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NELSON ALDRICH




Monetari CcitL

MISCELLANY




1 NJ

MONO. SEC.

TABLE OF CONTENTS,

CHAPTER I.—The evolution of central banks.
IL—Principles common to European banks.
x. Concentration of reserves.
2. Freedom of note issue.
3. Ready convertibility of assets.
4. The central bank and the de-posit banks.
5. The central bank and the international market.
III.—How European banks influence the money market.
1. Changing the rate of discount.'
2. Rediscounting commercial paper.
3. Thg purchase of gold.
4- Borrowing from the market.
5. Holding and dealing in foreign bills.
IV.—Systems of note issue.
1. System of the Bank of England.
2. System of the Bank of France.
3. System of the Bank of Germany.
4. Systems of note issues of other countries.
V.—Elasticity In the supply of credit.
1. Operation of the English system.
2. Operation of the French system.
3. Operation of the German system.
VI.—Policy puqued by European banks zn times of pressurc.
VII.—Nonpaymeht of interest'O'n Xposits.
VIII.—Special taxes and the apportionment of profits.
1. The Bank of England.
2. The Bank of France.
3. The Imperial Bank of Germany.
4. The Austro-Hungarian Bank.
5. The National Bank of Belgium.
6. The Bank of the Netherlands.
7. The National Swiss Bank.
8. The Bank of Italy.
ç. The Bank of Norway.
1o. The National Danish Bank.
xi. The Batik of Portugal.
12. The National Bank of Roumania.
IX.—The government of European banks.
1. The Bank of England.
2. The Bank of France.
3. The Imperial Bank of Germany.
4 The Aittro-Hungarian Bank.
g. The- National Bank of Belgium.
6. The Bank of the Netherlands.
7. The National Swiss Bank.
;

1

t




'NJ

MONO. SEC.

DEVELOPMENT OF
CENTRAL BANKS IN EUROPE.
CHAPTER L—THE EVOLUTION OF CENTRAL BANKS.
In every European country of any commercial importance there exists at the present time a single bank 2f,
issue charged either by statute or by the traditions of.
the financial community with general supervision over
the maintenance of the metallic reserves through control I
of the exchanges.
Relics of the system of the issue of notes by local banks .
still survive in a few countries of Europe, but are for the•
most part in process of extinction. In Scotland and Ireland the issue of notes is permitted by local banks which
were in existence in 1844, but under laws which are very
restrictive and under which the number of institutions
has declined to eight in Scotland and six in Ireland. In
Germany, when the Bank of Prussia was raised to the
dignity of the Imperial Bank of Germany in 1875, the
number of banks issuing notes was 33, but many of these
banks have since from time to time voluntarily given up
the power of note issue until the number which still avail
themselves of it is only four. Two of these are the Bank
of Bavaria and the Bank of Saxony, which'serve States
of much importance which have not desired to merge
their political and economic life entirely with that of
Prussia. In Italy there are still three banks;of issue—
the Bank of Italy, the Bank of Naples, and the Bank of
Sicily—but the latter two serve sections of country quite
distinct from the northern and central portions which are
served by the National Bank, and the Bank of Sicily
operates in a large island having an economic life largely
independent of that of the Italian peninsula. It thus
appears that, with only insignificant exceptions, every
European country has adopted the system ,of a central
bank of issue.
The Bank of England and the Bank of France are the
oldest important banks now doing business in Europe.
The Bank of England was established in 1694, and the
Bank of France in 1800, but not until near the middle of
the last century were they intrusted with practically
complete control over the note issue. All the other central banks, under their present form of organization, date
from 1850 or later. Many of them have been established
or given their presen, form within a generation. The
Bank of Prussia, which is now the Imperial Bank of Germany, dates back to 1765, but its business was not organized upon modern methods until a much later date, and
only by the law of 1875, after the unification of the currency system of Germany, did it acquire the position of
the dominant bank of the German Empire. The AustroHungarian Bank dates back to the time of Napoleon, but
for many years was little more than an instrumentality
for the issue of irredeemable paper to meet the needs of
the Government. It was not until 1878 that the National
Bank of Austria, as it was then called, was expanded into
the Austro-Hungarian Bank under a modern charter.




many, dates back to 1765, but its business was not organized upon modern methods until a much later date, and
only by the law of 1875, after the unific'Ilion of the currency system of Germany, did it acquire the position of
the dominant bank of the German Empire. The AustroHungarian Bank dates back to the time of Napoleon, but
for many years was little more than an instrumentality
for the issue of irredeemable paper to meet the needs of
the Government. It was not until 1878 that the National
Bank of Austria, as it was then called, was expanded into
the Austro-Hungarian Bank under a modern charter.
The National Bank of Belgium, whose charter became
in 1882 the model for that of the Bank of Japan, was
established only in 1850. The Bank of the Netherlands,
while created in 1814, was reorganized on the model of
the Bank of Belgium in 1864. Italy had several additional banks of issue before they were reduced to three,
after the crisis of 1893. Spain unified her note-issuing
system in 1874, when 18 local banks were ordered to transfer their circulation to the Bank of Spain. It was as
recently as 1888 that Portugal granted monopoly of note
'issue to her central bank. In the three Balkan States,
which became independent of Turkey after the war of
1877—Roumania, Bulgaria, and Servia—central banks
were established between 188o and. 1885. In Greece the
Epiro-thessalian Bank was absorbed by the National
Bank in 1899. Sweden continued the system of local
banks until 1897, when provision was made for transferring their circulation to the Royal Bank before the close
of 1905. Switzerland also, finding exchange almost uniformly, adverse under the system of note issues by some
30 local banks, was finally driven, after a discussion of
nearly twenty years, to the creation of a central bank,
which began operations in the summer of 1907.
The most obvious characteristic which the European
banks of, issue have in common, in spite of differences in
detail, is that they have become, either by statute or by
long-continued practice and tradition, the custodians', of
the metallic reserve and the regulators of the foreign
exchanges. In this capacity the bank of issue has come
to be looked upon as the ultimate source from which gold
and currency are to be obtained by other banks and by
individuals in case of need.
It should be constantly kept in mind that this concentration of the power of note issue and guardianship over
the national stock of gold has not by any means been
accompanied by a concentration in the central institution
of the control of deposit banking. On the contrary,,
there has grown up in the leading commercial countries
a body of joint-stock and private banks, many of which,




3 NJ SECTION
MONOTYPE

-

far surpass in the magnitude of their transactions the banks
of issue. The evolution of the central hank in Europe
has not represented the concentration of banking power,
but only the concentration of a few special banking
functions. The proceEs of development has been toward a
specialization and separation of functions rather than
toward the aggregation of functions. The central banks
have tended to acquire great and exclusive powers in their
particular field, but the limits of that field have in most
respects been narrowed and other fields have been left
for the exclusive cultivation of the deposit, finance, and
mortgage loan banks. Thus has developed a system of
which the bank of issue is the pivot, but in which it is
the servant or an aid to other types of banks rather than
a competitor with them in their peculiar fields.
In considering the problems submitted to the monetary
commission for solution we have been led to make a
careful analysis of the structure and methods of these
foreign banks. For the purpose of coordinating the
results of these investigations it seems desirable to outline the character of the more important central banks,
especially those at the three centers of international
exchange in Europe—London, Paris, and Berlin—and
the methods by which they meet the demand for currency
and protect the metallic reserve under the conditions of
their national financial development;
CHAPTER II.-PRINCIPLES COMMON TO EUROPEAN BANKS.
If light on the best banking policy in respect to the issue
fo circulating notes were to'be sought among the principal
countries of Europe, the choice would be open between a
system severely restrictive, as in England; one of almost
complete freedom, as in France; and one of modified and
attenuated restriction, as in Germany and AustriaHungary. In all these countries, however, and in substantially all other countries of Europe, the system of note
issue has two things in common—that the notes are issued
by a single institution with large powers over the money
market and that they are issued upon the basis of commercial paper and gold. Nor are these the only functions
and methods which the European banks have in common.
In spite of differences arising from statute law or from
long-continued traditions, there has grown up among
European banks of issue a series of banking principles
and of methods of fulfilling their functions which differ
little in substance throughout the European Continent.
The more:important of the principles of European banking
may be defined thus:
I. The metallic reserves of a country are substantially
concentrated in the central bank of issue.
II. The authority to issue circulating notes is comparatively unlimited so long as they are issued against
gold or commercial paper of a prescribed charater.
III. The assets of the central bank of issue consist
almost exclusively, apart from the metallic reserve, in
commercial obligations for short terms, capable of being
realized quickly, without depreciation.
IV. The central bank of issue forms an important agency
in the development of other institutions of credit and their




concentrated in the central bank of issue.
II. The authority to issue circulating notes is comparatively unlimited so long as they are issued against
gold or commercial paper of a prescribed charater.
III. The assets of the central bank of issue consist
almost exclusively, apart from the metallic reserve, in
commercial obligations for short terms, capable of being
realized quickly, without depreciation.
IV. The central bank of issue forms an important agency
in the development of other institutions of credit and their
support in times of stress.
V. The central bank of issue forms the natural and
most important connection between the local and the international money market.
It is desirable that we should examine the manner in
which these principles have been worked out in practice in
the principal European countries.
I. CONCENTRATION OF RESERVES.

The concentration of metallic reserves in a single strong
establishment in each European country has several
objects—to create a fund of gold so large that it shall
prevent any fear of its exhaustion; to enable the bank
to convert its credit into notes without trenching upon
its gold, for meeting internal demands for currency;
and to impose upon a single body, the governor and
directors of the bank, the responsibility for protecting
the money market against domestic stringency and
foreign drains.
The tendency, especially since 1875, toward the concentration of reserves in a single institution has been due
to the conclusion of European bankers that such an
institution is more efficient than small independent
banks in meeting internal needs for currency and in
controlling the international movement of gold by means
of the discount rate. Their experience, illustrated by
the early history of banking in England, France, Sweden,
Switzerland, and other countries, has been that local
banks, operating without concerted policy and responsible only to their shareholders, do not cooperate efficiently in raising the general discount rate; they do not
take harmonious and effective steps to withdraw redundant funds from the money market; and they can
borrow abroad only to a limited extent, from their own
correspondents and upon their own limited credit.
Special and almost inexhaustible powers are given to
the central bank by the function of note issue. The
bank protects its gold by meeting the demand for currency with notes; it is able to exchange notes for good
assets until legitimate demand is satisfied; and it is able
to influence the foreign exchanges by its ability to change
the discount rate. Thus there can be no fear of a currency famine; there can be no fear on the part of a
solvent merchant that his credit will be arbitrarily cut
off; and there can be no panic. This, at least, is the




4 NJ

MONO. SEC.
theory of central banking and the concentration of
reserves in Europe; and while European banks have not
been without their problems, they have escaped in modern times such upheavals as have affected the countries
where the system of banking is without a central reserve
organization.
The position of the principal European banks of issue
in respect to gold resources has greatly improved since
the great increase in the production of gold from the
mines which began to acquire momentum about 1892.
Prior to that date anxiety was sometimes felt as to the
relations of the gold supply to the volume of note issues
of the central banks and to the credit obligations of other
banking institutions. In England there was much discussion of the importance of strengthening reserves in
some manner, even if it was done by the joint-stock
banks rather than by the Bank of England. In France,
Belgium, and the Netherlands the situation was complicated, during the period of the rapid fall of silver, by
the existence of large amounts of legal-tender silver
money, of which the face value was much in excess of
the bullion value. To a certain extent, but not to the
same degree, the same situation existed in Germany,
while in Austria-Hungary, Italy, Spain, and Greece bank
notes were not redeemed in specie, less because of direct
fault on the part of the banks than because of heavy
demands by the Government for loans.
Since 1892 the status of banking reserves has followed,
in the chief commercial countries, two lines of development—a great increase in the gold stock of the central
bank in relation to its own obligations, but at the same
time a great increase in the volume of credit obligations
of the joint-stock banks, which depend for their ultimate
solvency upon the central bank. The increase in the
gold stock has reduced to insignificance the adverse
influence of the legal tender silver held in reserves, because
the amount of the latter has remained practically stationary, and from constituting more than one-third of
total metallic reserves in 1883, came to constitute only
about one-fifth as early as 1906. The proportion at the
repsent time is only about one-sixth.
The ratio of gold to outstanding notes, which was only
about 29 per cent in 1883, rose as early as 1896 to 54 per
cent, and after the accumulation of idle funds which followed the panic of 1907 attained at the close of 1908 a
ratio of 58 per cent. Without discussing at this point
the greatly increased obligations of the joint-stock banks,
which depend for their ultimate reserves upon the central
bank, it is sufficient to say that the growth in the absolute
mass of gold held, as well as the ratio of this mass to outstanding note issues, is such as to remove any anxiety in
the leading commercial countries as to the sufficiency of
the reserves of the central bank.
The gold reserves of all the European banks of issue
were in 1877 only about $575,000,000. They had risen
in 1885 to $700,000,000 and in 1890 to about $900,000,000.a




which depend for their ultimate reserves upon the central
bank, it is sufficient to say that the growth in the absolute
mass of gold held, as well as the ratio of this mass to outstanding note issues, is such as to remove any anxiety in
the leading commercial countries as to the sufficiency of
the reserves of the central bank.
The gold reserves of all the European banks of issue
were in 1877 only about $575,000,000. They had risen
•in 1885 to $700,000,000 and in 1890 to about $900,000,000.a
a Figures for 1877 and 1885 are based upon
the calculations of Soetbeet,
Bimetallism in Europe, soth Cong., ist sess., S. Ex. Doc. 34, p. i80. The
figures for later years are based upon tlhc ca,culationc published from week
to week in L'Economiste Europeen, Pa-iz.

Between 1890 and 1902, however, these reserves nearly
doubled in amount, without a corresponding increase in
the volume of outstanding notes, so that the ratio of gold
to notes, in all cases excluding the silver reserve, increased
from 35 per cent to 54 per cent. Since about 1902 the
ratio of increase in the amount of notes outstanding has
practically kept pace with the increase in gold reserves,
There was a material increase in the issue of notes after
the effects of the panic of 1907 had partially worn off,
which reduced the ratio of gold reserves to outstanding
notes to 56 per cent at the close of 1910.
The following table gives, in millions of francs, the gold
'reserve, the silver reserve, the circulation, and the percentage of gold to notes in European banks of issue at
the close of each year for representative years, beginning
with 1883:
Reserves of European banks of issue.
[In millions of francs.]

December 31'

Gold
reserve,

Silver
reserve.

Circulation.

Per cent
of gold
to notes.

3883

3,555.9

2,049.9

12.246.9

29

3888

6
4,37 .1

2. 517.0

12, 757.8

34

1890

4,592.7
6.207.1

2,339.2

13,205.8

35

3893

2,495.1

14.805.3

42
45

1894

6,952.0

2.603. 7

T5.539.5

18
95

7.963.0

2.484.0

IS.485.0

Sr

1896

7.859.9

2,512 7
.

.4,536.6

54

1898

8,160.0

2,636.0

14,975.0

54

1900

8.211.0

2.607.0

35,906.0

55

1902

8,752.0

2,823.0

36,215.0

54

1904

9.837.0

2,843.0

16.737.0

59

SZ
So

1905

9,683.0

2, 713.0

I9,000..

1906

,
9 954.0

2,678. co

19,667.0

19 7
0
1908
19 9
0
1910

10,043.0

2,610.

20, 286.0

49

12, 105.0

2.848.0

20,843.0

58
59
56

12,576.0

2,840.0

21,478.0

12,531.0

2, 759.0

22,244.0

a Response of the Secretary of the Treasury to S. Res. No. 33, of Dec.
12, 1907, 6oth Cong., ist sess., S. Doc. No. 208, p• 14.

It is considered by European experts important to the
working of the central banking system that the central
reserve of money should be in the custody of an institution which is responsible in some measure for the general
financial system of the country rather than responsible
purely to its shareholders for earning a profit. It is considered important also that such:resources should be in
the hands of an institution capable of converting them
into the most available forms of credit. For this reason,
their use is much more effective in the hands of a bank
than in the hands of the Government.




5t NJ

MONO. SEC.
It is a remarkable fact that while the banks of the United
States were drawing gold from Europe in the crisis of 1907,
the stock of gold in the United States was larger by hundreds of millions than the stock of any European country,
and larger than that of several important countries taken
together. The total gold stock of the United States on July
1, 1907,including coin in circulation,according to the calculations of the Director of the Mint, was $1,466,056,632.
The amount of gold estimated for the six European
countries having the largest stock, with the amount in
their bank reserves, on December 31, 1907, was as follows:b
b

Annual report of the Director of the Mint for the fiscal year 5908, p. 68.
Gold stock of leading countries. December 31, 1907.

Total stock
'
Germany
Prance
Russia
United Kingdom
Austria-Hungary
Italy

In banks and
treasuries.

$1,044,400.000
926,400.000
917,300.000
564.500,000
303,100.000
2589200,000

$147.000.000
520.900.000
00 ,
397,4 ,000
162.020,coo
226. 2C10.000
2.58 200,000

These figures show that the two largest gold stocks of
foreign banks are those of the Bank of France and the State
Bank of Russia. Of the former institution the average
circulation for the year 1907 was about $925,000,000,
showing a ratio of gold to notes of about 56 per cent. This
is exclusive of the silver reserve, which raised the average
reserve for 1907 to a little more than 75 per cent. At the
Bank of Russia the circulation on January i, 1908, was
about $601,000,000 and the value of the gold cover, including foreign bills, was $490,000,000, or more than 8o
per cent. Corresponding figures for the close of 1910
were as follows:
French and Russian gold reserves, end of 1910.

Circulation
:

Bank of France
Bank of Russia

Gold reSMUCCS.

ST ea .000.oco
642.100,000

S633,000.000
624.600,000

Ratio of
gold to
notes.
62. 2
97.3

It is not necessary to discuss at length the situation of
the Bank of Russia, because the financial centers of that
Empire are not in such close touch with international
exchanges as are Paris, London, and Berlin. It may be
worth while to note, however, the comment of M. Patron: a
_
a

The Bank of France in its Relation to National and International Credit,
National Monetary Commission,65st Cong., 2c1 sess., S. Doe. No. 494. p. 530.

".The recent Russo-Japanese war, for which financially
Russia was as well prepared as, from a military standpoint, it appeared to be poorly prepared, furnished a
striking example of what may be expected in time of war
from a firm financial organization. During that distant
and costly war, despite disorders at home, Russia was allle
to maintain its credit at a high level by reason of its immense holdings of gold, only little impaired, and at the
same time to acquire, on advantageous terms,.all that was
necessary to meet the imperious needs of war."
The holdings of the Bank of France have been sometimes critized as a waste of economic power. The experience of recent years, however, when the bank has come
to the rescue of other markets by loans or advances of gold,
without subjecting industry at home to serious pressure,
has raised no for her noliev earnest defenders

Tvoieal of

•




and costly war, despite disorders at home, Russia was ahle
to maintain its credit at a high level by reason of its immense holdings of gold, only little impaired, and at the
same time to acquire, on advantageous terms,all that was
necessary to meet the imperious needs of war."
The holdings of the Bank of France have been sometimes critized as a waste of economic power. The experience of recent years, however, when the bank has come
to the rescue of other markets by loans or advances of gold,
without subjecting industry at home to serious pressure,
has raised up for her policy earnest defenders. Typical of
their attitude is that of M. Pallain, Governor of the Bank
pf France, in the interview between the Monetary Pon mission and himself in 19438. Upon this point he said:
b Interviews on Banking and Currency Systems, National Monetary
Commission, igio, Cast Cong., 2d sem., S. Doc. No. 405, p. 217.

"It is true that France keeps locked up in its bank a
proportionately larger amount of specie than any other
country, but this policy is not without important compensations. Suppose the French public, changing its
mind, should reduce by one-half its monetary reserve of
which the bank is the guardian. It would gain thereafter
the interest on perhaps two milliards of francs released
and which would have become productive—that is to
say, a saving of from 8o,000,000 to ioo,000,000 francs
per year at the maximum—but if one reflects that it
would lose the advantage of the reduced rates of discount
which the extent and character of our reserves enable us
to maintain and from which all French production profits;
that it would lose in addition the sentiment of absolute
security, of complete financial independence, which every
crisis has strengthened, one would be less tempted to
conclude—with certain critics—that the policy of maintaining heavy reserves, the natural expression of the
country's instincts, is an unwise policy from an economic
and practical standpoint."
So well established in Europe is the principle that
metallic reserves are kept almost exclusively in the bank
of issue that it is rare that any attention is paid to holdings of gold or silver by other institutions. For information as to the country's monetary strength the financial
world looks to the weekly reports of the central bank—
its stock of gold, its supply of foreign bills, and the ratio
of gold to note issues and other liabilities. It is expected
that discount rates will be advanced or reduced according
to the index of monetary weakness or strength which
these figures afford. The duty of maintaining an adequate reserve is so clearly understood by everyone to rest
upon the central bank that other bankers consider simply




6 NJSEC.
O.

MON

to
l assets and their power
the quality of their commercia
a
case of need, either by
draw upon the central bank in
t of their good paper.
deposit account or by rediscoun
y
of their own banks the
In the reports of the condition
osits
es, and they treat dep
do not fear to disclose low reserv
e manner as cash. Thus,
at the central bank in the sam
al
nt-stock banks, it is usu
in the reports of English joi
Bank of
sh in hand and at
to group under one item, "Ca
nch banks, credits at the
England." In the case of Fre
h cash kept on hand under
Bank of France are mingled wit
k."
vaults and at the Ban
the caption, "Specie in the
.)
(Especes en caisse et en banque
h
nch joint-stock banks, wit
Thus at the five great Fre
acceptances amounting on
deposits, current accounts, and
,
0,000 francs ($996,3oo,000)
December 31, 1910, to 5,161,40
of
including that at the Bank
the amount of cash held,
s
00 francs ($72,93o,00o), or les
France, was only 377,900,0
es is
son for such small reserv
than 734 per cent. The rea
t in
ism, but the knowledge tha
not any lack of conservat
e
can be obtained by taking som
case more cash is needed it
l bank.
institutions to the centra
of the best assets of these
1910,
icy pursued during the year
This was, indeed, the pol
t
ed by M. Thery, the eminen
as the account was analyz
s
He declared that those report
French financial writer.a
. 17, iii, XXXIX, p. 330.

Mar
a L'Economiste Europeen,

proshowed that the banks had
which stated rediscounts
r
ources, notably by turning ove
cured supplementary res
nce,
paper to the Bank of Fra
a part of their commercial
had
ained at a low rate, they
and that these funds, obt
ey had so long been high.
utilized abroad, where mon
has
ck banks of England there
In the case of the joint-sto
es in
umulate additional reserv
been some disposition to acc
nk
n primarily because the Ba
recent years, but this has bee
al sense
bank" in the continent
of England is not a "State
ly
Government, and secondari
of responsibility to the
hin
uing notes is confined wit
because its privilege of iss
the
se in reserves made by
narrow limits. The increa
at
in part of a deposit credit
joint-stock banks consists
already
in nearly all cases, as
the Bank of England, and
ged in one.b
noted, the two items are mer
mission,

Monetary Com
king System, National
b Cf. The English Ban
it appears that the
Doc. No. 492, p. 86, where
., S.

1910, 6rst Cong., 2d sess
rates its reserve items,
h's Bank, which alone sepa
Union of London and Smit
England, £3,528,438."
53,635; cash in Bank of
shows: "rash in hand, £3,3

of
of the peculiar organization
Even in England, in spite
eserve
tendency of the "one-r
the banking system, the
es of,
n to increase the balanc
system" has always bee
ng
of England instead of imposi
otherbankers at the Bank
the
bank such as was felt by
a domestic drain upon the
crisis of 19°7. The joint-stock
banks of New Yofk in the
y,
country as well as in the cit
and private banks, in the
notes:from the center to
instead of drawing gold and
done by the banks of the
put in their own vaults, as is
trust, obtain rediscounts at
United States in periods of dis
ry the proceeds to their
the Bank of England and car
er to be able to draw checks
deposit accounts there in ord
be exchanged for notes if
freely on the bank, which can
kers' balanco increased
desired. Thus in 1857 ban
4 to £5,400p0o on Novemfrom .E3,400,000 on November
16,
k, between May 9 and May
ber 25. In 1866 in one wee
9oo,000
m £5,000,000 to £7,
bankers' balances"rose fro
rease from £7,274,000 on
and in 1875 there was an inc




the city,
the country as well as in
and private banks, in
ter to
d and notes:frotn the cen
instead of drawing gol
s of the
, as is done by the bank
put in their own vaults
ounts at
of distrust, obtain redisc
United States in periods
to their
and carry the proceeds
the Bank of England
checks
order to be able to draw
deposit accounts there in
es if
can be exchanged for not
freely on the bank, which
s.ed
bankers' balance,s increa
desired. Thus in 1857
vemNo
mber 4 to £5,400,000 on
from £3,400,000 on Nove
d May 16,
k, between May 9 an
ber 25. In 1866 in one wee
900,000
from £5,000,000 to £7,
bankers' balances'rose
,000 on
an increase from £7,274
and in 1875 there was
hough
June 2.° In 1890, alt
May 19 to £11,857,000 on
Del.IIALZ ua

24-25.
the Money Market, pp.
Palgrave: Bank Rate and

luence
longer published, the inf
,Aeparate returns were no
rease of
was shown by the inc
of the bankers' balances
12 to
,286,000 on November
general deposits from £3o
r i9.
£36,365,000 on'Novembe
ano central banking mech
In a country where there is
back
no line of defense to fall
nism the local banks have
deof legal-tender money are
upon when their reserves
local
ing such a mechanism the
pleted. In a country hav
lines of
g as they keep within the
,banks know that so lon
limit.
n obtain aid without
prudent banking they ca
by the
fact were thus stated
The consequences of this
nce:
governor of the Bank of Fra
bank
that the strength of a
"In France we consider
i. e., in
position of its portfolio,
consists more in the com
in the
cial bills, rather than
the value of its commer
t which
e. * * * The par
importance of its cash reserv
establishys toward the private
the Bank of France pla
,
many a time been proved
s permits the latter, as has
ment
devote,
ir cash reserves: and to
to reduce to a minimum the
s, than
k, a larger part, perhap
without exceptional ris
b
commercial operations."
elsewhere to productive
a

ry
s, etc., National Moneta
405, p. 201.
g., 2d sess., S. Doc. No.

Currency System
b Interviews on Banking and
Commission, 19xo, 6ist

Con

NOTE ISSUE.
2. FREEDOM OF

l of a
notes is under the contro
Where the issue of bank
d the
which has been impose
single institution upon
European
reserve of the country,
custody of the metallic
notes in
that the quantity of
experience has indicated
mmerce so
elf to the needs of co
circ ulation adjusts its
on to the
are kept in proper relati
long as the notes issued
in coin on
of gold by redemption
international movement
erience,
developed, in modern exp
demand. There has not
re coin
lation of note issues whe
undue tendency to inf
any




7 NJ .
SEC

MONO.

redemption prevails because the central bank and its
branches act to a large extent as the clearing house for
other banks. The latter, keeping their reserves largely
with the central institution, send in bank notes when
they are received for deposit, and such notes are canceled.
Differences exist among European banks of issue, as
already pointed out, as to the manner and degree in
which the issue of notes is restricted. Practically, however, such restrictions are limited, outside the Bank of
England, to the requirement that gold or coin shall be
held in a certain proportion to the volume of notes outstanding. In some cases even this requirement is not
made.
The Bank of France is the most conspicuous example
of a power of note issue which is practically unrestricted.
Nominally there is a restriction upon the issues of the
Bank of France, but it is purely arbitrary in its character. When specie payments were suspended in 1870—
not because of the inability of the bank to pay gold, but
because of the apparent wisdom of husbLnding the gold
resources of the bank during the war with Germany—it
was first provided that the total circulation should not
exceed 1,800,000,00o francs. Upon further deliberation
this limit was considered insufficient and was raised two
days later (Aug. 14, 1870) to 2,400,000,000 francs ($463,200,000). So prudent was the conduct of the bank that
the premium on gold did not rise higher at any time than
24 per cent, and this was attained after the war, when
the pressure for exchange was intensified by the payment
of the great war indemnity to Germany. Under these
requirements the limit of circulation was raised on Dece nber 29, 1871, to 2,800,000,000 francs; and again on
July 15, 1872, in order to facilitate the issue of the great
loan of 3,000,000,000 francs, the limit was raised to 3,200,000,000 francs.
When the occasion arose for another increase of the
circulation in 1884 the Government proposed the abolition of the limit. This was refused by the Chambers, but
the maximum was raised by the law of January 30, 1884,
to 3,500,000p00 francs. Other advances in the limit
were made by the law of January 25., 1893, to 4,000,000,000
francs; by the extension of the charter in 1897 to 5,000,000poo; and again by the law of February 9, 1906, to
5,800,000,cm francs.
On all these occasions the maximum was advanced as
soon as it was apparent that the circulation was approaching a point where the old limit might be restrictive.
When the advance was made in 1884 from the old limit
of 3,200,000,000 francs the actual circulation had attained
3,162,000,000 francs. On January 12, 1893, the actual
circulation rose to 3,473,000,000 francs, and thirteen days
later the measure became law extending the limit. The
average circulation of 1897 was still well within the legal
limit of 4,000,000,000 francs, but it seemed advisable„in
extending the charter, to give latitude for the further
expansion of the demand for currency.
Thus, in effect, there have been no legal restrictions
upon the issue of the notes of the Bank of France. The
bank has been able to discount freely for solvent clients,
and the country has passed through no such convulsions
of credit as have affected those countries where arbitrary
restrictions have been put upon the note issue or where
the notes have not been linked to the international move•
••

•

•




1.11C

measure ueckusit saw ext.enumg use Hum.

He

average circulation of 1897 was still well within the legal
limit of 4,000,000,000 francs, but it seemed advisable„in
extending the charter, to give latitude for the further
expansion of the demand for currency.
Thus, in effect, there have been no legal restrictions
upon the issue of the notes of the Bank of France. The
bank has been able to discount freely for solvent clients,
and the country has passed through no such convulsions
of credit as have affected those countries where arbitrary
restrictions have been put upon the note issue or where
the notes have not been linked to the international movement of gold. On several occasions the influence of the
issue of notes in meeting critical conditions stands out
clearly.. One of these was the occasion of the collapse of
the copper corner in 1889, the suicide of M. DenfertRochereau, and the run which was precipitated upon the
Comptoir d'Escompte, which had advanced large sums to
sustain his speculations. It was the eve of the exposition of 1889 and it was felt that a financial panic would
have been fatal to this international festival of commerce
and industry. The situation was saved by the offer of
the Bank of France to loan 14o,000,000 francs ($27,000,000) to the Comptoir on its commercial paper and
securities. The demand being entirely domestic, the bank
was not compelled to take anything from its gold reserve,
but made the loan almost entirely in notes and without
raising its rate of discount. The circulation, which on
March 7, 1889, was 2,741,000,000 francs, rose by degrees
to 2,888,000,000 francs on April 4.a
a Andre Liesse: Evolution of Credit and Banks in France, National Monetary Commission, 1910, 6ist Cong., 2d sess., S. Doc. No. 522, p. 184.

In the crisis of 1907 the Bank of France slowly followed
the other great banks in advancing its discount rate, but
the advance left French merchants free to borrow money
at 4 per cent, while those of London were paying 7 per
cent and those of Berlin 734 per cent. The discount rate
at the Bank of France remained unchanged at 3 per
cent from May 25, 1900, to January 16, 1907, when it was
advanced for a brief period to 334 per cent, then fell back
again on March 21 to 3 per cent, and was not put at 4
per cent until November 7, two weeks after the suspension of currency payments by the American banks.
Where undue restrictions have been imposed upon the
issue of notes, as in the case of the Bank of England, they
have hampered its power to meet a crisis. The bank act
of 1844 in England undoubtedly put a stop to the practice
of allowing the metallic reserve of the bank to dwindle
away until the soundness of the monetary system was
threatened. But in curing this evil .it created a new one.




8 NJ

MONO. SEC.
Henceforth the bank was prevented from employing freely
the resources which it possessed, and public attention was
fastened in every crisis upon the point at which the bank
might be compelled to stop lending, under the restrictions
of the law governing its note issue, even though its gold
resources were large and its reputation was unimpaired.
The remedy was found in 1847, 1857, and 1866, in the
suspension of the bank act, but only wl-en the financial
cpmmunity was in convulsions and credit seemed on the
eve of shipwreck.
Even as late as 1866, although the Bank of England is
,
Credited by Mr. Bagehot with having "in their till an
exceedingly good reserve according to the estimate of that
time "—the banking reserve, which was governed by the
note issue and determined lending power, was allowed to
run down until panic succeeded pressure and appeal to
the government for suspension of the bank act was
decided to be the only means of salvation. The bank had
acted generously on this occasion in granting discounts,
and if it had possessed the power of issuing notes without
restriction upon good commercial paper there would have
been no question of its ability to meet all legitimate
demands. On Government securities there were advanced in five days X2,874,000, and upon bills 1:9,35o,000.
But these advances so reduced the banking reserve that at
the excited conference which tooleplace on Friday night,
May II, between the chancellor of the exchequer and the
deputation from the banks one of the representatives of
the joint-stock banks is reported to have said to the repk
• '
resentatives of the Bank of England: "I can draw a
couple of checks to-morrow morning which will shut you
up at Once."‘a
a Gilbart; The History, Principles, and Practices of flanking, II, p. 319.

exchanges in Great Britain have gradually
adapted themselves to the limited note-issuing power of
the Bank of.England, and, the pressure of 1890, 1906, and
.1907 was met by other methods than the suspension of the
•
,bank act of 1844; but it will be seen in • the discussion
under other heads that it has been largely the complacent
.aid of the. Bank of France which has saved the Bank of
Etkgland from serious embarrassment or at least the suspension of the bank act.
Germany profited by the experience of England in
•framing the harter of the Imperial German Bank in 1875.
• The English -ystem was adopted in part--provision for a
fixed !tinit
issue, beyond which every note should be
.covered in f 11 by gold. Authdrit!P fo exceed these limits
was granted, however, in case the bank saw fit to pay a
.tax at the rate of 5 per cent per year.upon the notes thus
isstrl.d. A similar provision was engrafted upon the
Atistro-liungarian banking law in 1887 and was made a
part of the system of the Natidpal .Bank,ofjapan in 1888,
This restriction was felt to lie 'justified in a measure at
the time when it was imposed in Germany, in 1875, by the
fact that the country was entering upon a new experiment
in her political organization and. in her monetary system,
as well as in banking. It was thought wise that some
assurance should be given to the public that the new
banking system was adequately safeguarded. A similar
conclusion might be deduced from the political and economic conditions of Austria-Hungary and Japan, neither
'Domestic

of 11,1
1;.-.11

1, rt.•1,
,

r• •-••

•-•• •••-•

E



JO
7issult i similar provision was engrafted upon the
Austro-Hungarian banking law in 1887 and was
made a
part of the system of the Naticiaial Bank,of,j#pan in 1888,
This restriction was felt to lie '•justified in a measure
at
the time when it was imposed in Germany, in 1875,
by the
fact that the country was entering upon a new expe
riment
in her political organization and. in her monetary syst
em,
as well as in banking. It was thought wise that
some
assurance should be given to the public that the
new
banking system was adequately safeguarded. A
similar
conclusion might be deduced from the political
and economic conditions of Austria-Hungary and Japa
n, neither
of which was in a strong monetary position at
the time of
the adoption of these provisions of the bank chart
er.
In practice the restriction upon the Imperial
Bank of
Germany has imposed serious charges upon the
bank, but
has hampered German commerce only to a limit
ed degree
because.of the safety valve afforded by the powe
r to issue
notes under the tax of 5 per cent. It has been
found
advisable, however, to raise the limit of untaxed circu
lation at each revision of the charter. With the rapid
expansion of German industry the amount of taxe
d notes
has tended to increase toward the end of each decen
nial
term and to emphasize the necessity for great
er latitude
of issue. Thus in 1897 the number of weeks
in which
circulation was issued subject to the 5 per cent
tax w,as
nine; in 1898, sixteen; in 1899, twenty; and
in 1900,
twenty. The amount of tax paid rose to 2,517
,853 marks
($600,000) in 1900, and total payments for
the five years
ending with 1900 were 8,525,265 marks
($2,025,000).
The limit of authorized issues was raised on
this occasion
from the original amount of 250,000,000
marks to
450,000,000 marks (.
,
5107,140,000), which was increased
by the lapsed issues of local banks to 472,8
29,000 marks
($112,570,000)
.
With the approach of another decennial
period, however, circulation was issued subject to the
tax for seventeen weeks in 1906 and for twenty-five weeks
in 1907. At
the close of the latter year circulation subject
to tax was
outstanding to the amount of $149,000,000,
and taxes paid
for the year amounted to $1,350,000. Obvio
usly,a further
increase of the limit was called for, if Germ
an commerce
was not to be seriously hampered, and such
an increase
was made by the law of 1909 to 550000,000
marks, with
authority to issue an additional 200,000,00
0 marks free
from tax at the end of each quarter.
Of the actual operation of the German syst
em of note
issue more will be said in the discussion of
the experience
of the European banks in affording elasticity
in the supply
of credit. It is believed by many Germ
an economists
that the effect of the tax on excess circulatio
n has been




-NJ t

MONO. SEC.

largely sentimental. The Imperial Bank has not failed to
issue notes when required by demands for rediscount or
for the needs of the circulation, even though the discount
rate has not in all cases been raised to compensate for the
tax on the notes; but the rise of the circulation to the
point where taxed notes must be issued has come to be
regarded as a sort of danger signal of the impending curtailment of banking accommodation. As the matter was
put by Dr. Adolph Wagner, in the sittings of the commission on the renewal of the bank charter in the spring
of i9o8: a
'German Bank Inquiry ;of 1008, National Monetary Commission, 1910,
61st Cong., 2d sess., Senate Document No. 407. p. 209.

"As soon as the cash reserve in the banking department
or the note reserve in our bank is much diminished there
arises great anxiety on the part of the business world that
has need of credit; the demand for credit is correspondingly increased and makes itself felt earlier and more
urgently than is necessary, and the establishment of the
contingent serves to make the situation in the money
market more tense, and even to bring about a panic."
Doctor Wagner expressed the opinion that such a restriction was even more unsuitable to Germany than to
England, because as soon as the note reserve began to fall
off people began to say that the bank would be obliged
before long to take more strenuous measures for raising
the rate of discount, and that it might even happen that
shipments of gold from abroad, intended for Germany,
might be held back to get the benefit of the higher discount rate. He called attention to the remarkable strength
of the Bank of France, which had the largest supply of
cash in the world, and which was free from such restrictions and subject only to the discretion of its managers to
determine the proper relation between the quantity of
notes and cash. In his opinion, the danger signal in the
case of the German bank came at the wrong place and at
the wrong time and its effect was too acute, and he quoted
the dictum of the English expert, Lord Ashburton, that
there is really nothing more absurd and presumptuous in
dealing with such matters than to put a mechanism in the
place of the human understanding."
b Ibid.

p. 211.

