commerce and Industry Present State of the Circulation 
 and Discounts The Tendency towards the Gold Standard The 
 Finlands Bank. 
 
 r I ^HB Bank of Russia has been so entirely a mere organ 
 of the State from its foundation to the present time 
 that its history is closely bound up with that of the 
 paper issues of the government. The extension of accom- 
 modation to industry and commerce has been an element 
 in the business of the bank, but mainly because enlarged 
 issues of paper have promoted commercial movements. 
 Paper money has taken the place of all other currency as a 
 medium of circulation in Russia and while the bank has a 
 considerable store of gold and the Treasury has a greater 
 store, there are no definite indications as yet of a complete 
 return to a specie basis. The reorganization of the bank by 
 M. Witte in 1894, with its provisions for large advances of 
 notes to small farmers, producers, and manufacturers, is in- 
 tended to be a step towards bringing the bank into closer 
 harmony with the commercial interests of the country ; but 
 the hand of the government is placed more heavily than 
 even upon the management of the bank, and the long terms 
 and liberal conditions fixed for these loans involve some 
 elements of danger. 
 
 Paper money was introduced into Russia as early as 1768 
 and was welcomed at first because of its greater convenience 
 
 235 
 
236 HISTORY OF MODERN BANKS OF ISSUE. 
 
 than the copper money of which it was the representative. 
 The pretext was maintained for a time that the paper was 
 simply the coined certificate for the copper, and the notes, 
 which were known as assignats, were at a slight premium. 
 Bureaus were established at St. Petersburg, Moscow, and in 
 the provinces for the redemption of the paper, which ma}' be 
 considered forerunners of the Bank of Russia. A ukase of 
 January 10, 1774, prescribed that the limit of 20,000,000 
 roubles ($15,400,000) should never be exceeded in the issue 
 of paper money. This pledge was disregarded, as most such 
 limits upon paper issues have been, and after the limit had 
 been raised to 100,000,000 roubles ($77,200,000) on June 26, 
 1786, in order to obtain resources for war with Turkey, the 
 depreciation began. The price of the silver rouble had 
 risen before the end of the century to 1.47 in paper roubles 
 and the prices of merchandise had followed the upward 
 course of the precious metals. The government endeavored 
 to protect itself, at the same time that it recognized the de- 
 preciation of the paper, by a ukase of June 23, 1794, raising 
 the capitation tax paid by the peasants, ' ' in view of the fact 
 that the increased price of all products permits them to earn 
 more by cultivation and other work . " 1 
 
 The four most serious efforts to rescue the monetary system 
 of the country from the mire of irredeemable paper were 
 made in 1817, 1839, 1860, and 1881. The first attempt was 
 made by means of loans placed both abroad and at home, of 
 which a part of the proceeds was to be applied to the retire- 
 ment of the paper circulation. The Emperor Alexander 
 I., after the peace of Tilsit in 1810, recognized all the out- 
 standing notes as a public debt, pledged the public faith 
 to their redemption, and declared that no more paper money 
 should be issued. The circulation, notwithstanding these 
 pledges, climbed upward from 577,000,000 roubles in 1810 to 
 836,000,000 roubles in 1817. It was then that the loans 
 
 1 Paul Leroy-Beaulieu, La Science des Finances, II., 656. The rou- 
 ble is the exact equivalent of four francs in French money ($0.772) 
 and exchange on Paris at par is quoted in the form of 400 francs for 
 loo roubles. 
 
THE BANK OF RUSSIA. 237 
 
 were issued which had been promised in a decree of May 
 27, 1810, and the progress of reform was so rapid that the 
 circulation was reduced in 1822 to 595,776,000 roubles. 
 Count Cancrin was then at the head of Russian finances, 
 and he steadily refused to increase the paper circulation dur- 
 ing thirteen years, in spite of wars in Turkey, Persia, and 
 Poland. He hesitated, however, at the policy of substi- 
 tuting an interest-bearing debt for the immense mass of 
 paper obligations bearing no interest and did not succeed in 
 raising the value of the paper rouble much above a quarter 
 of the rouble of silver. * 
 
 The government made the second effort to reduce the vol- 
 ume of paper money by a decree of July i, 1839, that the 
 paper roubles should be valued at three and a half to a rou- 
 ble of silver and that a new form of paper should be substi- 
 tuted in this proportion. The new paper was to be known 
 as bills of credit and was to be redeemable in silver and 
 secured by the public domain. The exchange of the assig- 
 nats for the new bills was ordered to take place on June i, 
 1843, an d a pledge was given to the business community for 
 the credit of the new paper by depositing in the citadel of 
 St. Petersburg in December, 1844, a metallic reserve of 70,- 
 464,245 roubles ($54,000,000), which was to be under the 
 control of twenty-four members of the stock exchange. This 
 fund was increased on July 14, 1845, by 12,180,000 roubles, 
 which established a coin reserve of nearly fifty per cent, of 
 the 170,000,000 roubles in bills of credit then outstanding. 
 A limited redemption was maintained and the bills did not 
 drop far below par until the Crimean War, but new issues of 
 credit paper were made even before the alliance with Austria 
 to crush Hungary and 735,000,000 roubles in the new bills 
 were in circulation at the close of the Crimean War in 1857. 
 
 The third attempt to extricate the Empire from the evils 
 of a debased monetary standard was connected with the 
 establishment of the Bank of Russia in substantially the 
 
 1 The greatest depression in the value of the assignats was in 1815, 
 when 100 silver roubles exchanged for 418 in paper. Lvy, 200. 
 
238 HISTORY OF MODERN BANKS OF ISSUE. 
 
 form in which it existed from 1860 to 1894. The statutes of 
 the bank were established by a decree of May 26, 1860, and 
 the reserves of several older banking establishments were 
 turned into its coffers and it assumed their engagements. 
 The original capital was 15,000,000 roubles ($12,000,000) 
 and the declared object of the bank was to consolidate the 
 credit circulation and the floating debt of the Empire. The 
 entire ownership and management were in the government, 
 but the capital and reserve funds were declared to be invio- 
 bly set aside for the uses of the bank, and the private deposi- 
 tors were guaranteed against confiscation. A third of the 
 profits were to go to a reserve fund, part of which was to be 
 applied from time to time to the increase of the capital stock. 1 
 The capital was soon increased by this means to 25,000,000 
 roubles and the reserve fund to 3,000,000 roubles, where 
 they remained until the reorganization of the bank in 1894. 
 The bank had a metallic reserve on May I, 1861, of 86,000,- 
 ooo roubles against a circulation of 714,627,069 roubles, but 
 the commercial discounts scarcely exceeded 14,000,000 rou- 
 bles. The depreciation at this time was about ten per cent, 
 arid M. lyamauski, the deputy governor of the bank, pro- 
 posed a plan for restoring parity and protecting the note 
 issues. He recommended the transformation of the bank 
 into a stock company, with the monopoly of note issue for 
 twenty-eight years, the redemption of notes in coin accord- 
 ing to a sliding scale gradually approaching par, and author- 
 ity to sell the public domains, the forests and the state 
 railways to protect the circulation. 2 
 
 The plan of M. L,amanski was adopted in a measure, the 
 proceeds of a loan of 15,000,000 roubles were carried to the 
 coin reserve of the bank and it was decreed that bills re- 
 ceived in payment for the loan should be destroyed and that 
 new bills should be issued only against deposits of coin. A 
 scale of depreciation was fixed which involved the restora- 
 tion of parity on January i, 1864. Redemptions proceeded 
 
 1 Clement Juglar, Article " Banque " in Dictionnaire des Finances \ 
 
 I., 347- 
 
 8 Winiarski, 57. 
 
THE BANK OF RUSSIA. 239 
 
 for a while without great losses of coin to the bank, and 
 averaged 1,250,000 roubles per month up to January i, 1863. 
 A run then began for the redemption of the paper, which 
 resulted in a net loss of coin during January of 2,287,000 
 roubles; February, 4,921,000 roubles; March, 7,723,000 
 roubles; April, 10,213,000 roubles; May, 10,367,000 rou- 
 bles ; June, 2 ,233,000 roubles ; and in July, 6, 7 51,000 roubles. 
 Various devices were tried to stop the drain, but they were 
 unsuccessful and coin redemption was suspended by a ukase 
 of November 19, 1863. Exchange on Paris, which had 
 risen on October 29th to 396 francs, within four francs of 
 par, fell gradually to 350 francs, about which point it fluctu- 
 ated for some time. The net result of the effort to restore 
 specie payments was a reduction of the outstanding paper to 
 634,773,929 roubles on November 30, 1863, and a useless 
 expense to the Treasury of nearly 100,000,000 roubles ($75,- 
 000,000). 
 
 The bank was entrusted in 1862 with the mission of buy- 
 ing lands for the peasants and was aided by the deposit 
 of the Treasury funds free of interest. These funds were 
 partly employed in commercial discounts, which were so 
 freely granted that the legitimate necessities of commerce 
 were much exceeded and a mass of doubtful paper was left 
 in the hands of the bank in the crisis of 1873. The expan- 
 sion of credits, however, was chiefly confined to St. Peters- 
 burg and Moscow, and the provinces suffered the usual evils 
 of a country endowed with a single great bank, the lack 
 of capital, of currency, and of facilities for credit. The ex- 
 cess of capital at the centres caused reckless speculation and 
 blind investments in foreign securities, while the excessive 
 issues of paper money gradually found an outlet only after 
 the emancipation of the serfs created a greater demand for 
 currency for wages. One of the difficulties of the situation 
 was the constantly recurring deficit in the public finances, 
 which called for new issues of paper money to fill the void. 
 This difficulty was overcome for a moment in 1870, when 
 the deficit declined to 1,205,116 roubles, and during the next 
 five years, which showed a considerable surplus. The 
 
240 HISTORY OF MODERN BANKS OF ISSUE. 
 
 quotation of the rouble on the exchange market was 330 
 francs in 1876, or seventeen and a half per cent, below par, 
 when the menace of war with Turkey and of new issues of 
 paper money carried it down in 1877 as low as 234 francs, or 
 a loss of more than 41 per cent. 1 
 
 The new paper issues which were feared soon became a 
 reality, in order to maintain the armies in the field. The 
 circulation had risen on December 31, 1874, to 797,313,500 
 roubles and the metallic reserve had increased to 231,227,000 
 roubles. The circulation was reduced during the next two 
 years until it stood on July i, 1876, at 693,000,000 roubles. 
 The issue of bills of credit on account of the war was 491,- 
 000,000 roubles and the net circulation on December 18, 1878, 
 was 1,103,280,185 roubles. A supplementary issue of 96,- 
 000,000 roubles in 1879, with the famine and arrest of exports, 
 caused a crisis in 1880 which reduced the revenues of the 
 government and the railway receipts, in spite of high paper 
 prices, and caused the rapid fall of the coin value of the 
 rouble. The change of ministry which resulted from the 
 crisis brought into power M. Abasa, who at once announced 
 a plan for reimbursing the debt of the government to the 
 bank. A ukase of January i, 1881, ordered that the Treas- 
 ury pay to the bank without delay a sum sufficient to reduce 
 to 400,000,000 roubles the debt to the bank on account of 
 disbursements for the government ; that the remainder of 
 the debt (400,000,000 roubles) be funded by annual payments 
 of 50,000,000 roubles by the Treasury to the bank ; that 
 bills of credit be destroyed to the extent of their accumula- 
 tion in the hands of the bank and with due regard to the 
 needs of the circulation. The first part of this programme 
 had hardly been carried out when M. Abasa was replaced as 
 Minister of Finance by M. Bunge. The rigid policy of re- 
 form which had been inaugurated was somewhat relaxed and 
 the bills paid into the bank were kept on hand and sub- 
 sequently re-issued, instead of destroyed. 2 The circulation 
 
 1 Winiarski, 59-60. 
 
 9 M. Witte, the present Minister of Finance, has been subjected to 
 criticism for employing 92,700,000 roubles ($71, 000,000), paid into 
 
THE BANK OF RUSSIA. 241 
 
 was reduced during the ten j r ears from 1878 to 1888 from 
 1,188,000,000 roubles to 1,046,000,000 roubles, but the value 
 of the paper rouble did not advance materially towards that 
 of gold. 
 
 The statutes of the Bank of Russia were submitted to a 
 complete revision in 1894 and an effort was made to make 
 the bank of greater assistance than before in the promotion 
 of industry and commerce. The first article of the new 
 statutes, promulgated on June 24, 1894, declared the purpose 
 of the bank to be " to facilitate, by means of credit for short 
 terms, the movement of commerce and to promote the suc- 
 cess of national industry and agricultural production." ' The 
 new vStatutes define with considerable precision the accom- 
 modation extended to agriculture and industry by the bank. 
 The institution is authorized to open credits and make loans 
 against bills secured by pledges of hypothecation and by 
 agricultural or industrial material, by guarantee, and by 
 other sureties which the Minister of Finance may recognize 
 as sufficient. Loans secured on material are to be made only 
 to acquire supplementary material or renew old supplies, but 
 they are to constitute a lien upon the old material as well as 
 the new. The material obtained by loans from the bank is 
 required, in accordance with the protective policy of the 
 Empire, to be of Russian fabrication, but exceptions may be 
 authorized in certain cases by the Minister of Finance and, 
 in the case of agricultural material, with the concurrence of 
 the Minister of Agriculture. The maximum loan for an 
 industrial enterprise is 500,000 roubles and for a retail rner- 
 
 the bank for cancellation, in the construction of the Trans-Sibe- 
 rian Railway. De Cyon, 183-85. M. Raffalovich, however, credits 
 the government with having known how " not to abuse the issue of 
 paper money," and declares that " when the needs of commerce have 
 required a greater quantity of monetary signs an issue has been made 
 temporarily under the condition of a special guarantee." Le Marche 
 Financier en /tfpj-p/, 140. 
 
 1 Bulletin de Statistique, August, 1894, XXXVI., 183. The date 
 liere given, and most others in this chapter, are according to the 
 Julian calendar, whose use still prevails in Russia, and are twelve 
 days behind the Gregorian dates. 
 
 16 
 
242 HISTORY OF MODERN BANKS OF ISSUE. 
 
 chant 600 roubles. The maximum term for loans for mate- 
 rial is three years, but periodical payments are required 
 when the term exceeds six months. The bank is authorized 
 to accept as security for loans to small farmers, peasants, and 
 mechanics, upon the pledge of their products, the guarantee 
 of the provincial assemblies, institutions of credit (including 
 mutual societies which agree to operate under the rules 
 framed by the bank), and individuals chosen from among 
 the inhabitants of the respective communities who inspire 
 confidence at the bank. 
 
 This new policy of the bank has been subjected to severe 
 criticism upon the ground that the Russian people are 
 unused to operations of credit and cannot be trusted to meet 
 in good faith the required payments. The Minister of 
 Finance himself, in his report recommending the new sys- 
 tem, referred to the collapses of most of the banks of com- 
 merce and of mutual credit which have taken place in 
 Russia during the past twenty years and to the failure of 
 two branches of the Bank of Russia at Kief and Kharkof, 
 which were authorized to advance money to small farmers on 
 the guarantee of two large proprietors and the certificate of 
 the local tribunal that the property actually existed upon 
 which the advance was made. More than 2, 000,000 roubles 
 were advanced annually in loans of this sort, but great 
 abuses occurred and it was found that loans were obtained 
 upon products which had no existence by means of false 
 certificates given by the authorities. 1 The government has 
 felt, however, that some losses could be borne in teaching 
 the people the benefits of commerce and of credit and did 
 not hesitate, during the famine of 1892 and the customs war 
 with Germany in 1893, to advance to the suffering peasants 
 some 90,000,000 roubles which were recovered only partially 
 and by degrees. 
 
 The danger of loans upon products is increased, in the 
 opinion of the critics of the bank, by the permission that 
 the products on which loans are made may be retained in the 
 
 De Cyon, 135-36. 
 
THE BANK OF RUSSIA. 243 
 
 hands of the producers and by the long terms for which the 
 money is advanced. L,ong-term loans, in the absence of 
 large deposits, can only be made by fresh issues of paper 
 money and M. Witte made declarations in his report as to 
 the effect of such issues strangely like the declarations of 
 Mirabeau when the French assignats were authorized and of 
 Secretary Chase when he was urging upon the American 
 Congress the substitution of legal tender government paper 
 for bank-notes. 1 " The value of these bills," says M. Witte, 
 "issued exclusively for a useful object, will be maintained 
 by the productiveness of labor, and the issue of such bills 
 will not influence the quotations of the credit rouble, because 
 in making these issues in a manner responding to the object 
 in view the quantity of securities in circulation will be at the 
 same time increased." 
 
 The government of Russia, however, has undertaken a 
 comprehensive policy for the development of the resources 
 and productive power of the country. It has been felt by 
 those who shape this policy that the government should take 
 the initiative in measures which in other countries would be 
 left to private enterprise. This course has been adopted by 
 Russian statesmen, not in ignorance of the laws of finance 
 and political economy, but under the conviction that those 
 laws would not come rapidly into operation to stimulate com- 
 mercial and credit operations in an agricultural country 
 without the example of the leadership of the state. This 
 conviction is the keynote of the present policy of the Bank 
 of Russia. The government is willing to take steps in mak- 
 ing loans to producers which would not be taken by a private 
 financial establishment, because it is willing to risk some- 
 thing of the national wealth for the sake of increasing it, and 
 because the strong hand of the government can be appealed 
 to for the purpose of punishing defaulting debtors. The, 
 issue of paper money, through the instrumentality of a great 
 bank, is felt to be a necessary means for supplying the people 
 with that ample supply of monetary signs which proved so 
 
 1 Vide Ch. xv. 
 
244 ni STORY OF MODERN BANKS OF ISSUE. 
 
 beneficial to France after the great influx of gold from Cali- 
 fornia and Australia and which has proved so beneficial to 
 Scotland under her system of free banking. The government 
 has not put in jeopardy the solvency of the bank by its 
 agricultural loans, for the entire amount on December 16, 
 1895, was 27,466,804 credit roubles, or about one-eighth of 
 the commercial discounts. 
 
 The capital of the Bank of Russia was fixed by the new 
 statutes at 50,000,000 roubles ($38,000,000), and the limit of 
 the special reserve was increased from 3,000,000 roubles to 
 5,000,000 roubles. It was proposed at first to raise the new 
 capital by setting aside annually ten per cent, of the profits, 
 but this process was soon regarded as too slow and a decree 
 of February 6, 1895, provided for taking the necessary 
 amount from the surplus in the Imperial Treasury. 1 Losses 
 by the bank are met from the reserves, and, in case of their 
 exhaustion, are to be carried to the debit account of the 
 Treasury. The management of the bank is entrusted to the 
 Minister of Finance and the annual accounts are submitted 
 to the Imperial Council. 8 The number of branches at the 
 close of 1895 was 107. 
 
 The accounts of the Bank of Russia are stated in a similar 
 manner to those of the Bank of England, in the separation 
 of the issue from the banking department. The bills of 
 credit are government notes for all practical purposes and 
 the bank itself, even in its banking operations, is little more 
 than a bureau of the Treasury. A circulation of 769,342,- 
 911 roubles is based upon government obligations and corre- 
 sponds to the ' ' authorized circulation ' ' of the Bank of 
 
 1 Bulletin Russede Statislique, April, 1895, 220. 
 
 2 M. Witte, the present Finance Minister, has also created a board 
 of Treasury officers known as the Council of the Bank and corre- 
 sponding, according to his view, " to the similar councils in the 
 central banks of Western Europe." These boards take the place of 
 the Council of Imperial Institutions of Credit, created in 1817, which 
 contained representatives of the nobility and of the business commu- 
 nity, and the change is criticized by M. de Cyon on the ground that it 
 has brought the bank entirely under official supervision with no 
 external check. M. Witte et les Finances Russes, 145. 
 
THE BANK OF RUSSIA. 245 
 
 Kngland. Circulation beyond this amount is represented by 
 the coin reserve of the bank and can be increased only by 
 deposits of coin. The banking department was utilized for 
 several years for swelling the paper issues in much the same 
 manner as when the suspension of the bank act is authorized 
 in England. These special issues consisted for the most 
 part of the notes which the bank was ordered to call in and 
 destroy by the ukase of 1881, but which were kept in reserve 
 until special authority was given for their re-issue against 
 new deposits of securities or transfers of gold to the cash 
 reserves. 1 The government, by a ukase of December 9, 
 1894, abolished the distinction between the authorized per- 
 manent circulation and the temporary circulation charged 
 against the banking department by transferring the tempo- 
 rary issues from the banking department to the issue depart- 
 ment. The limit of authorized circulation without metallic 
 cover was increased by this process from 568,513,000 roubles 
 to 769,342,91 1 roubles, exclusive of about 285,000,000 roubles 
 covered by gold. Both sides of the account of the banking 
 department were diminished by the amount thus transferred, 
 200,829,455 roubles, and by an additional sum of 65,433,- 
 691 roubles transferred in gold from the banking to the issue 
 department as the gold value of that part of the increased 
 permanent issue not represented by securities. 2 
 
 The total gold funds of the bank and the Treasury on 
 January i, 1895, were 645,731,000 roubles ($500,000,000). 
 This sum was not all in actual gold held in Russia, the sum 
 of 58,331,000 roubles representing foreign credits payable in 
 gold on demand ; but the Treasury alone had a gold fund of 
 194,410,000 roubles and the bank held 39,540,000 roubles in 
 gold in its banking department, exclusive of that held 
 against outstanding notes. 3 The funds then set aside to 
 
 1 Le*vy, 201-203. 
 
 2 Bulletin Russe de Statistique, Jan.-Feb., 1895, 34-37. 
 
 3 It is interesting to note that 28,654,937 roubles ($21,500,000) of these 
 holdings was in American half-eagles, the largest amount of foreign 
 coin held of a single kind except 38,117,580 roubles ($29,000,000) in 
 English sovereigns. Bulletin Russe de Statistique, March, 1895, 170. 
 
246 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 cover the circulation were 351,939,000 roubles and the au- 
 thorized circulation, covered and uncovered, was 1,121,282,- 
 ooo roubles ($880,000,000). The government by a ukase of 
 March 3, 1895, increased the metallic coverture for the cir- 
 culation by transferring from the Treasury to the bank 98,- 
 061,276 roubles in exchange funds and substituting i, 125,682 
 in gold for an equal amount of silver in the bank reserves. 
 This made the total gold funds held against circulation 375,- 
 ooo, ooo roubles, exclusive of 75,000,000 held against a special 
 issue, and made the metallic coverture more than a third of 
 the outstanding bills. This is the largest reserve ever held, 
 the amount between 1861 and 1869 having risen from 67,- 
 713,000 to 92,884,000 roubles, but in no case higher than 
 13.6 per cent, of the circulation, and having risen after 
 1888 to 211,500,000 roubles, or about 20 per cent. 1 The ac- 
 counts of the bank in recent years are shown in the follow- 
 ing table : 
 
 YEAR. 
 
 MEAN CIR- 
 CULATION. 
 
 MEAN CURRENT 
 ACCOUNTS. 
 
 MEAN TOTAL 
 DEPOSITS. 
 
 MEAN LOANS AND 
 DISCOUNTS. 
 
 
 (In millions of roubles.) 
 
 1880 
 
 1,082.3 
 
 IOI.4 
 
 295.3 
 
 228.5 
 
 1885 
 
 893.8 
 
 132.3 
 
 335.9 
 
 205.2 
 
 iSgO 
 
 902.6 
 
 65.6 
 
 368.2 
 
 213.2 
 
 iSgl 
 
 975-3 
 
 83.2 
 
 399-9 
 
 189.4 
 
 1892 
 
 1,070.0 
 
 I39-I 
 
 438.2 
 
 162.8 
 
 1893 
 
 1,061.9 
 
 II4.6 
 
 405-0 
 
 198.0 
 
 1894 
 
 1,041.5 
 
 II8.8 
 
 495-6 
 
 2QI.7 
 
 i8 9 5 2 
 
 1,056.9 
 
 I2O.7 
 
 545-2 
 
 327.5 
 
 No official declaration has been made of a purpose to 
 establish the gold basis and specie payments in Russia, but 
 many recent events indicate that the government has its 
 face set in that direction. The credit rouble was originally 
 redeemable in silver, but the free coinage of silver was sus- 
 pended July 1 6, 1893, an d the credit rouble has remained far 
 above the value of the silver rouble since the great fall in 
 
 1 Bulletin Russe de Statistique, March, 1895, 137. 
 
 2 Actual condition Nov. 28th (Dec. loth by Gregorian calendar). The 
 " Total Deposits " include the current accounts and all other deposits, 
 public and private. 
 
THE BANK OF RUSSIA. 247 
 
 that metal. Customs duties are collected in gold and this 
 gold has been so carefully husbanded that the bank and the 
 Imperial Treasury now possess the largest visible stock in 
 the world. The strengthening of the metallic security for 
 the circulation at the close of 1894 was followed by a ukase 
 of May 8, 1895, f great significance. This ukase declared 
 that written contracts might be made payable in Russian 
 gold roubles and that such contracts might be settled in gold 
 or in roubles of equivalent gold value at the rate of exchange 
 prevailing at the date of payment. Public depositaries 
 were authorized to receive gold at its exchange value in the 
 payment of excises under regulations framed by the Minister 
 of Finance. 
 
 The purpose of this law, according to the Messagcr Offitiel, 
 is to ameliorate the vices of the regime of paper money and 
 ' ' to substitute little by little that of metallic money. ' ' With 
 this object, the journal declares, the last two reigns have 
 provided for the collection of customs duties in gold, the 
 reduction (projected in 1881) of the amount of bills of credit, 
 and have taken other steps ' ' which ought to prepare the 
 ground for the re-establishment of a metallic circulation." 
 The new law, it is declared, does not touch the question of 
 the monetary standard or the final basis of adjustment of 
 the paper money to the standard, but is simply intended 
 to give an abiding place in the circulation for gold, which 
 in spite of the large Russian production, has quickly taken 
 passage for foreign countries. The existing circulation of 
 government paper money the official journal found inelas- 
 tic, unresponsive to the demands for currency at the sale 
 of the crops, and difficult to bring back to the bank when 
 over-issued. The new measure is designed to permit imports 
 of gold when the money market is stringent, by giving gold 
 a legal status in Russian finance, and to liberate the govern- 
 ment from the necessity of proceeding to new issues of paper. 1 
 
 The article which announced this policy added the hint of 
 
 1 These statements are abbreviated from the article reprinted in the 
 Bulletin Russe de Statistique, May, 1895, 252-56. 
 
248 HISTORY OF MODERN BANKS OF ISSUE. 
 
 another step, which was soon taken, and declared that the 
 new policy would attract foreign capital and inspire confi- 
 dence in the Russian financial system. The new step was. 
 taken by a ukase of June 6, 1895, which authorized the 
 bank to receive deposits of gold coin and bullion and foreign 
 bank-notes and commercial bills payable in gold and to issue 
 certificates therefor, redeemable in gold on demand. These 
 certificates are receivable as the equivalent of gold at the 
 Treasury and the bank, but are not a legal substitute for 
 gold between individuals except with the consent of the 
 creditor. They are receivable at branches of the bank for 
 gold obligations due at other branches and the exchange is 
 furnished free except for the cost of telegraphic service. 1 
 These important acts were followed on July 26, 1895, by the 
 promulgation of rules permitting the creation of special gold 
 accounts at the bank, for the reception of gold and gold 
 certificates, and the issue of check -books representing pay- 
 ments exclusively in gold. The public are thus being grad- 
 ually prepared, by the flow of a stream of gold through the 
 Treasury and the banks, for the establishment of gold pay- 
 ments and the maintenance of a fixed relation between the 
 credit rouble and the metallic standard. 
 
 The Bank of Russia has established recently a fixed rate 
 of exchange for credit roubles and gold in the ratio of one 
 and a half to one. If this ratio of exchange could be re- 
 garded as permanent, and should be maintained in spite of 
 a heavy demand for gold, it would amount substantially to 
 the resumption of gold payments upon the basis proposed by 
 the government of Austria-Hungary in the legislation of 
 1892. The Bank of Russia has felt strong enough to estab- 
 lish this fixed rate of exchange in order to arrest speculation 
 in credit roubles abroad, which has always become acute at 
 the time for the settlement by foreign purchasers for the agri- 
 cultural exports of Russia. The bank, by establishing this 
 rate of exchange for gold and paper, has voluntarily aban- 
 doned the silver standard, by which the credit rouble would be 
 
 1 Bulletin Russe de Statistique , July-Aug., 1895, 27. 
 
THE BANK OF RUSSIA. 249 
 
 worth in gold only fifty per cent, of its face value and about 
 twenty-five per cent, less than its present market value. The 
 attempt to bring the credit rouble to par in gold, a metal 
 in which it was never redeemable by law, would depress 
 the price which the farmer receives for his product in credit 
 roubles, while wages and rents would remain substantially 
 unchanged. The position of Russia as an agricultural and 
 exporting country is felt to be adverse to this policy. For 
 this reason, while the Bank of Russia is as strong as any 
 European bank in its accumulation of coin reserves, the 
 Russian government will not for many years attempt the 
 complete retirement of the paper currency. 
 
 The Grand Duchy of Finland, which is independent of 
 Russia in its internal affairs, has a bank of issue known as 
 the Finlands Bank, or Bank of the State. The capital is 
 10,000,000 Finnish marks ($2, 000,000)' and the bank is gov- 
 erned by managers appointed by the Russian Emperor, who 
 is Grand Duke of Finland, upon the nomination of deputies 
 of the States. The circulation is not permitted to exceed 
 35,000,000 marks except upon deposits of coin. The actual 
 circulation on September 30, 1895, was 55,547,000 marks ; 
 gold reserve, 21,860,000 marks; foreign credits, 31,008,000 
 marks ; loans and inland bills, 26,687,000 marks ; deposits, 
 17,369,000 marks. 2 
 
 1 The present Finnish coinage system is based upon that of the 
 Latin Union, the markka being the equivalent of the franc ($o. 193). 
 
 2 Comptroller's Report, 1895, Letter of Minister Breckinridge, 98-99. 
 
CHAPTER XI. 
 
 THE BANKS OF NORTHERN EUROPE. 
 
 Development of Banks of Issue in Belgium The Strain Put upon 
 the National Bank by the Franco-Prussian War Difficulties 
 Caused by the Double Standard The Bank of Amsterdam and 
 Modern Banking in Holland Organization of the Banks of 
 Sweden, Norway, and Denmark. 
 
 THE history of banking in Belgium is a history of greater 
 freedom from state interference and entanglement with 
 the finances of the government than that of most other 
 European countries. Belgium began her present national 
 life in 1830 with the assumption of but a small debt as a 
 legacy from her relations with Holland and with the field 
 comparatively clear for the adoption of a sound system of 
 currency and banking. The neutrality of Belgium is prac- 
 tically guaranteed by the great powers of Europe and her 
 military expenditure scarcely exceeds one dollar per capita. 
 The National Bank of Belgium lias been employed by the 
 government, therefore, simply as its financial agent in its 
 ordinary transactions and has not been diverted from its 
 duties to industry and commerce by the necessity of floating 
 large loans or covering deficits in the public finances. The 
 government under these conditions has been able to keep in 
 its own hands the ultimate power over the bank, without 
 being often tempted to abuse it, and reserved in the first 
 charter the right to grant to other corporations the power to 
 issue notes. The National Bank has a monopoly of note 
 issue in fact, but is restrained in some measure from abuse 
 of its power by the knowledge that a competitor may at any 
 moment be legally authorized to enter the field. 
 
 250 
 
THE BANKS OF NORTHERN EUROPE. 25 I 
 
 Monopoly of note issue has existed in Belgium only since 
 1850. The oldest institution issuing bank-notes was the 
 General Society for the Promotion of National Industry (So- 
 ciete Gnrale pour favoriser V Industrie Nationale) . This so- 
 ciety was founded in 1822 principally as a bank of circulation 
 and discounts, but it became little by little a great institution 
 of finance interested in promoting investments. 1 The soci- 
 ety was a depository of public funds and of large private 
 savings, loaned money on mortgages, on public securities, 
 and on merchandise and was interested as promoter and fi- 
 nancial agent in nearly all the large enterprises of the coun- 
 try. It had no strong rival until after the separation of 
 Belgium and Holland and it invited rivalry then by its own 
 shortsightedness. The society and its management were 
 largely under Dutch influence and when the new govern- 
 ment of Belgium sought the assistance of the bank as a 
 public depositary the managers refused to make any arrange- 
 ments which would subject them to the public accounting 
 officers. They regarded the services of the bank as indis- 
 pensable and forced the government to countenance the 
 creation of a new banking institution more friendly in its 
 character. 
 
 The Bank of Belgium was founded February 24, 1835, and 
 the management of the public funds was taken away from 
 the old institution and given to the new. The methods of 
 the new bank had the same defects as those of the old, how- 
 ever, in attempting to make long time loans on commercial 
 paper, while issuing circulating notes payable on demand. 
 The result was a crisis in 1838, when confidence was im- 
 paired by the fear of war over the provinces of I,imbourg 
 and Luxembourg. There was a violent contraction of credit 
 at Brussels, and the Bank of Belgium found itself without 
 cash to meet its obligations. The older institution, which 
 was somewhat stronger, and was not regarded as so largely 
 a creature of the existing government, took advantage of 
 the opportunity to crush its rival and on December 4, 1838, 
 
 1 Courcelle-Seneuil, 339. 
 
252 HISTORY OF MODERN BANKS OF ISSUE. 
 
 presented 1,000,000 francs ($200,000) to the Bank of Belgium 
 for redemption. They followed this up on December loth, 
 by the presentation of 1,200,000 francs and on December 
 1 5th, by the presentation of 300,000 francs more. The bank 
 was forced to suspend and to appeal to the government for 
 assistance. A loan of 4,000,000 francs ($800,000) was voted, 
 of which 2,600,000 francs were applied to the payment of 
 bills and commercial obligations of the bank, and 1,400,000 
 francs to meeting the demands of depositors in the savings 
 branches which had been established. ' 
 
 The manner in which the existing institutions mixed up 
 the business of banks of issue and deposit with that of op- 
 erations for long terms created a strong feeling in favor of 
 a bank devoted exclusively to commercial banking. The 
 Bank of Belgium was again embarrassed in 1842 and was 
 compelled to surrender the privilege of keeping the public 
 monies. An arrangement was entered into between the 
 Treasury and the Societe Generate, but that institution felt 
 the effect of the crisis of 1842 and was compelled to abandon 
 all the branches which it had established except that at Ant- 
 werp. The government, therefore, in view of the necessity 
 for an institution of a different character, in granting a re- 
 newal of the charter of the Socieie Generate for twenty-five 
 years, in 1843, reserved the right to revise and restrict its 
 powers before the end of the year 1849. The crisis follow- 
 ing the political excitement of 1848 compelled both existing 
 banks to suspend specie payments and afforded the govern- 
 ment the best of excuses for curtailing their privileges. The 
 banks were aided for the moment by an act of March 20, 
 1848, giving forced legal tender character to their bills but 
 confining the issues within fixed limits. The year 1849 had 
 hardly begun, however, when the President of the Council 
 of Ministers, M. Frere-Orban, brought forward a plan for 
 the National Bank of Belgium (Banque Nationale de Bel- 
 gique). The charter of the bank was granted by the law of 
 May 5, 1850, fixing the capital at 25,000,000 francs ($5,000,- 
 
 Noel, I., 549. 
 
THE BANKS OF NORTHERN EUROPE. 253 
 
 ooo), divided into shares of 1,000 francs each, and giving 
 the bank its franchise for twenty-five years. The bank was 
 forbidden to borrow or make loans upon mortgages, or upon 
 deposits of industrial stock, and was forbidden to take part 
 directly or indirectly in industrial enterprises. The admin- 
 istration of the bank was intrusted to a governor appointed 
 by the King for five years and six directors chosen by the 
 shareholders, and a government commissioner was charged 
 with the supervision of discounts and the issuing of bills. 
 
 The National Bank found itself face to face with strong 
 competitors in the two older banking institutions, but grad- 
 ually gained in strength and credit up to 1870, when it was 
 subjected to one of the severest tests ever put upon a banking 
 institution. It was not distrust of the bank, but the politi- 
 cal events accompanying the Franco-Prussian War which 
 caused the stress. The demand for banking accommodation 
 was greatly increased by the necessity of furnishing supplies 
 for the hostile armies and many business transactions were 
 transferred to Belgium which would ordinarily have been 
 carried on in France or Germany. This was an evidence of 
 confidence in the bank which would not have been without 
 its benefits if the institution had been prepared for so sudden 
 an enlargement of its transactions, but this indication of con- 
 fidence from without was offset by a degree of distrust at 
 home which led to the presentation of large quantities of 
 bank bills for redemption in coin. The government added 
 to the dangers of the situation by a policy which tended to 
 embarrass the bank and to increase the uneasiness of the 
 public. 
 
 The administration feared that a declaration of war be- 
 tween France and Germany would lead to the violation of 
 the neutrality of Belgium, and directed the National Bank 
 to take measures to transfer the metallic reserve, represent- 
 ing the balance due the Treasury, to the port of Antwerp. 
 The bank was informed on July i3th that this transfer must 
 be effected without delay. An attempt was made to carry 
 out the movement secretly, but the news became public that 
 the metallic reserve had been removed from Brussels and 
 
254 HISTORY OF MODERN BANKS OF ISSUE. 
 
 caused great popular alarm. The government, instead of 
 sustaining the bank, issued two more stupid orders, one to 
 the agents of the Finance Department in the provinces, not 
 to permit their cash to be exchanged for bank bills, and the 
 other to the chiefs of the military forces, to exchange bank 
 bills in their military chests for coin. 1 Notwithstanding 
 this apparent^ deliberate effort to discredit the bank, the 
 government refused to permit the suspension of specie pay- 
 ments and held the institution strictly to the performance of 
 the obligations of its charter. The orders regarding the 
 public funds and the military chests were so palpably un- 
 wise that they were quickly revoked, and an order was 
 given to pay everything in bank bills which could be so 
 paid, and to exchange large bills at the agencies of the 
 banks for small ones, in order to facilitate payments in 
 bills. 
 
 The discounts of the bank increased from 177,500,000 
 francs on July 10, 1870, to 203,923,100 francs on July 2oth, 
 and to 223,231,744 francs on July 3ist. While assistance 
 was thus rendered to commercial credit, the presentation of 
 notes for redemption rose from a daily average of 600,000 
 francs ($120,000) during 1869 to a daily average of over 
 i, 000,000 francs ($200,000) during the eighty-two days from 
 July ist to September 20, 1870. The amount presented on 
 July 20th was 6,282,000 francs ($1,250,000) and on the next 
 day 7,025,000 francs ($1,400,000), and the daily average from 
 July i5th to July 3Oth was 2,094,000 francs ($415,000). 
 The bank was able to meet these demands by appeals for 
 loans of coin from London, Amsterdam, Hamburg, and 
 Paris, and by realizing the bills drawn on foreign countries 
 which it had in its possession. 2 These bills, which amounted 
 
 1 Noel, I., 486. 
 
 * The large holding of foreign bills, chiefly drawn on London, in 
 the cash reserves of European banks is, "to a very large extent, 
 solely for the sake of the interest which is to be made on them. 
 Bills on Bngland, owing to the high rate of interest which they often 
 bear, as compared with continental rates, are a favorite investment 
 abroad. In Paris, Berlin, Frankfort; Hamburg, and other conti- 
 
THE BANKS OF NORTHERN EUROPE. 255 
 
 at the outbreak of the crisis to 64,144,561 francs, were re- 
 duced on July 3ist to 7,227,333 francs. The proceeds were 
 employed in the purchase of bullion, principally in silver, 
 which the mint rapidly coined into crowns. The bank was 
 thus enabled to meet every demand and to reduce the rate 
 of discount as soon as the crisis was over. The rate of 
 July I5th was two and a half per cent., but this was in- 
 creased to five per cent, between July i5th and August 5th, 
 and to six per cent, from August 5th to August 27th, and 
 even to seven per cent, for bills drawn in foreign countries 
 on Belgium. The 27th of August saw the worst of the 
 crisis over, and the domestic rate fell to five and a half per 
 cent. ; on September 2Oth to four and a half per cent. ; and 
 on October 8th to three and a half per cent. 
 
 Belgium was led to propose the formation of the Latin 
 Union in 1865 because of the difficulty of maintaining the 
 double standard under the oscillations in the price of gold 
 and silver. The French system of decimal coinage was 
 adopted by the law of June 5, 1832, but silver was made the 
 standard and no provision was made for gold coinage. The 
 creation of a gold circulation in France after the great gold 
 discoveries led to a popular demand for the admission of 
 French gold coins into Belgium. This was decreed by the 
 law of June 4, 1861, and the result was to drive the silver 
 five-franc pieces out of sight and change the standard of 
 actual circulation from silver to gold. The National Bank 
 had a reserve at that time of 48,645,000 francs in silver five- 
 franc pieces, which was paid out to meet current demands, 
 but this fund declined by November 8, 1862, to 14,629,000 
 francs, and the bank suspended their further issue. 1 The 
 smaller pieces continued to disappear, but the movement 
 was retarded for a time by the suspension of specie pay- 
 
 nental cities, the bills on England held by the bankers and joint 
 stock companies often amount to many millions sterling ; and a very 
 large sum remains in their hands for several months, in fact, from 
 the time when the bills are drawn to the time when they fall due." 
 Goschen, Foreign Exchanges, 138. 
 1 Shaw, 191. 
 
256 HISTORY OF MODERN BANKS OF ISSUE. 
 
 merits in the United States. The drain set in again in 1865, 
 the small silver pieces became so scarce that they could not 
 be supplied by the bank in sufficient sums to meet the 
 demands of manufacturers, and the government was com- 
 pelled to resort to the coinage of nickel pieces. The Bel- 
 gian delegates urged the adoption of the gold standard at 
 the conference which resulted in the formation of the Latin 
 Union, but consented to the convention finally adopted by 
 the other powers. 
 
 The fall in the value of silver after 1867 dragged Belgium 
 into new difficulties, against which the convention of the 
 Latin Union afforded her no protection. The government 
 was authorized by the law of December 18, 1873, to suspend 
 the minting of silver five-franc pieces, which had been going 
 on at the rate of 300,000 francs a day. The coinage of sil- 
 ver had already exceeded domestic needs, and great quanti- 
 ties drifted across the French frontier and found their way 
 into the Bank of France. This circumstance was made 
 the occasion of a demand at the conference of 1885 that the 
 countries of the Union take back their national coins and 
 pay for them in gold. The Belgian delegate, M. Pirmez, 
 at first refused to consider any such proposition, declared 
 that Belgium was being made the victim of the misfortunes 
 of the Union, and absented himself from the sittings of the 
 conference. He declared that the treaty of 1865 made no 
 reference to any such process of liquidation ; that the ac- 
 ceptance of Belgian coins by French citizens had not been 
 a part of the treaty, but a result of voluntary action ; and 
 that the dissolution of the treaty w r ould simply relieve 
 public depositaries from further acceptance of foreign coins, 
 without imposing any obligations upon their issuers to re- 
 deem them. 1 The fear that the collapse of the Latin Union 
 would imperil the gold standard in Belgium finally pre- 
 vailed, however, over other arguments, and Belgium con- 
 sented to a basis of liquidation by which each country was 
 to pay in gold for one-half of its five-franc pieces returned 
 
 1 Ansiaux, 14. 
 
THE BANKS OF NORTHERN EUROPE. 257 
 
 to it and was allowed to leave the other half to be returned 
 by the play of foreign exchange. 1 
 
 The position of Belgium and of the National Bank will 
 be peculiarly embarrassing if the dissolution of the L,atin 
 Union destroys the legal status of the silver coins of one 
 country in Jhe others. Belgian coins would under such 
 circumstances flow rapidly back into Belgium and would be 
 likely to glut the reserves of the bank and make difficult 
 the maintenance of the gold standard. The metallic reserve 
 of the bank averages about 100,000,000 francs, of which 
 only a fourth is now in silver, but the volume of Belgian 
 five-franc pieces outstanding is estimated at 400,000,000 
 francs, of which about 200,000,000 are in the Bank of 
 France, besides those in active circulation in France. 3 A 
 glut of silver in Belgium would have the tendency to draw 
 gold from the National Bank, while there would be the 
 strongest disposition in the bank to retain gold and force 
 silver into circulation. It would put a severe test upon the 
 credit of the bank and its 460,000,000 francs of paper circu- 
 lation to attempt to enforce the policy of the Bank of France, 
 to redeem in silver at discretion, and the pressure for gold 
 for export would be strong because of the redundancy of 
 the monetary circulation which the glut of silver would 
 cause. The heroic policy of buying gold and selling silver 
 for what it will bring in the bullion market is favored by 
 some Belgian statesmen and may prove the only effective 
 means of maintaining the gold standard. 
 
 The present charter of the National Bank of Belgium was 
 granted in 1872, when the life of the bank was extended to 
 
 1 M. Haupt considers France rather than Belgium the victim in 
 this transaction and regrets that her delegates, after securing the 
 consent of the delegates of Italy, Switzerland, and Greece to liquida- 
 tion in full in gold, yielded to their demand that they have the same 
 privilege as Belgium of liquidating in gold to the extent of only one- 
 half their silver coins accumulating in French hands. The Monetary 
 Question in 1802, 90. 
 * Haupt, 93. 
 
258 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 January i, 1903, and the capital was increased to 50,0x30,000 
 francs ($10,000,000). Several changes were made in the 
 previous laws regarding taxation, the handling of the public 
 funds, and the share of the government in the profits of the 
 bank. Greater precision was introduced into the provi- 
 sions regarding the proportion of specie held, which is now 
 required to be one-third of the notes in circulation and of 
 other demand liabilities. This reserve may be trenched 
 upon in emergencies with the consent of the Minister of 
 Finance. The notes of the bank were made a legal tender 
 by the law of June 20, 1873, but only so long as they are 
 redeemed in coin on demand and are receivable in public 
 depositaries. Their acceptance by public depositaries is 
 defined by law, but may be suspended by the Minister of 
 Finance. 1 A portion of the public funds in the custody of 
 the bank is allowed to be loaned, but the profits earned go 
 to the credit of the Treasury. The government levies a 
 patent tax on the gross volume of business of the bank, a 
 stamp tax on the notes, and a tax of one-fourth of one per 
 cent, on the circulation above 275,000,000 francs ; and also 
 receives the product of discounts at rates above five per 
 cent, to the amount of the excess, and one-fourth of the 
 net profits of the bank in excess of six per cent. a The 
 leading items of the accounts of the bank since its founda- 
 tion are shown, in francs, in the following table : 
 
 DEC. 3lSt. 
 
 CIRCULATION. 
 
 METALLIC RE- 
 SERVE. 
 
 DISCOUNTS. 
 
 DEPOSITS. 
 
 1851 
 
 50,346,210 
 
 29,264,880 
 
 44,034,953 
 
 25,980,830 
 
 1860 
 
 117,899,960 
 
 63.023,535 
 
 155.958,745 
 
 81,825,144 
 
 1870 
 
 202,528,520 
 
 95,614,523 
 
 196,233,878 
 
 81,319,921 
 
 1880 
 
 339,9 6 9,5io 
 
 98,787,206 
 
 283,992,826 
 
 72,142,896 
 
 1890 
 
 404,721,600 
 
 103,413,340 
 
 3I2,67O,66l 
 
 67,723, 9 2f 
 
 1892 
 
 427,594,580 
 
 114,654,737 
 
 309,391,705 
 
 69,340,318 
 
 1894 
 
 469,662,000 
 
 130,756,515 
 
 346,590,227 
 
 78,558,169 
 
 1895 
 
 461,850,000 
 
 103,325,000 
 
 397,850,000 
 
 74,300,000 
 
 1 Noel, I. 526. 
 
 2 Noel, I. 563. 
 
THE BANKS OF NORTHERN EUROPE. 259 
 
 The Bank of The Netherlands. 
 
 The existing Bank of the Netherlands is the successor of the 
 Bank of Amsterdam, one of the most famous of the banks of 
 the Middle Ages. The Bank of Amsterdam was not a bank of 
 issue in the modern sense, but proposed originally to deliver 
 receipts for deposits of coin. The bank was founded by an 
 ordinance of the City of Amsterdam of January 31, 1609, 
 and was called the Exchange Bank {Amsterdamschc Wissel- 
 bank}. Much confusion and many disputes had arisen in 
 the city because of the variety of coins in circulation and 
 their departure from the proper standard. Money of full 
 weight rose to a premium with the exchange brokers and 
 the fact was considered as the result rather than the cause 
 of their operations. The city undertook by a statute of July 
 15, 1608, to prohibit the holding of deposits or the transfer 
 of money by any one except the owners or their personal 
 agents. The use of bills of exchange was forbidden and 
 traders were directed to make no discrimination between 
 light and heavy coins nor to give or take money at a higher 
 rate than that fixed by the States-General. 
 
 These provisions were only intended to clear the ground 
 for the establishment of the new bank under government 
 control. All bills of exchange were required to be paid 
 through the bank, and the institution w r as required to sell 
 any kind of specie demanded of it at as low a premium as 
 possible. The transferable deposits or credits came to be 
 known as ' ' bank money " and bore this designation through- 
 out the history of the bank. The creation of a means of 
 exchange of fixed and uniform value did much to promote 
 the great commerce of which Amsterdam was becoming the 
 centre. The bank accepted deposits only at their bullion 
 value and granted credit for the amount in lawful money, 
 subject to a proper charge for handling. Deposits were 
 necessarily subject to charges, because the bank was sup- 
 posed to keep in its vaults every guilder received and to do 
 no loan and discount business. Payments in Amsterdam 
 came to be made universally in bank money, by the pre- 
 
260 HISTORY OF MODERN BANKS OF ISSUE. 
 
 sentation of a transfer order at the bank by the payer or his 
 authorized agent, which entitled the payee to the credit on 
 the next day. The bank became so general a medium of 
 payments in Amsterdam that the most extravagant estimates 
 were formed of the gold and silver stored in its vaults. 
 Some put the amount as high as 900,000,000 gulden ($360,- 
 000,000) but the more modest and accurate estimate of 
 Adam Smith was 33,000,000 gulden ($13, 500,000). l 
 
 Direct redemption of bank credits in coin gradually fell 
 into disuse, partly because bank money was so much pref- 
 erable to coin for nearly all practical purposes and partly be- 
 cause of the acceptance of foreign coins on special deposits. 
 The system of advances upon such deposits was formally 
 put in operation in January, 1683, and the bank issued a re- 
 ceipt to the depositor for the bullion value of the deposit, 
 certifying his right to withdraw it upon returning the bank 
 money w r ith which he had been credited and paying one- 
 eighth of one per cent, interest. The right of withdrawal 
 was forfeited if the charges were not paid and the deposit 
 renewed within six months. It was necessary, therefore, in 
 order to withdraw coin thus deposited, to have both the re- 
 ceipt and the equivalent amount of bank money. The bank 
 money outstanding was in excess of the legal coin in the 
 custody of the bank, but not in excess of the domestic and 
 foreign coin and bullion. The lapsing of receipts protected 
 the bank, therefore, from demands for coin redemption which 
 it could not meet, while another method was adopted to pre- 
 vent the excess of the bank money in circulation and to pro- 
 vide bullion for those who desired it for export. 
 
 The method adopted by the bank for controling the vol- 
 ume of circulation and maintaining its credit was the sale of 
 bank money for specie or specie for bank money in such 
 amounts as the public might require. Regular agents of the 
 bank were charged with these transactions and kept the pre- 
 mium on bank money within narrow limits and its value 
 substantially unchanged. It was supposed until the last 
 
 1 Wealth of Nations, II. 61. 
 
THE BANKS OF NORTHERN EUROPE. 26 1 
 
 half of the eighteenth century that the bank had sacredly 
 fulfilled its obligations to keep in the vaults the exact amount 
 of coin and bullion represented by the bank money outstand- 
 ing. The affairs of the bank were kept secret by the small 
 committee of the city government which was charged with 
 its administration, and it was not generally known that as 
 early as 1657 individuals had been permitted to overdraw 
 their accounts and that in later years enormous loans of 
 specie had been made to the Dutch East India Company. 
 The truth became public property in the winter of 1789 and 
 1790. The premium on bank money, which was usually 
 kept above four per cent., then fell below two per cent, 
 and in August, 1790, disappeared. The bank failed to pro- 
 tect its credit by purchasing bank money on an adequate 
 scale and it was represented that large purchases would be 
 followed by a heavy export of bullion to the injury of com- 
 merce. The possibility of deception came to an end when 
 on November, 12, 1790, a notice was issued that silver would 
 be sold to the holders of bank money at a rate equivalent to 
 ninety per cent, of their claims. It was substantially an ad- 
 mission of insolvency and the debt was assumed in 1791 by 
 the government of the City of Amsterdam. The effort was 
 made to put the bank again on its feet, but the time for such 
 banks had passed, the position of Amsterdam as a commercial 
 centre had changed, the bank was closed by a royal decree 
 of December 19, 1819, and the small amount of bank money 
 outstanding was soon after paid off. 1 
 
 The Bank of the Netherlands (de Nederlandsche Bank} was 
 authorized by the government in 1814, after it became evi- 
 dent that the Bank of Amsterdam could not be revived. 
 The privilege of the bank was twice renewed for twenty-five 
 years, carrying its charter to March 31, 1889. The last re- 
 newal was nominally only for fifteen years, until March 31, 
 
 1 A summary of the result of the researches of the latest scholar- 
 ship regarding the Bank of Amsterdam, based in part upon the his- 
 tory of the bank by W. C. Mees, formerly president of the Bank of 
 the Netherlands, is presented by Prof. Dunbar in his valuable work 
 on The Theory and History of Banking, 82-105. 
 
262 HISTORY OF MODERN BANKS OF ISSUE. 
 
 1904, but a further renewal for ten years will be tacitly as- 
 sumed unless the abrogation of the privilege is decreed by 
 the State. 1 The law of December 22, 1863, left open the 
 possibility of establishing other banks of issue by special 
 law, but the Bank of the Netherlands has been in fact the 
 only bank of issue in Holland since its establishment. The 
 capital of the bank was originally 5,000,000 florins ($2,000,- 
 ooo) and has been increased from time to time to 10,000,000, 
 15,000,000, and 16,000,000 florins ($6,400,000). The bank 
 is not a public institution, but the State subscribed in 1863 
 for one thousand shares at 115, which were sold on June 
 i, 1864, at 190. The government exercises a supervision 
 over the affairs of the bank through a special commis- 
 sioner paid by the bank, and the president and secretary are 
 named by the King. The Treasury does not share directly 
 in the profits of the bank, but collects an impost in the na- 
 ture of a patent tax proportional to the dividend distributed. 
 Five per cent, dividends are provided for the shareholders, 
 which are to be made up from the reserve fund in case of in- 
 sufficiency of the profits. The bank performs gratuitously 
 the duties of agent of the Treasury at Amsterdam and in- 
 cludes the Treasury resources in its deposit accounts. 2 It is 
 limited to the usual operations of a bank of issue, discount, 
 and deposit and is forbidden to take part in any commercial 
 or industrial enterprise or to make advances upon real estate. 
 There is no fixed limit upon the note issues of the Bank 
 of the Netherlands, but the decree of August 16, 1884, fixed 
 the proportion of the metallic reserve at forty per cent, of 
 the aggregate of notes and deposits. The law imposes no 
 restrictions on the proportion of gold and silver, but since 
 1872 the bank has ceased to buy silver and has added as 
 much as possible to its gold. Holland suspended the free 
 coinage of silver in December, 1877, and has maintained her 
 monetary system at parity with gold by treating the silver 
 coins as tokens, redeemable in gold. The Bank of the 
 
 1 Lvy, 194. 
 
 a Alfred Neymarck, Article " Banque," in Didionnaire d' Economic 
 Politique, I., 144. 
 
THE BANKS OF NORTHERN EUROPE. 263 
 
 Netherlands held 42,996,000 florins in gold on December 28, 
 1895, and 82,164,000 florins in silver. The principal office 
 of the bank is at Amsterdam. There is a branch at Rotter- 
 dam, and there are thirteen agencies and correspondents of 
 three different classes in fifty-six other localities. The cir- 
 culation of the bank has gradually increased from a mean 
 of 104,859,994 florins in 1865, to 131,656,347 florins in 1870, 
 175,340,677 florins in 1875, and 203,600,000 florins ($82,000,- 
 ooo) in 1895. The issue of notes below ten florins ($4) is 
 prohibited. 
 
 The monetary system maintained by the Bank of the 
 Netherlands is of peculiar interest, because of the demonstra- 
 tion which it affords that, within narrow limits at least, it 
 is possible to maintain the gold standard with very little 
 gold and while the money of circulation is chiefly of silver 
 and paper. The bank pursues a policy directly opposite 
 from that of the Bank of France, by furnishing gold freely 
 for export and sparingly for domestic circulation. The pur- 
 pose of this policy is to maintain the parity of foreign ex- 
 change, because of the conviction that a refusal to furnish 
 gold for export would put the metal at a premium and pre- 
 cipitate the country upon a silver basis. This danger was a 
 serious one in 1883. The gld reserve, which had been at 
 56,924,000 florins at the close of 1880, declined in October, 
 
 1882, to 11,306,638 florins and in February, 1883, to 5,365,- 
 091 florins ($2,150,000). A bill was promptly introduced in 
 the States-General, authorizing the melting of 25,000,000 
 florins in old pieces of two and a half florins and their sale 
 as bullion, in order to obtain gold. The bill did not become 
 law until March 4, 1884, but the exchanges in the meantime 
 became favorable and the stock of gold rose on April 21, 
 
 1883, to 31,000,000 florins ($12,400,000). The bank now 
 stands ready to furnish gold for export or to furnish silver at 
 its bullion value, while the old stock of large silver coins is 
 being gradually reduced by subsidiary coinage for Holland 
 and Java. 1 
 
 1 Bimetallism in Europe, Sen. Ex. Doc. 34, soth Cong., ist Sess., 33. 
 
264 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The Banks of Sweden and Norway. 
 
 The three countries of the Scandinavian Union, Sweden, 
 Norway and Denmark, have a uniform monetary system 
 based upon the gold standard with the crown as the unit, 
 worth twenty-six and eight-tenths cents ($0.268) in United 
 States money, but each country has a banking system of its 
 own. The State Bank of Sweden (Sveriges-RiksbanK) was 
 founded November 30, 1656, and to Palmstruch, its founder, 
 is attributed the first use of bank bills as credit money, not 
 fully covered by the coin reserve. The bank became a pub- 
 lic institution in 1668, and its capital is furnished by the 
 nation, but the administration is under the charge of a com- 
 mission chosen by the Diet and is not responsible to the 
 executive department of the government. The capital of 
 the bank is 25,000,000 crowns ($6,700,000) with a reserve of 
 5,000,000 crowns, and it is allowed to issue notes to the 
 amount of both, plus its credits with foreign banks and its 
 metallic reserve. 1 The reserve is not allowed to fall below 
 10,000,000 crowns. The notes are a legal tender by the 
 Swedish constitution in Sweden and are receivable by public 
 depositaries, and in these respects have an advantage over 
 the notes issued by the private banks of issue. 
 
 The private banks number twenty-seven and may be estab- 
 lished by royal authority. The original legislation on the 
 subject (January 14,. 1824) required the number of share- 
 holders in each bank to be not less than thirty. A new law 
 of January i, 1887, imposed certain general conditions upon 
 the private banks, which are still in force. 2 The capital of 
 each is required to be at least 1,000,000 crowns ($268,000), 
 the charter runs for ten years, and the shareholders are no 
 longer responsible except for the amount of their shares. 
 The circulation is limited to the aggregate of the capital 
 invested in securities, the reserve similarly invested, half 
 the total of credits of the bank, and the coin reserve, after 
 the deduction of an amount equal to ten per cent, of the 
 
 1 Muhleman, 74. 
 
 2 Levy, 219. 
 
THE BANKS OF NORTHERN EUROPE. 26$ 
 
 capital. These banks are required to redeem their notes in 
 gold upon demand and are not authorized to substitute bills 
 of the State Bank. Five of the banks have branches at 
 Stockholm, where they exchange their bills for those of the 
 Bank of Sweden, which can be turned into gold upon 
 demand. 
 
 The note circulation of Sweden under this system of 
 comparatively free banking has been kept within prudent 
 limits and the notes circulate at par with coin. The circula- 
 tion of the Bank of Sweden on August i, 1895, was about 
 54,000,000 crowns and of the private banks 64,000,000 crowns 
 (making a total of $30,000,000). The metallic reserve of 
 the Bank of Sweden was 31,000,000 crowns and of the 
 private banks 20,000,000 crowns. The Bank of Sweden 
 carries about 27,000,000 crowns of this amount in gold, but 
 the private banks have only 8,500,000 crowns in gold. The 
 discounts of the Bank of Sweden were 35,500,000 crowns, 
 advances 55,000,000 crowns, and current accounts 38,500,000 
 crowns. The discounts of the private banks were 180,000,000 
 crowns, advances 155,000,000 crowns, and current accounts 
 400,000,000 crowns. The Bank of Sweden, in spite of its 
 public ownership, is not deeply involved with the obligations 
 of the government, but is the depositary of the public funds 
 and makes an annual advance, by vote of the Diet, of about 
 1,600,000 crowns to facilitate the operations of the Treasury. 1 
 
 The Bank of Norway {Norges Bank) was founded June 
 14, 1816, with its head office at Drontheim and branches in 
 leading towns of the province. Its capital was raised by 
 a tax upon landed property and the land-holders became 
 shareholders in the bank according to their respective pay- 
 ments. The original capital of the bank was 2,000,000 
 specie dollars and circulation was issued provisionally in the 
 proportion of five dollars to two dollars of the capital. One 
 of the purposes of the foundation of the bank was the im- 
 provement of agriculture, and the discount of commercial 
 
 1 Neymarck, Article " Banque," in Dictionnaire d* Economic Poli- 
 tique, I., 144. 
 
266 HISTORY OF MODERN BANKS OF ISSUE. 
 
 bills was at first only a secondary consideration. Loans 
 were made by means of note issues upon land to an amount 
 not exceeding two-thirds of the valuation, and the borrower 
 made a semi-annual payment, including not only interest, 
 but five per cent, annually of the principal, which was thus 
 liquidated in twenty years, like some modern mortgage loans. 
 The attempt to float a paper currency upon land values 
 resulted in failure and the notes of the bank in 1822 could 
 be exchanged at Hamburg at the rate of only $187.50 for 
 $100 in silver. The Storthing was compelled to pass a law 
 reducing the value of the notes by providing that 190 in 
 paper should be redeemed in the proportion of 100 in silver. 1 
 The value of the notes gradually rose and the bank was put 
 upon a sounder basis. The present capital is 10,000,000 
 crowns and the note issues are limited to twice the reserve, 
 of which one-third may consist of deposits with foreign 
 banks. The notes are legal tender in Norway and consti- 
 tute the only credit paper of general circulation. The gov- 
 erning board of the bank is named by the Storthing and 
 consists of fifteen representatives. The actual administra- 
 tion is entrusted to five directors at the central bank and 
 three at each branch, who are also named by the Storthing. 
 The State is a large shareholder, but the management of the 
 bank is kept independent of the Treasury. 2 The circulation 
 on August i, 1895, was about 60,000,000 crowns ($15,000,- 
 ooo), the metallic reserve 30,000,000 crowns, discounts 34,- 
 000,000 crowns, advances 20,000,000 crowns, and current 
 accounts 9,000,000 crowns. 
 
 The National Danish Bank. 
 
 The National Danish Bank was found in 1818 and has a 
 capital of 26,752,400 crowns ($7,ooo,ooo). 8 The bank was 
 the successor of the State Bank {Rigsbankeri), which had 
 been created by the government in 1813 to restore order to 
 
 1 Macleod, Theory and Practice of Banking, II., 263-64. 
 
 - Statistique Internationale des Banques d* Emission : Norvege, 6-7. 
 
 3 Levy, 218. 
 
THE BANKS OF NORTHERN EUROPE. 267 
 
 the demoralized financial system of the country. A decree 
 of July 4, 1818, transferred the privileges of the old bank to 
 the new for a term of ninety years. The government is 
 free at the end of this period, in 1908, to extend the privileges 
 or revoke them. The capital of the National Bank is in 
 private hands, but it was collected by an enforced levy upon 
 real estate, and the land owners became shareholders in the 
 bank for the amount of the tax paid. The bank assumed 
 the obligations of the State Bank and was unable to pay 
 dividends until 1845. The dividends since that time have 
 averaged about seven per cent. The note circulation has 
 no fixed limit, but is subject to conditions as to the amount 
 of reserve held. A decree of 1873 fixed the limit of circu- 
 lation not fully covered by specie at 27,000,000 crowns, but 
 this was increased by a decree of November 5, 1877, to 
 30,000,000 crowns. The metallic reserve is not permitted 
 in any case to fall below three-eighths of the face value of 
 the notes, and at least 12,000,000 crowns must be in gold 
 coin or in bullion which has been actually delivered to the 
 mint for coinage. The other portions of the metallic reserve 
 may be in gold bars or foreign gold coin and in foreign silver 
 to an amount not greater than one-third of the entire fund. 1 
 Redemption of notes is required in gold coin on demand. 
 The notes are legal tender and are the only credit paper in 
 use as currency in the Kingdom. The circulation on July 
 31, 1895, was about 83,000,000 crowns ($21,000,000) ; specie 
 reserve, 60,000,000 crowns ; discounts, 20,000,000 crowns ; 
 current accounts, 19,800,000 crowns; advances, 35,000,000 
 crowns. 
 
 1 Comptrollers Report, 1805, Report of Minister John E. Risley, 
 
 77- 
 
CHAPTER XII. 
 
 THE BANKS OF SOUTHERN EUROPE. 
 
 Development of Banking in Switzerland The Proposed Bank of the 
 Swiss Confederation The Bank of Spain and its Entanglements 
 with the Treasury Similar Situation of the Bank of Portugal 
 The Greek Banks and the Effects of Specie Suspension The 
 Ottoman Bank The Banks of Roumania, Bulgaria, and Servia. 
 
 BANKING in Switzerland had its earliest development 
 at Basle and Geneva, which were long noted for the 
 skill and wealth of their bankers, but banks of issue 
 were not established in either city until 1845. The first 
 Swiss bank of issue was established at St. Gall in 1836. 
 The cantonal bank of Vaud and the Bank of Basle were 
 established in 1845, tne Bank of Commerce at Geneva in 
 1846, and the Bank of Geneva in 1848. The incorporation 
 of banks of issue rapidly spread among those cantons which 
 contained a considerable number of merchants, and in 1863 
 eighteen banks had been established, with forty-two agencies 
 or branches. The aggregate circulation of these banks on 
 December 31, 1862, was 18,468,122 francs ($3,600,000), the 
 cash reserve was 19,380,922 francs and the current accounts, 
 representing deposits, 49, 166,405 francs (^Soo.ooo). 1 Eleven 
 of these eighteen banks were established with the help of the 
 cantonal governments and the remainder were established by 
 private funds. 
 
 The Swiss banks preserved until 1875 a purely local exist- 
 ence and their operations and circulation rarely extended 
 beyond the limits of the canton in which they were estab- 
 
 1 Courcelle-Seneuil, 350. 
 
 268 
 
THE BANKS OF SOUTHERN EUROPE. 269 
 
 lished, but the growing needs of commerce invited co-opera- 
 tion and the extension of banking facilities. Some of the 
 banks began to extend their branches into other cantons 
 and others made conventions with each other for the mutual 
 acceptance of their bills. It was at this stage in the devel- 
 opment of Swiss banking that the Federal constitution was 
 revised and authority to legislate regarding banks confided 
 to the Federal government. Protection against monopoly 
 was afforded by the provision of the constitution that Federal 
 legislation * ' shall not establish a monopoly of the issue of 
 bank bills nor decree their obligatory acceptance." The 
 law of 1875 required the Swiss banks to maintain a cash 
 reserve equal to forty per cent, of their notes in circula- 
 tion and forbade any one bank to issue circulation in excess 
 of 12,000,000 francs ($2,400,000). Each bank was required 
 to accept the notes of other banks and to redeem them in 
 coin. The number of banks at the end of 1873 was twenty- 
 eight and their circulation was 47, 606,000 francs ($9,400,000), 
 against which there was a cash reserve of 14,892,796 francs. 
 The Act of 1875 was superseded by that of March 8, 1881, 
 which limited the circulation to double the paid-up and 
 unimpaired capital (capital vers et reellement existanf} of the 
 banks and required banks of issue to have a capital of at 
 least 500,000 francs. The requirement of a forty per cent, 
 cash reserve was maintained, to be distinct and independent 
 of the other reserves of the bank and kept in a separate 
 account. The remainder of the circulation was required to 
 be fully covered by the deposit of securities or commercial 
 bills. Weekly, monthly, and annual reports are required 
 according to a form prescribed by the Federal Council and 
 an annual examination is made under public authority. 1 
 The notes are issued through the Federal inspectorate, are 
 delivered to the banks as they need them, and are of a uni- 
 form type. A bank which renounces its circulation is required 
 to redeem the notes for a certain time, to surrender the 
 redeemed notes to the Federal authorities and after the 
 
 1 Alfred Neymarck, Article, " Banque," in Dictionnaire d> Economic 
 Politique, L, 145. 
 
2/0 HISTORY OF MODERN BANKS OF ISSUE. 
 
 expiration of the period fixed for redemption to pay into the 
 Federal Treasury an amount of coin equal to the face value 
 of the notes still outstanding. The government then assumes 
 the obligation of redemption for thirty years, after which 
 the balance goes to a public fund. The Federal tax on cir- 
 culation is one per cent, a year and the cantons are allowed 
 to tax the average circulation of banks which are situated 
 within their limits. 1 
 
 The Swiss banking system as embodied in the law of 1881 
 is a system of free banking under government supervision. 
 The Federal Assembly reserved the right to fix the aggre- 
 gate of the Swiss circulation and to apportion it among the 
 banks, but this right has been exercised only for the purpose 
 of compelling the banks to conform to certain uniform 
 requirements. Among these requirements, besides those 
 already defined, are redemption of their notes in coin on 
 demand and the acceptance at par of the notes of other 
 specie-paying Swiss banks. The government in no way 
 guarantees the circulation, except where the canton may be 
 the owner of the bank, and the notes are not a legal tender 
 in private contracts. 2 Twenty-six of the Swiss banks entered 
 into a clearing arrangement by authority of a law of June 19, 
 1882, for the mutual exchange of notes. These banks are 
 known as "The Associated Banks" {Banques Concorda- 
 taires), and their notes circulate throughout Switzerland 
 and are received by public depositaries. . The entire number 
 of banks of issue in Switzerland is thirty-four, of which five 
 operate under Articles 15 and 16 of the banking law. These 
 articles permit the issue of notes against different forms of 
 security from those required of the other banks, but do not 
 dispense with the forty per cent, coin reserve. 
 
 The aggregate liabilities of the thirty-four Swiss banks on 
 December 31, 1895, were 1,258,027,831 francs ($243,000,000), 
 of which 196,200,000 francs was on account of circulation ; 
 168,459,131 francs for current accounts and other short term 
 obligatons ; 649, 132,940 francs for obligations at fixed terms ; 
 
 1 Comptroller's Report, 1895, Letter of Minister Brodhead, 104. 
 
 2 Levy, 216. 
 
THE BANKS OF SOUTHERN EUROPE. 
 
 147,025,000 francs for paid-up capital ; 27,483,163 francs for 
 reserve fund ; and the remainder for foreign bills, acceptances, 
 and unpaid capital. The item of term obligations included 
 223,223,661 francs of savings bank deposits and 389,137,822 
 francs of deposit bonds and similar obligations. The assets 
 included 77,339,580 francs in the legal specie reserve held 
 against circulation ; 16,003,595, francs " free " specie; 164,- 
 469,138 francs in domestic and 13,672,207 francs in foreign 
 bills of exchange ; 428,975,764 francs in advances ; and 145,- 
 019,723 francs in public securities. The mean effective cir- 
 culation outside the banks was 167,913,000 francs in 1895, 
 against 158,719,000 francs in 1894. The maximum in 1895 
 was 185,146,000 francs in the week of November 9th and the 
 minimum was 154,264,000 in the week of February 23d. The 
 total cash reserve attained a mean during 1895 of 93,649,000 
 francs, of which 71,688,000 francs represented the forty per 
 cent, reserve. The mean gold holdings were 82,667,000 
 francs and the mean silver 10,982,000 francs. The gold in 
 1894 was 77,190,000 and the silver 15,302,000 francs. The 
 maximum cash reserve in 1895 was 98,417,000 francs in the 
 week of January 26th and the minimum 90,461,000 francs in 
 the week of October 5th. 
 
 The passion for a great state bank seized upon Swiss 
 statesmen after the crisis of 1891 and an amendment was 
 adopted to the constitution remitting to the Federal Council 
 control of note issues. 1 The Chambers decided in favor of 
 a state bank rather than a private joint stock bank, 
 and the Department of -Finance presented a project of 
 law for the bank in the summer of 1894,' which yet 
 remains to be put in operation. The first article declares 
 the principal functions of the new bank to be to serve ' ' as 
 the regulator of the money market and to facilitate exchange 
 operations." The principal seat is to be at Berne, but every 
 canton has the right to demand the establishment of a branch 
 
 1 The popular vote on the amendment was 228,853 i the affirmative 
 and 143, 939 in the negative. The amendment forbids forced legal tender 
 except in time of war and exempts the bank from cantonal taxation. 
 
 2 Raffalovich, Le Marche Financier en 1894-5, 167. 
 
2/2 HISTORY OF MODERN BANKS OF ISSUE. 
 
 or agency within its own territory. The name of the new 
 institution is to be " The Bank of the Swiss Confederation," 
 the capital is to be furnished by an issue of bonds and the 
 Confederation makes itself responsible for the engagements 
 of the bank in case its own means prove insufficient. The 
 capital is fixed at 25,000,000 francs ($5,000,000), but may be 
 increased to 50,000,000 francs by vote of the Federal As- 
 sembly. " The exclusive right to issue bank bills " is con- 
 ferred on the new institution and the existing banks are 
 required to retire their circulation within two years and a 
 half from the date when the new bank begins operations, by 
 surrendering to the central bank quarterly one-tenth of the 
 notes outstanding at that date. Deficiencies in the quota of 
 notes must be made up in specie, to be held as a redemption 
 fund for the retirement of the notes. 1 
 
 No fixed limit is put upon the note issues of the new 
 bank, but it is required to hold gold coin or bullion or legal 
 silver coins to the amount of one-third of the circulation. 
 This plan was not entirely satisfactory to the commercial 
 interests of the country, and final action has not yet been 
 taken. A revised project of law passed the National Coun- 
 cil in the summer of 1896, by a vote of 89 to 43, and passed 
 the Council of the States by a vote of 27 to 17. The Union 
 of Commerce and Industry, however, representing the com- 
 mercial interests, met at Zurich on August 15, 1896, and 
 voted, 20 to 2, after three hours of discussion, to disapprove 
 the proposition of the government. The Union is in favor 
 of a central bank, but is opposed to government owner- 
 ship. 
 
 Banking in Spain. 
 
 Spain had banks of deposit during her period of prosperity 
 in the Middle Ages, some of which, like that at Barcelona, 2 
 
 ^Bulletin de Statistique, November, 1894, XXXVI., 533-39. 
 
 'This bank, founded in 1401, is said to have been the first bank of 
 deposit instituted for the accommodation of private merchants. Hal- 
 lam, II., 530. 
 
THE BANKS OF SOUTHERN EUROPE. 2?$ 
 
 attained considerable celebrity. These institutions disap- 
 peared with the decadence of Spanish commerce and it re- 
 mained for the modern age to witness a new development 
 of banking. An attempt was made in th ^ eighteenth century 
 to establish institutions of credit, and the Bank of San Carlos, 
 which was founded in 1782 at Madrid, was still in operation 
 when the monopoly of the issue of circulating notes was 
 given to the Bank of Spain in 1874. The Bank of Spain 
 was founded in 1829, under the name of the Bank of San 
 Fernando, but did not enjoy any special privileges outside 
 of Madrid and the places where it had branches until 1856.' 
 It was at first a government bank and its name was changed 
 at the time of the new legislation to the Bank of Spain, but 
 even after 1856 the right to incorporate other banks of issue 
 remained in the hands of the government. Such banks had 
 been established prior to 1856 by the consent of the public 
 authorities in much the same manner as departmental banks 
 might have been established in France before 1840. 
 
 The legislation of January 8, 1856, was simply a first 
 step in the direction of monopoly, like the similar legislation 
 of France and Germany. This law prescribed that there 
 should be not more than one bank of issue in any commercial 
 city. The general provisions regarding the new banks 
 limited their issues to three times their capital, obliged them 
 to keep a coin reserve of at least one-third of their circulation, 
 and fixed the minimum denomination of the notes at one 
 hundred reals ($5). The liberality of these provisions was 
 impaired by leaving to the government the nomination of 
 the governor of the Bank of Spain and of royal commissioners 
 to manage the independent banks. The Bank of Spain 
 had created up to 1863 only two branches, at Valencia and 
 at Alicanta, and there were independent banks at Cadiz, 
 Barcelona, Seville, Malaga, Corunna, Santander, and Val- 
 lodolid. The capital of the independent banks was not 
 large, but in this respect it was commensurate with the vol- 
 ume of business in Spain. The Bank of Spain on December 
 
 Courcelle-Seneuil, 361. 
 
274 HISTORY OF MODERN BANKS OF ISSUE. 
 
 31, 1862, showed a circulation of 208,380,901 reals ($10,400,- 
 ooo), a coin reserve of 107,398,201 reals, deposits of 235,063,- 
 731 reals, and a commercial portfolio of 309,231,378 reals 
 ($15,500,000). 
 
 The charter of the Bank of Spain was extended in 1856 
 for twenty-five years and was renewed in 1874 for thirty 
 years. The law of March 19, 1874, conferred upon the bank 
 the exclusive privilege of issuing notes and increased the 
 capital from 132,000,000 reals ($6,600,000) to 100,000,000 
 pesetas ($2o,ooo,ooo). x All the existing provincial banks, 
 then numbering eighteen, were ordered to liquidate their 
 circulation and transfer it to the Bank of Spain. The bank 
 is not a state institution and the state does not participate in 
 its profits, but it had the authority, under the law of 1874, to 
 require advances by the bank to the amount of 125,000,000 
 pesetas ($25,000,000) upon the deposit of proper guarantees. 
 The notes of the bank were made legal tender and limited 
 to five times the capital. The capital was increased soon 
 after the Act of 1874 to 150,000,000 pesetas ($30,000,000), 
 which carried the limit of circulation to 750,000,000 pesetas 
 ($i50,ooo,ooo). a 
 
 The necessities of the Treasury led to a new revision of 
 the charter by the law of July 14, 1891, and the extension 
 of the privilege of the bank until December 31, 1921. The 
 new charter authorizes the issue of notes to the amount of 
 1,500,000,000 pesetas ($300,000,000) against a cash reserve 
 of one-third, of which at least half is required to be kept in 
 gold. 8 The bank was required to pay for these privileges 
 by advancing 50,000,000 pesetas to the government annually 
 for three years without interest or right to reimbursement 
 until the expiration of the charter. The fate of the bank 
 has come to be bound up more and more with that of the 
 State and it has been only by the bank's help that the Treas- 
 
 1 The present Spanish coinage system follows that of the Latin 
 Union, the peseta being the equivalent of the franc ($0.193). 
 
 2 Alfred Neymarck, Article, " Banque," in Dictionnaire & Econo- 
 mic Politique, L, 140. 
 
 3 Bulletin de Statistique, July, 1891, XXX., 72. 
 
THE BANKS OF SOUTHERN EUROPE. 2/5 
 
 ury has been able to meet its engagements. The Treasury 
 budget has shown a persistent deficit and a floating debt was 
 incurred from 1885 to 1893 f 333> 000,000 pesetas ($66,000,- 
 ooo). The permanent debt on June 30, 1892, was 6,249,639,- 
 975 pesetas ($i, 200,000,000V and the charges on account of 
 the debt for 1894 were estimated at 309, 2 19, 669 pesetas ($61,- 
 000,000 or about $3.40 per capita). Kxchange has declined 
 about 20 per cent, and railway securities and public stocks 
 have fallen from 15 to 75 percent, during the past five years. 
 The commercial operations of the bank through its fifty- 
 eight branches have become subordinate to the issue of paper 
 notes to cover the advances to the state. A large proportion 
 of the assets are locked up in government and foreign secu- 
 rities, which increased rapidly for several years because the 
 bank maintained a uniform interest rate of four per cent., 
 which afforded a profit upon the difference between this rate 
 and the higher rate earned by the securities. 2 This differ- 
 ence was availed of by shrewd speculators to borrow on 
 securities, spend the loan on new purchases of securities, 
 deposit them again as guarantee for a larger loan, and so 
 on without limit. The rate was raised in January, 1892, 
 to five per cent., but without entirely curing the difficulty. 
 The cash reserve, moreover, is only available for the re- 
 demption of notes to about half of its face value. The gold 
 in the reserve on December 31, 1895, was 200,100,000 pesetas 
 and the silver 275,550,000 pesetas. Gold is at a premium 
 of 20 per cent, above bank-notes so that redemption in gold 
 would immediately drain the bank. Redemptions are actu- 
 ally made in silver, whose present commercial value is below 
 that of the bank paper. The Spanish peseta is the equiva- 
 lent of the French franc, but five pesetas are required to 
 obtain four francs, because of the greater stability of the 
 French currency under the policy of restricted silver coinage 
 and the fact that the franc is received as a token coin in the 
 countries of the Latin Union at par with gold. The recent 
 
 1 Raffalovich, Le Marche Financier en 1893-4, 217. 
 
 2 Raffalovich, Le Marche Financier en 1891, 119. 
 
276 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 insurrection in Cuba has required new appeals by the gov- 
 ernment to the bank and the circulation had been expanded 
 on September 30, 1895, to 961,900,000 pesetas. The follow- 
 ing table shows the principal items of the accounts of the 
 bank since it acquired the monopoly of circulation : 
 
 DEC. 3ISt. 
 
 CIRCULATION. 
 
 CASH 
 RESERVE. 
 
 COMMERCIAL 
 BILLS. 
 
 ADVANCES. 
 
 CURRENT 
 ACCOUNTS. 
 
 
 (In millions of pesetas.) 
 
 1875 
 
 127.7 
 
 I29.I 
 
 I5-I 
 
 4I.O 
 
 87.1 
 
 1880 
 
 246.8 
 
 2OO.6 
 
 24.2 
 
 II0.8 
 
 192.4 
 
 1885 
 
 469.0 
 
 272.2 
 
 74.4 
 
 188.3 
 
 234.1 
 
 iSgO 
 
 734.1 
 
 233.2 
 
 180.4 
 
 251-3 
 
 401.6 
 
 1893 
 
 934-0 
 
 375-0 
 
 342.7 
 
 135.1 
 
 374-3 
 
 1894 
 
 909.6 
 
 475-6 
 
 280.7 
 
 106.5 
 
 306.6 
 
 1895 
 
 987.0 
 
 475-1 
 
 356.4 
 
 ~ ~ 
 
 384.7 
 
 The Bank of Portugal. 
 
 Portugal has a single public bank of issue with a capital 
 of 13,500,000 milreis ($14,500,000). The statutes of the 
 bank originally imposed careful restrictions on the circula- 
 tion, but these restrictions have been suspended in order to 
 permit large loans to the government which have tended to 
 drag the circulation of the bank into the same mire of de- 
 preciation as the Bank of Spain. Article 15 of the original 
 law prescribed that the circulation should always be covered 
 by a metallic reserve and negotiable paper maturing in not 
 more than three months and that the metallic reserve should 
 be in gold and should equal one-third the aggregate of the 
 circulation and other demand liabilities. Article 16 fixed 
 the power of note issue at double the capital of the bank and 
 Article 37 limited to 2,000,000 milreis the advances to the 
 State. ' Both the latter limitations have been disregarded and 
 the circulation is now four times the capital and advances to 
 the government are more than ten times the amount fixed 
 by law. 
 
 The last extension of the charter continued the bank for 
 forty years, from 1888 to 1928, and conferred upon it the 
 208. 
 
THE BANKS OF SOUTHERN EUROPE. 2JJ 
 
 monopoly of the issue of legal tender notes in the realm of 
 Portugal and the neighboring islands. Seven other banks, 
 five at Oporto, one at Braga, and one at Guimaraes, had the 
 power to issue notes for circulation within their respective 
 districts, which were not received by public depositaries. 
 An arrangement of July 8, 1891, authorized the Bank of 
 Portugal to unify the circulation and substitute its own notes 
 for those of the other banks. The bank is managed by a 
 governor appointed by the Treasury for three years and a 
 board of ten directors chosen by the shareholders. The ac- 
 counts of the bank on September 30, 1895, showed a note 
 circulation of 55,000,000 milreis ($5 9, 000,000), protected by 
 a specie reserve of 12,400,000 milreis, of which only 4,850,- 
 ooo milreis ($5,250,000) was in gold and 7,550,000 milreis 
 ($8,150,000) in silver. The commercial portfolio amounted 
 to 11,300,000 milreis and the current accounts to 1,300,000 
 milreis. 
 
 The Banks of Greece. 
 
 Greece has three banks of issue, the National Bank of 
 Greece, founded in 1842 ; the Ionian Bank, founded in 1839 ; 
 and the Epiro-Thessalian Bank. The capital of the Na- 
 tional Bank is 20,000,000 drachmas. The Ionian Bank has 
 its head office in London and its paid-up capital is ,315,507, 
 or 7,887,687 drachmas. 1 All three banks have been dragged 
 into the channel of forced legal tender and depreciated money 
 by the enormous debts of the government and the steadily 
 growing embarrassments of the public Treasury. A law of 
 June 20, 1877, gave forced legal tender quality for the first 
 time in recent years to the notes of the National Bank to a 
 limit of 47,000,000 drachmas ($9,071,000) and to those of the 
 Ionian Bank to a limit of 12,000,000 drachmas ($2,316,000). 
 The money was restored to par in 1884 at a heavy expense 
 
 1 The coinage systems of Greece, Roumania, Bulgaria, and Servia 
 are each based upon the French decimal system and their monetary 
 unit in gold, though having different names, is equivalent to the 
 franc, which is valued by the United States Mint at nineteen and 
 three-tenths cents(|o.i93.) 
 
278 HISTORY OF MODERN BANKS OF ISSUE. 
 
 to the Treasury, but the suspension of specie payments was 
 thought necessary again in October, 1885, and authority to 
 issue inconvertible notes was extended to the Epiro-Thes- 
 salian Bank as well as to the other two banks. The Na- 
 tional Bank was authorized to issue notes of which one- third 
 should be covered by coin and bullion, one-third by commer- 
 cial paper, and one-third by securities. The government 
 borrowed from the bank 14,000,000 drachmas in gold and 
 required it to hold notes subject to its orders to the amount 
 of 70,000,000 drachmas. The bank was given in return for 
 these advances the right to circulate 60,000,000 drachmas 
 on its own account in inconvertible paper. The Ionian 
 Bank was authorized to maintain a circulation of 7,000,000 
 drachmas, of which 2,000,000 should be on account of the 
 government, and the Hpiro-Thessalian Bank was given a 
 maximum circulation of 5,000,000 drachms, of which 800,- 
 ooo should be on government account. The National Bank 
 was also authorized to circulate 7,000,000 drachmas in small 
 notes, and each of the other banks was authorized to issue 
 3,500,000 drachmas in such notes. The metallic reserve of 
 the National Bank has been reduced below 2,000,000 drach- 
 mas ($400,000) and while gold sometimes reaches the coun- 
 try after the sale of the crops it quickly flies abroad again or 
 disappears into private hoards. The price of gold in paper 
 was 122 in 1889 and 1890, 140 in 1892, 180 in 1893, an( ^ 2O 
 in 1894.' 
 
 The population of Greece is about 2,300,000, and the an- 
 nual budget for carrying on the government averages about 
 100,000,000 drachmas ($20,000,000), of which 35,000,000 
 drachmas is on account of interest on the debt. This in- 
 terest has not been paid for several years in gold, as required 
 by the contract, but desultory efforts have been made to per- 
 suade the holders of the securities to accept new securities in 
 payment of interest or to permit a complete readjustment of 
 Greek finances. The British holders of Greek securities 
 persuaded the London Foreign Office in 1892 to send Major 
 
 1 Raffalovich, Le Marche Financier en 1893-4, 
 
THE BANKS OF SOUTHERN EUROPE. 279 
 
 Law to Athens to study the actual condition of affairs and to 
 determine whether the government would be able to meet its 
 obligations. Major Law made a report to the British minis- 
 ter at Athens under date of March 10, 1893, recommending 
 various reforms in the financial system. He showed that the 
 aggregate public debt on January i, 1893, was about 750,- 
 000,000 drachmas ($150,000,000 or about $60 per head). 
 Greece imports more than she exports and the accumulated 
 deficits in the annual budgets since 1877, due to the premium 
 on gold and the inefficient methods of collecting the rev- 
 enues, have been 674,000,000 drachmas. 
 
 Major Law's recommendations were not adopted and no 
 definite plan has yet been perfected for the restoration of 
 order to Greek finance. The King, in his speech from the 
 throne on November 8, 1893, afforded striking evidence of 
 the depreciation of the bank-notes and the evils which have 
 come in its train. It was announced that all the subsidiary 
 coins, even to those of bronze, had disappeared and the gov- 
 ernment recommended the coinage at Paris of nickel pieces 
 of five, ten, and twenty centimes to supply the people with 
 small change. A law was approved December i, 1893,' P ro ~ 
 viding for the payment of 50 per cent, of the interest then 
 overdue on the public debt in bank-bills, for future payments 
 in the proportion of 30 per cent, in gold, and for covering 
 directly into the Treasury certain funds which had been 
 pledged as the guarantee of particular loans. This legisla- 
 tion led to protests by the European bond-holders and 
 several abortive efforts to readjust the debt. Meanwhile, 
 values in Greece have shrunk 225,000,000 drachmas, the 
 gold drachma has risen to 200 per cent, in paper, high prices 
 and an excess of paper circulation have failed to stimulate 
 exports, and raisins, the principal article of export, have 
 been shut from France and their export to the United States 
 has been reduced by the high tariffs which those countries 
 have established. 2 
 
 1 The Greeks still adhere to the Julian calendar. The actual date by 
 the Gregorian calendar, in use in Western Europe, was December I3th. 
 
 2 Raffalovich, Le Marcht Financier en i '894-95 ' 282-84. 
 
280 HISTORY OF MODERN BANKS OF ISSUE. 
 
 One of the essential defects of the Greek banking system 
 is the large proportion of assets required to be locked up in 
 mortgages. The law requires three-fourths of the capital 
 of the National Bank and three-fourths of the capital and 
 reserve funds of the Kpiro-Thessalian Bank to be thus in- 
 vested. The English bank is free from these restrictions. 
 The government is not a shareholder in either of the banks, 
 but appoints a royal commissioner to supervise the opera- 
 tions of each and requires the publication of periodical 
 reports. The banks pay a tax of five per cent, on their 
 dividends and the customary house- tax, and transfer public 
 monies free of charge. 1 The shareholders are liable only 
 for the amount of their investment. The National Bank 
 has twenty-six branches and the others have several each. 
 
 The manner in which the resources of the National Bank 
 have been absorbed by the government and by mortgage 
 investments is indicated in a striking manner by the bal- 
 ance sheet for October i, 1895. The to tal liabilities were 
 247,253,095 drachmas (about $47,700,000 in nominal gold 
 value, but about half this amount in silver or paper). 
 These liabilities comprized 106,252,864 drachmas in circulat- 
 ing notes, 7,000,000 drachmas in small notes, 94,727,724 
 drachmas in deposits and current accounts, 11,500,000 
 drachmas on account of reserve fund, and the remainder on 
 account of capital and other smaller items. The resources 
 for meeting this mass of liability included 1,852,396 drachmas 
 in cash, 2,965,500 drachmas in the notes of other banks, 
 8,938,462 drachmas in foreign credits, 10,430,598 drachmas 
 in advances to the government, 38,487,457 drachmas in gov- 
 ernment bonds, 28,435,445 drachmas in sundry loans to 
 public bodies, 38,818,548 drachmas in advances on first 
 mortgages, 77,787,754 drachmas on forced currency and notes 
 of one and two drachmas, and only 12,091,897 drachmas, 
 or about one-twentieth part of the assets, in unmatured 
 commercial bills. 
 
 The condition of the Ionian Bank more nearly conforms 
 
 1 Letter of Minister E. Alexander, Comptroller's Report, 1895, 84. 
 
THE BANKS OF SOUTHERN EUROPE. 28 1 
 
 to sound banking principles. The total liabilities on Sep- 
 tember i, 1895, were 33, 763, 979 drachmas, of which 7,887,687 
 drachmas was on account of capital, 8,566,061 drachmas 
 was for circulation, 3,495,298 drachmas for small notes, 
 3,831,876 drachmas for current accounts, and 8,150,292 
 drachmas for interest-bearing deposits. The assets included 
 402,578 drachmas in cash on hand, 230,874 drachmas cash 
 in London, 1,362,822 drachmas in notes of other banks, 
 3,670,668 drachmas in investments in London, 5,412,908 
 drachmas in commercial bills, 10,463,647 drachmas advanced 
 on securities and mortgages, 3,894,280 drachmas in loans to 
 the government on forced currency, and 3,499,999 drachmas 
 in loans on small notes. 
 
