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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.18.104.22.168 . 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