Owing to the peculiar organization of German finance,
unusual demands for currency arise at the end of each
quarter, which is made the settling day for rents, interest
on mortgages, and other obligations. They impose such
a heavy burden upon the bank that it was seriously proposed in 1908 that it should refuse to discount bills or
make advances on quarter days beyond a certain amount
corresponding to its existing position. It will be seen,
under the discussion:of the function of the banks of issue
in affording elasticity in the supply of credit, that the
experiment has recently been tried by the bank of imposing heavier charges on quarter days on rediscounts than
are imposed on other occasions, but the proposal to
limit such credit absolutely was not seriously entertained.
It was condemned by Mr. Waldemar Mueller for the following reasons: a

_
a Miscellaneous Articles on German Banking, National Monetary Commission, 1910, 614 con., 2d sees., S. Doc. No. so8, p. 16o.
..




--

viaamotAiaL

corresponding to its existing position. It will be seen,
under the discussion:of the function of the banks of issue
in affording elasticity in the supply of credit, that the
experiment has recently been tried by the bank of imposing heavier charges on quarter days on rediscounts than
are imposed on other occasions, but the proposal to
limit such credit absolutely was not seriously entertained.
It was condemned by Mr. Waldemar Mueller for the fol7
lowing reasons: a
Miscellaneous Articles on German Banking, National Monetary Commission, 1910, 614 çon., 2c1 sess., S. Doc. No. 508, p. 16o.

"'By doing so, the Reichsbank would abandon its
raison d'être as well as the task devolving on it of facilitating the adjustment of payments; for a central noteissuing institution,'with privileges such as are accorded to
the Reichsbank,lis useless if it can grant credit and issue
notes only during periods when business is quiet. For such
purposes even the deficient note-issuing banking system
of the United States would suffice. It is just at heavy
settling days and during crises that the Reichsbank must
prove itself capable of fulfilling its purposes. It is in the
latter sense that the Reichsbank has viewed its tasks
and has fulfilled them amply."
It is not necessary to analyze in detail the restrictions
or lack of them which exist in regard to note issue at other
European banks of issue, because those of the three most
important countries are typical—England, of severe
restrictions; France, of practical freedom; and Germany, of an intermediate policy. It happens that •at
other European banks of issue than those of England
and Germany such restrictions as exist do not ordinarily
hamper the granting of discounts. The Bank of AustriaHungary is governed by the same system as the Imperial
Bank of Germany and frequently issues notes subject to
tax, but has not been subjected to such pressure as to
cause any change in the limit of authorized circulation.
Other banks are regulated in some cases by the requirement that a certain percentage of notes issued shall be
covered by gold. This makes it possible to increase
the circulation without limit so long as the legal proportion of gold is drawn into the bank by changing the discount rate or by the other means which will be hereafter
discussed for attracting and retaining the metal. At the
State Bank of Russia there is nominally a limit of circulation as rigid as that of the Bank of England, but as the
gold stock is many million rubles in excess of legal requirements there is a margin for the legal issue of additional




10 NJ

MONO. SEC.
notes which has never been threatened. At the _National
Bank of Belgium an administrative regulation requires a
reserve to be kept of 33 per cent, but foreign bills may
be counted in the reserve, and the Government has power,
without change of law, to modify the reserve requirement.
At the Bank of The Netherlands a reserve must be kept
of 40 per cent against bank notes and all other demand
liabilities, and at the National Bank of Switzerland 40
per cent against outstanding notes.
3.

READY CONVERTIBILITY OF ASSETS.

It has required experience, in the form of some severe
lessons, to convince bankers that the assets of a noteissuing bank should be of a character capable of quick
convertibility into cash without depreciation in value.
To meet the latter condition it has been the experience in
Europe that commercial paper is superior to corporate
bonds and similar so-called "securities," because the
latter fluctuate in value and are unsalable in time of panic.
Commercial paper, on the other hand, fluctuates but little
and being payable in short terms is converted into cash
automatically,so to speak,by payment at maturity. If it
is paper which is the legitimate outcome of manufacturing
or distributing operations, it is extinguished in the ordinary course of business when these operations are completed and the obligations arising from them are settled.
These principles are now recognized at the chief banks of
issue in Europe and govern the bank strictly in its relations with borrowers and with other bankers.
In the infancy of banking it was not generally understood why any form of property, whether quickly convertible into cash or not, was not good security for the
issue of notes. Hence such propc*:s as those of John
Law and the French revolutionary authorities to issue
notes based upon the wealth of the country. Even after
the principle of basing active banking operations upon
land and general wealth had been abandoned, the distinction between quick commercial credit and credit
employed in financing operations for long terms was not
sharply defined. The experience of Belgium upon this
point is illuminating. Both the Societe Generale, which
was in operation when the Belgian Kingdom was created
in 1830, and the Bank of Belgium, which was founded in
1835,,locked up considerable amounts of capital in industrial' ventures. When the crises of 1837 and 1838 arrived,
these banks encountered a demand from two sides—for
the redemption of their notes in coin and for carrying
through the panic the industrial enterprises which they
were supporting. Their metallic reserves began to dwindle, there were no available means of replenishing them,
4
specie payments were suspended, and th:. Government
was compelled to come to the rescue with the grant of
special credits.°
"Charles A. Conant: The National Bank of Belgium, National Monetary
Commission, Iwo, 6ist Cong., 2d sess., S. Doc. No. 400. p. 14.

Even from this experience the lesson of the distinction,
between financing and short-tegi credits was not fully
learned. Both of these Belgian institutions were again
in difficulties in 1842 and were again compelled to suspend
specie payments in 1848. It was after these examples of
unsound banking methods that the charter of the Bank
of Belvium was enacted in 18co. in substantially the form




••••.. •

cialth

4,11

ILIC1.11

y stag

through the panic the industrial enterprises which they
were supporting. Their metallic reserves began to dwindle, there were no available means of replenishing them,
specie payments were suspended, and th,t Government
4
was compelled to come to the rescue with the grant of
special credits.a
a Charles A. Conant: The National Bank of Belgium, National
Monetary
Commission, 1910, 6ist Cong., 2d seas., S. Doc. No. 400,

p. 14.
Even from this experience the lesson of the distinction,

between financing and short-tyr.Fn credits was not fully
learned. Both of these Belgian institutions were again
in difficulties in 1842 and were again compelled to suspend
specie payments in 1848. It was after these examples of
unsound banking methods that the charter of the Bank
of Belgium was enacted in 185o, in substantially the form
in which it exists to-day. In this charter, which became
the model for the charter of the Bank of The Netherlands
in 1864 and the National Bank of Japan in 1882, are set
forth more clearly than in any earlier bank charter the
true scope and limitations of a bank of issue. In proposing the new charter, the Belgian statesman, M. Freye
Orban, described the requirements of a bank of issue
thus: a
a Documents Parlementaires, 1900.

p• 400.

"Every enterprise or form of commerce of a nature to
impair its credit ought to be carefully avoided. It ought
not to lock up its capital. It ought not to borrow, but
should operate with its own resources. It should not
carry on industry, but it ought to be impartial and t9
discount paper which embodies the required conditions.
It ought to stand as intermediary between the capitalist
and the producer, to distribute capital with justiec .and
liberality through all parts of the body corporate.'"
In carrying out this doctrine, the business of the bank
was confined substantially to strictly commercial operations—that is, to investments in commercial paper and
bills of exchange. Advances on securities were limited
to those of the Government or securities guaranteed by it,
and the amount of such advances was to be confined
"within limits and conditions to be fixed periodically by
the administration of the bank, jointly with the Council
of Censors and the approval of the Minister of Finance."
There were definite prohibitions against borrowing or
making loans on mortgages or on the deposit of industrial
shares. The bank could not lend on its own shares nor
buy them. It was forbidden to take part, directly or
indirectly, in industrial enterprises, to engage in any form
of commerce except that in gold and silver, or to acquire
any real property except such as might be strictly required
for its offices and necessary business. So rigidly were
these rules interpreted that, at the time of the revision of
the charter in 1872, it was reported that the bank was




11 NJ

[MONO. SEC.
refusing to discount paper based upon purchases of materials. The reply of the Government showed that thischarge was not true, but that the bank would refuse to
grant to the owners of an industrial enterprise the credit•
necessary for the building or enlargement of their factories. b
b Charles A. Conant: The National Bank of Belgium, National Monetary
.
Commission, 1910, 6ist Cong., 2d sess., S. Doc. No. 400. p. 40.

The example thus set by Belgium has been recognized
as the sound one at the central banks of other European'
countries. When the independent banks of Italy violated
the true rule, by making. advances for new construction
and for developing industrial enterprises, they awoke, in
the crash of 1893, to find gold at a premium of 15 per
. .
cent, their capital nearly wiped out, and bankruptcy
staring them in the face. Three of the six institutions
then existing went out of business, and the survivors were
subjected to requirements that they should limit their
operations to discounts for four months and to advances
on national securities.'c
C The law of 1803, by which these regulations were established, is somewhat compli:::+ted and permits several other classes of business; but it is
described as "necessarily a transitional law" and therefore not one to be
commended for imitation.—Vide Canovai: The Banks of Issue in Italy,
National Monetary Commission, 1910, 61st Cong., 2d sess., S. Doc. No. 575,
pp. 119-126.

The Imperial Bank of Germany is limited by law to
keeping its lotes covered by commercial paper "in dis=
counted bills which mature not later than within three
months," so far as they are not covered by cash.a The
a Section 17 of the bank act of Mar. 14. 1875, German Imperial Banking
Laws, National Monetary Commission, 1910, 6ist Cong., 2d sess., S. Doc.
No. 574, 1). 41.

reasons for this policy are thus defined by Doctor Koch,
the late governor of the bank:b
b Renewal of Reichsbank Charter, National Monetary Commission, 1910,
6ist Cong., 2d sess., S. Doc. No. 507, p. 210.

"The bill business is by far the leading asset business
of the central bank of issue. The economic strength of
the bank rests primarily upon this class of business,
,especially upon the great liquidity of its bill holdings.
The bank is thus enabled to withstand successfully even
severe crises. It can enlarge the circulation of its notes
without hesitation, since it knows that the ensuing return
,current will bring back to it the means required for their
redemption."
It is pointed out in the jubilee memorial of the Reichsbank, published in 19oo, that "in point of quick and safe
realization the i nvestments in loans on collateral are In
no way to be compared with bill holdings, carefully
selected in accord with banking principles." A loan on
collateral, 'A is declared by Doctor Koch,"is always far less
transparent tha a bill." Even with the most careful
discrimination ii accepting such pledges, the quickness
and possibility of realization depend upon the absorbing
power of the market. "Experience has proved," he continues, "that in times of severe crises even the most
solid securities can not be disposed of at all or only at a
great loss."
Ibid. p. 212.

By the requirement that the notes not covered by cash
shall be covered by commercial paper, the Imperial
Bank is restricted in any event to its capital and deposits
for making loans on securities, and while loans of the latter
class are large in the aggregate, they form only a modest
proportion of the total assets of the bank. The bank
t10 1q
1




and possibility of realization depend upon the absorbing
power of the market. "Experience has proved," he continues, "that in times of severe crises even the most
a
solid securities can not be disposed of at all or only at
great loss.",
e Ibid,

p. 212.

By the requirement that the notes not covered by cash
shall be covered by commercial paper, the Imperial
Bank is restricted in any event to its capital and deposits
for making loans on securities, and while loans of the latter
class are large in the aggregate, they form only a modest
proportion of the total assets of the bank. The bank
has for a long time endeavored to restrict applications
for such loans by keeping the interest rate for them one
per cent higher than for discounting commercial bills.
The bank act of 1875 left it to the executive committee
of the badk to suggest a maximum amount to which
advances on collateral should be made. (Act of Mar. 14,
1875, sec. 32d.) This limit has not been made public
while in operation, but was fixed in 1890 at i8o,000,000
marks ($42,85o,000)—the exact amount of the capital
of the bank. There is an obvious logic in this, since the
capital does not constitute a demand liability, like notes
and deposits. There have been times when loans on
collateral have considerably exceeded this limit, but in
recent years instructions have gone to the branch managers that discounts against deposits of securities are to be
e
granted in exceptional case only and that even financ
.'
bills are to be as carefully as possible excluded from assets
a Mid, pp. 67-69.

A preferential rate, which was granted for a time on bonds
in
of the Empire and the German States, was suspended
1897, with the result that loans on securities fell from
io6,000,000 marks ($25,15o,000) in 1896 to 83,600,000
marks in 1906, and the decline was entirely in the formerly
favored class.b For these and similar loans the Imperial
b 'bid, p. 225.

Bank is willing to remit borrowers to the joint-stock and
g
private banks, which are not charged with maintainin
the convertibility of the paper circulation.
As the charter of the National Bank of Switzerland,
granted in 1905, is the most recent of the charters of
European banks of issue, it may be considered as representing the most mature judgment of the character of
business which such an institution should carry on. The
,
s:
provisions of article 15 of the charter are as follow
l Monetary ComJulius Landmann: The Swiss Banking Law, Nationa
p. 209. These pro.
mission, igio, Gist Cong., 2c1 scss, S. Doc. No. 405,
24, ispx.
'visions were slightly =elided by a law of June




12 NJ

MONO. SEC.

"ART. 15. The National Bank, as a pure note, transfer,
and discount bank, is allowed to transact only the following business:
"I. Issue of'bank notes, according to the provisions ofthis law.
"2. Discounting of bills on Switzerland maturing in
not more than three months and bearing at least two
signatures of known solvency. Bills arising out of agricultural business which are based on a commercial transaction are to be placed on the same footing as other bills.
"3. Purchase and sale of bills and checks on foreign
countries the currency of which is on a metallic basis,
The bills must mature in not more than three months
and must bear at least two signatures of known solvency
"4. Granting of loans bearing interest for not morp
than three months against deposit of securities and title
deeds. Shares are not accepted as security for loans.
"5. Acceptance of moneys upon deposit without interest, and in the case of the Confederation and of the
administrations under its supervision also of deposits
bearing interest.
"6. Transfer and clearing house business; issue and
cashing of drafts.
"7. Purchase of interest-bearing bonds of the Confederation, the Cantons, or foreign countries, vesting in
the holder and easily realizable; this, however, only for
the purpose of a temporary investment of moneys.
"8. Purchase and sale of precious metals in bars and
coin, for its own account and for account of-third parties,
-and the granting of loans on the same.
"9. Issue of gold and silver certificates.
"10. Acceptance of securities and valuables for safekeeping and management.
"ii. Receiving of applications for loans of the Confederation and the Cantens, on commission, all participation in the permanerit taking over:of such loans being
forbidden to the banks."
At practically: all the European banks of issue except
the Bank of England a distinction is made in regard to
loans which is not usual at'American banks—discounts
and rediscounts of commercial paper being classified
separately from loans on securities, which are classed as
advances. The fact disclosed by this classification is that
the larger proportion of the business accepted is in the
form of discounts. In a comparative summary for:three
representative years printed by M. Edmond Tillery, the
editor of the French financial weekly, l'Economiste
Europeen, in the issue of July 8, 1910, the division between discounts and advances (omitting the Bank of
England, where the two items are merged) works out as
follows:
.1.eans of European banks of issue.
Iln thousands nf francs.)
.
? •
Discounts. Advances.

December 3i—
. ago

3.344.000

1.791.000

145

4.211.000

2.722,000

1909

6.615,000

1

4.045,000

These figures for the entire body of European banks of
issue do not fairly represent the position of the institutions having the most liquid assets, because they include
•
•iikwilwarimramormilin-

•
'

•

,•-•

•-

.1




tween discounts ana aavanees
are merged) works out as
j' England, where the two items
follows:
I
.),lcans of European banks of issue.
oTarslts,of francs.)
In ths
Discounts. Advances.

December 31—

3.344.000

1909

2.722.000

6.615.000 1

ises

1.791.000

4.211.000 '

.

4.045.000

These figures for the entire body of European banks of
issue do not fairly represent the position of the institutions having the most liquid assets, because they include
advances at the banks of Spain, the Netherlands, Russia,
and Switzerland which exceed the volume of discounts.
The conditions vary widely under which these advances
are made and do not indicate on the part of the banks of
Russia and the Netherlands any lack of ability to meet
legitimate demands. At the four institutions which conform most closely to scientific principles of management
the ratios of loans and advances at the close of 1909 are
thus stated:
Loans of certain banks of issue, Dec. 31, 1909.
[In thousands of francs"
Discounts. Advances.

-

889.000
1.546.000

365.000

716.000

63.000

785,000

Bank of France
Bank of Germany
Bank of Belgium
Austro-Hungarian Bank

94.000

0
333.00

The apparently large proportion of advances at the
Bank of France was due rather to the shrinkage of the
volume of discounts than to any radical increase in the
advances. There were several occasions during the year
J909 when discounts exceeded i ,000,000,000 francs, while
there was but one week when advances were in excess, and
then only a trifle, of the amount at the close of the year.
At the Imperial Bank of Germany also the proportion of
advances is above the normal because special demands fall
upon the bank at the end of each quarter and peculiarly
at the end of the year.
In pursuance of the purpose of keeping assets in a form
quickly convertible, modern European bank charters impose a narrow limit upon the term for which commercial
credit is granted. In the case of the National Bank of
Belgium the maximum duration of paper accepted for discount is ioo days. At the Bank of France and at several

0

it




13 NJ

MONO. SEC.
other European banks it is 90 days. These limitations of
law, however, are far from indicating the actual degree of
convertibility of the assets of the banks. The average
term of paper discounted is far within the legal limit, not
only because much commercial paper is made for 60 days
or less, but also because of the system of rediscounts, by
which much of the paper held by the central bank of issue
reaches the bank only after it has been for some time in
the custody of the joint-stock banks, by whom it was first
discounted. In the case of the National Bank of Belgium
the highest average for accepted paper during the 12 years
ending with 19o8 was 46 days and for nonaccepted paper
43 days. At the Bank of France the average maturity of
paper at the time it reached the bank was, during the year
1907, 26.06 days; in 1908, 25.65 days; in 1909, 22.53 days;
and in 1910, 24.46 days.
From a purely theoretical standpoint it lay in the
power of the Bank of France, by simply refusing further
discounts, to have collected in cash the entire volume of
its assets within less than ninety days. While this
would have been in fact impossible without wrecking
the financial and industrial fabric, the fact that its entire
holdings of commercial paper matured within this time
gave to the bank the necessary power to control the
movement of currency, capital, and credit upon the
margin of demand. A contraction of credit equal to a
tenth part of the obligations to the bank could be accomplished in a few days. If, on the other hand, expansion
became advisable, new notes could be put in circulation
to an equal amount if paper were brought in by the jointstock banks for rediscount.
Stating this high quality of convertibility in another
form, in the case of the Imperial Bank of Germany it is
disclosed by analysis of its assets that of the bills outstanding at the close of the year 1906, the proportion
maturing in fifteen days or less was 42 per cent; those
having thirty-one to sixty days to run, 27 per cent; and
those running from sixty-one to ninety days, only 15
per cent. Similar statistics for the Austro-Hungarian
Bank showed that of the paper held at the close of 1907
the proportion which matured during January was 62.67
per cent of the whole and during February 25.47 per
cent, leaving maturities of longer than two months of
only ii.86 per cent.
It is by constant scrutiny of the character of paper
presented for discount, and the elimination, so far as
possible, of discounts based upon investments of fixed
capital and financing, that the soundest of the European
banks maintain their strength. In the centers of great
financial operations—London, Paris, and Berlin—it has
become comparatively easy to limit the loans of the
central bank to legitimate commercial paper. In countries where the amount of free capital is less there is a
tendency to invest all the capital which can be obtained in
extensions of the producing machinery of the community.
Under such conditions it is more difficult, with the best
of intentions, to limit the loans of the banks of issue to
paper which is strictly convertible, representing transactions which actually mature within a short period,
It was thus that in Mexico,in spite of a careful organization
of the banking system in 1897, the banks became loaded
up with long-time obligations, which required the intervention of the Government to obtain aid abroad after




tries where the amount of free capital is less there is a
tendency to invest all the capital which can be obtained in
extensions of the producing machinery of the community.
Under such conditions it is more difficult, with the best
of intentions, to limit the loans of the banks of issue to
paper which is strictly convertible, representing transactions which actually mature within a short period,
It was thus that in Mexico,in spite of a careful organization
of the banking system in 1897, the banks became loaded
up with long-time obligations, which required the intervention of the Government to obtain aid abroad after
the crisis of 1907 and the creation of a special investment institution to take over some of the securities of
irrigation and development companies which, though not
readily marketable, had found their way into the assets
of banks of issue.a
a Charles A. Conant: The Banking System of Mexico, National Monetary
Commission, 1910, 6ist Cong., 2c1 sess., S. Doc. No. 493, PP. 9399.

4.

THE CENTRAL BANK AND THE DEPOSIT BANKS.

That the central bank holds, in European countries,
the effective gold reserve and the power to issue notes
for the purpose of converting credit freely into transferable forms, has already been set forth. It remains ba
consider how far the system has afforded an opportunity
for the safe development of other forms of banking institutions by enabling them to lean in emergencies upon
the central bank. For this purpose it is interesting to
examine the evolution of the joint-stock banks of France
and Germany.
In France, prior to the expansion of the Credit Lyonnais about 1881, banking was largely in the hands of
small private institutions, which would have been found
practically incapable of the great operations in foreign
exchange, in issuing and distributing new securities, and
in transferring securities from one market to another
which have become necessary with the development of
saved capital in France and its investment in the negotiable securities of governments, railways, and industrial
enterprises both at home and abroad. It was not until
1865 that a legal definition was given in France to the
check as an instrument for transferring funds, and it
was not until after the war with Germany in 1870 that
the joint-stock banks and credit societies acquired any
considerable development. When the first railways were
built in France, direct appeal was necessary to the Bank
of France for the flotation of their securities. But when,




14 NJ

MONO. SEC.
at a later date, the distkaution of Russian Government
loans and industrial seetaties began upon a large scale,
the joint-stock banks were in% position to engage in the
flotation. Branches were establis*d throughout France.
by the Credit Lyonnais, the Comp%Nr d'Escompte, and
the Societe Generale, with the object of i
gcthering up the
great savings of the French masses in the form of deposits
or for investment in securities. The Credit Lyonnais,
which in 1880 had only 70 agencies, increased the number by the year 1900 to 184 and by 1907 to 246. The
Comptoir d'Escompte, with 9 branches in I 880, had 212
in 1908, while the Societe Generale, of much more recent
origin, advanced from 308 in the year 19oo to 499 in
1908.6
b Vide Liesse: Evolution of Credit and Banks
in France, National Monetary Commission, 1910, 6ist Cong., 2d sess., S. Doc. No. 522, p. 201.

This extension of local branches by the credit societies
was encouraged rather than retarded by a similar extension of branches on the part of the Bank of France,
because at the branches of the Bank of France could
always be found, through the process of rediscount, the
resources in gold and notes necessary to meet any unusual demand upon the branches of the joint-stock banks.
The relations between the joint-stock banks and the
Bank of France were thus defined by one of the officers
of the Credit Lyonnais, in an interview with members of
the National Monetary Commission:
Interviews on Banking and Currency Systems, National Monetary
Commission, 1910, east Cong., 2d sess., S. Doc. No. 405, pp. 224
,
239.

"In France we have the Bank of France, which regulates the currency of the whole country, and any bank, if
it has need for additional cash, may present for rediscount
at the Bank of France the bills and other commercial
paper which it has in its vaults. The amount we carry
in the Bank of France may vary greatly according to
circumstances. It is not to our advantage to have too
large a sum at the bank, because the Bank of France does
not allow any interest. * * * There is no competition between the Bank of France and the other banks,
because they do not do the same kind of business. The
Bank of France receives deposits, but does not allow
interest upon them; it only discounts bills with three
signatures; it is the bankers' bank; it acts as the regulator of the money market."
The joint-stock banks could, therefore, afford to keep
their assets chiefly in commercial paper, because this paper
was convertible practically at will into coin or notes at the
central bank. Under these favoring conditions the four
chief credit societies were able to increase their total
deposits from 790,000,000 francs in 1885 to 1,626,000,000
francs in 1895; 2,438,500,000 francs in 1905; and
4,94 ,000,000 francs ($953,5oo,000) on June 30, 1911.
0
While at the Bank of France deposits have remained
almost stationary for the last fifteen years, the stock of
gold has increased in a manner which has tended to keep
pace with the increased liability imposed upon the bank
as the pivot of the credit system of the country. While
the Bank of France is not prohibited from dealing directly
with the public, it was estimated by the governor, in his
interviews with the monetary Commission,that 70 per cent
of the paper in the bank bore the signature of other banking
institutions and therefore represented rediscounts. It is
significant of the opinion held in French banking circles
on the functions of the Rank of France thqt M

411:




While at the Bank of France deposits have remained
almost stationary for the last fifteen years, the stock of
gold has increased in a manner which has tended to keep
pace with the increased liability imposed upon the bank
as the pivot of the credit system of the country. While
the Bank of France is not prohibited from dealing directly
with the public, it was estimated by the governor, in his
interviews with the monetary Commission,that 70 per cent
of the paper in the bank bore the signature of other banking
institutions and therefore represented rediscounts. It is
significant of the opinion held in French banking circles
on the functions of the Bank of France that M. Henri
Germain, the late head of the Credit Lyonnais, was
quoted as declaring that if the Bank of France did not
exist he would close the Credit Lyonnais in times of crisis.°
a Interviews on Banking and Currency Systems, etc., National
Monetary
Commission, 1910, 6ist Cong., 211 seas, S. Doc.
No. 405, P. 197.

Of a character somewhat similar to this evolution in
France has been the development of the joint-stock
banks of Germany since the control of exchanges throughout the Empire was conferred upon the Imperial Bank.
During the period from 1888 to 1907 the paid-up capital
of all the banks increased from 846,72o,000 marks to
2,873,300,000 marks ($685,000,000), or 239 per cent,
while their total capital resources, including reserve
funds, rose from 971,91o,000 marks to 3,517,230,000
marks ($836,000,00o), or 265 per cent. Groups of banks
have spread like a network all over Germany, under the
leadership of a half-dozen strong Berlin institutions,
which have lent their efforts without ceasing to the
development of German industry at home and abroad.
The resources controlled at the close of 1907 by the group
of which the Deutsche Bank is the center was 3,601,770,000
marks; by the Disconto Gesellschaft group, 2,025,690,000
marks; by the group of the Dresdner Bank, 2,170,930,000
marks; and by the group of the Bank fiir Handel und
Industrie, 934,920,000 marks. The 8 leading banks
of Berlin, with their affiliated institutions, represent resources of 9,849,18o,000 marks, or about 74 per cent of
the entire resources of the 421 German banks, which
amount to 13,294,220,000 marks ($3,160,000,000).a
a Robert Franz: Development of the German Banking System, Nationa
l
Monetary Commission, 1910, fast Cong., 2d sess, S. Doc. No. 508, p.
87.

ff..•

*4 •

.44.




15 NJ
MON

O. SEC.'

This develooment wankd have been mielt retarded, in
the opinion of G2rman authorities, but for the support
given to the banking system by the central bank. In
Germany, as in France, the joint-stock banks have been
able to aid in the development of industry and die extension of German international iinance, br:cause their chief
care has been centered upon obtaining sound assets for
their loans. They have beea unhampered by the necessity of piling up idle stocks of gold or by the haunting
fear that such stocks would prove inadequale to meet
some great strain. These functions have been the special
care of the Imperial Bank. Upon its scrutiny of the
international horizon, upon its control of the movement
of gold, and upon its power to issue its notes to supply
the currency needs of the country has depended the
ability of the joint-stock banks to go about their business,
making commercial loans, making advances where prudent for the development of German industry, and embarking in railway and colonial enterprises beyond sea.
When the rapidity of this expansion has brought reaction and aroused doubts of the ability of the joint-stock
and private banks to weather the storm, it has been the
leadership and the resources of the Imperial Bank which
have saved the situation. In 1898, when the gold reserve
Was threatened by the outbreak of war between Spain
and the United States and heavy payments on the Chinese
loan, the bank paid out within a few weeks about
$25,000,000 in coin and $58,000,000 in notes; but the discount rate was promptly raised to 6 per cent, foreign bills
were purchased to the amount of $2o,000,000, international securities began to leave Berlin to establish credits
abroad, and gold poured into Germany from England,
France, Austria, and China. "If the balance turned in
favor of Germany," Raffalovich declares, "the merit of
the change must be attributed to the measures taken by
the Imperial Bank." a In the graver crisis of 1901, which
a Le Marche Financier en 1898-99, p. 254.

carried down the Leipziger Bank and caused runs on several others, the Imperial Bank increased its volume of
discounts for the purpose of aiding commerce, but found
its deposits so swelled by the funds withdrawn from the
private banks that it reduced instead of raising its lending
rate!'
b

Raffalovich: Le Marche Financier en

1901-2, pp. 219 - 220.

Through the pressure of 1901 and through the American
panic of 1907 the Imperial Bank of Germany successfully
piloted the finances of the country, with no greater burden
than a discount rate at times of 6 per cent and,finally, in
1907,of
per cent, which was considered so severe and
unusual a tax upon German industry that a special. commission of the ablest bankers and economists was appointed
to determine how such a catastrophe as a
per cent
rate could. be guarded against in time to come.
It is a part of the theory of a central bank of issue that
it should possess reserve powers capable of being called
into play when other financial powers are exhausted, or
at least Unpaired. It is not desirable, therefore, that
these reserve powers, existing in the form of a large
metallic stock and the right to issue notes, should be
P1111111/11s.ei

4."




,„
wmcn was considered so severe and
unusual a tax upon German industry that a speci
al commission of the ablest bankers and economists was
appointed
to determine how such a catastrophe as a
per cent
7
rate could. be guarded against in time to come
.
It is a part of the theory of a central bank of
issue that
it should possess reserve powers capable of
being called
into play when other financial powers are
exhausted, or
at least impaired. It is not desirable,
therefore, that
these reserve powers, existing in the form
of a large
metallic stock and the right to issue notes, shoul
d be
employed up to the. limit under ordinary financial
conditions. It is in this respect—in straining their
resources
to the limit instead of holding them in reserve—
that the
Bank of England and the Bank of Germany
compare
unfavorably with the Bank of France. In each
case there
is a logic, which is something more than accid
ental, in
the fact that when money is plentiful the
central bank
finds the joint-stock and private banks under
bidding in
the open market the official discount rate
and taking away
its business. If discounters under such circu
mstances can
do without the help of the central bank, they
bring in
their paper to be rediscounted only a short
time before
maturity. Only when demands for credit
rise above the
level of the market:supply,.do calls upon the
central bank
acquire intensity, and it is then that its
long-husbanded
powers are promptly released for the
protection of the
market. Hence the justification of the
principles that
the central bank should be chiefly a bank
of rediscount,
that it should not seek to attract investme
nt deposits by
paying interest, and th3t its power of note
issue, when
properly used as a reserve resource,should
be substantially
unfettered.




16 NJ
MO

NO. SEC.

V. THE CENTRAL, BANK

AND Tim

INTERNATIONAL MARKET.

The central bank of issue fulfills in European countries
one of its most important functions in its relation to the
international money market.• In fulfilling this function,
it guards the national stock of gold by its influence over
exchange, affords a refuge for other banks in periods
of
stress, and in some cases actively encourages national
banking ventures in the colonies and in foreign countries.
Only institutions of well-established strength are fitted
to maintain successfully the necessary relations with foreign money markets. In times of financial peace this
service may be performed by large joint-stock banks
and
private bankers, but in emergencies reliance is place
d
upon the central bank of issue, not merely for sustaining
the local banks, but for giving a guaranty of security
to
loans contracted abroad.
Preeminence has been claimed for many years as the
center of the world's banking by the Bank of Engla
nd.
While its relative gold resources have not kept pace
with
those of certain other great banks, and it has been
compelled in several emergencies to rely for assistance
upon
the Bank of France, there has been no serious effort
to
transfer elsewhere its function, as defined by Mr. Withe
rs,
that of "custodian of the gold store for inter
national
banking.' a
a The English Banking System
, National Monetary Commission, 1910,
6ist Cong., 2d sess., S. Doc. No. 492, p. 16.

The Bank of England in fulfilling this oblig
ation has
to be prepared at any time to meet demands
from abroad,
based on credits given to foreigners by the Engli
sh banking community. It is thus required to observe
the signs
of financial weather in all part,s of the world and
to regulate the price of money in London so that the
foreign
exchanges may not become unduly adverse. Surro
unded
by joint-stock banks, colonial banks, and branc
hes of
foreign banks with liabilities running in the
aggregate
into hundreds of millions of pounds, the mana
gement of
the reserve of the Bank of England is delicate and
difficult.
Its duty in this respect has always been fulfil
led, but in
the absence of freedom of note issue has
required the
adoption of special devices for controlling
the money
market which have not been resorted to at other
central
banks. Obviously, the position of London as
the center
of international exchanges could not he maint
ained if
the regulation of the market were left to indep
endent and
competing banks. As the problem is stated
in a study
made for the commission:a
a Ibid., p. 22.

"If a banker wants to increase his holding of
bills, he
naturally does so at the market rate, without
considering
whether his doing so is likely to turn the forei
gn exchanges
against London and so cause a demand on
London for
gold. Consequently, the exigencies of their
daily business
and the strong competition between them impel
the banks
and discount houses to do business at rates
which may
sometimes be dangerous to the general interest,
and it is
thus clearly necessary that some institution with eon,




a Ibid., p. 22.

"If a banker wants to increase his holding of bills, he
naturally does so at the market rate, without considering
whether his doing so is likely to turn the foreign exchanges
against London and so cause a demand on London for
gold. Consequently, the exigencies of their daily business
and the strong competition between them impel the banks
and discount houses to do business at rates which may
sometimes be dangerous to the general interest, and it is
thus clearly necessary that some institution with a commanding position at the head of the machine should occasionally intervene and regulate its operations."
In each of the principal European countries the function of the central bank of issue as the ultimate guardian
of the national credit and gold reserve has been often
and clearly recognized. In several cases in recent times
the Bank of France, with its great stock of gold and its
unfettered power of note issue, has come to the aid of the
banks of other countries. As early as 1839, when the
reserve of the Bank of England fell to 1:3,00o,000, the
Bank of France advanced £2,000,000 in gold upon the
indorsement of the Barings. In 1890, when the Barings
themselves were the cause of disaster, the Bank of England gave such help as it could, but was not able to prevent
the flooding of the Paris market with international securities, which were thrown over in order to obtain gold. It
was then that the Bank of France again came forward
with a loan of 75,000,000 francs in gold for three months,
with a promise of renewal, secured by Exchequer bonds.
So complete was the restoration of confidence in London
as the result of this action that this gold was not only
returned to the Bank of France with seals unbroken, but
was not even sent across the channel. The Bank of
France was not affected by this operation. Its average
metallic reserve for the year 1890, including silver, was
2,513,000,000 francs ($.4.85,000,000), while in London at
the height of the crisis the bank reserve was under
$too,000,000. It is pointed out by M. Liesse that, as the
crisis was local, the remedy was close at hand. If the
Bank of England had been able to issue notes for .£ I5,000,000 the amount of its loan—in order to meet the crisis,
there would not have been the slightest need for an
appeal to the credit of the Bank of France.a
a Evolution of Credit and Banks in France, National Monetary Commission, Iwo, 6ist Cong., 2d sess., S. Doc. No. 522, p. 18g.

Since the renewal of the charter of the Bank of France
in 1897, the occasions have been frequent when aid has
been extended by the bank to other institutions. In
May, 1906, the sum of 40,000,000 francs was forwarded
to the Bank of England to relieve it from the necessity of
advancing the rate of discount. In the autumn of the

11



....spanoMIPOIMPAPPIPPSPIPPeamluoi ,*
"
"

"''''''

17 NJ

MONO. SEC:
same year, when acute string,.ncy affected the London
market and the demand for gold was intewified by pressure in the United States, as well as by demands from
Egypt. and Brazil, the Bank of France again came to the
rescue, but by a more refined method than the earlier
loans of physical gold. The bank discounted English
commercial paper to the amount of about 75,000p00
francs and afforded indirect aid in another direction by
releasing about 5,000,000 francs in gold for shipment to
Egypt. The Bank of France would not on this occasion
furnish gold directly for New York, because of the conviction that the Secretary of the Treasury should first
give such support as was in his power to the market and
because disapproval was felt of the extent to which
speculation in New York had been carried.
When the crisis of 1907 broke the Bank of France again
stood ready to aid the international market, and in
answer to a mere telegram forwarded to London S-16,000,00o in American gold eagles. The explanation of the
attitude of the Bank of France in this emergency toward
American bankers, given by a recent French author, is
as follows: a
a- Maurice Patron: The Rank of France in its Relations
to National and
International Credit, National Monetary Commission, 1910, 6-ist
Cong.,
2d sess., S. Doc. No. 494.
p• 144.

"It was at the time of this developing crisis that the
Bank of France was unreasonably reproached with its indifference to the monetary situation in the UnitediStates
and its refusal to give aid. The criticsjorgot that the
bank was prevented by. its statutes from the direct shipment of sums for which the Federal Government refused
to become responsible,and that,nevertheless,it forwarded
8o,000,000 francs in American coin, which merely passed
through London. Certain negotiations took place at that
time between the American Government and the Bank
of
France with a view to dealing directly, without the intervention of the London market. It is only because that
Government would not or could not offer such guaranties
as the Bank of France considered adequate that it made
use of the London market, which has a much greater
interest than ours in the prosperity of the United States.
"
In the case of Germany the Imperial Bank has not only
fulfilled, even at heavy cost, the function of guardian of
the national gold stock and of German monetary credit
abroad but has lent its encouragement to the joint-stock
•
banks in their ventures into foreign banking fields. Down
to the period of the early seventies the financial operations
growing out of the foreign trade of Germany were almost
exclusively in the hands of London banks. The establishment of the Deutsche Bank at Berlin in 1870 marked the
first important effort to turn this traffic into German
channels. The founders of this institution recognized
that there existed ,a gap in the German credit organization
which needed to be filled in order to render the foreign
commerce of the country independent. This program
was not at first easy to carry out, because Germany had
not yet established the gold standard and bills of exchange
drawn in the currencies of the various German States were
neither widely known)nor liked in the intertin+:---,

•

exclusively in the hands of London banks.
The establishment of the Deutsche Bank at Berlin in 1870
marked the
first important effort to turn this traffic
into German
channels. The founders of this institut
ion recognized
that there existed a gap in the German cred
it organization
which needed to be filled in order to rend
er the foreign
commerce of the country independent.
This program
was not at first easy to carry out, because
Germany had
not yet established the gold standard and
bills of exchange
drawn in the currencies of the various Ger
man States were
neither widely knownl nor liked in
the international
mdrket.b The adoption of the gold stan
dard in 1873 and
b Robert Franz: Deve
lopment of the German Banking Syste
m, 18881907, National Monetary Commission
, 1910, 6ist Cong., zd sess., S. Doe.
No. 508, pp. 31-32.

the unification of the banking system
in 1875 tended to
remove these difficulties, and:other
German joint-stock
banks followed the example of the
Deutsche Bank in
gathering up the saved capital of the
people and applying
it to the development of German indu
stry at home and
over seas.
CHAPTER III,—How EUROPEAN,BANKS
INFLUENCE THE
MONEY MARKET.
The development of European banking has
followed such
well-defined channels and has resulted
lin such a general
agreement among conservative bank
ers upon the rules
to be followed in given contingencies that
an examination
of these rules andlthe manner in whic
h they have been
applied seems likely to be advantageous
, even if they might
not be found applicable, without
certain modifications,
to banking conditions in the Unit
ed States. The scope
of such an inquiry is so wide
, it it is extended to all
branches of the subject, collater
al and remote, that it
seems advisable, at least as a first
step, to confine it to those
powers exercised by the Euro
pean banks which affect
most directly the character, amo
unt, and regularity of the
accommodation extended to indu
stry and commerce.
These are the powers which thes
e banks exercise in performing the two functions of supp
lying the internal circulation with an adequate stock
of bank-notes and in
conserving the national gold stock.
Simple as these two
propositions seem, they embody a larg
e part of the fundamental duties of the central banking
mechanism. How
these duties are performed by the
chief European banks
may be conveniently considered unde
r the following heads:







Alp

•

7^7

18 SEC.
NJ'
MONO.

I . CIIANC,ING TilE RATE Or DISCOUNT.