 The Imperial Ottoman Bank. 
 
 The Imperial Ottoman Bank at Constantinople received 
 the exclusive privilege of note issue in Turkey when it was 
 founded in 1863. The capital was furnished by British and 
 French capitalists and was originally ,2, 700,000. This was 
 increased in 1865 to ,4,050,000 and in August, 1874, by the 
 absorption of the Austro-Ottoman Bank, to ; 10,000,000, of 
 which half has been paid up. 1 The first charter was for 
 thirty years, but a new convention of February 17, 1875, 
 prolonged the privileges of the bank for an additional period 
 of twenty years, until 1913. The bank is required to main- 
 tain a cash reserve equal to one-third of its circulating notes 
 and these notes must be paid in coin to the bearer on pres- 
 entation. They are a legal tender in the districts in which 
 they are issued and where the branches of the bank are 
 established. The government is pledged by the charter to 
 issue no paper money during the continuance of the bank 
 and to authorize the creation of no other bank or establish- 
 ment with like privileges. The notes of the bank are 
 receivable at public depositaries and a large part of its func- 
 tions relate to its duties as financial agent of the Turkish 
 government. A new convention was concluded with the 
 
 1 Revue des Banques, May, 1895, XIV., 100. 
 
282 HISTORY OF MODERN BANKS OF ISSUE. 
 
 government for a period of six years in 1893, f r the purpose 
 of regulating the advances by the bank to the Treasury. 
 The maintenance of a floating debt is a necessary feature 
 of the present methods of taxation in Turkey, as most of 
 the revenue is obtained by a levy upon the land and crops 
 and is not paid until after the crops are harvested. 1 The 
 advances to the government are largely reimbursed when 
 the taxes are collected. The total advances on January i. 
 1895, were ,1, 358, 927. 
 
 The Turkish people have not yet become large users of 
 bank-notes and are easily excited to distrust. This happened 
 in the summer of 1894, when some forged notes were found 
 in circulation and the public presented ,218,000 for redemp- 
 tion within a week. The circulation at the head office, 
 which was ,249,000 during the first week in June, fell to 
 ,66,000 during the first week of July. The circulation of 
 the bank was as high as ,990,000 in 1893, but was only 
 ,838,797 at the close of 1894. The experience of this run 
 taught the management the importance of maintaining a 
 strong coin reserve and prepared them for the run which set 
 in during the political disturbances growing out of the Ar- 
 menian massacres in the autumn of 1895. The government 
 offered the bank the privilege of suspending specie payments 
 for thirty days, but the offer was declined and ,1,300,000 in 
 gold was obtained early in November from the Bank of 
 France. The Imperial government were so pleased with the 
 spirit shown by the bank that the charter was extended for 
 twelve years, until 1925. 2 The cash in hand at Constanti- 
 nople and the branches was ,1,746,905 on January i, 1895, 
 and ,1, 907, ooo on July 31, 1895. The bank also held Eng- 
 lish and French government securities on January i, 1895, 
 to the amount of ,1,510,007. 
 
 The bank has been extending its branches of late years and 
 has been finding them more profitable as their convenience 
 to commerce has come to be understood. Branches exist at 
 
 1 Lvy, 227. 
 
 2 London Bankers' Magazine, Dec., 1895, LX., 726. 
 
THE BANKS OF SOUTHERN EUROPE. 283 
 
 Smyrna, Bagdad, Aleppo, and Alexandria, and those at 
 Smyrna and Bagdad showed a material increase of business 
 during 1893 and 1894. The number of branches rose from 
 fourteen in 1883 to twenty-eight in 1894, au d an encouraging 
 feature of this development has been the fact that increased 
 advances of capital by the parent bank have not been required 
 at the branches in proportion to the increasing volume of busi- 
 ness, but the capital has been furnished by the communities. 1 
 The growth of deposits has also been an encouraging feature 
 of the history of the bank, the amount having increased from 
 about ;8, 000,000 of all classes in 1893 * $-> 55^, 469 in 
 current accounts and ,1,427,196 for fixed terms on January 
 i, 1895. The private securities held, representing the com- 
 mercial portfolio, were ,3,492,847 ; the advances on securi- 
 ties were ,4,920,796 ; and the current accounts of sundries 
 were ,4,679,364. Business conditions were not favorable 
 in Turkey during 1894, but some conversions of the public 
 debt and other large financial transactions enabled the bank 
 to show net profits of ,457,840 and to pay a dividend of 
 eight per cent. 
 
 The Banks of Roumania, Bulgaria, and Servia. 
 
 The National Bank of Roumania was founded in 1880 
 with the exclusive privilege of issuing notes payable to 
 bearer until December 31, 1912. The capital is 30,000,000 
 lei ($6,000,000) of which 12,000,000 lei have been paid in. 
 A third of the capital is furnished by the government and 
 the other two-thirds by individuals. A metallic reserve of 
 at least one-third of the note issues is required and no bill 
 can be issued below twenty lei ($4). The entire circulation 
 must be covered by securities which are readily negotiable, 
 but thirty per cent, of the metallic reserve may be represented 
 by foreign bills of exchange. 9 The circulation on Sep- 
 
 1 London Bankers' Magazine, Aug. 1895, LX., 252. 
 
 3 Ivvy, 225. The gold standard was adopted in Roumania by the law 
 of March 2, 1890. The unit in the three Slavic countries is the equiv- 
 alent of the French franc ($0.193). 
 
284 HISTORY OF MODERN BANKS OF ISSUE. 
 
 tember 30, 1895, was 139,900,000 lei ($27,000,000), the gold 
 reserve was 63,700,000 lei, and the foreign drafts were 9,700,- 
 ooo lei. The domestic discounts were 21,900,000 lei ; 
 advances, 17,800,000 lei ; and current deposit accounts, 
 10,200,000 lei. The government of Roumania issued paper 
 money soon after its establishment in 1878, guaranteed by 
 the public domains to the amount of 26,200,000 lei, and the 
 National Bank was charged with the withdrawal of this 
 paper and the substitution of its own notes. The amount 
 of this special issue has been gradually retired and the bank 
 reimbursed by the government until it has disappeared. 
 The net profits of the bank in 1894 were 3,203,000 lei. 1 
 
 The bank-note circulation of Bulgaria is issued by the 
 National Bank, which was founded on February 8, 1885, by 
 the government, with a capital of 10,000,000 lei ($2,000,- 
 ooo) in gold. The bank has the exclusive privilege of issu- 
 ing notes, and they are received in the public depositaries 
 and in all other offices of 'the government. It is required 
 to hold a cash reserve in gold equal to one-third the value 
 of the notes in circulation and to redeem the notes on demand 
 at the central office or at any of the branches. The gov- 
 ernor of the bank is named by the Prince upon the nomina- 
 tion of the Minister of Finance and four administrators are 
 appointed in the same way. The government is represented 
 by two delegates, one a counsellor of the court of accounts 
 and the other a member of the ministry of finance, who 
 exercise official supervision over the operations of the bank. 
 The circulation of the bank on July 14, 1895, was only 2,- 
 300,000 levs ($444,000), the cash reserve was 4,100,000 levs, 
 the portfolio of commercial paper 19,300,000 levs, and the 
 current accounts 40,900,000 levs. 
 
 The bank-note circulation of Servia is issued by the 
 National Bank of Servia, which was established by the law 
 of January 6, 1883, subsequently modified by the law of Sep- 
 tember 23, 1885. The capital of the bank is 20,000,000 
 dinars ($4,000,000). The privilege of the bank is fixed 
 
 1 Revue des Banques, April, 1895, XIV., 71. 
 
THE BANKS OF SOU 7^11 ERN EUROPE. 
 
 28 5 
 
 for twenty-five years and includes the monopoly of note 
 issues. The notes of ten dinars ($2) are redeemable in 
 silver and those of larger denominations in gold. The 
 bank is authorized, however, to redeem in silver at its market 
 value in a proportion fixed by the Minister of Finance upon 
 the special petition of the bank. Silver may also be substi- 
 tuted for gold to the amount of not more than twenty-five 
 per cent, of the cash reserve and the bank is not permitted 
 to increase its note issues above two and a half times its 
 reserve. The provision that the notes may be redeemable 
 in part in silver has led to a degree of distrust of the note 
 issues somewhat similar to that which existed in 1893 i* 1 tne 
 United States regarding the notes issued under the Sher- 
 man law. The distrust went far enough in Servia to send 
 gold to a premium, in spite of the fact that the bank 
 offered to pay 100 francs in gold for 115 francs in silver or 
 in notes redeemable in silver. This did not accord with 
 the market value of silver, but it was feared that the gold 
 reserve of the bank would become exhausted and that gold 
 payments would be suspended. The circulation of the bank 
 on September 22, 1895, was 26,600,000 dinars ($5,134,000), 
 protected by a specie reserve of 10,800,000 dinars, of which 
 6,100,000 dinars was in gold and 4,700,000 dinars in silver. 
 The discounts were 7,900,000 dinars, and current accounts 
 1,500,000 dinars. 
 
CHAPTER XIII. 
 
 THK BANK OF THE UNITKD STAGES. 
 
 Banks of Issue before the Adoption of the Constitution Hamilton's 
 Plan for the First Bank of the United States The Struggle over 
 a New Charter The Second Bank of the United States : Its Early 
 Errors and its Economic Services The Bank Dragged into 
 Politics by Jackson and Clay Jackson's Triumph and the Re- 
 moval of the Deposits The Independent Treasury System. 
 
 THK pathway of American colonial history is thickly 
 strewn with the failures of government paper money, 
 which might have afforded an instructive lesson to 
 the Continental Congress against its issues of Continental 
 bills. Several cases are found also of issues on private bank- 
 ing credit, but they were not based on sound banking prin- 
 ciples and do not shine greatly by comparison with the 
 unrestrained issues resting on the fiat of the State. The 
 "Land and Manufactures Bank," established in Massachu- 
 setts in 1740, did not pretend to do better than issue notes 
 redeemable in goods, but they stood for a time so much 
 higher than " Massachusetts bills " that, in spite of the hos- 
 tility of Governor Belcher, merchants specially advertised 
 goods to be sold for " Manufactory bills." ' In Connecticut 
 in 1733 the New London Society for Trade and Commerce 
 circulated notes which were current until prohibited by the 
 authorities, and in New Hampshire a company of " private 
 gentlemen " attempted to meet the demand for a circulating 
 medium by an issue of bills. Most of these schemes, in- 
 cluding that of the specie bank, formed to counteract the 
 
 1 Weeden, 487. 
 
 286 
 
THE BANK OF THE UNITED STATES. 287 
 
 Land and Manufactures Bank, fell under the prohibition of 
 the Joint Stock Companies' Act. This act was passed in 
 England after the bursting of the South Sea Bubble in 1720 
 and forbade the formation of banking companies without a 
 special charter, but it was not until 1740 that it was declared 
 by Parliament to extend to the colonies. 
 
 The history of banks of issue in the United States can 
 hardly be said to have begun, however, until the foundation 
 of the Bank of Pennsylvania. The bank originated in the 
 plan of a numoer 01 citizens of Philadelphia to suplv the 
 army with rations, and their first bills, issued in "1780, were 
 nothing more than interest-bearing notes payable at a future 
 time. The advances in Continental money made by the 
 shareholders were secured by bills of exchange for ; 150,000 
 drawn on the envoys in Europe, but not intended to be 
 negotiated. 1 Approval was given by Congress May 26, 
 1781, to the plan of Robert Morris for the Bank of North 
 "America J _with a capital of $400,000, to be increased if desired. 
 Morris arranged with the Bank of Pennsylvania to transfer 
 the foreign bills it was holding to the new bank and paid in 
 cash its claims against the Federation.- The charter of 
 the Bank of North America was not actually granted until 
 December 31, 1781, and business was begun January 7, 1782. 
 There was so much doubt of the power of Congress to 
 charter a bank that a charter was obtained April i, 1782, 
 from the State of Pennsylvania, under which the bank con- 
 tinued to operate until absorbed into the national banking 
 system in 1863. The bank did much to restore order to the 
 chaos of Federation finances and loaned Morris, as Superin- 
 tendent of Finance, $1,249,975, of which $996, 58 1 was repaid 
 in cash and the remainder by surrendering the bank stock 
 owned by the Federation. The government had originally 
 paid for its stock in silver brought from France, but this 
 silver was infinitely more productive by the skilful manage- 
 ment of the bank than it could ever have been if covered 
 into the public treasury. Livingston wrote to Dana Decem- 
 ber 17, 1782 : 
 
 1 Sumner, Finances of the American Revolution, II., 22. 
 
288 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Paper is entirely out of circulation, if we except the bank paper, 
 which, being payable at sight in specie, is equal to it in value. So 
 extensive has this circulation been that the managers not long since 
 published a distribution of the first half-year 1 s dividend at four and a 
 half per cent, notwithstanding a variety of expenses to which they 
 had been put in the first organization of the bank. 1 
 
 The Jirst Bank of the United States was incorporated by 
 the First Congress in 1791, 2 as a part of the scheme of Alex- 
 ander Hamilton to strengthen the new Federal government. 
 Those who had opposed the adoption of the Constitution 
 because of its centralizing tendencies, and some of those who 
 had supported it, opposed the granting of the bank charter 
 upon the ground that the Constitution contained no express 
 grant to Congress of the power to establish a corporation. 
 Their argument was that the case fell plainly within the 
 rule subsequently embodied in the tenth amendment to the 
 Constitution, that " The powers not delegated to the United 
 States by the Constitution, nor prohibited by it to the States, 
 are reserved to the States respectively or to the people." 
 President Washington obtained the opinion of the members 
 of the cabinet before signing the bill. The opinions of 
 Jefferson and Edmund Randolph were adverse to the con- 
 stitutionality of the measure ; but Washington followed the 
 advice of Hamilton, his brilliant young Secretary of the 
 Treasury, and gave the bill his approval. 
 
 The capital of the Bank of the United States was fixed at 
 $10,000,000, divided into 2^,000 shares of $400 each. The 
 protection of small investors in bank stock was sought by a 
 graduated scale of voting which did not permit more than 
 thirty votes to any shareholder. Foreign shareholders were 
 not allowed to vote by proxy, which practically prevented 
 their voting at all. The number of directors was fixed at 
 twenty- five, who must be citizens of the United States and 
 not more than three-fourths of whom were eligible for re- 
 election. The bank was not forbidden to loan on real 
 estate security, but could not become an owner of real estate 
 
 1 Wharton, Diplomatic Correspondence, VI., 146. 
 
 2 Act of February 25, 1791. 
 
THE BANK OF THE UNITED STATES. 289 
 
 (beyond what was needed for banking houses) unless the 
 property came into its hands in satisfaction of mortgages or 
 judgments. 1 The only limitation upon note issues was that 
 which limited all debts other than deposits to the amount of 
 the capital stock. The notes were receivable for dues to the 
 government so long as they were redeemable in coin on de- 
 mand. The charter was granted for twenty years, with the 
 provision that Congress should not charter another bank 
 within that time. This was far from implying a monopoly 
 of note issues, for the State banks were in no way disturbed 
 in their privileges and methods except so far as the new 
 institution by its example acted as a regulator of the currency. 
 Its large capital and pre-eminent position operated, and were 
 intended to operate, to give it such a commanding position 
 as was occupied by the Bank of England among the country 
 banks of that country. 
 
 The charter provided that jDnj^fifth of the capital should 
 be subscribed by the government of the United States, but a 
 loan was to be made to the government equal to the amount 
 subscribed, to be repaid in ten annual instalments of $200,- 
 ooo each, with interest at six per cent. No other loans were 
 to be made to the government exceeding $100,000 without 
 authority of law. The practical effect of the government 
 holdings of stock was simply to give the bank the note of 
 the government for its final payment, but as the bank was 
 forbidden to deal in its own stock the process of issue of the 
 government stock was somewhat complicated. It would 
 have been useless for the government to draw money from 
 Europe to pay into the treasury of the bank, to be immedi- 
 ately drawn out again and remitted to Europe for charges 
 there. The course adopted was for the Treasurer of the 
 United States to draw bills of exchange on the American 
 Commissioners in Amsterdam for the amount required to 
 
 1 It is significant of Hamilton's growing familiarity with finance that 
 he did not revive the project of the bank of issue based upon landed 
 security which had attracted him a few years before, but laid down 
 in his report the correct theory of a credit currency based upon quick 
 assets. Works, III. ,106-107. 
 19 
 
2QO HISTORY OF MODERN BANKS OF ISSUE. 
 
 pay the bank. The bills were purchased by the bank and 
 warrants issued in favor of the Treasury upon the bank, 
 thereby placing the amount in the Treasury. Other war- 
 rants were then issued upon the Treasury in favor of the 
 bank for the amount of the subscription to the stock, which 
 the bank receipted for as paid. The stock having been thus 
 paid for in accordance with law, the bank loaned $2,000,- 
 ooo to the government in accordance with the act of incor- 
 poration by handing over the bills of exchange originally 
 drawn by the Treasury on Amsterdam. l 
 
 The Bank of the United States was authorized to establish 
 offices of discount and deposit in the several States and 
 $4,700,000 of the capital was reserved for the central bank 
 at Philadelphia. The remainder was divided among eight; 
 branches, established eventually at New York, Baltimore, 
 Boston, Washington, Norfolk, Charleston, Savannah and 
 New Orleans. Private subscriptions were required to be 
 paid one-fourth in gold and silver and three-fourths in six 
 per cent, government stocks or in three per cent, stocks. The 
 capital was over-subscribed to the amount of four thousand 
 shares within two hours after the opening of the books. 
 Oliver Wolcott, who afterwards succeeded Hamilton as Secre- 
 tary of the Treasury, was offered the presidency, but de- 
 clined, and Thomas Willing of Philadelphia was selected. 
 
 The bank was more successful in its commercial dealings 
 than in obtaining prompt payment of its advances to the 
 government. No regular reports were made to the Treasury 
 Department, but the report communicated to Congress by 
 Secretary Gallatin for January 24, 1811, showed resources 
 of $24,183,046, of which the leading items were $14,578,294 
 in loans and discounts, $2,750,000 in United State six per 
 cent, stock, and $5,009,567 in specie. The leading items of 
 liability were $10,000,000 on account of capital, $5,037,125 
 in circulating notes, $5,900,423 in individual deposits, and 
 $1,929,999 in United States deposits. The average annual 
 dividends paid up to March, 1809, were over eight per cent. 
 
 Bolles, II., 129-30. 
 
THE BANK OF THE UNITED STATES. 29 1 
 
 The bank made several loans to the government in antici- 
 pation of the revenues early in its career. They were not 
 promptly paid and the debt of the government to the bank 
 at the end of 1792 was $2,556,595, which increased at the 
 end of 1795 to $6,200,000. An attempt was made to sell 
 government five per cent, stock, but only $i 20,000 was realized 
 and it became necessary for the government to part with one 
 of its most valuable assets, its shares in the bank. The 
 third and fourth instalments of the original $2,000,000 loan 
 to the government were not paid until 1797, when 2160 shares 
 of the government stock were sold at $500 per share (a pre- 
 mium of $100) and the proceeds, $1,080,000, were applied 
 to these two instalments and to other obligations of the gov- 
 ernment to the bank. Six hundred and twenty more shares 
 were sold soon afterwards for $304,260 and in 1802 the re- 
 maining shares were sold at an advance of forty-five per 
 cent, and the government ceased to be a stock-holder. 
 Secretary Gallatin reported in 1809 that the government 
 made a profit of $671,860 on the sale of its shares, besides 
 receiving dividends at the rate of about eight and three- 
 eights per cent, annually. The aggregate payments by the 
 government, including interest, were $2,636,427, while the 
 proceeds and dividends together were $3,773,580, represent- 
 ing a profit of nearly fifty-seven per cent, on the original 
 investment for the eleven years during which the government 
 was a shareholder. 1 
 
 Opposition to the Bank of the United States did not die 
 out with Washington's administration nor with its large 
 advances to the government. The conception of the func- 
 tions of a bank which then prevailed is indicated by Presi- 
 dent Jefferson's letter of July 12, 1803, to Gallatin, in which 
 he declared, ' ' I am decidedly in favor of making all the banks 
 republican by sharing deposits among them in proportion to 
 the dispositions they show." The bank had a steady friend 
 in Gallatin, however, and he not only continued to avail 
 himself of its assistance in the fiscal operations of the 
 
 1 Sen. Ex. Doc. 38, 52d Cong., 2d Sess., 34. 
 
2Q2 HISTORY OF MODERN BANKS OF ISSUE. 
 
 government, but induced Jefferson to approve a bill estab- 
 lishing a branch at New Orleans. 
 
 The charter of the bank was to expire in 1811 and the 
 shareholders petitioned in 1808 for a renewal. The proposal 
 was strongly supported by Gallatin in a report of March 9, 
 1809, reviewing the entire history of the bank. He recom- 
 mended that the capital be increased to $30,000,000, with a 
 view to lending three-fifths of the amount to the government 
 in case of war, and that the States be allowed to subscribe 
 $15,000,000. The advantage derived by the government 
 from the existing bank he classified under the four heads of 
 safe keeping of the public monies, transmission of public 
 monies, collection of revenue, and loans. 1 Congress was 
 not disposed to adopt so comprehensive a scheme as this, 
 but theoretical opposition to the bank had so far yielded to 
 practical considerations that the terms of a contract were 
 arranged for a new charter, which received the approval of 
 the House on April 21, 1810, by a vote of 75 to 35. It was 
 the fatal incapacity of the Eleventh Congress to take positive 
 action which prevented the taking up of the bill again, and 
 gave the State bankers time to organize an opposition and 
 instruct their senators against re-charter. 2 
 
 The charter was opposed at the next session not only by 
 the advocates of strict construction of the Constitution, but 
 by party factions opposed to Gallatin in the Cabinet and the 
 Senate. William Duane and Michael L,eib had attempted to 
 dictate the Federal appointments in Philadelphia and upon 
 Gallatin's refusal to submit became his bitter enemies. They 
 were supported in the bank contest by a Maryland clique 
 headed by Robert Smith, the Secretary of State, and Sena- 
 tor Samuel Smith, his brother. The^fact that about 1800 
 of the 2500 shares were held abroad was made the occasion 
 of bitter attacks upon the bank. A type of this sort of op- 
 position was the speech of Mr. Desha of Kentucky, in the 
 House on February 12, 1811, in which he declared that this 
 accumulation of foreign capital was one of the engines for 
 
 1 Stevens, 261. 
 
 2 Adams, V., 208. 
 
THE BANK OF THE UNITED STATES. 293 
 
 overturning civil liberty and that he had no doubt George 
 III. was a principal stock-holder and would authorize his 
 agent in this country to bid millions for a renewal of the 
 charter. 1 Gallatin had anticipated this ground of hostility 
 in his report to Congress. He called attention to the fact 
 that the foreign shareholders had no vote and that if the 
 charter was not renewed the principal of the foreign hold- 
 ings would have to be remitted abroad in liquidation of the 
 affairs of the bank. 
 
 William H. Crawford of Georgia was the champion of 
 Gallatin and the bank in the Senate and his able argument 
 commended him to the administration and made him a strong 
 candidate in later years for the presidency. Henry Clay held 
 that Congress had no power to create the bank or to continue 
 it, and followed the leanings of Mr. Desha in the opinion 
 that in case of war with England "the English premier" 
 would exercise control over the institution. The House on 
 January 24, 1811, postponed indefinitely the bill for renew- 
 ing the charter by a vote of 65 to 64. The vote in the Sen- 
 ate^ on February 2oth was 17 to 17, and the Vice- President, 
 George Clinton, an enemy of Gallatin, gave the casting vote 
 against the bill. "The necessity for such an institution," 
 says Mr. Henry Adams, "[was merely one of the moment, 
 but in the period of national history between 1790 and 1860, 
 the year 1811 was perhaps the only moment when destruc- 
 tion of the bank threatened national ruin." a The govern- 
 ment was compelled to rely in the war of 1812 on the State 
 banks, and their suspension of specie payments in 1814 al- 
 inust paralyzed the operations of the Treasury. ^ It became 
 impossible to make transfers of funds from one part of the 
 Union to another, because the notes of the banks of one sec- 
 tion did not pass* current in other sections.] Gallatin has left 
 on record the opinion that the suspension of specie payments 
 in 1814 "might have been prevented at the time when it 
 took place, had the former Bank of the United States been 
 still in existence. ' ' He believed that the bank would have 
 
 1 White, 265. 
 
 8 History of the United States, V., 329. 
 
294 HISTORY OF MODERN BANKS OF ISSUE. 
 
 aided the treasury and that " both acting in concert would 
 certainly have been able at least to retard the event ; and, as 
 the treaty of peace was ratified within less than six months 
 after the suspension took place, that catastrophe w r ould have 
 been altogether avoided." 
 
 The necessity for means of carrying on the war with 
 Great Britain led to a great variety of odd proposals in Con- 
 gress after the suspension of 1814. One of the crudest of 
 these was a plan of ex- President Jefferson's, communicated 
 to President Madison, to issue $20,000,000 in government 
 promissory notes annually as long as might be necessary and 
 to appeal to the State legislatures to relinquish the right to 
 establish banks. Dallas, who succeeded Gallatin as Secre- 
 tary of the Treasury on October 6, 1814, indicated indirectly 
 his opinion of this scheme by recommending a new bank 
 and remarking that " The extremity of that day cannot be 
 anticipated when any honest and enlightened statesman will 
 again venture upon the desperate expedient of a tender 
 law." 1 The plan of Dallas, as set forth in his report of 
 October lyth, was for a bank with a capital of $50,000,000, em- 
 powered to lend $30,000,000 to the Treasury. . There was a 
 provision in the bill reported, authorizing the suspension of 
 specie payments at the discretion of the President of the 
 United States, and it was fallen upon by Daniel Webster in 
 a speech of great power and eloquence. He urged the_crea- 
 tion of a bank for commercial purposes rather than one in- 
 volved at the outset with the government. The result of 
 his attack was the defeat of the bill by a tie vote, which was 
 then reconsidered and the bill sent to a select committee. 
 Amendments were adopted which met Mr. Webster's views, 
 but in this form the measure did not meet the wants of the 
 Treasury. It passed the House, 120 to 38, and the Senate, 
 20 to 14, but was _vetoedj)y the President on January 30, 
 1815. Another effort was made to pass the Dallas bill, but 
 it failed in the House on February iyth by a majority of one 
 vote. 
 
 1 Adams, VIII., 245-49. 
 
THE BANK OF THE UNITED STATES. 2g$ 
 
 The evils of the currency had not been remedied when 
 Congress met again in December, ,i.8i, and President Madi- 
 son suggested a_national__bank as a suitable instrument for 
 promoting specie payments. Secretary Dallas submitted a 
 detailed plan for the bank, which was adopted by Congress 
 with little change. The capital of the new bank was fixed 
 at $35,000,000, of which one-fifth was to be subscribed by 
 the government' in money or in its own obligations. The 
 government subscription was by a stock note, which was not 
 fully paid up in cash until 1831. The public funds were to 
 be deposited in the bank, " unless the Secretary of the Treas- 
 ury shall at any time otherwise order and direct ; in which 
 case the Secretary of the Treasury shall immediately lay be- 
 fore Congress, if in session, and if not, immediately after 
 the commencement of the next session, the reasons for such 
 order or direction. ' ' Twenty-five directors were to be chosen, 
 five to be named by the President, and the notes of the bank 
 were made receivable in all payments to the United States. 
 The bank was again given duration for twenty years and no 
 other bank was to be established within this time by Congress 
 outside the District of Columbia. This privilege, as in the 
 case of the first bank, carried with it no restrictions upon the 
 State banks of issue except such as the new bank was ex- 
 pected to exercise by its moral and financial influence tow- 
 ards the restoration of specie payments. A bonus to the 
 government was required of $500,000 annually for three 
 years after the end of the second year. 
 
 The progress of public opinion in favor of the implied 
 powers of the Federal government under the Constitution is 
 indicated by the attitude of Madison and the democratic 
 party towards the incorporation of the second Bank of the 
 United States. Madison as a member of the First Congress 
 had opposed the incorporation of the Bank of the United 
 States upon constitutional grounds, and in 1799 had alluded 
 to it as one of the examples of the usurping tendencies of 
 the Federal government ;' but as President in 1814 and 1815 
 
 1 Von Hoist, I., 388. 
 
296 HISTORY OF MODERN BANKS OF ISSUE. 
 
 he was willing to treat the constitutional issue as res adjudi- 
 cata. More surprising is the fact that Calhoun, in later 
 years the hair-splitting logician of strict construction and 
 the champion of nullification, was found foremost among 
 the supporters of the charter of the second bank. He re- 
 ported the bill to the House and suggested that if the bank by 
 its financial policy was unable to compel the State banks to 
 return to specie payments, Congress might resort to stronger 
 measures, which were within their power. Both Calhoun 
 and Webster favored the refusal by the government of the 
 notes of suspended banks and the collection of all govern- 
 ment dues in specie. 1 Webster secured an amendment to 
 the bank bill, requiring the payment of deposits as well as 
 notes in specie, subject to a forfeit of twelve per cent, on the 
 amount for which specie payment was refused. 
 
 The constitutional question had thus been decided by the 
 legislative branch of the government before it reached the 
 Supreme Court in 1819. That court, in the celebrated case of 
 McCulloch vs. Maryland, in which the Decision was rendered 
 by Chief-Justice Marshall, decided that the power to create 
 a national bank, to assist in carrying on the fiscal opera- 
 tions of the government, was within the implied powers 
 of the Constitution. Equally important was the decision 
 upon the direct issue raised in that case, whether the States 
 could constitutionally levy taxes upon the circulating notes 
 or the property of a national bank. Representative Fiske 
 of New York, in a strong speech in favor of the renewal of 
 the first charter in 1811, declared that the States, in order to 
 give the preference to their own paper, might exclude that 
 of any other State from circulation within their limits by 
 taxation. 2 He did not suggest that they might pursue the 
 same policy towards the notes of a national bank, but this 
 position was taken by the State of Maryland towards the 
 notes of the second Bank of the United States, and the case 
 was carried to the Supreme Court. A decision in favor of 
 the right of the States to have taxed the circulating notes of 
 
 1 White, 278. 
 
 2 Bolles, II., 150. 
 
THE BANK OF THE UNITED STATES. 297 
 
 the United States or of corporations chartered under its laws, 
 . would have precluded forever the creation of a national cur- 
 rency, issued either by the government or by national banks. 
 Indeed, if the Federal government had not the power to 
 withdraw its creations from discriminating legislation by 
 the States, Chief-Justice Marshall declared, they might tax 
 the mail or the mint, the papers of the custom house, or the 
 forms of judicial process. 1 
 
 fhe question of the existence of the bank in the face of 
 ( discriminating State taxation was not an academic one in 
 iSi8 and the following years, but one which was severely 
 practical. The efforts of the bank to drive the State notes 
 from circulation, and especially its later contraction of dis- 
 counts when it found itself on the verge of bankruptcy, 
 caused commercial distress and made the bank exceedingly 
 . North Carolina laid a tax of $5000 per year on 
 
 the branch at Fayetteville. Kentucky, Tennessee, Ohio, and 
 Maryland laid taxes on circulation or on the branches as 
 such. The Maryland act required the purchase of stamped 
 paper for the printing of the circulating notes or the annual 
 payment of $15,000 by the branch at Baltimore. The branch 
 continued to issue notes on unstamped paper and the cashier, 
 William McCulloch, was sued for debt and gave his name to 
 one of the most celebrated of American constitutional cases. 9 
 Chief-Justice Marshall, in rendering his decision, admitted 
 that the States possessed unimpaired the power of taxing the 
 people and property of the State and that it might tax the 
 real property of the bank in common with other such prop- 
 erty within the State, and might tax the interest of citizens 
 of Maryland in the bank ; but he declared that the Consti- 
 tution of the United States placed beyond the reach of State 
 power all the powers conferred on the government of the 
 Union and all the means given for the purpose of carrying 
 those powers into execution. 3 
 
 1 4 Wheaton, 316. 
 
 2 McMaster, IV., 497. 
 
 3 Following this decision, all securities of the United States have 
 been held free from taxation by the States unless with the consent of 
 
298 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The Bank of the United States was badly managed during 
 the first years of its existence and in the summer of 1818 
 was upon the verge of insolvency. The bank began busi- 
 ness January 7, 1817, and violated its charter from the out- 
 set. The proportion of specie required to be paid in on the 
 second and third instalments was not paid and the bank 
 loaned money to stockholders on the pledge of their stock 
 and personal notes. Trading in shares before they were paid 
 for pushed up the quotations and the bank loaned on the in- 
 creased value when other nominal security was furnished in 
 the form of mutual indorsements. The Baltimore branch 
 was practically wrecked by its managers, with a loss of 
 $1,671,221. The policy adopted for restoring specie pay- 
 ments was also defective. An arrangement was made with 
 the leading banks of New York, Philadelphia, and Rich- 
 mond for the resumption of specie payments by them on 
 February 20, 1817. The public deposits in these banks, 
 which the government had been unwilling to accept in de- 
 preciated bank paper, were to be transferred to the Bank of 
 the United States, but checks on the State banks which were 
 parties to the agreement received by the Bank of the United 
 States were to be credited as cash. Arrangements were also 
 made for liberal discounts by the- new bank, in order to re- 
 lieve the local banks from the commercial pressure. 
 
 These features of the resumption policy were not subject 
 to criticism and $7,472,419 in public funds and $3,336,491 in 
 special deposits were transferred from the State banks to the 
 
 the United States. The national banks created under the Act of June 
 3, 1864, for many years availed themselves of this condition to have 
 as large a proportion of their reserves as possible in United States 
 notes at the times when their property became subject to assessment 
 for taxation under State laws. This practice led to an act of Congress 
 in 1894, authorizing the States to tax such notes at the same rate as 
 other money. It was long held that the instruments of State sover- 
 eignty were exempt from Federal taxation upon the same grounds that 
 the instruments of Federal sovereignty were exempt from State taxa- 
 tion, but this view was overruled in regard to the circulating notes of 
 State banks in the case of Veazie Bank vs. Fenno, 8 Wall., 533. See 
 Kent, I., 429, note. 
 
THE BANK OF THE UNITED STATES. 299 
 
 central bank at Philadelphia. Eighteen branches of the 
 Bank of the United States were established and the notes 
 issued were received for government dues without reference 
 to the place of issue and were redeemable, wherever issued, 
 by the central bank or any of its branches. The mistake 
 made by the new bank was in directing the branches to push 
 their own notes into circulation in place of those of the State 
 banks, and to issue drafts on the Eastern cities to prevent 
 the remittance of their own notes. The notes of the local 
 banks were locked up in the Bank of the United States and 
 interest charged upon them to the local banks, but both the 
 notes of the branches and the branch drafts were remitted 
 eastward by the operations of trade. The notes of the 
 Western branch banks which were remitted to the East thus 
 exercised no controlling influence over the volume of 
 Western business, for they were not presented for redemp- 
 tion in the West. What made the matter worse was the 
 necessity imposed itu-many cases on the branches, in view 
 of the eastward movement of their own notes, to pay out 
 again the local notes in the granting of discounts. 
 
 The Western branches paid but limited attention to the 
 instructions of the parent bank to diminish their discounts, 
 even after the danger of their policy became apparent. 
 They issued what were known as "race-horse bills," by 
 which drafts were made by one branch upon another, which 
 were met when due at the accepting bank by new drafts 
 upon some other branch. The bank imported $7,311,750 
 in specie from Europe during its first two years at a cost of 
 $525,247,' but the drain upon its resources had reduced the 
 specie in Philadelphia on April 21, 1819, to $126,745, of 
 which $79,125 was owed to the city banks of Philadelphia. 3 
 The facts regarding the mismanagement of the bank were 
 brought out by the report of a committee of Congress in 
 1819 and caused many demands for the repeal of the charter. 
 Langdon Cheves was elected President, March 6, 1819, and he 
 adopted heroic measures to restore the bank to solvency. 
 
 1 Poor, 486. 
 2 Bolles, II., 326. 
 
300 HISTORY OF MODERN BANKS OF ISSUE. 
 
 | He borrowed $2,500,000 in specie of the Barings, who were 
 considerable holders of the bank stock, forbade the issue of 
 notes in the South and West when exchanges were against 
 the branches, which was almost invariably the case, and in 
 dealings with the government insisted upon the interval 
 between the transfer of funds and their disbursement which 
 was actually required for the transfers. The bank was 
 saved and was conducted with comparative prudence until 
 the breaking out of the war with President Jackson. 
 
 The second Bank of the United States undoubtedly 
 contributed for more than a decade to facilitate the transfer 
 _qf_.fnnHs from one part of the county to another and to 
 maintain a uniform circulation equal to coin. The rates of 
 domestic exchange, which were necessarily high because 
 of the imperfect means of communication, were materially 
 reduced by the bank. Its policy greatly benefitted com- 
 merce, but invited bitter complaints from the private dealers 
 in exchange, who had been enabled to make excessive prof- 
 its while the currency was below par because of its different 
 values in different States and the constant fluctuations in 
 these values. The bank, in the language of the report of 
 Senator Smith of Maryland in 1832, furnished " a currency 
 as safe as silver, more convenient, and more valuable than 
 silver, which through the whole Western and Southern and 
 interior parts of the Union, is eagerly sought in exchange 
 for silver ; which, in those sections, often bears a premium 
 paid in silver ; which is, throughout the Union, equal to 
 silver, in payment to the government, and payments to 
 individuals in business." Mr. McDuffie, who submitted the 
 minority report in the House at the same time, declared that 
 "The whole business of dealing in domestic bills of ex- 
 change, so essential to the internal commerce of the country, 
 has been almost entirely brought about within the last eight 
 3 7 ears. In June, 1819, the bank did not own a single dollar of 
 domestic bills ; and in December, 1824, it owned only to 
 the amount of $2,378,980; whereas it now owns to the 
 amount of $23,052,972." ' 
 
 1 House Rep., 460, 22d Cong., ist Sess., 312. 
 
THE BANK OF THE UNITED STATES. 30! 
 
 One of the most serious charges of evasion of law, brought j 
 against the bank in 1832, was in the issue of branch drafts * 
 to circulate as currency. Several appeals were made in vain 
 to Congress to modify one of the provisions of the charter 
 requiring the president and principal cashier to sign all the 
 circulating notes. The volume of circulation necessary to 
 do business was so great that the physical labor of signature 
 could not well be performed by those officers. Congress 
 neglected to act and in 1827 an opinion was obtained from 
 Horace Binney, in which Daniel Webster and William Wirt 
 concurred, that there was no legal obstacle to the issue of 
 checks drawn by officers of the branches upon the parent 
 bank, printed for even amounts in similar form to bank- 
 notes. Drafts of this sort for $5 and $10 were authorized by 
 the board of directors on April 6, 1827, and denominations 
 of $20 were issued in 1 83 1 . They became a common medium 
 of circulation in the South and West and were accepted in 
 payments to the United States Treasury. 1 The branch 
 drafts outstanding in April, 1832, were $7,410,090. They 
 simply served the purpose of currency without conforming 
 strictly to the intent of the law, in much the same manner 
 as the checks of the I/ondon Cheque Bank or the temporary 
 issues in the United States during the panic of 1893. 
 
 The Bank of the United States fell because so great an | 
 institution in a representative republic could not escape 
 political entanglements and the suspicion of the abuse of 
 political power! President Jackson surprised the financial 
 world by the announcement, in his first annual message in 
 1829, that "Both the constitutionality and the expediency 
 of the law creating the bank are well questioned by a large 
 portion of our fellow-citizens ; and it must be admitted 
 by all, that it has failed in the great end of establishing a 
 uniform and sound currency." The bank was at this time^ 
 under the presidency of Nicholas Biddle, who succeeded 
 
 1 Letter of Sec. Rush to Nicholas Biddle, Jan. 21, 1820. House Rep., 
 460, 22d Cong., ist Sess., 55. The authority to receive these drafts 
 for public dues was revoked by Secretary Woodbury, to take effect 
 January i, 1835. 
 
302 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Cheves in 1823, and was one of the most imposing institu- 
 tions of the country. The President's message, therefore, 
 was in the nature of a thunderbolt from a clear sky. Jack- 
 son's hostility was due to a complaint by Isaac Hill, a New 
 Hampshire politician who had been made Second Comp- 
 troller, that Mr. Mason, the manager of the branch at 
 Portsmouth, New Hampshire, had shown partiality to the 
 political opponents of General Jackson and that his conduct 
 had been " calculated not less to injure the institution than 
 to disgust and disaffect the principal business men." " No 
 measure short of his removal," in Hill's opinion, ''would 
 tend to reconcile the people of New Hampshire to the 
 bank." 
 
 The truth appears to have been that Mason had excited 
 hostility by his energetic contraction of discounts at Ports- 
 mouth and his efforts to correct previous mismanagement. 
 ]>vi Woodbury, who had defeated Mason for the United 
 States Senate in 1824, addressed a letter early in July, 1829, to 
 Mr. Ingham, the Secretary of the Treasury, making com- 
 plaints against Mason's management, which Ingham for- 
 warded to President Biddle for his consideration. Biddle 
 was a ready writer, he occupied one of the most powerful 
 positions in the country, he was surrounded by flatterers 
 and sycophants, and he was quickly entrapped into a quarrel 
 which resulted in the overthrow of the bank. He not only 
 denied that the bank had shown political favor at Ports- 
 mouth or elsewhere, but went out of his way to declare that 
 the governing board acknowledged no responsibility what- 
 ever to the Secretary of the Treasury in regard to the politi- 
 cal opinions of the officers of the bank and that it was] 
 carefully shielded by its charter from executive control. So 
 fixed had become the relations between the bank and the 
 Treasury in the handling of public monies, and so much a 
 matter of mere routine, that Biddle appeared to overlook the 
 possibility of the withdrawal of the public deposits. He 
 evidently had no realizing sense of the danger which hung 
 over his head or of the spirit of hostility which was being 
 aroused in the mind of Jackson. 
 
THE BANK OF THE UNITED STATES. 303 
 
 The President's suggestions in his annual message excited 
 the fear for a moment that he had information which was 
 not known to the public and bank shares dropped from 125 
 to 1 1 6, only to recover to 130 after a report by a committee 
 of Congress. The portions of the message relating to the 
 bank were referred to committees in both houses, both of 
 which exonerated the bank from the charge of bad manage- 
 ment and condemned the suggestion of the President, 
 whether a national bank, * * founded upon the credit of the 
 government and its revenues, might not be devised which 
 would avoid all constitutional difficulties, and at the same 
 time, secure all the advantages to the government and coun- 
 try that were expected to result from the present bank." 
 The House on May 10, 1830, tabled, by a vote of 89 to 66, 
 resolutions that the House would not consent to the renewal 
 of the bank charter and on May 29th tabled, by a vote of 
 95 to 67, resolutions calling for a comprehensive report of 
 the proceedings of the bank. 1 Similar votes in favor of the 
 bank were given in the Senate. The President was mild in 
 his allusions to the subject in the annual messages of 1830 
 and 1831 and the Secretary of the Treasury was even allowed 
 in the latter year to incorporate in his annual report a strong 
 argument in the bank's favor. It is not improbable that 
 Jackson might have been persuaded by the eminent finan- 
 ciers of his party to consent to a re-charter if the matter had 
 not been made an issue by Henry Clay in the presidential 
 campaign. 
 
 Th^iolilicaLdangers of a great central bank were demon- 
 strated in the campaign of 1832. President Jackson had 
 given the country in the main a firm and successful admin- 
 istration and it was necessary for Clay and the Whigs to 
 create political issues upon which to make a respectable 
 contest against him. There were dangers in making the 
 tariff the controling issue, because different Whig States 
 were on both sides of the question. Clay determined to 
 make the campaign upon the issues of internal improvement 
 and the recharter of the bank. It was natural that he should 
 
 Sumner, Andrew Jackson, 247. 
 
304 HISTORY OF MODERN BANKS OF ISSUE. 
 
 accept the sentiment of the financial portion of the commu- 
 nity in favor of the bank as the sentiment of the whole and 
 he was so confident of success that he feared Jackson would 
 evade the issue. The resolutions adopted at Baltimore on 
 December 12, 1831, at Clay's instigation, declared that the 
 President, ' ' is fully and three times over pledged to the 
 people to negative any bill that may be passed for recharter- 
 ing the bank. ' ' Biddle and the real friends of the bank who 
 were not politicians protested strongly against making the 
 recharter a party issue, but Clay forced them to the choice 
 between sustaining his party as the friends of the bank or 
 going without political friends. Professor Sumner declares 
 that ''Jackson never was more dictatorial and obstinate than 
 Clay was at this juncture." ' 
 
 The fight was opened in the Senate on January 9, 1832, 
 when Senator Dallas presented the memorial of the bank for 
 the renewal of its charter. Biddle came to Washington, 
 opened headquarters, gave sumptuous entertainments, and 
 defended the bank vigorously before the committee of inves- 
 tigation appointed by Congress. The bill for the recharter 
 was passed through both houses, only to encounter a veto 
 message from President Jackson on July loth. The issue 
 was thus made up for the presidential election, exactly as 
 Clay desired it, but the response of the people was 219 elec- 
 toral votes for Jackson, 49 for Clay, and 18 for all others. 
 The executive triumphed, as usual in a contest with Con- 
 gress, and the doom of the bank was decided. 
 
 The bank had five years of life before it. Its credit was 
 good and it still held the public deposits. It was not gener- 
 ally supposed that these would be withdrawn until near the 
 date for the termination of the charter, as had been the case 
 with the public deposits in the first Bank of the United 
 States. Jackson's blood was now up, however, and he 
 needed no further stimulus to crush his enemy. The bank 
 made two serious blunders during 1832 and 1833 in its rela- 
 tions with the Treasury. It undertook to make a private 
 arrangement with the Barings regarding the payment of 
 
 1 Andrew Jackson, 257. 
 
THE BANK OF THE UNITED STATES. 305 
 
 $5,000,000 of government three per cent, securities, which 
 the Secretary of the Treasury had notified the President of 
 the bank as early as March 24, 1832, would be paid from the 
 surplus revenues. A contract was made through a private 
 agent of the bank for extending these securities, which were 
 to be assumed by the bank and the interest paid to the gov- 
 ernment. The object was to retain possession of the public 
 money, on deposit with the bank, which was worth seven 
 per cent, in the discount market, rather than permit it to be 
 withdrawn for the redemption of the debt. When the cir- 
 cular of the Barings got into the newspapers in October, 
 Biddle was obliged to disavow the contract and made a lame 
 explanation to Secretary McLane for seeking to delay the 
 payment. The other case was the attempt to collect dam- 
 ages upon the amount of a bill of exchange drawn upon the 
 French government, which was refused payment by the 
 French Minister of Finance, because the money had not 
 been appropriated by the Chambers. The bill was taken up 
 by the Paris agents of the bank, and charged against it. 
 Secretary McL,ane paid the principal, $961,240, which had 
 been covered into the Treasury, back to the bank and 
 offered to pay actual costs. The bank insisted upon fifteen 
 per cent, damages, under a law of the District of Columbia 
 relating to protested paper, and deducted the amount from 
 the government dividends. The government sued and the 
 Supreme Court decided against the bank. 
 
 Performances like these on the part of President Biddle 
 convinced Jackson that the bank was weak and confirmed 
 his purpose to suspend the further deposit of public monies 
 in its custody. 1 Mr. McLane was transferred from the 
 Treasury to the State Department during the spring of 1833 
 and William J. Duane of Pennsylvania was made Secretary 
 of the Treasury. Duane was a conservative and able law- 
 3^er, with little of the politician in his make-up, and when 
 
 1 Jackson also believed that if the bank retained the public funds, 
 it would be able to buy up the votes in Congress necessary to make 
 two-thirds and pass a recharter bill over his veto. Sumner, Andrew 
 Jackson, 299. 
 
306 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the President insisted upon his suspending deposits in the 
 Bank of the United States and making them in future in the 
 State banks, Duane refused to comply and the President re- 
 moved him from office. Roger B. Taney, who afterwards 
 became so odious in the free States as Chief Justice of the 
 Supreme Court, was transferred from the Department of Jus- 
 tice to the Treasury on September 23d, and began the deposit 
 of the public funds in the State banks. 
 
 The contest which followed in Congress belongs to the h]s^ 
 Jtory of politics rather than that of finance. The Senate re- 
 jected the nomination of Taney for Secretary of the Treasury 
 and rejected the President's nominees for government direc- 
 tors of the bank, apparently upon the remarkable ground 
 that they were disposed to insist upon too accurate a knowl- 
 edge of the bank's affairs. The Senate called for the paper 
 which Jackson had read in the cabinet regarding the removal 
 of the deposits on September i8th, and received the reply 
 that the Senate had no constitutional right to interrogate 
 him on the subject of his communications with his heads of 
 departments. Clay introduced a resolution which was passed 
 on March 28, 1834, by a vote of 26 to 20, declaring that the 
 President had, " assumed upon himself authority and power 
 not conferred by the Constitution and the laws, but in deroga- 
 tion of both." The President sent a protest against this 
 resolution to the Senate on April lyth, which that body ten 
 days later voted, 27 to 16, was a breach of the privileges of 
 the Senate and should not be entered on the journal. The 
 friends of Jackson appealed to the people and gained enough 
 seats in the Senate to pass resolutions on January 16, 1837, 
 expunging the previous resolutions from the records. 
 
 JlheJBank of the United States obtained a charter from the 
 State of Pennsylvania on February 18, 1836, for thirty years. 
 The bank agreed to pay a bonus of $2,000,000 to the State 
 and $100,000 per yea fbr_thj_rt"years, besTdes various sub- 
 scriptions to the stock of transportation routes, which Ben- 
 ton described as bribery of the legislature and the people. 
 The shares in the bank owned by the United States, amount- 
 ing to $7,000,000, were paid in four annual instalments at 
 
THE BANK OF THE UNITED STATES. 
 
 307 
 
 the rate of 115.58. New stock was sold to replace the gov- 
 ernment stock, leaving the capital intact at $35,000,000. 
 The capital was too large for local commerciaTneettiTand 
 Biddle branched out into loans on stocks of uncertain value, 
 many of which proved worthless after the crisis of 1837. 
 The bank suspended at that time with the other banks of 
 the country, but was compelled to suspend again in 1838, 
 and again in 1841, after which it went into liquidation. The 
 creditors were paid, but the shareholders lost their entire 
 interest. Biddle had resigned in March, 1839, leaving the 
 bank, according to his view, in a prosperous condition. He 
 was indicted during the liquidation for conspiracy to defraud 
 the shareholders. The indictment was quashed, but Biddle 
 was ruined financially and died within five years insolvent 
 and broken-hearted. 1 
 
 The principal items in the accounts of the second Bank of 
 the United States up to the time of its final suspension are 
 shown in the following table : 
 
 YEAR. 
 
 LOANS. 
 
 DEPOSITS. 
 
 CIRCULATION. 
 
 SPECIE. 
 
 1820 
 
 $31,401,158 
 
 $ 6,568,794 
 
 $ 3,598,481 
 
 $ 3,39 2 ,755 
 
 1830 
 
 40,663,805 
 
 16,045,782 
 
 12,924,145 
 
 7,608,076 
 
 1834 
 
 54,911,461 
 
 10,838,555 
 
 19,208,379 
 
 10,039,237 
 
 1835 
 
 51,808,739 
 
 11,756,905 
 
 17,339,797 
 
 I5>708,369 
 
 1836 
 
 59,232,445 
 
 5,06l,456 
 
 23,075,422 
 
 8,417,988 
 
 1837 
 
 57,393,709 
 
 2,332,409 
 
 11,447,968 
 
 2,638,449 
 
 1838 
 
 45,256,571 
 
 2,6l6,7I3 
 
 6,768,067 
 
 3,770,842 
 
 1839 
 
 4I,6l8,637 
 
 6,779,394 
 
 5.982,621 
 
 4,153,607 
 
 1840 
 
 36,839,593 
 
 3,338,521 
 
 6,695,86! 
 
 1,469,674 
 
 The present method of dealing with public monies in the 
 United States is one of the results of the war over the United 
 States Bank. Secretary Taney, under Jackson's instruc- 
 tions, depositedjpublic money in certain State banks, most 
 of them selected because their officers were friendly to the 
 administration and characterized by its critics as the ' ' pet 
 banksj' The government imposed upon them the condi- 
 tions of giving security in certain cases, of issuing no small 
 
 1 Sumner, Andrew Jackson , 342. 
 
308 HISTORY OF MODERN BANKS OF ISSUE. 
 
 notes and of keeping one-third of their reserve in specie. 1 
 The State banks undertook by mutual agreement to honor 
 each other's notes and drafts, but the crisis of 1837 caused 
 a general suspension and the payment of $25,000,000 of the 
 deposits in bank-notes bearing an average depreciation of ten 
 per cent. Secretary Taney in his report for 1834 urged legis- 
 lation to sanction the use of the State banks as depositaries, I 
 but the bill prepared on the subject failed in the Senate. 
 The suspension of the banks in 1837 led President Van Buren, 
 in his annual message of that year, to recommend that the 
 public funds be kept exclusively by public officers and that 
 nothing but specie be received for dues to the government. 
 This plan embodying substantially the features of the 
 present independent treasury system was several times de- 
 feated, but was finally enacted June flo lM _i 840. One-fourth of 
 all dues to the Treasury were to be paid at once in specie, 
 and an additional fourth each year until the whole were thus 
 paid. 
 
 The success of Harrison and the Whigs resulted in the 
 repeal of the independent treasury law August 13, 1841. and 
 two national bank bills were passed, only to be successively 
 vetoed by President Tyler. The public monies were de- 
 posited in the banks or not, at the discretion of public offi- 
 cials, until 1846, when the independent treasury system was 
 again established by authority of Congress. The policy of 
 refusing State bank-notes for government dues continued 
 until the creation of the national banking system during the 
 Civil War. That system gave the government the security 
 of its own bonds for the bank-notes, and the national bank- 
 ing act provided that the notes should be " received at par 
 in all parts of the United States in payment of taxes, ex- 
 cises, public lands, and all other dues to the United States, 
 except for duties on imports ; and also for all salaries and 
 other debts and demands owing by the United States to in- 
 dividuals, corporations, and associations within the United 
 States, except interest on the public debt, and in redemption 
 
 1 Kinley, 17. 
 
THE BANK: OF THE UNITED STATES. 309 
 
 of the national currency." * The national banks were again 
 made the depositaries of public money during the first ad- 
 ministration of President Cleveland, but were required by 
 the Secretary of the Treasury to deposit United States bonds 
 as security for such monies in much the same manner as for 
 the security of national bank-notes. The amount of deposits 
 in the banks on August i, 1888, when Secretary Fairchild 
 made a report on the subject to Congress, was $54,475,055. 
 exclusive of $4,052,021 on deposit to the credit of disbursing 
 officers. The number of banks among which these deposits 
 were distributed was about three hundred and the largest 
 deposit was $1,100,000. The policy of Secretary Windom 
 and the absorption of the surplus reduced these deposits after 
 1892 and their entire amount on January ; 2, 1896, was $14,- 
 27 1 , 280. The independent Treasury continues to transact the 
 bulk of the public business and sub-treasuries are maintained 
 at New York, Philadelphia, Boston, Baltimore, Cincinnati, 
 Chicago, St. Louis, New Orleans, and San Francisco. 
 
 1 Act of June 3, 1864, Sec. 23. 
 
CHAPTER XIV. 
 
 THE STATE BANKING SYSTEMS. 
 
 The Condition of the Country When They were Adopted Success 
 of the Suffolk System and of Banking on General Assets The 
 New York Safety Fund and Security Systems Unhappy Experi- 
 ence in the West and South with Banks of State The Effects of 
 the Civil War Failure of the Security Syjjiem General Statis- 
 tics of the State Banks. 
 
 THE systems of banking authorized under the laws of 
 the various States of the United States offer examples 
 of nearly every form of note issues and every degree 
 of success or failure. The economic development of the 
 country between the Revolution and the Civil War was in 
 an experimental stage as well as its political development. 
 The rules of sound banking had not yet been worked out 
 even in the older countries of Europe, as the mistakes and 
 failures of English, French, and Austrian banking abund- 
 antly show ; but to ordinary sources of error and risk were 
 added in the United States the elements of experiment and 
 uncertainty in every department of human activity. The 
 Englishman or Frenchman might not be a good banker, but 
 he could at least form an intelligent estimate of the volume 
 of trade with which he had to reckon and the conditions un- 
 der which it was carried on. His problem was simply to > 
 work out, according to sound rules, a mathematical prob- 
 lem for which the necessary elements were known. .With % 
 the American, on the other hand, every element was an un- 
 known quantity. He had to guess at the first element in his 
 equation, and if he guessed wrongly absolute accuracy in 
 
 310 
 
THE STATE BANKING SYSTEMS. 311 
 
 his further computations could not possibly yield a true 
 result. 
 
 A new country, poor in specie and in loanable capital, is I 
 almost forced by the necessities of her situation to adopt I 
 monetary devices which would not be tolerated under better 
 conditions. Some of these devices would be comparatively 
 harmless if their true character were understood and they 
 were used with moderation ; but their tendency is mislead- 
 ing and intoxicating to the average mind and they are usu- 
 ally so abused as to offset the little benefit which might be 
 derived from them. The most successful banking systems i 
 under State law in the United States were those of New I 
 York and New England, where the surplus capital of the \ 
 country in the earlier days was concentrated.. The least suc- 
 cessful systems were in the newer and poorer sections of the 
 country and they grew progressively worse as inexperience, 
 and poverty seemed to make more imperative the necessity 
 for creating something out of nothing. Four distinctly 
 marked systems of note issue were in operation in the Unitejd 
 States side by side almost up to the close of the Civil War 
 and it is not surprising that the conglomerate currency 
 which they created has left unsavory memories behind it. 
 These four systems were : Issues upon general assets ; issues 
 protected by a general safety fund ; issues based upon public 
 securities ; and issues based upon the faith, and credit of the 
 States. 1 
 
 1 The principal sources for the preparation of this chapter have been 
 the monographs prepared by Mr. L. Carroll Root for the " Sound 
 Currency Committee " of the New York Reform Club ; the report of 
 John J. Knox, the United States Comptroller of the Currency, for 
 1876 ; the report prepared by Mr. Henry H. Smith, Assistant Register 
 of the Treasury, in response to Senate resolutions of July 26, 1892, 
 printed as Sen. Ex. Doc. 38, 52d Cong., 2d Sess. ; and the report of 
 Comptroller A. B. Hepburn for 1892. The investigations of these 
 gentlemen have brought together and co-ordinated a mass of material 
 which would otherwise have to be sought with great labor from a 
 variety of sources. Mr. Root has further favored me with an examina- 
 tion of this chapter and the suggestion of some changes, which I have 
 adopted. 
 
312 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The best illustration of the system of banking upon gen- 
 eral assets is afforded by the banks of New England, and 
 especially by the banks of Boston, which became the centre 
 of the New Kngland redemption system. The note issues 
 of the New Kngland banks were permitted in many cases , 
 to exceed the proportion to capital which is now consid- 
 ered safe, and they were not subject until late in their 
 history to thorough official supervision ; but in spite of 
 these defects of the system, the notes usually circulated at 
 par and specie was attracted to New England when driven 
 from other sections of the country by depreciated paper. 
 The first local bank in New England, and the second of the 
 kind in the United States, was incorporated by act of the 
 General Court of Massachusetts on February 7, 1784, with 
 a maximum capital of $300, coo, and was called the Mas- 
 sachusetts Bank. No limitations were imposed in the original 
 Massachusetts law upon note issues, but an act of 1792 pro- 
 hibited notes below $5, and the bank was directed to limit 
 the amount of notes, together with "money loaned by them/ 
 by a credit on their books or otherwise," to "twice thd 
 amount of their capital stock in gold anci silver, actually 
 deposited in the banks and held to answer the demands 
 against the same." A general law was passed in 1799, pro- 
 hibiting banking by unincorporated companies or the fur- 
 ther issue, except by the Nantucket Bank, of notes below 
 $5. This provision was modified in 1805 so as to permit the 
 issue of bills of $i, $2, and $3 to the amount of five per cent, 
 of paid-up capital. This limit was increased in 1809 to fifteen 
 per cent., reduced in 1812 to ten per cent., and again in- 
 creased in 1818 to twenty-five per cent., which remained the I 
 limit during the life of the State banking system. 1 
 
 An act was passed in 1803, requiring semi-annual re- 
 ports of condition by the Massachusetts banks to the State 
 officials, and it appeared that at that time seven banks were 
 in operation with a capital of $2,225,000 and a circulation of 
 $1,565,000. An attempt was made in 1811 to found a State 
 
 'Root, New England Bank Currency, "Sound Currency," Vol. 
 II., No. 13, p. 4. 
 
THE STATE BANKING SYSTEMS. 313 
 
 bank occupying a similar relation to the Commonwealth 
 that the United States Bank had occupied towards the 
 national government, but the State capital was never sub- 
 scribed and the authorized capital was reduced in 1817 
 from $3,000,000 to $i, 800,000. l The charter of this bank 
 and of the Merchants' Bank, also incorporated in 1811, 
 served as the model from which most subsequent charters in 
 Massachusetts were drawn. One-fifth of the capital was 
 required to be actually paid in before the beginning of 
 business ; the stockholders were individually liable to the 
 amount of their stock in case of loss arising from misman- 
 agement, and the liabilities, exclusive of deposits, were 
 limited to twice the amount of the capital. The limit upon 
 circulation, which was thus incidentally imposed, was re- 
 duced in the *case of most of the later banks to 150 per cent. 
 The Massachusetts and other New England banks main- 
 tained specie payments in 1814, when those of other parts of 
 the country suspended, and the current of specie towards 
 New England swelled the holdings of the Massachusetts 
 banks alone, from $1,513,000 in 1811 to $6,946,542 in 1814. 
 The total banking capital authorized had increased in 1828 
 to $9,075,000 and thirty-six new banks were incorporated 
 in the four years ending with that date. A new banking 
 law was passed on February 28, 1829, which applied to banks 
 thereafter incorporated and to those obtaining an increase of 
 capital or an extension of their charters. The limit of the 
 notes which a bank might circulate was reduced to 125 per 
 cent, of the capital and the total of the debts, exclusive of 
 deposits, was limited to twice the capital. A provision was 
 made against the practice of issuing notes promising pay- 
 
 1 The State subscribed $400,000 to the capital of the Union Bank of 
 Boston, which was incorporated in 1792, and was generally a subscri- 
 ber at the formation of new banks for the next twenty years. About 
 $1,000,000 of bank stock in this way came into the hands of the State 
 and afforded a generous dividend until it was sold in 1812 to meet 
 some unusual expenses. The State does not seem to have abused its 
 share in the ownership by interference with the management of the 
 banks. Martin's Boston Stock Market, cited in Comptroller's Report 
 for 1876. 
 
314 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ment with interest at a future date, by which the banks had 
 endeavored to escape the obligation to pay cash on demand 
 to depositors and note-holders. An effort was made to evade 
 this provision by issuing deposit books, making the same 
 promise. They were first issued mainly to depositors, but 
 they came to be extensively issued during the pressure of 
 1834 in discounting paper. The General Court passed a law 
 in that year prohibiting the practice. 
 
 The organization of banks in Massachusetts proceeded 
 with alarming rapidity during this period of speculation, 
 and at the end of 1836, seventy-eight new banks had been 
 added to the sixty-two older banks, and forty-three of the 
 latter had obtained an increase of capital. Several banks 
 succumbed towards the close of the year, but the Boston banks 
 were mainly sound and followed the New York banks reluc- 
 tantly on May 12, 1837, in the suspension of specie pay- 
 ments. An act of 1809 imposed a penalty of two per cent. 
 a month on banks which failed to redeem their notes in 
 specie. This provision was not enforced in 1837, an d tne 
 General Court suspended it until January i, 1839, in the case 
 of banks which kept their circulation within seventy-five per 
 cent, of their capital, redeemed notes below $5 in Boston, 
 and below $3 elsewhere, and complied with some other condi- 
 tions. Voluntary resumption took place throughout the State 
 on August 13, 1838. Failures still continued among the mush- 
 room institutions which had been created during the period of 
 speculation, and thirty-two Massachusetts banks wound up 
 their affairs between 1837 and 1844. The necessity of more 
 efficient supervision by the State was made plain by the 
 crisis of 1837, an< ^ three bank commissioners were authorized 
 to make annual examinations of all the banks and special 
 examinations when they thought proper. This law was 
 repealed after five years, but the Massachusetts banks were 
 now upon a sound basis and failures were few during the 
 twenty-five years before the creation of the national system. 
 Only two failures occurred between 1840 and 1855, and the 
 notes in both cases were paid in full. 
 
 Most of the bank charters were renewed for twenty years 
 
THE STATE BANKING SYSTEMS. 315 
 
 in 1831 and expired on October i, 1851. The renewal in the 
 latter year was made the occasion of several changes in the 
 banking laws. One of these revived the board of bank 
 commissioners with the same powers of examination as in 
 1838. Another change of law imposed liability upon stock- 
 holders for the redemption of notes, in case of failure, to the 
 amount of their stock, without the former limitation in re- 
 gard to mismanagement. The speculative mania which pre- 
 ceded the crisis of 1857 resulted in the creation of fifty-eight 
 new banks in Massachusetts with a capital of $14,400,000 
 and 157 increases in the capital of existing banks, amounting 
 to $18, 745,000. Several failures took place, but the note- 
 holders suffered little loss and a committee of the legislature 
 in 1856 reported against the granting of further charters. 
 The condition of the State banks of Massachusetts in 1862, 
 just before absorption into the national system, showed 183 
 banks in operation with a capital stock of $67,544,200 ; circu- 
 lation, $28,957,630 ; deposits, $44,737,490; loans and dis- 
 counts, $127,592,511 ; and specie, $9,595,53- 
 
 The banking systems of the other New England States 
 were generally based upon the principle of issuing notes 
 against assets and the banks maintained close relations with 
 those of Boston. The legislature of Maine took advantage 
 of the expiration of a number of charters in 1846 to adopt 
 some changes of law to afford greater security for circulating 
 notes. The Act of August 10, 1846, provided that for the 
 amount of circulation issued in excess of fifty per cent, of 
 the capital, one dollar in specie should be kept for three dol- 
 lars in bank-notes and that the total circulation should never 
 exceed the capital plus the amount of specie on hand. The 
 State of Vermont created in 1831 a safety fund modelled 
 closely upon that of New York. Each bank thereafter char- 
 tered was required to pay into the State Treasury, in six 
 annual instalments, the sum of four and a half per cent, 
 upon the amount of its capital stock, and in case the fund 
 was reduced by the failure of any bank it was to be restored 
 by assessments by the State Treasurer, not exceeding three- 
 fourths of one per cent, in any one year upon the capital of 
 
316 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the banks. An act was passed by the General Assembly in 
 1842, relieving the banks from contributions to the safety 
 fund in case the directors should execute satisfactory bonds 
 to redeem according to law all bills issued and to pay depos- 
 its on demand. 
 
 The banking laws of Rhode Island were peculiar in the 
 facilities which they extended to banks for recovering debts. 
 The first bank charter, issued to the Providence Bank in 
 1791, and creating the fifth chartered bank then existing in 
 the United States, provided that upon any note or other 
 instrument expressly made payable at the bank, the Presi- 
 dent or certain of the directors might cause a demand to be 
 made upon the debtor, in case of his failure to make pay- 
 ment at maturity, and in case the obligation remained un- 
 paid for ten days, these officers might write to either of the 
 clerks of the courts of common pleas or of the superior 
 court and order such clerk to issue a writ of execution capias 
 satisfaciendum fieri facias, and attachment of real estate 
 upon which the debt and costs might be levied, whereupon 
 the clerk was required to issue such an execution, to be 
 served by any sheriff or deputy. Subsequent charters did 
 not even require demand in writing or protest, but author- 
 ized the officers of the bank to order the clerk of one of the 
 courts to proceed to issue the execution. This drastic 
 method of collecting debts under the ' ' bank process ' ' made 
 banks very popular investments with capitalists and ac- 
 counted for their rapid increase up to 1818. An act was 
 passed forbidding the further granting of such charters, but 
 the decision of ' ' the Dartmouth College ' ' case in the 
 Federal courts, denying the power of the grantor of a char- 
 ter to change the terms except with the consent of the 
 grantee, delayed any provision for withdrawing the pow- 
 ers of the ''bank process" from banks already possessing 
 them. The arbitrary character of this process and the hard- 
 ships it inflicted aroused strong popular feeling and resulted 
 in an act of 1836 abolishing the privileges of "the bank 
 process " and limiting the banks thereafter to the same reme- 
 dies as individuals for the collection of debts. Sixty-one 
 
THE STATE BANKING SYSTEMS. 317 
 
 banks then existed in Rhode Island, of which thirty pos- 
 sessed the powers of the "bank process." 
 
 The peculiar feature of the New England bank circulation 
 was the Suffolk system of redemption, which was established 
 in order to protect sound banking currency from being driven 
 out of circulation by the inferior currency of other States. 
 The suspension of specie payments south and west of New 
 England in 1814 resulted in the introduction of depreciated 
 notes across the Connecticut border and drove the Connec- 
 ticut bank-notes into private hoards or brought them to the 
 banks for redemption in specie. The banks of Maine en- 
 countered a similar situation prior to the suspension of specie 
 payments in 1837. They were forbidden by law to issue 
 notes below $5, with the object of keeping the currency 
 saturated with coin, but this purpose was defeated by the 
 circulation of the small notes of the banks of neighboring 
 States. The banks of Boston found themselves, even before 
 the close of the last century, under somewhat the same com- 
 petition from the country banks of Massachusetts. The 
 Boston banks at first undertook to send the country notes 
 promptly home for redemption, but the banks protested 
 against this policy. The Boston banks then refused to re- 
 ceive the country notes altogether. The result was the 
 hoarding of "Boston money," which was sold at a small 
 premium to persons having payments to make at the 
 banks, while the channels of circulation were filled with the 
 country notes, which were known as ' ' foreign " or ' * current 
 money." 
 
 Several attempts were made in Boston to establish a 
 redemption office for sending notes home for redemption, 
 but it was not until 1813 that a systematic method of clear- 
 ing and redemption for bank-notes was put in operation by 
 the New England Bank. The discount on the notes of 
 "foreign" banks was larger than the actual expense of 
 redemption justified, and the New England Bank gave 
 notice that it would charge only the actual cost of sending 
 foreign money home for redemption and obtaining the 
 specie for it. The execution of their plan brought down 
 
3 1 8" HISTORY OF MODERN BANKS OF ISSUE.- 
 
 the discount on ' ' foreign ' ' notes fr^m four or five per cent, 
 to one per cent, for notes of Massachusetts banks and some- 
 what more for those of other States. 
 
 The Suffolk Bank was incorporated in Boston in 1818 and 
 the directors determined to give special attention to foreign 
 exchanges. A committee appointed to consider the subject 
 in 1819 reported that it was expedient "to receive at the 
 Suffolk Bank the several kinds of foreign money which are 
 now received at the New England Bank, and at the same 
 rates." They recommended that if any bank should make 
 a permanent deposit of $5000 with the Suffolk Bank, with 
 such further sums as were necessary from time to time to 
 redeem its bills taken by the Suffolk Bank, such bank 
 should have the privilege of receiving" its bills at the same 
 discount at which they were purchased. They recommended 
 that the banks of Providence and Newport and twenty-three 
 others keeping an account with the Suffolk have the 
 privilege of receiving such of their bills as were received by 
 the Suffolk bank at the same discount as taken, without the 
 permanent deposit of $5000, provided these banks would 
 make all their deposits at the Suffolk Bank and at all times 
 have money to redeem the bills taken. J The policy to be 
 adopted towards banks refusing to make a deposit w r as to 
 send their notes home for redemption. These recommenda- 
 tions were put in force and the lively competition of the 
 Suffolk with the New England Bank soon forced exchange 
 on Massachusetts notes to one-half of one per cent., or 
 even less. 
 
 The notes of the Boston banks were still crowded out of 
 circulation by the slight discount on the notes of the country 
 banks and it was found in 1824 that the permanent circula- 
 tion of the eleven city banks, with a capital of $11,150,000, 
 was not more than $300,000, while the country banks, with 
 a capital of less than $9,000,000, had a circulation of 
 $7,500,000. An agreement was made between the Suffolk 
 and six other Boston banks by which a fund of $300,000 in 
 their notes was furnished the Suffolk, to be paid out in 
 
 1 Whitney, 7-8. 
 
THE STATE BANKING SYSTEMS. 319 
 
 equal proportions in the purchase of country bank-notes. l 
 The tendency of this policy was to force the city notes into 
 circulation and withdraw the country notes unless they 
 were maintained absolutely at par by the action of the 
 country banks. The plan was vigorously resisted at first 
 by the country banks and the Boston association was 
 decorated with such opprobrious names as the "Holy 
 Alliance" and " Six-tailed Bashaw." The country banks 
 were forced to yield, however, and most of them consented 
 to make the permanent deposit of $2000 which was now 
 required, in addition to a sufficient sum for current redemp- 
 tions. The notes of those maintaining their redemption 
 fund were received at par and were charged up against them 
 once a week or as often as might be convenient. The Suf- 
 folk Bank charged interest whenever the amount redeemed 
 exceeded the funds to the credit of the issuing bank, but 
 received the notes of all banks in good standing and placed 
 them to the credit of the bank sending them in. 
 
 A sort of clearing house was thus established which 
 enabled the issues of one bank to be set off against those of 
 another in making settlements. The effect of restoring the 
 country notes to par was to reduce the circulation of sixteen 
 Massachusetts banks within six months by $382,781 and to 
 increase the circulation of the Boston banks by $283,497. 
 When any bank refused to join the Suffolk system, the 
 Suffolk Bank simply presented its notes for redemption. 
 This course soon convinced the majority of the country 
 banks that it was better to clear through the Suffolk Bank 
 than to maintain an unequal competition with neighboring 
 banks, which had the prestige of belonging to the Suffolk 
 system and whose notes were at par throughout New Eng- 
 land. The suspension of specie payments in 1837 P u *- an 
 end to enforced redemption for a time, but the majority of 
 the banks continued to settle their balances through the 
 Suffolk Bank and their bills passed current all over the 
 
 'John Amory Lowell, who served on the "Foreign Money Com- 
 mittee " for forty-two years, and William Lawrence, prepared this 
 plan and report. 
 
320 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Union, while those of the other banks had only a local 
 circulation. l 
 
 A branch redemption agency was established in Rhode 
 Island, by which the Merchants' Bank of Providence received 
 at par from the Rhode Island banks the bills of all other 
 banks in New England and settled balances as far as 
 possible among the Rhode Island banks. Bills issued by 
 banks outside of Rhode Island were sent to Boston, and 
 Rhode Island bills were sent in bulk by the Suffolk Bank to 
 Providence. Legal encouragement was given to the Suffolk 
 system in Vermont by the Act of 1842, which levied a tax 
 of one per cent, upon bank capital, but remitted the tax to 
 any bank which should ' ' keep a sufficient deposit of funds 
 in the City of Boston, and should at that city uniformly 
 cause its bills to be redeemed at par. ' ' All but three of 
 the Vermont banks were members of the system before 1848 
 and in 1850 all had joined. Several of the Maine banks 
 resisted for a time and received the support of the bank 
 commissioners in 1837, but their circulation became limited 
 to their immediate locality and the system was commended 
 by the commissioners in later reports. 
 
 The handsome profits derived by the Suffolk Bank from 
 the redemption system led to several efforts to establish a 
 rival institution. The work of the Suffolk Bank was so well 
 done that it was not until 1855 that these efforts bore tangible 
 fruit. The Bank of Mutual Redemption was then estab- 
 lished for the specific purpose of redeeming the currency of 
 the New England banks at par. The bank went into opera- 
 tion in 1858, with 135 New England banks interested as 
 stockholders and thirty-five keeping a permanent deposit 
 aggregating $143,000. The bank was admitted to the 
 clearing house after a struggle and most of the country 
 
 1 "At the time when the Suffolk system was at its best I lived in 
 Chicago. The notes of Massachusetts banks were in great request 
 there. They were considered the best currency .going and they bore 
 a premium over the notes of Illinois and Wisconsin banks." Testi- 
 mony of Horace White before House Committee on Banking, House 
 Report 1508, 53d Cong., 3d Sess., 84. 
 
THE STATE BANKING SYSTEMS. 32! 
 
 banks withdrew from the Suffolk and transferred their de- 
 posits to the Bank of Mutual Redemption. There was some 
 friction between the two institutions and it was feared in 
 some quarters that the entire system would be endangered, 
 but a mutual exchange of the notes of their patrons was 
 arranged between the two banks. The Suffolk Bank with- 
 drew from the system on November i, 1858, upon the ground 
 that ' ' its main feature, the right to send home bills for specie, 
 cannot be given up without destroying its efficacy," and 
 that "under the existing circumstances the bank does not 
 wish to stand in the way of a trial of the attempted experi- 
 ment of a foreign money system to be conducted on less 
 stringent principles." The Suffolk Bank continued to 
 receive country money at a discount of twenty-five cents 
 per $1000 and to share to this degree in the business of 
 redemption. 
 
 The circulation of the New England banks in 1858 was less 
 than $40,000,000 and the redemptions for that year through 
 the Suffolk Bank were 1400,000,000. Every note, therefore, on 
 the average, passed through the redemption agency ten times a 
 year, or a little less often than once a month. This frequency 
 of redemptions not only tested the solvency of the banks by 
 the ultimate test of a banking currency, but it kept the cir- 
 culation constantly adj usted to business conditions. The 
 redemptions through the Suffolk agency were $76,248,000 
 in 1834 and increased to $105,457,000 in 1837. There were 
 fluctuations during the period of specie suspension, but the 
 redemptions increased progressively to $137,000,000 in 1845, 
 $220,000,000 in 1850 and $341,000,000 in 1855, until they 
 reached their maximum of $400,000,000 in 1858. The ex- 
 penses of carrying on the redemption agency reached a 
 maximum of $40,000 in 1858, making an average expense 
 of ten cents per $1000. The suspension of specie payments 
 by the banks of the country at the close of 1861, as the re- 
 sult of Secretary Chase's issue of government demand notes, 
 arrested the regularity of redemptions through the Suffolk 
 system and it was superseded before resumption by the 
 National banking system. The Suffolk system was never 
 
322 HISTORY OF MODERN BANKS OF ISSUE. 
 
 sustained by formal law, but it maintained New England 
 bank currency for a generation at par with gold and pre- 
 vented any losses to note-holders larger than a fraction of 
 one per cent, of the entire volume of circulation. 
 
 New York tried two banking systems under which many 
 strong banks were created, but both of which failed in some 
 degree through defects of detail. The early New York 
 banks issued notes against their general assets and were 
 chartered under special acts of the legislature, which were 
 granted to some extent as political favors. The Bank of 
 New York was incorporated by Act of March 21, 1791, after 
 having done business for seven years under articles of associ- 
 ation drawn by Alexander Hamilton. This bank retained 
 a practical monopoly in New York City until 1799, when 
 the Manhattan Company began a banking business with a 
 capital of $2,000,000. The charter was obtained by the 
 management of Aaron Burr and would undoubtedly have 
 been refused by the Federalist majority in the legislature 
 if it had been clearly understood that it carried banking 
 powers ; but the charter was granted for the avowed purpose 
 of supplying the City of New York with pure water and 
 cloaked the banking power under a general provision per- 
 mitting the company to employ its surplus in any moneyed 
 transactions not inconsistent with the laws of the State. 1 
 Six additional banks were chartered up to 1811 ; nine ad- 
 ditional in that and the following year, after the lapse of the 
 charter of the Bank of the United States ; and twenty-four 
 more from 1813 to 1825. 
 
 Thirty New York bank charters were to expire between 
 1829 and 1833, and Governor Van Buren in the former year 
 urged upon the legislature a sweeping measure of reform. 
 He presented what is known as "the safety-fund plan," 
 which he stated had been presented to him by Mr. Joshua 
 Forman of Syracuse. Mr. Forman declared that ' l The 
 propriety of making the banks liable for each other was 
 suggested by the regulations of the Hong merchants in 
 Canton, where a number of men, each acting separately, 
 
 1 Roberts, 477. 
 
THE STATE BANKING SYSTEMS. 323 
 
 have, by a grant of the government, the exclusive right of 
 trading with foreigners and are all made liable for the debts 
 of each in case of failure." Mr. Form an did not propose 
 to extend this principle further than the guarantee of the 
 circulating notes, but by accident or design the bill which 
 passed the legislature made the safety fund liable for all the 
 debts of a failed bank. Each bank was required to pay 
 annually to the Treasurer of the State a sum equal to one- 
 half of one per cent, of its capital stock until the payments 
 should amount to three per cent. The first act, approved 
 April 2, 1829, provided for the distribution of the assets of 
 a failed bank in the usual way and that, after all the assets 
 had been turned into money and the final distribution made, 
 a court of chancery should enter an order showing the 
 amount necessary to discharge the remaining debts and 
 should authorize the Comptroller to pay the amount from 
 the bank fund. 'This law was modified by the Act of May 8, 
 1837, to enable the State authorities to take such measures 
 as might be necessary for the immediate payment of the 
 notes of any insolvent bank whose liabilities in excess of 
 assets should not exceed two- thirds of the bank fundX It 
 was not until 1842, after the failure of nine of the banks 
 incorporated under the safety fund system, that an act was 
 passed making the circulating notes only a charge against 
 the safety fund and leaving the other liabilities of the failed 
 bank to be paid from the assets. 
 
 The panic of 1837 put the safety fund to its first test and 
 compelled the State Comptroller to make heavy payments 
 in the redemption of circulating notes. Three important 
 banks in Buffalo failed early in May, 1837, with a reported 
 circulation of $413,961. The Comptroller announced that 
 their bills would be received in payment of canal tolls and 
 other debts to the State and they were maintained substan- 
 tially at par. The charters of two banks were repealed by 
 the Legislature in 1837 an d their notes redeemed by the 
 State, but one of these charters was renewed and the pay- 
 ments from the safety fund were reimbursed. The safety 
 fund was practically intact in 1840 and stood at $870,615. 
 
324 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The next three years witnessed eleven failures, which prac- 
 tically wiped out the safety fund and compelled calls upon 
 the solvent banks to make it good. The redemption of 
 notes was suspended after the first four failures, because the 
 fund was deemed no more than sufficient to cover their 
 liabilities, but the Act of 1 842 permitted the banks to antici- 
 pate their annual contributions by as much as six years in 
 some cases and to pay into the fund at par the notes of the 
 failed banks. The banks very generally took advantage of 
 this provision and made a good profit on notes of the failed 
 banks which had fallen into their hands at a considerable 
 discount. Their advance payments did not involve a loss 
 of interest, as the original law required the investment of 
 the bank fund and the payment of interest to the banks, 
 and the Act of 1842 granted seven per cent, interest on the 
 advance payments. Redemptions of notes up to September 
 30, 1850, were $1,614,577 and payments to other creditors 
 up to 1851 were $1,088,109. 
 
 The failure of the L,ewis County Bank in November, 1854, 
 with deposits of only $1,998 and outstanding notes for $148,- 
 545, found the safety fund no longer adequate to redeem 
 circulation. Future contributions up to 1860 were pledged 
 for the redemption of the public stocks which had been 
 issued to obtain ready money to provide for previous failures. 
 The notes of the Lewis County Bank were finally redeemed 
 twelve years later and the notes of the three banks which 
 failed in 1857 were provided for out of their assets. The 
 total contributions to the safety fund from its creation to the 
 abolition of the system were $3,104,999. 
 
 The safety fund system broke down primarily because 
 the fund was made to cover all liabilities instead of simply 
 the liability for note issues. The fact that another system 
 was adopted for banks organized after 1838 also operated to 
 the injury of the safety fund system, because no new banks 
 became contributors and the failure and withdrawal of some 
 of the old ones gradually reduced the number over whose 
 resources the liability was distributed. Another evil by 
 no means inherent in the safety fund system, but which 
 
THE STATE BANKING SYSTEMS. 325 
 
 increased the demand upon it, was the issue of notes by 
 several of the safety fund banks in excess of the maximum 
 allowed by law. This defect was remedied in 1843 by an 
 act providing for the issue of notes registered and counter- 
 signed by the Comptroller and the surrender of the plates 
 with which the banks were then printing their notes. A 
 mistake was made also in basing the contributions of the 
 banks to the safety fund upon their capital rather than 
 upon their outstanding circulation. But the arrest of the 
 expansion of the system, the over-issue of notes in viola- 
 tion of law, and the distribution of the assessment in pro- 
 portion to capital, would not have prevented the success of 
 the safety fund system if the fund had been maintained 
 exclusively for the redemption of circulating notes. The 
 fund would have amply secured the notes of the New York 
 banks and ensured their prompt redemption at par, even 
 without the reduplicated security aiforded by the constitu- 
 tion of 1846, which made the notes a first lien on the assets 
 and made stockholders liable, to the amount of their stock, 
 for the debts of a failed bank contracted after January i, 
 1850. A careful estimate shows that the annual assessment 
 required on the average from 1829 to 1865 to keep the fund 
 good and redeem every dollar of the circulation of suspended 
 banks would have been less than one-fourth of one per cent, 
 of the banking capital, or about three-eights of one per cent, 
 on the average outstanding circulation. 1 
 
 Bank charters continued to be granted in New York by 
 special acts and to be subject to political favor after the 
 adoption of the safety fund plan and up to 1838. A cam- 
 paign for free banking, in the sense of equal right to all 
 persons complying with fixed conditions, was waged by 
 
 'Root, New York Bank Currency, " Sound Currency," Vol. II., 
 No. 5, p. 15. Millard Fillmore, who was Comptroller of the State in 
 1848, showed that up to that time, covering the period of the most 
 numerous failures, the contributions to the safety fund had been 
 $1,876,063 and the outstanding circulation of the failed banks $1,548,- 
 558, leaving a surplus of $327,505, if the fund had been used simply 
 to guarantee circulation. 
 
326 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the Loco-Foco Democrats for several years and bore fruit in 
 the Free Banking Act of April 18, 1838. Individuals or 
 associations were authorized by this act to engage in the 
 issue of notes, which were to be delivered to them by the 
 State Comptroller, upon depositing with him the stocks of 
 the United States, of the State of New York, or of any 
 other State approved by the Comptroller, made equal to a 
 five per cent. New York stock. Provision was also made 
 for issuing notes on bonds and mortgages on improved, pro- 
 ductive and unincumbered real estate worth double the 
 amount secured by the mortgage, and the notes were to 
 show whether they were secured by stocks or by mortgages. 
 The mortgage feature of the law opened the door to a paper 
 money Saturnalia as dangerous as the issues of L,aw's Bank, 
 the assignats of the National Assembly, or the I^and Bank 
 of Norway ; but fortunately the conditions attached to the 
 issue of notes for mortgages were somewhat severe and such 
 issues never attained any considerable proportion of the 
 aggregate circulation of the free banks. The provision for 
 mortgages as a basis for circulation was repealed in 1863 
 and securities for note issues were restricted solely to stocks 
 of the State of New York and of the United States. 
 
 Individuals as well as associations were prompt to take 
 advantages of the free banking law and the amount of capi- 
 tal subscribed by January i, 1839, was $10,838,175. The 
 actual circulation under the law at that time was only 
 $396,300, but the circulation had increased by December 
 i, 1839, to about $5,ooo,ooo, issued by seventy-six persons 
 or associations, with fifty-seven additional applications 
 pending. Eight of these banks went out of business 
 before January i, 1841, and eighteen more followed in the 
 course of the next year. The notes were redeemed at an 
 average discount of twenty per cent, for those secured by 
 stocks and twenty-five per cent, for those secured by stock 
 and real estate. The results of the sales of securities up 
 to the close of 1850 showed aggregate receipts of $1,142,758 
 upon stocks which had been accepted as security for circula- 
 tion to the amount of $1,468,245. This afforded a dividend 
 
THE STATE B Ah 7 KING SYSTEMS. 327 
 
 of about 77 per cent, upon the circulation thus redeemed. 
 The New York stgcks sold on the average for 92.86 per 
 cent. ; Michigan stocks came next at 72.95 per cent. ; Indiana 
 bringing up the rear at 49.08 per cent. 
 
 The fact that individuals could issue notes under the free 
 banking law upon the deposit of securities led to many vi- 
 sionary efforts to exploit credit and resulted in 1844 in legis- 
 lation requiring an individual banker to deposit securities to 
 the amount of not less than $50,000 and to transact business 
 in the place in which he resided. A market was created in 
 New York for a time for securities which did not find a 
 ready sale elsewhere and quotations for such securities were 
 strengthened, but this market was destroyed by the Act of 
 1840, limiting the securities thereafter accepted to those of 
 New York. Such changes gradually strengthened the sys- 
 tem until there was little to be desired on the single ground 
 of security. The failures during the first twelve years of 
 the free banking system showed losses of $326,000, or only 
 $27,200 per year on an average circulation of about $6,000,- 
 ooo. This was less than one-half of one per cent, per year 
 and the losses in the remaining fifteen years of the operation 
 of the system averaged only $4800 per year on a circulation 
 of about $22,000,000, or less than one-fortieth of one per 
 cent. The circulation issued under the free banking law 
 was not a strong reliance, however, in times of pressure and 
 was threatened at such times, when strength was most 
 needed, by the decline in securities. It had little elasticity 
 and did not meet the demands of the business community in 
 this respect nearly so well as the circulation of the safety 
 fund banks. Defects of detail were gradually eliminated, 
 however, and the system was successful enough to attract 
 attention in Canada in 1850 and to become the model of the 
 national banking system of the United States in 1863. 
 
 The banking laws of New York were followed also in 
 many Western States, but not always closely enough to 
 assure the later systems the solidity of the original. The 
 State Bank of Ohio, created in 1845, was one of the best of \ 
 these institutions and its note issues were protected by a 
 
328 HISTORY OF MODERN BANKS OF ISSUE. 
 
 combination of the safety fund and security principles. The 
 bank was not, as its name might imply, an institution of 
 State, but was owned entirely by individuals and acted as a 
 sort of board of control for the branch banks. Bach branch 
 was required to deposit with the board of control ten per 
 cent, of the amount of its circulating notes, either in specie 
 or in the bonds of the State or the United States, as a safety 
 fund for the protection of the entire note issues of the bank. 
 Kach branch was liable for the circulation, but not for the 
 other liabilities, of the other branches. The reimbursement 
 of the safety fund for notes redeemed was constituted the 
 first lien on the assets of a failed branch. The State Bank 
 of Ohio was eminently successful and was managed in much 
 the same way as the State Bank of Indiana. The aggregate 
 capital of the thirty-six branches in 1863 was $4,054,700 ; 
 circulation, $7,246,513; loans and discounts, $8,653,459; 
 deposits, $5,631,629 ; and specie, $2,216,982. 
 
 The State of Michigan enacted a safety-fund law in 1836,"* 
 but it was forgotten and ignored in the phrensy of paper in- 
 flation which swept over the State during the next few 
 years. The first session of the State legislature in 1837] 
 passed a general banking law, which was followed up after 
 the panic in the same year by an act permitting new banks 
 to begin business in a condition of suspension of specie pay- 
 ments. Thirty per cent, of the capital was required to be 
 paid in specie, but this provision was evaded by borrowing 
 specie for a few days when the bank commissioners made 
 their tours of inspection. Any twelve free-holders could 
 form a bank if they were able to show a capital of $50,000, 
 including thirty per cent, in specie and the remainder in 
 bonds and mortgages approved by the Auditor General of 
 the State. 1 The restraints of the law \vere so recklessly 
 violated that the State was soon flooded with $1,000,000 in 
 worthless bills. Banks were created after specie resumption 
 in the most inaccessible places, that their notes might not be 
 presented for redemption ; and Eastern speculators took out 
 
 Felch, Senate Ex. Doc. 38, 52d Cong., 2d Sess., 76. 
 
THE STATE BANKING SYSTEMS. 329 
 
 Michigan charters and issued the bills in other States where 
 the standing of the banks could not be known. " They 
 were at a great discount," says Judge Cooley, " as compared 
 with Eastern bills ; the issues of one bank were at a dis- 
 count as compared with those of another ; merchants kept 
 couriers by whom they hurried off to the banks of issue the 
 bills they were compelled to take, that they might if possi- 
 ble exchange them for something in which they had more 
 confidence. No ' circulating medium ' ever before circulated 
 so rapidly." Fraudulent over-issues were frequent and in] 
 many cases were not even recorded. Misery and bankruptcy' 
 spread over the State, with their natural sequence of stay 
 laws and laws fixing the value at which the property of 
 debtors should be taken. The free banks were nearly all in 
 the hands of receivers when, in 1844, the Supreme Court of 
 the State decided that even the receiverships had no legal 
 existence, for the general banking act had been passed in 
 violation of the constitutional provision regarding corpora- 
 tions, which implied the necessity of a separate charter in 
 each case. 
 
