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
Applications to Social Philosophy. 2 vols. New York, 1893.
. MuHLEMAN, MAURICE L. Monetary Systems of the World : a Study of
Present Currency Systems and Statistical Information. New York,
1895.
NEYMARCK, ALFRED. Du Renouvellement du Privilege de la Banque de
France. Paris, 1885.
NOEL, OCTAVE. Les Banques d' Emission en Europe (to be completed in
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PALGRAVE, R. H. INGLIS. Dictionary of Political Economy. London, 1894.
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Columbia College. New York and Boston, 1886-95.
POOR, HENRY V. Money and Its Laws : Embracing a History of Monetary
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IESTON, ROBERT E. Production of Precious Metals in the United States.
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5 So LIST OF A UTHORITIES.
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"" Report of tJie Royal Commission Appointed to Inquire into the Recent Changes
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ROSCHER, WILLIAM. Principles of Political Economy. Translated by JOHN
J. LALOR. 2 vols. Chicago, 1882.
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SEYD, ERNEST. Bttllion and Foreign Exchanges, Theoretically and Prac-
tically Considered. London, 1 868.
""SHAW, W. A. The History of Currency, 1252 to 1894. New York and
London, 1895.
*-SHEPARD, EDWARD M. Martin Van Buren. Boston and New York, 1888,
SMITH, ADAM. An Inquiry into the Nature and Causes of the Wealth of
Nations. Edited by JAMES E. THOROLD ROGERS. 2 vols. Oxford,
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"^ Sound Currency. Published by the Sound Currency Committee of the
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la Statistique du Royaume d'ltalie. Rome, 1878.
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1620-1789. 2 vols. Boston, 1890.
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United States. 6 vols. Washington, 1889.
>~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.
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