This is now the most generally accepted method by
which a central bank protects the national stock of gold.
From about 186o down to near the close of the last century it was believed by many financiers to he practically
the only scientific method of exercising control over the
exchanges and so arresting the outflow of gold. During
every autumn and at every other period of"tight money,"
the financial world waits with keen interest to see if the
directors of the Bank of England will raise the discount
rate at their regular weekly meeting on Thursday and if
the Imperial Bank of Germany will follow them on the
next day. The crisis requires to be a very grave one to
lead the directors of either institution to change the rate
except on the day of Lhe regular N‘eekly meeting. When
a second change occurs inside the week, or when, as in
1907, at the Bank of England, there are three changes
within eight days," it is a signal that the situation is
a The rate was advaw-ed on Oct. sr. 1907, from 3,2 to 4, 2 per cent; on
1
Nov. 4, to 6 per cent; and on Nov. 7 to 7 per cent.

acute, and that the central bank is exerting all its great
powers to check the outflow of floating capital and to
attract it from abroad in the,form of gold.
The underlying principle of an advance in the discount
rate is to make the return upon capital more attractive
in the place where the advance is made, and thereby to
draw capital from without into the country and check its
exportation from the country. There are under modern
conditions many forms and representatives of capital—
commodities, the precious metals, negotiable securities,
bills of exchange, and other forms of banking credit.
The transfer of some of these forms of credit may take
place without the physical transfer of anything but paper,
and in some cases by a mere message by cable. It is not
necessary here to discuss at length the theory of the
balance of trade or the large part which securities play in
the transfer of capital. It is sufficient to call attention
to the fact that an advance in the rate of discount which
makes the return on capital at a given financial center
more attractive than it has previously been, or than it is
in other markets, is sufficient to work marked change in
the degree of pressure upon the money market. Defining
msome of the methoes in which a change in the discount
.rate operates in Germany, Mr. Fischel, of the Berlin firm
of Mendelssohn & Cc., speaking before the German commission which considered the renewal of the charter of
the Imperial Bank in 1908, expressed himself as follows:"
b German Bank Inquiry of 1908, National Monetary Commission, two,
6ist tong., 2c1 sess., S. Doc..No• 407, Pt. I, pp. 447-448
.

"If the bank puts up its rate the first effect is to cause
Germans to demand payment of sums due them abroad,
and a further effect is to cause foreign creditors to extend
the term of loans made to Germans, either by not demanding immediate payment on account of the higher rate of
interest or by the much more natural method exemplified
by the action, let us say, of an American holder of a bill




the Imperial Bank in 1908, expressed himself as follows:"
b German Bank Inquiry of 1908, National Monetary
Commission, zoto,
6ist Cong., zd sess., S. Doc. N. 407, Pt. I, pp.
448
447- .

"If the bank puts Lip its rate the first effect is to cause
Germans to demand payment of sums due them abroad,
and a further effect is to cause foreign creditors to extend
the term of loans made to Germans, either by not demanding immediate payment on account of the higher rate of
interest or by the much more natural method exemplified
by the action, let us say, of an American holder of a bill
of exchange against Germany on account of cotton sold,
who will not discount this bill in Germany, but instead
disposes of it in some other country where a lower rate of
interest prevails. Such a proceeding would, in a case like
this, be equivalent to the extension of a loan. The raising
of the rate of discount will have its effect upon the capital
invested by foreigners in this country. It will, moreover, affect the movement of securities, inasmuch as a
smaller amount will be bought in Germany and a larger
amount sold to the outside world. It will hinder the
floating of foreign loans in Germany and perhaps altogether prevent it, a point that has been repeatedly touched
upon in the course of these discussions. A further effect
of a rise in the rate of discount will he that the prices of
commodities in Germany will fall, or at least that an
advance will be checked, and that, in consequence of this,
•exportation will be promoted and importation prevented
or retarded. Above all, the spirit of enterprise will be
curbed, which will result indirectly in a diminution of
consumption."
So little was the principle understood of raising the discount rate sharply that prior to 1844 comparative uniformity in discount rates prevailed at the Bank of England. For more than a century, down to 1839, "the
bank rate" never exceeded 5 per cent nor fell below 4 per
cent. During the pressure of 1839 it was raised for some
months to 6 per cent, but in January, 1840, was reduced
to 5 per cent, where it remained until the passage of the
act of 1844.a At that time the open market rate was not
a Palgrave: Bank Rate and the
Money Market, p• 4g

above 2 per cent, and the bank was "out of the market
."
It was in August, 1844, that the bank rate was reduced
to
234 per cent, and since that date the changes in
rate have
been more numerous at the Bank of England than at any
other bank in the world.




rwromor.or"prooremori:
,
"',"SjelOWASAMPIIIIIIWIPrPrnessforepoimpowir,t„,...

19 NJ
MONO. SEC.
The total number of changes from IS44 to the clw-c of
1909 was 443, of which by far the greater number were
made after the change of policy in 1857, to be presently
referred to. During the thirty-eight years from 1857 to the
period of "cheap money" in 1894 occurred 330 changes,
or an average of more than 8 per year. The year 1873
witnessed 24 changes and 15 other years to or more
changes each. The frequency of the changes in 1873 was
due to the large operations in bills arising out of the payment of the French war indemnity to Germany. The
result of these repeated variations was to afford a low
rate for money during a large part of the period covered.
A rate not exceeding 2 per cent was charged during
7,036 days, from 1844 to 1909, or more than one-quarter
of the time; a rate not exceeding 3 per cent was charged
during 12,895 days, or more than half the time (including
the lower rate); and a rate not exceeding 4 per cent was
charged during 18,588 days, or more than three-quarters
of the time."
b Palgrave: The English Banking System, National Monetary Commission, east Cong., 2d sess., S. Doc. No. 492, p• 197.

Of the potency of raising the discount rate sharply, the
discovery came after the panic of 1857. Only then did
the directors of the Bank of England realize the dynamic
powers which lay ready to their hands by a simple decision in the bank parlor of a Thursday afternoon. Of
the effects of the adoption of that policy by the Bank of
England in those early days, Mr. Bagehot speaks thus: a
a Lombard Street, Works, V., p.

"The beneficial results of the improved policy of the
bank were palpable and speedy; we were enabled by it to
sustain the great drain of silver from Europe 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."
Change of the discount rate is now recognized at central banks as the chief means of controlling the foreign
exchanges. It is supplemented, as will presently appear,
by other methods of influencing the supply of loanable
funds and the movement of gold and does not occupy so
nearly exclusive a place at the Bank of France, the Bank
of Austria-Hungary, and the Bank of Belgium as at the
Bank of England, and in a lesser degree at the Imperial
Bank of Germany. Apart from the use of other methods
of influencing the exchanges, however, the discount rate
at the Bank of England has been changed more often
than at other banks of issue, because London is so dis-

ciples, at a severe crisis, preserved public credit."
Change of the discount rate is now recognized at central banks as the chief means of controlling the foreign
..
exchanges. It is supplemented, as will presently appear,
by other methods of influencing the supply of loanable
funds and the movement of gold and does not occupy so
nearly exclusive a place at the Bank of France, the Bank
of Austria-Hungary, and the Bank of Belgium as at the
Bank of England, and in a lesser degree at the Imperial
Bank of Germany. Apart from the use of other methods
of influencing the exchanges, however, the discount rate
at the Bank of England has been changed more often
than at other banks of issue, because London is so distinctively the clearing house for colonial and international
transactions; because the Bank of England carries a
smaller reserve in proportion to the volume of credit
which: upports, including that of the joint-stock banks,
it
than some other central banks; and because the Bank of
England is not a dealer in international bills. The result
of this greater pressure upon the London market has been
to make the number of changes in the rate of discount at
the Bank of England more than twice the number at any
other institution. The figures for leading banks have been
as follows: b
b palgrave: The English Banking
System, National Monetary Commission, 6ist Cong., 2d sess., S. Doc. No. 492, p. 185.

Changes in discount rate, 1844-Ipop.
Bank of England
Bank of Germany
Bank of France....
Bank of the Netherlands
Bank of Belgium c
. Only
0




front 1851 to 1909.

442
196
188
z92




20 NJ

MONO. SEC.
Examination of the records in greater detail shows that
during the whole period there have been only two years
when no change in the rate of discount took place at the
Bank of England; while there have been twenty-seven
separate years when no change has been made during the
year by the Bank of France; ten years at the Bank of
Germany; fifteen at the Bank of The Netherlands; and
eleven at the Bank of Belgium. The widest fluctuation
in any one year at the Bank of England was in 1866, when
the minimum rate was 334 per cent and the maximum
rate was to per cent. Never since 1866 has there been a
higher rate than 7 per cent.
In steadiness of rates since the efficacy of changes in the
discount rate was discovered, the Bank of France has the
most remarkable record, due to its large stock of coin and
to other causes which are discussed elsewhere in this
paper. During the earlier years of its history, from
January 13, 1820, to January 14, 1847, the rate was kept
uniformly at 4 per cent. In more recent years the rates
fixed on May 19, 1892-234 per cent for commercial discounts and 3 14 per cent for advances on securities—
remained unchanged for nearly three years, when they
were reduced on March 14, 1895, to 2 and 3 per cent.
There were changes resulting from the South African war
in 1898, which for brief periods in 1899 and 1900 carried
the rate for discounts as high as 434 per cent; but on
May 25, 1900, this rate was fixed at 3 per cent and for
advances at 334 per cent. The latter rates remained
unchanged for nearly seven years, until the growing pressure in international markets at the beginning of 1907 led
to an increase. The discount rate was advanced on January 17, 1907, to 334 per cent, fell back on March 21 to
3 per cent, and was again advanced on November 7 to
4 per cent, while at London it stood at 7 per cent and at
Berlin at 734 per cent. With the passing of the storm,
the rate at the Bank of France was reduced on January 9,
1908, to 334 per cent, and on January 23, to 3 per cent,
where it remained until September 23, 191t .a
a Full details of the history of the discount rate at leading European
banks can be found in The English Banking System, National Monetary
gommission, 6ist Cong., 2c1 scss., S. Doc. No. 492, pp. 184-201.

In 1858, after the system of sharp and radical changes
in the discount rate had demonstrated its efficacy at the
Bank of England, a similar policy was pursued for a time
at the Bank of France; but this policy was abandoned
in 1,464 in favor of greater stability of rates. It was felt
that the policy of advancing the discount rate in order to
influence the exchanges caused commerce alone to bear
the brunt of all demands for currency, contracted credit,
and hampered business. Under present conditions, therefore, the bank, in the language of a French authority,
"though sometimes forced to resort to this expedient, only
uses it in cases of extreme necessity, and * * * taxes
its ingenuity to find certain devices which may defer the
rise in the discount rate." b
, Maurice Patron; The Bank of France in its Relation to National and
4)




in

154 in _avtn uigicia.t.ci

V,

that the policy of advancing the discount rate in order to
influence the exchanges caused commerce alone to bear
the brunt of all demands for currency, contracted credit,
and hampered business. Under present conditions, therefore, the bank, in the language of a French authority,
"though sometimes forced to resort to this expedient, only
uses it in cases of extreme necessity, and * * * taxes
its ingenuity to find certain devices which may defer the
rise in the discount rate." b
4)
, Maurice Patron; The Bank of France in its Relation to National and
International Credit, National Monetary Commission, 1910, 6ist Cong.,
ad sess., S. Doc. No. 494, pp- 133-134.

Inevitably it has developed that control of this character
could be achieved only where its exercise was in strong
hands, dowered with leadership in the money market.
;Such power is .exercised effectively in Europe by a central bank. Wherever the attempt has been made to
regulate the movement of gold through independent
.banks, even where they have sought to act together, it
has usually failed. Down to the close of the last century
:Switzerland and Sweden were without central banks and
both suffered an adverse rate of exchange and a drain of
gold, which have been practically cured since the adoption
,of a central banking system. In Switzerland exchange
was for years steadily adverse and the drain of gold and
even of subsidiary silver compelled the banks to import
gold at their own cost in order to maintain their cash
reserves. In vain were repeated efforts made to secure
harmony of policy by clearing-house agreements and by
special committees. It is declared by a well-known
economic writer that, as each bank acted according to
its own convenience, "common action was prevented and
the measures of precaution taken by some establishments to strengthen their position were not only without
result, but were generally counteracted by establishments
which operated only from day to day and without regard
to the general situation." a
Raffalovich, Le Marche Financier en 1898-99, p. 565.

4
1

•




21 NJ

MONO. SEC.

11. REDISCOUNTING COMMERCIAL PAPER.

Rediscounting commercial paper for other banks is one
of the strongest weapons of the central bank. Rediscounting consists in the discounting by one banking institution for another of commercial paper which has already
been discounted by the latter for a client. Its essential
advantage lies in the fact that an institution which finds
itself without an adequate cash reserve may replenish its
cash by pledging its best paper with another institution
having a larger stock of cash or wider powers. To a
limited extent rediscounting is done in the United States
for country banks, but rarely for the larger banks of the
cities. In England the custom is somewhat more extended and is resorted to by the joint-stock banks in
periods of crisis, but only at the continental banks is the
system so well established and regularly pursued that it
reflects no discredit upon the largest joint-stock and private banks to rediscount their paper with the central bank.
Closely related to the system of rediscount is another
practice common in Europe—that of acceptance. As
acceptances are not widely employed in this country, it
may be instructive to quote the definition of the term
given in a French dictionary of commerce and based upon
the French commercial code..
This definition is as follows:
"Acceptance.—This is the act by which the person
drawn upon engages to pay the amount of a bill of exchange to the person who may be at maturity the regular
holder of such bill. It is accomplished by the indorsement on the bill of exchange made by the drawee of his
signature, preceded or not with the word 'accepted'(art.
122). Acceptance, besides the general conditions relative
to consent, must be the work of a person capable of obligating himself by a bill of exchange. It may be partial,
but not conditional (art. 124). Its effect is to create an
obligation on the part of the drawee toward the holder at
maturity, with all the consequences attached by law to
obligations arising. from a bill of exchange."—Commercial
Code, arts. 118-125.
Acceptance often, however, takes the form of the
guaranty by the accepting bank to pay the draft in case
of default on the part of the drawee. It has the advantage of putting behind the less known credit of other parties to a bill of exchange the credit of a well-known bank.
Through this acceptance, which is practically an indorsement, the- paper, from being a dead instrument and a
nonliquid asset, becomes a liquid asset, which is negotiable
at any sound banking institution. In the language of Mr
Warburg: a
a The Discount System in Europe, National Monetary Commission, ioio,
6ist Cong., 2d sess., S. Doc. No. 4.02, p. 7.

"Through the addition of .the banker's signature the
question of the maker's crectit,is eliminated and the note,
instead of being& mere evidence of,an advance, is transformed into a standard investment, the purchase and sale
of which will be governed only by the question of interest.
This investment commands the broadest possible market."
Thus, through the system of acceptances a negotiable
character has been given to bills of exchange payable at
European banking. institutions which puts them in a difNO.

PA:111XCl s signat
ure the
question of the maker's credit,i
s eliminated and the note,
instead of being.a mere evidence
of.,an advance, is transformed into a standard invest
ment, the purchase and sale
of which will be governed only by
the question of interest.
This investment commands the
broadest possible market."
Thus, through the system of
acceptances a negotiable
character has been given to bill
s of exchange payable at
European banking. institutions which
puts them in a difIerent category from promissor
y notes of individual firms
'held in the vaults of an Americ
an bank. The latter represent until maturity credit
in a form which is not readily
convertible into cash. Fro
m this difference between
American, and European met
hods of banking it results
that, no matter how good may
be the credit of the American purchaser or of an American
bank whose acceptance
may be offered to a shipper in
China, South America, or
Europe, shippers in such countr
ies will not, as a general
rule, take such an acceptance,
because the American bill
does not have the same ready
sale as the European bill.
For granting acceptances whe
re there is no actual investment of capital, a commissio
n of a fraction of i per
cent is charged by the banker
to the merchant. Large
business firms arrange for accept
ance of their bills at different financial centers lip to
a certain limit, hut are
charged only upon the accept
ances which are actually
granted. Thus a considerable prof
it is obtained by the
banks without the employmen
t of cash. Large firms
having credits in different market
s are able to save more
than the commission on accept
ances by drawing against
these credits in the market whi
ch has for the time being
the lowest discount rate. The
y may use all foreign credits
at the same time when the interest
rate at home is higher
than the rates ruling abroad, and
, conversely, they may at
times cover all their foreign cred
its and use only the financial accommodation offered at:hom
e if the rate there is for
the time being lower than rate
s abroad."
s‘a

a Ibid., p. Io.

The fact that a bill of exchange
has been accepted not
only gives it much higher value as
a convertible asset than
a mere promissory note with ind
ividual or firm indorsements, but it may considerably
diminish the demand for
'discounts by enabling .the own
er of the bill to retain it
until the occasion arises for obt
aining cash. Otherwise,
he might feel compelled to discou
nt it immediately after
receiving it, if money condit
ions were favorable at the
moment, in order to know tha
t he could have the cash
when he needed It.
The existence of a great mas
s of accepted paper in
European markets enables
the joint-stock banks of




44




22 NJ

MONO. SEC.
Europe to rediscount such • paper at the central bank
whenever they need cash, and only when they need it.
It is in France and Germany, among the leading countries,
that the system of rediscounting has attained its most
complete development. The system which has grown up
at London, as the result of the restricted power of the
Bank of England in the issue of notes, is complicated and
somewhat artificial, but accomplishes in the end the same
purpose as direct rediscount in France and Germany.
Rediscounting for the joint-stock banks by the Bank of
England is exceptional under ordinary conditions, but a
similar result is attained through the relations of the bill
brokers and the private bankers to the joint-stock banks
and the Bank of England. It was only after the influence
of changes in the rate of discount upon the foreign exchanges came to be clearly understo,od that the English
system began to assunie definite form. Even after this
discovery the Bank of England adhered for some years to
the policy of an official minimum rate of discount, which
was the same to all corners; but in 1878 the bank announced that it would no longer feel bound to adhere to
the rule of maintaining a ;fixed minimum rate as closely
as it had formerly done.
At the same time another change was announced having
an important influence upon the London money market—
that the bank would, when desired, make advances to bill
brokers. In 1890, a further change was made, in adding
to the privilege of advances on bills to bill brokers and
discount companies the right to have bills directly discounted at published rates Fhen Jhaving not more than
fifteen days to run. The currency of such bills has,since
been extended to sixty days. Under the operation of
this system, when a banker requires a bFoker to repay his
"call money," the only source from which the broker can
obtain the means of payment is the Bank of England. He
therefore pledges what are virtually the banker's own bills,
and thus is able to repay the banker. These bills may
have but a few days to run, but the money on them must
be had at once, and a demand for a comparatively small
sum'may produce a visible effect on the money market.
The defects of this system are set forth by Mr. Palgrave
thus: a
a

Bank Rate and the Money Market. 14. 52.

"This arrangement is ,not favorable to the quiet working of the money market. If the custom generally followed on the Continent prevailed in this country and
bankers laid themselves out to dis count freely for their
s
customers, feeling at liberty to rediscount these bills
whenever needed with the Bank of England, all the work
of ihiemit*ries vold be laved and ibusineo4 ygnsW be
slitstdocasiptham. It Is the ,
avelsoutinailts.
foreign centers, as at Berlin, to rediscount thus habitually.
The arrangement is a good one in many ways; it 'helps the
central bank to keep in touch with the smaller business
houses which surround it, and it enables those houses to
carry on their business with perfect smoothness."
It is through the systein of rediscount, which has been
brought to perfection in France and Germany, that the
central bank performs one of its most essential functions.
Through its reserve resources it protects the other banks
when their liauid assets are imnairpei The nolicv of the




foreign centers, as at Berlin, to rediscount thus habitually.
The arrangement is a good one in many ways; it helps the
central bank to keep in touch with the smaller business
houses which surround it, and it enables those houses to
carry on their business with perfect smoothness."
It is through the systein of rediscount, which has been
brought to perfection in France and Germany, that the
central bank performs one of its most essential functions.
Through its reserve resources it protects the other banks
When their liquid assets are impaired. The policy of the
Bank of France was thus defined to the members of the
Monetary Commission in their interview with Baron
Brincard, one of the officers of the Credit Lyonnais: b
b Interviews on Banking and Currency Systems, National Monetary
Commission, 2920, 62st Cong., 2d sess., S. Doc. No, 405, p. 224.

"In France we have the Bank of France, which regulates the currency of the-whole country, and any bank, if it
has need for additional cash, may present for rediscount
at the Bank of France the bills and other commercial
paper which it has in its vaults. The amount we carry
in the Bank of France may vary greatly according to circumstances. It is not to our advantage to have too large
a sum at the bank, because the Bank of France does not
allow any interest.".„4"IF 71
17
As the result of this policy, every crisis since sound
banking methods were understood has witnessed a great
expansion of discounts at the Bank of France. In 1907
commercial discounts increased from 855,700,000 francs
($165,200,00o) on August 22 to I ,396,800,000 francs
($269,600,000) on October 31. In 1908, after the pressure was over, the figures for corresponding dates were
673,200,000 francs (15130,000,00o) and 823,200,000 francs
($159,000,00o).a Even average discounts for the year
a Bulletin de Statistique, LXIII, p. 235, and LXV, p. 201.

showed an increase from 897,700,000 francs for 1906 to
1,125,700,000 francs for 1907, with a prompt decline for
1908 to 897,200000 francs.
The following table shows the total volume of discounts„
average for, the year, and average rate of discount for
representative years since I896'i
From Liesse, Evolution of Credit and Banks in France, National
Monetary Commission, 2920, 62st Cong., 2d sess., S. Doc. No. 522, p. 28;
completed from. Bulletin de Statistique, February, 2922, LXIX.
p. 164.
Discounts at Bank of France.
[In thousands of francs.)

Year.

I
28
97

Total sum Average of I Ay...age
discounted. balance ,"
sheet. t rate.
88364800

ram

13, 247,600 ,
9 555,900
,
10.834,300

730 0
.40
879.200 ;

13.980,900
15, 769. 100
12.800.600
12.336.372

1904
1906
1907
1908
:gag
Sgto
.

546.300
699.600
897. 700
1.135,700
8.
300
761. soo

14. 580. 730

977.300

2. 00

3. 35
3.00
3.00
3.00
3.45
3.04
3.00
3.00




23 NJ

MONO. SEC.

While it can not be stated with precision what proportion of the discounts of the Bank of France represent
rediscounts, it has been seen that they were estimated by
the governor of the bank in 1908 at 70 per cent of the
total. One of the reasons for the appearance of a large
volume of rediscounts in the assets of the bank is the
fact that its machinery of collection is employed by the
joint-stock banks for paper for very small amounts discounted for the retail shopkeepers of Paris. The ratio of
such bills to the total number discounted has been almost
steadily growing and has kept down to a low amount the
average value of discounts per piece. Thus, for 1907 the
average value of discounts per piece was 732 francs
($141.28); for 1908, 586 francs; for 1909, 573 francs; and
for 1910 620 francs ($119.66). Of 7,503,127 bills discounted at Paris in 1907, 3,646,229, or 48 per cent, were.
for zoo francs ($19.30) or less, and this has been about
the proportion during the present century.° These are
a Maurice Patron: The Bank of France in its Relation to National and
International Credit, National Monetary Commission, igio, 61st Cong.;
2d sess., S. Doc. No. 494, pp. 82-86.

practically all rediscounts, for which the discounting bank
is responsible in ease of default.
INThe manner in which rediscounting at the Imperial
Bank of Germany is relied upon by the joint-stock banks
was thus stated to the Monetary Compission,by an officer,
of the Deutsche Bank:a
a Interviewson Banking and Currency Systems, National Monetary Commission, 1910, 61st Cong., 2d sess., S. Doc. No. 405, P. 374.

"The great strength of our financial system in Germany
is the Reichsbank. Under th4 system the question a
our own cash reserve is of secondary importance, as we
can at all times convert our holdings of commercial paper
into cash at the Reichsbank. I may mention that of the
prime cpmmercial bills we are carrying, from $1,50o,000
to $2,000,000 fall due each day; for these we get cash or
credit at the Reichsbank at maturity."
It is declared by Doctor Koch, long time governor of
the Imperial Bank, that the institution gathers among
its holdings a very considerable proportion of all the
bills drawn and put in Circulation in Germany. As a
rule the bank attracts a larger share of the bills in circulation in times of business expansion than in times of
stagnation and depression, because under the latter conditions money is easy and the 'joint-stock banks are able to
underbid the Imperial Bank in Ow rate of discount.°
a Renewal of Reichsbank Charter, National Monetary Commission, 1910,
6ist Cong., 2d sess., S. Doc. No. 507, p. 209.

This condition varies, however, in a period of tension,
because the joint-stock banks then seek to increase their
b4ances at the Imperial Bank by means of rediscounts.
t.
Statistics based upon the stamp taxes are obtainable
in Germany in regard to the number of bills drawn.
These statistics show that, in spite of the organization of
other institutions and the economic progress of the empire




This condition varies, however, in a period of tension,
because the joint-stock banks then seek to increase their
bisiances at the Imperial Bank by means of rediscounts.
ta
Statistics based upon the stamp taxes are obtainable
in Germany in regard to the number of bills drawn.
These statistics show that, in spite of the organization of
other institutions and the economic progress of the empire
within the past thirty-five years, the ratio of bills held by
the Imperial Bank to the total amount drawn has not
decreased. Whereas, in 1876, the Imperial Bank purchased 33.3 per cent of all the bills put in circulation
during that year, this share, after many fluctuations, rose
by the year 1899 to 39 per cent, declining in 1900 to 36.7
per cent. The ratio of the average investnient in bills to
the total value in circulation is smaller, because the Imperial Bank does not hold the bills from the date when
titey are drawn. Its ratio of bill holdihgs to the total
fluctuated prior to 'goo between 11.3 per cent in 1881
and 15.8 per cent in 1893. In 19oo it amounted to 13.3
per cent. For years the Imperial Bank has been far
ahead of other central banks of issue in its average invest.. ,
ments in bills.a
a The Reichsbank, 1876-19oo, National Monetary Commission, 1910,6ist
Cong., 2d sess., S. Doc. No. 408, pp. 346-49.

The short average maturity of the bills in the portfolio
of the Imperial Bank is in itself evidence of the large volume of paper which is rediscounted. Other evidences are
afforded by the sharp upward movement of discounts in
times of pressure and by the accommodation extended 'to
small borrowers through the rediscount of the paper of
the cooperative societies. There is usually an increase in
the volume of discounts at the Imperial Bank with the
approach of the autumn, but this increase was much more
notable during the pressure of 1907 than in ordinary
years. In 1905, when conditions were comparatively
normal, the amount of discounted paper in the portfolio
of the bank increased from 845,267,000 marks
($2oo,75o,000) on August 23 to I,I09,485,000 marks
(.263,5wpm) on October 31. In 1907 the increase for
the corresponding weeks was from 1,034,439,000 marks
($245,679,000) to 1,322,833,000 marks ($314,2oo,000).
The average of discounts in the portfolio of the bank,
which was 908,816,000 marks for 1905, was 1,104,537,00o
marks for 1907.
It is through the cooperative societies which have grown
up under the laws of 1889 and 1896 that the small tradesman is able in an indirect way to obtain credit from the
Imperial Bank. The bank now accepts for rediscount
many small bills bearing the guaranty of a cooperative
society. The average face value of domestic bills (HsCoUnted was, in 1876, 1,480 marks ($352) and in 1906
1,689 marks ($4o2),




24 NJ

MONO. SEC:
3.

THE PURCHASE OF GOLD.

This has become an important auxiliary method of
protecting national credit where the raising of the discount
rate is not required by business conditions.
The occasions when it is wiser to purchase gold than to
raise the discount rate are those which cause a temporary
and local demand for currency or credit, without indicating the need for imposing a burden on general trade. The
Bank of France has been the most conspicuous example
of the policy of purchasing gold at its own expense rather
than raising its rate of discount to merchants. As early
as the three years 1855-58, the Bank of France expended
15,893,000 francs (53,o68,000) in premiums on the purchase of gold bullion to the amount of 1,384,553,000 francs
($267,000,000).a In later years the same policy has been
a patron: The Bank of France in its Relation to National and International Credit, National Monetary Commission, 1910, fast Cong., 2d sess.,
S. Doc. No. 494, p. 224.

from time to time pursued, with the essential purpose of
imposing upon the profits of the bank the charges for
incidental needs for gold, instead of imposing them upon
the business community by an advance in the rate of
discount. The French method, however, is not so efficient
in a serious crisis as raising the rate of discount, because
it does not operate upon the entire commercial structure
in a manner to restrict loans and speculation and to
attract capital from abroad.
The practice of purchasing gold has gained increasing
recognition at the central banks in recent years as an aux"iliary to raising the rate of discount. In England the
bank is the chief purchaser of the gold which comes into
.
the open market. Practically all the gold which arrives
from South Africa goes into the bank when it is not bid
for more resolutely by some other country. The Bank
of England is bound by law to pay 77s. 9d. per ounce for
gold presented in proper condition. The amount paid
at the mint is 775. I•zd., but there are advantages to
the private owner of bullion in taking the metal to the
bank rather than to the mint. When the Bank of England
is hard pressed for gold it raises to the amount of the
mint price or above it the rate which it offers. The
bank does not always, however, pay the open market
rate, because this rate may be artificially advanced by
the determination of some other government, like that
of Russia or Austria-Hungary, t9 obtain the metal, even
at a premium.
Several facts, which are the outgrowth of the strong
commercial position of Great Britain, but are in a sense
influences independent of that position, contribute tel
make London the international market for gold. No
obstacle is thrown in the way of obtaining gold at the
Bank of England and exporting it, except the change in
the rate of discount. This fact—that gold can at all times
be had and that England was for many years the only
..
. .




at a premium.
Several facts, which are the outgrowth of the strong
commercial position of Great Britain, but are in a sense
influences independent of that position, contribute t6
make London the international market for gold. No
obstacle is thrown in the way of obtaining gold at the
Bank of England and exporting it, except the change in
the rate of discount. This fact—that gold can at all times
be had and that England was for many years the only
country in which it was free to come and go—has done
much to give to London the control of the international
exchanges.
In other markets, where it has been thought proper to
charge a defensive premium for the yellow metal or to
discourage its exportation, international bills drawn on
these other markets have not had the same definite gold
value as those drawn on London. As was stated by Mr.
c
iig. hel in the German inquiry, "while in the case of sterling exchange only a small margin has to be allowed for
loss, the loss in transactions in German exchange in foreign
countries is always treated as an unknown quantity."a
a German Bank Inquiry of 1908, National Monetary Commission, 1910,
451st Cong., 2d sess., S. Doc. No. 407, Pt. I, p. 475. Mr. Fischel added that
he considered it "extremely injurious that a doubt should arise at any time
as to whether gold can be exported from Germany," and that he wished
:'that there might be no further occasion even for the mild reproach that
we are not glad to do it."

Another factor contributing to keep at London the international market for gold is the fact that in England there
is no seigmiorage charged upon coinage. If a bar of gola
is taken to the British mint, its full value comes back .in
coined sovereigns, weight for weight, without any deduction whatever. The cost of coinage is assumed lziy the
Government. The same is true at the mints of the
United States. In France and Germany, on the other
hand, a deduction is made for the cost of coinage. France
has accumulated so large a stock of the yellow metal that
it is not necessary to abolish the coinage eharge in order
to attract gold, but the range of fluctuation in foreign
exchange is wider than if such a charge did not exist and
Paris is thereby barred from becoming a free market for
gold in the same sense as London.

,

;.




25 NJ

MONO. SEC.

In Germany a pound of gold brought to the mint is
charged the sum of 3 marks (71.4 cents) by way of seigniorage. The Imperial Bank pays back to the depositor of
a pound of gold, worth 1,395 marks (S332), the sum of
1,392 marks. This subject was seriously discussed in the
'
German bank inquiry of 1908, and it was strongly urged.
charge should be abolby Mr. Fischel that the seigniorage
ished and that the price paid for gold at the Imperial
Bank should be fixed at 2,790 marks per kilogram of the
pure metal, or 1,395 mai•ks per pound.° If such a price
a German Bank Inquiry of lc-x.8, National Monetary Commission, 1910,
6ist Cong., 2d sess., S. Doe. No. 407, Pt. I, p. 455.

were paid permanently, it was contended, gold would more
frequently come to Germany in the course of the year and
the cost to the bank would be less than some other devices
resorted to for obtainirig gold. A different method of
attaining the same result was proposed by Doctor Lexis—
that the Imperial Ba_-_k should be permitted to count its
bullion and foreign gold coins at 1,395 marks to the pound
and to pay for such gold any price which market conditions might suggest, bctween 1,392 and 1,395 marks. It
would be unnecessary in most cases to convert such gold
into German coin and it could be furnished for export at
the coinage parity of 1,395 marks.' It was suggested by
o Ibid, p. 324.

Doctor Wagner that the bank, in its own discretion, might
even pay higher than 1,395 marks. Upon the question of
its responsibility in the matter, he made these declarations: c
c /bid, p. 412.

"The fact is that the Reichsbank has once for all the
function of regulating the currency and is more directly
concerned with the operations relating to the gold supply
than is the administration of the mint, and it is therefore
more expedient that it he charged with the business in
question. Of course, it must be ready to thrust a certain
pecuniary interest of its own into the background. From
what I can gather, tile Reichsbank has itself held this
view of the matter. The sums in question are indeed
not so large as to play any role by the side of the regular
profits of the Reichsbank."
Even without the direct authority to alter the price
paid for bullion, the Imperial Bank of Germany purchased
from 1876 to 1907 no less than $821,700,000 in gold bars
and foreign coin.a It was declared by Doctor Reisser, in
a Renewal of Reichsbank charter, National Boundary Commission, 1910,
6ist Cong., ist seas., S. Doc. IN;-). 507, p. 42. The gold purchases in 1908
were 298,879,768 marks; in 1909, 155,241,355 marks; and in 1910, 164,619,38s
marks.

the commission on the renewal of the charter in 1908, that
"the amount could undoubtedly have been greatly increased if the directors could have made up their minds
not to stick at the price."b A measure having the effect
_
•
_
German Bank Inquiry of 1908, Nat. Monetary Commission, 1910, 6ist
Cong., 3d seas., S. Doc. No. 407, pt. 1, p. 144.

of increasing indirectly the amount received for gold by
the holder, which was discussed in 1908, was put in operation by the Imperial Bank at intervals from 1879 to
1881, but proved only moderately effective. This was the
grant of advances free of interest on deliveries of gold to
the bank—in normal cases for five days and under special




creased if the directors could have made up their minds
not to stick at the price."b A measure having the effect
1) German Bank Inquiry of 1908, Nat. Monetary Commission, upo, fast
Cong., 2d sess., S. Doc. No. 40;, pt. 1, p. 144.

of increasing indirectly the amount received for gold by
the holder, which was discussed in 1908, was put in operation by the Imperial Bank at intervals from 1879 to
1881, but proved only moderately effective. This was the
grant of advances free of interest on deliveries of gold to
the bank—in normal cases for five days and under special
circumstances for eight days. Several branches of the
bank were even permitted to pay a higher price than the
rate fixed in the bank act (1,392 marks per German pound),
1,393 marks for amounts of at least 500,000 marks, and
1,393“ marks for amounts of at least 2,000,000 marks."
The Reichsbank, 1876-1900, National Monetary Commission, 1910, 61st
Cong., 2d sess., S. Doc. No. 4
08, pp. 236-237.

This policy was abandoned after 1881, hut was resumed
in 1908, with allowances of interest for as long a period as
six weeks. It was contended that to its operation was
due in a measure the importation of $56,170,000 in gold
during the first nine months of 1908, as compared with
$9,40o,000 for the whole of the year 1907 and S54,000,000
for 1906.d

(

d Renewal of Reichsbank charter, National Monetary Commission, 1910,
fast Cong., 2d sess., S. Doc. No. 507, P. 34.

At the National Bank of Belgium the obligation is recognized to maintain the national stock of coin, even at
heavy cost to the bank. In 1906 gold was imported by
the bank to the amount of 8i,500,000 francs and in 1907
98,500,000 francs ($19,000,000). The question has often
.
been raised in Belgium whether it would not be sounder
policy for the bank to retire its small notes and advance
its rate of discount, but it has been argued in favor of the
policy pursued that the cost of importing coin was a
bagatelle to the amount of the tax which would have been
imposed upon Belgian industry if the average discount
rate, which in 1906 was 3.84 per cent, had been maintained at 5 per cent or some other rate high enough to
turn the course of the exchanges. In other words, the
development of national industry and not the mere earning of dividends was recognized as the practical as well as
the abstract duty of the bank.'
a Charles A. Conant: The National Bank of Belgium, National Monetary
ikr
Commission, 1910, 6ist Cong., zd sess., S. Doe. ..o. 400, pp. 191-92.

a

•




26 NJ
MONO. SEC.
4.

BORitOWING FROM THE MARKET.