 Banking laws basing the issue of notes upon securities 
 were adopted by Illinois in 1851, Indiana in 1852, Wisconsin 
 in 1853, and other States soon after. The restrictions which 
 experience in New York showed to be necessary to protect 
 note-holders received little attention in the West and the 
 rapid depreciation of the ' ' red dog ' ' and ' ' wildcat ' ' cur- 
 rency cast a suspicion upon State bank issues which has 
 survived to this day. Fifty-one of the ninety-four free 
 banks of Indiana suspended before the panic of 1857 and 
 most of those left tumbled like a house of cards in all the 
 States when the pressure came. A fictitious market was 
 created for securities, which brought prices that could not 
 have been otherwise obtained, and the stimulus was -thus 
 given for the creation of public debt by the issue of securities, 
 the issue of bank-notes on the securities, the purchase of 
 more securities to be used as the pledge of new bank-notes, 
 
 1 Michigan, 272. 
 
33O HISTORY OF MODERN BANKS OF ISSUE. 
 
 and so on in an endless chain of debt creation and the infla- 
 tion of paper wealth. It was usually found when a bank 
 failed that the securities could not be marketed for their 
 face value and in many cases that there were no other avail- 
 able assets. The Bank Comptroller of Wisconsin reported 
 as late as 1863 a list of fifteen failed banks whose notes he 
 was redeeming at rates ranging from sixty cents to ninety- 
 five and a half cents on the dollar. 1 The basis of redemp- 
 tion, however, was not coin, but United States Treasury 
 notes, themselves depreciated about thirty per cent., so that 
 it was necessary to multiply the one depreciation into the 
 other to obtain the scanty proceeds in coin of Wisconsin 
 notes based upon "securities." Free banking laws were 
 passed in eastern States, but the system made little headway 
 in those States against the established credit of the chartered 
 banks. 
 
 One of the most dismal chapters in American banking 
 history is that which records the creation and collapse of 
 banks owned and managed by the States. The Federal 
 Constitution sought to close the door against issues of the 
 legal tender paper money, which had worked such havoc 
 with prices and credit during the Revolutionary era, by the 
 decree that no State should "emit bills of credit." The 
 Supreme Court sustained the force of this prohibition in the 
 case of Craig vs. the State of Missouri (4 Peters, 410), and 
 decided that the certificates issued by the State and made 
 receivable for salaries and taxes, even though not full legal 
 tender, fell under the ban of the constitutional restriction. 
 A different spirit ruled the court when the case of Brisco vs. 
 the Bank of the Commonwealth of Kentucky was decided 
 in 1837. Chief-Justice Marshall had just died, but Justice 
 Story, who dissented from the majority decision, insisted 
 that his dead associate had agreed with him, that the pend- 
 ing case could not be distinguished in principle from that of 
 Craig vs. Missouri. The majority found a distinction in the 
 fact that the bills in question were issued by a bank under 
 
 of the Secretary of the Treasury on Condition of the Banks 
 at the Commencement of 1863, 204. 
 
THE STATE BANKING SYSTEMS. 331 
 
 the direction of a president and twelve directors. They held, 
 notwithstanding the fact that the bank was exclusively the 
 property of the State, that the notes were not "bills of 
 credit " within their definition, which included only " paper 
 issued by the authority of a State on the faith of the State, 
 and designed to circulate as money." ' 
 
 The mania for banks of State was already well on its 
 course before this decision was made. The Commonwealth 
 of Kentucky had been part owner in the Bank of Kentucky, 
 incorporated in 1806, and owned $586,400 of the capital 
 stock of $2,726,100 when the charter was repealed in 1822. 
 The Bank of Kentucky was hampered throughout its career 
 by State interference, but was paying specie and its stock 
 was at par when the State decided to set up a rival under its 
 own exclusive ownership and management. The new-comer 
 was the Bank of the Commonwealth of Kentucky, chartered 
 for twenty years by the Act of November 29, 1820, with a 
 capital of $2,000,000, which was increased December 22, 
 1820, to $3,000,000. The State availed itself of the power 
 to appoint additional directors in the old bank to pack the 
 board with pliant tools, who soon effected its ruin for the 
 benefit of the new institution. The Bank of the Common- 
 wealth, however, was a pitiable failure. Its notes had fallen 
 on March 22, 1822, to sixty-two and a half cents on the dol- 
 lar and they continued to fall until the entire State was 
 embroiled in a legal controversy which almost ended in 
 
 1 Brisco vs. Bank of Kentucky is reported in n Peters, 257. Prof. 
 Simmer declares that by this decision "wildcat banking was granted 
 standing ground under the Constitution " and that "the decisions of 
 the Supreme Court on the constitutionality of the Legal Tender Act 
 must have borne an entirely different color, if Marshall's opinion had 
 prevailed in Brisco's case." Andrew Jackson, 363. Judge Story went 
 so far, in his Commentaries on the Constitution, as to intimate that 
 if the question were a new one, it would be doubtful if the States 
 had power under the Constitution to incorporate banks of issue ; but 
 it is obvious that the permission to issue notes, circulating, like other 
 commercial paper, upon private credit, is very different from the 
 issue under public authority of legal tender money. Kent, Commen- 
 taries, I., 408. 
 
332 HISTORY OF MODERN BANKS OF ISSUE. 
 
 revolution. The hard times of 1818 had resulted in the 
 charter of fort)- -six banks with a total capital of $8,720,000, 
 but the demand for specie by the United States Bank drove 
 them to the wall and the State was left without solvent 
 banks. A more permanent legacy of the hard times was a 
 replevin law, passed in 1820, which gave debtors two years 
 within which to redeem their goods unless payment was ac- 
 cepted by creditors in notes of the Bank of the Commonwealth. 
 
 ''The relief laws," of which the replevin law was one, 
 became the political issue of the hour. Judge Clarke, of the 
 Clarke County District Court, declared one of the provisions 
 of the replevin law unconstitutional, as impairing the obli- 
 gation of existing contracts. The Appellate Court sustained 
 Judge Clarke, in spite of an effort to remove him by an ex- 
 tra session of the legislature, but the relief party swept the 
 State in the elections of 1824, repealed all laws concerning 
 the Appellate Court and created a new Court of Appeals. 
 The Justices of the old court took the ground that their 
 offices were created by the Constitution and could be abol- 
 ished only by constitutional amendment. Their records 
 were taken from them and kept under military guard, but 
 the old court continued to meet and decide cases alongside 
 of the new. The next electoral campaign found the people 
 in more sober mood. The " Old Court party " elected sixty 
 members of the legislature against thirty-five of the "New 
 Court party," and at the next election a majority of the 
 Senate was secured and a bill was passed in December, 1825, 
 over the veto of the governor, by which all the laws consti- 
 tuting the new court were repealed. 1 An act was passed in 
 1830 by which the Bank of the Commonwealth ceased to loan 
 money, apparently for the reason that no one cared to borrow 
 the sort of money which it issued. The Commonwealth of 
 Kentucky had a share in some banks afterwards established, 
 but it did not again attempt the folly of State management. 
 
 The State of Alabama had an experience with a bank of 
 vState which, according to Governor Jones, has subjected the 
 
 Shaler, 178-84. 
 
THE STATE BANKING SYSTEMS. 333 
 
 people to a permanent tax of nearly $1000 per day for taxa- 
 tion to meet the cost of the experiment. 1 An act was 
 passed December 21, 1820, to incorporate the Bank of the 
 State of Alabama, but it provided for a capital of $2,000,- 
 ooo, of which three-fifths was to be obtained by private 
 subscriptions. Subscriptions were slow in coming and the 
 difficulty was met by an Act of 1823, removing any limit 
 upon the capital and providing that the State should furnish 
 the whole. Various public funds were set apart to consti- 
 tute a part of the capital, among them the proceeds from the 
 sale of lands donated by Congress for schools, amounting to 
 about $1,300,000, and the funds of the University of Ala- 
 bama to the amount of about $500,000. These grants were 
 only a beginning, and between 1832 and 1837 the State 
 issued bonds to the amount of $13,800,000 for the increase of 
 the capital of the bank and to enable it to resume specie 
 payments. 
 
 The purpose.of the founders of the bank was to distribute 
 the bank money as evenly as possible among the people of 
 the State and the original act stipulated that the loans 
 be apportioned among the several counties in proportion to 
 their representation in the General Assembly. lyOans to a 
 single individual or corporation were not to exceed $2,000, 
 but this rule was not closely adhered to in loans to the 
 president and directors. The president and twelve direc- 
 tors were chosen by the General Assembly and the choice 
 of directors for the branch banks increased the number 
 annually chosen to between sixty and seventy. Candidates 
 for the assembly were compelled to promise their supporters 
 liberal loans in case of election and to exact pledges from 
 candidates for the directorships that the loans should be 
 granted. One of the hotel keepers of Tuscaloosa succeeded 
 in securing an election as director in 1832 and his hotel 
 swarmed with members of the legislature and persons 
 desiring to borrow money, who hoped to secure his support 
 in the negotiation of loans. Four other hotel keepers 
 
 Century, Cheap Money Experiments, 88. 
 
334 HISTORY OF MODERN BANKS OF ISSUE. 
 
 realized that they were conducting business under a heavy 
 handicap and secured their own election as directors in 1834. 
 A director could not afford to refuse a discount requested by 
 a member of the legislature and the discounts of the bank 
 increased from $448,859 in 1826 to $20,642,473 in November, 
 1837. The circulation had swelled in the meantime from 
 $273,507 to $6,676,050. 
 
 Those were ' ' flush times ' ' in Alabama and so complete 
 was the intoxication of the people with the paper money 
 craze that the General Assembly on January 9, 1836, passed 
 an act abolishing direct taxation in the State and setting 
 aside $100,000 of the bank money to defray the expenses of 
 the State government. The crisis of 1837 led to an investi- 
 gation of the discounts and it was found that over $6,000,000 
 were worthless. Confidence in the paper money, " sup- 
 ported by the faith and credit and wealth of the State," to 
 use the favorite phrase of the champions of government 
 paper money, suddenly collapsed and with it the whole 
 structure of business and credit in Alabama. The General 
 Assembly was hastily summoned in special session and 
 authorized a loan to the people of $5,000,000 in bank money, 
 which was increased by $2,500,000 in December ; but the 
 fever had run its course, the charters of the branch banks 
 were repealed in 1842, and the charter of the State Bank was 
 not renewed when it expired in 1845. The assets of the 
 bank netted about $10,000,000 towards reducing the bonded 
 debt to the State, but $4,000,000 was a dead loss, in 
 addition to the public funds originally set aside for the use 
 of the bank. The effect of their experiment with a bank 
 of State upon the people of Alabama was indicated by the 
 provision of the constitution of 1867, that "The State shall 
 not be a stock-holder in any bank, nor shall the credit of 
 the State ever be given or loaned to any banking company 
 or association or corporation. ' ' 
 
 Mississippi had a similar experience. Two early experi- 
 ments in State ownership with bad results did not deter the 
 people from the establishment of the Union Bank of Missis- 
 sippi in 1838 with a capital of $15,000,000. This capital 
 
THE STATE BANKING SYSTEMS. 335 
 
 was to be raised by means of loans to be obtained from the 
 directors and the loans were to be negotiated through bonds 
 of the State for which the credit of the State was pledged. 
 The first block of $5,000,000 in bonds was sold at par through 
 Nicholas Biddle, president of the Bank of the United States. 
 The bank management exercised the worst possible judg- 
 ment in loans and advances and the bank ran its course 
 within four years. Post notes were issued, on account of 
 the suspension of specie payments, and the issues of the 
 bank and its six branches had increased in April, 1840, to 
 $3,337,665. The other banks vied with the Union Bank in 
 the issue of currency and at the close of 1839 the twenty-six 
 banks in the State professed to have a paid up capital of 
 $30,379,403, loans and discounts of $48,333,728 and a circula- 
 tion of $15,171,639. As the free white population of the 
 State at that time was only 170,000, the alleged paid-up 
 capital equalled $180 per capita, loans and discounts $285, 
 and circulation nearly $90. The State repudiated her obliga- 
 tions on the bonds issued and never attempted to pay them. 
 The results upon the community are thus set forth by Mr. 
 Henry V. Poor : ' 
 
 The $48,000,000 of loans were never paid ; the $23,000,000 of notes 
 and deposits never redeemed. The whole system fell, a huge and 
 shapeless wreck, leaving the people of the State very much as they 
 came into the world. Their condition at the time beggars description. 
 Society was broken up from its very foundations. Everybody was in 
 debt, without any possible means of payment. Lands became worth- 
 less, for the reason that no one had any money to pay for them. 
 The only personal property left was slaves, to save which, such num- 
 bers of people fled with them from the State that the common return 
 upon legal processes against debtors was in the very abbreviated form 
 of " G. T. T.," gone to Texas, a State which in this way received a 
 mighty accession to her population. 
 
 Several other Southern and Western States went through \ 
 similar experiences. The Union Bank of Florida, chartered 
 by the territorial government on February 12, 1833, with a 
 capital of $1,000,000, was assisted by the issue of State bonds, 
 
 1 Money and Its Laws, 540. 
 
336 HISTORY OF MODERN BANKS OF ISSUE. 
 
 of which more than half were sold in Europe. The pro- 
 ceeds were loaned on stock and mortgages, mainly to stock- 
 holders, and the circulation was run up in 1839 to $551,747. 
 A committee of the legislature made an investigation in 
 1840 and their report was very unfavorable to the bank. 
 The State government, after the admission of Florida to the 
 Union, refused to recognize the privileges of the Union 
 Bank and the Secretary of State reported in 1858 that its 
 circulating notes were worth not more than twenty cents on 
 the dollar. A real estate bank was one of the features of 
 the Arkansas system, towards which the subscribers to the 
 stock were required to pay nothing in, but merely to secure 
 their subscriptions by mortgaging their real estate. The 
 working capital of the institution was obtained by the issue 
 of State bonds, of which $2,000,000 were authorized. " A 
 prudent expansion of the currency of the State ' ' was one 
 of the avowed objects of the bank and loans were made 
 within a year after opening on December 12, 1838, amount- 
 ing to $1,585,190. The circulation of the bank at this time 
 was only $156,910, but specie payments were suspended and 
 circulation was increased in May, 1840, to $759,000. The 
 notes suffered a discount of forty to forty-five per cent, and it 
 was soon discovered that the collection of loans on maturity 
 was a far different matter from making them. The directors 
 made an assignment on April 2, 1842, and the notes of the 
 bank afterward passed fcr about twenty-five per cent, of 
 their face value in specie. A like experiment had been 
 going on in the meantime with the Bank of the State of 
 Arkansas and the total amount of unredeemed bonds issued 
 by the State on behalf of both banks, including interest, up 
 to October i, 1868, was $4,993,503. 
 
 Illinois tried several experiments at issuing money upon 
 " the credit of the State," and the circulation of the State 
 Bank of Illinois, incorporated in 1821, did not exceed $300,- 
 ooo. Even this moderate limit did not keep the notes from 
 falling within three years to twenty-five cents on the dollar, 
 and in 1825 an act was passed requiring the cashier of the 
 bank to collect all the signed and unsigned notes in his pos- 
 
THE STATE BANKING SYSTEMS. 337 
 
 session and burn them in the public square of Vandalia, in 
 the presence of the governor and the judges of the Supreme 
 Court. The next State Bank was incorporated in 1835 and 
 $2,000,000 of the capital subscribed by the State was paid by 
 the issue of bonds, which were taken by the bank at par. 
 Assistance was also given to the Bank of Illinois at Shaw- 
 neetown, but both banks collapsed in 1842 and the State was 
 saved from much actual loss by the surrender by the banks 
 of the State stock, which was burned in the Capital Square 
 at Springfield in the presence of the legislature. The Con- 
 stitution of 1848 provided that no State bank should there- 
 after be created nor should the State own any banking stock. 
 Tennessee authorized a State Bank in 1820, which issued 
 $1,000,000 in inconvertible notes in loans of $500 each upon 
 real estate mortgages worth double the amount. 1 The notes 
 quickly dropped below par and the bank closed in 1832. 
 
 Louisiana incorporated the Union Bank of Louisiana in 
 1832 upon similar principles with those of the Union Bank 
 of Florida and issued $7,000,000 in State bonds to provide 
 the capital. Bonds to the amount of $10,004,000 were issued 
 to two other institutions, but all three failed in 1842 and the 
 State enacted a sound banking law, under which she became 
 in 1860 the fourth State in the Union in banking capital and 
 the second in specie holdings. 2 The essential feature of the 
 law was the requirement that the liabilities be covered one- 
 third by specie and the remaining two-thirds by commercial 
 paper having not more than ninety days to run. Louisiana 
 prohibited State subscriptions for bank stock in her constitu- 
 tion of 1852. Georgia, Vermont, Missouri, Delaware and 
 the Carolinas all tried State ownership and management of 
 banks, but the first two early abandoned the experiment. 
 The others ceased to be banks of issue with the establish- 
 ment of the national banking system. The Farmers' Bank 
 of Delaware was never much under political influences and 
 is still conducted as a bank of discount and deposit. The 
 Bank of Missouri had a coin reserve of one-third of its cir- 
 
 1 Knox, Rhodes's Journal of Banking, Oct., 1892. 
 
 2 White, Sound Currency, Vol. II., No. i, p. 5. 
 
338 HISTORY OF MODERN BANKS OF ISSUE. 
 
 culation and its connection with the State ended in 1866 by 
 the sale of the State stock. 
 
 The State Bank of Indiana stands out, in the language of 
 Mr. Horace White, a ' ' notable tribute to sound banking 
 principles from the weltering mass of bank failures of the 
 period covered." The first bank of State was created origi- 
 nally as a private institution and adopted by the constitu- 
 tion of the State upon her admission in 1816 as a public 
 bank. The experiment was a failure and it was not until 
 1834 that the State Bank of Indiana was incorporated, with 
 ten branches. The parent bank, with a president and five 
 directors elected by the legislature, acted as a sort of board 
 of control over the branches, each of which was organized 
 with a capital of $160,000 and chose one director as a part 
 of the board of control. The two essential differences be- 
 tween the Bank of Indiana and the other banks of State were 
 the payment of the capital in actual cash and the issue of 
 notes upon liquid assets. The State, which took half the 
 capital of each branch, paid its proportion in silver and ad- 
 vanced five-eights of the private capital by the sale of five 
 per cent, bonds in I^ondon, taking mortgage security for the 
 final payment by the shareholders and crediting them with 
 the dividends paid by the bank. The remaining three- 
 eights of the private capital was paid in cash by the share- 
 holders, and each shareholder was made liable for an 
 amount equal to his stock and the branches were jointly 
 liable for each other's debts. The bank had a circulation in 
 1839 of $2,951,594. 
 
 The State Bank maintained a high credit, but was unable 
 to obtain the renewal of its charter upon its expiration in 
 1857 because of a provision in the new constitution of 1851 
 that ' ' the State shall not be a stock-holder in any bank after 
 the expiration of the present bank charter." The State 
 realized profits of $3,500,000 on the $1,000,000 invested in 
 the institution, and its management had done so much for the 
 development of the State that special privileges were given 
 to a new State Bank of Indiana which was chartered March 
 3, 1855. The act of incorporation was quietly carried 
 
THE STATE BANKING SYSTEMS. 339 
 
 through by a syndicate of politicians, who became large 
 subscribers to the stock of the various branches. They 
 opened negotiations with the managers of the old bank for 
 the sale of the franchises and the latter made the purchase 
 upon the condition that Hugh McCulloch, who had been for 
 twenty years manager of the old Fort Wayne branch, should 
 be made the president. The bank weathered the crisis of 
 1857 without suspending specie payments and rapidly retired 
 its circulation when gold went to a premium in 1862. The 
 bank was required by the conditions of its charter to pay its 
 notes in coin, but a decision was obtained from the Supreme 
 Court of the State that the United States legal tender notes 
 were lawful money and could be lawfully used for the re- 
 demption of the notes. The circulation was reissued upon 
 this basis, but upon the imposition of the ten per cent, tax 
 on the circulation of State banks the State Bank of Indiana 
 wound up its affairs with ample assets and unimpaired 
 credit. 1 
 
 The suspension of specie payments at the outbreak of the 
 Civil War drove gold and silver from circulation and required 
 an expansion of bank-note issues to maintain the volume of' 
 the currency. The Suffolk system continued in operation at 
 Boston, but the notes failed to flow in as rapidly as before 
 for redemption. The fact was noted and commented upon 
 by the reports of the bank commissioners of Maine, New 
 Hampshire and Massachusetts in their annual reports at the 
 close of 1862 and among the reasons assigned was the fact 
 that "in the present unsettled state of public affairs, the 
 people have more confidence in the bills of the local banks 
 than in any other paper currency." 2 Other reasons sug- 
 gested were the large sums carried by soldiers to the seat of 
 war and other sums left to be expended by their families, 
 and the large amount of Eastern bills sent to the West by 
 
 1 McCulloch, Ch. xi.-xii. 
 
 2 Report of the Bank Commissioners of Maine, December 8, 1862, 
 in Annual Report of the Secretary of the Treasury on the Condition 
 of the Banks of t!ie United States at the Commencement of the Year 
 1863, p. 3. 
 
340 HISTORY OF MODERN BANKS OF ISSUE. 
 
 New York banks, to fill the gap created by the winding up 
 of local institutions. The bank commissioners of Massa- 
 chusetts maintained that when specie payments are sus- 
 pended, " and bills are no longer redeemable in gold, a great 
 motive for sending them home is withdrawn, since, if in good 
 credit, they are as valuable as anything which can be got in 
 exchange for them. Men hold them and hoard them, there- 
 fore, precisely as they would do with specie, and the volume 
 of the currency becomes greater precisely as its current grows 
 more sluggish." 
 
 It was very generally feared that the banks would sell 
 their gold at a profit as it attained a high premium over legal 
 tender paper, but the New England banks generally held on 
 to their specie as a provision for the protection of their 
 creditors and as security for future resumption. The com- 
 missioner of Maine reported, regarding the sale of specie 
 for a premium, that " No instance has come to our knowl- 
 x edge where any bank has done anything of this kind ; and 
 certainly it cannot have been practised to any great extent, 
 for the comparative tables show that, notwithstanding the 
 suspension act, the specie in our banks has decreased only 
 some $40,000." The New Hampshire commissioners re- 
 ported that " the banks have not only kept their faith with 
 the public, in retaining their specie in the vaults, but have 
 actually increased the aggregate amount of specie, $38,827.52, 
 or more than twelve per cent." The Massachusetts com- 
 missioners undertook to discourage sales of specie and de- 
 clared that they ' ' regard the sale of gold by the banks as 
 altogether illegal, so long as they refuse to pay specie on 
 their obligations. ' ' 
 
 One of the disadvantages of issuing bank-note circulation 
 on securities was disclosed at the outbreak of the war in the 
 sudden fall in value of Southern State bonds pledged by 
 Northern banks to secure their circulation. This shrinkage 
 in the value of the security for .the notes was especially felt 
 in Wisconsin. The case of the Koshkonong Bank, whose 
 stock amounted at par to $48,000, of which all but $3,000 
 was issued by Southern States, was one of the worst, but 
 
THE STATE BANKING SYSTEMS. 341 
 
 was typical of many others. The net proceeds of the bonds, 
 when sold in the New York market, were only $21,769 and 
 afforded the billholders only fifty-four and three-fourths per 
 cent, on the dollar against an apparently well secured cir- 
 culation of $39,779. The Bank Comptroller of Wisconsin 
 was compelled to call upon nearly all the banks to make 
 good the depreciation of stocks and their position became 
 so precarious that a joint resolution was passed by the legis- 
 lature on February 15, 1861, suspending further calls for 
 additional securities. The Comptroller declared that "a 
 general failure, involving three-fourths of all the banks, was 
 imminent unless relief in some shape was granted ; and there 
 is scarcely any occasion for doubt but at least eighty out of 
 the one hundred and nine then existing banks would have 
 failed." 
 
 The resolution of February was rescinded early in April 
 and another call was made upon the banks to bring up the 
 value of their stocks. Thirteen banks failed to respond and 
 resisted the action of the Comptroller in the courts. The 
 stronger banks gradually replaced Southern securities by 
 those of Northern States and continued business upon this 
 basis until the establishment of the national banking system. 
 A shrewd stock jobbing scheme was put in operation by 
 some of the bankers in the meantime by buying up depreci- 
 ated currency at a great discount and offering it to the 
 Comptroller for redemption in the better class of bonds, 
 which could then be sold at a handsome margin over the 
 cost of the currency. The Comptroller refused to permit 
 the withdrawal of bonds except in such a way as to leave 
 the better bonds in the custody of the State as security for 
 the remaining circulation, but he modified this policy when 
 he found speculators holding on to the notes, in anticipation 
 of their final redemption from the proceeds of the stock, and 
 surrendered good and bad stocks in fixed proportions. * 
 
 The New England banks felt the pressure of the repudia- 
 
 1 Report of G. Van Steenwyck, Bank Comptroller of Wisconsin, 
 Madison, October I, 1861. House Ex. Doc. 25, 37th Cong., 3d Sess., 
 190-94. 
 
342 HISTORY OF MODERN BANKS OF ISSUE. 
 
 tion of Southern obligations, but they had been preparing 
 for it. Deposits fell in Boston from $20,811,889 on October 
 8, 1860, to $17, 176, 778 on December lotH, and specie reserves 
 fell on December i7th to $3,491,348, far below the limit re- 
 quired by law. The whole amount of Southern indebted- 
 ness to the North was estimated by intelligent merchants in 
 New York and Boston at $200,000,000, and a large part of 
 it was lost by the breaking out of war. 1 The Boston banks, 
 however, succeeded in restoring their specie reserves by 
 March, 1861, to $5,601,871, and the manner in which the 
 banks of the State met their losses is thus described by the 
 bank commissioners: 
 
 The system pursued by them for many years, of making an annual 
 reservation of a portion of their yearly earnings, had in some measure 
 protected them against unusual amounts of dishonored and worthless 
 paper. By the bank returns on the last Saturday of October 1860, 
 the net profits then on hand amounted to $6,360,539. n, or 9 T \per cent, 
 of the aggregate banking capital of the Commonwealth. And we do 
 not hesitate to express the opinion, based upon the examinations we 
 have made during the past year, and from information specially ob- 
 tained from other banks, principally in Boston, that, notwithstanding 
 the losses which some banks must inevitably sustain, the whole 
 amount of final loss growing out of our difficulties with the South 
 will be more than covered by the general surplus, thus leaving the 
 aggregate bank capital free and unimpaired. 2 
 
 1 Some estimated it at $200,000,000 to New York alone. Rhodes, 
 III, 560. The honorable conduct of the New Orleans banks is pleas- 
 antly referred to by Secretary Hugh McCulloch. The branches of the 
 Bank of Indiana in the southern part of the State, he says, "had 
 large dealings with men who were engaged in the Southern (Missis- 
 sippi) trade, and when measures were being instituted for the seces- 
 sion of Louisiana from the Union, and, indeed, after the ordinance of 
 secession had been adopted, these branches had large cash balances 
 and large amounts of commercial paper in the New Orleans banks. 
 Against the remonstrances of the secession leaders, and in disregard 
 of threatened violence, these cash balances and the proceeds of the 
 commercial paper as it matured were- remitted for according to direc- 
 tions, not a dollar was withheld." Men and Measures of Half a 
 Century, 139. 
 
 2 House Ex. Doc. 25, 37th Cong., 3d Sess., 50. 
 
THE STATE BANKING SYSTEMS. 
 
 343 
 
 The growth of the capital and business of the State banks 
 of circulation is shown in the following table : 
 
 YEAR. 
 
 NO. OF 
 BANKS. 
 
 CAPITAL STOCK. 
 
 LOANS AND DISCOUNTS. 
 
 DEPOSITS. 
 
 1834 
 
 506 
 
 $200,005,944 
 
 $324,119,499 
 
 $ 75,666,986 
 
 1835 
 
 704 
 
 231,250,337 
 
 365,163,834 
 
 83,081,365 
 
 1836 
 
 7^3 
 
 251,875,292 
 
 457,506,080 
 
 115,104,440 
 
 1837 
 
 788 
 
 290,772,091 
 
 525,115,702 
 
 127,397,185 
 
 1838 
 
 829 
 
 317,636,778 
 
 485,631,687 
 
 84,691,184 
 
 1839 
 
 840 
 
 3->7,i32,5i2 
 
 492,278,015 
 
 90,240,146 
 
 1840 
 
 9 OI 
 
 358,442,692 
 
 462,896,523 
 
 75,696,857 
 
 1841 
 
 784 
 
 313,608,959 
 
 386,487,662 
 
 64,890,101 
 
 1842 
 
 692 
 
 260,171,797 
 
 323,957,569 
 
 62,408,870 
 
 1843 
 
 6 9 I 
 
 228,861,948 
 
 254,544,937 
 
 56,168,628 
 
 1844 
 
 696 
 
 210,872,056 
 
 264,905,814 
 
 84,550,785 
 
 "1845 
 
 707 
 
 206,045,969 
 
 288,617,131 
 
 88,020,646 
 
 1846 
 
 707 
 
 196,894,309 
 
 312,114,404 
 
 96,913,070 
 
 1847 
 
 715 
 
 203,070,622 
 
 310,282,945 
 
 9 1 , 792,533 
 
 1848 
 
 751 
 
 204,838,175 
 
 344,476,582 
 
 103,226,177 
 
 1849 
 
 782 
 
 207,309,361 
 
 332,323,195 
 
 91,178,623 
 
 1850 
 
 824 
 
 217,317,211 
 
 364,204,078 
 
 109,586,595 
 
 1851 
 
 879 
 
 227,807,553 
 
 413,756,799 
 
 128,957,712 
 
 1853 
 
 750 
 
 207,908,519 
 
 408,943,758 
 
 145,553,876 
 
 1854 
 
 ,208 
 
 301,376,071 
 
 557,397,779 
 
 188,188,744 
 
 1855 
 
 ,307 
 
 332,177,288 
 
 576,144,758 
 
 190,400,342 
 
 1856 
 
 ,398 
 
 343,874,272 
 
 634,183,280 
 
 212,705,662 
 
 1857 
 
 ,416 
 
 370,834,686 
 
 684,456,887 
 
 230,351,352 
 
 1858 
 
 ,422 
 
 394,622,799 
 
 583,165,242 
 
 185,932,049 
 
 1859 
 
 ,476 
 
 401,976,242 
 
 657,183,799 
 
 259,568,278 
 
 1860 
 
 ,562 
 
 421,880,095 
 
 691,945,580 
 
 253,802,129 
 
 "1861 
 
 ,601 
 
 429,592,713 
 
 696,778,421 
 
 257,229,562 
 
 1862 
 
 ,492 
 
 418,139,741 
 
 646,677,780 
 
 296,322,408 
 
 1863 
 
 ,466 
 
 405,045,829 
 
 648,601,863 
 
 393,686,226 
 
 Tradition has handed down unhappy memories of the State 
 banks, which have been distorted by the lapse of time into 
 conceptions very different from the facts. The several sys- 
 tems, taken in the aggregate for the entire country, had the 
 great practical defect of lack of uniformity. This defect 
 was great enough to obscure the essential merits of many of 
 the State systems and to make any system which was 
 national in its scope and uniform in its character attractive 
 to the business community of the whole country. Whatever] 
 the merits or defects of the State systems, the currency in 
 circulation was judged by the worst of the systems, for by 
 the operation of Gresham's law that currency tended to drive j 
 
344 HISTORY OF MODERN BANKS OF ISSUE. 
 
 out of circulation all kinds which were superior ; and even 
 where this was prevented by laws or local conditions, the 
 bad currency was a constant source of irritation from the 
 very necessity of discriminating, in receiving money pay- 
 ments, between the bad and the good. One of the require- 
 ments of the modern business world is undoubtedly a 
 uniformity of currency which shall obviate the necessity for 
 discrimination and make every dollar of equal exchange 
 value with every other. This condition was not met by the 
 aggregate of State currencies and the fact that it was fully 
 met by the New Kngland currency at its best may easily 
 have been obscured, in the minds of New Englanders, by 
 the multiplicity of good and bad currencies from other sec- 
 tions which caused perpetual inconvenience. 
 
 The national banking system of later years garnered up 
 the lessons of many experiments with banking upon securi- 
 ties, adopted most of the good and discarded most of the 
 bad features, and afforded the country two of the great bene- 
 fits of a sound currency, security and uniformity. The 
 necessity of discrimination between currencies ceased when 
 every dollar in circulation rested upon a common basis, the 
 credit of the national government. The necessity of paying 
 high exchange rates, or surrendering the notes of distant 
 banks at a heavy discount, ceased also when every note 
 became as good in one part of the Union as in another. 
 Coupled with these great benefits of the new system was the 
 feature of Federal supervision and examination, which 
 arrested the creation of fraudulent banks at the outset and 
 subjected them annually or oftenerto the power of visitation 
 by the national authority. Thethree great benefits, secur- 
 ity, saving of exchange, and Federal supervision, are al- 
 most inherent parts of a national system. The fact that 
 they have been associated with a particular national system 
 has led many to believe that there can be no other equally 
 good, and that enmity to the present banking law is enmity to 
 the principles of sound finance. ' But all these benefits can 
 be obtained under national law with the added benefits, 
 which the present system lacks, of a banking currency ample 
 
THE STATE BANKING SYSTEMS. 345 
 
 for the demands of business, without the help of government 
 paper money, and flexibly responsive to those demands. 
 
 The foundation of a national currency upon evidences of 
 public debt is dangerous and unscientific and proved fatal to 
 some of the State currencies before the Civil War. A com- 
 parison of the State systems shows a distinct line of cleavage 
 which is far from favorable to the principles of the present 
 national banking law. This line of cleavage separates the 
 banks issuing currency against general assets, like those of 
 New England, Indiana, and Louisiana, from those issuing 
 circulation, on the other hand, against securities, like the 
 banks of New York, Illinois, and Wisconsin, and those 
 established under the parental care of the State, like the 
 Bank of the Commonwealth of Kentucky, the Union Bank 
 of Florida, the State Bank of Alabama, and the Bank of 
 Mississippi. The experience of the New England and 
 Indiana banks is the triumphant vindication of the principle 
 of banking on general assets and issuing notes redeemable 
 in coin on demand, which is supported by the critics of the 
 present national system and the advocates of a banking 
 currency. The banks issuing circulation on securities, with 
 their pitiable failures and their wildcat banking, were the 
 prototypes of the national system and afford a hint of what 
 that system would become if note issues based upon State 
 and municipal securities were substituted, as is sometimes 
 proposed, for note issues based upon national bonds. It 
 must be remembered, moreover, that perfect as the secur- 
 ity seems for bank-notes under the national system, it is a 
 security which has followed the ups and downs of govern- 
 ment paper money. There was neither purpose nor pretence 
 of maintaining the notes of national banks at parity with 
 coin while the notes of the government itself and the bonds 
 by which bank-notes were secured were depreciated. Bank- 
 notes remained from 1864 to 1879 at par with government 
 obligations because those obligations themselves were far 
 below par in coin. 
 
 If the banks issuing circulation upon securities were the 
 model for the national banks of to-day, the banks of State 7 
 
346 HISTORY OF MODERN BANKS OF ISSUE. 
 
 which existed before the war were the models and the 
 prototypes of the Federal treasury management under the 
 regime of legal tender paper. Their issues were not bank- 
 notes in the sense in which banking currency is opposed to a 
 government paper currency, but they were simply the bills 
 of credit of the State resting upon the credit of the 
 State as completely as the paper roubles of the Bank of Rus- 
 sia. The fact that they were hardly ever maintained at par 
 in coin, in spite of the great w r ealth and undoubted hon- 
 esty and good faith of the people of the various common- 
 wealths, is a practical demonstration of the folly of attempting 
 to do a banking business upon general credit without quick 
 assets. The lesson of the history of the State banking sys- 
 terns, reduced to its simplest terms, is the success of the 
 systems based upon the banking principle and the failure of 
 the systems based upon the deposit of securities, like the 
 national banking system, or based simply upon the public 
 credit, like the government currency system of the United 
 States. 
 
 One of the essential errors of early banking in the Unite'd 
 States was the undue expansion of credit upon slender re- 
 sources. It is an error common in a new country and one 
 from which the United States and Australia, in more recent 
 years and under other systems of note issue, have not been 
 exempt. The impression has been assiduously cultivated 
 by the opponents of a banking currency that the early 
 American banks issued a volume of circulating notes enor- 
 mously in excess of the legitimate demands of business. 
 This impression is absolutely unfounded and the proof is 
 afforded by the figures. Some of the State banking cur- 
 rencies were over-issued in the sense that every dollar which 
 is not kept at par with the metallic standard is improperly 
 issued, but the aggregate banking currency of the country 
 was at no time over-issued in the sense that an equal volume I 
 of good money was not capable, of ready and healthy absorp- j[ 
 tion by the legitimate demands of business. The circulation 
 of all forms of money in the United States between 1 880 and 
 1895 nas ranged between $21.71 and $24.44 and has only 
 
THE STATE BANKING SYSTEMS. 
 
 347 
 
 recently been regarded, with the slackening of business ac- 
 tivity, as beyond the volume required by business needs. It 
 is only necessary to compare such figures with those of the cir- 
 culation prior to the Civil War to show how erroneous is the 
 assertion that the currency was unduly inflated in volume 
 during the years of State banking. The following table 
 shows the circulation of both bank-notes and specie at vari- 
 ous dates, including the years of largest circulation, the 
 difference between the bank-note circulation and the total 
 money in circulation representing the specie : 
 
 YEAR. 
 
 ESTIMATED BANK- 
 NOTES OUTSTANDING. 
 
 TOTAL NOTES AND 
 MONEY IN CIRCULA- 
 TION. 
 
 POPULATION. 
 
 CIRCULA- 
 TION PER 
 CAPITA. 
 
 l800 
 
 $ 10,500,000 
 
 $ 26,500,000 
 
 5,308,483 
 
 $4-99 
 
 I8l0 
 
 28,OOO,OOO 
 
 55,000,000 
 
 7,239,881 
 
 7.60 
 
 1820 
 
 44,8OO,OOO 
 
 67,100,000 
 
 9,633,822 
 
 6.96 
 
 1830 
 
 61,000,000 
 
 87,344,295 
 
 12,866,020 
 
 6.69 
 
 1835 
 
 103,692,495 
 
 145,799,637 
 
 14,786,000 
 
 9.86 
 
 1837 
 
 149,185,890 
 
 217,185,890 
 
 1 5, 655,000 
 
 I3-87 
 
 l84O 
 
 106,968,572 
 
 186,305,488 
 
 17,069,453 
 
 lO.gl 
 
 1845- 
 
 98,603,711 
 
 177,950,405 
 
 19,878,000 
 
 8-95 
 
 1850 
 
 131,366,526 
 
 278,761,982 
 
 23,191,876 
 
 12.02 
 
 1853 
 
 I88,l8l,000 
 
 402,238,107 
 
 25,615,000 
 
 15.80 
 
 1854 
 
 204,689,207 
 
 425,551,240 
 
 26,433,000 
 
 16.10 
 
 1855 
 
 186,952,223 
 
 4l8,O2O,247 
 
 27,256,000 
 
 15-34 
 
 I8 5 6 
 
 195,747,950 
 
 425,846,625 
 
 28,083,000 
 
 I5.l6 
 
 1857 
 
 214,778,822 
 
 457,068,708 
 
 28,916,000 
 
 I5.8I 
 
 1858 
 
 155,208,344 
 
 4O8,8lO,O28 
 
 29,753,000 
 
 13.78 
 
 1859. 
 
 I93,306,8l8 
 
 438,967,542 
 
 30,596,000 
 
 14-35 
 
 
 1 
 
 
 
CHAPTER XV. 
 
 THE NATIONAL BANKING SYSTEM. 
 
 State of the National Finances at the Beginning of the War The 
 Suspension of Specie Payments and the Loan Policy of Secretary 
 Chase-^Xhe^First "Plans for the National Banking System 
 Changes in the Circulation Tlie__Necessity for a New System 
 and the Plan of Secretary Carlisle Recommendations of Comp- 
 troller Bckels. 
 
 THE national banking system of the United States had 
 its origin in the management of the finances during 
 the Civil War. The system was hardly in operation 
 until the war was two-thirds over, but it offered a market 
 for the public securities which Contributed materially to 
 raise their price in the depreciated paper with which the 
 government discharged its obligations. The system afforded 
 the country for some years a currency having the advantages 
 of uniformity and security, and possessed in these respects a 
 great advantage over the bank currency of the different 
 States which had before been in use. The national bank- 
 ing system, however, great as were its services in absorbing 
 the evidences of the public debt, always lacked the essential 
 feature of a purely banking currency. The currency was 
 without elasticity, in the sense of responsiveness to the 
 demands of business, and the volume fluctuated only with 
 the price of securities. The gradual reduction of the public 
 debt has removed the basis for national bank-note circulation 
 until it has become but a trifling factor in the currency sys- 
 tem of the country, and a strong demand has arisen for the 
 separation of the note issues from public securities. 
 
 348 
 
THE NATIONAL BANKING SYSTEM. 349 
 
 The United States at the outbreak of the Civil War were 
 conducting their financial operations through the independ- 
 ent Treasury. The notes of the State banks formed a large 
 part of the medium of exchange in private transactions, but 
 only specie was accepted in payments to the government. 
 The aid of the banks was not sought in handling funds, in 
 making transfers, in placing loans, or in paying interest. 
 This at least was the theory of the independent Treasury, 
 although in fact the absence of proper depositaries led many 
 public officers to deposit their funds temporarily in the banks 
 at their own risk. 1 The circulation of the country outside 
 of the Treasury on July i, 1861, consisted of $246,400,000 
 in specie and $202,005,767 in the notes of State banks, 
 making a total of $448,405,767, or $13.98 per capita. 3 The 
 essential question for Mr. Chase, Lincoln's Secretary of the 
 Treasury, was whether the operations of a great war could 
 be carried on through these instrumentalities. The question 
 was the occasion of much discussion at the time and has never 
 been answered to the satisfaction of all sides. The answer of 
 Mr. Chase was that the operations of the war could not 
 be carried on upon a basis of specie and State bank paper. 
 
 The government was obliged almost at the outset to abandon 
 the position that it was able to carry on its own finances with- 
 out the help of the banks. Some small loans had been placed 
 by public subscription during the administration of Buchanan, 
 but it was perfectly obvious that great sums could not be 
 obtained quickly except from the banks, which had the 
 keeping of the transferable capital of the country. Secre- 
 tary Chase held a conference in New York on August 9, 
 1 86 1, with representative bankers of New York, Philadel- 
 phia, and Boston. They agreed to advance to the Treasmy 
 $150,000,000 in gold, to be secured by three-year notes bear- 
 ing interest at 7.30 per cent., and to be reimbursed as the 
 proceeds of the sale of bonds were covered into the Treasury. 
 This union of the banks of New York, Boston, and Phila- 
 delphia in support of the public credit was one of the most 
 
 1 Kinley, 60-61. 
 
 2 Finance Report, 1894, p. cviii. 
 
350 HISTORY OF MODERN BANKS OF ISSUE. 
 
 important events of the war and committed the conservative 
 business element conclusively to the side of the Union and 
 the policy of coercion of the seceded States. The banks of 
 the three big Kastern cities had an aggregate capital of 
 $120,000,000, a circulation of $115,964,749, deposits of $125,- 
 617,207, and coin reserves of $63,165,039, the latter being 
 equal to forty-five per cent, of demand liabilities. 1 They 
 had already made an agreement in November, 1860, when 
 secession compelled them to contract their business and pre- 
 pare for a period of stress, for issuing clearing house certifi- 
 cates and making the specie of all the banks available as 
 a common fund. 2 
 
 Congress passed an Act on August 5, 1861, relaxing the 
 provisions of the sub-treasury law so far as to permit the 
 Secretary of the Treasury to deposit any money obtained 
 from loans to the credit of the United States Treasurer in 
 such solvent specie-paying banks as he might select. 3 The 
 banks accepted this law as authority for the use of the ordi; 
 nary means of commercial exchange, bank-notes, checks, 
 and drafts, in the transactions of the government. They, 
 recommended to the Secretary, therefore, that he should 
 take the proceeds of the advances made by the banks by 
 drawing checks and drafts upon the banks, in favor of 
 public creditors. They suggested that this would not only 
 prove of great practical convenience, but would diminish 
 the hoarding which would take place if the banks paid out 
 their coin and reduced their reserves while uneasiness as to 
 the future prevailed in the business community. Secretary 
 Chase, to the surprise of nearly every financier, declared, 
 that the Act of August 5th had no such meaning or intent, 
 and that he should require payment of the advances in coin.. 
 The subject was warmly discussed between the Secretary 
 and the bankers, but the Secretary's purpose was unshaken 
 and the banks yielded rather than break off negotiations 
 so important to the maintenance of the public credit. 
 
 1 Poor, 557. 
 
 <J Bolles, III,, 23. 
 
 3 Acts of Thirty-seventh Congress, 1st Sess., Ch. 46, Section 6. 
 
THE NATIONAL BANKING SYSTEM. 351 
 
 One of the acts of the special session of Congress in the 
 summer of 1861 authorized loans in several forms, including 
 non-interest bearing notes of denominations less than $50, 
 payable on demand by the assistant treasurers at New York, 
 Boston, and Philadelphia. These notes were not made legal 
 tender and Secretary Chase, in recommending them, declared 
 that "The greatest care will, however, be requisite to pre- 
 vent the degradation of such issues into an irredeemable 
 paper currency, than which no more certainly fatal ex- 
 pedient for impoverishing the masses and discrediting the 
 government of any country can well be devised." Notwith- 
 standing this brave language, the Treasury tiegan to issue 
 the new notes early in August. They were very reluctantly 
 accepted as currency and the banks refused to receive them 
 except as special deposits. The new notes threatened to 
 bring infinite disorder into the currency system by the ele- 
 ment of inflation which they involved. The banks filed a 
 prompt protest against thus trifling with the circulating 
 medium while they were straining their resources to with- 
 draw capital from active industry and divert it to the uses 
 of the government. The Secretary intimated that he would 
 suspend the issue of such notes until other resources were 
 exhausted, but that he did not regard it as proper to pledge 
 himself openly not to exercise a power conferred by law. 
 
 This was before the advances by the banks had begun, and 
 upon this assurance they began to pay coin into the sub- 
 treasury at the rate of about $5,000,000 at intervals of six 
 days. The attempt to secure popular subscriptions for the 
 seven-thirty notes through the agents of the government 
 resulted in subscriptions of only $24,678,866, and the banks 
 themselves came forward and took the notes and agreed to 
 negotiate their distribution among the people. So perfect 
 was the public confidence in the associated banks and so 
 rapid the circulation of the money that the specie in the 
 banks had not been materially reduced after the payment of 
 the second instalment. The gold paid by the banks into 
 the sub-treasury was disbursed by public officers and 
 through the channels of circulation found its way back into 
 
352 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the banks. There was no apparent reason why advances 
 should not be made in this manner to meet all the demands 
 of the war without impairing the solvency of the Eastern 
 banks. Fears were expressed in some quarters that the 
 coin would gradually be absorbed by the Western banks, 
 some of which were on a rather shaky foundation and had 
 issued notes secured by the bonds of the seceded States. 
 This evil had not begun to operate, however, before Secre- 
 tary Chase again began to put in circulation a mass of de- 
 mand notes issued directly by the government. 
 
 The Secretary did not long respect his assurances to the 
 banks. The promise was given in August and heavy issues 
 of notes took place in November. They were not cordially 
 received as a means of circulation and were largely presented 
 to the sub- treasuries for redemption in coin. The Treasury 
 had little coin except that drawn from the banks, and the 
 coin reserves of the latter now began to decline without any 
 signs of recuperation. The specie in the New York banks, 
 which was $49,733,990 on August iyth and 142,318,610 on 
 December yth, fell to $29,357,712 on December 28th. A 
 conference was held with Secretary Chase and he was as- 
 sured that the Treasury notes could not be received by the 
 banks at par with coin and that their steady infusion into 
 the currency would send gold to a premium as well as create 
 an inflation of the paper circulation which would drag down 
 the value of bank-notes in the same manner as the Treasury 
 notes. The Secretary stubbornly refused to change his pol- 
 icy and the banks voted to suspend specie payments on Mon- 
 day, Deceniber 31st. 1 The government necessarily followed 
 
 1 Prof. Sumner seems to ignore the effect of the government issues 
 of the demand notes and declares that the banks suspended, " without 
 any earnest attempts to avoid it, and certainly without any necessity." 
 History of American Currency, 194. Secretary Chase, on the con- 
 trary, did not appear to blame the banks, but declared that unex- 
 pected military delays had increased expenditures, and diminished 
 confidence in public securities, and that "These conditions made a 
 suspension of specie payments inevitable." Report on the Finances > 
 1862, 7. 
 
THE NATIONAL BANKING SYSTEM. 353 
 
 suit, for the independent Treasury afforded no adequate fund 
 of coin for keeping afloat such a mass of paper as Mr. Chase 
 proposed to put into circulation. 
 
 K This suspension, less than six months after the first 
 serious conflict at Bull Run, opened the way for the long 
 experience of irredeemable paper currency which ended only 
 with the resumption of specie payments on January i, 1879. 
 The legal tender notes, which followed quickly on the heels 
 of the demand notes, 'changed the standard of value in the 
 United States/ drove gold across the ocean or into private 
 hoards, deprived us of foreign help and sympathy /advanced 
 priceslrorii one liundred to two hundred per cent., and added 
 enormously to the profits of speculators and to the costs of 
 the^war~tb the people of theZomntry. The price of gold 
 advanced steadily from the suspension of specie payments 
 until the summer of 1864, when it touched 285. The whole- 
 sale prices of nearly all articles climbed upward with the 
 gold premium and retail prices in many cases advanced still 
 more, increasing the paper cost of every contract for carrying 
 on the war. The government was obliged to sell its secu- 
 rities for depreciated paper, and to apply the proceeds to 
 settlements in the same inflated medium. A computation of 
 the proceeds of $2,565,233,591 received from the sale of pub- 
 lic obligations for paper currency during forty-five months 
 ending September 30, 1865, put the gold value at $1,705,- 
 347,632, representing a loss to the government by its 
 depressed credit of $860,000,000, or more than the entire 
 bonded debt left in force at the beginning of the fiscal year 
 1889. a 
 
 There have always been those who have maintained that 
 the suspension of specie payments was a necessary condition 
 
 1 In the case of America there was a further evil ; being a new coun- 
 try, she ought in her times of financial want to borrow of old coun- 
 tries ; but the old countries were frightened by the probable issue of 
 unlimited inconvertible paper, and they would not lend a shilling. 
 Bagehot, The English Constitution, Ch. i., Works, IV., 46. 
 
 2 H. .C. Adams, " American War Financiering," Pol. Sc. Qrly., Sep- 
 tember, 1886, I., 374. 
 
 23 
 
354 HISTORY OF MODERN BANKS OF ISSUE. 
 
 of war. The managers of the associated banks of the East 
 recognized no such necessity until Secretary Chase began to 
 flood the country with government paper money for which 
 he had no means of redemption. They pointed out that 
 transactions to the amount of $20,000,000 were settled daily 
 in New York, without coin or even notes and that the settle- 
 ment of an additional one or two million dollars daily for 
 the government could be easily effected by the same ma- 
 chinery. It was only necessary that the government should 
 have in hand at any one time enough currency, even if it 
 insisted upon coin, for the transactions of a few days, while 
 the means of giving mobility to the capital and resources of 
 the country constantly existed in the hands of th_e,-banks. 
 When the Secretary showed himself immovable upon the 
 subject of issuing irredeemable notes, the suggestion was 
 made to him that, if this dangerous path must be trod, 
 it could be done much more safely through the banks 
 than directly through the Treasury. In the forcible 
 language of Mr. George S. Coe, it was represented to Mr. 
 Chase : ' 
 
 That if an irredeemable paper currency was the inevitable resort, it 
 would be more expedient and economical for the government not 
 to become involved in its dangers, but to impose the duty and respon- 
 sibility of issuing the notes upon the banks, who would naturally be 
 compelled to keep the day of redemption continually in view. Thus, 
 as a suspension of coin payment was about to be declared, it was prac- 
 ticable to preserve from distribution and set aside the forty millions 
 of coin then owned by the banks, together with one hundred and fifty 
 or sixty millions of government bonds, which could be taken by 
 them as a special security for two hundred millions of notes, which 
 could then be immediately issued by the associated banks from their 
 own plates, and be verified and made national by the stamp and signa- 
 ture of a government officer. And that such an issue, so supported 
 by coin and bonds, at once simple and expeditious, would serve the 
 temporary purpose required, with little if any deterioration below coin 
 value ; and that it would be then practicable for the banks to con- 
 tinue, without further agitation, their advances. But the Secretary 
 declined to entertain this suggestion ; preferring the system of na- 
 tional banks which he had already conceived. 
 
 1 " Financial History of the War," Bankers' Magazine, Jan., 1876. 
 
THE NATIONAL BANKING SYSTEM. 355 
 
 Secretary Chase made the fatal mistake at the outset of 
 relying upon loans to supply the means of carrying on the 
 war instead of appealing to the productive resources and 
 the patriotism of the people. ., His recommendation, at the 
 special session of Congress in the summer of 1861, was to 
 raise $80,000,000 by taxation and $240,000,000 by loans. 
 Of the amount raised by taxation $65,000,000 was required 
 for the ordinary expenses of the peace establishment, 
 $9,000,000 was to pay the interest on the new debt, and 
 $5,000,000 was to go to the establishment of a sinking fund 
 for its final payment. It is no afterthought to declare that 
 this policy of timidity was not approved by the country. A 
 meeting of bank delegates was held in Washington on 
 January n, 1862, which recommended a tax bill to raise 
 $125,000,000 in addition to the usual duties on imports. A 
 resolution was introduced in the House four days later de- 
 claring in favor of an annual revenue of $150,000,000. This 
 resolution passed the House with only five dissenting votes, 
 and its beneficial effect was shown by the advance of six 
 per cent, bonds from 90 to 107. The New York Chamber 
 of Commerce, on April 24th, adopted a memorial to Con- 
 gress declaring "that the masses of the people are ready 
 and desirous to contribute their quota to the ordinary and 
 extraordinary revenues of the country," and that the 
 public expenditures demanded an annual revenue of at least 
 $250,000,000. 
 
 It was not until his annual report of 1863 that Secretary 
 Chase awakened to the importance of taxation as a means 
 of supporting the public credit, and suddenly expressed his 
 desire for providing ' ' for the largest possible amount of ex- 
 traordinary expenditures by taxation." The net ordinary 
 receipts, exclusive of loans, were $51,919,261 for the fiscal 
 year ending June 30, 1862; $112,094,945 for the fiscal year 
 1863; $243,412,971 for 1864; $322,031,158 for 1865; and 
 $519,949,564 for 1866. If these figures could have been 
 moved backwards a single year, the effect upon the credit 
 of the government, the price of gold, and the depreciation 
 of the legal tender paper would have been striking, even 
 
356 HISTORY OF MODERN BANKS OF ISSUE. 
 
 if the change had not made it unnecessary to depart from the 
 metallic standard. It is probable that of the $6,844,571,431 
 computed 1 as the cost of the war up to the resumption of 
 specie payments in 1879, $2,000,000,000 could have been 
 saved to the tax-payers and the public debt would no longer 
 exist. Outside and beyond these considerations, moreover, 
 was the injury done to depositors in savings banks and to 
 other creditors by payment in a depreciated dollar, and the 
 injury to laborers, whose wages were far from keeping pace 
 with the advance in paper prices. 2 
 
 It has been necessary to refer to the financial policy of 
 Secretary Chase in order to show the conditions out of which 
 grew the national banking system. The system was a part 
 of the Secretary's policy of carrying on the war by means of 
 loans, and was intended to make a market for American 
 securities and to maintain their price. One of the first effects 
 of the suspension of specie payments was the increase of the 
 
 1 Bolles, III., 244. Mr. Edward Atkinson computes the war ex- 
 penditures for the seven years, 1862 to 1868, exclusive of the peace 
 establishment, at $4, 150, 000,000, of which "not less than $2, 200, 000,000 
 was paid for war material and supplies, the prices of which were 
 raised by the depreciation of bad money." The average advance in 
 prices in the four years of war over the prices of 1860 was 87 per 
 cent., which increased the cost of material of war $1,000,000,000. 
 Since that time we have paid more than five per cent, interest for 
 thirty years on seven-tenths of this sum, amounting to $1,050,000,000. 
 "The Cost of Bad Money," Harper's Weekly, Oct. 12, 1895, XXXIX., 
 964. 
 
 - Wholesale prices followed the gold premium in a majority of 
 cases at once or at an interval of about a month, but the advances in 
 many retail lines were undoubtedly much more rapid. Wholesale 
 prices, moreover, remained stationary for nearly a year after the gold 
 premium began to fall, and then only followed it downward at long 
 removes. See the admirable article of Fred Perry Powers, "The 
 Greenback in W T ar," Pol. Sc. Q'rly, March, 1887, II., 79. Mr. Atkin- 
 son, in the article quoted above, computes the transfer of profits from 
 wage earners to speculators or capitalists, as the result of the legal 
 tender laws, at $7,000,000,000 in the seven years 1862-68, $40 per 
 head annually, or $120 for a family of three, exclusive of enhanced 
 payments directly for taxes, out of an average income of about $450 
 per family. 
 
THE NATIONAL BANKING SYSTEM. 357 
 
 circulation of the existing banks. The banks were very pru- 
 dently conducted when the war cloud first threatened, but 
 they were soon confronted by a real demand for additional 
 circulation to take the place of the gold which disappeared 
 with the suspension of specie payments. The circulation 
 of the country outside the Treasury, which had been 
 $448,405,767 on July i, 1861, had declined to $334,697,744 
 on July i, 1862. The entire mass of specie in circulation 
 on the earlier date, which was $246,400,000, had disap- 
 peared, except about $25,000,000 on the Pacific Coast. 
 United States notes and demand notes had been pumped 
 into the circulation to the amount of $125,905,665, but they 
 did not fill the void left by the flight of gold and silver. 
 The scarcity of currency was more than remedied by July 
 i, 1863, when the total had been swelled to $595,394,038, 
 of which $312,481,418 was in United States notes and 
 $238,677,218 in the notes of the State banks. The circu- 
 lation of the latter had increased about $53,000,000 within 
 the year. 
 
 Secretary Chase inquired in his first annual report in the 
 autumn of 1861 whether, as the bank-note circulation con- 
 stituted a loan without interest from the people to the banks, 
 sound policy did not require that the advantages of this loan 
 be transferred, in part at least, from the banks, representing 
 only the interest of the stock-holders, to the government, 
 representing the aggregate interest of the whole people. 
 The Secretary suggested that Congress had power to control 
 the credit circulation, and that circulating notes might be 
 issued under national authority and secured by the pledge 
 of United States bonds. He outlined the advantages of his 
 proposed measure thus : 
 
 Its principal features are, (ist) a circulation of notes bearing a com- 
 mon impression and authenticated by a common authority ; (26) the 
 redemption of these notes by the associations and institutions to 
 which they may be delivered for issue ; and (3d) the security of that 
 redemption by the pledge of United State stocks, and an adequate 
 provision of specie. 
 
 In this plan the people, in their ordinary business, would find the 
 
358 HISTORY OF MODERN BANKS OF ISSUE. 
 
 advantages of uniformity in currency ; of uniformity in security ; of 
 effectual safeguard, if effectual safeguard is possible, against deprecia- 
 tion ; and of protection from losses in discounts and exchanges ; 
 while in the operations of the government the people would find the 
 further advantage of a large demand for government securities, of in- 
 creased facilities for obtaining the loans required by the war, and of 
 some alleviation of the burdens on industry through a diminution in 
 the rate of interest, or a participation in the profit of circulation, 
 without risking the perils of a great money monopoly. 1 
 
 The Committee of Ways and Means of the House of 
 Representatives set to work upon a bill and made a careful 
 study of the banking laws of the various States. The Secre- 
 tary's scheme was based upon the New York free banking 
 law and had been urged upon Mr. Chase as early as August, 
 1 86 1, by Mr. O. B. Potter of that State. Some improvements 
 on the New York plan were incorporated in the bill of the 
 committee. The provisions relating to the reserve fund were 
 drawn largely from the banking laws of Louisiana, and other- 
 features were adapted from the laws of Ohio and Illinois, 
 It was pointed out early in the public discussion of the plan 
 that the volume of circulation would depend upon the price 
 of bonds rather than upon the needs of the money market, 
 and opposition was pronounced among the New York bank- 
 ers. Thaddeus Stevens reported against the bill, and its 
 necessity was postponed for the time being by the issue of 
 legal tender notes. Mr. Chase returned to the subject in his 
 annual report for 1862, and his language in favor of basing 
 the monetary circulation on evidences of the public debt 
 sounds very like that adopted by Mirabeau, in urging the 
 issue of the assignats upon the French Assembly. 2 The 
 Secretary declared : 
 
 Every dollar of circulation would represent real capital, actually 
 invested in national stocks, and the total amount issued could always 
 be easily and quickly ascertained from the books of the Treasury. 
 These circumstances, if they might not wholly remove the tempta- 
 tion to excessive issues, would certainly reduce it to the lowest point, 
 while the form of the notes, the uniformity of devices, the signatures 
 
 1 Report on the Finances, 1861, 19. 
 
 2 Vide Ch. xxiii. 
 
THE NATIONAL BANKING SYSTEM. 359 
 
 of national officers, and the imprint of the national seal authenticating 
 the declaration borne on each that it is secured by bonds which re- 
 present the faith and capital of the whole country, could not fail to 
 make every note as good in any part of the world as the best known 
 and best esteemed national securities. 1 
 
 The time was more nearly ripe for such a device than in 
 the preceding session, and a bill was promptly introduced 
 in the House by Mr. Hooper of Boston, who had given much 
 attention to the subject during the summer. Senator Sher- 
 man introduced a similar measure in the upper branch, 
 which was passed and went to the House on February i2th. 
 Much of the argument in the Senate was based upon the 
 fact that the existing banks were increasing their circulation, 
 without the restraining influence of specie payments, and 
 were using the constantly swelling volume of government 
 paper money as a means of redemption. The debate in the 
 House was opened by Mr. Spalding of New York, who had 
 enjoyed the doubtful honor of fathering the legal tender law. 
 The bill passed the Senate by a vote of 23 to 21 ; passed the 
 House on February 2oth by a vote of 78 to 64, and received 
 the signature of the President on February 25, 1863. The 
 measure proved to be defective in some of its details, how- 
 ever, and was superseded by the Act of June 3, 1864. Banks 
 to the number of 134 had been organized when the Comp- 
 troller of the Currency made his first report in November, 
 1863, but no notes appeared until late in December. The 
 system was hardly in operation, therefore, until the war was 
 within a year of its end, but the fact that it had been au- 
 thorized undoubtedly contributed to create a market for 
 securities and to maintain their price. 
 
 The essential feature of the new banking law, so far as 
 concerns circulation, was the provision that circulating notes 
 should be issued by the Comptroller of the Currency upon 
 deposits of United States bonds, to the amount of ninety per 
 cent, of the face value of the bonds. No bank could be 
 organized with a less capital than $100,000, except in places 
 with a population not exceeding six thousand, where a 
 
 1 Report on the Finances, 1862, 18. 
 
360 HISTORY OF MODERN BANKS OF ISSUE. 
 
 bank might be organized, with the approval of the Secre- 
 tary of the Treasury, with a capital of not less than $50,000. 
 At least fifty per cent, of the capital was required to be paid 
 up before beginning business and the remainder in instal- 
 ments of ten per cent, of the whole amount of the capital 
 at the end of each month. The bond deposit was fixed at 
 not less than $30,000 nor less than one- third the capital 
 stock. Provision was afterwards made by the Act of June 
 20, 1874, for the withdrawal of circulating notes at the 
 option of the banks and the surrender of an equivalent 
 amount of bonds by the Treasury, provided that the 
 amount of bonds on deposit should not be reduced below 
 $50,000. The limit was further reduced in 1882, for banks 
 having a capital of $150,000 or less, to one-fourth of their 
 capital stock, but limitations were set upon both the retire- 
 ment and the issue of new circulation. The withdrawal of 
 currency was not permitted to proceed at the rate of more 
 than $3,000,000 per month for the entire country, and a 
 bank reducing circulation was not entitled to receive any 
 increase for the period of six months from the time it made 
 a deposit of lawful money, in lieu of the bonds, for the 
 redemption of outstanding notes. 1 
 
 The new banking currency was put upon the same depre- 
 ciated paper basis as the bonds and legal tender notes of the 
 government. It could not have circulated otherwise in com- 
 mon with United States notes, for it would have been at a 
 premium, like gold, or would have been presented to the 
 banks for redemption in gold for hoarding. The law made 
 the notes redeemable in "lawful money." Redemption of 
 this sort was simply the exchange of a note secured by one 
 government obligation for another, and was of so little value 
 that the banks were seldom troubled by the presentation of 
 their notes, although they were required to carry large quan- 
 
 1 This limitation proved troublesome to a few banks which desired 
 to take out circulation quickly during the panic of 1893, but had 
 within six mouths deposited lawful money with a view to retiring cir- 
 culation. Comptroller Eckels recommended its repeal in his annual 
 reports for 1894 and 1895. 
 
THE NATIONAL BANKING SYSTEM. 361 
 
 titles of legal tenders as a part of their lawful reserve. ' The 
 banks in Albany, Baltimore, Boston, Cincinnati, Chicago, 
 Cleveland, Detroit, Louisville, Milwaukee, New Orleans, 
 New York, Philadelphia, Pittsburg, St. Louis, San Fran- 
 cisco, and Washington were required to keep a reserve in 
 lawful money equal to twenty-five per cent, of their aggregate 
 notes in circulation and deposits. Banks outside of these 
 ' ' reserve cities ' ' were required to keep a reserve of at least 
 fifteen per cent., but three-fifths of the reserve in these cases 
 might be deposited with banks in the "reserve cities." 
 
 Hugh McCulloch was the first Comptroller of the Cur- 
 rency appointed under the new law, and it is to his ability 
 and good judgment that much of the success of the new 
 banking system was due. He had been president of the 
 admirably managed Bank of the State of Indiana, and went 
 to Washington in 1862 to oppose the national banking bill. 
 His opinions underwent a change after the bill was amended 
 in the following year and became a law, but it was with 
 some surprise that he received the invitation to become the 
 head of the new system. He stipulated for absolute control 
 over the choice of his employees and for permission to re- 
 sign the place as soon as the system was well organized. 
 The First National Bank of Philadelphia was the first au- 
 thorized to begin business, on June 20, 1863. Several other 
 certificates were issued on the same day, but the Western 
 banks were generally more prompt to come into the national 
 system than those of the East. Mr. McCulloch discusses 
 some of the objections to the new system and the manner in 
 which he met them, in the following passage of his me- 
 moirs : 
 
 1 It was the distinct proposal of Secretary Chase that the notes 
 should be payable, "after resumption, in specie, by the association 
 which issues them, on demand ; and if not so paid will be redeema- 
 ble at the Treasury of the United States from the proceeds of the 
 bonds pledged in security." Report on the Finances, 1862, 17. But 
 this safeguard was not adopted, and the banks continued, long after 
 resumption by the Treasury, to redeem their notes only in paper 
 money. 
 
362 HISTORY OF MODERN BANKS OF ISSUE. 
 
 There were four causes for the unwillingness of the State banks to 
 become national banks. 
 
 First : The apprehension that the national system might prove to 
 be a repetition of the free-bank system of the West, which had been a 
 disreputable failure. 
 
 Second : The opinion that in becoming national banks, and issu- 
 ing notes secured by Government bonds, their interests would be so 
 identified with the interests of the Government, their credit so de- 
 pendent upon, so interwoven with, the public credit, that they would 
 be ruined if the integrity of the Union should not be preserved. 
 
 Third : the danger of hostile legislation by Congress, or the annoy- 
 ances to which they might be exposed by Congressional interference 
 with their business for partisan purposes. 
 
 Fourth : The requirement, that in order to become national banks, 
 they must relinquish the names to which they had become attached, 
 and be known by numerals. 
 
 I had no great difficulty in satisfying the bankers with whom I had 
 personal interviews or correspondence that three of these objections 
 were unsubstantial. In answer to the first, I pointed out the impor- 
 tant particulars in which the national system differed from the free- 
 bank system of the West, in the requirement that the capitals of the 
 national banks should be real, and fully paid up ; that their circula- 
 tion was to be secured by United States bonds, with ten per cent, 
 margin ; that in case of the failure of a bank, its notes would be at 
 once redeemable at the United States Treasury; that all the banks 
 would be subjected to frequent examinations by men appointed by 
 the Treasury Department. In answer to the second, I took the 
 ground that the interests of the State banks were already so involved 
 with those of the Government, that the fate of the latter would be the 
 fate of the former also ; that whether they remained State banks or 
 became national, they would stand or fall with the Government. In 
 answer to the third, I expressed the opinion that there was as little 
 to fear from Congressional as from State legislation ; that if there 
 was trouble to be apprehended in either direction, it would be in the 
 control which the banks might have over Congress, rather than in 
 annoying interference by Congress with their legitimate business. 
 To the fourth I could make no reply. It seemed to me to be unrea- 
 sonable that the State banks should be required, in order to be con- 
 verted into national banks, to surrender the names that had been 
 made honorable by the manner in which their business had been 
 conducted, and accept for a name, a number. 1 
 
 1 Men and Measures of Half a Century ', 168, 169. 
 
THE NATIONAL BANKING SYSTEM. 363 
 
 The last point was finally conceded by the Secretary, and 
 banks were allowed to retain their old names with the pre- 
 fix "national." When this was yielded, says Mr. McCul- 
 loch, "they came into the national system with a rush, 
 Boston, as is her wont in all enterprises, taking the lead." 
 An Act was passed in 1873 forbidding the use of the word 
 " national " in the titles of banking institutions not organized 
 and transacting business under the National Currency Act. 
 
 The destruction of the State banks as banks of issue by 
 taxation was not a component part of the national banking 
 system at its origin. Secretary Chase, in his first annual 
 report, suggested the possibility of taxation, in order to 
 transfer to the government some of the profits of circulation, 
 and he remarked, in his second annual report for 1862, that 
 he had ' ' heretofore advised the imposing of a moderate tax 
 on corporate circulation, and now renews the recommenda- 
 tion as the best means of reduction and gradual substitu- 
 tion." The first banking act provided that any State bank 
 holding United States bonds to the amount of fifty per cent, 
 of its capital stock might deliver them to the United States 
 Treasurer and receive circulating notes equal to eighty per 
 cent, of the face value of the bonds transferred, and that 
 upon the failure of such a bank the bonds should be declared 
 forfeited to the United States and the circulating notes should 
 be redeemed and paid at the United States Treasury. These 
 provisions for State banks were omitted from the Act of 
 June 3, 1864, and Comptroller McCulloch, in his annual re- 
 port for 1864, suggested the query whether "the time has 
 not arrived when all these institutions should be compelled 
 to retire their circulation ? ' ' He stated that he had not felt 
 like recommending such action " as long as there was any 
 uncertainty in regard to the success of the national banking 
 system," and he limited his recommendations to taxation 
 "which should be sufficient to effect the object without 
 being oppressive." * The result was a provision in the 
 Revenue Act of March 3, 1865, laying a tax of ten per cent. 
 
 Report on the Finances, 1864, 54. 
 
364 HISTORY OF MODERN BANKS OF ISSUE. 
 
 per annum upon the circulation of State banks paid out by 
 them after July i, 1866. This provision, therefore, did not 
 take effect until a year after the practical close of the war, 
 and was intended to drive the State banks out of competi- 
 tion with the national system and to enlarge the market for 
 United States bonds. 
 
 There was still in circulation on July i, 1864, $179,157,717 
 in State bank-notes and only $31,235,270 in national bank- 
 notes. The State bank-notes amounted to $142,919,638 on 
 July i, 1865, three months after Appomattox, but had been 
 slightly surpassed by the national bank-notes, which now 
 amounted to $146,137,860. The arrival of the date for the 
 enforcement of the ten per cent, tax, a year later, found 
 $19,996,163 in circulation in State bank-notes and $276,012,- 
 713 in national bank-notes. The State bank-notes dwindled 
 to $4, 484, 1 12 a year later, and their last appearance in the 
 Treasury reports was on July i, 1876, when the amount was 
 stated at $1,047,335. The Act levying the ten per cent, tax 
 was several times revised and was extended in the Act of 
 March 26, 1867, to every national or State banker paying 
 out the notes of any town, city, or municipal corporation 
 after May i, 1867.' The law was finally re-enacted by sec- 
 tions 19, 20, and 21 of the Act of February 8, 1875, so as to 
 apply the ten per cent, tax to persons, firms, or corporations 
 
 'The Attorney General, on November 21, 1893, in an opinion re- 
 garding a clearing house certificate of deposit, declared that the paper 
 was "not within the meaning of the statute," and cited the rule of 
 law that " If there is any doubt as to the meaning of the statute impos- 
 ing this tax the doubt must be resolved in favor of exemption." 
 Official Opinions of the Attorneys General, XX., 682. The Solicitor 
 of the Treasury gave an opinion on September 28, 1894, in regard to 
 a proposed issue of county bonds of small denominations for use as a 
 local currency, "that no statute of the United States prohibits the 
 issue of county bonds in any denomination." He also observed "that 
 the word ' county ' is not enumerated among the corporations, bank- 
 ing associations, etc., mentioned in the statute ; nor can the word 
 'notes' be held to include county bonds." Both these opinions re- 
 ferred to the similar language of the Act of February 8, 1875, then in 
 force. 
 
THE NATIONAL BANKING SYSTEM. 365 
 
 paying out their own notes or those of any person, firm, or 
 corporation other than a national banking association. 1 
 
 Several of the States passed laws to aid the State banks 
 in organizing under the national system and many of them 
 made the change during the years 1864 and 1865. The 
 number of banks organized for the year ending October 31, 
 1864, was 453 with an aggregate capital of $79,366,950, and 
 the number organized for the year ending October 31, 1865, 
 was 1014 with an aggregate capital of $242,542,982. This 
 was the year during which the impending levy of the ten per 
 cent, tax drove nearly all banks desiring to continue their 
 circulation into the new system. The number of organiza- 
 tions for the year ending October 31, 1866, was only 62 and 
 for the next year only 10. The reorganization was accom- 
 plished with little friction and without arresting the ordinary 
 business of the banks. The stocks of many of them increased 
 in value and Comptroller McCulloch declared in 1864 that 
 he knew "of no instance in which their real market value 
 had been injuriously affected." Congress gave a preference 
 by an Act of March 3, 1865, to State banks not having over 
 $75,000 of capital in entering the national system, but, in 
 view of the ten per cent, tax on their notes, it was a rather 
 humorous observation which was made by Comptroller 
 Clarke, who succeeded Mr. McCulloch, that " nearly all of 
 the State banks voluntarily changed." 
 
 The original limit imposed on the national bank circula- 
 tion was $300,000,000, and it was provided that $150,000,000 
 should be apportioned to banks in the States and Territories 
 according to population and the remainder at the discretion 
 of the Secretary of the Treasury, with due regard to existing 
 banking capital, resources, and business. Some conflict 
 
 1 These sections refer in every case to "notes" or "circulating 
 notes," and Mr. Edward Atkinson of Boston has expressed the con- 
 viction that they do not impose any tax upon certificates of deposit 
 given by national, State, or private bankers to their depositors, even 
 though such certificates might be printed for even amounts and used 
 for general circulation. Journal of Commerce and Commercial Bul- 
 letin, Monday, July 29, 1895. 
 
366 HISTORY OF MODERN BANKS OF ISSUE. 
 
 resulted between this provision and that giving preference to 
 the State banks, and the Comptroller permitted the organi- 
 zation of the latter without limit. No stable State banks 
 existed in some of the Western States, so that their share 
 of banking capital was reduced to a minimum, and the diffi- 
 culty was increased with the restoration of the Southern 
 States to the Union. The Act of July 12, 1870, therefore, 
 authorized an increase of $54,000,000 in the bank-note circu- 
 lation, to be apportioned to banks " in those States and 
 Territories having less than their proportion," and anew 
 apportionment was directed to be made as soon as practicable, 
 based upon the census of 1870. Provision was also made 
 for withdrawing $25,000,000 of circulation from banks in 
 States having an excess. 
 
 The withdrawal of circulation was found to be difficult, 
 because the notes did not reach the banks or the Treasury 
 for redemption. It was only for the interest of the stock- 
 holders of new banks to compel redemption, by paying a 
 premium to brokers to sort out notes subject to withdrawal 
 and send them to the Treasury. The inflation bill vetoed 
 by President Grant in 1874 contained a provision for adding 
 $46,000,000 to the bank-note circulation. Congress took a 
 new tack after the veto, and provided for the withdrawal of 
 $55,000,000 of circulation from States having an excess and 
 its issue in States having a deficiency. This Act, that of 
 June 20, 1874, was the first to provide for the voluntary 
 retirement of circulation by the deposit of lawful money 
 with the United States Treasurer and the return of the 
 bonds to the bank. The panic of 1873 and the redundancy 
 of currency which followed, led to the voluntary retirement 
 of circulation, so that no requisitions upon the Eastern 
 banks were required to execute the Act of 1874. The Act 
 for the resumption of specie payments, approved January 
 14, 1875, wiped out any specific limitation upon the amount 
 of national bank-notes and declared that "each existing 
 banking association may increase its circulating notes in 
 accordance with existing law without respect to said aggre- 
 gate limit ; and the provisions of law for the withdrawal and 
 
THE NATIONAL BANKING SYSTEM. 367 
 
 re-distribution of national bank currency among the several 
 States and Territories are hereby repealed." 
 
 The national banks bore an honorable part in bringing 
 about the resumption of specie payments. A few bankers 
 who had extended their speculations beyond legitimate 
 limits undoubtedly desired to see the regime of irredeemable 
 paper perpetuated, but the majority were earnestly in favor 
 of return to a specie basis. Secretary McCulloch strongly 
 urged resumption in his first annual report in 1865 and was 
 authorized by the Act of April 12, 1866, to receive legal 
 tender notes for bonds and cancel the notes to an amount 
 not exceeding $10,000,000 in the first six months and 
 $4,000,000 in any one month thereafter. The maximum price 
 of gold, which had been 233.75 in 1865, was 167.75 * n l86 6 
 and 145.625 in 1867. Secretary McCulloch reduced the out- 
 standing legal tenders from $422,424,007 on March 31,1866, 
 to $356,000,000 in February, 1868. The fear of contraction, 
 stimulated by the reaction from the fever of the war specu- 
 lation, seized upon Congress and the further retirement of 
 legal tender notes was forbidden by the Act of February 
 3, 1868. 
 
 The Resumption Act was the outcome of a caucus com- 
 mittee appointed by the Republicans in December, 1874, to 
 frame a measure upon which the party could unite. The 
 previous session had witnessed the passage of the inflation 
 bill, increasing the limit of legal tender issues to $400,000,- 
 ooo and authorizing an addition of $46,000,000 to the bank- 
 note circulation, to be distributed to banks in the West and 
 South. The bill was vetoed by President Grant and the 
 inflation fever was checked. The Resumption Act was 
 hurried through Congress within six weeks after the begin- 
 ning of the session and was intentionally left in clumsy and 
 ambiguous shape in order to hold votes. Senator Schurz of 
 Missouri repeatedly inquired of Senator Sherman, who had 
 the bill in charge, whether the legal tender notes redeemed 
 in coin, as proposed by the bill, were to be retired and can- 
 celled. Mr. Sherman refused to give a definite reply and 
 Mr. Schurz voted with the Democratic Senators against 
 
368 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the bill. 1 Its redeeming feature was the provision for the 
 resumption of specie payments at the New York sub- 
 Treasury on January i, 1879, and the issue of bonds to 
 obtain the necessary coin. 
 
 The success of specie resumption depended largely upon 
 the action of the banks. They held more than $125,000,000 
 in legal tender notes, of which nearly one-third was in New 
 York City. A run upon the sub-Treasury for gold by means 
 of these notes would have quickly compelled a new suspen- 
 sion of specie payments. The subject of resumption was 
 discussed by the banks and a committee was appointed to 
 confer with Secretary Sherman and agree upon a common 
 course of action to sustain the public credit. The Assistant 
 Treasurer at New York was invited to become a member of 
 the Clearing House and balances between the banks and the 
 Treasury were proposed to be settled through the Clearing 
 House. The banks voluntarily decided to decline receiving 
 gold as a special deposit, to abolish special exchanges of 
 gold checks at the Clearing House, and to receive and pay 
 balances without discrimination between gold and legal 
 tender notes. This action dissipated all serious fear of the 
 success of resumption, and on December 17, 1878, gold sold 
 at par in the gold room of the New York Stock Exchange. 
 The banks, in the language of Mr. Bolles, at the beginning 
 of the war "parted with their gold to aid the government, 
 and now, when resumption was accomplished, they were 
 content to take whatever it desired to give." z 
 
 It was the policy of the Resumption Act to reduce the 
 volume of United States legal tender paper at the rate of 80 
 per cent, of the new national bank-notes issued and to con- 
 tinue redemption until the legal tenders should be reduced 
 to $300,000,000. The expectation that the bank currency 
 would rapidly expand to fill the void left by the retirement 
 of the legal tenders was not fulfilled. The circulation 
 
 1 Mr. Sherman, when Secretary of the Treasury, resolved this doubt 
 in his annual report for 1877, in favor of re-issuing the notes, but his 
 opinion was soon deprived of practical importance by the resolution 
 of May 31, 1878, forbidding the further retirement of legal tender notes. 
 
 4 Financial History of the United States, III., 301. 
 
THE NATIONAL BANKING SYSTEM. 369 
 
 secured by bonds reached a maximum of $350,692,966 on 
 December i, 1873, and fell rapidly from that time until 
 November i, 1876, when the amount was $301,658,372.' 
 The price of bonds as well as the redundancy of currency 
 was beginning to exercise the restraining influence on bank- 
 note circulation which in subsequent years forced it within 
 a narrow compass. The contraction of the bank-note cir- 
 culation and the retirement of government currency alarmed 
 the advocates of an ample money supply and led to the 
 resolution of May 31, 1878, providing for a second time that it 
 should not be lawful "for the Secretary of the Treasury or other 
 officers under him to cancel or retire any more of the United 
 States legal tender notes." The volume of legal tenders in 
 circulation on the day the Act became law was $346,681,016, 
 and has remained rigid at this amount since that date, 
 except for the addition of the Treasury notes issued under 
 the Sherman law and the temporary retention of notes in the 
 Treasury. 
 
 There was a slight tendency to increase bank-note circula- 
 tion for a time after the revival of business in i88o, 2 but the 
 increase was sharply arrested in the winter of 1881 by the 
 passage of a bill requiring the banks to deposit a new issue 
 
 1 The aggregate circulation on the earlier of these dates was $352,- 
 621,762 and on the later date 1323,241,308. The difference between 
 " secured " and actual circulation is made up by deposits of lawful 
 money with the United States Treasurer for the redemption and can- 
 cellation of notes still outstanding, for which the bonded security has 
 been withdrawn by the banks. This "lawful money " fund is reduced 
 as fast as the notes are redeemed from it and retired, but the with- 
 drawal of bonds was so rapid that the amount ran as high as $ 107,588, 
 447 on July i, 1887. The fund stood at $54,207,975 when the Act of 
 July 14, 1890, (Section 6) directed that it " be covered into the Treasury 
 as a miscellaneous receipt" and that redemptions be made thereafter 
 from the general cash. The notes outstanding redeemable in lawful 
 money on December 31, 1895, were $23,011,661. 
 
 2 One of the causes of the decline in secured circulation, as the date 
 approached for the resumption of specie payments, was the fact that 
 the price of the bonds was falling in currency in order to accommo- 
 date itself to the gold basis. This made it profitable to sell before 
 the premium disappeared, as the currency obtained for the bonds was 
 appreciating in value as it approached parity with gold. 
 
370 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 of three per cent, refunding bonds as security for circulating 
 notes. This limitation on the class of bonds was accom- 
 panied by a drastic provision repealing the authority to 
 reduce circulation and withdraw bonds. The banks gen- 
 erally preferred to retain the existing bonds, paying higher 
 rates of interest, even with the loss of circulation, than to 
 submit to such a measure, and 141 banks hastened to deposit 
 $18,764,434 in lawful money for the retirement of their notes 
 and the withdrawal of their bonds in anticipation of the 
 enactment of the bill. The measure was vetoed by President 
 Hayes, but the result upon the secured circulation was to 
 reduce it from $322,654,721 on February i, 1881, to $305,- 
 587,202 on March i, 1881. Many of the bonds were de- 
 posited again after the adjournment of Congress and the 
 circulation increased to $332,398,922 on January i, 1882. 
 A gradual decline, whose results may be observed* in the 
 following table, marked the history of the secured circulation 
 from 1882 to 1892 : 
 
 JANUARY 1ST. 
 
 AUTHORIZED CAPITAL 
 STOCK. 
 
 CIRCULATION SECURED 
 BY BONDS. 
 
 TOTAL NOTES OUT- 
 STANDING. 
 
 1873 
 
 $487,781,551 
 
 $344,582,812 
 
 $347,066,893 
 
 1874 
 
 499,003,401 
 
 348,624,953 
 
 350,848,236 
 
 I8?5 
 
 503,347,901 
 
 342,333,837 
 
 354,128,250 
 
 1876 
 
 511,155,865 
 
 324,484.539 
 
 346,479,756 
 
 1877 
 
 501,392,171 
 
 3O2.O2O,242 
 
 321,595,606 
 
 1878 
 
 485,557,771 
 
 309,890,415 
 
 321,672,505 
 
 1879 
 
 471,609,396 
 
 3I3,2l8,lS9 
 
 323,791,674 
 
 1880 
 
 461,557,515 
 
 328,773,639 
 
 342,387,336 
 
 1881 
 
 467,039,084 
 
 322,832,101 
 
 344,355,203 
 
 1882 
 
 470,OJ8,I35 
 
 332,398,922 
 
 362,421,988 
 
 1883 
 
 492,076,635 
 
 322,386,120 
 
 362,651,169 
 
 1884 
 
 518,031,135 
 
 310,953,321 
 
 350,482,828 
 
 1885 
 
 529,910,165 
 
 285,496,055 
 
 329,158,623 
 
 1886 
 
 534.378,265 
 
 274,466,748 
 
 317,443.454 
 
 1887 
 
 555,865,165 
 
 205,316,106 
 
 296,771,981 
 
 1888 
 
 584,726,915 
 
 165,205,724 
 
 268,398,878 
 
 1889 
 
 598,239,065 
 
 146,372,588 
 
 233,66O,O27 
 
 1890 
 
 623,7QI,365 
 
 127,742,440 
 
 197,230,405 
 
 1891 
 
 665,267,865 
 
 125,660,361 
 
 177,287,846 
 
 1892 
 
 685,762,265 
 
 I4O,O84,2O3 
 
 173,078,585 
 
 1893 
 
 695,148,665 
 
 150,526,651 
 
 174,404,424 
 
 1894 
 
 693,353,165 
 
 185,194,522 
 
 208,538,844 
 
 1895 
 
 670,906,365 
 
 176,667,466 
 
 206,513,653 
 
 1896 
 
 664,076,915 
 
 I9O,6l6,l6O 
 
 213,627,821 
 
THE NATIONAL BANKING SYSTEM. 3/1 
 
 It is obvious that a currency system whose permanent 
 circulation was reduced to $125,000,000 for a population of 
 63,000,000, had ceased to serve one of the chief purposes for 
 which it was created. The causes are to be found in the 
 rapid payment of the national debt, which reduced the pos- 
 sible basis for circulation ; the high price of bonds, which 
 reduced the profit on circulation ; and the steady stream 
 of silver money which was pumped into the monetary sys- 
 tem under the laws of 1878 and 1890, crowding out other 
 forms of currency. Hostility to the national banks, though 
 frequently expressed in the southern and western parts of 
 the country, was a result rather than a cause of their shrink- 
 ing circulation. There was filibustering in Congress against 
 the bill to extend their charters, but the fact that their dis- 
 counts and deposits remained unshaken is the best proof 
 that the business community never seriously doubted that 
 the system would survive. The original law gave the banks 
 corporate powers for twenty years and the new bill proposed 
 their continuance for another twenty years. Mr. Crapo, of 
 Massachusetts, who was in charge of the bill in the House, 
 failed twice to secure consideration, because under the rules 
 it required a two-thirds vote, but he obtained the necessary 
 votes on May i, 1882, and the bill passed the House on 
 May iyth, by a vote of 125 to 67. It passed the Senate with 
 amendments on June 22d and became law on July i2th. 
 
 The essential cause of diminishing circulation was finan- 
 cial rather than political and was chiefly found in the grow- 
 ing wealth and credit of the country. The bonded debt of 
 the United States shrivelled from $1,639,567,750 on June 30, 
 1881, to $610,529, 120 on June 30, 1891, and the result was 
 the wiping out of two large bond issues and almost the 
 extinction of a third. The national banks, which had 
 $360,488,400 in bonds on deposit to secure circulation at the 
 earlier date, had only $142,508,900 on deposit at the later 
 date, although the proportion to the whole remained almost 
 exactly the same. The price of bonds, as secure gold invest- 
 ments, rose to such a point that their investment value fell 
 far below three per cent., and their price was enhanced by 
 
3/2 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the large purchases by the government in advance of matu- 
 rity made necessary by the enormous surplus accumulating 
 in the Treasury. These purchases of bonds at a premium, 
 exclusive of redemptions at par at maturity, were $51,464,300 
 for the fiscal year 1888 ; $120,674,450 for the fiscal year 1889 ; 
 $104,546,750 for the fiscal year 1890; and $45,175,200 for 
 the fiscal year 1891 , after which purchases ceased. The high- 
 est average price paid by the government for four per cent. 
 bonds was 128.66 in 1889, when $38,106,400 were purchased. 
 The lowest average price was 124.23 in 1891, two years 
 nearer maturity, when $42,641,250 were purchased. 1 These 
 bonds remained, after the maturity of the four and a half 
 percent, loan in 1891, the chief source of security for national 
 bank-note circulation, and their price, including the premium, 
 could be more profitably loaned in many cases in the open 
 market than by obtaining ninety per cent, of the par value 
 of the bonds in circulating notes. 2 The clamor of dema- 
 gogues against the "double interest" derived from the 
 circulating notes and the interest on the bonds was less 
 eloquent of the facts than the steady withdrawal of bonds 
 because circulation had ceased to be profitable. The increase 
 in circulation since 1891 has been due to the fall in the 
 premium on the bonds as they have approached maturity 
 and to special causes, referred to elsewhere, connected with 
 the crisis of 1893 an( ^ the bond issues of 1894, 1895 an( ^ 
 1896. 
 
 The effect of the increase of the silver circulation under 
 the Bland- Allison Act of 1878 and the Sherman compromise 
 Act of 1890, in driving bank-notes out of existence can only 
 be roughly estimated. It was probably much less potent 
 
 1 These figures are taken from a communication of Secretary Car- 
 lisle to the Senate, Sept. 26, 1893, in response to a resolution of that 
 body. Sen. Ex. Doc. 18, Fifty-third Congress, 1st Sess. 
 
 2 The recommendation was several times made by the Comptroller 
 of the Currency, and embodied in bills introduced in Congress, after 
 the resumption of specie payments, that the banks be authorized to 
 issue circulation to the face value of the bonds deposited as security, 
 instead of ninety per cent, of that value ; but no such measure evei 
 became law. 
 
THE NATIONAL BANKING SYSTEM. 373 
 
 than the rise in the price of bonds, and had more effect in 
 expelling gold than bank-notes from the circulation. The 
 Bland Act, which was passed over the veto of President 
 Hayes on February 28, 1878, authorized the Secretary of 
 the Treasury to purchase not less than $2,000,000 nor more 
 than $4,000,000 worth of silver monthly and coin it into 
 standard silver dollars of 412)^ grains each, nine-tenths 
 fine. Every Secretary of the Treasury confined his purchases 
 closely to the minimum and the aggregate purchases, until 
 the act was superseded by the Act of 1890, were 291,272,019 
 fine ounces, at a cost of $308,279,261, which was coined into 
 378, 166,793 standard silver dollars. The Act of 1890, which 
 was approved by President Harrison on July i4th, took effect 
 thirty days after its passage and provided for the monthly 
 purchase by the Secretary of the Treasury of four and a 
 half million ounces of silver bullion at the market price, 
 and the issue of Treasury notes " redeemable on demand in 
 coin," in payment for the bullion. The purchases under 
 this act were 168,674,682 fine ounces of silver at a cost of 
 $155,931,002. These two measures added to the circula- 
 tion, therefore, $534,097,795 in currency secured by silver, 
 although the notes issued under the Act of 1890 are redeemed 
 in gold, and have been treated in most respects by the gov- 
 ernment upon the same footing as other United States legal 
 tender notes. The provision of the Act of 1890 authorizing 
 purchases of silver bullion was repealed on November i, 1893, 
 but the portion repealing the Act of 1878 was left in force, 
 so that all purchases of silver ceased on that date. The 
 currency in circulation outside the Treasury on that date 
 was $1,718,544,682, of which $498,121,679 was stated to be 
 in gold coin, $78,889,309 in gold certificates, $472,710,610 
 in the two forms of legal tender notes, $384,443,050 in silver 
 and silver certificates, and only $197,745,227 in national 
 bank-notes. The bank-notes formed less than one-eighth 
 of the circulation, and the $11,566,766 in the Treasury 
 formed a much smaller proportion of the money there held. 
 The redemption system established by the national bank- 
 ing act of June 3, 1864, provided for redemption in lawful 
 
374 HISTORY OF MODERN BANKS OF ISSUE. 
 
 money of the United States at the office of the issuing bank 
 and at some designated bank in a reserve city. The banks 
 of the reserve cities were required to have a redemption agent 
 in New York. The fact that the notes could be redeemed 
 only in government paper money, which was of no greater 
 value than the notes, prevented any general movement for 
 redemption and gradually filled the channels of circulation 
 with worn and mutilated currency. The notes of the banks 
 distant from the reserve cities drifted only slowly into the 
 redemption agencies and they were rarely sent at the expense 
 of the bank which received them to the issuing bank for 
 redemption. Several propositions were made to enforce 
 prompt redemption, but nothing was enacted into law until 
 1874. The banks were required by an act of that year to 
 pay into the Treasury of the United States a fund equal to 
 five per cent, of their circulation, which was to be constantly 
 kept good, for the redemption of mutilated notes. Mutilated 
 notes received by any of the banks or the sub-Treasuries 
 were to be sent to Washington for redemption and the 
 expenses of the entire redemption agency and of the trans- 
 portation of the notes were charged against the banks and 
 then taken from the five per cent. fund. 
 
 Redemptions under the new system have been sufficiently 
 rapid to withdraw notes which are badly worn, but have not 
 been rapid enough to give elasticity to the volume of the 
 currency. Where redemptions under the Suffolk system, 
 with a circulation of $40,000,000, were $400, 000,000 per year, 
 redemptions under the national system have never been 
 higher than $242,885,375 with a maximum circulation of 
 $355,448,578, and have averaged less in recent years than 
 $100,000,000 with a circulation in the neighborhood of $200,- 
 000,000. The aggregate redemptions of national bank-notes 
 for the twenty-two years ending June 30, 1896, were $2,543,- 
 967,746. The annual redemptions under the Suffolk system, 
 therefore, were ten times the circulation, while those under 
 the national system have been less than one-half of the 
 circulation. The economy of management was greatly in 
 favor of the Suffolk system. The charges for twenty-two 
 
THE NATIONAL BANKING SYSTEM. 375 
 
 years under the national system were $3,773,879, or an 
 average of about $172,000 per year. The charge has been 
 reduced in recent years, in more rapid proportion than the 
 reduction of the circulation, so that the rate is now below 
 this average. The cost, however, under the Suffolk system 
 was about ten cents per. $1000, while under the national 
 system the lowest rate (in 1896) was about seventy-five cents 
 per $1000. This does not include the costs of transporta- 
 tion, which are charged against the banks. 
 
 The original banking act authorized the Comptroller of 
 the Currency to appoint suitable persons to make examina- 
 tions of the affairs of the banks at such times as the Comp- 
 troller thought proper and to make a full report to him. 
 These officials were to be paid by the banks, but the expense 
 was a charge levied by the Comptroller, and fixed by him, 
 so that it did not make the examiner in any way subservient 
 to the bank. Examinations were originally made on an 
 average of about once a year, and other information was ob- 
 tained by the Comptroller from four reports of condition re- 
 quired during the year, not at the end of each quarter, but 
 at such dates as he saw fit to designate. The frequency of 
 these reports was increased in 1870 to five per year, and the 
 examinations were gradually made more severe as defects in 
 the existing system were disclosed. The same person made 
 all the examinations within a given district until the spring 
 of 1893, when Comptroller Eckels adopted the plan of shift- 
 ing the examiners of adjoining districts from time to time 
 and of making two examinations during the year instead of 
 one. The original purpose of the system of examination 
 was the protection of the government and of the stockhold- 
 ers against palpable fraud, and was not intended to remit in 
 any degree the vigilance of the directors of the banks. The 
 public came by degrees to look more and more to the gov- 
 ernment examinations for the assurance of the soundness of 
 the banks, and the system has become one of the most im- 
 portant and characteristic features of American banking. 
 
 The rapid expansion of the banking business of the coun- 
 try is indicated in the following table, showing the number 
 
376 
 
 HISTORY OF MODEKN BANK'S OF ISSUE. 
 
 of national banks, with their discounts and individual de- 
 posits at dates near the beginning of each year from the 
 organization of the system to the present time : * 
 
 YEAR. 
 
 NO. OF BANKS. 
 
 LOANS AND DISCOUNTS. 
 
 INDIVIDUAL DEPOSITS. 
 
 1864 
 
 139 
 
 $ io,666,T)95 
 
 $ 19,450,492 
 
 1865 
 
 638 
 
 166,448,718 
 
 183,479,636 
 
 1866 
 
 1,582 
 
 500,650,109 
 
 522,507,829 
 
 1867 
 
 1,648 
 
 608,771,799 
 
 558.699,768 
 
 1868 
 
 1,642 
 
 616,603,479 
 
 534,704,709 
 
 1869 
 
 1,628 
 
 644,945,039 
 
 568,530,934 
 
 1870 
 
 1.615 
 
 688,875,203 
 
 546,236,881 
 
 1871 
 
 1,648 
 
 725,515,538 
 
 507,368,6l8 
 
 1872 
 
 1,790 
 
 818,996,311 
 
 596,536,487 
 
 1873 
 
 1,940 
 
 885,653,449 
 
 598,114,679 
 
 1874 
 
 1,976 
 
 856,816,555 
 
 540,510,602 
 
 1875 
 
 2,027 
 
 955,862,580 
 
 682,846,607 
 
 1876 
 
 2,086 
 
 962,571,807 
 
 618,517,245 
 
 1877 
 
 2,082 
 
 929,066,408 
 
 619,350,223 
 
 1878 
 
 2,074 
 
 881,856,744 
 
 604,512,514 
 
 1879 
 
 2,051 
 
 823,906,765 
 
 643,337,745 
 
 1880 
 
 2,052 
 
 933,543,661 
 
 755,459,966 
 
 1 88 1 
 
 2,095 
 
 ,071,356,141 
 
 ,006,452,852 
 
 1882 
 
 2,l64 
 
 ,169,177,557 
 
 ,102,679,163 
 
 1883 
 
 2,3O8 
 
 ,230,456,213 
 
 ,O66,9OI,7I9 
 
 1884 
 
 2,529 
 
 ,307,491,250 
 
 ,106,453,008 
 
 1885 
 
 2,664 
 
 ,234,202,226 
 
 987,649,055 
 
 1886 
 
 2,732 
 
 1,343,517,559 
 
 ,111,429,914 
 
 1887 
 
 2,875 
 
 ,470,157,681 
 
 ,l69,7l6,4I3 
 
 1888 
 
 3,070 
 
 ,583,941,484 
 
 ,235,757,941 
 
 1889 
 
 3,150 
 
 1,676,554,863 
 
 ,331,265,617 ' 
 
 1890 
 
 3,326 
 
 1,811,686,891 
 
 ,436,402,685 
 
 1891 
 
 3,573 
 
 1,932,393,206 
 
 ,485,095,855 
 
 1892 
 
 3,692 
 
 2,001,032,625 
 
 ,602,052,766 
 
 1893 
 
 3,784 
 
 2,166,615,720 
 
 ,764,456,177 
 
 1894 
 
 3,787 
 
 1,871,^74,769 
 
 ,539,399,795 
 
 1895 
 
 3,737 
 
 1,974,623,974 
 
 ,695,489,346 
 
 1896 
 
 3,706 
 
 2,020,961,792 
 
 ,720,550,241 
 
 1 These figures are taken from the reports of condition called for by 
 the Comptroller and the dates are those of the reports nearest to the 
 first day of the year for which they are given. Reports were called 
 for during the early days of January up to 1870, since which time 
 they have usually been called for late in December or not until late 
 in February. The reports for December of the preceding year are 
 taken in these cases, as representing more nearly the condition on Jan- 
 uary ist, than those of several weeks later. The earliest of these De- 
 cember reports was December i6th in 1871, but most of them were for 
 the last two or three days of the month. The growth of deposits in 
 recent years in State and savings banks is shown in Chapter xxiii. 
 
THE NATIONAL BANKING SYSTEM. 377 
 
 The suspension of purchases of silver bullion and the issue 
 of circulating notes tinder the Sherman law left the United 
 States, in view of the limitations of the national bank-note 
 circulation, without any means of materially increasing 
 their currency. The importance of a currency system more 
 adapted to commercial needs, and capable of greater expan- 
 sion in the South and West, was under discussion among 
 Democratic leaders for several years before the panic of 1893 
 and began to assume definite shape during the discussion on 
 the repeal of the Sherman law. It was believed by many 
 that the clamor for the free coinage of silver was largely 
 stimulated by the lack of an elastic circulating medium in 
 the newer sections of the country and that this clamor 
 would end, except in the small silver-producing States, if 
 such a medium were provided. The democratic national 
 platform, adopted at Chicago, June 21, 1892, contained the 
 declaration, "We recommend that the prohibitory ten per 
 cent, tax on State bank issues be repealed. " This declara- 
 tion was not interpreted by conservative members of the 
 party in the North as a declaration for unconditional repeal, 
 and when that question was submitted to the House of 
 Representatives on June 6, 1894, ^ was rejected by a vote 
 of 102 in the affirmative and 172 in the negative, the nega- 
 tive vote including 74 Democrats, nearly all from the Northern 
 States. 
 
 The division of opinion existing in the country on the 
 banking problem was indicated by the divisions in the 
 House Committee on Banking in the long session of the 
 Fifty-third Congress in the spring and summer of 1894. 
 The Chairman of the Committee, Mr. Springer of Illinois, 
 declared himself at an early date opposed to the uncondi- 
 tional repeal of the tax on the circulation of State banks, 
 and when a vote was taken in committee the majority 
 were found to agree with him. They never reached an 
 agreement during the long session of Congress, however, 
 upon any affirmative measure. The Northern Democrats 
 who appreciated the importance of currency reform presented 
 a number of bills proposing a banking currency. Mr. John 
 
3/8 HISTORY OF MODERN BANKS OF ISSUE. 
 
 De Witt Warner of New York was the most active upon 
 this side and proposed the remission of the tax on both 
 State and national banks when they conformed to certain 
 prescribed conditions. These conditions involved making 
 the notes the first lien upon the assets, adequate provision 
 for redemption of notes, a paid-up capital of not less than 
 $50,000, the limitation of the circulation to 75 per cent, of 
 the capital, and the payment of an assessment for a guar- 
 antee fund for the redemption of the notes. A plan like 
 this was the basis of most of the measures for a banking 
 currency which were offered by the Northern members, but 
 most of the Southern Democrats felt bound to put themselves 
 on record in favor of unconditional repeal of the ten per 
 cent, tax in order to prove their sincerity to their constituents. 
 The result was the failure to agree upon any definite measure. 
 The necessity of some new banking legislation was strongly 
 urged upon President Cleveland by Representative Gates of 
 Alabama and other prominent members of Congress while 
 the repeal of the Sherman law and the tariff bill were pend- 
 ing. The President spoke in an encouraging manner of 
 the necessity of currency reform, but he refrained from com- 
 plicating the other issues before Congress by any specific 
 recommendations until the meeting of the short session on 
 December 3, 1894. The dissatisfaction with the system of 
 note issues authorized by the national banking law and the 
 belief that a different system must be substituted had been 
 steadily growing, and the adoption of a new system was 
 advocated by many of the most influential bankers of New 
 York and Boston. A convention of bankers at Baltimore 
 on October 18, 1894, declared in favor of permitting the 
 issue of circulating notes by existing national banks up to 
 the amount of 50 per cent, of their paid-up capital, secured 
 by general assets and by a guarantee fund deposited by the 
 banks with the United States Treasurer. This guarantee 
 fund was to be paid into the Treasury to the amount of two 
 per cent, of the circulation of the banks the first year and 
 thereafter at the rate of one-half of one per cent, per year until 
 the entire amount was five per cent, of the outstanding circula- 
 
THE NATIONAL BANKING SYSTEM. 379 
 
 tion, and the government was to have a first lien upon all the 
 assets of a failed bank, in order to ensure the redemption of 
 the notes to the holders. An emergency circulation was also 
 authorized to the amount of 25 per cent, of the capital, sub- 
 ject to a heavy tax upon the average amount outstanding for 
 the year. The exact rate of this ''heavy tax" was not 
 specified, but its purpose was to compel the retirement of the 
 *' emergency circulation" when the demand for money was 
 not acute enough to justify a high rate of interest. 1 
 
 Manifestations like these paved the way for the formal 
 presentation of the subject to Congress in the message of 
 President Cleveland and the annual report of Secretary 
 Carlisle. The President urged in emphatic language the 
 necessity of radical currency reform, but he left the exposi- 
 tion of the details to his minister of finance. The need of 
 action was emphasized by the large exports of gold and the 
 continuous pressure of the redundant paper currency of the 
 government upon the dwindling gold reserve. This redun- 
 dancy of the legal tender currency had stimulated a power- 
 ful demand for its retirement, which was ably supported in 
 New York by Mr. William Dodsworth of the Journal of 
 Commerce and Commercial Bulletin and in Boston by Mr. 
 Charles C. Jackson. 2 Mr. Carlisle was not a believer in legal 
 tender paper and would probably have been -glad to recom- 
 mend its absolute retirement by means of a loan, but out of 
 deference to possible opposition to such radical action he con- 
 tented himself with proposing the locking up of the legal 
 tender notes as security for the proposed new bank-note cir- 
 
 1 See the interesting testimony of Mr. Horace White before House 
 Committee on Banking, Dec. u, 1894, House Report 1508, 36. Sess., 
 Fifty-third Congress, 80-100. Mr. White presented a bill, on his own 
 responsibility, making the tax on emergency circulation four per cent., 
 in addition to the other taxes required on circulation in the first year. 
 
 2 The Democratic State Convention of Massachusetts, under the in- 
 fluence of John B. Russell, Henry C. Thacber, and George Fred. Wil- 
 liams, adopted a resolution demanding "that the government shall, 
 with the development of a banking system adequate to the demands 
 of trade, retire as rapidly as possible all its legal tender paper money." 
 The demand was reiterated in the Democratic State platform of 1895. 
 
380 HISTORY OF MODERN BANKS OF ISSUE. 
 
 dilation, in much the same way in which the Canadian 
 banks are required to hold forty per cent, of their circula- 
 tion in Dominion notes. Mr. Carlisle's propositions for 
 currency reform may be summarized in their important 
 features as follows : 
 
 1. Repeal all laws requiring, or authorizing, the deposit 
 of United States bonds as security for circulation. 
 
 2. Permit national banks to issue notes to an amount not 
 exceeding seventy-five per centum of their paid-up and un- 
 impaired capital, but require each bank before receiving 
 notes to deposit a guarantee fund consisting of United States 
 legal tender notes, including Treasury notes of 1890, to the 
 amount of thirty per centum upon the circulating notes 
 applied for. 
 
 3. Retain the provision of the law making stockholders 
 individually liable, and provide that the circulating notes 
 shall constitute a first lien upon all assets of the bank. 
 
 4. No national bank-note to be of less denomination than 
 ten dollars, and all notes of the same denomination to be 
 uniform in design ; but banks desiring to redeem their notes 
 in gold may have them made payable in that coin. 
 
 5. Require each national banking association to redeem its 
 notes at its own office, or at its own office and at agencies to 
 be designated by it. 
 
 6. Provide a safety fund by taxation upon the banks for 
 the immediate redemption of the circulating notes of failed 
 banks and require the legal tender guarantee fund of a failed 
 bank to be paid into the safety fund. The safety fund may 
 be invested in outstanding United States bonds having the 
 longest time to run, the bonds and the interest upon them to 
 be held as part of the fund and sold when necessary to 
 redeem notes of failed banks. 
 
 7. Repeal all provisions of the law requiring banks to keep 
 a reserve on account of deposits. 
 
 8. The Secretary of the Treasury may, in his discretion, 
 use any surplus revenue of the United States in the redemp- 
 tion and retirement of United States legal tender notes, but 
 such redemptions shall not in the aggregate exceed an 
 
THE NATIONAL BANKING SYSTEM. 381 
 
 amount equal to seventy per cent, of the additional circula- 
 tion taken out by national and State banks. 
 
 9. Suspend the ten per cent, tax on the circulation of 
 banks duly organized under the laws of any State, transact- 
 ing no other than a banking business, and complying with 
 the second and third provisions just named and promptly 
 redeeming their notes at the principal offices and branches. 
 The guarantee fund in United States legal tender notes 
 was to be permitted to be kept by the State banks in their 
 own custody, but must at all times equal thirty per cent, of 
 the outstanding circulation. 1 
 
 These propositions, embodying the essential principles of 
 an elastic banking currency, were cordially approved by 
 many bankers and financial journals, but the presentation 
 of a bill to carry them out, prepared by Mr. Carlisle, led to 
 an acrimonious discussion in which party politics were 
 largely involved, and in which the merits of the general 
 scope of the plan were so much obscured by criticism of 
 details that many bankers who were not opposed to a bank- 
 ing currency became hostile to any immediate legislation on 
 the subject. Mr. Carlisle himself appeared before the bank- 
 ing committee in support of his bill and the other witnesses 
 who appeared for or against the measure included some of 
 the most eminent bankers of the country. The Committee 
 on Banking closed the hearings on December 15, 1894, and 
 voted on that day to report Mr. Carlisle's bill to the House, 
 with some amendments. The Republican members did not 
 concur in reporting the bill or in closing the hearings so 
 promptly. Several of the Democrats also were opposed to 
 details of the measure, but were willing to have it reported 
 for consideration. It was contended by Mr. Sperry of Con- 
 necticut and other members that the bill did not meet the 
 most pressing financial necessity of the hour, which was the 
 retirement of legal tender notes and provision for the pro- 
 
 1 Most of these propositions are quoted verbatim from the annual 
 report of the Secretary of the Treasury to Congress (pp. Ixxvi-viii), 
 but it has been necessary to omit subsidiary features and details which 
 are the natural complement of the principles laid down. 
 
382 HISTORY OF MODERN BANKS OF ISSUE. 
 
 tection of the gold reserve. Mr. Sperry and Mr. Warner of 
 New York united in a request, at the meeting of democratic 
 members of the committee on December 2Oth, that provision 
 be made for the continuance of the existing system of note 
 circulation, in order not to compel too sudden a transition to 
 the new system, and that the provision imposing unlimited 
 liability upon the banks for the redemption of the notes of 
 failed banks be modified. Both of these changes were 
 accepted by the majority. 
 
 Chairman Springer of the Committee on Banking intro- 
 duced a substitute for the original bill on December 2ist, 
 embodying the various amendments which had the consent 
 of Secretary Carlisle. A caucus of democratic members of 
 the House was held on January 7, 1895, an d it was voted, 
 8 1 to 59, to proceed with the consideration of the bill in the 
 House. This vote was not encouraging to the advocates of 
 a banking currency, because it was known that the Repub- 
 licans would oppose the bill and that they would constitute, 
 with the minority of Democratic members, a majority of the 
 House. It was found that the extreme silver men would 
 not support the bill and they cast a vote of 54 against 64 in 
 the caucus for a substitute measure, offered by Mr. Terry of 
 Arkansas, to authorize the Treasury to issue notes upon 
 silver bullion deposited by the various States. Some of the 
 more moderate silver men were willing to abide by the 
 decision of the majority of the party, but tlreir votes were 
 offset by those of Eastern members who did not consider 
 the committee bill sufficiently guarded in its provisions. 
 The belief that the bill could not pass the House was verified 
 when the vote was taken on January 9th on the question of 
 consideration. The affirmative vote was 122 and the nega- 
 tive vote was 129. This margin might have been overcome 
 if all those voting for consideration could have been trusted 
 to support the bill, but it was well known that a considerable 
 number of them would not vote for the measure on its 
 passage. Some further efforts were made among members 
 of Congress to secure an agreement on a banking measure, 
 but they were not successful. The subject of maintaining 
 
THE NATIONAL BANKING SYSTEM. 383 
 
 the government gold reserve became more pressing than 
 that of banking reform, during the brief period remaining 
 before the termination of the session of Congress on March 
 4, 1895, an d was the subject of the bills subsequently 
 reported by the Banking Committee. 
 
 The Fifty-fourth Congress, which met on December 2, 
 1895, contained majorities politically hostile to the adminis- 
 tration of President Cleveland. This fact and the continued 
 danger of the gold reserve led the President in his message, 
 and the Secretary in his annual report, to make the subject 
 of the maintenance of the gold reserve paramount to sugges- 
 tions of radical changes in the banking laws. Secretary 
 Carlisle simply renewed the recommendations, repeatedly 
 made in former years by the Comptroller of the Currency, 
 that the banks be given greater freedom of note issue by 
 permission to issue circulation to the par value of the bonds 
 deposited as security, and that the tax on circulation be re- 
 duced from one-half to one-quarter of one per cent, annually. 
 He pointed out that until 1883 there was a tax upon the 
 capital and deposits of national banks, as well as a tax upon 
 their circulation, and that from all these sources the govern- 
 ment received up to the close of the fiscal year 1895 the sum 
 of $146,902,962. From the tax on circulation alone the 
 receipts amounted to $78,107,006, while the total estimated 
 expenses of supervision, including salaries of officials, had 
 been only $15,636,976. The average annual cost of super- 
 vision, declared the Secretary, " has been $473,848, while a 
 tax of one-fourth of one per cent, on the average annual 
 circulation would have yielded $680,294." The Secretary 
 also stated that ' ' The gain to the government on account of 
 national bank-notes lost or destroyed, and which are con- 
 sequently, never presented for redemption, is estimated to be 
 two-fifths of one per cent, upon the total amount issued, and 
 has, according to this estimate, amounted to the sum of 
 $2,805,715." 1 
 
 1 The amount of paper currency lost or destroyed and never pre- 
 sented for redemption is much smaller than is popularly believed. 
 No exact figures have ever been obtained, because notes of the oldest 
 
384 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Two important changes suggested by Secretar) r Carlisle 
 were the transfer of the current redemption of national bank- 
 notes from the United States Treasury to agencies estab- 
 lished by the banks and designated by the Comptroller of 
 the Currency, as was the case" prior to the Act of June 20, 
 1874, and that national banks be permitted to establish 
 branches for the transaction of all kinds of business except 
 the issue of notes. The Secretary suggested as an alterna- 
 tive plan, in case the redemption agency at Washington was 
 continued, that the banks be required to maintain their five 
 per cent, redemption fund in gold coin and to deposit gold 
 coin for the withdrawal of bonds whenever circulation was 
 to be permanently surrendered or reduced. This suggestion 
 was a part of the policy of withdrawing the legal tender 
 notes of the government recommended by the President and 
 Secretary, and was for the purpose of supplying the Treasury 
 with a proper medium for the redemption of bank-notes after 
 the retirement of the government notes. The establishment 
 
 issues are occasionally received for redemption, and even an approxi- 
 mate estimate can be made only upon issues of many years standing. 
 No calculation based upon such issues has shown a larger average 
 loss, except upon the small fractional currency, than one per cent, 
 and Secretary Carlisle's estimate of two-fifths of one per cent, is 
 probably not too small. The percentage applies, however, to the 
 entire issues rather than to the net amount in circulation at any one 
 time. The entire issues of United States notes up to the close of the 
 fiscal year 1895 were $2,725,981,808, and two-fifths of one per cent, of 
 this amount would be about $ 10,000,000. The total issues of national 
 bank-notes to October 31, 1895, were $1,906,918,995, and the propor- 
 tion of estimated loss would be about $7,500,000. This loss, however, 
 will not be realized until all the recent issues have been many years 
 outstanding, which accounts for the variation from the estimate of 
 Mr. Carlisle. One of the proofs of the small percentage of loss upon 
 paper currency is furnished by the old demand notes, of which 
 $60,030,000 were issued and only $54,847, or less than one-tenth of 
 one percent., were outstanding on June 30, 1895. These notes, how- 
 ever, having been received for customs in common with gold, did not 
 remain so long in circulation as some other forms of paper currency. 
 Of $i and $2 notes in circulation in Canada on June 3, 1871, less than 
 one per cent, were outstanding in 1894. Breckenridge, 337. 
 
THE NATIONAL BANKING SYSTEM. 385 
 
 of branches by the national banks was cordially approved by 
 the President. 
 
 Comptroller Eckels followed the President and Secretary 
 of the Treasury in abstaining from recommending a new 
 basis for the issue of bank-notes, but he indicated his belief 
 in the policy of an elastic banking currency in the following 
 terms : l 
 
 The advantage accruing to the Government by the substitution of a 
 bank-note for a Treasury-note currency would be immeasurably great. 
 The need of maintaining a gold reserve to meet the recurring demand 
 obligations, now never retired, would, within a reasonable time, be 
 obviated, and, delivered from this vexatious and expensive difficulty, 
 the Treasury Department could return to its legitimate function of 
 collecting the revenues of the Government needful to meet govern- 
 mental expenses and disbursing the same. 
 
 With the relief gained to it through the removal of this burden would 
 come a greater one to the business interests of the individual citizen, 
 whose every operation would no longer be harassed by the uncertainty 
 springing from a fear that either in the present or the future the cur- 
 rency obligations now forced by his Government through the provisions 
 of an inflexible law into the avenues of trade and commerce may be 
 discredited and dishonored. The relegating of note issuing entirely to 
 the banks would give a better guarantee of meeting the varying wants 
 of trade, which is impossible with a legal mandate decreeing an 
 amount of Treasury issues of no greater and no less volume at one 
 season of the year than another, whether or no there be a correspond- 
 ing increase or lessening of the demand for currency to transact the 
 business in hand. 
 
 1 Comptroller's Report, 1895, 23. ^ 
 
 " 
 
CHAPTER XVI. 
 
 THE CANADIAN BANKING SYSTEM. 
 
 Its Origin and Growth Foundation of the Bank of Montreal The 
 Union of the Canadian Provinces and the Dominion Banking^ 
 Reforms in 1870, 1880, and 1890 The Effect upon the Security 
 of Note Issues and the Small Losses by Failure Recent Sus- 
 pensions. 
 
 THE Canadian banking laws now in force represent an 
 almost steady growth from comparatively crude con- 
 ditions to a perfected scientific system. Founded 
 originally upon Scotch models, the Canadian banks enjoyed 
 at first the freedom from even the police supervision of the 
 government which naturally arose from the fact that they 
 framed their own charters. Canadian banking was not 
 exempt from the risks and difficulties of the other institu- 
 tions of a new and growing country, and defects in the secur- 
 ity of the note issues and the protection of deposits were 
 gradually remedied as they were disclosed by experience. 
 The development of the Canadian system, however, has 
 been natural and symmetrical and most of the changes in 
 the law have had the approval of the leading bankers. At- 
 tempts have been several times made to substitute a govern- 
 ment currency or a specially secured circulation for the 
 elastic medium provided by the banks, but these attempts 
 have not been sufficiently successful to destroy the essential 
 advantages of the Canadian banking system. They have 
 resulted in putting a considerable volume of government 
 paper alongside the bank-note currency and in requiring a 
 certain percentage of this paper to be held by the banks in 
 
 386 
 
THE CANADIAN BANKING SYSTEM. 387 
 
 their cash reserves, but they have not supplanted the bank- 
 note currency and are not likely to be permitted to, unless 
 the necessities of the government in time of war should be- 
 come paramount to the commercial interests of the country. 
 
 The history of Canada is that of several separate provinces 
 before the union in 1841. The movement for better banking 
 facilities began independently, but almost simultaneously in 
 each province early in the present century. The scarcity of 
 specie or of any other circulating medium in L,ower Canada 
 was partially supplied by the "Army bills" issued by the 
 government during the war with the United States and it 
 was not until 1817 that a banking company was formed. 1 
 Previous attempts to found a bank had been addressed to 
 the local legislature of Lower Canada, but on June 23, 1817, 
 a meeting was held at Montreal at which an association was 
 formed with a capital stock of ^250,000. An office was 
 opened in August under the title of the Bank of Montreal, 
 without waiting for legal authority, and what afterwards 
 became the strongest institution of the Dominion was thus 
 established. The bank was simply a private partnership, 
 with unlimited liability of the shareholders, and continued so 
 until the passage of a charter by the legislature on March 
 17, 1821, which was approved by the royal government and 
 proclaimed on July 22, 1822. 
 
 Charters for the Quebec Bank and the Bank of Canada, 
 situated at Montreal, were passed at the same session of the 
 legislature and their approval by royal authority was pro- 
 claimed on November 30, 1822. The Quebec Bank had been 
 organized in a similar manner to the Bank of Montreal on 
 July 9, 1818, with a capital of ,75,000, and the Bank of 
 Canada had been organized on August 25, 1818, with a capi- 
 tal of ^200,000. The charter of the Bank of Montreal, 
 whose provisions were followed in the charters of the other 
 two banks, gave the institution corporate powers until June 
 
 1 The Army bills outstanding at the close of the war in March, 1815, 
 were ^"1,249,996, but they were receivable for public dues and con- 
 vertible into government bills of exchange on London, and were re- 
 duced by May, 1816, to ^200,000. 
 
388 HISTORY OF MODERN BANKS OF ISSUE. 
 
 i, 1831, and provided for the choice of thirteen directors, 
 who must be British subjects and holders of at least four 
 shares each. The principle of limited liability was applied 
 to the shareholders, without any obligation beyond the 
 amount of their subscription to the stock, but the directors 
 were to be liable to the stockholders as well as to the holders 
 of bank-notes in case the debts of the corporation should ex- 
 ceed treble the amount of the capital stock actually paid in, 
 exclusive of the deposits. The bank was prohibited from 
 lending on land or mortgage, but might take such property 
 for debt contracted in the course of its legitimate dealings. 
 
 The fact that the acts passed by the provincial legislature 
 for the incorporation of these banks were based upon the 
 articles of agreement drawn by the incorporators made the 
 restrictions trifling which were imposed upon the banks. 
 There was no limit upon the volume of note issues except 
 the general liability of the directors for the aggregate indebt- 
 edness. There was no prohibition upon loans upon the 
 stock of the bank or upon loans to directors. The fact, 
 however, that each bank was established by a special law 
 afforded some measure of protection against indiscriminate 
 private banking and there was a disposition from the outset 
 to adhere closely to Scotch methods. 1 An indication of this 
 is given by the prompt establishment of branches by the 
 Bank of Montreal at Quebec and by both the Bank of Mon- 
 treal and the Bank of Canada at Kingston in the upper 
 province. The banks received the notes of their competitors 
 and exchanged them and settled the balances in specie as 
 often as once a week, according to the Scotch system. The 
 Bank of Montreal employed an agent in New York for the 
 negotiation of sterling exchange and all the Canadian banks 
 of importance eventually had an agent or correspondent in 
 the American metropolis. 
 
 1 Mr. R. M. Breckenridge, in his admirable work, The Canadian 
 
 Banking System, published by the American Bconomic Association, 
 
 from which many of these facts regarding early Canadian banking 
 
 . are taken, states that among 140 odd charter members of the Bank 
 
 of Montreal there were at least 90 Scotch names. 
 
THE CANADIAN BANKING SYSTEM. 389 
 
 The importance of freedom of note issues in developing 
 banking in a new country is indicated by the early returns 
 of the Canadian banks, in spite of the considerable deposits 
 which they were able to obtain. The total deposits of the 
 three banks of the lower province in 1824 were ,135,426, 
 while the circulation was ,167,498 ; the deposits in 1825 
 were ,151,637 and the notes in circulation ,177,454 ; the 
 deposits in 1826 were ,176,475 and the notes ,193,548. 
 The debts due to the banks, which may be assumed to 
 represent chiefly the discounts, were ,529,363 in 1824, 
 .585,265 in 1825, and ,594,515 in 1826. The debts due the 
 Montreal Bank in the latter year were .371,334; Quebec 
 Bank, ,111,523; and Bank of Canada, ,111,658. The 
 banks secured the renewal of their charters in 1830 and 1831, 
 until June i, 1837. The legislation of this time cut off 
 possible note issues by private bankers, by prohibiting notes 
 payable to bearer except when issued by banks incorporated 
 by law in Lower Canada. The tptal amount of notes in 
 circulation for less than $5 was limited to one-fifth the capi- 
 tal stock of the Bank of Montreal and notes for less than five 
 shillings were prohibited. Similar limitations were imposed 
 upon the Quebec Bank and the power was reserved to the 
 legislature to prohibit or limit entirely the circulation of 
 notes under $5. 
 
 The Bank of Canada found its business falling off in 1825 
 and after gradually reducing its capital stock went into 
 liquidation in 1831, upon the lapse of the charter. The 
 bank did not fail or suspend payments, but adopted a policy 
 of paying uncurrent and underweight coin, which led the 
 Bank of Montreal to refuse its checks and notes and caused 
 the rapid reduction of deposits until it became unprofitable 
 to continue business. A charter was granted to the City 
 Bank of Montreal in 1831, upon the representation of lead- 
 ing merchants that the capital of the existing bank was 
 " altogether inadequate to the circulation of the valuable 
 articles of import and export which its geographic position 
 naturally brings to it," and that the most effectual preven- 
 tive of the evil of monopoly <c is the admission of reasonable 
 
390 HISTORY OF MODERN BANKS OF ISSUE. 
 
 competition, with its counteracting influence." Another 
 Montreal bank began business in 1835 under the title of the 
 Banque du Peuple (Bank of the People). The principal part- 
 ners were Messrs. Viger, De Witt, and Co., who were fully 
 liable for the debts of the bank, while shares were issued to 
 persons having no share in the management and liable only 
 for the amount of their stock, according to the French 
 system of partnership en com mandite. 
 
 The movement for a bank in Upper Canada, now consti- 
 tuting the Province of Ontario, assumed definite shape a 
 trifle earlier than in Lower Canada, but the first charter 
 passed by the provincial legislature did not receive the royal 
 assent within the period provided by the charter to give it 
 validity, so that it became necessary to pass a new charter in 
 1819. The royal government again delayed action, but the 
 Bank of Upper Canada, situated at Kingston, was finally 
 authorized by proclamation of the royal assent on April 21, 
 1821, more than a year before such assent was granted for 
 the banks of Lower Canada. The capital of the bank was 
 originally fixed at ,200,000, but this was reduced in 1823 to 
 ,100,000. The general provisions of the charter were simi- 
 lar to those of the banks of Lower Canada, but notes under 
 five shillings were forbidden from the outset and the charter 
 was to remain in force until June i, 1848. The government 
 subscribed for 2,000 shares of the capital at a par value of 
 ,25,000. A practical monopoly of note issues was conferred 
 upon the bank in 1823 by an act prohibiting banks from 
 carrying on business in the province, which did not redeem 
 their notes in specie within its limits. The development of 
 Upper Canada was somewhat more rapid after the establish- 
 ment of the bank than before, from a combination of causes, 
 and the capital stock actually paid in increased from ,10,- 
 640 in 1823 to the full limit of ,100,000 in 1830. The debts 
 due by the bank increased from ,107,598 on December 15, 
 1826, to .260,557 on January i,-i83i, and the notes in circu- 
 lation increased during the same interval from ,87,339 to 
 .187,039. The bank encountered only the rivalry of an 
 institution purporting to be the Bank of Upper Canada under 
 
THE CANADIAN BANKING SYSTEM. 39! 
 
 a forfeited character, which soon collapsed, until the incor- 
 poration in 1832 of the Commercial Bank of the Midland 
 district. The capital of the new bank was fixed at ,100,000. 
 The capital of the Bank of Upper Canada was increased by 
 a like amount at the same session, and the utmost eagerness 
 was shown to purchase the stock. The Commercial Bank 
 within three years sought and obtained power to double its 
 capital stock and an act was passed incorporating the Gore 
 Bank at Hamilton with a capital of ;ioo,ooo. 
 
 The first bank charter in New Brunswick received the 
 royal assent as early as March 25, 1820. The institution 
 was known as the Bank of New Brunswick and was located 
 at St. John, with a capital of ,50,000. The shareholders 
 were liable only for the principal of their stock, and debts 
 by the directors, either as principals or indorsers, were lim- 
 ited to one-third of the paid-up capital. The banks were 
 forbidden by an Act of 1838 to issue notes of a less denomi- 
 nation than five shillings. The first bank of issue actually 
 established in Nova Scotia was opened in 1825 at Halifax 
 under the title of the Halifax Banking Company. The 
 Bank of Nova Scotia, which was the first chartered bank, 
 was incorporated by an Act approved March 30, 1832, with 
 an authorized capital of ,100,000. The bank was without 
 a chartered competitor for five years and during its first ten 
 years divided profits among the shareholders at the average 
 rate of 8.9 per cent, and increased its capital to ,140,000. 
 The issue of bank-notes for less than ,5 was prohibited in 
 Nova Scotia in 1834. 
 
 The banking system of the Canadian provinces was thus 
 established on a comparatively safe and scientific basis, 
 similar to the Scotch system in the part played by the large 
 incorporated banks and their branches, but without any 
 serious control by law. The history of the next thirty years 
 involves a mania for banking speculation similar to that 
 witnessed in the United States, on the part of the Canadian 
 people, and an effort to apply the rigid limits of the English 
 restriction act on the part of the home government at Lon- 
 don. The banking mania seized Upper Canada and resulted 
 
392 HISTORY OF MODERN BANKS OF ISSUE. 
 
 in the creation of several joint stock banks between 1834 
 and 1837. The creation of such banks without a special 
 charter was brought to a summary end by an Act of 1837, 
 prohibiting the issue of circulating notes, except by banks 
 holding legislative charters, and making such issues a misde- 
 meanor. The banking phrenzy was not checked by this 
 salutary regulation. The House of Assembly had passed 
 a bill in 1833 to enable the Receiver General to issue notes 
 chargeable on the public, and a select committee in 1835 re- 
 ported in favor of a provincial bank, on the basis of loans 
 guaranteed by the province. These measures alarmed the 
 home government and resulted in a despatch to the Lieuten- 
 ant Governor August 31, 1836, directing him not to permit 
 any act touching the circulation of promissory notes or the 
 law of legal tender to come into operation in Upper Canada 
 without having first received the royal sanction. This 
 precaution was taken none too early, for bills were passed 
 during the session of 1836-37 increasing the banking capital 
 of the province from ^"500,000 to ,4,500,000 and conferring 
 a power of note issue to the limit of < i3,5oo,ooo. 1 The 
 Imperial government did not formally disallow these acts, 
 but returned them to the Colonial legislature for more sober 
 consideration. This course was effective and none of the 
 measures were re-enacted. 
 
 The union of Upper and Lower Canada was accomplished 
 on February 5, 1841, under the title of the Province of 
 Canada, and banking legislation was henceforth enacted in 
 uniform terms for the entire province. The government of 
 Upper Canada prepared for the union by the sale of the 
 government stock in the Bank of Upper Canada and the 
 separation of the government from official connection with 
 the 'bank. A scheme was brought forward soon after the 
 union by the Governor General, Lord Sydenham, for a pro- 
 vincial bank of issue under the direct authority of the gov- 
 ernment. Lord Sydenham was a personal friend of Lord 
 Overstone, the great champion of " the currency principle " 
 in England, and endeavored to engraft upon Canadian 
 1 Breckeuridge, 77. 
 
THE CANADIAN BANKING SYSTEM. 393 
 
 finances the separation of the functions of note issue and 
 banking which were imposed upon the Bank of England by 
 the Act of 1844. Lord Sydenham suggested a series of 
 resolutions for a bank, with no other powers than that of 
 issue, with an authorized circulation of ; 1,000,000 and an 
 excess issued only against coin or bullion. The authorized 
 circulation was to be protected by government securities, of 
 which the interest was to go to pay the expense of managing 
 the bank and any balance to the public Treasury. There 
 was a strong outburst of public feeling against destroying 
 the profits and efficiency of the existing banks and the con- 
 servatives, French Canadians, and a few supporters of the 
 party in power, united in committee of the whole on August 
 31, 1841, in a resolution " that it is inexpedient to take into 
 further consideration during the present session the estab- 
 lishment of a provincial bank of issue, or the issue in any 
 way of a paper currency on the faith of the province. ' ' * 
 
 The committee which considered Lord Sydenham' s pro- 
 posals admitted the propriety of some uniform regulation of 
 the banks, and it had been repeatedly urged in circulars 
 from the home government. These recommendations con- 
 templated the usual safeguards against unsound banking, 
 limiting the business of the banks to a proper banking 
 business, conducted after the subscription of the capital, and 
 involving forfeiture if specie payments were suspended for 
 sixty days. These restrictions were applied to the three 
 banks of Lower Canada when they sought a renewal of their 
 charters in 1841. Notes under five shillings were prohibited, 
 and notes under one pound were not to exceed one-fifth of 
 the paid-up capital. The various charters were to expire at 
 the end of the first session of Parliament after June or De- 
 cember i, 1862. Double liability was imposed upon share- 
 holders, and nearly all the provisions for the public security 
 which had prevailed in either Lower or Upper Canada were 
 now applied to the banks of the entire province. The pet 
 theory of the home government, that coin should take the 
 place of small notes, in order to constitute a healthy monetary 
 
 1 Breckenridge, 112. 
 
394 HISTORY OF MODERN BANKS OF ISSUE. 
 
 system, led to considerable correspondence in 1846, pending 
 the approval of a charter passed in that year, but the gov- 
 ernment finally consented to the retention of the $i notes. 
 
 The mania for " free banking" on securities seized upon 
 the Canadian people towards the middle of the century and 
 resulted in the law of 1850, based upon New York models. 
 William Hamilton Merritt was the author of the new law, 
 and he first brushed away the obstacles by the repeal of the 
 laws prohibiting the circulation of the notes of private bank- 
 ers. Such note issues were permitted, provided that the 
 banks formed for the purpose deposited Provincial securities 
 with the Receiver- General for not less than $100,000 as a 
 pledge for their notes. One of the objects of this legisla- 
 tion, to broaden the market for Provincial securities, was 
 indicated by the provision that these notes were to be exempt 
 from the tax of one per cent, per year imposed on the circu- 
 lation of the chartered banks, and that the latter might 
 surrender their circulation against their assets, and issue 
 notes upon deposits of securities. The notes, in case of 
 suspension, were to be paid from the proceeds of the securi- 
 ties, and any balance was to be applied, with the other assets, 
 to the settlement of the remaining debts of the bank. The 
 notes were to constitute a preferred claim against other as- 
 sets in case the proceeds of the securities proved insufficient. 
 
 The effort to drive the chartered banks into the secured 
 note system was carried further, in 1851, by a bill granting 
 certain exemptions from taxation to banks which were will- 
 ing to restrict their circulation to the maximum show r n in 
 their last statement and to reduce it in three years to three- 
 fourths of the average for 1849 and 1850. Such banks were 
 permitted to issue additional notes to the amount held in 
 gold or silver coin or bullion, or in debentures issued by the 
 Receiver-General and reckoned at par. They were not re- 
 quired to deposit the debentures, but were required in case 
 of failure to apply them exclusively to the redemption of 
 their notes. The fact that the banks were required to hold 
 the debentures permanently, whether in the custody of the 
 government or in their own vaults, resulted in withdrawing 
 
THE CANADIAN BANKING SYSTEM. 395 
 
 active capital from commercial banking and offering insuffi- 
 cient inducement to investors of banking capital. Five 
 banks were created under the law, of which two soon disap- 
 peared and three were continued under special charters. 
 The Bank of British North America, which operated in all 
 the provinces under a royal charter, apparently obtained the 
 greatest advantages from the secured note system by employ- 
 ing it prudently in connection with its other business. The 
 failure of the "Free Banking Act " was acknowledged as 
 early as 1859, but it was not repealed until the passage of 
 the Provincial Note Act of 1866. 
 
 The temptation to use the power of note issue for the 
 benefit of the State assailed the provincial authorities again 
 in 1866, when the government found themselves compelled 
 to raise about $5,000,000 to discharge the floating debt. 
 Mr. A. T. Gait, Minister of Finance, succeeded in carrying 
 a bill, which received the royal assent August 15, 1866, 
 assuming the power of the Province to issue not more than 
 $8,000,000 of notes, payable on demand in specie at Montreal 
 or Toronto and legal tender except at those offices. He did 
 not dare propose the immediate abolition of the bank-note 
 currency, but proposed an indemnity payment by the gov- 
 ernment of five per cent, per year, on the amount of notes 
 outstanding on April 30, 1866, until the expiration of the 
 charter of any bank which might accept the conditions of 
 the act and withdraw its own circulation before January i, 
 1868. Banks willing to accept this offer were relieved from 
 the requirement to invest ten per cent, of their capital in 
 debentures and allowed to exchange them at par for Provin- 
 cial notes. The Bank of Montreal was the only institution 
 which accepted the new system and gradually substituted ' 
 Provincial notes for its own issue. This action separated 
 the interests of the Bank of Montreal from those of the 
 other banks and led the former to force the legal tender 
 notes into circulation as rapidly as possible in the settlement 
 of its balances. The Bank of Montreal was able to force 
 the other banks into holding legal tenders by threatening 
 to exact settlements in legal money, which the other banks 
 
396 HISTORY OF MODERN BANKS OF ISSUE. 
 
 were thus compelled to set aside for the purpose. The result 
 was a reduction of the banking resources of the other banks 
 and the complication of the paper currency by the rival cir- 
 culation of the Provincial notes in competition with bank- 
 notes. 
 
 New Brunswick and Nova Scotia were brought within the 
 circle of Canadian banking legislation by the Act of 1867, 
 creating the Dominion of Canada, which conferred exclusive 
 authority in matters connected with currency, coinage, and 
 banking upon the Parliament of the Dominion. The charters 
 of existing banks were extended temporarily to the end of the 
 first session of Parliament after January i, 1870, and several 
 provisions affecting the Canadian banks were extended to 
 those of New Brunswick and Nova Scotia. The Provincial 
 note issue was consolidated into an issue of Dominion notes 
 and redemption agencies were provided for in the capitals 
 of the four provinces. The banks in existence when the 
 Confederation became a fact on July i, 1867, were eighteen 
 in Ontario and Quebec, five in Nova Scotia, four in New 
 Brunswick, and one operating in all the provinces under 
 royal charter. 
 
 The attempts to create a secured circulation or a gov- 
 ernment currency were renewed after the creation of the 
 Dominion, and the supporters of the former had the benefit 
 of the example of the United States and the active efforts of 
 Mr. E. H. King, the manager of the Bank of Montreal. A 
 scheme of this sort was taken up by Mr. Rose, the new 
 Minister of Finance, in 1869, and, according to his bill, was 
 to go into effect on July i, 1871. The banks after that date 
 were to be required to reduce their unsecured circulation 
 twenty per cent, a year until the whole should be retired, and 
 were permitted to issue notes up to the amount of their capi- 
 tal stock actually paid in, bearing on their face the statement 
 that they were secured by the deposit of Dominion securi- 
 ties. These notes were to be legal tender throughout the 
 Dominion, except at the office of the issuing bank, so long 
 as they were redeemed in specie, and were to be protected by 
 a cash reserve amounting to twenty per cent, of the notes 
 
THE CANADIAN BANKING SYSTEM. 397 
 
 and one-seventh of the deposits subject to call. The notes 
 were to constitute the first charge upon the assets in case of 
 insolvency. The opposition was so strong, and there were 
 so many measures whose success was more important to the 
 ministry, that Mr. Rose announced on June i5th the tem- 
 porary withdrawal of the plan for the session. Sir Francis 
 Hincks became Minister of Finance before the next session 
 and he abandoned the policy of a specially secured circula- 
 tion and contented himself with throwing some additional 
 safeguards around the existing bank-note system. 
 
 The charters of the banks were extended by the Act of 
 May 12, 1870, for a period often 3^ears, and the most impor- 
 tant changes of the period were then made. The desire for 
 a codification of the banking law led, however, to a more com- 
 prehensive act in 1 87 1, 1 which embodied the reforms of 1870 
 with some minor changes and many amplifications of detail. 
 The banks in 1870 surrendered the right to issue notes below 
 the denomination of $4 and secured in compensation the 
 abolition of the one per cent, tax and the repeal of the re- 
 quirement to keep one-tenth of their capital in Dominion 
 securities. The government assumed the issue of small 
 notes and the banks were required to hold not less than one- 
 third of their cash reserves in Dominion notes. The severe 
 period of depression through which the Dominion passed 
 between 1874 and 1879, and the several bank failures which 
 occurred, led to further important changes in the banking 
 law when the charters were about to expire in 1880. The 
 bankers themselves came forward with the proposals for 
 reform and were now willing to accept several propositions 
 which they had before rejected. The minimum denomina- 
 tion of notes was changed to $5 and the banks were required 
 to retire the notes for $4 as soon as practicable. The pro- 
 portion of cash reserve to be held in Dominion notes was 
 increased to forty per cent. The use of the title of " Bank " 
 by a private firm not incorporated under the laws of the 
 Dominion was made a misdemeanor, unless the words ' ' Not 
 
 1 Act "of April 14, 1871, "relating to banks and banking," 34 Vic- 
 toria, c. 5. 
 
398 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Incorporated " were added to the title. This provision was 
 made to preve^fee public from mistaking private bankers 
 for those holding^ferters and was extended in 1890 so that 
 an}' such expression as " Bank" or " Banking House" was 
 made illegal, whether the words ' ' Not Incorporated ' ' were 
 added or not. 
 
 The history of the Canadian banking system between 1880 
 and the renewal of the bank charters in 1890 was a compara- 
 tively uneventful one, but experience of the banking law had 
 suggested a number of reforms which were carefully dis- 
 cussed before the renewal was voted. It was found that the 
 notes of the banks did not remain steadily at par in those 
 parts of the country far removed from the redemption 
 agencies. It was also found that, notwithstanding the 
 ample security for the final payment of the notes of failed 
 banks, they sometimes dropped to a discount when the 
 holders desired to realize upon them at once. 1 The impor- 
 tance of concerted action to secure the reforms desired by 
 the public, without infringing upon the freedom of banking, 
 was keenly felt by the leading banks and they held a meeting 
 in Montreal on January u, 1890, at which they resolved to 
 request an interview with Mr. Foster, the Minister of Fi- 
 nance. The request was granted and interviews took place 
 on January 25th and February nth and i2th. Several dif- 
 ferences of opinion developed regarding details, some of 
 which were carried before the Privy Council, but a thorough 
 revision of the banking law was enacted and received the 
 royal assent on May 16, 1890." The important features of 
 the Canadian banking system, as it developed from the legis- 
 
 " Although the liquidators were ready to redeem within a month, 
 the discount on the notes of the Exchange Bank after its failure rose 
 as high as five or ten per cent. Redemption of the notes of the 
 Maritime Bank, though finally in full, was delayed for nearly three 
 years after the failure, and in the meanwhile its issues sold for as low 
 as forty cents on the dollar. In notes of the Central Bank of Canada, 
 Americans near Sault Ste. Marie found a profitable speculation by 
 buying them up after the failure, at ten per cent, discount." Breck- 
 enridge, 315. 
 
 2 53 Victoria, c. 31, " An Act respecting banks and banking." 
 
THE CA NA DIA N BA %KING S YS TEM. 3 99 
 
 lation of 1870 and 1880 into that of 1890, may be discussed 
 under the following headings : 
 
 1. Security of note issues. 
 
 2. Elasticity of circulation. 
 
 3. Uniformity of circulation, without discount upon the 
 notes. 
 
 4. Inspection of accounts and security of general creditors. 
 
 5. Cash reserves and the use of coin. 
 
 6. Branch banks and the requirement of large capital. 
 
 I. The essential conditions which secure the note issues 
 of the Canadian banks are the duplicate liability of share- 
 holders, the first lien of note-holders upon the assets of a 
 failed bank, the Bank Circulation Redemption Fund, and 
 the six per cent, interest which accrues upon the notes of 
 failed banks from the date of refusal to redeem to the date 
 when readiness to redeem is again announced. The dupli- 
 cate liability of shareholders dates back to 1834 in Ontario 
 and 1841 in Quebec. The making of the notes a first lien 
 on the assets was suggested by the bankers in 1869, but was 
 abandoned because of the opposition of Mr. Hincks. He 
 feared that the impairment of the equal claims of other 
 creditors which this provision involved would lead to a run 
 by depositors and to the injury of the banks. The failures 
 between 1874 and 1879 compelled many note-holders to 
 realize on their notes at a great discount, in order to obtain 
 immediate use of their money, 1 and dissatisfaction was so 
 great that the bankers again proposed in 1880 that the notes 
 be made a first lien. The total assets of each bank were 
 from six to ten times its note obligations and, if these assets 
 were lost, the duplicate liability of the shareholders would 
 still cover the outstanding notes. These resources consti- 
 tuted a security for the redemption of the notes which it 
 was believed would prove complete, and which the bankers 
 were willing to concede to the public for the privilege of 
 retaining unimpaired their power of note issue. 
 
 The Act of 1890 confirmed the provisions of 1880 for 
 making the notes a first lien on the assets, and added two 
 1 Breckenridge, 289. Canadian bank-notes arc not legal tender. 
 
400 HISTOR Y OF MODERN BANKS OF ISSUE. 
 
 new provisions designed to keep the notes of a failed bank 
 absolutely at par during the period of liquidation. The 
 most important of these was the creation of a safety fund, to 
 be called "The Bank Circulation Redemption Fund," which 
 was to be raised by contributions from the banks, before July 
 16, 1892, to an amount equal to five per cent, of the average 
 circulation of each contributing bank. The redemption fund 
 is in the custody of the Minister of Finance and bears interest 
 at the rate of three per cent, per annum. It is specifically 
 set apart for the payment of the notes of failed banks. 
 Redemptions are required to be made without regard to the 
 amount which the failed bank may have paid into the re- 
 demption fund, but when the redemptions, with interest, 
 exceed such payments, the Minister of Finance may call 
 upon the other banks to make good to the fund the amount 
 of such excess. These calls upon the other banks are limited 
 to one per cent, annually of the amount of their circulation 
 and the amounts thus paid by the banks are reimbursed to 
 them when recovered from the failed bank. 1 
 
 The redemption fund afforded a guarantee, if it was 
 needed, that the notes of a failed bank would always be 
 paid in full. A further provision was made that the notes 
 of failed banks should bear interest at the rate of six per 
 cent, per year from the day of suspension to the date named 
 for their payment. The practical operation of this provision 
 has been eminently successful and has, in connection with 
 the guarantee afforded by the safety fund, made the notes 
 of a failed bank as valuable an investment up to the time 
 of redemption as a six per cent. bond. The holders of such 
 notes have had no difficulty in selling them at par to the 
 other chartered banks, to brokers or to persons having a little 
 
 1 The omission of a limitation of this sort upon the liability of the 
 banks for the general safety fund was one of the causes of hostility to 
 the banking plan of Secretary Carlisle, presented to the United States 
 Congress in his annual report for 1894. It was admitted by those 
 familiar with the facts that the resulting calls were not likely to be 
 large in fact, but it was feared that the indefinite character of the 
 liability would excite alarm among depositors. 
 
THE CANADIAN BANKING SYSTEM. 401 
 
 money seeking temporary investment. The legal money 
 of redemption under Canadian law is "specie," and the 
 gold standard is maintained with but little gold in circula- 
 tion. The banks, in making ordinary payments, were re- 
 quired by the law of 1880 to pay amounts up to $50, upon 
 request of the payee, in Dominion notes. This limit was 
 raised in the Act of 1890 to $100. 
 
 2. One of the important benefits inherent in the Cana- 
 dian bank-note circulation is its elasticity. This is not due 
 affirmatively to recent legislation, but is due to the success- 
 ful resistance of Canadian bankers to government proposi- 
 tions for a specially secured currency. 1 The banks pay out 
 the notes when business activity demands them and the 
 notes drift back for deposit and the settlement of discounts 
 when business activity slackens. The circulation thus varies 
 nearly fifteen per cent, in the course of a year. The mini- 
 mum circulation of the year has ranged during the past thir- 
 teen years from $28,063,000 in 1884 to $31,927,000 in 1893, 
 while the maximum circulation" of the year has ranged from 
 $33,998,000 in 1884 to $38,688,000 in 1892. The month of 
 October has been, with one exception during the past thir- 
 teen years, the month of maximum circulation. The mini- 
 mum has been reached in some cases in April, and in others 
 not until July or August, but the larger part of the reduc- 
 tion occurs during the spring and promptly upon the con- 
 traction of the demand for money. The following table, 
 showing the maximum and minimum circulation, with the 
 month in which it has occurred, for the past seven years, 
 affords an illustration of the fluctuations : 
 
 1 Even in 1890 the theory of a circulation based upon evidences of 
 the public debt had considerable footing and was advocated by Sir 
 Donald Smith, President of the Bank of Montreal. It seemed to be 
 thought in Canada that such a system would benefit the larger banks 
 at the expense of the weaker and some of the opposition to the crea- 
 tion of a safety fund was apparently based upon the fact that it would 
 invest the notes of the weakest banks with the same credit as those 
 of the strongest. Breckenridge, 320. This argument was necessarily 
 
 directed against convenience and uniformity. 
 26 
 
402 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 YEAR. 
 
 LOWEST POINT. 
 
 HIGHEST POINT. 
 
 MONTH. 
 
 AMOUNT. 
 
 MONTH. 
 
 AMOUNT. 
 
 1888 
 
 May 
 
 $29,278,000 
 
 October 
 
 $36,244,000 
 
 I88g 
 
 May 
 
 30,012,000 
 
 October 
 
 35,233,000 
 
 iSgO 
 
 April 
 
 30,672,000 
 
 October 
 
 36,480,000 
 
 iSgl 
 
 July 
 
 3O,58O,OOO 
 
 November 
 
 37,431,000 
 
 1892 
 
 May 
 
 31,383,000 
 
 October 
 
 38,688,000 
 
 1893 
 
 May 
 
 31,927,000 
 
 October 
 
 36,906,000 
 
 1894 
 
 May 
 
 28,467,000 
 
 October 
 
 34,516,000 
 
 The banking experience of Canada in recent years is a 
 sufficient vindication against the charge that a banking cur- 
 rency leads to inflation. The volume of notes usually in 
 circulation exceeds by only a small fraction fifty per cent, of 
 the aggregate capital stock of the banks, although they are 
 allowed to issue to the full amount of their capital. Some 
 of the banks have occasionally touched the maximum limit 
 and the branches have been promptly notified by telegraph 
 when the limit has been reached. A real demand for money 
 from such banks is met by loans to them from banks which 
 have not reached the limit. The contracts for these loans 
 call for money, like other contracts, but it is understood that 
 they shall be paid in the notes of the lending banks, so that 
 the public get the benefit of the limit upon their combined 
 issues and the two banks divide the profits on the circula- 
 tion thus put in circulation. 1 The paid-up capital of the 
 Canadian banks on January i, 1896, was $62,196,391, and 
 the notes outstanding were $32,565,179, so that there was a 
 margin of issues unavailed of to the amount of nearly 
 $30,000,000. 
 
 3. The necessity of providing more fully for maintain- 
 ing the notes of all the banks at par in all parts of the Do- 
 minion, which was recognized in 1890, was due not so 
 much to any question of the solvency of the banks as to the 
 mechanical provisions for redemption. The convenience of 
 note-holders had already been partially provided for by mu- 
 
 1 Root, Canadian Bank-Note Currency, "Sound Currency, ' : II., 
 No. 2, p. 7. 
 
THE CANADIAN BANKh\G SYSTEM. 403 
 
 tual arrangements between the banks for the redemption 
 of each other's notes. It would have involved a manifest 
 injustice, in view of the wide difference in character and 
 strength of the Canadian banks to compel each to redeem 
 the notes of all others against its will, but the banks were 
 ready to accept a mandatory law requiring each bank to 
 establish agencies for the redemption of its own notes at the 
 commercial centre of each province. It was accordingly 
 provided in the Act of 1890 (Section 55) : 
 
 The bank shall make such arrangements as are necessary to ensure 
 the circulation at par in any and every part of Canada, of all notes 
 issued or reissued by it and intended for circulation ; and ttfwards 
 this purpose the bank shall establish agencies for the redemption and 
 payment of its notes at the cities of Halifax, St. John, Charlottetown, 
 Montreal, Toronto, Winnipeg, and Victoria, and at such other places 
 as are, from time to time, designated by the Treasury Board. 
 
 4. The bank-note circulation of Canada, under the oper- 
 ation of the redemption fund and the complementary re- 
 quirements, has, in the language of Mr. Breckenridge, 
 " acquired a thoroughly national character; since 1890 it 
 has circulated from one end of the country to the other, 
 never causing loss to the holder, yet keeping unimpaired the 
 qualities for which, in its less perfect state, Canadians had 
 again and again refused to give it up." 1 The fulfilment of 
 these conditions, with the elasticity and sufficiency which 
 usually accompany a banking currency, meet all the require- 
 ments of a perfect currency system. The protection of 
 the note-holder against both temporary and permanent loss 
 closes the case in favor of Canadian banks of issue. They 
 may be well or ill managed as banks of discount and deposit, 
 but, as such banks must exist under any currency system, 
 their bad management cannot be made an argument against 
 the power of note issue unless that power increases their power 
 for evil as banks of discount and deposit. Questions, there- 
 fore, relating to the management of the Canadian banks in 
 their discounting business, and the number of failures they 
 may have suffered, should not be confused with the question 
 
 1 The Canadian Banking System, 338. 
 
404 HISTORY OF MODERN BANKS OF ISSUE. 
 
 of the success of their system of note issues in providing a 
 sufficient, elastic, and secure currency. 
 
 Having made this distinction, it may be admitted that the 
 Canadian banking system is capable of improvement in the 
 direction of official supervision. While discount banking is 
 essentially a private business, it is usually done by corpora- 
 tions holding special privileges by authority of the state, 
 and the subdivision of modern industries justifies the citizen 
 in asking that the state exercise the power of visitation and 
 supervision over such corporations, when they deal inti- 
 mately with the public, which he cannot conveniently ex- 
 ercise for himself. The weakest spot in the Scotch and 
 Canadian banking systems has been the absence of this su- 
 pervision, and, defective as government supervision often is, 
 it would probably have prevented some of the great losses 
 which have come to shareholders in those countries. The 
 proposal of government supervision in Canada has been sev- 
 eral times brought before Parliament, but has always been 
 resisted upon the grounds that public auditors or inspectors 
 could not ascertain accurately the real character of banking 
 assets, and that the fact of government inspection would 
 mislead the public into a confidence which might prove to be 
 misplaced. The project of inspection was renewed by Mr. 
 Foster in 1890, but the auditors whom he proposed were to 
 be appointed by the shareholders at their annual meeting. 
 The same objections w^hich had been made on previous occa- 
 sions were renewed and the project of a formal audit was 
 again abandoned. 
 
 The larger Canadian banks are not, however, without a 
 system of supervision of their own, which ought to be more 
 efficient than that of government officers when there is no 
 collusion between the inspector and general manager. Such 
 collusion is not likely to be a frequent occurrence, because 
 the chief inspector is required by his duties to be a man of 
 independent judgment, of banking experience and reputa- 
 tion, and to receive a large salary. It is his duty to make 
 tours of the . branches, annually or oftener, for the purpose 
 of examining the character of the discounts granted and the 
 
THE CANADIAN BANKING SYSTEM. 405 
 
 general policy pursued. The mere verification of accounts 
 is performed by subordinates. The chief inspector, there- 
 fore, is the equal in character and position of the general 
 manager, and is exposed to few of the temptations of an 
 inferior. He confers with the latter and reports the results 
 of his inquiries regarding the standing of firms seeking dis- 
 counts. If the inspector is associated too closely by family 
 or other ties with the general manager, the fact is likely to 
 become a subject of business gossip and to impair confidence 
 in the bank. The establishment of the general redemption 
 fund has had a salutary effect in attracting the attention of 
 the banks to each other's condition, because of the common 
 responsibility which the fund imposes. 
 
 The safeguards of the Canadian system have been such 
 that the entire losses to creditors, exclusive of shareholders, 
 since confederation in 1867, have been less than $2,000,000, 
 representing an average of about $72,000 annually, or $i in 
 $3000 of the present average liabilities. "The record for 
 the years preceding 1867," says Mr. Breckenridge, "is 
 hardly less admirable, there being no failures in Nova Scotia 
 or L,ower Canada, while in New Brunswick the double lia- 
 bility of shareholders saved the banks' creditors, and in Up- 
 per Canada the failure of the Bank of Upper Canada was the 
 only one which inflicted considerable loss." 1 The Bank of 
 Upper Canada violated the rules of sound banking under the 
 stimulus of a period of rapid growth in Ontario, and made 
 heavy loans to lawyers, politicians, and the gentry. Much 
 money was lost in the land speculations of 1857, tne capital 
 was reduced in 1861, the public deposits were reduced in 
 1863, another reduction of capital in 1866 failed to save the 
 bank, and payment was stopped September 18, 1866, with 
 liabilities of $3,402,000. The assets were nominally worth 
 $5,362,000, but gradually shrunk until in 1882 they were only 
 $420,387 against still outstanding liabilities of $1,380,015. 
 Of this liability $1,122,649 was still due the government, 
 which was open to the suspicion by its tardy efforts to re- 
 
 1 The Canadian Banking System, 355 
 
406 HISTORY OF MODERN BANKS OF ISSUE. 
 
 cover that it had abused its power to obtain advances from 
 the bank during its period of prosperity. * 
 
 Six failures occurred in Canada between 1871 and 1881, 
 six between 1883 and 1889, and two after the latter date. 
 The notes in every case since 1881 have been paid in full, 
 but in some cases prior to 1890 they were redeemed after 
 considerable delay and after they had fallen to a discount. 
 The capital of only one of the failed banks was larger than 
 $500,000. This one was the Federal Bank of Canada, which 
 increased its capital in 1883 to $3,000,000, but was compelled 
 to reduce it in 1885 to $1,250,000 on account of losses from 
 Michigan lumber transactions and loans in Manitoba. There 
 was no panic in the case of any of these failures, and the 
 other banks having offices in Toronto came to the assistance 
 of the Federal Bank in January, 1888, and agreed to advance 
 enough money to pay off its entire liabilities and assume the 
 assets, if the bank would wind up its affairs. The sharehold- 
 ers in Canadian banks lost between July, 1867, and the close 
 of the year 1889 $23,000,000 in capital, accumulated reserves, 
 and assessments resulting from duplicate liability. 
 
 The two failures since 1890 have been those of the Com- 
 mercial Bank of Manitoba and the Banque du Peuple of 
 Montreal. The Commercial Bank succeeded to the business 
 of a private firm at Winnipeg in 1884 and assumed the heavy 
 risks which are often run by banks in new countries. Its 
 business was essentially local and its failure was not a sur- 
 prise to other bankers in the Dominion. The other banks 
 were critical as early as 1892 about accepting the drafts of 
 the Commercial Bank on Montreal, and in May, 1893, a 
 drain of deposits began. The bank paid out its notes for 
 a time to nervous depositors and thus increased its circula- 
 tion between May 3ist and July 3d by the sum of $140,605, 
 while the deposits were reduced $189, 813. a The automatic 
 
 1 Breckenridge, 175. 
 
 2 The purpose of depositors in accepting their deposits in notes 
 was to convert an ordinary claim into a preferred claim, but the pro- 
 cess of conversion was necessarily limited by the limit of circulation 
 allowed the bank, as .well as by the certainty that the bank would 
 quickly be unable to settle its balances with the other banks. 
 
THE CANADIAN BANKING SYSTEM. 407 
 
 operation of the Canadian system of redemption came into 
 play when these notes fell into the hands of other banks, 
 and the Commercial Bank was compelled to suspend with 
 liabilities of $1,344,269. The Banque du Peuple was com- 
 pelled to reduce its capital in 1885 from $1,500,000 to 
 $1,200,000, and suspended on July 16, 1895, with a circula- 
 tion of about $787,000 and with total liabilities of about 
 $7,500,000. 
 
 The Banque du Peuple closed its doors in the hope that 
 arrangements might be concluded with its creditors which 
 would enable it to resume business within the period of 
 ninety days, for which continued suspension would, under 
 the law, "constitute the bank insolvent and operate a for- 
 feiture of its charter or act of incorporation, so far as regards 
 all further banking operations." The notes remained 
 steadily at par and were redeemed before October 5th, ex- 
 cept $150,000, for which the money was held in the bank. 
 One of the plans proposed for reorganization was the issue 
 of deposit receipts to depositors, payable in from six months 
 to two years. The period of suspension passed, however, 
 without resumption, and it appeared at the meeting of the 
 shareholders on December 17, 1895, that overdrafts had been 
 granted to five individuals and firms amounting to $1,229,000, 
 and to four of the directors to the amount of $235,000. The 
 cashier was among those to whom large overdrafts had been 
 granted, and it was reported that he had allowed the audit- 
 ors only twenty hours to examine transactions aggregating 
 $26,000,000 and had misled both auditors and directors. 2 
 
 5. The requirement of a fixed minimum reserve of specie 
 against liabilities was suggested by Mr. Hincks in 1869, but 
 he was convinced by the unanimous opposition of the bankers 
 that the requirement would prove more of an injury than a 
 benefit to the business community in times of stringency. 
 It was pointed out that a reserve which cannot be used is of 
 no avail in emergencies ; that if the proportion were low, it 
 
 1 Sec. 91. 
 
 2 New York Evening Post, Dec. 18, 1895, special despatch from 
 Montreal. 
 
408 HISTORY OF MODERN BANKS OF ISSUE. 
 
 would be treated by weak banks as always sufficient ; and 
 that a part of a bank's best and most available funds often 
 consisted of balances in New York and London, rather than 
 specie in its own vaults. These arguments were conclusive 
 with Mr. Hincks, but they failed to convince Mr. Foster 
 when the plan of a minimum reserve was suggested to him 
 in 1890. The experiment of a minimum reserve had then 
 been longer in operation in the United States and was 
 believed to have produced beneficial results. It was pointed 
 out, however, that the small local banks of the United States 
 occupied a very different position from the great chartered 
 banks of Canada and that regulations which might be 
 necessary in the one case might not be in the other. Mr. 
 Foster's proposition was to require each bank to hold specie 
 and Dominion notes to the amount of ten per cent, of its 
 liabilities. The bankers carried the contest before the Privy 
 Council and at a hearing given them on February 22, 1890, 
 carried the majority with them and secured the exclusion of 
 any provision for the reserve from the government bill. 1 
 
 One of the strongest arguments in favor of liquid reserves 
 and banking upon general assets, without government inter- 
 ference, is found in the comparative calm which has reigned 
 among Scottish and Canadian bankers when those of other 
 countries have been shaken by panic. The last test of this 
 kind came in 1893, when Canada could not fail to be affected 
 by the acute financial convulsion of her great neighbors, 
 the United States. Four of the Canadian banks have their 
 own offices in New York and the others have agents there 
 as well as in London. These agencies do not seek business 
 actively in New York and London, but buy and sell bills of 
 exchange when they can do so to better advantage than the 
 parent bank. They loan more or less on call, but only rarely 
 on time. In periods of stringency they have several times 
 come to the rescue of the New York money market, when 
 the requirements of a rigid reserve law tied the hands of the 
 American banks. Their most important service has been, 
 however, to their parent banks when the pressure of an 
 
 1 Breckenridge, 327. 
 
THE CANADIAN BANKING SYSTEM. 409 
 
 unusual demand has led the latter to draw upon their foreign 
 balances. These balances in New York constituted one of 
 the best liquid assets of the Canadian banks in 1893 and 
 were drawn down nearly $8, 000,000. The banks sacrificed 
 temporary high profits, raised their interest rates no higher 
 than seven per cent. , protected their regular customers, and 
 while their neighbors across the border were foundering in 
 the waves of a financial- crisis, they rode the storm with a 
 serenity which might have justified for them the heroic 
 motto of William the Silent, Stzvis tranquillus in undis. 1 
 
 6. Two of the important features of the Canadian, as 
 well as of the Scotch banking system, are the large capital 
 required by the banks and their system of branches. While 
 each feature is capable of separate discussion, they are more 
 or less connected with each other, from the fact that the 
 requirement of a large capital limits the number of the 
 banks and makes the establishment of branches necessary 
 to afford banking facilities to the country. The minimum 
 paid-up capital required in Canada prior to the revision of 
 1890 was only $100,000, and several small banks of a local 
 character had failed and caused losses to the depositors as 
 well as the shareholders. The law of 1890 required sub- 
 scriptions to the capital stock of each new bank to an amount 
 not less than $500,000 and actual payments to the amount 
 of $250,000. No new bank is permitted to begin business 
 or to issue notes until the Treasury Board is satisfied that 
 this capital has been actually paid up, and only two banks 
 are now in existence chartered since 1883. The paid-up 
 capital of the thirty-eight Canadian banks on December 31, 
 1895, was $62,196,391, of which $52,608,489 was in Ontario 
 and Quebec. This affords an average about nine times as 
 large as that of the 3715 national banks of the United States, 
 which reported a capital on November i, 1895, f $664,136,- 
 915. The Bank of Montreal now has a paid-up capital of 
 $12,000,000 ; the Merchant's Bank of Canada, situated at 
 Montreal, and the Canadian Bank of Commerce at Toronto 
 have a capital of $6,000,000 each ; the Bank of British North 
 
 1 Breckeiiridge, 451. 
 
410 HISTORY OF MODERN BANKS OF ISSUE. 
 
 America has a capital of $4,866,666 ; the Bank of British 
 Columbia has a capital of $2,920,000 ; the Quebec Bank has 
 a capital of $2,500,000; Molson's Bank of Montreal has a 
 capital of $2,000,000 ; and the Imperial Bank of Canada at 
 Toronto has a capital of $1,963,600. The smaller banks 
 are in Nova Scotia and New Brunswick or among the French 
 banks of Quebec which received charters at an early date. 
 The smallest paid-up capital is that of the Summer Side 
 Bank of Prince Edward Island, which is $48,666. The 
 thirty -eight Canadian banks had at the beginning of 1896, 
 outside of city branches of local banks, 483 establishments 
 in 273 localities. There were 250 bank offices in Ontario, 
 89 in Quebec, 63 in Nova Scotia, 31 in New Brunswick, 20 
 in Manitoba, 14 in British Columbia, 9 in the Northwest 
 Territory, and 7 in Prince Edward Island. 1 The entire 
 country is thus served as efficiently in the mere number of 
 establishments as the United States with its banks without 
 branches. 
 
 It is maintained by the friends of the Canadian system 
 that the combination of large capitals and numerous branches 
 has many advantages beyond the mere supply of banking 
 facilities. It secures on the one hand a unity of policy on 
 the part of the leading banks in times of stringency far dif- 
 ferent from the playing at cross-purposes which distinguished 
 the action of the national banks of the great reserve cities in 
 the United States in the panic of 1893 against the smaller 
 banks of the interior and the far West. The Canadian sys- 
 tem, on the other hand, does not sacrifice one section to 
 another, but enables the managers of the large banks to 
 distribute accommodation evenly throughout their system, 
 to mass currency where it is most needed, and by means of 
 their power of note issue to equip every branch with ample 
 resources for sustaining commercial credit without weaken- 
 ing their reserves of actual cash. The effect of the Canadian 
 system has been to make the rate at the most distant interior 
 
 1 Letter of Mr. J. H. Plummer, Chairman editing committee of 
 Canadian Bankers' Association, January 31, 1896. 
 
THE CANADIAN BANKING SYSTEM. 411 
 
 branch not more than one or two per cent, higher than to 
 the best borrower in Montreal or Toronto, while in the 
 United States rates range between ten and twelve per cent. 
 in the newer sections of the country while money is a drug 
 in the market in the great reserve cities. 1 The effect of the 
 comparative unity of Canadian banking without the evils of 
 monopoly which sometimes accompany such unity, is to 
 diminish failures and protect a bank against local losses by 
 the profits in other localities. The management at the cen- 
 tral office are able to keep a sufficiently close watch upon 
 every branch to prevent reckless banking and bad manage- 
 ment, but they are willing to conduct a branch in many 
 cases at a rate of profit which would not justify the main- 
 tenance of a separate bank or even of a branch bank with- 
 out the power of note issue. The Canadian system, therefore, 
 permits the extension of banking facilities more efficiently 
 than the American system of small independent banks, and 
 the power to issue notes against general assets affords a 
 margin of profit and a diminished expense for cash reserve 
 which would not be afforded by a specially secured note 
 issue. 
 
 The leading items of the accounts of the Canadian banks 
 for representative years have been as follows : 2 
 
 1 Cornwall, 16. 
 
 2 The table gives only a general view of the progress of Canadian 
 banking operations, without permitting absolutely exact comparisons, 
 because of the changes in the form of the official reports which were 
 made in 1870, 1872, 1880, and 1890. The figures for 1841 and 1851 are 
 reduced from pounds sterling, in which the accounts were then ex- 
 pressed, and with those of 1861 cover only the Dominion of Canada, 
 without including New Brunswick and Nova Scotia. The changes in 
 the form of statement affect principally the item of discounts, which 
 included substantially all loans in 1867, but excluded certain advances 
 on securities and on current accounts between that date and 1890. 
 The present form of statements includes under "current loans" 
 somewhat more than was formerly included. In every case, however, 
 these loans on bills discounted make up the bulk of the loan account. 
 The private deposits in the banks, payable on demand, on December 
 31, 1895, were $67,452,397 ; deposits payable after notice or on a fixed 
 day, 1119,667,176. 
 
412 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 DEC. 3iST. 
 
 NO. BANKS. 
 
 PAID-UP CAPITAL. 
 
 NOTE CIRCULATION. 
 
 DISCOUNTS. 
 
 l84I 
 
 9 
 
 $11,380,000 
 
 $ 455,ooo 
 
 $ l6,4OO,OOO 
 
 1851 
 
 8 
 
 I4,48O,OOO 
 
 810,000 
 
 27,800,000 
 
 1861 
 
 16 
 
 24,410,796 
 
 11,780,364 
 
 39,588,842 
 
 1867 
 
 28 
 
 32,500,162 
 
 10,102,439 
 
 54,899,142 
 
 1873 
 
 28 
 
 57,931-359 
 
 29,016,659 
 
 119,647,350 
 
 1876 
 
 39 
 
 66,137,315 
 
 23,275,701 
 
 122,562,334 
 
 1880 
 
 36 
 
 59,819,603 
 
 27,328,358 
 
 105,587,672 
 
 1885 
 
 41 
 
 61,763,279 
 
 32,363,992 
 
 125,493,660 
 
 1890 
 
 38 
 
 60,057,235 
 
 35,006,274 
 
 153,236,184 
 
 1891 
 
 38 
 
 61,299,305 
 
 35,634,129 
 
 l86,59O,6O2 
 
 1892 
 
 39 
 
 61,938,515 
 
 36,194,023 
 
 I98,532,l60 
 
 1893 
 
 39 
 
 62,099,243 
 
 34,418,936 
 
 200,397,'4 9 8 
 
 1894 
 
 39 
 
 61,683,719 
 
 32,375,620 
 
 195,836,141 
 
 1895 
 
 38 
 
 62,196,39! 
 
 32,565,179 
 
 202,088,259 
 
CHAPTER XVII. 
 
 t 
 
 THK BANKS OF LATIN AMERICA. 
 
 Variety of Systems in Mexico and the Southern Countries The Ex- 
 perience of Chile, Brazil, the Argentine Republic, and Uruguay, 
 with the Suspension of Specie Payments Paraguay and the 
 Northern States Haiti, Central America, and the Banks of the 
 European Colonies. 
 
 THK banking systems of the American States and depen- 
 dencies of the South offer a great variety of methods 
 of note issue and a great variation in the safeguards 
 thrown around such issues. Some of the banking systems 
 of Latin America have been the development of time and 
 experience ; others have been framed as an entirety upon 
 the model of some European system, sometimes with the 
 approval of eminent foreign economists ; and others are sim- 
 ply concessions by the governments to English capitalists 
 who conduct the affairs of the banks from London. The 
 domestic systems of banking and of currency have illus- 
 trated in many cases the fact that the best regulations do 
 not always constitute a safeguard against unsound banking 
 in countries where internal development is rapid, specula- 
 tion is intense, and the conservatism of fixed conditions does 
 not prevail. Bad as have been the results of some of the 
 banking systems, however, their evils have hardly kept 
 pace with the evils of government paper currency, which has 
 proved such a fetter upon the prosperity of many South 
 American States. The banking systems which have been 
 at their worst have been those which have been only covert 
 branches of the Treasury or the pliant tools of executive 
 
 413 
 
HISTORY OF MODERN BANKS OF ISSUE. 
 
 power. The banks founded by English capital have for the 
 most part kept free from these entanglements and have paid 
 continuous dividends to their shareholders. They have not 
 escaped in some cases serious losses from the depreciation of 
 the paper currency or the fall of exchange in silver-using 
 countries, but they have battled against these evils with the 
 intelligence and caution which are derived from a knowledge 
 of correct banking principles. 1 
 
 The Banks of Mexico. 
 
 The present banking circulation of Mexico is principally 
 supplied by the National Bank of Mexico, which grew out 
 of the consolidation in 1884 of several banks of issue then in 
 existence. Several banks were authorized to issue circulat- 
 ing notes under special charters during the early history of 
 the republic, but only a few survive, one of these being an 
 
 1 The great English banks which do business in South America, as 
 well as in Asia, Africa, and the islands of the sea, are one of the po- 
 tent instruments of British commercial supremacy in the world and 
 concentrate the business of foreign exchange in London. Sixty in- 
 corporated banks, nearly all of large capital, exist iu London, devoted 
 exclusively to international banking. Their aggregate capital is com- 
 puted at 1294,000,000, in addition to $ 175, 000,000 invested by private 
 banking houses, and their deposits exceed $1,200,000,000. Address 
 of Ulysses D. Eddy before National Association of Manufacturers at 
 Chicago, New York Journal of Commerce, Jan. 24, 1896. The Inter- 
 national American Conference, held at Washington in 1889, recom- 
 mended the creation of an international American bank, to promote 
 direct exchange transactions with South America. Bills have been 
 introduced in several successive Congresses, proposing the incorpora- 
 tion of such an institution, and one is pending in the Fifty-fourth 
 Congress, but no effective action has yet been taken. It was sug- 
 gested by Secretary Elaine, in his letter to President Harrison, trans- 
 mitting the report of the Conference, in favor of such a bank, that 
 the volume of trade with the countries south of the United States 
 amounted in 1889 to $282,005,057, of which $181,058,966 consisted of 
 imports of merchandise into the United States and $71,938,181 of ex- 
 ports of merchandise, upon which a commission of three-quarters of 
 one per cent, would represent a banking charge of about $1,800,000. 
 Sen. Ex. Doc. 129, Fifty-first Congress, ist Sess., 2. 
 
THE BANKS OF LATIN AMERICA. 415 
 
 English institution called the Bank of London, Mexico, and 
 South America. The National Bank of Mexico was founded 
 mainly with French capital, and occupies substantially the 
 position of the Bank of Kngland in regulating the credit cir- 
 culation of the country and making advances to the govern- 
 ment. The capital is $2o,ooo,ooo, 1 of which forty per cent, 
 is paid up. The bank agreed at the outset to advance from 
 $6,000,000 to $8,000,000 to the government at six per cent., 
 and to collect a part of the federal revenues for a small com- 
 mission. The charter of the bank runs for fifty years from 
 May 31, 1884. The bank has the right to issue notes to the 
 amount of three times the cash reserve, which may be held 
 in gold or silver coin or bullion. Their issue is supervised 
 by two officers appointed by the government, who affix an 
 official seal, indicating that the stamp tax has been paid, 
 and take note of the cash reserve, in order to assure them- 
 selves that the law imposing a fixed proportion between 
 reserve and note issues is complied with. 
 
 The denominations of the notes run from $i to $1000 and 
 they are required to be redeemed in silver coin on demand 
 at the central office of the bank or at the branches through 
 which they are issued. The notes of the National Bank are 
 receivable for public dues in cities where branches exist or 
 where there are agents who exchange the notes for coin 
 without discount. 2 The liabilities of the National Bank on 
 account of circulation on December 31, 1895, were $18,359,- 
 346 and of the International and Mortgage Bank about 
 $2,000,000. The total liabilities of the National Bank on 
 that date were $67,743,288, of which $24,641,661 was on 
 account of deposits, $1,992,281 on account of reserve, and 
 $20,000,000 on account of capital. The assets included 
 $12,000,000 in capital not called up, $25,695,037 in cash 
 
 1 The Mexican unit is the dollar or peso, which is worth in gold 
 $0.983, but the country is on the silver basis, which makes the silver 
 coins worth only about half their nominal gold value. The amounts 
 in the- text are expressed in Mexican silver dollars. 
 
 2 Lvy, 271. 
 
41 6 HISTORY OF MODERN BANKS OF ISSUE. 
 
 items, $14, 133,038 in commercial paper, and $11,372,706 
 in debtor current accounts. 1 
 
 The Banks of Chile. 
 
 Chile has been in recent years under the domination of 
 government paper money and legal tender bank-notes, in 
 spite of the comparative wealth and prosperity of the republic 
 among other South American countries. Free banking 
 existed in Chile up to 1839, when a law was passed forbidding 
 the creation of banks of issue without the authority of the 
 governor of the municipality or department where they were 
 established. A general reform of the banking system was 
 made by the law of July 23, 1860, under the inspiration of 
 M. Courcelle-Seneuil. 2 This law limited the maximum cir- 
 culation to one and one-half times the capital of the banks 
 and provided that the notes should be redeemable in specie, 
 and in case of default should constitute a judgment (titres 
 extcutoires) against the goods and persons of the proprietors. 
 The issue of the notes was placed under the supervision of 
 the public authorities by requiring the signature and seal of 
 the superintendent of the mint. Shareholders were liable 
 only for the amount of their shares, loans to officers and 
 directors were required to be specially recorded, and the 
 books and cash were to be open to government inspection. 3 
 These regulations are still in force, but the readjustment of 
 the monetary standard has led to some recent changes in the 
 provisions governing the circulation. 
 
 The suspension of specie payments in Chile was decreed 
 in 1865, but was brought to an end on August 31, 1866. 
 The specie basis was again abandoned and forced legal tender 
 decreed by a law of July 25, 1878, which fixed the maximum 
 circulation at 15,000,000 piasters ($13, 600,000), divided 
 among eleven banks which subscribed to a new loan. The 
 
 1 The author is indebted to Senor Romero, the Mexican Minister at 
 Washington, for the latest figures from the Diario Oficial, Jan. 3, 1896. 
 
 2 Levy, 291. 
 
 3 Comptroller's Report, 1895, Letter of Minister Edward H. Stro- 
 bel, 68. 
 
THE BANKS OF LATIN AMERICA. 417 
 
 government resorted to legal tender paper, issued directly by 
 the Treasury, during the war with Peru, and the amount 
 had risen, on January 5, 1881, to 40,000,000 piasters. The 
 banks, at the outbreak of the revolution against President 
 Balmaceda in 1891, had a circulation of about 15,000,000 
 piasters, upon a capital of 30,000,000 piasters and a reserve 
 of 6,000,000. The circulation increased after the fall of 
 Balmaceda to 20,000,000 piasters, and the government paper 
 money increased to 42,000,000 piasters. The Junta estab- 
 lished at Iquique during the civil war proclaimed liberty of 
 note issues, and the Bank of Tarapaca, the railway companies, 
 the municipality of Iquique, the principal corporations and 
 business houses, and even retail tradesmen, issued their own 
 notes. The notes were not legal tender and the public ac- 
 cepted those they regarded as good and rejected those they 
 regarded as bad, but the return of civil order was followed 
 by the redemption of the paper in nearly every case. The 
 government made an unsuccessful effort to restore specie 
 payments in 1892, by means of a bond issue and an adjust- 
 ment of the standard to meet the depreciation of the paper 
 money. The paper continued at a heavy discount and a 
 new law was pushed through Congress early in 1895, still 
 further reducing the standard. The "dollar" was made 
 the monetary unit, but was reduced to one-thirteenth part 
 of a pound sterling or about 36.49 cents in United States 
 gold coin. Gold was made the monetary standard and was 
 to be paid out for paper, beginning June i, 1895. Resump- 
 tion was begun under these requirements, but the foreign 
 exchanges were for some time unfavorable and gold was 
 largely exported. 
 
 The law of 1895 P ut a limit of 24,000,000 dollars ($9,000,- 
 ooo) upon bank-note issues until December 31, 1897, appor- 
 tioned to the paid-up capital of the banks, and provided that 
 the notes should be guaranteed to their full amount by 
 deposits in the public treasury of gold, government notes, 
 municipal bonds, treasury bills, or bonds of mortgage banks. 
 These notes are to be receivable in payment of taxes until 
 
 December 31, 1897. The notes constitute the first lien on 
 27 
 
41 8 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the assets, and in case of failure the securities in the treasury 
 are to be sold for the benefit of the note-holders. 1 The total 
 circulation of the Chilean banks on August 31, 1895, ex ~ 
 pressed in Chilean money, was $19,304,386, deposits were 
 $114,228,282, and gold holdings were $3, 55 7, 695. The Bank 
 of Chile, by far the largest institution in the country, had 
 on August 31, 1895, $10,639,595 in outstanding notes, 
 $50,705,626 in deposits, and a paid-up capital of $20,000,- 
 ooo. Its advances and amounts receivable were $64,374,979 
 and its cash, including government notes and checks, was 
 $8,995,213- 
 
 The Banks of Brazil. 
 
 The government of Brazil succeeded in 1888, before the 
 overthrow of the Kmpire, in restoring the parity of the 
 paper currency based upon the gold standard. The milreis 
 was worth fifty-four and six-tenths cents in United States 
 currency, and foreign exchange was substantially at par. 
 The circulation at the time of the fall of the Empire in 1889- 
 was about 200,000,000 milreis ($109,000,000) in paper. Two 
 banks were founded at about this time with the support of 
 French capitalists, the National Bank of Brazil and the 
 Bank of the United States of Brazil. They had been in 
 operation but a short time when a decree of President Fon- 
 seca in December, 1890, based upon a report by Ruy Barbosa, 
 the Minister of Finance, authorized the union of the two 
 institutions under the name of the Bank of the Republic of 
 the United States of Brazil, with a capital of 200,000,000 
 milreis. The new bank was authorized to issue notes to 
 three times the amount of its gold reserve, and the charter 
 provided that the government should grant the right of 
 note issue in future to no new banks and that the circulation 
 of existing banks should be remitted to the new establish- 
 ment as the old ones surrendered their privileges. The 
 existing banks of issue numbered six, with a limit of cir- 
 culation of 166,000,000 milreis. The new bank undertook 
 
 1 Bulletin of the Bureau of the American Republics, April, 1895, 
 670-74. 
 
THE BANKS OF LATIN AMERICA. 419 
 
 the retirement of the government paper money, which had 
 been in circulation for some fifteen years and still amounted 
 in June, 1891, to 168,000,000 milreis. 
 
 A new organization was given to the Bank of the United 
 States of Brazil by an Act of December 17, 1892, under the 
 title of the Bank of the Republic of Brazil. The capital was 
 reduced from 190,000,000 milreis to 150,000,000 milreis, the 
 notes were made legal tender, and the bank was pledged to 
 retire 100,000,000 milreis in bills within the year 1893. l The 
 circulation of the bank, including interest-bearing bonds, 
 which were made legal tender and receivable at public 
 depositaries, and including the circulation of other bank bills 
 assumed by the consolidated bank, reached 379,390,720 mil- 
 reis ($205, 000,000) and the government paper money reached 
 200,000,000 milreis ($iO9,ooo,ooo) 2 . This was the situation 
 early in 1893, but the suspension of specie payments as the 
 result of a new civil war led to repeated new issues of paper 
 money and a constantly growing premium on gold. The 
 pledge to retire paper money and bank-notes in 1893 was 
 partially kept, only to be followed by new issues larger than 
 those withdrawn. The total circulation was thus forced up 
 early in 1894 to 713,000,000 milreis, of the nominal value 
 of $385,000,000 in United States money, but an actual value 
 of much less, but some reduction was made during 1894 
 and 1895, au d the paper circulation was computed in the 
 latter year at 340, 7 11,370 milreis in bank-notes and 367,358,- 
 652 milreis in government notes. 3 The statutes establishing 
 the bank provide for the resumption of specie payments as 
 soon as foreign exchange has been maintained for one year 
 at par or as soon as the forced legal tender of the bills shall 
 be suspended. The government, however, has employed the 
 deposits of the banks for war expenses and resumption does 
 not seem to be at hand. Foreign commerce has enjoyed the 
 benefit which is attributed to an unfavorable exchange in 
 stimulating exports, but in 1892 the rise of prices in dispro- 
 
 1 Revue des Banques, January, 1893, XII., 293. 
 
 2 Lvy, 282-84. 
 
 3 Revue des Banques, July, 1895, XIV., 141. 
 
420 HISTORY OF MODERN BANKS OF ISSUE. 
 
 portion to wages drove Italian and other European laborers 
 out of the country to such an extent that coffee planting 
 could not command the necessary number of hands. 1 
 
 Banking in Argentina. 
 