"Borrowing from the market" is a means of withdrawing surplus funds from the open market which is practiced
by the Bank of England for making effective the rate of
discount when the official rate fixed by the bank fails to
influence sufficiently the market rate. The growth of the
joint-stock banks of London and the great increase in the
volume of banking transactions carried on there, coupled
with the restraints put by the act of 1844 upon the lending
capacity of the Bank of England through its power of
issue, have impaired somewhat the ability of the bank to
-ket by the simple device of raising the
influence the mal
0Mcial discount rate. This failure of a change in the
official rate to control the market is a comparatively recent
development. In Bagehot's time, a generation ago, any
change made by the Bank of England would at once affect
the open-market rate. The other banks have created such
a mass of credit, however, that they do not always feel
compelled to follow the central bank. Much of this credit
is derived from the deposit of foreign money in London
joint-stock banks and from the exchange operations of
important foreign banks having branches in London.
With this money at command the bill brokers by their
discounts counteract unconsciously the effects of changes
in the official bank rate. An individual banker or bill
broker who wants to add to his holdings of bills or to renew
his maturities naturally discounts good paper at the best
rate he can get. He can not be expected to stop and
wonder whether his purchase below the bank rate will have
an adverse effect on the foreign exchanges. The obligations of the Bank of England, however, are of a different
character. It feels under the necessity of regulating the
price of money in London in order to maintain its banking
reserve and protect the national stock of gold. As the
matter is put by one of the authorities consulted by the
Monetary Commission: a
a Hartley Withers: The English Banking System, National Monetary
Commission, 1910, 6ist Cong., 2d sess., S. Doc. No. 492, p. 22.

"This necessity for regulation is a fact which is only
dimly grasped by the London money market as a whole,
which frequently resents the operations of the Bank of
England and contends that the price of money ought to
:be left to the natural,laws of supply and demand. The
position of the London money market, however, as the
only one in which gold can at all times be obtained, to
any extent and without question, clearly makes some
regulation of the rates at Which it is prepared to work
inevitable. None of the various. items which compose
the market can be expected to conduct their business
with a view to the necessities of the market as a whole.
* * * Consequently the exigencies of their daily business, and the strong competition between them, impel the
• tanks and discount houses to do business at rates which
may sometimes be dangerous to the general interest, and
it is thus clearly .necessary that some institution with a
commanding position at tpe head of the machine should
wreivinqflv intervetie and regulate its operations."




with a view to the necessities of the market as a whole.
* * * Consequently the exigencies of their daily business, and the strong competition between them, impel the
banks and discount houses to do business at rates' which
may sometimes be dangerous to the general interest, and
it is thus clearly necessary that some institution with a
commanding position- at the head of the machine should
occasionally intervene and regulate its operations."
The action taken by the Bank of England under such
--circumstances is to get rid of the pressure of surplus
money by the simple expedient of itself borrowing the
surplus. This is accomplithed by selling consols for
"money," and ,buying them back for the "account."
,
The ," account" price, at which they are bought back- is
of course higher than the "money" price, at which they
are sold (because it includes a larger proportion of the
accruing dividend), and the difference between the two
prices represents the interest paid for the loan.
The effect of this policy is to reduce the surplus of capital in the market. The buyers of consols for money
• give checks on their bankers in payment, which tend to
create balances against these banks' in the settlements
through the clearing house. Their balances at the Bank
of England are, therefore, reduced, and they are compelled
to rectify their position by refusing further_accommodation to the bill brokers. At the Bank of England the
holding of securities is reduced by the sales for money;
the amotuit borrowed cancels apart of the bank's deposit




27 NJ

MONO. SEC.
liabilities to the joint-stock banks whose balances are reduced, and thus the basis of credit is narrowed, money
becomes dearer, the open-market rate of discount is
brought into closer relation with the official rate, the foreign exchanges are influenced, and the probability is increased that gold will come to London or will not be
taken for export.
This system is characterized by a recent English
writer as "clumsy and artificial," and as "having been
brought into existence by the great development of the
activities of the other banks, which have manufactured
credit so successfully that part of the output has sometimes
to be absorbed by the Bank of England, which does not
want it but has to prevent the evil consequences that
might result from its overabundance." a
a Withers: The Meaning of Money, p. 230.

The reason for the failure of the Bank of England to
control the market is the absence of the powers in respect to note issue which belong to the Bank of France
and to the Imperial Bank of Germany, and also the comparative absence of the policy of rediscount, which would
tend to make the joint-stock banks more dependent upon
the central bank. The difficulty arises, however, in times
of abundant money rather than in times of peril. At a
time of stress there is usually an exhaustion of the supply
of credit outside the Bank of England, so that the openmarket rate responds quickly to an advance in the bank
rate. Under such circumstances the other banks, wishing to strengthen their position, call in a large portion of
their loans to the market. The situation is thiis forced
into the hands of the Bank of England, which is enabled
to raise rates to such a height as it thinks necessary to
prevent the further export of gold from the country and
to attract fresh supplies.
5.

HOLDING AND DEALING IN FOREIGN BILLS.

Dealing in gold bills drawn on London or other financial
centers has been one of the methods which have acquired
considerable development in recent years at European
banks as a means of protecting of their gold stock
and at the same time avoiding undue pressure in the
market. If a central bank can buy bills on favorable
terms when they are freely offered and can, on the other
hand, offer them for sale when the demand is heavy for
exchange, it can do much to restrict the shipment of gold
and to minimize the effect which such shipments produce.
The policy is not a new one in theory or in practice, but
has been adopted on a large scale only recently at the
Imperial Bank of Germany and the Austro-Hungarian
Bank. The largest use of the system prior to the present
generation was made by the National Bank of Belgium,
both under the special pressure of the Franco-Prussian
war and in the ordinary management of its reserve.
The fact that Belgium was neutral territory during
the war of 1870 led to the transfer of both French and
German business operations to the markets of Brussels
and Antwerp and to the imposition of a heavy strain upon
the limited resources of the Belgian Bank. There was
for a time a run upon the bank for the redemption of its
notes. This required gold, which was obtained by the
cnoln •-•;

V.:11 '

• -

r-

•

..




has been adopted on a large scale only recently at the
Imperial Bank of Germany and the Austro-Hungarian
Bank. The largest use of the system prior to the present
generation was made by the National Bank of Belgium,
both under the special pressure of the Franco-Prussian
war and in the ordinary management of its reserve.
The fact that Belgium was neutral territory during
the war of 1870 led to the transfer of both French and
German business operations to the markets of Brussels
and Antwerp and to the imposition of a heavy strain upon
the limited resources of the Belgian Bank. There was
for a time a run upon the bank for the redemption of its
notes. This required gold, which was obtained by the
sale of the bills drawn on foreign countries which the
bank already had in its possession. The amount of these
bills held on July 21, 1870, was 64,144,561 francs
($12,38o,000), which was reduced on July 31 to 7,227,333
francs. Through the sale of these bills the bank was
enabled, with the aid of an increase in the discount rate
in July to 5 per cent and in August to 6 per cent, to buy
coin abroad and thus to fully meet its obligations.
This policy of carrying foreign bills in its reserves was
not discouraged at the Bank of Belgium by the experiences of 1870. Almost from the beginning the bank was
allowed by the Government to count such bills as the
equivalent of coin, without any specific provision to this
effect in its statutes, and as the bills drew interest they
afforded a more profitable form of reserve than idle metal.
Constituting, according to Prof. Denis, from 1872 to
1876, only about 6 per cent of the total discounts of the
bank, they grew for the period from 1893 to 1897 to 25
per cent of discounts and to a much larger proportion of
the metallic reserve.a In the discussion of the policy of
a Charles A. Conant: The National Bank of Belgium,
National Monetary
Commission, 1910, Oist Cong., 2d sess., S. Doc. No.
400, p• 79.

the bank on the subject, which took place on the renewal
of the charter in 1900, it was declared that the drafts
carried were of the first order and were protected by the
indorsement of the most important banking houses of
Paris, London, Berlin, Amsterdam, Hamburg, Cologne
,
Frankfort, and Vienna. At no time had the bank suffered the slightest loss upon these securities. The average
rate of operations in foreign bills during the year 1897
was 2.53 per cent, with an average maturity of 47
days;
in 1906, 2.51 per cent, with an average maturity of
48
days!
,
b

_
p. 84.

28 NJ

MONO. SEC.

It was explained on behalf of the Government that
the
paper discounted came from third parties, through banking
firms which gave it their indorsement. These instituti
ons
bound themselves, moreover, to rediscount such paper at
any time at a rate which should not be higher than the
official rate of the central bank of the country from which
the paper emanated and should protect the National
Bank, according to its instructions, either in bills of
exchange at market"quotations or in gold coin or bullion.
It is declared by an English economist that the bank has
been enabled to carry on its operations with a comparatively small bullion reserve through its skill in discounting, and through the power of regulating the foreign
exchanges which it possesses by means of the quantity of
foreign paper which it holds. "The moderate rates of
discount charged and the comparatively small range of
fluctuation," he declares, "show how carefully, especially
of late years, the Bank of Belgium has maintained this
power."a
a Palgrave; Bank Rate and the Money Market, pp. 184-185.

,‘ The holding of bills simply as investments was long
practiced by European bankers, but did not expand into
their general use- as a resource for protecting the national
gold stock until a comparatively recent date. At, the
Imperial Bank of Germany, the system of carrying
foreign bills has attained serious proportions only during
the twentieth century. It was long ,understood that the
bank could prevent a sudden and forced rise of exchange
rates by selling such bills; but as late as 1898 the amount
carried amounted to but a few million marks. The commission for the purchase of long-time foreign bills was
then reduced from one-tenth of per cent to half this
amount.b After this change, business of this sort inb Renevyal of Reichsbank Charter, National Monetary
Commission, 1910,
6ist Cong., 2d seas., S. Doc. No. 507, p. 35.

creased rapidly. The maturity of the bills, which in 1895
did not exceed 17 days, gradually rose until in 9o7
they ran 6o days. Summing up the progress made and
Vie reasons for the change of policy, the "Frankfurter
Zeitung ".declared:
c Ibid., p. 36.

"Of all bills bought by the Imperial Bank in 1907, 4
per cent were foreign bills, while the Austro-Hungarian
Bank's proportion ,of foreign bills amounted to 8:3 ,per
cent, that of the Bank of The Netherlands to 12 per cent,
that of the National Bank of Belgium (which treats them
%. -like its metal reserve as cover for outstanding circulation)
to 23.9 per cent. The restraint of the Reichsbank can
not be ascribed to any reluctance on its part to make
material sacrifices. The explanation is to be sought
rather in the fact that for years the management held the
opinion regarding gold imports and foreign exchange that
it would be better not to interfere with the international
movement of money because attempts at artificial improvement were apt to be succeeded by vehement counter
movements. Under the present management the ReiChsbank has come to share our conviction that, when the
balance of payments is favorable, it is wiser not to,'look
on idly until the natural movements of foreign exchange




•

P

. •

Ii.

.'

-

.1

.AP."'

11

rather in the fact that for years the management held the
opinion regarding gold imports and foreign exchange that
it would be better not to interfere with the international
movement of money because attempts at artificial improvement were apt to be succeeded by vehement counter
movements. Under the present management the ReVphsbank has come to share our conviction that, when the
balance of payments is favorable, it is wiser not to look
on idly until the natural movements of foreign exchange
rates- force an influx of gold and to run the risk, by spch
inactivity, that the surplus of Germany's commercial
credit balances abroad be invested in foreign loans or
used for other purposes."
The sale of foreign bills was much discussed by the members. of the special e6mmission which considered the
renewal of the bank charter of 1908, and was strongly
commended by members of the governing board of the
Imperial Bank and by leading private bankers. It was
pointed out by Mr. Fischel, of Mendelssohn & Co., that
the sale of foreign bills was likely to have a much
greater effect when made by the Imperial Bank than
when made from the supply of foreign bills possessed by
private bankers or by private banks, because, throtigh the
distribution of the bills by the Imperial Bank, money
flowed out of general business and out of the open market
into the bank. A contraction of the general note circulation resulted, which had the same effect as the raising of
the rate of discount and which so far tended to loNiier
the rate of foreign exchange. In the transactions of the
private banks, Mr. Fischel declared, money merely
changes hands, but through the lowering of the rate Of
exchange the exportation of gold could at times be
diminished, retarded, and perhaps even prevented. Another benefit of the system Mr. Fischel found in the fact
that the appearance of the Imperial Bank in the market
as a purchaser of bills tended to set a limit to the downward movement of the rate of exchange.a
a German Bank Inquiry of 1908, National Monetary Commission, 1910,
fast Cong., zd sess., S. Doc. No. 407, Pt. 1, pp. 482-483.




-.4,,44.7616,4606.800




29 NJ

MONO. SEC.

The importance of intrusting dealings in foreign bills to
the bank of issue was maintained also by the chief officers
of the Austro-Hungarian Bank and was made the basis of
an important change in the policy of the bank in 190i.
After measures had been initiated in 1892 for the resumption of gold payments it gradually became apparent that
some influence must be exerted over the foreign exchanges
in order to complete and maintain the reform. The specie
paid into the government treasuries had been previously
deposited with private bankers, who allowed a low rate of
interest and who contracted to furnish the sums needed
for foreign payments by the Government in the kinds of
coin required up to the amount of the credit balances.
This led periodically to excessive advances in the rate of
gold exchange. It was charged that these rises were
brought about artificially and that the government funds
were used in international speculations.' In the summer
a Zuckerkandl: The Austro-Hungarian Bank, National Monetary Commission, 1910, 6ist Cong., 3d seas., S. Doc. No. 586, p.
Of 'so' Count von Bilinski, the governor of the bank,
after much previous negotiation, arranged a meeting on
August 8 at his home at Ischl with the finance ministers
of the two Governments of Austria and Hungary. It was
agreed that the deposits of public money should be transferred to the Austro-Hungarian Bank and that the latter
should not only furnish the exchange for Government
obligations abroad, but should provide it also for private
parties,. The task assumed was a heavy one, but has
been resolutely pursued with a high degree of success for
ten years.
The fundamental policy of the Austrian Bank.has been
to substitute dealings in exchange for movements of gold.
The redemption of the notes of the bank in gold has not
been made obligatory by law, but gold is furnished in
many cases where required for special purposes. Among
the steps taken at the beginning was the issue of gold
customs drafts in exchange for foreign and domestic gold
coin. This measure had the advantage not merely of
economizing the physical handling of gold, but of transferring disputes as to the value of foreign coins from the
customs office to the bank. The bank was formally authorized to adopt the policy of carrying gold bills payable
within three months as a part of its metallic reserve.
They could not be held for this purpose to a greater
amount than 6o,000,000 crowns ($i 2,000,000), but there
was no limitation upon the amount which might be held
as assets against the uncovered note issues.b
b Mises: The Foreign Exchange Policy of the Austro-Hungarian Bank,
F,conoinic journal, June, i90?, XLX,p. mu.

By maintaining large deposits and credits abroad the bank
was able to sell bills it such rates that exchange never rose
higher than would have been the case with a gold circulation. When exchange was placed wholly, within the
control of the bank after the negotiations of 19m, bills
were steadily offered to meet the usual foreign demands,
and were thereby substituted for the shipment of gold.
If the demand proved greater than the bank Was
able to
meet from bills on hand or from its foreign
credits, it
shipped gold on its own account to cover further
sales of




By maintaining large deposits and credi
ts abroad the bank
was able to sell bills at such rates that
exchange never rose
higher than would have been the case
with a gold circulation. When exchange was placed
wholly within the
control of the bank after the negot
iations of 1901, bills
were steadily offered to meet the usual
foreign demands,
and were thereby substituted for
the shipment of gold.
If the demand proved greater than
the bank Was able to
meet from bills on hand or from its
.foreign credits, it
shipped gold on its own account to cover further
sales of
bills. The total volume of transactions in tl* department of foreign bills has reached in a single &ay the sum
of 71,90o,000 crowns ($14,595,000).
The success of the policy of the bank has thus far been
striking. As its physical gold has not been impaired, and
as it has gathered up surplus bills which have come upon
the market, to be used later when there was a demand for
them, there has been less fluctuation in the discount rate
at the Austro-Hungarian Bank than at any other of the
important central banks of Europe, except at the Bank
of
France. In the critical November days of 1907, when
the London rate of discount was 7 per cent and the Berli
n
rate 736 per cent, the rate of the Austro-Hungarian Bank
did not exceed 6 per cent, and the average for the year
was only 4.9 per cent. This rate has never fallen below
334 per cent, because that would be contrary to the ratio
of demand and supply for free capital in Austria. From
1892 to 1907, both inclusive, however, while the Engli
sh
bank rate was changed 74 times and the German rate
57
tithes, that of the Austro-Hungarian Bank was chan
ged
only 21 times. The private bank rate in Vienna, mote
over, during the last quarter of 1907 was 5.28 per cent,
while that of London stood at 6.54 per cent and
that of
Berlin at 6.62 per cent. The character:and results
of its
policy are thus summed up by an eminent economist:
a
a Zuckerkandl: The Austro-Hungarian Bank, Nation
al Monetary Come
mission, 1911:4 6ist Cong., 2d sess., S. Doc. No. 586,
p.

11




30 NJ

MONO. SEC.
"It is universally admitted that the bank has develo
ped
its foreign exchange and foreign coin business along model
lines with the achievement of the complete control of the
market, and it has done this, not for the sake of profit,
but solely in the interest of the public. The maintenance
of a rate of exchange as close as possible to parity is rightly
considered as a matter to be dealt with by the national
administration and as a function appertaining to the central bank of issue, which is not supposed to act in this
capacity as an institution organized for profit, but as an
organ of the Government instituted for the purpose in
question, and which, it is presumed, will be ready to
incur
losses should circumstances demand it."
The experience of the Austro-Hungarian Bank in using
foreign bills to maintain the parity of exchange, with
similar experiences in Russia in establishing the gold
standa. and with the experience of Mexico and the
'
Philippine Islands in maintaining the gold exchange
standard, may be said to have added a new chapter to
banking methods. There have been cases of failure to
control exchange in this manner, notably in Spain in 1903,
but these failures seem to have resulted from incomplete
understanding of the principle or from the inadequacy of
the resources employed. With the thorough discussion
which the subject has recently received in Germany and
itsstidcess there, so far as applied, in relieving commerce
fi;diii the burden of too frequent changes in the discount
rate; there seems little doubt that in the accumulation of
a portfolio of foreign bills and the skilful use of them for
protecting the home market and the national gold stock,
the central banks have found a new weapon of high precision and k•ng range in defending their stocks of gold.

CHAPTER IV.
-SYSTEMS OF NOTE ISSUE.
While the chief European banks of issue have much in
common in the principles governing their policy, there are
differences in their organic structure which modify in
some respects the methods by which these principles are
enforced. These differences, apart from those of form of
organization and administration, are the product chiefly
of differences in the regulations governing the issue of
notes, and it is desirable to a clear understanding of the
measures which these banks take under varying conditions of the money market to understand the fundamental
elements of their system of note issue. To this end an
outline will be given of the three systems of note issue in
operation at the Bank of England, the Bank of France,
and the Imperial Bank of Germany, with brief references
to the systems prevailing at other important banks. This
subject will be discussed under the following subdivisions:
1. System of the Bank of England.
2. System of the Bank of France.
3. System of the Bank of Germany.
4. Systems of note issue in other countries.

I. THE SYSTEM OF THE BANK OF ENGLAND.
The system of note issue of the Bank of England is
governed by the act of July 19, 1844 (7 and 8 Victoria,
cap. 32) generally referred to as "the bank act," and
sometimes as "Peel's Act," because it was introduced
and
supported in Parliament by Sir Robert Peel, then
prime
minister. The system of circulation e:-.._tablislied
by this
•




t. System of the Bank of England.
2. System of the Bank of France.
3. System of the Bank of Germany.
4. Systems of note issue in other countries.
I. THE SYSTEM OF THE BANK OF ENGLAND.

The system of note issue of the Bank of England is
governed by the act of July 19, 1844 (7 and 8 Victoria,
cap. 32) generally referred to as "the bank act," and
sometimes as "Peel's Act," because it was introduced and
supported in Parliament by Sir Robert Peel, then prime
minister. The system of circulation ebtablished by
this
act differs materially from the systems of other count
ries
and, while some of its features have been adopt
ed elsewhere, they have been so modified by other features
that
few parallels can be found in the operation of the Engli
sh
and other foreign systems.
T1 e panic of 1836 was marked by the failure of a num,
ber of important commercial banks and such
demands
upon the Bank of England that its specie reserv
es were
nearly exhausted. The result of these experiences
was a
demand for a radical revision of the charter of the
Bank
of England, especially with reference to its privil
ege of
issuing notes. To meet this demand was framed the
act
of 1844, whose declared purpose was "to cause our mixed
circulation of coin and bank notes to expand and contr
act,
as it would have expanded and contracted under simila
r
circumstances had it consisted exclusively of coin."
The bank was accordingly given authority to issue
notes
upon securities to the amount of £14,000,000—of
which
,000,000 was to be based upon the old loan of
that
amount by the bank to the Government and £3,00
0,000
upon exchequer bills or other securities, over which
the
bank was to have entire control. The adopt
ion of this
limit was based upon the theory, proved by
experience,
that the demand for notes by the public for the
ordinary
purposes of carrying on exchanges would never fall
below
this amount; but out of abundant caution the
bank was
given power to diminish the £3,000,000 in misce
llaneous
securities for the purpose of finding the means for
redeeming the notes.a The bank might issue notes to
any amount
(/ Sir Robert Palgraye, The English Banking
System, National Monetary
Commission, 1910, 6ist Cong., ad sess., S. Doc.
No. 492, p. 166.

in excess of

14,000,000, but only under the restriction
that they muct he covered for their full
value by coin or
I ullion. The, additional notc, theref
,e
„
ore, constituted
substantially only gold certificates and their
issue afforded
no increase in what is callel elasticity,
like 'the issue of

."

"

31 NJ

MONO. SEC.

notes against a limited percentage of reserve.
The circulation of the Bank of England outside
the bank has
ranged at times nearly as high as .£3o,000,0
00, but that
portion not represented by securities has been
fully covered by gold.
To offset the contraction in the gross circulatio
n of the
country which might be caused by the gradu
al disappearance of the country bank notes, it was provi
ded that the
limit of authorized issues of the Bank of Engl
and might
be increased from time to time by two-thirds of the
amount
of country bank notes retired. The theory of
this provision was that the issues retired had been
protected by
one-third of their amount in gold, so that
the net curtailment in the supply of currency caused by their
withdrawal
would be offset by the two-thirds in new issue
s allowed
to the Bank of England. The right to make
the new issues
did not, however, fall to the bank automatica
lly, but required an order from the Crown in Council.
Such increases
were authorized by the Government from time
to time as
country notes were retired, until they amounted
in the
aggregate to .£4,450,000 and raised the autho
rized circulation of the bank to £ i 8,45o,000.a
a Interviews on Banking and
Currency Systems, National Monetary
Commission, two, 6ist Cong., 2d sess., S. Doc.
No. 405, p. 13.

1



In order to make clear the character of the system
of note
issue established by the act of 1844, and to
insure its
operation without evasion or modification, the
accounts
of the Bank of England were separated into two
distinct
departments. These departments are called
the "issue
department" and the "banking department."
The issue
department, although under the direction of
the bank,
might just as well be an office of the treasury,
so far as
any discretion lies with the officers of the bank
in regard
to its administration, except in the matter of
changing the
securities above Li 1,000,000. In this depa
rtment are
kept all the securities held against notes
and the gold
coin and bullion deposited for additional notes
. On the
liability side of the account stands just one
item—"notes
issued." On the credit side stands the Gove
rnment debt
held, other securities, and gold coin and bulli
on. These
credit items always exactly equal the amou
nt of notes
issued.
Entirely distinct from. the issue departme
nt is the
banking department, with its own separ
ate balance
sheet. In the statement of this department
appear on
the debit side the capital, "rest" (or surplus),
and deposits. On the credit side appear only f9u.K.
items—
Government securities, other securities, notes, gold and
ever coin. The item "other securities" includes not
only such stocks and bonds as the bank may own, but
all the commercial bills and other collateral deposited to
secure loans, discounts, and advances made in the course
of its ordinary banking business. The bank make
s
weekly reports, showing its condition under these broad
classifications, but does not subdivide its deposits or
its
loans in such a way as to indicate whether in the one
case they are time deposits or current accounts or in the
other case whether they are commercial paper, advances




°my such stocks and bonds as the
bank may own, but
all the commercial bills and other
collateral deposited to
secure loans, discounts, and adva
nces made in the course
of its ordinary banking busi
ness. The bank makes
weekly reports, showing its cond
ition under these broad
classifications, but does not subd
ivide its deposit3 or its
loans in such a way as to indi
cate whether in the one
case they are time deposits or curr
ent accounts or in the
other case whether they are commercial
paper, advances
to bifl brokers, or loans on securities.
'rue separatioi between the issu.e department and the
banking departmeAt accomplishes the purp
ose intended,
of preventing abEolutely any interference
on behalf of
the banking department with the asse
ts of the issue
department. It is the banking departme
nt which purchases gold from the public and determin
es the price to
be paid for it. If the price is above the
mint price, ,the
difference is a loss to the banking departme
nt. Such gold
is turned over at once to the issue depa
rtment and notes
are issued against it at the mint price of
the metal. These
notes appear in the weekly statemen
t of the bank as
assets of the banking department.
It is the relation
between the deposits and the reserve
of notes in the
hands of the banking department whic
h commands
attention as the "bank return" is mad
e public from
week to week. If the bank lends these
notes to a large
amount, thereby increasing its holdings
of other securities
and its deposits, the result is a fall in
the ratio of the
banking reserve.
The essential feature of this system of
note issue is
that the reserve of notes in the banking depa
rtment may
be greatly depleted or it may greatly
increase without
affecting the solvency of the issue departme
nt. In the
issue department, if the quantity of note
s issued is increased, the quantity of gold coin and bull
ion is increased
by exactly the same amounts. Of the
total note issue,
however, the amount in the hands of
the public is not
usually much more than half. The rema
ining notes are
in the reserve of the banking department
and constitute
its visible means of meeting demands for
credit.
This segregation of the issue departmen
t from the banking department was one of the distinct
ive merits claimed
for the act of 1844. The result of near
ly seventy years'
experience has been, however, that
while the soundness
of the bank note has been beyond ques
tion, the bank has
many times been reduced to grea
t distress through the
reduction almost to the vanishin
g point of the notes in

1.




32 NJ

MONO. SEC.

the banking department. This reserve of lending power
was seriously depleted in the panics of 1847, 1857, and
1866, and the knowledge of this fact added greatly to
the intensity of those panics. They were checked in
each case by the declaration of the Government, in a
formal letter, that if the bank should arbitrarily increase
its lending power in violation of law by issuing notes
which were not covered by gold the Government would
bring into Parliament an act of indemnity, relieving the
bank from the penalties of violating the law. As such
penalties were not specifically set forth, however, the
Government did not think it necessary after the panic
was over to bring in the proposed act.
It is not necessary 1:ere to pass upon the question, which
has been discussed in England and elsewhere, whether the
act of 1844 has been a serious detriment to English finance
by the limitations which it has imposed upon the power of
note issue. Subsecuent crises, like tf at of 1890, were met
without suspension of the bank act. The influence of that
act was felt in the restrictions which it imposed upon the
power of the bank, but the difficulty was overcome by
the borrowing of gold from the Bank of France, which
thus increased the poteatial power of note issue and the
lending power of the Bank of England. In these later
crises the bank acted more resolutely than in the earlier
ones upon tl:e rule now generally recognized as the proper
one for checking panics, that "he gives twice who gives
quickly." Whatever may have been the merits or defects
of the act of 1844, therefore,they have ceased to influence
directly and acutely periods of stress in England, but they
have had an indirect influence, which has been important,
in shaping the evolution of the credit mechanism in Great
Britain. The restriction upon the power to issue notes has
led to the development of the use of checks and the clearjng system to a greater extent than in any other country
except the United States. As conditions under the
English system are summed up by an English banking
expert in his monograph for the Monetary Commission,a
a palgrave, The English Banking System, National Monetary Commission, 1910, 61st Cong., 2c1 scss., S. Doc. No. 492, p. 261.

"Bank notes are now no longer in England the means by
-which the ordinary business of the country is carried on.
They are valued as the representatives of gold, and Lon-don being the principal and practically the only free
market for gold in Europe, is naturally more exposed to
demands for specie than any other monetary center ih the
world. It is true that for more than forty years the Government has not had occasion to sanction any suspension
of the Peel Act,' but the price which has had to be paid
for this has been an extremely high one, and the adoption
of the arrangements of the act of 1844 can not be recommended to any other country."
SYSTEM OF THE BANE OF FRANCE.

FrohOsuch restrictions upon the right to issue circulating notes as exist in England the continental banks are
practically free. This is especially the case in France,
where there has been an almost uninterrupted increase in
,,the use of bank notes for more than sixty years. There is
a legal limitation upon the amount of notes which may be
issued by the Bank of France, but it is a limit which is




Ai& Luc reel "ct., out

llle

price %%Pima nas nau to ue paitt

for this has been an extremely high one, and the adoption
of the arrangements of the act of 1844 can not be recommended to any other country."
SYSTEM OF THE BANK OP FRANCE.

FromAuch restrictions upon the right to issue circulating notes as exist in England the continental banks are
practically free. This is especially the case in France,
where there has been an almost uninterrupted increase in
he use of bank notes for more than sixty years. There is
a legal limitation upon the amount of notes which may be
issued by the Bank of France, but it is a limit which is
always advanced by the Chambers when it seems likely to
hamper the operations of the bank. The Bank of France
acquired the monopoly of note issue only after the revolution of 1848. During the two decades prior to that time
there had been a considerable expansion of business and of
banking activity in France, which had been met in part
by the creation in various French cities of nine:joint-stock
banks described as "departmental banks." The field of
their circulation was largely local, but amounted in the
aggregate at the close of 1847 to go,'oo,000 francs ($17,4.00,000), secured by a coin reserve of 41,700,000 francs.
.The revolution of 1848, following close upon the heels of
the panic of 1847, caused a suspension of specie payments,
both by the Bank of France and the departmental banks.
Decrees were issued giving forced legal-tender character to
the notes of the Bank of France throughout the Republic.
These decrees were followed almost immediately (April 27
and May 2, 1848) by others providing for the fusion of the
departmental banks with the Bank of France and the
substitution of the notes of the latter for all other notes
in circulation. A limit of total circulation was first
imposed upon the Bank of France by the decree permitting the suspension of specie payments, The maximum.
was then fixed at 350,000,000 francs, which was increased
soon after the absorption of the departmental banks to
525,000p00 francs ($0a1 J25,000).
The restoration of specie payments in 1850 was actompanied by the removal of any arbitrary limitation upon
the note issues of the b'ank. When specie suspension
again became advisable, in the opinion of the Giwtrnmtnt, at the outbreak of the war with Germany in 1870,




J
33 NO. SEC.
N
MO

n fixed for the circukttion
'an arbitrary maximum was agai
t was at first 1,800,000,of the Bank of France. This limi
m time to time until it
00o francs, but was increased fro
the operations required
was fixed on July 15, 1872,-during
3,200,000,000 francs.
to adjust the war 'indemnity, to
e in the maximum
Subsequent increases have been mad
February 9, 1906, at
until it was fixed by a law of
000). In all cases an
5,800,000,000 francs ($1,119,400,
made promptly when
advance in the amount has been
in any way hampered
it appeared that the bank would be
there is a statutory
by the restriction. The fact that
ons taken at the time
limit is a survival of the precauti
ment, when the reasons
of the suspensions of specie pay
different grounds from
for such a restriction rested upon
redeemable in coin on
those which exist when notes are
demand.
ilege of the Bank of
In one important respect the priv
the minimum denomiFrance has been restricted—in
Even this restriction
nation of the notes which it issues.
own volition, but would
since 1873 has been due to its
the Government if the
perhaps have been enforced by
matter lacking in conbank had shown a spirit in the
tion of note now issued
servatism. The lowest denomina
leaves the channels of
is for r francs ($9.65). This
be filled by coin, and
circulation below that point to
gold in general circulahas made France nearly as rich in
ts of the bank.
tion as in the great reserve in the vaul
denomination of
Im the early history of the bank the
($193) and 500 francs
its notes was limited to ',CVO francs
ch they served was
($96.50). Obviously, the purpose whi
between merchants
for settlements of some magnitude
k and deposit sysand bankers at a time when the chec
try branches a
tems were almost unknown. At the coun
wed of 250 francs
minimum denomination was soon allo
this reduction
($48.25), but it was not until 1847 that
s, with a further
was extended to the main office at Pari
same time notes
reduction to 200 francs. At about the
banks of the
were issued for the accommodation of
wal of
4enomination of 5,000 francs ($965). At the rene
imum denominathe charter of the bank in 1857 the min
time, in spite
tion was reduced to 50 francs for the first
tiz4tion" of the
of some misgivings lest this "democrEk
drive out coma
bank note ghould tempt counterfeiters and
p. 166.
a Noel, Banques dtmission en Europe,
of the suspension of
Thus matters stood at the time
was made in the
specie payments in 1870. No change
of specie suspendenominations of the notes at the time
use of the slight
sion, but the disappearance of coin beca
t of authority
premium on gold and silver led to the gran
issue notes for 25,
to the bank in the latter part of 1871, to
smallest of these denominations,
20, to, and 5 francs. The
two years when
however, had been in circulation less than
the payment of
the bank, on November 7, 1873, began
Gold pieces of 5
silver 5-franc pieces for 5-franc notes.
the channels of
and to francs soon followed the coins into
dard napecirculation, and In November, 1874, the stan




denominations of the notes at the time of specie suspension, but the disappearance of coin because of the slight
premium on gold and silver led to the grant of authority
to the bank in the latter part of 1871, to issue notes for 25,
20, IO, and 5 francs. The smallest of these denominations,
however, had been in circulation less than two years when
the bank, on November 7, 1873, began the payment of
silver 5-franc pieces for 5-franc notes. Gold pieces of 5
and io francs soon followed the coins into the channels of
circulation, and in November, 1874, the standard napoleons of 20 francs began to be paid out by the bank.
From these dates bank notes below so francs began to disappear from circulation and the small quantities outstanding on the books of the bank represented chiefly those
which have been lost or were preserved as souvenirs. At
the beginning of 1881 the amount of 20-franc notes unredeemed was only 5,659,980 francs ($1,o92,5oo) and of the
25 and 5-franc notes together there were only 1,585,150
francs ($3o6,00o). From that time the sip-franc note has
been the minimum. When in 1877 the bank wished to
create a still larger vacuum for gold by retiring the notes
of 50 francs and ioo francs, such a lively protest arose from
the public that the project was abandoned.°
Arnaune, La Monnaie, Ia Credit at k Change, third edition, iaon. p. 43i.

When it is taken into consideration that neither the
charter of the Bank of France nor any provision of law
imposes any requirement of a minimum metallic reserve,
the almost absolute freedom of the Bank of France in the
matter of the amount of its note issue is brought into higher
relief. It may be stated, however, without going in detail
into the magnitude of reserves, that the Bank of France
has for many years carried a metallic reserve much larger
than is required in any country except where the notes are
covered in full, and which has stood for a generation almost
uniformly above 50 per cent and sometimes at 75 per cent
or higher.
Possessed of these unrestricted powers in the matter of
note issue, the Bank of France is not hampered in extending to commerce any amount of actotzimodation which circumstances may seem to require. It is restricted neither
by the amount of capital intrusted to its custody by dthers,
like the ordinary bank of deposit, nor by the obligation of
keeping any fixed percentage of gold to protect increased
liabilities, nor by any other restrictions tipon its freedom
of issue except that its notes must be covered by shortterm commercial paper so far as they are not covered by
cash, and that the total issue must be kept within a certain
maximum, which thus far has always been promptly
raised when there has been need for it.




34 NJ
MONO. SEC.
3. SYSTEM OF THE BANK OF GERMANY.

In distinguishing between different systems of note
issue, the German system, which dates only from the
year 1875, occupies a sort of middle ground between the
extreme restrictions of the English system and the substantial freedom of the French system. When the circulation of the German Empire was unified by the law of
March 14, 1875, the system of the Bank of England was
followed to the extent that an authorized limit of circulation was adopted, which was fixed at 250,000,000 marks
($59,375,coo). The English system was followed in
principle also in another provision—that when any
existing bank of circulation should surrender or lose its
note-issuing privilege, the amount should be added to the
authorized circulation of the Imperial Bank. These
lapses of provincial circulation amounted, before the
revision of the charter in 1889 took effect in 1891, to
00
43,4 ,000 marks ($143,31 o,000), raising the total limit of
the Imperial Bank to 293,400,000 marks. The authorized
circulation was fixed by the renewal of the charter in 1899
at 4541,0001000 marks ($1o7,000,000), which was increased
by lapsed issues before the renewal of 1909 to 470000000
marks. The limit of authorized issues was advanced by
the law of 1909 to 550,000,000 marks ($i 30,650,000), to
take effect on January 1, 1911, with a special provision
for quarter-ends to be presently referred to.a Only fwitr
a compare German Imperial Banking Laws, National Monetary Commission, 1910, 6ist Cong., ad seas., S. Doc. No. 574, pp. 71, 129.

other banks retained at this time their power of note
issue, amounting in the aggregate to 68,771,000 marks.
Against its authorized circulation, the Imperial Bank is
required to hold a reserve of one-third in coin or legal
German money.
In one important particular the German system departs
from the English system. It follows the English system
in providing for the issue of notes without.restniction upon
the deposit of gold to the full amount of the notes issued.
Under this provision the circulation is always much above
the limit of the so-called authorized circulation, the
excess being fully covered by the large gold holdings of
the bank. The novel feature of the German law, in which
It departs from the English system, is the provision that
additional circulation may be issued, without increasing
the gold reserve, subject to a tax at the rate of 5 per cent
per year. Periodical reports of the condition ,of the bank
are required by the Government and to the amount that
the circulation exceeds the authorized limit and the excess
of free gold a tax is imposed of five forty-eighths of per
cent per week. This figure is obtained by dividing the
year, for the purpose of the tax, into 48 equal parts, or 4
per month, instead of following the irregularities of the
calendar. Under this provision additional notes have
been issued from time to time in large amounts, but have




per year. Periodical reports of the condition qf the bank
pre required by the Government and to the amount that
*
the circulation exceeds the authorized limit and the excel
of free gold a tax is imposed of five forty-eighths of i per
cent per week. This figure is obtained by dividing the
year, for the purpose of the tax, into 48 equal parts, or 4
per month, instead of following the irregularities of the
calendar. Under this provision additional notes have
been issued from time to time in large amounts, but have
been retired by the bank as soon as they ceased to be
required in circulation.
A new provision was introduced in the revion of the
charter in 1909, by which the authorized circulation of
the bank might rise for the last week of each quarter of
the calendar year to 750,000,000 marks ($i 78,250,000).
This provision was due to the facts that transactions in
Germany are still carried on largely by means of bank
notes rather than by the use of checks and similar instruments of credit, and that settlements with retail tradesmen and others are usually made at the end of each
quarter. The demand for currency at such times is,
therefore, exceptional, just as in the United States at the
time of the movement of the crops. Experience under
the German law has indicated that the excessive demand
for notes at the end of each quarter was promptly followed by the return of the notes for redemption through
deposit in the various banks. The new provision was
based upon the conclusion that it was unnecessary to
impose upon the country the burden of importing gold or
raising the discount rate to meet conditions which are
essentially temporary, and that a special increase of
circulation for each of these four weeks would cause no
injurious impairment of the strength of the bank or any
adverse influence on the exchanges.a
a Compare German Bank Inquiry of 1908, National Monetary Commission, 1910, 61st Cong., ad seas., S. Doc. No. 407, pp. 203, 215.

4.

SYSTEMS OF NOTE ISSUE IN OTHER C01UNTRIBS.

The system of note issue of the Austro-Hungarian
Bank is the same in principle as that of the Imperial
Bank of Germany. There is an authorized limit of circulation which is not required to be covered in tun by
coin, which has remained since the reorganization of the
bank in 1878 at 400,000,000 crowns ($8opoo,000), or its
equivalent. Against this must be held a reserve of 40
per cent in coin and foreign gold bills. AboVe this
amount the bank may issue notes only to the value of the
coin deposited, but at the revision of the charter in 1887
the German system was adopted of permitting supplementary issues under a tax of 5 per cent.
At the National Bank of Belgium there is no limit
upon the total circulation, and no limit is fixed by law
upon the amount of reserve required. The law of 185o,




35 NJ

MONO. SEC.
which established the bank, provided that there should
be a relation established between the metallic stock and
the circulation, but left to the statutes of the bank, to
be determined upon by the Government, the decision
what this relation should be. The proportion is fixed by
Article XXXIV of the present bank statutes at one-third
of the amount of notes and other obligations payable at
sight, but it is provided that the cash reserve may be
allowed to go below this minimum under circumstances
and limits to be authorized by the minister of finance.
The bank is allowed to make another important departure
from the actual holding of coin by counting first-class
fcregn bills as the equivalent of coin.'
a Charles A. Conant, The National Bank of Belgium, National Monetary
Commission, 1910, 6ist Cong., 2c1 sess., S. Doe. No. 400, P. 74The State Bank of Russia adopted in 1894 the English
system of separating note issues from commercial operations and fixing the"authorized circulation "at 769,342,911
roubles ($396,000,000). Circulation beyond this sum was
required to be covered by the coin reserve. This system
of circulation was modified after the restoration of gold
payments in 1897. By a ukase of August 29, 1897, the
system of separating the issue department from eommfrcial operations was abandoned and the accounts were fused
into a general balance sheet. The system of a fixed limit
of authorized circulation was, however, retained and the.,
amount of such circulation was reduced to 600,000,000
roubles ($3o9,00o,000), which is required to be covered in
the proportion of 50 per cent by gold. Issues in excess
of this amount can be made only for gold, but the amount
of gold held by the State Bank has continued so large,
even during the war with Japan, that the margin of available issue in excess of the notes outstanding has never yet
;
raised any question of the need for additional poweni
In Russia, as in Austria-Hungary and in Belgium, firstciass foreign bills are counted as the equivalent of gold.
/n some of the other European States the status of the
central bank is less strong than in the countries above
named, because of the demands by the Government for
advances which have exceeded the powers of the bank and
hampered its capacity to meet the requirements of commerce. This was notably the case at one dire in Italy,
Spain,and Greece,but radical reforms were introduced into'
the Italian banking system after the crisis of 1893, and
material improvement has taken place in recent years in
the condition of the central banks of Spain and Greece.

CHAPTUR V.—ELASTICITY IN mat SUPPLY OF CliERIT.
One of the most important purposes for which banks
exist is to convert credit into negotiable forms and to
afford a sufficient supply of such negotiable credit for,
carrying on the production of natural products and manufactured goods and the distribution of such prcducts and.
goods. It has been the most persistent and severe criticism which has been directed for at least fifteen years
against the existing banking system of the United States
that it does not adequately meet these requirements.'
American banks, it is admitted,have performed this func..




convert. %a euaL HILO negotianie zorms and to
afford a sufficient supply of such negotiable credit for
carrying on the production of natural products and nranu-.
factured goods and the distribution of such prcducts and
goods. It has been the most persistent and severe criticism which has been directed for at least fifteen years
against the existing banking system of the United States
that it does not adequately meet these requirements.
American banks, it is admitted,have performed this function of creating negotiable credit in some degree and indeed
in a very large degree. The occasions on which they are
criticized for having failed to perform it have been miods
,
of special pressure for currency and for credit accommodation. The failure to perform this function as well on
such occasions as it seems to have been performed by
certain foreign banks is attributed to the fact that the
isolated local banks with which the country is prided,
to the number of over 7,300 under the national system
and nearly 15,000 under other systems, have each acted
for themselves, with only limited and precarious support
from other institutions. They have used their credit to
the full limit authorized by law and by sound banking
rules under ordinary conditions of demand for it, and
have had no resource to which they could turn foroeeting
additional demands except institutions sometimes larger
in their resources in the aggregate, but hampered by
similar limitations in the power to use such resources and
under no binding obligation to use them except for their
own protection. Without entering here upon a further
analysis of conditions in America, it is proposed to outline the method by which the central bankilg institutions of Europe are organized for meeting such demands
for credit and to examine how far they have been able
to fulfill this purpose under conditions of pressure or
threatened crisis.
The gradual evolution of European banking has tended
to a separation of functions, by which local banks without
the power of note issue.have felt relieved from the necessity of maintaining large independent reserves in currency
because the function of maintaining such reserves has
'devolved by law or public policy upon the central bank
of issue. Inevitably, relief from the necessity of maintaining large cash reserves has increased the lending power
of the local banks, has thereby enabled them to offer
credit on better terms and at lower rates to their native
manufacturers, merchants, and exporters than could be
offered under other conditions, and has even enabled
them in some cases to devote a larger propoition of their
assets to loans for industrial development than would be
safe if the avidity of their assets depended entirely upon
their own resources in money and quickly convertible
credit.
CALM. is LO




36 NJ

MONO. SEC.
In examining the questioi whether European banks
of
issue have succeeded in performing this function
of a
reserve resource for other institutions, and how they
have
performed it, it is not necessary to go much beyond
the
experience of the three leading commercial countries—
England, Fra ice, aid Germany. In order to determine
whether the operation of their systems has guarded agains
t
violent and unnecessary changes in the rate for the loan
of capital and has averted such monetary crises as affected
•the United States in 1873, 1893, and 1907, it is necessary
to examine the actual operation of the system of note
issue and of the relationship between the central bank
and the joint-stock and private banks. It is to be considered that the mechanism of the central bank of issue
is relied upon in these countries, not to avert only those,
severe crises which recur at intervals of a number of years,
but also to afford that elasticity in the supply of credit
which permits the movement of the crops or the settlement of periodical obligations without those acute disturbances in rates for money, in the calling of loans, and
in the consequent disastrous effect upon speculative commitments which have sometimes marked conditions in
the United States, even in the absence of a severe crisis.
II. ao,a4vr1opt., OF, THE

ENGLISH sy'rEg,

The English banking system, as has been frequently
pointed out, is the unique product of the adaptation
of
business to peculiar conditions and, in the opinion
of
ore of the authorities quoted by the Monetary Commission
,
"can not be commended to any other country." a It is,
a palgrave: The English Banking
System, National Monetary Commission, 1910, 61st Cong., 2d sess., S. Doc. No. 492, p. 261.

nek ertheless, essential to examine its operation with some
carc, becaus6 of the importance of London as the gold
market of the world, and in order to bring into ,clear light
the differences between the English system and
the
systems of France and Germany.
Elasticity in the English ,lbfknking system is secured
largely through other forms of credit than the issue
of
, bank notes. There is no power in the Bank of Engla
nd
to extend credit by the issue of notes in exchange for
commercial paper. It can discount such paper with such
notes as it has, but, under ,the bank act of 1844 new
notes can be issued only for gold. The result of the
substitution of check and'
.'ileposit credit for the issue of
notes has been to leave the note circulation of' the Bank
of England comparatively uniform throtigholit, the year:
0•
It is declared by Sir Roberefilgrive, in the analysis of
the statistics of the Bank prepared for the Monetary
Commission, that it is not possible to trace any absolute
rule governing the fluctuations in the amount of notes
in
the hands of the public. The increase in the amount of
notes thus held may be influenced by the ordinary, holiday season and is no doubt influenced by many other
requirements, as for till money by the banks in England




low
It is decIared 1* Sir
the analysis of
the stktigtics of the Bank prepared for the Monetary
Commission, that it is not possible to trace any absolute
rule governing the fluctuations in the amount of notes in
the hands of the public. The increase in the amount oE
notes thus held may be influenced by the ordinary holiday season and is no doubt influenced by many other
requirements, as for till money by the banks in England
and Wales, where the notes are legal tender. There i?
also some increase in the demand for notes for holiday
and harvest purposes; which usually reaches its maxi:
mum in August. b
b vide Interviews on Banking and Currency Systems, National Mone.
tary Commission, 1910, 6ist Cong., 2d sess., S. Doe. No. 405, p. 15.

A table, booed upon the averfage of the weekly statements for the twenty years 1888-1907, shows an amount
of Bank of England notes held by the public on the
average for the year of E27,I22,000. The lowest point
is afforded by the average of the eighth week, or near the
end of February, while the highest point of the averages
is attained in the twenty-seventh week, or early in July.
The variation is from a minimum of £25,827,000 .to a
maximum of '08,339,000.a This variation of about
a Statistics of Great Britain, Germany, and France, National Monetary
Commission, Two, foist Cong., zd sess., S. Doc. No. 578, p. 88.
.£2,500,000 would fall a little short of io per cent of the

average circulation. The percentage of variation is
somewhat larger if the figures of more recent years are
considered, but the periods of minimum and maximum
circulation coincide only roughly with those for the
period of twenty years. For the 6 years ending with
the year 1900, the average circulation by months showed
a maximum in September of E35,557,000 and a minimum
in December of £31.,575,000. b
b Palgrave: Bank Rate and the Money Market, p. 71.

The elastic element in the accounts of the Bank of
England depends not upon the amount of notes which
the bank has issued but the amount which it has on
hand in its banking department. When gold comes
to the bank on deposit, notes are issued to the banking
department by the issue department for the amount of
such gold and are held by the banking department as its
means for making additional loans. It is this surplus of
notes in the banking department,with such small amounts
of till money as may be on hand, which is referred to in
the weekly reports as the "reserve" of the bank. In the
language of the London money market, the reserve of the
Bank of England does not ,correspond to the surplus, as
understood in American banking, nor, strictly to the

• •1




37 NJ

MONO. SEC.

metallic reserve, but represents the unused lending power
of the bank. There is no legal restraint upon the impairment of this reserve, except that the lending power of
the bank ceases after the whole of the reserve has been
exhausted. It has never been completely exhausted
since the enactment of the bank act of 1844, and this fact
is claimed as one of the merits of that act.
The banking reserve consists, therefore, of the notes
and coin which are held in the banking department for
the purpose of making new loans and advances. It is the
percentage of this reserve to deposit liabilities which
forms the barometer of the strength of the bank and to
some extent of the condition of the English money
market, and which must, therefore, be studied to determine the degree of elasticity given to credit by the resources of the Bank of England. These items show a
much wider range of elasticity than the changes in the
volume of notes in the hands of the public.
The system of averaging the returns for the twenty years
1888-1907 shows the banking reserve at its maximum in
the eleventh week of the year, or about the middle of
March, and its minimum in the fifty-second week, or just
before the close of the year The maximum average for
the twenty years was £24,477,000, and the minimum was .
£18,335,000.° This difference of about £6,000,000 reprea Statistics for Great Britain, Germany, and France, National Monet
Commission, 1910, 61st Cong., 2d sent., S. Doc. No. 578, p. 88.

•

sents about 27 per cent of the average for the year; but
the actual variations between the high and low points of
the reserve may be much greater in any given year, and
they have in fact been so in nearly eVery year. While the
high and low points may under similar conditions converge on approximately the same dates in different years;
they are profoundly disturbed by special occurrences in
the market for money and credit.
The proportion of reserve to deposit liabilities has
varied as widely between 1888 and zo7 as from 27 per
cent on January i, 1890, up to 71 per cent for several
weeks in the summer and autumn of 1894. A low minimum percentage of the reserve is not always indicative so
much of a serious reduction in the abiolute amount of the
reserve as of a large increase in liabilities, due to special
circumstances. The lowest point to which the actual
amount of the reserve has been allowed to fall since 1887
was £9,309,000,on January 1, 1890, when the ratio to liabilities was 27 per cent. The highest point in the amount
of the reserve was attained at the time when the influx of
gold from South Africa first attained magnitude and before
the new gold was widely distributed to other countries.
The amount of the reserve at this time reached £40,996,000,
on February 26, 1896; but the highest ratio of reserve to
liabilities came at an earlier date because of the small
demands at that time upon the bank.b The following
b The weekly statements for twenty years appear in Statistics
for Great
Britain, Germany, and France, National Monetary Commission, 1920, 61st
Cong., 2d seas., S. Doc. No. 578, pp. 102-121.

table shows the amount of the reserve and its ratio to
deposit liabilities in representative years, at the high and
• .
•
„--

•

wys., VW. Luc ingnest ratio
ot reserve to
liabilities came at an earlier date because of
the small
demands at that time upon the bank."
The following

b The weekly statements for twenty years
appear in Statistics for Great
Britain, Germany, and France, National Moneta
ry Commission, 1910, 6ist
Cong., ad SM., S. Doc. No. 578, pp. IO2-I2I
.

table shows the amount of the reserve and
its ratio to
deposit liabilities in representative years, at the
high and
low point of the amount of reserve and the avera
ge for the
year:
Ratio of banking reserve at the 440 of Englan

d.

(In thousands ot pounds4

Year.

Maximum Per MinimumPer I
Per
reserve.
cent.
reserve. cent. , A v' erase. cent.
1
16,596

45

10,302

34

12,666

41

17.407

9,309

27

13.683

41

35,958

St
61

62

40,996

63

23,972

52

29.875

48
37

34
,645

3
8

22,919

46

27,939

49

24 0 8
,6
18,350

24,950
28.01 I

45

16.303

38

21,433

43

54

16.222

30

24,046

48

34
1
37 i

34,166

46

23,781

47

45

17,309

27
,309
29,005

U 1

27,140

47

17,669

59

19,531

37

24,574

32,532

49

SS
46

17,629

34

25,306
23,500

47
45
5c
49

28,988
28,757
31,279

52
51

30.753

49

17,849

30

17,695

35

19,337
29,990

38

24
,434
26,748

36

26,649

44

It should be noted that the low point of the reserve
has
occurred in recent years usually at the end of the
year,
whetn large loans and advances were made by the Bank
of England for temporary purposes in making the annu
al
settlements and with the knowledge that a large part of
these credits would be extinguished and the percentage
of reserve thereby increased within a week or fortn
ight.
The present policy of the bank in this particular is thus
set forth by one of the experts consulted by the monetary
Commission:"
a Hartley Withers: The English Banking System, Nation
al Monetary
Commission, 1910, 6ist Cong., ad seas., S. Doc. No. 492,
pp.
20-2I.

"At the end of the half year it is sometimes applied to
for fresh credits to the extent of over twenty millions
sterling, chiefly in the form of advances for a few days.
On one side of its account its holding of securities is

81.




1




38 NJ

MONO. SEC.

expanded by this amount and on the other its
liability
on deposits is similarly swollen. At the end of
1902,
the last occasion when the bank's weekly return was
made
up on December 31, and so showed the full extent
of the
extra credit provided by it at the end of the year,
the other
securities rose from £27,647,000 on December
17 to
£47,736,000 on December 31. The other deposits
at the
same time rose from £36,653,00o to £55,
259,000, and
this increase in the basis of credit was perh
aps used by
the other banks for the provision of five to ten
times as
much accommodation for their customers.
A week later
the other securities had declined to £29,625,
000 and the
other deposits to £41,073,000, though reenforc
ed in the
meantime by the payment of Government divi
dends; the
emergency credit had been wiped out, when
no longer
required, by the simple process of repaymen
t to the
Bank of England of the sums borrowed from
it; and the
bank's proportion of cash to liabilities, whic
h had fallen
to 28 per cent on December 31, had risen
to 38 per
cent."
The whole organization of British credit
rests upon
the reserve of the Bank of England and
the ability of
the bank to maintain this reserve. Not only
is this true
of England and Wales, but of the whole Unit
ed Kingdom,,
including the banks of Scotland and
Ireland. While
these banks are nominally banks of issue
, they were
subjected in 1845 to substantially the same
rules in regard
to circulation as were established for the Bank
of England
by the act of 1844. They can only increase
their issues
to meet the demand for currency by incre
asing their
holdings of gold. They rarely put the gold
in circulation;
but issue notes against it, of which a large
proportion are
for Li. In Scotland so much use had been
made prior
to 1844 of the freedom to issue notes, whic
h were paid
at the market places in the purchase of cattl
e and other
supplies from farmers, that a violent prote
st went up
from the banks as well as the public
against cutting off
the Li notes. While in England the restr
iction to a minimum denomination of £5 had been in
force since the
resumption of specie payments in 1821
, and was not
seriously objected to, in Scotland notes for
E I had been
in constant use and had obviated the neces
sity for carrying about large amounts of gold coin.
The evidence
given by the Scottish bankers of the utili
ty of the £1;
notes was so strong that the provision for
restricting the
minimum denomination to £5 was dropped
from the act
of 1845 during its discussion and was not
embodied in
the measure as enacted.
In Scotland and Ireland the demand for note
s at certain
seasons of the year is met by borrowin
g gold from the
Bank of England, which is treated as the
ultimate reserve
resource of the Scotch as well as the Engl
ish banks.
This obligation was felt by the Bank of Engl
and as early
as the panic of 1857, when the governor of
the bank, in
reporting to the treasury on the measures take
n to stay
the panic, said:
"The English Banking System, National Monet
ary Commission, 1910,,
6ist Cong., 2d seas., S. Doc. No. 492, p. 208.

"Upon this state of things, however,
supervened the
•

.•

•




seasons ot the year is met by borrowing gold from the
Bank of England, which is treated as the ultimate reserve
resource of the Scotch as well as the English banks.
This obligation was felt by the Bank of England as early
as the panic of 1857, when the governor of the bank, in
reporting to the treasury on the measures taken to stay
the panic, said: a
a The English Banking System, National Monetary Commission, 1910?
6ist Cong., ad sess., S. Doc. No. 492, p. 208.

"Upon this state of things, however, supervened the
failure of the Western Bank of Scotland and the City of
Glasgow Bank and the renewed discredit in Ireland,
causing an increased action upon the English circulation
by the abstraction in four weeks of upward of £2,000,000
of gold to supply the wants of Scotland and Ireland."
The influence of this Scottish and Irish demand for gold
is felt by the Bank of England, not only in periods of severe
stress, but also in the autumnal pressure which occurs
almost annually, especially in Scotland, in connection
with the marketing of the crops. On such occasions it
is customary for the Scotch banks to send to London for
such amounts of gold as they need to cover their increased
issue of notes and to return the gold when the need for it
has passed. The effect of these conditions, as described
by Mr. Palgrave, one of the authorities consulted by the
commission, is "to transfer every fluctuation in the note
circulation of Scotland, where the issue is always above
the authorized limit, and many of those in Ireland, where
the issue as a rule is closer to the authorized limit, directly
to the reserve of the Bank of England." a
a The English Banking System,
National Monetary Commission, 1910,
61st Cong., 2d sess., S. Doc. No. 492, p. 269.

It is the growth in the importance of the joint-stock
banks, however, which has imposed the heaviest obligations upon the Bank of England. Its obligations in this
respect may be summed up by saying that the bank, by
reason of the fact that a credit in its books is as good as
gold, enables the banking community, represented now
chiefly by the joint-stock banks, to expand credits and
create check currency so long as it is prepared to lend
credit. And, as no specific reserve requirements are




39 NJ

MONO. SEC.

Imposed upon English banks,the extent to which the banking community is prepared to lend is regulated only by its
own discretion and consideration for the proportion between its cash resources and its liabilities. The system has
thus come to work, according to one of the experts consulted by the Commission, "with extreme elasticity and
banking facilities can be provided in England with extr
aordinary ease." b The note issues, of which the mini
mum
b Hartley Withers, The Engli
sh Banking System, National Monetary
Commission, 1910, 6ist Cong., 2d sess., S. Doc.
No. 492, p. 26.
limit is £5, are used in circulation to only

a minor degree,
a large proportion being absorbed as reserves
in banks and
their branches. It is estimated that there are
in England
and Wales fully 4,600 bank offices which requi
re Bank of
England notes in their reserves, which did
not do so in
1872. If, on the average, each of these offic
es required
about E700 in notes, the increase in the Bank
of England
issue in lieu of country notes withdrawn woul
d be roughly
accounted for. The results of this system
are thus
summed up: e
c Ibid., p. 30.

•

follows that this system, by which checks draw
n
against banking credits are the chief currency
in England,
while banking credits can be multiplied to any
extent that
the prudence of bankers considers right and
are based on
credits at the Bank of England which can agai
n be multiplied without any legal restriction, has comp
letely freed
the English monetary machine from any
regulations except those imposed by its own sense of duty
and the possible criticism of the public; and the deve
lopment of the
use of checks has thus completely nullified
the attempt to
regulate the English currency syst
em made by Peel's
bank act of 1844."
The magnitude of the obligations thus
created by the
joint-stock and private banks increased
enormously during
the last two decades of the nineteen
th century and the
increase has not ceased during the pres
ent century. The
compilations made by financial journ
als, although not
absolutely complete nor official, affor
d a pretty accurate
idea of this movement. For periods
of years the deposits
and current accounts, exclusive of
those of the Bank of
England, are reported as follows:
"It

a For explanations and further detail
s, Vide: Statistics for Great Britain,
Germany, and France, 578, pp. 27-23.
Bank deposits in the United Kingdow.
October—

zgao
i885
1890

England and
Wales.

Scotland.

gt33,258.mo

£8,77.coo

Sf17.208,000

242. 290.000

75. 58
3.000

331.679,000

83.434.000
89.076.000

17.167,090
23,5870200

2905

390.752.000
485.277.000
6so. ay.000

93.4 9.000
8
303,054.000

672.329.000

101.5311,000

722.282.000

1895
3900

Ireland.

105.718.000

39,071.000
43.623.00a
47.720,000
53.093.000
55.3o6.1no

These figures are swollen in some of
the statements
made for recent years by adding the
deposits of colonial
banks with London offices and forei
gn banks with London
offices. The deposits of the former
class were reported
for 1908 at £253,453,000 and of the lattpr plasm
at




+cos
mom
7903
'2908

485.277.000

09
9.3, ,00o
103,674.0m

4.3,683.0016
47,726,000

672.329.000

101.538.000

83.03,0m

712.282.000

lo8018.000

8.3h000

630.269.000

These figures are swollen in some of the statements
made for recent years by adding the deposits of colonial
banks with London offices and foreign banks with London
offices. The deposits of the former class were reported
for 1908- at £253,453,000 and of the latter class at
E.360,749,000. It is proper that the influence of these
institutions upon the London money market, which is
very considerable, should not be ignored in dealing with
the position and responsibilities of the Bank of England;
but it is somewhat misleading to include in a report of
British deposits the many millions of scattered in Australia,
India, Africa, China, and America, and especially those in
independent banks on the Continent of Europe, which
have established offices in London chiefly for the conduct
of exchange operations. Thus, of the deposits reported
by foreign banks in 1908 not less than £208,000,000
represented the gross deposits, at home and abroad, of
the Comptoir Nationale d'Escompte and the Credit Lyonnais, both of Paris, and the three principal Berlin banks—
the Deutsche Bank, Disconto Gesellschaft, and Dresdner
Bank.° While the appearance of these foreign institua Ibid., p. 40,

tions in London has undoubtedly added to the volume
of exchanges there, it would somewhat exaggerate this
influence upon the Bank of England to treat it as creating
an obligation of the same character as the deposits of the
banks operating or controlled in the United Kingdom.
The extent to which the use of checks and deposit credit
has expanded in England is illustrated by the growth of
transactions through the clearing houses. The origins of
the London Clearing House date back to the eighteenth
century, and its activities have been extended and reduced
to system from time to time with the growth of the demands upon it.a While the Bank of England performs
a vide Robert M. Holland: The English Banking System, National
Monetary Commission, £910, lint Cong., 2d sess., S. Doc. No. 492, PP.
26794.

.04

,F.




40 NJ
MONO. SEC.
no such functions in clearing credits as we shall find performed by the Bank of France and the Imperial Bank of
Germany, and did not enter the London Clearing House
until 1864, it performs a function for which there is no
equivalent in the American clearing system. As the clearing banks have balances at the Bank of England, their
debits at the clearing house are settled in cheeks upon
these balances instead of by currency. This practice in
itself results in an economy in the use of Bank of England
notes which would amount to a considerable proportion
of the total circulation. A view of the volume of business done through the London Clearing House is afforded
by the following figures:
Operations of the London Clearing House.

Total clearings.

Daily average.

£3 425.185.0
,
00

3.914.320h000

22.545.600

2
875
288.3

5,685. 793,000
5,794,238.000

18,812,500

1885
1890

7.801.048.000

Proportion
on stockexchange
settling
days.

£10.978.m0

Year.

Per cent.
z868
3870.

2895
2900
zpoi
1905
3906
1907
1908
2909
2950

5,511.071,000

7.592,886.0=

25.3
i6. 2
25.3
19.8
o
18.1

x8.520,soo

17 951,4
,
00
25,410,600

10.028,742.000
12,287.935.000

17.1

24,732,500
29,:86. 200
33,098,100
40,i56,600

8,9606170,000

12,711,334.00o

is.6
j6.8

41,405.000

12. 730.393,090

14.9

67,200
41,4

12, 120.362.000

39.351,80
,

13.525.446,000

44,056,800

14.658,863,000

15.9
14.3
23.8

47,748,7oo

15. 7
15.4

The concentration on the London market of such a mass
of credit has, naturally, strained at times the resources of
the Bank of England and has led to suggestions for increasing its reserve or imposing additional legal obligations upon the joint-stock banks. How completely the
joint-stock banks have been accustomed to lean upon the
Bank of England is indicated by a quotation from an
eminent banker, chairman of the largest joint-stock bank
in,...gngland, in regard to an institution which had been
absorbed by his own. He said: a
a The English Banking System, National Monetary Commission, 1910,
6xst Cong., 2d seas., S. Doc. No. 492, p.92.

may add that a joint-stock bank which came into our
fold some years ago, whose reputation and position were
second to none in the Kingdom, and justly so, too, and
was a model of good management in other respects, employed every farthing they possessed, save and except
what they required for till money, up to the hilt every
day; feeling sure that by means of their investments, .
which were gilt-edged, though not consols, they would
always be helped over the stile if pressure came. And
that, I may say, is not an exceptional case."
After the crisis of 189o, when the Bank of England was
saved largely by gold loans negotiated in France and
Russia, it was strongly urged by Lord Goschen that the
metallic banking reserves of the country should be increased and that the position of the joint-stock banks
should be disclosed by the publication of a monthly
PT 1. . •.
•
•
"
I

4




•&,:4104$44

VCr

Luc sum u pressure came.

And

that, I may say, is not an exceptional case."
After the crisis of 1890, when the Bank of England was
saved largely by gold loans negotiated in France and
Russia, it was strongly urged by Lord Goschen that the
metallic banking reserves of the country should be increased and that the position of the joint-stock banks
should be disclosed by the publication of a monthly
statement. The latter suggestion was,adopted by a
majority of these banks, but none of the private banks or
the country banks joined in the movement. It has been
stated by a president of the Bankers' Institute that the
proportion of cash to liabilities shown by country banks
ranges down to a point as low as 2.2 per cent. The jointstock banks have shown a reserve as high as 15.8 per cent
itt. cash and cash obligations, which is a great improvement over the conditions of a generation ago, but there is
no reason to believe that this favorable condition is constant or that it extends to the country banks.b
•
^

b Hartley Withers, new edition of Bagehot's "Lombard Street," p.
xvi.
2. OPERATION OF THE FRENCH SYSTEM.

Elasticity in the supply of credit in France is afforded,
up to the limit of legitimate demands, by the resources of
the Bank of France. The comparatively settled condition
of industry and commerce in France, and ,the absence of
demands for new capital for enterprises within the country, make the fluctuations in the note circulation of the
bank comparatively moderate. The absence of restrictions upon the porportion of gold required against notes
or deposits, and the large resources in gold which the bank
has possessed in recent years, enables it to make such
rediscounts as business may require without fear of reducing its reserves unduly and without the necessity
ordinarily of taking strong measures to retain gold. The
fact that the loans of the bank are made chiefly by the
discount of commercial paper makes the volume of circulation respond quickly to business conditions. As
stated by M. Pallain, the governor of the bank, in an
interview with members of the National Monetary
Comthission:
_
" Interviews on Banking and Currency Systems, National Monetary Commission, 1910, 6ist Cong., ad sess., S. Doc. No. 405, p. 212.

"By virtue of the statutory machinery, the emissions
ot the bank are essentially variable and are commanded
precisely by the discount or loan operations. It is therefore the bills presented for discount and the requests for
loaits—that is to say, the requirements of business—
which fix the amount of the issue."
Further questions put to M. Pallain regarding the
elasticity of the note issue at certain seasons brought out
the following replies: b
b Ibid., p. 213.




41 NJ
MONO. SEC.
largely
"Q. Does this demand for increase come more
from the banks or from customers in general?
"A. Both banks and other clients. The demands of
the banks are particularly important, as they centralize
the demands of their numerous clients.
If
"Q. The fluctuations are more or less automatic?
there is an excess of notes, it is, I assume, soon taken
care of by presentation for redemption?
"A. The mechanism is quite automatic. When circumstances demand a reduction of issue the notes are
naturally presented for redemption, and it seems to us
that as long as this redemption is made without difficulty there can never be an excess of notes in circulation."
The absence of any legal requirements as to the gold
reserve of the Bank of France has not prevented the accumulation of a large reserve—the strongest in Europe, with
perhaps the exception of that of Russia—but enables the
bank to make new discounts without studying carefully
the ratio of reserve to note issue. As put by M. Pallain:
"It may happen that among our assets a certain fraction
of the gold is replaced by an equal amount of bills in our
portfolio, and that without changing the total of notes in
circulation." Conclusions based on the fluctuations in
the note issue of the Bank of France must, therefore, be
corrected by consideration of the changes in the gold
stock, in order to arrive at the net influence upon the
position of the bank caused by an increase or decrease in
the volume of paper discounted. The average fluctuation in the volume of notes outstanding does not often
exceed io per cent of the total amount, but the fluctuations in discounts granted show a much wider range.
The difference in this range of variation is accounted for
chiefly by changes in the gold stock. If the volume of
discounts granted is increased, the amount required for
the new discounts appears in the balance sheet partly in
the issue of additional notes and partly in the reduction
of the stock of gold. When the volume of discounts
granted is decreased, the influence of the decrease is reflected both by a decrease in the amount of notes outstanding and by increase in the stock of gold. The notes
are paid out by way of granting discounts; they are retired and canceled when they are received back into the
bank in payment of those discounts. The gold is paid
out also in granting discounts; it comes back into the
bank when the bills discounted are paid. If these considerations are kept clearly in mind, they will throw light
on the table which appears below in regard to the functions of the Bank of France in giving elasticity to the
supply of credit:°
a Vide Statistics for Great Britain, Germany, and /trance, National
,
Monetary Commission, 1910, fast Cong., ad sets., S. Doc. No. 578 PP.
94'3132
(In thousands of francs.)
Date.

Discounts.

issis Gold stock.
rcu
Ct:

Variations in discounts at Bank of France.
(In thousands al francs.)

Date.

Discounts.

rculs
etion.

1Goki stock.
——




• Vane

OtaMAWS

sus

/Imam, i..c114441644y, sum

-w. ••••••••••••••
4•4.024*

Monetary Commission, 1910, 6ist Cong., 2d sess., S. Doc. No. 578, pp.
294-313.
[In thousands of francs.)

Discounts.

Date.

Circula•
tion

Gold stock
c
.

Variations in discounts at Bank of France.
[In thousands of francs.)

Discounts.

Date.

Circulation.

Gold stock.

2.954.500

1,292,IOC

3,061,400

1,114,9cc

762.200

3,161.30e

1.34(2,200

00
421,4
482.000

3.086,900

1,677, toe

3.392,700

Nov. 3o

739,800

3,358,500

1.684,406
1,703,60e

1894—Apr. 26

983,400

3,470.100

I,743,400

Sept. 6

360,000

3,362,600

1,5106,3oa

322,000

3,303,300

1.030,4=

1,050,100

3,838,800

1,914,604

378.902

3,517,700

2.879.100

1,032,100

3.811,800

1,833,200

1,267,600

4,163,000

1,863,300

633. Ice

3,943,200

2,263,900

4,284,600

2.449,000

,
3,991,2 0

2,625,400

4,427,900

2,362,604
2,664,4420

II..496.600
asp—Sept.
978,600
NOV. 27
7892—Jan. 7
Sept. 23
2893—Sept. 21.

1896—Sept. ro .
Dec. 3x
1898—Sept.8.
Nov. 3
1900—Jan.4
Sept. 20

.

1902—Jan.2..846,100
Aug. 21

393,100

973,600
•
.
1904—Mar. 31
8..483,100
Sept.
,
470 300
1903—June 8
Dec. 28
9
1 06—Jan. 4

Aug. 2,3
r907—Jan. 3.
Aug. 22
z9o8—Jan. 2
Sept. 10
1909—Peb.
Aug. 12
--Sept. 23
z910
Nov.3

4,180,8e0
4,345,000

2,866,904

60
97,9
1,0
1.339.200
633,000

4,565,900

2,878,400

00
1,533,8

4.905,300

2,831,300

4.413,800

2,923,400

3,092,700
4.598,100

2,664.800

833,700
1,549,500

3,o66,goo

2.676,200

,30
353 0

4,765,900

3,220,200

94,600
2,0

,171,800
5

572,400

8 800
4.94 ,

00
,6
3 33,6
3.702,600

7
152,9
00

4 00
,02 ,7
5

600
3079,

1,493,700

3•495,800

,0
3 3 3,10a

2,810,440

The figures show for each year quoted the maximum and
minimum points in amount of discounts granted as shown
by the weekly reports of the bank and the state of the
circulation and the gold stock at the same dates. It will
be found that in nearly every case the amount of the
increase in discounts from the minimum to the maximum
of the year is represented substantially by the increase in
notes outstanding plus the decrease in gold, and conversely, that the decrease in discounts is represented substantially by the decrease in notes outstanding plus the
increase in the stock of gold. Where there seems to be a
serious departure from this result it may be due to an
increase of a temporary nature in advances on securities
or to the increase in deposits, such a showing resulting
occasionally from operations in connection with,the distribution of Government loans.

.1




42 NJ
1
SE0.

matic character of the
To illustrate more clearly the auto
one or two concrete
elasticity which these figures indicate,
figures for 1906 afford
cases may be selected. Thus, the
the following results:
Francs.

Discounts:
January 4
August 23.

I, 339, 200,000
635,000,000
704, 200,000

Decrease

491,500,000
72, 100,000

Decrease in outstanding notes
Increase in gold stock.

563,60°,000

Total.

in discounts
These figures show that with a decrease
t 700,000,000
between January 4 and August 23 of abou
curtailed nearly
francs ($135,000,000), note circulation was
gold stock of
500,000,00o francs ($96,300,000) and the
00,000 francs
the bank was increased by about 75,0
1908, when the bank found
($14,475,000• The figures for
the year by the
its discounts swollen at the beginning of
having relations
heavy accommodation extended to those
more striking
with London and New York, afford even
in the volume of
confirmation of the rule that a decrease
outstanding note
discounts is reflected by a decrease in the
The decrease in
issue and an increase in the gold stock.
r io, 1908, was
discounts between January 2 and Septembe
is accounted for
996,000,000 francs ($192,3oo,000). This
00o francs and
by a decrease in the note issue of 301,000,
francs.
an increase in the gold stock of 544,000,000
ure to what
The figures given above indicate in a meas
the joint-stock
extent the Bank of France is relied upon by
ure. They
banks to grant rediscounts in periods of press
financial transhow that during years of comparative
m discounts are
quillity, as in 1902 and 1904,the maximu
in 1906, 1907,
much less than in years of disturbance, as
pressure they
and 1908, but that in periods of monetary
out seriously
may increase by mo per cent or more with
the year 1909,
affecting the resources of the bank. Even
t at the jointwhich was one of ample supplies of credi
m of discounts
stock banks, shows a much lower maximu
The average disand less fluctuation than 1908 or 1910.
years of trancounts of the last few years—some of them
with the averquillity and others of financial disturbance—
ount in those
age note issue, gold stock, and rate of disc
years, appear in the following table:
of France.
Average discounts and discount rate at Bank
[in thousands ci francs"

Year.