 The forced legal tender of paper currency is declared by 
 M. Levy to have been, ''since 1826, a chronic malady, with 
 rare intermissions, in the Argentine Republic." * The his- 
 tory of the country for the years prior to the crisis of 1890 was 
 the story of unduly expanded credit, discounting too rapidly 
 the possibilities of the future, which was witnessed in the 
 United States in 1837 an( ^ l8 57 an ^ more recently in Aus- 
 tralia. The oldest bank of the Argentine Republic was the 
 Bank of the Province of Buenos Ayres, which was founded 
 as a private bank in 1822, but was purchased by the State in 
 1826 from the proceeds of an English loan. It was authorized 
 as a state bank to issue circulating notes redeemable in silver. 
 The issues were excessive and had depreciated in 1868 to a 
 value of four cents on the dollar. The bank was then au- 
 thorized to convert the notes into a new issue and continued 
 in operation until 1891. The Bank of the Nation {Banco de 
 la Nation) was created by the Act of November 5, 1872, limit- 
 ing the circulation to double the paid-up capital and requir- 
 ing a cash reserve of at least one-fourth of the outstanding 
 notes. The government subscribed for $2,000,000 of the 
 capital stock, which was fixed at $5,ooo,ooo. 3 The bank 
 was given continuance for twenty years and its notes were 
 legal tender. 
 
 The banking system which was established in 1887, and 
 which broke down so completely in 1890, was peculiar in the 
 fact that the circulating notes purported to combine the 
 double guarantee of metallic coverture, so dear to the fraru- 
 
 1 London Bankers' Magazine, January, 1893, LV., 79. 
 
 2 Melanges Financiers, 286. 
 
 3 The Argentine monetary unit is the peso ($.965), equal to five 
 francs, but its value is so near that of the dollar that Argentine cur- 
 rency is often stated in dollars. 
 
THE BANKS OF LATIN AMERICA. 421 
 
 ers of the English Act of 1844, and the coverture by means 
 of evidences of the public debt, which is the basis of the 
 national banking system of the United States. But the 
 gold was borrowed, the issue of evidences of the public debt 
 went beyond legitimate currency requirements and the guar- 
 antees proved of no avail against inflation, depreciation, and 
 resulting insolvency. The Bank of the Nation was reor- 
 ganized under the Guaranteed Banking Act of November 
 3, 1887. This Act authorized the issue of notes by any 
 provincial bank which complied with the requirement of a 
 deposit of government bonds. A special issue of four and a 
 half per cent, gold bonds was authorized by the general 
 government as the basis of this circulation, and in order to 
 secure the gold required to buy these bonds each of the 
 provinces desiring a provincial bank sold abroad a special 
 issue of its own gold bonds. The gold received was paid 
 into the national Treasury for the national bonds and the 
 banks of the provinces were authorized to issue an amount 
 of paper money equal to the bonds thus purchased. The 
 provinces became responsible for the issue of paper money 
 by the respective provincial banks. 1 A considerable sum of 
 gold was obtained by the sale of bonds, which resulted in a 
 great inflation of the prices of property on which loans were 
 made by the banks. 
 
 Bad banking and excessive issues wrecked the new sys- 
 tem within four years, and sent gold to 300 per cent, in 
 paper, in spite of the security of the note issues. Every 
 bank of issue suspended in 1891 and is still in process of 
 liquidation. The guaranteed bonds issued to found the sys- 
 tem were estimated to be outstanding in 1893 to the amount 
 of $100,082, 965. 3 The inflation had been aided by the issue 
 of paper money without special guarantee, but it was the 
 opinion of the executive power that the Guaranteed Bank- 
 ing Act was the cause of the crisis. 3 The government as- 
 
 1 Comptroller's Report, 1895, Letter of Minister William I. Bucha- 
 nan, 596. 
 
 2 London Bankers' Magazine, March, 1893, L,V., 408-16. 
 
 3 Lvy, 286. 
 
422 HISTORY OF MODERN BANKS OF ISSUE. 
 
 sumed responsibility for the outstanding paper and required 
 the surrender of the bonds and specie held by the banks. It 
 was necessary to have some banking institution to permit 
 the continuance of government finance, and the Bank of the 
 Argentine Nation was erected in December, 1891, upon the 
 ruins of the old Bank of the Nation and of the provincial 
 banks. The bank was opened with a capital of $50,000,000, 
 entirely paid in paper. The affairs of the old national bank 
 were made over to the new bank and its shareholders given 
 a preference in the subscriptions to the new stock. The bank 
 was allowed to issue notes to the amount of seventy-five per 
 cent, of the internal bonds deposited as a guarantee. 1 The 
 attempt to sell stock to the public proved a failure and 
 the capital of the bank was furnished exclusively by the 
 Treasury. 
 
 Banking in Paraguay. 
 
 Banking in Paraguay has been in a somewhat chaotic state 
 since the collapse of credit in the Argentine Republic, of 
 which the country is a near neighbor. The circulation was 
 issued for many years by the National Bank of Paraguay, 
 in which the government was a large shareholder. The 
 gold unit of value, prior to the suspension of specie pa) r - 
 ments, was the English pound sterling, and five paper 
 dollars were paid for ^i in gold. The suspension of the 
 National Bank of the Argentine Republic on January i, 
 1885, was not followed at once by suspension in Paraguay, 
 but later in the year gold went to a premium of fifty per 
 cent. The National Bank had the option of redeeming in 
 gold or silver, and redeemed in silver until 1889, when the 
 Bank of Paraguay and the River Plate was founded, redeem- 
 ing its notes exclusively in silver. Both banks were sub- 
 jected to a severe run in 1890, their silver reserves were 
 reduced, and gold went to 300 per cent, in paper. The 
 National Bank suspended the payment of its obligations 
 and announced that it would be compelled to grant an ex- 
 tension to its customers, many of whom were land owners of 
 
 1 London Bankers' Magazine, June, 1892, LIU., 905. 
 
THE BANKS OF LATIN AMERICA. 423 
 
 large means, but unable to meet their immediate obligations. 
 The bank was granted by law a ten years' extension of time 
 within which to collect its credits and settle its debts, and 
 debtors were expected to pay their indebtedness in quarterly 
 instalments during the ten years. The money had originally 
 been borrowed upon a specie basis, but was to be paid back 
 in paper. Even these payments were not made, and in 
 August, 1894, the bank agreed to accept fifty per cent, of the 
 amounts due. Many debtors paid under this condition, but 
 the demand for money drove up the interest rates so sharply 
 that others were prevented from making payment within 
 the three months allowed. 1 The affairs of the bank are now 
 in process of liquidation through a syndicate. 
 
 The Bank of Paraguay and the River Plate (Banco Para- 
 guay y de la Plata] was founded with a capital of $8,000,000 
 in Paraguayan money, worth at the time of its foundation in 
 1889 about 66| cents to the dollar in gold, but now worth 
 about eighteen cents. The government subscribed one- 
 quarter of the capital through a bond for ,400,000 nego- 
 tiated at six per cent., and receives five per cent, of the 
 profits of the Bank of Paraguay in compensation for the 
 privileges of the charter. The present paper circulation of 
 Paraguay is about $5,000,000, with a gold value of about 
 $850,000. The only provision now in force for the redemp- 
 tion of notes is through the customs, of which five per cent, 
 are set aside for redemption purposes. There is a difference 
 of opinion in Paraguay whether to destroy the notes thus 
 redeemed or to employ them in the purchase of gold. The 
 business is managed by the Agricultural Bank (Banco Agri- 
 cola}, which is an institution under the entire charge of the 
 government and is governed by a directory of five members 
 named by the executive. 
 
 Banking in Uruguay. 
 
 Uruguay was until recently under the regime of free bank- 
 ing and is still upon the gold basis. There was in circula- 
 
 1 Letter of Vice-Consul Bben M. Flagg, Comptrollers^ Report, 1895, 
 9 2 - 
 
424 HISTORY OF MODERN BANKS OF ISSUE. 
 
 lation a considerable issue of government paper money, but 
 it was entirely withdrawn at the end of September, 1892. 
 The country has made several experiments with government 
 banks, but they have been mismanaged and have gone out 
 of existence. The National Bank was the last of these 
 institutions. The circulation on September 30, 1893, was 
 780,000 piasters ($800,000) and that of the London and 
 River Plate Bank was 2,600,000 piasters, which was in- 
 creased a year later to 2,940,000 piasters. The law of March 
 23, 1865, prescribed uniform rules for the government of 
 banks of issue. One of these rules fixed the circulation at 
 three times the capital, but this was limited in 1870 to twice 
 the capital actually paid up. 1 The private banks in 1893 re- 
 nounced the right of circulation and it was decided to author- 
 ize no additional banks of issue. The two such banks now in 
 existence are the London and River Plate Bank, owned and 
 managed in London, 2 and the Italian Bank of the River 
 Plate. Banks of issue pay an annual patent tax of $2000, 
 which is twice the tax imposed on banks of other classes. 3 
 The government is not a shareholder in any of the existing 
 banks, but is responsible for the liquidation of the National 
 Bank and named one of the three members of the liquida- 
 ting committee of the English Bank of the River Plate. 4 
 Each bank is required to redeem its notes in gold on demand. 
 
 1 Lvy, 281. 
 
 2 This bank does business in several other South American coun- 
 tries, but its issue of circulating notes is limited to Uruguay. The 
 capital of the bank is ^900,000, and the current accounts on Septem- 
 ber 30, 1895 were ^9,729,245. The bank carried cash to the large 
 amount of ^6,037,411, which was a more effective resource, in the 
 opinion of the chairman of the board of directors, than any form of 
 securities, and had much to do with enabling the bank to weather the 
 storm of the crisis in Argentina, Uruguay, and Paraguay, which swept 
 away so mauy other banking institutions. London Bankers' Maga- 
 zine, January, 1895, LJX., 98. 
 
 3 Letter of Minister Granville Stuart, Comptroller's Report, 1895, 105. 
 
 4 The President of the Republic recommended in December, 1895, 
 the creation of a new National Bank, with a capital of $10,000,000, of 
 which a considerable portion is to be sought in London. London 
 Bankers' Magazine, Feb., 1896, LXL, 247. 
 
THE BANKS OF LATIN AMERICA. 42$ 
 
 Bank-notes are not a legal tender, but are a first lien on the 
 assets of the banks and are limited to a minimum denomi- 
 nation of ten piasters ($10.30). The Italian Bank showed 
 total assets on December 31, 1894, of $8,798,570, of which 
 $5,109,197 was in securities and $896,711 in cash. The lia- 
 bilities were $1,500,000 for capital, $851,230 for circulation, 
 and $5,109,197 for deposits. 
 
 The Banks of the Northern States. 
 
 Banking in Venezuela is governed by the law of May 7, 
 1895, which permits the creation of banks of issue under 
 fixed conditions. The notes are not legal tender and can be 
 issued to the amount of no more than fifty per cent, of the 
 paid-up capital. The banks are required to redeem their 
 notes in lawful money on demand, at the central office and 
 the branches. Twenty-five per cent, of the capital of a pro- 
 posed new bank is required to be held as a cash reserve. The 
 banks of issue are forbidden to loan on their own shares or 
 to make loans which will lock up their capital for over six 
 months. Balance sheets must be published quarterly, show- 
 ing, among other things, the loans to directors and officers, 
 and changes in the by-laws must be promptly communicated 
 to the government. The national executive is empowered 
 to appoint an inspector for each bank with power to exam- 
 ine books and cash. 1 The only banks in operation are those 
 of Caracas and Maracaibo. Their circulation on Decem- 
 ber 31, 1894, was 2,382,660 bolivars ($450,000). 
 
 The system of government paper currency which pre- 
 vailed for many years in Colombia has recently been a sub- 
 ject of legislation with a view to raising its value and 
 permitting the creation of a banking system. The law of 
 November 21, 1894, provided for the coinage of silver pieces 
 of ten and twenty cents and the retirement of paper notes 
 of the same denominations. The National Bank was to be 
 reduced to a section of the Treasury Department and its 
 commercial affairs liquidated. The power to issue circulat- 
 
 1 Gaceta Official, Caracas, May 10, 1895, Ley de Bancos. 
 
426 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ing notes was declared by the new law to belong exclusively 
 to the nation and was not to be delegated until paper money 
 should be at par with silver. Banks of circulation estab- 
 lished after these conditions were restored were required to 
 have not less than $250,000 in legal silver or gold money. 
 The limit of issues is double the amount of the metallic 
 reserve and the privilege cannot be granted for a longer 
 period than seven years, but may be renewed. 1 The bank- 
 note circulation at the end of 1894 was $26,109,557. 
 
 The two leading banks of issue in Ecuador were until 
 recently the Bank of Ecuador and the International Bank, 
 and their notes were maintained at par and were preferred 
 to silver. The International Bank has recently been merged 
 with the Bank of Commerce and Agriculture, established at 
 Guayaquil, with a capital of 5,000,000 sucres ($2,500,000). 
 The capital of the Bank of Ecuador, established in 1867 at 
 Guayaquil, is 2,000,000 sucres. The banks are allowed to 
 issue circulation to the amount of three times their coin 
 reserve in silver. They are subject to examination by gov- 
 ernment officials, but are private corporations and the share- 
 holders are subject to no liability beyond their investment. 2 
 The outstanding circulation is about 4,500,000 sucres. 
 
 Several banks of circulation exist in Bolivia and issue 
 notes under legal regulations. The National Bank of 
 Bolivia is located at Sucre and has a capital of 2,600,000 
 bolivars ($2,600,000). The Francisco Argandona Bank at 
 Sucre, founded in 1893, nas a capital of 100,000 bolivars. 
 The Bank of Potosi is also a bank of issue. The circulation 
 of the National Bank on June 30, 1893, was 3,532,000, boli- 
 vars and of the Francisco Argandona Bank on December 31, 
 1893, 393. 000 bolivars. The metallic reserve in each case 
 was about one-fourth of the circulation. 3 
 
 There are no banks of issue in Peru, but the existing dis- 
 
 1 Monthly Bulletin of the Bureau of the American Republics, Feb- 
 ruary, 1895, II., 570-72. 
 
 3 Comptroller's Report, 1895, Letter of Minister James D. Tillman, 
 78-9. 
 
 3 Lvy, 279. 
 
THE BANKS OF LATIN AMERICA. 427 
 
 count banks hold government paper money in their cash 
 reserves. This money was issued to the amount of 100,- 
 000,000 soles ($100,000,000) during the war with Chile, but 
 has been largely retired, leaving actual transactions to be 
 carried on in silver. The banks are permitted to establish 
 branches and are required to pay five per cent, of their net 
 profits as a patent tax. 1 
 
 The National Bank of Haiti. 
 
 ' The exclusive privilege of issuing bills to bearer, payable 
 in specie on presentation," was conferred on the National 
 Bank of Haiti by the decree of the National Assembly of 
 April i, 1880. The Bank was founded by French capital- 
 ists, with a capital of 10,000,000 francs ($2,000,000), and its 
 privileges were conferred for fifty years. The charter re- 
 quired the coin reserve to equal at least one-third of the 
 circulation and made the notes legal tender throughout the 
 republic. The founders of the bank secured from the gov- 
 ernment a pledge to adopt a national currency and this was 
 done by making the gourde the unit (equal to five French 
 francs) and providing for gold and silver coinage at the Paris 
 mint. The government went further and violated the privi- 
 leges of the bank by issuing a national paper currency, 
 amounting to 1,000,000 gourdes in 1884, and eventually to 
 6,200,000 gourdes. 3 The amount has been somewhat re- 
 duced, but has in the meantime deranged the financial sys- 
 tem and substantially deprived the bank of the power of 
 issuing its own notes. The bank was required by a law of 
 September 29, 1892, to issue notes of one and two gourdes 
 on account of the 'government. 3 More recently (in 1895) 
 the National Assembly has authorized a loan for 50,000,000 
 francs in Hurope, with which it is proposed to establish the 
 gold standard. The National Bank manages the public debt 
 
 1 Comptroller's Report, 1895, Letter of Richard R. Neill, Charge 
 d' Affaires, 94. 
 
 * Comptroller's Report, 1895, Letter of Minister John B. Ferris, 86. 
 , 274. 
 
428 HISTORY OF MODERN BANKS OF ISSUE. 
 
 and is exempt from taxation upon its property and notes. 
 None of its own notes have been in circulation during the 
 recent paper money regime, but the bank has done a consid- 
 erable discount business through several branches. One of 
 the branches is at Paris. 
 
 San Domingo also has a National Bank endowed with the 
 power of note issue and in 1894 adopted the gold standard, 
 with the United States dollar as the monetary unit. 
 
 The Banks of Central America. 
 
 The republic of Salvador contains five banks of issue, 
 with special charters granted by the government, under the 
 provisions of a general law. The banks are allowed to issue 
 notes to the amount of twice their subscribed capital, but 
 are required to hold forty per cent, of the amount of the 
 circulation in silver coin. The Industrial Bank is required 
 to hold a reserve of fifty per cent, against its notes, but 
 thirty per cent, of the mortgages held may be counted as 
 the equivalent of coin. Notes are redeemable in silver coin 
 on demand. The five banks in operation are the Interna- 
 tional Bank of Salvador, with a capital of $3,000,000 ; 1 the 
 Western Bank {Banco Occidental), with a capital of $2,000,- 
 ooo ; the Salvadorean Bank {Banco Salvadorend) with a 
 capital of $3,000,000 ; The Industrial Bank of Salvador 
 {Banco Industrial del Salvador}, with a capital of $2,000,000 ; 
 and the London Bank of Central America. The latter in- 
 stitution has only a branch in Salvador, and the proportion 
 of the capital there employed is not absolutely fixed. The 
 aggregate circulation of the four domestic banks is about 
 $5,ooo,ooo. 2 
 
 The only bank in Nicaragua is the London Bank of Cen- 
 tral America, Limited, whose head office is in London. The 
 bank was founded in 1888, with a nominal capital of ^"600,- 
 
 1 The monetary unit in Central America is the peso, nearly equal 
 at the old parity of gold and silver to the United States dollar, but the 
 depreciation of silver makes its present bullion value about 50 cents. 
 Most of the sums stated in dollars represent pesos. 
 
 2 Comptroller's Report, 1895, Letter of Minister Lewis Baker, 99-101. 
 
THE BANKS OF LATIN AMERICA. 429 
 
 ooo, under the name of the Bank of Nicaragua, but only 
 19,567 of the 60,000 shares have been issued and only fifty 
 per cent, has been paid up on these. The shareholders are 
 liable only for the amount of their stock, and government 
 officials have the right at any time to make an inspection of 
 the books and cash of the bank. The reserve is required to 
 be kept in silver and must equal forty per cent, of the out- 
 standing circulation. The bank is not subject to special 
 taxes and has the privilege of using the national railway, 
 steamship, telegraph, and telephone lines without charge. 1 
 The notes of the bank are registered in the State Treasury 
 and amounted on December 31, 1894, to ^99. 2 &9- The de- 
 posits and current accounts were ,89,751, and the reserve 
 funds, including ,12,000 to cover depreciation in exchange, 
 were ,"23,734. The cash in hand was .154,075 ; bills re- 
 ceivable, ,88,526, and loans, ,68,758. 
 
 Semi-annual reports are required of banks of issue in 
 Guatemala and the government designates experts to make 
 periodical examinations of their books. 2 A cash reserve of 
 fifty to sixty per cent, is usually required to be held against 
 notes, but the charters granted have not been uniform in 
 their requirements. The four existing banks of issue are 
 the International Bank ; the Commercial Bank of Guatemala ; 
 the Colombian Bank, with a paid-up capital of 1,630,000 
 pesos ; and the Bank of the Occident, with a paid-up capital 
 of i, 500, ooo pesos. The International Bank had a circulation 
 on December 31, 1894, f $ 2 > 539>747 ; deposits and current 
 accounts, $3,668,270; reserve fund, $950,000; cash, $3,878,- 
 584; discounts and advances, $4,540,608. The bank also 
 holds among its securities $382,190 in British Consols and 
 United States four per cent, bonds. 3 The Colombian Bank 
 had a circulation on December 31, 1894, f $434> II2 J the 
 Commercial Bank, $1,220,011 ; and the Bank of the Occident, 
 $1,408,029. 
 
 1 Comptroller's Report, 1895, Letter of Minister Lewis Baker, 106. 
 
 2 Comptroller's Report, 1895, Letter of D. Lynch Pringle, Charge^ 
 <T Affaires, 85. 
 
 3 London Bankers' Magazine, May, 1895, LIX, 729. 
 
430 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Costa Rica has both government paper money and bank- 
 notes in circulation. The latter are issued chiefly by the 
 Bank of Costa Rica, which has a capital of $1,155,000 and 
 a circulation of about $3,500,000.' 
 
 The Banks of European Colonies. 
 
 The banks of issue of the French colonies in America 
 were authorized by laws of the republic passed in 1849, 
 which put them under the supervision of the home govern- 
 ment and under certain general regulations. These banks 
 were authorized to issue notes no smaller than 25 francs ($5) 
 until 1874, when the law of June 24th reduced the limit to 
 five francs ($i). The circulation was limited to three times 
 the metallic reserve and the liabilities were not permitted to 
 exceed three times the capital. The French colonial banks 
 have a common agency at Paris under the supervision of the 
 Minister for the Colonies. 2 The Bank of Martinique and 
 the Bank of Guadeloupe were each established in 1853, with 
 a capital of 3,000,000 francs, while the Bank of French 
 Guiana was founded in 1855 with a capital of 300,000 francs, 
 which w 7 as increased in 1864 to 600,000 francs. The two 
 older banks have loaned largely on the growing crops, which 
 has brought them difficulties and losses in years w r hen the 
 crops have failed, but has contributed greatly to the con- 
 venience of the community. The Bank of Guadeloupe has 
 a circulation of about 7,000,000 francs ; the Bank of Mar- 
 tinique, 8,000,000 francs ; and the Bank of French Guiana, 
 1,600,000 francs. 3 The Bank of Guadeloupe paid a dividend 
 in 1894 f twenty-one per cent, on the nominal capital, and 
 the management proposed to reduce the rate on loans on the 
 crops from six to four per cent. 4 
 
 The bank-note circulation of the British West Indies and 
 of British Guiana is largely furnished by the Colonial Bank, 
 with headquarters in London and fifteen branches and 
 
 1 Lvy, 277. 
 
 2 Courtois, 190-94. 
 
 3 Levy, 275. 
 
 4 Revue des Banques, August, 1895, XIV., 156. 
 
THE BANKS OF LATIN AMERICA. 431 
 
 agencies. The bank was chartered by the British govern- 
 ment in 1836 and the charter was renewed in 1856. The 
 paid-up capital is ,600,000 and the total liabilities on 
 June 30, 1895, were ;4>759> 6 42, of which ,452,672 was 
 on account of circulation, "1,724,346 on account of deposits, 
 and "1,794,963 for bills payable and other liabilities. The 
 discounts were "1,771,084 ; bills receivable,. ,1,464, 296, and 
 specie 419, 988.' Mr. Muhleman distributes the circulation 
 among the various colonies as follows : Jamaica, $ 900,000 ; 
 British Guiana, $300,000 ; Trinidad, $500,000 ; Barbadoes, 
 $160,000 ; others, $240, ooo. 2 The Nassau Bank furnishes 
 a part of the circulation in the Bahamas, based upon coin 
 and British and United States bonds, and the British Guiana 
 Bank provides a part of the circulation for the colony for 
 which it is named. 
 
 The Spanish Bank of Cuba has provided the paper circu- 
 lation of the largest island of the West Indies. The gov- 
 ernment utilized the bank during the insurrection several 
 years ago for the issue of legal tender paper on government 
 account, but this paper was withdrawn in 1893. The capital 
 of the bank is 8,000,000 piasters ($7,400,000). Porto Rico 
 also has a bank of issue, known as the Spanish Bank of 
 Porto Rico. The institution was founded in 1891 and has 
 a circulation of about 1,500,000 piasters. 3 
 
 Dutch Guiana is provided with a circulation of about 
 1,000,000 florins ($400,000) by the Bank of Surinam. St. 
 Thomas also has a bank of her own, the Bank of St. 
 Thomas, which issues notes in terms of dollars, running as 
 low as $i. 
 
 1 London Bankers' Magazine, February, 1896, LXI. 293. 
 9 Monetary Systems of 'the World, 113. 
 , 276. 
 
CHAPTER XVIII. 
 
 BANKING IN AFRICA AND THK EAST. 
 
 The Early Banking Experience of India and the Present Paper Cur- 
 rency The Banking System of Japan and the Beginning of 
 Banking in China The Bank of Persia The Recent Failures in 
 Australia The Maintenance of the Gold Standard in Java The 
 Colonial Banks of Great Britain, France, Spain, and Portugal. 
 
 THE banking experience of the continents of Africa and 
 Asia and of the great islands of the Pacific offers 
 much that is of interest to the financial student and 
 historian, in spite of the comparatively recent creation of 
 some of the banking systems. The influence of British capi- 
 tal and British models is more apparent even than in Latin 
 America in the financial system of British India, in the great 
 colonies of Australia and in the institutions which handle 
 exchange with South Africa and the free ports of China. 
 The history of the independent banking systems of the East 
 is of peculiar interest also, because it has put to the test 
 certain economic theories under conditions which could not 
 have been found under the complicated and conservative 
 financial management of European nations. One of 'the 
 most interesting of these experiments is that conducted for 
 nearly twenty years in the Island of Java, under Dutch con- 
 trol, where values have been maintained upon the gold 
 standard and silver coins have been kept at parity with gold 
 by means of the absolute limit put upon their amount, with 
 scarcely a gold guilder in circulation and a merely nominal 
 supply of gold in the reserves of the Bank of Java. Equally 
 interesting promises to be the experience of China, whose 
 
 432 
 
BANKING IN AFRICA AND THE EAST. 433 
 
 native bankers and great English companies are soon to en- 
 counter the rivalry of a bank under Russian influence, whose 
 example is likely to invite other competitors to enter the 
 field. 
 
 Banking in India. 
 
 The issue of circulating notes through the medium of 
 banks was brought to an end in India in 1861, but prior to 
 that date there was a flourishing system of banks of issue. 
 Banking in India in the early days of European supremacy 
 was subject to no fixed regulations. The bulk of the busi- 
 ness was transacted for many years by the " agency houses," 
 founded by civil and military employees who had retired 
 from the active service of the East India Company to go into 
 private business. They made loans to the company at a 
 high rate during the latter part of the last century, but the 
 rate had fallen by 1813 to six per cent, and the debt had 
 risen to ^27,000,000. Some of these houses became very 
 powerful, but large investments in industrial establishments, 
 which suffered many failures in 1828, 1829, and 1830, caused 
 their downfall. The total liabilities of the six agency houses 
 which failed from 1830 to 1834 were estimated at over ^"17,- 
 000,000 and one of the largest paid little more than three 
 per cent. 1 
 
 The era of responsible banks began after the crisis. The 
 Bank of Bengal had been founded as early as 1809, but its 
 charter was renewed in 1840; a charter was issued in the 
 same year to the Bank of Bombay, with a capital of ^525,- 
 ooo ; and a charter was issued in 1842 to the Bank of Madras. 
 The private banks had been allowed to issue notes and this 
 was true also of the Union Bank of Calcutta, founded in 
 1829, and the Bank of Agra. The Bank of Bengal in 1834 
 refused to receive the notes of the Union Bank or any of the 
 new concerns, and the Union Bank went down in the crisis 
 of 1846. The Bank of Western India was founded in Bom- 
 
 1 J. W. Macl/ellan, in London Bankers* Magazine, January, 1893, 
 
 , 55- 
 I 
 
434 HISTORY OF MODERN BANKS OF ISSUE. 
 
 bay in 1842, opened branches in Calcutta, Ceylon, and 
 Canton, and became the Oriental Bank in 1845. This bank 
 seems to have inaugurated the business of circuitous ex- 
 change, and encountered the unsuccessful hostility of London 
 houses and the East India Company when it sought a royal 
 charter in 1850. 
 
 The discovery of gold in Australia led to the projection 
 in London of many new banks for foreign business, but it 
 soon appeared that there was already a sufficient banking 
 capital invested in India. The Bank of Bombay found 
 legitimate discount business so dull that the directors en- 
 deavored to obtain a modification of their charter which 
 would permit them to engage in exchange business in and 
 out of India. The directors proposed, if this were granted, 
 that the limit of note issues should be reduced from ,2,000,- 
 ooo to ,1,000,000. The actual circulation was only ,400,000, 
 and the government refused to assent to the proposal. 
 
 The banks of the three great presidency towns had a cir- 
 culation in 1860 amounting to ,2,241,471, with current ac- 
 counts of only ,1,855,293. The circulation increased by the 
 spring of 1861 to ,3,081,599, of which ,1,851, 627 was issued 
 by the Bank of Bengal, ,1, 006, 460 by the Bank of Bombay, 
 and ,223, 5 12 by the Bank of Madras. Each bank was re- 
 quired to keep in its vaults cash equal to one-fourth of all 
 outstanding demand liabilities. No complaint had been 
 made up to this time of the manner in which these banks 
 conducted their business, but it was thought that a profit 
 might be made by the government out of the issue of notes. 1 
 The proposition to take the power of issue away from the 
 banks was discussed as early as April 27, 1859, in a despatch 
 from Lord Canning, and was embodied into law in 1861. 
 The record of the banks was less creditable after the loss of 
 the power of note issue. The Bank of Bombay, which had 
 been so carefully conducted for twenty years that its gross 
 losses were computed at only ,2,500, obtained a new char- 
 ter in 1863, sweeping away most of the restrictions on its 
 
 1 London Bankers* Magazine, April, 1893, LV., 548. 
 
BANKING IN AFRICA AND THE EAST. 435 
 
 operations and permitting an increase of the capital by June, 
 1864, to ,2,090,000. Another crash came in 1866, follow- 
 ing the news of the failure of Overend, Gurney, and Co., in 
 London, and the Bank of Bombay lost in three years ,2,046,- 
 898, and was compelled to wind up. 1 A new Bank of Bom- 
 bay was formed, and in May, 1868, the liquidator stated that 
 ,1,889,993 of the capital of the old bank had been lost. The 
 great presidency banks are still important factors in the finan- 
 cial affairs of India and usually hold in their reserves from 
 3,000,000 to 4,000,000 rupees in government notes. 2 
 
 The power to issue notes was withdrawn from the three 
 banks by Act XIX., of 1861, and a paper currency estab- 
 lished under government supervision, upon substantially 
 the same basis as that of the issue department of the Bank 
 of England, if entirely separated from the banking depart- 
 ment. Some changes were made in the law in 1893, but 
 they were principally such as were required by the suspen- 
 sion of the free coinage of silver. The circulation based 
 upon securities is 80,000,000 rupees, and the interest upon 
 these securities, which amounted to 3,452,284 for the year 
 ending March 31, 1895, * s covered into the Indian Treasury. 
 The remainder of the circulation is represented by coin. The 
 average gross circulation for the year ending March 31, 1863, 
 was 44,194,385 rupees, which increased in 1869 to 101,455,- 
 327, in 1873 to 128,640,267, in 1879 to 131,905,084, in 1883 
 to 151,807,113, in 1889 to 164,316,288, in 1892 to 254,362,371, 
 in 1893 to 270,995,630, in 1894 to 282,915,237, and in 1895 
 to 311,111,406 rupees. A considerable proportion of these 
 notes is held in the treasury offices and the bank reserves, 
 so that the average circulation in the hands of the public in 
 
 1 J. W. MacLellan, in London Bankers' Magazine, February, 1893, 
 LV., 223-24. 
 
 8 The amount thus held on March 31, 1895, was 2,610,000 rupees, 
 but the monthly average for the year was 3,740,000 rupees. Report 
 from Head Commissioner of Paper Currency, Calcutta, July 24, 1895. 
 The rupee was worth about forty-eight cents in United States cur- 
 rency when silver was at parity with gold, but it is now worth 
 about twenty-two cents. 
 
436 HISTORY OF MODERN BANKS OF ISSUE. 
 
 1895 is calculated by the head commissioner at 185,000,000 
 rupees. The maximum of the year was 202,000,000 in De- 
 cember, 1894, an d the minimum 168,400,000 in April, 1894. 
 Redemptions, including those accomplished by the transfer 
 of notes between treasury branches, are much more rapid 
 than for the paper money of the United States, having 
 reached 1,002,336,925 rupees during 1895, or more than 
 three times the circulation. The new currency has pos- 
 sessed perfect security and has obviated the necessity for 
 large transfers of silver coin, but it has lacked the element 
 of elasticity and has restricted the expansion of banking 
 business in India. The total liabilities of the three banks 
 which formerly issued notes have increased in no such pro- 
 portions as the liabilities of banks in other countries, and 
 interest rates in India have averaged much higher than in 
 countries possessing a banking currency. 1 
 
 The suspension of free coinage in India in 1893* was au 
 attempt to arrest the downward course of the silver rupee 
 by giving it a scarcity value. The commission which con- 
 sidered the subject recommended that an exchange rate of 
 one shilling, four pence (32 cents), be fixed by the offering 
 of Council bills, sold by the government in London, at that 
 rate. The experience of the Netherlands and the Bank of 
 Java in thus putting an arbitrary gold value on silver token 
 coins, and the success of Austria-Hungary and Russia in 
 maintaining their credit paper and silver coins above the 
 bullion value of silver, were the models of the new Indian 
 policy. The policy was not at once successful. Rupee 
 paper would not bring sixteen pence and the government was 
 eventually compelled to sell it for what it would fetch. The 
 very fact that the government succeeded in raising the value 
 of the coined rupee somewhat above its bullion value operated 
 to counteract the effects of this success. Silver coins began 
 to pour out of private hoards, to be replaced (if replaced at 
 all) by silver bars. A curious proof of this, and a pre- 
 sumptive proof that the silver circulation expanded in spite 
 
 1 London Bankers' Magazine, April, 1893, LV., 548. 
 
 2 For further reference to this subject, see Chapter XXII. 
 
BANKING IN AFRICA AND THE EAST. 437 
 
 of the suspension of coinage, is afforded by the fact that 
 coins of old coinages constituted in 1895 a considerably 
 larger proportion of the amounts received at government 
 treasuries than in former years. The percentage of the 
 coins of William IV. increased from 1.47 per cent, of the 
 total in 1894 to 1.54 in 1895 > coins of 1840, first issue, from 
 4.0 to 4.4 ; second issue, from 10.99 to Ii: - 2 3 ; and other issues 
 up to 1882, with few exceptions, showed an increase. 1 
 
 Banking in Japan. 
 
 Japan, after experimenting with government paper money 
 and local banks issuing notes on the evidences of the public 
 debt, has adopted the system of a single great bank of issue 
 governed by regulations similar to those of the Imperial 
 Bank of Germany. Paper money was in use in Japan for 
 many generations, but its recent history dates from 1867. 
 That year was marked by the overthrow of the feudal sys- 
 tem, which had long prevailed in the Empire, and the 
 restoration of the power of the Mikado. It was considered 
 necessary to continue the circulation of the existing paper 
 money in order to pay the indemnities granted to the feudal 
 lords for the surrender of their privileges and their land 
 taxes. A new form of paper, bearing the traditional emblems 
 of the Empire, was adopted and acquired a more general 
 circulation than the old. 2 
 
 The local banks were authorized under the name of 
 national banks by a law of 1872. The law was passed 
 largely to prevent the fall in value of the government paper 
 money, and the redemption of the paper was partially pro- 
 vided for by the issue of government stocks. The banks 
 were required to purchase the stocks in order to issue circu- 
 lating notes and were at first required to redeem their notes 
 on demand in gold. The depreciation of silver and the 
 excess of paper caused such a persistent demand for the 
 
 1 Mr. F. C. Harrison, in Report from the Head Commissioner of 
 Paper Currency, Calcutta, July 24, 1895, 39-42. 
 
 2 G. Boissonade, Journal des Economistes, Sept., 1895, 410. 
 
438 HISTORY OF MODERN BANKS OF ISSUE. 
 
 conversion of the notes that the banks were authorized in 
 
 1876 to redeem in government paper money. The capital 
 of these banks was allowed to consist of any form of govern- 
 ment stock, and the banks were required to place this stock 
 in the custody of the government, receiving 80 per cent, of 
 the amount in paper money. There was almost a mania for 
 new banks between 1876 and 1879 and the number in opera- 
 tion at the close of the latter year was 153. Paper fell in 
 
 1877 forty per cent, in relation to silver and fifty per cent, in 
 relation to gold, and the situation was made worse by the 
 issue of 27,000,000 yen in government notes to pay the 
 expenses of putting down the rebellion of 1877-78. 
 
 A new effort was made in 1878 to bring order into the dis- 
 ordered financial system by the suspension of further issues 
 of paper, the issue of short-term treasury bonds bearing in- 
 terest, exchangeable for government notes, and the issue of 
 long-term bonds bearing interest at seven per cent, and paya- 
 ble in silver. It was announced that the redemption of a 
 portion of these bonds annually would be accompanied by 
 the burning of an equal quantity of paper money. These 
 measures were completely successful. The breaking down 
 of feudal barriers developed the domestic commerce of the 
 country and stimulated a production which found an outlet 
 in foreign exports and brought silver pouring into Japan in 
 payment. The banks bought up the depreciated paper 
 money so rapidly, in order to exchange it for bonds, that the 
 issue of bonds had to be temporarily suspended to prevent 
 too great a rarefication of the circulating medium. A mint 
 was opened, specie was received at the custom-houses at its 
 current value in paper, and in less than seven years (in 1885) 
 paper was within five or six per cent, of par. 
 
 The new policy was promoted by the creation in 1882 of 
 the Bank of Japan, with a capital of 20,000,000 silver yen, 1 
 
 235. The gold yen is worth 10.997 in United States money, 
 but the silver yen, containing 26.956 grammes of silver nine-tenths 
 fine, is worth only about half as much in bullion, owing to the rapid 
 depreciation of silver in recent years. Japan is now on the silver 
 basis. 
 
BANKING IN AFRICA AND THE EAST. 439 
 
 and by the laws of 1883 and 1884, providing for the gradual 
 retirement of the notes of the local banks and the substitu- 
 tion of those of the new institution. The law of 1884 pre- 
 scribed the rules governing the circulation of the Bank of 
 Japan and required that the notes be convertible into silver 
 on demand. The bank was authorized to issue notes to the 
 amount of 85,000,000 yen without a specie reserve and of 
 this sum not more than 27,500,000 yen were to be issued in 
 place of internal bank-notes cancelled after 1887. A leaf 
 was taken from the German law in the provision that the 
 government might permit the extension of the limit of cir- 
 culation in case of need, but that the excess of circulation 
 should be subject to a tax of five per cent. The circula- 
 tion not covered by specie is required to be covered by good 
 commercial paper or treasury bonds. 1 Circulation may be 
 issued beyond the authorized limit without special tax when 
 specie is held for the full amount of the excess. The bank 
 has branches at Osaka and Shimonoseki and five sub- 
 branches. The circulation is about 150,000,000 yen. 
 
 The Act of 1883, which regulated the retirement of the 
 notes of the local banks, required them to surrender the 
 privilege of note issue at the expiration of the term of twenty 
 years for which they were originally chartered. They were 
 required to create a fund for the redemption of their notes, 
 from monies to be set aside annually from their profits. 
 This fund is in the custody of the Bank of Japan, which 
 employs it in the purchase of public stocks and cancels the 
 notes with the proceeds of the interest on the stocks! The 
 terms of the local banks expire between 1896 and 1899, and 
 the government in 1894 brought in a bill providing that the 
 banks should cease, on the expiration of their privilege, to 
 be banks of issue and that outstanding circulation should be 
 redeemed by the State. The bill was not finally acted on 
 and the local banks have been making an earnest fight for 
 an extension for ten years of the privilege of note issue. 
 The government is still seeking the suppression of local is- 
 
 1 Report of the Director of the Mint for 1895, 367. 
 
440 HISTORY OF MODERN BANKS OF ISSUE. 
 
 sues, upon the ground that it gives the national banks an 
 unfair advantage over the seven hundred private banks and 
 retards the unification of the currency. 1 
 
 Japan originally employed both gold and silver money, but 
 was driven to the silver standard when the restoration of 
 specie payments was attempted in 1882 and has suffered in- 
 convenience by the great difference of exchange with gold- 
 using countries. There has been much discussion of the 
 currency problem and some agitation in favor of the gold 
 standard. A commission was appointed in September, 1893, 
 to consider the existing state of the currency and the best 
 standard for Japanese interests. The result of their delibera- 
 tions has not been harmonious and only individual reports 
 have been submitted to the government. The theory that 
 a high premium on specie stimulates exportations, and that 
 its disappearance removes this stimulus, has not been directly 
 verified in the case of Japan . Exports have steadily increased , 
 in spite of the rise in value of the paper money ; but this 
 phenomenon is partially explained by the fact that the rise 
 of paper in relation to silver has been neutralized by the fall 
 of silver in relation to gold, which has left the paper money 
 in something like its old relation to the gold standard of 
 other countries. 9 
 
 1 Letter of Jiuchi Soyeda, in Economic Journal, Dec., 1894, IV., 
 
 735- 
 
 2 For another case of the failure of this theory, see Ch. XII., p. 279, 
 tinder The Banks of Greece. M. Combes de Lestrade, in the discus- 
 sion before the Societe d' Economic Politique, at Paris, Sept. 5, 1895, 
 declared that Russia, with a gold reserve adequate for the restoration 
 of gold payments, allowed the paper rouble to remain below par in 
 order to avoid a sudden arrest of exportation. Journal des Econo- 
 mistes, Sept., 1895, 420. The effect of the silver standard in Japan, 
 according to the observation of Mr. Soyeda, who is in the best posi- 
 tion to know the facts, has been to raise domestic prices as well as to 
 increase the burden of gold obligations expressed in the silver stand- 
 ard. He says : " The prices of exportable goods, such as rice, the chief 
 article of food, have risen a great deal. Thus the effect of the de- 
 preciation was felt not only in the external trade, but also in the in- 
 ternal transactions." Economic Journal, Dec., 1894, IV., 732. 
 
BANKING IN AFRICA AND THE EAST. 441 
 
 Banking in China. 
 
 The bank-note circulation of China is under no legal regu- 
 lation. The Chinese banks of issue are mainly at Peking 
 and issue notes as low as ten cents, but the notes rarely cir- 
 culate far from the locality. The Peking banks, however, 
 and the discount banks in the provinces, which perform the 
 functions of the treasury for the government, stand high in 
 the public estimation. The issue of paper money by the 
 government took place as far back as five hundred years 
 before Christ, but was suspended in 1445 and has been only 
 once resumed for a brief period. 1 No special taxes or bur- 
 dens are imposed upon bankers as such, but they are ex- 
 pected to aid the government by loans in times of emergency. 
 Several branches have been established in China of foreign 
 banks, some of which issue notes in Hongkong which have 
 acquired circulation within Chinese jurisdiction. 
 
 The greatest of the foreign banks is the Hongkong and 
 Shanghai Banking Corporation, which was incorporated in 
 1864 with a capital of $2, 500,000. 2 The bank began business 
 in 1865, with several merchants of Hongkong among its 
 directors, and has increased its capital to $10,000,000 and 
 its note issues to $9,543,171. The report of the directors 
 for the half-year ending June 30, 1895, showed net profits, 
 including a small balance on hand, of $1,248,802. The sum 
 of $492,140 of this profit was absorbed by the difference in 
 exchange between China and the gold-using countries where 
 the dividends are paid, but $444,444 was awarded in dividends 
 in gold and $500,000 transferred to the reserve fund. The- 
 magnitude of the business of the bank may be judged by the 
 fact that its liabilities were $167,128,037, including deposits 
 of $119,804,395 and bills payable of $20,766,669. The cash 
 in hand and in transit was $51,390,449 ; loans and discounts 
 were $47,650,726, and bills receivable were $60,036,316. 
 
 Several other English and East Indian banks do business 
 
 1 Comptroller's Report, 1895, Letter of Minister Charles Denby, 
 
 74-75- 
 
 1 London Bankers' Magazine, Feb., 1893, I/V., 221. 
 
442 HISTORY OF MODERN BANKS OF ISSUE. 
 
 in China, but it was only in the closing months of 1895 that 
 plans were perfected for a Russo-Chinese bank, with head- 
 quarters at St. Petersburg. The bank has been organized 
 with a capital of 6,000,000 roubles ($4,600,000), of which 
 more than half has been subscribed by French bankers. 
 The capital is said to be furnished by the same syndicate 
 which effected the issue of the Chinese loan guaranteed by 
 the Russian government after the close of the war between 
 China and Japan. The president of the new bank is Prince 
 Ksperukhtomsky, who has attained some prominence in 
 Russian politics. 
 
 The Bank of Persia. 
 
 The Imperial Bank of Persia was established for thirty 
 years by a group of English capitalists in 1889, and its head 
 office is in London. The capital of the bank is ,650,000, 
 with authority to increase to ,4,000,000, and the metallic re- 
 serve is required to be at least one-third of the amount of notes 
 in circulation. The excess of circulation above the reserve 
 is not allowed to exceed the amount of the capital actually paid 
 in. The reserve may consist of gold or silver, but the charter 
 provides that if Persia adopts the single standard of gold 
 or silver, three- fourths of the reserve shall be held in the metal 
 which may be adopted as the standard. The notes constitute 
 a first lien upon the reserve and may be redeemed at the 
 expense of reducing the reserve below the legal limit. 1 The 
 notes, which reached ,72,668 on September 20, 1895, are g et ~ 
 ting into general circulation in Persia, and branches of the 
 bank have been established at Teheren, Ispahan, Tabiz, 
 Meched, Shivas, Bushir, Bagdad, Basvah, and Bombay. The 
 bank advanced ,500,000 to the Persian government in 1892, 
 for the purpose of buying back the tobacco monopoly from 
 those who held it, and was accorded the guarantee of reim- 
 bursement from the customs duties. The dividends paid in 
 1895 were .35,000, notwithstanding some losses during the 
 past few years arising from the depreciation of silver. 2 The 
 
 1 Lvy, 236. 
 v 2 Revue des Banques, Dec., 1894, XIII., 253. 
 
BANKING IN AFRICA AND THE EAST. 443 
 
 aggregate assets on September 20, 1895, were ,1,402,694, of 
 which ,141,986 was in cash and ,799,726 in loans and dis- 
 counts. The deposits were ^"239,164. 
 
 The Banking System of Australia. 
 
 The banking system of Australia was organized in some 
 respects like the Scottish system prior to the crisis of 1893, 
 but was not managed with the conservatism and good judg- 
 ment which have been the characteristics of Scotch bank- 
 ing. The difficulties developed in the crisis of 1893, 
 were not, however, the result of any excess of note issues, 
 but of the error common in new countries, excessive specu- 
 lation in land and the locking up of assets in investments 
 which did not prove immediately productive. The original 
 Bank Act of Victoria, passed in 1864, was general in its pro- 
 visions, required no independent audit of bank accounts, 
 and imposed no definite limit upon note issues. The demand 
 for funds for speculation in land led to heavy loans to the 
 speculators, but some of the shrewder bankers evidently 
 doubted their legality and secured in 1888 an important 
 amendment of the banking law. A commission was ap- 
 pointed, with the avowed purpose of revising the law, and the 
 act which resulted from their deliberations purported to 
 impose new safeguards by requiring a paid-up capital of 
 ,125,000 for banks issuing notes and by making the notes a 
 first charge upon the assets. 1 These reforms, however, were 
 apparently only the cloak for the new provision that, ' ' Any 
 incorporated banking company may, notwithstanding any- 
 thing to the contrary contained in any act in force in the 
 Colony of Victoria relating to such banks, advance or lend 
 money on the security of lands, houses, ships, or pledges of 
 merchandise. ' ' 
 
 Banking in Australia had been carried to its extreme 
 
 1 Mr. MacFie, London Bankers' Magazine, January, 1892, LIII., 
 68, 69. Notes constituted an unlimited liability in Queensland, and 
 by the. Act of 1874 in New South Wales. London Bankers* Magazine, 
 August, 1894, LVIII., 154. 
 
444 HISTORY OF MODERN BANKS OF ISSUE. 
 
 limits, and millions of English and Scotch capital were at- 
 tracted to the country by its rapid development and by the 
 fact that the people were of the same blood and presumably 
 of the same temper in business matters as the lenders. The 
 banks of Victoria alone increased their aggregate liabilities 
 from ^"19,488,512 in 1880, to ^42,224,084 in 1890, while the 
 aggregate assets increased from ^"23,284,822, including ^3,- 
 408,961 in coin, to ^60,937,955, including .6,868,328 in 
 coin. 1 The proof of the activity and of the risks assumed 
 in Australian banking is afforded by the proportion between 
 available deposits and the discounts and advances made just 
 before the crisis of 1893. The following table shows how 
 the Australian banks loaned "up to the hilt " in comparison 
 with the more conservative English banks : * 
 
 
 DEPOSITS. 
 
 DISCOUNTS AND ADVANCES. 
 
 London Joint Stock Banks . . 
 English Provincial Banks. ... 
 Australian Banks 
 
 ^232,332,633 
 
 62,272,817 
 
 I4Q 4.OO ^2Q 
 
 ;l4S,942,304 
 46,856,402 
 
 TCJ. Cj.7 ^7o 
 
 
 
 
 The proof that the evils which carried down fourteen great 
 banks and closed several hundred branches in the spring of 
 l8 93> grew purely out of bad banking, and had substantially 
 no connection with the note issues, is afforded by the com- 
 paratively small figures of the circulation. The banks of 
 Victoria increased their note circulation only from ,1,236,- 
 046, in 1880, to ,1,543,340 in 1890, and in 1893 it wa $ 
 substantially the same. The chief medium of circulation 
 in Australia was gold, and the Australian people were so 
 well accustomed to British methods of the use of credit that 
 the absence or presence of the power of note issue would 
 probably have made little difference in the crisis of 1893. 
 The inflation of credit and the crisis occurred without any 
 great expansion of note issues, and if the habits of the people 
 had required a concurrent expansion it would have been 
 
 1 London Bankers' Magazine, April, 1892, LIIL, 580. 
 
 2 London Bankers' Magazine, January, 1893, LV., 46. 
 
BANKING IN AFRICA AND THE EAST. 445 
 
 only an incident of the deeper causes of the crash. As M. 
 Levy sums up the situation : 1 
 
 It is worth remarking that the Australian crisis was not due to an 
 excess of issues of bank-notes, whose figures, on the contrary, have 
 never ceased to restrain themselves within reasonable limits, but to 
 the large lock-ups upon mortgage advances which could not be 
 repaid, which left the banks without the liquid resources necessary to 
 satisfy their depositors. 
 
 The discredit thrown upon the notes of suspended banks 
 by the crisis of 1893, and the pressure for currency which 
 usually accompanies the disappearance of credit, led to a 
 temporary issue of government notes in New South Wales 
 and to some modifications of the banking law. The 
 principal change affecting the bank-note circulation was 
 the adoption of the provision, enacted in Victoria in 1888, 
 making the notes of a failed bank a first charge on the 
 assets. Bank-notes were made a legal tender except at the 
 bank, as in the case of the notes of the Bank of England, 
 and the amount in circulation, in excess of the coin reserve, 
 was not permitted to exceed one-third of the capital, nor to 
 exceed in any case ,2,000,000. 
 
 The future of Australian banking is by no means free 
 from storm-clouds. The banks adopted plans of reconstruc- 
 tion after the crisis of 1893, which involved the change of 
 demand and time deposits into deferred liabilities with in- 
 terest in most cases at four and a half per cent. This plan 
 afforded a breathing spell, and the principal of these deposits 
 does not become due in any considerable amount until 1898. 
 The payments required in that year, are ^"10,605,772 ; in 
 1899, ^"10,873,620; in 1900, ;i2, 258, 320; and in 1901, /"8,- 
 390,508.' It is already becoming a serious question how this 
 immense mass of liability is to be met, for it is evident that, 
 unless there is a marked change in feeling among investors 
 in England and Scotland, the principal due there will nearly 
 all be withdrawn. This probability presents as serious a 
 
 1 Melanges Financiers, 299. 
 
 2 Ivondon Bankers' Magazine, June, 1894, LVIL, 869. 
 
446 HISTORY OF MODERN BANKS OF ISSUE. 
 
 problem as that which has confronted the United States 
 during the long period of the withdrawal of foreign capital 
 which followed the passage of the silver purchase law of 
 1890. It is indeed, from a mathematical standpoint, much 
 more serious in the case of Australia, for the amount of 
 liability to Kurope is computed at ^20,000,000, or at the 
 rate of 16 per head for the Australian population. 1 If this 
 withdrawal of capital actually takes place, it means the 
 crippling of many Australian industries, the forced sale of 
 land and other assets held by the banks, and the impairment 
 of their power to pay. The prolonged payment of interest 
 in itself on such a mass of liability means high rates for 
 money on commercial loans and to that extent a tax upon 
 the productive power of the colonies. The fact that these 
 burdens are proving heavy is indicated by the second sus- 
 pension, on July 17, 1895, of the City of Melbourne Bank, 
 with liabilities of nearly ,4,000,000. The bank first sus- 
 pended on May 17, 1893, and reopened on July igth follow- 
 ing, but it was declared by the directors in a report of March 
 31, 1895, that the high rate of interest on deposit receipts 
 could not be maintained. If the remaining banks meet 
 their heavy obligations more successfully, it will be because 
 of the great recuperative power of the colonies, the return 
 of confidence among foreign investors, and the effect of high 
 discount rates in attracting and holding foreign money. 
 
 The Bank of Java. 
 
 The bank-note circulation of the Dutch East Indies, of 
 which the Island of Java forms the most important part, is 
 furnished by the Bank of Java. The bank was founded in 
 1828, with a capital of 6,000,000 florins ($2,400,000),* but 
 the chief interest of its history to the Western World is the 
 success with which it has maintained the gold standard in 
 Java since the suspension of free coinage in Holland in 1875. 
 The situation in Java has been in many respects the same 
 
 1 London Bankers' Magazine, Dec., 1894, I, VIII., 741. 
 
 2 Muhleman, 126. 
 
BANKING IN AFRICA AND THE EAST. 447 
 
 as in the mother country, but the experiment is one which 
 might have seemed more precarious because of the situation 
 of Java in the midst of silver standard countries and the 
 almost entire absence of gold in the reserves of the bank. 
 Silver was for many years the legal standard of Java, but 
 the government of Dutch India continued for a considerable 
 time, beginning in 1818, to make the bulk of its payments 
 in copper. This resulted in driving silver from circulation 
 and led to the introduction of paper currency to represent 
 the copper coins. ' In 1875 the Bank of Java was empowered 
 to regulate its operations according to the principles on 
 which the Bank of Holland was working. A bill was 
 brought forward and passed in 1877, by the Dutch Ministrj-, 
 for the regulation of the currency of their Indian possessions. 
 The principal features of this bill were the establishment of 
 the double standard on the same basis as in Holland, the 
 formal suspension of the further coinage of silver. 
 
 The parity of the notes of the Bank of Java and of the 
 silver coins is maintained through the foreign exchanges. 
 All commercial operations with Holland or other countries 
 in Europe are settled by bills drawn on Amsterdam or Lon- 
 don, and the exchange has shown an extreme fluctuation 
 never greater than five and a quarter per cent, on Amster- 
 dam and six per cent, on London. Since 1885 the fluctua- 
 tion has not been greater than three per cent. The bank 
 rate has varied from nine per cent, for a time in 1876 to as 
 low a rate as four per cent, in 1878 and in 1886. The mean 
 rate in 1894 was 5.28 per cent. 2 Settlements for merchan- 
 dise balances between Holland and Java are made by ship- 
 ments of silver. These shipments are taken up at home by 
 the Bank of the Netherlands against bank-notes or credits at 
 par with gold. 3 There was an industrial crisis in Java in 
 1886, which was attributed in some quarters to the mainte- 
 nance of the gold standard of wages and prices, but the 
 
 1 London Bankers' Magazine, March, 1893, I/V., 383-91. 
 
 2 L'Economiste Europeen, Nov. 9, 1895, VIII., 581. 
 
 3 Letter from Mr. Van den Berg, Report of the Indian Currency 
 Committee, Sen. Misc. Doc. 23, Fifty-third Cong., ist Sess., 573. 
 
448 HISTORY OF MODERN BANKS OF ISSUE. 
 
 planters adopted improved methods of production and re- 
 cent years have been years of prosperity. The majority of 
 Dutch and English observers have been disposed to regard 
 the fixed par of exchange maintained with gold standard 
 countries as more advantageous to the island under actual 
 conditions of production than the possible benefits of the 
 declining cost of production in gold obtained in silver stand- 
 ard countries by the comparatively slow rise in wages, rents, 
 and raw materials. The actual gold holdings of the Bank 
 of Java seldom exceed 6,000,000 florins ($2,400,000) l against 
 a note circulation of 45,000,000 florins ($18,000,000), and 
 gold is seldom seen in general circulation. The smaller 
 currency consists of silver coined in Holland and the larger 
 of the notes of the bank. 
 
 The Banks of South Africa. 
 
 The strongest banks of South Africa are mostly English 
 institutions, with their head offices in London. The Cape 
 Government passed an act in 1891, requiring the withdrawal 
 of circulating notes then outstanding and the deposit of se- 
 curities with the Treasurer-General to cover future issues. 
 The only securities accepted were those of the Cape Govern- 
 ment, which tends to justify the belief that the law was sug- 
 gested by the necessity for placing the securities rather 
 than the benefit of the banking system. The notes circu- 
 late over a wide area and no provision is made for any spe- 
 cific coin reserve. 2 The note issues of the great English 
 banks are so overshadowed, however, by their discount and 
 exchange business that the regulations on the subject are 
 of minor importance. The development of the gold mines 
 furnishes a metallic circulating medium of magnitude, and 
 British methods of banking by transfers of credit are rapidly 
 making headway into the interior of Africa. The unusual 
 stimulus given to business in South Africa during the past 
 few years by the great gold discoveries has afforded the 
 
 1 Levy, 297. 
 
 2 London Bankers' Magazine, Jan., 1892, LIU., 100-101. 
 
BANKING IN AFRICA AND THE EAST. 449 
 
 banks large profits, and has led in one case to an increase 
 of capital and in another case to a proposed increase of 
 note issues ; but the latter increase will carry the note issues 
 of the bank hardly above ten per cent, of the aggregate lia- 
 bilities. 
 
 The Standard Bank of South Africa is the largest of the 
 English banks, with a paid-up capital of ,1,000,000. The 
 note circulation on June 30, 1895, was ;73>389, but the 
 aggregate liabilities were ,15,873,509. It was announced 
 at the annual meeting, on October 8, 1895, that taking the 
 five items on the other side, of cash, deposits with bankers, 
 native, gold investments, and bills bought, they held in 
 liquid assets and readily available securities ,10,673,430, or 
 more than eighty-four per cent, of the indebtedness. The 
 dividend and bonus paid for the year was sixteen per cent. l 
 The Bank of Africa, which had liabilities on June 30, 1895, 
 of ,4,683,249, authorized an increase of its paid-up capital, 
 at the annual meeting on September 25, 1895, from ^250,000 
 to ,525,000. The note circulation on June 30, 1895, was 
 ^151, 495, and the cash held was ,1, 026, 919. a The bank 
 which has proposed an increase of note issues is the African 
 Banking Corporation, which has a paid-up capital of 
 ,297,645. The total liabilities on September 30, 1895, were 
 ,3,843,147, but the circulation was only ,33,870, with a cash 
 reserve of ,1,382,037, and the proposed increase in circulation 
 is only ,250,000, for the purpose of extending branches in 
 Rhodesia, Natal, and the Transvaal. 3 
 
 The National Bank of the South African Republic, situ- 
 ated at Pretoria, was founded in 1891, with a capital of 
 ,502,000. The bank showed profits in 1893 of ,42,000, but 
 the larger portion (.35,000) was transferred to a special 
 reserve fund, to cover possible losses on securities reverting 
 to the bank by the default of borrowers upon them. 4 The 
 circulation is about ,130,000 and is covered many times by 
 
 1 London Bankers 1 Magazine, Nov., 1895, LX., 656. 
 
 2 London Bankers* Magazine, Nov., 1895, LX., 637. 
 
 3 London Bankers' Magazine, Nov., 1895, LX., 661. 
 
 4 Revue des Banques, June, 1894, XIII., 128. 
 
 aq 
 
450 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the coin reserve. The aggregate liabilities in 1894 were 
 2,281,472. 
 
 The Orange River Free State has a national bank with a 
 capital of ,100,000 and a circulation of less than ,400,000,. 
 against a cash reserve of about ^600, ooo. 1 
 
 The Colonial Banks of European Countries. 
 
 The bank-note circulation of the French colonies in Asia 
 is controlled by the Bank of Indo-China, which was estab- 
 lished by the decree of January 21, 1875, subsequently 
 modified by the decree of February 20, 1888. The capital 
 of the bank is 12,000,000 francs ($2,400,000), and its privi- 
 lege runs until January 21, 1905. It is authorized to do the 
 business of a bank of issue, loans, and discounts for Cochin- 
 China, French India, and New Caledonia, as well as for the 
 protectorate of Cambodia, Annam, and Tonkin. There are 
 branches in China and Japan, at Pondicherry in India, and 
 in various other parts of Asia and Oceanica. The note 
 issues are not permitted to exceed three times the metallic 
 reserve and the liabilities on account of notes, deposit ac- 
 counts, and other debts are not permitted to exceed three 
 times the capital and reserve, unless the excess is fully 
 covered by coin. The bank is obliged to deal in several 
 different forms of money to meet the tastes of its various 
 customers. Mexican dollars have been coined at the Paris 
 mint, rupees are used at Pondicherry, and francs are used in 
 keeping the accounts of the bank and in parts of its terri- 
 tory. 3 The larger proportion of the money issued through 
 the bank has consisted of piasters, which correspond to the 
 trade dollar of 420 grains, formerly issued by the United 
 States, but efforts are being made to put the French franc 
 into circulation as the monetary unit. The note circulation 
 of the bank of Indo-China at the close of 1894 was 22,482,000 
 francs ($4,400,000), the cash reserve was 9,080,000 francs, 
 
 1 Levy, 246. 
 
 2 Le"vy, 231. 
 
BANKING IN AFRICA AND THE EAST. 451 
 
 the deposits were 8,577,000 francs and the loans were 19,- 
 415,000 francs. 1 
 
 The circulation of Algeria is furnished by the Bank of 
 Algeria, which was given the exclusive privilege of note 
 issue by the Act of August 4, 1851. The privilege was 
 originally granted for twenty years, but was extended by 
 various decrees until November i, 1897. The capital of the 
 bank was originally 3,000,000 francs, but is now 20,000,000 
 francs. The notes are legal tender at public depositaries 
 and by individuals. The cash reserve is not permitted to be 
 less than one-third of the amount of the notes and current 
 accounts. The capital of the bank is invested in French 
 public securities and the director is appointed by the Presi- 
 dent of the Republic upon the nomination of the Minister of 
 Finance. A limit of circulation, to the amount of 18,000,- 
 ooo francs, was fixed by the law of August 12, 1870, which 
 suspended specie payments for Algeria as well as for the 
 Bank of France, but the maximum circulation was three 
 times increased until it was fixed by the law of March 26, 
 1872, at 48,000,000 francs. The resumption of specie pay- 
 ments was followed by the law of April 3, 1880, which abol- 
 ished a fixed limit and left the circulation to be governed by 
 the law of 1851. 2 
 
 The Bank of Senegal began business August 4, 1855, 
 under the general conditions of the law of April 30, 1849. 
 The cash reserve is required to equal one-third of the notes 
 in circulation, and the circulation, the current accounts, and 
 other liabilities are not allowed to exceed three times the 
 capital, unless the additional liability is represented in full 
 by a corresponding increase of the metallic reserve. The 
 bank is subject to the supervision of the Minister for the 
 Colonies at Paris, like the colonial banks of Latin America, 
 and conducts business through the same Parisian agency. 
 The capital of the Bank of Senegal is 600,000 francs and the 
 circulation is about 1,000,000 francs, with a metallic reserve 
 
 1 Muhleman, 97. 
 
 2 Courtois, 197. 
 
452 HISTORY OF MODERN BANKS OF ISSUE. 
 
 of 750,000 francs. The aggregate operations in 1894 were 
 5,093,594 francs in loans and discounts and 6,996,075 francs 
 in exchange operations, and the dividend paid was thirteen 
 and a half per cent. ' 
 
 The Bank of Reunion was founded July 4, 1853, and has 
 a capital of 4,000,000 francs. The circulation is about 8,000, - 
 ooo francs and is governed by the conditions of the French 
 law of 1849. The Bank of Reunion showed a considerable 
 loss in loans and discounts during 1894, but an increase in 
 exchange operations. The losses of the bank were chiefly 
 through a banking company which was one of its principal 
 clients, and a subsidy of 8,000,000 francs was voted by the 
 local government in order to save an institution considered 
 indispensable to the existence of the colony. The metallic 
 reserve fell 487,606 francs below the legal reguirements on 
 June 30, 1894, and the bank has been again threatened with 
 difficulties by the acute competition in France of the tapioca 
 crop of Singapore, which enjoys the advantage of the dif- 
 ference in exchange between silver and gold using countries. 
 Reunion is on the gold basis, while Singapore pays wages 
 and other costs of production in silver and sells in gold 
 markets at an enhanced profit. The bankers and planters 
 of Reunion have recently asked the imposition of a heavy 
 tariff in France on tapioca from other than French colonies, 
 in order to hold the French market. 2 
 
 The Portuguese colonies in Africa are provided with cir- 
 culation by the Ultramarine Bank {Banco Ultramarine], 
 which has its principal offices at Lisbon and was founded in 
 1864. The notes of the bank circulate at Cape Verd and in 
 Portuguese Guinea. The Philippine Islands are served by 
 the Spanish Bank of the Philippines {Banco Espagnol Fili- 
 pino], with a capital of 600,000 pesetas and a circulation of 
 about twice this amount. 3 
 
 1 Revue des Banques, Aug., 1895,- XIV., 136. 
 
 2 D Economists Europ&en, Nov. 9, 1895, VIII., 580. 
 
 , 287. 
 
CHAPTER XIX. 
 
 CRISES AND THEIR CAUSES. 
 
 The Recurrence of Crises at Regular Intervals Due to General Causes 
 The Operation of a Credit Cycle upon Production, upon Loan- 
 able Capital, and upon the Accounts of the Banks The Effect of 
 Overproduction and of Machinery Influence of a Crisis upon the 
 Distribution of Wealth Bank-Notes a Small Factor in Inflation 
 of Credit. 
 
 AN economic crisis is the sudden arrest of commercial 
 activity and the collapse of credit. Such crises have 
 been an important phase of modern industrial devel- 
 opment and have been essentially periodic in their recur- 
 rence. 1 Particular events in nature and political history 
 have been sought as the explanation of economic crises, and 
 these events have not been without their influence ; but the 
 conditions which have produced crises have been of a more 
 universal character and are intimately interwoven with the 
 structure of modern credit and the speculative tendencies of 
 the human mind. A period of speculation and expansion, 
 
 1 A distinction is sometimes made between financial and commercial 
 crises, according to their particular phenomena or the causes which 
 bring them about. A panic often occurs in the money market or on 
 the stock exchange, as the result of a great failure, a political event, 
 or a mere rumor. Such events, where they produce no effect upon 
 the general movement of affairs, may be described as financial or 
 purely monetary crises, if they are worth dignifying with any special 
 designation ; but those here treated are those which affect the whole 
 economic development of the community, because they are the result 
 of a long train of events and usually involve elements both financial 
 and commercial. 
 
 453 
 
454 HISTORY OF MODERN BANKS OF ISSUE. 
 
 followed by a sudden arrest of the expansive movement and 
 a collapse of credit, complete a credit cycle and produce the 
 conditions for the beginning of a new cycle within substan- 
 tially the same orbit as the old. In tracing the movements 
 of credit through a completed cycle, it is proper to begin 
 during the period of quiescence and distrust which follows a 
 crisis. At such times the capital which has survived the 
 crisis accumulates in the banks, where it lies largely idle, 
 partly because the arrest of business activity has curtailed 
 the demand for capital and partly because safety is preferred 
 to profit, for the time being, by the owners of capital. 
 
 The seeds of a new crisis are sown in three ways, in the 
 production of merchandise, in the excessive consumption 
 which apparent prosperity brings, and in the effect of pro- 
 duction and consumption upon loanable capital. The effect 
 of reviving industry upon production is a rise of prices. 
 The markets have gradually become barren of commodities 
 as the result of the arrest of production following the panic. 
 The demand, which was less than the supply, suddenly con- 
 fronts a supply which is insufficient. Prices rise, mill- 
 wheels and factories are set in motion, the demand for the 
 essentials of life increases the purchasing power of their 
 producers, and their demand sets in motion again the pro- 
 duction of luxuries or less essential articles. The movement 
 of revival is thus diffused by degrees through the whole 
 community. Prices pursue a constantly ascending scale, as 
 the demand from all quarters increases, and the restoration 
 of business prosperity becomes an accomplished and com- 
 pleted fact. The effect of the upward movement in stimu- 
 lating a speculative advance in prices is well described by 
 Mr. John Stuart Mill in his chapter on "The Influence of 
 Credit on Prices. ' ' He says : 
 
 The inclination of the mercantile public to increase their demand 
 for commodities by making use of all or much of their credit as a 
 purchasing power, depends on th'eir expectation of profit. When 
 there is a general impression that the price of some commodity is 
 likely to rise, from an extra demand, a short crop, obstructions to 
 importation, or any other cause, there is a disposition among dealers 
 
CRISES AND THEIR CAUSES. 455 
 
 to increase their stocks, in order to profit by the expected rise. This 
 disposition tends in itself to produce the effect which it looks forward 
 to, a rise of price : and if the rise is considerable and progressive, 
 other speculators are attracted, who, so long as the price has not 
 begun to fall, are willing to believe that it will continue rising. 
 These, by further purchases, produce a further advance : and thus a 
 rise of price for which there were originally some rational grounds, is 
 often heightened by merely speculative purchases, until it greatly 
 exceeds what the original grounds will justify. After a time this 
 begins to be perceived ; the price ceases to rise, and the holders, 
 thinking it time to realize their gains, are anxious to sell. Then the 
 price begins to decline : the holders rush into market to avoid a still 
 greater loss, and, few being willing to buy in a falling market, the 
 price falls much more suddenly than it rose. 1 
 
 This revival of industry gradually affects the character of 
 consumption as well as of production . Those who prac- 
 ticed economies, and lived closely within their incomes 
 through the period of depression, begin planning their mode 
 of living upon the basis of future profits as well as within 
 their actually increased earnings. Houses are planned, 
 carriages and servants are employed, and other luxuries are 
 used, which would not be used but for the belief in con- 
 stantly growing earnings and profits. People live beyond 
 their incomes and consume the product of other people's 
 labor and of their own savings. It is this which makes a 
 community so poor when the cycle has run its course. There 
 is no better established law of political economy than that 
 the means of employing labor in the future are the product 
 of past savings. When these savings have been dissipated 
 in luxuriant living, there is no adequate capital left to em- 
 ploy labor or to continue the old scale of expenditure. As 
 Prof. Bonamy Price remarks, " If all England took to eat- 
 ing and drinking up and consuming everything in the land 
 in one year, the abundance and luxury and enjoyment of 
 riches would be what the world had never seen." * But it 
 could not last. Those who have been spending more capital 
 than they have been really earning go into bankruptcy and 
 
 1 Principles of Political Economy, B. III., Ch. xii., Sec. 3. 
 
 2 Currency and Banking, 147. 
 
HISTORY OF MODERN BANKS OF ISSUE. 
 
 the loss falls upon those who have advanced them their own 
 capital in the form of horses, carriages, wines, woollens, silks, 
 and houses. The suspension of the production which sup- 
 plied these people with luxuries would in itself diminish the 
 present demand for labor and change the course of indus- 
 trial development. When the mere cessation of demand is 
 accompanied by inability to pay for what has been consumed, 
 the situation becomes even worse. The business community 
 wake up to the fact that they have consumed the savings of 
 past years, that production to meet this fictitious demand 
 must cease, and that even a normal and healthful demand 
 must be curtailed while society is repairing its shattered 
 forces. 
 
 These influences at work in the merchandise markets 
 cannot fail to have an influence upon the market for capital. 
 Capital is idle and redundant during the period of liquida- 
 tion following a crisis. Those who have it are afraid to 
 invest, and those who usually employ it are indisposed to 
 enter the market as borrowers. When this feeling has par- 
 tially subsided, capital can be obtained at low rates, so long 
 as the security is good, because it is so plentiful. Low rates 
 and ample supplies of capital tempt borrowers, and indus- 
 tries develop into activity and reduce the idle accumulation 
 of capital in the banks. The demand increases the rate of 
 interest, at the same time that the demand for commodities 
 increases their price and makes more money necessary to 
 carry on a given business. The mere advance in prices, as 
 pointed out by Mr. Mill, tempts to increased production, to 
 new investments and increased speculation, and every such 
 step increases the demand for capital at the same time that 
 it diminishes the supply. The time comes when exports 
 diminish because of their high prices as compared with 
 those of the same goods in other countries ; and then gold, 
 the only money which can be used in international ex- 
 changes, begins to go abroad, instead of commodities, in 
 payment for commodities imported. 
 
 The withdrawal of gold from the bank reserves and its 
 export abroad is usually the most striking visible sign that 
 
CRISES AND THEIR CAUSES. 457 
 
 business is upon the eve of a crisis. When goods can no 
 longer be sold as rapidly as they are produced, partly be- 
 cause domestic purchasers can no longer pay the enhanced 
 prices and partly because foreign purchasers can buy similar 
 goods elsewhere at less prices, the manufacturers and mer- 
 chants are no longer able to meet their obligations at the 
 banks at maturity. They apply for extensions and continu- 
 ances and impose a constantly increasing strain upon the 
 banking reserves of the banks. When the banks are no 
 longer able to lend with the same freedom as before, their 
 weaker customers default in their obligations, and the panic 
 begins. The dream of rapidly acquired riches, of constantly 
 rising prices, of a perpetual advance in the stock market and 
 of extravagant profits, is suddenly brought to an end and 
 merchants lose their illusions and look about to discover 
 their real situation. They often find that the rise in the 
 price of their raw materials has kept pace with that of their 
 products, that their seeming profits have been calculated by 
 over-discounting of the future, and that they have a great 
 stock of goods on their hands which cannot be sold at the 
 cost of production. 
 
 The effects of a crisis upon the accounts of a bank follow 
 so uniform a rule that the history of crises might easily be 
 traced, by one who understands their operation, by the fluc- 
 tuations in the bank returns. The period of .speculation 
 and ascending prices is marked by a steadily widening sepa- 
 ration between the amount of the cash reserves and of the 
 loans and discounts. The cash falls while the loans rise. 
 The fall in the cash is partly due to the steadily growing 
 domestic demand for currency and credit, to meet which the 
 cash is put in circulation ; but the decline is sharply accen- 
 tuated, after speculation reaches the danger-point, by the 
 demand for cash for settling foreign balances which have 
 ceased to be settled in merchandise. The changed condition 
 of the bank's accounts up to this point is brought about by 
 the gradual operation of the expansion of credit and the 
 rise of prices. The discovery that the danger-point has been 
 reached, and that cash and discounts are too far apart, usu- 
 
458 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ally comes suddenly, as the result of heavy withdrawals of 
 specie for export. Then begins the panic, which becomes 
 more or less acute according to the circumstances of the case 
 and the extent to which credit has been overstrained. The 
 demands for loans and advances increase, while the decline 
 of the cash reserve becomes so rapid as to compel a prudent 
 bank to raise the rate of discount. The effect of the in- 
 crease in the discount rate is to diminish the demand for 
 credit from those who can do without it, while it attracts 
 capital from abroad or, what is substantially the same thing, 
 induces foreign creditors to suspend the withdrawal of their 
 credits by the attraction of their higher earning power. 
 
 The moment the acute danger is over and the rush for 
 currency has ceased, a radical change comes over the ac- 
 counts of the bank as the result of the arrest in the activity 
 of affairs. The demand for credit declines to a minimum, 
 resulting in the reduction of loans and discounts, while the 
 diminished demand for currency sends it back to the solvent 
 banks and results in the rapid piling up of specie in their 
 reserves. These movements are the result of inevitable 
 financial laws, which seem to act with automatic precision at 
 the various stages of a credit cycle. The movement of 
 deposits varies somewhat, according to the real pressure of 
 the crisis and the banking rules by which deposits are 
 regulated. The general tendency of the real deposits, those 
 which are not merely transfers of credit by the bank to its 
 customers on account of loans, is to follow the cash reserve. 
 They diminish when the demand for currency is most acute 
 and begin to accumulate again when the crisis is over. 
 Their recovery is usually less rapid than that of the cash 
 reserves and is comparatively slow where real losses have 
 been heavy and the wealth has disappeared which made 
 deposits possible. The movement to withdraw deposits be- 
 cause of distrust of the solvency of the banks is more abnor- 
 mal and has been reduced in recent crises to a comparatively 
 small factor. Such withdrawals, without commercial reasons, 
 greatly cripple the powers of a bank to assist those who 
 need assistance and have been among the most serious dan- 
 
CRISES AND THEIR CAUSES. 459 
 
 gers of financial crises, where banking was not regulated by 
 sound laws and among peoples where its methods were not 
 well understood. 
 
 The intensity of the demand for credit after the arrest of 
 inflation and of the rise of prices is usually in an inverse 
 ratio to the possibility of getting it. The demand of the 
 moment is for cash, or what represents cash in its general 
 acceptability in the discharge of obligations. So long as 
 banks are solvent, and their solvency is generally credited, 
 bank-notes fulfil this demand as absolutely as gold. This 
 has been proved repeatedly in the case of the Bank of Eng- 
 land and of the Scotch banks, and was proved in the case of 
 the banks of the United States during the crisis of 1893. 
 If currency is hoarded under a solvent banking system, it is 
 because the amount is believed to be limited and those who 
 hoard it fear that they may not be able to obtain the share 
 which they need at the moment when it may be demanded. 
 An elastic limit of note issue is a powerful weapon for restor- 
 ing financial confidence on such occasions. It was the 
 existence of a practically rigid limit in England in 1847, 
 1857, an d 1866, and in the United States in 1893, which led 
 to the pressure for currency and the tendency to hoard it. 
 The removal of the rigid limit, by means of the suspension 
 of the Bank Act in England and by the issue of Clearing 
 House certificates and certified checks in the United States, 
 did much to restore healthful conditions to the financial 
 organism. 
 
 The expansive theory, at it is called by Professor MacLeod, 
 has been too often tested during the past half century against 
 the restrictive theory to leave any doubt as to the wisdom of 
 the former. The expansive theory involves loans in times 
 of panic up to the utmost limit, upon good security, which 
 the resources of the bank permit, in order to meet the 
 emergency of the moment. A solvent bank need have no 
 fear in a crisis, if it has the power to issue notes which 
 command the public confidence, that it will not find its specie 
 reserves fully restored after the acute stage of the crisis is 
 over. The power of note issue may be employed to the 
 
460 HISTORY OF MODERN BANK'S OF. ISSUE. 
 
 extreme limit, so long as general business itself and the 
 business of the bank are substantially sound. The restrict- 
 ive theory assumes the necessity of bringing everything at 
 once to a metallic basis. It is supposed to have the effect 
 upon the congested financial body of a healthy purging ; 
 and the principle might be defensible, if it were not for the 
 hardships which it causes to persons who have not carried 
 the inflation of their business to an extreme point and who 
 are simply embarrassed by the unusual clamor of the moment 
 for cash. One of the duties of the banks is to sustain such 
 people until the panic is over and the operations of credit 
 return to their normal channels. In the language of Mr. 
 Bagehot, in criticising the course of the Bank of England : * 
 
 What is wanted and what is necessary to stop a panic, is to diffuse 
 the impression that though money may be dear, still money is to be 
 had ; if people could be really convinced that they could have money 
 if they wait a day or two, and that utter ruin is not coming, most 
 likely they would cease to run in such a mad way for money. 
 
 The regularity with which production and the absorption 
 of capital proceed, from the period of quiescence after a 
 crisis to the point of excessive expansion, followed by a 
 sudden check, a crisis and a new period of quiescence, justifies 
 the theory that crises are substantially periodic in their 
 recurrence. The seeking of special causes may be of value 
 to enable the business community to guard against the repe- 
 tition of old mistakes, but the belief that conditions can be 
 produced which will put an end to the regular cycle of 
 credit contraction and expansion has not been justified by 
 any theory of banking, of trade, or of public finance which 
 has yet been tested. The field for making such tests is 
 limited to a few great commercial nations, because the 
 perturbations in nations where production is more limited and 
 credit more restrained are of a different character, often 
 influenced more by local than general causes, and afford 
 little instruction for the great trading nations. These great 
 nations, moreover, are governed by the most divergent 
 
 1 Lombard Street, Works, V., 45. 
 
CRISES AND THEIR CAUSES. 461 
 
 policies in respect to tariffs, monetary standards, banking 
 methods, and the intervention of the State in private affairs ; 
 yet the phenomena of recurring cycles of expansion and 
 contraction, of exaltation and of depression, are in many 
 respects the same. 1 In the language of M. Juglar, " Wars, 
 revolutions, tariff changes, loans, variations of fashion, new 
 pathways opened to commerce are still accused " as the cause 
 of crises. 3 One of these events often comes to precipitate 
 the panic at a particular moment, like the match which 
 causes the explosion when the powder train is fully laid. 
 These special causes, however, grow less easy of definition 
 and isolation as the structure of commerce and credit grows 
 more complex and the industries of every producing nation 
 reach out to new and diversified fields. 
 
 The salient feature of nearly every crisis has been the 
 sinking of capital in unproductive enterprises. These en- 
 terprises have usually been in new fields, whose limitations 
 have not been accurately measured by investors or even by 
 capitalists of presumed judgment and experience. The 
 opening of such a field has been followed by a rush in that 
 direction, which has quickly exhausted all its possibilities 
 and resulted in overproduction and the loss of the capital 
 invested. New discoveries and the opening of new conti- 
 nents have contributed greatly to these mistakes during the 
 modern commercial age. One of the earliest of these phe- 
 nomena, which took place under modern conditions, was the 
 sinking of capital in canals in Kngland in the middle of the 
 
 1 The argument is not without plausibility that the protective tariff 
 policy contributes to the frequency and severity of crises, by the arti- 
 ficial stimulus which it gives to favored industries, inviting great 
 investments of capital in these directions, which result in overpro- 
 duction and subsequent stagnation. The effect of such a policy would 
 seem to be to give a jerky development to industry, causing successive 
 periods of extreme activity and exhaustive reaction, like the effect of 
 powerful stimulants upon the physical body. The protectionists are 
 able to answer that Great Britain, the chief free-trade country, has 
 suffered panics as acute as those of any other nation, if they have 
 not affected equally her permanent prosperity. 
 
 2 Des Crises Commer dales, 5. 
 
462 HISTORY OF MODERN BANKS OF ISSUE. 
 
 eighteenth century. It was the beginning of the wonderful 
 new birth of the world out of the grave of feudalism into 
 the modern age of machinery, steam, and electricity. The 
 sinking of capital in canals was followed by changes from 
 hand to machine labor, which threw laborers out of employ- 
 ment and destroyed the value of their simple tools ; by loans 
 to farmers for enclosure and irrigation ; by immense subsidies 
 by England to European nations ; and by fifteen years of the 
 continuous waste of war. When the investing public of Great 
 Britain and Europe had recovered from the losses consequent 
 on these events, they permitted millions to be swept away in 
 the crisis of 1825 by foolish investments in Latin-American 
 securities ; in 1837, by loans in the United States ; in 1847, 
 by the failure of the cotton crops ; in 1857, by railway specu- 
 lation ; in 1866, by the effects of the American war and use- 
 less investments in cotton mills and ships ; in 1873, by 
 railway building in the American wilderness ; and in 1890, 
 by a new fever of investment in South America. 
 
 The overproduction of commodities by means of machinery 
 has been one of the recent forms of the sinking of capital. 
 The use of machinery has immensely increased the produc- 
 tive power of the world and added to the sum of comforts to 
 be distributed among mankind. But this power of produc- 
 tion has been carried to such a point that it has in many 
 cases outrun the effective demand of the community. 1 Over- 
 production in a broad sense is hardly within the power of 
 the entire producing mechanism of mankind. The world 
 
 1 Prof. Lexis of Gottingen points out that overproduction is now 
 due in many cases to the development of the industrial capacity of 
 establishments far beyond any concurrent market demand and to their 
 long continued operation when they have ceased to pay dividends. 
 Abstract political economy of the old school taught that when prices 
 no longer equalled the cost of production and a fair profit, production 
 would be diminished or suspended ; but the system of joint stock 
 companies enables many to remain in operation for years without 
 paying dividends, where an individual employer would close, and 
 even the latter is often tempted to continue an unprofitable produc- 
 tion upon the theory that he thereby avoids the " deterioration of the 
 plant." Wells, 73. 
 
CRISES AND THEIR CAUSES. 463 
 
 is not too rich in the products of human labor, but is still 
 too poor. But overproduction for all practical purposes is 
 production beyond the effective demand of those who have the 
 means and habit of using, and the capital employed in the pro- 
 duction of goods which are not consumed is more hopelessly 
 sunk than if devoted to railways or public works ; for railways 
 and public works may prove of value in the future, even if 
 their production has outrun the necessities of the present. ' 
 
 One of the striking effects of a commercial crisis under 
 modern conditions is its influence upon the distribution of 
 wealth. Accumulated capital suffers much more than pro- 
 ductive industry and the result is to transfer the interest on 
 such accumulations and a part of the principal to labor. 
 Those laborers who continue to earn their customary wages, 
 including those who earn professional salaries as well as 
 those who labor with their hands, are benefited materially 
 in a period of low prices, because of the greatly increased 
 purchasing power of their earnings. Even laborers who are 
 thrown out of employment cannot suffer any such loss in a 
 modern civilized state as is suffered by capital ; for, if they 
 are without savings, they derive the means of subsistence 
 from public charity, contributed by taxation upon the accu- 
 mulated earnings of capital. Only so far as their degree of 
 comfort under such conditions differs from that when they 
 are wage earners do they suffer an actual material loss, 
 whatever may be the social evils of their situation. 
 
 But the effect of a crisis upon the distribution of wealth is 
 more profound than the mere losses which it occasions 
 during the period of acute depression. Such a crisis is the 
 result of overproduction and is followed by the accumula- 
 tion of idle capital in the banks and public depositaries. 
 Every crisis of modern times has witnessed a greater ac- 
 
 1 Prof. Paul Leroy-Beaulieu points out that a railway constitutes an 
 actual economic benefit to the community, even though it fails to pay 
 operating expenses, if the economy in transportation which results 
 from its operation as compared with pre-existing means of transpor- 
 tation is sufficient to pay the interest on the capital invested. La 
 Science des Finances, II. , 216, note. 
 
464 HISTORY OF MODERN BANKS OF ISSUE. 
 
 cumulation of idle capital than those which have preceded, 
 and the result has been keenly felt in recent years in the 
 decline in the rate of interest. A given capital which earned 
 six per cent, a decade or two ago now earns but three or 
 four per cent, and double the accumulation is required to 
 render the same return. Every crisis corrects the tendency 
 to the undue earnings of accumulated capital by arresting 
 the advance in prices, reducing the value of manufacturing 
 and railway plants and of the securities which represent 
 them, and in many cases compelling the readjustment of 
 nominal capital upon a reduced basis. Capital is often 
 deprived absolutely of earning capacity for several years 
 following a crisis. This implies that if production continues, 
 the proceeds are distributed without charge beyond the 
 wages of labor among the consumers of the community. 
 An industrial enterprise which continues to operate without 
 profit or at a loss during a period of depression transfers all 
 its benefits, therefore, to the wage earners, and their wealth is 
 enhanced at the expense of the owners of inherited or accu- 
 mulated capital. 1 
 
 The argument is sometimes made that issues of paper 
 currency pave the way for crises because they pile up a vast 
 
 1 This theory has been more boldly worked out by Bastiat in his 
 Harmonies Economiques^ and recently by M. Budore Pirmez in his 
 La Crise : Situation Economique de la Belgique, 1884, who declares 
 that "In the measure that capital increases, the absolute share of 
 the capitalist in the total product is augmented and his relative part 
 diminished. The laborer, on the contrary, sees his share augment 
 in both senses." A striking illustration of the shrinkage of the 
 earnings of capital is afforded by a table printed by M. Hector Denis, 
 showing the dividends of corporations in Belgium from 1870 to 1890. 
 The maximum was attained in 1871, when corporate earnings were 
 77,33 2 >342 francs. The figures shrunk in 1877 to 38,837,320 francs, 
 after which they gradually recovered until 1883, when they were 
 61,860,805 francs. There were some losses in succeeding years, and 
 the amount in 1885 was 48,721,046 fi an cs, but the total in 1890 had 
 risen again to 71,875,225 francs. It is obvious that a range of fluctu- 
 ations representing fifty per cent, of the maximum is greater than 
 could be matched for the aggregate earnings of labor. La Depression 
 Economique et Sociale, 61-79. 
 
CRISES AND THEIR CAUSES. 465 
 
 credit structure on a slender basis of coin. While this con- 
 ception may have some incidental truth, the fundamental 
 idea upon which it is usually based is wrong. A bank-note 
 is secured by the substantial assets of the bank, which are 
 chiefly bills of exchange representing commodities. It does 
 not matter, so long as the bills are genuine, that the same 
 merchandise may have been the subject of several transac- 
 tions and of several bills, for the maker or endorser has in 
 each case substantial means to cover his obligations if he is 
 doing a prudent business. Credit may be overstrained, 
 fictitious bills may be drawn, and losses may result, but 
 such losses are not often due to the issue of bank-notes. A 
 man may strain his credit by too many verbal promises to 
 pay bags of gold, where a purely metallic currency is used, 
 just as he may strain it by putting those promises in the 
 form of negotiable paper. He may strain it even more by 
 book credits and abuse of the confidence of capitalists than 
 he can ever do, under modern conditions, by obtaining notes 
 from a banker. Nothing but the brushing away of all forms 
 of credit, and return to barter and the hoarding of vast piles 
 of gold, would prevent any possible abuse of credit ; and 
 that would be the destruction of modern commerce, with 
 all the increase in productive power and the distribution of 
 the products of that power which it has brought to the 
 human race. 
 
 The conception that every transaction in which coin does 
 not pass is a credit transaction ignores the essential fact 
 that the business community is trading in commodities and 
 not in the precious metals. The advocates of a larger 
 metallic circulation have a favorite metaphor by which they 
 picture ' ' the vast structure of credit ' ' as an inverted 
 pyramid, supported in unstable equilibrium upon a golden 
 apex. A better image than that of the inverted pyramid 
 would be that of the railway or canal, which by a single 
 route permits the happy interchange of all commodities. 1 
 
 1 "Currency, therefore, 4 is not capital, any more than ships are 
 freight ; it is only a labor-saving machine for making easy transfers." 
 Suniner, History of American Currency, 171. 
 
4 66 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Proper facilities for transportation do not require a car for 
 every car-load of wheat which exists nor a canal broad 
 enough for all vessels to pass abreast. The possibility of 
 having the car when it is needed, the promise of the use of 
 the canal for a brief time, serve every purpose ; and no one 
 thinks of charging that the transportation system is " a vast 
 structure of credit ' ' resting upon a few real cars or upon 
 abnormally narrow tracks. 
 
CHAPTER XX. 
 
 THE EARLY CRISES OF THE CENTURY. 
 
 The Periodicity of Crises up to 1793 The Use of Accommodation 
 Bills in the Crisis of 1782 The Effects of the Napoleonic Wars 
 and the Crisis of 1810 The Speculative Mania of 1825 The 
 Specie Circular and the Bank War in the United States The 
 Railway Development and the Crisis of 1847. 
 