1875
2880
ins
1890
1895
1900

1905
:906
1907
1908
1009
1910

Average
Average discount
Average
Average
discounts. note issue. gold stock.
rate.
4.00

2,461,100

1,133.200

2.3059400

727,700

1.84

677.200

2,848.000
3.060.400

390
2,20 00
19256.300

3.00
3.00

559,000
,
758 500
784,300

2.10

00
543,6

3,526,700

8759200

4,0349100

2,047,900
2.103,100

3.25

840.50o
897,700
1,235,700

4,408,too

2,834,700

3.00

4,6580100

2,Mt,see

4.800.400
4.853.aro
3.ono,Imo
5. 197,700

2, 7.3.3oo

3.00
.3.45
3.04
3.00
3.60

07,200
8
761,500

977,300

3,052.000
3,63o,aoo
3.400.000

The fact that the volume of discounts at the Bank of
k
France has failed to increase as rapidly as the gold stoc
• .. • - -€
:C rine to two circumstances—the




4.,.
Alba
29115
:goo
1895
1400
0
19 5
aoo6
non

2908
nog,

714,300
677,200
543,600
0
7S,1 0
8
640,900
897,700
1,143,700
897,200

••• -.•• •
. 4.
2 11 6
3,060,400
3,526,700
0
4,034,10
8,
4940 100
5,
4.6 11 500
4,Soo,000

761,soo

,400
4.853
5.079,900

977,300

5,197,700

4.404.400

1,o6,
47 9 0
1,0 , 0
2,105,100
04
2444,7
.m
2 s,aoo
00
2,703.3
3,034,000
3,630,400
3,400,000

3.410
3.00
2.10
3.25
3.00
3.00
3.45
3.04
3.00
3.00

1440

Bank of
discounts at the
at the volume of
ock
The fact th
y as the gold st
increase as rapidl
to
ances—the
France has failed
to two circumst
of notes is due
k banks during
and the issue
by the joint-stoc
on of new business
of the
absorpti
that a large part
on and the fact
coin held
the past generati
ance consists of
the Bank of Fr
ounts.
resources of
ailable for disc
therefore not av
d
portance
against notes an
ed their chief im
ock banks attain
The joint-st
lly spread a
that time gradua
and have since
edit
after 188o
France. The Cr
ches throughout
mptoir d'Esnetwork of bran
anches; the Co
d, in 188o, 70 br
exist.
Lyonnais ha
nerale did not
d the Societe Ge
nais, 246
contpte only 9; an
r the Credit Lyon
r 1908 were, fo
te,
The figures fo
rnptoir d'Escomp
g offices; the Co
nkin
striel et
branches or ba
d the Credit Indu
Generale, 499; an
ete
ing agencies
212; the Soci
number of bank
34. The total
w
Commercial,
s in France is no
joint-stock bank
the
mainder
established by
e in Paris and the re
ich about 250 ar
over 950,of wh
under various
nk' of France,
ovinces. The Ba
banking
in the pr
d its number of
law, has increase
2 in 1910.
requirements of
6 in 1907 and 51
252 in 1890 to 46
e
offices from
ance supports th
h the Bank of Fr
whic
by one of
The manner in
is thus defined
of the country
ission: a
financial fabric
e Monetary Comm
s consulted by th
the expert
tional Moneance, Na
s and Credit in Fr
olution of Bank
No. 522, p. 200.
Andre Liesse: Ev
, S. Doc.
a
., 2d SC9.3.
,'gm,fast Cong
tary Commission
connection

that
mate
is seen the inti
re that
, such as
It is he
"
zation of credit
ce in the organi
the Bank of
exists in Fran
de it, between
evolution has ma
werful
historical
s. The first is po
credit companie
nsiderable
France and the
issue and its co
its privilege of
t, the
because of
two causes: Firs
ich is due to
wh
ing from our
metallic reserve,
changes, result
of favorable ex
e
continuation
road; second, th
nts of capital ab
vestme
vanconsiderable in
With these two ad
the bank note.
of the system;
great credit of
comes the pivot
nk of France be
small
tages the Ba
to keep .a very
edit companies
cr
ng discounts
it permits the
nstantly in maki
al
rve; to use co
metallic rese
. The commerci
confided to them
ich is
llic
the capital wh
next to the meta
shall see, ranks
we
e it is easily
'portfolio,' as
sources, becaus
g available re
reserve amon
ance."
the Bank of Fr
rediscountable at

•




43 NJ

MONO. SEC.
As a profit-making concern, the Bank of France appears
more formidable by the magnitude of its business than it
is in fact, because a.large proportion of this business is
not directly productive to the bank. This follows from
the fact that a large proportion of the notes is fully covered
by the metallic reserve of gold and silver. Inevitably, a
profit is derived only from the excess of.issues above the
metallic reserve. When the proportion of the reserve to
outstanding issues of notes is examined, it becomes
apparent that in recent years not more than one-fourth
of the total issue, and in many cases a much smaller
proportion, is capable of affording a profit to the bank.
The following table shows the ratio of the metallic reserve
to the circulation for representative years: b
b Statistics for Great Britain, Germany, and France, National Monetary
Commission, 1910, Gist Cong., 2d sess., S. Doc. No. 578, p. 293.

. t.

Ratio of reserve to notes at Bank of France.
•

[In millions of francs.)

.

Year.

Gold.

Silver.

Total
reserve.

Circula-

Ratio of
I to notes.

Average:
1875'
1884
1885-1894

I.02g.9

3.341. 4

953.•

3980.9

2.544.1

77

1,214.8

2,557.3

3,012.5

8
4
85

,
4 468. 2

88
8
4
76

18
95-19 4
0

2.184.7

1,17 .
06

r9ag

2.854.7

1,101.8

3.355.3
3.956. 5

2,882. 1

„1,F.49!,4

3:931.6

•

1906
1967 .

•

2,703.3

,

•

1910

971
.

3.674.4

9.1, 0 7
2i
893.8

4,524. 2,

4 853.4
,
5.07,9

8
9

kit g
.

t•

4,658.8
4,8ao-4,

3.?3?. a
3630.4

•

3968
r9o9

3,924.!

4,261.6

5.197. 7'

82

Sr

,
Examination of these•figures:indicates in a nieagure the
Manner in which the Bank of •Fpance.has strengthened its
position during the past fifteen years in its tatito of gold
to silVer. The relative magnitude of tke
Stock Was
a,source of some anxiety after the great fall in the value
of the metal after 1873, and there was a marked tendency
for some .
years for the excess of silver cdinage not needed
in circulation to accumulate ,,in! the vaults of the bank.
As the silver 5-franc pieces of:Belgium, Italy; arid Switzerland weite legal' tender in France under the s terms of the
%
Latin'Union of 1865, the coins;of those- countries tended
.
to flOW into Trance, creating, a, redundancy; which was
'
relieved only by thejr ‘payment.into the ,Bank of'Fialfee a
•1.

I

a A, brief account of:the Latin Monetary Union is givfn,thy
comurt,"The
National Ban) .of. Oalgiusii," National Monetary Commission, 1910, 6ist
Cong.,
sess., S. Doc. No. 40o. pp. 167-172.

?The aYerage gilver:rperve.9cceed,ed. M1,e goldlneserve by
-consideriatle';613 kunts during the years 4,879 to 1883, and
f
the. monetitiY -pressure at the clpse of/..4,8.81 reduced the
gold, stp,Ck'''til'1 52,000,000 francs ($.1
5
5p,000) b The
.
b 'Jesse:- Evolution of Credit and Banka,ki. Pritatie\olfatiphal
Comiuiswsn 2910, 61st COtig:', 2d sess., S.

,

lóónctaiy
62i. No. 50,- pr1 2,75. •
;
;•

ratio ofFthitliWo 'tnetlilg in the reServe thel b$Coppliiiimptj
'
*lately equal mkt remained so
1891. '4•0281*sit date
,
until 1809 the silver stock
Fompqratively sta*woe
tionary, wHile the gold stock ra
, amounting
,
in 1400 to 2,I03,
,o0,000 francs ($4
' -Cioo,cloo), RS'against
456,
' silv to theamount of 1, 34,100,00o francs($2I9,009,000)
aer
.
4 40010#
4
1
1
4#0: From

that time the increase in the gold stock has been
taOid, while the silver stock has been declining until the

1

41




rom mat este
mid remained so mytn I591.
until i899 the silver stock reniainett comparatively staT
tionary', wliile the gold stock rapidly *creased, amounting
in 19oo' to 2,103,1oo,000 francs ($4.66;800,o0o), as'against
ier
• silv ,. to. the amount of 1,134,100,000 francs ($219,000,000).
2 From that time the increase in the gold stock has been
'rapid, while the silver stock has been declining until the
average for 1910 was only 861,600,000 francs ($166,,000,doo). The ratio of the silver stock to the gold stock,
therefore, which was approximately equal as recently as
1891, and was* nearly three to five as recently as 1899, has
now falIen to the ratio of about one to four. This has
greatly strengthened the ability of the bank to meet
demands for gold for export purposes and supports the
suggestion of M. Pallain, in his interview with members of
the Monetary Commission, that "the extent of our reserves
allows us to contemplate without emotion important
variations of our metallic stock." The bank was some'times charged, during its period of large silver holdings,
with charging a premium for the redemption of notes in
gold. Its policy in this respect was thus explained by the
•itgatery

governor:"
"Interviews on Banking and Currency Systems, National Monetary Corn.
mission, 1916, fast Cong., zd sess., S. Doc. No. 405, p. 216.

of France can not, of course, renounce its
right to redeem its notes in gold or in silver, since gold
,.
•
pieces and silver coins of 5-francs are equally legal tender
••
, in France. But it .only uses this right with discPetion
and to the extent that it ,appears necessary in order to
prevent art' unjustifiable weakening of its reserves. In no
'Case; however, whatever may have been said',;.iliame we
ever charged any premium on French gold'in redemption

. ,• .." The 'Bank

of note."
While the operations of the Bank ,of France ,are more
,
intimately 'interwoven with the commereial life of the
,
cOuntry. by reason of its many branches, than the opera. tions. the Bank of . England are interwoven with the
commercial life of Great Britain, the Bank of France can
.
• .
not be said to be subjected to the same sudden and intense pressure for gold as that which falls frequently upon
:
KEngland.a The obligations of the joint-stock

,
:1;)

'
Cf. Palgravf: Bank ./titte and'the Money Market, p. 149.

banks in France, although they have been growing in recent years, fall much below the total of such obligations in
Great Britain. Their deposits, moreover, are less active,
and a considerable proportion are payable only on time.
To .these influences, as well .as to the large metallic resources of the Bank of France, are to be attributed in part
thefgreater,steadiness in its rate of discount.




WO'

44 NJ

MONO. SEC.
While the use of ;the check system is still much restricted in France, a system of economizing the use of
money has been long in use at the Bank of France which
operates as a form of clearing. This system, which we
shall find even more extensively deireIbped in Germany,
consists of direct transfers of credit (virements) on the
books of the Bank of France, not only at the main office
in Paris, but between the branches. It is contended by
some authofities that these transfers are more direct and
economical than the system of drawing checks and clearing them through outside agencies.b The method by
b. Maurice Patron: The Bank of,France in its Relation to National and
Infetnational Credit, National Monetary Commission, 1910, 61st Cong., 2c1
sess., S. Doc. No. 494, PP. 73
-75.

which these transfers are made is thus described* One of
the experts consulted by the Monetary Commission:c
/bi4., p.69.

-

"The operation'consists in causing a sum to pass from
the ;edit of one account to the credit of another. From
the Standp' oint of bookkeeping nothing is easier. The
1
simplicity, is just as great for the holder of the acccinnt.
He Oyes the order to debit his account and to credit such
otlif as he may designate, existing in France. This is
done with no other cost than the io centimes for the
stamp on the receipt which is handed to him.° , He sends
p The only condition for this free service is that the sender shall have;
discounted with the bank, within ten days, a sum equal to the amount he
is sending, or that the recipient be a debtor for a similar amount. If one
of.these conditions is not fulfilled, a commission of 25 centimes per t,000
flitnq is charged. But in practice the cases are very rare where commission
*charged.
this receipt to the recipient, who is dui's:notified. If,h9w.
eSer, he prefers, he need not take a receipt, the amount
being imthediately transferred to the new account, which
, is credited on the day of the transfer. It is clear what
economy results from the use of this syStem for ,banks
with, a considerable volume of business. It is eiftectitlly
advimtageous for private bankers who must frequently
cover themselves, sometimes at the shortest ,notice."
The transfers made from one account to another within
the bank are written on a pink order; those directing
payment. to a third person from the accoiint of the drawer
oti a Ake order. One. the greatest merits of this pracof
tice is that it eltablishes a system of domestic exchange,
practically gratuitous and at par, throughout ,France.
How convenient it has proved, in spite of its limited
acceptanee outside of Paris, may be judged from he magnitude of the operations of Olt sort carried ona by the
bank. A,regulfir account has been kept for many years
of; the payments made into the bank sind of their character, whether coin, bank notes, or transfer orders.
Figures for representative years appear in the following
table:
Annual receipts of the Bank of France.
BM millions of 6.snal
Year.

I

Specie. I

Notes.

Total.

"




bank. A s regular iccottnt haft been kept for many years
of the payments made into the bank and of their character, whether coin, bank notes, or transfer orders.
Figures for representative years appear in the following
table:
Annual receipts of.the Bank of France.
(In millions of francs.)
3 .3

Year.

2840
i860

specie.

Notes.

Transfers
or checks.

4.350. 1

955.9
6.629.1

3,281.4
11,488.4

33.528.

32.713.5
43,330.7

82,867.

2880

5,323.3

15
,411.0
32,095.1

2890
4

Total.

3,098.8

36,437.9

2 9.5
8
sgoo

2,904.8

33,802.2

52,472.6

3,350.5

43,449.6

102,447.0

8,387.4
70031.9

89 179.7
,
149,247.

3902

3,898.2

44,138.

320,233.

1904

4,309.7

152,822.5

0205,485.2
.

2905
3906

4 452.4
,
4,476.8

48 353.0
,
48,393.3

171,227.7

22 ,
4 073.5

2907

4
,378.0
4,578.0

53,914.6

189.233.4
279,399.4
0,
17 261.3

237,692.2

4,268.8
4,804.I

54,873.6
54r 926.

214,191.7

273
,334.3

245,8
42.5

305.572.9

1
138
1909
2910

49,318.8

50,718. 2

168. 270. 2

243,029.2:

225,537.

' These immense totals show that the policy of the Bank
of France has accomplished much in subkitUting trani:
fers of credit by other means than bank notes, in spite4g
the large use of the latter which has grown up in France
since the opening of the era of railways and the general
substitution of money for barter in rural communities.
The total payments into the bank, as shown by the figures
above, were equivalent in 1910 to about $59,000,090000,
4
Of which payments by cheeks and transfer orders Made
up about $47,500,000, or about 8o per cent. This aimpares :with clearings at New York fpr dr year =Wing
September 30, 1910, of $102,553,959,069,--pf whickuthe
balances paid in money were $4,195,293,969; or 4.09..tler
cent. Up to the present time at the Bank of France the
proportion of the receipts coming into the branches nkthe
form of transfers has not attained the samellevelopment
as at Paris. That progress is being made at the branches
is indicated, however, by the following comparison:
Receipts at Paris and branches.
[In millions,of francs.)
Total payments.

Transfers.

Place.
t 1895

1910

189s

titt!i

Paris.
Branches

67,983.4
.21, 196.3

201,813.2

ST,643

43,759. 7

86163

4 43.4
,6

'

8
90797

305072
29

52,,472.6

245,842.$

Aggregate

241,199.2

.5

t?




45 NJ

MONO. SEC.
Without pausing to comment at length upon these figures, it is obvious that they illustrate the marked success which has attended the efforts of the Bank of France to
extend the use of credit. These efforts have been especially marked since the renewal of the charter of the bank
in 1897 for the period ending December 31, 1920. Among
the new obligations imposed at that time upon the bank
was the creation of at least one branch in each Department
where none existed. This obligation has been more than
fulfilled. The number of banking offices, which stood at
261 at the close of 1896, was 512 at the close of 191o.
Among recent measures taken by the bank to extend the
use of credit instruments have been an agreement between
the Bank of France and several of the joint-stock banks
ibr the wider use of "crossed" checks and an effort to
encourage the payment of small bills of exchange by transfers of credit at the offices of the bank instead of payment
in currency at the domicile of the drawee.°
a fide International Conference on Bills of Exchange, 6ist Cong., 3d
scs*, S. Doe. No. 768, p. 483; also Economiste Europeen, Oct. 14, 1910,
X.XXVIII, P. 49 .
0

Thus, upon the largest theater of monetary demand In
the world outside the United States, the Bank of France
fulfills the functions of supplying paper currency practically without restrictions up to the limit of legitimate
demand, of rediscounting freely to meet the needs of the
joint-stock banks, of affording clearing facilities on a large
stale, which it is constantly laboring to extend, and of
successfully protecting the largest gold reserve in the
world by a rate. of discount which for nearly thirty years
has:neve- been higher than 4 per cent, and has for long
intervals of time been as low as 3 or evea 2 per cent.
3.

OPERATION OP THE GERMAN SYSTEM.

The system of the Imperial'Bank of Germany for meeting increased demands for credit is distinctively that of
the issue of bank notes. The bank is not permitted to
issue notes, however, with the same freedom from restrictions as the Bank of France. As already set forth in
detail, the German system of note issue establishes an
authorized limit of 55o,000,Ooo marks ($130,94o,000), secured by a reserve of one-third in legal money, With the
privilege of additional issues without limit upon thelleposit
of the full value in gold. This corresponds ,precipely in
principle to the English system, and if it had :Operated
without other ameliorating provisions it would have caused
during many recent years intense pressure in the German
money market.
The additional provision which gives a certain degree of
elasticity to the German note system is the authority given
to the Imperial Bank to issue notes beyond the authorized
limit without the lull deposit of. gold, provided a tax is
paid upon such excess issues at the rate of 5 per cent per




of the full value in gold. This corresponds ,precisely in
principle to the English system, and if it had operated
without other ameliorating provisions it would have caused
during many recent years intense pressure in the German
money market.
The additional provision which gives a certain degree of
elasticity to the German note system is the authority given
to the Imperial Bank to issue notes beyond the authorized
limit without the full deposit of gold, provided a tax is
paid upon such excess issues at the rate of 5 per cent per
annum. This provision has attracted much attention
among financiers and economists since its adoption in
1875, and has been imitated in Austria-Hungary and
Japan. It has received the most severe test in Germany,
because in the other two counties in which it has been
adopted there has been a less rapid expansion in the
eliemand for credit. When the plan was adopted it was
regarded by some authorities as a safeguard only for
serious emergencies. Mr. Stanley Jevons, an English
authority off monetary subjects, declared that the rate of
tax on the excess issues should be much more than 5 per
cent, his idea being that the excess issues should only be
ealled into play in some such emergency as those which
confronted the Bank of England in 1857 and 1866, when
authority was given to the bank to exceed the legal limit
of note issue provided that additional loans were made at
the rate of io per cent.
Experience has resulted, however, in the issue of notes
subject to the 5 per cent tax whenever, in the opinion of
the managment of the Imperial Bank, monetary conditions have required an increase of issues. The resources
of the bank, as in the case of the Bank of France, are
derived chiefly from its issue of notes. Liabilities to
depositors and all other liabilities except capital and surplus scarcely equal a third of the liability on account of
notes. In meeting demands for credit in Germany, however, the bank is not able to permit the decline of its
gold resources with the same complacency as the Bank
of Fran, because its gold stock is relatively much
smaller in proportion to liabilities. Indeed, such has been
the pressure of industrial expansion in Germany, with its
demand for enlarged credits, that the ratio of cash to
notes was reduced at the close of 1907 as low as 41.34
per cent and the ratio of cash to total demand liabilities
Was only 30.64 per cent.

46 NJ

MONO. SEC.
Imperial
These conditions have imposed upon the
the rate of disBank of Germany a policy in regard to
rent from
count and the protection of its gold stock diffe
lling it to
that pursued at the Bank of France, by compe
al derely chiefly upon the issue of notes to meet speci
thus
mands for credit. The function of the bank was
under its
described in the memorial volume published




authority in I goo: a
'Stitt
a The Reichsbank, 1876-1903, National Monetary Commission, two,
Cong„ 2d sess., S. Doc. No. 408, p. 41.

German
"The Reichsbank is the last support of the
s every
home market. It satisfies out of its own fund
note issue,
Increased demand for money by increasing its
contingent;
even when this largely exceeds its tax-free
for money
on the other hand, it regulates the demand
circulaand counteracts too great an extension of note
depends on
tion by fixing the discount rate. It neither
do private
other banks nor does it rediscount bills, as
g its capital
banks of issue, for the purpose of diminishin
s by claims
invested in bills and strengthening its fund
on third parties.
relations
"In the same way, the supervision of foreign
the hands
of German monetary affairs lies exclusively in
sufficient
of the Reichsbank. It endeavors to hold a
ations
gold reserve, out of which at all times foreign oblig
standard."
can be settled without causing a shock to our
ial Bank
In the fulfillment of these obligations the Imper
-stock banks,
rediscounts freely paper offered by the joint
upon
especially in periods of pressure, and issues its notes
extent
The
such rediscounts where they are required.
lean upon the Imto which the joint-stock banks thus
with repreperial Bank is indicated in the interviews held
the monesentatives of those institutions by members of
two of the
tary Commission. Thus, in an interview with
questions
directors of the Dresdner Bank, the following
and answers took place:
ary
o Interviews on Banking and Currency Systems, National Monet
405, pp. 395-98.
ssion, 1910, 6ist Cong., 2d seas., S. Doe. No.
Commi

maintain a certain percentage
"Q. Do you endeavor to
deposit
of cash on hand and in. the Reichsbank to your
and acceptance liabilities?
nt"A. No; we are practically indifferent to the perce
sufficient
age, as long as we know that we have on hand a
amount of prime bills.
all other banks endeavor
"Q. Then,in practice, you and
to fully employ all available funds?
other
"A. Yes; we only carry in the Rcichsbank and
Of course,
banks sufficient for the conduct of business.
of the
we do an important business in various parts
ces in
world, and it is profitable for us to have balan
fers for.
various centers in order that we may make trans
should
the accommodation of our customers. If we
than our cash
have a debit in the clearing house of more

amount of prime bills.
"Q. Then,in practice, you and all other banks endeavor
to fully employ all available funds?
"A. Yes; we only carry in the Reichsbank and other
banks sufficient for the conduct of business. Of course,
we do an important business in various parts of the
world, and it is profitable for us to have balances in
various centers in order that we may make transfers for.
the accommodation of our customers. If we should
have a debit in the clearing house of more than our cash
In the Reichsbank we would immediately send over bills
with our indorsements and establish a credit sufficient
to pay the amount of our debit. * * *
"Q. You regard your item 'bills discounted' as one of
practical.reserve ?
"A. Yes; it is immediately convertible into cash at the
Reichgbank."
The demand for notes has increased in Germany with
the development of industrial activity and increase in
population in a much larger ratio than if the check
system had been more widely extended. It will be
shown hereafter that much has been done by the Imperial
Bank to facilitate the transfer of credit without the use
of currency; but it has remained true, in spite of these
measures, that the check sytsem has been introduced only
to a limited extent and that the joint-stock banks do
business largely with the money of their shareholders
and a character of business which could not be done upon
the same scale with deposits repayable on demand. The
result has been that the note circulation of the Imperial
Bank has increased upon the average to a large amount,
apart from the variations at different seasons of the
year, and that the requirement for gold for the protection
of the notes has increased in corresponding degree.
The following table exhibits the average volume of outstanding discounts for representative years, together with
the note issue and the metallic reserve: a
a Statistics for Great Britain, Germany, and France, National Monetary
Commission, 1910, fast Cong., 2d sess., S. Doc. No. 578, p. 373.

Average discounts and note issues at Bank of Germany.
[In thousands of marks.]

Year.

Average
Average
discounts, note issue.

Average
metallic
stock.

Average
discount
rate.

02 0
4 .9 9

684.8O6

510.593

4.16

345,726

MA

735,013

562.091

4.34

x885
1414o,

6
372.74

727,442

586.131

4.13

534,142

983,882

801,014

4.5*

r8iks

573.924
800,180

95.591
1,0
1.138,561

1.011,763
817.137

3.14

1900. ,
0
19 5

908.816

1.33,701

972,959

3.42

1906

8 ,445
99

1.387,237

890,965

5.15

1907
1908

1,104,537

1.47 ,783
8
4,1
1,52 42

43,340
8
1,019,065

6.03
4.76

1,57 ,532
8
t,6os,11112

1,046,333
1,055,803

435

1909
1910




967,729
918,894
1.143.628

5.33

3.93




47 NJ SEC.
MONO.
These figures show an almost uninterrupted increase in
the average annual demand for notes. This increase is •
due in part to the increased responsibilities assumed by
the bank in the form of discounts, but in part also to the
same influence which has operated to enlarge the note
issues of the Bank of France—the diffusion of the use of
currency and the preference for paper over coin. It may
be added that in Germany the increase in note issues during the past few years has been due in part to the authority given by the government in 1906 for the issue of notes
for 5o marks ($11.90) and 20 marks ($4.76). Prior to
this law the smallest denomination of bank note was ioo
marks ($23.80). It was the theory of some of those who
advocated the reduction of the minimum denomination
that it would enable the bank to draw into its reserves the
gold which would be displaced in the circulation by the
small notes. Without discussing here the soundness of
this theory, it may be remarked that it is not universally
accepted by economists and financiers. The authority
to issue small notes was promptly availed of, but the
amount outstanding at the close of 1910 was smaller than
at the close of 1907 or 1909. The figures of the number
and value of notes of each denomination at the close of
1905, before small notes were authorized, and at the close
of 1910 appear in the following table:
a Bulletin de Statistique, I.IX, p. 439, and LXIX, p. 349.
Denominationslof German bank notes.
1910.

Denomination.
Notes.

:moo marks
too marks
m marks
a/smelts

6
424.18
12.324.962

Value.
Marks.
424.186.000
1,232.496,200

Value.

Notes.

,272,371
14

Marks.
370.952,000
1,427,237.100

21842,693

:42,1349630

6.622.136

132,442,720

0
37 .932

, The German note circulation shqws greater elastic4y,
in the sense of increase or decrease from week to week
during the year, than that of England or France. An
average of the weekly note circulation and bank reserves
for the twenty years 1888-1907 shows that the highest
point is reached in the week of December 31 and the
lowest in the week of March 15. The maximum average
um
is i,372,o43,000 marks ($326,000,000), and the minim
968,461,000 marks ($230,500,000), a variation of 403,500,
s
coo marks ($95,5°0,000). As there are special demand
for currency at the close of each quarter, which are now
met under provisions which will be presently referred to,
it might afford a better view in some respects of the ordiexnary expansion and contraction of the note issue to
the
chide the final' week of each quarter. If this is done,
week of
high point for other weeks will be found in the
marks.
October 15,which shows an average of 1 ,216,482,000
the
Comparing this item with the low point of March 15,
,
variation is shown to be 215 ono.000 tv rics. or a pr000r-

Wiamq




-*a •

marks ($95,5oo,000). As there are special demands
for currency at the close of each quarter, which are now
met under provisions which will be presently referred to,
it might afford a better view in some respects of the ordinary expansion and contraction of the note issue to exclude the finat week of each quarter. If this is done, the
high point for other weeks will be found in the week of
October 15,which shows an average of 1,2 I6,482,000 marks.
Comparing this item with the low point of March 15, the
variation is shown to be 248,000,000 marks, or a proportion of more than 25 per cent of the minimum and about
to be a fair
20 per cent of the maximum. This seems
measure of the variations in the German circulation under
conditions essentially normal. The figures for 1907, which
was a year of great disturbance and large demands upon
the Imperial Bank, showed, as is usual, the highest points
85,at the quarter ends,which reached for December 31,1,8
922,000 marks. The minimum circulation of the year was
t
1,274,917,000 for the week of February 23. The highes
point, exclusive of quartera.ends, was on October 7, when
outstanding issues were 1,712,145,000 marks. This shows
in the ina wide range of fluctuation, which was reflected
the
crease in bills discounted. The following table shows
not
relationship between the volume of discounts, the
circulation, and the metallic reserve of the Imperial Bank
ve
at the maximum and minimum points for representati
years since 1887: a

000

National Monetary
a Statisti42 for Great Britain, Germany,and France,
e2d;sess., S. Doc. No1578, pp. 174-193.
62st Cong.,:
Callatiliggion, 1920,
Variations in discounts at Bank of Germany.
[In thousands of marks.]

Date.

Discounts.

Circulathan_

Metallic

reserve.

53t.685

971,6cr

381,579

916,858

6
779,57
976,446

434.149
665.279

886.05.

821,288

1.131.733

724.7.1

485.623

8
9 9.437

959.234

634.746

2.675,866

483.03!

4.954
86
886,027

616.686

953,172
1.169,i88

560,938

2,065,677

799.507
512.240

1..57,418
1,622,969

964.629

1.293,658

726.129

686,738

2,006.osi

8
857.95

1,688.321
761.986

0 ,945
1,4 9
I, 166,341

2.650,759

1.626.225

1.516.469

786,123

Dec. 31

1.137.918

986,785

29,24—Itebt 23

732,718

Mar. 31

1,693.485

2spos—Pebk 15

661,317

6,935
1,49
,194.658

1.341,217

1,682,646

73...1S

774.358
1.396.638

45
2.234.8

996,224

1,704,131

675,301

0,
1,3 3 534

890,419

7907—Feb. 25

863,911
1.493.593

2.885,922

704,179

Dec. 3t

3888—Jan. 7
Aug. is
289cr—Peb. 23
Sept. 30
saga—Jan. 23
Oct. 3:
se94—Jah• 31
June 3o
Ago—Feb. is
Sept. 30
211198—Peb. 15
Oct. 7
nio--Peb. 23
.

Dec.31

1902—Mar. 7

Sept. 30
sç.6—Pebt is
Sept. ao

66
99,3
8
952.212
815.546
951,416

9 3
72 ,8 0

828,679
1,116,288




NJ
48 SEC.
MONO.
The manner in which the Imperial Bank extends its aid
to German commerce is indicated by comparison of the
discounts alone. While in years of comparative tranquillity, as in 1902 and 19o4, the difference between the
maximum and minimum volume of discounts is approxiinately 50 per cent of the minimum and perhaps 30 per
cent of the maximum,the range of variation is much wider
in years of monetary disturbance. Thus is 1905 the.
increase from the low to the high point was more than lo0
per cent and in 1906 and 907 did not fall far short of this
proportion.
To the question which naturally arises—By what means
was this great expansion of accommodation extended to
business houses and to the joint-stock banks?—the answer
is that it was chiefly through the issue of additional notes,
which promptly returned to the bank when the volume of
discounts declined. Thus, as early as 1890 a decline in
discounts between February 23 and September 30 amounting to 231,000,000 marks was accompanied by a decline
in outstanding notes of 245,600,000 marks ($58,35o,000),
On the other hand, the expansion of discounts in i9oo,
amounting between February 23 and December 31 to
407,500,000 marks, was accompanied by an increase in
notes outstanding of 4o3,90o,000 marks. In 1907 when
the resources of the bank were severely tested, ap expe,nsion of discounts, from the low point of February 15 to the
high point of December 31, amounting to 629,000,000
marks, was accompanied by an increase in notes outstanding of 582,000,000 marks. The lack of exact correspondence in these figpres is due to changes in the volume of
deposits and the movement of gold.
Comparison of these figures with those for France will
Gerruany
show that the manner in -which the Bank of,
meets the demand for additional credit differs in a marked
iklegree from the method at the Bank of France. While
at the Bank of France the increased demand for discounts
is met, it might almost be said indiscriminately, from the
large stock of gold and from the issue of notes, at the Bank
of Germany it is met almost entirely by the increase of
note issues so far as this is practicable. For the purposes
of domestic demand the issue of notes meets requirements;
it is only in the case of a foreign demand, calling for the
export of gold, that•the Imperial Bank makes increased
discounts by the surrender of the metal or by throwing
upon the market a portion of the;, foreign bills which it
has in recent years added to its assets and which
satisfy the essential purpose of the export demand for gold
by giving to the purchaser a title to gold abroad.
It remains to inquire how far the 5 per cent tax levied
upon excess note issues has wisely restrained or unwisely
hampered the issue of notes up to the limit of legitimate
need. Upon this point it was the general testimony,at the
iliquiry on the renewal of the bank charter in 1908, that
'the tax has not restrained the bank from issuing all the
notes which it deenard tn tle rpniiired and further et-.4
''•

1116 •




Upon tile MUTICell U.

portion ui

LEILI

ittsseign

taisses wassuaa at.

has in recent years added to its assets and which
satisfy the essential purpose of the export demand for gold
by giving to the purchaser a title to gold abroad.
It remains to inquire how far the 5 per cent tax levied
upon excess note issues has wisely restrained or unwisely
hampered the issue of notes up to the limit of legitimate
need. Upon this point it was the general testimony,at the
lAsquiry on the renewal of the bank charter in 1908, that
.
`the tax has not restrained the bank from issuing all the
notes which it deenvd to be required, and further that
• such issues were often made when the rate of discount was
5 per cent or less. All such issues upon which tax was
paid, would obviously be a source of loss to the bank; hut
this loss would be limited by the small ratio which the
taxed issues bore to the totoll issues and by the short
periods of time for which the tax would be paid. Thus,
• it was declared by.Dr. August Weber, a member of the
Reichstag: a
a German Bank Inquiry of 1908, National Monetary Commission, 1910,
6ist Cong., 2d sess., S. Doc. No. 407, Pt. I., p.

"The experience of past years establishes beyond a
.doubt the fact that neither the former nor the pretwent
,
president of the Reichsbank has permitted himself, or will
permit himself, to be-guided in fixing the rate of discount
by the consideration whether the highest limit of the note
contingent is passed or not; and I think that, conversely,
if the rate of discount should be higher than the tax to be
paidt upon overstepping the note contingent, this would
have no influence upon the further development, of the
..rate of discount. It is melt known that other causes
operate upon the height of the rate of discount."
Examination of the record of the issue of notes under
the 5 per cent tax Ishowsithat such issues have increasegf
inear the end of each ten-year period for which the bank
tharter runs. This is due* in part to the economic expansion of Germany and the increase of population, which
• have raised the average amount of notes vequired
general business. This normal increase was recognized:at the
renewal of the charter in 1899 and in 1909 by the raising of the limit of uncovered issues. This extension of
• the limit, by giving a wider latitude to the bank, reduced
tthe amount of issues suhiect to the tax for the first few
: years f011owing the change, but excess issues 'appeared
ikilarge amounts in the returns for 1899 and t9oo, before
the new limit took effect on January 1, ioz, and reap:peered also during each of the four years preceding the
:new ;limit which took,effect on. January 1, 191 .

1?"

•

49 NJ

MONO. SEC.'
Issues of notes subject to the tax were comparativ,flyi
rare prior to 1896, the whole number of weeks during
which they occurred being only nineteen during the fifteen
years 1881-1895. During this period a number of years
passed without any excess issues and the year showing the
largest number was 189o, when the tax was paid for six
different weeks. From 1896 downward issues subject to
tax have been frequent and have sometimes reached large
amounts. This was especially the case in 1899, 1900, 1906,
and 1907. The total number of weeks during which notes
were issued subject to the tax during the nineteen years
1896-1908 was 159, the largest numbers Wog in 1899,
of
2o; in 1900, 20; and in 1907, 25. The largest excess
notes outstanding prior to 1905 was 371,233,000 marks
($88,175,000) for the week ending September 30, 1899.
Beginning with 1905,., however, still larger amounts
appeared, the maxima falling usually at the end of a quarter. The largest excess wasifor the week of December 31, s
1907, which amounted to 625,974,000 marks ($148,750,300). The record for 1907 showed issues subject to the
,,
tax in ten of the twelve months .of the year, the only.
months free from such issues being February and May.
Even thtKyear of comparative tranquillity, 1908, showed
excess issues in eight months and during fourteen different
weeks."
a The details for each week appear in "Renewal of Reichsbank Charter,"
National Monetary Commission, 1910, 6nt Cong., 2d seas., S. Doc. 507,

facing p. 120.

•

Abundant evidence is afforded, however, by the record
of the truth of the assertion made by the officers of the bank
that the rate of discount has not necessarily been raised_
above 5 per cent because of the issue of notes subject to.,
the 5 per cent tax. During the 178 weeks showing an excess
of note issue, from the incorporation of the bank,in 1876
down to the close of 1908, the number of such weeks in
.
which the rate of discount exceeded 5 per cent was 74. Of.
these, 14occurred during the period of considerable pressure
in 1899, io in the autumn of 1906, and 25 iptthe year '907.
Of Wiese 74 cases, moreover,there were 24 in which the rate
of discount was at 534 per cent, which,in view of the inci-_
dental costs of issue and discounting, would afford a very
insignificant profit to the bank. Still stronger evidence per
haps of the policy of the bank in issuing notes up to the
limit of legitimate commercial demand, even at a loss, is
iffOrtted13y analysis of the returns for the 104 weeks in •
which excess issues were made, while the rate of discount
remained at 5 per cent or lower. In only 47 cases was the,
rate as high as 5 per cent. For seven weeks it was 434 per
cent, for 37 weeks it was 4 per cent, and for io weeks it




•

wasonly 3 per cent.
The demand for bank notes has in recent years been
especially keen at the end of each calendar quarter. This
was tor the first time specially provided for in the amend-,
ment to the charter which took effect on January 1, 1911,
permitting the issue of 200,000p00 marks ($47,600,000)
,
for the single week ending with each quarter, in addition
to the regular limit of issue in other weeks." If such a
n•

•

.••••

•,
;4441*,,x404•••••AP '

afforaeu oy
which excess issues were made, while the rate of discount
remained at 5 per cent or lower. In only 47 cases was the
rate as high as 5 per cent. For seven weeks it was 44 per
cent, for 37 weeks it was 4 per cent, and for io weekg it
wasonly 3 per cent.
The demand for bank notes has in recent years been
especially keen at the end of each calendar quarter. This
was for the first time specially provided for in the amendment to the charter which took effect on January 1, 1911,
permitting the issue of 200,000,000 marks ($47,600,000)
for the single week ending with each quarter, in addition
to the regular limit of issue in other weeks.° If such a
a Law

of Junt I, 1909, art. 2.

provision had been in force in previous years, it would
have made a marked difference in the amount of notes
subject to the tax. Thus, in 1908 the excess for March
31, which was 361,657,668 marks, would have fallen to
161,657,668 marks, and a corresponding reduction would
have appeared in the excess for June 30, which was
215,800,300 marks; September 30, 320,647,610 marks; and
December 31, 454,793,551 marks.
Even this extension of the limit, however, has not
prcived adequate to meet recent demands upon the
Imperial Bank at quarter ends. In order to reduce these
demands to the absolutely essential needs for credit, the
Imperial Bank adopted in May, 1911, a new rule regarding the short rediscounts which come to the bank at the
quarter ends, partly to obtain temporary cash and partly
to enlist the services of the bank in the collection of the
paper. The new rule was, that beginning at the end of
June all discounts. asked during the first week of a quarter
and all discounts which ran beyond the last day of a
quarter should pay a supplementary interest for io days.
The rule applies, however, only to requests for the discount of sums above 3,000 marks ($714), thereby seeking
to exempt the small,clients of the bank.a
a

Llgoonomiste Europeen, June 2, 1911, XXXIX, p,695.

The pressure at the quarter ends is due to the organization of retail trade and banking methods in Germany,
which concentrates a great mass of settlements upon those
dates. It is not in itself an indication of abnormal
monetary strain, and the recent action of the Imperial
Bank has resulted in suggestions that dates for trade
settlements and other payments be distributed more




59 NJ

MONO. EC.

•

,evenly throughout the year and that the use
of checks be
!tore widely extended. The tension in the mon
ey market
Ar ced at. the clofie of June, 491 i,.found
iodu
partial relief
in the influx of foreign money under the impu
lse of a high
.„„pkte,,of private clispount.b
Ao

•
•

b

Ibid., July 7, 1911, XL, p. 22.

The increase in the demand for notes
in Germany has
not taken place without vigorous efforts
on the part Of
the Imperial Bank to extend the use of.
other means for
making payments. The most importan
t department of
the bank, apart from note issue and the
granting of discounts, is the so-called giro, or transfer
, system. This
.system, as it existed at the Bank of
Prussia, was reorganized immediately after the passage
,of the bank act of
1875, and its use has been rapidly and
widely extended
,from year to year. As described in the
memorial volume
...issued On the :twenty-fifth annivers
ary of the bank, the
,systetn is as follows:C

•
.




••

'

c The jteichsbank, Natio

nal Monetary- ConunisSion,,t9to, fast
Cong., 3ti
cSelis?, S..Thcl. .*'• 4o8,pP. 91- 2
c
9.

,,
.