 THE development of existing methods of commerce 
 and of credit belongs essentially to the period of the 
 last century and a half. Great commercial transactions 
 were carried on before that time, but they were carried on by 
 other banking methods than those of the modern age. The 
 world was not linked, as it is to-day, in all its parts, by a 
 community of commercial operations and by houses of 
 international banking credit. Such economic crises as oc- 
 curred were local in their effects and were produced, much 
 more directly and more often than those of to-day, by 
 political events. Their chief interest, therefore, is in demon- 
 strating the essentially periodic character of such convulsions 
 wherever commerce has attained anything like its niodeni 
 development. Professor Jevons finds some evidence of a 
 stock-jobbing mania as far back as 1682 and others in 1711, 
 1721, 1731, 1763, 1772-73, and 1783, with evidence of periods 
 of high prices in 1742 and 1752. Complaints of stock job- 
 bing and " bubbling " were so pronounced that acts were 
 passed by Parliament in 1710 and 1711, and again in 1733, 
 with the result, according to Defoe, that " a happy stop was 
 put to 'this spreading mischief." * 
 
 1 Jevons, Investigations in Currency and Finance, 210-211. 
 
 46;' 
 
468 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The first serious credit crisis of which authentic details 
 exist was that of 1763, when the inflated bubble blown by 
 the Seven Years' War was pricked by the coming of peace. 
 This crisis is of peculiar interest, because it was most severe 
 at Amsterdam and Hamburg, where no paper currency was 
 employed except the "bank money " issued against deposits 
 of coin by the Bank of Amsterdam and the Bank of Ham- 
 burg. The next great crisis, that of 1772, fell upon Eng- 
 land and Scotland in the midst of a period of remarkable 
 industrial and inventive activity. The first act for the build- 
 ing of a canal in England was passed in 1755, and the next 
 twenty-five years witnessed the construction of a network 
 of canals more extensive than those of any other country 
 except Holland. Brindley completed the canal from Worsley 
 to Manchester in 1762 and Arkwright and Watt were at the 
 same time developing their wonderful mechanical inventions. 
 
 The practice of drawing accommodation bills seems to 
 have come into use in Scotland for the first time just before 
 this crisis, although there is evidence that it had been prac- 
 tised earlier in England. A newspaper of the time contained 
 a letter stating that * ' Banking companies had appeared in 
 almost every corner of the Kingdom, and bills of exchange 
 had been multiplied by a new method called Swivelling, 
 without any solid transactions." ' Adam Smith alludes to 
 " the well-known shift of drawing and redrawing," and says 
 that " The practice of raising money in this manner had 
 been long known in England, and during the course of the 
 late war, when the high profits of trade afforded a great 
 temptation to overtrading, is said to have been carried on to 
 a very great extent." * Professor MacLeod declares the 
 system of accommodation bills to be " the curse and bane of 
 commerce," and expresses the opinion that "it has been the 
 great cause of those frightful commercial crises which seem 
 periodically to recur." The English courts have decided, 
 however, that a bill given for a consideration is a good bill 
 
 1 Public Advertiser, July 8, 1772, quoted by MacLeod, II., 215. 
 8 Wealth of Nations, Book II., Ch. ii. 
 
THE EARLY CRISES OF THE CENTURY. 469 
 
 and that such consideration exists when such bills are mu- 
 tually interchanged. This makes it difficult to legislate 
 against accommodation bills, even if it were desirable, with- 
 out destroying banking transactions, which are based upon 
 a similar interchange of credits. 1 
 
 The crisis of 1783 is notable for having had an international 
 character, in affecting the Caisse d' Escompte in Paris as well 
 as the British banks, and for the enlightened policy of sus- 
 taining credit adopted by the Bank of England. A policy 
 of rigid contraction was at first followed by the directors, 
 but as soon as this policy had turned the flow of bullion 
 towards England they came boldly to the assistance of the 
 government and expanded their discounts to solvent houses. 
 A different policy was pursued in the crisis of 1793 and it 
 was the government, instead of the bank, which came to the 
 relief of credit. Everything was ripe in England in 1792 
 for the explosion of a crisis when the disturbances in France 
 and the declaration of war by the National Convention 
 applied the torch. 3 A large failure occurred in London on 
 February 15, 1793, and the panic spread throughout England, 
 causing the failure of over one hundred of the country banks 
 and frightening the Bank of England into the reduction of 
 its discounts. 3 The pressure for money suggested to Sir 
 John Sinclair a return to Montague's device in 1697 of issu- 
 ing Exchequer bills to solvent merchants. A committee was 
 appointed by the House of Commons, which promptly re- 
 
 1 MacLeod, Theory and Practice of Banking, I., 359-68. 
 
 2 M. Juglar lays stress upon the fact that this crisis was a typical 
 commercial crisis, due to economic conditions, and was not essentially 
 hastened by the declaration of war, for unfavorable exchanges and 
 exports of specie had already set in twelve months before hostilities. 
 France suffered a severe crop failure in 1789, but this did not arrest 
 the expansion of credit and of commercial operations until the period 
 of ten years from the preceding crisis of 1783. Des Crises Commer- 
 ciales > 302. 
 
 3 Country merchants and bankers were permitted under then exist- 
 ing laws to issue optional notes, payable in the country or in London, 
 and it is stated that out of 279 country bankers issuing notes 204 
 issued these optional notes. Levi, 69. 
 
470 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ported in favor of the issue of ^5, 000,000 in such bills under 
 the direction of a board of commissioners. The bill was 
 passed after some opposition and afforded almost instant 
 relief. Applications for ,2,202,000, made by 238 persons or 
 firms, were granted and only forty-nine applications were 
 definitely rejected. Only two of the parties assisted became 
 bankrupt, much of the money was repaid before it was due, 
 and the government obtained a clear profit, above all inci- 
 dental expenses, of ,4348. 
 
 The period from the crisis of 1793 to the close of the Na- 
 poleonic wars in 1815 was marked by several spasms of panic 
 in the markets of Great Britain and the Continent, but these 
 convulsions were so directly due to political events that 
 they lose much of the regular character of commercial phe- 
 nomena. The period of expanding credit was interrupted 
 in England by the suspension of specie payments in 1797, 
 and was again cut short in 1803, after the upward movement 
 had been resumed, by the rupture of the Peace of Amiens. 
 France witnessed a collapse of credit soon after the rupture 
 of the Peace, which brought Napoleon back from Austerlitz 
 to reorganize the Bank of France. * The speculative oppor- 
 tunities of the long war left their impress upon the trade of 
 Europe and the United States for many years, and the inci- 
 dents of the trade drove the United States into war with 
 Great Britain. 
 
 The Crisis of 1810. 
 
 The publication of the Berlin decree of Napoleon on No- 
 vember 21, 1806, shutting British commerce out of Europe, 
 was one of a series of events which led to the wildest specu- 
 lation in raw materials and steadily advanced their prices. 
 The products of the countries of the East rose to double or 
 treble their usual figures, and the French occupation of 
 Spain quadrupled the price of Spanish wool. France was 
 supreme in Italy, which affected the value of silk, and she 
 attempted to dictate a policy of exclusion against Great 
 Britain to Russia and Sweden. These efforts of the French 
 
 1 Vide p. 52. 
 
THE EARLY CRISES OF THE CENTURY. 471 
 
 Emperor were far from effective in stifling commerce, but 
 they gave it the character of a speculation and enhanced its 
 profits when it was successful. The imports of the United 
 Kingdom increased from ^28,561,270 in 1805 to .39,301,- 
 612 in 1810 and the exports increased in the same period 
 from 3 1, 064,492 to ;435 68 >757- England lost trade in 
 the United States by her retaliatory decrees against Na- 
 poleon, which drove American products to France, but Brit- 
 ish goods penetrated through Napoleon's paper blockade at 
 Embden and Hamburg, and the corrupt French officials 
 grew rich as the price of certifying that these goods were the 
 product of Prussian factories. 1 The country banks of Eng- 
 land increased under the stimulus of speculation from 270 
 in 1797 to 600 in 1808, and 721 in 1810. The Bank of Eng- 
 land, in the meantime, increased its discounts from .9,100,- 
 ooo in 1804 to .16,400,000 in 1809, and 2 1,400,000 in 1810. 
 The circulation of the Bank of England rose from ,16,400,- 
 ooo in 1801 to 24,200,000 in 1810, but the increase was 
 trifling up to 1809 and was the consequence rather than the 
 cause of the great increase in prices due to speculation. 
 
 If over-issues of bank-notes were responsible in some de- 
 gree for the speculative mania in England, rather than 
 merely its convenient tools, it was because the divorce of 
 the paper currency from specie made bank-note issues easy 
 and their issuers irresponsible. The proof that the specula- 
 tive mania was not due entirely to the issues of paper money 
 in Great Britain may be found in the fact that a like condi- 
 tion existed in France, which was upon a specie basis. The 
 liquidation which followed the crisis of 1805 caused coin to 
 pile up in the Bank of France to such an extent that the 
 bank was obliged to invest a part in the obligations of the 
 receivers general and to reduce interest to two and three per 
 cent. 2 Commerce began to expand again in 1808, and the 
 discounts of the Bank of France reached in that year 142,- 
 000,000 francs and in 1810 187,000,000 francs. Numerous 
 failures occurred in 1810, but the leading merchants of Paris 
 
 1 Cunningham, II., 521, note. 
 2 Juglar, 406. 
 
472 HISTORY OF MODERN BANKS OF ISSUE. 
 
 kept their heads, discouraged exaggerated speculations, and 
 prevented a serious panic. In England, business came to a 
 standstill, the discounts of the bank dropped from ^23,000,- 
 ooo to ^12,000,000 and on April n, 1811, the Treasury 
 came to the rescue of the market by an advance of ^6,000,- 
 ooo in Exchequer bonds to merchants offering good security. 
 The period of liquidation was made more severe than usual 
 and recovery slower by the great poverty of the crops of 
 1811. Speculation in agricultural products and land led to 
 the rapid extension of the system of enclosure of land which 
 had formerly been in commons. Such large sums were sunk 
 in fencing and improvements and so much land was brought 
 under cultivation that the fall of prices, upon the close of 
 the Napoleonic wars and the resumption of specie payments, 
 ruined many small cultivators and threw their land again 
 upon the market. 1 
 
 The Crises of 1814.- 19. 
 
 The commercial movements of the second decade of the 
 present century reflected the disturbed condition of public 
 affairs. The policy of crushing each other's trade by paper 
 blockades and interference with the rights of neutrals, which 
 governed England and her allies on one side and France and 
 her dependencies on the other, made commerce like the cast- 
 ing of dice in a game of chance. Markets which had been 
 closed to English and American goods were opened from 
 time to time, with the expulsion of the French from Portu- 
 gal and Spain and the accession of Russia and Sweden to 
 the coalition against Napoleon. The news of his disasters 
 in Russia in the autumn of 1812 diffused the belief in Eng- 
 land that the French Emperor was upon the eve of his down- 
 fall and that France would soon be thrown open to the 
 commerce of the world. Speculation ran riot in colonial 
 produce, which it was believed would find a ready market 
 in France at the extravagant prices which ruled there for 
 the small quantities which had escaped the Continental 
 1 Cunningham, II., 479. 
 
THE EARLY CRISES OF THE CENTURY. 473 
 
 blockade. 1 The rejection of the recommendations of the 
 Bullion Report and the depreciation of irredeemable bank- 
 notes in England encouraged the delusion that the growth 
 of wealth was commensurate with the rise of prices. Prices 
 reached their maximum at the moment of the abdication of 
 Napoleon in the spring of 1814 and the coming of the gen- 
 eral peace. The opening of the Continental markets had 
 been too greatly discounted, goods could not be sold at the 
 prices at which they were held, and the fabric of paper 
 wealth tumbled like a house of cards. The country banks 
 failed by the score in 1815, 1816, and 1817, and the disap- 
 pearance of their notes so contracted the paper circulation 
 that Bank of England paper seemed for a moment on the 
 point of touching par. 2 
 
 The United States were already feeling the embarrassments 
 of a new country in maintaining an adequate metallic circu- 
 lation, when the War of 1812 and the financial incompetence 
 of the government precipitated a crisis. The expiration of 
 the charter of the Bank of the United States in 1811 brought 
 many new banks into the field and a veritable banking mania 
 prevailed for several years in the Middle, Southern, and West- 
 ern States. The offer of the Pennsylvania shareholders of 
 the Bank of the United States to pay a bonus of $500,000 to 
 the State for the privileges of a State charter, and to loan 
 the State $500,000 in addition, 3 aroused such extravagant 
 estimates of the profits of banking that the proposition was 
 rejected and an effort made to secure these profits for local 
 banks. A bill authorizing forty-one new banks was passed 
 over the veto of the governor and thirty-seven of them went 
 into operation in 1814. Similar events occurred in other 
 States, and in two years the number of banks in the United 
 States increased from 88 to 208. The volume of specie was 
 not adequate to support the mass of credit thus attempted 
 to be created and what there was in the country rapidly 
 
 1 Coffee, which was four pence per pound in England, had been 
 selling for four or five shillings in France. Juglar, 323. 
 
 2 Vide p. in. 
 3 McMaster, IV., 287. 
 
474 HISTORY OF MODERN BANKS OF ISSUE. 
 
 drifted to New England, where prices were low and transac- 
 tions were upon a metallic basis. 1 
 
 It needed but a breath to overthrow credit in the South 
 and West, and the motive came with the capture of Wash- 
 ington on August 24, 1814. The banks of Philadelphia 
 announced their suspension on August 3ist, and the banks 
 of New York followed on the next day, and did not resume 
 until after the creation of the second Bank of the United 
 States in 1817. The country was stripped of specie, notes 
 were issued for as small an amount as one cent, and 
 many municipalities put out notes for a few cents, redeem- 
 able in bank-notes and receivable for taxes. a The period 
 following the war was one of prostration in the United 
 States as well as in Great Britain. The United States were 
 for a short time importers and found the British exporters 
 eager to sell because of the excessive stocks they had 
 accumulated in anticipation of the European peace. But 
 importations fell off as the American people discovered the 
 real poverty with which they had come out of the war. 
 The month of August, 1819, found 20,000 persons seeking 
 employment in Philadelphia, and a similar condition of 
 affairs in the other great cities of the North. 3 
 
 The economic disturbances in England were chiefly mone- 
 tary in 1817 and 1818, but were intensified by scarcity and 
 the high prices of cereals. The monetary difficulties were 
 due to the steady withdrawal of gold for foreign coinages 
 and in the form of subscriptions to Prussian, Austrian, and 
 French loans. The sum of 125,000,000 francs in gold was 
 coined at the Paris mint, of which three- fourths was esti- 
 mated to have been drawn from England. 4 France, in the 
 meantime, was paying the penalty of defeat in the field. 
 Commercial affairs were brought nearly to a standstill by 
 the entrance of the Allied armies into Paris in 1814, and 
 they suffered another period of enforced liquidation after 
 
 1 Vide p. 315. 
 
 2 McMaster, IV., 297. 
 
 3 Sumner, History of American Currency ', 79. 
 4 Juglar, 327. 
 
THE EARLY CRISES OF THE CENTURY. 475 
 
 Napoleon's return from Elba in March, 1815. France was 
 obliged, after Waterloo, to issue 500,000,000 francs of 
 public obligations to pay the war contributions imposed 
 upon her. The price of securities fell so disastrously that 
 the Minister of Finance came to the rescue of the market 
 and loaned freely to the speculators, in order to maintain 
 prices. The result was to bring the securities raining upon 
 the Paris market and to increase the exportation of bullion. * 
 The metallic reserve of the Bank of France fell from 117,- 
 000,000 francs on July i, 1818, to 37,000,000 francs on 
 October 29th. The bank shortened the term of commercial 
 discounts to forty -five days and in 1819 was flooded again 
 with idle capital. 
 
 The Crisis of 1825. 
 
 The next great crisis which shook the commercial world 
 attained its height in England at the end of the year 1825. 
 The metallic reserve of the Bank of England steadily in- 
 creased from 1820 until 1823, when it stood at ^"14, 100,000, 
 while the circulation was reduced until it stood at about 
 ^16,300,000. The Bank was required by the Act of 1819 to 
 retire its ^5 notes by redeeming them in gold within four 
 years. This demand for gold, comparatively trifling in itself, 
 was accompanied by a foreign drain due to the immense 
 loans contracted by the governments of Europe and Latin 
 America and the fever of speculation in domestic and Amer- 
 ican companies which developed in England. This specula- 
 tive mania was attributed by Mr. J. H. Palmer, the Governor 
 of the Bank of England, to the reduction of the interest on 
 government securities. He said to the Parliamentary com- 
 mittee of inquiry into the causes of the crisis : 
 
 The first movement in that respect was, I think, upon ^135,000,- 
 
 000 of five per cents., which took place in 1823. In the subsequent 
 year, 1824, followed the reduction of ^80,000,000 of four per cents. 
 
 1 have always considered that reduction of interests, one-fifth in one 
 case, and one-eighth in the other, to have created the feverish feeling 
 
 1 Raffalovich, Marche Financier en 1891, 9. 
 
HISTORY OF MODERN BANKS OF ISSUE. 
 
 in the minds of the public at large, which prompted almost every- 
 body to entertain any proposition for investment, however absurd, 
 which was tendered. The excitement of that period was further pro- 
 moted by the acknowledgment of the South American republics by 
 this country, and the inducements held out for engaging in mining 
 operations, and loans to those governments, in which all classes of 
 the community in England seem to have partaken almost simultane- 
 ously. With those speculations arose general speculation in commer- 
 cial produce, which had an effect of disturbing the relative values 
 between this and other countries, and creating an unfavorable foreign 
 exchange, which continued from October, 1824, to November, 1825, 
 causing a very considerable export of bullion from the bank, about 
 seven millions and a half. * 
 
 The correctness of these views is supported by the phrensy 
 of speculation which seized the community. The new re- 
 publics of Latin America, the New European states which 
 had been carved out of the Empire of Napoleon, and the 
 older governments which had incurred heavy war expenses, 
 appeared in the London market as borrowers and the public 
 loans issued within four years were estimated at nearly ^50,- 
 000,000. Stock companies were formed with objects as 
 indefinite and impracticable as in the time of the South Sea 
 Bubble. One which found subscribers proposed to drain the 
 Red Sea to recover the gold lost by the Egyptians when 
 pursuing the Israelites. 2 It was estimated that ^150,000,000 
 of British money, including that invested in government 
 loans, had been sunk in Mexico and South America alone/ 
 Much of it went into mining shares, which advanced fabu- 
 lously during 1824 and 1825. The Real del Monte shares, 
 on which ^70 was paid, were at ^550 in December, 1824, 
 and ,1350 in the following January. The first payments 
 required did not usually exceed five per cent, of the par value 
 of the shares, so that the humblest were able to count upon 
 enormous dividends from very trifling investments. The num- 
 ber of stock companies created was computed at 624, calling 
 for a nominal capital of ^372, 173,100. This enormous 
 
 1 Gilbart, I., 65. 
 
 2 Juglar, 334. 
 
 3 MacLeod, Theory and Practice of Banking, II., in 
 
THE EARLY CRISES OF THE CENTURY. 477 
 
 sum, if actually paid in, would have required $1,850,000,000 
 of capital, and in the England of that day, with her popula- 
 tion of 13,000,000, would have represented an investment of 
 nearly $150 per capita, or one-third of the wealth of the 
 country. 
 
 The withdrawal of so much capital from legitimate com- 
 mercial uses as was actually paid into these companies caused 
 a sharp increase in the value of money and the prices of 
 commodities, and manufacturers were forced to borrow money 
 to carry on their ordinary operations at the increased rates. 
 The rising prices in the latter half of the year 1825 reduced 
 purchases, the warehouses began to fill and the owners of 
 merchandise were confronted with the usual dilemma of a 
 commercial crisis, to sell their goods at a loss or make new 
 loans at higher rates of discount. The coin reserve of the 
 Bank of England steadily declined after March, 1824, when 
 it stood at ^"13,800,000, until it reached ^"9, 490,420 on Janu- 
 ary 29, 1825, and ,6,659,780 at the end of April. The 
 reserve had been forced down to ,3,012,150 on November 
 26th, and the country banks, which had been increasing their 
 discounts and their note issues, were suddenly brought to a 
 halt by the failure of Sir Peter Pole and Co. , on Monday, 
 December 12, 1825. Sixty-three country banks were forced 
 to suspend, and " the consequence," says Mr. Bagehot, 
 " was a panic.so tremendous that its results are well remem- 
 bered after nearly fifty years. ' ' 
 
 The Bank of England went on expanding its discounts up 
 to the end of April, in spite of an adverse foreign exchange 
 and the rapid reduction of the coin reserve. The process of 
 contraction began in May, but the bank did not raise the dis- 
 count rate until the panic had actually broken. It was not 
 until December i3th, that they advanced the rate from four 
 per cent, to five. The policy of contraction during the first 
 days of the panic, on Monday and Tuesday, caused absolute 
 paralysis of business. Mr. Huskisson said afterwards in the 
 House of Commons that during these two days, " It was 
 impossible to convert into money, to any extent, the best 
 securities of the government." The usury laws, which 
 
478 HISTORY OF MODERN BANKS OF ISSUE. 
 
 limited the rate of interest outside the Bank of England to 
 five per cent., prevented loans of private capital, which 
 might have been willingly made at seven, eight, or ten per 
 cent. The very desperateness of the situation brought its 
 ow T n remedy in time by forcing the sale of commodities at a 
 ruinous loss, which brought foreign capital pouring back 
 into England in the purchase of goods. The directors of 
 the bank changed their course on Wednesday, enlarged 
 their issues to solvent borrowers, and almost in a moment 
 the panic was stayed in London. 
 
 The bank issued upwards of ,5,000,000 in notes, between 
 Wednesday and Saturday, by advances on stock and Ex- 
 chequer bills as well as by discounts, in the language of 
 Mr. Jeremiah Harman, one of the directors, "by every pos- 
 sible means consistent with the safety of the bank ; and we 
 were not, upon some occasions, over-nice." The coin in the 
 vaults of the Bank of England scarcely exceeded ,1,000,- 
 ooo on Saturday night of this eventful week and the influ- 
 ence of the panic had not been fully stayed throughout the 
 country. The clamor for gold was stilled, however, by the 
 free issue of notes and a box of ,1 notes was sent down into 
 the country. The Gurneys, who did business at Norwich, 
 displayed piles of notes many feet thick on their counters 
 and prevented a run by the confidence which this exhibi- 
 tion inspired. The aid of the Bank of France was sought 
 and a credit for ,2,000,000 opened on three months bills. 1 
 The sum of .400,000 arrived from France in gold on Mon- 
 day, the i Qth, but the deputy governor of the Bank of Eng- 
 land had already given the assurance to Lord Liverpool on 
 Saturday evening that the danger was over in the city and 
 that quiet would soon be restored in the country. 
 
 The crisis of 1825 was an essentially English crisis, be- 
 cause loanable capital was more plentiful in England than 
 elsewhere and the speculative mania was mainly confined to 
 the London market. The solidarity of the world's markets 
 was indicated, however, by the appeal to the Bank of France 
 
 1 Levi, 188. 
 
THE EARLY CRISES OF THE CENTURY. 479 
 
 and by the reflex influence of the crisis in France and the 
 United States. The war with Spain caused some curtail- 
 ment of commercial opera tions^ in France in 1823 and broke 
 the force of the ascending movement of business. Much of 
 the gold expelled from England by unfavorable exchanges 
 found its way into the Bank of France, so that when the re- 
 flex movement of the English crisis was felt in France in the 
 demand for enlarged discounts, the bank had an ample re- 
 serve to meet it. The volume of discounts, which had been 
 478,000,000 francs in 1824, increased to 638,000,000 in 1825 
 and 688,000,000 in 1826, and fell to 556,000,000 in 1827 and 
 402,000,000 in 1828. The ebb and flow of the commercial 
 tide followed, therefore, substantially the same course in 
 France as across the channel, but without such an acute dis- 
 turbance. 1 The rate of discount was maintained uniformly 
 at four per cent. 
 
 The Crisis of ^37-39. 
 
 The crisis of 1837 was felt most severely in the United 
 States, but over-speculation in banks and joint stock com- 
 panies affected Great Britain and the Continent, and Great 
 Britain was affected also by her large loans in America. 
 There were symptoms of a panic in England in 1832, but 
 they arose from political events, aggravated by bad manage- 
 ment of the Bank of England, and did not present the phe- 
 nomena of a genuine economic crisis. The government 
 undertook the conversion of the public debt at three and a 
 half per cent, and the disturbance thus caused in the money 
 market was complicated with the expiration of the charter 
 of the bank and the political convulsions on the Continent. 
 The reform bill was pending in Parliament and the masses 
 were irritated against Wellington and the conservative min- 
 istry for their opposition. The circulation of the Bank of 
 England was much less than in 1825 (about ^16,800,000), 
 but the coin reserve had been allowed to fall below ,5,000,- 
 ooo. The attempt to create a political run upon the bank 
 
 1 Juglar, 410. 
 
480 HISTORY OF MODERN BANKS OF ISSUE. 
 
 caused alarm for a time, but was repressed without serious 
 results. ' 
 
 The crisis of 1837 ' m t^ e United States was one of the re- 
 sults of that discounting of*the future in a new country, 
 which results in over-speculation and the sinking of capital 
 in unproductive enterprises. Foreign capital became available 
 in great quantities for the use of the American people after 
 the recovery from the crisis of 1825 in England, and specie 
 imports kept company with an excess of imports of merchan- 
 dise, amounting in seven years to $140,700,000, as evidence 
 of the heavy loans which Europe was willing to make in the 
 United States. 2 The fact that the United States succeeded in 
 wiping out their entire public debt and accumulating a sur- 
 plus seemed, among the financiers of European countries, 
 burdened under millions of debt and annual interest charges, 
 to be a proof of great prosperity. 3 The success of the Erie 
 Canal led to the projection of many similar enterprises in the 
 Middle States and the West ; cities were laid out in the wil- 
 derness, and city lots sold at prices which in conservative 
 times could hardly have been realized in New York and 
 Philadelphia. The valuation of the city of Mobile in 1831 
 was $1,294,810; it rose in 1837 to $27,482,961, only to fall 
 in 1846 to $8,638,250.* The price of cotton was pushed up, 
 and negroes became as active a subject of speculation in the 
 South as the timber lands of Maine in the North. 
 
 1 Juglar, 342. 
 
 2 The excessive purchases of foreign goods, which did not have to 
 be paid for in either merchandise or bullion, is shown by the fact that 
 the imports from Europe increased from 162,893,883 for the year end- 
 ing September 30, 1833, to $127,511,020 in 1836, and even the imports 
 from other countries increased from $38,154,060 to $49,068,134. This 
 great increase in consumption was offset only partially by the in- 
 crease in exports of American merchandise to Europe, which rose 
 from $56,556,837 in 1833 to $96,413,449 in 1836, while other exports 
 slightly fell off. The reaction was striking after the breaking out of 
 the crisis. Imports fell during the year ending September 30, 1838, 
 to $62,017,575, while exports from the United States to Europe fell 
 only to $79,849,768. 
 
 3 Juglar, 464. 
 
 4 Shepard, 251. 
 
THE EARLY CRISES OF THE CENTURY. 481 
 
 Speculation in the public lands ran to extravagant limits. 
 The United States did not advance the price of public lands 
 beyond one dollar and a quarter per acre, which had been 
 fixed by law many years before. The speculators bought 
 of the government at this fixed price and sold on a steadily 
 rising market. The increase in sales of public lands had 
 been comparatively steady and healthful up to 1834, when 
 the sales were 4,659,218 acres and the amount received was 
 $6,099,981. The next year witnessed the sale of 12,364,478 
 acres and receipts of $15, 999, 804, and 1836 witnessed sales 
 of 20,074,870 acres and receipts of $25,167,833. The specu- 
 lative character of these sales is indicated by the steady 
 decline in receipts after 1837, until they fell in 1842 to only 
 $1,417,972. : President Jackson began to realize in 1836 the 
 true character of the rush for the public hands and en- 
 deavored to check it by the issue of the famous " Specie 
 circular." The circular was the result of the conclusion 
 that the banks organized in the new sections of the West 
 were not safe enough to meet the requirement of existing 
 law, that payments for lands should be received only in 
 specie and notes of specie value. These banks were organ- 
 ized in many cases by land speculators, who issued notes, 
 borrowed the notes and bought the land. The notes received 
 for sales of land were deposited in the bank, increasing its 
 resources, and were then borrowed again for new purchases 
 of land. The "Specie circular," issued July n, 1836, put 
 an end to this by requiring payments in coin or land scrip, 
 except until December i5th by actual settlers or residents of 
 the States in which the lands were situated. 
 
 The shriek of rage which was uttered by the defeated 
 speculators was echoed by the political enemies of Jackson, 
 and the legend still has believers, that the crisis of 1837 was 
 the result of no other causes than the specie circular and the 
 deposit of public funds in State banks instead of the Bank of 
 the United States. The events connected with the discon- 
 tinuance of deposits in the Bank of the United States and 
 
 1 Poor, 528. 
 
 3 1 
 
482 HISTORY OF MODERN BANKS OF ISSUE. 
 
 the veto of the charter 3 undoubtedly caused some degree of 
 financial uneasiness at the time, but the causes of the crisis 
 of 1837 lay deeper than merely political events. The infla- 
 tion of credit which has been attributed by some to the 
 distribution of the public monies among the State banks 
 had already begun before the transfers were made, and the 
 inflation would have been trifling if it had been limited to the 
 amount of the deposits at the time. The deposits were then 
 only $10,000,000, and it is obvious that they would not have 
 been a large factor in a healthy money market and were a still 
 smaller factor in a period of inflated values and extravagant 
 speculation. The deposits increased, however, from $10,000,- 
 ooo in 1823 to $41,500,000 in 1836. 
 
 Congress added fuel to the speculation, and greatly em- 
 barrassed the Treasury when the crisis came, by the policy 
 of distributing the. surplus revenues among the States. 
 Tariff reductions, although recommended by President Jack- 
 son, were not made with sufficient rapidity to prevent the 
 accumulation of a surplus, which amounted, on January i, 
 1836 to $26,749,803. This surplus and subsequent accumu- 
 lations up to January i, 1837, reserving $5,000,000 for the 
 government, were ordered by the Act of June 23, 1836, to 
 be ' ' deposited ' ' with the several States in proportion to 
 their representation in Congress. Jackson had favored a 
 distribution in 1829, * but in 1836 had come to see the 
 dangers of the plan and only reluctantly permitted the bill 
 to become a law. A new element of disturbance was pro- 
 jected into the financial situation by the coinage Act of 1834, 
 which changed the ratio of value of gold and silver from 
 fifteen to one to sixteen to one, in order to promote the 
 circulation of gold. 3 It was the desire of President Jackson 
 and Senator Benton to create a metallic currency, in place 
 of a bank-note currency resting upon insecure foundations, 
 and it was provided, in the bill authorizing the deposit of 
 
 1 Videch. xiii. 
 
 - Knox, 169. 
 
 3 The measure was designed to make a market for the gold which 
 was then being mined in considerable quantities in the Southern 
 Appalachian range. 
 
THE EARLY CRISES OF THE CENTURY. 483 
 
 the surplus with the States, that each of the deposit banks 
 should redeem its notes in specie and should issue no notes 
 after July 4, 1836, of a lower denomination than $5. The 
 adoption of a coinage system which sent silver to a premium 
 over gold, at the same moment that it was proposed to 
 exclude small notes from circulation, threatened to leave the 
 country without a medium for small payments, but the 
 breaking out of the crisis and the suspension of specie pay- 
 ments suspended the operation of the new conditions before 
 any considerable amount of gold had found its way into 
 circulation. 
 
 Omens of trouble were already in the air in the opening 
 months of 1837. Popular meetings were held in New York 
 for the purpose of protesting against the high prices of 
 provisions and the undue inflation of bank credits. One of 
 these meetings, on February i4th, became riotous, a flour 
 warehouse was gutted, and the military were called out to 
 preserve order. 1 The commercial crash was delayed until 
 April. The news from England indicated a financial 
 stringency there which was soon felt in the United States. 
 One hundred and twenty-eight failures occurred in New 
 York between April i stand April nth, cotton fell nearly fifty 
 per cent., the banks of New York suspended specie pay- 
 ments on May loth, and the banks throughout the country 
 which had not already fallen followed the example of New 
 York within a few days. The deposit banks ceased to pay 
 specie, the public revenues fell off, further deposits of public 
 monies with the States were suspended, and on May i5th 
 President Van Buren called an extra session of Congress for 
 September. 2 
 
 1 Shepard, 270. 
 
 2 The New York batiks resumed specie payments on May 10, 1838, 
 and most of the other banks of the country followed on July ist. 
 Early resumption was strongly championed by ex-Secretary Albert 
 Gallatin, then President of the National Bank of New York, who 
 was chairman of a committee, appointed by the New York banks as 
 early as August 15, 1837, to confer on the subject with the bankers 
 of other cities. The New York banks would probably have resumed 
 much earlier, but for the dilatory policy of the United States Bank of 
 Pennsylvania. Stevens, 282-85. 
 
484 HISTORY OF MODERN BANKS OF ISSUE. 
 
 An important incident of the crisis, which affected seriously 
 the Southern States and European investors, was the great 
 speculation of President Biddle of the United States Bank 
 of Pennsylvania in cotton. He undertook to corner the 
 cotton product of the world by arranging with the merchants 
 to make all their consignments to the agents of the bank 
 at Havre and Liverpool. He drew bills on England in 
 1837 against cotton for ,3, 000,000, and expected to get the 
 benefit of the difference between the rates at which he 
 loaned in the United States five and six per cent. and 
 the English rate of two per cent. But the United States 
 Bank no longer controlled the supply of commercial credit, 
 and the fabulous profits which Biddle appeared to be realiz- 
 ing stimulated the creation of banks all through the cotton 
 belt, which made advances to the planters and undertook to 
 sell cotton on their own account in Europe. The rise of the 
 Bank of England discount rate suddenly curtailed the profits 
 of many of these banks and the Bank of the United States 
 went to their rescue in order to maintain the price of cotton. 
 Bank shares and commercial paper were purchased by Biddle 
 at a discount of more than twenty-five per cent., which were 
 thrown upon the European market and eagerly snatched up 
 at par by European investors, who had not discovered the 
 tottering condition of American finance. But the enterprise 
 was too vast, even for Biddle' s resources. The reserves of 
 cotton were brought out, old stocks in the hands of manu- 
 facturers were allowed to run down, consumption diminished 
 and mills reduced their output, while bale upon bale con- 
 tinued to pour upon the Liverpool and Havre markets. 
 The House of Hottinguer of Paris protested Biddle' s paper, 
 the Hopes of Amsterdam broke off relations with him, and 
 the price of cotton tumbled, in common with that of other 
 commodities. 1 
 
 Speculation in banks and joint stock companies had 
 reached a serious point in England, irrespective of large 
 English investments in America. The growth of the specu- 
 
 Juglar, 462-65. 
 
THE EARLY CRISES OF THE CENTURY. 485 
 
 lative spirit did not escape the attention of shrewd j udges of 
 the situation, and Lord Wharncliffe as early as August 14, 
 1834, called attention in Parliament to the extension of joint 
 stock banks and the insufficient capital with which they 
 were trading. 1 The matter was made the subject of a Parli- 
 amentary inquiry in May, 1836. Mr. Poulett Thompson, 
 President of the Board of Trade, took part in the debate 
 and said that he had kept a register 4< of the different joint 
 stock companies, and of the nominal amount of capital pro- 
 posed to be embarked in them. The nominal capital to be 
 raised by subscription amounts to nearly ^200,000,000 and 
 the number of companies to between 300 and 400." " The 
 greater part of these companies," Mr. Thompson observed, 
 14 are got up by speculators, for the purpose of selling their 
 shares. They bring up their shares to a premium, and then 
 sell them, leaving the unfortunate purchasers, who are foolish 
 enough to invest their money in them, to shift for themselves." 
 The most extravagant expectations of railway profits and 
 of mining profits absorbed private capital and were pre- 
 paring the way for a crash, when the failure of the wheat 
 crop in 1836 inaugurated a drain of gold from the Bank of 
 England. 
 
 The bullion in the bank in March, 1836, exceeded ^8,000,- 
 ooo. From this date it steadily declined, but it was not 
 until July that the bank raised the discount rate to four and 
 a half per cent, and in August to five per cent. The Agricul- 
 tural and Commercial Bank of Ireland failed in November, 
 and a run began upon the other Irish banks. They had 
 strengthened themselves by drawing gold from the Bank of 
 Kngland to the amount of ^"2,000,000 and were able to pay 
 specie on demand, but the distrust was so great that Bank of 
 Kngland notes were taken by the Bank of Ireland only in 
 small amounts and at a discount of two shillings and six- 
 pence in the pound. The Northern and Central Bank at 
 Manchester, with a capital of ^800,000 and with forty 
 branches, appealed to the Bank of England for help in 
 
 MacLeod, Theory and Practice of Banking, II., 137. 
 
486 HISTORY OF MODERN BANKS OF ISSUE. 
 
 December, and it was only granted on condition that the 
 institution should discontinue all its branches except at 
 Liverpool, and afterwards that it should discontinue business 
 after February, 1837.' The bank was more liberal to some 
 of the large houses with American connections and eventu- 
 ally aided them to the amount of ,6,000,000. 
 
 The latter half of the year 1837 and the year 1838 showed 
 an increase of the cash reserve of the Bank of England and 
 a reduction in the discounts and circulation. The access of 
 gold to Bngland, however, was due to the abuse of credit in 
 America, France, and Belgium and did not indicate a return 
 of sound conditions at home. Notwithstanding the danger, 
 the Bank of England lowered its discount rate, November 
 29, 1838, from four to three and a half per cent, and an 
 increase to five percent, on May 16, 1839, was insufficient to 
 arrest the downward course of the reserve. The suspension 
 of specie payments again stared the bank in the face, offers 
 were made to sell annuities, some public stocks were sold, 
 and drafts were made upon Paris for ,600,000 in bills of 
 exchange. The bank was unable to reimburse these drafts 
 when they matured and foreign bankers began to draw 
 upon London for coin. Messrs. Baring and Company came 
 to the rescue and made an agreement with several bankers 
 of Paris to accept bills of exchange to the amount of 
 ,2,000,000. A like arrangement with the bankers of Ham- 
 burg procured ,900,000 more, and on September 2, 1839, 
 when the coin and bullion were at .2,406,000, the decline 
 was arrested. 
 
 The Bank of France was fortunately in a position to meet 
 these demands in 1839, for its own coin reserve had increased 
 in January to 214,000,000 francs ($41,400,000). It would 
 have been less easy to spare gold at an earlier date, for the 
 bank had only 105,000,000 francs ($20,000,000) in its reserve 
 in January, 1837, an< ^ demands for discounts were rapidly 
 increasing from Paris and the country. The bank was com- 
 pelled to buy 8,000,000 francs in gold and to import 10,000,- 
 
 1 Gilbart, I., 314. 
 
THE EARLY CRISES OF THE CENTURY. 487 
 
 ooo francs in gold bullion. 1 The crisis was less severe in 
 France than in England and the Bank of France was able, 
 at some risk to commerce, to maintain the uniform discount 
 rate of four per cent. 2 The demand for coin and for in- 
 creased discounts came mostly from the interior of France 
 and while the gold flowed rapidly from the bank into the 
 provinces in 1836, it flowed almost as rapidly back in the 
 second half of 1837. The suspension of the Bank of Bel- 
 gium in November, 1838, and the disasters in the United 
 States led to an increased demand for accommodation from 
 the Bank of France and discounts rose from 103,000,000 
 francs in June, 1838, to 228,000,000 francs in January, 1839, 
 but legitimate demands were met without impairing the 
 coin reserve. 
 
 The Crisis of 
 
 The crisis of 1847 was so severely felt in Great Britain 
 and France, on account of the failure of their crops, that 
 they were driven to pour their gold and silver into the lap 
 of the United States in the purchase of her bounteous har- 
 vests, and the year was for her one of unusual prosperity. 
 The value of the exports of merchandise from the United 
 States for the fiscal year 1847 was $ T 5^,74 1,598, an increase 
 of more than forty per cent, over any preceding year ; the 
 excess of exports over imports was $34,317,249, a balance 
 never again attained until 1876 ; and the imports of gold 
 and silver were $21,574,931, a total which stood substan- 
 tially unchallenged until shortly before the resumption of 
 specie payments in 1879. This great prosperity on the 
 western shore of the Atlantic was obtained at the expense 
 of fever, starvation, and death on the eastern shore. A long 
 season of rain and wet rotted the entire potato crop of Ire- 
 land in 1845 and 1846 and destroyed the food of a people. 
 The Irish peasant, who had no other means of living, was 
 dying literally by tens of thousands among the marshes and 
 hovels of his native land. Coffins could no longer be pro- 
 
 , 414. 
 Courtois, 159. 
 
488 HISTORY OF MODERN BANKS OF ISSUE. 
 
 vided in some districts and the coroner refused to go on hold- 
 ing inquests. The population of Ireland was found when 
 the famine was over to have shrunken by death and emigra- 
 tion from eight millions to six millions. 1 Three-quarters of 
 a million of Irish immigrants reached the United States in 
 the decade ending with 1850 and nearly a million followed 
 in the next. 
 
 The great demand for gold to pay for foreign grain was 
 the immediate occasion of the crisis of 1847, but there had 
 been also a great transformation of circulating into fixed 
 capital in the building of railways, and the effect of the ex- 
 port of gold was much intensified in England by the opera- 
 tion of the Bank Act of 1844. This act did not accomplish 
 its original purpose, to contract domestic circulation in the 
 exact measure of the export of bullion. Had it done so, 
 the effect would have been even more disastrous than was 
 actually the case ; but it accomplished, at a time when it 
 was too late to arrest speculation, a needless pressure upon 
 the money market and a sharp contraction of discounts. 
 The railway mania steadily spread in Great Britain for 
 several years. New railway capital was authorized by Par- 
 liament in three years to the amount of ^221,000,000 and 
 the amount actually expended on railways in two and a half 
 years was computed at ^76, 390,000. 2 The countries of the 
 Continent had followed Great Britain in railway expansion. 
 Belgium in 1845 had 343 miles of railway, built at a cost of 
 $29,000,000 ; France 552 miles, at a cost of $51,000,000, with 
 1900 miles projected at a cost of $150,000,000 ; Germany, 
 2000 miles at a cost of $77,000,000, with 2300 miles pro- 
 jected ; and the United States, 3688 miles at a cost of $88,- 
 000,000, with 5624 miles under construction at an estimated 
 cost of $ 1 34, ooo, ooo. 3 The effect of this great absorption of 
 the savings of the community in a single class of enterprises 
 was illustrated in an incidental way when Parliament in 
 1846 required all railway companies intending to apply for 
 
 1 McCarthy, I., 278-82. 
 
 2 Report of the Lords' Committee, Gilbart, I., 337-38. 
 
 3 Levi, 303-304. 
 
THE EARLY CRISES OF THE CENTURY. 489 
 
 incorporation to lodge ten per cent, of their capital within 
 fifteen days after the beginning of the Parliamentary session. 
 It was feared that the notes issued under the Bank Act of 
 1844 would prove insufficient to make these payments and it 
 was arranged that the ,14,000,000 found to be required 
 should be obtained by daily payments deposited in the Bank 
 of England and immediately loaned out again for further 
 payments. 1 
 
 The harvests of 1842, 1843, anc * 1844 were abundant, large 
 savings were made by the British nation, the quantity of 
 capital required to be invested in goods in stock was re- 
 duced by improvements in the means of transit, and bullion 
 rapidly accumulated in the Bank of Kngland. Discount 
 rates at the bank fell as low as one and three-quarters per 
 cent, on the best bills and after some fluctuations stood at 
 three per cent, from August, 1846, to January 16, 1847. 
 The failure of the potato crop in Ireland in 1845, followed 
 by a worse failure in 1846, required the exportation of large 
 quantities of bullion to pay for foreign grain, and the bullion 
 holdings of the bank decreased from ,15, 163,000 on Decem- 
 ber 19, 1846, to ,9,867,000 on April 10, 1847. The bank- 
 ing reserve in the meantime had fallen from ,8,864,000 to 
 ,2,558,000. A panic stared the market in the face for a 
 moment and discount among private bankers rose to ten and 
 twelve per cent. The rise in the bank rate, however, stopped 
 the flow of bullion and a sum of ,100,000 which had been 
 actually put on shipboard for America was relanded. 2 The 
 pressure passed off for a time and the bullion in the bank at 
 the end of June had increased to ,10,526,000 and the bank- 
 ing reserve to "5,625,000. 
 
 The relief was only temporary. A series of heavy failures 
 came crowding on each other's heels in August, involving 
 liabilities of 1,200,000 in the week ending August i6th and 
 ,15,000,000 by the end of October. Saunderson and Co., a 
 leading firm of bill brokers, stopped payment in the middle 
 
 1 Gilbart, L, 343- 
 
 2 MacLeod, Theory of Credit, II., 796. 
 
490 HISTORY OF MODERN BANKS OF ISSUE. 
 
 of September, heavily involved with leading houses in the 
 corn trade. Firms in the India trade were crippled by the 
 long credits afforded and were compelled to suspend. Mer- 
 chants whose own business was sound were ruined by their 
 reckless speculations in railroad securities. The directors 
 of the Bank of England realized that heroic measures were 
 required to save the bank and on October 2, 1847, advanced 
 the bank rate to five and a half per cent, and refused to 
 make advances on stock or on Exchequer bills. The bullion 
 had fallen again to ,8,565,000 and the banking reserve to 
 ,3,409,000. The refusal to make advances on public securi- 
 ties caused wild excitement on the stock exchange, a fall in 
 the price of Consols, and the disappearance of coin and 
 bank-notes into private hoards. The Bank of England was 
 reduced to the choice of bringing business to a standstill, by 
 refusing all further discounts and pulling down the entire 
 commercial structure in a shapeless mass of ruins, or break- 
 ing through the shackles placed upon its action by the Bank 
 Act of 1844. 
 
 The government waited until the situation was desperate, 
 in the hope that the pressure would pass away, as that of 
 April had done, without the necessity for suspending the 
 law. The reserve dropped to ,1,176,000 and the govern- 
 ment finally acted, late on Saturday, October 23d, and notified 
 the bank that they would seek a bill of indemnity from 
 Parliament if notes were issued in excess of the limit im- 
 posed by the Act at a rate of discount not less than nine per 
 cent. The effect was magical. The knowledge that money 
 might be had to meet demands instantly destroyed the 
 desire for it. The bank prepared ,400,000 in additional 
 notes, but it was not found necessary to issue them. Notes 
 which had been hoarded, under the impression that the 
 limit of issues fixed by the Act would soon be reached and 
 all relief cut off from the business community, came pouring 
 from their hiding places ; gold which had been stored in 
 safe deposit vaults was brought back to the banks for deposit, 
 and both the bullion and the banking reserve of the Bank 
 of England rapidly returned to safe proportions. 
 
THE EARLY CRISES OF THE CENTURY. 491 
 
 France suffered less keenly than England in 1846 from the 
 insufficiency of the crops, but the exportation of bullion, 
 under the demands of the London market and in payment 
 for grain, carried the reserve of the Bank of France down 
 from 252,000,000 francs on July i, 1846, to 80,000,000 francs 
 on January i, 1847. The bank was besieged for discounts, 
 purchased gold and silver in the provinces at a premium, and 
 sold 20,000,000 francs in French securities to the Barings 
 of London for gold. The crisis was so intense that the 
 management of the bank decided on January 14, 1847, for 
 the first time in twenty-seven years, to raise the rate of 
 discount from four to five per cent. The outflow of specie 
 ceased and the reserve rose from 78,000,000,000 francs on 
 January i5th to 1 10,000,000 francs on March i6th. The Em- 
 peror of Russia came to the rescue of the bank and offered 
 to buy French public securities to the amount of 50,000,000 
 francs. 1 The bank accepted the offer and these securities 
 went to Russia in payment for grain in place of the bullion 
 which would otherwise have been exported. It was well 
 understood in France that the efflux of gold was due to 
 foreign payments and there was no disposition to present 
 bank-notes for redemption in specie for domestic use. 2 The 
 bank was so well equipped with bullion and confidence was 
 so fully restored that France was little affected by the autumn 
 pressure in England and discount was reduced on December 
 27, 1847, to tne standard rate of four per cent. The break- 
 ing out of the revolution of 1848 arrested the development 
 of business, and led the bank to seek the suspension of 
 specie payments by authority of the government for the 
 protection of its metallic reserve. The accumulation of 
 bullion was unprecedented from 1848 to 1851 and attained 
 on October 2, 1851, 626,000,000 francs, which was about 
 20,000,000 francs in excess of the entire circulation of bills. 
 
 1 Noel I., in. The negotiations were opened by the Russian 
 ambassador at Paris, Count Kisselef, and a deputy governor of the 
 bank went to St. Petersburg to conclude the transaction. The con- 
 tract was signed March 17, 1847. 
 
 2 Juglar, 417. 
 
CHAPTER XXI. 
 
 THE LATER CRISES OP THE CENTURY. 
 
 Growth in the Popular Understanding of Crises The Effect of the 
 Gold Discoveries and Railway Building in 1857 and 1866 The 
 Failure of Overend, Gurney, and Co. in 1866, and of the Barings 
 in 1890 The Economic Effects of the American and Franco- 
 Prussian Wars and the Long Period of Depression from 1873 to 
 1879. 
 
 THE economic crises of the closing half of the nine- 
 teenth century have been of wider extent than some 
 of the earlier crises, because of the wider area of 
 modern commerce, and the suffering which they have in- 
 flicted has been keen ; but they have possessed fewer of 
 the characteristics of unreasoning panic than the earlier 
 crises of the century, because of the more accurate compre- 
 hension of the laws of banking which has been diffused in 
 the business community. The panic in England was less 
 intense in 1857 than in 1847, an d the serious dangers of the 
 Baring failure in 1890 were warded off by the union of the 
 Bank of England and the great financial houses, without 
 any outbreak of visible alarm. The United States in 1893 
 passed through an equally trying experience, and runs upon 
 the banks by depositors were several times feared, but no 
 such runs took place except in cases where there were well- 
 founded reasons for distrust. 
 
 The Crisis 0/1857. 
 
 The crisis of 1857 took its direction from two of the car- 
 dinal events of the nineteenth century, the gold discoveries 
 
 492 
 
THE LATER CRISES OF THE CENTURY. 493 
 
 in California and Australia and the great extension of rail- 
 ways. The gold discoveries worked a revolution in the pro- 
 portions of the precious metals available for monetary uses, 
 .such as had only been worked by the discoveries of the 
 treasures of Mexico and Peru more than three centuries 
 before. The gold product of 358 years, from 1492 to 1850, 
 had averaged only about $9,000,000 per year, 1 when it was 
 suddenly swelled to an average of $133,000,000 from 1851 to 
 1860. President Buchanan estimated the production of the 
 United States alone for the eight years ending in 1857 at 
 $400,000,000. Prices did not advance in proportion to the 
 increase in the volume of metallic money, because they were 
 regulated by credit and because a large part of the new 
 money was absorbed by the lateral expansion of commerce 
 in quantity, but enterprises of all kinds received a stimulus 
 unheard of in the history of the world. 
 
 To this influence of the doubling of the supply of the pre- 
 cious metals, as if by magic, was added the influence of rail- 
 way extension. The railway mileage built in the United 
 States in 1856 was 3642 miles, a and the construction for the 
 nine years ending with 1857 was 21,000 miles. This con- 
 struction, forming seven-ninths of the entire mileage of the 
 country, had absorbed $700,000,000, largely in foreign capi- 
 tal. England and the Continent had witnessed a similar 
 absorption of circulating capital. Over four thousand miles 
 of railway had been built in England since 1850 at an ex- 
 pense of ^150,000,000, doubling the mileage of the country. 3 
 So rapid was the development in every branch of American 
 life that, in the language of Professor Von Hoist, "It was 
 
 1 Prof. Adolph Soothbeer gives the aggregate production from 1493 
 to 1850 as 13,258,000,000 marks ($3,150,000,000), and from 1851 to 1885 
 as 17,810,000,000 ($4,250,000,000). Bimetallism in Europe, Sen. Ex. 
 Doc. 34, 5oth Cong., ist Sess., 78. The production from 1885 to Dec. 
 31, 1895, was about $1,375,000,000. 
 
 * Sumner, History of American Currency, 180. 
 
 3 These figures are taken from Mr. Rhodes' History of the United 
 States (HI., 53), who has made a careful compilation of the essential 
 facts of the crisis in this country. 
 
494 HISTORY OF MODERN BANKS OF ISSUE. 
 
 more and more lost sight of, that even in the age of steam, 
 time must remain an essential factor in every process of de- 
 velopment." It no longer seemed absurd to project railways 
 into the wilderness, in the confident belief that they would 
 open up new countries and create traffic where none existed. 
 Immigration lent its aid to the natural growth of population, 
 and the American people, under these combined influences, 
 "worked themselves deeper and deeper into the delusion 
 that the fancy could scarcely keep pace with the reality, and 
 were thus led to mould the reality in their minds in accor- 
 dance with what imagination pictured to them." 
 
 There were signs of a tight money market in both the 
 United States and England for several years before 1857. 
 Bad crops and the diminution of foreign investments caused 
 uneasiness among the Western banks as early as the summer 
 of 1853. They drew heavily upon their balances in New 
 York to replace the capital sunk in railway enterprises, and 
 
 1 Von Hoist, VI., 104. It was argued at the time of the panic of 
 1857, and has been maintained since, that the crash was caused by 
 the low tariff of 1846, which led to large exports of specie to make 
 payments for foreign goods and drained the country of metallic money. 
 Mr. Rhodes, who will not be accused of partiality to the administra- 
 tion of either Polk or Buchanan, says that " in this reasoning cause 
 and effect are confused, and in part, at least, inverted. It was the ex- 
 port of specie which increased the importations of merchandise, and 
 not the importations of merchandise which increased the export of 
 specie." He shows that during the nine years ending June 30, 1857, 
 the excess of the exports of specie over imports was 1271,000,000, and 
 that during the same period there was a production of gold in the 
 United States of about $477,500,000, leaving a net increase of specie 
 of about $206,000,000. The net increase in specie in circulation shown 
 by the Treasury estimates during this period was only $148,000,000, 
 the remainder having been absorbed in the arts, but this amount was 
 more than sufficient for American monetary uses, and such export of 
 specie as occurred probably tended to restrain speculation rather than 
 stimulate it. Mr. Rhodes expresses his obligations for this part of his 
 history to Prof. Edward G. Bourne of Adelbert College. History of 
 the United States, III., 51-52. Prof. Max Wirth, the eminent Ger- 
 man historian of economic crises, makes no mention of the tariff 
 among the causes of the crisis of 1857. 
 
THE LATER CRISES OF THE CENTURY. 495 
 
 many were compelled to suspend payment. The Crimean 
 War led to speculation in shipping in England and some 
 perturbation in business circles. The anticipation of trouble, 
 however, as the result of the war, made money lenders cau- 
 tious and prevented serious embarrassment until the summer 
 of 1855. The Bank of England in that year suffered a seri- 
 ous drain of bullion, which carried its supply down from 
 ^18,169,000011 June 23d to ^11,752,300 on October i3th. 
 This drain continued, in spite of advances in the discount 
 rate by successive steps, from three and a half per cent, dur- 
 ing the summer to six per cent, on October i8th, and finally 
 to seven per cent, on November 8th. The volume of trade 
 did not seem to yield to the pressure of high rates of inter- 
 est, and prices continued to climb upward, 1 but the bullion 
 in the bank was kept nearly stationary through the year 
 1856. The tightness of the money market continued into 
 the summer of 1857, when on August i7th the bullion stood 
 at ,10,606,000 and the rate of discount was five and a half 
 per cent. 
 
 The situation in the United States was complicated, as it 
 was in France, by the changes in the metallic circulation 
 caused by the great production of gold. Gold took the place 
 of silver as the overvalued metal at the coinage ratio, was 
 invariably chosen by debtors for payments, and silver, hav- 
 ing become the dearer metal, disappeared from circulation, 
 in spite of bimetallic enactments, under the relentless opera- 
 tion of Gresham's law. The Secretary of the Treasury 
 attempted in 1853 to relieve the contraction thus caused by 
 paying for silver at the mint in gold, which would be added 
 to the circulation. 2 The banks, in spite of their rapid in- 
 crease, were unable to keep pace with the demand for loan- 
 able capital which resulted from the fever of speculation. 3 
 
 1 Juglar, 363. 
 
 2 Kinley, 175. 
 
 3 The number of banks increased from 715 in 1847 to 1416 in 1857, 
 and the loans and discounts from 1310,282,945 to $684,456,887. The 
 increase in the note circulation was from 1105,519,766 to $214, 778,822. 
 The circulation fell in 1858 to $155,208,344 and the specie holdings of 
 
496 HISTORY OF MODERN BANKS OF ISSUE. 
 
 The specie reserves of the New York banks were strength- 
 ened for a time by government bond purchases and they 
 were able to expand their loans. Foreign capital continued 
 to flow into the United States and the bubble of speculation 
 to be blown to the extremist tension. 
 
 Conditions were ripe both in Europe and America for a 
 crash, when the impulse came on August 24, 1857, fr m the 
 failure of the Ohio Life Insurance and Trust Co., of Cincin- 
 nati and New York, with reported liabilities of $7,000,000. 
 A panic followed on the New York Stock Exchange, stocks 
 fell, money was hoarded and loaned only at extravagant 
 rates, deposits began to disappear from the banks, and late 
 in September a run began on the banks of Philadelphia. 
 They were compelled to suspend specie payments on Sep- 
 tember 26th and were followed by the New York City banks 
 on October i3th. The early part of October had witnessed 
 the failure of the Illinois Central Railroad, the New York 
 and Erie, and the Michigan Central, and the run upon the 
 New York banks for the withdrawal of their deposits fol- 
 lowed close upon these events. 1 Prices of commodities tum- 
 bled with the price of stocks and the farmers felt the pinch 
 in the depreciation of wheat, flour and pork as well as in 
 the fall in real estate. 
 
 Money continued tight in England up to the autumn of 
 1857 and many complaints were made against the Bank of 
 England for the high rate of discount. The news of the 
 failure of the Ohio Life and Trust Co. caused intense alarm 
 
 the banks, which had not suffered during the crisis, rose from $58,- 
 349,838 in 1857 to 174,412,832 in 1858 and to $104,537,818 in 1859. M. 
 Juglar points out that it was not increase of circulation which caused 
 expansion so much as "the attraction of deposits by high interest 
 and the lending of them to reckless speculators."^^ Crises Com- 
 merciales, 268. 
 
 ! The New York banks contracted their discounts from $122,000,000 
 on August 8th to $97,200,000 on October i7th. The constitution of 
 the State of New York forbade suspension of specie payments directly 
 or indirectly, but the judges of the Supreme Court met and agreed 
 not to grant any injunction unless the bank appeared to be insolvent 
 or guilty of fraud. Sumner, History of American Currency, 184. 
 
THE LATER CRISES OF THE CENTURY. 497 
 
 for the ,80,000,000 of English money which was believed 
 to be invested in American securities. A group of specula- 
 tors added to the alarm in London by forming a combination 
 to "bear" the market, by finding flaws in securities and 
 working through the press to excite general distrust and 
 depress prices. 1 The high rates of interest in New York be- 
 gan to attract gold from Hamburg ; the Bank of France lost 
 25,000,000 francs in a single week, and the bullion in the 
 Bank of England declined to ;8, 991,000 on October igth. 
 The great house of Dennistoun stopped payment on Novem- 
 ber 7th, with liabilities of nearly ,2, 000,000, the Western 
 Bank of Scotland closed its doors two days later under ap- 
 palling revelations of mismanagement and loss, the City of 
 Glasgow Bank suspended, and the banking reserve of the 
 Bank of England dropped on November nth to ,1,462,000. 
 The money actually in London in the banking department 
 of the Bank of England on this eventful Wednesday night 
 consisted of ,375,005 in notes, ^310,784 in gold coin, and 
 ,44,046 in silver coin. The bank could not have held out 
 a day longer under the Act of 1844. It would have been 
 obliged to suspend discounts not later than Friday and this 
 would have been followed by a run for their reserves on the 
 part of the stock banks, the bill brokers, and the private 
 bankers, who had deposits at the Bank of England to the 
 amount of ,5,458,000. At the last moment the Bank Act 
 was suspended. A letter reached the bank on November 
 1 2th, authorizing them to issue notes in excess of the legal 
 limit, provided they maintained the rate of discount at ten 
 per cent. Public excitement was suddenly calmed, but the 
 demand for discounts continued heavy for more than a fort- 
 night. The bank issued ,2,000,000 in notes above the stat- 
 utory limit, but the maximum in the hands of the public was 
 ,928,000 on November 2oth. The remainder were added 
 to the banking reserve. The governor of the bank after- 
 wards testified that there was less acute panic in 1857 than 
 in 1847, Du t that the real commercial pressure was more 
 
 London Times, Sept. 10, 1857, quoted by Gilbart, II., 337. 
 
 3 2 
 
498 HISTORY OF MODERN BANKS OF ISSUE. 
 
 intense. This may be judged from the fact that the aggre- 
 gate loans by discounts and advances on stocks by the Bank 
 of England were ,12,645,000 from November i2th to 
 December ist. 1 Greater caution was shown than on former 
 occasions in reducing the discount rate, and it was main- 
 tained as high as five per cent, in 1858 until the bullion had 
 returned to ^i5,ooo,ooo. 2 
 
 France and other countries of the Continent suffered in 
 the crisis of 1857, though less acutely than England and 
 America, because of the smaller scope of their commercial 
 affairs. The establishment of the Second Empire in France 
 gave an assurance of security to the mercantile classes, 
 which was shaken for only a moment at the outbreak of the 
 Crimean War. Business resumed its activity when it ap- 
 peared that the operations of the war would be confined sub- 
 stantially to the East and the discounts of the Bank of France 
 rose from the maximum of 154,000,000 francs ($29,000,000) 
 in 1851 to 628,000,000 francs ($121,000,000) in 1857. The 
 bank found it necessary to raise the discount rate to six per 
 cent, in the autumn of 1856 and found its specie reserve at 
 Paris reduced in January, 1857, to 72,000,000 francs ($14,- 
 000,000). One of the surprising features of the panic of 
 1857 was tne disappearance of gold from circulation in spite 
 of the enormous production of the preceding ten years. The 
 Bank of France was continually in the market as a purchaser 
 of bullion and expended 14,000,000 francs in 1855, 1856, 
 and 1857 in premiums on 1,274,508,519 francs ($250,000,000) 
 in gold bullion. 3 
 
 1 Levi, 404. 
 
 2 MacLeod, Theory and Practice of Banking, II., 190. 
 
 3 Juglar, 422. This disappearance of gold from sight, when the 
 quantity in the world available for monetary uses had probably in- 
 creased more than fifty per cent, in ten years, throws an interesting 
 light on the suggestion of Mr. Forssell, the Swedish delegate to the in- 
 ternational mon etary conference of 1892, that an attempt to create a mon- 
 etary union wide enough to prevent exports of the metal under- valued 
 in the coinage laws would be followed by its disappearance within the 
 union. Conference Monetaire Internationale, Proces Verbaux, 246. 
 
THE LATER CRISES OF THE CENTURY. 499 
 
 Hamburg, with her purely metallic currency, did not es- 
 cape the violence of the storm. The rate of discount reached 
 nine per cent, and 145 failures occurred, with reported liabili- 
 ties of $100, ooo, ooo. ' An attempt was made to sustain credit 
 by combination among the leading merchants, but it failed 
 and resort was had to the government, which borrowed 10,- 
 000,000 marks from Austria for discounting commercial bills. 
 The Norwegian and Danish governments were also obliged 
 to contract loans for the benefit of the mercantile community, 
 and in Sweden the National Bank was authorized to borrow 
 abroad 12,000,000 rix dollars, to be apportioned among the 
 different towns. 2 In Prussia the Jewish houses suffered 
 more than the banks, and complaint was made that the 
 substantial monopoly of the Bank of Prussia injured credit 
 by the contraction of the volume of circulation. The laws 
 against usury were suspended and the banks were author- 
 ized to discount paper secured by either raw materials or 
 manufactured goods. 
 
 The Crisis of 186^-66. 
 
 The years following the outbreak of the American civil 
 war were years of financial disturbance in both Kurope and 
 America, partly as the result of influences set in operation 
 by the war, and partly as the result of independent influ- 
 ences whose effect was intensified by the operation of the 
 others. Periods which witness the turning of business from 
 its ordinary courses into new channels are always periods of 
 uneasiness, of unusual risks and of speculative tendencies. 
 This was the character of the entire period from 1861 to 
 1866. The great discoveries of gold which had lent their 
 brilliant hue to the dreams of American business men be- 
 fore the crisis of 1857 began to have a more marked effect in 
 Europe a few years later. Their effect was heightened by 
 the fact that at the close of 1861 the banks and Treasury of 
 the United States suspended specie payments and gold flowed 
 
 1 Courtois, 235. 
 
 2 Levi, 405. 
 
500 HISTORY OF MODERN BANKS OF ISSUE. 
 
 with an accelerated current towards Europe. The net gold 
 exports from the United States in 1862 were $21,532,892 ; in 
 1863, $56,632,300; in 1864, $89,484,865; and in 1865, $51,- 
 882,805. These great additions to the monetary supply of 
 Europe produced only a slight effect upon prices, ' but they 
 proved a great stimulus to business activity, because of the 
 means of conducting exchanges which they put in circula- 
 tion in countries formerly without such means. The effect 
 in France is described by an eminent French writer, 2 in the 
 following terms : 
 
 In those arrondissements and cantons where formerly the bill was 
 a myth and the gold louis a phenomenon, hundreds of thousands of 
 francs and even millions in specie and in bills are now in continuous 
 rotation, promoting a movement of transactions which grow in in- 
 tensity and extent day by day. They constitute a potent dike against 
 depression and depreciation. The ancient possessor of monetary 
 capital is neither robbed nor defrauded by this increase in the quan- 
 tity of instruments of circulation, whether the increase consists in 
 real gold or in credit gold (or suppose}. On the contrary, he gains as 
 much by it, more perhaps, than the general public. The superior 
 activity of exchanges assures to the aggregate of circulating capital 
 employment more fertile, more constant, and, inasmuch as it stimu- 
 lates production and renders products more abundant and less dear, 
 it even increases the value and the purchasing power of the pre- 
 existing gold. 
 
 The news of war in America had an immediate effect upon 
 the price of cotton and upon the London money market. 
 The first influence upon the Bank of England, before the 
 suspension of specie payments in the United States, was a 
 loss of bullion and an increase of the discount rate on Feb- 
 ruary 14, 1 86 1, to eight percent. The United States became 
 smaller purchasers than before from Europe and if they had 
 remained on a specie basis might have exacted the price of 
 
 1 Prof. Jevons, who accepts the quantitative theory of money suffi- 
 ciently to make a careful mathematical calculation of the effects of 
 the new gold, declares "that ten per cent, may be taken as the best 
 approximation which we can get to the rise of prices between 1845- 
 50 and 1860-62." Investigations in Currency and Finance ', 58. 
 
 2 Horn, 263. 
 
THE LATER CRISES OF THE CENTURY. 501 
 
 their exports for a time in specie. The opposite policy caused 
 bullion to flow freely into the Bank of England and per- 
 mitted the gradual reduction of the discount rate to two and 
 a half per cent, in January, 1862. The high price of cotton 
 still required specie exports, but not to the United States. 
 The blockade of the Southern ports compelled English mills 
 to seek their raw materials in other markets. India, Egypt, 
 and China were appealed to, and it was not possible to com- 
 pensate this new trade at once by exports of merchandise. 
 It had to be settled, especially in the case of India, by ex- 
 ports of silver from Great Britain. 1 France felt the counter- 
 stroke of this movement in the steady export of silver in 
 exchange for gold. Silver was more valuable as bullion than 
 at the ratio fixed by the French coinage laws and was sold 
 at a premium for gold imported from England and the 
 United States. The Bank of France was driven to making 
 its redemptions in gold, in order to prevent a run for silver. 
 The bank not only exchanged 50,000,000 francs in silver for 
 an equal sum in gold, at the coinage ratio, with the Bank of 
 England, but in November, 1860, effected a like exchange 
 of 30,000,000 francs with Russia and in July, 1861, of 6,000,- 
 ooo francs with the Bank of Italy. 3 
 
 The reduction of the cotton supply, the derangement 
 caused by the new supplies of gold, and the accumulation of 
 capital in Great Britain as the result of the extended use of 
 machinery, gave a feverishness and speculative character to 
 the money market which recalled the manias of 1825 and 
 1847 in Great Britain and of 1837 an< ^ T ^57 * n tne United 
 States. One of the new elements which entered into the 
 problem in Great Britain was the creation of companies of 
 
 1 The net imports of silver into India for the four years ending 
 March 31, 1866, were 54,094,337 tens of rupees, or 13,523,584 tens of 
 rupees per year, while the bills on India sold by the home govern- 
 ment were 29,409,469 tens of rupees, or 7,352,368 tens of rupees per 
 year. The annual average for the five years ending with 1860 was 
 10,072,495 tens of rupees in silver and 992,569 in bills. The ten of 
 rupees was about equal to 1. 
 
 * Juglar, 426. 
 
502 HISTORY OF MODERN BANKS OF ISSUE. 
 
 limited liability. Such companies were only created by 
 special charter prior to 1855, an( ^ it was n t until after the 
 amendment of the Companies' Act in 1862 that their crea- 
 tion attained the proportions of a mania. A new form of 
 financial enterprise which developed was the creation of stock 
 companies to furnish funds for new enterprises upon pledge 
 of their stock. A proposed railway would not await the 
 slow process of placing its stock and bonds among investors, 
 in order to obtain funds to begin construction, but would 
 deposit these securities with a finance company, which would 
 agree to accept its debts for a specified sum. The immediate 
 service rendered by the finance company was simply the use 
 of its name, and the dangers of this method of financing did 
 not become obvious until these long-dated acceptances began 
 to press upon the market. The finance companies were able 
 to sell their own shares at high prices and thus obtained the 
 funds with which to make advances to the railways and 
 construction companies. 1 
 
 This new method of financing, through great capitalists 
 and banking companies, was legitimate within the limits of 
 the strength of the guaranteeing companies, and the pros- 
 pects of the new enterprises, and it afforded a method of set- 
 ting in operation at once enterprises for which the capital 
 could not formerly have been found without appealing to the 
 clumsy methods of government finance. The new system 
 was employed, however, without wisdom and sometimes 
 without honesty during the sixties and it soon brought the 
 inevitable crash. One of the most conspicuous of the new 
 finance houses was that of Overend, Gurney, and Co., which 
 made investments in railways in Great Britain, in cotton in 
 the United States, and in new enterprises in India. The 
 company commanded the unlimited confidence of the public, 
 because of the high credit of the private firm which was 
 turned into a limited company in July, 1865. The firm was 
 already in debt at that time to the amount of ,2,970, 168 and 
 the methods by which this money had been lost were reck- 
 
 1 Levi, 462. 
 
THE LATER CRISES OF THE CENTURY. 503 
 
 lessly continued by the limited company. The very confi- 
 dence reposed in the company was to some extent the cause 
 of its later fall, for it invited such large deposits that use had 
 to be found for them at the expense of safety. 
 
 The craze for limited companies increased their number in 
 England within a few years by nearly three hundred, with a 
 nominal capital of ^504,000,000. Many were abandoned 
 before starting, others went into bankruptcy, and the project- 
 ors of some disappeared, leaving no record behind them. 
 The deposits in the London joint stock banks increased from 
 ^43, 000,000 in 1860 to ^91,000,000 in 1864, and the country 
 and private banks probably held on the latter date ,20,000,- 
 ooo more. A large part of these deposits consisted of ac- 
 ceptances, which were confounded indiscriminately with cash 
 and credits. 1 France had entered upon the policy of "fi- 
 nancing," under the encouragement of Napoleon III., even 
 in advance of England, and her great Societe de Credit Mobi- 
 lier for several years paid tempting profits and was the model 
 of similar creations across the channel. 2 But France and the 
 Continent met their crisis in 1864. The rise of prices was 
 arrested in January of that year and the Bank of France, by 
 keeping its discount rate two per cent, below that in Lon- 
 don, was obliged to purchase gold, from January to Novem- 
 ber, to the amount of 221,000,000 francs. Discounts fell off 
 and business for the next six years was kept within conser- 
 vative limits by the fear of war and the political uncertainties 
 attending the decadence of the Second Empire. 8 
 
 Deficient crops added their influence in 1862 to high prices 
 for cotton to create a balance of trade adverse to England, 
 but it was not until the close of 1863 that the exchanges be- 
 came adverse, the metallic reserve of the Bank of England 
 fell to ^13,000,000, and the discount rate was gradually 
 raised, until in December it stood at eight per cent. Bullion 
 began to flow back into the bank, the rate was reduced, 
 
 1 Juglar, 385. 
 
 2 Levi, 461. 
 
 3 Courtois, 255. 
 
J 
 
 504 HISTORY OF MODERN BANKS OF ISSUE. 
 
 speculation revived, and a new increase to nine per cent, be- 
 came necessary late in April, 1864. There was another lull 
 until the autumn, when the prospect of peace in the United 
 States caused a tumble in cotton and a smaller fall in prices 
 of all commodities. The bank rate was again advanced to 
 nine per cent, in September, there was an increase of 2,- 
 500,000 in discounts, and the pressure for ready money was 
 so intense that Consols fell from 89 to 87. The year 1864 
 witnessed in a sense two crises in England, the first result- 
 ing in the liquidation of the smaller tradesmen, the second 
 involving the great capitalists. The liquidation of both these 
 classes was completed on the Continent in 1864. The effects 
 of the crisis crossed the oceans to Brazil and Australia and 
 if they were not felt in the United States it was because the 
 events of the war interrupted the regular movements of the 
 economic system. Liquidation was not fully completed in 
 England in the case of the great financiers and the spring of 
 1866 witnessed an after-clap more severe in its effects than 
 the crisis of 1864. 
 
 The first gust of the storm of 1866 was the failure of the 
 Joint-Stock Discount Company in February, which was fol- 
 lowed in March by the suspension of Barned's Bank of 
 Liverpool, with liabilities of ^3, 500,000.' The discount 
 rate of the Bank of England, which had fallen to six per 
 cent., was raised to seven per cent, on May 3d, eight per 
 cent, on May 8th, nine per cent, on May gth, and ten per 
 cent, on May loth. It was on the evening of the last named 
 day, after banking hours, that the news spread of the great- 
 est failure which had ever taken place in England. An 
 action was pending in the courts against the Mid- Wales 
 Railway Company, to recover ,60,000, accepted by them 
 and held by the great house of Overend, Gurney, and Co., 
 and two other firms. Judgment was delivered on May Qth, 
 to the effect that the railway company had no right to accept 
 the bills and that they were of no validity. 2 The decision of 
 
 1 Gilbart, II., 343. 
 
 3 MacLeod, Theory of Credit, II., 832. 
 
THE LATER CRISES OF THE CENTURY. 50$ 
 
 the court, coming at a season of growing alarm, caused a run 
 upon Overend, Gurney, and Co., by depositors, and on the 
 afternoon of May loth the firm suspended with liabilities of 
 ^18,727,915. ' 
 
 The next day, May nth, known as " Black Friday," was 
 long memorable in English financial history. Lombard 
 Street became impassable with the surging crowd and ex- 
 travagant rumors assailed the reputations of the strongest 
 houses. The Bank of England extended accommodations 
 during the day in loans and discounts to an amount exceed- 
 ing ,4,000,000, and the banking reserve was reduced close 
 to ,3,000,000. The Chancellor of the Exchequer announced 
 these facts in the evening in the House of Commons and 
 stated that the government had addressed a letter to the 
 bank, authorizing the suspension of the Act of 1844. The 
 announcement was received with cheers and the news had a 
 marked effect in mitigating the panic the next day. The 
 decision to authorize the extra issue was not reached until 
 midnight, and a deputation from the bankers waited upon 
 the Chancellor while the House was in session. One of the 
 representatives of the joint stock banks is reported to have 
 said to the representative of the Bank of England, " I can 
 draw a couple of checks to-morrow morning which will shut 
 you up at once. ' ' a The letter of the government, signed by 
 
 1 These figures are taken from the report of the liquidators at a 
 meeting for dissolving the company, held in London on November 
 16, 1893. It appeared that ,"8,266,048 of the liabilities was on account 
 of bills re-discounted under the guarantee of the company and ,"6,018,- 
 835 was due creditors holding security. The proved claims were 
 finally reduced to ^4,913,382, including interest, and they were paid 
 out of the proceeds of amounts realized from bills of exchange and 
 other credits to the amount of ,"1,982,289 ; from assets of the old firm, 
 ,"688,561 ; separate estates of the partners of the old firm, ^"909,870 ; 
 cash and interest on investments, ,"60,273 '> a d calls of ,"25 per 
 share upon the shareholders, ,"2,088,286. The liquidators were en- 
 abled to return ,"626,945 to the contributories, and the various law 
 costs and expenses of the twenty-seven years of liquidation were 
 ^188,953. London Bankers' Magazine, Dec., 1893, LVL, 809. 
 
 9 Gilbart, II., 354. 
 
506 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Lord John Russell and Mr. Gladstone, contained the following : 
 
 If, then, the directors of the Bank of England, proceeding upon 
 the prudent rules of action by which their administration is usually 
 governed, shall find that, in order to meet the wants of legitimate 
 commerce, it be requisite to extend their discounts and advances upon 
 approved securities, so as to require issues of notes beyond the limits 
 fixed by law, Her Majesty's Government recommend that this neces- 
 sity should be met immediately upon its occurrence, and in that 
 event they will not fail to make application to Parliament for its 
 sanction. 
 
 No such discount or advance, however, should be granted at a rate 
 of interest less than ten per cent., and Her Majesty's Government 
 reserve it to themselves to recommend, if they should see fit, the im- 
 position of a higher rate. After deduction by the bank of whatever 
 it may consider to be a fair charge for its risk, expense and trouble, 
 the profits of these advances will accrue to the public. 
 
 The effect of the suspension of the Act of 1844 was so 
 marked that it appeared the next day, which was Saturday, 
 as if the crisis was at an end. The pressure upon the banks 
 ceased for the moment, and the Bank of England did not 
 find it necessary to use the authority to issue notes beyond 
 the legal limits. The demands for discount continued large, 
 but were met from the deposits, which were poured freely 
 into the bank by the outside bankers when they were assured 
 that their appeals for notes would be honored. Large com- 
 mercial failures began again, however, during the week, 
 which imperilled the banks holding their paper and led to 
 new demands by depositors. The Bank of London paid out 
 fifty per cent, of its deposits in cash and was obliged to stop, 
 with liabilities, according to its last balance sheet, of ,4,335, - 
 877. The Consolidated Bank came to its rescue, but was in 
 its turn exhausted. The Agra an'd Masterman's Bank, with 
 wide connections in India and the East, and obligations of 
 ^15,582,002, was also compelled to suspend payments. These 
 banks had ample assets, but were unable to convert them 
 into bank-notes and cash rapidly enough to meet the de- 
 mand of their depositors. The magnitude of the demands 
 upon the Bank of England after the authority was given to 
 suspend the Bank Act, may be judged from the debate 
 
THE LATER CRISES OF THE CENTURY. 507 
 
 which took place in the House of Commons on the evening 
 of May lyth. The Chancellor of the Exchequer stated, in 
 reply to a number of interrogations : 
 
 The advances made by the Bank of Bngland on government 
 securities on Friday, the day of the panic, amounted to ,"919,000, on 
 Saturday to ,"747,000, and on three subsequent days various amounts, 
 making up the total amount advanced on these securities in five days 
 to ^2,874,000. Then with regard to the accommodation of commerce 
 in general, the best measure that can be given of the manner in 
 which the bank has exercised its functions is shown in this : that it 
 has made advances upon bills and has discounted bills to the extent 
 of ^9,350,000, making a total of advances and discounts in five days 
 of ^12,225, ooo. 1 
 
 The rate of ten per cent, at the Bank of England was main- 
 tained from May nth, to August 6th, and distrust of Eng- 
 lish investments was so keen that this high rate failed for a 
 time to attract foreign capital from countries where interest 
 rates ruled much lower. The rate of the Bank of France 
 continued for months at four per cent, and the coin reserves 
 of the bank remained unimpaired. 2 This circumstance was 
 seized upon by critics of the rule of controlling the flow of 
 bullion by the discount rate as proof that the rule was not 
 based upon sound economic law. The simple truth was that 
 the credit of English finance was shaken to its centre. A 
 high rate of interest ceases to attract when grave doubt ex- 
 ists whether the principal will ever be repaid. England paid 
 the penalty for the wide ramification of her credit system, 
 and the severe shock which it received in 1866, in an almost 
 universal fear that her great banks and finance companies, 
 even the Bank of England itself, were on the verge of 
 bankruptcy. The prevalence of a ten per cent, rate for 
 
 'Gilbart, II., 348. 
 
 2 Liquidation in France had already taken place, in anticipation of 
 war, and the suspension of specie payments in Italy sent large quanti- 
 ties of bullion over the Alps. MacLeod, Theory and Practice of Bank- 
 ing ^ II., 196-97. M. Horn endeavors to trace the low rates in France to 
 the agitation there against the monopoly of the Bank of France, but 
 if such an influence operated, it was evidently only because other con- 
 ditions concurred to make low rates safe. La Libert^ des Banques, 446. 
 
508 HISTORY OF MODERN BANKS OF ISSUE. 
 
 three months was in itself a heavy fetter upon trade and. 
 strengthened the belief that there was something funda- 
 mentally wrong with English banking. The distrust abroad 
 was profound enough to justify for a moment the phrase of 
 Sir Stafford Northcote, that there was "a run upon Eng- 
 land," and to wound the national pride with the unaccus- 
 tomed fear that lyOndon was about to lose her pre-eminence 
 over the money markets of the world . ' 
 
 In the presence of such fears, an economic law which 
 would operate under normal conditions of credit was tem- 
 porarily suspended, just as in the past few years foreign 
 capital has been persistently withdrawn from the United 
 States, in spite of tempting opportunities for investment, 
 because of the fear that they would abandon the gold stan- 
 dard. The cherished " convertibility of the bank-note" 
 did not prevent the suspicion abroad that the British govern- 
 ment intended to establish forced legal tender, and its 
 intervention to permit the suspension of the Bank Act of 
 1844 was interpreted among those not familiar with the 
 English banking system as a step in that direction. The 
 Earl of Clarendon gave official testimony to the gravity of 
 the situation, without accomplishing much to relieve it, by 
 issuing a circular letter to the British embassies throughout 
 Europe, stating that "Her Majesty's government have no 
 reason to apprehend that there is any general want of sound- 
 ness in the ordinary trade of this country which can give 
 reasonable ground for anxiety or alarm, either in this coun- 
 try or abroad." 8 Distrust at home had not at any time 
 extended to the solvency of the Bank of England, after the 
 directors were authorized to borrow from the reserve in the 
 issue department, and the bullion, never below ^11,800,000, 
 rose in December to ^19,200,000. The discounts, which had 
 risen during the acute stage of the panic to ,33,400,000, 
 fell gradually, with liquidations and the slackening of busi- 
 ness, to ^19,100,000. 
 
 1 Wolowski, La Banque d'Angleterre, etc., 133. 
 
 2 Levi, 471. 
 
THE LATER CRISES OF THE CENTURY. 509 
 
 The Depression of 1873-79. 
 
 The long period of depression which began with panics in 
 Austria and the United States in 1873, and which had hardly 
 terminated six years later, followed some of the most re- 
 markable experiences of the waste of national resources, 
 the sinking of capital, and changes in the economic order 
 which the world has ever seen. National resources were 
 wasted like water in three great wars, that of Secession in 
 the United States, that of Italy against Austria in 1866, and 
 that of France against Germany in 1870. The direct cost 
 of the American war, exclusive of pensions, was estimated 
 at more than $5,500,000,000, to the government of the 
 United States alone, exclusive of the cost to the South, the 
 injury to private property, and the drain upon the productive 
 power of the country. 1 The cost of the Franco-Prussian 
 War, brief as its military operations proved to be, was esti- 
 mated at a total, direct and indirect, of $2,700,000,000, of 
 which $2, 125,000,000 was the share of France and $575,000,- 
 ooo the share of Germany. 3 The effect of an important war 
 upon credit is to compel a forced liquidation of business 
 transactions in advance of the time which would be set by 
 the normal movements of a credit cycle. If this was the 
 case during the Napoleonic wars, it has been more strikingly 
 the case under modern conditions, with the great expansion 
 of credit which thej r have involved. The United States, 
 having escaped the crisis of 1866 by the forced liquidations 
 of 1860 and 1861, was ripe for an explosion in 1873 ; while 
 France, having been forced to liquidation in 1870, felt only 
 the ripples of the crisis of 1873, which were wafted back 
 from the storm in other countries. 
 
 The absorption of capital in great enterprises during the 
 ten years prior to 1873 was as great as its waste in war. The 
 average annual increase of railways in the United States from 
 1860 to 1867 was I 3 11 miles. The increase in 1869 was 
 4953 miles; in 1870, 5690 miles; in 1871, 7670 miles; in 
 
 1 Bolles, III., 244. 
 
 2 Giffen, I., 76. 
 
510 HISTORY OF MODERN BANKS OF ISSUE. 
 
 1872, 6167 miles ; and in 1873, after the panic had broken, 
 3948 miles. 1 The United States did not stand alone in rail- 
 way expansion. In Russia, a system of 12,000 miles of 
 railway had been almost entirely created since 1868 ; in 
 Austria, eight years had witnessed an increase from 2200 to 
 6000 miles ; and in South America, nearly $200,000,000 of 
 English capital had been borrowed, mostly for railway enter- 
 prises. 9 The result of this network of new lines was the 
 opening of great producing areas, which laid down their 
 harvests in Liverpool and Hamburg at prices which crushed 
 competition, forced down the prices of English and German 
 agricultural lands, and threatened the earnings of the laborer. 
 The great war indemnity paid by France to Germany ac- 
 cumulated such a surplus of loanable capital in the latter 
 country that new manufacturing industries sprung up all 
 over the Empire, which soon outran the demands of domes- 
 tic consumption, and the agricultural population flocked 
 rapidly from the country to the cities. In Prussia alone 
 687 new joint stock companies were founded between Janu- 
 ary i, 1872, and July i, 1873, with an aggregate capital of 
 $481,045,000. The construction of the Suez Canal was com- 
 pleted in 1869, destroying the value of much pre-existing 
 shipping, and the development of railway building gave 
 extraordinary activity to mining, forced up the prices of 
 iron and resulted in the establishment of many new foundries 
 in Great Britain and the United States. To these causes of 
 the loss and absorption of capital had to be added, during 
 the period of liquidation, the effect of bad crops in Great 
 Britain and the destruction of vineyards in France by the 
 ravages of the phylloxera, to the value of $2, 000,000, ooo. 3 
 The world had gained greatly in productive power during 
 the two decades ending in 1873, but the gain was not suffi- 
 cient to offset the combined operation of all these causes of 
 waste and these transformations of old conditions. The 
 United States, revelling in the fool's paradise of forced legal 
 tender paper currency, was subjected to several severe heats 
 
 1 Gilbart, II., 388. 
 
 2 Giffen, I., 113-14. 
 
 3 Wells, 23. 
 
THE LATER CRISES OF THE CENTURY. $11 
 
 and chills, while timid statesmen were waiting for the coun- 
 try "to grow up" to the volume of the currency. Great 
 Britain poured out her capital in foreign loans, as if untaught 
 by the history of previous losses, and the total securities 
 floated were calculated at ,505,000,000 in 1872 and ,624,- 
 000,000 in 1873. The number of joint stock companies 
 formed in Great Britain in 1872 was 1116, with a subscribed 
 capital of ^130,000,000, and British exports rose from ^199,- 
 586,000 in 1870 to ^255,165,000 in 1873. l Prices were in- 
 flated on every European bourse, and when the crash came 
 the fall in securities on the Berlin market alone was estimated 
 at I3i,i38,ooothalers. Loans taken in lyondon to the amount 
 of ^"614,228,300 were found wholly or partially in default in 
 1873 to the amount of ^332,399,800 of the principal involved. 2 
 Stringency was the chronic condition of the money market 
 in the United States during the closing portions of 1872 and 
 the spring and summer of 1873. The final crash came with 
 the failure of trust companies in New York and Brooklyn 
 early in September, 1873. They were followed on September 
 1 8th by the failure of Jay Cooke and Company, who were 
 agents of the government and had been leaders of the pow- 
 erful syndicate which had handled the refunding of the 
 public debt. Credit was already greatly overstrained, runs 
 took place on the banks of Washington, Philadelphia, and 
 New York, nineteen banks and trust companies closed on 
 September i9th, and the Stock Exchange was closed for ten 
 days. Failures followed each other in quick succession, 
 mills and foundries stopped, production ceased, and for six 
 years the pall of depressed industry lay over the United 
 
 1 The fact that loans are made chiefly in commodities rather than 
 in currency is an important factor in finance and has had much to do 
 with the development of English trade. The exporter furnishes the 
 commodities, which have for him the character of sales for cash, 
 because the bills which he draws are purchased by lenders of capital, 
 for transmission to the borrowing country in payment for the new 
 securities. The borrowing country, being thus permitted to purchase 
 by the evidences of deferred payments, is able to become a much 
 larger purchaser than would otherwise be the case. London Bankers' 
 Magazine ; May, 1892, LIU., 739. 
 
 2 Levi, 498. 
 
512 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 States. Deposits in the national banks fell from $641,121,- 
 775 on June 13, 1873, to $540,510,602 on December 26th. 
 The failures for four years showed aggregate liabilities of 
 $775,865,000 and the railway bonds in default on January 
 i, 1876, amounted to $789, 367, 655. 1 
 
 The Secretary of the Treasury endeavored to relieve the 
 money market by paying out $24,000,000 in the purchase of 
 bonds. L,ittle of the money reached the New York banks 
 and they found a more effectual expedient in the issue of 
 clearing-house certificates. 2 This resource had been availed 
 of during the forced liquidations of 1860 and other years of 
 the war, but the amount had never before reached the fig- 
 ures which were attained in 1873. These certificates were 
 issued by a committee, upon the deposit of approved securi- 
 ties by the banks taking out certificates, and were receivable 
 in the settlement of the balances of the several banks at the 
 clearing house. This made them the equivalent of currency 
 in the bank reserves and released a corresponding amount of 
 currency for other uses. The issues of clearing-house cer- 
 tificates at New York on the various occasions of stringency 
 since they were first adopted have been as follows : * 
 
 YEAR. 
 
 FIRST ISSUE. 
 
 FINAL CANCELLATION. TOTAL ISSUE. 
 
 MAXIMUM OUT- 
 STANDING. 
 
 i860 
 
 Nov. 23 
 
 Mar. 9, 1861 
 
 $ 7,375,ooo 
 
 $ 6,86O,OOO 
 
 1861 
 
 Sept. 16 
 
 Apr. 28, i 62 
 
 22,585,000 
 
 2I,96O,OOO 
 
 1863 
 
 Sept. 15 
 
 Feb. i, 1864 
 
 11,471,000 
 
 9,608,000 
 
 1864 
 
 Feb. 29 
 
 June 13, 1864 
 
 17,728,000 
 
 16,418,000 
 
 1873 
 
 Sept. 22 
 
 Jan. 14, 1874 
 
 26,505,000 
 
 22,4IO,OOO 
 
 1884 
 
 May 15 
 
 June 6, i884 4 
 
 24,915,000 
 
 21,885,000 
 
 1890 
 
 Nov. 12 
 
 Feb. 7, 1891 
 
 16,645,000 
 
 15,205,000 
 
 1893 
 
 June 21 
 
 Nov. i, 1893 
 
 41,490,000 
 
 38,280,000 
 
 1 Wells, 6. 
 
 2 Kinley, 185-86. 
 
 3 New York Journal of Commerce, Jan. 16, 1896. The Philadelphia 
 clearing house issued 16,785,000 in 1873. The banks paid six per cent, 
 interest on the certificates held, which ensured their retirement when 
 the emergency was passed. 
 
 4 Except $250,000 issued to the Metropolitan National Bank, some 
 of which were not paid until September 23, 1886. 
 
THE LATER CRISES OF THE CENTURY. 513 
 
 The crash in Vienna came earlier than that in the United 
 States. The German government became disquieted by the 
 fever of speculation in Prussia and the creation of new joint 
 stock companies, and the paper of many of these companies 
 was refused acceptance by the Bank of Prussia. The specu- 
 lators transferred their operations to Vienna and in the first 
 quarter of 1873 $140,000,000, of so-called securities, but with 
 little real security behind them, were issued at the Austrian 
 capital. The Bank of Austria was permitted to loan largely 
 on such securities, in order to keep the speculators from 
 failure, but on May 27th, the morrow of the opening of the 
 International Exposition, seventy failures occurred, and on 
 the next day no, involving establishments of the first im- 
 portance. The Bourse was closed, the government sus- 
 pended the limit upon the note issues of the bank, loans 
 were made by the Treasury, and a syndicate of bankers was 
 formed to make advances on sound securities. 1 A general 
 panic was thus prevented, but credit was so far impaired 
 that it was not until 1875 that business in Austria resumed 
 its wonted activity. 
 
 The forced liquidations of the Franco- Prussian War caused 
 severe pressure for a short time upon the reserves of the 
 Bank of England ; but the early effect of the war, in driving 
 international exchanges to London and Belgium, and send- 
 ing capital there for safekeeping, was to flood the bank with 
 money and to carry the discount rate downward from six 
 per cent, on August 4th until it touched two and a half per 
 cent, on September 29th. The terms of settlement of the 
 French indemnity kept money in Great Britain for a time, 
 and it was eagerly absorbed at low rates by traders and 
 manufacturers." The determination of Germany to establish 
 the gold standard, and the heavy credits she had accumu- 
 lated in London, began in 1873 to draw gold away from 
 England, but the raising of the discount rate at the Bank of 
 England, until it touched nine per cent, on September 25, 
 1873, attracted gold back from the Continent, Australia, and 
 
 1 Juglar, 495. 
 
 9 Gilbart, II., 385. 
 
 33 
 
514 HISTORY OF MODERN BANKS OF ISSUE. 
 
 India, and 1873 and 1874 passed away with comparatively 
 little disturbance. 
 