"The signature of the deposito
r to the•printed 'Regulations for transfers at the Reichsbank
' is required as
•,
proof of the conclusion of a contract
. The account is
,opened by a cash deposit called balance (Gutitaben).
This
is increased by further cash deposits,
by transfers from
other current accounts, and by an adju
stment of transactions between the bank and the depo
sitor (crediting of
discounted bills, granting of loans
on collateral, etc.).
.•
.
The depositor can close the account
by drawing out the
balance in cash, by transferring
it to other current
Accounts, and by ;settling with the
bank (debiting bills
Made. payable at the bank by
the account holder, or
Follaterni:loans due from him, etc.).
• ,`"IU .red check, which represents the real
transfer
draft, las introduced for transfers,from
one account to
,another. The White checks serve for
the withdrawal qf
gash and for settlement of transact
ions with the bank.
The red check bears the name qf the
person to whom the
transfer is made, and is not tran
sferable. The , white
check, on the Contrary, is made out
in the name of the
payee, with the addition 'or bearer.'
For making payments between diilerent places (dis
tance transactions) the
red gheck—that is', the transfer from account
to account—
is used almost exclusively, as
a fee is charged for cash
payment from one account to. anot
her by means of a
white cheek, and such payment can
be made only after it
. ha& been determined fittether a
balaggeitat band at the
lwaislis& .4 • .•
- •. • • • •
',•
"
ficibileit'lltda...provideil by the Imperial
bank art open'to all•classes,of,the poPu
lation, to institutions, and ,to tye public .aUthOrities.
The bank Opens an
account for ankne who enjoys
sufficient 'standing to
coMmand confidence. It is ,expecte
d ,that the bolder of
an account will keep a balance corr
esponding tone labor
involved for the , bank, but the amo
unt of such balance
Is. not fixed, but based , upon
the extent to which the




•

•
,,„the„rapsfer. fact
. tileg"thprovideil by the Imperial
.'"i3pA4t ut openAo all-classes, of,the poPulation, to instit
utions, and to Om public ,atttliOrities. The bank Opens
an
account for anyqiie who enjoys sufficient 'standing
to
cOMmand confidence. , It is ,expected that the .hold
er of
• an' account w,ill,keep a balance corresponding'toithelabor
involved for the.bank, but the amount of such balan
ce
Is, not fixed, but based upon the extent to which. the
services of.the,bank are employed. In the case of trades.,.people, ltowev,er, there is an understanding that
the
miniestun balanne shall not. fall below r,ociO marks in
small places. ancl larger amounts in trade centers. If
trailactiimsr the account increase largely, the bank
requests tileotipj_er of the aecount to increase *is balan
,
Id
ce.
Thus, in mach the swat manner as in France, the
Imperial Bank provides a convenient and economical
system pf.4 dpinestic lexchange. It is the balances kept
by clients of the bank for the purpose of making transf
ers
which form the bulk of the obligations of the bank
apart
from its note issues. These balances are considered
by
German financiers and economists a safer resou
rce than
inactive deposits, because they are needed by the
owners
fpr carrying on their daily . business and could
not be
reduced materially, even in a period of distrust, witho
ut
causing greater inconvenience to the owners than
would be
suffered by the bank. As their status was put by
Doctor
.Schincket, president of the Hamburg Chamber of Commerce, in the bank inquiry of Igo§: a
Germ'an Hank Inquiry of 1908, National Moneta
ry Commission, Dm,
61st Cong., 2d sess., S. Doc. No. 407, Pt. I,
pp. 876
-877"As a matter,of actual experience

, a large part of the
total deposits, in the Reichsbank are, so to say,
on the
• road, being in process of transfer from one
locality to
another, and therefore are quite incapable of being
with'drawn from the bank. And for my part I am sure
that
everyone at a time of crisis, and just at such a
time, is
more anxious to increase the balance which he has
subject
to draft at the Reichsbank than to decrease it.
I therefore regard thç. danger to the Reichsbank arisin
g from
, the mass of deposits subject to draft as extre
mely slight
apd t,he. need qf a cover for their protection equally slight
,"

•-• •.

•

,

• •t:

•




51 NJ

MONO. SEC.

As these deposit balances are created for the purpose of
making transfers, the volume of operations upon them
reaches large figures, corresponding in recent years
approximately to the amount of similar transfers through
the Bank of France. The following figures indicate the
gross movement of individual and governmental accounts
for representative years: b
b

Bulletin de Statistique, March, iii, LXIX, p. 350.
Movement of accounts at Bank of Germany.
[In thousan4s of marks.)
Individual
accounts.

Year.

Public
accounts.

2,1176
Mao
ago

35,234
,255

1,372.195

79,749,501

4 054
, ,542

1900

135,159 94
, 0

28,479,195

S905

178,572,655

9
43,578,12

16,711,245

2,070,624

3906

294,432,653

51,204,924

3,27

207,179,650

,8
53 4 9,114

3soS.

220,181,9
61
225.105,263

6
9,933,344

439,278,106

74,9 5,927
0

Moo
ipso,

59,77 ,4 9
8 0

The total movement of these accounts has risen, accord.
In to these figures, from about $2o,000poo,000 in 1890
and $4opoo,000,000 in 1900 to about $75,000,noo,000 in
291o. The total for 1910 exceeds by more than $15,000,7
000,000 the similar movement of accounts in France, but
with allowance for difference in population would fall
somewhat short of the French average per capita. The
method* of settlement of the German accounts for 1907
show cash payments in the proportion of 15.4 per cent;
balancing of accounts, 22.4 per cent; local transfers, 33.4
per cent; and transfers from and to other cities, 28.8 per
cent. The settlements without cash payments, therefore, reached 84.6 per cent of the whole—an average •
'which has been departed from only slightly for the past
ten or *welve years.°
a Miscellaneous articiesoo German Banking, National Monetary Commission, irpio, 6tst Cemg., 2d see., S. Doc. No. 5o8, p. 6o.

The essential character of these accounts, as means of
making transfers rather than as fixed deposits, is brought
out in a striking manner in the case of the private accounts
by the large average volume of transactions in prog
portion to average balances. The figures show 'that.,on
each mark of the average balance the turnover as far back
as the year 1900 was 405 marks for the year, and that of
this total 266 marks was effected without currency. The
average time for which amounts received were left with
the bank decrgased from three days in 1876 to 1.47 days
In 1900. The iverage balance to each account is rather
6
b The Reichshank, National Monetary Commission, 1910,fist Cong., 2d
am., S. Doc. No.08, p.

high, by reason of the large balances kept by the banks,
but has been decreasing from year to year. The average
volume of transactions annually for each account, on the
other hand, has shown a tendency to increase, in spite of
the decline in the average balance. The following figures
for representative years illustrate these tendencies:
.
4
4

beldttlePit and

tranaantions in vivo

^-

•••




S; Doc. No. 40. p• Ito.
8

high, by reason of the large balances kept by the banks,
but has been decreasing from year to year. The average
volume of transactions annually for each account, on the
other hand, has shown a tendency to increase, in spite of
the decline in the average balance. The following figures
for representative years illustrate these tendencies:
.
Avatar balances and transactions in giro acco.unts.

Year.

Average
Average volume qf
transom,
balance. floss per
account.
Marks.

20
80
2900

33,829
27,401

20
05

90
23,8
22,067

7 0
97

20,7 7
0

Marks.
1,995,111
$,88,791
9,596,020
9.581,0Sz
t0„1.95,69.1

The transfer service is availed of by all branches of commerce and finance, but most largely by the banking world.
On March 31, i9o8, the distribution of the giro accounts
of private concerns was as follows: Industry and trade,
27 per cent; commerce, transportation, and insurance,
13.8 per cent; banks, private bankers, etc.,. 52.6 per cent
(banking corporations alone furnishing 36.1 per cent);
corporate bodies, foundations, private individuals, etc., 6
per cent; agriculture and allied industries, 0.8 per cent.
Thus, in spite of great commercial expansion in recent
years, imposing a severe strain upon her stock of free
capital, Germany has been supplied with a flexible currency
and with credit accommodation at reasonable rates,
through the mechanism of the Imperial Bank and the
system of taxed emergency note issues, supplemented by
the system of free transfers of credit to all parts of the
empire which the bank has organized. Its services are
thus summed up by Doctor Stroell, manager of the
Bavarian Note Bank:a
a Renewal of Reichsbank Charter. National Monetary Commission, ispo„
15xst Cong., 2d seas., S. Doc. No. so7, p. 246.

"The Reichsbank has fulfilled its duty, from without
and from within, and this both in normal and in critical
times. From without, it has protected the German gold
standard; within, it has drawn over the empire a splendid
network of institutions dispensing credit and performing
monetary transfers. ' the basis of a flexible note issue
On
these institutions satisfy the need for credit at a rate of
interest which is now higher, now lower, but which is
always determined by the existindeconomic conditions,
and is never fixed by considerations other than those
pertaining to the public welfare."




52 NJ

MONO. SEC.
CHAPTER

VI.
-THE POLICY PURSUED BY EUROPEAN
BANKS IN TIMES OF PRESSURE.

The policy pursued by the central banks of Europe in
periods of pressure has been an evolution from experience
,
in which many mistakes were made in the infancy of bank
ing,as was the case in America with the Unite
States Bank
d
and the State banks before the Civil War. The meth
ods
of influencing the exchanges by sharp changes in
the discount rate, by buying or borrowing gold, and by the
use
of foreign bills, which have been already described,
have
come to be understood and effectively employed
only
within the past forty or fifty years and some
of them
within a much less time. It is not impossible that furth
er
improvement in these methods or the adoption of suppl
e.
mentary methods will emerge from further
experience.,
thxter present conditions, however, a system of dealin
g.,
with periods of pressure has grown up in the Euro
pean
banking world which has averted many of the difficulties ,
which arose in the earlier history at banking,
'These
results are now at the command of
spy country' which
ciesires to establish a similar system of regjg
ating the
exchanges, averting pressure, and guarding
against
panic.
It is not contended by careful economists sox.,
financiers
that the European banks have discovered any
Jmethp4 of
preventing absolutely the overextension of
credit in
periods of cominercial expansion or any panac
ea against
human error. It is simply contended that by
means of
the influence which they exert, directly and
indirectly,
the banks are able to restrict unwise banking
within narrower limits than in those countries where there
is not
some-form of coordination of single banking units
into
I
a cohesive whole, and that they are,able to corre
ct the.
results of sut mistakes as do occur,,with a mini
f
mum 01,
shock,to soUnd and legitimate busin• and witho
ess
ut permitfing the effects of individual error• , to be magni
s
fied
r
and mu1tip4ecl by unfounded alarm., and unwar
ranted
reatrictions of credit.
Inevitably,the measure of success of. central
t,he
banking
mechanism in accomplishing these ends has varie
d in some
degree according to financial conditions in the
country
where the bank is established. In a narrow sense
it is
not possible to raise the stream of credit far
above its
source; but it is contended for the central banks
that they
%an so regulate the stream as to prevent its
overflowing
banks with violence or being suddenly dried up witho
ut
'
1
*
reason, in this respect the policy of the central banking
m44gutnism may be defined is that of a re4ining reser
voir,
which limits the amount 0credit released when
it is not
required, but keeps it available for use when credi
t from;
other sources becomes scanty. It is obvious that
this is it
function which could be performed only with diffic
ulty, at,
considerable cost and probably only under the compu
lsion.
of law, by a loose association of banking institutions with.1
out an organized and established head, Wit could
be per-formed by them at all.
.ks stated above, the polity which is now pursu
ed toc
avert periods of pressure is the result of exper
ience and
evolution and was not well understood or steadily
nursued




Meehanism may be defined as that of a re4i
ning reservoir,
which limits the amount a credit released
when it is not
required, but keeps it available for use when
credit from
other sources becomes scanty. It is obvi
,It
ous that this is a
function which could be performed only with
difficulty,'at
.
considerable cost and probably only under
the compulsion
o law, by a loose association of banking insti
tutions with.1
out an organized and established head,
itit,could be per-formed by thepm at all.
A§ stated above, the polisor which is now pursued
to
avert periods of pressure is the result of
experience and
evolution and was not well understood or
steadily pursued
prior to the middle of the last century.
The Bank of.
England was then practically the center Of
the finincial
world, but the peculiar conditions under whic
h itt was
organized and developed prevented its taki
ng the lead for
a time so effectively as it ha; since come-to
• do. In the
pitnic of I U5, according to the well-known
work of Mr.
li4gehot: a
a Lombard Street, new edition. New York, 1910,

pp. 201-202.

"In the panic of 18. .5 the Bank of England
2
at first acted
as unwisely as it was possible to act. By ever
y means it
tried to restrict its advances. The reserve
being very
small,it endeavore4 to protect that rese
rve by lending as
little as possible. The result was a peri
od of frantic and
,
almost inconceivable violence; scarcely
anyone. k.new
whom to trust; credit was almost suspende
d; the country
was, as Mr. Huskisson expressed it, whi
n twentyjouK,

Iriars ot,ti'itate of barter."

•
••4::f




53 NJ

MONO. SEC.

Ultimately, upon the advice of the Government, the
bank decided to make liberal advances upon the security
of goods and, according to a letter from Sir Robert Peel
to the Duke of Wellington, "reluctantly consented, and
reSQUeCi us from a very embarrassing predicament.
"
Without discussing at the moment the fetters imposed
by the bank act of 1844 upon the Bank of England in later
crises, it is desired here simply to bring out the fact that
only by degrees was the lesson learned among European
bankers,that when a crisis was actually imminent the bank
should lend freely, but at a high rate, upon unquestioned
security. This policy is very different from that of lending
freely before the attempt has begun to check speculative
expansion. Such advances are made upon sound tom-.
mercial paper or temporarily upon first-class securities, in
order to protect legitimate trade, and are not made to,
promote new ventures. The system of making such loans,
and advances freely in times of threatened crisis is now
accepted and acted upon at practically all the leading
foreign banks. Thus, in the interview of members of the
Monetary Commission with the officers of the Bank of
England, occurred these answers: a
a Interviews on Banking aud Currency
Systems, National Monetary
commission, wzo, 6ist Cong., ad sess„ S. Doc. Na,440, p. 28.

"9. Is it the practice of the bank In times of stress to

diseount hills of a satisfactory character for its customers,
freely?
"A. At such times the bank is always ready to.discount
4
bills of a satisfactory character for its customers ocfor theli
market,
"Q. Is it the policy of the bank to discriminate against
finance bills in times of financial crises?
"A. The bank always discriminates against '
accommodation bills pure and simple, but in times of financial
'
s
crises each case would be considered on its merits.
"Q. Does the understood policy of thepank of England
to advance bank rates rapidly and at the same time to ,
extend liberal .credit in times of serious financial trouble
meet with general approval in business and banking
circles?
"A. This is a question more for the.general public.to
zanswer, but it :is believed that on the whole the action
the bank during the autumn of 1907 met with general
4pproval."
Substantially similar answers were made by the heads
of other great banks in the conferences held with them hy
members of the commission. In the case. of the Bank cif
.1/ranee, the Matter was thus put by the governor: a
Interviews on Banking and qiurrency Systems, National Monetar

111WOO, 1910, 6ist Cong., 2d teas., S. Doc. No. 405, pp• 006-207. y Com"It. Do the banks rely implicitly on the Bank of France_
hto grant them credit-wh44% they, require it?
A. They *knew .very well that in times of .difficulty
we are the supreme resource.
"Q. Does the amount and the character, of credit
granted to other banks depend on the amount and the .•
„character of their accounts at the Bank of France?
There is no fixed rule, and although the .balance
.41 the, account. is not a matter of indifference, it is more
6.4speeially the quality of the paper presented which fixes
'Abe extent of the credit. In periods of crisis, in 1830,.
In 1848, in 187o,in 1889, the general council of the ,bankk




ao grant tnem crecut-wm,1 tney, require it
" They know .very well that in times of .difficulty
A.
we are the supreme resource.
"Q. Does the amount and the character. of credit
granted to other banks depend on the amount and the ,
„character of their accounts at the Bank of France?
"'A, There is no fixed rule, and although the.,balance
Ow account. is not a matter of indifference, it is more
Kispedilly the quality of the paper presented which fixes
'the' extent of the credit. In periods of crisis, in 1830,,.
In 1848, in 1870,in 1889, the general council of the bankt
,
did not hesitate to come to the assistance of establish-,
ments which were in difficulties, but which held assets of unquestioned character and value, by extepci*g to them
the largest possible credits."
The obligation and policy of the Imperial Bank of Germany were defined by one of the officers of the Dresdner.
Bank in the following terms: a
p. 398.

"Q. Is it the policy of the Reichsbank and of your own
bank,in times of stress, to extend credit liberally to people
who are entitled to it?
"A. I think the Reichsbank extends credits liberally,,
as long as it possibly can.
,
"Q. We found that policy was adopted f by the beot
banks in England.
"A. We had a very serious crisis here in 1901. It was
a money crisis, and at that time the Reichsbank was very
liberal in ektending credits. The Reichsbank feels tint
it has a patriotic duty to preserve the credit of the,Empirel
at is a state institution."

111111111111111
""ENOMOViassoonp.

NJ
54 SEQ,
MONO.

l•




At all the chief banks of issue the fact was emphasized,
which has already been referred to in discussing the
ready convertibility of assets and the system of rediscounts, that the bulk of their resources were .attsually
employed in the discounting and rediscounting of commerciat paper and that so far as possible such discounts
were limited to paper based upon real transactions. This
fact is brought out in the answerS already quoted by the
governor of the Bank of England, which goes further in
making advances upon securities than do most of the,
continental banks.
In cases where advances are made to a considerable
amount upon securities other than commercial paper, as
at the Imperial Bank of Germany,the effort is made to limit
them to accommodation extended only temporarily and to
bankers rather than to individuals, in the belief that the
temporary character of the advance and the knowledge that
it must be repaid within a short time will restrict the banker
to asking such advances only upon assets which he considers
to be sound and convertible. The volume of loans on
securities at the Bank of Germany fluctuates within wide
Iltimits, being almost invariably largest at the quarter ends.
This is due to the fact that the joint-stock banks are called
upon for large credits or for considerable amounts of curwenoy at such times by clients who are paying their
quarterly accounts. The banker obtains the means of
supplying further credit at such times by getting loans on
securities at the Imperial Bank, which are often paid off
within a week. It was to meet this demand, peculiar to
the German method of doing business, that the recent
• extension was made in the authorized note issue, by which
200,000,000 marks might be issued at the end of each
quarter, in addition to the regular issue, without being
• subject to the tax on excess issues,a
a cf. Dr. R. Koch: Renewal of Reichsbank Charter, National Monetary
Commission, 292o, forst Cong., 2d sess., S. Doc. No. 5°7, p. 227.

The position of the central banks of issue in Europe is
not that of absolute dictators in the money' market, but
is a position of great influence, more especially in times of
• FEessure. It is not within their power to prescribe directly
z ad arbitrarily the policy of the joint-stock banks, but it
is within the scope of their indirect influence to restrict
mound banking by the knowledge that those who practice
•?! it will receive less support at the central bank than those
who adhere to-methods which are sound and conservative.
In England, as the result of the absence of participation
by the Government in the management of the Bank Of
gmland, there is less direct influence of this sort probably
than in the countries of the Continent. On 'this subject
the following statement is made by one of the experts
consulted by the Monetary Commission:a
a Hartley Withers: The English Banking System, National Monetary
Commission, 2920, 6ist Cong., 2d ass., S. Doc. No. 492, p. 207.

"The only regulating influence in English banking is
that of the Bank of England, and it is only exercised occasionally and under exceptional circumstances. Occasions
have been known on which the governor of the bank has
summoned the manager of one of the banks whose action
•

•

-

.9

• .•

...

•
. .4 •




consulted by the Monetary Commission;41
g System, National Monetary
Hartley Withers: The English Bankin
492, p. mg.
sion, 1910, 6ist Cong., ad seas., S. Doc. No.
Commis

ng is
"The only regulating influence in English banki
ised occathat of the Bank of England, and it is only exerc
Occasions
sionally and under exceptional circumstances.
the bank has
have been known on which the governor of
e action
summoned the manager of one of the banks whos
remonstrance
he thought fit to question and administered
mely rare.
and rebuke; but such an occurrence is extre
ons of this
Moreover, as has been shown in earlier porti
regumemorandum, the Bank of England intervenes and
which
lates the price of money in London by measures
in
have already been described, namely, by borrowing
rate
order to make its own rate effective, and raising that
et as a
if it thinks it necessary in the interests of the mark
whole."
On the Continent the influence exercised by the heads
ive
of the central banks is probably more direct and effect
which
than in England, but this is obviously a question
, howdoes not lend itself to precise statement. In all cases
nor of
ever, the authority and the obligation of the gover
n as
the central bank to take the lead in such joint actio
recogmay be required in a critical situation is generally
and,
nized. This has come to be the case even in Engl
raespecially since the panic of 1866. There had been decla
of the Bank
tions previous to that date by the governor
of England that the bank was under no greater responObil
any
ity in maintaining sound financial conditions than
other joint-stock bank. After the panic of 1866, however,
s,
the governor of the bank, at a meeting of the proprietor
s:b
made an address, in which he used the following word
b Bagehot: Lombard Street, p. 167.

•••..• ••

,




55 NJ •, .%.
MONO. SEC.
"This house exerted itself to the utmost, and exerted
itself most successfully, to meet the crisis. We did not
flinch from our post. * * * It was not unnatural that
in this state of things a certain degree of alarm should
have taken possession of the public mind, and that those
who required accommodation from the bank should have
gone to the chancellor of the exchequer and requested the
Government to empower us to issue notes beyond the
statutory amount, if we should think that such a measure
was desirable. But we had to act before we could receive
any such power,and before the chancellor of the exchequer
was perhaps out of his bed we had advanced one-balf of
our reserves, which were certainly thus reduced to an
%mount which we could not witness without regret. But
we did not finch from the duty which we conceived was
imposed upon us of supporting the banking community,.
and I am not aware that any legitimate application made.
for assistance to this house was refused."
In the later crisis of 1890, when the Bank of England!
was fortunate in having at its head Mr. Lidderdale, a. man4
of much strength of character, even greater responsibilities were assumed. Mr. Lidderdale refused the offer by
the Government of the right to issue notes in excess of
the legal limit and took the lead in forming a syndicate of
kankers which guaranteed the obligations of the Barings
and .agreed to divide among then!,the loss, if any should
()MUT.
In acting as guardians of tO monetary situation the
central banks have endeavored to avoid as far as possible
und4"competition with other banking institutions. One
.p
of the reasons why the balance sheets of the Bank of
Prance and the Imperial Bank of Germany do not show
more rapid growth in the volume of discounts is the fact
that these banks permit the market to underbid them at
times when money is plentiful. In other words, the private discount rate quoted by the joint-stock banks on the
best quality of paper is lower than the official rate of,the
central bank. An effort has been made in some countries
to correct this in a measure by authorizing the state bank
to lend under certain circumstances below the official rate.
As a broad question of policy, however, the central banks
have been disposed to relax their control of the market
and to sacrifice profits rather than to compete with the
joint-stock banks in lowering the rates for money below
the usual and normal rate for short-term loans. This
does not seriously impair their control over the market
when credit becomes scarce, because the resources of the
joint-stock banks are tken reduced, they are compelled to
recur to the central bank for rediscounts, and they necessarily bring up their own charges to their clients to the
•
rates fixed by the central bank.
It is one of the consequences of the great development
of private and joint-stock banking in recent years that
the relative power of the central bank has in some countries been diminished. This has been particularly t4e
case in England. The means by which the difficulty is
corrected in that country—some of whicili are not usually
employed by other banks—have been already referred to
under the discussions on buying gold and borrowing from
the market. Upon the whole, however, the central bank
has not lost its ability in any European country to influence the gener21
.4.112tion to the ext-nt




‘..caiLI111 MUM.

It is one of the consequences of the great development
of private and joint-stock banking in recent years that
the relative power of the central bank has in some coun
tries been diminished. This has been particularly
the
case in England. The means by which the diffic
ulty is
corrected in that country—some of which are not
usually
employed by other banks—have been already refer
red to
under the discussions on buying gold and borrowing
from
the mitrket. Upon the whole, however, the centr
al bank
has not lost its ability in any European country
to influence the general banking situation to the extent requi
red
to avert danger and protect the national stock
of gold.
It was even contended by the officers of the Bank
of England, in their conference with the commission,
that the
raising of the discount rate is more effective at the
present
time in controlling gold movements than at the
time of
the suspension of the bank act in 1866. To the
questi9n,
"To what do you attribute this increased efficiency
?" the
reply was made, "To the increased and more rapid
means
of intercommunication between financial cente
rs." To
illustrate the potency of the policy of the bank
under
modern conditions, the following summitry was
made of
itsAction during the crisis of 1907: a
a Interviews on
Banking and Currency Systems, National Monet
ary
Commission, 1910, 6ISt C011g.:2d sess., S. Doc.
No. 405, p. 27.

"On the 15th August, 1907, the bank rate
was raised
to 434 per cent and so continued till the
31st October,
when it was further raised to 534 per cent.
On tile latter
date the total bullion held by the bank was
£31,79opoo
and the proportion of reserve to deposits
39.9 per cent.
On the 4th November, owing to :further
withdrawals
of gold, the governor, acting on bis
.powers, raised the rate
to 6 per cent. On the 7th November the
court of
directors raisedi he rate to 7 per cent, the total
)
bullion
being £28,7oo,00o ,andIthe proportion 35.2
per cent.
• Thenceforward the inflow/of gold was great
er than the
outflow, thus demonstratingitherpowerfof
an effective
increase of rate. On the i ith ' mber
[
Dece
the total
bullion was £34,1oo,00o and the- proportion
47 per cent.
At the end of January, by which time thelr
ate had been
gradually reduced to 4 per cent, the total
bullion VMS
3i3,5oo,000 and the proportion 56.6 per cent
.
"

•




6
5 NJ

MONO. SEC.

It was a significant fact, going to sustain the contention
of the officers of the bank in regard to the efficiency of
advancing the discount rate untiler modern conditions,that
)
gold flowed to London from no less than 24 countries ,
including British colonies.
Upon the subject of possible competition in France.
between the central bank and the joint-stock banks,one
of the officers of the Cr4dit Lyonnais said that the rate of
discount of the Credit Lyonnais was rarely higher than,
that at the Bank of France awl at the time of the con—
ference was much lower. lie added: a
4 Ibid., p. 239.

"There would be competitioik. between. thk. Bank of.
France and the other baAcs if the Bank of France had a
very low rate of discount, but as a matter of fact it does....
not lower its rate. For loans on collateral tpe Bank of
France only accepts certain classes of securities, and ^all'
other classes of securities are left for the other banks."
Upon the same subject in its bearings upon conditions
in Germany, the following discussion took place between
members of the Commission and officers of theImperial
Bank

b

b,Ibid., p. 346.

"Q. What is the relation between this bank and otherbanks, such as the Deutsche and the Dresdner—that isi
as to the character of business transacted? Are you copi-A pctitors?
bp said that the Reichsbank is more lie- "A. k strioted by law. At a private bank the rate of discount
may be much cheaper than at the Reichsbank. The
private banker knows his clients, and he may be willing to
accept from them a bill that the Reichsbank would not and
could not accept.
"Q. Then there is to some extent competition?
"A. Yes; but that competition is not large. It is not
felt that the Reichsbank is a competitor of other banks,
but it is a public institution. The Reichsbank has its
official rate, which is higher than the private rate. A bank
will take bills on its own account running three months or
more and hold them,and in case of need will take bills run;ling ten days or less to the Reichsbank for discount. The
Reichsbank pays no interest, and acts as agent for transfer
of currency and credit to all parts of the Empire without
charge."
CHAPTER VII.—NON-PAYMENT OP INTEREST ON DE-

rosin.
One of the respects in which the central banks of Europe
refuse absolutely to enter into competition with jointstock and private banks is in the payment of interest on
deposits. Such interest is not paid at any of the chief
specie-paying banks of issue. The foundation of this
policy is the principle that a bank of issue should not
encourage deposits for any other than commercial purposes. It was declared by M. Burdeau in the debates on
the renewal of the charter of the Bank of France in 1897
that the issue of bank notes and the acceptance of interest.
bearing deposits are absolutely incompatible services.
Their union in a single hand, he declared, "would replace
the present organization by one entirely new, which in case
of a crisis would offer much less vitality and power of




deposits. Such interest is not paid at any of the chief
specie-paying banks of issue. The foundation of this
policy is the principle that a bank of issue should not
encourage deposits for any other than commercial purposes. It was declared by M. Burdeau in the debates on
the renewal of the charter of the Bank of France in 1897
that the issue of bank notes and the acceptance of interestbearing deposits are absolutely incompatible services.
Their union in a single hand, he declared,"would replace
the present organization by one entirely new, which in case
of a crisis would offer much less vitality and power of
resistance." a The payment of interest, it was estimated
a Patron: The Bank of Prance in Its Relation to National and Inter.
national Credit, National Monetary Commission, 1910, 6ist C.ong., od semi
§. Doc. No. 494, p. 0.

by M. Burdeau, even at the rate of i per cent on deposits
subject to check, might draw into the Bank of France a
sum in the neighborhood of $zoo,000,000. This amount
would be taken from the joint-stock banks, with serious
results to them, and would impose upon the Bank of
France a liability which would be a serious menace in time
of peril. The legitimate commercial deposits, however,
kept in the bank for the purposes of current business,
would not be withdrawn to any large extent and might
even increase with the slackening of commercial activity.

---

4.;•• ifty_ .•

.e

'

4.-.•••T"-7-

• •li*solowati*Noimisnow •

•

'
qt. •

iti;•(IN
,

•.;

•

1.

115.111

'IU4

.. 11'' ‘.. .

2
'

NOTYPt SECTIO*' --al
'

In Belgium the true rule was tinderstood and followed
at the Organization of the bank in 1850,
,and when the pro,
, - •
posal wassmade 1111872 to permit the payment of,interest,
'a strong argument was, made by M. Pimiez, the minister
offinance, against it." Commercial deposits, he declared,
a Documents Officiels, 41872, pp. 54-56.

receive their remuneration in services rendered.. :Such
depositt are made only when one expects to ,qbtain in the
movements Of business the advantages which the,bank
:
assinvt, and as the movements of business are for each
tradesman a Continuing series, it follows, that, after the
exhaustion Of a deposit it will, almost always be renewed.
That. which Stiniti/atedthe first deposit mould, stimulate
later On'eS. Thus, eVen r the funds which commercial
houses'leave at the National Bank,. rather than keep in
their \tanks for their -daily needs, disappear only to retnrn
ohCe,"becauSe they constitute the available.reserye of
Which they haVe. need.
• In the disdussions on the renewal of the charter of the
'Imperial pink c.f...0er1nany, by the special commisdion Of
19o8, expert opinion was so pronounced that it was .declared by Dr. Stroll, director of the Bayerische Notenbank
of Munich, that "on this particular question there was
absolutely no difference of opinion."b And many reasons
b German BankInquiry, of 1908, National Monetary CominilidOn;
6ist Cong., 2d sea.,S. Doc. No. 407, Part I, p• 968. ,
, • .

were given for this argument additional to those adduced
in Frande and Belgium. The point was,emphasized by
Mr. Sehnicket:Chaiiinan of tie Hamb.urgt cb*
.
.aticr of COm..
,
therce, that for the Continercial deposits reduction,in.times ,
•
;•
of Crisis would be ahnost,iMpossible,,for no,one whq i car- t
ryink on an actiVe -businessi Ciniild get, along without,some
kind of eredit tialA:neelat the IMperial Bank,_,_ As.a matter
of attifil'eicpetienee; l'arge part of the total deposits of
.
, • !,•. •, , ,
the lititileare constantly in process of transfer from. one ,
., •
lodalitY to another,,and are therefore incapable. of,being
withdrawn.' At a time of crisis,'moreove.r, everyone was
maii"sakikimiS to increase the balance which he. bagi sub- .,
ject 16 draft'than to decrease it.c It was insisted by Mr.
..•
c Ibid., pp. 876-877.

..

Fischer tifiat interest-bearing deposits could be .regarded .
•:.
only is Capital for long time investment and t4at.if admitted atthe v.itrai bnk Would add a neyf and incongru.ous • •
depattnifetA to its'business." The pce*ling opinion on
;!;:•
t '`; '

d

—4titemeanwilstita




p. 94/
.

the subject Vntii infiiiii4,4 by11111 '11
1
. 1,11% chairman of
the Chamber '4.;Co4 nmer44il4ut1inges, in the declarai
tion tho ".The'lliftqualified judge of all is the Imperial
Bank WO,which has for twenty-five years not exercised
this right, and has doubtless refrained from dais so on
good irouideato
g
;
'i .''
t ,1114
;1 •
,
7:7't 4f:tar
• .4.1
7. !,•4,4
t; •
e

1\1

p. 992.

'•1;fr.

• CHAPTER

4:11t•

.

•

VIII.---SFECIAl. TAXES, AND TH,l3k,.APPORTION'.•

MENT OF PRbFITS.

It is proposed under this head to discuss ohiefly thQsie
taxes which are levied-specially upon .the issue.94941,91' .•;
other banking functions, in order to inustrateJorther thct
relations of the central banks of issue with, the Govern,-




.
•
BaoacAtiotif, which has for twenty-five years not exereised
this Tiirfit, and has doubtless refrained from doing so on
'
'
good ground.''''''
:F.: f; •
•
:4.1 .'t

e Ibid., p. 992.

.1•-

•

•

CHAPTER VIII.—SPECIAL, .1-AXES, AND THE.. APPORTION•

MENT OP

PR6PITS.

It is proposed under this. head to discuss chiefly the..
taxes which are levied-specially upon.the.issue#ofJptes 1qr
other banking functions,.in order to illustrate,further the
relations of the central banks of issue with, the .Govern
ment. An effort will not be made to analyze, except
dentally, taxes levied under general laws. which are Pai4.
by the banks in,common'iwith,other persons and corpora-. .„.
tions. These laws vary so imuch in .different.,countrie. „
that it would require.much, explanation ii order to make,...
them intelligible; and they are, not pertinent 4irectly, to,
.
.
the subject of the special taxes,laid.upon the banks by vii?
tue of their privileges and;functi6ns.
In the infancy.of modern banking,there was,less disposition to restrict the profits of banks of issue than under
more recent legislation, because banking'in its 'Modern
form was mitnie 'or less' °fiat lexPeriment; and it was4elt
that its importance to the development of the economic
life of the community was such asto justify affording it an 1 ,
opportunity for Unfettered serviCe. It was in this, spirit
that a distinguished English author declared that
"restrictions upon banks are taxes upon the public."
The tendency in Europe in more recent times has been,
however; toward the restriction of • special privileges,
except in the single'matter of the issue of notes and as com-1
pensation .fOr the'Privileges granted in this respect to levy
heavy charges uPim banking profits... Thesetharges have'
been directed t614;vo 661&tiulfirst,to'prevent the derivation of excessive benefits fitith'4 public'franchise; and secondly, to reinoVe ihecindtie6ifieni to itnpose high ilisCount.
rates and SiMilar CliargeS for the useibf icredit for the Putpose of increaShig rbalikihg.PPOfitS.r; HO* thesttwo endS ."
have been attaihed Will be best CieieloPed by'ctn examina-'
tion of the specid taxes Or'PlrbviSiiiing'for the 'division of
profits which are in force in the principal Corintries of
f
Europe.
I

r

I

14'

,,•1; „
•

I

.,1 1;•

• 1
15
•1.1 i
•••t
•

• ;

o

I.

•

i I 4,,




6,8 NJ

MONO. SEC.

There has been a tendency in recent banking legislation,
not only to impose restrictions upon the profit-earning
capacity of the banks of issue, but to provide for a division
of their profits with the State. In this way the close relation of these institutions with the State has been given
emphasis additional to that arising from the appointment
of the chief officers by the State and the performance by
the bank of the principal functions of the public treasury.
There are not less than ten European banks which are
required by laws enacted within the past thirty years to
divide their profits with the State after the allotment of
a moderate dividend to the shareholders.
In discussing these provisions an exception has to be
made in regard to the Bank of England, whose privileges,
derived from its original charter, have not been radically
modified in recent years. Even the Bank of England,
however, is required to pay annually to the Government
EI 20,000, in consideration of the exclusive right of note
issue in London and the country within 65 miles of London, which was specially granted to the bank by acts;
and 4 of William IV. The bank is also required to pay
a further sum equal to the net profits on all notes in excess
of £14,000,000 which are issued against securities under
rights which have been acquired since the passage of the
bank act of 1844. The total sum paid to the Government
under these heads in the fiscal year i9o7 was £r86,593.
A payment of £6o,000 is also made annually in consideration of the exemption of the notes of the bank from
stamp duty and for the profits of issue. a
a Interviews on Banking and Currency Systems, National Monetary
Commission, 1910, 6xst Cong., 2d seas., S. Doc. No. 405, p. 16.

In the case of the Bank of France, the recent legislation
for the division of profits of the bank with the State has
not followed exactly the same lines as in other recent Continental bank charters, but accomplishes practically the
same result of keeping the profits of the shareholders
within much narrower limits than if they were subject
only to ordinary taxes. As a corporation subject to the
general taxes on private companies, including land taxes,
the Bank of France paid in 1907 taxes of 2,252;100 francs
($425,000). The special taxes levied upon the bank are
two in number—a stamp tax on notes, which amounted
in 1907 to 1,473,000 francs, and the much more important
royalty to the State,modified by the renewal of the charter
in 1897, which amounted in 1907 to 7,357,000 .francs
($1,420,000). The total taxes or public charges levied upon the bank, therefore, were I1,082,100 francs
($2,14o,000), constituting more than one-third of the net
profits, which were 31,000,000 francs.' In 19to the total
b Ibid., p. 203.

of such charges was 9,298,070 francs ($1,795,000, of
which the royalty contributed 5,733,368 francs, carrying
the total levies on this account since 1897 to 66,190,929
francs ($12,775,
00o).
The stamp tax on notes is imposed in lieu of the similar
tax on commercial paper, which is 50 centimes per 1,000
francs (9.65 cents per $193.) For that portion of the
outstanding circulation which is fully covered by coin the
..entitroac npr noo froricS. Tin
• -




profits, which were 31,000,000 francs.°

In 1910 tne total

b Ibid., p. 203.

of such charges was 9,298,070 francs ($i,795,000), of
which the royalty contributed 5,733,368 francs, carrying
the total levies on this account since 1897 to 66,190,929
.
francs ($12,775,000)
The stamp tax on notes is imposed in lieu of the similar
tax on commercial paper, which is 50 centimes per i,000
francs (9.65 cents per $193.) For that portion of the
outstanding circulation which is fully covered by coin the
rate is calculated at only zo centimes per I,000 francs. Up
to the renewal of the charter in 1897, the royalty paid to
the Government had been fixed at an annual amount of
2,500,000 francs. The new law provided that the amount
of the tax should be the proceeds of one-eighth of the rate
of discount upon the productive operations of the bank,
but that the amount paid should not in any case be less
than 2,000,000 francs in any one year. The amount of
the productive operations is based upon the difference
between the metallic reserve and the aggregate of discounts, calculated in the same manner as the annual average of the productive circulation subject to the stamp tax,
tinder the law of June 13, 1878. a
a Details of the manner of assessment can be found in Levy, Banques
d'Emission et Tresors Publics, Paris, 1911, pp. 37-39.