 The crisis in Great Britain was delayed until 1875, when 
 several large firms doing business in South America went 
 down. In May came the collapse of the Aberdare Iron 
 Company, with liabilities of over ,1,000,000, which dragged 
 down two other large concerns and the brokerage firm of 
 Sanderson and Company, with liabilities of about ,7,000,- 
 ooo. The banks maintained a firm front and actual panic 
 did not occur until June i5th, when Alexander Collie and 
 Company, East India merchants, failed, with liabilities esti- 
 mated at ,3,000,000. Thirty firms followed them into the 
 ditch during the following week and it was found that these 
 firms, as in the case of those connected with the Aberdare 
 Iron Company, were simply tools of Collie and Company, in 
 floating their paper. The Bank of England was well equip- 
 ped with bullion and notes, and sound firms were liberally 
 assisted, without any advance in the rate of discount, which 
 was only three and a half per cent. Many small firms went 
 to the wall, but Great Britain was touched lightly by the 
 crisis and confidence was only briefly shaken in 1875. The 
 experience of 1878, when the City of Glasgow Bank failed 
 with liabilities of ,12,404,297, was also creditable to the 
 soundness and conservatism of British banking. The banks 
 increased their deposits in the Bank of England ,7,000,000, 
 while they drew down the cash reserves of the bank about 
 ,4,000,000. They thus strengthened themselves by actual 
 cash in hand or credits on the Bank of England to the 
 amount of .11,000,000. Several important failures occurred 
 during the autumn of 1878, including that of the West of 
 England Bank at Bristol, on December gth, with liabilities 
 of about .5,000,000, but the crisis gradually passed off dur- 
 ing 1879 without a general run upon the solvent banks. 
 
 The Crisis of 1882-84.. 
 
 The crisis in 1882 in Europe, which reacted upon the 
 United States in 1884, was most severe in its economic ef- 
 
 
THE LATER CRISES OF THE CENTURY. 515 
 
 fects iii France, which had escaped the effects of the crisis 
 of 1873 by the forced liquidation of the Franco-Prussian War. 
 The severity of the crisis in France was due in a large meas- 
 ure to the education in the employment of negotiable securi- 
 ties which was afforded by the payment of the great war 
 indemnity. The masses of the French people, little accus- 
 tomed up to that time to any form of saving but in coin and 
 lands, emptied their hoards in the purchase of national se- 
 curities, partly from a great outburst of patriotic feeling, but 
 partly also because they felt that the guarantee of the gov- 
 ernment gave safety and tangibility to engraved pieces of 
 paper, which under other circumstances they would have 
 refused to look upon as a sensible investment. The habit 
 of accepting such securities once formed, and the advantage 
 derived from their regular returns once enjoyed, it became 
 easier to tempt the French peasant and workman to experi- 
 ment with other securities of a less certain guarantee. 1 In- 
 vestment societies, trust companies, and syndicates sprang 
 up like mushrooms in the speculative atmosphere of Paris, 
 and those which were upon too grand a scale for any but 
 the great financiers and the rich had their imitators among 
 the adventurers of the street, who accepted gratefully in in- 
 stalments the petty savings of the poor. 8 The loans of the 
 Credit Fonder swelled from 50,000,000 francs in 1879 to 
 278, ooo, ooo francs in 1881, while the Credit General Fran $ais y 
 the Union Ge'ne'rale, and the Banque de la Loire were types 
 of great investment companies whose shares ran brief careers 
 of extravagant advances in price. 3 
 
 It was not in France alone that speculation assumed a 
 new development in the eighth decade of the century. Specu- 
 lation in earlier times had been largely limited to the raw 
 materials and finished products of commerce, and the burst- 
 ing of the bubble had come when high prices made goods 
 unmarketable and continuances of loans at the old rates 
 could no longer be obtained at the banks. The much more 
 
 1 Leroy-Beaulieu, II., 218. 
 'Jannet, 385-86. 
 3 Juglar, 435. 
 
516 HISTORY OF MODERN BANKS OF ISSUE. 
 
 complicated structure of modern commerce, the distribution 
 of risks by margins and futures, sales for report and arbi- 
 trage, and the diffusion of savings and the taste for invest- 
 ment among all classes in civilized states, have given a new 
 character to speculation and made the stock market a more 
 sensitive barometer of business conditions than the more 
 sluggish merchandise markets. Securities have become the 
 most convenient means of settling international balances, 
 and by their unrecorded transfers have impaired the value 
 of the statistics of visible commerce. They have become in 
 a large measure a substitute for money and have to be con- 
 sidered in dealing with monetary problems. The steady rise 
 of national securities in recent years has been chiefly the 
 result of the falling interest rates on capital and their safety 
 as temporary investments, but shrewd speculators, by play- 
 ing upon the ignorance of investors, have convinced them 
 that the other securities upon the market were sure, in their 
 hands, to pursue the same ascending course. Intoxicated 
 by this prospect of paper riches, investors have measured 
 their expenditures by their assumed wealth, have furnished 
 occupations for the ministers of luxury, and have brought 
 perturbation into the entire economic order. 1 
 
 Marginal profits in stock speculations depend in several 
 ways upon low rates for money, and these disappeared in 
 England and France during the autumn of 1881. The 
 United States resumed specie payments on January i, 1879, 
 and the current of gold drawn towards the country by the 
 operations of the treasury was swelled by the abundant crops 
 and large exports of the years which immediately followed. 
 The merchandise exports from the United States in 1881 were 
 
 1 "These effects of growing wealth have their effect even upon the- 
 public finances. Transactions being more numerous and being made 
 at higher prices, the registration taxes give larger revenues. It is 
 thus, that from 1875 to 1881, the receipts of the Treasury exceeded 
 the official estimates by 580,701,788 francs, and this was made the oc-' 
 casion by the party in power for launching into foolish expenses, in 
 the famous plan of public works of M. Freycinet and the purchase of 
 little railway lines, which resulted in a series of loans in profound 
 peace." Jannet, 392. 
 
THE LATER CRISES OF THE CENTURY. 517- 
 
 $902,377,346, an amount never before equalled, and never 
 equalled afterwards until 1892. The excess of exports over 
 imports of merchandise was $264,661,666 in 1879, $167,683,- 
 912 in 1880, and $259,712,718 in 1881. Europe was suffer- 
 ing from a deficiency of crops, for which, in the language 
 of Mr. Wells, "in respect to duration and extent, there had 
 been no parallel in four centuries." The tide of gold, which 
 had been outward for sixteen years, turned towards America 
 in 1878, and the net gold imports were $77,119,371 in 1880, 
 and $97,466,127 in 1881. The Bank of France found its re- 
 serve falling in the autumn of 1881, and endeavored to avoid 
 too sharp an advance in the discount rate by paying light 
 coin and charging a premium for bullion. The Bank of 
 Kngland raised its discount rate on October 6th from four 
 to five per cent., and the Bank of France followed with a 
 like advance on October 2oth. The crash came in Paris 
 and Lyons in January, 1882, with the collapse of the Union 
 Gnrale and a fall in all classes of securities. The Lyons 
 brokers sought and obtained succor from the Bank of France, 
 to the amount of 100,000,000 francs, upon securities which 
 would not ordinarily have been accepted, and the Paris 
 agents of exchange obtained 80,000,000 francs, upon the 
 guarantee of a syndicate of bankers. The sum of ,924,000 
 was withdrawn from the Bank of England for France on 
 January 3Oth, and ,2, 000,000 was drawn out during the 
 week. The Bank of England discount rate was advanced 
 on February 2d to six per cent., and private bankers, con- 
 trary to their usual custom, raised their rates to that of the 
 bank. 2 
 
 The counter-stroke of the crisis in the United States, 
 which was delayed until 1884, was more financial than 
 economic, but the multitude of failures caused intense alarm 
 for a time and threatened to bring business to a standstill. 
 The Marine Bank of New York suspended on May 5th, 
 closely followed by the failure of the Metropolitan Bank, the 
 exposure of the peculiar methods of John C. Eno, Ferdinand 
 
 1 Recent Economic Changes, 6. 
 
 2 Juglar, 396. 
 
518 HISTORY OF MODERN BANKS OF ISSUE. 
 
 Ward, and George I. Seney and the collapse of smaller 
 houses connected with them. Money went to one per cent. 
 a day, the interior banks began to draw heavily upon their 
 New York reserves, and it was hardly possible to obtain 
 cash or credit upon the best securities. 1 The decision of the 
 associated banks to issue Clearing-House certificates calmed 
 the storm by degrees, but the failures of the year were com- 
 puted to show liabilities of $240,000, coo, 2 and deposits in 
 the national banks fell from $i, 060, 778, 388 on April 24th to 
 $979,020,349 on June 20, 1884. 
 
 The Crisis of 1890. 
 
 The crisis of 1890 afforded a striking illustration of the 
 better understanding of such events which has arisen within 
 the past half century, and of the success of skilful and 
 courageous financiers in dealing with them. The partic- 
 ular cause of the crisis was the heavy loans through the 
 Barings to the Argentine Republic, but the years preceding 
 1890 had been marked, as in other such periods, by excessive 
 speculation, the increase of joint stock companies and the 
 inflation of prices. A part of this tendency to speculation 
 was attributed, as in the case of the crisis of 1837, to the 
 conversion of the public stocks or Consols in 1888, under 
 the management of Chancellor Goschen, from three per cent. 
 to two and three-quarters per cent. The returns of the reg- 
 istrar of joint stock companies showed the total amount of 
 capital registered during 1888 to have been ,353,781,594, 
 and in 1889 ^241,277,468, while the loans to the Argentine 
 Republic alone in those two years were stated at ,36,102,- 
 766 in 1888, and ,29, 223, 341 in iSSg. s Railway earnings 
 
 1 It is apropos of this crisis that Mr. Henry Clews remarks that, 
 " Were the banks allowed to use their reserves under such circum- 
 stances, a fund would be provided for mitigating the force of the 
 crisis, and the danger might be gradually tided over ; but, as it is, 
 the banks can legally do little or nothing to avert panic ; on the con- 
 trary, the law compels them to take a course which precipitates it." 
 Twenty-eight Years in Wall Street, 161. 
 
 2 Juglar, 477. 
 
 3 Journal of 'the Institute of 'Bankers, Jan., 1891, XII., I. 
 
THE LATER CRISES OF THE CENTURY. 519 
 
 i 
 
 were increasing, clearing-house transactions were multiply- 
 ing, and the securities of the South American republics were 
 eagerly accepted by investors under the endorsement of 
 such a house as the Barings. 
 
 Money had been poured into the Argentine Republic for 
 the development of banking, public works, and retail trade, 
 until the natives might well have been convinced that their 
 credit in London was without limit. A boom began in 1886 
 which carried up the price of lands, which a few years before 
 could be had almost for the taking, to $50,000 per league, 
 while suburban lots bounded upward from a few cents to 
 several dollars per square metre. Extravagance and luxury 
 ruled among the governing classes, and the banks which 
 were opened in 1887 under the Guaranteed Banking Law 
 advanced money without security, by the hundreds of thou- 
 sands to men of prominence and by the thousands to their 
 humbler followers. The requirement of payment by instal- 
 ments disclosed the fact that the banks had made many bad 
 debts, and it soon appeared that these had been covered up 
 for a time by fraudulent over-issues of bank-notes. The 
 legal circulation, which amounted to $160,000,000, or about 
 $40 per capita, was increased by the fraudulent issue of 
 $50,000,000 to $60,000,000 in additional paper. The Na- 
 tional Bank, alone, exceeded its limit $26,000,000. Notes 
 supposed to be redeemed were constantly reissued, and when 
 the crash came paper money was so discredited that gold 
 went to a premium of three hundred in paper, and tickets 
 for a few cents were issued by barbers and retail stores 
 to take the place of the small coins which disappeared. 1 
 
 The interest rate at the Bank of England was gradually 
 lowered during 1890, from six per cent, on February 2oth, to 
 three per cent, on April iyth, where it remained until June 
 26th. It was then raised to four per cent., and afterwards to 
 five per cent., where it stood on Thursday, November 6th. 
 Uneasiness began to be felt among well informed bankers 
 over the increase in the acceptances assumed by the Barings 
 
 1 " Gaucho Banking," London Bankers' Magazine, Jan., 1891, LI., 
 37-47- 
 
520 HISTORY OF MODERN BANKS OF ISSUE. 
 
 and other houses, and the decline of securities indicated a 
 more pressing demand for money and a slackening of busi- 
 ness activity. The bank rate was advanced to six per cent, 
 on Friday, November yth, and ugly rumors were afloat in 
 Bombard Street. The real cause of the uneasiness among 
 the great financiers did not, however, become public property 
 until a week later. It was made known on November 8th, to 
 the Governor of the Bank of England, Mr. William L,id- 
 derdale, fortunately a man of great ability and decision of 
 character, that the Barings were on the eve of suspending 
 payment, with liabilities of ^21,000,000. 
 
 Mr. L,idderdale believed, in spite of the unfortunate his- 
 tory of previous crises, that measures could be adopted which 
 would prevent a crash. He accordingly perfected arrange- 
 ments within the following week, by which the Bank of 
 England was able to announce on November i4th that all the 
 liabilities of Baring Brothers and Company would be pro- 
 vided for by the bank, and that any loss to the bank would be 
 made good by a circle of guarantors embracing the greatest 
 institutions of Great Britain. The joint stock banks of 
 London, the leading banks of the provinces, and the joint 
 stock banks of Scotland entered into a combination aggre- 
 gating ^15,000,000, ''to make good to the Bank of Eng- 
 land any loss which may appear whenever the Bank of 
 England shall determine that the final liquidation of the 
 liabilities of Messrs. Baring Brothers and Company has been 
 completed, so far as in the opinion of the governors is prac- 
 ticable." This guarantee was to continue for three years, 
 and afforded absolute assurance to the business community 
 that no great losses to individuals and respectable houses 
 would occur. The Chancellor of the Exchequer was in 
 constant consultation with Mr. Lidderdale while the ne- 
 gotiations for the guarantee were going on and offered him 
 the benefit of the suspension of the Bank Act of 1844, so as 
 to permit the issue of additional notes, if he thought it desi- 
 rable, but Mr. Lidderdale declined to foster alarm by admit- 
 ting the necessity for the classic remedy of the great crises 
 of 1847, 1857, and 1866. 
 
THE LATER CRISES OF THE CENTURY. $21 
 
 Mr. Lidderdale preferred to keep within the law, and at 
 the same time to equip the bank with the means of meeting 
 heavy demands for notes, by borrowing gold from France, 
 Russia, and other sources. The sum of ,3,000,000 in gold 
 was brought over under a special contract with the Bank of 
 France, 1 ,1,500,000 was obtained from St. Petersburgh, and 
 ,500,000 was drawn from other sources. All this sum of 
 ,5,000,000 thus became available as the guarantee of addi- 
 tional note issues if the pressure for money should become 
 serious. Mr. Lidderdale would not even alarm the commu- 
 nity by forcing up the rate of interest to an extreme point, 
 but maintained it at six per cent, and insisted that the great 
 joint stock banks should continue discounting, as usual. 2 
 These measures were so successful that the period of stress 
 was passed without actual panic and liquidation set in with- 
 out important failures. The note issues of the Bank of 
 England increased from ,34,507,580 on November I2th to 
 ,39,939,900 on November 26th, but the increase was almost 
 exclusively in the notes held in the banking department and 
 there was no unusual pressure for currency. 
 
 The firm of Baring Brothers and Company was reorganized 
 as a limited company with a capital of ,1,000,000, and made 
 arrangements to continue business. The affairs of the Ar- 
 gentine Republic were found in an extremely bad shape and 
 have not yet been entirely adjusted, but the surplus resources 
 of the Barings enabled a gradual reduction of their liabilities 
 outstanding at the time of the failure. The adjustment 
 proceeded so rapidly that Mr. David Powell, the Governor 
 of the Bank of England, was able, at a general court held 011 
 March 16, 1893, to make the following report : 3 
 
 The liabilities, which have been increased during the past six 
 months by a claim from the executors of the late T. C. Baring, now 
 
 1 This loan was secured by the deposit of Exchequer bonds issued to 
 the Bank of England by the British Government, in exchange for 
 national debt stock. The cost of the transaction was ^"100,000, be- 
 sides interest. Pol. Science Qua^ly, March, 1894, IX., 23. 
 
 2 MacLeod, Theory of Credit, II., 836. 
 
 3 London Bankers' Magazine, April, 1893, L/V., 610. 
 
522 HISTORY OF MODERN BANKS OF ISSUE. 
 
 stand at ,"4,558,813, while the value of the assets under the new es- 
 timate stands at ^4,908,935, giving an apparent surplus of ^"350,122. 
 It will be seen that progress, though not so rapid as in the previous 
 six months, has been made in the liquidation, the debt to the bank 
 having been reduced in the past six months by ^625,000. It may be 
 well, however, to remind you how much has been effected since the 
 guarantee was set on foot. The liabilities, which in the aggregate 
 reached a total of ^30,313,000, have been reduced, in a period of about 
 two years and a quarter, to ^4,558,813 ; nearly the whole of the 
 "bills receivable," "remittances to come forward," etc., amounting 
 to ^ i, 1 93, 664, have been got in without loss, and securities have 
 been realized to the value of ^4,560,523. It will be remembered that 
 the period of three years, for which the guarantees were originally 
 given, will expire in November next, and, looking to the question 
 how far the liquidation could be carried out without material loss be- 
 fore that date, it was felt desirable, in the interests of the guarantors, 
 that the time should be extended ; and I am happy to be able to say, 
 that practically the whole body of guarantors have consented to con- 
 tinue their guarantee for one-fourth of the original amount which is 
 all that is required for one year certain from November next, and 
 for a further period of one year if deemed expedient in the inter- 
 ests of the guarantors. ! 
 
 The intimate connection between the world's markets is 
 indicated by the fact that the withdrawal of British deposits 
 in Australia caused a stringency which foreshadowed the 
 crisis of 1893, and that the Imperial Bank of Germany for- 
 bore for a time making drafts upon London. 2 The strin- 
 gency which occurred in the United States, however, in the 
 autumn of 1890 came before the Baring crisis and was less 
 intimately related to that event than to the accumulation of 
 surplus revenues in the Treasury. This had been so serious 
 a danger for several years that Secretary Fairchild in 1888 
 deposited a large part of the surplus in national banks, while 
 he extended the policy, which he had already inaugurated, 
 of purchasing unmatured bonds at a premium. The pur- 
 chase of bonds was continued by Secretary Windom, and 
 was pursued on a large scale during the summer and autumn 
 
 1 The guarantors were relieved of further liability towards the close 
 of 1894, and the further settlements were undertaken by a private 
 company. 
 
 8 Jannet, 113. 
 
THE LATER CRISES OF THE CENTURY. 523 
 
 of 1890. "The amount of public money set free within 
 seventy-five days by these several disbursements," Secretary 
 AVindom declared, referring to circulars issued up to Septem- 
 ber 6th, " was nearly $76,660,000, and the net gain to circu- 
 lation was not less than forty-five millions of dollars, yet 
 the financial conditions made further prompt disbursements 
 imperatively necessary." Another offer to purchase these 
 bonds was issued on September 13, 1890, and the total dis- 
 bursements between June 3Oth and the close of September 
 were $98,276,682, of which $75,828,200 was on the principal 
 of bonds redeemed and the remainder for interest and premi- 
 ums. The resources of the Treasury were practically ex- 
 hausted and no assistance could be given to the money 
 market when the reflex action of the Baring crisis was felt 
 two months later in the United States. A number of im- 
 portant failures occurred, but the more disastrous results of 
 the exhaustion of the Treasury were reserved for 1893. 
 
 1 Finance Report, 1890, xxix. 
 
* CHAPTER XXII. 
 
 THE CRISIS OF 1893. 
 
 The Reverberation of the Baring Crash over Europe, America, and 
 Australia Distrust of American Silver Legislation The Failure 
 of the Brussels Conference, the Suspension of Free Coinage in 
 India, and the Coming of the Panic The Shrinkage of Values 
 Repeal of the Sherman Law and the Bond Contract of 1895 
 Land Speculation and Bad Banking in Australia. 
 
 THE financial crisis of 1893 was in a large measure an 
 afterclap of the Baring failure in 1890. Many mil- 
 lions of British money had been invested in American 
 and Australian securities and the discredit which fell upon 
 Argentine and other South American investments with the 
 failure of the Barings resulted in an irresistible movement 
 to unload such securities and transfer European capital to 
 home investments. Such a tendency would in itself have 
 seriously crippled the great enterprises carried on in the 
 United States, South America, and Australia on foreign capi- 
 tal, even if those countries had not been in any way at fault. 
 Results proved that, while credit rested upon no such rotten 
 basis in the United States and Australia as in Argentina, 
 there had been much sinking of circulating capital in unpro- 
 ductive enterprises and a tendency towards unwise economic 
 policies which had fettered the industries of those countries 
 and driven gold from its legitimate place in their monetary 
 circulation. Circumstances which might have impaired 
 American and Australian credit under any conditions were 
 emphasized by the general distrust aroused by the Baring 
 failure and it required only the rude test of the withdrawal 
 of foreign support to confirm the suspicions of foreign inves- 
 
 524 
 
THE CRISIS OF 1 893. $2$ 
 
 tors and bring to a head the real evils of the economic 
 situation. 
 
 The first shock was felt in Australia, whose people had 
 been congratulating themselves upon their rapidly accumulat- 
 ing wealth and their swelling bank credits, based in reality 
 upon inflated valuations of real estate and of agricultural 
 products. The shock was soon communicated to the United 
 States and its reverberations affected the stock markets of 
 Berlin and Vienna, checked the efforts of Austria-Hungary 
 to establish the gold standard, and drove Austrian securities 
 homeward from Germany as the result of the scramble for 
 ready cash in the Berlin market. Italy was affected by the 
 prevailing distrust, and the evils generated by corruption 
 among her bankers and public men were intensified by the 
 return of Italian securities and the steady outflow of gold 
 and even of subsidiary silver coins under the pressure of a 
 depreciated paper currency. The Credit Mobilier Italien, 
 with a capital of 75,000,000 lires ($14, 500,000), was forced 
 to suspend by the difficulty of calling up advances, with de- 
 posits of 50,425,000 lires and advances of 89,109,000 lires. 1 
 France saw her importations shrink from 4, 767, 867,0x30 francs 
 ($920,000,000) in 1891 to 3,936,720,000 francs ($760,000,000) 
 in 1893. Even Turkey suffered from the fall in the prices 
 of the products of agriculture, which constitute the larger 
 part of her exportations. Opium within the space of a few 
 years fell twenty-four per cent., wool fifteen percent., and 
 raisins eight per cent. 2 
 
 The crisis in the United States attracted the most aften- 
 tion, because of the magnitude of their commercial interests 
 and of the investments of foreign capital in their railways, 
 breweries, cattle ranges and public securities. Foreign in- 
 vestments in the United States would have required large 
 payments to Europe prior to 1893 if American enterprises 
 had not proved up to that time so attractive that the interest 
 upon them was constantly reinvested. The result, accord- 
 ing to the acute observation of M. Arthur Raffalovich, was 
 
 1 Revue dcs Banques, Jan., 1894, XIII., 15. 
 
 2 Revue des Banques, Au~., 1894, XIII., 166. 
 
526 HISTORY OF MODERN BANKS OF ISSUE. 
 
 that ' ' the true indebtedness of the United States abroad had 
 been completely hidden by the influx of foreign capital. 
 What the nation had to pay in interest on railway and 
 municipal obligations and industrial investments had never 
 been felt as a charge upon commerce, in consequence of the 
 compensation which resulted from the uninterrupted entry 
 of capital placed by Europe." 1 The withdrawal of this 
 capital, even the mere suspension of the process of rein- 
 vesting it, meant heavy payments in gold or merchandise 
 to Europe, without compensation in returning gold or goods. 
 The annual payments required to Europe, outside those com- 
 pensated by American exports, were estimated by Mr. Heidle- 
 bach, a New York banker, at $350,000,000, and the principal 
 of the debt upon which interest was due was computed at not 
 less than two billions of dollars. 2 The withdrawal of a large 
 portion of this productive loan was the price which the United 
 States were called upon to pay for political manoeuvres which 
 aroused the fear that they would abandon the gold standard 
 and make silver the basis of their monetary system. 3 
 
 1 Le Marche Financier en 1893-1894, 255. 
 
 2 These figures were largely mere estimates until a careful compu- 
 tation was made in the Journal of Commerce and Commercial Bulle- 
 tin, July 8, 1895, based upon inquiries among brokers, steamship 
 agents, and others possessing actual knowledge. This investigation 
 made the total annual indebtedness to Europe, exclusive of merchan- 
 dise movements in either direction, $175,475,000 and the credits on 
 the other side $29,750,000, leaving a net indebtedness by the United 
 States of $145.725,000. The leading debtor item was $90,000,000 on 
 investment account, which would represent a capital of at least $2,- 
 500,000,000. The creditor items included $14,000,000 brought by im- 
 migrants, $14,850,000 for outlays of foreign vessels in American ports, 
 and $1,900,000 for outward earnings of American vessels. These fig- 
 ures take no account of the portion of the annual debt which may be 
 settled by new securities. 
 
 3 This tendency to the withdrawal of foreign capital was observed to 
 some extent after the passage of the Bland bill and the Senate reso- 
 lution offered by Senator Matthews of Ohio, that the obligations of 
 the United States were legally payable in silver. Vide London Econo- 
 mist, September 28, 1878 ; Leroy-Beaulieu, II., 229. The tendency 
 only became marked, however, after the passage of the law of 1890. 
 
THE CRISIS OF 
 
 527 
 
 A combination of influences worked together to induce an 
 unhealthy condition of industry and finance and to bring 
 about the collapse of 1893. The passage of the Sherman 
 silver law of 1890 was not the absolutely unique cause of 
 the crash of three years later, but it contributed powerfully 
 to that result, indirectly as well as directly. The withdrawal 
 of gold from the United States Treasury pursued an almost 
 uninterrupted course from the moment of the enactment of 
 the Sherman silver law until the outbreak of the panic. The 
 following table, brought down for convenience to a more re- 
 cent date, will show the progress of this depletion of the 
 gold reserve : 
 
 DATE. 
 
 TOTAL GOLD IN 
 TREASURY. 
 
 GOLD CERTIFICATES 
 IN CIRCULATION. 
 
 NET GOLD RESERVE. 
 
 February 28, 1889 
 
 $326,456,697 
 
 $130,210,717 
 
 $196,245,980 
 
 June 30, 1889 
 
 303,504,319 
 
 116,792,759 
 
 186,711,560 
 
 December 31, 1889 
 
 3I3,8l8,94I 
 
 122,985,889 
 
 I 9, 8 33,052 
 
 June 30, 1890 
 
 321,612,424 
 
 131,380,019 
 
 190,232,405 
 
 December 31, 1890 
 
 293,O2O,2I4 
 
 144,047,279 
 
 148,972,935 
 
 June 30, 1891 
 
 258,518,122 
 
 120,850,399 
 
 117,667,723 
 
 December 31, 1891 
 
 278,846,750 
 
 148,106,119 
 
 130,740,631 
 
 June 30, 1892 
 
 255,577,705 
 
 141,235,339 
 
 114,342,367 
 
 December 31, 1892 
 
 238,359,801 
 
 117,093,139 
 
 121,266,663 
 
 June 30, 1893 
 
 188,455,432 
 
 92,970,019 
 
 95,485,413 
 
 December 31, 1893 
 
 158,303,779 
 
 77,412,179 
 
 80.891,600 
 
 June 30, 1894 
 
 131,217,434 
 
 66,344,409 
 
 64,873,025 
 
 December 31, 1894 
 
 139,606,354 
 
 53,361,909 
 
 86,244,445 
 
 June 30, 1895 
 
 155,893,931 
 
 43,381,569 
 
 107,512,362 
 
 December 31, 1895 
 
 113,198,707 
 
 49,936,439 
 
 49,845,507 
 
 March 1 6, 1896 
 
 171,356,965 
 
 43,426,829 
 
 127,930,136 
 
 Gold exports began in large volume the month the Sher- 
 man law was approved and reached a total in the fiscal year 
 1891 of $86,362,654 ; in 1892 of $50,195,327 ; and in 1893 
 of $108,680,844. There were imports during the months in 
 which the American crops were marketed, but the three 
 years contributed an excess of exports of $68,130,087 in 
 1891, $495,873 in 1892, and $87,506,463 in 1893. The theory 
 of Gresham's law, that the departure of gold denotes the 
 presence of a poorer currency behind the gold, expelling it 
 from the country, was verified by the manner in which the 
 
528 HISTORY OF MODERN BANKS OF ISSUE. 
 
 gold went out as the new Treasury notes were pumped into 
 the circulation at the rate of $4,5(00,000 per month. The 
 Treasury notes issued undes the Sherman law up to June 30, 
 1893, were $ 1 47> I 9> 22 7 J tne net S old exports from the 
 United States from June 30, 1890, to June 30, 1893, were 
 $156,132,423; and the reduction of the aggregate gold in 
 the Treasury during the same period was $i33> I 56,99i- 
 Other causes than the mere addition of the notes to the cir- 
 culating medium doubtless contributed to the expulsion of 
 gold, but the coincidence of these three items, the loss of 
 gold by the Treasury, its export from the United States, and 
 the issues of notes, is at least striking. 
 
 From the moment that the Sherman law was enacted, the 
 Treasury of the United States was under the necessity of 
 constant expedients to keep its gold and replenish it when it 
 was lost. The government availed itself of every opportu- 
 nity to obtain gold in exchanges when there was a demand 
 for small notes by offering greater conveniences to those who 
 tendered gold in exchange for paper than to those who ten- 
 dered other forms of currency. Appeals to the generosity 
 and patriotism of the national banks, which still held a con- 
 siderable reserve of gold, were frequently made during the 
 autumn of 1892 and the early months of 1893. New appeals 
 of this sort were made under the administration of President 
 Cleveland and the gold reserve was increased from $90,722,- 
 958 on June 10, 1893, to $97,286,677 on July loth, by the 
 efforts of a banking combination in New York, and by lead- 
 ing bankers of Boston, Baltimore, Chicago, and Philadel- 
 phia. 
 
 These devices were unavailing to permanently arrest the 
 combined effects of the infusion of paper into the currency 
 and the period of speculation and large imports of foreign 
 merchandise which had set in. Funds were raised for work- 
 ing alleged tin-mines in South Dakota ; vast tracts of land 
 were purchased in Florida to be unloaded as sugar lands 
 upon foreign investors under the guarantee of the govern- 
 ment bounty upon sugar ; and new towns sprang up all over 
 the South, dowered in the imagination of their projectors 
 
THE CRISIS OF 1893. $2$ 
 
 with infinite possibilities of mineral wealth and manufactur- 
 ing development, but which proved in fact little more than 
 bottomless pits for the millions of northern capital spent in 
 laying them out. It was the same with suburban improve- 
 ments in the neighborhood of the great cities as with the 
 1 ' boom ' ' towns of the South. Millions were sunk in improve- 
 ments, in advance of actual demand, upon property for 
 which no purchasers could be found when people began to 
 ask themselves what was the basis of reality beneath inflated 
 and fictitious values. Railroad building was not so marked 
 a feature of the years preceding the panic of 1893 as of earlier 
 panics, but there was a great demand for capital for equipping 
 street railways with new power and the railways, as usual, 
 were among the first to feel the effects of slakening industry. 1 
 The conviction that the country was upon the high road of 
 prosperity led to extravagant expenditure by individuals, 
 corporations, municipalities, and the Federal government. 
 Foreign goods poured into the country at an accelerating 
 velocity until the volume of imports rose from $745,131,652 
 in 1889 to $866,400,922 in 1893. The scarcity of the crops 
 in Europe in 1891 caused a great demand upon the United 
 States to supply the deficiency, and American exports of 
 $1,015,732,011 in the fiscal year ending June 30, 1892, offset 
 in a measure the stream of imports, arrested the loss of gold, 
 and delayed the crisis which might otherwise have sooner 
 followed the operation of the Sherman law. 
 
 The relief which the farmers were thus enabled to bring 
 to the fiscal situation of the country was but temporary. 
 Europe was just recovering from a crisis and a part of the 
 
 1 A list of dividends paid in 1893 which had ceased to be paid in 
 1895 showed a total of $61,710,000 per year. Capitalizing this at five 
 per cent, and making an addition for smaller concerns not included in 
 the list, " the bad investments of the public, within three years, came 
 fully up to $1,500,000,000 and are likely to exceed it." "Matthew 
 Marshall " in New York Sun, July i, 1895. This list included no 
 losses on real estate investments and none in industrial enterprises, 
 except a few of the largest, whose shares were the subject of trading 
 on the New York Stock Exchange. 
 
 34 
 
530 HISTORY OF MODERN BANKS OF ISSUE. 
 
 payment for the crops of 1891 was made by the return of 
 American securities instead of the shipment of gold. Amer- 
 ican exports of merchandise fell in the fiscal year 1893 to 
 $831,030,785 and the balance of trade against the United 
 States for the six months ending June 30, 1893, was $68,800,- 
 021. The national banks of the East, warned by the Euro- 
 pean crisis, began to scan their loans and strengthen their 
 gold holdings. 1 The failures reported by Bradstreet's Com- 
 mercial Agency in April, 1893, were 905, as compared with 
 703 in the same month of 1892, and the number increased 
 to 969 in May as compared with 680 in May of the year 
 before. The panic did not become acute, however, until the 
 middle of May. The Chemical National Bank of Chicago, 
 with a capital of $1,000,000, closed its doors on May 9th, 
 and was followed two days later by the Columbia National 
 Bank of Chicago, with a capital of an equal sum. These 
 suspensions, accompanied by the collapse of private and 
 State banks and business firms and corporations, paralyzed 
 credit and brought the country to the verge of a crisis. 
 
 Upon these conditions of unstable equilibrium came the 
 shock of the suspension of silver coinage in British India. 
 There, as in other silver using countries, the fall in the gold 
 price of silver had brought changes in values and difficulties 
 of administration and exchange. The United States had 
 been making efforts for seventeen years to avert the effects 
 of the depreciation of silver by means of an international 
 bimetallic union. Congress by a joint resolution of August 
 15, 1876, appointed a joint committee of eight members, 
 known as the "Silver Commission," which submitted an 
 elaborate report on March 2, 1877. The majority of this 
 commission reported in favor of * ' the restoration of the 
 
 1 Their gold holdings increased $22, 000,000 during the year ending 
 September 30, 1892, which, says Comptroller Hepburn, "coupled with 
 the known fact that many State banks and trust companies have also 
 fortified themselves with a gold reserve during the year, shows that the 
 fear that we were drifting towards a silver basis was not confined to 
 foreigners." This is dated December 5, 1892, six months before the 
 crisis. 
 
THE CRISIS OF 1893. 531 
 
 double standard and the unrestricted coinage of both met- 
 als." 1 The other three members did not favor free coinage 
 by the United States without the concurrence of other 
 nations. The United States took the initiative in proposing 
 an international conference, which met in Paris on August 
 10, 1878, and the American delegates proposed an interna- 
 tional agreement for the equal coinage of both metals. The 
 majority of the delegates of the European states presented 
 resolutions declaring "that the question of the restriction 
 of the coinage of silver should equally be left to the discre- 
 tion of each state or group of states," and that the differ- 
 ences of opinion which had developed ' ' exclude the discussion 
 of the adoption of a common ratio between the two metals." a 
 The American delegates Mr. R. K. Fenton, Mr. W. S. 
 Groesbeck, General Francis A. Walker, and their secretary, 
 Mr. S. Dana Horton, filed a protest against this decision. 
 A second attempt to secure a bimetallic union was made 
 in the summer of 1881 by the concurrent invitations of the 
 American and French governments. Senator Magnin, the 
 French Minister of Finance, presided at the opening of the 
 conference and indicated a part of the reasons for its meet- 
 ing by stating that the resolutions adopted by the majority 
 of the European delegates in 1878 were adopted when the 
 Dutch delegates were not present, the Italian delegates refused 
 to be parties and the approval by other delegates was given 
 only under reservations. The American and French dele- 
 gates, through Mr. Evarts, lately Secretary of State of the 
 United States, again urged the formation of a bimetallic 
 agreement, and the delegates of the European states voted 
 "that there is ground for believing that an understanding 
 may be established between the states which have taken 
 part in the conference ; but that it is expedient to suspend 
 its meetings. ' ' Upon their proposition , therefore, an adj ourn- 
 
 1 Reports of the Silver Commission of 1876, Sen. Rep. 703, 44th 
 Cong., 2d. Sess., 126. 
 
 * International Monetary Conferrenceheld in Paris, in August, 1878, 
 Sen. Ex. Doc. 58, 45th Cong., 3d Sess., 163. 
 
532 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ment was taken until April 12, 1882, but the conference was 
 never reassembled. 1 
 
 The last attempt to secure a bimetallic agreement was 
 made at the suggestion of the United States in 1892, but the 
 invitations were limited to the purpose of securing a larger 
 use for silver. The British government was unwilling to 
 enter a conference with the declared purpose of restoring the 
 free coinage of both gold and silver and the form of the in- 
 vitations was adapted by the United States to their position, 
 in order to secure their participation in the conference. The 
 delegates of the United States were Senator Allison of Iowa, 
 Senator Jones of Nevada, Representative McGreary of Ken- 
 tucky, Mr. Henry W. Cannon of New York, formerly Comp- 
 troller of the Currency, and Professor E. Benjamin Andrews, 
 President of Brown University of Providence, Rhode Island. 
 Mr. Terrell, the United States Minister at Brussels, also took 
 part in the conference and Mr. Edward O. Leech, the Di- 
 rector of the Mint, was an advisory delegate. Several 
 propositions for the purchase and coinage of silver on gov- 
 ernment account in limited quantities were submitted to the 
 conference, but it was again found that an agreement could 
 not be reached and an adjournment was taken on December 
 17, 1892, until May 30, 1893. The German delegates were 
 unwilling to bind their government to the policy of a second 
 meeting, 3 and the events of the winter were so little favor- 
 able to bimetallism that President Cleveland did not feel 
 justified in seeking a reassembling of the conference. 
 
 These several efforts to restore bimetallic coinage hardly 
 arrested for a moment the downward course of silver, and 
 the government of British India felt that they could no 
 longer await the distant possibilities of international action. 
 The fall in the price of silver caused constantly increasing 
 difficulties, because of the heavy interest charges payable in 
 London and the diminishing value of the proceeds of taxa- 
 
 1 Proceedings of the International Monetary Conference held in 
 Paris in 1881 ; Washington, 1887 ; 506. 
 
 2 International Monetary Conference, held at Brussels under the 
 Act of August 5, 1892. Sen. Ex. Doc. 82, 370. 
 
THE CRISIS OF l8$J. 533 
 
 tion when measured in gold. It was not merely a difficulty 
 which weighed upon the local administration, but it affected 
 every British officer in India who received his pay in silver 
 rupees, originally worth about forty-eight cents, but which 
 had been steadily declining in gold value. A remittance by 
 bills of exchange on London to family or creditors at home 
 meant a shrinkage of nearly fifty per cent, in the nominal 
 value of the money received in India. These troubles led to 
 the appointment of a special committee of able financiers by 
 the Secretary of State for India on October 21, 1892, who 
 submitted their report on May 31, 1893. 
 
 Rumors of the character of the report of the Indian Cur- 
 rency Committee began to circulate in London early in June, 
 but their proposals still lacked the sanction of executive 
 action. It was not until June 26, 1893, that it was officially 
 announced that the Legislative Council of India had ordered, 
 with the approval of the home government, the closing of the 
 mints to the free coinage of silver on account of individuals. 
 It was proposed at the same time to fix the exchange value of 
 the rupee at one shilling, four pence, or the equivalent of about 
 thirty-two cents in United States money. Such a policy had 
 been recommended by the Committee and was supported by 
 the experience of Holland and Austria-Hungary, which had 
 been able by suspending the free coinage of silver to float a 
 large mass of silver and paper currency far above the bullion 
 value of the silver and not far below parity in gold. 1 The 
 net imports of silver into India for the nineteen English 
 official years ending March 31, 1893, were $704,040,907, or 
 an annual average of $37,054,784, which had been much 
 exceeded during the last eight years of the period. The 
 market for nearly one-third of the annual production of the 
 silver mines of the world was thus closed by the stroke of a 
 pen in Downing Street. 
 
 The news of the action of the British government caused 
 a profound sensation in the United States and increased the 
 tendency to unreasoning panic. Secretary Carlisle had al- 
 
 Report of Indian Currency Committee, Sec. 93-98. 
 
534 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ready, on June 22d, authorized the anticipation of the July 
 interest on the four per cent, bonds and the Pacific Railroad 
 six per cent, bonds, with a view to bringing the slender 
 resources of the Treasury to the relief of the growing string- 
 ency in the money market. The Treasury was practically 
 exhausted by the enormous purchases of bonds at a pre- 
 mium in the autumn of 1890 and by the abolition of the duty 
 on sugar by the tariff act of that year, and the gold reserve 
 was already below $ 100,000,000. The price of silver, which 
 was 36 pence per ounce in London and 78 cents in New 
 York on June 26th, tumbled to 30^ pence in London and 
 65 to 67 cents in New York on June 3oth. The value of the 
 bullion holdings of the government shrivelled by this change 
 in four days by about $37,000,000, and it was evident that 
 the United States could no longer afford to carry alone the 
 burden of sustaining the price of silver. 
 
 President Cleveland made an earnest effort to secure the 
 repeal of the Sherman law during the short session of the 
 Fifty-second Congress, before taking office, as he had done 
 in 1885 to secure the repeal of the Bland Silver Act, then 
 in force. The House Committee on Coinage in the Fifty- 
 second Congress had been constituted by Speaker Crisp with 
 a majority in favor of free coinage and of continuing in force 
 existing laws requiring Treasury purchases of silver. It 
 was necessary, therefore, in order to bring before the House 
 any measure repealing the Sherman law, to have it reported 
 from another committee. Representative Andrew of Boston 
 was one of the first to discover a way of doing this. He 
 introduced, on December 12, 1892, a bill amending the na- 
 tional banking law, but containing a provision repealing the 
 silver purchasing clause of the Act of 1890. This bill was 
 referred under the rules to the Committee on Banking and 
 came before the House on February gth, by means of a 
 special order reported by the Committee on Rules for its 
 consideration. The order was not satisfactory in form to 
 the advocates of repealing the Act of 1890, and its adoption, 
 by a vpte of 152 to 143, constituted their virtual defeat. The 
 affirmative vote was given by 108 Democrats, 35 Republi- 
 
THE CRISIS OF 1 893. 535 
 
 cans, and 9 Populists and the negative vote by 105 Democrats 
 and 38 Republicans. Several conferences were held with a 
 view to a further effort to secure repeal or to secure a reduc- 
 tion of silver purchases, but no plan was framed which was 
 acceptable to the Eastern Republicans, whose votes were 
 necessary to make a majority for repeal. President Cleve- 
 land caused it to be understood, soon afte-r his inauguration, 
 that he would not summon Congress in extra session before 
 September unless a serious crisis confronted the country. 
 The crisis was invoked in the latter days of June, 1893, by 
 the closing of the Indian mints and the effect upon the 
 American currency. A meeting of the cabinet was held on 
 June 3oth, at which the increasing number of suspensions 
 by the banks and the paralysis of business were fully dis- 
 cussed, and it was decided to issue a proclamation summon- 
 ing Congress in extra session at noon on the yth day of 
 August. 
 
 The summons came none too soon and did little to stay the 
 progress of the panic. Banking institutions, national, State, 
 and private, were daily suspending, depositors were with- 
 drawing their cash from the banks, and industrial enter- 
 prises were coming to a halt. Twenty-five national banks 
 suspended in June, a number never before exceeded in an 
 entire year, seventy-eight suspended in July, and thirty- 
 eight in August. 1 The collapse of private and State banks 
 was even more alarming. An average of about seventy sus- 
 pensions per year up to the close of 1892 swelled to 415 dur- 
 ing the first eight months of 1893, representing liabilities of 
 $97,193,530. Banks all over the country began to refuse to 
 pay checks except in certified or clearing-house checks, cur- 
 rency went to a premium, and many factories were obliged 
 to shut down for lack of money to pay their employees. 
 The refusal to cash checks in currency and the premium 
 offered for it by New York brokers arrested deposits in the 
 
 1 Eighty-four of the banks afterwards resumed business. The capi- 
 tal of sixty-seven national banks actually insolvent during the year 
 ending October 31, 1893, was 511,035,000. 
 
536 HISTORY OF MODERN BANKS OF ISSUE. 
 
 banks, but brought much that was in private hoards into the 
 market. 1 
 
 Some conception of the reduction in exchanges caused by 
 the panic may be gathered from the shrinkage of the tran- 
 sactions of the New York Clearing House from $34,421,380,- 
 870 for the year ending October i, 1893, 10124,230,145,368 
 for the year ending October i, 1894. The comparison for 
 the prosperous month of October, 1892, with the same month 
 of 1893, showed a shrinkage in the clearing transactions of 
 the leading cities of the United States from $5,501,901,592 
 to $4,043,510,662. The clearings throughout the leading 
 cities of the country showed a shrinkage from $58,880,682,- 
 455 for the year ending September 30, 1893, which included 
 a part of the period of panic, to $45,017,960,736 for the year 
 ending September 30, 1894. The failures throughout the 
 country increased from 10,270, with liabilities of $108,500,- 
 ooo, in 1892, to 15,560, with liabilities of $402,400,000, in 
 1894. 
 
 The shrinkage in money values was as marked as in the 
 volume of exchanges. Securities which had been considered 
 the safest ceased to pay dividends and fell rapidly in value 
 in the hands of the holders. The Erie, the Philadelphia and 
 Reading, the Atchison, Topeka and Santa Fe, and the Union 
 Pacific were among the great railway sj^stems, representing 
 hundreds of millions of obligations, which passed into the 
 hands of receivers. Railway earnings fell $147,390,077 dur- 
 ing the year ending June 30, 1894, as compared with the 
 previous year, or 12.07 P er cent, of the gross earnings. 
 Hundreds of millions of invested capital thus ceased to be 
 productive, and those who had fancied themselves in the 
 
 1 The surprising thing about this suspension of cash payments by 
 some of the banks was that little public complaint was made about it. 
 The business public seemed to recognize it as a necessary condition 
 of the panic, although it is doubtful if it was necessary. Some of the 
 banks continued to meet all demands for currency and nearly all paid 
 small checks. It was estimated that $15,000,000 in currency was sold 
 in New York during the crisis. Alex. D. Noyes, Political Science 
 Quarterly, IX., 29. 
 
THE CRISIS OF ifyj. 537 
 
 possession of an assured income from their stock holdings 
 found their wealth turned to ashes in their hands. A crash 
 in industrial stocks took place on May 5, 1893, Du t July 26th 
 was one of the panic days on the stock exchanges. Rates 
 for money in New York, which were normal in the morning, 
 rose to 75 per cent, per annum before the close of business. 
 The scarcity of money forced holders of securities to unload. 
 Atchison general fours dropped from 71 to 66 ; New York, 
 Lake Erie, and Western seconds fell from 59 to 53 ; Chicago 
 gas went down from 50 to 43^ ; and General Electric 
 slumped from 47^ to 40^. The excitement in New York 
 was so intense that it was proposed to close the Stock Ex- 
 change, but the proposition was rejected by the governors 
 at their meeting the next day. An appeal was made to the 
 foreign exchange houses for help and $10,000,000 in gold 
 was engaged in London while exchange was quoted above 
 the exporting point. 
 
 The heavy demands upon the national banks and the re- 
 duction of their coin and currency threatened early in the 
 panic to carry their cash reserves below the limit required 
 by law in the reserve cities. The reserves of the New York 
 banks were close to the limit early in July and fell on 
 August 5, $14,017,800 below it. The natural remedy for 
 the scarcity of currency was the successful expedient of 
 other years of panic, the issue of clearing-house certifi- 
 cates. The first issues w5=T*rnade in Philadelphia on June 
 1 6th, but the New York banks promptly followed on June 
 2ist, and those of Boston and Baltimore six days later. 
 The largest amount outstanding at one time in New York 
 was $38,280,000, from August 29th to September 6th; in 
 Philadelphia, $10,965,000, on August i5th ; in Boston, 
 $11,445,000, from August 23d to September ist ; and in 
 Baltimore, $1,475,000 from August 24th to September gth. 
 These issues, amounting with $987,000 at Pittsburg, to 
 $63,152,000, are the only ones reported by the Comptroller 
 of the Currency, but they only served as a lesson to the 
 clearing houses of the country. Some form of certificate of 
 this character was issued in nearly every considerable city 
 
538 HISTORY OF MODERN BANKS OF ISSUE. 
 
 and served to greatly relieve the strain upon the ordinary 
 circulation. 
 
 A more striking indication of the readiness of American 
 bankers and business men to respond to the necessities of 
 the moment was the issue of emergency paper for general 
 circulation. The clearing-house certificates were employed 
 only between the banks. The law imposing a ten per cent, 
 tax upon the notes of State and private banks was supposed 
 to stand across the path of any issues for general circulation, 
 but the law received little attention when the absolute 
 necessity of a circulating medium forced itself upon the 
 country. Certificates and certified checks were issued in 
 scores of communities where currency could not be had. 
 They were usually guaranteed by the associated banks 
 where there were such banks ; they were issued by a single 
 bank in even amounts where concerted action could not be 
 obtained ; and they were issued by railway companies and 
 manufacturers where arrangements could not be made with 
 the banks. In a few cases they were issued with the guar- 
 antee of the local authorities drawn upon some public fund. 
 These certificates and checks proved very useful where cur- 
 rency was in demand for pay-rolls, were treated as cash by 
 banks and merchants, and were promptly redeemed when 
 the panic was over. l 
 
 The financial crisis of 1893 was a striking illustration of 
 the truth that bank-note circulation plays but a trifling part, 
 or none, in promoting crises. The national banks had been 
 
 1 Representative John DeWitt Warner of New York, commenting 
 upon the relations of these issues to the ten per cent, tax law, de- 
 clared that " In this way, after the machinery so carefully adjusted by 
 government had utterly failed to work, the business common sense 
 of our people readjusted its finances ; and in every part of the land 
 business started up again, manufacture continued, the laborer received 
 his hire, and the merchant disposed of his goods." Sound Currency ', 
 Vol. II., No. 6, p. 8- These emergency issues were so entirely winked 
 at by the government that the collections under the ten per cent, tax 
 on bank circulation were returned by the Commissioner of Internal 
 Revenue for the year ending June 30, 1894, as only two dollars and 
 twenty-six cents. 
 
THE CRISIS OF l8$J. 539 
 
 contracting their secured circulation until it stood on June i, 
 1893, at only $177,164,255. They had shared in the expan- 
 sion of business, however, by the increase in their numbers 
 and in their deposits. The number of national banks formed 
 in 1890 was 307, with an aggregate capital of $36,250,000. 
 The year 1891 showed organizations of 193 new banks, with 
 capital of $20,700,000 ; 1892 showed organizations of 163 
 banks, with capital of $15,285,000; and 1893 na( l already 
 shown 119 new organizations, with capital of $11,230,000, 
 before the process of expansion was arrested, with the bank- 
 ing year only two-thirds complete. Even more remarkable 
 was the extension of banking on deposits instead of on the 
 capital and surplus of the banks. Bank capital increased 
 seventy per cent, from 1870 to 1892, and the number of 
 banks more than doubled, but individual deposits were 
 multiplied three and one half times and rose from one-third 
 of total liabilities in 1870 to more than one-half in 1892. 
 
 One of the defects of the operation of the national banking 
 law, revealed anew by the crisis, was the use made of the pro- 
 visions permitting the deposit in reserve cities of three- fifths 
 of the cash reserve of the country banks and permitting the 
 reserve banks to pay interest on such deposits. The national 
 banks of the country on May 4, 1893, showed $174,312,- 
 119 as due from reserve agents, $121,673,794 due from 
 national banks, and $32,681,708 due from State banks. 
 Many banks throughout the West were obliged to suspend, 
 because their reserves were not within ready reach. Out 
 of a total of one hundred and fifty-eight national banks 
 which were forced to suspend payments during the year 
 ending October 31, 1893, eighty-six were authorized to re- 
 sume business within a short time, and not one of these was 
 east of the Ohio or north of the Potomac. This is the best 
 proof that these Western and Southern banks would have 
 been able to maintain their solvency if their cash reserve 
 had been in their own custody. l It was also a subject of 
 
 1 This argument is intelligently worked out by Mr. Alexander D. 
 Noyes, "The Banks and the Panic of 1893," in Political Science 
 
540 HISTORY OF MODERN BANKS OF ISSUE. 
 
 criticism that the banks were forbidden to make new loans 
 when their cash reserves fell below the fixed legal limits. 
 The Comptroller was authorized to require a bank to make 
 good its reserve, and failing this to appoint a receiver. This 
 power was used with moderation by Comptroller Bckels and 
 the banks of the reserve cities increased their liquid resources 
 by their issues of clearing-house certificates. 1 
 
 The meeting of Congress on August yth found the Eastern 
 members of both political parties so strongly impressed with 
 the serious condition of the country that the}* were prepared 
 to push the repeal of the silver purchase law by the most 
 drastic measures and by a union of forces without regard to 
 political divisions. The message of President Cleveland, 
 transmitted to Congress on the day following their meeting, 
 recommended, ' ' the prompt repeal of the provisions of the 
 Act passed July 14, 1890, authorizing the purchase of silver 
 bullion, and that other legislative action may put beyond all 
 doubt or mistake the intention and the ability of the govern- 
 ment to fulfil its pecuniary obligations in money universally 
 recognized by all civilized countries. ' ' An agreement was 
 reached on August loth, between the supporters and oppo- 
 nents of the President, that debate should begin the next day 
 and that the vote on a repealing bill should be taken on 
 August 28th. Mr. Wilson of West Virginia, the recognized 
 leader of the Democratic majority of the House, introduced 
 a repealing bill early the next morning. The silver men, 
 in accordance with their pledges to their opponents, made 
 no attempt to interpose dilatory tactics and the roll was 
 called on the passage of the bill on the 28th of August. 
 
 The votes given upon this day showed the largest ma- 
 jority against the silver standard given for many years in 
 the House of Representatives. The first vote was taken 
 upon a motion of Representative Bland of Missouri, for the 
 opening of the mints of the United States to the free coinage 
 
 Quarterly, IX., 12. It is not to be inferred that deposits in reserve 
 cities should be cut off entirely, but simply that they should be con- 
 fined within more prudent limits. 
 1 Report on the Finances, 1893, 356. 
 
THE CRISIS OF ifyj. 541 
 
 of silver at the ratio of sixteen to one. The vote was 125 in 
 the affirmative and 226 in the negative, a majority of 101 
 against the proposition. The intense interest taken in the 
 issue and the demand from the country that every member 
 should be accounted for is indicated by the size of the vote, 
 which included every living member of the House except 
 two, a sick member from New York who was paired in 
 favor of repeal with a South Carolina silver member. The 
 next vote was taken upon free coinage at the ratio of seven- 
 teen to one, which was rejected, 101 to 241. Free coinage 
 at the ratio of eighteen to one was rejected, 103 to 240 ; free 
 coinage at the ratio of nineteen to one was rejected, 104 to 
 238 ; free coinage at the ratio of twenty to one was rejected, 
 122 to 222. The next motion of Mr. Eland's was to revive 
 the Act of February 28, 1878, requiring the monthly pur- 
 chase of not less than $2, 000,000 worth of silver bullion and 
 its coinage into standard silver dollars. The silver men 
 rallied their greatest strength upon this proposition, which 
 they represented as a compromise, but Mr. Eland's motion 
 was rejected, 136 to 213. The roll was then called upon the 
 repealing bill of Mr. Wilson and it was passed, 239 to 109, 
 a clear majority of 130 votes. The affirmative vote was cast 
 by 138 Democrats and 101 Republicans ; the negative vote 
 was cast by 73 Democrats, 25 Republicans, and 1 1 Populists 
 and Independents. 
 
 The indications of favorable action in the Senate, where 
 the supporters of silver were strongest, were greatly strength- 
 ened when the Committee on Finance voted, on August i8th, 
 to report a repealing bill, similar in its effects to the bill 
 which was before the House, but containing some declara- 
 tory matter in favor of maintaining the parity of gold and 
 silver. A careful canvass, during the progress of the debate, 
 revealed the conversion to the repeal side of enough admin- 
 istration Democrats and moderate Republicans to make a 
 majority of eleven for repeal. The existence of this ma- 
 jority seemed for a time, however, to be of little avail 
 against the cumbersome rules of the Senate. The silver 
 Senators, by persistent dilatory tactics, brought the Senate 
 
542 HISTORY OF MODERN BANKS OF ISSUE. 
 
 at least twice close to the verge of surrender to their wishes. 
 The last and . most serious occasion was after the failure of 
 the attempt to tire out the silver leaders by a night session. 
 The Senate went into continuous session on the evening of 
 October nth, but the Populist Senator, Allen of Nebraska, 
 held the floor continuously for fifteen hours, and the attempt 
 to maintain a quorum of repeal members broke down at half- 
 past one o'clock on the morning of October i3th. Senator 
 Gorman of Maryland, who had never expressed any confi- 
 dence of getting a vote on repeal, was one of the promoters 
 of the compromise then proposed, and every Democratic 
 Senator but four signed an agreement to support it. The 
 President refused to countenance compromise in a statement 
 given out on Sunday night, October 22d, and the renewed 
 firmness of the friends of repeal forced the silver men three 
 days later to lay down their arms and admit that they could 
 not postpone indefinitely a vote on the bill. The repeal bill 
 passed the Senate on October 3oth, by a vote of 43 to 32, with 
 five pairs ; two days later, on November ist, the Senate 
 amendments to the form of the bill were concurred in by the 
 House, and the bill was approved by the President. 1 
 
 The acute stage of the crisis was over before the approval 
 of the silver repeal bill by the President, but the expected 
 revival of activity did not follow on the heels of repeal. 
 Confidence in American credit abroad had been too severely 
 shaken and the unfavorable conditions created by the Sher- 
 man law were still felt with too much force for business to 
 resume at once its wonted activity. The histor)* of former 
 financial crises was repeated in the accumulation of idle 
 capital in the banks in the form of deposits, the swelling of 
 the cash reserves, and the reduction of commercial loans. 
 
 1 The writer by a rather curious coincidence, predicted in the 
 Journal of Commerce and Commercial Bulletin on July 6th, and in the 
 Springfield Republican on July 10, 1893, the exact date on which the 
 repeal bill would become law. "The Sherman law cannot be re- 
 pealed before November ist," was the language used in the Repub- 
 lican, and the course of events under the rules of the two houses 
 of Congress was outlined almost exactly as they afterwards occurred. 
 
THE CRISIS OF 1893. 
 
 543 
 
 The following table shows the state of the loans, the specie 
 reserve, and the individual deposits of the national banks at 
 various dates before the crisis and during the period of de- 
 pression which followed, according to the reports to the 
 Comptroller of the Currency : 
 
 DATE. 
 
 LOANS AND DIS- 
 COUNTS. ^ 
 
 SPECIE RESERVE. 
 
 INDIVIDUAL 
 DEPOSITS. y 
 
 May 4, 1893 
 
 $2,l6l,40I,858 
 
 $207,222,141 
 
 $1,749,930,817 
 
 July 12, 1893 
 
 2,020,483,671 
 
 l86,76l,I73 
 
 ,556,761,230 
 
 October 3, 1893 
 
 ,843,634,167 
 
 224,703,860 
 
 ,451,124,330 
 
 December 19, 1893 
 
 ,871,574,769 
 
 251,253,648 
 
 ,539,399,795 
 
 February 28, 1894 
 
 ,872,402,605 
 
 256,166,585 
 
 ,586,800,444 
 
 May 4, 1894 
 
 ,926,686,824 
 
 259,941,923 
 
 ,670,958,769 
 
 July 18, 1894 
 
 ,944,441,315 
 
 -25O,67O,652 
 
 ,677,801,200 
 
 October 2, 1894 
 
 ,007,122,19! 
 
 237,250,eS4 
 
 ,728,418,819 
 
 December 19, 1894 
 
 ,191,913,123 
 
 218,041,222 
 
 ,695,489,346 
 
 March 5, 1895 
 
 ,965,375,368 
 
 220,931,641 
 
 ,667,843,286 
 
 May 7, 1895 
 
 ,989,411,20! 
 
 - 218,646,599 
 
 ,690,961,299 
 
 July ii, 1895 
 
 2,016,639,535 
 
 214,427,194 
 
 ,736,022,006 
 
 September 28, 1895 
 
 2,059,408,402 
 
 - 196,237,311 
 
 ,701,653,521 
 
 These figures show the gradual reduction and slow re- 
 covery of the loans and discounts, which afford the best 
 measure of business activity. The individual deposits 
 suffered at first, but began to recover, as timid capital was 
 withdrawn from active investment. The accumulations of 
 idle capital were largest in New York and other cities of the 
 East, because less capital had been destroyed there by bad 
 investments and less was needed to support consumption 
 which was no longer supplied by current earnings. The 
 partial restoration of confidence in the banks, unaccompanied 
 by sufficient general confidence to promote new business 
 enterprises, transformed the scarcity of currency which pre- 
 vailed at the acute state of the panic into plethora, which 
 there was no means of relieving except by the export of 
 gold. Gold for export had been furnished up to 1892 by 
 the banks of New York city, and the banks and the govern- 
 ment mutually paid gold and gold certificates in the settle- 
 ment of their balances at the New York Clearing House. 
 The settlement of these balances in gold was practically sus- 
 
544 HISTORY OF MODERN BANKS OF ISSUE. 
 
 pended by the Treasury in the summer of 1892. The banks 
 were obliged to withhold gold from their customers for the 
 payment of custom duties and to send them to the Treasury 
 for gold for export. 
 
 The combined effects of the loss of gold income, the 
 reduction of receipts, the plethora of government paper 
 currency, and the continued withdrawal of foreign capital 
 was to compel four issues of bonds, aggregating $262,315,- 
 400 in principal and $293,000,000 in net proceeds to the 
 Treasury, during 1894, 1895, an d 1896. The most potent 
 cause of these losses was the withdrawal of foreign capital, 
 but this withdrawal was itself stimulated by the accumula- 
 tion of idle currency, and the distrust of the financial policy 
 of the United States which was invoked by the reduction 
 of the gold reserve. The operation of the legal tender 
 currency and of the Act of 1878, forbidding its cancellation 
 when redeemed, was to expose the Treasury to persistent 
 raids for gold, against which it had no means of protection 
 through the interest rate, the charging of a premium, or the 
 control of the foreign exchanges. The very gold paid into 
 the Treasury for bonds sold to replenish the reserve, was 
 obtained in large measure by the presentation of legal tender 
 notes at the New York sub-Treasury for redemption. 
 
 The bids for the first issue of $50,000,000 in five per cent, 
 ten year bonds were opened on February i, 1894, and the 
 reserve was raised on February 28th, to $106,527,068. Gold 
 exports from the United States set in heavily again in April, 
 1894, an d were not arrested until the beginning of the out- 
 ward movement of the crops in August. The net exports 
 of gold from the United States, after deducting imports, 
 were $9,402,110 in April, $23,124,058 in May, $22,376,872 
 in June, $12,823,572 in July, and $1,935,303 in August, 1894, 
 when the tide turned slightly in the other direction. The 
 respite was but a short one and bids for another block of 
 $50,000,000 in five per cent, ten year bonds were opened 
 November 24, 1894.' The reserve was restored from $58,- 
 
 1 The net proceeds of the first loan were 158,660,917, and of the 
 second $58,538,500. Finance Report, 1894, 
 
THE CRISIS OF ifyj. 545 
 
 S75.3 1 ? on September 29th, to $106,821,428 on December 
 loth ; but the demand for the redemption of notes in gold 
 during the next two months surpassed all previous experience 
 and carried the reserve down to $44,705,967 on January 31, 
 1895. The redemptions of November were $7,799,747 and 
 those of December $31,907,221. There was a slackening 
 of the pressure during the early days of January, but it set 
 in again with renewed violence during the last ten days of 
 the month and drove the Treasury to the verge of the sus- 
 pension of gold payments. The single day of January 25, 
 1895, showed redemptions of $7,156,046, and the evening of 
 Saturday, February 2d, arrived with only $9,700,000 in gold 
 coin available in the New York sub-Treasury. Even this 
 was obtained by trenching upon the fund held for the re- 
 demption of gold certificates. Panic was seizing the busi- 
 ness community and a single New York bank reported to 
 Assistant Secretary Curtis that on January 3oth they received 
 over one hundred and fifty requests for gold coin, most of it 
 evidently for hoarding. ' 
 
 President Cleveland recommended the retirement of the 
 legal tender notes and the substitution of a banking currency 
 in his annual message to Congress in December, but the 
 House of Representatives on January 9, 1895, refused to 
 consider the bill reported in pursuance of this recommenda- 
 tion. The President on January 28th sent a special message 
 to Congress, asking that he be given authority to retire the 
 greenbacks and to issue bonds under more favorable condi- 
 tions than those authorized by existing law. A bill to carry 
 out his recommendations was introduced by Chairman 
 
 1 Distrust of the security of United States notes or the pressure of 
 the excessive paper currency produced a very different attitude on the 
 part of the public towards the gold reserve after the passage of the 
 Sherman law from that which prevailed before. The paper money 
 presented to the Treasury for redemption in gold was $7,976,698 during 
 the fiscal year 1879, the first six months after resumption, and declined 
 in 1882 as low as $4o,cxx>. The largest redemptions between 1879 and 
 1891 were $6,863,699 in 1886. The redemptions in 1891 were $5,986,- 
 070 ; in 1892, $9,125,842 ; in 1893, $102,100,345 ; in 1894, $84,802,150; 
 in 1895, $117,354,178; and in 1896, $158,655,956. 
 
546 HIS TOR Y OF MODERN BANKS OF ISSUE. 
 
 Springer of the Banking Committee and reported by him to 
 the House two days later. The bill authorized the issue of 
 three per cent, bonds, redeemable after ten days at the 
 pleasure of the government ; the cancellation of the green- 
 backs received in payment for the bonds, to the amount of 
 new circulation issued ; and the increase of national bank 
 circulation to the par value of bonds deposited as security. 
 This bill was defeated, on January yth, by a vote of 135 to 
 162. 
 
 The eighth day of February, 1895, was marked by the 
 delivery to Congress of a special message from President 
 Cleveland, describing one of the most notable transactions 
 of modern finance. The President announced the comple- 
 tion of a contract for the purchase by the government of 
 3,500,000 ounces of standard gold coin, by the delivery of 
 about $62,400,000 in four per cent, coin bonds, redeemable 
 after thirty years. 1 The purchasers of the bonds were 
 Messrs. August Belmont and Co. , on behalf of themselves, 
 and Messrs. N. M. Rothschild and Sons, of I^ondon, and 
 Messrs. J. P. Morgan and Co., on behalf of themselves and 
 Messrs. J. S. Morgan and Co. of L,ondon. The contract was 
 witnessed by Assistant Secretary William E. Curtis, who 
 had much to do with bringing it to a successful completion, 
 and by Mr. Francis Lynde Stetson of New York. There 
 was an alternative clause, reserving to the Secretary of the 
 Treasury the right, in case he should receive authority from 
 Congress within ten days, to substitute three per cent, bonds 
 specifically payable in gold coin for the coin bonds author- 
 ized by existing law. The effect of this substitution, if the 
 gold bonds were accepted at par, as the contract provided, 
 would have been, according to the message of the President, 
 to save the United States in interest charges $539,159 per 
 year, or $16, 174,770 during the thirty years fixed as the term 
 of the bonds. A bill to authorize this substitution of gold 
 bonds was reported by Chairman Wilson of the Ways and 
 
 1 The actual transactions under the contract were the delivery of 
 165,116,2.44 in gold for $62,315, 400 in bonds. Finance Report, 1895, 
 
 IvVI. 
 
THE CRISIS OF ifyj. 547 
 
 Means Committee of the House on February 13, 1895, but 
 was defeated in the House the next day by a vote of 120 to 
 167, and the contract was left in force according to its 
 original terms. 
 
 The peculiar feature of this contract for the exchange of 
 bonds for gold lay in the provision that the purchasers of the 
 bonds, ' ' as far as lies in their power, will exert all financial 
 influence and will make all legitimate efforts to protect the 
 Treasury of the United States against the withdrawal of 
 gold pending the complete performance of this contract. ' ' 
 The fulfilment of this pledge was accomplished through the 
 control over the foreign exchanges which was exercised by 
 the firms which purchased the bonds. They brought into 
 their syndicate the leading gold shipping houses, and for- 
 eign bills of exchange were placed upon the market for 
 several months in just sufficient quantities to meet the cur- 
 rent demand. The syndicate by this process created debts 
 in Europe which it was necessary to cover at some time by 
 the purchase of exchange or the shipment of gold. They 
 guarded in a measure against possible losses by keeping the 
 rate for the bills which they sold considerably above the 
 gold shipping point. They thus, in effect, created a corner 
 in foreign exchange and imposed the cost of their operations 
 upon the purchasers of foreign bills. This method of con- 
 trolling exchange operated with wonderful success all 
 through the spring and up to the closing days of July. The 
 tide of gold exports, which rose to $24,698,489 in the month 
 of 'January, was turned into net imports by the operations 
 of the syndicate in bringing gold from Europe. February 
 showed net imports of $4,067,003 ; March, net imports of 
 $4,120,290; April, net imports of $2,029,761 ; May, net im- 
 of $3,271,193 ; and June, net imports of $1,963,750. The 
 effect upon the treasury was equally striking. The redemp- 
 tions of United States legal tender notes in gold, which had 
 been $45,117,738 in January, were reduced to $5,560,952 in 
 February, $1,089,085 in March, $1,017,571 in April, $1,166,- 
 472 in May, and $1,239,287 in June. 
 
 The essential purpose of the contract, in spite of criticisms 
 
548 HISTORY OF MODERN BANKS OF ISSUE. 
 
 to which it was justly subject, was to afford a breathing 
 spell to the country for the restoration of confidence in the 
 monetary standard and in the business future. The period 
 of business depression beginning in 1893 had lasted long 
 enough to exhaust idle stocks of goods, to accumulate capi- 
 tal in the banks, and to prepare the business community for 
 a new period of activity if confidence could be restored. Mr. 
 J. Pierpont Morgan, the eminent financier who was the 
 leading spirit in the arrangement, would probably have made 
 no attempt to restore confidence and business activity by 
 similar methods in the spring of 1893 or of 1894, but he 
 counted upon the probabilities of success in such an under- 
 taking in 1895, an( i events partially justified his judgment. 
 The loans and discounts of the national banks of the City 
 of New York increased from $332,069,999 on March 5, 1895, 
 to $363,848,573 on September 28, 1895, while the loans and 
 discounts of all the national banks of the country advanced 
 in the same interval from $1,965,375,368 to $2,059,408,402. 
 The imports for the calendar year 1895 were $801,663,490, 
 an increase of $125,000,000 over 1894, and only $39,000,000 
 less than in the prosperous year 1892. Receipts for postage, 
 an unfailing index of business conditions, increased in every 
 quarter of 1895 over tne corresponding quarter of 1894, and 
 reached for the concluding quarter of the year a total of 
 $20,517,014, the largest volume of business ever recorded. 
 
 The essential defects of the policy of the syndicate con- 
 tract were its failure to diminish the redundant volume of 
 currency, the stimulus thus afforded to imports over exports, 
 and the artificial nature of the attempt to corner the exchange 
 market. This attempt practically broke down towards the 
 close of July. A leading coffee firm which had payments 
 to make in Europe found that they could be made cheaper 
 by the shipment of gold drawn from the Treasury than by 
 the purchase of exchange at the rates fixed by the syndi- 
 cate. One of the syndicate firms was also compelled to ship 
 gold withdrawn from the Treasury, in order to cover the bills 
 of exchange which they had sold. The syndicate had been 
 released from a part of the obligation to bring half the gold 
 
THE CRISIS OF 1 893. 549 
 
 in payment for the bonds from abroad, and had completed 
 their deliveries under the contract on June 24, 1895. Mem- 
 bers of the syndicate still held considerable quantities of 
 gold, and the first exports were made up by voluntary 
 deposits of this gold in the Treasury, amounting up to 
 September n, 1895, to $ l6 > 12 7>43 2 - These deposits several 
 times restored the reserve to $100,000,000, when it was on 
 the point of falling below that amount, but the reserve 
 slowly travelled downward from $107,512,362 at the end of 
 June to $92,943,179 at the end of October. 
 
 The loss of control over the exchange market practically 
 terminated the efforts of the syndicate to maintain the re- 
 serve, in spite of their voluntary gold deposits. The gold 
 obtained for shipment continued to be drawn almost ex- 
 clusively from the Treasury, the net exports were $13,468,- 
 188 in November and $14,170,899 in December, and the gold 
 reserve fell to $63,262,268 on December 31, 1895. President 
 Cleveland in the meantime delivered to Congress on Decem- 
 ber 3d, his annual message, laying special stress upon the 
 importance of retiring, by means of a bond issue, the legal 
 tender notes, which were presented over and over again to 
 the Treasury for redemption and were required by the Act of 
 May 31, 1878, to be " re-issued and paid out again and kept 
 in circulation." Congress gave no indication of compliance 
 with this recommendation, and the raid upon the gold re- 
 serve increased in intensity after the delivery of the special 
 message of the President upon the encroachments of Great 
 Britain upon the Venezuelan boundary. The possibility of 
 war between Great Britain and the United States led Eng- 
 lish investors to unload American securities, caused large 
 withdrawals of gold from the Treasury for export, and 
 brought the country to the verge of the suspension of gold 
 payments. The President, on December 2oth, called the 
 attention of Congress in a special message to the serious 
 financial condition of the country and urged that they should 
 not take a recess for the holidays without taking some step 
 for the protection of the public credit. An eifort was made 
 by Congress to pass some legislation, but it was not satis- 
 
550 HISTORY OF MODERN BANKS OF ISSUE. 
 
 factory at any time to the administration, because provision 
 was not made for the issue of bonds specifically payable in 
 gold nor for the retirement of legal tender notes. It soon 
 appeared that the Senate and House could not agree upon 
 any measure between themselves, and the President and 
 Secretary of the Treasury determined upon another issue of 
 bonds under the existing law. 
 
 A public call for subscriptions to $100,000,000 of four per 
 cent, coin bonds, dated February i, 1895, an d payable at the 
 pleasure of the United States after thirty years, was issued 
 by Secretary Carlisle on January 5, 1896. There was some 
 doubt at first among financiers whether the subscriptions 
 from responsible holders of gold would be sufficient to per- 
 manently restore the gold reserve. Mr. J. Pierpont Morgan 
 had been organizing a syndicate, in the hope of making a 
 contract with the government similar to that of 1895, an< ^ the 
 fact that he intended to obtain gold for the execution of his 
 part of the contract from outside the Treasury gave the plan, 
 in the opinion of many financiers, an advantage over a popu- 
 lar loan. The response to the call of Secretary Carlisle, 
 however, when the bids were opened on February 5th, was 
 such as to dissipate such fears and to materially strengthen 
 the public credit. The number of subscriptions of an appar- 
 ently bona fide character was four thousand six hundred and 
 forty, and the amount was $568, 269, 850. A syndicate headed 
 by Mr. Morgan subscribed for the entire amount at 110.6877. 
 It was found that there were subscriptions for $66,788,650 at 
 higher figures, so that Mr. Morgan's syndicate were allotted 
 only the remainder of the $100,000,000. Subsequent defaults 
 on the part of some of the subscribers raised Mr. Morgan's 
 allotment to about $38,000,000 and made the net proceeds 
 of the loan about $111,250,000. The gold reserve of the 
 Treasury was rapidly increased by the deposit of gold in 
 payment for the bonds and rose on March 17, 1896, to $127,- 
 862,644. The loan appeared to afford some of the advan- 
 tages in restoring business confidence afforded by the 
 syndicate contract of 1895. Business showed increased 
 activity, and net exports of gold fell off until revived by agi- 
 
THE CRISIS OF 1 893. 551 
 
 tation regarding the maintenance of the metallic standard. 
 This outward movement was checked by the banks and ex- 
 change houses and the reserve again increased during the 
 autumn of 1896. / 
 
 The crisis in Australia in 1893 was one of those peculiar 
 to new countries. The future had been too rapidly dis- l/ 
 counted, speculation in land had been 'carried beyond the 
 possibility of the immediate development of the country 
 and an enormous debt had been created for public works. 
 Competition in banking had been carried to such an extreme 
 that nearly every little community supported branches of 
 all the leading banks, and obtained excessive loans on prop- 
 erty which could not be converted into quick assets. Not 
 content with loaning their own funds in this way, the Aus- 
 tralian banks established agencies all over the United King- 
 dom, with some local solicitor or stock broker as agent, and 
 paid commissions to obtain deposits. When the crisis broke 
 out in January 1893, the British deposits in the Australian 
 banks were about one-third of the total deposits of ^153,- 
 000,000. Foreign money had poured into Australia under 
 the conviction among British investors that investments 
 among those of their own blood were safer than among the 
 South American republics or the decrepit nations of Eastern 
 and Southern Europe. 
 
 This easy accession of riches came to be counted by the 
 Australians as part and parcel of their own accumulations. 
 A circular issued on behalf of a public loan for the colony 
 of Victoria in 1892 counted up the wealth of the people at 
 ^440,000,000 or at the rate of nearly ^"400 for each of the 
 1,140,000 inhabitants. This valuation was more than fifty 
 per cent, greater per capita than that of Great Britain, after 
 centuries of accumulation, but it was made up by appraising 
 unsettled lands at 2 per acre which could not be sold to- 
 day for i and by a similar process of inflation of bank 
 credits and personal wealth. 1 The City of Melbourne, with 
 its population of 500,000, was extended on the maps of the 
 land speculators to limits which would have afforded ample 
 
 1 Raffalovich, Le Marche Financier en 1893-94, 305. 
 
552 HISTORY OF MODERN BANKS OF ISSUE. 
 
 accommodations for a city with twice the population of 
 I/mdon. The feeling of affluence which such figures caused 
 had encouraged the creation of a public debt of about ^34 per 
 head, almost exactly twice the enormous public debt of the 
 United Kingdom. 
 
 Stubborn facts did not bear out these inflated valuations 
 and the adoption of the protective policy in a country where 
 manufacturing had hardly been born added to the fetters 
 upon consumption, whatever might be expected from its 
 final results in developing native industries. The revision 
 of the tariff in 1892 was made with the avowed purpose of 
 obtaining additional revenue to meet the charges on the for- 
 eign debt, but its results were to reduce the customs receipts 
 for the fiscal year 1893 by about ,250,000. Warnings 
 against the land boom were given several years before 
 the crisis of 1893, but many of the banks had plunged in 
 so deep and tied up so large a proportion of their assets in 
 landed security that they dared not take a backward step. 
 Advances once made on land were increased in proportion to 
 the fictitious value reached by speculation, the discount on 
 the added loan was deducted from the new advance to the 
 borrower, and this actual increase in the risk of the batik 
 was carried to the fictitious account of earnings and profit. l 
 
 A large proportion of the British deposits which had been 
 secured through agents were owned in Scotland and fell due 
 on the half yearly term days. Every half year represented 
 a critical point in Australian banking and none looked more 
 critical as it drew near than the Whitsunday term of 1893. 
 The danger was so threatening, that some of the banks 
 would be compelled to suspend, by demands from Scotland, 
 that Australian depositors began to withdraw their accounts 
 and thus brought about the collapse which might otherwise 
 have been again postponed. The signal of the actual crash 
 came on January 29th, when the Federal Bank of Melbourne 
 failed. It was a new institution, with limited capital, long 
 looked upon with distrust by the older banks, and a strong 
 
 1 Sydney J. Murray, London Bankers' Magazine, Oct., 1895, LX., 
 479- 
 
THE CRISIS OF 7c?pj. 553 
 
 effort was made to create the impression that the failure had 
 simply cleared the air and left the older institutions stronger 
 than before. The public refused to accept this view of the 
 case and gradually began to withdraw their deposits from all 
 the banks. Notices of withdrawal poured in from Great 
 Britain, and on April 4th the Commercial Bank of Austra- 
 lasia closed its doors, with deposits of ^12,044,000. The 
 English and Australian Bank, with deposits of .5,795,000 
 and ninety-one branches, stopped payment on April i2th, and 
 the London Chartered Bank, with deposits of ,6,588,000 
 and fifty-eight branches, closed its doors during the next 
 week. The government proclaimed a five days' holiday 
 early in May, in the hope that public excitement would sub- 
 side while the banks were enjoying a breathing spell. But 
 banks continued to go down, and when the last failure oc- 
 curred on May iyth, fourteen institutions had failed with 
 aggregate deposits of ^85,000,000, including ^"26,000,000 
 owed in Great Britain. 
 
 Twelve banks, with deposits before the panic of ^71,000,- 
 ooo, succeeded in weathering the storm and did much to re- 
 store confidence by their refusal to avail themselves of some 
 of the devices of the weaker institutions. The government 
 of New South Wales made bank-notes a legal tender for six 
 months, which enabled the banks, without increasing circu- 
 lation more than ten per cent., to come to the relief of com- 
 merce by liberal loans. The surplus of loanable capital in 
 Europe brought some relief, when the substantial character 
 of the assets of the stronger banks become known, and plans 
 of reconstruction were soon set in motion. 1 There is still 
 some apprehension as to the ability of the banks to meet their 
 extended obligations at maturity, and the belief is held by 
 careful observers of Australian affairs that the reduction of 
 competing branches of the banks has not proceeded far 
 enough. The era of inflation has, however, been brought 
 to an end, and the great resources of Australia seem likely 
 to permit a gradual recovery of her real prosperity, if not of 
 the inflated values of former times. 
 
 1 London Bankers' Magazine, May, 1895, LJX., 715. 
 
CHAPTER XXIII. 
 
 THE ADVANTAGES OP A BANKING CURRENCY. 
 
 It is Created for Carrying on Business and is Subject to Business 
 Conditions The Volume of Exchanges through the Banks and 
 Clearing Houses Superiority of Bank-notes over Government 
 Paper Money in Convenience, the Promotion of Banking Facilities, 
 and Stability The Importance of Large Liquid Assets in Main- 
 taining Redemption on Demand. 
 
 inherent advantage of a currency issued by well 
 regulated banks is its adaptation to business needs. 
 It is the outgrowth of the relations of business men 
 with each other and, where its essential character has not 
 been too much modified by repressive laws, it represents the 
 evolution of the simplest and best methods of making com- 
 mercial exchanges. Being the growth and creature of busi- 
 ness transactions, its adaptability to them is more nearly 
 perfect, of necessity, than other systems originated for other 
 purposes and only incidentally shaped to accommodate such 
 needs. It is of prime importance that there should be a 
 fixed metallic standard of value, just as it is of importance 
 that there should be a fixed official length for the meter or 
 yard-stick. The standard being fixed, the duty of the state 
 is done and it should be left for the business community to 
 conduct its transactions, so long as they are measured by the 
 standard, by the means which it finds most convenient. 
 These means, the business community has decreed, are 
 found in the various forms of commercial paper. The great 
 development of modern credit has made bank-notes only the 
 small change in such transactions, but they are of supreme 
 importance in giving credit birth where it is unknown and 
 
 554 
 
THE ADVANTAGES OF A BANKING CURRENCY. 555 
 
 are still the essential tools of the retail trade which makes 
 possible the greater commerce. 
 
 The essential advantages of a banking currency may be 
 summarized under these heads : 
 
 1. Economy and convenience in making payments. 
 
 2. The adjustment of the volume of currency to business 
 conditions. 
 
 3. The promotion of banking facilities and of the use of 
 instruments of credit. 
 
 4. The adherence to a fixed metallic standard of value. 
 
 I. The economy of payment by means of paper credit 
 was understood in remote antiquity, when bills of exchange 
 occasionally took the place of physical transfers of silver 
 and gold. In more modern times, the application of the 
 same economy to domestic transactions has given birth to 
 checks, domestic bills of exchange, bank-notes, bank credits, 
 and clearings. Kvery such transaction which dispenses 
 with metallic money, without impairing the safety of the 
 standard, saves to the community the capital which would 
 otherwise be employed in the mere mechanism of exchange 
 and releases it for the active service of production and re- 
 production. The economic effects of this saving have been 
 set forth by Adam Smith in a passage which has become 
 classic : ' 
 
 The gold and silver money which circulates in any country, and by 
 means of which the produce of its land and labor is annually circu- 
 lated and distributed to the proper consumers, is, in the same manner 
 as the ready money of the dealer, all dead stock. It is a very valu- 
 able part of the capital of the country, which produces nothing to the 
 country. The judicious operations of banking, by substituting paper 
 in the room of a great part of this gold and silver, enable the coun- 
 try to convert a great part of this dead stock into active and produc- 
 tive stock ; into stock which produces something to the country. 
 The gold and silver money which circulates in any country may very 
 properly be compared to a highway, which, while it circulates and 
 carries to market all the grass and corn of the country, produces 
 itself not a single pile of either. The judicious operations of bank- 
 ing, by providing, if I may be allowed so violent a metaphor, a sort 
 
 1 Wealth of Nations, B. II., Ch. ii. (L, 321-22). 
 
556 HISTORY OF MODERN BANKS OF ISSUE. 
 
 of wagon-way through the air, enable the country to convert, as it 
 were, a great part of its highways into good pastures and corn-fields, 
 and thereby to increase very considerably the annual produce of its 
 land and labor. 
 
 The extent in our time of this substitution of paper credit 
 for metallic money, without hampering the operations of 
 trade, is as great a marvel in its way as the development of 
 the power of steam or electricity. The volume of metallic 
 money has grown from year to year, until the amount in use 
 in the world is computed at over $8,000,000,000 ; ' but the 
 expansion in the volume of money has followed with but 
 halting steps the growth in the volume of commercial trans- 
 sactions and the development of the use of credit in carry- 
 ing them on. An estimate of the aggregate of the world's 
 transactions would be an idle undertaking. The most that 
 is possible is a record of the balances which pass through 
 the banks and clearing houses of a few commercial centres. 
 The use of circulating notes has become but a small part of 
 these great transactions, but still remains under many con- 
 ditions an important part. Banks now do business largely 
 through the power to grant credits on their books, which is 
 derived from their deposits. The total banking power of 
 the world, including capital and deposits, is calculated by 
 Mr. Muhleman, the able Deputy Assistant Treasurer of 
 
 1 The economy in the substitution of paper money and bank-notes 
 for coin has become a factor relatively so small in comparison with 
 the economy of other forms of credit that it is not necessary to dwell 
 upon it at length ; but the development of the other forms of credit 
 is often promoted, as will appear later, by the power to issue bank- 
 notes. The gold in use in the world as money in 1895, according to 
 the report of the Director of the United States Mint, was $4,086,800,- 
 ooo and the silver, at the coining value, was $4,070,500,000. The cost 
 of maintaining ^95,000,000 in gold, silver, and copper in circulation 
 in Great Britain is estimated by Mr. W. Stanley Jevons at ,"2,972,000 
 ($14,500,000) annually, of which ^2,850,000 is for interest at three 
 per cent. Investigations in Currency and Finance, 296. The cost 
 of maintaining the currency of the United States, if the present vol- 
 ume of about $1,600,000,000 were exclusively metallic, would be 
 about $45,000,000 annually ; and the annual cost of maintaining the 
 actual gold and silver circulation of the world is about 240,000,000. 
 
THE ADVANTAGES OF A BANKING CURRENCY. 557 
 
 the United States at New York, at .3, 9 15, 000,000, or $19,- 
 000,000,000, distributed as follows : l 
 
 Europe, 
 Asia, 
 Africa, 
 Oceanica, 
 North America, 
 South America, 
 
 ^"2,200,000,000 
 
 150,000,000 
 
 50,000,000 
 
 175,000,000 
 
 1,200,000,000 
 
 140,000,000 
 
 ,3,915,000,000 
 
 The banking resources of the banks of the United King- 
 dom of Great Britain and Ireland alone are nearly ;i,ooo,- 
 000,000, and such resources attained in the United States 
 in 1895 the even greater total of $6, 703, 544, 084." This vast 
 banking power, moreover, represents only partially the 
 capacity of the banks of the world for conducting exchanges. 
 The exchanges through the clearing houses in the great 
 commercial countries represent annually many times their 
 capital, or circulation, or deposits at any fixed date, and 
 more than the entire net earnings of the people. The Lon- 
 don Clearing House was in operation as early as 1773, but 
 the universal use of the clearing system is a development of 
 the last half century. The private bankers retained exclu- 
 sive control of the London Clearing House until 1854, when 
 the London and Westminster and other leading joint stock 
 banks were permitted to share in its advantages. 3 The Bank 
 of England was not admitted until 1864, and even at thepres- 
 
 1 Monetary Systems of the World, 160. This calculation is based 
 in part upon an estimate of Mr. Mulhall, the English statistician, in 
 1889, but the estimate is enlarged to correspond to the more recent 
 date and to known omissions in his figures. 
 
 2 For the United Kingdom, see p. 135. The figures for the United 
 States include the aggregate capital, surplus, undivided profits, and 
 individual deposits of national banks on July n, 1895, and of State, 
 stock savings, and private banks, and loan and trust companies at 
 date of latest report. Comptroller's Report, 1895, 512. 
 
 3 Prof. MacLeod computes that the admission of the joint stock 
 banks released them from keeping ,"500,000 in currency almost con- 
 stantly on hand, and made that amount available for general circula- 
 tion. Theory and Practice of Banking, II., 183-84. 
 
558 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ent time some of the large Scotch banks do their business 
 indirectly, through the agency of another bank. 
 
 The Paris Clearing House is composed of eleven banking 
 houses and was not organized on its present basis until 1872. 
 The Vienna Clearing House, with a dozen leading banking 
 houses grouped around the Imperial Bank of Austria-Hun- 
 gary, was organized in the same year, but several of the 
 private banks had adjusted their compensations between 
 themselves as early as 1864. Clearing houses were estab- 
 lished in Italy by legal decree of May 19, 1881, at Rome, 
 Milan, Geneva, Bologna, Florence, and Catana. Cologne 
 and Stuttgart have each possessed a clearing house since 
 1882, and one was formed at Berlin in 1883, with the Impe- 
 rial Bank as its centre. No clearing system seems to have 
 existed in Germany prior to this date, but the Imperial 
 Bank, the Check Bank of Hamburg, and several others, 
 practised the use of transfer checks upon a large scale, and 
 clearing houses are now in operation at Hamburg, Bremen, 
 Leipsic, Breslau, and Dresden. 1 The operations through 
 the London Clearing House were ,954,000,000 in 1839, and 
 ^1,900,000,000 in i857. 2 Their magnitude in recent years 
 is indicated in the following table : 
 
 YEAR. 
 
 ON STOCK EXCHANGE 
 SETTLING DAYS. 
 
 PER CENT. OF 
 TOTAL. 
 
 TOTALS FOR THE YEAR. 
 
 1868 
 
 523,349,000 
 
 15-3 
 
 ^3,425,185,000 
 
 1872 
 
 1,015,959,000 
 
 17.2 
 
 5,916,452,000 
 
 1874 
 
 1,010,456,000 
 
 17.0 
 
 5,936,772,000 
 
 1876 
 
 761,091,000 
 
 15-4 
 
 4,963,48O,OOO 
 
 1878 
 
 795,443,000 
 
 15-9 
 
 4,992,398,000 
 
 1880 
 
 ,151,867,000 
 
 19.8 
 
 5,794,238,000 
 
 1882 
 
 ,228,916,000 
 
 19.7 
 
 6,221,206,000 
 
 1884 
 
 960,623,000 
 
 16.6 
 
 5,798,555,000 
 
 1886 
 
 ,198,557,000 
 
 20.3 
 
 5,901,925,000 
 
 1888 
 
 ,252,466,000 
 
 18.9 
 
 6,916,133,000 
 
 iSgO 
 
 ,416,543,000 
 
 18.1 
 
 7,801,048,000 
 
 iSgi 
 
 ,067,403,000 
 
 15-5 
 
 6,847,5O6,OOO 
 
 1892 
 
 ,022,764,000 
 
 15-7 
 
 6,481.562,000 
 
 1893 
 
 ,002,664,000 
 
 15-4 
 
 6,478,013,900 
 
 1894 
 
 964,455,000 
 
 15-2' 
 
 6,337,222,000 
 
 1895 
 
 1,304,679,000 
 
 17.1 
 
 7,592,886,000 
 
 1 Arnaune, 382-84. 
 
 2 The largest amount of bank-notes used in 1839 in one day for the 
 
THE ADVANTAGES OF A BANKING CURRENCY. 559 
 
 The clearings at Paris were 1,602,584,727 francs in the 
 year ending March 31, 1873 ; 3,222,745,255 francs in 1880 ; 
 4,142,562,483 francs in 1885 ; 5, 140, 959, 989 francs in 1890 ; 
 6,003,883,202 francs in 1891 ; and 5,379,348,428 francs in 
 1894. These figures, however, give an incomplete idea of 
 the banking business done in Paris. A great central bank 
 operates in some measure as a clearing house in itself, and 
 this is more notably the case with the Bank of France, with 
 its comparatively feeble rivals, than with the Bank of Eng- 
 land, surrounded by the great stock banks and private banks. 
 The last report of the Board of Regents of the Bank of 
 France shows the transactions for 1894, including deposits 
 of bills and currency and transfers by checks on the central 
 bank, to have been 61,500,196,400 francs ($12,000,000,000), 
 of which 45,150,142,500 francs was in checks, 15,098,022,600 
 in bank bills, and 1,252,031,300 francs in specie. Thus 
 three times the net income of all Frenchmen passes annu- 
 ally through the bank in the form of currency or credits. 
 The regents remark that, " as every transfer represents a 
 payment and a receipt, there is a movement of funds of 
 ninety milliards effected without the displacement of bills 
 or specie, ' ' and they add that they have a right to say that 
 the bank " fulfils in France, without cost to its clients and 
 without profit for itself, the functions of the English Clearing 
 House." ' 
 
 The Bank of France has kept for many years an exact 
 account of its daily receipts, which indicates not only the 
 
 payment of balances was ^593,900. The balances settled in 1879-80 
 ran as high as ,"5,334,000, but settlements had ceased since 1854 to 
 be made in notes, or they would have absorbed one-fifth of the circu- 
 lation of the Bank of England. London Bankers' Magazine, Feb., 
 1896, LXL, 253. 
 
 1 Assemblee Generate de la Banque de France, du 31 Janvier, 
 1895, p. 7. The fact that money transfers are so much in excess of 
 incomes is due to the fact that the incomes of traders represent a 
 much larger volume of transactions than their profits, which figure 
 as net income. The estimates of M. L,eroy-Beaulieu and other au- 
 thorities put the net incomes of Frenchmen at 20,000,000,000 francs 
 (f4,ooo,ooo,ooo), equivalent to about $107 per capita, or 1535 for a 
 family of five. La Science des Finances, I., 380. 
 
5 6o 
 
 HISTORY OF MODERN BANKS OF ISSUE. 
 
 vast aggregate of its transactions, but the comparatively 
 small part which is played in them by coin and bank-notes. 
 The figures for representative years have been as follows : 
 
 YEAR. 
 
 SPECIE. 
 
 NOTES. 
 
 TRANSFERS OR 
 CHECKS. 
 
 TOTAL. 
 
 (In millions of francs.) 
 
 1817 
 
 534-9 
 
 7,140.9 
 
 7,675.8 
 
 1820 
 
 248.6 
 
 6,406.8 
 
 .... 
 
 6,655.4 
 
 1830 
 
 624.4 
 
 4,882.1 
 
 2,382.2 
 
 7,888.7 
 
 1840 
 
 955-9 
 
 4,150.1 
 
 3,281.4 
 
 8,387.4 
 
 1850 
 
 2,327.7 
 
 6,962.1 
 
 3,499-3 
 
 12,789.1 
 
 i860 
 
 6,629.1 
 
 15,411.0 
 
 11,488.4 
 
 33,528.5 
 
 1870 
 
 6,458.1 
 
 23,496.3 
 
 19,037.2 
 
 48,991.6 
 
 1880 
 
 5,323.3 
 
 32,095.1 
 
 32,713.5 
 
 70,131.9 
 
 1890 
 
 3,098.8 
 
 36,437.9 
 
 43,330.7 
 
 82,867.5 
 
 1891 
 
 3,002.2 
 
 37,990.1 
 
 48,745.0 
 
 89,737.7 
 
 1892 
 
 2,712.1 
 
 35,357.2 
 
 37,451-6 
 
 75,520.8 
 
 1893 
 
 3,168.5 
 
 33,521-5 
 
 38,090.5 
 
 74,780.6 
 
 1894 
 
 2,727.5 
 
 34,921.6 
 
 46,170.0 
 
 83,819.2 
 
 The exchanges of the clearing houses in the United States, 
 although far from comprehending the transactions of all the 
 banks, have several times been in excess of $50,000,000,000, 
 or more than the net annual earnings of the people. Clear- 
 ing houses have been established from year to year in the 
 smaller cities of the country, until there are in 1896 about 
 seventy-five as compared with forty in 1888, but the clear- 
 ings of the new institutions are not large enough to greatly 
 impair the value of the comparisons for the various years. 
 The total clearings for the year ending September 30, 1888, 
 were $48,750,886,813; for 1889, $54,494,754,586; for 1890, 
 $59,882,477,513; for 1891, $56,803,253,957; for 1892, $60,- 
 883,572,438 ; for 1893, $58,880,682,455 ; for 1894, $45,028,- 
 496,746; and for 1895, $5 I ,m, 591,928. The transactions 
 of the New York Clearing House have been carefully re- 
 corded since 1854 and the following figures show the pro- 
 gressive increase in representative years : 
 
THE ADVANTAGES OF A BANKING CURRENCY. 561 
 
 YEAR. 
 
 CLEARINGS. 
 
 BALANCES PAID IN MONEY. 
 
 PER CENT. OF 
 BALANCES TO 
 CLEARINGS. 
 
 1854 
 
 $5,750,455,987 
 
 $297,4I[,494 
 
 5-2 
 
 1860 
 
 7,231,143,057 
 
 380,693,438 
 
 5-3 
 
 1865 
 
 26,032,384,342 
 
 ,035,765,108 
 
 4.0 
 
 1869 
 
 37,407,028,987 
 
 ,I2O,3l8,3O8 
 
 3-0 
 
 1870 
 
 27,804,539,406 
 
 ,036,484,822 
 
 3-7 
 
 i873 
 
 35,46l,O52,826 
 
 ,474,508,025 
 
 4.1 
 
 1876 
 
 21,597,274,247 
 
 ,295,O42,O29 
 
 5-9 
 
 1879 
 
 25,178,770,691 
 
 ,400,111,063 
 
 5.6 
 
 1880 
 
 37,182,128,621 
 
 ,516,538,631 
 
 4.1 
 
 1881 
 
 48,565,8l8,2I2 
 
 ,776,018,162 
 
 3-5 
 
 1885 
 
 25,250,791,440 
 
 ,295,355,252 
 
 5-1 
 
 1890 
 
 37,66O,686,572 
 
 ,753,040,145 
 
 4-7 
 
 1891 
 
 34,053,698,770 
 
 ,584,635,500 
 
 4-6 
 
 1892 
 
 36,279,905,236 
 
 ,861,500,575 
 
 5.1 
 
 1893 
 
 34,421,380,870 
 
 ,696,207,176 
 
 4-9 
 
 1894 
 
 24,230,145,363 
 
 ,585,241,634 
 
 6.5 
 
 1895 
 
 28,264,379,126 
 
 ,80,574,349 
 
 6.7 
 
 Several investigations during the last two decades have 
 shown that more than ninety per cent, of the transactions 
 through banks at the leading commercial cities are con- 
 cluded by means of checks, bills of exchange and other 
 instruments of credit, exclusive of bank-notes. The last 
 investigation of this sort in the United States was made by 
 the Comptroller of the Currency in 1892 and called upon na- 
 tional banks to separate the various items of their receipts on 
 September i5th of that year. The result obtained was as 
 follows : 
 
 LOCATION OF BANKS. 
 
 NO. OF 
 BANKS. 
 
 TOTAL RECEIPTS. 
 
 / 
 
 COIN. 
 
 PER CENT 
 PAPER 
 CURRENCY. 
 
 CHECKS, 
 DRAFTS, 
 ETC. 
 
 New York, 
 Other reserve cities, 
 Banks elsewhere, 
 
 United States, 
 
 48 
 28l 
 
 3,144 
 
 $130,976,963 
 116,514,324 
 83,713,926 
 
 O.II 
 
 0.82 
 3 .80 
 
 7-53 
 6.44 
 11.29 
 
 92.36 
 92.74 
 84.91 
 
 3,473 
 
 $331,205,213 
 
 1.29 
 
 8.10 
 
 90.61 
 
 While the bewildering aggregates of clearing operations 
 swell from year to year with the increase in business trans- 
 actions, an opposite effect has been produced upon the clear- 
 36 
 
562 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ing house records by the creation of stock exchange clearing 
 houses for the settlement of transactions in negotiable secur- 
 ities. The first official stock exchange clearing house was 
 founded at Frankfort in May, 1867, and it was found that 
 settlements involving $250,000,000 in securities could be 
 made by the payment of $5, 000,000 in currency. The pri- 
 mary feature of the stock exchange clearing houses is the 
 setting off of sales of stock by certain brokers against pur- 
 chases of the same stock by other brokers, so that the final 
 balances only are delivered by the clearing houses. Several 
 of the stock exchange clearing houses go further, however, 
 and settle the entire money balances between the brokers. 
 The Berlin exchange adopted the clearing system in 1869, 
 the Hamburg exchange in 1870, that of Vienna in 1873, and 
 that of London in 1876. The peculiar organization of the 
 Paris Bourse has prevented the formation of a regular stock 
 clearing house in Paris, but the same results are obtained by 
 a voluntary comparison of accounts. The system was not 
 introduced at New York until 1892, when a committee was 
 appointed to investigate and report and their report was 
 promptly adopted. The new plan went into operation on 
 May 16, 1892, and has worked with remarkable success. 1 
 The necessity of keeping bank deposits to cover the full pay- 
 ment for stock has been brought to an end and accounts are 
 settled by the payment of the balances. 
 
 The effect of the withdrawal of so much of the stock 
 exchange business from the New York Clearing House has 
 been marked. Comptroller Knox calculated in 1881 that 
 $113,000,000 of the sum of $141,000,000 received by the 
 State and national banks of New York City on a given day 
 was cleared by twenty-three banks having relations with 
 brokers. An examination of their clearings disclosed the 
 fact that $80,000,000 was in certified checks, of which it was 
 estimated that 90 per cent., or $72,000,000, represented stock 
 transactions. The Comptroller admitted that it was impos- 
 sible to determine what proportion of these transactions were 
 
 1 Alexander D. Noyes in Political Science Quarterly, June, 1893, 
 VIII., 260. 
 
THE ADVANTAGES OF A BANKING CURRENCY. 563 
 
 speculative and what proportion for investment, but he com- 
 puted that about three-sevenths of the whole receipts of the 
 New York banks represented speculative transactions on the 
 Stock Exchange. The falling off in clearings since 1892 has 
 not been nearly so great as this, and the brokers still make 
 large incidental use of the banks, but the establishment of 
 the Stock Exchange Clearing House has introduced a new 
 factor into financial transactions which has to be considered 
 in computing their changes in volume. The record of the 
 operations of three years through the New York Stock Ex- 
 change Clearing House is as follows : 
 
 TOTAL VALUE. 
 
 From May 14, 1892, to May I, 1893. 
 225,325,800 $15,425,648,200 | $4,484,600,000 
 
 From May I, 1893, to May i, 1894. 
 219,974,200 | $13,067,400,000 [ 4,450,880,000 
 
 From May I, 1894, to May I, 1895. 
 186,192,500 | $12,278,700,000 | 4,363,700,000 
 
 II. What has gone before is the best proof of the close 
 relation of the currency to business transactions and that 
 currency should be the hand-maid of commerce rather than 
 the instrument of public power. A government paper cur- 
 rency has rarely been issued to promote the convenience of 
 commerce and has seldom contributed to that end. The 
 success and convenience of paper credit in balancing busi- 
 ness transactions has led in many minds to a false analogy 
 between the evidences of such credit and stamped pieces of 
 paper, issued by governments in discharge of public obliga- 
 tions. Governments have even gone further and claimed 
 that the power to issue paper pledges for general circulation, 
 payable to bearer on demand, was an attribute of sovereignty 
 and could not be lawfully assumed by a citizen or a corpora- 
 tion. 1 But this is not the true theory of currency. Experi- 
 
 1 The determination of the legal question is now largely a matter of 
 positive law, but it was admitted in England that at common law the 
 
564 HISTORY OF MODERN BANKS OF ISSUE. 
 
 ence, as well as theory, have proved that government paper 
 money is essentially different in character from banking 
 paper and opens a Pandora's box of evil for every nation 
 which issues it. 
 
 The difference between government paper currency and 
 bank-notes is not one of experience or accident merely ; it is 
 a difference which is fundamental. Banking institutions are 
 subject to the law ; the state is the power which makes the 
 law. Bank paper is based upon business transactions and 
 is limited by their demands ; government paper is based 
 upon the will of the state and is limited only by its neces- 
 sities. The almost invariable rule of government paper 
 issues is that one begets another, until the entire volume 
 exceeds the legitimate demands of business, upsets values, 
 and goes beyond the reach of restoration to the metallic 
 standard. A government is not only not under no restraint 
 of law when tempted to pass the limits of safety in its paper 
 issues, but there are no natural and automatic limits fixed 
 by the conditions of the note issues, as in the case of banks. 
 A banking currency, when not disturbed by the public au- 
 thority, except to enforce uniformity, safety, and converti- 
 bility with coin, is automatically responsive to the demands 
 of business. When business is active such a currency is 
 expansive in proportion to its needs ; when business slack- 
 ens the notes return to their issuers for redemption, the 
 volume of paper money is reduced, and the parity of coin 
 and paper is constantly maintained. 
 
 The evils of government interference with the natural 
 
 power to issue bank-notes was unrestricted, and in France the power 
 was freely used until after the creation of the Bank of France. The 
 power of the government, according to the soundest modern theories, 
 should be limited to giving an official certificate of the weight and 
 fineness of bullion by fixing a standard coin as the unit ; and the 
 failure in the long run to accomplish anything else was illustrated in 
 ancient times by the changes in prices which followed the use of 
 "the power of sovereignty " to debase the value of the coins, and has 
 been illustrated in modern times by the similar changes which have 
 followed the use of the same power to give value to legal-tender paper 
 money. 
 
THE ADVANTAGES OF A BANKING CURRENCY. 565 
 
 laws of a banking currency are second only to the evils of 
 direct issues of government paper money. The very sol- 
 vency and credit which sound banks have attained have 
 been turned against them when they have been seized upon 
 to supply the necessities of governments. This was the case 
 in the infancy of modern banking, when ' ' time and experi- 
 ence," in the language of Cantillon, taught the Venetians 
 that the over- issue of notes for the purposes of war destroyed 
 the parity of coin and paper, upset prices, and diminished 
 the revenue of the republic. 1 It was the case in France, 
 when Necker wrecked the Caisse d' Escompte by the advances 
 which he demanded from it. It was the case in England, 
 when Pitt pumped almost dry the reservoirs of the Bank of 
 England to carry on the Napoleonic wars. It was the case 
 in France again, when Napoleon, at the summit of his glory 
 after Austerlitz, returned to Paris to find the Bank of France 
 compromised by advances to the State. It has been more 
 recently the case in Italy, where loans to public men have 
 been governed by political motives rather than the sound 
 rules of commercial transactions. It has been the case also 
 in Spain, where the absorption of the note issues of the Bank 
 of Spain in loans to the government has crippled commerce 
 and flooded the country with a depreciated paper currency. 
 The volume of bank currency in these cases has become no 
 longer responsive to the needs of commerce, but the measure 
 of the hard necessities of the state. Under such circum- 
 stances, as M. Clement Juglar remarks of the increase in the 
 Bank of England circulation during the Napoleonic wars, 
 " We are no longer in the presence of a real credit circula- 
 tion, but of advances which represent no commercial 
 operation ; which explains how in more recent times the 
 movements of circulation, released from this pressure, are 
 no longer the same and are obedient to other influences." 
 
 The advantage which banks enjoy over the public authori- 
 ties in controlling the monetary circulation is due to their 
 banking powers. These powers grow out of the connection be- 
 
 1 Essai sur le Commerce^ 411-12. 
 5 Des Crises Commentates, 219. 
 
566 HISTORY OF MODERN BANKS OF ISSUE. 
 
 tween the volume of the currency and commercial movements, 
 but they are exercised by peculiar methods which are be- 
 yond the reach of the most skilful and prudent public official. 
 It is the power to push the interest rate up or down which 
 has been proven to be the regulator at once of the foreign 
 exchanges and of the domestic supply of currency and loan- 
 able capital. 1 No such automatic regulator can act upon a 
 government paper currency, because the government does 
 not do a banking business. The state is not a money lender 
 nor a receiver of deposits payable on demand. It can neither 
 retain gold at home by raising the discount rate nor govern 
 the volume of its paper issues by business conditions. The 
 Secretary of the Treasury of the United States has sat help- 
 lessly in his chair, while the gold reserve has dwindled, 
 armed with no power to arrest the drain unless an enormous 
 surplus permitted the retention of redeemed notes in the 
 Treasury cash. He found himself without this resource in 
 the period of redundant currency which followed the crisis 
 of 1893. The result was an export of gold, under the relent- 
 less operation of Gresham's law, which the machinery of 
 the government was powerless to arrest. The mass of need- 
 less paper money issued under the Act of 1890 pressed stead- 
 ily upon the coin and expelled the surplus in the form of 
 gold. What the Treasury proved incompetent to do was ac- 
 complished in a measure in the summer of 1895 ^y a syndi- 
 cate of banking houses, because of their power to influence 
 the exchanges. 
 
 III. While much which has preceded is applicable to the 
 banking powers possessed by banks of discount and deposit, 
 without the power of issuing circulating notes, there remains 
 to be defined a peculiar advantage of banking which cannot 
 be obtained without the power of note issue. This advan- 
 tage lies in the introduction of banking methods into a 
 country in which they have not attained full development. 
 A banking currency paves the way for deposit banking. It 
 is much easier to found a profitable bank of issue than a 
 
 1 I 7 idep. 17. 
 
THE ADVANTAGES OF A BANKING CURRENCY. 567 
 
 bank of deposit, for notes can be quickly put out, based upon 
 capital and the commercial paper offered for discount ; but 
 deposits come more slowly by the voluntary act of deposit- 
 ors. Deposit banking is still in its infancy outside Great 
 Britain, Canada, and the United States, as a glance at the 
 relative deposits and note issues of the great Europern banks 
 plainly shows ; and even in the United States it has only 
 attained full development in the great commercial cities of 
 the North. The method in which note issues pave the way 
 for deposit banking is well described by Mr. Walter Bagehot 
 thus : 
 
 The way in which the issue of notes by a banker prepares the 
 way for the deposit of money with him is very plain. When a pri- 
 vate person begins to possess a great heap of bank-notes, it will soon 
 strike him that he is trusting the banker very much, and that in re- 
 turn he is getting nothing. He runs the risk of loss and robbery just 
 as if he were hoarding coin ; he would run no more risk by the fail- 
 ure of the bank if he made a deposit there, and he would be free from 
 the risk of keeping the cash. No doubt it takes time before even this 
 simple reasoning is understood by uneducated minds. So strong is 
 the wish of most people to see their money that they for some time 
 continue to hoard bank-notes ; for a long period a few do so : but in 
 the end common-sense conquers, the circulation of bank-notes de- 
 creases and the deposit of money with the banker increases. The 
 credit of the banker having been efficiently advertised by the note, 
 and accepted by the public, he lives on the credit so gained years after 
 the note issue itself has ceased to be very important to him. . . . 
 
 A system of note issues is therefore the best introduction to a large 
 system of deposit banking. As yet, historically, it is the only intro- 
 duction ; no nation as yet has arrived at a great system of deposit 
 banking without going first through the preliminary stage of note 
 issue ; and of such note issues the quickest and most efficient in this 
 way is one made by individuals resident in the district and conversant 
 with it. 1 
 
 In proof of the last assertion may be cited the banking 
 history of Scotland, where the issue of notes is now a trifling 
 part of the liabilities of the banks, but where the profits were 
 originally derived almost entirely from the circulation. The 
 Bank of Dundee, founded in 1763, had for twenty-five years 
 
 1 Lombard Street, Works, V., 59-61. 
 
568 HISTORY OF MODERN BANKS OF ISSUE. 
 
 no deposits whatever, but subsisted on the profits of its note 
 issues and some incidental remittance business. Nothing" 
 could better illustrate the graphic words of M. Juglar : 
 
 The power of creating bills has this great advantage, that it per- 
 mits a bank to be born ; and this is the important point for small 
 towns, far from great centres, where the channels of circulation of 
 the large banks fail to penetrate. These new promises to pay, added 
 to those of the state, give a new activity to exchanges and place a 
 new capital at the disposition of everyone ; and the rate of interest 
 tends to fall and even the intensity of crises is diminished. 1 
 
 A banking currency, therefore, forms the readiest means 
 of introducing the use of credit and stimulating the produc- 
 tion of commodities and the transfer of capital. A certain 
 volume of currency of some sort is absolutely essential to 
 the commercial life of a people. The supply varies with 
 commercial habits, and the demand is greatest where the 
 use of credit is least developed and large exchanges are 
 made by the methods of actual barter and cash payment. 
 Bankers, as Prof. MacLeod so happily says, are " dealers in 
 credit." Under a fully developed credit system, the buyer 
 of credits is content to draw checks against the credit trans- 
 ferred to his account, because those checks are readily ac- 
 cepted as a substitute for money. If checks are not readily 
 accepted and if money is lacking, purchases and sales of 
 credit are reduced and capital lies idle and unproductive. 
 Such is the situation of a new country, whose people have 
 neither become generally accustomed to deposit and credit 
 banking nor have the power to issue a credit currency be- 
 cause restrained by prohibitory laws. This poverty of the 
 means of carrying on transactions is a striking feature of 
 the condition of many parts of the Southern and Western 
 sections of the United States, and the remedy lies in an ex- 
 pansive currency which shall make exchange easier and 
 afford the buyer of credit an instrument which he can read- 
 ily use. The relative equipment of these States in banking- 
 
 1 Des Crises Commerciales, 183. 
 
THE ADVANTAGES OF A BANKING CURRENCY. 569 
 
 power in comparison with the better equipped States of the 
 Northeast is illustrated by the following figures : * 
 
 STATE. 
 
 BANKING 
 POWER PER 
 CAPITA. 
 
 STATE. 
 
 BANKING 
 POWER PER 
 CAPITA. 
 
 Rhode Island, 
 
 $377-55 
 
 South Dakota, 
 
 $21.83 
 
 Massachusetts, 
 New York, 
 
 328.02 
 298.74 
 
 Georgia, 
 South Carolina, 
 
 18.53 
 13.89 
 
 Connecticut, 
 
 279-35 
 
 Mississippi, 
 
 10.21 
 
 Pennsylvania, 
 
 II2.8I 
 
 North Carolina, 
 
 9.56 
 
 Illinois, 
 
 77.98 
 
 Alabama, 
 
 7-49 
 
 Minnesota, 
 
 65.38 
 
 Arkansas, 
 
 6.90 
 
 The peculiar advantage of a banking currency issued by 
 a network of local banks is in affording banking accommo- 
 dation to all parts of the country where the system prevails. 
 In this respect, if in no others, a system of local banks en- 
 joys an advantage over a great national bank in promoting 
 the development of industry and commerce. A government 
 paper currency does practically nothing to promote the 
 banking facilities of the people, and a single bank of issue 
 usually promotes the commerce of the capital where it is 
 located at the expense of the commerce of outlying sec- 
 tions. This was peculiarly the case in France before the 
 establishment of the independent departmental banks and it 
 became the case again after those banks were deprived of 
 the power of note issue. Banking in France was in the 
 primary stage of development, where note issues were essen- 
 
 1 These figures are taken from the Report of the Comptroller of the 
 Currency for 1895, p. 512, and include the aggregate capital, surplus, 
 undivided profits, and individual deposits of national banks on July 
 n, 1895, and of State, stock savings, and private banks and loan and 
 trust companies at date of latest reports. The average banking power 
 per capita for the United States is computed at $95.83. It is a com- 
 mon opinion, among those who have studied the subject, that this 
 poverty of banking power in the South has greatly stimulated the 
 demand there for a larger metallic circulation, and that laws provid- 
 ing better banking accommodation, by permitting the issue of circu- 
 lating notes upon general banking assets, would do much to diminish 
 this demand. 
 
570 HISTORY OF MODERN BANKS OF ISSUE. 
 
 tial to profitable banking, and the independent banks made 
 most of their profits by means of note issues and with but 
 trifling private deposits. 1 The promotion of the banking 
 facilities of the capital at the expense of other sections has 
 been the feature of all the great national banks of Europe, 
 at Vienna and Buda Pesth, at Berlin, at St. Petersburg, 
 and at Madrid, and the countries in which they are situ- 
 ated have lagged far behind England, Scotland, Switzerland, 
 the United States, and Canada in the development of their 
 industrial activity. 3 
 
 The power to establish branches has not proved a suffi- 
 cient substitute for the power to create independent banks 
 in the introduction of facilities for credit and in the expan- 
 sion of commercial operations, where the power of note 
 issue has been lodged in a single great institution. Manda- 
 tory legislation was required in France to compel the Bank 
 of France to establish branches in each department and as 
 late as 1865 only fifty-five branches had been created, or at 
 the rate of one for 700,000 inhabitants. 3 The essential de- 
 fect of branch banking of this sort is the system of bureau- 
 
 1 The aggregate circulation of the nine independent banks in 1847, 
 the last year before their suppression, was 90,100,000 francs ($18,- 
 000,000), while their deposits on current accounts were only 16,800,- 
 ooo), francs ($3,350,000.) 
 
 2 Mr. Bagehot cites the comparative history of the Bank of France 
 and the banks of Switzerland in proof of the assertion that " A single 
 monopolist issuer, like the Bank of France, works its way with diffi- 
 culty through a country, and advertises banking very slowly." The 
 note issues of the Bank of France in 1865 were equal to ^"112,000,000 
 and the deposits were only ^15,000,000. The Swiss banks, on the 
 other hand, showed note issues equal to ^761,000 and deposits of 
 ^4,709,000. The private deposits of the Bank of France had risen 
 on July n, 1895, to 426,390,693 francs and private deposits at the 
 branches were 62,873,753 francs, but they amounted together to less 
 than one-seventh of the circulation, which was 3,503,503,270 francs. 
 
 3 Scotland at that time had a branch bank for every 5100 of her 
 people, the equivalent of 137 times the banking facilities of France. 
 A like multiplication of banking facilities in the latter country would 
 require 10,000 branches of the Bank of France and the number of all 
 classes had risen in 1895 to only 259. 
 
THE ADVANTAGES OF A BANKING CURRENCY. 5/1 
 
 cracy under which it is usually conducted and the absence 
 of sympathy between local business interests and the direct- 
 ing authority at the head. 1 The effect of such a system also 
 in attracting deposits and solvent borrowers is very different 
 from that of a bank managed by men of whom something 
 is known in the locality. The first branches of the Bank of 
 France proved unprofitable, but the independent depart- 
 mental banks which followed them earned unusual divi- 
 dends. The reason for the difference is hinted at by M. 
 Horn as follows : 2 
 
 The countryman, prudent and timid in his nature, confides his 
 small savings willingly only to those whom he personally knows, 
 only to an association sprung from the heart of the local community, 
 only to a bank created and directed by men who have deep root in the 
 locality, only to institutions in which he, his relatives, or his friends 
 are directly interested. 
 
 Branch banking may, however, prove of great value in 
 promoting banking facilities if absolute monopoly of note 
 issues does not prevail at the centre of the system. The 
 competition of a few great banks, authorized to issue their 
 own notes through their branches, has proved more success- 
 ful, in equipping Scotland and Canada with facilities for 
 credit, than the system of smaller local banks, without the 
 power of issuing notes upon assets, has proved in the United 
 States. A system of strong central banks with numerous 
 branches means a much wider extension of banking facili- 
 ties than would be possible where each bank was indepen- 
 dent. It means not only the ready transfer of capital from 
 points where it is plentiful to points where it is lacking, but 
 it means that a community too small to support an indepen- 
 dent bank may enjoy the advantage of a branch. A single 
 official, possessing knowledge of local conditions, would pre- 
 side over a branch and take the place of president, cashier, 
 
 1 Even the slow progress of popular credit banks in France was at- 
 tributed to the system of centralization which governs her financial 
 policy, by the jury on social economy of the Paris Exposition of 1889. 
 Economic Sociale, par Leon Say ; Rapport General, 322. 
 
 2 La Liberte des Banques, 438. 
 
5/2 HISTORY OF MODERN BANKS OF ISSUE. 
 
 and board of directors of an independent local bank. A 
 small branch would involve no investment in an idle coin 
 reserve, for the funds of the branch would consist in the 
 notes of the parent bank, which would represent no expense 
 until they were issued. The system of branches has re- 
 sulted in Scotland and Canada in the ready transfer of the 
 savings of the agricultural sections to the manufacturing 
 cities, while the branches in the cities have stood ready to 
 furnish capital for the farming districts on the less frequent 
 occasions when it has been needed. The transfer of capital 
 in this way has been carried on to some extent in England 
 by the practice of rediscounting, but this prevents accurate 
 knowledge of many of the facts regarding the paper offered 
 for rediscount, which would be known to the central bank 
 under the branch system and involves elements of danger 
 readily understood by every banker. 1 
 
 IV. One of the essential conditions of a sound currency is 
 redemption in coin on demand. This is the touchstone and 
 proof of the equality of paper with coin and of the mainte- 
 nance of the standard of value. A banking currency is usu- 
 ally subject by law to the condition of coin redemption ; a 
 government paper currency is rarely subject to such a con- 
 dition. Governments seldom resort to the issue of paper 
 money until their lack of credit impairs their other resources. 
 Their issues are then expanded to the point where they be- 
 come redundant, even after they have driven out all other 
 currency and filled its place. An issue too small to become 
 redundant, and which was maintained steadily at par with 
 the metallic standard, would be too small for the purposes 
 which usually control the action of governments in resorting 
 to paper currency. 
 
 Even a limited issue of paper is maintained at par by a 
 government with much greater difficulty than by well regu- 
 lated banks. The reason is fundamental. Governments 
 have no quick assets. The advocates, of government paper 
 
 "The abuses connected with rediscount by fictitious bills are ef- 
 fectually prevented, and the bank can more readily regulate its ad- 
 vances in accordance with its means." Gilbart, II., 210. 
 
THE ADVANTAGES OF A BANKING CURRENCY. 573 
 
 money are fond of declaring that a national currency is 
 based on the aggregate wealth and credit of the entire na- 
 tion. But they miss the purpose of currency and of banks 
 of issue. It is not wealth in the abstract which currency 
 must represent, but quickly negotiable wealth. 1 The essen- 
 tial question in regard to government paper money is not 
 whether government and people have wealth, but whether 
 the government is equipped with negotiable assets to do a 
 banking business. Mirabeau missed this distinction, in 
 tirging the issue of the assignats upon the French Assembly, 
 when he declared : 
 
 They represent real property, the most secure of all possessions, 
 the laud on which we tread. Why is a metallic circulation solid? 
 Because it is based upon subjects of real and durable value, as the 
 land which is directly or indirectly the source of all wealth. Paper 
 money, we are told, will become superabundant ; it will drive the 
 metallic out of circulation. Of what paper do you speak ? If of a 
 paper without a solid basis, undoubtedly ; if of one based on the firm 
 foundation of landed property, never. 
 
 It was a plausible argument and if it was a sound one the 
 French paper money should not have depreciated below par, 
 because it did not for a long time exceed in volume the 
 value of the national domains which were pledged as its 
 security. But the assignats fell until they were worth one- 
 thousandth part of their face value. The government then 
 put the theory of landed security to a closer test by issuing 
 territorial mandates, redeemable in land on demand, but they 
 fell also to one-fortieth part of their face value and few hold- 
 ers were disposed to take the scattered domains of the state 
 as the equivalent of current money. 2 The distinction be- 
 
 1 " A relative of mine, C. Poulett Thomson, afterwards Lord Syden- 
 ham, many years since, used to say to me that nothing was easier to 
 conduct than the business of a banker, if he would only learn the 
 difference between a mortgage and a bill of exchange." Hankey, 25. 
 
 2 As Blanqui tersely puts it, in comparing the assignats with the 
 notes of the Bank of England during the first years of suspension, 
 " The one sort, exchangeable for land, were worth nothing ; the 
 others, although deprived of their specie guarantee, preserved their 
 nominal value." Histoire d' Economic Politique en Europe, II., 176. 
 
574 HISTORY OF MODE KM BANKS OF ISSUE. 
 
 tween such security and the security of institutions doing a 
 sound banking business, while not always grasped by those 
 unfamiliar with the subject, is of supreme importance. 
 Banking, in the technical sense, consists in dealing in com- 
 mercial paper for short terms. Few governments have any 
 quick assets beyond the actual coin in their vaults', while a 
 well-managed bank has assets, in the form of commercial 
 paper and securities, in excess of all its liabilities, both to 
 note-holders and depositors, of which all but a small per- 
 centage can be quickly turned into cash. The government, 
 beyond its actual cash in hand, has only two corresponding 
 resources the pledge of public property and the power of 
 taxation. Custom houses and highways, field guns and 
 ironclads, are not the sort of assets which can be quickly 
 marketed or put in pawn to borrow money, and the power 
 of taxation is even less efficient as security for a banking 
 business. It is in the nature of an assessment upon the 
 stockholders, which is a worthless resource during solvency 
 and is resorted to only for liquidation after suspension of 
 payments. 1 
 
 The peculiar strength of a banking currency lies in the 
 enormous mass of quick assets behind its demand liabilities. 
 The United States Treasury, even if all its financial opera- 
 tions of receipt and disbursement are viewed as banking 
 transactions, handles less than one-fifteenth of the average 
 quick assets of the banks of the country and an infinitely 
 smaller proportion of their gross receipts during the year. 
 The largest balance in the Treasury in recent years was 
 $778,604,339 on June 30, 1892. The aggregate capital, sur- 
 plus, undivided profits, and individual deposits of national 
 and State banks, loan and trust companies, and savings and 
 
 1 " The Treasury is like a bank, in which the stockholders are liable 
 for all its debts, and have bound themselves to put in ample cash 
 capital whenever it is wanted, but in which no cash capital has yet 
 been called up. The Treasury has no bills receivable, no promises of 
 other people to pay it gold coming due from day to day." Charles 
 C. Jackson, " Why Legal Tender Notes Must Go," Sound Currency, 
 Vol. III., No. 2, p. 3. 
 
THE ADVANTAGES OF A BANKING CURRENCY. 575 
 
 private banks in the United States, according to reports on 
 or about that date, was $6,390,094,128 and the same items 
 about June 30, 1895, were $6,703,544,084. The capital of 
 the banking institutions of the country, therefore, was not 
 less than eight times the cash assets of the Treasury of the 
 United States and was much less restricted to special objects. 
 For, of government funds on June 30, 1892, $141,325,339 
 was set aside for the redemption of gold certificates and 
 $326,880,803 for the redemption of silver certificates, leaving 
 only about $310,000,000 to meet all other demands both for 
 daily transactions and for the protection of circulating legal 
 tender notes. A portion of the funds of the banks are set 
 aside, for special purposes, but in no such proportion as those 
 of the Treasury. 
 
 Turning to the actual flow of money through the Treasury 
 and through the banks, the proportion is still greater in 
 favor of the banks. The gross receipts from all sources of 
 public revenues, including the postal service, during the 
 fiscal year 1895 were $390,373,203, or a little more than 
 $1,000,000 per day. The gross receipts of the banks can 
 only be partially ascertained, but the transactions through 
 the clearing houses alone during the year ending September 
 30, 1895, were $51,111,591,928, or an average of nearly 
 $140,000,000 per day. In the stream of money pouring 
 through their hands, available to meet current demands, the 
 banks of the United States are, therefore, nearly one hun- 
 dred and forty times stronger than the Treasury. 
 
LIST OF AUTHORITIES 
 
 CONSULTED IN THE PREPARATION OF THIS WORK. 
 
 The following are the full titles of the leading financial and historical 
 authorities consulted in the preparation of this work and referred to in the 
 text. Certain public documents referred to for particular facts, and fully 
 described where cited, are not given here. The works are cited in the text by 
 the name of the author only, where only one of his works has been used, 
 and with the name of the work in addition where two or more works of the 
 same author have been used ; 
 
 r- ADAMS, HENRY. History of the United States of America. 9 vols. New 
 
 York, 1889-91. 
 ALLARD, ALPHONSE. La Crise Agricole el Mone'taire. Brussels and Paris, 
 
 1895. 
 
 ANSIAUX, MAURICE. La Question Mone'taire en Belgique. Liege, 1892. 
 
 ARNAUNE, AUGUST. La Monnaie, le Credit et le Change. Paris, 1894. 
 
 p- BAGEHOT, WALTER. Complete Works. Edited by FORREST MORGAN. 
 
 5 vols. Hartford, 1889. 
 - Bankers', Insurance Managers', and Agents' Magazine. London, published 
 
 monthly. 
 
 BANQUE DE FRANCE. Assemble Ge'ntrale des Actionnaires de la Banque de 
 France du ji Janvier, 1895. Sous la Presidence de M. J. MAGNIN, 
 Gouverneur. Paris, 1895. 
 BLANQUI. Histoire de F Economic Politiqite en Europe dcpuis les Anciens, 
 
 jusqiia Nos Jours. 2 vols. Paris, 1860. 
 ~\ BOLLES, ALBERT S. The Financial History of the United States. 3 vols. 
 
 New York, 1884-86. 
 
 BOISSEVAIN, G. M. La Question Mone'taire. Paris, 1895. 
 BRECKENRIDGE, ROELIFF MORTON. The Canadian Banking System, i8i~- 
 iSqo. Publications of the Amer. Economic Association, X., 1-3. New 
 York, 1894. 
 
 Bulletin de Statislique et Legislation Compare's ( Official monthly publication 
 of the French Government). Paris. 
 
 577 
 
578 LIS T OF A UTHORITIES. 
 
 Bulletin, Russe de Statistique Financier e et de Legislation. St. Petersburg. 
 
 Printed monthly at the Ministry of Finance. 
 CANTILLON, RICHARD. Essai stir la Nature du Commerce en Generate. 
 
 London, 1755 ; reprinted for Harvard University, 1892. 
 Century Magazine. "Cheap Money Experiments in Past and Present 
 
 Times." New York, 1892. 
 
 CLEWS, HENRY. Twenty-eight Years in Wall Street. New York, iSSS. 
 COOLEY, THOMAS M. Michigan : A History of Governments. Boston, 1885. 
 CORNWELL, WILLIAM C. 7' he Currency and the Banking Law of the 
 
 Dominion of Canada. New York and London, 1895. 
 COURCELLE-SENEUIL, J. G. Traile" Theorique et Pratique des Ope'rations 
 
 de Banque. Paris, 1876. 
 
 COURTOIS, ALPHONSE, fils. Histoire des Banques en France. Paris, 1881. 
 C UNNINGH AM , W. The Growth of English Industry and Commerce. 2 vols. 
 
 Cambridge, Eng., 1892. 
 
 DE CYON, E. M. Witte et les Finances Russes. Paris, 1895. 
 DENIS, HECTOR. La Depression Economique et Sociale et r Histoire dc-s 
 
 Prix. Brussels, 1895. 
 DILLON, MALCOLM. The History and Development of Banking in Ireland. 
 
 from, the Earliest Times to the Present Day. Dublin, 1889. 
 DUNBAR, CHARLES F. Chapters on the Theory and History of Banking. 
 
 New York and London, 1893. 
 DURAND, Louis. Le Credit Agricole en France et a V Etranger. Paris, 
 
 1891. 
 Economic Journal. The Journal of the British Economic Association. 
 
 Published quarterly in London, beginning 1891. 
 FELCH, ALPHEUS. Early Banks and Banking in Michigan. Sen. Ex. 
 
 Doc. 38, 52d Cong., 2d Sess. 
 
 GlDE, CHARLES. Principes d' Economic Politique. Paris, 1894. 
 GIFFEN, ROBERT. Essays in Finance. 2 vols. New York, 1886. 
 GlLBART, J. W. The History, Principles, and Practice of Banking. 
 
 Revised by A. S. MICHIE. 2 vols. London, 1893. 
 GOSHEN, GEORGE J. The Theory of the Foreign Exchanges. London, 
 
 1895. 
 HALLAM, HENRY. View of the State of Europe during the Middle Ages. 
 
 2 vols. New York, 1880. 
 HAMILTON, ALEXANDER. Works of. 9 vols. New York and London, 
 
 1885. 
 HANKEY, THOMSON. The Principles of Banking, its Utility and Economy / 
 
 with Remarks on the Working and Management of the Bank of England. 
 
 London, 1887. 
 
 HAUPT, OTTOMAR. The Monetary Question in i8g2. London, 1892. 
 HORN, J. E. La Libertd des Banques. Paris, 1866. 
 JANNET, CLAUDIO. Le Capital, la Speculation et la Finance au Dix-neuvieme 
 
 Siecle. Paris, 1892. 
 
LIS T OF A UTHORITIES. 5 79 
 
 _ JEVONS, W. STANLEY. Investigations in Currency and Finance. London, 
 
 1884. 
 JUGLAR, CLEMENT. Des Crises Commer dales et de Leur Retour Periodique 
 
 en France, en Angleterre et aux Etats-Unis. Paris, 1889. 
 KENT, JAMES. Commentaries on American Law. Thirteenth edition. 
 
 Edited by CHARLES M. BARNES. 4 vols. Boston, 1884. 
 
 KlNLEY, DAVID. The History, Organization and Influence of the Indepen- 
 
 dent Treasury of the United States. New York, 1893. 
 
 KNOX, JOHN JAY. United States Notes. New York, 1884. 
 LAVELEYE, EMILE DE. Elements d' Economic Politiqtie. Paris, 1892. 
 LEROY-BEAULIEU, PAUL. Traitt de la Science des Finances. Fifth edition. 
 
 2 vols. Paris, 1892. 
 LEVI, LEONE. The History of British Commerce and of the Economic 
 
 Progress of the British Nation, 1763-1878. London, 1880. 
 LEVY, RAPHAEL-GEORGES. Melanges Financiers. Paris, 1894. 
 Lois et Statuts qui Re'gissent la Banque de France. Paris, 1887. 
 MACAULAY, THOMAS BABINGTON. History of England. 
 ^- MACLEOD, HENRY DUNNING. The Elements of Banking. London, 1891. 
 
 The Theory and Practice of Banking. London, 1892. 
 
 The Theory of Credit. 2 vols. London, 1891-94. 
 
 MCCARTHY, JUSTIN. A History of Our Own Times, from the Accession of 
 Queen Victoria to the General Election of 1880. 2 vols. New York, 
 1881. 
 - McCuLLOCH, HUGH. Men and Measures of Half a Century. New York, 
 
 1889. 
 
 ^ McMASTER, JOHN BACH. A History of the People of the United States, 
 from the Revolution to the Civil War. 4 vols. (to be completed in 
 6 vols.). New York, 1885-95. 
 MILL, JOHN STUART. Principles of Political Economy, with Some of Their 
 
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 1895. 
 NEYMARCK, ALFRED. Du Renouvellement du Privilege de la Banque de 
 
 France. Paris, 1885. 
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 PALGRAVE, R. H. INGLIS. Dictionary of Political Economy. London, 1894. 
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5 So LIST OF A UTHORITIES. 
 
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 >~1__WHITE, HORACE. Money and Banking. New York, 1895. 
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INDEX. 
 
 (The names of important banks will be found under the distinctive 
 part of the name rather than under the title " Bank.") 
 
 Accommodation bills, 468. 
 Africa, South, banking in, 448- 
 
 50. 
 Alabama, experiments with State 
 
 banking, 332-34. 
 Algeria, Bank of, 451. 
 Amsterdam, Bank of, origin, 259 ; 
 
 method of redemption, 260; 
 
 failure, 261 ; failure to prevent 
 
 credit crisis, 468. 
 
 Arbitrage, contributes to settle- 
 ment of French war indemnity, 
 
 66. 
 Argentine Republic, banking in, 
 
 420-22 ; speculation before 1890, 
 
 519. 
 
 Assets, necessity that they be 
 quickly negotiable, 13-15 ; in- 
 efficiency of government assets, 
 
 574-75- 
 
 Assignats, issue and abandon- 
 ment in France, 49 ; Mirabeau's 
 misconception, 573. 
 
 Atkinson, Edward, opinion that 
 certificates of deposit are not 
 subject to federal tax, 365, 
 note. 
 
 Australia, banking system of, or- 
 ganization, 443 ; expansion of 
 loans on land, 444-45 ; clouds 
 in the future, 445-46 ; with- 
 drawal of British deposits, 522 ; 
 crisis of 1893, 551-53. 
 
 Austria, National Bank of, foun- 
 dation, 214; effect of specie 
 suspension, 216 ; attempt to re- 
 sume, 218 ; regulations govern- 
 ing circulation, 220 ; converted 
 into Austrio-Hungarian Bank, 
 223 ; loan son securities in 1873, 
 
 513.. 
 
 Austria, struggles with paper 
 money, 209-213 ; efforts to re- 
 sume specie payments, 216-18 ; 
 union with Hungary, 222 ; 
 adoption of gold standard, 225- 
 27; retirement of pa per money, 
 228 ; delay in resumption, 229 ; 
 development of deposit certifi- 
 cates, 234. 
 
 Austro-Hungarian Bank, formed 
 from National Bank of Austria, 
 223 ; rules governing circula- 
 tion, 223-24 ; required to estab- 
 lish gold payments, 227 ; man- 
 agement of the bank, 231 ; rate 
 of discount, 232 ; proposed re- 
 charter, 233. 
 
 Ayr Bank, based upon landed 
 'security, 142 ; failure, 144. 
 
 B 
 
 Bank Act of 1844, approved by 
 Sir Robert Peel, 120; purpose 
 of the limit on authorized cir- 
 culation, 121 ; operation of the 
 act in 1847, 124 ; failure to con- 
 
 583 
 
584 
 
 INDEX. 
 
 tract circulation, 126 ; effect 
 upon use of credit instruments, 
 128 ; intensifies crisis of 1847, 
 488 ; beneficial effects of sus- 
 pension, 490 ; suspension in 
 l8 57> 497 ; suspension in 1866, 
 5 5-7 ; proposed suspension in 
 1890, 520. 
 
 Banking currency, theory and 
 purpose, 2-3 ; should not be im- 
 prisoned within fixed limits, 6 ; 
 does not add to existing capital, 
 8-10 ; necessity of liquid assets, 
 14 ; volume should be regulated 
 by foreign exchanges, 16-17 
 growth of commercial transac- 
 tions, 554 ; economy, 556 ; evils 
 of government interference, 
 564-65 ; promotes deposit bank- 
 ing* 567-69; advantages over 
 government paper money, 572- 
 
 75-. 
 
 Banking, origin in Italy, 21 ; 
 deposit banking established by 
 the Jews, 23 ; modern system 
 of note issue not developed 
 until seventeenth century, 24 ; 
 affected by economic crises, 
 457-59; expansion in recent 
 years, 556 ; clearing house sta- 
 tistics, 557-61. 
 
 "Banking Principle," distingu- 
 ished from currency principle, 7. 
 
 Bank money, used by Bank of 
 Hamburg, 195 ; by Bank of 
 Amsterdam, 259. 
 
 Bank-notes, different from money, 
 2 ; represent commodities in 
 exchange, 3 ; not the cause 
 of commercial crises, 12 ; should 
 be redeemable in coin, 13 ; ad- 
 vantages over coin in Scotland, 
 J 57 j preferred to coin in bank 
 failures, 165 ; promote banking 
 in Prussia, 184-85 ; not the 
 cause of crises, 465 ; connection 
 with crisis of 1810, 471. 
 
 Bank, origin of the word, 22. 
 
 Banque du Peuple, of Montreal, 
 foundation, 390; failure, 407. 
 
 Baring Brothers and Co., assist 
 Bank of England in 1839, 486 ; 
 buy French securities in 1847, 
 491 ; investments in Argentine 
 Republic, 518; failure in 1890, 
 
 520-22 ; effect of failure in 
 United States, 524. 
 
 Bavaria, provision for new bank, 
 204. 
 
 Belgium, proposes Latin Union, 
 67, 255 ; foundation of the So- 
 ciete Generate, 251 ; failure of 
 banking on landed security, 
 252 ; The National Bank, 253 ; 
 experience in Franco-Prussian 
 war, 254 ; organization of Na- 
 tional Bank, 258. 
 
 Biddle, Nicholas, becomes Pres- 
 ident of Bank of the United 
 States, 302 ; opposes bringing 
 the bank into politics, 304 ; dies 
 insolvent, 307 ; speculation in 
 cotton, 484. 
 
 Bills of exchange, useful to 
 Church of Rome, 24 ; early use, 
 
 555- 
 
 Black Friday, in England, 505. 
 
 Bland- Allison Act, 373 ; causes 
 withdrawal of foreign capital, 
 526, note ; offered as substitute 
 for Sherman law, 541. 
 
 Bolivia, banking in, 426. 
 
 Bonaparte, Napoleon, decree for 
 a national bank, 51 ; reorgan- 
 izes Bank of France, 52 ; effects 
 of abdication, 53 ; effect of Ber- 
 lin decree on trade, 470 ; dis- 
 asters in Russia, 472. 
 
 Bonds, issues of 1894, 544; syn- 
 dicate contract of 1895, 546-49 ; 
 issue of 1896, 550. 
 
 Boston, banks of, early institu- 
 tions, 312 ; competition of coun- 
 try banks, 317 ; Suffolk re- 
 demption system, 318 ; conduct 
 in 1861, 342. 
 
 Bourse of Paris, 44, note. 
 
 Branch banking. Scotch banks 
 in England, 154 ; benefits to 
 Scotch industry, 160 ; success 
 in Canada, 409-11 ; not a sub- 
 stitute for independent banks, 
 570 ; advantages where there 
 are strong competing banks, 
 571-72. 
 
 Branch drafts, issued by Bank of 
 the United States, 301. 
 
 Brazil, banks of, 418-20. 
 
 British India, banking in, 433- 
 37- 
 
INDEX. 
 
 585 
 
 British Linen Company, 142. 
 Brunswick, Bank of, resists 
 
 Imperial banking policy, 203. 
 Bulgaria, National Bank of, 284. 
 Bullion Report, results from a 
 
 motion by Mr. Horner, 104 ; 
 
 the facts proved, 106 ; features 
 
 of the report, 107-9. 
 Burr, Aaron, secures charter of 
 
 Manhattan Company, 322. 
 Business men, failure to grasp 
 
 theory of currency, 105. 
 
 Caisse d^ Escompte du Com- 
 merce, established in France, 
 46 ; embarrassed by demands 
 of Caloune and Necker, 48 ; re- 
 established in 1797, 50; ab- 
 sorbed by Bank of France, 52. 
 
 Call loans, not available in a 
 crisis, 14. 
 
 Calonne, diverts Caisse d'Es- 
 compte to public uses, 48. 
 
 Cambodia, banking in, 450. 
 
 Canadian banking, early his- 
 tory, 387-92 ; proposals for 
 secured circulation, 393 ; mania 
 for free banking, 394 ; issue of 
 Dominion notes, 395 ; efforts 
 for secured circulation, 396 ; 
 extension of charters in 1870, 
 397; advantages of recent legis- 
 lation, 399 ; security of note 
 issues, 399-400 ; elasticity, 401- 
 2 ; redemption agencies, 403 ; 
 methods of examination, 404- 
 5 ; failures, 406-7 ; reserves, 
 408 ; large capital and branches, 
 409-11. 
 
 Canals, development in Eng- 
 land, 468; Erie Canal, 480; 
 Suez Canal, 510. 
 
 Capital, not increased by note 
 issues, 8-10 ; regulated by law 
 of supply and demand, 19 ; ac- 
 cumulation after a crisis, 456 ; 
 sinking in unproductive enter- 
 prises, 461 ; effect of crises upon 
 distribution, 463-64 ; with- 
 drawal from United States in 
 1893, 526. 
 
 Carlisle, . John G., proposes new 
 banking system, 380-82 ; pro- 
 
 poses changes in national bank- 
 ing act, 383-85. 
 
 Cash credits, creation by Royal 
 Bank of Scotland, 162 ; advan- 
 tages to Scotch industry, 164. 
 
 Central America, banks of, 428- 
 30- 
 
 Chamberlain, Hugh, plan for 
 Land Bank, 84. 
 
 Chase, Salmon P., conference 
 with New York bankers, 349 ; 
 interpretation of Act of 1861, 
 350 ; issues demand notes, 351- 
 52 ; relies upon loans, 355 ; 
 recommends banking system, 
 357 purpose to pay bank-notes 
 in specie, 361 ; recommends 
 taxation of state notes, 363. 
 
 Cheque Bank, established in 
 London, 128. 
 
 Chile, banking in, 416-18. 
 
 China, banking in, 441. 
 
 Circulation, regulations govern- 
 ing, Italy, 26, 28, 31, 32; 
 France, 58, 61 ; England, 93, 
 113, 116, 118, 119, 121, 123; 
 Scotland, 145, 159 ; Germany, 
 185, 189, 199-201 ; Austria, 210, 
 214, 220, 223, 224, 228 ; Russia, 
 245 ; First Bank of the United 
 States, 289 ; Second Bank of the 
 United States, 301 ; Massachu- 
 setts, 312-14; New York, 323, 
 326 ; Michigan, 328 ; Louisiana, 
 337 ; Wisconsin, 341 ; under na- 
 tional banking system, 359, 366, 
 369 ; Canada, 393, 394, 395, 397, 
 399-401, 408 ; Mexico, 415 ; 
 Chile, 416-18 ; Brazil, 418 ; Ar- 
 gentina, 421 ; Uruguay, 424 ; 
 Venezuela, 425 ; Colombia, 
 426; Ecuador, 426; Haiti, 427; 
 Salvador, 428 ; Nicaragua, 429 ; 
 Guatemala, 429 : Martinique 
 and Guadeloupe, 430 ; India, 
 434, 435 ; Japan, 437, 439 ; Chi- 
 na, 441 ; Persia, 442 ; Australia, 
 443 ; South Africa, 448 ; Co- 
 chin-China, 450 ; Algeria, 451 ; 
 Senegal, 451. 
 
 City of Glasgow Bank, suspen- 
 sion in 1857, 149 ; failure in 
 1878, 150; effect upon unlim- 
 ited liability, 151. 
 
 Clay, Henry, denies power of 
 
586 
 
 INDEX. 
 
 Congress to create a bank, 293 ; 
 supports second Bank of the 
 United States, 303-304 ; resolu- 
 tion to censure Jackson, 306. 
 
 Clearing houses, shrinkage of 
 transactions in 1894, 536 ; trans- 
 actions in London, 558 ; trans- 
 actions in United States, 560- 
 61. 
 
 Clearing House certificates, is- 
 sues in United States, 512 ; 
 effect of issues in 1884, 518 ; 
 issues in 1893, 537. 
 
 Cleveland, Grover, recommends 
 currency reform, 379 ; efforts to 
 repeal Sherman law, 534 ; sum- 
 mons extra session of Congress, 
 535 ; opposes silver compro- 
 mise, 542 ; recommends retire- 
 ment of legal tender notes, 545 ; 
 announces syndicate contract, 
 546 ; again recommends retire- 
 ment of legal tender notes, 
 
 549- 
 
 Cochin-China, banking system 
 of, 450. 
 
 Coin reserve, relation to note 
 issues, 13 ; the English system, 
 14 ; affected by withdrawals of 
 deposits, 15. 
 
 Colombia, banking in, 425. 
 
 Colonial Bank of London, dis- 
 tribution of circulation, 431. 
 
 Compagnie des Indes, develops 
 from the bank of John Law, 42 ; 
 fall of the stock and readjust- 
 ment of property, 45-46. 
 
 Connecticut, bank-notes affected 
 by depreciated foreign paper, 
 
 317. 
 Consols, origin, 92, note ; effect 
 
 of conversion in 1825, 475-76 ; 
 
 conversion in 1888, 518. 
 Consorzio, established in Italy in 
 
 1874, 29. 
 
 "Cornering" money, not prac- 
 ticable under free banking, 19. 
 Costa Rica, banking system, 430. 
 Cotton, subject of Biddle's spe- | 
 
 culations 484 ; new markets 
 
 opened in 1861, 501. 
 Council bills, sale by Indian 
 
 government in London, 436. 
 Crawford, William H., supports 
 
 Bank of the United States, 293. 
 
 Credit, gives monetary value to 
 gold as well as paper, 3 ; use of 
 checks, 10 ; seems to multiply 
 capital, 10 ; effect on crises, 
 454-55 J relation to note issues, 
 465 ; economy in use of coin, 
 556 ; proportion in receipts of 
 Bank of France, 560 ; propor- 
 tion in transactions in United 
 States, 561 ; promoted by a 
 banking currency, 568. 
 
 Crimean war, effect on com- 
 merce, 495, 498. 
 
 Crises, not caused by bank-note 
 issues, 12 ; distinctive classes, 
 435 J origin and development, 
 454 ; effect on merchandise 
 markets, 456 ; effect upon bank 
 accounts, 457-58; advantages 
 of liberal accommodation, 459- 
 60 ; sinking of capital, 461-62 ; 
 effect upon distribution of 
 wealth, 463 ; influence of bank 
 notes, 465 ; early history, 467 ; 
 crisis of 1783, 469-70; of 1810, 
 470-72 ; of 1814-19, 472-75 ; of 
 1825, 475-79; of 1837-39, 479- 
 87 ; of 1847, 487-91 ; of 1857, 
 492-99 ; of 1864-66, 499-508 ; of 
 i 8 73-79, 509-14; of 1882-84, 
 514-18 ; of 1890, 518-23 ; of 
 1893, 524-54. 
 
 Cuba, Spanish Bank of, 431. 
 
 Currency principle, distinguished 
 from banking principle, 7 ; 
 adopted by Sir Robert Peel, 
 120 ; ignores use of credit, 122 ; 
 failure in the crisis of 1844, 124 ; 
 connection with convertibility 
 of notes, 127 ; advocated in 
 Canada, 392-93. 
 
 D 
 
 Dallas, Alexander J., plan for a 
 national bank, 294. 
 
 Darien Company, competition 
 with Bank of Scotland, 139. 
 
 Delaware, banking in, 337. 
 
 Demand notes, issued by Secre- 
 tary Chase, 351 ; cause specie 
 suspension, 352. 
 
 Departmental banks in France, 
 foundation, 53 ; suspension of 
 specie payments, 57 ; fusion 
 
INDEX. 
 
 587 
 
 with Bank of France, 58 ; op- 
 erate without deposits, 570. 
 
 Deposits, how affected by crises, 
 458. 
 
 Discount rate, folly of attempt- 
 ing to maintain a uniform rate, 
 18 ; method of Bank of France, 
 71 ; system of rapid changes 
 adopted by Bank of England, 
 129 ; changes in leading banks, 
 136. 
 
 Dominion notes in Canada, issue 
 authorized, 395 ; required in 
 bank reserves, 397 ; may be de- 
 manded at banks, 401. 
 
 Dutch East India Company, bor- 
 rows from Bank of Amsterdam, 
 261. 
 
 Eckels, James H., modifies sys- 
 tem of bank examinations, 375 ; 
 recommends new basis for 
 banks of issue, 385. 
 
 Ecuador, banks of, 426. 
 
 Elasticity, fluctuations with the 
 seasons in Scotland, 156 ; essen- 
 tial benefit of a banking cur- 
 rency, 566. 
 
 England, Bank of, exchanges 
 gold for silver with Bank of 
 France, 67 ; conditions of crea- 
 tion, 78-81 ; Paterson's plan, 
 81 ; political dangers, 84 ; finan- 
 cial dangers, 86-90 ; monopoly 
 of note issues, 93 ; suspension 
 of specie payments. 95-98 ; ef- 
 fect of specie suspension, 101 ; 
 bullion report, 106-9; resolu- 
 tions of Mr. Vansittart, no; 
 resumption of cash payments, 
 114 ; monopoly of note issues 
 modified, 116; adoption of cur- 
 rency principle, 120; failure 
 of currency principle, 124 ; 
 changes in discount rate, 129 : 
 the "one reserve system," 131 ; 
 organization, 134 ; increase of 
 discounts in 1810, 471 ; policy 
 in the crisis of 1825, 477 ; issue 
 of \ notes, 478 ; supported by 
 the Barings in 1839, 486 ; sus- 
 pension of Bank Act in 1847, 
 490 ; suspension of Bank Act 
 
 in 1857, 497 5 suspension of 
 Bank Act in 1866, 505-7; dis- 
 trust of bank abroad, 508 ; well 
 equipped in 1875, 514 ; manage- 
 ment in crisis of 1890, 520-21. 
 
 England, economic position in 
 1697, 87 ; extension of interna- 
 tional banking, 414, note ; leg- 
 islation against stock jobbing, 
 467 ; accommodation bills, 468 ; 
 contraband trade with Ger- 
 many, 471 ; speculation after 
 fall of Napoleon, 473 ; scarcity 
 of cereals in 1818, 474 ; specu- 
 lation in 1825, 476; railway 
 extension, 488; absorption of 
 capital in 1857, 495 ; joint stock 
 companies in 1864, 502 ; distrust 
 of British credit abroad, 508 ; 
 crisis of 1875, 514 ; loans in Ar- 
 gentine Republic, 518. 
 
 Equivalent fund, made the basis 
 of Royal Bank of Scotland, 141. 
 
 Examination of banks, method 
 under national banking law, 
 375 ; method in Canada, 404. 
 
 Exchequer bills, effect of issue in 
 I 793 47 >* issue of 1811, 472. 
 
 Finlands Bank, 249. 
 
 j Florida, State banking, 335-36. 
 
 I Foreign exchanges, influence on 
 redundancy of the currency, 
 1 6 ; method of controlling, 17 ; 
 method of management by 
 Bank of France, 71 ; employed 
 to maintain gold standard in 
 Java, 447 ; effort to control by 
 syndicate con tract, 547 ; defects 
 of system, 548. 
 
 France, invaded by Italian sub- 
 sidiary coin, 34 ; origin of 
 banking, 38 ; the Mississippi 
 Company and the plans of John 
 Law, 39-45 ; collapse of Law's 
 system, 45 ; ban king before the 
 Revolution, 46-49 ; issue of the 
 assignats, 49 ; the Caisse des 
 Comptes Courants and Caisse 
 d" 1 Escompte^ 50 ; foundation of 
 the Bank of France, 51 ; the 
 independent departmental 
 banks, 53-57 ; effects of the 
 
588 
 
 INDEX. 
 
 double standard, 66 ; character 
 of the Latin Union, 67-70 ; po- 
 sition of the Bank of France, 
 75-77 5 collapse of credit in 
 1805, 470 ; effects of Napoleon's 
 fall, 472; abuse of credit in 
 1837, 486 ; condition in 1847, 
 491 ; benefits of gold discover- 
 ies, 500 ; craze for stock com- 
 panies, 503 ; speculation in 
 securities, 515. 
 
 France, Bank of, foundation, 51 ; 
 reorganization by Napoleon, 
 52 ; resistance to monopoly of 
 the bank, 56 ; suspension of 
 specie payments, 57 ; assists 
 railway enterprises, 59; influ- 
 enced by the war with Ger- 
 many, 60; threatened by the 
 Commune, 61 ; assists in pay- 
 ing war indemnity, 62-65 ; 
 embarrassed by variations be- 
 tween gold and silver, 66 ; 
 changes in limit of circulation, 
 
 72 ; gold and silver holdings, 
 
 73 ; government of the bank, 
 76 ; proposed renewal of char- 
 ter, 77 ; dangerous position in 
 1805, 470 ; expansion of dis- 
 counts in 1810, 471 ; fall of 
 metallic reserve in 1818, 475 ; 
 strong position in 1825, 479 ; 
 loans to Bank of England in 
 1839, 486 ; purchases of gold in 
 1847, 491 ; losses of gold in 
 1857, 498 ; character of receipts, 
 560. 
 
 Franco-Prussian war, effect on 
 Bank of France, 60-65 ; effect 
 on National Bank of Belgium, 
 2 53-55 J cost , 509 ; effect on Ger- 
 many, 510 ; effect on Bank of 
 England, 513 ; effect on France, 
 
 515- 
 
 Free banking, outlines of the 
 theory, 2 ; prevents the corner- 
 ing of currency, 19 ; does not 
 imply absence of uniform regu- 
 lations, 20 ; illustrated by 
 Swiss system, 270. 
 
 Free banking law in New York, 
 its features, 326 ; issues by indi- 
 viduals, 327 ; similar laws 
 adopted in Western States, 
 329 ; failure in Wisconsin, 341. 
 
 French Revolution, effect 0:1 
 banking in Italy, 25 ; on credit 
 in France, 49 ; upon Bank of 
 England, 95-98. 
 
 Gallatin, Albert, supports Bank 
 of the United States, 292 ; 
 opinion of specie suspension, 
 
 293. 
 
 Geneva, Bank of, 268. 
 
 Genoa, Bank of, origin and 
 political power, 22-23 ; the later 
 bank of 1844, 25 ; unites with 
 National Bank of Sardinia, 
 26-27. 
 
 Germany, terms of the French 
 war indemnity, 62-65 banks 
 of Prussia, 182-86 ; banks of 
 the German States, 186-89 ; 
 limiting circulation of foreign 
 bills, 189-91 ; centralizing pol- 
 icy of Prussia, 191-92 ; adop- 
 tion of gold standard, 193-94, 
 Bank of Hamburg, 195 ; unifi- 
 cation of banking system, 196- 
 97 ; the Imperial Bank, 198-201 ; 
 regulation of local banks, 201- 
 5 ; popular loans of the Im- 
 perial Bank, 207 ; cost of war 
 with France, 509 ; effects of 
 war indemnity, 510; specula- 
 tion in 1873, 513. 
 
 Godfrey, Michael, share in or- 
 ganizing Bank cf England, Si , 
 describes business of the bank, 
 
 83. 
 
 Gold, derives value from charac- 
 ter as money, 3 ; variation from 
 coinage ratio in France, 66; 
 relation to paper in England, 
 102 ; relation to prices, 106 ; 
 favored as the standard by Ger- 
 man cities, 193 ; adopted as the 
 standard in Germany, 194 ; 
 recommended as standard in 
 Austria, 225 ; importations into 
 Austria, 228 ; accumulation in 
 Russia, 245 ; certificates in Rus- 
 sia,- 248 ; maintenance of the 
 standard in Holland, 263 ; 
 method of maintaining the 
 standard in Java, 447 ; with- 
 drawals from England in 1818, 
 
INDEX. 
 
 589 
 
 474 ; new coinage policy in 
 United States, 482 ; effect of 
 opening American mines, 493 ; 
 disappearance in France, 1857, 
 498 ; benefits of new supplies in 
 France, 500 ; borrowed by 
 Bank of England abroad in 
 1890, 521. 
 
 Goschen, Sir George J., adopts 
 rule of rapidly raising discount 
 rate, 129-30; proposes \ 
 notes, 131-32. 
 
 Great Britain, see England, Scot- 
 land, and Ireland 
 
 Greece, banking in, early history, 
 277 ; relations with the govern- 
 ment, 278 ; economic condition 
 of country, 278-79. 
 
 Guadeloupe, Bank of, 430. 
 
 Guaranteed Banking Act in Ar- 
 gentina, 421 ; results in specu- 
 lation, 519. 
 
 Guatemala, banking laws, 429. 
 
 Guiana, banks of, 430-31. 
 
 H 
 
 Haiti, banking system of, 427. 
 
 Hamburg, Bank of, history and 
 liquidation, 195 ; failure to pre- 
 vent crisis of 1763, 468 ; failure 
 to prevent crisis of 1857, 499. 
 
 Hamilton, Alexander, deceived 
 in regard to lauded security, 
 34 ; plan for Bank of the United 
 States, 288 ; change of views 
 regarding landed security, 289, 
 note. 
 
 Holland, banking in, Bank of 
 Amsterdam, 259-61 ; Bank of 
 the Netherlands, 262-63. 
 
 Hongkong and Shanghai Bank- 
 ing Corporation, 441. 
 
 Horner, Francis, moves for an 
 inquiry regarding currency and 
 exchanges in England, 104 ; 
 prepares Bullion Report, 105 ; 
 resolutions defeated in Parlia- 
 ment, no. 
 
 Houblon, Sir John, first Governor 
 Bank of England, 82 ; stays a 
 panic, 86. 
 
 Hungary, demands payments 
 from' National Bank of Austria, 
 222 ; relations with Austro- 
 
 Hungarian Bank, 223 ; adop- 
 tion of gold standard, 225 ; 
 Separatist feeling affects bank 
 charter, 233. 
 
 Illinois, failure of State banks, 
 336-37- 
 
 Imperial Bank of Germany, cre- 
 ated from Royal Bank of 
 Prussia, 196 ; organization, 197; 
 rules governing circulation, 
 199-201 ; rate of discount, 201; 
 gold holdings, 206 ; relations 
 with popular banks, 207. 
 
 Imperial Ottoman Bank, organi- 
 zation, 281 ; effects of panic on 
 circulation, 282. 
 
 Independent Treasury system, 
 outgrowth of conflict over 
 Bank of the United States, 
 308 ; modified in 1861, 349 ; 
 fails to prevent specie suspen- 
 sion, 353. 
 
 Indemnity of France to Ger- 
 many, share of Bank of France 
 in its payment, 62-64 > effect 
 on securities, 65-66. 
 
 India, early banking history, 433 ; 
 adoption of government paper 
 currency, 435 ; effect of sus- 
 pending free coinage, 436 ; re- 
 port of Currency committee, 
 
 533- 
 
 Indiana, success of State Bank, 
 338 ; the new bank, 339. 
 
 Interest, opposed among Chris- 
 tians, 23 ; paid on notes of sus- 
 pended banks in Scotland, 140 ; 
 allowance on deposits benefits 
 Scotch people, 159-62 ; paid on 
 notes of suspended banks in 
 Canada, 400. 
 
 Ireland, depreciation of currency 
 considered by Parliamentary 
 committee, 103 ; economic for- 
 tunes, 167 ; savings of the peo- 
 ple, 181. 
 
 Ireland, Bank of, foundation, 
 171 ; monopoly of banking, 
 173 ; circulation, 180. 
 
 Ireland, banking in, early private 
 banks, 168-70 ; foundation of 
 Bank of Ireland, 171; suspen- 
 
590 
 
 INDEX. 
 
 sion of cash payments, 172 ; 
 the Provincial Bank, 174; Na- 
 tional Bank, 175 ; Tipperary 
 Bank, 177 ; Banking Act of 
 1845, 178-80. 
 
 Italy, early banking history, 22- 
 25 ; National Bank of the King- 
 dom, 27 ; policy of unity in 
 banking, 28 ; corruption among 
 officials, 30 ; flight of subsidi- 
 ary money, 34 ; present eco- 
 nomic condition, 35 ; popular 
 banking, 36-37 ; participates in 
 Latin Union, 68 ; feels crisis of 
 1893, 525- 
 
 Italy, National Bank of, created 
 by Victor Emanuel, 27 ; loans 
 to government, 29 ; illegal cir- 
 culation, 30 ; absorbs National 
 Bank of Tuscany and Tuscan 
 Bank of Credit, 31 ; new or- 
 ganization in 1893, 32 ; relations 
 with the Roman Bank, 35. 
 
 Jackson, Andrew, criticises Bank 
 of the United States, 301 ; de- 
 termines to suspend deposits in 
 bank, 305 ; protests against 
 Senate resolutions, 306 ; issues 
 specie circular, 481. 
 
 James I., policy of raising taxes, 
 80. 
 
 Japan, early banking history, 
 437-3 8 ; the Bank of Japan, 
 439; effect of silver standard, 
 440. 
 
 Java, Bank of, organization, 446 ; 
 method of maintaining gold 
 standard, 447. 
 
 Jay Cooke & Co., failure of, 511. 
 
 Jefferson, Thomas, policy towards 
 Bank of the United States, 291. 
 
 Joint stock banks, discovered to 
 be legal in England, 1 15 ; first 
 bank established in London, 
 117 ; lack of coin reserve, 130. 
 
 Joint stock companies, effect on 
 production, 462, note ; variety 
 of objects in England in 1825, 
 476 ; expansion in England in 
 1834, 485; effect of Limited 
 Companies' Act, 502 ; expansion 
 in France, 503 ; absorption of 
 
 capital in Prussia, 510 ; specu- 
 lation in Vienna, 513 ; develop- 
 ment in France up to 1882, 
 515 ; expansion in England up 
 to 1890, 518. 
 
 K 
 
 Kentucky, banking in, 330-31 ; 
 
 relief laws, 332. 
 King, Lord, issues a circular to 
 
 tenants requiring payments in 
 
 coin, in. 
 
 L 
 
 Labor, employed from past sav- 
 ings, 455 ; affected by crises, 
 
 463- 
 
 Land Bank, projected by Cham- 
 berlain, 84 ; collapses, 85. 
 
 Land, not a proper security for 
 bank-notes, 15 ; fails in Eng- 
 land, 87 ; leads to collapse of 
 Ayr Bank, 143 ; causes failure 
 in Ireland, 168-169 ; failure as 
 security in Belgium, 252 ; fail- 
 ure in Paraguay, 423 ; evil re- 
 sults in Australia, 444~45> 55 2 ; 
 failure in France, 573. 
 
 Latin America, banks of, 412-13. 
 
 Latin Union, conference of 1893 
 regarding redemption of Italian 
 subsidiary coins, 34; originated 
 in a proposition from Belgium, 
 67, 255 ; attempts to maintain 
 circulation of silver, 68 ; makes 
 gold primary money, 68 ; limi- 
 tation of silver coinage, 70; 
 effect of the Union upon Bank 
 of France, 71 ; exchange of 
 minor coins, 256. 
 
 Law, John, foundation of the 
 Compagnied* Occident, 39 ; con- 
 tracts with French govern- 
 ment, 41 ; continued issue of 
 stock, 42 ; collapse of the sys- 
 tem, and attack upon Law, 45. 
 
 Legal tender, in Italy, 26, 27, 32 ; 
 in France, 44, 57, 60 ; in Eng- 
 land, 98, 118; in the German 
 States, 189 ; in German Empire, 
 206; in Austria, 216, 221; in 
 United States, 353 ; in New 
 South Wales, 445 ; in Algeria, 
 451- 
 
INDEX. 
 
 591 
 
 Legal Tender Notes, President 
 Cleveland recommends retire- 
 ment, 545, 549- 
 
 Lidderdale, William, skilful man- 
 agement of Bank of England in 
 1890, 520. 
 
 Limited liability, its adoption 
 in Great Britain in 1858, 151 ; 
 modified in 1879, 152. 
 
 London clearing house transac- 
 tions, 558. 
 
 Louisiana, banking system, 337. 
 
 M 
 
 Machinery, influence on over- 
 production, 462-63. 
 
 Macleod, Prof. Henry Dunning, 
 demonstration that value is not 
 an inherent quality, 3 ; theory 
 of credit and banking, 8-9 ; 
 theory of discounting, 17. 
 
 Madison, James, suggests a na- 
 tional bank, 295 ; change of 
 constitutional views, 296. 
 
 Maine, banking laws, 315 ; specie 
 in banks in 1861, 340. 
 
 Marshall, John, decision regard- 
 ing national bank, 296. 
 
 Martinique, Bank of, 430. 
 
 Massachusetts, Land and Manu- 
 facturing Bank, 286 ; early 
 banking laws, 312 ; banks main- 
 tain specie payments, 313 ; in- 
 crease in banks prior to panic 
 of 1837, 314 ; Suffolk banking 
 system, 317-21. 
 
 McCulloch vs. Maryland, decided 
 by Marshall, 296. 
 
 McCulloch, Hugh, appointed 
 Comptroller of the Currency, 
 361 ; recommends taxation of 
 State bank-notes, 363 ; recom- 
 mends resumption, 367. 
 
 Melbourne, Bank of, 446. 
 
 Mexico, banks of, 414-16. 
 
 Michigan, wildcat banking in, 
 328-29. 
 
 Mississippi, failure of State 
 banks, 334-35. 
 
 Mississippi Company, see Com- 
 pagnie des Indes. 
 
 Missouri, banks of, 337-38. 
 
 Monetary conferences, in tern a- 
 
 national, in 1878, 531 ; in 1881, 
 
 531 ; in 1892, 532. 
 Montreal, Bank of, foundation, 
 
 387 ; issues provincial notes, 
 
 395 ; favors secured circulation, 
 
 396. 
 Morgan, J. Pierpont, syndicate 
 
 contract with Treasury, 546- 
 
 48 ; subscription to loan of 
 
 1896, 550. 
 Morris, Robert, founds Bank of 
 
 North America, 287. 
 Mortgages as security, see Land. 
 
 N 
 
 Nassau Bank, 431. 
 
 National banking system of the 
 United States, comparison with 
 State systems, 344-46 ; origi- 
 nates in difficulties of the Treas- 
 ury, 349-57 ; Secretary Chase's 
 plans, 358 ; rules governing cir- 
 culation, 360; objections met 
 by Comptroller McCulloch, 
 362 ; taxation of State notes, 
 363-64 ; changes in circulation, 
 365-67 ; resumption of specie 
 payments, 367-69 ; extension 
 of charters, 371 ; effect of Bland 
 Act and Sherman Act, 373 ; re- 
 demptions, 374 ; examinations, 
 375 ; efforts for a new system, 
 377-85; failures in 1893, 530, 
 535; expansion of banking cap- 
 ital, 539 ; effect of the reserve 
 system, 539-40 ; changes in 
 discounts and deposits, 543. 
 
 Necker, exacts secret loans from 
 Caisse d 1 Escompte, 48. 
 
 Netherlands, Bank of, succeeds 
 Bank of Amsterdam, 261; meth- 
 od of maintaining the gold 
 standard, 263. 
 
 New Brunswick, banking in, ear- 
 ly charters, 391 ; brought under 
 Canadian law, 396; branches, 
 410. 
 
 New England banks, illustrated 
 by Massachusetts system, 312 ; 
 legislation in Maine and Ver- 
 mont, 312 ; in Rhode Island, 
 316 ; Suffolk system, 317-21 ; 
 suspension of 1861, 321 ; effect 
 on circulation and specie re- 
 
592 
 
 INDEX. 
 
 serves, 339-40 ; comparison 
 with other systems, 344-45. 
 
 New Hampshire, batiks retain 
 their specie, 340. 
 
 New South Wales, modification 
 of the banking law, 445 ; bank- 
 notes made legal tender, 553. 
 
 New York banks, advances to 
 Treasury in 1861, 349 ; suspend 
 specie payments, 352 ; resump- 
 tion of specie payments in 
 1838, 483 ; restrict discounts in 
 1893, 53- 
 
 New York, early banking char- 
 ters, 322 ; adopts safety fund 
 plan, 323 ; reasons for failure, j 
 325 ; free banking act, 326 ; j 
 issues by individuals, 327. 
 
 Nicaragua, banks of, 428-29. 
 
 Norway, banking system, 267. 
 
 Nova Scotia, banking in, early i 
 charters, 391 ; brought under 
 Canadian law, 396. 
 
 O 
 
 Ohio, State Bank of, 328. 
 
 Options, introduced into France 
 by John Law, 42. 
 
 Orange River Free State, Na- 
 tional Bank of, 450. 
 
 Overend, Gurney & Co., conduct 
 in crisis of 1825, 478 ; suspen- 
 sion in 1866, 505. 
 
 Overstone, Lord, advocates cur- 
 rency principle, 120. 
 
 Palmstruch, founder of Bank of 
 Sweden, 264. 
 
 Paper currency, losses by wear, 
 383, note. 
 
 Paper money, in Italy, 29, 33 ; in 
 France, 49 ; in the German 
 states, 204 ; in Austria, 210-18 ; 
 in Russia, 235-40; in United 
 States, 351-53 ; in Canada, 387, 
 395, 397 ; in Brazil, 419 ; in In- | 
 dia, 435 ; in Japan, 437 ; in 
 China, 441 ; differs from bank- 
 note issues, 564 ; absence of 
 quick assets, 573-75. 
 
 Paraguay, banking in, 422-23. 
 
 Paterson, William, plan for Bank 
 
 of England, 81 ; organizes Da- 
 rien Company, 139. 
 
 Peel, Sir Robert, supports re- 
 sumption by Bank of England, 
 113 ; adopts currency principle, 
 1 20 ; admits partial failure of 
 Act of 1844, 124. 
 
 Pennsylvania, Bank of, 287 ; 
 banking mania, 473. 
 
 Persia, Imperial Bank of, 442. 
 
 Peru, banking system, 426-27. 
 
 Philippine Islands, banking in, 
 452. 
 
 Pitt, William, demands upon 
 Bank of England, 95-^97. 
 
 Popular banks, relations with 
 banks of Naples and Sicily, 36 ; 
 relations with German Imperial 
 Bank, 207 ; in Russia, 241-43. 
 
 Porto Rico, Spanish Bank of, 
 
 43 r - 
 
 Portugal, Bank of, 276. 
 
 Prices, how affected by credit 
 cycles, 454 ; advanced by Ber- 
 lin decree, 470 ; affected by fall 
 of Napoleon, 472. 
 
 Protective tariff, effect on crises, 
 461, note. 
 
 Provincial Bank of Ireland, 174. 
 
 Prussia, Bank of, origin, 183 ; im- 
 portance of circulating notes, 
 185 ; accumulates stock of gold, 
 195 ; converted into Imperial 
 Bank, 196 ; contest with Bank 
 of Brunswick, 203 ; refuses 
 speculative paper in 1873, 513. 
 
 Prussia, law regarding circulation 
 of foreign bills, 189 ; adopts 
 centralizing policy in banking, 
 191. 
 
 Railways, aided by Bank of 
 France, 59 ; economic benefit 
 to the community, 463, note ; 
 mania in 1847, 488 ; mileage up 
 to 1857, 493 ; new method of 
 financing, 502 ; absorption of 
 capital iip to 1873, 509 ; loss 
 of earnings in 1894, 536. 
 
 Redemption in coin, its import- 
 ance in a banking currency, 13 ; 
 related to stable system of val- 
 ues, 15-17. 
 
INDEX. 
 
 593 
 
 Redemption of bank-notes, meth- 
 od under national banking 
 system, 374-75 ; changes recom- 
 mended by Secretary Carlisle, 
 
 384. 
 
 Redemption of United States 
 notes, 545, 549. 
 
 Relief laws, in Kentucky, 332. 
 
 Restriction of cash payments in 
 England, 98 ; effect upon bank- 
 notes, 101-4 ; brought to an 
 end, 114. 
 
 Resumption, recommended by 
 Secretary McCulloch, 367 ; sup- 
 ported by national banks, 368. 
 
 Reunion, Bank of, 452. 
 
 Rhode Island, law for recovery 
 of bank debts, 316 ; agency of 
 Suffolk redemption system, 
 318. 
 
 Roman Bank, foundation, 28 ; 
 exceeds legal circulation, 30 ; 
 compelled to liquidate, 31, 35. 
 
 Roumania, banking in, 283-84. 
 
 Royal Bank of Scotland, created 
 from the Equivalent Fund, 141 ; 
 establishes branch in London, 
 154 ; establishes cash credits, 
 162. 
 
 Russia, Bank of, close relations 
 with the state, 235 ; origin and 
 capital, 238 ; plans for specie 
 resumption, 240 ; revision of 
 charter, 241 ; rules governing 
 circulation, 244-45 ; steps to- 
 wards gold payments, 246-48. 
 
 Russia, paper money issues, 236 ; 
 efforts to restore specie pay- 
 ments, 237-40 ; new industrial 
 policy, 243 ; steps towards gold 
 standard, 246-48 ; loan to Bank 
 of France in 1847, 491 ; ex- 
 change of silver with Bank of 
 France in 1861, 501 ; loans 
 to Bank of England in 1890, 
 52i. 
 
 Russo-Chinese Bank, 442. 
 
 Safety fund system, adoption in 
 New York, 323 ; failure and its 
 causes, 324-25. 
 
 Salvador, banks of, 428. 
 
 Sardinia, National Bank of, cre- 
 38 
 
 ated in 1849, 26 ; reorganizes as 
 National Bank of Italy, 27. 
 
 Scotch banking system, its early 
 history, 138-43"; strength dur- 
 ing specie suspension, 145 ; 
 failure of the Western and City 
 of Glasgow Banks, 146-50 ; 
 limited liability, 150-52 ; pro- 
 posal to abolish Scotch note 
 issues, 153 ; advantages of 
 Scotch banking, 155-66. 
 
 Scotland, Bank of, foundation, 
 139 ; increase of capital, 144 ; 
 application for limited liability, 
 152 ; establishes branch in Lon- 
 don, 154. 
 
 Scotland, origin of accommoda- 
 tion bills, 468 ; failure of West- 
 ern Bank, 497 ; failure of City 
 of Glasgow Bank, 514. 
 
 Securities, introduced in France 
 by John Law, 41 ; effect of 
 French indemnity loan upon 
 price, 65-66 ; tendency to re- 
 turn to country of origin, 229 ; 
 effect of official sales in France, 
 475 ; new method of financing, 
 502 ; extension in France, 515 ; 
 effect on trade statistics, 516; 
 American, held in Europe, 526 ; 
 shrinkage in dividends in 1895, 
 
 529- 
 
 Senegal, Bank of, 451. 
 
 Servia, National Bank of, 284-85. 
 
 Sherman law, effect on bank cir- 
 culation, 373 ; efforts of Presi- 
 dent Cleveland to repeal, 524 ; 
 effect on gold exports and 
 Treasury reserve, 527 ; repeal- 
 ing bill, 540 ; action in House, 
 541 ; repeal, 542. 
 
 Sicily, Bank of, foundation, 28 ; 
 exceeds legal circulation, 30 ; 
 subject to law of 1893, 33 ; as- 
 sists people's banks, 37. 
 
 Silver, fluctuations embarrass 
 Bank of France, 66 ; causes the 
 formation of Latin Union, 68 ; 
 change in the commercial ratio, 
 69 ; limitation of coinage, 70 ; 
 effect upon circulation of Bank 
 of France, 72 ; disappears from 
 England, 101 ; principal me- 
 tallic stock of Germany, 192 ; 
 standard of the Bank of Ham- 
 
594 
 
 INDEX. 
 
 burg, 194 ; place in Austrian 
 circulation, 226-28 ; deprecia- 
 tion in Spain, 275 ; causes dis- 
 turbance in Servia, 285 ; effect 
 of suspending free coinage in 
 India, 436 ; effect upon Japan- 
 ese exports, 440 ; monetary 
 conferences, 530-33 ; suspen- 
 sion of free coinage in British 
 India, 533. 
 
 Singapore, competition with Bank 
 of Reunion, 452. 
 
 Small notes, advantages to Scotch 
 industry, 158. 
 
 South African Republic, National 
 Bank of, 449. 
 
 South America, banking in, 416- 
 
 430- 
 South Sea Company, contest with 
 
 Bank of England, 90. 
 Spain, Bank of, early history, 
 
 273 ; extension of charter, 274 ; 
 
 subordination to Treasury, 
 
 275- 
 
 Spain, economic condition of, 
 274-76.- 
 
 Spanish Bank of the Philippines, 
 452. 
 
 Specie circular, issued by Jack- 
 son, 481. 
 
 Springer, William M., reports 
 banking bill, 382. 
 
 Standard Bank of South Africa, 
 
 449- 
 
 State banks, suspension of pay- 
 ments in 1814, 293 ; notes held 
 exempt from federal taxation, 
 298, note ; compelled to re- 
 sume, 298 ; variety of systems 
 in the United States, 311 ; Mas- 
 sachusetts, 312-15 ; other New 
 England States, 315-17 ; New 
 York, 322-27; Ohio, 328; 
 Michigan, 328 ; other western 
 states, 329 ; Kentucky, 331-32 ; 
 other southern states, 333-37; 
 Indiana, 338; effects of the 
 Civil War upon the system, 
 339-41 ; advantages and disad- 
 vantages, 343-46 ; limited cir- 
 culation, 347 ; advances to the 
 Treasury in 1861, 349; suspend 
 specie payments, 352 ; subject- 
 ed to tax on circulation, 364 ; 
 proposed revival, 377. 
 
 Stockholm Bank, issues trans- 
 port notes, 25. 
 
 Stock exchange clearing houses, 
 562-63. 
 
 Stock jobbing, acts against, 467 ; 
 extension to American colonies, 
 287. 
 
 St. Thomas, Bank of, 431. 
 
 Suez canal, 510. 
 
 Suffolk system of redemption, 
 origin, 318; effect of operation, 
 319 ; rivalry of Bank of Mutual 
 Redemption, 320 ; economy of 
 system, 321, 374. 
 
 Surinam, Bank of, 431. 
 
 Surplus, distribution among the 
 States, 482. 
 
 Sweden, banking in, 264-65. 
 
 Switzerland, legislation regarding 
 silver, 67 ; urges the gold stan- 
 dard, 68 ; limits silver coinage, 
 70 ; early banks, 268 ; forma- 
 tion of Concordat, 270 ; pro- 
 posed state bank, 271. 
 
 Sydenham, Lord, supports cur- 
 rency principle, 393. 
 
 Syndicate contract of 1895, 546- 
 "49- 
 
 Taney, Roger B., changes method 
 of depositing public funds, 306. 
 
 Tariff, influence upon crises, 461, 
 note ; connection with crisis of 
 1857, 494, note. 
 
 Taxation, national banks exempt 
 from special taxes by States, 
 296 ; federal taxation of State 
 notes, 298 ; tax of 1865 on State 
 notes, 363 ; effect on circula- 
 tion, 364 ; repeal recommended 
 by Democratic convention, 
 3.77 ; favored by Secretary Car- 
 lisle, 380; tax fails to check 
 emergency issues in 1893, 538. 
 
 Tennessee/State Bank, 337. 
 
 Thiers, manages French war in- 
 demnity, 63 ; opinion of Bank 
 of France, 75, note. 
 
 Tipperary Joint Stock Bank, 
 foundation, 177 ; peculations 
 of John Sadlier, 178. 
 
 Turkey, banking in, 281-83 ; fall 
 of prices, 525. 
 
INDEX. 
 
 595 
 
 u 
 
 Ultramarine Bank, 452. 
 
 Union Generate, failure of, 517. 
 
 United States, suspension of spe- 
 cie payments in 1814, 474 ; 
 crisis of 1837, 479-83 ; exports 
 of 1847, 487 ; railway extension 
 in 1857, 493 ; changes in circu- 
 lation, 495 ; crisis of 1857, 496 ; 
 effect of civil war, 500 ; crisis 
 of 1873, 511-12 ; crisis of 1884, 
 517; crisis of 1893, 524-50; 
 transactions of clearing houses, 
 560 ; proportion of credit in- 
 struments, 561 ; advantage of 
 banks over the Treasury, 574- 
 
 75- 
 
 United States, Bank of, origin, 
 287 ; relations with Treasury, 
 289-91 ; expiration of charter, 
 292 ; plans for second bank, 
 294-95 ; constitutional opposi- 
 tion to the new bank, 296 ; case 
 of McCulloch vs. Maryland, 
 297 ; specie resumption, 298 ; 
 branch drafts, 301 ; arouses 
 hostility of Jackson, 302-4 ; 
 removal of the deposits, 306 ; 
 origin of sub-Treasury system, 
 
 307-9- 
 United States, banking in, see 
 
 United States, Bank of, State 
 
 banks, and national banking 
 
 system. 
 Uruguay, banking in, 423-25. 
 
 V 
 
 Van Buren, Martin, recommends 
 
 safety fund system, 322 ; colls 
 extra session of Congress, 483. 
 
 Vansittart, opposes bullion re- 
 port, no. 
 
 Venezuela, banking law, 425. 
 
 Venice, Bank of, transfer office 
 of the national debt, 21 ; de- 
 posit bank created, 22. 
 
 Vermont, banking in, 315 ; en- 
 courages Suffolk system, 320. 
 
 Victoria, banking laws of, 443 ; 
 estimated wealth in 1892, 551. 
 
 Vienna, Bank of, creation and 
 failure, 210. 
 
 Vienna, speculation in 1873, 513. 
 
 W 
 
 Webster, Daniel, favors creation 
 of a commercial bank, 294 ; 
 secures amendment of bank 
 bill, 296; opinion in favor of 
 branch drafts, 301. 
 
 Western Bank of Scotland, adopts 
 policy hostile to that of other 
 Scotch banks, 147 ; failure and 
 heavy losses, 148-49 ; effect of 
 failure, 497. 
 
 West Indies, British, banks of, 
 
 430-31. 
 
 Wilson, William L., bill to repeal 
 Sherman Law, 540 ; bill to au- 
 thorize gold bonds, 546. 
 
 Wisconsin, failed banks, 330; 
 decline in southern securities, 
 340-41. 
 
 Witte, Russian finance minister, 
 new organization of Bank of 
 Russia, 241-44. 
 
UNIVERSITY OF CALIFORNIA LIBRARY 
 BERKELEY 
 
 Return to desk from which borrowed. 
 This book is DUE on the last date stamped below. 
 
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 MAY 1 3 1961 
 
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