Another provision of the charter of 1897 provided that
three-fourths of the profits arising from a discount rate
above 5 per cent should be paid into the public treasury. In view of the low discount rates prevailing for
many years at the Bank of France, this provision has not
been operative since its enactment.
The Imperial Bank of Germany is the most important
of a long line of institutions which are governed by a system, of allotting to the State a .percentage of the annual
net profits. Prior to the revision of the charter in 1889
the shareholders of the German bank were allotted dividends of 434 per cent, before any other allotment. The
new charter reduced this initial dividend to 334 per cent.
Twenty per cent of the remaining profits were then to be
carried to a reserve fund, until this fund reached a fourth
of the share capital of the bank. The remainder was to
be divided equally between the shareholders and the
imperial Treasury until the shareholders had received
dividends of 6 per cent. Above 6 per cent the shareholders received only a fourth of the remaining profits
and the Imperial Treasury the other three-fourths. If
the bank did not earn 334 per cent, a dividend of this
amdunt was to be paid from the reserve funds.

,voisuiro

__________

Sr




59 NJ.

MONO, SEC.

A further change in favor of the Government was made
at the revision of the charter in 1899. • The original proposal of the Government was that after setting aside for
the shareholders the initial dividend of 334 per cent, the
division of profits between them and the Government
should be equal until they had received 5 per cent, after
which three-fourths of the remainder should go into the
treasury of the Empire. The last clause was stricken oitt
in the Reichstag committee. Under the law as enacted
the shareholders were to continue to receive an initial
dividend of 334 per cent,and after its payment 20 per cent
of the surplus profits were to be added to the reserve fund,
until it should reach 6o,00o,000 marks ($14,28o,000).
After this division, three-quarters of the remaining profits
went into the public treasury and only one-quarter to the
shareholders.
Only one change was made in 1909, and it was slightly
favorable to the shareholders. This change was a reduction of the allotment made to surplus funds to io per cent
instead of 20 per cent of the balance remaining after the
first dividend.'
a For further details of these changes, see German Imperial Banking
Laws, National Monetary Commission, r9zo, 6ist Cong., 2d am., S. Dee.
No. 574, p. 79.

The result of these provisions has been to increase the
share of the Government in the earnings to a point which
has made them materially larger than the share of the
stockholders. Under the law as it existed in 1879 the
stockholders received 86.7 per cent of the net profits,
which were then at the lowest mark,and the Government
received only 8.8 per cent. In 1890 the shareholders
received only 51 per cent and the Government 34.2 per
cent. The amendment of 1899, which took effect in 1891,
resulted in the reduction of the proportion of the shareholders to 48.5 per cent for that year and raised that of
the Empire to 46.1 per cent. In i9o7 the shareholders
received only 34 per cent, while the share of the Empire
was 66 per cent, nothing being allotted at that time to
surplus. The amount of net profits since the creation of
the bank and their division between the Imperial Government, the shareholders, and the surplus fund are indicated
in the following table:
Division of profits of the Imperial Bank of Germany.
- [In thousands of dollars.)
Total Imperial stock.
Govern- holders. Surplus.
net
ment.
profits.

Period.

39.410

1878-1800

1891190049.279
31070
2110119127
9,70
sige
t909
9910

,

8.280

27,110

,
4.05

23,470
29.420

22.00
19.310

2.65e

3.473

3.321

82
3.4

2,969

6.588

3.816

240

2.492
2.770

In dealing with these figures it should not be overlooked
that before 'net earnings are computed for distribution
two other important items of payment to the State are
included in cost of operation. The smaller of these is
the regular annual payment to the Government of Prussia
-0 rA 122.2,1
1
•.•
• .1.1.•06i.r. 144 4 ICr,
mil;eh was fiv"ra




4,031

39.00

1901-007
saoll
••

1909
2410

8.280

27,110

46.270

2076-1i90
1a91-1900

23,470

22.560

240

0
5147
8,796
. 5.431
6.386

29.420
5.475
2.934
3.316

,310
19
3.321

2,65.

2.492
2.770

•
•

-

In dealing with these figures it should not be overlooked
that before 'net earnings are computed for distribution
two other important items of payment to the State are
included in cost of operation. The smaller of these is
the regular annual payment to the Government of Prussia
of 621,910 thalers ($4.45,000) which was fixed in 1856 and
was assumed by the Imperial Bank on taking over the
liabilities of the Bank of Prussia in 1875. The other
charge is the tax on excess circulation, which has already
been discussed under the head of the elasticity of credit.
The total amount of this tax from the year 1881, when it
was first paid, down to the close of 1910 was about
33,552,000 marks ($7,975,000). The payments have been
much heavier in recent years, hoitever, than in the
earlier history of the bank. The amount paid for the
five years ending December 31, 1910, was 19,650,000
marks ($4,675,000), or at the rate of about $935,000 per
year.
The proportion of profits going to the Government in
Germany is larger than at any other leading bank of issueexcept those owned entirely by the State, as in the case
of the State Bank of Russia and the State Bank of Sweden.
The following table shows the average dividends received
by the shareholders of several leading banks, on the
average for the five-year period ending with 1905, and theamounts and proportions received by the Governments.
for the single year 19o7:°
a Renewal of Reichsbank Charter, National Monetary COMMini011, 1910,
Gist Cong., ad sess., S. Doc. No. so7, p. as.

Division'of profits of certain banks.

Institution.

Amount of Profits to
.
profits to Govern
Government
meni in
in zoo.
2907.

Per cent.
Per cent.
66.o
6.22 $11,2242,000
4.x6
2,3600poo
54.8
16.9
moo
2,410,m0
st•o
390,000
ts•oo

Imperial Bank of Germany
Bank of the Netherlands
Bank of France
Bank of Belgium
Augtro-HUnPrian Bank

+61

411611114.
5,44

Dividends,
0019
19 - 05*

2,270,000

37.5




NJ
60 YPE SECTION
MONOT
itIn the case of the Austro-Hungarian Bank the laws imposing a division of profits between the bank and the two
Governments are similar in general scope to those of Germany. Under the law of 1878, which converted the
National Bank of Austria into the Austro-Hungarian
Bank, and which was not radically changed in 1889, a
dividend of 5 per cent went to the shareholders before any
other allotment. Ten per cent of the remainder was
added to the reserve, and a further allotment was permitted to shareholders up to a total dividend of 7 per
cent. Half of the remainder went into the treasuries of
the two monarchies in the proportion of 70 per cent to
• Austria and 30 per cent to Hungary, and the other half
was added to the dividend to the shareholders. This
division of profits was modified in 1899 so that the initial
dividend to shareholders was reduced to 4 per cent. Ten
per cent of the remainder continued to be allotted to the
reserve and an additional small amount was allowed for
pensions. Half of what was left went to the State and
half to the shareholders until the total dividend of the
latter reached 6 per cent. Beyond this point the State
took two-thirds. The profits of the two Governments
during the continuance of the charter were to be devoted
to the reduction of the debt of 8o,000,000 liorMs to the
bank." The share of the State in the profits was no
a Zuckerkandl: The Austro-Hungarian Bank, National Monetary Corn.
mission, 1910, 6ist Cong., ad seas., S. Doc. No. 586, p. 94.

longer to be divided between Austria and Hungary in the
ratio of 70 to 30, because Hungary had gained materially
over Austria in volume of business. The Hungarian Goveminent made it a condition of entering into the negotiations regarding the renewal of the.charter that its share of
the profits should be in proportion to the earnings of the
bank in Hungary."
b Ibid., p. tog.

Under the distribution fixed by the law of 1899, net
profits in 1907 were 29,925,536 crowns ($6,075,000), of
which the shareholders received 16,119,640 crowns
($3,275,000), or at the rate of 7.67 per cent, while the
.
State received 11,228,216 crowns. There was also paid
on account of excess circulation above the authorized
limit 1,886,460 crowns, bringing up the total receipts of
the State from these sources, to 13,114,676 crowns
($2,662,000). The earnings for this year, however, were
swollen by the high discount rate of the autumn pressure
caused by the reaction of the panic in America. In 1910
net profits fell to 21,143,444 crowns ($4,292,000 which
permitted dividends to shareholders of 13,545,000 crowns,
or 6.45 per cent, and payments to the State 0( 6,076,153
crowns, in addition to allotments to surplus and pension
funiis. The amount paid the State under the 5 per cent
tax on excess note issues was 2,793,70o marks, bringing
up total payments to the State on these items to 8,869,854
crowns ($i,800,030).
In the case of the National Bank of Belgium a heavy
* ' •"-

•

••

".0141
L.Nr +,,. ;••••:". ••!4

.rdio4

.4




waala a ....aam.aa,Paa
map
'

.11aiFC111A/‘ui1.1.111e1 lea.

111 1910

net profits fell to 21,143,444 crowns ($4,292,000), which
permitted dividends to shareholders of 13,545,000 crowns,
or 6.45 per cent, and payments to the State of 6,076,153
crowns, in addition to allotments to surplus and pension
knits. The amount paid the State under the 5 per cent
tax on excess note issues was 2,793,700 marks, bringing
up total payments to the State on these items to 8,869,854
crowns ($i,800,00o).
In the case of the National Bank of Belgium a heavy
burden is assumed by the gratuitous services rendered by•
the bank to the treasury In special taxes the law follows
the principles of the German law, but is somewhat more
favorable to the shareholders. Under the extension of
the charter which was made in 1872 the bank was required to pay a patent tax on the gross volume of business, a stamp tax on note issues, and a tax of one-quarter
of i per cent semiannually on the circulation in excess of
275,000,000 francs. These provisions were continued by
the law of March 26, 1900. The other principal taxes
levied by the law of 1872 were one-quarter of the net
profits of the bank after a dividend of 6 per cent and the
entire excess of receipts from discounts above a rate of 5
per cent. The tax on excess circulation—amounting to
one-half of x per cent per year—has been a source of increasing revenue with the increase of the issues of the bank
and the substitution of small notes for metallic currency
in circulation. The amount received from the tax increased from 413,000 francs in x888 to 85r,173 francs in
1895, and 2,326,937 francs ($449,000) for 1908. Commenting upon this tendency to increase, the Minister of
Finance declared, in the debates on the renewal of the
charter in 1898, that the clause imposing a duty upon the
circulation was eminently favorable to the State, because
it guaranteed a sure return to the treasury, whatever
might be the net profits realized.by the bank.a
O Charles A. Conant: The National Bank of Belgium, National Monetary
Commission, 1910, 6ist Cong., ad seas., S. Doc. No. 400, pp. 132-134.




61. NJ

MONO. SEC.

The other two provisions of the old charter, providing
for the apportionment of net profits and the payment to
the Government of the earnings from a high discount rate,
were radically changed in 1900. Under the new provisions
the initial dividend to the stockholders before division
with the state, which had been 6 per cent, was reduced to
4 per cent. After this amount had been allotted, onequarter of the remaining profits was to go to the state and
the remaining three-quarters was left to the shareholders. While this provision was much more favorable
to the shareholders than that of the German law, it was
more severe than the original charter of the Bank of
Belgium. Under the law of 1850, by which the initial
allotment of dividends to the shareholders was 6 per cent,
the amount of the participation of the state above this
amount was only one-sixth. The lightness of this levy
was based upon the fact that the institution was necessary
to the Government of Belgium when it was established and
was still in the,stage of experiment. By the renewal of
the charter in 1872, the dividend allotted to the shareholders before participation by the state was left at 6 per
cent, but the share of the state in the remaining profits
was increased from one-sixth to one-quarter. The total
allotments of profits to the state from the beginning 'oi
1873 to the close of 1899 were 31,104,864 francs, affording
an annual average of 1,152,032 francs $223,000).6 The
a Ibid. P. 135.

amount going to the state in 1908 under the law of 1900
was 2,635,491 francs ($509,00o).
In respect to the payment into the public treasury of
the excess of profits from the discount rate above a fixed
point, the law of 1900 changes this rate from 5 per cent to
372' per cent. The returns for circulating capital had been
so low in Europe for many years prior to the debates of
1900 that there were only six years between 1873 and 1897
in which the discount rate of the National Bank was at
any time above 5 per cent. The largest amount collected
under this tax, while the untaxed rate of discount was
still at 5 per cent, was in 1873, when the amount paid
into the public treasury was 1,336,338 francs ($258000).
This was more than the entire amount collected in the
other five years in which such a tax came into operation,
the total collections up to 1899 having been 2,330,182
francs ($450,030). It was declared during the debates that
if the discount rate was raised to an abnormal figure, it
was important that the action of the bank should be free
from stIspicion. Changes in the condition of the internatio** money market made the collections under this
ta4 mach larger than was anticipatect The year 1905
witnessed such pressure in the money market that the
proceeds of the excess discount rate paid into the public
treasury were 471,269 francs; in 1906, 2,025,989 francs;
in 1907, 70302,541 francs; and in 1908, 1,258,706 francs..
The total collections during the nine years ending with
1908 were 13,665,788 francs ($2,635,000).
In the case of the Bank of The Nethpriands the system

.4




natio* moncy market made the collections
under this
tax nmeh larger than was anticipatel The
year 1905
witnessed such Pressure in the money mark
et that the
proceeds of the excess discount rate paid into
- the publie
treasury were 471,269 francs; in 1906, 2,02
5,989 francs;
in 1907, 7,002,541 francs; and in 1908, 1,25
8,706 francs..
The total collections during the nine year
s ending with
1908 were 13,665,788 francs ($2,635,000).
In the case of the Bank of The Netherlands the
system
of a division of profits with the state has been
given wide
scope in recent years. Under the law of 1898
dividends
of 5 per cent were to be paid to the sharehol
ders, even if
it was necessary to levy upon the reserve fund
s to make
up the amount. After such payment, to per
cent of the
remainder was to go to the reserve fund until
it should
attain 23 per cent of capital. The remainin
g profits were
to be divided equally between the state and
the shareholders until the dividend of the latter reached
7 per cent.
Beyond this point they were to receive only
one-third
and the state the remaining two-thirds. Unde
r the law
of 1903 the initial dividend was reduced to
334 per cent,
to per cent of the remainder still going to
surplus and 3
per cent of what was left to the managers
and supervisors. After this allotment the remainin
g profits were
to be distributed in the proportion of twothirds to the
state and one-third to the shareholders
. In the fiscal
year 1907 the share of the Government in the
profits was
3,397,349 florins 41,350,000.o
a Van der Borght: The Bank of the Nethe
rlands, National Monetary Commission, 1910, 61st Cong., 2d sess., S. Doc.
No. 586, p. 46.

In the charter of the Swiss National Bank
, the division
of profits follows substantially the lines
of the laws of
Germany, Austria-Hungary, Belgium,
and The Netherlands, but contains some special provisio
ns growing out
of the federal character of the Governme
nt. The amendment adopted in 1891 to article 39 of the
federal constitution provided that the profits:of the proposed
central bank,
after the deduction Of an equitable rate
of interest on the
capital, should be paid to the cantons
in the proportion of
at least two-thirds. The provisions of
the law of 1905
were that to per cent of net profits shou
ld be transferred
annually to the surplus, but not to a
greater amount than
500,000 francs. A dividend of 4 per
cent was then assigned
to the paid-up capital. Out of the rema
ining amount the
compenSation payable to the cantons
is to be provided for,
after which the dividend to the capit
al may be increased
to a maximum of 434 percent. The rema
inder goes to the
cantons and the confederation in the
proportion of twothirds to the former and one-third to the
latter. b
b Julius Landmann:
The Swiss Banking Law, National
Monetary CotnmissiOn, 19zo, 6ist Cong., 2d sess., S. Doc.
No. 401, pp. 150-152.




62 NJ

MONO. SEC.

In the case of the Bank of Italy the involved conditioiof the banks at the time of the crisis of 1893 led to many
complicated provisions regarding the note tax, which
will not be discussed in detail here. New legislation in
19o8 provided that after January 1, 19o9, a dividend
of 5 per cent of the net profits of the Bank of Italy
should be allotted to shareholders, after which one-third
should go to the state, but that if the dividend to the
shareholders under this provision should carry their total
dividend above 6 per cent one-half of the excess should
go to the state.a
a Carlo F. Ferraris: The Italian Banks of Issue, National Monetary Commission, 1910, 6ist Cong., ad SeSS., S. Doc. No. 575, pp. 250-254 and
275-276
.
In the case of the Bank of Norway, although the state
is a large shareholder, the policy of limiting dividends was
adopted by the law of i9oo. The initial allotment to
shareholders is 6 per cent. Of the excess, It) per cent is
added to the reserve funds and the remainder is divided
equally between the state and the share capital until the
proportion of the shareholders reaches io per cent, when
three-quarters of the remainder goes to the state."
b Bulletin de Statistique, October, i9or,
L., p. 437.
In Denmark the National Danish Bank is acting under
a law of July 12, 1907, which provides that the institution
shall pay 750,000 Crowns ($zoo,000) from its profits into
the public treasury before paying a dividend to shareholders, and after paying such a dividend to the amount
of 6 per cent shall pay into the public treasury one-quarter
of the remaining profits.
In Portugal, under the law authorizing the Bank of
Portugal to unify the cireulation, in 1891, a dividend of
7 per cent is first allotted to the shareholders of the bank,
and after a levy of at least 5 per cent has been made for
the ordinary and extraordinary reserves thel remaining
profits are divided equally between the state and the
shareholders.
,
C Raphael Georges-Levy, Banques d'Emissi
on et Tresors Publics, Paris,
1911, p. 1455.

The shareholders of the National Bank of Roinnania
receive a dividend of 6 per cent, after which 20 per cent
of what remains goes to the state. This proportion
will
be increased after 1913 to 30 per cent.

CHAPTER IX.—THE GOVERNMENT OF EUROPEAN BANKS.
With the exception of the Bank of England,the government of European banks of issue is interwoven more or
less closely with the state. In only three cases—Russia.
Sweden, and Bulgaria—is the bank actually the property
of the Government. In a few other cases the Government
owns or has owned some of the shares. Whatever the
form of ownership, however, the government in nearly
every case selects the governor and deputy governors of
•.
-

ua
panic 01 r,ngtand, the government of European banks of issue is interwoven more
or
less closely with the state. In only three cases—Ru
ssia,
Sweden, and Bulgaria—is the bank actually the
property
of the Government. In a few other cases the Gove
rnment
owns or has owned some of the shares. What
ever the
form of ownership, however, the governme
nt in nearly
every case selects the governor and deputy
governors of
the bank and appoints either members cf
the general
governing board or a distinctive board to super
vise the
policy of the bank and the actions of thos
e officers or
boards which represent the private owners.
In those cases where the Government is
the actual
owner of a bank, care has been taken to separ
ate the institution from government operations and have
it conducted
as nearly as possible according to the methods
and policy
of joint-stock banks. As a bank directly
owned by the
Government is not likely to be considered serio
usly in
the United States, it is intended to discu
ss more fully
the operation of those important banks—li
ke the Bank of
France, the Imperial Bank of Germany,
the AustroHungarian Bank, the National Bank of Belg
ium, and the
Bank of The Netherlands—which are typic
al of the
methods of central banking which are generally
accepted
among European statesmen and economists as repre
senting the proper and sound degree of interventi
on by the
state in the business of commercial banking and the
regulation of the currency supply. Hence there
will be set forth
the character of the administrative organizati
on of the
more"prominent of the European banks, and espec
ially
those which have been relatively free from
abuse of their
privileges by the Government in the form of
excessive
loans and the use of the power of note issue
to net government needs instead of commercial needs
.

0

.„.., _.„,_.7,i. .4.„„„ •
IN ,




••••••-41 • A.,.......•r•.•••.e•
,




Q3 NJ

MONO. SEC.

In the case of the Bank of England the Government,
in the words of one of the officers to members of the commission, "has no voice in the management of the bank,
nor does it own any stock."a The supreme control of the
a Interviews on Banking and Currency Systems, National Monetary
Commbsion, 1910, 6ist Cong., 2d sess., S. Doc. No. 405, p. 8.

affairs of the institution rests with the governor, deputy
governor, and a court of 24 directors, who are elected
annually by the shareholders. It is customary for the
governor and deputy governor to be reelected, at the
close of their first year of office, to the same positions for
a further term of one year, and the deputy governor is
usually elected to the office of governor after the completion of two years' tenure of his position. The governor,
while directing the general policy of the bank and supervising and controlling the whole of its affairs, devotes his
attention chiefly to the business of the head office, while
the deputy governor concerns himself more particularly
with the business of the branches and the maintenance of
the bank's various premises.
The holders of bank stock, who are called "the proprietors," constitute, when they formally meet, the general
court, which elects the governor, deputy governor, and
directors, and may make by-laws for the conduct of the
bank's business, provided that such by-laws are not repugnant to the laws of the Kingdom. There are halfyearly meetings of the general court for receiving reports
and for the declaration of dividends. To have a vote a
proprietor must hold gsoo of stock, but no matter how
much additional stock he may hold he has no more than
one vote. There is no limit to the number of shares which
may be held by any one person, and the approval of the
bank is not required for a transfer of stock. Directors are
usually reelected. There is no legal restriction as to the
class from which. they may be selected, except that they
must be "natural-born subjects of Englend, or naturalized;" but in actual practice the selection is confined to
those who are or have been members of mercantile or
financial houses, excluding bankers, brokers, bill discounters, or directors of other banks operating in the
United Kingdom. There is no inspection or supervision
of the bank by the Governmeht, but by act of Parliament
the bank is required to furnish weekly statements of its
position to the chancellor of the exchequer and to the
commissioners of stamps and taxes.
In the case of the Bank of France the bank is legally a
private establishment. The Government does not own
any of the shares. The capital of 182,5oo,000 francs
($35,225,000) is divided between 30,000 holders, of whom
about i0000 have not more than one share. Only the
200 largest shareholders are allowed to vote for the general
conncil of the bank—its regents and its censors. The
shareholders meet only once a year, on the last Thursday
in January, and at that time elect or reelect the board of
regents and three censors. Five of the regents and the

In the case of the Bank of France the bank is legally a
private establishment. The Government does not own
any of the shares. The capital of 182,500,00o francs
($35,225,000) is divided between 30,000 holders, of whom
about ro,000 have not more than one share. Only the
200 largest shareholders are allowed to vote for the genera
l
conncil of the bank—its regents and its censors. The
shareholders meet only once a year, on the last Thursday
in January, and at that time elect or reelect the board of
regents and three censors. Five of the regents and the
three censors must be chosen from among the commercial
and industrial classes, and three regents must be taken
from the tresariers payeurs getteraux (general government
disbursing officers).
The governor and the two deputy governors are named
by a decree of the President of the Republic, on the proposal of the Minister of Finance. Their terms of servic
e
are not for any fixed period, and they are removalile by
the Government. The managers of branches are name
d
by decree of the President, on the report of the Minister
of
Finance, upon the presentation of three candidates by
the
governor of the bank. Thus all these executive officer
s
represent directly the influence of the Government,
and
in practice prominent government officials have usuall
y
been appointed to the higher places when vacancies
occurred. The present governor, M. Georges Pallain.,
was
connected with the customs administration prior to
his
appointment as the successor of M. Magnin in 1897.
Notwithstanding this potent influence of the state in
the government of the bank,there have never been
serious
charges of its abuse for political purposes. Upon
this
subject the governor of the bank said, in his conference
with members of the commission:a
a Interviews on Banking and Currency System
s, National monetary Commission, 1910, 6ist Cong., sd sew, S. Doe. No. 405, p.
189.

"No charge has ever been made that the bank favor
ed
or aided any political party. There is never any
claim
that politics enters in any degree into the manag
ement of
the bank. Except for the renewal of the charte
r in 1897,
no legislation affecting the bank has been enacted
since
1857. There is no sentiment for any change in
banking
methods nor for any new legislation. It shoul
d be added
that neither the governor nor deputy governor is
permitted.
to be a member of either body of Parliament
."

II



fts4:11ibewormisza




64 NJ

MONO. SEC, :,tiEfE.1.14.0.0
.
The regents correspond practically to the board of
directors in an American institution and meet usually once
a week. In order to define clearly their power to confine
the bank to its character as a commercial institution, this
board alone decides upon changes in the rate of discount,
The governor can not change the rate without the approval
of the regents. Each regent has one vote and decisions
are taken by a majority. Notwithstanding the authority
of the board over the discount rate, it was intimated by
M. Rouland, who was governor of the bank at the time of
the official inquiry of 1865, that it had not perhaps happened twice in sixty-two years that the proposal to change
the rate of discount had come from the council. The fact
that it had originated with the active officers of the bank,
however, was emphasized not to demonstrate unwarranted governmental dictation, but to indicate that the
financial judgment of the officers and of the board of
regents was usually in accord. It was the function of the
persons chosen by the state, according to M, Rouland, to
see that the business of the bank was carried on for the
public advantage. It was their duty to see that the
statutes were not overstepped, and that the interests of
trade and commerce were attended to. "Nothing of any
description which concerns the great interests of the
public," he declared, "nothing which concerns the larger
duties which the bank has to perform toward commerce
and industry, nothing of all that class of business is left
to the discretion of the interested party." a M. Rouland
a Palgrave: Bank Rate and the Money Market, p. 147.

proceeded to add that the two portions of the governmental body had always worked together in the most
perfect harmony and that in this harmony consisted the
security of the institution.
In the case of the Imperial Bank of Germany, whose
capital was fixed in 1899 at 18o,000,000 marks ($42,750,000), the shares are owned entirely by private individuals,
a considerable portion of them in Holland. The administration of the bank is in some respects more completely
centralized in the hands of the Government than in the
case of the Bank of France. The administration is carried
on by three boards—first, the curatorium; second, the
direktorium (president and managers); third, the central
ausschuss, or governing committee. The curatorium is
composed of five members, one being the chancellor of the
Empire, who is chairman. The second member is
appointed by the Emperor, and has usually been the
Prussian minister or finance,. The three additional members are appointed by the Bundesrath (Federal Council)
from among its own members. This .board, meets once in
three months. The chancellor does not usually attend,
but is represented by a substitute appointed by the
Emperor, usually in the person of the imperial minister of
the interior. The chancellor, has supreme power, but he
has never exercised it but once in the history of the bank.
On that occasion he demanded that the bank should .not
receive Russian securities as collateral for loans—an order

asimmiN1111111111011 1
hers are appointed by the Bundesrath (Federal Council)
from among its own members. This .board‘ meets once in
three months. The chancellor does not usually attend,
but is represented by a substitute appointed by the
Emperor, usually in the person of the imperial minister of
the interior. The chancellor, has supreme power, but he
has never exercised it but once in the history of the bank.
On that occasion he demanded that the bank should not
receive Russian securities as collateral for loans—an order
which has since been rescinded.
The so-called directorate consists of the president, the
vice-president, and seven active managers of the different
departments of the bank. The president and other members of the management are recommended by the Bundesrath to the Emperor, who makes the appointments. In
case of the managers, the advice of the central committee
is also considered. The power of the directorate is thus
defined by the statute:0
a Bank act of Mar. 14, 1875, sec. 27; German Imperial Banking Laws,
National Monetary Commission, 1910, 6ist Cong., zd sess., S. Doc. No.
574, P. 45.

"The Reichsbank board of directors is the managing
and executive authority, as well as the official representative, of the Reichsbank."
The third body, the central ausschuss, is composed of
fifteen shareholders, who are elected at the annual meeting
of the shareholders, with fifteen alternates, who serve in
the absence of the regular members of the board. The
functions of this body were thus described by officers of
the bank in an interview with members of the commission:b
b Interviews on Banking and Currency Systems, National Monetary
Commission, 29xo, 6ist Cong., 2d sess., S. Doc. No. 405, pp. 336-337.

"This body meets once a month. From among their
number they appoint a subcommittee, known as deputies
,
of the central ausschuss, of three members and three
alternates. The deputies meet weekly with the president
and directots. The central atisschusS are made familiar
with the transactions carried on by the bank and give
their advice and recommendations to the direktorium in
reference thereto. In practice, their advice is generally
carefully considered and taken. In two points they are
given actual power: (t) They have the authority to limit
the amount of securities which may be purchased by the
bank, not as to the character, but as to the amount. (2)
They have the power to veto any proposed transactions
with the Empire, Or any State of the Empire,if such transactions run counter to the general conditions of business.
The point of this is that the chancellor might request of
the bank loans for the Empire,or for States of the Empire,
for the purpose of carrying into effect certain plans, and
the central ausschuss have the power of vetoing any
such action.

01wIlihew& Polit
4



rminnimummemonipmmumm




65 NJ

MONO. SEC.
"The management is so constituted that the government has actual and final control through the Curatorium.
The business of the bank is transacted by the second body,
the Direktorium. In the fixing of the bank rate it is their
custom to call a special meeting, if need be, of the Central
Ausschuss, who always confer in regard to the advisability
of a change in the bank rate. The final power, however,
lies with the directors, who usually follow the advice of the
Central Ausschuss, but who have at times disregarded it."
It was also declared, in this confer(nee with the Commission, that there had been no lack of harmony between
the Central Ausschuss and the management,in spite of the
exceptional cases when the advice of the former was not
followed. 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 official
employees of the Empire. They are accorded honors and
pensions, 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 employees of the bank, moreover, are forbidden by
law to hold stock in the institution.a
a Bank act of Mar. 4, 1875, sec. 28; German Imperial Banking Laws,
National Monetary Commission, 1910, 6ist Cong., 2d sess., S. Doc. No. 574,
P. 45.

Contrary to the provisions of the charters of some other
important banks,the shareholders of the German Bank are
allowed to vote in the general meeting even if holders of
only a single share. The number of votes which each person may cast is determined by the face value of his shares,
but no single shareholder may cast more than 300 votes.
Prior to 1899, when the minimum share was 3,000 marks
($714), each of these shares had one vote, but after the
issue of shares for t,000 marks under the law of 1899, which
were allowed one vote, the shares of 3,000 marks were
given three votes in order to maintain the same proportionate voting power.b
•—

_
b German Imperial Banking Laws, National Monetary Commission, 1910,

6ist Cong., 2d sess., S. Doc. No. 574, pp. 52, 84(note 126), and 99.

In the case of the Austro-Hungarian Bank the method
of government is similar to that of the Imperial Bank of
Germany, but has been modified in some respects to meet
the requirements of the dual monarchy. The governor of
the bank is named by the Emperor upon the joint nomination of the finance ministers of Austria and Hungary,
and two vice-governors and two deputy vice-governors are
appointed by the Emperor on the nomination of the respective ministers of finance of the two countries. The two
vice-governors had been appointed by the Emperor previous to the revision of the charter in 1899 from a list
submitted by the general council, but under the revised
charter the transfer of their nomination to the ministers
a
I
*•••""

. •

- •-welknak




the nomination
appointed by the Emperor on
o
the two countries. The tw
tive ministers of finance of
r preointed by the Empero
vice-governors had been app
charter in 1899 from a list
vious to the revision of the
ised
council, but under the rev
submitted by the general
isters
ir nomination to the min
charter the transfer of the
se
l measures taken to increa
of finance was one of severa
control over the bank.a
the degree of governmental

ry Comn Bank, National Moneta
a zuckerkandl: The Austro-Hungaria
, p. 104.
sess., S. Doc. No. 586
mission, 1910, 6ist Cong., 2d

t the resolutions of the gen
It was provided,further, tha
s
committee, and the variou
eral council, the executive
e
general council must receiv
standing committees of the
ective
or in order to become eff
the approval of the govern
(at
of the two official boards
and that the resolutions
ing
be submitted to the presid
Vienna and Budapest) must
. The
e-governor or his deputy
officer; that is, to the vic
ng the
ies charged with supervisi
two government commissar
embehalf of the State were
operations of the bank on
ive
deliberations of the execut
powered to take part in the
made
ng committees. It was
committee and the standi
t any
officials to protest agains
the duty of each of these
ers, the
assembly of the sharehold
resolutions of the general
standing
cutive committee, the
general council, the exe
consider
gement which he might
committee, or the mana
narchy
of that part of the mo
opposed to the interests
be perThe commissaries were to
which he represented.
manlves with the details of the
mitted to acquaint themse
ed that
The new statutes provid
agement of the bank.
uty vice-governors, and the dep
the governor, the ,vice
e years
ointed for a term of fiv
governors should be app
ppointed.
only, but might be rea

.1




4.001000prio
, ,

66 NJ

MONO. SEC.
The central managing body of the Austro-Hungarian
Bank is styled the general council and consists of the
governor, the vice governors, and deputy vice governors,
whose functions have been already described, and of 12
members elected by the shareholders, of whom six must
be Austrian citizens and six Hungarians. The executive
committee and other committees are equally divided between the two nationalities, and general meetings are held
as far as practicable alternately at Vienna and Budapest.
At each of the two divisions of the bank—at Vienna and
Budapest—the directorate is made up of the local vice
governor, the deputy vice governor, and the 6 national
members of the general council elected by the shareholders. Those having a right to participate in the general assembly of the shareholders must have at least 20
shares.°
a

Ibid., p. 85.

The management of the National Bank of Belgium is in
the hands of a governor and six directors, or managers,
who make up the administrative council. The governor
is appointed, suspended, and dismissed by the
King.
The six directors are elected by the shareholders.
The
shareholders also/elect the council of censors, a supervisory body which inspects the accounts and whose approval is required for important:measures of policy.
The governor represents the state in its control over the
operations of the bank. He is appointed for five years
and may be reappointed indefinitely. He can not be a
member of the legislative body or draw a state pension.
He has the right to suspend the taking effect of decisions
made by the administrative council, in order to submit
them to the general assembly of the shareholders, which
he may call on urgent occasions. The governor has the
casting vote in meetings of the administrative council.
He represents the council in the courts and has authority
over all the agents of the bank and can suspend them
without reference to the council. He must own so shares
of the bank's stock as security for the performance 'of his
duty. The King selects a vice governor from among the
directors, who acts instead of the governor in case of the
latter's absence, incapacity, or suspension.
The six directors chosen by the general assembly of the
shareholders must be Belgian citizens (native-born or
naturalized) and reside in Brussels. They are appointed
for six years and may be reelected. Each director must
own at least 25 shares in the National Bank, and none of
them can belong to the administrative council of any
other bank. Besides their general functions, each is
intrusted with the control of one department or more of
the bank and has authority over the employees under
him. The censors are named by the general assembly of
the shareholders for terms of three years—three going out
the first year, two the second, and two the third. Each
censor is required to hold ten shares of bank stock. They
meet at the call of the governor of the bank whenev
er
conditions make it desirable, but not less often than once
a month.
64111
11 u,
The governor, directors, and censors constitute theNeneral council, which meets on the last Saturday of each
month. The general council exercises supervision over
the situation of the bank, acts on questions relatin
g to
the regulations, apportions profits, and controls
matters
lirliemOdkoM6,'

1

4,1‘44iiiigtoiaiiiNeNaiiii41.1

ommommiempilligilr




.1
other bank. Besides their general functions, each is
intrusted with the control of one department or more of
the bank and has authority over the employees under
him. The censors are named by the general assembly of
the shareholders for terms of three years—three going out
the first year, two the second, and two the third. Each
censor is required to hold ten shares of bank stock. They
meet at the call of the governor of the bank whenever
conditions make it desirable, but not less often than once
004
i
a month.
v?,
r4q
The governor, directors, and censors constitute thellgeneral council, which meets on the last Saturday of each
month. The general council exercises supervision over
the situation of the bank, acts on questions relating to
the regulations, apportions profits, and controls matters
relating to the manufacture and issue of notes. It:selects
a discount committee from among merchants or old
clients, which examines the paper presented for:discount
and determines what to accept and what to reject. There
is a Government commissioner, appointed by the state,
but whose salary is paid by the bank, to exercise the
functions of a comptroller, with regard to discounts and
the note circulation. He has the right to attend meetings of the various boards of the bank, including the general assembly, and to speak at such meetings, but not to
vote.
The general assembly of the shareholders, which meets
twice a year or oftener, is limited to those shareholders
who possess at least io registered shares. A shareholder
can be represented by proxy only by another shareholder
entitled to vote. No one is allowed more than five votes
as a shareholder, whatever may be the number of his
shares, nor:more than five votes as attorney, whatever
may be the number of his principals.°
a Charles A. Conant: The National Bank of Belgium, National Monetary
Commission, zgozo, 6ist Cong., 2d sess., S. Doc. No. 400, pp. ios-ro6.

67 NJ

MONO. SEC.

At the Bank of The Netherlands the active management is exercised by a directorate, consisting of the president, five directors or managers, and a secretary. The
president and secretary are permanent officers and are
appointed and removed by the sovereign. Since the revision of the charter in 1888, the five directors have been
elected by the shareholders for a term of five years, but not
all at the same time. Official supervision over the bank
has been exercised since 1863 by a royal commissioner.
The shareholders are represented by the general assembly,
in which the ownership of five shares is necessary to a vote
and every additional ten shares confers the right to one
additional vote. The general assembly chooses fifteen
bank commissaries, who constitute a sort of supervisory
council. They are chosen for a term of five years, one-fifth
retiring annually,a
a Van der Borght: The Bank of The Netherlands, National Monetary Commission, 1910, 6ist Cong.. ad sess., S. Doc. No. 586, p. 47.

The National Swiss Bank is linked rather closely with
the Government by reason of the participation of the
Cantons in its ownership. The council of the bank is composed of forty members, appointed for four years, of whom
fifteen are designated by the general meeting of the shareholders and twenty-five by the federal council of the
Republic. The federal council selects the president and
vice-president of the bank, who are members of the bank
council. The general meeting of the shareholders then
nominates its fifteen members and gives notice to the
federal council of these nominations. The federal council
then proceeds to the nomination of twenty-three other
members, of which not more than five can be members of
the federal chambers and not more than five members of
the governments of the Cantons. In the choice of these
twenty-three members equitable representation is sought
of the leading banking cities and the principal centers of
commerce and industry. The members of the council are
not required to deposit shares in the bank as qualifications
for membership. The president serves for four years.a
a Interviews on Banking and Currency Systems, National Monetary Commission, 1910, fast Cong., ad WM., S. Doc. No. 405, pp. 5o6-5o7.

Thus a large majority of the governing board owes its
selection to the federal council, but the membership is
restricted in part to those connected with commerce and
industry. This ratio of influence in the selection of the
board is based in a measure on the distribution of the
capital of the bank, of which two-fifths was assigned to
the Cantons and one-fifth to the existing banks of issue."
b Julius Landmann: The Swiss Banking Law,National Monetary Commis.
sion, 1910, 6ist Cong., ad MS" S. Doc. No. 4o1, p. 136.

I'




The general assembly of the shareholders meets once a
year. Each shareholder is entitled to one vote per share,
but no private shareholder is entitled to more than ioo
votes.
C

p. 192.

0


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102